10-Q 1 a10-q.txt FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Quarterly Report under Section 13 of the Securities Exchange Act of 1934 For the Quarter Ended June 30, 2000 Commission File No. 1-4290 K2 INC. (exact name of registrant as specified in its charter) DELAWARE 95-2077125 (State of Incorporation) (I.R.S. Employer Identification No.) 4900 South Eastern Avenue Los Angeles, California 90040 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (323) 724-2800 Former name, former address and former fiscal year, if changed since last report: Not applicable Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X --- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of July 31, 2000. Common Stock, par value $1 17,950,000 Shares FORM 10-Q QUARTERLY REPORT PART - 1 FINANCIAL INFORMATION Item 1. Financial Statements STATEMENTS OF CONSOLIDATED INCOME (condensed) (In thousands, except per share figures)
THREE MONTHS SIX MONTHS ENDED JUNE 30 ENDED JUNE 30 ----------------------------------------------------------------- 2000 1999 2000 1999 -------------------------------- ------------------------------- (Unaudited) Net sales $159,049 $158,292 $340,861 $321,352 Cost of products sold 107,065 110,122 237,817 228,871 --------------- --------------- --------------- --------------- Gross profit 51,984 48,170 103,044 92,481 Selling expenses 25,356 22,855 52,320 45,951 General and administrative expenses 13,001 11,787 27,578 25,244 --------------- --------------- --------------- --------------- Operating income 13,627 13,528 23,146 21,286 Interest expense 3,992 3,031 8,558 6,328 Other income, net (59) (14) (139) (114) --------------- --------------- --------------- --------------- Income before income taxes 9,694 10,511 14,727 15,072 Provision for income taxes 3,296 3,365 5,007 4,823 --------------- --------------- --------------- --------------- Income from continuing operations 6,398 7,146 9,720 10,249 Discontinued Operations Income from operations, net of taxes 623 858 1,039 1,007 Estimated loss on disposal, net of taxes (718) - (718) - --------------- --------------- --------------- --------------- (95) 858 321 1,007 Net income $6,303 $8,004 $10,041 $11,256 =============== =============== =============== =============== Basic earnings (loss) per share: Continuing operations $0.36 $0.43 $0.54 $0.62 Discontinued operations (0.01) 0.05 0.02 0.06 --------------- --------------- --------------- --------------- Net income $0.35 $0.48 $0.56 $0.68 =============== =============== =============== =============== Diluted earnings (loss) per share: Continuing operations $0.36 $0.43 $0.54 $0.62 Discontinued operations (0.01) 0.05 0.02 0.06 --------------- --------------- --------------- --------------- Net income $0.35 $0.48 $0.56 $0.68 =============== =============== =============== =============== Basic shares outstanding 17,949 16,566 17,949 16,565 Diluted shares outstanding 18,000 16,566 17,998 16,565 Cash dividend per share $ - $ - $ - $0.11
See notes to consolidated condensed financial statements. 1 CONSOLIDATED BALANCE SHEETS (condensed) (In thousands, except number of shares)
JUNE 30 DECEMBER 31 2000 1999 ------------------ ------------------ (Unaudited) ASSETS Current Assets Cash and cash equivalents $2,262 $9,421 Accounts receivable, net 117,010 149,151 Inventories, net 161,801 172,154 Deferred taxes 3,559 10,030 Prepaid expenses and other current assets 9,554 5,053 ------------------ ------------------ Total current assets 294,186 345,809 Property, plant and equipment 165,586 162,453 Less allowance for depreciation and amortization 95,241 89,858 ------------------ ------------------ 70,345 72,595 Intangibles, principally goodwill, net 40,982 38,928 Net assets of discontinued operations 24,706 Other 4,177 5,840 ------------------ ------------------ Total Assets $409,690 $487,878 ================== ================== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Bank loans $21,944 $57,359 Accounts payable 35,952 44,231 Accrued payroll and related 17,642 19,781 Other accruals 35,766 32,808 Current portion of long-term debt 4,444 4,444 ------------------ ------------------ Total current liabilities 115,748 158,623 Long-term debt 68,443 107,280 Deferred taxes 3,423 3,455 Commitments and Contingencies SHAREHOLDERS' EQUITY Preferred Stock, $1 par value, authorized 12,500,000 shares, none issued . Common Stock, $1 par value, authorized 40,000,000 shares, issued shares 18,682,810 in 2000 and 1999 18,674 18,673 Additional paid-in capital 143,331 143,326 Retained earnings 85,289 75,248 Employee Stock Ownership Plan and stock option loans (1,837) (1,975) Treasury shares at cost, 733,810 shares in 2000 and 733,110 in 1999 (8,998) (8,992) Accumulated other comprehensive loss (14,383) (7,760) ------------------ ------------------ Total Shareholders' Equity 222,076 218,520 ------------------ ------------------ Total Liabilities and Shareholders' Equity $409,690 $487,878 ================== ==================
See notes to consolidated condensed financial statements 2 STATEMENTS OF CONSOLIDATED CASH FLOWS (condensed) (In thousands)
SIX MONTHS ENDED JUNE 30 ----------------------------------- 2000 1999 ----------------------------------- (unaudited) Operating Activities Income from continuing operations $ 9,720 $ 10,249 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,493 6,221 Deferred taxes 6,439 2,323 Changes in operating assets and liabilities: Accounts receivable 39,922 12,462 Inventories 10,353 34,550 Prepaid expenses and other current assets (4,501) (2,192) Accounts payable (8,279) (11,144) Payrolls and other accruals (5,139) 1,362 ----------------- ---------------- Net cash provided by operating activities 55,008 53,831 Investing Activities Property, plant & equipment expenditures (4,493) (6,136) Disposals of property, plant & equipment 600 136 Purchase of business (2,961) Other items, net (7,226) (329) ----------------- ---------------- Net cash used in investing activities (11,119) (9,290) Financing Activities Borrowings under long-term debt 67,000 11,500 Payments of long-term debt (106,273) (24,500) Net decrease in short-term bank loans (34,979) (28,088) Net payment on accounts receivable facility (7,781) Dividends paid (1,820) ----------------- ---------------- Net cash used in financing activities (82,033) (42,908) ----------------- ---------------- Net increase (decrease) in cash and cash equivalents (38,144) 1,633 from continuing operations Discontinued operations Income from discontinued operations 321 1,007 Proceeds received from sale of discontinued operation 27,500 Adjustments to reconcile income to net cash provided by (used in) discontinued operations: Depreciation and amortization 1,426 1,510 Capital expenditures (287) (1,824) Other items, net 2,025 (763) ----------------- ---------------- Cash provided by (used in) discontinued operations 30,985 (70) Net increase (decrease) in cash and cash equivalents (7,159) 1,563 Cash and cash equivalents at beginning of year 9,421 3,394 ----------------- ---------------- Cash and cash equivalents at end of period $ 2,262 $ 4,957 ================= ================
See notes to consolidated condensed financial statements 3 K2 INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS JUNE 30, 2000 NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2000 are not necessarily indicative of the results that may be expected for the year ended December 31, 2000. The balance sheet at December 31, 1999 has been derived from the audited financial statements but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the Consolidated Financial Statements and Notes to Financial Statements included in K2 Inc.'s ("K2's) Annual Report on Form 10-K for the year ended December 31, 1999. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ACCOUNTS RECEIVABLE AND ALLOWANCES Accounts receivable are net of allowances for doubtful accounts of $6,175,000 at June 30, 2000 and $6,572,000 at December 31, 1999. INVENTORIES The components of inventory consist of the following:
June 30 December 31 2000 1999 -------------- --------------- (Thousands) Finished goods $123,625 $129,429 Work in process 9,732 10,573 Raw materials 30,324 34,228 -------------- --------------- Total at lower of FIFO cost or market (approximates current cost) 163,681 174,230 Less LIFO valuation reserve 1,880 2,076 -------------- --------------- $161,801 $172,154 -------------- ---------------
4 K2 INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2000 NOTE 3 - DISCONTINUED OPERATIONS On September 10, 1998, K2 adopted a plan to dispose of its Simplex building products division (the "Division") as part of K2's strategic focus on the core sporting goods and other recreational businesses. Accordingly, the Division has been shown in the consolidated financial statements as a discontinued operation since that date. On June 30, 2000, K2 completed the sale of the assets and business of the Division to Ludlow Building Products, ("Ludlow") a subsidiary of Tyco International Ltd. Consideration included $27.5 million in cash and the assumption of certain liabilities by Ludlow. The purchase price is subject to final adjustment prior to the end of the fiscal year. The estimated loss on disposal of the Division, net of a tax benefit of $386,000, includes an estimate of the costs of disposal, a reserve for final purchase price adjustments and reserves related to the retention of certain liabilities by K2. NOTE 4 - ACQUISITIONS On October 7, 1999 K2 completed the acquisition of Ride, Inc. ("Ride"), a designer and manufacturer of snowboard equipment, apparel and accessories, in an all-stock merger transaction accounted for using the purchase method of accounting. The results of operations of Ride have been included in the consolidated financial statements since the date of acquisition. The following summarized unaudited pro forma results of operations of K2 assume the acquisition of Ride had occurred as of the beginning of the respective periods. This pro forma information does not purport to be indicative of what would have occurred had the acquisition been made as of those dates, or of results which may occur in the future: PRO FORMA INFORMATION (UNAUDITED) (dollars in thousands, except per share amounts)
FOR THE QUARTER FOR THE SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, 1999 1999 --------------- ------------------ Net sales $159,927 $326,565 Income (loss) from continuing operations (3,831) (4,450) Diluted earnings (loss) per share - continuing operations (0.21) (0.25)
5 K2 INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2000 NOTE 5 - BORROWINGS AND OTHER FINANCIAL INSTRUMENTS Covenants contained in K2's $75 million credit line and accounts receivable financing arrangement, among other things, restrict amounts available for payment of cash dividends and stock repurchases by K2. As of June 30, 2000, $11.1 million of retained earnings was free of such restrictions. At June 30, 2000, $42 million of accounts receivable were sold: $41 million under K2's $75 million domestic accounts receivable purchase facility and $1 million under a new $20 million facility available in Germany. On April 4, 2000, K2 increased the capacity of the domestic accounts receivable purchase facility from $50 million to $75 million. NOTE 6 - COMPREHENSIVE INCOME During the three and six months ended June 30, 2000 total comprehensive income amounted to $4.7 million and $3.5 million, respectively. For the three and six months ended June 30, 1999, total comprehensive income amounted to $7.0 million and $7.9 million, respectively. NOTE 7- EARNINGS PER SHARE DATA Basic earnings per share ("EPS") is determined by dividing net income by the weighted average number of shares outstanding during the period. Diluted EPS reflects the potential dilutive effects of stock options, using the treasury stock method. For the three and six month periods ended June 30, 2000, the computation of diluted EPS included the dilutive effects of 51,000 and 48,000 stock options, respectively, and excluded all 1,014,000 stock options outstanding since their inclusion would have been antidilutive. For both the three and six month periods ended June 30, 1999, computation of diluted EPS excluded all 1,095,000 stock options outstanding since their inclusion would have been antidilutive. 6 K2 INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2000 NOTE 8 - SEGMENT INFORMATION The segment information presented below is for the three months ended June 30:
Net Sales to Unaffiliated Customers Intersegment Sales Operating Profit (Loss) ------------------------- ------------------------- -------------------------- 2000 1999 2000 1999 2000 1999 ------------ ------------ ------------ ------------ ------------ ----------- (Millions) Sporting goods $116.8 $115.9 $11.1 $8.1 $10.2 $9.5 Other recreational 9.5 10.4 0.3 0.1 (0.2) (0.1) Industrial 32.8 32.0 0.3 0.2 4.7 5.5 ------------ ------------ ------------ ------------ ------------ ----------- Total segment data $159.1 $158.3 $11.7 $8.4 14.7 14.9 ============ ============ ============ ============ ------------ ----------- Corporate expenses, net 1.0 1.4 Interest expense 4.0 3.0 ------------ ----------- Income from continuing operations before provision for income taxes $9.7 $10.5 ============ ===========
The segment information presented below is for the six months ended June 30:
Net Sales to Unaffiliated Customers Intersegment Sales Operating Profit (Loss) ------------------------- ------------------------- -------------------------- 2000 1999 2000 1999 2000 1999 ------------ ------------ ------------ ------------ ------------ ----------- (Millions) Sporting goods $256.1 $237.2 $20.8 $13.9 $17.3 $14.4 Other recreational 18.8 20.3 0.4 0.1 (0.9) (0.8) Industrial 66.0 63.9 0.8 0.5 9.5 10.6 ------------ ------------ ------------ ------------ ------------ ----------- Total segment data $340.9 $321.4 $22.0 $14.5 25.9 24.2 ============ ============ ============ ============ ------------ ----------- Corporate expenses, net 2.6 2.8 Interest expense 8.6 6.3 ------------ ----------- Income from continuing operations before provision for income taxes $14.7 $15.1 ============ ===========
7 K2 INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2000 NOTE 9 - CONTINGENCIES K2 is subject to various legal actions and proceedings in the normal course of business. While the ultimate outcome of these matters cannot be predicted with certainty, management does not believe these matters will have a material adverse effect on K2's financial statements. K2 is one of several named potentially responsible parties ("PRP") in three Environmental Protection Agency matters involving discharge of hazardous materials at old waste sites in South Carolina and Michigan. Although environmental laws technically impose joint and several liability upon each PRP at each site, the extent of the K2's required financial contribution to the cleanup of these sites is expected to be limited based upon the number and financial strength of the other named PRPs and the volume and types of waste involved which might be attributable to K2. Environmental and related remediation costs are difficult to quantify for a number of reasons including the number of parties involved, the difficulty in determining the extent of the contamination, the length of time remediation may require, the complexity of environmental regulation and the continuing advancement of remediation technology. K2's environmental engineers, consultants and legal counsel have developed estimates based upon cost analyses and other available information for this particular site. K2 accrues for these costs when it is probable that a liability has been incurred and the amount can be reasonably estimated. At June 30, 2000 and December 31, 1999, K2 had accrued approximately $905,000 and $806,000, respectively, with no provision for expected insurance recovery. The ultimate outcome of these matters cannot be predicted with certainty, however, management does not believe these matters will have a material adverse effect on K2's financial statements. 8 ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations COMPARATIVE SECOND QUARTER RESULTS OF OPERATIONS Net sales from continuing operations for the three months ended June 30, 2000 increased to $159.0 million from $158.3 million in the year-earlier period. Income from continuing operations for the second quarter of 2000 declined 10.5% to $6.4 million, or $.36 per diluted share, from $7.1 million, or $.43 per diluted share, in the second quarter a year ago. Net income for the quarter was $6.3 million, or $.35 per diluted share, as compared with $8.0 million, or $.48 per diluted share, in the prior year quarter. NET SALES. In the sporting goods segment, net sales improved to $116.8 million from $115.9 million in the 1999 second quarter. Shakespeare fishing tackle sales experienced strong domestic sales led by growth in new reels and new product introductions such as the outdoor furniture line. New sales have resulted from the popularity of the Kickboard, a three-wheeled scooter, primarily in European markets. Snowboard product sales increased reflecting the impact of the acquisition of Ride, Liquid and 5150 in the prior year's fourth quarter. As expected, sales of Stearns products increased, especially in children's life vests, reflecting a shift in the timing of the business. In-line skate sales declined for the quarter, due in part to the weakening of the German currency in the past year, which resulted in lower translated sales for the period. Strong sales in the first quarter, however, resulted in an overall increase of in-line skate sales for the first six months over the prior year period. Ski shipments declined for the quarter due to the continued movement of production offshore resulting in product being delivered closer to the season. Bike shipments declined in a seasonally slow sales quarter reflecting the changing nature of K2's bike business. In the other recreational products segment, net sales declined to $9.5 million from $10.4 million in the prior year's quarter. The decrease was attributable mainly to lower apparel sales to the corporate apparel market in continued sluggish market conditions. Net sales of the two businesses in the industrial products group improved 2.5% to $32.8 million from $32.0 million in the prior year's quarter. The sales increase reflected higher demand for specialty resins, elastomers and increased sales of composite light poles. GROSS PROFIT. Gross profit for the second quarter of 2000 increased 7.9% to $52.0 million, or 32.7% of net sales, as compared with $48.2 million, or 30.4% of net sales, in the year ago quarter. The gross profit improvement reflects the cost reduction programs implemented by K2, including a shift of more of K2's manufacturing to its overseas plants and increasing offshore product sourcing. COSTS AND EXPENSES. Selling expenses increased to $25.4 million, or 15.9% of net sales, from $22.9 million, or 14.4% of net sales, in the prior year's quarter. General and administrative expenses increased to $13.0 million, or 8.2% of net sales, from $11.8 million, or 7.4% of net sales, in the 1999 first quarter. These increases largely reflect seasonal expenses associated with recent acquisitions in a seasonally slower sales quarter. In addition, K2 also initiated certain marketing programs in the quarter which ordinarily would have occurred later in the year. 9 OPERATING INCOME. Operating income for the second quarter improved to $13.7 million or 8.6% of net sales, as compared to operating income of $13.5 million, or 8.5% of net sales, a year ago. The improvement reflects increased gross profit margins, offset by increased selling and general and administrative expenses. INTEREST EXPENSE. Interest expense increased $961,000 to $4.0 million in the second quarter of 2000 compared to $3.0 million in the year-earlier period. Lower average borrowings reduced interest expense by $725,000, which was offset by an increase in interest expense of $1,686,000 due to higher interest rates. The interest rate increase was due to an increase in the LIBOR variable rate as compared to the prior year, an increase in international borrowing costs and the refinancing of variable debt into higher cost long-term fixed debt. COMPARATIVE SIX-MONTH RESULTS OF OPERATIONS Net sales from continuing operations for the six months ended June 30, 2000 increased 6.1% to $340.9 million from $321.4 million in the year-earlier period. Income from continuing operations for the first half of 2000 was $9.7 million, or $.54 per diluted share, as compared with $10.2 million, or $.62 per diluted share, in the first six months of 1999. Net income was $10.0 million, or $.56 per diluted share, as compared with $11.3 million, or $.68 per diluted share, in the prior year six months. NET SALES. In the sporting goods segment, net sales increased 8.0% to $256.1 million from $237.2 million in the 1999 period. The growth was primarily the result of increases in worldwide fishing tackle, snowboard, Kickboard and in-line skate sales. Fishing tackle sales continue to be strong led by the continued growth of the Ugly Stik line, new packaged rods and reels and other new products. Increased snowboard sales are the result of recent acquisitions. New sales of the Kickboard, a recent product innovation, are the result of high demand in the European markets. In-line skate sales have increased for the period despite a substantial weakening in the German currency which had a negative impact on translated sales from the German subsidiary. Partially offsetting these increases were lower sales of ski and bike products. Ski shipments declined for the period reflecting the mild winter weather in the domestic market, the movement of certain production offshore and the plan to deliver product closer to the season. Bike sales declined reflecting the changing nature of the K2's bike business with later delivery of product, closer to the season. Sales of Stearns products were comparable with the prior year. In the other recreational products segment, net sales for the first six months declined to $18.8 million from $20.3 million in the prior year. The decrease was attributable mainly to lower apparel sales to the advertising specialty market in continued sluggish market conditions. Net sales of the two businesses in the industrial products group, improved 3.4% to $66.0 million from $63.9 million in the prior year. The sales increase reflects higher demand for specialty resins and elastomers and increased sales of composite light poles. GROSS PROFIT. Gross profits for the first half of 2000 increased 11.4% to $103.0 million, or 30.2% of net sales, from $92.5 million, or 28.8% of net sales, in the prior year period. The gross profit improvement reflects an increase in sales volume and the cost reduction programs implemented 10 by K2 including a shift of more of K2's manufacturing to it's overseas plants and increasing offshore product sourcing. COSTS AND EXPENSES. Selling expenses increased to $52.3 million, or 15.3% of net sales, from $46.0 million, or 14.3% of net sales, in the prior year. General and administrative expenses were $27.5 million, or 8.1% of net sales as compared with $25.2 million or 7.9% of net sales, in the prior year. These increases reflect the increase in sales during the first six months of the year and the timing of seasonal expenses associated with recent acquisitions with most of the related sales volume to occur in the second half of the year. In addition, K2 also initiated certain marketing programs in the first six months which ordinarily would have occurred later in the year. OPERATING INCOME. Operating income for the first six months improved 8.9% to $23.2 million, or 6.8% of net sales as compared with $21.3 million, or 6.6% in the prior year. The improvement reflects increased gross profit margins, offset by increased selling and general and administrative expenses. INTEREST EXPENSE. Interest expense increased $2.2 million to $8.6 million for the first six months of 2000 compared to $6.3 million in the year-earlier period. Lower average borrowings reduced interest expense by $940,000, which was offset by an increase in interest expense of $3.2 million due to higher interest rates. The interest rate increase was due to an increase in the LIBOR variable rate as compared to the prior year, an increase in international borrowing costs and the refinancing of variable debt into higher cost long-term fixed debt. LIQUIDITY AND SOURCES OF CAPITAL K2's continuing operating activities provided $55.0 million of cash during the six months ended June 30, 2000 as compared with $53.8 million of cash provided during the six month period a year ago. Net cash used for investing activities was $11.1 million in the first half of 2000, compared to $9.3 million in the first half of 1999. Capital expenditures in the 2000 period were $1.6 million lower compared to the 1999 first six months which also had a $3.0 million cash outlay for the acquisition of certain assets of a snowboard company. The current year six months also reflected an increase of $3.2 million in (accumulated other comprehensive loss) over the prior year six months. There were no material commitments for capital expenditures at June 30, 2000. Net cash used in financing activities was $82.0 million during the six months ended June 30, 2000 as compared with $42.9 million of cash used during the six- month period a year ago. The year to year increase of $39.1 million in cash used was due to higher net repayments of short and long-term debt as well as a net paydown on the domestic accounts receivable facility. The disposition of the Division resulted in cash of $27.5 million in the period. K2 anticipates its remaining cash needs in 2000 will be provided from operations and borrowings under existing credit lines. 11 STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE This Form 10-Q contains certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent K2's expectations or beliefs concerning future events, including, but not limited to, the following: statements regarding sales and earnings, market trends, market conditions, market positioning, product cost reduction efforts, expense control efforts and overall trends which involve substantial risks and uncertainties. K2 cautions that these statements are further qualified by important factors which could cause actual results to differ materially from those in the forward-looking statements, including, but not limited to, economic conditions, product demand, competitive pricing and the impact of foreign exchange on product costs, and other risks described in K2's Annual Report on Form 10-K filed with the Securities and Exchange Commission. ITEM 3 Quantitative and Qualitative Disclosures of Market Risk K2's earnings and cash flow are subject to fluctuations due to changes in foreign currency exchange rates. K2 manages its exposure to changes in foreign currency exchange rates on certain firm purchase commitments and anticipated, but not yet committed purchases, by entering into foreign currency forward contracts. K2's risk management objective is to reduce its exposure to the effects of changes in exchange rates on the cost of products sold over quarterly time horizons. Foreign currency exchange rate movements also affect K2's competitive position, as exchange rate changes may affect business practices and/or pricing strategies of non-U.S. based competitors and may affect the profitability and pricing strategies of K2 as well. K2's foreign currency risk policies entail entering into foreign currency derivative instruments only to manage risk of currency fluctuations over a given period of time, not for speculative investments. Considering both the anticipated cash flows from firm purchase commitments and anticipated purchases for the next quarter and the foreign currency derivative instruments in place, the continued weakness of the euro and DM against the U.S. dollar is expected to continue to increase the cost of products purchased in U.S. dollars for sale in the European market. As a result, this will have an unfavorable impact on the remainder of 2000, and consequently on earnings and on cash flows. This impact is offset in part by the favorable impact of cost reduction programs that were initiated in anticipation of the continued weakness in these currencies. This analysis ignores the potential effect that may result from changing costs. In addition, currency exchange rates are subject to change which could result in lesser or greater impacts to earnings and cash flows. 12 PART II - OTHER INFORMATION ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The following exhibits are filed as part of this report. 10 Material Contracts (a) Amended and Restated Transfer and Administration Agreement among Enterprise Funding Corporation, as the Company, K2 Funding, Inc., as the Transferor, K2 Inc. as the Master Servicer and Bank of America, National Association as Agent and Bank Investor dated as of April 4, 2000. (b) Asset Purchase Agreement dated June 8, 2000 by and between Tyco International (US) Inc., Ludlow Building Products, Inc., as Buyer, Tyco Plastics Services AG, as IP Buyer, and K2 Inc., as Seller 27 Financial Data Schedule for the six months ended June 30, 2000. (b) Reports on Form 8-K filed since the date of the last Form 10-Q Report on Form 8-K dated July 5, 2000 containing K2's press release dated June 29, 2000 announcing the execution of the agreement for the sale of assets and business of K2's Simplex building products division to Ludlow Building Products. 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. K2 INC. (registrant) Date: August 14, 2000 /S/ RICHARD M. RODSTEIN ------------------------------- Richard M. Rodstein President and Chief Executive Officer Date: August 14, 2000 /S/ JOHN J. RANGEL ------------------------------- John J. Rangel Senior Vice President - Finance 14