10-Q 1 d10q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities --- Exchange Act of 1934 For the period ended June 30, 2001 ------------- OR Transition Report Pursuant to Section 13 or 15(d) of the Securities --- Exchange Act of 1934 For the transition period from to ----------------- -------------- Commission File number 0-18490 K-SWISS INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 95-4265988 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 31248 Oak Crest Drive, Westlake Village, CA 91361 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) 818-706-5100 -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares of common stock outstanding at July 17, 2001: Class A 6,591,467 Class B 2,953,478 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ------ K-SWISS INC. CONSOLIDATED BALANCE SHEETS (Dollar amounts in thousands)
June 30, December 31, 2001 2000 -------- -------- (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 66,725 $ 67,350 Accounts receivable, less allowance for doubtful accounts of $769 and $852 as of June 30, 2001 and December 31, 2000, respectively 34,506 25,489 Inventories 37,632 43,815 Prepaid expenses and other 2,548 4,452 Deferred taxes 1,384 1,571 -------- -------- Total current assets 142,795 142,677 PROPERTY, PLANT AND EQUIPMENT, net 8,172 8,358 OTHER ASSETS Intangible assets 5,099 3,973 Other 3,319 2,419 -------- -------- 8,418 6,392 -------- -------- $159,385 $157,427 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Bank lines of credit $ 544 $ 546 Current maturities of subordinated debentures 500 500 Trade accounts payable 8,236 9,763 Accrued income taxes 884 711 Accrued liabilities 12,948 10,589 -------- -------- Total current liabilities 23,112 22,109 OTHER LIABILITIES 6,304 7,590 DEFERRED TAXES 7,985 7,509 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; 11,140,399 shares issued, 6,669,467 shares outstanding and 4,470,932 shares held in treasury at June 30, 2001 and 11,080,299 shares issued, 6,992,467 shares outstanding and 4,087,832 shares held in treasury at December 31, 2000 111 111 Class B-authorized 10,000,000 shares of $.01 par value; issued and outstanding 2,953,478 shares at June 30, 2001 and 2,983,478 shares at December 31, 2000 30 30 Additional paid-in capital 40,879 40,444 Treasury stock (58,307) (49,348) Retained earnings 139,975 129,570 Accumulated other comprehensive earnings - Foreign currency translation (704) (588) -------- -------- 121,984 120,219 -------- -------- $159,385 $157,427 ======== ========
The accompanying notes are an integral part of these statements. 2 K-SWISS INC. CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS (Amounts in thousands, except per share amounts) (Unaudited)
SIX MONTHS THREE MONTHS ENDED JUNE 30, ENDED JUNE 30, ---------------------------- ------------------------- 2001 2000 2001 2000 -------- -------- ------- ------- Revenues $123,668 $122,464 $55,419 $51,006 Cost of goods sold 74,005 73,702 33,265 29,264 -------- -------- ------- ------- Gross profit 49,663 48,762 22,154 21,742 Selling, general and administrative expenses 32,721 31,534 15,533 16,006 -------- -------- ------- ------- Operating profit 16,942 17,228 6,621 5,736 Interest income, net 979 1,662 89 946 -------- -------- ------- ------- Earnings before income taxes 17,921 18,890 6,710 6,682 Income tax expense 7,223 7,582 2,625 2,711 -------- -------- ------- ------- NET EARNINGS $ 10,698 $ 11,308 $ 4,085 $ 3,971 ======== ======== ======= ======= Earnings per common share (Note 3) Basic $ 1.08 $ 1.08 $ .41 $ .38 ======== ======== ======= ======= Diluted $ 1.02 $ 1.04 $ .39 $ .37 ======== ======== ======= ======= Net earnings $ 10,698 $ 11,308 $ 4,085 $ 3,971 Other comprehensive loss, net of tax - Foreign currency translation adjustments (116) (16) (134) (45) -------- -------- ------- ------- Comprehensive earnings $ 10,582 $ 11,292 $ 3,951 $ 3,926 ======== ======== ======= =======
The accompanying notes are an integral part of these statements. 3 K-SWISS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited)
SIX MONTHS ENDED JUNE 30, ------------------------ 2001 2000 -------- -------- Net cash provided by operating activities $ 10,104 $ 23,348 Cash flows from investing activities: Purchase of property, plant and equipment (541) (640) Proceeds from sale of property 8 9 -------- -------- Net cash used in investing activities (533) (631) Cash flows from financing activities: Net (repayments) borrowings under bank lines of credit (2) 322 Payment to minority member (1,000) - Purchase of treasury stock (8,959) (7,362) Proceeds from stock options exercised 165 35 Payment of dividends (293) (310) -------- -------- Net cash used in financing activities (10,089) (7,315) Effect of exchange rate changes on cash (107) (56) -------- -------- Net (decrease) increase in cash and cash equivalents (625) 15,346 Cash and cash equivalents at beginning of period 67,350 53,119 -------- -------- Cash and cash equivalents at end of period $ 66,725 $ 68,465 ======== ======== Supplemental disclosure of cash flow information: Non-cash investing and financing activities: Contribution of assets by minority member $ 1,333 $ - Income tax benefit of options exercised $ 270 $ 28 Cash paid during the period for: Interest $ 63 $ 47 Income taxes $ 3,988 $ 4,259
The accompanying notes are an integral part of these statements. 4 K-SWISS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the consolidated financial position of K-Swiss Inc. (the "Company") as of June 30, 2001 and the results of its operations and its cash flows for the six and three months ended June 30, 2001 and 2000. The results of operations and cash flows for the six and three months ended June 30, 2001 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, 2000. Certain reclassifications have been made in the six and three months ended June 30, 2000 presentation to conform to the six and three months ended June 30, 2001 presentation. 2. The federal income tax returns of the Company for the years ended 1990, 1991 and 1992 are under examination by the Internal Revenue Service ("IRS"). In May 1998, the IRS issued its final report proposing additional taxes of an aggregate of approximately $1,561,000 plus penalties and interest for these years. The Company is protesting the IRS assessment. Also, the federal income tax returns of the Company for the years ended 1993, 1995, 1996 and 1998 are currently under examination by the IRS. In August 2000, the IRS issued its final report proposing additional taxes for the years ended 1993, 1995 and 1996 of an aggregate of approximately $4,985,000 plus penalties and interest for these years. Through June 2001, the Company has agreed to certain adjustments for the years ended 1990 through 1996 resulting in approximately $1,644,000 of taxes. These tax adjustments did not require the Company to record additional income tax expense as the Company had recorded deferred income taxes on the untaxed portion of unremitted earnings of a foreign subsidiary. The Company recorded approximately $635,000 of interest expense in the quarter ended June 30, 2001 related to adjustments agreed to by the Company during the quarter. The interest charges are reflected net of interest income on the Company's consolidated statement of earnings. Of the remaining balance of the proposed assessments, the Company believes that approximately $2,115,000 of taxes which might become payable as a result of these examinations would not result in additional expense recognized in the financial statements other than interest and penalties, if any, as the Company has recorded deferred income taxes on the untaxed portion of the unremitted earnings of a foreign subsidiary. For the remaining assessed taxes of approximately $2,787,000, for which the Company has not provided deferred income taxes, the Company believes it has meritorious defenses to the IRS challenges although no assurance can be given that the final results of such IRS challenges will not have a material adverse impact on the Company's financial position and results of operations. 3. 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 June 30, 2001. 4. The Company entered into a license agreement in May 2001. The license agreement requires the Company to make minimum royalty payments through the year 2005 as follows: 2001 $ 212,000 2002 750,000 2003 1,155,000 2004 1,575,000 2005 1,875,500 ---------- $5,529,500 ========== 5 5. The following is a reconciliation of the number of shares (denominator) used in the basic and diluted earnings per share computations (shares in thousands):
Six Months Ended June 30, Three Months Ended June 30, ----------------------------------------- ---------------------------------------- 2001 2000 2001 2000 ------------------ ------------------ ----------------- ------------------ Per Per Per Per Share Share Share Share Shares Amount Shares Amount Shares Amount Shares Amount ------- -------- ------ -------- ------ -------- ------ -------- Amount Basic EPS 9,901 $1.08 10,498 $1.08 9,870 $ .41 10,334 $ .38 Effect of dilutive stock options 596 (.06) 397 (.04) 583 (.02) 439 (.01) ------ ----- ------ ----- ------ ----- ------ ----- Diluted EPS 10,497 $1.02 10,895 $1.04 10,453 $ .39 10,773 $ .37 ====== ===== ====== ===== ====== ===== ====== =====
The following options were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares:
Six Months Three Months Ended June 30, Ended June 30, ------------------------- --------------------- 2001 2001 ------------------------- --------------------- Options to purchase shares of common stock (in thousands) 75 245 Exercise prices $27.13 - $47.38 $24.80 - $47.38 Expiration dates April 2009 - October 2010 April 2009 - May 2011 Six and Three Months Ended June 30, 2000 ------------------------- Options to purchase shares of common stock (in thousands) 99 Exercise prices $17.06 - $47.38 Expiration dates April 2009 - October 2009
6 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. The following tables summarize segment information (in thousands):
SIX MONTHS THREE MONTHS ENDED JUNE 30, ENDED JUNE 30, ------------------------ --------------------- 2001 2000 2001 2000 -------- -------- ------- ------- Revenues from unrelated entities: United States $108,133 $109,872 $48,738 $46,239 Europe 7,801 8,383 2,434 2,669 Other International 7,734 4,209 4,247 2,098 -------- -------- ------- ------- $123,668 $122,464 $55,419 $51,006 ======== ======== ======= ======= Inter-geographic revenues: United States $ 933 $ 539 $ 404 $ 199 Europe 34 14 9 14 Other International 3,343 2,320 2,026 1,023 -------- -------- ------- ------- $ 4,310 $ 2,873 $ 2,439 $ 1,236 ======== ======== ======= ======= Total revenues: United States $109,066 $110,411 $49,142 $46,438 Europe 7,835 8,397 2,443 2,683 Other International 11,077 6,529 6,273 3,121 Less inter-geographic revenues (4,310) (2,873) (2,439) (1,236) -------- -------- ------- ------- $123,668 $122,464 $55,419 $51,006 ======== ======== ======= ======= Operating profit (loss): United States $ 21,786 $ 21,248 $ 8,959 $ 8,545 Europe (1,553) (571) (1,231) (794) Other International 1,183 383 848 379 Less corporate expenses and eliminations (4,474) (3,832) (1,955) (2,394) -------- -------- ------- ------- $ 16,942 $ 17,228 $ 6,621 $ 5,736 ======== ======== ======= =======
June 30, December 31, 2001 2000 -------- -------- Identifiable assets: United States $ 80,702 $ 78,944 Europe 6,994 5,770 Other International 23,490 20,752 Corporate assets and eliminations (1) 48,199 51,961 -------- -------- $159,385 $157,427 ======== ======== (1) Corporate assets include cash and cash equivalents and intangible assets. 7 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; the size and growth of the overall athletic footwear and apparel markets; the size of the Company's competitors; intense competition among designers, marketers, distributors and sellers of athletic footwear and apparel for consumers and endorsers; market acceptance of the Company's training shoe line; market acceptance of new Limited Edition product; market acceptance of non-performance product in Europe; demographic changes; changes in consumer preferences; popularity of particular designs, categories of products, and sports; seasonal and geographic demand for the Company's products; the size, timing and mix of purchases of the Company's products; fluctuations and difficulty in forecasting operating results, including, without limitation, the fact that advance "futures" orders may not be indicative of future revenues due to the changing mix of futures and at-once orders; potential cancellation of future orders; the ability of the Company to continue, manage or forecast its growth and inventories; new product development and commercialization; the ability to secure and protect trademarks, patents, and other intellectual property; performance and reliability of products; customer service; adverse publicity; the loss of significant customers or suppliers; dependence on distributors; business disruptions; increased costs of freight and transportation to meet delivery deadlines; changes in business strategy or development plans; general risks associated with doing business outside the United States, including, without limitation, import duties, tariffs, quotas and political and economic instability; changes in government regulations; liability and other claims asserted against the Company; the ability to attract and retain qualified personnel; and other factors referenced or incorporated by reference in this report and other reports. The Company operates in a very competitive and rapidly changing environment. New risk factors can arise and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on the Company's business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Investors should also be aware that while the Company does, from time to time, communicate with securities analysts, it is against the Company's policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, investors should not assume that the Company agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, the Company has a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts or others contain any projections, forecasts or opinions, such reports are not the responsibility of the Company. 8 Results of Operations The following table sets forth, for the periods indicated, the percentage of certain items in the consolidated statements of earnings relative to revenues.
SIX MONTHS THREE MONTHS ENDED JUNE 30 ENDED JUNE 30, ------------------ ----------------- 2001 2000 2001 2000 ----- ----- ----- ----- Revenues 100.0% 100.0% 100.0% 100.0% Cost of goods sold 59.8 60.2 60.0 57.4 Gross profit 40.2 39.8 40.0 42.6 Selling, general and administrative expenses 26.5 25.8 28.0 31.4 Interest income, net 0.8 1.4 0.1 1.9 Earnings before income taxes 14.5 15.4 12.1 13.1 Income tax expense 5.8 6.2 4.7 5.3 Net earnings 8.7 9.2 7.4 7.8
Revenues increased to $55,419,000 for the quarter ended June 30, 2001 from $51,006,000 for the quarter ended June 30, 2000, an increase of $4,413,000 or 8.7%. Revenues increased to $123,668,000 for the six months ended June 30, 2001 from $122,464,000 for the six months ended June 30, 2000, an increase of $1,204,000 or 1.0%. The increases for the quarter and six months ended June 30, 2001 were the result of an increase in the volume of footwear sold partially offset by lower average wholesale prices per pair. The volume of footwear sold increased to 2,163,000 and 4,655,000 pair for the quarter and six months ended June 30, 2001 from 1,811,000 and 4,449,000 pair for the quarter and six months ended June 30, 2000. The increase in the volume of footwear sold for the quarter ended June 30, 2001 was primarily the result of increased sales of the children's, training and Classic categories of shoes of 32.2%, 177.7% and 7.0%, respectively. In addition, during the quarter and six months ended June 30, 2001, approximately 16% of revenues were made to one domestic customer and during the quarter and six months ended June 30, 2000, approximately 23% of revenues were made to this same domestic customer. The average wholesale price per pair decreased to $25.02 and $25.81 for the quarter and six months ended June 30, 2001 from $27.21 and $26.39 for the quarter and six months ended June 30, 2000, decreases of 8.0% and 2.2%, respectively. The decrease in the average wholesale price per pair for the quarter and six months ended June 30, 2001, is primarily attributable to a lower average wholesale price in the Classic and children's categories, as well as an increase in closeout sales during the quarter ended June 30, 2001, which carry a lower average wholesale price per pair. Domestic revenues increased 5.8% to $48,738,000 for the quarter ended June 30, 2001 from $46,050,000 for the quarter ended June 30, 2000. Domestic revenues decreased 1.3% to $108,133,000 for the six months ended June 30, 2001 from $109,607,000 for the six months ended June 30, 2000. International revenues increased 34.8% to $6,681,000 for the quarter ended June 30, 2001 from $4,956,000 for the quarter ended June 30, 2000. International revenues increased 20.8% to $15,535,000 for the six months ended June 30, 2001 from $12,857,000 for the six months ended June 30, 2000. International revenues, as a percentage of total revenues, increased to 12.1% and 12.6% for the quarter and six months ended June 30, 2001 as compared with 9.7% and 10.5% for the quarter and six months ended June 30, 2000. Gross profit margins, as a percentage of revenues, decreased to 40.0% for the quarter ended June 30, 2001, from 42.6% for the quarter ended June 30, 2000. Gross profit margins, as a percentage of revenues, increased to 40.2% from 39.8% for the six months ended June 30, 2001 and 2000, respectively. Gross profit margins decreased for the quarter ended June 30, 2001 primarily due to changes in the geographic and product mix of sales. Selling, general and administrative expenses decreased to $15,533,000 (28.0% of revenues) for the quarter ended June 30, 2001, from $16,006,000 (31.4% of revenues) for the quarter ended June 30, 2000, a decrease of $473,000 or 3.0%. Selling, general and administrative expenses increased to $32,721,000 (26.5% of revenues) for the six months ended June 30, 2001, from $31,534,000 (25.8% of revenues) for the six months ended June 30, 2000, an increase of $1,187,000 or 3.8%. The increase in these expenses for the six months ended June 30, 2001 was primarily the result of the decrease in the expense related to an employee incentive bonus during the first quarter of the prior year that did not also occur in 2001. In the six months ended June 30, 2000, there was a reduction of employee incentive bonus accruals due to diminished financial performance during that period compared to the same period of the previous year. The increase for the six months ended June 30, 2001 was partially offset by a decrease in advertising expenses. 9 Net interest income was $89,000 (0.1% of revenues) and $979,000 (0.8% of revenues) for the quarter and six months ended June 30, 2001, respectively, compared to $946,000 (1.9% of revenues) and $1,662,000 (1.4% of revenues) for the quarter and six months ended June 30, 2000, respectively, decreases of $857,000 and $683,000, respectively. During the quarter ended June 30, 2001, the Company recorded approximately $635,000 of interest expense related to the 1993, 1995 and 1996 Internal Revenue Service examinations. The Company has agreed to certain adjustments for these tax years, none of which will require the Company to record additional income tax expense, as the Company has recorded deferred income taxes on the untaxed portion of unremitted earnings of a foreign subsidiary. The decrease in net interest income was primarily due to this additional interest expense recorded. The decrease was also the result of a decrease in the weighted average interest rates, partially offset by higher average balances for the quarter and six months ended June 30, 2001 as compared to the quarter and six months ended June 30, 2000. The Company's effective tax rate increased to 40.3% of earnings before income tax from 40.1% for the six months ended June 30, 2001 and 2000, respectively. Net earnings increased 2.9% to $4,085,000 for the quarter ended June 30, 2001 from $3,971,000 for the quarter ended June 30, 2000. Net earnings decreased 5.4% to $10,698,000 for the six months ended June 30, 2001 from $11,308,000 for the six months ended June 30, 2000. At June 30, 2001 and 2000, domestic futures orders with start ship dates from July through December 2001 and 2000 were approximately $77,108,000 and $65,113,000, respectively, an increase of 18.4%. At June 30, 2001 and 2000, international futures orders with start ship dates from July through December 2001 and 2000 were approximately $10,127,000 and $7,406,000, respectively, an increase of 36.7 %. At June 30, 2001 and 2000 total futures orders with start ship dates from July through December 2001 and 2000 were approximately $87,235,000 and $72,519,000, respectively, an increase of 20.3%. The 20.3% increase in total futures orders is comprised of a 4.6% increase in the third quarter futures orders and a 70.6% increase in the fourth quarter futures orders. "Backlog", as of any date, represents orders scheduled to be shipped within the next six months. Backlog does not include orders scheduled to be shipped on or prior to the date of determination of backlog. These orders are not necessarily indicative of revenues for subsequent periods because: (1) the mix of "futures" and "at-once" orders can vary significantly from quarter to quarter and year to year and (2) the rate of customer order cancellations can also vary from quarter to quarter and year to year. Liquidity and Capital Resources The Company generated cash of $10,104,000 and $23,348,000 from its operating activities during the six months ended June 30, 2001 and 2000, respectively. Cash provided by operations for the six months ended June 30, 2001 as compared to the six months ended June 30, 2000 varied primarily due to changes in accounts receivable, inventories, and prepaid expenses and other assets. The Company had a net outflow of cash from its investing activities for the six months ended June 30, 2001 and 2000 due to the purchase of property, plant and equipment. The Company had a net outflow of cash from its financing activities for the six months ended June 30, 2001 primarily due to the purchase of treasury stock and a payment to a minority member. In October 1999, the Company announced the completion of its April 1998 $20 million stock repurchase program and a new authorization by the Board of Directors for the Company to repurchase through December 2003 up to an additional $25 million of its Class A Common Stock from time to time on the open market, as market conditions warrant. The Company adopted this program because it believes repurchasing its shares can be a good use of excess cash depending on the Company's array of alternatives. Currently, the Company has made purchases under all stock repurchase programs from August 1996 through July 20, 2001 (the date of filing of this Form 10-Q) of 4,548,932 shares at an aggregate cost totaling approximately $60,284,000. There is no amount remaining under the October 1999 authorization. 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 June 30, 2001. 10 No other material capital commitments exist at June 30, 2001. Depending on the Company's future growth rate, funds may be required by operating activities. In July 2001, the Company signed a new agreement with a bank whereby the Company may borrow, in the form of an unsecured revolving credit facility, up to $15,000,000. 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. 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 2001. The Company's working capital decreased $885,000 to $119,683,000 at June 30, 2001 from $120,568,000 at December 31, 2000. 11 PART II - OTHER INFORMATION ITEM 1: Legal Proceedings. ----------------- None. ITEM 2: Changes in Securities. --------------------- None. ITEM 3: Defaults Upon Senior Securities. ------------------------------- None. ITEM 4: Submission of Matters to a Vote of Security Holders. --------------------------------------------------- (a) The Annual Meeting of Stockholders was held May 17, 2001. (b) The following directors were elected to serve until the 2002 Annual Meeting of Stockholders or until their successors have been duly elected and qualified: Class A Directors Class B Directors ----------------- ----------------- Stephen Fine Steven Nichols Martyn Wilford George Powlick Lawrence Feldman (c) Of the 6,549,706 shares of Class A Common Stock represented at the meeting, the Class A Directors named in (b) above were elected by the following votes: No. Of Votes Received ---------------------------------- Name For Withheld Authority --------------- -------------- ------------------ Stephen Fine 6,473,987 75,719 Martyn Wilford 6,461,197 88,509 Of the 2,794,535 shares of Class B Common Stock represented at the meeting, the Class B Directors named in (b) above were elected by the following votes: No. Of Votes Received -------------------------------- Name For Withheld Authority ---------- ------------ ------------------ Steven Nichols 27,945,350 - George Powlick 27,945,350 - Lawrence Feldman 27,945,350 - ITEM 5: Other Information. ----------------- None. ITEM 6: Exhibits and Reports on Form 8-K: -------------------------------- (a) Exhibits 10 - Business Loan Agreement dated July 1, 2001 between the Registrant and Bank of America, N.A. (b) Reports on Form 8-K There was one report filed on Form 8-K during the second quarter of 2001. On May 29, 2001, the Company issued a press release announcing that it had formed a joint venture with Rugged Shark to license, produce and market a line of National Geographic footwear. 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. K-Swiss Inc. Date: July 19, 2001 By: /s/ George Powlick ----------------------------------- George Powlick, Vice President Finance and Chief Financial Officer 13 EXHIBIT INDEX Exhibit Page ------- ---- 10 Business Loan Agreement 15 14