<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 MARCH 31, 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 May 13, 1996 was 5,686,799.
- - --------------------------------------------------------------------------------
<PAGE>
MORROW SNOWBOARDS, INC.
INDEX
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Shareholders' Equity (Deficit)
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
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MORROW SNOWBOARDS, INC.
For the Quarter Ended
March 31, 1996
2
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
1996 1995
----------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 10,588 $ 15,026
Accounts receivable, net 1,250 5,886
Inventories 6,414 2,747
Prepaid expense 350 252
Deferred income taxes 1,475 289
----------- -------------
Total Current Assets 20,077 24,200
Property, Plant and Equipment-net 7,747 6,936
Other Assets 42 43
----------- -------------
Total Assets $ 27,866 $ 31,179
----------- -------------
----------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Operating line of credit - -
Accounts payable 1,287 1,857
Accrued liabilities 638 964
Current portion of long-term debt and
capital lease obligations 304 2,657
----------- -------------
Total Current Liabilities 2,229 5,478
Long-Term Liabilities:
Capital lease obligations, net of current portion 401 475
Deferred income taxes 76 76
----------- -------------
Total Long-Term Liabilities 477 551
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,
5,686,799 and 5,500,448 shares issued and outstanding 26,292 25,385
Notes receivable for common stock (94) (94)
Accumulated deficit (1,038) (141)
----------- -------------
Total Shareholders' Equity 25,160 25,150
----------- -------------
Total Liabilities and Shareholders' Equity $ 27,866 $ 31,179
----------- -------------
----------- -------------
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(unaudited)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For The Three Months Ended
March 31,
-------------------------------
1996 1995
----------- ------------
<S> <C> <C>
Net Sales $ 647 $ 2,717
Cost of Goods Sold 548 2,188
----------- ------------
Gross Profit 99 529
Operating Expenses:
Selling, marketing and customer service 893 674
Engineering, research and product
development 179 161
General and administrative 604 340
----------- ------------
Total Operating Expenses 1,676 1,175
----------- ------------
Operating Loss (1,577) (646)
Other Income (Expense):
Interest expense (82) (144)
Interest income 208 -
----------- ------------
Total Other Income (Expense) 126 (144)
----------- ------------
Loss Before Income Tax (1,451) (790)
Income Tax Benefit 554 308
----------- ------------
Net Loss $ (897) $ (482)
----------- ------------
----------- ------------
Net Loss Per Share: $ (0.16) $ (0.14)
----------- ------------
----------- ------------
Weighted Average Number of Shares Used in
Computing Per Share Amounts: 5,616,562 3,412,362
----------- ------------
----------- ------------
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
(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 46,403 76 - - 76
Warrant activity 139,948 199 - - 199
Tax benefit for exercise of warrants - 632 - - 632
Net loss - - - (897) (897)
--------- --------- ---------- ----------- ----------
Balance, March 31, 1996 5,686,799 $ 26,292 $ (94) $(1,038) $ 25,160
--------- --------- ---------- ----------- ----------
--------- --------- ---------- ----------- ----------
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For The Three Months Ended
March 31,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (897) $ (482)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 240 215
Loss on retirement of assets - 7
Deferred income taxes (554) 131
Changes in operating assets and liabilities:
Decrease in accounts receivable 4,636 759
Increase in inventories (3,667) (917)
(Increase) decrease in prepaid expenses (98) 39
Decrease in officer advances - 15
(Increase) decrease in other assets 1 (1)
Increase (decrease) in accounts payable (570) 394
Decrease in accrued liabilities (326) (13)
----------- -----------
Net Cash Provided By (Used In) Operating Activities (1,235) 147
Cash Flows From Investing Activities:
Acquisition of property and equipment (1,051) (625)
Proceeds from sale of equipment - 35
----------- -----------
Net Cash Used In Investing Activities (1,051) (590)
Cash Flows From Financing Activities:
Proceeds from issuance of common stock 275 -
Proceeds from subordinated debentures - 285
Principal payments on long-term liabilities (2,427) (254)
Line of credit payments, net (97)
----------- -----------
Net Cash Used In Financing Activities (2,152) (66)
----------- -----------
Net Decrease In Cash and Cash Equivalents (4,438) (509)
Cash and Cash Equivalents at Beginning Of Period 15,026 509
----------- -----------
Cash and Cash Equivalents at End Of Period 10,588 $ -
----------- -----------
----------- -----------
Supplemental disclosure:
Cash paid for interest 92 107
Cash paid for income taxes 19 -
Noncash Transactions:
Assets acquired under capital lease - 78
Tax benefit on exercise of warrants 632 -
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
DESCRIPTION OF BUSINESS
Morrow Snowboards, Inc. and subsidiary (the "Company"), headquartered in
Salem, Oregon, was 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 March 31, 1996, and for the three months ended March 31, 1996, 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 three month period ended March 31, 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
7
<PAGE>
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.
8
<PAGE>
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 March 31, 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:
MARCH 31, DECEMBER 31,
1996 1995
---------- ------------
(in thousands)
Finished goods $ 3,870 $ 446
Work-in-process 393 333
Raw materials 2,151 1,968
---------- ------------
Total inventories $ 6,414 $ 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
<PAGE>
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. The Company also manufactures private label
snowboards and bindings under short-term agreements on an OEM basis. In prior
years, the Company manufactured the majority of this private label product
during the first two quarters of the year to reduce seasonal fluctuations in
production and increase sales. With the proceeds from the Company's initial
public offering in December 1995, the Company had the capital to be able to
focus more of its financial resources on the build-up of inventory of "Morrow"
branded products rather than producing and selling OEM products during the first
quarter of 1996. The increase in inventories for the quarter are a result of the
decision to build up inventory of "Morrow" branded products for delivery later
in the year to fill preseason orders, rather than transact OEM sales as in the
first quarter of prior years.
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 begins to deliver snowboards, backlog
decreases and is usually eliminated by the end of the year. The Company had net
sales of $647,000 and estimated backlog sales orders of approximately
$28,000,000 at March 31, 1996. At March 31, 1995, the Company had net sales of
$2,717,000 and estimated backlog sales orders of approximately $18,600,000.
Backlog sales orders are subject to cancellation.
As a result of this shift in emphasis, 1996 first quarter sales consisted
almost entirely of closeout and sales samples of "Morrow" branded products,
while the majority of 1995 first quarter sales were OEM sales. The Company"s net
sales decreased 76.2% to $647,000 for the quarter ended March 31, 1996 from
$2,717,000 in the quarter ended March 31, 1995, causing the majority of
operating expenses, as a percentage of net sales, to increase.
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 quarter 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.
Management is 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. However, investors should also be aware of
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; competitive product, advertising, promotional and pricing activity;
10
<PAGE>
dependence on the rate of development and degree of acceptance of new product
introductions in the marketplace; and the difficulty of forecasting sales at
certain times in certain markets.
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods indicated
as a percentage of net sales.
<TABLE>
<CAPTION>
Quarters Ended March 31, Year Ended
------------------------- -------------
1996 1995 Dec. 31, 1995
------------------------- -------------
<S> <C> <C> <C>
Net Sales 100.0 % 100.0 % 100.0 %
Cost of Goods Sold 84.7 80.5 69.8
------------------------- -------------
Gross Profit 15.3 19.5 30.2
Operating Expenses:
Selling, marketing and customer service 138.0 24.8 14.1
Engineering, research and product development 27.6 5.9 3.2
General and administrative 93.4 12.5 6.5
------------------------- -------------
Total Operating Expenses 259.0 43.2 23.8
------------------------- -------------
Operating Income (Loss) (243.7) (23.8) 6.4
Interest Expense 12.7 5.3 3.5
Interest Iincome (32.3) - (0.1)
------------------------- -------------
Income (Loss) Before Income Taxes (224.1) (29.1) 3.0
Income Tax Benefit (Expense) 85.6 11.3 (1.0)
------------------------- -------------
Net Income (Loss) (138.5)% (17.8)% 2.0 %
------------------------- -------------
------------------------- -------------
</TABLE>
COMPARISON OF THE QUARTERS ENDED MARCH 31, 1996 AND 1995
NET SALES. Net sales for the first quarter of 1996 decreased 76.2% to
$647,000 from $2,717,000 in the first quarter of 1994 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 first
quarter of 1996 decreased 87.2% to $280,000 from $2,181,000 for the first
quarter of 1995. The sale of bindings decreased 35.9% to $202,000 for the first
quarter of 1996 from $315,000 in the first quarter of 1995. The sale of boots
increased 94.3% to $103,000 for the first quarter of 1996 compared to $53,000 in
the first quarter of 1995. As a percentage of net sales, snowboards represented
43.3% in the first quarter of 1996 compared to 80.3% in the first quarter of
1995. In the first quarter of 1996, "Morrow" branded snowboards represented
42.8% of net sales compared to 16.9% in the first quarter of 1995. OEM snowboard
sales were $3,000 in the first quarter of 1996 compared to $1,721,000 in the
first quarter of 1995, representing .5% and 63.3% of net sales, respectively.
As a percentage of net sales, binding sales represented 31.2% in the first
quarter of 1996 compared to 11.6% in the first quarter of 1995. Boot sales
represented 15.9% of net sales in the first quarter of 1996 compared to 2.0% in
the first quarter of 1995. The increase in boot sales is the result of the
closeout of 1995/96 season during the first quarter of 1996.
GROSS PROFIT. Gross profit for the first quarter of 1996 decreased 81.3%
to $99,000 from $529,000 for the first quarter of 1995 as a result of the
overall decrease in sales. Total gross margin for the first quarter of 1996
decreased to 15.3% from 19.5% for the first quarter of 1995. First quarter
"Morrow" branded sales are largely comprised of closeout sales of 1995/96
product and sale samples of 1996/97 product. In addition, a significant amount
of OEM sales occurred, increasing margins during the first quarter of 1995.
11
<PAGE>
SELLING, MARKETING AND CUSTOMER SERVICE. Selling, marketing and customer
service expenses for the first quarter of 1996 increased 32.3% to $893,000 from
$674,000 for the first quarter of 1995, representing 138.0% and 24.8% of net
sales, respectively. The Company's growth required increased expenses associated
with additional staff and professional team riders, increased promotion and
marketing activities and an increase in trade show expenses. As a percentage of
net sales, staff and employee-related expenses increased 21.7% and promotional
and marketing expenses increased 37.0% and team contract expenses increased
18.0%. All other expense categories also increased as a percentage of net sales
on a period-to-period basis because of the significant reduction in sales.
ENGINEERING, RESEARCH AND PRODUCT DEVELOPMENT. Engineering, research and
product development expenses for the first quarter of 1996 increased 11.2% to
$179,000 from $161,000 for the first quarter of 1995, representing 27.7% and
5.9% 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 14.9%. All other expense categories also
increased as a percentage of net sales on a period-to-period basis because of
the significant reduction in sales.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
first quarter of 1996 increased 77.6% to $604,000 from $340,000 for the first
quarter of 1995, representing 93.4% and 12.5% of net sales, respectively. This
increase was primarily due to additional staff and employee-related expenses and
increased professional fees. As a percentage of net sales, staff and employee-
related expenses increased 33.3% and professional fees increased 11.6%,
primarily as the result of operating as a public company. All other expense
categories also increased as a percentage of net sales on a period-to-
period basis because of the significant reduction in sales.
INTEREST EXPENSE. Interest expense decreased 43.1% to $82,000 for the
first quarter of 1996 from $144,000 for the first quarter of 1995. This was the
direct result of the company paying off its bank operating line with a portion
of the proceeds provided by the Company's initial public offering in December
1995.
INTEREST INCOME. Interest income of $208,000 in the first quarter of 1996
which results from investments made with a portion of the proceeds provided by
the Company's initial public offering in December 1995, compared to zero
interest income in the first quarter of 1995.
INCOME TAX BENEFIT. The income tax benefit for the first quarter of 1996
was $554,000 compared to a benefit of $308,000 for the first quarter of 1995.
The income tax benefit for the first 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 first quarter of 1996 was $897,000 compared
to a net loss of $482,000 for the first 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
12
<PAGE>
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 adequately
capitalized to increase its focus on growing its "Morrow" branded products.
The Company had $10,588,000 in cash at March 31, 1996. Net cash used in
operating activities for the first quarter of 1996 was $1,235,000, resulting
primarily from a net loss of $897,000, decreases in accounts receivable of
$4,636,000 and increases in inventory of $3,667,000. The decrease in accounts
receivable for the quarter is a result of collections during the quarter and
fewer first quarter OEM sales than in prior years. The increase in inventories
for the quarter are a result of the decision to build up inventory of "Morrow"
branded products for delivery later in the year to fill preseason orders rather
than transact OEM sales as in the first quarter of prior years. Net cash used in
investing activities for the first quarter of 1996 was $1,051,000, which was
used primarily for the purchase and construction of equipment. Net cash used in
financing activities for the first quarter of 1996 was $2,152,000, primarily
from the exercise of the option under the lease to purchase the Company's
administrative and manufacturing facility. The lease was recorded as a long-term
obligation and the building was already recorded as an asset under property,
plant and equipment. At March 31, 1996, the Company had working capital of
$17,848,000.
Capital expenditures for the three months ended March 31, 1996 were
$1,051,000. Capital expenditures were primarily for the purchase or construction
of manufacturing equipment, fixtures, new snowboard, binding and boot toolings.
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 80.0% 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 March 31, 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 March 31, 1996) plus 0.75%. The
Company has the option under the credit facility to enter 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. In previous years, the
Company from time to time has been in violation of certain operating covenants
under its credit facilities. At March 31, 1996, the Company was in compliance
with all of its covenants. The Company is renegotiating its revolving facility
which expires June 1, 1996.
13
<PAGE>
The Company"s debt structure is comprised of the following:
March 31,
1996
---------
Short-term debt:
Operating line of credit $ -
Current portion of long-term debt and capital
lease obligations 304
---------
Total short-term debt $ 304
---------
---------
Long-term debt:
Capital lease obligations $ 705
Less current portion (304)
---------
Total long-term debt, net of current portion $ 401
---------
---------
The Company believes that its current 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
125 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.
14
<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 an unstated amount of
wages and an equal amount 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 sexual harassment claims are
limited by statute to attorney's fees, lost wages and a cumulative total of
$200,000 in punitive and compensatory 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
("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-
15
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
-None-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
-None-
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 fiscal quarter ended
March 31, 1996.
16
<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 May 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)
17
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