<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 June 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
-
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of July 31, 1997.
Common Stock, par value $1 16,532,221 Shares
<PAGE>
FORM 10-Q QUARTERLY REPORT
PART - 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATEMENTS OF CONSOLIDATED INCOME (condensed)
(In thousands, except per share figures)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
-------------------------- ---------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
Net sales $171,522 $143,373 $343,063 $302,226
Cost of products sold 120,376 102,157 245,536 219,627
-------- -------- -------- --------
Gross profit 51,146 41,216 97,527 82,599
Selling expenses 22,891 16,569 45,282 35,701
General and administrative expenses 12,926 12,428 26,196 25,502
-------- -------- -------- --------
Operating income 15,329 12,219 26,049 21,396
Interest expense 2,679 2,297 5,198 4,729
Other expense (income), net 63 (335) (228) (632)
-------- -------- -------- --------
Income before provision for income taxes 12,587 10,257 21,079 17,299
Provision for income taxes 3,900 3,280 6,530 5,535
-------- -------- -------- --------
Net income $ 8,687 $ 6,977 $ 14,549 $ 11,764
======== ======== ======== ========
Per share data:
Net income $ 0.52 $ 0.42 $ 0.87 $ 0.70
Cash dividend $ 0.11 $ 0.11 $ 0.22 $ 0.22
Average shares outstanding 16,703 16,742 16,714 16,731
</TABLE>
See notes to consolidated condensed financial statements.
1
<PAGE>
CONSOLIDATED BALANCE SHEETS (condensed)
(In thousands)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1997 1996
--------- -----------
(Unaudited)
<S> <C> <C>
Assets
------
Current Assets
Cash and cash equivalents $ 4,527 $ 10,860
Accounts receivable, net 107,764 94,079
Inventories
Finished goods 111,991 111,989
Work in process 12,060 10,810
Raw materials 39,832 37,041
-------- --------
163,883 159,840
Less LIFO reserve 4,568 4,464
-------- --------
159,315 155,376
Deferred taxes 8,362 8,195
Prepaid expenses and other current assets 5,501 5,899
-------- --------
Total current assets 285,469 274,409
Property, Plant and Equipment 168,163 157,371
Less allowance for depreciation and amortization 94,872 89,848
-------- --------
73,291 67,523
Intangibles, principally goodwill 16,258 16,346
Investments -- 6,408
Other 3,027 3,145
-------- --------
Total Assets $378,045 $367,831
======== ========
</TABLE>
See notes to consolidated condensed financial statements.
2
<PAGE>
CONSOLIDATED BALANCE SHEETS (condensed)
(In thousands, except per share figures)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1997 1996
---------- ------------
(Unaudited)
<S> <C> <C>
Liabilities and Shareholders' Equity
------------------------------------
Current Liabilities
Bank loans $ 11,399 $ 7,307
Accounts payable 22,237 26,639
Accrued payroll and related 20,968 20,410
Other accruals 21,696 15,012
Current portion of long-term debt 4,446 4,882
-------- --------
Total current liabilities 80,746 74,250
Long-Term Debt 80,112 89,096
Deferred Taxes 15,494 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 -
17,155,980 in 1997 and 17,131,662 in 1996 17,156 17,132
Additional paid-in capital 132,026 131,627
Retained earnings 65,954 55,047
Employee Stock Ownership Plan and
stock option loans (1,582) (7,087)
Treasury shares at cost, 621,379 shares in
1997 and 575,928 in 1996 (8,031) (6,719)
Cumulative translation adjustments (3,830) (1,012)
-------- --------
Total Shareholders' Equity 201,693 188,988
-------- --------
Total Liabilities and Shareholders' Equity $378,045 $367,831
======== ========
</TABLE>
See notes to consolidated condensed financial statements.
3
<PAGE>
STATEMENTS OF CONSOLIDATED CASH FLOWS (condensed)
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30
-----------------------------
1997 1996
--------- ---------
<S> <C> <C>
Operating Activities (unaudited)
Net income $ 14,549 $ 11,764
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,615 5,380
Deferred taxes (170) 2,208
Changes in operating assets and liabilities:
Accounts receivable (8,960) 5,331
Inventories (3,939) 10,147
Prepaid expenses and other current assets 398 1,033
Accounts payable (4,402) (8,880)
Payrolls and other accruals 7,244 (98)
-------- --------
Net cash provided by operating activities 11,335 26,885
Investing Activities
Property, plant and equipment expenditures (12,245) (7,966)
Disposals of property, plant and equipment 50 (9)
Sale of investments 6,408
Other items, net (2,719) (2,880)
-------- --------
Net cash used in investing activities (8,506) (10,855)
Financing Activities
Borrowings under long-term debt 18,667 30,000
Payments of long-term debt (28,087) (35,701)
Net increase (decrease) in short-term bank loans 4,092 (49,523)
(Repurchase of) proceeds from accounts receivable facility (4,725) 40,725
Dividends paid (3,642) (3,648)
Repayment of loans to ESOP 4,533 400
-------- --------
Net cash used in financing activities (9,162) (17,747)
-------- --------
Net decrease in cash and cash equivalents (6,333) (1,717)
Cash and cash equivalents at beginning of year 10,860 7,357
-------- --------
Cash and cash equivalents at end of period $ 4,527 $ 5,640
======== ========
Supplemental disclosure of cash flow information:
Interest paid $ 4,936 $ 4,502
Income taxes paid 6,700 1,753
-------- --------
$ 11,636 $ 6,255
======== ========
</TABLE>
See notes to consolidated condensed financial statements.
4
<PAGE>
K2 INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 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 six month periods ended June
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
Name Change
On June 3, 1996, the Company changed its name from Anthony Industries, Inc. to
K2 Inc.
Accounts Receivable and Allowances
Accounts receivable are net of allowances for doubtful accounts of $5,646,000 at
June 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 weighed 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 six
months ended June 30, 1997 were $.53 and $.88, respectively and $.42 and $.71,
respectively for the three and six months ended June 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.
5
<PAGE>
K2 INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS-CONTINUED
JUNE 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 June 30, 1997, $16.2
million of retained earnings were free of such restrictions.
At June 30, 1997, $42 million of accounts receivable had been sold under the
existing $50 million accounts receivable purchase facility.
6
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
A. Comparative Second Quarter Results of Operations
------------------------------------------------
Net sales for the three months ended June 30, 1997 advanced 19.6% to $171.5
million compared to $143.4 million in the year-earlier period. Net income for
the second quarter of 1997 increased 24.3% to $8.7 million, or $.52 per share,
from $7.0 million, or $.42 per share, in the second quarter of 1996.
Net sales. In the sporting goods and other recreational products group, net
sales grew 25.7% to $114.0 million in the 1997 quarter compared to $90.7 million
in the year-earlier period. K2 in-line skates led the sales growth. Sales of K2
skates increased nearly 85%, reflecting growth in shipments of preseason orders
to both the European and domestic markets. Shipments of skis increased over 60%
in the second quarter due to higher demand from dealers for K2's innovative
shaped skis. Sales of Shakespeare fishing tackle increased 22%, despite the
effect of a special one-year promotional program in the prior year. Modest sales
gains of back packs, full suspension mountain bikes and Stearns active water
sports products also contributed favorably to the quarter's sales performance.
Second quarter shipments of snowboard products declined due mainly to lower
private label sales, and sales of Hilton active apparel products declined due to
the impact of lower jacket sales during the quarter.
Net sales of the industrial products group increased to $57.5 million in the
1997 second quarter, from $52.7 million in the prior-year quarter. Strong sales
of fiberglass lightpoles, aided by modest sales gains in paperweaving
monofilaments and industrial flexible packaging accounted for the increase.
Gross profit. Gross profit rose 24.0% to $51.1 million, or 29.8% of net sales,
in the second quarter of 1997 as compared to $41.2 million, or 28.7% of net
sales, in the comparable 1996 quarter. The increase in gross profit as a
percentage of net sales resulted from a sales mix that included a larger
proportion of higher margin products and manufacturing efficiency gains,
particularly at Shakespeare's fiberglass pole and fishing tackle operations.
Partially offsetting the improvement was the impact of closeout sales of
mountain bikes and active apparel.
Costs and expenses. In the second quarter of 1997, selling expenses increased
38.0% to $22.9 million, or 13.4% of net sales, from $16.6 million, or 11.6% of
net sales, in the second quarter of 1996. The increase was attributable to the
higher sales volume and to increased marketing and promotional activities.
General and administrative expenses increased only slightly to $12.9 million in
the second quarter of 1997 compared to $12.4 million in the year-earlier period,
but declined as a percentage of net sales from 8.6% to 7.5%.
7
<PAGE>
Operating income. Operating income grew 25.4% to $15.3 million, or 8.9% of net
sales, in the second quarter of 1997, compared to $12.2 million, or 8.5% of net
sales, in the comparable 1996 period. The percentage increase was attributable
to the improvement in gross profit percentage and to lower general and
administrative expenses net of the increase in selling expenses as a percentage
of net sales.
Interest expense. Interest expense increased slightly in the second quarter of
1997 compared to the year-earlier period. Higher average borrowings incurred to
support the growth in sales increased interest expense by $.4 million.
B. Comparative Six-Month Results of Operations
-------------------------------------------
Net sales for the six months ended June 30, 1997 increased 13.5% to $343.1
million as compared to $302.2 million in the corresponding prior-year period.
Net income advanced 22.9% to $14.5 million, or $.87 per share, compared with
$11.8 million, or $.70 per share, in the 1996 six-month period.
Net Sales. Net sales in the sporting goods and other recreational products
group increased 18.7% to $235.8 million from $198.6 million in the 1996 period.
The improvement was mainly due to an increase of over 100% in worldwide
shipments of preseason orders of K2 softboot in-line skates. Ski sales enjoyed a
19.7% growth as a result of increased demand for K2's innovative shaped skis.
Sales of backpacks and full-suspension mountain bikes added modestly to the
sales improvement for the period. Shakespeare fishing tackle sales declined due
to the impact during the first quarter of the one-year promotional program in
effect a year ago. Sales of Stearns active water sports products declined
slightly, and sales of Hilton active apparel were lower due to a softness in
demand for jackets.
The industrial products group reported net sales of $107.3 million for the six
months ended June 30, 1997, up from the $103.6 million in the year-earlier
period. Improved sales of fiberglass lightpoles, marine antennas and industrial
flexible packaging offset slightly lower sales of paperweaving monofilaments.
Gross Profit. Gross profit improved 18.0% to $97.5 million, or 28.4% of net
sales, in the first six months of 1997 compared to $82.6 million, or 27.3% of
sales, in the corresponding year-earlier period. The improvement in gross profit
as a percentage of net sales resulted from a sales mix that included a larger
proportion of higher margin products and manufacturing efficiency gains,
particularly at Shakespeare's fiberglass pole operation. Partially offsetting
the improvement was the impact of closeout sales of mountain bikes.
Costs and Expenses. Selling expenses increased 26.9% to $45.3 million, or 13.2%
of net sales, in the first six months of 1997 compared to $35.7 million, or
11.8% of 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 $26.2
million, as compared to $25.5 million in the year-earlier period, but declined
as a percentage of sales from 8.4% to 7.6%.
8
<PAGE>
Operating Income. Operating income improved 21.5% to $26.0 million, or 7.6% of
net sales, in the first six months of 1997, as compared to $21.4 million, or
7.1% of net sales, in the same prior-year period. The percentage increase was
due to higher gross profit margins, partially reduced by higher selling
expenses.
Interest Expense. Interest expense increased slightly in the first half of 1997
compared to the year-earlier period. Higher average borrowings incurred to
support the growth in sales increased interest expense by $.9 million, which was
offset by a reduction of $.4 million due to lower interest rates.
C. Financial Condition
-------------------
The Company's operating activities provided $11.3 million of cash during the six
months ended June 30, 1997 as compared to $26.9 million of cash during the six
months ended June 30, 1996. The decline in the cash provided in the 1997 period
was primarily due to financing higher levels of working capital arising from the
growth of sales of in-line skates and the corresponding increase in inventory.
Increased capital expenditures of $4.3 million were offset by the funds received
from the sale of investments. Higher capital expenditures were necessary in the
first half of 1997 to increase manufacturing capacity in the recreational
products group and improve manufacturing efficiencies in the industrial products
group. The impact of the strong dollar on the net assets of European
subsidiaries also contributed to the increase. There were no material
commitments for capital expenditures at June 30, 1997.
Net cash used in financing activities was $9.2 million in the 1997 six month
period as compared with $17.7 million in the corresponding year ago period. The
net reduction of $8.6 million in cash used was due to an increase in borrowings
to support the growth in sales. Partially offsetting this increase was the
repayment of $4.5 million from the Company's ESOP for funds borrowed in the
prior year. During the 1997 six 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.
9
<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 directors of the Company, Robert T.
Anthony and Abraham L. Gray, 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 heard the Company's motion for
summary judgment on July 23, 1997 and orally granted the motion. The
Court indicated its intention to enter a formal, written order of
dismissal on, or shortly after, August 18, 1997. The plaintiffs will
have 60 days thereafter to file an appeal, if they choose to do so.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K filed in the second quarter ended June 30,
1997
None
10
<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: August 13, 1997 /s/ RICHARD M. RODSTEIN
--------------------------------
Richard M. Rodstein
President and Chief Executive
Officer
Date: August 13, 1997 /s/ JOHN J. RANGEL
--------------------------------
John J. Rangel
Senior Vice President - Finance
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 4,527
<SECURITIES> 0
<RECEIVABLES> 113,410
<ALLOWANCES> (5,646)
<INVENTORY> 159,315
<CURRENT-ASSETS> 285,469
<PP&E> 168,163
<DEPRECIATION> 94,872
<TOTAL-ASSETS> 378,045
<CURRENT-LIABILITIES> 80,746
<BONDS> 0
0
0
<COMMON> 17,156
<OTHER-SE> 184,537
<TOTAL-LIABILITY-AND-EQUITY> 378,045
<SALES> 343,063
<TOTAL-REVENUES> 343,291
<CGS> 245,536
<TOTAL-COSTS> 245,536
<OTHER-EXPENSES> 70,437
<LOSS-PROVISION> 1,041
<INTEREST-EXPENSE> 5,198
<INCOME-PRETAX> 21,079
<INCOME-TAX> 6,530
<INCOME-CONTINUING> 14,549
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,549
<EPS-PRIMARY> .87
<EPS-DILUTED> .87
</TABLE>
