<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 March 31, 2000 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 April 30, 2000.
Common Stock, par value $1 17,949,000 Shares
<PAGE>
FORM 10-Q QUARTERLY REPORT
PART - 1 FINANCIAL INFORMATION
ITEM 1 Financial Statements
STATEMENTS OF CONSOLIDATED INCOME (condensed)
(Dollars in thousands, except per share figures)
<TABLE>
<CAPTION>
Three months
ended March 31
--------------------------------------
2000 1999
--------------------------------------
(Unaudited)
<S> <C> <C>
Net sales $ 181,812 $ 163,060
Cost of products sold 130,752 118,749
----------------- -----------------
Gross profit 51,060 44,311
Selling expenses 26,964 23,096
General and administrative expenses 14,577 13,457
----------------- -----------------
Operating income 9,519 7,758
Interest expense 4,566 3,297
Other income, net (80) (100)
----------------- -----------------
Income before income taxes 5,033 4,561
Provision for income taxes 1,711 1,458
----------------- -----------------
Income from continuing operations 3,322 3,103
Discontinued operations, net of taxes 416 149
----------------- -----------------
Net income $ 3,738 $ 3,252
================= =================
Basic earnings per share:
Continuing operations $ 0.19 $ 0.19
Discontinued operations 0.02 0.01
----------------- -----------------
Net income 0.21 0.20
================= =================
Diluted earnings per share:
Continuing operations $ 0.18 $ 0.19
Discontinued operations 0.02 0.01
----------------- -----------------
Net income $ 0.20 $ 0.20
================= =================
Basic shares outstanding 17,949 16,566
Diluted shares outstanding 17,992 16,566
Cash dividend $ - $ 0.11
</TABLE>
See notes to consolidated condensed financial statements
1
<PAGE>
CONSOLIDATED BALANCE SHEETS (condensed)
(In thousands, except number of shares)
<TABLE>
<CAPTION>
March 31 December 31
2000 1999
----------------- ----------------
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 9,747 $ 9,421
Accounts receivable, net 134,837 149,151
Inventories, net 163,147 172,154
Deferred taxes and income taxes receivable 5,984 10,030
Prepaid expenses and other current assets 9,135 5,053
----------------- ----------------
Total current assets 322,850 345,809
Property, plant and equipment 163,916 162,453
Less allowance for depreciation and amortization 92,810 89,858
----------------- ----------------
71,106 72,595
Intangibles, principally goodwill, net 40,841 38,928
Net assets of discontinued operations 24,321 24,706
Other 4,944 5,840
----------------- ----------------
Total Assets $ 464,062 $ 487,878
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Bank loans $ 20,411 $ 57,359
Accounts payable 39,250 44,231
Accrued payroll and related 19,653 19,781
Other accruals 34,329 32,808
Current portion of long-term debt 4,444 4,444
----------------- ----------------
Total current liabilities 118,087 158,623
Long-term debt 125,070 107,280
Deferred taxes 3,423 3,455
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 -
18,682,810 in 2000 and 1999 18,673 18,673
Additional paid-in capital 143,326 143,326
Retained earnings 78,986 75,248
Employee Stock Ownership Plan and stock option loans (1,841) (1,975)
Treasury shares at cost, 733,810 shares in 2000 and 733,110 in 1999 (8,998) (8,992)
Accumulated other comprehensive loss (12,664) (7,760)
----------------- ----------------
Total Shareholders' Equity 217,482 218,520
----------------- ----------------
Total Liabilities and Shareholders' Equity $ 464,062 $ 487,878
================= ================
</TABLE>
See notes to consolidated condensed financial statements
2
<PAGE>
STATEMENTS OF CONSOLIDATED CASH FLOWS (condensed)
(In thousands)
<TABLE>
<CAPTION>
Three months
ended March 31
---------------------------------
2000 1999
---------------------------------
Operating Activities (unaudited)
<S> <C> <C>
Income from continuing operations $ 3,322 $ 3,103
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 3,093 3,131
Deferred taxes 914 396
Changes in operating assets and liabilities:
Accounts receivable 754 (12,590)
Inventories 9,007 24,481
Prepaid expenses and other current assets (982) (1,866)
Accounts payable (4,981) (6,665)
Payrolls and other accruals 1,393 2,475
--------------- ---------------
Net cash provided by operating activities 12,520 12,465
Investing Activities
Property, plant & equipment expenditures (1,576) (3,210)
Disposals of property, plant & equipment 3 74
Purchase of business (2,961)
Change in accumulated other comprehensive loss (4,904) (2,412)
Other items, net (724) 596
--------------- ---------------
Net cash used in investing activities (7,201) (7,913)
Financing Activities
Borrowings under long-term debt 31,790 5,500
Payments of long-term debt (14,000) (6,000)
Net decrease in short-term bank loans (36,948) (2,632)
Net proceeds from accounts receivable facility 13,560
Dividends paid (1,822)
--------------- ---------------
Net cash used in financing activities (5,598) (4,954)
--------------- ---------------
Net decrease in cash and cash equivalents from continuing operations (279) (402)
Discontinued operations
Income from discontinued operations 416 149
Adjustments to reconcile income to net cash provided by
discontinued operations:
Depreciation and amortization 713 755
Capital expenditures (109) (1,360)
Other items, net (415) 1,307
--------------- ---------------
Cash provided by discontinued operations 605 851
Net increase in cash and cash equivalents 326 449
Cash and cash equivalents at beginning of year 9,421 3,394
--------------- ---------------
Cash and cash equivalents at end of period $ 9,747 $ 3,843
=============== ===============
</TABLE>
See notes to consolidated condensed financial statements
3
<PAGE>
K2 INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2000
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 month period ended March 31, 2000
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2000.
The balance sheet at December 31, 1999 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 K2 Inc.'s ("K2's") Annual Report on
Form 10-K for the year ended December 31, 1999.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTS RECEIVABLE AND ALLOWANCES Accounts receivable are net of allowances
for doubtful accounts of $6,689,000 at March 31, 2000 and $6,572,000 at
December 31, 1999.
INVENTORIES
The components of inventory consist of the following:
<TABLE>
March 31 December 31
2000 1999
-------------------- -------------------
(Thousands)
<S> <C> <C>
Finished goods $123,265 $129,429
Work in process 10,219 10,573
Raw materials 31,769 34,228
-------------------- -------------------
Total at lower of FIFO cost or market (approximates
current cost) 165,253 174,230
Less LIFO valuation reserve 2,106 2,076
-------------------- -------------------
$163,147 $172,154
==================== ===================
</TABLE>
4
<PAGE>
K2 INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
NOTE 3 - DISCONTINUED OPERATIONS
In 1998, K2 adopted a plan to dispose of its Simplex building products division
as part of K2's strategic focus on the core sporting goods and other
recreational businesses. K2 currently continues to pursue its plan to dispose of
Simplex and, accordingly, has reported the operation as discontinued since the
date the plan was adopted.
NOTE 4 - ACQUISITIONS
On October 7, 1999 K2 completed the acquisition of Ride, Inc. ("Ride"), a
designer and manufacturer of snowboard equipment, apparel and accessories, in
an all-stock merger transaction accounted for using the purchase method of
accounting. The results of operations of Ride have been included in the
consolidated financial statements since the date of acquisition. The
following summarized unaudited pro forma results of operations of K2 assume
the acquisition of Ride had occurred as of the beginning of the respective
periods. This pro forma information does not purport to be indicative of what
would have occurred had the acquisition been made as of those dates, or of
results which may occur in the future:
PRO FORMA INFORMATION (UNAUDITED)
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED MARCH 31,
2000 1999
--------------- -------------
<S> <C> <C>
Net sales $ 181,812 $ 166,638
Income (loss) from continuing operations 3,322 (619)
Diluted earnings (loss) per share - continuing operations .20 (.03)
</TABLE>
NOTE 5 - BORROWINGS AND OTHER FINANCIAL INSTRUMENTS
Covenants contained in K2's $75 million credit line and accounts receivable
financing arrangement, among other things, restrict amounts available for
payment of cash dividends and stock repurchases by K2. As of March 31, 2000,
$11.1 million of retained earnings were free of such restrictions.
At March 31, 2000, $63.6 million of accounts receivable were sold; $50
million under its existing domestic accounts receivable purchase facility and
$13.6 million under a new $20.0 million facility available in Germany. On
April 4, 2000, K2 increased the capacity of the domestic accounts receivable
purchase facility from $50.0 million to $75.0 million.
NOTE 6 - COMPREHENSIVE INCOME
Total comprehensive (loss) income was ($1.2) million and $0.8 million for
the three months ended March 31, 2000 and 1999, respectively. Total
comprehensive (loss) income includes the net change in accumulated other
comprehensive loss for the period.
NOTE 7- EARNINGS PER SHARE DATA
Basic earnings per share ("EPS") is determined by dividing net income 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. The March 31, 2000 computation of diluted EPS included the
dilutive effects of 43,000 stock options and excluded 1,057,000 stock options
outstanding since their inclusion would have been antidilutive. The March 31,
1999 computation of diluted EPS excluded all 1,115,000 stock options since their
inclusion would have been antidilutive.
5
<PAGE>
K2 INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
NOTE 8 - SEGMENT INFORMATION
The segment information presented below is as of March 31:
<TABLE>
<CAPTION>
Net Sales to Unaffiliated
Customers Intersegment Sales Operating Profit (Loss)
-------------------------- -------------------------- ---------------------------
2000 1999 2000 1999 2000 1999
------------- ------------ ------------- ------------ ------------ ------------
(Millions)
<S> <C> <C> <C> <C> <C> <C>
Sporting goods $ 139.3 $ 121.3 $ 9.7 $ 5.8 $ 7.1 $ 4.9
Other recreational 9.3 9.9 0.1 - (0.7) (0.7)
Industrial 33.2 31.9 0.5 0.3 4.8 5.1
============= ============ ============= ============ ------------ ------------
Total segment data $ 181.8 $ 163.1 $ 10.3 $ 6.1 11.2 9.3
============= ============ ============= ============ ------------ ------------
Corporate expenses, net (1.6) (1.4)
Interest expense 4.6 3.3
------------ ------------
Income from continuing operations before provision for income taxes $ 5.0 $ 4.6
============ ============
</TABLE>
NOTE 9 - CONTINGENCIES
K2 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 K2's financial statements.
K2 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 K2'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 K2.
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. K2's environmental engineers, consultants
and legal counsel have developed estimates based upon cost analyses and other
available information for this particular site. K2 accrues for these costs when
it is probable
6
<PAGE>
K2 INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
that a liability has been incurred and the amount can be reasonably estimated.
At March 31, 2000 and December 31, 1999, K2 had accrued approximately $830,000
and $806,000, 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 K2's financial statements.
7
<PAGE>
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations
COMPARATIVE FIRST QUARTER RESULTS OF OPERATIONS
Net sales from continuing operations for the three months ended March 31, 2000
increased 11.5% to $181.8 million from $163.1 million in the year-earlier
period. Income from continuing operations for the first quarter of 2000 rose
7.1% to $3.3 million, or $.18 per diluted share, from $3.1 million, or $.19 per
diluted share, in the first quarter of 1999. Net income increased to $3.7
million, or $.20 per diluted share, from $3.3 million, or $.20 per diluted
share, in the prior year quarter.
NET SALES. In the sporting goods segment, net sales increased 14.8% to $139.3
million from $121.3 million in the 1999 first quarter. The growth was primarily
the result of double-digit increases in worldwide fishing tackle and in-line
skate sales. Shakespeare fishing tackle has experienced strong sales in the
domestic market led by continued growth of the Ugly Stik line, new packaged rods
and reels and other new products. The increase in in-line skate sales reflects
greater worldwide demand for K2's softboot skates, increased penetration into
new European markets and growth of the children's softboot skate line. Despite a
mild winter season, snowboard product sales increased overall due to recent
acquisitions. Ski shipments declined for the quarter reflecting the mild winter
weather in the domestic market and K2's lower domestic ski market share. Stearns
sales were off slightly, reflecting a shift in the timing of product shipments
to subsequent quarters.
In the other recreational products segment, net sales of $9.3 million
declined slightly from the year ago period of $9.9 million. The decline was
attributable mainly to lower apparel sales to the advertising specialty
market in continued sluggish market conditions.
Net sales of the two businesses in the industrial products group increased 4.2%
to $33.2 million from $31.9 million in the prior year's quarter. The improvement
was due to higher demand for monofilament line used in the paper industry and
increased sales of light poles and outdoor composites.
GROSS PROFIT. Gross profits for the first quarter of 2000 rose 15.2% to $51.1
million, or 28.1% of net sales, as compared with $44.3 million, or 27.2% of net
sales, in the year ago quarter. The improvement was attributable to cost
reduction programs implemented throughout K2.
COSTS AND EXPENSES. Selling expenses increased 16.7% to $27.0 million, or
14.8% of net sales, from $23.1 million, or 14.2% of net sales, in the prior
year's quarter. The dollar increase is attributable to the large increase in
sales and the timing of selling expenses associated with recent acquisitions
in a seasonally slower sales quarter. General and administrative expenses
declined as a percentage of net sales from 8.3%, or $13.5 million in the 1999
first quarter to 8.0%, or $14.6 million, in 2000. The improvement as a
percentage of net sales is due to the effect of increased sales and ongoing
expense controls throughout K2 .
8
<PAGE>
OPERATING INCOME. Operating income for the first quarter improved 22.7% to $9.5
million, or 5.2% of net sales, as compared to operating income of $7.8 million,
or 4.8% of net sales, a year ago. The dollar improvement is due to increased
sales and gross profit margins, offset by increased general and administrative
and selling expenses.
INTEREST EXPENSE. Interest expense increased $1.3 million to $4.6 million in
the first quarter of 2000 compared to $3.3 million in the year-earlier
period. Lower average borrowings reduced interest expense by $164,000, which
was offset by an increase in interest expense of $1,433,000 due to higher
interest rates. The interest rate increase was due to an increase in the
LIBOR variable rate as compared to the prior year, an increase in
international borrowing costs and the refinancing of variable debt into
higher cost long-term fixed debt.
LIQUIDITY AND SOURCES OF CAPITAL
The Company's continuing operating activities provided $12.5 million of cash
during both of the three months ended March 31, 2000 and 1999.
Net cash used for investing activities was $7.2 million in the current first
quarter compared to $7.9 million in the 1999 first quarter. Capital
expenditures in the 2000 period were $1.6 million lower compared to the 1999
first quarter which also had a $3.0 million cash outlay for the acquisition
of certain assets of a snowboard company. The current year quarter also
reflected an increase of $2.5 million in (accumulated other comprehensive
loss) over the prior year quarter. There were no material commitments for
capital expenditures at March 31, 2000.
Net cash used in financing activities was $5.6 million in the 2000 first
quarter compared with $5.0 million used in the corresponding year-ago
quarter. The year-to-year increase of $0.6 million of cash used in financing
activities was due to a higher net repayment of debt.
The Company anticipates its remaining cash needs in 2000 will be provided from
operations and borrowings under existing credit lines.
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 K2'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 cost reduction efforts,
expense control efforts and overall trends which involve substantial risks
and uncertainties. K2 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 the impact of
foreign exchange on product costs, and other risks described in K2's Annual
Report on Form 10-K filed with the Securities and Exchange Commission.
9
<PAGE>
ITEM 3 Quantitative and Qualitative Disclosures of Market Risk
K2's earnings and cash flow are subject to fluctuations due to changes in
foreign currency exchange rates. K2 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. K2's risk management objective is to reduce its exposure to the
effects of changes in exchange rates on the cost of products sold over
quarterly time horizons. Foreign currency exchange rate movements also affect
K2's competitive position, as exchange rate changes may affect business
practices and/or pricing strategies of non-U.S. based competitors and may
affect the profitability and pricing strategies of K2 as well. K2's foreign
currency risk policies entail entering into foreign currency derivative
instruments only to manage risk of currency fluctuations over a given period
of time, not for speculative investments.
Considering both the anticipated cash flows from firm purchase commitments
and anticipated purchases for the next quarter and the foreign currency
derivative instruments in place, the continued weakness of the euro and DM
against the U.S. dollar is expected to increase the cost of products
purchased in U.S. dollars for sale in the European market. As a result, this
will have an unfavorable impact on the second quarter 2000, and consequently
on earnings and on cash flows. This impact is offset in part by the favorable
impact of cost reduction programs that were initiated in anticipation of the
continued weakness in these currencies. This analysis ignores the potential
effect that may result from changing cost structures. In addition, currency
exchange rates are subject to change which could result in a lesser or
greater impact to earnings and cash flows.
10
<PAGE>
PART II - OTHER INFORMATION
ITEM 4 SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
(c) At the Annual Meeting of the Stockholders of K2 held
April 28, 2000, the following actions were taken:
(1) Three directors were elected:
Richard J. Heckmann - 14,679,536 votes for and 378,724 votes
withheld;
Robin E. Hernreich - 14,692,358 votes for and 365,902 votes
withheld;
Stewart M. Kasen - 14,612,887 votes for and 445,373 votes
withheld.
(3) The selection by the Board of Directors of Ernst & Young LLP
as K2's independent auditors for the year 2000 was ratified
as follows:
14,874,481 votes for, 81,467 votes against and 102,312
votes abstained.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K filed in the first quarter ended
March 31, 2000
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:May 15, 2000 /s/ RICHARD M. RODSTEIN
--------------------------
Richard M. Rodstein
President and Chief Executive
Officer
Date:May 15, 2000 /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> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 9,747
<SECURITIES> 0
<RECEIVABLES> 141,526
<ALLOWANCES> (6,689)
<INVENTORY> 163,147
<CURRENT-ASSETS> 322,850
<PP&E> 163,916
<DEPRECIATION> (92,810)
<TOTAL-ASSETS> 464,062
<CURRENT-LIABILITIES> 118,087
<BONDS> 0
0
0
<COMMON> 18,673
<OTHER-SE> 198,809
<TOTAL-LIABILITY-AND-EQUITY> 464,062
<SALES> 181,812
<TOTAL-REVENUES> 181,812
<CGS> 130,752
<TOTAL-COSTS> 130,752
<OTHER-EXPENSES> 40,937
<LOSS-PROVISION> 604
<INTEREST-EXPENSE> 4,566
<INCOME-PRETAX> 5,033
<INCOME-TAX> 1,711
<INCOME-CONTINUING> 3,322
<DISCONTINUED> 416
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,738
<EPS-BASIC> .21
<EPS-DILUTED> .20
</TABLE>
