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, 2005
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, 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 27, 2005:
| Class A | 25,691,981 | |
| Class B | 8,380,128 |
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
K•SWISS INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
| March 31, 2005 |
December 31, 2004 |
|||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS |
||||||||
| Cash and cash equivalents |
$ | 134,057 | $ | 144,857 | ||||
| Accounts receivable, less allowance for doubtful accounts of $2,043 and $2,009 as of March 31, 2005 and December 31, 2004, respectively |
90,838 | 49,411 | ||||||
| Inventories |
55,494 | 64,901 | ||||||
| Prepaid expenses and other |
2,955 | 7,710 | ||||||
| Deferred taxes |
2,816 | 4,654 | ||||||
| Total current assets |
286,160 | 271,533 | ||||||
| PROPERTY, PLANT AND EQUIPMENT, net |
8,480 | 8,228 | ||||||
| OTHER ASSETS |
||||||||
| Intangible assets (Note 4) |
4,700 | 4,700 | ||||||
| Deferred taxes |
4,648 | 5,305 | ||||||
| Other |
5,583 | 5,111 | ||||||
| 14,931 | 15,116 | |||||||
| $ | 309,571 | $ | 294,877 | |||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES |
||||||||
| Bank lines of credit |
$ | 7,481 | $ | 6,750 | ||||
| Trade accounts payable |
19,686 | 22,262 | ||||||
| Accrued income taxes |
5,829 | 932 | ||||||
| Accrued liabilities |
22,278 | 23,020 | ||||||
| Total current liabilities |
55,274 | 52,964 | ||||||
| OTHER LIABILITIES |
13,163 | 15,083 | ||||||
| STOCKHOLDERS’ EQUITY (Note 5) |
||||||||
| 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; 27,692,565 shares issued, 25,949,169 shares outstanding and 1,743,396 shares held in treasury at March 31, 2005 and 27,536,890 shares issued, 26,193,494 shares outstanding and 1,343,396 held in treasury at December 31, 2004 |
277 | 275 | ||||||
| Class B – authorized 18,000,000 shares of $0.01 par value; issued and outstanding 8,380,128 shares at March 31, 2005 and 8,411,028 shares at December 31, 2004 |
84 | 84 | ||||||
| Additional paid-in capital |
38,108 | 36,692 | ||||||
| Treasury Stock |
(39,504 | ) | (27,000 | ) | ||||
| Retained earnings |
236,199 | 211,193 | ||||||
| Accumulated other comprehensive earnings - |
||||||||
| Foreign currency translation |
6,516 | 6,871 | ||||||
| Net loss on hedge derivatives |
(546 | ) | (1,285 | ) | ||||
| 241,134 | 226,830 | |||||||
| $ | 309,571 | $ | 294,877 | |||||
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)
| Three Months Ended March 31, |
||||||||
| 2005 |
2004 |
|||||||
| Revenues (Note 6) |
$ | 153,143 | $ | 152,020 | ||||
| Cost of goods sold |
81,160 | 82,254 | ||||||
| Gross profit |
71,983 | 69,766 | ||||||
| Selling, general and administrative expenses |
32,339 | 34,207 | ||||||
| Operating profit |
39,644 | 35,559 | ||||||
| Interest income, net |
518 | 127 | ||||||
| Earnings before income taxes |
40,162 | 35,686 | ||||||
| Income tax expense |
14,298 | 13,918 | ||||||
| NET EARNINGS |
$ | 25,864 | $ | 21,768 | ||||
| Earnings per common share (Note 2) |
||||||||
| Basic |
$ | 0.75 | $ | 0.62 | ||||
| Diluted |
$ | 0.72 | $ | 0.57 | ||||
| Weighted average number of shares outstanding (Note 2) |
||||||||
| Basic |
34,536 | 35,376 | ||||||
| Diluted |
36,049 | 37,968 | ||||||
| Dividends declared per common share |
$ | 0.025 | $ | 0.025 | ||||
| Net Earnings |
$ | 25,864 | $ | 21,768 | ||||
| Other comprehensive (loss) earnings – |
||||||||
| Foreign currency translation adjustments, net of income taxes of $0 and $0 for the three months ended March 31, 2005 and 2004, respectively |
(355 | ) | (980 | ) | ||||
| Change in deferred loss on hedge derivatives, net of income tax benefit of $0 and $0 for the three months ended March 31, 2005 and 2004, respectively |
739 | — | ||||||
| Comprehensive Earnings |
$ | 26,248 | $ | 20,788 | ||||
The accompanying notes are an integral part of these statements.
3
K•SWISS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
| Three Months Ended March 31, |
||||||||
| 2005 |
2004 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net earnings |
$ | 25,864 | $ | 21,768 | ||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
414 | 430 | ||||||
| Impairment on intangibles and goodwill |
— | 1,730 | ||||||
| Net loss on disposal of property, plant and equipment |
8 | 3 | ||||||
| Deferred income taxes |
2,482 | 775 | ||||||
| Income tax benefit of stock options exercised |
931 | 615 | ||||||
| Increase in accounts receivable |
(41,598 | ) | (42,382 | ) | ||||
| Decrease in inventories |
9,014 | 16,696 | ||||||
| Decrease in prepaid expenses and other assets |
4,171 | 2,572 | ||||||
| Increase in accounts payable and accrued liabilities |
841 | 12,601 | ||||||
| Net cash provided by operating activities |
2,127 | 14,808 | ||||||
| Cash flows from investing activities: |
||||||||
| Purchase of property, plant and equipment |
(698 | ) | (332 | ) | ||||
| Net cash used in investing activities |
(698 | ) | (332 | ) | ||||
| Cash flows from financing activities: |
||||||||
| Borrowings under bank lines of credit |
3,000 | — | ||||||
| Repayments on bank lines of credit |
(2,269 | ) | — | |||||
| Repurchase of stock |
(12,504 | ) | (4,258 | ) | ||||
| Payment of dividends |
(858 | ) | (883 | ) | ||||
| Proceeds from stock options exercised |
398 | 149 | ||||||
| Net cash used in financing activities |
(12,233 | ) | (4,992 | ) | ||||
| Effect of exchange rate changes on cash |
4 | (700 | ) | |||||
| Net (decrease) increase in cash and cash equivalents |
(10,800 | ) | 8,784 | |||||
| Cash and cash equivalents at beginning of period |
144,857 | 81,455 | ||||||
| Cash and cash equivalents at end of period |
$ | 134,057 | $ | 90,239 | ||||
| Supplemental disclosure of cash flow information: |
||||||||
| Cash paid during the period for: |
||||||||
| Interest |
$ | 88 | $ | 181 | ||||
| Income taxes |
$ | 226 | $ | 294 | ||||
The accompanying notes are an integral part of these statements.
4
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, 2005 and the results of its operations and its cash flows for the three months ended March 31, 2005 and 2004 have been included for the periods presented. The results of operations and cash flows for the three months ended March 31, 2005 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, 2004 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, 2004. Certain reclassifications have been made in the three months ended March 31, 2004 presentation to conform to the three months ended March 31, 2005 presentation.
2. 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, |
||||||||||||
| 2005 |
2004 |
|||||||||||
| Shares |
Per Share Amount |
Shares |
Per Share Amount |
|||||||||
| Basic EPS |
34,536 | $ | 0.75 | 35,376 | $ | 0.62 | ||||||
| Effect of Dilutive Stock Options |
1,513 | (0.03 | ) | 2,592 | (0.05 | ) | ||||||
| Diluted EPS |
36,049 | $ | 0.72 | 37,968 | $ | 0.57 | ||||||
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, 2005 |
Three Months Ended March 31, 2004 | ||||
| Options to purchase shares of common stock (in thousands) |
4 | — | |||
| Exercise prices |
$ | 31.51 | — | ||
| Expiration dates |
February 2015 | — | |||
3. 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 (“APB”) 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, 2005 there were no options that were granted at exercise prices below fair market value and during the three months ended March 31, 2004 there were 8,500 options that 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.
5
In connection with the exercise of options, the Company realized income tax benefits in the three months ended March 31, 2005 and 2004 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, |
||||||||
| 2005 |
2004 |
|||||||
| Net earnings (in thousands) |
||||||||
| As reported |
$ | 25,864 | $ | 21,768 | ||||
| Add stock-based employee compensation charges reported in net income |
46 | 70 | ||||||
| Less total stock-based employee compensation expense, determined under the fair value method |
(495 | ) | (487 | ) | ||||
| Pro forma |
$ | 25,415 | $ | 21,351 | ||||
| Basic earnings per share |
||||||||
| As reported |
$ | 0.75 | $ | 0.62 | ||||
| Pro forma |
0.74 | 0.60 | ||||||
| Diluted earnings per share |
||||||||
| As reported |
$ | 0.72 | $ | 0.57 | ||||
| Pro forma |
||||||||