-----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, DH0cACXIxvXJDuBP7nPEbneyyTvp2vTiu9SfUchN7BMuVsbWhxltw+/Z8c3jV2U/ XlaPqSiAwBwDSiQhphmlsQ== 0000898430-99-003938.txt : 19991022 0000898430-99-003938.hdr.sgml : 19991022 ACCESSION NUMBER: 0000898430-99-003938 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991021 FILER: COMPANY DATA: COMPANY CONFORMED NAME: K SWISS INC CENTRAL INDEX KEY: 0000862480 STANDARD INDUSTRIAL CLASSIFICATION: FOOTWEAR, (NO RUBBER) [3140] IRS NUMBER: 954265988 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-18490 FILM NUMBER: 99731743 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 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities - --- Exchange Act of 1934 For the period ended September 30, 1999 -------------------------------- OR ___ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from___________ to_________ Commission File number 0-18490 ------- K-SWISS INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 95-4265988 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 31248 Oak Crest Drive, Westlake Village, CA 91361 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) 818-706-5100 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ ----- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares of common stock outstanding at October 20, 1999: Class A 7,777,223 Class B 3,013,978 1 PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS - ------ K-SWISS INC. CONSOLIDATED BALANCE SHEETS (Dollar amounts in thousands)
September 30, December 31, 1999 1998 -------------- ------------- (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 55,674 $ 37,360 Accounts receivable, less allowance for doubtful accounts of $1,279 and $825 as of September 30, 1999 and December 31, 1998, respectively 34,153 26,478 Inventories 40,417 33,535 Prepaid expenses and other 4,116 2,883 Deferred taxes 1,931 1,746 -------- -------- Total current assets 136,291 102,002 PROPERTY, PLANT AND EQUIPMENT, net 8,855 8,009 OTHER ASSETS Intangible assets 4,235 4,429 Other 1,769 1,025 -------- -------- 6,004 5,454 -------- -------- $151,150 $115,465 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Bank lines of credit $ 1,974 $ 155 Current maturities of subordinated debentures 500 500 Trade accounts payable 4,705 7,783 Accrued liabilities 12,698 10,265 -------- -------- Total current liabilities 19,877 18,703 OTHER LIABILITIES 10,441 5,267 DEFERRED TAXES 6,941 8,227 STOCKHOLDERS' EQUITY Preferred Stock-authorized 2,000,000 shares of $.01 par value; none issued and outstanding - - Common Stock: Class A-authorized 18,000,000 shares of $.01 par value; 11,006,155 shares issued, 8,087,223 shares outstanding and 2,918,932 shares held in treasury at September 30, 1999 and 9,832,728 shares issued, 7,313,796 shares outstanding and 2,518,932 shares held in treasury at December 31, 1998 110 98 Class B-authorized 10,000,000 shares of $.01 par value; issued and outstanding 3,013,978 shares at September 30, 1999 and 3,426,556 shares at December 31, 1998 30 34 Additional paid-in capital 40,607 25,830 Treasury stock (30,749) (17,760) Retained earnings 104,358 75,500 Accumulated other Comprehensive Income - Foreign currency translation (465) (434) -------- -------- 113,891 83,268 -------- -------- $151,150 $115,465 ======== ========
The accompanying notes are an integral part of these statements. 2 K-SWISS INC. CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS (Amounts in thousands, except per share amounts) (Unaudited)
NINE MONTHS THREE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ------------------------- --------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Revenues $235,884 $121,501 $80,134 $38,212 Cost of goods sold 132,707 69,149 45,625 20,606 -------- -------- ------- ------- Gross profit 103,177 52,352 34,509 17,606 Selling, general and administrative expenses 55,462 39,266 19,443 13,279 -------- -------- ------- ------- Operating profit 47,715 13,086 15,066 4,327 Interest income, net 1,101 1,471 483 572 -------- -------- ------- ------- Earnings before income taxes 48,816 14,557 15,549 4,899 Income tax expense 19,457 5,726 6,212 1,868 -------- -------- ------- ------- NET EARNINGS $ 29,359 $ 8,831 $ 9,337 $ 3,031 ======== ======== ======= ======= Earnings per common share (Note 3) Basic $ 2.66 $ .81 $ .84 $ .28 ======== ======== ======= ======= Diluted $ 2.55 $ .77 $ .80 $ .26 ======== ======== ======= ======= Net earnings $ 29,359 $ 8,831 $ 9,337 $ 3,031 Other comprehensive (loss) income, net of tax - Foreign currency translation adjustments (31) (142) 7 (20) -------- -------- ------- ------- Comprehensive net earnings $ 29,328 $ 8,689 $ 9,344 $ 3,011 ======== ======== ======= =======
The accompanying notes are an integral part of these statements. 3 K-SWISS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, ---------------------- 1999 1998 -------- ------- Net cash provided by operating activities $ 25,888 $12,093 Cash flows from investing activities: Proceeds from the maturity of investment securities - 5,995 Purchase of property, plant and equipment (1,686) (5,159) Proceeds from sale of property 16 2,267 -------- ------- Net cash (used in) provided by investing activities (1,670) 3,103 Cash flows from financing activities: Net borrowings (repayments) under bank lines of credit 1,827 (640) Purchase of treasury stock (12,989) (3,371) Proceeds from stock options exercised 5,785 83 Payment of dividends (501) (326) -------- ------- Net cash used in financing activities (5,878) (4,254) Effect of exchange rate changes on cash (26) (137) -------- ------- Net increase in cash and cash equivalents 18,314 10,805 Cash and cash equivalents at beginning of period 37,360 36,123 -------- ------- Cash and cash equivalents at end of period $ 55,674 $46,928 ======== ======= Supplemental disclosure of cash flow information: Non-cash investing and financing activities: Income tax benefit of options exercised $ 9,000 $ 50 Cash paid during the period for: Interest $ 71 $ 76 Income taxes $ 12,968 $ 6,901
The accompanying notes are an integral part of these statements. 4 K-SWISS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the consolidated financial position of K-Swiss Inc. (the "Company") as of September 30, 1999 and the results of its operations and its cash flows for the nine and three months ended September 30, 1999 and 1998. The results of operations and cash flows for the nine and three months ended September 30, 1999 are not necessarily indicative of the results to be expected for any other interim period or the full year. These consolidated financial statements should be read in combination with the audited consolidated financial statements and notes thereto for the year ended December 31, 1998. 2. The federal income tax returns of the Company for the years ended 1990, 1991 and 1992 are under examination by the Internal Revenue Service ("IRS"). In May 1998, the IRS issued its final report proposing additional taxes of an aggregate of approximately $1,561,000 plus penalties and interest for these years. The Company is protesting the IRS assessment. Also, the federal income tax returns of the Company for the years ended 1993, 1995 and 1996 are currently under examination by the IRS. The IRS has issued a preliminary examination report covering the 1993 fiscal year proposing adjustments to income of approximately $3,426,000 for this year. Although no assurance can be given regarding the outcome of such examinations, the Company believes that any taxes which might become payable as a result of these examinations would not result in additional expense recognized in the financial statements other than interest and penalties, if any, as the Company has recorded deferred income taxes on the untaxed portion of unremitted earnings of a foreign subsidiary. Therefore, management believes that resolution of the IRS examinations should not have a material adverse impact on the Company's financial position and results of operations. 3. The following is a reconciliation of the number of shares (denominator) used in the basic and diluted earnings per share computations (shares in thousands):
Nine Months Ended September 30, Three Months Ended September 30, --------------------------------- ---------------------------------- 1999 1998 1999 1998 --------------- ---------------- ---------------- --------------- Per Per Per Per Share Share Share Share Shares Amount Shares Amount Shares Amount Shares Amount ------ ------ ------ ------- ------- ------- ------ ------ Basic EPS 11,036 $ 2.66 10,939 $ .81 11,164 $ .84 10,877 $ .28 Effect of dilutive stock options 493 ( .11) 494 (.04) 521 (.04) 603 (.02) ------ ------ ------ ------- ------ ------ ------ ------ Diluted EPS 11,529 $ 2.55 11,433 $ .77 11,685 $ .80 11,480 $ .26 ====== ====== ====== ======= ====== ====== ====== ======
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 Months Three Months Ended September 30, Ended September 30, ------------------- ------------------- 1999 1999 ------------- -------------- Options to purchase shares of common stock (in thousands) 1 1 Exercise price $47.38 $47.38 Expiration date May 2009 May 2009
5 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 Months Three Months Ended September 30, Ended September 30, ------------------- ------------------- 1998 1998 ------------- ------------- Options to purchase shares of common stock (in thousands) 121 - Exercise prices $10.63 - $ 11.50 - Expiration dates August 2001 - - November 2004
4. The Company's predominant business is the design, development and distribution of athletic footwear. The Company is organized into three geographic regions: the United States, Europe and other international operations. Certain reclassifications have been made in the 1999 and 1998 presentations. The following tables summarize segment information (in thousands):
NINE MONTHS THREE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ------------------- ------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Revenues from unrelated entities: United States $ 218,245 $ 108,618 $ 74,078 $ 33,820 Europe 10,545 8,378 3,278 2,752 Other International 7,094 4,505 2,778 1,640 -------- -------- ------- ------- $ 235,884 $ 121,501 $ 80,134 $ 38,212 ======== ======== ======= ======= Inter-geographic revenues: United States $ 1,950 $ 1,340 $ 818 $ 512 Europe 21 18 18 11 Other International 2,909 2,756 245 725 -------- -------- ------- ------- $ 4,880 $ 4,114 $ 1,081 $ 1,248 ======== ======== ======= ======= Total revenues: United States $ 220,195 $ 109,958 $ 74,896 $ 34,332 Europe 10,566 8,396 3,296 2,763 Other International 10,003 7,261 3,023 2,365 Less inter-geographic revenues (4,880) (4,114) (1,081) (1,248) -------- -------- ------- ------- $ 235,884 $ 121,501 $ 80,134 $ 38,212 ======== ======== ======= ======= Operating profit (loss): United States $ 53,677 $ 19,691 $ 17,120 $ 6,163 Europe (752) (607) (706) (232) Other International 3,305 199 487 88 Less corporate expenses and eliminations (8,515) (6,197) (1,835) (1,692) -------- -------- ------- ------- $ 47,715 $ 13,086 $ 15,066 $ 4,327 ======== ======== ======= =======
September 30, December 31, 1999 1998 ---- ---- Identifiable assets: United States $ 86,005 $ 67,487 Europe 6,937 6,299 Other International 14,413 15,720 Corporate assets and eliminations (1) 43,795 25,959 -------- ------- $ 151,150 $ 115,465 ======== =======
(1) Corporate assets include cash and cash equivalents, investments and intangible assets. 6 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF - ------ FINANCIAL CONDITION AND RESULTS OF OPERATIONS Note Regarding Forward-Looking Statements and Analyst Reports "Forward-looking statements", within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"), include certain written and oral statements made, or incorporated by reference, by the Company or its representatives in this report, other reports, filings with the Securities and Exchange Commission ("the S.E.C."), press releases, conferences or otherwise. Such forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and may contain the words "believe", "anticipate", "expect", "estimate", "intend", "plan", "project", "will be", "will continue", "will likely result", or any variations of such words with similar meaning. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements. Investors should carefully review the risk factors set forth in other reports or documents the Company files with the S.E.C., including Forms 10-Q, 10-K and 8-K. Some of the other risks and uncertainties that should be considered include, but are not limited to, the following: international, national and local general economic and market conditions (including the current Asian economic situation)the size and growth of the overall athletic footwear and apparel markets; the size of the Company's competitors; intense competition among designers, marketers, distributors and sellers of athletic footwear and apparel for consumers and endorsers; market acceptance of the Company's new training shoe line; demographic changes; changes in consumer preferences; popularity of particular designs, categories of products, and sports; seasonal and geographic demand for the Company's products; the size, timing and mix of purchases of the Company's products; fluctuations and difficulty in forecasting operating results, including, without limitation, the fact that advance "futures" orders may not be indicative of future revenues due to the changing mix of futures and at-once orders; the ability of the Company to continue, manage or forecast its growth and inventories; new product development and commercialization; the ability to secure and protect trademarks, patents, and other intellectual property; performance and reliability of products; customer service; year 2000 compliance issues; adverse publicity; the loss of significant customers or suppliers; dependence on distributors; business disruptions; increased costs of freight and transportation to meet delivery deadlines; changes in business strategy or development plans; general risks associated with doing business outside the United States, including, without limitation, import duties, tariffs, quotas and political and economic instability; changes in government regulations; liability and other claims asserted against the Company; the ability to attract and retain qualified personnel; and other factors referenced or incorporated by reference in this report and other reports. The Company operates in a very competitive and rapidly changing environment. New risk factors can arise and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on the Company's business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Investors should also be aware that while the Company does, from time to time, communicate with securities analysts, it is against the Company's policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, investors should not assume that the Company agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, the Company has a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts or others contain any projections, forecasts or opinions, such reports are not the responsibility of the Company. 7 Results of Operations The following table sets forth, for the periods indicated, the percentage of certain items in the consolidated statements of earnings relative to revenues.
NINE MONTHS THREE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ------------------- -------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Revenues 100.0% 100.0% 100.0% 100.0% Cost of goods sold 56.3 56.9 56.9 53.9 Gross profit 43.7 43.1 43.1 46.1 Selling, general and administrative Expenses 23.5 32.3 24.3 34.8 Interest income, net 0.5 1.2 0.6 1.5 Earnings before income taxes 20.7 12.0 19.4 12.8 Income tax expense 8.3 4.7 7.7 4.9 Net earnings 12.4 7.3 11.7 7.9
Revenues increased to $80,134,000 for the quarter ended September 30, 1999 from $38,212,000 for the quarter ended September 30, 1998, an increase of $41,922,000 or 109.7%. Revenues increased to $235,884,000 for the nine months ended September 30, 1999 from $121,501,000 for the nine months ended September 30, 1998, an increase of $114,383,000 or 94.1%. The increases for the quarter and nine months ended September 30, 1999 were the result of an increase in the volume of footwear sold and higher average wholesale prices per pair. The volume of footwear sold increased to 2,897,000 and 8,629,000 pair for the quarter and nine months ended September 30, 1999 from 1,472,000 and 4,760,000 pair for the quarter and nine months ended September 30, 1998. The increase in the volume of footwear sold for the quarter ended September 30, 1999 was primarily the result of increased sales of the Classic and children's categories of shoes of 118.6% and 89.4%, respectively. The average wholesale price per pair increased to $26.77 and $26.18 for the quarter and nine months ended September 30, 1999 from $24.93 and $24.46 for the quarter and nine months ended September 30, 1998, increases of 7.4% and 7.0%, respectively. The increase in the average wholesale price per pair for the quarter and nine months ended September 30, 1999, is primarily attributable to the introduction of new styles in the Classic and children's category at higher average wholesale prices. Domestic revenues increased 119.8% to $74,014,000 for the quarter ended September 30, 1999 from $33,674,000 for the quarter ended September 30, 1998. Domestic revenues increased 101.0% to $217,914,000 for the nine months ended September 30, 1999 from $108,423,000 for the nine months ended September 30, 1998. International revenues increased 34.9% to $6,120,000 for the quarter ended September 30, 1999 from $4,538,000 for the quarter ended September 30, 1998. International revenues increased 37.4% to $17,970,000 for the nine months ended September 30, 1999 from $13,078,000 for the nine months ended September 30, 1998. The increase in international revenues for the nine months ended September 30, 1999 was due to increases in most of the Company's international markets. International revenues, as a percentage of total revenues, decreased to 7.6% for the quarter and nine months ended September 30, 1999 as compared with 11.9% and 10.8% for the quarter and nine months ended September 30, 1998. Gross profit margins, as a percentage of revenues, decreased to 43.1% for the quarter ended September 30, 1999, from 46.1% for the quarter ended September 30, 1998. Gross profit margins, as a percentage of revenues, increased to 43.7% from 43.1% for the nine months ended September 30, 1999 and 1998, respectively. Gross profit margins, for the three and nine months ended September 30, 1999, fluctuated primarily due to changes in the product mix of sales. Selling, general and administrative expenses increased to $19,443,000 (24.3% of revenues) and $55,462,000 (23.5% of revenues) for the quarter and nine months ended September 30, 1999, respectively, from $13,279,000 (34.8% of revenues) and $39,266,000 (32.3% of revenues) for the quarter and nine months ended September 30, 1998, respectively, increases of $6,164,000 and $16,196,000 or 46.4% and 41.3%, respectively. The increases in these expenses for the quarter and nine months ended September 30, 1999 were the result of increases in advertising costs, salaries and commissions as well as an increase in the bonus accrual for an employee incentive program. The decreases in these expenses as a percentage of revenues for the quarter and nine months ended September 30, 1999 were the result of increases in the revenues for the quarter and nine months ended September 30, 1999 at a faster rate than the increase in the selling, general and administrative expenses during the same time periods. Net interest income was $483,000 (0.6% of revenues) and $1,101,000 (0.5% of revenues) for the quarter and nine months ended September 30, 1999, respectively, compared to $572,000 (1.5% of revenues) and $1,471,000 (1.2% of revenues) for the quarter and nine months ended September 30, 1998, respectively, decreases of $89,000 and $370,000, respectively. The decrease in net interest income was primarily due to lower average balances and rates for the quarter and nine months ended September 30, 1999 as compared to the quarter and nine months ended September 30, 1998. 8 The Company's effective tax rate increased to 39.9% of earnings before income tax from 39.3% for the nine months ended September 30, 1999 and 1998, respectively. The $9,000,000 income tax benefit of options exercised for the nine months ended September 30, 1999 was credited to additional paid-in capital and therefore did not impact the effective tax rate. Net earnings increased 208.1% to $9,337,000 for the quarter ended September 30, 1999 from $3,031,000 for the quarter ended September 30, 1998. Net earnings increased 232.5% to $29,359,000 for the nine months ended September 30, 1999 from $8,831,000 for the nine months ended September 30, 1998. At September 30, 1999 and 1998, domestic futures orders with start ship dates from October 1999 and 1998 through March 2000 and 1999 were approximately $105,054,000 and $106,176,000, respectively, a decrease of 1.1%. At September 30, 1999 and 1998, international futures orders with start ship dates from October 1999 and 1998 through March 2000 and 1999 were approximately $8,073,000 and $7,578,000, respectively, an increase of 6.5%. At September 30, 1999 and 1998 total futures orders with start ship dates from October 1999 and 1998 through March 2000 and 1999 were approximately $113,127,000 and $113,754,000, respectively, a decrease of 0.6%. The 0.6% decrease in total futures orders is comprised of a 44.5% increase in the fourth quarter 1999 futures orders and a 21.4% decrease in the first quarter 2000 futures orders. "Backlog", as of any date, represents orders scheduled to be shipped within the next six months. Backlog does not include orders scheduled to be shipped on or prior to the date of determination of backlog. These orders are not necessarily indicative of revenues for subsequent periods because: (1) the mix of "futures" and "at-once" orders can vary significantly from quarter to quarter and year to year and (2) the rate of customer order cancellations can also vary from quarter to quarter and year to year. Liquidity and Capital Resources The Company generated cash of $25,888,000 and $12,093,000 from its operating activities during the nine months ended September 30, 1999 and 1998, respectively. Cash provided by operations for the nine months ended September 30, 1999 as compared to the nine months ended September 30, 1998 varied primarily due to changes in net earnings, accounts receivable, inventories, prepaid expenses and other assets, accounts payable and accrued liabilities. The Company had a net outflow of cash from its investing activities for the nine months ended September 30, 1999 due to the purchase of property, plant and equipment. The Company had a net inflow of cash from its investing activities for the nine months ended September 30, 1998 due to proceeds from the maturity of investment securities, partially offset by net purchases of property, plant and equipment. The Company had a net outflow of cash from its financing activities for the nine months ended September 30, 1999 primarily due to the purchase of treasury stock, partially offset by proceeds from the exercise of stock options. On October 8, 1999, the Company announced the completion of its April 1998 $20 million stock repurchase program and a new authorization by the Board of Directors for the Company to repurchase through December 2003 up to an additional $25 million of its Class A Common Stock from time to time on the open market. The Company adopted this program because it believes repurchasing its shares can be a good use of excess cash depending on the Company's array of alternatives. Currently, the Company has made purchases under all stock repurchase programs from August 1996 through October 21, 1999 (the date of filing of this Form 10-Q) of 3,228,932 shares at an aggregate cost totaling approximately $36,116,000. The Company maintains an agreement with a bank whereby the Company may borrow, in the form of a secured revolving credit facility, up to $30,000,000. This facility currently expires in July 2001. Substantially all of the Company's assets (other than real estate) are pledged as security for this facility. The credit facility provides for interest to be paid at the prime rate less 3/4% or, at the Company's discretion and with certain restrictions, other market based rates. The Company pays a commitment fee of 1/8% of the unused line for availability of the credit facility. The Company must meet certain restrictive financial convenants as agreed upon in the facility. The Company's European offices have agreements with the bank whereby they can borrow up to $4,500,000 in the form of secured revolving credit facilities. These facilities are made available until terminated by either party . No material capital commitments exist at September 30, 1999. 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 1999. The Company's working capital increased $33,115,000 to $116,414,000 at September 30, 1999 from $83,299,000 at December 31, 1998. 9 Impact of Year 2000 The Year 2000 Issue is the result of computer-controlled systems using two digits rather than four to define the applicable year. For example, computer programs that have time-sensitive software may recognize a date ending in "00" as the year 1900 rather than the year 2000. This could result in system failure or miscalculations causing disruptions of operations including, among other things, an inability to process transactions, send invoices, or engage in similar normal business activities. If the Company, its significant customers, or suppliers fail to make necessary modifications and conversions on a timely basis, the year 2000 Issue could have a material adverse effect on Company operations. However, the impact cannot be quantified at this time. To address these year 2000 Issues with its internal systems, the Company has initiated a comprehensive program which is designed to deal with the most critical systems first. Assessment and remediation are proceeding in tandem. The Company completed its year 2000 software program conversions for its critical systems during the first quarter of 1999, which encompass all major categories of systems in use by the Company, including manufacturing, sales and finance. During the second and third quarters of 1999, the Company worked with critical suppliers of products and services and customers to determine whether they are year 2000 capable and to monitor their progress towards year 2000 capability. Once supplier and customer capability is determined, the Company will commence work on various types of contingency planning to address potential problem areas with internal systems and with suppliers, customers, and other third parties. Nevertheless, there can be no assurance that there will not be a material adverse effect on the Company if third party governmental or business entities do not convert or replace their systems in a timely manner and in a way that is compatible with the Company's systems. Costs related to the year 2000 Issues are funded through operating cash flows. Currently, the Company has expended approximately $470,000 in remediation efforts, principally the cost of modifying the applicable code of existing software. The Company estimates remaining costs to be minimal. The Company presently believes that the total cost of achieving Year 2000 compliant systems is not expected to be material to financial condition, liquidity, or results of operations. Time and cost estimates are based on currently available information. Developments that could affect estimates include, but are not limited to, the availability and cost of trained personnel; the ability to locate and correct all relevant computer code and systems; and remediation success of the Company's suppliers and customers. 10 PART II - OTHER INFORMATION ITEM 1: Legal Proceedings. ----------------- None. ITEM 2: Changes in Securities. --------------------- None. ITEM 3: Defaults Upon Senior Securities. ------------------------------- None. ITEM 4: Submission of Matters to a Vote of Security Holders. --------------------------------------------------- None. ITEM 5: Other Information. ----------------- None. ITEM 6: Exhibits and Reports on Form 8-K: -------------------------------- (a) Exhibits 27 - Financial Data Schedule (b) Reports on Form 8-K There were no reports filed on Form 8-K during the third quarter of 1999; however, the Company did file a Current Report on form 8-K on October 8, 1999 relating to the issuance by the Company of a press release announcing the completion of its April 1998 $20 million stock repurchase program and a new authorization by the Board of Directors for the Company to repurchase through December 2003 up to an additional $25 million of its Class A Common Stock from time to time on the open market. 11 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. K-Swiss Inc. Date: October 20, 1999 By: /s/ George Powlick ------------------------- George Powlick, Vice President Finance and Chief Financial Officer 12 EXHIBIT INDEX ------------- Exhibit Page - ------- ---- 27 Financial Data Schedule 14 13 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS: 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 55,674 0 35,432 (1,279) 40,417 136,291 8,855 0 151,150 19,877 0 0 0 140 113,751 151,150 235,884 235,884 132,707 55,462 0 0 1,101 48,816 19,457 29,359 0 0 0 29,359 2.66 2.55 Interest Income Net of Interest Expense
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