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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 30, 2000
Commission File Number 0-27002
GRANITE BAY TECHNOLOGIES, INC.
(Formerly Morrow Snowboards, Inc.)
(Exact name of Registrant as specified in its charter)
California 93-1011046
(State or other jurisdiction of (I.R.S. 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)
Securities registered pursuant to Section 12(b) of the Act:
None N/A
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
---
The aggregate market value of voting shares held by non-affiliates of the
registrant's Common Stock on April 10, 2001, was approximately $7,550,119 (based
on closing sale price of such stock as reported by Pink Sheets, $0.51).
The number of shares outstanding of the registrant's Common Stock, no par value,
as of April 10, 2001, was 19,150,507.
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With the exception of historical facts stated herein, the matters discussed
in this Form 10-K are "forward looking" statements that involve risks and
uncertainties that could cause actual results to differ materially from
projected results. Such "forward looking" statements include, but are not
necessarily limited to statements regarding anticipated levels of future
revenues and earnings from the operation of Granite Bay Technologies, Inc. and
its subsidiaries, (the "Company"), projected costs and expenses related to
operations of the Company's liquidity, capital resources, and the availability
of future equity capital on commercially reasonable terms. Factors that could
cause actual results to differ materially are discussed under "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources - Factors That May Affect Future
Results." Readers of this Form 10-K are cautioned not to put undue reliance on
"forward looking" statements which, by their nature, are uncertain as reliable
indicators of future performance. The Company disclaims any intent or obligation
to publicly update these "forward looking" statements, whether as a result of
new information, future events, or otherwise.
PART I
Item 1. Business
Granite Bay Technologies, Inc. (the "Company," "Gbay," "we" or "us") was
originally incorporated under Oregon law as Morrow Snowboards, Inc. 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. In 1999, we sold our Morrow intellectual property,
inventory and snowboard and binding production equipment to K2 Acquisitions Inc.
(K2) and sold our apparel line to Westbeach Sports, Inc. and discontinued the
manufacturing, marketing and sale of snowboards, boots, bindings, apparel and
accessories. On January 31, 2000, we purchased all of the outstanding shares of
Common Stock of International DisplayWorks, Inc., a Delaware corporation,
("IDW") from four private investors, whereby IDW became our wholly owned
subsidiary. On February 1, 2000, IDW acquired through its wholly-owned
subsidiary, International DisplayWorks (HK) Ltd.(IDWHK), a company organized
under the laws of Hong Kong, SAR, 100% of the shares of MULCD Microelectronics
Company Ltd. ("MULCD") and IDW Shenzhen Technology Development Company Ltd.
("IDWT"), companies organized under the laws of the People's Republic of China
from Vikay Industrial Ltd., a Singapore company operating under Judicial
Management. Judicial management is a form of bankruptcy proceeding in Singapore.
(MULCD and IDWT are collectively referred to as the "PRC Companies"). In October
2000, pursuant to shareholder approval, the Company changed its state of
incorporation to California and its name to Granite Bay Technologies, Inc.
The major business operation of the company is conducted through IDW, IDWHK
and the PRC companies. IDW, IDW HK and the PRC Companies operate as an
integrated company. The following discussion is presented on a consolidated
basis, and analyzes the financial condition and results of operations of IDW and
its subsidiaries for the year ended December 30, 2000.
Our headquarters are located in Rocklin, California. We design and
manufacture a wide range of display products including liquid crystal displays
("LCD"), LCD modules, turnkey assemblies, front panel display systems, printed
circuit board assemblies for use in the end products of Original Equipment
Manufacturers ("OEMs") and products incorporating LCD's for use in
telecommunications and other electronics equipment, including appliance
controllers, and personal communications devices.
The LCD's and circuits we design and manufacture are used in
telecommunications (cell phones and other wireless communication devices), as
well as in medical equipment, household appliances, utility applications,
automotive equipment, retail and office equipment, and consumer electronic
products. Targeted areas for new applications include office equipment (copiers,
facsimile machines, and printers), high-resolution graphic display products for
personal digital assistants (PDA's) and small
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computer and map displays. Our corporate mission is "to be the premier LCD
Company of the 21st Century." To achieve this we must create an efficient
display manufacturing operation that will include the latest product and
production technologies and high production yields. The design and manufacturing
of our products are conducted at the facilities of the PRC Companies in Heng
Gang, Shenzhen, Peoples Republic of China (PRC) where we employ approximately
1,300 people.
Approximately 25% of fiscal year 2000 sales were from the home appliance
market, approximately 20% to the telecommunications industry (principally
cellular telephones and caller ID), approximately 15% to the local Hong Kong
consumer market, approximately 10% to the automotive market, and the balance
spread over a variety of products and industries. We currently market our
services primarily in Hong Kong and the United States, with a growing presence
in other parts of Asia, and we intend to expand in the PRC and other Asian
regions, as well as Europe. We maintain design centers at our manufacturing
facilities and in Singapore. Over 90% of sales in fiscal year 2000 were from
custom liquid crystal displays and modules developed in close collaboration with
our customers.
When we purchased the PRC Companies, they were under judicial management, a
form of bankruptcy proceeding in Singapore where the PRC Companies' former
parent was based. The PRC Companies had higher output prior to their control by
the Judicial Managers. We are actively working to build revenues throughout the
company by focusing on 10 to 12 major accounts located throughout the world,
some of which are relationships lost during the Judicial Management era, and
many of which are new relationships we have been developing since the
acquisition of the PRC companies. To remain competitive we are expanding
production capacity and capabilities, improving the organization of and
expanding the staff at the manufacturing facilities, and increasing the level of
senior management supervision throughout the company. We are focusing on
high-volume production and management support to increase yields and decrease
unit costs, reducing inventories through careful planning and scheduling,
increasing design staff to support new projects and product development and
reducing overall operating costs. We have established internal systems and
priorities to improve the level of communications among the factory, sales
offices and customers to reduce lead times for price quotations, design and
manufacturing turn-around.
We believe that these internal changes will facilitate substantial and
profitable sales growth over the next five years, refine our customer base and
the markets we serve, give us strength in designing prototypes and producing
products on a timely and cost-efficient basis, including a wide variety of
custom design, quality display modules required in the end products of OEMs and
increase the volume and efficiency of throughput through our LCD line.
Industry Overview
Since the commercial production of the first light emitting diodes,
("LEDs") in the 1960s and twisted nematic (TN) liquid crystal displays in the
1970s, the use of LCD and LED indicators has become widespread in industrial and
consumer electronics products with LCD now the predominant technology. These new
technologies were developed to overcome limitations in uses, principally in
terms of size, life, and power consumption, or prior standard displays or
indicators.
An LCD modifies light that passes through or is reflected by it, rather
than emitting light like an LED. An LCD generally consists of a layer of liquid
crystalline material suspended between two glass plates. The crystals align
themselves in a predictable manner, which changes when stimulated electrically.
The change in alignment produces a visual representation of the information
desired when used in conjunction with A polarizers and either an external light
source or natural ambient light.
The flexibility of liquid crystal technology allows for easy customization
in both size and design. For instance, displays are manufactured in sheet form
and the images can be changed by generating artwork to the customer's
requirements. Display size can be controlled by programming the cutting tool
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to the desired dimensions. There is no significant additional manufacturing cost
for a fully custom display that allows each product to have its own unique
appearance such as icons, annunciators, and color printing.
OEMs often design their products to contain unique display modules and
features as a highly cost-effective means of differentiating their products from
competing products. OEMs then make the decision whether to use standard devices,
design and produce devices in-house or outsource design and/or production. In
making the decision, OEMs often recognize that their greatest strengths are
consumer recognition of their brand names, market research and product
development expertise and effective sales and distribution channels. OEMs also
recognize that the time constraints and limitations of available resources often
preclude them from maintaining the specialized in-house expertise and equipment
necessary to design and manufacture custom devices and that standard
"off-the-shelf" devices are not always available. As a result, many OEMs decide
to outsource the design and production of devices and components in which they
lack the requisite technology and expertise and focus their resources on the
areas where they have the greatest expertise and leverage. Outsourcing allows
them to gain access to specialized design and manufacturing technology and
expertise, accelerate the design process, reduce their own investment in
equipment, facilities, and personnel necessary for specialized design and
production capabilities, reduce design and manufacturing costs by utilizing the
specialized resources of the supplier, and concentrating their resources on
their strengths in the production and distribution of their core products.
Several major OEM's in the electronics industry have announced their
decision to outsource production of components and final assembly of end
products, including major cellular phone and PDA manufacturers, and many others.
We believe that these decisions have been made to allow major OEM's to
concentrate on designing concepts and marketing the finished product, and to
better control costs. IDW expects to benefit from these decisions because it
will provide us with more design input and create more value-added
opportunities, resulting in increased module and assembly business, and
solidified relationships, while providing our customers with quality,
reliability and lower overall product and service costs.
The estimated world market for segmented and character LCD's is reported to
be $1.3 billion, of which $225 million is in North America. The majority of our
business is small alpha-numeric displays and modules which represents a
significant portion of that market.
Products and Service
Our products consist of LCD's and subassemblies, ranging from the low-end
LCD's for calculators, watches and electronic games to STN-LCD's for use in
applications that require high multiplex rates and wide viewing angles. Such
devices are used in cellular telephones, consumer appliances, office equipment,
bar code readers, automotive equipment, and medical electronics. The display
division, MULCD, produces the LCD's. The electronics division, IDWT, designs and
manufactures customized LCD modules adding value to the basic displays with
electronics, keypads, interface circuitry, back lighting and mounting hardware.
This division also produces assemblies without LCD's. IDWT has production and
design capability in module processes, including surface mount technology
("SMT"), chip-on-board ("COB"), chip-on-film ("COF"), tape automated bonding
("TAB"), keypads and back lighting. IDW expects to add chip-on-glass ("COG")
processing during the second quarter of 2001.
IDW currently emphasizes custom-design display modules. IDW believes that
custom devices represent approximately 90% of its sales and the best opportunity
for higher profits and potential growth. For each custom device, IDW works
directly with its customer to develop and produce the original design and
manufacture the device in accordance with the customer's specifications. IDW
identifies the specific needs of existing and prospective customer's
applications. IDW then assigns a cross-functional
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team of IDW engineers to a custom design project to develop the product working
with the customer's engineers throughout the design phase, prototype development
and manufacturing process. This effort normally results in a complete system or
product requiring a specific visual display (cellular telephones, medical
instruments or hand-held data collection devices). IDW has a number of
previously prepared custom designs that are currently generating revenue and are
expected to generate additional revenue in the future.
IDW also designs and produces standard or "off-the-shelf" devices, which
include designs that are adaptable to various fixed-end uses without
modifications or with slight modification. Standard devices encompass a wide
variety of LCD devices having varied applications including dot matrix modules,
graphic modules and watch and calculator displays.
IDW is instituting a careful marketing and customer selection process to
more closely align its growth and development with that of the customers and
industries we believe offer the greatest opportunity for growth. IDW's research
and development will focus upon technological developments and products that
meet the current and future requirements of those industries and companies.
With our high-volume LCD manufacturing line at the MULCD facilities, IDW
will focus its efforts on creating advanced display technologies. These advanced
display technologies will allow IDW to provide its customers with
differentiating products or products that provide higher information content in
either custom or standard devices.
Manufacturing
The PRC Companies have a broad range of production processes to manufacture
a variety of LCD types and features, including TN and STN displays which
incorporate a wide variety of interface technology, as well as appearance and
environmental options. The PRC Companies compose two manufacturing divisions.
MULCD, the display subsidiary, has a state-of-the-art, fully automated, LCD
front-end sheet processing production line that started in 1998, supported by
back-end processing and testing operators. MULCD's LCD line was awarded an ISO
9001 certification for quality. (ISO is a quality standard established by the
International Organization for Standardization.) The existing LCD front-end
processing production line is currently operating at 35% capacity with the
majority of the production supporting the local Hong Kong market. IDW will focus
on fully utilizing the excess production capacity by selling to a select number
of high volume users in the Far Eastern, North American and European markets to
create longer production runs thereby further reducing unit costs. IDW's future
plans potentially include adding a second automated LCD production line and an
Indium Tin Oxide (ITO) production line that will complement the present line by
adding capabilities for thin glass production and chip-on-glass displays. IDW
has adequate space to incorporate a second line if circumstances warrant. IDW
expects the costs of such an additional line to be up to $14 million. This cost
would be funded through internal generation of funds, lease financing, debt
financing, and/or private placement by Granite Bay of additional shares of
Common Stock. There are no concrete plans at the present time for such an
investment.
IDWT, the module and assembly subsidiary, is an ISO 9001 certified display
module and assembly production facility geared for customers with $1 million or
more per month in production requirements. This division is currently running at
approximately 40% capacity and is qualified to produce LCD modules for several
major cell phone and telecommunication manufacturers. Current manufacturing
technologies are COB, SMT, TAB assembly and heat seal flex circuitry assembly.
IDWT has the option to buy displays from outside sources in order to expand its
production capabilities or to have a second source to meet customers'
requirements. IDWT's production capabilities include five (5) SMT lines for
high-speed electronic component placement and seventeen (17) production lines
for LCD Modules, PCB assemblies. IDWT also produces printed circuit board
assemblies without LCD's.
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We believe that wage costs for manufacturing are currently materially lower
in China, a competitive advantage that allows IDW to compete effectively for
business in the United States, Europe and throughout Asia. IDW may be less able
to compete for customers outside China with companies with closer manufacturing
facilities if this wage advantage were to disappear or lessen other cost
differentials affecting IDW's ability to provide products at competitive prices.
We seek to increase our value to customers by providing responsive,
flexible, total design and manufacturing services. To date, manufacturing
services have been concentrated towards the manufacture of LCD's and assembly of
custom design display modules. IDW will provide extended manufacturing services
beyond those base services if the customer requests them. Extended services may
include design, process development and turnkey manufacturing.
Quality Control
IDW has an aggressive quality control program and maintains quality systems
and processes that meet or exceed the requirements set by many leading OEMs in
our targeted industries. IDW bases its quality control program upon Total
Quality Management ("TQM"). IDW routinely performs product testing on its
standard and custom products to ensure product reliability and quality. IDW
analyzes test results and takes actions to adjust the manufacturing process or
enhance product design and quality. IDW's customers generally evaluate price in
the quotation process, while delivery and quality are evaluated after the
product is shipped. Therefore, many customers evaluate a company's quality by
reviewing the quality systems employed. IDW's receipt of an ISO 9001
certification for quality for the MULCD facility and an ISO 9001 certification
for the IDWT facility will give its clients assurance as to IDW's quality
control processes. IDW is also certified with QS9000 for automotive products,
which qualifies it to work with North American automakers.
Sales and Marketing
IDW has contracted with electronics sales representative organizations
establishing a network of sales representatives covering the majority of North
America. We also have sales representatives covering the key markets in the Far
East, including Singapore, Malaysia, Taiwan and PRC. IDW also employs a full
time sales staff covering the Hong Kong market. In support of our sales force,
we employ design and sales support engineers for technical backup. These
engineers are based in the USA, Singapore, Hong Kong and at the manufacturing
facilities. Sales offices are currently maintained in Rocklin, CA, Hong Kong and
Singapore.
IDW's sales in Asia were approximately 55% of total sales in fiscal year
2000, primarily concentrated in the Hong Kong market. The United States
accounted for 41% of total sales and Europe accounted for approximately 4% of
total sales in fiscal year 2000.
Customers
IDW operates under Non-Disclosure Agreements with many of its major
customers and thus cannot provide specific customer details. Our largest
customer accounted for approximately 28% of sales in fiscal year 2000. Four
customers each represented more than 5% of sales in fiscal year 2000.
Research and Development
IDW is currently developing LCD technology to compete for the automotive
dashboard and clock business, laser printer and copier business and the
point-of-sale market (through development of cold cathode fluorescent ("CCF")
back-lighting production capability) and, through development of large
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graphic LCD's, portable word processing, medical instrument, ticketing machines,
hand-held computers, financial terminals and point-of-sale and other electronics
markets.
Additionally, IDW will conduct research and development that is focused on
improving technology, developing improved designs, improving manufacturing
processes and improving the overall quality of the products and services that
IDW offers. IDW expects to increase its research and development efforts on new
display technologies and more sophisticated display technologies. IDW expects to
restore research and development funding activities to appropriate levels and is
hiring research personnel to accomplish that goal.
Backlog
As of December 30, 2000, IDW had a backlog of orders in excess of $5
million, all of which is believed to be firm and expected to be filled by
December 31, 2001. IDW believes that the changing economic environment has
encouraged customers to place orders on a shorter order cycle, thus reducing
overall value of IDW's backlog. However, customers have been ordering
consistently and on a more frequent basis. We believe that IDW will continue to
receive orders from its key customers, resulting in increased revenues overall.
Seasonality
IDW's business experiences a marginal amount of seasonality. Our production
tends to ramp up in the second quarter, continuing through the fourth quarter,
but declines somewhat in the first quarter leading up to and immediately
following the Chinese New Year. We believe that as we increase our revenues to
key customers in the USA and Far East, and reduce our reliance on traditional
markets in Hong Kong, that IDW's seasonality will be less of a factor.
Competition
IDW believes Three-Five Systems, Varitronix, Wintek, Optrex, Truly, Elec &
Eltek and Namtai constitute the principal competitors for IDW's LCD devices.
Some of these competitors are presently larger companies that are believed to
have greater financial, technical, marketing, manufacturing, research and
development, and personnel resources than IDW. IDW's success, including its
revenue and profitability, depends substantially on its ability to compete with
the other suppliers of display modules. There is no assurance that IDW will
continue to be able to compete successfully with such companies. There are also
other companies in the electronics industry that have significantly greater
resources than the Company and these other companies could decide to enter the
LCD market and become major competitors. However, we believe that IDW can
compete favorably on the basis of customer relationships, service, technical
innovation, design capability, product performance, cost, quality and timely
delivery. To remain competitive and increase market share, IDW needs to develop
more sophisticated, higher-end LCD displays and COG module capability.
Intellectual Property
IDW relies upon a combination of trade secrets, trademark, confidentiality
procedures and contractual provisions to protect its intellectual property.
IDW's core business is not dependent on any patent or trademark protection and
IDW does not expect to seek patent protection for any technology in the near
future, and does not presently hold any patents for existing technology.
Raw Materials/Suppliers
The principal raw materials used in producing IDW's products consist of raw
and coated glass, polarizers, liquid crystal, chemicals, PCBs, driver IC's,
molded plastic parts, electronic components and
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packaging materials. The PRC Companies electric power plant requires the use of
diesel fuel to generate electricity. IDW has alternative sources of supply for
the majority of these materials and believes that additional sources would be
available if any of its existing suppliers were to go out of business or not be
able to furnish materials. Several of these materials, however, must be obtained
from foreign suppliers, which subjects IDW to the risk inherent in obtaining
materials from foreign sources, including currency fluctuations and supply
interruptions. IDW's ability to produce a significant percentage of its
requirements of LCD glass has reduced its dependence on foreign LCD glass
suppliers. The PRC companies are evaluating the opportunity to switch to the
local utility power grid, which would eliminate the need for consuming diesel
fuel to generate electricity. Meanwhile, diesel fuel continues to be available
but prices have been increasing which will affect margins.
Employees
As of December 30, 2000, the Company and its subsidiaries employed
approximately 1,279 persons. Of those, most are employed by the PRC Companies,
with 10 employed by IDW in California, 10 by IDW HK in Hong Kong, and 3 by IDWS
in Singapore. Over 90% of our employees who are employed by the PRC Companies
work in manufacturing. We consider our relationships with employees to be good
and that compensation provided to our employees is similar to comparable
employers in the same geographic markets and industry. Our employees do not
belong to a union or other collective bargaining unit.
Environmental
IDW's operations generate small amounts of hazardous waste as manufacturing
byproducts, including various gases, epoxies, inks, solvents and other wastes.
The PRC Companies also operate a diesel-fired electricity plant on its property.
As IDW's operations expand, the amount of such hazardous waste produced may
increase. Over time, hazardous waste has received increased regulation from
federal, state, local and international governments and agencies. Our operations
comply with all applicable environmental regulations and that all hazardous
waste is being stored, used and disposed of in accordance with applicable laws.
Corporate History
From its inception in 1989, the Company was 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. The Company originally organized under the laws of
the State of Oregon and was headquartered in Salem, Oregon. In November 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. On March 26, 1999, the Company sold all of its "Morrow"
intellectual property, along with all snowboard inventories and its snowboard
and binding production equipment to K2 Acquisitions Inc. On November 12, 1999, a
subsidiary of the Company, Westbeach Canada ULC, sold all of its "Westbeach"
operations, along with all apparel inventories to Westbeach Sports, Inc. The
Company has discontinued all manufacturing and marketing of snowboards, boots,
bindings and apparel. These sales effectively eliminated all the prior ongoing
operations of the Company.
On January 31, 2000, we acquired all of the outstanding shares of IDW,
headquartered in Rocklin, California. On February 1, 2000, IDW acquired, through
its wholly owned subsidiary "IDW HK," a company organized under the laws of Hong
Kong, People's Republic of China ("PRC"), MULCD and IDWT, both companies
organized under PRC law. The Company is now headquartered in Rocklin, California
and, with approval of its shareholders, reincorporated into the State of
California.
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During 2000, we loaned IDW approximately $8.3 million to finance the
acquisitions of MULCD and IDWT, as outlined below, and to provide for working
capital needs. Unless otherwise noted, all references herein to monetary amounts
are to United States Dollars ("US$").
To complete the acquisition of the PRC Companies, a payment of $4,271,729
was made on February 1, 2000, $592,935 on May 1, 2000, $296,457 on May 31, 2000,
$296,463 on June 9, 2000, $533,641 on June 27, 2000, and $650,000 on September
15, 2000. Further, the following was placed in escrow pending the finalization
of documents: $542,920 on January 26, 2001, $288,027 on February 26, 2001 and
$8,894 on February 27, 2001. These final payments are expected to leave IDW with
a small credit balance when the final reconciliation is completed. 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. Upon finalization of documents, these
charges will be released. These releases are expected to occur by April 30,
2001.
Item 2. Property
The PRC Companies own manufacturing facilities which consist of three
buildings totaling approximately 270,000 square feet situated on four acres in
Heng Gang Industrial Estate located 30 minutes from the city of Shenzhen and
about one hour from Hong Kong. The buildings are approximately ten years old,
the LCD production line approximately three years old, the SMT production
machinery approximately two to three years old and the balance of the machinery
of varying ages. There is sufficient land to accommodate future expansion and
growth of the business. There is additional production floor space for available
support and expansion of IDW's manufacturing operations. The PRC Companies'
facilities are on land leased pursuant to a 50-year land lease expiring in 2043.
The PRC Companies must pay annual land rent of approximately US$70,000, subject
to certain periodic rent increases. The PRC companies also lease dormitory
facilities for its production employees on an adjacent property from the local
government.
Space is also leased in Singapore for sales and engineering staff. In
Singapore, the Company leases approximately 2,100 sq. ft in an office building
at a lease rate of $3,000 per month which lease expires March 2003.
IDW HK's corporate offices consist of 3,100 sq. ft. in a high-rise office
building in Hong Kong, SAR (Special Administrative Region). The lease is for 6
months with a base rent of $3,850 per month and a building management fee of
$1,400 per month. Management of IDW is reviewing a possible extension to this
lease, as well as considering other space in the same locale.
The Company's corporate offices consist of 9,300 sq. ft. in an industrial
park in Rocklin, California. The lease is for a term of 62 months and expires in
April 2005. Besides the base rent of $8,817 per month, IDW pays a proportionate
share of operating expenses not to exceed $2,149 per month. In October 2002, the
base rent will be adjusted to $9,259 for the remainder of the lease.
On December 1, 2000, we sold the approximately 103,000 square foot facility
in Salem, Oregon ("Oregon Property") for $2.7 million. The proceeds were used to
reduce debt and provide working capital. The Oregon Property was used in
discontinued business of Morrow Snowboards(TM).
Item 3. Legal Proceedings
The Company is currently involved in the litigation and proceeding
described below.
Nicholas Steenolsen vs. Squaw Valley Ski Corporation, Granite Bay Technologies,
Inc., Morrow
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Snowboards, Inc., et al., Superior Court of California, Los Angeles County, Case
No. BC243817, a complaint for personal injuries that arose from plaintiff's use
of a snowboard allegedly manufactured by Morrow Snowboards, Inc. The complaint
seeks unspecified general damages, and unspecified past and future medical
expenses. The Company has not yet answered the complaint and no discovery has
been conducted. The Company intends to defend the action and has no basis upon
which to determine the amount of damages or probability of recovery at this
time.
Item 4. Submission of Matters to a Vote of Security Holders
The Company did not submit any matters to security holders during the
fourth quarter of its last fiscal year ended December 30, 2000.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
From December 14, 1995 until February 18, 2000, the Company's Common Stock
was trading under the symbol "MRRW" and since February 18, 2000, under the
symbol "GBAY." On April 27, 1999, the Company was delisted from the Nasdaq
National Market, but is currently traded on the Pink Sheets. As of April 10,
2001, there were approximately 703 registered holders of the Common Stock of the
Company. Because many of the shares of Common Stock are held in street name,
there may be additional beneficial holders of the Company's Common Stock. On
December 30, 2000 there were 19,150,507 shares outstanding.
The following table shows the range of high and low market prices as
reported by the Pink Sheets and while the Company was involved in its current
operations:
High Low
Fiscal 2000:
- -----------
First Quarter (Apr 2) $5.25 $0.28
Second Quarter (July 2) $3.31 $1.50
Third Quarter (Oct. 1) $2.30 $1.60
Fourth Quarter (Dec. 31) $1.90 $0.45
The following table shows the range of high and low market prices as
reported by the Nasdaq National Market or Pink Sheets while the Company was
involved in the now discontinued operations:
High Low
Fiscal 1999:
- -----------
First Quarter (Apr. 3) $0.84 $0.38
Second Quarter (July 3) $0.38 $0.01
Third Quarter (Oct. 2) $0.25 $0.01
Fourth Quarter (Jan. 1) $1.00 $0.01
The Company has paid no dividends on its Common Stock since its inception.
For the foreseeable future, any earnings will be retained to finance the growth
of the Company and, accordingly, the Company does not anticipate the payment of
cash dividends.
11
Recent Sales of Unregistered Securities
For the year ended December 30, 2000, we have sold and issued the following
securities which were not previously reported in our quarterly reports:
1. We granted stock options to our employees, officers, and directors
pursuant to the 1990 Stock Option Plan, in the aggregate amount of 547,500
shares at exercise prices ranging from $0.75 to $1.70.
2. We granted an aggregate of 180,000 shares of our Common Stock to our
outside directors under our 1999 Stock Option Plan for nonemployee directors at
exercise prices ranging from $0.75.
3. We granted an aggregate of 131,000 shares of our Common Stock to our
employees, officers and directors under our 2000 Equity Incentive Plan exercise
prices ranging from $0.75 to $0.78.
4. On October 27, 2000, we changed our corporate domicile from Oregon to
California pursuant to a merger agreement. Each outstanding share of Common
Stock and option and warrant to purchase shares of Common Stock of our
predecessor automatically became one share of our Common Stock or option or
warrant to purchase shares of our Common Stock. The corporate existence of our
predecessor ceased. We relied on the exemption from registration contained in
Rule 145(a)(2) of the Securities Act of 1933.
5. In connection with our private placement in June 2000, we issued
warrants to purchase 25,000 shares of Common Stock at a price of $1.50 per share
which expires June 21, 2005 to finders.
6. On August 1, 2000, the Company granted 5,000 shares of Common Stock,
pursuant to stock purchase agreements, to creditors in connection with
discontinued operations. These shares were granted in consideration of the
creditors release of interest in the Oregon property refinance.
7. In connection with the Company's August 2000 private placement of
134,000 shares of Common Stock, the Company entered into a put option agreement.
In the put option agreement the shareholder has the right to require the
Company, for a period of thirty (30) days beginning August 24, 2001, to purchase
all or a portion of these shares at a price of $2.25 per share. The Company at
its option may redeem these shares at a price of $2.25 up to August 25, 2001.
8. On September 8, 2000, the Company granted 10,000 shares of Common Stock
at $1.73 per share to a Vice President of IDW for his services.
9. On September 8, 2000, the Company sold 100,000 shares of Common Stock to
a Vice President of IDW. The Company received a promissory note for $150,000 for
the purchase of these shares. These shares and related note were subsequently
cancelled when the employment of the employee was ended.
10. Also, in the fourth quarter of 2000, the Company, in another private
placement, sold 458,630 shares of Common Stock at $1.50 per share to accredited
investors. Total proceeds from the offering were $687,945. The Board set the
offering price based on then market prices and other factors.
11. On December 22, 2000, the Company closed a unit offering consisting of
debt instruments and warrants to purchase shares of Common Stock of the Company
equal to 20% of the investment amount. Under the debt instruments, the Company
will pay interest only payments each month at a rate of 12.68% per year and the
total amount borrowed is due on December 30, 2001. The warrants are exercisable
for $0.75 per share for a period of 5 years. The Company's net proceeds from the
offering were $449,303. There was no broker or placement agent in this
transaction. After December 30, 2000, we sold additional units with net proceeds
totaling $50,000.
The sales and issuances of the shares of Common Stock, options, put
options, and warrants to purchase Common Stock in private placements listed
above were made by us in reliance upon the exemptions from registration provided
under Section 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 offers and sales were made to accredited investors as defined in Rule
501(a) under the Securities Act, no general solicitation was made by us or any
person acting on our behalf; the securities sold were subject to transfer
restrictions, and the certificates for those shares contained an appropriate
legend stating that they had not been registered under the Securities Act and
may not be offered or sold absent registration or pursuant to an exemption
therefrom.
12
Item 6. Selected Consolidated Financial Data
The following table presents a summary of selected financial data for each
of the five years in the period ended December 30, 2000. The Financial Data
includes the Company discontinued snowboard and apparel operations, except where
noted.
Years Ended
- ------------------------------------------------------------------------------------------------------------------------------------
December 30, January 1, December 26, December 27, December 31,
2000 2000 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except share and per share data)
Net sales (1) $ 17,804 $ -
Cost of goods sold (1) 12,578 -
--------- --------- --------- --------- ---------
Gross profit (1) 5,226 - - - -
--------- --------- --------- --------- ---------
Operating expenses:
Selling, marketing & customer service 1,545 - - - -
Engineering, advance design and product
management 570 - - - -
General and administrative 5,124 347 295 332 315
--------- --------- --------- --------- ---------
Total operating expenses (1) 7,239 347 295 332 315
--------- --------- --------- --------- ---------
Operating loss (2,013) (347) (295) (332) (315)
--------- --------- --------- --------- ---------
Other income (expense):
Interest expense (442) (27) - - -
Unrealized loss on asset (1,000)
Other income (29) - - - -
--------- --------- --------- --------- ---------
(1,471) (27) - - -
--------- --------- --------- --------- ---------
Loss from continuing operations before income taxes (3,484) (374) (295) (332) (315)
--------- --------- --------- --------- ---------
Income tax benefit (expense) - - - - -
--------- --------- --------- --------- ---------
Loss from continuing operations (3,484) (374) (295) (332) (315)
--------- --------- --------- --------- ---------
Income (loss) on discontinued snowboard operations 69 165 (7,402) (6,688) 2,462
Loss on disposition of snowboard operations (269) - (1,952) - -
Loss on discontinued apparel operations (112) (3,309) (4,939) - -
Loss on disposition of apparel operations (269) (132) - - -
--------- --------- --------- --------- ---------
Loss from discontinued snowboard and apparel
operations, net of taxes before extraordinary item (581) (3,276) (14,293) (6,688) 2,462
--------- --------- --------- --------- ---------
Extraordinary Loss on Extinguishment of Debt - - - - -
--------- --------- --------- --------- ---------
Net income (loss) $ (4,065) $ (3,650) $ (14,588) $ (7,020) $ 2,147
========= ========= ========= ========= =========
Income (loss) per share from continuing operations (2)
Basic $ (0.20) $ (0.06) $ (0.05) $ (0.06) $ (0.05)
Diluted $ (0.20) $ (0.06) $ (0.05) $ (0.06) $ (0.05)
Income (loss) per share from discontinued operations (2)
Basic $ (0.03) $ (0.51) $ (2.31) $ (1.18) $ 0.43
Diluted $ (0.03) $ (0.51) $ (2.31) $ (1.18) $ 0.41
Net income (loss) per share (2)
Net loss - basic $ (0.23) $ (0.57) $ (2.36) $ (1.24) $ 0.38
Net loss - diluted $ (0.23) $ (0.57) $ (2.36) $ (1.24) $ 0.35
Weighted average number of shares outstanding (1)
Basic 17,482,583 6,377,556 6,176,556 5,671,634 5,684,053
=========== ========= ========= ========= =========
Diluted 17,482,583 6,377,556 6,176,556 5,671,634 5,929,674
=========== ========= ========= ========= =========
- ------------------------------------------------------------------------------------------------------------------------------------
As Of
December 30, January 1, December 26, December 27, December 31,
2000 2000 1998 1997 (3) 1996 (3)
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except share and per share data)
Balance Sheet Data:
Cash and cash equivalents 914 1,930 1,348 855 5,062
Short term investments - - - - 3,700
Net current assets from continuing operations 5,563 2,111 1,348 9,790 23,017
Net current assets of discontinued operations 24 2,332 9,449 4,006 -
Equipment, fixtures, and property, net 7,191 3,061 3,108 3,980 9,183
Total assets from continuing operations 18,849 6,172 4,456 17,965 32,243
Total net assets from discontinued operations 24 2,404 15,622 9,332 -
Current liabilities 4,941 3,973 12,583 5,196 3,789
Long-term debt and capital lease obligations, net
of current portion 201 - - 13 258
Shareholders' equity 13,731 4,603 7,495 22,058 27,892
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Since its formation in 1989 until 1999, the Company focused its business
activities on designing, manufacturing and marketing premium snowboards and
related products under the "Morrow" brand name. 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
discontinuance of all operations. The Company's total revenues from the
discontinued operations during the fiscal year ended December 30, 2000 amounted
to $107,000 representing rent income on a facility previously used in the
discontinued apparel operations. This compares to $9,108,000 for the
discontinued operations during the fiscal year ended January 1, 2000, of which
$86,000 related to discontinued snowboard operations and $9,022,000 related to
discontinued apparel operations.
On January 31, 2000, the Company acquired 100% of the outstanding shares of
International DisplayWorks, Inc. ("IDW") and, concurrently, IDW (through its
subsidiary IDW Hong Kong ("IDW HK") acquired 100% of the shares of MULCD
Microelectronics Company Ltd. ("MULCD") and Vikay Shenzhen Technology
Development Company, Ltd. ("IDWT"). MULCD and IDWT are engaged in the
manufacturing and assembly of liquid crystal displays and assemblies in the
Peoples Republic of China ("PRC Companies").
The operations of the Company in the year ended December 30, 2000 consist of the
activities of IDW on a consolidated basis for the eleven-month period from their
acquisition on January 31, 2000 through December 30, 2000.
Comparison of the Years Ended December 30, 2000 (Fiscal 2000) and January 1,
2000 (Fiscal 1999)
Continuing Operations. The Company's continuing operations consist of IDW,
IDW HK and the PRC Companies, which manufacture liquid crystal displays and
assemblies. As previously mentioned, the Company discontinued snowboard and
apparel operations. As a result of the discontinued operations, the consolidated
financial statements report the transactions of the discontinued operations as
net amounts separate from continuing operations. All continuing operations
ceased in 1999 except for some general and administrative expenses incurred to
wind down operations and interest expense on the Company's bridge loan.
Discussion and analysis of the results of continuing operations in fiscal 2000
as compared to fiscal 1999 follow.
Revenues. The Company had consolidated net sales of $17,804,000, from the
sale of liquid crystal displays and assemblies for electronic equipment for the
year ended December 30, 2000. Such sales represent sales of IDW and its
subsidiaries for the eleven-month period from their acquisition on January 31,
2000 through December 30, 2000. All sales in fiscal 1999 were part of the
Company's discontinued operations and, therefore, are not compared to the fiscal
2000 results.
Gross Profit. Gross profit from continuing operations in the fiscal year
ended December 30, 2000 was $5,226,000, which represents continuing operations
of IDW and its subsidiaries for the eleven- month period from their acquisition
on January 31, 2000 through December 30, 2000. All prior year gross profit is
part of the Company's discontinued operations and therefore is not compared to
the 2000 results.
13
Operating Expenses. Operating expenses of continuing operations consist of
selling, marketing and customer service; engineering, advance design and product
development; and general and administrative expenses. These expenses were
$7,239,000 for the year ended December 30, 2000, which represents the operating
expenses of the continuing operations of IDW and its subsidiaries from the
acquisition date of January 31, 2000 through December 30, 2000 and the ongoing
corporate administration of the Company.
Selling, Marketing and Customer Service. Selling, marketing and customer
service expenses for the year ended December 30, 2000 were $1,545,000, which
represents continuing operations of IDW and its subsidiaries from the
acquisition date of January 31, 2000 through December 30, 2000. There were no
selling, marketing and customer service expenses in fiscal 1999 related to
continuing operations. Significant elements of this expense in fiscal 2000
consists of staff and employee related expenses of $1,071,000, travel and
related expenses of $65,000 and advertising expense of $73,000.
Engineering, Advance Design and Product Management. Engineering, advance
design and product management expense for the year ended December 30, 2000 were
$570,000 representing continuing operations of IDW and its subsidiaries from the
acquisition date of January 31, 2000 through December 30, 2000. There were no
engineering, advance design and product management expenses during fiscal 1999
related to continuing operations. The significant element of the engineering,
advance design and product management expenses for continuing operations during
fiscal 2000 was staff and employee related expenses of $522,000.
General and Administrative. General and administrative expenses for the
year ended December 30, 2000 were $5,124,000, which represents continuing
operations of IDW and its subsidiaries from the acquisition date of January 31,
2000 through December 30, 2000 and continuing operations expenses for ongoing
corporate administration of the Company. The significant elements of the general
and administrative expenses of continuing operations of IDW and its subsidiaries
during fiscal 2000 relate to staff and employee related expenses of $1,696,000,
rent, telephone, and utilities expenses of $288,000, legal expenses of $158,000,
accounting expenses of $238,000 and local government fees of $122,000.
Significant elements of the continuing operations expenses for the Company's
ongoing corporate administration include $310,000 in accounting fees, $249,000
in legal fees, $213,000 of insurance costs, $175,000 in salaries and benefits,
and $395,000 in amortization of goodwill from the IDW acquisition. Depreciation
of general and administrative facilities amounted to $341,000.
Interest Expense. Interest expense increased by $415,000, to $442,000 for
the year ended December 30, 2000, from $27,000 for the year ended January 1,
2000. The interest expense in fiscal 2000 related primarily to interest on the
obligations incurred to raise the funds for the acquisitions of IDW and its
subsidiaries. The interest expense in fiscal 1999 related to payments on the
$675,000 outstanding bridge loan.
Other Expense. Other expenses of continuing operations in fiscal 2000
amounted to a $1,000,000 unrealized loss resulting from the write-off of an
investment in common shares of Globalgate, an e-commerce company that had
suffered deteriorated financial condition such that the company believed its
investment had little or no market value, and $29,000 representing small items
of other income and expense. There was no other income or expense in 1999 of
continuing operations.
Net Loss. Net loss for fiscal year 2000 was $4,065,000 compared to net loss
of $3,650,000 for fiscal 1999. The loss from continuing operations in 2000 was
$3,484,000, or an increase of $3,110,000 over the loss from continuing
operations of $374,000 in 1999. The loss from continuing operations in 2000
represents the results of operations of IDW and its subsidiaries while the
activities in 1999 were primarily focused on discontinued operations of the
snowboard and apparel segments. The loss from
14
discontinued operations was $581,000 in fiscal 2000, a decrease of $2,695,000
from the loss from discontinued operations of $3,276,000 in fiscal 1999. The
decrease is attributable to the closure of operations of the discontinued
segments. Costs of winding down the discontinued operations and losses on
disposition of their assets in excess of previous estimates resulted in the
fiscal 2000 loss from discontinued operations.
Discontinued Operations. The net loss from discontinued snowboard and
apparel operations in fiscal 2000 was $581,000 consisting of a loss of $43,000
from discontinued operations ($69,000 income for snowboards and $112,000 loss
for apparel) and a loss of $538,000 from disposition of assets of the
discontinued operations ($269,000 loss from snowboards and $269,000 from
apparel). The loss from discontinued operations represents differences between
incurred costs of winding down the operations and losses on disposal of the
assets of discontinued operations and estimates made in prior years when the
decision was made to discontinue the two segments activities.
Comparison of the Years Ended January 1, 2000, (Fiscal 1999) and December 26,
1998, (Fiscal 1998)
Continuing Operations. 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. As a result of these transactions, all continuing
operations ceased except for some general and administrative expenses incurred
to wind down operations and interest expense on the Company's bridge loan. These
continuing operations expenses were $374,000 for fiscal 1999.
Net Sales. All sales are a part of the Company's discontinued operations
and therefore not reflected in this comparison.
Gross Profit. All 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 of continuing operations consist of
general and administrative costs. These costs increased to $347,000 for the year
ended January 1, 2000, from $295,000 for the year ended December 26, 1998. This
increase is a result of greater consulting needs in fiscal 1999 to wind down
operations. The general and administrative expenses for fiscal 1999 consisted of
salaries and accounting consulting of $242,000 as well as $105,000 in
depreciation expense.
Interest Expense. Interest expense increased to $27,000 for the year ended
January 1, 2000, from $0 for the year ended December 26, 1998. The interest
expense in 1999 related to payments on the $675,000 outstanding bridge loan. The
1998 interest expense is a part of discontinued operations and is not reflected
in this comparison.
Other Income/Expense. There were no other income/expenses due to the
Company's discontinued operations and therefore none are reflected in this
comparison.
Discontinued Operations. On March 26, 1999, the Company sold all of its
snowboard, boot and binding assets to K2 for $3.2 million. The Company retained
all of the related receivables and liabilities, except for capital lease
obligations and certain contract team rider obligations.
There was income from discontinued snowboard operations of $165,000 in 1999
compared to a loss on discontinued snowboard operations of $7,402,000 in fiscal
1998. The Company recognized a loss on the discontinuance of $1,952,000 in
fiscal 1998, which is comprised of a $454,000 loss on the sale to K2 and
$1,498,000 in accruals related to discontinued snowboard operations in the first
quarter of fiscal 1999. The Company also saw decreased sales and write downs in
the value of certain equipment related to future usage for the discontinued
snowboard operations in 1998. The income from discontinued snowboard operations
in fiscal 1999 resulted from the revaluation of allowances and accruals
established at the time of the sale to K2.
15
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 1999 of $3,309,000 compared to a loss
from discontinued apparel operations of $4,939,000 in 1998. The Company
recognized a loss on the discontinuance of $132,000 in fiscal 1999, which
results from a loss on the sale to Westbeach Sports, Inc. The fiscal 1999 loss
from discontinued apparel operations included a loss on impairment of goodwill
of $1,135,000.
Net (Loss) Income. Net loss for fiscal 1999 was $3,650,000 compared to net
loss of $14,588,000 for fiscal 1998. The difference is mainly attributable to
the discontinuance of the snowboard business and the significant losses it
created in 1998. Of the $3,650,000 net loss for fiscal 1999, $374,000 is net
loss from continuing operations related to the operating expense and interest
expense previously mentioned.
Liquidity and Capital Resources
The Company requires capital to pay certain existing fixed obligations,
provide working capital for the PRC Companies, cover administrative overhead for
the parent company and certain costs related to being a public company. As
discussed below, the Company will require additional working capital to
implement its current Business Plan for IDW.
Net cash used in operating activities from continuing operations for Fiscal
2000 was $1,051,000 resulting primarily from a net loss of $4,065,000, increases
in accounts receivable of $1,501,000 and decreases in accounts payable of
$1,597,000 partially offset by noncash expenses of depreciation and amortization
of $2,413,000 and loss from write-off of a $1,000,000 investment. This compares
to cash provided by operating activities for 1999 of $4,741,000 resulting
primarily from a net loss of $3,650,000, increases in accrued liabilities of
$1,998,000 and increase in accrued loss on disposal of $1,498,000 with add backs
for depreciation and amortization of $758,000, loss on write-down of fixed
assets of $2,659,000, decreases in accounts receivable of $3,339,000, decreases
in inventories of $4,099,000. Cash provided by discontinued operations in fiscal
2000 was $2,394,000, which consisted primarily of proceeds from sale of real
estate of the previous apparel segment.
Net cash used in investing activities for fiscal 2000 was $4,493,000. Of
that amount, $4,272,000 represents payments toward the purchase of the PRC
Companies, and $285,000 was used for the acquisition of property and equipment.
Net cash provided by financing activities in fiscal 2000 was $2,134,000,
consisting principally of $6,017,000 from sale of shares of Common Stock in
private placements and partially offset by $4,391,000 of net repayment of debt.
Net cash used in financing activities was $4,524,000 in fiscal 1999, consisting
of $2,251,000 in principal payments and $3,698,000 in repayment of line of
credit borrowings, partially offset by $675,000 borrowings from the acquired
bridge loan and $750,000 proceeds from the issuance of Common Stock.
On March 30, 1999, some of the Company's trade creditors filed an
Involuntary Petition ("Involuntary Petition") for relief under Chapter 7 of the
United States Bankruptcy Code in the United States Bankruptcy Court for the
District of Oregon (Case No. 699-61663-FRA7). On March 30, 1999, the Company's
accounts payable were approximately $2,500,000 and were all overdue more than 90
days. The Company negotiated a settlement with substantially all those creditors
and the Involuntary Petition was dismissed on June 16, 1999. The settlement was
accepted by over 90% of the Company's creditors (by number and dollar amount of
claims) with undisputed claims. On August 2, 2000, the Company made the final
payment of $1,384,000 due to creditors under the settlement.
16
The planned future expansion of IDW and its subsidiaries includes an
expansion into COG production and related product development. A payment of
approximately $800,000 is required in the second quarter of 2001. In addition,
approximately $2,000,000 of additional capital expenditures is expected to be
needed during 2001 to enhance existing production capabilities, de-bottleneck
processes, assure future product quality and reliability, reduce costs, and
expand capacity. IDW is expected to generate significant amounts of working
capital beginning later in 2001. IDW expects to borrow against unleveraged
assets such as the manufacturing facility in PRC.
Any financing, involving equity or rights to acquire equity interests,
would result in dilution in the percentage ownership of existing shareholders
when such equity interests were issued and, depending on the sales price, a
dilution in book value. There is no assurance the expected $2.8 million in
financing needed in 2001 will be raised or raised in a timely manner. In such
event, we would face a reduced level of operating performance, possible losses
on investment and ability to service our customers' growing needs.
See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Factors that May Affect Future Results -- PRC
Companies' Operating Results; Payment of Balance of Purchase Price for the PRC
Companies" and "--Granite Bay's Capital Resources and Liquidity; Potential
Consequences of Failure to Raise Additional Needed Capital" regarding the
Company's capital and resources to finance such payments and the risks
associated therewith.
Factors That May Affect Future Results
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," "Granite Bay" or "we") or its management, including without
limitation, IDW, IDW HK and the PRC Companies (as defined herein), are intended
to identify such forward-looking statements. Granite Bay's actual results,
performance or achievements could differ materially from the results expressed
in, or implied by these forward-looking statements. Granite Bay wishes to
caution readers of the important factors, among others, that in some cases have
affected, and in the future could affect Granite Bay's actual results and could
cause actual consolidated results for fiscal year 2001, and beyond, to differ
materially from those expressed in any forward-looking statements made by, or on
behalf of, Granite Bay. These factors include without limitation, Granite Bay's
change in business lines, Granite Bay's ability to obtain capital and other
financing in the amounts and the times needed, realization of forecasted income
and expenses,initiatives by competitors, price pressures, changes in the
political climate for business, the loss of one or more significant customers
and the risk factors listed from time to time in Granite Bay's SEC reports and
risk factors listed below.
Granite Bay's principal assets consist of its equity interests in IDW. As a
result, Granite Bay's operating results will primarily reflect IDW's operating
results. A wide variety of factors will affect operating results and could
adversely impact net sales and profitability. Significant factors in our success
will be our ability to establish and, in certain cases, re-establish design and
manufacturing relationships with key OEM customers that will generate sufficient
orders, including orders of higher margin products, to increase revenues and
profitability.
Our products are incorporated in a wide variety of communications, consumer
and appliance products. A slowdown in demand for such products that utilize
IDW's displays and modules as a result of economic or other conditions and the
market served by IDW or other factors could adversely affect IDW's operating
results. Our products are sold into an industry characterized by increasingly
rapid product turnaround, increasingly shorter lead times, product obsolescence,
order cancellation and other
17
factors that make it difficult to forecast future orders, production and
personnel needs and other resource requirements with a high level of certainty.
Our 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 are beyond the
Company's control are described below.
Granite Bay's Capital Resources and Liquidity and IDW 2000 Operating
Results. The actual performance of IDW for 2000, following its acquisition by
Granite Bay was materially less than forecasted. This performance resulted from
unexpectedly longer lead times to restart relationships that had been ignored
while the PRC companies were operated under Judicial Management, prior to their
acquisition by IDW. In addition, the longer than expected time to complete the
final payments and reconciliation with the Judicial Managers, and the protracted
accounting and legal issues relating to the complexity of buying companies out
of distress situations, has affected the timeliness of Granite Bay regaining its
listing on NASDAQ, which, along with an increasingly difficult environment in
North America for raising new capital, has slowed our ability to provide for the
financing requirements of IDW. While IDW is closer to producing a positive cash
flow, if we are unsuccessful in raising capital when required, then Granite Bay
could face a total risk of loss of its investment in IDW as well as the
underlying PRC Companies. Further, any financing, involving equity or rights to
acquire equity interests, would result in dilution in the percentage ownership
of existing shareholders when such equity interests were issued and, depending
on the sales price, a dilution in book value. Further, to capitalize on certain
growth opportunities for the PRC Companies or if projected revenues are less
and/or costs higher than projected, we would have to raise additional financing
beyond that outlined above. Without such expansion, the potential for IDW to
grow, as well as to maximize revenues and potential profitability, will be
limited; this could affect the value of the Company's Common Stock. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "-- Factors that May Affect
Future Results" regarding Granite Bay's capital and resources to finance such
payments and the risks associated therewith.
Dependence on Key Personnel. Our success is largely dependent upon the
expertise of key members of IDW's management team including its founder, Anthony
Genovese, and Philip Gregory, its VP of Manufacturing. Loss of their services
could materially and adversely affect our business, its future prospects and
operating results, including its ability to penetrate the United States market.
We do not presently have a long-term employment agreements with these key
employees. Our business and operating results also depend substantially on the
efforts and abilities of our senior management and technical personnel. The
competition for qualified management and technical personnel is intense. The
loss of service of one or more of its key employees or the ability to add and
retain key personnel could have a material adverse effect. We do not presently
maintain key-person life insurance.
A Few Customers and Applications Account for a Significant Portion of IDW's
Sales; Order Cancellations. In fiscal year 2000 ten customers represented 56% of
total sales revenue. One customer represented 28% of IDW revenue. At our present
size, the loss of any one of these customers could have a material affect on the
Company's health. Customers have not made firm long-term purchase commitments.
Delay or reduction of customer orders could result in under-absorption of
manufacturing capacity. These risks are enhanced because of the large percentage
of sales to electronic industry customers who are subject to severe competitive
pressures, rapid technological change and obsolescence. While we expect to
continue to receive orders from existing and new customers, there is no
assurance orders will be received, and if received, not cancelled, delayed or
reduced, which could have a material adverse effect on IDW's results of
operations. To reduce this risk, we expect to continue to emphasize custom
modules which increase sales to the above customers or new customers for custom
devices where purchase orders are generally longer term with more limited
cancellation provisions.
18
Need for Additional Financing. The opportunities for long-term growth in
IDW's lines of business are dependent upon having sufficient capital resources
available to realize the rapid growth potential of significant OEM key accounts
which we have identified and targeted. We expect to need capital to fuel IDW's
growth for both working capital and our capital expenditure program.
The inability to include new display devices in its product offerings may
affect our ability to seek business from certain customers who want complete
solutions to all their display device needs or could adversely affect IDW's
operating results if technology shifts to such higher-end devices in general.
Ramifications of a Long Period of Judicial Management. Since the parent of
MULCD and IDWT was under judicial management from December 6, 1997 through
January 2000, many of our customers found second sources of supply or purchased
goods elsewhere. The probability of recovering much of that lost business has
been impaired by the passage of time. Judicial management also affected the
pricing, terms and conditions of payments to its suppliers. In many cases,
supplier relationships may have been adversely impacted in the short and long
run. We have worked hard to reestablish credit and verify that material costs
are in line with the industry. In some cases, we may have to establish new
sources of supply. We also believe that the judicial management resulted in
financial and operating performances that are not reliable in terms of
predicting future financial performance operations.
IDW Faces Intense Competition. We operate in a competitive environment that
is characterized by price erosion, technological change and competition. IDW
competes with major Asian and international companies. Most of IDW's competitors
have greater market recognition and substantially greater financial, technical,
marketing, distribution, manufacturing and other resources than IDW. Further,
many of our competitors have manufacturing and sales forces that are
geographically diversified allowing them to reduce transportation, tariff costs
and currency fluctuations for certain customers in markets where their
facilities are located. Many competitors have production lines that allow them
to produce more sophisticated and complex devices than IDW and to offer a
broader range of display devices to customers. New emerging companies or
companies in related industries may also increase their participation in the
display module market which would increase competition.
Our ability to compete successfully depends on a number of factors, both in
and outside of its control. Those factors include: the price, quality,
performance, reliability, ease of use and features of our products; the variety
of our product solutions; foreign currency fluctuation; trade barriers and
custom duties which may effect the cost of products; our ability to design and
manufacture new product solutions, including incorporating new technology; the
availability and price of raw materials; our ability to fully utilize our
manufacturing facility; new product technology or solutions by our competitors;
the number and success of competitors; and general market and economic
conditions. Our competitive position can also be adversely affected if one or
more of our customers, including our key customers, decide to design and
manufacture their own display modules, use different devices or purchase devices
from competitors. We cannot assure that we will compete successfully in the
future.
Risk of Inability to Produce High-End Products. IDW's success will be
partly dependent upon our ability to effectively offer or manufacture higher-end
products such as large graphic STN, color graphic displays, micro-displays and
black mask automotive products.
These products offer both the opportunity to increase utilization of
existing manufacturing capacity, and also the opportunity to generate higher
margins and profits at given revenue levels. The production of such products
requires increased custom design and manufacturing and the maintenance of strong
customer relationships. This will require that we maintain and upgrade our
research, engineering and designing capabilities to remain in the forefront of
developments in the industries.
19
Changing Technologies. We operates in an industry characterized by
technological advances, the introduction of new products and new design and
manufacturing techniques. As a result, IDW will be required to expend
substantial funds and to commit significant resources to continuing research and
development activities, engaging additional engineering and other technical
personnel, purchasing new design, production and test equipment, and continually
enhancing design and manufacturing processes and techniques. IDW's future
operating results will depend significantly on our ability to timely provide
design and manufacturing services for new products that compete favorably with
the design and manufacturing capabilities of OEMs and third-party suppliers.
IDW could invest significant sums in design and manufacturing services for
new product solutions that may not receive or maintain customer or market
acceptance or effectively address customer needs which could adversely affect
our future operating results. Further, customers may change or delay product
introductions or terminate existing products without notice for any number of
reasons unrelated to IDW, including lack of market acceptance for a product.
We may also be required to increase our design staff and other personnel
and incur other expenses on capital equipment, leasehold permits and other items
to meet the anticipated or actual demand of our customers. Those additional
costs may adversely impact operating margins in the short term.
Maintenance of Satisfactory Manufacturing Yields and Capacities;
Variability of Customer Requirements. The profitability and operating results of
IDW are dependent upon a variety of factors, including product mix, utilization
rates of its manufacturing lines, downtime due to product changeover, impurities
in raw materials causing shutdowns, maintenance of contaminant-free operations
and other factors.
Risks Associated with International Operations. IDW has made a decision to
locate all of its manufacturing operations in China and to establish sales
offices in Asia, Europe and the United States. The geographical distance between
its manufacturing facilities in China and in North America create a number of
logistical and communications challenges. Because of the location of the
manufacturing facilities in China, IDW may be affected by economic and political
conditions in that country, as well as economic and political conditions in the
countries in which it markets and distributes its products, including without
limitation, problems related to labor unrest, lack of developed infrastructure,
variances in payment cycles, currency fluctuations, overlapping taxes and
multiple taxation issues, employment and severance taxes, compliance with local
laws and regulatory requirements, greater difficulty in collecting accounts
receivable, political and economic instability and the burdens of cost and
compliance with a variety of foreign laws.
Further, changes in policies by the United States or other foreign
governments resulting in, among other things, increased duties, higher taxation,
currency conversion, limitations and restrictions on the transfer or
repatriation of funds or limitations on imports or exports, or the expropriation
of private enterprises could also have a materially adverse effect on IDW and
its results of operations. In addition, IDW could be adversely affected if China
were to change its current policies of encouraging foreign investment or foreign
trade. IDW could also be adversely impacted if the United States were to
withdraw the "most favored nation" ("MFN") status and trade preferences
currently being extended to China. That status is annually reviewed and there is
no assurance that the United States will renew China's MFN status in future
years. The non-renewal of China's MFN status could adversely affect IDW by
increasing the cost to United States customers or products manufactured by IDW
in China. IDW's operators are further subject to significant political,
economic, legal and other uncertainties in China. Despite progress in developing
its legal system, China does not have a comprehensive or highly developed
system of laws, particularly with respect to foreign investment activities and
foreign trade. Enforcement of existing and future laws and contracts is
uncertain, and implementation and interpretation of such laws may be
inconsistent. Changes in existing laws, the adoption of new laws and preemption
of local regulations by national laws may adversely affect foreign investment in
China. IDW could also be adversely affected
20
by other factors, including the imposition of austerity and other monetary
measures to fight inflation or to achieve other economic objectives, inadequate
development or maintenance of infrastructure, including adequate power and water
supplies, transportation or raw materials in parts or the deterioration in the
general political, economic or social environment.
Risks Associated with Collectibility of Receivables. IDW extends credit to
its customers based on an assessment of a customer's financial circumstances,
generally without requiring collateral, in both the United States and in various
countries in the Far East. These extended payment terms, if continued, may
increase our exposure to risk of uncollected receivables. The inability to
collect on these accounts receivable taking into account normal bad debt
reserves, could have a materially adverse effect on our results of operations
and profitability.
Risks Associated with Currency Fluctuations and International Trade. Sales
in global markets, primarily Europe, the United States and other parts of Asia,
are expected to increase significantly in 2001 and subsequent years. Economic
and political conditions internationally may adversely affect the manufacture
and sale of IDW's products. Protectionist trade legislation in the United States
or foreign countries, such as a change in export or import compliance laws,
tariff or duty structures, or other trade policies, could adversely affect our
ability to sell devices in foreign markets, to purchase raw materials or
equipment from foreign suppliers.
IDW transacts business in a variety of currencies including HK dollars,
Singapore dollars, US dollars and the Chinese renmimbi ("RMB"). Increased sales
to Europe may result in payments in other currencies, such as the Euro. Further,
IDW accounts for a portion of its costs, such as payroll, land rent and certain
other costs in RMB. While foreign currency exchange fluctuations are not
believed to materially affect our operations, changes in the relation of the RMB
or other currencies to the US dollar, could affect IDW's cost of goods sold,
operating margins and result in exchange losses. In addition, currency
devaluations, changes in exchange rate fluctuations could affect the value of
deposits of currencies IDW holds or results of operations. The Chinese RMB has
experienced significant devaluation against most major currencies in the past.
Because the RMB is not freely traded, hedging that currency is difficult.
IDW May Experience Shortages of Raw Materials and Supplies. Principal raw
materials used in producing IDW's products consist of raw and coated glass,
polarizers, liquid crystal, chemicals, PCBs, driver IC's, molded plastic parts,
electronic components and packaging materials. For its energy supply, IDW uses
diesel fuel. IDW purchases most of these materials in Asia. We do not have long
term supply contracts with our suppliers. IDW believes that it has secondary
sources of supplies for most of its products and, if we were to lose any of its
primary or secondary suppliers, we could develop new sources of supply. However,
because IDW's sources for many materials are from foreign suppliers, IDW may be
subject to certain risks, including tariffs, currency fluctuations and supply
interruptions. The impact of price increases will affect operating costs and
product margins, the materiality of which cannot be presently determined.
Environmental Regulations. Our operations result in the creation of small
amounts of hazardous wastes, including various gases, epoxies, inks, solvents
and other coal wastes. IDW is, therefore, subject to national, state and local
governmental regulations related to the use, storage and disposal of such
hazardous wastes used in the manufacturing processes. IDW also has its own
electric power generation plant which operates on diesel fuel. The amounts of
such hazardous waste are expected to increase in the future as our manufacturing
operations increase. The failure to comply with present and future environmental
regulation can result in the imposition of fines, suspension or halting of
production, or closure of manufacturing operations. Environmental compliance may
also require IDW to purchase pollution-control equipment or to incur significant
capital or other expenses. Although we believe we are operating in compliance
with applicable environmental laws, there is no assurance that IDW is in
compliance or will remain in compliance as such laws and regulations change.
21
Governmental Regulations. IDW is subject to numerous foreign, state and
local government regulations. We are subject to laws and regulations governing
its relationship with our employees, including wage and hour requirements,
working and safety conditions, citizenship requirements, work permits and travel
restrictions. Further, the PRC Companies are leasing the land under their
facilities under a 50-year lease, which expires in the year 2043. We are also
subject to significant government regulation relating to property ownership and
use, import restrictions, currency restrictions and other areas, all of which
consistently impact profits and operating results.
Other Risks. Other risks IDW faces include the prior cyclical nature of the
electronics industry, the protection of IDW's trade secrets and technology,
management of expected rapid growth in personnel, capital equipment, outside
sales force, sales and accounts receivable and other items, and maintenance of
adequate research and development efforts and personnel.
Besides the general risk factors noted above, there are several specific
risks that should be noted:
Future Potential Depressive Effect in Stock Prices from Recently Issued
Securities. In fiscal year 2000, the Company issued an additional 9,973,951
shares of its Common Stock. All of those shares are restricted under federal and
state securities laws and may only be resold pursuant to exemptions or under
Rule 144 in the future. Under Rule 144, each of the holders of those securities,
after holding them for one year, may sell in any given calendar quarter
thereafter, the greater of (i) 1% of the outstanding Common Stock, (currently
approximately 194,000 shares) per quarter, or (ii) the average weekly trading
volume for the Common Stock for the prior four full calendar weeks. Under Rule
144, a significant amount of stock could be sold in any calendar quarter after
January 31, 2001, with a potential depressive effect on the Company's stock
prices.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Inflation Risk
We do not expect inflation to have a material effect on the Company's
operating expenses
Interest Rate Risk
We do not believe that any change in interest rates will have a material
impact on the Company during fiscal 2001. Currently, our long-term debt is at a
fixed interest rate.
Foreign Currency Exchange 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 U.S. dollars using the year-end
exchange rate, for a total of $440,926. The potential loss in fair value
resulting from an adverse change in quoted foreign currency exchange rates of
10% amounts to $44,049. Actual results may differ. The Company does not hold
other market sensitive instruments and therefore does not expect to be affected
by any adverse changes in commodity prices, or marketable equity security
prices.
22
Item 8. Financial Statements and Supplemental Data
Consolidated Financial statements and Supplemental Schedule
For the Years Ended December 31, 2000, January 1, 2000 and December 26, 1998
Independent Auditor's Report. . . . . . . . . . . . . . . . . . . . . . . . . 23
Consolidated Financial Statements
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . 24 to 25
Consolidated Statement of Operations. . . . . . . . . . . . . . . . . 26 to 27
Consolidated Statement of Shareholders' Equity. . . . . . . . . . . . . . . 28
Consolidated Statement of Cash Flows. . . . . . . . . . . . . . . . . 29 to 30
Nots to Consolidated Financial Statements . . . . . . . . . . . . . . 31 to 47
Supplemental Schedule - Supplementary Information Requiried
under the Securities and Exchange Act of 1934. . . . . . . . . . . . . . . . 48
23
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Granite Bay Technologies, Inc.
and Subsidiaries
We have audited the accompanying consolidated balance sheet of Granite Bay
Technologies, Inc. and subsidiaries (the "Company"), as of December 30, 2000 and
January 1, 2000, and the related consolidated statements of operations,
shareholders' equity and cash flows for the years then ended. These consolidated
financial statements and the schedule referred to on the following page are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and supplemental schedules
based on our audit. The consolidated financial statements of Granite Bay
Technologies, Inc. and subsidiaries, as of and for the year ended December 26,
1998, were audited by other auditors whose report dated June 17, 1999 on those
statements included an explanatory paragraph describing conditions that raised
substantial doubt about the Company's ability to continue as a going concern.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Granite Bay Technologies, Inc. and subsidiaries as of December 30, 2000 and
January 1, 2000, and the consolidated results of their operations and their cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, certain matters raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are described in Note 1. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
Our audits were conducted for the purpose of forming an opinion on the
basic consolidated financial statements taken as a whole. The Supplemental
Schedule of Valuation and Qualifying Accounts is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not a part
of the basic consolidated financial statements. This information has been
subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic consolidated financial statements
taken as a whole.
/s/ Perry-Smith LLP
Sacramento, California
March 9, 2001, except for Note 19, as to which
the date is April 11, 2001.
24
Report of Independent Public Accountants
To the Board of Directors of
Granite Bay Technologies, Inc.:
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of Granite Bay Technologies, Inc. (a
California corporation, formerly Morrow Snowboards, Inc.) and subsidiaries (the
Company) for the year ended December 26, 1998. These financial statements and
the schedule referred to below are the reponsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaulating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations, changes in shareholders'
equity and cash flows of Grantie Bay Technologies, Inc. (formerly Morrow
Snowboards, Inc.) and subsidiaries for the year ended December 26, 1998 in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company incurred significant losses in 1998 and had
liquidity problems. These matters raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
mattters are described in Note 1. The fianancial statements do not include any
adjustments relating to the recoverability and classifications of asset carrying
amounts or the amount and classification of liabilites that might result should
the Company be unable to continue as a going concern.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The Schedule of Valuation
and Qualifying Accounts as of and for the year ended December 26, 1998 is
presented for purposes of complying with the Securities and Eschange
Commission's rules and is not part of the basic consolidated financial
statements. This information has been subject to the auditing procedures applied
in our audit of the basic consolidated financial statements and, in or opinion,
fairly states in all material respects, the financial data required to be set
forth therein, in relation to the basic consolidated financial statements taken
as a whole.
ARTHUR ANDERSEN LLP
Portland, Oregon
June 17, 1999 (except with respect to the discontinuance
of the Westbeach operations discussed in Notes 1 and 18,
as to which the date is November 12, 1999)
25
GRANITE BAY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands, Except Share Data)
December 30, 2000 and January 1, 2000
December 30, January 1,
2000 2000
------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 914 $ 1,930
Accounts receivable, net 2,954 -
Inventories (Note 4) 1,466 -
Prepaid expense 178 127
Refundable income taxes 54
Other 51 -
Net current assets of discontinued
operations (Notes 4, 15 and 18) 24 2,332
------------- --------------
Total current assets 5,587 4,443
------------- --------------
Property and equipment, at cost, net (Note 5) 7,191 3,061
Other assets:
Investments (Note 6) - 1,000
Goodwill, net (Note 3) 6,079 -
Net non-current assets of
discontinued operations
(Noted 5 and 18) - 72
Other assets, net 16 -
------------- --------------
Total other assets 6,095 1,072
------------- --------------
Total assets $ 18,873 $ 8,576
============= ==============
26
GRANITE BAY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands, Except Share Data)
(Continued)
December 30, 2000 and January 1, 2000
December 30, January 1,
2000 2000
------------- --------------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,265 $ 2,796
Accrued liabilities (Note 7) 1,356 502
Notes payable, short term (Note 8) 1,320 -
------------- --------------
Total current liabilities 4,941 3,298
------------- --------------
Notes payable, noncurrent (Note 8) - 675
------------- --------------
Total Liabilities 4,941 3,973
------------- --------------
Put option (Note 8) 201 -
Commitments and contingencies (Note 10)
Shareholders' equity (Note 11):
Preferred stock, no par value,
10,000,000 shares authorized, no
shares issued or outstanding - -
Common stock, no par value,
20,000,000 shares authorized,
19,150,507 and 9,176,556 shares
issued and outstanding at
December 30, 2000 and 40,997 27,866
January 1, 2000, respectively
Accumulated deficit (27,317) (23,252)
Accumulated other comprehensive
income (loss) 51 (11)
------------- --------------
Total shareholders' equity 13,731 4,603
------------- --------------
Total liabilities and share $ 18,873 8,576
equity ============= =============
The accompanying notes are an integral part of these financial statements.
27
GRANITE BAY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands, Except Share and Per Share Data)
For the Years Ended December 30, 2000, January 1, 2000 and December 26, 1998
December 30, January 1, December 26,
2000 2000 1998
------------ ------------ ------------
Net sales $ 17,804 - -
Cost of goods sold 12,578 - -
------------ ------------ ------------
Gross profit 5,226 - -
------------ ------------ ------------
Operating expenses:
Selling, marketing and
customer service 1,545 - -
Engineering, advanced design
and product management 570 - -
General and administrative 5,124 347 295
------------ ------------ ------------
Total operating expenses 7,239 347 295
------------ ------------ ------------
Operating loss (2,013) (347) (295)
Other income (expense):
Interest expense (442) (27) -
Unrealized loss (Note 6) (1,000) - -
Other expense (29) - -
------------ ------------ ------------
(1,471) (27) -
------------ ------------ ------------
Loss from continuing operations - - -
before income taxes (3,484) (374) (295)
------------ ------------ ------------
Income tax benefit (Note 13)
Loss from continuing operations (3,484) (374) (295)
Income (loss) on discontinued
snowboard operations 69 165 (7,402)
Loss on disposition of snowboard
operations (269) 1,952) -
Loss on discontinued apparel
operations (112) (3,309) (4,939)
Loss on disposition of apparel
operations (269) (132) -
------------ ------------ ------------
Loss from discontinued snowboard
and apparel operations, net of
taxes (Notes 13 and 18) (581) (3,276) (14,293)
------------ ------------ ------------
Net loss $ (4,065) $ (3,650) $ (14,588)
============ ============ ============
(Continued)
28
GRANITE BAY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands, Except Share and Per Share Data)
(Continued)
For the Years Ended December 30, 2000, January 1, 2000 and December 26, 1998
December 30, January 1, December 26,
2000 2000 1998
------------ ---------- ------------
Net loss per common share (Note 3):
Loss from continuing operations - basic $ (.06) $ (.06) $ (.05)
Loss from continuing operations - diluted $ (.20) $ (.06) $ (.05)
Loss from discontinued operations -
basic $ (.03) $ (.51) $(2.31)
Loss from discontinued operations -
diluted $ (.03) $ (.51) $(2.31)
Net loss - basic $ (.23) $ (.57) $(2.36)
Net loss - diluted $ (.23) $ (.57) $(2.36)
Weighted average number of shares
used in computing per share amounts:
Basic 17,482,583 6,377,556 6,176,556
============ ========== ============
Diluted 17,482,583 6,377,556 6,176,556
============ ========== ============
The accompanying notes are an integral part of these financial statements.
29
GRANITE BAY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In Thousands, Except Share Data)
For the Years Ended December 30, 2000, January 1, 2000 and December 26, 1998
Accumulated
Notes Other
Common Stock Receivable Comprehensive
------------ for Common Accumulated Income
Shares - Amount Stock Deficit (Loss) Total
---------- ----------- -------------
Balance, December 27, 1997 6,176,556 $27,116 $ (94) $ (5,014) $ 50 $ 22,058
Forgiveness of shareholder
notes receivable 94 94
Comprehensive loss:
Net loss (14,588) (14,588)
Change in translation
adjustment (69) (69)
----------
Total comprehensive loss (14,657)
--------- -------- ---------- ----------- ------------- ----------
Balance, December 26, 1998 6,176,556 27,116 (19,602) (19) 7,495
Sale of stock 3,000,000 750 750
Comprehensive loss:
Net loss (3,650) (3,650)
Change in translation
adjustment 8 8
------------- ----------
Total comprehensive loss (3,642)
--------- -------- ---------- ----------- ------------- ----------
Balance, January 1, 2000 9,176,556 27,866 (23,252) (11) 4,603
--------- -------- ---------- ----------- ------------- ----------
Comprehensive loss:
Net loss (4,065) (4,065)
Change in translation
adjustment 62 62
------------- ----------
Total comprehensive loss (4,003)
Stock issued for acquisition
(Notes 2 and 11) 2,680,000 7,236 7,236
Stock issued in Private
Placement (Note 11) 7,251,601 6,078 6,078
Common stock options exercised
(Note 11) 42,350 18 18
Common stock subject to put
option (Note 8) (201) (201)
---------- -------- ---------- ----------- ------------- ----------
Balance, December 30, 2000 19,150,507 $40,997 $ - $ (27,317) $ 51 $13,731
========== ======== ========== =========== ============= ==========
The accompanying notes are an integral part of these financial statements.
30
GRANITE BAY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
For the Years Ended December 30, 2000, January 1, 2000 and December 26, 1998
December 30, January 1, December 26,
2000 2000 1998
------------ ---------- ------------
Cash flows from operating activities:
Net loss $ (4,065) $ (3,650) $ (14,588)
Adjustments to reconcile net loss to
net cash (used in) provided by
operating activities:
Loss from discontinued operations 581 1,267 1,952
Depreciation 2,018 671 2,122
Amortization of goodwill 395 87 87
Provision for uncollectible
accounts receivable 66 - -
Write-off of investment 1,000 - -
Loss on impairment of assets - 2,659 2,745
Loss on retirement of fixed a 33 30 89
Deferred income taxes - - (30)
Loss on forgiveness of shareholder
notes receivable - - 94
Other income (17) 8 (69)
Changes in operating assets and
liabilities, net of business
combinations:
(Increase) decrease in:
Accounts receivable (1,501) 3,339 1,215
Inventories 372 4,099 1,757
Prepaid expenses 127 469 32
Refundable income taxes 54 (54) 285
Other assets 849 (431) (292)
Increase (decrease) in:
Accounts payable (1,597) (257) 1,405
Accrued liabilities 631 (1,998) 899
(Continued)
31
GRANITE BAY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
For the Years Ended December 30, 2000, January 1, 2000 and December 26, 1998
December 30, January 1, December 26,
2000 2000 1998
------------ ---------- ------------
Accrued loss on disposal 3 (1,498) -
------------ ---------- ------------
Net cash (used in) provided
by operating activities (1,343) 4,741 (2,297)
------------ ---------- ------------
Cash flows from investing activities:
Purchase of investment - (1,000) -
Acquisitions, net of cash acquired (4,208) - -
Acquisition of property and equipment (285) (209) (924)
Proceeds from sale of equipment - 1,574 81
------------ ---------- ------------
Net cash (used in) provided by
investing activities (4,493) 365 (843)
------------ ---------- ------------
Cash flows from financing activities:
Proceeds from issuance of common
stock $ 6,078 750 -
Proceeds from issuance of short-term
notes payable 1,320 - -
Proceeds from issuance of noncurrent
notes payable 2,100 675 $ 2,000
Principal payments on notes payable (7,141) (2,251) (142)
Payment of loan fees (223) - -
Line of credit (payments) borrowings, net - (3,698) 1,775
------------ ---------- ------------
Net cash provided by (used in)
financing activities 2,134 (4,524) 3,633
------------ ---------- ------------
Net (decrease) increase in cash and cash
equivalents (1,016) 582 493
Cash and cash equivalents at beginning
period 1,930 1,348 855
------------ ---------- ------------
Cash and cash equivalents at end of period $ 914 $ 1,930 $ 1,348
============ ========== ============
The accompanying notes are an integral part of these financial statements.
32
GRANITE BAY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
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 the design, manufacture and
worldwide distribution of liquid crystal displays (LCDs), modules, and
assemblies for major original equipment manufacturers (OEMs) applications
in telecommunications, automotive, industrial, medical and consumer
products.
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 was conducted from organization through
discontinuance of the snowboard and apparel operations in November 1999. In
March 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"). In November
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 (Note 18).
During the year ended December 30, 2000, the Company operated in the single
business segment of electronic equipment and parts.
Going Concern
-------------
The Company incurred net losses of $4,065,000, $3,650,000 and $14,588,000
in the fiscal years ended 2000, 1999 and 1998, respectively. Commencing in
1998, management evaluated its ability to continue under the then existing
corporate structure and determined to sell the snowboard, boot and binding
business. In addition, in 1999 a subsidiary of the Company sold its
Westbeach operations. The results of operations for 1999 and 1998 reflect
the losses incurred in connection with the discontinuance of operations,
including impairment write- downs of equipment and other assets of
$2,659,000 and $2,745,000, respectively (Notes 5 and 18). The Company has
experienced liquidity problems as a result of recurring losses from
operations.
The Company completed several private placements of common stock during
2000 (Note 11). Consistent with management's strategic plans for the
Company, the proceeds from the offerings were used to facilitate the
acquisition of certain manufacturing companies. Management believes that
these companies will generate sufficient net income and liquidity to
sustain the Company's operations. Further, in the event of a capital
shortfall, management of the Company believes that it has the ability to
raise additional equity capital. However, there can be no assurances that
the Company's recent acquisitions will operate profitably or that
management will be successful in raising additional equity capital.
The matters described above raise a substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not
include any adjustments relating to the recoverability and classification
of asset carrying amounts or the amount and classification of liabilities
that might result should the Company be unable to continue as a going
concern.
33
2. INTERNATIONAL DISPLAYWORKS, INC.
Acquisition
-----------
On January 31, 2000, the Company acquired 100% of the outstanding shares of
International DisplayWorks, Inc., (IDW) a Delaware corporation,
headquartered in Rocklin, California, through the issuance of 2,680,000
shares of common stock. The acquisition was accounted for using the
purchase method of accounting. On February 1, 2000, IDW through its wholly
owned subsidiary, International DisplayWorks (Hong Kong) Ltd. (IDW HK),
acquired 100% of the shares of MULCD Microelectronics Company Ltd. (MULCD)
and IDW Shenzhen Technology Development Company, Ltd. (IDWT). MULCD and
IDWT are engaged in the manufacturing and assembly of LCDs and modules in
Peoples Republic of China (PRC Companies). The PRC Companies 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 total payment of approximately $8,481,000. As of December 30,
2000, approximately $820,000 was due, which may be further adjusted to
reflect final accounting adjustments and other items under negotiation
(Note 19). 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.
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 collateralize the deferral of the
payment of the balance of the purchase price for the PRC Companies. Upon
finalization of documents, these charges will be released (Note 19)
Following the acquisition of the PRC Companies, IDW, together with IDW HK
and the PRC Companies, designs, markets and produces LCDs and products
incorporating LCDs, principally in Asia, the United States and Europe.
Design and manufacture of such products is done at the facilities of the
PRC Companies in the Peoples Republic of China, with a focus on high-volume
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. IDW HK
also owns 100% of Glamorous Fortune, Inc., a British Virgin Islands
Company.
Over 90% of IDW's sales in 2000 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 service), 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.
The consolidated financial statements include accounts and transactions of
IDW and the PRC Companies from January 31, 2000, the date of their
acquisition.
34
The following unaudited pro forma information presents the results of
operations of the Company as if the acquisition had taken place on the
first day of each of the years ended as follows (in thousands, except
weighted average shares outstanding and earnings per share):
Years Ended
----------------------------
December 30, January 1,
2000 2000
------------- ----------
Net sales $ 19,320 $ 22,292
Cost of goods $ 13,789 $ 19,199
Operating expenses $ 7,360 $ 2,431
Net loss $ (3,901) $ (2,778)
Weighted average shares outstanding 17,703,341 9,057,556
Earnings per share $ (.22) $ (.31)
These unaudited pro forma results of operations have been prepared for
comparative purposes only and do not purport to be indicative of the
results of operations which actually would have resulted had the
acquisition occurred on the date indicated, or which may result in the
future.
3. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the Company,
and its 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 in
consolidation.
Fiscal Year
-----------
The Company previously used a 52 or 53 week fiscal year ending on the
Saturday nearest December 31. Accordingly, the 2000 fiscal year ended on
December 30, 2000, the 1999 fiscal year ended on January 1, 2000 and the
1998 fiscal year ended on December 26, 1998.
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents consist of cash on hand and on deposit and highly
liquid investments purchased with a maturity of three months or less. 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 December 30, 2000 and January1, 2000.
Inventories
-----------
Inventories for continuing operations are stated at the lower of cost or
market. Costs included in the valuation of inventory are labor, materials
(including freight and duty) and manufacturing overhead.
35
Investments
-----------
Investments as of and January 1, 2000 consist of equity securities deemed
by management to be available-for-sale and are reported at fair value with
net unrealized gains or losses, if applicable, reported within
shareholders' equity.
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 to 35 years for
buildings and improvements and 3 to 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 of leasehold improvements is included in
depreciation expense.
Goodwill and Other Long-Lived Assets
------------------------------------
Goodwill resulting from the IDW acquisition is being amortized over 15
years using the straight-line method and is recorded net of amortization of
$395,000 at December 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. In 1999 and prior to the sale of Westbeach operations, the
Company recorded a loss for impairment of goodwill related to Westbeach of
$1,135,000 which is reflected in loss from discontinued apparel operations.
Goodwill of Westbeach was previously being amortized over 15 years using
the straight-line method.
Warranty Costs
--------------
The Company asks that the customer report defects within fifteen days of
receipt of product. All products are fully replaceable if defective. As the
Company manufactures custom products to customer specifications and has not
experienced significant returns, the Company 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 expenses for
the year ended December 30, 2000 were approximately $73,000. There were no
advertising and promotion expenses for continuing operations in 1999 or
1998.
Revenue Recognition
-------------------
The Company recognizes revenue from the sale of its products when the
products are shipped to customers.
Income Taxes
------------
The Company accounts for income taxes using the liability method. The
estimated future tax effects of differences between the basis in assets and
liabilities for tax and accounting purposes is accounted for as deferred
taxes. Deferred tax assets are also recognized for operating losses and
unused tax credits that are available to offset future taxable income. A
valuation allowance is established to reduce deferred tax assets when it is
more likely than not that all, or some portion, of such deferred tax assets
will not be realized. A valuation allowance
36
for substantially all of the Company's deferred tax assets has been
established due to the uncertainty of realizing these deferred tax assets.
Stock Options and Warrants
--------------------------
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 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.
Warrants and stock options granted to third-parties for goods or services
are valued using the Black-Scholes model.
Product Development Costs
-------------------------
Expenditures associated with the development of new products and
improvements to existing products are expensed as incurred. Product
development costs for the year ended December 30, 2000 were approximately
$314,000. There were no product development expenses for continuing
operations in 1999.
Net Loss Per Share
------------------
The shares used in the calculation of net loss per share are computed as
follows:
Years Ended
--------------------------------------
December 30, January 1, December 26,
2000 2000 1998
------------ ---------- ------------
Shares:
Weighted average shares out-
standing for basic earnings
per share 17,482,583 6,377,556 6,176,556
Dilutive effect of stock options
and warrants (1) - - -
------------ ---------- ------------
Weighted average shares out-
standing for diluted earnings
per share 17,482,583 6,377,556 6,176,556
============ ========== ============
(1) The effect of potential common securities of 1,915,509, 584,448 and
432,998 shares for 2000, 1999 and 1998, respectively, are excluded
from the diluted earnings per share calculation as their effect would
be antidilutive.
Foreign Currency Translation
----------------------------
The value of the U.S. dollar rises and falls day-to-day on foreign currency
exchanges. Since the Company does business in certain foreign countries,
these fluctuations affect the Company's financial position and results of
operations. All foreign assets and liabilities have been translated in the
preparation of the consolidated financial statements at the exchange rates
prevailing at the respective balance sheet dates, and all income statement
items have been translated using the weighted average exchange rates during
the respective periods. The net gain or loss resulting from translation
upon consolidation of the financial statements is reported as a component
of comprehensive income of each period with the accumulated foreign
currency gain or loss reported as a component of the equity category for
comprehensive income (loss). Some transactions of the Company and its
foreign subsidiaries are made in currencies different from their own.
Translation gains and losses from these transactions in foreign currencies
are included in income as they occur.
37
The cash flows of the Company's foreign subsidiaries are translated using
the weighted average exchange rates during the respective period. As a
result, amounts in the statement of cash flows related to changes in assets
and liabilities will not necessarily agree with the changes in the
corresponding balances on the balance sheet which were translated at the
exchange rate at the end of the period. The effect of exchange rate changes
on foreign cash and cash equivalents is reported as a separate element of
the statement of cash flows, if significant.
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.
4. INVENTORY
Inventories consisted of the following (in thousands):
December 30, January 1,
2000 2000
----------------- ------------
Finished goods $ 614
Work-in-process 443
Raw materials 1,075
Less: reserve for obsolete inventory (666)
----------------- ------------
Total continuing operations
inventories, net $ 1,466 $
================= ============
Total discontinued operations
inventories, net $ - $ 70
================= ============
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
December 30, January 1,
2000 2000
----------------- ------------
Property:
Building and improvements $ 2,286 $ 3,300
Plant, equipment, furniture
and fixtures 5,809 500
8,095 3,800
Less accumulated depreciation (904) (739)
----------------- ------------
Property and equipment for continuing
operations, net $ 7,191 $ 3,061
================= ============
Equipment, fixtures and other assets
for discontinued operations, net $ - $ 72
================= ============
In December 2000, the Company sold its Salem, Oregon facility for
$2,700,000 and recorded a loss on the sale of $348,565. The proceeds were
used to retire the outstanding note payable (Note 8) and for working
capital. The loss is included in loss on disposition of apparel operations.
38
As more fully discussed in Note 1, the Company performed an evaluation of
its machinery, equipment and other assets and, as a result, recognized
impairment write-downs primarily related to discontinued operations of
$2,659,000 and $2,745,000 in 1999 and 1998, respectively.
6. INVESTMENTS
Investments consisted of the following (in thousands):
December 30, January 1,
2000 2000
------------ ----------
Investment in Globalgate $ - $1,000,000
============ ==========
In November and December 1999, the Company purchased $1,000,000 in
preferred shares of Globalgate e-Commerce, Inc. ("Globalgate"), a company
formed to build a dominant scalable e-commerce platform for merchants
selling to businesses and consumers. The financial condition of Globalgate
has severely deteriorated and the Company believes that their investment
has little market value, if any. Accordingly, the Company has recorded a $1
million unrealized loss which is included in the loss from continuing
operations for the year ended December 30, 2000 in the Company's
consolidated statement of operations.
7. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
December 30, January 1,
2000 2000
------------ ----------
Accrued commissions $ 62 $ 46
Accrued payroll and related liabilities 27
Accrued inventory purchases 325 128
Accrued warranty 17
Other 969 284
------------ ----------
Total accrued liabilities $ 1,356 $ 502
============ ==========
39
8. NOTES PAYABLE
Notes payable consisted of the following (in thousands):
December 30, January 1,
2000 2000
------------ ----------
Notes payable, interest only payments
due in monthly installments of
$4,993 at 12% interest; principal
balance due and payable in full
December 15, 2001, collateralized
by all shares of the Company's
common stock, and the accounts receivable,
inventory, equipment and other tangible
assets the Company. $ 499
Note payable interest only payments
due in monthly installments of
$6,750 at 12% interest; collateralized
by first deed of trust on property
held for rent; retired in 2000. $ 675
Note payable, unsecured short-term at 6%
interest per annum; payable on demand; due
for purchase of the PRC Companies. 821
------------ ----------
$ 1.320 $ 675
============= ==========
In the quarter ended December 30, 2000, the Company issued approximately
$499,000 of collateralized notes payable due December 15, 2001 to a key
employee, board members and other individual investors. The related parties
received warrants to purchase 99,861 shares of the Company's common stock
at $.75 per share. The proceeds were used for general working capital.
Put Option
----------
In connection with a private sale of 133,333 shares of common stock for
$201,000 during the quarter ended September 30, 2000, the Company entered
into an agreement with a shareholder where the shareholder has the right to
require the Company, beginning August 24, 2001, and continuing thereafter
for a period of thirty days, to redeem all or a stated portion of the
shares of common stock issued to the shareholder at a redemption price of
$2.25 per share (put option). The amount related to the Company's $300,000
potential repurchase obligation has been reclassified from shareholders'
equity to put options.
9. CAPITAL LEASE OBLIGATIONS
Substantially all of the Company's capital lease obligations were related
to the discontinued snowboard operations. K2 assumed the snowboard-related
obligations during the purchase that occurred on March 26, 1999.
10. COMMITMENTS AND CONTINGENCIES
Commitments
-----------
The Company is obligated under a single operating lease for office
space at $8,817 per month plus the cost of common area maintenance,
commencing March 1, 2000 for thirty-two months, and then for $9,259 per
month through April 2005.
40
Legal Matters
-------------
The Company is subject to legal proceedings and claims which arise in the
ordinary course of business. In the opinion of management, the amount of
ultimate liabililty with respect to such actions, will not materially
affect the financial position or results of the operaitons of the Company.
11. SHAREHOLDERS' EQUITY
Changes in Securities
---------------------
On January 31, 2000, the Company, pursuant to a Securities Purchase
Agreement, exchanged 2,680,000 shares of its no par value common stock (the
"common stock") for all the outstanding securities and rights to acquire
securities of IDW, a Delaware corporation with offices and headquarters in
Rocklin, California. Following such share exchange, IDW became a
wholly-owned subsidiary of the Company. Shares were exchanged in reliance
on the exemptions under Sections 4(2) and 4(6) of the Securities Act of
1933, as amended, and Rule 506 of Regulation D, promulgated by the SEC
under federal securities laws and comparable exemptions for sales to
accredited investors and/or private/limited offerings under state
securities laws. The Board set the exchange ratio based on its evaluation
of the value of IDW and the then market price for the Company's common
stock and other factors.
Also, in January 2000, the Company, in a private placement ("Private
Offering"), sold 5,800,000 shares of common stock at $.75 per share. Shares
were sold to "accredited" investors 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 the then market price
for the Company's common stock and other factors.
The Company engaged Capitol Bay Securities, Inc. (CBS) as the placement
agent for the Private Offering. As placement agent, the Company paid CBS
sales commissions of $435,000 and an expense allowance of $14,000, equal to
an aggregate of 12% of the proceeds raised, and issued warrants to acquire
580,000 shares of the Company's common stock at an exercise price of $.75
per share. CBS is a wholly owned subsidiary of Capitol Bay Group, Inc.
which is wholly owned by a director of the Company.
In June 2000, the Company, in a private placement, sold 334,000 shares of
common stock at $1.50 per share to a single accredited investor 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 the then market price of the Company's common stock and
other factors.
In August 2000, the Company, in another private placement, sold 134,000
shares of common stock at $1.50 per share to a single accredited investor
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 the then market price of the Company's
common stock and other factors.
In the third and fourth quarters of 2000, the Company, in another private
placement, sold 983,601 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 the then market price
of the Company's common stock and other factors.
41
Stock Option Plans
------------------
The Company has a stock option plan (the "Plan") for selected executives,
employees and directors for which 1,102,500 shares of common stock have
been reserved for issuance under the Plan. The Plan permits the granting of
options for terms not to exceed ten years from the date of grant. The
options generally vest ratably over a four-year period and are exercisable
subject to terms established in the Plan document. The exercise price of
the options granted under the Plan must be equal to or greater than the
fair market value of the shares on the date of grant for incentive stock
options and not less than 85 percent of the fair market value for
nonqualified stock options. The exercise price of the options granted by
the Company has generally been equal to or greater than fair market value
at the date of grant. Fair market value for periods prior to the Company's
initial public offering were determined by the Board of Directors without
an independent valuation.
In September 2000, the Company established the Granite Bay Technologies
2000 Equity Incentive Plan for certain key employees of the Company. The
plan also permits the grant of stock options, restricted stock awards,
stock appreciation rights, stock units and other stock grants to certain
persons with a relationship with the Company, including agents,
consultants, advisors, independent contractors, sales representatives,
distributors, principals and retail distribution outlets for the Company's
products. The plan provides for up to 882,000 shares of stock that are
authorized for issue. The price of each share of stock covered by an option
shall not be less than 100% of the fair value of the Company's common stock
on the date of grant. Each option certificate shall have an exercise period
of 6 months to ten years.
In October 1999, the Board of Directors adopted the Morrow Snowboards, Inc.
1999 Stock Option Plan for non-employee directors. This plan provides for
the issuance of up to 300,000 shares of the Company's common stock to
existing directors and in the case of extra services or duties, past
directors. Unless otherwise provided in the option grant, the options vest
over the year following the date of grant and expire after the later of
five years after the date of grant or five years after termination as a
director.
A summary of the activity within the plans follows:
Weighted
Average
Number Exercise Aggregate
of Shares Price Price
---------- -------- -----------
Options outstanding at
December 27, 1997 544,424 $ 4.68 $2,548,000
Options granted 116,250 1.33 154,600
Options lapsed/canceled (261,676) 4.57 (1,194,600)
---------- -------- -----------
Options outstanding at
December 26, 1998 398,998 3.78 1,508,000
Options granted 280,000 .25 70,000
Options lapsed/canceled (128,550) 4.41 (566,819)
---------- -------- -----------
Options outstanding at
January 1, 2000 550,448 1.84 1,011,181
Options exercised (42,350) .43 (18,401)
Options granted 858,500 1.64 1,409,230
Options lapsed/canceled (231,250) 3.69 (852,501)
---------- -------- -----------
Options outstanding at
December 30, 2000 1,135,348 $ 1.34 $1,549,510
========== ======== ===========
42
The following table summarizes information about stock options outstanding
at December 30, 2000:
Total options exercisable at December 30, 2000, January 1, 2000 and
December 26, 1998 were 665,707, 538,882 and 275,648, respectively, at
weighted average exercise price per share of $.79, $1.87 and $4.38,
respectively.
Number of Weighted Weighted Number of Weighted
Range of Shares Out- Average Average Shares Exer- Average
Exercise standing at Remaining Exercise cisable at Exercise
Prices December 31, Contractual Price December 31, Price
Per Share 2000 Life (Years) per Share 2000 per Share
-------------- ------------ ------------ --------- ------------ ---------
$ .01 - $ 5.00 1,095,348 5.01 $ 1.19 665,707 $ .79
$5.01 - $10.00 40,000 4.65 6.20
-------------- ------------ ------------ --------- ------------ ---------
Total/average 1,135,348 5.00 $ .79 665,707 $ .79
============ ============ ========= ============ =========
In 1995, the shareholders approved the Stock Option Plan for Non-Employee
Directors (the "Directors Plan"), which plan reserved 122,500 shares of the
Company's common stock for future grants to eligible Directors (as defined
in the Directors Plan). Options granted pursuant to the Directors Plan
reduced the number of underlying shares available under the Plan on a
one-to-one basis. The Directors Plan provided for an annual grant of 2,450
shares of common stock to each eligible Director immediately following each
annual meeting of shareholders commencing with the 1996 annual meeting.
Grants were made at the fair market value of the common stock on the date
of grant and were fully vested after six months. The Directors Plan was
discontinued in October 1999.
Pro forma Results of Operations
-------------------------------
The Company has computed, for pro forma disclosure purposes, the value of
all options granted during 2000, 1999 and 1998 using the Black-Scholes
option pricing model, and the following weighted average assumptions for
grants for the years ended:
December 30, January 1, December 26,
2000 2000 1998
------------ ---------- ------------
Risk-free interest rate 6.0% 5.7% 5.3%
Expected dividend yield 0.0% 0.0% 0.0%
Expected lives (years) 5 6 6
Expected volatility 90.0% 53.8% 99.1%
Statement of Financial Accounting Standards No. 123
---------------------------------------------------
Using the Black-Scholes methodology, the total value of options granted
during 2000, 1999 and 1998 was $777,374, $34,000 and $114,000,
respectively, which would be amortized on a pro forma basis over the
vesting period of the options (typically four years). The weighted average
fair value per share of options granted during 2000, 1999 and 1998 was
$.91, $.14, $.98, respectively.
Had the measurement provisions of SFAS No. 123 been adopted, results of
operations computed on a pro forma basis would have been as follows (in
thousands, except per share information):
43
Years Ended
-----------------------------------------------------------------
December 30, 2000 January 1, 2000 December 26, 1998
------------------ ------------------ ---------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
Net loss $(4,065) $(4,726) $(3,650) $(3,893) $(14,588) $ (14,898)
Net loss per share:
Basic $ (.23) $ (.27) $ (.57) $ (.61) $ (2.36) $ (2.41)
Diluted $ (.23) $ (.57) $ (.61) $ (2.36) $ (2.41) $ (2.41)
The effects of applying the measurement provision of SFAS No. 123 in this
pro forma disclosure are not indicative of future amounts. SFAS No. 123
does not apply to awards prior to January 1, 1995, and additional awards
are anticipated in future years.
Stock Warrants
--------------
The Company, from time to time, has issued stock warrants as payment for
fees, interest and services rendered. At December 30, 2000, January 1, 2000
and December 26, 1998, the Company had outstanding warrants to purchase
780,161, 34,300 and 34,300 shares of common stock, respectively. The
warrants are exercisable at a weighted average price per share of $.87. In
2000, 1999 and 1998, no warrants to purchase common stock were exercised.
During 2000, 745,861 warrants were granted and none lapsed. During 1999 and
1998, no warrants were granted or lapsed.
12. RELATED PARTY TRANSACTIONS
Related party transactions not previously disclosed in other sections of
this report include the following:
A member of the Company's Board of Directors was issued 20,000 warrants to
purchase the Company's common stock at an exercise price of $.85 per share
as compensation for assisting in the sale of the Salem, Oregon building
during 2000. Another director was issued 21,000 warrants at an exercise
price of $1.50 per share as a fee for personally guaranteeing the debt
refinancing project on the Salem, Oregon building.
During 1999 and 1998, the Company purchased certain manufacturing tooling
and supplies from Morrow Aircraft Corporation (MAC) a company owned by
certain shareholders, including a shareholder who is also a Company
Director. The Company recorded $72,000 of manufacturing expenses in 1998
and capitalized $47,000 and $245,000 for tooling related to these
transactions in 1999 and 1998, respectively. All such purchases were
related to the discontinued snowboard operations. The Company believes that
the agreement with MAC was made on terms comparable to those in the market
place.
Capital Bay Management, Inc. (CBM) purchased 3,000,000 shares of the
Company during 1999. Subsequent to the purchase of the stock, one of the
owners of CBM became a director of the Company.
13. INCOME TAXES
The provisions for income taxes consist of taxes currently due plus
deferred taxes for the net change in items with different bases for
financial and income tax reporting purposes. The items with different bases
are primarily fixed assets, allowance for doubtful accounts, accrued
liabilities for discontinued operations, employee vacation, and inventory
and warranty reserves. The deferred tax assets and liabilities represent
the future tax consequences of those differences, which will either be
deductible or taxable when the assets and liabilities are recovered or
settled, using enacted marginal income tax rates in effect when the
differences are expected to reverse. Deferred tax assets are recognized for
operating losses and tax credits that are available to offset future
federal income taxes. Net deferred taxes consist of the following tax
effects relating to temporary differences and carryforwards (in thousands):
44
December 30, January 1,
2000 2000
-------------- ------------
Deferred tax assets:
Accrued expenses and reserves $ 105 $ 494
Depreciation 145
Net operating loss and tax credit
carryforwards 10,970 8,827
-------------- ------------
Deferred tax assets before
valuation allowance 11,075 9,466
Valuation allowance (11,067) (9,466)
-------------- ------------
Total deferred tax assets 8
Deferred tax liabilities:
Depreciation and amortization (8)
-------------- ------------
Net deferred tax assets $ - $ -
============== ============
At December 30, 2000 and January 1, 2000, the Company had an estimated
federal net operating loss carryforward of approximately $28,128,000 and
$22,636,000, respectively, expiring through 2020. Due to the
discontinuation of its snowboard and apparel operations (Note 18) and the
purchase of IDW and the PRC Companies (Note 2), the Company does not meet
the continuity of operations requirement of Internal Revenue Code Section
382. Accordingly, approximately $22,636,000 in net operating losses will
not be available to offset future Federal income taxes, if any. For the
years ended December 30, 2000 and January 1, 2000, the Company increased
its valuation allowance by $1,601,000 and $1,337,000, respectively. A
valuation allowance has been established due to the uncertainty of
realizing deferred tax assets.
The components of income tax (benefit) expense for both continuing and
discontinued operations are as follows (in thousands):
Years Ended
---------------------------------------
December 30, January 1, December 26,
2000 2000 1998
------------ ---------- ------------
(Benefit) expense for income taxes:
Current:
Federal
Foreign $ 30
------------ ---------- ------------
Total 30
------------ ---------- ------------
Deferred $ (1,601) $(1,337) (5,171)
Valuation allowance 1,601 1,337 5,141
------------ ---------- ------------
Total benefit for income taxes $ - $ - $ -
============ ========== ============
Tax (benefit) expense recorded in:
Continued operations $ - $ - $ -
Discontinued operations $ - $ - $ -
45
A reconciliation of the income tax at the federal statutory income tax rate
to the income tax benefit as reported is as follows:
Years Ended
---------------------------------------
December 30, January 1, December 26,
2000 2000 1998
------------ ---------- ------------
Benefit computed at statutory rates (34.0)% (34.0)% (34.0)%
State taxes, net of federal benefit (4.4) (4.4) (4.4)
Change in valuation allowance 38.4 38.4 35.2
Other 3.2
------------ ---------- ------------
Income tax benefit as
reported - % - % - %
============ ========== ============
14. CASH FLOW DISCLOSURES
Supplemental cash flow disclosures are as follows (in thousands):
Years Ended
---------------------------------------
December 30, January 1, December 26,
2000 2000 1998
------------ ---------- ------------
Supplemental disclosure:
Cash paid for interest $ 442 $ 100 $ 483
Cash paid for income taxes $ 54
Noncash investing transactions:
Assets acquired under capital
lease $ 4,272
In 2000, IDW HK purchased all of the outstanding securities of MULCD and
IDWT for cash. In conjunction with the acquisition, liabilities were
assumed as follows (in thousands):
Fair value of assets acquired $ 12,017
Liabilities assumed (2,213)
Deposit paid in 1999 by IDW HK (1,000)
Payment due to complete acquisition (Note 2) (4,532)
Less: cash acquired (64)
----------
Cash paid to acquire PRC Companies $ 4,208
==========
15. CONCENTRATIONS
Credit Risks
------------
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of temporary cash
investments, short-term investments and trade receivables. The Company
places its temporary cash investments and short-term investments with high
quality financial institutions.
Major Customer
--------------
Sales to one customer for the year ended December 30, 2000 accounted for
approximately 28% of total sales.
46
16. EMPLOYEE SAVINGS PLAN
The Company created an employee savings plan (the 'Plan") on July 1, 1996,
under the provisions of Section 401(k) of the Internal Revenue Code. The
plan covered substantially all full-time employees. The Company's matching
contributions took two forms; a basic matching contribution of 30 percent
of employee contributions, and a discretionary supplemental matching
contribution based upon parameters set by management on an annual basis.
The Company terminated the Plan in December 2000. Participants are fully
vested in their 401(k) contributions and matching contribution accounts.
Company matching contributions in 1999 and 1998 were $11,372 and $27,000,
respectively.
17. SEGMENT AND GEOGRAPHIC INFORMATION
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's subsidiaries produce only
displays or display modules for end products of original equipment
manufacturers. However, the Company has two major geographic territories
where it sells and distributes essentially the same products. The
geographic territories are the United States and Asia. The following
represents continuing operations geographical data for the year ended
December 30, 2000 (in thousands).
Year Ended December 30, 2000
---------------------------------------
Asia USA Total
------- ------ -------
Revenue form external customers $10,479 $7,325 $17,804
Cash $ 795 $ 119 $ 914
Fixed assets, net of accumulated
depreciation $ 6,998 $ 193 $ 7,191
Total assets $11,116 $7,757 $18,873
18. 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
received $3.2 million.
In October 1999, Westbeach's Bellevue, Washington retail store lease,
inventory and trade fixtures were sold for approximately $196,000. Payment
included the assumption of accounts payable related to that store's
inventory, assumption of the retail store lease (including a release of
Westbeach) and approximately $48,000 in cash, based on subsequent sales,
payable in interest-free installments on January 5, 2000 and December 30,
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 assets were sold for
47
$2,680,000 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
sales price was subject to adjustment based on final inventory and accounts
receivable verifications. A $100,000 holdback to fund certain adjustments
has since been refunded to the Company.
As a result of these transactions, the following net book values of assets
purchased and liabilities assumed at January 1, 2000 and December 26, 1998
have been shown as net current and non-current assets of discontinued
operations in the Consolidated Balance Sheet (in thousands):
December 30, January 1,
2000 2000
------------ ----------
Accounts receivable, net $ 24 $ 1,504
Inventory 70
Other assets 758
------------ ----------
Net current assets of
discontinued operations 24 2,332
------------ ----------
Equipment, fixtures, and other
assets (net of accumulated
depreciation and allowance
for write-downs of $218 72
------------ ----------
Net non-current assets of
discontinued operations 72
------------ ----------
Total net assets of discontinued
operations $ 24 $ 2,404
------------ ----------
Operating results of the snowboard and apparel operations for 2000, 1999
and 1998 are shown separately in the consolidated statement of operations
as loss from discontinued operations, net of taxes. The net loss on the
sale of the snowboard operations has been reflected in the 1998
consolidated statement of operations as loss from discontinued snowboard
operations, as has the accrued operating loss of the snowboard segment for
the period from year-end to the date of sale. The net loss on the sale of
the apparel operations has been reflected in the 1999 consolidated
statement of operations as loss from discontinued apparel operations, as
has the accrued operating loss of the apparel segment for the period from
year-end to the date of sale. The discontinued snowboard operating results
include an allocation of consolidated net interest expense based on net
assets. The allocated net interest expense was $96,000 and $483,000 in 1999
and 1998, respectively. Sales from discontinued snowboard operations of
$86,000 and $15,991,000 in 1999 and 1998, respectively, were excluded from
revenues and included in loss from discontinued snowboard and apparel
operations. The net interest expense allocated for discontinued apparel
operations was $27,000 in 1999. Sales from discontinued apparel operations
of $9,022,000 in 1999 were excluded from revenues and included in loss from
discontinued snowboard and apparel operations. The consolidated statement
of cash flows has not been restated to reflect the discontinued operations
presentation.
19. SUBSEQUENT EVENTS
Credit Facility
---------------
On March 23, 2001, IDW executed a one year $3,000,000 credit facility from
BFI Business Finance, under which the Company can borrow up to 80% of the
value of its U.S. accounts receivable. The facility bears interest at 3%
above the prime rate of Comerica Bank of California and is collateralized
by the assets of IDW and the receivables of IDW HK. On April 4, 2001, the
Company drew $634,000 on this credit facility.
48
Subordinated Debt
-----------------
Granite Bay Technologies recorded a total of $600,000 in new debt, which is
subordinated to the BFI credit facility and is collateralized by the assets
of IDW and its subsidiaries. The debt bears interest at 12.68% per annum
and is due in installments starting in October 2001 and ending April 2002.
Final Settlement with Judicial Managers
---------------------------------------
On April 11, 2001, IDW completed a settlement with the Judicial Managers of
Vikay Industrial Ltd. for all remaining amounts owing under the Sales and
Purchase Agreement (Note 2) and the Supplemental Deed and Charge, thereby
finalizing all matters relating to the acquisition on February 1, 2000 of
MULCD Microelectronics Company Ltd. and Vikay Shenzhen Technology
Development Company Ltd. The final amount paid under the terms of the
settlement was $820,948. This amount has been included in Short Term Notes
payable at December 30, 2000 (Note 8).
49
SUPPLEMENTAL SCHEDULE
SUPPLEMENTARY INFORMATION REQUIRED
UNDER THE SECURITIES AND EXCHANGE
ACT OF 1934
AS OF DECEMBER 30, 2000, JANUARY 1, 2000
AND DECEMBER 26, 1998GRANITE BAY TECHNOLOGIES, INC. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULE
VALUATION AND QUALIFYING ACCOUNTS
As of and for the years ended December 30, 2000,
January 1, 2000 and December 26, 1998
The following schedule has not been restated to conform to discontinued
operations presentation:
Balance at Charged to Balance
Beginning Costs and at End
Description of Period Expenses Deductions * of Period
- ------------------------- --------- -------- ------------ ---------
December 26, 1998
Allowances deducted from
asset accounts:
Allowance for doubtful
accounts $ 659 $ 550 $ (143) $ 1,066
Obsolete inventory
allowance $ 535 $ 2,806 $ (549) $ 2,792
January 1, 2000
Allowances deducted from
asset accounts:
Allowance for doubtful
accounts $ 1,066 220 $ (280) $ 1,006
Obsolete inventory
allowance $ 2,792 $(2,750) $ 42
December 30, 2000
Allowances deducted from
asset accounts:
Allowance for doubtful
accounts $ 1,006 $ $ $ 1,006
Obsolete inventory
allowance $ 42 $ $ $ 42
* Balances written off, net of recoveries
50
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
On January 14, 2000, and as previously reported in our Annual Report on
Form 10-K for the year ended January 1, 2000, Arthur Andersen, LLP ("Arthur
Andersen") resigned as outside auditors for the Company. The Company's Board of
Directors accepted Arthur Andersen's resignation and appointed the accounting
firm of Perry-Smith LLP ("Perry-Smith") of Sacramento, California, as the
Company's new outside auditors and the shareholders ratified the appointment at
the Annual Shareholders' Meeting held on September 28, 2000. Based on a review
of several accounting firms, the Board selected Perry-Smith which has both
public company and international auditing experience.
Arthur Andersen included a "going concern" qualification in its audit
report on the financial statements for the Company's two fiscal years ended
December 27, 1997 and December 26, 1998, but did not in either of the financial
statements include an adverse opinion or a disclaimer of opinion or a
qualification or modification as to uncertainty, audit scope or accounting
principles. During the two most recent fiscal years and any subsequent interim
period preceding Arthur Andersen's resignation, there were no disagreements
between the Company and the former auditors on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure which, if not resolved to the satisfaction of the former auditors,
would have caused Arthur Andersen to make a reference to the subject matter of
the disagreement in connection with its audit reports in such financial
statements. Prior to Arthur Andersen's resignation, Arthur Andersen did not
express a difference of opinion regarding any events listed in Item
304(a)(2)(v)(A) through (D) of Regulation S-K. Arthur Andersen sent a letter
evidencing no objection to the Company's responses to the SEC.
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
- ---------
On October 24, 2000, the Company increased the size of its Board from five
(5) to seven (7) directors and two new directors were added to the Board. Below
is information on the current directors of the Company:
Stephen C. Kircher, age 47, has served as Chairman of the Board of
Directors of the Company since February 2000 and as a director since October
1999. He has served as a director of International Display Works, Inc. since its
formation in June 1999. Since 1993, he has served as Chairman and is majority
owner of Capitol Bay Group, Inc. (holding company), and as Chairman of Capitol
Bay Securities, Inc. (securities and investment banking) and Capitol Bay
Management, Inc. (investment company). Both Capitol Bay Securities, Inc. and
Capitol Bay Management, Inc. are wholly-owned subsidiaries of Capitol Bay Group,
Inc. He was a founding Director of Burlingame Bancorp and served on its Board
from 1984 to 1991. Prior to 1993, Mr. Kircher formed and managed Spinner
Corporation, which engaged in leveraged buyouts of troubled companies. Mr.
Kircher has extensive experience as a principal in equity private placements,
sale and leaseback financing, multiple forms of debt financing and initial
public offerings. Mr. Kircher began his career with Dean Witter in 1975 before
joining Bateman, Eichler, Hill & Richards, a regional investment-banking firm in
1978. Mr. Kircher has a BA degree from the University of California, San Diego.
William H. Hedden, age 46, has served as President and Chief Executive
Officer of Consolidated Adjusting, Inc. (construction insurance adjusting) since
1992. From 1985 to 1992, Mr. Hedden served as Director of Burlingame Bancorp and
its subsidiary, Burlingame Bank & Trust Co. In 1984, Mr. Hedden served as
Chairman of the Board of Bayhill Service Corporation, a mortgage banking
subsidiary of Delta Federal Savings & Loan. From 1983 to 1987, Mr. Hedden served
as Chairman of the Board and majority shareholder of Delta Federal Savings &
Loan. Mr. Hedden has a Juris Doctor degree from Hastings College of the Law, San
Francisco in 1979 and a BA degree from Stanford University, Palo Alto in 1975.
He has been a director of the Company since October 1999.
Thomas J. Manz, age 50, has served as a Director of the Company since
October 1999. Mr. Manz has been Owner, Director or Managing Member of various
businesses, primarily involved with real estate development and financial
services, over the last twenty years. Mr. Manz has been involved in the
construction and development of millions of square feet of real estate, property
management and sales. He also served as an operating officer and
51
founding Director of M. L. Oates Insurance Co., which was sold in 1993; Director
of United Way of Sacramento from 1989 to 1992; a founding Director of Roseville
First National Bank from 1990 and Chairman of the Board from 1993 to 2000 until
the Bank merged with Western Sierra Bancorp. Mr. Manz has continued as a
Director of Western Sierra Bancorp and is currently the Co-Chairman; he was a
founding Director of Pacific Coast Banker's Bank since 1995 and has been the
Vice-Chairman since 1999. Mr. Manz received a Bachelor of Science degree from
Iowa State University.
Anthony G. Genovese, 58, has been a Director of Granite Bay since September
2000. He is presently the Chairman and Chief Technology Officer of IDW since
October 2000. He founded IDW in June 1999 to purchase the shares of MULCD and
Vikay Industrial (Shenzhen) Limited ("IDWT"). IDW operated MULCD and IDWT under
a management contract with Vikay Industrial (Singapore) Limited ("Vikay"),
MULCD's and IDWT's parent company, from August 1, 1999. From 1997 to 1999, Mr.
Genovese was President, joint member of the Office of the Chief Executive and
Director of Vikay. Vikay entered Judicial Management, a form of bankruptcy
proceeding in Singapore, in December 1997. The Judicial Managers of Vikay
selected Mr. Genovese for this position. In 1986, Mr. Genovese founded VGI, Inc,
a joint venture company with Vikay to market Vikay LCD's and to help Vikay enter
the LCD module business in the United States. He introduced custom products to
major companies such as ADEMCO, GE, Honeywell, Schlumberger, AT&T, Milton
Bradley, Lifescan and White-Rogers. In 1992, VGI became a subsidiary of Vikay
and was renamed Vikay America, Inc. Mr. Genovese continued as President and CEO
of Vikay America from 1992 to 1997. Prior to Vikay, Mr. Genovese was a
technologist and Marketing Executive for PCI Displays (1977 to1986), and founded
the LCD operations at Beckman Instruments (1972 to1976) and Rockwell
International (1966 to 1969). Mr. Genovese received a BS in Physics from
Manhattan College in 1964, an MS in Physics & Mathematics from NYU & Courant
Institute of Mathematical Sciences in 1966 and attended USC for 18 graduate
credits towards a Master Degree in Systems Management in 1975 and 1976.
P. Blair Mullin, 47, is the President, Chief Financial Officer and
Secretary of Granite Bay and has served as a Director of Granite Bay since
October 1998. Mr. Mullin has served as Granite Bay's President since May 1998
and as Chief Financial Officer since Granite Bay's acquisition of Westbeach
Snowboard Canada Ltd. ("Westbeach") in November 1997. Mr. Mullin served as
Chairman of the Board of Granite Bay from April 1999 to February 2000. He has
been Director of IDW since February 2000 and was appointed the Chief Operating
Officer of IDW in October, 2000. In addition, he served as Treasurer and
Secretary of Granite Bay since January 1998. Mr. Mullin was the President and
Chief Executive Officer of Westbeach from July 1995 to November 1997 and the
Chief Executive Officer of Westbeach Canada, ULC, from May 1998 to present. Mr.
Mullin was responsible for the sale of the snowboard manufacturing assets and
the snowboard apparel trademarks in 1999. From 1992 to 1995, Mr. Mullin was a
private business consultant, serving companies in distress situations. Mr.
Mullin received an MBA from the University of Western Ontario in 1982 and a
Bachelor of Arts degree in Economics from Wilfrid Laurier University in 1975.
Timothy B. Nyman, 50, has served as a Director of Granite Bay Technologies
since October 2000. Mr. Nyman is the Vice President of Operations for the
Western United States at GTECH Corporation, the world's largest supplier of
online lottery systems and services. In 1979, Mr. Nyman went to work with the
predecessor company of GTECH Corporation, which was the gaming division of
Datatrol, Inc. In his twenty-one years with GTECH and its predecessors, Mr.
Nyman has performed in various operations and marketing functions. He has
directed a full range of corporate marketing activities and participated in the
planning and installation of new online lottery systems domestically and
internationally. Mr. Nyman received a Bachelor of Science degree with majors in
Marketing, Accounting and Finance from Michigan State University in 1973.
Ronald A. Cohan, 59, has served as a Director of Granite Bay Technologies
since October 2000. Since 1995, Mr. Cohan has served as a consultant to High
Integrity Systems, Inc., a subsidiary of Equifax, Inc. Mr. Cohan joined the law
office of Pettit & Martin as an Associate in 1968 and was admitted as a Partner
in 1972. He opened the Los Angeles office of Pettit & Martin in October of 1972
and was Partner In Charge until March of 1983. Mr. Cohan left Pettit & Martin in
February of 1992 and became Principal of his own law firm. Mr. Cohan has
specialized in government procurement matters for various institutional clients
such as Honeywell, 3M, Mitsui, Sentax and Equifax. Mr. Cohan received a Bachelor
of Arts degree from Occidental College in 1963 and a Juris Doctor degree from
the University of California, Berkeley (BOALT Hall) Law School in 1966.
52
Executive Officers and Significant Employees
Set forth below is information on the executive officers of the Company:
Name Age Position
- ---- --- --------
Stephen C. Kircher(1) 47 Chairman of the Board
P. Blair Mullin(1) 47 President, Chief Financial Officer, Treasurer and
Secretary and Chief Operating Officer of IDW
- --------------
(1) For information regarding Messrs. Kircher and Mullin, see "Item 10.
Directors," above.
Key Employees of the Company's Subsidiary - International DisplayWorks ("IDW")
Anthony G. Genovese (see "Item 10. Directors" above.)
Alan Lefko, Chief Financial Officer, joined IDW in February 2000. From July
1999 to January 2000, Mr. Lefko was the Chief Financial Officer of The Original
Bungee Company ("Bungee") in Oxnard, California, a manufacturer and distributer
of stretch cord and webbing products. Mr. Lefko was responsible for the
reorganization of Bungee's financing structure, establishment of an asset based
lending program and implementation of cost accounting systems and controls. From
1989 to 1999, Mr. Lefko served as Chief Financial Officer and Controller of
Micrologic, a manufacturer and distributor of Global Positioning Systems and
Vikay America, Inc., a subsidiary of Vikay Industrial (Singapore) Limited, based
in Chatsworth, California. Mr. Lefko has a BA degree in Business Administration
and Accounting from California State University, Northridge, California.
Philip Gregory, Vice President, Manufacturing, joined IDW in November,
1999. Mr. Gregory has over 30 years' experience in the electronics industry in
areas of product and process development, equipment design, equipment
maintenance, installation and automation, in both high and low volume,
manufacturing environments. From 1996 to 1999, Mr. Gregory served as a
manufacturing consultant to Three-Five Systems, Micro Display Corp., Accudyne
and Villa Precision International. From 1994 to 1995, he was Product Development
Manager for Villa Precision International, responsible for product development,
customer process improvements and sales support. Mr. Gregory experience also
includes CEO of Dove Communications, General Manager of the telecom division of
Elteck, VP of Operations for PCI, Operations Manager of National Semi-conductor,
and various positions with Texas Instruments. Mr. Gregory attended North Texas
State University, majoring in business.
Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's executive officers and directors, and persons who own more than
ten percent (10%) of the Company's Common Stock, to file reports of ownership on
Form 3 and changes in ownership on Form 4 or 5 with the Securities and Exchange
Commission (the "SEC"). Such executive officers, directors and ten percent (10%)
shareholders are also required by SEC rules to furnish the Company with copies
of all Section 16(a) forms they file. Based solely upon its review of copies of
such forms received by it, or on written representations from certain reporting
persons that no other filings were required for such persons, the Company
believes that, during the year ended December 30, 2000, all of its executive
officers, directors and ten percent (10%) shareholders complied with all
applicable Section 16(a) filing requirements, except the initial filings for
Messrs. Cohan and Nyman. These reports were delayed due to confusion during the
holidays. These reports have been filed.
53
Item 11. Executive Compensation
Compensation Summary
The following table summarizes all compensation earned by or paid to our
President and Chief Financial Officer and the former Chief Executive Officer. No
other executive officer's total annual compensation for services rendered in all
capacities for 1998 and 1999 and 2000 exceeded $100,000.
Summary Compensation Table
--------------------------
Annual Salary Long-Term Compensation
-------------------------------------------- --------------------------------------------
Securities
Name and Underlying Other
Principal Position Year $ Bonus Options (#) Compensation
- ------------------ ---- - ----- ----------- ------------
P. Blair Mullin(1) 2000 $124,224 -- 80,000 --
Chairman of the Board 1999 $121,774 -- 70,000 117(3)
President, Chief Financial Officer, and 1998 $118,218 -- --(2) 2,402(4)
Secretary and Chief Operating Officer of
IDW
Anthony Genovese, 2000 $200,833 -- 260,000 9,000(5)
1999 -- -- -- --
1998 -- -- -- --
Phil Gregory 2000 $114,583 -- 60,000 5,000(6)
1999 -- -- -- --
1998 -- -- -- --
Alan Lefko 2000 $109,375 -- 50,000 $13,250(7)
-- -- -- --
-- -- -- --
Ben Tang 2000 $169,233 -- 25,000 $19,694(8)
1999 -- -- -- --
1998 -- -- -- --
- --------------------------
(1) Blair Mullin was appointed President of the Company effective May 18, 1998.
He is also serving as Chief Financial Officer and Secretary/Treasurer of
the Company and served as Chairman of the Board from April 1, 1999 to
February 2000.
(2) 50,000 options granted in 1998 were cancelled.
Represents medical insurance reimbursement
(4) Represents reimbursement of moving expenses.
Represents vehicle allowance.
Represents moving allowance.
Represents $8,000 moving allowance and $5,250 vehicle allowance. Represents
vehicle allowance.
54
Option Grants in 2000
- ---------------------
The following table provides information relating to stock options granted
during the year ended December 30, 2000.
Individual Grants
Potential Realizable Value
at Assumed Annual Rates
Percent of Total of Stock Price
Number of Securities Options Granted to Exercise Appreciation
Underlying Employees Price Expiration For Option Terms
----------------
Name Options Granted (#) In Fiscal Year Per Share Date 5% 10%
---- ------------------- -------------- --------- ------ -------- ---------
P. Blair Mullin 70,000 12.66 $ .75 1/7/10 $ 33,017 $ 83,671
10,000 1.81 $ .75 12/15/05 $ 2,072 $ 4,579
Anthony Genovese 250,000 45.21 $ 1.70 8/25/05 $117,420 $259,467
10,000 1.81 $ .75 12/15/05 $ 2,072 $ 4,579
Phil Gregory 50,000 9.04 $ 1.70 8/25/05 $ 23,484 $ 51,893
10,000 1.81 $ .75 12/15/05 $ 2,072 $ 4,579
Alan Lefko 50,000 9.04 $ 1.70 8/25/05 $ 23,484 $ 51,893
Ben Tang 25,000 4.52 $ 1.70 8/25/05 $ 11,742 $ 25,947
The exercise price of each option was equal to the fair market value of our
Common Stock on the date of the grant. Percentages shown under "Percent of Total
Options Granted to Employees in the Last Fiscal Year" are based on an aggregate
of 553,000 options granted to our employees under the 1998 Stock Option Plan,
2000 Equity Incentive Plan and outside of this plan during the year ended
December 30, 2000.
Potential realizable value is based on the assumption that our Common Stock
appreciates at the annual rate shown, compounded annually, from the date of
grant until the expiration of the five-year term. These numbers are calculated
based on Securities and Exchange Commission requirements and do not reflect our
projection or estimate of future stock price growth. Potential realizable values
are computed by:
o Multiplying the number of shares of Common Stock subject to a given
option by the exercise price;
o Assuming that the aggregate stock value derived from that calculation
compounds at the annual 5% or 10% rate shown in the table for the
entire five-year term of the option; and
o Subtracting from that result the aggregate option exercise price.
Fiscal Year End Option Values
The following table sets forth for each of the executive officers named in
the Summary Compensation Table the number and value of exercisable and
unexercisable options for the year ended December 30, 2000.
Number of Securities
Underlying Unsecured Value of Unexercised
Shares Options In-The-Money Options
Acquired on Value At December 30, 2000 at December 30, 2000
------------------------------------ -------------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ ------------ ----------- ------------- ----------- -------------
- - 150,000 - 24,500 -
P. Blair Mullin
Anthony Genovese - - 93,166 175,000 - -
Phil Gregory - - 30,000 30,000 - -
Alan Lefko - - 25,000 25,000 - -
Ben Tang - - 12,500 12,500 - -
Amounts shown under the column "Value of Unexercised In-The-Money Options
at December 30, 2000," represent the difference between the fair market value of
the shares of Common Stock underlying the options at December 29, 2000, $0.60
per share (the closing price on the first day of trading of 2000, as reported by
the Pinksheets) less the corresponding exercise price of such options.
55
Performance Measurement Comparison
[Please update to December 30, 2000 and change name to Granite Bay
Technologies.]
COMPARISON OF CUMULATIVE TOTAL RETURN ON INVESTMENT*
Compensation Committee Report on Executive Compensation
The executive compensation policies and programs developed by the Company
are designed to retain and motivate executive officers and to ensure that their
interests are aligned with the interests of the Company's shareholders. The
Company's policy is to offer competitive compensation opportunities for its
employees based on a combination of factors, including Company growth, corporate
performance and the individual's personal contribution to the business.
The Company's compensation programs are implemented by the Compensation
Committee of the Board of Directors ("Board"). Such programs consist of base
salary, annual incentives and long-term incentives. Executive officers who are
also directors do not participate in decisions affecting their own compensation.
Base Salary
The Compensation Committee considered its own assessment of the individual
performances of each executive officer and its own subjective assessment of the
Company's overall financial performance. There is no fixed relationship between
base salary and corporate performance or between base salary and the competitive
range of salaries that may be offered by competitive companies. The Compensation
Committee members considered their business judgment in light of their
experience to be an important factor in establishing executive compensation.
Annual Incentives
On an annual basis, the Compensation Committee considers the grant of
annual incentive bonuses to each executive officer. Incentive bonuses are
discretionary and are determined subjectively, with the Compensation Committee
taking into consideration the individual's performance, contribution and
accomplishments during the past fiscal year and the Company's financial
performance. Neither the decision to award a bonus, nor the specific size of the
incentive bonus, is based on any specific measure of corporate performance. In
fiscal 2000, no incentive bonuses were awarded to any executive officer.
Stock Incentive Compensation
The Board believes that stock ownership by executive officers and key
employees provides valuable incentives for those persons to benefit as the
Company's Common Stock price increases, and that stock option-based incentive
compensation arrangements help align the interests of executives, employees and
shareholders. To facilitate these objectives, the Board has granted stock
options to executives and key employees through the Company's Employee Equity
Incentive Plan (formerly, the 1990 Amended and Restated Stock Option Plan) (the
"Plan"), approved by the shareholders in 1991. The Plan was amended by the Board
in 1995 to increase the number of shares available under the Plan to 1,102,500,
which amendment was approved by the Company's shareholders. The Plan was again
amended by the Board in 1997 to change the name of the Plan, add certain
additional types of equity grants, provide for acceleration of vesting on
certain changes in control or sale of substantially all the Company's assets and
a number of immaterial changes to update, modernize and reorganize the Plan,
which amendment was also approved by the Company's shareholders. This Plan has
now expired.
Effective October 12, 1999, the Board adopted the 1999 Stock Option Plan
for Non-Employee Directors (the "Directors' Plan"). The Plan provides for the
issuance of up to 300,000 shares of the Company's Common Stock (as presently
constituted) to existing directors and, in the case of extra service or duties,
to prior directors. Options may be awarded in such amounts, at such times, at
such exercise prices and on such other terms as the Board determines, subject to
any limitations in the Plan. Unless otherwise designated, options vest uniformly
over the year following the date of grant. The options, subject to earlier
termination under the Plan or option grant, expire after the later of (i) five
years after the date of grant or (ii) five years after termination as a
director. In 2000, the Board issued fully-vested options for 180,000 shares to 6
persons who were directors over the past year, all at an exercise price of $.75
per share.
Effective September 28, 2000, the Board and the shareholders of the Company
approved the 2000 Employee Equity Incentive Plan ("Equity Incentive Plan"). A
total of 882,800 shares of Common Stock were reserved for issuance under the
Equity Incentive Plan. The purpose of the Equity Incentive Plan to attract and
retain the services of key employees, directors, officers and consultants and to
help such individuals realize a direct proprietary interest in the Company. A
total of 882,800 shares of Common Stock were reserved for issuance under the
Equity Incentive Plan. In 2000, the Board issued options to purchase 553,000
shares at exercise prices ranging from $.75 to $1.70.
In determining the number of options granted to executive officers and key
employees, the Board considered the person's opportunity to affect the share
price of the Company's Common Stock, the level of the person's performance based
on past performance, future contribution to the Company and the anticipated
incentive effect of the number of options granted.
The Board believes that the policies and plans described above provide
competitive levels of compensation and effectively link executives and
shareholder interests. Moreover, the Board believes such policies and plans are
consistent with the long-term investment objectives appropriate to the business
in which the Company is engaged.
56
Respectfully Submitted,
Compensation Committee of Granite Bay Technologies, Inc.
Stephen C. Kircher
William H. Hedden
Thomas J. Manz
Ronald Cohan
Timothy Nyman
Compensation of Directors
Board members are currently not compensated for participation in Board
meetings. This policy may change in the future. All directors are reimbursed for
expenses incurred in attending Board and committee meetings. Additionally, the
Board may grant stock options to its members for service as directors. During
the fiscal year ended December 30, 2000, non-employee directors were granted
options to purchase 180,000 shares at an exercise price of $0.75 vesting
immediately. All options were granted at an exercise price equal to or greater
than the fair market value. Mr. Manz was granted warrants to purchase 20,000
shares of Common Stock of the Company at $0.75 per share for his extraordinary
efforts in selling the Salem, Oregon building.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of April 10, 2001,
with respect to the beneficial ownership of our Common Stock for (i) each
director, (ii) all of our directors and officers as a group, and (iii) each
person known to us to own beneficially five percent (5%) or more of the
outstanding shares of our Common Stock.
Unless otherwise indicated, the address for each listed shareholder is:
Granite Bay Technologies, Inc., 599 Menlo Drive, Suite 200, Rocklin, California
95765. To our knowledge, except as indicated in the footnotes to this table or
pursuant to applicable community property laws, the persons named in the table
have sole voting and investment power with respect to the shares of Common Stock
indicated.
Number of
Name of Beneficial Owner Shares(1) Percent(2)
------------ ----------
Stephen C. Kircher 2,675,861(3) 13.67%
William H. Hedden 65,000(4) *%
P. Blair Mullin 159,797(5) *%
Anthony Genovese 1,405,000(6) 7.31%
Thomas Manz 279,000(7) 1.45%
Ronald Cohan 154,000(8) *%
Timothy Nyman 336,664(9) 1.76%
All directors and
executive officers
as a group (six persons) 5,075,322(10) 25.38%
- -------------------
* Does not exceed 1% of the class.
(1) "Beneficial Ownership" is defined pursuant to Rule 13d-3 of the Exchange
Act, and generally means any person who directly or indirectly has or
shares voting or investment power with respect to a security. A person
shall be deemed to be the beneficial owner of a security if that person has
the right to acquire beneficial ownership of the security within 60 days,
including, but not limited to, any right to acquire the security through
the exercise of any option or warrant or through the conversion of a
security. Any securities not outstanding that are subject to options or
warrants shall be deemed to be outstanding for the purpose of computing the
percentage of outstanding securities of the class owned by that person, but
shall not be deemed to be outstanding for the purpose of computing the
percentage of the class owned by any other person.
(2) Based on 19,150,507shares of the Company's Common Stock outstanding at
December 30, 2000, plus that number of shares subject to options
exercisable within 60 days of April 10, 2001, owned by each individual or
group of individuals.
(3) Includes 2,000,000 shares, options to purchase 85,000 shares and warrants
to purchase 335,861 shares in Mr. Kircher's name; 35,000 shares held by
Capital Bay Securities, Inc. ("CBS"), 220,000 shares held by Eureka Capital
Corporation Ltd. held for the benefit of CBS. CBS is a wholly owned
subsidiary of Capital Bay Group ("CBG") and Mr. Kircher is a majority
shareholder in CBG.
(4) Includes 65,000 shares subject to options exercisable within 60 days after
April 10, 2001.
(5) Includes 9,797 shares and 150,000 shares subject to options exercisable
within 60 days after April 10, 2001.
(6) Includes 670,000 shares held in joint tenancy with Mr. Genovese's wife,
Sharon Genovese, 670,000 shares held by an individual retirement account
for Anthony Genovese by Delaware trust and 35,000 shares subject to options
and 30,000 shares subject to warrants exercisable within 60 days after
April 10, 2001.
(7) Includes 174,000 shares and 65,000 shares subject to options exercisable
within 60 days after December 30, 2000 and 40,000 shares subject to
warrants exercisable within 60 days after April 10, 2001.
(8) Includes 134,000 shares and options to purchase 20,000 shares exercisable
within 60 days after April 10, 2001.
(9) Includes 316,664 shares and options to purchase 20,000 shares exercisable
within 60 days after April 10, 2001.
(10) Includes 4,229,461 shares, options to purchase 440,000 shares and warrants
to purchase 405,861 shares exercisable within 60 days after April 10, 2001.
57
Item 13. Certain Relationships and Related Transactions
The Company engaged Capitol Bay Securities, Inc. ("CBS") as the placement
agent for a private placement on January 31, 2000. As placement agent, CBS
received sales commissions of $435,000 and an expense allowance of $87,000,
equal to 12% of the proceeds raised, and received warrants to acquire 580,000 of
the Company's Common Stock at an exercise price of $.75 per share. CBS is a
wholly-owned subsidiary of Capitol Bay Group, Inc. ("CBG") and CBG is
wholly-owned by Stephen Kircher, a director of the Company.
On August 1, 2000, Mr. Kircher and his wife personally guaranteed the $2.1
million re-finance of the Company's Oregon property. The board granted Mr. and
Mrs. Kircher warrants to purchase 21,000 shares at $1.50 per share expiring
August 10, 2005 for their efforts in re-financing the Oregon Property and
exposure assumed through the guarantee.
On September 8, 2000, the Company loaned Thomas Lauer, $150,000 pursuant to
a promissory note to purchase 100,000 shares of Common Stock of the Company. Mr.
Lauer was the Vice President of Sales & Marketing of IDW at the time of the
loan. Mr. Lauer is no longer employed by the Company. The shares and note were
cancelled.
On December 22, 2000, the Company closed a unit offering consisting of
debt instruments and warrants to purchase shares of Common Stock of the Company
equal 20% of the investment amount. Under the debt instruments, the Company will
pay interest only payments each month at a rate of 12.68 percent per year with
the total amount borrowed due on December 30, 2001. The Company's net proceeds
from the offering were $499,303. Mr. Kircher, the Company's Chairman of the
Board, invested $99,303. Directors, Messrs. Manz and Genovese invested $100,000
and $150,000, respectively.
Subsequent to the year end, on February 23, 2000, Mr. and Mrs. Cohan, one
of the Company's Directors and his wife, loaned the Company $200,000 pursuant to
a secured promissory note. Under the secured promissory note, the total amount
borrowed together with an interest payment at a rate of 12.68 percent per year
is due on April 2, 2001. As security for the loan, the Company pledged the
shares of Common Stock of IDW and Mr. and Mrs. Kircher, the Company's Chairman
and his wife, guaranteed the debt.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements (see Item 8.)
o Report of Independent Public Accountants (Perry-Smith LLP)
o Consolidated Balance Sheets - December 30, 2000 and January 1,
2000
o Consolidated Statements of Operations - Years Ended December 30,
2000, January 1, 2000 and December 16, 1998
o Consolidated Statements of Shareholders' Equity - Years Ended
December 30, 2000, January 1, 2000 and December 26, 1998
o Consolidated Statements of Cash Flows - Years Ended December 30,
2000, January 1, 2000 and December 26, 1998
o Notes to Consolidated Financial Statements
2. Financial Statement Schedules
o Schedule II - Valuation and Qualifying Accounts (accounts not
required or not material have been omitted)
3. Exhibits
See Exhibit Index.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the last quarter
of the period covered by this report:
Date of Report Item Reported
---------------- -------------
November 6, 2000 Reincorporation into California effected by a merger
of Morrow Snowboards, Inc. dba Granite Bay
Technologies, an Oregon corporation into Granite Bay
Technologies, Inc, a California corporation
58
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-8 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Rocklin, State of California, on April 16, 2001.
GRANITE BAY TECHNOLOGIES, INC.,
a California corporation
Dated: April 13, 2001 By: /s/ P. BLAIR MULLIN
---------------- --------------------------------------------
P. Blair Mullin, President and Chief
Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
date indicated.
GRANITE BAY TECHNOLOGIES, INC.,
a California corporation
Dated: April 13, 2001 By: /s/ P. BLAIR MULLIN
---------------- --------------------------------------------
P. Blair Mullin, President and Chief
Financial Officer (Principal Executive and
Chief Financial Officer)
Dated: April 13, 2001 By: /s/ STEPHEN C. KIRCHER
---------------- --------------------------------------------
Stephen C. Kircher, Chairman of the Board
Dated: April 13, 2001 By: /s/ THOMAS J. MANZ
---------------- --------------------------------------------
Thomas J. Manz, Director
Dated: April 13, 2001 By: /s/ RONALD A. COHAN
--------------- --------------------------------------------
Ronald A. Cohan, Director
Dated: April 13, 2001 By: /s/ TIM NYMAN
---------------- --------------------------------------------
Tim Nyman, Director
Dated: April 13, 2001 By: /s/ WILLIAM H. HEDDEN
---------------- --------------------------------------------
William H. Hedden, Director
Dated: April 13, 2001 By: /s/ ANTHONY G. GENOVESE
---------------- --------------------------------------------
Anthony G. Genovese, Director
A-I
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
EXHIBITS
Filed with the
ANNUAL REPORT ON
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 30, 2000
UNDER
THE SECURITIES EXCHANGE ACT OF 1934
------------------------
GRANITE BAY TECHNOLOGIES, INC.
A-II
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
2.1 Agreement and Plan of Merger merging Morrow Snowboards, Inc. into Granite
Bay Technologies, Inc. (1)
3.1 Articles of Incorporation (1)
3.2 Bylaws [Note: The Bylaws need to be attached as an exhibit.]
4 Registration Rights Agreement dated April 20, 1994 among the Registrant
and the investors named therein (2)
4.2 Securities Purchase Agreement dated October31, 1997 among the Registrant,
Morrow, LLC, Morrow Snowboards ULC, Westbeach Snowboard Canada Ltd. and
the security holders of Westbeach Snowboard Canada Ltd. listed therein (5)
10.1 Lease and Option Agreement among PR Investors Limited Liability Company,
the Registrant, Ray E. Morrow, Jr. and Sharon Morrow dated July 25, 1994,
as amended by Amendment to Lease and Option Agreement dated August 1, 1995
(2)
10.2 Forms of Warrant (2)
10.3 Employment Agreement between Ray E. Morrow, Jr. and the Registrant dated
April 20, 1994, as amended (2-3)
10.4 Noncompete Agreement between Ray E. Morrow, Jr. and Nicollett Limited
Partners Partnership dated April 20, 1994 (2)
10.5 Assignment Agreement by and among the Registrant, Nicollett Limited
Partners, James V. Zaccaro, Gregory M. Eide, Dennis R. Shelton and Erik J.
Krieger dated December 19, 1995 (4)
10.6 Morrow Snowboards, Inc. Employee Equity Incentive Plan as amended and
restated February 13, 1997 (3)
10.7 Form of Nonqualified Stock Option Agreement (2-3)
10.8 Form of Incentive Stock Option Agreement (2-3)
10.9 Manufacturing Agreement between the Registrant and Plasticos Duramas,
S.A., dated July 20, 1995 (2)
10.10 Form of Sales Representative Agreement (2)
10.11 Letter Agreements between the Registrant and Pacific Crest Securities Inc.
dated February 22, 1994, January 27, 1995, August 4, 1995 and October 4,
1995 (2)
10.12 Form of Indemnification Agreement (2-3)
10.13 Stock Option Plan for Non-Employee Directors (2-3)
10.14 Purchase and Sales Agreement dated February 29, 1996 (4)
10.15 Securities Purchase Agreement dated October 31, 1997 among the Registrant,
Morrow, LLC, Morrow Snowboards ULC, Westbeach Snowboard Canada Ltd. and
the Security holders of Westbeach Snowboard Canada Ltd. listed therein (5)
10.16 Loan and Security Agreement dated as of May 7, 1998 among the Registrant
and Westbeach Snowboard U.S. A., Inc., as Borrower, and Foothill Capital
Corporation as Lender (as assigned to Capitol Bay Management, Inc.) (8)
10.17 Guarantee and Postponement of Claim by Morrow Westbeach Canada ULC in
favor of Foothill Capital Corporation dated as of May 7, 1998 (as assigned
to Capitol Bay Management, Inc.) (18)
10.18 Intellectual Property and Security Agreement dated as of May 7, 1998,
between Morrow Snowboards, Inc. and Foothill Capital Corporation (as
assigned to Capitol Bay Management, Inc.)(18)
10.19 General Security Agreement dated as of May 7, 1998, between Morrow
Westbeach Canada ULC and Foothill Capital Corporation (as assigned to
Capitol Bay Management, Inc.)(18)
10.20 Security Agreement-Stock Pledge dated as of May 7, 1998, between Morrow
Snowboards, Inc. and Foothill Capital Corporation (as assigned to Capitol
Management, Inc.)(18)
10.21 Assignment and Acknowledgment Agreement dated May 7, 1999, between Capitol
Bay Management, Inc. and Foothill Capital Corporation, the Registrant and
Westbeach Snowboard U.S.A. Inc.(18)
10.22 Apparel Design and Manufacturing Agreement dated December 31, 1996,
between the Registrant and Marmot Mountain Ltd. (6)
10.23 "Terms of Instrument - Part 2", dated April 1, 1994, as amended by "Terms
of Instrument - Part 2", Modification Agreement, dated October 17, 1997,
between Westbeach Snowboard Canada Ltd. (now Morrow Westbeach Canada ULC)
and Western IMMO Holdings Inc. (7)
10.24 International Distribution Agreement dated as of January 1, 1998, between
the Registrant and K.K. Morrow Japan (7)
10.25 Acquisition Agreement dated as of March 26, 1999, by and between K2
Acquisitions, Inc. and the Registrant (9)
10.26 Memorandum of Understanding between Capitol Bay Management, Inc. and the
Company (10)
10.27 Payment Agreement effective June 17, 1999 among Morrow Snowboards, Inc.,
certain Petitioning Creditors named therein and Robert K. Morrow, Inc., a
Disbursing Agent for the Petitioning Creditors (11)
10.28 Promissory Note dated August 25, 1999, given by Morrow Snowboards, Inc. to
Dennis and Carol Pekkola (12)
10.29 Trust Deed dated August 25, 1999, given by Morrow Snowboards, Inc. to
Robert Smejkel, as Trustee, with Dennis and Carol Pekkola as beneficiaries
(12).
10.30 Subordination Agreement dated August 25, 1999, among Morrow Snowboards,
Inc., Robert K. Morrow, as Escrow Agent for certain creditors of the
Company and the Pekkolas (12)
10.31 Morrow Snowboards, Inc. 1999 Stock Option Plan for Non-Employee Directors
(13)
10.32 Asset Purchase Agreement dated as of November 12, 1999, among Westbeach
Canada ULC and Westbeach Sports Inc. (14)
10.33 General Assignment dated as of November 12, 1999, among Westbeach Canada
ULC and Westbeach Sports Inc.(14)
10.34 Assignment of Lease and Consent among Westbeach Canada ULC, Westbeach
Sports Inc. and Western Immo Holdings, Inc. dated as of November 12, 1999
(14)
10.35 Assignment of Lease and Consent among Westbeach Canada ULC, Westbeach
Sports Inc. and Welf Arne Von Dehn dated as of November 12, 1999 (14)
10.36 Bill of Sale between Westbeach Canada ULC and Westbeach Sports Inc. dated
as of November 12, 1999 (14)
A-III
10.37 Letter from Arthur Andersen, LLP dated January 24, 2000 (15)
10.38 Placement Agent Agreement dated January 13, 2000, between Morrow
Snowboards, Inc. and Capitol Bay Securities, Inc (16)
10.39 Securities Purchase Agreement effective as of January 31, 2000, among
Morrow Snowboards, Inc. and the Sellers (17).
10.40 Sale and Purchase Agreement February 1, 2000 among Vikay Industrial (Hong
Kong) Ltd. And International DisplayWorks, Inc. (18)
10.41 Supplemental Deed and Charge dated February 1, 2000, between International
DisplayWorks (Hong Kong) Ltd. And International DisplayWorks, Inc., as
Chargors, and Vikay Industrial Ltd. (in Judicial Management) and Vikay
Industrial (Hong Kong) Ltd. as Chargees (17)
21 Subsidiaries of the Registrant
27 Financial Data Schedule
(1) Incorporated herein by reference from the Company's Current Report on Form
8-K dated November 6, 2000 (File No. 0-753683.
(2) Incorporated herein by reference from the Company's Registration Statement
on Form S-1 (File No. 33-97800).
(3) Management contract or compensatory plan or arrangement.
(4) Incorporated herein by reference from the Company's 1995 Annual Report on
Form 10-K (File No. 0-27002).
(5) Incorporated by reference from the Company's Current Report on Form 8-K
dated October 31, 1997 (File No. 0-27002).
(6) Incorporated by reference from the Company's Current Report on Form 8-K
dated November 11,1997 (File No. 0-27002).
(7) Incorporated by reference from the Company's 1997 Annual Report on Form
10-K (File No. 0-27002).
(8) Incorporated by reference from the Company's Current Report on Form 8-K
dated May 8, 1998 (File No. 0-27002).
(9) Incorporated by reference from the Company's Current Report on Form 8-K
dated March 26, 1999 (File No. 0-27002).
(10) Incorporated by reference from the Company's Current Report on Form 8-K
dated April 27, 1999 (File No. 0-27002).
(11) Incorporated by reference from the Company's Current Report on Form 8-K
dated June 28, 1999 (File No. 0-27002).
(121)Incorporated by reference from the Company's Current Report on Form 8-K
dated August 25, 1999 (File No. 0-27002).
(13) Incorporated by reference from the Company's Current Report on Form 8-K
dated September 30, 1999 (File No. 0-27002).
(14) Incorporated by reference from the Company's Current Report on Form 8-K
dated November 12, 1999 (File No. 0-27002).
(15) Incorporated by reference from the Company's Current Report on Form 8-K
dated January 14, 2000 (File No. 0-27002).
(16) Incorporated by reference from the Company's Current Report on Form 8-K
dated January 31, 2000 (File No. 0-27002).
(17) Incorporated by reference from the Company's Current Report on Form 8-K
dated January 31, 2000 (File No. 0-27002).
(18) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended January 1, 2000 (File No.0-27002).