K2 board takes control in new era of corporate assertiveness.

TENSION began to mount this summer during the normally collegial board meetings at K2 Inc. as several directors of the L.A.-based recreational products company were pressing Chief Executive Richard Rodstein to define a growth strategy.

The maker of skis, snowboards, skates, fishing and boating gear had seen little revenue movement over the past several years. There also had been a number of product and operational miscues. The board wanted a plan that would lead the company out of its funk, recalls Chairman Richard Heckmann, formerly head of U.S. Filter Corp.

"I'll never forget one of the great questions that (board member and football coach) Lou Holtz asked: 'Why do you think that if you keep doing the same things your results are going to change?'" says Heckmann.

At an Oct. 4 board meeting in Columbia, S.C., the debate was settled. With a firm nudge from the board, Rodstein resigned on Oct. 11, and Heckmann, who built U.S. Filter from practically zero to $5.2 billion in revenue before its 1999 acquisition by Vivendi, took over as chief executive.

"(Rodstein) called me and we talked about it and we agreed, and so the change was made," Heckmann says.

It's clearly a sign of the times. The kind of "friendly" coup that occurred at K2 is likely to become more common as changes in the regulatory, business and political climate work their way through the nation's boardrooms. Many of the regulatory changes are intended to improve the effectiveness of corporate boards, but over the short term, they've been thrown into a tumult.

New rules

"The last six months have sort of kicked the anthill of the board room, and it's going to take them awhile to get organized before they can sit back and stroke their beards to see if the CEO's strategic vision is on line," says Ralph Ward, publisher of Board Room Insider, an online journal for corporate directors.

The new rules are forcing boards to recruit independent members and members with financial acumen, rearrange key committee memberships, and alter meeting schedules so some can be held without management presence.

Over the next year or so--as the economy improves, the changes are digested and boards begin to feel their new clout--more changes at the top are likely, Ward predicts.

"It's like a fire, you have oxygen, you have fuel and you have heat all coming together," Ward says. "The board actually begins to realize, we are an entity, we have powers. What can we do with them?"

Indeed, a balance of power has shifted from management and into the hands of shareholders and boards, says Richard Koppes, former general counsel at California Public Employees' Retirement System, now advising boards and management clients at Jones Day Reavis & Pogue in Sacramento.

He points to recently awakened boards at Walt Disney Co. and Healthsouth Corp., and notes that his own clients who are directors have become more activist-oriented (though he can't disclose who they are). "A lot of these issues don't get aired in public," Koppes says.

At K2, Heckmann acknowledges that the new climate helped spur the board to act, although he maintains that a change would have been made anyway. Heckmann was a member of the New York Stock Exchange Corporate Accountability and Listing Standards Committee, which produced some of the new board recommendations.

"I've spent the last year and a half on these corporate governance issues," Heckmann says. "If you're not an activist on a board now, you're missing a bet."

Nevertheless, there's probably no decision more wrenching for a board than sacking its chief executive. Do it too soon, and the remaining employees will conclude that the boss was treated unfairly. Wait too long, and the executive team will believe that the boss got away with murder, so why shouldn't they?

Do it at all, and friendships can be broken that may have lasted for years.

Plenty of appeal

Alfred Osborne, a K2 director and head of UCLA's Price Center for Entrepreneurial Studies, maintains that Rodstein wouldn't have wanted to be spared once he lost the confidence of the board.

"Rich also had a vision for building K2 into one of the leading sports equipment companies in the world," says Osborne, who will still remain friends with Rodstein. "But on the issue of driving the company through its next phase of growth, the best person is someone else."

Rodstein, who couldn't be reached for comment, will remain a consultant to K2, and his employment contract, which expires in May 2004, will be honored.

K2 retains plenty of brand appeal. Besides the K2 brand used in skis and snowboards, it has Shakespeare (fishing), Stearns (water safety) and Hilton (apparel), among others.

"They have a very strong brand, they are considered a leader in many areas they offer, and our customers ask for K2 by name," says Craig Levra, chairman and chief executive of Sport Chalet Inc. in La Canada Flintridge.

But like other suppliers to the sporting goods industry, K2 has had its ups and downs, as industry growth slowed and several product categories went boom-bust.

In 2001, K2's sales were $595.5 million, down from $670.8 million in 2000 and barely above the $560 million generated in 1997. The company lost $7.7 million last year, compared with net income of $16.6 million in 2000. For the third quarter ended Sept. 30, K2 posted net income of $3.9 million, compared with a loss of $10.7 million for the like period a year ago.

To some degree, K2's results have tracked the industry as a whole. In 2001, U.S. wholesale sporting goods sales fell 1.8 percent, to $65 billion, according to SGMA International, a trade association. In 1997, industry-wide sales were $59 billion, said Mike May, a SGMA spokesman.

However, K2 has had its own specific miscues. It was late to move its bicycle manufacturing to China, says Osborne, and a large investment in scooter infrastructure was made just in time for the fad to go bust. Last year, the problem was a glut of in-line skates, which wilted on the shelves of sporting goods stores as the economy went south.

"The company made some bad choices," says Heckmann, who Rodstein brought onto K2's board in 1998. "It was a combination of a wide range of things that culminated in an anemic stock price, and a company, when you turned around and look backwards, that had essentially no growth for the past four or five years."

Competitive market

Heckmann believes that some of K2's problems can be fixed by simply bringing in more talent.

"If you've got the right marketing and brand people, and the right design people, and you incentivize them properly, and you motivate them properly, you ought to be the survivor not the prey," he says.

The industry is highly fragmented, but consolidating. The top three retailers in the U.S., Sports Authority Inc., Dick's Sporting Goods Inc. and Gart Sports Co. have only 6 percent of the market, says Anthony Lebiedzinski, an equity analyst with Sidoti & Co. Meanwhile, new players like Galyan's Trading Co. are introducing 100,000 square foot store formats that emulate some of the big-box retailers such as Wal-Mart Stores Inc. All are expanding.

"It's pretty competitive out there. I think what you're going to see in the next several years is some consolidation," says Lebiedzinski.

Retail consolidation has driven consolidation by suppliers in other industries. To keep up, K2 must acquire other brands and companies, Osborne says.

"If this business consolidates ... you need to have power in the aisle, you need to have presence across brands or across categories within brands, or you're subject to the retailer's whims," he says.

With Heckmann, K2 now has a leader who's made more than 200 acquisitions in his career. He's also someone who carries a reputation on Wall Street and can attract the equity analyst coverage, the investment banking relationships and the interest among institutional investors that are required for a successful acquisition strategy.

Heckmann says he's already fielding calls from bankers, analysts and prospective sellers. He won't give any specifics on his plans, but says he's got specific ideas on how to fill out K2's product line.

Meanwhile, since the management change, K2's stock has rebounded to a recent price of $9.58 from a low of $6.40 on Oct. 10. With 18 million shares outstanding, the difference in stock price alone gives K2 another $57 million in its war chest for acquisitions.

"There's no magic to this," says Heckmann. "I keep telling all the people I'm talking to in the company, this is all very much instinct, and we all have it."

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K2 Inc.

Stock Prices

YEAR (Dec. 31)                  2001    2000

Revenue (millions)            $595.5  $670.8
Total Expenses (millions)      594.2     632
Operating Income (millions)      1.3    38.8
Net Income (millions)          (7.7)    16.6
Earnings Per Share           $(0.43)   $0.92

Quarterly Net Income (millions)

SUMMARY

Business: Sporting goods manufacturer

Market Cap: $171.9 million

Headquarters: Los Angeles

CEO: Richard J. Heckmann

Dividend Yield: N/A *

Total Liabilities: $212.5 million

P/E Ratio: 18.9

Long-Term Debt: $105.2 million

* K2 Inc. does not pay dividends.

Financial Editor Anthony Palazzo can be reached at 323-549-5225, ext. 224, or [e-mail].