-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EOzzkCqK3o6Vg8qDyAb2f589ihcFGJxEZp8Omr/Cs8C+jTwjeG8Qe2ND6bmNHHW5 6Uay9pzTbcJi99fs7g6AmA== 0000912057-00-015063.txt : 20000331 0000912057-00-015063.hdr.sgml : 20000331 ACCESSION NUMBER: 0000912057-00-015063 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: K2 INC CENTRAL INDEX KEY: 0000006720 STANDARD INDUSTRIAL CLASSIFICATION: [3949] IRS NUMBER: 952077125 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-04290 FILM NUMBER: 587856 BUSINESS ADDRESS: STREET 1: 4900 S EASTERN AVE STREET 2: SUITE 200 CITY: LOS ANGELES STATE: CA ZIP: 90040 BUSINESS PHONE: 3237242800 MAIL ADDRESS: STREET 1: 4900 S EASTERN AVE STREET 2: SUITE 200 CITY: LOS ANGELES STATE: CA ZIP: 90040 FORMER COMPANY: FORMER CONFORMED NAME: ANTHONY INDUSTRIES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: ANTHONY POOLS INC DATE OF NAME CHANGE: 19720317 10-K/A 1 10-K/A - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K/A ANNUAL REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 ------------------------ 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 90040 LOS ANGELES, CALIFORNIA (Zip Code) (Address of principal executive offices)
Registrant's telephone number, including area code (323) 724-2800 Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED ------------------- ------------------------ Common Stock, par value $1 New York Stock Exchange Pacific Exchange Series A Preferred Stock Purchase Rights New York Stock Exchange Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act: None Indicate by an "X" whether the registrant 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 has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of the voting stock of the registrants held by nonaffiliates was approximately $130,135,325 as of March 7, 2000. Indicate the number of shares outstanding of each of the issuer's classes of common stock as of March 7, 2000. Common Stock, par value $1 17,949,700 Shares Documents Incorporated by Reference Portions of the proxy statement for the Annual Meeting of Shareholders to be held April 28, 2000 are incorporated by reference in Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA K2 INC. STATEMENTS OF CONSOLIDATED INCOME
YEAR ENDED DECEMBER 31 ------------------------------------------ 1999 1998 1997 ------------ ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE FIGURES) Net sales................................................... $635,105 $574,510 $559,030 Cost of products sold....................................... 462,033 418,950 391,860 -------- -------- -------- Gross profit.............................................. 173,072 155,560 167,170 Selling expenses............................................ 95,774 87,389 79,832 General and administrative expenses......................... 40,341 39,030 38,303 Research and development expenses........................... 12,113 12,391 11,979 -------- -------- -------- Operating income.......................................... 24,844 16,750 37,056 Interest expense............................................ 12,741 12,163 10,560 Other income, net........................................... (413) (236) (619) -------- -------- -------- Income from continuing operations before provision for income taxes............................................ 12,516 4,823 27,115 Provision for income taxes.................................. 4,005 955 7,815 -------- -------- -------- Income from continuing operations......................... 8,511 3,868 19,300 Discontinued operations, net of taxes....................... 1,332 975 2,600 -------- -------- -------- Net Income.................................................. $ 9,843 $ 4,843 $ 21,900 ======== ======== ======== Basic earnings per share: Continuing operations..................................... $ 0.50 $ 0.23 $ 1.17 Discontinued operations................................... 0.08 0.06 0.15 -------- -------- -------- Net income................................................ $ 0.58 $ 0.29 $ 1.32 ======== ======== ======== Diluted earnings per share: Continuing operations..................................... $ 0.50 $ 0.23 $ 1.15 Discontinued operations................................... 0.08 0.06 0.16 -------- -------- -------- Net income................................................ $ 0.58 $ 0.29 $ 1.31 ======== ======== ======== Basic shares outstanding.................................... 16,880 16,554 16,541 Diluted shares outstanding.................................. 16,883 16,637 16,713
See notes to consolidated financial statements 20 K2 INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31 --------------------- 1999 1998 --------- --------- (IN THOUSANDS, EXCEPT NUMBER OF SHARES) ASSETS CURRENT ASSETS Cash and cash equivalents................................. $ 9,421 $ 3,394 Accounts receivable, net.................................. 149,151 126,011 Inventories, net.......................................... 172,154 188,348 Deferred taxes and income taxes receivable................ 10,030 12,780 Prepaid expenses and other current assets................. 5,053 5,037 -------- -------- Total current assets.................................... 345,809 335,570 PROPERTY, PLANT AND EQUIPMENT Land and land improvements................................ 1,637 992 Buildings and leasehold improvements...................... 32,219 29,814 Machinery and equipment................................... 124,421 111,872 Construction in progress.................................. 4,176 8,393 -------- -------- 162,453 151,071 Less allowance for depreciation and amortization.......... 89,858 84,480 -------- -------- 72,595 66,591 OTHER ASSETS Intangibles, principally goodwill, net.................... 38,928 19,564 Net assets of discontinued operations..................... 24,706 27,511 Other..................................................... 5,840 3,759 -------- -------- Total Assets............................................ $487,878 $452,995 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Bank loans................................................ $ 57,359 $ 64,350 Accounts payable.......................................... 44,231 20,807 Accrued payroll and related............................... 19,781 15,982 Other accruals............................................ 32,808 21,555 Current portion of long-term debt......................... 4,444 4,444 -------- -------- Total current liabilities............................... 158,623 127,138 Long-term Debt.............................................. 107,280 110,724 Deferred Taxes.............................................. 3,455 13,014 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Preferred Stock, $1 par value, authorized 12,500,000 shares, none issued Common Stock, $1 par value, authorized 40,000,000 shares, issued shares--18,672,646 in 1999 and 17,190,652 in 1998.................................................... 18,673 17,191 Additional paid-in capital................................ 143,326 132,488 Retained earnings......................................... 75,248 67,227 Employee Stock Ownership Plan and stock option loans...... (1,975) (1,981) Treasury shares at cost, 733,110 in 1999 and 623,759 in 1998.................................................... (8,992) (8,106) Accumulated other comprehensive loss...................... (7,760) (4,700) -------- -------- Total Shareholders' Equity.............................. 218,520 202,119 -------- -------- Total Liabilities and Shareholders' Equity.............. $487,878 $452,995 ======== ========
See notes to consolidated financial statements 21 K2 INC. STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1999 --------------------------------------------------------------------------------------- EMPLOYEE STOCK ACCUMULATED ADDITIONAL OWNERSHIP TREASURY OTHER COMMON PAID-IN RETAINED PLAN AND STOCK SHARES, COMPREHENSIVE STOCK CAPITAL EARNINGS OPTION LOANS AT COST LOSS TOTAL -------- ---------- -------- -------------- -------- ------------- -------- (IN THOUSANDS EXCEPT PER SHARE FIGURES) BALANCE AT DECEMBER 31, 1996............. $17,132 $131,627 $55,047 $(7,087) $(6,719) $(1,012) $188,988 Net income for the year 1997........................ 21,900 21,900 Translation adjustments....... (3,905) (3,905) -------- Comprehensive income.......... 17,995 Exercise of stock options..... 28 459 487 Cash dividends, $.44 per share....................... (7,279) (7,279) Repurchase of shares and stock option loan repayments...... 1,070 (1,387) (317) Employee Stock Ownership Plan, amortization, loan and partial loan repayment...... 3,011 3,011 ------- -------- ------- ------- ------- ------- -------- BALANCE AT DECEMBER 31, 1997............. 17,160 132,086 69,668 (3,006) (8,106) (4,917) 202,885 Net income for the year 1998........................ 4,843 4,843 Translation adjustments....... 217 217 -------- Comprehensive income.......... 5,060 Exercise of stock options..... 31 402 433 Cash dividends, $.44 per share....................... (7,284) (7,284) Stock option loan(s).......... (96) (96) Employee Stock Ownership Plan, amortization, loan and partial loan repayment...... 1,121 1,121 ------- -------- ------- ------- ------- ------- -------- BALANCE AT DECEMBER 31, 1998............. 17,191 132,488 67,227 (1,981) (8,106) (4,700) 202,119 Net income for the year 1999........................ 9,843 9,843 Translation adjustments....... (3,060) (3,060) -------- Comprehensive income.......... 6,783 Issuance of shares from acquisition of Ride, Inc.... 1,482 10,838 12,320 Repurchase of shares.......... (886) (886) Cash dividends, $.11 per share....................... (1,822) (1,822) Stock option loan(s).......... (4) (4) Employee Stock Ownership Plan, amortization, loan and partial loan repayment...... 10 10 ------- -------- ------- ------- ------- ------- -------- BALANCE AT DECEMBER 31, 1999............. $18,673 $143,326 $75,248 $(1,975) $(8,992) $(7,760) $218,520 ======= ======== ======= ======= ======= ======= ========
See notes to consolidated financial statements 22 K2 INC. STATEMENTS OF CONSOLIDATED CASH FLOWS
YEAR ENDED DECEMBER 31 ------------------------------- 1999 1998 1997 --------- -------- -------- (THOUSANDS) OPERATING ACTIVITIES Income from continuing operations......................... $ 8,511 $ 3,868 $ 19,300 Gain on sale of investments............................... (3,500) Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities: Depreciation of property, plant and equipment........... 11,685 11,183 10,313 Amortization of intangibles............................. 2,041 1,556 1,261 Deferred taxes and income taxes receivable.............. (6,522) (4,515) (1,476) Changes in operating assets and liabilities: Accounts receivable................................... (10,653) (13,521) (27,638) Inventories........................................... 25,830 (5,353) (31,813) Prepaid expenses and other current assets............. 283 1,438 (1,139) Accounts payable...................................... 14,389 (16,500) 4,325 Payrolls and other accruals........................... 1,867 (828) 4,733 --------- -------- -------- Net cash provided by (used in) continuing operations...... 47,431 (22,672) (25,634) INVESTING ACTIVITIES Property, plant and equipment expenditures................ (16,204) (17,257) (19,425) Disposals of property, plant and equipment................ 4,013 1,527 298 Purchases of businesses, net of cash acquired............. (2,629) (834) Proceeds on sale of investments........................... 9,908 Other items, net.......................................... 99 (729) (5,654) --------- -------- -------- Net cash used in investing activities..................... (14,721) (16,459) (15,707) FINANCING ACTIVITIES Borrowings under long-term debt........................... 125,035 62,500 51,892 Payments of long-term debt................................ (128,479) (40,444) (52,755) Net increase (decrease) in short-term bank loans.......... (22,749) 15,383 41,658 Net proceeds from accounts receivable facility............ 3,275 Exercise of stock options................................. 433 487 Dividends paid............................................ (1,822) (7,284) (7,279) Net repayments by ESOP.................................... 1,107 3,000 --------- -------- -------- Net cash (used in) provided by financing activities....... (28,015) 31,695 40,278 --------- -------- -------- Net increase (decrease) in cash and cash equivalents from continuing operations..................................... 4,695 (7,436) (1,063) DISCONTINUED OPERATIONS Income from discontinued operations....................... 1,332 975 2,600 Adjustments to reconcile income from discontinued operations to net cash used in discontinued operations: Depreciation and amortization........................... 2,939 2,844 2,652 Capital expenditures.................................... (2,565) (3,442) (4,303) Other items, net........................................ (374) 4,747 (4,734) --------- -------- -------- Cash provided by (used in) discontinued operations.......... 1,332 5,124 (3,785) --------- -------- -------- Net increase (decrease) in cash and cash equivalents........ 6,027 (2,312) (4,848) Cash and cash equivalents at beginning of year.............. 3,394 5,706 10,554 --------- -------- -------- Cash and cash equivalents at end of year.................... $ 9,421 $ 3,394 $ 5,706 ========= ======== ========
See notes to consolidated financial statements 23 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION K2 is a leading designer, manufacturer and marketer of brand name sporting goods, which represent $474.3 million, or 74.7%, of K2's 1999 consolidated net sales, and other recreational products, which represent $41.0 million in 1999 net sales. K2 is also a manufacturer and supplier of selected industrial products, which had sales of $119.8 million in 1999. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of K2 and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. FISCAL PERIODS K2 maintains its books using a 52/53 week year ending on the last Sunday of December. For purposes of the consolidated financial statements, the year end is stated as of December 31. The years ended December 31, 1999, 1998 and 1997 consisted of 52 weeks. REVENUE RECOGNITION K2 recognizes revenue from product sales upon shipment to its customers. USE OF ESTIMATES The preparation of financial statements in conformity with Generally Accepted Accounting Principles ("GAAP") requires management to make estimates and assumptions affecting the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual amounts could differ from those estimates. FOREIGN CURRENCY TRANSLATION The functional currency for most foreign operations is the local currency. The financial statements of foreign subsidiaries have been translated into United States dollars. Asset and liability accounts have been translated using the exchange rate in effect at the balance sheet date. Revenue and expense accounts have been translated using the average exchange rate for the year. The gains and losses associated with the translation of the financial statements resulting from the changes in exchange rates from year to year have been reported in the other comprehensive income or loss account in shareholders' equity. Transaction gains or losses, other than intercompany debt deemed to be of a long-term nature, are included in net income in the period in which they occur. CASH EQUIVALENTS Short-term investments (including any debt securities) that are part of K2's cash management portfolio are classified as cash equivalents and are carried at amortized cost. These investments are highly liquid, are of limited credit risk and have original maturities of three months or less when purchased. The carrying amount of cash equivalents approximates market. 24 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ACCOUNTS RECEIVABLE AND ALLOWANCES Accounts receivable are the result of K2's worldwide sales activities. Although K2's credit risk is spread across a large number of customers within a wide geographic area, periodic concentrations within a specific industry occur due to the seasonality of its businesses. At December 31, 1999 and 1998, K2's receivables from sporting goods retailers who sell skis, skates, snowboards and bikes amounted to 71% and 66%, respectively of total receivables. K2 generally does not require collateral and performs periodic credit evaluations to manage its credit risk. Accounts receivable are net of allowances for doubtful accounts of $6,572,000 and $5,798,000 at December 31, 1999 and 1998, respectively. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined on the LIFO method with respect to approximately 14% and 23% of total inventories at December 31, 1999 and 1998, respectively. Cost was determined on the FIFO method for all other inventories. LONG-LIVED ASSETS Long-lived assets, include, among others, goodwill, intangible assets, and property, plant and equipment and are reviewed periodically to determine if the carrying values are not impaired. K2 considers the future undiscounted cash flows of the acquired companies in assessing the recoverability of these assets. If indicators of impairment are present, or if long-lived assets are expected to be disposed of, impairment losses are recorded. Any impairment is charged to expense in the period in which the impairment is incurred. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost. Depreciation is provided on the straight-line method based upon the estimated useful lives of the assets. In the fourth quarter of 1999, K2 wrote down certain equipment in connection with the restructuring of its ski and snowboard operations no longer in use. In the third quarter of 1998, K2 wrote down certain equipment related to its bike product line no longer in use. INTANGIBLES Goodwill arising from acquisitions is amortized on a straight-line basis over a period ranging from 15 to 40 years. Other intangibles are amortized on a straight-line basis over 3 to 15 years. Accumulated amortization of intangibles as of December 31, 1999 and 1998, amounted to $8,867,000 and $7,259,000, respectively. STOCK-BASED COMPENSATION AND OTHER EQUITY INSTRUMENTS K2 and its subsidiaries account for employee and directors' stock option grants using the intrinsic method. Generally, the exercise price of K2's employee stock options equals or exceeds the market price of the underlying stock on the date of grant and no compensation expense is recognized. If the option price is less than the fair value, K2 records compensation expense over the vesting period of the option. Options 25 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) granted to non-employees are accounted for using the fair value method. K2 disclosed the pro forma effects of using the fair value method for all option plans in the accompanying financial statements. ADVERTISING COSTS Advertising costs are expensed as incurred. Advertising costs for the years ended December 31, 1999, 1998 and 1997 amounted to $23,680,000, $21,903,000 and $20,548,000, respectively. RESEARCH AND DEVELOPMENT Research and development costs are charged to expense as incurred. OTHER INCOME Other income includes interest income, royalties and other miscellaneous income INCOME TAXES Income taxes are recorded using the liability method. EARNINGS PER SHARE Basic earnings per share ("EPS") are 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 dilutive effects of stock options included in the dilutive EPS calculation at December 31, 1999, 1998 and 1997 were 3,000, 83,000 and 171,000, respectively. During 1999, 1998 and 1997, the computation of diluted EPS did not include the options to purchase 1,064,000, 542,000 and 4,500 shares of common stock, respectively, because their inclusion would have been antidilutive. NEWLY ISSUED ACCOUNTING STANDARDS Effective in 2001 accounting for gains or losses resulting from changes in the value of derivatives would be changed depending on the use of the derivative and whether they qualify for hedge accounting. The adoption of this new requirement is not expected to have a material impact on the financial position or results of operations of K2. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform with the current year presentation. NOTE 2--CHARGES AGAINST EARNINGS In the fourth quarter of 1999, a pre-tax charge of $10.5 million was charged to cost of products sold to cover restructuring costs of $6.5 million and downsizing costs of $4.0 million. K2's strategic initiative was adopted in 1999 to reduce the cost structure of its ski and snowboard operations by taking advantage of lower cost manufacturing and sourcing opportunities. In accordance with the initiative, K2's Seattle manufacturing facility has been downsized and approximately half of its ski and all of its snowboard 26 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 2--CHARGES AGAINST EARNINGS (CONTINUED) manufacturing have been moved to either K2's China or California production facilities or to third party sourcing operations worldwide. The restructuring charge reflects expenses associated with the write-off of related equipment and inventory, the reduction of approximately 200 production personnel and the utilization of approximately 200 temporary workers. The downsizing costs were incurred in 1999 as a result of reducing the size of the Seattle manufacturing facility. Approximately $5.3 million of the total amount is cash related. The following table summarizes the activity in 1999:
SEVERANCE EQUIPMENT INVENTORY AND RELATED SUBTOTAL DOWNSIZING TOTAL --------- --------- ----------- -------- ---------- -------- (THOUSANDS) 1999 Charges......................... $3,355 $2,229 $923 $6,507 $3,993 $10,500 UTILIZED: Cash............................... 500 130 630 3,852 4,482 Non-cash........................... 3,355 1,132 4,487 141 4,628 ------ ------ ---- ------ ------ ------- 3,355 1,632 130 5,117 3,993 9,110 Balance December 31, 1999............ $ -- $ 597 $793 $1,390 $ -- $ 1,390 ====== ====== ==== ====== ====== =======
In the third quarter of 1998, a pre-tax charge of $14.5 million was included in earnings from continuing operations. Of this amount, $10.5 million was charged to cost of products sold to write down certain categories of bike and skate inventories as a result of a sudden change in the market demand for those products. The balance of the charge was recorded in general and administrative expenses for costs associated with the change in the bike business and implementing planned cost reduction programs at the winter sports operations. The charges primarily related to non-cash items. At December 31, 1999, in addition to the reserves in the table above, approximately $13.5 million of the 1998 charges had been utilized with approximately $2.1 million of reserves remaining primarily against inventory and accounts receivable. These reserves are expected to be utilized in the year 2000, with no significant cash outflow, as the related inventory is disposed of and the accounts receivable balances are written off. In 1997, a pre-tax restructuring charge of $2.4 million was recorded in connection with the announcement of K2's plan to consolidate its mountain bike and outdoor equipment operations into its existing facility on Vashon Island, Washington, and to move its production of outdoor products to outside sources. The restructuring was completed during 1998. NOTE 3--DISCONTINUED OPERATIONS On September 10, 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. Accordingly, Simplex is shown in the accompanying consolidated financial statements as a discontinued operation. Income from discontinued operations are net of taxes of $718,000, $525,000 and $1,400,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Net assets of discontinued operations were segregated in the accompanying consolidated balance sheets and consisted primarily of accounts receivable, inventories and fixed assets, offset by accounts payable, accrued payroll and related items and other accruals. Net sales of $72,985,000, $86,616,000 and $87,903,000 for the years ended December 31, 1999, 27 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 3--DISCONTINUED OPERATIONS (CONTINUED) 1998 and 1997, respectively, were excluded from consolidated net sales in the accompanying consolidated statements of income. 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. Under the terms of the merger, each share of Ride common and preferred stock was converted into 1/10 share of common stock of K2. Based on the number of preferred and common shares outstanding of Ride as of the acquisition date, approximately 1,482,000 shares of K2's common stock were issued to the Ride shareholders and the purchase price was valued at $12.3 million. This transaction was accounted for using the purchase method of accounting; accordingly, the purchased assets and liabilities have been recorded at their estimated fair values at the date of the acquisition. The preliminary purchase price allocation resulted in an excess of cost over net assets acquired of approximately $15.3 million, to be amortized on a straight-line basis over 20 years. 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)
FOR THE YEAR ENDED DECEMBER 31, -------------------------- 1999 1998 ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales............................................ $653,582 $616,288 Loss from continuing operations...................... (11,440) (5,008) Loss per common share................................ (.63) (.28)
On March 26, 1999, K2 acquired certain assets relating to the Morrow snowboard business, including the Morrow trademark, from Morrow Snowboards, Inc. The net cash purchase price was approximately $3.0 million. The purchase price allocation resulted in an excess of cost over net assets acquired of approximately $1.7 million, to be amortized on a straight-line basis over 15 years. The results of operations related to the acquisition have been included in the consolidated financial statements since the date of acquisition. The acquisition did not have a material pro forma impact on operations. On August 19, 1998, K2 purchased the remaining 65% of shares of K2 Japan Corporation not previously owned by K2. K2 Japan Corporation is a distributor of K2 branded products located in Japan. The transaction was accounted for using the purchase method of accounting and the results of operations from this business have been included in the consolidated statements of income from the date of acquisition. The purchase price of the acquisition was not material. The fair value of the liabilities of K2 28 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 4--ACQUISITIONS (CONTINUED) Japan Corporation at the acquisition date approximated the fair value of the assets acquired including $2.7 million of goodwill to be amortized over 25 years. NOTE 5--INVENTORIES Inventories consisted of the following at December 31:
1999 1998 -------- -------- (THOUSANDS) Finished goods.......................................... $129,429 $146,233 Work in process......................................... 10,573 8,078 Raw materials........................................... 34,228 37,911 -------- -------- Total at lower of FIFO cost or market (approximates current cost)....................................... 174,230 192,222 Less LIFO valuation reserve............................. 2,076 3,874 -------- -------- $172,154 $188,348 ======== ========
NOTE 6--BORROWINGS AND OTHER FINANCIAL INSTRUMENTS At December 31, 1999, K2 had $84.6 million under foreign and domestic short-term lines of credit with $56.8 million outstanding and no borrowings available under K2's debt covenant restrictions. The foreign subsidiaries' lines of credit generally have no termination date but are reviewed annually for renewal and are denominated in the subsidiaries' local currencies. At December 31, 1999, interest rates on short-term lines of credit ranged from 2.1% to 11.2%. The weighted average interest rates on short-term lines of credit as of December 31, 1999 and 1998 were 6.5% and 4.4%, respectively. 29 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 6--BORROWINGS AND OTHER FINANCIAL INSTRUMENTS (CONTINUED) The principal components of long-term debt at December 31 were:
1999 1998 -------- -------- (THOUSANDS) Notes payable due in seven equal annual principal installments through 2009 with annual interest payable at 8.41%.............................................. $ 50,000 Notes payable due in six equal annual principal installments through 2004 with semi-annual interest payable at 8.39%...................................... 22,224 $ 26,668 $75 million five-year unsecured bank revolving credit line due September 30, 2004, interest payments due at LIBOR plus 1.00% to 2.00% and a commitment fee of 0.225% to 0.50% on the unused portion of the line through September 30, 2004............................ 39,500 $100 million bank revolving credit line replaced by the $75 million credit line described above............... 88,500 -------- -------- 111,724 115,168 Less-amounts due within one year........................ 4,444 4,444 -------- -------- $107,280 $110,724 ======== ========
The principal amount of long-term debt maturing in each of the five years following 1999 is:
(THOUSANDS) 2000........................................................ $ 4,444 2001........................................................ 4,444 2002........................................................ 4,444 2003........................................................ 11,587 2004........................................................ 51,091 Thereafter.................................................. 35,714 -------- $111,724 ========
Interest paid on short- and long-term debt for the years ended December 31, 1999, 1998 and 1997 was $12.7 million, $12.2 million and $10.6 million, respectively. Under an accounts receivable arrangement, K2 can sell with limited recourse, undivided participation interests in designated pools of accounts receivable for a period of up to five years, in an amount not to exceed $50 million. Under this arrangement, $50 million of accounts receivables as of December 31, 1999 and 1998, were sold. The $75 million credit line and the accounts receivable arrangement, among other things, restrict amounts available for payment of cash dividends and stock repurchases by K2. As of December 31, 1999, $9.3 million of retained earnings were free of such restrictions. The interest rate on the $75 million credit line at December 31, 1999 was 8.5%. K2 had $21.0 million of letters of credit outstanding as of December 31, 1999. 30 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 6--BORROWINGS AND OTHER FINANCIAL INSTRUMENTS (CONTINUED) The carrying amounts for the short-term lines of credit and the long-term bank revolving credit line approximate their fair value since floating interest rates are charged, which approximate market rates. The fair value of the $50.0 million 8.41% notes payable, based on quoted market price, is $46.6 million as compared to a carrying amount of $50.0 million. The fair value of the $22.2 million 8.39% notes payable, based on quoted market price, is $21.0 million as compared to a carrying amount of $22.2 million. K2, including its foreign subsidiaries, enters forward exchange contracts to hedge certain firm and anticipated sales and purchase commitments which are denominated in U.S. or foreign currencies. The purpose of the foreign currency hedging activities is to reduce K2's risk of fluctuating exchange rates. At December 31, 1999, K2 had foreign exchange contracts with maturities of within one year to exchange various foreign currencies to dollars in the aggregate amount of $33.6 million, and with a fair market value of approximately $33.2 million based on current market rates. The fair value of these contracts, represented a net unrealized gain of approximately $438,000 as of December 31, 1999 and will be recognized in earnings when the underlying transaction occurs. Counterparties on foreign exchange contracts expose K2 to credit losses in the event of non-performance, but K2 does not anticipate non-performance. NOTE 7--INCOME TAXES Pretax income from continuing operations for the years ended December 31 was taxed under the following jurisdictions:
1999 1998 1997 -------- -------- -------- (THOUSANDS) Domestic......................................... $ 6,365 $(2,543) $22,003 Foreign.......................................... 6,151 7,366 5,112 ------- ------- ------- $12,516 $ 4,823 $27,115 ======= ======= =======
Components of the income tax provision applicable to continuing operations for the three years ended December 31 are:
1999 1998 1997 ------------------- ------------------- ------------------- CURRENT DEFERRED CURRENT DEFERRED CURRENT DEFERRED -------- -------- -------- -------- -------- -------- (THOUSANDS) Federal.................. $ 9,147 $(7,317) $1,525 $(2,825) $8,140 $(1,695) State.................... 705 (25) 575 70 60 470 Foreign.................. 2,050 (555) 2,115 (505) 405 435 ------- ------- ------ ------- ------ ------- $11,902 $(7,897) $4,215 $(3,260) $8,605 $ (790) ======= ======= ====== ======= ====== =======
31 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 7--INCOME TAXES (CONTINUED) The principal elements accounting for the difference between the statutory federal income tax rate and the effective tax rate for the three years ended December 31 are:
1999 1998 1997 -------- -------- -------- (PERCENT) Statutory federal income tax rate...................... 35.0 35.0 35.0 State income tax effect, net of federal benefit........ 3.5 8.7 1.3 Valuation allowance and foreign earnings............... (5.5) (20.5) (6.1) Other.................................................. (1.0) (3.4) (1.4) ----- ----- ----- 32.0 19.8 28.8 ===== ===== =====
No provision for United States income taxes has been made on undistributed earnings of foreign subsidiaries, since these earnings are considered to be permanently reinvested. At December 31, 1999, foreign subsidiaries had unused operating loss carryforwards of approximately $6.1 million of which approximately $260,000 expires in 2001 and the remainder carries forward indefinitely. Since the use of these operating loss carryforwards is limited to future taxable earnings of the related foreign subsidiaries, a valuation allowance has been recognized to offset the deferred tax assets arising from such carryforwards. The valuation allowance, which is included in the tax effect of foreign earnings above, was reduced by $0.3 million in 1999 and $1.6 million in 1998, due to the utilization of the related operating loss carryforwards, and increased in 1997 by a net $4.1 million due to a previously unusable foreign loss carryforward which became usable. At the acquisition date, Ride had federal net operating loss carryovers. The ability of K2 to utilize these losses to reduce future tax due is very limited. For financial reporting purposes, the realization of these carryovers, if any, will reduce goodwill recorded on the acquisition of Ride. 32 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 7--INCOME TAXES (CONTINUED) Deferred tax assets and liabilities are comprised of the following at December 31:
1999 1998 -------- -------- (THOUSANDS) Deferred tax liabilities: Depreciation and amortization of property, plant and equipment............................................... $ 5,618 $ 5,078 Trademark amortization.................................... 390 364 Other..................................................... 1,758 7,572 ------- ------- Deferred tax liabilities................................ 7,766 13,014 Deferred tax assets: Insurance accruals........................................ 2,044 1,426 Tax effect of foreign loss carryforwards.................. 3,063 2,999 Tax effect of domestic loss carryforwards................. 3,000 0 Bad debt reserve.......................................... 1,167 1,207 Inventory reserve......................................... 1,106 2,038 Other..................................................... 11,112 8,109 ------- ------- 21,492 15,779 Valuation allowance....................................... 6,063 2,999 ------- ------- Current deferred tax assets............................. 15,429 12,780 ------- ------- Deferred tax (assets) liabilites, net..................... $(7,663) $ 234 ======= =======
Income taxes paid, net of refunds, in the years ended December 31, 1999, 1998 and 1997 were $9.0 million, $5.3 million and $10.9 million, respectively. NOTE 8--COMMITMENTS AND CONTINGENCIES Future minimum payments under noncancelable operating leases as of December 31, 1999 are as follows:
(THOUSANDS) 2000........................................................ $ 5,166 2001........................................................ 4,239 2002........................................................ 2,271 2003........................................................ 1,532 2004........................................................ 787 Thereafter.................................................. 211 ------- $14,206 =======
Leases are primarily for rentals of facilities, and about two-thirds of these contain rights to extend the terms from one to ten years. 33 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 8--COMMITMENTS AND CONTINGENCIES (CONTINUED) Net rental expense, including those rents payable under noncancelable leases and month-to-month tenancies, amounted to $4,797,000, $4,417,000 and $3,684,000 for the years ended December 31, 1999, 1998 and 1997, respectively. K2 has not experienced any substantial difficulty in obtaining raw materials, parts or finished goods inventory for its sporting goods and other recreational products businesses. Certain components and finished products, however, are manufactured or assembled abroad and therefore could be subject to interruption as a result of local unrest, currency exchange fluctuations, increased tariffs, trade difficulties and other factors. Major portions of K2's in-line skates are manufactured by a single supplier. K2 believes alternate sources for these products could be found. 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 an Environmental Protection Agency matter 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 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 has developed estimates based upon cost analyses and other available information for this particular site. K2 accrues for these costs when it is probable a liability has been incurred and the amount can be reasonably estimated. At December 31, 1999 and 1998, K2 had recorded an estimated liability of approximately $806,000 and $963,000, respectively, with no provision for expected insurance recovery. The ultimate outcome of these matters cannot be predicted with certainty, however, management does not believe these matters will have a material adverse effect on K2's financial statements. NOTE 9--PENSION PLANS AND OTHER BENEFIT PLANS K2 sponsors several trusteed noncontributory defined benefit pension plans covering most of its employees. Benefits are generally based on years of service and the employee's highest compensation for five consecutive years during the years of credited service. Contributions are intended to provide for benefits attributable to service to date and service expected to be provided in the future. K2 funds these plans in accordance with the Employee Retirement Income Security Act of 1974. K2 also sponsors defined contribution pension plans covering most of its domestic employees. Contributions by K2 for the defined contribution plans are determined as a percent of the amounts contributed by the respective employees. During 1999, 1998 and 1997, K2 expensed contributions of $940,000, $928,000 and $753,000, respectively, related to these plans. 34 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 9--PENSION PLANS AND OTHER BENEFIT PLANS (CONTINUED) The following table sets forth the defined benefit plans' funded status and amounts recognized in K2's consolidated balance sheets at December 31:
PENSION PLAN ------------------- 1999 1998 -------- -------- (THOUSANDS) CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year.................. $ 58,411 $51,896 Service cost............................................. 2,089 1,749 Interest cost............................................ 4,041 3,796 Actuarial (gain) loss.................................... (8,294) 3,994 Benefits paid............................................ (3,085) (3,024) -------- ------- Benefit obligation at end of year........................ $ 53,162 $58,411 ======== ======= CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year........... $ 50,611 $48,432 Actual return on fair value of plan assets............... 9,531 4,884 Employer contributions................................... 319 319 Benefits paid............................................ (3,085) (3,024) -------- ------- Fair value of plan assets at end of year................. 57,376 50,611 -------- ------- Funded status of the plan................................ 4,214 (7,800) Unrecognized prior service cost.......................... 1,146 1,283 Unrecognized net transition asset........................ (65) (275) Unrecognized actuarial (gain) loss....................... (10,705) 2,666 -------- ------- Accrued benefit cost..................................... $ (5,410) $(4,126) ======== ======= WEIGHTED AVERAGE ASSUMPTIONS Discount rate............................................ 7.75% 6.75% Expected return on plan assets........................... 9.00% 9.00% Rate of compensation increase............................ 5.00% 5.00%
The actuarial gains included in the benefit obligation for 1999 are the result of the increase in the discount rate assumption made for the year as well as a change in demographic data. The actuarial losses included in the benefit obligation for 1998 are primarily the result of a decrease in the discount rate assumption made for the year. 35 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 9--PENSION PLANS AND OTHER BENEFIT PLANS (CONTINUED) Net pension cost consisted of the following for the year ended December 31:
PENSION PLAN ------------------------------ 1999 1998 1997 -------- -------- -------- (THOUSANDS) NET PERIODIC COST Service cost...................................... $ 2,089 $ 1,749 $ 1,707 Interest cost..................................... 4,041 3,796 3,698 Expected return on plan assets.................... (4,474) (4,280) (3,857) Amortization of prior service cost................ 137 139 110 Amortization of transition asset.................. (210) (210) (210) Amortization of loss.............................. 20 13 24 ------- ------- ------- Net periodic cost................................. $ 1,603 $ 1,207 $ 1,472 ======= ======= =======
36 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 10--QUARTERLY OPERATING DATA (UNAUDITED)
QUARTER -------------------------------------------- FIRST SECOND THIRD FOURTH (A) YEAR (B) -------- -------- -------- ----------- --------- (IN MILLIONS, EXCEPT PER SHARE FIGURES) 1999 Net sales from continuing operations.............. $163.0 $158.3 $139.9 $173.9 $635.1 Gross profit...................................... 44.3 48.2 43.7 36.9 173.1 Income (loss) from continuing operations.......... 3.1 7.1 3.3 (5.0) 8.5 Discontinued operations, net of taxes............. 0.1 0.9 0.0 0.3 1.3 ------ ------ ------ ------ ------ Net income (loss)................................. $ 3.2 $ 8.0 $ 3.3 $ (4.7) $ 9.8 ====== ====== ====== ====== ====== Basic earnings (loss) per share Continuing operations........................... $ 0.19 $ 0.43 $ 0.20 $(0.29) $ 0.50 Discontinued operations......................... 0.01 0.05 0.00 0.02 0.08 ------ ------ ------ ------ ------ Net income (loss)............................... $ 0.20 $ 0.48 $ 0.20 $(0.27) $ 0.58 ====== ====== ====== ====== ====== Diluted earnings (loss) per share Continuing operations........................... $ 0.19 $ 0.43 $ 0.20 $(0.29) $ 0.50 Discontinued operations......................... 0.01 0.05 0.00 0.02 0.08 ------ ------ ------ ------ ------ Net income (loss)............................... $ 0.20 $ 0.48 $ 0.20 $(0.27) $ 0.58 ====== ====== ====== ====== ====== Cash dividend per share........................... $ 0.11 $ -- $ -- $ -- $ 0.11 Stock prices: High............................................ $11.63 $11.63 $10.56 $ 8.94 $11.63 Low............................................. $ 8.56 $ 7.88 $ 8.81 $ 6.94 $ 6.94
- ------------------------ (a) Gross profit, income from continuing operations and net income are $47.4, $2.1and $2.4, respectively, before restructuring costs totaling $6.5 ($4.4 net of taxes) and downsizing costs totaling $4.0 ($2.7 net of taxes). See Note 2 to Notes to Consolidated Financial Statements. (b) Gross profit, income from continuing operations and net income are $183.6, $15.7 and $17.0, respectively, before restructuring costs totaling $6.5 ($4.4 net of taxes) and downsizing costs totaling $4.0 ($2.7 net of taxes). See Note 2 to Notes to Consolidated Financial Statements. 37 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 10--QUARTERLY OPERATING DATA (UNAUDITED) (CONTINUED)
QUARTER ------------------------------------------- FIRST SECOND THIRD (A) FOURTH YEAR (B) -------- -------- ---------- -------- --------- (IN MILLIONS, EXCEPT PER SHARE FIGURES) 1998 Net sales from continuing operations............... $151.0 $156.8 $133.9 $132.8 $574.5 Gross profit....................................... 41.5 47.7 29.4 37.0 155.6 Income (loss) from continuing operations........... 2.7 7.4 (7.9) 1.6 3.8 Discontinued operations, net of taxes.............. 0.4 0.7 (0.4) 0.3 1.0 ------ ------ ------ ------ ------ Net income (loss).................................. $ 3.1 $ 8.1 $ (8.3) $ 1.9 $ 4.8 ====== ====== ====== ====== ====== Basic earnings (loss) per share Continuing operations............................ $ 0.16 $ 0.45 $(0.48) $ 0.10 $ 0.23 Discontinued operations.......................... 0.03 0.04 (0.03) 0.02 0.06 ------ ------ ------ ------ ------ Net income (loss)................................ $ 0.19 $ 0.49 $(0.51) $ 0.12 $ 0.29 ====== ====== ====== ====== ====== Diluted earnings (loss) per share Continuing operations............................ $ 0.16 $ 0.45 $(0.48) $ 0.10 $ 0.23 Discontinued operations.......................... 0.03 0.04 (0.03) 0.02 0.06 ------ ------ ------ ------ ------ Net income (loss)................................ $ 0.19 $ 0.49 $(0.51) $ 0.12 $ 0.29 ====== ====== ====== ====== ====== Cash dividend per share............................ $ 0.11 $ 0.11 $ 0.11 $ 0.11 $ 0.44 Stock prices: High............................................. $23.69 $23.63 $21.13 $17.44 $23.69 Low.............................................. $17.75 $16.69 $15.00 $ 7.75 $ 7.75
- ------------------------ (a) Gross profit, income from continuing operations and net income are $39.9, $1.5 and $1.1, respectively, before charges totaling $14.5 ($9.4 net of taxes). See Note 2 to Notes to Consolidated Financial Statements. (b) Gross profit, income from continuing operations and net income are $166.1, $13.3 and $14.3, respectively, before charges totaling $14.5 ($9.4 net of taxes). See Note 2 to Notes to Consolidated Financial Statements. NOTE 11--STOCK OPTIONS Under K2's 1999 and 1994 Incentive Stock Option Plans ("1999 Plan" and "1994 Plan", respectively), options may be granted to eligible directors and key employees of K2 and its subsidiaries at not less than 100% of the market value of the shares on the dates of grant. No further options may be granted under the 1994 Plan. The 1999 Plan permits the granting of options for terms not to exceed ten years from date of grant. The options are exercisable on such terms as may be established at the dates of grant. 38 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 11--STOCK OPTIONS (CONTINUED) K2 is authorized, at the discretion of the Compensation Committee, to provide loans to key employees in connection with the exercise of stock options under the 1999 and 1994 Plans. At December 31, 1999 and 1998, there was a total of $215,000 and $230,000, respectively, of loans to key employees made to enable the exercise of stock options, and accrued interest outstanding. The loans are due on various dates through June 2003. The amounts of these loans are shown as a reduction of shareholders' equity. The loans are collateralized by the underlying shares of stock issued and bear interest at the applicable rates published by the IRS. Options granted, exercised and forfeited for the 1999 Plan and 1994 Plan were as follows:
EXERCISE PRICE ------------------------------ WEIGHTED SHARES LOW HIGH AVERAGE --------- -------- -------- -------- Options outstanding at December 31, 1996................. 689,059 $11.11 $26.50 $20.56 Granted................................................ 234,000 23.50 29.88 23.68 Exercised.............................................. (28,418) 11.11 23.00 17.13 Forfeited.............................................. (16,850) 16.38 29.88 24.33 --------- Options outstanding at December 31, 1997................. 877,791 11.11 29.88 21.43 Granted................................................ 359,500 11.25 21.50 11.38 Exercised.............................................. (30,572) 11.11 22.88 14.15 Forfeited.............................................. (84,058) 11.11 29.88 22.41 --------- Options outstanding at December 31, 1998................. 1,122,661 11.11 29.88 18.33 Granted................................................ 229,500 7.50 10.63 7.55 Forfeited.............................................. (63,050) 10.63 29.88 18.42 --------- Options outstanding at December 31, 1999................. 1,289,111 7.50 29.88 16.40 =========
At December 31, 1999, 1998 and 1997, stock options to purchase 695,761, 500,711 and 667,332, shares were exercisable at weighted average prices of $20.21, $20.02 and $21.19, respectively. At December 31, 1999, 2,534,536 shares of common stock were reserved for issuance under the Plans. K2 uses the intrinsic-value method of accounting for stock-based awards granted to employees. Accordingly, K2 has not recognized compensation expense for its stock-based awards to employees. Had K2 elected to adopt the fair value approach, net income and basic and diluted earnings per share would have been $8,525,000, $.51 and $.50, respectively, for the year ended December 31, 1999, $3,950,000, $.24 39 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 11--STOCK OPTIONS (CONTINUED) and $.24, respectively, for the year ended December 31, 1998 and $21,157,000, $1.28 and $1.27, respectively, for the year ended December 31, 1997. The pro forma effect was calculated using Black-Scholes option valuation model, and the following assumptions were utilized.
1999 1998 1997 -------- -------- -------- Risk free interest rate......................... 5.5% 5.0% 5.0% Expected life................................... 5 years 5 years 5 years Expected volatility............................. .388 .326 .225 Expected dividend yield......................... -- 3.9% 2.2%
The pro forma amounts may not be representative of future disclosures since the estimated fair value of stock options is amortized to expense over the vesting period and additional options may be granted in future years. Since changes in the subjective assumptions used in the Black-Scholes model can materially affect the fair value estimate, management believes the model does not provide a reliable measure of the fair value of its options. Options are granted at an exercise price equal to the fair market value at the date of grant. Information regarding stock options outstanding as of December 31, 1999 is as follows:
OPTIONS OUTSTANDING --------------------------------- OPTIONS EXERCISABLE WEIGHTED ------------------- WEIGHTED AVERAGE WEIGHTED AVERAGE REMAINING AVERAGE EXERCISE CONTRACTUAL EXERCISE PRICE RANGE SHARES PRICE LIFE SHARES PRICE - ----------- -------- -------- ----------- -------- -------- $7.50 to $11.11.............................. 286,331 $ 8.27 8.58 years 57,331 $11.11 $11.250 to $17.25............................ 494,680 12.89 7.50 years 232,280 14.74 $21.50 to $29.88............................. 508,100 24.41 7.13 years 406,150 24.63
NOTE 12--SHAREHOLDERS' EQUITY PREFERRED STOCK Shares are issuable in one or more series, and the Board of Directors has authority to fix the terms and conditions of each series. No shares were issued or outstanding during 1999 and 1998. EMPLOYEE STOCK OWNERSHIP PLAN K2 has an Employee Stock Ownership Plan ("ESOP") which covers substantially all of its domestic non-union employees with at least one year of service. As of December 31, 1999, the trust was indebted to K2 in the aggregate amount of $565,000 in connection with stock purchases made from 1982 through 1984 of which 131,836 shares with an aggregate market value of $1,005,000 as of December 31, 1999 remained unallocated to participants. These loans are repayable over the next three to five years with interest at prime plus 1/2%, not to exceed 18%, and the unallocated shares will be released to participants proportionately as these loans are repaid. Of the total dividends received by the ESOP on its investment in K2's Common Stock, dividends on allocated and unallocated shares in the amount of $29,000 and $167,000 in 40 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 12--SHAREHOLDERS' EQUITY (CONTINUED) 1999 and 1998, respectively, were used to service these loans. Allocated shares as of December 31, 1999 totaled 1,584,816. Additionally, the trust was indebted to K2 in the amount of $1,100,000 at December 31, 1999 and 1998, in connection with distributions made to terminees. Shareholders' equity has been reduced by the amounts of the loans and any payments made by K2 on behalf of the trust. The payments, made by K2 on behalf of the trust, which at December 31, 1999 totaled $89,000, are being amortized to expense over the lives of the loans. The amount of K2's annual contribution to the ESOP is at the discretion of K2's Board of Directors. For the two years 1999 and 1998, contributions were limited to amounts in excess of annual dividends, net of debt service, of the ESOP necessary to fund obligations arising in each of those years to retired and terminated employees. These amounts were $200,000 and $100,000, respectively. ESOP expense, including amortization of the foregoing payments, was $638,000 and $156,000 in 1999 and 1998, respectively. No expense was recorded and no contributions were made in 1997. PREFERRED STOCK RIGHTS Rights are outstanding which entitle the holder of each share of Common Stock of K2 to buy one one-hundredth of a share of Series A Junior Participating Cumulative Preferred Stock at an exercise price of $60.00 per one one-hundredth of a share, subject to adjustment. The rights are not separately tradable or exercisable until a party either acquires, or makes a tender offer resulting in ownership of, at least 15% of K2's common shares. If a person becomes the owner of at least 15% of K2's outstanding common shares (an "Acquiring Person"), each holder of a right other than such Acquiring Person and its affiliates is entitled, upon payment of the then-current exercise price per right (the "Exercise Price"), to receive shares of Common Stock (or Common Stock equivalents) having a market value of twice the Exercise Price. If K2 subsequently engages in a merger, a business combination or an asset sale with the Acquiring Person, each holder of a right other than the Acquiring Person and its affiliates is thereafter entitled, upon payment of the Exercise Price, to receive stock of the Acquiring Person having a market value of twice the Exercise Price. At any time after any party becomes an Acquiring Person, the Board of Directors may exchange the rights (except those held by the Acquiring Person) at an exchange ratio of one common share per right. Prior to a person becoming an Acquiring Person, the rights may be redeemed at a redemption price of one cent per right, subject to adjustment. The rights are subject to amendment by the Board. NOTE 13--SEGMENT DATA K2 classifies its business into three segments based on similar product types consisting of sporting goods products, other recreational products and selected industrial products. The sporting goods segment consists primarily of sports equipment used to participate in individual sports activities sold primarily through sporting goods specialty dealers, regional and national sporting goods chains and the sporting goods department of mass merchants. The equipment includes in-line skates, skis, snowboards, bikes, fishing tackle and flotation vests. The other recreational products segment are primarily active leisure apparel sold principally into the advertising specialty market through distributors, and leisure footwear and other apparel sold through specialty sporting goods dealers. The industrial products segment includes monofilament line sold to the paper industry, string trimmer line sold to a variety of distributors, retailers 41 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 13--SEGMENT DATA (CONTINUED) and equipment manufacturers, fiberglass light poles sold to contractors, utility companies and municipalities and marine and CB radio antennas sold to marine dealers. K2 evaluates performance based on operating profit or loss (before interest, corporate expenses and income taxes). The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in Note 1 of Notes to Consolidated Financial Statements. Intercompany profit or loss is eliminated where applicable. The information presented below is as of or for the year ended December 31.
NET SALES TO UNAFFILIATED CUSTOMERS INTERSEGMENT SALES OPERATING PROFIT (LOSS) ------------------------------ ------------------------------ ------------------------------ 1999 1998 1997 1999 1998 1997 1999 1998 1997 -------- -------- -------- -------- -------- -------- -------- -------- -------- (MILLIONS) Sporting goods................. $474.3 $404.9 $410.8 $30.4 $18.6 $21.2 $15.0* $ 5.3* $26.3* Other recreational............. 41.0 43.7 34.2 0.2 0.3 -- (1.9) (1.1) 0.7 Industrial..................... 119.8 125.9 114.0 1.1 1.4 0.9 17.5 18.4 17.5 ------ ------ ------ ----- ----- ----- ----- ----- ----- Total segment data........... $635.1 $574.5 $559.0 $31.7 $20.3 $22.1 30.6 22.6 44.5 ====== ====== ====== ===== ===== ===== ----- ----- ----- Corporate expenses, net........ (5.4) (5.6) (6.8) Interest expense............... 12.7 12.2 10.6 ----- ----- ----- Income from continuing operations before provision for income taxes............. $12.5 $ 4.8 $27.1 ===== ===== =====
- ------------------------ * 1999, 1998 and 1997 include charges of $10.5 million, $14.5 million and $2.4 million, respectively.
DEPRECIATION AND IDENTIFIABLE ASSETS AMORTIZATION CAPITAL EXPENDITURES ------------------------------ ------------------------------ ------------------------------ 1999 1998 1997 1999 1998 1997 1999 1998 1997 -------- -------- -------- -------- -------- -------- -------- -------- -------- (MILLIONS) Sporting goods................. $346.9 $301.3 $283.6 $ 9.9 $ 9.3 $ 8.1 $13.0 $ 6.9 $14.5 Other recreational............. 32.4 40.4 33.9 0.8 0.8 0.6 0.5 0.6 0.4 Industrial..................... 63.3 66.8 55.7 2.8 2.5 2.8 2.7 9.8 4.5 ------ ------ ------ ----- ----- ----- ----- ----- ----- Total segment data........... 442.6 408.5 373.2 13.5 12.6 11.5 16.2 17.3 19.4 Corporate...................... 20.6 17.0 14.3 0.2 0.1 0.1 ------ ------ ------ ----- ----- ----- Total continuing operations................. 463.2 425.5 387.5 13.7 12.7 11.6 16.2 17.3 19.4 ------ ------ ------ ----- ----- ----- ----- ----- ----- Discontinued operations........ 24.7 27.5 31.9 2.9 2.8 2.7 2.6 3.4 4.3 ------ ------ ------ ----- ----- ----- ----- ----- ----- Total........................ $487.9 $453.0 $419.4 $16.6 $15.5 $14.3 $18.8 $20.7 $23.7 ====== ====== ====== ===== ===== ===== ===== ===== =====
42 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 13--SEGMENT DATA (CONTINUED)
1999 1998 1997 -------- -------- -------- (MILLIONS) NET SALES BY LOCATION United States..................................... $408.1 $381.4 $406.7 Europe............................................ 170.1 153.0 125.0 Asia.............................................. 56.9 40.1 27.3 ------ ------ ------ Total net sales................................. $635.1 $574.5 $559.0 ====== ====== ====== ASSETS United States..................................... $348.0 $320.9 $315.0 Europe............................................ 94.8 97.3 91.1 Asia.............................................. 45.1 34.8 13.3 ------ ------ ------ Total assets.................................... $487.9 $453.0 $419.4 ====== ====== ====== LONG-LIVED ASSETS United States..................................... $ 99.2 $ 75.4 $ 69.3 Europe............................................ 8.3 8.3 7.4 Asia.............................................. 4.0 2.5 2.6 ------ ------ ------ Total long-lived assets......................... $111.5 $ 86.2 $ 79.3 ====== ====== ======
43 K2 INC. REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders: K2 Inc. We have audited the accompanying consolidated balance sheets of K2 Inc. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of K2 Inc. and subsidiaries at December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP Los Angeles, California February 21, 2000 44 SIGNATURES Pursuant to the requirements of Section 13 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. By: /s/ RICHARD M. RODSTEIN ----------------------------------------- Richard M. Rodstein PRESIDENT AND CHIEF EXECUTIVE OFFICER Date: March 24, 2000 --------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ RICHARD M. RODSTEIN Director, President and Chief ------------------------------------------- Executive Officer (Principal March 24, 2000 Richard M. Rodstein Executive Officer) /s/ JOHN J. RANGEL Senior Vice President--Finance ------------------------------------------- (Principal Financial and March 24, 2000 John J. Rangel Accounting Officer) /s/ B.I. FORESTER ------------------------------------------- Director, Chairman of the March 24, 2000 B.I. Forester Board /s/ SUSAN E. ENGEL ------------------------------------------- Director March 24, 2000 Susan E. Engel /s/ JERRY E. GOLDRESS ------------------------------------------- Director March 24, 2000 Jerry E. Goldress /s/ WILFORD D. GODBOLD, JR. ------------------------------------------- Director March 24, 2000 Wilford D. Godbold, Jr. /s/ RICHARD J. HECKMANN ------------------------------------------- Director March 24, 2000 Richard J. Heckmann
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SIGNATURE TITLE DATE --------- ----- ---- /s/ STEWART M. KASEN ------------------------------------------- Director March 24, 2000 Stewart M. Kasen /s/ JOHN H. OFFERMANS ------------------------------------------- Director March 24, 2000 John H. Offermans /s/ ALFRED E. OSBORNE, JR. ------------------------------------------- Director March 24, 2000 Alfred E. Osborne, Jr.
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