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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the period ended March 31, 2003

OR

For the transition period from                  to                 

Commission File number 0-18490

K-SWISS INC.

(Exact name of registrant as specified in its charter)

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 22, 2003:

PART I—FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

K-SWISS INC.

CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands)

The accompanying notes are an integral part of these statements.

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K-SWISS INC.

CONSOLIDATED STATEMENTS OF EARNINGS

AND COMPREHENSIVE EARNINGS

(Amounts in thousands, except per share amounts)

(Unaudited)

The accompanying notes are an integral part of these statements.

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K-SWISS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

The accompanying notes are an integral part of these statements.

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K-SWISS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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:

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During the three months ended March 31, 2003 and 2002, approximately 27% and 18%, respectively of revenues were made to one customer.

During the quarters ended March 31, 2003 and 2002, 16,000 and 2,000 options, respectively, were granted at exercise prices below fair market value. Net compensation expense recognized from all options granted at exercise prices below fair market value was $87,000 and $96,000 for the quarters ended March 31, 2003 and 2002, respectively. 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.

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In connection with the exercise of options, the Company realized income tax benefits in the quarters ended March 31, 2003 and 2002 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. 123, the Company’s net earnings and earnings per share would have been:

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

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 as of March 31, 2003 and December 31, 2002 are as follows (in thousands):

The changes in the carrying amount of goodwill and intangible assets is as follows (in thousands):

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In applying SFAS No. 142, the Company has performed the annual reassessment and impairment test required as of January 1, 2003 and determined that goodwill and intangible assets were not impaired. However, in March 2003, after a review of sales backlog, the Company has subsequently determined based on estimated revenues, operating profits and cash flows that its investment in the National Geographic license was impaired and recognized an impairment loss of $746,000 in the first quarter of 2003. In addition, the Company recognized a $2.9 million expense in the first quarter of 2003 related to a guaranteed royalty payment commitment to National Geographic.

In July 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under previous guidance, a liability for an exit cost was recognized at the date of the commitment to an exit plan. The provisions of this statement will be applied prospectively, as applicable, and are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a material effect on the Company’s financial position or results of operations.

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under specified guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements in this interpretation were effective for financial statements of interim or annual periods ending after December 15, 2002. Additionally, the recognition of a guarantor’s obligation should be applied on a prospective basis to guarantees issued after December 31, 2002. The adoption of FIN 45 did not have a material effect on the Company’s financial position or results of operations.

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). This interpretation explains how to identify variable interest entities and how an enterprise assesses its interest in a variable interest entity to decide whether to consolidate that entity. This interpretation requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. Variable interest entities that effectively disperse risks will not be consolidated unless a single party holds an interest or combination of interest that effectively recombines risks that were previously dispersed. This interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The adoption of FIN 46 did not have a material effect on the Company’s financial position or results of operations.

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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 us or our 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 we file 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 our competitors; intense competition among designers, marketers, distributors and sellers of athletic footwear and apparel for consumers and endorsers; market acceptance of our training shoe line; market acceptance of new Limited Edition product; market acceptance of non-performance product in Europe; market acceptance of National Geographic footwear; market acceptance of Royal Elastics footwear; demographic changes; changes in consumer preferences; popularity of particular designs, categories of products, and sports; seasonal and geographic demand for our products; the size, timing and mix of purchases of our 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; our ability to continue, manage or forecast our growth and inventories; new product development and commercialization; the ability to secure and protect trademarks, patents, and other intellectual property, including, without limitation, our ability to successfully defend against trademark cancellation claims made by Swiss Army Brands, Inc.; difficulties in implementing, operating and maintaining our increasingly complex information systems and controls; concentration of production in China; potential earthquake disruption due to the location of our warehouse and headquarters; potential disruption in supply chain or customer purchasing habits due to health concerns relating to severe acute respiratory syndrome or other related illnesses; 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; the effects of terrorist actions on business activities, customer orders and cancellations, and the United States and international governments’ responses to these terrorist actions; 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 us; the ability to attract and retain qualified personnel; and other factors referenced or incorporated by reference in this report and other reports.

K-Swiss (the “Company,” “we,” “us,” and “our”) 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 we assess the impact of all such risk factors on our 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 we communicate, from time to time, with securities analysts, it is against our policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, investors should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, we have 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 our responsibility.

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Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

We believe that the estimates, assumptions and judgments involved in the accounting policies described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our most recent Annual Report on Form 10-K have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Because of the uncertainty inherent in these matters, actual results could differ from the estimates we use in applying the critical accounting policies. Certain of these critical accounting policies affect working capital account balances, including the policies for revenue recognition, the reserve for uncollectible accounts receivable and inventory reserves. These policies require that we make estimates in the preparation of our financial statements as of a given date.

Within the context of these critical accounting policies, we are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported.

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.

K-Swiss brand revenues increased to $113,980,000 for the quarter ended March 31, 2003 from $79,500,000 for the quarter ended March 31, 2002, an increase of $34,480,000 or 43.4%. This increase resulted primarily from an increase in the volume of footwear sold to approximately 4,508,000 pair for the quarter ended March 31, 2003 from approximately 3,053,000 pair for the quarter ended March 31, 2002. This increase was partially offset by a decrease in the average wholesale price per pair to $24.71 for the quarter ended March 31, 2003 from $25.20 for the quarter ended March 31, 2002. The increase in the volume of footwear sold was primarily the result of increased sales of the Classic, tennis/court and children’s categories of shoes of 57.6%, 48.5% and 26.0%, respectively. The average wholesale price per pair decreased primarily due to a lower average wholesale price in the Classic category.

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The breakdown of revenues (dollar amounts in thousands) is as follows. “Other” as shown below includes Royal Elastics and National Geographic brand revenues.

Overall gross profit margins, as a percentage of revenues, decreased to 43.5% for the quarter ended March 31, 2003, from 44.7% for the quarter ended March 31, 2002. Gross profit margins decreased primarily due to the recognition of a $2.9 million expense related to a guaranteed royalty payment commitment to National Geographic, partially offset by achievement of target costing objectives.

Overall selling, general and administrative expenses increased to $28,035,000 (24.2% of revenues) for the quarter ended March 31, 2003 from $20,001,000 (24.8% of revenues) for the quarter ended March 31, 2002, an increase of $8,034,000 or 40.2%. The increase in these expenses was primarily the result of increases in payroll as a result of an increase in payroll and related expenses, including an increase in bonus accrual for an employee incentive program, advertising expenses, commissions due to increased revenues, increase in legal expenses and impairment of the National Geographic license.

Overall net interest income was $116,000 (0.1% of revenues) for the quarter ended March 31, 2003 compared to $197,000 (0.2% of revenues) for the quarter ended March 31, 2002, a decrease of $81,000 or 41.1%. This decrease in net interest income was the result of significantly lower average interest rates as well as lower average balances.

Our effective tax rate decreased to 39.5% of earnings before income tax from 40.4% for the quarters ended March 31, 2003 and 2002, respectively.

Net earnings increased 41.1% to $13,644,000 for the quarter ended March 31, 2003 from $9,668,000 for the quarter ended March 31, 2002.

At March 31, 2003 and 2002, total futures orders with start ship dates from April through September 2003 and 2002 were approximately $171,779,000 and $105,495,000, respectively, an increase of 62.8%. The 62.8% increase in total futures orders is comprised of a 75.1% increase in the second quarter 2003 futures orders and a 48.7% increase in the third quarter 2003 futures orders. At March 31, 2003 and 2002, domestic future orders with start ship dates from April through September 2003 and 2002 were approximately $152,446,000 and $90,756,000, respectively, an increase of 68.0%. At March 31, 2003 and 2002, international futures orders with start ship dates from April through September 2003 and 2002 were approximately $19,333,000 and $14,739,000, respectively, an increase of 31.2%. “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. The mix of “futures” and “at once” orders can vary significantly from quarter to quarter and year to year and therefore “futures” are not necessarily indicative of revenues for subsequent periods. Orders generally may be canceled by customers without financial penalty. We believe our rate of net customer cancellations of domestic orders approximates industry averages for similar companies. Customers may also reject nonconforming goods. To date, we believe we have not experienced returns of our products or bad debts of customers materially in excess of industry averages for similar companies.

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Liquidity and Capital Resources

We experienced a net cash outflow of approximately $8,545,000 from our operating activities for the quarter ended March 31, 2003 and a net cash inflow of approximately $4,611,000 for the quarter ended March 31, 2002. Cash used in operations for the quarter ended March 31, 2003 as compared to cash provided by operations for the quarter ended March 31, 2002 varied due to changes in accounts receivable, inventories, accounts payable and accrued liabilities, offset by an increase in net earnings.

We had a net outflow of cash from our investing activities for the quarter ended March 31, 2003 and 2002 primarily due to the purchase of property, plant and equipment.

We had a net outflow of cash from our financing activities for the quarter ended March 31, 2003 primarily due to the purchase of treasury stock.

In October 2002, we announced the completion of our September 2001 $25 million stock repurchase program and a new authorization by the Board of Directors for us to repurchase through December 2007 up to an additional $25 million of our Class A Common Stock from time to time on the open market, as market conditions warrant. We adopted this program because we believe repurchasing our shares can be a good use of excess cash depending on our array of alternatives. Currently, we have made purchases under all stock repurchase programs from August 1996 through April 23, 2003 (the day prior to the filing of this Form 10-Q) of 11.3 million shares of Class A Common Stock at an aggregate cost totaling approximately $100,700,000.

No other material capital commitments exist at March 31, 2003. Depending on our future growth rate, funds may be required by operating activities. With continued use of our revolving credit facility and internally generated funds, we believe our present and currently anticipated sources of capital are sufficient to sustain our anticipated capital needs for the remainder of 2003.

Our working capital increased $3,716,000 to $136,634,000 at March 31, 2003 from $132,918,000 at December 31, 2002.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes from the information previously reported under Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2002.

ITEM 4.    CONTROLS AND PROCEDURES

Within the 90 days prior to the date of this Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s President and Chief Executive Officer along with the Company’s Vice President of Finance and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Company’s President and Chief Executive Officer along with the Company’s Vice President of Finance and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic S.E.C. filings. There have been no significant changes in the Company’s internal controls or in other factors which could significantly affect internal controls subsequent to the date the Company carried out its evaluation.

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PART II—OTHER INFORMATION

ITEM 1:    Legal Proceedings.

In June 2001, we were notified by counsel representing the trustee appointed to oversee the liquidation of assets of a previous customer of ours, which filed for bankruptcy protection in 1999, that they are seeking reimbursement of all payments made to us 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, while the trustee is seeking the court’s permission to add a further $600,000 in claimed preferential transfers. We believe these payments were received in the ordinary course of business and that we have meritorious defenses against the trustee’s claims. In November 2001, the trustee filed suit against us (and other creditors) in the U.S. Bankruptcy Court for the District of Delaware, to recover payments made to us during the 90 days prior to the customer’s bankruptcy filing. We continue to believe that we have a meritorious “ordinary course of business” defense against these claims and will assert that defense in detail at the appropriate time in the litigation. No provision for this claim has been made in our financial statements as of March 31, 2003.

In response to our opposition to Swiss Army Brands, Inc.’s registration and intended use of Swiss Army as a trademark on footwear, Swiss Army Brands has petitioned for cancellation of our U.S. registrations for the K-Swiss trademark. These proceedings are before the Trademark Trial and Appeal Board of the Patent and Trademark Office and were commenced in May 1995. We believe we have meritorious defenses to the petitions, but the outcome cannot be predicted at this time. An unfavorable decision could have a material adverse impact on us.

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

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(b) Reports on Form 8-K

    None.

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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.

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CERTIFICATIONS

I, Steven Nichols, certify that:

Date: April 23, 2003

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CERTIFICATIONS

I, George Powlick, certify that:

Date: April 23, 2003

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EXHIBIT INDEX

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