-----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, BUZxwkBdkLie4oC/gFmXLVq27SZsLoi96gODFCLlA6jMLvCRHm4KfvJxuAKmEdZS 8lrmnp3e+YsW2YhzPdcU0g== 0000912057-99-005476.txt : 19991117 0000912057-99-005476.hdr.sgml : 19991117 ACCESSION NUMBER: 0000912057-99-005476 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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-Q SEC ACT: SEC FILE NUMBER: 001-04290 FILM NUMBER: 99751452 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-Q 1 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 September 30, 1999 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 October 31, 1999. Common Stock, par value $1 17,899,700 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 NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 ----------------------------------------------------------------- 1999 1998 1999 1998 -------------------------------- -------------------------------- (Unaudited) Net sales $ 139,883 $ 133,884 $ 461,235 $ 441,716 Cost of products sold 96,227 101,657 325,098 320,371 --------- --------- --------- --------- Gross profit 43,656 32,227 136,137 121,345 Selling expenses 23,171 21,498 69,122 64,085 General and administrative expenses 12,954 20,181 38,198 45,439 --------- --------- --------- --------- Operating income (loss) 7,531 (9,452) 28,817 11,821 Interest expense 2,677 2,833 9,005 9,147 Other (income) expense, net 8 (68) (106) (208) --------- --------- --------- --------- Income (loss) before income taxes 4,846 (12,217) 19,918 2,882 Provision (credit) for income taxes 1,552 (4,308) 6,375 643 --------- --------- --------- --------- Income (loss) from continuing operations 3,294 (7,909) 13,543 2,239 Discontinued operations, net of taxes 37 (449) 1,044 627 --------- --------- --------- --------- Net income (loss) $ 3,331 $ (8,358) $ 14,587 $ 2,866 --------- --------- --------- --------- --------- --------- --------- --------- Basic earnings (loss) per share: Continuing operations $ 0.20 $ (0.48) $ 0.82 $ 0.13 Discontinued operations 0.00 (0.03) 0.06 0.04 --------- --------- --------- --------- Net income (loss) $ 0.20 $ (0.51) $ 0.88 $ 0.17 --------- --------- --------- --------- --------- --------- --------- --------- Diluted earnings (loss) per share: Continuing operations $ 0.20 $ (0.48) $ 0.82 $ 0.13 Discontinued operations 0.00 (0.03) 0.06 0.04 --------- --------- --------- --------- Net income (loss) $ 0.20 $ (0.51) $ 0.88 $ 0.17 --------- --------- --------- --------- --------- --------- --------- --------- Cash dividends per share $ - $ 0.11 $ 0.11 $ 0.33 Basic shares outstanding 16,549 16,547 16,559 16,551 Diluted shares outstanding 16,549 16,547 16,559 16,629
See notes to consolidated condensed financial statements. 1 CONSOLIDATED BALANCE SHEETS (condensed) (In thousands, except number of shares)
SEPTEMBER DECEMBER 31 1999 1998 ----------- ----------- (Unaudited) ASSETS Current Assets Cash and cash equivalents $ 9,855 $ 3,394 Accounts receivable, net 115,054 126,011 Inventories, net 166,190 188,348 Deferred taxes 10,130 12,780 Prepaid expenses and other current assets 6,012 5,037 --------- --------- Total current assets 307,241 335,570 Property, plant and equipment 160,289 151,071 Less allowance for depreciation and amortization 88,665 84,480 --------- --------- 71,624 66,591 Intangibles, principally goodwill, net 20,244 19,564 Net assets of discontinued operations 25,092 27,511 Other 6,253 3,759 --------- --------- Total Assets $ 430,454 $ 452,995 --------- --------- --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Bank loans $ 42,114 $ 64,350 Accounts payable 21,212 20,807 Accrued payroll and related 17,259 15,982 Other accruals 26,356 21,555 Current portion of long-term debt 4,444 4,444 --------- --------- Total current liabilities 111,385 127,138 Long-term debt 93,724 110,724 Deferred taxes 13,014 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 17,190,652 in 1999 and 1998 17,191 17,191 Additional paid-in capital 132,488 132,488 Retained earnings 79,992 67,227 Employee Stock Ownership Plan and stock option loans (1,976) (1,981) Treasury shares at cost, 656,810 shares in 1999 and 623,759 in 1998 (8,313) (8,106) Accumulated other comprehensive loss (7,051) (4,700) --------- --------- Total Shareholders' Equity 212,331 202,119 --------- --------- Total Liabilities and Shareholders' Equity $ 430,454 $ 452,995 --------- --------- --------- ---------
See notes to consolidated condensed financial statements 2 STATEMENTS OF CONSOLIDATED CASH FLOWS (condensed) (Dollars in thousands)
NINE MONTHS ENDED SEPTEMBER 30 ---------------------------- 1999 1998 ---------------------------- (unaudited) Operating Activities Income from continuing operations $ 13,543 $ 2,239 Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Depreciation and amortization 9,763 10,368 Deferred taxes 1,794 (3,700) Changes in operating assets and liabilities: Accounts receivable 10,957 (9,502) Inventories 22,158 7,106 Prepaid expenses and other current assets (1,723) 658 Accounts payable 405 (10,431) Payrolls and other accruals 6,078 7,576 -------- --------- Net cash provided by operating activities 62,975 4,314 Investing Activities Property, plant & equipment expenditures (13,640) (15,751) Disposals of property, plant & equipment 219 313 Purchase of business, net of cash acquired (2,961) Other items, net (2,564) 18 -------- --------- Net cash used in investing activities (18,946) (15,420) Financing Activities Borrowings under long-term debt 11,500 40,500 Payments of long-term debt (28,500) (18,201) Net decrease in short-term bank loans (22,236) (11,827) Proceeds from accounts receivable facility 700 Dividends paid (1,820) (5,462) Repayment of loans by ESOP 1,000 -------- --------- Net cash (used in) provided by financing activities (41,056) 6,710 -------- --------- Net increase (decrease) in cash and cash equivalents from continuing operations 2,973 (4,396) Discontinued operations Income from discontinued operations 1,044 627 Adjustments to reconcile income from discontinued operations to net cash provided by discontinued operations: Depreciation and amortization 2,263 2,270 Capital expenditures (2,107) (3,067) Other items, net 2,288 3,832 -------- --------- Cash provided by discontinued operations 3,488 3,662 Net increase (decrease) in cash and cash equivalents 6,461 (734) Cash and cash equivalents at beginning of year 3,394 5,706 -------- --------- Cash and cash equivalents at end of period $ 9,855 $ 4,972 -------- --------- -------- ---------
See notes to consolidated condensed financial statements. 3 K2 INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 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 nine month periods ended September 30, 1999 are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. The balance sheet at December 31, 1998 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the Consolidated Financial Statements and Notes to Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ACCOUNTS RECEIVABLE AND ALLOWANCES Accounts receivable are net of allowances for doubtful accounts of $5,170,000 at September 30, 1999 and $5,798,000 at December 31, 1998. INVENTORIES The components of inventory consist of the following:
September 30 December 31 1999 1998 ------------ ----------- (Thousands) Finished goods $ 127,623 $ 146,233 Work in process 10,479 8,078 Raw materials 31,147 37,911 --------- --------- Total at lower of FIFO cost or market (approximates current cost) 169,249 192,222 Less LIFO valuation reserve 3,059 3,874 --------- --------- $ 166,190 $ 188,348 --------- --------- --------- ---------
4 K2 INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1999 NOTE 3 - ACQUISITIONS On March 26, 1999, the Company acquired certain assets relating to the Morrow snowboard business, including the Morrow trademark, from Morrow Snowboards, Inc. On October 7, 1999 the Company completed the acquisition of Ride, Inc., a designer and manufacturer of snowboard equipment, apparel and accessories, in an all-stock merger transaction. Under the terms of the merger, each common and preferred share of Ride, Inc. is convertible into 1/10 share of common stock of the Company. Based on the number of preferred and common shares outstanding of Ride, Inc., 1,452,000 shares of common stock of the Company, having a total value of $12.1 million, are issuable to the Ride, Inc. shareholders, and 272,000 additional shares are reserved for possible future issuance on exercise of options and warrants. The merger transaction will be accounted for under the purchase method of accounting. NOTE 4 - SALE OF ASSETS On October 25, 1999 the Company announced that the previously reported agreement to sell its Simplex building products division, signed August 4, 1999, was terminated. The Company has accounted for Simplex as discontinued operations since September 30, 1998 and is currently exploring its options. NOTE 5 - BORROWINGS AND OTHER FINANCIAL INSTRUMENTS Covenants contained in the Company's $100 million credit line and accounts receivable financing arrangement, among other things, restrict amounts available for payment of cash dividends and stock repurchases by the Company. As of September 30, 1999, $13.2 million of retained earnings were free of such restrictions. At September 30, 1999, $49.0 million of accounts receivable were sold, utilizing 98% of the capacity of the existing accounts receivable purchase facility. 5 K2 INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1999 NOTE 6 - COMPREHENSIVE INCOME During the three and nine months ended September 30, 1999 total comprehensive income amounted to $4.4 million and $12.2 million, respectively. For the three and nine months ended September 30, 1998, total comprehensive income (loss) amounted to ($7.3) million and $3.0 million, respectively. NOTE 7 - EARNINGS PER SHARE DATA Basic earnings per share ("EPS") is determined by dividing net income or loss 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 nine month periods ended September 30, 1999, computation of diluted EPS excluded all 1,083,000 stock options outstanding since their inclusion would have been antidilutive. For the three and nine month periods ended September 30, 1998, computation of diluted EPS included the dilutive effects of 73,000 and 78,000 stock options, respectively and excluded 556,000 stock options, since their inclusion would have been antidilutive. NOTE 8 - SEGMENT INFORMATION The segment information presented below is for the three months ended September 30:
Net Sales to Unaffiliated Customers Intersegment Sales Operating Profit (Loss) ------------------------- ------------------------- -------------------------- 1999 1998 1999 1998 1999 1998 ------------ ------------ ------------ ------------ ------------ ----------- (Millions) Sporting goods $ 102.1 $ 93.7 $ 6.2 $ 3.2 $ 5.9 $ (12.2)* Other recreational 10.4 11.9 - 0.2 (0.3) 0.1 Industrial 27.4 28.3 0.4 0.3 3.9 4.2 ------------ ------------ ------------ ------------ ------------ ----------- Total segment data $ 139.9 $ 133.9 $ 6.6 $ 3.7 9.5 (7.9) ------------ ------------ ------------ ------------ ------------ ----------- ------------ ------------ ------------ ------------ Corporate expenses, net 2.0 1.5 Interest expense 2.7 2.8 ------------ ----------- Income (loss) from continuing operations before provision for income taxes $ 4.8 $ (12.2) ============ ===========
* 1998 includes a $14.5 million charge 6 K2 INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1999 The segment information presented below is for the nine months ended September 30:
Net Sales to Unaffiliated Customers Intersegment Sales Operating Profit (Loss) ------------------------- ------------------------- -------------------------- 1999 1998 1999 1998 1999 1998 ------------ ------------ ------------ ------------ ------------ ----------- (Millions) Sporting goods $ 339.3 $ 312.0 $ 20.1 $ 14.9 $ 20.3 $ 1.8* Other recreational 30.7 31.8 0.1 0.2 (1.1) (0.7) Industrial 91.2 97.9 0.9 0.8 14.5 14.6 ------------ ------------ ------------ ------------ ------------ ----------- Total segment data $ 461.2 $ 441.7 $ 21.1 $ 15.9 33.7 15.7 ------------ ------------ ------------ ------------ ------------ ----------- ------------ ------------ ------------ ------------ Corporate expenses, net 4.8 3.7 Interest expense 9.0 9.1 ------------ ----------- Income from continuing operations before provision for income taxes $ 19.9 $ 2.9 ------------ ----------- ------------ -----------
* 1998 includes a $14.5 million charge NOTE 9 - CONTINGENCIES The Company 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 the Company's financial statements. The Company 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 Company'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 the Company. 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. The Company's environmental engineers, consultants and legal counsel have developed estimates based upon 7 K2 INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1999 cost analyses and other available information for this particular site. The Company accrues for these costs when it is probable that a liability has been incurred and the amount can be reasonably estimated. At September 30, 1999 and December 31, 1998, the Company had accrued approximately $1,267,000 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 the Company's financial statements. 8 ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations COMPARATIVE THIRD QUARTER RESULTS OF OPERATIONS Net sales from continuing operations for the three months ended September 30, 1999 increased 4.5% to $139.9 million from $133.9 million in the year-earlier period. Income from continuing operations for the third quarter of 1999 was $3.3 million, or $.20 per diluted share. This contrasts with a loss of $7.9 million, or $.48 per diluted share, in the third quarter a year ago, which included an aftertax charge of $9.4 million, or $.57 per diluted share. Net income for the quarter was $3.3 million, or $.20 per diluted share, as compared with a loss of $8.4 million, or $.51 per diluted share, in the prior year quarter, which included the aforementioned charge. NET SALES. In the sporting goods segment, net sales rose 9.0% to $102.1 million from $93.7 million in the 1998 third quarter. Sales in the quarter benefited from strong double digit percentage increases in the snowboard, fishing tackle, Stearns and bike businesses. Increased snowboard volume primarily reflects the Company's shipment of K2 brand products and Morrow brand products acquired earlier in the year. The popularity of the Ugly Stik, packaged rods and reels and new product introductions fueled the increase in Shakespeare fishing tackle sales. Higher shipments of flotation and new outdoor products accounted for the increase in sales of Stearns products. The restructured bike group continued to improve as higher sales were reported for the third consecutive quarter. Ski shipments declined in the third quarter reflecting the impact of a mild winter on preseason orders and a lower domestic market share. The Company recently introduced K2's new MOD ski technology which has been well received by its dealers. Despite an increase in European preseason orders, in-line skate sales declined as retailers worldwide became more cautious in maintaining inventory levels. In the other recreational products segment, net sales declined from $11.9 million to $10.4 million as the Company experienced lower apparel sales to the advertising specialty market due to continued sluggish market conditions. Net sales of the two businesses in the industrial products group, Shakespeare composites and electronics and Shakespeare monofilaments and specialty resins, declined 3.3% to $27.4 million from $28.3 million in the prior year's quarter. The sales decline reflected reduced demand for monofilament line used in the paper industry. Partially offseting this were improved sales of marine antennas and specialty resins. GROSS PROFIT. Gross profit for the third quarter of 1999 increased to $43.7 million, or 31.2% of net sales, as compared with $32.2 million, or 24.1% of net sales, in the year ago quarter. Excluding the effect of the charge for reserves, gross profit for the 1998 third quarter was $39.9 million, or 29.8% of net sales. The improvement in gross profit percentage before the prior year charge reflects an improved product mix and fewer close-out sales. In the winter sports area, sales of ski and snowboard products were negatively impacted by manufacturing delays from the factory and margins declined from higher manufacturing costs. The Company is nearing completion of an extensive planning process intended to improve K2's manufacturing and procurement processes. Alternative opportunities for significant 9 improvement have been identified and an announcement of the Company's plan will be made when the improvement plan is finalized during the fourth quarter. COSTS AND EXPENSES. Selling expenses increased 7.8% to $23.2 million, or 16.6% of net sales, from $21.5 million, or 16.1% of net sales, in the prior year's quarter. The increase largely reflects the impact of the new brand acquired and new products developed this year along with the inclusion of selling expenses of an affiliate acquired in Japan late in the third quarter of 1998. General and administrative expenses improved to $13.0 million, or 9.3% of net sales, from $20.2 million, or 15.1% of net sales, in the 1998 third quarter. Excluding the effect of the charge for reserves, general and administrative expenses in the 1998 third quarter were $13.4 million or 10.0% of net sales. The reduction in general and administrative expenses before the prior year charge reflects the benefit of ongoing expense reduction efforts throughout the Company. OPERATING INCOME. Operating income for the third quarter was $7.5 million or 5.4% of net sales. This contrasts with an operating loss of $9.5 million, a year ago. Excluding the charge for reserves, operating income in the year ago quarter was $5.0 million, or 3.8% of net sales. The improvement before the prior year charge is attributable to the increases in sales volume and gross profit percentage. INTEREST EXPENSE. Interest expense decreased $156,000 to $2.7 million in the third quarter of 1999 compared to $2.8 million in the year-earlier period. The lower figure for the quarter reflected benefits of $43,000 and $113,000, from lower interest rates and lower average borrowings, respectively, during the quarter. COMPARATIVE NINE-MONTH RESULTS OF OPERATIONS Net sales from continuing operations for the nine months ended September 30, 1999 increased 4.4% to $461.2 million from $441.7 million in the year-earlier period. Income from continuing operations for the first nine months of 1999 was $13.5 million, or $.82 per diluted share, as compared with $2.2 million, or $.13 per diluted share, in the first nine months of 1998. Net income was $14.6 million, or $.88 per diluted share, as compared with $2.9 million, or $.17 per diluted share, in the year ago period. Before the third quarter 1998 aftertax charge of $9.4 million, or $0.57 per diluted share, previously referred to, income from continuing operations and net income for the first nine months of 1998 were $.70 and $.74 per diluted share, respectively. NET SALES. In the sporting goods segment, net sales increased 8.7% to $339.3 million from $312.0 million in the 1998 period. The growth was the result of increases in worldwide skate, fishing tackle, snowboard and bike sales. Partially offsetting these increases were lower sales of ski products due to the mild winter impact on re-orders and preseason orders. Sales of Stearns products were comparable with the prior year. In the other recreational products segment, net sales declined slightly to $30.7 million from $31.8 million reflecting lower apparel sales to the advertising specialty market due to continued sluggish market conditions. This was partially offset by improved sales of skateboard shoes. 10 Net sales of the two businesses in the industrial products group, Shakespeare composites and electronics and Shakespeare monofilaments and specialty resins, fell 6.8% to $91.2 million from $97.9 million in the prior year. The sales decline reflected lower demand for paperweaving monofilament line, which was partially offset by an increase in sales of cutting line and marine antennas. GROSS PROFIT. Gross profit for the first nine months of 1999 increased 12.2% to $136.1 million, or 29.5% of net sales, from $121.3 million, or 27.5% of net sales, in the prior year period. Excluding the effect of the charge for reserves, gross profit was $129.0 million or 29.2% for the first nine months of 1998. The gross profit improvement before the prior year charge is primarily sales related with the increase in gross profit percentage coming from an improved sales mix. COSTS AND EXPENSES. Selling expenses increased 7.9% to $69.1 million, or 15.0% of net sales, from $64.1 million, or 14.5% of net sales, in the prior year. The increase is attributable to expanded marketing of the various brands and products throughout the Company along with the inclusion of selling expenses related to an affiliate acquired in Japan late in the third quarter of 1998. General and administrative expenses were $38.2 million, or 8.3% of net sales, as compared with $45.4 million or 10.3% of net sales, in the prior year. Excluding the effect of the charge for reserves, general and administrative expenses were $38.6 million, or 8.7% of net sales, in the prior year. OPERATING INCOME. Operating income for the first nine months was $28.8 million, or 6.2% of net sales, as compared with $11.8 million, or 2.7%, in the prior year. Excluding the charge for reserves, operating income a year ago was $26.3 million, or 6.0% of net sales. The improvement before the prior year charge is attributable to the increases in sales volume and gross profit percentage. INTEREST EXPENSE. Interest expense decreased $142,000 for the first nine months of 1999 compared to the year-earlier period. Higher average borrowings incurred to support the growth in sales increased interest expense by $708,000, which was offset by a reduction of $850,000 of interest due to lower interest rates. LIQUIDITY AND SOURCES OF CAPITAL The Company's continuing operating activities provided $63.0 million of cash during the nine months ended September 30, 1999 as compared with $4.3 million of cash provided during the nine month period a year ago. The $58.7 million year-to-year improvement in cash is primarily attributable to reduced accounts receivable and inventory levels from the same prior year period. Net cash used for investing activities was $18.9 million in the first nine months of 1999, compared to $15.4 million in the first nine months of 1998. The 1999 period reflected the negative impact of foreign currencies on the Company's foreign investments, $2.1 million of lower capital expenditures and $3.0 million used in the acquisition of certain assets of Morrow Snowboards, Inc. There were no material commitments for capital expenditures at September 30, 1999. 11 Net cash used in financing activities was $41.1 million during the nine months ended September 30, 1999 as contrasted with $6.7 million of cash provided during the nine month period a year ago. The year to year increase of $47.8 million in cash used was due to lower borrowings and higher debt repayments. The Company anticipates its remaining cash needs in 1999 will be provided from operations and borrowings under existing credit lines. YEAR 2000 ISSUE As is more fully described in the Company's Annual Report on Form 10-K for the year ended December 31, 1998, the Company is modifying or replacing portions of its software as well as certain hardware to enable the uninterrupted continuation of its operations beyond December 31, 1999. As of September 30, 1999, the Company estimates that its progress toward completion of its Year 2000 remediation plan is as described below. The Company's plan to resolve the Year 2000 issue involves the following four phases: assessment, remediation, testing, and implementation. To date, the Company has fully completed its assessment of all systems that it believes could have a material impact on the sales, liquidity or operations of the Company and that could be significantly affected by the Year 2000 issue. The completed assessment indicated that most of the Company's significant information technology systems could be affected. That assessment also indicated that certain software and hardware (embedded chips) used in production and manufacturing systems (hereafter also referred to as operating equipment) are at risk. Based on a review of its product line, the Company has determined that the products it has sold and will continue to sell do not require remediation to be Year 2000 compliant. Accordingly, the Company does not believe that the Year 2000 presents a material exposure as it relates to the Company's products. In addition, the Company has gathered information about the Year 2000 compliance status of its significant suppliers and subcontractors and continues to monitor their compliance. For its information technology exposures, to date the Company is approximately 95% complete on the remediation phase overall. The Company expects to complete software reprogramming and replacement no later than December 15, 1999. Once software is reprogrammed or replaced for a system, the Company begins testing and implementation. These phases run concurrently for different systems. To date, the Company has completed approximately 70% of its testing overall and has implemented approximately 75% of its remediated systems where such remediation was found to be necessary. Completion of the testing and remediation phases for all significant systems is expected by December 15, 1999. The Company is approximately 95% complete in the remediation phase of its operating equipment and the Company is 100% complete with the testing of its remediated operating equipment. The Company's billing system interfaces directly with certain significant customers. The Company is in the process of working with these customers to ensure that the Company's systems that interface directly with them are Year 2000 compliant by December 31, 1999. The Company has completed its assessment phase and is approximately 90% complete with the remediation, testing and implementation phases. 12 The Company has queried its significant suppliers and subcontractors that do not share information systems with the Company (external agents). To date, the Company is not aware of any external agent with a Year 2000 issue that would materially impact the Company's results of operations, liquidity, or capital resources. However, the Company has no means of ensuring that external agents will be Year 2000 ready. The inability of external agents to complete their Year 2000 resolution process in a timely fashion could materially impact the Company. The effect of non-compliance by external agents is not determinable. The total cost of the Year 2000 issue is estimated at $1.5 million and is being funded through operating cash flows. To date, the Company has incurred approximately $1,106,000 ($440,000 expensed and $666,000 capitalized for new systems) related to all phases of the Year 2000 project. Management's assessment of the risks associated with the Year 2000 issue are unchanged from that described in the 1998 annual report on Form 10-K. The Company's plan to complete the Year 2000 modifications is based on management's best estimates, which are based on numerous assumptions about future events including the continued availability of certain resources and other factors. Estimates on the status of completion and the expected completion dates are based on the level of effort expended to date to total expected (internal) staff effort. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those plans. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all the relevant computer codes and similar uncertainties. 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 the Company'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 acceptance and demand, inventory reduction efforts, the impact of the Year 2000 on computerized information systems, cost reduction efforts and overall trends which involve substantial risks and uncertainties. The Company cautions that these statements are further qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements, including, but not limited to, economic conditions, product demand, competitive pricing and products, and other risks described in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. ITEM 3 Quantitative and Qualitative Disclosures of Market Risk The Company's earnings and cash flow are subject to fluctuations due to changes in foreign currency exchange rates. The Company 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. A hypothetical 10% weakening of the U.S. dollar relative to all other currencies would not materially adversely affect expected 13 fourth quarter 1999 earnings or cash flows. This analysis is dependent on actual purchases during the next quarter occurring within 90% of budgeted forecasts. The effect of the hypothetical change in exchange rates ignores the effect this movement may have on other variables including competitive risk. If it were possible to quantify this competitive impact, the results could well be different than the sensitivity effects shown above. In addition, it is unlikely that all currencies would uniformly strengthen or weaken relative to the U.S. dollar. In reality, some currencies may weaken while others may strengthen. 14 PART II - OTHER INFORMATION ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The following exhibit is filed as part of this report. 27 Financial Data Schedule for the nine months ended September 30, 1999. (b) Reports on Form 8-K filed since the date of the last Form 10-Q Report on Form 8-K dated October 22, 1999 containing the Company's press release dated October 8, 1999 announcing the completion of the Company's acquisition of the issued and outstanding shares of common stock of Ride, Inc. on October 7, 1999. 15 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: November 12, 1999 /s/ RICHARD M. RODSTEIN -------------------------- Richard M. Rodstein President and Chief Executive Officer Date: November 12, 1999 /s/ JOHN J. RANGEL ------------------ John J. Rangel Senior Vice President - Finance 16 EX-27 2 EXHIBIT 27
5 1,000 9-MOS DEC-31-1999 SEP-30-1999 9,855 0 120,224 (5,170) 166,190 307,241 160,289 (88,665) 430,454 111,385 0 0 0 17,191 195,140 430,454 461,235 461,235 325,098 325,098 107,320 2,092 9,005 19,918 6,375 13,543 1,044 0 0 14,587 .88 .88
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