<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 APRIL 1, 2000
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 (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
------------------------------
599 MENLO DRIVE, SUITE 200
ROCKLIN, CALIFORNIA 95765
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(916) 315-2021
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 May 1, 2000 was 17,666,506.
1
<PAGE>
MORROW SNOWBOARDS, INC.
INDEX
<TABLE>
<CAPTION>
<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 Flow 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion & Analysis of Financial Condition
and Results of Operations 17
Part II. Other Information
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 24
Item 3. Defaults upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MORROW SNOWBOARDS, INC.
For the Quarter Ended
April 1, 2000
3
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
DBA GRANITE BAY TECHNOLOGIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
-------- ---------
ASSETS April 1, January 1,
2000 2000
-------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 598 $ 1,930
Accounts receivable,
less allowance for uncollectible accounts 4,036 --
Receivable - private placement 64 --
Inventories 1,815 --
Prepaid expense 126 127
Refundable income taxes 54 54
Refundable VAT taxes 30 --
Net current assets of discontinued operations 190 2,332
-------- --------
Total current assets 6,913 4,443
-------- --------
Property and equipment, at cost 10,180 3,061
Other assets
Investments 1,000 1,000
Goodwill, net 6,402 --
Net non-current assets of discontinued operations 7 72
Other assets, net 110 --
-------- --------
Total Other Assets 7,519 1,072
-------- --------
Total Assets $ 24,612 $ 8,576
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,627 $ 2,796
Accrued liabilities 424 502
Notes payable, short term 4,532 --
Current portion of long term debt 675 675
-------- --------
Total Current Liabilities 10,258 3,973
-------- --------
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,
17,666,506,and 17,666,506 shares issued and outstanding 38,957 27,866
Accumulated deficit (24,605) (23,252)
Cumulative Translation Adjustment 2 (11)
-------- --------
Total Shareholders' Equity 14,354 4,603
-------- --------
Total Liabilities and Shareholders' Equity $ 24,612 $ 8,576
======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
4
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
DBA GRANITE BAY TECHNOLOGIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Quarter Ended
----------------------------
April 1, March 27,
2000 1999
------------ ------------
<S> <C> <C>
Net sales $ 2,583 $ --
Cost of goods sold 2,356 --
------------ ------------
Gross profit 227 --
------------ ------------
Operating expenses:
Selling, marketing & customer service 119 --
Engineering, advance design and product
management -- --
General and administrative 1,085 87
------------ ------------
Total operating expenses 1,204 87
------------ ------------
Operating loss (977) (87)
Other income (expense):
Interest expense (27) --
Other income (expense) 8 --
------------ ------------
Total other income (expense) (19) --
------------ ------------
Loss from continuing operations (996) (87)
Income tax benefit (expense) -- --
------------ ------------
Loss from continuing operations, net of taxes (996) (87)
------------ ------------
Income (loss) on discontinued snowboard operations (4) 150
Loss on discontinued apparel operations (353) (1,362)
------------ ------------
Loss from discontinued snowboard and apparel
operations, net of taxes (357) (1,212)
------------ ------------
Net loss $ (1,353) $ (1,299)
============ ============
Net loss per common share:
Loss from continuing operations - basic $ (0.06) $ (0.01)
Loss from continuing operations - diluted $ (0.06) $ (0.01)
Loss from discontinued operations - basic $ (0.02) $ (0.20)
Loss from discontinued operations - diluted $ (0.02) $ (0.20)
Net loss - basic $ (0.08) $ (0.21)
Net loss - diluted $ (0.08) $ (0.21)
Weighted average number of shares used in computing per share amounts:
Basic 17,666,506 6,176,556
============ ============
Diluted 17,666,506 6,176,556
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
5
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
DBA GRANITE BAY TECHNOLOGIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK CUMULATIVE
-------------------------- ACCUMULATED TRANSLATION
SHARES AMOUNT DEFICIT ADJUSTMENT TOTAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 2000 9,176,556 $ 27,866 $ (23,252) $ (11) $ 4,603
Stock issued for acquisition 2,680,000 7,236 7,236
Stock issued in private placement 5,800,000 3,850 3,850
Common stock options exercised 9,950 5 5
Repurchase of common stock --
Net loss (1,353) (1,353)
Translation adjustment 13 13
-----------
Total Comprehensive Loss (1,340)
------------------------------------------------------------------------
Balance, April 1, 2000 17,666,506 $ 38,957 $ (24,605) $ 2 $ 14,354
========================================================================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
6
<PAGE>
MORROW SNOWBOARDS, INC. AND SUBSIDIARIES
DBA GRANITE BAY TECHNOLOGIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
----------------------
APRIL 1, MARCH 27,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,353) $ (1,299)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 536 477
Loss on retirement of fixed assets 33 --
Loss on sale of westbeach 112 --
Other -- 3
Changes in operating assets and liabilities
(Increase) decrease in accounts receivable (139) 3,353
(Increase) decrease in inventories 23 2,909
(Increase) decrease in prepaid expenses 84 157
(Increase) decrease in refundable income taxes (6) --
(Increase) decrease in other assets 597 850
Increase (decrease) in accounts payable (334) 122
Increase (decrease) in accrued liabilities (385) (849)
Increase (decrease) in accrued loss on disposal -- (1,498)
-------- --------
Net cash provided by/(used in) operating activities (832) 4,225
-------- --------
Cash flows from investing activities:
Acquisition of PRC Companies (4,272) --
Acquisition of property and equipment (147) (115)
Proceeds from sale of equipment -- 470
-------- --------
Net cash provided by/(used in) investing activities (4,419) 355
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 3,855 --
Principal payments on long-term liabilities -- (1,501)
Line of credit borrowings, net -- (3,698)
-------- --------
Net cash provided by/(used in) financing activities 3,855 (5,199)
-------- --------
Decrease in cash and cash equivalents (1,396) (619)
Cash and cash equivalents at beginning of period 1,994 1,348
-------- --------
Cash and cash equivalents at end of period $ 598 $ 729
======== ========
Supplemental disclosures:
Cash paid for interest $ 20 $ 17
======== ========
Acquisition of PRC Companies
Fair value of assets assumed $ 11,017
Liabilities assumed (2,213)
Payment due to complete acquisition (Note 4) (4,532)
--------
Cash paid to acquire PRC Companies $ 4,272
========
</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 AND CURRENT EVENTS
DESCRIPTION OF BUSINESS
Morrow Snowboards, Inc. and subsidiaries, dba Granite Bay Technologies
(the "Company"), headquartered in Salem, Oregon, which was organized in October
1989, is engaged in (i) the design, manufacture and worldwide distribution of
liquid crystal displays (LCDs), modules, and assemblies for major OEM
applications in telecommunications, automotive, industrial, medical and consumer
products and (ii) the holding of an investment in Globalgate e-Commerce, Inc.
The Company was originally organized 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, which business the Company conducted from organization through
November 1999. 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 had three
subsidiaries, an Austrian organization whose principal activity consists of a
European sales warehousing operation, a United Kingdom organization consisting
of European sales and a Washington State corporation whose principal activity is
U.S. 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"). On
November 12, 1999, a subsidiary of the Company, Westbeach Canada ULC, sold all
of its "Westbeach" operations, along with all apparel inventories to Westbeach
Sports, Inc. The results of operations for these business segments have been
reflected as discontinued operations in the accompanying Consolidated Statements
of Operations.
In November and December 1999, the Company purchased shares of
Globalgate e-Commerce, Inc. ("Globalgate"), a recently formed company whose
business purpose is to build a dominant scalable e-commerce platform for
merchants selling to businesses and consumers. Globalgate's investments consist
of six operating companies, including majority ownership of YellowPages.Com,
Inc., a business directory web-site; BrightInfo.com, Inc., which provides
technology to power online selling sites; Spark Online, Inc., which connects
internet advertisers and ad space; TradeWind CTS, Inc., a business-to-business
marketplace for non-production goods; ThinkMart.com, a developer of a variety of
e-marketplaces; and GrapeVINE, a technology that permits personalization of
e-commerce products and services. The Company hopes to make a return on its
investment in Globalgate, if Globalgate or one or more of its subsidiaries are
successful. However, there is no assurance that the Company will recover its
investment or realize a profit from its investment.
On January 31, 2000, the Company acquired 100% of the outstanding
shares of International DisplayWorks, Inc., ("IDW") a Delaware corporation,
headquartered in Rocklin, California.
IDW, after the acquisition of the companies described below, is engaged
in the design, manufacturing and worldwide distribution of liquid crystal
displays (LCDs), modules and assemblies for major OEM applications in
telecommunications, automotive, industrial, medical and consumer products. The
acquisition was accomplished by the issuance of 2,680,000 shares of Morrow's
Common Stock to the IDW shareholders in exchange for their common stock and was
accounted for by the purchase method of accounting.
8
<PAGE>
Concurrently, IDW through its wholly owned subsidiary, International
DisplayWorks (Hong Kong) Ltd. ("IDWHK"), acquired 100% of the shares of MULCD
Microelectronics Company Ltd. ("MULCD") and Vikay Shenzhen Technology
Development Company, Ltd. ("VKSTD"). MULCD and VKSTD are engaged in the
manufacturing and assembly of LCDs and modules in Peoples Republic of China
("PRC Companies"). MULCD and VKSTD manufacture LCDs and assemblies for the USA,
Europe and Far East markets. The acquisition, which was accounted for by the
purchase method of accounting, required an initial payment of $4.2 million with
the balance due in two installments: $600,000, due on May 1, 2000, and $3.945
million, due May 31, 2000. The payment due May 1, 2000, was paid in the amount
of $1 million Singapore dollars, which converts to $587,000 US dollars with the
difference being due to currency exchange. The balance of $3.945 million due May
31, 2000, is being renegotiated and is expected to be paid toward the end of the
second quarter.
The PRC Companies are located in Heng Gang, Shenzhen, China. The PRC
Companies are involved in the manufacture of liquid crystal displays (LCDs),
turnkey assemblies, front panel display systems, subassemblies with integrated
circuits ("ICs") and products incorporating LCDs for use in the end products of
original equipment manufacturers ("OEMs"), including telecommunications and
other electronics equipment, including cellular telephones. The PRC Companies
employ approximately 1,350 people. The manufacturing facilities consist of three
buildings totaling approximately 270,000 sq.ft. with its own electric power
generation plant (diesel fuel), situated on four acres in Heng Gang Industrial
Estate, located 30 minutes from the city of Shenzhen and about one hour from
Hong Kong. The PRC Companies' facilities are on land leased pursuant to a
50-year land lease expiring in 2043. The PRC Companies must pay annual land rent
of approximately US $2,500, subject to certain periodic rent increases. Space is
also leased in Singapore for sales and design staff personnel of the PRC
Companies.
Following the acquisition of the PRC Companies, IDW, together with IDW
HK and the PRC Companies, will design, market and produce LCDs and products
incorporating LCDs, principally in Asia, the United States and Europe, with
design and manufacture of such products to be at the facilities of the PRC
Companies, with a focus on high-volume original equipment manufacturers ("OEMs")
who are leaders in their fields. IDW's corporate mission is to be the most
customer-oriented LCD company in the world. Unless the context indicates
otherwise, IDW means IDW, IDW HK and the PRC Companies and references to IDW or
IDW's electronics business, unless the context indicates otherwise, is to the
business conducted by the PRC Companies prior to their acquisition by IDW HK and
by IDW and its subsidiaries thereafter.
Over 60% of IDW's sales in 1999 consisted of custom display modules
developed in close collaboration with its customers. Devices designed and
manufactured by IDW include applications in telecommunications (cell phones and
other wireless communication services), as well as in medical equipment,
appliances, utility applications, automotive equipment, retail and office
equipment, and consumer electronic products, including entertainment systems.
Targeted areas for new applications include office equipment (copiers, facsimile
machines, and printers) and high resolution graphic display products for
personal digital assistance and small computer and map displays. Approximately
30% of 1999 total sales were to the office machinery market (principally
calculators) and approximately 20% to the telecommunications industry
(principally cellular telephones) with the balance spread over a variety of
products and industries. IDW currently specializes in LCD components and
technology and providing design and manufacturing services for its customers.
IDW currently markets its services primarily in Hong Kong and, to a lesser
extent, Asia, but intends to expand sales efforts in the United States, Europe
and Asia. IDW maintains design centers at its manufacturing facilities and in
Singapore, a country which contains corporate headquarters or regional
headquarters for many major electronics firms.
9
<PAGE>
The consolidated financial statements include the wholly owned
subsidiaries, IDW (a Delaware corporation), 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.
CURRENT EVENTS
The Company completed a $4,350,000 private placement of common stock
subsequent to year end. Consistent with management's strategic plans for the
Company, the proceeds for the offering were used to facilitate the acquisition
of the PRC Companies, mentioned above. Management believes that these companies
will generate sufficient net income and liquidity to sustain the Company's
operations. Further, in the event of a capital shortfall, management of the
Company believes that it has the ability to raise additional equity capital.
However, there can be no assurances that the Company's recent acquisitions will
operate profitably or that management will be successful in raising additional
equity capital.
On February 1, 2000, using funds advanced by the Company to IDW, IDW HK
acquired pursuant to a Sale and Purchase Agreement ("Purchase Agreement") from
the Judicial Manager, KMPG Peat Marwick, in a Judicial Management Proceeding in
Singapore (a form of bankruptcy proceeding), all of the outstanding voting stock
and rights to acquire stock and other equity interests in MULCD and VKSTD. The
Singapore Judicial Management Proceeding resulted from the bankruptcy of the
parent of the PRC Companies, Vikay Industrial, Ltd. ("Vikay"), headquartered in
Singapore. Prior to December 6, 1997, Vikay was a publicly listed company on the
SESDAQ Exchange in Singapore, with its trading privileges suspended when it went
under judicial management on December 6, 1997. The total net adjusted purchase
price for the equity interests was $9,803,524 (US$) with $1 million being paid
by IDW prior to acquisition by Morrow, $4,271,729 paid at closing, and notes for
$4,531,795, bearing interest at the rate of 6% per annum, given for the balance
of the purchase price, with such notes originally being due and payable in the
amount of $3,571,403 plus accrued interest on May 1, 2000 and the balance of
$960,392 plus accrued interest on May 31, 2000, such numbers being based on the
January 27, 2000 conversion rate of the Singapore dollar into the US Dollar of
1.6865 to 1. As noted, the initial payment for the PRC Companies was funded
through loans from the Company. Proceeds from collection of PRC Companies'
accounts receivable, that were to be applied to the payments due under the
Purchase Agreement, were used to fund higher than expected initial operating
losses for the PRC Companies to date and higher than expected costs in
establishing IDW's California and Singapore offices. IDW HK renegotiated the May
1 and May 31, 2000 payments due under the Purchase Agreement with the Judicial
Manager. As renegotiated, the May 1, 2000 payment was $587,000 ($1 million
Singapore dollars) and the May 31, 2000 payment will be $3.945 million, plus
interest with the total of the May 1 and May 31, 2000 payments of $4.5 million,
plus interest, being unchanged. The balance of $3.945 million due May 31, 2000,
is being renegotiated and is expected to be paid toward the end of the second
quarter. While oral agreement has been reached this restructuring, there is no
assurance that the restructuring will occur. Further, there is no assurance that
the Company will be able to make the payments provided under the Purchase
Agreement when due, as presently structured or expected to be restructured. If
that occurs, the Company could face a risk of the loss of its investment in the
PRC Companies. See "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" regarding
the Company's capital and resources to finance such payments and the risks
associated therewith.
Besides the Purchase Agreement, IDW HK entered into a Supplemental Deed
and Charge ("Charge Agreement") among IDW and IDW HK, as Chargors, and Vikay
Industrial (Hong Kong) Ltd. and Vikay Industrial, Ltd., as Chargees. Under the
Charge Agreement, IDW pledged the Common Stock of IDW HK and the PRC Companies'
assets to secure the payment of the balance of the purchase price for the PRC
Companies. While the Company presently expects to be fully able to finance
those payments, if such payments are not timely made, the security interest in
the IDW HK Common Stock and/or the PRC Companies' assets could be foreclosed
upon on short notice and IDW's investment through IDW HK in the PRC Companies
lost.
10
<PAGE>
The Independent Auditors' Report for the Company's financial statements
as of and for the year ended January 1, 2000 included in the 1999 Form 10-K
contains a going concern qualification in Note 1 to the Consolidated Financial
Statements. Further, the Company has been advised by the auditors for the PRC
Companies that the financial statements for the PRC Companies when issued will
contain a going concern qualification. The going concern qualification relates
to the facts that the auditors are (i) unable to verify with the PRC Companies'
former parent and its affiliates (collectively "Former Parent") receivables on
the books of the PRC Companies due from the Former Parent in the approximate
amount of $39.3 million or accounts payable to the Former Parent in the amount
of approximately $21.5 million and (ii) due to the existing judicial management
procedure in Singapore affecting the Former Parent, the ability of the Former
Parent to pay such receivables or the ability of the PRC Companies to offset
such receivables against the accounts payable owing to the Former Parent. While
the judicial managers for the Former Parent have indicated they will enter into
a "novation agreement" that would allow the offset of the receivables against
the accounts payable, such novation agreement cannot be entered until certain
further action is taken in the judicial proceeding and, there is no assurance,
that such agreement will be entered or that the Former Parent will otherwise
have the resources to pay the receivables of the Former Parent held by the PRC
Companies. The Company understands that as a matter of law, the PRC Companies
cannot offset the receivables from the Former Parent against the accounts
payable, absent such novation agreement. While such receivables and accounts
payable are reflected in the PRC Companies financial statements for prior
periods, except for approximately $2.3 million of accounts payable assumed by
IDW HK in acquiring the PRC Companies, such receivables and accounts payables
are neither an asset or liability of the PRC Companies on an ongoing basis.
There is no assurance that the Company will not encounter future
financial problems due to unexpected contingencies, unsuccessful results,
adverse results in pending litigation, or other factors.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed balance sheet as of April 1, 2000,
condensed statements of operations for the three month periods ended April 1,
2000, and March 27, 1999, and the condensed statements of cash flows for the
three month periods ended April 1, 2000, and March 27, 1999, have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation SX. Accordingly, they do not include all of the information and
footnote disclosures required by generally accepted accounting principles for
complete financial statements. It is suggested that these condensed financial
statements be read in conjunction with the audited financial statements and
notes thereto included in the registrant's (the Company's) Annual Report for the
Fiscal Year Ended January 1, 2000, on Form 10-K. In the opinion of management,
the accompanying condensed consolidated financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the Company's financial position and results of operations
for the periods presented. The results of operations for the period ended April
1, 2000 are not necessarily indicative of the operating results of the full
year.
11
<PAGE>
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Certain amounts in the fiscal 1999 financial statements have been
reclassified to conform with the presentation in the fiscal 2000 financial
statements.
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 2000 began on January 2,
2000, and ended on April 1, 2000, whereas the corresponding quarter of the prior
fiscal year began on December 27, 1998, and ended on March 27, 1999.
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 April 1, 2000, and March 27, 1999.
INVENTORIES
Inventories for continuing operations are stated at standard cost.
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 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 IDW acquisition is being amortized over 15
years using the straight-line method and is net of amortization of $72,000 at
April 1, 2000. 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.
WARRANTY COSTS
The Company asks that the customer report defects within fifteen days
of receipt of product.
12
<PAGE>
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
All products are fully replaceable if defective. The Company manufactures custom
products to customer specifications and does not anticipate it will incur a
material amount of warranty expense.
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 using the liability method so
that deferred taxes are determined based on the estimated future tax effects of
differences between the financial statement and tax bases of assets and
liabilities given the provisions of enacted tax laws and tax rates. Deferred
income tax expenses or credits are based on the changes in the financial
statement bases versus the tax bases in the Company's assets or liabilities from
period to period.
STOCK-BASED COMPENSATION PLANS
The Company accounts for its stock-based plans under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees".
PRODUCT DEVELOPMENT COSTS
Expenditures associated with the development of new products and
improvements to existing products are expensed as incurred.
NET LOSS PER SHARE
The shares used in the calculation of net loss per share are computed
as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------
Shares APRIL 1, 2000 MARCH 27, 1999
------------- --------------
<S> <C> <C>
Weighted average shares outstanding 17,666,506 6,176,556
Stock option and convertible debenture dilution (1) -- --
--------------------------
Weighted average shares outstanding for diluted EPS 17,666,506 6,176,556
--------------------------
</TABLE>
(1) The effect of potential common securities of 570,898 shares and 391,398
shares are excluded from the dilutive calculation for periods ended
April 1, 2000, and March 27, 1999, respectively, as their effect would
be antidilutive.
13
<PAGE>
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year balances to
conform to the current period presentation. Such reclassifications have no
effect on previously reported results of operations.
3. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
April 1, Jan 1,
2000 2000
-------- ------
(in thousands)
<S> <C> <C>
Finished goods $ 42 $ --
Work-in-process 664 --
Raw materials 1,109 --
Goods in transit -- --
------ ------
--
Less reserve for obsolete inventory --
------ ------
Total continuing operations inventories, net $1,815 $ --
====== ======
Total discontinued operations inventories, net $ -- $ 70
====== ======
</TABLE>
4. NOTES PAYABLE AND LONG-TERM DEBT
On August 25, 1999, the Company borrowed $675,000 (the "Bridge Loan")
secured by a first lien against the Company's approximately 103,000 square foot
offices and warehouse in Salem, Oregon and related real estate ("Real
Property"). The amounts owing under the Payment Agreement are also secured by a
trust deed against the Real Property. The security interest in the Real Property
under the Payment Agreement is subordinate up to $750,000 to the Trust Deed
signed in connection with the Bridge Loan. Interest only payments are due in
monthly installments of $6,750 at 12%, with principal balance due and payable in
full June 28, 2000. The $675,000 outstanding balance as of April 1, 2000, is
classified as Current Portion of Long Term Debt in the accompanying consolidated
balance sheet.
14
<PAGE>
4. NOTES PAYABLE AND LONG-TERM DEBT (continued)
To complete the acquisition of the PRC Companies, a payment of $3.945
million, plus interest, is due May 31, 2000. This payment is being renegotiated
and is expected to be paid toward the end of the second quarter. While oral
agreement has been reached, there is no assurance that the restructuring will
occur (Note 1).
On May 31, 2000, a payment of $200,000 is due under the terms of the
settlement of the Involuntary Petition. This payment relieves amounts owing to
certain creditors in accounts payable. See "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" regarding the Involuntary Petition.
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 two major geographic territories. The product segments are categorized as
liquid crystal displays and modules. The geographic territories are the United
States and Asia. 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.
The following represents continuing operations segment and geographical data for
the three months ended April 1, 2000. There were no continuing reportable
segments for the three months ended March 27, 1999.
<TABLE>
<CAPTION>
Three Months Ended April 1, 2000
USA Asia Totals
--------------------------------
<S> <C> <C> <C>
Revenues:
Liquid crystal displays $ 492 $ 593 $ 1,085
Modules 680 818 1,498
-------- -------- --------
Total revenues 1,172 1,411 2,583
Segment operating profit / (loss) 881 (1,550) (669)
Interest expense -- -- --
Depreciation and amortization 2 419 421
Segment continuing operation assets 2,064 11,452 13,516
Segment asset expenditures for continuing
operations 93 27 120
</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.
In October 1999, Westbeach's Bellevue, Washington retail store lease,
inventory and trade fixtures were sold for approximately $196,000, with the
payment amount including the assumption of accounts payable related to that
store's inventory, assumption of the retail store lease (including a release of
Westbeach) and the payment of the balance of the purchase price of approximately
$48,000 payable in installments without interest based on subsequent store sales
on January 5, 2000 and December 31, 2000.
On November 12, 1999, Westbeach sold substantially all its assets,
including its remaining two retail stores in Vancouver and Whistler, British
Columbia, and its apparel line, together with the Westbeach trademarks, to
Westbeach Sports, Inc., a British Columbia corporation, not affiliated with
either the Company or Westbeach. The purchase price for the assets sold was
$2,680,000. The sale was pursuant to an Asset Purchase Agreement that contained
certain representations and warranties by Westbeach to the buyer and
indemnification of the Buyer by Westbeach in certain events for certain
liabilities or any inaccuracies in such representations and warranties. The sale
price was subject to adjustment, based on the final inventory and accounts
receivable counts, and there was a $100,000 holdback to fund certain
adjustments. Currently, only $30,000 is held back, as the remaining $70,000 was
refunded to the Company and a loss of $112,000 was included in loss from
discontinued apparel operations, which loss resulted from the sale price
adjustments.
Operating results of the snowboard operations for the first three
months and the first quarter of 1999 are shown separately in the Consolidated
Statements of Operations as income (loss) from discontinued snowboard
operations, net of tax. Operating results of the apparel operations for the
first three months and the first quarter of 1999 are shown separately in the
Consolidated Statements of Operations as income (loss) from discontinued apparel
operations, net of tax. The Consolidated Statements of Cash Flows have not been
restated to reflect discontinued operations presentation.
7. IDW ACQUISITION
On January 31, 2000, the Company acquired all of the outstanding
securities of International DisplayWorks, Inc., ("IDW") in exchange for
2,680,000 newly-issued shares of the Company's common stock valued at
$7,236,000. The transaction has been accounted for as a purchase with the excess
of the purchase price over the fair value (which approximated historical
carrying value) of the net assets acquired allocated to goodwill. The operations
of IDW have been included in the accompanying financial statements since the
date of acquisition.
16
<PAGE>
7. IDW ACQUISITION (continued)
Summarized unaudited 1999 and 2000 pro forma results of continuing
operations, which includes the PRC Companies, assuming the IDW acquisition took
place on January 1 of each year, are as follows:
<TABLE>
<CAPTION>
Quarters Ended
(in thousands)
April 1, March 27,
2000 1999
----------- -----------
<S> <C> <C>
Net sales $ 3,227 $ 3,302
Cost of goods sold 2,284 3,377
Operating expenses 1,084 904
Net loss (206) (979)
Weighted average shares outstanding 1,000,010 1,000,010
Net loss per share:
Basic $ (0.21) $ (0.98)
Diluted $ (0.21) $ (0.98)
</TABLE>
8. SUBSEQUENT EVENTS
The Company is seeking to refinance its Salem, Oregon facility for
$1.5 to $2.0 million and to raise, through a private placement of its Common
Stock, a minimum of $3.0 to $4.0 million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Through March 1999, the Company 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. 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. In
November 1999, the Company sold its "Westbeach" brand name to Westbeach Sports,
Inc. resulting in discontinued operations. As a result of the sale of Westbeach,
the Company had no continuing operations until January 31, 2000, with its
acquisition of International DisplayWorks, Inc. ("IDW"), a Delaware corporation,
and IDW's subsequent acquisition on February 1, 2000, through its wholly owned
subsidiary, International DisplayWorks Hong Kong ("IDW HK"), a company organized
under the laws of Hong Kong, People's Republic of China ("PRC") of (i) MULCD
Microelectronics Company Ltd. ("MULCD") and (ii) IDW Shenzhen Technology
Development Company, Ltd. ("VKSTD"), two companies organized under PRC law
(collectively, the "PRC Companies"). IDW, IDW HK and the PRC Companies operate
as an integrated company.
17
<PAGE>
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.
When used in this report, the words "anticipate," "believe," "estimate,"
"expect" and similar expressions as they relate to Morrow Snowboards, Inc. dba
Granite Bay Technologies ("the Company") or its management, including without
limitation, IDW (as defined herein) and the Company's other subsidiaries, are
intended to identify such forward-looking statements. The Company's actual
results, performance or achievements could differ materially from the results
expressed in, or implied by these forward-looking statements. The Company wishes
to caution readers of the important factors, among others, that in some cases
have affected, and in the future could affect the Company's actual results and
could cause actual consolidated results for fiscal year 2000, 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, the
Company's change in business lines, the ability to obtain capital and other
financing in the amounts and the times needed (including to complete payment of
the acquisition costs of the PRC Companies and fund these companies' growth and
operations), realization of forecasted income and expenses by the PRC Companies,
initiatives by competitors, price pressures, changes in the political climate
for business in China, and the loss of one or more of IDW's significant
customers, and the risk factors listed from time to time in the Company's SEC
reports and risk factors listed below, including, in particular, the factors and
discussion in Item 7 of the 1999 Form 10-K.
The Company's principal assets consist of its equity interests in
Globalgate e-Commerce, Inc. ("Globalgate") and IDW. No immediate return is
expected from the Company's investment in Globalgate. A wide variety of factors
will affect IDW's operating results and could adversely impact its net sales and
profitability. Significant factors in IDW's success will be its ability to
establish and, in certain cases, re-establish design and manufacturing
relationships with key OEM customers that will generate sufficient orders,
including orders of higher margin products, to increase revenues and
profitability. Although IDW products are incorporated in a wide variety of
communications, consumer and appliance products, approximately 20% of its total
sales in 1999 were for display modules for cellular products and 30% for use in
office machines (primarily calculators). A slowdown in demand for cellular
products or calculators that utilize IDW's devices as a result of economic or
other conditions and the market served by IDW or other factors could adversely
affect IDW's operating results. IDW's products are sold into an industry
characterized by increasingly rapid product turnaround, increasingly shorter
lead times, product obsolescence, order cancellation and other factors that make
it difficult to forecast future orders, production and personnel needs and other
resources requirements with a high level of certainty. IDW's ability to
anticipate such factors and respond to them in a timely fashion will affect its
ability to utilize its manufacturing capacity effectively, maintain a proper
product mix and avoid downtimes due to product conversions and other factors.
Such uncertainty also creates difficulties in maintaining adequate supplies of
raw materials to meet shifting customer needs and customer orders placed on
short notice.
Other factors, many of which could be beyond the Company's and IDW's
control, include the following:
- IDW's ability to increase sales, including sales of higher
margin products and sales in Asia, Europe and the United
States;
- IDW's ability to expand sales into other industries that have
significant growth potential and to establish strong and
long-lasting relationships with companies in those industries;
18
<PAGE>
- IDW's ability to provide significant design and manufacturing
services for those companies in a timely and cost-efficient
manner;
- Granite Bay's and IDW's ability to raise sufficient working
capital to fund IDW's operations and growth;
- Over the long run, Granite Bay's ability to raise additional
capital for IDW to buy equipment and expand plant facilities
to expand into higher margin products;
- IDW's success in maintaining customer satisfaction with its
design and manufacturing services and its products'
performance and reliability;
- Customer order patterns, changes in order mix, and the level
and timing of customer orders placed by customers that IDW can
complete in a calendar quarter;
- Market acceptance and demand for customer products and the
product life;
- The availability and effective utilization of manufacturing
capacity;
- The quality, availability and cost of raw materials,
equipment and supplies;
- Continuation of IDW's wage cost advantages;
- The cyclical nature of the electronics industries;
- Technological changes and technological obsolescence; and
- Competition and competitive pressure on prices.
RESULTS OF OPERATIONS
The only continuing operations of the Company were the IDW operations,
acquired on January 31, 2000. The purchase method of accounting applies to the
acquisition of IDW; as a result, balance sheet information for IDW and its
subsidiaries is only included as of April 1, 2000 and operating results are only
included from January 31, 2000 for IDW, and, from February 1, 2000 for IDW HK
and the PRC Companies. Because the three months ended March 27, 1999, and the
year ended January 1, 2000, reflect all discontinued operations, they have been
omitted from this comparison.
COMPARISON OF THE THREE MONTHS ENDED APRIL 1, 2000, AND MARCH 27, 1999
CONTINUING OPERATIONS. The Company's continuing operations consist of
IDW and the IDW HK subsidiaries (the PRC Companies), MULCD and VKSTD, which
manufacture liquid crystal displays and assemblies. These continuing operations
stem from the acquisition of IDW on January 31, 2000 and the acquisition of the
PRC Companies on February 1, 2000. As previously mentioned, the Company sold its
Morrow business to K2 in March 1999, and its Westbeach business to Westbeach
Sports, Inc. in November 1999, creating discontinued snowboard operations and
discontinued apparel operations.
19
<PAGE>
NET SALES. Net sales for continuing operations for the first three
months of 2000 were $2,583,000, which represents continuing operations of IDW
from the acquisition date of January 31, 2000, through April 1, 2000. All prior
year sales are a part of the Company's discontinued operations and therefore not
reflected in this comparison.
GROSS PROFIT. Gross profit for continuing operations in the first three
months of 2000 was $227,000, which represents continuing operations of IDW from
the acquisition date of January 31, 2000, through April 1, 2000. All prior year
sales and cost of sales are a part of the Company's discontinued operations and
therefore no gross profit is reflected in this comparison.
OPERATING EXPENSES. Operating expenses for continuing operations
consist of selling, marketing and customer service; engineering, advance design
and product development; and general and administrative expenses. These expenses
were $1,204,000 for the first three months of 2000, which represents continuing
operations of IDW from the acquisition date of January 31, 2000, through April
1, 2000.
SELLING, MARKETING AND CUSTOMER SERVICE. Selling, marketing and
customer service expenses for the first three months of 2000 were $119,000,
which represents continuing operations of IDW from the acquisition date of
January 31, 2000, through April 1, 2000. Significant elements of this expense
consists of staff and employee related expenses of $64,000, travel and related
expenses of $30,000, and advertising expense of $12,000.
ENGINEERING, ADVANCE DESIGN AND PRODUCT MANAGEMENT. There were no
continuing operations or discontinued operations expenses incurred during the
first quarter of 2000 for engineering, advance design, and product management.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
first three months of 2000 were $1,085,000, which represents continuing
operations of IDW from the acquisition date of January 31, 2000, through April
1, 2000 and continuing operations expenses for ongoing corporate administration
of the Company. The significant elements of the IDW expenses relate to staff and
employee related expenses of $572,000, relocation expenses of $15,000, rent,
telephone, and utilities expenses of $52,000, legal expenses of $28,000, and
local government fees of $29,000. Significant elements of the continuing
operations expenses for the Company's ongoing corporate administration include
$93,000 in accounting fees, $34,000 in legal fees, $30,000 in salaries, and
$72,000 in amortization of goodwill from the IDW acquisition.
INTEREST EXPENSE. Interest expense was $27,000 for the first three
months of 2000, which relates to payments on the $675,000 outstanding bridge
loan.
OTHER INCOME/EXPENSE. Other income was $8,000 for the first three
months of 2000, which represents continuing operations of IDW from the
acquisition date of January 31, 2000, through April 1, 2000. This relates to
$11,000 in interest income and $3,000 in other expense for IDW.
NET LOSS. Net loss for continuing operations for the first three months
of 2000 was $996,000, of which $725,000 represents net loss from continuing
operations of IDW from the acquisition date of January 31, 2000, through April
1, 2000, while $271,000 represents net loss from continuing operations for
ongoing corporate administration of the Company.
DISCONTINUED OPERATIONS. In March of 1999, the Company sold all of its
snowboard, boot and binding assets to K2. There was a net loss from discontinued
snowboard operations of $4,000 in the first quarter of 2000 compared to income
on discontinued snowboard operations of $150,000 in the first quarter of 1999.
20
<PAGE>
On November 12, 1999, the Westbeach subsidiaries were sold creating
discontinued apparel operations for the apparel business. Westbeach had a loss
from discontinued apparel operations in the first quarter of 2000 of $353,000,
due to $112,000 in working capital adjustments on the purchase price paid by
Westbeach Sports, Inc., $22,000 in legal fees related to the discontinuance, and
general and administrative fees incurred to wind down operations. This compares
to a loss from discontinued apparel operations of $1,362,000 in the first
quarter of 1999.
YEAR 2000
The Company and its subsidiaries have updated and tested their software
to correct for the Year 2000 problem. However, there can be no assurances these
software corrections will be free of errors. IDW's manufacturing facilities
operate independently of the municipal power supply, as IDW has its own power
generation plant onsite. IDW does not expect Year 2000 problems to adversely
affect operations or its power supply. IDW has been verifying that its vendors
are Year 2000 compliant. While that verification has not been completed, to
date, IDW has not encountered any significant problems with any suppliers it has
contacted. Presently, the Company does not expect to incur any material expenses
due to Year 2000 compliance or interruptions in its business from Year 2000
compliance issues of others, including its vendors and customers.
MARKET RISK
The Company accumulates foreign currency in payment of accounts
(principally Hong Kong dollars and 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 $153,000. The potential loss in fair value resulting from
an adverse change in quoted foreign currency exchange rates of 10% amounts to
$13,000. 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 to pay certain existing fixed obligations
and provide working capital for the PRC Companies and to fund administrative
overhead for the parent company. The increase in cash at January 1, 2000,
partially resulted from decisions by the Company and its Canadian subsidiary to
terminate certain business lines in 1999, the sale of which generated working
capital for the Company to fund the payment of Company debt and provide
additional funds for investment. As discussed below, the Company will require
additional working capital to implement its current Business Plan for IDW.
Net cash used in operating activities for the first quarter of 2000 was
$832,000, resulting primarily from the net loss of $1,353,000. There was a
decrease in other assets of $597,000 mainly attributable to the reduction of
amounts owed from Westbeach Sports, Inc. related to the discontinuance of the
apparel operations.
Net cash used in investing activities for the three months ended
April 1, 2000, totaled $4,419,000, resulting from the $4,272,000 initial
payment for the purchase of the PRC Companies and $147,000 for acquisition of
equipment.
21
<PAGE>
Net cash provided by financing activities for the three months ended
April 1, 2000, was $3,855,000 which was the net proceeds of a sale of common
stock, through a private placement of 5.8 million shares.
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 negotiated a settlement with substantially all those creditors
and the Involuntary Petition was dismissed on June 16, 1999. The settlement was
accepted by over 90% of the Company's creditors (by number and dollar amount of
claims) with undisputed claims. Under the terms of the settlement, as reflected
in the Payment Agreement among the Company, certain creditors and others (the
"Payment Agreement"), certain creditors holding undisputed, non-contingent,
liquidated claims against the Company (approximately $2.5 million in the
aggregate) have received or will receive payments from the Company as follows:
$250,000 within 60 days after the order dismissing the Involuntary Petition
(which payment was made on August 28, 1999); $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. All payments required
to date have been timely made. Such payments are secured by a lien against the
Company's Salem, Oregon facility, subject to a senior lien up to $750,000 to
secure a $675,000 principal amount bridge loan or replacement financing
therefore. The Company is current in its payment obligations under the Payment
Agreement. The balance owing as of March 31, 2000, was approximately $1,650,000
with a payment of $200,000 due on May 31, 2000 and the balance of approximately
$1,450,000 due on or before June 28, 2000.
The Company requires capital to pay certain existing fixed obligations
and provide working capital for the PRC Companies and to cover administrative
overhead for the parent company and certain costs related to being a public
company. Additionally, planned future expansion for the PRC Companies includes
an accelerated movement into chip-on-glass ("COG") production and related
product development requiring additional capital of approximately $2.0 million
during the year 2000. Future expansion plans under review for 2001 and
subsequent years include a previously proposed second LCD production line.
Except for the PRC Companies, the Company currently has no operating businesses
that are expected to provide working capital. The PRC Companies are not expected
to generate significant amounts of working capital in the near future and are
expected to require infusions of approximately $500,000 of working capital in
the near future to offset projected near term operating losses and provide a
working capital cushion.
Fixed existing obligations the Company must fund include the following:
<TABLE>
<CAPTION>
PAYMENT OBLIGATION AMOUNT PAYMENT DATE
------------------ ------ ------------
<S> <C> <C>
Purchase Agreement 3,945,000(1)(2) May 31, 2000
Payment Agreement 200,000 May 31, 2000
Payment Agreement 1,450,000 June 28, 2000
Bridge Loan 675,000(2) June 28, 2000
----------
Total $6,270,000
==========
</TABLE>
(1) Payment being renegotiated for payment in second quarter
(2) Does not include interest due with such payment
22
<PAGE>
The Company expects to fund the above obligations from the following
sources:
<TABLE>
<CAPTION>
SOURCE EXPECTED FINANCING AMOUNT
---------------------------------- -------------------------
<S> <C>
Refinance of Salem, Oregon facility $2,000,000
Sale of Company stock 3,000,000
Collection of PRC Companies' Receivables 3,000,000
----------
$8,000,000
==========
</TABLE>
After paying such fixed payment obligations from the expected financing
proceeds, the remaining approximate $1.7 million will be used to fund immediate
projected working capital needs of the PRC Companies' operations at the parent
level and near term capital expenditure plans. The Company is presently
projecting that the PRC Companies will generate positive cash flow in the third
quarter and not require additional working capital for manufacturing operations
thereafter.
The expected $2.0 million of capital expenditures for 2000 will still
need to be financed by the Company. The Company is exploring a number of
alternatives to raise such capital, including sale of its Salem, Oregon
facility, margining IDW's accounts receivable, selling and/or (if available)
borrowing against the Company's Globalgate stock and issuing additional debt or
equity securities.
Any financing, involving equity or rights to acquire equity interests,
would result in dilution in the percentage ownership of existing shareholders
when such equity interests were issued and, depending on the sales price, a
dilution in book value. There is no assurance the expected $4.1 million in
financing needed in May 2000 and $2.1 million needed for the balance of 2000
will be raised or raised in a timely manner. In such event, the Company would
face a loss of its investment in the PRC Companies.
A more detailed discussion of the risks associated with such matters
and other factors that may affect the Company's operations is contained in Item
7 of the Company's Annual Report on Form 10-K for the fiscal year ended January
1, 2000 ("1999 From 10-K") filed with the Securities and Exchange Commission
("SEC") on April 25, 2000.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is currently involved in the litigation and proceedings
described below.
There are two legal matters before the Company, one of which has been
settled (the Empire matter).
1. 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 $127,000 (US$), 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
23
<PAGE>
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. Discovery is underway in this lawsuit and trial
is expected in October 2000.
2. EMPIRE OF CAROLINA, INC. ("EMPIRE") V. MORROW SNOWBOARDS, INC. AND K2, INC.
(Palm Beach County, Florida, Circuit Court of the Fifteenth Judicial Circuit,
No. CL99-3453-AE). Empire has filed a lawsuit claiming 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. In December 1999, the court approved the Company's motion to
dismiss the lawsuit for lack of jurisdiction under Florida law. Empire has
appealed that decision. While that appeal is pending, the parties have agreed to
voluntary mediation of the dispute. No discovery has occurred to date. On May 2,
2000, the parties in the voluntary mediation proceedings agreed to a settlement.
Under the agreed to settlement, the Company will pay Empire $27,500 by May 17,
2000.
An award of damages or the expenditure of significant sums in any 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.
On January 31, 2000, the Company pursuant to a Securities Purchase
Agreement exchanged 2,680,000 shares of its Common Stock (no par value) ("Common
Stock") for all the outstanding securities and rights to acquire securities of
International DisplayWorks, Inc. ("IDW"), a Delaware corporation with offices
and headquarters at 599 Menlo Drive, Suite 200, Rocklin, California 95765;
telephone: 916-415-0645. Following such share exchange, IDW became a wholly
owned subsidiary of the Company. Shares were exchanged in reliance on the
exemptions under Sections 4(2) and 4(6) of the Securities Act of 1933, as
amended, and Rule 506 of Regulation D, promulgated by the SEC under federal
securities laws and comparable exemptions for sales to "accredited" investors
and or private/limited offerings under state securities laws. The Board set the
exchange ratio based on its evaluation of IDW and the then market prices for the
Common Stock and other factors.
Also, on January 31, 2000, the Company, in a private placement
("Private Offering") sold 5,800,000 shares of Common Stock at $.75 per share.
Shares were sold to "accredited" investors only in reliance on the exemptions
under Sections 4(2) and 4(6) of the Securities Act of 1933, as amended, and Rule
506 of Regulation D, promulgated by the SEC under federal securities laws and
comparable exemptions for sales to "accredited" investors under state securities
laws. The Board set the offering price on then market prices and other factors.
The Company engaged Capitol Bay Securities, Inc. ("CBS") as the
placement agent for the Private Offering. As placement agent, CBS received sales
commissions of $435,000 and an expense allowance of $87,000, equal to 12% of the
proceeds raised, and received warrants to acquire 580,000 of the Company's
Common Stock at an exercise price of $.75 per share. CBS is a wholly owned
subsidiary of Capitol Bay Group, Inc. ("CBG") and CBG is wholly owned by Stephen
Kircher, a director of the Company.
24
<PAGE>
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
Reports on Form 8-K
A current report on Form 8-K dated December 30, 1999 and filed with the
SEC on January 10, 2000 reporting a change in stock ownership by a significant
shareholder and reporting an additional acquisition of Globalgate shares.
A current report on Form 8-K dated January 14, 2000 and filed with
the SEC on January 24, 2000, to report a change in certifying accountants.
A current report on Form 8-K dated January 31, 2000 and filed with the
SEC on February 1, 2000 ("IDW Form 8-K") to report the acquisition of IDW, a
Delaware corporation, the private placement sale of 5,800,000 shares with
$4,350,000 in proceeds, and the acquisition by the wholly owned subsidiary, IDW,
of MULCD and VKSTD, two PRC Companies.
Four amendments, filed with the SEC on January 15, 16 and 24 and March
31, 2000, to the current report on Form 8-K dated January 31, 2000 to disclose
further detail related to the IDW, MULCD, and VKSTD acquisitions.
A current report on Form 8-K dated January 31, 2000 and filed with the
SEC on March 17, 2000, to report the expected late filings of (i) the Company's
1999 Form 10-K and (ii) the audited financial statements for the PRC Companies,
to be filed as an amendment, to the IDW Form 8-K.
25
<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
Rocklin, State of California, on May 10, 2000.
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 OFFICER 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.
26
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