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, 1998 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, 1998.
Common Stock, par value $1 16,541,321 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
------------------------
1998 1997
----------- ---------
(Unaudited)
Net sales $173,165 $171,541
Cost of products sold 128,974 125,160
-------- --------
Gross profit 44,191 46,381
Selling expenses 22,801 22,391
General and administrative expenses 13,618 13,270
-------- --------
Operating income 7,772 10,720
Interest expense 3,139 2,519
Other income, net (62) (291)
-------- --------
Income before provision for income taxes 4,695 8,492
Provision for income taxes 1,550 2,630
-------- --------
Net income $ 3,145 $ 5,862
-------- --------
-------- --------
Earnings per share:
Basic $ 0.19 $ 0.35
Diluted $ 0.19 $ 0.35
Shares:
Basic 16,537 16,556
Diluted 16,616 16,727
Cash dividend $ 0.11 $ 0.11
See notes to consolidated condensed financial statements.
1
CONSOLIDATED BALANCE SHEETS (condensed)
(Dollars in thousands)
MARCH 31 DECEMBER 31
1998 1997
----------- -----------
(Unaudited)
Assets
------
Current Assets
Cash and cash equivalents $ 7,679 $ 5,914
Accounts receivable, net 126,208 118,579
Inventories
Finished goods 143,567 137,123
Work in process 17,448 20,802
Raw materials 31,177 35,238
-------- --------
192,192 193,163
Less LIFO reserve 3,855 3,795
-------- --------
188,337 189,368
Deferred taxes 5,353 9,236
Prepaid expenses and other current assets 7,189 7,071
-------- --------
Total current assets 334,766 330,168
Property, Plant and Equipment 185,496 179,562
Less allowance for depreciation and amortization 104,808 101,774
-------- --------
80,688 77,788
Intangibles, principally goodwill, net 17,527 17,561
Other 4,169 3,411
-------- --------
Total Assets $437,150 $428,928
-------- --------
-------- --------
See notes to consolidated condensed financial statements.
2
CONSOLIDATED BALANCE SHEETS (condensed)
(Dollars in thousands)
MARCH 31 DECEMBER 31
1998 1997
----------- -----------
(Unaudited)
Liabilities and Shareholders' Equity
------------------------------------
Current Liabilities
Bank loans $ 48,781 $ 48,967
Accounts payable 28,702 29,607
Accrued payroll and related 15,431 17,740
Other accruals 24,640 21,794
Current portion of long-term debt 4,444 4,445
-------- --------
Total current liabilities 121,998 122,553
Long-Term Debt 99,668 88,668
Deferred Taxes 11,376 14,822
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 -
17,162,080 in 1998 and 17,160,080 in 1997 17,162 17,160
Additional paid-in capital 132,118 132,086
Retained earnings 70,993 69,668
Employee Stock Ownership Plan and
stock option loans (3,002) (3,006)
Treasury shares at cost, 623,759 shares in 1998
and in 1997 (8,106) (8,106)
Cumulative translation adjustments (5,057) (4,917)
-------- --------
Total Shareholders' Equity 204,108 202,885
-------- --------
Total Liabilities and Shareholders' Equity $437,150 $428,928
-------- --------
-------- --------
See notes to consolidated condensed financial statements.
3
STATEMENTS OF CONSOLIDATED CASH FLOWS (condensed)
(Dollars in thousands)
THREE MONTHS
ENDED MARCH 31
------------------------
1998 1997
----------- ---------
(Unaudited)
Operating Activities
Net income $ 3,145 $ 5,862
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,016 3,255
Deferred taxes 437 1,427
Changes in operating assets and liabilities:
Accounts receivable (7,629) (15,481)
Inventories 1,031 3,435
Prepaid expenses and other current assets (118) 60
Accounts payable (905) (401)
Payrolls and other accruals 537 (847)
------- --------
Net cash provided by (used in) operating activities 514 (2,690)
Investing Activities
Property, plant and equipment expenditures (6,715) (6,209)
Disposals of property, plant and equipment 97 9
Other items, net (1,124) (1,471)
------- --------
Net cash used in investing activities (7,742) (7,671)
Financing Activities
Borrowings under long-term debt 13,000 12,000
Payments of long-term debt (2,001) (4,833)
Net decrease in short-term bank loans (186) (285)
Dividends paid (1,820) (1,822)
------- --------
Net cash provided by financing activities 8,993 5,060
------- --------
Net increase (decrease) in cash and cash equivalents 1,765 (5,301)
Cash and cash equivalents at beginning of year 5,914 10,860
------- --------
Cash and cash equivalents at end of period $ 7,679 $ 5,559
------- --------
------- --------
Supplemental disclosure of cash flow information:
Interest paid $ 2,740 $ 1,920
Income taxes paid 1,113 1,203
See notes to consolidated condensed financial statements.
4
K2 INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1998
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,
1998, are not necessarily indicative of the results that may be expected for the
year ended December 31, 1998. 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, 1997.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTS RECEIVABLE AND ALLOWANCES
Accounts receivable are net of allowances for doubtful accounts of $7,213,000 at
March 31, 1998 and $7,418,000 at December 31, 1997.
NOTE 3 - 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 by the Company. As of March 31,
1998, $16.1 million of retained earnings were free of such restrictions.
At March 31, 1998, $50 million of accounts receivable were sold, fully
utilizing the existing accounts receivable purchase facility.
NOTE 4 - COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this Statement had no impact on the
Company's net income or shareholders' equity. SFAS No. 130 requires foreign
currency translation adjustments, which prior to adoption were reported
separately in shareholders' equity, to be included in other comprehensive
income.
During the first quarter of 1998 and 1997, total comprehensive income amounted
to $3.1 million and $5.0 million, respectively.
5
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, 1998 increased slightly to $173.2
million from $171.5 million in the year-earlier period. Net income for the
first quarter of 1998 declined 46.3% to $3.1 million, or $.19 per diluted share,
from $5.9 million, or $.35 per diluted share, in the first quarter of 1997.
NET SALES. In the sporting goods and other recreational products group, net
sales decreased 4.2% to $116.6 million from $121.7 million in the
year-earlier period. The decline was mainly due to a worldwide reduction of
$7.0 million in K2 shipments of in-line skates from the year-ago quarter.
The reduction reflected cautious ordering of K2 skate products by retailers
as they continue to reduce inventory levels of plastic skates which have been
high relative to retail sales levels. Sales of mountain bikes and skis also
declined, while snowboard product shipments were comparable with those in the
prior year--all in the seasonally weak first quarter for these products. Ski
shipments in the first quarter declined due to cautious ordering by ski
retailers following a poor ski season. First quarter sales of Stearns active
water sports also decreased due to shifts in the ordering patterns of certain
customers to take delivery closer to the retail selling seasons. Sales of
Shakespeare fishing tackle increased 18% from the prior year due to the
introduction of new Shakespeare branded products and the strength of the Ugly
Stik and fishing kits.
Net sales of the industrial products group increased 13.6% to $56.6 million in
the 1998 first quarter from $49.8 million in the prior-year quarter. The gain
was primarily due to increased sales of paperweaving product and cutting line.
Improved shipments of building products and composite light pole products also
contributed to the sales gains.
GROSS PROFIT. Gross profit fell 4.7% to $44.2 million, or 25.5% of net sales,
in the first quarter of 1998 as compared to $46.4 million, or 27.0% of net
sales, in the comparable 1997 quarter. The decrease in gross profit as a
percentage of net sales reflects the impact of an unfavorable sales mix that
included a smaller proportion of higher margin in-line skates and higher
manufacturing costs in the manufacture of monofilament line.
COSTS AND EXPENSES. In the first quarter of 1998, selling expenses of $22.8
million, or 13.2% of net sales, were comparable with those in the prior
year's quarter of $22.4 million, or 13.1% of net sales. General and
administrative of $13.6 million, or 7.9% of net sales, in the first quarter
of 1998 were also comparable to $13.3 million, or 7.7%% of net sales, in the
year-earlier period.
OPERATING INCOME. Operating income declined 27.5% to $7.8 million, or 4.5% of
net sales, in the first quarter of 1998, compared to $10.7 million, or 6.2% of
net sales, in the comparable 1997 period. The decrease was mainly attributable
to the decline in the gross profit percentage.
6
INTEREST EXPENSE. Interest expense increased $620,000, or 24.6%, to $3.1
million in the first quarter of 1998 compared to the year-earlier period.
Higher average borrowings incurred to support the growth in sales increased
interest expense by $734,000, which was offset by a reduction of $114,000 of
interest due to lower interest rates.
B. Financial Condition
The Company's operating activities provided $500,000 of cash during the three
months ended March 31, 1998, as compared with $2.7 million of cash used
during the first three months ended March 31, 1997. The net cash provided in
the 1998 period is attributable to a smaller seasonal buildup of accounts
receivable as compared with the prior year's period which included a
significant increase in in-line skate sales. Partially offsetting this factor
is the smaller decline in inventories from the year-ago period due to the
continuing shift in ordering patterns of certain customers.
Net cash used for investing activities of $7.7 million in the first quarter
of 1998 approximated that used in the first quarter of 1997. There were no
material commitments for capital expenditures at March 31, 1998.
Net cash provided by financing activities increased to $9.0 million over the
prior year due to an increase in long-term borrowings to support growth in sales
and a decrease in the repayment of long-term borrowing.
The Company anticipates its remaining cash needs in 1998 will be provided from
operations and borrowings under existing credit lines.
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 regarding
softboot in-line skates and skis, inventory levels at retail and overall market
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 filing with the Securities and Exchange Commission.
7
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 7, 1998, the following actions were taken:
(1) Three directors directors were elected:
Susan E. Engel - 14,899,910 votes for and 162,912 votes
withheld;
Wilford D. Godbold, Jr. - 14,965,338 votes for and
97,484 votes withheld;
Richard M. Rodstein - 14,940,721 votes for and 122,101
votes withheld.
(2) The selection by the Board of Directors to approve Ernst &
Young as the Company's independent auditors for the year
1998 was ratified as follows:
14,931,410 votes for, 64,529 votes against and 66,883
votes abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.01 Employment agreement dated May 8, 1998 between the
Company and Richard M. Rodstein.
10.02 Employment agreement dated May 8, 1998 between the
Company and John J. Rangel.
27 Financial Data Schedule
(b) Reports on Form 8-K filed in the first quarter ended
March 31, 1998
None
8
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, 1998 /S/ RICHARD M. RODSTEIN
------------------------
Richard M. Rodstein
President and Chief Executive
Officer
Date: May 13, 1998 /S/ JOHN J. RANGEL
-------------------
John J. Rangel
Senior Vice President - Finance
9