<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 SEPTEMBER 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 November 8, 1996 was 5,762,299.
- -------------------------------------------------------------------------------
<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
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MORROW SNOWBOARDS, INC.
For the Quarter Ended
September 30, 1996
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
- -------------------------------------------------------------------------------
ASSETS
September 30, December 31,
1996 1995
------------- -----------
Current Assets:
Cash and cash equivalents $ 8,227 $ 15,026
Accounts receivable, net 9,521 5,886
Inventories 5,673 2,747
Prepaid expense 464 252
Deferred income taxes 289 289
------------- -----------
Total Current Assets 24,174 24,200
Property, Plant and Equipment, net 8,849 6,936
Other Assets 35 43
------------- -----------
Total Assets $ 33,058 $ 31,179
------------- -----------
------------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,540 $ 1,857
Accrued liabilities 2,744 964
Current portion of long-term debt and
capital lease obligations 263 2,657
------------- -----------
Total Current Liabilities 4,547 5,478
Long-Term Liabilities:
Capital lease obligations, net of current portion 316 475
Deferred income taxes 76 76
------------- -----------
Total Long-Term Liabilities 392 551
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,
5,762,299 and 5,500,448 shares issued and outstanding 26,656 25,385
Notes receivable for common stock (94) (94)
Accumulated earnings (deficit) 1,557 (141)
------------- -----------
Total Shareholders' Equity 28,119 25,150
------------- -----------
Total Liabilities and Shareholders' Equity $ 33,058 $ 31,179
------------- -----------
------------- -----------
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 Nine For The Three
Months Ended Months Ended
September 30, September 30,
-------------------- -------------------
1996 1995 1996 1995
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Net Sales $ 22,352 $ 14,963 $ 19,667 $ 10,212
Cost of Goods Sold 13,896 10,703 11,961 7,106
---------- ---------- ---------- ---------
Gross Profit 8,456 4,260 7,706 3,106
Operating Expenses:
Selling, marketing and customer service 3,361 2,217 1,747 1,008
Engineering, research and product development 546 588 181 253
General and administrative 2,068 1,210 877 472
---------- ---------- ---------- ---------
Total Operating Expenses 5,975 4,015 2,805 1,733
---------- ---------- ---------- ---------
Operating Income 2,481 245 4,901 1,373
Other Income (Expense):
Interest expense (149) (639) (29) (273)
Interest income 394 4 79 --
Other income (expense) 94 2 79 (14)
---------- ---------- ---------- ---------
Total Other Income (Expense) 339 (633) 129 (287)
---------- ---------- ---------- ---------
Income (Loss) Before Income Tax 2,820 (388) 5,030 1,086
Income Tax Benefit (Expense) (1,122) 170 (1,961) (405)
---------- ---------- ---------- ---------
Net Income (Loss) $ 1,698 $ (218) $ 3,069 $ 681
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Net Income (Loss) Per Share:
Primary $ 0.28 $ (0.05) $ 0.51 $ 0.20
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Fully Diluted $ 0.28 $ (0.05) $ 0.51 $ 0.18
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Weighted Average Number of Shares Used in
Computing Per Share Amounts:
Primary 6,037,868 3,539,549 6,039,041 3,791,760
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Fully Diluted 6,043,627 3,539,549 6,046,066 4,031,686
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Accumulated
------------ Notes Earnings
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 117,003 327 - - 327
Warrant activity 144,848 212 - - 212
Tax benefit for exercise of warrants
and stock options - 732 - - 732
Net Income - - - 1,698 1,698
--------- ------- ---------- ----------- -------
Balance, September 30, 1996 5,762,299 $26,656 $ (94) $ 1,557 $28,119
--------- ------- ---------- ----------- -------
--------- ------- ---------- ----------- -------
</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 Nine Months Ended
September 30,
-------------------------
1996 1995
--------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income (Loss) $ 1,698 $ (218)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 793 678
Loss on retirement of assets 24 -
Deferred income taxes - (170)
Other - 6
Changes in operating assets and liabilities:
Increase in accounts receivable (3,635) (4,425)
Increase in inventories (2,926) (1,412)
Increase in prepaid expenses (212) (60)
Decrease in officer advances - 21
(Increase) decrease in other assets 8 (26)
Increase (decrease) in accounts payable (317) 739
Increase in accrued liabilities 2,512 77
--------- -----------
Net Cash Used In Operating Activities (2,055) (4,790)
Cash Flows From Investing Activities:
Acquisition of property and equipment (2,733) (719)
Proceeds from sale of equipment 3 40
--------- -----------
Net Cash Used In Investing Activities (2,730) (679)
Cash Flows From Financing Activities:
Line of credit borrowings, net - 3,365
Proceeds from issuance of long-term liabilites - 800
Proceeds from issuance of common stock 539 -
Proceeds from subordinated debentures - 1,500
Principal payments on long-term liabilities (2,553) (615)
Increase in other assets - (89)
--------- -----------
Net Cash Provided By (Used In) Financing Activities (2,014) 4,961
--------- -----------
Net Decrease In Cash and Cash Equivalents (6,799) (508)
Cash and Cash Equivalents at Beginning of Period 15,026 509
--------- -----------
Cash and Cash Equivalents at End of Period $ 8,227 $ 1
--------- -----------
--------- -----------
Supplemental disclosure:
Cash paid for interest $ 150 $ 846
Cash paid for income taxes 20 -
Noncash Transactions:
Assets acquired under capital lease - 434
Tax benefit on exercise of warrants and stock options 732 -
Conversion of debt to common stock - 25
Warrant and stock option activity - 191
</TABLE>
See Notes to Consolidated Financial Statements
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
DESCRIPTION OF BUSINESS
Morrow Snowboards, Inc. (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 its 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
at September 30, 1996, and for the three and nine months ended September 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 nine month period ended September 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
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 INCOME (LOSS) PER SHARE
Net income (loss) per share has been computed by dividing net income
(loss) 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 income per
share calculation for the period ended September 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:
September 30, December 31,
1996 1995
------------- ------------
(in thousands)
(unaudited)
Finished goods $ 3,423 $ 446
Work-in-process 311 333
Raw materials 1,939 1,968
------------- ------------
Total inventories $ 5,673 $ 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 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 typically occur in the first two
quarters of the year.
The Company's net sales increased 49.4% to $22,352,000 for the nine
months ended September 30, 1996 from $14,963,000 for the first nine months of
1995. For the nine months ended September 30, 1996, "Morrow" branded
snowboard sales represented 68.7% of net sales compared to 46.9% for the nine
months ended September 30, 1995. OEM snowboard sales represented 0.9% and
23.3% of net sales, respectively. Operating expenses remained relatively
constant as a percentage of net sales for the first nine months of 1996
compared to the first nine months of 1995.
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 $22,352,000 and estimated open sales orders
(preseason orders AND new orders) of approximately $7,500,000 at September
30, 1996. At September 30, 1995 the Company had net sales of $14,963,000 and
estimated open sales orders of approximately $7,100,000. 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 nine 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, sell-through of competitors' products, 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 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.
10
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods
indicated as a percentage of net sales.
Nine Months Ended Year Ended
September 30, December 31,
----------------- ------------
1996 1995 1995
------ ----- -----
Net Sales 100.0% 100.0% 100.0%
Cost of Goods sold 62.2 71.5 69.8
------ ----- -----
Gross Profit 37.8 28.5 30.2
Operating Expenses:
Selling, marketing and customer service 15.0 14.8 14.1
Engineering, research and product development 2.4 3.9 3.2
General and administrative 9.3 8.1 6.5
------ ----- -----
Total Operating Expenses 26.7 26.8 23.8
------ ----- -----
Operating Income 11.1 1.7 6.4
Interest expense 0.7 4.3 3.5
Interest income (1.8) - -
Other (income) expense (0.4) - (0.1)
------ ----- -----
Income (Loss) Before Income Taxes 12.6 (2.6) 3.0
Income Tax Benefit (Expense) (5.0) 1.1 (1.0)
------ ----- -----
Net Income (Loss) 7.6% (1.5)% 2.0%
------ ----- -----
------ ----- -----
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
NET SALES. Net sales for the nine months ended September 30, 1996
increased 49.4% to $22,352,000 from $14,963,000 for the same period in 1995.
The sale of snowboards for the nine months ended September 30, 1996 increased
48.0% to $15,553,000 from $10,506,000 for the same period a year ago. For the
nine months ended September 30, 1996, "Morrow" branded snowboards represented
68.7% of net sales compared to 46.9% for the nine months ended September 30,
1995. OEM snowboard sales were $206,000 for the nine months ended September
30, 1996 compared to $3,486,000 for the nine months ended September 30, 1995,
representing 0.9% and 23.3% of net sales, respectively. As a percentage of
net sales, snowboards represented 69.6% for the nine months ended September
30, 1996 compared to 70.2% for the nine months ended September 30, 1995. The
sale of bindings increased 79.7% to $5,743,000 for the nine months ended
September 30, 1996 from $3,195,000 for the nine months ended September 30,
1995. The sale of boots decreased 25.7% to $451,000 for the nine months
ended September 30, 1996 compared to $607,000 for the same period in 1995. As
a percentage of net sales, binding sales represented 25.7% for the nine
months ended September 30, 1996 compared to 21.4% for the nine months ended
September 30, 1995. Boot sales represented 2.0% of net sales for the nine
months ended September 30, 1996 compared to 4.1% for the nine months ended
September 30, 1995.
GROSS PROFIT. Gross profit for the nine months ended September 30, 1996
increased 98.5% to $8,456,000 from $4,260,000 for the same period in 1995
primarily as a result of the overall increase in sales. The gross margin for
the nine months ended September 30, 1996 was 37.8%, compared to 28.5% for the
nine months ended September 30, 1995, an increase of 9.3% on a year-to-year
basis. This is a result of a shift in demand toward higher margin products,
improved manufacturing efficiencies, lower material costs attained through
better sourcing and increased sales of "Morrow" branded snowboards, which
have higher margins relative to OEM snowboards.
11
<PAGE>
SELLING, MARKETING AND CUSTOMER SERVICE. Selling, marketing and
customer service expenses for the nine months ended September 30, 1996
increased 51.6% to $3,361,000 from $2,217,000 for the same period in 1995,
representing 15.0% and 14.8% of net sales, respectively. The Company's sales
growth required increases in staff and employee-related expenses, sales
commissions and promotion and marketing activities. As a percentage of net
sales, these and all other expense categories remained consistent on a
period-to-period basis.
ENGINEERING, RESEARCH AND PRODUCT DEVELOPMENT. Engineering, research
and product development expenses for the nine months ended September 30, 1996
decreased 7.1% to $546,000 from $588,000 for the nine months ended September
30, 1995, representing 2.4% and 3.9% of net sales, respectively. This
decrease was primarily due to the creation of a product management
department, which assumed certain engineering and product development
functions and related expenses. Product management expenses are included in
selling, marketing and customer service. The result was a decrease in staff
and employee-related expenses in engineering, research and product
development. As a percentage of net sales, staff and employee-related
expenses decreased 1.6%. All other expense categories remained consistent on
a period-to-period basis.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
nine months ended September 30, 1996 increased 70.9% to $2,068,000 from
$1,210,000 for the nine months ended September 30, 1995, representing 9.3%
and 8.1% 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 and recruitment expenses. As a percentage of net sales, all other
expense categories remained consistent on a period-to-period basis.
INTEREST EXPENSE. Interest expense decreased 76.7% to $149,000 for the
nine months ended September 30, 1996 from $639,000 for the nine months ended
September 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 $394,000 for the nine months ended
September 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 nine months of 1995.
INCOME TAX BENEFIT (EXPENSE). The income tax expense for the nine
months ended September 30, 1996 was $1,122,000 compared to a benefit of
$170,000 for the nine months ended September 30, 1995. The income tax benefit
(expense) for the nine months ended September 30, 1996 and 1995 was based on
the Company's estimated effective tax rate.
NET INCOME (LOSS). Net income for the nine months ended September 30,
1996 was $1,698,000 compared to a net loss of $218,000 for the nine months
ended September 30, 1995.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
NET SALES. Net sales for the third quarter of 1996 were $19,667,000,
compared to $10,212,000 in the third quarter of 1995. The sale of snowboards
in the third quarter of 1996 increased 102.6% to $13,544,000 from $6,684,000
for the third quarter of 1995. In the third quarter of 1996, "Morrow"
branded snowboards represented 67.9% of net sales compared to 63.8% in the
third quarter of 1995. OEM
12
<PAGE>
snowboard sales were $198,000 in the third quarter of 1996 compared to
$172,000 in the third quarter of 1995, representing 1.0% and 1.7% of net
sales, respectively. As a percentage of net sales, snowboards represented
68.9% in the third quarter of 1996 compared to 65.5% in the third quarter of
1995. The sale of bindings increased 109.4% to $5,261,000 for the third
quarter of 1996 from $2,513,000 in the third quarter of 1995. As a percentage
of net sales, binding sales represented 26.8% in the third quarter of 1996
compared to 24.6% in the third quarter of 1995. The sale of boots decreased
38.7% to $338,000 for the third quarter of 1996 compared to $551,000 in the
third quarter of 1995. Boot sales represented 1.7% of net sales in the third
quarter of 1996 compared to 5.4% in the third quarter of 1995.
GROSS PROFIT. Gross profit for the third quarter of 1996 increased
148.1% to $7,706,000 from $3,106,000 for the third quarter of 1995 primarily
as a result of the overall increase in sales. Total gross margin for the
third quarter of 1996 increased to 39.2% from 30.4% for the third quarter of
1995. This is the result of a shift in demand toward higher margin products,
improved manufacturing efficiencies and lower material costs attained through
better sourcing.
SELLING, MARKETING AND CUSTOMER SERVICE. Selling, marketing and
customer service expenses for the third quarter of 1996 increased 73.3% to
$1,747,000 from $1,008,000 for the third quarter of 1995, representing 8.9%
and 9.9% of net sales, respectively. The Company's sales growth required
increases in staff and employee-related expenses, sales commissions and
promotion and marketing activities. As a percentage of net sales, all other
expense categories remained consistent on a period-to-period basis.
ENGINEERING, RESEARCH AND PRODUCT DEVELOPMENT. Engineering, research
and product development expenses for the third quarter of 1996 decreased
28.5% to $181,000 from $253,000 for the third quarter of 1995, representing
0.9% and 2.5% of net sales, respectively. This decrease was primarily due to
the creation of a product management department, which assumed certain
engineering and product development functions and related expenses. Product
management expenses are included in selling, marketing and customer service.
The result was a decrease in staff and employee-related expenses in
engineering, research and product development. As a percentage of net sales,
staff and employee-related expenses decreased 1.0 %. All other expense
categories remained consistent on a period-to-period basis.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
third quarter of 1996 increased 85.8% to $877,000 from $472,000 for the third
quarter of 1995, representing 4.5% and 4.6% of net sales, respectively. This
increase in expenses 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 and
recruitment expenses. As a percentage of net sales, all other expense
categories remained consistent on a period-to-period basis.
INTEREST EXPENSE. Interest expense decreased 89.4% to $29,000 for the
third quarter of 1996 from $273,000 for the third 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 $79,000 in the third 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 no
interest income in the third quarter of 1995.
INCOME TAX EXPENSE. Income tax expense for the third quarter of 1996
was $1,961,000 compared to $405,000 for the third quarter of 1995. Income tax
expense for the third quarter of 1996 and 1995 was based on the Company's
estimated effective tax rate.
13
<PAGE>
NET INCOME. Net income for the third quarter of 1996 was $3,069,000
compared to $681,000 for the third 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, receiving 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
developing the "Morrow" brand.
The Company had $8,227,000 in cash and cash equivalents at September 30,
1996. Net cash used in operating activities for the nine months ended
September 30, 1996 was $2,055,000, primarily from seasonal increases in
receivables and inventory. Net cash used in investing activities for the nine
months ended September 30, 1996 was $2,730,000, which was used primarily for
the purchase and construction of equipment. Net cash used in financing
activities for the nine months ended September 30, 1996 was $2,014,000, which
was primarily used to pay off the manufacturing facility debt and reduce
other long term capital lease obligations. At September 30, 1996, the Company
had working capital of $19,627,000.
The Company has a revolving credit facility with Bank of America Oregon
(the "Bank"). Under its revolving facility, the amount of the line of credit
is $5,000,000 for the periods between August 1 and March 31 of each calendar
year, and will increase to $7,500,000 for the periods of April 1 through July
31 of each calendar year. This line of credit is available through October
31, 1997. At September 30, 1996, there was no amount of outstanding
principal under the facility. A commitment fee of 0.125% of the available
balance under the credit facility before the first advance, and 0.25% after
the first advance, is payable quarterly. Interest under the credit facility
is payable on a monthly basis. The facility bears interest at the Bank's
Reference Rate (8.25% at September 30, 1996). 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 excluding its real
estate. 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. At September
30, 1996, the Company was in compliance with all of its covenants.
The Company's debt structure is comprised of the following:
September 30, 1996
------------------
Short-term debt:
Operating line of credit $ -
Current portion of long-term debt and capital lease
obligations 263
------------------
Total short-term debt $ 263
------------------
------------------
Long-term debt:
Capital lease obligations $ 579
Less Current portion (263)
------------------
Total long-term debt, net of current portion $ 316
------------------
------------------
14
<PAGE>
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 through
1997. 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. The suit has progressed to the initial stages of discovery and a trial
date has not been set.
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.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K.
Exhibit 11 - Computation of Income (Loss) Per Share.
Exhibit 27 - Financial Data Schedule.
There have been no reports on Form 8-K filed with the Securities and
Exchange Commission on behalf of the Company during the nine months ended
September 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 November 8, 1996.
MORROW SNOWBOARDS, INC.
By: /s/ David E. Calapp
--------------------
David E. Calapp
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE)
By: /s/ David S. Cleary
--------------------
David S. Cleary
CHIEF FINANCIAL OFFICER AND SECRETARY
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
<PAGE>
MORROW SNOWBOARDS, INC.
COMPUTATION OF INCOME (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
For The Nine Months Ended For The Three Months Ended
September 30, September 30,
-------------------------- --------------------------
1996 1995 1996 1995
------------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
Net income (loss)(1) $1,698,000 $ (169,000) $ 3,069,000 $ 740,000
------------ ----------- ------------- ------------
------------ ----------- ------------- ------------
Weighted average number of common
shares outstanding 5,762,299 2,933,529 5,762,299 2,993,023
Application of the "treasury stock"
method to stock options and warrants
whose effect is dilutive 275,569 - 276,742 347,523
Common equivalent shares for stock
options and convertible debentures
issued within twelve months of
the initial public offering and
whose exercise and conversion
price is below the estimated
initial public offering price
(treasury stock method used for
stock options) - 606,020 - 451,214
------------ ----------- ------------- ------------
Total shares for primary earnings
per share 6,037,868 3,539,549 6,039,041 3,791,760
------------ ----------- ------------- ------------
------------ ----------- ------------- ------------
Weighted average number of common
shares outstanding 5,762,299 2,933,529 5,762,299 2,993,023
Application of the "treasury stock"
method to stock options and
warrants whose effect is dilutive 281,328 - 283,767 403,549
Common equivalent shares for stock
options and convertible debentures
issued within twelve months of the
initial public offering and whose
exercise and conversion price is
below the estimated initial public
offering price (treasury stock method
used for stock options) - 606,020 - 635,114
------------ ----------- ------------- ------------
Total shares for fully diluted
earnings per share 6,043,627 3,539,549 6,046,066 4,031,686
------------ ----------- ------------- ------------
------------ ----------- ------------- ------------
Primary income (loss) per share $ 0.28 $ (0.05) $ 0.51 $ 0.20
------------ ----------- ------------- ------------
------------ ----------- ------------- ------------
Fully diluted income (loss) per
share $ 0.28 $ (0.05) $ 0.51 $ 0.18
------------ ----------- ------------- ------------
------------ ----------- ------------- ------------
</TABLE>
- -------------------------
(1) Net income (loss) for 1995 is adjusted for interest relating to convertible
debentures issued within twelve months of the initial public offering.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 8,227
<SECURITIES> 0
<RECEIVABLES> 9,521
<ALLOWANCES> 0
<INVENTORY> 5,673
<CURRENT-ASSETS> 24,174
<PP&E> 8,849
<DEPRECIATION> 0
<TOTAL-ASSETS> 33,058
<CURRENT-LIABILITIES> 4,547
<BONDS> 316
0
0
<COMMON> 26,656
<OTHER-SE> 1,463
<TOTAL-LIABILITY-AND-EQUITY> 33,058
<SALES> 22,352
<TOTAL-REVENUES> 0
<CGS> 13,896
<TOTAL-COSTS> 5,975
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (149)
<INCOME-PRETAX> 2,820
<INCOME-TAX> (1,122)
<INCOME-CONTINUING> 1,698
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,698
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.28
</TABLE>
