<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, 1999 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 (323) 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, 1999.
Common Stock, par value $1 17,899,700 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 NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
-----------------------------------------------------------------
1999 1998 1999 1998
-------------------------------- --------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 139,883 $ 133,884 $ 461,235 $ 441,716
Cost of products sold 96,227 101,657 325,098 320,371
--------- --------- --------- ---------
Gross profit 43,656 32,227 136,137 121,345
Selling expenses 23,171 21,498 69,122 64,085
General and administrative expenses 12,954 20,181 38,198 45,439
--------- --------- --------- ---------
Operating income (loss) 7,531 (9,452) 28,817 11,821
Interest expense 2,677 2,833 9,005 9,147
Other (income) expense, net 8 (68) (106) (208)
--------- --------- --------- ---------
Income (loss) before income taxes 4,846 (12,217) 19,918 2,882
Provision (credit) for income taxes 1,552 (4,308) 6,375 643
--------- --------- --------- ---------
Income (loss) from continuing operations 3,294 (7,909) 13,543 2,239
Discontinued operations, net of taxes 37 (449) 1,044 627
--------- --------- --------- ---------
Net income (loss) $ 3,331 $ (8,358) $ 14,587 $ 2,866
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic earnings (loss) per share:
Continuing operations $ 0.20 $ (0.48) $ 0.82 $ 0.13
Discontinued operations 0.00 (0.03) 0.06 0.04
--------- --------- --------- ---------
Net income (loss) $ 0.20 $ (0.51) $ 0.88 $ 0.17
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted earnings (loss) per share:
Continuing operations $ 0.20 $ (0.48) $ 0.82 $ 0.13
Discontinued operations 0.00 (0.03) 0.06 0.04
--------- --------- --------- ---------
Net income (loss) $ 0.20 $ (0.51) $ 0.88 $ 0.17
--------- --------- --------- ---------
--------- --------- --------- ---------
Cash dividends per share $ - $ 0.11 $ 0.11 $ 0.33
Basic shares outstanding 16,549 16,547 16,559 16,551
Diluted shares outstanding 16,549 16,547 16,559 16,629
</TABLE>
See notes to consolidated condensed financial statements.
1
<PAGE>
CONSOLIDATED BALANCE SHEETS (condensed)
(In thousands, except number of shares)
<TABLE>
<CAPTION>
SEPTEMBER DECEMBER 31
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 9,855 $ 3,394
Accounts receivable, net 115,054 126,011
Inventories, net 166,190 188,348
Deferred taxes 10,130 12,780
Prepaid expenses and other current assets 6,012 5,037
--------- ---------
Total current assets 307,241 335,570
Property, plant and equipment 160,289 151,071
Less allowance for depreciation and amortization 88,665 84,480
--------- ---------
71,624 66,591
Intangibles, principally goodwill, net 20,244 19,564
Net assets of discontinued operations 25,092 27,511
Other 6,253 3,759
--------- ---------
Total Assets $ 430,454 $ 452,995
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Bank loans $ 42,114 $ 64,350
Accounts payable 21,212 20,807
Accrued payroll and related 17,259 15,982
Other accruals 26,356 21,555
Current portion of long-term debt 4,444 4,444
--------- ---------
Total current liabilities 111,385 127,138
Long-term debt 93,724 110,724
Deferred taxes 13,014 13,014
Commitments and Contingencies
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
17,190,652 in 1999 and 1998 17,191 17,191
Additional paid-in capital 132,488 132,488
Retained earnings 79,992 67,227
Employee Stock Ownership Plan and stock option loans (1,976) (1,981)
Treasury shares at cost, 656,810 shares in 1999 and 623,759 in 1998 (8,313) (8,106)
Accumulated other comprehensive loss (7,051) (4,700)
--------- ---------
Total Shareholders' Equity 212,331 202,119
--------- ---------
Total Liabilities and Shareholders' Equity $ 430,454 $ 452,995
--------- ---------
--------- ---------
</TABLE>
See notes to consolidated condensed financial statements
2
<PAGE>
STATEMENTS OF CONSOLIDATED CASH FLOWS (condensed)
(Dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30
----------------------------
1999 1998
----------------------------
(unaudited)
<S> <C> <C>
Operating Activities
Income from continuing operations $ 13,543 $ 2,239
Adjustments to reconcile income from continuing operations to net cash
provided by operating activities:
Depreciation and amortization 9,763 10,368
Deferred taxes 1,794 (3,700)
Changes in operating assets and liabilities:
Accounts receivable 10,957 (9,502)
Inventories 22,158 7,106
Prepaid expenses and other current assets (1,723) 658
Accounts payable 405 (10,431)
Payrolls and other accruals 6,078 7,576
-------- ---------
Net cash provided by operating activities 62,975 4,314
Investing Activities
Property, plant & equipment expenditures (13,640) (15,751)
Disposals of property, plant & equipment 219 313
Purchase of business, net of cash acquired (2,961)
Other items, net (2,564) 18
-------- ---------
Net cash used in investing activities (18,946) (15,420)
Financing Activities
Borrowings under long-term debt 11,500 40,500
Payments of long-term debt (28,500) (18,201)
Net decrease in short-term bank loans (22,236) (11,827)
Proceeds from accounts receivable facility 700
Dividends paid (1,820) (5,462)
Repayment of loans by ESOP 1,000
-------- ---------
Net cash (used in) provided by financing activities (41,056) 6,710
-------- ---------
Net increase (decrease) in cash and cash equivalents from continuing operations 2,973 (4,396)
Discontinued operations
Income from discontinued operations 1,044 627
Adjustments to reconcile income from discontinued operations
to net cash provided by discontinued operations:
Depreciation and amortization 2,263 2,270
Capital expenditures (2,107) (3,067)
Other items, net 2,288 3,832
-------- ---------
Cash provided by discontinued operations 3,488 3,662
Net increase (decrease) in cash and cash equivalents 6,461 (734)
Cash and cash equivalents at beginning of year 3,394 5,706
-------- ---------
Cash and cash equivalents at end of period $ 9,855 $ 4,972
-------- ---------
-------- ---------
</TABLE>
See notes to consolidated condensed financial statements.
3
<PAGE>
K2 INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
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, 1999 are not necessarily
indicative of the results that may be expected for the year ended December
31, 1999.
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements.
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, 1998.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTS RECEIVABLE AND ALLOWANCES
Accounts receivable are net of allowances for doubtful accounts of $5,170,000 at
September 30, 1999 and $5,798,000 at December 31, 1998.
INVENTORIES
The components of inventory consist of the following:
<TABLE>
<CAPTION>
September 30 December 31
1999 1998
------------ -----------
(Thousands)
<S> <C> <C>
Finished goods $ 127,623 $ 146,233
Work in process 10,479 8,078
Raw materials 31,147 37,911
--------- ---------
Total at lower of FIFO cost or market (approximates
current cost) 169,249 192,222
Less LIFO valuation reserve 3,059 3,874
--------- ---------
$ 166,190 $ 188,348
--------- ---------
--------- ---------
</TABLE>
4
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K2 INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
NOTE 3 - ACQUISITIONS
On March 26, 1999, the Company acquired certain assets relating to the Morrow
snowboard business, including the Morrow trademark, from Morrow Snowboards, Inc.
On October 7, 1999 the Company completed the acquisition of Ride, Inc., a
designer and manufacturer of snowboard equipment, apparel and accessories, in
an all-stock merger transaction. Under the terms of the merger, each common
and preferred share of Ride, Inc. is convertible into 1/10 share of common
stock of the Company. Based on the number of preferred and common shares
outstanding of Ride, Inc., 1,452,000 shares of common stock of the Company,
having a total value of $12.1 million, are issuable to the Ride, Inc.
shareholders, and 272,000 additional shares are reserved for possible future
issuance on exercise of options and warrants. The merger transaction will be
accounted for under the purchase method of accounting.
NOTE 4 - SALE OF ASSETS
On October 25, 1999 the Company announced that the previously reported
agreement to sell its Simplex building products division, signed August 4,
1999, was terminated. The Company has accounted for Simplex as discontinued
operations since September 30, 1998 and is currently exploring its options.
NOTE 5 - BORROWINGS AND OTHER FINANCIAL INSTRUMENTS
Covenants contained in the Company's $100 million credit line and accounts
receivable financing arrangement, among other things, restrict amounts available
for payment of cash dividends and stock repurchases by the Company. As of
September 30, 1999, $13.2 million of retained earnings were free of such
restrictions.
At September 30, 1999, $49.0 million of accounts receivable were sold, utilizing
98% of the capacity of the existing accounts receivable purchase facility.
5
<PAGE>
K2 INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
NOTE 6 - COMPREHENSIVE INCOME
During the three and nine months ended September 30, 1999 total comprehensive
income amounted to $4.4 million and $12.2 million, respectively. For the three
and nine months ended September 30, 1998, total comprehensive income (loss)
amounted to ($7.3) million and $3.0 million, respectively.
NOTE 7 - EARNINGS PER SHARE DATA
Basic earnings per share ("EPS") is determined by dividing net income or loss
by the weighted average number of shares outstanding during the period.
Diluted EPS reflects the potential dilutive effects of stock options, using
the treasury stock method. For the three and nine month periods ended
September 30, 1999, computation of diluted EPS excluded all 1,083,000 stock
options outstanding since their inclusion would have been antidilutive. For
the three and nine month periods ended September 30, 1998, computation of
diluted EPS included the dilutive effects of 73,000 and 78,000 stock options,
respectively and excluded 556,000 stock options, since their inclusion would
have been antidilutive.
NOTE 8 - SEGMENT INFORMATION
The segment information presented below is for the three months ended September
30:
<TABLE>
<CAPTION>
Net Sales to Unaffiliated
Customers Intersegment Sales Operating Profit (Loss)
------------------------- ------------------------- --------------------------
1999 1998 1999 1998 1999 1998
------------ ------------ ------------ ------------ ------------ -----------
(Millions)
<S> <C> <C> <C> <C> <C> <C>
Sporting goods $ 102.1 $ 93.7 $ 6.2 $ 3.2 $ 5.9 $ (12.2)*
Other recreational 10.4 11.9 - 0.2 (0.3) 0.1
Industrial 27.4 28.3 0.4 0.3 3.9 4.2
------------ ------------ ------------ ------------ ------------ -----------
Total segment data $ 139.9 $ 133.9 $ 6.6 $ 3.7 9.5 (7.9)
------------ ------------ ------------ ------------ ------------ -----------
------------ ------------ ------------ ------------
Corporate expenses, net 2.0 1.5
Interest expense 2.7 2.8
------------ -----------
Income (loss) from continuing operations before provision for income taxes $ 4.8 $ (12.2)
============ ===========
</TABLE>
* 1998 includes a $14.5 million charge
6
<PAGE>
K2 INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
The segment information presented below is for the nine months ended September
30:
<TABLE>
<CAPTION>
Net Sales to Unaffiliated
Customers Intersegment Sales Operating Profit (Loss)
------------------------- ------------------------- --------------------------
1999 1998 1999 1998 1999 1998
------------ ------------ ------------ ------------ ------------ -----------
(Millions)
<S> <C> <C> <C> <C> <C> <C>
Sporting goods $ 339.3 $ 312.0 $ 20.1 $ 14.9 $ 20.3 $ 1.8*
Other recreational 30.7 31.8 0.1 0.2 (1.1) (0.7)
Industrial 91.2 97.9 0.9 0.8 14.5 14.6
------------ ------------ ------------ ------------ ------------ -----------
Total segment data $ 461.2 $ 441.7 $ 21.1 $ 15.9 33.7 15.7
------------ ------------ ------------ ------------ ------------ -----------
------------ ------------ ------------ ------------
Corporate expenses, net 4.8 3.7
Interest expense 9.0 9.1
------------ -----------
Income from continuing operations before provision for income taxes $ 19.9 $ 2.9
------------ -----------
------------ -----------
</TABLE>
* 1998 includes a $14.5 million charge
NOTE 9 - CONTINGENCIES
The Company is subject to various legal actions and proceedings in the normal
course of business. While the ultimate outcome of these matters cannot be
predicted with certainty, management does not believe these matters will have a
material adverse effect on the Company's financial statements.
The Company is one of several named potentially responsible parties ("PRP") in
three Environmental Protection Agency matters involving discharge of hazardous
materials at old waste sites in South Carolina and Michigan. Although
environmental laws technically impose joint and several liability upon each PRP
at each site, the extent of the Company's required financial contribution to the
cleanup of these sites is expected to be limited based upon the number and
financial strength of the other named PRPs and the volume and types of waste
involved which might be attributable to the Company.
Environmental and related remediation costs are difficult to quantify for a
number of reasons including the number of parties involved, the difficulty in
determining the extent of the contamination, the length of time remediation may
require, the complexity of environmental regulation and the continuing
advancement of remediation technology. The Company's environmental engineers,
consultants and legal counsel have developed estimates based upon
7
<PAGE>
K2 INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
cost analyses and other available information for this particular site. The
Company accrues for these costs when it is probable that a liability has been
incurred and the amount can be reasonably estimated. At September 30, 1999 and
December 31, 1998, the Company had accrued approximately $1,267,000 and
$963,000, respectively, with no provision for expected insurance recovery.
The ultimate outcome of these matters cannot be predicted with certainty,
however, management does not believe these matters will have a material adverse
effect on the Company's financial statements.
8
<PAGE>
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
COMPARATIVE THIRD QUARTER RESULTS OF OPERATIONS
Net sales from continuing operations for the three months ended September 30,
1999 increased 4.5% to $139.9 million from $133.9 million in the year-earlier
period. Income from continuing operations for the third quarter of 1999 was $3.3
million, or $.20 per diluted share. This contrasts with a loss of $7.9 million,
or $.48 per diluted share, in the third quarter a year ago, which included an
aftertax charge of $9.4 million, or $.57 per diluted share. Net income for the
quarter was $3.3 million, or $.20 per diluted share, as compared with a loss of
$8.4 million, or $.51 per diluted share, in the prior year quarter, which
included the aforementioned charge.
NET SALES. In the sporting goods segment, net sales rose 9.0% to $102.1
million from $93.7 million in the 1998 third quarter. Sales in the quarter
benefited from strong double digit percentage increases in the snowboard,
fishing tackle, Stearns and bike businesses. Increased snowboard volume
primarily reflects the Company's shipment of K2 brand products and Morrow
brand products acquired earlier in the year. The popularity of the Ugly Stik,
packaged rods and reels and new product introductions fueled the increase in
Shakespeare fishing tackle sales. Higher shipments of flotation and new
outdoor products accounted for the increase in sales of Stearns products. The
restructured bike group continued to improve as higher sales were reported
for the third consecutive quarter. Ski shipments declined in the third
quarter reflecting the impact of a mild winter on preseason orders and a
lower domestic market share. The Company recently introduced K2's new MOD ski
technology which has been well received by its dealers. Despite an increase in
European preseason orders, in-line skate sales declined as retailers
worldwide became more cautious in maintaining inventory levels.
In the other recreational products segment, net sales declined from $11.9
million to $10.4 million as the Company experienced lower apparel sales to the
advertising specialty market due to continued sluggish market conditions.
Net sales of the two businesses in the industrial products group, Shakespeare
composites and electronics and Shakespeare monofilaments and specialty resins,
declined 3.3% to $27.4 million from $28.3 million in the prior year's quarter.
The sales decline reflected reduced demand for monofilament line used in the
paper industry. Partially offseting this were improved sales of marine antennas
and specialty resins.
GROSS PROFIT. Gross profit for the third quarter of 1999 increased to $43.7
million, or 31.2% of net sales, as compared with $32.2 million, or 24.1% of net
sales, in the year ago quarter. Excluding the effect of the charge for reserves,
gross profit for the 1998 third quarter was $39.9 million, or 29.8% of net
sales. The improvement in gross profit percentage before the prior year charge
reflects an improved product mix and fewer close-out sales.
In the winter sports area, sales of ski and snowboard products were negatively
impacted by manufacturing delays from the factory and margins declined from
higher manufacturing costs. The Company is nearing completion of an extensive
planning process intended to improve K2's manufacturing and procurement
processes. Alternative opportunities for significant
9
<PAGE>
improvement have been identified and an announcement of the Company's plan
will be made when the improvement plan is finalized during the fourth quarter.
COSTS AND EXPENSES. Selling expenses increased 7.8% to $23.2 million, or
16.6% of net sales, from $21.5 million, or 16.1% of net sales, in the prior
year's quarter. The increase largely reflects the impact of the new brand
acquired and new products developed this year along with the inclusion of
selling expenses of an affiliate acquired in Japan late in the third quarter
of 1998. General and administrative expenses improved to $13.0 million, or
9.3% of net sales, from $20.2 million, or 15.1% of net sales, in the 1998
third quarter. Excluding the effect of the charge for reserves, general and
administrative expenses in the 1998 third quarter were $13.4 million or 10.0%
of net sales. The reduction in general and administrative expenses before the
prior year charge reflects the benefit of ongoing expense reduction efforts
throughout the Company.
OPERATING INCOME. Operating income for the third quarter was $7.5 million or
5.4% of net sales. This contrasts with an operating loss of $9.5 million, a
year ago. Excluding the charge for reserves, operating income in the year ago
quarter was $5.0 million, or 3.8% of net sales. The improvement before the
prior year charge is attributable to the increases in sales volume and gross
profit percentage.
INTEREST EXPENSE. Interest expense decreased $156,000 to $2.7 million in the
third quarter of 1999 compared to $2.8 million in the year-earlier period.
The lower figure for the quarter reflected benefits of $43,000 and $113,000,
from lower interest rates and lower average borrowings, respectively, during
the quarter.
COMPARATIVE NINE-MONTH RESULTS OF OPERATIONS
Net sales from continuing operations for the nine months ended September 30,
1999 increased 4.4% to $461.2 million from $441.7 million in the year-earlier
period. Income from continuing operations for the first nine months of 1999
was $13.5 million, or $.82 per diluted share, as compared with $2.2 million,
or $.13 per diluted share, in the first nine months of 1998. Net income was
$14.6 million, or $.88 per diluted share, as compared with $2.9 million, or
$.17 per diluted share, in the year ago period. Before the third quarter 1998
aftertax charge of $9.4 million, or $0.57 per diluted share, previously
referred to, income from continuing operations and net income for the first
nine months of 1998 were $.70 and $.74 per diluted share, respectively.
NET SALES. In the sporting goods segment, net sales increased 8.7% to $339.3
million from $312.0 million in the 1998 period. The growth was the result of
increases in worldwide skate, fishing tackle, snowboard and bike sales.
Partially offsetting these increases were lower sales of ski products due to
the mild winter impact on re-orders and preseason orders. Sales of Stearns
products were comparable with the prior year.
In the other recreational products segment, net sales declined slightly to
$30.7 million from $31.8 million reflecting lower apparel sales to the
advertising specialty market due to continued sluggish market conditions.
This was partially offset by improved sales of skateboard shoes.
10
<PAGE>
Net sales of the two businesses in the industrial products group, Shakespeare
composites and electronics and Shakespeare monofilaments and specialty
resins, fell 6.8% to $91.2 million from $97.9 million in the prior year. The
sales decline reflected lower demand for paperweaving monofilament line,
which was partially offset by an increase in sales of cutting line and marine
antennas.
GROSS PROFIT. Gross profit for the first nine months of 1999 increased 12.2%
to $136.1 million, or 29.5% of net sales, from $121.3 million, or 27.5% of
net sales, in the prior year period. Excluding the effect of the charge for
reserves, gross profit was $129.0 million or 29.2% for the first nine months
of 1998. The gross profit improvement before the prior year charge is
primarily sales related with the increase in gross profit percentage coming
from an improved sales mix.
COSTS AND EXPENSES. Selling expenses increased 7.9% to $69.1 million, or
15.0% of net sales, from $64.1 million, or 14.5% of net sales, in the prior
year. The increase is attributable to expanded marketing of the various
brands and products throughout the Company along with the inclusion of
selling expenses related to an affiliate acquired in Japan late in the third
quarter of 1998. General and administrative expenses were $38.2 million, or
8.3% of net sales, as compared with $45.4 million or 10.3% of net sales, in
the prior year. Excluding the effect of the charge for reserves, general and
administrative expenses were $38.6 million, or 8.7% of net sales, in the
prior year.
OPERATING INCOME. Operating income for the first nine months was $28.8
million, or 6.2% of net sales, as compared with $11.8 million, or 2.7%, in
the prior year. Excluding the charge for reserves, operating income a year
ago was $26.3 million, or 6.0% of net sales. The improvement before the prior
year charge is attributable to the increases in sales volume and gross profit
percentage.
INTEREST EXPENSE. Interest expense decreased $142,000 for the first nine
months of 1999 compared to the year-earlier period. Higher average borrowings
incurred to support the growth in sales increased interest expense by
$708,000, which was offset by a reduction of $850,000 of interest due to
lower interest rates.
LIQUIDITY AND SOURCES OF CAPITAL
The Company's continuing operating activities provided $63.0 million of cash
during the nine months ended September 30, 1999 as compared with $4.3 million
of cash provided during the nine month period a year ago. The $58.7 million
year-to-year improvement in cash is primarily attributable to reduced
accounts receivable and inventory levels from the same prior year period.
Net cash used for investing activities was $18.9 million in the first nine
months of 1999, compared to $15.4 million in the first nine months of 1998.
The 1999 period reflected the negative impact of foreign currencies on the
Company's foreign investments, $2.1 million of lower capital expenditures and
$3.0 million used in the acquisition of certain assets of Morrow Snowboards,
Inc. There were no material commitments for capital expenditures at September
30, 1999.
11
<PAGE>
Net cash used in financing activities was $41.1 million during the nine
months ended September 30, 1999 as contrasted with $6.7 million of cash
provided during the nine month period a year ago. The year to year increase
of $47.8 million in cash used was due to lower borrowings and higher debt
repayments.
The Company anticipates its remaining cash needs in 1999 will be provided
from operations and borrowings under existing credit lines.
YEAR 2000 ISSUE
As is more fully described in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998, the Company is modifying or replacing
portions of its software as well as certain hardware to enable the
uninterrupted continuation of its operations beyond December 31, 1999. As of
September 30, 1999, the Company estimates that its progress toward completion
of its Year 2000 remediation plan is as described below.
The Company's plan to resolve the Year 2000 issue involves the following four
phases: assessment, remediation, testing, and implementation. To date, the
Company has fully completed its assessment of all systems that it believes
could have a material impact on the sales, liquidity or operations of the
Company and that could be significantly affected by the Year 2000 issue. The
completed assessment indicated that most of the Company's significant
information technology systems could be affected. That assessment also
indicated that certain software and hardware (embedded chips) used in
production and manufacturing systems (hereafter also referred to as operating
equipment) are at risk. Based on a review of its product line, the Company
has determined that the products it has sold and will continue to sell do not
require remediation to be Year 2000 compliant. Accordingly, the Company does
not believe that the Year 2000 presents a material exposure as it relates to
the Company's products. In addition, the Company has gathered information
about the Year 2000 compliance status of its significant suppliers and
subcontractors and continues to monitor their compliance.
For its information technology exposures, to date the Company is
approximately 95% complete on the remediation phase overall. The Company
expects to complete software reprogramming and replacement no later than
December 15, 1999. Once software is reprogrammed or replaced for a system,
the Company begins testing and implementation. These phases run concurrently
for different systems. To date, the Company has completed approximately 70%
of its testing overall and has implemented approximately 75% of its
remediated systems where such remediation was found to be necessary.
Completion of the testing and remediation phases for all significant systems
is expected by December 15, 1999. The Company is approximately 95% complete
in the remediation phase of its operating equipment and the Company is 100%
complete with the testing of its remediated operating equipment.
The Company's billing system interfaces directly with certain significant
customers. The Company is in the process of working with these customers to
ensure that the Company's systems that interface directly with them are Year
2000 compliant by December 31, 1999. The Company has completed its assessment
phase and is approximately 90% complete with the remediation, testing and
implementation phases.
12
<PAGE>
The Company has queried its significant suppliers and subcontractors that do
not share information systems with the Company (external agents). To date,
the Company is not aware of any external agent with a Year 2000 issue that
would materially impact the Company's results of operations, liquidity, or
capital resources. However, the Company has no means of ensuring that
external agents will be Year 2000 ready. The inability of external agents to
complete their Year 2000 resolution process in a timely fashion could
materially impact the Company. The effect of non-compliance by external
agents is not determinable.
The total cost of the Year 2000 issue is estimated at $1.5 million and is
being funded through operating cash flows. To date, the Company has incurred
approximately $1,106,000 ($440,000 expensed and $666,000 capitalized for new
systems) related to all phases of the Year 2000 project. Management's
assessment of the risks associated with the Year 2000 issue are unchanged
from that described in the 1998 annual report on Form 10-K.
The Company's plan to complete the Year 2000 modifications is based on
management's best estimates, which are based on numerous assumptions about
future events including the continued availability of certain resources and
other factors. Estimates on the status of completion and the expected
completion dates are based on the level of effort expended to date to total
expected (internal) staff effort. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially
from those plans. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel
trained in this area, the ability to locate and correct all the relevant
computer codes and similar uncertainties.
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
This Form 10-Q contains certain "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, which represent the
Company's expectations or beliefs concerning future events, including, but
not limited to, the following: statements regarding sales and earnings,
market trends, market conditions, market positioning, product acceptance and
demand, inventory reduction efforts, the impact of the Year 2000 on
computerized information systems, cost reduction efforts and overall trends
which involve substantial risks and uncertainties. The Company cautions that
these statements are further qualified by important factors that could cause
actual results to differ materially from those in the forward-looking
statements, including, but not limited to, economic conditions, product
demand, competitive pricing and products, and other risks described in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
ITEM 3 Quantitative and Qualitative Disclosures of Market Risk
The Company's earnings and cash flow are subject to fluctuations due to
changes in foreign currency exchange rates. The Company manages its exposure
to changes in foreign currency exchange rates on certain firm purchase
commitments and anticipated but not yet committed purchases by entering into
foreign currency forward contracts. A hypothetical 10% weakening of the U.S.
dollar relative to all other currencies would not materially adversely affect
expected
13
<PAGE>
fourth quarter 1999 earnings or cash flows. This analysis is dependent on
actual purchases during the next quarter occurring within 90% of budgeted
forecasts. The effect of the hypothetical change in exchange rates ignores
the effect this movement may have on other variables including competitive
risk. If it were possible to quantify this competitive impact, the results
could well be different than the sensitivity effects shown above. In
addition, it is unlikely that all currencies would uniformly strengthen or
weaken relative to the U.S. dollar. In reality, some currencies may weaken
while others may strengthen.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibit is filed as part of this report.
27 Financial Data Schedule for the nine months ended
September 30, 1999.
(b) Reports on Form 8-K filed since the date of the last Form 10-Q
Report on Form 8-K dated October 22, 1999 containing the
Company's press release dated October 8, 1999 announcing the
completion of the Company's acquisition of the issued and
outstanding shares of common stock of Ride, Inc. on October 7,
1999.
15
<PAGE>
SIGNATURES
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, 1999 /s/ RICHARD M. RODSTEIN
--------------------------
Richard M. Rodstein
President and Chief Executive
Officer
Date: November 12, 1999 /s/ JOHN J. RANGEL
------------------
John J. Rangel
Senior Vice President - Finance
16
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