-----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, C23308/DBfpmjmDwPq7eEv32VQKse9JwIl2oG8LBfgI+OwKlLm5Z3BUrol6u/ZTS 3d3yAbggR9U7vw1W39K1ow== 0001047469-99-020505.txt : 19990517 0001047469-99-020505.hdr.sgml : 19990517 ACCESSION NUMBER: 0001047469-99-020505 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 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: 99622620 BUSINESS ADDRESS: STREET 1: 4900 S EASTERN AVE STREET 2: SUITE 200 CITY: LOS ANGELES STATE: CA ZIP: 90040 BUSINESS PHONE: 2137242800 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 March 31, 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 April 30, 1999. Common Stock, par value $1 16,565,806 Shares FORM 10-Q QUARTERLY REPORT PART - 1 FINANCIAL INFORMATION ITEM 1 Financial Statements STATEMENTS OF CONSOLIDATED INCOME (condensed) (Dollars in thousands, except per share figures)
THREE MONTHS ENDED MARCH 31 --------------------------- 1999 1998 --------------------------- (Unaudited) Net sales $ 163,060 $ 151,041 Cost of products sold 118,749 109,599 --------- --------- Gross profit 44,311 41,442 Selling expenses 23,096 21,054 General and administrative expenses 13,457 13,271 --------- --------- Operating income 7,758 7,117 Interest expense 3,297 3,139 Other income, net (100) (62) --------- --------- Income before income taxes 4,561 4,040 Provision for income taxes 1,458 1,321 --------- --------- Income from continuing operations 3,103 2,719 Discontinued operations, net of taxes 149 426 --------- --------- Net income $ 3,252 $ 3,145 --------- --------- --------- --------- Basic earnings per share: Continuing operations $ 0.19 $ 0.16 Discontinued operations 0.01 0.03 --------- --------- Net income 0.20 0.19 --------- --------- --------- --------- Diluted earnings per share: Continuing operations $ 0.19 $ 0.16 Discontinued operations 0.01 0.03 --------- --------- Net income 0.20 0.19 --------- --------- --------- --------- Basic shares outstanding 16,566 16,537 Diluted shares outstanding 16,566 16,616 Cash dividend $ 0.11 $ 0.11
See notes to consolidated condensed financial statements 1 CONSOLIDATED BALANCE SHEETS (condensed) (In thousands, except share and per share figures)
MARCH 31 DECEMBER 31 1999 1998 ----------- ----------- (Unaudited) ASSETS Current Assets Cash and cash equivalents $ 3,843 $ 3,394 Accounts receivable, net 138,601 126,011 Inventories, net 163,867 188,348 Deferred taxes 11,528 12,780 Prepaid expenses and other current assets 6,831 5,037 --------- --------- Total current assets 324,670 335,570 Property, plant and equipment 153,727 151,071 Less allowance for depreciation and amortization 86,834 84,480 --------- --------- 66,893 66,591 Intangibles, principally goodwill, net 19,284 19,564 Net assets of discontinued operations 27,382 27,511 Other 6,455 3,759 --------- --------- Total Assets $ 444,684 $ 452,995 --------- --------- --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Bank loans $ 61,718 $ 64,350 Accounts payable 14,142 20,807 Accrued payroll and related 17,070 15,982 Other accruals 22,941 21,555 Current portion of long-term debt 4,444 4,444 --------- --------- Total current liabilities 120,315 127,138 Long-term debt 110,224 110,724 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 68,657 67,227 Employee Stock Ownership Plan and stock option loans (1,975) (1,981) Treasury shares at cost, 624,846 shares in 1999 and 623,759 in 1998 (8,118) (8,106) Accumulated other comprehensive loss (7,112) (4,700) --------- --------- Total Shareholders' Equity 201,131 202,119 --------- --------- Total Liabilities and Shareholders' Equity $ 444,684 $ 452,995 --------- --------- --------- ---------
See notes to consolidated condensed financial statements 2 STATEMENTS OF CONSOLIDATED CASH FLOWS (condensed) (In thousands)
THREE MONTHS ENDED MARCH 31 --------------------------- 1999 1998 -------- -------- (unaudited) Operating Activities Income from continuing operations $ 3,103 $ 2,719 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 3,131 3,259 Deferred taxes 396 437 Changes in operating assets and liabilities: Accounts receivable (12,590) (5,091) Inventories 24,481 388 Prepaid expenses and other current assets (1,866) (485) Accounts payable (6,665) (4,024) Payrolls and other accruals 2,475 480 -------- -------- Net cash provided by (used in) operating activities 12,465 (2,317) Investing Activities Property, plant & equipment expenditures (3,210) (5,390) Disposals of property, plant & equipment 74 84 Purchase of business (2,961) Other items, net (1,816) (1,675) -------- -------- Net cash used in investing activities (7,913) (6,981) Financing Activities Borrowings under long-term debt 5,500 13,000 Payments of long-term debt (6,000) (2,001) Net decrease in short-term bank loans (2,632) (186) Dividends paid (1,822) (1,820) -------- -------- Net cash (used in) provided by financing activities (4,954) 8,993 -------- -------- Net decrease in cash and cash equivalents from continuing operations (402) (305) Discontinued operations Income from discontinued operations 149 426 Adjustments to reconcile income to net cash provided by (used in) discontinued operations: Depreciation and amortization 755 757 Capital expenditures (1,360) (1,325) Other items, net 1,307 1,177 -------- -------- Cash provided by discontinued operations 851 1,035 Net increase in cash and cash equivalents 449 730 Cash and cash equivalents at beginning of year 3,394 5,706 -------- -------- Cash and cash equivalents at end of period $ 3,843 $ 6,436 -------- -------- -------- -------- Supplemental disclosure of cash flow information: Interest paid $ 2,830 $ 2,740 Income taxes paid 287 1,113
See notes to consolidated condensed financial statements 3 K2 INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS MARCH 31, 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 month period ended March 31, 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 $5,341,000 at March 31, 1999 and $5,798,000 at December 31, 1998. INVENTORIES The components of inventory consist of the following:
March 31 December 31 1999 1998 --------- ----------- (Thousands) Finished goods $126,867 $146,233 Work in process 9,537 8,078 Raw materials 31,192 37,911 -------- -------- Total at lower of FIFO cost or market (approximates current cost) 167,596 192,222 Less LIFO valuation reserve 3,729 3,874 -------- -------- $163,867 $188,348 -------- -------- -------- --------
4 K2 INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1999 NOTE 3 - ACQUISITION On March 26, 1999, the Company acquired certain assets relating to the Morrow snowboard business, including the Morrow trademark, from Morrow Snowboards, Inc. NOTE 4 - 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 March 31, 1999, $7.5 million of retained earnings were free of such restrictions. At March 31, 1999, $50 million of accounts receivable were sold, fully utilizing the existing accounts receivable purchase facility. NOTE 5 - COMPREHENSIVE INCOME Total comprehensive income was $.8 million and $3.0 million for the three months ended March 31, 1999 and 1998, respectively. NOTE 6- 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. The March 31, 1999 computation of diluted EPS excluded all 1,115,000 stock options outstanding since their inclusion would have been antidilutive. The March 31, 1998 computation of diluted EPS included the dilutive effects of 79,000 stock options and excluded 612,000 stock options since their inclusion would have been antidilutive. 5 K2 INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1999 NOTE 7 - SEGMENT INFORMATION The segment information presented below is as of March 31:
Net Sales to Unaffiliated Customers Intersegment Sales Operating Profit (Loss) ------------------ ------------------ ----------------------- 1999 1998 1999 1998 1999 1998 ------ ------- ------- ----- ---------- -------- (Millions) Sporting goods $121.3 $107.2 $5.8 $5.3 $ 4.9 $ 4.4 Other recreational 9.9 9.4 - - (0.7) (0.7) Industrial 31.9 34.4 0.3 0.3 5.1 5.0 ------ ------ ---- ---- ----- ----- Total segment data $163.1 $151.0 $6.1 $5.6 9.3 8.7 ------ ------ ---- ---- ----- ----- ------ ------ ---- ---- Corporate expenses, net (1.4) (1.6) Interest expense 3.3 3.1 ----- ------ Income from continuing operations before provision for income taxes $ 4.6 $ 4.0 ----- ------ ----- ------
6 ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations COMPARATIVE FIRST QUARTER RESULTS OF OPERATIONS Net sales from continuing operations for the three months ended March 31, 1999 increased 8.0% to $163.1 million from $151.0 million in the year-earlier period. Income from continuing operations for the first quarter of 1999 rose 14.8% to $3.1 million, or $.19 per diluted share, from $2.7 million, or $.16 per diluted share, in the first quarter of 1998. Net income increased to $3.3 million, or $.20 per diluted share, from $3.1 million, or $.19 per diluted share, in the prior year quarter. NET SALES. In the sporting goods segment, net sales increased 13.2% to $121.3 million from $107.2 million in the 1998 first quarter. The growth was primarily the result of a double-digit increase in worldwide skate sales. Shakespeare fishing tackle has experienced a strong order rate in the domestic market led by continued growth of the Ugly Stik line, new packaged rods and reels and other new products. Timing of certain shipments to large customers, however, resulted in first quarter overall sales that were flat with the prior year. Stearns sales were off slightly, reflecting decline in the water ski vest and wetsuit business which offset growth from new products. The mild winter produced lower sales and a higher proportion of closeout sales of ski and snowboard products in the seasonally weak first quarter. In the other recreational products segment, net sales of $9.9 million rose slightly from the year ago period of $9.4 million. The improvement arose from sales of new skateboard shoes, which more than offset lower 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, fell 7.4% to $31.9 million from $34.4 million in the prior year's quarter. The decline was due to reduced demand for paperweaving monofilament line which was only partially offset by an increase in cutting line and marine antenna sales. GROSS PROFIT. Gross profits for the first quarter of 1999 rose 7.0% to $44.3 million, or 27.2% of net sales, as compared with $41.4 million, or 27.4% of net sales, in the year ago quarter. The decline in the gross profit percentage was mainly due to costs incurred resulting from a planned shutdown of the ski and snowboard plant in the first quarter to reduce inventory levels. COSTS AND EXPENSES. Selling expenses increased 9.5% to $23.1 million, or 14.2% of net sales, from $21.1 million, or 14.0% of net sales, in the prior year's quarter. The dollar increase is attributable to expanded marketing of the various brands and products throughout the Company. General and administrative expenses were comparable at $13.5 million, or 8.3% of net sales, from $13.3 million, or 8.8% of net sales, in the 1998 first quarter. The decline as a percentage of net sales is due to the effect of ongoing expense controls throughout this Company, particularly in the bike business. 7 OPERATING INCOME. Operating income for the first quarter improved 9.8% to $7.8 million, or 4.8% of net sales, as compared to operating income of $7.1 million, or 4.7% of net sales, a year ago. The dollar increase is due to a higher gross profit, offset by increased selling expenses. INTEREST EXPENSE. Interest expense increased $158,000 to $3.3 million in the first quarter of 1999 compared to $3.1 million in the year-earlier period. Higher average borrowings incurred to support the growth in sales increased interest expense by $427,000, which was offset by a reduction of $269,000 of interest due to lower interest rates. LIQUIDITY AND SOURCES OF CAPITAL The Company's continuing operating activities provided $12.5 million of cash during the three months ended March 31, 1999, as contrasted with $2.3 million of cash used during the three- month period a year ago. The $14.8 million year-to-year improvement in cash largely reflected lower inventory levels in the current period which more than offset higher levels of accounts receivable. Net cash used for investing activities was $7.9 million in the current first quarter compared to $7.0 million in the 1998 first quarter. The 1999 period included a $3.0 million cash outlay for the acquisition of certain assets of a snowboard company, and reflected $2.2 million of lower capital expenditures. There were no material commitments for capital expenditures at March 31, 1999. Net cash used in financing activities was $5.0 million in the 1999 first quarter compared with $9.0 million provided in the corresponding year-ago quarter. The year to year decrease of $14.0 million in cash used in financing activities was due to a higher net repayment of debt. 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 continued operations beyond December 31, 1999. As of March 31, 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 8 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 75% complete on the remediation phase overall. The Company expects to complete software reprogramming and replacement no later than September 30, 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 50% 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 September 30, 1999. The Company is approximately 90% 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 and testing phases and is approximately 75% complete with the remediation phase. 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 continues to be estimated at $1.5 million and is being funded through operating cash flows. To date, the Company has incurred approximately $350,000 ($275,000 expensed and $75,000 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. 9 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 second 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. 10 PART II - OTHER INFORMATION ITEM 4 SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS (c) At the Annual Meeting of the Stockholders of the Company held May 6, 1999, the following actions were taken: (1) Three directors were elected: Jerry E. Goldress - 12,052,924 votes for and 398,964 votes withheld; John H. Offermans - 12,034,227 votes for and 417,661 votes withheld; Alfred E. Osborne, Jr. - 12,051,813 votes for and 400,075 votes withheld. (2) The K2 1999 Stock Option Plan was adopted as follows: 8,510,201 votes for, 749,367 votes against and 168,394 votes abstained. (3) The selection by the Board of Directors of Ernst & Young LLP as the Company's independent auditors for the year 1999 was ratified as follows: 12,283,723 votes for, 85,683 votes against and 82,482 votes abstained. ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K filed in the first quarter ended March 31, 1999 None 11 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:May 14, 1999 /s/ RICHARD M. RODSTEIN ----------------------------- Richard M. Rodstein President and Chief Executive Officer Date:May 14, 1999 /s/ JOHN J. RANGEL ------------------------------- John J. Rangel Senior Vice President - Finance 12 EX-27 2 EXHIBIT 27
5 1,000 3-MOS DEC-31-1999 MAR-31-1999 3,843 0 143,942 (5,341) 163,867 324,670 153,727 (86,834) 444,684 120,315 0 0 0 17,191 183,940 444,684 163,060 163,160 118,749 118,749 35,792 761 3,297 4,561 1,458 3,103 149 0 0 3,252 .20 .20
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