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, 1996 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 (213) 724-2800
Former name, former address and former fiscal year, if changed since last
report:
Anthony Industries, Inc.
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, 1996.
Common Stock, par value $1 16,574,830 Shares
1
FORM 10-Q QUARTERLY REPORT
PART - 1 FINANCIAL INFORMATION
Item 1. Financial Statements
STATEMENTS OF CONSOLIDATED INCOME (condensed)
(In thousands except for per share figures)
(Unaudited)
Three months Six months
ended June 30 ended June 30
---------------------------------------------------
1996 1995(a) 1996 1995(a)
------------------------ ------------------------
Net Sales $143,373 $135,847 $302,226 $273,868
Cost of products sold 102,157 99,664 219,627 203,353
-------- -------- -------- --------
Gross profit 41,216 36,183 82,599 70,515
Selling expenses 16,569 14,772 35,701 29,809
General and administrative expenses 12,428 11,090 25,502 22,788
-------- -------- -------- --------
Operating income 12,219 10,321 21,396 17,918
Interest expense 2,297 2,715 4,729 5,547
Other income, net (335) (419) (632) (681)
-------- -------- -------- --------
Income before provision for income taxes 10,257 8,025 17,299 13,052
Provision for income taxes 3,280 2,604 5,535 4,034 (b)
-------- -------- -------- --------
Income from continuing operations 6,977 5,421 11,764 9,018
Discontinued operations, net of taxes 943 (567)
-------- -------- -------- --------
Net Income $ 6,977 $ 6,364 $ 11,764 $ 8,451
======== ======== ======== ========
Per share
Continuing operations $ 0.42 $ 0.41 $ 0.70 $ 0.71
Discontinued operations 0.07 (0.04)
-------- -------- -------- --------
Net Income $ 0.42 $ 0.48 $ 0.70 $ 0.67
======== ======== ======== ========
Cash dividend $ 0.11 $ 0.11 $ 0.22 $ 0.22
Average shares outstanding 16,742 13,127 16,731 12,626
(a) Information has been restated to reflect the sale of the assets and
business of the swimming pool and motorized pool cover business.
(b) Reduced by $259, or 2 cents per share, foreign tax settlement.
See notes to consolidated condensed financial statements.
2
CONSOLIDATED BALANCE SHEETS (condensed)
(dollars in thousands)
June 30 December 31
1996 1995
------------- --------------
(Unaudited)
Assets
------
Current Assets
Cash and cash equivalents $ 5,640 $ 7,357
Accounts receivable, less allowances of
$6,040 in 1996 and $8,235 in 1995 94,146 140,202
Inventories
Finished goods 87,521 97,193
Work in process 13,587 9,700
Raw materials 35,194 38,668
-------- --------
136,302 145,561
Less LIFO reserve 5,770 4,882
-------- --------
130,532 140,679
Deferred taxes 4,475 6,683
Prepaid expenses and other current assets 4,501 5,534
-------- --------
Total current assets 239,294 300,455
Property, Plant and Equipment 147,375 139,706
Less allowance for depreciation and amortization 86,214 82,599
-------- --------
61,161 57,107
Intangibles, principally goodwill 14,722 14,108
Net assets of discontinued operations 5,702 8,650
Other 3,418 4,103
-------- --------
Total Assets $324,297 $384,423
======== ========
See notes to consolidated condensed financial statements.
3
CONSOLIDATED BALANCE SHEETS (condensed)
(dollars in thousands)
June 30 December 31
1996 1995
------- -----------
(Unaudited)
Liabilities and Shareholders' Equity
------------------------------------
Current Liabilities
Bank loans $ 696 $ 50,219
Accounts payable 19,105 27,985
Accrued payroll and related 20,138 21,443
Other accruals 13,874 16,031
Current portion of long-term debt 4,872 4,855
-------- --------
Total current liabilities 58,685 120,533
Long-Term Debt 69,353 75,071
Deferred Taxes 13,003 13,003
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-
17,093,014 in 1996 and 17,064,065 in 1995 17,093 17,064
Additional paid-in capital 131,300 130,995
Retained earnings 45,237 37,121
Employee Stock Ownership Plan and
stock option loans (3,193) (4,778)
Treasury shares at cost, 519,684 share in
1996 and 481,059 in 1995 (5,246) (4,189)
Cumulative translation adjustments (1,935) (397)
-------- --------
Total Shareholders' Equity 183,256 175,816
-------- --------
Total Liabilities and Shareholders' Equity $324,297 $384,423
======== ========
See notes to condensed financial statements.
4
STATEMENTS OF CONSOLIDATED CASH FLOWS (condensed)
(dollars in thousands)
Six months
ended June 30
------------------------
1996 1995
------------------------
(unaudited)
Operating Activities
Income from continuing operations $ 11,764 $ 9,018
Adjustments to reconcile income from
continuing operations to net cash provided
by (used in) operating activities:
Depreciation and amortization 5,380 5,216
Deferred taxes 2,208 1,163
Changes in operating assets and liabilities:
Accounts receivable 5,331 (11,338)
Inventories 10,147 (12,648)
Prepaid expenses and other current assets 1,033 (921)
Accounts payable (8,880) (2,186)
Payrolls and other accruals (98) 3,097
-------- --------
Net cash provided by (used in) operating activities 26,885 (8,599)
Investing Activities
Property, plant & equipment expenditures (7,966) (10,123)
Disposals of property, plant & equipment (9) 71
Other items, net (2,480) (246)
-------- --------
Net cash used in investing activities (10,455) (10,298)
Financing Activities
Borrowings under long-term debt and revolving lines of credit 30,000
Payments of long-term debt and revolving lines of credit (35,701) (63,961)
Net increase (decrease) in short-term bank loans (49,523) 16,280
Proceeds from sale of accounts receivable 40,725
Dividends paid (3,648) (3,118)
Net proceeds from stock offering 67,230
-------- --------
Net cash provided by (used in) financing activities (18,147) 16,431
-------- --------
Net decrease in cash and cash equivalents from
continuing operations (1,717) (2,466)
Discontinued Operations
Loss from discontinued operations (567)
Adjustments to reconcile loss to net cash used in
discontinued operations:
Depreciation and amortization 220
Capital expenditures (488)
Other items, net (1,609)
--------
Cash used in discontinued operations (2,444)
--------
Net decrease in cash and cash equivalents (1,717) (4,910)
Cash and cash equivalents at beginning of year 7,357 7,700
-------- --------
Cash and cash equivalents at end of period $ 5,640 $ 2,790
======== ========
Supplemental disclosure of cash flow information:
Interest paid $ 4,502 $ 5,739
Income taxes paid 1,753 2,583
-------- --------
$ 6,255 $ 8,322
======== ========
See notes to consolidated condensed financial statements.
5
K2 INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 1996
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, 1996, are not necessarily indicative of the results that may be expected for
the year ended December 31, 1996. 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, 1995.
NOTE 2 - Summary of Significant Accounting Policies
On June 3, 1996, the Company officially changed its name from Anthony
Industries, Inc. to K2 Inc.
The Company maintains its books using a 52/53 week year ending on the last
Sunday of December. For purposes of the consolidated financial statements, the
yearend is stated as December 31. The year ending December 31, 1996 will
consist of 52 weeks and each of the quarters will consist of 13 weeks. The year
ended in 1995 consisted of 53 weeks with the additional week included in the
first quarter ended March 31, 1995.
NOTE 3 - Newly Issued Accounting Standard
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" which requires that impaired assets
or assets to be disposed of be accounted for at the lower of carrying amount or
fair value of the assets less cost of disposal. The adoption of the new
standard did not have a material effect on the Company's financial statements.
NOTE 4 - Discontinued Operations
On March 5, 1996 the Company completed the sale of substantially all of the
assets and business of its swimming pool and motorized pool cover business
("Division") to General Aquatics, Inc. As a result of the sale, the Company
reclassified the accompanying prior year's financial statements to show the
Division as a discontinued operation.
6
K2 INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 1996
NOTE 5 - Borrowings and Sale of Accounts Receivable
On May 21, 1996, the Company entered into an agreement providing for a $75
million, five-year bank revolving credit line due May 20, 2001. Interest on
borrowings under this agreement is at various rates based on LIBOR plus a spread
ranging from .3 of one percent through .625 of one percent. A commitment fee,
ranging from .1 of one percent through .225 of one percent, is payable on the
unused portion of the credit. At June 30, 1996, $30 million was outstanding
under this line.
On May 21, 1996, the Company entered into an accounts receivable purchase
facility with a bank to provide for the sale of up to $50 million of an
undivided interest in a pool of accounts receivable. The agreement expires May
20, 1997, and is subject to extension upon consent from the bank. The ongoing
costs pertaining to the agreement are based on the purchaser's cost of issuing
commercial paper plus a fixed rate. At June 30, 1996, accounts receivable
carried on the balance sheet were reduced by $40.7 million representing the sale
of receivables under this program.
The proceeds from the $75 million credit facility and from the sale of
receivables were used to retire an $85 million credit facility and a $40 million
364-day unsecured revolving short-term facility. The $75 million credit
facility and the accounts receivable purchase facility are subject to an
agreement which, among other things, restricts amounts available for payment of
cash dividends by the Company. As of June 30, 1996, $8.7 million of retained
earnings were free of such restrictions.
NOTE 6 - Stock Offering
On June 1, 1995, the Company completed its public offering of 4.6 million
primary shares of its common stock. The net proceeds of $67.2 million were used
to reduce amounts outstanding under the $85 million credit facility ("Credit
Facility").
On a proforma basis, assuming the offering had been completed on January 1,
1995, earnings per share from continuing operations were 42 cents for the 1996
second quarter versus 33 cents for the year-earlier quarter and 70 cents for the
1996 six-month period versus 62 cents for the corresponding year-ago period.
7
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
A. Comparative Second Quarter Results of Operations
Net sales from continuing operations for the three months ended June 30, 1996
increased 5.6% to $143.4 million compared to $135.8 million in the year-earlier
period. Income from continuing operations for the second quarter of 1996 grew
29.6% to $7.0 million from $5.4 million in the second quarter of 1995. Earnings
per share from continuing operations, reflecting the completion on June 1, 1995
of the Company's public offering of 4.6 million shares, was $.42 per share as
compared with $.41 per share in the year-ago quarter. Net income for the second
quarter was $7.0 million, or $.42 per share, as compared with $6.4 million, or
$.48 per share in 1995, after including net income from discontinued operations
of $0.9 million, or $.07 per share.
Net Sales. In the sporting goods and other recreational products group, net
sales increased 8.9% to $90.7 million in the 1996 quarter compared to $83.3
million in 1995. The growth was attributable primarily to worldwide shipments
of K2 Exotech in-line skates, mainly in the international markets. Strong sales
of Stearns active water products as well as Hilton Active Apparel also
contributed to the quarter's performance. Domestic sales of Shakespeare fishing
tackle products benefited from sales of promotional products. Partially
offsetting these gains was a decline in the worldwide fishing tackle sales and
lower shipments of full suspension mountain bikes to retailers.
Sales of the industrial products group slightly increased to $52.7 million from
$52.5 million in the prior year quarter. The increase was primarily due to
improvements in the paperweaving monofilament business, partially offset by a
decline in sales of building products.
Gross profit. Gross profit increased 13.8% to $41.2 million, or 28.7% of net
sales, in the second quarter of 1996 as compared to $36.2 million, or 26.7% of
net sales, in the second quarter of 1995. The improvement of gross profit as a
percentage of net sales resulted from the sales mix which included a larger
proportion of higher margin products and gains in efficiency, particularly at K2
and Stearns. Overall gross profit improved despite higher manufacturing costs in
the fiberglass light pole business. In addition, the 1995 period included
higher costs of recycled corrugated scrap paper, which unfavorably affected
gross profit.
Costs and Expenses. In the second quarter of 1996, selling expenses increased
12.2% to $16.6 million, or 11.6% of net sales, from $14.8 million, or 10.9% of
net sales, in the second quarter of 1995. The increase was attributable to
higher spending in support of new products in the in-line skate, snowboard,
mountain bike, backpack and active apparel businesses. General and
administrative expenses increased 11.7% to $12.4 million, or 8.6% of net sales,
in the second quarter of 1996 compared to $11.1 million, or 8.2% of net sales,
in the year-earlier period. Spending increased to support growth of new
products.
8
Operating Income. Operating income advanced 18.4% to $12.2 million, or 8.5% of
net sales, in the second quarter of 1996, compared to $10.3 million, or 7.6% of
net sales, in the comparable 1995 period. The percentage increase was
attributable to a higher gross profit margin which was partially offset by the
increase in selling, general and administrative expenses as a percentage of net
sales.
Interest Expense. Interest expense decreased by $0.4 million in the second
quarter of 1995 compared to the year-earlier period. Lower interest rates
accounted for $0.3 million of the decrease, and $8.6 million reduced levels of
average borrowings accounted for the remainder.
B. Comparative Six-Month Results of Operations
Net sales for the six months ended June 30, 1996 increased 10.3% to $302.2
million as compared to $273.9 million in the corresponding prior year period.
Income from continuing operations advanced 31.1% to $11.8 million, or $.70 per
share from $9.0 million, or $.71 per share in the 1995 period. Net income grew
38.8% to $11.8 million, or $.70 per share compared with $8.5 million, or $.67
cents per share in the 1995 six-month period, after deducting a loss from
discontinued operations of $0.6 million, or $.04 per share.
Net Sales. Net sales in the sporting goods and other recreational products
group increased 17.0% to $198.6 million from $169.8 million in the 1995 period.
The improvement was mainly attributable to worldwide shipments of K2 Exotech in-
line skates and snowboards. New product introductions at Stearns accounted for
gains as well as Shakespeare fishing tackle promotional items. Sales of Hilton
active apparel and shipments of ProFlex full-suspension mountain bikes also
contributed to the increase. Additionally, Dana Design backpacks, a 1995
acquisition, reported higher sales.
The industrial products group reported net sales of $103.6 million for the six
months ended June 30, 1996 compared with $104.1 million for the year-earlier
period. Improved sales in paperweaving monofilaments and fiberglass utility and
ornamental light poles were offset by a decline in sales of building products.
Gross profit. Gross profit improved 17.2% to $82.6 million, or 27.3% of net
sales, in the first six months of 1996 compared to $70.5 million, or 25.7% of
net sales, in the corresponding year-ago period. Increased sales of higher
margin products were responsible for the improvement. Additionally, the 1995
gross profit margin was unfavorably impacted by increased costs of recycled
corrugated scrap paper which was only partially offset by price increases.
Costs and Expenses. Selling expenses increased 19.8% to $35.7 million, or 11.8%
of net sales, for the 1996 six month period from $29.8 million, or 10.9% of net
sales, in the same 1995 period. The increase was incurred in support of new
product sales. General and administrative expenses increased 11.8% to $25.5
million in the six months ended June 30, 1996 compared to $22.8 million in the
same period a year ago. As a percentage of net sales, general and administrative
expenses were comparable to the prior year period.
9
Operating Income. Operating income improved 19.6% to $21.4 million, or 7.1% of
net sales, in the first six months of 1996 compared to $17.9 million, or 6.5% of
net sales, in the comparable 1995 period. The percentage increase was due to
higher gross profit margins partially reduced by higher selling expenses.
Interest Expense. Interest expense decreased by $0.8 million in the six months
ended June 30, 1996 compared to the same year-ago period. Lower average
borrowings of $5.6 million accounted for $0.2 million of reduced interest
expense and lower rates accounted for the $0.6 million remainder.
Income Taxes. The provision for income taxes for the first six months of 1996
was reduced as a result of a credit received from a $0.3 million foreign tax
settlement.
C. Financial Condition
The Company's continuing operations provided $26.9 million of cash during the
six month period ended June 30, 1996 whereas the comparable period in 1995 used
$8.6 million. The improvement in cash provided during the current period
reflects improved accounts receivable and inventory management during the
period, primarily with respect to new products. Consistent with prior years,
the allowance for doubtful items decreased as a result of a seasonal reduction
in the allowance for volume discount.
Net cash used for investing activities was $10.5 million in the first six months
of 1996 and was comparable to the $10.3 million used in prior year's period.
No material commitments for capital expenditures existed at June 30, 1996.
Net cash used in financing activities during the six-month period ended June 30,
1996 was $18.1 million as compared with $16.4 million provided by the six-month
period a year ago. The Company retired its three-year $85 million and 364-day
$40 million revolving credit facilities with the proceeds from a new five-year
$75 million revolving credit facility and from the sale of accounts receivable
under its $50 million accounts receivable purchase facility. The prior year
period included proceeds from the stock offering that was used to reduce debt
The Company anticipates its remaining cash needs in 1996 will be provided from
operations and borrowings under the $75 million Credit Line.
10
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On August 1, 1996, the Board of Directors of the Company,
pursuant to Article Thirteenth of the Company's Article of
Incorporation, voted to expand the size of the Board of Directors
from nine to eleven directors and elected the following
individuals as directors to fill the two vacancies:
Susan E. Engel, for a term of office expiring at the annual
meeting of shareholders to be held in 1998 and until her
successor is elected and qualified.
Richard M. Rosenberg, for a term of office expiring at the
annual meeting of shareholders to be held in 1997 and until
his successor is elected and qualified.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3(i) Certificate of Amendment of Restated Certificate of
Incorporation of Anthony Industries, Inc.
10.02 Credit Agreement dated as of May 21, 1996 among
Anthony Industries, Inc., Bank of America National
Trust and Savings Association as Agent, Swing Line
Bank and Issuing Bank and the Other Financial
Institutions Party Hereto.
10.03 Transfer and Administrative Agreement among
Enterprise Funding Corp. as the Company, Anthony
Industries, Inc. as the Transferor and Master
Servicer, and Nationsbank, N.A. as the
Administrative Agent and the Collateral Agent
effective May 21, 1996.
10.04 First Amendment to Note Agreement, dated May 1,
1996.
27 Financial Data Schedule
(a) June 30, 1996 Financial Data Schedule
(b) June 30, 1995 Restated Financial Data Schedule
(b) Reports on Form 8-K filed in the second quarter ended June
30, 1996
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: August 13, 1996 /s/ RICHARD M. RODSTEIN
-----------------------------
Richard M. Rodstein
President and Chief Executive
Officer
Date: August 13, 1996 /s/ JOHN J. RANGEL
-------------------------------
John J. Rangel
Senior Vice President - Finance
12