<PAGE>
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 28, 1998
COMMISSION FILE NUMBER 0-27002
----------------------------------
MORROW SNOWBOARDS, INC.
(Exact name of Registrant as specified in its charter)
OREGON 93-1011046
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
----------------------------------
2600 PRINGLE ROAD, S.E.
SALEM, OREGON 97302
(Address of principal executive offices)
(503) 375-9300
(Registrant's telephone number; including area code)
----------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [x] yes [ ] no
The number of shares outstanding of the registrant's common stock, no par value,
as of March 31, 1998 was 6,176,556.
<PAGE>
MORROW SNOWBOARDS, INC.
INDEX
Part I. Financial Information
Item 1. Financial Statements 3
Consolidated Balance Sheets 4
Consolidated Statements of Operations 5
Consolidated Statement of Shareholders' Equity 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Part II. Other Information
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MORROW SNOWBOARDS, INC.
For the Quarter Ended
March 28, 1998
3
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS MARCH 28, DECEMBER 27,
----------- ------------
1998 1997
----------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 277 $ 855
Accounts receivable, less allowance for uncollectible accounts 2,915 6,058
Inventories 7,645 5,926
Prepaid expense 239 628
Refundable income taxes 285 285
Other current assets 197 159
----------- ------------
Total Current Assets 11,558 13,911
Property, plant and equipment, net 9,773 9,547
Other assets:
Goodwill, net 4,021 4,061
Other assets, net 93 134
----------- ------------
Total Other Assets 4,114 4,195
----------- ------------
Total Assets $ 25,445 $ 27,653
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Line of credit $ 2,079 $ 1,923
Accounts payable 2,949 1,648
Accrued liabilities 1,450 1,601
Current portion of capital lease obligations 139 139
----------- -----------
Total Current Liabilities 6,617 5,311
Long-Term Liabilities:
Capital lease obligations, net of current portion 222 254
Deferred income taxes 31 30
----------- -----------
Total Long-Term Liabilities 253 284
Commitments and Contingencies
Shareholders' Equity
Preferred stock, no par, 10,000,000 shares authorized
no shares issued or outstanding - -
Common stock, no par, 20,000,000 shares authorized,
6,176,556 and 6,176,556 shares issued and outstanding 27,116 27,116
Notes receivable for common stock (94) (94)
Accumulated deficit (8,450) (5,014)
Cumulative translation adjustment 3 50
----------- -----------
Total Shareholders' Equity 18,575 22,058
----------- -----------
Total Liabilities and Shareholders' Equity $ 25,445 $ 27,653
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
4
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------------
MARCH 28, MARCH 29,
1998 1997
----------- -----------
<S> <C> <C>
Net Sales $ 2,777 $ 689
Cost of goods Sold 2,367 794
----------- -----------
Gross Profit (Loss) 410 (105)
Operating Expenses:
Selling, marketing and customer service 1,796 1,132
Engineering, advance design and product
management 806 238
General and administrative 1,213 690
----------- -----------
Total Operating Expenses 3,815 2,060
----------- -----------
Operating Loss (3,405) (2,165)
Other Income (Expense):
Interest expense (97) (16)
Other income (expense) 66 152
----------- -----------
Total Other Income (Expense) (31) 136
----------- -----------
Loss Before Income Tax (3,436) (2,029)
Income Tax Benefit - 791
----------- -----------
Net Loss $ (3,436) $ (1,238)
=========== ===========
Net Loss Per Share:
Basic $ (0.56) $ (0.22)
=========== ===========
Diluted $ (0.56) $ (0.22)
=========== ===========
Weighted Average Number of Shares Used in
Computing Per Share Amounts:
Basic 6,176,556 5,633,277
=========== ===========
Diluted 6,176,556 5,633,277
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK CUMULATIVE
-------------------- NOTES ACCUMULATED TRANSLATION
SHARES AMOUNT RECEIVABLE DEFICIT ADJUSTMENT TOTAL
--------- ------- ---------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 27, 1997 6,176,556 $27,116 $(94) $(5,014) $ 50 $22,058
Net loss - - (3,436) - (3,436)
Translation adjustment - - - (47) (47)
--------- ------- ---- ------- ---- -------
Balance, March 28, 1998 6,176,556 $27,116 $(94) $(8,450) $ 3 $18,575
========= ======= ==== ======= ==== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------
MARCH 28, MARCH 29,
1998 1997
--------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $(3,436) $(1,238)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 543 285
Deferred income taxes 1 (791)
Other (43) -
Changes in operating assets and liabilities
Decrease in accounts receivable 3,143 5,217
Increase in inventories (1,719) (2,769)
(Increase) Decrease in prepaid expenses 389 (30)
(Increase) Decrease in other assets (38) 10
Increase (Decrease) in accounts payable 1,301 (1,019)
Decrease in accrued liabilities (151) (1,192)
------- -------
Net Cash Used In Operating Activities (10) (1,527)
Cash Flows From Investing Activities:
Redemption of short-term investments - 1,000
Acquisition of property and equipment (692) (475)
Net Cash Provided By (Used In) ------- -------
Investing Activities (692) 525
Cash Flows From Financing Activities:
Proceeds from issuance of common stock - 18
Payments for repurchase of common stock - (530)
Principal payments on capital lease obligations (32) (75)
Line of credit borrowings, net 156 -
Net Cash Provided By (Used In) ------- -------
Financing Activities 124 (587)
------- -------
Decrease In Cash and Cash Equivalents (578) (1,589)
Cash and Cash Equivalents at Beginning of Period 855 5,062
------- -------
Cash and Cash Equivalents at End of Period $ 277 $ 3,473
======= =======
Supplemental disclosure:
Cash paid for interest $ 69 $ 16
Cash paid for income taxes $ - $ 440
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION
Description of Business
Morrow Snowboards, Inc. ("Morrow") and subsidiaries (the "Company"),
headquartered in Salem, Oregon, was organized in October 1989 to design,
manufacture and market snowboards, boots, bindings, apparel and accessories to
retail outlets in the United States and to international distributors in several
foreign countries. On November 13, 1997, the Company acquired all of the
outstanding securities of Westbeach Snowboard Canada Ltd. ("Westbeach") 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 and warehousing operation, a
United Kingdom organization whose principal activity is 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, Westbeach's
three subsidiaries and Morrow International, Inc., a Guam foreign sales
corporation. All significant intercompany accounts and transactions have been
eliminated.
The Company operates in a relatively new and rapidly growing segment of the
sporting goods industry which is highly seasonal. Further, the Company has
undergone significant expansion since its inception in 1989, related to its
manufacturing, marketing and sales activities. These and other factors present
certain risks to the future operations of the Company.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission (the "Commission"). While these statements
reflect all necessary, normal and recurring adjustments in the opinion of
management required to present fairly, in all material respects, the financial
position, results of operations and cash flows of the Company and its
subsidiaries at March 28, 1998, and for the quarters ended March 28, 1998 and
March 29, 1997, they do not include all notes required by generally accepted
accounting principles for complete financial statements. Further information is
contained in the annual financial statements of the Company and notes thereto,
for the year ended December 27, 1997, contained in the Company's Form 10-K,
filed with the Commission pursuant to the Securities Exchange Act of 1934.
Operating results for the quarter ended March 28, 1998, are not necessarily
indicative of the results that may be expected for the full year.
2. WESTBEACH ACQUISITION
On November 13, 1997, the Company acquired all of the outstanding securities
of Westbeach Snowboard Canada Ltd. (Westbeach) in exchange for 584,240 newly-
issued shares of the Company's common stock valued at $1,680,000, cash of
approximately $2,251,000 and fees and expenses of $425,000. Subsequent to the
acquisition, Westbeach was merged into Morrow Westbeach Canada ULC, a wholly
owned subsidiary of the Company. The transaction has been accounted for as a
purchase with the excess of the purchase price over the fair value (which
approximated historical carrying value) of the net assets acquired allocated to
goodwill.
8
<PAGE>
Summarized unaudited pro forma results of operations, assuming the Westbeach
acquisition took place on January 1 of 1997, are as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------
MARCH 29,
MARCH 28, 1997
1998 PROFORMA
------------------- -------------------
<S> <C> <C>
Net Sales $ 2,777 $ 1,772
Net loss (3,436) (1,927)
Loss per share:
Basic (0.56) (0.31)
Diluted (0.56) (0.31)
</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 first fiscal quarter of 1998 began on
December 28, 1997 and ended on March 28, 1998, whereas the prior fiscal quarter
ended on March 29, 1997.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and on deposit and highly
liquid investments purchased with an original maturity of three months or less.
Financial Instruments
A financial instrument is cash or a contract that imposes or conveys, a
contractual obligation, or right, to deliver or receive cash or another
financial instrument. The fair value of financial instruments approximated
their carrying value as of March 28, 1998 and December 27, 1997.
Inventories
Inventories are stated at the lower of cost or market using standard costs
which approximate the first-in, first-out (FIFO) method. Costs for inventory
valuation include labor, materials and manufacturing overhead.
Depreciation and Amortization
Property, plant and equipment are carried at cost. Depreciation of property,
plant and equipment is provided using the straight-line method over the
estimated useful lives of the assets (3 to 35 years). As of December 28, 1998,
the Company prospectively revised the lives of certain equipment and tooling.
This change increased the loss for the quarter ended March 28, 1998 by $147,000
or $.024 per share. Amortization of leasehold improvements, facilities and
equipment under capital lease is provided using the straight-line method over
the expected useful lives of the assets or the initial term of the lease
(including periods related to renewal options which are expected to be
exercised), whichever is shorter. Amortization is included in depreciation
expense.
9
<PAGE>
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 $103,000 at
March 28, 1998. Goodwill and other long-lived assets are periodically evaluated
when facts and circumstances indicate that the value of such assets may be
impaired. Evaluations are based on undiscounted projected cash flows. If the
valuation indicates that undiscounted cash flows are insufficient to recover the
recorded assets, then the projected cash flows are discounted to determine the
revised carrying value and a write-down for the difference is recorded.
Deferred Loan Costs
Deferred loan costs included in other assets are amortized over the life of
the related debt on a straight-line basis, which does not differ materially
from the effective rate method.
Warranty Costs
The Company offers a one-year warranty on its products. The Company provides
for anticipated warranty expense related to products sold.
Advertising and Promotion Costs
Advertising and promotion costs are expensed as incurred and included in
selling, marketing and customer service expenses.
Revenue Recognition
The Company recognizes revenue from the sale of its products when the products
are shipped to customers.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
SFAS 109 uses the liability method so that deferred taxes are determined based
on the estimated future tax effects of differences between the financial
statement and tax bases of assets and liabilities given the provisions of
enacted tax laws and tax rates. Deferred income tax expenses or credits are
based on the changes in the financial statement bases versus the tax bases in
the Company's assets or liabilities from period to period.
Product Development Costs
Expenditures associated with the development of new products and improvements
to existing products are expensed as incurred.
Stock-Based Compensation Plans
The Company accounts for its stock-based plans under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). In
1996, the Company adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123).
10
<PAGE>
Net Income (Loss) Per Share
The Company has adopted SFAS 128, "Earnings Per Share". SFAS 128 prescribes
new calculations for Basic and Diluted Earnings Per Share (EPS), which replaces
the former calculations for Primary and Fully Diluted EPS. Basic EPS is computed
by dividing net income (loss) by the weighted average shares outstanding; no
dilution for any potentially dilutive securities is included. Diluted EPS is
calculated differently than the Fully Diluted EPS calculation under the old
rules. When applying the treasury stock method for Diluted EPS to compute
dilution for options, SFAS 128 requires use of the average share price for the
period, rather than the greater of the average share price or end-of-period
share price. Prior period EPS data has been restated. EPS is computed as
follows:
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 28, MARCH 29,
------------------ -----------------
1998 1997
------------------ -----------------
<S> <C> <C>
Earnings:
Net loss for Basic EPS $ (3,436) $ (1,238)
------------------ -----------------
Net loss for Diluted EPS $ (3,436) $ (1,238)
================== =================
Shares:
Weighted average shares outstanding for Basic EPS 6,176,556 5,633,277
Stock option and warrant dilution (1) - -
------------------ -----------------
Weighted average shares for Diluted EPS 6,176,556 5,633,277
================== =================
Basic EPS $ (.56) $ (.22)
================== =================
Diluted EPS $ (.56) $ (.22)
================== =================
</TABLE>
(1) The effect of potential common securities are excluded from the dilutive
calculation for periods ending March 28, 1998 and March 29, 1997, as their
effect would be antidilutive. Options and warrants to purchase 525,777 shares of
common stock at an average price of $4.43 per share were outstanding during the
first quarter of 1998 but were not included in the computation of diluted EPS.
Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries are translated
into U. S. dollars using exchange rates at the balance sheet date for assets and
liabilities, and average exchange rates for the period for revenues and
expenses. Adjustments resulting from translating foreign functional currency
financial statements into U.S. dollars are included in the Cumulative
Translation Adjustment in the Consolidated Statement of Shareholders' Equity.
11
<PAGE>
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles required management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
4. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
MARCH 28, DECEMBER 27,
1998 1997
----------------- -----------------
<S> <C> <C>
(in thousands)
Finished goods $4,618 $2,836
Retail Goods 473 818
Work-in-Process 572 413
Raw materials 2,515 2,394
----------------- -----------------
8,178 6,461
Less reserve for obsolete inventory (533) (535)
================= =================
Total inventories $7,645 $5,926
================= =================
</TABLE>
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since its formation, the Company has focused its business activities on
designing, manufacturing and marketing premium snowboards and related products
under the "Morrow" brand name. The Company acquired Westbeach, a merchandiser of
snowboarding apparel and casual clothing, on November 13, 1997. Accordingly,
Westbeach financial information and operating results are included in the
Company's first quarter results for 1998, but not for the first quarter 1997.
Due to the seasonal nature of the snowboard industry a majority of the Company's
sales occur in the third and fourth quarters of the year.
The Company accumulates a significant backlog of sales orders beginning in
February of each year as a result of preseason orders placed in connection with
winter sports trade shows. As the Company begins to deliver snowboards, the
backlog decreases and is usually eliminated by the end of the year. The Company
had net sales of $2,777,000 and estimated open (preseason and new orders) sales
orders of approximately $20,200,000 for Morrow, Westbeach and OEM products at
March 28, 1998. At March 29, 1997, the Company had net sales of $689,000 and
estimated open sales orders of approximately $20,000,000 for Morrow and OEM
products. Open sales orders are subject to cancellation.
The Company's net sales increased 303% to $2,777,000 for the three months
ended March 28, 1998 (210% is attributable to apparel and retail sales by the
new Westbeach subsidiary and the balance to increased closeout sales of 1997/98
model snowboards), from $689,000 for the three months ended March 29, 1997.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements which are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
The forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially from the forward-looking statements. Morrow
Snowboards wishes to caution readers that important factors, among others, in
some cases have affected, and in the future could affect, Morrow Snowboards'
actual results and could cause actual consolidated results for the first three
months of 1998, and beyond, to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, Morrow Snowboards. These
factors include, without limitation, new initiatives by competitors, price
pressures, cancellation of preseason orders, inventory risks due to shifts in
market demand, raw materials costs, the ability to manufacture product at
planned costs, weather in primary winter resort areas of the world, and the risk
factors listed from time to time in the Company's SEC reports, including but not
limited to the report on Form 10-K for the year ended December 27, 1997.
The Company's year to date net sales of $2,777,000 and order backlog of
$20,200,000 at March 28, 1998 are up from those reported at March 29, 1997, with
net sales of $689,000 and a order backlog of $20,000,000. This is attributed to
the acquisition of Westbeach.
13
<PAGE>
The snowboard market worldwide has in prior years experienced a significant
oversupply of products at both the retail and wholesale level which contributed
to soft market conditions throughout the industry. Management believes this
oversupply has been materially reduced. Management is unaware of any other
trends or conditions that could have a material adverse effect on the Company's
consolidated financial position, future results of operations or liquidity.
However, investors should also be aware of factors which could have a negative
impact on prospects and the consistency of progress. These include political,
economic or other factors such as currency exchange rates, inflation rates,
recessionary or expansive trends, taxes, regulations and laws affecting the
worldwide business in each of the Company's markets; competitive product,
advertising, promotional and pricing activity; dependence on the rate of
development and degree of acceptance of new product introductions in the
marketplace; the difficulty of forecasting sales at certain times in certain
markets; and securing financial support to meet the requirements of the Company.
14
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods indicated
as a percentage of net sales.
<TABLE>
<CAPTION>
Quarter Ended Year Ended
----------------------------------- --------------------------
March 28, March 29, December 27,
1998 1997 1997
----------------------------------- --------------------------
<S> <C> <C> <C>
Net Sales 100.0 % 100.0 % 100.0 %
Cost of Goods Sold 85.2 115.2 78.9
----------------------------------- --------------------------
Gross Profit (Loss) 14.8 (15.2) 21.1
----------------------------------- --------------------------
Operating Expenses:
Selling, marketing and customer
service 64.7 164.3 23.0
Engineering, advance design and
product management 29.0 34.5 8.2
General and administrative 43.7 100.1 18.7
Loss on write-down of fixed assets - - 7.8
----------------------------------- --------------------------
Total Operating Expenses 137.4 298.9 57.7
----------------------------------- --------------------------
Operating Loss (122.6) (314.1) (36.6)
Interest Expense (3.5) ( 2.3) (0.4)
Other Income 2.4 22.1 1.7
----------------------------------- --------------------------
Loss Before Income Taxes (123.7) (294.3) (35.3)
Income Tax Benefit - 114.8 0.6
------------------------------------ --------------------------
Net Loss (123.7)% (179.5)% (34.7)%
==================================== ==========================
</TABLE>
Comparison of the Quarters ended March 28, 1998 and March 29 , 1997
Net Sales. Net sales for the first quarter of 1998 increased 303.0% to
$2,777,000 from $689,000 in the first quarter of 1997, reflecting the addition
of $564,000 from Westbeach apparel sales, $886,000 from Westbeach retail sales
and an increase of $638,000 in Morrow brand sales. The majority of "Morrow"
branded product sales occur in the third and fourth quarters of the year. In
the first quarter of 1998 sales consisted of 46.0% of the "Morrow" branded hard
goods, with the balance attributable to apparel and retail sales. By comparison
the first quarter of 1997 sales consisted almost entirely of closeout sales and
sales samples of the "Morrow" branded hard goods. Snowboard sales were up
194.0% in the first quarter of 1998 compared to the first quarter of 1997. As a
percentage of net sales, the snowboard sales represented 37.5% of total net
sales in the first quarter of 1998 compared to 51.3% of total net sales in the
first quarter of 1997. Net sales for bindings increased by 10.0%, representing
7.5% of net sales in the first quarter of 1998 compared to 27.4% in the first
quarter of 1997. Net sales for boots decreased 73.8%, representing 1.0 % of net
sales in the first quarter of 1998 compared to 15.4% in the first quarter of
1997. Apparel and accessory sales increased to 22.2% of net sales in the first
quarter of 1998 compared to 5.9% in the first quarter of 1997 largely due to
Westbeach apparel sales which were 20.3% of total net sales for the quarter.
Retail sales constituted 31.9% of total sales as a result of the Westbeach
acquisition in November, 1997.
Gross Profit (Loss). Gross profit for the first quarter of 1998 increased
490.5% to a gross profit of $410,000 from a gross loss of $105,000 for the first
quarter of 1997 as a result of increased apparel and retail sales due to the
acquisition of Westbeach in November, 1997. Gross margin for the first quarter
of 1998 increased to positive 14.8% from negative 15.2% for the first quarter of
1997. First quarter sales in 1998 are largely comprised of closeout sales of
1997/98 product, sales samples of 1998/99 product, and with the acquisition of
Westbeach, shipments of the 1998 spring/summer clothing line and retail sales.
15
<PAGE>
Selling, Marketing and Customer Service. Selling, marketing and customer
service expenses for the first quarter of 1998 increased 58.7% to $1,796,000
from $1,132,000 for the first quarter of 1997, representing 64.7% and 164.3% of
net sales, respectively, primarily as a result of the Westbeach acquisition.
Since the acquisition of Westbeach, the Morrow and Westbeach sales and
distribution networks have been partially combined to generate more efficient
use of the sales and marketing staff, along with greater penetration in the
North American and International markets for the combined lines of product. The
full extent of these efficiencies had not yet been achieved by the end of the
first quarter of 1998 and the Company continues to integrate Morrow and
Westbeach to realize the benefit of operating synergies. As a percentage of net
sales, staff and employee-related expenses decreased 20.9%, sales van program
expenses decreased 4.5%, commissions decreased 4.2%, promotional products
decreased 9.1% and advertising decreased 36.4%. With the addition of Westbeach,
the cost of rent, taxes and utilities related to sales distribution locations
added $133,000 in expenses for the quarter ended March, 1998 with no costs of
this type for the quarter ended March, 1997. The remaining expense categories
of travel, trade shows and general supplies, remained relatively consistent as a
percentage of net sales on a period to period basis.
Engineering, Advance Design and Product Management. Engineering, advance
design and product management expenses were previously identified as
"Engineering, Research and Development". Although the title has changed to more
clearly indicate the type of expenses, the nature of these expenses have not
changed. Related costs for the first quarter of 1998 increased 238.7% to
$806,000 from $238,000 for the first quarter of 1997, representing 29.0% and
34.5% of net sales, respectively. This increase was primarily a result of
increased expenses associated with additional staffing related to development of
product management teams. Product development expenses for boards, bindings and
boots increased by $61,000 to $102,000 in the first quarter of 1998 compared to
$41,000 in the first quarter of 1997. This is a reflection of the Company's
significant efforts towards development of its proprietary step-in binding
system. Product development costs related to the apparel product lines totaled
$240,000 in the first quarter of 1998 compared to $-0- in the first quarter of
1997.
General and Administrative. General and administrative expenses for the first
quarter of 1998 increased 75.8% to $1,213,000 from $690,000 for the first
quarter of 1997, representing 43.7% and 100.1% of net sales, respectively. This
increase was primarily due to the increased staffing with the acquisition of
Westbeach and the addition of retail store employees. These staff related
expenditures reflected a 140.0% increase to $564,000 in the first quarter of
1998 compared to $235,000 in the first quarter of 1997. Legal expenditures
remained relatively constant as a percentage of sales but increased to $66,000
in the first quarter of 1998, compared to $22,000 in the first quarter of 1997.
This increase is a result of SEC compliance activities related to the
acquisition of Westbeach and financing issues related to the LaSalle Business
Credit loan agreement. Depreciation expenses which remained consistent as a
percentage of net sales on a period-to-period basis, increased 288.9% to
$105,000 in the first quarter of 1998 compared to $27,000 in the first quarter
of 1997 as a result of a revision in the estimate of remaining useful life of
certain equipment. The Company also recognized goodwill in the acquisition of
Westbeach, resulting in related amortization of $68,000 during the first quarter
of 1998 compared to $-0- in the first quarter of 1997. All other categories of
expenses decreased as a percentage of sales but remained relatively consistent
on a total expenditure basis.
Interest Expense. Interest expense increased 506.3% to $97,000 for the first
quarter of 1998 from $16,000 for the first quarter of 1997. This was largely the
result of the Company's continued borrowings to partially fund the acquisition
of Westbeach in November, 1997 and borrowings to fund operations during the
first quarter of 1998.
16
<PAGE>
Other Income. Other income was $66,000 in the first quarter of 1998,
compared to income of $152,000 in the first quarter of 1997. The utilization of
Company cash in the acquisition of Westbeach, significantly reduced Company
funds available to invest and as a result, interest income decreased 94.0% to
$7,000 in the first quarter of 1998 from $116,000 in the first quarter of 1997.
Income Tax Benefit. The Company did not recognize an income tax benefit
based on its losses for the first quarter of 1998. The income tax benefit for
the first quarter of 1997 was $791,000 based on the Company's estimated tax rate
of approximately 39.0%.
Net Loss. Net loss for the first quarter of 1998 was $3,436,000 compared to
$1,238,000 for the first quarter of 1997.
Liquidity and Capital Resources
The Company requires capital for the development of its technology and
products, procurement of raw materials and other supplies, and capital equipment
for its manufacturing facility. At March 28, 1998, the Company had outstanding
revolving loans of $2,079,000.
Net cash used in operating activities for the first quarter of 1998 was
$10,000, resulting primarily from net loss of $3,436,000, with add backs for
depreciation and amortization of $543,000, decreases in accounts receivable of
$3,143,000, decreases in prepaid expenses of $389,000 and increases in accounts
payable and accrued liabilities of $1,150,000, offset by increases in
inventories of $1,719,000. The decrease in accounts receivable is a result of
collections during the quarter. The increase in inventories is a result of
building inventory for the 1998/99 season and the addition of Westbeach
inventories.
Capital expenditures for the three months ended March 28, 1998 were
$692,000. Capital expenditures were primarily for the purchase or construction
of manufacturing equipment, fixtures, and new snowboard, binding and boot
toolings.
Net cash provided by financing activities for the first quarter of 1998 was
$124,000, consisting of $156,000 from net borrowings under the revolving credit
facility, less $32,000 of payments on capital leases.
On May 7, 1998, the Company entered into a new credit facility with
Foothill Capital Corporation ("Lender") which credit facility replaces the
Company's prior credit facility with LaSalle Business Credit, Inc. ("Prior
Lender") which has been fully repaid. The Company's line of credit under the new
credit facility is up to $10,000,000. The new credit facility includes a
revolving credit line up to $10,000,000, an inventory subline up to $3,500,000,
a letter of credit subline up to $5,000,000, a term loan of up to $2,000,000 and
a one-time over advance subline of up to $1,000,000. Borrowings available under
the revolving credit facility and line are reduced by borrowings from time to
time under the other credit facilities. The amount that may be borrowed is also
limited to the value of certain eligible inventory, accounts receivable and
other assets. At May 11, 1998 the Company has borrowed approximately $2,900,000
under the credit facility which includes $900,000 under the over advance subline
and has issued letters of credit of $1,500,000 under the letter of credit
subline.
The credit facility bears interest at the Lender's Reference Rate plus .5
to 1.5% depending on the principal amount outstanding. The Company is required
to pay a monthly fee equal to .25% per annum on the average unused amount of the
revolving credit facility. The credit facility was issued based on a loan fee of
$200,000, payable in installments and monthly servicing fees of $4,000 per
month. The one-time advance subline is being used to fund peak seasonal needs in
Spring 1998 and will be repaid beginning May 31, 1998 with full repayment of
that subline
17
<PAGE>
by August 1998 and use of the revolving credit or other facilities thereafter.
The term loan provides for interest only payments in the first year, monthly
principal payments of approximately $42,000 thereafter and the remaining
principal balance due May 6, 2002. A fee of 1.5% per annum is payable on the
undrawn amount of outstanding letters of credit.
The revolving facility is secured by substantially all of the Company's
assets. The revolving credit facility contains various covenants that require
the Company, among other things, to meet certain objectives with respect to net
worth, an "EBITDA" test as defined in the credit facility and capital
expenditure limits. The credit facility is available through May 6, 2002.
The Company's debt structure is comprised of the following:
<TABLE>
<CAPTION>
March 28,
1998
------------------
<S> <C>
Short-term debt:
Operating line of credit $2,079
Current portion of capital lease obligations 139
------------------
Total short-term debt $2,218
==================
Long-term debt:
Capital lease obligations $ 361
Less current portion (139)
------------------
Total long-term debt, net of current portion $ 222
==================
</TABLE>
Assuming certain minimum pre-book orders for the 1998/1999 season, the
Company believes that, with certain steps being taken to significantly trim
its operating costs in 1998, the Company will have sufficient financing to
realize on its business plan. However, to provide additional cushion and
liquidity for the Company, the Company is exploring raising up to $5,000,000
through convertible equity or debt securities offering.
18
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
K2 Corporation (K2) has contacted the Company alleging that Company's new
Engage 3 step-in boot and binding system ("Engage System") infringes a K2 patent
and requesting that Company either cease using such Engage System or contact K2
to discuss a potential license. K2 has also requested an accounting of unit
sales to determine damages it may have suffered. The Company, after reviewing
this matter with its outside patent counsel, believes that the Engage System
does not infringe such patent and is so notifying K2. If, after such response,
K2 continues to pursue such claim, Morrow intends to vigorously defend against
any such claim. If the Engage System did infringe such patent, Morrow could be
liable for damages and Morrow's sales and net income and results of operation
could be adversely impacted.
ITEM 2. CHANGES IN SECURITIES.
-None-
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
-None-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
-None-
ITEM 5. OTHER INFORMATION.
-None-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibits: 27.1 -- Financial Data Schedule
27.2 -- Financial Data Schedule
27.3 -- Financial Data Schedule
The following reports on Form 8-K were filed during the quarter ended March
28, 1998:
. A Current Report on Form 8-K/A dated October 31, 1997 was filed on January
20, 1998 to report the proforma financial statement data related to the
acquisition of Westbeach Snowboard Canada Ltd.
. A Current Report on Form 8-K dated January 21, 1998 was filed on February 5,
1998 to report the change in titles of various executive management and add
management team members.
. A Current Report on Form 8-K dated January 30, 1998 was filed on February 10,
1998 to report a suit filed against Principle Marketers, Inc. for payment of
goods sold.
. A Current Report on Form 8-K dated March 3, 1998 was filed on March 10, 1998
to report a default on the existing loan agreement with LaSalle Business
Credit, Inc.
19
<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 May 12, 1998.
MORROW SNOWBOARDS, INC.
By: /s/ David E. Calapp
---------------------
David E. Calapp
Chief Executive Officer
(Principal Executive)
By: /s/ P. Blair Mullin
---------------------
P. Blair Mullin
Chief Financial Officer
(Principal Financial and
Accounting Officer)
20
<PAGE>
Exhibit Index
-------------
Exhibit No. Description
- ---------- -----------
27.1 Financial Data Schedule
27.2 Financial Data Schedule
27.3 Financial Data Schedule
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-26-1998
<PERIOD-START> DEC-27-1997
<PERIOD-END> MAR-28-1998
<CASH> 277
<SECURITIES> 0
<RECEIVABLES> 3,585
<ALLOWANCES> 670
<INVENTORY> 7,645
<CURRENT-ASSETS> 11,558
<PP&E> 14,129
<DEPRECIATION> 4,356
<TOTAL-ASSETS> 25,445
<CURRENT-LIABILITIES> 6,617
<BONDS> 0
0
0
<COMMON> 27,022
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<TOTAL-LIABILITY-AND-EQUITY> 25,445
<SALES> 2,777
<TOTAL-REVENUES> 2,777
<CGS> 2,367
<TOTAL-COSTS> 2,367
<OTHER-EXPENSES> 806
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 97
<INCOME-PRETAX> (3,436)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,436)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,436)
<EPS-PRIMARY> (0.56)
<EPS-DILUTED> (0.56)
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
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<MULTIPLIER> 1,000
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS 6-MOS 9-MOS YEAR
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<CURRENT-ASSETS> 24,200 20,077 19,547 24,174 23,017
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<DEPRECIATION> 0 0 0 0 0
<TOTAL-ASSETS> 31,179 27,866 27,769 33,058 32,243
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0 0 0 0 0
0 0 0 0 0
<COMMON> 25,385 26,292 26,332 26,656 25,980
<OTHER-SE> (235) (1,132) (1,606) 1,463 1,912
<TOTAL-LIABILITY-AND-EQUITY> 31,179 27,866 27,769 33,058 32,243
<SALES> 24,586 647 2,685 22,352 31,699
<TOTAL-REVENUES> 24,586 647 2,685 22,352 31,699
<CGS> 17,165 548 1,935 13,896 20,843
<TOTAL-COSTS> 17,165 548 1,935 13,896 20,843
<OTHER-EXPENSES> 787 179 365 546 769
<LOSS-PROVISION> 0 0 0 0 0
<INTEREST-EXPENSE> 865 82 120 149 153
<INCOME-PRETAX> 749 (1,451) (2,210) 2,820 3,427
<INCOME-TAX> 264 (554) (839) 1,122 1,280
<INCOME-CONTINUING> 485 (897) (1,371) 1,698 2,147
<DISCONTINUED> 0 0 0 0 0
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 485 (897) (1,371) 1,698 2,147
<EPS-PRIMARY> 0.15 (0.16) (0.24) 0.30 0.38
<EPS-DILUTED> 0.13 (0.16) (0.24) 0.29 0.36
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<TABLE> <S> <C>
<PAGE>
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<SECURITIES> 2,700 508 0 0
<RECEIVABLES> 3,519 4,305 7,877 6,717
<ALLOWANCES> 0 0 0 659
<INVENTORY> 7,302 9,058 6,285 5,926
<CURRENT-ASSETS> 18,810 17,163 17,759 13,911
<PP&E> 9,373 9,971 10,579 13,836
<DEPRECIATION> 0 0 0 4,289
<TOTAL-ASSETS> 28,216 27,167 28,366 27,653
<CURRENT-LIABILITIES> 1,525 1,405 2,207 5,311
<BONDS> 0 0 0 0
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<TOTAL-REVENUES> 689 2,838 13,011 20,253
<CGS> 794 2,231 9,316 15,971
<TOTAL-COSTS> 794 2,231 9,316 15,971
<OTHER-EXPENSES> 238 503 652 3,230
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<INCOME-PRETAX> (2,029) (3,401) (2,502) (7,149)
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<NET-INCOME> (1,238) (2,067) (1,617) (7,020)
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<EPS-DILUTED> (0.22) (0.37) (0.29) (1.24)
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