<PAGE>

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                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FORM 10-K

(Mark One)
                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
  [X]               OF THE SECURITIES EXCHANGE ACT OF 1934
                  For the fiscal year ended December 31, 1999

                                      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               (I.R.S. Employer
    incorporation or organization)             Identification Number)

    31248 Oak Crest Drive, Westlake                     91361
          Village, California                        (Zip Code)
    (Address of principal executive
               offices)

      Registrant's telephone number, including area code: (818) 706-5100

          Securities registered pursuant to Section 12(b) of the Act:

<TABLE>
<CAPTION>
                                                           Name of each exchange
             Title of each Class                            on which registered
             -------------------                           ---------------------
<S>                                            <C>
                    None                                            None
</TABLE>

          Securities registered pursuant to Section 12(g) of the Act:
                             Class A Common Stock,
                           par value $.01 per share
                               (Title of class)

  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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.                                              [X]

  The aggregate market value of the Class A Common Stock of the Registrant
held by non-affiliates of the Registrant on February 1, 2000 based on the
closing price of the Class A Common Stock on the NASDAQ National Market on
such date was $93,101,200.

  The number of shares of the Registrant's Class A Common Stock outstanding at
February 1, 2000 was 7,677,223 shares. The number of shares of the
Registrant's Class B Common Stock outstanding at February 1, 2000 was
3,013,978 shares.

                      DOCUMENTS INCORPORATED BY REFERENCE

  Portions of the proxy statement for the Registrant's 2000 Annual
Stockholders Meeting are incorporated by reference into Part III.

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<PAGE>

                                  K.SWISS INC.

                      INDEX TO ANNUAL REPORT ON FORM 1O-K

                  For The Fiscal Year Ended December 31, 1999

<TABLE>
<CAPTION>
            Caption                                                        Page
            -------                                                        ----
 <C>        <S>                                                            <C>
 PART I
 Item 1.    Business....................................................     3

 Item 2.    Properties..................................................    10

 Item 3.    Legal Proceedings...........................................    10

 Item 4.    Submission of Matters to a Vote of Security Holders.........    10

 Item 4(a). Executive Officers of the Registrant........................    11

 PART II
 Item 5.    Market for Registrant's Common Equity and Related
            Stockholder Matters.........................................    13

 Item 6.    Selected Financial Data.....................................    14

 Item 7.    Management's Discussion and Analysis of Financial Condition
            and Results of Operations...................................    15

 Item 8.    Financial Statements and Supplementary Data.................    21

 Item 9.    Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure....................................    40




 PART III
 Item 10.   Directors and Executive Officers of the Registrant..........    41

 Item 11.   Executive Compensation......................................    41

 Item 12.   Security Ownership of Certain Beneficial Owners and
            Management..................................................    41

 Item 13.   Certain Relationships and Related Transactions..............    41

 PART IV
 Item 14.   Exhibits, Financial Statement Schedules, and Reports on Form
            8-K.........................................................    42
</TABLE>

                                       2
<PAGE>

                                    PART I

Item 1. Business

Company History and General Strategy

  K-Swiss Inc. designs, develops and markets a growing array of athletic
footwear for high performance sports use, fitness activities and casual wear.
The Company was founded in 1966 by two Swiss brothers, who introduced one of
the first leather tennis shoes in the United States. The shoe, the K-Swiss
"Classic", has remained relatively unchanged from its original design, and
accounts for a significant portion of the Company's sales. The Classic has
evolved from a high-performance shoe into a casual, lifestyle shoe. The
Company has emphasized in its marketing the commitment to produce products of
high quality and enduring style. The Company plans to continue to emphasize
the high quality and classic design of its products as it introduces new
models of athletic footwear.

  On December 30, 1986, the Company was purchased by an investment group led
by the Company's current President. The Company thereafter recruited
experienced management and reduced manufacturing costs by increasing offshore
production and entering into new, lower cost purchasing arrangements. The
Company's products are manufactured to its specifications by overseas
suppliers predominately in China. In June 1991 and September 1992, K-Swiss
International Ltd. and K-Swiss B.V. (located in the Netherlands),
respectively, commenced operations to broaden the Company's distribution on a
global scale. In addition, in August 1992, K-Swiss Inc. completed the
acquisition of K-Swiss Europe Limited (renamed to K-Swiss (UK) Ltd.) which
handles distribution in the United Kingdom.

  The Company's product strategy is two pronged. The first combines classic
styling with high quality components and technical features designed to meet
performance requirements of specific sports. The Company endeavors to use
classic styling to reduce the impact of changes in consumer preferences and
believes that this strategy leads to longer product life cycles than are
typical of the products of certain of its competitors. Management believes
that long product life cycles reduce total markdowns over the life of the
products, thereby enhancing their attractiveness to retailers. This strategy
also enables the Company to maintain inventory with less risk of obsolescence
than is typical of more fashion-oriented products. The second product strategy
uses fashion-oriented footwear sold principally on a futures only basis
usually with little or no planned inventory position taken on these products.
This strategy allows the Company to take advantage of trends in the
marketplace that it identifies while attempting to minimize the risk generally
associated with this type of product.

  The Company sells its products in the United States through independent
sales representatives primarily to specialty athletic footwear stores, pro
shops, sporting good stores and department stores. The Company also sells its
products to a number of foreign distributors. The Company now has sales
offices or distributors throughout the world. In 1992, the Company established
sales offices and now has appointed exclusive distributors in much of Europe.
The Company believes that its overseas sales offices and foreign distributors
provide an opportunity for future growth.

  The Company was organized under the laws of the State of Delaware on April
16, 1990. The Company is successor in interest to K-Swiss Inc., a
Massachusetts corporation, which in turn was successor in interest to K-Swiss
Inc., a California corporation. The Company's principal executive offices are
located at 31248 Oak Crest Drive, Westlake Village, California 91361, and its
telephone number is (818) 706-5100. Unless the context otherwise requires, the
term the "Company" as used herein refers to K-Swiss Inc. and its consolidated
subsidiaries.

                                       3
<PAGE>

Products

  The following table summarizes the K-Swiss product lines and sets forth the
approximate contribution to revenues (in dollars and as a percentage of
revenues) attributable to each footwear category for the periods indicated.
All footwear categories come in both men's (approximately 44% of 1999
revenues) and women's (approximately 29% of 1999 revenues). Most styles within
each footwear category are offered in men's, women's and children's.

<TABLE>
<CAPTION>
                                                    Revenues (1)
                                       ----------------------------------------
                                              Year Ended December 31,
                                       ----------------------------------------
                                           1999          1998          1997
                                       ------------  ------------  ------------
   Product Category                       $      %      $      %      $      %
   ----------------                    -------- ---  -------- ---  -------- ---
                                           (Dollar amounts in thousands)
   <S>                                 <C>      <C>  <C>      <C>  <C>      <C>
   Classic............................ $186,477  66% $ 98,312  61% $ 67,163  58%
   Tennis/Court.......................   22,107   8    20,146  13    20,505  18
   Children's.........................   64,434  22    36,491  22    21,288  19
   Other (2)..........................   11,652   4     5,972   4     6,169   5
                                       -------- ---  -------- ---  -------- ---
   Total.............................. $284,670 100% $160,921 100% $115,125 100%
                                       ======== ===  ======== ===  ======== ===
   Domestic (3)....................... $263,728  93% $144,891  90% $ 91,040  79%
                                       ======== ===  ======== ===  ======== ===
</TABLE>
--------
(1)  For purposes of this table, revenues do not include other domestic income
     and fees earned by the Company on sales by foreign licensees and
     distributors.

(2) Other consists of outdoor shoes, apparel, accessories, sport sandals and
    blemished shoes.

(3) Included in totals on previous line.

 Footwear

  The Company's product line through 1987 consisted primarily of the Classic.
The Classic was originally developed in 1966 as a high-performance tennis
shoe. Since that time, the Classic has become a popular casual shoe, while
realizing strong sales as the original Classic shoe. The upper of the Classic
includes only three separate pieces of leather, which allows for a relatively
simple manufacturing process and yields a product with few seams. This simple
construction improves the shoe's comfort, fit and durability. The Company has
from time to time incorporated certain technical advances in materials and
construction, but the Classic has remained relatively unchanged in style since
1966. The Classic continues to be the Company's single most important product.

  The Classic, through product development, has evolved also into a category
of shoes denoted as the Classic category. The Classic category is comprised of
three segments, the original Classic as described above, the K-S Collection
and the Limited Edition series.

  The original Classic segment contains shoes that the Company intends to
carry in its product assortment for several years. They generally have shoe
characteristics such as d-rings and five stripes, and, because they are long-
duration shoes, the Company maintains significant inventory positions of this
component. Significant inventory positions allow for effective EDI programs
with our retailers which fits into the Company's strategy of attempting to
become the retailers most profitable vendor. The K-S Collection comprises
shoes offered for several seasons and they generally do not contain d-rings
and have diffused or no stripes. Sometimes inventory is maintained on these
products. The Limited Edition segment is generally meant as a one-season
offering. They are generally fashionable type shoes that are purchased from
factories based only on futures orders received from retailers.


                                       4
<PAGE>

  In 1997, the Company launched a high-end performance line of footwear,
termed the 7.0 System (after the NTRP rating system). The line is sold mainly
in tennis specialty and pro shops. This has become the flagship product of the
tennis category. With the 7.0 line priced at the higher end of the market, the
Si-18 Series is a collection of popularly priced tennis products.

  Presently, the Company competes in the Classic category (casual), tennis and
children's footwear. Each product category has certain styles designated as
core products. The Company's core products offer style continuity and often
include on-going improvement. The Company believes its core product program is
a critical factor in attempting to achieve the Company's goal of becoming the
"retailers' most profitable vendor". The core program tends to minimize
retailers' markdowns and maximizes the effectiveness of marketing expenditures
because of longer product life cycles.

 Apparel and Accessories

  The Company markets a line of K-Swiss branded apparel and accessories. The
products are designed with the same classic strategies used in the footwear
line. Classic styling allows the Company to appeal to a variety of new markets
from an urban distribution to an upscale suburban consumer. The products
represent high quality with an exceptional value.

  In 1999, the Company introduced a new 7.0 line of high tech tennis apparel
to complement its performance 7.0 footwear. The product line consists of world
class apparel (skirts, shorts, tops, polo's, dresses and warm-ups) for both
Men and Women. The Company also offers a collection for the casual athletic
consumer consisting of tee shirts, shirts, wind wear, denim caps, socks and
bags.

  The apparel line is distributed through the large chain sporting goods
stores as well as independent shoe and sporting goods dealers nationwide. The
tennis apparel line is sold primarily through tennis specialty and tennis pro
shops.

  The apparel products offer the Company the ability to dress the consumer
from head to toe. It also offers the Company visible promotional
opportunities.

 Sales

  Financial information relating to international and domestic operations is
presented as part of Item 8 of this report. See Note M to the Company's
Consolidated Financial Statements.

Marketing

 Advertising and Promotion

  Management believes that its strategy of designing products with longer life
cycles and introducing fewer new models relative to its competition enhances
the effectiveness of its advertising and promotions.

  In 1999, K-Swiss launched its largest ever television campaign. The campaign
titled "Up and Comers" was run primarily on network and cable television, and
was supported by several general interest/fashion magazines. The campaign
positioned K-Swiss as a performance footwear company, whereas in the previous
two years, the emphasis had been on casual lifestyle oriented advertising. The
Up and Comers campaign was also supported via in-store point of sale fixtures.
The Company continues to reach tennis consumers via enthusiast magazines along
with a multi-year endorsement deal with "The Woodies".

                                       5
<PAGE>

  Advertising and promotion efforts in foreign markets are directed by local
distributors. The Company's agreements with foreign distributors generally
require such distributors to spend a certain percentage of their sales of the
Company's products on advertising and promotion. The Company controls the
nature and content of these promotions.

 Domestic Marketing

  The Company's current marketing strategy emphasizes distribution to
retailers whose marketing strategies are consistent with the Company's
reputation for quality and service.

  The Company's footwear products are sold domestically through approximately
45 independent regional sales representatives and four Company-employed senior
sales managers. The independent sales representatives are paid on a commission
basis, and are prohibited by contract from representing other brands of
athletic footwear and related products. These representatives sold to
approximately 3,100 separate accounts as of December 31, 1999, 1998 and 1997.
The Company's strategy is to increase its account base of upscale retail
outlets in a controlled manner.

  During 1999, the Foot Locker group of stores and affiliates accounted for
approximately 24% of total revenues. See Note L to the Company's Consolidated
Financial Statements. No other domestic customer accounted for more than 10%
of total revenues during this period.

  The Company offers a "futures" program, under which retailers are offered
discounts on orders scheduled for delivery more than five months after the
order is made. There is no guarantee that such orders will not be canceled
prior to acceptance by the customer. This program is similar to programs
offered by other athletic shoe companies. Because of the positive effect of
the futures program on inventory costs, planning and production scheduling,
the Company has expanded the program. See "Distribution". In addition, the
Company engages in certain marketing programs from time to time that provide
for extended terms on initial domestic orders of new styles.

  The Company maintains a customer service department consisting of 16 persons
at its Westlake Village, California facility. The customer service department
accepts orders for the Company's products, handles inquiries and notifies
retailers of the status of their orders. The Company has made a substantial
investment in computer equipment for general customer support and service, as
well as for distribution. See "Distribution".

  In 1999, seeking to expand its marketing reach, provide product distribution
to consumers that do not otherwise have the ability to purchase its products
and to take advantage of the new advances in technology and the internet, the
Company initiated an effort to better utilize the internet and the World Wide
Web. The approach was two pronged. The K-Swiss website (www.k-swiss.com) was
enhanced and made to tie in with its advertising theme featuring up and coming
athletes. The second part of its strategy led to the creation of a new entity
called K-Swiss Direct. K-Swiss Direct's function is to provide the end
consumers an alternate method of acquiring its products when they cannot find
the product in their local retail outlets or do not have reasonable access to
retail outlets carrying the product. Using the internet, consumers can
purchase select footwear and apparel, at prices competitive with the Company's
retailers, and have it shipped directly to them.

 International Marketing

  In 1991, the Company established a sales management team in Asia. The
Company has exclusive distributors in certain Pacific Rim countries. Exclusive
distributors of the Company's products are generally contractually obligated
to spend specific amounts on advertising and promotion of the Company's
products. The Company has also established exclusive distributors in other
international markets.

                                       6
<PAGE>

  To expand the marketing of its products into Europe, the Company opened its
own office in Amsterdam, the Netherlands in 1992.

  By the end of 1999, K-Swiss was working through 4 international subsidiaries
and 26 distributors to market K-Swiss products in potentially 49 countries.

Distribution

  During December 1997, the Company relocated its distribution facility. The
Company now maintains 309,000 square feet of warehouse space at a leased
facility in Mira Loma, California. Approximately 90,000 square feet of this
facility is subleased to a tenant. See "Item 2. Properties".

  The Company purchases footwear from independent manufacturers located
predominantly in China. The time required to fill new orders placed by the
Company with its manufacturers is approximately five months. Such footwear is
generally shipped in ocean containers and delivered to the Company's facility
in California. In some cases, large customers of the Company may receive
containers of footwear directly from the manufacturer. Distribution to
European and certain other distributors is based out of the Netherlands office
public distribution facility. The Company generally arranges shipment of other
international orders directly from its independent manufacturers.

  The Company maintains an open-stock inventory on certain products which
permits it to ship to retailers on an "at once" basis in response to orders
placed by mail, fax or toll-free telephone call. The Company has made a
significant investment in computer equipment that provides on-line capability
to determine open-stock availability for shipment. Additionally, products can
be ordered under the Company's "futures" program. See "Marketing--Domestic
Marketing". The Company ships by package express or truck from California,
depending upon size of order, customer location and availability of inventory.

Product Design and Development

  The Company maintains offices in Westlake Village, California and Taichung,
Taiwan that include a staff of individuals responsible for the design and
development of new styles for all global regions. This staff receives guidance
from the Company's management team in California, who meet regularly to review
sales, consumer and market trends.

Manufacturing

  In 1999, approximately 87% of the Company's footwear products were
manufactured in China, 12% in Thailand, and 1% in Taiwan. This shift from
prior years in the geographic sourcing of production capacity occurred
primarily because of lower prevailing labor wage rates in China and certain
other factors. Although the Company has no long-term manufacturing agreements
and competes with other athletic shoe companies for production facilities
(including companies that are much larger than the Company), management
believes that the Company's relationships with its footwear producers are
satisfactory and that it has the ability to develop, over time, alternative
sources for its footwear. The Company's operations, however, could be
materially and adversely affected if a substantial delay occurred in locating
and obtaining alternative producers.

  All manufacturing of footwear is performed in accordance with detailed
specifications furnished by the Company and is subject to quality control
standards, with the Company retaining the right to reject products that do not
meet specifications. The bulk of all raw materials used in such production is
purchased by manufacturers at the Company's direction. The Company's
inspectors at the manufacturing facilities conduct testing and inspection of
footwear products prior to shipment from those facilities.


                                       7
<PAGE>

  During 1999, the Company's apparel and accessory products were manufactured
in Macau, China, Thailand, Taiwan and the United States by certain
manufacturers selected by the Company.

  The Company's operations are subject to compliance with relevant laws and
regulations enforced by the United States Customs Service and to the customary
risks of doing business abroad, including fluctuations in the value of
currencies, increases in customs duties and related fees resulting from
position changes by the United States Customs Service, import controls and
trade barriers (including the unilateral imposition of import quotas),
restrictions on the transfer of funds, work stoppages and, in certain parts of
the world, political instability causing disruption of trade. These factors
have not had a material adverse impact upon the Company's operations to date.
Imports into the United States are also affected by the cost of
transportation, the imposition of import duties, and increased competition
from greater production demands abroad. The United States or the countries in
which the Company's products are manufactured may, from time to time, impose
new quotas, duties, tariffs or other restrictions, or adjust presently
prevailing quotas, duty or tariff levels, which could affect the Company's
operations and its ability to import products at current or increased levels.
The Company cannot predict the likelihood or frequency of any such events
occurring. A change in any such duties, quotas or restrictions could result in
increases in the costs of such products generally and might adversely affect
the sales or profitability of the Company and the athletic footwear industry
as a whole.

  The Company's use of common elements in raw materials, lasts and dies gives
the Company flexibility to duplicate sourcing in various countries in order to
reduce the risk that the Company may not be able to obtain products from a
particular country.

  The Company's footwear products are subject to the United States customs
duties which range from 8.5% to 10.5% on footwear made principally of leather
to duties on moderately priced canvas shoes of 15.6% to 37.5% plus $.90 per
pair. Currently, approximately 97% of the Company's footwear volume is derived
from sales of leather footwear and approximately 3% of the Company's footwear
volume is derived from sales of canvas footwear.

  A large portion of the Company's imported products are manufactured in the
People's Republic of China ("China"). As discussed below, the continued
importation of these products could be affected by any one of several
significant trade issues that presently impact U.S.-China relations.

  After a serious dispute with the United States Trade Representative ("USTR")
over the protection of intellectual property rights in China, including the
threat by USTR to impose trade sanctions, the Chinese government agreed to
meet its enforcement obligations. That agreement is now being monitored by the
USTR, and the failure of China to comply with its obligations could result in
trade sanctions in the future, including the imposition of retaliatory tariffs
that might affect the Company's imports of footwear from China. From time to
time there have been other trade disputes with China, involving such things as
market access, textile quotas, automotive industry policies, and agricultural
products. These and other such matters could also present problems in the
future that might lead to trade sanctions affecting the Company's imports of
footwear.

  Imports from China continue to enter the United States on a conditional
normal-trade-relations ("NTR") basis. Pursuant to NTR, products imported by
the Company from China currently receive the lower tariff rates made available
to most of the United States' major trading partners. In the case of China,
however, this NTR treatment is made possible under the Trade Act of 1974 by
virtue of certain Presidential findings that waive restrictions that would
otherwise render China ineligible for NTR treatment. The President has waived
these restrictions each year since 1979. This year the President has announced
that he intends to seek the passage of legislation that would grant permanent
NTR status to China. The proposal is controversial, and there can be no
assurance that it will be passed. Moreover, there can be no assurance that
China will continue to enjoy NTR status in the future. If goods manufactured
in China enter the United States without benefit of NTR treatment, such goods

                                       8
<PAGE>

will be subject to significantly higher duty rates, ranging between 20% and
66% of customs value. Any such increased duties or tariffs could significantly
increase the cost or reduce supply of goods from China.

Backlog

  At December 31, 1999 and 1998, domestic futures orders with start ship dates
from January through June 2000 and 1999 were approximately $95,309,000 and
$131,452,000, respectively, a decrease of 28%. At December 31, 1999 and 1998,
international futures orders with start ship dates from January through June
2000 and 1999 were approximately $10,437,000 and $9,011,000, respectively, an
increase of 16%. At December 31, 1999 and 1998 total futures orders with start
ship dates from January through June 2000 and 1999 were approximately
$105,746,000 and $140,463,000, respectively, a decrease of 25%. The 25%
decrease in total futures orders is comprised of a 26% decrease in the first
quarter 2000 futures orders and a 22% decrease in the second quarter 2000
futures orders. "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. The Company believes
its rate of net customer cancellations of domestic orders approximates
industry averages for similar companies. Customers may also reject
nonconforming goods. To date, the Company believes it has not experienced
returns of its products or bad debts of customers materially in excess of
industry averages for similar companies.

Competition

  The athletic footwear industry is highly competitive, and sales growth of
athletic and athletic-style leisure footwear slowed considerably in 1999,
increasing competition. The largest domestic marketers of footwear are Nike
and adidas, while the international market is dominated by Nike, adidas and
Reebok. Each of these companies has substantially greater financial,
distribution and marketing resources as well as greater brand awareness than
the Company.

  The Company has recently increased its emphasis on product lines beyond the
Company's Classic tennis model. In the past, the Company has introduced
products in such highly competitive categories such as court, boating, outdoor
and children's shoes. See "Products". There can be no assurance that the
Company will penetrate these or other new markets or increase the market share
it has established to date.

  The principal elements of competition in the athletic footwear market
include brand awareness, product quality, design, pricing, fashion appeal,
marketing, distribution, performance and brand positioning. The Company's
products compete primarily on the basis of technological innovations, quality,
style, and brand awareness among consumers. While the Company believes that
its competitive strategy has resulted in increased brand awareness and market
share, there can be no assurance that the Company will be able to retain or
increase its market share or respond to changing consumer preferences.

Trademarks and Patents

  The Company utilizes trademarks on all of its products and believes that its
products are more marketable on a long-term basis when identified with
distinctive markings. K-Swiss(R) is a registered trademark in the United
States and certain other countries. The Company's name is not registered as

                                       9
<PAGE>

a trademark in certain countries because of restrictions on registering names
having geographic connotations. However, since K-Swiss is not a geographic
name, the Company has often secured registrations despite such objections. The
Company's shield emblem and the five-stripe design are also registered in the
United States and certain foreign countries. The five-stripe design is not
presently registered in some countries because it has been deemed ornamental
by regulatory authorities. The five-stripe design has not been registered in
Germany because of a possible conflict with adidas' three-stripe design mark.
The Company selectively seeks to register the names of its shoes, its logos
and the names given to certain of its technical and performance innovations,
including Aosta(R) rubber and Silicone Formula 18(R). The Company has obtained
patents in the United States regarding the Bio Feedback(R) ankle support
system, the Shock Spring(R) cushioning system incorporated into K-Swiss'
7.0 System(R) performance tennis shoes and training line, the D.R. Cinch
System(R), the stability design incorporated in the Si-18(R) tennis shoe, and
other features. The Company vigorously defends its trademarks and patent
rights against infringement worldwide and employs independent security
consultants to assist in such protection. To date, the Company is not aware of
any significant counterfeiting problems regarding its products.

Employees

  At December 31, 1999, the Company employed 183 persons in the United States,
67 persons in Taiwan, China and Thailand, and 33 persons in England and the
Netherlands.

Item 2. Properties

  In August 1998, the Company moved into its new headquarters facility in
Westlake Village, California. This facility, which is owned by the Company, is
approximately 50,000 square feet. The Company occupies one-half of this
facility and leases the remaining portion.

  The Company leases a 309,000 square foot distribution facility in Mira Loma,
California. This lease expires in January 2003, subject to two options, each
of which would extend the term of the lease for three years. Approximately
90,000 square feet of this facility is subleased to a tenant through January
2003. The Company uses the Mira Loma facility as its main distribution center.
The effective monthly commitment for the Mira Loma facility is approximately
$78,000.

Item 3. Legal Proceedings

  The Company is, from time to time, a party to litigation which arises in the
normal course of its business operations. The Company does not believe it is
presently a party to litigation which will have a material adverse effect on
its business or operations.

Item 4. Submission of Matters to a Vote of Security Holders

  None.

                                      10
<PAGE>

Item 4(a). Executive Officers of the Registrant

  The executive officers of the Company are as follows:

<TABLE>
<CAPTION>
                     Age at
                  December 31,
       Name           1999                         Position
       ----       ------------                     --------
 <C>              <C>          <S>
 Steven Nichols        57      Chairman of the Board and President
 Preston Davis         55      Vice President--Sales
 Edward Flora          48      Vice President--Operations
 Lee Green             46      Corporate Counsel
 Thomas Harrison       57      Senior Vice President
 Donna Lucas           37      Vice President--Apparel
 Deborah Mitchell      38      Vice President--Marketing
 George Powlick        55      Vice President--Finance, Chief Financial Officer,
                                Secretary and Director
 Janice Smith          38      Corporate Controller
 Brian Sullivan        46      Vice President--National Accounts
 Peter Worley          39      Vice President--Product Development
</TABLE>

  Officers are appointed by and serve at the discretion of the Board of
Directors.

  Steven Nichols has been President and Chairman of the Board of the Company
since 1987. From 1980 to 1986, Mr. Nichols was a director and Vice President--
Merchandise of Stride Rite Corp., a footwear manufacturer and holding company.
In addition, Mr. Nichols was President of Stride Rite Footwear from 1982 to
1986. From 1979 to 1982, Mr. Nichols served as an officer and President of
Stride Rite Retail Corp., the largest retailer of branded children's shoes in
the United States. From 1962 through 1979, he was an officer of Nichols Foot
Form Corp., which operated a chain of New York retail footwear stores.

  Preston Davis, Vice President--Sales, joined the Company in March 1987 as a
consultant and served as Vice President--Sales from June 1987 to January 1989
and Vice President--Marketing from February 1989 to February 1991. Prior to
joining the Company, Mr. Davis owned and managed Preston Davis Associates, a
marketing and sales consulting firm, specializing in sporting goods. From June
1982 through December 1985, Mr. Davis was Vice President--Sales for Kaepa,
Inc., another athletic shoe company.

  Edward Flora, Vice President--Operations, joined the Company as a consultant
in June 1990 and served as Director--Administration from October 1990 to
February 1994. Prior to joining the Company, Mr. Flora was Vice President--
Distribution for Bugle Boy Industries, a manufacturer and distributor of
Men's, Women's, and Children's apparel, from 1987 through May 1990.

  Lee Green, Corporate Counsel, joined the Company in December 1992. Mr. Green
was formerly a partner in the international law firm of Baker & McKenzie. He
worked in the firm's Taipei office from 1985 to 1988 and its Palo Alto office
from 1988 to 1992.

  Thomas Harrison, Senior Vice President, joined the Company in January 1989.
From 1987 through 1988, Mr. Harrison was President of Osh Kosh Footwear, a
manufacturer and wholesaler of casual footwear. From 1985 to 1987, Mr.
Harrison was President of Keds Corp., a division of Stride Rite Corp. From
1984 to 1985, Mr. Harrison was national account representative for Osh Kosh
Footwear. From 1977 through 1984, Mr. Harrison was manager of the consumer
products division of Uniroyal, Inc., which included the footwear lines of
Keds, Pro-Keds and Sperry Topsider. Mr. Harrison joined Uniroyal in 1967 as a
sales representative for its Keds Division.

                                      11
<PAGE>

  Donna Lucas, Vice President--Apparel, joined the Company in December 1996.
Ms. Lucas was the Director of Design and Merchandising for Benetton
Sportsystem USA from 1990 to 1996. Previous to that she was with adidas USA in
several different capacities from 1986 to 1990. Her responsibilities ranged
from design to merchandising of all the product categories from tennis to
special markets ending in Senior Merchandising for the entire product range.

  Deborah Mitchell, Vice President--Marketing, joined the Company in October
1994. Ms. Mitchell served as Director of Marketing for Fruit of the Loom, the
largest manufacturer of men's underwear, from December 1993 through October
1994. Ms. Mitchell worked at Procter and Gamble in various positions ending in
brand management from 1984 through 1993 except while she was earning her
degree from Harvard Business School.

  George Powlick, Director, Vice President--Finance, Chief Financial Officer
and Secretary, joined the Company in January 1988. Mr. Powlick is a certified
public accountant and was an audit partner in the independent public
accounting firm of Grant Thornton from 1975 to 1987.

  Janice Smith, Corporate Controller, joined the Company in August 1987. Ms.
Smith is a certified public accountant. From 1984 to July 1987, Ms. Smith was
an auditor with the independent public accounting firm of Grant Thornton.

  Brian Sullivan, Vice President--National Accounts, joined the Company in
December 1989. From 1986 to 1989, he was Vice-President and General Manager of
Tretorn, Inc., a manufacturer and distributor of tennis shoes. From 1984
through 1985, Mr. Sullivan was Vice-President of Sales of Bancroft/Tretorn, a
tennis shoe manufacturer and distributor and predecessor to Tretorn. From 1978
to 1984, Mr. Sullivan held various positions at Bancroft/Tretorn, including
Field Salesperson, Marketing and Sales Planning Manager and National Sales
Manager.

  Peter Worley, Vice President--Product Development, joined the Company in May
1996. Mr. Worley worked for Reebok International, Ltd. from May 1986 through
October 1989, and again from July 1991 through April 1996 in various
merchandising and product line management positions, including Director of
Classic, Director of Cross Training and Director of Tennis. From October 1989
through July 1991, Mr. Worley was Sport Product Manager of Bausch & Lomb's
Ray-ban Sunglass Division.

                                      12
<PAGE>

                                    PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

  The Company's Class A Common Stock began trading June 4, 1990 on the
National Market System maintained by the National Association of Securities
Dealers (now the Nasdaq National Market) upon completion of the Company's
initial public offering. Per share high and low sales prices (in dollars) for
the quarterly periods during 1999 and 1998 as reported by Nasdaq were as
follows:

<TABLE>
<CAPTION>
                                   March 31, June 30, September 30, December 31,
                                   --------- -------- ------------- ------------
     <S>                           <C>       <C>      <C>           <C>
     1999
       Low........................   13.13    23.69       28.38        10.81
       High.......................   34.13    59.81       52.63        31.50
     1998
       Low........................    8.00     9.50       10.00        10.00
       High.......................    9.75    11.50       14.50        15.63
</TABLE>

  The Company announced on February 8, 1999 that the Company's Board of
Directors approved a two-for-one stock split for both Class A and Class B
common stock. This stock split was in the form of a 100 percent stock dividend
that was distributed on March 26, 1999 to stockholders of record at the close
of business on March 15, 1999.

  The Class A Common Stock is listed on the Nasdaq National Market under the
symbol KSWS.

  The number of stockholders of record of the Class A Common Stock on December
31, 1999 was 98. However, based on available information, the Company believes
that the total number of Class A Common stockholders, including beneficial
stockholders, is approximately 5,940.

  There is currently no established public trading market for the Company's
Class B Common Stock. The number of stockholders of record of the Class B
Common Stock on December 31, 1999 was 11.

Dividend Policy

  The Company announced on February 16, 1994 that the Company's Board of
Directors was initiating a cash dividend program payable at an annual rate of
4 cents per common share. On February 8, 1999, the Company announced an
increase in the cash dividend per share to an annual rate of 6 cents per
common share. The Board declared quarterly dividends of 1.5 cents per share
and 1 cent per share to stockholders of record as of the close of business on
the last day of each quarter in 1999 and 1998, respectively. The payment of
any future dividends will be at the discretion of the Company's Board of
Directors and will depend upon, among other things, future earnings,
operations, capital requirements, the general financial condition of the
Company and general business conditions. The Company is currently limited in
the extent to which it is able to pay dividends under the Company's revolving
credit agreement. See Note D to the Company's Consolidated Financial
Statements.

                                      13
<PAGE>

Item 6. Selected Financial Data

  The selected consolidated financial data presented below for each of the
five years in the period ended December 31, 1999 have been derived from
audited financial statements which for the most recent three years appear
elsewhere herein. The data presented below should be read in conjunction with
such financial statements, including the related notes thereto and the other
information included herein.

<TABLE>
<CAPTION>
                                              Year ended December 31,
                                    --------------------------------------------
                                      1999     1998     1997     1996     1995
                                    -------- -------- -------- -------- --------
                                       (In thousands, except per share data)
<S>                                 <C>      <C>      <C>      <C>      <C>
Income Statement Data
Revenues..........................  $285,497 $161,540 $116,213 $106,833 $120,252
Cost of goods sold................   162,658   90,925   70,769   72,320   77,726
                                    -------- -------- -------- -------- --------
  Gross Profit....................   122,839   70,615   45,444   34,513   42,526
Selling, general and
 administrative expenses..........    67,885   51,220   40,074   33,440   36,131
                                    -------- -------- -------- -------- --------
  Operating profit................    54,954   19,395    5,370    1,073    6,395
Interest income, net..............     1,784    1,853    1,823    1,527      789
                                    -------- -------- -------- -------- --------
  Earnings before income taxes....    56,738   21,248    7,193    2,600    7,184
Income tax expense................    22,454    8,702    3,020    1,869    5,331
                                    -------- -------- -------- -------- --------
  Net earnings....................  $ 34,284 $ 12,546 $  4,173 $    731 $  1,853
                                    ======== ======== ======== ======== ========
Earnings per share
Basic.............................  $   3.12 $   1.15 $    .36 $    .06 $    .14
                                    ======== ======== ======== ======== ========
Diluted...........................  $   2.99 $   1.10 $    .35 $    .06 $    .14
                                    ======== ======== ======== ======== ========
Weighted average number of shares
 outstanding
Basic.............................    10,972   10,914   11,688   12,911   13,155
Diluted (1).......................    11,451   11,432   11,927   12,985   13,259
Balance Sheet Data (at period end)
Current assets....................  $131,230 $102,002 $ 91,053 $ 90,537 $ 92,786
Current liabilities...............    17,442   18,703   14,662   11,240    9,603
Total assets......................   146,772  115,465  101,195  100,275  102,378
Total debt (2)....................       853      655    1,142    1,711      920
Stockholders' equity..............   112,030   83,268   75,865   79,569   84,069
</TABLE>
--------
(1) Includes common stock and dilutive potential common stock (options).
(2) Includes all interest-bearing debt and capital lease obligations, but
    excludes outstanding letters of credit ($8,765,000, $7,703,000,
    $12,156,000, $8,000,000 and $7,741,000 as of December 31, 1999, 1998,
    1997, 1996 and 1995).

                                      14
<PAGE>

Item 7. 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 the Company or its
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 the Company files 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 (including the current Asian economic situation); the size and
growth of the overall athletic footwear and apparel markets; the size of the
Company's competitors; intense competition among designers, marketers,
distributors and sellers of athletic footwear and apparel for consumers and
endorsers; market acceptance of the Company's new training shoe line;
demographic changes; changes in consumer preferences; popularity of particular
designs, categories of products, and sports; seasonal and geographic demand
for the Company's products; the size, timing and mix of purchases of the
Company's 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; the ability of the Company to continue, manage or forecast
its growth and inventories; new product development and commercialization; the
ability to secure and protect trademarks, patents, and other intellectual
property; performance and reliability of products; customer service; year 2000
compliance issues; adverse publicity; the loss of significant customers or
suppliers; dependence on distributors; business disruptions; increased costs
of freight and transportation to meet delivery deadlines; 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 the Company; the
ability to attract and retain qualified personnel; and other factors
referenced or incorporated by reference in this report and other reports.

  The Company 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 it assess the impact of all such risk factors
on the Company's 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 the Company does, from time to
time, communicate with securities analysts, it is against the Company's policy
to disclose to them any material non-public information or other confidential
commercial information. Accordingly, investors should not assume that the
Company agrees with any statement or report issued by any analyst irrespective
of the content of the statement or report. Furthermore, the Company has a
policy against issuing or confirming financial forecasts or projections issued
by others. Thus, to the extent that reports issued by securities analysts
contain any projections, forecasts or opinions, such reports are not the
responsibility of the Company.

                                      15
<PAGE>

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.

<TABLE>
<CAPTION>
                                Year ended December 31,
                                -------------------------
                                 1999     1998     1997
                                -------  -------  -------
       <S>                      <C>      <C>      <C>
       Revenues................   100.0%   100.0%   100.0%
       Cost of goods sold......    57.0     56.3     60.9
       Gross profit............    43.0     43.7     39.1
       Selling, general and
        administrative
        expenses...............    23.7     31.7     34.5
       Interest income, net....     0.6      1.2      1.6
       Earnings before income
        taxes..................    19.9     13.2      6.2
       Income tax expense......     7.9      5.4      2.6
       Net Earnings............    12.0      7.8      3.6
</TABLE>

1999 Compared to 1998

  Total revenues increased 76.7% to $285,497,000 in 1999 from $161,540,000 in
1998. This increase was attributable to increases in the average underlying
wholesale price per pair, in addition to an increase in the volume of footwear
sold. The volume of footwear sold increased 65.6% to 10,490,000 pair in 1999
from 6,334,000 pair in 1998. The average wholesale price per pair increased by
6.6% to $26.16 in 1999 from $24.54 in 1998. This increase in the average
wholesale price per pair is primarily attributable to an increase in the
Classic and children's categories, in both units and average price per pair.
The major changes in volume for footwear categories are as follows: Classics,
children's and tennis/court categories increased 75%, 65% and 9%,
respectively. Revenues increased, despite a poor retail environment, due
principally to the popularity of several new Classic products and the
cumulative results of additional spending on marketing and advertising.

  Domestic revenues increased 81.9% to $264,341,000 in 1999 from $145,293,000
in 1998. International product revenues increased 30.6% in 1999 to $20,943,000
from $16,030,000 in 1998. International revenues, as a percentage of total
revenues, decreased to 7.4% in 1999 from 10.1% in 1998. Fees earned by the
Company on sales by foreign licensees and distributors were $213,000 for 1999
and $217,000 for 1998.

  The Company believes that the athletic and casual footwear industry
experiences seasonal fluctuations, due to increased domestic sales during
certain selling seasons, including Easter, back-to-school and the year-end
holiday seasons. The Company presents full-line offerings for the Easter and
back-to-school seasons, for delivery during the first and third quarters,
respectively, but not for the year-end holiday season.

  At December 31, 1999 domestic and international futures orders with start
ship dates from January through June 2000 were approximately $95,309,000 and
$10,437,000, respectively, 28% lower and 16% higher, respectively, than such
orders were at December 31, 1998 for start ship dates of the comparable period
of the prior year. These orders are not necessarily indicative of revenues for
subsequent periods because: (1) the mix of "future" and "at-once" orders can
vary significantly from quarter to quarter and year to year and (2) the rate
of customer order cancellations can also vary from quarter to quarter and year
to year.

  Gross profit margins decreased, as a percentage of revenues, to 43.0% in
1999 from 43.7% in 1998. Gross profit margins decreased primarily due to
changes in the domestic/international and product mix of sales.


                                      16
<PAGE>

  Selling, general and administrative expenses increased 32.5% to $67,885,000
(23.7% of revenues) in 1999 from $51,220,000 (31.7% of revenues) in 1998. The
increase in the amounts for the year ended December 31, 1999 compared to the
year ended December 31, 1998 was primarily the result of an increase in direct
advertising costs, commissions and salaries expense, as well as additional bad
debt expense recorded due to the bankruptcy of one of the Company's larger
customers. The decrease in selling, general and administrative expenses, as a
percentage of revenues, was due primarily to these expenses growing more
slowly than revenues during 1999.

  Net interest income was $1,784,000 (0.6% of revenues) in 1999 compared to
$1,853,000 (1.2% of revenues) in 1998, a decrease of $69,000 or 3.7%. This
decrease in net interest income was the result of reduced rates earned on
commercial paper investments, partially offset by additional interest expense
recognized in 1998 in relation to a state tax audit and higher average
balances on commercial paper investments.

  The Company's effective tax rate decreased to 39.6% in 1999 from 41.0% in
1998. The $8,410,000 income tax benefit of options exercised during 1999 was
credited to additional paid-in capital and therefore did not impact the
effective tax rate.

  Net earnings increased 173.3% to $34,284,000 or $3.12 per common share
(basic earnings per share) in 1999 from $12,546,000 or $1.15 per common share
(basic earnings per share) in 1998. Net earnings for 1999 included net losses
of the Company's European operations of $791,000. The European operations are
wholly-owned subsidiaries of the Company rather than independent unaffiliated
distributors as are utilized throughout most of the balance of the Company's
international operations. The Company's European operations do not generate
sufficient margins to exceed the necessary fixed costs involved in creating a
presence in this foreign market. The Company is attempting to increase
revenues in this market as well as exploring ways to reduce costs. See
Note A11 to the Company's Consolidated Financial Statements for the Company's
policies relating to risk management of foreign currency.

1998 Compared to 1997

  Total revenues increased 39.0% to $161,540,000 in 1998 from $116,213,000 in
1997. This increase was attributable to increases in the average underlying
wholesale price per pair, in addition to an increase in the volume of footwear
sold. The volume of footwear sold increased 30.1% to 6,334,000 pair in 1998
from 4,870,000 pair in 1997. The average wholesale price per pair increased by
7.9% to $24.54 in 1998 from $22.74 in 1997. This increase in the average
wholesale price per pair is primarily attributable to an increase in the
Classic category, in both units and average price per pair. The major changes
in volume for footwear categories are as follows: Classics and children's
categories increased 31% and 60%, respectively, and the tennis/court category
decreased 2%. Revenues increased despite a poor retail environment due
principally to the popularity of several new Classic products and the
cumulative results of additional spending on marketing and advertising.

  Domestic revenues increased 58.7% to $145,293,000 in 1998 from $91,568,000
in 1997. International product revenues decreased 33.4% in 1998 to $16,030,000
from $24,085,000 in 1997. International revenues, as a percentage of total
revenues, decreased to 10.1% in 1998 from 20.7% in 1997. Fees earned by the
Company on sales by foreign licensees and distributors decreased to $217,000
for 1998 from $560,000 for 1997.

  Gross profit margins increased as a percentage of revenues to 43.7% in 1998
from 39.1% in 1997. Gross profit margins increased primarily due to the
Company introducing new styles at relatively higher margins. In addition,
gross profit margins increased due to changes in the domestic/international
and product mix of sales.

                                      17
<PAGE>

  Selling, general and administrative expenses increased 27.8% to $51,220,000
(31.7% of revenues) in 1998 from $40,074,000 (34.5% of revenues) in 1997. The
increase in the amounts for the year ended December 31, 1998 compared to the
year ended December 31, 1997 was primarily the result of an increase in direct
advertising costs and commissions, as well as an increase in the bonus accrual
for an employee incentive program. These increases were partially offset by a
bad debt recovery of a 1995 write-off. The decrease in selling, general and
administrative expenses, as a percentage of revenues, was due primarily to
these expenses not increasing as greatly as sales during 1998.

  Net interest income was $1,853,000 (1.2% of revenues) in 1998 compared to
$1,823,000 (1.6% of revenues) in 1997, an increase of $30,000 or 1.6%. This
increase in net interest income was the result of higher average balances on
commercial paper investments and reduced average outstanding balances owed
under the Company's revolving credit facilities partially offset by lower
rates earned on commercial paper investments and additional interest expense
recognized in relation to a state tax audit.

  The Company's effective tax rate decreased to 41.0% in 1998 from 42.0% in
1997.

  Net earnings increased 200.6% to $12,546,000 or $1.15 per common share
(basic earnings per share) in 1998 from $4,173,000 or $.36 per common share
(basic earnings per share) in 1997. Net earnings for 1998 included net losses
of the Company's European operations of $806,000. The European operations are
wholly-owned subsidiaries of the Company rather than independent unaffiliated
distributors as are utilized throughout most of the balance of the Company's
international operations. The Company's European operations do not generate
sufficient margins to exceed the necessary fixed costs involved in creating a
presence in this foreign market. The Company is attempting to increase
revenues in this market as well as exploring ways to reduce costs. See
Note A11 to the Company's Consolidated Financial Statements for the Company's
policies relating to risk management of foreign currency.

Liquidity and Capital Resources

  The Company experienced a net cash inflow of approximately $31,536,000,
$4,473,000 and $17,898,000 from its operating activities during 1999, 1998 and
1997, respectively. Cash provided by operations in 1999 increased from 1998,
due to an increase in net earnings, as well as differences in the amounts of
changes in accounts receivable, inventories, prepaid expenses and other
assets, and accounts payable and accrued liabilities. Cash provided by
operating activities for the year ended 1998 as compared to 1997 varied
primarily due to differences in the amounts of changes in prepaid expenses and
other assets, inventories, and accounts receivable, as well as an increase in
net earnings.

  The Company had a net outflow of cash from its investing activities during
1999 from the net purchase of property, plant and equipment. The Company had a
net inflow of cash from its investing activities during 1998 principally from
the maturity of investment securities partially offset by net purchases of
property, plant and equipment.

  In 1999 and 1998, the net cash provided by operating activities was used for
the purchase of treasury stock, the repayment of borrowings under bank lines
of credit and to pay cash dividends, partially offset by proceeds from stock
options exercised.

  The Company anticipates future cash needs for principal repayments required
pursuant to its lines of credit facilities. In addition, depending on the
Company's future growth rate, additional funds may be required by operating
activities. Finally, at December 31, 1999, approximately $26,305,000 of
foreign subsidiary earnings which are not considered indefinitely invested may
eventually be remitted

                                      18
<PAGE>

to the parent company as circumstances warrant. Upon receipt of these funds,
the Company will use approximately $10,296,000 in cash to pay income taxes
previously accrued on these foreign subsidiary earnings. The Company's
intention is to repatriate earnings of foreign operations as cash needs and
other circumstances require. No other material capital commitments exist at
December 31, 1999. With continued use of its revolving credit facility (as
discussed below), the Company believes its present and currently anticipated
sources of capital are sufficient to sustain its anticipated capital needs for
the remainder of 2000.

  On October 8, 1999, the Company announced the completion of its April 1998
$20 million stock repurchase program and a new authorization by the Board of
Directors for the Company to repurchase through December 2003 up to an
additional $25 million of its Class A Common Stock from time to time on the
open market, as market conditions warrant. The Company adopted this program
because it believes repurchasing its shares can be a good use of excess cash
depending on the Company's array of alternatives. Currently, the Company has
made purchase under all stock repurchase programs from August 1996 through
February 9, 2000 (the day prior to the filing of this Form 10-K) of
3,328,932 shares at an aggregate cost totaling approximately $37,405,000.

  In September 1998, the Company amended an agreement with a bank whereby the
Company may borrow, in the form of a secured revolving credit facility, up to
$30,000,000. The unused portion of this credit facility, which includes
letters of credit and bankers acceptances, was $22,060,000 at December 31,
1999. This facility currently expires in July 2001. Substantially all of the
Company's assets (other than real estate) are pledged as security for this
facility. The credit facility provides for interest to be paid at the prime
rate less 3/4% or, at the Company's discretion and with certain restrictions,
other market based rates. The Company pays a commitment fee of 1/8% of the
unused line for availability of the credit facility.

  The Company's European offices have agreements with a bank whereby they can
borrow up to $4,500,000 in the form of secured revolving credit facilities.
The unused portion of these credit facilities was $3,322,000 at December 31,
1999. These facilities are made available until terminated by either party.

  Total debt increased 30.2% to $853,000 at December 31, 1999 from $655,000 at
December 31, 1998 (excluding outstanding letters of credit of $8,765,000 and
$7,703,000 at December 31, 1999 and 1998, respectively). The increase was due
to borrowings under bank lines of credit under the Company's credit
facilities.

  The Company's working capital increased $30,489,000 to $113,788,000 at
December 31, 1999 from $83,299,000 at December 31, 1998.

  The Company has historically maintained higher levels of inventory relative
to sales compared to its competitors because (1) it does not ship directly to
its major domestic customers from its foreign contract manufacturers to the
same extent as its larger competitors, which would reduce inventory levels and
increase inventory turns, and (2) unlike many of its competitors, the Company
designates certain shoes as core products whereby the Company commits to its
retail customers that it will carry core products from season to season and,
therefore, the Company attempts to maintain open-stock positions on its core
products in the Company's Mira Loma, California distribution center to meet
at-once orders.

  The federal income tax returns of the Company for the years ended 1990, 1991
and 1992 are under examination by the Internal Revenue Service ("IRS"). See
Note H to the Company's Consolidated Financial Statements. In May 1998, the
IRS issued its final report proposing additional taxes of an aggregate of
approximately $1,561,000 plus penalties and interest for these years. The
Company is protesting the IRS assessment. Also, the federal income tax returns
of the Company for

                                      19
<PAGE>

the years ended 1993, 1995 and 1996 are currently under examination by the
IRS. The IRS has issued a preliminary examination report covering the 1993
fiscal year proposing adjustments to income of approximately $3,426,000 for
this year. Although no assurance can be given regarding the outcome of such
examinations, the Company believes that any taxes which might become payable
as a result of these examinations would not result in additional expense
recognized in the financial statements other than interest and penalties, if
any, as the Company has recorded deferred income taxes on the untaxed portion
of unremitted earnings of a foreign subsidiary. Therefore, management believes
that resolution of the IRS examinations should not have a material adverse
impact on the Company's financial position and results of operations.

Impact of Year 2000

  The Company completed its Year 2000 software program conversions for its
critical systems during the first quarter of 1999 and the remaining compliance
programs during the second through fourth quarters of 1999. The total
expenditure for such programs was approximately $470,000. As of February 9,
2000, the Company has not experienced any Year 2000 problems either internally
or from outside sources. However, since it may take several additional months
before it is known whether the Company or third party suppliers, vendors or
customers may have undergone year 2000 problems, no assurances can be given
that the Company will not experience losses or disruptions due to year 2000
computer related problems.

Quantitative and Qualitative Disclosures About Market Risk

 Market Risk

  Market risk is the potential change in an instrument's value caused by, for
example, fluctuations in interest and currency exchange rates. The Company's
primary market risk exposure is the risk of unfavorable movements in exchange
rates between the U.S. dollar and the British pound and between the U.S.
dollar and the German mark. Monitoring and managing these risks is a continual
process carried out by senior management, which reviews and approves the
Company's risk management policies. Market risk is managed based on an ongoing
assessment of trends in foreign exchange rates and economic developments,
giving consideration to possible effects on both total return and reported
earnings.

 Foreign Exchange Rate Risk

  Sales denominated in currencies other than the U.S. dollar, which are
primarily sales to customers in Europe, expose the Company to market risk from
unfavorable movements in foreign exchange rates between the U.S. dollar and
the foreign currency. The Company's historical primary risk exposures have
been from changes in the rates between the U.S. dollar and the British pound
and between the U.S. dollar and the German mark, and this trend is expected to
continue. To fix the U.S. dollar amount it will receive on sales denominated
in British pounds and German marks, the Company enters into forward exchange
contracts to sell the foreign currency denominated in those currencies. The
extent to which forward exchange contracts are used is modified periodically
in response to management's estimate of market conditions and the terms and
length of specific sales contracts.

  The Company enters into foreign exchange contracts in order to reduce the
impact of foreign currency fluctuations and not to engage in currency
speculation. The use of derivative financial instruments allows the Company to
reduce its exposure to the risk that the eventual dollar net cash inflow
resulting from the sale of products to foreign customers will be adversely
affected by changes in exchange rates. Fluctuations in the value of hedging
instruments are offset by fluctuations in the value of the underlying
exposures being hedged. The Company does not hold or issue financial
instruments for trading purposes. The foreign exchange contracts are
designated for firmly committed or forecasted

                                      20
<PAGE>

sales. These contracts are generally for terms of less than one year. Gains
and losses related to hedges of firmly committed transactions are deferred and
are recognized in income or as adjustments of carrying amounts when the hedged
transaction occurs. Gains and losses of foreign exchange contracts that are
designated for forecasted transactions are recognized as the exchange rates
change.

  The forward exchange contracts generally require the Company to exchange
foreign currencies for U.S. dollars at maturity, at rates agreed at the
inception of the contracts. The counter party to derivative transactions is a
major financial institution with investment grade or better credit rating;
however, the Company is exposed to credit risk with this institution. The
credit risk is limited to the unrealized gains in such contracts should this
counter party fail to perform as contracted.

  The table below provides information as of December 31, 1999 and 1998 about
the Company's foreign currency forward exchange contracts by currency. The
information is presented in U.S. dollars:

<TABLE>
<CAPTION>
                                                          December 31,
                                                  -----------------------------
                                                       1999           1998
                                                  -------------- --------------
<S>                                               <C>            <C>
United Kingdom (Pound Sterling)..................
  Notional amount................................ $    1,300,000 $    1,200,000
  Fair value.....................................          9,000            --
  Average contractual exchange rate.............. $1.62/UK pound $1.63/UK pound
Germany (Deutsche Mark)
  Notional amount................................ $    3,290,000 $    3,839,000
  Fair value.....................................        181,000          9,000
  Average contractual exchange rate.............. $       .55/DM $       .58/DM
</TABLE>

  The Company does not anticipate any material adverse effect on its results
of operations or financial position relating to these foreign currency forward
exchange contracts. Based on the Company's overall currency rate exposure at
December 31, 1999, a 10% change in currency rates would not have had a
material effect on the financial position, results of operations and cash
flows of the Company.

Inflation

  The Company believes that distributors of footwear in the higher priced end
of the footwear market, including the Company, are able to adjust their prices
in response to an increase in direct and general and administrative expenses,
without a significant loss in sales. Accordingly, to date, inflation and
changing prices have not had a material adverse effect on the Company's
revenues or earnings.

Item 8. Financial Statements and Supplementary Data

  The Consolidated Financial Statements required in response to this section
are submitted as part of Item 14(a) of this Report.

                                      21
<PAGE>

              REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors and Stockholders
K-Swiss Inc.

  We have audited the consolidated balance sheets of K-Swiss Inc. as of
December 31, 1999 and 1998, and the related consolidated statements of
earnings and comprehensive earnings, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of management. Our responsibility is to
express an opinion on these financial statements based on our audits.

  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

  In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of K-Swiss Inc.
as of December 31, 1999 and 1998, and the consolidated results of its
operations and its consolidated cash flows for each of the three years in the
period ended December 31, 1999, in conformity with generally accepted
accounting principles.

  We have also audited Schedule II of K-Swiss Inc. for each of the three years
in the period ended December 31, 1999. In our opinion, this schedule presents
fairly, in all material respects, the information required to be set forth
therein.

/s/ GRANT THORNTON LLP

Los Angeles, California
January 28, 2000

                                      22
<PAGE>

                                  K-SWISS INC.

                          CONSOLIDATED BALANCE SHEETS

                                  December 31,

                         (Dollar amounts in thousands)

<TABLE>
<CAPTION>
                                                              1999      1998
                                                            --------  --------
                          ASSETS
                          ------
<S>                                                         <C>       <C>
Current Assets
  Cash and cash equivalents (Note A4)...................... $ 53,119  $ 37,360
  Accounts receivable, less allowance for doubtful accounts
   of $1,740 and $825 for 1999 and 1998, respectively
   (Notes D and L).........................................   27,950    26,478
  Inventories (Notes A5 and D).............................   44,164    33,535
  Prepaid expenses and other...............................    4,051     2,883
  Deferred taxes (Notes A8 and H)..........................    1,946     1,746
                                                            --------  --------
    Total current assets...................................  131,230   102,002
Property, Plant and Equipment, net (Notes A6, B and D).....    8,848     8,009
Other Assets
  Intangible assets (Notes A7, C and D)....................    4,179     4,429
  Other....................................................    2,515     1,025
                                                            --------  --------
                                                               6,694     5,454
                                                            --------  --------
                                                            $146,772  $115,465
                                                            ========  ========
<CAPTION>
           LIABILITIES AND STOCKHOLDERS' EQUITY
           ------------------------------------
<S>                                                         <C>       <C>
Current Liabilities
  Bank lines of credit (Note D)                             $    353  $    155
  Current maturities of subordinated debentures (Note E)...      500       500
  Trade accounts payable...................................    4,588     7,783
  Accrued liabilities (Note F).............................   12,001    10,265
                                                            --------  --------
    Total current liabilities..............................   17,442    18,703
Other Liabilities (Note G).................................   10,196     5,267
Deferred Taxes (Notes A8 and H)............................    7,104     8,227
Commitments and Contingencies (Notes H and I)..............      --        --
Stockholders' Equity (Note K)
  Preferred Stock-authorized 2,000,000 shares of $.01 par
   value; none issued and outstanding......................      --        --
  Common Stock:
  Class A--authorized 18,000,000 shares of $.01 par value;
   11,006,155 shares issued, 7,727,223 shares outstanding
   and 3,278,932 shares held in treasury at December 31,
   1999 and 9,832,728 shares issued, 7,313,796 shares
   outstanding and 2,518,932 shares held in treasury at
   December 31, 1998.......................................      110        98
  Class B--authorized 10,000,000 shares of $.01 par value;
   issued and outstanding 3,013,978 shares at December 31,
   1999 and 3,426,556 shares at December 31, 1998..........       30        34
  Additional paid-in capital...............................   40,017    25,830
  Treasury Stock...........................................  (36,766)  (17,760)
  Retained earnings (Note D)...............................  109,122    75,500
  Accumulated other comprehensive earnings--
   Foreign currency translation (Note A9)..................     (483)     (434)
                                                            --------  --------
                                                             112,030    83,268
                                                            --------  --------
                                                            $146,772  $115,465
                                                            ========  ========
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       23
<PAGE>

                                  K-SWISS INC.

                      CONSOLIDATED STATEMENTS OF EARNINGS
                           AND COMPREHENSIVE EARNINGS

                            Year Ended December 31,

            (Dollar amounts in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                      1999      1998     1997
                                                    --------  -------- --------
<S>                                                 <C>       <C>      <C>
Revenues (Notes A12, L and M).....................  $285,497  $161,540 $116,213
Cost of goods sold................................   162,658    90,925   70,769
                                                    --------  -------- --------
  Gross profit....................................   122,839    70,615   45,444
Selling, general and administrative expenses (Note
 A13).............................................    67,885    51,220   40,074
                                                    --------  -------- --------
  Operating profit................................    54,954    19,395    5,370
Interest income, net..............................     1,784     1,853    1,823
                                                    --------  -------- --------
  Earnings before income taxes....................    56,738    21,248    7,193
Income tax expense (Notes A8 and H)...............    22,454     8,702    3,020
                                                    --------  -------- --------
  NET EARNINGS....................................  $ 34,284  $ 12,546 $  4,173
                                                    ========  ======== ========
Earnings per common share (Note A14)
  Basic...........................................  $   3.12  $   1.15 $    .36
                                                    ========  ======== ========
  Diluted.........................................  $   2.99  $   1.10 $    .35
                                                    ========  ======== ========
Net Earnings......................................  $ 34,284  $ 12,546 $  4,173
Other comprehensive (loss) earnings, net of tax--
 Foreign currency translation adjustments.........       (49)       36     (419)
                                                    --------  -------- --------
Comprehensive earnings............................  $ 34,235  $ 12,582 $  3,754
                                                    ========  ======== ========
</TABLE>


        The accompanying notes are an integral part of these statements.

                                       24
<PAGE>

                                  K-SWISS INC.

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                      Three years ended December 31, 1999

                         (Dollar amounts in thousands)

<TABLE>
<CAPTION>
                                Common Stock                           Treasury Stock
                     ------------------------------------            ------------------             Accumulated
                          Class A           Class B       Additional      Class A                      other
                     ----------------- ------------------  paid-in   ------------------  Retained  comprehensive
                       Shares   Amount   Shares    Amount  capital    Shares    Amount   earnings    earnings     Total
                     ---------- ------ ----------  ------ ---------- --------- --------  --------  ------------- --------
<S>                  <C>        <C>    <C>         <C>    <C>        <C>       <C>       <C>       <C>           <C>
Balance at January
 1, 1997...........   8,174,036  $ 82   4,991,144   $ 50   $25,034   1,004,000 $ (5,221) $ 59,675      $ (51)    $ 79,569
Conversion of
 shares (Note K)         20,000   --      (20,000)    --       --          --       --        --         --           --
Proceeds from
 exercise of
 options (Note K)..      27,136   --          --      --       144         --       --        --         --           144
Income tax benefit
 of options
 exercised.........         --    --          --      --        27         --       --        --         --            27
Purchase of
 treasury stock....         --    --          --      --       --    1,001,400   (7,168)      --         --        (7,168)
Dividends paid
 ($.04 per share)
 (Note D)..........         --    --          --      --       --          --       --       (461)       --          (461)
Net earnings for
 the year..........         --    --          --      --       --          --       --      4,173        --         4,173
Foreign currency
 translation (Note
 A9)...............         --    --          --      --       --          --       --        --        (419)        (419)
                     ----------  ----  ----------   ----   -------   --------- --------  --------      -----     --------
Balance at
 December 31, 1997.   8,221,172    82   4,971,144     50    25,205   2,005,400  (12,389)   63,387       (470)      75,865
Conversion of
 shares (Note K)...   1,544,588    16  (1,544,588)   (16)      --          --       --        --         --           --
Proceeds from
 exercise of
 options (Note K)..      66,968   --          --      --       423         --       --        --         --           423
Income tax benefit
 of options
 exercised.........         --    --          --      --       202         --       --        --         --           202
Purchase of
 treasury stock....         --    --          --      --       --      513,532   (5,371)      --         --        (5,371)
Dividends paid
 ($.04 per share)
 (Note D)..........         --    --          --      --       --          --       --       (433)       --          (433)
Net earnings for
 the year..........         --    --          --      --       --          --       --     12,546        --        12,546
Foreign currency
 translation (Note
 A9)...............         --    --          --      --       --          --       --        --          36           36
                     ----------  ----  ----------   ----   -------   --------- --------  --------      -----     --------
Balance at
 December 31, 1998.   9,832,728    98   3,426,556     34    25,830   2,518,932  (17,760)   75,500       (434)      83,268
Conversion of
 shares (Note K)...     412,578     4    (412,578)    (4)      --          --       --        --         --           --
Proceeds from
 exercise of
 options (Note K)..     760,849     8         --      --     5,777         --       --        --         --         5,785
Income tax benefit
 of options
 exercised.........         --    --          --      --     8,410         --       --        --         --         8,410
Purchase of
 treasury stock....         --    --          --      --       --      760,000  (19,006)      --         --       (19,006)
Dividends paid
 ($.06 per share)
 (Note D)..........         --    --          --      --       --          --       --       (662)       --          (662)
Net earnings for
 the year..........         --    --          --      --       --          --       --     34,284        --        34,284
Foreign currency
 translation (Note
 A9)...............         --    --          --      --       --          --       --        --         (49)         (49)
                     ----------  ----  ----------   ----   -------   --------- --------  --------      -----     --------
Balance at
 December 31, 1999.  11,006,155  $110   3,013,978   $ 30   $40,017   3,278,932 $(36,766) $109,122      $(483)    $112,030
                     ==========  ====  ==========   ====   =======   ========= ========  ========      =====     ========
</TABLE>

         The accompanying notes are an integral part of this statement.

                                       25
<PAGE>

                                  K-SWISS INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                            Year ended December 31,

                         (Dollar amounts in thousands)

<TABLE>
<CAPTION>
                                                     1999      1998     1997
                                                   --------  --------  -------
<S>                                                <C>       <C>       <C>
Cash flows from operating activities:
  Net earnings.................................... $ 34,284  $ 12,546  $ 4,173
  Adjustments to reconcile net earnings to net
   cash provided by operating activities:
    Depreciation and amortization.................    1,374       940      918
    Net loss (gain) on disposal of property, plant
     and equipment................................       66      (384)       2
    Deferred income taxes.........................   (1,323)   (1,033)     306
    Increase in accounts receivable...............   (1,511)  (10,811)    (954)
    Increase in inventories.......................  (10,636)   (6,321)  (3,428)
    (Increase) decrease in prepaid expenses and
     other assets.................................   (2,662)      937   11,647
    Increase in accounts payable and accrued
     liabilities..................................   11,944     8,599    5,234
                                                   --------  --------  -------
  Net cash provided by operating activities.......   31,536     4,473   17,898
Cash flows from investing activities:
  Purchase of investment securities...............      --        --    (9,619)
  Proceeds from maturity of investment securities.      --      5,995    3,624
  Purchase of property, plant and equipment.......   (2,086)   (5,654)  (1,641)
  Proceeds from disposal of property, plant and
   equipment......................................       29     2,268        9
                                                   --------  --------  -------
  Net cash (used in) provided by investing
   activities.....................................   (2,057)    2,609   (7,627)
Cash flows from financing activities:
  Net borrowings (repayments) under bank lines of
   credit and capital leases......................      207      (487)    (564)
  Purchase of treasury stock......................  (19,006)   (5,371)  (7,168)
  Payment of dividends............................     (662)     (433)    (461)
  Proceeds from stock options exercised...........    5,785       423      144
                                                   --------  --------  -------
  Net cash used in financing activities...........  (13,676)   (5,868)  (8,049)
Effect of exchange rate changes on cash...........      (44)       23     (413)
                                                   --------  --------  -------
      Net increase in cash and cash equivalents...   15,759     1,237    1,809
Cash and cash equivalents at beginning of year....   37,360    36,123   34,314
                                                   --------  --------  -------
Cash and cash equivalents at end of year.......... $ 53,119  $ 37,360  $36,123
                                                   ========  ========  =======
Supplemental disclosure of cash flow information:
  Non-cash investing and financing activities:
    Income tax benefit of options exercised....... $  8,410  $    202  $    27
  Cash paid during the year for:
    Interest...................................... $     98  $    334  $   156
    Income taxes.................................. $ 16,302  $ 10,133  $ 3,280
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       26
<PAGE>

                                 K-SWISS INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       December 31, 1999, 1998 and 1997

NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1. Nature of Operations

  The Company designs, develops and markets footwear for high performance use,
fitness and casual activities. The Company operates in an industry dominated
by a small number of very large competitors. The size of these competitors
enables them to lead the product direction of the industry, and therefore,
potentially diminish the value of the Company's products. In addition to
generally greater resources, these competitors spend substantially more money
on advertising and promotion than the Company and therefore dominate market
share. The Company's market share is estimated at approximately two percent.
Lastly, the retail environment forecasted for the near term is difficult,
which could put additional pressure on the Company's ability to maintain
margins.

  The Company purchases a significant portion of its products from a small
number of contract manufacturers in China and Thailand. This concentration of
suppliers in these locations subjects the Company to the risk of interruptions
of product flow for various reasons and possible loss of sales, which would
adversely affect operating results.

  The United States Trade Representative ("USTR") has expressed concern about
the protection of intellectual property rights within China. The failure of
the Chinese government to make substantial progress with respect to these
concerns could result in the imposition of retaliatory duties on imports from
China, including footwear, which could affect the cost of products purchased
and sold by the Company.

2. Estimates in Financial Statements

  In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities; the
disclosure of contingent assets and liabilities at the date of the financial
statements; and revenues and expenses during the reporting period. Actual
results could differ from those estimates.

3. Basis of Consolidation

  The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and balances
have been eliminated. Certain reclassifications have been made in the 1998
presentation to conform to the 1999 presentation.

4. Cash Equivalents

  For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.

5.Inventories

  Inventories, consisting of merchandise held for resale, are stated at the
lower of cost (first-in, first-out method) or market. Management continually
evaluates its inventory position and implements
promotional or other plans to reduce inventories to appropriate levels
relative to its sales estimates for particular product styles or lines.
Estimated losses are recorded when such plans are implemented. It

                                      27
<PAGE>

                                 K-SWISS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 1999, 1998 and 1997

NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)

is at least reasonably possible that management's plans to reduce inventory
levels will be less than fully successful, and that such an outcome would
result in a change in the inventory reserve in the near-term.

6.  Property, Plant and Equipment

    Property, plant and equipment are carried at cost. For financial reporting
and tax purposes, depreciation and amortization are calculated using straight-
line and accelerated methods over the estimated service lives of the
depreciable assets. The service lives of the Company's building and related
improvements are 30 and 5 years, respectively. Equipment is depreciated from 3
to 10 years and leasehold improvements are amortized over the lives of the
respective leases.

7.  Intangible Assets

    Intangible assets are being amortized using the straight-line method over
their estimated economic useful lives at the time of acquisition. The
intangible assets principally include trademarks and contingent purchase
payments and are amortized over 30 to 35 years. Other intangible assets
consist of organization costs and trademark defense costs and are amortized
over 5 to 7 years.

8.  Income Taxes

    The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). SFAS 109
is an asset and liability approach that requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been recognized in the Company's financial statements or tax
returns. Provision is made for appropriate United States income taxes on
earnings of subsidiary companies which are intended to be remitted to the
parent company.

9.  Foreign Currency Translation

    Assets and liabilities of certain foreign operations are translated into
U.S. dollars at current exchange rates. Income and expenses are translated
into U.S. dollars at average rates of exchange prevailing during the period.
Adjustments resulting from translating foreign functional currency financial
statements into U.S. dollars are taken directly to a separate component of
stockholders' equity. Foreign currency transaction gains and losses are
included in income.

10. Fair Value of Financial Instruments

    For certain of the Company's financial instruments, including cash and cash
equivalents, accounts receivable, outstanding borrowings under the line of
credit, accounts payable and other accrued liabilities, the carrying amounts
approximate fair value due to their short maturities. The estimated fair value
of the subordinated debentures is based on borrowing rates currently available
to the Company for bank loans with similar terms and maturities.


                                      28
<PAGE>

                                 K-SWISS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 1999, 1998 and 1997

NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)

11. Financial Risk Management and Derivatives

    The Company enters into foreign exchange contracts in order to reduce the
impact of foreign currency fluctuations (British pounds and German marks) and
not to engage in currency speculation. The use of derivative financial
instruments allows the Company to reduce its exposure to the risk that the
eventual dollar net cash inflow resulting from the sale of products to foreign
customers and purchases from foreign suppliers will be adversely affected by
changes in exchange rates. Fluctuations in the value of hedging instruments
are offset by fluctuations in the value of the underlying exposures being
hedged. The Company does not hold or issue financial instruments for trading
purposes. The foreign exchange contracts are designated for firmly committed
or forecasted sales. These transactions are generally expected to occur in
less than one year. Gains and losses related to hedges of firmly committed
transactions are deferred and are recognized in income or as adjustments of
carrying amounts when the hedged transaction occurs. Gains and losses of
foreign exchange contracts that are designated for forecasted transactions are
recognized as the exchange rates change. At December 31, 1999 and 1998,
deferred gains and losses are not material to the consolidated financial
statements.

    The forward exchange contracts generally require the Company to exchange
foreign currencies (British pounds and German marks) for U.S. dollars at
maturity, at rates agreed to at the inception of the contracts. The counter
party to derivative transactions is a major financial institution with
investment grade or better credit rating; however, the Company is exposed to
credit risk with this institution. The credit risk is limited to the
unrealized gains in such contracts should this counter party fail to perform
as contracted.

    The aggregate notional principal amounts and fair values of the Company's
derivative financial instruments were $4,590,000 and $190,000 at December 31,
1999 respectively, and $5,040,000 and $9,000 at December 31, 1998,
respectively. The estimated fair value of derivatives used to hedge the
Company's risks will fluctuate over time. The fair value of the forward
exchange contracts is estimated by obtaining quoted market prices.

12. Recognition of Revenues

    Revenues include sales and fees earned on sales by licensees and are
recognized upon shipment of goods.

13. Advertising Costs

    Advertising costs are expensed as incurred and are included in selling,
general and administrative expenses. Advertising expenses amounted to
$18,461,000, $13,323,000 and $6,553,000 for 1999, 1998, and 1997,
respectively.

14. Earnings per Share

    Basic earnings per share excludes dilution and is computed by dividing net
earnings available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share reflect
the potential dilution that could occur if options to issue common stock were
exercised into common stock.

                                      29
<PAGE>

                                 K-SWISS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 1999, 1998 and 1997


NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)

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

<TABLE>
<CAPTION>
                                   1999             1998             1997
                             ---------------- ---------------- ----------------
                                    Per Share        Per Share        Per Share
                             Shares  Amount   Shares  Amount   Shares  Amount
                             ------ --------- ------ --------- ------ ---------
<S>                          <C>    <C>       <C>    <C>       <C>    <C>
Basic EPS................... 10,972   $3.12   10,914   $1.15   11,688   $ .36
Effect of Dilutive Stock
 Options....................    480    (.13)     518    (.05)     239    (.01)
                             ------   -----   ------   -----   ------   -----
Diluted EPS................. 11,452   $2.99   11,432   $1.10   11,927   $ .35
                             ======   =====   ======   =====   ======   =====
</TABLE>

  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:

<TABLE>
<CAPTION>
                                           1999          1998          1997
                                      -------------- ------------- -------------
<S>                                   <C>            <C>           <C>
Options to purchase shares of common
 stock (in thousands)...............        69            16            716
Exercise prices.....................   $29.63-$47.38 $11.50-$12.81  $7.63-$11.50
Expiration dates....................   April 2009-   January 2003- January 2000-
                                      September 2009  August 2008   August 2007
</TABLE>

15. New Accounting Pronouncement

  In 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133 ("SFAS 133"), Accounting for
Derivative Instruments and Hedging Activities, which is effective for 2000.
SFAS 133 will require the Company to record all derivatives on the balance
sheet at fair value. For derivatives that are hedges, changes in the fair
value of derivatives will be offset by the changes in the fair value of the
hedged assets, liabilities or firm commitments. In June 1999, the FASB amended
SFAS 133 by issuing Statement of Financial Accounting Standards No. 137 ("SFAS
137"), Accounting for Derivative Instruments and Hedging Activities-Deferral
of the Effective Date of FASB Statement No. 133-an amendment of FASB Statement
No. 133. The new standard delayed the effective date of SFAS 133 to all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company believes
the impact of adopting this standard will not be material to results of
operations or equity.

                                      30
<PAGE>

                                 K-SWISS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 1999, 1998 and 1997


NOTE B--PROPERTY, PLANT AND EQUIPMENT

  Property, plant and equipment as of December 31 consists of the following
(in thousands):

<TABLE>
<CAPTION>
                                                                1999     1998
                                                               -------  -------
     <S>                                                       <C>      <C>
     Building and improvements................................ $ 5,841  $ 5,443
     Furniture, machinery and equipment.......................   6,309    6,186
                                                               -------  -------
                                                                12,150   11,629
     Less accumulated depreciation and amortization...........  (3,997)  (4,315)
                                                               -------  -------
                                                                 8,153    7,314
     Land.....................................................     695      695
                                                               -------  -------
                                                               $ 8,848  $ 8,009
                                                               =======  =======
</TABLE>

NOTE C--INTANGIBLE ASSETS

  Intangible assets as of December 31 consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                1999     1998
                                                               -------  -------
     <S>                                                       <C>      <C>
     Contingent purchase payments............................. $ 4,579  $ 4,579
     Trademarks...............................................   2,081    2,269
     Other....................................................      10      198
     Less accumulated amortization............................  (2,491)  (2,617)
                                                               -------  -------
                                                               $ 4,179  $ 4,429
                                                               =======  =======
</TABLE>

NOTE D--BANK LINES OF CREDIT

  The Company maintains revolving credit facilities whereby it may borrow up
to an aggregate of $34,500,000 including outstanding letters of credit and
bankers' acceptances. The weighted average interest rate provided under these
credit facilities was 6.35% and 8.50% at December 31, 1999 and 1998,
respectively. A fee of up to 1/8% of the average unused line is paid for
availability of the primary credit facility.

  One of the credit agreements contains certain covenants and financial ratio
requirements, including restrictions on dividend payments. At December 31,
1999, $22,600,000 was unrestricted as to the payment of dividends. The amounts
borrowed under the facilities are collateralized by substantially all of the
assets of the Company.

  Under the most restrictive covenant, the Company must maintain stockholders'
equity, including subordinated debt, less intangible assets and exclusive of
treasury stock of at least $108,351,000 at December 31, 1999.

NOTE E--SUBORDINATED DEBENTURES

  The subordinated debentures are payable to an officer and a director of the
Company. The debentures bear interest at 10%. Interest is due on the unpaid
balance quarterly. The debentures are due in full in 2001, however, beginning
June 30, 1996 the debenture holders could have required the Company to redeem
a portion of principal semi-annually.

                                      31
<PAGE>

                                 K-SWISS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 1999, 1998 and 1997


NOTE F--ACCRUED LIABILITIES

  Accrued liabilities as of December 31 consist of the following (in
thousands):

<TABLE>
<CAPTION>
                                                                  1999    1998
                                                                 ------- -------
     <S>                                                         <C>     <C>
     Bonuses.................................................... $ 1,908 $ 1,960
     Advertising................................................   2,160   2,280
     Production Molds...........................................   1,246     428
     Other......................................................   6,687   5,597
                                                                 ------- -------
                                                                 $12,001 $10,265
                                                                 ======= =======
</TABLE>

NOTE G--OTHER LIABILITIES

  Included in other liabilities is $8,150,000 and $4,441,000 as of December
31, 1999 and 1998, respectively, representing accrued bonuses under the
Company's Economic Value Added ("EVA") incentive program not payable within
one year. These amounts are at risk of forfeiture to the plan participants
depending on the Company maintaining presently achieved levels of EVA.

NOTE H--INCOME TAXES

  The provision for income taxes includes the following for the years ended
December 31 (in thousands):

<TABLE>
<CAPTION>
                                                          1999     1998    1997
                                                         -------  ------  ------
     <S>                                                 <C>      <C>     <C>
     Current
      United States
       Federal.......................................... $20,497  $8,258  $2,366
       State............................................   3,125   1,406     243
      Foreign...........................................     155      71     105
     Deferred
      United States
       Federal..........................................  (1,184)   (925)    273
       State............................................    (139)   (108)     33
                                                         -------  ------  ------
                                                         $22,454  $8,702  $3,020
                                                         =======  ======  ======
</TABLE>

  A reconciliation from the U.S. federal statutory income tax rate to the
effective tax rate for the years ended December 31 is as follows:

<TABLE>
<CAPTION>
                                                               1999  1998  1997
                                                               ----  ----  ----
     <S>                                                       <C>   <C>   <C>
     U.S. Federal statutory rate.............................. 35.0% 35.0% 34.0%
     State income taxes.......................................  4.1   4.1   4.1
     Net results of foreign subsidiaries......................  0.1   1.3   1.8
     Amortization of intangibles..............................  0.1   0.3   0.9
     Other....................................................  0.3   0.3   1.2
                                                               ----  ----  ----
                                                               39.6% 41.0% 42.0%
                                                               ====  ====  ====
</TABLE>

                                      32
<PAGE>

                                 K-SWISS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 1999, 1998 and 1997


NOTE H--INCOME TAXES--(Continued)

  Deferred income taxes are determined based on the estimated future tax
effects of differences between the financial statement and the tax basis of
assets and liabilities given the provisions of the enacted tax laws. The net
current and non-current components of deferred income taxes recognized in the
balance sheets are as follows as of December 31 (in thousands):

<TABLE>
<CAPTION>
                                                                   1999   1998
                                                                  ------ ------
     <S>                                                          <C>    <C>
     Net current assets.......................................... $1,946 $1,746
     Net non-current liabilities.................................  7,104  8,227
                                                                  ------ ------
     Net liability............................................... $5,158 $6,481
                                                                  ====== ======
</TABLE>

  Significant components of the Company's deferred tax assets and liabilities
are as follows as of December 31 (in thousands):

<TABLE>
<CAPTION>
                                                                 1999    1998
                                                                ------- -------
     <S>                                                        <C>     <C>
     Assets
       State taxes............................................. $   822 $   527
       Bad debts reserve.......................................     626     299
       Inventory reserve and capitalized costs.................     544     812
       Bonuses.................................................   3,187   1,737
       Deferred compensation plan..............................     800     323
       Other...................................................      59     108
                                                                ------- -------
         Gross deferred tax assets.............................   6,038   3,806
     Liabilities
       Unremitted earnings of a foreign subsidiary.............  10,296   9,626
       Contingent purchase payments............................     172     180
       Other...................................................     728     481
                                                                ------- -------
         Gross deferred tax liabilities........................  11,196  10,287
                                                                ------- -------
       Net deferred tax liability.............................. $ 5,158 $ 6,481
                                                                ======= =======
</TABLE>

  The Company did not record any valuation allowances against deferred tax
assets at December 31, 1999. Management has determined, based on the Company's
history of prior operating earnings and its expectations for the future, that
operating income of the Company will more likely than not be sufficient to
recognize fully these deferred tax assets.

  The federal income tax returns of the Company for the years ended 1990, 1991
and 1992 are under examination by the Internal Revenue Service ("IRS"). In May
1998, the IRS issued its final report proposing additional taxes of an
aggregate of approximately $1,561,000 plus penalties and interest for these
years. The Company is protesting the IRS assessment. Also, the federal income
tax returns of the Company for the years ended 1993, 1995 and 1996 are
currently under examination by the IRS. The IRS has issued a preliminary
examination report covering the 1993 fiscal year proposing adjustments to
income of approximately $3,426,000 for this year. Although no assurance can be
given regarding the outcome of such examinations, the Company believes that
any taxes which might become payable as a result of these examinations would
not result in additional expense recognized in the financial statements other
than interest and penalties, if any, as the Company has recorded

                                      33
<PAGE>

                                 K-SWISS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 1999, 1998 and 1997


NOTE H--INCOME TAXES--(Continued)

deferred income taxes on the untaxed portion of unremitted earnings of a
foreign subsidiary. Therefore, management believes that resolution of the IRS
examinations should not have a material adverse impact on the Company's
financial position and results of operations.

NOTE I--COMMITMENTS AND CONTINGENCIES

  The Company leases its principal warehouse facility through January 2003,
under an agreement which provides for two options, each of which would extend
the lease for three years. In addition, certain property and equipment is
leased primarily on a month to month basis. Future minimum rental payments
under these leases as of December 31, 1999 are as follows (in thousands):

<TABLE>
<CAPTION>
     Year ending
     December 31,
     ------------
     <S>                                                                  <C>
     2000................................................................ $1,270
     2001................................................................  1,121
     2002................................................................  1,022
     2003................................................................    114
     2004................................................................     12
                                                                          ------
                                                                          $3,539
                                                                          ======
</TABLE>

  Rent expense for operating leases was approximately $1,281,000, $1,502,000,
and $1,451,000 for the years ended December 31, 1999, 1998, and 1997,
respectively. Sublease rental income was approximately $324,000 for the year
ended December 31, 1999.

  The Company has subleased approximately 90,000 square feet of its principal
warehouse facility to another company for the remainder of its initial lease
term. The total of the future minimum rentals to be received as of December
31, 1999 is $998,000.

  The Company has outstanding letters of credit totaling approximately
$8,765,000 and $7,703,000 at December 31, 1999 and 1998, respectively. These
letters of credit, which have original terms from one month to one year,
collateralize the Company's obligation to third parties for the purchase of
inventory. The fair value of these letters of credit is based on fees
currently charged for similar agreements and is not significant at December
31, 1999 and 1998.

  The Company is, from time to time, a party to litigation which arises in the
normal course of its business operations. The Company does not believe it is
presently a party to litigation which will have a material adverse effect on
its business or operations.

NOTE J--EMPLOYEE BENEFIT PLANS

  In 1988, the Company adopted a discretionary contribution profit sharing
plan covering all employees meeting certain eligibility requirements. In 1993,
the plan was amended to include a 401(k) plan. The expense for this plan was
approximately $477,000, $343,000, and $472,000 for 1999, 1998 and 1997,
respectively.

                                      34
<PAGE>

                                 K-SWISS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 1999, 1998 and 1997


NOTE K--STOCKHOLDERS' EQUITY

  Each share of Class B Common Stock is freely convertible into one share of
Class A Common Stock at the option of the Class B stockholder. Holders of
Class A Common Stock are entitled to one vote per share and holders of Class B
Common Stock are entitled to ten votes per share for all matters submitted to
a vote of the stockholders of the Company, other than the election of
directors. Holders of Class A Common Stock are initially entitled to elect two
directors and holders of Class B Common Stock are entitled to elect all
directors other than directors that the holders of Class A Common Stock are
entitled to elect. If the number of members of the Company's Board of
Directors is increased to not less than eleven and not greater than fifteen
(excluding directors representing holders of Preferred Stock, if any), holders
of Class A Common Stock will be entitled to elect three directors. If the
number of members of the Company's Board of Directors is increased to a number
greater than fifteen (excluding directors representing holders of Preferred
Stock, if any), holders of Class A Common Stock will be entitled to elect four
directors.

  During 1990, the Company adopted the 1990 Stock Option Plan under which it
was authorized to issue non-qualified stock options, incentive stock options,
and warrants to key employees. As amended, the number of options available for
issuance under the 1990 Stock Option Plan is 1,650,000 shares of Class A
Common Stock. The options have a term of ten years and generally become fully
vested by the end of the fifth year.

  In 1999, the Company adopted the 1999 Stock Incentive Plan under which it is
authorized to award up to 600,000 shares or options to employees and directors
of the Company. The awards have a term of ten years although none have
currently been issued.

  Combined plan transactions for 1999, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
                                1999                1998                1997
                         ------------------- ------------------- -------------------
                                    Weighted            Weighted            Weighted
                                    average             average             average
                                    exercise            exercise            exercise
                          Shares     price    Shares     price    Shares     price
                         ---------  -------- ---------  -------- ---------  --------
<S>                      <C>        <C>      <C>        <C>      <C>        <C>
Options outstanding
 January 1,............. 1,335,020   $ 6.48  1,407,788   $6.58   1,370,524   $6.76
Granted.................   147,000    19.88     46,450    3.38     192,300    5.28
Exercised...............  (760,849)    7.48    (66,968)   5.93     (27,136)   5.32
Canceled................   (14,168)   12.73    (52,250)   7.11    (127,900)   6.75
                         ---------           ---------           ---------
Options outstanding
 December 31,...........   707,003     8.06  1,335,020    6.48   1,407,788    6.58
                         =========           =========           =========
Options available for
 grant at December 31,..   650,878             183,710             177,910
</TABLE>

  Weighted average fair value of options granted during the year are as
follows:

<TABLE>
<CAPTION>
                                                            1999   1998  1997
                                                           ------ ------ -----
     <S>                                                   <C>    <C>    <C>
     Exercise price is below market price at date of
      grant............................................... $19.01 $11.90 $6.22
     Exercise price equals market price at date of grant..  20.39   4.60  2.43
</TABLE>

                                      35
<PAGE>

                                 K-SWISS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 1999, 1998 and 1997


NOTE K--STOCKHOLDERS' EQUITY--(Continued)

  The following information applies to options outstanding at December 31,
1999:

<TABLE>
<CAPTION>
                                      Options Outstanding        Options Exercisable
                                -------------------------------- --------------------
                                             Weighted
                                              average
                                             remaining  Weighted             Weighted
                                            contractual average              average
                                  Number       life     exercise   Number    exercise
     Range of exercise prices   outstanding   (years)    price   exercisable  price
     ------------------------   ----------- ----------- -------- ----------- --------
     <S>                        <C>         <C>         <C>      <C>         <C>
     $  .50-$ 1.00...........     126,449         9      $ 0.66      8,332    $ 0.50
     $ 4.38-$ 6.50...........     359,012         7        4.92    139,777      4.67
     $ 6.88-$ 9.88...........      86,642         7        8.23     22,602      7.99
     $10.13-$17.38...........      65,900         8       13.83     15,067     11.13
     $29.63-$47.38...........      69,000        10       32.22         --        --
</TABLE>

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

<TABLE>
<CAPTION>
                                                               1999  1998  1997
                                                               ----  ----  ----
     <S>                                                       <C>   <C>   <C>
     Expected life (years)....................................    7     7     7
     Risk-free interest rate.................................. 6.50% 5.50% 6.25%
     Expected volatility......................................   59%   30%   22%
     Expected dividend yield..................................   .2%   .4%   .7%
</TABLE>

  Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation, 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 1999, 1998 and 1997, 73,000, 34,450 and 42,000 options, respectively,
were granted at exercise prices below fair market value. This resulted in net
compensation expense of $214,000, $74,000 and $32,000 for 1999, 1998 and 1997,
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.

  In connection with the exercise of options, the Company realized income tax
benefits in 1999, 1998 and 1997 which have been credited to additional paid-in
capital.

                                      36
<PAGE>

                                 K-SWISS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 1999, 1998 and 1997


NOTE K--STOCKHOLDERS' EQUITY--(Continued)

  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:

<TABLE>
<CAPTION>
                                                          1999    1998    1997
                                                         ------- ------- ------
     <S>                                                 <C>     <C>     <C>
     Net earnings (in thousands)
       As reported...................................... $34,284 $12,546 $4,173
       Pro forma........................................  34,150  12,428  4,163
     Basic earnings per share
       As reported...................................... $  3.12 $  1.15 $  .36
       Pro forma........................................    3.11    1.14    .36
     Diluted earnings per share
       As reported...................................... $  2.99 $  1.10 $  .35
       Pro forma........................................    2.98    1.09    .35
</TABLE>

  The effects of applying SFAS 123 in this proforma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1995,
and additional awards in future years are anticipated.

NOTE L--CONCENTRATIONS OF CREDIT RISK

  Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash
equivalents, trade accounts receivable and financial instruments used in
hedging activities. The Company maintains cash and cash equivalents with high
quality institutions and limits the amount of credit exposure to any one
institution. As part of its cash and risk management processes, the Company
performs periodic evaluations of the relative credit standing of the financial
institutions.

  During the years ended December 31, 1999, 1998 and 1997, approximately 24%,
26% and 17%, respectively, of revenues were made to one domestic customer. At
December 31, 1999 and 1998 approximately 15% and 16%, respectively, of
accounts receivable were from this major customer. Credit risk with respect to
other trade accounts receivable is generally diversified due to the large
number of entities comprising the Company's customer base and their dispersion
across many geographies. The Company controls credit risk through credit
approvals, credit limits and monitoring procedures and for international
receivables, the use of letters of credit and letters of guarantee.

                                      37
<PAGE>

                                 K-SWISS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 1999, 1998 and 1997

NOTE M--SEGMENT INFORMATION

  The Company's predominant business is the design, development and
distribution of athletic footwear. The Company is organized into three
geographic regions: the United States, Europe and other international
operations. Certain reclassifications have been made in the 1999, 1998 and
1997 presentations. The following tables summarize segment information (in
thousands):

<TABLE>
<CAPTION>
                                                   Year ended December 31,
                                                  ----------------------------
                                                    1999      1998      1997
                                                  --------  --------  --------
       <S>                                        <C>       <C>       <C>
       Revenues from unrelated entities:
         United States........................... $264,341  $145,293  $ 91,568
         Europe..................................   11,395     9,324     8,818
         Other International.....................    9,761     6,923    15,827
                                                  --------  --------  --------
                                                  $285,497  $161,540  $116,213
                                                  ========  ========  ========
       Inter-geographic revenues:
         United States........................... $    854  $    755  $  1,549
         Europe..................................       22        18        59
         Other International.....................    5,110     4,926     2,744
                                                  --------  --------  --------
                                                  $  5,986  $  5,699  $  4,352
                                                  ========  ========  ========
       Total revenues:
         United States........................... $265,195  $146,048  $ 93,117
         Europe..................................   11,417     9,342     8,877
         Other International.....................   14,871    11,849    18,571
         Less inter-geographic revenues..........   (5,986)   (5,699)   (4,352)
                                                  --------  --------  --------
                                                  $285,497  $161,540  $116,213
                                                  ========  ========  ========

       Operating profit (loss):
         United States........................... $ 62,410  $ 28,148  $ 10,708
         Europe..................................   (1,437)   (1,122)   (1,751)
         Other International.....................    4,268     1,067     3,205
         Less corporate expenses and
          eliminations...........................  (10,287)   (8,698)   (6,792)
                                                  --------  --------  --------
                                                  $ 54,954  $ 19,395  $  5,370
                                                  ========  ========  ========
       Interest income:
         United States........................... $  1,043  $  1,079  $  1,395
         Europe..................................       30        44        35
         Other International.....................      877       966       596
                                                  --------  --------  --------
           Total interest income.................    1,950     2,089     2,026
         Interest expense:
         United States...........................      118       200       126
         Europe..................................       48        36        76
         Other International.....................      --        --          1
                                                  --------  --------  --------
           Total interest expense................      166       236       203
                                                  --------  --------  --------
       Interest income, net...................... $  1,784  $  1,853  $  1,823
                                                  ========  ========  ========
</TABLE>

                                      38
<PAGE>

                                  K-SWISS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                        December 31, 1999, 1998 and 1997


NOTE M--SEGMENT INFORMATION--(Continued)

<TABLE>
<CAPTION>
                                                      Year ended December 31,
                                                     --------------------------
                                                       1999     1998     1997
                                                     -------- -------- --------
<S>                                                  <C>      <C>      <C>
Income tax expense:
  United States..................................... $ 22,334 $  8,631 $  2,915
  Europe............................................       65       47       61
  Other International...............................       55       24       44
                                                     -------- -------- --------
                                                     $ 22,454 $  8,702 $  3,020
                                                     ======== ======== ========
Identifiable assets:
  United States..................................... $ 82,935 $ 66,867 $ 46,579
  Europe............................................    6,777    6,299    4,312
  Other International...............................   16,392   16,340   15,308
  Corporate assets and eliminations (1).............   40,668   25,959   34,996
                                                     -------- -------- --------
                                                     $146,772 $115,465 $101,195
                                                     ======== ======== ========
Provision for depreciation and amortization:
  United States..................................... $  1,184 $    713 $    671
  Europe............................................      125      167      198
  Other International...............................       65       60       49
                                                     -------- -------- --------
                                                     $  1,374 $    940 $    918
                                                     ======== ======== ========
Capital expenditures:
  United States..................................... $  1,891 $  5,370 $  1,532
  Europe............................................      139      207       57
  Other International...............................       56       77       52
                                                     -------- -------- --------
                                                     $  2,086 $  5,654 $  1,641
                                                     ======== ======== ========
</TABLE>
--------
(1) Corporate assets include cash and cash equivalents, investments and
    intangible assets.

                                       39
<PAGE>

                                 K-SWISS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 1999, 1998 and 1997


NOTE N--QUARTERLY FINANCIAL DATA (Unaudited)

  Summarized quarterly financial data for 1999 and 1998 follows (in thousands
except for per share amounts):

<TABLE>
<CAPTION>
                                         First  Second   Third  Fourth
                                        Quarter Quarter Quarter Quarter   Year
                                        ------- ------- ------- ------- --------
<S>                                     <C>     <C>     <C>     <C>     <C>
1999
  Revenues............................. $88,577 $67,173 $80,134 $49,613 $285,497
  Gross profit.........................  38,375  30,293  34,509  19,662  122,839
  Net earnings.........................  13,286   6,736   9,337   4,925   34,284
 Earnings per share
  Basic................................ $  1.23 $   .61 $   .84 $   .46 $   3.12
  Diluted ............................. $  1.15 $   .58 $   .80 $   .44 $   2.99
1998
  Revenues............................. $42,274 $41,015 $38,212 $40,039 $161,540
  Gross profit.........................  17,146  17,600  17,606  18,263   70,615
  Net earnings.........................   3,545   2,255   3,031   3,715   12,546
 Earnings per share
  Basic................................ $   .32 $   .21 $   .28 $   .34 $   1.15
  Diluted.............................. $   .31 $   .20 $   .26 $   .32 $   1.10
</TABLE>

Item 9. Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure

  None.

                                      40
<PAGE>

                                   PART III

Item 10. Directors and Executive Officers of the Registrant

  Except for the information disclosed in Item 4(a) of this Annual Report on
Form 10-K, the information required by this item will be contained in the
Company's Proxy Statement for its Annual Stockholders Meeting to be held May
18, 2000 to be filed with the Securities and Exchange Commission within 120
days after December 31, 1999 and is incorporated herein by reference.

Item 11. Executive Compensation

  The information required by this item will be contained in the Company's
Proxy Statement for its Annual Stockholders Meeting to be held May 18, 2000 to
be filed with the Securities and Exchange Commission within 120 days after
December 31, 1999 and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

  The information required by this item will be contained in the Company's
Proxy Statement for its Annual Stockholders Meeting to be held May 18, 2000 to
be filed with the Securities and Exchange Commission within 120 days after
December 31, 1999 and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

  The information required by this item will be contained in the Company's
Proxy Statement for its Annual Stockholders Meeting to be held May 18, 2000 to
be filed with the Securities and Exchange Commission within 120 days after
December 31, 1999 and is incorporated herein by reference.

                                      41
<PAGE>

                                    PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

  (a) Financial Statements:

<TABLE>
<CAPTION>
                                                                 Page Reference
                                                                   Form 10-K
                                                                 --------------
<S>                                                              <C>
Report of Independent Certified Public Accountants..............       22
Consolidated Balance Sheets as of December 31, 1999 and 1998....       23
Consolidated Statements of Earnings and Comprehensive Earnings
 for the three years ended December 31, 1999....................       24
Consolidated Statement of Stockholders' Equity for the three
 years ended December 31, 1999..................................       25
Consolidated Statements of Cash Flows for the three years ended
 December 31, 1999..............................................       26
Notes to Consolidated Financial Statements......................     27-40
</TABLE>

  (b) Reports on Form 8-K

  A Form 8-K, dated October 8, 1999, was filed with the Securities and
Exchange Commission during the fourth quarter of 1999. The Form 8-K reported
the issuance by the Company of a press release announcing the completion of
its April 1998 $20 million stock repurchase program and a new authorization by
the Board of Directors for the Company to repurchase through December 2003 up
to an additional $25 million of its Class A Common Stock from time to time on
the open market. A copy of the October 8, 1999 press release was attached as
exhibit 99 to the report.

  (c) Exhibits

<TABLE>
     <C> <S>
     3.1 Amended and Restated Certificate of Incorporation of K-Swiss Inc.
         (incorporated by reference to exhibit 3.4 to the Registrant's Form S-1
         Registration Statement No. 33-34369).
     3.2 Certificate of Designations of Class A Common Stock of K-Swiss Inc.
         (incorporated by reference to exhibit 3.2 to the Registrant's Form S-1
         Registration Statement No. 33-34369).
     3.3 Certificate of Designations of Class B Common Stock of K-Swiss Inc.
         (incorporated by reference to exhibit 3.3 to the Registrant's Form S-1
         Registration Statement No. 33-34369).
     3.4 Amended and Restated Bylaws of K-Swiss Inc. (incorporated by reference
         to exhibit 3.4 to the Registrant's Form 10-K for the fiscal year ended
         December 31, 1991).
     4.1 Specimen K-Swiss Inc. Class A Common Stock Certificate (incorporated
         by reference to exhibit 4.1 to the Registrant's Form S-1 Registration
         Statement No. 33-34369).
     4.2 Specimen K-Swiss Inc. Class B Common Stock Certificate (incorporated
         by reference to exhibit 4.2 to the Registrant's Form S-1 Registration
         Statement No. 33-34369).
     4.3 $400,000 324 Corp. 10% Junior Subordinated Debenture due December 31,
         2001 originally issued to The Rug Warehouse, Inc. Pension Plan and
         Trust (incorporated by reference to exhibit 4.7 to the Registrant's
         Form S-1 Registration Statement No. 33-34369).
</TABLE>


                                      42
<PAGE>

<TABLE>
     <C>   <S>
      4.4  $100,000 324 Corp. 10% Junior Subordinated Debenture due December
           31, 2001 issued to George E. Powlick (incorporated by reference to
           exhibit 4.8 to the Registrant's Form S-1 Registration Statement No.
           33-34369).
      9.1  Stockholders Agreement dated as of December 30, 1986 by and among
           324 Corp., Steven B. Nichols, Kenneth J. Zises and The Biltrite
           Corporation (incorporated by reference to exhibit 9.2 to the
           Registrant's Form S-1 Registration Statement No. 33-34369).
      9.2  Letter Agreement dated May 3, 1990 by and among the Company, Steven
           B. Nichols, Kenneth J. Zises, The Biltrite Corporation and certain
           affiliates (incorporated by reference to exhibit 9.3 to the
           Registrant's Form S-1 Registration Statement No. 33-34369).
      9.3  Voting Agreement dated May 3, 1990 by and between The Biltrite
           Corporation and the Nichols Family Trust (incorporated by reference
           to exhibit 9.4 to the Registrant's Form S-1 Registration Statement
           No. 33-34369).
     10.1  K-Swiss Inc. 1990 Stock Incentive Plan (incorporated by reference to
           exhibit 10.1 to the Registrant's Form S-1 Registration Statement No.
           33-34369).
     10.2  Amendment to K-Swiss Inc. 1990 Stock Incentive Plan (incorporated by
           reference to exhibit 10.36 to the Registrant's Form 10-K for the
           fiscal year ended December 31, 1993).
     10.3  Amendment to K-Swiss Inc. 1990 Stock Incentive Plan (incorporated by
           reference to exhibit 10.32 to the Registrant's Form 10-K for the
           fiscal year ended December 31, 1995).
     10.4  K-Swiss Inc. 1999 Stock Incentive Plan (incorporated by reference to
           Exhibit 4.1 of the Registrant's Form S-8 Registration Statement No.
           333-79641).
     10.5  K-Swiss Inc. Profit Sharing Plan, as amended (incorporated by
           reference to exhibit 10.3 to the Registrant's Form S-1 Registration
           Statement No. 33-34369).
     10.6  Amendment to K-Swiss Inc. 401(k) and Profit Sharing Plan
           (incorporated by reference to exhibit 10.35 to the Registrant's Form
           10-K for the fiscal year ended December 31, 1993).
     10.7  Amendment to K-Swiss Inc. 401(k) and Profit Sharing Plan dated May
           26, 1994 (incorporated by reference to exhibit 10.32 to the
           Registrant's Form 10-K for the fiscal year ended December 31, 1994).
     10.8  Form of Indemnity Agreement entered into by and between K-Swiss Inc.
           and directors (incorporated by reference to exhibit 10.4 to the
           Registrant's Form S-1 Registration Statement No. 33-34369).
     10.9  Employment Agreement dated as of June 11, 1990 with Steven B.
           Nichols (incorporated by reference to exhibit 10.11 to the
           Registrant's Form S-1 Registration Statement No. 33-34369).
     10.10 First Amendment to Employment Agreement with Steven B. Nichols dated
           November 13, 1991 (incorporated by reference to exhibit 10.32 to the
           Registrant's Form 10-K for the fiscal year ended December 31, 1991).
</TABLE>


                                       43
<PAGE>

<TABLE>
     <C>   <S>
     10.11 Employment Agreement between the Registrant and Steven B. Nichols
           dated as of April 30, 1993 (incorporated by reference to exhibit
           10.30 to the Registrant's Form S-1 Registration Statement No. 33-
           62254).
     10.12 Employment Agreement between the Registrant and Steven B. Nichols
           dated as of March 1, 1995 (incorporated by reference to exhibit 10.2
           to the Registrant's Form 10-Q for the quarter ended June 30, 1995).
     10.13 Note and Warrant Agreement dated as of December 29, 1986 by and
           among K-Swiss, 324 Corp. and John Hancock Mutual Life Insurance
           Company (incorporated by reference to exhibit 10.18 to the
           Registrant's Form S-1 Registration Statement No. 33-34369).
     10.14 Amendment to Note and Warrant Agreement dated as of August 1, 1988
           by and among K-Swiss, 324 Corp. and John Hancock Mutual Life
           Insurance Company (incorporated by reference to exhibit 10.19 to the
           Registrant's Form S-1 Registration Statement No. 33-34369).
     10.15 Note Agreement dated August 25, 1989 and Amendment to Note and
           Warrant Agreement dated as of December 29, 1986, as amended, by and
           between K-Swiss Inc. and John Hancock Mutual Life Insurance Company
           (incorporated by reference to exhibit 10.20 to the Registrant's Form
           S-1 Registration Statement No. 33-34369).
     10.16 Amendment to Note and Warrant Agreement, as amended, dated as of
           April 26, 1990 by and among K-Swiss Inc., the Registrant and John
           Hancock Mutual Life Insurance Company (incorporated by reference to
           exhibit 10.21 to the Registrant's Form S-1 Registration Statement
           No.33-34369).
     10.17 Amendment to Note and Warrant Agreement as amended, and Note
           Agreement, dated as of January 15, 1991, between the Registrant and
           John Hancock Mutual Life Insurance Company (incorporated by
           reference to exhibit 10.17 to the Registrant's Form 10-K for the
           year ended December 31, 1990).
     10.18 Purchase Agreement dated as of December 29, 1986 by and between 324
           Corp. and The Biltrite Corporation (incorporated by reference to
           exhibit 10.37 to the Registrant's Form S-1 Registration Statement
           No. 33-34369).
     10.19 Amendment to Purchase Agreement dated December 29, 1986 by and
           between 324 Corp. and The Biltrite Corporation (incorporated by
           reference to exhibit 10.34 to the Registrant's Form S-1 Registration
           Statement No. 33-34369).
     10.20 Lease Agreement dated March 11, 1997 by and between K-Swiss Inc. and
           Space Center Mira Loma, Inc. (incorporated by reference to exhibit
           10 to the Registrant's Form 10-Q for the quarter ended March 31,
           1997).
     10.21 Credit Agreement dated March 25, 1994 by and among the Registrant
           and Bank of America National Trust and Savings Association, with
           schedules (incorporated by reference to exhibit 10.33 to the
           Registrant's Form 10-K for the fiscal year ended December 31, 1994).
     10.22 Amendment to Credit Agreement dated March 25, 1994 by and among the
           Registrant and Bank of America National Trust and Savings
           Association (incorporated by reference to exhibit 10.1 to the
           Registrant's Form 10-Q for the quarter ended June 30, 1995).
     10.23 Second Amendment to Credit Agreement (incorporated by reference to
           exhibit 10 to the Registrant's Form 10-Q for the quarter ended
           September 30, 1996).
</TABLE>

                                       44
<PAGE>

<TABLE>
     <S>    <C>
     10.24  Third Amendment to Credit Agreement (incorporated by reference to exhibit 10 to the Registrant's
            Form 10-Q for the quarter ended September 30, 1997).
     10.25  Fourth Amendment to Credit Agreement (incorporated by reference to exhibit 10 to the Registrant's
            Form 10-Q for the quarter ended September 30, 1998).
     10.26  Fifth Amendment to Credit Agreement (incorporated by reference to exhibit 10.31 to the Registrant's
            Form 10-K for the year ended December 31, 1998).
     10.27  Agreement for the Purchase of Assets and Rights of Robey between N. Chr. M. Wilke and NMB-Heller
            N.V. and K-Swiss International Ltd., dated January 4, 1996 (incorporated by reference to exhibit 10
            to the Registrant's Form 10-Q for the quarter ended March 31, 1996).
     10.28  K-Swiss Inc. Deferred Compensation Plan, Master Plan Document (incorporated by reference to exhibit
            10.1 to the Registrant's Form 10-Q for the quarter ended March 31, 1998).
     10.29  K-Swiss Inc. Deferred Compensation Plan, Master Trust Agreement (incorporated by reference to
            exhibit 10.2 to the Registrant's Form 10-Q for the quarter ended March 31, 1998).
     10.30  Amendment to K-Swiss Inc. 401(k) and Profit Sharing Plan dated January 1, 2000.
     21     Subsidiaries of K-Swiss Inc.
     23     Consent of Grant Thornton LLP.
     27     Financial Data Schedule
</TABLE>

  (d) Schedules

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                        <C>
    Financial Statement Schedules:
     Schedule II--Valuation and Qualifying Accounts.......................  47

     All supplemental schedules other than as set forth above are omitted
     as inapplicable or because the required information is included in
     the Consolidated Financial Statements or the Notes to Consolidated
     Financial Statements.
</TABLE>

                                       45
<PAGE>

                                  SIGNATURES

  Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized.

                                          K.Swiss Inc.

                                               /s/ George Powlick
                                          By __________________________________
                                               George Powlick, Vice-President
                                               and Chief Financial Officer

                                          February 8, 2000

  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
             Signature                           Title                    Date
             ---------                           -----                    ----
<S>                                  <C>                           <C>

/s/ Steven Nichols                                                      February 8, 2000
------------------------------------
Steven Nichols                       Chairman of the Board,
                                      President and Chief
                                      Executive Officer

/s/ George Powlick                                                      February 8, 2000
------------------------------------
George Powlick                       Vice President Finance,
                                      Chief Financial Officer,
                                      Principal Accounting
                                      Officer, Secretary and
                                      Director

/s/ Lawrence Feldman                                                    February 8, 2000
------------------------------------
Lawrence Feldman                     Director

/s/ Jonathan Layne                                                      February 8, 2000
------------------------------------
Jonathan Layne                       Director

/s/ Martyn Wilford                                                      February 8, 2000
------------------------------------
Martyn Wilford                       Director
</TABLE>

                                      46
<PAGE>

                                  SCHEDULE II

                       VALUATION AND QUALIFYING ACCOUNTS

                             (Amounts in thousands)

<TABLE>
<CAPTION>
        Column A            Column B         Column C          Column D     Column E
        --------          ------------- ------------------- -------------- ----------
                                             Additions
                                        -------------------
                           Balance at   Charged to Charged  Write-offs and Balance at
                          Beginning of  Costs and  to Other  Deductions,     End of
      Description            Period      Expenses  Accounts      Net         Period
      -----------         ------------- ---------- -------- -------------- ----------
<S>                       <C>    <C>    <C>        <C>      <C>            <C>
Allowance for bad debts.  (1999) $  825   $1,141     $ --      $  (426)      $1,540
                          (1998)    477       63       --          285          825
                          (1997)    630      420       --         (573)         477

Allowance for
 inventories............  (1999) $1,521   $1,171     $ --      $(1,726)      $  966
                          (1998)  2,627      537       --       (1,643)       1,521
                          (1997)  2,880    1,769       --       (2,022)       2,627
</TABLE>

                                       47
<PAGE>

                                 EXHIBIT INDEX
<TABLE>
<CAPTION>

Number                                                                  Page
---------                                                               ----
<S>         <C>                                                         <C>
10.30       Amendment to K-Swiss Inc. 401(k) and Profit Sharing Plan.

21          Subsidiaries of K-Swiss Inc.

23          Consent of Grant Thornton LLP.

27          Financial Data Schedule
</TABLE>