<PAGE>
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
- --------------------------------------------------------------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 26, 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 September 30, 1998 was 6,176,556.
<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
September 26, 1998
3
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
---------------- ---------------
ASSETS SEPTEMBER 26, DECEMBER 27,
1998 1997
---------------- ---------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 360 $ 855
Accounts receivable, less allowance for uncollectible accounts 7,772 6,058
Inventories 7,173 5,926
Prepaid expense 204 628
Refundable income taxes 285 285
Other current assets 255 159
-------------- -------------
Total Current Assets 16,049 13,911
Property, plant and equipment, net 9,219 9,547
Other assets:
Goodwill, net 3,950 4,061
Other assets, net 113 134
-------------- -------------
Total Other Assets 4,063 4,195
-------------- -------------
Total Assets $ 29,331 $ 27,653
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Line of credit $ 3,822 $ 1,923
Accounts payable 3,140 1,648
Accrued liabilities 2,141 1,601
Current portion of long term debt 2,127 139
-------------- -------------
Total Current Liabilities 11,230 5,311
Long-Term Liabilities:
Capital lease obligations, net of current portion 168 254
Deferred income taxes 30 30
-------------- -------------
Total Long-Term Liabilities 198 284
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 (9,142) (5,014)
Cumulative translation adjustment 23 50
-------------- -------------
Total Shareholders' Equity 17,903 22,058
-------------- -------------
Total Liabilities and Shareholders' Equity $ 29,331 $ 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 NINE MONTHS ENDED FOR THE THREE MONTHS ENDED
----------------------------------- ---------------------------------
SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27,
1998 1997 1998 1997
-------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
Net Sales $18,280 $13,011 $12,278 $10,173
Cost of Goods Sold 12,404 9,316 7,872 7,085
-------------- --------------- --------------- -------------
Gross Profit 5,876 3,695 4,406 3,088
Operating Expenses:
Selling, marketing and customer service 3,924 3,503 1,470 1,422
Engineering, advance design and product
management 1,704 652 335 149
General and administrative 3,821 2,228 1,395 614
Loss on write-down of fixed assets 68 - 68 -
-------------- --------------- --------------- -------------
Total Operating Expenses 9,517 6,383 3,268 2,185
-------------- --------------- --------------- -------------
Operating Income (Loss) (3,641) (2,688) 1,138 903
Other Income (Expense):
Interest expense (433) (59) (168) (32)
Other income (expense) 1 245 (55) 28
--------------- --------------- --------------- -------------
Total Other Income (Expense) (432) 186 (223) (4)
--------------- --------------- --------------- -------------
Income (Loss) Before Income Tax (4,073) (2,502) 915 899
Income Tax Benefit (Expense) (55) 885 (55) (449)
--------------- --------------- --------------- -------------
Net Income (Loss) $(4,128) $(1,617) $ 860 $ 450
=============== =============== ============== =============
Net Income (Loss) Per Share:
Basic $ (0.67) $ (0.29) $ 0.14 $ 0.08
=============== =============== ============== =============
Diluted $ (0.67) $ (0.29) $ 0.14 $ 0.08
=============== =============== ============== =============
Weighted Average Number of Shares Used in
Computing Per Share Amounts:
Basic 6,176,556 5,599,956 6,176,556 5,582,516
=============== =============== ============== =============
Diluted 6,176,556 5,599,956 6,176,556 5,806,843
=============== =============== ============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
CUMULATIVE
COMMON STOCK 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 - - (4,128) - (4,128)
Translation adjustment - - - (27) (27)
=========== =========== ========== ========== =========== ===========
Balance, September 26,1998 6,176,556 $27,116 $ (94) $(9,142) $ 23 $17,903
=========== =========== ============ ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
------------------ ------------------
SEPTEMBER 26, SEPTEMBER 27,
1998 1997
------------------ ------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (4,128) $ (1,617)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,644 892
Loss on write-down of fixed assets 68 -
Loss on retirement of fixed assets 92 -
Deferred income taxes - (885)
Other (27) -
Changes in operating assets and liabilities
(Increase) Decrease in accounts receivable (1,714) 859
Increase in inventories (1,247) (1,752)
Decrease in prepaid expenses 424 207
(Increase) Decrease in other assets (257) 15
Increase (Decrease) in accounts payable 1,492 (634)
Increase (Decrease) in accrued liabilities 540 (871)
----------------- -----------------
Net Cash Used In
Operating Activities (3,113) (3,786)
Cash Flows From Investing Activities:
Redemption of short-term investments - 3,700
Acquisition of property and equipment (1,230) (2,288)
Proceeds from sale of equipment 47 -
----------------- -----------------
Net Cash Provided By (Used In)
Investing Activities (1,183) 1,412
Cash Flows From Financing Activities:
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 (98) (186)
Line of credit borrowings, net 1,899 -
----------------- -----------------
Net Cash Provided By (Used In)
Financing Activities 3,801 (764)
----------------- -----------------
Decrease In Cash and Cash Equivalents (495) (3,138)
Cash and Cash Equivalents at Beginning of Period 855 5,062
----------------- -----------------
Cash and Cash Equivalents at End of Period $ 360 $ 1,924
================= =================
Supplemental disclosure:
Cash paid for interest $ 261 $ 59
Cash paid for income taxes $ 55 $ 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 September 26, 1998, and for the quarters and nine months ended
September 26, 1998 and September 27, 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/A, filed with the Commission pursuant to
the Securities Exchange Act of 1934. Operating results for the quarter and nine
months ended September 26, 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. 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 Snowboard Canada Ltd. 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 Nine Months Ended For the Three Months Ended
(in thousands, except share data) (in thousands, except share data)
--------------------------------- ------------------------------------
September 26, September 27, September 26, September 27,
1998 1997 1998 1997
(Actual) (Proforma) (Actual) (Proforma)
-------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C>
Net sales $ 18,280 $ 18,493 $ 12,278 $ 13,479
Net income (loss) (4,128) (2,438) 860 852
Income (loss) per share:
Basic $ (0.67) (0.39) 0.14 0.14
Diluted $ (0.67) (0.39) 0.14 0.13
</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 third fiscal quarter of 1998 began on
June 28, 1998 and ended on September 26, 1998, whereas the prior fiscal quarter
ended on September 27, 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 September 26, 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, which are 10 to 35 years for buildings
and improvements, and 3 to 12 years for equipment, fixtures and other assets. As
of December 28, 1997, the Company prospectively revised the lives of certain
equipment and tooling. This change increased the loss for the nine months ended
September 26, 1998 by $283,000 or $.05 per share and for the quarter ended
September 26, 1998 by $66,000 or $.01 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 $242,000
at September 26, 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 Nine Months Ended For the Three Months Ended
(in thousands except share data) (in thousands except share data)
---------------------------------- ----------------------------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Earnings:
Net income (loss) for Basic EPS ($4,128) ($1,617) $860 $450
Net income (loss) for Diluted EPS ($4,128) ($1,617) $860 $450
Shares:
Weighted average shares outstanding for 6,176,556 5,599,956 6,176,556 5,582,516
Basic EPS
Stock option and warrant dilution (1) - - - 224,327
Weighted average shares for Diluted EPS 6,176,556 5,599,956 6,176,556 5,806,843
Basic EPS ($0.67) ($0.29) $0.14 $0.08
Diluted EPS ($0.67) ($0.29) $0.14 $0.08
</TABLE>
(1) The effect of potential common securities are excluded from the dilutive
calculation for the periods ended September 26, 1998 and for the nine
months ended September 27, 1997 as their effect would be antidilutive.
Options and warrants to purchase 477,223 shares of common stock at an
average price of $3.82 per share were outstanding during the third 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>
September 26, December 27,
1998 1997
------------------ ------------------
<S> <C> <C>
(in thousands)
Finished goods $4,043 $2,836
Retail Goods 967 818
Work-in-Process 603 413
Raw materials 1,907 2,394
------------------ ------------------
7,520 6,461
Less reserve for obsolete inventory (347) (535)
================== ==================
Total inventories $7,173 $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 September 26,
1998 the Company has borrowed approximately $5,822,000 under the credit
facility which includes the $2,000,000 term loan and $3,822,000 under the
revolving line of credit. In addition, the Company has issued letters of
credit of $1,711,000 under the letter of credit subline.
12
<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 was used to fund peak seasonal
needs in spring 1998 and was fully repaid by September 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
of $542,000 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 and is available through May 6, 2002. 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. As of September 26, 1998, the Company
was not in compliance with the "EBITDA" test, therefore all long term debt
balances have been classified as current.
13
<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 nine months of results for 1998, but not for the first nine
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 $18,280,000 and estimated
open (preseason and new order) sales orders of approximately $5,200,000 for
Morrow, Westbeach and OEM products at September 26, 1998. At September 27,
1997, the Company had net sales of $13,011,000 and estimated open sales orders
of approximately $4,000,000. Open sales orders are subject to cancellation.
The Company's net sales increased 40.5% to $18,280,000 for the nine months
ended September 26, 1998 from $13,011,000 in the nine months ended September 27,
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.
The Company wishes to caution readers that important factors, among others, in
some cases have affected, and in the future could affect, the Company's actual
results and could cause actual consolidated results for the first nine months of
1998, and beyond, to differ materially from those expressed in any forward-
looking statements made by, or on behalf of, the Company. 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 competitors' 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/A for the fiscal year
ended December 27, 1997.
The Company's year-to-date net sales of $18,280,000 and backlog of
$5,200,000 at September 26, 1998 are up from those reported at September 27,
1997, with net sales of $13,011,000 and a backlog of $4,000,000. Management
attributes this increase 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
14
<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>
NINE MONTHS ENDED THREE MONTHS ENDED YEAR ENDED
-------------------------------------------------------------------------------
SEPT. 26 SEPT. 27 SEPT. 26 SEPT. 27 DEC. 27,
1998 1997 1998 1997 1997
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of Goods Sold 67.9 71.6 64.1 69.6 78.9
-------------------------------------------------------------------------------
Gross Profit 32.1 28.4 35.9 30.4 21.1
-------------------------------------------------------------------------------
Operating Expenses:
Selling, marketing and customer service 21.5 26.9 12.0 14.0 23.0
Engineering, advance design and product
management 9.3 5.0 2.7 1.5 8.2
General and administrative 20.9 17.1 11.4 6.0 18.7
Loss on write-down of fixed assets 0.3 - 0.6 - 7.8
-------------------------------------------------------------------------------
Total Operating Expenses 52.0 49.0 26.7 21.5 57.7
-------------------------------------------------------------------------------
Operating Income (Loss) (19.9) (20.6) 9.2 8.9 (36.6)
Interest expense (2.4) (0.5) (1.6) (0.3) (0.4)
Other income (expense) (0.0) 1.9 (0.4) 0.2 1.7
-------------------------------------------------------------------------------
Income (Loss) Before Income Tax (22.3) (19.2) 7.4 8.8 (35.3)
Income Tax Benefit (Expense) (0.3) 6.8 (0.4) (4.4) 0.6
-------------------------------------------------------------------------------
Net Income (Loss) (22.6)% (12.4)% 7.0 % 4.4 % (34.7)%
-------------------------------------------------------------------------------
</TABLE>
Comparison of the Nine Months ended September 26, 1998 and September 27, 1997
Net Sales. Net sales for the first nine months of 1998 increased 40.5% to
$18,280,000 from $13,011,000 in the first nine months of 1997, reflecting the
addition of $4,235,000 from Westbeach apparel sales, $1,990,000 from Westbeach
retail sales and a decrease of $363,000 in Morrow brand hard good sales (boards,
boots and bindings). The majority of "Morrow" branded hard good product sales
occur in the third and fourth quarters of the year. In the first nine months of
1998 sales consisted of 65.4% of the "Morrow" branded hard goods, with the
balance attributable to apparel and retail sales. By comparison, during the
first nine months of 1997, sales consisted of 95.1% of the "Morrow" branded hard
goods, with the rest attributable to "Morrow" apparel and accessories.
Snowboard sales were up 19.6% in the first nine months of 1998, compared to the
first nine months of 1997. As a percentage of net sales, the snowboard sales
represented 56.3% of total net sales in the first nine months of 1998, compared
to 66.5% of total net sales in the first nine months of 1997. Due to late
deliveries by suppliers in the third quarter, net sales for boots decreased
64.5% in the first nine months of 1998, representing 0.2% of net sales compared
to 8.0% in the first nine months of 1997. Since many customers prefer to
receive boots and bindings in the same shipment, with the delay in boot
deliveries, net sales for bindings decreased by 39.1%, representing 8.9% of net
sales in the first nine months of 1998, compared to 21.0% in the first nine
months of 1997. Apparel and accessory sales increased $3,880,000, representing
23.8% of net sales in the first nine months of 1998, compared to 3.8% in the
first nine months of 1997 largely due to Westbeach apparel sales, which were
23.1% of total net sales for the nine month period. Retail sales constituted
10.8% of total sales as a result of the Westbeach acquisition in November 1997.
15
<PAGE>
Gross Profit (Loss). Gross profit for the first nine months of 1998
increased 59.0% to $5,876,000 or 32.1% of net sales compared to $3,695,000 or
28.4% of net sales for the first nine months of 1997. This is a result of
increased apparel and retail sales due to the acquisition of Westbeach in
November, 1997 and cost cutting measures taken in the second quarter of 1998 to
reduce the overhead costs for board production. Sales for the first nine months
of 1998 are largely comprised of the 1998 spring/summer and fall clothing lines,
retail sales and 1998/99 boards and outerwear, with a lesser amount of sales
contributed by the closeout of 1997/98 product lines.
Selling, Marketing and Customer Service. Selling, marketing and customer
service expenses for the first nine months of 1998 increased 12.0% to $3,924,000
from $3,503,000 for the first nine months of 1997, representing 21.5% and 26.9%
of net sales, respectively. This increase is a result of increased commission
expenses on the increased sales revenues, increased contract costs of certain
Company team riders and settlement costs related to the termination of contracts
with other Company team riders. 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
product lines. These efficiencies were fully realized by the end of the first
nine months of 1998.
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
indicate more clearly the type of expenses, the nature of these expenses has not
changed. Related costs for the first nine months of 1998 increased 161.3% to
$1,704,000 from $652,000 for the first nine months of 1997, representing 9.3%
and 5.0% of net sales, respectively. This increase was primarily a result of
increased expenses associated with additional staffing related to development of
product management teams, production engineering and further product development
for the binding and apparel product lines.
General and Administrative. General and administrative expenses for the
first nine months of 1998 increased 71.5% to $3,821,000 from $2,228,000 for the
first nine months of 1997, representing 20.9% and 17.1% of net sales,
respectively. This increase was due to increased staffing resulting from the
Westbeach acquisition, including the addition of employees at three retail
stores. Legal and consulting expenditures increased during the first nine
months of 1998 compared to the first nine months of 1997 as a result of SEC
compliance activities related to the Westbeach acquisition 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 costs during the first nine months of 1998,
whereas no such expense was incurred during the first nine months of 1997.
Loss on Write-Down of Fixed Assets. During the first nine months of 1998,
the Company recognized a loss on write-down of tooling for the 98/99 board
models that have completed production and are discontinued for the 99/00 season,
whereas in the first nine months of 1997, production of discontinued lines had
not been completed and therefore no such costs were incurred.
Interest Expense. Interest expense increased to $433,000 for the first nine
months of 1998 from $59,000 for the first nine 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 nine months of 1998
created an increase in interest expense of $374,000 compared to the first nine
months of 1997. Related amortization of deferred financing fees, included in
interest expense, was recognized in the first nine 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 deferred financing fees related to this agreement were expensed in
the first nine months of 1998.
16
<PAGE>
Other Income. Other income was $1,000 in the first nine months of 1998,
compared to income of $245,000 in the first nine months of 1997. The utilization
of Company cash in the Westbeach acquisition significantly reduced Company funds
available for investment. 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
nine months of 1998 as compared to the first nine months of 1997.
Income Tax Benefit (Expense). The income tax expense of $55,000 for the
first nine months of 1998 related to previously unrecognized taxes on the income
of the Canadian subsidiary for the period November 13, 1997 through December 27,
1997. The Company did not recognize an income tax benefit based on its loss for
the first nine months of 1998. The income tax benefit for the first nine months
of 1997 was $885,000, based on the Company's estimated tax rate of approximately
39.0%
Net Loss. Net loss for the first nine months of 1998 was $4,128,000
compared to $1,617,000 for the first nine months of 1997.
Comparison of the Quarters ended September 26, 1998 and September 27, 1997
Net Sales. Net sales for the third quarter of 1998 increased 20.7% to
$12,278,000 from $10,173,000 in the third quarter of 1997, reflecting the
addition of $3,167,000 from Westbeach apparel sales, $801,000 from Westbeach
retail sales and a decrease of $1,408,000 in "Morrow" brand hard good sales
(boards, boots and bindings). The majority of "Morrow" branded product sales
occur in the third and fourth quarters of the year. In the third quarter of
1998, 67.2% of sales consisted of the "Morrow" branded hard goods, with the
balance attributable to apparel and retail sales. By comparison, during the
third quarter of 1997, 95.9% of sales consisted of the "Morrow" branded hard
goods. Snowboard sales were up 2.0% in the third quarter of 1998, compared to
the third quarter of 1997. As a percentage of net sales, the snowboard sales
represented 57.2% of total net sales in the third quarter of 1998 compared to
68.5% of total net sales in the third quarter of 1997. Due to late deliveries
by suppliers, there were no sales of boots in the third quarter of 1998,
compared to $943,000 in the third quarter of 1997 representing 9.3% of net
sales. Since many customers prefer to receive boots and bindings in the same
shipment, with the delay in boot deliveries, net sales for bindings decreased by
32.6%, representing 10.0% of net sales in the third quarter of 1998 compared to
18.1% in the third quarter of 1997. Apparel and accessory sales increased by
$2,881,000, representing 26.3 % of net sales in the third quarter of 1998
compared to 4.1% in the third quarter of 1997, largely due to Westbeach apparel
sales, which were 25.6% of total net sales for the third quarter. Retail sales
constituted 6.5% of total sales in the third quarter of 1998 as a result of the
Westbeach acquisition in November 1997.
Gross Profit (Loss). Gross profit for the third quarter of 1998 increased
42.7% to $4,406,000 or 35.9% of net sales compared to $3,088,000 or 30.4% of
net sales for the third quarter of 1997. This is a result of increased apparel
and retail sales due to the acquisition of Westbeach in November, 1997 and cost
cutting measures taken in the second quarter of 1998 to reduce the overhead
costs for board production. Third quarter sales are largely comprised of
retail sales, the fall 1998 clothing line and the 1998/99 product lines for
boards and outerwear.
Selling, Marketing and Customer Service. Selling, marketing and customer
service expenses for the third quarter of 1998 increased 3.4% to $1,470,000 from
$1,422,000 for the third quarter of 1997, representing 12.0% and 14.0% of net
sales, respectively. This increase is a result of increased commission expenses
on the increased sales revenues, increased contract costs for certain Company
team riders and settlement costs related to the termination of contracts with
other Company team riders. These increases are offset by decreases in
promotional and advertising expenditures. Since the acquisition of Westbeach,
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
17
<PAGE>
international markets for the combined product lines. These efficiencies and
operating synergies were fully recognized in the third quarter of 1998.
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
indicate more clearly the type of expenses, the nature of these expenses has not
changed. Related costs for the third quarter of 1998 increased 124.8% to
$335,000 from $149,000 for the third quarter of 1997, representing 2.7% and 1.5%
of net sales, respectively. This increase was partially 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. In addition, as a result of the acquisition of Westbeach, the Company
incurred costs related to the development of the spring and fall 1999 apparel
product lines, whereas in the third quarter of 1997, the Company did not
produce a special line of apparel geared to the spring season.
General and Administrative. General and administrative expenses for the
third quarter of 1998 increased 126.8% to $1,395,000 from $614,000 for the third
quarter of 1997, representing 11.4% and 6.0% of net sales, respectively. This
increase was due to the increased staffing with the acquisition of Westbeach,
including the addition of employees at three retail stores. The Company also
recognized goodwill in the acquisition of Westbeach, resulting in related
amortization costs during the third quarter of 1998, whereas no such expense was
incurred during the third quarter of 1997. Legal and consulting expenditures
increased during the third quarter of 1998 compared to the third quarter of 1997
as a result of patent related issues and the Company's start of ISO 9000
compliance-related activities.
Loss on Write-Down of Fixed Assets. During the third quarter of 1998,
the Company recognized a loss on write-down of tooling for the 98/99 board
models that have completed production and are discontinued for the 99/00 season,
whereas in the third quarter of 1997, production of discontinued lines had not
been completed and therefore no such costs were incurred.
Interest Expense. Interest expense increased to $168,000 for the third
quarter of 1998 from $32,000 for the third quarter of 1997. The Company's
continued borrowings to fund operations during the third quarter of 1998 created
an increase of $136,000 in interest expense in the third quarter of 1998
compared to the third quarter of 1997.
Other Income (Expense). Other expense was $55,000 in the third quarter of
1998, compared to income of $28,000 in the third quarter of 1997. The
utilization of Company cash in the acquisition of Westbeach significantly
reduced Company funds available for investment. 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 third quarter of 1998, compared to the third
quarter of 1997.
Income Tax Expense. The income tax expense for the third quarter of 1998
was $55,000 related to previously unrecognized taxes on the income of the
Canadian subsidiary for the period November 13, 1997 through December 27, 1997.
No other income tax expense was recognized for the third quarter of 1998 due to
the Company's year-to-date loss position. The income tax expense for the third
quarter of 1997 was $449,000, based on the Company's estimated tax rate of
approximately 39.0%.
Net Income. Net income for the third quarter of 1998 was $860,000 compared
to $450,000 for the third quarter of 1997.
18
<PAGE>
Year 2000 Compliance.
The Company is undertaking an assessment of both its internal Year 2000
compliance issues and its key vendors and customers Year 2000 compliance status.
Internal Year 2000 Compliance. During the first nine months of 1998, the
Company has continued to assess its Year 2000 readiness by evaluating its
computer hardware and software and any services to the Company controlled by
computer, such as its fire and security alarm, telephone system and HVAC system.
As a result of this assessment, the Company has determined that upgrades are
required to its voice mail system; e-mail system; the software for its payroll
records, time clocks and manifesting program; and a few PC work stations.
Management estimates the cost of these upgrades, which it expects to complete by
September 1999, will be approximately $35,000.
External Year 2000 Compliance. In addition to its internal assessment, the
Company will survey each of its vendors and its top 20 customers to determine
their Year 2000 readiness. Based on the results of those surveys, the Company
will develop a contingency plan for any suppliers of critical materials not
expected to be Year 2000 compliant, including identifying alternate sources of
materials and, subject to available financing, possibly purchasing excess
inventory before the 1999 fiscal year-end. The Company generally has alternate
sources for all of its key products and raw materials/inventories. However,
problems with or delays in obtaining key products or raw materials/inventories
or higher costs due to vendor or shipper Year 2000 compliance problems could
adversely impact the Company's ability to timely deliver products and the
manufacturing/component costs for such products and related gross profit
margins. The financial disruption of key distrubutors/retailers' operations, or
shipping/transportation channels, due to Year 2000 compliance problems, could
adversely impact the Company's sales, costs and related gross profit margins on
products.
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 September 26, 1998, the Company had
outstanding revolving loans of $3,822,000 and notes payable of $2,000,000.
Net cash used in operating activities for the first nine months of 1998 was
$3,113,000, resulting primarily from a net loss of $4,128,000, with add-backs
for depreciation and amortization of $1,644,000, loss on retirement and write-
down of fixed assets of $160,0000, decreases in prepaid expenses of $424,000 and
increases in accounts payable and accrued liabilities of $2,032,000, offset by
increases in accounts receivable of $1,714,000, other assets of $257,000 and
inventories of $1,247,000. The increase in accounts receivable is a result of
sales occurring during the first nine months of 1998 with payment terms of
December 1, 1998. The increase in inventories is a result of the addition of
Westbeach inventories.
Capital expenditures for the nine months ended September 26, 1998 were
$1,230,000. 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 nine months of 1998
was $3,801,000, consisting of $1,899,000 from net borrowings under the revolving
credit facility, $2,000,000 from borrowings under a term loan agreement, less
$98,000 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., which has
been fully repaid. The Company's line of credit under the new credit facility
is up to $10,000,000, including an inventory subline of up to $3,500,000, a
letter of credit subline up to $5,000,000, a term loan of up to $2,000,000 and a
one-time over-advance 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 September 26, 1998 the Company had borrowed approximately
$5,822,000 under the credit facility, including a $2,000,000 term loan and
$3,822,000 under the revolving line of credit. In addition, the Company has
issued letters of credit of $1,711,000 under the letter of credit subline. At
September 26, 1998 the Company had utilized the full extent of its revolving
line of credit and the one-time advance subline had been repaid in full.
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
19
<PAGE>
on a loan fee of $200,000, payable in installments and monthly servicing fees of
$4,000 per month. The one-time over-advance subline was used to fund peak
seasonal needs in spring 1998. The one-time advance subline began on May 31,
1998 and was fully repaid by August 1998. The term loan provides for interest
only payments in the first year and monthly principal payments of approximately
$42,000 thereafter, withthe remaining principal balance of $542,000 due May 6,
2002. A fee of 1.5% per annum is payable on the undrawn amount of outstanding
letters of credit.
The credit facility is secured by substantially all of the Company's
assets. The facility requires the Company to comply with certain financial
covenants, including, among other things, an "EBITDA" test as defined in the
credit facility. The "EBITDA" requirement is $3,750,000 for the six months ended
September 26, 1998 and $3,000,000 for the nine months end December 26, 1998. The
Company's "EBITDA" for the six months ended September 26 1998 was $800,000
compared to the $3,750,000 "EBITDA" requirement. The Lender has waived the
failure to meet the "EBITDA" requirement for that period, subject to payment of
a $10,000 fee and the Company's retention of a financial consultant to perform
certain reviews and services to be determined. Based on current projections, the
Company will not meet that financial covenant for the nine months ended December
26, 1998. The Company's failure to meet the "EBITDA" financial covenant results
principally from lower than projected sales revenue and related net income,
including third quarter cancellations of approximately $2,300,000 of pre-booked
orders, lower gross profit margins on certain products and other factors.
The Company's debt structure is comprised of the following:
September 26,
1998
---------------
(in thousands)
Short-term debt:
Operating line of credit $ 3,822
Current portion of Notes payable 2,000
Current portion of capital lease obligations 127
---------------
Total short-term debt $ 5,949
===============
Long-term debt:
Capital lease obligations $ 295
Less current portion (127)
---------------
Total long-term debt, net of current portion $ 168
===============
The Company presently projects that it will achieve up to approximately
$27,000,000 in sales (including new orders and reorders of $3,500,000) in fiscal
1998, although there is no assurance the Company will do so. If the Company
achieves its projections, management currently estimates the Company will
require up to $5,000,000 in additional working capital by 1999 to continue its
current level of operations. If Company sales are lower than projected and/or
the Company is unable to achieve profitable operations in its next fiscal year,
the Company will require greater working capital.
As previously noted in a Current Report in Form 8-K dated June 24, 1998
filed on July 9, 1998 with the SEC, the Company had engaged Veber Partners to
seek additional financing. That relationship was terminated and the Company has
since been working with other investment banking companies to seek additional
financing. The Company is in preliminary discussions with several prospects
for additional debt, near debt and equity financing. The Company is also
exploring other possibilities of raising additional working capital, including
the sale and leaseback of its business facility and, the sale of portions of its
business lines, including its retail stores. If the Company succeeds in raising
additional capital, it may be able to do so only on terms that are highly
dilutive to the current shareholders' interest in the Company, both from a
voting percentage and book value/earnings per share perspective. However, there
is no assurance the Company will be able to raise the needed capital or that the
Lender will waive any violation of the "EBITDA" test at fiscal year-end and
maintain the current credit facility. If the Company cannot raise the needed
working capital or, absent an alternate credit facility, the Lender does
20
<PAGE>
not waive any future violation of the "EBITDA" covenant, the Company may not be
able to continue operations or to fully realize on the value of its assets.
The Company's Common Stock is quoted on the Nasdaq National Market System
("NNMS"). There are certain ongoing requirements that must be met for continued
inclusion in the NNMS. Those requirements include having a minimum bid price of
at least $1.00 per share during any 30 consecutive business days. The Company's
Common Stock has recently traded below $1.00 per share. If such requirement is
not met, the Company has 90 calendar days to take action that results in a
minimum bid of $1.00 per share and the maintenance of such minimum price at
least once in every 30 consecutive business days. In such event, there is no
assurance corrective action could be successfully undertaken, and, if that
occurred, investors in the Company may find their ability to trade the Company's
Common Stock decreased and the lack of such listing may affect the perceived
market value of the Company's securities.
21
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not currently involved in any material litigation or legal
proceeding and is not aware of any potential material litigation or proceeding
threatened against it other than as described below.
As disclosed in the Company's Reports on Form 10-Q for the quarters ended
March 28 and June 27, 1998, The Burton Corporation ("Burton") and K-2
Corporation ("K-2") both alleged that the Company's Engage 3 step-in boot and
binding system ("Engage System") infringes patents of each of those companies.
After considering the cost of litigating these claims, the risk that potential
infringement may exist, and the Company's current financial resources, the
Company determined the best resolution of these matters was to negotiate patent
licenses from both Burton and K-2 for the Company's Engage System. Accordingly,
around November 3, 1998 the Company entered into a three-year licensing
agreement with Burton. The agreement provides for annual payments of $20,000 to
Burton and payment of a three-percent (3%) royalty on sales of the Engage System
by the Company. The Burton agreement may be renewed for two additional one-year
terms. Around November 3, 1998, the Company also entered into a licensing
agreement with K-2. The K-2 agreement has no definite term and may be cancelled
by Morrow on 30 days' notice although the Company would not cancel the agreement
if such license were needed to exploit the Engage System. The agreement
provides for payment of a three-percent (3%) royalty on sales of the Engage
System by the Company, with a minimum royalty payment of $15,000 per year. Both
of these agreements limit the Company's ability to use the Engage System in OEM
products, to sublicense the Engage System and to transfer the associated
technology by merger with certain large companies that produce sports equipment
or winter sports products. However, except for the time limit on the Burton
agreement, neither agreement limits the Company's ability to fully exploit the
technology under the Morrow brand name. The royalty payments are not expected to
be material in amount under either contract during the current or next fiscal
year.
There are also three pending legal matters before the Company that, while
not material separately, could be material to the Company, if considered
together.
1. Employment Claim. A former employee has alleged that the Company
----------------
wrongfully terminated her employment by failing to reinstate her upon return
from maternity leave in accordance with the requirements of the Family Medical
Leave Act. She has threatened to file suit against the Company for wrongful
termination, but has not made a specific claim for damages. The Company believes
it has a reasonable basis for defending against any such claim, but there can be
no assurance the Company will be successful in its defense. If the former
employee were successful in asserting such claim, she could recover lost wages
and benefits, attorney's fees, and, depending on the claims raised and facts
asserted, damages for emotional distress and punitive damages.
2. Vendor Claim. Pama Limited, a Hong Kong company ("Pama") was an agent of
------------
Westbeach for fall 1997 production and fall 1998 sales samples. Pama claims
approximately $84,000 was owing for services provided. Westbeach claims Pama
failed to perform given that fall 1998 samples were not timely delivered and
that certain surcharges were not agreed to. The parties are in discussions to
settle this matter.
3. Michael Joseph Fashion Agency, Inc. v. Morrow Snowboards, Inc.
-------------------------------------------------------------
(Supreme Court, Province of British Columbia, No. C981832). Michael
Joseph Fashion Agency Inc. ("Michael Joseph"), the Company's former Western
Canadian sales representative, filed a suit in Vancouver, British Columbia
claiming damages of approximately $127,000 (United States Dollars), together
with interest, attorneys' fees and certain litigation costs. Michael Joseph is
seeking approximately $60,000 for lost sales commissions due to the alleged
termination of its sales representative relationship without adequate notice
under Canadian common law principles, approximately $60,000 for alleged lost
sales commissions on gray market goods shipped through unauthorized distribution
channels and its exclusive sales territory and the balance for certain expenses
incurred. The Company has retained legal counsel in Vancouver, British Columbia
to
22
<PAGE>
defend this action. The Company believes it has a reasonable basis for defending
against any such claim, but there can be no assurance the Company will be
successful in this defense.
An award of damages or the expenditure of significant sums in all the
matters described above could have a material adverse effect on the Company's
financial condition and results of operations.
ITEM 2. CHANGES IN SECURITIES.
-None-
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
-None-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
-None-
ITEM 5. OTHER INFORMATION.
The Company has entered into a three year contract, effective
retroactively as of November 1, 1997, with Todd Richards, a
professional snowboard rider. Pursuant to this agreement, Mr.
Richards has agreed to ride as a Morrow Pro Rider, exclusively
promote and use, ride or wear Morrow snowboards, snowboard bindings
and certain snowboard accessories, and assist in designing and
evaluating Morrow products for the 1997 through 1999 snowboard
seasons. In addition, Mr. Richards has granted Morrow an exclusive
right to use his name, picture and likeness on certain Morrow
products. Subject to the terms and conditions of the agreement, Mr.
Richards retains certain rights to promote, use and grant the use of
his name and/or likeness on certain other products under
nonconflicting agreements with other manufacturers or distributors.
In exchange for such rights and services, the Company will pay Mr.
Richards $15,000 per month and an additional sum of $38,333 per
quarter, subject to certain limitations, during the term of the
agreement. This agreement replaces a previous pro rider agreement
between the Company and Mr. Richards and a royalty agreement
regarding the payment of royalties on the Todd Richards signature
line of snowboards.
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
September 26, 1998:
. 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.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Salem, State of Oregon, on November 10, 1998.
MORROW SNOWBOARDS, INC.
By: /s/ P. Blair Mullin
---------------------
P. Blair Mullin
President (1)
(Principal Executive Officer)
By: /s/ P. Blair Mullin
-------------------
P. Blair Mullin
Chief Financial Officer
(Principal Financial and Accounting Officer)
(1) No Chief Executive Officer is appointed. Under the Company's Bylaws, if no
Chief Executive Officer is appointed, the President acts in such capacity and
has the authority of a Chief Executive Officer.
24
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.1 Agreement dated April 9, 1998 between Morrow Snowboards, Inc, and Todd
Richards.
27 Financial Data Schedule
<PAGE>
AGREEMENT
THIS AGREEMENT ("Agreement") is entered into between MORROW SNOWBOARDS,
INC., an Oregon corporation, (hereinafter "MORROW") and TODD RICHARDS, a
Colorado resident (hereinafter "RIDER").
WHEREAS, MORROW and its subsidiaries are engaged in the manufacture, sale
and distribution of certain goods, including but not limited to, snowboards,
snowboard boots, snowboard bindings, snowboard outerwear, apparel, leisure and
sports clothing ("street wear") and accessories, under the MORROW(R) and other
brands (hereinafter "MORROW Products" or "Products"), and MORROW desires to
increase the exposure of the Products to the public;
WHEREAS, MORROW desires to engage the services of RIDER to (i) promote
MORROW, (ii) as a MORROW team rider, exclusively use, promote and market the
Designated Products (as defined herein), (iii) promote and wear MORROW Products
in public, (iv) assist MORROW in designing new Products, (v) evaluate MORROW
Products, and (vi) continue and expand a Todd Richards line of MORROW Designated
Products, containing RIDER's name and/or likeness;
WHEREAS, RIDER is a skilled and experienced snowboard rider, and, for the
11/1/97-10/31/98 season ("1997 Season"), 11/1/98-10/31/99 season ("1998
Season"), and 11/1/99-10/31/00 season ("1999 Season") (the 1997, 1998 and 1999
Seasons being individually, "a Season" or "the Season" and collectively the
"Seasons"), desires to ride as a MORROW Pro Rider, to promote MORROW Products,
to exclusively use the Designated Products, to assist MORROW in designing new
Products and evaluating MORROW Products and to exclusively grant MORROW the
right for Designated Products to continue and create a Todd Richards line of
products during such Seasons.
NOW THEREFORE, MORROW and RIDER agree as follows:
1. No Conflicting Obligations. RIDER represents and warrants to MORROW,
--------------------------
that RIDER has not entered, and agrees that RIDER will not, without MORROW's
written consent, which consent may be withheld in MORROW's sole discretion:
Page 1 -- AGREEMENT
<PAGE>
a. Enter, into any contract or other arrangement with any other
manufacturer or distributor to represent that manufacturer or distributor or
grant use of the Todd Richards' name or likeness during the 1997 through 1999
Seasons for Products, other than for the Excluded Products.
b. Except for agreements regarding displays on Excluded Products,
enter any agreement that would cause RIDER to display any logos,
trademarks/trade names, symbols or other emblems on RIDER's clothing, footwear,
snowboards, headbands, helmets or other apparel worn or accessories used by
RIDER, other than those designated by MORROW, in any "Public Appearance" as
defined in Section 2.b(ii); or
c. Promote any product that MORROW reasonably finds to damage or
hurt MORROW's image.
RIDER represents that RIDER is not subject to any obligation which would
conflict with or prevent RIDER from preforming any of his obligations under the
terms of this Agreement or granting use of the Todd Richards' name or likeness.
MORROW acknowledges that RIDER has entered a sponsored agreement with Oakley,
Inc. to promote sunglasses ("Oakley Agreement") which agreement RIDER has
furnished to MORROW. The Oakley Agreement and any other contract that RIDER
enters into to promote other products or services that is allowed under this
Agreement shall be referred to herein as a "Nonconflicting Agreement." RIDER
will promptly notify MORROW and provide MORROW with copies of any sponsorship
contracts for Excluded Products.
For purposes of this Agreement, (i) "Excluded Products" includes snowboard
outerwear and snowboard boots, worn pursuant to a sponsorship contract for
snowboarding and snowboarding competition, (ii) "Designated Products" includes
snowboards, snowboard bindings and snowboard accessories, and (iii) "snowboard
accessories" or "accessories" include, but are not limited to, headbands, hats,
gloves and bags.
2. Services and Rights Grant.
-------------------------
Page 2 -- AGREEMENT
<PAGE>
a. Services ("Services"). Except as otherwise provided herein,
---------------------
MORROW agrees to retain RIDER as, and RIDER agrees to exclusively represent
MORROW and exclusively perform the following services during the 1997 through
1999 Seasons:
(i) Pro Rider Services. During each of the 1997 through 1999
------------------
Seasons, Pro Rider agrees to represent MORROW with responsibilities set forth on
Exhibit 1 hereto, including but not limited to, snowboard riding and
participation in competitions, events, promotions and such other events as
MORROW reasonably requests, including, without limitation, the events set forth
in Exhibit 1.
(ii) Promotion of Products. During each of the 1997 through 1999
---------------------
Seasons, RIDER hereby agrees to (A) participate in events, promotions,
advertising, media interviews, photo shoots, personal appearances and snowboard
and apparel industry events, including, without limitation, MORROW marketing
events, with the responsibilities set forth in Exhibit 2; (B) except for
Excluded Products, to exclusively utilize, ride and/or exclusively wear MORROW
Designated Products furnished to RIDER in any instance where RIDER appears in
his capacity as a professional athlete, competitor or celebrity, including but
not limited to all competitions, public appearances, demonstrations, photo
sessions, motion picture appearances and video recordings ("Public Appearance")
with RIDER agreeing to use the Designated Products supplied to RIDER from MORROW
Products and not ride any other snowboard or use any other product competing
with the Products for any purpose whatsoever during the term of this Agreement,
except as specifically permitted pursuant to Section 1; provided, if RIDER finds
that the MORROW Products supplied are not adequate for competitive riding, RIDER
will provide his specifications to MORROW and MORROW will provide products
meeting those specifications; provided, MORROW will not have to undertake
unusual manufacturing costs or expense, but may supply other products of other
companies reasonably meeting those requirements with the logos of such products
removed; (C) wear apparel supplied to RIDER from MORROW Products when appearing
in public, except when snowboarding or competing in Excluded Products, except
that RIDER will not be required to wear any clothing that he finds reasonably
objectionable in terms of style, fit or quality; and (D) prominently display on
his snowboard outerwear a
Page 3 -- AGREEMENT
<PAGE>
patch provided by MORROW, no larger than 2" x 3" in size, indicating that RIDER
is a MORROW Team Rider and to wear a headband/hat bearing the MORROW brand logo.
(iii) Testing and Evaluation of Products. RIDER shall test all
----------------------------------
MORROW Products, including, without limitation, the Designated Products to be
used by RIDER in competitive and recreational riding, as well as, MORROW's new
product lines. MORROW shall make all reasonable efforts to provide Products for
testing to RIDER on or before September 15 of each year with testing to occur
and be completed by October 31st each year; provided, that the testing and
evaluation of products for the 1997 Season will be done without additional
compensation owing hereunder during the 1997 Season. MORROW Designated Products
to be used by RIDER should be tested, evaluated and specifications finalized by
October 31st each Season.
(iv) Overall Service Obligation. RIDER acknowledges that he will
--------------------------
devote full time to the activities outlined herein; provided, however, RIDER
shall only be responsible to work the number of days which MORROW designates.
RIDER agrees that MORROW may modify the assignments given in a given Season with
reasonable notice. Further, RIDER acknowledges that, based on the consideration
herein, RIDER's primary obligation will be to support MORROW and MORROW
Designated Products and will schedule his other commitments and obligations so
as to meet his obligations to MORROW hereunder.
b. Rights Granted ("Rights"). RIDER grants MORROW during the term of
-------------------------
this Agreement the Right to exclusively use the name, picture and likeness of
RIDER on Designated Products and in connection with the promotion thereof and
nonexclusively to promote MORROW in general. Further, MORROW shall retain a
nonexclusive license following the termination of this Agreement to liquidate in
a normal fashion all Designated Products containing such name, picture or
likeness, to the extent such Products were produced in quantities reasonably
related to expected sales during the Season(s) falling within this Agreement
prior to termination hereof; provided, however, if this Agreement is terminated
by MORROW due to a breach by RIDER hereof, such license shall remain exclusive
throughout the remainder of the Season then falling
Page 4 -- AGREEMENT
<PAGE>
within this Agreement without the payment of further compensation hereunder.
3. Standards of Performance. RIDER agrees to use his best efforts to
------------------------
actively and aggressively promote MORROW's snowboards and related Products on a
full time basis and to enhance the image and reputation of MORROW. RIDER agrees
to act in a professional and dignified manner and to display sportsmanlike
conduct at all times while representing MORROW, avoiding conduct and action
which will discourage the good name and reputation of MORROW or the Products.
RIDER agrees that while representing MORROW in training, riding competitions,
events, demonstrations or promotional activities of any type, including Personal
Appearances, RIDER will not use alcohol or use or possess any illegal drugs or
substances.
4. Compensation; Expenses. In exchange for the Services to be
----------------------
performed and Rights granted hereunder, MORROW agrees to compensate RIDER, and
RIDER agrees to accept as full compensation therefore the following payments,
subject to adjustment as provided in this Section 4 and withholding by MORROW
from any cash payments hereunder the amount of any required federal, state and
local income or other tax withholding:
a. For Services, MORROW shall:
(i) Pay RIDER the sum of $15,000 per month, payable on the first
day of each month, beginning November 1, 1997 throughout the term of this
Agreement.
(ii) Pay RIDER the additional sum of $38,333.33 for each calendar
quarter ended January 31, April 30, July 31 and October 31 falling within the
11/1/97 and 10/31/00 period; provided (a) that the payment for the calendar
quarter ending 1/31/00 (before any applicable reduction) shall be $38,333.37;
(b) such quarterly payment shall be reduced pro rata (on a daily basis) for any
periods of injury falling within the calendar quarter ending on the payment date
that are not part of an "Excused Injury" (as defined herein); (c) such payment
will be forfeited, in MORROW's discretion, for any calendar quarter in which
MORROW reasonably determines that RIDER has failed to perform his obligations
hereunder; provided, that under this Section 4.a.(ii) or Section 11.e.(v), RIDER
shall not be
Page 5 -- AGREEMENT
<PAGE>
penalized for any failure to perform due to external events reasonably beyond
RIDER's control, such as cancellation of airline flights, weather (such as
avalanches, hurricanes or other storms that cancel events), civil war,
insurrection, acts of God, and other similar events. To the extent of any
reductions due to non-Excused Injuries, RIDER may elect to extend this Agreement
for such periods as necessary to earn such amounts; provided, such extension
must be upon no less than 90 days written notice prior to the termination of
this Agreement and RIDER may not be in default of his obligations hereunder at
the time of such extension and this Agreement must not previously have been
terminated; and (d) to the extent such payment is earned for a calendar quarter
ending 1/31/98, 4/30/98, 7/31/98, or 10/31/98, such payment shall be paid on the
following 1/31/99, 4/30/99, 7/31/99, and 10/31/99, respectively, with all other
quarterly payments to the extent earned to be paid within ten days of the
calendar quarter earned.
b. MORROW agrees to provide RIDER with (i) a lap top computer with
internet capabilities and capabilities to receive and transmit faxes and e-mail
transmission through land line hookups, and (ii) the goods listed in Exhibit 3,
at no charge, during each Season, such goods to be returned to MORROW at the end
of each Season. Morrow may expand the list of goods provided and require RIDER
to utilize the same lap top computer for each Season.
c. Notwithstanding anything contained herein, RIDER shall be
responsible for all of his expenses in performing his obligations under this
Agreement, including competing in snowboard competitions. Notwithstanding the
foregoing, MORROW shall pay all of RIDER's reasonable out-of-pocket expenses
related to (i) trip(s) to the MORROW Product factory or headquarters in the
United States while this Agreement is in effect to enable RIDER to assist in the
design, development and promotion and marketing of the Products, and (ii) photo
shoots or promotional appearances at times and locations that do not fit in with
the performance of RIDER's other duties hereunder, i.e., photo shoots scheduled
for dead periods between major races would be excluded; provided, that MORROW
will pick-up the reasonable lodging and meal expenses in appearing at such photo
shoots or promotional appearances to the extent they require additional days
stay before or after events otherwise related to RIDER's performance of other
duties hereunder.
Page 6 -- AGREEMENT
<PAGE>
5. Public Appearances.
------------------
a. RIDER acknowledges and agrees that MORROW will prepare any news
releases, advertisements, brochures and other promotional material using RIDER's
name or likeness in connection with the Designated Products and, in other ways,
publicizing and using RIDER's endorsement in connection with advertisements,
promotions and the sale of the Designated Products and promotion of MORROW
during the term of this Agreement and following its termination.
b. MORROW shall have the continuing right, following the termination
of this Agreement, to use all publicity and publicity materials which may have
been generated by or about RIDER during the term of this Agreement without the
payment of any additional compensation. RIDER grants and assigns to MORROW all
of RIDER's right, title and interest, including copyrights, if any, in any and
all films, photographs, video and audio tapes, magazine and newspaper articles
or any other material, including but not limited to statements or testimonials
of RIDER and reuse by MORROW or its assigns in any advertisements or promotional
materials, or any other manner desired by MORROW.
6. Other Pro Rider Agreements. MORROW reserves the right to enter into
--------------------------
Pro Rider Agreements with other athletes for the use and promotion of MORROW
products. RIDER agrees to work with MORROW management and any additional Riders
appointed by MORROW to fulfill RIDER's obligations under this Agreement and to
more fully promote MORROW's products.
7. Liability Release and Indemnity.
-------------------------------
a. RIDER hereby acknowledges that snowboard riding and racing can be
a dangerous sport, possibly resulting in serious temporary or permanent bodily
injury or death, and releases MORROW and its directors, officers, employees,
agents and affiliates from any and all liability for any damage or injury
incurred by RIDER in connection with the performance of his services, including,
but not limited to, riding, testing, competing, or otherwise performing with
MORROW's Products pursuant to this Agreement, except to the extent such
liability, damage or injury is caused, directly or
Page 7 -- AGREEMENT
<PAGE>
indirectly, in whole or in part, by the active or willful negligence, misconduct
or intentional wrongdoing of MORROW or any of it's directors, officers,
employees, agents or affiliates.
b. RIDER shall indemnify and hold harmless MORROW and its directors,
officers, employees, agents and affiliates from any liability and expense
(including, without limitation, attorneys' fees and costs) from any third-party
claim arising, directly or indirectly, in whole or in part, from any act or
omission of RIDER constituting negligence, gross misconduct or intentional
wrongdoing.
c. MORROW shall indemnify and hold harmless RIDER from any liability
and expense (including, without limitation, attorneys' fees and costs) in
connection with any claim arising out of this Agreement or in connection with
RIDER's association MORROW, to the extent that such liability and expense is
caused by the negligence, gross misconduct or intentional wrongdoing of MORROW
or any of its directors, officers, employees, agents of affiliate.
8. Medical Coverage and Insurance.
------------------------------
a. RIDER represents that he is in good physical condition and has no
knowledge of any disabilities or infirmities which would affect RIDER's ability
to participate in the sport of snowboarding or perform his obligations under
this Agreement.
b. RIDER agrees to procure and maintain, during the term of this
Agreement, a medical insurance policy that includes major medical coverage on
RIDER. RIDER agrees to pay all costs of his medical coverage, treatment or other
expenses arising from any injury that he incurs from any cause, including but
not limited to any injury sustained while riding, competing, participating, or
traveling in performance of his obligations under this Agreement.
c. RIDER shall notify MORROW of any injury or illness which may
prevent RIDER from complying with the terms of this Agreement within twenty four
(24) hours after said injury or illness occurs.
Page 8 -- AGREEMENT
<PAGE>
d. MORROW may, at its expense, secure life, disability or other
insurance upon RIDER and name itself as the beneficiary of said insurance
policies.
9. Confidential Information. RIDER may have access to Product
------------------------
improvements, concepts, designs, processes and other confidential information of
MORROW. Said confidential information is considered to be part of the trade
secrets of MORROW and RIDER agrees not to disclose or divulge any such
confidential information to any third party without the prior written approval
by MORROW. RIDER shall not disclose to the public or any other rider any
material terms of this Agreement except by compulsion of law. Failure to abide
by this Section may result in suspension of termination of this Agreement.
10. Annual Schedule; Biweekly Reports.
---------------------------------
a. Prior to each season, MORROW and RIDER shall agree on a tentative
schedule of races, promotional events and Personal Appearances for that season.
For the 1997 Season, such Annual Schedule shall be agreed upon on or before
November 30, 1997.
b. Every other week RIDER shall furnish MORROW with a complete
written update in a form approved by MORROW, which may include, among other
items, the following: (i) results of races or demonstrations for all events or
competitions in which RIDER participated during the previous two weeks; (ii)
evaluations of any Products, if applicable; (iii) a report evaluating all MORROW
snowboards or other Products during the prior two weeks; and (iv) a listing and
description of RIDER's schedule of activities, competitions and other events,
including time, date, and location, for the next four weeks.
11. Term Of Agreement. This Agreement shall commence on November 1, 1997
-----------------
and, unless otherwise agreed in writing or earlier terminated as provided
herein, shall terminate on October 31, 2000. Notwithstanding anything contained
herein, this Agreement may be terminated upon the occurrence of any of the
following events:
a. By RIDER, upon failure of MORROW to timely make any payment under
Section 4; provided however, MORROW shall be entitled to notice of the first
three (3) failures to timely make any
Page 9 -- AGREEMENT
<PAGE>
payment within any consecutive twelve (12) month period under this Agreement and
such termination rights shall only apply for those late payments for which
notice is required, if MORROW fails to make such payment within ten (10) days of
such notice.
b. MORROW's failure to perform its other obligations hereunder after
written notice from RIDER of such failure and MORROW's failure to initiate
action to correct such failure within five (5) days of receipt of such notice
and continue such efforts until such nonperformance is cured.
c. Except for failure due to an Excused Injury (as defined in
Section 11), RIDER's failure to perform his obligations hereunder after written
notice from MORROW of such failure and RIDER's failure to initiate action to
correct such failure within five (5) days of receipt of such notice.
d. RIDER's death or disability, to the extent such disability is
permanent or will prevent RIDER from continuing, after a reasonable recovery
period (not to exceed eight weeks), from competing in Major Competitions.
e. RIDER's failure to achieve any of the following or RIDER's
engaging in any of the following activities:
(i) RIDER's inappropriate or excessive use of alcohol.
(ii) RIDER's possession or use of illegal drugs or substances.
(iii) RIDER's suspension, probation or banning from competition
by any snowboard governing body, U.S. Olympic Committee or International Olympic
Committee.
(iv) RIDER's arrest and/or being charged with any crime that
constitutes a felony, that involves moral or sexual conduct, drug possession,
sale or use, fraud, dishonesty or similar actions.
(v) Except for periods of an Excused Injury, RIDER's failure to
either (A)(I) participate in at least 90%
Page 10 -- AGREEMENT
<PAGE>
percent of the Major Competitions listed in Exhibit 1, or (II) 90% of the photo
shoots/media interviews listed in Exhibit 2, or (B) perform at least 90% of the
work assigned in any Season hereunder based on a number of total days of
assignment hereunder; provided, whether RIDER's obligations for a given season
under this Section 11.d.iii are being met, shall be determined at the end of
each calendar month, beginning with the third month in any Season.
(vi) RIDER's failure to place in the top five places in 80% of
the Major Competitions RIDER enters in a given Season.
For purposes of this Agreement, an Excused Injury shall be an injury from
which RIDER is expected to recover within eight (8) weeks provided, in no event
shall an injury be deemed an Excused Injury to the extent the total amount of
time for recovery from such Excused Injury and all prior such Excused Injuries
in a Season exceeds eight (8) weeks.
12. Personal Services Contract; Independent Contractor. This Agreement
--------------------------------------------------
constitutes a personal service contract and the RIDER shall not sell, assign or
transfer this Agreement or any of the rights or delegate any of his
responsibilities without the prior written consent of MORROW. If for any reason
RIDER violates this Section, MORROW may, at its discretion, and without notice,
terminate this Agreement. This Agreement shall be binding upon and inure to the
benefit of the heirs, executives, administrators, successors, and permitted
assigns of the respective parties. RIDER acknowledges that RIDER is an
independent contractor, not an employee, and as such, has no authority to act on
behalf of or bind MORROW in any manner.
13. Additional Agreements.
---------------------
a. Royalties. RIDER ACKNOWLEDGES THAT THIS AGREEMENT SUPERSEDES ALL
---------
OTHER AGREEMENTS OR UNDERSTANDINGS, REGARDING THE PAYMENT OF ROYALTIES, AND NO
OTHER ROYALTIES WILL BE PAYABLE ON MORROW PRODUCTS BEARING RIDER'S NAME, PICTURE
OR LIKENESS DURING THE TERM OF THIS AGREEMENT OR ON PRODUCTS COVERED HEREUNDER.
Page 11 -- AGREEMENT
<PAGE>
b. Future Rights. RIDER hereby grants MORROW a right of first
-------------
refusal to acquire the rights to have RIDER promote and use RIDER's name and
likeness in relation to promoting Excluded Products, to the extent that such
Excluded Products are not subject to a promotional contract with RIDER and a
third party as of January 1, 1998 and, if subject to such contract on January 1,
1998, such right of first refusal shall apply from and after the expiration of
the term of any such contract.
14. Miscellaneous.
-------------
a. Notices. All notices required or permitted to be given under this
-------
Agreement shall be in writing. Notices may be served by airmail, postage paid
with return receipt requested; by private courier, prepaid; by telex, facsimile,
or other telecommunication device capable of transmitting or creating a written
record; or personally. Mailed notices shall be deemed delivered ten (10)
business days after mailing, properly addressed. Couriered notices shall be
deemed delivered on the date that the courier warrants that delivery will occur.
Telex or telecommunicated notices shall be deemed delivered when receipt is
either confirmed by confirming transmission equipment or acknowledged by the
addressee or its office. Personal delivery shall be effective when accomplished.
Unless a party changes its address by giving notice to the other party as
provided herein, notices shall be delivered to the parties at the following
addresses:
Morrow Snowboards, Inc. Todd Richards
2600 Pringle Road SE P.O. Box 4372
Salem, Oregon 97302 Breckinridge, Colorado 80424
P.O. Box 12606 Facsimile: (970) 453-8046
Salem, Oregon 97309 Phone: (970) 453-8046
Facsimile: (503) 315-1199
Phone: (503) 315-1169
b. Governing Law. THE PARTIES INTEND THAT THIS AGREEMENT SHALL BE
-------------
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF OREGON
APPLICABLE TO CONTRACTS MADE AND WHOLLY PERFORMED WITHIN OREGON BY PERSONS
DOMICILED IN OREGON. The parties each consent to the venue and jurisdiction of
any state or federal court located in Marion County, Oregon. Each party agrees
that
Page 12 -- AGREEMENT
<PAGE>
service of process may be made upon it wherever it can be located or by
certified mail directed to its address for notices under this Agreement.
c. Severability; Modification. Any provision of this Agreement that
--------------------------
is deemed invalid or unenforceable shall be ineffective to the extent of such
invalidity or unenforceability, without rendering invalid or unenforceable the
remaining provisions of this Agreement. To the extent any provision herein
would cause RIDER to violate any general rules (a rule not specifically
applicable to MORROW) regarding advertising displays or similar matters of an
event competition, any sponsoring snowboard governing body of an event,
including without limitation, the U.S. Olympic Committee or International
Olympic Committee, the requirements of this Agreement shall be modified for
purpose of that event only, to conform with the requirements of such event.
d. Attorney Fees. If any suit or action arising out of or related
-------------
to this Agreement is brought by any party, the prevailing party or parties shall
be entitled to recover the costs and fees (including without limitation
reasonable attorney fees, the fees and costs of experts and consultants,
copying, courier and telecommunication costs, and deposition costs and all other
costs of discovery) incurred by such party or parties in such suit or action,
including without limitation any post-trial or appellate proceeding.
e. Waiver. No provision of this Agreement shall be deemed to have
------
been waived unless such waiver is in writing signed by the waiving party. No
failure by any party to insist upon the strict performance of any provision of
this Agreement, or to exercise any right or remedy consequent upon a breach
thereof, shall constitute a waiver of any such breach, of such provision or of
any other provision. No waiver of any provision of this Agreement shall be
deemed a waiver of any other provision of this Agreement or a waiver of such
provision with respect to any subsequent breach, unless expressly provided in
writing.
f. Headings. The section headings in this Agreement are included
--------
for convenience only; they do not give full notice of the terms of any portion
of this Agreement and are not relevant to the interpretation of any provision of
this Agreement.
Page 13 -- AGREEMENT
<PAGE>
g. Relationship of the Parties. Neither party hereto shall be
---------------------------
deemed an agent, partner, joint venturer, employer, or related entity of the
other by reason of this Agreement.
h. Continuing Agreement; Binding Effect. This Agreement is a
------------------------------------
continuing agreement and, unless sooner terminated pursuant to Section 11, shall
remain in full force and effect until all obligations of the parties hereunder
have been fully performed or otherwise discharged, and shall bind and inure to
the benefit of, and be enforceable by, the parties hereto and their respective
successors, heirs, and permitted assigns.
i. Counterparts. This Agreement may be executed in any number of
------------
counterparts, all of which when taken together shall constitute one agreement
binding on all parties, notwithstanding that all parties are not signatories to
the same counterpart.
j. Entire Agreement; Amendment. This Agreement, together with the
---------------------------
Exhibits and Appendices hereto, constitutes the entire agreement of the parties
relating to the subject matter hereof. There are no promises, terms, conditions,
obligations, or warranties other than those contained in this Agreement or in
the Exhibits and Appendices hereto. This Agreement supersedes all prior
communications, representations, or agreements, verbal or written, among the
parties relating to the subject matter hereof, including, without limitation,
the Exhibits and Appendices hereto. This Agreement may not be amended except in
a writing executed by the parties.
The parties hereto have caused this Agreement to be executed at Salem,
Oregon on this 9th day of April, 1998, effective as of November 1, 1997.
MORROW SNOWBOARDS, INC., an RIDER
Oregon corporation
By: /s/ Georell Bracelin /s/ Todd Richards
--------------------------- --------------------------
Its: Vice President of Marketing TODD RICHARDS
Page 14 -- AGREEMENT
<PAGE>
EXHIBIT 1
PRO RIDER SERVICES
Mandatory Events Each Season/1/
- ----------------------------
RIDER shall appear in at least ten (10) international competitions per Season
with the expectation that RIDER will spend approximately five (5) days at each
contest, including travel and training time, a total of fifty (50) days. The
types of events will include the U.S. Open, Westbeach Classic, ISF World Cup, X
Games, FIS_World Cup and Olympic qualifying events ("Major Competitions"). For
the 1997 Season, such events, assuming RIDER qualifies, will include the Winter
Olympic Games.
Optional Events Each Season/1/
- ---------------------------
Such other events as MORROW designates.
<PAGE>
EXHIBIT 2
PROMOTIONAL EVENTS
[UNDER REVISION]
Mandatory Events Each Season
- ----------------------------
1. Participation in filming of widely distributed films related to
snowboarding.
2. Photo shoots for product catalogs, magazines and editorials.
3. In-house seminars, summer camps, winter camps and consulting times at
MORROW Snowboards, Inc., including in June through August at MORROW, each
Season.
4. Magazine interviews, photos and appearances.
5. Personal Appearances at shop promotions, media events, trade shows and
other similar events, including in Japan, in Europe and in North America and
Canada.
Optional Events Each Season
- ---------------------------
Other events as MORROW designates such as web site participation.
<PAGE>
EXHIBIT 3
EQUIPMENT TO BE PROVIDED BY MORROW
Products to include snowboards, snowboard bindings, accessories and other
"Designated Products" up to $4,000.00.
/1/ MORROW and RIDER agree to equitably adjust above schedule to the
extent there is any change in the nature, timing and scope of the professional
snowboard contests and events during the term of this Agreement to ensure that
RIDER appears at the type and nature of events outlined above.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-26-1998 DEC-26-1998
<PERIOD-START> JUN-27-1998 DEC-28-1997
<PERIOD-END> SEP-26-1998 SEP-26-1998
<CASH> 360 360
<SECURITIES> 0 0
<RECEIVABLES> 8,661 8,661
<ALLOWANCES> 889 889
<INVENTORY> 7,173 7,173
<CURRENT-ASSETS> 16,049 16,049
<PP&E> 9,219 9,219
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 29,331 29,331
<CURRENT-LIABILITIES> 11,230 11,230
<BONDS> 0 0
0 0
0 0
<COMMON> 27,022 27,022
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 29,331 29,331
<SALES> 12,278 18,280
<TOTAL-REVENUES> 12,278 18,280
<CGS> 7,872 12,404
<TOTAL-COSTS> 7,872 12,404
<OTHER-EXPENSES> 335 1,704
<LOSS-PROVISION> 68 68
<INTEREST-EXPENSE> 168 433
<INCOME-PRETAX> 915 (4,073)
<INCOME-TAX> 55 55
<INCOME-CONTINUING> 860 (4,128)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 860 (4,128)
<EPS-PRIMARY> 0.14 (0.67)
<EPS-DILUTED> 0.14 (0.67)
</TABLE>
