<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 27, 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 (I.R.S. Employer Identification No.)
of 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 6, 1997 was 5,592,316.
<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
September 27, 1997
2
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
ASSETS
September 27 December 31,
1997 1996
------------ -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,924 $ 5,062
Short-term investments - 3,700
Accounts receivable, net 7,877 8,736
Inventories 6,285 4,533
Prepaid expense 329 536
Refundable income taxes 270 -
Deferred income taxes 1,074 450
------------ -----------
Total Current Assets 17,759 23,017
Property, Plant and Equipment-net 10,579 9,183
Other Assets 28 43
------------ -----------
Total Assets $ 28,366 $ 32,243
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 918 $ 1,552
Accrued liabilities 1,138 2,009
Current portion of capital lease obligations 151 228
------------ -----------
Total Current Liabilities 2,207 3,789
Long-Term Liabilities:
Capital lease obligations, net of current portion 149 258
Deferred income taxes 304 304
------------ -----------
Total Long-Term Liabilities 453 562
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 389 2,006
------------ -----------
Total Shareholders' Equity 25,706 27,892
------------ -----------
Total Liabilities and Shareholders' Equity $ 28,366 $ 32,243
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 27, September 30, September 27, September 30,
--------------------------- --------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales $ 10,173 $ 19,667 $ 13,011 $ 22,352
Cost of Goods Sold 7,085 11,961 9,316 13,896
------------ ------------ ------------ ------------
Gross Profit 3,088 7,706 3,695 8,456
Operating Expenses:
Selling, marketing and customer service 1,422 1,747 3,503 3,361
Engineering, research and product development 149 181 652 546
General and administrative 614 877 2,228 2,068
------------ ------------ ------------ ------------
Total Operating Expenses 2,185 2,805 6,383 5,975
------------ ------------ ------------ ------------
Operating Income (Loss) 903 4,901 (2,688) 2,481
Other Income (Expense):
Interest expense (32) (29) (59) (149)
Other income 28 158 245 488
------------ ------------ ------------ ------------
Total Other Income (Expense) (4) 129 186 339
------------ ------------ ------------ ------------
Income (Loss) Before Income Tax 899 5,030 (2,502) 2,820
Income Tax Benefit (Expense) (449) (1,961) 885 (1,122)
------------ ------------ ------------ ------------
Net Income (Loss) $ 450 $ 3,069 $ (1,617) $ 1,698
============ ============= ============ ============
Net Income (Loss) Per Share: $ 0.08 $ 0.51 $ (0.29) $ 0.28
============ ============= ============ ============
Weighted Average Number of Shares Used in
Computing Per Share Amounts: 5,752,518 6,039,041 5,582,614 6,037,868
============ ============= ============ ============
</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 Nine Months Ended September 27, 1997
(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 (92,583) (596) - - (596)
Tax benefit for exercise of option - 9 - - 9
Net loss - - - (1,617) (1,617)
----------- ----------- ----------- ----------- -----------
Balance, September 27, 1997 5,582,516 $ 25,411 $ (94) $ 389 $ 25,706
=========== ============ =========== =========== ===========
</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>
Nine Months Ended
September 27, September 30,
1997 1996
------------ -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ (1,617) $ 1,698
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 892 793
Loss on retirement of assets - 24
Deferred and refundable income taxes (885) -
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 859 (3,635)
Increase in inventories (1,752) (2,926)
(Increase) decrease in prepaid expenses 207 (212)
Decrease in other assets 15 8
Decrease in accounts payable (634) (317)
Increase (decrease) in accrued liabilities (871) 2,512
---------- -----------
Net Cash Used In Operating Activities (3,786) (2,055)
Cash Flows From Investing Activities:
Redemption of short-term investments 3,700 -
Acquisition of property and equipment (2,288) (2,733)
Proceeds from sale of equipment - 3
---------- -----------
Net Cash Provided By (Used In) Investing Activities 1,412 (2,730)
Cash Flows From Financing Activities:
Proceeds from issuance of common stock 18 539
Payments for repurchase of common stock (596) -
Principal payments on long-term liabilities (186) (2,553)
---------- -----------
Net Cash Used In Financing Activities (764) (2,014)
---------- -----------
Net Decrease In Cash and Cash Equivalents (3,138) (6,799)
---------- -----------
Cash and Cash Equivalents at Beginning of Period 5,062 15,026
---------- -----------
Cash and Cash Equivalents at End of Period $ 1,924 $ 8,227
========== ===========
Supplemental disclosure:
Cash paid for interest $ 59 $ 150
Cash paid for income taxes 440 20
Noncash Transactions:
Tax benefit on exercise of stock options and warrants 9 732
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 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 and its subsidiary
at September 27, 1997, and for the quarters and nine months then ended September
27, 1997 and September 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 nine months ended
September 27, 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
September 27th, whereas the prior year calendar quarter ended on September 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.
7
<PAGE>
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 September 27, 1997 and December 31, 1996.
Short-Term Investments
Short-term investments consisted of certain tax exempt securities, which
were classified as trading securities under the provisions of Statement of
Financial Accounting Standards No. 115 "Accounting for Certain Investments in
Debt and Equity Securities". At December 31, 1996 short-term investments were
stated on the balance sheet at cost, which approximated fair market value.
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.
8
<PAGE>
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.
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 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.
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 income (loss) per share amounts for the
quarters and nine months ended September 27, 1997 and September 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.
9
<PAGE>
3. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
September 27, December 31,
1997 1996
------------- ------------
(in thousands)
<S> <C> <C>
Finished goods $3,470 $1,979
Work-in-process 496 197
Raw materials 2,319 2,357
------ ------
Total inventories $6,285 $4,533
====== ======
</TABLE>
4. SUBSEQUENT EVENT
Pending Acquisition
On October 31, 1997, the Company signed a definitive agreement to acquire
privately-held Westbeach Snowboard Canada, Ltd. (Westbeach), a leading supplier
of snowboard and other outdoor apparel based in Vancouver, British Columbia.
The acquisition price includes payment of CN$3.2 million (US$2.3 million) in
cash, issuance of 584,240 shares of Morrow Snowboards, Inc. common stock to the
shareholders of Westbeach, assumption of the Westbeach operating line of credit
and payment of term debt of approximately CN$2.8 million (US$2.0 million). The
acquisition is expected to close by November 13, 1997. The transaction has been
approved by the board of directors of both companies, and is subject to normal
conditions, including approval by the shareholders of Westbeach, which is
privately-held. The acquisition will be accounted for as a purchase.
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 $13,011,000 and estimated open (preseason and new orders) sales orders
of approximately $4,000,000 at September 27, 1997. At September 30, 1996, the
Company had net sales of $22,352,000 and estimated open sales orders of
approximately $7,500,000. Open sales orders are subject to cancellation.
The Company's net sales decreased 41.8% to $13,011,000 for the nine months
ended September 27, 1997 from $22,352,000 in the nine months ended September 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 nine 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 September 27,
1997 are down from those reported at September 30, 1996 as a result of soft
market conditions throughout the industry due to an oversupply of snowboards in
1996, and the Company's aggressive approach to eliminate the gray market for its
snowboards worldwide. Management estimates that more than two-thirds of the
overall sales decline is caused by the Company's refusal to accept orders from
dealers which diverted product to these markets.
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>
Nine Months Ended Year Ended
------------------------------- ---------------
September 27, September 30, December 31,
1997 1996 1996
------------------------------- ---------------
<S> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0%
Cost of Goods Sold 71.6 62.2 65.8
-----------------------------------------------------
Gross Profit 28.4 37.8 34.2
-----------------------------------------------------
Operating Expenses:
Selling, marketing and customer service 26.9 15.0 14.5
Engineering, research and product
development 5.0 2.4 2.4
General and administrative 17.1 9.3 8.1
-----------------------------------------------------
Total Operating Expenses 49.0 26.7 25.0
-----------------------------------------------------
Operating Income (Loss) (20.6) 11.1 9.2
Interest Expense (0.5) (0.7) (0.5)
Other Income 1.9 2.2 2.1
-----------------------------------------------------
Income (Loss) Before Income Taxes (19.2) 12.6 10.8
Income Tax Benefit (Expense) 6.8 (5.0) (4.0)
-----------------------------------------------------
Net Income (Loss) (12.4)% 7.6% 6.8%
=====================================================
</TABLE>
Comparison of the Nine Months ended September 27, 1997 and September 30, 1996
Net Sales. Net sales for the nine months ended September 27, 1997
decreased 41.8% to $13,011,000 from $22,352,000 for the same period in 1996. As
a percentage of net sales, snowboards represented 66.5% for the nine months
ended September 27, 1997 compared to 69.6% for the same period in 1996. Binding
sales represented 20.7% of net sales for the nine months ended September 27,
1997 compared to 25.7% for the nine months ended September 30, 1996. Boot sales
represented 7.9% of net sales for the nine months ended September 27, 1997
compared to 2.0% for the nine months ended September 30, 1996. Apparel and
accessories represent the balance of net sales, 4.9% and 2.7% for the nine
months ended September 27, 1997 and September 30, 1996, respectively.
Gross Profit. Gross profit of $3,695,000 for the nine months ended
September 27, 1997 decreased 56.3% from a gross profit of $8,456,000 for the
nine months ended September 30, 1996. Total gross margin for the nine months
ended September 27, 1997 as a percentage of net sales decreased to 28.4% from
37.8% for the nine months ended September 30, 1996. The decreases are a result
of a higher proportion of manuacturing overhead absorbed over lower production
volumes and a higher proportion of international sales which include larger
distributor discounts than domestic sales.
Selling, Marketing and Customer Service. Selling, marketing and customer
service expenses for the nine months ended September 27, 1997 increased 4.2% to
$3,503,000 from $3,361,000 for the nine months ended September 30, 1996,
representing 26.9% and 15.0% of net sales, respectively. The increase is the
result of increased expenses associated with additional staff, increases in
trade show expenses and travel. As a percentage of net sales, staff and
employee-related expenses increased 3.2%, trade show expenses increased 1.1%
and travel increased 1.1%. However, these increases are offset by a decrease in
advertising agency fee expense. As a percentage of net sales, this decrease
represents 1.4%. 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 nine months ended September 27, 1997
increased 19.4% to $652,000 from $546,000 for the nine months ended September
30, 1996, representing 5.0% and 2.4% of net sales, respectively. This increase
was primarily a result of increased expenses associated with additional staff.
As a percentage of net sales, staff and employee-related expenses increased
1.7%. 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
nine months ended September 27, 1997 increased 7.7% to $2,228,000 from
$2,068,000 for the nine months ended September 30, 1996, representing 17.1% and
9.3% 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, the allowance for bad debt increased 2.8% and insurance costs
increased 1.3%. All other expense categories remained relatively consistent as a
percentage of net sales on a period-to-period basis.
Interest Expense. Interest expense decreased 60.4% to $59,000 for the
nine months ended September 27, 1997 from $149,000 for the nine months ended
September 30, 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 $245,000 for the nine months ended September
27, 1997, compared to $488,000 for the nine months ended September 30, 1996. The
Company had less cash to invest from the proceeds of its December 1995 initial
public offering in the nine months ended September 27, 1997 than during the same
period in 1996, resulting in a decrease in interest income.
Income Tax Benefit (Expense). The income tax expense for the nine months
ended September 27, 1997 was $885,000 compared to an expense of $1,122,000 for
the nine months ended September 30, 1996. The income tax benefit (expense) for
the nine months ended September 27, 1997 and September 30, 1996 was based on the
Company's estimated effective tax rate of approximately 35% and 40%,
respectively.
Net Income (Loss). The net loss for the nine months ended September
27, 1997 was $1,617,000 compared to net income of $1,698,000 for the nine months
ended September 30, 1996.
Comparison of the Quarters ended September 27, 1997 and September 30, 1996
Net Sales. Net sales for the third quarter of 1997 decreased 48.3% to
$10,173,000 from $19,667,000 in the third quarter of 1996. As a percentage of
net sales, snowboards represented 68.5% in the third quarter of 1997 compared to
68.9% in the third quarter of 1996. Binding sales represented 18.1% of net
sales in the third quarter of 1997 compared to 26.8% in the third quarter of
1996. Boot sales represented 9.3% of net sales in the third quarter of 1997
compared to 1.7% of net sales for the same period in 1996. Apparel and
accessories represented 4.1% and 2.6%, respectively, for the quarters ended
September 27, 1997 and September 30, 1996.
Gross Profit. Gross profit for the third quarter of 1997 decreased 59.9%
to $3,088,000 from $7,706,000 for the third quarter of 1996 as a result of
lower sales and a higher mix of international sales compared to domestic sales
in the third quarter. International sales typically represent lower overall
gross profit. Total gross profit for the third quarter of 1997 as a percentage
of net sales decreased to 30.4% from 39.2% for the third quarter of 1996.
13
<PAGE>
Selling, Marketing and Customer Service. Selling, marketing and customer
service expenses for the third quarter of 1997 decreased 18.6% to $1,422,000
from $1,747,000 for the third quarter of 1996, representing 14.0% and 8.9% of
net sales, respectively. The relative increase in expense to net sales is due to
additional staff, and promotion and marketing activities, offset by a decrease
in commission expense and advertising agency fees. As a percentage of sales,
staff and employee-related expenses increased 1.3%, promotion and marketing
activities increased 2.0%, and advertising agency fees decreased 1.0%. As a
percentage of sales, all other expense categories remained consistent on period-
to-period basis.
Engineering, Research and Product Development. Engineering, research and
product development expenses for the third quarter of 1997 decreased 17.7% to
$149,000 from $181,000 for the third quarter of 1996, representing 1.5% and 0.9%
of net sales, respectively. All expense categories remained relatively
consistent as a percentage of net sales on a period-to-period basis.
General and Administrative. General and administrative expenses for the
third quarter of 1997 decreased 30.0% to $614,000 from $877,000 for the
third quarter of 1996, representing 6.0% and 4.5% of net sales, respectively.
This decrease was primarily due to the reduction in legal expenses. All other
expense categories remained consistent as a percentage of net sales on a period-
to-period basis.
Interest Expense. Interest expense increased 10.3% to $32,000 for the
third quarter of 1997 from $29,000 for the third quarter of 1996. This was
largely the result of the Company borrowing against its revolving credit
facility during the third quarter of 1997.
Other Income. Other income was $28,000 in the third quarter of 1997,
compared to $158,000 in the third quarter of 1996. The Company had less cash to
invest from the proceeds of its December 1995 initial public offering in the
third quarter of 1997 than during the same quarter in 1996, resulting in a
decrease in interest income. The Company also had a reduction in cash discounts
earned from suppliers, due to its cash flow position in the third quarter.
Income Tax Expense. Income tax expense for the third quarter of 1997 was
$449,000 compared to $1,961,000 for the third quarter of 1996. The income tax
rate for the third quarters of 1997 and 1996 was approximately 50% and 39%,
respectively.
Net Income. Net income for the third quarter of 1997 was $450,000
compared to $3,069,000 for the third 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.
On October 31, 1997, the Company signed a definitive agreement to acquire
privately-held Westbeach Snowboard Canada, Ltd. (Westbeach), a leading supplier
of snowboard and other outdoor apparel based in Vancouver, British Columbia.
The acquisition price includes payment of CN$3.2 million (US$2.3 million) in
cash, issuance of 584,240 shares of Morrow Snowboards, Inc. common stock to the
14
<PAGE>
shareholders of Westbeach, assumption of the Westbeach operating line of credit
and payment of the term debt of approximately CN$2.8 million (US$2.0 million).
The purchase price will be funded by a combination of working capital and a new
credit facility with LaSalle Business Credit, Inc. The Company's previous
credit facility expired. The terms of the new credit facility include a
revolving line of credit of up to $14 million based upon advance rates tied to
eligible accounts receivable and inventories. The line of credit is available
through November 10, 2000 with interest payable at prime rate plus 1/4%. If
certain 1998 financial results are achieved, the Company has an option within
the credit facility for up to an additional $4 million in term loans. The
credit facility is secured by substantially all of the Company's assets, and
contains various covenants which require the Company, among other things, to
meet certain objectives with respect to net worth, limits of capital
expenditures, and debt service ratios. The revolving line will be drawn to fund
a portion of the Westbeach Snowboard Canada, Ltd. purchase.
The Company had $1,924,000 in cash at September 27, 1997. Net cash used in
operating activities for the nine months ended September 27, 1997 was
$3,786,000, resulting primarily from a net loss of $1,617,000, a decrease in
accounts receivable of $859,000, an increase in inventory of $1,752,000 and
reductions in accounts payable and accrued liabilities of $1,505,000. The
decrease in accounts receivable is a result of collections during the period.
The increase in inventories is largely a result of some retailers requesting
temporary delays of shipments. Net cash provided by investing activities for the
nine months ended September 27, 1997 was $1,412,000, 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 nine months ended
September 27, 1997 was $764,000, primarily from the repurchase of common stock.
At September 27, 1997, the Company had working capital of $15,552,000.
Capital expenditures for the nine months ended September 27, 1997 were
$2,288,000. Capital expenditures were primarily for the purchase or construction
of manufacturing equipment, fixtures, and new snowboard and binding toolings.
The Company's debt structure is comprised of the following:
<TABLE>
<CAPTION>
September 27,
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 $ 300
Less current portion (151)
----------
Total long-term debt, net of current portion $ 149
==========
</TABLE>
The Company believes that its full year cash flow from operations, available
line of credit under its new credit facility and cash on hand will be adequate
to meet its anticipated cash requirements. The Company may need to raise
additional capital if it makes any further 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.
-None-
Item 2. Changes in Securities.
-None-
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
September 27, 1997.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Salem, State of Oregon, on November 12, 1997.
MORROW SNOWBOARDS, INC.
By: /s/ David E. Calapp
---------------------
David E. Calapp
Chief Executive Officer
(Principal Executive)
By: /s/ David E. Calapp
---------------------
David E. Calapp
Acting Chief Financial Officer (1)
(Principal Financial and Accounting Officer)
(1) The position of Chief Financial Officer is vacant. The Chief Executive
Officer is filling such position and is authorized to sign on behalf of the
registrant and in the capacity of Chief Financial Officer.
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> DEC-27-1997 DEC-27-1997
<PERIOD-START> JAN-01-1997 JUN-29-1997
<PERIOD-END> SEP-27-1997 SEP-27-1997
<CASH> 1,924 1,924
<SECURITIES> 0 0
<RECEIVABLES> 7,877 7,877
<ALLOWANCES> 0 0
<INVENTORY> 6,285 6,285
<CURRENT-ASSETS> 17,759 17,759
<PP&E> 10,579 10,579
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 28,366 28,366
<CURRENT-LIABILITIES> 2,207 2,207
<BONDS> 0 0
0 0
0 0
<COMMON> 25,411 25,411
<OTHER-SE> 295 295
<TOTAL-LIABILITY-AND-EQUITY> 25,706 25,706
<SALES> 13,011 10,173
<TOTAL-REVENUES> 13,011 10,173
<CGS> 9,316 7,085
<TOTAL-COSTS> 9,316 7,085
<OTHER-EXPENSES> 6,383 2,185
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 59 32
<INCOME-PRETAX> (2,502) 899
<INCOME-TAX> (885) 449
<INCOME-CONTINUING> (1,617) 450
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,617) 450
<EPS-PRIMARY> (.29) .08
<EPS-DILUTED> (.29) .08
</TABLE>
