| K SWISS INC Item 1A Risk Factors The Company operates in a changing environment that involves numerous known and unknown risks and uncertainties that could materially adversely affect our operations |
| The risks described below highlight some of the factors that have affected, and in the future could affect our operations |
| Additional risks we do not yet know of or that we currently think are immaterial may also affect our business operations |
| If any of the events or circumstances described in the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected |
| The market for athletic footwear is intensely competitive and if we fail to compete effectively, we could lose our market position |
| The athletic footwear industry is intensely competitive |
| Certain of our competitors have substantially greater financial, distribution and marketing resources as well as greater brand awareness than us |
| The principal methods of competition in our industry include product design, product performance, quality, brand image, price, marketing and promotion, customer support and service, our ability to meet delivery commitments to retailers, obtaining access to retail outlets and sufficient floor space |
| A major marketing or promotional success or technological innovation by one of our competitors could adversely impact our competitive position |
| Additionally, in countries where the athletic footwear market is mature, our ability to maintain and increase our market share can principally come at the expense of our competitors, which may be difficult to accomplish |
| Our results of operations and market position may be adversely impacted by our competitors and the competitive pressures in the athletic footwear industry |
| The athletic footwear business is subject to consumer preferences and unanticipated shifts in consumer preferences could adversely affect our sales and results of operations |
| The footwear industry is subject to rapid changes in consumer preferences |
| Consumer demand for athletic footwear and apparel is heavily influenced by brand image |
| Our initiatives to strengthen our brand image, which include conducting market research, introducing new and innovative products and initiating focused advertising campaigns, may not be successful |
| Our current products may not continue to be popular and new products we may introduce may not achieve adequate consumer acceptance for us to recover development, manufacturing, marketing and other costs |
| Our failure to anticipate, identify and react to shifts in consumer preferences and maintain a strong brand image could have an adverse effect on our sales and results of operations |
| Also, if our customers purchase our products and do not have success in selling our products at retail, they may request a price adjustment or return to assist them in marking down the selling price to make the products more attractive to retail consumers |
| 10 ______________________________________________________________________ Furthermore, consumer preferences and purchasing patterns may be influenced by consumers’ disposable income |
| Consequently, the success of our operations may depend to a significant extent upon a number of factors affecting disposable income, including general economic conditions and factors such as employment, business conditions, consumer confidence, interest rates and taxation |
| If we fail to accurately forecast consumer demand, we may experience difficulties in handling customer orders or in liquidating excess inventories and our sales and brand image may be adversely affected |
| The athletic footwear industry has relatively long lead times for the design and production of products |
| Consequently, we must commit to production tooling, and in some cases to production, in advance of orders based on our forecasts of consumer demand |
| If we fail to forecast consumer demand accurately, we may under-produce or over-produce a product and encounter difficulty in handling customer orders or in liquidating excess inventory |
| Additionally, if we over-produce a product based on an aggressive forecast of consumer demand, retailers may not be able to sell the product and may seek to return the unsold quantities and cancel future orders |
| These outcomes could have an adverse effect on our sales and brand image |
| Our current backlog of open orders may not be indicative of our level of future sales |
| Our current backlog position may not be indicative of future sales |
| 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 cancelled by customers without financial penalty |
| We believe our current rate of customer cancellations of domestic orders approximates industry averages for similar companies; however, there is no assurance this current rate of customer cancellations will not change in a material adverse manner in the future |
| 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; however, there is no assurance our past experience in this area will continue in the future |
| If we experience adverse developments in customer cancellations, product returns or bad debts of customers, such developments could have a material adverse impact on our business, financial condition or results of operations |
| Fluctuations in the price, availability and quality of raw materials could cause delay and increase costs |
| Fluctuations in the price, availability and quality of the fabrics, leather or other raw materials used by us in our manufactured products and in the price of materials used to manufacture our footwear could have a material adverse effect on our cost of sales or our ability to meet our customers’ demands |
| The price and availability of such raw materials may fluctuate significantly, depending on many factors, including natural resources (oil, electricity), increased freight costs, increased labor costs and weather conditions |
| In the future, we may not be able to pass all or a portion of such higher raw materials prices on to our customers |
| The loss of a significant customer, or a significant reduction in our sales to such a customer, could adversely affect our sales and results of operations |
| Our largest customer accounted for approximately 18prca of our total revenues in 2005 |
| While no other customer accounted for more than 10prca of our total revenues in 2005, we do have other significant customers |
| The loss of any of these customers, or a significant reduction in our sales to any of such customers, could adversely affect our sales and results of operations |
| In addition, if any of such customers became insolvent or otherwise failed to pay its debts, it could have an adverse affect on our results of operations |
| 11 ______________________________________________________________________ Our financial success is limited to the success of our customers |
| Our financial success is directly related to the success of our customers and the willingness of our customers to continue to buy our products |
| We do not have long-term contracts with any of our customers |
| Sales to our customers are generally on an order-by-order basis and are subject to rights of cancellation and rescheduling by our customers |
| If we cannot fill our customers’ orders in a timely manner, our relationships with our customers may suffer, and this could have a material adverse effect on us |
| Furthermore, if any of our major customers experiences a significant downturn in its business, or fails to remain committed to our products or brands, then these customers may reduce or discontinue purchases from us, which could have a material adverse effect on our business, results of operations and financial conditions |
| If we decrease the price that we charge for our products, we may earn lower gross margins and our revenues and profitability may be adversely affected |
| The prices that we are able to charge for our products depend on the type of product offered, the consumer and retailer response to the product and the prices charged by our competitors |
| To the extent that we are forced to lower our prices, our gross margins will be lower and our revenues and profitability will be adversely affected |
| Our business is subject to economic conditions in our major markets |
| Our business is subject to economic conditions that may fluctuate in the major markets in which we operate |
| Factors that could cause economic conditions to fluctuate include, without limitation, recession, inflation, general weakness in retail markets and changes in consumer purchasing power and preferences |
| Adverse changes in such economic factors could have a negative effect on our business |
| Our international sales and manufacturing operations are subject to the risks of doing business abroad, which could affect our ability to sell or manufacture our products in international markets, obtain products from foreign suppliers or control the cost of our products |
| We operate offices and sell products in numerous countries outside the United States |
| In recent years, we have experienced revenue growth in international markets |
| Additionally, all of our footwear products are manufactured abroad and we have suppliers located in China and Taiwan |
| Our athletic footwear sales and manufacturing operations are subject to the risks of doing business abroad |
| These risks include: • fluctuations in currency exchange rates; • political instability; • limitations on conversion of foreign currencies into US Dollars; • restrictions on dividend payments and other payments by our foreign subsidiaries and other restrictions on transfers of funds to or from foreign countries; • import duties, tariffs, regulations, quotas and other restrictions on free trade, particularly as these regulations may affect our operations in China; and • investment regulation and other restrictions by foreign governments |
| If these risks limit or prevent us from selling or manufacturing products in any significant international market, prevent us from acquiring products from our foreign suppliers or significantly increase the cost of our products, our operations could be seriously disrupted until alternative suppliers 12 ______________________________________________________________________ are found or alternative markets are developed |
| Although we may enter into forward currency exchange contracts to hedge the risk of exchange rate fluctuations, these steps may not fully protect us against this risk and we may incur losses |
| Our financial position, cash flow or results may be adversely affected by the threat of terrorism and related political instability and economic uncertainty |
| The threat of potential terrorist attacks on the United States and throughout the world and the political instability has created an atmosphere of economic uncertainty in the United States and in foreign markets |
| Our results may be impacted by the macroeconomic effects of those events |
| Also, a disruption in our supply chain as a result of terrorist attacks or the threat thereof may significantly affect our business and its prospects |
| In addition, such events may also result in heightened domestic security and higher costs for importing and exporting shipments of components and finished goods |
| Any of these occurrences may have a material adverse effect on our financial position, cash flow or results in any reporting period |
| Because we rely on independent manufacturers to produce our products, our sales and profitability may be adversely affected if our independent manufacturers fail to meet pricing, product quality and timeliness requirements or if we are unable to obtain some components used in our products from limited supply sources or supply chain disruptions |
| We depend upon independent manufacturers to manufacture our products in a timely and cost-efficient manner while maintaining specified quality standards |
| We rely heavily on manufacturing facilities located in China |
| In 2005, 99prca of our footwear manufacturing occurred in China |
| We also rely upon the availability of sufficient production capacity at our manufacturers |
| Delivery of product depends on many factors such as weather conditions, disruption of the transportation systems or shipping lines used by our suppliers, or uncontrollable factors such as natural disasters, epidemic diseases, terrorism and war |
| It is essential that our manufacturers deliver our products in a timely manner and in accordance with our quality standards because our orders are cancelable by customers if agreed-upon delivery windows are not met or products are not of agreed-upon quality |
| A failure by one or more of our manufacturers to meet established criteria for pricing, product quality or timely delivery could adversely impact our sales and profitability |
| We rely on our warehouses and if there is a natural disaster or other serious disruption at any of these facilities, we may be unable to deliver product effectively to our retailers |
| We rely on warehouses in Mira Loma, California and Rotterdam, the Netherlands |
| Any natural disaster or other serious disruption at either of these facilities due to fire, earthquake, flood, terrorist attack or any other natural or manmade cause could damage a portion of our inventory or impair our ability to use our warehouse as a docking location for product |
| Any of these occurrences could impair our ability to adequately supply our customers and negatively impact our operating results |
| We depend on independent distributors to sell our products in certain international markets |
| We sell our products in certain international markets mainly through independent distributors |
| If a distributor fails to meet annual sales goals, it may be difficult and costly to locate an acceptable substitute distributor |
| If a change in our distributors becomes necessary, we may experience increased costs, as well as a substantial disruption and a resulting loss of sales |
| Our competitive position could be harmed if we are unable to protect our intellectual property rights |
| Counterfeiting of our brands can divert sales and damage our brand image |
| We believe that our trademarks, patents and proprietary technologies and designs are of great value |
| From time to time third parties have challenged, and may in the future try to challenge, our 13 ______________________________________________________________________ ownership, or the validity, of our intellectual property |
| A successful challenge to any of our significant intellectual property rights could adversely affect our business and ability to generate revenue |
| Our brands and designs are constantly at risk for counterfeiting and infringement of our intellectual property rights, and we find counterfeit products and products that infringe on our intellectual property rights in our markets as well as domain names that use our trade names or trademarks without our consent |
| We have not always been successful, particularly in some foreign countries, in combating counterfeit products and stopping infringements or other misappropriation of our intellectual property rights |
| Counterfeit and infringing products can not only cause us to lose significant sales, but also can harm the integrity of our brands by associating our trademarks or designs with lesser quality or defective goods |
| Additionally, the scope of protection of our proprietary intellectual property rights can vary significantly from country to country, and can be quite narrow in some countries because of local law or practices |
| We may need to resort to litigation in the future to enforce our intellectual property rights |
| This litigation could result in substantial costs and may require the devotion of substantial resources |
| We may be subject to periodic litigation and other regulatory proceedings and may be affected by changes in government regulations |
| From time to time we may be a party to lawsuits and regulatory actions relating to our business |
| Due to the inherent uncertainties of litigation and regulatory proceedings, we cannot accurately predict the ultimate outcome of any such proceedings |
| An unfavorable outcome could have a material adverse impact on our business, financial condition and results of operations |
| In addition, regardless of the outcome of any litigation or regulatory proceedings, such proceedings could result in substantial costs and may require that we devote substantial resources to defend the Company |
| Further, changes in government regulations both in the United States and in the countries in which we operate could have adverse affects on our business and subject us to additional regulatory actions |
| Our net income may be adversely affected by an increase in our effective tax rate |
| At any point in time, many tax years are subject to audit by various taxing jurisdictions |
| The results of these audits and negotiations with tax authorities may affect tax positions taken |
| Additionally, our effective tax rate in a given financial statement period may be materially impacted by changes in the geographic mix or level of earnings |
| We depend on attracting and retaining qualified personnel, whose loss would adversely impact our business |
| Our success is largely dependent upon the efforts of Steven Nichols, our President, Chief Executive Officer and Chairman, and certain other key executives |
| Although we have entered into an employment agreement with Mr |
| Nichols that expires in December 2010, the loss of his and/or other key executive’s services would have a material adverse effect on our business and prospects |
| Our success also depends to a significant degree upon the continued services of our personnel |
| Our continued success will depend on our ability to attract, retain and motivate qualified management, marketing, technical and sales personnel |
| These people are in high demand and often have competing employment opportunities |
| The labor market for skilled employees is highly competitive due to limited supply, and we may lose key employees or be forced to increase their compensation |
| Employee turnover could significantly increase our training and other related employee costs |
| The loss of the services of any key personnel or our inability to attract additional personnel could have a material adverse effect on our ability to manage our business |
| 14 ______________________________________________________________________ A limited number of our stockholders can exert significant influence over the Company |
| At December 31, 2005, Steven Nichols held approximately 93prca of the voting power of our Class B Common Stock taken as a whole |
| This voting power would permit this stockholder to exert significant influence over the outcome of stockholder votes, including votes concerning the election of a certain class of directors, by-law amendments, possible mergers, corporate control contests and other significant corporate transactions |
| We depend on our computer and communications systems |
| We extensively utilize computer and communications systems to operate our Internet business and manage our internal operations including without limitation, demand and supply planning, and inventory control |
| Any interruption of this service from power loss, telecommunications failure, failure of our computer system or other interruption caused by weather, natural disasters or any similar event could disrupt our operations and result in lost sales |
| In addition, hackers and computer viruses have disrupted operations at many major companies |
| We may be vulnerable to similar acts of sabotage, which could have a material adverse effect on our business and operations |
| We rely on our management information systems to operate our business and to track our operating results |
| Our management information systems will require modification and refinement as we grow and our business needs change |
| If we experience a significant system failure or if we are unable to modify our management information systems to respond to changes in our business needs, then our ability to properly run our business could be adversely affected |
| Our business may be adversely affected if we encounter complications in connection with our implementation of SAP information management software |
| In 2006 and over the next few years we plan to implement SAP information management software in our domestic and international operations |
| The implementation of such software could be delayed and we may encounter computer and operational complications in connection with such implementation that could have a material adverse effect on our business, financial condition or results of operations |