<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): October 31, 1997
MORROW SNOWBOARDS, INC.
(Exact name of registrant as specified in its charter)
OREGON 0-27002 93-1011046
(State or other jurisdiction of (Commission (IRS Employer
incorporation or organization) File Number) Identification Number)
2600 PRINGLE ROAD, S.E.
SALEM, OR 97302
(Address of principal executive offices)
(503) 375-9300
Registrant's telephone number, including area code
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
Morrow Snowboards, Inc. ("Morrow"), as reported in the Current Reports
on Form 8-K filed by Morrow on November 17, 1997 and November 26, 1997, through
a wholly-owned affiliate, Morrow Westbeach Canada Ltd. ("MWC"), a British
Columbia company, acquired all of the outstanding securities of Westbeach
Snowboard Canada Ltd. ("Westbeach") in exchange for 584,240 shares of Morrow
Common Stock and $3,170,000 Canadian (CN). Morrow also loaned Westbeach
$4,029,000 CN. Except as otherwise indicated herein, all references to dollars
($) or CN are to Canadian dollars. MWC is a wholly-owned subsidiary of Morrow
Snowboards ULC ("Morrow Nova Scotia"), a Nova Scotia unlimited company, which is
a wholly-owned subsidiary of Morrow, LLC, an Oregon limited liability company
which is a wholly-owned subsidiary of Morrow. Except for its investment in its
wholly-owned subsidiary, none of these entities, other than Morrow and
Westbeach, had any material assets or operations. Subsequent to the acquisition,
Westbeach and MWC were continued (corporate domicile transferred) into Nova
Scotia as Nova Scotia companies and, effective January 1, 1998, Westbeach, MWC
and Morrow Nova Scotia were amalgamated into a single surviving Nova Scotia
unlimited company, Morrow Westbeach Canada ULC. Morrow Westbeach Canada ULC will
continue to operate Westbeach's business. References herein to Westbeach shall
mean Westbeach Snowboard Canada Ltd. prior to such amalgamation, and Morrow
Westbeach Canada ULC thereafter.
This Form 8-K contains as exhibits certain financial and other
information regarding Morrow and Westbeach as required by the Securities
Exchange Act of 1934 and Securities and Exchange Commission ("SEC") rules.
This Form 8-K also contains certain background information regarding Westbeach's
business and prior financial performance.
Certain statements in this Form 8-K, including statements in
"Westbeach Business" and elsewhere in this Form 8-K, constitute "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (United States federal law). Such forward looking statements involve
known and unknown risks, uncertainties and other factors that may cause the
actual results, market performance or achievements of Westbeach and Morrow,
alone and as combined, to differ materially from any future results, performance
or achievements expressed or implied by such forward looking statements.
Important factors that could cause such differences include, but are not limited
to, new initiatives by competitors, price pressures, continuing excess
inventories of snowboard products at both the wholesale and retail levels,
continued overproduction of snowboards and related equipment, apparel and
accessories, cancellation of pre-season orders, inventory risks due to shifts in
market demand, raw material costs, the ability to manufacture product to plan
costs, weather in primary winter resort areas of the world, the challenge of
integrating Morrow's and Westbeach's business operations, loss of key Westbeach
employees, and the risk factors listed from time to time in Morrow's SEC
reports, including, but not limited to, the Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 and Quarterly Reports on Form 10-Q for the
thirteen week periods ended March 29, 1997, June 28, 1997 and September 27, 1997
filed with the SEC pursuant to the Securities Exchange Act of 1934. Operating
results for Morrow and Westbeach through September 1997 are not necessarily
indicative of the results that may be expected for the full year.
WESTBEACH BUSINESS
Reasons For the Exchange and the Acquisition. The Boards and
management of both Morrow and Westbeach identified significant potential
benefits to the transaction, including: (i) expanding Westbeach's distribution
in retail outlets in the United States market through Morrow's sales
representative and dealer network; (ii) through the larger public company,
Westbeach should have better access to capital markets and bank financing; (iii)
Westbeach's shareholders, subject to a one (1) year holding period and certain
sales volume limitations under Rule 144, would have stock that is freely
tradable under US and Canadian (except possibly Ontario, based on the provinces
in which Westbeach shareholders presently live) securities laws; (iv) Morrow,
through Westbeach's design, manufacturing and distribution expertise in the
apparel area, should be able to more quickly develop and market Morrow(R) brand
apparel and accessories; (v) Morrow, through Westbeach's sales representative
and dealer network, should be able to expand its Morrow(R) brand snowboard, boot
and
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binding products into Canada and Europe at a faster rate, markets where Morrow
has more limited penetration currently; (vi) the Westbeach(R) brand, due to the
combination of Morrow and Westbeach, will have broader marketing, finance and
manufacturing expertise available to support, market and promote the brand; and
(vii) the combined companies' increased size and capacity, should lead to
greater market recognition and opportunity for both brands. The Boards and
management of both companies also believe that the Westbeach management team
will present a strong complement to the Morrow management team and the combined
companies will have greater marketing potential while reducing the companies'
selling, general and administrative costs in some areas.
WESTBEACH SNOWBOARD CANADA LTD.
General. Westbeach is a well recognized manufacturer, wholesaler and
retailer of snowboarding apparel and casual clothing. Westbeach also sells
snowboards, boots, bindings and a full line of apparel and accessories through
its three retail stores. Established in 1979 as a merchandiser of clothing
products, Westbeach was incorporated under the Canadian Business Corporations
Act ("CBCA") on April 7, 1982 under the name Windlift Design Ltd. In June 1986,
Westbeach changed its name to Westbeach Surf Company Ltd. and in February 1993
changed its name to Westbeach Snowboard Canada Ltd., its current name. In
August 1997, Westbeach, through a continuation procedure, changed its
jurisdiction of organization from that of a Canadian federal corporation
governed by the CBCA, to a British Columbia corporation governed by the British
Columbia Company Act. As noted previously herein, Westbeach has since changed
its jurisdiction of organization to Nova Scotia and through an amalgamation
process effective January 1, 1998 become Morrow Westbeach Canada ULC.
Established in 1979 as a merchandiser of clothing products, Westbeach
began designing, manufacturing and marketing clothing. Westbeach designs,
manufactures and distributes snowboarding and casual clothing in 15 countries
through a network of distributors and commissioned sales representatives
principally under the Westbeach(R) brand. As discussed herein, Morrow and
Westbeach have established a reorganized and integrated distribution network
which is expected to expand Westbeach distribution to additional countries.
Wholesale clothing sales account for approximately 2/3 of Westbeach's total
revenues.
Product Development. Westbeach has had a design team comprised of
senior management, clothing designers, a product coordinator, retail managers
and Westbeach-sponsored snowboarders. Morrow and Westbeach have been
reorganizing their design teams to coordinate design and production efforts.
Westbeach aims to maintain a reputation for creating quality customer-sensitive
image products. In the past, the design team obtained market feedback from
distributors, customer feedback from the retail stores and feedback from its
snowboarders. In addition, senior management traveled extensively to all
markets to follow trends among both snowboarding youth and lifestyle customers.
Such feedback and travel is expected to continue.
In 1980, Westbeach developed and introduced a line of street clothing
aimed at youths ages 16-24 under the Westbeach Streetwear label. The basic line
of street clothing, which will constitute an estimated 15% of 1997 wholesale
clothing sales, is aimed at snowboarders, but has growth potential in all
markets, particularly in the United States and Japan where the Westbeach brand
is becoming better established. Westbeach also introduced a line of women's
snowboard clothing in 1995. Westbeach's design teams continue to develop new
concepts for possible future development.
Manufacturing; Import Restrictions; Retail Suppliers. Westbeach
designs its products and subcontracts on a fixed contract basis all of its
products to independent clothing manufacturers. Approximately 35% of its 1997
production was contracted to a single manufacturer in Hong Kong, China with the
balance contracted 55% to approximately five manufacturers located in the lower
mainland of British Columbia and 10% to a manufacturer in Europe. In 1996, 35%
of production was subcontracted to two Chinese manufacturers. Westbeach has an
outside consultant assigned to quality control inspection at the Chinese
manufacturers' plants and who checks production at other plants. While
Westbeach has no written contracts with its Hong Kong,
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China or other manufacturers, relations with such manufacturers are good and
Westbeach expects to continue to source products from those manufacturers.
Westbeach imports finished goods in the United States under
multilateral and bilateral trade agreements between the United States and China.
These agreements impose import quotas on the amount and types of textile and
products that can be imported into the United States from the affected country.
To expand United States sales, Westbeach must ensure its manufacturing sources
have adequate import quotas for the goods. Morrow does not anticipate these
restrictions will adversely affect Westbeach's operations and expected growth
since it could meet its demands within the United States from countries not
affected by the restrictions. Similarly, European sales are primarily subject
to European Economic Community rules. Under those rules, there are few internal
trade barriers, but many goods imported to Europe are subject to constraints,
including quotas and duty charges. Morrow does not anticipate these
restrictions will materially or adversely affect Westbeach's operations and
projected growth.
For its retail stores, Westbeach has numerous brands available and
does not anticipate any problems in obtaining adequate inventory from a variety
of manufacturers.
DIRECTORS AND OFFICERS
Following the Westbeach acquisition through December 31, 1997,
Westbeach's Board was comprised of David Calapp, Morrow's CEO, and two Westbeach
officers, Blair Mullin and Scott Sibley. Mr. Calapp also became Westbeach's
CEO. Since December 31, 1997, the Board of Morrow Westbeach Canada ULC also has
consisted of David Calapp, Blair Mullin and Scott Sibley. Westbeach's
management team, comprised of Mark Allinott, Blair Mullin, Scott Sibley and
Dennis (Chip) Wilson, have signed one-year employment agreements with Morrow,
effective November 12, 1997. Information regarding those persons is outlined
below. Information regarding Mr. Calapp is contained in the Morrow 1997 Proxy
Statement dated May 22, 1997 filed with the SEC.
<TABLE>
<CAPTION>
Principal Occupation or
Name Age Employment for Past Five Years
- ---- --- ------------------------------
<S> <C> <C>
Blair Mullin 44 Chief Financial Officer and Secretary, Morrow, since November 1997; President and Chief Executive Officer
of Westbeach from July 1995 to November 1997; Private business consultant from 1992 to 1995; Chief
Financial Officer of Bradbury International Equities Ltd. from 1988 to 1992; and General Manager of
Padovano Foods Inc. (food processing) from 1990 to 1992.
Chip Wilson 42 Vice-President, Marketing and Design, of Westbeach since 1985.
Scott Sibley 42 Vice-President, Sales and Director of Westbeach since 1985 and President of Westbeach from 1985 to
July 1995.
Mark Allinott 42 Full time manager of U.S.A. operations of Westbeach since 1993 and manager of retail operations of
Westbeach from 1985 to 1993.
</TABLE>
MARKETING
The principal factors contributing to the demand for Westbeach's
products include advertising, on-time delivery, quality, design, competitive
pricing and well-capitalized distributors. Prior to the acquisition by Morrow,
the Westbeach product line has been positioned as a Canadian, West Coast,
quality driven, authentic, outdoor product line for people who love
snowboarding, targeted at 16-24 year olds, providing value at all price
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points. Morrow expects Westbeach to maintain that focus, as well as continue to
broaden its products' range of appeal to more mainstream consumers.
Snowboarding Apparel and Accessories. Westbeach's target market for
its snowboard apparel is young people ages 16 to 24 years. Historically, the
target market has been heavily weighted toward males; however, the changing
trend is for a greater proportion of females in that age group to take up
snowboarding and become Westbeach customers. Westbeach introduced a full line
of women's outerwear and casual clothing in 1995. Snowboarding apparel
accounted for 80% of Westbeach's wholesale clothing sales in 1996 and is
expected to comprise 85% in 1997. The balance of such sales are casual (street)
clothing.
Street Clothing. Snowboarding retailers often market complementary
products, such as skateboarding equipment and clothing, in the non-snowboarding
seasons. While the 16-24 year olds have been significant buyers of Westbeach's
street clothing, the brands have had increased popularity among other age groups
as well. This trend is believed to be due in part to the products' image
styling and quality and in part to the fact that as traditional customers have
grown older, the brand appeal has simply spilled over into both younger and
older age groups. To reflect this broader appeal, Westbeach's designs have been
tending toward a more "mainstream" look.
SALES AND DISTRIBUTION
Sales. Westbeach's promotion and sales strategy is to increase
penetration in the growing North American and international snowboard apparel
markets, as well as to expand Westbeach's presence in the casual wear market.
North American and European market penetration will continue through the
specialty retail distribution channel. International sales will be developed
through sales representatives and Westbeach's dealer and distributor network.
Prior to the acquisition, Westbeach had appointed 26 commissioned sales
representatives in seven countries, including the United States, Canada and
Germany, and had distributors in eight countries, including Japan. Following
the acquisition, Morrow's and Westbeach's sales and distribution networks were
partially combined to create 26 commissioned sales representatives in seven
countries, including the United States and Canada, and 20 distributors in 15
countries. Westbeach and its distributors participate in United States,
European and Japanese trade shows and advertise in international trade
publications. Due to the seasonal nature of the snowboard industry and
predominance of snowboarding apparel in Westbeach's product line, a significant
portion of Westbeach's sales occur in the third and fourth quarters. In 1996,
more than 70% of sales were made in the last six months of the year.
Distribution. The primary distribution channels for "Westbeach" brand
products are specialty retailers and Westbeach's three retail stores. Specialty
retailers cater to experienced riders, existing skiers, other winter sport
enthusiasts and new snowboarding participants. These distribution channels
allow Westbeach to achieve the higher margins associated with the premium
snowboard market and enhance the feel of the "Westbeach" brand name. Within
such distribution channels, Westbeach will continue to focus on and enhance
customer service, including timely delivery of products, high-quality product
information materials and increased access to consumer service representatives.
Wholesale sales in the United States commenced in August 1993. In 1997,
Westbeach had approximately 200 active wholesale accounts in the United States
and 300 active wholesale accounts in Canada.
Levante, Inc., Westbeach's exclusive distributor of "Westbeach" brand
products in Japan, accounted for approximately 31% and 25% of Westbeach's net
sales for the years ended December 31, 1996 and 1995, respectively, and will
account for an expected 19% in 1997. Westbeach has an exclusive distributorship
agreement with Levante. While Levante has been required to purchase certain
minimum quantities of Westbeach products in the past, the minimum purchase
requirements, if any, are being discussed and renegotiated currently. The
contract may be canceled if minimum orders are not received. Westbeach has no
economic interest in Levante. No other customer accounted for more than 10% of
Westbeach's net sales in 1996
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and 1995. All international sales through distributors are shipped against
irrevocable letters of credit which are negotiable or wire transfer funds when
the product is shipped.
Westbeach's Canadian, United States, Japan and other net sales are set
forth below for the year ended December 31, 1996:
WHOLESALE/RETAIL BREAKDOWN OF SALES
1996
----
<TABLE>
<CAPTION>
(CN000s) %
-------- -----
<S> <C> <C>
Wholesale
Canadian $ 2,235 18.4%
United States $ 1,427 11.7%
Japan $ 3,808 31.3%
Europe $ 859 7.1%
Retail
Canadian $ 3,279 26.9%
United States $ 565 4.6%
------- -----
Total $12,173 100.0%
======= =====
</TABLE>
Retail. Westbeach opened its first retail store in Vancouver, British
------
Columbia in 1984 and currently operates three retail stores. Two of the stores
are in British Columbia at locations in Vancouver and Whistler. The third store
is located in Bellevue, Washington, and is operated through Westbeach's wholly
owned subsidiary, Westbeach Snowboard U.S.A. Inc. Westbeach closed a North
Vancouver, B.C. store in April 1996 to concentrate on the then four remaining
stores and closed its Richmond, B.C. store in January 1997. Retail sales
represented approximately 31.5% of total sales in 1996 and 33.4% of total sales
in 1995 and are expected to remain at approximately 1/3 of total sales for 1997.
In the retail stores, Westbeach's products account for approximately
1/3 of sales. Clothing from other manufactures also account for approximately
1/3 of sales, with snowboards and other accessories representing the balance.
Westbeach has historically carried between five and eight brands of snowboards,
plus several brands of boots and bindings in each of its retail stores.
Westbeach has not previously carried Morrow(R) brand products.
All store locations are leased. A breakdown of sales per store for
1996 is as follows:
SALES REVENUE BY RETAIL OUTLET(1)
1996
----
<TABLE>
<CAPTION>
(CN000s) %
-------- -----
<S> <C> <C>
Vancouver $1,910 49.7
North Vancouver(2) $ 125 3.3
Richmond(3) $ 336 8.7
Whistler $ 908 23.6
Bellevue (Washington) $ 565 14.7
------ -----
Total $3,844 100.0%
====== =====
</TABLE>
(1) Unaudited.
(2) The North Vancouver store was closed at the end of April 1996.
(3) The Richmond store was closed at the end of January 1997.
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The Whistler store has been in operation since December 1993 and the
Bellevue store and related warehouse space opened in August 1993. The Vancouver
store is the original store and flagship of the group. The Vancouver store
underwent major renovations in 1996 and 1997. Margins in the retail stores
averaged 37.3% in 1996, including Westbeach and non-Westbeach goods. Margins on
Westbeach goods are in the 40-50% range, which are significantly higher than
non-Westbeach goods.
Advertising. Westbeach places considerable emphasis on advertising to
maintain its image as a leading manufacturer of snowboard products. Advertising
consists of print media advertising in major U.S. and worldwide snowboard
publications. Advertising is done directly by Westbeach and also indirectly
through distributors. Westbeach estimates that its direct advertising
expenditures are approximately equal to the amount spent indirectly by
distributors. In addition, Westbeach sponsors certain snowboarding events,
including the Westbeach Classic at Whistler, B.C., throughout the year, as well
as individual snowboarders who compete worldwide wearing Westbeach's products.
Backlog. As of September 30, 1997, Westbeach had net sales
(unaudited) to date of $7.6 million and estimated backlog sales orders for
wholesale clothing of $3.0 million.
Competition. The market for snowboarding apparel and causal clothing
is highly competitive and Morrow expects competition to increase as market
interest in snowboards continues to grow. The Burton Corporation is currently
the leader in the snowboard apparel industry, with several other companies,
including Westbeach, having smaller but significant market shares, and many
smaller manufacturers and distributors sharing the remainder of the market.
Other significant competitors in the apparel area include Sims, AGC (Nike,
Inc.), Concept, Bonfire, NFA, Sessions, Special Blend and Twist in the high end
specialty markets. Westbeach believes its strongest markets are Japan, Canada
and Europe, and that Westbeach is not yet a major competitor in the United
States market. Westbeach competes with a number of established manufacturers
and distributors. In addition, other established manufacturers could introduce
additional competition by introducing snowboard apparel under existing brands,
developing new sports apparel brands or acquiring other snowboard apparel
brands. Nike, Inc., which already manufactures snowboard and other clothing
under the AGC brand, has recently announced its intention to enter the
snowboarding industry on a broader scale, including introducing snowboards,
bindings and boots.
Patents and Trademarks. Westbeach has obtained trademark protection
in 17 counties, including Japan, United States and Canada, and is seeking
protection in all of the European community and eight additional countries for
the "Westbeach" brand for use with snowboarding apparel and, to a lesser degree,
trademark protection for the "3 surfer" and other marks. Westbeach also claims
common law rights to the foregoing and various other trademarks arising out of
its use of such marks.
While Westbeach believes that the Westbeach trademark has significant
value, Westbeach believes that significant factors in its business are
maintaining current designs, fabrics and colors in its products, product quality
and customer service and follow-through.
Governmental Regulation. Except for environmental laws generally
applicable to its activities, Westbeach does not believe it is subject to any
special or unusual governmental regulation. However, as noted, the import of
Westbeach products into various countries, including the United States, is
subject to import quotas and duties.
Employees. As of October 20, 1997, Westbeach had approximately 65
employees, including 27 in its retail sales operations. Since Westbeach's
acquisition by Morrow, a number of employees have joined Morrow and a number of
overlapping duties or duplicative functions are being eliminated, with an
expected net reduction of ten (10) employees for the two companies. Westbeach's
employees are not subject to any collective bargaining agreement. Westbeach
considers its employee relations to be good. Westbeach also engages the
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services of seven professional team riders in Europe, Canada and the United
States, all of whom Westbeach considers independent contractors. The number of
professional riders is under review.
Description of Property. Westbeach leases the following properties:
1. An approximate 16,038 square foot administrative and warehouse
facility in Vancouver, British Columbia under a lease expiring 4/30/98 with a
five-year renewal option.
2. An approximate 1,407 square foot retail store in Whistler
Mountain, B.C. under a lease expiring 12/11/98 with a one-year renewal option.
3. An approximate 5,000 square foot retail store in Vancouver, B.C.
under a lease expiring 3/31/2005 with a five-year renewal option.
4. An approximate 3,500 square foot warehouse and retail store in
Bellevue, Washington under a lease expiring 7/31/98 with a five-year renewal
option.
5. An approximate 2,500 square foot warehouse and sales office, in
Innsbruck, Austria under a month-to-month lease.
6. Use of an approximate 1,000 square foot warehouse through December
1997 near Munich, Germany.
Subsidiaries. Westbeach has three subsidiaries as follows:
<TABLE>
<CAPTION>
Name Country of Organization Principal Activity
- ---- ----------------------- ------------------
<S> <C> <C>
Westbeach Snowboard Gesellschaft m.b.H. Austria European sales warehousing
Westbeach Snowboard UK Limited United Kingdom European sales
Westbeach Snowboard U.S.A. Inc. Washington state, United States United States retail operations
</TABLE>
Legal Proceedings. Westbeach is not involved in any material pending legal
proceedings.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Businesses Acquired.
Consolidated Financial Statements for Westbeach Snowboard
Canada Ltd. as of and for the year ended December 31, 1996. See
pages F-1 through F-8.
Unaudited Consolidated Financial Statements for Westbeach
Snowboard Canada Ltd. as of September 30, 1997 and for the nine
months ended September 30, 1997 and 1996. See pages F-9 through
F-12.
(b) Pro Forma Financial Information.
Pro Forma Consolidated Financial Statements for Morrow
Snowboards, Inc. (Morrow) and Westbeach Snowboard Canada Ltd.
(Westbeach) as of and for the fiscal nine months ended
September 27, 1997 for Morrow (September 30, 1997 for
Westbeach)and the year ended December 31, 1996. See pages PF-1
through PF-5.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant had 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 January 15, 1998.
MORROW SNOWBOARDS, INC.
By: /s/ DAVID E. CALAPP
--------------------------------------------
David E. Calapp
Chief Executive Officer
(Principal Executive Officer)
By: /s/ BLAIR MULLIN
--------------------------------------------
Blair Mullin
Chief Financial Officer
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Document Description
- ----------- --------------------
<C> <S>
23 Consent of Ellis Foster, Chartered Accountants, regarding 1996
Consolidated Financial Statements (see Exhibit 99.1).
99.1 Consolidated Financial Statements for Westbeach Snowboard Canada
Ltd. as of and for the year ended December 31, 1996 (1996
Consolidated Financial Statements), including:
Consolidated Balance Sheet as of December 31, 1996.
Consolidated Statement of Income and Retained Earnings for the
year ended December 31, 1996.
Consolidated Statement of Changes in Financial Position for the
year ended December 31, 1996.
Notes to 1996 Consolidated Financial Statements.
99.2 Unaudited Consolidated Financial Statements for Westbeach
Snowboard Canada Ltd. as of September 30, 1997 and for the nine
months ended September 30, 1997 and 1996 (1997 Consolidated
Financial Statements), including:
Consolidated Balance Sheet as of September 30, 1997.
Consolidated Statement of Operations and Retained Earnings for
the nine-month periods ended September 30, 1997 and 1996.
Consolidated Statement of Changes in Financial Position for
the nine-month periods ended September 30, 1997 and 1996.
Notes to 1997 Consolidated Financial Statements.
99.3 Pro Forma Consolidated Financial Statements for Morrow
Snowboards, Inc. (Morrow) and Westbeach Snowboard Canada Ltd.
(Westbeach) as of and for the fiscal nine months ended
September 27, 1997 for Morrow (September 30, 1997 for
Westbeach) and the year ended December 31, 1996 (Pro Forma
Consolidated Financial Statements), including:
Pro Forma Consolidated Balance Sheet as of September 27, 1997.
Pro Forma Consolidated Statement of Operations for the nine-month
period ended September 27, 1997.
Pro Forma Consolidated Statement of Operations for the year ended
December 31, 1996.
Notes to Pro Forma Consolidated Financial Statements.
</TABLE>
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EXHIBIT 23
Consent of Independent Public Accountants
As independent public accountants we hereby consent to the incorporation of our
report dated February 14, 1997 on the consolidated financial statements of
Westbeach Snowboard Canada Ltd. as of and for the year ended December 31, 1996
included in this Form 8-K/A, into Morrow Snowboards, Inc.'s previously filed
Registration Statement File No. 333-4761 on Form S-8.
ELLIS FOSTER, CHARTERED ACCOUNTANTS
Vancouver, Canada
January 13, 1998
<PAGE>
EXHIBIT 99.1
AUDITORS' REPORT
To the Shareholders of
WESTBEACH SNOWBOARD CANADA LTD.
We have audited the consolidated balance sheet of WESTBEACH SNOWBOARD CANADA
LTD. as at December 31, 1996 and the consolidated statements of income and
retained earnings and changes in financial position for the year then ended.
These financial statements are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at December 31, 1996
and the results of its operations and the changes in its financial position for
the year then ended in accordance with generally accepted accounting principles.
As required by the Company Act of the Province of British Columbia, we report
that, in our opinion, these principles have been applied on a basis consistent
with that of the preceding year.
Vancouver, Canada ELLIS FOSTER
February 14, 1997 Chartered Accountants
F-1
<PAGE>
<TABLE>
<CAPTION>
WESTBEACH SNOWBOARD CANADA LTD.
Consolidated Balance Sheet
December 31, 1996
(Canadian dollars)
ASSETS
- ---------------------------------------------------------------------------------------------------
<S> <C>
Current
Cash $ 1,198,980
Accounts receivable 958,293
Other receivables 211,509
Inventories (note 2) 2,000,570
Income taxes recoverable 58,452
Prepaid expenses and deposits 309,445
- ---------------------------------------------------------------------------------------------------
4,737,249
Capital assets (note 3) 342,864
Trademarks (net of accumulated amortization of $44,092) 144,690
Deferred refinancing costs (net of accumulated amortization of $60,480) 167,334
- ---------------------------------------------------------------------------------------------------
$ 5,392,137
===================================================================================================
LIABILITIES
- ---------------------------------------------------------------------------------------------------
Current
Accounts payable and accrued liabilities $ 1,383,301
Current portion of obligations under capital leases (note 4) 10,156
Current portion of subordinated debenture (note 5) 200,000
- ---------------------------------------------------------------------------------------------------
1,593,457
Obligations under capital leases (note 4) 472
Deferred income taxes 44,611
Subordinated debenture (note 5) 2,730,000
- ---------------------------------------------------------------------------------------------------
4,368,540
- ---------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------
Share capital (note 6) 174,340
Retained earnings 849,257
- ---------------------------------------------------------------------------------------------------
1,023,597
- ---------------------------------------------------------------------------------------------------
$ 5,392,137
===================================================================================================
</TABLE>
Commitments (note 7)
F-2
<PAGE>
<TABLE>
<CAPTION>
WESTBEACH SNOWBOARD CANADA LTD.
Consolidated Statement of Income and Retained Earnings
Year Ended December 31, 1996
(Canadian dollars)
- ------------------------------------------------------------------------------------
<S> <C>
Sales $12,173,285
Cost of goods sold 7,110,723
- ------------------------------------------------------------------------------------
Gross profit 5,062,562
- ------------------------------------------------------------------------------------
Expenses
Selling, marketing and customer service 2,203,692
Engineering, research and product development 578,067
General and administration 1,914,581
- ------------------------------------------------------------------------------------
4,696,340
- ------------------------------------------------------------------------------------
Income from operations 366,222
Other income 43,600
- ------------------------------------------------------------------------------------
409,822
- ------------------------------------------------------------------------------------
Interest on operating line of credit 52,219
Interest on long-term debt 211,549
- ------------------------------------------------------------------------------------
263,768
- ------------------------------------------------------------------------------------
Income before income taxes 146,054
Income taxes
Current 47,108
Deferred (10,952)
- ------------------------------------------------------------------------------------
36,156
- ------------------------------------------------------------------------------------
Net income for the year 109,898
Retained earnings, beginning of year 751,119
- ------------------------------------------------------------------------------------
861,017
Dividends paid (11,760)
- ------------------------------------------------------------------------------------
Retained earnings, end of year $ 849,257
====================================================================================
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
WESTBEACH SNOWBOARD CANADA LTD.
Consolidated Statement of Changes in Financial Position
Year Ended December 31, 1996
(Canadian dollars)
- ----------------------------------------------------------------------------------
<S> <C>
Cash provided by (used for) operating activities
Operations
Net income for the year $ 109,898
Items not involving cash
Amortization 140,035
Deferred income taxes (10,952)
- ----------------------------------------------------------------------------------
238,981
- ----------------------------------------------------------------------------------
Cash provided by (used for) non-cash working capital
Accounts receivable (279,662)
Other receivables (145,359)
Inventories (315,515)
Income taxes recoverable (58,452)
Prepaid expenses and deposits (183,035)
Accounts payable and accrued liabilities 365,188
Income taxes payable (22,361)
Deferred revenue (300,000)
- ----------------------------------------------------------------------------------
(939,196)
- ----------------------------------------------------------------------------------
(700,215)
- ----------------------------------------------------------------------------------
Cash provided by (used for) financing activities
Dividends paid (11,760)
Refinancing costs incurred (135,609)
Repayment of obligations under capital leases (12,016)
Funds received through the issuance of debenture 1,930,000
- ----------------------------------------------------------------------------------
1,770,615
- ----------------------------------------------------------------------------------
Cash provided by (used for) investing activities
Purchase of capital assets (195,686)
- ----------------------------------------------------------------------------------
(195,686)
- ----------------------------------------------------------------------------------
Increase in cash position 874,714
Cash position, beginning of year 324,266
- ----------------------------------------------------------------------------------
Cash position, end of year $ 1,198,980
==================================================================================
</TABLE>
F-4
<PAGE>
WESTBEACH SNOWBOARD CANADA LTD.
Notes to Consolidated Financial Statements
December 31, 1996
(Canadian dollars)
________________________________________________________________________________
1. Significant Accounting Policies
Accounting Principles
---------------------
These consolidated financial statements have been prepared in accordance
with Canadian generally accepted accounting principles.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Westbeach Snowboard USA Inc., a U.S.
corporation and Westbeach Snowboard Gesellschaft m.b.H., an Austrian
Corporation. All significant intercompany accounts and transactions have
been eliminated.
Inventories
-----------
Inventories are recorded at the lower of cost and net realizable value. Cost
is determined on a weighted average basis.
Capital Assets
--------------
Capital assets are recorded at historical cost. Amortization is charged to
earnings in amounts sufficient to amortize the costs over the assets'
estimated useful lives using the following annual rates:
Automobiles 30% declining balance
Computer equipment 30% declining balance
Furniture and equipment 20% declining balance
Leasehold improvements 20% straight line
The Company reduces these rates by one-half in the year of acquisition.
Trademarks
----------
Trademarks are recorded at cost net of related amortization. Amortization
of each trademark is recorded on a straight-line basis over a 17 year
period.
Deferred Refinancing Costs
--------------------------
Deferred refinancing costs are recorded at cost net of related
amortization. Amortization is recorded on a straight-line basis over a 5
year period.
The Company reduces the rate by one-half in the year the costs are
incurred.
F-5
<PAGE>
WESTBEACH SNOWBOARD CANADA LTD.
Notes to Consolidated Financial Statements
December 31, 1996
(Canadian dollars)
________________________________________________________________________________
1. Significant Accounting Policies (continued)
Foreign Currency Translation
----------------------------
The Company translates the accounts of its subsidiary companies to Canadian
dollars at year-end rates for all monetary assets and liabilities.
Non-monetary assets and liabilities are translated at historical rates.
Revenues and expenses are translated at the average rate for the period
except for amortization which is translated at historical rates. Gains and
losses resulting from movements in rates are reflected in the statement of
income.
Deferred Income Taxes
---------------------
The Company accounts for income taxes using the deferral method of tax
allocation, under which income taxes are provided in the year in which
transactions affect net income, regardless of when such items are
recognized for tax purposes.
2. Inventories
Inventories are comprised of the following:
<TABLE>
<CAPTION>
1996
----
<S> <C>
Raw material $ 876,327
Work-in-progress 38,888
Finished goods 1,085,355
----------
$2,000,570
==========
</TABLE>
3. Capital Assets
Capital assets are comprised of the following:
<TABLE>
<CAPTION>
1996
-----------------------------------------------------
Accumulated
Cost Amortization Net Book Value
-----------------------------------------------------
<S> <C> <C> <C>
Automobiles $ 16,126 $ 4,838 $ 11,288
Computer equipment 309,775 168,425 141,350
Furniture and equipment 233,960 124,200 109,760
Leasehold improvements 170,036 89,570 80,466
-----------------------------------------------------
$ 729,897 $ 387,033 $ 342,864
=====================================================
</TABLE>
F-6
<PAGE>
WESTBEACH SNOWBOARD CANADA LTD.
Notes to Consolidated Financial Statements
December 31, 1996
(Canadian dollars)
________________________________________________________________________________
4. Obligations Under Capital Leases
The Company has obligations under capital leases. Minimum lease payments
under capital leases for the next two years are as follows:
1997 $ 10,156
1998 472
----------
$ 10,628
==========
5. Subordinated Debenture
The first debenture issue consisted of 200 individual units with each unit
comprised of one 12% subordinated debenture in the principle amount of
$5,000 and 1,750 Class A common voting shares in the capital of the Company
and a put and call option relating to the shares.
The second debenture issue consists of 2,130 individual units with each
unit comprised of one debenture in the principle amount of $1,000 bearing
interest at the rates of 14% in 1997, 16% in 1998 and 18% in 1999 and 150
share purchase warrants each warrant entitling the holder thereof to
purchase 1 Class "A" common share of the Corporation at any time until
March 31, 2000 at a price of $2.50 per share.
The units are secured by a general security agreement containing a floating
charge on all present and after acquired property of the Company, which is
subordinate in priority to the general security agreement in favour of the
Company's principal banker to a maximum of $1,250,000. In addition,
insurance in favour of the Trustee on the lives of four officers, each in
the amount of $500,000.
Principal repayments for the next three years are as follows:
1997 $ 200,000
1998 726,000
1999 2,004,000
----------
2,930,000
Less: Current portion (200,000)
----------
$2,730,000
----------
F-7
<PAGE>
WESTBEACH SNOWBOARD CANADA LTD.
Notes to Consolidated Financial Statements
December 31, 1996
(Canadian dollars)
________________________________________________________________________________
6. Share Capital
Share capital is comprised as follows:
Authorized
Unlimited number of Class A common voting
shares of no par value.
Unlimited number of Class B common non-voting
shares of no par value.
Unlimited number of non-cumulative redeemable
Class A preferred shares.
Unlimited number of non-cumulative Class B
preferred shares, par value of $1, redeemable at $1 each.
Issued and fully paid
999,250 Class A common shares $ 27,340
147,000 Class B preferred shares 147,000
---------
$ 174,340
=========
7. Commitments
The Company is committed to various operating leases for office and retail
premises. Under the terms of the leases, payments for the next three
fiscal years are as follows:
1997 $ 270,599
1998 211,569
1999 38,675
---------
$ 520,843
=========
Other commitments in the form of letters of credit totaled $255,490 at
December 31, 1996.
F-8
<PAGE>
EXHIBIT 99.2
<TABLE>
<CAPTION>
WESTBEACH SNOWBOARD CANADA LTD AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Canadian dollars in thousands)
(Unaudited)
ASSETS
September 30, 1997
------------------
<S> <C>
Current assets:
Cash ........................................................... $ --
Accounts receivable, net ....................................... 2,362
Inventories .................................................... 3,026
Prepaid expenses ............................................... 359
------
Total current assets ...................................... 5,747
Property, plant and equipment, net ................................ 351
Trademarks ........................................................ 136
Deferred refinancing .............................................. 117
======
Total assets ................................................ $6,351
======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Operating line of credit ....................................... $ 426
Short-term note payable ........................................ 1,004
Accounts payable ............................................... 1,315
Accrued liabilities ............................................ 273
Current portion of long-term debt .............................. 677
------
Total current liabilities ................................... 3,695
------
Deferred income taxes ............................................. 45
Subordinated debentures, net of current portion ................... 2,154
------
Total long-term liabilities ................................. 2,199
------
Shareholders' equity:
Share capital................................................... 174
Retained earnings .............................................. 283
------
Total shareholders' equity .................................. 457
======
Total liabilities and shareholders' equity ........................ $6,351
======
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-9
<PAGE>
<TABLE>
<CAPTION>
WESTBEACH SNOWBOARD CANADA LTD AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
(Canadian dollars in thousands)
(Unaudited)
Nine months ended September 30,
1997 1996
------- -------
<S> <C> <C>
Net sales .......................................... $ 7,588 $ 9,078
Cost of goods sold ................................. 4,497 5,367
------- -------
Gross profit .................................... 3,091 3,711
------- -------
Operating expenses:
Selling, marketing and customer service ......... 1,563 1,516
Engineering, research and product development ... 401 433
General and administrative ...................... 1,715 1,376
------- -------
Total operating expenses ..................... 3,679 3,325
------- -------
Operating income (loss) ............................ (588) 386
------- -------
Other income (expense):
Interest expense ................................ (354) (186)
Other ........................................... (2) --
------- -------
Total other income (expense) ................. (356) (186)
------- -------
Income (loss) before income tax .................... (944) 200
Income tax benefit (expense) ....................... 378 (80)
------- -------
Net income (loss) .................................. (566) 120
Retained earnings, beginning of period ............. 849 751
------- -------
Retained earnings, end of period ................... $ 283 $ 871
======= =======
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-10
<PAGE>
<TABLE>
<CAPTION>
WESTBEACH SNOWBOARD CANADA LTD AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
(Canadian dollars in thousands)
(Unaudited)
Nine months ended September 30,
1997 1996
------- -------
<S> <C> <C>
Cash provided by (used in) operating activities:
Net income (loss) ................................. $ (566) $ 120
Items not affecting cash:
Amortization/depreciation ...................... 134 78
------- -------
(432) 198
------- -------
Changes in non-cash working capital
Accounts receivable ............................... (1,025) (3,042)
Other receivables ................................. (168) (233)
Inventories ....................................... (1,040) (306)
Prepaid expenses .................................. 22 (135)
Accounts payable and accrued liabilities .......... 192 1,578
------- -------
(2,019) (2,138)
------- -------
(2,451) (1,940)
------- -------
Cash provided by (used in) financing activities:
Proceeds (repayments) of subordinated debentures .. (100) 1,200
Proceeds on line of credit, net ................... 426 619
Proceeds (repayments) of short term loan .......... 995 (7)
------- -------
1,321 1,812
------- -------
Cash used in investing activities:
Purchase of capital assets ........................ (69) (196)
------- -------
Decrease in cash balance ............................. (1,199) (324)
Cash balance at beginning of period .................. 1,199 324
======= =======
Cash balance at end of period ........................ $ -- $ --
======= =======
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-11
<PAGE>
WESTBEACH SNOWBOARD CANADA LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Description of Business
Westbeach Snowboard Canada Ltd. and subsidiaries (the "Company"), headquartered
in Vancouver, B.C., Canada, was organized in 1982 to design and market snowboard
and other outdoor apparel to retail outlets worldwide. The Company operates in
a single business segment. The consolidated financial statements include its
wholly-owned subsidiaries, Westbeach Snowboard U.S.A. Inc. (a U.S. corporation),
Westbeach Snowboard Gesellschaft m.b.H. (an Austrian corporation), and Westbeach
Snowboard UK Limited (a UK 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. This 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 Canadian generally accepted accounting principles. 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 changes in financial position of
the Company and its subsidiaries at September 30, 1997, and for the nine months
ended September 30, 1997 and 1996, they do not include all notes required by
generally accepted accountiung 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 accompanying Form 8-K/A. Operating results for the nine months ended
September 30, 1997 and 1996 are not necessarily indicative of the results that
may be expected for the full year.
F-12
<PAGE>
WESTBEACH SNOWBOARD CANADA LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Description of Business
Westbeach Snowboard Canada Ltd. and subsidiaries (the "Company"), headquartered
in Vancouver, B.C., Canada, was organized in 1982 to design and market snowboard
and other outdoor apparel to retail outlets worldwide. The Company operates in
a single business segment. The consolidated financial statements include its
wholly-owned subsidiaries, Westbeach Snowboard U.S.A. Inc. (a U.S. corporation),
Westbeach Snowboard Gesellschaft m.b.H. (an Austrian corporation), and Westbeach
Snowboard UK Limited (a UK 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. This 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 Canadian generally accepted accounting principles. 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 changes in financial position of
the Company and its subsidiaries at September 30, 1997, and for the nine months
ended September 30, 1997 and 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 accompanying Form 8-K/A. Operating results for the nine months ended
September 30, 1997 and 1996 are not necessarily indicative of the results that
may be expected for the full year.
F-12
<PAGE>
EXHIBIT 99.3
<TABLE>
<CAPTION>
MORROW SNOWBOARDS, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
(in thousands)
(U.S. dollars)
(Unaudited)
Morrow Westbeach
Snowboards, Snowboard Morrow
Inc. Canada, Ltd. Pro Forma Snowboards, Inc.
(September 27, 1997) (September 30, 1997) Adjustments Pro Forma
-------------------- -------------------- ----------- ----------------
ASSETS (2)
<S> <C> <C> <C> <C>
Current assets:
Cash and equivalents ........................... $ 1,924 -- (1,000) (e) 924
Accounts receivable, net ....................... 7,877 1,710 -- 9,587
Inventories .................................... 6,285 2,191 -- 8,476
Prepaid expenses ............................... 329 260 -- 589
Refundable income taxes ........................ 270 -- -- 270
Deferred income taxes .......................... 1,074 -- -- 1,074
------- ------- ------- -------
Total current assets ...................... 17,759 4,161 (1,000) 20,920
Property, plant and equipment, net ................ 10,579 254 -- 10,833
Intangibles (principally goodwill) ................ -- 98 3,997 (a) 4,095
Other assets ...................................... 28 85 35 (d) 148
------- ------- ------- -------
Total assets ................................ $28,366 4,598 3,032 35,996
======= ======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Operating line of credit ....................... $ -- 308 (308)(b) --
Accounts payable ............................... 918 951 -- 1,869
Accrued liabilities ............................ 1,138 198 -- 1,336
Short-term note payable ........................ -- 727 -- 727
Current portion of long-term debt .............. 151 490 (490)(b) 151
------- ------- ------- -------
Total current liabilities ................... 2,207 2,674 (798) 4,083
------- ------- ------- -------
Long-term revolving line of credit ................ -- -- 4,041 (e) 4,041
Deferred income taxes ............................. 304 33 -- 337
Long-term debt, net of current portion ............ 149 1,560 (1,560)(b) 149
------- ------- ------- -------
Total long-term liabilities ................. 453 1,593 2,481 4,527
------- ------- ------- -------
Shareholders' equity:
Common stock ................................... 25,317 -- 1,680 (c) 26,997
Retained earnings .............................. 389 -- -- 389
------- ------- ------- -------
Total shareholders' equity .................. 25,706 -- 1,680 27,386
------- ------- ------- -------
Total liabilities and shareholders' equity ........ $28,366 4,267 3,363 35,996
======= ======= ======= =======
</TABLE>
See Notes to Pro Forma Consolidated Financial Statements
PF-1
<PAGE>
<TABLE>
<CAPTION>
MORROW SNOWBOARDS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except share and per share data)
(U.S. dollars)
(Unaudited)
Morrow Westbeach
Snowboards, Snowboard
Inc. Canada, Ltd. Morrow
(For the period (For the period Pro Forma Snowboards, Inc.
1/1/97-9/27/97) (2) 1/1/97-9/30/97) Adjustments Pro Forma
------------------- ----------------- ----------- ----------------
<S> <C> <C> <C> <C>
Net sales ...................................... $ 13,011 5,516 -- 18,527
Cost of goods sold ............................. 9,316 3,269 -- 12,585
----------- ----------- ----------- -----------
Gross profit ................................ 3,695 2,247 -- 5,942
----------- ----------- ----------- -----------
Operating expenses:
Selling, marketing and customer service ..... 3,503 1,136 -- 4,639
Engineering, research and product development 652 291 -- 943
General and administrative .................. 2,228 1,247 198 (f) 3,673
----------- ----------- ----------- -----------
Total operating expenses ................. 6,383 2,674 198 9,255
----------- ----------- ----------- -----------
Operating loss ................................. (2,688) (427) (198) (3,313)
----------- ----------- ----------- -----------
Other income (expense):
Interest expense ............................ (59) (257) (29)(g) (345)
Other ....................................... 245 (1) -- 244
----------- ----------- ----------- -----------
Total other income (expense) ............. 186 (258) (29) (101)
----------- ----------- ----------- -----------
Loss before income tax benefit ................. (2,502) (685) (227) (3,414)
Income tax benefit ............................. 885 275 79 (h) 1,239
----------- ----------- ----------- -----------
Net loss ....................................... $ (1,617) (410) (148) (2,175)
=========== =========== =========== ===========
Net loss per share ............................. $ (0.29) $ (0.35)
=========== ===========
Shares used in per share calculations .......... 5,582,614 584,240 (i) 6,166,854
=========== =========== ===========
</TABLE>
See Notes to Pro Forma Consolidated Financial Statements
PF-2
<PAGE>
<TABLE>
<CAPTION>
MORROW SNOWBOARDS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(in thousands, except share and per share data)
(U.S. dollars)
(Unaudited)
Morrow Westbeach Morrow
Snowboards, Snowboard Pro Forma Snowboards, Inc.
Inc. Canada, Ltd. Adjustments Pro Forma
----------- ------------ ----------- ----------------
<S> <C> <C> <C> <C>
Net sales ...................................... $ 31,699 8,901 -- 40,600
Cost of goods sold ............................. 20,843 5,200 -- 26,043
----------- ---------- --------- ----------
Gross profit ................................ 10,856 3,701 -- 14,557
----------- ---------- --------- ----------
Operating expenses:
Selling, marketing and customer service ..... 4,592 1,612 -- 6,204
Engineering, research and product development 769 423 -- 1,192
General and administrative .................. 2,581 1,400 264 (f) 4,245
----------- ---------- --------- ----------
Total operating expenses ................. 7,942 3,435 264 11,641
----------- ---------- --------- ----------
Operating income ............................... 2,914 266 (264) 2,916
----------- ---------- --------- ----------
Other income (expense):
Interest expense ............................ (153) (193) (174)(g) (520)
Other ....................................... 666 32 -- 698
----------- ---------- --------- ----------
Total other income (expense) ............. 513 (161) (174) 178
----------- ---------- --------- ----------
Income before income tax (expense) benefit ..... 3,427 105 (438) 3,094
Income tax (expense) benefit ................... (1,280) (26) 153 (h) (1,153)
----------- ---------- --------- ----------
Net income ..................................... $ 2,147 79 (285) 1,941
=========== ========== ========= ==========
Net income per share ........................... $ 0.36 $ 0.29
=========== ==========
Share used in per share calculations ........... 6,030,475 584,240 (i) 6,614,715
=========== ========= ==========
</TABLE>
See Notes to Pro Forma Consolidated Financial Statements
PF-3
<PAGE>
MORROW SNOWBOARDS, INC.
Notes to Pro Forma Consolidated Financial Statements
(in thousands)
(U.S. dollars)
(Unaudited)
1. Basis of Presentation
---------------------
The accompanying unaudited pro forma financial statements have been prepared to
present the effect of the acquisition by Morrow Snowboards, Inc. (the Company)
of Westbeach Snowboards Canada Ltd. (WSCL). The pro forma financial statements
have been prepared based on the historical financial statements of the Company
and WSCL as if the acquisition had occurred at September 30, 1997 and at the
beginning of the respective periods. The WSCL historical financial statements
were converted to U.S. dollars at the current exchange rate at September 27,
1997 and the average rate for the periods ended September 27, 1997 and December
31, 1996 and have been prepared in accordance with Canadian generally accepted
accounting principles (GAAP). There are no material differences between U.S. and
Canadian GAAP as it relates to WSCL financial statements.
On November 12, 1997 the Company acquired all of the outstanding securities of
WSCL in exchange for 584,240 shares of Morrow Snowboards, Inc. common stock,
cash totaling $2,295,400 ($3,170,000 Canadian), the assumption of $1,976,800
($2,730,000 Canadian) of long term debt, fees and expenses of $570,000 and the
assumption of the operating assets and liabilities of WSCL, including WSCL's
operating line of credit. The purchase price has been allocated to the assets
and liabilities of WSCL based on their fair values at the date of purchase
(which approximated their historical carrying value) with the excess being
allocated to goodwill in accordance with the purchase method of accounting in
accordance with Accounting Principles Board Opinion No. 16. Goodwill is being
amortized over 15 years. The transaction has been structured such that goodwill
is deductible for U.S. tax purposes.
The Pro Forma Consolidated Statements of Operations may not be indicative of the
results of operations that actually would have occurred if the transaction had
been in effect as of the beginning of the respective periods nor do they purport
to indicate the results of future operations of the Company. The pro forma
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's 1996 Annual Report on Form 10-K and
the audited financial statements and notes thereto for WSCL included elsewhere
in this report on Form 8-K/A. Management believes that all adjustments
necessary to present fairly such pro forma financial statements have been made
based on the terms and structure of the transaction.
2. Periods Presented
-----------------
Beginning in 1997, Morrow Snowboards, Inc. reported its fiscal periods on a 13
week quarter. Its fiscal nine months ended September 27, 1997, while WSCL ended
its fiscal nine months on September 30, 1997. The difference in financial
position and results of operations as of and for the first fiscal nine months of
the year is not material to the pro forma financial statements.
3. Pro Forma Adjustments
---------------------
(a) Goodwill resulting from the acquisition of WSCL as follows:
<TABLE>
<S> <C>
Purchase price of WSCL including liabilities
assumed as of September 27, 1997 $ 8,630
Allocated to:
Currents assets (4,161)
Non-current assets excluding goodwill (472)
-------
Goodwill $ 3,997
=======
</TABLE>
(b) Payoff of WSCL subordinated debentures and operating line of credit.
PF-4
<PAGE>
MORROW SNOWBOARDS, INC.
Notes to Pro Forma Consolidated Financial Statements
(in thousands)
(U.S. dollars)
(Unaudited)
3. Pro Forma Adjustments, cont'd.
- ----------------------------------
(c) Issuance of 584,240 shares of Morrow Snowboards, Inc. common stock at $2.88
per share in connection with the acquisition of WSCL, at the quoted market
price at September 27, 1997.
(d) Deferred loan fees as follows:
Morrow Snowboards, Inc. loan fees associated with
financing of purchase $ 120
Write-off of WSCL loan fees (85)
--------
$ 35
========
(e) Morrow Snowboards, Inc. financing associated with the acquisition. The
Company's long-term revolving line of credit is a three year facility, interest
at prime plus 1/4%, expiring in November 2000.
(f) Goodwill amortization over a 15 year life, commencing at the beginning of
each period presented.
(g) Incremental interest expense associated with the acquisition financing as
follows:
<TABLE>
<CAPTION>
Year ended Period ended
12/31/96 9/27/97
---------- ------------
<S> <C> <C>
Interest under Morrow Snowboards, Inc. operating line of
credit, associated with acquisition financing $ 379 $ 246
Less interest expense on WSCL long-term debt and (205) (217)
operating line repaid in connection with the -------- --------
acquisition. $ 174 $ 29
======== ========
</TABLE>
(h) Income tax benefits resulting from goodwill amortization and interest
expense adjustments in (f) and (g) above, using an effective income tax rate of
35%.
(I) Shares of Morrow Snowboards, Inc. common stock issued in connection with
the acquisition of WSCL.
PF-5
