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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 27, 1997
COMMISSION FILE NUMBER 0-27002
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MORROW SNOWBOARDS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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OREGON 93-1011046
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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2600 PRINGLE ROAD, S.E., SALEM, OREGON 97302
(ADDRESS OF PRINCIPAL, EXECUTIVE OFFICES)
(503) 375-9300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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(TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
NONE N/A
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
(TITLE OF CLASS)
COMMON STOCK, NO PAR VALUE (REGISTERED DECEMBER 13, 1995)
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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. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of voting shares held by non-affiliates of the
registrant's common stock on February 27, 1998 was approximately $16,986,000
(based on last sale price of such stock as reported by Nasdaq National
Market).
The number of shares outstanding of the registrant's common stock, no par
value, as of February 27, 1998 was 6,176,556.
DOCUMENTS INCORPORATED BY REFERENCE
Part III is incorporated by reference from the proxy statement to be filed
in connection with the Company's 1998 Annual Meeting of Shareholders.
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CONTENTS
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PART I ................................................................. 1
Item 1. Business........................................................ 1
Item 2. Properties...................................................... 12
Item 3. Legal Proceedings............................................... 12
Item 4. Submission of Matters to a Vote of Security Holders............. 13
PART II ................................................................. 14
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters........................................................ 14
Item 6. Selected Consolidated Financial Data............................ 15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 16
Item 8. Financial Statements and Supplementary Data..................... 23
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure........................................... 43
PART III................................................................. 43
Item 10. Directors and Executive Officers of the Registrant.............. 43
Item 11. Executive Compensation.......................................... 43
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 43
Item 13. Certain Relationships and Related Transactions.................. 43
PART IV.................................................................. 44
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K............................................................ 44
SIGNATURES............................................................... 45
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Morrow Snowboards ("Morrow") is a well recognized designer, manufacturer and
marketer of premium snowboards, bindings, boots and related accessories.
Morrow strives to be one of the leaders in the industry by using innovative
technology to design snowboards that are strong and lightweight with high-
performance characteristics and bindings which are also performance-enhancing
as well as comfortable and easy to use. Morrow's 1998/99 product line includes
52 snowboard models which it manufactures at its facility in Salem, Oregon. In
addition, Morrow assembles 5 types of bindings at its Salem facility for the
1998/99 product line. Morrow also has the new step-in binding "Engage 3
System," and 8 styles of boots manufactured to its specifications. The
manufacturing facility currently is one of the largest producers of snowboards
in North America with additional capacity to manufacture private label
snowboards and bindings.
Morrow's product line, marketed under the "Morrow" brand name, targets a
broad range of consumers, including the young core consumer group, crossover
skiers and new snowboard participants of all ages. Morrow products are sold
predominantly in the United States, Canada, Japan and Europe primarily through
specialty snowboard, outdoor recreation, skate, surf and ski shops ("specialty
retailers"). This distribution channel typically offers superior customer
service and enhances the appeal of the "Morrow" brand name.
In November 1997, Morrow acquired all of the outstanding securities of
Westbeach Snowboard Canada Ltd. ("Westbeach"), a British Columbia company
established in 1979 as a merchandiser of clothing products. Westbeach was
subsequently amalgamated with two acquisition entities to form Morrow
Westbeach Canada ULC, a Nova Scotia unlimited liability company. Westbeach is
well recognized for its designs, manufacturing, wholesaling and retailing of
snowboarding apparel and casual clothing. Wholesale clothing sales account for
approximately 2/3 of Westbeach's sales which are sold in 15 countries through
a network of distributors and sales representatives. Westbeach also sells
snowboards, boots, bindings and a full line of apparel and accessories through
its three retail stores in Canada and the U.S. Westbeach has three
subsidiaries: an Austrian Corporation whose principal activity consists of a
European sales and warehousing operation, a United Kingdom corporation whose
principal activity consists of European sales and a Washington corporation
whose principal activity is U.S. wholesale and retail sales. Morrow also has a
Guam foreign sales corporation, Morrow International, Inc.
As discussed herein, since the acquisition, the consolidated Morrow and
Westbeach companies (the "Company") have established a reorganized and
integrated distribution network that is expected to expand Westbeach
distribution to additional countries and to increase both Morrow and Westbeach
penetration in certain existing markets.
Management believes that "Westbeach" brand clothing presents a strong
complement to Morrow's product lines, and that the combined companies'
increased size and capacity should lead to greater market recognition and
opportunity for both brands.
Unless otherwise indicated, all financial numbers and operating results
presented for the Company for 1997 include information for Morrow for the
entire fiscal year January 1, 1997 through December 27, 1997 and Westbeach
only for the period since Westbeach's acquisition by Morrow (November 13, 1997
through December 27, 1997). Further, all pro forma Westbeach financial
information which is normally expressed in Canadian dollars has been converted
to U.S. dollars at the assumed exchange rate of 1.384 (except as otherwise
indicated herein).
INDUSTRY
In the late 1980s and early 1990s, Morrow was among a small group of
companies that helped pioneer fundamental changes in the construction and
performance characteristics of snowboards. These advances contributed
significantly to the broadening of the industry's consumer base and the
increase in the overall number of snowboard enthusiasts. As an indicator of
its mainstream appeal, snowboarding was designated a full medal sport
beginning with the 1998 Olympic Winter Games.
1
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While the vast majority of snowboarders are young males between the ages of
12 and 24, the snowboard industry is experiencing an increasing percentage of
both male and female participants of all ages, including crossover skiers.
According to the National Sporting Goods Association (the "NSGA"), there were
3.7 million snowboarders in the U.S. in 1996, up from 1.2 million in 1992, a
compound annual growth rate of 33%. According to the NSGA, in recent years the
snowboard industry has experienced rapid growth, whereas the ski industry has
experienced a slight decline.
The recent growth of snowboarding is attributable in part to the perceived
advantages that the sport holds over downhill skiing. Many participants find
snowboarding a more desirable sport in part because of its steeper learning
curve, allowing the rider to advance more quickly, the elimination of poles
and the use of lighter and more comfortable boots and apparel. Snowboarding is
also more easily adaptable to a broader range of conditions than skiing
because of its wider, single carving platform.
The snowboard industry is highly fragmented with more than 100 companies
marketing snowboards. In the U.S. snowboard market, Morrow estimates the
"Morrow" brand has approximately 9-10% market share and ranks third behind
Burton (38%) and K2 (15%) overall and ranks second only to Burton within the
specialty shop distribution channel. The Company believes that significant
consolidation is occurring and will continue to occur over the next two years,
in part as the result of prior production in excess of actual growth.
OPERATING STRATEGY
The Company has implemented its operating strategy based on advanced
technology, extensive in-house snowboard manufacturing capabilities and
focused brand positioning.
Commitment to Technology. The Company incorporates innovative technology to
produce high-quality, high-performance snowboards and bindings. Building on
its foundation in research and development, the Company also leverages its
engineering capabilities to enhance the performance characteristics of its
product line.
Advantages of On-Site Manufacturing. By controlling the manufacturing
process, the Company retains greater flexibility to take advantage of market
opportunities and adjust product line mix to reflect changes in demand. The
Company's manufacturing and administrative facility enables it to spread out
production evenly over the year and realize certain economic benefits.
Focused Brand Positioning. The Company believes that the advanced technology
and high-performance characteristics of its snowboard and binding products
appeal to a broad cross-section of consumers and, based on feedback from its
sales representatives, distributors and customers, provide a basis for brand
loyalty. To increase exposure to the high end of the consumer market, the
Company strategically places its premium line of products with specialty
retailers. Due to the Westbeach acquisition, the Company also now operates
three retail stores selling "Westbeach" brand and other products.
GROWTH STRATEGY
The Company is well positioned to continue to take advantage of expansion in
the industry. The Company's growth strategy is to: (i) maintain technological
leadership through continuous product innovation; (ii) increase efficiencies
in the manufacturing process; (iii) increase distribution of "Morrow" brand
products in Canada and Europe through Westbeach's sales representative and
dealer network; and (iv) increase distribution of "Westbeach" brand products
through the combined companies' increased marketing, finance and manufacturing
expertise.
Product Innovation. The Company will continue to devote significant
resources to research and development to ensure that the Company's products
incorporate the latest technology. The Company has the ability to implement
changes in design to snowboards and bindings during the manufacturing cycle
based on new technology and the feedback it receives from the field.
2
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Increased Manufacturing Efficiencies. The Company expects to continue to
benefit from further plant automation.
Enhanced Distribution and International Growth. The Company's strategic
promotion and sales programs are aimed at increasing market penetration within
the Company's current distribution channel. The Company will continue to
enhance and expand its product lines to capture an increased share of the
growing snowboard market. The Company also focuses on providing superior
service to its retailers. In addition, the Company believes there are
significant opportunities to increase sales internationally, primarily in
Canada and Europe, through Westbeach's sales representative and dealer
network, and will aggressively pursue this growth strategy.
Clothing Line Expansion. In 1980, Westbeach developed and introduced a line
of street clothing aimed at youths ages 16-24 under the Westbeach Streetwear
label. The basic product line of street clothing is aimed at snowboarders, but
has growth potential in all markets, particularly in the U.S. where the
Westbeach brand is becoming better established and more well known. Westbeach
introduced a line of women's snowboard clothing in 1995. Westbeach's design
teams continue to develop new concepts for possible future development.
Strategic Acquisitions. As discussed above, Morrow acquired Westbeach in
November 1997 and as a result now includes "Westbeach" brand snowboarding and
casual clothing in its product line.
TECHNOLOGY AND DESIGN
Since inception, Morrow has been dedicated to the development and
construction of technologically advanced premium snowboards. Using innovative
design techniques and advanced composite technology, Morrow combines a diverse
group of materials with varying physical properties to create product lines
with high-performance characteristics.
The Company has pioneered a number of fundamental elements in its snowboard
construction that are featured in varying combinations throughout the
Company's board lines, including the following:
Composite Core. The Company uses a full-length molded (not injected) polymer
composite core in all of its snowboards to ensure consistent flex and reduce
weight.
Continuous Torsion Box. The Company employs monocoque construction
techniques which feature vertical fiberglass walls connecting the top and
bottom layers, increasing strength while retaining camber and flex
characteristics. Fibers fully encompass the board to give added strength,
while decreasing the weight.
Continuous Braided Torsion Sock (Torque Rod). The Company uses what is
basically a mini torsion box, which provides extra strength near the edges of
the board, allowing the rider extra carving power while maintaining a soft
freestyle feel. This construction concentrates energy from nose to tail,
strengthening the sidewall and adding considerable "spring."
Double Barrel(TM) Construction (Two Torque Rods). The Company has developed
double torque rod construction which offers more independent suspension than
single torque rod construction. The Double Barrel composite torsion box
controls the torsional flex and lateral flex, allowing the board to
continuously "read" the changing terrain.
Triple Barrel Construction (Three Torque Rods). The Company's Triple Barrel
Construction allows even greater control of the board for freestyle maneuvers
and uneven terrain. Added carbon fiber eliminates some of the fiberglass and
weight while retaining the strength of the board.
These innovative features make the "Morrow" brand of snowboards among the
lightest, most durable and responsive snowboards available.
3
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The Company's bindings feature aircraft grade aluminum for light weight and
strength. Its standard bindings feature a ratchet system on its straps for
ease in tightening and release and anatomically correct base plates for right
and left feet. The introduction in the 1998/99 season of the step-in binding
system incorporates a unique boot design featuring custom foot form and
internal highback which can be locked into a supportive position. These
features increase both comfort and performance.
The Company's clothing line includes men's and women's outerwear pants and
jackets, fleece insulating garments, sweaters and T-shirts. The outerwear line
uses adjustable hood technology to allow custom fit at eye level for better
visibility, zip out lining systems and flow through systems to create free air
flow to carry away perspiration while exhaust vents provide a cooling down
ability if required. The fleece product line incorporates both "polyolefin"
and "polartec" fabrics. These fabrics are designed to wick moisture away from
the body, keeping the wearer dry. "Polyolefin" is a light weight fabric
engineered with "micro-ban", an anti-microbial which is built into the
molecular structure so that it does not wash out. "Polartec" is a Malden Mills
branded fabric and is offered in different weights. "Polartec" provides
insulation and breathability.
The Westbeach design team is comprised of senior management, clothing
designers, a product coordinator, retail managers and Westbeach-sponsored
snowboarders. The design team obtains market feedback from distributors,
customer feedback from the retail stores and feedback from its snowboarders.
In addition, senior management travels extensively to all markets to follow
trends among both snowboarding youth and lifestyle customers.
PRODUCTS
The following table sets forth the contribution to net sales attributable to
each of the Company's product groups for the years ended December 27, 1997 and
December 31, 1996 and 1995.
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<CAPTION>
1997 1996 1995
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PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
NET SALES NET SALES NET SALES NET SALES NET SALES NET SALES
-------------- ------------- ------------- ------------- ------------- -------------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
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PRODUCT GROUP
Snowboards.............. $12,833 63.3% $21,246 67.0% $15,868 64.5%
Bindings................ 3,683 18.2 8,337 26.3 6,148 25.0
Boots................... 1,248 6.2 1,432 4.5 1,725 7.0
Accessories and apparel. 1,365 6.8 684 2.2 845 3.5
Retail.................. 1,124 5.5 -- -- -- --
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Total................. $20,253 100.0% $31,699 100.0% $24,586 100.0%
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Through product innovation, the Company continued to expand its market base
with the introduction of new products for the 1997/98 product line. These
introductions included 6 snowboard models, designed for riders who enjoy
freeriding (carving and powder) and are more interested in performance than
image, and updates to the current A1 & M1 bindings which are designed
especially for better fit with various boot styles and sizes.
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The following table sets forth Westbeach's unaudited proforma sales by
product group for the years ended December 27, 1997 and December 31, 1996 and
1995 by product group.
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<CAPTION>
1997 1996 1995
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PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
NET SALES NET SALES NET SALES NET SALES NET SALES NET SALES
-------------- ------------- ------------- ------------- ------------- -------------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
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PRODUCT GROUP
Snowboards.............. $ -- -- % $ -- -- % $ -- -- %
Bindings................ -- -- -- -- -- --
Boots................... -- -- -- -- -- --
Accessories and apparel. 6,271 68.6 6,018 68.4 4,807 66.6
Retail.................. 2,875 31.4 2,777 31.6 2,412 33.4
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Total................. $9,146 100.0% $8,795 100.0% $7,219 100.0%
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Snowboards. The Company designs and manufactures a full product line of
snowboards with a variety of performance characteristics. For the 1998/99
model year, the Company offers 52 snowboards in 12 performance categories
under the "Morrow" brand name, including five "Signature" models, named for
Matt Goodwill and Todd Richards, internationally recognized snowboard
champions and members of the Company's professional snowboarding team.
SNOWBOARD SPECIFICATIONS
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MODEL NAME PRIMARY RIDING STYLE CONSTRUCTION METHOD
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Mach.......... Entry level all mountain Torsion Box w/spring channels
Rail.......... Freeride/Freestyle Torsion Box, Carbon FiberTorque rods
Dimension..... Freeride/Freestyle Torsion Box, Carbon FiberTorque rods
Wildflower.... All Mountain Torsion Box, Carbon FiberTorque rods
Escape........ Freeride Torsion Box, Carbon FiberTorque rods
Escape +...... Freeride (large feet) Torsion Box, Carbon FiberTorque rods
Indy.......... Freeride/Freecarve Torsion Box, Carbon FiberTorque rods
Revert X...... Technical Freestyle Torsion Box, Carbon FiberTorque rods
Lithium....... Freestyle/Freeride Torsion Box, Carbon FiberTorque rods
Masters....... Freeride Torsion Box Triple Barrel
Rocket........ G.S. Race/Freecarve Torque rods/Titanal/IDS
Todd Richards. Freestyle/Freeride Torsion Box, Carbon FiberTorque rods
</TABLE>
Bindings. The Company manufactures and markets 5 models of "Morrow" bindings
that are designed to provide both comfort and performance for a variety of
riding styles and experience levels. The Company's bindings are crafted of
high-grade aircraft aluminum and lightweight plastic resin and are designed to
absorb vibrations, increase range of motion and eliminate pressure points. The
Company's bindings include ratchet buckles, which facilitate use of the
bindings, and anatomically correct base plates, which increase comfort and
performance. In addition to the 5 conventional bindings, the Company has also
developed and introduced an innovative step-in binding system for the 1998/99
product line providing both convenience of entry and enhanced performance.
Boots. The Company markets 8 styles of "Morrow" boots, which incorporate
several high-performance features to provide riders with excellent traction,
shock absorption and stability.
Apparel and Accessories. The Company markets a line of apparel and
accessories with "Morrow" logo, including T-shirts, sweatshirts, hats, caps,
backpacks, and bags. Since the Westbeach acquisition, the Company also markets
a line of technical snowboarding apparel and accessories for men and women
under the "Westbeach" brand.
5
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SALES AND DISTRIBUTION
Sales
The Company's promotion and sales strategy for "Morrow" snowboards and
related products is to increase penetration into the growing domestic and
international snowboard markets, especially at the mid-range to high-end price
points. Domestic penetration will continue through the specialty retail
distribution channel, while international sales will be further developed
through the Company's international dealer and distributor network. The
Company and its distributors participate in North American, European and
Japanese trade shows and advertise in international trade publications.
Due to the seasonal nature of the snowboard industry, a significant portion
of the Company's sales of snowboards and related products occur in the third
and fourth quarters. In 1997, 86% of the Company's sales were made in the last
six months of the year of which 9% were attributed to Westbeach. Typically,
there are limited amounts of sales occurring during the first quarter. These
sales are comprised primarily of close-out sales. The second quarter sales are
comprised largely of international sales and a limited amount of domestic
sales. The last six months of the year are comprised of domestic sales,
typically occurring from August through the end of the year, and the balance
of international sales, typically shipped by the end of the third quarter.
The Company's promotion and sales strategy for "Westbeach" products is to
increase penetration in the North American and international snowboard apparel
markets, as well as to expand Westbeach's presence in the casual wear market.
North American and European market penetration will continue through
Westbeach's specialty retail distribution channel. International sales will be
developed through sales representatives and Westbeach's dealer and distributor
network. Since the acquisition, Morrow's and Westbeach's sales and
distribution networks have been partially combined to create 26 commissioned
sales representatives and 20 distributors covering 17 countries including the
United States and Canada. Westbeach and its distributors historically have
participated in United States, European and Japanese trade shows and
advertised in international trade publications.
Due to the seasonal nature of the snowboard industry and predominance of
snowboarding apparel in Westbeach's product line, a significant portion of
Westbeach's sales occur in the third and fourth quarters. In 1997, more than
70% of the pro forma 12 months sales were made in the last six months of the
year.
Distribution
The Company's primary distribution channels for "Morrow" brand products are
specialty retailers and, to a lesser extent, select regional sporting goods
stores. The primary distribution channels for "Westbeach" brand products are
specialty retailers and Westbeach's three retail stores in the U.S. and
Canada, which comprised 31% of Westbeach's 1997 revenues. Specialty retailers
cater to experienced riders, existing skiers, other winter sport enthusiasts
and new snowboarding participants. These distribution channels allow the
Company to achieve the higher margins associated with the premium snowboard
market and enhance the appeal of the "Morrow" and "Westbeach" brand names.
Within such distribution channels, the Company will continue to focus on and
enhance customer service, including timely delivery of products, high-quality
product information materials and increased access to customer service
representatives.
In the key U.S. markets, the Company distributes its products through
independent sales representatives, who in most cases are subject to a standard
three-year written sales representative agreement that is cancelable on 30
days' notice by either party. Internationally, the Company distributes its
products pursuant to informal agreements to a network of independent local
distributors who, in turn, market and sell the Company's products to retailers
in those markets.
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K.K. Morrow Japan, Inc., Morrow's exclusive distributor of "Morrow" brand
products in Japan, accounted for approximately 30% and 21% of Morrow net sales
for the years ended December 27, 1997 and December 31, 1996, respectively.
Morrow has an exclusive distributorship agreement with K.K. Morrow Japan
through 1999 subject to extension through 2002. The Company has no economic
interest in Morrow Japan, Inc. No other customer accounted for more than 10%
of Morrow's net sales in 1997 or 1996.
Levante, Inc., the exclusive distributor of "Westbeach" brand products in
Japan, accounted for approximately 21% and 31% of Westbeach's net sales for
the years ended December 27, 1997 and December 31, 1996, respectively.
Westbeach has an exclusive distributorship agreement with Levante through
2000. While Levante has been required to purchase certain minimum quantities
of Westbeach products in the past, the minimum purchase requirements, if any,
are being discussed and renegotiated currently. The contract may be canceled
if minimum orders are not received. Westbeach has no economic interest in
Levante. No other customer accounted for more than 10% of Westbeach's net
sales in 1997 or 1996.
The Company's U.S., Canada and export net sales are set forth below for the
years ended December 27, 1997 and December 31, 1996 and 1995. Generally, the
margins for export sales of boots, bindings and snowboards are lower than for
domestic sales, while the margins for apparel and accessory sales are
comparable.
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<CAPTION>
1997 1996 1995
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PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
NET SALES NET SALES NET SALES NET SALES NET SALES NET SALES
-------------- ------------- ------------- ------------- ------------- -------------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
United States........... $11,147 55.0% $19,810 62.5% $16,446 66.9%
Canada(1)............... 1,619 8.0 -- -- -- --
Japan................... 5,738 28.3 6,551 20.7 4,973 20.2
Europe and other(1)..... 1,749 8.7 5,338 16.8 3,167 12.9
------- ----- ------- ----- ------- -----
Total................. $20,253 100.0% $31,699 100.0% $24,586 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
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(1) Prior to 1997, Canadian sales were included in Europe and other, as
amounts were not material.
The following table sets forth Westbeach's unaudited pro forma sales for
Canada, U.S., Japan and Europe for the years ended December 27, 1997 and
December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- ---------------------------- ----------------------------
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
NET SALES NET SALES NET SALES NET SALES NET SALES NET SALES
-------------- ------------- ------------- ------------- ------------- -------------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Wholesale
Canada................ $2,051 22.4% $1,615 18.4% $1,442 20.0%
United States......... 1,080 11.8 1,031 11.7 911 12.6
Japan................. 1,915 20.9 2,751 31.3 1,832 25.4
Europe................ 1,225 13.5 621 7.1 622 8.6
Retail
Canada................ 2,438 26.6 2,369 26.9 2,033 28.2
United States......... 437 4.8 408 4.6 379 5.2
------ ----- ------ ----- ------ -----
Total............... $9,146 100.0% $8,795 100.0% $7,219 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
Westbeach opened its first retail store in Vancouver, British Columbia in
1984 and currently operates three retail stores. Two of the stores are in
British Columbia at locations in Vancouver and Whistler. The third store is
located in Bellevue, Washington, and is operated through Westbeach's wholly-
owned subsidiary, Westbeach Snowboard U.S.A. Inc. Westbeach closed a North
Vancouver, B.C. store in April 1996 to concentrate on the then four remaining
stores and closed its Richmond, B.C. store in January 1997. Retail sales
represented approximately 31.4% of total sales in 1997 and 31.5% of total
sales in 1996.
7
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In the retail stores, Westbeach's products account for approximately 1/3 of
sales. Clothing from other manufacturers also account for approximately 1/3 of
sales, with snowboards and other accessories representing the balance.
Westbeach has historically carried between five and eight brands of
snowboards, plus several brands of boots and bindings in each of its retail
stores.
All store locations are leased. A breakdown of unaudited pro forma sales by
store for the periods ended December 27, 1997 and December 31, 1996 and 1995
is as follows:
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<CAPTION>
1997 1996 1995
---------------------------- ---------------------------- ----------------------------
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
NET SALES NET SALES NET SALES NET SALES NET SALES NET SALES
-------------- ------------- ------------- ------------- ------------- -------------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Vancouver............... $1,525 53.0% $1,379 49.7% $ 891 36.9%
North Vancouver(1)...... -- -- 90 3.3 338 14.0
Richmond(2)............. 2 0.1 243 8.7 278 11.5
Whistler................ 911 31.7 656 23.6 527 21.8
Bellevue (Washington)... 437 15.2 409 14.7 378 15.8
------ ----- ------ ----- ------ -----
Total................. $2,875 100.0% $2,777 100.0% $2,412 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
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(1) The North Vancouver store was closed at the end of April 1996.
(2) The Richmond store was closed at the end of January 1997.
The Whistler store has been in operation since December 1993 and the
Bellevue store and related warehouse space opened in August 1993. The
Vancouver store is the original store and flagship of the group. The Vancouver
store underwent major renovations in 1996 and 1997. Margins in the retail
stores averaged 34.8% in 1997, including Westbeach and non-Westbeach goods.
Margins on Westbeach goods are in the 40-50% range, which are significantly
higher than non-Westbeach goods.
Westbeach found the retail stores offered an outlet for Westbeach clothing
while at the same time provided an opportunity to stay in touch with trends in
apparel. The Company plans to continue to support the retail outlets but has
no plans to expand this distribution outlet at the current time.
MANUFACTURING
The Company manufactures all of its snowboards and bindings at its Salem,
Oregon facility. The Company's manufacturing facility currently is one of the
largest producers of snowboards and bindings in North America. The Company's
experienced in-house manufacturing capability provides advantages over those
snowboard companies that place snowboard orders on an annual basis with OEM
manufacturers. The Company has the ability to implement changes in design and
product mix that may arise during the manufacturing season based on new
technology and the feedback it receives from its customers, sales
representatives, distributors, retailers and professional team riders. The
facility also allows the Company to manufacture product relatively evenly
throughout the year to maintain a stable workforce, reduce down time and
maintain quality.
Each of the products produced by the Company undergoes quality assurance
testing throughout the manufacturing process. The Company has a quality
assurance department which works with the Company's inspectors at various
stages of the manufacturing process. The Company is able to produce uniform
products as a result of its integrated manufacturing process and continuous
quality assurance program.
The Company also has the capability to manufacture private label snowboards
and bindings under short-term agreements. However, it is currently not
actively pursuing this option as part of its overall strategy, which is to
maximize development of the "Morrow" brand products.
8
<PAGE>
The Company has taken certain steps to further position itself for future
growth and, in connection therewith, has implemented and improved certain
controls and systems, including improving its perpetual inventory system. In
addition, the Company has implemented a year 2000 compliant integrated
manufacturing and accounting software system.
"Westbeach" brand products are subcontracted on a fixed contract basis to
independent clothing manufacturers. Approximately 35% of Westbeach's 1997
production was contracted to a single manufacturer in Hong Kong, China, with
the balance contracted 55% to approximately five manufacturers located in the
lower mainland of British Columbia and 10% to a manufacturer in Europe. In
1996, 35% of production was subcontracted to two Chinese manufacturers.
Westbeach has an outside consultant assigned to quality control inspection at
the Chinese manufacturer's plants and who checks production at other plants.
While there are no written contracts with Westbeach's Hong Kong, China or
other manufacturers, relations with such manufacturers are good and Westbeach
expects to continue to source products from those or other manufacturers.
The Company imports finished goods (apparel and accessories) in the U.S.
under multilateral and bilateral trade agreements between the U.S. and China.
These agreements impose import quotas on the amount and types of textile and
products that can be imported into the U.S. from the affected country. To
expand U.S. sales, the Company must ensure its manufacturing sources have
adequate import quotas for the goods. The Company does not anticipate these
restrictions will adversely affect Westbeach's expected growth since the
Company could meet its demands within the U.S. from countries not affected by
the restrictions. Similarly, European sales are primarily subject to European
Economic Community rules. Under those rules, there are few internal trade
barriers but many goods imported to Europe are subject to constraints,
including quotas and duty charges. The Company does not anticipate these
restrictions will materially or adversely affect projected growth.
PRODUCT DEVELOPMENT
The Company strives to be a technology leader in the snowboard industry by
drawing on the expertise of its in-house product development team, outside
design consultants, sales representatives, distributors, retailers and
founders to develop high-performance products. The Company's research and
development efforts have produced significant innovations in the design and
construction of its snowboards and bindings. In addition, the Company has
integrated its professional team riders into its product development process,
allowing regular testing of both prototypes and finished products. This
collaboration continues to produce new products and enhancements to existing
technology. The Company's product development programs are augmented by
research and development assistance provided by principal suppliers of raw
materials to the Company. The Company significantly increased its commitment
to product development of boards and the step-in binding in 1997, with
expenditures of $1,662,000 compared to $769,000 and $787,000 in 1996 and 1995,
respectively.
With the acquisition of Westbeach, the Company has acquired the Westbeach
expertise in the apparel industry. The need for style and design sensitivity
will be factors the in-house expertise incorporate in their collaboration with
outside design consultants, sales representatives and it's retail outlets to
stay on top of the changing trend in apparel.
MARKETING
Snowboards. The goal of the Company's marketing program is to maintain
Morrow's image as one of the leading high-performance snowboard brands in the
specialty retail channel. Whereas many snowboard companies have marketing
strategies that rely primarily on image and graphics, the Company's marketing
efforts also focus on the high-performance characteristics of the Company's
products to appeal to a broad cross-section of consumers. The Company employs
print and broadcast advertising in addition to regularly attending North
American and international trade shows to market its products. The Company
9
<PAGE>
also utilizes a team of professional snowboard riders who provide significant
brand exposure through photographic and editorial coverage in major industry
magazines and at organized snowboarding events, as well as in television
sports coverage and in certain ski/snowboard movies. Additionally, the Company
uses its field support team to promote the "Morrow" brand name in key domestic
snowboarding regions through on-mountain and in-store demonstrations. These
programs are designed to improve the visibility of the Company's products
while enhancing the reputation of the "Morrow" brand.
Snowboarding Apparel and Accessories. The Company's target market for
"Westbeach" snowboard apparel is young people age 16 to 24 years.
Historically, the target market has been heavily weighted toward males;
however, the changing trend is for a greater proportion of females in that age
group to take up snowboarding and become Westbeach customers. Westbeach
introduced a full line of women's outerwear and casual clothing in 1995.
Street Clothing. Snowboarding retailers often market complementary products,
such as skateboarding equipment and clothing, in the non-snowboarding seasons.
While the 16-24 year olds have been significant buyers of Westbeach's street
clothing, the brands have had increased popularity among other age groups as
well. This trend is believed to be due in part to the products' image, styling
and quality and in part to the fact that as traditional customers have grown
older, the brand appeal has simply spilled over into both younger and older
age groups. To reflect this broader appeal, Westbeach's designs have been
trending toward a more "mainstream" look.
CUSTOMER AND RETAILER SUPPORT
The Company provides customer support through its field staff and in-house
personnel, with a focus toward enhancing end-user and retailer satisfaction.
The Company's field support team provides technical support to retailers and
riders and works in conjunction with the Company's independent sales
representatives to provide hands-on education and product demonstrations using
the Company's user-friendly "technical manual." The Company's customer service
group facilitates order entry, tracking and delivery, and is responsible for
oversight of the Company's warranty policy. The Company provides a one-year
warranty on all of its products against defects in materials and workmanship.
The Company repairs or replaces a defective product promptly at no cost to the
owner during the warranty period.
SUPPLIERS
"Morrow" brand products. Based on its internal estimates and discussions
with suppliers, the Company believes that its current or identified suppliers
can meet its raw materials requirements for the foreseeable future, although
there have been shortages generally in the availability of certain raw
materials used in manufacturing snowboards, including aluminum, fiberglass and
certain plastics. Most of the Company's suppliers are domestically based, with
several suppliers located in the Pacific Northwest. The Company's snowboard
boots are manufactured to its specifications under agreements with independent
footwear manufacturers located in Korea, Taiwan and China. The Company has
developed second sources of supply for all of its significant raw materials.
The Company's accessory products are sourced through a variety of U.S. and
foreign manufacturers. The Company has no long-term contracts with any
suppliers of components for its snowboards, bindings, apparel or accessories.
"Westbeach" brand products. Four manufacturers located in Korea, Republic of
China, and People's Republic of China have been contracted to manufacture the
Company's Westbeach line of snowboard outerwear and certain of its casual
streetwear styles for the 1998/99 season. A small portion of Westbeach apparel
is manufactured in Canada. For goods manufactured in Asia, the independent
contractors are responsible for the purchase of raw materials under the
Company's direction. For goods manufactured in Canada, the Company purchases
fabric and other raw materials and the contractor is contracted for cutting
and sewing only. Based on discussions with the independent contractors and
with
10
<PAGE>
fabric mills and suppliers of other raw materials, the Company believes that
adequate supplies of fabric and other raw materials are available for the
foreseeable future. The Company has no long-term contracts with either its
independent contractors or its suppliers of fabric and other raw materials.
COMPETITION
The snowboard industry is highly competitive, and the Company expects this
competition to increase as market interest in snowboards continues to grow.
The Burton Corporation is currently the leader in the industry, followed by K-
2, Ride and Morrow, with several other companies having smaller but
significant market shares, and over 100 other smaller manufacturers and
distributors sharing the remainder of the market. The Company believes that
significant consolidation will occur over the next two years. The Company
competes with a number of established manufacturers and distributors. In
addition, manufacturers and large ski and sporting goods companies could
introduce additional competition by developing new snowboard brands or
acquiring other snowboard companies. Nike, Inc. has indicated it intends to
market Nike(R) brand snowboards and boots and bindings in the 1999/2000
season.
The market for snowboarding apparel and casual clothing is also highly
competitive and the Company expects competition to increase as market interest
in snowboards continues to grow. The Burton Corporation is currently the
leader in the snowboard apparel industry, with several other companies,
including Westbeach, having smaller but significant market shares, and many
smaller manufacturers and distributors sharing the remainder of the market.
Other significant competitors in the apparel area include Sims, AGC (Nike,
Inc.), Bonfire, NFA, Sessions and Special Blend in the high end specialty
markets. The Company believes Westbeach's strongest markets are Canada and
Europe, and that Westbeach is not yet a major competitor in the U.S. market.
Westbeach competes with a number of established manufacturers and
distributors. In addition, other established manufacturers could introduce
additional competition by introducing snowboard apparel under existing brands,
developing new sports apparel brands or acquiring other snowboard apparel
brands. Nike, Inc., which already manufactures snowboard and other clothing
under the AGC brand, has announced its intention to enter the snowboarding
industry on a broader scale, including introducing snowboards, bindings and
boots.
INTELLECTUAL PROPERTY
Except for the Company's advanced boot-binding (step-in) system, the Company
does not generally rely on proprietary rights associated with its technology.
The Company believes its product development and marketing capabilities have
been of greater importance to its business than patent or trademark
protection. Due in part to rapid technological changes in snowboarding, the
Company does not believe that its business depends on obtaining and enforcing
broad protection of its intellectual property, although it believes that
obtaining patent and other intellectual property protection may provide it
with benefits. The Company has a patent application pending in the U.S. for an
advanced boot-binding system. In addition, the Company anticipates that it
will seek patent protection for future innovations, where available.
The Company has federal trademark registrations in the U.S. for the "Morrow"
name used alone and in connection with certain designs. The Company has been
assigned trademark rights to the "Morrow" name in Japan. In addition, the
Company has applied for trademark registration in the U.S. and Japan for the
Morrow crescent moon symbol and other marks appearing on certain of its
products. The Company has applied for trademark registration in Japan, Peru,
Chile and the European Economic Community for the "Morrow" name. The Company
also claims common law rights to the foregoing and to various other trademarks
arising out of the use of such marks.
The Company also has trademark protection for the "Westbeach" name in 17
countries, including Japan, the U.S. and Canada, and is seeking protection in
all of the European Economic Community and 8 additional countries for the
"Westbeach" brand for use with snowboarding apparel and, to a lesser degree,
trademark protection for the "3 surfer" and other marks. The Company also
claims common law rights to the foregoing and various other trademarks arising
out of its use of such marks.
11
<PAGE>
From time to time, the Company has received, and may in the future receive,
third-party claims asserting intellectual property rights relating to the
Company's products and product features. The Company investigates any such
claims and determines an appropriate response depending on the claim's
strength, its significance to the Company's business, and financial
considerations. The Company has incurred no material liabilities as a result
of any such third-party claims.
EMPLOYEES
As of December 27, 1997, the Company had 284 employees, including 167 in
manufacturing; 22 in general and administrative; 47 in sales, marketing and
customer service; 22 in product engineering, research and development; and 26
in Westbeach's retail sales operations. The Company's employees are not
subject to a collective bargaining agreement. The Company considers its
employee relations to be good.
The Company also engages the services of 26 independent sales
representatives who are responsible for selling the Company's products to
retailers in the United States and Canada, 4 independent field representatives
in the United States and 11 professional team riders in Europe, Canada and the
United States, all of whom the Company considers to be independent
contractors. The number of professional riders is under review.
ENVIRONMENTAL
Based on a review of its manufacturing practices and activities, the Company
believes that it is currently in substantial compliance with environmental
laws and regulations, and does not believe that it will be required to make
significant capital expenditures in order to comply with such laws and
regulations as they currently exist.
ITEM 2. PROPERTIES
The Company owns its approximately 106,000 square foot administrative and
manufacturing facility in Salem, Oregon. Prior to March 1996, the Company
leased the space.
The Company leases 2,200 square feet in the building adjacent to the
Company's manufacturing facility under a lease expiring September 30, 2000.
The Company also holds various leases to maintain the operations of its
subsidiaries.
The Company leases administrative and warehouse space in Vancouver, British
Columbia of approximately 16,000 square feet through April 30, 1998 with a
five-year renewal option, and in Innsbruck, Austria of approximately 2,500
square feet on a month-to-month basis. Use of approximately 1,000 square feet
of warehouse space was leased through 1997 near Munich, Germany.
The Company also leases warehouse and retail space of approximately 3,500
square feet in Bellevue, Washington under a lease expiring July 31, 1998 with
a five-year renewal option.
Finally, the Company leases retail space in Whistler Mountain, British
Columbia under a lease expiring December 11, 1998 with a one-year renewal
option, and in Vancouver, British Columbia under a lease expiring March 31,
2005 with a five-year renewal option.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in any material litigation or legal
proceeding and is not aware of any potentially material litigation or
proceeding threatened against it other than as described below.
Subsequent to the year ended December 27, 1997, the Company filed a claim
against The Board Locker for collections of receivables due in the amount of
$479,000, a portion of which has been reserved. Morrow Snowboards, Inc. v.
Principle Marketers, Inc., dba The Board Locker and Scott Hardy, Circuit Court
Case No. 98C-10879, for the Circuit Court of Marion County, Oregon. The
complaint was filed on
12
<PAGE>
January 29, 1998. The Company is seeking to recover $478,715 from Principle
Marketers Inc. directly and Scott Hardy as a guarantor of such obligations,
for goods sold to Principle Marketers, Inc., plus accrued services charges of
$76,961.63 from January 1, 1997, through January 20, 1998, plus service
charges at 18% per annum from January 29, 1998, until judgment, plus
attorney's fees and costs and disbursements, plus 18% on all proceedings from
the date of judgment until paid,
The Company intends to vigorously defend against any lawsuit brought seeking
injunctive relief or damages from the Company relating to these matters. There
can be no assurance, however, that the Company will be successful in the
defense of any such claims. An award of damages or the expenditure of
significant sums in such cases referenced above could have a material adverse
effect on the Company's financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since December 14, 1995, the Company's Common Stock has been trading on the
Nasdaq National Market under the symbol "MRRW." As of February 27, 1998, there
were 552 holders of the Common Stock of the Company. Since certain of the
shares of Common Stock are held in street name, there may be additional
beneficial holders of the Company's Common Stock. On February 27, 1998, there
were 6,176,556 shares outstanding.
The following table shows the range of high and low market prices as
reported by the Nasdaq National Market for the past two calendar years:
<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
NATIONAL MARKET SYMBOL: MRRW
1st Quarter, 1996.............................................. $16.50 $9.25
2nd Quarter, 1996.............................................. $12.50 $8.75
3rd Quarter, 1996.............................................. $13.25 $9.00
4th Quarter, 1996.............................................. $13.25 $5.75
1st Quarter, 1997.............................................. $ 7.75 $4.50
2nd Quarter, 1997.............................................. $ 5.50 $3.25
3rd Quarter, 1997.............................................. $ 4.88 $3.25
4th Quarter, 1997.............................................. $ 4.00 $2.22
</TABLE>
The Company has paid no dividends on its Common Stock since its inception.
For the foreseeable future any earnings will be retained to finance the growth
of the Company and, accordingly, the Company does not anticipate the payment
of cash dividends.
14
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents a summary of selected financial data for each of
the five years in the period ended December 27, 1997.
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------------------------------
DECEMBER 31,
DECEMBER 27, ------------------------------------------
1997 1996 1995 1994 1993
------------ --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $ 20,253 $ 31,699 $ 24,586 $ 13,844 $ 8,875
Cost of goods sold(2)... 15,971 20,843 17,165 9,516 5,873
--------- --------- --------- --------- ---------
Gross profit........ 4,282 10,856 7,421 4,328 3,002
Operating expenses:
Selling, marketing and
customer service..... 4,666 4,592 3,459 2,108 1,287
Engineering, research
and product
development.......... 1,662 769 787 248 136
General and
administrative(2).... 3,789 2,581 1,595 868 685
Loss on facility lease
termination(1)....... -- -- -- 352 --
Loss on write-down of
fixed assets(2)...... 1,568 -- -- -- --
--------- --------- --------- --------- ---------
Total operating
expenses........... 11,685 7,942 5,841 3,576 2,108
--------- --------- --------- --------- ---------
Operating income (loss). (7,403) 2,914 1,580 752 894
Interest expense........ (87) (153) (865) (500) (558)
Other income (expense).. 341 666 34 (50) (10)
--------- --------- --------- --------- ---------
Income (loss) before
income taxes........... (7,149) 3,427 749 202 326
Income tax benefit
(expense).............. 129 (1,280) (264) 131 (6)
--------- --------- --------- --------- ---------
Net income (loss)....... $ (7,020) $ 2,147 $ 485 $ 333 $ 320
========= ========= ========= ========= =========
Net income (loss) per
share(3),(4)
Basic................. $ (1.24) $ 0.38 $ 0.15 $ 0.13 $ 0.18
========= ========= ========= ========= =========
Diluted............... $ (1.24) $ 0.36 $ 0.14 $ 0.12 $ 0.16
========= ========= ========= ========= =========
Weighted average number
of shares
outstanding(3),(4)
Basic................. 5,671,634 5,684,053 3,130,636 2,592,411 1,822,802
========= ========= ========= ========= =========
Diluted............... 5,671,634 5,929,674 3,822,569 2,837,545 2,091,022
========= ========= ========= ========= =========
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 855 $ 5,062 $ 15,026 $ 509 $ 47
Short term investments.. -- 3,700 -- -- --
Current assets.......... 13,911 23,017 24,200 5,645 4,345
Property, plant and
equipment, net......... 9,547 9,183 6,936 6,140 2,262
Total assets............ 27,653 32,243 31,179 11,821 6,607
Current liabilities..... 5,311 3,789 5,478 4,845 4,564
Long-term debt and
capital lease
obligations, net of
current portion........ 254 258 475 2,688 546
Shareholders' equity(5). 22,058 27,892 25,150 3,975 1,497
</TABLE>
- --------
(1) The Company moved to its present administrative and manufacturing facility
in August 1994. The Company's previous facility was leased under an
operating lease that was to expire in April 1996,
15
<PAGE>
and the Company recognized an expense of $110,000 associated with
terminating such lease. In addition, leasehold improvements with a net book
value of $242,000 were written off in connection with the move to the
present facility. Both of these amounts have been included in operating
expenses for the year ended December 31, 1994.
(2) In 1997, the Company experienced a significant reduction in net sales due
to soft market conditions and oversupply of snowboards which, among other
factors, resulted in a significant loss. In addition, the Company
evaluated its equipment used in the manufacture of snowboards, boots and
bindings in light of current and future usage and expected market demand
and provided a write-down in the statement of operations of $1,568,000 in
the fourth quarter of 1997 to reflect the equipment at net realizable
value. In addition, in the fourth quarter 1997, the Company recorded
significant changes in estimates for the allowance for doubtful accounts
and direct write-offs of accounts receivable of $524,000, an increase in
the reserve for inventory obsolescence of $638,000, and increases in the
deferred tax valuation allowance of $770,000.
(3) Common share equivalents included in the computation of per share amounts
represent shares issuable upon assumed exercise of stock options and
warrants using the treasury stock method.
(4) Weighted average number of shares and net income (loss) per share for the
years ended 1996, 1995, 1994 and 1993 have been restated in accordance
with SFAS No. 128, " Earnings Per Share."
(5) In December 1995, the Company completed an initial public offering of
1,919,500 shares of common stock at $11.00 per share. Net proceeds to the
Company were $18,517,000.
ITEM 7. 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. The
Company's consolidated net sales have decreased 36.1% to $20,253,000 for the
year ended December 27, 1997 ("1997 fiscal year") from $31,699,000 in 1996.
Net sales for Westbeach for the period of November 13, 1997 through December
27, 1997 included in consolidated net sales were $1,810,000 at an average
exchange rate of 1.4227 U.S. dollars, which makes up 8.9% of the consolidated
net sales of $20,253,000. Net sales generated by Westbeach for the period
ended January 1, 1997 through November 12, 1997 were $ 7,336,000 and
$9,146,000 for the year ended December 27, 1997, assuming an annual average
exchange rate of 1.384 U.S. dollars. Unless otherwise indicated financial
results and numbers herein include Westbeach sales and financial information
for the period November 13, 1997 to December 27, 1997 for the 1997 fiscal
year.
Due to the seasonal nature of the snowboard industry, a majority of the
Company's sales occur in the last two quarters of the year. In 1997 and 1996,
over 86% (85% without Westbeach sales) and 90% of the Company's net sales
occurred in the last six months of the year, respectively. Gross margins vary
significantly throughout the year depending on product mix, price, production
volumes, fixed and semi-variable cost components, changes in raw materials and
other manufacturing costs. In 1997, close-out sales of 1996/97 product
occurred during the first six months of the year and were at lower margins
than 1997/98 "Morrow" brand products. The Company's production utilization has
a significant impact on gross margins because when production is at lower
levels, fixed and semi-variable manufacturing costs are spread over a smaller
production base. Conversely, as the Company increases production, margins
improve because of the higher production base. The Company's operating and
growth strategies focus on increasing overall sales of all product lines,
further improving the quality of its products and increasing manufacturing
efficiencies. These strategies enable the Company to manufacture at more
consistent levels, thus maintaining higher quality and a more stable work
force, reducing down time and maximizing the use of capital assets.
16
<PAGE>
The Company accumulates a significant backlog of sales orders in February
and March of each year as a result of preseason orders placed in connection
with winter sports trade shows. As the Company begins delivery of preseason
orders, backlog sales orders decrease and are usually eliminated by the end of
the year.
The Company has taken certain steps to position itself for future growth,
including focusing on other product lines offered by the Company, such as
apparel, boots and bindings, improving operating efficiencies, maintaining an
efficient management staff with expertise in core areas of the business and
implementing financial and accounting controls and systems.
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods
indicated as a percentage of net sales.
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------------
DECEMBER 27, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net sales............................ 100.0 % 100.0 % 100.0 %
Cost of goods sold................... 78.9 65.8 69.8
----- ----- -----
Gross profit..................... 21.1 34.2 30.2
Operating expenses:
Selling, marketing and customer
service........................... 23.0 14.5 14.1
Engineering, research and product
development....................... 8.2 2.4 3.2
General and administrative......... 18.7 8.1 6.5
Loss on write-down of fixed assets. 7.8 -- --
----- ----- -----
Total operating expenses......... 57.7 25.0 23.8
----- ----- -----
Operating income (loss).............. (36.6) 9.2 6.4
Interest expense..................... (0.4) (0.5) (3.5)
Other income......................... 1.7 2.1 0.1
----- ----- -----
Income (loss) before income taxes.... (35.3) 10.8 3.0
Income tax benefit (expense)......... 0.6 (4.0) (1.0)
----- ----- -----
Net income (loss).................... (34.7)% 6.8% 2.0%
===== ===== =====
</TABLE>
COMPARISON OF THE YEARS ENDED DECEMBER 27, 1997 AND DECEMBER 31, 1996
Net Sales. Net sales for 1997 decreased 36.1% to $20,253,000, ($18,443,000
or 41.8% if Westbeach sales are excluded) from $31,699,000 for 1996. The
decrease in sales was primarily due to the general oversupply of snowboards in
the market in 1996 and Company efforts to combat "gray market" sales into
conventional distribution channels. This caused a decrease in pre-season sales
orders for 1997, as well as reorders during 1997. The sale of snowboards in
1997 decreased 39.6% to $12,833,000 from $21,246,000 in 1996. The sale of
bindings decreased 55.8% to $3,683,000 in 1997 from $8,337,000 for 1996. The
sale of boots decreased 12.8% to $1,248,000 for 1997 compared to $1,432,000 in
1996. As a percentage of net sales, snowboards represented 63.3% in 1997
(69.6% if Westbeach sales are excluded) compared to 67% in 1996. In 1997,
"Morrow" brand snowboards represented 59.6%, (94.0% of total snowboard sales),
(65.4% if Westbeach sales are excluded) of net sales compared to 65.2% (97.2%
of total snowboard sales) in 1996. OEM snowboard sales represented 3.7% of net
sales in 1997 (4.0% if Westbeach sales are excluded) compared to 1.8% in 1996.
As a percentage of net sales, binding sales decreased to 18.2% in 1997 (20.0%
if Westbeach sales are excluded) compared to 26.3% for 1996 partially due to
the lack of a step-in binding. Boot sales increased to 6.2% of net sales in
1997 (6.8% if Westbeach sales are excluded) from 4.5% in 1996. Apparel sales
increased to 6.8% of net sales in 1997 from 2.2% in 1996 largely due to
Westbeach sales which were 3.3% of net sales in 1997. Retail sales constituted
5.5% of total sales as a result of the Westbeach acquisition in November 1997.
17
<PAGE>
Gross Profit. Gross profit for 1997 decreased 60.6% to $4,282,000 from
$10,856,000 for 1996 as a result of the overall decrease in sales and
increased manufacturing overhead costs. Total gross margin for 1997 decreased
to 21.1% from 34.2% for 1996.
Selling, Marketing and Customer Service. Selling, marketing and customer
service expenses for 1997 remained fairly constant at $4,666,000 from
$4,592,000 for 1996, representing 23.0% and 14.5% of net sales, respectively.
The increase in the percentage of net sales is due to the decrease in net
sales and the fact that expenses remained constant during 1997. Although these
types of expenditures remained constant, the Company increased it's efforts at
market exposure by increases in team rider travel, participating in the
Montreal trade show for the first time and providing for improvements to the
Company show booths. In addition, the Company significantly increased its
internal advertising activities in an effort to eliminate agency fees and
control long term costs.
Engineering, Research and Product Development. Engineering, research and
product development expenses for 1997 increased 116.1% to $1,662,000 from
$769,000 for 1996, representing 8.2% and 2.4% of net sales, respectively.
Increased product development expense in 1997 also reflected significantly
increased staff and consulting fees and significant efforts in development of
the Company's proprietary step-in binding system.
General and Administrative. General and administrative expenses for 1997
increased 46.8% to $3,789,000 from $2,581,000 for 1996, representing 18.7% and
8.1% of net sales, respectively. This increase was primarily due to the
increase in bad debt expense to $960,000 in 1997 compared to $110,000 for
1996. The increase in bad debt expense is a reflection of the soft snowboard
market in 1997 and its effect on Morrow customers. All other expense
categories remained relatively consistent on a dollar year-to-date basis.
Loss on Write-down of Fixed Assets. As mentioned above, in 1997 the Company
experienced a significant reduction in net sales due to soft market conditions
and oversupply of snowboards which, among other factors, resulted in
significant loss. Accordingly, the Company evaluated its equipment for
snowboards, boots and bindings in light of current and future usage and
expected market demand and provided a write-down in the 1997 statement of
operations of $1,568,000 to reflect the equipment at net realizable value.
Interest Expense. Interest expense decreased 43.1% to $87,000 for 1997 from
$153,000 for 1996. This decrease was primarily a result of using cash raised
in the December 1995 initial public offering, which significantly reduced the
need for outside borrowing in 1997.
Other Income. Other income decreased to $341,000 for 1997 from $666,000 in
1996, largely as a result of the decrease in interest income. The Company sold
all short term investments throughout the year ended December 27, 1997.
Income Tax Benefit (Expense). The income tax benefit for 1997 was $129,000
compared to an expense of $1,280,000 for 1996. The effective income tax rates
were 1.8% and 37.4% for 1997 and 1996, respectively. The low effective tax
rate for 1997 is due to the fact that the Company provided a valuation
allowance on its net deferred tax assets as of December 27, 1997.
Net (Loss) Income. Net loss for 1997 was $7,020,000 compared to net income
of $2,147,000 for 1996.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Net Sales. Net sales for 1996 increased 28.9% to $31,699,000 from
$24,586,000 for 1995. This increase was due to increased sales to domestic and
international customers of "Morrow" brand
18
<PAGE>
snowboards, bindings and boots, primarily during the last six months of 1996.
The sale of snowboards in 1996 increased 33.9% to $21,246,000 from $15,868,000
in 1995. The sale of bindings increased 35.6% to $8,337,000 in 1996 from
$6,148,000 for 1995. The sale of boots decreased 17.0% to $1,432,000 for 1996
compared to $1,725,000 in 1995. As a percentage of net sales, snowboards
represented 67.0% in 1996 compared to 64.5% in 1995. In 1996, "Morrow" brand
snowboards represented 65.2% (97.2% of total snowboard sales) of net sales
compared to 50.3% (77.9% of total snowboard sales) in 1995. OEM snowboard
sales represented 1.8% of net sales in 1996 compared to 14.2% in 1995. As a
percentage of net sales, binding sales remained relatively constant at 26.3%
and 25.0% for 1996 and 1995, respectively. Boot sales decreased to 4.5% of net
sales in 1996 from 7.0% in 1995.
Gross Profit. Gross profit for 1996 increased 46.3% to $10,856,000 from
$7,421,000 for 1995 as a result of the overall increase in sales and increased
manufacturing efficiencies. Total gross margin for 1996 increased to 34.2%
from 30.2% for 1995. The gross margin on boards and bindings manufactured for
the 1996 selling season increased as a result of increases in the level of
production and manufacturing efficiencies throughout the year and an increase
in the sale of higher margin "Morrow" brand snowboards and bindings. During
1996, management focused on increasing the sale of "Morrow" brand snowboards
and bindings and decreasing the sale of lower margin OEM snowboards and
bindings.
Selling, Marketing and Customer Service. Selling, marketing and customer
service expenses for 1996 increased 32.8% to $4,592,000 from $3,459,000 for
1995, representing 14.5% and 14.1% of net sales, respectively. The Company's
growth required increased expenses associated with additional staff and
increased promotion and marketing activities, consulting expenses, trade show
expenses and sales commissions. As a percentage of net sales, the more
significant changes were consulting expenses increasing 0.4%, commissions
increasing 0.3% and promotional and marketing expenses decreasing 0.4%. All
other expense categories remained relatively consistent as a percentage of net
sales on a period-to-period basis.
Engineering, Research and Product Development. Engineering, research and
product development expenses for 1996 decreased 2.3% to $769,000 from $787,000
for 1995, representing 2.4% and 3.2% of net sales, respectively. This decrease
was primarily due to a reduction in staff and employee-related expenses. As a
percentage of net sales, staff and employee-related expenses decreased 0.7%
and research and development expenses decreased 0.3%. All other expense
categories remained relatively consistent as a percentage of net sales on a
year-to-year basis.
General and Administrative. General and administrative expenses for 1996
increased 61.8% to $2,581,000 from $1,595,000 for 1995, representing 8.1% and
6.5% of net sales, respectively. This increase was primarily due to additional
staff and employee-related expenses and increased professional fees, partially
due to the increased cost of operating as a public company in 1996, compared
to 1995. As a percentage of net sales, professional services increased 0.9%.
All other expense categories remained relatively consistent as a percentage of
net sales on a year-to-year basis.
Interest Expense. Interest expense decreased 82.3% to $153,000 for 1996 from
$865,000 for 1995. This decrease was primarily due to the Company's purchase
of its manufacturing and administrative facility in March 1996. Prior to the
purchase, the facility was leased by the Company. As a result of the cash
raised in the December 1995 initial public offering, the Company did not have
any other significant borrowings outstanding in 1996.
Other Income. Other income increased to $666,000 for 1996 from $34,000 in
1995, largely as a result of interest income on the cash raised in the
Company's initial public offering in December 1995.
Income Tax Expense. The income tax expense for 1996 was $1,280,000 compared
to $264,000 for 1995. The effective income tax rates were 37.4% and 35.2% for
1996 and 1995, respectively.
Net Income. Net income for 1996 was $2,147,000 compared to $485,000 for
1995.
19
<PAGE>
YEAR 2000
During 1997, the Company implemented new Year 2000 compliant financial
systems to replace its older financial systems as part of its normal course of
business. The Company is in the process of assessing any additional Year 2000
compliance issues, but does not expect the potential effect on operations to
be material. However, there can be no guarantee that the systems of other
companies on which the Company relies will be converted on a timely basis and
would not have an adverse effect on the Company's operations.
MARKET RISK
The Company accumulates foreign currency in payment of accounts (principally
Canadian dollars) which it then uses to pay its foreign vendors or converts to
U.S. dollars, exposing the Company to fluctuations in currency exchange rates.
The Company currently holds foreign currencies which are translated into
dollars using the year-end exchange rate, for a total of $867,000. The
potential loss in fair value resulting from an adverse change in quoted
foreign currency change rates of 10% amounts to $105,000. Actual results may
differ. The Company does not hold other market risk sensitive instruments and
therefore does not expect to be affected by any adverse changes in commodity
prices, marketable equity security prices, or interest rates.
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 December 27, 1997, the Company
had $855,000 in cash and revolving loans of $1,923,000, compared to $8,762,000
in cash and short term investments and no revolving loans outstanding at
December 31, 1996.
Net cash used in operating activities for 1997 was $211,000, resulting
primarily from net loss of $7,020,000, with add backs for depreciation and
amortization of $1,593,000, loss on write-off of fixed assets of $1,568,000,
decreases in accounts receivable of $5,155,000, decreases in inventories of
$1,732,000, offset by decreases in accounts payable and accrued liabilities of
$1,894,000. The decrease in accounts receivable is attributable to the
decrease in sales for the year.
Net cash used in investing activities for 1997 was $1,829,000, of which
$2,975,000 was used for the acquisition of property and equipment and
$2,554,000 was used for the purchase of the securities of Westbeach, off-set
by $3,700,000 from the proceeds of sales of short-term investments.
Net cash used in financing activities for 1997 was $2,167,000, consisting of
$1,923,000 from net borrowings under the revolving credit facility, less
$596,000 from the repurchase of common stock and $3,546,000 from payments on
short- and long-term borrowings, primarily those assumed in the Westbeach
acquisition.
The Company has a revolving credit facility with LaSalle Business Credit,
Inc. (the "Bank"). The Company's line of credit under the revolving credit
facility is up to $7,000,000 for the period between October 15 and February
28, and up to $14,000,000 for the period between March 1 and October 14. As a
sub-limit to the revolving credit facility, the Company has a letter of credit
facility with the Bank for an amount up to $5,000,000. The line of credit
available under the revolving credit facility from time to time is reduced by
the amount then outstanding under this sub-limit.
The credit facility bears interest at the Bank's Prime Rate plus .25
percent. The Company has the option under the credit facility to request a
fixed interest rate for specified periods equal to the Bank's LIBOR Rate plus
2.75 percent. Upon the Company's achievement of certain profitability
requirements, the interest rate would be reduced to the Bank's Prime Rate, or
its LIBOR Rate plus 2.5 percent.
The Company is required to pay the Bank a monthly fee equal to .25 percent
per annum on the daily average unused amount of the revolving credit facility.
The Company is also required to pay the Bank a
20
<PAGE>
monthly fee equal to 1.5 percent per annum on the aggregate undrawn face
amount of all outstanding letters of credit for the Company's account.
The credit facility is available through November 10, 2000, with one-year
renewal periods thereafter. At December 27, 1997, the outstanding principal
balance under the facility was $1,923,000.
The revolving facility is secured by substantially all of the Company's
assets. The revolving credit facility contains various covenants that require
the Company, among other things, to meet certain objectives with respect to
net worth, capital expenditures, interest coverage and debt service coverage.
The Company's net worth is currently below that required in the revolving
credit facility, an event of default under the revolving credit facility. The
Bank, to preserve its rights, has noted the default, and agreed to forbear
from exercising its rights and remedies under the revolving credit facility
until April 10, 1998 to give the Company time to address the Bank's concerns.
During the forbearance period, the Bank has invoked the Default Rate of
Interest (two percent (2%) above the normal rate), suspended the LIBOR
conversion rate, and limited advances under certain lines to $-0- on raw
materials, $7,000,000 on the revolver amount and $4,000,000 on inventory
advances.
To address the Bank's concerns, as well as its own projected working capital
needs, the Company may need to raise additional capital. If the Company were
unsuccessful in addressing the Bank's concerns during the forbearance period
or in raising additional working capital, the Company's operations and ability
to realize on its business plan could be adversely affected.
The Company's debt structure is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 27,
1997
------------
<S> <C>
Short-term debt:
Borrowings under revolving line of credit................... $1,923,000
Current portion of capital lease obligations................ 139,000
Long-term debt:
Capital lease obligation, net of current portion............ 254,000
</TABLE>
Assuming certain minimum pre-book orders for the 1998/99 season, the Company
believes that it has adequate resources at its disposal to raise additional
working capital either under the existing revolving credit facility, or by
selling or mortgaging the building where its snowboards are manufactured, or
issuing new subordinated debt or preferred securities. In addition, the
Company believes it will be able to trim its operating costs significantly in
1998 such that the amount of additional working capital required will be
reduced. However, there can be no assurance that the Company will be able to
raise additional capital on terms acceptable to the Company or that it will be
able to do so on a timely basis.
FACTORS THAT MAY AFFECT FUTURE RESULTS
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 in the
future to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company. These factors include,
without limitation, cure or waiver of the existing bank line default, adequate
sales volume, new initiatives by competitors, price pressures, cancellation of
preseason orders, inventory risks due to shifts in market demand, raw
materials costs, the ability to manufacture product at planned costs, weather
in primary winter resort areas of the world, the Company's ability to obtain
21
<PAGE>
adequate financing, address lenders' concerns and achieve sufficient sales
levels and the risk factors listed from time to time in the Company's SEC
reports, including, but not limited to, this report.
Management is unaware of any other trends or conditions that could have a
material adverse effect on the Company's consolidated financial position,
future results of operations or liquidity. However, investors should also be
aware of factors which could have a negative impact on prospects and the
consistency of progress. These include political, economic or other factors
such as currency exchange rates, inflation rates, recessionary or expansive
trends, taxes and regulations and laws affecting the worldwide business in
each of the Company's markets; competitive product, advertising, promotional
and pricing activity; dependence on the rate of development and degree of
acceptance of new product introductions in the marketplace; and the difficulty
of forecasting sales at certain times in certain markets.
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Morrow Snowboards, Inc.:
We have audited the accompanying consolidated balance sheets of Morrow
Snowboards, Inc. (an Oregon corporation) and subsidiaries as of December 27,
1997 and December 31, 1996 and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 27, 1997. These financial statements and the
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Morrow Snowboards, Inc.
and subsidiaries as of December 27, 1997 and December 31, 1996, and the
results of their operations and their cash flows for each of the three years
in the period ended December 27, 1997 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred significant losses in 1997 and
is in default of the minimum net worth covenant under the Company's line of
credit agreement. The lender has agreed to forbear its rights and remedies
under the line of credit agreement until April 10, 1998. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1.
The financial statements do not include any adjustments relating to the
recoverability and classifications of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable
to continue as a going concern.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule of Valuation
and Qualifying Accounts is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in our audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein, in relation to the basic
consolidated financial statements taken as a whole.
Arthur Andersen LLP
Portland, Oregon
March 17, 1998
23
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents.......................... $ 855 $ 5,062
Short-term investments............................. -- 3,700
Accounts receivable, less allowance for
uncollectible accounts of $659 and $134, at
12/27/97 and 12/31/96 respectively................ 6,058 8,736
Inventories........................................ 5,926 4,533
Prepaid expenses................................... 628 536
Refundable income taxes............................ 285 --
Deferred income taxes.............................. -- 450
Other current assets............................... 159 --
------- -------
Total Current Assets............................. 13,911 23,017
Property, plant and equipment, net................... 9,547 9,183
Other assets
Goodwill, net...................................... 4,061 --
Other assets, net.................................. 134 43
------- -------
Total Assets..................................... $27,653 $32,243
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Line of credit..................................... $ 1,923 $ --
Accounts payable................................... 1,648 1,552
Accrued liabilities................................ 1,601 2,009
Current portion of capital lease obligations....... 139 228
------- -------
Total Current Liabilities........................ 5,311 3,789
Long-Term Liabilities:
Capital lease obligations, net of current portion.. 254 258
Deferred income taxes.............................. 30 304
------- -------
Total Long-Term Liabilities...................... 284 562
Commitments and contingencies (Note 9)
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 5,667,749 shares issued and
outstanding....................................... 27,116 25,980
Notes receivable for common stock.................. (94) (94)
Retained earnings (accumulated deficit)............ (5,014) 2,006
Cumulative translation adjustment.................. 50 --
------- -------
Total Shareholders' Equity....................... 22,058 27,892
------- -------
Total Liabilities and Shareholders' Equity....... $27,653 $32,243
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
24
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------
DECEMBER 31,
DECEMBER 27, --------------------
1997 1996 1995
------------ --------- ---------
<S> <C> <C> <C>
Net Sales.................................. $ 20,253 $ 31,699 $ 24,586
Cost of Goods Sold......................... 15,971 20,843 17,165
--------- --------- ---------
Gross Profit............................. 4,282 10,856 7,421
Operating Expenses:
Selling, marketing and customer service.. 4,666 4,592 3,459
Engineering, research and development.... 1,662 769 787
General and administrative............... 3,789 2,581 1,595
Loss on write-down of fixed assets....... 1,568 -- --
--------- --------- ---------
Total Operating Expenses............... 11,685 7,942 5,841
--------- --------- ---------
Operating Income (Loss).................... (7,403) 2,914 1,580
Other Income (Expense):
Interest expense (includes $0, $1 and $42
for related parties).................... (87) (153) (865)
Other income............................. 341 666 34
--------- --------- ---------
Total Other Income (Expense)........... 254 513 (831)
--------- --------- ---------
Income (Loss) Before Income Tax............ (7,149) 3,427 749
Income Tax Benefit (Expense)............... 129 (1,280) (264)
--------- --------- ---------
Net Income (Loss).......................... $ (7,020) $ 2,147 $ 485
========= ========= =========
Net Income (Loss) Per Share:
Basic.................................... $ (1.24) $ 0.38 $ 0.15
========= ========= =========
Diluted.................................. $ (1.24) $ 0.36 $ 0.14
========= ========= =========
Weighted Average Number of Shares Used in
Computing Per Share Amounts:
Basic.................................... 5,671,634 5,684,053 3,130,636
========= ========= =========
Diluted.................................. 5,671,634 5,929,674 3,822,569
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOTES RETAINED
COMMON STOCK RECEIVABLE EARNINGS CUMULATIVE
------------------ WARRANTS FOR COMMON (ACCUMULATED TRANSLATION
SHARES AMOUNT OUTSTANDING STOCK DEFICIT) ADJUSTMENT TOTAL
--------- ------- ----------- ---------- ------------ ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... 2,901,103 $ 4,545 $ 56 $ -- $ (626) $-- $ 3,975
Sale of common stock
for cash.............. 1,919,500 18,517 -- -- -- -- 18,517
Debt conversion........ 414,398 1,521 -- -- -- -- 1,521
Common stock options
exercised............. 208,103 268 -- -- -- -- 268
Notes issued for stock
options exercised..... -- -- -- (110) -- -- (110)
Cash payments received
on notes issued for
stock options
exercised............. -- -- -- 16 -- -- 16
Stock option
compensation expense.. -- 23 -- -- -- -- 23
Warrant activity....... 57,344 165 (56) -- -- -- 109
Tax benefit for
exercise of non-
qualified stock
options............... -- 346 -- -- -- -- 346
Net income............. -- -- -- -- 485 -- 485
--------- ------- ---- ----- ------- ---- -------
Balance, December 31,
1995................... 5,500,448 25,385 -- (94) (141) -- 25,150
Common stock options
exercised............. 114,953 318 -- -- -- -- 318
Repurchase of common
stock................. (92,500) (657) -- -- -- -- (657)
Warrant activity....... 144,848 211 -- -- -- -- 211
Tax benefit for
exercise of non-
qualified stock
options............... -- 723 -- -- -- -- 723
Net income............. -- -- -- -- 2,147 -- 2,147
--------- ------- ---- ----- ------- ---- -------
Balance, December 31,
1996................... 5,667,749 25,980 -- (94) 2,006 -- 27,892
Stock issued for
acquisition........... 584,240 1,680 -- -- -- -- 1,680
Common stock options
exercised............. 12,250 40 -- -- -- -- 40
Repurchase of common
stock................. (92,583) (596) -- -- -- -- (596)
Warrant activity....... 4,900 12 -- -- -- -- 12
Net loss............... -- -- -- -- (7,020) -- (7,020)
Translation adjustment. -- -- -- -- -- 50 50
--------- ------- ---- ----- ------- ---- -------
Balance, December 27,
1997................... 6,176,556 $27,116 $-- $ (94) $(5,014) $ 50 $22,058
========= ======= ==== ===== ======= ==== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------
DEC. DEC. 31,
27, ----------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss)................................. $(7,020) $ 2,147 $ 485
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization................... 1,593 1,205 892
Loss on write-down of fixed assets.............. 1,568 -- --
Deferred income taxes........................... 146 67 (82)
Effect on income tax from excercise of stock
options........................................ -- 723 346
Other........................................... 28 26 27
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable.... 5,155 (2,850) (2,928)
(Increase) decrease in inventories............ 732 (1,786) (1,212)
(Increase) decrease in prepaid expenses....... 18 (284) (74)
Increase in refundable income taxes........... (285) -- --
Increase in other assets...................... (252) -- (7)
Decrease in accounts payable.................. (1,486) (305) (179)
Increase (decrease) in accrued liabilities.... (408) 1,045 111
------- ------- -------
Net Cash Used In Operating Activities........... (211) (12) (2,621)
Cash Flows From Investing Activities:
Proceeds from sale of short term investments...... 3,700 -- --
Purchase of short term investments................ -- (3,700) --
Acquisition of Westbeach, net of cash acquired.... (2,554) -- --
Acquisition of property and equipment............. (2,975) (3,481) (1,228)
Proceeds from sale of equipment................... -- 3 40
------- ------- -------
Net Cash Used In Investing Activities........... (1,829) (7,178) (1,188)
Cash Flows From Financing Activities:
Proceeds from issuance of common stock............ 52 529 18,759
Payments for repurchase of common stock........... (596) (657) --
Proceeds from subordinated debentures............. -- -- 1,496
Proceeds from issuance of long-term liabilities... -- -- 800
Proceeds from payment of note receivable for
stock............................................ -- -- 16
Principal payments on long-term liabilities....... (275) (2,646) (1,536)
Principal payments on debt assumed from Westbeach. (3,271) -- --
Line of credit borrowings (payments), net......... 1,923 -- (1,209)
------- ------- -------
Net Cash Provided By (Used In) Financing
Activities..................................... (2,167) (2,774) 18,326
------- ------- -------
Net Increase (Decrease) In Cash and Cash
Equivalents........................................ (4,207) (9,964) 14,517
Cash and Cash Equivalents at Beginning Of Year...... 5,062 15,026 509
------- ------- -------
Cash and Cash Equivalents at End Of Year............ $ 855 $ 5,062 $15,026
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND CURRENT EVENTS
Description of Business
Morrow Snowboards, Inc. 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 has three subsidiaries, an
Austrian organization whose principal activity consists of a European sales
warehousing operation, a United Kingdom organization consisting of European
sales and a Washington State corporation whose principal activity is U.S.
wholesale and retail sales.
The consolidated financial statements include the wholly-owned subsidiaries,
Morrow Westbeach Canada ULC, a Canadian corporation 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.
Current Events
In 1997 the Company experienced a significant reduction in net sales due to
soft market conditions and oversupply of snowboards which, among other
factors, resulted in a significant loss. In addition, the Company evaluated
its equipment used in the manufacture of snowboards, boots and bindings in
light of current and future usage and expected market demand and provided a
write-down in the 1997 statement of operations of $1,568,000 to reflect the
equipment at net realizable value.
As a result of the 1997 loss, the Company is in default of the minimum net
worth covenant under the Company's line of credit agreement. The lender has
declared the loan in default but has agreed to forbear its rights and remedies
under the line of credit agreement until April 10, 1998. The Company's
operations are very seasonal with the majority of the revenue recorded in the
third and fourth quarters. Accordingly, the Company has a liquidity problem.
The Company is continuing to work with its lender to address the lender's
concerns, including the adequacy of the Company's working capital during the
forbearance period granted by the lender regarding such default. After
reviewing its working capital needs, the Company expects to need additional
working capital for 1998. The Company is working on limiting the amount of
working capital needed and pursuing alternatives to raise that capital without
issuing additional equity.
The above matters raise a substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern.
2. WESTBEACH ACQUISITION
On November 13, 1997, the Company acquired all of the outstanding securities
of Westbeach Snowboard Canada Ltd. (Westbeach) in exchange for 584,240 newly-
issued shares of the Company's common stock valued at $1,680,000, cash of
approximately $2,251,000 and fees and expenses of $425,000. Subsequent to the
acquisition, Westbeach was merged into Morrow Westbeach Canada ULC, a wholly
28
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. The operations of Westbeach have been included in the
accompanying financial statements since the date of acquisition.
Summarized unaudited pro forma results of operations, assuming the Westbeach
acquisition took place on January 1 of each year, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------
DECEMBER 27, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Net Sales.......................................... $27,890 $40,600
Net income (loss).................................. (7,703) 1,941
Earnings (loss) per share
Basic............................................ (1.27) .31
Diluted.......................................... (1.27) .30
</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 1997 fiscal year ended on December
27th, whereas the prior year fiscal year ended on December 31st.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and on deposit and highly
liquid investments purchased with a 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 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. Retail
inventories are stated at average cost.
Depreciation and Amortization
Property, plant and equipment are carried at cost. Depreciation of property,
plant and equipment is provided using the straight-line method over the
estimated useful lives of the assets (3 to 35 years). Amortization of
leasehold improvements 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.
29
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $34,000 at
December 27, 1997. 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 earnings. If
the valuation indicates that undiscounted earnings are insufficient to recover
the recorded assets, then the projected earnings 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. Advertising and promotion
expenses totaled $1,440,000, $1,284,000, and $1,067,000, in 1997, 1996 and
1995 respectively.
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.
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).
Product Development Costs
Expenditures associated with the development of new products and
improvements to existing products are expensed as incurred.
30
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net Income Per Share
Effective December 27, 1997, the Company adopted SFAS 128, "Earnings Per
Share". SFAS 128 prescribes new calculations for Basic and Diluted Earning 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>
YEAR ENDED
----------------------------------
DECEMBER 31,
DECEMBER 27, ---------------------
1997 1996 1995
------------ ---------- ----------
<S> <C> <C> <C>
Earnings:
Net income (loss) for Basic EPS............. $ (7,020) $ 2,147 $ 485
Add interest on convertible debentures...... -- -- 59
--------- ---------- ----------
Net income (loss) for Diluted EPS........... $ (7,020) $ 2,147 $ 544
========= ========== ==========
Shares:
Weighted average shares outstanding for
Basic EPS.................................. 5,671,634 5,684,053 3,130,636
Stock option and convertible debenture
dilution(1)................................ -- 245,621 691,933
--------- ---------- ----------
Weighted average shares for Diluted EPS..... 5,671,634 5,929,674 3,822,569
========= ========== ==========
Basic EPS................................. $ (1.24) $ .38 $ .15
========= ========== ==========
Diluted EPS............................... $ (1.24) $ .36 $ .14
========= ========== ==========
</TABLE>
- --------
(1) The effect of potential common securities are excluded from the dilutive
calculation in 1997 as their effect would be antidilutive.
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 Translations Adjustment in the Consolidated Statements of
Shareholders' Equity.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires 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.
31
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Short-Term Investments
Short-term investments consist of certain tax exempt securities, which are
classified as trading securities under the provisions of Statement of
Financial Accounting Standards No. 115 "Accounting for Certain Investments in
Debt and Equity Securities". The short-term investments are stated on the
balance sheet at cost, which approximates fair market value. There were no
unrealized holding gains or losses at December 31, 1996.
4. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 31,
1997 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Finished goods..................................... $ 2,836 $ 2,115
Retail goods....................................... 818 --
Work-in-process.................................... 413 197
Raw materials...................................... 2,394 2,357
------- -------
6,461 4,669
Less reserve for obsolete inventory................ (535) (136)
------- -------
Total inventories, net........................... $ 5,926 $ 4,533
======= =======
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<CAPTION>
DECEMBER 27, DECEMBER 31,
1997 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Land............................................... $ 500 $ 500
Building and improvements.......................... 3,060 2,480
Equipment, fixtures and other...................... 9,420 7,443
Equipment and fixtures under construction.......... 856 1,513
------- -------
13,836 11,936
Less accumulated depreciation, amortization and
reserve for write-down............................ (4,289) (2,753)
------- -------
Property, plant and equipment, net............... $ 9,547 $ 9,183
======= =======
</TABLE>
Included in equipment and fixtures was $902,000 and $1,055,000 of equipment
under capital lease as of December 27, 1997 and December 31, 1996,
respectively. In July, 1994, the Company entered into a long-term agreement to
lease its manufacturing and administrative facility in Salem, OR. The
agreement provided the Company an option to purchase the facility at a fixed
cost. In March, 1996, the Company exercised its option to purchase the land
and building at a price of $2,449,000.
As more fully discussed in Note 1, the Company performed an evaluation of
its machinery and equipment and as a result, has recognized in 1997 a write-
down of its fixed assets of $1,568,000.
32
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 31,
1997 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Accrued commissions................................ $ 275 $ 700
Accrued payroll and related liabilities............ 508 475
Accrued inventory purchases........................ 154 --
Accrued warranty................................... 260 300
Accrued income taxes............................... 55 460
Other.............................................. 349 74
------ ------
Total Accrued Liabilities........................ $1,601 $2,009
====== ======
</TABLE>
7. LINES OF CREDIT
Lines of credit consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 31,
1997 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Operating line of credit with Bank of America Oregon
of $5,000,000 for the periods between August 1
through March 31 of each calendar year, increasing
to $7,500,000 for the periods April 1 through July
31 of each calendar year, collateralized by
personal property of the Company. Monthly interest
payments were made at the bank's reference rate
(8.5% at October 31, 1997). The agreement expired
on October 31, 1997................................ $ -- $ --
------ -----
Operating line of credit with LaSalle Business
Credit, Inc. of $7,000,000 for the period between
October 15 through February 28 of each calendar
year, increasing to $14,000,000 for the periods
March 1 through October 14 of each calendar year,
collateralized by accounts receivable, inventory,
personal property, investment property, intangibles
and all deposit accounts. Monthly interest payments
are made at 0.25% above the prime rate. The
agreement expires on November 20, 2000............. 1,923 --
====== =====
$1,923 $ --
====== =====
</TABLE>
The LaSalle operating line of credit above contains a facility for
commercial letters of credit. An unused line fee, payable annually, is equal
to 0.25% on the daily average amount the outstanding Revolving Loan and Letter
of Credit obligations is less than the Revolver Maximum Amount. The Company
has the option under the loan agreement to enter into a Term Loan provided
certain conditions are met. The credit agreement with the Bank contains
various covenants which require the Company, among other things, to meet
certain objectives with respect to tangible net equity and capital expenditure
limits, and beginning in 1998 the ratio of EBITDA to interest expense and the
ratio of debt service coverage. At December 27, 1997, the Company was in
default of the tangible net equity covenant contained in the credit agreement.
The Bank is not waiving this default but will forbear in the exercise of its
rights and remedies until April 10, 1998. Until that time the Company will pay
a default interest rate of 2.25% over the prime rate as required by the loan
agreement. During this time the Company will seek to obtain additional capital
and work on limiting the amount of working capital needed. However, if not
obtained and the Company is unsuccessful in addressing the lender's concerns
during this forbearance period, this default could have a material adverse
impact on the Company's operations.
33
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. CAPITAL LEASE OBLIGATIONS
Capital lease obligations consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 31,
1997 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Lease of certain equipment with lease terms ranging
from 24 to 60 months, monthly payments totaling
$19,000 secured by the equipment under lease, with
certain leases guaranteed by a shareholder........ $393 $486
---- ----
Total capital lease obligations.................... 393 486
Less current portion............................... 139 228
---- ----
Total capital lease obligations, net of current
portion......................................... $254 $258
==== ====
</TABLE>
Minimum annual lease payments for the 12-month periods ending December are
as follows (in thousands):
<TABLE>
<S> <C>
1998................................................................ $175
1999................................................................ 144
2000................................................................ 89
2001................................................................ 36
2002................................................................ 36
----
Net minimum lease payments for capital leases....................... 480
Less amount representing interest................................... (87)
----
Present value of net minimum lease payments for capital leases.... $393
====
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
The Company currently leases five locations to house its distribution
operations, its retail operations and its graphics department.
Minimum annual real property lease obligations for the 12 month period
ending December are as follows (in thousands):
<TABLE>
<S> <C>
1998................................................................. $136
1999................................................................. 64
2000................................................................. 64
2001................................................................. 57
2002................................................................. 60
----
Minimum lease payments for real property leases...................... $381
====
</TABLE>
From time to time the Company is involved in litigation arising out of the
normal course of its business. In the opinion of management, the disposition
of all claims or litigation currently pending will not have a material effect
on the Company's financial position, results of operations or liquidity.
34
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. SHAREHOLDERS' EQUITY
Stock Option Plans
In September 1990, the Company adopted a stock option plan (the "Plan") for
selected executives, employees and directors which reserved 490,000 shares of
common stock for issuance under the Plan. In January 1995, the Plan was
amended to increase the number of shares of common stock under the Plan to
857,500. In July 1995, the Plan was further amended to increase the number of
shares of common stock under the Plan to 1,102,500. In February, 1997 a new
stock option plan was adopted with the number of shares subject to all plans
unchanged.
The Plan permits the granting of options for terms not to exceed ten years
from date of grant. The options generally vest ratably over a four-year period
and are exercisable on terms established in the Plan document. The exercise
price of the options granted under the Plan must be equal to or greater than
the fair market value of the shares on the date of grant for incentive stock
options and not less than 85 percent of the fair market value for nonqualified
stock options. The exercise price of the options granted by the Company has
generally been equal to or greater than fair market value at the date of
grant. Fair market value for periods prior to the Company's initial public
offering were determined by the Board of Directors without an independent
valuation. Information regarding the Plan is shown below:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF EXERCISE AGGREGATE
SHARES PRICE PRICE
-------- -------- -----------
<S> <C> <C> <C>
Options outstanding at December 31, 1994........ 465,498 $ 1.97 $ 915,000
Granted....................................... 316,050 4.12 1,302,000
Lapsed........................................ (6,863) 2.62 (18,000)
Exercised..................................... (208,103) 1.29 (268,000)
-------- ------ -----------
Options outstanding at December 31, 1995........ 566,582 3.41 1,931,000
Granted....................................... 131,200 11.27 1,478,000
Lapsed........................................ (17,105) 5.39 (92,000)
Exercised..................................... (114,953) 2.77 (318,000)
-------- ------ -----------
Options outstanding at December 31, 1996........ 565,724 5.30 2,999,000
Granted....................................... 83,750 3.90 326,000
Re-Issued..................................... 90,500 9.20 833,000
Lapsed/Canceled............................... (183,300) 8.57 (1,570,000)
Exercised..................................... (12,250) 3.27 (40,000)
-------- ------ -----------
Options outstanding at December 27, 1997........ 544,424 $ 4.68 $ 2,548,000
======== ====== ===========
</TABLE>
In accordance with the terms of option agreements, in August 1995, certain
employees exercised their stock options in exchange for notes receivable. The
notes bear interest at 10 percent per annum and were due and payable August 1,
1997; however, these notes have been extended to August 1, 1998. The notes
receivable, net of any payments received, have been reflected in shareholders'
equity in the accompanying consolidated financial statements.
Effective November 1, 1995, the shareholders approved the Stock Option Plan
for Non-Employee Directors (the "Directors Plan"), which plan reserves 122,500
shares of the Company's common stock for future grants to Eligible Directors
(as defined in the Directors Plan). Options granted pursuant to the Directors
Plan reduce the number of underlying shares available under the Plan on a one-
to-one basis. The Directors Plan provides for an annual grant of 2,450 shares
of common stock to each Eligible Director immediately following each annual
meeting of shareholders commencing with the 1996 annual meeting.
35
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Grants are made at the fair market value of the common stock on the date of
grant and are fully vested after six months.
Statement of Financial Accounting Standards No. 123
During 1995, the Financial Accounting Standards Board issued SFAS 123 which
defines a fair value based method of accounting for employee stock options and
similar equity instruments, and encourages all entities to adopt that method
of accounting for all of their employee stock compensation plans. However, it
also allows an entity to continue to measure compensation costs for those
plans using the method of accounting prescribed by APB 25. Entities electing
to remain with the accounting in APB 25 must make pro forma disclosures of net
income and earnings per share, as if the fair value based method of accounting
defined in SFAS 123 had been adopted.
The Company has elected to account for its stock-based compensation plans
under APB 25; however, the Company has computed, for pro forma disclosure
purposes, the value of all options granted during 1997, 1996 and 1995 using
the Black-Scholes options pricing model as prescribed by SFAS 123 using the
following weighted average assumptions for grants for the years ended:
<TABLE>
<CAPTION>
DECEMBER 31,
DECEMBER 27 --------------
1997 1996 1995
----------- ------ ------
<S> <C> <C> <C>
Risk-free interest rate........................ 6.0% 6.5% 7.1%
Expected dividend yield........................ 0.0% 0.0% 0.0%
Expected lives (Years)......................... 6.0 6.0 5.3
Expected volatility............................ 64.3% 57.1% 0.0%
</TABLE>
Using the Black-Scholes methodology, the total value of options granted
during 1997, 1996 and 1995 was $ 752,000, $918,000 and $403,000, respectively,
which would be amortized on a pro forma basis over the vesting period of the
options (typically four years). The weighted average fair value of options
granted during 1997, 1996 and 1995 was $4.32 per share, $6.99 per share and
$1.27 per share, respectively.
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's net income (loss) and net income
(loss) per share would approximate the pro forma disclosures below, for the
years ended December 27, 1997, and December 31, 1996 and 1995 (in thousands
except per share data):
<TABLE>
<CAPTION>
1997 1996 1995
----------------- --------------- --------------
AS PRO AS PRO AS PRO
REPORTED FORMA REPORTED FORMA REPORTED FORMA
-------- ------- -------- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
Net income (loss)............ $(7,020) $(7,366) $2,147 $1,901 $485 $419
Net income (loss) per share:
Basic...................... $ (1.24) $ (1.35) $ .38 $ .34 $.15 $.14
Diluted.................... $ (1.24) $ (1.35) $ .36 $ .33 $.14 $.11
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to
January 1, 1995, and additional awards are anticipated in future years.
36
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about stock options outstanding
at December 27, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE NUMBER OF AVERAGE
NUMBER REMAINING EXERCISE SHARES EXERCISE
RANGE OF OUTSTANDING CONTRACTUAL PRICE EXERCISABLE PRICE
EXERCISE PRICES AT DECEMBER 27, LIFE PER AT DECEMBER 27, PER
PER SHARE 1997 (YEARS) SHARE 1997 SHARE
--------------- --------------- ----------- -------- --------------- --------
<S> <C> <C> <C> <C> <C>
$ 1.63-$ 4.50.... 420,474 4.4 $ 3.45 296,877 $ 3.36
$ 5.31-$ 8.50.... 61,250 8.6 $ 7.17 49,250 $ 7.25
$10.62-$11.50.... 62,700 8.5 $10.45 14,700 $10.77
</TABLE>
Total options exercisable at December 27, 1997, December 31, 1996 and 1995
were 360,827, 106,934 and 7,252, respectively, at a weighted average exercise
price of $4.19 per share, $4.19 per share and $1.84 per share, respectively.
Stock Warrants
The Company, from time to time, has issued stock warrants as payment for
fees, interest and services rendered. At December 27, 1997, December 31, 1996
and 1995, the Company had outstanding warrants to purchase 58,801, 63,701 and
208,549 shares of common stock, respectively. The warrants are exercisable at
weighted average exercise prices per share of $2.45, $2.45, and $1.76
respectively. Warrants are valued at the excess of the fair value of the
common stock over the exercise price at the date of the grant. Any excess of
the fair value over the grant price of the common stock at the date of grant
is recognized as a capital contribution to warrants outstanding and
corresponding expense. During 1997, 1996 and 1995, warrants to purchase 4,900,
144,848 and 57,344 shares of common stock were exercised at weighted average
exercise prices of $2.45, $1.46 and $2.88 per share, respectively. During
1997, 1996 and 1995, no warrants were granted. No warrants lapsed during 1997
or 1996. During 1995, 25,726 warrants lapsed at a weighted average exercise
price of $2.45.
Initial Public Offering
In December 1995, the Company completed an initial public offering of
1,919,500 shares of Common Stock at $11.00 per share. The net proceeds were
$18,517,000.
Cancellation and Reissuance of Stock Options
In February 1997, the Company canceled and reissued certain options granted
to employees during 1996 under the 1990 Stock Option Plan as amended. The
options canceled were for 90,500 shares of common stock at a weighted average
exercise price of $11.41 per share. The option price for the reissued options
were at or above market value of the stock at the date the options were
issued, therefore no compensation expense was recognized.
Repurchase of Common Stock
On December 18, 1996, the Board of Directors passed a resolution to
repurchase and retire up to 300,000 shares of the Company's outstanding common
stock. During 1997 and 1996, 92,583 and 92,500 shares of common stock,
respectively, had been repurchased and retired.
37
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. RELATED PARTY TRANSACTIONS
During 1995, related party notes for $94,000 bearing interest at 10 percent
per annum were issued in exchange for employee stock options.
During 1996 and 1995, the Company paid a guarantee fee of $1,000, and
$42,000, respectively, to shareholders of the Company for personal guarantees
of certain Company obligations. The guarantee fees are recorded as interest
expense in the accompanying consolidated statements of income.
During 1997 and 1996, the Company purchased certain manufacturing tooling
and supplies from a company owned by shareholders of the Company. The Company
recorded $105,000 and $4,000 of manufacturing expenses and capitalized
$448,000 and $63,000 for tooling related to these transactions respectively.
12. INCOME TAXES
The provisions for income taxes consist of taxes currently due plus deferred
taxes for the net change in items with different bases for financial and
income tax reporting purposes. The items with different bases are primarily
fixed assets, allowance for doubtful accounts, accrued liabilities for
employee vacation and sick leave, and inventory and warranty reserves. The
deferred tax assets and liabilities represent the future tax consequences of
those differences, which will either be deductible or taxable when the assets
and liabilities are recovered or settled, using enacted marginal income tax
rates in effect when the differences are expected to reverse. Deferred tax
assets are recognized for operating losses and tax credits that are available
to offset future federal income taxes. Net deferred taxes consist of the
following tax effects relating to temporary differences and carryforwards:
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 31,
1997 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Assets:
Accrued expenses and
reserves................. $ 715 $ 341
Net operating loss and tax
credit carryforwards..... 3,092 309
------- -----
Gross deferred tax
assets................. 3,807 650
Less valuation
allowance.............. (2,988) --
------- -----
Net deferred tax asset.. 819 650
Deferred Tax Liabilities:
Depreciation and
amortization........... (849) (504)
------- -----
Net deferred tax assets
(liability)................ $ (30) $ 146
======= =====
</TABLE>
At December 27, 1997, and December 31, 1996, the Company has an estimated
federal net operating loss carryforward of $7,928,000 and $321,000,
respectively, expiring through 2012. For the year ended December 27, 1997, the
Company increased its valuation allowance $2,988,000.
38
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of income tax (benefit) expense are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
------------------------
DECEMBER
31,
DECEMBER 27, -----------
1997 1996 1995
------------ ------ ----
(IN THOUSANDS)
<S> <C> <C> <C>
(Benefit) expense for income taxes:
Current:
Federal........................................ $ (275) $1,034 $288
State.......................................... -- 179 58
------- ------ ----
Total.......................................... (275) 1,213 346
Deferred......................................... (2,842) 67 (82)
Valuation allowance.............................. 2,988 -- --
------- ------ ----
Total (benefit) expense for income taxes....... $ (129) $1,280 $264
======= ====== ====
</TABLE>
Taxes related to foreign subsidiaries were immaterial for the year ended
December 27, 1997.
A reconciliation of the income tax expense at the federal statutory income
tax rate to the income tax (benefit) expense as reported is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------
DECEMBER 31,
DECEMBER 27, --------------
1997 1996 1995
------------ ------ ------
<S> <C> <C> <C>
Expense computed at statutory rates............. 34.0 % 34.0% 34.0%
State taxes, net of federal benefit............. 4.4 4.4 4.4
Change in valuation allowance................... (41.8) -- --
Other........................................... 1.6 (1.0) (3.2)
----- ------ ------
Income tax rate (benefit) expense as reported... (1.8)% 37.4% 35.2%
===== ====== ======
</TABLE>
13. CASH FLOW ACTIVITIES
The following are supplemental disclosures to the statement of cash flows:
<TABLE>
<CAPTION>
YEAR ENDED
------------------------
DECEMBER
31,
DECEMBER 27, -----------
1997 1996 1995
------------ ---- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Supplemental Disclosure:
Cash paid for interest........................... $ 80 $154 $ 878
Cash paid for income taxes....................... -- 22 13
Noncash Transactions:
Assets acquired under capital lease.............. 182 -- 513
Conversion of debt to common stock............... -- -- 1,521
Stock option and warrant activity................ -- -- 191
Tax benefit on exercise of non-qualified stock
options......................................... -- 723 346
</TABLE>
39
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company purchased all of the outstanding securities of Westbeach
Snowboard Canada Ltd. for cash and common stock of $4,356,000. In conjunction
with the acquisition, liabilities were assumed as follows (dollars in
thousands):
<TABLE>
<S> <C>
Fair value of assets acquired, including goodwill................... $ 9,241
Cash paid for the securities, including expenses.................... (2,676)
Common stock issued for the securities.............................. (1,680)
Cash received from Westbeach........................................ (122)
-------
Liabilities assumed............................................... $ 4,763
=======
</TABLE>
14. CONCENTRATION OF CREDIT RISK AND GEOGRAPHIC DATA
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of temporary cash investments, short term
investments and trade receivables. The Company places its temporary cash
investments and short term investments with high quality financial
institutions.
The Company sells to customers located predominantly throughout the United
States, Japan, Canada and Europe. The concentrations of credit risk with
respect to trade receivables are, in management's opinion, considered not
significant due to the Company's ongoing performance of credit evaluations of
its customers' financial condition and the fact that a significant portion of
export sales are made on a letter-of-credit basis. The Company generally does
not require collateral from its domestic branded-label customers. The Company
maintains policies and procedures to consistently monitor the reserves for
potential credit losses. In 1997, due to adverse market conditions, the
Company recognized additional reserves on certain outstanding accounts
receivable balances. Such reserves are reflected in Accounts Receivable in the
Consolidated Balance Sheets. Total bad debt expense for 1997, 1996 and 1995 of
$960,000, $110,000 and $123,000, respectively, are included in the General and
Administrative section of the Consolidated Statements of Operations. In 1997,
1996 and 1995, one customer accounted for 28%, 21% and 19% of net sales,
respectively.
Export sales are made primarily to customers in Japan and Europe. Net sales
by the Company to international customers were:
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------
DECEMBER 31,
DECEMBER 27, --------------
1997 1996 1995
------------ ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Japan............................................ $5,738 $ 6,551 $4,793
Europe and other................................. 1,749 5,338 3,167
------ ------- ------
$7,487 $11,889 $7,960
====== ======= ======
</TABLE>
40
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. EMPLOYEE SAVINGS PLAN
The company created an Employee savings plan on July 1, 1996, under the
provisions of Section 401(k) of the Internal Revenue Code. The plan covers
substantially all full-time employees. The Company's matching contributions
take two forms; a basic matching contribution of 30 percent of employee
contributions, and a discretionary supplemental matching contribution based
upon parameters set by management on an annual basis. The basic matching
contribution is allocable each month to participants who have made
contributions for that month, and who remain employed as of the end of that
month. Supplemental matching contributions are allocable to participants who
are actually employed by the Company as of the last day of the plan year.
Participants are fully vested in their 401 (k) contributions and basic
matching contribution accounts. Supplemental matching contributions are
subject to a three year (one-third per year) vesting schedule. Company
matching contributions expensed in 1997 and 1996 were $36,000 and $26,000,
respectively.
16. QUARTERLY INFORMATION (UNAUDITED)
The following is a summary of operating results by quarter for the years
ended December 27, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
1997 QUARTER ENDED
-------------------------------------------------
MARCH 29, JUNE 28, SEPTEMBER 27, DECEMBER 27, (1)
--------- -------- ------------- ----------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Net sales................ $ 689 $2,149 $10,173 $ 7,242
Gross profit (loss)...... (105) 712 3,088 587
Net income (loss)........ (1,238) (830) 450 (5,402)
Net income (loss) per
share(2)
Basic.................. (0.22) (0.15) 0.08 (0.92)
Diluted................ (0.22) (0.15) 0.08 (0.92)
<CAPTION>
1996 QUARTER ENDED
-------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ----------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Net sales................ $ 647 $2,038 $19,667 $ 9,347
Gross profit............. 99 651 7,706 2,400
Net income (loss)........ (897) (474) 3,069 449
Net income (loss) per
share(2)
Basic.................. (0.16) (0.08) 0.54 0.08
Diluted................ (0.16) (0.08) 0.51 0.07
</TABLE>
- --------
(1) In the fourth quarter of 1997 the Company recorded significant changes in
estimates for a write-down of fixed assets of $1,568,000, increases in the
allowance for doubtful accounts and direct write-offs of accounts
receivable of $524,000, an increase in the reserve for inventory
obsolescence of $638,000, and increases in the deferred tax valuation
allowance of $770,000.
(2) Earnings per share has been restated to conform to the presentation
required by SFAS 128, "Earnings Per Share".
41
<PAGE>
SCHEDULE II
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
CHARGED
BALANCE AT TO COSTS CHARGED BALANCE
BEGINNING AND TO OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ----------- ---------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1995
Reserves deducted from
asset accounts:
Allowance for doubtful
accounts............... $ 30 $123 $ -- $(103)(a) $ 50
Obsolete inventory
reserve................ 16 168 -- (118)(a) 66
DECEMBER 31, 1996
Reserves deducted from
asset accounts:
Allowance for doubtful
accounts............... 50 110 -- (26)(a) 134
Obsolete inventory
reserve................ 66 221 -- (151)(a) 136
DECEMBER 27, 1997
Reserves deducted from
asset accounts:
Allowance for doubtful
accounts............... 134 960 -- (435)(a) 659
Obsolete inventory
reserve................ 136 888 -- (489)(a) 535
</TABLE>
- --------
(a)Balances written-off, net of recoveries
42
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
The information required by this item is incorporated by reference to
information in the Company's definitive proxy statement which will be filed
pursuant to Regulation 14A within 120 days of December 27, 1997.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
information in the Company's definitive proxy statement which will be filed
pursuant to Regulation 14A within 120 days of December 27, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
information in the Company's definitive proxy statement which will be filed
pursuant to Regulation 14A within 120 days of December 27, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
information in the Company's definitive proxy statement which will be filed
pursuant to Regulation 14A within 120 days of December 27, 1997.
43
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements (see Item 8.)
. Report of Independent Public Accountants
. Consolidated Balance Sheets--December 27, 1997 and December 31, 1996
. Consolidated Statements of Operations--Years Ended December 27, 1997
and December 31, 1996 and 1995
. Consolidated Statements of Shareholders' Equity--Years Ended
December 27, 1997 and December 31, 1996 and 1995
. Consolidated Statements of Cash Flows--Years Ended December 27, 1997
and December 31, 1996 and 1995
. Notes to Consolidated Financial Statements
2. Financial Statement Schedules
. Schedule II--Valuation and Qualifying accounts (accounts not
required or not material have been omitted)
3. Exhibits
See Exhibit Index.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the quarter ended
December 27, 1997:
. A Current Report on Form 8-K dated October 31, 1997 was filed on
November 17, 1997 to report the acquisition of Westbeach Snowboard
Canada Ltd.
. A Current Report on Form 8-K dated November 11, 1997 was filed on
November 26, 1997 to report entering into the revolving credit
facility with LaSalle Business Credit, Inc. and the final closing of
the Westbeach acquisition.
44
<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 March 27, 1998.
MORROW SNOWBOARDS, INC.
/s/ David E. Calapp
By: ___________________________________
David E. Calapp
Chief Executive Officer/Chairman of
the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons in the
capacities indicated on March 27, 1998.
<TABLE>
<S> <C>
/s/ David E. Calapp Chief Executive Officer/Chairman of
________________________________________ the Board (principal executive
David E. Calapp officer)
/s/ P. Blair Mullin Chief Financial Officer (principal
________________________________________ financial officer and principal
P. Blair Mullin accounting officer)
/s/ Ray E. Morrow Jr. Chairman Emeritus
________________________________________
Ray E. Morrow Jr.
/s/ Gregory M. Eide Director
________________________________________
Gregory M. Eide
/s/ Erik J. Krieger Director
________________________________________
Eric J. Krieger
/s/ James V. Zaccaro Director
________________________________________
James V. Zaccaro
/s/ Maurice C. Bickert Director
________________________________________
Maurice C. Bickert
/s/ Victor G. Petroff Director
________________________________________
Victor G. Petroff
</TABLE>
45
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
3.1 Amended and Restated Articles of Incorporation (Note 1)
3.2 Amended and Restated Bylaws (Note 1)
4 Registration Rights Agreement dated April 20, 1994 among the
Registrant and the investors named therein (Note 1)
4.2 Securities Purchase Agreement dated October 31, 1997 among the
Registrant, Morrow, LLC, Morrow Snowboards ULC, Westbeach Snowboard
Canada Ltd. and the security holders of Westbeach Snowboard Canada
Ltd. listed therein (Note 4)
10.1 Lease and Option Agreement among PR Investors Limited Liability
Company, the Registrant, Ray E. Morrow, Jr. and Sharon Morrow dated
July 25, 1994, as amended by Amendment to Lease and Option Agreement
dated August 1, 1995 (Note 1)
10.2 Forms of Warrant (Note 1)
10.3 Employment Agreement between Ray E. Morrow, Jr. and the Registrant
dated April 20, 1994, as amended (Notes 1 & 2)
10.4 Noncompete Agreement between Ray E. Morrow, Jr. and Nicollett Limited
Partners Partnership dated April 20, 1994 (Note 1)
10.5 Assignment Agreement by and among the Registrant, Nicollett Limited
Partners, James V. Zaccaro, Gregory M. Eide, Dennis R. Shelton and
Erik J. Krieger dated December 19, 1995 (Note 3)
10.6 1990 Amended and Restated Stock Option Plan (Notes 1 & 2)
10.7 Form of Nonqualified Stock Option Agreement (Notes 1 & 2)
10.8 Form of Incentive Stock Option Agreement (Notes 1 & 2)
10.9 Manufacturing Agreement between the Registrant and Plasticos Duramas,
S.A., dated July 20, 1995 (Note 1)
10.10 Form of Sales Representative Agreement (Note 1)
10.11 Letter Agreements between the Registrant and Pacific Crest Securities
Inc. dated February 22, 1994, January 27, 1995, August 4, 1995 and
October 4, 1995 (Note 1)
10.12 Form of Indemnification Agreement (Notes 1 & 2)
10.13 Stock Option Plan for Non-Employee Directors (Notes 1 & 2)
10.14 Purchase and Sales Agreement dated February 29, 1996 (Note 3)
10.15 Securities Purchase Agreement dated October 31, 1997 among the
Registrant Morrow, LLC, Morrow Snowboards ULC, Westbeach Snowboard
Canada Ltd. and the Security holders of Westbeach Snowboard Canada
Ltd. listed therein (Note 4)
10.16 Loan and Security Agreement dated as of November 10, 1997 between the
Registrant, as Borrower, and LaSalle Business Credit, Inc. as Lender
(Note 5)
10.17 Apparel Design and Manufacturing Agreement dated December 31, 1996
between the Registrant and Marmot Mountain Ltd. (Note 5)
10.18 "Terms of Instrument--Part 2", a lease agreement dated April 1, 1994,
as amended by "Terms of Instrument--Part 2", Modification Agreement,
dated October 17, 1997 between Westbeach Snowboard Canada Ltd. (now
Morrow Westbeach Canada ULC) and Western IMMO Holdings Inc.
10.19 International Distribution Agreement dated as of January 1, 1998,
between the Registrant and K.K. Morrow Japan
11 Computation of Income Per Share
21 Subsidiaries of the Registrant
23 Consent of Independent public accountants
27 Financial Data Schedule
</TABLE>
<PAGE>
- --------
(1) Incorporated herein by reference from the Company's Registration Statement
on Form S-1 (File No. 33-97800).
(2) Management contract or compensatory plan or arrangement.
(3) Incorporated herein by reference from the Company's 1995 Annual Report on
Form 10-K (File No. 0-27002).
(4) Incorporated by reference from the Company's Current Report on Form 8-K
dated October 31, 1997 (File No. 0-27002).
(5) Incorporated by reference from the Company's Current Report on Form 8-K
dated November 11, 1997 (File No. 0-27002).
<PAGE>
Exhibit 10.18
"TERMS OF INSTRUMENT - PART 2"
THIS IS A LEASE made as of the 1st day of April, 1994
IN PURSUANCE OF THE LAND TRANSFER FROM ACT PART 2
BETWEEN:
WESTERN IMMO HOLDINGS INC.
1967 West 1st Avenue,
Vancouver, B.C. V6J 1G7
(hereinafter called the "Landlord")
OF THE FIRST PART
AND:
WESTBEACH SNOWBOARD CANADA LTD.
1766 West 4th Avenue
Vancouver, B.C.
V6J 1M1
(hereinafter called the "Tenant")
OF THE SECOND PART
ARTICLE 1
DEFINITIONS
-----------
1.01 Defined Terms
-------------
In this Lease
"Building" means collectively the Land and all buildings, structures,
facilities and other improvements erected on the Land;
"Eligible Corporation" means a corporation which controls or is
controlled by or under common control with the Tenant, where to control means to
own beneficially either directly or indirectly more than fifty (50%) percent of
the voting shares of a corporation;
"HVAC Costs" means the cost of heating, ventilating and air-conditioning
the Building and includes but is not limited to cost of fuel, electricity,
operation of air distribution and cooling equipment, labour, materials, repairs,
maintenance, service and other such costs;
<PAGE>
-2-
"Land" means the Land described in Schedule "A";
"Lease Year" means a period of twelve (12) consecutive calendar months
during the Term ending on the last day of the financial year of the Landlord
excepting that:
(a) the first Lease Year during the Term begins on the first day of the
Term and ends on the last day of the financial year of the Landlord in
which the first day of the Term occurs, and may be a period less than
twelve (12) consecutive calendar months,
(b) the last Lease Year during the Term begins on the first day of the
financial year of the Landlord during which the last day of the Term
occurs and end on the last day of the Term, and may be a period less
than twelve (12) consecutive calendar months, and
(c) if the Landlord changes its financial year and gives notice to the
Tenant of the first and last days of the new financial year, the
period between the last day of the old financial year and the last day
of the new financial year will be a Lease Year and will be a period
less than twelve (12) consecutive calendar months, and the next Lease
Year will continue consecutively;
"Mortgage" means a mortgage or charge (including a deed of trust and
mortgage securing bonds and all other indentures supplemental thereto) of the
reversion immediately expectant on the Term, and includes all renewals,
modifications, consolidations, replacements and extensions thereof;
"Mortgagee" means the mortgagee or trustee for bondholders, as the
case may be, named in a Mortgage;
"Operating Costs" means the sum (without duplication) of all costs of
the Landlord of operating and maintaining in good repair the Building including
but not limited to the total costs of:
(a) insuring the Building ________ pursuant to the covenants of the
Landlord contained in this Lease, and such other insurance as the
Landlord effects against public liability, property damage, loss of
rental income and other casualties and risks; HVAC Costs, ___________
_______________________ cleaning, including snow removal, garbage and
waste collection and disposal; lighting, electricity (including that
used for
<PAGE>
-3-
signs), public utilities; fees and other remuneration payable to firms
for provision of operating, maintenance, property management, legal
and accounting services and if such services are performed by
individuals in the employ of the Landlord, they shall include other
remuneration including contributions to usual fringe benefits,
unemployment insurance and pension plans; the cost to the Landlord of
building supplies and the rental equipment used by the Landlord in the
maintenance and operating services; and depreciation (computed by the
Landlord in accordance with accounting principles generally accepted
in the Province of British Columbia) of fixtures and equipment which
by their nature require periodic replacement, but excluding buildings
and structures and permanent parts thereof,
(b) repair and maintenance of the Building and repair, maintenance and
necessary replacement of all fixtures, fittings and improvements
contained therein, including periodic painting and decorations as
determined by the Landlord, with due diligence and dispatch,
reasonable wear and tear only excepted;
(c) maintaining and operating the area occupied by a central heating or
cooling system or any other service or facility used to heat or cool
the Premises or other parts of the Building;
(d) the amount of all taxes, rates, duties, levies and assessments
whatsoever, whether municipal, provincial, federal or otherwise,
assessed upon the Landlord on account of the capital of the Landlord
as such amount is reasonably allocated by the Landlord to the Building
based upon the Landlord's determination of the fair market value
thereof in proportion to the fair market value of all of the assets of
the Landlord within the applicable jurisdiction with capital deemed to
include the amounts of the capital stock, retained earnings,
contributed and other surpluses and all loans, advances, indebtedness
and other liabilities, whether secured or unsecured, of the Landlord
and all taxes which may in the future be levied in lieu of the
foregoing but excluding income or profits taxes upon the income of the
Landlord and excluding taxes upon the capital of
<PAGE>
-4-
the Landlord to the extent that such taxes are credited against the
Landlord's income tax liability provided that such excluded taxes are
not levied in lieu of the foregoing,
"Premises" means the premises leased to the Tenant by this Lease and
described in Section 3.01:
"Tenant's Proportionate Share" where applied to an amount of money
referable to a period of time and where
<PAGE>
-5-
expressed to be payable for a Lease Year means: One Hundred (100%) percent of
such amount.
"Term" means the term of this Lease as stipulated in section 3.02;
"Unavoidable Delay" means a delay in performance of an act or
compliance with a covenant caused by fire, inability to procure material,
restrictive laws or governmental regulations or other cause of any kind beyond
the reasonable control of the party obligated to perform or comply, excepting a
delay caused by lack of funds or other financial reason.
ARTICLE II
STRUCTURE OF DOCUMENTS AND INTERPRETATION
-----------------------------------------
2.01 Schedules
---------
The schedules to this document are a part of this Lease and consist of:
Schedule A - Description of Land
2.02 Number and Gender
-----------------
The necessary grammatical changes required to make the provision of this
Lease apply in the plural sense where the Tenant comprises more than one entity
and to corporations, associations, partnerships, or individuals, males or
females, in all cases will be assumed as though in each case fully expressed.
2.03 Headings and Captions
---------------------
The table of contents, article numbers, article headings, section numbers
and section headings are inserted for convenience of reference only and are not
to be considered when interpreting this Lease.
2.04 Obligations as Covenants
------------------------
Each obligation of the Landlord or the Tenant expressed in this Lease
even though not expressed as a covenant, is considered to be a covenant for all
purposes.
2.05 Entire Agreement
----------------
This Lease contains all the representations, warranties, covenants,
agreements, conditions and understandings between the Landlord and the Tenant
concerning the Premises or the subject matter of this Lease
<PAGE>
-6-
2.05 Governing Law
-------------
This Lease shall be interpreted under and is governed by the laws of the
Province of British Columbia.
2.06 Net Lease
---------
The Tenant acknowledges and agrees that it is intended that this Lease
shall be a completely carefree net lease for the Landlord, except as expressly
hereinafter set out, and the Landlord shall not be responsible during the Term
for any costs, taxes, charges, expenses or outlays of any nature whatsoever
arising from or relating to the Premises or the contents thereof, and the Tenant
shall pay all charges, impositions, costs and expenses of every nature and kind
relating to the Premises and all costs, taxes, charges, expenses and outlays of
every nature and kind relating to the Building and the Land unless expressly
excluded herein, and the Tenant covenants with the Landlord accordingly.
ARTICLE III
PREMISES, TERM, RENT AND ADDITIONAL RENT
----------------------------------------
3.01 The Premises
------------
The Landlord leases to the Tenant for the Term the Premises, which
includes the Land and Building.
3.02 The Term
--------
The Term of this Lease is for FIVE (5) YEARS commencing on the 1st day of
April, 1994 and terminating on the 31st day of March, 1999.
3.03 Minimum Rent
------------
The Tenant will pay to the Landlord, at the office of the Landlord or at
such other place in Canada as the Landlord designates from time to time in
writing, in lawful money of Canada and without deduction or set-off, on the
first day of each month, monthly in advance, the following fixed minimum rent:
April 1, 1994 to March 31, 1996 - $4,166.00 each consecutive month;
April 1, 1996 to March 31, 1997 - $4,666.00 each consecutive month
April 1, 1997 to March 31, 1999 - $6,001.00 each consecutive month
<PAGE>
-7-
3.04 - N/A
3.05 Additional Rent and Charges
---------------------------
(1) In each Lease Year the Tenant will pay to the Landlord as additional
rent:
(a) the Tenant's Proportionate Share of the Operating Costs for the
corresponding financial year of the Landlord,
(b) municipal realty taxes (including school taxes) attributable to the
Premises,
(c) the EVAC Cost attributable to the Premises, and
(d) all other sums of money required under this Lease to be paid to the
Landlord by the Tenant whether or not designated as "additional rent."
(2) In each Lease Year the Tenant will pay as additional rent and discharge
when they become due and payable, all taxes, rates, duties and assessments and
other charges that may be levied, rated, charged or assessed against
improvements, equipment and facilities of the Tenant on the Premises, and every
tax and licence fee in respect of every business conducted on or from the
Premises or in respect of their use or occupancy by the Tenant (and any and
every assignee, subtenant, concessionaire, licensee and other person conducting
business on or from the Premises), other than such taxes as corporate, income,
profits or excess profits taxes assessed upon the income of the Landlord,
whether the taxes, rates, duties, assessments and license fees are charged by a
municipal, parliamentary, school or other body. The Tenant will indemnify and
keep indemnified the Landlord against payment for all loss, costs, charges and
expenses arising from all the taxes, rates, duties, assessments and licence fees
referred to and all taxes which may in future be levied in lieu of those taxes,
and any loss, costs, charges and expenses suffered by the Landlord may be
recovered by the Landlord in the same manner as rent hereby reserved and in
arrears. Upon request of the Landlord the Tenant will deliver promptly to the
Landlord for inspection receipts for payment of all taxes, rates, duties,
assessments and other charges in respect of all improvements, equipment and
facilities of the Tenant on the Premises which were due and payable up to one
(1) year prior to the request, and will deliver to the Landlord if requested by
the Landlord, evidence satisfactory to the
<PAGE>
-8-
Landlord before the 21st day of January in each year of payments for the
preceding calendar year.
(3) If any of the amounts referred to in subsections (1) and (2) is not paid
at the time provided in this Lease, it will be collectible as rent with the next
instalment of rent falling due, but nothing in this Lease suspends or delays the
payment of any amount of money when it becomes due and payable, or limits any
other remedy of the Landlord.
3.06 Payment of Additional Rent and Charges
--------------------------------------
Whenever the Tenant is to pay in a Lease Year the Tenant's Proportionate
Share of an amount of money referable to a period of time wholly or partly
within the Lease Year the Landlord will estimate the Tenant's Proportionate
Share of the amount before the beginning of the Lease Year and the Tenant will
pay to the Landlord the Tenant's Proportionate Share of the amount in monthly
instalments in advance during the Lease Year with the other rental payments
provided for in this Lease. Within sixty (60) days after the end of each Lease
Year the Landlord will make a final determination of the Tenant's Proportionate
Share of the amount for the Lease Year, and will furnish the Tenant with a
statement of the Operating Costs and HVAC Costs attributable to the Premises for
the relevant financial year or years of the Landlord, the municipal realty taxes
attributable to the Premises for the relevant calendar year or years and all
other amounts referred to in section 3.05(1) paid or payable for any relevant
period and in each case the amount thereof payable by the Tenant relating to the
Lease Year and showing in reasonable detail the information necessary for the
determination of the costs and the calculation of the Tenant's Proportionate
Share of the amount. If the Tenant's Proportionate Share of the amount exceeds
the sum of the instalments paid by the Tenant, the Tenant shall pay to the
Landlord as additional rent within thirty (30) days after the date of delivery
of the statement by the Landlord the excess without interest or, if the sum of
the monthly instalments paid by the Tenant during the preceding Lease Year
exceeds the Tenant's Proportionate Share of the amount, the Landlord will
deliver to the Tenant within thirty (30) days after the date of delivery of the
statement by the Landlord, the excess without interest.
<PAGE>
-9-
3.07 Post Dated Cheques
------------------
If the Landlord so requests, the Tenant shall provide post-dated
cheques in payment of rent and additional rent for such period as the Lessor may
request, by way of a series of post-dated cheques to be delivered to the
Landlord.
3.08 Goods and Services Tax
----------------------
The Tenant will pay to the Landlord or to the Federal, Provincial and
Municipal authorities imposing the same, as required by law, all Goods and
Services Tax and other taxes by whatever name called assessed upon or as a
direct result of the payment of rent or any other amounts payable under this
Lease as often as such taxes become due. Without limiting the foregoing, if the
Department of National Revenue issues an assessment claiming that the Landlord
has failed to pay all Goods and Services Tax imposed under the Excise Tax Act
(as amended from time to time and legislation in substitution therefor) in
respect of any amounts payable by the Tenant under this Lease, the Tenant will
immediately pay the amount of such assessment and hold the Landlord harmless
from all liability arising from such assessment.
Article IV - Deleted - Records, Books and Audits
-------------------------
ARTICLE V
<PAGE>
-10-
ARTICLE VI
COVENANT TO PAY RENT
--------------------
6.01 The Covenant
------------
The Tenant covenants to pay rent and all other costs and charges as
herein provided.
ARTICLE VII
USE OF PREMISES
---------------
7.01 Purpose of Use
--------------
The Premises will not be used for any purpose other than the purpose
of conducting the business of sporting goods - retail and wholesale and workshop
office use and warehousing and the Tenant will not use the Premises or permit
them to be used for any other purpose. Without limitation, none of the following
businesses or methods of doing business will be conducted on or from the
Premises:
(b) a special sale other than one incidental to the normal routine of the
Tenant's business upon the Premises with its regular customers,
(c) a store for the sale of second-hand goods or surplus articles,
insurance, salvage stock, fire-sale or bankruptcy stock,
(e) an operation in any line of merchandise which makes a practice of
unethical or deceptive advertising or selling procedures.
(f) sleeping apartments or lodging rooms, or
(g) an unlawful purpose.
7.02 Conduct of Business
-------------------
The Tenant will conduct its business in and use the whole of the
Premises continuously throughout the Term in an up-to-date, first class and
reputable manner.
<PAGE>
-11-
7.03 Furniture, Furnishing, Equipment and Fixtures not to be removed
---------------------------------------------------------------
The Tenant's furniture, furnishing and equipment and fixtures shall not
be removed from the Leased Premises, except in the normal course of business
carried on upon the Leased Premises, until all Rent due or to become due during
the entire Term of the Lease have been paid in full.
ARTICLE VIII
USE OF COMMON AREAS
-------------------
Deleted
ARTICLE IX
REPAIR
------
9.01 Repair by the Landlord
----------------------
Subject to Section 9.03, the Landlord will maintain and repair damage to
the foundations and structure of the Building caused by reasonable wear and tear
and by settling due to improper construction of the Building, provided that such
structural damage shall not be caused by the Tenant, its employees, agents,
servants or independent contractors.
9.02 Repair by Tenant
----------------
The Tenant will:
a) keep in good and substantial state of repair, normal wear and tear excluded
and subject to 9.01 and 9.03 hereof, the Building including all leasehold
improvements and all trade fixtures therein, exterior doors, all glass
<PAGE>
-12-
and utilities and all heating, air conditioning and ventilating
equipment therein, but with the exception of structural elements of the
Building;
(b) permit the Landlord to enter and view the state of repair on reasonable
notice except during any emergency when notice will not be required and
will repair according to notice in writing as required by clause (a),
subject only to the exception referred to in clause (a), and will leave
the Premises in a good and substantial state of repair ________________
_____________ subject only to the exception referred to in clause (a),
and
(c) if part of the Building _________________________ becomes in disrepair,
is damaged or destroyed through the negligence of the Tenant or its
officers, employees, customers or other invitees, reimburse the
Landlord the cost of repairs or replacements promptly upon demand
except to the extent that the Landlord is indemnified by insurance.
9.03 Abatement of Rent
-----------------
If there is damage to the Premises or damage to the Building __________
which prevents access to the Premises or the supply of services essential to the
Premises and if the damage is such that the Premises or a substantial part of
the Premises is rendered not reasonably capable of use by the Tenant for the
conduct of its business for a period of time exceeding ten (10) days,
(a) unless the damage was caused by the negligence of the Tenant or an
assignee, subtenant, concessionaire, licensee or other person
conducting business on or from the Premises or an officer, employee,
customer or other invitee of any of them, the fixed minimum rent
payable under Section 3.03 for the period beginning upon the occurrence
of the damage until at least a substantial part of the Premises is
again reasonably capable of use and occupancy for the purpose aforesaid
will abate in the proportion that the area of the part of the Premises
rendered not reasonably capable of use by the Tenant for the conduct of
its business bears to the total area of the Premises; and
(b) unless this Lease is terminated under Section 9.04, the Landlord or the
Tenant or both, as the case may be (according to the nature of the
damage and their respective obligations to repair under Sections
<PAGE>
-13-
9.01 and 9.02) will repair the damage with all reasonable diligence, but there
shall be no abatement for time required to repair or replace Tenant's trade
fixtures and leashold improvements which is in excess of the time required to
make other necessary repairs and replacements.
9.04 Destruction of Premises
-----------------------
(1) If the Premises and Building are so damaged by fire or other casualty
that the Landlord decides not to restore them, the Landlord shall within sixty
(60) days after the damage occurs give to the Tenant a notice in writing of such
decision, and thereupon the Term of this Lease shall end, and the Tenant shall
vacate the Premises and surrender them to the landlord.
(2) If this Lease is terminated under subsection: (1) neither the Landlord
nor the Tenant will be bound to repair as provided in Sections 9.01 and 9.02,
and the Tenant will deliver up possession of the Premises to the Landlord with
reasonable speed but in any event within fifteen (15) days after the giving of
the notice of termination, and all rent will be apportioned and paid to the
date, but otherwise the Landlord or the Tenant or both, as the case may be
(according to the nature of the
<PAGE>
-14-
damage and the respective obligations to repair) under Sections 9.01 and 9.02
will repair the damage with all reasonable diligence.
ARTICLE X
UTILITIES AND SERVICES - PREMISES
---------------------------------
10.01 Utility and Service Charges
---------------------------
The Tenant is solely responsible for and will promptly pay all charges
for water, gas, electricity, janitor service, window cleaning, and any other
utility or service used on the Premises. The Landlord will not be liable to the
Tenant in damages or otherwise for an interruption or failure in the supply of
utilities or services to the Premises unless caused by the negligence of the
Landlord or another person for whose negligence the Landlord is responsible in
law.
10.02 Tenant not to Overload Utility and Service Facilities
-----------------------------------------------------
The Tenant will not install equipment that will exceed or overload the
capacity of utility facilities and agrees that if equipment installed by the
Tenant requires additional facilities, they will be installed at the Tenant's
expense in accordance with plans and specifications reasonably approved by the
Landlord prior to installation.
ARTICLE XI
SUBORDINATION, ATTORNMENT AND STATUS STATEMENT BY TENANT
- --------------------------------------------------------
11.01 Subordination and Attornment
----------------------------
The Tenant will subordinate this Lease to every mortgage that
hereafter affects the Land and
<PAGE>
-15-
execute promptly a document in confirmation of the subordination if requested by
the Landlord in which the Tenant also will agree with the mortgagee that if the
mortgagee becomes a mortgagee in possession or takes action to realize the
security of the mortgage the Tenant will attorn to the mortgagee as a tenant
upon all the terms of this Lease, but only if the mortgagee agrees in writing to
accept the attornment and permit the Tenant to continue in occupation of the
Premises until this Lease is terminated by the passage of time or by action
taken because of a default of the Tenant. If the Tenant fails to execute the
documents of confirmation or attornment requested by the Landlord the Landlord
may terminate this Lease after the expiration of ten (10) days' notice of its
intention to do so because of the Tenant's failure unless within the ten (10)
day period the Tenant executes the documents.
11.02 Status Statement
----------------
At any time or times at reasonable intervals within fifteen (15) days
after a written request by the Landlord the Tenant will execute, acknowledge and
deliver to the Landlord or such assignee or mortgagee as the Landlord
designates, a certificate stating:
(a) that this Lease is unmodified and in force and effect and in
accordance with its terms (or if there have been modifications, that
this Lease is in force and effect as modified, and identifying the
modification agreements, or if this Lease is not in force and effect,
that it is not),
(b) the date to which rental has been paid under this Lease,
(c) whether or not there is an existing default by the Tenant in the
payment of rent or any other sum of money under this Lease, and
whether or not there is any other existing default by either party
under this Lease with respect to which a notice of default has been
served, and if there is such a default specifying its nature and
extent, and
(d) whether or not there are any set-offs, defences or counterclaims
against the enforcement of the obligations to be performed by the
Tenant under this Lease.
<PAGE>
-16-
ARTICLE XII
INSURANCE AND INDEMNITY
-----------------------
12.01 Insurance
---------
The Tenant will take out and keep in force throughout the Term and
during such other time as the Tenant occupies the Premises or part thereof all
risk direct damage insurance upon its merchandise, stock-in-trade, furniture,
plate glass, fixtures and improvements and all parts of the Premises which the
Tenant is obligated to keep in repair under Section 9.02 to the full replacement
Value thereof, and broad boiler insurance on any boilers in the Premises. The
Tenant will take out and maintain other insurance in amounts and upon terms
reasonable for a prudent tenant to provide, as determined by the Landlord.
12.02 Comprehensive General Liability Insurance
-----------------------------------------
The Tenant will take out and keep in force throughout the Term
comprehensive general liability insurance against claims for personal injury,
death or property damage or loss arising out of all operations of the Tenant and
subtenants, concessionaires, licensees and other persons conducting business on
or from the Premises, indemnifying and protecting the Landlord and the Tenant to
a limit of two million ($2,000,000.00) dollars inclusive, or such additional
amount as would be carried by a prudent owner.
12.03 The Insureds
------------
Each insurance policy referred to in sections 12.01 and 12.02 will
name the Landlord and the persons, firms or corporations designated by the
Landlord as additional named insureds as their interest may appear, will contain
if available and as appropriate a waiver of rights of subrogation against the
Landlord and the Tenant or a cross-liability clause protecting the Landlord and
other insureds designated by it against claims by the Tenant as if the Landlord
and other insureds designated by it were separately insured, and protecting the
Tenant against claims by the Landlord and other insureds by it as if the Tenant
were separately insured, and will contain a clause that the insurer will not
cancel or change or refuse to renew the insurance without first giving the
Landlord thirty (30) days' prior written notice. All policies of insurance will
<PAGE>
-17-
be with insurers acceptable to the Landlord and in form satisfactory to the
Landlord, and the Tenant will see that there is delivered to the Landlord copies
or certificates of the policies. And will provide written evidence of the
continuation of such policies not less than ten (10) days prior to their
expected expiry dates. If the Tenant fails to take out or keep in force any
policy of insurance referred to in sections 12.01 and 12.02 the Landlord may do
so and pay the premium, and in that event the Tenant will pay the premium, and
in that event the Tenant will pay to the Landlord the amount so paid as premium
as additional rent and it will be due and payable on the first day of the month
following the payment by the Landlord.
12.04 Landlord's Insurance
--------------------
The Landlord will take out and keep in force throughout the Term all
risks direct damage insurance on the buildings and improvements comprised in the
Building but which may exclude foundations and the improvements upon which the
Tenant is obliged to take out insurance under section 12.01, with responsible
insurance companies and in an amount such as would be carried by a prudent
owner, and the cost of the insurance will be included in Operating Costs. Each
insurance policy referred to in this section will contain, if available, a
waiver of the right of subrogation against the Tenant to the extent only of that
part of a claim against the Tenant in excess of the amount of comprehensive
general liability insurance which the Tenant is required to take out and keep in
force.
12.06 Increase in Landlord's Insurance Premiums
-----------------------------------------
(1) The Tenant agrees that nothing will be done, omitted to be done, kept,
used, sold or offered for sale on or from the Premises that may contravene any
of the Landlord's policies insuring any part of the Building___________
<PAGE>
-18-
or which will prevent the Landlord from procuring policies with companies
acceptable to the Landlord. The Tenant will pay all increases in premiums for
all risks direct damage insurance, and broad boiler insurance, including repair
or replacement and rental income coverages and such other insurance as is
customary for prudent owners of property similar to the Building__________ to
carry against loss of or damage to the Building___________ liability arising
therefrom that may be charged during the Term for insurance carried by the
Landlord insuring any part of the Building____________ resulting from the type
of merchandise sold on or from the Premises or anything done or kept thereon or
any use to which they may be put, whether or not the Landlord has consented to
them. In determining whether increased premiums are the result of the use of the
Premises a schedule issued by the organization making the insurance rate on the
Premises showing the various components of the rate will be conclusive evidence
of the several items and charges which make up the fire insurance rate on the
Premises.
(2) If the occupancy or use of the Premises causes an increase of Premium
for any of the policies insuring the Premises or any part of the
Building________ above the rate for the least hazardous type of use or occupancy
legally permitted in the Premises, the Tenant will pay the amount of the
increase. The Tenant will also pay in that event any additional premium for
rental income insurance carried by the Landlord for its protection against rent
loss through an insured risk. Bills for the increases and additional payments
may be rendered by the Landlord to the Tenant when the Landlord elects, and will
be due and payable by the Tenant when rendered, and the amount thereof will be
paid as additional rent.
12.07 Cancellation of Insurance
-------------------------
If an insurance policy upon part of the Building_______ is cancelled or
threatened by the insurer to be cancelled, or the coverage thereunder reduced or
threatened to be reduced by the insurer because of the use and occupation of the
Premises, and if the Tenant fails to remedy the condition giving rise to
cancellation, threatened cancellation, reduction or threatened reduction of
coverage within forty-eight (48) hours after notice thereof by the Landlord, the
Landlord may either:
(a) re-enter the Premises whereupon Article XVIII will apply, or
(b) enter the Premises and remedy the condition giving rise to the
cancellation or reduction or threatened cancellation or reduction, and
the Tenant will pay to the Landlord the cost thereof on demand as
<PAGE>
-19-
additional rent, and the Landlord will not be liable for damage or
injury caused to property of the Tenant or others located on the
Premises as a result or the entry.
12.08 Indemnification of the Landlord
-------------------------------
Except to the extent that the loss of life, personal injury or damage
to property referred to in this sentence is caused by the negligence of the
Landlord or another person for whose negligence the Landlord is responsible in
law, the Tenant will indemnify the Landlord and save it harmless from and
against any and all claims, actions, damages, liability and expenses in
connection with loss of life, personal injury or damage to property arising from
any occurrence on the Premises or the occupancy or use of the Premises or
occasioned wholly or in part by an act or omission of the Tenant, its officers
employees, agents, customers, contractors or other invitees, licensees or
concessionaires or by anyone permitted by the Tenant to be on the Premises. In
case the Landlord, without actual (as opposed to merely vicarious) fault on its
part, is made a party to litigation begun by or against the Tenant, excepting a
bona fide action by the Tenant against the Landlord, the Tenant will protect and
hold the Landlord harmless and will pay all costs, expenses and reasonable legal
fees incurred or paid by the Landlord in connection with the litigation.
12.09 Loss and Damage
---------------
Unless caused by the negligence of the Landlord or another person for
whose negligence the Landlord is responsible in law, the Landlord is not liable
for the death of or injury to the Tenant or others on the Premises, or for the
loss of or damage to property of the Tenant or others by theft or otherwise.
Without limiting the generality of the foregoing, the Landlord is not liable for
death, injury, loss or damage of or to persons or property resulting from fire,
explosion, falling plaster, steam, gas, electricity, water, rain or snow or
leaks from any part of the Premises or from the pipes, appliances or plumbing
works or from the roof, street or sub-surface or from any other place or by
dampness or by other cause of any kind. The Landlord is not liable for death,
injury, loss or damage caused by other tenants or occupants or other persons on
the Premises or in any other part of the Building, resulting from construction,
alteration or repair. The Tenant agrees that there is no promise,
representation, or undertaking by or binding upon the Landlord with respect to
alterations, remodelling or decoration of or installation of equipment or
fixtures in the Premises except such, if any, as is expressly contained or
referred to in this Lease, and that unless an express provision provides for
completion of the
<PAGE>
-20-
alteration, remodelling, decoration of installation after the Tenant's taking
occupancy of the Premises, the taking of occupancy, constitutes conclusive
evidence as against the Tenant that the alterations, remodelling or decoration
or installation of equipment of fixtures has been satisfactorily completed. All
property of the Tenant kept or stored on the Premises will be kept or stored at
the risk of the Tenant only and the Tenant will hold the Landlord harmless from
all claims arising out of damage to it, including subrogation claims by the
Tenant's insurers.
ARTICLE XIII
ASSIGNMENT AND SUBLETTING
-------------------------
13.01 Consent Required
----------------
Except to an Eligible Corporation the Tenant will not, and will not
permit a subtenant to assign this Lease in whole or in part, or sublet all or
part of the Premises, or mortgage or encumber this Lease or the Premises or part
thereof, and will not permit the occupation or use of all or any part thereof by
others other than an Eligible Corporation, without the prior written consent of
the Landlord in each case, which, consent, will not be withheld unreasonably
except that it may be withheld in any event if the permitted use of the Premises
stipulated in section 7.01 would be changed.
The consent by the Landlord to an assignment or subletting will not constitute
a waiver of its consent to a subsequent assignment or subletting. This
prohibition against assignment or subletting includes a prohibition against an
assignment or subletting includes a prohibition against an assignment or
subletting by operation of law. If this Lease is assigned, or if all or part of
the Premises is sublet or occupied by anybody other than the Tenant, in any case
without the consent of the Landlord when required, the
<PAGE>
-21-
Landlord may collect rent from the assignee, subtenant or occupant, and apply
the net amount collected to the rent herein reserved, but no such assignment,
sublease, occupancy or collection will be considered a waiver of this covenant,
or the acceptance of the subtenant or occupant as Tenant. Despite an assignment
the Tenant remains fully liable under this Lease. An assignment of this Lease if
consented to by the Landlord will be prepared by the Landlord or its solicitors,
and all reasonable legal costs of its preparation will be paid by the Tenant.
13.02 Financing by Tenant
-------------------
Notwithstanding anything to the contrary contained in this Lease, the Landlord
agrees that the Tenant may from time to time finance its business operations and
in relation to such financing the Tenant may mortgage the Tenant's leasehold
interest herein, and such mortgage may be registered against the Lease without
the need for consent from the Landlord. The Landlord agrees that upon the
request of the Tenant the Landlord will promptly provide any person (in this
paragraph called the "Lender") proposing to take or having a charge against the
Tenant's leasehold interest with confirmation as to the status of this Lease and
the Tenant's compliance with its terms. Without limiting the Lender's rights in
law or equity, the Landlord agrees that the Lender will receive the benefit of
all notices and rights of the Tenant hereunder; that the Landlord will not
terminate the Lease in the event of default by the Tenant without first giving
the Lender a reasonable opportunity to cure the default and that the Lease will
not be terminated thereafter so long as the Lender maintains the Lease in good
standing; that the Landlord will not unreasonably withhold consent to the
assignment of the Lease or subletting of the demised premises in whole or in
part by the Lender to a third party in the event that the Lender realises on its
security taken against the Lease; and that the Landlord will enter an agreement
with the Lender upon the Lender's request in confirmation of these agreements;
PROVIDED in all cases that all reasonable expense of the Landlord incurred in
giving any confirmation, notice or agreement pursuant to this paragraph will be
paid by the Tenant or Lender.
<PAGE>
-22-
ARTICLE XIV
CHANGE IN CONTROL
-----------------
14.01 Corporate Ownership
-------------------
If after the date of execution of this Lease shares not listed for
sale on a recognized stock exchange in Canada either of the Tenant or of an
Eligible Corporation which controls the Tenant are transferred by sale,
assignment, bequest, inheritance, operation of law of other disposition, or
issued by subscription or allotment, or cancelled or redeemed, so as to result
in a change in the effective voting or other control of the Tenant or of an
Eligible Corporation which controls the Tenant by the person or persons holding
control on the date of execution of this Lease or on the date when the Tenant
becomes a corporation, if later, or if other steps are taken to accomplish a
change of the control, the Tenant promptly will notify the Landlord in writing
of the change, which will be considered to be an assignment of this Lease to
which sections 13.01, and apply: and whether or not the Tenant notifies the
Landlord, the Landlord may terminate this Lease within sixty (60) days after the
Landlord learns of the change unless the Landlord previously had consented to
the change. The Tenant will make available to the Landlord or its lawful
representatives all corporate books and records of the Tenant and of any
Eligible Corporation which controls the Tenant for inspection at all reasonable
times, to ascertain to the extent possible whether there has been a change in
control.
ARTICLE XV
WASTE AND GOVERNMENTAL REGULATIONS
----------------------------------
15.01 Waste or Nuisance
------------------
The Tenant will not commit or permit to be committed waste upon the
Premises or a nuisance or other thing that may disturb the quiet enjoyment of
any other tenant in the Building or of any person within five hundred (500) feet
of a boundary of the Building whether or not the nuisance arises out of the use
of the Premises by the Tenant for a purpose permitted by this Lease.
15.02 Governmental and Insurance Underwriters' Regulations
----------------------------------------------------
The Tenant, at the Tenant's cost, will comply with the applicable
requirements of all municipal, provincial, federal and other governmental
authorities now in force or
<PAGE>
-23-
which may hereafter be in force pertaining to the Tenant's occupancy or use of
the Premises and will observe any occupancy and use of the Premises all
municipal by-laws and provincial and federal statutes and regulations now in
force or which may hereafter be in force, and will comply with all regulations
made by fire insurance underwriters. The Tenant grants the Landlord the right to
enter the Premises at any time or times with as little interference as is
reasonably possible with the conduct of the Tenant's business to enable the
Landlord to comply with any municipal by-law or provincial statute now or in the
future applicable to the Premises whether or not the application of the by-law
or statute to the Premises results from an act or omission of the Landlord or
another person for whose act or omission the Landlord is responsible.
ARTICLE XVI
NOTIFICATION BY TENANT OF DAMAGE
--------------------------------
16.01 Notification by Tenant of Damages
---------------------------------
Tenant will notify the Landlord immediately that the Tenant becomes aware
of any fire or accident in the Premises or of any damage to or malfunctioning of
the heating, electrical, plumbing, mechanical or ventilating system in the
Building or any damage to the foundations, structure, roof, exterior walls or
supporting walls of the Building.
ARTICLE XVII
SIGNS, FIXTURES AND ALTERATIONS
-------------------------------
17.01 Installation and Changes by Tenant
----------------------------------
All fixtures installed by the Tenant will be of first class quality.
The Tenant will not make or cause to be made any change, decoration, addition or
improvement or cut or drill into, nail or otherwise attach, secure or
<PAGE>
-24-
install any trade fixture, exterior sign, floor covering, interior or exterior
lighting, or mechanical or electrical system or fixture, or plumbing fixture,
shade or awning to any part of the Premises or to the exterior of the Premises
including the store front or hang from or affix anything to the ceiling without
first obtaining the Landlord's written approval. The Tenant will present to the
Landlord plans and specifications for the work at the time approval is sought
and the work will be done by contractors or other workers or tradesmen approved
by the Landlord and in good and workmanlike manner with first class materials.
The Tenant will not make any change to the structural elements of the Premises.
17.02 Removal of Installations and Restoration by Tenant
--------------------------------------------------
All alterations, decorations, additions and improvements made by the
Tenant or made by the Landlord on the Tenant's behalf become on affixation the
property of the Landlord. No alteration, decoration, addition or improvement
will be removed from the Premises before the end of the Term without prior
consent in writing from the Landlord. Upon termination of this Lease the
alterations, decorations, additions and fixed improvements excepting Tenant's
trade fixtures will remain in the property of the Landlord as part the
reversion, but the Tenant will remove all or some of the alterations,
decorations, additions and fixed improvements if and to the extent requested by
the Landlord, and restore the Premises as provided in Section 9.02(b). Every
installation, removal or restoration by the Tenant of its trade fixtures will be
done at the sole expense of the Tenant and the Tenant promptly will make good or
reimburse the Landlord the cost of making good all damage to structural elements
relating to the Premises or to the heating, ventilating, air conditioning,
plumbing, electrical or other mechanical systems in the Building caused thereby.
Nothing herein prevents the Tenant from painting over, removing, or covering up
its trademarks.
17.03 Not to Overload Floors
----------------------
The Tenant will not bring upon the Premises any machinery, equipment
or things that by reason of its weight, size or use in the opinion of the
Architect might damage the Premises and will not at any time overload the floors
of the Premises. If overloading occurs and damage ensues the Tenant forthwith
will repair the damage or pay to the Landlord the cost of making it good.
17.04 Tenant Discharge All Liens
--------------------------
The Tenant promptly will pay all its contractors and materialmen and
do all things necessary to minimize the possibility of a lien attaching to the
Premises or to any other part of the Building and should a claim for
<PAGE>
-24a-
lien be registered, the Tenant will cause it to be discharged at the Tenant's
expense within seven (7) days after it is brought to the attention of the
Tenant.
17.05 Tenant's Signs, Awnings and Canopies
------------------------------------
The Tenant will not place or permit to be placed or maintained on
the roof or on any exterior or interior door, wall or window of the Premises any
sign, awning, canopy, decoration, lettering, advertising matter or other thing
of any kind and will not place or maintain any decoration, lettering or
advertising matter on the glass of any window or door of the Premises without
first obtaining the Landlord's written consent, but this sentence has no
application to signs, awnings, canopies, decorations, lettering, advertising
matter or other things to be placed inside the Premises if of a reasonable
standard of acceptability to the Landlord and not visible from outside the
Premises.
<PAGE>
-25-
ARTICLE XVIII
DEFAULT OF TENANT
-----------------
18.01 Right to Re-enter
-----------------
If and whenever the rent hereby reserved or any part thereof shall not
be paid on the day appointed for payment thereof, whether lawfully demanded or
not, or in case of breach or non-observance or non-performance of any of the
covenants, agreements, provisos and conditions on the part of the Tenant to be
kept, observed or performed, or if re-entry is permitted under other terms of
this Lease, the Landlord in addition to any other right or remedy it may have
will have the right of immediate re-entry and may remove all persons and
property from the Premises and the property may be removed and stored in a
public warehouse or elsewhere at the cost of and for the account of the Tenant,
all without service of notice for resort to legal process and without being
considered guilty of trespass or becoming liable for loss or damage occasioned
thereby.
18.02 Bankruptcy of Tenant
--------------------
If
(a) any of the goods and chattels of the Tenant on the Premises at any
time during the Term are seized or taken in execution or attachment by
a creditor of the Tenant,
(b) the Tenant or a guarantor or indemnifier of this Lease makes an
assignment for the benefit of creditors or a bulk sale from the
Premises other than a bulk sale to an assignee or sublessee pursuant
to an assignment or sublease which under section 13.01 was consented
to or did not require a consent,
(c) a receiver-manager is appointed to control the conduct of the business
on or from the Premises,
(d) the Tenant becomes bankrupt or insolvent or takes the benefit of an
Act now or hereafter in force for bankrupt or insolvent debtors,
(e) an order is made for the winding-up of the Tenant.
<PAGE>
-26-
(f) the Premises, without the written consent of the Landlord, become and
remain vacant for a period of ten (10) days or are used by any other
persons than those entitled to use them under the terms of this Lease,
(g) the Tenant, without the written consent of the Landlord, abandons or
attempts to abandon the Premises or sells or disposes of its goods or
chattels or removes any of them from the Premises so that there would
not in the event of abandonment, sale or disposal be sufficient goods
on the Premises subject to distress to satisfy all rentals due or
accruing due hereunder.
the then current month's rent and the next ensuing three (3) months' rent
immediately will become due and payable as accelerated rent and the Landlord may
re-enter and take possession of the Premises as though the Tenant or the
servants of the Tenant or any other occupant of the Premises were holding over
after the expiration of the Term and the Lease, at the option of the Landlord
forthwith will become forfeited and determined. In every one of the cases above
mentioned the accelerated rent may be recovered by the Landlord in the same
manner as rent reserved and in arrears and the option will be considered to have
been exercised if the Landlord or its agents notice to that effect to the
Tenant.
18.03 Landlord may Perform Tenant's Obligations
-----------------------------------------
If the Tenant fails to perform an obligation of the Tenant under this
Lease the Landlord may perform the obligation and for that purpose may enter
upon the Premises on not less than five (5) days' prior notice to the Tenant or
without notice in the case of an emergency and do such things upon or in respect
of the Premises as the Landlord considers necessary. The Tenant will pay as
additional rent all expenses incurred by or on behalf of the Landlord under this
section upon presentation of a bill therefore. The Landlord will not be liable
to the Tenant for loss or damage resulting from such action by the Landlord
unless caused by the negligence of the Landlord or another person for whose
negligence the Landlord is responsible in law.
18.04 Right to Relet
--------------
If the Landlord re-enters, as herein provided, it may either
terminate this Lease or it may from time to time without terminating the
Tenant's obligations under this Lease, make alterations and repairs considered
by the Landlord necessary to facilitate a reletting, and relet the
<PAGE>
-27-
Premises or any part thereof as agent of the Tenant for such term or terms and
at such rental or rentals and upon such other terms and conditions as the
Landlord in its reasonable discretion considers advisable. Upon each reletting
all rent and other monies received by the Landlord from the reletting will be
applied, first to the payment of indebtedness other than rent due hereunder from
the Tenant to the Landlord, secondly to the payment of costs and expenses of the
reletting including brokerage fees and solicitor's fees and cost of the
alterations and repairs, and third to the payment of rent due and unpaid
hereunder. The residue, if any, will be held by the Landlord and applied in
payment of future rent as it becomes due and payable. If the rent received from
the reletting during a month is less than the rent to be paid during that month
by the Tenant, the Tenant will pay the deficiency to the Landlord. The
deficiency will be calculated and paid monthly. No re-entry by the Landlord will
be construed as an election on its part to terminate this lease unless a written
notice of that intention is given to the Tenant. Despite a reletting without
termination, the Landlord may elect at any time to terminate this Lease for a
previous breach. If the Landlord terminates this Lease for any breach, in
addition to other remedies it may recover from the Tenant all damages it incurs
by reason of the breach including the cost of recovering the Premises,
reasonable legal fees and the worth at the time of termination of the excess, if
any, of the amount of rent and charges to rent reserved in this Lease for the
remainder of the Term over then reasonable rental value of the Premises for the
remainder of the Term, all of which amounts immediately will be due and payable
by the Tenant to the Landlord. In any of the events referred to in Sections
18.01, 18.02 and 18.03, in addition to all other rights, including the rights
referred to in this section and Section 18.01, the full amount of the current
month's minimum rent, monthly contributions towards taxes, insurance premiums,
the Tenant's proportionate Share of the Operating Costs and all other payments
required to be made monthly and the next three (3) months minimum rent
immediately will become due and payable, and the Landlord may immediately
distrain for it, together with arrears then unpaid.
18.05 Legal Expenses
--------------
If the Landlord brings an action against the Tenant arising from an
alleged breach of a covenant or condition in the Lease to be complied with by
the Tenant and the court
<PAGE>
-28-
establishes that the Tenant is in breach of the covenant or condition, the
Tenant will pay to Landlord all expenses incurred by the Landlord in the action
including reasonable legal fees.
18.06 Interest on Overdue Monies
--------------------------
All overdue monies payable to the Landlord by the Tenant on any
account whatsoever shall bear interest at the rate of ten (10%) per cent per
annum.
18.07 Waiver of Distress
------------------
The Tenant covenants with the Landlord that in consideration of the
making of this Lease, none of the goods and chattels of the Tenant on the
Premises is exempt from levy by distress for rent in arrears, and that upon a
claim being made for exemption by the Tenant or on distress being made by the
Landlord, this section may be pleaded as an estoppel against the Tenant in an
action brought to test the right to levy upon goods named as exempted.
ARTICLE XIX
REMEDIES OF LANDLORD AND WAIVER
-------------------------------
19.01 Remedies of Landlord Cumulative
-------------------------------
No exercise of a specific right or remedy by the Landlord or by the
Tenant precludes it from or prejudices it in exercising another right or
pursuing another remedy or maintaining an action to which it may otherwise be
entitled either at law or in equity.
19.02 Waiver
------
The waiver by the Landlord or the Tenant of a breach of a term,
covenant or condition of this Lease will not be considered to be a waiver of a
subsequent breach of the term, covenant or condition or another term, covenant
or condition. The subsequent acceptance of rent by the Landlord will not be
considered to be a waiver of a preceding breach by the Tenant of a term,
covenant or condition of this Lease, regardless of the Landlord's knowledge of
the preceding breach at the time of acceptance of the rent. No covenant, term or
condition of this Lease will be considered to have been waived by the Landlord
or by the Tenant unless the waiver is in writing signed by the Landlord or by
the Tenant, as the case may be.
<PAGE>
-29-
ARTICLE XX
ACCESS BY LANDLORD
------------------
20.01 Right of Entry
--------------
The Landlord and its agents may enter the Premises at all reasonable
times to examine them and show them to a prospective purchaser, lessee or
mortgagee. The Landlord may make alterations, additions and adjustments to and
changes of location of the pipes, conduits, wiring, ducts and other
installations of any kind in the Premises where necessary to serve another part
of the Building, and the Landlord may take all material required therefor on to
the Premises without constituting an eviction of the Tenant in whole or in part,
and the rent reserved will not abate while the alterations, additions or changes
of location are being made by reason of loss or interruption of the business of
the Tenant, or otherwise, and the Landlord will not be liable for damage to
property of the Tenant or of others located on the Premises as a result of an
entry unless caused by the negligence of the Landlord or another person for
whose negligence the Landlord is responsible in law. During the six (6) months
prior to the expiration of the Term the Landlord may place upon the Premises the
usual notice "For Rent" which the Tenant will permit to remain without
interference. If the Tenant is not present to open and permit entry into the
Premises when for proper reason entry is necessary or permissible, the Landlord
or its agents may enter by a master key or way forcibly enter without rendering
the Landlord or its agents liable therefor and without affecting the Lease.
Nothing in this section, however, imposes upon the Landlord an obligation,
responsibility or liability for the care, maintenance or repair of the Premises
or any part thereof except as specifically provided in this Lease.
<PAGE>
-30-
ARTICLE XXI
ASSIGNMENT BY LANDLORD
----------------------
21.01 Assignment
----------
If the Landlord sells an interest in the Building or in this Lease, to
the extent that the purchaser or assignee is responsible for compliance with the
covenants and obligations of the Landlord hereunder, the Landlord without
further written agreement will be relieved of liability under its covenants and
obligations.
ARTICLE XXII
RULES AND REGULATIONS
---------------------
22.01 Landlord May Make
-----------------
The Landlord from time to time may establish, modify and enforce
reasonable rules and regulations regarding the use and occupancy of the Premises
set aside by the Landlord for leasing to tenants of the Building. All rules and
regulations and modifications whether made under this section or section 8.02
become a part of this Lease and bind the Tenant. The Tenant will comply with the
rules and regulations and modifications. Notice of the rules and regulations and
modifications, if any, will be given to the Tenant by the Landlord. No rule or
regulation or modification will contradict a provision of this Lease.
ARTICLE XXIII
LANDLORD'S COVENANTS AND OBLIGATIONS
------------------------------------
23.01 Taxes
-----
The Landlord will pay all real property taxes (including local
improvement rates) that may be assessed by a lawful authority against the
Building, _______________________, subject to sections 3.05 and 5.01.
23.02 Quiet Enjoyment
---------------
Subject to the provisions of this Lease the Landlord covenants with
the Tenant for quiet enjoyment.
<PAGE>
-31-
ARTICLE XXIV
OVERHOLDING
-----------
24.01 No Tacit Renewal
----------------
If the Tenant remains in possession of the Premises after the end of
the Term and without the execution and delivery of a new lease or a written
renewal or extension of this Lease, there is no tacit or other renewal of this
Lease, and the Tenant will be considered to be occupying the Premises as a
Tenant from month to month at a monthly rental payable in advance on the first
day of each month equal to the sum of:
(a) One and a half times the monthly installment of fixed minimum rent
payable for the last month of the Term, and
(b) one-sixth (1/6th) of the percentage rent, if any, for the Lease Year
immediately preceding the last Lease Year of this Lease, and
(c) one-sixth (1/6th) of the amount of additional rent and charges payable
by the Tenant for the year immediately preceding the last Lease Year
of this Lease.
and otherwise upon the terms and conditions set forth in this Lease, so far as
applicable.
ARTICLE XXV
OPTION TO RENEW
---------------
25.01 Option to Renew
---------------
Provided that:
(a) the Tenant pays the rental and other sums payable hereunder and
performs each and every one of the covenants, provisos and agreements
herein contained on the part of the Tenant to be paid and performed
punctually and in accordance with the provisions of this Lease; and
(b) the Tenant has not assigned this Lease or sublet or permitted a change
in occupancy of the Premises unless specifically permitted or consent
to under section 13.01; and
(c) there has been no change in ownership of the majority of the capital
stock of the Tenant unless specifically permitted or consented to
under
<PAGE>
-32-
section 14.01
then the Tenant shall have the option of renewing this Lease by notice in
writing given to the Landlord not later than six (6) months nor earlier than
eight (8) months prior to the expiry of the Term for an additional term of ONE
(1) years on the same terms and conditions set forth in this Lease, save and
except:
(i) that any renewals of the Lease shall be limited to one (1) years each
and shall limited to one (1) in number; and
(ii) the minimum rental to be paid during the renewal term shall be
$5,650.00 per month.
OBLIGATIONS OF INDEMNITOR
-------------------------
26.01 The Indemnitor, as a separate and distinct agreement and in
consideration of the Landlord entering into this Lease with the Tenant and other
good and valuable consideration (the receipt and sufficiency of which is hereby
acknowledged), covenants and agrees with the Landlord as follows:
(a) this indemnity is absolute and unconditional;
(b) the Tenant will duly keep, observe and perform all of its covenants
and agreements under this Lease (including the payment of rent,
additional rent and all other amounts from time to time payable under
this Lease);
(c) if any default is made by the Tenant under this Lease, the Indemnitor
shall on demand of the Landlord forthwith remedy such default;
<PAGE>
-33-
(d) the Landlord shall not be bound or required to proceed against the
Tenant or any other obligated person or to have recourse to or exhaust
any security from time to time held by it for the performance of such
covenants or agreements or to pursue any other remedy whatsoever which
may be available to it, before proceeding against the Indemnitor.
(e) the Indemnitor shall indemnify and save harmless the Landlord with
respect to all loss, costs, expenses, claims, liabilities and damages
that may be suffered or incurred by the Landlord by reason of or
relating to, directly or indirectly, any default of the Tenant under
this Lease;
(f) the Indemnitor is jointly and severally bound with the Tenant to the
Landlord to keep, observe and perform all covenants and agreements of
the Tenant under this Lease and the Indemnitor expressly waives any
benefits of division and discussion which it may have;
(g) the obligations of the Indemnitor hereunder shall be in no way
released, discharged, reduced or otherwise affected by;
(i) modifications, releases or discharges granted to the Tenant in
respect of its obligation to keep, observe and perform its
covenants and agreements hereunder;
(ii) any neglect, delay or forbearance of the Landlord in demanding,
requiring or enforcing the keeping, observance or performance
by the Tenant of any of its covenants or agreements under this
Lease or by the Indemnitor of any of its obligations hereunder;
(iii) granting any extensions of time, waivers or indulgences;
(iv) any assignment or subleasing by the Tenant or any trustee in
bankruptcy, receiver or other successor or any consent of the
Landlord to any assignment or subleasing;
(v) bankruptcy, insolvency or dissolution of the Tenant;
(vi) any other event or occurrence which would have the effect at
law of terminating or rendering unenforceable any covenants or
<PAGE>
-34-
agreements of the Tenant;
(vii) any agreements or other dealings between the Landlord and the
Tenant having the effect of amending or altering the Lease or
the obligations of the Tenant hereunder:
(viii) any want of notice by the Landlord to the Indemnitor of any
default of the Tenant;
(ix) any re-entry into the Premises or termination of this Lease;
or
(x) any other matter, thing, act or omission of the Landlord
whatsoever;
(h) the obligations of the Indemnitor hereunder shall extend to the Term
and to any overholding by the Tenant thereafter and to any renewal or
extension of the Term;
(i) the Indemnitor will submit to the jurisdiction of the governing laws
of this Lease in any action or proceeding brought by the Landlord to
enforce its rights hereunder;
(j) no proceeding hereunder and no recovery made as a result thereof will
be a bar or defence to any further proceeding hereunder;
(k) the Indemnitor waives any right to receive notice of any default of
the Tenant; and
(l) the Indemnitor is bound by all the terms and provisions of the Lease.
ARTICLE XXVII
MISCELLANEOUS
-------------
27.01 Accord and Satisfaction
-----------------------
No payment by the Tenant or receipt by the Landlord of a lesser amount
than rent herein stipulated will be considered to be other than on account of
the earliest stipulated rent, nor will an endorsement or statement on a cheque
or in a letter accompanying a cheque or payment as rent be considered to be an
accord or satisfaction, and the Landlord may accept a cheque or payment without
prejudice to the Landlord's right to recover the balance of the rent or pursue
any other remedy.
<PAGE>
-35-
27.02 No Partnership
--------------
The Landlord does not in any way or for any purpose become a partner
of or joint venturer or a member of a joint enterprise with the Tenant. The
provisions of this Lease relating to percentage rent are solely to provide a
method of computing rent and neither the method of computing rent nor any other
provision of this Lease creates a relationship between the parties other than
that of Landlord of Tenant.
27.03 Unavoidable Delay
-----------------
If there is an Unavoidable Delay in the performance of an act or
compliance with a covenant or condition, performance or compliance during the
period of the Unavoidable Delay will be excused and the period for the
performance or compliance will be extended for a period equal to the period of
the Unavoidable Delay.
27.04 Partial Invalidity
------------------
If a term, covenant or condition of this Lease or the application
thereof to any person or circumstances is held to any extent invalid or
unenforceable, the remainder of this Lease or the application of the term,
covenant or condition to persons or circumstances other than those as to which
it is held invalid or enforceable will not be affected.
27.05 Joint and Several Liability
---------------------------
If two or more individuals, corporations, partnerships or other
business associations (or a combination of two or more) are the Tenant or the
Indemnitor, the liability of each individual, corporation, partnership or other
business association to pay rent and perform all other obligations hereunder is
joint and several. If the Tenant or the Indemnitor is a partnership or other
business association the members of which are by virtue of statute or general
law subject to personal liability, the liability of each member is joint and
several.
27.06 Registration
------------
The Tenant may register this Lease and the Landlord shall be obligated
to deliver this Lease in registrable form.
27.07 Notice
------
A notice, demand, request, statement or other evidence required or
permitted to be given under this Lease must be written and will be sufficiently
given if mailed in
<PAGE>
-36-
Canada by registered mail to the party to whom it is directed at its address as
hereinbefore first set out or if delivered to such address
A notice, demand, request, statement or other instrument mailed as
aforesaid will be considered to have been given to the party to which it is
addressed on the third business day following the date of mailing. In the event
of interruptions in the normal postal service a notice will be deemed received
when actually received by the party whom it is addressed.
A party at any time may give notice to any other party of a change of
its address, and after the giving of the notice the address therein specified
will be considered be the address of the party which gave the notice.
27.08 Amendment in Writing
--------------------
No alteration, amendment, change or addition to is Lease will bind the
Landlord or the Tenant unless in writing and signed by the parties hereto.
27.09 Successors and Assigns
----------------------
This Lease binds and benefits the parties and their respective heirs,
executors, administrators, successors and assigns. No rights, however, benefit
an assignee of the Tenant unless the assignment was consented to by the Landlord
pursuant to Section 13.01.
27.10 Security Deposit
----------------
The Landlord acknowledges receipt of $1,900.00 to be held by the
Landlord as a deposit without liability for the payment of interest thereon, as
security for the payment of rent and performance of the Tenant's obligations
under this Lease. If at any time Rent or any other amount payable by the Tenant
is overdue and unpaid or the Tenant fails to perform any of its obligations
under this Lease, the Landlord, either before or after terminating this Lease,
may apply the whole or any part of the deposit to the payment of such Rent or to
compensate the Landlord for any loss or expense incurred by the Landlord and
such application will be without prejudice to the Landlord's right to pursue
its remedies. If the whole or any part of the deposit is applied by the
Landlord, the Tenant will pay to the Landlord forthwith a sufficient amount to
restore the deposit to the amount specified above, and the Tenant's failure to
do so within ten (10) days after demand will constitute a breach of this Lease.
If the Tenant promptly pays all Rent as it falls due and performs all of its
obligations under this Lease, the Landlord will repay the deposit or any balance
held by the Landlord to the Tenant within thirty (30) days
<PAGE>
-37-
after termination of this Lease. The Landlord may deliver and assign the deposit
to any purchaser of the Landlord's interest in the Premises and thereupon the
Landlord will be discharged from any further liabilities with respect to such
deposit.
IN WITNESS WHEREOF the parties have executed this lease the day and year first
above written.
WESTERN IMMO HOLDINGS Inc.
per [Name illegible] [Name illegible]
----------------------- ------------------------
Authorised signatory Witness
WESTBEACH SNOWBOARD
CANADA LTD.
per [Name illegible] [Name illegible]
----------------------- ------------------------
Authorised Signatory Witness
<PAGE>
-39-
Schedule A
Schedule to a lease between WESTERN IMMO HOLDINGS LTD. and WESTBEACH SNOWBOARD
CANADA LTD dated as of April 1, 1994.
DESCRIPTION OF LAND
LEGAL DESCRIPTION: Lots 7 & 8, Block 248
District Lot 526, Plans 590 and 3863
CIVIC DESCRIPTION: 1766 West 4th Avenue, Vancouver, B.C.
END OF DOCUMENT
<PAGE>
LAND TITLE ACT
FORM C
(section 219.9))
Province of British Columbia
GENERAL DOCUMENT Page 1 of 5
================================================================================
1. APPLICATION:
________________________________________________________________________________
2. PARCEL IDENTIFIER(S) AND LEGAL DESCRIPTION(S) OF LAND:
P.I.D. LEGAL DESCRIPTION
015-242-374 Lot 7 except part in plan 3863 Block
248 DL 526 Plan 590
015-242-391 Lot 8 except part in plan 3863 Block
248 DL 526 Plan 590
________________________________________________________________________________
3. NATURE OF INTEREST: DOCUMENT REFERENCE PERSON ENTITLED
Description (page and paragraph) TO INTEREST
Modification of Lease Entire document Transferee
No. BH205406
________________________________________________________________________________
4. TERMS: (Part 2 of this instrument consists of (select one only):
a) Filed standard charge terms [_] DF No.
b) Express Charge Terms [X] Annexed as Part 2
c) Release [_] There is no Part 2 of this instrument
A selection of (a) includes any additional or modified terms referred to in Item
10 or in a schedule annexed to this mortgage.
________________________________________________________________________________
5. TRANSFEROR(S)
WESTERN IMMO HOLDINGS INC. (Incorp. No. 337343)
--------------------------
________________________________________________________________________________
6. TRANSFEREE(S) (including occupation, postal address and postal code)
WESTBEACH SNOWBOARD CANADA LTD., (Registration No. A-21970)
-------------------------------
1766 West 4th Avenue, Vancouver, B.C. V6J 1MI
________________________________________________________________________________
7. ADDITIONAL OR MODIFIED TERMS:
Nil
________________________________________________________________________________
<PAGE>
Page 2 of 5
8. EXECUTION(S): This instrument creates, assigns, modifies enlarges,
discharges or governs the priority of the interest(s) described in item 3 and
the Transferor(s) and every other signatory agree to be bound by this
instrument, and acknowledge(s) receipt of a true copy of the filed standard
charge terms, if any.
Officer(s) signature Execution date Party(ies) signature
Y M D WESTERN IMMO HOLDINGS INC.
1997 10 17 by its authorised signatory
/s/ Jamileh Yazdi /s/ Mark Abedi
- --------------------------- -----------------------------
JAMILEH YAZDI MARK ABEDI
Bassister & Solicitor
770- 1100 MELVILLE STREET
VANCOUVER, B.C. V6E 4A6
Tel: 681-7109 Fax: 634-2626
As to the Signature-of
the Transferor
WESTBEACH SNOWBOARD CANADA LTD.
by its authorised
signatures)
/s/ Jenny Bell /s/ Chip Wilson
- -------------------------- -----------------------------
Name JENNY BELL Name CHIP WILSON
Address SECRETARY
/s/ Scott Sybley
----------------------------
Name SCOTT SYBLEY
As to the signature of
the Transferor
OFFICER CERTIFICATION:
Your signature constitutes a representation that you are a solicitor, notary
public or other person authorized by the Evidence Act R.S.B.C. 1979, c.116, to
take affidavits for use in British Columbia and certifies the matters set out in
Part 5 of the Land Title Act as they pertain to the execution of this
instrument.
<PAGE>
Page 3 of 5
"TERMS OF INSTRUMENT - PART 2"
MODIFICATION AGREEMENT
THIS MODIFICATION OF LEASE dated for reference and made as of July 1, 1997
BETWEEN:
WESTERN IMMO HOLDINGS INC.
--------------------------
1967 West 1st Avenue
Vancouver, B.C., V6J 1G7
("the Landlord")
AND:
WESTBEACH SNOWBOARD CANADA INC.
-------------------------------
1766 West 4th Avenue
Vancouver, B.C., V6J 1M1
("the Tenant")
WHEREAS:
A. By a lease ("the Lease") dated April 1, 1994 between the Landlord and the
Tenant, which was registered in the Land Titles Office at New Westminster on
June 1, 1994 under registration number BH205406, the Tenant leased certain
premises ("the Premises") from the Landlord located at 1766 West 4th Avenue,
Vancouver, B.C. more particularly described in Paragraph 2 of Form C hereof;
B. The Lease was for a term of 6 years, with an option to renew for an
additional one (1) year;
C. The Landlord and Tenant wish to modify the Lease by extending the term of
the Lease and increasing the renewal term pursuant to option to renew;
NOW THEREFORE in consideration of the premises, rents, covenants agreements and
conditions contained herein, the parties agree as follows:
1. Paragraph 3.02 of the Lease is deleted and the following substituted
therefor:
"3.02 The Term of this Lease is for 10 years commencing on the 1st day of
April 1994 and terminating on the 31st day of March, 2005."
<PAGE>
4 of 5
2. Paragraph 3.02 of the Lease is deleted and the following substituted
therefor:
"3.03 The Tenant shall pay to the Landlord, at the office of the Landlord or at
such other place in Canada as the Landlord designates from time to time in
writing, in lawful money of Canada and without deduction or set-off, on the
first day of each month, monthly in advance, the following fixed minimum rent:
April 1, 1994 to March 31, 1996 - $4,166.00 each consecutive month
April 1, 1996 to March 31, 1997 - $4,666.00 each consecutive month
April 1, 1997 to March 31, 1999 - $6,001.00 each consecutive month
April 1, 1999 to March 31, 2000 - $6,301.00 each consecutive month
April 1, 2000 to March 31, 2001 - $6,616.00 each consecutive month
April 1, 2001 to March 31, 2002 - $6,947.00 each consecutive month
April 1, 2002 to March 31, 2003 - $7,294.00 each consecutive month
April 1, 2003 to March 31, 2004 - $7,659.00 each consecutive month
April 1, 2004 to March 31, 2005 - $8,042.00 each consecutive month
3. Paragraph 25.01 of the Lease is deleted and the following substituted
therefor:
25.01 Option to Renew
---------------
Provided that:
(a) the Tenant pays the rental and other sums payable hereunder and
performs each and every one of the covenants, provisos and
agreements herein contained on the part of the Tenant to be paid and
performed punctually and in accordance with the provisions of this
Lease; and
(b) the Tenant has not assigned this Leased or sublet or permitted a
change in occupancy of the Premises unless specifically permitted or
consented to under section 13.01; and
(c) there has been no change in ownership of the majority of the capital
stock of the Tenant unless specifically permitted or consented to
under section 14.01;
then the Tenant shall have the option of renewing this Lease by notice in
writing given to the Landlord not later than six (6) months nor earlier than
eight (8) months prior to the expiry of the Term for an additional term of FIVE
(5) years on the same terms and conditions set forth in this Lease, save and
except:
(i) there shall be no further right of renewal, unless agreed to by the
Landlord; and
<PAGE>
5 of 5
(ii) the minimum rental to be paid during the renewal term shall not be
less than the minimum rent paid during the last twelve (12) month
period of the preceding term and shall be settled by agreement
between the Landlord and the Tenant, or if they fail to agree within
three (3) months prior to the expiration of the existing Term, then
the minimum rental shall be the then fair market rental value for
space of comparable size, quality and location to that of the
Premises, with particular regard to its actual use, an not its zoned
use, as determined by an arbitrator appointed under the Commercial
Arbitration Act, S.B.C 1986 (as such legislation may be amended from
time to time), whose decision shall be final an binding upon the
Landlord and Tenant. The cost of such arbitration shall be borne by
the Landlord and Tenant equally.
4. Except as hereby expressly amended, the Lease are hereby ratified and
confirmed by the parties.
END OF DOCUMENT
<PAGE>
EXHIBIT 10.19
INTERNATIONAL DISTRIBUTION AGREEMENT
------------------------------------
THIS AGREEMENT is made and entered into as of January 1, 1997, by and between
Morrow Snowboards, Inc., (hereinafter referred to as "Manufacturer"), an Oregon
corporation having its offices in Salem, Oregon, United States, and K.K. Morrow
Japan, a corporation organized under the laws of Japan and having its offices in
Osaka, Japan (hereinafter referred to as "Distributor").
RECITALS:
A. Manufacturer presently offers a line of snowboards and snowboard
equipment, apparel and accessories for sale under the "Morrow(R)" brand
("Product" or "Products") and desires to continue to market such products in
Japan.
B. Distributor currently markets winter recreation products in Japan and has
substantial resources, personnel and experience which would enable Distributor
to market these products for manufacturer in Japan.
C. Distributor has previously purchased and distributed the Products in
Japan.
D. Manufacturer and Distributor would like to enter into an agreement whereby
Distributor would use its existing resources, personnel and experience to market
certain of the Products in Japan.
WITNESSETH:
In consideration of the mutual covenants and conditions herein contained, and
intending to be legally bound hereby, the parties mutually agree as follows:
1. Products and Territory
----------------------
(a) Manufacturer hereby appoints Distributor on an exclusive basis as its sole
distributor for the sale of the Products described in Exhibit A during the term
of this Agreement.
Distributor shall not place orders for Products in a calendar year in amounts
greater than Distributor reasonably believes can be sold in the season beginning
in the current year and shall orderly liquidate any overstock of prior season's
Products. Manufacturer reserves the right to add or delete specific products
from the Products covered by this Agreement and to change the design or
specification of Products, to delete Product models or lines, and to add Product
models and lines in the Manufacturer's sole discretion.
Distributor shall use its best efforts to promote and sell the Products to the
maximum number of responsible customers in the Territory.
Page 1--INTERNATIONAL DISTRIBUTION AGREEMENT
<PAGE>
(b) Manufacturer is appointing Distributor hereunder with respect to the resale
of Products to any purchasers whose principal place of business is located in
the following described territory (the "Territory"): Japan.
(c) Distributor shall not solicit orders for any Product from any prospective
purchaser with its principal place of business located outside the Territory. If
Distributor receives an order for any Product from a prospective purchaser whose
principal place of business is located outside the Territory, Distributor shall
immediately refer that order to Manufacturer. Distributor shall not accept any
such orders. Distributor may not deliver or tender (or cause to be delivered or
tendered) any Product outside of the Territory. Distributor shall not sell any
Product to a purchaser if Distributor knows or has or should have reason to
believe that such purchaser intends to remove that Product from the Territory.
(d) Manufacturer reserves the right, in its sole discretion, at any time upon
thirty (30) days' prior written notice to Distributor, to expand or reduce in
any manner the Products which are covered by this Agreement.
2. Prices and Payment.
------------------
(a) Distributor shall order Products from Manufacturer by submitting a written
purchase order using the Manufacturer's purchase order form and identifying the
Products ordered, requested delivery date(s) and any export/import information
required to enable Manufacturer to fill the order. All orders for Products are
subject to acceptance or rejection by Manufacturer's V.P. Sales/International at
Manufacturer's office at 2600 Pringle Road SE, Salem in Manufacturer's sole
discretion. Manufacturer shall have no liability to Distributor with respect to
purchase orders which are not accepted; provided, however, that Manufacturer
-------- -------
will not unreasonably reject any purchase order for Products which do not
require any modifications or additions in order to meet the specifications of
Distributor or its customers. All purchase orders for initial sales for each
calendar year must be placed by March 1st each year, provided such order may be
increased up to April 15th each year. Manufacturer may accept reorders in its
sole discretion thereafter. Manufacturer may allocate production among
Distributor, other distributors, dealers and others as the Manufacturer deems
appropriate in its sole discretion if orders exceed scheduled production and
scale shipments over several months.
(b) If a purchase order is accepted in accordance with Section 2(a) above, the
prices for Products covered by such purchase order shall be Manufacturer's net
distributor prices ex works the shipment location for export sales in comparable
quantities, which are in effect on the date of Manufacturer's acceptance.
Manufacturer may from time to time change those prices, such change being
effective immediately upon Distributor's receipt of notice thereof; provided,
--------
however, that no price change shall affect purchase orders offered by
- -------
Distributor and accepted by Manufacturer prior to the date such price change
becomes effective.
(c) Distributor shall be free to establish its own pricing for Products which
it sells. Distributor shall notify Manufacturer of its pricing, as in effect
from time to time.
Page 2--INTERNATIONAL DISTRIBUTION AGREEMENT
<PAGE>
(d) The ultimate shipment of orders to Distributor shall be subject to the
right and ability of Manufacturer to make such sales, and obtain required
licenses and permits, under all decrees, statutes, rules and regulations of the
government of the United States and agencies or instrumentalities thereof
presently in effect or which may be in effect hereafter. Any order which has
been accepted by Manufacturer but which cannot be fulfilled due to such decrees,
statutes, rules and regulations shall be considered to have been rejected when
submitted to Manufacturer for acceptance or rejection.
(e) Distributor hereby agrees: (i) to assist Manufacturer in obtaining any such
required licenses or permits by supplying such documentation or information as
may be requested by Manufacturer; (ii) to comply with such decrees, statutes,
rules and regulations of the government of the United States and agencies or
instrumentalities thereof; (iii) to maintain the necessary records to comply
with such decrees, statutes, rules and regulations (iv) not to export any
Products except in compliance with such decrees, statutes, rules and regulations
(v) to obtain all governmental approvals and licenses necessary to import the
Products into the Territory; (vi) not to sell, transfer or otherwise dispose of
Products in violation of the export laws of the United States; and (vii) to
indemnify and hold harmless Manufacturer from any and all fines, damages,
losses, costs and expenses (including reasonable attorneys' fees) incurred by
Manufacturer as a result of any breach of this subsection (e) by Distributor or
any of Distributor's customers.
(f) Unless Distributor requests otherwise, all Products ordered by Distributor
shall be packed for shipment and storage in accordance with Manufacturer's
standard commercial practices. It is Distributor's obligation to notify
Manufacturer of any special packaging requirements (which shall be at
Distributor's expense). Shipment dates shall be those specified in
Manufacturer's confirmation of acceptance of Distributor's purchase order,
unless otherwise agreed between the parties. Risk of loss and damage to a
Product shall pass to Distributor upon the removal of such Products from
Manufacturer's facility. Notwithstanding anything contained herein, Manufacturer
shall have the right to make partial shipments and each shipment shall be deemed
a separate sale. Further, all delivery dates are estimates only. Shipment shall
be ex works Manufacturer's Salem, Oregon facility or other facility designated
by Manufacturer.
The Manufacturer warrants that the Products are free from defect in materials
and workmanship and conform to the Manufacturer's standard product
specifications. All claims for non-conforming shipments must be made in writing
to Manufacturer within three (3) months of the passing of risk of loss and
damage, as described above. Any claims not made within such period shall be
deemed waived and released. Distributor is responsible for any damage to
Products if the damage occurs after the Products have been delivered ex works
from the shipment facility to a carrier.
(g) Distributor shall, within thirty (30) days after receiving notice of
Manufacturer's acceptance of a Purchase Order, establish a confirmed Irrevocable
Letter of Credit ("ILC") in favor of Manufacturer issued by a bank chartered in
the United States acceptable to Manufacturer (the "Bank"), payable in U.S.
Dollars, in an amount equal to the total then-current distributor prices ex
works Manufacturer's factory at Salem, Oregon, of the Products ordered under
such
Page 3--INTERNATIONAL DISTRIBUTION AGREEMENT
<PAGE>
Purchase Order. The ILC shall be in a form satisfactory to Manufacturer and
shall provide that Manufacturer may draw upon it in full upon presentation to
the Bank of two (2) copies of a certificate of Manufacturer that it has tendered
such Products at Manufacturer's factory at Salem, Oregon in accordance with
Section 2(f) hereof. No part of any amount payable to Manufacturer hereunder may
be reduced due to any counterclaim, set-off, adjustment or other right which
Distributor might have against Manufacturer, any other party or otherwise.
(h) In the event of any discrepancy between any purchase order accepted by
Manufacturer and this Agreement, the terms of this Agreement shall govern.
(i) The Manufacturer may cancel any accepted orders or refuse or delay shipment
of any orders if Distributor fails to meet any obligation arising under this
Agreement.
3. Other Obligations of Distributor.
--------------------------------
(a) Distributor shall maintain an active sales organization which is
knowledgeable with respect to the functional capabilities and uses of the
Products.
(b) Distributor shall employ competent and experienced service personnel,
provide appropriate service shop facilities, and maintain an adequate stock of
spare parts so as to render prompt and adequate service to the users of the
Products in the Territory. As part of Distributor's obligations under this
Agreement, Distributor agrees to provide, at Distributor's expense, any and all
repair or other Product service of the Products after they have been sold or
otherwise distributed by Distributor to any customer.
(c) Distributor shall prepare, at Distributor's cost, a reasonable number of
catalogs, brochures or other promotional materials which may be reasonably
necessary to promote the sale of the Product. Distributor shall translate, at
its own expense, all user and technical manuals and advertising and marketing
information with respect to the Products into the Japanese language and provide
Manufacturer with advance copies (in both English and Japanese) of all such
materials for approval by Manufacturer. Copies of any such material shall be
approved in advance by Manufacturer with English language translation of any
foreign language text. Distributor shall assign all copyrights in such
translations to Manufacturer. Distributor shall have a non-exclusive right
during the term of this Agreement, in connection with its activities pursuant to
this Agreement, (i) to use such translations, and (ii) to incorporate such
translations into its own manuals, advertising and marketing information.
Manufacturer shall not be liable for translation errors made by Distributor or
at Distributor's direction or for the non-conformance of such translated
materials with laws and regulations in force from time to time in the Territory.
Distributor shall indemnify and hold Manufacturer harmless to the extent that a
third party brings claims against Manufacturer based on such errors or non-
conformance.
(d) Distributor shall comply with all applicable laws, statutes, regulations
and treaties relating to the marketing, sale and distribution of the Products in
the Territory and the performance of Distributor's duties and obligations
hereunder and obtain all governmental import, product registration, currency
(including foreign exchange) and other approvals, licenses or authorizations
Page 4--INTERNATIONAL DISTRIBUTION AGREEMENT
<PAGE>
necessary in Japan or necessary for distribution and the performance of
Distributor's obligations hereunder.
(e) Distributor shall maintain satisfactory international communication devices
and retain one or more members of its staff who is proficient in reading and
writing English.
(f) Distributor shall each calendar year undertake the level and type of
specific promotional activities Distributor has previously undertaken to promote
the Product.
4. Relationship of the Parties.
---------------------------
(a) Distributor shall be considered to be an independent contractor. The
relationship between Manufacturer and Distributor shall not be construed to be
that of employer and employee, nor to constitute a partnership, joint venture or
agency of any kind.
(b) Distributor shall pay all of its expenses, including without limitation all
travel, lodging and entertainment expenses, incurred in connection with its
services hereunder. Manufacturer shall not reimburse Distributor for any of
those expenses. Distributor's sole compensation for the performance of its
duties will arise from its resale of Products.
(c) Distributor shall have no right to enter into any contracts or commitments
in the name of, or on behalf of, Manufacturer, or to bind Manufacturer in any
respect whatsoever. Neither party shall have the right to represent the other
party to a third party. Should either of the parties inflict any losses on the
other party because it has acted in the name of or as an agent for the other
party, the inflicting party shall hold the damaged party harmless from such
losses and expenses incurred thereby.
(d) In addition, Distributor shall not obligate or purport to obligate
Manufacturer by issuing or making any affirmations, representations, warranties
or guaranties with respect to Products to any third party, other than the
warranties described in Exhibit B attached hereto and made a part hereof.
(e) Each party shall furnish the other party with information which is
necessary to help further sales promotion of the Products.
5. Minimum Purchase Requirements.
-----------------------------
Distributor shall annually purchase a sufficient amount of Products from
Manufacturer so as to meet or exceed the minimum purchase requirements set forth
in Exhibit A. For the purposes of this provision, a "purchase" of Products
within a specified time period shall mean both ordering such Products and paying
Manufacturer for such Products on or before the last day of such period.
Failure to meet such minimum requirements in any calendar year ("Annual
Requirement") or the additional requirement to purchase 80% of a Product
Category (as defined in Exhibit A) for any
Page 5--INTERNATIONAL DISTRIBUTION AGREEMENT
<PAGE>
Product Category on or before April 15 of such calendar year ("Partial Year
Requirement") shall constitute a material breach of this Agreement for the
purposes of Section 10 (Termination and Term) hereof; provided, however, that as
-------- -------
long as purchases of each Product Category are at least 50% of the Partial Year
Requirement or the Annual Requirement for that Product Category, whichever is
then applicable, instead of terminating this Agreement pursuant to Section 10
("Partial Year Requirement") (Termination and Term) based on such breach, the
exclusive rights granted to Distributor under Section 1 (Products and Territory)
shall become non-exclusive rights, in which case Manufacturer shall then have
the right to appoint additional non-exclusive distributors in the Territory and
the right to sell the Products itself in the Territory, either directly
(including without limitation with the assistance of sales representatives) or
through one or more or more of its affiliates.
6. Trademarks, Service Marks and Trade Names.
-----------------------------------------
(a) Right to Use. Distributor may use Manufacturer's trademarks, service marks
------------
and trade names listed below (hereinafter referred to as the "Trademarks") on an
exclusive basis in the Territory only for the duration of this Agreement and
solely for display or advertising purposes in connection with selling and
distributing the Products in accordance with this Agreement subject to
conversion to nonexclusive use as provided herein:
MORROW; MORROW SNOWBOARDS; REVERT; 3-D REVERT; REVERT X; TODD RICHARDS; SPOON;
4TEN; RAIL; SLICK; MODEL T; MATT GOODWILL; JUNYOR; A-1; B-1; M-1; M-3; ROTO.
Distributor upon thirty (30) days written notice may add or delete trademarks
from this list. Distributor shall not at any time do or permit any act to be
done which may in any way impair the rights of Manufacturer in the Trademarks.
Such rights are in addition to any rights granted or obligations assumed under
the Trademark License Agreement between Manufacturer and Distributor dated
November 21, 1996.
(b) Quality Control. In order to comply with Manufacturer's quality control
---------------
standards, Distributor shall: (i) use the Trademarks in compliance with all
relevant laws and regulations; (ii) accord Manufacturer the right to inspect
during normal business hours, without prior advance notice, Distributor's
facilities used in connection with efforts to sell Products in order to confirm
that Distributor's use of such Trademarks is in compliance with this Section;
and (iii) not modify any of the Trademarks in any way and not use any of the
Trademarks on or in connection with any goods or services other than the
Products. Any approved modifications or uses shall become the property of
Manufacturer.
7. Limited Warranty.
----------------
(a) As to all components of the Products manufactured by Manufacturer,
Manufacturer makes the warranties set forth in Exhibit B, attached hereto and
made a part hereof. As to all components of the Products manufactured by any
entity other than Manufacturer, Manufacturer extends to Distributor the
warranties as to such components provided by such other entity to Manufacturer
for the length of time that such warranty remains valid for Manufacturer. The
time and scope of
Page 6--INTERNATIONAL DISTRIBUTION AGREEMENT
<PAGE>
the warranties described in Exhibit B shall not exceed the time and scope of any
warranties granted by Distributor to any purchaser of such Product.
(b) Under no circumstances shall the warranties set forth in Exhibit B apply to
any Product which has not been properly installed or set-up or which has been
used with unapproved assemblies or sub-assemblies or to any Product which has
been customized or modified, damaged or misused. Notwithstanding any other
provision in this Agreement, Manufacturer shall not be held responsible for any
damage which may result from a defective part, except for the replacement of
such part as set forth in Exhibit B.
(c) THE PROVISIONS OF THE FOREGOING WARRANTIES ARE IN LIEU OF ANY OTHER
WARRANTY, WHETHER EXPRESS OR IMPLIED, WRITTEN OR ORAL (INCLUDING ANY WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE).
(d) Any different or additional warranty given by Distributor to its customers
shall be at Distributor's sole cost, expense and risk and Distributor shall
indemnify the Manufacturer against any liablity arising out of any such
different or additional warranty.
(e) Manufacturer may elect to satisfy any warranty claim by replacing the
defective Product or refunding the total purchase price at the Manufacturer's
option. If requested, the Distributor shall return the defective Product at its
expense to the Manufacturer.
8. Limitations on Liability.
------------------------
(a) MANUFACTURER'S LIABILITY ARISING OUT OF THE MANUFACTURE, SALE OR SUPPLYING
OF THE PRODUCTS OR THEIR USE OR DISPOSITION, WHETHER BASED UPON WARRANTY,
CONTRACT, TORT OR OTHERWISE, SHALL NOT EXCEED THE ACTUAL PURCHASE PRICE PAID BY
DISTRIBUTOR FOR THE PRODUCTS.
(b) IN NO EVENT SHALL MANUFACTURER BE LIABLE TO DISTRIBUTOR OR ANY OTHER PERSON
OR ENTITY FOR SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING, BUT NOT
LIMITED TO, LOSS OF PROFITS, LOSS OF DATA OR LOSS OF USE DAMAGES) ARISING OUT OF
THE MANUFACTURE, SALE OR SUPPLYING OF THE PRODUCTS, EVEN IF MANUFACTURER HAS
BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES OR LOSSES.
9. Indemnification.
---------------
(a) Distributor hereby agrees to indemnify, defend and hold harmless
Manufacturer, its affiliates and all officers, directors, employees and agents
thereof (hereinafter referred to as "Indemnitees") from all liabilities, claims,
damages, losses, costs, expenses, demands, suits and actions (including without
limitation attorneys' fees, expenses and settlement costs) (collectively,
"Damages") arising out of or related to any use or operation of any Product sold
by Distributor,
Page 7--INTERNATIONAL DISTRIBUTION AGREEMENT
<PAGE>
including without limitation Damages arising out of or related to damage or
injury to property or persons or to any representations or warranties of
Distributor not authorized hereunder.
(b) Manufacturer shall indemnify Distributor against any claim that a Product
infringes any United States patent, provided Distributor gives the Manufacturer
prompt notice of any such claim which comes to its attention and provides all
assistance reasonably requested by the Manufacturer in connection with such
action. This indemnification shall not apply to any claim of patent infringement
based on any modification of the Product or use of the Product in conjunction
with any other equipment.
10. Termination and Term.
--------------------
(a) Upon the occurrence of a material breach or default as to any obligation
hereunder by either party and the failure of the breaching party to promptly
pursue (within thirty (30) days after receiving written notice thereof from the
non-breaching party) a reasonable remedy designed to cure (in the reasonable
judgment of the non-breaching party) such material breach or default, this
Agreement may be terminated by the non-breaching party by giving written notice
of termination to the breaching party, such termination being immediately
effective upon the giving of such notice of termination; provided, no cure
period shall be provided to meet the Partial Year or Annual Requirement.
(b) Upon the filing of a petition in bankruptcy, insolvency or reorganization
against or by Distributor, or Distributor becoming subject to a composition for
creditors, whether by law or agreement, or Distributor going into receivership
or otherwise becoming insolvent, this Agreement may be terminated by
Manufacturer by giving written notice of termination to Distributor, such
termination being immediately effective upon the giving of such notice of
termination.
(c) Upon the occurrence of a change in control or management or operating
personnel of Distributor, then Distributor shall promptly notify Manufacturer in
writing within ten (10) calendar days. If, in the reasonable opinion of
Manufacturer such change in control or management or operating personnel of
Distributor could have a material adverse effect on the business, prospects or
operations of Distributor and if Distributor fails to promptly pursue (within 90
days after receiving written notice thereof from Manufacturer) a remedy designed
to cure (in the sole judgment of Manufacturer) Manufacturer's objections to such
change, this Agreement may be terminated by Manufacturer by giving written
notice of termination to Distributor, such termination being immediately
effective upon the giving of such notice of termination.
(d) The term of this Agreement shall begin on the later of the date that (i)
Manufacturer executes this Agreement and (ii) Distributor executes this
Agreement (the "Effective Date"). The term of this Agreement shall expire on
December 31, 1999, subject to extension for an additional year as provided in
this Section 10(d) unless terminated earlier pursuant to the terms of this
Section 10 (Termination and Term). If Distributor has met all minimum purchase
requirements through June 1, 1999, Distributor is not in default under this
Agreement and this Agreement has not otherwise been terminated, this Agreement
has not been converted to a nonexclusive agreement under Section 5 of this
Agreement, Distributor may elect to extend this Agreement for
Page 8--INTERNATIONAL DISTRIBUTION AGREEMENT
<PAGE>
an additional calendar year with an expiration of December 31, 2000 (such
extended term being subject to earlier termination as provided pursuant to the
terms of this Section 10) by giving written notice to Manufacturer of such
intention after June 1, 1999 and before June 30, 1999.
(e) In the event of a termination pursuant to any of subsections (a), (b) or
(c) above or upon expiration of this Agreement pursuant to subsection (d) above,
Manufacturer shall not have any obligation to Distributor, or to any employee of
Distributor, for compensation or for damages of any kind, whether on account of
the loss by Distributor or such employee of present or prospective sales,
investments, compensation or goodwill or otherwise. Distributor, for itself and
on behalf of each of its employees, hereby waives any rights which may be
granted to it or them under the laws and regulations of the Territory or
otherwise which are not granted to it or them by this Agreement. Distributor
hereby indemnifies and holds Manufacturer harmless from and against any and all
claims, costs, damages and liabilities whatsoever asserted by any employee,
agent or representative of Distributor under any applicable termination, labor,
social security or other similar laws or regulations.
(f) Termination of this Agreement shall not affect the obligation of
Distributor to pay Manufacturer all amounts owing or to become owing as a result
of Products tendered or delivered to Distributor on or before the date of such
termination, as well as interest thereon to the extent any such amounts are paid
after the date they became or will become due pursuant to this Agreement.
(g) Notwithstanding anything else in this Agreement to the contrary, the parties
agree that Sections of this Agreement, including without limitation, Sections 7,
8, 9, 17, 19, but excluding without limitation, Sections 1 and 2, shall survive
the termination or expiration of this Agreement, as the case may be, to the
extent required thereby for the full observation and performance by any or all
of the parties hereto and the completion of any obligations or rights, following
termination, that the parties have hereunder.
11. Publicity.
---------
Distributor agrees that any publicity or advertising which shall be released
by it in which Manufacturer is identified in connection with the Products shall
be in accordance with the terms of this Agreement and with any information or
data which Manufacturer has furnished in connection with this Agreement. Copies
of all such publicity and advertising shall be forwarded promptly to
Manufacturer in both the languages to be used in the Territory and English.
12. Modification.
------------
No modification or change may be made in this Agreement except by written
instrument duly signed by a duly authorized representative of each party. Any
change in course of conduct by the parties, whether of an isolated or repeat
nature, shall not be deemed to be a modification of this Agreement unless so
reduced to writing.
13. Assignment.
----------
Page 9--INTERNATIONAL DISTRIBUTION AGREEMENT
<PAGE>
This Agreement and the rights and obligations hereunder may not be assigned,
delegated or transferred by either party without the prior written consent of
the other party.
14. Notice.
------
All notices given under this Agreement shall be in writing in the English
language and shall be addressed to the parties at their respective addresses set
forth below:
If to Distributor:
K.K. Morrow Japan
1-5-8 Tamatsukuri, Chou-ku
Osaka, Japan
Attention: ___________________
Telecopy Number: 011-816-788-0220
If to Manufacturer:
Morrow Snowboards, Inc.
2600 Pringle Road SE
Salem, Oregon 97302
UNITED STATES
Attention: VP Sales/International
Telecopy Number: 1-503-315-1199
Either party may change its address or its telecopy number for purposes of this
Agreement by giving the other party written notice of its new address or
telecopy number. Any such notice if given or made by registered or recorded
delivery international air mail letter shall be deemed to have been received on
the earlier of the date actually received and the date fifteen (15) calendar
days after the same was posted (and in proving such it shall be sufficient to
prove that the envelope containing the same was properly addressed and posted as
aforesaid) and if given or made by telecopy transmission shall be deemed to have
been received at the time of dispatch, unless such date of deemed receipt is not
a business day on which banks are open in Salem, Oregon, the United States, in
which case the date of deemed receipt shall be the next such succeeding business
day. None of this shall be effective if the sending party has reasonably given
such notice improperly or incompletely transmitted or otherwise not received by
the parties to whom it was sent.
15. Waiver.
------
None of the conditions or provisions of this Agreement shall be held to have
been waived by any act or knowledge on the part of either party, except by an
instrument in writing signed by a duly authorized officer or representative of
such party. Further, the waiver by either party of
Page 10--INTERNATIONAL DISTRIBUTION AGREEMENT
<PAGE>
any right hereunder or the failure to enforce at any time any of the provisions
of this Agreement, or any rights with respect thereto, shall not be deemed to be
a waiver of any other rights hereunder or any breach or failure of performance
of the other party.
16. Validity.
--------
Manufacturer warrants that this Agreement is lawful and may be performed in
accordance with its terms under all laws in force in the United States at the
time of execution of this Agreement. Distributor warrants that this Agreement is
lawful and may be performed in accordance with its terms under all laws in force
in Japan at the time of execution of this Agreement. Each party covenants and
warrants to the other party that it will advise the other party of any changes
in the laws of the country or countries as to which it is making a warranty in
this Section of which the party making such warranty becomes aware if such
changes might or will impair the validity or lawful performance of all or any
part of this Agreement.
17. Construction of Agreement and Resolution of Disputes.
----------------------------------------------------
(a) This Agreement, which is in English, shall be interpreted in accordance
with the commonly understood meaning of the words and phrases hereof in the
United States of America, and it and performance of the parties hereto shall be
construed and governed according to the laws of the State of Oregon applicable
to contracts made and to be fully performed therein, excluding the United
Nations Convention on Contracts for the International Sale of Goods.
(b) Any dispute, controversy or claim arising out of or relating to this
Agreement or to a breach hereof, including its interpretation, performance or
termination, shall be finally resolved by arbitration. The arbitration shall be
conducted by one arbitrator selected by Manufacturer and Distributor or, if they
cannot agree on an arbitrator, by the President of International Chamber of
Commerce.
The arbitration shall be conducted in English and in accordance with the rules
of the International Chamber of Commerce, which shall administer the arbitration
and act as appointing authority. The arbitration, including the rendering of the
award, shall take place in Salem, Oregon, USA, and shall be the exclusive forum
for resolving such dispute, controversy or claim. For the purposes of this
arbitration, the provisions of this Agreement and all rights and obligations
thereunder shall be governed and construed in accordance with the laws of the
State of Oregon. The decision of the arbitrators shall be binding upon the
parties hereto, and the expense of the arbitration (including without limitation
the award of attorneys' fees to the prevailing party) shall be paid as the
arbitrators determine. The decision of the arbitrators shall be executory, and
judgment thereon may be entered by any court of competent jurisdiction.
Judgment based on the decision of the arbitrators may be entered by any court of
competent jurisdiction. Notwithstanding this, judgment upon the award of the
arbitration may be entered in any court where the arbitration takes place or any
court having jurisdiction thereof, and application may be made to any court for
a judicial acceptance of the award or order of enforcement.
Page 11--INTERNATIONAL DISTRIBUTION AGREEMENT
<PAGE>
(c) Notwithstanding anything contained in this Section 17 to the contrary, each
party shall have the right to institute judicial proceedings against the other
party or anyone acting by, through or under such other party, in order to
enforce the instituting party's rights hereunder through reformation of
contract, specific performance, injunction or similar equitable relief.
18. Manufacturer Marketing Office in the Territory.
----------------------------------------------
Manufacturer may from time to time maintain a marketing office at one or more
locations in or near the Territory. Personnel associated with such office or
offices shall be authorized to and may, from time to time, act on behalf of
Manufacturer and shall be entitled to exercise all of the rights of Manufacturer
under this Agreement. Such personnel shall be entitled to all information with
respect to all matters relevant to Distributor's performance under the
Agreement, and Distributor shall at all times cooperate with such personnel with
respect to all such matters.
19. Confidentiality Maintained.
--------------------------
(a) Distributor agrees that Manufacturer has a proprietary interest in any
information provided to Distributor by Manufacturer, whether in connection with
this Agreement or otherwise, whether in written or oral form, which is (i) a
trade secret, confidential or proprietary information, (ii) not publicly known,
and (iii) annotated by a legend, stamp or other written identification as
confidential or proprietary information (hereinafter referred to as "Proprietary
Information"). For such purposes, information regarding the manufacture, design,
pricing, marketing and other aspects of the Products and the manner in which the
Manufacturer conducts its business, excluding information which is, or becomes,
public or general industry knowledge through no fault of the Distributor, shall
be deemed to be "Proprietary Information" whether or not stamped, legended or
otherwise identified as such. Distributor shall disclose the Proprietary
Information only to those of its agents and employees to whom it is necessary in
order properly to carry out their duties as limited by the terms and conditions
hereof. Both during and after the term of this Agreement all disclosures by
Distributor to its agents and employees shall be held in strict confidence by
such agents and employees. During and after the term of this Agreement,
Distributor, its agents and employees shall not use the Proprietary Information
for any purpose other than in connection with Distributor's sale of the Products
in the Territory pursuant to this Agreement. Distributor shall, at its expense,
return to Manufacturer the Proprietary Information as soon as practicable after
the termination or expiration of this Agreement. All such Proprietary
Information shall remain the exclusive property of Manufacturer during the term
of this Agreement and thereafter. This Section 19 shall also apply to any
consultants or subcontractors that Distributor may engage in connection with its
obligations under this Agreement.
(b) Notwithstanding anything contained in this Agreement to the contrary,
Distributor shall not be liable for a disclosure of the Proprietary Information
of Manufacturer, if the information so disclosed: (i) was in the public domain
at the time of disclosure without breach of this Agreement; or (ii) was known to
or contained in the records of Distributor from a source other than Manufacturer
at the time of disclosure by Manufacturer to Distributor and can be so
demonstrated or (iii) was independently developed and is so demonstrated
promptly upon receipt of the documentation and technology by Distributor; or
(iv) becomes known to Distributor from
Page 12--INTERNATIONAL DISTRIBUTION AGREEMENT
<PAGE>
a source other than Manufacturer without breach of this Agreement by Distributor
and can be so demonstrated; or (v) must be disclosed pursuant to a contract or
subcontract with a governmental agency in order to obtain/retain a procurement
contract; or (vi) was disclosed pursuant to court order or as otherwise
compelled by law.
20. Entire Agreement.
----------------
This Agreement supersedes and cancels any previous agreements or
understandings, whether oral, written or implied, heretofore in effect and sets
forth the entire agreement between Manufacturer and Distributor with respect to
the subject matter hereof. This Agreement may be translated in the various
languages for the convenience of the parties hereto; however, in the event of
any discrepancy between the translated versions of this Agreement and the
original, the English version of this Agreement shall be controlling for all
purposes.
21. No Rights by Implication.
------------------------
No rights or licenses with respect to the Products or the Trademarks are
granted or deemed granted hereunder or in connection herewith, other than those
rights expressly granted in this Agreement or the Trademark License Agreement.
22. Responsibility for Taxes.
------------------------
Taxes, whether in Japan or any other country, now or hereafter imposed with
respect to the transactions contemplated hereunder, including without
limitation, assessments, duties, custom fees or charges, import fees, value
added taxes, special excise taxes and governmental impositions of any nature
whatsoever which may be levied upon the Products (with the exception of income
taxes or other taxes imposed upon Manufacturer and measured by the gross or net
income of Manufacturer), shall be the responsibility of Distributor, and if paid
or required to be paid by Manufacturer, the amount thereof shall be added to and
become a part of the amounts payable by Distributor hereunder.
23. Modification of Products.
------------------------
Distributor may not customize, modify or have customized or modified any
Product unless it obtains the prior written consent of Manufacturer, which
consent may be withheld in the sole discretion of Manufacturer. Any unauthorized
customizing or modification of any Product by Distributor or any third party
shall relieve Manufacturer from any obligation it would otherwise have had with
respect to such Product under the warranties described in Exhibit A hereto.
24. Force Majeure.
-------------
(a) Neither Manufacturer nor Distributor shall be liable in damages, or shall
be subject to termination of this Agreement by the other party, for any delay or
default in performing any obligation hereunder if that delay or default is due
to any cause beyond the reasonable control and
Page 13--INTERNATIONAL DISTRIBUTION AGREEMENT
<PAGE>
without fault or negligence of that party; provided that, in order to excuse
-------- ----
its delay or default hereunder, a party shall notify the other of the occurrence
or the cause, specifying the nature and particulars thereof and the expected
duration thereof and provided, further, that within fifteen (15) calendar days
-------- -------
after the termination of such occurrence or cause, such party shall give notice
to the other party specifying the date of termination thereof. All obligations
of both parties shall return to being in full force and effect upon the
termination of such occurrence or cause (including without limitation any
payments which became due and payable hereunder prior to the termination of such
occurrence or cause).
(b) For the purposes of this Section 24, a "cause beyond the reasonable
control" of a party shall include, without limiting the generality of the
phrase, any act of God, act of any government or other authority or statutory
undertaking, industrial dispute, fire, explosion, accident, power failure,
flood, riot or war (declared or undeclared).
25. Compliance With Laws.
--------------------
Each of Distributor and Manufacturer covenants that all of its activities
under or pursuant to this Agreement shall comply with all applicable laws, rules
and regulations. In particular, but without limitation, Distributor shall be
responsible for obtaining all licenses, permits and approvals which are
necessary or advisable for sales of Products in the Territory and for the
performance of its duties hereunder.
26. Severability.
------------
If any provision of this Agreement is declared invalid or unenforceable by a
court having competent jurisdiction, it is mutually agreed that this Agreement
shall endure except for the part declared invalid or unenforceable by order of
such court. The parties shall consult and use their best efforts to agree upon a
valid and enforceable provision which shall be a reasonable substitute for such
invalid or unenforceable provision in light of the intent of this Agreement.
27. Counterparts.
------------
This Agreement may be executed in one or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
Page 14--INTERNATIONAL DISTRIBUTION AGREEMENT
<PAGE>
28. Definition of Affiliates.
------------------------
For the purposes of this Agreement, "affiliates" shall mean all companies,
natural persons, partnerships and other business entities controlled by, under
common control with or controlling either party to this Agreement.
IN WITNESS WHEREOF, the parties hereto have signed this Agreement.
K.K. Morrow Japan, as Distributor
By /s/ Minor Hase
-------------------
Name: Minor Hase
Title:
Morrow Snowboards Inc., as Manufacturer
By /s/ Martin Carrigan
-----------------------
Name: Martin Carrigan
Title:
Page 15--INTERNATIONAL DISTRIBUTION AGREEMENT
<PAGE>
EXHIBIT A
COVERED PRODUCTS AND MINIMUM PURCHASE REQUIREMENTS
COVERED PRODUCTS/1/
Morrow(R) Morrow(R) Morrow(R) Morrow(R) Apparel
Snowboard Products Bindings Boots and Accessories
- ------------------ -------- ----- ---------------
MINIMUM PURCHASE REQUIREMENTS PER PRODUCT CATEGORY
<TABLE>
<CAPTION>
Morrow(R) Morrow(R) Morrow(R)
Snowboard Bindings Boots Morrow(R) Apparel
Year Product/2/ (Pairs) (Pairs) and Accessories/3/
- ---- --------- ------- ------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997 25,000 25,000 10,000
1998 31,250 31,250 12,500
1999 39,000 39,000 16,000
2000/4/ 50,000 50,000 20,000
</TABLE>
- -------------------
/1/ The Products covered by this Agreement are subject to change as provided in
Section 1.(a) of the Agreement.
/2/ Units of merchandise.
/3/ Dollar amount of invoices of products by Manufacturer to Distributor.
/4/ Assuming this Agreement is extended for the calendar year 2000.
Page 16--INTERNATIONAL DISTRIBUTION AGREEMENT
<PAGE>
EXHIBIT B - LIMITED WARRANTY
Page 17--INTERNATIONAL DISTRIBUTION AGREEMENT
<PAGE>
Exhibit 11
MORROW SNOWBOARDS, INC.
COMPUTATION OF INCOME PER SHARE
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1996 1995 1994
------------------------------------
<S> <C> <C> <C>
Net income attributable to primary earnings per share (1) $ 2,147,000 $ 544,000 $ 333,000
=========== ========== ==========
Net income attributable to fully diluted earnings per $ 2,147,000 $ 545,000 $ 341,000
share (2) =========== ========== ==========
Weighted average number of common shares outstanding 5,758,270 3,064,192 2,592,411
Common equivalent shares from stock options and warrants 171,404 361,466 207,654
outstanding whose effect is dilutive (using the treasury
stock method)
Common equivalent shares for stock options and convertible - 511,214 615,884
debentures issued within twelve months of the initial public
offering and whose exercise or conversion price is below
the estimated initial public offering price (treasury stock
method used for stock options) __________ __________ __________
Total shares for primary earnings per share 5,929,674 3,936,872 3,415,949
Shares attributable to other convertible debt and common 100,801 225,966 37,480
equivalent shares for stock options and warrants on a
fully diluted basis (treasury stock method using year end
stock price) _________ _________ _________
Total shares for fully diluted earnings per share 6,030,475 4,162,838 3,453,429
========== ========== ==========
Primary income per share $ 0.36 $ 0.14 $ 0.10
========== ========== ==========
Fully diluted income per share $ 0.36 $ 0.13 $ 0.10
========== ========== ==========
</TABLE>
- -----------
(1) Net earnings attributable to primary earnings per share for 1995 are
adjusted for interest relating to convertible debentures issued within
twelve months of the initial public offering.
(2) Net earnings attributable to fully diluted earnings per share is adjusted
for interest relating to the Company's convertible debt.
<PAGE>
EXHIBIT 21
MORROW SNOWBOARDS, INC.
SUBSIDIARIES OF THE REGISTRANT
. Morrow International, Inc.
. Morrow Westbeach Canada ULC and subsidiaries:
Westbeach Snowboard U.S.A., Inc.
Westbeach Snowboard GmbH
Westbeach Snowboard UK Limited
<PAGE>
EXHIBIT 23
MORROW SNOWBOARDS, INC.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accounts, we hereby consent to the incorporation of our
report included in this Form 10-K into the Company's previously filed
Registration Statement No. 333-4761 on Form S-8.
Arthur Andersen LLP
Portland, Oregon
March 24, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS AND STATEMENTS OF OPERATIONS AS OF AND FOR FISCAL YEARS ENDED
12/27/97 AND 12/31/96 AND NOTES THERETO, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-27-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-27-1997 DEC-31-1996
<CASH> 855 5,062
<SECURITIES> 0 3,700
<RECEIVABLES> 6,717 8,870
<ALLOWANCES> 659 134
<INVENTORY> 5,926 4,533
<CURRENT-ASSETS> 13,911 23,017
<PP&E> 13,836 11,936
<DEPRECIATION> 4,289 2,753
<TOTAL-ASSETS> 27,653 32,243
<CURRENT-LIABILITIES> 5,311 3,789
<BONDS> 0 0
0 0
0 0
<COMMON> 27,022 25,886
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 27,653 32,243
<SALES> 20,253 31,699
<TOTAL-REVENUES> 20,253 31,699
<CGS> 15,971 20,843
<TOTAL-COSTS> 27,656 28,785
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 87 153
<INCOME-PRETAX> (7,149) 3,427
<INCOME-TAX> (129) 1,280
<INCOME-CONTINUING> (7,020) 2,147
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (7,020) 2,147
<EPS-PRIMARY> (1.24) 0.38
<EPS-DILUTED> (1.24) 0.36
</TABLE>
