<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 PERIOD ENDED DECEMBER 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________
TO ________________
Commission File Number: 1-13042
-------
RIDE, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Washington 91-1571027
- --------------------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8160 304th Avenue Southeast
Preston, Washington 98050
- --------------------------------------------- -----------------------------
(Address of principal executive offices) (Zip Code)
(425) 222-6015
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- --------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, without par value 14,234,821 shares as of February 8, 1999.
<PAGE>
INDEX
RIDE, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets -- December 31, 1998 and
June 30, 1998
Condensed consolidated statements of operations -- three and six month
periods ended December 31, 1998 and period ended December 31,
1997
Condensed consolidated statements of cash flows -- three and six month
periods ended December 31, 1998 and 1997
Notes to condensed consolidated financial statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosure about Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBITS
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RIDE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31,
1998 June 30,
(Unaudited) 1998
-----------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $884 $165
Receivables, less allowance for doubtful accounts of
$456 at December 31, 1998 and $981 at
June 30, 1998 17,704 4,487
Inventories (Note 3) 6,319 9,752
Prepaid expenses and other current assets 751 887
Income taxes receivable 153 1,571
-----------------------------------
Total current assets 25,811 16,862
Plant and equipment, net of accumulated depreciation 4,992 5,792
Notes receivable, net of discount 3,110 1,400
Goodwill, net of accumulated amortization 8,631 9,205
Other assets 1,146 1,345
-----------------------------------
Total assets $43,690 $34,604
-----------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $4,083 $5,918
Accrued expenses 2,535 2,911
Short-term borrowings 14,568 5,544
----------------------------------
Total current liabilities 21,186 14,373
Long-term liabilities 924 979
Shareholders' equity:
Preferred stock 2,690 2,832
Common stock 43,465 43,257
Accumulated other comprehensive loss (219) (163)
Accumulated deficit (24,356) (26,674)
----------------------------------
Total shareholders' equity 21,580 19,252
----------------------------------
----------------------------------
Total liabilities and shareholders' equity $43,690 $34,604
----------------------------------
----------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE>
RIDE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three months ended December 31, Six months ended December 31,
----------------------------------------------------------------------
1998 1997 1998 1997
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 16,117 $ 10,701 $ 34,499 $ 28,916
Cost of goods sold 11,624 8,699 24,023 21,089
---------------------------------------------------------------------
Gross profit 4,493 2,002 10,476 7,827
Selling, general and administrative expenses 4,024 13,901 8,278 18,486
---------------------------------------------------------------------
Operating income (loss) 469 (11,899) 2,198 (10,659)
Sale of subsidiary 680 680
Interest income 103 41 149 92
Interest expense (372) (194) (635) (383)
---------------------------------------------------------------------
Income (loss) before income taxes 880 (12,052) 2,392 (10,950)
Income tax expense 0 868 0 1,309
---------------------------------------------------------------------
Net income (loss) $ 880 $ (12,920) $ 2,392 $ (12,259)
---------------------------------------------------------------------
---------------------------------------------------------------------
Net income per share:
Basic $ 0.07 $ (1.12) $ 0.18 $ (1.07)
Diluted $ 0.05 $ (1.12) $ 0.14 $ (1.07)
Share used in computation of net income per share:
Basic 12,779 11,538 12,699 11,449
Diluted 17,685 11,538 16,606 11,449
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
RIDE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six months ended December 31,
--------------------------------------
1998 1997
--------------------------------------
<S> <C> <C>
Net cash used in operating activities (8,403) $1,282
INVESTING ACTIVITIES:
Acquisitions of Device Mfg Corp. and Smiley Hats, Inc. -- (758)
Purchase of plant and equipment (153) (165)
Payments on note receivable 200 --
Proceeds from SMP sale 250 --
Other (79) (211)
--------------------------------------
Net cash provided by (used in) investing activities 218 (1,134)
FINANCING ACTIVITIES:
Advances (payments) on line of credit 9,048 (4310)
Proceeds from sale of preferred stock -- 2811
Repayments of long term debt (79) (50)
Dividends paid (17) (22)
Other (127) 13
--------------------------------------
Net cash provided by (used in) financing activities 8,904 (1,558)
--------------------------------------
Net increase/(decrease) in cash and cash equivalents 719 (1,410)
Cash and cash equivalents at beginning of period 165 2,742
--------------------------------------
Cash and cash equivalents at end of period $884 $1,332
--------------------------------------
--------------------------------------
SUPPLEMENTAL DISCLOSURE:
Cash paid (received) for income taxes ($1,418) --
Cash paid for interest 384
NONCASH FINANCING ACTIVITY:
Common stock issued in acquisitions -- $1,025
Preferred stock dividend declared not paid (9)
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
RIDE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared by Ride, Inc. (the "Company") in accordance with generally accepted
accounting principles for interim financial statements and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and disclosures required by generally accepted accounting
principles for complete financial statements. In the opinion of the Company's
management, all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation have been included. The Company's revenues are highly
seasonal, occurring primarily between July and December as its products are
shipped to customers. The results of operations for the six month period ended
December 31, 1998, therefore may not be indicative of the results for the full
fiscal year. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the period ended June 30, 1998. All amounts are stated in US dollars.
2. INVENTORIES
Inventories at December 31,
1998 and June 30, 1998 consisted of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
---------------------------------
(In thousands)
<S> <C> <C>
Finished goods $4,974 $8,283
Raw materials and work in process 2,226 2,916
Obsolescence reserve (879) (1,447)
---------------------------------
$6,319 $9,752
---------------------------------
---------------------------------
</TABLE>
3. LINE OF CREDIT AND LONG TERM DEBT
On August 31, 1998, the Company entered into a Loan and Security Agreement
("Agreement") with CIT Group/Credit Finance, Inc. ("CIT") which credit facility
replaces the Company's prior credit facility. The Company's line of credit under
the new credit facility is up to $15.0 million (to be increased to $17.0 million
from October 15 to December 15 each year) for a term of three years. The amount
that may be borrowed is also limited to the sum of (i) 85% of eligible accounts
receivable, provided the dilution does not exceed 5.0% and after implementation
of an 11.0% dilution reserve against loan availability during the season, and
(ii) 55% of eligible finished goods inventory, not to exceed $6.5 million during
April through September, $3.25 million in October, $2.5 million in November, and
$2.0 million in December, extended to February 12, 1999. There will be no
advances against inventory during January through March of each year unless
otherwise extended. The facility provides for a maximum letter of credit
subline of $8.0 million.
The facility bears interest at the Prime Rate plus 1.5%. Additionally, the
facility requires an annual facility fee of 0.5% of the facility due each
anniversary of the closing and a monthly letter of credit fee of 1.5% per
annum of the face amount of any standby and documentary letters of credit.
5
<PAGE>
RIDE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Simultaneous with the execution of the Agreement, the Company entered into a
Consent, Reaffirmation, and Release Agreement with US Bank N.A. pursuant to
which the Company retained a $3.0 million credit facility with that
institution. The US Bank facility expires August 30, 1999 and bears interest
at Prime Rate plus 1.5% per annum until February 28, 1999 and Prime Rate plus
2.0% per annum from March 1, 1999 through and including the date the
principal is repaid. Additionally, the facility is secured by the personal
guarantee of one of the Company's outside directors.
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
Dec 31, 1998 Dec 31, 1997 Dec 31, 1998 Dec 31, 1997
------------------------------------------------------------------------
(In Thousands, Except (In Thousands, Except
Per Share Amounts) Per Share Amounts)
<S> <C> <C> <C> <C>
Numerator
Net income (loss) $880 $(12,920) $2,392 $(12,259)
Preferred stock dividend (36) (9) (73) (9)
------------------------------------------------------------------------
Numerator for basic and diluted earnings per
share-income available to common stockholders 844 (12,929) 2,319 (12,268)
------------------------------------------------------------------------
Denominator
Denominator for basic earnings per share -
weighted average shares 12,779 11,538 12,699 11,449
Dilute effect of convertible preferred stock 4,906 - 3,907 -
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed conversions 17,685 11,538 16,606 11,449
------------------------------------------------------------------------
------------------------------------------------------------------------
Basic earnings per share $ 0.07 $(1.12) $ 0.18 $(1.07)
------------------------------------------------------------------------
------------------------------------------------------------------------
Diluted earnings per share $ 0.05 $(1.12) $ 0.14 $(1.07)
------------------------------------------------------------------------
------------------------------------------------------------------------
</TABLE>
6
<PAGE>
RIDE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. BUSINESS SEGMENTS
The Company reports operating results in two segments due to distinct
product differences. These two segments include the Company's hardgoods and
softgoods product lines. The hardgoods segment includes snowboards, snowboard
bindings, snowboard boots, wakeboards, and wakeboard boots. The softgoods
segment includes apparel and accessories.
<TABLE>
<CAPTION>
Three months ended
December 31, 1998 December 31, 1997
Apparel/ Apparel/
Accessories Hardgoods Total Accessories Hardgoods Total
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers
USA 1,370 11,428 12,798 2,640 6,168 8,808
Foreign 111 3,208 3,319 505 1,387 1,892
------- ------- ------- ------- ------- -------
Total 1,481 14,636 16,117 3,145 6,710 10,701
Interest Expense 21 351 372 29 165 194
Depreciation and amortization exp. 54 383 437 71 214 285
Segment gain (loss) 753 127 880 (1,387) (11,533) (12,920)
Segment assets 4,332 39,358 43,690 8,223 32,772 40,995
Expenditures for long-lived assets 19 134 153 195 186 381
</TABLE>
<TABLE>
<CAPTION>
Six months ended
December 31, 1998 December 31, 1997
Apparel/ Apparel/
Accessories Hardgoods Total Accessories Hardgoods Total
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers
USA 4,213 22,365 26,578 5,174 14,570 19,744
Foreign 405 7,516 7,921 2,156 7,016 9,172
------- ------- ------- ------- ------- -------
Total 4,618 29,881 34,499 7,330 21,586 28,916
Interest Expense 44 591 635 40 343 383
Depreciation and amortization exp. 82 561 643 127 497 624
Segment gain (loss) 965 1,427 2,392 (847) (11,412) (12,259)
Segment assets 4,332 39,358 43,690 8,223 32,772 40,995
Expenditures for long-lived assets 19 134 153 195 186 381
</TABLE>
The SMP apparel and Smiley Hats subsidiaries are stand alone units and
make up in excess of 50% of the Apparel and Accessory segment. The remaining
revenues are comprised of the Ride apparel and accessory lines which are sold
through the traditional hardgoods distribution units, namely Ride Snowboards
and Ride Canada. The sales for this remaining portion are specifically
calculated. Expenses and assets for the Apparel and Accessory segments of
Ride Snowboards and Ride Canada are allocated based on sales. The operating
assets of the SMP subsidiary were sold on November 2, 1998. This accounts for
most of the decrease in the Accessory and Apparel segment revenues for the
three and six months ended December 31, 1998. The gain on the sale of this SMP
segment also accounts for the majority of the revenue segment gain in the
same period.
7
<PAGE>
RIDE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Plant and equipment, goodwill and other long-lived assets of $16.8 million
represent $16.6 million located in the United States, the Company's country of
domicile, and $0.2 million located in Canada.
6. SUBSEQUENT EVENT
a. SERIES B PREFERRED SHARE CONVERSION
The terms of the Series B 5% Cumulative Preferred Stock of the Company
issued to Advantage Fund II, Ltd. ("Investor") in December 1997, provide,
among other things, that Investor may cause the Company to redeem for certain
amounts of such Preferred Stock in the event the price of the Company's
Common Stock declines and remains below a threshold level for a certain
period time. In September 1998, the Company was informally notified by
Investor that Investor's Preferred Stock redemption rights had arisen the
preceding month due to a decline in the Company's Common Stock share price in
the corresponding period. Subsequent to such informal notice, the Company and
Investor entered into negotiations resulting in an agreement which has
received the approval of the Company's lenders, pursuant to which the
remaining 1,500 shares of Series B 5% Cumulative Preferred Stock issued to
Investor will be converted into a secured promissory note in the principal
amount of approximately $1,725,000 (the "Note"). The Note will bear interest
at the rate of ten percent (10%) per annum and have a term due date of June
30, 1999, which date will be automatically extended to September 30, 1999 in
the event the Company has executed a letter of intent describing a
transaction which would raise capital sufficient to fully redeem the Note.
The Note is secured by a security interest in the Company's assets subordinate
to the outstanding security interests of the Company's senior secured
creditors. The Company's inability to successfully redeem the Note when due
would have a material and adverse impact on the Company's financial condition.
b. NASDAQ LISTING REQUIREMENTS
On January 21, 1999 the Company was notified by Nasdaq that the closing bid
price of its common stock was less than $1.00 for the preceding 30-day trading
period in violation of Nasdaq's listing standards. The Company has a 90-day
period ending April 21, 1999 in which to regain compliance. Compliance can be
achieved only if the closing bid price of the Company's common stock equals or
exceeds $1.00 for 10 consecutive trading days. If compliance is not achieved,
the Company's common stock will be delisted from the Nasdaq National Market. If
the common stock is delisted, trading could continue in the over-the-counter
market, but investors might find it more difficult to trade the stock or to
obtain timely market price information.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
To the extent that this Quarterly Report on Form 10-Q discusses financial
projections, information or expectations about the Company's products or
markets, or otherwise makes statements about the future, such statements are
forward looking and are subject to a number of risks and uncertainties that
could cause actual results to differ materially from the statements made. These
factors include the competitive environment, industry and product
concentrations, dependence on third-party selling efforts and other risks
outlined in more detail in the Company's Annual Report on Form 10-K as filed
with the Securities and Exchange Commission for the fiscal year ended June 30,
1998. Certain forward looking statements contained in the following discussion
are more specifically identified with the symbol (*).
GENERAL
The Company is a leading designer, manufacturer and marketer of
snowboards and related products through its subsidiaries: Ride Snowboard
Company ("Ride Snowboards"), Ride Manufacturing, Inc. ("Ride Manufacturing"),
Ride Canada, Inc. ("Ride Canada"), Smiley Hats, Inc. ("Smiley") and Carve,
Inc. ("US2"). The Company was founded in September 1992 and acquired C.A.S.
Sports International, Inc. and C.A.S. Sports Agency, Inc. (collectively,
"CAS") in August 1994, Ride Manufacturing in September 1995 and SMP Clothing,
Inc. ("SMP") in October 1995. The Company also acquired 5150 Snowboards, Inc.
("5150") in September 1995 and later merged 5150 with and into Ride
Snowboards. In October 1996, the Company transferred substantially all of the
Canada-based operating assets and liabilities of CAS (other than fixed
assets) into Ride Canada, a newly formed corporation, and all of the US-based
operating assets and liabilities of CAS into Ride Snowboards, and sold the
CAS entities. In June 1997, the Company acquired substantially all of the
assets and liabilities of Device Mfg Corp. and transferred those assets and
liabilities to Ride Snowboards. In July 1997, the Company's newly formed
Smiley subsidiary acquired substantially all of the assets of Galena Creek
Trading Corp. In December 1997, the Company acquired US2 Sports Group Inc.
through a merger of that company with and into Carve, Inc., a newly formed
corporation. Effective November 2, 1998, the Company sold the operating
assets and inventory of its Chula Vista, California-based, SMP subsidiary to
SMP's Australian licensee. As part of the transaction, Company has retained
certain of SMP's liabilities as well as SMP's accounts receivable. The
results of operations of these acquired subsidiaries are included in the
Company's financial statements from their respective dates of acquisition
through their applicable dates of disposition.
Because snowboarding traditionally is a winter sport and the Company's
sales are concentrated in the northern hemisphere, sales of the Company's
products predominantly occur in the months of July through December, the
Company's first and second fiscal quarters. Because relatively lower net
sales are realized in the months of January through June of each year, the
Company expects to incur operating losses in its third and fourth fiscal
quarters for the foreseeable future. The Company expects the addition of
wakeboarding products to its product line-up through its acquisition of US2
will help to supplement sales in the third and fourth quarters of the year in
future periods. In addition to seasonal fluctuations, the Company's operating
results fluctuate from quarter to quarter as a result of the timing of order
shipments, new product introductions, new retailer openings, consumer buying
patterns, weather conditions, discretionary spending habits, general economic
conditions in the United States and abroad and other factors. Furthermore,
the Company's gross margins fluctuate with product mix, the timing of product
price adjustments and the mix of international and domestic sales. See
"Business - Risk Factors - Seasonality; Fluctuations in Quarterly Operating
Results."
The Company accumulates a backlog of orders beginning in February as a result of
preseason orders placed in connection with winter sports trade shows. The
backlog decreases beginning in late spring as product begins to be shipped and
is usually insignificant by the end of the year. Backlog in the snowboarding
industry is subject to delay or cancellation.
9
<PAGE>
RESULTS OF OPERATIONS
QUARTER ENDED DECEMBER 31, 1998 COMPARED WITH QUARTER ENDED DECEMBER 31, 1997
Net sales in the second quarter of 1998 were $16.1 million compared to
$10.7 million in the comparable quarter of 1997. Sales for the six months
ending December 31, 1998 were $34.5 million versus $28.9 million for the six
months ending December 31, 1997.
Hard goods (defined as snowboards, bindings, boots, wake boards and
skateboards) represented 91% of second quarter 1998 net sales while soft
goods (apparel and accessories) made up 9%. For the comparable quarter of
1997, hard goods comprised 63% of sales and soft goods 37%. Sales of hard
goods made up 87% and soft goods the remaining 13% for the six months ending
December 31, 1998. Comparable sales for the six months ending December 31,
1997 were 75% for hard goods and 25% for soft good. The main reason for the
decrease in the ratio of soft goods to hard goods in 1998 versus 1997 is the
sale of the operating portion of the SMP subsidiary on November 2, 1998. For
the second quarter of 1998, sales in North America made up 79% of total sales
with international sales representing the remaining 21%. For the comparable
quarter of 1997, North America represented 82% of total sales and
international 18%. For the six months ending December 31, 1998, sales in
North America were 77% while international sales made up the remaining 23%.
For the same six month period ending December 31, 1997, North American sales
were 68% while international sales were 32%.
Gross margin for the second quarter was 27.9% bringing the gross margin
for the six months ending December 31, 1998 to 30.4%. The primary reason for
the drop in margin for the second quarter was an incremental expense of
approximately $700,000 for air freight to fly in late delivered product.
Gross margins for the second quarter ending December 31, 1997 were 18.7% and
were 27.1% for the six months ending December 31, 1997.
Selling, general and administrative expenses were $4.0 million for the
second quarter of 1998 compared to $13.9 million in the same period of 1997.
The large discrepancy between 1997 and 1998 was the write down loss of $8.6
million on impairment of goodwill in December of 1997. Selling, general and
administrative expenses were $8.3 million for the six months ending December
31, 1998. This compares to $18.5 million for the comparable six months of
1997. Excluding the effect of the goodwill write down the decrease in expense
from 1997 to 1998 was primarily due to staff reductions, and lower executive
salaries.
Interest income was $103,000 in the second quarter of 1998 compared with
$41,000 for the same period of 1997. The additional interest income in the
second quarter of 1998 can be mostly attributed to the interest on the note
receivable from the sale of the SMP assets. Interest income for the six months
ended December 31, 1998 was $149,000 versus $92,000 for the comparable six month
period in 1997. Interest expense in the second quarter of 1998 increased to
$372,000 from $194,000 in the same quarter of 1997. For the six months ending
December 31, 1998 interest expense was $635,000 versus $383,000 for the same
period in 1997. These increases in 1998 versus 1997 were due to a generally
higher level of direct advances on the Company's revolving credit facility
during the 1998 period.
For the three and six months periods ended December 31, 1998 no tax
expense was recorded as the Company was in a net operating loss carry forward
position. For the three months ending December 31, 1997 the Company recorded
income tax expense of $868,000. For the six month period ending December 31,
1997 the Company recorded income tax expense of $1.3 million. Even though the
Company was in a loss position, the company's tax benefit is limited to the
amount of income taxes recoverable from prior years. The tax expense for the
six month period ending December 31, 1997 was adjusted accordingly to reflect
this situation.
LIQUIDITY AND CAPITAL RESOURCES
During the second quarter of 1998, the Company financed its operations
primarily through the collection of receivables and the Company's line of credit
facility. Net cash used in operating activities totaled $8.4 million in the
second quarter of 1998 compared with $1.3 million increase in cash in the
comparable period of 1997. The
10
<PAGE>
large increase in cash used in 1998 versus 1997 was primarily related to an
increase in accounts receivable which was a direct result of significantly
higher sales in the last quarter of 1998 compared to the last quarter of
1997. There was net cash provided by investing activities of $200,000
during the second quarter of 1998 in the investment activities section
primarily due to the proceeds from the sale of the SMP operating assets as
well as payments received on the Gen-X note receivable. This compares to net
cash used in investing activities of $1.1 million during the comparable
quarter of 1997. The reduction from 1997 to 1998 relates almost entirely to
the Device Mfg. Corp. acquisition in the period ending December 31, 1997. Net
cash provided by financing activities totaled $8.9 million in the second
quarter of 1998 compared with $1.3 million used in financing in the
comparable period of 1997. The primary financing activity for 1998 was net
advances on the Company's line of credit of $9.0 million. In 1997 the main
source of cash was from proceeds from the sale of the Series B 5% Cumulative
Preferred Stock issuance offset by repayment on the line of credit.
The Company operates in a highly seasonal business, generating the majority
of its sales in the months of July through December. The Company's cash receipts
from its North American customers are received predominantly in the months of
December, January and February while its international customers generally pay
by cash in advance or letter of credit. In order to finance operations and
manufacture and purchase products during the remainder of the year, the Company
has historically utilized a revolving line of credit.
On August 31, 1998, the Company entered into a Loan and Security Agreement
("Agreement") with CIT Group/Credit Finance, Inc. ("CIT") which credit facility
replaces the Company's prior credit facility. The Company's line of credit under
the new credit facility is up to $15.0 million (to be increased to $17.0 million
from October 15, to December 15, each year) for a term of three years. The
amount that may be borrowed is also limited to the sum of (i) 85% of eligible
accounts receivable, provided the dilution does not exceed 5.0% and after
implementation of an 11.0% dilution reserve against loan availability during the
season, and (ii) 55% of eligible finished goods inventory, not to exceed $6.5
million during April through September, $3.25 million in October, $2.5 million
in November, and $2.0 million in December, extended by agreement to February 12,
1999. There will be no advances against inventory during January through March
of each year unless otherwise extended. The new facility provides for a maximum
letter of credit subline of $8.0 million.
The facility bears interest at the Prime interest rate plus 1.5% and is
collateralized by substantially all the assets of the Company. Additionally,
the facility requires an annual facility fee of 0.5% of the facility due each
anniversary of the closing and a monthly letter of credit fee of 1.5% per
annum of the face amount of any standby and documentary letters of credit.
Simultaneous with the execution of the Agreement, the Company entered
into a Consent, Reaffirmation, and Release Agreement with US Bank N.A.,
pursuant to which the Company retained a $3.0 million credit facility with
that institution. The US Bank Facility bears interest at Prime Rate plus 1.5%
per annum until February 28, 1999 and Prime rate plus 2.0% per annum from
March 1, 1999 through and including the date the principal is repaid.
Additionally, the facility is secured by the personal guarantee of one of the
Company's outside directors.
The Company believes the CIT Line is adequate to meet the current needs of
its business. There is, however, no assurance the CIT Line is sufficient to fund
the demands of the Company's future growth. To this end, the Company and CIT
have agreed to review the line in March 1999 with a view to increasing same if
then current business conditions warrant doing so. However, there can be no
assurance such an increase in the CIT Line will be available even if the
Company's business prospects at that time require and warrant doing so. In
addition, availability of funds under the CIT Line is at all times conditioned
on the Company achieving certain collateral requirements. There can be no
assurance such requirements will be achieved or, if achieved, that they can be
consistently maintained. The Company's inability to increase the CIT Line or
meet or maintain specific collateral requirements could each have a material
adverse impact on the Company's financial condition and could result in a
substantial limitation or reduction in the scope of the Company's business. With
respect to the US Bank Line, the Company is obligated to satisfy all sums due
thereunder on or before its August 30, 1999 expiration date. There can be no
assurance the Company will be successful in doing so. The Company's inability to
successfully satisfy or
11
<PAGE>
extend the US Bank Line, if necessary, could have a material adverse impact
on the Company's financial conditions.
The Company and Advantage Fund II, Ltd. ("Investor") have agreed the
1,500 shares of Series B 5% Cumulative Preferred Stock of the Company issued
to Investor in December 1997 are to be converted into a secured promissory
note in the approximate amount of $1,725,000 (the "Note"). The Note will bear
interest at the rate of 10% per annum and be due June 30, 1999, which date
is automatically extended to September 30, 1999 in the event the Company has
executed a letter of intent describing a transaction which will raise capital
sufficient to fully redeem the principal and accrued interest. The Note will
be secured by a security interest in the Company's assets subordinate to the
outstanding security interests in favor of senior secured creditors. The
Company's inability to successfully redeem the Note would have a material and
adverse impact on the Company's financial condition.
YEAR 2000
The "year 2000 problem" is the result of computer programs being written
using two digits rather than four to define the applicable year. Software
programs and systems that have date-sensitive features may recognize a date
using "00" as the year 1900 instead of the year 2000. The Company has assessed
its year 2000 needs and has purchased and is presently installing year
2000-compliant software in all its known non-compliant hardware and software
systems, which installation the Company anticipates will be completed by the
June 30, 1999 year-end. The cost of the purchase and installations of the year
2000-compliant software is anticipated to exceed $250,000. The Company is in the
process of reviewing with each of its material suppliers, service providers and
customers the steps each is taking to insure their respective computer systems
of third parties on whose commercial efforts the Company directly or indirectly
relies, will be year 2000-compliant in a timely fashion. Because the Company has
not completed its review of its material third party suppliers, service
providers and customers, it has not created a contingency plan setting forth
what steps will be taken if such third parties are not year 2000 compliant by
December 31, 1999. Based on information received from its third party vendors,
service providers and customers, the Company intends to have a contingency plan
in place by June 1999. The failure of third parties to be year 2000 compliant
could cause material delays in the design, manufacture and shipment of products,
delay in payment for products, and delay in the availability of credit of funds
necessary to operate the business of the Company. The failure of the Company's
or one or more third-party's computer systems as a result of year 2000
non-compliance may have a material adverse effect on the Company's business and
results of operations.
SUBSEQUENT EVENT
On January 21, 1999 the Company was notified by Nasdaq that the closing bid
price of its common stock was less than $1.00 for the preceding 30-day trading
period in violation of Nasdaq's listing standards. The Company has a 90-day
period ending April 21, 1999 in which to regain compliance. Compliance can be
achieved only if the closing bid price of the Company's common stock equals or
exceeds $1.00 for 10 consecutive trading days. If compliance is not achieved,
the Company's common stock will be delisted from the Nasdaq National Market. If
the common stock is delisted, trading could continue in the over-the-counter
market, but investors might find it more difficult to trade the stock or to
obtain timely market price information.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
None.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In March 1997, a shareholder filed a lawsuit against the Company and four of its
current or former officers and directors, styled MURRAY V. RIDE, INC. ET AL. The
lawsuit alleges violations of certain federal securities laws and state laws,
and purports to seek unspecified monetary damages on behalf of a class of
shareholders who purchased the Company's common stock during the period of
August 10, 1995 through December 30, 1996. In August 1998, the Company, together
with the individually named defendants, entered into a Memorandum of
Understanding with the plaintiffs in the lawsuit, wherein the parties have
agreed to settle the lawsuit upon the following principal terms: (1) a
settlement fund will be created consisting of: (a) $3,000,000 cash paid by the
Company's insurance carrier; and (b) warrants to purchase 600,000 shares of the
Company's Common Stock, exercisable for a four year period ending December 31,
2002 at a price of $3.00 per share; and (2) the dismissal of the lawsuit against
all named defendants with prejudice. The Memorandum of Understanding has been
reduced to a Stipulation of Settlement, which has received the preliminary
approval of the Court, and which will be before the Court for final approval in
a hearing presently scheduled for March 8, 1999. While the Company anticipates
final approval will be forthcoming, there can be no assurance the Court will
issue final approval of the settlement. In the event the Court denies final
approval of the settlement, the Company expects the litigation will resume and
the Company will renew its vigorous defense of the claims. In the event of a
renewal of the litigation, an award of monetary damages against the Company in
excess of applicable insurance, if any, the expenditure of significant sums in
the defense thereof or diversion of management's attention from other business
concerns, could each have a material adverse effect on the Company's financial
condition and results of operations.
The Company is also engaged in legal proceedings against Switch Manufacturing,
Inc. alleging patent infringement and seeking monetary damages. While the
Company intends to vigorously prosecute the lawsuit, there can be no assurance
that the Company will prevail in the action. The expenditure of significant sums
in the prosecution of the action could have a material adverse effect on the
Company's financial condition and results of operations.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
a. ASSET SALE
Effective November 2, 1998, the Company sold the operating assets and
inventory of its Chula Vista, California-based, subsidiary SMP Clothing, Inc. to
SMP's Australian licensee for the sum of $2,081,412. The purchase price consists
of a cash payment of $250,000 and promissory notes for the balance due on or
before March 31, 1999. The notes are secured by a first position in the assets
being sold. As part of the transaction, Ride retains SMP's current liabilities
and accounts receivable in the approximate amounts of $300,000 and $1,100,000,
respectively.
13
<PAGE>
b. SERIES B PREFERRED SHARE CONVERSION
The terms of the Series B 5% Cumulative Preferred Stock of the Company
issued to Advantage Fund II, Ltd. ("Investor") in December 1997, provide,
among other things, that Investor may cause the Company to redeem certain
amounts of such Preferred Stock in the event the price of the Company's
Common Stock declines and remains below a threshold level for a certain
period time. In September 1998, the Company was informally notified by
Investor that Investor's Preferred Stock redemption rights had arisen the
preceding month due to a decline in the Company's Common Stock share price in
the corresponding period. Subsequent to such informal notice, the Company and
Investor entered into negotiations resulting in an agreement pursuant to
which the remaining 1,500 shares of Series B 5% Cumulative Preferred Stock
issued to Investor will be converted into a secured promissory note in the
principal amount of approximately $1,725,000 (the "Note"). The Note will bear
interest at the rate of ten (10%) per annum and have a due date of June 30,
1999, which date will be automatically extended to September 30, 1999 in the
event the Company has executed a letter of intent describing a transaction
which would raise capital sufficient to fully redeem the Note. The Note is
secured by a security interest in the Company's assets subordinate to the
outstanding security interests of the Company's senior secured creditors.
The Company's inability to successfully redeem the Note when due would have a
material and adverse impact on the Company's financial condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Manual
Exhibit No. Description Page No.
- ----------- ----------- --------
<C> <S> <C>
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter ended December 31,
1998.
14
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RIDE, INC.
---------------------------------------------
(Registrant)
Dated: February 16, 1999 By /s/ Robert F. Marcovitch
-------------------------------
Robert F. Marcovitch
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Dated: February 16, 1999 By /s/ Gregory S. Cook
-------------------------------
Gregory S. Cook
CHIEF FINANCIAL OFFICER/COO
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 884
<SECURITIES> 0
<RECEIVABLES> 17,704
<ALLOWANCES> 0
<INVENTORY> 6,319
<CURRENT-ASSETS> 25,811
<PP&E> 4,992
<DEPRECIATION> 0
<TOTAL-ASSETS> 43,690
<CURRENT-LIABILITIES> 21,186
<BONDS> 0
0
2,690
<COMMON> 43,465
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 43,690
<SALES> 16,117
<TOTAL-REVENUES> 0
<CGS> 11,624
<TOTAL-COSTS> 4,024
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 372
<INCOME-PRETAX> 880
<INCOME-TAX> 0
<INCOME-CONTINUING> 880
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 880
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.05
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