<PAGE>
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
- --------------------------------------------------------------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 27, 1998
COMMISSION FILE NUMBER 0-27002
-------------------------------
MORROW SNOWBOARDS, INC.
(Exact name of Registrant as specified in its charter)
OREGON 93-1011046
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
-------------------------------
2600 Pringle Road, S.E.
SALEM, OREGON 97302
(Address of principal executive offices)
(503) 375-9300
(Registrant's telephone number; including area code)
-------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] yes [ ] no
The number of shares outstanding of the registrant's common stock, no par value,
as of June 30, 1998 was 6,176,556.
1
<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
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MORROW SNOWBOARDS, INC.
For the Quarter Ended
June 27, 1998
3
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
---------- --------------
ASSETS June 27, December 27,
1998 1997
---------- --------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 307 $ 855
Accounts receivable, less allowance for uncollectible accounts 2,827 6,058
Inventories 7,873 5,926
Prepaid expense 337 628
Refundable income taxes 285 285
Other current assets 237 159
------- -------
Total Current Assets 11,866 13,911
Property, plant and equipment, net 9,544 9,547
Other assets:
Goodwill, net 3,982 4,061
Other assets, net 120 134
------- -------
Total Other Assets 4,102 4,195
------- -------
Total Assets $ 25,512 $ 27,653
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Line of credit $ 2,855 $ 1,923
Accounts payable 2,092 1,648
Accrued liabilities 1,220 1,601
Current portion of capital lease obligations 139 139
------- ---------
Total Current Liabilities 6,306 5,311
Long-Term Liabilities:
Capital lease obligations, net of current portion 196 254
Notes payable, long term 2,000 -
Deferred income taxes 30 30
------- ---------
Total Long-Term Liabilities 2,226 284
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,
6,176,556 and 6,176,556 shares issued and outstanding 27,116 27,116
Notes receivable for common stock (94) (94)
Accumulated deficit (10,002) (5,014)
Cumulative translation adjustment (40) 50
------- ---------
Total Shareholders' Equity 16,980 22,058
------- ---------
Total Liabilities and Shareholders' Equity $ 25,512 $ 27,653
======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
4
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
For The Six Months Ended For The Three Months Ended
--------------- --------------- --------------- --------------
June 27, June 28, June 27, June 28,
1998 1997 1998 1997
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Net Sales $ 6,322 $ 2,838 $ 3,545 $ 2,149
Cost of Goods Sold 4,852 2,231 2,485 1,437
------- ------- ------- -------
Gross Profit 1,470 607 1,060 712
Operating Expenses:
Selling, marketing and customer service 2,454 2,081 658 949
Engineering, advance design and product
management 1,369 503 563 265
General and administrative 2,426 1,613 1,213 923
------- ------- ------- -------
Total Operating Expenses 6,249 4,197 2,434 2,137
------- ------- ------- -------
Operating Loss (4,779) (3,590) (1,374) (1,425)
Other Income (Expense):
Interest expense (265) (27) (168) (12)
Other income (expense) 56 216 (10) 64
------- -------- ------- -------
Total Other Income (Expense) (209) 189 (178) 52
------- ------- ------- -------
Loss Before Income Tax (4,988) (3,401) (1,552) (1,373)
Income Tax Benefit - 1,334 - 543
------- ------- ------- -------
Net Loss $(4,988) $(2,067) $(1,552) $ (830)
======= ======= ======= =======
Net Loss Per Share:
Basic $ (0.81) $ (0.37) $ (0.25) $ (0.15)
======= ======= ======= =======
Diluted $ (0.81) $ (0.37) $ (0.25) $ (0.15)
======= ======= ======= =======
Weighted Average Number of Shares Used in
Computing Per Share Amounts:
Basic 6,176,556 5,608,822 6,176,556 5,585,173
========= ========= ========= =========
Diluted 6,176,556 5,608,822 6,176,556 5,585,173
========= ========= ========= =========
</TABLE>
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Common Stock Cumulative
------------------------------ Notes Accumulated Translation
Shares Amount Receivable Deficit Adjustment Total
---------------- ------------- ------------ ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 27,1997 6,176,556 $27,116 $ (94) $ (5,014) $ 50 $22,058
Net loss - - (4,988) - (4,988)
Translation adjustment - - - (90) (90)
---------------- ------------- ------------ ------------ ----------- --------
Balance, June 27,1998 6,176,556 $27,116 $ (94) $ (10,002) $ (40) $16,980
=============== ============ ========= ============= =========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
<TABLE>
<CAPTION>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Year to Date
---------------------------------------------
June 27, June 28,
1998 1997
------------------- -------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $(4,988) $(2,067)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,158 583
Loss on retirement of fixed assets (1) -
Deferred income taxes - (1,333)
Other (90) -
Changes in operating assets and liabilities
Decrease in accounts receivable 3,231 4,431
Increase in inventories (1,947) (4,523)
Decrease in prepaid expenses 291 80
(Increase) Decrease in other assets (203) 10
Increase (Decrease) in accounts payable 444 (1,119)
Decrease in accrued liabilities (381) (1,188)
------- -------
Operating Activities (2,486) (5,126)
Cash Flows From Investing Activities:
Redemption of short-term investments - 3,192
Acquisition of property and equipment (971) (1,371)
Proceeds from sale of equipment 35 -
------- -------
Net Cash Provided By (Used In)
Investing Activities (936) 1,821
Cash Flows From Financing Activities:
Line of credit borrowings, net 932 -
Proceeds from issuance of common stock - 18
Payments for repurchase of common stock - (596)
Proceeds from issuance of long-term liabilities 2,000 -
Principal payments on long-term liabilities (58) (133)
------- -------
Net Cash Provided By (Used In)
Financing Activities 2,874 (711)
------- -------
Decrease In Cash and Cash Equivalents (548) (4,016)
Cash and Cash Equivalents at Beginning of Period 855 5,062
------- -------
Cash and Cash Equivalents at End of Period $ 307 $ 1,046
Supplemental disclosure: ======= =======
Cash paid for interest $ 140 $ 27
Cash paid for income taxes $ - $ 440
Noncash Transactions:
Tax Benefit on exercise of stock options and warrants $ - $ 9
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
7
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION
Description of Business
Morrow Snowboards, Inc. ("Morrow") and subsidiaries (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. On November 13, 1997, the Company acquired all of the
outstanding securities of Westbeach Snowboard Canada Ltd. a manufacturer,
wholesaler and retailer of snowboarding apparel and casual clothing. Westbeach
Snowboard Canada Ltd., through a reorganization, is now Morrow Westbeach Canada
ULC ("Westbeach"). Westbeach has three subsidiaries, an Austrian organization
whose principal activity consists of a European sales and warehousing operation,
a United Kingdom organization whose principal activity is European sales and a
Washington State corporation whose principal activity is U.S. retail sales.
The consolidated financial statements include the wholly-owned subsidiaries,
Morrow Westbeach Canada ULC, a Nova Scotia unlimited liability company,
Westbeach's three subsidiaries and 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, related to 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
subsidiaries at June 27, 1998, and for the quarters and six months ended June
27, 1998 and June 28, 1997, 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 27, 1997, contained in the Company's
Form 10-K, filed with the Commission pursuant to the Securities Exchange Act of
1934. Operating results for the quarter and six months ended June 27, 1998, are
not necessarily indicative of the results that may be expected for the full
year.
2. WESTBEACH ACQUISITION
On November 13, 1997, the Company acquired all of the outstanding securities
of Westbeach Snowboard Canada Ltd. (Westbeach) in exchange for 584,240 newly-
issued shares of the Company's common stock valued at $1,680,000, cash of
approximately $2,251,000 and fees and expenses of $425,000. Subsequent to the
acquisition, Westbeach was merged into Morrow Westbeach Canada ULC, a wholly
owned subsidiary of the Company. The transaction has been accounted for as a
purchase with the excess of the purchase price over the fair value (which
approximated historical carrying value) of the net assets acquired allocated to
goodwill.
8
<PAGE>
Summarized unaudited pro forma results of operations, assuming the Westbeach
acquisition took place on January 1 of 1997, are as follows:
<TABLE>
<CAPTION>
For the Six Months Ended For the Three Months Ended
(in thousands, except share data) (in thousands, except share data)
----------------------------------------- --------------------------------------
June 27, June 28, June 27, June 28,
1998 1997 1998 1997
(Actual) (Proforma) (Actual) (Proforma)
------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
Net sales $ 6,322 $ 5,014 $ 3,545 $ 3,241
Net loss (4,988) (3,289) (1,552) (1,362)
Loss per share:
Basic $(0.81) (0.53) (0.25) (0.22)
Diluted $(0.81) (0.53) (0.25) (0.22)
</TABLE>
3. 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 second fiscal quarter of 1998 began on
March 29, 1998 and ended on June 27, 1998, whereas the prior fiscal quarter
ended on June 28, 1997.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and on deposit and highly
liquid investments purchased with an original maturity of three months or less.
Financial Instruments
A financial instrument is cash or a contract that imposes or conveys, a
contractual obligation, or right, to deliver or receive cash or another
financial instrument. The fair value of financial instruments approximated
their carrying value as of June 27, 1998 and December 27, 1997.
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.
9
<PAGE>
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). As of December 28, 1997,
the Company prospectively revised the lives of certain equipment and tooling.
This change increased the loss for the six months ended June 27, l998 by
$217,000 or $.035 per share and for the quarter ended June 27, 1998 by $70,000
or $.011 per share. 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.
Goodwill and Other Long Lived Assets
Goodwill resulting from the Westbeach acquisition is being amortized over 15
years using the straight-line method and is net of amortization of $172,000 at
June 27, 1998. Goodwill and other long-lived assets are periodically evaluated
when facts and circumstances indicate that the value of such assets may be
impaired. Evaluations are based on undiscounted projected cash flows. If the
valuation indicates that undiscounted cash flows are insufficient to recover the
recorded assets, then the projected cash flows are discounted to determine the
revised carrying value and a write-down for the difference is recorded.
Deferred Loan Costs
Deferred loan costs included in other assets are amortized over the life of
the related debt on a straight-line basis, which does not differ materially
from the effective rate method.
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 recognizes revenue from the sale of its products when the products
are shipped to customers.
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.
10
<PAGE>
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
The Company has adopted SFAS 128, "Earnings Per Share". SFAS 128 prescribes
new calculations for Basic and Diluted Earnings Per Share (EPS), which replaces
the former calculations for Primary and Fully Diluted EPS. Basic EPS is computed
by dividing net income (loss) by the weighted average shares outstanding; no
dilution for any potentially dilutive securities is included. Diluted EPS is
calculated differently than the Fully Diluted EPS calculation under the old
rules. When applying the treasury stock method for Diluted EPS to compute
dilution for options, SFAS 128 requires use of the average share price for the
period, rather than the greater of the average share price or end-of-period
share price. Prior period EPS data has been restated. EPS is computed as
follows:
<TABLE>
<CAPTION>
For the Six Months Ended For the Three Months Ended
(in thousands except share data) (in thousands except share data)
------------------------------------- -------------------------------------
June 27, June 28, June 27, June 28,
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Earnings:
Net loss for Basic EPS ($4,988) ($2,067) ($1,552) ($830)
Net loss for Diluted EPS ($4,988) ($2,067) ($1,552) ($830)
Shares:
Weighted average shares outstanding for 6,176,556 5,608,822 6,176,556 5,585,173
Basic EPS
Stock option and warrant dilution (1) - - - -
Weighted average shares for Diluted EPS 6,176,556 5,608,822 6,176,556 5,585,173
Basic EPS ($0.81) ($0.37) ($0.25) ($0.15)
Diluted EPS ($0.81) ($0.37) ($0.25) ($0.15)
</TABLE>
(1) The effect of potential common securities are excluded from the dilutive
calculation for periods ending June 27, 1998 and June 28, 1997, as their
effect would be antidilutive. Options and warrants to purchase 512,027
shares of common stock at an average price of $3.79 per share were
outstanding during the second quarter of 1998 but were not included in the
computation of diluted EPS.
11
<PAGE>
Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries are translated
into U. S. dollars using exchange rates at the balance sheet date for assets and
liabilities, and average exchange rates for the period for revenues and
expenses. Adjustments resulting from translating foreign functional currency
financial statements into U.S. dollars are included in the Cumulative
Translation Adjustment in the Consolidated Statement of Shareholders' Equity.
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.
4. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
June 27, December 27,
1998 1997
----------------- -----------------
(in thousands)
<S> <C> <C>
Finished goods $5,200 $2,836
Retail Goods 402 818
Work-in-Process 593 413
Raw materials 1,901 2,394
----------------- -----------------
8,096 6,461
Less reserve for obsolete inventory (223) (535)
================= =================
Total inventories $7,873 $5,926
================= =================
</TABLE>
5. DEBT
On May 7, 1998, the Company entered into a new credit facility with Foothill
Capital Corporation ("Lender") which credit facility replaces the Company's
prior credit facility with LaSalle Business Credit, Inc. ("Prior Lender") which
has been fully repaid. The Company's line of credit under the new credit
facility is up to $10,000,000. The new credit facility includes a revolving
credit up to $10,000,000, an inventory subline of $3,500,000, a letter of credit
subline up to $5,000,000, a term loan of $2,000,000 and a one-time overadvance
subline of up to $750,000. Borrowings available under the revolving credit
facility and line are reduced by borrowings from time to time under the other
credit facilities. The amount that may be borrowed is also limited to the value
of certain eligible inventory, accounts receivable and other assets. At June 27,
1998 the Company has borrowed approximately $4,855,000 under the credit facility
which includes the $2,000,000 term loan, $711,000 under the over advance subline
and $2,144,000 under the revolving line of credit. In addition, the Company has
issued letters of credit of $2,207,000 under the letter of credit subline.
The credit facility bears interest at the Lender's Reference Rate plus .5% to
1.5% depending on the principal amount outstanding. The Company is required to
pay a monthly fee equal to .25% per annum on the average unused amount of the
revolving credit facility. The credit facility was issued based on a loan fee of
$200,000, payable in installments and monthly servicing fees of $4,000 per
month. The one-time advance subline is being used to fund peak seasonal needs in
spring 1998. Repayment of the one-time advance subline began May 31, 1998 and
will be fully repaid by August 1998. The term loan provides for interest only
payments in the first year, monthly principal payments of approximately $42,000
thereafter and the remaining principal balance due May 6, 2002. A fee of 1.5%
per annum is payable on the undrawn amount of outstanding letters of credit.
The revolving facility is secured by substantially all of the Company's
assets. The revolving credit facility contains various covenants that require
the Company, among other things, to meet certain objectives with respect to net
worth, an "EBITDA" test as defined in the credit facility and capital
expenditures. The credit facility is available through May 6, 2002.
12
<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 acquired Westbeach, a merchandiser of
snowboarding apparel and casual clothing, on November 13, 1997. Accordingly,
Westbeach financial information and operating results are included in the
Company's first six months of results for 1998, but not for the first six months
of 1997. Due to the seasonal nature of the snowboard industry a majority of the
Company's 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,
snowboard products and apparel, backlog decreases and is usually eliminated by
the end of the year. The Company had net sales of $6,322,000 and estimated open
(preseason and new order) sales orders of approximately $16,200,000 for Morrow,
Westbeach and OEM products at June 27, 1998. At June 28, 1997, the Company had
net sales of $2,838,000 and estimated open sales orders of approximately
$15,000,000. Open sales orders are subject to cancellation.
The Company's net sales increased 123% to $6,322,000 for the six months ended
June 27, 1998 from $2,838,000 in the six months ended June 28, 1997.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements which are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
The forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially from the forward-looking statements. Morrow
Snowboards wishes to caution readers that important factors, among others, in
some cases have affected, and in the future could affect, Morrow Snowboards'
actual results and could cause actual consolidated results for the first six
months of 1998, 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, excess wholesale and retail inventory, gray market sales of the
Company's and competitor goods, raw material 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
27, 1997.
The Company's year to date net sales of $6,322,000 and backlog of $16,200,000
at June 27, 1998 are up from those reported at June 28, 1997, with net sales of
$2,838,000 and a backlog of $15,000,000. This is attributed to the acquisition
of Westbeach.
The snowboard market worldwide has in prior years experienced a significant
oversupply of products at both the retail and wholesale level which contributed
to soft market conditions throughout the industry. Management believes this
oversupply has been materially reduced. 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, 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
13
<PAGE>
development and degree of acceptance of new product introductions in the
marketplace; the difficulty of forecasting sales at certain times in certain
markets; and securing financial support to meet the requirements of the Company.
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods indicated
as a percentage of net sales.
<TABLE>
<CAPTION>
Six Months Ended Year Ended
------------------------------------- ----------------
June 27, June 28, December 27,
1998 1997 1997
------------------------------------- ----------------
<S> <C> <C> <C>
Net Sales 100.0 % 100.0 % 100.0 %
Cost of Goods Sold 76.7 78.6 78.9
---------------------------------------------------------------
Gross Profit 23.3 21.4 21.1
---------------------------------------------------------------
Operating Expenses:
Selling, marketing and customer service 38.8 73.3 23.0
Engineering, research and product development 21.7 17.7 8.2
General and administrative 38.4 56.8 18.7
Loss on write-down of fixed assets 0.0 0.0 7.8
---------------------------------------------------------------
Total Operating Expenses 98.9 147.8 57.7
---------------------------------------------------------------
Operating Loss (75.6) (126.4) (36.6)
Interest Expense (4.2) (1.0) (0.4)
Other Income 0.9 7.6 1.7
---------------------------------------------------------------
Loss Before Income Taxes (78.9) (119.8) (35.3)
Income Tax Benefit 0.0 47.0 0.6
---------------------------------------------------------------
Net Loss (78.9) % (72.8) % (34.7) %
===============================================================
</TABLE>
Comparison of the Six Months ended June 27, 1998 and June 28, 1997
Net Sales. Net sales for the first six months of 1998 increased 122.8% to
$6,322,000 from $2,838,000 in the first six months of 1997, reflecting the
addition of $985,000 from Westbeach apparel sales, $1,380,000 from Westbeach
retail sales and an increase of $981,000 in Morrow brand sales. The majority of
"Morrow" branded product sales occurs in the third and fourth quarters of the
year. In the first six months of 1998 sales consisted of 58.1% of the "Morrow"
branded hard goods, with the balance attributable to apparel and retail sales.
By comparison the first six months of 1997 sales consisted almost entirely of
closeout sales and sales samples of the "Morrow" branded hard goods. Snowboard
sales were up 91.6% in the first six months of 1998 compared to the first six
months of 1997. As a percentage of net sales, the snowboard sales represented
51.3% of total net sales in the first six months of 1998 compared to 59.5% of
total net sales in the first six months of 1997. Net sales for bindings
decreased by 53.4%, representing 6.3% of net sales in the first six months of
1998 compared to 30.1% in the first six months of 1997. Net sales for boots
decreased 64.5%, representing 0.5% of net sales in the first six months of 1998
compared to 3.0% in the first six months of 1997. Apparel and accessory sales
increased to 16.4% of net sales in the first quarter of 1998 compared to 3.7% in
the first six months of 1997 largely due to Westbeach apparel sales which were
15.6% of total net sales for the six month period. Retail sales constituted
21.8% of total sales as a result of the Westbeach acquisition in November 1997.
Gross Profit (Loss). Gross profit for the first six months of 1998 increased
142.2% to a gross profit of $1,470,000 from a gross profit of $607,000 for the
first six months of 1997 as a result of increased apparel and retail sales due
to the acquisition of Westbeach in November, 1997. Gross margin for the first
six months of 1998 increased to 23.3% from 21.4% for the first six months of
1997. The first six months sales in 1998 are largely comprised of sales of
1998/99 boards to Japan, closeout sales of
14
<PAGE>
1997/98 product, sales samples of 1998/99 product, and with the acquisition of
Westbeach, shipments of the 1998 spring/summer clothing line and retail sales.
Selling, Marketing and Customer Service. Selling, marketing and customer
service expenses for the first six months of 1998 increased 17.9% to $2,454,000
from $2,081,000 for the first six months of 1997, representing 38.8% and 73.3%
of net sales, respectively. This increase is a result of increased expenses
associated with additional staff, increased trade show and sales meeting costs,
increases in travel, and increases in advertising and promotional costs. Since
the acquisition of Westbeach, the Morrow and Westbeach sales and distribution
networks have been combined to generate more efficient use of the sales and
marketing staff, along with greater penetration in the North American and
International markets for the combined lines of product. These efficiencies
began to be realized by the end of the first six months of 1998. The Company
plans to achieve full integration of Morrow and Westbeach to realize the benefit
of operating synergies within the third quarter. As a percentage of net sales,
staff and employee-related expenses decreased 5.6%, sales meeting and trade show
expenses decreased 2.4% travel expenses decreased 1.8%, and advertising and
promotional products decreased 14.2%. With the addition of Westbeach, the cost
of rent, taxes and utilities related to sales distribution locations added
$172,000 in expenses for the first six months of 1998 with no costs of this type
in the first six months of 1997. The remaining expense categories of
commissions, telephone, shipping costs, sales van program and general supplies,
remained relatively consistent as a percentage of net sales on a period to
period basis.
Engineering, Advance Design and Product Management. Engineering, advance
design and product management expenses were previously identified as
"Engineering, Research and Development". Although the title has changed to more
clearly indicate the type of expenses, the nature of these expenses have not
changed. Related costs for the first six months of 1998 increased 172.2% to
$1,369,000 from $503,000 for the first six months of 1997, representing 21.7%
and 17.7% of net sales, respectively. This increase was primarily a result of
increased expenses associated with additional staffing related to development of
product management teams and product development of the binding and apparel
product lines. Product development expenses for the first six months of 1998
related to boards were $31,000, for bindings $183,000, for boots $38,000, for
apparel $198,000, and for accessories $74,000, totaling $524,000 compared to
$83,000 for all product lines in the first six months of 1997. This increase is
a reflection of the acquisition of Westbeach in November 1997 and the Company's
significant efforts towards development of its proprietary step-in binding
system.
General and Administrative. General and administrative expenses for the first
six months of 1998 increased 50.4% to $2,426,000 from $1,613,000 for the first
six months of 1997, representing 38.4% and 56.8% of net sales, respectively.
This increase was due to the increased staffing with the acquisition of
Westbeach and the addition of retail store employees. These staff related
expenditures reflected an 89.8% increase in the first six months of 1998
compared to the first six months of 1997. An increase in depreciation of 247.3%
in the first six months of 1998 to $257,000 from $74,000 in the first six months
of 1997 was caused in part by a revision in the estimate of remaining useful
life of certain equipment. Legal expenditures increased 253.2% in the first six
months of 1998, compared to the first six months of 1997. This is a result of
SEC compliance activities related to the acquisition of Westbeach and financing
issues related to loan agreements with LaSalle Business Credit and Foothill
Capital Corp. The Company also recognized goodwill in the acquisition of
Westbeach, resulting in related amortization of $138,000 during the first six
months of 1998 compared to $-0- in the first six months of 1997. Bad debt
expenses decreased 89.9% in the first six months of 1998 compared to the first
six months of 1997. All other categories of expenses remained relatively
consistent on a total expenditure basis from period to period.
Interest Expense. Interest expense increased to $265,000 for the first six
months of 1998 from $27,000 for the first six months of 1997. The Company's need
to partially fund the acquisition of Westbeach in November, 1997 and its
continued borrowings to fund operations during the first six
15
<PAGE>
months of 1998 created an increase in interest expense of 615.4% to $186,000
compared to $26,000 in the first six months of 1997. Related amortization of
deferred financing fees accounted for an additional $78,000 in expense for the
first six months of 1998, whereas in 1997 no such expenditures were incurred. In
May, 1998 the Company terminated its financing agreement with LaSalle Business
Credit, Inc. and as a result $62,000 of the amortization expense incurred in
1998 is related to the write-off of deferred financing fees related to this
financing agreement.
Other Income (Expense). Other income was $56,000 in the first six months of
1998, compared to $216,000 in the first six months of 1997. The utilization of
Company cash in the acquisition of Westbeach significantly reduced Company funds
available to invest and as a result, interest income decreased 93.7% to $10,000
in the first six months of 1998 from $158,000 in the first six months of 1997.
In addition, the Company's ability to capitalize on cash discounts with its
vendors has been impaired by its use of cash and as a result, discounts earned
and taken decreased and finance charges increased in the first six months of
1998 to net an expense of $13,000 compared to income of $21,000 in the first six
months of 1997. Foreign currency transactions recognized income of $66,000 in
the first six months of 1998 compared to $24,000 in 1997. This increase is due
largely to the acquisition of the Westbeach foreign subsidiaries and the
increased activity in fluctuating currencies. Other income items decreased 71.4%
to $4,000 in the first six months of 1998 compared to $14,000 in the first six
months of 1997.
Income Tax Benefit. The Company did not recognize an income tax benefit based
on its losses for the six months of 1998. The income tax benefit for the first
six months of 1997 was $1,334,000 based on the Company's estimated tax rate of
approximately 39.0%.
Net Loss. Net loss for the first six months of 1998 was $4,988,000 compared
to $2,067,000 for the first six months of 1997.
Comparison of the Quarters ended June 27, 1998 and June 28, 1997
Net Sales. Net sales for the second quarter of 1998 increased 65.0% to
$3,545,000 from $2,149,000 in the second quarter of 1997, reflecting the
addition of $413,000 from Westbeach apparel sales, $485,000 from Westbeach
retail sales and an increase of $290,000 in Morrow brand sales. The majority of
"Morrow" branded product sales occur in the third and fourth quarters of the
year. In the second quarter of 1998 sales consisted of 68.3% of the "Morrow"
branded hard goods, with the balance attributable to apparel and retail sales.
By comparison the second quarter of 1997 sales consisted almost entirely of
closeout sales and sales samples of the "Morrow" branded hard goods. Snowboard
sales were up 57.0% in the second quarter of 1998 compared to the second quarter
of 1997. As a percentage of net sales, the snowboard sales represented 62.9% of
total net sales in the second quarter of 1998 compared to 66.0% of total net
sales in the second quarter of 1997. Net sales for bindings decreased by 71.3%,
representing 5.4% of net sales in the second quarter of 1998 compared to 31.0%
in the second quarter of 1997. Net sales for boots represented 0.1% of net sales
in the second quarter of 1998 compared to a negative sales balance in the second
quarter of 1997. Apparel and accessory sales increased to 11.6% of net sales in
the second quarter of 1998 compared to 3.0% in the second quarter of 1997
largely due to Westbeach apparel sales which were 11.6% of total net sales for
the second quarter. Retail sales constituted 13.7% of total sales in the second
quarter of 1998 as a result of the Westbeach acquisition in November, 1997.
Gross Profit. Gross profit for the second quarter of 1998 increased 48.9% to
$1,060,000 from $712,000 in the second quarter of 1997 as a result of sales of
1998/99 boards to Japan and increased apparel and retail sales due to the
acquisition of Westbeach in November, 1997. Gross margin for the second quarter
of 1998 decreased to 29.9% from 33.1% for the second quarter of 1997. Second
quarter sales in 1998 are largely comprised of sales of the 1998/99 board line
to Japan, and with the acquisition of Westbeach, shipments of the 1998
spring/summer clothing line and retail sales.
16
<PAGE>
Selling, Marketing and Customer Service. Selling, marketing and customer
service expenses for the second quarter of 1998 decreased 30.7% to $658,000 from
$949,000 for the second quarter of 1997, representing 18.6% and 44.2% of net
sales, respectively. This decrease is a result of decreased expenses associated
with travel, advertising and promotions, and trade show and sales meeting costs.
Since the acquisition of Westbeach, the Morrow and Westbeach sales and
distribution networks have been combined to generate more efficient use of the
sales and marketing staff, along with greater penetration in the North American
and International markets for the combined lines of product. These efficiencies
and operating synergies are recognized in the second quarter of 1998. As a
percentage of net sales, staff and employee-related expenses decreased 3.1%,
travel expenses decreased 2.6%, advertising and promotional products decreased
9.9%, and trade show and sales meeting expenses decreased 94.4%. With the
addition of Westbeach, the cost of rent, taxes and utilities related to sales
distribution locations added $73,000 in expenses for the second quarter of 1998
with no costs of this type in the second quarter of 1997. The remaining expense
categories of telephone, shipping costs, sales van program, commissions and
general supplies, remained relatively consistent as a percentage of net sales on
a period to period basis.
Engineering, Advance Design and Product Management. Engineering, advance
design and product management expenses were previously identified as
"Engineering, Research and Development". Although the title has changed to more
clearly indicate the type of expenses, the nature of these expenses have not
changed. Related costs for the second quarter of 1998 increased 112.5% to
$563,000 from $265,000 for the second quarter of 1997, representing 15.9% and
12.3% of net sales, respectively. This increase was primarily a result of
increased expenses associated with additional staffing related to development of
product management teams and product development of the binding and apparel
product lines. Product development expenses for the second quarter of 1998
related to boards were $8,000, for bindings $89,000, for boots $28,000, for
apparel $16,000, and for accessories $25,000, totaling $166,000 compared to
$33,000 for all product lines in the second quarter of 1997. This increase is a
reflection of the Company's significant efforts towards development of its
proprietary step-in binding system.
General and Administrative. General and administrative expenses for the
second quarter of 1998 increased 31.4% to $1,213,000 from $923,000 for the
second quarter of 1997, representing 34.2% and 43.0% of net sales, respectively.
This increase was due to the increased staffing with the acquisition of
Westbeach and the addition of retail store employees. These staff related
expenditures reflected a 79.1% increase in the second quarter of 1998 compared
to the second quarter of 1997. An increase in depreciation of 187.0% in the
second quarter of 1998 to $132,000 from $46,000 in the second quarter of 1997
was a result of a revision in the estimate of remaining useful life of certain
equipment. Legal expenditures increased 237.3% in the second quarter of 1998,
compared to the second quarter of 1997. This is a result of financing issues
related to loan agreements with LaSalle Business Credit and Foothill Capital
Corp. The Company also recognized goodwill in the acquisition of Westbeach,
resulting in related amortization of $69,000 during the second quarter of 1998
compared to $-0- in the second quarter of 1997. Bad debt expenses decreased
93.4% in the second quarter of 1998 compared to the second quarter of 1997. All
other categories of expenses remained relatively consistent on a total
expenditure basis from period to period.
Interest Expense. Interest expense increased to $168,000 for the second
quarter of 1998 from $12,000 for the second quarter of 1997. The Company's
continued borrowings to fund operations during the second quarter of 1998
created an increase of 700.0% in interest expense to $96,000 compared to $12,000
in the second quarter of 1997. Related amortization of deferred financing fees
accounted for an additional $70,000 in expense during the second quarter of
1998, whereas in 1997 no such expenditures were incurred. In May, 1998 the
Company terminated its financing agreement with LaSalle Business Credit, Inc.
and as a result $62,000 of the amortization expense incurred in the second
quarter of 1998 is related to the write-off of deferred financing fees related
to this financing agreement.
17
<PAGE>
Other Income (Expense). Other expense was $10,000 in the second quarter of
1998, compared to income of $64,000 in the second quarter of 1997. The
utilization of Company cash in the acquisition of Westbeach, significantly
reduced Company funds available to invest and as a result, interest income
decreased 91.4% to $3,000 in the second quarter of 1998 from $35,000 in the
second quarter of 1997. In addition, the Company's ability to capitalize on
cash discounts with its vendors has been impaired by its use of cash and as a
result, discounts earned and taken decreased and finance charges increased in
the second quarter of 1998 to net an expense of $12,000 compared to income of
$10,000 in the second quarter of 1997. Other income and expense items decreased
105.3% to a net expense of $1,000 in second quarter of 1998 compared to income
$19,000 in the second quarter of 1997.
Income Tax Benefit. The Company did not recognize an income tax benefit based
on its losses for the second quarter of 1998. The income tax benefit for the
second quarter of 1997 was $543,000 based on the Company's estimated tax rate of
approximately 39.0%.
Net Loss. Net loss for the second quarter of 1998 was $1,552,000 compared to
$830,000 for the second quarter of 1997.
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. At June 27, 1998, the Company had outstanding
revolving loans of $2,855,000 and long term notes payable of $2,000,000.
Net cash used in operating activities for the first six months of 1998 was
$2,486,000, resulting primarily from a net loss of $4,988,000, with add backs
for depreciation and amortization of $1,158,000, decreases in accounts
receivable of $3,231,000, decreases in prepaid expenses of $291,000 and
increases in accounts payable and accrued liabilities of $63,000, offset by
increases in other assets of $203,000 and inventories of $1,947,000. The
decrease in accounts receivable is a result of collections during the first six
months. The increase in inventories is a result of building inventory for the
1998-99 season and the addition of Westbeach inventories.
Capital expenditures for the six months ended June 27, 1998 were $971,000.
Capital expenditures were primarily for the purchase or construction of
manufacturing equipment, fixtures, and new snowboard, binding and boot toolings.
Net cash provided by financing activities for the first six months of 1998
was $2,874,000, consisting of $932,000 from net borrowings under the revolving
credit facility, $2,000,000 from borrowings under a long term loan agreement,
less $58,000 of payments on capital leases.
On May 7, 1998, the Company entered into a new credit facility with Foothill
Capital Corporation ("Lender") which credit facility replaces the Company's
prior credit facility with LaSalle Business Credit, Inc. ("Prior Lender") which
has been fully repaid. The Company's line of credit under the new credit
facility is up to $10,000,000. The new credit facility includes a revolving
credit up to $10,000,000, an inventory subline of $3,500,000, a letter of credit
subline up to $5,000,000, a term loan of $2,000,000 and a one-time overadvance
subline of up to $750,000. Borrowings available under the revolving credit
facility and line are reduced by borrowings from time to time under the other
credit facilities. The amount that may be borrowed is also limited to the value
of certain eligible inventory, accounts receivable and other assets. At June 27,
1998 the Company has borrowed approximately $4,855,000 under the credit facility
which includes the $2,000,000 term loan, $711,000 under the over advance subline
and $2,144,000 under the revolving line of credit. In addition, the Company has
issued letters of credit of $2,207,000 under the letter of credit subline. At
June 27, 1998 the Company had utilized the full extent of it's revolving line of
credit and had $39,000 available under the over advance subline.
18
<PAGE>
The credit facility bears interest at the Lender's Reference Rate plus .5% to
1.5% depending on the principal amount outstanding. The Company is required to
pay a monthly fee equal to .25% per annum on the average unused amount of the
revolving credit facility. The credit facility was issued based on a loan fee
of $200,000, payable in installments and monthly servicing fees of $4,000 per
month. The one-time advance subline is being used to fund peak seasonal needs
in spring 1998. Repayment of the one-time advance subline began May 31, 1998
and will be fully repaid by August 1998. The term loan provides for interest
only payments in the first year, monthly principal payments of approximately
$42,000 thereafter and the remaining principal balance due May 6, 2002. A fee
of 1.5% per annum is payable on the undrawn amount of outstanding letters of
credit.
The revolving facility is secured by substantially all of the Company's
assets. The revolving credit facility contains various covenants that require
the Company, among other things, to meet certain objectives with respect to net
worth, an "EBITDA" test as defined in the credit facility and capital
expenditures. The credit facility is available through May 6, 2002.
The Company's debt structure is comprised of the following:
<TABLE>
<CAPTION>
June 27,
1998
------------------
<S> <C>
Short-term debt:
Operating line of credit $2,855
Current portion of capital lease obligations 139
------------------
Total short-term debt $2,994
==================
Long-term debt:
Notes payable, long term $2,000
Capital lease obligations 335
Less current portion (139)
Total long-term debt, net of current portion $2,196
==================
</TABLE>
Assuming certain minimum pre-book orders for the 1998/99 season, certain
levels of retail stock sales, and certain levels of re-orders, the Company
believes that, with certain steps being taken to significantly trim its
operating costs in 1998, the Company will have sufficient financing to realize
on its business plan. However, to provide additional cushion and liquidity for
the Company, the Company is exploring raising up to $5,000,000 through
convertible equity or debt securities offering.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has reached a partial settlement of its claim against The Board
Locker for collection of receivables due, which claim was first reported in the
Company's Annual Report on Form 10-K for the fiscal year ended December 27,
1997. Of the $478,715 claimed (plus service charges and related costs), the
Company has released claims for $340,000 in consideration of an agreement with a
vendee of The Board Locker to pay $327,500 to the Company. To date, the Company
has received $200,000 pursuant to this agreement and expects to receive the
balance in August 1998.
The Burton Corporation ("Burton") has just contacted the Company alleging
that the Company's new Engage 3 step-in boot and binding system ("Engage
System") infringes a Burton patent and requesting that the Company either cease
using the Engage System or indicate the basis for a determination that the
Engage System does not fall within the Burton patent. The Company has referred
this matter to its outside patent counsel for review. If the Engage System did
infringe such patent, Morrow could be liable for damages, or, if agreeable to
the patent holder, the license of such technology and payment of royalties
thereon, either of which could impact Morrow's sales and net income and results
of operations.
As reported in the Company's report on Form 10-Q for the quarter ended
March 28, 1998, K2 Corporation ("K2") previously alleged that the Engage System
infringes a K2 patent. The Company, after reviewing this matter with its
outside patent counsel, believes that the Engage System does not infringe such
patent and has recently notified K2 of this determination. Should K2 pursue this
claim, the Company intends to vigorously defend against such patent infringement
claim.
ITEM 2. CHANGES IN SECURITIES.
-None-
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
-None-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its annual shareholders' meeting on June 24, 1998. The
following matters were voted on and approved:
1. Election of the Company's six directors to serve until the next annual
shareholders' meeting. The votes were cast as follows:
<TABLE>
<CAPTION>
Director For Withhold
<S> <C> <C>
Ray E. Morrow, Jr. 4,003,375 336,583
Maurice C. Bickert 4,032,920 307,038
Gregory M. Eide 4,037,621 302,337
Erik J. Krieger 4,034,175 305,783
Victor G. Petroff 4,035,225 304,733
James V. Zaccaro 4,033,765 306,193
</TABLE>
2. Ratification of the selection of Arthur Andersen, LLP as the Company's
independent auditors for the fiscal year ending December 26, 1998. 4,111,047
votes were cast for the proposal, 215,138 votes were cast against the proposal
and 13,733 abstained.
ITEM 5. OTHER INFORMATION.
-None-
20
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
See Exhibit Index
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the quarter ended June
27, 1998:
. A Current Report on Form 8-K dated April 16, 1998 was filed on
April 30, 1998 to report an agreement to restructure the Company's
loan agreement with LaSalle Business Credit, Inc.
. A Current Report on Form 8-K dated May 8, 1998 was filed on May
22, 1998 to report (i) changes in officer and Chairman of the Board of
Directors positions, (ii) revision of a statement regarding sales
forecast in the CEO's letter in the Company's Annual Report, and (iii)
along with its affiliate company, Westbeach Snowboard U.S.A., Inc.,
the Company's entering into a revolving credit facility with Foothill
Capital Corporation.
. A Current Report on Form 8-K dated June 24, 1998 was filed on July
9, 1998 to report the Company's engagement of Veber Partners, an
investment banking company, to act as the Company's exclusive
financial advisor.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Salem, State of Oregon, on August 11, 1998.
MORROW SNOWBOARDS, INC.
By: /s/ P. Blair Mullin
---------------------------------
P. Blair Mullin
President (1)
(Principal Executive)
By: /s/ P. Blair Mullin
---------------------------------
P. Blair Mullin
Chief Financial Officer
(Principal Financial and Accounting
Officer)
(1) The position of Chief Executive Officer is vacant. The President is
filling such position and is authorized to sign on behalf of the registrant and
in the capacity of Chief Executive Officer.
22
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
10.1 First Amendment dated as of April 16, 1998 to the Loan and Security
Agreement dated as of November 10, 1997 between the Company, as
Borrower, and LaSalle Business Credit, Inc. (Note 1)
10.2 Loan and Security Agreement dated as of May 7, 1998 among Morrow
Snowboards, Inc. and Westbeach Snowboard U.S.A. Inc., as Borrowers,
and Foothill Capital Corporation, as Lender. (Note 2)
10.3 Guarantee and Postponement of Claim by Morrow Westbeach Canada ULC in
favor of Foothill Capital Corporation dated as of May 7, 1998.
(Note 2)
10.4 Intellectual Property and Security Agreement dated as of May 7, 1998
between Morrow Snowboards, Inc. and Foothill Capital Corporation.
(Note 2)
10.5 General Security Agreement dated as of May 7, 1998 between Morrow
Westbeach Canada ULC and Foothill Capital Corporation. (Note 2)
10.6 Security Agreement-Stock Pledge dated as of May 7, 1998 between Morrow
Snowboards, Inc. and Foothill Capital Corporation. (Note 2)
27 Financial Data Schedule
</TABLE>
______________
/1/ Incorporated herein by reference from the Company's Current Report on Form
8-K dated April 16, 1998 (File No. 0-27002)
/2/ Incorporated herein by referenced from the Company's Current Report on Form
8-K dated May 8, 1998 (File No. 0-27002)
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-26-1998 DEC-26-1998
<PERIOD-START> MAR-29-1998 DEC-28-1997
<PERIOD-END> JUN-27-1998 JUN-27-1998
<CASH> 307 307
<SECURITIES> 0 0
<RECEIVABLES> 3,503 3,503
<ALLOWANCES> 676 676
<INVENTORY> 7,873 7,873
<CURRENT-ASSETS> 11,866 11,868
<PP&E> 9,544 9,544
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 25,512 25,512
<CURRENT-LIABILITIES> 6,306 6,306
<BONDS> 0 0
0 0
0 0
<COMMON> 27,022 27,022
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 25,512 25,512
<SALES> 3,545 6,322
<TOTAL-REVENUES> 3,545 6,322
<CGS> 2,485 4,852
<TOTAL-COSTS> 2,485 4,852
<OTHER-EXPENSES> 563 1,369
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 168 265
<INCOME-PRETAX> (1,552) (4,988)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,552) (4,988)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,552) (4,988)
<EPS-PRIMARY> (0.25) (0.81)
<EPS-DILUTED> (0.25) (0.81)
</TABLE>
