ITEM 1. BUSINESS
INTRODUCTION
Ride, Inc. (the "Company") is a leading designer, manufacturer and marketer of contemporary sporting goods equipment and apparel for snowboard and wakeboard consumers. The Company markets its equipment and apparel throughout the world under multiple brands specifically targeted to serve certain price points, product lines and distribution channels. This report on Form 10-K is being filed as a result of the change in the Company's fiscal year end from December 31 to June 30, beginning with the six month period ended June 30, 1998. The change in fiscal year end was made to more closely align the Company's accounting and reporting practices with its product cycle. References herein to "fiscal 1998" refer to the period January 1, 1998 to June 30, 1998.
The Company was founded in September 1992 and acts as a holding company for the following subsidiaries: Ride Snowboard Company ("Ride Snowboards"), Ride Manufacturing, Inc. ("Ride Manufacturing"), Ride Canada, Inc. ("Ride Canada"), SMP Clothing, Inc. ("SMP"), Smiley Hats, Inc. ("Smiley"), and Carve, Inc. d/b/a US2 Sports ("US2"). The Company acquired C.A.S. Sports International, Inc. and C.A.S. Sports Agency, Inc. (collectively, "CAS") in August 1994. The Company acquired Ride Manufacturing and 5150 Snowboards, Inc. ("5150") and SMP in September and October 1995, respectively. The Company later merged 5150 with and into Ride Snowboards. In October 1996, the Company transferred certain of its assets and liabilities of the CAS business to Ride Canada and Ride Snowboards, and sold the CAS entities. In June 1997, the Company acquired substantially all of the assets (except cash and accounts receivable) and liabilities of Device Mfg Corp. ("Device") and transferred those assets and liabilities to Ride Snowboards. In July 1997, the Company purchased substantially all of the assets of Galena Creek Trading Company, Inc., d/b/a Smiley Hats, and transferred those assets to its Smiley subsidiary, which the Company formed specifically for that purpose. Finally, in December 1997, the Company acquired US2 Sports Group, Inc. d/b/a FullTilt Wakeboards, through a merger of that company with and into Carve, Inc., a newly-formed corporation.
Ride Snowboards sells premium to mid-range snowboards and related products primarily through specialty snowboard and ski shops. Ride Manufacturing is a manufacturer of premium snowboards principally for Ride Snowboards and, to a lessor extent, a limited number of other snowboard companies on an OEM basis. SMP designs and manufactures snowboard, surf, skate, motocross and street apparel which is sold primarily through specialty shops. Ride Canada acts as the Company's Canadian distributor. Smiley designs and manufactures premium head and neck wear for the winter sports industry which products are sold through specialty shops. US2 designs, manufactures and distributes wakeboards, wakeboard bindings and accessories under the "FullTilt" and "Sub Rosa" brand names through sporting goods, marine and specialty retailers. Until its disposition in October 1996, CAS marketed entry-level snowboards and related products under various brand names and on a private label basis, primarily to regional sporting goods stores and large-format sporting goods retailers. In addition, CAS sold snowboards and related products on an OEM basis to other
snowboard companies and bought excess snowboard and sporting goods inventories from manufacturers and sold such products to retailers throughout the world. The OEM and excess inventory portions of the CAS business were sold in October 1996 while the branded and private label portions of the business were retained by the Company and have been integrated as an additional component of the Company's product offering.
In fiscal 1998, the Company began operating under the d/b/a "Ride Sports" to reflect the expanded scope of sporting goods products currently offered by the Company for outdoor sports enthusiasts.
INDUSTRY BACKGROUND
Snowboarding
Tracing its roots to surfing and skateboarding, snowboarding was invented in the late 1970's. The first products available were unsophisticated in design and were made almost entirely by small "backyard" manufacturers. In the early 1990's, snowboard design advanced to higher performance standards and the sport began to attract broader demographic participation.
The majority of snowboarders continue to be young males, however, the sport is growing in popularity among females and older sports enthusiasts, especially downhill skiers. The sport is now welcome and promoted at nearly all of the ski areas worldwide. Snowboarding recently made its debut with four full medal events at the 1998 Winter Olympic Games in Nagano, Japan.
The Company believes that the growth of snowboarding is attributable in large part to advantages the sport holds over alpine skiing. Many people find that snowboarding not only is more natural and easier to learn than alpine skiing, but also provides a greater degree of excitement over more diverse terrain. For many, snowboarding equipment is also less cumbersome and more comfortable than alpine ski equipment; poles are unnecessary and the boots are softer and lighter than ski boots. Moreover, recent design improvements are making step-in snowboard bindings a more attractive option for crossover skiers and others seeking the functionality and ease of use of alpine ski step-in products.
The Company believes the snowboard industry is dominated by approximately seven major competitors, including one industry market share leader, three predominantly snowboard-related companies, including the Company, and three ski manufacturers. The remainder of the market is highly fragmented among scores of competitors. The Company believes that recent acquisitions of smaller brands by larger competitors represents a broader consolidation trend in the industry as weaker brands are either absorbed by larger companies or cease business operations.
Industry data show continued growth in snowboard participation. The Company believes that similar growth continues in the European and Japanese markets, although the economic recession currently affecting Japan may cause growth in that market to slow or stop until the economy improves and discretionary income is once again available to the average consumer to expend on leisure pursuits such as snowboarding. However, the Company believes sales at the wholesale level in each of the past three winter seasons outpaced retail growth and that there remains an oversupply of product at the retail level. While the Company believes that this oversupply of product is declining, this condition persists to the greatest degree in the Japanese market. The Company anticipates current oversupply conditions may continue to adversely affect worldwide wholesale sales growth opportunities in the 1998-1999 season.
Wakeboarding
The Company believes that the relatively new sport of wakeboarding shares many functional and demographic characteristics with snowboarding and snowboarders. In function, wakeboarding is comparable to waterskiing in the same manner that snowboarding is comparable to alpine skiing. Appealing predominantly to young outdoor enthusiasts, wakeboard riders are typically pulled behind a power boat or personal water craft and perform aerial tricks and other maneuvers on the wake of the towing vessel for recreational or competitive purposes. While the current market for wakeboards is relatively small in comparison to snowboarding, the Company believes that the sport is growing in popularity. The Company believes the wakeboard market is dominated by a single competitor while four or five other competitors, including the Company, share a smaller but growing segment of the market, with the balance divided among twenty to thirty smaller companies. With relatively low barriers to entry, the Company expects there to be additional entrants into the market in the short term similar to what occurred in the snowboard industry.
OPERATING STRATEGY
The Company's operating strategy is to creatively market high quality, technologically innovative contemporary sports products and extend its position in the sporting goods equipment market into the apparel marketplace.
Brand Marketing of Sporting Goods Equipment: The Company uses a multiple brand strategy to serve the product needs, price points and demographics of its diverse consumer base. The "Ride" brand is specifically positioned to appeal to a broad range of snowboard enthusiasts at mid to higher price points; "5150" is targeted at the Company's more aggressive counterculture snowboard consumers; "Liquid" produces entry level products at moderate price points; and "FullTilt" and "Sub Rosa" serve the wakeboard and wakeboard binding markets.
Technology Based Products: The Company uses its in-house production capabilities at Ride Manufacturing, an extensive engineering staff and its team of world-class professional snowboarders and wakeboarders to develop high-performance snowboard and wakeboard equipment incorporating the most advanced technologies currently available. The Company believes the products designed by these professional athletes, with production and management oversight provided by Company engineers, gives its snowboard brands competitive advantages in the consumer marketplace. This strategy was rewarded in 1997 with snowboardingonline's first ever product review in which the Company's "Ride" Timeless and Jeff Brushie snowboards were selected as the best in their respective product categories. The awards have continued in 1998 with Mountain Sports & Living (f.k.a. Snowcountry) naming the Company's "Ride" Timeless and Control snowboards "Tester's Choice" in their respective categories.
Expansion into Apparel: The Company seeks to broaden its revenue base by marketing accessories and softgoods specifically targeted to snowboard and wakeboard enthusiasts. The Ride Snowboard Apparel brand is targeted at the high end snowboard enthusiast who requires extensive technical features such as waterproof breathable fabrics. The "SMP" brand, originating in Southern California, is marketed to the Company's more fashion oriented motocross, snow, skate and wakeboard consumers. The Company intends to expand the recognition of its equipment brands with accessories such as backpacks, snowboard bags, gloves and hats. Recently acquired Smiley produces high-quality head and neck-wear for winter sports enthusiasts, further increasing the Company's presence in the winter sports accessories marketplace.
PRODUCTS
Snowboard Equipment
"Ride"
The "Ride" brand is designed for high performance, capitalizes on the Company's most advanced technologies and has historically been positioned toward the higher price points in the snowboard market. In 1997, the Company began offering moderate price point products under the "Ride" brand to target entry and intermediate level consumers, thus expanding recognition of the "Ride" brand name. Designed to connect the snowboarder to the snowboard, the "Ride" product line includes both traditional "strap" snowboard bindings and boots and a complete line of "Device-compatible" step-in snowboard bindings and boots. Included in the Company's products for the first time in 1997, step-in snowboard bindings provide an increased level of convenience by allowing the user to simply step-in to the binding to connect himself to the snowboard as opposed to sitting down in the snow to "strap-in" to traditional snowboard bindings. In order to maximize the strength and positioning of the "Ride" product series, the Company merged its "Preston" high end strap-in bindings into the '98-'99 "Ride" product line. The mounting features of all of the Company's bindings are compatible with the Company's snowboards and those offered by virtually all competitors.
The "Ride" product line currently includes 47 sizes of snowboards within 12 board series with suggested retail prices ranging from $165 for a children's board to $525 for a high-end expert board, five models of traditional "strap" snowboard bindings with suggested retail prices ranging from $100 to $170, two models of "Device-compatible" step-in snowboard bindings with suggested retail prices from $130 to $160 and 13 models of "Device-compatible" step-in and 13 models of traditional "strap" snowboard boots with suggested retail prices ranging from $130 to $250.
"5150"
Incorporating many of the technologies available under the "Ride" brand, the "5150" brand is targeted at the counter-culture niche of the snowboarding market. The "5150" product line currently includes 15 sizes of snowboards within four board series with suggested retail prices ranging from $325 to $430.
"Liquid"
The "Liquid" product line is aimed at entry level snowboarders who require quality products at a competitive price. The line currently includes 28 sizes of snowboards within seven board series with suggested retail prices ranging from $230 to $300, nine models of traditional "strap" snowboard bindings with suggested retail prices ranging from $35 to $85, one model of "Device-compatible" step-in snowboard bindings with a suggested retail price of $115 and one and four models, respectively, of "Device-compatible" step-in and traditional snowboard boots with suggested retail prices ranging from $80 to $110.
Apparel
The Company believes that clothing is an important element of the snowboarding subculture and that the demand for snowboarding apparel will grow with the popularity of the sport. In addition, snowboard apparel has crossed over into everyday fashion, thereby increasing the potential market for the Company's apparel products.
The Company has developed and introduced for the 1998-1999 season a new line of technical snowboard outerwear and apres snowboard apparel under the "Ride Snowboard Apparel" brand name. Previously produced under the "Cappel" brand name, this product line extends the "Ride" brand's reputation for equipment quality and performance to the snowboard apparel market. "Ride" brand apparel is intended for the consumer who desires technology and function in his or her snowboard clothing. Retail value for outerwear ranges from $90 for an entry level pair of pants to $270 for the line's full featured waterproof, breathable parka.
Developed by San Diego-based SMP Clothing, the "SMP" product line includes clothing and accessory items used in snowboarding, surfing, skateboarding, and motocross, as well as pants, shirts, sweaters and other street and beach wear. SMP apparel is targeted at a more fashion conscious consumer desirous of technically advanced features with retail prices ranging from $15 for fashion T-shirts to $240 for a high-end snowboard jacket.
Accessories
The Company offers a variety of snow and wakeboarding accessories, including snowshoes, gloves, bags, packs, hats and caps under the "Ride," "5150," "Liquid,", "SMP," "FullTilt" and "Smiley" brands. The Company's subsidiary, Smiley, offers high quality head and neck wear for wintersports enthusiasts ranging from basic wool hats to alternative synthetic fleece hats and headbands. Smiley's products generally retail for $10 to $40. The Company also offers a line of "Slim" snowboard tools for adjustment of snowboard bindings and maintenance during use.
Wakeboards and Wakeboard Bindings
The Company's December 1997 acquisition of US2 Sports Group has extended the Company's product line to wakeboards and wakeboard bindings. The Company offers 15 models of wakeboards under the "FullTilt" brand with suggested retail prices ranging from $270 to $700 and five models of wakeboard bindings under the "Sub Rosa" brand with suggested retail prices ranging from $100 to $280. These products are distributed through specialty retailers, marine dealerships and large format sporting goods chains. In 1998, the Company moved its wakeboard production to its state-of-the-art Ride Manufacturing facility in Corona, California. The move is reflected in the enhanced quality and technologically advanced features of the Company's 1999 "FullTilt" wakeboard product line.
The following table sets forth the contribution to net sales (in thousands and as a percentage of net sales) attributable to each of the Company's product groups for the year ended December 31, 1997 and the six month period ended June 30, 1998.
TIERED DISTRIBUTION STRATEGY
The Company's worldwide distribution strategy is centered around a policy of limited distribution and market segmentation. Although the Company believes that more rapid sales growth might be achieved in the short term by selling all brands across all distribution channels, the Company believes that continued growth and brand loyalty can be best achieved by selling each of the Company's brands primarily through those retailers that best serve the market segment to which the particular brand is targeted.
North America
The Company distributes its branded products to retailers through its independent sales representatives and a limited number of employee sales representatives. The following table details the Company's tiered distribution strategy for each of its brands:
The three main retail channels of distribution for the Company's branded products in North America are defined as follows:
Specialty Snowboard and Ski Shops. These retailers generally operate one to three relatively small sized shops specifically targeted at the core of their respective markets. Providing the highest amount of customer service and significantly influencing the purchasing decisions of consumers, they tend to cater to experienced snowboarders, a majority of whom are repeat buyers, as well as intermediate snowboarders, cross-over skiers and other winter sports enthusiasts. These retailers primarily sell the Company's premium and mid-priced snowboards, including "Ride," and "5150" snowboards, bindings, boots and accessories and "Ride Snowboard Apparel" and "SMP".
Regional Sporting Goods Stores and Apparel Chains. These retailers typically have 10 or more large to moderate size stores within a large geographical area, target their product lines at specific sport sectors and generally appeal to intermediate and novice sports enthusiasts. Accordingly, they offer trained sport specific sales assistance for their customers at the moderate to upper price points. These stores primarily sell the Company's "Ride" and "Liquid" product lines. The Company's "SMP" brand is widely distributed through this channel by multiple location young men's apparel chains typically found in most major shopping malls.
Large-Format Sporting Goods Retailers. These retailers sell primarily to first-time and price-sensitive buyers. Offering the broadest range of sporting goods equipment, these stores maximize volume based on providing price point products and offer a modest amount of sales and service support for their customers. These retailers typically carry the Company's "Liquid" product line.
International
The Company has historically generated the largest portion of its international revenues in the Japanese marketplace through sales of its "Ride", "5150", and "SMP" brands to independent distributors who, in turn, sell these product lines to Japanese retailers. Due to the oversupply of snowboard equipment in the Japanese marketplace, the Company determined that its ability to maintain market share and control its "Ride" brand image is directly related to the level of control the Company has over its distribution channels in that marketplace. During 1997, the Company implemented a two-tiered distribution strategy in Japan for the "Ride" brand whereby it sells directly to the top retailers in that market and distributes to specialty retailers through a sub-distributor.
Throughout the rest of the world, the Company sells to independent distributors who in turn market and sell products to retailers in their respective markets, except in France and Great Britain, where the Company sells directly to retailers through independent sales representatives. The Company works closely with its international distributors to ensure that its policies of limited distribution and market segmentation are followed worldwide.
The Company's North American and export sales (in thousands) are set forth below for the year ended December 31, 1997 and the six-month period ended June 30, 1998. No customer accounted for more than 10% of sales in either period. See "--Risk Factors--Risks of International Business."
INNOVATIVE PRODUCT DESIGNS
A key component of the Company's progressive image and operating strategy is its commitment to be the industry leader in technologically innovative product design. Unlike many other snowboard companies, which rely largely on third-party design technicians and engineers, the Company uses in-house product development teams in collaboration with Company team riders to develop high-performance products that incorporate the most advanced snowboarding technology. The Company continues advances in the use of light weight, durable materials in the construction of its snowboards. For the 1998/1999 snowboard product line, the Company has introduced several new construction styles, including the "Concept" board, designed especially for freestyle riding, which is lighter than any board the Company has produced to date, and the "Enigma" board that incorporates an innovative variable angle cap. The Company is applying this same approach to the development of its 1999 wakeboard product line. The Company pioneered the use of lightweight and durable aircraft-grade aluminum in traditional "strap-in" snowboard bindings. Research and development expenses totaled approximately $417,000 and $338,000 in 1996 and 1997, respectively, and $180,000 in fiscal 1998. The Company expects to spend comparable amounts the 1999 fiscal year as it has in recent past fiscal years on research and development efforts for snowboard equipment and apparel while increasing its expenditures on wakeboards and wakeboard bindings.
IN-HOUSE MANUFACTURING CAPABILITY
The Company's September 1995 acquisition of Ride Manufacturing significantly expanded its snowboard development, production and quality assurance capabilities. To date, the Company has been able to lower its snowboard production costs, reduce reliance on outside suppliers and enhance product development efforts. In fiscal 1998, the Company produced virtually all of its snowboards in this factory and anticipates to continue doing so in 1999 fiscal year. The Company devoted the majority of the Ride Manufacturing production efforts toward construction of "Ride," "5150" and "Liquid" brand snowboards in fiscal 1998. In addition, the Company produced a limited number of OEM and promotional snowboards to the mix. The Company anticipates to repeat this production pattern in 1999 fiscal year. The Company successfully moved the "FullTilt" wakeboard production to the Ride Manufacturing factory in fiscal 1998. The Company anticipates this production shift will consume production time and capacity in the fall and early winter months when the factory would otherwise be idle due to the seasonality of snowboard production. See "-- Risk Factors -- Manufacturing."
MARKETING
The Company has established its flagship "Ride" brand name as an aggressive, technologically advanced brand on the leading edge of snowboarding. The Company has established different brands for other target markets and seeks to increase consumer awareness of these brands without jeopardizing the "Ride" brand image. An important element of this strategy is the Company's "Ride," "5150," "SMP," and "FullTilt" professional snowboard and wakeboard riders, who are prominently featured in the Company's print advertising in leading industry magazines and several "underground" snow/surf/skate/wakeboard publications. Participating in their respective sports approximately 250 days a year, the Company's professional teams provide significant brand exposure through
photographic and editorial coverage in major industry magazines and at organized events. The Company also sponsors top local riders in various markets with free products. Additionally, the Company's product demo program, "We Put the Ass Back in Passion," provides trial rides to customers and potential customers at ski areas around the country through the Company's five demo vans. The Company has also increased its efforts to bring industry media attention to the technological features of its products through Company-sponsored tours of its state-of-the-art Ride Manufacturing factory and on-hill demonstration events. In fiscal 1998, the Company employed a public relations firm to further enhance the Company's exposure in important industry media and events. These programs are each designed to improve the visibility of the Company's products while enhancing the high-performance reputation of the "Ride," "5150," and "FullTilt" brands. The Company also markets its products through regular attendance at industry trade shows.
SUPPLIERS
In fiscal 1998, the Company sourced all of its "strap" and "Device-compatible" step-in snowboard bindings from the Taiwan-based Snowboard Factory, Inc. ("SFI") to capitalize on lower product cost opportunities available in the Far East. The Company expects to continue this arrangement in 1999. The Company's apparel, boot and accessory products will continue to be sourced through a variety of U.S. and foreign manufacturers.
The Company generally does not have contracts with its manufacturing sources and competes with other companies for the production capacity of certain manufacturers. Although the Company believes that it has established close relationships with its principal manufacturing sources, its future success may depend on its ability to maintain such relationships. If the Company's relationship with any of its binding, boot, apparel or other product manufacturers were interrupted, the Company could find it difficult to locate another source with sufficient production capacity to meet the Company's short-term needs, and the Company could miss the retailing season for that product. The establishment of new manufacturing relationships involves numerous uncertainties, including those relating to payment terms, costs of manufacturing, adequacy of manufacturing capacity, quality control and timeliness of delivery, and the Company is unable to predict whether such relationships would be on terms that the Company regards as satisfactory. Should an unexpected change in binding, boot, apparel or other product suppliers become necessary, the Company would likely experience increased costs, as well as a substantial disruption and a potential loss of sales. In addition, from time to time manufacturers in the snowboard industry have experienced shortages and, in some cases, price increases in certain raw materials, and such shortages or price increases may recur. At times, the Company has also experienced delays in the receipt of products from its suppliers as a result of shortages in raw materials, including fiberglass and P-Tex. Although the Company believes that it is well-positioned to minimize the impact of raw material shortages and delays in supplier shipments, such shortages and delays could have a material adverse affect on the Company's business, financial condition and results of operations. See "-- Risk Factors -- Dependence on Outside Manufacturers."
COMPETITION
Both the snowboarding and wakeboarding businesses are highly competitive and have relatively few technological or manufacturing barriers to entry. The Company's technology is generally not proprietary. The Company competes with a number of established manufacturers and distributors whose brand names enjoy recognition that exceeds that of the Company's brand names. In all its product categories, the Company competes with numerous manufacturers and distributors that have significantly greater financial, distribution, advertising and marketing resources than the Company. There can be no assurance that the Company will compete successfully in the future. Moreover, the current industry oversupply position, future events affecting the Company or its competitors, consumer buying patterns, the introduction of new products by the Company or its competitors, weather patterns that may affect the demand for the Company's products, product supply fluctuations in the Company's markets, regulations affecting the Company's products, the financial condition of the Company's suppliers and the entry of additional competitors in the Company's markets, among other factors, could result in insufficient or excess inventory levels, missed market opportunities or higher markdowns, any of which could have a material adverse effect on the Company's financial condition and results of operations. See "-- Risk Factors -- Competition."
LICENSING
The Company is currently licensing its recently acquired "Device Compatible" step-in snowboard binding technology to several competitors in the snowboard boot and binding market and anticipates licensing this technology to additional snowboard boot and binding manufacturers in the future. The Company expects these licensing arrangements will increase the market penetration of its "Device Compatible" snowboard boot and binding system in North America, Europe and Japan. The Company is also licensing its
"Liquid" brand name for worldwide apparel distribution, and the "SMP" brand for distribution in specific regions outside the United States.
INTELLECTUAL PROPERTY
The Company aggressively seeks to protect its intellectual property rights such as trademarks, product designs and new concepts. These rights are protected through trademark registrations, the maintenance of trade secrets, the development of trade dress and, when necessary, appropriate action against those who are, in the Company's opinion, unfairly competing. In addition, the Company is seeking and, when appropriate, will continue to seek patent protection for product function and design innovations.
The Company has applied for or been granted trademark registration in the United States and certain foreign jurisdictions for "Ride," "Liquid," "5150," "Preston," "Cappel," "SMP," "Device," "Smiley," "FullTilt," and "Sub Rosa" as well as certain associated logos. The Company also claims rights to the foregoing and to various other trademarks arising out of use of such marks. Although the Company believes these rights are enforceable, there can be no assurance that any of these trademarks are enforceable or that the Company is otherwise capable of protecting the goodwill associated with them. The Company believes that the failure to protect its trademarks could have a material adverse effect on the Company's business. See "-- Risk Factors -- Limited Protection of Technology;" "Item 3. Legal Proceedings."
RECENT DEVELOPMENTS
On August 31, 1998, the Company entered into a Loan and Security Agreement with CIT Group/Credit Finance, Inc. ("CIT") whereby the Company was extended a $15.0 million credit facility, which is increased to $17.0 million during the October 15 - December 15 time period. On the same date, the Company entered into a Consent, Reaffirmation, and Release Agreement with US Bank NA, pursuant to which the Company retained a $3.0 million credit facility with that institution. The CIT facility has a term of three years, expiring August 30, 2001, and is secured by substantially all of the assets of Ride and its subsidiaries. The US Bank facility has a term of one year, expiring August 30,1999, and is secured by a $1.8 million note receivable, the personal guarantee of one of the Company's outside directors (including certain real property owned by that director), and a second position on the other assets of Ride and its subsidiaries.
In August 1998, the Company, together with the individually named defendants, entered into a Memorandum of Understanding with the plaintiffs in the lawsuit filed by certain current and/or former shareholders of the Company styled Murray v. Ride, Inc., et al., wherein the parties have agreed to settle the lawsuit upon the following principal terms: (1) the creation of a settlement fund consisting of: (a) $3,000,000 cash paid by the Company's insurance carrier; and (b) warrants to purchase 600,000 shares of the Company's Common Stock, exercisable for a four year period ending December 31, 2002 at a price of $3.00 per share; and (2) the dismissal of the lawsuit against all named defendants with prejudice. The Memorandum of Understanding is to be reduced to a Stipulation of Settlement, which will be presented to the Court for approval. While the Company is hopeful such approval will be forthcoming, there can be no assurance such approval will be given. In the event Court approval of the settlement is denied, the Company expects the litigation will resume and the Company will renew its vigorous defense of the claims.
On June 16, 1998, Robert E. Hall resigned his position as the Company's Chief Executive Officer and President, and as a member of the Company's Board of Directors; and Bruce Manke resigned his position as the Company's Senior Vice President of Board Sports and Administration. Contemporaneous with the resignations, Robert F. Marcovitch, formerly the Company's Senior Vice President of International and Apparel, was appointed President and Chief Executive Officer, and Greg Cook, formerly President of the Company's Ride Canada subsidiary, was appointed Chief Operating Officer. Mr. Marcovitch was also appointed to the Company's Board of Directors to fill the position left vacant by Mr. Hall's resignation. Effective August 31, 1998, Scott Stewart resigned his position as the Company's Vice President, Chief Financial Officer and Treasurer. Mr. Cook has assumed Mr. Stewart's role as the Company's principal financial and accounting officer.
Fiscal 1998 results include non-recurring charges totaling approximately $1,046,000. The charges include a $280,000 expense for the restructure of the Company's SMP operations, which includes asset write-downs, lease termination and severance charges. The Company's agreement to settle the securities class action lawsuit, while a positive step for the business of the Company, requires the Company to issue warrants to purchase 600,000 shares of the Company's Common Stock. The Company has accrued a charge of $500,000 in fiscal 1998 representing the fair value and costs
of issuing the warrants as well as related settlement expenses. An additional charge of $266,000 has been taken to cover severance and other expenses resulting from the resignations of Mr. Hall and Mr. Manke and related management transition costs.
EMPLOYEES
As of September 23, 1998, the Company had 237 full-time (including seasonal) employees. None of the Company's employees are subject to a collective bargaining agreement. The Company considers its employee relations to be good.
RISK FACTORS
In evaluating the Company's business, careful consideration should be given to the following factors in addition to the other information presented in this Annual Report on Form 10-K:
Liquidity; Dependence on Line of Credit. The Company operates a seasonal business and generates the majority of its sales in the quarters ending September 30 and December 31. In order to manufacture product during the remainder of the year, the Company has a revolving line of credit arrangement with an asset-based lender, CIT Group/Credit Finance, Inc. ("CIT"), to finance import letters of credit and working capital needs (the "CIT Line"). The term of the line is three years, expiring August 30, 2001. The maximum amount available under the line is $15 million, which is extended to $17 million between October 15 and December 15 of each year during the term. In addition to the CIT Line, the Company has retained a line of credit with US Bank NA ("US Bank") in the reduced amount of $3.0 million (the "US Bank Line"). The term of the US Bank Line expires on August 30, 1999. The Company believes the CIT Line is adequate to meet the current needs of its business. There is, however, no assurance the CIT Line is sufficient to fund the demands of the Company's future growth. To this end, the Company and CIT have agreed to review the line in March 1999 with a view to increasing same if then current business conditions warrant doing so. However, there can be no assurance such an increase in the CIT Line will be available even if the Company's business prospects at that time require and warrant doing so. In addition, availability of funds under the CIT Line is at all times conditioned on the Company achieving certain collateral requirements. There can be no assurance such requirements will be achieved or, if achieved, that they can be consistently maintained. The Company's inability to increase the CIT Line or meet or maintain specific collateral requirements could each have a material adverse impact on the Company's financial condition and could result in a substantial limitation or reduction in the scope of the Company's business. With respect to the US Bank Line, the Company is obligated to satisfy all sums due thereunder on or before its August 30, 1999 expiration date. There can be no assurance the Company will be successful in doing so. The Company's inability to successfully satisfy or extend the US Bank Line, if necessary, could have a material adverse impact on the Company's financial condition.
Risks of International Business. In fiscal 1998, approximately 18% of the Company's sales were outside of North America. The Company's business is subject to the risks generally associated with doing business internationally, such as fluctuations in exchange rates, foreign governmental regulation, product distribution patterns and changes in economic conditions. These factors, among others, could influence the Company's ability to sell its products in international markets, as well as its ability to procure products or components. The Company sources all of its binding and boot production in China. A large portion of its apparel is manufactured in Asia as well. While the Company believes the financial health of its Asian suppliers to be good, there can be no assurance that the economic slowdown affecting Asia today will not have an adverse effect on the Company's Asian suppliers' ability to source or fund their production requirements, or fulfill the Company's orders. The Company ships its Asian-sourced products in sea-borne containers from a central facility in Hong Kong to central distribution centers in North America and Europe, and to individual customers in Japan. The economic slowdown in Asia has dramatically reduced the availability of such containers and increased the cost of those containers that are available. The Company's inability to timely ship its Asian-sourced products, or its being forced to use alternative, higher cost air freight, as a result of the paucity of sea-borne containers available to the Company's shipper may adversely effect the Company's business, financial condition and results of operations. In addition, the Company believes that its relationship with its current Japanese retailer customers is good and that they will continue to do business with the Company. However, the Company believes that current adverse economic conditions in Japan may negatively affect end-user buying patterns in that country, which may in turn cause a reduction in future orders from its Japanese retailer customers. Any such reduction may adversely effect the Company's business and results of operations. The Company purchases many of its products and components from sources outside of the United States, with purchase prices often denominated in foreign currencies. From time to time, the Company enters into foreign currency forward contracts to either buy or sell foreign currencies at future dates in order to minimize currency risk. Despite this hedging program, unanticipated or long-term changes in the value of the U.S. dollar relative to that of certain foreign currencies could have a material adverse effect on the Company's results of operations through either higher product
costs or reduced export sales prices and/or export sales volumes. The Company is also subject to risks inherent in hedging programs and in 1997 and 1996 the Company recognized losses on foreign currency contracts totalling $17,000 and $160,000, respectively. In addition, the Company's business is subject to the risks associated with the imposition of legislation and regulation relating to imports, including quotas, duties or taxes and other charges, restrictions or retaliatory actions on imports to the United States and other countries in which the Company's products are sold or manufactured. The Company cannot predict whether the foregoing legislation and regulation will be imposed by the United States or other countries, nor can it predict what effect such imposition would have on its business or results of operations.
Issuance of Preferred Stock; Dilution. In December 1997, the Company issued 3,000 shares of Series B 5% Cumulative Convertible Preferred Stock (the "Series B Preferred Stock") to a single institutional investor. Subject to certain adjustments, the Series B Preferred Stock converts to Common Stock at the lesser of $2.68 per share or 90% of the market price (as defined) of the Common Stock at the time of the conversion. During the period ended June 30, 1998, 716 shares of Series B Preferred Stock were converted into 441,687 shares of Common Stock. As of September 21, 1998, approximately 2.8 million shares of Common Stock would have been issuable upon conversion of all of the remaining Series B Preferred Stock. Any unconverted Series B Preferred Stock converts automatically to Common Stock in December 2000.
The Board of Directors may, without shareholder approval, issue additional preferred stock with dividend, liquidation, conversion, voting or other rights that could adversely affect the voting power and other rights of the holders of the Common Stock. In the event of additional issuances, the preferred stock could be utilized, under certain conditions, as a method of delaying, deterring or preventing a change in control of the Company. Although the Company has no current plans to issue any additional shares of preferred stock, there can be no assurance that it will not do so in the future.
Potential Applicability of "Penny Stock Restrictions"; Potential to Fail to Meet Continuing Nasdaq Listing Requirements. Stocks selling for less than $5.00 per share, excluding broker or dealer commissions, may be designated as "penny stocks" and may be subject to certain requirements imposed by Rules 15g-1 through 15g-9 under the Exchange Act. The net effect of these regulations may be to delay transactions in stocks that are deemed to be penny stocks. The Company's Common Stock is currently trading for less than $5.00 per share, however the "penny stock restrictions" are not applicable based on exemptions provided in Rule 3a51-1 under the Exchange Act, which among other things provides an exemption from the penny stock restrictions for securities that are quoted on the Nasdaq and for those that have tangible assets in excess of $2.0 million. If the Company's Common Stock were to be delisted from Nasdaq and its net worth drop below $2.0 million at a time when its stock price was less than $5.00 per share, and if no other exemption from the penny stock restrictions were available to the Company, then its Common Stock could be subject to such restrictions and sales of the Company's Common Stock by brokers and dealers and resales by investors would likely be adversely affected. To meet the continued listing requirements for the Nasdaq National Market, among other things, the minimum bid price of the Common Stock must be $1.00. If the minimum bid price of the Common Stock were for a continuing period of time to be less than $1.00, the Common Stock could be delisted from the Nasdaq National Market which would adversely affect the ability of shareholders to buy and sell shares of Common Stock.
Year 2000 Problem. The "year 2000 problem" is the result of computer programs being written using two digits rather than four to define the applicable year. Software programs and systems that have date-sensitive features may recognize a date using "00" as the year 1900 instead of the year 2000. The Company has assessed its year 2000 needs and has purchased and is presently installing year 2000-compliant software in all its known non-compliant hardware and software systems, which installation the Company anticipates will be completed by the June 30, 1999 year-end. The cost of the purchase and installation of the year 2000-compliant software is anticipated to exceed $250,000. The Company is in the process of reviewing with each of its material suppliers, service providers and customers the steps each is taking to insure their respective computer systems are presently or will be year 2000-compliant in a timely fashion. The Company's shipper has confirmed to the Company it has installed year 2000-compliant software in all of its material systems. There can be no assurance the computer systems of third parties on whose commercial efforts the Company directly or indirectly relies, will be year 2000-compliant in a timely fashion. Because the Company has not completed its review of its material third party suppliers, service providers and customers, it has not created a contingency plan setting forth what steps will be taken if such third parties are not year 2000 compliant by December 31, 1999. Based on information received from its third party vendors, service providers and customers, the Company intends to have a contingency plan in place by June 1999. The failure of third parties to be year 2000 compliant could cause material delays in the design, manufacture and shipment of products, delay in payment for products, and delay in the availability of credit or funds necessary to operate the business of the Company. The failure of the Company's or one or more third-party's computer systems as a result of year 2000 non-compliance may have a material adverse effect on the Company's business and results of operations.
Industry and Product Concentration. The Company's current product offerings consist predominantly of snowboards and related products. As a result of this concentration, the Company's future success will depend in large part on the continued growth of the snowboard market. Snowboarding is a relatively new sport, and there can be no assurance that the sport will continue to grow at the rate experienced in recent years, or that its popularity will not decline. Moreover, the market for snowboards is characterized largely by image-conscious, brand-driven younger consumers, and the Company's future success depends on its ability to regularly update its products and maintain its progressive, cutting-edge image, particularly with respect to its flagship "Ride" brand. Any failure by the Company to accurately predict and target future trends or to maintain its progressive image could have a material adverse effect on its results of operations.
The Company believes that controlling its channels of distribution is critical to maintaining the premium image of its brands. While the Company can control the initial wholesale distribution of its products, it has limited ability to monitor or control the resale of its products through alternative channels. Failure to adequately control distribution of its products could have an adverse effect on its brand image and sales which in turn could have a material impact on the Company's financial position and results of operations. In addition, supply and demand imbalances in the snowboard industry could also have a material adverse effect on the Company's growth prospects, financial condition and results of operations. The Company believes that its future success will depend, among other things, on its ability to introduce innovative, well-received products, and there can be no assurance of its ability to do so. In addition, a major innovation by one or more of the Company's competitors could have a negative effect on the sales of one or more of the Company's product lines or brands.
Acquisition-Related Risks; Ability to Manage Change. During 1997 the Company completed three acquisitions. In June, the Company purchased substantially all of the assets (except cash and accounts receivable) and the liabilities of Device Mfg Corp., a manufacturer of step-in snowboard bindings. In July, the Company purchased substantially all of the assets of Galena Creek Trading Company, Inc. (dba Smiley Hats), a manufacturer of winter head and neckwear. In December, the Company purchased the stock of US2 Sports Group, Inc., a manufacturer of wakeboards and related products. Acquisitions involve numerous risks, including difficulties in the assimilation of the operations, technologies and products of the acquired companies, the diversion of management's attention from other business concerns, risks associated with entering markets or conducting operations with which the Company has no or limited direct prior experience, and the potential loss of key employees of the acquired company. Moreover, there can be no assurance that the anticipated benefits of an acquisition will be realized. Acquisitions also place considerable demands on existing financial and management control systems. Acquired operations entail transition of key systems, establishment of new systems and often require improvement, upgrade or replacement of existing financial and management control systems. Failure to adequately absorb acquired operations into the Company's systems or difficulties encountered during such improvements and upgrades could adversely affect the Company's financial condition and results of operations. The Company may, when and if the opportunity arises, acquire other businesses. Future acquisitions by the Company could result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities and amortization expense related to goodwill and other tangible assets, all of which could materially adversely affect the Company's financial condition and results of operations.
Dependence on Outside Manufacturers. Many of the Company's products are manufactured by outside suppliers. In 1998, the Company sourced its entire line of "Ride," "Liquid" and "Slim" traditional "strap" and "Device compatible" step-in bindings from Taiwan-based Snowboard Factory, Inc. In addition, all of the Company's snowboard boots and the majority of its apparel are manufactured to the Company's specifications by independent contractors. The Company generally does not have contracts with its manufacturing sources and competes with other companies for the production capacity of certain manufacturers. Although the Company believes that it has established close relationships with its principal manufacturing sources, its future success may depend on its ability to maintain such relationships. If the Company's relationship with any of its binding, boot, apparel or other product manufacturers were interrupted, the Company could find it difficult to locate another source with sufficient production capacity to meet the Company's short-term needs, and the Company could miss the retailing season for that product. The establishment of new manufacturing relationships involves numerous uncertainties, including those relating to payment terms, costs of manufacturing, adequacy of manufacturing capacity, quality control and timeliness of delivery, and the Company is unable to predict whether such relationships would be on terms that the Company regards as satisfactory. Should an unexpected change in binding, boot, apparel or other product suppliers become necessary, the Company would likely experience increased costs, as well as a substantial disruption and a potential loss of sales. In addition, from time to time manufacturers in the snowboard industry have experienced shortages and, in some cases, price increases in certain raw materials, and such shortages or price increases may recur. At times, the Company has also experienced delays in the receipt of products from its suppliers as a result of shortages in raw materials, including fiberglass and P-Tex. Although the Company believes that it is well-positioned to minimize the impact of raw material shortages and delays in
supplier shipments, such shortages and delays could have a material adverse affect on the Company's business, financial condition and results of operations.
Seasonality; Fluctuations in Quarterly Operating Results. Because snowboarding is traditionally a winter sport and the Company's sales are concentrated in the northern hemisphere, sales of the Company's products predominantly occur in what was traditionally the Company's quarters ending September 30 and December 31. Although the Company believes that its recent entry into the wakeboard industry should reduce overall seasonality, the Company expects that for the foreseeable future the majority of net sales will continue to be generated in the quarters ending September 30 and December 31. Because relatively lower net sales are to be realized in the quarters ending March 31 and June 30 of each year, the Company expects to incur operating losses in such quarters for the foreseeable future. Apart from seasonal factors, demand for the Company's products fluctuates in response to consumer buying patterns, weather conditions, discretionary spending habits, general economic conditions in the United States and abroad, product supply fluctuations in the United States and abroad and other factors. In addition to seasonal fluctuations, the Company's operating results fluctuate from quarter to quarter as a result of the timing of order shipments, new product introductions and new retailer openings. Furthermore, the Company's gross margins will fluctuate with product mix, the timing of product price adjustments, the mix of international and domestic sales and in-house production cost fluctuations. The Company's operating results for any interim period may not be indicative of the results for the entire year.
Risks Associated With the Apparel Business. Fashion trends are volatile, and there can be no assurance that the Company will accurately anticipate shifts in fashion trends and adjust its merchandise mix to appeal to changing consumer tastes in a timely manner. If the Company is unsuccessful in responding to changes in fashion trends or market demand, the Company could experience insufficient or excess inventory levels, missed market opportunities or higher markdowns, any of which would have a material adverse effect on the Company's financial condition and results of operations.
Manufacturing. As a manufacturer of certain of the Company's products, the Company continually faces risks regarding the availability and cost of raw materials and labor, the potential need for additional capital equipment, increased manufacturing costs, potential organized labor issues, plant and equipment obsolescence, worker's safety and compensation issues and quality control. A disruption in the Company's production or distribution could have a material adverse effect on the Company's results of operations. Like certain of its suppliers, the Company has experienced delays in the receipt of raw materials used in the manufacturing process.
Dependence on Third-Party Selling Efforts. The Company primarily relies on third parties to sell, and in some cases to distribute, its products to retailers. In the United States and Canada, the Company generally uses independent sales representatives who work under contract. Generally, such contracts may be terminated by either party upon 30 days' notice. The Company uses distributors under long-term contractual arrangements in certain international markets. Loss of services, poor performance or difficulties encountered with any of the Company's independent sales representatives or distributors could each have a material adverse effect on the Company's results of operations.
Dependence on Key Individuals. The Company's future success depends in large part on the continued service of Robert F. Marcovitch, the Company's President and Chief Executive Officer and Greg Cook, the Company's Chief Operating Officer and acting Chief Financial Officer. The loss of the services of either of these officers could have a material adverse effect on the Company's business. Further, the Company believes that the market for key personnel in its industry is highly competitive. There can be no assurance that the Company will be able to attract and retain key personnel with the skills and expertise necessary to manage the Company's business, both in the United States and abroad.
Competition. The snowboarding and wakeboarding businesses are highly competitive and have relatively few technological or manufacturing barriers to entry. The Company's technology is generally not proprietary. The Company competes with a number of established manufacturers and distributors whose brand names enjoy recognition that exceeds that of the Company's brand names. In all its product categories, the Company competes with numerous manufacturers and distributors that have significantly greater financial, distribution, advertising and marketing resources than the Company. There can be no assurance that the Company will continue to compete successfully in the future. Moreover, the current industry oversupply position, future events affecting the Company or its competitors, consumer buying patterns, the introduction of new products by the Company or its competitors, weather patterns that may affect the demand for the Company's products, product supply fluctuations in the Company's markets, regulations affecting the Company's products, the financial condition of the Company's suppliers and the entry of additional competitors in the
Company's markets, among other factors, could result in insufficient or excess inventory levels, missed market opportunities or higher markdowns, any of which could have a material adverse effect on the Company's financial condition and results of operations.
Product Liability. The Company's products are often used in relatively high-risk recreational settings. Consequently, the Company is exposed to the risk of product liability claims in the event that users of the Company's products are injured in connection with such use. In many cases, users of the Company's products may engage in imprudent or even reckless behavior while using such products, thereby increasing the risk of injury. The Company maintains product liability, general liability and excess liability insurance coverage. There can be no assurance that such coverages will continue to be available on acceptable terms, or will be available in sufficient amounts to cover one or more large claims, or that the insurer will not disclaim coverage as to any claim. The successful assertion of one or more large claims against the Company that exceed available insurance coverage or changes in the Company's insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on the Company's financial condition and results of operations.
Limited Protection of Technology. Most of the Company's products are not based on proprietary technology. As a result, there are relatively few technological or other barriers to entry, and the Company's products may be replicated by competitors. There can be no assurance that current or future competitors will not offer products substantially identical to the Company's products, or competing products to customers at lower prices. The Company has filed for trademark and patent registration in the United States and certain foreign countries for certain of its trademarks and product designs and/or functions. There can be no assurance that trademark or patent protection, as the case may be, will be granted in any or all of the countries in which applications are currently pending, or granted on the breadth of the current description of goods or designs. The Company has substantial international sales; the laws of foreign countries treat the protection of proprietary rights and intellectual property differently from, and may not protect the Company's proprietary or intellectual property rights to the same extent as do, the laws in the United States.
Volatility of Stock Price. The market price of the Common Stock has fluctuated substantially in the past. There can be no assurance that the market price of the Common Stock will not significantly fluctuate from its current level. Future announcements concerning the Company or its competitors, quarterly variations in operating results, the introduction of new products or changes in product pricing policies by the Company or its competitors, weather patterns that may be perceived to affect the demand for the Company's products, changes in earnings estimates by analysts, changes in accounting policies, future inventory supply situations and events in current or future legal proceedings, among other factors, could cause the market price of the Common Stock to fluctuate substantially. In addition, stock markets have experienced extreme price and volume volatility in recent years. This volatility has had a substantial effect on the market prices of securities of many smaller public companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of the Company's Common Stock.
Legal Proceedings. In March 1997, a shareholder filed a lawsuit against the Company and four of its current or former officers and directors, styled Murray v. Ride, Inc. et al. The lawsuit alleges violations of certain federal securities laws and state laws, and purports to seek unspecified monetary damages on behalf of a class of shareholders who purchased the Company's common stock during the period of August 10, 1995 through December 30, 1996. In August 1998, the Company, together with the individually named defendants, entered into a Memorandum of Understanding with the plaintiffs in the lawsuit, wherein the parties have agreed to settle the lawsuit upon the following principal terms: (1) a settlement fund will be created consisting of: (a) $3,000,000 cash paid by the Company's insurance carrier; and (b) warrants to purchase 600,000 shares of the Company's Common Stock, exercisable for a four year period ending December 31, 2002 at a price of $3.00 per share; and (2) the dismissal of the lawsuit against all named defendants with prejudice. The Memorandum of Understanding is presently being reduced to a Stipulation of Settlement, which will be presented to the Court for approval. While the Company anticipates approval will be forthcoming, there can be no assurance the Court will approve the settlement. In the event Court approval of the settlement is denied, the Company expects the litigation will resume and the Company will renew its vigorous defense of the claims. In the event of a renewal of the litigation, an award of monetary damages against the Company in excess of applicable insurance, if any, the expenditure of significant sums in the defense thereof or diversion of management's attention from other business concerns, could each have a material adverse effect on the Company's financial condition and results of operations. The Company is also engaged in legal proceedings against Switch Manufacturing, Inc. alleging patent infringement and seeking monetary damages. While the Company intends to vigorously prosecute the lawsuit, there can be no assurance that the Company will prevail in the action. The expenditure of significant sums in the prosecution of the action could have a material adverse effect on the Company's financial condition and results of operations.
Potential Adverse Effect of Environmental Regulations. The Company is subject to federal, state and local governmental regulations relating to the storage, use, discharge and disposal of toxic, volatile or otherwise hazardous chemicals used in its manufacturing process. There can be no assurance that changes in environmental regulations or in the kinds of raw materials used by the Company will not impose the need for additional capital equipment or other requirements. Any failure by the Company to control the use of, or adequately restrict the discharge of, hazardous substances under present or future regulations could subject the Company to substantial liability or could cause its manufacturing operations to be suspended. Such liability or suspension of manufacturing operations could have a material adverse effect on the Company's results of operations.
ITEM 2.
ITEM 2. PROPERTIES
Ride Snowboards leases approximately 82,400 square feet of office and warehouse space in Preston, Washington, under a lease that expires December 31, 2003. The Company is currently subleasing approximately 3,900, 12,600, and 4,300 square feet under agreements which expire in November 1998, May 2002, and September 2002, respectively, and is seeking to sublet additional office space.
Ride Canada leases approximately 13,000 square feet of warehouse and office space in Etobicoke, Ontario, pursuant to a lease that expires on November 30, 2001.
Ride Manufacturing occupies a 25,000 square foot manufacturing and office facility in Corona California under a lease expiring August 31, 2001. Ride Manufacturing also occupies a 16,300 square foot facility adjacent to the 25,000 square foot facility under a sublease expiring March 31, 1999.
SMP leases approximately 26,250 square feet of office, warehouse and light manufacturing space in Chula Vista, California, pursuant to a lease that expires June 30, 1999.
Smiley Hats leases approximately 21,000 square feet of office, warehouse and light manufacturing space in Sparks, Nevada, under a lease that expires in September 1999. Smiley Hats subleases roughly 5,000 square feet of this space under an agreement expiring in September 1999.
US2 leased approximately 11,300 square feet of office, warehouse and manufacturing space in Woodinville, Washington under an agreement which expires in September 2001. In 1998, the Company assigned its interest in the lease agreement to a third party for the remaining term of the lease, but remains secondarily liable in the event of default by the assignee.
In connection with the Company's acquisition of Device Mfg Corp, the Company assumed a lease for approximately 5,100 square feet of office and manufacturing space in Boulder, Colorado expiring in January 2000. The Company has subleased this space for the remaining term of the lease.
The Company anticipates that its current facilities will satisfy its needs through at least 1999.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On March 14, 1997, a shareholder filed a lawsuit against the Company and four of its current or former officers and directors in the United States District Court for the Western District of Washington at Seattle, styled Murray v. Ride, Inc. et al., Civil Action No. C97-0402-Z. In August 1998, the Company, together with the individually named defendants, entered into a Memorandum of Understanding with the plaintiffs in the lawsuit, wherein the parties have agreed to settle the lawsuit upon the following principal terms: (1) a settlement fund will be created consisting of: (a) $3,000,000 cash paid by the Company's insurance carrier; and (b) warrants to purchase 600,000 shares of the Company's Common Stock, exercisable for a four year period ending December 31, 2002 at a price of $3.00 per share; and (2) the dismissal of the lawsuit against all named defendants with prejudice. The Memorandum of Understanding is presently being reduced to a Stipulation of Settlement, which will be presented to the Court for approval. While the Company anticipates approval will be forthcoming, there can be no assurance the Court will approve the settlement. In the event Court approval of the settlement is denied, the Company expects the litigation will resume and the Company will renew its vigorous defense of the claims. In the event of a renewal of the litigation, an award of monetary damages against the Company in excess of applicable insurance, if any, the expenditure of significant sums in the defense thereof or diversion of management's attention from other business concerns, could each have a material adverse effect on the Company's financial condition and results of operations.
In 1996, the Company initiated legal proceedings against Switch Manufacturing, alleging infringement by Switch of certain of the Company's patented binding technologies and seeking monetary damages. The case is pending in the United States District Court for the Northern District of California as Raines, et al. v. Switch Manufacturing, Civil Action No. C96-2648-DLJ. The Company intends to vigorously prosecute this lawsuit. However, there can be no assurance that the Company will prevail in the action. An expenditure of significant sums in the prosecution of the Switch action could have a material adverse effect on the Company's financial condition and results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on May 18, 1998. The following members were elected to the Company's Board of Directors to hold office for the ensuing year.
The proposal to increase the Company's authorized amount of Common Stock from 20,000,000 shares to 40,000,000 shares was approved as follows:
The proposal to ratify Ernst & Young LLP as the Company's independent public accountants for the 1998 fiscal year was approved as follows:
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
STOCK TABLE
The following table sets forth for the calendar quarters indicated the high and low closing bid prices as reported by NASDAQ:
The prices quoted reflect inter-dealer quotations, without retail mark-ups, mark-downs or commissions, and do not necessarily represent actual transactions. As of September 23, 1998, there were 676 record holders of the Company's common stock.
Except for distributions paid to shareholders when the Company was an S Corporation, the Company has never paid dividends on its common stock and does not anticipate paying regular cash dividends in the foreseeable future. The Company's bank loan agreement restricts the payment of dividends.
SALES OF UNREGISTERED SECURITIES
In the six month period ended June 30, 1998, the Company issued unregistered securities in the amounts, at the dates and for the aggregate amounts of consideration given below. The issuances were made in reliance upon Section 4(2) of the Securities Act of 1933, as amended (the "Act"), and/or Regulation 506 promulgated under the Act.
On January 22, 1998, the Company issued 44,237 shares of common stock valued at $66,000 to one accredited individual in connection with the retirement of a note payable.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)
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(1) Results for the year ended December 31, 1994 reflect the Company's August 18, 1994 acquisition of CAS Sports.
(2) Results for the year ended December 31, 1995 reflect the Company's September 1, 1995 acquisitions of Ride Manufacturing, Inc. and 5150 Snowboards, Inc. and the October 20, 1995 acquisition of SMP Clothing, Inc.
(3) Results for the year ended December 31, 1996 include the CAS Sports excess inventory and OEM businesses from January 1, 1996 through October 11, 1996, the date those businesses were sold.
(4) Results for the year ended December 31, 1997 reflect the Company's June 12, 1997 acquisition of the assets and liabilities of Device Mfg Corp, the July 22, 1997 acquisition of the assets of Galena Creek Trading Company (dba Smiley Hats), and the December 19, 1997 acquisition of US2 Sports Group, Inc.
(5) For the year ended December 31, 1993, the Company was exempt from the payment of federal income taxes as a result of its election to be treated as an S Corporation. The pro forma net income (loss) per share for these periods include pro forma provisions for income taxes as if the Company had been subject to such taxes for the periods presented. Historical net income (loss) per share data is not presented because per share amounts of an S Corporation may not be meaningful.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
This report of Form 10-K is being filed as a result of the change in the Company's fiscal year end from December 31 to June 30, beginning with the six month period ended June 30, 1998. The change in fiscal year end was made to more closely align the Company's accounting and reporting practices with its product cycle. In the following discussion, the six month period ended June 30, 1998 will be compared to the corresponding unaudited six month period ended June 30, 1997. The Liquidity and Capital Resources discussion is as of June 30, 1998.
The Company is a leading designer, manufacturer and marketer of snowboards and related products through its subsidiaries: Ride Snowboard Company ("Ride Snowboards"), Ride Manufacturing, Inc. ("Ride Manufacturing"), Ride Canada, Inc. ("Ride Canada"), SMP Clothing, Inc. ("SMP"), Smiley Hats, Inc. ("Smiley") and Carve, Inc. ("US2"). The Company was founded in September 1992 and acquired C.A.S. Sports International, Inc. and C.A.S. Sports Agency, Inc. (collectively, "CAS") in August 1994, Ride Manufacturing in September 1995 and SMP in October 1995. The Company also acquired 5150 Snowboards, Inc. ("5150") in September 1995 and later merged 5150 with and into Ride Snowboards. In October 1996, the Company transferred substantially all of the Canada-based operating assets and liabilities of CAS (other than fixed assets) into Ride Canada, a newly formed corporation, and all of the US-based operating assets and liabilities of CAS into Ride Snowboards, and sold the CAS entities. In June 1997, the Company acquired substantially all of the assets and liabilities of Device Mfg Corp. and transferred those assets and liabilities to Ride Snowboards. In July 1997, the Company's newly formed Smiley subsidiary acquired substantially all of the assets of Galena Creek Trading Corp. In December 1997, the Company acquired US2 Sports Group Inc. through a merger of that company with and into Carve, Inc., a newly formed corporation. The results of operations of these acquired subsidiaries are included in the Company's financial statements from their respective dates of acquisition through their applicable dates of disposition.
Because snowboarding traditionally is a winter sport and the Company's sales are concentrated in the northern hemisphere, sales of the Company's products predominantly occur in the months of July through December, the Company's first and second fiscal quarters. Because relatively lower net sales are realized in the months of January through June of each year, the Company expects to incur operating losses in its third and fourth fiscal quarters for the foreseeable future. The Company expects the addition of wakeboarding products to its product line-up through its acquisition of US2 will help to supplement sales in the third and fourth fiscal quarters of the year in future periods. In addition to seasonal fluctuations, the Company's operating results fluctuate from quarter to quarter as a result of the timing of order shipments, new product introductions, new retailer openings, consumer buying patterns, weather conditions, discretionary spending habits, general economic conditions in the United States and abroad and other factors. Furthermore, the Company's gross margins fluctuate with product mix, the timing of product price adjustments and the mix of international and domestic sales. See "Business - Risk Factors - Seasonality; Fluctuations in Quarterly Operating Results."
The Company accumulates a backlog of orders beginning in February as a result of preseason orders placed in connection with winter sports trade shows. The backlog decreases beginning in late spring as product begins to be shipped.
Backlog in the snowboarding industry is subject to delay or cancellation. The Company's backlog of orders as of June 15, 1998 was approximately $37 million, compared to a backlog of $26 million as of June 1997.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998
Net sales decreased 4% to $7.3 million for the six months ended June 30, 1998 from $7.6 million for the corresponding period in 1997. Device, Smiley and US2 contributed a total of $1.2 million to net sales in the fiscal 1998 period. The remaining net decrease was due primarily to higher sales of closeout products in the 1997 period as the Company worked down its excess inventories remaining for the 1996 calendar year.
SALES BY PRODUCT GROUP
Snowboard hardgood sales, comprising boards, boots and bindings, decreased by $237,000 from the corresponding period of 1997. Sales from January through June of each year are traditionally closeout in nature and are highly dependent on market price at the time of sale. Hardgood sales of wake, skate and other are up $737,000 due to the inclusion of the Fulltilt brand of wake boards in 1998.
In the first six months of 1998, sales in North America made up 82% of total sales with international sales making up the remaining 18%. Amounts for the corresponding period in the previous year were 68% and 32%, respectively. The change in sales mix was primarily due to a decline in apparel sales in Japan.
Gross profit for the six months ended June 30, 1998 was negative $1.0 million versus a profit of $2.0 million for the first six months of 1997. A number of factors contributed to this change. In fiscal 1998, the Company transferred its US2 operations to Ride Manufacturing incurring closure and consolidation costs, had close out sales at lower than expected margins, and increased its inventory reserves for the remaining close out merchandise due to the continued soft market conditions.
Selling, general and administrative expenses for the first six months of 1998 were $10.7 million versus $8.4 million for the corresponding period in 1997. Approximately $1.0 million of the increase was due to non-recurring costs associated with the settlement of the Class Action Lawsuit, certain severance and other costs associated with management reorganization, and restructuring SMP. Bad debt expense increased by approximately $700,000 in the 1998 period due to slower than expected collection of accounts receivable from 1997 and write off of the remaining CAS sales accounts receivable. The balance was attributable to additional administrative cost related to the inclusion of Device, Smiley Hats, and US2 acquisitions made in the second half of 1997 and included in the first six months of 1998.
Interest expense increased by $104,000 in fiscal 1998 due to higher borrowing levels attributed to the Company's cash losses.
For the six months ended June 30, 1998, there was no income tax benefit recorded as the Company was in a net operating loss carryforward position. For the six months ended June 30, 1997, a tax benefit was recorded based upon the amount of income tax that was recoverable in carryback periods.
As a result of the foregoing, the Company's net loss increased to $11.8 million in the first six months of 1998 from a loss $4.4 million in 1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
Net sales decreased 52% to $36.5 million in 1997 from $75.7 million in 1996. Device, Smiley and US2 contributed a total of $2.5 million to net sales in 1997, subsequent to their respective acquisition dates. The CAS excess inventory and OEM businesses contributed $15.4 million to sales in 1996 through their October 11, 1996 disposition date. The remaining net decrease was due primarily to soft market conditions throughout the industry due to an oversupply of snowboard products.
SALES BY PRODUCT GROUP
Net sales of hard goods (snowboards, bindings, boots, wakeboards and skateboards) represented 70% of total sales in 1997 while soft goods (apparel and accessories) made up 30%. In 1996, hard goods comprised 80% of total sales and soft goods 20%. The increase in percentage of soft goods sales to total sales is attributable to additional sales added by the Smiley acquisition and to relatively smaller declines in sales of soft goods as compared to hard goods due to relatively less severe oversupply conditions. In the hard goods categories, snowboards declined to 34% of sales in 1997 from 53% in 1996 due to the disposition of the CAS entities. Snowboard bindings increased to 23% of sales in 1997 from 16% in 1996 due to the relative strength of the Company's "Preston" brand strap-in series of bindings and the step-in binding sales added from the acquisition of Device. Boots increased to 10% of sales in 1997 compared to 6% in the prior year due to the 1997 introduction of boots under the Ride label as well as the step-in boot sales added as a result of the acquisition of Device. Skate, wake and other hard goods declined to 3% of sales in 1997 from 5% in 1996 primarily due to the disposition of the CAS excess inventory business which was involved in numerous non-snowboard close-out categories. Apparel increased to 23% of sales in 1997 from 18% in 1996 due to smaller net declines than seen in the hard goods categories. Accessories increased to 7% of net sales in 1997 due primarily to the addition of Smiley in July 1997.
In 1997, net sales in North America made up 68% of total sales with international sales making up the remaining 32%. In 1996, North American sales comprised 54% and international sales 46%. The decrease in international sales in 1997 is attributable to the relatively more severe excess inventory conditions in the Japanese market.
Gross profit decreased to $9.8 million in 1997 from $14.1 million in 1996 while gross margins increased to 27% in 1997 from 19% in 1996. The dollar decrease was due to the large drop in sales volume in 1997. The increase in gross margins was due to the $6.5 million inventory write down taken by the Company in 1996 related to canceled commitments from the Company's principal Japanese distributor. Absent the 1996 inventory write down, gross margins would also have been 27% in 1996. Gross margins in 1997 were positively impacted by the sale of the CAS businesses, which generally had lower gross margins than other divisions, the addition of the relatively high gross margin Smiley business, and cost savings associated with moving the Company's binding operations offshore.
Offsetting these improvements was the sale of lower margin 1996 close out products and the under-utilization of the Company's manufacturing facility as a result of the decline in snowboard sales volumes. The Company began moving the "FullTilt" wakeboard production to its Corona facility in April 1998. The Company anticipates that this production shift will consume production time and capacity in the fall and early winter months when the factory would otherwise be operating below capacity due to the seasonality of snowboard production.
Selling, general and administrative expenses decreased 11% to $18.3 million in 1997 from $20.5 million in 1996. This decrease was due primarily to staff reductions, lower executive salaries, lower variable expenses associated with the lower sales volumes (primarily commissions and bad debt accruals) and the disposition of the CAS businesses, offset partly by increased occupancy and legal expenses as well as the expenses of Device, Smiley and US2 acquired in 1997. The primary components of selling, general and administrative expenses were salaries, wages, commissions and other compensation ($7.5 million in 1997 and $8.6 million in 1996), advertising, promotion and team ($3.7 million in 1997 and $4.3 million in 1996), and occupancy, depreciation and amortization expense ($2.1 million in 1997 and $1.9 million in 1996).
Also included in operating expenses in 1997 is an $8.6 million loss on impairment of goodwill. FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of, requires the Company to periodically review the events and circumstances affecting its operations for indications that the Company's long-lived assets might be impaired. During the fourth quarter of 1997, the Company determined that reorders for its primary products would not meet previously anticipated levels and the Company realized pricing pressure on its lower-end products, thus suggesting that the Company's current production capacity and infrastructure were underutilized. Based on this evaluation, the Company determined that the $13.9 million of goodwill associated with its acquisitions of CAS, SMP and Ride Manufacturing was impaired and wrote it down by $8.6 million. The Company's estimates of the discounted cash flows expected to be generated from these entities indicate that the remaining carrying amounts are expected to be recovered. However, it is possible that the current industry oversupply of snowboard products may be a sign of a permanent shift in demand and there can be no assurance that the carrying value of the goodwill associated with these acquisitions will be fully recoverable. Operating expenses in 1996 included $2.5 million in restructuring charges associated with the moving the Company's snowboard binding operations offshore and the withdrawal of snowboard production from two outside snowboard manufacturers. The primary components of the restructuring charges are write-offs of abandoned equipment, tooling and leasehold improvements, accrual of future lease costs and vendor cancellation fees.
Interest income decreased to $195,000 in 1997 from $333,000 in 1996. The decrease was due to lower invested cash balances on hand in 1997 as a result of operating losses incurred in 1996 and 1997. Interest expense increased to $426,000 in 1997 from $268,000 in 1996. This increase was due principally to higher seasonal utilization of the Company's line of credit for working capital purposes. Also included in the 1996 results is a gain of $482,000 on the disposition of the CAS excess inventory and OEM businesses.
At December 31, 1997, the Company was in a tax loss carryforward position. Accordingly, the Company's tax benefit is limited to the amount of income taxes recoverable from prior years, or approximately $0.6 million, resulting in an effective tax rate of 3.4%. The effective tax rate in 1996 was 34.3% which reflects full recoverability of tax losses through carryback of such losses against taxes paid in 1994 and 1995.
As a result of the foregoing, the Company's net loss increased to $16.7 million in 1997 from $5.5 million in 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Net sales increased 1% to $75.7 million in 1996 from $74.9 million in 1995. Ride Manufacturing, 5150 and SMP contributed a total of $7.6 million to net sales in 1995, subsequent to their respective acquisition dates, and $16.1 million in 1996. The remaining difference is due to the inclusion of the CAS excess inventory and OEM businesses for the full year in 1995 as opposed to 1996 when they were included only through their October 11, 1996 disposition date.
SALES BY PRODUCT GROUP
Net sales of hard goods represented 80% of total sales in 1996 while soft goods made up 20%. In 1995, hard goods comprised 90% of total sales and soft goods 10%. As a percentage of sales, snowboards decreased to 53% in 1996 from 67% in 1995. The decline was due to a substantial decrease in OEM snowboard business in 1996, both at Ride Manufacturing where factory production was utilized almost exclusively for internal production as well as brokered OEM snowboards sold by CAS. In addition, sales decreased in the retained CAS branded and private label businesses due to increased competition at the lower price points where these products were targeted. The increase in snowboard binding sales in 1996 is due primarily to the market success of the Company's "Preston" brand aluminum bindings. The decrease in other hard goods was due to the sale of the CAS excess inventory business which was involved in numerous non-snowboard close-out categories. The increase in apparel sales is attributable primarily to the inclusion of SMP for the entire year in 1996 as opposed to 1995 when SMP was included only from its October 20, 1995 acquisition date.
In 1996, net sales in North America made up 54% of total sales with international sales making up the remaining 46%. In 1995, North American sales comprised 67% and international sales 33% of total sales. The increase in international sales in 1996 was attributable primarily to the addition of SMP for the entire year in 1996 as a majority of that company's sales were to international markets.
Gross profit decreased to $14.1 million in 1996 from $19.9 million in 1995 while gross margins dropped to 19% in 1996 from 27% in 1995. These decreases were due to a $6.5 million inventory write down taken by the Company in December 1996. This write down was necessitated by excess inventories resulting primarily from canceled commitments from the Company's principal Japanese distributor. Without the inventory write down, gross margins would have been 27% in 1996. The addition of Ride Manufacturing in September 1995 allowed the Company to internally manufacture 45% of its branded snowboards in 1996 compared to only 10% in 1995. Cost savings from this change had a positive impact on gross margins. In addition, the inclusion of a full year of higher-margin SMP sales in 1996 also served to increase gross margins. Offsetting these gains was an aggressive fourth quarter 1996 discounting program offered by the Company in an attempt to reduce the amount of excess inventory on hand.
Selling, general and administrative expenses increased 88% to $20.5 million in 1996 from $10.9 million in 1995. The increase was due to the inclusion of the operations for Ride Manufacturing and SMP for the entire year in 1996 as well as the increased scope of the Company's operations in 1996. In addition, the Company incurred $1.0 million in management transition expenses in 1996 associated with the 1996 changes in top management. The primary components of selling, general and administrative expenses were salaries, wages, commissions and other compensation ($8.6 million in 1996 and $5.5 million in 1995), advertising, promotion and team ($4.3 million in 1996 and $1.9 million in 1995) and occupancy, depreciation and amortization expense ($1.9 million in 1996 and $735,000 in 1995).
Operating expenses in 1996 also included $2.5 million in restructuring charges associated with the moving the Company's snowboard binding operations offshore and the withdrawal of snowboard production from two outside snowboard manufacturers. The primary components of the restructuring charges are write-offs of abandoned equipment, tooling and leasehold improvements, accrual of future lease costs and vendor cancellation fees.
Interest income decreased to $333,000 in 1996 from $406,000 in 1995. The decrease was due to higher cash balances on hand in 1995 from the Company's secondary stock offering in August 1995 and the proceeds from exercise of common stock warrants. Interest expense increased to $268,000 in 1996 from $18,000 in 1995. This increase was due to principally to seasonal utilization of the Company's line of credit for working capital purposes. Also included in the 1996 results is a gain of $482,000 on the disposition of the CAS excess inventory and OEM businesses.
The provision for income taxes represents a 36.5% effective tax rate for 1995 compared with a 34.3% effective rate for 1996. The decrease is due primarily to expense for state income tax purposes lowering the overall tax benefit of the 1996 loss.
As a result of the foregoing factors, including the non-recurring restructuring charges, inventory write down and management transition expenses, the Company incurred a net loss of $5.5 million in 1996 compared to net income of $6.0 million in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital for the development of its technology and products, procurement of raw materials and finished goods manufactured by others, and capital equipment. The Company financed its 1998 and 1997 operations from seasonal borrowings under its lines of credit and through a $3.0 million private placement of convertible preferred stock in December 1997. The Company financed its 1996 operations through cash and securities remaining from its 1995 secondary stock offering and from seasonal borrowings under its lines of credit. Net cash used in operating activities totaled $2.6 million in 1998, $4.0 million in 1997 and $10.8 million in 1996. The decrease in cash used in operations in 1998 was attributable primarily to decreases in accounts receivable, partially offset by increases in inventory balances. The decrease in cash used in operations in 1997 was attributable primarily to decreases in accounts receivable and inventory balances, net of amounts received in acquisitions and income tax refunds received. Net inventory balances increased approximately 10% at December 31, 1997 compared to December 31, 1996, primarily due to inventories received in the Device, Smiley and US2 acquisitions. Due to the seasonal nature of its business, the Company's need for cash has been greater in the months of July through December, when working capital has been invested in accounts receivable and inventories.
Net cash used in investing activities totaled $818,000 in 1998, $3.0 million in 1997 and $1.2 million in 1996. The 1998 amount pertains primarily to $738,000 of capital expenditures. The 1997 amount included approximately $2.0 million expended in the Company's acquisitions of Device, Smiley and US2 and $753,000 in capital expenditures. Net cash used in investing activities in 1996 included $5.4 million in capital expenditures, offset by liquidation of securities and investments of $3.8 million and $884,000 in net cash received from the sale of the CAS businesses. Principal capital expenditures in 1998 and 1997 included manufacturing equipment, new business software and snowboard molds and tooling. The Company expects to invest similar amounts in capital expenditures during 1999. The Company intends to finance 1999 capital expenditures through internally generated funds, through leasing or from borrowings under its line of credit.
Net cash provided by financing activities totaled $2.3 million in 1998, $5.0 million in 1997 and $0.9 million in 1996. Financing sources in 1998 were principally net advances on the Company's line of credit of $2.6 million. Financing sources in 1997 included $2.8 million in net proceeds received on a private placement of convertible preferred stock, $307,000 in exercises of stock options and $2.0 million in net advances on the Company's line of credit. Financing sources in 1996 included $1.1 million in exercises of stock options and $750,000 in long term debt proceeds associated with the Company's tenant improvements, offset by $1.0 million in repayments of acquisition notes payable.
The Company operates in a highly seasonal business, generating the majority of its sales in the months of July through December. The Company's cash receipts from its North American customers are received predominantly in the months of December, January and February while its international customers generally pay by cash in advance or letter of credit. In order to finance operations and manufacture and purchase products during the remainder of the year, the Company has historically utilized a revolving line of credit.
In December 1997, the Company issued 3,000 shares of Series B 5% Cumulative Convertible Preferred Stock for $3,000,000 ("Series B Preferred"). In connection with this transaction, the Company also issued warrants to purchase 283,720 shares of common stock for an exercise price of approximately $2.68 per share ("the Warrants"). Dividends on the Series B Preferred accrue quarterly, are payable in cash or stock and must be paid before dividends can be declared and paid on the Company's Common Stock. Portions of the Series B Preferred may be converted into the Company's Common Stock, at the option of the holders, beginning in March 1998. All the Series B Preferred automatically converts to common stock in December 2000. Subject to certain adjustments, the Series B Preferred converts to Common Stock at the lesser of $2.68 per share or 90% of the market price (as defined) of the Company's Common Stock at the time of conversion. The Company has reserved approximately 2,245,000 shares of Common Stock for issuance upon conversion of the Series B Preferred and exercise of the warrants. The 10% discount from market price of the conversion of
preferred stock is accounted for as a preferred stock dividend. The dividend is required to be included in earnings per share computations over the period from the date of issuance through the date the security is first convertible. The Company has therefore included a $30,000 preferred stock dividend in its net loss per share calculations for the year ended December 31, 1997 and an additional $270,000 preferred stock dividend in its net income (loss) per share for fiscal 1998.
On August 31, 1998, the Company entered into a Loan and Security Agreement ("Agreement") with CIT Group/Credit Finance, Inc. ("CIT") which credit facility replaces the Company's prior credit facility. The Company's line of credit under the new credit facility is up to $15.0 million (to be increased to $17.0 million from October 15, 1998 to December 15, 1998) for a term of three years. The amount that may be borrowed is also limited to the sum of (i) 85% of eligible accounts receivable, so long as dilution does not exceed 5.0% and after implementation of an 11.0% dilution reserve against loan availability during the season, and (ii) 55% of eligible finished goods inventory, not to exceed $6.5 million during April through September, $3.25 million in October, $2.5 million in November, and $2.0 million in December. There will be no advances against inventory during January through March of each year. The new facility provides for a maximum letter of credit subline of $8.0 million.
The facility bears interest at the Prime interest rate plus 1.5% and is collateralized by substantially all the assets of the Company. The Company was required to pay a closing fee of $75,000 at the time of closing. Additionally, the facility requires an annual facility of 0.50% due each anniversary of the closing and a monthly letter of credit fee of 1.5% per annum of the face amount of any standby and documentary letters of credit.
Simultaneous with the execution of the Agreement, the Company entered into a Consent, Reaffirmation, and Release Agreement with US Bank NA. Pursuant to which the Company retained a $3.0 million credit facility with that institution. The US Bank facility bears interest at Prime Rate plus 1.5% per annum until February 28, 1999 and Prime rate plus 2.0% per annum from March 1, 1999 through and including the date Borrower repays the principal amount owed hereunder, is subordinated to the CIT credit line, has a term of one year and is secured by $1.8 million of promissory notes from Global Sports, Inc. Additionally, the facility is secured by the personal guarantee of one of the Company's outside directors, including certain real property owned by that director.
The Company believes the CIT Line is adequate to meet the current needs of its business. There is, however, no assurance the CIT Line is sufficient to fund the demands of the Company's future growth. To this end, the Company and CIT have agreed to review the line in March 1999 with a view to increasing same if then current business conditions warrant doing so. However, there can be no assurance such an increase in the CIT Line will be available even if the Company's business prospects at that time require and warrant doing so. In addition, availability of funds under the CIT Line is at all times conditioned on the Company achieving certain collateral requirements. There can be no assurance such requirements will be achieved or, if achieved, that they can be consistently maintained. The Company's inability to increase the CIT Line or meet or maintain specific collateral requirements could each have a material adverse impact on the Company's financial condition and could result in a substantial limitation or reduction in the scope of the Company's business. With respect to the US Bank Line, the Company is obligated to satisfy all sums due thereunder on or before its August 30, 1999 expiration date. There can be no assurance the Company will be successful in doing so. The Company's inability to successfully satisfy or extend the US Bank Line, if necessary, could have a material adverse impact on the Company's financial condition.
Although the Company cannot accurately anticipate the effects of inflation, the Company does not believe inflation has had or is likely to have a material effect on its results of operations or liquidity.
Except for distributions paid to shareholders when the Company was an S Corporation, the Company has never paid dividends on its common stock. The Company's present policy is to retain any earnings to finance the Company's business. Any future dividends will be dependent upon the Company's financial condition, results of operations, current and anticipated cash requirements, acquisition plans and plans for expansion, and any other factors which the Company's Board of Directors deems relevant. The Company's bank loan agreement restricts the payment of dividends. The Company has no present intention of paying dividends on its common stock in the foreseeable future.
The "year 2000 problem" is the result of computer programs being written using two digits rather than four to define the applicable year. Software programs and systems that have date-sensitive features may recognize a date using "00" as the year 1900 instead of the year 2000. The Company has assessed its year 2000 needs and has purchased and is presently installing year 2000-compliant software in all its known non-compliant hardware and software systems, which installation the Company anticipates will be completed by the June 30, 1999 year-end. The cost of the purchase and installation of the year 2000-compliant software is anticipated to exceed $250,000. The Company is in the process of reviewing with each of its material suppliers, service providers and customers the steps each is taking to insure their respective computer systems are presently or will be year 2000-compliant in a timely fashion. The Company's shipper has confirmed to the Company it has installed year 2000-compliant software in all of its material systems. There can be no assurance the computer systems of third parties on whose commercial efforts the Company directly or indirectly relies, will be year 2000-compliant in a timely fashion. Because the Company has not completed its review of its material third party suppliers, service providers and customers, it has not created a contingency plan setting forth what steps will be taken if such third parties are not year 2000 compliant by December 31, 1999. Based on information received from its third party vendors, service providers and customers, the Company intends to have a contingency plan in place by June 1999. The failure of third parties to be year 2000 compliant could cause material delays in the design, manufacture and shipment of products, delay in payment for products, and delay in the availability of credit or funds necessary to operate the business of the Company. The failure of the Company's or one or more third-party's computer systems as a result of year 2000 non-compliance may have a material adverse effect on the Company's business and results of operations.
MARKET RISK
The Company's Ride Canada subsidiary operates and maintains its accounting records using the Canadian dollar as its functional currency. In accordance with generally accepted accounting principles, upon consolidation the assets, liabilities, revenues and expenses of this subsidiary are translated into US dollars at the appropriate exchange rate prevailing during the period and are therefore subject to fluctuations in the exchange rates between the Canadian dollar and the US dollar.
The Company purchases certain raw materials from foreign suppliers with payments denominated in foreign currencies. In order to protect against changes in the exchange rate between these currencies and the US dollar, the Company, from time to time, enters into forward foreign exchange contracts with financial institutions to fix the cost of these purchases. Although the Company believes that these contracts decrease the Company's overall exposure to gains and losses from currency fluctuations, such exposure cannot be entirely eliminated. In addition, during the contractual periods, the Company is exposed to certain losses in the event of nonperformance by the counterparties to the forward contracts. At December 31, 1997 and June 30, 1998, the Company did not have any open forward contracts.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders Ride, Inc.
We have audited the accompanying consolidated balance sheets of Ride, Inc. and subsidiaries as of December 31, 1996 and 1997, and June 30, 1998 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997 and the six months ended June 30, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. 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 evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ride, Inc. and subsidiaries at December 31, 1996 and 1997, and June 30, 1998 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 and for the six months ended June 30, 1998 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1, the Company has incurred significant operating losses and negative cash flows from operations for the years ended December 31, 1996, and 1997, and for the six months ended June 30, 1998. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
ERNST & YOUNG LLP
Seattle, Washington September 11, 1998
RIDE, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
See accompanying notes.
RIDE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
RIDE, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
See accompanying notes.
RIDE INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
See accompanying notes.
RIDE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998
1. SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The consolidated financial statements include the accounts of Ride, Inc. ("Ride" or the "Company") and its subsidiaries: Ride Snowboard Company ("Ride Snowboards"), Ride Manufacturing, Inc. ("Ride Manufacturing"), Ride Canada, Inc. ("Ride Canada"), SMP Clothing, Inc. ("SMP"), Smiley Hats, Inc. ("Smiley") and Carve, Inc. ("US2"). The Company was founded in September 1992 and acquired C.A.S. Sports International, Inc. and C.A.S. Sports Agency, Inc. (collectively, "CAS") in August 1994, Ride Manufacturing in September 1995 and SMP in October 1995. The Company also acquired 5150 Snowboards, Inc. ("5150") in September 1995 and later merged 5150 with and into Ride Snowboards. In October 1996, the Company transferred substantially all of the Canada-based operating assets and liabilities of CAS (other than fixed assets) into Ride Canada, a newly formed corporation, and all of the US-based operating assets and liabilities of CAS into Ride Snowboards, and sold the CAS entities. In June 1997, the Company acquired substantially all of the assets and liabilities of Device Mfg Corp. and transferred those assets and liabilities to Ride Snowboards. In July 1997, the Company's newly formed Smiley subsidiary acquired substantially all of the assets of Galena Creek Trading Corp. In December 1997, the Company acquired US2 Sports Group Inc. through a merger of that company with and into Carve, Inc., a newly formed corporation. The results of operations of these acquired subsidiaries are included in the Company's financial statements from their respective dates of acquisition through their applicable dates of disposition. See Notes 4 and 5.
Ride Snowboards sells premium to mid-range snowboards and related products primarily through specialty snowboard and ski shops. Ride Manufacturing is a manufacturer of premium snowboards which are produced principally for Ride Snowboards. Ride Manufacturing also produces a limited number of snowboards for other snowboard companies on an OEM basis. SMP designs and manufactures snowboard, surf, skate, motocross and street apparel which is sold primarily through specialty shops. Ride Canada acts as the Company's Canadian distributor for the Company's branded products. Smiley designs and manufactures premium head and neck wear for the winter sports industry and is sold through specialty shops. US2 designs, manufactures and distributes wakeboards, wakeboard bindings and accessories under the "FullTilt" and "Sub Rosa" brand names through marine and specialty retailers. Until its disposition in October 1996, CAS marketed entry-level snowboards and related products under various brand names and on a private label basis primarily to regional sporting goods stores and large-format sporting goods retailers. In addition, CAS sold snowboards and related products on an OEM basis to other snowboard companies and bought excess snowboard and sporting goods inventories from manufacturers and sold such products to retailers throughout the world. The OEM and excess inventory portions of the CAS business were sold in October 1996 (see Note 5) while the branded and private label portions of the business were retained by the Company.
Liquidity
The Company has incurred losses of $5.5 million, $16.7 million and $11.8 million for the years ended December 31, 1996 and 1997, and for the six months ended June 30, 1998, respectively. The Company used $17.4 million of cash in operations during these periods which resulted in a decrease in working capital to $2.5 million at June 30, 1998. The financial statements have been prepared assuming the Company will continue as a going concern and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets and liabilities that may result from this uncertainty.
The Company operates a seasonal business and generates the majority of its sales in the quarters ending September 30 and December 31. In order to manufacture product during the remainder of the year, the Company has a revolving line of credit arrangement with an asset-based lender, CIT, to finance import letters of credit and working capital needs. The Company believes the CIT Line is adequate to meet the current needs of its business. There is, however, no assurance the CIT Line is sufficient to fund the demands of the Company's future growth. In addition, availability of funds under the CIT Line is at all times conditioned on the Company achieving certain collateral requirements. There can be no assurance such requirements will be achieved or, if achieved, that they can be consistently maintained. The Company's inability to increase the CIT Line or meet or maintain specific collateral requirements could each have a material adverse impact on the Company's financial condition and could result in a substantial limitation or reduction in the scope of the Company's business.
In June 1998, the Company replaced certain members of management and reorganized its operations. Subsequent thereto, operational changes have been put in place to reduce fixed costs to a level that can be supported by forecasted sales and gross margin levels. Additional financing has been obtained in August 1998 and the Company anticipates increasing its lines of credit or seeking other sources of financing through long term debt or additional equity financing. However, there can be no assurance that the Company will meet its sales and gross margin forecast for fiscal year ended June 30, 1999, control expenditures to an acceptable level, or that such additional sources of financing will be available on favorable terms or at all. The Company's inability to meet the above business plan would have a material adverse impact on the Company's financial condition and may require the Company to further reduce its expenditures, curtail certain operations, or dispose of operating assets to enable the Company to continue its operations at least through June 1999.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany transactions have been eliminated in consolidation.
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 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Foreign Currency
The local currency is considered the functional currency of the Company's Canadian operations. The financial statements of the Company's Canadian subsidiary are translated into U.S. dollars using the exchange rate at the balance sheet date for assets and liabilities and the average exchange rate for the period for revenues and expenses. Resulting translation adjustments are recorded as a separate component of shareholders' equity.
The Company enters into foreign currency forward contracts, generally with terms of 270 days or less, as a hedge against some of its foreign currency commitments. Offsetting gains and losses on these contracts are recognized concurrently with the exchange gains and losses stemming from the associated commitments. During the contractual periods, the Company is exposed to certain losses in the event of nonperformance by the counterparties to the forward contracts. At June 30, 1998, the Company did not have any open forward contracts.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Inventories
Inventories are carried at the lower of cost or market using the first-in, first-out method.
Plant and Equipment
Plant and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally five to ten years. Leasehold improvements are amortized over the lesser of the estimated useful life of the asset or
the term of the related lease. Snowboard and snowboard binding molds are amortized to cost of goods sold over one to three years based on the number of related snowboards and bindings sold.
Goodwill
Goodwill is being amortized over 15 to 40 years using the straight-line method. The Company periodically reviews the carrying value of goodwill to determine if the facts and circumstances suggest that the value may be impaired. See Note 3.
Revenue Recognition
The Company recognizes revenue from the sale of its products when the products are shipped to customers.
Research and Development Costs
Research and development costs are charged to expense as incurred and totaled approximately $217,000 in 1995, $417,000 in 1996, $338,000 in 1997 and $180,000 for the six months ended June 30, 1998.
Advertising Costs
The Company expenses the production costs of advertising the first time the advertising takes place. Advertising expense totaled $528,000 in 1995, $847,000 in 1996, $1,090,000 in 1997 and $596,000 for the six months ended June 30, 1998.
Warranty Costs
The Company generally offers a one-year warranty on its products from the time of retail sale. Anticipated net costs associated with warranties are charged to expense at the time of the sale of its products. The Company is reimbursed for a portion of the cost of defective products by the manufacturers.
Income Taxes
The Company accounts for income taxes under the liability method. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.
Net Income (Loss) Per Share
Basic earnings per share is computed by dividing net income (loss) by the average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income (loss) by the average number of common and dilutive common equivalent shares outstanding during the period.
Stock Based Compensation
The Company has elected to apply the disclosure-only provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation." Accordingly, the Company accounts for stock-based compensation using the intrinsic method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Compensation cost for stock options is measured at the excess, if any, of the fair value of the Company's common stock at the date of the grant over the stock option price.
Comprehensive income
As of January 1, 1998, the Company adopted Statement 130, Reporting Comprehensive Income. Statement 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company's net income or shareholders' equity. Statement 130 requires unrealized gains or losses on the Company's available-for-sale securities and the foreign currency translation adjustments, which prior to adoption were reported separately in shareholders' equity, to be included in other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of Statement 130. The Company's total comprehensive income (loss) for the years ended December 31, 1995, 1996, and 1997 and the six months ended June 30, 1998 was $5,955,000, ($5,490,000), ($16,820,000), and ($11,811,000), respectively.
Reclassifications
Certain reclassifications have been made to prior year balances to conform with current year presentation.
2. CHANGE IN YEAR END
The Company's Board of Directors approved a change in the Company's fiscal year-end from December 31 to June 30, beginning with the six month period ended June 30, 1998. The change in fiscal year end was made to more closely align the Company's accounting and reporting practices with its product cycle. Comparative information for the six month periods ended June 30, 1997 and 1998 are as follows:
3. IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of, the Company periodically reviews the events and circumstances affecting its operations for indications that the Company's long-lived assets might be impaired. In December 1997, the Company determined that reorders for its primary products would not meet previously anticipated levels and the Company realized pricing pressure on its lower-end products, thus suggesting that the Company's current production capacity and infrastructure were underutilized. Based on this evaluation, the Company determined that the $13.9 million of goodwill associated with its acquisitions of CAS, SMP and Ride Manufacturing was impaired and wrote it down by $8.6 million. The Company's estimates of the discounted cash flows expected to be generated from these entities indicate that the remaining carrying amounts are expected to be recovered. However, it is possible that the current industry oversupply of snowboard products may be a sign of a permanent demand shift and there can be no assurance that the carrying value of the goodwill related to these acquisitions will be recoverable which could result in additional write-down of goodwill in the future.
4. ACQUISITIONS
Ride Manufacturing and 5150
On September 1, 1995, the Company acquired all of the capital stock of Ride Manufacturing, a snowboard manufacturer, and 5150, a marketer of snowboards, for $11.9 million in cash. The acquisition has been accounted for as a purchase with the excess of the purchase price over the fair value of the assets acquired allocated primarily to goodwill.
SMP
On October 20, 1995, SMP, a newly-formed, wholly owned subsidiary of the Company acquired certain assets (primarily inventories, fixed assets, trademarks and other intangibles) of Sex Money Power Clothing, Inc., a manufacturer of snowboard, surf, skate and street apparel. The aggregate purchase price of $2.46 million was comprised of $937,500 in cash, $937,500 in short-term notes payable, and 28,409 newly-issued shares of Common Stock valued at $593,000. The transaction has been accounted for as a purchase with the excess of the purchase price over the fair value of the assets acquired allocated primarily to goodwill.
Device
On June 12, 1997, the Company purchased substantially all of the assets (except cash and accounts receivable) and liabilities of Device, a manufacturer of step-in snowboard bindings and boots based in Boulder, Colorado. The purchase price was comprised of approximately $1.0 million in assumed liabilities and 276,220 newly-issued shares of Common Stock valued at $764,900. The transaction has been accounted for as a purchase with the excess of the purchase price over the fair value of the assets acquired allocated primarily to goodwill. During 1998, the Company took back 9,045 common shares valued at $25,000 previously issued as consideration, pursuant to a performance adjustment provision in the purchase agreement.
Smiley Hats
On July 22, 1997, the Company purchased substantially all of the assets of Galena Creek Trading Company, Inc. (d.b.a. Smiley Hats), a manufacturer of winter hats based in Sparks, Nevada. The purchase price was comprised of approximately $550,000 in cash and 320,000 shares of Common Stock valued at $750,000. Galena Creek Trading Company was majority owned and controlled by the Company's then Chief Executive Officer. The transaction has been accounted for as a purchase with the excess of the purchase price over the fair value of the assets acquired allocated primarily to goodwill.
US2
On December 19, 1997, Carve, Inc., a newly-formed, wholly owned subsidiary of the Company acquired the stock of US2 Sports Group, Inc., a manufacturer of wakeboards and wakeboard bindings. The purchase price was comprised of 605,263 newly-issued shares of Common Stock valued at $910,000 plus the assumption of net liabilities of $652,000. The transaction has been accounted for as a purchase with the excess of the purchase price over the fair value of the assets acquired allocated primarily to goodwill. During 1998, the Company issued 44,237 shares of its common stock in settlement of a $66,000 note payable to a former owner of US2.
Summarized unaudited pro forma results of operations, assuming the Device, Smiley Hats and US2 acquisitions took place on January 1 of each year, are as follows:
5. DISPOSITION
On October 11, 1996, the Company sold the stock of CAS to Gen-X Equipment, Inc., a company formed by two former Company executives and a number of CAS employees. The $3.0 million sales price was comprised of $1,000,000 in cash and short-term notes and $2.0 million in long-term notes. The Company recognized a pre-tax gain of $482,000 in connection with this sale.
The long-term notes are secured by the stock of the sold corporations and bear interest at prime. Principal payments of $100,000 plus interest are due quarterly through September 2002. The balance outstanding on the note at June 30, 1998 was $1.8 million and the $400,000 current portion of the notes due in fiscal year 1999 is included in Accounts Receivable.
In May 1998, Gen-X was sold to Global Sports, Inc. (GSI) and the notes payable to Ride were assumed by GSI. GSI, a publicly held company, designs and markets branded footwear and distributes off-price athletic sporting goods. Realization of the Company's $1.8 million notes receivable is dependent on GSI's successful conduct of future operations. The eventual outcome of these matters cannot be determined at this time.
6. RESTRUCTURING AND INVENTORY WRITE-DOWN
On December 12, 1996 the Company's Board of Directors approved a plan to writedown excess inventories and restructure the Company's manufacturing operations. Due to canceled commitments from the Company's principal Japanese distributor and an oversupply of snowboards from other manufacturers, the Company recognized a $6.5 million write-down of its inventories. This amount has been included in cost of sales for the year ended December 31, 1996. In addition, the Company recognized a $2.5 million restructuring charge in connection with moving the Company's binding production offshore and the withdrawal of snowboard production from two outside snowboard manufacturers used in 1996. The primary components of this charge were write-offs of abandoned equipment, tooling and leasehold improvements, cancellation fees paid to U.S. vendors and future lease costs. The Company anticipates future cash outlays will not exceed the $228,000 included in other long-term liabilities for future minimum lease payments and will be funded through normal operating cash flows.
7. INVENTORIES
Inventories consisted of the following:
8. PLANT AND EQUIPMENT
Plant and equipment consisted of the following:
9. LINE OF CREDIT AND LONG-TERM DEBT
At June 30, 1998, Ride had a $11.0 million revolving credit line agreement with US Bank NA to finance its import letters of credit and working capital needs. Advances on the line bear interest at 1% over the bank's prime rate (effective rate of 9.5% at June 30, 1998). At June 30, 1998, the Company had outstanding advances of $5,236,000 and $5,764,000 in outstanding import letters of credit drawn against this line.
On August 31, 1998, the Company entered into a Loan and Security Agreement ("Agreement") with CIT Group/Credit Finance, Inc. ("CIT") which credit facility replaces the Company's prior credit facility. The Company's line of credit under the new credit facility is up to $15.0 million (to be increased to $17.0 million from October 15, 1998 to December 15, 1998) for a term of three years. The amount that may be borrowed is also limited to the sum of (i) 85% of eligible accounts receivable, so long as dilution does not exceed 5.0% and after implementation of an 11.0% dilution reserve against loan availability during the season, and (ii) 55% of eligible finished goods inventory, not to exceed $6.5 million during April through September, $3.25 million in October, $2.5 million in November, and $2.0 million in December. There will be no advances against inventory during January through March of each year. The new facility provides for a maximum letter of credit subline of $8.0 million.
The facility bears interest at the Prime interest rate plus 1.5% and is collateralized by substantially all the assets of the Company. The Company was required to pay a closing fee of $75,000 at the time of closing. Additionally, the facility requires an annual facility of 0.50% due each anniversary of the closing and a monthly letter of credit fee of 1.5% per annum of the face amount of any standby and documentary letters of credit. The bank loan agreement restricts the payment of dividends.
Simultaneous with the execution of the Agreement, the Company entered into a Consent, Reaffirmation, and Release Agreement with US Bank NA. Pursuant to which the Company retained a $3.0 million credit facility with that institution. The US Bank facility bears interest at Prime Rate plus 1.5% per annum until February 28, 1999 and Prime rate plus 2.0% per annum from March 1, 1999 through and including the date Borrower repays the principal amount owed hereunder, is subordinated to the CIT credit line, has a term of one year and is secured by $1.8 million of promissory notes from Global Sports, Inc. (see Note 5). Additionally, the facility is secured by the personal guarantee of one of the Company's outside directors, including certain real property owned by that director.
During 1996, the Company's landlord loaned the Company $750,000 to fund a portion of the expansion and improvement of the Company's Preston, Washington office and warehouse facilities. The loan has an effective interest rate of approximately 3% and is due in monthly payments of principal and interest of $9,100 through December 2003. The total amount outstanding at June 30, 1998 was $554,000 of which $103,000 is current.
10. INCOME TAXES
Deferred tax assets and (liabilities) consisted of the following:
At June 30, 1998, the Company had net operating loss carryforwards for income tax purposes of $18.2 million, which are available to offset future federal taxable income, if any. The federal operating loss carryforwards begin to expire in 2007 through 2018. Recognition of approximately $3.2 million of the Company's federal operating loss carryforwards may be limited pursuant to Section 382 of the Internal Revenue Code. The valuation allowance was established for the deferred tax assets in excess of deferred tax liabilities.
Significant components of the provision (benefit) for income taxes are as follows:
The Company's effective income tax rate varied from the U.S. federal statutory tax rate as follows:
11. SHAREHOLDERS' EQUITY
Preferred Stock
Series A
On December 31, 1993, the Company issued 100,000 shares of Series A 7% cumulative convertible nonvoting preferred stock for $500,000 ("Series A Preferred"). Dividends on the Series A Preferred accrue quarterly and must be paid before dividends can be declared and paid on the Company's Common Stock. In the event of liquidation, the holders of the Series A Preferred will be entitled to $5.00 per share plus unpaid dividends before any payments are made to the holders of Common Stock. The Series A Preferred is convertible at the holder's option into 200,000 shares of Common Stock. The Series A Preferred may be redeemed by the Company at $5.00 per share beginning January 1, 1999 and ending December 31, 2004. The Company has reserved 200,000 shares of Common Stock for issuance upon the conversion of the Series A Preferred.
Series B
On December 19, 1997, the Company issued 3,000 shares of Series B 5% cumulative convertible nonvoting preferred stock for $3,000,000 ("Series B Preferred"). In connection with this transaction, the Company also issued warrants to purchase 283,720 shares of common stock for an exercise price of approximately $2.68 per share ("the Warrants"). Dividends on the Series B Preferred accrue quarterly, are payable in cash or stock and must be paid before dividends can be declared and paid on the Company's Common Stock. The Series B Preferred is convertible into the Company's Common Stock at the option of the holders through December 2000 at which time all of the remaining shares automatically convert to common stock. Subject to certain adjustments, the Series B Preferred converts to Common Stock at the lesser of $2.68 per share or 90% of the market price (as defined) of the Company's Common Stock at the time of conversion. During the six month period ended June 30, 1998, 716 shares of Series B Preferred were converted into 441,687 shares of common stock. The Company has reserved approximately 3,000,000 shares of Common Stock for issuance upon conversion of the remaining shares of Series B Preferred and exercise of the warrants.
The 10% discount from market price of the conversion of preferred stock has been accounted for as a preferred stock dividend. The dividend is required to be included in earnings per share computations over the period from the date of issuance through the date the security is first convertible. Accordingly, the Company has recorded preferred stock dividends relating to this discount of $30,000 for the year ended December 31, 1997 and $270,000 for the six months ended June 30, 1998.
Stock Purchase Plan
In 1995, the Company adopted an Employee Stock Purchase Plan which allows eligible employees to buy the Company's Common Stock at a 15% discount from market price utilizing payroll deductions. A total of 100,000 shares have been reserved for issuance under this Plan. During the years ended December 31, 1995, 1996 and 1997 and for the six months ended June 30, 1998, 3,971, 11,123, 23,600 and 8,690 shares of Common Stock were purchased by employees under this Plan, respectively. As of June 30, 1998, 52,616 shares were available for future sale under the Plan.
12. STOCK-BASED COMPENSATION
The Company adopted two stock option plans in 1994 that provide for the grant of incentive and nonqualified stock options to the Company's employees, officers, and directors. At June 30, 1998, the Company had 2,103,513 shares of Common Stock reserved for issuance pursuant to these plans. Options generally vest over a four-year period commencing one year from the date of grant.
Pro forma information regarding net income (loss) per share is required by FASB Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The value for these options was estimated at the date of grant using a Black-Scholes option-pricing model with the following weighted average assumptions:
For purposes of pro forma disclosures, the estimated weighted average value of the options granted of $3.05, $4.91, $2.65 and $0.93 per share during the years ended December 31,1995, 1996 and 1997 and the six months ended June 30, 1998, respectively, is amortized to expense over the options' vesting period. The Company's pro forma information is as follows (in thousands except per share amounts):
A summary of options granted and outstanding are as follows (in thousands except per share amounts):
Included in the 1997 option grants are approximately 400,000 employee options repriced to $6.50 per share.
The following table summarizes information concerning currently outstanding and exercisable options:
At June 30, 1998 options to purchase 226,906 shares were available for future grant.
13. FOREIGN CURRENCY TRANSACTIONS
The Company enters into foreign currency forward contracts, generally with terms of 270 days or less, as a hedge against some of its foreign currency commitments. Derivative financial instruments held by the Company are generally used to manage well-defined foreign exchange and interest rate risks which occur in the normal course of business. Forward foreign exchange contracts are used by the Company to reduce the potential impact of unfavorable fluctuations in foreign exchange rates. The Company regularly has off balance sheet commitments to buy and sell foreign currencies relating to foreign exchange contracts to hedge against future currency fluctuations.
Gains and losses on foreign currency contracts not intended to hedge operating requirements are reported currently in other income. Gains and losses on foreign currency contracts intended to meet firm commitments are deferred and recognized as part of the cost of the underlying transaction being hedged. Counterparties to the foreign exchange contracts are typically major international financial institutions. The Company's theoretical risk in these transactions is the cost of replacing, at current market rates, these contracts in the event of default by the counterparty. Management believes the risk of incurring such losses as a result of a default by a counterparty is remote.
During 1996 and 1997, the Company recognized losses on foreign currency contracts totaling approximately $160,000 and $17,000, respectively. The Company recognized approximately $646,000 in gains on foreign currency futures and forward contracts during the year ended December 31, 1995. These amounts are included in cost of goods sold in the accompanying statements of operations. The Company had no open foreign currency contracts at December 31, 1997 or June 30, 1998.
14. COMMITMENTS AND CONTINGENCIES
Leases
The Company is committed under noncancelable operating leases expiring at various dates through 2003 for warehouse, manufacturing and office facilities. The leases generally require that the payments of taxes, insurance and maintenance are the responsibility of the Company.
At June 30, 1998, the Company's future minimum rental payments with respect to capital leases, non-cancelable operating leases with terms in excess of one year and related sublease receivables were as follows:
Rent expense, net of sublease income, for the years ended December 31, 1995, 1996 and 1997 and for the six month period ended June 30, 1998 was approximately $406,000, $1,042,000, $1,053,000, and $401,000, respectively.
Class Action Lawsuit
In August 1998, the Company, together with the individually named defendants, entered into a Memorandum of Understanding with the plaintiffs in the lawsuit filed by certain current and/or former shareholders of the Company styled Murray v. Ride, Inc., et al., wherein the parties have agreed to settle the lawsuit upon the following principal terms: (1) the creation of a settlement fund consisting of: (a) $3,000,000 cash paid by the Company's insurance carrier; and (b) warrants to purchase 600,000 shares of the Company's Common Stock, exercisable for a four year period ending December 31, 2002 at a price of $3.00 per share; and (2) the dismissal of the lawsuit against all named defendants with prejudice. The Memorandum of Understanding is to be reduced to a Stipulation of Settlement, which will be presented to the Court for approval. While the Company is hopeful such approval will be forthcoming, there can be no assurance such approval will be given. In the event Court approval of the settlement is denied, the Company expects the litigation will resume and the Company will renew its vigorous defense of the claims.
From time to time, the Company is subject to various other pending and threatened legal actions that arise in the normal course of business. In the opinion of management, liabilities arising from these claims will not have a material effect on the financial position of the Company.
15. EMPLOYEE BENEFIT PLANS
Beginning January 1996, the Company provided a 401(k) plan covering substantially all of its U.S. employees. Under this plan, participating employees may defer up to 15% of their pre-tax earnings, subject to certain Internal Revenue Service limitations. The Company provides matching contributions which vest 20% annually over a five year period equal to 25% of each employee's contribution. The Company's 1996 and 1997 matching contributions for this plan were approximately $31,000 and $39,000, respectively. Contributions for the period ending June 30, 1998 were $21,000.
16. CONCENTRATION OF CREDIT RISK AND GEOGRAPHICAL INFORMATION
The Company sells its products to customers predominantly located throughout North America, Japan and Europe. The concentrations of credit risk with respect to trade receivables are considered minimal due to the Company's ongoing credit evaluations of its customers. Based on the Company's assessment of credit risk, sales in the United States and Canada are made on open credit, C.O.D., cash in advance, or by postdated check. International sales are generally made on a cash in advance or letter of credit basis. In 1995 and 1996, sales to the Company's principal Japanese distributor accounted for approximately 22% and 17% of net sales,
respectively. In 1996, sales to another of the Company's Japanese distributors accounted for 12%. No one customer accounted for more than 10% of revenues in 1997 or 1998.
Worldwide sales of the Company's products were (in thousands):
17. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
(1) The effects of potential common securities are excluded from the diluted calculation for 1996, 1997 and 1998 as their effects would be antidilutive.
18. BUSINESS SEGMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (Statement 131), which is effective for years beginning after December 15, 1997. Statement 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. Statement 131 is effective for financial statements for fiscal years beginning after December 15, 1997. The Company has adopted Statement 131 for the six months ended June 30, 1998 but has not retroactively adjusted previously reported segments because it was impractical to do so.
The Company reports operating results in two segments due to distinct product differences. These two segments include the Company's hardgoods and softgoods product lines. The hardgoods segment includes snowboards, snowboard bindings, snowboard boots, wakeboards, and wakeboard boots. The softgoods segment includes apparel and accessories.
The SMP apparel and Smiley Hats subsidiaries are stand alone units and make up approximately 84% of the Apparel and Accessory segment. The remaining 16% is comprised of the Ride apparel and accessory lines which are sold through the traditional hardgoods distribution units, namely Ride Snowboards and Ride Canada. The Sales for this remaining portion are specifically calculated. Expenses and assets for the Apparel and Accessory segments of Ride Snowboards and Ride Canada are allocated based on sales.
Plant and equipment, goodwill and other long-lived assets of $16,342,000 represent $16,075,000 located in the United States, the Company's country of domicile, and $267,000 located in Canada.
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
(1) Includes $6.5 million inventory write-down. See Note 6.
(2) Includes $6.5 million inventory write-down and $2.5 million restructuring charge. See Note 6.
(3) Includes $8.6 million loss on impairment of goodwill. See Note 3.
ITEM 9
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Directors of the Registrant are as follows:
Cory J. Hechler, age 33, has served as a director of the Company since December 1993. Mr. Hechler joined Bear Stern Securities, Inc., an investment banking firm, in January 1986 and has been a Senior Managing Director since September 1993. Mr. Hechler received his B.A. degree from the State University of New York at Oneonta.
Robert F. Marcovitch, age 41, was elected as a director of the Company on June 16, 1998 to fill the vacancy created by the resignation of Robert E. Hall. Mr. Marcovitch was also appointed to serve as the Company's President and Chief Executive Officer. Prior to that time, Mr. Marcovitch served as Sr. Vice President of the Company's Apparel and International divisions since October 1996. Before that he was employed by C.A.S. Sports International, Inc., a Canadian-based former subsidiary of the Company, where he served as President from August 1994 through October 1996. From December 1992 to August 1994, Mr. Marcovitch was Director of Apparel for Nike Canada, where he was responsible for all of Nike's non-footwear business in Canada. From 1989 to 1992, Mr. Marcovitch was Strategic Account Manager of Nike Canada's apparel division. Mr. Marcovitch attended Concordia University in Montreal.
Mark M. Salter, age 38, has been a director of the Company since April 1993, and served as Vice Chairman of the Board from November 1993 to December 1995. He also served as the Company's Director of Investor Relations from October 1994 until September 1995. Mr. Salter has been the Director of fixed Income Securities for Amherst Securities Group, Inc., a Houston-based securities broker-dealer, since October 1995. From 1989 to 1994, he was Executive Vice President and Director of Trading for Westcap Securities L.P., a Houston-based fixed income securities firm. Mr. Salter received his B.A. degree from York University in Toronto.
The Executive Officers of the Registrant who are not also Directors are as follows:
Mark Braiser, 34, joined the Company in June 1995 as Vice President of Sales for the Company's C.A.S. Sports International subsidiary. He was promoted to Vice President of Sales for the Company's Special Products Group in October 1996 and was appointed the Company's Vice President of Sales in June 1998. Prior to joining the Company, Mr. Brasier owned his own Independent Sales Representative agency for the preceding 10-year period. Mr. Brasier graduated from the University of Western Ontario with a BA in Business.
Gregory S. Cook, 50, joined the Company in March 1996 as Chief Financial Officer and Chief Operating Officer for the Company's C.A.S. Sports International subsidiary. In October 1996, Mr. Cook was appointed President of the Company's Ride Canada subsidiary, a position he served until his appointment as the Company's Chief Operating Officer in June 1998. Mr. Cook served as President of Head/Tyrollia Sports Canada from 1985 until his departure in 1996 to join the Company. Mr. Cook is a Certified Management Accountant and holds a degree in Business Administration and Accounting from Mohawk College in Hamilton, Ontario.
David H. Davis, 39, joined the Company as Secretary and General Counsel in September 1996. Prior to that he served as Corporate Counsel and Assistant Secretary of Egghead, Inc., a reseller of computer software, hardware and peripherals, where he was employed from September 1994 through August 1996. Before joining Egghead, Mr. Davis was an associate attorney with the Seattle law firm of Stanislaw Ashbaugh from April 1990 through September 1994. Mr. Davis earned his BA degree from Whitman College and his JD from the University of Oregon.
Former executive officer Robert E. Hall, age 50, joined the Company in August 1996 as Chief Executive Officer and President, was appointed to the Board of Directors in September 1996, and resigned as a director and employee of the Company in June 1998.
Former executive officer Bruce Manke, age 55, joined the Company in September 1996 as Senior Vice President of Winter Sports and Administration and resigned his position in June 1998.
Scott C. Mavis, 30, joined the Company in March 1993 as its Customer Services Manager. Mr. Mavis worked his way through the organization, performing duties as an Assistant Product Manager, an Inventory Trafficking Manager and International Sales Coordinator, before being appointed to Managing Director of European Sales, a position he held until being promoted to the Company's Vice President of Marketing in June 1998. Mr. Mavis graduated from the University of Vermont with a BS in Business Administration with a focus on International Marketing.
Former executive officer G. Scott Stewart, 36, served as the Company's Vice President from April 1995 until September 1996, when he was appointed Senior Vice President of Finance, a position he held until his resignation in August 1998.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
Executive Compensation
The following table sets forth annual and long-term compensation for services rendered during the six months ended June 30, 1998 and the years ended December 31, 1997, 1996 and 1995 by the Named Executive Officers.
Summary Compensation Table
(1) Mr. Hall joined the Company in August 1996 and resigned on June, 16, 1998; the salaries shown for each of 1996 and the six months ending June 30, 1998 are for a partial year's employment. The amount shown for other annual compensation represents contributions by the Company to the Company's 401(k) savings plan on behalf of Mr. Hall and an automobile allowance. Stock option grants for 1997 include the cancellation, repricing and reissuance of 62,500 options originally issued in 1996.
(2) Mr. Manke joined the Company in September 1996 and resigned from his position on June 16, 1998; the salaries shown for each of 1996 and the six months ending June 30, 1998 are for a partial year's employment. The amount shown for other annual compensation represents contributions by the Company to the Company's 401(k) savings plan on behalf of Mr. Manke. Stock option grants for 1997 include the cancellation, repricing and reissuance of 15,000 options originally issued in 1996.
(3) The amount shown for other annual compensation for Mr. Marcovitch represents contributions by the Company to the Company's Retirement Savings Plan on behalf of Mr. Marcovitch.
(4) Mr. Stewart joined the Company in April 1995 and resigned his position in August 1998; the salary shown for 1995 is for a partial year's employment. The amount shown for other annual compensation represents contributions by the Company to the Company's 401(k) savings plan on behalf of Mr. Stewart and an automobile allowance in 1997 and 1998.
(5) Mr. Cook joined the Company in March 1996; the salary shown for that year is for a partial year's employment. The amount shown for other annual compensation represents contributions by the Company to the Company's Retirement Savings Plan on behalf of Mr. Cook and an automobile allowance.
(5) Mr. Davis joined the Company in September 1996; the salary shown for that year is for a partial year's employment. The amount shown for other annual compensation represents contributions by the Company to the Company's 401(k) savings plan on behalf of Mr. Davis. Stock option grants for 1997 include the cancellation, repricing and reissuance of 10,000 options originally issued in 1996.
(6) Mr. Braiser joined the Company in June 1995; the salary shown for that year is for a partial year's employment. The amount shown for other annual compensation represents contributions by the Company to the Company's Retirement Savings Plan on behalf of Mr. Brasier and an automobile allowance.
(7) The amount shown for other annual compensation represents contributions by the Company to the Company's 401(k) savings plan on behalf of Mr. Mavis.
Option Grants in 1998
The following table provides information on option grants to the Named Executive Officers in 1998.
(1) Based on an aggregate of 570,500 stock options granted to employees during the six month period ended June 30, 1998.
(2) Potential realizable value is based on an assumption that the value of the Common Stock appreciates at the annual rate shown (compounded annually) from the date of grant until the end of the option term. This formula is calculated based on SEC requirements and does not reflect the Company's estimate of future stock price growth.
The Company's Stock Option Plan is administered by the Compensation Committee of the Board of Directors, which consists of Messrs. Hechler, and Salter. The Compensation Committee determines to whom options are granted, the number of shares subject to each option, the vesting schedule and the exercise price. The exercise price may not be less than the fair market value of the Common Stock on the date of grant. Options generally vest over four years and have a duration of ten years. The exercise price may be paid in cash, by delivering shares of Common Stock already owned by the option holder or by complying with any other payment mechanism approved by the plan administrator. Subject to certain limitations, the Compensation Committee may modify the terms of and reprice outstanding options.
Option Exercises and Fiscal Year-End Option Values
The following table shows data relating to stock options exercised by the Company's Named Executive Officers and unexercised options held by such persons at June 30, 1998.
(1) The amount shown is the aggregate number of shares of Common Stock that may be purchased pursuant to the exercise of outstanding options, multiplied by the difference between the closing price of the Common Stock reported on Nasdaq National Market on September 23, 1998, $1.00, and the per share exercise price of such options.
COMPENSATION OF DIRECTORS
Directors who are employees of the Company are not compensated for service as directors. Non-employee directors of the Company receive $1,000 per board meeting attended in person. The Company also reimburses each director for reasonable expenses incurred in attending meetings of the Board of Directors. In addition, in June 1998 the Directors approved, subject to shareholder approval, a Non-Employee Directors' Nonqualified Stock Option Plan whereby upon election or appointment to the Board of Directors, each non-employee director receives an option under such Plan to purchase 5,000 shares of Common Stock. The option vests and is exercisable on the earlier of one year from the date of grant or the last business day preceding the next following Annual Shareholders' Meeting. Unvested and unexpired options terminate upon the first of the following events: (i) ten years from the date of grant; (ii) the expiration of 90 days from the date of an optionee's termination as a director for any reason other than death or disability; or (iii) the expiration of one year from the date of death of an optionee or cessation of the optionee's service as a director by reason of disability.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Common Stock Ownership of Certain Beneficial Owners and Management
The following table sets forth information regarding the beneficial ownership of the Company's Common Stock as of September 21, 1998 by (i) each person known by the Company to be the beneficial owner of more than five percent of the Company's Common Stock; (ii) by each director; (iii) by the group of individuals collectively referred to as "the Named Executive Officers" consisting of all individuals serving as the Company's Chief Executive Officer or acting in a similar capacity during the six months ended June 30, 1998, and the other five most highly paid executive officers of the Company other than the Chief Executive Officer; and (iv) by all directors and executive officers of the Company as a group.
Table of Beneficial Ownership
* Less than 1%
(1) Except as otherwise noted in these footnotes, each of the persons named in the table has sole voting and investment power with respect to the shares shown beneficially owned by such person. As noted in these footnotes, shares beneficially owned may include shares subject to options that are exercisable on or before November 20, 1998.
(2) Includes 893,764 shares held by DLS Financial Holdings, Inc., a trust controlled by Mr. Salter and 120,000 shares subject to options that are currently exercisable or exercisable on or before November 20, 1998.
(3) Includes: (i) 835,000 shares held by Salter Family Partners, Ltd., a limited partnership of which Mark Salter and his wife are the sole general partners, with shared voting and investment control; (ii) 6,000 shares held by Mark Salter as custodian for his two minor children, for which Mr. Salter disclaims beneficial ownership; (iii) 200,000 shares that are issuable upon the conversion of 100,000 shares of the Company's Series A Convertible Preferred Stock held by Salter Family Partners, Ltd.; and (iv) 123,818 shares subject to options that are currently exercisable or exercisable on or before November 20, 1998.
(4) Includes 339,000 shares owned directly and 80,000 shares subject to options that are currently exercisable or exercisable on or before November 20, 1998.
(5) Includes 534 shares owned directly and 54,375 shares subject to options that are currently exercisable or exercisable on or before November 20, 1998.
(6) Includes 2,306 shares owned directly and 24,375 shares subject to options that are currently exercisable or exercisable on or before November 20, 1998. Mr. Stewart resigned from the Company on August 31, 1998, but remains as a consultant to the Company. Under his consulting agreement, Mr. Stewart continues to participate in the Company's employee stock option plan in accordance with the terms of such plan.
(7) Includes 9,240 shares owned directly, and 7,000 shares held by the Robert E. Hall Family Trust, a trust controlled by Mr. Hall.
(8) Represents 7,875 shares subject to options that are currently exercisable or exercisable on or before November 20, 1998.
(9) Includes 4,749 shares owned directly and 5,625 shares subject to options that are currently exercisable or exercisable on or before November 20, 1998.
(10) Represents 3,125 shares subject to options that are currently exercisable or exercisable on or before November 20, 1998.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND TRANSACTIONS.
None.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Financial Statements.
2. Financial Statement Schedules.
3. Exhibits.
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(1) Exhibit is incorporated by reference to an identically numbered exhibit to the Company's Registration Statement on Form SB-2, file no. 33-75770-LA.
(2) Exhibit is incorporated by reference to an identically numbered exhibit to the Company's Amendment No. 1 to Registration Statement on Form SB-2, file no. 33-75770-LA.
(3) Exhibit is incorporated by reference to an identically numbered exhibit to the Company's Registration Statement on Form SB-2, file no. 33-75770-LA, with confidential portions omitted and filed separately with the Commission pursuant to a Request of Confidential Treatment under Rule 406 of the Securities Act of 1933.
(4) Exhibit is incorporated by reference to Exhibit No. 10.1 to the Company's Current Report on Form 8-K, dated August 31, 1994.
(5) Exhibit is incorporated by reference to Exhibit No. 1.1A to the Company's Amendment No. 1 to Registration Statement on Form SB-2, file no. 33-75770-LA.
(6) Exhibit is incorporated by reference to an identically numbered exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994.
(7) Exhibit is incorporated by reference to an identically numbered exhibit to the Company's Post-Effective Amendment No. 1 to the Registration Statement on Form SB-2, file no. 33-75770-LA.
(8) Exhibit is incorporated by reference to an identically numbered exhibit to the Company's Post-Effective Amendment No. 2 to the Registration Statement on Form SB-2, file no. 33-75770-LA.
(9) Exhibit is incorporated by reference to an identically numbered exhibit to the Company's Registration Statement on Form S-1, file no. 33-94814.
(10) Exhibit is incorporated by reference to an identically numbered exhibit to Amendment No. 1 to the Company's Registration Statement on Form S-1, file no. 33-94814.
(11) Exhibit is incorporated by reference to an identically numbered exhibit to Amendment No. 1 to the Company's Registration Statement on Form S-1, file no. 33-94814, with confidential portions omitted and filed separately with the Commission pursuant to a Request of Confidential Treatment under Rule 406 of the Securities Act of 1933.
(12) Exhibit is incorporated by reference to an identically numbered exhibit to Amendment No. 2 to the Company's Registration Statement on Form S-1, file no. 33-94814.
(13) Exhibit is incorporated by reference to an identically numbered exhibit to the Company's Current Report on Form 8-K, dated September 1, 1995.
(14) Exhibit is incorporated by reference to an identically numbered exhibit to the Company's Current Report on Form 8-K, dated October 20, 1995.
(15) Exhibit is incorporated by reference to Exhibit No. 2.1 to the Company's Current Report on Form 8-K, dated September 1, 1995.
(16) Exhibit is incorporated by reference to Exhibit No. 2.2 to the Company's Current Report on Form 8-K, dated October 20, 1995.
(17) Exhibit is incorporated by reference to Exhibit No. 1.1 to the Company's Registration Statement on Form S-1, file no. 33-94814.
(18) Exhibit is incorporated by reference to an identically numbered exhibit to the Company's Quarterly Report on Form 10-Q, for the fiscal quarter ended September 30, 1995.
(19) Exhibit is incorporated by reference to an identically numbered exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995.
(20) Exhibit is incorporated by reference to an identically numbered exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1996.
(21) Exhibit is incorporated by reference to an identically numbered exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1996.
(22) Exhibit is incorporated by reference to an identically numbered exhibit to the Company's Current Report on Form 8-K, dated October 11, 1996.
(23) Exhibit is incorporated by reference to an identically numbered exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.
(24) Exhibit is incorporated by reference to an identically numbered exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1997.
(25) Exhibit is incorporated by reference to an identically numbered exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997.
(26) Exhibit is incorporated by reference to exhibit 4.6 to the Company's Current Report on Form 8-K, dated January 8, 1998.
(27) Exhibit is incorporated by reference to exhibit 4.5 to the Company's Current Report on Form 8-K, dated January 8, 1998.
(28) Exhibit is incorporated by reference to an identically numbered exhibit to the Company's Current Report on Form 8-K, dated January 8, 1998.
(29) Exhibit is incorporated by reference to exhibit 4.4 to the Company's Current Report on Form 8-K, dated January 8, 1998.
* Certain portions of this exhibit have been omitted and filed separately with the Commission pursuant to an Application for Confidential Treatment.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K, dated December 19, 1997, related to the private placement of Series B Convertible Preferred Stock.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
RIDE, INC. (Registrant)
/s/ ROBERT F, MARCOVITCH ------------------------------------- Robert F. Marcovitch Chief Executive Officer and President
DATE: September 28, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dated indicated
EXHIBIT INDEX
RIDE, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
(1) Amounts acquired in purchase acquisitions.
(2) Uncollectible accounts written off, net of recoveries.
(3) Cost of goods sold in excess of net realized value and obsolete inventories written off, net of recoveries.