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 December 31, 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 February 13, 1998
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 December 31, 1997 and March 31, 1997 3
Condensed Consolidated Statements of Operations
For the Three and Nine Months Ended
December 31, 1997 and 1996 5
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended
December 31, 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 19
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)
- -------------------------------------------------------------------------------------------------------------------
ASSETS
<CAPTION>
December 31, March 31,
1997 1997
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,220 $ 13,532
Accounts receivable, net of allowance for doubtful
accounts of $1,207 and $2,139, respectively 46,245 26,279
Inventories 38,979 33,849
Prepaid and other current assets 8,490 4,611
---------- ----------
Total current assets 98,934 78,271
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Land 1,050 1,050
Building and improvements 7,533 7,356
Machinery and equipment 20,619 25,302
Furniture, fixtures and office equipment 4,511 4,511
---------- ----------
33,713 38,219
Less accumulated depreciation and amortization (16,238) (18,941)
---------- ----------
Net property, plant and equipment 17,475 19,278
---------- ----------
INTANGIBLE ASSETS, net of accumulated amortization 16,768 17,475
---------- ----------
OTHER ASSETS 1,826 2,116
---------- ----------
$ 135,003 $ 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)
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
December 31, March 31,
1997 1997
---------- ----------
<S> <C> <C>
CURRENT LIABILITIES:
Notes payable to banks $ 64,804 $ 38,930
Current maturities of long-term debt 2,469 3,038
Current maturities of Series A Bonds, issued
to a related party 4,500 -
Accounts payable 5,189 5,393
Other current liabilities 6,216 9,785
---------- ----------
Total current liabilities 83,178 57,146
---------- ----------
LONG-TERM DEBT, net of current maturities 17,151 16,487
---------- ----------
SERIES A BONDS, issued to a related party 5,500 10,000
---------- ----------
MINORITY INTEREST 1,604 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) (2,305) 858
Cumulative foreign currency translation adjustments (6,535) (5,565)
---------- -----------
Total shareholders' equity 27,570 31,697
---------- -----------
$ 135,003 $ 117,140
========== ===========
</TABLE>
The accompanying notes to condensed consolidated
financial statements 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 Nine Months
Ended December 31, Ended December 31,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $ 39,362 $ 60,305 $ 70,642 $ 93,529
COST OF SALES 25,395 39,656 47,157 59,662
-------- -------- -------- --------
GROSS PROFIT 13,967 20,649 23,485 33,867
-------- -------- -------- --------
OPERATING EXPENSES:
Selling 4,683 4,950 11,164 10,450
General and administrative 937 4,121 8,668 8,710
Research and development 915 924 3,081 2,354
Warehousing and shipping 674 565 1,601 1,321
Amortization of goodwill and intangibles 138 - 554 -
-------- -------- -------- --------
7,347 10,560 25,068 22,835
-------- -------- -------- --------
OPERATING INCOME (LOSS) 6,620 10,089 (1,583) 11,032
-------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense (1,569) (1,326) (4,009) (3,611)
Equity in losses of unconsolidated
subsidiary - - - (281)
Other, net 86 713 548 655
-------- -------- -------- --------
(1,483) (613) (3,461) (3,237)
-------- -------- -------- --------
NET INCOME (LOSS) BEFORE INCOME TAXES AND
MINORITY INTEREST 5,137 9,476 (5,044) 7,795
(PROVISION) BENEFIT FOR
INCOME TAXES (1,849) (3,048) 1,816 (2,443)
MINORITY INTEREST (350) (1,010) 65 (1,010)
-------- -------- --------- --------
NET INCOME (LOSS) $ 2,938 $ 5,418 $ (3,163) $ 4,342
======== ======== ========= ========
NET INCOME (LOSS) PER
COMMON SHARE:
Basic $ 0.26 $ 0.49 $ (0.28) $ 0.43
======== ======== ======== ========
Diluted $ 0.26 $ 0.48 $ (0.28) $ 0.43
======== ======== ======== ========
WEIGHTED AVERAGE SHARES:
Basic 11,130,577 11,129,127 11,129,694 10,004,702
Diluted 11,184,445 11,186,925 11,164,969 10,092,222
</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 Nine Months
Ended December 31,
1997 1996
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (3,163) $ 4,342
Adjustments to reconcile net income to net cash
used in operating activities:
Minority interest in income (loss) (65) 1,010
Gain on sale of property, plant and equipment (89) -
Depreciation and amortization 3,841 2,756
Equity in earnings of unconsolidated subsidiary - 281
Change in assets and liabilities:
Increase in accounts receivable, net (20,646) (25,836)
Increase in inventories (7,042) (1,570)
Increase in prepaid and other assets (3,767) (1,567)
Increase in accounts payable 605 815
Increase (decrease) in other current liabilities (2,735) 4,516
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES (33,061) (15,253)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (5,694) (7,342)
Payment for purchase of DNR, net of cash acquired - (14,469)
Proceeds from disposition of equipment 3,768 591
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (1,926) (21,220)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on notes payable to banks 27,729 29,403
Proceeds from issuance of common stock, net 6 14,789
Proceeds from issuance of long-term debt 3,173 10,118
Principal payments on Series A Bonds - (3,500)
Principal payments on long-term debt (3,072) (2,582)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 27,836 48,228
--------- ---------
Effect of foreign exchange rate changes on cash (1,161) (76)
--------- ---------
Net increase (decrease) in cash and cash equivalents (8,312) 11,679
Cash and cash equivalents at beginning of period 13,532 6,189
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,220 $ 17,868
========= =========
</TABLE>
The accompanying 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 nine months ended December
31, 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):
December 31, 1997 March 31, 1997
------------------- --------------
Raw materials $ 463 $ 1,054
Work in process 3,807 2,739
Finished goods 34,709 30,056
---------- ----------
$ 38,979 $ 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 Nine Months Ended
(Unaudited and in thousands except per share amounts) -------------------------
December 31,
-------------
1997 1996
---- ----
(actual) (pro forma)
Net Sales $ 70,642 $ 112,399
Operating Income (Loss) (1,583) 11,421
Net Income (Loss) (3,163) 5,360
Net Income (Loss) per Common Share $ (0.28) $ 0.48
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 December 31, 1997 and March 31, 1997 accumulated amortization of
goodwill and intangible assets totaled approximately $1.1 million and $0.6
million, respectively.
8
<PAGE>
MARKER INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
As a result of the outcome of the arbitration proceedings (see Note 8
and Management's Discussion and Analysis) the Company may be required to
reassess the realizability of the carrying value of intangible assets associated
with the acquisition of DNR.
Note 6. New Pronouncements
The Company adopted the provisions of 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. Basic net income (loss) per common share (Basic EPS) excludes dilution
and is computed by dividing net income (loss) by the weighted average number of
common shares outstanding during the year. Diluted net income (loss) per common
share (Diluted EPS) reflects the potential dilution that could occur if stock
options were exercised or converted into common stock. The computation of
Diluted EPS does not assume exercise of stock options that would have an
antidilutive effect on net income (loss) per common share. Net income (loss) per
common share amounts have been restated for all periods presented to reflect
Basic and Diluted EPS.
For the quarters ended December 31, 1997 and 1996, there were
outstanding options to purchase 595,500 and 719,000 shares of common stock,
respectively, that were not included in the computation of Diluted EPS because
exercise prices of such the options were greater than the average market price
of common shares.
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.
9
<PAGE>
MARKER INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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.
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 as a result of a default by a counterparty is remote.
Note 8. Recent Events
As discussed in Note 4 above and in Management's Discussion and
Analysis of Financial Condition and Results of Operations the Company is
involved in arbitration proceedings between Thomas P. Sims ("Sims") and DNR, the
Company's 80% owned subsidiary.
Subsequent to December 31, 1997, the Company entered into an agreement
whereby it would recoup approximately $2,000,000 of the legal costs previously
expensed by the Company. This amount has been recorded as an offset to general
and administrative expenses in the accompanying condensed consolidated statement
of operations.
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, Marker Japan and Marker
Canada has its own sales force and marketing departments for sales and marketing
of bindings and related parts directly to retailers in the United States, to
both retailers and wholesalers in Japan and to retailers in Canada. Marker
Austria distributes the Company's ski bindings into Austria through an
independent sales force. 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"), Marker Germany, DNR Japan Co., Ltd. ("DNR Japan") and Marker Canada,
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, Marker Germany, DNR Japan and Marker Canada, through their own sales
forces, market snowboards, Interface Step-in SystemsTM, snowboard bindings and
boots directly to retailers in the United States, Germany, Austria, Japan and
Canada, 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 December 31, 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 15%, 11% and 11%, 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 nine months ended December 31, 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 16%, 10% and 16%, 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 December 31, 1997 with the three months
- --------------------------------------------------------------------------------
ended December 31, 1996
- -----------------------
Net sales for the quarter ended December 31, 1997 decreased to $39.4
million, compared to $60.3 million for the corresponding quarter of the prior
fiscal year. The decrease in sales is primarily attributable to lower sales at
the Company's 80% owned subsidiary, DNR, which recognized a reduction in net
sales of approximately $23.8 million for the quarter ended December 31, 1997,
compared to the corresponding quarter of the prior fiscal year. DNR's reduced
sales reflect an over-supply of snowboard products in the market and the
restructuring of the brand of snowboard products distributed by the Company.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (continued)
In addition, sales decreased as 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 third quarter of fiscal 1998,
compared to the corresponding quarter of the prior fiscal year.
Net sales increased during the third quarter of fiscal 1998 compared to
the corresponding period of the prior fiscal year at all of the Company's
subsidiaries, except DNR, as discussed above.
Gross profit for the quarter ended December 31, 1997 decreased to $14.0
million, or 35.5% of net sales, compared to $20.6 million, or 34.2% of net
sales, for the corresponding quarter of the prior fiscal year. The decrease in
gross profit was attributable to the reduced sales at DNR, as discussed above.
The increase in gross profit percentage is primarily attributable to the timing
of shipments of the new Logic 1(R) high-end binding, which carries both higher
gross margin dollars and percentage.
Operating expenses for the quarter ended December 31, 1997 decreased to
$7.3 million, compared to $10.6 million for the corresponding quarter of the
prior fiscal year. The decrease in operating expenses is primarily attributable
to the recoupment of approximately $2.0 million of legal fees that had been
expensed by the Company during the first and second quarter of fiscal 1998.
In addition, expenses decreased as a result of translating expenses of
the Company's foreign subsidiaries from their functional currency to Dollars. As
noted above, the Dollar was significantly stronger against all of the functional
currencies of the Company's foreign subsidiaries during the third quarter of
fiscal 1998, compared to the corresponding quarter of the prior fiscal year.
The income tax benefit recognized for each of the quarters ended
December 31, 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 nine months ended December 31, 1997 with the nine months ended
- --------------------------------------------------------------------------------
December 31, 1996
- -----------------
Net sales for the nine months ended December 31, 1997 decreased to
$70.6 million, compared to $93.5 million for the corresponding period of the
prior fiscal year. The decrease in sales is primarily attributable to lower
sales at the Company's 80% owned subsidiary, DNR, which recognized a reduction
in net sales of approximately $16.0 million for the nine months ended December
31, 1997, compared to the corresponding period of the prior fiscal year. Sales
also decreased as a result of translating sales of the Company's foreign
subsidiaries from their functional currency to Dollars.
Gross profit for the nine months ended December 31, 1997 decreased to
$23.5 million, or 33.2% of net sales, compared to $33.9 million, or 36.3% 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 lower sales
at DNR and lower gross profit recognized by DNR compared to the consolidated
gross profit of the Company's other subsidiaries. In addition, the Company
recognized negative gross margins as a result of under-utilization of the
Company's snowboard manufacturing facility.
Operating expenses for the nine months ended December 31, 1997
increased to $25.1 million, compared to $22.8 million for the corresponding
period of the prior fiscal year. The increase resulted primarily from (i) the
full year consolidation of DNR's operating expenses into those of the Company
which were approximately $2.0 million more for the nine months ended December
31, 1997, compared to the corresponding period of the prior fiscal year, (ii)
the recording of approximately $1.3 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. Operating expenses
decreased as a result of translating operating expenses of the Company's foreign
subsidiaries from their functional currency to Dollars.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (continued)
Interest expense for the nine months ended December 31, 1997 increased
to $4.0 million, compared to $3.6 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 nine month periods
ended December 31, 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 December 31, 1997, the Company had working capital of $15.7 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 nine 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 December 31, 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 $73.0 million in short-term
credit facilities, of which approximately $64.8 million had been borrowed as of
December 31, 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, a ruling was issued in an arbitration proceeding
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 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 connection with the transfer of the License by
Sims.
On December 1, 1997, the arbitrator issued an Interim Award which
resulted in a split decision. The arbitrator ruled that while Sims had a basis
for terminating the License for technical noncompliance, DNR was entitled to
damages against Sims for failure to honor DNR's right of first refusal to
purchase the Sims trademarks. The right of first refusal entitled DNR to match
the price and terms at which Sims sold his trademarks to a Boston investment
firm in a complex merger transaction in March of 1996. The arbitrator also
concluded that the soft boot/step-in binding system was developed by Marker,
Tecnica and DNR without any drawings or concepts that Sims claimed to have
provided, and that Marker is the owner of the soft boot/step-in binding system.
The arbitrator further ruled that DNR committed various breaches of the
License Agreement, primarily relating to defined sales percentages of Sims and
non-Sims products prior to 1995, change in technical control of DNR, and Sims'
option rights to purchase shares of DNR. The arbitrator, however, denied Sims'
claims that the quality of DNR's products did not meet specified standards and
that DNR's conduct after termination of the License constituted trademark
infringement.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (continued)
The arbitrator has scheduled Phase II of the arbitration to begin on
July 13, 1998 to determine the amount of damages for either party.
"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 those 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.
18
<PAGE>
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 September
30, 1997.
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 December 9, 1997,
including the news release relating to the
Arbitrator's decision in Phase I of the binding
American Arbitration Association proceeding between
DNR Sportstystem Ltd., an 80% owned subsidiary of
Marker, and Tom Sims.
- ----------------------
* 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: February 17, 1998 /s/ Henry E. Tauber
--------------------
Henry E. Tauber
Chairman of the Board,
President and Chief
Executive Officer
Dated: February 17, 1998 /s/ Kevin Hardy
----------------
Kevin Hardy
Chief Financial Officer
20
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