<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 27, 1999
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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(503) 375-9300
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
The number of shares outstanding of the registrant's common stock, no par value,
as of March 31, 1999 was 6,176,556.
<PAGE>
MORROW SNOWBOARDS, INC.
INDEX
<TABLE>
<S> <C>
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 16
Part II. Other Information
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 27
Item 3. Defaults upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 29
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MORROW SNOWBOARDS, INC.
For the Quarter Ended
March 27, 1999
3
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 27, DECEMBER 26,
1999 1998
--------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 729 $ 1,348
Accounts receivable, less allowance for uncollectible accounts 1,490 4,843
Inventories 1,260 1,452
Prepaid expense 439 596
Other current assets 249 119
Net current assets of discontinued operations - 2,439
-------- --------
Total Current Assets 4,167 10,797
Equipment and fixtures, net 449 571
Property held for sale, net 3,111 3,108
Other assets:
Goodwill, net 3,855 3,926
Other non-current assets, net 193 208
Net non-current assets of discontinued operations - 1,468
-------- --------
Total Other Assets 4,048 5,602
-------- --------
Total Assets $ 11,775 $ 20,078
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Line of credit $ - $ 3,698
Accounts payable 3,175 3,053
Accrued liabilities 1,651 2,321
Accrued loss on disposal - 1,498
Current portion of long-term debt and capital lease obligations 750 2,013
-------- --------
Total Current Liabilities 5,576 12,583
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
Accumulated deficit (20,901) (19,602)
Other comprehensive loss (16) (19)
-------- --------
Total Shareholders' Equity 6,199 7,495
-------- --------
Total Liabilities and Shareholders' Equity $ 11,775 $ 20,078
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------
MARCH 27, MARCH 28,
1999 1998
---------- ----------
<S> <C> <C>
Net Sales $ 1,945 $ 1,501
Cost of goods Sold 1,222 1,038
--------- ---------
Gross Profit 723 463
Operating Expenses:
Selling, marketing and customer service 862 1,056
Engineering, advance design and product
management 174 276
General and administrative 1,083 991
--------- ---------
Total Operating Expenses 2,119 2,323
--------- ---------
Operating Loss (1,396) (1,860)
Other Income (Expense):
Interest expense (17) (85)
Other income (expense) (36) 67
--------- ---------
Total Other Income (Expense) (53) (18)
Loss from Continuing Operations (1,449) (1,878)
Income (loss) from Discontinued Snowboard Operations, net 150 (1,558)
--------- ---------
Net Loss $ (1,299) $ (3,436)
========= =========
Net income (loss) per common share:
Loss from continuing operations - basic $ (0.23) $ (0.31)
Loss from continuing operations - diluted (0.23) (0.31)
Income (loss) from discontinued operations - basic 0.02 (0.25)
Income (loss) from discontinued operations - diluted 0.02 (0.25)
Net loss - basic (0.21) (0.56)
Net loss - diluted (0.21) (0.56)
Weighted Average Number of Shares Used in
Computing Per Share Amounts:
Basic 6,176,556 6,176,556
========= =========
Diluted 6,176,556 6,176,556
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK OTHER
----------------------- ACCUMULATED COMPREHENSIVE
SHARES AMOUNT DEFICIT INCOME (LOSS) TOTAL
--------- -------- --------- ------------- -------
<S> <C> <C> <C> <C> <C>
Balance, December 26, 1998 6,176,556 $ 27,116 $ (19,602) $ (19) $ 7,495
Comprehensive Income (Loss):
Net loss - - (1,299) - (1,299)
Change in translation adjustment - - - 3 3
-------
Total Comprehensive Loss (1,296)
--------- -------- --------- ----- -------
Balance, March 27, 1999 6,176,556 $ 27,116 $ (20,901) $ (16) $ 6,199
========= ======== ========= ===== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------
MARCH 27, MARCH 28,
1999 1998
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (1,299) $ (3,436)
Adjustments to reconcile net loss to net cash
provided by (used) in operating activities:
Deferred income taxes - 1
Depreciation and amortization 477 543
Other 3 (43)
Changes in operating assets and liabilities
Decrease in accounts receivable 3,353 3,143
(Increase) Decrease in inventories 2,909 (1,719)
Decrease in prepaid expenses 157 389
(Increase) Decrease in other assets 850 (38)
Increase in accounts payable 122 1,301
Decrease in accrued liabilities (849) (151)
Decrease in accrued loss on disposal (1,498) -
-------- --------
Net Cash Provided By (Used) In
Operating Activities 4,225 (10)
Cash Flows From Investing Activities:
Acquisition of property and equipment (115) (692)
Proceeds from sale of equipment 470 -
-------- --------
Net Cash Provided By (Used In)
Investing Activities 355 (692)
Cash Flows From Financing Activities:
Line of credit (payments) borrowings, net (3,698) 156
Principal payments on long-term liabilities (1,501) (32)
-------- --------
Net Cash Provided By (Used In)
Financing Activities (5,199) 124
-------- --------
Decrease In Cash and Cash Equivalents (619) (578)
Cash and Cash Equivalents at Beginning of Period 1,348 855
-------- --------
Cash and Cash Equivalents at End of Period $ 729 $ 277
======== ========
Supplemental disclosure:
Cash paid for interest 17 69
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND CURRENT EVENTS
DESCRIPTION OF BUSINESS
Morrow Snowboards, Inc., dba Westbeach, 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 as well as 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 and warehousing operation, a
United Kingdom organization consisting of European sales and a Washington State
corporation whose principal activity is U.S. retail sales. On March 26, 1999,
the Company sold all of its "Morrow" intellectual property, along with all
1999/2000 snowboard inventories and its snowboard and binding production
equipment to K2 Acquisitions Inc. (K2) ("Note 5").
The consolidated financial statements include the wholly owned
subsidiaries, Morrow Westbeach Canada ULC, a Nova Scotia unlimited liability
company 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 action sports industry that is highly seasonal. Further, the Company has
undergone significant expansion since its inception in 1989, related to its
manufacturing, marketing and sales activities with subsequent discontinuance of
its snowboard, boot and binding operations. 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 27, 1999, and for the quarters ended March 27, 1999 and
March 28, 1998, they do not include all notes required by generally accepted
accounting principles for complete financial statements.
8
<PAGE>
Further information is contained in the annual financial statements of the
Company and notes thereto, for the year ended December 26, 1998, 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 27, 1999,
are not necessarily indicative of the results that may be expected for the
full year.
CURRENT EVENTS
In 1998 the Company experienced a significant increase in operating
expenses due to higher costs related to the Westbeach merger and further debt
and organizational restructuring charges, among other factors. The Company
evaluated its equipment used in the manufacture of snowboards, boots, and
bindings in light of current and future usage, as well as market demand. The
Company evaluated its ability to continue under the current corporate structure
and its need for an infusion of cash to continue operations. This evaluation
resulted in the sale of the snowboard, boot and binding business in March of
1999.
As a result of the 1998 loss, effective March 12, 1999, the Company was
in default of certain of the covenants of its line of credit agreement with
Foothill Capital. The Company entered into an agreement with Capitol Bay
Management, Inc. in which Capitol Bay replaced Foothill Capital as the Company's
working capital lender. After reviewing its working capital needs, the Company
has determined it will need additional working capital for 1999. The Company is
working on reducing the amount of working capital needed and pursuing
alternatives to raise the additional capital.
The Company estimates that it will require a minimum of $1,000,000 in
additional working capital to implement its Business Plan for the 1999-2000
winter sports season. Further, such amount does not include any reserves or
contingencies. Such minimum number is also based on a number of assumptions
about orders of the Company's products, follow-up orders and retail store sales,
based on historical numbers. The minimum amount required could increase
significantly if the Company is unsuccessful in negotiating acceptable
settlements to the pending lawsuits and/or successfully prevailing in such
litigation. Further, the Company will need to obtain part or all of such
financing at certain dates to maintain adequate working capital and liquidity to
fund and continue its operations, as well as place and ship orders for apparel
for distribution under its Westbeach brand and acquire inventory for its
Westbeach retail stores.
Based on response to date from potential financing sources, management
believes there is significant risk that the Company will be unable to obtain
adequate working capital at the time or in the amount needed. As a result, the
Company is considering selling part or all of its business lines. Besides
considering a potential sale of part or all of its business lines, the Company
will continue to seek additional working capital to continue and maintain the
business lines as part of the Company.
Certain of the Company's creditors filed an involuntary petition under
Chapter 7 of the United States Bankruptcy code. Dismissal of the involuntary
petition was approved by the bankruptcy court on June 16, 1999. The settlement
with the creditors has been approved by over 90% of the creditors (by number and
dollar amount of claims) with undisputed claims. The settlement covers most, but
not all, creditors. There is no assurance that the Company will not encounter
future financial problems due to unexpected contingencies, unsuccessful results,
negotiations in the pending litigation, or other factors.
9
<PAGE>
To provide capital to pay its creditors, the Company is seeking to sell
its principal office/manufacturing facility in Salem, Oregon, which has been
shown in the financial statements as property held for sale. As noted, the
Company is also considering selling its retail stores and/or its apparel line.
There remains significant risk that the Company will be unsuccessful in raising
sufficient working capital to sustain its operations and could face liquidation,
either voluntary or involuntary.
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. SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
Effective January 1, 1997, the Company changed its year-end from a
calendar year end to a 52 or 53 week fiscal year ending on the Saturday nearest
December 31st. Accordingly, the first fiscal quarter of 1999 began on December
27, 1998, and ended on March 27, 1999, whereas the prior fiscal quarter ended on
March 28, 1998.
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 March 27, 1999, and December 26, 1998.
INVENTORIES
Inventories for continuing operations, including retail inventories,
are stated at the lower of average cost or market. Inventories for discontinued
operations are stated at the lower of cost or market using standard costs, which
approximate the first-in, first-out (FIFO) method. Costs for valuation of
manufacturing inventory are comprised of labor, materials (including freight and
duty) 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, which are 10-35 years for buildings
and improvements and 3-12 years for equipment, fixtures and other. Amortization
of leasehold improvements and equipment under capital leases is provided
10
<PAGE>
using the straight-line method over the expected useful lives of the assets
or the initial term of the lease (including periods related to renewal
options which are expected to be exercised), whichever is shorter.
Amortization is included in depreciation expense.
GOODWILL AND OTHER LONG LIVED ASSETS
Goodwill resulting from the Westbeach acquisition is being amortized
over 15 years using the straight-line method and is net of amortization of
$383,000 and $103,000 at March 27, 1999 and March 28, 1998, respectively.
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 non-discounted projected earnings. If the valuation
indicates that non-discounted 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. Management has
evaluated the Westbeach goodwill and believes it is realizable from future
continuing operations.
PROPERTY HELD FOR SALE
As a result of the sale of its snowboard, binding, and boot business
lines, the Company has decided to sell its manufacturing facility and
improvements. Such assets are reflected as property held for sale in the
accompanying Consolidated Balance Sheets.
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 offered a one-year warranty on its snowboard, binding and
boot products. The Company provided for anticipated warranty expense related to
products sold. On May 11, 1999, the Company entered into an agreement with K2,
in which K2 assumed all future liability related to warranty claims in exchange
for certain of the Company's outstanding accounts receivable. The Company offers
a one year warranty on its snowboard apparel and has provided for anticipated
warranty expense.
ADVERTISING AND PROMOTION COSTS
Advertising and promotion costs are expensed as incurred and included
in selling, marketing and customer service expenses.
11
<PAGE>
REVENUE RECOGNITION
The Company recognizes revenue from the sale of its products when the
products are shipped to customers or for retail sales when the customer takes
the product.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). 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).
NET LOSS PER SHARE
Effective December 27, 1997, the Company 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.
12
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------
MARCH 27, 1999 MARCH 28, 1998
--------------- --------------
<S> <C> <C>
Shares
Weighted average shares outstanding 6,176,556 6,176,556
Stock option and convertible debenture dilution (1)
- -
-------------------------------------
Weighted average shares outstanding for diluted EPS 6,176,556 6,176,556
-------------------------------------
</TABLE>
(1) The effect of potential common securities of 391,398 shares and 525,777
shares are excluded from the dilutive calculation for periods ending
March 27, 1999 and March 28, 1998, respectively, 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
balance sheet components into U.S. dollars are included in Other Comprehensive
Income (Loss) in the Consolidated Statement 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,
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.
3. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
MARCH 27, DECEMBER 26,
1999 1998
------------ ----------------
(in thousands)
<S> <C> <C>
Finished goods $ 816 $ 846
Retail goods 473 787
Work-in-process - 13
Raw materials 122 247
------------ ---------------
1,412 1,843
Less reserve for obsolete inventory (152) (441)
------------ ---------------
Total continuing operations inventories, net $ 1,260 $ 1,452
================================
Total discontinued operations inventories, net $ - $ 2,717
================================
</TABLE>
13
<PAGE>
4. LONG-TERM DEBT
On May 7, 1998, the Company entered into a new credit facility
with Foothill Capital Corporation ("Lender") which credit facility
replaces the Company's prior credit facility with LaSalle Business
Credit, Inc., which has been fully repaid. The Company's line of credit
under the new credit facility is up to $10,000,000, including an
inventory subline of up to $3,500,000, a letter of credit subline up to
$5,000,000, a term loan of up to $2,000,000 and a one-time over-advance
subline of up to $750,000. Borrowings available under the revolving
credit facility and line are reduced by borrowings from time to time
under the other credit facilities. The amount that may be borrowed is
also limited to the value of certain eligible inventory, accounts
receivable and other assets. At March 27, 1999, the Company had
borrowed approximately $742,000 under the credit facility, including a
$742,000 term loan and $0 under the revolving line of credit.
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 term
loan provides for interest-only payments in the first year and monthly
principal payments of $41,667 thereafter, with the remaining principal
balance of $542,000 due May 8, 2002. A fee of 1.5% per annum is payable
on the undrawn amount of outstanding letters of credit.
The credit facility is secured by substantially all of the
Company's assets. The facility requires the Company to comply with
certain financial covenants, including, among other things, a tangible
net worth value and an "EBITDA" test as defined in the credit facility.
The company's tangible net worth is currently at $2,151,000, compared
to the required value of $10,500,000. The Company's "EBITDA" for the
nine months ended March 27, 1999, was a loss of $10,070,000 compared to
the $3,000,000 "EBITDA" requirement. The Company's failure to meet both
the tangible net worth covenant and the "EBITDA" covenant results
principally from lower than projected sales revenue and related net
income.
This credit facility was acquired by Capitol Bay Management,
Inc. (Capitol Bay) from the lender on May 7, 1999, pursuant to an
Assignment and Acceptance among Capitol Bay, Morrow Snowboards, Inc.
and certain other parties. At the time, the amount owing under the
credit facility was $217,722, which amount was increased to $451,055,
reflecting a reduced Termination Fee (as defined in the credit
facility) of $100,000 and an unpaid closing fee of $133,333. At May 7,
1999, the Company was in default of the over-advance funding limitation
under Section 2.5 of the Credit Agreement. As a result of such default,
the Lender was entitled to exercise its rights and remedies in
accordance with the Credit Agreement. The Lender reserved all of its
rights to enforce the Credit Agreement as a result of that event of
default, effective March 12, 1999, and invoked its right to charge
interest at the default rate of 5.5% above the Lender's prime rate as
specified in the Credit Agreement. In addition, the Company is out of
compliance with its tangible net worth and EBITDA covenants. No default
has been declared in these compliance issues. Capitol Bay, as successor
to the Lender under the credit facility, has not waived these defaults
or increased interest rate.
14
<PAGE>
5. SEGMENT AND GEOGRAPHIC REPORTING
Under Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
(SFAS 131), public companies are required to disclose certain
information about the enterprise's reportable segments. The Company has
two continuing reportable product segments within four major geographic
territories. The product segments are categorized as softgoods and
retail. Softgoods consist of apparel and accessories. The geographic
territories are the United States, Canada, Europe and Japan. The
accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company's
territorial segments market, sell and distribute essentially the same
products with the exception of its retail stores, which additionally
market and sell competitor products. The following represents
continuing operations segment and geographical data.
<TABLE>
<CAPTION>
Quarter Ended March 27, 1999
--------------------------------------------------------
USA Canada Europe Totals
--------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Softgoods 45 431 369 845
Retail 138 962 - 1,100
--------------------------------------------------------
Total Revenues 183 1,393 369 1,945
Segment operating profit / (loss (1,363) 167 (253) (1,449)
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended March 28, 1998
--------------------------------------------------------
USA Canada Europe Totals
--------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Softgoods 51 496 69 616
Retail 142 743 - 885
---------------------------------------------------------
Total Revenues 193 1,239 69 1,501
Segment operating profit / (loss) (1,735) 32 (175) (1,878)
</TABLE>
15
<PAGE>
6. DISCONTINUED OPERATIONS
On March 26, 1999, the Company sold all of its right, title and
interest in and to the "Morrow" and "Morrow Snowboards" names and the other
trademarks, trade names and service marks to K2 Acquisitions, Inc. (K2). In
addition, K2 purchased all of the machinery, equipment and tooling used for
manufacture of snowboards and bindings; rights to the machinery, equipment and
tooling that is leased by the Company; all of the Company's snowboard inventory
for the 1999/2000 season; purchase orders reflecting sales orders received and
accepted by the company prior to the date of sale; trademark licensing agreement
and international distribution agreement and all of the Company's rights,
claims, credits, causes of action or rights of set-off against third parties
relating to the assets. In consideration of the sale, conveyance, assignment,
transfer and delivery of the assets the Company was paid $3.2 million.
As a result of this transaction, the net book value of the assets
purchased and liabilities assumed by K2 at December 26, 1998 have been shown as
net current and non-current assets of discontinued operations in the
Consolidated Balance Sheets.
Operating results of the snowboard operations for the first quarter of
1998 are shown separately in the Consolidated Statements of Operations as loss
from discontinued snowboard operations, net of tax. The loss from discontinued
operations from year-end to the date of the sale was accrued as of December 26,
1998. The discontinued snowboard operating results include an allocation of
consolidated net interest expense based on net assets. The Consolidated
Statements of Cash Flows have not been restated to reflect discontinued
operations presentation.
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 12,1997. In March 1999,
the Company sold its "Morrow" intellectual property, along with all 1999/2000
inventories and its snowboard and binding production equipment to K2. The
Company's consolidated net sales were $1,945,000 for continuing operations for
the three months ended March 27,1999. This compares to $1,501,000 for the three
months ended March 28, 1998.
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. The three Westbeach
retail stores, which do not carry as heavy a seasonal trend, help to reduce the
Company's seasonal nature. Gross margins vary significantly throughout the year
depending on product mix, price and the mix of wholesale versus retail sales
throughout the year.
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
pre-season orders, backlog sales orders decrease and are usually eliminated by
the end of the year.
16
<PAGE>
The Company has taken certain steps to position itself for the future,
including selling of the Morrow-TM- brand product line, focusing on the core
apparel line offered by the Company, maintaining an efficient management staff
with expertise in core areas of the business and implementing appropriate
additional financial and accounting controls and systems.
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 1999, and beyond, to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company. These factors include, without limitation, new initiatives by
competitors, price pressures, cancellation of preseason orders, inventory risks
due to shifts in 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 26, 1998.
The Company's year to date net sales of $1,945,000 and order backlog of
$5,345,000 at March 27, 1999 are up from those reported at March 28, 1998, with
net sales of $1,501,000 and an order backlog of $4,974,000. The increase is
attributable to stronger sales from the Canadian retail stores and sales of the
spring/summer season product line in the European market.
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 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 requirement of the Company.
17
<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
--------------------------
March 27, March 28,
1999 1998
--------------------------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of goods sold 62.8 69.1
------------------------
Gross profit 37.2 30.9
Operating expenses:
Selling, marketing and customer service 44.3 70.4
Engineering, research and product development 9.0 18.4
General and administrative 55.7 66.0
------------------------
Total operating expenses 109.0 154.8
------------------------
Operating loss (71.8) (123.9)
Interest expense (0.9) (5.7)
Other income (1.8) 4.5
------------------------
Loss from continuing operations (74.5) (125.1)
Income (loss) from discontinued operations, net 7.7 (103.8)
------------------------
Net loss (66.8)% (228.9)%
========================
</TABLE>
COMPARISON OF THE QUARTERS ENDED MARCH 27, 1999 AND MARCH 28, 1998
CONTINUING OPERATIONS. The Company's continuing operations consist of
the Westbeach-TM- brand apparel and accessory lines and its three retail stores.
These continuing operations stem from the acquisition of Westbeach in November
1997.
NET SALES. Net sales for continuing operations in 1999 increased to
$1,945,000, from $1,501,000 for 1998. This increase is a result of stronger
sales from the Canadian retail stores and the sales of the spring/summer season
in the European market. Sales for continuing operations include Westbeach-TM-
brand apparel of $845,000 for quarter ended March 1999 and $616,000 for the
quarter ended March 1998. Retail sales for the quarter ended March 1999 in the
amount of $1,100,000 and $885,000 for the quarter ended March 1998 are also
included in sales for continuing operations.
GROSS PROFIT. Gross profit for continuing operations in 1999 increased
to $723,000 from $463,000 for 1998 as a result of the increased retail and
European sales. As a percentage of sales, total gross margin for 1999 increased
to 37.2%, up from 30.9% in 1998. This is mainly a result of
18
<PAGE>
the increased mix of retail sales, as well as the reduction of closeout sales,
which generally result in lower margins.
OPERATING EXPENSES. Operating expenses for continuing operations
consist of selling, marketing and customer service costs, engineering, research
and product development costs and general and administrative costs. These costs
decreased to $2,119,000 for the first quarter of 1999 from $2,323,000 for the
first quarter of 1998. This decrease is due to operating reductions made in
response to the significant limitation in the availability of cash resources. As
a percentage of sales, the costs decreased to 109.6% in 1999, from 154.8% in
1998.
SELLING, MARKETING AND CUSTOMER SERVICE. Selling, marketing and
customer service expenses for the first quarter of 1999 decreased 18.4% to
$862,000 from $1,056,000 for the first quarter of 1998. As a percentage of
sales, selling, marketing and customer service expenses decreased to 44.3% in
1999, from 70.4% in 1998. Travel expenses decreased $64,000, trade show expenses
decreased $67,000, advertising decreased $68,000, and all other expenses
increased by $5,000.
ENGINEERING, ADVANCE DESIGN AND PRODUCT MANAGEMENT. Engineering,
advance design and product management expenses for the first quarter of 1999
decreased 37.0% to $174,000 from $276,000 for the first quarter of 1998. As a
percentage of sales, engineering, advance design and product management
decreased to 9.0% in 1999 from 18.4% in 1998. These expenses relate to the
product development of the Westbeach-TM- brand apparel and accessories. This
decrease was the result of a reduction in product testing expense and apparel
samples production. The Fall/Winter 1997 apparel sample lines, which were
expected to be produced, shipped and expensed during the fourth quarter of 1997
were produced and shipped later than expected, resulting in the expense being
incurred in the first quarter of 1998.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
first quarter of 1999 increased 9.3% to $1,083,000 from $991,000 for the first
quarter of 1998, representing 55.7% and 66.0% of net sales, respectively. This
increase was primarily due to the recognizing of bad debt expense, which
increased in the first quarter of 1999 to $141,600 from $12,800 in 1998. Staff
related expenditures decreased in the first quarter of 1999 to $397,000 from
$461,000 in 1998. The decrease can be attributed to the start of the integration
of Morrow and Westbeach to generate a more efficient use of general and
administrative staff and operations.
INTEREST EXPENSE. Interest expense decreased to $17,000 for the first
quarter of 1999 from $85,000 for the first quarter of 1998. The Company's
continuing need during 1998 to partially fund the acquisition of Westbeach in
November 1997 and its continued borrowings to fund discontinued operations
during 1998 are reflected in the decrease.
OTHER INCOME / EXPENSE. Other expense was $36,000 for the first quarter
of 1999 compared to other income of $67,000 for the first quarter of 1998. This
change in other income/expense is primarily due to the fluctuations in currency
exchange rates and, also, loan fees paid to Foothill Capital.
19
<PAGE>
NET LOSS. Net loss for the first quarter of 1999 was $1,299,000
compared to net loss of $3,436,000 for 1998. The loss from discontinued
operations from year-end to the date of the sale was accrued as of December 26,
1998.
DISCONTINUED OPERATIONS. On March 26, 1999, the Company sold all of its
snowboard, boot and binding assets to K2 for $3.2 million. The Company retained
all of the related receivables and liabilities, except for capital lease
obligations and certain contract team rider obligations.
During 1998, the Company continued to incur losses related to the
oversupply of products produced in 1996 by a highly fragmented, over-populated
and under-capitalized industry. Net sales of the discontinued operations
decreased 48.4% in the first quarter of 1999 to $659,000, as accrued at December
26, 1998, from $1,276,000 in the first quarter of 1998. Corresponding gross
profits remained at a consistent level at $1,330,000, as accrued at December 26,
1998, from $1,329,000 in 1998. The 1999 level is made up of close out sales
effects of the discontinued operations. The soft market in 1997 continued
through 1998. This market effect on the Company, its ability to compete under
the current corporate structure and its need for an infusion of cash to continue
operations provided a need to evaluate its current and future involvement in the
snowboard, boot and binding business. This evaluation resulted in the sale of
the snowboard, boot and binding business to K2 in March 1999. This transaction
generated a net loss on discontinued operations of $7,402,000 in fiscal year
1998 compared to $7,113,000 in fiscal year 1997. In addition, the Company
recognized a loss on the discontinuance of $1,952,000 which is comprised of a
$454,000 loss on the sale to K2 and $1,498,000 in accruals related to
discontinued snowboard operations in the first quarter of 1999.
For the quarter ended March 27, 1999, the Company had an income from
discontinued operations of $150,000. This income was not included in the accrual
for the loss on discontinued operations that was recognized as of December 26,
1998, as this income resulted from a revision in certain warranty and commission
accruals, as well as a gain from a property tax refund from over assessments
from 1995, 1996 and 1997.
YEAR 2000
The Company is undertaking an assessment of both its internal Year 2000
compliance issues and its key vendors, and customers, Year 2000 compliance
status.
INTERNAL YEAR 2000 COMPLIANCE. During 1998, the Company has continued
to assess its Year 2000 readiness by evaluating its computer hardware, such as
its fire and security alarm, telephone system and HVAC system. As a result of
this assessment, the Company has determined that upgrades are required to its
voice mail system; e-mail system; the software for its payroll records, time
clocks and manifesting program; and a few PC work stations. Management estimates
the cost of these upgrades which it expects to complete by September 1999, will
be approximately $15,000.
20
<PAGE>
EXTERNAL YEAR 2000 COMPLIANCE. In addition to its internal assessment,
the Company will survey each of its vendors and its top 20 customers to
determine their Year 2000 readiness. Based on the results of those surveys, the
Company will develop a contingency plan for any suppliers of critical materials
not expected to be Year 2000 compliant, including identifying alternate sources
of materials and, subject to available financing, possibly purchasing excess
inventory before the 1999 fiscal year-end. The Company generally has alternate
sources for all of its key products and raw materials/inventories. However,
problems with or delays in obtaining key products or raw materials/inventory or
higher costs due to vendor or shipper Year 2000 compliance problems could
adversely impact the Company's ability to timely deliver products, the
manufacturing/component costs for such products and related gross profit
margins. The financial disruption of key distributors/retailers' operations or
shipping/transportation channels due to Year 2000 compliance problems could
adversely impact the Company's sales, costs and related gross profit margins on
products.
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 U.S. dollars using the quarter-end exchange rate, for a total of
$154,441. The potential loss in fair value resulting from an adverse change in
quoted foreign currency exchange rates of 10% amounts to $15,444. Actual results
may differ. The Company does not hold other market sensitive instruments and
therefore does not expect to be affected by any adverse changes in commodity
prices, or marketable equity security prices. The Company may be exposed to
future interest rate changes on its debt. The Company does not believe that a
hypothetical 10 percent change in interest rates would have a material effect on
the Company's cash flow.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital for the procurement of raw materials and
other supplies used in production. At March 27, 1999, the Company had $729,000
in cash and no revolving loans, compared to $277,000 in cash and revolving loans
of $2,079,000 outstanding at March 28, 1998.
Net cash provided by operating activities for the first quarter of
1999, was $4,225,000, resulting primarily from the discontinued snowboard
operations. The following is a detailed account of the operating activity
affecting cash flows for the first quarter of 1999: depreciation and
amortization provided $477,000, an increase in "other" provided $3,000, which is
mostly comprised of differences in currency exchange. The following represents
changes in operating assets and liabilities for the first quarter of 1999 (as
compared to the fourth quarter of 1998). There was a significant decrease in
accounts receivable by $3,353,000, due, in large part, to the collections of
accounts for the 98/99 season products. A decrease in inventories of $2,909,000,
due to the sale of the snowboard operations to K2, and a decrease in both
prepaid expenses for $157,000 and in other assets by $850,000. There was an
increase in accounts payable of
21
<PAGE>
$122,000, a decrease in accrued liabilities of $849,000 and finally, a
decrease in accrued loss on disposal of $1,498,000, which is also attributed
to the sale of snowboard assets to K2.
Net cash generated from investing activities for the first quarter of
1999 totaled $355,000, resulting from the outlay of cash for the acquisition of
property and equipment in the amount of $115,000, and the proceeds from the sale
of equipment of $470,000.
Net cash used in financing activities for the quarter were $5,199,000,
consisting of $3,698,000 in line of credit payments and $1,501,000 in payments
on long-term liabilities.
On May 7, 1998, the Company entered into a new credit facility with
Foothill Capital Corporation ("Lender") which credit facility replaced the
Company's prior credit facility with LaSalle Business Credit, Inc., which has
been fully repaid. The Company's line of credit under the new credit facility is
up to $10,000,000, including an inventory subline of up to $3,500,000, a letter
of credit subline up to $5,000,000, a term loan of up to $2,000,000 and a
one-time over-advance subline of up to $750,000. Borrowings available under the
revolving credit facility and line are reduced by borrowings from time to time
under the other credit facilities. The amount that may be borrowed is also
limited to the value of certain eligible inventory, accounts receivable, and
other assets.
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 over-advance subline was used to fund peak
seasonal needs in spring 1998. The one-time advance subline began on May 31,
1998 and was fully repaid by August 1998. The term loan provides for interest
only payments in the first year and monthly principal payments of approximately
$42,000 thereafter, with the remaining principal balance of $542,000 due May 6,
2002. A fee of 1.5% per annum is payable on the undrawn amount of outstanding
letters of credit.
The credit facility is secured by substantially all of the Company's
assets. The facility requires the Company to comply with certain financial
covenants, including, among other things, a tangible net worth value and an
"EBITDA" test as defined in the credit facility. The Company's tangible net
worth is currently $2,151,000, compared to the lender's required value of
$10,500,000. The Company's "EBITDA" for the nine months ended March 27, 1999 was
a loss of $10,070,000 compared to the $3,000,000 "EBITDA" requirement. The
Company's failure to meet both the tangible net worth covenant and the "EBITDA"
covenant results principally from lower than projected sales revenue and related
net income, and also the fact that the company discontinued its snowboard
operations in the first quarter of 1999.
As discussed in more detail below, this credit facility was acquired by
Capitol Bay Management, Inc. (Capitol Bay) from the Lender on May 7, 1999
pursuant to an Assignment and Acceptance among Capitol Bay, Morrow Snowboards,
Inc. and certain other parties. At the time, the amount owing under the credit
facility was $217,722, which amount was increased to $451,055, reflecting a
reduced Termination Fee (as defined in the credit facility) of $100,000 and an
unpaid closing fee of $133,333. At May 7, 1999, the Company was in default of
the over-advance funding limitation under Section 2.5 of the Credit Agreement
with the lender. As a result of such default, the Lender was entitled to
exercise its rights and remedies in accordance with the Credit Agreement. The
Lender reserved all of its rights to enforce the Credit Agreement as a result of
that event of default, effective March 12, 1999, and invoked its right to charge
interest at the default rate of 5.5% above the Lender's prime rate as specified
in the Credit Agreement. In
22
<PAGE>
addition, the Company is out of compliance with the tangible net worth and
"EBITDA" covenants. No default has been declared on these covenants. Capitol
Bay, as successor to the Lender under the credit facility, has not waived
these defaults or the increased interest rate.
On March 30, 1999, certain of the Company's trade creditors filed an
Involuntary Petition ("Involuntary Petition") for relief under Chapter 7 of the
United States Bankruptcy Code in the United States Bankruptcy Court for the
District of Oregon (Case No. 699-61663-FRA7). On March 30, 1999, the Company's
accounts payable were approximately $2,500,000, with all overdue more than 90
days. The Company retained insolvency counsel to assist it in responding to the
Involuntary Petition ("the Dismissal"). A motion to dismiss the Involuntary
Petition "the Dismissal" was filed and approved. See "Item 1. Legal Proceedings"
in Part II.
On April 27, 1999, the Company's Board of Directors authorized the
Company to enter into a binding Memorandum of Understanding ("MOU") with Capitol
Bay whereby Capitol Bay provided the Company with additional financing to be
used as working capital, as previously reported in detail in the Form 8-K filed
May 3, 1999. Pursuant to the MOU, Capitol Bay acquired Foothill's secured lender
position under the credit facility on May 7, 1999. While there is no written
agreement to provide additional working capital under the credit facility, the
Company believes that Capitol Bay may be less restrictive in releasing funds
under the credit facility and that some additional limited working capital may
be available under the credit facility. Under the MOU, Capitol Bay also intends
to obtain and fund a loan to be secured by the Company's real estate to provide
additional working capital. The proposed settlement with certain creditors
outlined below and in "Item 1. Legal Proceedings" limits the aggregate amount
secured to $500,000, subject to increase under certain conditions to $750,000,
thereby limiting the amount that may be raised.
Pursuant to the MOU, the Company has negotiated a tentative settlement
with its creditors as outlined in "Item 1. Legal Proceedings." The tentative
settlement has been approved by over 90% of the Company's creditors (by number
and dollar amount of claims) with undisputed claims. There is no assurance that
the Company will be able to make the payments provided under such plan. Based on
discussion with potential financing sources to date, the Company has serious
concerns about its ability to raise adequate working capital in the amount or at
the times needed to fund its business lines for the 1999-2000 winter sports
season. To protect the value of the Company's business lines, the Company's
subsidiaries are currently considering selling part or all of those business
lines or the assets thereof.
Under the MOU, the Company has agreed to allow Capitol Bay to convert
up to $500,000 of the credit facility into up to 2,000,000 shares (as presently
constituted) of the Company's Common Stock (no par value) at the conversion rate
of $.25 per share. The Conversion right runs for a one-year period from the date
the Dismissal became final. Until consummation of the financings under the MOU
or, if earlier, the termination of the MOU, the Company has agreed not to issue
any securities without the prior written consent of Capitol Bay. The Company has
further agreed to refrain from filing a petition under the bankruptcy laws.
At the close of business on April 26, 1999, the Company was delisted
from the NASDAQ National Market System. Because the Company has been delinquent
in its filings under the Securities Exchange Act of 1934, trading in the
Company's securities will be reported in the pink sheets until the Company has
filed the Quarterly Report on Form 10-Q for the fiscal quarter ended June 26,
1999 and a requisite number of market makers have applied for a listing on the
OTC Bulletin Board on the Company's behalf. The Company anticipates it will file
such Form 10Q on September 30, 1999 and be listed on the OTC Bulletin Board
shortly thereafter.
23
<PAGE>
Due to the lack of borrowing capacity under the credit facility, the
Company's limited working capital, the Involuntary Petition, the Company's
debts, including accounts payable, and other factors as outlined herein, the
Company has a liquidity problem. After reviewing its working capital needs, the
Company has determined it will need additional working capital for 1999. The
Company is working on reducing the amount of working capital needed and pursuing
alternatives to raise that capital.
The Company estimates that it will require a minimum of $1,000,000 in
additional working capital to implement its Business Plan for the 1999-2000
winter sports season. Further, such minimum working capital does not include any
reserves for contingencies. Such minimum number is also based on a number of
assumptions about orders of the Company's products, follow-up orders and retail
store sales, based on historical numbers. The minimum amount required could
increase significantly if the Company is unsuccessful in negotiating acceptable
settlements to the numerous pending lawsuits and/or successfully prevailing in
such litigation. Further, the Company will need to obtain part or all of such
financing at certain dates to maintain adequate working capital and liquidity to
fund and continue its operations, defend such lawsuits, as well as place and
ship orders for apparel for distribution under its Westbeach brand and acquire
inventory for its Westbeach retail stores.
Based on response to date from potential financing sources, there is
significant risk the Company will be unable to obtain adequate working capital
at the time or in the amount needed. As a result, the Company is currently
considering selling part or all of its business lines. Besides considering a
potential sale of part or all of its business lines, the Company will continue
to seek additional working capital to continue and maintain the business lines
as part of the Company. There is no assurance that the Company will be able to
obtain adequate working capital in the amounts needed or at the times needed to
sustain its operations or sell its business lines in a timely fashion.
The Company's debt structure is comprised of the following:
<TABLE>
<CAPTION>
March 27, 1999
----------------
<S> <C>
Short-term debt:
Current portion of notes payable 742,000
Current portion of capital lease obligations 8,000
----------------
Total short-term debt $ 750,000
================
</TABLE>
On August 24, l999, the Company closed a bridge loan for $675,000,
secured by the Company's real property in Salem, Oregon. The Company received
net proceeds for working capital purposes of $327,000 after payment of certain
loan costs and fees, certain property taxes and a payment of $250,000 to
creditors under the Payment Agreement. This section does not reflect the effect
of such loan. A Form 8-k containing more detail on the loan will be filed in the
near future.
24
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is currently involved in the litigation and proceedings
described below.
There are seven pending legal matters before the Company. While not all
matters are material on an individual basis, they would be material to the
Company, if considered together. In general, all litigation against the company,
but not foreign subsidiaries, was stayed during the involuntary bankruptcy
petition described above, but with the dismissal of such petition, that stay was
lifted.
1. INVOLUNTARY PETITION UNDER CHAPTER 7 BANKRUPTCY (United States Bankruptcy
Court for the District of Oregon, No. 699-61663-fra7). On March 30, 1999,
certain of the Company's trade creditors filed an involuntary petition for
relief under Chapter 7 of the United States Bankruptcy Code in the United States
Bankruptcy Court for the District of Oregon.
The Company has negotiated a settlement with the creditors that filed
the Involuntary Petition as described under "Tentative Settlement of Involuntary
Petition" in the May 3, 1999 Form 8-K and under "Payment Agreement" in the June
28, 1999 Form 8-K. In general, under the terms of the settlement, creditors
holding undisputed, non-contingent, liquidated claims against the Company
(approximately $2.5 million in the aggregate) will receive payments from the
Company as follows: $250,000 within 60 days after the order dismissing the
Involuntary Petition; $200,000 each calendar quarter after the first payment is
made; and the remaining unpaid balance of such claims, without interest, all due
and payable in one year. Such payments will be secured by a lien against the
Company's improved real property located in Salem, Oregon, subject to a senior
lien to secure financing for the Company up to a maximum amount of $500,000
which may be increased to $750,000 if the $250,000 initial payment is made
timely to such creditors. Alternatively, at the Company's option, such creditors
will receive payments of 85% of the amount of their claims, in full
satisfaction, within 60 days after an order dismissing the Involuntary Petition
(Dismissal) becomes final. The settlement was approved by over 90% of the
Company's creditors (by number and dollar amount of claims) with undisputed
claims. Most, but not all creditors, are covered by the settlement.
2. SANDRA TEAL V. MORROW SNOWBOARDS, INC. (United States District Court,
District of Oregon, No. 99-6005-HO). The lawsuit filed by a former employee
is a civil action for declaratory injunctive relief, damages and attorneys'
fees for federal claims pursuant to the Family and Medical Leave Act of 1993,
29 U.S.C. (S) 2601-2619 (1994) ("FMLA Claims"). The action also includes
supplemental claims under the Oregon Family Leave Act, ORS 659.470 to 659.494
("OFLA Claims") and ORS 659.030 (prohibiting employment discrimination based
on sex). The FMLA Claims allege that Morrow violated the plaintiff's leave
and re-employment rights. For the FMLA Claims, the plaintiff seeks
reinstatement to her former position, compensatory damages estimated to
exceed $50,000, and equivalent liquidated damages, plus attorneys' fees. The
OFLA Claims are similar to the FMLA Claims. For the OFLA Claims, the
plaintiff seeks reinstatement
25
<PAGE>
to her former position, compensatory damages estimated to
exceed $50,000, plus attorneys' fees. Additionally, under Oregon law, the
plaintiff seeks damages for Morrow's alleged sex discrimination in hiring new
employees to perform duties that plaintiff performed, reinstatement to her
former position, compensatory damages estimated to exceed $50,000, and
punitive damages in excess of $50,000, plus attorneys' fees. The Company
believes it has a reasonable basis for defending against such claims, but
there can be no assurance the Company will be successful in its defense.
Because a jury may award significant compensatory damages, liquidated damages
and punitive damages for these types of claims if the jury finds the
allegations to be true, a judgment against the Company could be material and
could have a material adverse impact upon the Company, its financial
condition and continued operations. The Company intends to vigorously defend
against these claims.
3. VENDOR CLAIM. Pama Limited, a Hong Kong company ("Pama") was an agent of
Westbeach for fall 1997 production and fall 1998 sales samples. Pama claims
approximately $84,000 was owing for services provided. Westbeach claims Pama
failed to perform given that fall 1998 samples were not timely delivered and
that certain surcharges were not agreed to. The parties are in discussions to
settle this matter.
4. MICHAEL JOSEPH FASHION AGENCY, INC. V. MORROW SNOWBOARDS, INC. (Supreme
Court, Province of British Columbia, No. C981832). Michael Joseph Fashion
Agency Inc. ("Michael Joseph"), the Company's former Western Canadian sales
representative, filed a suit in Vancouver, British Columbia claiming damages
of approximately $127,000 (U.S. Dollars), together with interest, attorneys'
fees and certain litigation costs. Michael Joseph is seeking approximately
$60,000 for lost sales commissions due to the alleged termination of its
sales representative relationship without adequate notice under Canadian
common law principles, approximately $60,000 for alleged lost sales
commissions on gray market goods shipped through unauthorized distribution
channels in its exclusive sales territory and the balance for certain
expenses incurred. The Company has retained legal counsel in Vancouver,
British Columbia to defend this action. The Company believes it has a
reasonable basis for defending against any such claim, but there can be no
assurance the Company will be successful in this defense.
5. MARMOT MOUNTAIN LTD. V. MORROW SNOWBOARDS, INC. (United States District
Court for the Northern District of California, No. C99-1786). Marmot Mountain
Ltd. (MML) is seeking payment of damages in the amount of $130,000 plus
interest at the legal rate on $60,000 of such amount from January 15, 1998,
and on $70,000 of such amount from January 15, 1999. In its complaint, MML
alleges breach of a contract whereby MML agreed to provide the Company with
design, manufacturing and merchandising services related to snowboard
apparel. A tentative settlement of $35,500 has been reached.
6. AMERI-TOOL INDUSTRIES, INC. V. MORROW SNOWBOARDS, INC. (Marion County, Oregon
Circuit Court, No. 98C19786). Ameri-Tool is seeking payment for molded plastic
products and related goods furnished to the Company in the amount of $169,405,
together with interest. The Company believes that the Company and Ameri-Tool,
subsequent to their initial agreement for the sale of such goods, entered into a
revised payment arrangement with regard to such products, in addition to other
agreements regarding the delivery by Ameri-Tool of additional products and
tooling. The Company has filed an answer containing a counterclaim for alleged
damage incurred by the Company due to Ameri-Tool's failure to deliver the
products and tooling in accordance with the revised agreement. Morrow does not
disagree with the amount claimed by Ameri-Tool. This matter is believed resolved
by the agreement with Ameri-Tool to receive payment under the Payment Agreement.
26
<PAGE>
7. EMPIRE OF CAROLINA, INC. ("EMPIRE") V. MORROW SNOWBOARDS, INC. Empire has
asserted rights to a breakage fee of $500,000 and reimbursement of its costs
under the Letter of Intent with the Company dated March 2, 1999. The Company has
responded that it believes the Letter of Intent was terminated without any
obligation on the Company's part to pay such a fee or reimburse any costs. The
Company believes it has a reasonable basis for that position and will vigorously
defend against any action by Empire seeking such fee.
An award of damages or the expenditure of significant sums in some or a
combination of some of the matters described above could have a material adverse
effect on the Company's financial condition and results of operations. The
Company's financial condition and capital resources may also adversely affect
its ability to vigorously defend any action.
ITEM 2. CHANGES IN SECURITIES.
--None--
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
--None--
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
--None--
ITEM 5. OTHER INFORMATION
The Company previously reported information regarding a
"principal shareholder" in its Form 8-K dated June 28, 1999 and filed July 13,
1999. Based on the Schedule 13-D filed by Capitol Bay Management, Inc. ("CBM"),
Capitol Bay Securities, Inc. ("CBS") and Steve Kircher (collectively, the
"Reporting Persons") on July 16, 1999, the Company is correcting certain
information in that Form 8-K under the heading "Principal Shareholder; Potential
Control and Influence." As previously reported, CBM has the right to convert
$500,000 of convertible debt held by CBM into 2,000,000 shares of the Company's
Common Stock (no par value) ("Common Stock") and to acquire another 1,000,000
shares of Common Stock for cash, all the shares of Common Stock would be issued
for a consideration of $.25 per share. After such conversion and purchase, CBM
would own beneficially and of record 3,180,400 shares of the outstanding
9,176,556 shares of the Company's Common Stock outstanding, or 34.662% of the
total outstanding Common Stock. Further, 180,400 shares of Common Stock reported
on such Form 8-K as owned by CBM are actually owned of record and beneficially
by CBS, such share ownership constituting 2.92% of the Company's outstanding
Common Stock currently. Further, Steve Kircher is the sole owner of CBM and CBS,
and may be deemed to be the beneficial owner of all 3,180,400 shares of Common
Stock held or acquired by CBM and CBS. Further, the mailing address for CBM,
CBS, and Steve Kircher is 2424 Professional Drive, Roseville, California 95661.
As previously noted, if such rights to acquire Common Stock were fully
exercised, such outstanding shares if voted together may have sufficient voting
power to control matters submitted to the Company's shareholders for approval,
including the election of the Company's Board of Directors. See the Form 8-K for
June 28, 1999 filed July 13, 1999.
27
<PAGE>
The information contained herein is based on the Schedule 13-D filed by
CBM, CBS and Steve Kircher on July 19, 1999. In such schedule 13-D, the
Reporting Persons noted that the shares were acquired for investment purposes in
the ordinary course of business. They further noted that the Reporting Persons
have no present plan or proposal as to any specific actions regarding such
shares currently or actions related to the Company, its policies or its Board of
Directors. The Reporting Persons noted they may decide in the future, should
they believe that the Common Stock continues to be undervalued, to increase
their overall ownership of shares through, among other things, the purchase of
additional shares on the open market or in private transactions, through tender
offer or otherwise, on such terms and at such times as the Reporting Persons may
deem advisable and/or to propose a transaction pursuant to which all or a
portion of the Company shall be sold, and in connection therewith Reporting
Persons may seek to acquire control of the Company and negotiate transactions or
otherwise. The Schedule 13-D also noted that the Reporting Persons may also seek
in the future to have one or more of their representatives appointed to the
Company's Board of Directors, by agreement or otherwise, including running its
own slate of nominees at an annual or special meeting of the Company. Further,
the Schedule noted that the Reporting Persons may in the future propose other
matters for consideration and approval by the Company's shareholders or Board of
Directors, but have not identified any such matters at this time.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits: 27.1 - Financial Data Schedule
Reports on Form 8-K
A current report on Form 8-K dated January 22, 1999, was filed on
February 1, 1999, to report NASDAQ-Amex informed the Company that listing
conditions were not met.
A current report on Form 8-K dated March 2, 1999, was filed on March 9,
1999, to report the Company entered into a non-binding letter of intent with
Empire of Carolina, Inc. in which Empire would provide $2,000,000 in financing.
A current report on Form 8-K dated March 15, 1999, was filed on March
22, 1999, to report the termination of the non-binding letter of intent between
the Company and Empire of Carolina, Inc.
A current report on Form 8-K dated June 28, 1999 was filed on July 13,
1999 to report the termination of the involuntary bankruptcy proceeding, the
Payment Agreement and the right of Capitol Bay to acquire the Company's Common
Stock.
28
<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 September 3, 1999.
MORROW SNOWBOARDS, INC.
By: /S/ P. Blair Mullin
P. Blair Mullin
PRESIDENT (1)
(PRINCIPAL EXECUTIVE OFFICER)
By: /S/ P. Blair Mullin
P. Blair Mullin
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
(1) No Chief Executive Officer is appointed. Under the Company's
Bylaws, if no Chief Executive Officer is appointed, the President acts in such
capacity and has the authority of a Chief Executive Officer.
29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> DEC-27-1998
<PERIOD-END> MAR-27-1999
<CASH> 729
<SECURITIES> 0
<RECEIVABLES> 1,490
<ALLOWANCES> 0
<INVENTORY> 1,260
<CURRENT-ASSETS> 4,167
<PP&E> 3,560
<DEPRECIATION> 0
<TOTAL-ASSETS> 11,775
<CURRENT-LIABILITIES> 5,576
<BONDS> 0
0
0
<COMMON> 27,116
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 11,775
<SALES> 1,945
<TOTAL-REVENUES> 1,945
<CGS> 1,222
<TOTAL-COSTS> 1,222
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17
<INCOME-PRETAX> (1,299)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,449)
<DISCONTINUED> 150
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,299)
<EPS-BASIC> (.21)
<EPS-DILUTED> (.21)
</TABLE>
