<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report under Section 13
of the Securities Exchange Act of 1934
For the Quarter Ended September 30, 1996 Commission File No. 1-4290
K2 INC.
(exact name of registrant as specified in its charter)
DELAWARE 95-2077125
(State of Incorporation) (I.R.S. Employer Identification No.)
4900 South Eastern Avenue
Los Angeles, California 90040
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (213) 724-2800
Former name, former address and former fiscal year, if changed since last
report:
Not applicable
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, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X
-
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of October 31, 1996.
Common Stock, par value $1 16,565,525 Shares
<PAGE>
FORM 10-Q QUARTERLY REPORT
PART - 1 FINANCIAL INFORMATION
Item 1. Financial Statements
STATEMENTS OF CONSOLIDATED INCOME (condensed)
(In thousands except for per share figures)
(Unaudited)
<TABLE>
<CAPTION>
Three months Nine months
ended September 30 ended September 30
-----------------------------------------------
1996 1995(a) 1996 1995(a)
---------------------- -----------------------
<S> <C> <C> <C> <C>
Net Sales $ 147,664 $ 134,657 $ 449,890 $ 408,525
Cost of products sold 104,830 98,331 324,457 301,684
--------- --------- --------- ---------
Gross profit 42,834 36,326 125,433 106,841
Selling Expenses 18,036 15,740 53,737 45,549
General and administrative
expenses 12,668 10,180 38,170 32,968
--------- --------- --------- ---------
Operating income 12,130 10,406 33,526 28,324
Interest expense 2,076 1,929 6,805 7,476
Other income, net (433) (372) (1,065) (1,053)
--------- --------- --------- ---------
Income before provision for
income taxes 10,487 8,849 27,786 21,901
Provision for income taxes 3,355 2,886 8,890 6,920(b)
--------- --------- --------- ---------
Income from continuing
operations 7,132 5,963 18,896 14,981
Discontinued operations, net
of taxes 623 56
--------- --------- --------- ---------
Net Income $ 7,132 $ 6,586 $ 18,896 $ 15,037
========= ========= ========= =========
Per share
Continuing operations $ 0.43 $ 0.36 $ 1.13 $ 1.08
Discountinued operations 0.04 0.01
--------- ---------- --------- ---------
Net Income $ 0.43 $ 0.40 $ 1.13 $ 1.09
========= ========== ========= =========
Cash dividend $ 0.11 $ 0.11 $ 0.33 $ 0.33
Average shares outstanding 16,747 16,598 16,732 13,831
</TABLE>
(a) Information has been restate to reflect the sale of the assets and business
of the swimming pool and motorized pool cover business.
(b) Reduced by $259, or 2 cents per share, foreign tax settlement.
See notes to consolidated condensed financial statements.
1
<PAGE>
CONSOLIDATED BALANCE SHEETS (condensed)
(dollars in thousands)
<TABLE>
<CAPTION>
September 30 December 31
1996 1995
------------ -----------
(Unaudited)
<S> <C> <C>
Assets
------
Current Assets
Cash and cash equivalents $ 6,127 $ 7,357
Accounts receivable, less allowances of
$6,329 in 1996 and $8,235 in 1995 112,439 140,202
Inventories
Finished goods 96,708 97,193
Work in process 12,905 9,700
Raw materials 33,236 38,668
-------- --------
142,849 145,561
Less LIFO reserve 5,878 4,882
-------- --------
136,971 140,679
Deferred taxes 3,994 6,683
Prepaid expenses and other current assets 9,988 5,534
-------- --------
Total current assets 269,519 300,455
Property, Plant and Equipment 152,516 139,706
Less allowance for depreciation and amortization 88,336 82,599
-------- --------
64,180 57,107
Intangibles, principally goodwill 16,551 14,108
Net assets of discontinued operations 5,702 8,650
Other 3,448 4,103
-------- --------
Total Assets $359,400 $384,423
======== ========
</TABLE>
See notes to consolidated condensed financial statements.
2
<PAGE>
CONSOLIDATED BALANCE SHEETS (condensed)
(dollars in thousands)
<TABLE>
<CAPTION>
September 30 December 31
1996 1995
------------ -----------
(Unaudited)
<S> <C> <C>
Liabilities and Shareholders' Equity
------------------------------------
Current Liabilities
Bank loans $ 4,792 $ 50,219
Accounts payable 25,709 27,985
Accrued payroll and related 21,372 21,443
Other accruals 12,914 16,031
Current portion of long-term debt 4,876 4,855
-------- --------
Total current liabilities 69,663 120,533
Long-Term Debt 88,151 75,071
Deferred Taxes 13,006 13,003
Shareholders' Equity
Preferred Stock $1 part value, authorized
12,500,000 shares, none issued
Common Stock, $1 par value, authorized
40,000,000 shares, issued shares -
17,094,514 in 1996 and 17,064,065 in 1995 17,095 17,064
Additional paid-in capital 131,324 130,995
Retained earnings 50,547 37,121
Employee Stock Ownership Plan and
stock option loans (2,787) (4,778)
Treasury shares at cost, 534,778 shares in
1996 and 481,059 in 1995 (5,639) (4,189)
Cumulative translation adjustments (1,960) (397)
-------- --------
Total Shareholders' Equity 188,580 175,816
-------- --------
Total Liabilities and Shareholders' Equity $359,400 $384,423
======== ========
</TABLE>
See notes to consolidated condensed financial statements.
3
<PAGE>
STATEMENTS OF CONSOLIDATED CASH FLOWS (condensed)
(dollars in thousands)
<TABLE>
<CAPTION>
Nine months
ended September 30
-----------------------
1996 1995
-----------------------
(unaudited)
<S> <C> <C>
Operating Activities
Income from continuing operations $ 18,896 $ 14,981
Adjustments to reconcile income from continuing operations to
net cash provided by (used in) operating activities:
Depreciation and amortization 7,017 7,837
Deferred taxes 2,668 2,513
Changes in operating assets and liabilities:
Accounts receivable (12,307) (30,565)
Inventories 4,967 (22,920)
Prepaid expenses and other current assets (4,448) (561)
Accounts payable (2,631) 935
Payrolls and other accruals 111 5,226
--------- --------
Net cash provided by (used in) operating activities 14,273 (22,554)
Investing Activities
Property, plant & equipment expenditures (12,206) (13,382)
Disposals of property, plant & equipment 64 161
Acquisitions of businesses, net of cash acquired (3,366) (2,159)
Other items, net (2,924) 1,630
--------- --------
Net cash used in investing activities (18,432) (13,750)
Financing Activities
Borrowings under long-term debt and revolving lines of credit 49,000 9,000
Payments of long-term debt and revolving lines of credit (35,896) (68,558)
Net increase (decrease) in short-term bank loans (45,430) 32,193
Proceeds from sale of accounts receivable 40,725
Dividends paid (5,470) (4,931)
Net proceeds from stock offering 67,234
--------- --------
Net cash provided by financing activities 2,929 34,938
--------- --------
Net decrease in cash and cash equivalents from continuing operations (1,230) (1,366)
Discontinued Operations
Income from discontinued operations 56
Adjustments to reconcile income to net cash used in discontinued operations
Depreciation and amortization 329
Capital expenditures (602)
Other items, net (2,074)
--------
Cash used in discontinued operations (2,291)
--------
Net decrease in cash and cash equivalents (1,230) (3,657)
Cash and cash equivalents at beginning of year 7,357 7,700
--------- --------
Cash and cash equivalents at end of period $ 6,127 $ 4,043
========= ========
Supplemental disclosure of cash flow information:
Interest paid $ 5,950 $ 5,651
Income taxes paid 4,506 4,478
--------- --------
$ 10,456 $ 10,129
========= ========
</TABLE>
See notes to consolidated condensed financial statements.
4
<PAGE>
K2 INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 1996
NOTE 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three- and nine-month periods ended
September 30, 1996, are not necessarily indicative of the results that may be
expected for the year ended December 31, 1996. For further information, refer
to the Consolidated Financial Statements and Notes to Financial Statements
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1995.
NOTE 2 - Summary of Significant Accounting Policies
On June 3, 1996, the Company officially changed its name from Anthony
Industries, Inc. to K2 Inc.
The Company maintains its books using a 52/53 week year ending on the last
Sunday of December. For purposes of the consolidated financial statements, the
yearend is stated as December 31. The year ending December 31, 1996 will
consist of 52 weeks and each of the quarters will consist of 13 weeks. The year
ended in 1995 consisted of 53 weeks with the additional week included in the
first quarter ended March 31, 1995.
NOTE 3 - Newly Issued Accounting Standard
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" which requires that impaired assets
or assets to be disposed of be accounted for at the lower of carrying amount or
fair value of the assets less cost of disposal. The adoption of the new
standard did not have a material effect on the Company's financial statements.
5
<PAGE>
K2 INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 1996
NOTE 4 - Discontinued Operations
On March 5, 1996 the Company completed the sale of substantially all of the
assets and business of its swimming pool and motorized pool cover business
("Division") to General Aquatics, Inc. As a result of the sale, the Company
reclassified the accompanying prior year's financial statements to show the
Division as a discontinued operation.
NOTE 5 - Acquisition of Businesses
In the current year third quarter, the Company purchased the stock of Basic
Designs, Inc., a designer and distributor of outdoor and marine products for
sale primarily in the United States and Japan. The Company additionally
purchased the assets of a small bicycle shock absorber manufacturer, which was
integrated into the full-suspension mountain bike business.
NOTE 6 - Borrowings and Sale of Accounts Receivable
On May 21, 1996, the Company entered into an agreement providing for a $75
million, five-year bank revolving credit line due May 20, 2001. Interest on
borrowings under this agreement is at various rates based on LIBOR plus a
spread ranging from .3 of one percent through .625 of one percent. A commitment
fee, ranging from .1 of one percent through .225 of one percent, is payable on
the unused portion of the credit. At September 30, 1996, $49 million was
outstanding under this line.
On May 21, 1996, the Company entered into an accounts receivable purchase
facility with a bank to provide for the sale of up to $50 million of an
undivided interest in a pool of accounts receivable. The agreement expires May
20, 1997, and is subject to extension upon consent from the bank. The ongoing
costs pertaining to the agreement are based on the purchaser's cost of issuing
commercial paper plus a fixed rate. At September 30, 1996, accounts receivable
carried on the balance sheet were reduced by $40.7 million representing the sale
of receivables under this program.
The proceeds from the $75 million credit facility and from the sale of
receivables were used to retire an $85 million credit facility and a $40 million
364-day unsecured revolving short-term facility. The $75 million credit
facility and the accounts receivable purchase facility are subject to an
agreement which, among other things, restricts amounts available for payment of
cash dividends by the Company. As of September 30, 1996, $10.5 million of
retained earnings were free of such restrictions.
6
<PAGE>
K2 INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 1996
NOTE 7 - Stock Offering
On June 1, 1995, the Company completed its public offering of 4.6 million
primary shares of its common stock. The net proceeds of $67.2 million were used
to reduce amounts outstanding under the $85 million credit facility.
On a proforma basis, assuming the offering had been completed on January 1,
1995, earnings per share from continuing operations were $1.13 for the 1996
nine-month period versus $.98 for the corresponding year-ago period.
7
<PAGE>
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
A. Comparative Third Quarter Results of Operations
Net sales from continuing operations for the three months ended September 30,
1996 advanced 9.7% to $147.7 million compared to $134.7 million in the
year-earlier period. Income from continuing operations for the third quarter of
1996 increased 18.3% to $7.1 million, or $.43 per share, from $6.0 million, or
$.36 per share, in the third quarter of 1995. Net income for the 1996 third
quarter was $7.1 million, or $.43 per share, as compared with $6.6 million, or
$.40 per share in 1995, after adding the seasonal income from discontinued
operations of $0.6 million, or $.04 per share.
Net Sales. In the sporting goods and other recreational products group, net
sales grew 14.3% to $99.6 million in the 1996 quarter compared to $87.1 million
in the year-earlier period. The increase was primarily due to K2 Exotech
in-line skates. Sales of K2 skates nearly doubled from the prior year,
reflecting growth in the European market and increased domestic distribution.
Domestic sales of Shakespeare fishing tackle products benefited from a one-year
promotional program entered into earlier in the year. Sales of Hilton Active
Apparel products as well as Stearns active water products also contributed to
the quarter's performance. Partially offsetting these gains was a shortfall in
shipments of full suspension mountain bikes to retailers.
Net sales of the industrial products group increased slightly to $48.1 million
in the 1996 third quarter from $47.6 million in the prior-year quarter primarily
from strength in shipments of building products.
Gross profit. Gross profit rose 17.9% to $42.8 million, or 29.0% of net sales,
in the third quarter of 1996 as compared to $36.3 million, or 26.9% of net
sales, in the comparable 1995 quarter. The increase in gross profit as a
percentage of net sales resulted from the sales mix which included a larger
proportion of higher margin products and gains in efficiency, particularly at
K2, Stearns and Shakespeare's fiberglass light pole operation. Also contributing
to the improvement was the return to more normal costs of recycled corrugated
scrap paper as compared with the year ago quarter.
Costs and Expenses. In the third quarter of 1996, selling expenses increased
14.6% to $18.0 million, or 12.2% of net sales, from $15.7 million, or 11.7% of
net sales, in the third quarter of 1995. The increase was attributable to
improved sales and to higher spending in support of new products in the ski,
in-line skate, mountain bike, active water sports and back pack businesses.
General and administrative expenses increased 24.5% to $12.7 million, or 8.6% of
net sales, in the third quarter of 1996 compared to $10.2 million, or 7.6% of
net sales, in the year-earlier period. The increase reflects the acquisition of
two new businesses and expenditures to support the growth of the Company.
8
<PAGE>
Operating Income. Operating income grew 16.3% to $12.1 million, or 8.2% of net
sales, in the third quarter of 1996, compared to $10.4 million, or 7.7% of net
sales, in the comparable 1995 period. The percentage increase was attributable
to the higher gross profit margin net of the increase in selling and general and
administrative expenses as a percentage of net sales.
Interest Expense. Interest expense increased by a net of $.1 million in the
third quarter of 1996 compared to the year-earlier period. Higher average
borrowings to support the growth of several product lines increased interest
expense by $.5 million, which was offset by a reduction of $.4 million of
interest due to lower interest rates.
B. Comparative Nine-Month Results of Operations
Net sales for the nine months ended September 30, 1996 advanced 10.1% to $449.9
million as compared to $408.5 million in the year-earlier period. Income from
continuing operations rose 26.0% to $18.9 million, from $15.0 million. Earnings
per share from continuing operations, reflecting the completion on June 1, 1995
of the Company's public offering of 4.6 million shares, was $1.13 per share as
compared with $1.08 per share in the year-ago period. Net income increased 25.7%
to $18.9 million, or $1.13 per share, compared with $15.0 million, or $1.09 per
share, in the 1995 nine-month period, after adding net income from discontinued
operations of $0.1 million, or $.01 per share.
Net Sales. Net sales in the sporting goods and other recreational products
group increased 16.0% to $298.2 million from $257.0 million in the 1995 period.
The improvement was attributable to worldwide shipments of K2 Exotech in-line
skates and snowboards. Shakespeare fishing tackle promotional products, Dana
Design backpacks, new product introductions at Stearns and Hilton active
apparel provided gains as well. Partially offsetting the sales growth were lower
shipments of ProFlex full suspension mountain bikes.
In the industrial products group, net sales were $151.7 million in the first
nine months of 1996 compared with $151.5 million for the corresponding 1995
period. Improved sales of paperweaving monofilaments and fiberglass utility
and ornamental light poles were offset by an early-year decline in sales of
building products.
Gross profit. Gross profit increased 17.4% to $125.4 million, or 27.9% of net
sales, in the nine months ended September 30, 1996 compared to $106.8 million,
or 26.1% of net sales, in the year-earlier period. The improvement was a result
of sales of higher margin products and the return to more normal costs of
recycled corrugated scrap paper as compared with the year ago period.
Costs and Expenses. Selling expenses increased 18.0% to $53.7 million, or 11.9%
of net sales, for the 1996 nine month period from $45.5 million, or 11.1% of net
sales, in the same 1995 period. The increase was attributable to improved sales
and to higher spending in support of new products. General and administrative
expenses increased 15.8% to $38.2 million, or 8.5% of net sales, in the first
nine months of 1996 compared to $33.0 million, or 8.1% of net sales, in the
corresponding year-ago period. The increase was mainly due to higher spending to
support internal growth and from acquisitions.
9
<PAGE>
Operating Income. Operating income improved 18.4% to $33.5 million, or 7.5% of
net sales, in the first nine months of 1996 compared to $28.3 million, or 6.9%
of net sales, in the comparable 1995 period. The percentage increase was due to
higher gross profit margins, partially reduced by higher selling expenses.
Interest Expense. Interest expense decreased by $0.7 million in the nine months
ended September 30, 1996 compared to the same year-ago period. Lower rates
resulted in a $.9 million decrease which was offset by a $.2 million increase
arising from higher average borrowings.
Income Taxes. The provision for income taxes for the first nine months of 1995
was reduced as a result of a credit received from a $0.3 million foreign tax
settlement.
C. Financial Condition
The Company's continuing operating activities provided $14.3 million of cash
during the nine-month period ended September 30, 1996, as contrasted with a
$22.6 million net usage of cash for the comparable period in 1995. The
improvement primarily reflects improved accounts receivable and inventory
management during the period, mainly with respect to new products. Consistent
with prior years, the allowance for doubtful items decreased as a result of a
seasonal reduction in the allowance for volume discounts.
Net cash used for investing activities increased to $18.4 million in the first
nine months of 1996 from $13.8 million in the prior year's period, primarily
due to the purchases of businesses in the third quarter of 1996. There were no
material commitments for capital expenditures at September 30, 1996.
Net cash provided by financing activities for the nine-month period ended
September 30, 1996 was $2.9 million as compared with $34.9 million for the
nine-month period a year ago. The Company retired its three-year $85 million and
364-day $40 million revolving credit facilities with the proceeds from a new
five-year $75 million revolving credit facility and from the sale of accounts
receivable under its $50 million accounts receivable purchase facility. The
prior year period included proceeds from the secondary stock offering that was
used to reduce debt.
The Company anticipates its remaining cash needs in 1996 will be provided from
operations and borrowings under the $75 million credit line.
10
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(a) September 30, 1996 Financial Data Schedule
(b) September 30, 1995 Restated Financial Data
Schedule
(b) Reports on Form 8-K filed in the third quarter ended
September 30, 1996
None
11
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
K2 INC.
(registrant)
Date: November 11, 1996 /s/ RICHARD M. RODSTEIN
-----------------------
Richard M. Rodstein
President and Chief
Executive Officer
Date: November 11, 1996 /s/ JOHN J. RANGEL
------------------
John J. Rangel
Senior Vice
President-Finance
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 6,127
<SECURITIES> 0
<RECEIVABLES> 118,768
<ALLOWANCES> (6,329)
<INVENTORY> 136,971
<CURRENT-ASSETS> 269,519
<PP&E> 152,516
<DEPRECIATION> 88,336
<TOTAL-ASSETS> 359,400
<CURRENT-LIABILITIES> 69,663
<BONDS> 0
0
0
<COMMON> 17,095
<OTHER-SE> 171,485
<TOTAL-LIABILITY-AND-EQUITY> 359,400
<SALES> 449,890
<TOTAL-REVENUES> 450,955
<CGS> 324,457
<TOTAL-COSTS> 324,457
<OTHER-EXPENSES> 89,766
<LOSS-PROVISION> 2,141
<INTEREST-EXPENSE> 6,805
<INCOME-PRETAX> 27,786
<INCOME-TAX> 8,890
<INCOME-CONTINUING> 18,896
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,896
<EPS-PRIMARY> 1.13
<EPS-DILUTED> 1.13
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 4,043
<SECURITIES> 0
<RECEIVABLES> 148,293
<ALLOWANCES> (8,095)
<INVENTORY> 122,166
<CURRENT-ASSETS> 275,797
<PP&E> 136,311
<DEPRECIATION> 80,853
<TOTAL-ASSETS> 361,204
<CURRENT-LIABILITIES> 116,642
<BONDS> 0
0
0
<COMMON> 16,993
<OTHER-SE> 161,536
<TOTAL-LIABILITY-AND-EQUITY> 361,204
<SALES> 408,525
<TOTAL-REVENUES> 409,578
<CGS> 301,684
<TOTAL-COSTS> 301,684
<OTHER-EXPENSES> 77,255
<LOSS-PROVISION> 1,262
<INTEREST-EXPENSE> 7,476
<INCOME-PRETAX> 21,901
<INCOME-TAX> 6,920
<INCOME-CONTINUING> 14,981
<DISCONTINUED> 56
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,037
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 1.08
</TABLE>
