UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
Commission File Number 0-27002
GRANITE BAY TECHNOLOGIES, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
California 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)
(916) 315-2021
----------------------------------------------------
(Registrant's telephone number, including area code)
MORROW SNOWBOARDS, INC.
----------------------------------------
(Former name, changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X yes no
The number of shares outstanding of the registrant's common stock, no par value,
as of November 2, 2000, was 19,143,840.
<PAGE>2
<TABLE>
<S> <C>
GRANITE BAY TECHNOLOGIES, INC.
INDEX
Page Number
------------
Part I Financial Information
Item 1. Financial Statements (Unaudited):
Balance Sheets at September 30, 2000
and January 1, 2000.................................................................3
Statements of Operations
for the Three and Nine Months Ended
September 30, 2000, and September 25, 1999..........................................4
Statement of Shareholder's Equity for
the Nine Months Ended September 30, 2000............................................5
Statements of Cash Flow for
the Nine Months Ended September 30, 2000,
and September 25, 1999 .............................................................6
Notes to Financial Statements ......................................................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................................16
Part II Other Information
Item 1. Legal Proceedings..................................................................21
Item 2. Changes in Securities..............................................................21
Item 3. Default Upon Senior Securities.....................................................21
Item 4. Submission of Matters to a Vote of Security Holders................................22
Item 5. Other Information..................................................................22
Item 6. Exhibits and Reports on Form 8-K...................................................22
Signatures..................................................................................23
</TABLE>
<PAGE>3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GRANITE BAY TECHNOLOGIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
<TABLE>
<S> <C> <C>
ASSETS September 30, January 1,
2000 2000
------------- ----------
Current assets:
Cash and cash equivalents $ 372 $ 1,930
Accounts receivable,
net of allowance for uncollectible accounts 2,295 --
Inventories 1,569 --
Prepaid expense 359 127
Refundable income taxes -- 54
Net current assets of discontinued operations 24 2,332
------------- ----------
Total current assets 4,619 4,443
------------- ----------
Property and equipment, net 11,061 3,061
------------- ----------
Other assets:
Investments 1,000 1,000
Goodwill, net 6,186 --
Net non-current assets of discontinued operations -- 72
Other assets, net 12 --
------------- ----------
Total other assets 7,198 1,072
------------- ----------
Total Assets $ 22,878 $ 8,576
============= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 3,392 $ 2,796
Accrued liabilities 980 502
Notes payable, short term 650 --
Current portion of long term debt -- --
Net current liabilities of discontinued operations 55 --
------------- ----------
Total current liabilities 5,077 3,298
Long-Term Debt, Net of Current Portion 2,100 675
------------- ----------
7,177 3,973
------------- ----------
Shareholders' Equity
Preferred stock, no par, 10,000,000 shares authorized
no shares issued or outstanding -- --
Common stock, no par, 40,000,000 shares authorized,
18,740,199 issued September 30, 2000; and 40,504 27,866
9,176,556 issued January 1, 2000
Common stock - subscribed 765 --
Note receivable - sale of common stock (150) --
Accumulated deficit (25,487) (23,252)
Cumulative translation adjustment 69 (11)
------------- ----------
Total Shareholders' Equity 15,701 4,603
------------- ----------
Total Liabilities and Shareholders' Equity $ 22,878 $ 8,576
============= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>4
GRANITE BAY TECHNOLOGIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
<TABLE>
<S> <C> <C> <C> <C>
For The Nine Months Ended For The Three Months Ended
-------------------------------- -----------------------------
September 30, September 25, September 30, September 25,
2000 1999 2000 1999
-------------- --------------- ------------- -------------
Net sales $ 12,231 $ -- $ 3,043 $ --
Cost of goods sold 9,073 -- 2,256 --
-------------- --------------- ------------- -------------
Gross profit 3,158 -- 787 --
-------------- --------------- ------------- -------------
Operating expenses:
Selling, marketing & customer service 851 -- 246 --
Engineering 133 -- 47 --
General and administrative 4,034 498 1,290 166
-------------- --------------- ------------- -------------
Total operating expenses 5,018 498 1,583 166
-------------- --------------- ------------- -------------
Operating loss (1,860) (498) (796) (166)
-------------- --------------- ------------- -------------
Other income (expense):
Lease Income 73 -- 33 --
Interest expense (150) -- (102) --
Other income 72 -- 60 --
-------------- --------------- ------------- -------------
(5) -- (9) --
-------------- --------------- ------------- -------------
Loss from continuing operations before income taxes (1,865) (498) (805) (166)
-------------- --------------- ------------- -------------
Income tax benefit (expense) -- -- -- --
-------------- --------------- ------------- -------------
Loss from continuing operations (1,865) (498) (805) (166)
-------------- --------------- ------------- -------------
Income (loss) on discontinued snowboard operations 11 166 -- 23
Loss on discontinued apparel operations (112) (3,388) 50 (1,549)
Loss on disposition of apparel operations (266) -- -- --
-------------- --------------- ------------- -------------
Loss from discontinued snowboard and apparel
operations, net of taxes before extraordinary item (367) (3,222) 50 (1,526)
-------------- --------------- ------------- -------------
Extraordinary Loss on Extingushment of Debt -- (287) -- --
-------------- --------------- ------------- -------------
Net loss $ (2,232) $ (4,007) $ (755) $ (1,692)
============== =============== ============= =============
Net loss per common share:
Loss from continuing operations - basic $ (0.11) $ (0.08) $ (0.04) $ (0.03)
Loss from continuing operations - diluted $ (0.11) $ (0.08) $ (0.04) $ (0.03)
Loss from discontinued operations - basic $ (0.02) $ (0.52) $ 0.00 $ (0.25)
Loss from discontinued operations - diluted $ (0.02) $ (0.52) $ 0.00 $ (0.25)
Loss from extraordinary item - basic $ -- $ (0.05) $ -- $ --
Loss from extraordinary item - diluted $ -- $ (0.05) $ -- $ --
Net loss - basic $ (0.13) $ (0.65) $ (0.04) $ (0.27)
Net loss - diluted $ (0.13) $ (0.65) $ (0.04) $ (0.27)
Weighted average number of shares used in computing per
share amounts:
Basic 16,929,293 6,176,556 18,248,033 6,176,556
============== =============== ============= =============
Diluted 16,929,293 6,176,556 18,248,033 6,176,556
============== =============== ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>5
GRANITE BAY TECHNOLOGIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands, except share data)
(unaudited)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Common Cumulative
Common Stock Stock Note Accumulated Translation
Shares Amount Subscribed Receivable Deficit Adjustment Total
------------- ------------ ------------- ------------ ----------- ------------ --------
Balance, January 1, 2000 9,176,556 $ 27,866 $ (23,255) $ (11) $ 4,600
Comprehensive Income (Loss)
Net loss (2,232) (2,232)
Translation adjustment 80 80
Net Comprehensive Income (Loss) (2,152)
Stock issued for acquisition 2,680,000 7,236 7,236
Stock issued in private placement 6,841,293 5,384 5,384
Common stock options exercised 42,350 18 18
Common stock - subscribed 765 765
Note receivable - sale of common stock (150) (150)
------------- ------------ ------------- ------------ ----------- ------------ --------
Balance, September 30, 2000 18,740,199 $ 40,504 $ 765 $ (150) $ (25,487) $ 69 $ 15,701
============= ============ ============= ============ =========== ============ ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>6
GRANITE BAY TECHNOLOGIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<S> <C> <C>
Year to Date
September 30, September 25,
2000 1999
-------------- --------------
Cash flows from operating activities:
Net loss $ (1,865) $ (498)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss on discontinued operations (367) (3,222)
Extraordinary loss on extingishment of debt -- (287)
Depreciation and amortization 1,369 700
Provision for uncollectible accounts 66 --
Loss on impairment of assets -- 1,135
Loss on retirement of fixed assets 33 48
Loss on sale of discontinued operations 112 --
Other -- (16)
Changes in operating assets and liabilities
(Increase) decrease in accounts receivable (842) 3,980
(Increase) decrease in inventories 269 2,491
(Increase) decrease in prepaid expenses (54) 415
(Increase) decrease in refundable deposits 54 (679)
(Increase) decrease in refundable income taxes -- (53)
(Increase) decrease in other assets 810 1,008
Increase (decrease) in accounts payable (470) 1,186
Increase (decrease) in accrued liabilities 255 (1,788)
Increase (decrease) in income tax payable -- 20
Increase (decrease) in accrued loss on disposal -- (1,498)
-------------- --------------
Net cash provided by (used in) operating activities (629) 2,942
-------------- --------------
Cash flows from investing activities:
Business acquisitions (4,272) --
Acquisition of property and equipment (285) (139)
Proceeds from sale of equipment -- 470
-------------- --------------
Net cash provided by (used in) investing activities (4,557) 331
-------------- --------------
Cash flows from financing activities:
Proceeds from issuance of common stock 5,252 --
Proceeds from issuance of common stock subscriptions 765 --
Proceeds from issuance of long-term liabilities 2,100 1,425
Principal payments on note payable (4,391) (2,251)
Payment of loan fees (162) --
Line of credit borrowings, net -- (3,698)
-------------- --------------
Net cash provided by (used in) financing activities 3,564 (4,524)
-------------- --------------
Decrease in cash and cash equivalents (1,622) (1,251)
Cash and cash equivalents at beginning of period 1,994 1,348
-------------- --------------
Cash and cash equivalents at end of period $ 372 $ 97
============== ==============
Supplemental disclosures:
Cash paid for interest $ 150 $ 73
============== ==============
Non-cash financing transactions:
Issued common stock in exchange for a note receivable from employee $ 150 $ --
============== ==============
Acquisition of PRC Companies
Fair value of assets acquired $ 11,017
Liabilities assumed (2,213)
Payment due to complete acquisition (4,532)
--------------
Cash paid to acquire PRC Companies $ 4,272
==============
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>7
GRANITE BAY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND CURRENT EVENTS
Description of Business
Granite Bay Technologies, Inc. and subsidiaries (the "Company"),
headquartered in Rocklin, California, was organized in October 1989 as Morrow
Snowboards, Inc., and recently changed its name to Granite Bay Technologies,
Inc. upon its change in state of incorporation from Oregon to California. The
Company is currently 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 when that business was discontinued. 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 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 consisted of European sales and a Washington State corporation
whose principal activity was U.S. retail sales. 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., an
unrelated company. 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, located in
Rocklin, California, through the issuance of 2,680,000 shares of common stock.
The acquisition was accounted for by the purchase method of accounting.
Concurrently, IDW through its wholly owned subsidiary, International
DisplayWorks (Hong Kong) Ltd. ("IDWHK"), acquired 100% of the shares of MULCD
Microelectronics Company Ltd.
<PAGE>8
("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 a $1 million deposit, 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, and which was further subject to adjustment upon
final accounting based upon such items as actual inventory balances, accounts
receivables and advances to operations by the Judicial Managers during the
period that the Company operated the PRC Companies prior to the final
accounting. The Company made further payments of $650,015 during the third
quarter, and as of September 30, 2000, the Company still owed $650,000, which
may be further adjusted to reflect final accounting adjustments and other items
under negotiation. Any adjustments to the final purchase price have been
reflected as an adjustment to the recorded values of the assets purchased in the
period in which the accounting and final settlement is made. (Note 4).
In addition to the acquisition of the PRC Companies, 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. The Company presently expects to be fully able to
finance the final payment, if such payment is 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.
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. 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.
<PAGE>9
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
During the quarter ended September 30, 2000, the Company also received
$1,524,000 upon the private sale of common stock at $1.50 per share and issued
$150,000 of common stock in exchange for a note receivable from employee. The
net proceeds to the Company were used for continuing operations and to meet
certain scheduled payments of debt.
The Company previously completed a $4,350,000 private placement of common
stock in the quarter ended April 1, 2000, and the proceeds for the offering were
used to facilitate the acquisition of the PRC Companies, mentioned above.
Although initial operating results have not demonstrated sufficient income to
meet operations, Management believes that these companies will generate
sufficient net income in future periods which will create sufficient 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, or obtaining it on terms
favorable to the Company.
Going Concern
The Independent Auditors' Report on the Company's financial statements for
the year ended January 1, 2000, included in the 1999 Form 10-K, contains
disclosures about circumstances that raised substantial doubt about the
Company's ability to continue as a going concern. Further, the independent
auditor's report for the PRC Companies for the year ended December 31, 1999,
also contains a going concern qualification.
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 September 30,
2000, condensed statements of operations for the three and nine month periods
ended September 30, 2000, and September 25, 1999, and the condensed statements
of cash flows for the three and nine month periods ended September 30, 2000, and
September 25, 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,
<PAGE>10
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 September 30, 2000, are not
necessarily indicative of the operating results of the full year.
Certain amounts in the fiscal 1999 financial statements have been
reclassified to conform with the presentation in the fiscal 2000 financial
statements.
Fiscal Year
The Company uses a 52 or 53 week fiscal year ending on the Saturday
nearest December 31st. Accordingly, the third fiscal quarter of 2000 began on
July 2, 2000, and ended on September 30, 2000, whereas the corresponding quarter
of the prior fiscal year began on June 27, 1998, and ended on September 25,
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. The
Company maintains its cash in bank deposit accounts which, at times, may exceed
federally insured limits.
Financial Instruments
A financial instrument is cash or a contract that imposes or conveys a
contractual obligation, or right, to deliver or receive cash or another
financial instrument. The fair value of financial instruments approximated their
carrying value as of September 30, 2000, and January 1, 2000.
Inventories
Inventories for continuing operations are stated at the lower of cost or
market. 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.
<PAGE>11
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 $288,000 at
September 30, 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. 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. Advertising costs for the
three and nine months ended September 30, 2000, were $7,800 and $70,000,
respectively.
Revenue Recognition
The Company recognizes revenue from the sale of its products when the
products are shipped to customers.
Income Taxes
The Company accounts for income taxes under the provisions of Statement
of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes,
using the liability method. The estimated future tax effect of differences
between the basis in assets and liabilities for tax and accounting purposes is
accounted for as deferred taxes. In accordance with the provisions of SFAS No.
109, a valuation allowance would be established to reduce deferred tax assets if
it were likely that all, or some portion, of such deferred tax assets would not
be realized. A valuation allowance, equal to net deferred tax assets, has been
established due to the uncertainty of realizing deferred tax assets.
Stock-Based Compensation Plans
As permitted by SFAS No. 123, Accounting for Stock-Based Compensation,
the Company has elected to measure and record compensation costs relative to
employee stock option and purchase plans in accordance with the provisions of
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and make pro forma disclosure of net income and earnings per share as
if the fair value based method of valuing stock options has been applied.
<PAGE>12
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>
<S> <C> <C>
Nine Months Ended
-------------------------------
Sept 30, 2000 Sept 25, 1999
------------- -------------
Shares
Weighted average shares outstanding 16,929,293 6,176,556
Stock options and common stock subscribed(1) - --
-------------- -------------
Weighted average shares outstanding for diluted EPS 16,929,293 6,176,566
</TABLE>
(1) The effect of potential common securities of 1,856,848 shares and 2,310,548
shares are excluded from the dilutive calculation for periods ended
September 30, 2000, and September 25, 1999, 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.
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.
<PAGE>13
3. INVENTORIES
Inventories consisted of the following:
Sept. 30, January 1,
2000 2000
-------- ---------
(in thousands)
Finished goods $ 487 $ -
Work-in-process 614 -
Raw materials 1,193 -
Less reserve for obsolete inventory (725) -
-------- ---------
Total continuing operations inventories, net $ 1,569 $ -
======== =========
Total discontinued operations inventories, net $ $ 70
======== =========
4. NOTES PAYABLE AND LONG-TERM DEBT
During the quarter ended September 30, 2000, the Company refinanced the
Oregon real estate. Proceeds from the $2.1 million note payable were used to
retire the $675,000 Bridge Loan and the $1,370,000 due to former Morrow
creditors from discontinued operations included in accounts payable. The note
bears interest at 14% with interest due monthly and principal due August 1,
2003. The note is personally guaranteed by the Company's Chairman of the Board.
To complete the acquisition of the PRC Companies, a payment of $2,837,000,
plus interest at the rate of 6% per annum, was due May 31, 2000, of which
$650,000 remained unpaid at September 30, 2000, subject to further adjustment
and offset due to final accounting. The final payment and amount of any offset
is being negotiated and is expected to be closed early in the fourth quarter.
While a proposed offset and final settlement payment has been proposed, there is
no assurance that the final payment will occur in the early part of the
fourth quarter (Note 1).
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 nine months ended September 30, 2000. There were no continuing reportable
segments for the nine months ended September 25, 1999.
<PAGE>14
<TABLE>
<S> <C> <C> <C>
Nine Months Ended September 30,
2000
-------- -------- --------
USA Asia Totals
-------- -------- --------
Electronic Parts Revenue $4,559 $ 7,672 $12,231
Segment operating profit/(loss) $ (55) $ (501) $ (556)
Interest expense $ - $ (13) $ (13)
Depreciation and amortization $ 12 $ 988 $ 1,000
Segment continuing operation assets $ 811 $11,697 $12,508
Capital asset expenditures for continuing operations $ 138 $ 111 $ 249
</TABLE>
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, which has since been refunded to the Company.
Operating results of the snowboard operations 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
are shown separately in the Consolidated Statements of Operations as income
(loss) from discontinued apparel operations, net of tax.
<PAGE>15
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.
The actual purchase price may be further adjusted, as provided in the purchase
agreement, based on final accounting for inventories and accounts receivable
(Note 1).
<PAGE>16
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.
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 Granite Bay Technologies,
Inc. ("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
<PAGE>17
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:
o IDW's ability to increase sales, including sales of higher margin
products and sales in Asia, Europe and the United States;
o 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;
o IDW's ability to provide significant design and manufacturing services
for those
companies in a timely and cost-efficient manner;
o The Company's ability to raise sufficient working capital to fund
IDW's operations and growth;
o Over the long run, the Company's ability to raise additional capital
for IDW to buy equipment and expand plant facilities to expand into
higher margin products;
o IDW's success in maintaining customer satisfaction with its design and
manufacturing services and its products' performance and reliability;
o 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;
o Market acceptance and demand for customer products and the product
life;
o The availability and effective utilization of manufacturing capacity;
o The quality, availability and cost of raw materials, equipment and
supplies;
o Continuation of IDW's wage cost advantages;
o The cyclical nature of the electronics industries;
<PAGE>18
o Technological changes and technological obsolescence; and
o 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 September 30, 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 and nine months ended
September 25, 1999, and the year ended January 1, 2000 are comprised solely of
businesses that have been discontinued, they have been omitted from this
management's discussion and analysis.
Comparison of the Three and Nine Months Ended September 30, 2000, and September
25, 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.
Net Sales. Net sales for continuing operations for the three and nine
months ended September 30, 2000, were $3,043,000 and $12,231,000, which
represents continuing operations of IDW from the acquisition date of January 31,
2000, through September 30, 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 three and
nine months ended September 30, 2000, were $787,000 and $3,158,000, which
represents continuing operations of IDW from the acquisition date of January 31,
2000, through September 30, 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, and general and
administrative expenses. These expenses were $1,583,000 and $5,018,000 for the
three and nine months ended September 30, 2000, which represents continuing
operations of IDW from the acquisition date of January 31, 2000, through
September 30, 2000, and ongoing corporate administration expenses of the
Company.
Selling, Marketing and Customer Service. Selling, marketing and customer
service expenses for the three and nine months ended September 30, 2000, were
$246,000 and $851,000, which represents continuing operations of IDW from the
acquisition date of January 31, 2000, through September 30, 2000. Significant
elements of this expense consists of staff and employee related expenses of
$546,000, travel and related expenses of $85,000, and advertising expense of
$70,000.
<PAGE>19
Engineering. Expenses incurred during the three and nine months ended
September 30, 2000, were $47,000 and $133,000, of which $39,000 and $102,000
were related to employee expenses.
General and Administrative. General and administrative expenses for the
three and nine months ended September 30, 2000, were $1,290,000 and $4,034,000,
which represents continuing operations of IDW from the acquisition date of
January 31, 2000, through September 30, 2000, and continuing corporate
administration of the Company. The significant elements of IDW expenses relate
to staff and employee expenses of $1,766,000, rent, telephone, and utilities
expenses of $173,000, legal expenses of $87,000, and local government fees of
$88,000. Significant elements of the Company's ongoing corporate administration
include $258,000 in accounting fees, $137,000 in legal fees, $116,000 in
salaries and related benefits, $288,000 in amortization of goodwill from the IDW
acquisition, and $211,000 for insurance.
Interest Expense. Interest expense was $102,000 and $150,000 for the
three and nine months ended September 30, 2000, which relates to payments on the
bridge loan and building loan.
Other Income. Other income was $93,000 and $145,000 for the three and
nine months ended September 30, 2000. This relates to $72,000 in interest income
and $73,000 in lease income related to ongoing corporate administration.
Net Loss. Net loss for continuing operations for the three and nine
months ended September 30, 2000, were $805,000 and $1,865,000, respectively, of
which $763,000 represents net loss from continuing operations of IDW from the
acquisition date of January 31, 2000, through September 30, 2000, while
$1,102,000 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 gain from discontinued
snowboard operations of $0 and $11,000 for the three and nine months ended
September 30, 2000, compared to a loss on discontinued snowboard operations of
$23,000 for the three months ended September 25, 1999, and income of $166,000
for the nine months ended September 25, 1999.
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 nine months of 2000 of
$378,000, with $112,000 due to working capital adjustments to 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 gain from discontinued apparel operations of
$50,000 in the third quarter of 2000, resulting from a change in estimates of
activities to wind down discontinued operations.
Market Risk
The Company accumulates foreign currency in payment of accounts 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 $278,000 using the quarter-end
exchange rate. The potential loss in fair value resulting from an adverse change
in quoted foreign currency exchange rates of 10% amounts to $27,800. Actual
<PAGE>20
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 nine months ended
September 30, 2000, was $629,000 resulting primarily from the net loss of
$1,865,000 for the period.
Net cash used in investing activities for the nine months ended
September 30, 2000, totaled $4,557,000 resulting from the $4,272,000 payment
towards the final purchase of the PRC Companies and $285,000 for acquisition of
equipment.
Net cash provided by financing activities for nine months ended
September 30, 2000, was $3,564,000 resulting from the $6,017,000 sale of common
stock, $2,100,000 refinance of real estate and the $4,391,000 principal
reduction of debt.
During this quarter, on August 1, 2000, the Company refinanced its
Salem, Oregon facility for $2.1 million, the proceeds of which were used to make
the required final payments to the former Morrow secured creditors, including
interest on that indebtedness.
The Company previously reported fixed obligations of $6,270,000 to be
funded by June 30, 2000, consisting of $3,945,000 relating to the Purchase
Agreement, $1,650,000 to the former Morrow creditors Agreement and $675,000 to
the Bridge Loan, of which approximately $2,800,000 was funded through operating
cash flow. The Company refinanced its Oregon real estate for $2.1 million and
the fixed obligations were further funded in part through approximately $665,000
in net proceeds received through the private placement of equity securities in
the second quarter, and an additional $1,679,000 in this quarter.
The Company has revised prior forecasts on capital expenditures and
moved implementation of certain programs, including its proposed Chip on Glass
business, until the first and second quarters of fiscal year 2001. Accordingly,
the Company anticipates requiring approximately $400,000 for working capital
related principally for inventory and meeting backlog through the remainder of
the current fiscal year. The Company believes that it can adequately meet the
short term capital requirements through equity placements and debt financing. No
assurance can be made that such financing will be available, or that it will be
available on terms favorable to the Company.
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
<PAGE>21
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.
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 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 has been completed in this lawsuit and trial is expected in October
2000. Although the Company believes that the claims are without merit and it
intends to defend the claims vigorously, there can be no assurance that an award
of damages may not result from the trial. Further, any significant award may
adversely affect the Company's financial condition and capital resources. The
action was settled for payment of $12,500 (CD) which has been paid and the
Company is waiting for final dismissal papers.
ITEM 2. CHANGES IN SECURITIES.
In the third quarter 2000, the Company, in another private placement
sold 510,000 shares of common stock in the aggregate at $1.50 per share, to
accredited investors 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-None -
<PAGE>22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Five (5) proposals were submitted to shareholders at the Company's
annual meeting of shareholders held on September 28, 2000, and the final count
of votes on each proposal is listed below:
<TABLE>
<S> <C> <C> <C> <C>
For Withhold
---------- --------
Proposal #1 - Election of Directors
William Hedden 13,697,250 12,010
Stephen Kircher 13,674,063 35,195
Thomas Manz 13,697,250 12,010
Anthony Genovese 13,672,050 37,210
P. Blair Mullin 13,699,013 10,247
For Against Abstain Withheld
---------- ------- ------- ---------
Proposal #2 - Approval of Company's 13,638,878 31,005 39,377
name change to Granite Bay
Technologies
Proposal #3 - Approval of the change 10,110,189 31,965 42,792 3,524,314
of the state of incorporation from
Oregon to California
Proposal #4 - Approval of the 12,861,672 429,747 417,841
Company's 2000 Equity Incentive Plan
Proposal #5 - Approval of Perry-Smith 14,397,250 4,593 41,922
LLP as the Company's independent
auditors
</TABLE>
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
<PAGE>23
A current report on Form 8-K dated October 27, 2000, and filed with the
SEC on November __, 2000, reported the reincorporation and name change of the
Company and filed the Articles of Incorporation and related documents.
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 November ___, 2000.
GRANITE BAY TECHNOLOGIES, INC.
/s/ P. BLAIR MULLIN
-------------------------------------------
P. Blair Mullin, President(1)
(Principal Executive Officer, Principal
Accounting Officer and Principal Financial
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.
