<PAGE>
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 28, 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 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 July 31, 1997 was 5,582,516.
<PAGE>
MORROW SNOWBOARDS, INC.
INDEX
<TABLE>
Part I. Financial Information
<S> <C>
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
</TABLE>
<TABLE>
Part II. Other Information
<S> <C>
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
</TABLE>
Signatures
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MORROW SNOWBOARDS, INC.
For the Quarter Ended
June 28, 1997
2
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 28, December 31,
1997 1996
-------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,046 $ 5,062
Short-term investments 508 3,700
Accounts receivable, net 4,305 8,736
Inventories 9,056 4,533
Prepaid expense 456 536
Deferred income taxes 1,792 450
------- -------
Total Current Assets 17,163 23,017
Property, Plant and Equipment-net 9,971 9,183
Other Assets 33 43
------- -------
Total Assets $27,167 $32,243
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 433 $ 1,552
Accrued liabilities 821 2,009
Current portion of capital lease obligations 151 228
------- -------
Total Current Liabilities 1,405 3,789
Long-Term Liabilities:
Capital lease obligations, net of current portion 202 258
Deferred income taxes 304 304
------- -------
Total Long-Term Liabilities 506 562
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,
5,582,516 and 5,667,749 shares issued and outstanding 25,411 25,980
Notes receivable for common stock (94) (94)
Retained Earnings (Deficit) (61) 2,006
------- -------
Total Shareholders' Equity 25,256 27,892
------- -------
Total Liabilities and Shareholders' Equity $27,167 $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 SHARE DATA)
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For The Six Months Ended For The Three Months Ended
June 28, June 30, June 28, June 30,
------------------------ --------------------------
1997 1996 1997 1996
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net Sales $ 2,838 $ 2,685 $ 2,149 $ 2,038
Cost of Goods Sold 2,231 1,935 1,437 1,387
----------- ----------- ------------ -----------
Gross Profit 607 750 712 651
Operating Expenses:
Selling, marketing and customer service 2,081 1,614 949 721
Engineering, research and product development 503 365 265 186
General and administrative 1,613 1,191 923 587
----------- ----------- ------------ -----------
Total Operating Expenses 4,197 3,170 2,137 1,494
----------- ----------- ------------ -----------
Operating Loss (3,590) (2,420) (1,425) (843)
Other Income (Expense):
Interest expense (27) (120) (12) (38)
Other income 216 330 64 122
----------- ----------- ------------ -----------
Total Other Income (Expense) 189 210 52 84
----------- ----------- ------------ -----------
Loss Before Income Tax (3,401) (2,210) (1,373) (759)
Income Tax Benefit 1,334 839 543 285
----------- ----------- ------------ -----------
Net Loss $ (2,067) $ (1,371) $ (830) $ (474)
=========== =========== ============ ===========
Net Loss Per Share: $ (0.37) $ (0.24) $ (0.15) $ (0.08)
=========== =========== ============ ===========
Weighted Average Number of Shares Used in
Computing Per Share Amounts: 5,608,822 5,652,523 5,585,173 5,688,484
=========== =========== ============ ===========
</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
FOR THE SIX MONTHS ENDED JUNE 28, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Retained
---------------------- Notes Earnings
Shares Amount Receivable (Deficit) 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 (92,583) (596) - - (596)
Tax benefit for exercise of options - 9 - - 9
Net loss - - - (2,067) (2,067)
--------- ------- ---- ------- -------
Balance, June 28, 1997 5,582,516 $25,411 $(94) $ (61) $25,256
========= ======= ==== ======= =======
</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 Six Months Ended
June 28, June 30,
1997 1996
-------- --------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $(2,067) $(1,371)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 583 520
Loss on Retirement of Assets - 20
Deferred income taxes (1,333) (838)
Changes in operating assets and liabilities:
Decrease in accounts receivable 4,431 3,584
Increase in inventories (4,523) (7,661)
(Increase) decrease in prepaid expenses 80 (282)
Decrease in other assets 10 9
Decrease in accounts payable (1,119) (118)
Decrease in accrued liabilities (1,188) (379)
------- -------
Net Cash Used In Operating Activities (5,126) (6,516)
Cash Flows From Investing Activities:
Redemption of short-term investments 3,192 -
Acquisition of property and equipment (1,371) (1,792)
------- -------
Net Cash Provided By (Used In) Investing Activities 1,821 (1,792)
Cash Flows From Financing Activities:
Proceeds from issuance of common stock 18 315
Payments for repurchase of common stock (596) -
Principal payments on long-term liabilities (133) (2,489)
------- -------
Net Cash Used In Financing Activities (711) (2,174)
------- -------
Net Decrease In Cash and Cash Equivalents (4,016) (10,482)
Cash and Cash Equivalents at Beginning Of Period 5,062 15,026
------- -------
Cash and Cash Equivalents at End Of Period $ 1,046 $ 4,544
======= =======
Supplemental disclosure:
Cash paid for interest $ 27 $ 120
Cash paid for income taxes 440 20
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 June 28, 1997, and for the quarters and six months ended June 28, 1997 and
June 30, 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 and six months ended June 28, 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 June
28th, whereas the prior year calendar quarter ended on June 30th.
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 June 28, 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>
Stock-Based Compensation Plans
The company accounts for its stock-based plans under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). In
1996, the Company adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123).
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
and six months ended June 28, 1997 and June 30, 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 June 28, 1997 or December 31, 1996.
3. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
JUNE 28, DECEMBER 31,
1997 1996
-------- ------------
(in thousands)
<S> <C> <C>
Finished goods $5,163 $1,979
Work-in-process 723 197
Raw materials 3,170 2,357
------ ------
Total inventories $9,056 $4,533
====== ======
</TABLE>
9
<PAGE>
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.
10
<PAGE>
ITEM 2. 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.
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 $2,838,000 and estimated backlog sales orders of approximately
$15,000,000 at June 28, 1997. At June 30, 1996, the Company had net sales of
$2,685,000 and estimated backlog sales orders of approximately $26,400,000.
Backlog sales orders are subject to cancellation.
The Company's net sales increased 5.7% to $2,838,000 for the six months
ended June 28, 1997 from $2,685,000 in the six months ended June 30, 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 six months 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 total of net sales and backlog of orders at June 28, 1997 are
down from those reported at June 30, 1996 as a result of soft market conditions
throughout the industry due to an oversupply of snowboards in 1996.
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.
11
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods indicated
as a percentage of net sales.
<TABLE>
<CAPTION>
Six Months Ended Year Ended
------------------------ ------------
June 28, June 30, December 31,
1997 1996 1996
------------------------ ------------
<S> <C> <C> <C>
Net Sales 100.0 % 100.0 % 100.0 %
Cost of Goods Sold 78.6 72.1 65.8
------------------------ ------------
Gross Profit 21.4 27.9 34.2
Operating Expenses:
Selling, marketing and customer service 73.3 60.1 14.5
Engineering, research and product development 17.7 13.6 2.4
General and administrative 56.8 44.4 8.1
------------------------ ------------
Total Operating Expenses 147.8 118.1 25.0
------------------------ ------------
Operating Income (Loss) (126.4) (90.2) 9.2
Interest Expense (1) (4.5) (0.5)
Other Income 7.6 12.3 2.1
------------------------ ------------
Income (Loss) Before Income Taxes (119.8) (82.4) 10.8
Income Tax Benefit (Expense) 47.0 31.2 4.0
------------------------ ------------
Net Income (Loss) (72.8)% (51.2)% 6.8 %
======================== ============
</TABLE>
Comparison of the Six Months Ended June 28, 1997 and June 30, 1996
Net Sales. Net sales for the first six months of 1997 increased 5.7% to
$2,838,000 from $2,685,000 in the first six months of 1996. The majority of
"Morrow" branded product sales occur in the third and fourth quarters of the
year. As a percentage of net sales, snowboards represented 59.5% in the first
six months of 1997 compared to 74.8% in the first six months of 1996. Binding
sales represented 30.1% of net sales in the first six months of 1997 compared to
18.0% in the first six months of 1996. Boot sales represented 3.0% of net sales
in the first six months of 1997 compared to 4.2% in the first six months of
1996.
Gross Profit. Gross profit for the first six months of 1997 decreased
19.1% to a gross profit of $607,000 from a gross profit of $750,000 for the
first six months of 1996 as a result of a change in the timing of recognition of
manufacturing variances in 1997. Total gross margin for the first six months of
1997 as a percentage of net sales decreased to 21.4% from 27.9% for the first
six months of 1996.
Selling, Marketing and Customer Service. Selling, marketing and customer
service expenses for the first six months of 1997 increased 28.9% to $2,081,000
from $1,614,000 for the first six months of 1996, representing 73.3% and 60.1%
of net sales, respectively. The increase is the result of increased expenses
associated with additional staff, increases in trade show expenses, consulting,
travel, and meals, the addition of a sales meeting and the addition of two toll-
free customer service lines. As a percentage of net sales, staff and employee-
related expenses increased 4.8%, trade show expenses increased 1.6%, consulting
increased 1.0%, travel increased 1.2%, meals increased 1.1% and sales meeting
expenses increased 1.1%. As a percentage of sales, the toll-free customer
service lines represented 1.3%. All other expense categories remained relatively
consistent as a percentage of net sales on a period to period basis.
12
<PAGE>
Engineering, Research and Product Development. Engineering, research and
product development expenses for the first six months of 1997 increased 37.8% to
$503,000 from $365,000 for the first six months of 1996, representing 17.7% and
13.6% of net sales, respectively. This increase was primarily due to an increase
in recruitment expenses associated with hiring an engineering manager and an
increase in consulting services contracted in the first six months of 1997. As
a percentage of net sales, recruitment expenses increased 2.0% and consulting
increased 1.9%. 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 six months of 1997 increased 35.4% to $1,613,000 from $1,191,000 for the
first six months of 1996, representing 56.8% and 44.4% of net sales,
respectively. This increase was primarily due to an increase in the allowance
for bad debt and increased insurance costs. As a percentage of net sales, bad
debt expense increased 10.2% and insurance costs increased 2.4%. All other
expense categories remained relatively consistent as a percentage of net sales
on a period-to-period basis.
Interest Expense. Interest expense decreased 77.5% to $27,000 for the
first six months of 1997 from $120,000 for the first six months 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 $216,000 in the first six months of 1997,
compared to $330,000 in the first six months of 1996. The Company had less cash
to invest from the proceeds of its December 1995 initial public offering in the
first six months of 1997 than during the same period in 1996, resulting in a
decrease in interest income.
Income Tax Benefit. The income tax benefit for the first six months of
1997 was $1,334,000 compared to a benefit of $839,000 for the first six months
of 1996. The income tax benefit for the first six months of 1997 and 1996 was
based on the Company's estimated effective tax rate of approximately 39.0% and
38.0%, respectively.
Net Loss. The net loss for the first six months of 1997 was $2,067,000
compared to a net loss of $1,371,000 for the first six months of 1996.
Comparison of the Quarters Ended June 28, 1997 and June 30, 1996
Net Sales. Net sales for the second quarter of 1997 increased 5.4% to
$2,149,000 from $2,038,000 in the second quarter of 1996. The majority of
"Morrow" branded product sales occur in the third and fourth quarters of the
year. As a percentage of net sales, snowboards represented 66.0% in the second
quarter of 1997 compared to 84.8% in the second quarter of 1996. Binding sales
represented 31.0% of net sales in the second quarter of 1997 compared to 13.7%
in the second quarter of 1996.
Gross Profit. Gross profit for the second quarter of 1997 increased 9.4%
to $712,000 from $651,000 for the second quarter of 1996. Total gross margin
for the second quarter of 1997 as a percentage of net sales increased to 33.1%
from 31.9% for the second quarter of 1996.
Selling, Marketing and Customer Service. Selling, marketing and customer
service expenses for the second quarter of 1997 increased 31.6% to $949,000 from
$721,000 for the second quarter of 1996, representing 44.2% and 35.4% of net
sales, respectively. This increase is the result of increased expenses
13
<PAGE>
associated with additional staff, increases in trade show expenses, travel,
consulting and team rider contracts. As a percentage of net sales, staff and
employee-related expenses increased 3.1%, trade show expenses increased 1.4%,
travel expenses increased 2.1%, consulting increased 1.1% and team rider
contracts increased 1.3%. All other expense categories remained consistent as a
percentage of net sales on a period-to-period basis.
Engineering, Research and Product Development. Engineering, research and
product development expenses for the second quarter of 1997 increased 42.5% to
$265,000 from $186,000 for the second quarter of 1996, representing 12.3% and
9.1% of net sales, respectively. This increase was primarily due to an increase
in expenses associated with additional staff, an increase in recruitment
expenses associated with hiring an engineering manager and an increase in
consulting services contracted in the first six months of 1997. As a percentage
of net sales, staff and employee-related expenses increased 1.0%, recruitment
expenses increased 2.2% and consulting services increased 1.4%. 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
second quarter of 1997 increased 57.2% to $923,000 from $587,000 for the
second quarter of 1996, representing 43.0% and 28.8% of net sales,
respectively. This increase was primarily due to increases in the allowance for
bad debt and insurance expense. As a percentage of net sales, the allowance for
bad debt increased 16.5% and insurance costs increased 1.5%. All other expense
categories remained consistent as a percentage of net sales on a period-to-
period basis.
Interest Expense. Interest expense decreased 68.4% to $12,000 for the
second quarter of 1997 from $38,000 for the second 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 $64,000 in the second quarter of 1997,
compared to $122,000 in the second quarter of 1996. The Company had less cash to
invest from the proceeds of its December 1995 initial public offering in the
second 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 second quarter of 1997
was $543,000 compared to a benefit of $285,000 for the second quarter of 1996.
The income tax benefit for the second quarters of 1997 and 1996 was based on the
Company's estimated effective tax rate of approximately 39.0% and 38.0%,
respectively.
Net Loss. The net loss for the second quarter of 1997 was $830,000
compared to a net loss of $474,000 for the second 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
14
<PAGE>
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 $1,046,000 in cash at June 28, 1997. Net cash used in
operating activities for the first six months of 1997 was $5,126,000, resulting
primarily from a net loss of $2,067,000, a decrease in accounts receivable of
$4,431,000, an increase in inventory of $4,523,000 and reductions in accounts
payable and accrued liabilities of $2,307,000. The decrease in accounts
receivable is a result of collections during the period. The increase in
inventories is largely 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 six months of 1997 was
$1,821,000, 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 six months of 1997 was $711,000, primarily from the
repurchase of common stock. At June 28, 1997, the Company had working capital of
$15,758,000.
Capital expenditures for the six months ended June 28, 1997 were
$1,371,000. Capital expenditures were primarily for the purchase or construction
of manufacturing equipment, fixtures, and new snowboard and binding 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 June 28, 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 June 28, 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
June 28, 1997, the Company was in compliance with all of its covenants.
The Company's debt structure is comprised of the following:
<TABLE>
<CAPTION>
June 28,
1997
--------
<S> <C>
Short-term debt:
Operating line of credit $ -
Current portion of capital lease obligations 151
--------
Total short-term debt $ 151
========
Long-term debt:
Capital lease obligations $ 353
Less current portion (151)
--------
Total long-term debt, net of current portion $ 202
========
</TABLE>
15
<PAGE>
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.
16
<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 it 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-
17
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
-None-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 25, 1997 at the Company's annual shareholder's meeting, the
following matters were submitted to the shareholders:
1. Election of the Company's seven directors to serve until the next
annual shareholder's meeting.
2. Ratification of Arthur Andersen, LLP as the Company's independent
auditors for the fiscal year ending December 27, 1997.
3. Approval of Amendments to the Company's 1990 Amended and Restated
Stock Option Plan, including a name change to the Employee Equity
Incentive Plan.
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
June 28, 1997.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Salem, State of Oregon, on August 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)
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-27-1997 DEC-27-1997
<PERIOD-START> JAN-01-1997 MAR-30-1997
<PERIOD-END> JUN-28-1997 JUN-28-1997
<CASH> 1,046 1,046
<SECURITIES> 508 508
<RECEIVABLES> 4,305 4,305
<ALLOWANCES> 0 0
<INVENTORY> 9,056 9,056
<CURRENT-ASSETS> 17,163 17,163
<PP&E> 9,971 9,971
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 27,167 27,167
<CURRENT-LIABILITIES> 1,405 1,405
<BONDS> 0 0
0 0
0 0
<COMMON> 25,411 25,411
<OTHER-SE> (155) (155)
<TOTAL-LIABILITY-AND-EQUITY> 27,167 27,167
<SALES> 2,838 2,149
<TOTAL-REVENUES> 2,838 2,149
<CGS> 2,231 1,437
<TOTAL-COSTS> 2,231 1,437
<OTHER-EXPENSES> 4,197 2,137
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 27 12
<INCOME-PRETAX> (3,401) (1,373)
<INCOME-TAX> (1,334) (543)
<INCOME-CONTINUING> (2,067) (830)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,067) (830)
<EPS-PRIMARY> (0.37) (0.15)
<EPS-DILUTED> (0.37) (0.15)
</TABLE>
