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, 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 July 31, 1999.
Common Stock, par value $1 16,545,406 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 SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
---------------------------- ----------------------------
1999 1998 1999 1998
---------------------------- ----------------------------
(Unaudited)
Net sales $158,292 $156,791 $321,352 $307,832
Cost of products sold 110,122 109,115 228,871 218,714
-------- -------- -------- --------
Gross profit 48,170 47,676 92,481 89,118
Selling expenses 22,855 21,533 45,951 42,587
General and administrative expenses 11,787 11,987 25,244 25,258
-------- -------- -------- --------
Operating income 13,528 14,156 21,286 21,273
Interest expense 3,031 3,175 6,328 6,314
Other income, net (14) (78) (114) (140)
-------- -------- -------- --------
Income before income taxes 10,511 11,059 15,072 15,099
Provision for income taxes 3,365 3,630 4,823 4,951
-------- -------- -------- --------
Income from continuing operations 7,146 7,429 10,249 10,148
Discontinued operations, net of taxes 858 650 1,007 1,076
-------- -------- -------- --------
Net income $ 8,004 $ 8,079 11,256 $ 11,224
-------- -------- -------- --------
-------- -------- -------- --------
Basic earnings per share:
Continuing operations $ 0.43 $ 0.45 $ 0.62 $ 0.61
Discontinued operations 0.05 0.04 0.06 0.07
-------- -------- -------- --------
Net income 0.48 0.49 0.68 0.68
-------- -------- -------- --------
-------- -------- -------- --------
Diluted earnings per share:
Continuing operations $ 0.43 $ 0.45 $ 0.62 $ 0.61
Discontinued operations 0.05 0.04 0.06 0.07
-------- -------- -------- --------
Net income 0.48 0.49 0.68 0.68
-------- -------- -------- --------
-------- -------- -------- --------
Basic shares outstanding 16,566 16,548 16,565 16,544
Diluted shares outstanding 16,566 16,629 16,565 16,624
Cash dividend $ - $ 0.11 $ 0.11 $ 0.22
See notes to consolidated condensed financial statements.
2
CONSOLIDATED BALANCE SHEETS (condensed)
(Dollars in thousands, except number of shares)
JUNE 30 DECEMBER 31
1999 1998
---------------- -------------------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 4,957 $ 3,394
Accounts receivable, net 113,549 126,011
Inventories, net 153,798 188,348
Deferred taxes 9,601 12,780
Prepaid expenses and other current assets 6,884 5,037
---------------- -------------------
Total current assets 288,789 335,570
Property, plant and equipment 152,696 151,071
Less allowance for depreciation and amortization 85,428 84,480
---------------- -------------------
67,268 66,591
Intangibles, principally goodwill, net 20,502 19,564
Net assets of discontinued operations 27,283 27,511
Other 4,292 3,759
---------------- -------------------
Total Assets $ 408,134 $ 452,995
---------------- -------------------
---------------- -------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Bank loans $ 36,262 $ 64,350
Accounts payable 9,663 20,807
Accrued payroll and related 16,379 15,982
Other accruals 22,520 21,555
Current portion of long-term debt 4,444 4,444
---------------- -------------------
Total current liabilities 89,268 127,138
Long-term debt 97,724 110,724
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 76,661 67,227
Employee Stock Ownership Plan and stock option loans (1,975) (1,981)
Treasury shares at cost, 638,610 shares in 1999 and 623,759 in 1998 (8,150) (8,106)
Accumulated other comprehensive loss (8,087) (4,700)
---------------- -------------------
Total Shareholders' Equity 208,128 202,119
---------------- -------------------
Total Liabilities and Shareholders' Equity $ 408,134 $ 452,995
---------------- -------------------
---------------- -------------------
See notes to consolidated condensed financial statements
3
STATEMENTS OF CONSOLIDATED CASH FLOWS (condensed)
(Dollars in thousands)
SIX MONTHS
ENDED JUNE 30
-------------------------------------------
1999 1998
------------------ -------------------
(unaudited)
Operating Activities
Income from continuing operations $ 10,249 $ 10,148
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities:
Depreciation and amortization 6,221 6,663
Deferred taxes 2,323 3,035
Changes in operating assets and liabilities:
Accounts receivable 12,462 (496)
Inventories 34,550 4,606
Prepaid expenses and other current assets (2,192) 566
Accounts payable (11,144) (9,273)
Payrolls and other accruals 1,362 (4,111)
------------------ -------------------
Net cash provided by operating activities 53,831 11,138
Investing Activities
Property, plant & equipment expenditures (6,136) (10,422)
Disposals of property, plant & equipment 136 276
Purchase of business, net of cash acquired (2,961)
Other items, net (329) 410
------------------ -------------------
Net cash used in investing activities (9,290) (9,736)
Financing Activities
Borrowings under long-term debt 11,500 26,000
Payments of long-term debt (24,500) (14,001)
Net decrease in short-term bank loans (28,088) (12,246)
Dividends paid (1,820) (3,639)
------------------ -------------------
Net cash used in financing activities (42,908) (3,886)
------------------ -------------------
Net increase (decrease) in cash and cash equivalents from continuing operations 1,633 (2,484)
Discontinued operations
Income from discontinued operations 1,007 1,076
Adjustments to reconcile income from discontinued operations to net cash
provided by (used in) discontinued operations:
Depreciation and amortization 1,510 1,512
Capital expenditures (1,824) (2,257)
Other items, net (763) 314
------------------ -------------------
Cash provided by (used in) discontinued operations (70) 645
Net increase (decrease) in cash and cash equivalents 1,563 (1,839)
Cash and cash equivalents at beginning of year 3,394 5,706
------------------ -------------------
Cash and cash equivalents at end of period $ 4,957 $ 3,867
------------------ -------------------
------------------ -------------------
Supplemental disclosure of cash flow information:
Interest paid $ 8,567 $ 6,597
Income taxes paid 3,247 8,577
See notes to consolidated condensed financial statements.
4
K2 INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 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 six month periods ended June
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 $5,061,000 at
June 30, 1999 and $5,798,000 at December 31, 1998.
INVENTORIES
The components of inventory consist of the following:
June 30 December 31
1999 1998
------------- -------------
(Thousands)
Finished goods $ 117,321 $ 146,233
Work in process 8,181 8,078
Raw materials 31,825 37,911
------------- -------------
Total at lower of FIFO cost or market
(approximates current cost) 157,327 192,222
Less LIFO valuation reserve 3,529 3,874
------------- -------------
$ 153,798 $ 188,348
------------- -------------
------------- -------------
5
K2 INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 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 July 22, 1999 the Company entered into a definitive agreement to acquire
Ride, Inc., a designer and manufacturer of snowboard equipment, apparel and
accessories. Under the terms of the agreement, the Company will acquire all
outstanding shares of Ride, Inc. preferred or common stock in exchange for
shares of K2 Inc. common stock. Based on the current number of Ride, Inc.
preferred and common shares outstanding, the value of the transaction is
approximately $14.8 million and will result in the issuance of approximately
1.5 million new K2 Inc. common shares, and, reserving approximately 42,000
additional shares for possible future issuance on exercise of options and
warrants. The merger transaction, which is subject, among other things, to
approval by Ride's shareholders, is expected to be completed in the fourth
quarter and will be accounted for under the purchase method of accounting.
NOTE 4 - SALE OF ASSETS
On August 4, 1999 the Company signed a definitive agreement to sell its Simplex
products division subject to several contingencies including the buyer's ability
to obtain adequate financing. The transaction is priced at $32 million plus a
performance based payment of up to $3 million subject to final adjustment. The
Company has accounted for Simplex as discontinued operations since September 30,
1998. The transaction is expected to be completed in the fourth quarter.
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 June
30, 1999, $11.5 million of retained earnings were free of such restrictions.
At June 30, 1999, $50 million of accounts receivable were sold, fully utilizing
the existing accounts receivable purchase facility.
NOTE 6 - COMPREHENSIVE INCOME
During the three and six months ended June 30, 1999 total comprehensive income
amounted to $7.0 million and $7.9 million, respectively. For the three and six
months ended June 30, 1998, total comprehensive income amounted to $7.3 million
and $10.3 million, respectively.
6
K2 INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
NOTE 7- 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. For the three and six month periods ended June 30, 1999,
computation of diluted EPS excluded all 1,095,000 stock options outstanding
since their inclusion would have been antidilutive. For both the three and
six month periods ended June 30, 1998, computation of diluted EPS included
the dilutive effects of 81,000 stock options and excluded 612,000 and 592,000
stock options, respectively, since their inclusion would have been
antidilutive.
NOTE 8 - SEGMENT INFORMATION
The segment information presented below is for the three months ended June 30:
Net Sales to Unaffiliated
Customers Intersegment Sales Operating Profit (Loss)
-------------------------------- -------------------------- ----------------------------
1999 1998 1999 1998 1999 1998
------------- ----------------- ------------ ------------ ------------ --------------
(Millions)
Sporting goods $ 115.9 $ 111.2 $ 8.1 $ 6.4 $ 9.5 $ 9.6
Other recreational 10.4 10.5 0.1 - (0.1) -
Industrial 32.0 35.1 0.2 0.2 5.5 5.4
------------- ----------------- ------------ ------------ ------------ --------------
Total segment data $ 158.3 $ 156.8 $ 8.4 $ 6.6 14.9 15.0
------------- ----------------- ------------ ------------ ------------ --------------
------------- ----------------- ------------ ------------
Corporate expenses, net 1.4 0.7
Interest expense 3.0 3.2
------------ --------------
Income from continuing operations before provision for income taxes $ 10.5 $ 11.1
------------ --------------
------------ --------------
7
K2 INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
The segment information presented below is for the six months ended June 30:
Net Sales to Unaffiliated
Customers Intersegment Sales Operating Profit (Loss)
------------------------------ ------------------------ -----------------------------
1999 1998 1999 1998 1999 1998
------------- --------------- ---------- ------------ ------------- --------------
(Millions)
Sporting goods $ 237.2 $ 218.3 $ 13.9 $ 11.7 $ 14.4 $ 14.0
Other recreational 20.3 19.9 0.1 - (0.8) (0.8)
Industrial 63.9 69.6 0.5 0.5 10.6 10.4
------------- --------------- ---------- ------------ ------------- --------------
Total segment data $ 321.4 $ 307.8 $ 14.5 $ 12.2 24.3 23.6
------------- --------------- ---------- ------------ ------------- --------------
------------- --------------- ---------- ------------
Corporate expenses, net 2.8 2.2
Interest expense 6.3 6.3
------------- --------------
Income from continuing operations before provision for income taxes $ 15.1 $ 15.1
------------- --------------
------------- --------------
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 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 June 30, 1999 and
December 31, 1998, the Company had accrued approximately $1,103,000 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 SECOND QUARTER RESULTS OF OPERATIONS
Net sales from continuing operations for the three months ended June 30, 1999
rose slightly to $158.3 million from $156.8 million in the year-earlier
period. Income from continuing operations for the second quarter of 1999
declined 3.8% to $7.1 million, or $.43 per diluted share, from $7.4 million,
or $.45 per diluted share, in the second quarter a year ago. Net income for
the quarter was $8.0 million, or $.48 per diluted share, as compared with
$8.1 million, or $.49 per diluted share, in the prior year quarter.
NET SALES. In the sporting goods segment, net sales rose 4.3% to $115.9
million from $111.2 million in the 1998 second quarter. Shakespeare fishing
tackle sales experienced a double digit percentage increase, reflecting
strong performance domestically. Demand for the Ugly Stik, certain packaged
rods and reels and outdoor furniture, a new product category, fueled the
increase. K2 in-line skate sales continued to improve driven by the growing
market worldwide for soft boot in-line skates. The restructured bike group
reported higher sales for the second consecutive quarter. As expected, ski
shipments declined in the seasonally slow second quarter reflecting the
impact of a mild winter on preseason orders. Snowboard product sales declined
due to the timing impact of international shipments, partially offset by the
benefits of the recently acquired Morrow brand. Sales of Stearns products
were comparable with the prior-year quarter reflecting lower water ski vest
and wetsuit sales, offset by higher shipments of new outdoor products.
In the other recreational products segment, net sales were comparable with
the prior year quarter. Lower apparel sales to the advertising specialty
market due to continued sluggish market conditions were more than offset by a
strong sales performance of our skateboard shoes.
Net sales of the two businesses in the industrial products group, Shakespeare
composites and electronics and Shakespeare monofilaments and specialty
resins, declined 9.1% to $32.0 million from $35.1 million in the prior year's
quarter. The sales decline reflected lower demand for paperweaving
monofilament line, partially offset by an increase in sales of marine
antennas.
GROSS PROFIT. Gross profit for the second quarter of 1999 increased slightly
to $48.2 million, or 30.4% of net sales, as compared with $47.7 million, or
30.4% of net sales, in the year ago quarter. The gross profit improvement is
consistent with the increase in net sales.
COSTS AND EXPENSES. Selling expenses increased 6.1% to $22.9 million, or
14.4% of net sales, from $21.5 million, or 13.7% 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 a recently acquired affiliate in Japan where
corresponding sales will not be reflected until the third quarter. General
and administrative expenses declined slightly to $11.8 million, or 7.4% of
net sales, from $12.0 million, or 7.6% of net sales, in the 1998 first
quarter. The decline as a percentage of net sales reflects the benefit of
ongoing expense controls throughout the Company.
9
OPERATING INCOME. Operating income for the second quarter declined 4.4% to
$13.5 million or 8.5% of net sales, as compared to operating income of $14.2
million, or 9.0% of net sales, a year ago. The decline is attributable to the
increase in selling expenses of the sporting goods group.
INTEREST EXPENSE. Interest expense decreased $144,000 to $3.0 million in the
second quarter of 1999 compared to $3.2 million in the year-earlier period.
The lower figure for the quarter reflected a $461,000 benefit from lower
interest rates and $317,000 of additional interest from higher average
borrowings incurred to support the growth in sales.
COMPARATIVE SIX-MONTH RESULTS OF OPERATIONS
Net sales from continuing operations for the six months ended June 30, 1999
increased 4.4% to $321.4 million from $307.8 million in the year-earlier
period. Income from continuing operations for the first six months of 1999
was $10.2 million, or $.62 per diluted share, as compared with $10.1 million,
or $.61 per diluted share, in the first six months of 1998. Net income was
$11.3 million, or $.68 per diluted share, as compared with $11.2 million, or
$.68 per diluted share, in the prior year six months.
NET SALES. In the sporting goods segment, net sales increased 8.7% to $237.2
million from $218.3 million in the 1998 period. The growth was the result of
increases in worldwide skate, fishing tackle and bike sales. Partially
offsetting these increases were lower sales of ski and snowboard products due
to the mild winter. In the case of snowboard products, sales declined due to
the timing impact of international shipments. Sales of Stearns products were
off slightly reflecting a decline in the water ski vest and wetsuit business.
In the other recreational products segment, net sales were comparable with
the prior year reflecting improvement in sales of skateboard shoes which
offset 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 8.3% to $63.9 million from $69.6 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 half of 1999 increased slightly to
$92.5 million, or 28.8% of net sales, from $89.1 million, or 28.9% of net
sales, in the prior year period. The gross profit improvement is primarily
sales related.
COSTS AND EXPENSES. Selling expenses increased 7.9% to $46.0 million, or
14.3% of net sales, from $42.6 million, or 13.8% 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 of a recently acquired affiliate in Japan where
corresponding sales will not be reflected until the third quarter. General
and administrative expenses were $25.2 million, or 7.9% of net sales as
compared with $25.3
10
million or 8.2% of net sales, in the prior year. The decline as a percentage
of net sales reflects the benefit of ongoing expense controls throughout
this Company.
OPERATING INCOME. Operating income for the first six months was $21.3
million, or 6.6% of net sales as compared with $21.3 million, or 6.9% in the
prior year. The decline as a percentage of net sales is primarily
attributable to increased selling expenses of the sporting goods group.
INTEREST EXPENSE. Interest expense was comparable at $6.3 million for the first
half of 1999 compared to the year-earlier period. Higher average borrowings
incurred to support the growth in sales increased interest expense by $805,000,
which was offset by a reduction of $791,000 of interest due to lower interest
rates.
LIQUIDITY AND SOURCES OF CAPITAL
The Company's continuing operating activities provided $53.8 million of cash
during the six months ended June 30, 1999 as compared with $11.1 million of
cash provided during the six month period a year ago. The $42.7 million
year-to-year improvement in cash is attributable to reduced accounts
receivable and inventory levels from the same prior year period.
Net cash used for investing activities was $9.3 million in the first half of
1999, compared to $9.7 million in the first half of 1998. The 1999 period
reflected $4.2 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 June 30, 1999.
Net cash used in financing activities was $42.9 million during the six months
ended June 30, 1999 as compared with $3.9 million used during the six months
a year ago. The year to year increase of $39.0 million in cash used was due
largely to higher debt repayment.
The Company anticipates its remaining cash needs in 1999 will be provided from
operations and borrowing 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
June 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
11
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 85% 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 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 September 30, 1999. The Company is approximately 90% complete
in the remediation phase of its operating equipment and 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 is approximately 90% complete with the remediation and testing phases.
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 $1.7 million and is
being funded through operating cash flows. To date, the Company has incurred
approximately $830,000 ($340,000 expensed and $490,000 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
12
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 third 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.
13
PART II - OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as part of this report.
2 Amended and Restated Agreement and Plan of Merger
dated as of July 22, 1999 among K2 Inc., Ride, Inc.
and KT Acquisition, Inc. included as Appendix A to
Form S-4 Registration No. 333-84791, filed August 9,
1999 and incorporated herein by reference.
3(ii) By-Laws of K2 Inc., as amended, May 6, 1999.
4 Rights Agreement dated as of July 1, 1999 between K2
Inc. and Harris Trust Company of California, as
Rights Agent, which includes thereto the Form of
Rights Certificate to be distributed to holders of
Rights after the Distribution, filed as Item 2,
Exhibit 1 to Form 8-A filed August 9, 1999 and
incorporated herein by reference.
10 Asset Purchase Agreement dated August 4, 1999 by
and between Simplex Products Inc., as Buyer, and K2
Inc., as Seller.
27 Financial Data Schedule for the six months ended
June 30, 1999.
(b) Reports on Form 8-K filed since the date of the last
Form 10-Q
Report on Form 8-K dated July 30, 1999 containing the
Company's press release dated July 22, 1999 announcing
the execution of the Agreement and Plan of Merger between
the Company and Ride, Inc., dated July 22, 1999.
Report on Form 8-K dated August 6, 1999 containing the
Company's press release dated August 5, 1999 announcing
the execution of the definitive agreement to sell the
Simplex products division, dated August 4, 1999.
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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:August 13, 1999 /s/ RICHARD M. RODSTEIN
--------------------------
Richard M. Rodstein
President and Chief Executive
Officer
Date:August 13, 1999 /s/ JOHN J. RANGEL
------------------
John J. Rangel
Senior Vice President - Finance
15