K SWISS INC - 10-Q Quarterly Report

UNITED STATES

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 quarterly period ended March 31, 2004

¨	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, California		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 ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). 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 April 28, 2004:


Class A		26,801,482
Class B		8,530,734

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

K-SWISS INC.

CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands)


	March 31, 2004			December 31, 2003
	(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	90,239		$	81,455
Accounts receivable, less allowance for doubtful accounts of $2,043 and $2,079 as of March 31, 2004 and December 31, 2003, respectively		93,286			51,006
Inventories		56,727			73,660
Prepaid expenses and other		1,988			4,760
Deferred taxes		2,863			3,014

Total current assets		245,103			213,895
PROPERTY, PLANT AND EQUIPMENT, net		8,466			8,596
OTHER ASSETS
Intangible assets (Note 5)		5,571			7,301
Other		5,026			4,838

		10,597			12,139

	$	264,166		$	234,630

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Trade accounts payable	$	16,516		$	19,447
Accrued income taxes		10,037			347
Accrued liabilities		22,277			16,715

Total current liabilities		48,830			36,509
OTHER LIABILITIES		15,359			15,234
DEFERRED TAXES		3,984			3,360
STOCKHOLDERS’ EQUITY (Note 7)
Preferred Stock – authorized 2,000,000 shares of $0.01 par value; none issued and outstanding		—			—
Common Stock:
Class A – authorized 90,000,000 shares of $0.01 par value; 26,979,348 shares issued, 26,800,148 shares outstanding and 179,200 shares held in treasury at March 31, 2004 and 26,755,362 shares issued and outstanding at December 31, 2003		270			268
Class B – authorized 18,000,000 shares of $0.01 par value; issued and outstanding 8,530,734 shares at March 31, 2004 and 8,682,734 shares at December 31, 2003		85			87
Additional paid-in capital		31,878			31,059
Treasury Stock		(4,258	)		—
Retained earnings		164,312			143,427
Accumulated other comprehensive earnings -
Foreign currency translation		3,706			4,686

		195,993			179,527

	$	264,166		$	234,630

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)


	Three Months Ended March 31,
	2004			2003
Revenues	$	152,020		$	115,809
Cost of goods sold		82,254			61,593

Gross profit		69,766			54,216
Selling, general and administrative expenses		34,207			26,531

Operating profit		35,559			27,685
Interest income, net		127			187

Earnings from continuing operations before income taxes		35,686			27,872
Income tax expense		13,918			10,972

Earnings from continuing operations		21,768			16,900
Loss from discontinued operations, less applicable income tax benefit of $2,064 for the three months ended March 31, 2003 (Note 2)		—			(3,256	)

NET EARNINGS	$	21,768		$	13,644

Earnings per common share (Note 3)
Basic:
Earnings from continuing operations	$	0.62		$	0.47
Loss from discontinued operations		—			(0.09	)

Net Earnings	$	0.62		$	0.38

Diluted:
Earnings from continuing operations	$	0.57		$	0.45
Loss from discontinued operations		—			(0.09	)

Net Earnings	$	0.57		$	0.36

Dividends declared per common share	$	0.025		$	0.005

Net Earnings	$	21,768		$	13,644
Other comprehensive earnings (loss) –
Foreign currency translation adjustments, net of income taxes of $0 and $0 for the three months ended March 31, 2004 and 2003, respectively		(980	)		910

Comprehensive earnings	$	20,788		$	14,554

The accompanying notes are an integral part of these statements.

K-SWISS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)


	Three Months Ended March 31,
	2004			2003
Net cash provided by (used in) operating activities	$	14,808		$	(8,545	)

Cash flows from investing activities:
Purchase of property, plant and equipment		(332	)		(508	)

Net cash used in investing activities		(332	)		(508	)

Cash flows from financing activities:

Purchase of treasury stock		(4,258	)		(11,064	)
Payment of dividends		(883	)		(176	)
Proceeds from stock options exercised		149			24

Net cash used in financing activities		(4,992	)		(11,216	)

Effect of exchange rate changes on cash		(700	)		461

Net increase (decrease) in cash and cash equivalents		8,784			(19,808	)
Cash and cash equivalents at beginning of period		81,455			67,593

Cash and cash equivalents at end of period	$	90,239		$	47,785

Supplemental disclosure of cash flow information:

Cash paid during the period for:
Interest	$	181		$	1
Income taxes	$	294		$	409

The accompanying notes are an integral part of these statements.

K-SWISS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “S.E.C.”). 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” or “K-Swiss”) as of March 31, 2004 and the results of its operations and its cash flows for the three months ended March 31, 2004 and 2003 have been included for the periods presented. The results of operations and cash flows for the three months ended March 31, 2004 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, 2003 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, 2003. Certain reclassifications have been made in the three months ended March 31, 2003 presentation to conform to the three months ended March 31, 2004 presentation.

2. National Geographic

In the fourth quarter of 2003, the Company reached an agreement with National Geographic to terminate its licensing agreement for $2.0 million. Operations of the National Geographic brand have been accounted for and shown as a discontinued operation in the accompanying financial information. The operations for National Geographic for the three months ended March 31, 2003 are as follows (in thousands):


	Three Months Ended March 31, 2003
Revenues	$	124
Cost of goods sold		3,869

Gross loss		(3,745	)
Selling, general and administrative expenses		1,504

Operating loss		(5,249	)
Interest expense, net		71
Income tax benefit		(2,064	)

Loss from discontinued operations	$	(3,256	)

3. Earnings per Share

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


	Three Months Ended March 31,
	2004				2003
	Shares	Per Share Amount			Shares	Per Share Amount
Basic EPS	35,376	$	0.62		35,562	$	0.38
Effect of Dilutive Stock Options	2,592		(0.05	)	2,261		(0.02	)

Diluted EPS	37,968	$	0.57		37,823	$	0.36

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:


	Three Months Ended March 31, 2004	Three Months Ended March 31, 2003
Options to purchase shares of common stock (in thousands)	—	56
Exercise prices	—	$12.50
Expiration dates	—	March 2013

4. Accounting for Stock-Based Compensation

Statement of Financial Accounting Standards (“SFAS”) No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of SFAS 123,” encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company’s stock at the date of grant over the amount an employee must pay to acquire the stock.

During the three months ended March 31, 2004 and 2003, 8,500 and 32,000 options, respectively, were granted at exercise prices below fair market value. All other options were granted at an exercise price equal to the fair market value of the Company’s common stock at the date of grant. Accordingly, no compensation cost has been recognized for such options granted.

In connection with the exercise of options, the Company realized income tax benefits in the three months ended March 31, 2004 and 2003 that have been credited to additional paid-in capital.

Had compensation cost for the plan been determined based on the fair value of the options at the grant dates consistent with the method of SFAS No. 148, the Company’s net earnings and earnings per share would have been:


	Three Months Ended March 31,
	2004			2003
Net earnings (in thousands)
As reported	$	21,768		$	13,644
Add stock-based employee compensation charges reported in net income		70			53
Less total stock-based employee compensation expense, determined under the fair value method		(487	)		(384	)

Pro forma	$	21,351		$	13,313

Basic earnings per share
As reported	$	0.62		$	0.38
Pro forma		0.60			0.37

Diluted earnings per share
As reported	$	0.57		$	0.36
Pro forma		0.56			0.35

The fair value of options at date of grant was estimated using the Black-Scholes model with the following assumptions:


	March 31,
	2004		2003
Expected life (years)	4		8
Risk-free interest rate	2.40	%	3.35	%
Expected volatility	46	%	58	%
Expected dividend yield	0.4	%	0.2	%

5. Goodwill and Intangible Assets

SFAS No. 142, “Goodwill and Other Intangible Assets,” 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 finite lives will continue to be amortized over their useful lives. Goodwill and intangible assets are as follows (in thousands):