K2 Inc. is expanding faster than waistlines during the holidays as the sporting goods industry’s leading brand aggregator looked just up the street for an appetizer to hold them over until their next big deal. The company on Wednesday announced that it will acquire sports-memorabilia-maker Fotoball USA in an all-stock deal valued at roughly $17.2 million.

Fotoball has seen its fortunes decline over the last year as large deals with the Disney Store and Disney theme park business and Quick-Serve restaurant promotional activity evaporated. FUSA saw a 26% decline in sales in its most recent quarter as the company swung to a $45,000 loss versus a $270, 000 profits in the year-ago period. Total 2002 year-end sales were approximately $44.0 million.

Fotoball year-to-date 2003 sales were down 31.6% through September and are expected to reach about $31 million for the full year.

At first glance the acquisition makes little sense when looking at the customer base of each company, with K2’s focus clearly on sporting goods retail and Fotoball focused on the promotional business. But Fotoball has seen a significant shift in their customer base, as sales in the promotions end of the business fell 65% in the company’s third quarter and entertainment sales decreased 49%. The downturn in those businesses was offset by a 13% increase in team sales and an 8% increase in retail sales, right up K2’s alley.

Each FUSA share will be exchanged for 0.2757 shares of KTO common stock. K2 said the deal, which must be approved by government regulators and the stockholders of both companies, is expected to close by the end of January.

The deal, which will turn Fotoball USA into a wholly owned subsidiary of K2, is expected to qualify as a “tax-free” reorganization for federal income tax purposes.

FUSA will have the ability to terminate the agreement if the average closing price for K2's shares are less than $11.78 for any ten trading days ending not later than two trading days prior to the expiration of the offer.

KTO shares were up 0.7% for the week to close at $15.30 on Friday. FUSA shares were up 7.5% for the week, closing at $4.14 on Friday.

In other K2 news, the company announced earlier last week that current company COO J. Wayne Merck was appointed to the position of President of K2 Inc., with overall responsibility for the operations of K2's various divisions.

K2 also reaffirmed guidance for the fourth quarter and full-year 2003.


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