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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, 2002
 
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
incorporation or organization)
  
(I.R.S. Employer
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 24, 2002:
 
Class A 12,753,296
Class B   5,670,956
 

 
PART I—FINANCIAL INFORMATION
 
ITEM 1.    FINANCIAL STATEMENTS
 
K-SWISS INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
 
    
June 30,
2002
     
December 31,
2001
  
    
 
(Unaudited
)
         
ASSETS
                  
CURRENT ASSETS
                  
Cash and cash equivalents
   
$
73,444
 
   
$
61,579
 
Accounts receivable, less allowance for doubtful accounts of $1,062 and $993 as of June 30, 2002 and December 31, 2001, respectively
   
 
50,823
 
   
 
30,478
 
Inventories
   
 
34,037
 
   
 
43,995
 
Prepaid expenses and other
   
 
1,435
 
   
 
3,014
 
Deferred taxes
   
 
1,555
 
   
 
1,822
 
    
  
Total current assets
   
 
161,294
 
   
 
140,888
 
PROPERTY, PLANT AND EQUIPMENT, net
   
 
7,978
 
   
 
8,140
 
OTHER ASSETS
                  
Intangible assets
   
 
8,238
 
   
 
8,362
 
Other
   
 
3,603
 
   
 
3,409
 
    
  
    
 
11,841
 
   
 
11,771
 
    
  
    
$
181,113
 
   
$
160,799
 
    
  
LIABILITIES AND STOCKHOLDERS’ EQUITY
                  
CURRENT LIABILITIES
                  
Bank lines of credit
   
$
136
 
   
$
—  
 
Trade accounts payable
   
 
8,877
 
   
 
10,728
 
Accrued income taxes
   
 
2,595
 
   
 
129
 
Accrued liabilities
   
 
15,254
 
   
 
11,077
 
    
  
Total current liabilities
   
 
26,862
 
   
 
21,934
 
OTHER LIABILITIES
   
 
6,718
 
   
 
6,794
 
DEFERRED TAXES
   
 
6,476
 
   
 
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; 22,844,760 shares issued, 12,956,696 shares outstanding and 9,888,064 shares held in treasury at June 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
   
 
228
 
   
 
225
 
Class B-authorized 10,000,000 shares of $.01 par value; issued and outstanding 5,670,956 shares at June 30, 2002 and 5,806,956 shares at December 31, 2001
   
 
57
 
   
 
58
 
Additional paid-in capital
   
 
43,676
 
   
 
41,222
 
Treasury stock
   
 
(70,825
)
   
 
(68,686
)
Retained earnings
   
 
167,717
 
   
 
152,308
 
Accumulated other comprehensive earnings-
                  
Foreign currency translation
   
 
204
 
   
 
(768
)
    
  
    
 
141,057
 
   
 
124,359
 
    
  
    
$
181,113
 
   
$
160,799
 
    
  
 
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
ENDED JUNE 30,
     
THREE MONTHS
ENDED JUNE 30,
  
    
2002
   
2001
     
2002
   
2001
  
Revenues
   
$
154,840
   
$
123,668
 
   
$
74,521
   
$
55,419
 
Cost of goods sold
   
 
86,879
   
 
74,005
 
   
 
42,239
   
 
33,265
 
    
  
  
  
Gross profit
   
 
67,961
   
 
49,663
 
   
 
32,282
   
 
22,154
 
Selling, general and administrative expenses
   
 
42,367
   
 
32,721
 
   
 
22,718
   
 
15,533
 
    
  
  
  
Operating profit
   
 
25,594
   
 
16,942
 
   
 
9,564
   
 
6,621
 
Interest income, net
   
 
451
   
 
979
 
   
 
254
   
 
89
 
    
  
  
  
Earnings before income taxes
   
 
26,045
   
 
17,921
 
   
 
9,818
   
 
6,710
 
Income tax expense
   
 
10,309
   
 
7,223
 
   
 
3,750
   
 
2,625
 
    
  
  
  
NET EARNINGS
   
$
15,736
   
$
10,698
 
   
$
6,068
   
$
4,085
 
    
  
  
  
Earnings per common share (Note 4)
                                
Basic
   
$
.85
   
$
.54
 
   
$
.33
   
$
.21
 
    
  
  
  
Diluted
   
$
.79
   
$
.51
 
   
$
.30
   
$
.20
 
    
  
  
  
Net earnings
   
$
15,736
   
$
10,698
 
   
$
6,068
   
$
4,085
 
Other comprehensive earnings (loss),
      net of tax—  
                                
Foreign currency translation adjustments
   
 
972
   
 
(116
)
   
 
1,010
   
 
(134
)
    
  
  
  
Comprehensive earnings
   
$
16,708
   
$
10,582
 
   
$
7,078
   
$
3,951
 
    
  
  
  
 
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,
  
    
2002
     
2001
  
Net cash provided by operating activities
   
$
13,246
 
   
$
10,104
 
Cash flows from investing activities:
                  
Cash paid for interest in licensing agreement
   
 
—  
 
   
 
(1,000
)
Purchase of property, plant and equipment
   
 
(676
)
   
 
(541
)
Proceeds from sale of property
   
 
7
 
   
 
8
 
    
  
Net cash used in investing activities
   
 
(669
)
   
 
(1,533
)
Cash flows from financing activities:
                  
Net borrowings (repayments) under bank lines of credit
   
 
133
 
   
 
(2
)
Purchase of treasury stock
   
 
(2,139
)
   
 
(8,959
)
Proceeds from stock options exercised
   
 
778
 
   
 
165
 
Payment of dividends
   
 
(327
)
   
 
(293
)
    
  
Net cash used in financing activities
   
 
(1,555
)
   
 
(9,089
)
Effect of exchange rate changes on cash
   
 
843
 
   
 
(107
)
    
  
Net increase (decrease) in cash and cash equivalents
   
 
11,865
 
   
 
(625
)
Cash and cash equivalents at beginning of period
   
 
61,579
 
   
 
67,350
 
    
  
Cash and cash equivalents at end of period
   
$
73,444
 
   
$
66,725
 
    
  
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
   
$
1,561
 
   
$
270
 
Cash paid during the period for:
                  
Interest
   
$
31
 
   
$
63
 
Income taxes
   
$
5,331
 
   
$
3,988
 
 
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, 2002 and the results of its operations and its cash flows for the six and three months ended June 30, 2002 and 2001. The results of operations and cash flows for the six and three months ended June 30, 2002 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, 2001. Certain reclassifications have been made in the six and three months ended June 30, 2001 presentation to conform to the six and three months ended June 30, 2002 presentation.
 
2.    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.
 
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, 2002.

5

K-SWISS INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
4.    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,
  
    
2002
     
2001
     
2002
     
2001
  
    
Shares
   
Per Share Amount
     
Shares
   
Per Share Amount
     
Shares
   
Per Share Amount
     
Shares
   
Per Share Amount
  
Basic EPS
   
18,523
   
$
.85
 
   
19,802
   
$
.54
 
   
18,561
   
$
.33
 
   
19,739
   
$
.21
 
Effect of dilutive
    stock options
   
1,324
   
 
(.06
)
   
1,191
   
 
(.03
)
   
1,394
   
 
(.03
)
 &nbs