Morrow Snowboards, Inc. and K2 Inc. announced March 26, 1999 that the Morrow snowboard brand had been acquired by K2 for 3.2-million dollars in cash.

The assets acquired include Morrow intellectual property (including board, boot, binding, and step-in technologies), ’99/00 inventory, tooling, and production equipment from Morrow’s Salem, Oregon factory.

Not included in the deal were the Westbeach apparel brand and three retail outlets–all located in or near Vancouver, British Columbia. They will remain assets of the publicly held company currently called Morrow Snowboards, Inc.

In a related move, Morrow announced the closure of its Salem, Oregon offices and factory. Production of Morrow snowboards will move to the K2 factory on Vashon Island in Washington. The Morrow office building and factory are currently for sale. “The revenues on the sale of the building will be used to pay off any remaining debt and reduce the amounts owed to unsecured creditors,” says Morrow CEO Blair Mullin. The amount owed to these creditors is approximately 1.93-million dollars.

On Thursday, March 25 nearly all of Morrow’s approximately 160 employees were laid off in separate meetings lead by each department head. Employees who will continue to work at Morrow Snowboards, Inc. are: Blair Mullin, Georell Bracelin, Marco Allinott, Scott Sibley, Greg Hughes, Susan Howell, and Barbara Saunders.

Since part of the acquisition is the use of the Morrow name, Mullin says he’d need to change the name of Morrow Snowboards, Inc. in a “relatively brief period of time.” Most likely this will occur at the next board of directors meeting in May, says Marketing Manager Bracelin.

Mullin says the offices will relocate once the sale of its current location is complete, but indicated the move will not be back to Vancouver.

K2’s GainWhile the Morrow parent company has found its way out of a grave financial situation, K2 has picked up a top-five snowboard brand to add to it’s own top-five line.

Richard Rodstein, president and chief executive officer of K2 Inc., says: “The Morrow name is well known in the industry and has been synonymous with innovation. We are pleased to add them to our snowboard group, and we look forward to working with Morrow’s dealers and providing them with innovative products and marketing support.”

“The acquisition is part of K2’s growth strategy to leverage its distribution by adding new product lines,” he adds.

According to Brent Turner, K2 vice president and general manager of snowboards, plans are to continue to produce and market the Morrow brand along the lines that it has been to help differentiate it from K2.

“There’s a clear construction difference and the image is unique,” he says of the Morrow brand. With the purchase of the capital equipment, K2 plans on continuing Morrow’s construction techniques through this season, and is currently talking to some of the former employees to bring in to build the product.

The reps will stay the same for now, and Todd Richards will continue to ride for the company. The other team riders have also been spoken to and K2 plans on keeping the Morrow team in place. However, the Morrow Engage step-in program has been shelved at this time.

The deal seems like a good one for K2. Morrow had already produced 8,000 boards for the ’99/00 season, says Bracelin. Assuming each board sells at wholesale for 130-dollars, the inventory alone is worth slightly more than one-million dollars.

FinancialsSo who gets the 3.2-million in cash? “Most of the proceeds will be used to pay down debt from Foothill Capital, and the balance of proceeds will be used for general working-capital purposes,” says Mullin.

Foothill Capital Corporation has been a key player since it replaced Morrow’s previous lender in May 1998, anteing up a working capital line of credit ana two-million-dollar, four-year term loan.

Foothill and Morrow Snowboards, Inc. are currently negotiating a new finance arrangement that will fund the remaining assets.

And as for the shareholders of Morrow Snowboards, Inc., Mullin says: “The proper way to look at it is that you own stock in a company that owns several assets. One of those assets has been sold, but the company continues.”

“What we’ve found in the Empire deal and other deals of this sort is that trying to sell the entire company can be too time consuming,” says Morrow CEO Blair Mullin. “The hardgoods were clearly what K2 showed the most interest in.”

The Scuttled Empire DealNews of the K2 acquisition came hard upon the heels of the on-again/off-again merger with Empire of Carolina, makers of the Big Wheel line of toys and Wilson golf shoes and accessories.

That deal called for each outstanding share of Morrow stock to be exchanged for 0.375 shares of Empire stock at closing, making it worth about 1.5-million dollars at press time.

But there was more. If Empire’s stock didn’t close above two dollars for sixty days in the eighteen months after closing, Morrow shareholders would have received enough additional Empire stock to give them value equal to what they would have received if the stock had traded at two dollars. That would have made the total value of the deal more than four-million dollars and would have included the Westbeach brand.

Most importantly, Morrow was to receive from Empire a 120-day, two-million-dollar loan bearing interest at twelve percent a year. Empire could have converted the loan into 1,333,000 shares of Morrow common stock any time it wanted. “This financial injection means Morrow moves into our industry’s largest trade show this week with a message of financial stability to our customers,” said Mullin in a press release just prior to the SIA show.

However, the deal was soon on the rocks and the interim financing never kicked in. Mullin says the deal was officially terminated on March 15, but effectively on March 12–the fourth day of the SIA trade show.

According to a Morrow press release the deal was terminated because certain conditions required by the letter of intent were not met. Mullin declined to be specific about what those conditions were.

There isn’t total agreement with what actually happened. “Something’s rotten in Salem,” says Bill Craig, CFO of Empire of Carolina. “We were living up to our obligation outlined in the letter of intent, and you can infer that they didn’t.”

Craig says that the termination was made unilaterally by Morrow. “To be really candid,” he says, “I don’t know why it happened. We received the press release just like everyone else. If I had to guess, I’d say another deal came along that was better.”

“Particularly with a public company, if third party comes in and offers more, than that’s the American way, and you go with that deal. However, at least you should notify the company you’re dealing with and live up to your obligations–which is the break-up fee and money for expenses.”

The letter of intent signed by Empire and Morrow outlined a 500,000-share fee for breaking-up the deal past a certain point.

“After all, the first company out of the gate takes the most risk,” says Craig. “We became the stalking-horse. People could see our offer and try to beat us.”

He adds that Empire is pursing legal remedies to the problem: “We have an obligation to our shareholders to show them what we did in January and February.”

According to Bracelin: “Because we’re the ones who terminated the agreement, we avoided the 500,000-share penalty and the immediate pay back of the loan. At this point we owe Empire nothing.

“At the time we signed the letter of intent, the Empire deal was the best deal we had going,” she continues. “It had no other rivals until after we released the details of the deal with the March 9, 1999 8K. I think when people saw the valuation of the deal and the response we received at Vegas, it renewed a lot of interest.”

Indeed, according to Mullin, “After the Empire deal was announced there were several–perhaps as many as eight–different expressions of interest.” The price Empire was paying was mentioned as a factor in these instances, but not in all cases he claims. When asked whether Morrow was contacted by K2 at the SIA trade Show about putting a deal together, Mullin said he didn’t want to be specific about timing.–Sean O’Brien and John Stouffermpire deal was the best deal we had going,” she continues. “It had no other rivals until after we released the details of the deal with the March 9, 1999 8K. I think when people saw the valuation of the deal and the response we received at Vegas, it renewed a lot of interest.”

Indeed, according to Mullin, “After the Empire deal was announced there were several–perhaps as many as eight–different expressions of interest.” The price Empire was paying was mentioned as a factor in these instances, but not in all cases he claims. When asked whether Morrow was contacted by K2 at the SIA trade Show about putting a deal together, Mullin said he didn’t want to be specific about timing.–Sean O’Brien and John Stouffer