<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 29, 1997
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
incorporation or organization) No.)
-----------------------------------------------------------
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 April 30, 1997 was 5,587,516.
<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
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
MORROW SNOWBOARDS, INC.
For the Quarter Ended
March 29, 1997
2
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
- --------------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
March 29, December 31,
1997 1996
---------- -------------
<S>
Current Assets: <C> <C>
Cash and cash equivalents $ 3,473 $ 5,062
Short-term investments 2,700 3,700
Accounts receivable, net 3,519 8,736
Inventories 7,302 4,533
Prepaid expense 566 536
Deferred income taxes 1,250 450
--------- --------
Total Current Assets 18,810 23,017
Property, Plant and Equipment-net 9,373 9,183
Other Assets 33 43
--------- --------
Total Assets $ 28,216 $ 32,243
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 533 $ 1,552
Accrued liabilities 817 2,009
Current portion of capital lease obligations 175 228
--------- --------
Total Current Liabilities 1,525 3,789
Long-Term Liabilities:
Capital lease obligations, net of current portion 236 258
Deferred income taxes 304 304
--------- --------
Total Long-Term Liabilities 540 562
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,
5,595,599 and 5,667,749 shares issued and outstanding 25,477 25,980
Notes receivable for common stock (94) (94)
Retained Earnings 768 2,006
--------- --------
Total Shareholders' Equity 26,151 27,892
--------- --------
Total Liabilities and Shareholders' Equity $ 28,216 $ 32,243
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
3
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share and share data)
(unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For The Quarters Ended
March 29, March 31,
1997 1996
------------ -----------
<S> <C> <C>
Net Sales $ 689 $ 647
Cost of Goods Sold 794 548
----------- -----------
Gross Profit (Loss) (105) 99
Operating Expenses:
Selling, marketing and customer service 1,132 893
Engineering, research and product development 238 179
General and administrative 690 604
----------- -----------
Total Operating Expenses 2,060 1,676
----------- -----------
Operating Loss (2,165) (1,577)
Other Income (Expense):
Interest expense (16) (82)
Other income 152 208
----------- -----------
Total Other Income (Expense) 136 126
----------- -----------
Loss Before Income Tax (2,029) (1,451)
Income Tax Benefit 791 554
----------- -----------
Net Loss $ (1,238) $ (897)
=========== ===========
Net Loss Per Share: $ (0.22) $ (0.16)
=========== ===========
Weighted Average Number of Shares Used in
Computing Per Share Amounts: 5,633,277 5,616,562
=========== ===========
</TABLE>
The accompanying notes are an integral part of these 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
------------------------------- Notes Retained
Shares Amount Receivable Earnings Total
-------------- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 5,667,749 $25,980 $(94) $ 2,006 $27,892
Common stock options exercised 7,350 18 -- -- 18
Repurchase of common stock (79,500) (530) -- -- (530)
Warrant activity -- -- -- -- --
Tax benefit for exercise of options -- 9 -- -- 9
Net loss -- -- -- (1,238) (1,238)
-------------- --------------- -------------- -------------- --------------
Balance, March 29, 1997 5,595,599 $25,477 $(94) $ 768 $26,151
============== =============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
For The Quarters Ended
March 29, March 31,
1997 1996
----------- ----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $(1,238) $ (897)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 285 240
Deferred income taxes (791) (554)
Changes in operating assets and liabilities:
Decrease in accounts receivable 5,217 4,636
Increase in inventories (2,769) (3,667)
Increase in prepaid expenses (30) (98)
Decrease in other assets 10 1
Decrease in accounts payable (1,019) (570)
Decrease in accrued liabilities (1,192) (326)
----------- ----------
Net Cash Used In Operating Activities (1,527) (1,235)
Cash Flows From Investing Activities:
Redemption of short-term investments 1,000 --
Acquisition of property and equipment (475) (1,051)
----------- ----------
Net Cash Provided By (Used In) Investing Activities 525 (1,051)
Cash Flows From Financing Activities:
Proceeds from issuance of common stock 18 275
Payments for repurchase of common stock (530) --
Principal payments on long-term liabilities (75) (2,427)
----------- ----------
Net Cash Used In Financing Activities (587) (2,152)
----------- ----------
Net Decrease In Cash and Cash Equivalents (1,589) (4,438)
Cash and Cash Equivalents at Beginning Of Period 5,062 15,026
----------- ----------
Cash and Cash Equivalents at End Of Period $ 3,473 $10,588
=========== ==========
Supplemental disclosure:
Cash paid for interest $ 16 $ 92
Cash paid for income taxes 440 19
Noncash Transactions:
Tax benefit on exercise of stock options and warrants 9 632
</TABLE>
The accompanying notes are an integral part of these 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 29, 1997, and for the quarters ended March 29, 1997 and 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, 1996, contained in the Company's Form 10-K, filed with
the Commission pursuant to the Securities Exchange Act of 1934. Operating
results for the quarter ended March 29, 1997, are not necessarily indicative of
the results that may be expected for the full year.
2. SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
Effective January 1, 1997, the Company changed its year end from a
calendar year ended December 31st to a 52 or 53 week fiscal year ending on the
Saturday nearest December 31st. Accordingly, the 1997 fiscal quarter ended on
March 29th, whereas the prior year calendar quarter ended on March 31st.
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.
Financial Instruments
A financial instrument is cash or a contract that imposes or conveys, a
contractual obligation, or right, to deliver or receive cash or another
financial instrument. The fair value of financial instruments approximated their
carrying value as of March 29, 1997 and December 31, 1996.
7
<PAGE>
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 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.
8
<PAGE>
Net Loss Per Share
Net loss per share has been computed by dividing net 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.
Effective December 15, 1997, the Company will be required to adopt SFAS
No. 128 "Earnings per Share". At that time all previously reported earnings per
share amounts will be restated to conform to SFAS No. 128. However, SFAS No. 128
would not affect the reported net loss per share amounts for the quarters ended
March 29, 1997 and March 31, 1996.
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.
Short-Term Investments
Short-term investments consist of certain tax exempt securities, which
are classified as trading securities under the provisions of Statement of
Financial Accounting Standards No. 115 "Accounting for Certain Investments in
Debt and Equity Securities". The short-term investments are stated on the
balance sheet at cost, which approximates fair market value. There were no
unrealized gains or losses at March 29, 1997 or December 31, 1996.
3. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
March 29, December 31,
1997 1996
--------------- ---------------
(in thousands)
<S> <C> <C>
Finished goods $3,616 $1,979
Work-in-process 428 197
Raw materials 3,258 2,357
--------------- ---------------
Total inventories $7,302 $4,533
=============== ===============
</TABLE>
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. The
majority of "Morrow" branded product sales occur in the third and fourth
quarters of the year. In the first quarters of both 1997 and 1996, sales
consisted almost entirely of closeout sales and sales samples of "Morrow"
branded products.
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 $689,000 and estimated backlog sales orders of approximately
$20,000,000 at March 29, 1997. At March 31, 1996, the Company had net sales of
$647,000 and estimated backlog sales orders of approximately $28,000,000.
Backlog sales orders are subject to cancellation.
The Company's net sales increased 6.5% to $689,000 for the quarter
ended March 29, 1997 from $647,000 in the quarter ended March 31, 1996.
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 1997, 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, 1996.
The Company's backlog of orders at March 29, 1997 are down from those
reported at March 31, 1996 as a result of soft market conditions throughout the
industry due to an oversupply of snowboards. The Company is currently examining
all operating costs in light of the potential for lower sales in 1997.
Management is unaware of any other 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; 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.
10
<PAGE>
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 Year Ended
------------------------------------ ------------------
March 29, March 31, December 31,
1997 1996 1996
------------------------------------- ------------------
<S> <C> <C> <C>
Net Sales 100.0 % 100.0 % 100.0 %
Cost of Goods Sold 115.2 84.7 65.8
------------------------------------ ------------------
Gross Profit (Loss) (15.2) 15.3 34.2
Operating Expenses:
Selling, marketing and customer service 164.3 138.0 14.5
Engineering, research and product development 34.5 27.6 2.4
General and administrative 100.1 93.4 8.1
------------------------------------ -----------------
Total Operating Expenses 298.9 259.0 25.0
------------------------------------ -----------------
Operating Income (Loss) (314.1) (243.7) 9.2
Interest Expense (2.3) (12.7) (0.5)
Other Income 22.1 32.3 2.1
------------------------------------ -----------------
Income (Loss) Before Income Taxes (294.3) (224.1) 10.8
Income Tax Benefit (Expense) 114.8 85.6 (4.0)
------------------------------------ -----------------
Net Income (Loss) (179.5) % (138.5) % 6.8 %
==================================== =================
</TABLE>
Comparison of the Quarters Ended March 29, 1997 and March 31, 1996
Net Sales. Net sales for the first quarter of 1997 increased 6.5% to
$689,000 from $647,000 in the first quarter of 1996. The majority of "Morrow"
branded product sales occur in the third and fourth quarters of the year. In the
first quarters of both 1997 and 1996, these sales consisted almost entirely of
closeout sales and sales samples of "Morrow" branded products. As a percentage
of net sales, snowboards represented 39.3% in the first quarter of 1997 compared
to 43.3% in the first quarter of 1996. Binding sales represented 27.4% of net
sales in the first quarter of 1997 compared to 31.2% in the first quarter of
1996. Boot sales represented 15.4% of net sales in the first quarter of 1997
compared to 15.9% in the first quarter of 1996.
Gross Profit (Loss). Gross profit for the first quarter of 1997
decreased 206.1% to a gross loss of $105,000 from a gross profit of $99,000 for
the first quarter of 1996 as a result of a change in the timing of recognition
of manufacturing variances in 1997. Total gross margin for the first quarter of
1997 decreased to negative 15.2% from positive 15.3% for the first quarter of
1996. First quarter sales are largely comprised of closeout sales of 1996/97
product and sale samples of 1997/98 product.
Selling, Marketing and Customer Service. Selling, marketing and
customer service expenses for the first quarter of 1997 increased 26.8% to
$1,132,000 from $893,000 for the first quarter of 1996, representing 164.3% and
138.0% of net sales, respectively. The Company's growth required increased
expenses associated with additional staff, increases in trade show expenses and
the sales van program, an increase in promotional product and increased
commissions. As a percentage of net sales, staff and employee-related expenses
increased 9.8%, trade show expenses increased 2.3%, sales van program expenses
increased 2.2%, promotional product increased 9.7% and commissions increased
2.8%. All other expense categories remained consistent as a percentage of net
sales on a period to period basis.
11
<PAGE>
Engineering, Research and Product Development. Engineering, research
and product development expenses for the first quarter of 1997 increased 33.0%
to $238,000 from $179,000 for the first quarter of 1996, representing 34.5% and
27.7% of net sales, respectively. This increase was primarily due to an increase
in research and development of new products and consulting services contracted
in the first quarter of 1997. As a percentage of net sales, research and
development expenses increased 1.5%. Consulting, which was nonexistent in the
first quarter of 1996, represented 3.5% of net sales in the first quarter of
1997. All other expense categories remained consistent as a percentage of net
sales on a period-to-period basis.
General and Administrative. General and administrative expenses for the
first quarter of 1997 increased 14.2% to $690,000 from $604,000 for the first
quarter of 1996, representing 100.1% and 93.4% of net sales, respectively. This
increase was primarily due to increased professional fees and insurance costs.
As a percentage of net sales, professional fees increased 2.8% and insurance
costs increased 5.0%. All other expense categories remained consistent as a
percentage of net sales on a period-to-period basis.
Interest Expense. Interest expense decreased 80.5% to $16,000 for the
first quarter of 1997 from $82,000 for the first quarter of 1996. This was
largely the result of the company purchasing its building in March of 1996 with
the proceeds provided by the Company's initial public offering in December 1995.
Prior to the purchase, the building was subject to a capital lease, which
required the Company to recognize interest expense on the outstanding lease
debt.
Other Income. Other income was $152,000 in the first quarter of 1997,
compared to $208,000 in the first quarter of 1996. The Company had less cash to
invest from the proceeds of its December 1995 initial public offering in the
first quarter of 1997 than during the same quarter in 1996 resulting in a
decrease in interest income.
Income Tax Benefit. The income tax benefit for the first quarter of
1997 was $791,000 compared to a benefit of $554,000 for the first quarter of
1996. The income tax benefit for the first quarter of 1997 and 1996 was based on
the Company's estimated effective tax rate of approximately 39.0%.
Net Loss. The net loss for the first quarter of 1997 was $1,238,000
compared to a net loss of $897,000 for the first quarter of 1996.
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 had 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 $3,473,000 in cash at March 29, 1997. Net cash used in
operating activities for the first quarter of 1997 was $1,527,000, resulting
primarily from a net loss of $1,238,000, a decrease in accounts receivable of
$5,217,000 and an increase in inventory of $2,769,000 and reductions in accounts
12
<PAGE>
payable and accrued liabilities of $2,211,000. The decrease in accounts
receivable for the quarter is a result of collections during the quarter. The
increase in inventories for the quarter is a result of the buildup of inventory
of "Morrow" branded products for delivery later in the year to fill preseason
orders. Net cash provided by investing activities for the first quarter of 1997
was $525,000, which was the result of the redemption of short term investments
and the purchase and construction of equipment. Net cash used in financing
activities for the first quarter of 1997 was $587,000, primarily from the
repurchase of common stock. At March 29, 1997, the Company had working capital
of $17,285,000.
Capital expenditures for the three months ended March 29, 1997 were
$475,000. Capital expenditures were primarily for the purchase or construction
of manufacturing equipment, fixtures, and 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 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 March 29, 1997, 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 (8.50% at March 29, 1997). 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 March 29, 1997, the Company was in
compliance with all of its covenants.
The Company's debt structure is comprised of the following:
<TABLE>
<CAPTION>
March 29,
1997
---------------
<S> <C>
Short-term debt:
Operating line of credit $ -
Current portion of capital lease obligations 175
---------------
Total short-term debt $175
===============
Long-term debt:
Capital lease obligations $411
Less current portion (175)
===============
Total long-term debt, net of current portion $236
===============
</TABLE>
The Company believes that its full year 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. 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.
13
<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 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. No contact
has been made by the German company since this initial notice.
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. There has been no contact from the German distributor
since that time. 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 lawsuit brought
seeking injunctive relief or damages from the Company relating to these matters.
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-
14
<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 Reports on Form 8-K.
Exhibits - 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 fiscal quarter ended
March 29, 1997.
15
<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 12, 1997.
MORROW SNOWBOARDS, INC.
By: /s/ David E. Calapp
---------------------------------
David E. Calapp
Chief Executive Officer
(Principal Executive)
By: /s/ Margaret Daniels
---------------------------------
Margaret Daniels
Acting Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
16
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