<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, 1997 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
-
As of October 31, 1997, the total number of outstanding shares of each of the
issuer's classes of common stock was:
Common Stock, par value $1 16,534,821 Shares
<PAGE>
FORM 10-Q QUARTERLY REPORT
PART - 1 FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
STATEMENTS OF CONSOLIDATED INCOME (condensed)
(In thousands, except per share figures)
Three months Nine months
ended September 30 ended September 30
------------------------------------------------------
1997 1996 1997 1996
-------------------------- --------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Net sales $142,335 $147,664 $485,398 $449,890
Cost of products sold 101,327 104,830 346,863 324,457
------------ ------------ ------------ ------------
Gross profit 41,008 42,834 138,535 125,433
Selling expenses 19,416 18,036 64,698 53,737
General and administrative expenses 12,190 12,668 38,386 38,170
Restructuring charge 2,400 2,400
------------ ------------ ------------ ------------
Operating income 7,002 12,130 33,051 33,526
Interest expense 2,574 2,076 7,772 6,805
Other expense (income), net 116 (433) (112) (1,065)
------------ ------------ ------------ ------------
Income before provision for income taxes 4,312 10,487 25,391 27,786
Provision for income taxes 1,245 3,355 7,775 8,890
------------ ------------ ------------ ------------
Net income $ 3,067 $ 7,132 $ 17,616 $ 18,896
=========== =========== =========== ===========
Per share data:
Net income $ 0.18 $ 0.43 $ 1.05 $ 1.13
Cash dividend $ 0.11 $ 0.11 $ 0.33 $ 0.33
Weighted average shares outstanding 16,720 16,747 16,713 16,732
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
CONSOLIDATED BALANCE SHEETS (condensed)
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996 *
-------------- --------------
(Unaudited)
<S> <C> <C>
Assets
------
Current Assets
Cash and cash equivalents $ 6,237 $ 10,860
Accounts receivable, net 108,069 94,079
Inventories
Finished goods 131,269 111,989
Work in process 12,266 10,810
Raw materials 41,812 37,041
-------------- --------------
185,347 159,840
Less LIFO reserve 4,651 4,464
-------------- --------------
180,696 155,376
Deferred taxes 8,997 8,195
Prepaid expenses and other current assets 7,726 5,899
-------------- --------------
Total current assets 311,725 274,409
Property, plant and equipment 172,477 157,371
Less allowance for depreciation and amortization 98,169 89,848
-------------- --------------
74,308 67,523
Intangibles, net - principally goodwill 15,968 16,346
Investments 6,408
Other 3,243 3,145
-------------- --------------
Total Assets $405,244 $367,831
============= =============
</TABLE>
<PAGE>
CONSOLIDATED BALANCE SHEETS (condensed) - continued
(In thousands, except per share figures)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996 *
-------------- --------------
(Unaudited)
<S> <C> <C>
Liabilities and Shareholders' Equity
------------------------------------
Current Liabilities
Bank loans $ 31,519 $ 7,307
Accounts payable 21,906 26,639
Accrued payroll and related 20,652 20,410
Other accruals 24,375 15,012
Current portion of long-term debt 4,446 4,882
-------------- --------------
Total current liabilities 102,898 74,250
Long-term debt, less current portion 86,112 89,096
Deferred taxes 15,497 15,497
Shareholders' Equity
Preferred Stock $1 par value, authorized
12,500,000 shares, none issued
Common Stock, $1 par value, authorized
40,000,000 shares, issued shares -
17,158,080 in 1997 and 17,131,662 in 1996 17,158 17,132
Additional paid-in capital 132,055 131,627
Retained earnings 67,203 55,047
Employee Stock Ownership Plan and
stock option loans (3,037) (7,087)
Treasury shares at cost, 623,759 shares in
1997 and 575,928 in 1996 (8,106) (6,719)
Cumulative translation adjustments (4,536) (1,012)
-------------- --------------
Total Shareholders' Equity 200,737 188,988
-------------- --------------
Total Liabilities and Shareholders' Equity $405,244 $367,831
============= =============
</TABLE>
* Derived from the audited consolidated balance sheet at December 31, 1996.
See notes to consolidated condensed financial statements.
<PAGE>
STATEMENTS OF CONSOLIDATED CASH FLOWS (condensed)
(In thousands)
<TABLE>
<CAPTION>
Nine months
ended September 30
--------------------------
1997 1996
--------------------------
(unaudited)
<S> <C> <C>
Operating Activities
Net income $ 17,616 $ 18,896
Adjustments to reconcile net income to net cash
provided by (used in ) operating activities:
Depreciation and amortization 10,276 7,017
Deferred taxes (802) 2,668
Changes in operating assets and liabilities:
Accounts receivable (8,765) (12,307)
Inventories (25,320) 4,967
Prepaid expenses and other current assets (1,827) (4,448)
Accounts payable (4,733) (2,631)
Payrolls and other accruals 9,607 111
------------ ------------
Net cash provided by (used in) operating activities (3,948) 14,273
Investing Activities
Property, plant and equipment expenditures (16,823) (12,206)
Disposals of property, plant and equipment 441 64
Sale of investments 6,408
Acquisition of businesses, net of cash acquired (3,366)
Other items, net (3,808) 1,676
------------ ------------
Net cash used in investing activities (13,782) (13,832)
Financing Activities
Borrowings under long-term debt 24,667 49,000
Payments of long-term debt (28,086) (35,896)
Net increase (decrease) in short-term bank loans 24,211 (45,430)
(Repurchase of) proceeds from accounts receivable facility (5,225) 40,725
Dividends paid (5,460) (5,470)
Repayment of loans to (borrowing by) ESOP 3,000 (4,600)
------------ ------------
Net cash provided by (used in) financing activities 13,107 (1,671)
------------ ------------
Net decrease in cash and cash equivalents (4,623) (1,230)
Cash and cash equivalents at beginning of period 10,860 7,357
------------ ------------
Cash and cash equivalents at end of period $ 6,237 $ 6,127
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 6,597 $ 5,950
Income taxes paid 8,577 4,506
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
K2 INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
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, 1997, are not necessarily indicative of the results that may be
expected for the year ended December 31, 1997. 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, 1996.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounts Receivable and Allowances
Accounts receivable are net of allowances for doubtful accounts of $5,592,000 at
September 30, 1997 and $6,120,000 at December 31, 1996.
Investments
Investments received in connection with the sale of the Company's swimming pool
and motorized pool cover business were sold during the second quarter ended June
30, 1997. The amount of the net gain realized on the sale of the investments
after establishment of reserves was not material.
Per Share Data
Earnings per share were determined by dividing net income by the weighted
average number of outstanding shares, including common stock equivalents, using
the treasury stock method. Common stock equivalents include stock options.
Primary earnings per share approximate earnings per share on a fully diluted
basis.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share", which
establishes a different method of computing earnings per share than is currently
used. The Company will be required to present both basic earnings per share and
diluted earnings per share. Basic earnings per share for the three and nine
months ended September 30, 1997 were $.19 and $1.07, respectively, and $.43 and
$1.14, respectively, for the three and nine months ended September 30, 1996.
Diluted earnings per share for all of these periods were not materially
different than basic earnings per share. The Company plans to adopt SFAS No. 128
on December 31, 1997, and at that time all historical earnings per share data
presented will be restated to conform to the provisions of SFAS No. 128.
<PAGE>
K2 INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -CONTINUED
SEPTEMBER 30, 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-CONTINUED
Newly Issued Accounting Standard
On January 1, 1997, the Company adopted the requirements of SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." The impact of adoption did not have a material effect on the
Company's consolidated financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
NOTE 3 - BORROWINGS AND OTHER FINANCIAL INSTRUMENTS
On April 18, 1997, the Company increased its unsecured, five-year bank revolving
credit line from $75 million to $100 million and extended its due date to May
20, 2002. All other material terms remained unchanged. This credit facility is
subject to an agreement which, among other things, restricts amounts available
for payment of cash dividends by the Company. As of September 30, 1997, $16.0
million of retained earnings were free of such restrictions.
At September 30, 1997, $41.5 million of accounts receivable has been sold under
the existing $50 million accounts receivable purchase facility.
NOTE 4 - RESTRUCTURING CHARGE
A special restructuring charge of $2.4 million ($1.6 million, or $.09 per share,
after-tax) was recorded in the third quarter of 1997. The restructuring charge
was recorded subsequent to the announcement of the Company's plan to consolidate
its mountain bike and outdoor equipment operations into its facility on Vashon
Island, Washington, and move its production of outdoor products to outside
sources. The restructuring charge includes slightly over $1.0 million in
expected cash outlays primarily related to severance benefits and shutdown of
the facilities. The balance of the restructuring charge relates to the
divestiture of the remaining assets. The Company plans to complete the
restructuring by the end of the first quarter of 1998.
NOTE 5 - SUBSEQUENT EVENTS
On October 1, 1997, the Company purchased the stock of Planet Earth Skateboards,
Inc., a designer, manufacturer and marketer of skateboards and related apparel
and accessories. The Company also purchased, on October 20, 1997, the net
assets of Katin U.S.A., Inc., a designer, manufacturer and marketer of surfwear
apparel. The combined purchase price of the acquisitions was not material.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
A. Comparative Third Quarter Results of Operations
-----------------------------------------------
Net sales for the three months ended September 30, 1997 declined to $142.3
million from $147.7 million in the year-earlier period. Net income for the
period fell to $3.1 million, or $.18 per share, from $7.1 million, or $.43 per
share, a year ago. In the current year's quarter, net income included the
impact of a special restructuring charge of $2.4 million ($1.6 million, or $.09
per share, after-tax).
Net sales. In the sporting goods and other recreational products group, net
sales declined to $94.7 million from $99.6 million in the year-earlier period.
Sales of K2 in-line skates for the quarter fell 32.2%, reflecting disappointing
industry-wide sales of in-line skates coupled with significant discounting of
large amounts of inventory of hard plastic skates by competitors and unfavorable
weather conditions throughout most of the summer in Europe. Partially offsetting
the decline was an increase in snowboard boot, binding and board sales. Demand
for Shakespeare's core fishing tackle products strengthened substantially,
although overall shipments were down due to the impact of a one-time promotional
program a year ago. Contributing to the demand were favorable weather
conditions which extended the fishing season and new products which have been
well received by the retailers. Sales of Hilton activewear declined due to soft
third quarter demand for activewear in the advertising specialty market. Each
of the Compamy's other recreational and sporting goods product lines - Stearns
active water sports products, K2 mountain bikes and Dana Design and K2 outdoor
products - reported sales gains during the quarter.
Net sales of the industrial products group were essentially flat at $47.6
million versus $48.1 million. Continuing strong demand of fiberglass lightpoles
and antennas aided by sales gains in paperweaving monofilaments and industrial
flexible packaging were offset by lower sales of Simplex's Thermo-ply
insulative sheathing for the residential housing market. Significant
competition from a competitive product primarily accounted for the sales
decline.
Gross profit. Gross profit decreased slightly to $41.0 million, or 28.8% of net
sales, in the third quarter as compared to $42.8 million, or 29.0% of net sales,
in the prior year's quarter. The dollar decline in gross profit is largely
volume related. The percentage decline in gross profit reflects an increase in
the quarter in the cost of raw materials used in the manufacture of Thermo-ply,
partially offset by a favorable sales mix of higher margin products and
improvements in manufacturing efficiencies in several other businesses.
Costs and expenses. Selling expenses for the third quarter increased to $19.4
million, or 13.6% of net sales, from $18.0 million, or 12.2% of net sales, in
the prior year. The increase was mainly attributable to K2 brand marketing and
promotional activities. General and administrative expenses, before the
restructuring charge, decreased to $12.2 million as compared to $12.7 million in
the prior year period. As a percentage of net sales, these expenses were 8.6%
for both years.
<PAGE>
Restructuring charge. A special restructuring charge of $2.4 million ($1.6
million, or $.09 per share, after-tax) was recorded subsequent to the
announcement of the Company's plan to consolidate its mountain bike and outdoor
equipment operations into its facility on Vashon Island, Washington, and move
its production of outdoor products to outside sources. The restructuring charge
includes slightly over $1.0 million in expected cash outlays primarily related
to severance benefits and shutdown of the facilities. The balance of the
restructuring charge relates to the divestiture of the remaining assets. The
Company plans to complete the restructuring by the end of the first quarter of
1998.
Operating income. Operating income before the restructuring charge fell to $9.4
million, or 6.6% of net sales, in the third quarter as compared to $12.1
million, or 8.2% of net sales, in the comparable 1996 period. The decline is
mainly due to higher selling expenses for the quarter. Operating profit after
the restructuring charge was $7.0 million, or 4.9% of net sales, versus $12.1
million, or 8.2% of net sales, in the third quarter of 1996.
Interest expense. Interest expense increased $498,000 in the third quarter of
1997 compared to the year-earlier period. The increase was primarily due to
higher average borrowings to finance higher levels of working capital arising
from an increase of in-line skate inventory.
B. Comparative Nine-Month Results of Operations
--------------------------------------------
Net sales for the nine months ended September 30, 1997 increased to $485.4
million as compared to $449.9 million in the corresponding prior-year period.
Net income decreased to $17.6 million, or $1.05 per share, compared with $18.9
million, or $1.13 per share, in the 1996 nine-month period. Net income for the
current year's period included the impact of a special restructuring charge of
$2.4 million ($1.6 million, or $.09 per share, after-tax).
Net Sales. Net sales in the sporting goods and other recreational products
group increased to $330.5 million from $298.2 million in the 1996 period. The
improvement was mainly due to sharply higher preseason shipments of K2 softboot
in-line skates in the first six months of the year. Ski sales also grew as a
result of increased demand for K2's innovative shaped skis while sales of
backpacks and full-suspension mountain bikes also improved for the period.
Shakespeare fishing tackle sales declined due to the impact of the one-year
Marlboro promotional program in effect a year ago. Sales of Stearns active
water sports products increased slightly, while sales of Hilton active apparel
were lower due to a softness in demand for jackets and warm up suits.
The industrial products group reported net sales of $154.9 million for the nine
months ended September 30, 1997, up from the $151.7 million in the year-earlier
period. Improved sales of fiberglass poles, marine antennas and industrial
flexible packaging accounted for the increase.
Gross Profit. Gross profit improved to $138.5 million, or 28.5% of net sales,
for the first nine months compared to $125.4 million, or 27.9% of sales, in the
corresponding year-earlier period. The improvement in gross profit as a
percentage of net sales arose from a favorable sales mix and manufacturing
efficiency gains. Partially offsetting the improvement was the impact of
closeout sales of mountain bikes and the higher cost of raw materials used in
the manufacture of Thermo-ply.
<PAGE>
Costs and Expenses. Selling expenses increased to $64.7 million, or 13.3% of
net sales, in the first nine months compared to $53.7 million, or 11.9% of net
sales, in the comparable 1996 period. Higher sales volume and increased
marketing and promotional activities contributed to the rise in selling
expenses. General and administrative expenses increased slightly to $38.4
million prior to the restructuring charge of $2.4 million.
Operating Income. Operating income before the restructuring charge increased to
$35.5 million, or 7.3% of net sales, in the first nine months as compared to
$33.5 million, or 7.4% of net sales, in the corresponding prior-year period.
The dollar increase was due to an improvement in sales augmented by a higher
gross profit percentage. Operating income after the restructuring charge was
$33.1 million, or 6.8% of net sales.
Interest Expense. Interest expense increased $967,000 in the first nine months
compared to the year-earlier period. The increase was primarily due to $1.3
million of higher average borrowings, offset in part by a reduction of $333,000
from lower interest rates.
C. Financial Condition
-------------------
The Company's operating activities used $3.9 million of cash during the nine
months ended September 30, 1997, as compared to $14.3 million of cash provided
during the nine months ended September 30, 1996. The decline in the cash
provided in the 1997 period was primarily due to financing higher levels of
working capital arising from an increase of in-line skate inventory.
Higher capital expenditures of $4.6 million were incurred to increase
manufacturing capacity in the recreational products group and improve
manufacturing efficiencies in the industrial products group. There were no
material commitments for capital expenditures at September 30, 1997.
Net cash provided by financing activities was $13.1 million in the 1997 nine-
month period as compared with $1.7 million used in the corresponding year-ago
period. The net increase of $14.8 million in cash provided was due to an
increase in borrowings to support the growth in inventory and the repayment of
$3.0 million from the Company's ESOP for funds borrowed in the prior year.
During the 1997 nine-month period, the Company increased its primary long-term
borrowing facility from $75 million to $100 million.
The Company anticipates its remaining cash needs in 1997 will be provided from
operations and borrowings under existing credit lines.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As reported in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996, two then directors of the Company, Robert T.
Anthony and Abraham L. Gray (who remains a director of the Company),
and Mr. Anthony's mother, acting as stockholders of the Company, filed
a complaint on December 5, 1995 in the California Superior Court for
Los Angeles County (No. BC140251) entitled Marilyn Anthony, Robert T.
Anthony and Abraham L. Gray vs. John B. Simon, Hugh V. Hunter, Anthony
Industries, Inc. and Does 1 through 100. The complaint purports to be
a derivative complaint brought on behalf of the Company and arises out
of the negotiation and approval of a retirement agreement in November
1995 between the Company and B. I. Forester, then the Company's
Chairman of the Board and Chief Executive Officer.
On September 11, 1996, the Board of Directors appointed a Special
Committee and delegated to it various matters including the task of
evaluating whether continuance of the lawsuit is in the best interest
of the Company. On February 18, 1997, the Special Committee issued a
report finding that the lawsuit is without merit, a waste of corporate
resources and should be dismissed. Based on this finding, the Company
moved for a summary judgment. The Court granted the Company's motion
for summary judgment and, on September 15, 1997, dismissed the lawsuit
with prejudice. On October 28, 1997, the plaintiffs filed a notice of
appeal to the dismissal. The plaintiff's appeal is currently pending.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K filed in the third quarter ended
September 30, 1997
None
<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 12, 1997 /s/ RICHARD M. RODSTEIN
--------------------------
Richard M. Rodstein
President and Chief Executive
Officer
Date: November 12, 1997 /s/ JOHN J. RANGEL
------------------
John J. Rangel
Senior Vice President - Finance
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 6,237
<SECURITIES> 0
<RECEIVABLES> 113,661
<ALLOWANCES> (5,592)
<INVENTORY> 180,696
<CURRENT-ASSETS> 311,725
<PP&E> 172,477
<DEPRECIATION> (98,169)
<TOTAL-ASSETS> 405,244
<CURRENT-LIABILITIES> 102,898
<BONDS> 0
0
0
<COMMON> 17,158
<OTHER-SE> 183,579
<TOTAL-LIABILITY-AND-EQUITY> 405,244
<SALES> 485,398
<TOTAL-REVENUES> 485,510
<CGS> 346,863
<TOTAL-COSTS> 346,863
<OTHER-EXPENSES> 103,911
<LOSS-PROVISION> 1,573
<INTEREST-EXPENSE> 7,772
<INCOME-PRETAX> 25,391
<INCOME-TAX> 7,775
<INCOME-CONTINUING> 17,616
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,616
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.05
</TABLE>
