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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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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 90040
LOS ANGELES, CALIFORNIA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (323) 724-2800
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ------------------------
Common Stock, par value $1 New York Stock Exchange
Pacific Exchange
Series A Preferred Stock Purchase Rights New York Stock Exchange
Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by an "X" whether the registrant 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 has been subject to such filing requirements for
the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stock of the registrants held by
nonaffiliates was approximately $130,135,325 as of March 7, 2000.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of March 7, 2000.
Common Stock, par value $1 17,949,700 Shares
Documents Incorporated by Reference
Portions of the proxy statement for the Annual Meeting of Shareholders
to be held April 28, 2000 are incorporated by reference in Part III.
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FORM 10-K ANNUAL REPORT
PART I
ITEM 1. BUSINESS:
GENERAL
K2 Inc. ("K2") is a premier, branded consumer products company with a
primary focus on sporting goods and other recreational products as well as
certain niche industrial products. K2 offers a diverse portfolio of products
used primarily in individual sports activities such as alpine skiing,
snowboarding, in-line skating, mountain and BMX biking, fishing and watersport
activities. K2's sporting goods include several name brand lines such as K2 and
OLIN alpine skis, K2, RIDE AND MORROW snowboards, boots and bindings, K2 in-line
skates, K2 bikes, SHAKESPEARE fishing rods and reels, STEARNS personal flotation
devices, rainwear and wet suits and K2 backpacks. K2's other recreational
products include HILTON corporate casual apparel, PLANET EARTH skateboards,
apparel and shoes. K2's industrial products consist primarily of SHAKESPEARE
monofilament line used in weed trimmers, in paper mills and as fishing line, and
SHAKESPEARE fiberglass and composite marine antennas, and composite utility and
decorative light poles. Founded in 1946, K2. has grown to over $600 million in
annual sales through a combination of internal growth and strategic
acquisitions. For segment and geographic information, see Note 13 to Notes to
Consolidated Financial Statements.
In recent years, K2 has aggressively expanded into several new sporting
goods markets in the United States, Europe and Japan, including in-line skates,
snowboards, footwear and fishing tackle kits and combos. Management believes
these newer products have benefited from the brand strength, reputation,
distribution, and the market share positions of other Company products, several
of which are now among the top brands in their respective markets. For example,
in the United States, K2 has the #2 market position in in-line skates and
snowboard products, and management believes that STEARNS has the #1 market
position in personal flotation devices and that Shakespeare's UGLY STIK is the
top selling line of moderately priced fishing rods.
During the third quarter of 1998, K2 adopted a plan to sell its Simplex
building products division ("Division"). As a result, K2 reclassified the
Division as a discontinued operation in 1998 and similarly reclassified prior
years' operations (see Note 3 to Notes to Consolidated Financial Statements for
further discussion). K2 is continuing to actively pursue its plan of disposal
and consequently the Division is shown in the accompanying consolidated
financial statements as a discontinued operation. The discussion which follows
focuses on the continuing operations of K2.
K2's common stock was first offered to the public in 1959 and is currently
traded on the New York and Pacific Stock Exchanges (symbol: KTO).
1
SPORTING GOODS PRODUCTS
Net sales for sporting goods products were $474.3 million in 1999,
$404.9 million in 1998 and $410.8 million in 1997. The following table lists
K2's principal sporting good products and the brand names under which they are
sold.
PRODUCT BRAND NAME
- -------------------------------------------- ----------
Alpine skis K2, Olin
Snowboards and accessories K2, Ride, 5150, Liquid, Morrow
In-line skates K2
Fishing rods and reels Shakespeare, Ugly Stik, Pfleuger
Active water sports products Stearns
Mountain and BMX bikes K2, Noleen
Backpacks K2, Dana Design
ALPINE SKIS. K2 sells its alpine skis under the names K2 and OLIN in the 3
major ski markets of the world--the United States, Europe and Japan. While
participation rates for alpine skiing have been relatively flat during the past
few years, K2 believes that industry retail sales have declined in the domestic
market during the same period. In particular, K2 believes that poor weather
conditions in certain markets, the high cost of skiing, the opportunity to
participate in alternative activities such as snowboarding, and the increased
use of rental or demo skis further contributed to a decline in retail sales. K2
skis have benefited from their popularity among retail purchasers, resulting
from their high-quality, innovative features, (such as its performance enhancing
skis in the form of "shaped" or "carving" skis and its use of piezoelectronics
technology), attractive graphics and creative marketing. K2 recently introduced
K2's new MOD ski technology which has been well received by dealers and
customers in its initial limited introduction.
K2 and OLIN skis have been manufactured by K2 in the United States and
Norway. During the fourth quarter, K2 announced a strategic initiative to
significantly reduce the cost of its skis by restructuring and downsizing the
United States manufacturing operation to take advantage of lower cost
manufacturing and sourcing opportunities internationally. As part of this
initiative, K2 will move approximately half of ski manufacturing to either
K2-run China facility or to third party sourcing operations worldwide. High-end
skis, mostly featuring K2's recently introduced MOD ski technology, will
continue to be manufactured in the United States. The skis are sold to specialty
retail shops and sporting goods chains in the U.S. by independent sales
representatives and in Europe and Japan through independent and Company-owned
distributors. K2 and OLIN alpine skis are marketed to skiers ranging from
beginners to top racers using youthful and often irreverent advertising. Within
each brand, K2 offers various styles of skis to meet the performance, usage and
terrain requirements of the consumer. From a pricing perspective, K2 positions
the brands in the mid-level and premium price points, reflecting the quality of
materials used in construction and the continual incorporation of technological
innovations. To assist in its marketing efforts, K2 sponsors amateur and
professional skiers including the well-known extreme skier, Glen Plake.
SNOWBOARDS. K2 sells snowboards, boots, bindings and apparel under the K2,
RIDE, MORROW, 5150 and LIQUID brands. K2 also sells strapless snowboard bindings
and compatible snowboard boots under the K2 CLICKER brand. Back country
accessories, including packs and high performance snowshoes integrating the
CLICKER bindings and backpacks for carrying snowboards and other gear when
hiking into the back country are being marketed under the K2 Brand. Snowboard
apparel has recently been introduced. The snowboard market, which is highly
fragmented, has been consolidating in favor of the larger, better established
brands. During 1999, K2 completed the acquisition of Morrow snowboards and of
Ride, Inc., two leaders in the snowboard market. K2 manufactures most of its own
snowboards. K2 believes that its manufacturing capability and ability to
innovate provide a competitive advantage. Like its alpine skis, K2 snowboards
are of high quality, have innovative features and attractive graphics and are
creatively marketed.
2
K2's innovations in its snowboarding line include the CLICKER, an advanced
step-in binding system for snowboards jointly developed with Shimano Inc. and
sourced and licensed from them under a distribution agreement, the Electra, a
snowboard which utilizes piezoelectronics technology for electronic vibration
dampening, the Ride M2 construction featuring the edge contact system which
results in a better turning board, and the Fatbob board, an extra-wide
snowboard. The CLICKER was among the first commercially available step-in
binding systems for snowboards.
K2's snowboards are manufactured by K2 in the United States and China.
During the fourth quarter, K2 announced a restructuring of the snowboard
manufacturing operations designed to lower the cost structure, by relocating
low-end snowboards to K2's China production facility, and mid- and high-end
snowboards to K2's newly acquired Ride manufacturing plant in California. K2's
snowboard brands are sold to specialty retail shops and sporting goods chains in
the U.S. by independent sales representatives and in Europe and Japan through
independent and K2-owned distributors. Like K2 skis, K2, RIDE and MORROW
snowboards are marketed using youthful and irreverent advertising, and K2
sponsors professional and amateur snowboarders.
IN-LINE SKATES. K2 introduced its K2 soft boot in-line skates in 1994. The
in-line skate market in the U.S. grew dramatically as K2's sales of this product
went from $10 to $117 million in four years. The domestic market, however,
declined in 1999. Growth in the European market also slowed in 1999.
K2's in-line skates target the enthusiast and are priced at the mid to upper
end of the industry's price points. K2 skates are attractive and of high
quality, with innovative features such as a soft mesh and leather upper designed
for improved comfort, with a rigid plastic cuff for support. K2's skates
incorporate several innovations, including the soft boot with hinged support
cuffs either outside or inside the walls of the soft boot. The patented product
line is designed for performance as well as superior comfort and support. K2
also sells women's-specific skates and recently introduced adjustable-size,
softboot skates for children, and incorporated the softboot technology in a line
of ice skates.
K2 in-line skates are manufactured to company specifications and primarily
assembled by a vendor in Korea and China. They are sold to specialty retail
shops and sporting goods chains in the U.S. by independent sales representatives
and in Europe and Japan through independent and K2-owned distributors. During
1999, sales of in-line skates in Europe amounted to approximately 64% of total
in-line skate sales.
FISHING RODS AND REELS. K2 sells fishing rods, reels and fishing line in
most of the world. K2 believes that Shakespeare's UGLY STIK models have been the
best selling fishing rods in the U.S. over the past 20 years. The success of
these fishing rods has allowed K2 to establish a strong position with retailers
and mass merchandisers, thereby increasing sales of new rods, reels and kits and
combos and allowing K2 to introduce new products such as collapsible furniture,
to its distribution. SHAKESPEARE rods and reels are manufactured principally in
China, although blanks for the UGLY STIK fishing rod are made by K2 in the
United States. SHAKESPEARE products are sold directly by K2 and through
independent sales representatives to mass merchandisers (two of which in the
aggregate purchase more than one-third of K2's fishing rods and reels).
ACTIVE WATER SPORTS PRODUCTS. K2 sells STEARNS flotation vests, jackets and
suits ("personal flotation devices"), cold water immersion products, wet suits,
outdoor products, rainwear and inflatable and towable water products in the
United States and in certain foreign countries. In the United States, occupants
of boats are required by law either to wear or have available personal flotation
devices meeting Coast Guard standards. STEARNS personal flotation devices are
manufactured to such standards and are subject to rigorous testing for
certification by Underwriters Laboratories. Stearns manufactures most of its
personal flotation devices in the U.S. and sources its other products from Asia.
STEARNS products are sold principally through an in-house marketing staff and
independent sales representatives to mass merchandisers,
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specialty shops and chain stores and to the off-shore oil industry, commercial
fishermen and other commercial users through independent sales representatives.
MOUNTAIN AND BMX BIKES. K2 designs and distributes high quality
full-suspension mountain bikes, front suspension mountain bikes, comfort bikes,
and BMX Bikes and components under the K2 AND NOLEEN names in the United States
and internationally. Performance and comfort are provided by mountain bikes
which have shock absorbing elements for either front and rear wheels or front
wheels only, thereby improving climbing ability and decreasing rider fatigue and
off-road vibration. K2 entered the high-end, full-suspension mountain bike
business in 1993 through its acquisition of Girvin and in late 1998, introduced
several new products to reposition its product line at more popular price
points. In addition to its premium bike, K2's product line includes front
suspension or "hardtail" bikes, the K2 comfort series and K2 BMX bikes. The
comfort series line, is designed to appeal to a more mature recreational
audience and is equipped with dampening technology in the seat and handlebar
stem. K2's BMX line is supported by professional BMX riders, providing the
product with exposure on television and at other events.
The bikes are manufactured and assembled to K2's specifications by vendors
and are distributed through an in-house marketing staff and by independent sales
representatives to independent bicycle dealers in the U.S. and through
distributors internationally.
BACKPACKS. Dana Design, which was acquired by K2 in 1995, manufactures and
distributes high-end backpacks in the U.S. DANA DESIGN products are known for
their comfort, high quality and innovative features, such as custom fitting. The
line also includes a series of "activity specific" packs marketed by K2 ski,
bike and snowboard. DANA DESIGN and K2 backpacks are primarily manufactured to
K2's specifications by vendors internationally for sale by independent sales
representatives to specialty retailers in the United States.
OTHER RECREATIONAL PRODUCTS
Net sales for other recreational products were $41.0 million in 1999,
$43.7 million in 1998 and $34.2 million in 1997. The following table lists K2's
principal other recreational products and brand names under which they are sold.
PRODUCT BRAND NAME
- -------------------------------------------- ------------------------------------
Imprinted Corporate Casuals Hilton
Skateboard apparel Planet Earth
Snowboard apparel Planet Earth
Skateboard shoes Adio and Hawk
CORPORATE CASUALS. K2 manufactures and distributes jackets, shirts, fleece
tops and other active wear under the HILTON and USA brand names. The products
are sold in the United States to advertising specialty customers, embroiderers
and screen printers who in turn sell imprinted items, including garments,
principally to corporate buyers. HILTON and USA apparel, which are both
manufactured by K2 in the United States and sourced from offshore vendors, are
sold through catalogs by a direct sales force and by independent sales
representatives.
SKATEBOARD AND SNOWBOARD APPAREL AND SKATEBOARD SHOES. Skateboard and
snowboard apparel and skateboard shoes are sold in the U.S., Europe and Japan.
These products are manufactured to K2's specifications by suppliers, primarily
located in Asia. The products are sold through company-owned and independent
distributors in Europe and Asia and to retailers in the domestic market by
independent sales representatives. K2's skateboard shoes are designed with
significant assistance from a group of well-known professional skateboarders.
With favorable demographic trends, skateboarding has been enjoying a significant
resurgence in popularity, principally among pre-teen and early teen boys.
Skateboard shoes, with retail prices between $65 and $85, are marketed under the
Adio brand name, and models are named
4
after the specific skateboarder who aided in the design. K2 has recently
introduced the "Hawk" line of skateboard shoes. This brand of shoes has been
designed and introduced in cooperation with Tony Hawk, the best-known
professional skateboarder in the world.
INDUSTRIAL PRODUCTS
Net sales of industrial products were $119.8 million in 1999,
$125.9 million in 1998 and $114.0 million in 1997. The following table lists
K2's principal industrial products and the brand names under which they are
sold.
PRODUCT BRAND NAME
- -------------------------------------------- ------------------------------------
Monofilament Line Shakespeare
Composite Utility and Decorative Light Poles Shakespeare
Fiberglass Marine Radio Antennas Shakespeare
MONOFILAMENT LINE. Nylon and polyester monofilament line is domestically
manufactured and sold by K2 in a variety of diameters, tensile strengths and
softness. Monofilament is used in various applications including the manufacture
of woven mats for use by paper producers in the United States, Europe and South
America and for use as line in weed trimmers in the United States and are sold
directly to paperweavers and distributors of cutting line and to others through
independent sales representatives. Monofilament sold in Europe for woven mats is
manufactured primarily in K2's U.K. facility. Shakespeare monofilament also
manufactures fishing line domestically, which is marketed by Shakespeare's
fishing tackle division to retailers and mass merchandisers through independent
sales representatives.
COMPOSITE UTILITY AND DECORATIVE LIGHT POLES. K2 produces and sells
directly composite utility and decorative light poles under the SHAKESPEARE name
in the United States, principally to public and private utilities and developers
for specialty and unique applications. K2 believes that a large majority of
major utility companies in the United States have approved the use of composites
for its light and utility poles.
MARINE RADIO ANTENNAS. K2 manufactures fiberglass radio antennas in the
United States for marine, citizen band and military application under the
SHAKESPEARE name. The products are sold primarily in the United States. K2 also
distributes marine radios and other marine electronics under the SHAKESPEARE
name which are manufactured in Asia to K2's specifications. The antennas, radios
and other marine electronics are sold by an in-house sales department and
independent sales representatives to specialty marine dealers.
COMPETITION
K2's competition varies among its business lines. The sporting goods markets
and recreational products markets are generally highly competitive, with
competition centering on product innovation, performance and styling, price,
marketing and delivery. Competition in these products (other than snowboards and
active wear) consists of a relatively small number of large producers, some of
whom have greater financial and other resources than K2. A relatively large
number of companies compete in snowboards and active wear. While K2 believes
that its well-recognized brand names, established distribution networks and
reputation for developing and introducing innovative products have been key
factors in the successful introduction of its sporting goods products, there are
no significant technological or capital barriers to entry into the markets for
many sporting goods and recreational products. These markets face competition
from other leisure activities, and sales of leisure products are affected by
changes in consumer tastes, which are difficult to predict.
K2 believes that its industrial products segment competes based on product
quality, service and delivery, however, K2's industrial products are, in most
instances, subject to price competition, ranging from moderate in marine
antennas and monofilament line to intense for commodity-type products.
5
Composite utility and light poles compete with products made of other materials,
such as wood and aluminum. Certain industrial competitors have greater financial
and other resources than K2.
FOREIGN SOURCING AND RAW MATERIALS
K2 has not experienced any substantial difficulty in obtaining raw
materials, parts or finished goods inventory for its sporting goods and other
recreational products businesses. Certain components and finished products,
however, are manufactured or assembled abroad and therefore could be subject to
interruption as a result of local unrest, currency exchange fluctuations,
increased tariffs, trade difficulties and other factors. A growing portion of
K2's sporting goods products are manufactured in the People's Republic of China
which trades with the United States under Normal Trade Relations ("NTR") status.
This includes most of K2's fishing rods, including its UGLY STIK models, and
reels and its in-line skates and certain snowboards and skis. While K2 believes
that alternative sources for these products produced in China could be found,
maintaining its existing costs of such products will depend on China's
continuing to be treated under NTR tariff rates, which the United States from
time to time has threatened to rescind. Additionally, the gross margins on K2's
products manufactured or sourced in the U.S. or in Asia and distributed in
Europe will depend on the relative exchange rates between the U.S. dollar and
the Euro.
K2 has not experienced any substantial difficulty in obtaining raw materials
for its industrial products segment.
SEASONALITY AND CYCLICALITY; BACKLOG
Sales of K2's sporting goods are generally highly seasonal and in many
instances are dependent on weather conditions. K2's industrial products are
mildly seasonal. This seasonality causes K2's financial results to vary from
quarter to quarter, and K2's sales and earnings are usually weakest in the first
quarter. In addition, the nature of K2's ski, snowboard, bike and in-line skate
businesses requires that in anticipation of the selling season for these
products, it make relatively large investments in inventory. The selling season,
in the case of skis and snowboards runs from August through December, in the
case of bikes runs from October through April and in the case of in-line skates,
runs primarily from February through July. Relatively large investments in
receivables are consequently made during and shortly after such seasons. The
rapid delivery requirements of K2's customers for its sporting goods products
and other recreational products also result in investment in significant amounts
of inventory. K2 believes that another factor in its level of inventory
investment is the shift by certain of its sporting goods customers from
substantial purchases of pre-season inventories to deferral of deliveries until
the products' retail seasons and ordering based on rates of sale.
Sales of sporting goods and other recreational products depend to a large
extent on general economic conditions including the amount of discretionary
income available for leisure activities and consumer confidence. Sales of K2's
industrial products are dependent to varying degrees upon economic conditions in
the container and paper industries.
As a result of the nature of many of K2's businesses, backlog is generally
not significant, except for the in-line skate business. The backlog of in-line
skate sales as of February 28, 1999 and 1998 was approximately $44.2 million and
$36.7 million, respectively. The backlog may be subject to cancellation or other
adjustments and is not necessarily indicative of future sales.
CUSTOMERS
K2 believes that its customer relationships are excellent, and no one
customer of K2 accounted for ten percent or more of its consolidated annual net
sales or 5% of its operating income in 1999 or 1998.
6
RESEARCH AND DEVELOPMENT
Consistent with K2's business strategy of continuing to develop innovative
brand name products and improving the quality, cost and delivery of products, K2
maintains decentralized research and development departments at several of its
manufacturing centers which are engaged in product development and the search
for new applications and manufacturing processes. Expenditures for research and
development activities totaled approximately $12.1 million in 1999,
$12.4 million in 1998 and $12.0 million in 1997 and were expensed as a part of
general and administrative expenses in the year incurred.
ENVIRONMENTAL FACTORS
K2 is one of several potentially responsible parties ("PRP") named in an
Environmental Protection Agency matter 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 K2's required financial contribution to the cleanup
of these sites is expected to be limited based on the number and financial
strength of the other named PRPs and the volume and types of waste involved
which might be attributable to K2.
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. K2's environmental engineers, consultants
and legal counsel have developed estimates based upon cost analyses and other
available information for this particular site. K2 accrues for these costs when
it is probable that a liability has been incurred and the amount can be
reasonably estimated. At December 31, 1999 and 1998, K2 accrued approximately
$806,000 and $963,000, respectively, with no provision for expected insurance
recovery.
EMPLOYEES
K2 had approximately 3,000 and 2,700 employees at December 31, 1999 and
1998, respectively. The increase was generally due to acquisitions. K2 believes
that its relations with employees generally have been good.
PATENTS AND INTELLECTUAL PROPERTY RIGHTS
While product innovation is a highly important factor in K2's sporting goods
and other recreational products segments and many of K2's innovations have been
patented, K2 does not believe that the loss of any one patent would have a
material effect on it, however, the loss of the in-line skate patent could
result in increased competition and reduced sales and margins. Certain of its
brand names, such as K2, OLIN, RIDE, MORROW, SHAKESPEARE, UGLY STIK, PFLEUGER,
STEARNS, HILTON and DANA DESIGN are believed by K2 to be well-recognized by
consumers and therefore important in the sales of these products. Registered and
other trademarks and tradenames of Company products are italicized in this
Form 10-K.
7
ITEM 2. PROPERTIES
The table below provides information with respect to the principal
production and distribution facilities utilized by K2 for continuing operations
as of December 31, 1999.
OWNED FACILITIES LEASED FACILITIES
-------------------- --------------------
TYPE OF NO. OF SQUARE NO. OF SQUARE
LOCATION FACILITY LOCATIONS FOOTAGE LOCATIONS FOOTAGE
- -------- -------------- --------- -------- --------- --------
SPORTING GOODS
Minnesota............................. Distribution
and production 2 302,000 3 106,000
South Carolina........................ Distribution
and production 1 100,000
Washington............................ Distribution
and production 1 160,000 2 170,000
California............................ Production and
warehouse 2 41,000
Nevada................................ Distribution
and production 1 21,000
Foreign............................... Distribution
and production 1 15,000 22 372,000
-- ------- -- -------
5 577,000 30 710,000
== ======= == =======
OTHER RECREATIONAL PRODUCTS
Alabama............................... Distribution
and production 2 160,000
California............................ Distribution 2 40,000
Illinois.............................. Distribution 1 85,000
-- ------- -- -------
2 160,000 3 125,000
== ======= == =======
INDUSTRIAL PRODUCTS
Florida............................... Production 1 15,000
South Carolina........................ Distribution
and production 2 515,000
Foreign............................... Distribution
and production 1 33,000
-- ------- -- -------
4 563,000 0 0
== ======= == =======
The corporate headquarters of K2 is located in 11,000 square feet of leased
office space in Los Angeles, California. The terms of K2's leases range from one
to eight years, and many are renewable for additional periods. The termination
of any lease expiring 2000 would not have a material adverse effect on K2's
operations.
K2 believes that, in general, its plants and equipment are adequately
maintained, in good operating condition and are adequate for K2's present needs.
K2 regularly upgrades and modernizes its facilities and equipment and expands
its facilities to meet production and distribution requirements.
ITEM 3. LEGAL PROCEEDINGS
Certain of K2's products are used in relatively high risk recreational
settings and from time to time K2 is named as a defendant in lawsuits asserting
product liability claims relating to its sporting goods products. To date none
of these lawsuits has had a material effect on K2, and K2 does not believe that
any lawsuit now pending could reasonably be expected to have such an effect. K2
maintains product liability, general
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liability and excess liability insurance coverages. No assurances can be given
that such insurance will continue to be available at an acceptable cost to K2 or
that such coverage will be sufficient to cover one or more large claims, or that
the insurers will not successfully disclaim coverage as to a pending or future
claim.
K2 is one of several potentially responsible parties ("PRP") named in an
Environmental Protection Agency matter involving discharge of hazardous
materials at old waste sites in Michigan and South Carolina. Although
environmental laws technically impose joint and several liability upon each PRP
at each site, the extent of K2's required financial contribution to the cleanup
of these sites is expected to be limited based on the number and financial
strength of the other named PRPs and the volume and types of waste involved
which might be attributable to K2.
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. K2's environmental engineers, consultants
and legal counsel have developed estimates based upon cost analyses and other
available information for these particular sites. K2 accrues for these costs
when it is probable that a liability has been incurred and the amount can be
reasonably estimated. At December 31, 1999 and 1998, K2 accrued approximately
$806,000 and $930,000, respectively, with no provision for expected insurance
recovery
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF K2
NAME POSITION AGE
- ---- -------- --------
Richard M. Rodstein President and Chief Executive Officer 45
Robert E. Doyle Senior Vice President; President of Simplex Products 53
John J. Rangel Senior Vice President--Finance 46
Tony H. Chow Vice President and Director of Taxes 52
David G. Cook Vice President; President of Stearns 62
Timothy C. Cronin Vice President; President of Hilton Corporate Casuals 49
David H. Herzberg Vice President; President of Shakespeare Monofilament 57
J. Wayne Merck Vice President; President of Shakespeare Composites and
Electronics 40
James A. Vandergrift Vice President 49
Susan E. McConnell Secretary 56
Mr. Rodstein has been President of K2 since 1990 and Chief Executive Officer
since January 1, 1996.
Mr. Doyle has been a Senior Vice President of K2 and president of Simplex
Products for more than the past five years.
Mr. Rangel, a CPA, has been Senior Vice President-Finance of K2 for more
than the past five years.
Mr. Chow has been a Vice President of K2 for more than the past five years.
Mr. Cook has been a Vice President of K2 and president of Stearns for more
than the past five years.
Mr. Cronin has been a Vice President of K2 since January 1, 1996 and
president of Hilton Corporate Casuals since November 1996. Mr. Cronin was
Executive Vice President of Hilton Corporate Casuals from October 1992 to
October 1996.
Mr. Herzberg has been a Vice President of K2 and president of Shakespeare
Monofilament for more than the past five years.
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Mr. Merck has been a Vice President of K2 since January 1, 1996 and
president of Shakespeare Composites & Electronics since June 1996. Mr. Merck was
president of K2's former Anthony Pools business from February 1994 to June 1996.
Mr. Vandergrift has been a Vice President of K2 since January 1, 1996 and
vice president of product development of K-2 Corporation for more than the past
five years.
Mrs. McConnell, a California attorney, has been Secretary of K2 for more
than the past five years.
Officers of K2 are elected for one year by the directors at their first
meeting after the annual meeting of shareholders and hold office until their
successors are elected and qualified.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
PRINCIPAL MARKETS
K2's Common Stock is listed on the New York Stock Exchange and the Pacific
Stock Exchange under the symbol "KTO." At March 7, 2000 there were 1,847 holders
of record of Common Stock of K2.
COMMON STOCK PRICES AND DIVIDENDS
The following table sets forth, for the quarters indicated, the reported
high, low and closing sales prices of K2's Common Stock, as reported by the New
York Stock Exchange during K2's two most recent fiscal years, and the cash
dividends per share declared by K2 during those years:
STOCK PRICES
--------------------------------------- CASH DIVIDENDS
HIGH LOW CLOSE PER SHARE
----------- ----------- ----------- --------------
1999
Fourth................................................. 8 15/16 6 15/16 7 3/4 --
Third.................................................. 10 9/16 8 13/16 8 13/16 --
Second................................................. 11 5/8 7 7/8 8 15/16 --
First.................................................. 11 5/8 8 9/16 9 $.11
1998
Fourth................................................. 17 7/16 7 3/4 10 5/16 $.11
Third.................................................. 21 1/8 15 17 11/16 $.11
Second................................................. 23 5/8 16 11/16 17 5/8 $.11
First.................................................. 23 11/16 17 3/4 22 5/16 $.11
DIVIDENDS
K2 paid a cash dividend on the Common Stock from 1978 through March 31,
1999. On May 6, 1999, the Board of Directors of K2 announced the discontinuance
of the cash dividend. K2 is subject to credit agreements which limit its ability
to pay cash dividends. As of December 31, 1999, $9.3 million of retained
earnings were free of such restrictions. See Note 6 of Notes to Consolidated
Financial Statements for further description of K2's credit facilities.
TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING AGENT FOR COMMON STOCK
Harris Trust Company of California
601 South Figueroa Street, Suite 4900
Los Angeles, California 90017
11
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31(A)
------------------------------------------------------------
1999 (B) 1998 (C) 1997 (D) 1996 1995
---------- ---------- ---------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE FIGURES AND PERCENTAGES)
INCOME STATEMENT DATA:
Net sales............................... $635,105 $574,510 $559,030 $513,170 $448,575
Cost of products sold (e)............... 462,033 418,950 391,860 360,029 321,053
-------- -------- -------- -------- --------
Gross profit............................ 173,072 155,560 167,170 153,141 127,522
Selling expenses........................ 95,774 87,389 79,832 67,324 54,538
General and administrative expenses
(e)................................... 40,341 39,030 38,303 38,490 34,758
Research and development expenses....... 12,113 12,391 11,979 9,317 6,437
-------- -------- -------- -------- --------
Operating income........................ 24,844 16,750 37,056 38,010 31,789
Interest expense........................ 12,741 12,163 10,560 9,294 9,916
Other income, net....................... (413) (236) (619) (1,476) (1,396)
-------- -------- -------- -------- --------
Income from continuing operations before
provision for income taxes............ 12,516 4,823 27,115 30,192 23,269
Provision for income taxes.............. 4,005 955 7,815 9,105 6,947
-------- -------- -------- -------- --------
Income from continuing operations....... 8,511 3,868 19,300 21,087 16,322
Discontinued operations, net of taxes
(f)................................... 1,332 975 2,600 4,130 (1,443)
-------- -------- -------- -------- --------
Net Income.............................. $ 9,843 $ 4,843 $ 21,900 $ 25,217 $ 14,879
======== ======== ======== ======== ========
Basic earnings per share:
Continuing operations................. $ 0.50 $ 0.23 $ 1.17 $ 1.27 $ 1.14
Discontinued operations............... 0.08 0.05 0.15 0.25 (0.10)
-------- -------- -------- -------- --------
Net income............................ $ 0.58 $ 0.29 $ 1.32 $ 1.52 $ 1.04
======== ======== ======== ======== ========
Diluted earnings per share:
Continuing operations................. $ 0.50 $ 0.23 $ 1.15 $ 1.26 $ 1.13
Discontinued operations............... 0.08 0.06 0.16 0.25 (0.10)
-------- -------- -------- -------- --------
Net income............................ $ 0.58 $ 0.29 $ 1.31 $ 1.51 $ 1.03
======== ======== ======== ======== ========
Dividends:
Cash--per share....................... $ 0.11 $ 0.44 $ 0.44 $ 0.44 $ 0.44
Basic shares............................ 16,880 16,554 16,541 16,574 14,367
Diluted shares.......................... 16,883 16,637 16,713 16,734 14,498
BALANCE SHEET DATA:
Total current assets.................... $345,809 $335,570 $305,048 $251,606 $278,793
Total assets............................ 487,878 452,995 419,413 357,006 374,373
Total current liabilities............... 158,623 127,138 115,227 63,425 110,483
Long-term debt.......................... 107,280 110,724 88,668 89,096 75,071
Shareholders' equity.................... 218,520 202,119 202,885 188,988 175,816
- ------------------------
(a) Certain income statement and balance sheet accounts have been restated to
reflect the Simplex building products division as discontinued operations.
See Note 3 to Notes to Consolidated Financial Statements.
(b) Gross profit, operating income, income from continuing operations and net
income are $183,572, $35,344, $15,651, and $16,983, respectively, before
restructuring costs totaling $6,500 ($4,420 net of taxes) and downsizing
costs totaling $4,000 ($2,720 net of taxes). See Note 2 to Notes to
Consolidated Financial Statements.
12
(c) Gross profit, operating income, income from continuing operations and net
income are $166,060, $31,250, $13,293 and $14,268, respectively, before
charges totaling $14,500 ($9,425 net of taxes). See Note 2 to Notes to
Consolidated Financial Statements.
(d) Operating income, income from continuing operations and net income are
$39,456, $20,860 and $23,460, respectively, before restructuring costs of
$2,400 ($1,560 net of taxes). See Note 2 to Notes to Consolidated Financial
Statements.
(e) For 1999, cost of products sold includes a $10,500 charge recorded in the
fourth quarter. For 1998, cost of products sold includes a $10,500 charge
and general and administrative expenses includes a $4,000 charge recorded in
the third quarter of 1998. See Note 2 to Notes to Consolidated Financial
Statements.
(f) See Note 3 to Notes to Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
K2 Inc. is a leading designer, manufacturer and marketer of brand name
sporting goods which represent $474.3 million, or 74.7% of K2's 1999
consolidated net sales, and other recreational products, which represent
$41.0 million in 1999 sales. K2 is also a manufacturer and supplier of selected
industrial products, which had sales of $119.8 million in 1999.
On October 7, 1999 K2 completed the acquisition of Ride, Inc. ("Ride"), a
designer and manufacturer of snowboard equipment, apparel and accessories, in an
all-stock merger transaction valued at $12.3 million. The results of operations
of Ride have been included in the consolidated financial statements since the
date of acquisition.
During 1999, K2 announced a plan to reduce the cost structure of its ski and
snowboard operations by restructuring and downsizing its Seattle manufacturing
operation in favor of lower cost manufacturing and sourcing opportunities.
Consequently, K2 recorded charges to cost of products sold for restructuring
costs of $6.5 million, or $4.4 million and $.26 per diluted share after tax, and
downsizing costs of $4.0 million, or $2.7 million and $.16 per diluted share
after tax. These costs are associated with the downsizing of production and
reduction of personnel, as well as the write-off of related equipment and
inventory.
In 1998, K2 adopted a plan to dispose of its Simplex building products
division. This plan is consistent with K2's strategy to focus on its core
sporting goods and other recreational products businesses. As a result, K2
reclassified Simplex as a discontinued operation in 1998 and similarly
reclassified prior years' operations. K2 currently continues to pursue its plan
to dispose of Simplex and, accordingly, has reported the operation as
discontinued in the current year. The discussion which follows focuses on the
continuing operations of K2.
REVIEW OF OPERATIONS: COMPARISON OF 1999 TO 1998
Net sales from continuing operations increased to $635.1 million from
$574.5 million in the prior year. Income from continuing operations for 1999 was
$8.5 million, or $.50 per diluted share in 1999 as compared to $3.9 million, or
$.23 per diluted share, in the prior year. Net income improved to $9.8 million,
or $.58 per diluted share, from $4.8 million, or $.29 per diluted share, in the
prior year.
NET SALES. In the sporting goods segment, net sales increased 17.1% to
$474.3 million from $404.9 million in 1998. The increase was attributable to
strong demand during the year for most of the products in the segment. In-line
skates, snowboard products, fishing tackle and bikes all registered double-
digit growth. The increase in shipments of in-line skates reflected the strong
demand for K2's softboot skates, especially in the European market, and
worldwide growth of the children's softboot skate line. Improved snowboard
volume reflected the benefit of the Ride and Morrow acquisitions completed
during
13
the year and expansion of distribution into the Japanese market. Shakespeare
fishing tackle continued to show strength in sales led by the popular Ugly Stik
fishing rod series, packaged rods and reels and new product introductions. Bikes
benefited from its repositioned bike product line. Sales of Stearns products
increased due to new product introductions. Offsetting these increases was a
decline in ski shipments for the year reflecting the mild winter season in the
domestic market and K2's lower domestic market share.
In the other recreational products segment, net sales declined 6.2% to
$41.0 million from $43.7 million in the prior year. Sales of skateboard shoes
and apparel for the year increased substantially over the prior year, however,
declines in sales to the advertising specialty market more than offset K2's
strength in the skateboard business.
In the industrial products group, net sales declined 4.8%, to
$119.8 million from $125.9 million in 1998. The sales decline reflected reduced
demand for monofilament line used in the paper industry. Partially offsetting
this decline was improved sales of specialty resins and marine antennas.
GROSS PROFIT. Gross profit for the year increased to $173.1 million, or
27.3% of sales in 1999, from $155.6 million, or 27.1% of sales in 1998. For the
years ended 1999 and 1998, gross profit was net of a $10.5 million charge in
each period. In the fourth quarter of 1999, K2 announced a strategic initiative
to significantly reduce the cost structure of its ski and snowboard operations
by restructuring and downsizing the Seattle manufacturing operation to take
advantage of lower cost manufacturing and sourcing opportunities in Asia, Europe
and the United States. This resulted in a charge to cost of products sold for
restructuring costs of $6.5 million and related downsizing costs of
$4.0 million. In 1998, a charge was recorded to write-down the cost of high-end,
full suspension mountain bike and "aggressive" skate inventory resulting from
the sudden shift in market demand and subsequent repositioning of the bike
business into more popularly priced, front suspension mountain bikes, comfort
bikes and BMX bikes. Excluding the impact of the charge in both years, gross
profit as a percentage of sales was comparable at 28.9%
COSTS AND EXPENSES. Selling expenses increased 9.5% to $95.8 million, or
15.1% of net sales as compared with $87.4 million, or 15.2% of sales in 1998.
The increase was attributable to increased sales volume in the sporting goods
segment along with increased selling expenses related to recent acquisitions.
General and administrative expenses increased 3.4% to $40.3 million, or 6.4%
of net sales, compared with $39.0 million, or 6.8% of net sales in 1998. 1998
expense included a $4.0 million charge to write-down equipment and other items
no longer used to manufacture mountain bikes, and for the costs related to
repositioning the bike business. Excluding the impact of the 1998 charge,
expenses for 1999 increased due to the fourth quarter impact of the Ride
acquisition. Research and development expenses declined to $12.1 million from
$12.4 million in 1998.
OPERATING INCOME. Operating income from continuing operations improved to
$24.8 million, or 3.9% of net sales, from $16.8 million, or 2.9% of net sales,
in 1998. Excluding 1999 restructuring and downsizing costs totaling
$10.5 million and the 1998 charges of $14.5 million, operating income from
continuing operations for the years ended December 31, 1999 and 1998 was
$35.3 million, or 5.5% of sales, and $31.2 million, or 5.4% of sales,
respectively. The improvement is attributable to increased sales volume over the
prior year on comparable gross margins.
INTEREST EXPENSE. Interest expense increased largely due to higher average
borrowing balances, by $.6 million in 1999.
OTHER INCOME. Other income, which includes royalties, interest income and
other miscellaneous income, increased to $.4 million from $.2 million in 1998.
INCOME TAXES. The income tax rate for 1999 increased due to an increase in
domestic earnings as percentage of total earnings.
14
SEGMENT INFORMATION. Total segment operating profit or loss (before
interest, corporate expenses and income taxes) improved to $30.6 million from
$22.6 million in 1998. In the sporting goods segment, operating profit increased
to $15.0 million from $5.3 million in 1998. Excluding the $10.5 million charge
for restructuring and downsizing costs in 1999 and the $14.5 million charge for
reserves in 1998, segment operating profit was $25.5 million compared with
$19.8 million in 1998. The improvement was attributable to the increases in
sales volume at comparable margins in most product lines over the prior year.
In the other recreational products segment, an operating loss of
$1.9 million was reported in 1999 as compared with an operating loss of
$1.1 million in 1998. The increase in the loss was attributable to the decline
in sales volume without a corresponding reduction in related expenses in the
advertising specialty market.
In the industrial products segment, operating profit declined to
$17.5 million from $18.4 million in 1998, but was comparable as a percentage of
net sales at 14.6%. The decline was due to reduced sales volume of monofilament
line used in the paper industry.
REVIEW OF OPERATIONS: COMPARISON OF 1998 TO 1997
Net sales from continuing operations increased to $574.5 million from
$559.0 million in the prior year. Income from continuing operations for 1998 was
$3.9 million, or $.23 per diluted share, as compared to $19.3 million, or $1.15
per diluted share in the prior year. Net income declined to $4.8 million, or
$.29 per diluted share, from $21.9 million, or $1.31 per diluted share in the
prior year.
NET SALES. In the sporting goods segment, net sales decreased 1.4% to
$404.9 million from $410.8 million in 1997. The decrease was primarily due to a
decline in ski and mountain bike sales. Unfavorable weather conditions in the
important fourth quarter combined with the impact of declining industry sales
worldwide resulted in lower shipments of K2 and Olin brand skis. Sales of the
bike business were down substantially due to a rapid shift in the marketplace
away from high-end, full suspension mountain bikes. Since K2 bikes were
positioned in the high-end niche, full-suspension mountain bike shipments
declined 47% for the year. More modest declines were incurred in sales of
outdoor products. K2 softboot in-line skate sales were comparable with the prior
year. A decline in sales of "aggressive" skates, due to an industry-wide
reduction in demand, was offset by the growth of K2 children's skates. Sales
increases were reported in K2 snowboard products, Shakespeare fishing tackle and
Stearns products. Although also feeling the effects of poor weather conditions
in late 1998, snowboard products benefited from strong demand for the Clicker
step-in binding, related boots and snowboards. Shipments of Shakespeare's Ugly
Stik fishing rods grew during the year in acceptance of several new models. New
kit and combo products and other new products also contributed to overall growth
in fishing tackle sales. New product introductions including inflatables, waders
and other products by Stearns also contributed to the increase in sales.
In the other recreational products segment, net sales grew 27.8% to
$43.7 million from $34.2 million in the prior year. Sales growth was driven
primarily by the acceptance of skateboard shoes, snowboard apparel and other
apparel sales of the Planet Earth group, and by the inclusion for the full year
of the base business, which was acquired in 1997.
In the industrial products group, net sales increased 10.4%, to
$125.9 million from $114.0 million in 1997. Improved sales were reported by the
Shakespeare Monofilament business due to new product introductions and increased
penetration of its cutting line business. Net sales in 1998 of fiberglass light
poles and marine and military antennas were comparable with the prior year.
GROSS PROFIT. Gross profit declined to $155.6 million, or 27.1% of sales in
1998, from $167.2 million, or 29.9% of sales in 1997. Gross profit in 1998 was
net of a $10.5 million charge (a discussion regarding an additional
$4.0 million which was charged against general and administrative expenses is
included below). Excluding the impact of the charge, gross profit as a
percentage of sales declined to 28.9%. The charge was recorded to write down the
cost of high-end, full suspension mountain bike and "aggressive" skate
15
inventory made necessary by the sudden shift in market demand and subsequent
repositioning of the bike business into more popularly priced, front suspension
mountain bikes, comfort bikes and BMX bikes. The remaining reduction in the
gross profit percentage was due mainly to an unfavorable sales mix which
included a larger proportion of closeout bikes, skates and skis at reduced or no
margins.
COSTS AND EXPENSES. Selling expenses increased 9.5% to $87.4 million from
$79.8 million in 1997. The increase was largely volume-driven and related to
launches of new products, such as skateboard shoes and apparel, and the
continued support of K2's product lines in the marketplace.
General and administrative expenses increased 1.8% to $39.0 million from
$38.3 million in 1997, although as a percentage of sales they declined slightly
from the prior year. 1998 expense included a $4.0 million charge to write down
equipment and other items no longer used to manufacture mountain bikes referred
to above, and for the costs related to repositioning the bike business. 1997
expense included a $2.4 million restructuring charge to consolidate the mountain
bike and outdoor equipment operations. Research and development expense
increased to $12.4 million from $12.0 million in 1997.
OPERATING INCOME. Operating income from continuing operations declined to
$16.8 million, or 2.9% of net sales, from $37.1 million, or 6.6% of net sales,
in 1997. The percentage decrease is mainly due to the charge discussed above
which totaled $14.5 million, and due to an unfavorable mix of sales which
included a greater proportion of skis, "aggressive" skates and mountain bikes
sold at discounted prices. Excluding the charge, operating income was
$31.3 million, or 5.4% of net sales.
INTEREST EXPENSE. Interest expense increased by a net amount of
$1.6 million in 1998. Lower interest rates resulted in a decrease of $1.1million
while higher average borrowing balances resulted in an increase of
$2.7 million.
OTHER INCOME. Other income, which includes royalties, interest income and
other miscellaneous income, decreased to $.2 million from $.6 million in 1997.
INCOME TAXES. The income tax rate for 1998 declined due to a reduction of
the income tax valuation reserve, as a result of further utilization of prior
year foreign net losses utilized in the current period.
SEGMENT INFORMATION. Total segment operating profit or loss (before
interest, corporate expenses and income taxes) decreased to $22.6 million from
$44.5 million in 1997. In the sporting goods segment operating profit declined
to $5.3 million from $26.3 million in 1997. The decrease was due to a wider loss
in the full-suspension mountain bike business reflecting a decline in sales due
to a shift in the market and resulting sale of inventory at reduced prices,
resulting in a $14.5 million charge, and sales of other sporting goods products
at reduced margins (such as skis and in-line skates as described above).
In the other recreational products segment, an operating loss of
$1.1 million was reported in 1998 as compared with operating profit of
$.7 million in 1997. The current year loss was due to start-up costs of new
products for the emerging sports market, partially offset by improved operating
profits of the activewear group.
In the industrial products segment, operating profit increased
$18.4 million from $17.5 million in 1997. The improvement was attributable to
sales-related gains in the monofilament and specialty resins businesses.
LIQUIDITY AND SOURCES OF CAPITAL
K2's continuing operations provided $47.4 million of cash as contrasted with
$22.7 million of cash used in 1998. The $70.1 million year-to-year improvement
in cash, excluding the effects of acquisitions, is primarily attributable to the
reduction in inventories as compared with the prior year's increase, and an
increase in accounts payable as compared with the prior year's decrease. The
reduction in inventory levels, is attributable to a program initiated by all
segments to reduce inventory levels by working with the supply
16
chain to reduce purchasing lead times and receiving product when needed. The
increase in accounts payable is attributable to more favorable payment terms
obtained from vendors throughout K2. Net cash used in investing activities from
continuing operations was $14.7 million, as compared to $16.5 million in 1998.
The improvement was attributable to a reduction in net capital expenditures in
the current year. No material commitments for capital expenditures existed at
year end.
Cash used in financing activities was $28.0 million as contrasted with cash
provided of $31.7 million in 1998. Cash provided in 1999 from operations was
used to pay down short and long-term debt and debt assumed from acquisitions,
resulting in a reduction of total debt of $10.4 million as compared to the prior
year.
K2's principal long-term borrowing facility is a $75 million Credit Line
("Credit Line") which becomes due on September 30, 2004. Additionally, K2 has a
$50 million accounts receivable purchase facility ("Purchase Facility"). At
December 31, 1999, $39.5 million was outstanding under the Credit Line and
$50.0 million of accounts receivable had been sold under the Purchase Facility.
Under the Credit Line and Purchase Facility, K2 is subject to an agreement
which, among other things, restricts amounts available for payment of cash
dividends and stock repurchases by K2. As of December 31, 1999, $9.3 million of
retained earnings were free of such restrictions. K2 also had $22.2 million of
8.39% unsecured senior notes due through 2004, payable in six equal principal
payments, and $50.0 million of 8.41% unsecured notes due through 2009, payable
in seven equal principal payments commencing in 2003. The notes are subject to
agreements which are generally less restrictive than the long-term borrowing
facilities. Additionally, at December 31, 1999, K2 had $84.6 million under
foreign and domestic short-term lines of credit with $56.8 million outstanding
and no borrowings available under K2's debt covenant restrictions. For further
information regarding K2's borrowings, see Note 6 to Notes to Consolidated
Financial Statements.
K2 anticipates its cash needs in 2000 will be provided from operations and
from borrowings, principally under its Credit Line and Purchase Facility and, to
a lesser extent, other existing credit lines.
ENVIRONMENTAL MATTERS
K2 is one of several named potentially responsible parties ("PRP") in an
Environmental Protection Agency matter 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 K2's required financial contribution to the cleanup
of these sites is expected to be limited based on the number and financial
strength of the other named PRPs and the volume and types of waste involved
which might be attributable to K2.
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. K2's environmental engineers, consultants
and legal counsel have developed estimates based upon cost analyses and other
available information for this particular site. K2 accrues for these costs when
it is probable a liability has been incurred and the amount can be reasonably
estimated. At December 31, 1999 and 1998, K2 had recorded an estimated liability
of approximately $806,000 and $963,000, respectively, with no provision for
expected insurance recovery.
The ultimate outcome of this matter cannot be predicted with certainty,
however, and taking into consideration reserves provided, management does not
believe this matter will have a material adverse effect on K2's financial
statements.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which
17
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires companies to recognize all derivatives on the
balance sheet at fair value. K2 will adopt SFAS No. 133 in 2000. The adoption of
the new standard is not expected to have a material effect on its results of
operations or financial position.
IMPACT OF INFLATION AND CHANGING PRICES
The inflation rate, as measured by the Consumer Price Index, has been
relatively low in the last few years, and therefore, pricing decisions by K2
have largely been influenced by competitive market conditions. Depreciation
expense is based on the historical cost to K2 of its fixed assets, and
therefore, is considerably less than it would be if it were based on current
replacement cost. While buildings, machinery and equipment acquired in prior
years will ultimately have to be replaced at significantly higher prices, it is
expected that this will be a gradual process over many years.
YEAR 2000 ISSUE
In prior years, K2 discussed the nature and progress of its plans to become
year 2000 ready. In late 1999, K2 completed its remediation and testing of
systems. As a result of those planning and implementation efforts, K2
experienced no significant disruptions in mission critical information
technology and non-information technology systems and believes those systems
successfully responded to the Year 2000 date change. K2 is not aware of any
material problems resulting from Year 2000 issues, either with its products, its
internal systems, or the products and services of third parties. K2 incurred
approximately $1.1 ($.7 million expensed and $.4 million capitalized) million
during 1999 in connection with remediating its systems. K2 will continue to
monitor its mission critical computer applications and those of its suppliers
and vendors throughout the year 2000 to ensure that any latent Year 2000 matters
that may arise are addressed promptly.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
This Annual Report on Form 10-K contains "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
K2's expectations or beliefs concerning future events, including, but not
limited to, the following: statements regarding market trends regarding softboot
in-line skates, bikes, skis and snowboards, inventory levels at retail, product
acceptance and demand, marketing efforts, growth efforts, cost reduction
efforts, margin enhancement efforts, product development efforts, success of new
product introductions, marketing positioning and overall market trends which
involve substantial risks and uncertainties.
Actual results could differ materially from those indicated in
forward-looking statements by reason of a number of factors, many of which are
outside of K2's control. Among such factors are the following:
- Developments in the economies of the United States, Europe and Asia. A
substantial portion of K2 sales are to customers in Europe and Asia, and a
significant portion of K2 products are manufactured in China. Adverse
economic changes in the United States or such foreign markets could result
in decreased sales and revenues, inflationary pressures on costs of
production, and/or increases in interest and other costs.
- CHANGES IN CURRENCY EXCHANGE RATES. Changes in the exchange rates between
the United States dollar and the currencies of Europe and Asia could make
K2 products less-competitive in foreign markets, and could reduce the
value of revenues represented by foreign currencies.
- UNEXPECTED DELAYS AND COSTS OF RESTRUCTURING. K2 has undertaken a
significant restructuring of its manufacturing operations for skis and
snowboards, including a shift in some manufacturing to
18
China. Failure to complete the restructuring timely and efficiently could
eliminate anticipated cost savings, or even lead to increased costs of
production.
- UNFAVORABLE POLITICAL DEVELOPMENTS. K2's business is dependent on
international trade, both for sales of finished goods and low-cost
sourcing of products. Any political developments adversely affecting trade
with Europe or Asia, including China, could severely impact K2 results of
operations.
- COMPETITIVE DEVELOPMENTS AND INITIATIVES BY K2'S COMPETITORS. New product
introductions, financial incentives to retailers and other initiatives by
K2 competitors could weaken the market position of K2 products.
- RAPID CHANGES IN MARKETING STRATEGIES, PRODUCT DESIGN, STYLES AND TASTES.
Consumer demand for recreational products is strongly influenced by
matters of taste and style. Further, development of the internet is
leading to dramatic changes in product marketing and distribution. K2's
success is dependent, in significant part, on its ability to keep abreast
of, and lead, such changes.
- WEATHER. Sales of K2's recreational products are strongly influenced by
the weather. Poor snow conditions in the winter or summer conditions
unfavorable to water sports can adversely affect sales of important
K2 products.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
K2's earnings and cash flow are subject to fluctuations due to changes in
foreign currency exchange rates. K2 manages its exposures 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. K2's risk management objective is to reduce its exposure to the
effects of changes in exchange rates on the cost of products sold over quarterly
time horizons. Foreign currency exchange rate movements also affect K2's
competitive position, as exchange rate changes may affect business practices
and/or pricing strategies of non-U.S. based competitors and may affect the
profitability and pricing strategies of K2 as well. K2's foreign currency risk
policies entail entering into foreign currency derivative instruments only to
manage risk of currency fluctuations over a given period of time, not for
speculative investments.
Considering both the anticipated cash flows from firm purchase commitments
and anticipated purchases for the next quarter and the foreign currency
derivative instruments in place at year end, a hypothetical 10% weakening of the
U.S. dollar relative to all other currencies would not materially adversely
affect expected first quarter 2000 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.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
K2 INC.
STATEMENTS OF CONSOLIDATED INCOME
YEAR ENDED DECEMBER 31
------------------------------------------
1999 1998 1997
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE FIGURES)
Net sales................................................... $635,105 $574,510 $559,030
Cost of products sold....................................... 462,033 418,950 391,860
-------- -------- --------
Gross profit.............................................. 173,072 155,560 167,170
Selling expenses............................................ 95,774 87,389 79,832
General and administrative expenses......................... 40,341 39,030 38,303
Research and development expenses........................... 12,113 12,391 11,979
-------- -------- --------
Operating income.......................................... 24,844 16,750 37,056
Interest expense............................................ 12,741 12,163 10,560
Other income, net........................................... (413) (236) (619)
-------- -------- --------
Income from continuing operations before provision for
income taxes............................................ 12,516 4,823 27,115
Provision for income taxes.................................. 4,005 955 7,815
-------- -------- --------
Income from continuing operations......................... 8,511 3,868 19,300
Discontinued operations, net of taxes....................... 1,332 975 2,600
-------- -------- --------
Net Income.................................................. $ 9,843 $ 4,843 $ 21,900
======== ======== ========
Basic earnings per share:
Continuing operations..................................... $ 0.50 $ 0.23 $ 1.17
Discontinued operations................................... 0.08 0.06 0.15
-------- -------- --------
Net income................................................ $ 0.58 $ 0.29 $ 1.32
======== ======== ========
Diluted earnings per share:
Continuing operations..................................... $ 0.50 $ 0.23 $ 1.15
Discontinued operations................................... 0.08 0.06 0.16
-------- -------- --------
Net income................................................ $ 0.58 $ 0.29 $ 1.31
======== ======== ========
Basic shares outstanding.................................... 16,880 16,554 16,541
Diluted shares outstanding.................................. 16,883 16,637 16,713
See notes to consolidated financial statements
20
K2 INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
---------------------
1999 1998
--------- ---------
(IN THOUSANDS, EXCEPT
NUMBER OF SHARES)
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 9,421 $ 3,394
Accounts receivable, net.................................. 149,151 126,011
Inventories, net.......................................... 172,154 188,348
Deferred taxes and income taxes receivable................ 10,030 12,780
Prepaid expenses and other current assets................. 5,053 5,037
-------- --------
Total current assets.................................... 345,809 335,570
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements................................ 1,637 992
Buildings and leasehold improvements...................... 32,219 29,814
Machinery and equipment................................... 124,421 111,872
Construction in progress.................................. 4,176 8,393
-------- --------
162,453 151,071
Less allowance for depreciation and amortization.......... 89,858 84,480
-------- --------
72,595 66,591
OTHER ASSETS
Intangibles, principally goodwill, net.................... 38,928 19,564
Net assets of discontinued operations..................... 24,706 27,511
Other..................................................... 5,840 3,759
-------- --------
Total Assets............................................ $487,878 $452,995
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank loans................................................ $ 57,359 $ 64,350
Accounts payable.......................................... 44,231 20,807
Accrued payroll and related............................... 19,781 15,982
Other accruals............................................ 32,808 21,555
Current portion of long-term debt......................... 4,444 4,444
-------- --------
Total current liabilities............................... 158,623 127,138
Long-term Debt.............................................. 107,280 110,724
Deferred Taxes.............................................. 3,455 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--18,672,646 in 1999 and 17,190,652 in
1998.................................................... 18,673 17,191
Additional paid-in capital................................ 143,326 132,488
Retained earnings......................................... 75,248 67,227
Employee Stock Ownership Plan and stock option loans...... (1,975) (1,981)
Treasury shares at cost, 733,110 in 1999 and 623,759 in
1998.................................................... (8,992) (8,106)
Accumulated other comprehensive loss...................... (7,760) (4,700)
-------- --------
Total Shareholders' Equity.............................. 218,520 202,119
-------- --------
Total Liabilities and Shareholders' Equity.............. $487,878 $452,995
======== ========
See notes to consolidated financial statements
21
K2 INC.
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
---------------------------------------------------------------------------------------
EMPLOYEE STOCK ACCUMULATED
ADDITIONAL OWNERSHIP TREASURY OTHER
COMMON PAID-IN RETAINED PLAN AND STOCK SHARES, COMPREHENSIVE
STOCK CAPITAL EARNINGS OPTION LOANS AT COST LOSS TOTAL
-------- ---------- -------- -------------- -------- ------------- --------
(IN THOUSANDS EXCEPT PER SHARE FIGURES)
BALANCE AT
DECEMBER 31, 1996............. $17,132 $131,627 $55,047 $(7,087) $(6,719) $(1,012) $188,988
Net income for the year
1997........................ 21,900 21,900
Translation adjustments....... (3,905) (3,905)
--------
Comprehensive income.......... 17,995
Exercise of stock options..... 28 459 487
Cash dividends, $.44 per
share....................... (7,279) (7,279)
Repurchase of shares and stock
option loan repayments...... 1,070 (1,387) (317)
Employee Stock Ownership Plan,
amortization, loan and
partial loan repayment...... 3,011 3,011
------- -------- ------- ------- ------- ------- --------
BALANCE AT
DECEMBER 31, 1997............. 17,160 132,086 69,668 (3,006) (8,106) (4,917) 202,885
Net income for the year
1998........................ 4,843 4,843
Translation adjustments....... 217 217
--------
Comprehensive income.......... 5,060
Exercise of stock options..... 31 402 433
Cash dividends, $.44 per
share....................... (7,284) (7,284)
Stock option loan(s).......... (96) (96)
Employee Stock Ownership Plan,
amortization, loan and
partial loan repayment...... 1,121 1,121
------- -------- ------- ------- ------- ------- --------
BALANCE AT
DECEMBER 31, 1998............. 17,191 132,488 67,227 (1,981) (8,106) (4,700) 202,119
Net income for the year
1999........................ 9,843 9,843
Translation adjustments....... (3,060) (3,060)
--------
Comprehensive income.......... 6,783
Issuance of shares from
acquisition of Ride, Inc.... 1,482 10,838 12,320
Repurchase of shares.......... (886) (886)
Cash dividends, $.11 per
share....................... (1,822) (1,822)
Stock option loan(s).......... (4) (4)
Employee Stock Ownership Plan,
amortization, loan and
partial loan repayment...... 10 10
------- -------- ------- ------- ------- ------- --------
BALANCE AT
DECEMBER 31, 1999............. $18,673 $143,326 $75,248 $(1,975) $(8,992) $(7,760) $218,520
======= ======== ======= ======= ======= ======= ========
See notes to consolidated financial statements
22
K2 INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
YEAR ENDED DECEMBER 31
-------------------------------
1999 1998 1997
--------- -------- --------
(THOUSANDS)
OPERATING ACTIVITIES
Income from continuing operations......................... $ 8,511 $ 3,868 $ 19,300
Gain on sale of investments............................... (3,500)
Adjustments to reconcile income from continuing operations
to net cash provided by (used in) operating activities:
Depreciation of property, plant and equipment........... 11,685 11,183 10,313
Amortization of intangibles............................. 2,041 1,556 1,261
Deferred taxes and income taxes receivable.............. (6,522) (4,515) (1,476)
Changes in operating assets and liabilities:
Accounts receivable................................... (10,653) (13,521) (27,638)
Inventories........................................... 25,830 (5,353) (31,813)
Prepaid expenses and other current assets............. 283 1,438 (1,139)
Accounts payable...................................... 14,389 (16,500) 4,325
Payrolls and other accruals........................... 1,867 (828) 4,733
--------- -------- --------
Net cash provided by (used in) continuing operations...... 47,431 (22,672) (25,634)
INVESTING ACTIVITIES
Property, plant and equipment expenditures................ (16,204) (17,257) (19,425)
Disposals of property, plant and equipment................ 4,013 1,527 298
Purchases of businesses, net of cash acquired............. (2,629) (834)
Proceeds on sale of investments........................... 9,908
Other items, net.......................................... 99 (729) (5,654)
--------- -------- --------
Net cash used in investing activities..................... (14,721) (16,459) (15,707)
FINANCING ACTIVITIES
Borrowings under long-term debt........................... 125,035 62,500 51,892
Payments of long-term debt................................ (128,479) (40,444) (52,755)
Net increase (decrease) in short-term bank loans.......... (22,749) 15,383 41,658
Net proceeds from accounts receivable facility............ 3,275
Exercise of stock options................................. 433 487
Dividends paid............................................ (1,822) (7,284) (7,279)
Net repayments by ESOP.................................... 1,107 3,000
--------- -------- --------
Net cash (used in) provided by financing activities....... (28,015) 31,695 40,278
--------- -------- --------
Net increase (decrease) in cash and cash equivalents from
continuing operations..................................... 4,695 (7,436) (1,063)
DISCONTINUED OPERATIONS
Income from discontinued operations....................... 1,332 975 2,600
Adjustments to reconcile income from discontinued
operations to net cash used in discontinued operations:
Depreciation and amortization........................... 2,939 2,844 2,652
Capital expenditures.................................... (2,565) (3,442) (4,303)
Other items, net........................................ (374) 4,747 (4,734)
--------- -------- --------
Cash provided by (used in) discontinued operations.......... 1,332 5,124 (3,785)
--------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 6,027 (2,312) (4,848)
Cash and cash equivalents at beginning of year.............. 3,394 5,706 10,554
--------- -------- --------
Cash and cash equivalents at end of year.................... $ 9,421 $ 3,394 $ 5,706
========= ======== ========
See notes to consolidated financial statements
23
K2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
K2 is a leading designer, manufacturer and marketer of brand name sporting
goods, which represent $474.3 million, or 74.7%, of K2's 1999 consolidated net
sales, and other recreational products, which represent $41.0 million in 1999
net sales. K2 is also a manufacturer and supplier of selected industrial
products, which had sales of $119.8 million in 1999.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of K2 and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
FISCAL PERIODS
K2 maintains its books using a 52/53 week year ending on the last Sunday of
December. For purposes of the consolidated financial statements, the year end is
stated as of December 31. The years ended December 31, 1999, 1998 and 1997
consisted of 52 weeks.
REVENUE RECOGNITION
K2 recognizes revenue from product sales upon shipment to its customers.
USE OF ESTIMATES
The preparation of financial statements in conformity with Generally
Accepted Accounting Principles ("GAAP") requires management to make estimates
and assumptions affecting the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Actual amounts could differ from those estimates.
FOREIGN CURRENCY TRANSLATION
The functional currency for most foreign operations is the local currency.
The financial statements of foreign subsidiaries have been translated into
United States dollars. Asset and liability accounts have been translated using
the exchange rate in effect at the balance sheet date. Revenue and expense
accounts have been translated using the average exchange rate for the year. The
gains and losses associated with the translation of the financial statements
resulting from the changes in exchange rates from year to year have been
reported in the other comprehensive income or loss account in shareholders'
equity. Transaction gains or losses, other than intercompany debt deemed to be
of a long-term nature, are included in net income in the period in which they
occur.
CASH EQUIVALENTS
Short-term investments (including any debt securities) that are part of K2's
cash management portfolio are classified as cash equivalents and are carried at
amortized cost. These investments are highly liquid, are of limited credit risk
and have original maturities of three months or less when purchased. The
carrying amount of cash equivalents approximates market.
24
K2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTS RECEIVABLE AND ALLOWANCES
Accounts receivable are the result of K2's worldwide sales activities.
Although K2's credit risk is spread across a large number of customers within a
wide geographic area, periodic concentrations within a specific industry occur
due to the seasonality of its businesses. At December 31, 1999 and 1998, K2's
receivables from sporting goods retailers who sell skis, skates, snowboards and
bikes amounted to 71% and 66%, respectively of total receivables. K2 generally
does not require collateral and performs periodic credit evaluations to manage
its credit risk. Accounts receivable are net of allowances for doubtful accounts
of $6,572,000 and $5,798,000 at December 31, 1999 and 1998, respectively.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined on
the LIFO method with respect to approximately 14% and 23% of total inventories
at December 31, 1999 and 1998, respectively. Cost was determined on the FIFO
method for all other inventories.
LONG-LIVED ASSETS
Long-lived assets, include, among others, goodwill, intangible assets, and
property, plant and equipment and are reviewed periodically to determine if the
carrying values are not impaired. K2 considers the future undiscounted cash
flows of the acquired companies in assessing the recoverability of these assets.
If indicators of impairment are present, or if long-lived assets are expected to
be disposed of, impairment losses are recorded. Any impairment is charged to
expense in the period in which the impairment is incurred.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is provided
on the straight-line method based upon the estimated useful lives of the assets.
In the fourth quarter of 1999, K2 wrote down certain equipment in connection
with the restructuring of its ski and snowboard operations no longer in use. In
the third quarter of 1998, K2 wrote down certain equipment related to its bike
product line no longer in use.
INTANGIBLES
Goodwill arising from acquisitions is amortized on a straight-line basis
over a period ranging from 15 to 40 years. Other intangibles are amortized on a
straight-line basis over 3 to 15 years. Accumulated amortization of intangibles
as of December 31, 1999 and 1998, amounted to $8,867,000 and $7,259,000,
respectively.
STOCK-BASED COMPENSATION AND OTHER EQUITY INSTRUMENTS
K2 and its subsidiaries account for employee and directors' stock option
grants using the intrinsic method. Generally, the exercise price of K2's
employee stock options equals or exceeds the market price of the underlying
stock on the date of grant and no compensation expense is recognized. If the
option price is less than the fair value, K2 records compensation expense over
the vesting period of the option. Options
25
K2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
granted to non-employees are accounted for using the fair value method. K2
disclosed the pro forma effects of using the fair value method for all option
plans in the accompanying financial statements.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising costs for the years
ended December 31, 1999, 1998 and 1997 amounted to $23,680,000, $21,903,000 and
$20,548,000, respectively.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred.
OTHER INCOME
Other income includes interest income, royalties and other miscellaneous
income
INCOME TAXES
Income taxes are recorded using the liability method.
EARNINGS PER SHARE
Basic earnings per share ("EPS") are 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 dilutive effects of stock options included in the dilutive EPS
calculation at December 31, 1999, 1998 and 1997 were 3,000, 83,000 and 171,000,
respectively. During 1999, 1998 and 1997, the computation of diluted EPS did not
include the options to purchase 1,064,000, 542,000 and 4,500 shares of common
stock, respectively, because their inclusion would have been antidilutive.
NEWLY ISSUED ACCOUNTING STANDARDS
Effective in 2001 accounting for gains or losses resulting from changes in
the value of derivatives would be changed depending on the use of the derivative
and whether they qualify for hedge accounting. The adoption of this new
requirement is not expected to have a material impact on the financial position
or results of operations of K2.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
NOTE 2--CHARGES AGAINST EARNINGS
In the fourth quarter of 1999, a pre-tax charge of $10.5 million was charged
to cost of products sold to cover restructuring costs of $6.5 million and
downsizing costs of $4.0 million. K2's strategic initiative was adopted in 1999
to reduce the cost structure of its ski and snowboard operations by taking
advantage of lower cost manufacturing and sourcing opportunities. In accordance
with the initiative, K2's Seattle manufacturing facility has been downsized and
approximately half of its ski and all of its snowboard
26
K2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 2--CHARGES AGAINST EARNINGS (CONTINUED)
manufacturing have been moved to either K2's China or California production
facilities or to third party sourcing operations worldwide. The restructuring
charge reflects expenses associated with the write-off of related equipment and
inventory, the reduction of approximately 200 production personnel and the
utilization of approximately 200 temporary workers. The downsizing costs were
incurred in 1999 as a result of reducing the size of the Seattle manufacturing
facility. Approximately $5.3 million of the total amount is cash related.
The following table summarizes the activity in 1999:
SEVERANCE
EQUIPMENT INVENTORY AND RELATED SUBTOTAL DOWNSIZING TOTAL
--------- --------- ----------- -------- ---------- --------
(THOUSANDS)
1999 Charges......................... $3,355 $2,229 $923 $6,507 $3,993 $10,500
UTILIZED:
Cash............................... 500 130 630 3,852 4,482
Non-cash........................... 3,355 1,132 4,487 141 4,628
------ ------ ---- ------ ------ -------
3,355 1,632 130 5,117 3,993 9,110
Balance December 31, 1999............ $ -- $ 597 $793 $1,390 $ -- $ 1,390
====== ====== ==== ====== ====== =======
In the third quarter of 1998, a pre-tax charge of $14.5 million was included
in earnings from continuing operations. Of this amount, $10.5 million was
charged to cost of products sold to write down certain categories of bike and
skate inventories as a result of a sudden change in the market demand for those
products. The balance of the charge was recorded in general and administrative
expenses for costs associated with the change in the bike business and
implementing planned cost reduction programs at the winter sports operations.
The charges primarily related to non-cash items. At December 31, 1999, in
addition to the reserves in the table above, approximately $13.5 million of the
1998 charges had been utilized with approximately $2.1 million of reserves
remaining primarily against inventory and accounts receivable. These reserves
are expected to be utilized in the year 2000, with no significant cash outflow,
as the related inventory is disposed of and the accounts receivable balances are
written off. In 1997, a pre-tax restructuring charge of $2.4 million was
recorded in connection with the announcement of K2's plan to consolidate its
mountain bike and outdoor equipment operations into its existing facility on
Vashon Island, Washington, and to move its production of outdoor products to
outside sources. The restructuring was completed during 1998.
NOTE 3--DISCONTINUED OPERATIONS
On September 10, 1998, K2 adopted a plan to dispose of its Simplex building
products division as part of K2's strategic focus on the core sporting goods and
other recreational businesses. Accordingly, Simplex is shown in the accompanying
consolidated financial statements as a discontinued operation.
Income from discontinued operations are net of taxes of $718,000, $525,000
and $1,400,000 for the years ended December 31, 1999, 1998 and 1997,
respectively. Net assets of discontinued operations were segregated in the
accompanying consolidated balance sheets and consisted primarily of accounts
receivable, inventories and fixed assets, offset by accounts payable, accrued
payroll and related items and other accruals. Net sales of $72,985,000,
$86,616,000 and $87,903,000 for the years ended December 31, 1999,
27
K2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 3--DISCONTINUED OPERATIONS (CONTINUED)
1998 and 1997, respectively, were excluded from consolidated net sales in the
accompanying consolidated statements of income.
NOTE 4--ACQUISITIONS
On October 7, 1999 K2 completed the acquisition of Ride, Inc. ("Ride"), a
designer and manufacturer of snowboard equipment, apparel and accessories, in an
all-stock merger transaction. Under the terms of the merger, each share of Ride
common and preferred stock was converted into 1/10 share of common stock of K2.
Based on the number of preferred and common shares outstanding of Ride as of the
acquisition date, approximately 1,482,000 shares of K2's common stock were
issued to the Ride shareholders and the purchase price was valued at
$12.3 million. This transaction was accounted for using the purchase method of
accounting; accordingly, the purchased assets and liabilities have been recorded
at their estimated fair values at the date of the acquisition. The preliminary
purchase price allocation resulted in an excess of cost over net assets acquired
of approximately $15.3 million, to be amortized on a straight-line basis over
20 years. The results of operations of Ride have been included in the
consolidated financial statements since the date of acquisition.
The following summarized unaudited pro forma results of operations of K2
assume the acquisition of Ride had occurred as of the beginning of the
respective periods. This pro forma information does not purport to be indicative
of what would have occurred had the acquisition been made as of those dates, or
of results which may occur in the future:
PRO FORMA INFORMATION (UNAUDITED)
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------
1999 1998
---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Net sales............................................ $653,582 $616,288
Loss from continuing operations...................... (11,440) (5,008)
Loss per common share................................ (.63) (.28)
On March 26, 1999, K2 acquired certain assets relating to the Morrow
snowboard business, including the Morrow trademark, from Morrow
Snowboards, Inc. The net cash purchase price was approximately $3.0 million. The
purchase price allocation resulted in an excess of cost over net assets acquired
of approximately $1.7 million, to be amortized on a straight-line basis over
15 years. The results of operations related to the acquisition have been
included in the consolidated financial statements since the date of acquisition.
The acquisition did not have a material pro forma impact on operations.
On August 19, 1998, K2 purchased the remaining 65% of shares of K2 Japan
Corporation not previously owned by K2. K2 Japan Corporation is a distributor of
K2 branded products located in Japan. The transaction was accounted for using
the purchase method of accounting and the results of operations from this
business have been included in the consolidated statements of income from the
date of acquisition. The purchase price of the acquisition was not material. The
fair value of the liabilities of K2
28
K2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 4--ACQUISITIONS (CONTINUED)
Japan Corporation at the acquisition date approximated the fair value of the
assets acquired including $2.7 million of goodwill to be amortized over
25 years.
NOTE 5--INVENTORIES
Inventories consisted of the following at December 31:
1999 1998
-------- --------
(THOUSANDS)
Finished goods.......................................... $129,429 $146,233
Work in process......................................... 10,573 8,078
Raw materials........................................... 34,228 37,911
-------- --------
Total at lower of FIFO cost or market (approximates
current cost)....................................... 174,230 192,222
Less LIFO valuation reserve............................. 2,076 3,874
-------- --------
$172,154 $188,348
======== ========
NOTE 6--BORROWINGS AND OTHER FINANCIAL INSTRUMENTS
At December 31, 1999, K2 had $84.6 million under foreign and domestic
short-term lines of credit with $56.8 million outstanding and no borrowings
available under K2's debt covenant restrictions. The foreign subsidiaries' lines
of credit generally have no termination date but are reviewed annually for
renewal and are denominated in the subsidiaries' local currencies. At
December 31, 1999, interest rates on short-term lines of credit ranged from 2.1%
to 11.2%. The weighted average interest rates on short-term lines of credit as
of December 31, 1999 and 1998 were 6.5% and 4.4%, respectively.
29
K2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 6--BORROWINGS AND OTHER FINANCIAL INSTRUMENTS (CONTINUED)
The principal components of long-term debt at December 31 were:
1999 1998
-------- --------
(THOUSANDS)
Notes payable due in seven equal annual principal
installments through 2009 with annual interest payable
at 8.41%.............................................. $ 50,000
Notes payable due in six equal annual principal
installments through 2004 with semi-annual interest
payable at 8.39%...................................... 22,224 $ 26,668
$75 million five-year unsecured bank revolving credit
line due September 30, 2004, interest payments due at
LIBOR plus 1.00% to 2.00% and a commitment fee of
0.225% to 0.50% on the unused portion of the line
through September 30, 2004............................ 39,500
$100 million bank revolving credit line replaced by the
$75 million credit line described above............... 88,500
-------- --------
111,724 115,168
Less-amounts due within one year........................ 4,444 4,444
-------- --------
$107,280 $110,724
======== ========
The principal amount of long-term debt maturing in each of the five years
following 1999 is:
(THOUSANDS)
2000........................................................ $ 4,444
2001........................................................ 4,444
2002........................................................ 4,444
2003........................................................ 11,587
2004........................................................ 51,091
Thereafter.................................................. 35,714
--------
$111,724
========
Interest paid on short- and long-term debt for the years ended December 31,
1999, 1998 and 1997 was $12.7 million, $12.2 million and $10.6 million,
respectively.
Under an accounts receivable arrangement, K2 can sell with limited recourse,
undivided participation interests in designated pools of accounts receivable for
a period of up to five years, in an amount not to exceed $50 million. Under this
arrangement, $50 million of accounts receivables as of December 31, 1999 and
1998, were sold.
The $75 million credit line and the accounts receivable arrangement, among
other things, restrict amounts available for payment of cash dividends and stock
repurchases by K2. As of December 31, 1999, $9.3 million of retained earnings
were free of such restrictions. The interest rate on the $75 million credit line
at December 31, 1999 was 8.5%.
K2 had $21.0 million of letters of credit outstanding as of December 31,
1999.
30
K2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 6--BORROWINGS AND OTHER FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amounts for the short-term lines of credit and the long-term
bank revolving credit line approximate their fair value since floating interest
rates are charged, which approximate market rates. The fair value of the
$50.0 million 8.41% notes payable, based on quoted market price, is
$46.6 million as compared to a carrying amount of $50.0 million. The fair value
of the $22.2 million 8.39% notes payable, based on quoted market price, is
$21.0 million as compared to a carrying amount of $22.2 million.
K2, including its foreign subsidiaries, enters forward exchange contracts to
hedge certain firm and anticipated sales and purchase commitments which are
denominated in U.S. or foreign currencies. The purpose of the foreign currency
hedging activities is to reduce K2's risk of fluctuating exchange rates. At
December 31, 1999, K2 had foreign exchange contracts with maturities of within
one year to exchange various foreign currencies to dollars in the aggregate
amount of $33.6 million, and with a fair market value of approximately
$33.2 million based on current market rates. The fair value of these contracts,
represented a net unrealized gain of approximately $438,000 as of December 31,
1999 and will be recognized in earnings when the underlying transaction occurs.
Counterparties on foreign exchange contracts expose K2 to credit losses in the
event of non-performance, but K2 does not anticipate non-performance.
NOTE 7--INCOME TAXES
Pretax income from continuing operations for the years ended December 31 was
taxed under the following jurisdictions:
1999 1998 1997
-------- -------- --------
(THOUSANDS)
Domestic......................................... $ 6,365 $(2,543) $22,003
Foreign.......................................... 6,151 7,366 5,112
------- ------- -------
$12,516 $ 4,823 $27,115
======= ======= =======
Components of the income tax provision applicable to continuing operations
for the three years ended December 31 are:
1999 1998 1997
------------------- ------------------- -------------------
CURRENT DEFERRED CURRENT DEFERRED CURRENT DEFERRED
-------- -------- -------- -------- -------- --------
(THOUSANDS)
Federal.................. $ 9,147 $(7,317) $1,525 $(2,825) $8,140 $(1,695)
State.................... 705 (25) 575 70 60 470
Foreign.................. 2,050 (555) 2,115 (505) 405 435
------- ------- ------ ------- ------ -------
$11,902 $(7,897) $4,215 $(3,260) $8,605 $ (790)
======= ======= ====== ======= ====== =======
31
K2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 7--INCOME TAXES (CONTINUED)
The principal elements accounting for the difference between the statutory
federal income tax rate and the effective tax rate for the three years ended
December 31 are:
1999 1998 1997
-------- -------- --------
(PERCENT)
Statutory federal income tax rate...................... 35.0 35.0 35.0
State income tax effect, net of federal benefit........ 3.5 8.7 1.3
Valuation allowance and foreign earnings............... (5.5) (20.5) (6.1)
Other.................................................. (1.0) (3.4) (1.4)
----- ----- -----
32.0 19.8 28.8
===== ===== =====
No provision for United States income taxes has been made on undistributed
earnings of foreign subsidiaries, since these earnings are considered to be
permanently reinvested. At December 31, 1999, foreign subsidiaries had unused
operating loss carryforwards of approximately $6.1 million of which
approximately $260,000 expires in 2001 and the remainder carries forward
indefinitely. Since the use of these operating loss carryforwards is limited to
future taxable earnings of the related foreign subsidiaries, a valuation
allowance has been recognized to offset the deferred tax assets arising from
such carryforwards. The valuation allowance, which is included in the tax effect
of foreign earnings above, was reduced by $0.3 million in 1999 and $1.6 million
in 1998, due to the utilization of the related operating loss carryforwards, and
increased in 1997 by a net $4.1 million due to a previously unusable foreign
loss carryforward which became usable.
At the acquisition date, Ride had federal net operating loss carryovers. The
ability of K2 to utilize these losses to reduce future tax due is very limited.
For financial reporting purposes, the realization of these carryovers, if any,
will reduce goodwill recorded on the acquisition of Ride.
32
K2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 7--INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities are comprised of the following at
December 31:
1999 1998
-------- --------
(THOUSANDS)
Deferred tax liabilities:
Depreciation and amortization of property, plant and
equipment............................................... $ 5,618 $ 5,078
Trademark amortization.................................... 390 364
Other..................................................... 1,758 7,572
------- -------
Deferred tax liabilities................................ 7,766 13,014
Deferred tax assets:
Insurance accruals........................................ 2,044 1,426
Tax effect of foreign loss carryforwards.................. 3,063 2,999
Tax effect of domestic loss carryforwards................. 3,000 0
Bad debt reserve.......................................... 1,167 1,207
Inventory reserve......................................... 1,106 2,038
Other..................................................... 11,112 8,109
------- -------
21,492 15,779
Valuation allowance....................................... 6,063 2,999
------- -------
Current deferred tax assets............................. 15,429 12,780
------- -------
Deferred tax (assets) liabilites, net..................... $(7,663) $ 234
======= =======
Income taxes paid, net of refunds, in the years ended December 31, 1999,
1998 and 1997 were $9.0 million, $5.3 million and $10.9 million, respectively.
NOTE 8--COMMITMENTS AND CONTINGENCIES
Future minimum payments under noncancelable operating leases as of
December 31, 1999 are as follows:
(THOUSANDS)
2000........................................................ $ 5,166
2001........................................................ 4,239
2002........................................................ 2,271
2003........................................................ 1,532
2004........................................................ 787
Thereafter.................................................. 211
-------
$14,206
=======
Leases are primarily for rentals of facilities, and about two-thirds of
these contain rights to extend the terms from one to ten years.
33
K2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 8--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Net rental expense, including those rents payable under noncancelable leases
and month-to-month tenancies, amounted to $4,797,000, $4,417,000 and $3,684,000
for the years ended December 31, 1999, 1998 and 1997, respectively.
K2 has not experienced any substantial difficulty in obtaining raw
materials, parts or finished goods inventory for its sporting goods and other
recreational products businesses. Certain components and finished products,
however, are manufactured or assembled abroad and therefore could be subject to
interruption as a result of local unrest, currency exchange fluctuations,
increased tariffs, trade difficulties and other factors. Major portions of K2's
in-line skates are manufactured by a single supplier. K2 believes alternate
sources for these products could be found.
K2 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 K2's financial statements.
K2 is one of several named potentially responsible parties ("PRP") in an
Environmental Protection Agency matter 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 K2'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 K2.
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. K2's environmental engineers, consultants
and legal counsel has developed estimates based upon cost analyses and other
available information for this particular site. K2 accrues for these costs when
it is probable a liability has been incurred and the amount can be reasonably
estimated. At December 31, 1999 and 1998, K2 had recorded an estimated liability
of approximately $806,000 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 K2's financial statements.
NOTE 9--PENSION PLANS AND OTHER BENEFIT PLANS
K2 sponsors several trusteed noncontributory defined benefit pension plans
covering most of its employees. Benefits are generally based on years of service
and the employee's highest compensation for five consecutive years during the
years of credited service. Contributions are intended to provide for benefits
attributable to service to date and service expected to be provided in the
future. K2 funds these plans in accordance with the Employee Retirement Income
Security Act of 1974.
K2 also sponsors defined contribution pension plans covering most of its
domestic employees. Contributions by K2 for the defined contribution plans are
determined as a percent of the amounts contributed by the respective employees.
During 1999, 1998 and 1997, K2 expensed contributions of $940,000, $928,000 and
$753,000, respectively, related to these plans.
34
K2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 9--PENSION PLANS AND OTHER BENEFIT PLANS (CONTINUED)
The following table sets forth the defined benefit plans' funded status and
amounts recognized in K2's consolidated balance sheets at December 31:
PENSION PLAN
-------------------
1999 1998
-------- --------
(THOUSANDS)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year.................. $ 58,411 $51,896
Service cost............................................. 2,089 1,749
Interest cost............................................ 4,041 3,796
Actuarial (gain) loss.................................... (8,294) 3,994
Benefits paid............................................ (3,085) (3,024)
-------- -------
Benefit obligation at end of year........................ $ 53,162 $58,411
======== =======
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year........... $ 50,611 $48,432
Actual return on fair value of plan assets............... 9,531 4,884
Employer contributions................................... 319 319
Benefits paid............................................ (3,085) (3,024)
-------- -------
Fair value of plan assets at end of year................. 57,376 50,611
-------- -------
Funded status of the plan................................ 4,214 (7,800)
Unrecognized prior service cost.......................... 1,146 1,283
Unrecognized net transition asset........................ (65) (275)
Unrecognized actuarial (gain) loss....................... (10,705) 2,666
-------- -------
Accrued benefit cost..................................... $ (5,410) $(4,126)
======== =======
WEIGHTED AVERAGE ASSUMPTIONS
Discount rate............................................ 7.75% 6.75%
Expected return on plan assets........................... 9.00% 9.00%
Rate of compensation increase............................ 5.00% 5.00%
The actuarial gains included in the benefit obligation for 1999 are the
result of the increase in the discount rate assumption made for the year as well
as a change in demographic data. The actuarial losses included in the benefit
obligation for 1998 are primarily the result of a decrease in the discount rate
assumption made for the year.
35
K2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 9--PENSION PLANS AND OTHER BENEFIT PLANS (CONTINUED)
Net pension cost consisted of the following for the year ended December 31:
PENSION PLAN
------------------------------
1999 1998 1997
-------- -------- --------
(THOUSANDS)
NET PERIODIC COST
Service cost...................................... $ 2,089 $ 1,749 $ 1,707
Interest cost..................................... 4,041 3,796 3,698
Expected return on plan assets.................... (4,474) (4,280) (3,857)
Amortization of prior service cost................ 137 139 110
Amortization of transition asset.................. (210) (210) (210)
Amortization of loss.............................. 20 13 24
------- ------- -------
Net periodic cost................................. $ 1,603 $ 1,207 $ 1,472
======= ======= =======
36
K2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 10--QUARTERLY OPERATING DATA (UNAUDITED)
QUARTER
--------------------------------------------
FIRST SECOND THIRD FOURTH (A) YEAR (B)
-------- -------- -------- ----------- ---------
(IN MILLIONS, EXCEPT PER SHARE FIGURES)
1999
Net sales from continuing operations.............. $163.0 $158.3 $139.9 $173.9 $635.1
Gross profit...................................... 44.3 48.2 43.7 36.9 173.1
Income (loss) from continuing operations.......... 3.1 7.1 3.3 (5.0) 8.5
Discontinued operations, net of taxes............. 0.1 0.9 0.0 0.3 1.3
------ ------ ------ ------ ------
Net income (loss)................................. $ 3.2 $ 8.0 $ 3.3 $ (4.7) $ 9.8
====== ====== ====== ====== ======
Basic earnings (loss) per share
Continuing operations........................... $ 0.19 $ 0.43 $ 0.20 $(0.29) $ 0.50
Discontinued operations......................... 0.01 0.05 0.00 0.02 0.08
------ ------ ------ ------ ------
Net income (loss)............................... $ 0.20 $ 0.48 $ 0.20 $(0.27) $ 0.58
====== ====== ====== ====== ======
Diluted earnings (loss) per share
Continuing operations........................... $ 0.19 $ 0.43 $ 0.20 $(0.29) $ 0.50
Discontinued operations......................... 0.01 0.05 0.00 0.02 0.08
------ ------ ------ ------ ------
Net income (loss)............................... $ 0.20 $ 0.48 $ 0.20 $(0.27) $ 0.58
====== ====== ====== ====== ======
Cash dividend per share........................... $ 0.11 $ -- $ -- $ -- $ 0.11
Stock prices:
High............................................ $11.63 $11.63 $10.56 $ 8.94 $11.63
Low............................................. $ 8.56 $ 7.88 $ 8.81 $ 6.94 $ 6.94
- ------------------------
(a) Gross profit, income from continuing operations and net income are $47.4,
$2.1and $2.4, respectively, before restructuring costs totaling $6.5 ($4.4
net of taxes) and downsizing costs totaling $4.0 ($2.7 net of taxes). See
Note 2 to Notes to Consolidated Financial Statements.
(b) Gross profit, income from continuing operations and net income are $183.6,
$15.7 and $17.0, respectively, before restructuring costs totaling $6.5
($4.4 net of taxes) and downsizing costs totaling $4.0 ($2.7 net of taxes).
See Note 2 to Notes to Consolidated Financial Statements.
37
K2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 10--QUARTERLY OPERATING DATA (UNAUDITED) (CONTINUED)
QUARTER
-------------------------------------------
FIRST SECOND THIRD (A) FOURTH YEAR (B)
-------- -------- ---------- -------- ---------
(IN MILLIONS, EXCEPT PER SHARE FIGURES)
1998
Net sales from continuing operations............... $151.0 $156.8 $133.9 $132.8 $574.5
Gross profit....................................... 41.5 47.7 29.4 37.0 155.6
Income (loss) from continuing operations........... 2.7 7.4 (7.9) 1.6 3.8
Discontinued operations, net of taxes.............. 0.4 0.7 (0.4) 0.3 1.0
------ ------ ------ ------ ------
Net income (loss).................................. $ 3.1 $ 8.1 $ (8.3) $ 1.9 $ 4.8
====== ====== ====== ====== ======
Basic earnings (loss) per share
Continuing operations............................ $ 0.16 $ 0.45 $(0.48) $ 0.10 $ 0.23
Discontinued operations.......................... 0.03 0.04 (0.03) 0.02 0.06
------ ------ ------ ------ ------
Net income (loss)................................ $ 0.19 $ 0.49 $(0.51) $ 0.12 $ 0.29
====== ====== ====== ====== ======
Diluted earnings (loss) per share
Continuing operations............................ $ 0.16 $ 0.45 $(0.48) $ 0.10 $ 0.23
Discontinued operations.......................... 0.03 0.04 (0.03) 0.02 0.06
------ ------ ------ ------ ------
Net income (loss)................................ $ 0.19 $ 0.49 $(0.51) $ 0.12 $ 0.29
====== ====== ====== ====== ======
Cash dividend per share............................ $ 0.11 $ 0.11 $ 0.11 $ 0.11 $ 0.44
Stock prices:
High............................................. $23.69 $23.63 $21.13 $17.44 $23.69
Low.............................................. $17.75 $16.69 $15.00 $ 7.75 $ 7.75
- ------------------------
(a) Gross profit, income from continuing operations and net income are $39.9,
$1.5 and $1.1, respectively, before charges totaling $14.5 ($9.4 net of
taxes). See Note 2 to Notes to Consolidated Financial Statements.
(b) Gross profit, income from continuing operations and net income are $166.1,
$13.3 and $14.3, respectively, before charges totaling $14.5 ($9.4 net of
taxes). See Note 2 to Notes to Consolidated Financial Statements.
NOTE 11--STOCK OPTIONS
Under K2's 1999 and 1994 Incentive Stock Option Plans ("1999 Plan" and "1994
Plan", respectively), options may be granted to eligible directors and key
employees of K2 and its subsidiaries at not less than 100% of the market value
of the shares on the dates of grant. No further options may be granted under the
1994 Plan.
The 1999 Plan permits the granting of options for terms not to exceed ten
years from date of grant. The options are exercisable on such terms as may be
established at the dates of grant.
38
K2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 11--STOCK OPTIONS (CONTINUED)
K2 is authorized, at the discretion of the Compensation Committee, to
provide loans to key employees in connection with the exercise of stock options
under the 1999 and 1994 Plans. At December 31, 1999 and 1998, there was a total
of $215,000 and $230,000, respectively, of loans to key employees made to enable
the exercise of stock options, and accrued interest outstanding. The loans are
due on various dates through June 2003. The amounts of these loans are shown as
a reduction of shareholders' equity. The loans are collateralized by the
underlying shares of stock issued and bear interest at the applicable rates
published by the IRS.
Options granted, exercised and forfeited for the 1999 Plan and 1994 Plan
were as follows:
EXERCISE PRICE
------------------------------
WEIGHTED
SHARES LOW HIGH AVERAGE
--------- -------- -------- --------
Options outstanding at December 31, 1996................. 689,059 $11.11 $26.50 $20.56
Granted................................................ 234,000 23.50 29.88 23.68
Exercised.............................................. (28,418) 11.11 23.00 17.13
Forfeited.............................................. (16,850) 16.38 29.88 24.33
---------
Options outstanding at December 31, 1997................. 877,791 11.11 29.88 21.43
Granted................................................ 359,500 11.25 21.50 11.38
Exercised.............................................. (30,572) 11.11 22.88 14.15
Forfeited.............................................. (84,058) 11.11 29.88 22.41
---------
Options outstanding at December 31, 1998................. 1,122,661 11.11 29.88 18.33
Granted................................................ 229,500 7.50 10.63 7.55
Forfeited.............................................. (63,050) 10.63 29.88 18.42
---------
Options outstanding at December 31, 1999................. 1,289,111 7.50 29.88 16.40
=========
At December 31, 1999, 1998 and 1997, stock options to purchase 695,761,
500,711 and 667,332, shares were exercisable at weighted average prices of
$20.21, $20.02 and $21.19, respectively. At December 31, 1999, 2,534,536 shares
of common stock were reserved for issuance under the Plans.
K2 uses the intrinsic-value method of accounting for stock-based awards
granted to employees. Accordingly, K2 has not recognized compensation expense
for its stock-based awards to employees. Had K2 elected to adopt the fair value
approach, net income and basic and diluted earnings per share would have been
$8,525,000, $.51 and $.50, respectively, for the year ended December 31, 1999,
$3,950,000, $.24
39
K2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 11--STOCK OPTIONS (CONTINUED)
and $.24, respectively, for the year ended December 31, 1998 and $21,157,000,
$1.28 and $1.27, respectively, for the year ended December 31, 1997. The pro
forma effect was calculated using Black-Scholes option valuation model, and the
following assumptions were utilized.
1999 1998 1997
-------- -------- --------
Risk free interest rate......................... 5.5% 5.0% 5.0%
Expected life................................... 5 years 5 years 5 years
Expected volatility............................. .388 .326 .225
Expected dividend yield......................... -- 3.9% 2.2%
The pro forma amounts may not be representative of future disclosures since
the estimated fair value of stock options is amortized to expense over the
vesting period and additional options may be granted in future years. Since
changes in the subjective assumptions used in the Black-Scholes model can
materially affect the fair value estimate, management believes the model does
not provide a reliable measure of the fair value of its options.
Options are granted at an exercise price equal to the fair market value at
the date of grant. Information regarding stock options outstanding as of
December 31, 1999 is as follows:
OPTIONS OUTSTANDING
--------------------------------- OPTIONS EXERCISABLE
WEIGHTED -------------------
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
EXERCISE CONTRACTUAL EXERCISE
PRICE RANGE SHARES PRICE LIFE SHARES PRICE
- ----------- -------- -------- ----------- -------- --------
$7.50 to $11.11.............................. 286,331 $ 8.27 8.58 years 57,331 $11.11
$11.250 to $17.25............................ 494,680 12.89 7.50 years 232,280 14.74
$21.50 to $29.88............................. 508,100 24.41 7.13 years 406,150 24.63
NOTE 12--SHAREHOLDERS' EQUITY
PREFERRED STOCK
Shares are issuable in one or more series, and the Board of Directors has
authority to fix the terms and conditions of each series. No shares were issued
or outstanding during 1999 and 1998.
EMPLOYEE STOCK OWNERSHIP PLAN
K2 has an Employee Stock Ownership Plan ("ESOP") which covers substantially
all of its domestic non-union employees with at least one year of service. As of
December 31, 1999, the trust was indebted to K2 in the aggregate amount of
$565,000 in connection with stock purchases made from 1982 through 1984 of which
131,836 shares with an aggregate market value of $1,005,000 as of December 31,
1999 remained unallocated to participants. These loans are repayable over the
next three to five years with interest at prime plus 1/2%, not to exceed 18%,
and the unallocated shares will be released to participants proportionately as
these loans are repaid. Of the total dividends received by the ESOP on its
investment in K2's Common Stock, dividends on allocated and unallocated shares
in the amount of $29,000 and $167,000 in
40
K2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 12--SHAREHOLDERS' EQUITY (CONTINUED)
1999 and 1998, respectively, were used to service these loans. Allocated shares
as of December 31, 1999 totaled 1,584,816.
Additionally, the trust was indebted to K2 in the amount of $1,100,000 at
December 31, 1999 and 1998, in connection with distributions made to terminees.
Shareholders' equity has been reduced by the amounts of the loans and any
payments made by K2 on behalf of the trust. The payments, made by K2 on behalf
of the trust, which at December 31, 1999 totaled $89,000, are being amortized to
expense over the lives of the loans.
The amount of K2's annual contribution to the ESOP is at the discretion of
K2's Board of Directors. For the two years 1999 and 1998, contributions were
limited to amounts in excess of annual dividends, net of debt service, of the
ESOP necessary to fund obligations arising in each of those years to retired and
terminated employees. These amounts were $200,000 and $100,000, respectively.
ESOP expense, including amortization of the foregoing payments, was $638,000 and
$156,000 in 1999 and 1998, respectively. No expense was recorded and no
contributions were made in 1997.
PREFERRED STOCK RIGHTS
Rights are outstanding which entitle the holder of each share of Common
Stock of K2 to buy one one-hundredth of a share of Series A Junior Participating
Cumulative Preferred Stock at an exercise price of $60.00 per one one-hundredth
of a share, subject to adjustment. The rights are not separately tradable or
exercisable until a party either acquires, or makes a tender offer resulting in
ownership of, at least 15% of K2's common shares. If a person becomes the owner
of at least 15% of K2's outstanding common shares (an "Acquiring Person"), each
holder of a right other than such Acquiring Person and its affiliates is
entitled, upon payment of the then-current exercise price per right (the
"Exercise Price"), to receive shares of Common Stock (or Common Stock
equivalents) having a market value of twice the Exercise Price. If K2
subsequently engages in a merger, a business combination or an asset sale with
the Acquiring Person, each holder of a right other than the Acquiring Person and
its affiliates is thereafter entitled, upon payment of the Exercise Price, to
receive stock of the Acquiring Person having a market value of twice the
Exercise Price. At any time after any party becomes an Acquiring Person, the
Board of Directors may exchange the rights (except those held by the Acquiring
Person) at an exchange ratio of one common share per right. Prior to a person
becoming an Acquiring Person, the rights may be redeemed at a redemption price
of one cent per right, subject to adjustment. The rights are subject to
amendment by the Board.
NOTE 13--SEGMENT DATA
K2 classifies its business into three segments based on similar product
types consisting of sporting goods products, other recreational products and
selected industrial products. The sporting goods segment consists primarily of
sports equipment used to participate in individual sports activities sold
primarily through sporting goods specialty dealers, regional and national
sporting goods chains and the sporting goods department of mass merchants. The
equipment includes in-line skates, skis, snowboards, bikes, fishing tackle and
flotation vests. The other recreational products segment are primarily active
leisure apparel sold principally into the advertising specialty market through
distributors, and leisure footwear and other apparel sold through specialty
sporting goods dealers. The industrial products segment includes monofilament
line sold to the paper industry, string trimmer line sold to a variety of
distributors, retailers
41
K2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 13--SEGMENT DATA (CONTINUED)
and equipment manufacturers, fiberglass light poles sold to contractors, utility
companies and municipalities and marine and CB radio antennas sold to marine
dealers.
K2 evaluates performance based on operating profit or loss (before interest,
corporate expenses and income taxes). The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies in Note 1 of Notes to Consolidated Financial Statements.
Intercompany profit or loss is eliminated where applicable.
The information presented below is as of or for the year ended December 31.
NET SALES TO
UNAFFILIATED CUSTOMERS INTERSEGMENT SALES OPERATING PROFIT (LOSS)
------------------------------ ------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- -------- -------- -------- --------
(MILLIONS)
Sporting goods................. $474.3 $404.9 $410.8 $30.4 $18.6 $21.2 $15.0* $ 5.3* $26.3*
Other recreational............. 41.0 43.7 34.2 0.2 0.3 -- (1.9) (1.1) 0.7
Industrial..................... 119.8 125.9 114.0 1.1 1.4 0.9 17.5 18.4 17.5
------ ------ ------ ----- ----- ----- ----- ----- -----
Total segment data........... $635.1 $574.5 $559.0 $31.7 $20.3 $22.1 30.6 22.6 44.5
====== ====== ====== ===== ===== ===== ----- ----- -----
Corporate expenses, net........ (5.4) (5.6) (6.8)
Interest expense............... 12.7 12.2 10.6
----- ----- -----
Income from continuing
operations before provision
for income taxes............. $12.5 $ 4.8 $27.1
===== ===== =====
- ------------------------
* 1999, 1998 and 1997 include charges of $10.5 million, $14.5 million and
$2.4 million, respectively.
DEPRECIATION AND
IDENTIFIABLE ASSETS AMORTIZATION CAPITAL EXPENDITURES
------------------------------ ------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- -------- -------- -------- --------
(MILLIONS)
Sporting goods................. $346.9 $301.3 $283.6 $ 9.9 $ 9.3 $ 8.1 $13.0 $ 6.9 $14.5
Other recreational............. 32.4 40.4 33.9 0.8 0.8 0.6 0.5 0.6 0.4
Industrial..................... 63.3 66.8 55.7 2.8 2.5 2.8 2.7 9.8 4.5
------ ------ ------ ----- ----- ----- ----- ----- -----
Total segment data........... 442.6 408.5 373.2 13.5 12.6 11.5 16.2 17.3 19.4
Corporate...................... 20.6 17.0 14.3 0.2 0.1 0.1
------ ------ ------ ----- ----- -----
Total continuing
operations................. 463.2 425.5 387.5 13.7 12.7 11.6 16.2 17.3 19.4
------ ------ ------ ----- ----- ----- ----- ----- -----
Discontinued operations........ 24.7 27.5 31.9 2.9 2.8 2.7 2.6 3.4 4.3
------ ------ ------ ----- ----- ----- ----- ----- -----
Total........................ $487.9 $453.0 $419.4 $16.6 $15.5 $14.3 $18.8 $20.7 $23.7
====== ====== ====== ===== ===== ===== ===== ===== =====
42
K2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 13--SEGMENT DATA (CONTINUED)
1999 1998 1997
-------- -------- --------
(MILLIONS)
NET SALES BY LOCATION
United States..................................... $408.1 $381.4 $406.7
Europe............................................ 170.1 153.0 125.0
Asia.............................................. 56.9 40.1 27.3
------ ------ ------
Total net sales................................. $635.1 $574.5 $559.0
====== ====== ======
ASSETS
United States..................................... $348.0 $320.9 $315.0
Europe............................................ 94.8 97.3 91.1
Asia.............................................. 45.1 34.8 13.3
------ ------ ------
Total assets.................................... $487.9 $453.0 $419.4
====== ====== ======
LONG-LIVED ASSETS
United States..................................... $ 99.2 $ 75.4 $ 69.3
Europe............................................ 8.3 8.3 7.4
Asia.............................................. 4.0 2.5 2.6
------ ------ ------
Total long-lived assets......................... $111.5 $ 86.2 $ 79.3
====== ====== ======
43
K2 INC.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders:
K2 Inc.
We have audited the accompanying consolidated balance sheets of K2 Inc. and
subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of K2 Inc. and
subsidiaries at December 31, 1999 and 1998, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States.
Los Angeles, California
February 21, 2000
44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as noted in the following paragraph the information called for by
Items 10, 11, 12 and 13 have been omitted because on or before April 29, 2000,
Registrant will file with the Commission pursuant to Regulation 14A a definitive
proxy statement. The information called for by these items set forth in that
proxy statement is incorporated herein by reference.
The information called for by Item 10 with respect to executive officers of
the Registrant appears following Item 4 under Part I of the Report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as part of this report.
(a-1) Financial Statements (for the three years ended December 31, 1999 unless
otherwise stated):
PAGE REFERENCE
FORM 10-K
--------------
Statements of consolidated income........................... 20
Consolidated balance sheets at December 31, 1999 and 1998... 21
Statements of consolidated shareholders' equity............. 22
Statements of consolidated cash flows....................... 23
Notes to consolidated financial statements.................. 24-43
Report of Ernst & Young LLP, Independent Auditors........... 44
(a-2) Consolidated financial statement schedule:
II--Valuation and qualifying accounts....................... F-1
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes.
(a-3) Exhibits
(3)(a)(i) Restated Certificate of Incorporation dated May 4, 1989, filed as
Exhibit (3)(a) to Form 10-K for the year ended December 31, 1989
and incorporated herein by reference.
(a)(ii) Certificate of Amendment of Restated Certificate of Incorporation
dated May 31, 1995, filed as Exhibit 3(a)(ii) to Form 10-K for the
year ended December 31, 1995 and incorporated herein by reference.
45
(a)(iii) Certificate of Amendment of Restated Certificate of
Incorporation, filed as Exhibit (3)(i) to Form 10-Q for the
quarter ended June 30, 1996 and incorporated herein by reference.
(b)(i) By-Laws of K2 Inc., as amended and restated, filed as Exhibit 3 to
Form 10-Q for the quarter ended March 31, 1997 and incorporated
herein by reference.
(b)(ii) By-Laws of K2 Inc., as amended, filed as Exhibit 3 to Form 10-Q
for the quarter ended June 30, 1999 and incorporated herein by
reference.
(4)(a) 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) Material contracts
(a) Note Agreement Re: $40,000,000 8.39% Senior Notes due November 20,
2004 dated as of October 15, 1992, filed as Exhibit (10)(b) to
Form 10-K for the year ended December 31, 1992 and incorporated
herein by reference.
(1) First Amendment to the Note Agreements, dated May 1, 1996, and
filed as Exhibit 10.04 to Form 10-Q for the quarter ended
June 30, 1996 and incorporated herein by reference.
(2) Second Amendment to the Note Agreements, dated December 1, 1999.
Guaranty Agreement Re: $40,000,000 8.39% Senior Notes due
November 30, 2004 of K2 Inc. dated as of December 1, 1999.
(3) Guaranty Agreement Re: $40,000,000 8.39% Senior Notes due
November 30, 2004 of K2 Inc. dated as of December 1, 1999.
(b) Transfer and Administration Agreement among Enterprise Funding Corp.
as the Company, K2 Inc. (formerly 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,
filed as Exhibit 10.03 to Form 10-Q for the quarter ended June 30,
1996 and incorporated herein by reference.
(1) First Amendment to Receivables Purchase Agreements and Transfer
and Administration Agreement dated as of March 15, 1997, filed as
Exhibit 10.01 to Form 10-Q for the quarter ended March 31, 1997
and incorporated herein by reference.
(2) Second Amendment to Transfer and Administration Agreement dated
as of May 20, 1998 filed as Exhibit (10)(c)(2) to Form 10-K for
the year ended December 31, 1998 and incorporated herein by
reference.
(3) Seventh Amendment to Transfer and Administration Agreement dated
as of February 18, 2000.
(c) Note Agreement Re: $50,000,000 8.41% Series 1999-A Senior Notes due
December 1, 2009, dated as of December 1, 1999.
(d) Credit Agreement dated as of December 21, 1999 among K2 Inc., Bank of
America, N.A., as Administrative Agent, Swing Line Lender and Letter
of Credit Issuing Lender and the Other Financial Institutions Party
Hereto.
46
(e) Executive compensation plans and arrangements:
(1)(i) Retirement agreement dated November 20, 1995 between K2 Inc.
and B.I. Forester, filed as Exhibit (10)(d)(1)(i) to
Form 10-K for the year ended December 31, 1995 and
incorporated herein by reference.
(ii) Trust for Anthony Industries, Inc. Supplemental Employee
Retirement Plan for the Benefit of B.I. Forester between
K2 Inc. and Wells Fargo Bank N.A., as Trustee, dated
November 20, 1995, filed as Exhibit (10)(d)(1)(ii) to
Form 10-K for the year ended December 31, 1995 and
incorporated herein by reference.
(2)(i) Special Supplemental Benefit Agreement between K2 Inc. and
Bernard I. Forester dated December 9, 1986, filed as
Exhibit (10)(g) to Form 10-K for the year ended December 31,
1986 and incorporated herein by reference.
(3) 1988 Incentive Stock Option Plan filed as Exhibit A to the Proxy
Statement for the Annual Meeting of Shareholders held on May 5,
1988 and incorporated herein by reference.
(4) Anthony Industries, Inc. Non-Employee Directors' Benefit Plan
effective May 1, 1992, filed as Item 6, Exhibit (a)(28) of
Form 10-Q for the quarter ended March 31, 1992 and incorporated
herein by reference.
(5) Anthony Industries, Inc. Corporate Officers' Medical Expense
Reimbursement Plan, as amended through October 22, 1993,
effective August 15, 1974, filed as Exhibit (10)(c)(5) to
Form 10-K for the year ended December 31, 1993 and incorporated
herein by reference.
(6) Anthony Industries, Inc. Directors' Medical Expense Reimbursement
Plan, as amended through October 22, 1993, effective January 1,
1993, filed as Exhibit (10)(c)(6) to Form 10-K for the year ended
December 31, 1993 and incorporated herein by reference.
(7) K2 Inc. Executive Officers' Incentive Compensation Plan adopted
August 5, 1993 as amended December 17, 1996, filed as
Exhibit 10(d)(7) to Form 10-K for the year ended December 31,
1996 and incorporated herein by reference.
(8) 1994 Incentive Stock Option Plan, filed as Exhibit A to the Proxy
Statement for the Annual Meeting of Shareholders held on May 5,
1994 and incorporated herein by reference.
(9) Employment agreement dated May 8, 1998 between K2 Inc. and
Richard M. Rodstein, filed as Item 6, Exhibit 10.01 of Form 10-Q
for the quarter ended March 31, 1998 and incorporated herein by
reference.
(10) Employment agreement dated May 8, 1998 between K2 Inc. and
John J. Rangel, filed as Item 6, Exhibit 10.02 of Form 10-Q for
the quarter ended March 31, 1998 and incorporated herein by
reference.
(11) 1999 Incentive Stock Option Plan, filed as Exhibit A to the
Proxy Statement for the Annual Meeting of Shareholders held on
May 6, 1999 and incorporated herein by reference.
(f) (1) Asset Purchase Agreement dated February 16, 1996 among General
Aquatics, Inc., KDI Sylvan Pools, Inc. as Buyer, and Anthony
Industries, Inc., as Seller, filed as Item 7, Exhibit 99(A) to
Form 8-K filed March 21, 1996 and incorporated herein by
reference.
47
(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) Asset Purchase Agreement dated August 4, 1999 by and between
Simplex Products Inc., as Buyer, and K2 Inc., as Seller, filed as
Item 6, Exhibit 10 of Form 10-Q for the quarter ended June 30,
1999 and incorporated herein by reference.
(21) Subsidiaries
(23) Consent of Independent Auditors
(27) Financial Data Schedule
(b) Reports on Form 8-K:
Report on Form 8-K dated December 23, 1999, amending the Report of Form 8-K
dated October 22, 1999, to include the filing of financial statements and
pro forma financial information relative to the completion of K2 Inc.'s
acquisition of the issued and outstanding shares of common stock of
Ride, Inc. on October 7, 1999.
(c) Refer to (a-3) above.
(d) Refer to (a-2) above.
48
SIGNATURES
Pursuant to the requirements of Section 13 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.
By: /s/ RICHARD M. RODSTEIN
-----------------------------------------
Richard M. Rodstein
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: March 24, 2000
--------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RICHARD M. RODSTEIN Director, President and Chief
------------------------------------------- Executive Officer (Principal March 24, 2000
Richard M. Rodstein Executive Officer)
/s/ JOHN J. RANGEL Senior Vice President--Finance
------------------------------------------- (Principal Financial and March 24, 2000
John J. Rangel Accounting Officer)
/s/ B.I. FORESTER
------------------------------------------- Director, Chairman of the March 24, 2000
B.I. Forester Board
/s/ SUSAN E. ENGEL
------------------------------------------- Director March 24, 2000
Susan E. Engel
/s/ JERRY E. GOLDRESS
------------------------------------------- Director March 24, 2000
Jerry E. Goldress
/s/ WILFORD D. GODBOLD, JR.
------------------------------------------- Director March 24, 2000
Wilford D. Godbold, Jr.
/s/ RICHARD J. HECKMANN
------------------------------------------- Director March 24, 2000
Richard J. Heckmann
II-1
SIGNATURE TITLE DATE
--------- ----- ----
/s/ STEWART M. KASEN
------------------------------------------- Director March 24, 2000
Stewart M. Kasen
/s/ JOHN H. OFFERMANS
------------------------------------------- Director March 24, 2000
John H. Offermans
/s/ ALFRED E. OSBORNE, JR.
------------------------------------------- Director March 24, 2000
Alfred E. Osborne, Jr.
II-2
K2 INC
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(THOUSANDS)
ADDITIONS
-------------------------------------- DEDUCTIONS
CHARGED --------------
CHARGED ACQUISITIONS TO OTHER AMOUNTS
BALANCE AT TO COSTS ACCOUNTED ACCOUNTS CHARGED TO BALANCE
BEGINNING AND FOR AS A (PRIMARILY RESERVE NET OF AT END
DESCRIPTION OF YEAR EXPENSES PURCHASE GROSS SALES) REINSTATEMENTS OF YEAR
- ----------- ---------- -------- ------------ ------------ -------------- --------
Year ended December 31, 1999
Allowance for doubtful items...... $5,798 $2,594 $1,687 $-- $3,507 $6,572
------ ------ ------ ---- ------ ------
$5,798 $2,594 $1,687 $-- $3,507 $6,572
====== ====== ====== ==== ====== ======
Year ended December 31, 1998
Allowance for doubtful items...... $6,590 $2,061 $ -- $-- $2,853 $5,798
------ ------ ------ ---- ------ ------
$6,590 $2,061 $ -- $-- $2,853 $5,798
====== ====== ====== ==== ====== ======
Year ended December 31, 1997
Allowance for doubtful items...... $5,351 $2,289 $ -- $-- $1,050 $6,590
Other (primarily sales
discounts)...................... 1,062 331 1,393
------ ------ ------ ---- ------ ------
$6,413 $2,289 $ -- $331 $2,443 $6,590
====== ====== ====== ==== ====== ======
F-1