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, 1997 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:
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, 1997.
Common Stock, par value $1 16,542,121 Shares
FORM 10-Q QUARTERLY REPORT
PART - 1 FINANCIAL INFORMATION
Item 1. Financial Statements
STATEMENTS OF CONSOLIDATED INCOME (condensed)
(Dollars in thousands, except for per share figures)
THREE MONTHS
ENDED MARCH 31
--------------------
1997 1996
--------------------
(Unaudited)
Net sales $171,541 $158,853
Cost of products sold 125,160 117,470
-------- --------
Gross profit 46,381 41,383
Selling expenses 22,391 19,132
General and administrative expenses 13,270 13,074
-------- --------
Operating income 10,720 9,177
Interest expense 2,519 2,432
Other income, net (291) (297)
-------- --------
Income before provision for income taxes 8,492 7,042
Provision for income taxes 2,630 2,255
-------- --------
Net income $ 5,862 $ 4,787
======== ========
Per share data:
Net income $ 0.35 $ 0.29
Cash dividend $ 0.11 $ 0.11
Average shares outstanding 16,727 16,731
See notes to consolidated condensed financial statements.
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CONSOLIDATED BALANCE SHEETS (condensed)
(Dollars in thousands)
MARCH 31 DECEMBER 31
1997 1996
----------- ------------
(Unaudited)
Assets
------
Current Assets
Cash and cash equivalents $ 5,559 $ 10,860
Accounts receivable, net 114,285 94,079
Inventories
Finished goods 105,933 111,989
Work in process 11,664 10,810
Raw materials 38,857 37,041
-------- --------
156,454 159,840
Less LIFO reserve 4,513 4,464
-------- --------
151,941 155,376
Deferred taxes 6,765 8,195
Prepaid expenses and other current assets 5,839 5,899
-------- --------
Total current assets 284,389 274,409
Property, Plant and Equipment 162,845 157,371
Less allowance for depreciation and amortization 92,386 89,848
-------- --------
70,459 67,523
Intangibles, principally goodwill 16,502 16,346
Investments 6,408 6,408
Other 3,200 3,145
-------- --------
Total Assets $380,958 $367,831
======== ========
See notes to consolidated condensed financial statements.
2
CONSOLIDATED BALANCE SHEETS (condensed)
(Dollars in thousands)
MARCH 31 DECEMBER 31
1997 1996
----------- ----------
(Unaudited)
Liabilities and Shareholders' Equity
------------------------------------
Current Liabilities
Bank loans $ 7,022 $ 7,307
Accounts payable 26,238 26,639
Accrued payroll and related 18,793 20,410
Other accruals 15,782 15,012
Current portion of long-term debt 4,887 4,882
-------- --------
Total current liabilities 72,722 74,250
Long-Term Debt 100,983 89,096
Deferred Taxes 15,494 15,497
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 -
17,149,174 in 1997 and 17,131,662 in 1996 17,149 17,132
Additional paid-in capital 131,933 131,627
Retained earnings 59,087 55,047
Employee Stock Ownership Plan and
stock option loans (6,479) (7,087)
Treasury shares at cost, 603,987 shares in 1997
and 575,928 shares in 1996 (7,537) (6,719)
Cumulative translation adjustments (2,394) (1,012)
-------- --------
Total Shareholders' Equity 191,759 188,988
-------- --------
Total Liabilities and Shareholders' Equity $380,958 $367,831
======== ========
See notes to consolidated condensed financial statements.
3
STATEMENTS OF CONSOLIDATED CASH FLOWS (condensed)
(Dollars in thousands)
THREE MONTHS
ENDED MARCH 31
--------------------
1997 1996
--------------------
Operating Activities (Unaudited)
Net income $ 5,862 $ 4,787
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 3,255 2,525
Deferred taxes 1,427 343
Changes in operating assets and liabilities:
Accounts receivable (15,481) (11,605)
Inventories 3,435 8,603
Prepaid expenses and other current assets 60 339
Accounts payable (401) (2,120)
Payrolls and other accruals (847) (835)
-------- --------
Net cash (used in) provided by operating activities (2,690) 2,037
Investing Activities
Property, plant and equipment expenditures (6,209) (4,670)
Disposals of property, plant and equipment 9 12
Other items, net (1,471) (201)
-------- --------
Net cash used in investing activities (7,671) (4,859)
Financing Activities
Borrowings under long-term debt 12,000 4,500
Payments of long-term debt (4,833) (100)
Net decrease in short-term bank loans (285) (1,816)
Dividends paid (1,822) (1,825)
-------- --------
Net cash provided by financing activities 5,060 759
-------- --------
Net decrease in cash and cash equivalents (5,301) (2,063)
Cash and cash equivalents at beginning of year 10,860 7,357
-------- --------
Cash and cash equivalents at end of period $ 5,559 $ 5,294
======== ========
Supplemental disclosure of cash flow information:
Interest paid $ 1,920 $ 1,367
Income taxes paid 1,203 220
-------- --------
$ 3,123 $ 1,587
======== ========
See notes to consolidated condensed financial statements.
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K2 INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 1997
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,
1997, are not necessarily indicative of the results that may be expected for the
year ended December 31, 1997. 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, 1996.
NOTE 2 - Summary of Significant Accounting Policies
Name Change
On June 3, 1996, the Company changed its name from Anthony Industries, Inc. to
K2 Inc.
Accounts Receivable and Allowances
Accounts receivable are net of allowances for doubtful accounts of $6,017,000 at
March 31, 1997 and $6,120,000 at December 31, 1996.
Newly Issued Accounting Standard
On January 1, 1997, the Company adopted the requirements of Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." Accordingly, the
Company has modified several agreements to meet the new requirements to enable
it to continue recognizing transfers of certain receivables to a special purpose
entity as sales. As a result, the impact of adoption did not have a material
effect on the Company's consolidated financial statements.
NOTE 3 - Borrowings and Other Financial Instruments
On April 18, 1997, the Company amended it principal long-term borrowing facility
to increase amounts available from $75 million to $100 million. All other
material terms remained unchanged. This credit facility is subject to an
agreement which, among other things, restricts amounts available for payment of
cash dividends by the Company. As of March 31, 1997, $13.6 million of retained
earnings were free of such restrictions.
At March 31, 1997, $42 million of accounts receivable were sold under the
existing $50 million accounts receivable purchase facility.
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ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
A. Comparative First Quarter Results of Operations
Net sales for the three months ended March 31, 1997 advanced 7.9% to $171.5
million compared to $158.9 million in the year-earlier period. Net income for
the first quarter of 1997 increased 22.9% to $5.9 million, or $.35 per share,
from $4.8 million, or $.29 per share, in the first quarter of 1996.
Net Sales. In the sporting goods and other recreational products group, net
sales grew 12.8% to $121.7 million in the 1997 quarter compared to $107.9
million in the year-earlier period. K2 in-line skates led the growth. Sales of
K2 skates increased nearly 150% from the prior year, reflecting continued growth
in the European market and increased domestic distribution. Modest sales gains
of snowboards, full-suspension mountain bikes and back packs also contributed
favorably to the quarters' sales performance. Sales of Shakespeare fishing
tackle declined due to the effect of a special one-year promotional program in
effect a year ago. First quarter sales of Stearns active water sports products
also decreased due to shifts in the ordering patterns of several large
customers, and sales of Hilton active apparel products declined due to the
impact of lower jacket sales during the quarter.
Net sales of the industrial products group decreased slightly to $49.8 million
in the 1997 first quarter from $51.0 million in the prior-year quarter. Improved
shipments of building products were offset by declines in cutting line and
fiberglass pole sales.
Gross profit. Gross profit rose 12.1% to $46.4 million, or 27.1% of net sales,
in the first quarter of 1997 as compared to $41.4 million, or 26.1% of net
sales, in the comparable 1996 quarter. The increase in gross profit as a
percentage of net sales resulted from a sales mix that included a larger
proportion of higher margin products and manufacturing efficiency gains,
particularly at Shakespeare's fiberglass pole operation. Partially offsetting
the improvement was the impact of closeout sales of mountain bikes and
snowboards and increased raw material costs in the manufacture of residential
building products.
Costs and Expenses. In the first quarter of 1997, selling expenses increased
17.3% to $22.4 million, or 13.1% of net sales, from $19.1 million, or 12.0% of
net sales, in the first quarter of 1996. The increase was attributable to the
higher sales volume and to increased marketing and promotional activities.
General and administrative expenses increased slightly to $13.3 million in the
first quarter of 1997 compared to $13.1 million in the year-earlier period but
declined as a percentage of net sales from 8.2% to 7.8%.
Operating Income. Operating income grew 16.3% to $10.7 million, or 6.2% of net
sales, in the first quarter of 1997, compared to $9.2 million, or 5.8% of net
sales, in the comparable 1996 period. The percentage increase was attributable
to the improvement in gross profit percentage and to lower general and
administrative expenses net of the increase in selling expenses as a percentage
of net sales.
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Interest Expense. Interest expense increased slightly in the first quarter of
1997 compared to the year-earlier period. Higher average borrowings to support
the growth in sales increased interest expense by $.4 million, which was offset
by a reduction of $.3 million of interest due to lower interest rates.
B. Financial Condition
The Company's operating activities used $2.7 million of cash during
the three months ended March 31, 1997, as compared to $2.0 million of cash
provided during the first three months ended March 31, 1996. The net use of cash
in the 1997 period was primarily due to financing higher levels of working
capital arising from the growth of sales of in-line skates and shifts in the
ordering patterns of several large customers which require manufacturers to
carry higher inventory levels.
An increase over the prior year's period of $2.8 million in net cash used for
investing activities arose from capital expenditures necessary to increase
manufacturing capacity in the recreational products group and improve
manufacturing efficiencies in the industrial products group. The impact of the
strong dollar on the net assets of European subsidiaries also contributed to the
increase. There were no material commitments for capital expenditures at March
31, 1997.
Net cash provided by financing activities increased $4.3 million over the prior
year due to an increase in long-term borrowings to support growth in sales. The
Company increased its primary long term-borrowing facility from $75 million to
$100 million.
The Company anticipates its remaining cash needs in 1997 will be provided from
operations and borrowings under existing credit lines.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(c ) At the Annual Meeting of the Stockholders of the Company held May
8, 1997, the following actions were taken:
(1) The following directors were elected:
Bernard I. Forester - 14,431,873 voted for and 190,469
votes were withheld;
Richard J. Heckmann - 14,296,919 voted for and 325,423
votes were withheld;
Stewart M. Kasen - 14,266,942 voted for and 355,400 votes
were withheld.
(2) The selection by the Board of Directors to approve Ernst &
Young as the Company's independent auditors for the 1997 year
was ratified as follows:
14,442,693 voted for, 43,512 voted against and 136,137
votes abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3 Amended and restated By-Laws of K2 Inc.
10.01 First Amendment to Receivables Purchase Agreements and
Transfer and Administration Agreement dated as of March
15, 1997.
10.02 Second Amendment to Credit Agreement dated as of April 18,
1997.
27 Financial Data Schedule
(b) Reports on Form 8-K filed in the first quarter ended March 31,
1997
None
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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 13, 1997 /s/ RICHARD M. RODSTEIN
--------------------------
Richard M. Rodstein
President and Chief Executive
Officer
Date: May 13, 1997 /s/ JOHN J. RANGEL
---------------------------
John J. Rangel
Senior Vice President - Finance
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