SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 0-24556
MARKER INTERNATIONAL
(Exact name of registrant as specified in its charter)
Utah 87-0372759
(State or other jurisdiction of incorporation) (I.R.S. Employer ID No.)
1070 West 2300 South
Salt Lake City, Utah 84119
(Address of principal executive offices)
(801) 972-2100
(Telephone number)
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filings
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock Outstanding at October 31, 1997
--------------------- -------------------------------
Common Stock, $0.01 par value 11,130,577
<PAGE>
MARKER INTERNATIONAL
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements Page
----
Condensed Consolidated Balance Sheets
As of September 30, 1997 and March 31, 1997 3
Condensed Consolidated Statements of Operations
For the Three and Six Months Ended
September 30, 1997 and 1996 5
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended
September 30, 1997 and 1996 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
Part II - Other Information
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
2
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
MARKER INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
ASSETS
September 30, March 31,
1997 1997
-------- --------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 6,623 $ 13,532
Accounts receivable, net of allowance for doubtful
accounts of $1,186 and $2,139, respectively 39,220 26,279
Inventories 47,803 33,849
Prepaid and other current assets 8,208 4,611
---------- ----------
Total current assets 101,854 78,271
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Land 1,050 1,050
Building and improvements 7,508 7,356
Machinery and equipment 19,799 25,302
Furniture, fixtures and office equipment 4,539 4,511
---------- ----------
32,896 38,219
Less accumulated depreciation and amortization (15,535) (18,941)
---------- ----------
Net property, plant and equipment 17,361 19,278
---------- ----------
INTANGIBLE ASSETS, net of accumulated amortization 17,112 17,475
---------- ----------
OTHER ASSETS 1,994 2,116
---------- ----------
$ 138,321 $ 117,140
========== ==========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated balance sheets.
3
<PAGE>
<TABLE>
MARKER INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in Thousands)
(Unaudited)
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, March 31,
1997 1997
-------- --------
CURRENT LIABILITIES:
<S> <C> <C>
Notes payable to banks $ 67,765 $ 38,930
Current maturities of long-term debt 3,751 3,038
Accounts payable 6,404 5,393
Other current liabilities 7,532 9,785
---------- ----------
Total current liabilities 85,452 57,146
---------- ----------
LONG-TERM DEBT, net of current maturities 16,468 16,487
---------- ----------
SERIES A BONDS, issued to a related party 10,000 10,000
---------- ----------
MINORITY INTEREST 1,273 1,810
---------- ----------
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 5,000,000 shares
authorized and none issued - -
Common stock, $0.01 par value, 25,000,000
shares authorized; 11,130,577 and 11,129,127
issued and outstanding, respectively 111 111
Additional paid-in capital 36,299 36,293
Retained earnings (deficit) (5,242) 858
Cumulative foreign currency translation adjustments (6,040) (5,565)
----------- -----------
Total shareholders' equity 25,128 31,697
----------- ----------
$ 138,321 $ 117,140
========== ===========
</TABLE>
The accompanying notes to condensed consolidated financial statement
are an integral part of these condensed consolidated balance sheets.
4
<PAGE>
<TABLE>
MARKER INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
For the Three Months For the Six Months
Ended September 30, Ended September 30,
-------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $ 29,009 $ 31,718 $ 31,280 $ 33,224
COST OF SALES 19,674 19,163 21,762 20,006
-------- -------- -------- --------
GROSS PROFIT 9,335 12,555 9,518 13,218
-------- -------- -------- --------
OPERATING EXPENSES:
Selling 3,622 3,159 6,481 5,500
General and administrative 4,672 2,170 7,731 4,589
Research and development 1,174 769 2,166 1,430
Warehousing and shipping 488 442 927 756
Amortization of goodwill and intangibles 189 - 416 -
-------- ---------- -------- --------
10,145 6,540 17,721 12,275
-------- -------- -------- --------
OPERATING INCOME (LOSS) (810) 6,015 (8,203) 943
--------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense (1,326) (1,264) (2,440) (2,285)
Equity in losses of unconsolidated subsidiary - (201) - (281)
Other, net 78 (44) 462 (58)
-------- -------- -------- --------
(1,248) (1,509) (1,978) (2,624)
-------- -------- -------- --------
NET INCOME (LOSS) BEFORE INCOME TAXES AND
MINORITY INTEREST (2,058) 4,506 (10,181) (1,681)
(PROVISION) BENEFIT FOR INCOME TAXES 821 (1,622) 3,665 605
MINORITY INTEREST 191 - 415 -
-------- -------- -------- --------
NET INCOME (LOSS) $ (1,046) $ 2,884 $ (6,101) $ (1,076)
========= ======== ======== ========
NET INCOME (LOSS) PER
COMMON SHARE $ (0.09) $ 0.28 $ (0.55) $ (0.11)
======== ======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING 11,129,372 10,457,658 11,129,250 9,515,425
========== ========== ========== =========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated statements.
5
<PAGE>
<TABLE>
MARKER INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
For the Six Months
Ended September 30,
-------------------------------
1997 1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (6,101) $ (1,076)
Adjustments to reconcile net income to net cash
used in operating activities:
Minority interest in loss (414) -
Gain on sale of property, plant and equipment (85) -
Depreciation and amortization 2,619 1,602
Equity in earnings of unconsolidated subsidiary - 281
Change in assets and liabilities:
Increase in accounts receivable, net (12,257) (24,765)
Increase in inventories (14,889) (8,642)
Increase in prepaid and other assets (3,516) (3,461)
Increase in accounts payable 91 1,256
Increase in other current liabilities 341 1,620
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES (34,211) (33,185)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (4,252) (3,612)
Payment for purchase of DNR, net of cash acquired - (14,469)
Proceeds from disposition of equipment 3,763 -
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (489) (18,081)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on notes payable to banks 29,407 33,587
Proceeds from issuance of common stock, net 6 14,789
Proceeds from issuance of long-term debt 2,084 7,656
Principal payments on long-term debt (1,578) (1,582)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 29,919 54,450
--------- ---------
Effect of foreign exchange rate changes on cash (2,128) (458)
--------- ---------
Net increase (decrease) in cash and cash equivalents (6,909) 2,726
Cash and cash equivalents at beginning of period 13,532 6,189
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,623 $ 8,915
========= =========
</TABLE>
Theaccompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated statements.
6
<PAGE>
MARKER INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Interim Financial Statements
The accompanying condensed consolidated financial statements include
the accounts of Marker International and its subsidiaries (the "Company"). The
condensed consolidated financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission (the "SEC").
Certain information and footnote disclosures normally required in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to such rules and regulations. The financial
statements reflect all adjustments (consisting only of normal recurring
adjustments) which, in the opinion of management, are necessary to fairly
present the financial position, results of operations and cash flows for the
periods presented.
The results of operations for the three and six months ended September
30, 1997 are not necessarily indicative of the results to be expected for the
full fiscal year. It is suggested that these condensed consolidated financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
March 31, 1997.
Note 2. Cash and Cash Equivalents
Cash and cash equivalents include investments in certificates of
deposit with original maturities of less than 30 days and restricted cash. The
Company has granted a security interest in a $2.0 million time deposit held in
the Company's name at a United States branch of a German bank. This deposit is
restricted for use as collateral on borrowings from such bank.
Note 3. Inventories
Inventories include direct materials, direct labor and manufacturing
overhead costs and are recorded at the lower of cost (using the first-in,
first-out method) or market. The major classes of inventories are as follows (in
thousands):
September 30, 1997 March 31, 1997
-------------------- --------------
Raw materials $ 445 $ 1,054
Work in process 4,463 2,739
Finished goods 42,895 30,056
---------- ----------
$ 47,803 $ 33,849
========== ==========
7
<PAGE>
MARKER INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 4. Investment in DNR Sportsystem
On June 30, 1995, the Company acquired 25% of the common shares of DNR
Sportsystem Ltd. ("DNR"), a Swiss Corporation. On June 26, 1996, the Company
acquired an additional 55% of the common shares of DNR, thus bringing the
Company's total ownership of DNR to 80%. Prior to its 80% ownership, the Company
accounted for its then 25% investment in DNR using the equity method of
accounting.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and DNR as if the Company had
owned 80% of DNR at the beginning of the fiscal year ended March 31, 1997. Pro
forma adjustments have been made to give effect to amortization of goodwill,
interest expense on acquisition debt and certain other adjustments. The pro
forma results have been prepared for comparative purposes only. They do not
purport to be indicative of the results of operations which actually would have
resulted had the Company owned 80% of DNR for the entire first six months of the
fiscal year ended March 31, 1997.
For the Six Months Ended
(Unaudited and in thousands except per share amounts) September 30,
--------------
1997 1996
---- ----
(actual) (pro forma)
Net Sales $ 31,280 $ 65,337
Operating Income (Loss) (8,203) 6,250
Net Income (Loss) (6,101) 2,086
Net Income (Loss) per Common Share $ (0.55) $ 0.19
Note 5. Intangible Assets
Intangible assets consist of goodwill, trade names and license
arrangements resulting from the Company's acquisition of DNR. Intangible assets
are amortized using the straight-line method over lives ranging from 5 to 30
years. At September 30, 1997 and March 31, 1997 accumulated amortization of
goodwill and intangible assets totaled approximately $1.0 million and $0.6
million, respectively.
8
<PAGE>
MARKER INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 6. New Pronouncements
In February 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share". This statement specifies the computation, presentation and disclosure
requirements for earnings per share ("EPS") for financial statements issued for
all periods ending after December 15, 1997. Early adoption is prohibited and
upon adoption, all prior period EPS data presented must be restated. SFAS 128
simplifies the standards for computing EPS in comparison to APB Opinion No. 15
and replaces the presentations of Primary EPS and Fully Diluted EPS with a
presentation of Basic EPS and Diluted EPS. The Company believes that SFAS 128
will not have a material impact when adopted.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, "Reporting Comprehensive Income", and Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information". Both statements are
effective for fiscal years beginning after December 15, 1997.
Note 7. Other Matters
Disclosures about Derivative Financial Instruments.
The SEC has issued final rules governing disclosure requirements for
financial instruments, including derivatives. Derivative financial instruments
held by the Company are generally used to manage well-defined foreign exchange
and interest rate risks which occur in the normal course of business. Forward
foreign exchange contracts are used by the Company to reduce the potential
impact of unfavorable fluctuations in foreign exchange rates. The Company has
off balance sheet commitments to buy and sell foreign currencies relating to
foreign exchange contracts to hedge against future currency fluctuations.
9
<PAGE>
MARKER INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Gains and losses on foreign currency contracts not intended to hedge
operating requirements are reported currently in other income. Gains and losses
on foreign currency contracts intended to meet firm commitments are deferred and
recognized as part of the cost of the underlying transaction being hedged.
Counterparties to the foreign exchange contracts are typically major
international financial institutions. The Company's theoretical risk in these
transactions is the cost of replacing, at current market rates, these contracts
in the event of default by the counterparty. Management believes the risk of
incurring such losses is remote.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements and notes thereto appearing elsewhere in this report.
General
Marker International is a leading designer, developer, manufacturer and
marketer of alpine ski bindings in the United States and throughout the world.
The Company is a holding company which operates through its subsidiaries, Marker
Deutschland GmbH ("Marker Germany"), Marker USA, Marker Japan, Ltd. ("Marker
Japan"), Marker Austria GmbH ("Marker Austria") and Marker Canada, Ltd. ("Marker
Canada"). Substantially all of the Company's ski bindings are manufactured by
Marker Germany, which also distributes bindings in Germany, to subsidiaries of
the Company, and to independent distributors in countries where the Company does
not have a distribution subsidiary. Each of Marker USA and Marker Japan has its
own sales force and marketing departments for sales and marketing of bindings
and related parts directly to retailers in the United States, and to both
retailers and wholesalers in Japan. Marker Austria distributes the Company's ski
bindings into Austria through an independent sales force. Marker Canada
distributes the Company's ski bindings into Canada which are then sold through
an independent distributor. Marker Ltd., also a subsidiary of the Company,
designs, distributes and sells to retailers the Company's clothing, gloves and
luggage products for skiing and other recreational activities. The principal
markets for the Company's products are North America, Europe and Asia.
In addition, Marker International, through its 80% owned subsidiary,
DNR Sportsystem Ltd. ("DNR") (which is held by Marker International through its
wholly-owned Swiss subsidiary, Marker AG), and through its wholly-owned
subsidiaries, DNR USA, Inc. ("DNR USA"), DNR North America, Inc. ("DNR North
America") and DNR Japan Co., Ltd. ("DNR Japan"), is a leading designer,
developer, manufacturer and marketer of snowboards, Interface Step-in SystemsTM,
traditional snowboard bindings and snowboard boots. DNR designs, develops and
distributes snowboards and related products throughout the world. DNR USA
manufactures snowboards for distribution worldwide. DNR North America and DNR
Japan, through their own sales forces, market snowboards, Interface Step-in
SystemsTM, snowboard bindings and boots directly to retailers in the United
States and Japan, respectively.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (continued)
Quantitative and Qualitative Disclosure About Market Risk
Marker Germany receives payment primarily in German marks ("Marks") for
ski bindings sold. For subsidiaries of the Company (principally Marker USA and
Marker Japan), Marker Germany may allow payment for ski bindings sold to be made
in the functional currency of the subsidiary. Marker Germany or the distribution
subsidiary, as applicable, routinely enters into forward foreign exchange
contracts with financial institutions in order to fix the cost of converting the
functional currency to Marks. Sales prices for the ski bindings offered to the
subsidiaries and ultimately the price the subsidiaries offer for the sale of the
ski bindings to their customers is based upon, among other things, the rate
afforded by the forward foreign exchange contracts and market conditions.
Accordingly, the relationship of the exchange rate between the functional
currency of the subsidiary and the Mark has a direct impact on the cost of the
products sold by the distribution subsidiary.
Each of the Company's distribution subsidiaries operates and maintains
its accounting records in the functional currency of the country in which it
operates. In accordance with United States generally accepted accounting
principles, upon consolidation of these subsidiaries in the Company's
consolidated financial statements, the assets, liabilities, revenues and
expenses of each of the Company's foreign subsidiaries are translated at the
appropriate exchange rate prevailing during the period. Therefore, the Company's
assets, liabilities and results of operations are subject to fluctuations in
forward foreign exchange contract rates and translation effects which can vary
as a result of fluctuations in the exchange rates between the functional
currencies of such foreign subsidiaries and the United States dollar ("Dollar").
For the quarter ended September 30, 1997, average exchange rates
between the Dollar and the Mark, the Dollar and the Japanese yen ("Yen") and the
Dollar and the Swiss franc ("Franc") resulted in an effective decrease in the
value of the Mark against the Dollar, the Yen against the Dollar and the Franc
against the Dollar of approximately 21%, 9% and 22%, respectively, compared to
the corresponding quarter of the prior year. Such currency exchange fluctuations
resulted in a corresponding decrease in the value of the revenues and expenses
of Marker Germany, Marker Japan and Marker AG, as well as DNR and DNR Japan,
when converted to Dollars, compared to the corresponding quarter of the prior
fiscal year.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (continued)
For the six months ended September 30, 1997, average exchange rates
between the Dollar and the Mark, the Dollar and the Yen, and the Dollar and the
Franc resulted in an effective decrease in the value of the Mark against the
Dollar, the Yen against the Dollar and the Franc against the Dollar of
approximately 17%, 10% and 19%, respectively, compared to the corresponding
period of the prior year. Such currency exchange fluctuations resulted in a
corresponding decrease in the value of the revenues and expenses of Marker
Germany, Marker Japan and Marker AG, as well as DNR and DNR Japan, when
converted to Dollars, compared to the corresponding period of the prior fiscal
year.
The Company's business is seasonal in nature. Consistent with this
seasonal nature and the ski and snowboard industries in general, the Company
historically records a relatively small percentage of its annual net sales
during its first fiscal quarter. The Company historically records a majority of
its sales during its second and third fiscal quarters and to a lesser extent
during its fourth fiscal quarter. For additional information on Quantitative and
Qualitative Disclosure About Market Risk, see Note 7 to the Company's Condensed
Consolidated Financial Statements, above.
Results of Operations
Comparison of the three months ended September 30, 1997 with the three months
ended September 30, 1996
Net sales for the quarter ended September 30, 1997, decreased to $29.0
million, compared to $31.7 million for the corresponding quarter of the prior
fiscal year. The decrease in sales is primarily attributable to late deliveries
of Marker's new Logic 1(R) ski binding line which was introduced this year. The
new Logic 1(R) binding line replaces Marker's previous high-end binding models
which account for a significant portion of the Company's dollar sales and gross
margin. Production of the Logic 1(R) series began in late June 1997, and the
majority of these bindings will be delivered to Marker customers and recognized
as sales in the Company's third fiscal quarter which ends December 31, 1997.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (continued)
In addition, sales decreased as a result of translating sales of the
Company's foreign subsidiaries from their functional currency to Dollars. The
Dollar was significantly stronger against all of the functional currencies of
the Company's foreign subsidiaries during the second quarter of fiscal 1998,
compared to the corresponding quarter of the prior fiscal year. The decrease in
sales was offset in part by the consolidation of the Company's 80% owned
subsidiary DNR, which was not consolidated during the corresponding quarter of
the prior fiscal year.
Gross profit for the quarter ended September 30, 1997 decreased to $9.3
million, or 32.1% of net sales, compared to $12.6 million, or 39.7% of net
sales, for the corresponding quarter of the prior fiscal year. The decrease in
gross profit and gross profit percentage was primarily a result of (i) the
timing of shipments of the new Logic 1(R) high-end binding, which carries both
higher gross margin dollars and percentage, which will be recognized in the
Company's third fiscal quarter, (ii) negative gross margins caused by
underutilization of the Company's snowboard manufacturing facility, and (iii)
lower gross margins recognized by DNR compared to the consolidated margin
percentage of the Company's other subsidiaries. DNR recognizes gross margin only
on sales of its products to distributors at the wholesale level, unlike the
Company's other subsidiaries which recognize gross margin from sales of their
products at the production, wholesale and distribution levels.
Operating expenses for the quarter ended September 30, 1997 increased
to $10.1 million, compared to $6.5 million for the corresponding quarter of the
prior fiscal year. Approximately $3.1 million of the increase was a result of
the consolidation of DNR and $0.5 million of the increase related to the
Company's snowboard distribution subsidiaries, neither of which were
consolidated in the corresponding quarter of the prior fiscal year. DNR's
operating expenses for the quarter include approximately $1.0 million of
nonrecurring legal fees related to arbitration proceedings (see Part II, Item 1.
Legal Proceedings, herein). No similar legal fees were incurred during the
second quarter of the prior fiscal year.
The income tax benefit recognized for each of the quarters ended
September 30, 1997 and 1996 was calculated using the estimated consolidated
annual effective tax rate which considers the effective tax rates of domestic
and foreign tax jurisdictions.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (continued)
Comparison of the six months ended September 30, 1997 with the six months ended
September 30, 1996
Net sales for the six months ended September 30, 1997, decreased to
$31.3 million, compared to $33.2 million for the corresponding period of the
prior fiscal year. The decrease in sales is primarily attributable to late
deliveries of Marker's new Logic 1(R) ski binding line which was introduced this
year. The new Logic 1(R) binding line replaces Marker's previous high-end
binding models which account for a significant portion of the Company's dollar
sales and gross margin. Production of the Logic 1(R) series began in late June
1997, and the majority of these bindings will be delivered to Marker customers
and recognized as sales in the Company's third fiscal quarter which ends
December 31, 1997.
In addition, sales decreased as a result of translating sales of the
Company's foreign subsidiaries from their functional currency to Dollars. The
Dollar was significantly stronger against all of the functional currencies of
the Company's foreign subsidiaries during the first six months of fiscal 1998,
compared to the corresponding period of the prior fiscal year. This decrease in
sales was offset in part by the consolidation of the Company's 80% owned
subsidiary, DNR, which was not consolidated during the corresponding period of
the prior fiscal year.
Gross profit for the six months ended September 30, 1997, decreased to
$9.5 million, or 30.4% of net sales, compared to $13.2 million, or 39.8% of net
sales, for the corresponding period of the prior fiscal year. The decrease in
gross profit and gross profit percentage was primarily a result of (i) the
timing of shipments of the new Logic 1(R) high-end binding, which carries both
higher gross margin dollars and percentage, which will be recognized in the
Company's third fiscal quarter, (ii) negative gross margins caused by
underutilization of the Company's snowboard manufacturing facility, and (iii)
lower gross margins recognized by DNR compared to the consolidated margin
percentage of the Company's other subsidiaries.
Operating expenses for the six months ended September 30, 1997,
increased to $17.7 million, compared to $12.3 million for the corresponding
period of the prior fiscal year. The increase resulted primarily from (i) the
consolidation of approximately $4.5 million in DNR's operating expenses into
those of the Company, (ii) the recording of approximately $ 0.8 million in
operating expenses relating to snowboard distribution subsidiaries which were
not operational during the same period of the prior fiscal year, and (iii)
research and development expenses relating to the Company's collaborative
agreement with NIKE. DNR's operating expenses for the period include
approximately $1.5 million of nonrecurring legal fees related to arbitration
proceedings (see Part II, Item 1. Legal Proceedings, herein).
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (continued)
Interest expense for the six months ended September 30, 1997, increased
to $2.4 million, compared to $2.3 million for the corresponding period of the
prior fiscal year. The increase was caused primarily by higher working capital
requirements associated with the increase in inventories and the establishment
of the Company's snowboard manufacturing and distribution subsidiaries.
The income tax benefit recognized for each of the six month periods
ended September 30, 1997 and 1996 was calculated using the estimated
consolidated annual effective tax rate which considers the effective tax rates
of domestic and foreign tax jurisdictions.
Liquidity and Capital Resources
The Company's primary cash requirements are for raw materials inventory
for production, finished goods inventory, funding of accounts receivable,
capital expenditures and strategic business acquisitions. Historically, the
Company's primary sources of cash for its business activities have been cash
flows from operations and borrowings under its lines of credit and term loans.
At September 30, 1997, the Company had working capital of $16.4
million, compared to $21.1 million at March 31, 1997. The decrease in working
capital is primarily the result of borrowing on the Company's credit lines to
fund operating expenses during the first six months of fiscal 1998. In addition,
the Company used working capital in the current period to sustain growth and
finance a portion of its current expansion into the snowboard market through DNR
USA, DNR North America and DNR Japan.
On June 26, 1997, the Company entered into a sale-leaseback agreement.
Under this arrangement, the Company sold approximately $3.0 million of various
machinery and equipment and leased it back for a period of 7 years. The
leaseback has been accounted for as an operating lease. The gain of
approximately $0.2 million realized in this transaction has been deferred and
will be amortized to income in proportion to rental expense over the term of the
lease.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (continued)
At September 30, 1997, the Company's primary sources of liquidity
consisted of cash and short-term investments and available borrowings under
lines of credit. The Company has approximately $74.8 million in short-term
credit facilities, of which approximately $67.8 million had been borrowed as of
September 30, 1997. Substantially all of the Company's credit lines are secured
by inventory and receivables. The Company believes that it will have adequate
bank lines to meet its cash flow demands during fiscal 1998.
Recent Events
During the quarter, an arbitration hearing was conducted between Thomas
P. Sims ("Sims") and DNR Sportsystem Ltd. ("DNR"), the Company's 80% owned
subsidiary. The arbitration arose out of a claim filed by Sims against DNR for
breach of his licensing agreement (the "License") with DNR for the production
and distribution of snowboards and related products bearing the Sims trademark
outside of the United States and Canada. DNR responded with a counterclaim
against Sims for wrongful termination of the License and for breach of its right
of first refusal in the License. Sims had previously filed an action in the
Superior Court of California for the County of Santa Barbara (the "Superior
Court") against the Company and DNR and, on November 27, 1996, was granted a
preliminary injunction against the Company and DNR, preventing DNR from
manufacturing, shipping, selling or distributing snowboard products with the
Sims trademark, pending the outcome of the arbitration.
The arbitration hearing began on July 1, 1997 and was concluded on July
30, 1997. The arbitrator thereafter established a schedule for the exchange of
briefs, in lieu of closing arguments, that extended into early October 1997. The
arbitrator has advised that he will render a written decision on or before
December 2, 1997.
The preliminary injunction is not a final judgment and factual findings
made by the Superior Court in the preliminary injunction proceeding are not
binding upon the arbitrator. Under the terms of the License, the arbitrator's
award is binding on the parties and is not subject to appeal or further court
review except for extraordinary circumstances.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (continued)
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
1995
With the exception of historical information (information relating to
the Company's financial condition and results of operations at historical dates
or for historical periods), the matters discussed in this Management's
Discussion and Analysis of Financial Condition and Results of Operations are
forward-looking statements that necessarily are based on certain assumptions and
are subject to certain risks and uncertainties. These forward-looking statements
are based on management's expectations as of the date hereof, and the Company
does not undertake any responsibility to update any of these statements in the
future. Actual future performance and results could differ from that contained
in or suggested by these forward-looking statements as a result of the factors
set forth in this Management's Discussion and Analysis of Financial Condition
and Results of Operations, the Business Risks described in the Company's Report
on Form 10-K for the year ended March 31, 1997 and elsewhere in the Company's
filings with the Securities and Exchange Commission.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See the description set forth in Part I of this Quarterly Report on
Form 10-Q under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Recent Events." Such description updates
the information provided under the caption "Legal Proceedings" set forth in the
Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30,
1997.
18
<PAGE>
PART II - OTHER INFORMATION (Continued)
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
10.25 Sale/Leaseback Agreement with Zions Credit Corporation
for $3,000,000 of machinery and equipment related to
the Company's snowboard manufacturing subsidiary dated
June 26, 1997. (Filed as exhibit 10.25 to the Company's
Form 10-Q dated August 13, 1997 and incorporated herein
by reference).
27 Financial Data Schedule. *
b) Reports Filed on Form 8-K:
1. Current Report on Form 8-K dated July 22, 1997,
including the news release relating to a collaborative
arrangement between Marker International and NIKE, Inc.
relating to snowboarding products.
- ----------------------
* Filed herewith.
19
<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.
MARKER INTERNATIONAL
--------------------
Registrant
Dated: November 14, 1997 /s/ Henry E. Tauber
--------------------
Henry E. Tauber
Chairman of the Board,
President and Chief
Executive Officer
Dated: November 14, 1997 /s/ Terry J. Tuttle
--------------------
Terry J. Tuttle
Chief Financial Officer
20
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