<PAGE>
- - --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
COMMISSION FILE NUMBER 0-27002
------------------------------
MORROW SNOWBOARDS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OREGON 93-1011046
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
------------------------------
2600 PRINGLE ROAD, S.E.
SALEM, OREGON 97302
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(503) 375-9300
(REGISTRANT'S TELEPHONE NUMBER; INCLUDING AREA CODE)
------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. /x/ yes / / no
The number of shares outstanding of the registrant's common stock, no par
value, as of August 13, 1996 was 5,698,599.
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<PAGE>
MORROW SNOWBOARDS, INC.
INDEX
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statement of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
1
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MORROW SNOWBOARDS, INC.
For the Quarter Ended
June 30, 1996
2
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MORROW SNOWBOARDS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
- - --------------------------------------------------------------------------------
ASSETS
June 30, December 31,
1996 1995
----------- -----------
Current Assets:
Cash and cash equivalents $ 4,544 $ 15,026
Accounts receivable, net 2,302 5,886
Inventories 10,408 2,747
Prepaid expense 534 252
Deferred income taxes 1,759 289
----------- -----------
Total Current Assets 19,547 24,200
Property, Plant and Equipment, net 8,188 6,936
Other Assets 34 43
----------- -----------
Total Assets $ 27,769 $ 31,179
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,739 $ 1,857
Accrued liabilities 585 964
Current portion of long-term debt and
capital lease obligations 286 2,657
----------- -----------
Total Current Liabilities 2,610 5,478
Long-Term Liabilities:
Capital lease obligations, net of current portion 357 475
Deferred income taxes 76 76
----------- -----------
Total Long-Term Liabilities 433 551
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, no par, 10,000,000 shares authorized
no shares issued or outstanding - -
Common stock, no par, 20,000,000 shares authorized,
5,698,599 and 5,500,448 shares issued and
outstanding 26,332 25,385
Notes receivable for common stock (94) (94)
Accumulated deficit (1,512) (141)
----------- -----------
Total Shareholders' Equity 24,726 25,150
----------- -----------
Total Liabilities and Shareholders' Equity $ 27,769 $ 31,179
----------- -----------
----------- -----------
See Notes to Consolidated Financial Statements
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MORROW SNOWBOARDS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
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<TABLE>
<CAPTION>
For The Six Months Ended For The Three Months Ended
June 30, June 30,
-------------------------- --------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales $ 2,685 $ 4,751 $ 2,038 $ 2,034
Cost of Goods Sold 1,935 3,597 1,387 1,409
----------- ----------- ----------- -----------
Gross Profit 750 1,154 651 625
Operating Expenses:
Selling, marketing and customer
service 1,614 1,209 721 535
Engineering, research and product
development 365 335 186 174
General and administrative 1,191 738 587 398
----------- ----------- ----------- -----------
Total Operating Expenses 3,170 2,282 1,494 1,107
----------- ----------- ----------- -----------
Operating Loss (2,420) (1,128) (843) (482)
Other Income (Expense):
Interest expense (120) (366) (38) (222)
Interest income 315 4 107 4
Other income 15 16 15 16
----------- ----------- ----------- -----------
Total Other Income (Expense) 210 (346) 84 (202)
----------- ----------- ----------- -----------
Loss Before Income Tax (2,210) (1,474) (759) (684)
Income Tax Benefit 839 575 285 267
----------- ----------- ----------- -----------
Net Loss $ (1,371) $ (899) $ (474) $ (417)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net Loss Per Share: $ (0.24) $ (0.25) $ (0.08) $ (0.11)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted Average Number of Shares
Used in Computing Per Share
Amounts: 5,652,523 3,535,587 5,688,484 3,412,362
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements
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MORROW SNOWBOARDS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock
------------------------ Notes Accumulated
Shares Amount Receivable Deficit Total
--------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 5,500,448 $ 25,385 $ (94) $ (141) $ 25,150
Common stock options exercised 58,203 116 - - 116
Warrant activity 139,948 199 - - 199
Tax benefit for exercise of warrants - 632 - - 632
Net loss - - - (1,371) (1,371)
--------- ---------- -------- --------- -----------
Balance, June 30, 1996 5,698,599 $ 26,332 $ (94) $ (1,512) $ 24,726
--------- ---------- -------- --------- -----------
--------- ---------- -------- --------- -----------
</TABLE>
See Notes to Consolidated Financial Statements
5
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MORROW SNOWBOARDS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
For The Six Months Ended
June 30,
-------------------------
1996 1995
---------- --------
Cash Flows From Operating Activities:
Net loss $ (1,371) $ (899)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 520 461
Loss on retirement of assets 20 -
Deferred income taxes (838) (575)
Other - 5
Changes in operating assets and liabilities:
Decrease in accounts receivable 3,584 513
Increase in inventories (7,661) (2,700)
Increase in prepaid expenses (282) (27)
Decrease in officer advances - 21
(Increase) decrease in other assets 9 (49)
Increase (decrease) in accounts payable (118) 18
Decrease in accrued liabilities (379) (176)
---------- --------
Net Cash Used In Operating Activities (6,516) (3,408)
Cash Flows From Investing Activities:
Acquisition of property and equipment (1,792) (729)
Proceeds from sale of equipment - 40
---------- --------
Net Cash Used In Investing Activities (1,792) (689)
Cash Flows From Financing Activities:
Proceeds from issuance of common stock 315 -
Proceeds from subordinated debentures - 1,500
Principal payments on long-term liabilities (2,489) (495)
Line of credit borrowings, net - 2,583
---------- --------
Net Cash Provided By (Used In) Financing
Activities (2,174) 3,588
---------- --------
Net Decrease In Cash and Cash Equivalents (10,482) (509)
Cash and Cash Equivalents at Beginning Of Period 15,026 509
---------- --------
Cash and Cash Equivalents at End Of Period $ 4,544 $ -
---------- --------
---------- --------
Supplemental disclosure:
Cash paid for interest $ 120 $ 346
Cash paid for income taxes 20 -
Noncash Transactions:
Assets acquired under capital lease - 185
Tax benefit on exercise of warrants 632 -
Conversion of debt to common stock - 25
Stock option and warrant activity - 48
See notes to Consolidated Financial Statements
6
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
DESCRIPTION OF BUSINESS
Morrow Snowboards, Inc. and subsidiary (the "Company"), headquartered in
Salem, Oregon, were organized in October 1989 to design, manufacture and market
snowboards, boots, bindings, apparel and accessories to retail outlets in the
United States and to international distributors in several foreign countries.
The Company operates in a single business segment. The consolidated financial
statements include the wholly-owned subsidiary, Morrow International, Inc., a
Guam foreign sales corporation. All significant intercompany accounts and
transactions have been eliminated.
The Company operates in a relatively new and rapidly growing segment of the
sporting goods industry which is highly seasonal. Further, the Company has
undergone significant expansion since its inception in 1989 in its
manufacturing, marketing and sales activities. These and other factors present
certain risks to the future operations of the Company.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission (the "Commission"). While these statements
reflect all necessary, normal and recurring adjustments in the opinion of
management required to present fairly, in all material respects, the financial
position, results of operations and cash flows of the Company and its subsidiary
at June 30, 1996, and for the three and six months ended June 30, 1996 and 1995,
they do not include all notes required by generally accepted accounting
principles for complete financial statements. Further information is contained
in the annual financial statements of the Company and notes thereto, for the
year ended December 31, 1995, contained in the Company's Form 10-K, filed with
the Commission pursuant to the Securities Exchange Act of 1934. Operating
results for the six month period ended June 30, 1996, are not necessarily
indicative of the results that may be expected for the full year.
2. SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and on deposit and highly
liquid investments purchased with an original maturity of three months or less.
INVENTORIES
Inventories are stated at the lower of cost or market using standard costs
which approximate the first-in, first-out (FIFO) method. Costs for inventory
valuation include labor, materials and manufacturing overhead.
DEPRECIATION AND AMORTIZATION
Property, plant and equipment are carried at cost. Depreciation of
property, plant and equipment is provided using the straight-line method over
the estimated useful lives of the assets (3 to 35 years). Amortization of
leasehold improvements, facilities and equipment under capital lease is provided
using the straight-line method over the expected useful lives of the assets or
the initial term of the lease (including
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periods related to renewal options which are expected to be exercised),
whichever is shorter. Amortization is included in depreciation expense.
WARRANTY COSTS
The Company offers a one-year warranty on its products. The Company
provides for anticipated warranty expense related to products sold.
ADVERTISING AND PROMOTION COSTS
Advertising and promotion costs are expensed as incurred and included in
selling, marketing and customer service expenses.
REVENUE RECOGNITION
The Company generally recognizes revenue from the sale of its products when
the products are shipped to customers. The Company also manufactures private
label products under short-term agreements for OEM customers. Revenue from the
sale of OEM products is recognized when production is completed in accordance
with customer specifications (completed orders are not subject to cancellation),
the orders are staged for shipment and the following conditions are met: 1) the
purchaser has executed an agreement that acknowledges the transfer of title and
responsibility for the product upon invoicing, 2) a cash deposit securing the
order has been received, and 3) upon acceptance of the invoice, the purchaser
has agreed to full payment and has assumed the risks associated with any change
in market price. In addition, the Company only recognizes revenue from OEM
customers when collectability is reasonably assured.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
SFAS 109 uses the liability method so that deferred taxes are determined based
on the estimated future tax effects of differences between the financial
statement and tax bases of assets and liabilities given the provisions of
enacted tax laws and tax rates. Deferred income tax expenses or credits are
based on the changes in the financial statement bases versus the tax bases in
the Company's assets or liabilities from period to period.
PRODUCT DEVELOPMENT COSTS
Expenditures associated with the development of new products and
improvements to existing products are expensed as incurred.
2.45-FOR-1 STOCK SPLIT
The Company effected a 2.45-for-1 stock split on November 16, 1995.
Accordingly, all share and per share data presented in the consolidated
financial statements and footnotes have been adjusted to reflect the 2.45-for-1
stock split.
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NET LOSS PER SHARE
Net loss per share has been computed by dividing net income by the weighted
average number of common shares and equivalents outstanding (if dilutive).
Common share equivalents (if dilutive) included in the computation represent
shares issuable upon assumed exercise of stock options and warrants using the
treasury stock method.
Pursuant to Securities and Exchange Commission Staff Accounting
Bulletin 83, common stock options granted and Convertible Subordinated
Debentures issued during the 12 months immediately preceding the Company's
initial public offering date with an exercise or conversion price below the
offering price of the Company's common stock have been reflected in the net loss
per share calculation for the period ended June 30, 1995 as if they had been
outstanding for the full period. Shares relating to stock options were
calculated using the treasury stock method.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation. These reclassifications had no effect on previously reported
results of operations.
3. INVENTORIES
Inventories consist of the following:
June 30, December 31,
1996 1995
---------- ------------
(in thousands)
Finished Goods $ 7,301 $ 446
Work-in-process 736 333
Raw materials 2,371 1,968
---------- ------------
Total inventories $ 10,408 $ 2,747
---------- ------------
---------- ------------
4. SIGNIFICANT EVENT
BUILDING PURCHASE
During the first quarter of 1996, the Company exercised an option under its
lease to purchase the administrative and manufacturing facility. The lease was
originally recorded as a long-term obligation and the building was recorded as
an asset under property, plant and equipment.
9
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since its formation, the Company has focused its business activities on
designing, manufacturing and marketing premium snowboards and related products
under the "Morrow" brand name and, to a lesser extent, on an OEM basis. In
1996, the Company implemented a business strategy to further develop and support
"Morrow" branded products and de-emphasize OEM sales. The proceeds from the
Company's initial public offering in December 1995 has provided the capital
necessary to implement this strategy. The majority of "Morrow" branded product
sales occur primarily in the third and fourth quarters of the year whereas OEM
sales occur in the first two quarters of the year. In previous years, OEM sales
helped reduce seasonal fluctuations in production and sales. In the first half
of 1996, the Company's strategy shift resulted in a significant decline in net
sales as compared to the same period in 1995. However, the Company anticipates
a substantial increase in sales during the latter half of 1996 as it fills its
preseason orders for "Morrow" branded products from its inventory and continued
production.
The Company's net sales decreased 43.5% to $2,685,000 for the six months
ended June 30, 1996 from $4,751,000 for the first six months of 1995. For the
six months ended June 30, 1996, "Morrow" branded snowboard sales represented
74.5% of net sales compared to 10.7% for the six months ended June 30, 1995.
OEM snowboard sales represented 0.3% and 69.8% of net sales, respectively.
Operating expenses, as a percentage of net sales, increased in the first half of
1996 over the first half of 1995 because of reduced sales and further growth and
support of the "Morrow" brand, a result of the business strategy implemented at
the beginning of 1996.
The Company accumulates a significant backlog of sales orders beginning in
February of each year as a result of preseason orders placed in connection with
winter sports trade shows. As the Company delivers snowboards, the backlog
decreases and is usually eliminated by the end of the year. The Company had net
sales of $2,685,000 and estimated open sales orders of approximately $26,400,000
at June 30, 1996. At June 30, 1995 the Company had net sales of $4,751,000 and
estimated open sales orders of approximately $16,500,000. Open sales orders are
subject to cancellation.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements which are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The forward-looking statements involve risks and uncertainties that could
cause actual results to differ materially from the forward-looking statements.
Morrow Snowboards wishes to caution readers that important factors, among
others, in some cases have affected, and in the future could affect, Morrow
Snowboards' actual results and could cause actual consolidated results for the
first six months of 1996, and beyond, to differ materially from those expressed
in any forward-looking statements made by, or on behalf of, Morrow Snowboards.
These factors include, without limitation, new initiatives by competitors, price
pressures, cancellation of preseason orders, inventory risks due to shifts in
market demand, raw materials costs, the ability to manufacture product at
planned costs, weather in primary winter resort areas of the world, and the risk
factors listed from time to time in the Company's SEC reports, including but not
limited to the report on Form 10-K for the year ended December 31, 1995.
Additionally, investors should be aware of global factors which could have a
negative impact on prospects and the consistency of progress. These include
political, economic or other factors such as currency exchange rates, inflation
rates, recessionary or expansive trends, taxes and regulations and laws
affecting the worldwide business in each of the Company's markets. Management is
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presently unaware of any trends or conditions that could have a material adverse
effect on the Company's consolidated financial position, future results of
operations or liquidity.
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods indicated
as a percentage of net sales.
Six Months Ended June 30, Year Ended
------------------------- -----------------
1996 1995 December 31, 1995
------------------------- -----------------
Net Sales 100.0 % 100.0 % 100.0 %
Cost of Goods Sold 72.1 75.7 69.8
------------------------- -----------------
Gross Profit 27.9 24.3 30.2
Operating Expenses:
Selling, marketing and
customer service 60.1 25.4 14.1
Engineering, research and
product development 13.6 7.1 3.2
General and administrative 44.4 15.5 6.5
------------------------- -----------------
Total Operating Expenses 118.1 48.0 23.8
Operating Income (Loss) (90.2) (23.7) 6.4
Interest Expense (4.5) (7.7) (3.5)
Interest Income 11.7 0.1 0.1
Other Income 0.6 0.3 -
------------------------- -----------------
Income (Loss) Before Income
Taxes (82.4) (31.0) 3.0
Income Tax Benefit (Expense) 31.2 12.1 (1.0)
------------------------- -----------------
Net Income (Loss) (51.2)% (18.9)% 2.0 %
------------------------- -----------------
------------------------- -----------------
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
NET SALES. Net sales for the six months ended June 30, 1996 decreased
43.5% to $2,685,000 from $4,751,000 for the same period in 1995 as a result of
the Company's business strategy to further develop, support and produce "Morrow"
branded products and reduce OEM sales. The sale of snowboards for the six
months ended June 30, 1996 decreased 47.4% to $2,009,000 from $3,822,000 for the
same period a year ago. For the six months ended June 30, 1996, "Morrow" branded
snowboards represented 74.5% of net sales compared to 10.7% for the six months
ended June 30, 1995. OEM snowboard sales were $8,000 for the six months ended
June 30, 1996 compared to $3,314,000 for the six months ended June 30, 1995,
representing 0.3% and 69.8% of net sales, respectively. As a percentage of net
sales, snowboards represented 74.8% for the six months ended June 30, 1996
compared to 80.4% for the six months ended June 30, 1995. The sale of bindings
decreased 29.3% to $482,000 for the six months ended June 30, 1996 from $682,000
for the six months ended June 30, 1995. The sale of boots increased 101.8% to
$113,000 for the six months ended June 30, 1996 compared to $56,000 for the same
period in 1995. As a percentage of net sales, binding sales represented 18.0%
for the six months ended June 30, 1996 compared to 14.4% for the six months
ended June 30, 1995. Boot sales represented 4.2% of net sales for the six months
ended June 30, 1996 compared to 1.2% for the six months ended June 30, 1995.
The decrease in binding sales is the result of the Company's shift in emphasis
toward "Morrow" branded product, the majority of which is delivered in the last
two quarters of the year, and away from OEM product, which is normally delivered
in the first and second quarters of the year. The increase in boot sales is the
result of the closeout of 1995/96 season boots during the first quarter of 1996.
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GROSS PROFIT. Gross profit for the six months ended June 30, 1996
decreased 35.0% to $750,000 from $1,154,000 for the same period in 1995 as a
result of the overall decrease in sales. Total gross margin for the second
quarter of 1996 increased 16.6% to 31.9% from 15.3% in the first quarter for a
combined 27.9% for the six months ended June 30, 1996, compared to 24.3% for the
six months ended June 30, 1995, an increase of 3.6% on a year-to-year basis.
This is largely a result of the increased sales of "Morrow" branded snowboards,
which have higher margins relative to OEM snowboards.
SELLING, MARKETING AND CUSTOMER SERVICE. Selling, marketing and customer
service expenses for the six months ended June 30, 1996 increased 33.5% to
$1,614,000 from $1,209,000 for the same period in 1995, representing 60.1% and
25.4% of net sales, respectively. The Company's growth required increased
expenses associated with additional staff, increased promotion and marketing
activities, trade show expenses and travel expenses, as well as the
implementation of an on-hill "tech rep" program and the establishment of a
product management department. As a percentage of net sales, staff and
employee-related expenses increased 7.1%, promotion and marketing expenses
increased 12.6%, trade show expenses increased 1.4% and travel expenses
increased 2.3%. The on-hill "tech rep" program, which represented 1.4% of net
sales in the first six months of 1996, was implemented in late 1995. In
addition, the Company created a product management department in the second
quarter of 1996. Product management consulting services represented 1.5% of net
sales for the first six months of 1996. All other expense categories also
increased as a percentage of net sales on a period-to-period basis because of
the reduction in sales.
ENGINEERING, RESEARCH AND PRODUCT DEVELOPMENT. Engineering, research and
product development expenses for the six months ended June 30, 1996 increased
9.0% to $365,000 from $335,000 for the six months ended June 30, 1995,
representing 13.6% and 7.1% of net sales, respectively. This increase was
primarily due to additional staff and employee-related expenses. As a
percentage of net sales, staff and employee-related expenses increased 4.3%.
All other expense categories also increased as a percentage of net sales on a
period-to-period basis because of the reduction in sales.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
six months ended June 30, 1996 increased 61.4% to $1,191,000 from $738,000 for
the six months ended June 30, 1995, representing 44.4% and 15.5% of net sales,
respectively. This increase was primarily due to additional staff and employee-
related expenses, increased professional fees and expenses attributable to being
a public company and increases in bad debt reserve, insurance and recruitment
expenses. As a percentage of net sales, staff and employee-related expenses
increased 9.7%, professional fees and public company expenses increased 7.8%,
bad debt expense increased 2.1%, insurance expenses increased 2.5% and
recruitment expenses increased 2.0%. All other expense categories also
increased as a percentage of net sales on a period-to-period basis because of
the reduction in sales.
INTEREST EXPENSE. Interest expense decreased 67.2% to $120,000 for the six
months ended June 30, 1996 from $366,000 for the six months ended June 30, 1995.
This was the direct result of the Company paying off its bank operating line and
purchasing its manufacturing facility with a portion of the proceeds provided by
the Company's initial public offering in December 1995. The manufacturing
facility, which was purchased in March of 1996, was formerly recorded as a long-
term capital lease.
INTEREST INCOME. Interest income of $315,000 for the six months ended June
30, 1996 results from investments made with a portion of the proceeds provided
by the Company's initial public offering in December 1995, compared to $4,000 of
interest income in the first six months of 1995.
INCOME TAX BENEFIT. The income tax benefit for the six months ended June
30, 1996 was $839,000 compared to a benefit of $575,000 for the six months ended
June 30, 1995. The income tax benefit for the
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six months ended June 30, 1996 and 1995 was based on the Company's estimated
effective tax rate of approximately 38.0% and 39.0%, respectively.
NET LOSS. The net loss for the six months ended June 30, 1996 was
$1,371,000 compared to a net loss of $899,000 for the six months ended June 30,
1995.
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995
NET SALES. Net sales for the second quarter of 1996 remained relatively
stable at $2,038,000 in the second quarter of 1996 compared to $2,034,000 in the
second quarter of 1995. However, the mix changed considerably as a result of
the Company's increased emphasis toward the production of "Morrow" branded
products and a corresponding reduction in OEM sales. The sale of snowboards in
the second quarter of 1996 increased 5.4% to $1,729,000 from $1,641,000 for the
second quarter of 1995. In the second quarter of 1996, "Morrow" branded
snowboards represented 84.6% of net sales compared to 2.4% in the second quarter
of 1995. OEM snowboard sales were $5,000 in the second quarter of 1996 compared
to $1,593,000 in the second quarter of 1995, representing 0.2% and 78.3% of net
sales, respectively. As a percentage of net sales, snowboards represented 84.8%
in the second quarter of 1996 compared to 80.7% in the second quarter of 1995.
The sale of bindings decreased 23.7% to $280,000 for the second quarter of 1996
from $367,000 in the second quarter of 1995. As a percentage of net sales,
binding sales represented 13.7% in the second quarter of 1996 compared to 18.0%
in the second quarter of 1995. The decrease in binding sales is the result of
the Company's shift in emphasis away from OEM product toward "Morrow" branded
product, the majority of which is delivered in the last two quarters of the
year. The sale of boots increased 233.3% to $10,000 for the second quarter of
1996 compared to $3,000 in the second quarter of 1995. Boot sales represented
0.5% of net sales in the second quarter of 1996 compared to 0.1% in the second
quarter of 1995.
GROSS PROFIT. Gross profit for the second quarter of 1996 increased 4.2%
to $651,000 from $625,000 for the second quarter of 1995. Total gross margin
for the second quarter of 1996 increased to 31.9% from 30.7% for the second
quarter of 1995. This is largely a result of the Company's strategy change
toward "Morrow" branded snowboards, which have higher margins relative to OEM
snowboards.
SELLING, MARKETING AND CUSTOMER SERVICE. Selling, marketing and customer
service expenses for the second quarter of 1996 increased 34.8% to $721,000 from
$535,000 for the second quarter of 1995, representing 35.4% and 26.3% of net
sales, respectively. This increase was primarily due to the addition of staff,
increased promotion and marketing activities and the establishment of a product
management department. As a percentage of net sales, staff and employee-related
expenses increased 1.8%, promotion and marketing expenses increased 6.0% and
product management consulting services represented 1.0% of net sales for the
second quarter of 1996. All other expense categories remained consistent as a
percentage of net sales.
ENGINEERING, RESEARCH AND PRODUCT DEVELOPMENT. Engineering, research and
product development expenses for the second quarter of 1996 increased 6.9% to
$186,000 from $174,000 for the second quarter of 1995, representing 9.1% and
8.6% of net sales, respectively. All other expense categories remained
consistent as a percentage of net sales.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
second quarter of 1996 increased 47.5% to $587,000 from $398,000 for the second
quarter of 1995, representing 28.8% and 19.6% of net sales, respectively. This
increase resulted from an increase in professional services and expenses
attributable to being a public company and increased recruitment and insurance
expenses. As a
13
<PAGE>
percentage of net sales, professional services and public company expenses
increased 5.9%, recruitment expenses increased 1.9% and insurance expenses
increased 1.1%. All other expense categories remained consistent as a
percentage of net sales.
INTEREST EXPENSE. Interest expense decreased 82.9% to $38,000 for the
second quarter of 1996 from $222,000 for the second quarter of 1995. This was
the direct result of the Company paying off its bank operating line and reducing
other debt, including purchasing its manufacturing facility, with a portion of
the proceeds provided by the Company's initial public offering in December 1995.
INTEREST INCOME. Interest income of $107,000 in the second quarter of 1996
results from investments made with a portion of the proceeds provided by the
Company's initial public offering in December 1995, compared to $4,000 of
interest income in the second quarter of 1995.
INCOME TAX BENEFIT. The income tax benefit for the second quarter of 1996
was $285,000 compared to a benefit of $267,000 for the second quarter of 1995.
The income tax benefit for the second quarter of 1996 and 1995 was based on the
Company's estimated effective tax rate of approximately 38.0% and 39.0%,
respectively.
NET LOSS. The net loss for the second quarter of 1996 was $474,000
compared to a net loss of $417,000 for the second quarter of 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital for the development of its technology and
products, procurement of raw materials and other supplies, and capital equipment
for its manufacturing facility. In December 1995, the Company completed its
initial public offering which resulted in net proceeds of $18.5 million after
deducting underwriting discounts and offering expenses. Prior to the offering,
the Company had financed its growth and operations through numerous private
placements of equity and debt securities, refinancings of its bank indebtedness
and the incurrence of a significant number of capital leases. The Company's cash
flow has been constrained primarily due to its growth, seasonality and operating
performance. With the proceeds from the offering, the Company is more adequately
capitalized to increase its focus on growing its "Morrow" branded products.
The Company had $4,544,000 in cash and cash equivalents at June 30, 1996.
Net cash used in operating activities for the six months ended June 30, 1996 was
$6,516,000, primarily for the inventory buildup of "Morrow" branded product for
shipment later in the year. Net cash used in investing activities for the six
months ended June 30, 1996 was $1,792,000, which was used primarily for the
purchase and construction of equipment. Net cash used in financing activities
for the six months ended June 30, 1996 was $2,174,000, which was primarily used
to pay off the manufacturing facility debt and reduce other long term capital
lease obligations. At June 30, 1996, the Company had working capital of
$16,937,000.
The Company has a revolving credit facility with Bank of America Oregon
(the "Bank"). Under its revolving facility, the Company has an operating line of
$5,000,000. Availability under the revolving facility is based upon 80% of
eligible domestic accounts receivable, 90.0% of eligible accounts receivable
backed by letters of credit, and the lesser of $750,000 or 30.0% of eligible
finished goods and raw material inventory. At June 30, 1996, there was no amount
of outstanding principal under the facility. A commitment fee of 0.25% of the
available balance under the credit facility is payable quarterly. Interest under
the credit facility is payable on a monthly basis. The facility bears interest
at the Bank's Reference Rate (9.0% at June 30, 1996) plus 0.75%. The Company has
the option under the credit facility to enter
14
<PAGE>
into fixed interest rates for specified periods for all or a portion of the line
of credit. The revolving facility is secured by substantially all of the
Company's assets. The credit agreement with the Bank contains various covenants
which require the Company, among other things, to meet certain objectives with
respect to tangible net equity, the ratio of liabilities to tangible net equity,
and the ratio of current assets to current liabilities. In addition, the
agreement places certain limitations on capital expenditures, lease rental
payments and other outside borrowings and prohibits the payment of dividends.
At June 30, 1996, the Company was in compliance with all of its covenants. The
Company is renegotiating its revolving facility which has been extended through
August 1, 1996.
The Company's debt structure is comprised of the following:
June 30, 1996
-------------
Short-term debt:
Operating line of credit $ -
Current portion of long-term debt
and capital lease obligations 286
-------------
Total short-term debt $ 286
-------------
-------------
Long-term debt:
Capital lease obligations $ 643
Less Current portion (286)
-------------
Total long-term debt, net of
current portion $ 357
-------------
-------------
The Company believes that its cash flow from operations, available line of
credit under its Credit Facility and net proceeds from its initial public
offering will be adequate to meet its anticipated cash requirements for the next
12 months. The Company may need to raise additional capital if it makes any
acquisitions or if working capital requirements are greater than anticipated.
There can be no assurance that the Company will be able to raise additional
capital on terms acceptable to the Company or that it will be able to do so on a
timely basis.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not currently involved in any material litigation or legal
proceedings and is not aware of any potentially material litigation or
proceeding threatened against it other than as described below.
In April 1996, a former employee of the Company filed a civil suit against
the Company with the United States District Court alleging sexual harassment and
wage discrimination, and seeking damages of $575,000 plus lost wages in an
unstated amount and an equal amount of lost wages as liquidated damages. Based
on a review of the claims and discussions with counsel, the Company believes
that it would have defenses to any such claims. Furthermore, the Company
believes the claims are limited by statute to a cumulative total of $200,000 in
punitive and compensatory damages, plus attorneys' fees and lost wage damages.
If an appropriate basis for additional claims were found to exist in any such
civil action, the complainant could raise additional claims and seek additional
damages. The Company filed a response to the complaint and written discovery on
May 1, 1996. This complaint against the Company was originally filed with the
Bureau of Labor and Industries (the "BOLI") in January 1995. Under a joint
working relationship with the Equal Employment Opportunity Commission (the
"EEOC"), the BOLI transferred the matter to the EEOC. In January 1996, the EEOC
administratively dismissed the federal and state law claims without any findings
on the merits of the claims.
In June 1995, the Company received notice from a German company alleging
that the Company's M-1 bindings sold prior to 1995 infringe on a patent held by
that company, which notice requests certain royalties based on M-1 binding
sales. Based on a review of the infringement claims and discussions with
counsel, the Company believes that it has defenses to such claims.
In early January 1996, the Company terminated its distribution arrangement
with its German distributor and appointed another company as its German
distributor. In late January 1996, the Company received notice from the
terminated German distributor alleging that the Company had an exclusive
distribution agreement and that such distributor is entitled to certain royalty
payments and other rights. Based on a review of such claims with German counsel,
the Company believes that is has defenses to such claims.
The Company intends to vigorously defend against any administrative
proceeding or lawsuit brought seeking injunctive relief or damages from the
Company. There can be no assurance, however, that the Company will be successful
in the defense of any such claims. An award of damages or the expenditure of
significant sums in such cases referenced above could have a material adverse
effect on the Company's financial condition and results of operations.
ITEM 2. CHANGES IN SECURITIES.
None.
16
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 26, 1996 at the Company's annual shareholder's meeting, the
following matters were submitted to the shareholders:
1) Election of the Company's six directors to serve until the next
annual shareholder's meeting.
2) Ratification of Arthur Andersen as the Company's independent
auditors for the fiscal year ending December 31, 1996.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K.
Exhibits - None.
There have been no reports on Form 8-K filed with the Securities and
Exchange Commission on behalf of the Company during the six months ended June
30, 1996.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Salem, State of Oregon, on August 13, 1996.
MORROW SNOWBOARDS, INC.
By: /s/ Dennis R. Shelton
-----------------------------------
Dennis R. Shelton
CHIEF OPERATING OFFICER AND PRESIDENT
(PRINCIPAL EXECUTIVE)
By: /s/ David S.Cleary
-----------------------------------
David S. Cleary
CHIEF FINANCIAL OFFICER AND SECRETARY
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
18
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