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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER 1-2883
OUTBOARD MARINE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 36-1589715
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
100 SEA HORSE DRIVE 60085
WAUKEGAN, ILLINOIS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (847) 689-6200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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<S> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
7% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2002 NEW YORK STOCK EXCHANGE &
CHICAGO STOCK EXCHANGE
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates at
December 23, 1998 was $0.
Number of shares of Common Stock of $0.01 par value outstanding at December
23, 1998 was 20,425,554 shares.
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TABLE OF CONTENTS
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ITEM NO. PAGE
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PART I
1 Business.................................................... 2
2 Properties.................................................. 14
3 Legal Proceedings........................................... 15
4 Submission of Matters to a Vote of Security Holders......... 15
PART II
5 Market for Registrant's Common Equity and Related
Shareholder Matters....................................... 16
6 Selected Financial Data..................................... 16
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 17
7A Quantitative and Qualitative Disclosures About Market
Risk...................................................... 31
8 Financial Statements and Supplementary Data................. 33
9 Changes in and Disagreements on Accounting and Financial
Disclosure................................................ 61
PART III
10 Directors and Executive Officers of the Registrant.......... 61
11 Executive Compensation...................................... 65
12 Security Ownership.......................................... 73
13 Certain Relationships and Related Transactions.............. 76
PART IV
14 Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 77
Signatures.................................................. 79
Exhibit Index............................................... 80
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PART I
ITEM 1. BUSINESS
Unless the context otherwise requires, all references herein to the
"Company" or "OMC" shall mean Outboard Marine Corporation, a Delaware
corporation, and its consolidated subsidiaries. Unless otherwise indicated, all
domestic industry statistics referenced herein are derived from data published
by the National Marine Manufacturers' Association, which the Company has not
independently verified but believes to be reliable. All foreign industry data
referenced herein are estimates prepared internally by the Company based in part
on publicly-available sources, which the Company has not independently verified
but believes to be reliable.
GENERAL
Outboard Marine Corporation believes it is the world's largest dedicated
manufacturer of outboard marine engines and boats. As of September 30, 1998, the
Company had an approximate 35% share of the United States outboard marine engine
market and estimated it had an approximate 26% share of the worldwide market.
Sold under the Johnson and Evinrude brand names, the Company offers one of the
industry's widest ranges of outboard engines, with models ranging from two to
250-horsepower. The Company's boat brands are also among the most recognized in
the industry and are one of the market leaders in several categories, including
the fishing, aluminum and recreational boat segments. OMC's primary boat brands
include Chris*Craft, Four Winns, Seaswirl, Stratos, Javelin, Hydra-Sports, Lowe
and Princecraft. The Company also generates a significant, recurring stream of
revenue in replacement parts and accessories from its large installed base of
over seven million engines. The Company believes that its marine dealer network
of approximately 6,500 independent authorized dealers worldwide, approximately
4,300 of which are located in North America, is one of the largest marine dealer
networks in the world. The Company currently has several important strategic
alliances with respect to marine engines, including for the development of the
new FICHT fuel-injection technology, a supply arrangement with Suzuki Motor
Corporation relating to certain four-stroke outboard engines, and a supply
arrangement with Volvo Penta of the Americas, Inc. relating to gasoline stern
drive and inboard marine power systems.
The Company was incorporated in 1936 by members of the Briggs and Evinrude
families. Prior to the late 1980s, the focus of the Company's strategy was to be
the industry leader in the two-cycle engine market by manufacturing engines and
a variety of products powered by small gasoline engines. In addition to outboard
engines, the Company's products included lawnmowers, chainsaws, snowmobiles,
light industrial vehicles and turf care products. In the late 1980s, a
structural shift occurred in the marine industry as engine manufacturers,
including the Company, began to package their engines with boats from boat
manufacturers. Marine dealers found it more efficient and economical to buy
boats "packaged" with engines rather than buy engines and boats separately. In
line with this trend, the Company acquired 15 boat companies by 1990 and
divested its non-marine product lines, thereby transforming itself from an
engine company to a marine company.
On September 12, 1997, Greenmarine Holdings LLC ("Greenmarine Holdings")
acquired control of approximately 90% of the then outstanding shares of common
stock ("Pre-Merger Company Shares") of Outboard Marine Corporation through an
$18.00 per share tender offer pursuant to Greenmarine Holdings' Offer to
Purchase dated August 8, 1997 (the "Tender Offer"). On September 30, 1997,
Greenmarine Holdings acquired the untendered Pre-Merger Company shares by
merging an acquisition subsidiary with and into the Company (the "Merger"). As a
result of the Merger, OMC became a wholly-owned subsidiary of Greenmarine
Holdings; each untendered Pre-Merger Company Share outstanding immediately prior
to the Merger was converted into the right to receive a cash payment of $18.00
per share; and 20.4 million shares of new common stock of the Company were
issued to Greenmarine Holdings. The Tender Offer and the Merger are collectively
referred to herein as the "Greenmarine Acquisition."
Since the Greenmarine Acquisition, the Company has recruited a new, highly
experienced senior management team led by David D. Jones, Jr. as President and
Chief Executive Officer. Mr. Jones was
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previously President of the Mercury Marine Division of Brunswick Corporation,
where, under his direction, the division gained substantial market share in
several key marine segments. Mr. Jones has more than twenty years of experience
in the marine industry. The new management team also includes Andrew P. Hines
who joined the Company as Executive Vice President and Chief Financial Officer.
Mr. Hines has extensive experience in turnaround situations. In addition, the
Company has added a substantial number of new members to its management team to
fill key operational and administrative positions, including new heads of most
of its boat divisions, its engine manufacturing operations, its purchasing and
supply operations, and its sales, marketing and advertising operations. The new
senior management team has developed several key initiatives to turn around and
substantially improve the Company's operations.
The Company owns a majority interest in FICHT GmbH & Co. KG, which has
developed a patented, highly innovative fuel-injection technology designed for
two-stroke engines. The FICHT fuel-injection technology utilizes advanced
electronic microprocessors to directly inject high-pressure fuel into a sealed
combustion chamber, eliminating the escape of any unburned fuel. The FICHT
fuel-injection system uses fewer mechanical parts, is smaller and, the Company
believes, more reliable than any other low-emission engine. The FICHT
fuel-injection technology possesses several advantages over standard two-stroke
engines, including smoother and quieter operation, 35% better fuel economy on
average, up to 80% reduction in hydrocarbon emissions and virtually no smoke on
start-up. In addition, two-stroke engines based on the FICHT fuel-injection
technology offer several benefits relative to four-stroke engines, including
increased low-end power, lighter weight and smaller size. Furthermore, the FICHT
fuel-injection technology meets emissions standards mandated by the United
States Environmental Protection Agency (the "EPA") set for the year 2006. The
Company has already introduced outboard engines incorporating the FICHT
fuel-injection technology in six separate horsepower categories. To date, the
Company has received several awards relating to its FICHT fuel-injection
technology, including the 1996 Popular Mechanics Design & Engineering Award for
marine engines, the 1997 International Marine Trades Exposition and Conference
Innovation Award, the 1997 Motor Boating and Sailing Magazine Innovation Award,
the 1997 Society of Automotive Engineers International Off-Highway & Powerplant
Company of the Year Award and the 1997 Euromot Award.
INDUSTRY OVERVIEW
The recreational boating industry generated approximately $19.3 billion in
domestic retail sales in 1997, including approximately $8.8 billion in sales of
boats, engines, trailers and accessories. According to statistics compiled by
the U.S. Department of Commerce, recreational products and services represent
one of the fastest growing segments of U.S. expenditures.
Although unit sales in the marine industry in recent years have been
declining or flat, the Company believes it may benefit from recent industry-wide
efforts in the U.S. designed to increase the share of recreational expenditures
related to boating. The National Marine Manufacturers' Association ("NMMA"), the
Marine Retailers Association of America ("MRAA") and other marine industry
leaders, including the Company, have formed a joint task force to implement
initiatives to improve the quality of the industry's marine dealer network,
improve the overall boating experience for consumers and enhance the awareness
of boating as a recreational activity through various advertising programs. The
Company believes that the overall shift in spending of discretionary income
towards recreational products and services and recent efforts to increase the
share of recreational expenditures directed towards boating, may contribute to
growth in the recreational boating industry over the next several years.
Recreational marine industry sales are impacted by the general state of the
economy, interest rates, consumer spending, technology, dealer effectiveness,
demographics, weather conditions, fuel availability and government regulations
and other factors. See "Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Cyclicality; Seasonality;
Weather Conditions." During the period from 1983 to 1992, the recreational
marine industry experienced both its largest growth (from 1983 to 1988) and its
largest downturn (from 1988 to 1992) in over 30 years. The growth was stimulated
not only by increasing real disposable income, but also by the emerging trend
within the marine industry of packaging engines with boats, which resulted in
boat packages that were more affordable to consumers, and easily obtainable
marine loans that required no money down and could be financed over a term of
over ten years. The
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contraction in sales from 1988 to 1992 was due to the recession during the early
1990s, as well as to the fact that the accentuated level of sales in the late
1980s. Many boat owners had loan balances in the early 1990s that exceeded the
value of the boats, which made trade-up sales more difficult to obtain. In
addition, the U.S. government imposed a luxury tax in 1990 on boats sold at
prices in excess of $100,000. The Company believes that many consumers were
under the impression that this luxury tax applied to all boats and that this
depressed sales of boats in all price segments. The luxury tax was repealed in
1993.
Since 1992, domestic sales of recreational boats have increased from $2.2
billion in 1992 to $3.6 billion in 1997.
PRODUCTS
The Company manufactures a wide variety of outboard engines, boats and
marine parts and accessories and distributes these products throughout the
world.
The following table sets forth, for the periods indicated, information
concerning the Company's net sales by division (including the value of
intercompany engine sales in the Company's Engine Group) expressed in dollars in
millions and as a percentage of net sales.
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FISCAL YEAR 1998 FISCAL YEAR 1997 FISCAL YEAR 1996
----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Engines............................ $ 561.1 54.7% $519.1 53.0% $ 653.6 58.3%
Boats.............................. 272.9 26.6 262.7 26.8 255.8 22.8
Parts & Accessories................ 185.7 18.1 189.5 19.4 195.4 17.4
Other.............................. 6.0 0.6 8.2 0.8 16.7 1.5
-------- ----- ------ ----- -------- -----
Total.................... $1,025.7 100.0% $979.5 100.0% $1,121.5 100.0%
======== ===== ====== ===== ======== =====
</TABLE>
The following table sets forth, for the periods indicated, information
concerning the Company's net sales by geographic region expressed in dollars in
millions and as a percentage of net sales (for additional information concerning
the Company's sales by geographic region for the Company's last three fiscal
years, see Note 16 of the Notes to the Consolidated Financial Statements
included elsewhere herein).
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<CAPTION>
FISCAL YEAR 1998 FISCAL YEAR 1997 FISCAL YEAR 1996
----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
United States...................... $ 769.7 75.0% $721.0 73.6% $ 813.3 72.5%
Europe............................. 91.9 9.0 90.9 9.3 114.8 10.2
Other.............................. 164.1 16.0 167.6 17.1 193.4 17.3
-------- ----- ------ ----- -------- -----
Total.................... $1,025.7 100.0% $979.5 100.0% $1,121.5 100.0%
======== ===== ====== ===== ======== =====
</TABLE>
Outboard Engines
The Company's Johnson and Evinrude brands are two of the most recognized
outboard engine brands worldwide. Johnson and Evinrude are competitively priced
with other premium priced outboard engines and include offerings in virtually
every segment of the outboard engine market. In July 1998, the Company announced
its new brand strategy for its Johnson and Evinrude outboard engines. This
strategy is designed to differentiate the Johnson and Evinrude lines, which had
become identical engines that were marketed under different names. Johnson and
Evinrude engines are now readily distinguishable from each other and will be
marketed to target different consumers. The Company's Evinrude brand will
comprise two-stroke models incorporating the Company's FICHT fuel-injection
technology and certain four-stroke engines. The Evinrude brand will be marketed
as the Company's "premium" outboard marine engine brand. The Company's Johnson
brand will comprise a full line of traditional carbureted two-stroke models. In
addition, the Company has entered into a supply agreement with an affiliate of
Suzuki Motor Corporation under which Suzuki will manufacture certain other
four-stroke engines for sale by the Company under its Evinrude brand.
In 1997, the Company introduced a 150-horsepower outboard engine with FICHT
fuel-injection technology. Through its Evinrude brand line, the Company
currently offers engines incorporat-
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ing its innovative FICHT fuel-injection technology in the 90, 115, 150, 175, 200
and 225-horsepower categories and is reviewing expanding this technology across
the remainder of the Evinrude outboard engine product line. The FICHT
fuel-injection system uses an electronically driven fuel injector, controlled by
a powerful microprocessor-based engine management system, to blast short bursts
of highly pressurized fuel directly into the combustion chamber at rates of up
to 100 times per second. This high-pressure fuel pulse atomizes and positions
each burst of gasoline in the cylinder for complete ignition once the exhaust
port has been closed by the rising piston resulting in no unburned fuel escaping
prior to combustion. The FICHT fuel-injection technology possesses several
advantages over standard two-stroke engines, including smoother and quieter
operation, 35% better fuel economy on average, up to 80% reduction in
hydrocarbon emissions and virtually no smoke on start-up. In addition,
two-stroke engines based on the FICHT fuel-injection technology offer several
benefits relative to four-stroke engines, including increased low-end power,
lighter weight and smaller size. Engines with FICHT fuel-injection technology
meet the EPA emissions standards set for the year 2006.
Since the Company originally acquired the FICHT technology from the Ficht
family, it has been actively engaged in research and development efforts aimed
at improving the FICHT technology. See "-- Research and Development" below. The
Company, directly or through its FICHT GmbH & Co. KG subsidiary, has entered
into arrangements to sublicense the FICHT fuel-injection technology to
manufacturers of snowmobiles, personal watercraft, motorcycles and lawn
equipment, including Polaris Industries, Inc., Arctic Cat, Inc., Kawasaki Heavy
Industries, Ltd., and two lawn and garden-care equipment manufacturers. See
"-- Strategic Alliances -- FICHT Joint Venture" and "-- Intellectual Property"
below. The Company is currently evaluating other opportunities to sublicense the
FICHT fuel-injection technology to manufacturers of non-automotive engines.
The following table sets forth the number of engine models and price range
by size of engine in terms of horsepower:
<TABLE>
<CAPTION>
NUMBER OF RETAIL PRICE
HORSEPOWER RANGE MODELS RANGE($)
- ---------------- --------- ------------
<S> <C> <C>
2-24 horsepower..................................... 60 676-3,060
25-99 horsepower.................................... 83 2,534-8,454
100-250 horsepower.................................. 76 7,836-16,076
Total.......................................... 219
</TABLE>
Boats
The Company's boat brands are among the most recognized in the industry and
are market leaders in several categories, including the fishing, aluminum and
recreational boat segments. OMC's primary boat brands include Chris*Craft, Four
Winns, Seaswirl, Stratos, Javelin, Hydra-Sports, Lowe and Princecraft. The
Company offers products that cover most segments in the recreational and fishing
boat market, from ten foot aluminum boats to 33-foot luxury cruisers, and is the
largest producer of boats in units and one of the two largest in dollars.
In fiscal year 1998, the Company began rationalizing and realigning its
boat brands to lower its manufacturing costs and better focus each of its brands
on a particular niche in the boating industry, thereby reducing competition and
inefficient overlap among its brands. As part of this rationalization plan, the
Hydra-Sports brand became the Company's flagship saltwater fishing boat line,
the Stratos brand became the Company's top-of-the-line, tournament-style
freshwater fishing boat line and the Javelin brand became the Company's entry to
mid-level recreational fishing boat line. Production of the Company's Sunbird
brand runabout boats for the 1999 model year was suspended, and the Sunbird
Neptune series saltwater fishing boat products were incorporated into the
Hydra-Sports brand. Hydra-Sports brand freshwater fishing boats and Stratos
brand saltwater fishing boats have been discontinued. The Company has realigned
its aluminum boat brands by consolidating the most popular models from its
Grumman, Roughneck and Sea Nymph lines and incorporating them into the Lowe
brand. The Lowe brand is now positioned to offer a full line of aluminum boats.
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The following table provides a brief description of the Company's 1999
model year boat products by category, including product line and trade name,
overall length, retail price range, and a brief description of boats
manufactured:
<TABLE>
<CAPTION>
PRODUCT LINE OVERALL RETAIL
& TRADE NAME LENGTH (FT) PRICE RANGE ($) DESCRIPTION
- ------------ ----------- --------------- -----------
<S> <C> <C> <C>
RECREATIONAL:
Chris*Craft 19-32 19,993-125,947 Chris*Craft is one of the world's most
recognized brands in the marine industry,
serving the "prestige" market for boaters
seeking a "top-of-the-line" boat. In 1997,
Powerboat Magazine named the Chris*Craft
210 Bowrider "Boat of the Year."
Four Winns 17-33 11,600-148,056 Four Winns is the nation's third most
popular boat brand. Four Winns offers a
premium line of family-oriented
recreational boats.
Seaswirl 17-26 13,900-59,500 Seaswirl is a mid-priced boat line, and is
one of the leading boat brands in the
Western United States.
FISHING:
Stratos 16-21 17,047-34,457 Stratos is a performance line of
freshwater fishing boats designed for the
discriminating angler. The line includes
bass and fish-'n-ski boats.
Javelin 17-20 12,533-27,823 Javelin is a value-priced freshwater
fishing boat line. Products include bass
and fish-'n-ski boats.
Hydra-Sports 16-31 14,325-101,370 Hydra-Sports is a full line of saltwater
fishing boats designed for the fishing
enthusiast.
ALUMINUM:
Lowe 10-25 385-22,828 Lowe offers aluminum jon, fishing, pontoon
and deck boats.
Princecraft 10-24 473-28,634 Princecraft is a premium line of aluminum
boats manufactured in Canada and sold
throughout North America. Products include
jon, fishing, fish-'n-ski, pontoon and
deck boats.
</TABLE>
Parts and Accessories
The Company also offers a wide line of marine parts and accessories through
its Johnson and Evinrude dealers. Key products include engine parts, propellers
and engine oil. Most of the parts business consists of replacement parts for
outboard motors. The Company estimates that there are approximately seven
million Johnson and Evinrude outboard motors in use, which produce a steady
demand for high-margin replacement parts. In addition, in 1996, OMC launched a
new value-line of marine accessories under the Nautic Pro brand name. This brand
is marketed in part through a new distribution channel of marine and discount
retailers, and is priced to compete with other private label and discount
brands. Marine parts and accessories comprised approximately 18% of OMC's sales
in fiscal year 1998.
In June 1998, the Company announced that it had entered into a long-term
strategic business agreement with Johnson Worldwide Associates, Inc. to supply a
range of private-label, electric trolling motors designed to the Company's
specifications. This arrangement will allow the Company to offer its dealers a
full line of industry leading electric trolling motors with state-of-the-art
technology.
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Quality Assurance
The Company maintains rigid quality controls and extensively tests its
products and components in each of its manufacturing and assembly facilities. In
addition to on-site testing, the Company maintains year-round, on-water testing
facilities in Illinois and Florida. The Company continually monitors and
endeavors to improve its quality assurance programs and intends to expand these
programs and further motivate its workforce towards achieving increasing quality
standards.
STRATEGIC ALLIANCES
FICHT Joint Venture
On April 30, 1992, the Company and FICHT GmbH of Kirchseeon, Germany
entered into a license agreement (the "1992 License Agreement") pursuant to
which FICHT granted to the Company an exclusive, worldwide right and license to
manufacture, use, sell and sublicense marine engines that utilize the FICHT
fuel-injection system. The 1992 License Agreement provides that the Company
shall pay royalties to FICHT GmbH on a per cylinder basis for each marine engine
that is sold by the Company which utilizes the FICHT fuel-injection system. The
term of the license is for the duration of each patent that relates to the FICHT
fuel-injection system existing at the time that the 1992 License Agreement was
executed or filed within one year thereafter. Since certain patents related to
the FICHT technology have not been formally issued to date by certain foreign
jurisdictions, the ultimate term of the 1992 License Agreement cannot be
determined until each such unissued patent is issued. However, assuming that
none of such unissued patents were to issue, the 1992 License Agreement would
expire on July 25, 2015.
On July 21, 1995, the Company acquired a majority ownership interest in
FICHT GmbH to promote the development and worldwide manufacturing and marketing
of the FICHT fuel-injection system. FICHT GmbH was subsequently converted to a
limited partnership known as FICHT GmbH & Co. KG (together with any predecessor
in interest, "FICHT GmbH"), in which the Company is the general partner and
holds a 51% interest and in which members of the Ficht family collectively hold
a 49% interest. The partnership agreement contains certain supermajority
provisions which provide that the partnership may not sell the business of FICHT
GmbH as a whole or in substantial parts, including licensing, sublicensing or
sale of patents and other intellectual property related to the FICHT
fuel-injection technology, without a unanimous vote of the partners and may not
effect certain other actions, including acquisitions of other enterprises,
without a majority of 75% of the votes of the partners. All ordinary course of
business matters require only a simple majority vote. As part of the Company's
1995 acquisition of a majority ownership in FICHT GmbH, the 1992 License
Agreement was assigned to FICHT GmbH & Co. KG.
On February 7, 1997, the Company and FICHT GmbH entered into a license
agreement (the "1997 License Agreement") pursuant to which FICHT GmbH granted to
the Company an exclusive, worldwide license to manufacture, use, sell and
sublicense the FICHT fuel-injection system for all non-marine, non-automotive
applications, including but not limited to, snowmobiles, all-terrain vehicles,
scooters, motorcycles, forest and garden equipment, lawn equipment and utility
equipment. The terms of the 1997 License Agreement provide that the Company
shall pay to FICHT GmbH a basic license fee in monthly installments through
February 2000. The term of the license is for the duration of each patent that
relates to the FICHT fuel-injection system existing at the time that the 1997
License Agreement was executed or filed within one year thereafter.
Since certain patents related to the FICHT technology have not been
formally issued to date by certain foreign jurisdictions, the ultimate term of
the 1997 License Agreement cannot be determined until each such unissued patent
is issued. However, assuming that none of such unissued patents were to issue,
the 1997 Licence Agreement would expire on July 25, 2015.
Prior to the execution of the 1997 License Agreement, FICHT GmbH entered
into non-exclusive sublicense agreements with two lawn and garden equipment
manufacturers, pursuant to which FICHT GmbH granted non-exclusive licenses for
the manufacture and sale of non-marine engines that utilize the FICHT
fuel-injection system in return for certain royalty payments, of which the
Company is entitled to a 51%
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interest. In addition, since entering into the 1997 License Agreement, the
Company has executed separate sublicense agreements with each of Kawasaki Heavy
Industries, Ltd., Arctic Cat, Inc. and Polaris Industries, Inc. Under these
sublicense agreements, which, subject to certain exceptions, may be terminated
by each sublicensee after five years, the Company has granted a non-exclusive
license for the manufacture and sale of certain non-automotive, marine and
non-marine applications of the FICHT fuel-injection system in return for certain
license fees and/or royalty payments.
OMC/Volvo Stern Drive Joint Venture
On December 8, 1998 the Company transferred its interest in the joint
venture Volvo Penta Marine Products L.P. (the "Volvo Penta Joint Venture") to an
affiliate of Volvo Penta of the Americas, Inc. ("Volvo"). The joint venture was
formed by the Company, AB Volvo Penta and Volvo Penta North America, Inc. in
1993 to manufacture sterndrive engines for boats. Concurrently with the transfer
of the Company's interest in the Volvo Penta Joint Venture, the Company and
Volvo entered into an agreement whereby Volvo will supply to the Company
sterndrives through June 30, 2001 and component parts through June 30, 2011 and
the Company will supply component parts to Volvo through June 30, 2011.
Suzuki Agreement
On June 13, 1997, the Company entered into a five-year Original Equipment
Manufacturer Supply/ Purchase Agreement with an affiliate of Suzuki Motor
Corporation for the purchase of certain four-stroke outboard engines and related
parts and accessories. The products are manufactured by Suzuki and marketed and
sold under the Evinrude brand. The Company and Suzuki have recently participated
in a joint evaluation of respective product performance characteristics. The
Company and Suzuki are currently negotiating an agreement for the
supply/purchase of OMC-manufactured engines and parts and accessories to be
branded and sold under the Suzuki name. There can be no assurance that these
negotiations will result in a binding agreement between the Company and Suzuki.
SALES AND DISTRIBUTION
The Company believes that it has one of the world's largest marine dealer
networks with approximately 6,500 dealers worldwide, approximately 4,300 of the
dealers are in North America, and many of them sell both the Company's boats and
its engines. The Company's outboard engines and parts and accessories are
distributed in the United States and Canada through a dealer network. The
majority of those dealers purchase the Company's products directly from the
Company. The Company's boats are sold, for the most part, directly to
dealerships. Distribution of the Company's products outside the United States
and Canada is handled by various divisions and subsidiaries of the Company,
which sell to dealers and wholesale distributors throughout the world. The
Company's dealership agreements are typically nonexclusive and are executed on
an annual basis.
The Company sponsors various programs to provide its dealers with marketing
and financial assistance and to encourage them to offer broader lines of the
Company's products. Such programs include "cooperative" advertising, boat-show
promotions, dealer rebate programs and "floor plan" financing assistance and
various other credit arrangements. In a typical "floor plan" financing
arrangement, an institutional lender agrees to provide a dealer with a line of
credit in a specified amount for the purchase of inventory which secures such
credit. For certain lenders the Company, in turn, agrees to repurchase products
up to a specified amount in the event of repossession by the lender upon a
dealer's default. The Company's "floor plan" financing arrangements contain
provisions which limit the Company's obligations to approximately $31 million
per model year for a period not to exceed 30 months from the date of invoice.
This obligation automatically reduces over the 30-month period. The Company
resells any repurchased products at a discount. Losses incurred to date under
this program have not been material. In fiscal year 1998, the Company
repurchased approximately $4.2 million of repossessed products, which were
subsequently resold. The Company accrues for losses that are anticipated in
connection with expected repurchases.
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<PAGE> 10
The Company augments its dealers' marketing efforts by, among other
methods, advertising in boating and other recreational magazines, by furnishing
displays at regional, national or international boat shows and by sponsoring
various fishing tournaments and fishing professionals. In fiscal year 1998, the
Company refocused its marketing efforts to emphasize and reinforce its new
brand-realignment strategies.
As part of its sales efforts, the Company actively pursues original
equipment manufacturer ("OEM") and pre-rig arrangements relating to its outboard
engines. Among the Company's OEM arrangements are those with Mako Marine
International, Inc., Smoker Craft, Inc., Alumacraft Boat Company, Triton Boats
and Godfrey Conveyer Company. The Company also has pre-rig arrangements with
certain boat manufacturers, including Genmar Holdings, Inc. and Pro Line. Each
of these manufacturers has agreed to pre-rig certain of its products for
outboard engines sold by OMC to such manufacturer's dealers. In return, OMC pays
a fee to the boat manufacturer based on the number of pre-rigged boats sold by
the manufacturer.
MANUFACTURING OPERATIONS
The Company's principal outboard engine manufacturing and assembly
facilities are located in Illinois, Wisconsin, Georgia, North Carolina, Mexico,
China, Brazil and Hong Kong. Its principal boat manufacturing facilities are
located in Michigan, Florida, Tennessee, South Carolina, Oregon, Indiana,
Missouri, Australia and Canada. See "Item 2 -- Properties."
The Company has taken significant steps to improve the efficiency of its
manufacturing operations. In February 1998, the Company closed its Old Hickory,
Tennessee plant and moved its production to the Company's Murfreesboro,
Tennessee plant. In connection with this closure, the Company has accrued $1.3
million in severance costs in its allocation of purchase price in connection
with the Greenmarine Acquisition. The Murfreesboro plant now focuses on the
production of fiberglass, freshwater fishing boats. Concurrently, production of
certain of the Company's saltwater fishing boats was moved to the Company's
Columbia, South Carolina manufacturing facility. This move focused the Columbia
facility exclusively on saltwater fishing boats and located production of the
Company's saltwater fishing boats closer to the retail market for these boats.
In September 1998, the Company announced that, over the next two years, it
will be closing its engine manufacturing facilities located in Milwaukee,
Wisconsin and Waukegan, Illinois. In connection with these closures, the Company
recorded a restructuring charge of $98.5 million in fiscal year 1998. See "Item
7 -- Management's Discussion and Analysis of Financial Condition and Results of
Operation" and Note 4 of the Notes to the Consolidated Financial Statements
contained elsewhere herein. As part of the Company's plan to close these
facilities, substantially all of the production operations currently conducted
at these facilities will be outsourced to third-party vendors. These plant
closures will be effected in phases, and the production transfers associated
therewith already have begun and are expected to be completed by December 2000.
The Company has begun several important initiatives aimed at reducing costs
in its engine manufacturing facilities. These initiatives include: (i) measures
aimed at reducing purchasing costs through consolidation of vendors and
improvement of the design process; (ii) improving factory layouts and work
flows; (iii) standardizing labor inputs; (iv) outsourcing non-core capabilities;
and (v) improving quality control. The Company has implemented the first phase
of its lean manufacturing initiative at its main outboard engine manufacturing
and assembly facility in Calhoun, Georgia. The second phase of this initiative
is currently being implemented at additional sub-assembly facilities. The
Company has also identified potential vendors for outsourcing the production of
certain engine components.
For the fiscal year ended September 30, 1998, approximately 25% of the
Company's net sales were derived from operations conducted outside the United
States. As of September 30, 1998, approximately 15.8% of the Company's assets
were located outside the United States. Foreign operations are subject to
special risks that can materially affect sales of the Company and the value of
the Company's foreign assets, including currency exchange rate fluctuations, the
impact of inflation, government expropriation, exchange controls and other
restrictions on the repatriation of earnings, political instability, civil
insurrection and other risks. Changes in certain exchange rates could have an
adverse effect on the relative prices at which the Company and foreign
9
<PAGE> 11
competitors sell their products in the same market and on the Company's ability
to meet interest and principal obligations with respect to its U.S.
dollar-denominated debt (see "Item 7A -- Quantitative and Qualitative
Disclosures About Market Risk"). Similarly, the cost of certain items required
in the Company's operations may be affected by changes in the value of the
relevant currencies. Specifically, the substantial devaluation of the Japanese
yen since the beginning of the fourth quarter of fiscal year 1997 has improved
the competitive position of several of the Company's Japanese competitors by
decreasing the sales price in U.S. dollars of their Japanese products in the
U.S. market. While the Company hedges certain exposures to foreign currency
exchange rate changes arising in the ordinary course of business, there can be
no assurance that the Company will be successful and that shifts in currency
exchange rates will not have a material adverse effect on the Company. See "Item
7 -- Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition; Liquidity and Capital Resources" and Note 10
of the Notes to the Consolidated Financial Statements included elsewhere herein.
COMPETITION
The Company faces competition on international, national, regional and
local levels. Each of the markets in which the Company participates is highly
competitive. In addition, the Company faces competition generally from other
forms of recreational products and activities such as golf, camping and
recreational vehicles. Management believes that the Company is the world's
second largest manufacturer of outboard engines, with an approximate 35% share
of the United States outboard marine engine market and an estimated 26% share of
the worldwide market. Management also believes that the Company is the world's
largest manufacturer of aluminum boats and freshwater fiberglass fishing boats,
and the third largest manufacturer of recreational boats.
The marine engine market has high barriers to entry due to the capital
investment and technological expertise required in manufacturing marine engines.
As a result, the marine engine market is concentrated with two main U.S.-based
competitors, OMC and Brunswick Corporation, and three main Japan-based
manufacturers, Yamaha Motor Co., Ltd., American Honda Motor Co., Inc. and Suzuki
Motor Corporation. There are hundreds of manufacturers of boats which compete
with the Company, the largest of which in the United States are Brunswick,
Genmar Industries, Inc. and Tracker Marine, L.P. Many of the Company's
competitors in the boat manufacturing industry are smaller, regional builders
who may possess cost advantages over the Company's boat manufacturing
operations. Although the recreational boat market is fragmented, the top four
boat builders (including the Company) accounted for approximately 45% of the
U.S. market in 1997 in terms of unit sales.
Many of the Company's competitors, including Brunswick and Yamaha, are
large, vertically integrated companies that may have greater resources,
including financial resources, than the Company. However, the Company believes
it is well positioned within the recreational boating industry, as it is one of
only two integrated domestic manufacturers of both marine engines and boats. The
Company believes that this integration is a competitive advantage as the
industry continues to trend towards sales of integrated boat and engine
packages.
INTELLECTUAL PROPERTY
The Company's engine manufacturing business relies heavily on patented and
other proprietary technology. The Company relies upon a combination of patent,
trademark and trade secret laws, together with licenses, confidentiality
agreements and other contractual covenants to establish and protect its
technology and other intellectual property rights. Wherever legally permissible
and appropriate, the Company files applications to acquire its patents and
register its trademarks and service marks in the United States and many foreign
countries where the Company currently sells its products or could reasonably be
expected to sell products in future years. There can be no assurance that the
patent applications submitted by the Company or its licensors will result in
patents being issued or that, if issued, such patents or pre-existing patents
will afford adequate protection against competitors with similar technology.
There can also be no assurance that any patents issued to or licensed by the
Company will not be infringed upon or designed around by others, that others
will not obtain patents that the Company will need to license or design around,
that the Company's
10
<PAGE> 12
products will not inadvertently infringe upon the valid patents of others or
that others will not manufacture and distribute the Company's patented products
upon expiration of such patents. In addition, there can be no assurance that key
patents of the Company will not be invalidated or that the Company or its
licensors will have adequate funds to finance the high cost of prosecuting or
defending patent validity or infringement issues.
The Company has received correspondence from Orbital Engine Corporation
Limited ("Orbital") alleging that the Company's FICHT fuel-injected
150-horsepower engines infringe two Australian Orbital patents, which correspond
to three U.S. patents and to a number of foreign patents. The Company believes
that it has substantial defenses to these allegations, including that the three
corresponding U.S. patents are not infringed and/or are invalid. However, there
can be no assurance that Orbital will not commence litigation against the
Company with respect to this matter or, if such litigation is commenced, that
the Company's defenses will be successful. If Orbital is successful in an action
against the Company, the Company could be required to obtain a license from
Orbital to continue the manufacture, sale, use or sublicense of FICHT products
and technology or it may be required to redesign its FICHT products and
technology to avoid infringement. There can be no assurance that any such
license could be obtained or that any such redesign would be possible. There can
be no assurance that the failure to obtain any such license or effect any such
redesign, or any cost associated therewith, would not have a material adverse
effect on the Company. The sale of FICHT engines accounted for approximately 8%
of the Company's revenues in fiscal year 1998.
The Company also uses a number of trade names and trademarks in its
business, including Chris*Craft, Evinrude, FFI, FICHT, Four Winns, Grumman,
Hydra-Sports, Javelin, Johnson, Lowe, OMC, Princecraft, Roughneck, Sea Horse,
Sea Nymph, Seaswirl and Stratos. Wherever legally permissible and appropriate,
the Company files applications to acquire its patents and register its
trademarks and service marks in the United States and many foreign countries
where the Company currently sells its products or could reasonably be expected
to sell products in future years.
The Company has license agreements with FICHT GmbH & Co. KG (a
majority-owned subsidiary of the Company), Chris Craft Industries, Inc. and
Northrop Grumman Corporation. The Company has an exclusive, worldwide license
with its majority-owned subsidiary FICHT GmbH for the marine industry for the
FICHT fuel-injection system. This license is royalty bearing and is active for
the duration of each patent existing at the time that the license agreement was
executed in April 1992 or filed within one year thereafter. The Company also has
an exclusive, worldwide license with its majority-owned subsidiary FICHT GmbH
for all non-automotive applications of the FICHT fuel-injection technology. This
license is royalty bearing and is active for the duration of each patent
existing at the time that the license agreement was executed in February 1997 or
filed within one year thereafter. The Company's license with Chris Craft
Industries, Inc. is an exclusive, perpetual, royalty bearing license to use the
Chris*Craft trade name and trademark for boats and certain boat products
worldwide. The Company's Grumman license is an exclusive, royalty-free license
to use the Grumman trade name and trademark for recreational aluminum boats and
canoes in territories which include the United States and Europe. This license
expires on December 31, 1999, however it is subject to unlimited ten year
renewal terms at the Company's option.
RESEARCH AND DEVELOPMENT
In the fiscal years 1998, 1997 and 1996, OMC spent $36.8 million, $38.2
million and $41.8 million, respectively, on research and development activities
relating to the development of new products and improvement of existing
products, including the FICHT fuel-injection technology. All of these activities
were financed by OMC. The EPA has adopted regulations governing emissions from
marine engines. The regulations relating to outboard engines phase in over nine
years, beginning in model year 1998 and concluding in model year 2006. With
respect to personal watercraft, the regulations phase in over eight years,
beginning in model year 1999 and concluding in model year 2006. Marine engine
manufacturers will be required to reduce hydrocarbon emissions from outboard
engines, on average, by 8.3% per year beginning with the 1998 model year, and
emissions from personal watercraft by 9.4% per year beginning in model year
1999. In 1994, the Company announced Project LEAP, a project to develop new
low-emission technologies and to convert its entire outboard product line to
low-emission products within the next decade. To date, the Company estimates
that it has spent approximately $50 million on Project LEAP, including the
introduction of its new FICHT
11
<PAGE> 13
fuel-injection technology and four-stroke outboard engines, and by the year
2006, the Company is expected to have expended an aggregate of approximately
$90.0 million to meet the EPA's new emission standards. Compliance with these
standards will add cost to the Company's engine products in the short-term.
However, this situation is not seen as a major deterrent to sales since value
will be added to its products at the same time that the entire industry is faced
with developing solutions to the same regulatory requirements. The Company
believes this situation will not have a material impact on future results of
operations or the financial condition of the Company. See "Item
7 -- Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ENVIRONMENTAL MATTERS
The Company is subject to regulation under various federal, state and local
laws relating to the environment and to employee safety and health. These laws
include those relating to the generation, storage, transportation, disposal and
emission into the environment of various substances, those relating to drinking
water quality initiatives, and those which allow regulatory authorities to
compel (or seek reimbursement for) clean-up of environmental contamination at
its owned or operated sites and at facilities where its waste is or has been
disposed. Permits are required for operation of the Company's business
(particularly air emission permits), and these permits are subject to renewal,
modification and, in certain circumstances, revocation. The Company believes
that it is in substantial compliance with such laws and permit requirements,
except where such non-compliance is not expected to have a material adverse
effect.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA" or "Superfund") and earlier state laws impose joint, strict, and
several liability on (i) owners or operators of facilities at, from, or to which
a release of hazardous substances has occurred; (ii) parties who generated
hazardous substances that were released at such facilities; and (iii) parties
who transported or arranged for the transportation of hazardous substances to
such facilities. A majority of states have adopted Superfund statutes comparable
to, and in some cases more stringent than, CERCLA. The Company has been notified
that it is named a potentially responsible party ("PRP") at various sites for
study and clean-up costs. In some cases there are several named PRPs and in
others there are hundreds. The Company generally participates in the
investigation or clean-up of these sites through cost sharing agreements with
terms which vary from site to site. Costs are typically allocated based upon the
volume and nature of the materials sent to the site. However, as a PRP, the
Company can be held jointly and severally liable for all environmental costs
associated with a site.
Once the Company becomes aware of its potential liability at a particular
site, it uses its experience to determine if it is probable that a liability has
been incurred and whether or not the amount of the loss can be reasonably
estimated. Once the Company has sufficient information necessary to support a
reasonable estimate or range of loss for a particular site, an amount is added
to the Company's aggregate environmental contingent liability accrual. The
amount added to the accrual for the particular site is determined by analyzing
the site as a whole and reviewing the probable outcome for the remediation of
the site. This is not necessarily the minimum or maximum liability at the site
but, based upon the Company's experience, most accurately reflects the Company's
liability based on the information currently available. The Company takes into
account the number of other participants involved in the site, their experience
in the remediation of sites and the Company's knowledge of their ability to pay.
As a general rule, the Company accrues remediation costs for continuing
operations on an undiscounted basis and accrues for normal operating and
maintenance costs for site monitoring and compliance requirements. The Company
also accrues for environmental close-down costs associated with discontinued
operations or facilities, including the environmental costs of operation and
maintenance until disposition. At September 30, 1998, the Company has accrued
approximately $24 million for costs relating to remediation at contaminated
sites including operation and maintenance for continuing and closed-down
operations. The possible recovery of insurance proceeds has not been considered
in estimating contingent environmental liabilities. Each site, whether or not
remediation studies have commenced, is reviewed on a quarterly basis and the
aggregate environmental contingent liability accrual is adjusted accordingly.
Therefore, the Company believes the accruals accurately reflect the Company's
liability based upon current information.
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<PAGE> 14
The EPA has adopted regulations governing emissions from marine engines.
The regulations relating to outboard engines phase in over nine years, beginning
in model year 1998 and concluding in model year 2006. With respect to personal
watercraft, the regulations phase in over eight years, beginning in model year
1999 and concluding in model year 2006. Marine engine manufacturers will be
required to reduce hydrocarbon emissions from outboard engines, on average, by
8.3% per year beginning with the 1998 model year, and emissions from personal
watercraft by 9.4% per year beginning in model year 1999. In 1994, the Company
announced Project LEAP, a project to convert its entire outboard product line to
low-emission products within the next decade. To date, the Company estimates
that it has spent approximately $50.0 million on Project LEAP, including the
introduction of its new FICHT fuel-injection technology, and by the year 2006
the Company is expected to have expended an aggregate of approximately $90.0
million to meet the EPA's new emissions standards. The Company does not believe
that compliance with these standards, which will add cost to the Company's
engine products and will initially result in a lower margin to the Company, will
be a major deterrent to sales. The Company believes that its new compliant
technology will add value to its products at the same time that the entire
industry is faced with developing solutions to the same regulatory requirements.
The Company does not believe that compliance with these new EPA regulations will
have a material adverse effect on its financial condition or future results of
operations.
On December 10, 1998 the California Air Resources Board ("CARB") adopted
emissions standards for outboard engines and personal watercraft sold in the
State of California that would require compliance with the EPA's year 2006
emissions standards in 2001, and significantly more stringent standards in 2004
and 2008. All manufacturers of outboard engines and personal watercraft will be
affected by the regulations. While the Company has not been able to fully assess
the impact that such standards will have on its business, the Company has begun
to assess possible responses to these standards, including a possible legal
challenge. The Company's FICHT fuel-injection and four-stroke outboard engines
currently comply with CARB's 2001 standards, and all but one of these engines
comply with CARB's 2004 standard. The Company believes that this one engine will
be in compliance by 2004. In addition, based on current technology, CARB's year
2008 standards would require the Company to turn to untested technologies in an
attempt to achieve compliance. The California market represents only 2.87% of
the Company's North American sales of outboard engines.
Additionally, certain states have required or are considering requiring a
license to operate a recreational boat. While such licensing requirements are
not expected to be unduly restrictive, regulations may discourage potential
first-time buyers, which could affect the Company's business, financial
condition and results of operations. In addition, certain state and local
government authorities are contemplating regulatory efforts to restrict boating
activities, including the use of engines, on certain inland bodies of water. In
one instance, the East Bay Municipal Utility District, located near Oakland,
California, has adopted regulations that, on one of the three water bodies under
its jurisdiction, will limit certain gasoline engine use effective January 1,
2002. While the Company cannot assess the impact that any such contemplated
regulations would have on its business until such regulations are formally
enacted, depending upon the scope of any such regulations, they may have a
material adverse effect on the Company's business. The Company, however, does
not believe that the regulations adopted by the East Bay Municipal Utility
District will have a material adverse effect on the Company's business.
The Company cannot predict the environmental legislation or regulations
that may be enacted in the future or how existing or future laws or regulations
will be administered or interpreted. Compliance with more stringent laws or
regulations, as well as more vigorous enforcement policies of the regulatory
agencies or stricter interpretation of existing laws, may require additional
expenditures by the Company, some or all of which may be material.
In October 1996, the American Institute of Certified Public Accountants
issued Statement of Position 96-1 ("SOP 96-1"), "Environmental Remediation
Liabilities", which provides authoritative guidance on the recognition,
measurement, display and disclosure of environmental remediation liabilities.
The Company adopted SOP 96-1 in the quarter ended September 30, 1997. The change
in accounting estimate required the Company to accrue for future normal
operating and maintenance costs for site monitoring and compliance requirements
at particular sites. The initial expense for implementation of SOP 96-1 was $7.0
million, charged
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<PAGE> 15
to selling, general and administrative expense in the quarter ended September
30, 1997. See Note 18 of the Notes to the Consolidated Financial Statements
contained elsewhere herein.
RAW MATERIALS
The principal raw materials required in the Company's manufacturing
operations are aluminum, resin and fiberglass, all of which are purchased at
competitive or prevailing market prices. The Company has supply arrangements for
the purchase of resin and aluminum. From time to time, the Company has also
purchased commodity options to hedge anticipated price fluctuations with respect
to purchases of aluminum. See "Item 7A -- Quantitative and Qualitative
Disclosures About Market Risk" and Note 10 of the Notes to the Consolidated
Financial Statements contained elsewhere herein. The Company believes that
adequate sources of supply exist and will continue to exist, at competitive
prices, for all of the Company's raw material requirements.
EMPLOYEES
As of September 30, 1998, approximately 6,400 people were employed by OMC
and its subsidiaries, consisting of 1,316 salaried and 5,086 hourly employees.
Approximately 17% of the Company's employees are represented by one of three
unions. The Laborers International Union of North America ("LIUNA") represents
approximately 515 employees at the Calhoun, Georgia facility; the independent
Marine Machinists Association ("IMMA") represents approximately 433 employees at
the Waukegan, Illinois facility; and the United Steel Workers of America
("USWA") represents approximately 353 employees at the Milwaukee, Wisconsin
facility. The Company's agreements with the LIUNA, IMMA and USWA are effective
through September 30, 2000, October 30, 1999 and March 31, 2003, respectively.
The Company believes that its labor relations are satisfactory.
In connection with the Company's planned closure over the next two years of
its manufacturing facilities in Milwaukee, Wisconsin and in Waukegan, Illinois,
the Company's workforce will be reduced by approximately 950 salaried and hourly
employees by the end of such closure period. See Note 4 of the Notes to the
Consolidated Financial Statements contained elsewhere herein.
ITEM 2. PROPERTIES
The following table sets forth the Company's material facilities as of
September 30, 1998.
<TABLE>
<CAPTION>
OWNED OR LEASED
LOCATION FACILITY TYPE/USE (LEASE EXPIRATION) SQUARE FOOTAGE
- -------- ----------------- ------------------ --------------
<S> <C> <C> <C>
Waukegan, IL Worldwide headquarters; outboard
engine component manufacturing Owned 1,400,000
Delavan, WI Outboard engine component
manufacturing Leased (Aug. 2006) 40,000
Milwaukee, WI Outboard engine component
manufacturing Owned 375,000
Burnsville, NC Outboard engine component
manufacturing Owned 290,000
Spruce Pine, NC Outboard engine component
manufacturing Owned 100,000
Andrews, NC Outboard engine component
manufacturing Owned 150,000
Calhoun, GA Outboard engine assembly Owned 290,000
Beloit, WI Worldwide parts and accessories
distribution center Owned 483,000
Waukegan, IL Distribution center Leased (Jan. 2003) 180,000
Morrow, GA Distribution center Owned 86,000
Parsippany, NJ Distribution center Owned 88,000
Dallas, TX Distribution center Owned 86,000
Kent, WA Distribution center Leased (Dec. 2000) 56,000
Sunrise, FL Sales Office Leased (Sept. 2001) 8,000
Cadillac, MI Boat manufacturing Owned 364,000
</TABLE>
14
<PAGE> 16
<TABLE>
<CAPTION>
OWNED OR LEASED
LOCATION FACILITY TYPE/USE (LEASE EXPIRATION) SQUARE FOOTAGE
- -------- ----------------- ------------------ --------------
<S> <C> <C> <C>
Lebanon, MO Boat manufacturing Owned 227,000
Murfreesboro, TN Boat manufacturing Owned 275,000
Columbia, SC Boat manufacturing Owned 178,000
Culver, OR Boat manufacturing Owned 166,000
Syracuse, IN Boat manufacturing Owned 235,000
Sarasota, FL Boat manufacturing Owned 153,000
Princeville,
Quebec, Canada Boat manufacturing Owned 417,000
Juarez, Chihuahua,
Mexico Outboard engine component
manufacturing Owned 200,000
Dongguan, China Outboard engine component
manufacturing Leased (Apr. 1999) 65,000
Hong Kong Outboard engine and component
manufacturing and distribution
center Leased (Jun. 2047) 35,000
Manaus, Brazil Outboard engine and component assembly
and fabrication Leased (Aug. 1999) 46,000
Altona, Australia Boat manufacturing and assembly Owned 28,000
Yatala, Australia Boat manufacturing and assembly Owned 37,000
Bankstown,
Australia Office; distribution center Leased (Dec. 2004) 54,000
Gent, Belgium Office; warehouse Leased (Apr. 2003) 13,000
Bankstown,
Australia Office; warehouse Leased (Apr. 2001) 54,000
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
The Company is engaged in a substantial number of legal proceedings arising
in the ordinary course of business. While the result of these proceedings cannot
be predicted with any certainty, based upon the information presently available,
the Company is of the opinion that the final outcome of all such proceedings
should not have a material adverse effect on the financial condition or the
results of operations of the Company. See also "Item
1 -- Business -- Environmental Matters."
The Company has received correspondence from Orbital Engine Corporation
Limited ("Orbital") alleging that the Company's FICHT fuel-injected
150-horsepower engines infringe two Australian Orbital patents, which correspond
to three U.S. patents and to a number of foreign patents. The Company believes
that it has substantial defenses to these allegations, including that the three
corresponding U.S. patents are not infringed and/or are invalid. However, there
can be no assurance that Orbital will not commence litigation against the
Company with respect to this matter or, if such litigation is commenced, that
the Company's defenses will be successful. If Orbital is successful in an action
against the Company, the Company could be required to obtain a license from
Orbital to continue the manufacture, sale, use or sublicense of FICHT products
and technology or it may be required to redesign its FICHT products and
technology to avoid infringement. There can be no assurance that any such
license could be obtained or that any such redesign would be possible. There can
be no assurance that the failure to obtain any such license or effect any such
redesign, or any cost associated therewith, would not have a material adverse
effect on the Company. The sale of FICHT engines accounted for approximately 8%
of the Company's revenues in fiscal 1998.
Products sold or serviced by the Company may expose it to potential
liability for personal injury or property damage claims relating to the use of
those products. Historically, the resolution of product liability claims has not
materially affected the Company. The Company maintains a Domestic Products
Liability/Protection and Indemnity Self-Insured Retention Program. The Company
has a Primary Self-Insured Retention for any one accident or occurrence of
$250,000 with an underlying Self-Insured Retention of $2,000,000 per accident
with a $2,000,000 per year aggregate. Product liability claims occurring outside
the United States are covered by insurance with a limit of $1,000,000 per
occurrence, $2,000,000 aggregate. In the
15
<PAGE> 17
event that the underlying products liability insurance or retentions are
exhausted, there is excess coverage up to $100,000,000 per occurrence and in the
aggregate.
See Note 18 of the Notes to the Consolidated Financial Statements contained
elsewhere herein.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the 1998 fiscal year, there were no matters
submitted to a vote of security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
There were two record holders of common stock of OMC at September 30, 1998.
There is no established public trading market for the Company's common stock.
During fiscal year 1998, the Company granted an aggregate of 991,745 options to
156 employees.
ITEM 6. SELECTED FINANCIAL DATA
The following summary represents certain financial information for the five
fiscal years ended September 30, 1998.
16
<PAGE> 18
<TABLE>
<CAPTION>
POST-MERGER PRE-MERGER COMPANY
COMPANY ----------------------------------------------------
AT OR FOR FISCAL YEAR AT OR FOR FISCAL YEARS ENDED SEPTEMBER 30,
ENDED SEPTEMBER 30, ----------------------------------------------------
1998 1997 1996 1995 1994
--------------------------- ---------- ---------- ---------- ----------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
<S> <C> <C> <C> <C> <C>
Net sales................. $1,025.7 $ 979.5 $1,121.5 $1,229.2 $1,078.4
Net earnings (loss)....... (150.5) (79.1) (7.3) 51.4 48.5
Average number of shares
of common stock
outstanding and common
stock equivalents, if
applicable.............. 20.4 20.2 20.1 20.1 20.0
Per average share of
common stock --
Net earnings (loss)
Primary.............. (7.38) (3.91) (.36) 2.56 2.42
Fully diluted........ (7.38) (3.91) (.36) 2.33 2.22
Dividends declared........ -- .20 .40 .40 .40
Total assets(1)........... 1,082.1 1,094.8 873.7 907.0 817.1
Long-term debt............ 247.9 103.8 177.6 177.4 178.2
OTHER DATA:
EBITDA (as defined)(2).. 20.0 (0.9) 77.3 118.7 93.4
Net cash provided by
operating
activities........... 60.3 (9.2) 91.1 51.4 57.3
Net cash provided by
investing
activities........... (24.0) (26.1) (50.5) (65.8) (63.0)
Net cash provided by
financing
activities........... (45.1) (3.7) (2.9) (8.1) (19.7)
Depreciation and
amortization
(including
amortization of debt
discount)............ 50.1 57.0 54.7 47.6 44.0
Amortization of debt
discount............. 0.8 2.7 0.8 1.0 0.8
Capital expenditures.... 34.4 36.3 52.7 66.5 68.2
Ratio of earnings to
fixed charges........ N/A N/A N/A 3.5x 4.3x
</TABLE>
- ---------------
(1) Total assets at September 30, 1998 and September 30, 1997 are not comparable
with 1996, 1995 and 1994 due to the application of purchase accounting. See
"Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(2) "EBITDA" represents earnings from operations (including income derived from
the Company's stern drive joint venture, net of joint venture expenses)
before depreciation and amortization (excluding debt discount amortization)
and restructuring charges. For the fiscal year ended September 30, 1998 and
September 30, 1996, "EBITDA" does not include restructuring charges of $98.5
million and $25.6 million, respectively. See Note 4 of the Notes to the
Consolidated Financial Statements contained elsewhere herein. For fiscal
year ended September 30, 1997, "EBITDA" does not include a one-time $11.8
million charge due to a change of control expense related to compensation
expenses resulting from the change of control as a result of the Greenmarine
Acquisition. EBITDA is widely used by securities analysts and is presented
here to provide additional information about the Company's ability to meet
its future debt service, capital expenditures and working capital
requirements. While management believes that EBITDA is an appropriate
approximation of the Company's liquidity, EBITDA should not be considered as
an alternative to, or more meaningful than, income from operations or to
cash flows from operating activities (as determined in accordance with
generally accepted accounting principles), as a measure of liquidity, and
should not be construed as a measure of liquidity or as an indication of a
company's operating performance. EBITDA as presented herein may be
calculated differently by other companies and, accordingly, the amounts
presented herein may not be comparable to similarly titled measurements of
other companies.
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<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the more
detailed information and Consolidated Financial Statements of the Company,
together with the notes thereto, included elsewhere herein. The Company restated
its consolidated financial statements for its fiscal year ended September 30,
1997 in connection with its revising the accounting for its acquisition by
Greenmarine Holdings. The Company also restated its financial statements for its
fiscal quarters ended December 31, 1997, March 31, 1998, and June 30, 1998. The
restatement resulted from management's reconsideration of the periods to which
the reorganization plan expenses incurred in connection with the acquisition by
Greenmarine Holdings should be charged. As of September 30, 1997, management had
recorded these expenses as purchase accounting adjustments. Upon further
consideration, management believed that these charges were more appropriately
reported in fiscal year 1998. Operational refinements during fiscal year 1998,
for example, changes in the specific plants to be closed, and the fact that
certain parts of the plan were not implemented within a one year time period,
resulted in a decision that these expenses were, using interpretations of
authoritative accounting literature, more appropriately reported in fiscal year
1998. As a result, the Company's September 30, 1997 financial statements were
restated to reverse $122.9 million of previously recorded accrued liabilities
and contingencies with a corresponding reduction in goodwill. The Company has
recognized approximately $149 million in operating expenses and restructuring
costs in fiscal year 1998 to record its reorganization plan and contingencies.
The Company also reclassified certain deferred tax items and a valuation reserve
to more properly aggregate them in the appropriate asset and liability accounts.
Separately, the Company reduced the deferred tax assets and the corresponding
valuation allowance to reflect the tax impacts of the purchase accounting
adjustments. As part of the purchase accounting adjustments, the Company also
reclassified a valuation reserve for a joint venture investment to "other
assets" from "accrued liabilities". Such reclassifications did not change net
income in the Statement of Consolidated Earnings for the fiscal year ended
September 30, 1997 but did have the effect of reducing earnings from operations
by approximately $150 million for the fiscal year ended September 30, 1998. This
reduction included a restructuring charge (see "-- Results of Operations" below)
of $98.5 million and additional operating expenses of $53.3 million. The
restatements did not have an effect on the Company's Statement of Consolidated
Cash Flows (other than certain reclassifications in the cash flows from
operations) for fiscal year 1997 or fiscal year 1998. See Note 4 of the Notes to
the Consolidated Financial Statements contained elsewhere herein.
Industry Overview. According to data published by the NMMA, the
recreational boating industry generated approximately $19.3 billion in domestic
retail sales in 1997, including approximately $8.8 billion in sales of boats,
engines, trailers and accessories. In addition, according to statistics compiled
by the U.S. Department of Commerce, recreational products and services represent
one of the fastest growing segments of U.S. expenditures. Although unit sales in
the marine industry in recent years have been declining or flat, the Company may
benefit from recent industry-wide efforts in the U.S. designed to increase the
share of recreational expenditures related to boating. The NMMA, MRAA and other
marine industry leaders, including the Company, have formed a joint task force
to implement initiatives to improve the quality of the industry's marine dealer
network, improve the overall boating experience for consumers and enhance the
awareness of boating as a recreational activity through various advertising
programs. The Company believes that the overall shift in spending of
discretionary income towards recreational products and services and recent
efforts to increase the share of recreational expenditures directed towards
boating may contribute to growth in the recreational boating industry over the
next several years.
Cyclicality; Seasonality; Weather Conditions. The recreational marine
industry is highly cyclical. Industry sales, including sales of the Company's
products, are closely linked to the conditions of the overall economy and are
influenced by local, national and international economic conditions, as well as
interest rates, consumer spending, technology, dealer effectiveness,
demographics, fuel availability and government regulations. In an economic
downturn, consumer discretionary spending levels are reduced, often resulting in
disproportionately large declines in the sale of relatively expensive items such
as recreational boats. Similarly, rising interest rates could have a negative
impact on consumers' ability, or willingness to obtain financing from lenders,
which could also adversely affect the ability of the Company to sell its
products. Even if prevailing
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<PAGE> 20
economic conditions are positive, consumer spending on non-essential goods such
as recreational boats can be adversely affected due to declines in consumer
confidence levels. According to data published by the NMMA, total unit sales of
outboard boats in the United States fell from a high of 355,000 units in 1988 to
192,000 units in 1992, while total unit sales of outboard engines in the United
States fell from a high of 460,000 units to 272,000 units during the same time
period. The sales decline in the marine industry during this period was the
worst such decline in the last 30 years. According to data published by the
NMMA, 1995 annual U.S. purchases of boats and engines increased to 336,960 and
317,000, respectively, but unit sales declined in 1996 and 1997, when reported
U.S. sales of boats and engines were 320,850 and 308,000, and 304,600 and
302,000, respectively. The Company believes these declines were partially due to
adverse weather conditions.
The recreational marine industry, in general, and the business of the
Company are seasonal due to the impact of the buying patterns of dealers and
consumers. The Company's peak revenue periods historically have been its fiscal
quarters ending June 30 and September 30, respectively. Accordingly, the
Company's receivables, inventory and accompanying short-term borrowing to
satisfy working capital requirements are usually at their highest levels in the
Company's fiscal quarter ending March 31 and decline thereafter as the Company's
products enter the peak consumer selling seasons. Short-term borrowings averaged
$35.7 million in fiscal year 1998, with month-end peak borrowings of $70.7
million in February and March 1998. Because of the seasonality of the Company's
business, the results of operations for any fiscal quarter are not necessarily
indicative of the results for the full year. Additionally, an event which
adversely affects the Company's business during any of these peak periods could
have a material adverse effect on the Company's financial condition or results
of operations for the full years.
The Company's business is also affected by weather patterns which may
adversely impact the Company's operating results. For example, excessive rain
during the Spring and Summer, the peak retail sales periods, or unseasonably
cool weather and prolonged winter conditions, may curtail customer demand for
the Company's products. Although the geographic diversity of the Company's
dealer network may reduce the overall impact on the Company of adverse weather
conditions in any one market area, such conditions may continue to represent
potential adverse risks to the Company's financial performance.
Acquisition by Greenmarine Holdings LLC. On September 12, 1997,
Greenmarine Holdings acquired control of approximately 90% of the then
outstanding shares of common stock (the "Pre-Merger Company Shares") of the
Company through an $18.00 per share tender offer pursuant to Greenmarine
Holdings' Offer to Purchase dated August 8, 1997 (the "Tender Offer"). On
September 30, 1997, Greenmarine Holdings acquired the untendered Pre-Merger
Company Shares by merging its acquisition subsidiary (i.e., Greenmarine
Acquisition Corp.) with and into the Company (the "Merger", and together with
the Tender Offer, the "Greenmarine Acquisition"). As a result of the Merger, the
Company became a wholly-owned subsidiary of Greenmarine Holdings; each
untendered Pre-Merger Company Share outstanding immediately prior to the Merger
was converted into the right to receive a cash payment of $18.00 per share; and
20.4 million shares of new common stock of the Company were issued to
Greenmarine Holdings. The Greenmarine Acquisition was completed for aggregate
consideration of approximately $373.0 million and has been accounted for under
the purchase method of accounting. Accordingly, the purchase price has been
allocated to assets acquired and liabilities assumed based on fair market values
at the date of acquisition (i.e., September 30, 1997). In the opinion of
management, accounting for the purchase as of September 30, 1997 instead of
September 12, 1997 did not materially affect the Company's results of operations
for fiscal 1997. The fair values of tangible assets acquired and liabilities
assumed were $883.6 million and $817.8 million, at September 30, 1997,
respectively. In addition, $83.9 million of the purchase price was allocated to
intangible assets for trademarks, patents and dealer network. The excess
purchase price over fair value of the net assets acquired was $127.3 million and
has been classified as goodwill in the Statement of Consolidated Financial
Position as of September 30, 1997. At September 30, 1998, the allocation of
purchase price to assets acquired and liabilities assumed in the Greenmarine
Acquisition was finalized. The material adjustments from the preliminary
purchase price allocation at September 30, 1997 included an adjustment of $5.3
million to reverse a portion of a valuation allowance established for the
disposition of the Company's joint venture agreement (see Note 3 of the Notes to
the Consolidated Financial Statements contained elsewhere herein) and reverse
goodwill accordingly. In addition, the Company reduced its purchase accounting
reserves and corresponding goodwill, by $1.4 million
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<PAGE> 21
for revisions of certain estimates. The goodwill related to the acquisition will
be amortized using the straight-line method over a period of 40 years.
New Management Initiatives. Since the Greenmarine Acquisition, the Company
has assembled a new, highly-experienced senior management team led by David D.
Jones. The new senior management team has developed a turnaround strategy to
capitalize on the Company's strong market position and leading, well-recognized
brand names and to take advantage of anticipated growth in the recreational
marine industry. Under its new management, the Company has also developed a
business reorganization plan to realign and consolidate its products offered in
the marketplace, and to improve existing manufacturing processes that will
enable the Company to increase production efficiency and asset utilization. This
turnaround strategy and reorganization plan includes the elimination and/or
consolidation of certain of the Company's products and includes the closing
and/or consolidation of certain of the Company's manufacturing facilities and
corresponding involuntary employee terminations.
In January 1998, the Company began implementing its strategy and
reorganization plan by closing its Old Hickory, Tennessee facility and
consolidating the freshwater fishing operations at the Company's Murfreesboro,
Tennessee facility. The Company also began, and has now completed, the
consolidation of certain of its saltwater fishing operations. In addition, the
Company reduced its workforce by approximately 540 employees as of March 31,
1998, primarily within the Company's boat operations. The Company has accounted
for liabilities assumed in connection with the severance benefits associated
with the closure of the Old Hickory facility ($1.3 million) as part of the
purchase price allocation at September 30, 1997.
In March 1998, the Company announced a lean manufacturing initiative for
its marine power manufacturing operations. Lean manufacturing is a disciplined
approach for implementing proven manufacturing methodologies in order to reduce
manufacturing costs through improved employee productivity and reduced
inventory. The first phase of this initiative was introduced at the Company's
final assembly plant in Calhoun, Georgia and, as a second phase, this initiative
has been expanded to certain of the Company's sub-assembly facilities. This
initiative is expected to reduce costs, shorten production times, lower
inventory and improve the Company's responsiveness to dealer and consumer
demand. The Company also began implementing a strategic purchasing program in
January 1998. This program is designed to reduce purchasing costs by
consolidating purchasing across vendors, integrating suppliers into the product
design process at an early stage and designing products for lower cost.
In April 1998, the Company announced that it would close its research
facility in Waukesha, Wisconsin and relocate these operations to other
facilities. The Company has accounted for its closure of the Waukesha, Wisconsin
facility in its fiscal year ended September 30, 1998 results by recording
approximately $2.5 million of expenses in its Statement of Consolidated
Earnings.
In June 1998, the Company announced the realignment of its aluminum boat
brands. The most popular models from the Grumman, Roughneck and Sea Nymph lines,
were consolidated into the Lowe brand which has been positioned to offer a full
line of aluminum boats. The consolidation is a further step in the Company's
efforts to reduce competition among its own brands in every aluminum market and
as a way to help its dealers offer a complete line of boats to meet customer
demand, rather than having to select from multiple boat company lines.
Also in June 1998, the Company announced that it had entered into a
long-term strategic business agreement with Johnson Worldwide Associations, Inc.
("JWA") to supply a range of private labeled electric trolling motors designed
to OMC'S specifications. This will give OMC a full line of industry leading,
current technology electric trolling motors to offer its dealers.
In July 1998, the Company announced a new brand strategy for its Johnson
and Evinrude outboard engines. This strategy is designed to differentiate its
Johnson and Evinrude lines, which had become identical engines that were
marketed under different names. Upon implementing this strategy, Johnson and
Evinrude engines will become readily distinguishable from each other and will be
marketed to target different consumers. The Company's Evinrude brand will
comprise two-stroke models incorporating the Company's FICHT fuel-injection
technology and certain four-stroke engines. The Evinrude brand will be marketed
as the
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<PAGE> 22
Company's "premium" outboard marine engine brand. The Company's Johnson brand
will comprise a full line of traditional carbureted two-stroke models. As a
result, while OMC dealers previously sold either Johnson or Evinrude engines,
they will now sell both engine lines.
On September 24, 1998, the Company announced that it would be closing its
Milwaukee, Wisconsin and Waukegan, Illinois facilities by the year 2000. A
restructuring charge of approximately $98 million was recognized in the fourth
quarter of fiscal 1998 and includes charges for the costs associated with
closing these two facilities, and the related employee termination benefits for
approximately 950 employees. See Note 4 of the Notes to the Consolidated
Financial Statements contained elsewhere herein. The Company plans to outsource
substantially all of the manufacturing of parts currently produced by these two
facilities to third party vendors. It has started to obtain proposals from
vendors and is currently reviewing the proposals received in anticipation of
outsourcing production. The Company anticipates substantial completion of the
restructuring plan by the end of year 2000.
Introduction of FICHT Engines; Regulatory Compliance. The EPA has adopted
regulations governing emissions from two-stroke marine engines. As adopted, the
regulations as they relate to outboard engines phase in over nine years,
beginning in model year 1998 and concluding in model year 2006. With respect to
personal watercraft, the regulations phase in over eight years, beginning in
model year 1999 and concluding in model year 2006. Marine engine manufacturers
will be required to reduce hydrocarbon emissions from outboard engines, on
average by 8.3% per year through model year 2006 beginning with the 1998 model
year, and emissions from personal watercraft by 9.4% per year through model year
2006 beginning in model year 1999. In 1994, the Company announced "Project
LEAP", a project to convert its entire outboard product line to low-emissions
products within the next decade. Partly in response to these EPA emission
standards, the Company introduced its Evinrude engines with FICHT fuel-injection
technology, which offer an average hydrocarbon emission reduction of 80% and an
approximate 35% increase in fuel economy depending on the application. The
higher manufacturing costs of the FICHT fuel injected engines will result
initially in a lower margin to the Company; however, the Company has implemented
several initiatives to reduce the manufacturing costs of its new engines.
Because of the higher retail costs of engines incorporating the FICHT
technology, consumer acceptance of the new engines may be restrained as long as
less expensive engine models, which may or may not meet the new EPA standards,
continue to be available. Through September 30, 1998, the Company estimates that
it has spent approximately $50 million on low-emission technology, and by the
year 2006 the Company is expected to spend an aggregate of approximately $90.0
million to meet the EPA's new emission standards.
In fiscal year 1997, the Company became aware of certain performance issues
associated with its FICHT engines. In April 1998, the Company began to identify
the causes of these performance issues and an upgrade kit was prepared and
distributed. The Company established a reserve for the correction of the
problems in fiscal year 1998. This resulted in an approximate $7 million
increase in the Company's warranty reserve for fiscal year 1998.
The Company has received correspondence from Orbital Engine Corporation
Limited ("Orbital") alleging that the Company's FICHT fuel-injected
150-horsepower engines infringe two Australian Orbital patents, which correspond
to three U.S. patents and to a number of foreign patents. The Company believes
that it has substantial defenses to these allegations, including that the three
corresponding U.S. patents are not infringed and/or are invalid. However, there
can be no assurance that Orbital will not commence litigation against the
Company with respect to this matter or, if such litigation is commenced, that
the Company's defenses will be successful. If Orbital is successful in an action
against the Company, the Company could be required to obtain a license from
Orbital to continue the manufacture, sale, use or sublicense of FICHT products
and technology or it may be required to redesign its FICHT products and
technology to avoid infringement. There can be no assurance that any such
license could be obtained or that any such redesign would be possible. There
also can be no assurance that the failure to obtain any such license or effect
any such redesign, or any cost associated therewith, would not have a material
adverse effect on the Company. The Company determined a range of potential
outcomes for this matter and recorded a liability in its September 1998
financial statements (See Note 18 of the Notes to the Consolidated Financial
Statements contained
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<PAGE> 23
elsewhere herein). The sale of FICHT engines accounted for approximately 8% of
the Company's revenues in fiscal year 1998.
The Company does not believe that compliance with the EPA's new emission
standards, which will add cost to the Company's engine products and will
initially result in a lower margin to the Company, will be a major deterrent to
sales. The Company believes that its new compliant technology will add value to
its products at the same time that the entire industry is faced with developing
solutions to the same regulatory requirements. In addition, the Company has
implemented several initiatives to reduce the manufacturing costs of its new
engines. Although there can be no assurance, the Company does not believe that
compliance with these new EPA regulations will have a material adverse effect on
future results of operations or the financial condition of the Company.
On December 10, 1998, the California Air Resources Board ("CARB") adopted
emissions standards for outboard engines and personal watercraft sold in the
State of California that would require compliance with the EPA's year 2006
emissions standards in 2001, and significantly more stringent standards in 2004
and 2008. All manufacturers of outboard engines and personal watercraft will be
affected by the regulations. While the Company has not been able to fully assess
the impact that such standards will have on its business, the Company has begun
to assess possible responses to these standards, including a possible legal
challenge. The Company's FICHT fuel-injection and four-stroke outboard engines
currently comply with CARB's 2001 standards, and all but one of these engines
comply with CARB's 2004 standard. The Company believes that this one engine will
be in compliance by 2004. In addition, based on current technology, CARB's year
2008 standards would require the Company to turn to untested technologies in an
attempt to achieve compliance. The California market represents only 2.8% of the
Company's domestic sales of outboard engines.
Additionally, certain states have required or are considering requiring a
license to operate a recreational boat. While such licensing requirements are
not expected to be unduly restrictive, regulations may discourage potential
first-time buyers, which could affect the Company's business, financial
condition and results of operations. In addition, certain state and local
government authorities are contemplating regulatory efforts to restrict boating
activities, including the use of engines, on certain inland bodies of water. In
one instance, the East Bay Municipal Utility District, located near Oakland,
California, has adopted regulations that, on one of the three water bodies under
its jurisdiction, will limit certain gasoline engine use effective January 1,
2002. While the Company cannot assess the impact that any such contemplated
regulations would have on its business until such regulations are formally
enacted, depending upon the scope of any such regulations, they may have a
material adverse effect on the Company's business. The Company, however, does
not believe that the regulations adopted by the East Bay Municipal Utility
District will have a material adverse effect on the Company's business.
The Company cannot predict the environmental legislation or regulations
that may be enacted in the future or how existing or future laws or regulations
will be administered or interpreted. Compliance with more stringent laws or
regulations as well as more vigorous enforcement policies of the regulatory
agencies or stricter interpretation of existing laws, may require additional
expenditures by the Company, some or all of which may be material.
Research and Development. In fiscal years 1998, 1997, and 1996, OMC spent
approximately $36.8 million, $38.2 million, and $41.8 million, respectively, on
research and development activities relating to the development of new products
and improvement of existing products, including FICHT fuel-injection technology.
The Company expenses its research and development costs as they are incurred.
Environmental Compliance. The Company is subject to regulation under
various federal, state and local laws relating to the environment and to
employee safety and health. These laws include those relating to the generation,
storage, transportation, disposal and emission into the environment of various
substances, those relating to drinking water quality initiatives and those which
allow regulatory authorities to compel (or seek reimbursement for) cleanup of
environmental contamination arising at its owned or operated sites and
facilities where its waste is being or has been disposed. The Company believes
it is in substantial compliance with such laws except where such noncompliance
is not expected to have a material adverse effect. The Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA" or "Superfund")
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and similar state laws impose joint, strict and several liability on (i) owners
or operators of facilities at, from, or to which a release of hazardous
substances has occurred; (ii) parties who generated hazardous substances that
were released at such facilities; and (iii) parties who transported or arranged
for the transportation of hazardous substances to such facilities. The Company
has been notified that it is named a potentially responsible party ("PRP") at
various sites for study and clean-up costs. In some cases there are several
named PRPs and in others there are hundreds. The Company generally participates
in the investigation or clean-up of these sites through cost sharing agreements
with terms which vary from site to site. Costs are typically allocated based
upon the volume and nature of the materials sent to the site. However, as a PRP,
the Company can be held jointly and severally liable for all environmental costs
associated with a site. As of September 30, 1998, the Company has accrued
approximately $24 million for costs relating to remediation at contaminated
sites, including operation and maintenance for continuing and closed-down
operations. The Company believes that these reserves are adequate, although
there can be no assurance that this amount will be adequate to cover such known
or unknown matters. See Note 18 of the Notes to the Consolidated Financial
Statements included elsewhere herein.
Change in Fiscal Year-End. Effective October 1, 1998, the Company's fiscal
year-end will change from September 30 to December 31. The Company will file
with the Securities and Exchange Commission a transition report on Form 10-Q for
the transition period of October 1, 1998 through December 31, 1998.
RESULTS OF OPERATION
The following table sets forth, for the periods indicated, selected
financial information expressed in dollars (millions) and as a percentage of net
sales:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SEPTEMBER 30,
--------------------------------------------------------
1996 1997 1998
----------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Net sales............................ $1,121.5 100.0% $979.5 100.0% $1025.7 100.0%
Cost of goods sold................... 892.2 79.6 826.5 84.4 791.4 77.2
Gross earnings....................... 229.3 20.4 153.0 15.6 234.3 22.8
Selling, general and administrative
expense............................ 210.3 18.8 215.4 22.0 268.4 26.2
Restructuring charges................ 25.6 2.3 -- -- 98.5 9.6
Change in control expenses --
compensation....................... -- -- 11.8 1.2 -- --
-------- ----- ------ ----- ------- -----
Loss from operations................. (6.6) (0.7) (74.2) (7.6) (132.6) (12.9)
Non-operating expense, net........... 3.8 0.3 2.1 0.2 14.5 1.4
Provision (credit) for income
taxes.............................. (3.1) (0.3) 2.8 0.3 3.4 0.3
-------- ----- ------ ----- ------- -----
Net earnings (loss).................. $ (7.3) (0.7)% $(79.1) (8.1)% $(150.5) (14.7)%
======== ===== ====== ===== ======= =====
</TABLE>
Fiscal Year Ended September 30, 1998 Compared to Fiscal Year Ended September
30, 1997
Net Sales. Net sales increased to $1,025.7 million in fiscal year 1998
from $979.5 million in the fiscal year 1997, an increase of 4.7%. The Company's
sales increase was attributable primarily to higher volume sales in the United
States of marine engines in fiscal year 1998, resulting in a 25% increase in net
sales as compared to fiscal year 1997. The increase in U.S. marine engine sales
in 1998 was partially offset by reductions in international sales due to the
poor economic conditions in Asia and due to tighter credit controls in Russia.
Engine sales were lower in the first half of fiscal 1997 as a result of the
Company's program to restrain engine production in order to assist dealers in
reducing inventory levels. In the first quarter of fiscal 1997, the Company
suspended production of many of its larger engines for nearly a month in order
to make changes to equipment and processes necessary in order to significantly
improve the quality of those engines. Finally, boat sales declined, as planned,
by approximately 5% due to certain model and brand eliminations.
Cost of Goods Sold. Cost of goods sold decreased to $791.4 million in
fiscal year 1998 from $826.5 million in fiscal year 1997, a decrease of $35.1
million or 4.2%. Cost of goods sold was 77.2% of net sales in
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<PAGE> 25
fiscal year 1998 as compared with 84.4% of net sales in fiscal year 1997. The
improvements in the Company's gross margin in the current fiscal year reflected
increased manufacturing efficiencies at engine and boat plants and a better
absorption of fixed costs, due primarily to higher engine sales volume. In
addition, in fiscal 1997, the Company's cost of goods sold was impacted
negatively by the production suspension discussed above and by certain expenses
discussed below in the comparison of fiscal year 1997 and fiscal year 1996.
Selling, General and Administrative ("SG&A") Expense. SG&A expense
increased to $268.4 million in fiscal year 1998 from $215.4 million in fiscal
year 1997, an increase of $53.0 million or 24.6%. SG&A expense as a percentage
of net sales increased to 26.2% in fiscal year 1998 from 22.0% in fiscal year
1997. SG&A expense increased in fiscal year 1998 due primarily to: (i) $10.9
million for potential legal expenses related to claims known, but not
quantifiable at the end of fiscal 1997, (ii) $7.0 million primarily for
increased warranty expense associated with upgrading engines designed prior to
September 30, 1997, (iii) $2.8 million in compensation expense related to
forfeitures resulting from the termination of an executive's employment
agreement with a former employer in connection with the Company's hiring the
executive concurrently with the acquisition of the Company by Greenmarine
Holdings, and (iv) $17.6 million of expenses associated with implementing the
Company's boat group reorganization plan. Additionally, the SG&A expense in the
current fiscal year reflected higher amortization of goodwill and intangibles
due to purchase accounting. Finally, the Company recognized approximately $7.0
million in additional expenses in fiscal year 1998 associated with its marketing
and advertising of model year 1999 boats and engines.
Restructuring Charge. During the fourth quarter of fiscal year 1998,
management finalized a restructuring plan for the closure/consolidation of its
Milwaukee and Waukegan engine facilities. The Company announced the closure of
the Milwaukee and Waukegan facilities on September 24, 1998. The Company
recorded a $98.5 million restructuring charge to recognize severance and
benefits for approximately 950 employees to be terminated ($14.0 million),
curtailment losses associated with the acceleration of pension and
post-retirement benefits for employees at the two facilities ($72.1 million),
and facility shut down costs associated with closing the facilities and
disposing of certain assets($12.4 million). The Company's plan includes
outsourcing substantially all of its sub-assembly production currently performed
in its Milwaukee and Waukegan facilities to third-party vendors. See Note 4 of
the Notes to the Consolidated Financial Statements contained elsewhere herein.
Change in Control Expenses. In fiscal year 1997, the Company recorded
$11.8 million in compensation expenses associated with certain officer
agreements and the executive incentive plan which required settlement payments
to certain current and former management team members at the time of the
Greenmarine Acquisition.
Earnings (Loss) from Operations. Loss from operations was $132.6 million
in fiscal year 1998 compared with a loss of $74.2 million in fiscal year 1997,
an increase of $58.4 million. Excluding the restructuring charge and change in
control expenses recorded in 1998 and 1997, the loss from operations was $34.1
million in fiscal year 1998, an improvement of $28.3 million compared to the
loss of $62.4 million in fiscal year 1997.
Non-Operating Expense, Net. Interest expense increased to $30.1 million in
fiscal year 1998 from $16.2 million in fiscal year 1997, an increase of $13.9
million. The increase resulted from the new debt structure in place after the
Greenmarine Acquisition (see "-- Financial Condition; Liquidity and Capital
Resources" below). Other non-operating income was $15.6 million in fiscal year
1998 compared to $14.1 million in fiscal year 1997. The non-operating income in
fiscal year 1998 included interest income of $4.3 million, gains from
disposition of certain fixed assets of $2.9 million, and favorable foreign
exchange transactions of $0.7 million. The non-operating income in fiscal year
1997 included an insurance recovery and a lawsuit settlement ($10.7 million), as
well as gains on disposition of fixed assets ($5.8 million), which was offset by
$15.1 million in expenses associated with the Greenmarine Acquisition. These
expenses included $7.5 million in payments to a potential buyer of the Company
for 'breakage fees' as a result of the Company being acquired by Greenmarine
Holdings. See Note 14 of the Notes to the Consolidated Financial Statements
contained elsewhere herein.
Provision (Credit) for Income Taxes. The provision for income taxes was
$3.4 million in fiscal year 1998 and $2.8 million in fiscal year 1997. The
provision for income taxes for fiscal year 1998 and 1997 resulted
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from the net of expected taxes payable and benefits relating to certain
international subsidiaries. No tax benefit is allowed for domestic losses
because they are not deemed realizable, at this time, under Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
Fiscal Year Ended September 30, 1997 Compared to Fiscal Year Ended September
30, 1996
Net Sales. Net sales decreased to $979.5 million in fiscal year 1997 from
$1,121.5 million in fiscal year 1996, a decrease of $142.0 million or 12.7%.
U.S. revenues, which accounted for 74% of total net sales, declined 11.3% in
fiscal year 1997 while international sales decreased 16.1%. Industry unit volume
in the U.S. declined for outboard motors and boats in fiscal year 1997 compared
to fiscal year 1996. The Company's sales of outboard motor units in the U.S.
declined by 19.5% in fiscal year 1997 as compared to fiscal year 1996. These
declines were due primarily to the planned reduction in dealer inventories,
disruptions in marketing efforts and customer demand resulting from the
announcement in April 1997 concerning the possible sale of the Company, as well
as an overall decline in the industry for sales of outboard engines.
Cost of Goods Sold. Cost of goods sold decreased 7.4% to $826.5 million in
fiscal year 1997 from $892.2 in fiscal year 1996. Cost of goods sold was 84.4%
of net sales in fiscal 1997 as compared with 79.6% of net sales in fiscal year
1996. Cost of goods sold in fiscal year 1997 included approximately $8.2 million
of expenses comprised of the following: (i) an additional accrual relating to
salt water intrusion issues on certain engines sold in international markets,
which have since been resolved ($1.0 million); (ii) the write-off of impaired
assets (based on adoption of the Financial Accounting Standards Board's
Statement of Accounting Standards No. 121, "Accounting for Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of.") relating to the
Chris*Craft line of boats as a result of the Company's analysis of the
Chris*Craft division's undiscounted future cash flows being insufficient to
recover the carrying value of the division's long-lived assets ($2.0 million);
(iii) the write-offs of inventory and tooling relating to discontinued or
obsolete products and technology the Company is not going to use ($2.6 million);
(iv) additional reserves relating to changes in the method of estimating surplus
parts and accessories inventory over known or anticipated requirements and
recognizing certain pre-rigging rebate expenses ($1.8 million); and (v) certain
expenses associated with the introduction of the FICHT technology were incurred
for the new product, including incremental expenses and additional product
testing to ensure quality ($0.8 million). Excluding these charges, cost of goods
sold in fiscal year 1997 would have been $818.3 million or 83.5% of net sales.
Selling, General and Administrative Expense. SG&A expense increased to
$215.4 million in fiscal year 1997 from $210.3 million in fiscal year 1996, an
increase of $5.1 million or 2.4%. SG&A expense, as a percentage of net sales
increased to 22.0% in fiscal year 1997 from 18.8% in fiscal year 1996. The SG&A
expenses in fiscal year 1997 included the following: (i) changes in accounting
estimate resulting from the early adoption of the AICPA Statement of Position
96-1, "Environmental Remediation Liabilities", which required the Company to
accrue for future normal operating and maintenance costs for site monitoring and
compliance requirements at particular sites ($7.0 million) and; (ii) additional
accruals for warranty expenses at the Company's Boat Group that resulted from
the Company extending the warranty claim acceptance period on certain models and
revising the lag factor (i.e., the period of time between the sale of products
to a dealer or distributor and the ultimate payment by the Company of a warranty
claim made to repair products) used to estimate the warranty reserve ($9.7
million). Excluding these charges, SG&A expense for fiscal year 1997 would have
been $198.7 million or 20.3% of net sales. These charges were partially offset
by reductions of costs resulting from the restructuring programs initiated in
fiscal year 1996.
Earnings (Loss) from Operations. Operating loss increased to $74.2 million
in fiscal year 1997 from a loss of $6.6 million in fiscal year 1996. Fiscal year
1997 includes $11.8 million in compensation expenses resulting from the change
in control as a result of the Greenmarine Acquisition. The increase in operating
loss was primarily a result of the decline in net sales, higher costs for
product and higher SG&A expense, each as described above. Fiscal year 1996
included restructuring charges of $25.6 million, primarily related to the
closing of distribution operations and the write-down of manufacturing
facilities outside the United States. Excluding the $11.8 million change in
control compensation expense in fiscal year 1997 and the unusual expenses and
charges referred to in the discussion of Cost of Goods Sold and Selling, General
and Administrative Expense above, respectively, operating loss would have been
$37.5 million for fiscal year 1997.
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Non-Operating Expense (Income). Interest expenses in fiscal 1997 increased
by $3.9 million to $16.2 million in fiscal year 1997 from $12.3 million in
fiscal year 1996. The increase in fiscal year 1997 was primarily attributable to
a $5.0 million favorable interest adjustment for past tax liabilities which was
recorded in fiscal year 1996. Other non-operating income was $14.1 million in
fiscal year 1997 as compared to $8.5 million in fiscal year 1996. Included in
non-operating expense in fiscal year 1997 was $15.1 million of change of control
expenses associated with the Greenmarine Acquisition. The fiscal year 1997
amount included insurance recovery and a lawsuit settlement ($10.7 million), as
well as higher gains on disposition of fixed assets ($5.8 million). See Note 14
of the Notes to the Consolidated Financial Statements included elsewhere herein.
Provision (Credit) for Income Taxes. Provision (credit) for income taxes
was $2.8 million in fiscal 1997 and $(3.1) million in fiscal year 1996, and is
explained in Note 15 of the Notes to the Consolidated Financial Statements
included elsewhere herein. The provision for income taxes for fiscal year 1997
resulted from the net of expected taxes payable and benefits relating to certain
international subsidiaries. No tax benefit is allowed for domestic losses
because they are not deemed realizable, at this time.
FINANCIAL CONDITION; LIQUIDITY AND CAPITAL RESOURCES
As a result of the Greenmarine Acquisition, the Statement of Consolidated
Financial Position as of September 30, 1997 was prepared using the purchase
method of accounting which reflects the fair values of assets acquired and
liabilities assumed. The excess of the total acquisition cost over the estimated
fair value of assets acquired and liabilities assumed at the date of acquisition
was approximately $127 million, which was subsequently adjusted at September 30,
1998 to approximately $120 million (prior to amortization of goodwill). See Note
1 of the Notes to the Consolidated Financial Statements contained elsewhere
herein.
The Company's business is seasonal in nature with receivable and inventory
levels normally increasing in the Company's fiscal quarter ending December 31
and peaking in the Company's fiscal quarter ending March 31. Current assets at
September 30, 1998 decreased $52.9 million from September 30, 1997. Cash and
cash equivalents at September 30, 1998 decreased $9.2 million from September 30,
1997. In addition, the Company had $28.6 million in "Restricted Cash" at
September 30, 1998, which cash is held in interest reserve accounts for the
benefit of the Company's senior lenders (as discussed below). Receivables at
September 30, 1998 increased $0.3 million due primarily to an increase in
domestic engine sales versus the prior year which was partially offset by lower
European receivables due to a slowdown in sales, primarily in Asia and Russia
due to the poor economic conditions in those countries. Inventories in fiscal
year 1998 decreased $2.5 million from fiscal year 1997 due primarily to more
effective inventory management at all of the Company's locations implemented as
part of the Company's lean manufacturing initiative. Other current assets at
September 30, 1998 decreased $47.9 million from September 30, 1997 due primarily
to a reduction in a trust depository that funded the remaining untendered
outstanding shares of the Company's pre-merger common stock and due to the
funding for letters of credit. Accounts payable at September 30, 1998 decreased
$26.9 million from September 30, 1997 due primarily to payments to Company
shareholders for untendered outstanding stock and to other payments relating to
the change of control. Accrued liabilities increased $38.0 million from
September 30, 1997 due to a restructuring charge (see discussion of the Results
of Operations for fiscal year 1998 above) that was partially recorded in accrued
liabilities ($6.0 million) and due to increases in the Company's warranty
reserves ($17.0 million) due partially to performance issues associated with the
introduction of the Company's new FICHT fuel-injection technology. See
"-- General -- Introduction of FICHT Engines; Regulatory Compliance" above.
Cash provided by operations was $60.3 million for the twelve months ended
September 30, 1998 compared with a use of cash of $9.2 million for the twelve
months ended September 30, 1997. The favorable increase in the Company's cash
flow from operations was due primarily to effective working capital management.
Expenditures for plant, equipment and tooling were $34.4 million for the
twelve months ended September 30, 1998, representing a $1.9 million decrease
from the prior year period of $36.3 million, primarily as a result of certain
deferrals of capital expenditures. The reduced level of capital spending in
fiscal year 1998 is also related to a new, more rigorous process of reviewing
the Company's needs. In fiscal year 1997, capital
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spending was lower than historical levels (approximately $50 million per year)
due to anticipation of the Company's sale, which was completed in September
1997. Capital expenditures in fiscal year 1998 included continued expenditures
related to the introduction of the FICHT technology to the Company's various
engine models, cost reduction programs, product quality improvements,
improvements to and upgrades of the Company's hardware and software, and other
general capital improvements.
Loans payable decreased $96 million from September 30, 1997 as the Company
paid its remaining obligations under its revolving credit agreement with
American Fidelity Group on May 27, 1998 (as discussed below). Current maturities
and sinking fund requirements of long-term debt decreased by $61.7 million from
September 30, 1997 due primarily to the redemption on November 12, 1997 of
approximately 90% of the Company's 7% Convertible Subordinated Debentures due
2002 (as discussed below).
The Company entered into an Amended and Restated Loan and Security
Agreement, effective as of January 6, 1998 (as amended, the "Credit Agreement"),
with a syndicate of lenders for which NationsBank of Texas, N.A. is
administrative and collateral agent (the "Agent"). The Credit Agreement provides
a revolving credit facility (the "Revolving Credit Facility") of up to $150.0
million, subject to borrowing base limitations, to finance working capital with
a $30.0 million sublimit for letters of credit. The Revolving Credit Facility
expires on December 31, 2000. The Revolving Credit Facility is secured by a
first and only security interest in all of the Company's existing and hereafter
acquired accounts receivable, inventory, chattle paper, documents, instruments,
deposit accounts, contract rights, patents, trademarks and general intangibles
and is guaranteed by the Company's four principal domestic operating
subsidiaries. On September 30, 1998, the Company did not have any outstanding
borrowings under the Credit Agreement, but did have $37.7 million of letter of
credit obligations outstanding under the Credit Agreement at September 30, 1998.
The Credit Agreement contains a number of financial covenants, including those
requiring the Company to satisfy specific levels of (i) consolidated tangible
net worth, (ii) interest coverage ratios, and (iii) leverage ratios. On May 21,
1998, the Company entered into a First Amendment to Amended and Restated Loan
and Security Agreement with the lenders under the Credit Agreement, pursuant to
which, among other things, (i) the Company's compliance with consolidated
tangible net worth covenant for the period ended June 30, 1998 was waived,
notwithstanding the Company's anticipated compliance therewith, (ii) the
Company's consolidated tangible net worth requirement for the period ended
September 30, 1998 was amended, (iii) the borrowing base was amended to allow
for borrowings against eligible intellectual property, thereby increasing
borrowing capacity, (iv) the sublimit for the issuance of letters of credit was
increased from $25.0 million to $30.0 million, and (v) the lenders consented to
certain matters relating to the Company's offering of $160.0 million of 10 3/4%
Senior Notes due 2008, including the establishment of an interest reserve
account. The Company entered into a Second Amendment to Amended and Restated
Loan and Security Agreement, effective as of August 31, 1998, with the lenders
under the Credit Agreement, pursuant to which, among other things, the sublimit
for the issuance of letters of credit was increased from $30.0 million to $50.0
million. The Company entered into a Third Amendment to Amended and Restated Loan
and Security Agreement, effective as of December 21, 1998, with the lenders
under the Credit Agreement, pursuant to which, among other things, (i) the
Company's compliance with the consolidated tangible net worth, consolidated
interest coverage ratio and consolidated leverage ratio covenants were waived
for the period ended September 30, 1998 and (ii) the Company's consolidated
tangible net worth, consolidated interest coverage ratio and consolidated
leverage ratio covenants for future periods were amended.
The Company became obligated under a credit agreement, as amended, which
provided for loans of up to $150 million (the "Acquisition Debt"). The
Acquisition Debt was used to finance a portion of the funds acquired to effect
the Greenmarine Acquisition. Amounts outstanding under this credit agreement
were secured by 20.4 million shares of common stock of the post-Merger Company
and bore interest at 10%. On November 12, 1997, the Company borrowed the
remaining $54.0 million principal amount of Acquisition Debt in connection with
the purchase of all properly tendered 7% Convertible Subordinated Debentures due
2002, which the Company was required to offer to repurchase as a result of the
Greenmarine Acquisition (as discussed below). The full amount of the Acquisition
Debt was paid on May 27, 1998 from the proceeds of the sale of the Senior Notes
(as described below).
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On May 27, 1998, the Company issued $160.0 million of 10 3/4% Senior Notes
("Senior Notes") due 2008, with interest payable semiannually on June 1 and
December 1 of each year. The net proceeds from the issuance of the Senior Notes
totaled $155.2 million, of which $150.0 million was used to repay the
Acquisition Debt. The Senior Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after June 1, 2003 in cash at
prescribed redemption prices set forth in the indenture governing the Senior
Notes. In addition, at any time prior to June 1, 2001, the Company may on any
one or more occasions redeem up to an aggregate of 35% of the original principal
amount of the Senior Notes at a redemption price of 110.750% of the principal
amount thereof, plus accrued at unpaid interest, with the net proceeds of one or
more equity public offerings, provided that at least 65% of the aggregate
principal amount of Senior Notes originally issued remains outstanding
immediately after the occurrence of any such redemption. The Senior Notes are
guaranteed on a joint and several basis by each of the Company's principal
domestic operating subsidiaries. The Indenture governing the Senior Notes
contains certain covenants that limit, among other things, the ability of the
Company and its restricted subsidiaries to (i) pay dividends, redeem capital
stock or make certain other restricted payments or investments; (ii) incur
additional indebtedness or issue certain preferred equity interests; (iii) merge
or consolidate with any other person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of its assets; (iv) create liens
on assets; and (v) enter into certain transactions with affiliates or related
persons.
Concurrently with the issuance of the Senior Notes, the Company entered
into a depositary agreement which provided for the establishment and maintenance
of an interest reserve account for the benefit of the holders of the Senior
Notes and an interest reserve account for the benefit of the other senior
creditors of the Company. An aggregate amount of cash equal to one year's
interest due to these lenders was deposited into these interest reserve
accounts. At September 30, 1998, the "Restricted Cash" held in these interest
reserve accounts totaled $28.6 million. The "Restricted Cash" must remain in
such accounts for a minimum of three years.
At September 30, 1998, $62.6 million principal amount of the Company's
9 1/8% Debentures due 2017 (the "9 1/8% Debentures") was outstanding. The 9 1/8%
Debentures mature on April 15, 2017, and interest thereon is payable
semi-annually on April 15 and October 15 of each year. The 9 1/8% Debentures are
redeemable through the operation of a sinking fund beginning on April 15, 1998,
and each year thereafter to and including April 15, 2016 at a sinking fund
redemption price equal to 100% of the principal amount thereof plus accrued
interest to the redemption date. On or prior to April 15 in each of the years
1998 to 2016 inclusive, the Company is required to make a mandatory sinking fund
payment in cash in an amount sufficient to redeem 9 1/8% Debentures in the
aggregate principal amount of $5,000,000 plus accrued interest thereon. However,
9 1/8% Debentures reacquired or redeemed by the Company may be used at the
principal amount thereof to reduce the amount of any one or more mandatory
Sinking Fund payments. As of September 30, 1998, the Company had repurchased and
deposited with the trustee for the 9 1/8% Debentures $34.8 million principal
amount of 9 1/8% Debentures, which will be used to satisfy its mandatory sinking
fund obligations through April 15, 2004. The Company at its option may make an
optional sinking fund payment in cash in each year from 1998 to 2016 inclusive
in an amount sufficient to redeem up to an additional $10,000,000 principal
amount of 9 1/8% Debentures.
At September 30, 1998, an aggregate of approximately $20.8 million
principal amount of the Company's Medium-Term Notes Series A (the "Medium-Term
Notes") were outstanding. Interest rates on the Medium-Term Notes range from
8.160% to 8.625%. The maturity dates of the Medium-Term Notes include March 15,
1999, March 15, 2000 and March 15, 2001. Interest on each of the outstanding
Medium-Term Notes is payable semi-annually each March 30 and September 30 and at
maturity.
At September 30, 1998, $7.1 million principal amount of the Company's 7%
Convertible Subordinated Debentures due 2002 (the "Convertible Debentures") were
outstanding. Following the Merger, the Company was required to offer to purchase
for cash any and all of the then outstanding Convertible Debentures at a
purchase price equal to 100% of the outstanding principal amount of each
Convertible Debenture plus any accrued and unpaid interest thereon. On November
12, 1997, the Company consummated such offer to purchase and, as a result
thereof, purchased $67.7 million principal amount of Convertible Debentures.
Immediately prior to the Merger, the Convertible Debentures were convertible
into shares of common stock of
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the Company at the conversion price of $22.25 per share. As a result of the
Merger, the remaining $7.1 million principal amount of outstanding Convertible
Debentures are no longer convertible into shares of common stock of the Company
and each holder of the remaining outstanding Convertible Debentures has the
right to convert such holder's Convertible Debentures into the cash that was
payable to holders of common stock in the Merger for each share of common stock
into which such Convertible Debentures might have been converted immediately
prior to the Merger. Accordingly, as a result of the Merger, the remaining $7.1
million principal amount of Convertible Debentures are convertible at the
conversion price of $22.25 per share of common stock into the right to receive
$18.00 per share of common stock into which the Convertible Debentures would
have been convertible had the Convertible Debentures been converted into
Pre-Merger Company Shares prior to the Merger (i.e., $18.00 / $22.25).
Accordingly, the remaining outstanding Convertible Debentures are convertible
into the right to receive a cash payment equal to $809 for each $1,000 principal
amount of Convertible Debentures so converted (i.e., ($18.00 / $22.25) *
$1,000). The outstanding Convertible Debentures are convertible at any time
prior to their maturity on July 1, 2002.
The Company has various Industrial Revenue Bonds outstanding in an
aggregate principal amount of approximately $13 million. The Industrial Revenue
Bonds have various maturity dates between 2002 and 2007. Interest rates on the
Industrial Revenue Bonds range from 6% to 12.037%.
In fiscal year 1999, the Company will pay approximately $10 million in cash
to satisfy obligations that will become due in fiscal year 1999 on the Medium
Term Notes. See Note 9 of the Notes to the Consolidated Financial Statements
contained elsewhere herein. In addition, the Company will pay approximately $1.2
million in cash to satisfy obligations that will become due at various times in
fiscal year 1999 under certain of its Industrial Revenue Bonds.
As a normal business practice, the Company has made arrangements with
financial institutions by which qualified retail dealers may obtain inventory
financing. Under these arrangements, the Company will repurchase products in the
event of repossession upon a retail dealer's default. These arrangements contain
provisions which limit the Company's repurchase obligation to $31 million per
model year for a period not to exceed 30 months from the date of invoice. This
obligation automatically reduces over the 30-month period. The Company resells
any repurchased products. Losses incurred under this program have not been
material. In fiscal 1998, the Company repurchased approximately $4.2 million of
products, all of which were resold at a discounted price. The Company accrues
for losses that are anticipated in connection with expected repurchases. The
Company does not expect these repurchases to materially affect its results of
operations.
Based upon the current level of operations and anticipated cost savings,
the Company believes that its cash flow from operations, together with
borrowings under the Credit Agreement, the interest reserve accounts and its
other sources of liquidity, will be adequate to meet its anticipated requirement
for working capital and accrued liabilities, capital expenditures, interest
payments and scheduled principal payments over the next several years. There can
be no assurance, however, that the Company's business will continue to generate
cash flow at or above current levels or that anticipated costs savings can be
fully achieved. If the Company is unable to generate sufficient cash flow from
operations in the future to service its debt and accrued liabilities and make
necessary capital expenditures, or if its future earnings growth is insufficient
to amortize all required principal payments out of internally generated funds,
the Company may be required to refinance all or a portion of its existing debt,
sell assets or obtain additional financing. There can be no assurance that any
such refinancing or asset sales would be possible or that any additional
financing could be obtained on attractive terms, particularly in view of the
Company's high level of debt.
YEAR 2000 MATTERS
During fiscal years 1997 and 1998, the Company assessed the steps necessary
to address issues raised by the coming of Year 2000. The steps to be taken
included reviews of the Company's hardware and software requirements worldwide,
including processors embedded in its manufacturing equipment, as well as vendors
of goods and services. Based on this review, the Company developed a strategy
for attaining Year 2000 compliance that includes modifying and replacing
software, acquiring new hardware, educating its dealers and distributors and
working with vendors of both goods and services. With the assessment phase of
the strategy
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completed, the Company is in the process of implementing and testing remedies of
issues identified during the assessment phase. To date, all applications on the
Company's mainframe have been reprogrammed and initial testing will be conducted
through the first quarter of calendar 1999. Issues raised relative to personal
computers and local and wide area networks are in the process of being remedied
through the acquisition of new software and hardware. The Company has found very
few embedded processors contained in its manufacturing equipment which would be
affected by the Year 2000 and those which were identified are in the process of
being modified. Most of the Company's telecommunications equipment is currently
Year 2000 compliant and in cases where it is not, the equipment has either been
replaced or appropriation requests for the replacement have been prepared and
are being processed. The Company anticipates completing all implementation and
testing of internal remedies by June 30, 1999.
Also as part of the Company's Year 2000 compliance efforts, it has
substantially reviewed all vendors of goods and is currently reviewing vendors
providing services and prioritized them from critical (i.e., vendors whose goods
or services are necessary for the Company's continued operation) to non-critical
(i.e., suppliers whose products were either not critical to the continued
operation of the Company or whose goods or services could otherwise be readily
obtained from alternate sources) providers. These vendors range from service
providers, such as banks, utility companies and benefit plan service providers
to suppliers of goods required for the manufacture of the Company's products.
Following this initial vendor review, the Company established a strategy to
determine the readiness of those vendors for Year 2000. This initially involves
sending a letter notifying the vendor of the potential Year 2000 issues, which
was followed by a questionnaire to be completed by the vendor. In the event a
non-critical supplier either did not respond or responded inadequately,
follow-up questionnaires were sent and calls made in order to further clarify
the vendor situation. In the event that a critical vendor did not respond or
responded inadequately, the Company not only follows up with additional
questionnaires and telephone calls but also scheduled or will schedule on-site
meetings with the vendor in order to satisfy itself that the vendor is or will
be prepared to operate into the Year 2000. The Company believes that the
unresponsive critical vendors create the most uncertainty in the Company's Year
2000 compliance efforts. In the event that the Company is not satisfied that a
critical vendor will be able to provide its goods or services into the Year
2000, the Company will review alternate suppliers who are in a position to
assure the Company that they are or will be Year 2000 ready. The timing of the
Company's decision to change vendors will depend on what type of goods or
service the non-responsive or non-compliant vendor provides and the lead time
required for an alternate vendor to begin supplying. The Company has reviewed
those critical vendors that have not responded adequately and has been reviewing
the timing of replacing, if necessary, any such non-compliant vendor.
In addition, the Company has reviewed the goods which it manufactures for
sale to its dealers, distributors and original equipment manufacturers and has
determined that those goods are Year 2000 compliant.
Finally, in preparing for the advent of the Year 2000, the Company has
taken steps to heighten the awareness among its dealer and distributor network
of the issues associated with the Year 2000. The issue is covered in monthly
publications which are distributed to the dealers and also by the sales force
that is responsible for the regular communications with the dealer and
distributor network.
To date, the Company has spent and expensed a total of approximately $3.8
million on personal computer and network, mainframe and telecommunication
solutions to issues related with the Year 2000 and estimates that it will spend
up to a total of $11 million, approximately half of which is associated with
personal computers and networks, to remedy all of the issues associated with
ensuring that its hardware and software worldwide, and the systems associated
therewith, are able to operate into the Year 2000.
The Company believes that its owned or licensed hardware and software will
be able to operate into the Year 2000. However, the Company relies on the goods
and services of other companies in order to manufacture and deliver its goods to
the market. Although the Company is taking every reasonable step to determine
that these vendors will be able to continue to provide their goods or services,
there can be no assurance that, even upon assurance of their ability to do so,
the Company's vendors will be able to provide their goods and services to the
Company in a manner that satisfactorily addresses the Year 2000 issues. If, on
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or near January 1, 2000, the Company discovers that a non-critical vendor, which
previously assured the Company that it would be Year 2000 compliant, is in-fact
not compliant, an alternate supplier will be used by the Company and there
should be no material effect on the Company's business. If, on or near January
1, 2000, the Company discovers that a critical vendor, such as a utility company
or a supplier of a part, component, or other goods or service that is not
readily available from an alternate supplier, which previously assured to the
Company that it would be Year 2000 compliant, is in-fact not compliant, the
Company may not be able to produce, on a timely basis, finished goods for sale
to its dealers. If this should occur, the Company will either wait for such
vendor to become Year 2000 compliant or seek an alternate vendor who can provide
the applicable goods or services in a more timely manner. In the event that the
vendor is critical and either no alternate vendor is available or is able to
operate into the Year 2000, this event could have a negative impact on the
Company's business, results of operations, or financial condition.
RECENTLY ADOPTED ACCOUNTING STANDARDS
In fiscal year 1999, the Company will implement three accounting standards
issued by the Financial Accounting Standards Board, SFAS 130, "Reporting
Comprehensive Income," SFAS 131, "Disclosures About Segments of an Enterprise
and Related Information," and SFAS 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits." The Company believes that these changes will
have no effect on its financial position or results of operations (as currently
reported) as they require only changes in or additions to current disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities."
SFAS 133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting. SFAS 133 is effective for fiscal years beginning after June
15, 1999. The Company has not yet quantified the impacts of adopting SFAS 133 on
its financial statements and has not determined the timing of or method of its
adoption of SFAS 133.
INFLATION
Inflation may cause or may be accompanied by increases in gasoline prices
and interest rates. Such increases may adversely affect the sales of the
Company's products. Inflation has not had a significant impact on operating
results during the past three fiscal years.
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. The
Company wishes to ensure that all such forward-looking statements are
accompanied by meaningful cautionary statements pursuant to the safe harbor
established in such act. All statements other than statements of historical
facts included in this Form 10-K may constitute forward-looking statements.
Forward-looking statements include the intent, belief or current expectations of
the Company and members of its senior management team. All forward-looking
statements are inherently uncertain as they are based on various expectations
and assumptions concerning future events and they are subject to numerous known
and unknown risks and uncertainties which could cause actual events or results
to differ materially from those projected and which include, but are not limited
to, the impact of competitive products and pricing, product demand and market
acceptance, new product development, availability of raw materials, the
availability of adequate financing on terms and conditions acceptable to the
Company, and general economic conditions including interest rates and consumer
confidence. Investors are also directed to other risks discussed in this annual
report on Form 10-K and documents filed by the Company with the Securities and
Exchange Commission.
31
<PAGE> 33
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest and foreign
exchange rates and commodity prices and enters into financial contracts in the
ordinary course of business to hedge these exposures. The Company does not use
financial instruments for trading or speculative purposes. Derivative
instruments are matched to existing assets, liabilities or transactions with the
objective of reducing the impact of adverse movements in interest rates,
currency exchange rates or commodity prices. Generally, the amounts of the
instruments are less than or equal to the amount of the underlying assets,
liabilities or transactions and are held to maturity. Instruments are either
traded over authorized exchanges or with counterparties of high credit standing.
As a result of these factors, the Company's exposure to market and credit risks
from financial derivative instruments is considered to be negligible.
The Company has used interest rate swaps to adjust the ratio of fixed and
floating rates in the Company's debt portfolio. The following table provides
information about the Company's derivative financial instruments and other
financial instruments that are sensitive to changes in interest rates, including
interest rate swaps and debt obligations. The table presents principal cash
flows and related weighted average interest rates by expected maturity dates.
For interest rate swaps, the table presents notional amounts and weighted
average interest rates by expected (contractual) maturity date. Notional amounts
are used to calculate the contractual payments to be exchanged under the
contract. Weighted average variable rates are based on implied forward rates in
the yield curve at the reporting date.
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
----------------------------------------------------------------------------------
SEPTEMBER 30, 1998 9/30/99 9/30/00 9/30/01 9/30/02 9/30/03 THEREAFTER TOTAL FAIR VALUE
(IN MILLIONS) ------- ------- ------- ------- ------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES
Debt:
Fixed Rate ($US).......... $ 11.2 $ 7.0 $ 6.3 $ 8.4 $ 1.4 $226.3 $260.5 $241.0
Average Interest
Rate................. 10.03% 10.10% 10.15% 10.22% 10.29% 9.61% 9.98%
Variable Rate ($US)....... -- -- -- -- -- $ 5.5 $ 5.5 $ 5.5
Average Interest
Rate................. -- -- -- -- -- 4.67% 3.43%
INTEREST RATE DERIVATIVES
Interest Rate Swaps:
Variable to Fixed ($US)... $ 5.0 -- -- -- -- -- $ 5.0 $(0.1)
Average Pay Rate....... 10.20% -- -- -- -- -- 10.20%
Average Receive Rate... 5.10% -- -- -- -- -- 5.10%
</TABLE>
The Company uses forward and option contracts to reduce the earnings and
cash flow impact of nonfunctional currency denominated receivables and payables.
The contract maturities are matched with the settlement dates of the related
transactions. As of September 30, 1998, there was a net unrealized gain on
forward contracts of $0.8 million, calculated as the difference between the
contract rate and the rate available to terminate the contracts. Assuming a 10%
appreciation in the U.S. dollar at September 30, 1998, potential losses in the
net fair value of foreign exchange contracts would have been $4.3 million. As
these contracts are used for hedging purposes, the Company feels that these
losses would be largely offset by gains on the underlying firm commitments or
anticipated transactions.
The Company's exposure to commodity price changes relates to certain
manufacturing operations that utilize various commodity-based components,
primarily for aluminum. The Company manages its exposure to changes in prices
through the terms of its supply and procurement contracts and the use of
exchange-traded and over-the-counter commodity contracts. As of September 30,
1998, there was an unrealized loss on aluminum futures of $0.1 million. Assuming
a 10% change in market prices at September 30, 1998, additional potential losses
in the net fair value of these contracts would have been $0.2 million.
The estimated losses mentioned above assume the occurrence of certain
adverse market conditions. They do not consider the potential effect of
favorable changes in the market factors.
32
<PAGE> 34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Outboard Marine Corporation:
We have audited the accompanying Statements of Consolidated Financial
Position of Outboard Marine Corporation (a Delaware corporation) and
subsidiaries ("Post-Merger Company" or "Company") as of September 30, 1998 and
1997 and the related Statements of Consolidated Earnings, Consolidated Cash
Flows and Changes in Consolidated Shareholders' Investment for the year in the
period ended September 30, 1998 and the related Statements of Consolidated Cash
Flows and Changes in Consolidated Shareholders' Investment from inception (see
Note 1) to September 30, 1997. We have also audited the accompanying Statements
of Consolidated Earnings, Consolidated Cash Flows and Changes in Consolidated
Shareholders' Investment of Outboard Marine Corporation (a Delaware corporation)
and subsidiaries ("Pre-Merger Company") for each of the two years in the period
ended September 30, 1997. These financial statements are the responsibility of
the Post-Merger and Pre-Merger Company's management. Our responsibility is to
express an opinion on these financial statements based upon 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 financial position of the Post-Merger Company as
of September 30, 1998 and 1997 and the results of their operations and their
cash flows for the year in the period ended September 30, 1998 and their cash
flows from inception to September 30, 1997, and the results of operations and
cash flows of the Pre-Merger Company for each of the two years in the period
ended September 30, 1997, in conformity with generally accepted accounting
principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II "Valuation and Qualifying
Accounts", as listed in the index of financial statements, is presented for
purposes of complying with the Securities and Exchange Commissions rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
December 23, 1998
33
<PAGE> 35
OUTBOARD MARINE CORPORATION
STATEMENTS OF CONSOLIDATED FINANCIAL POSITION
<TABLE>
<CAPTION>
POST-MERGER COMPANY
----------------------
SEPTEMBER 30,
----------------------
1998 1997
--------- ---------
(DOLLARS IN MILLIONS,
EXCEPT AMOUNTS PER
SHARE)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 45.2 $ 54.4
Receivables (less reserve for doubtful receivables of $9.5
million in 1998 and $6.7 million in 1997)............... 153.5 153.2
Inventories............................................... 174.4 176.9
Deferred income tax benefits.............................. 25.4 19.0
Other current assets...................................... 19.6 67.5
-------- --------
Total current assets.................................... 418.1 471.0
Restricted cash............................................. 28.6 --
Product tooling, net........................................ 32.4 34.2
Plant and equipment, net.................................... 194.5 210.2
Goodwill, net............................................... 116.3 127.3
Trademarks, patents and other intangibles, net.............. 81.6 83.9
Pension asset............................................... 45.6 74.4
Other assets................................................ 165.0 93.8
-------- --------
Total assets............................................ $1,082.1 $1,094.8
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Loan payable.............................................. $ -- $ 96.0
Accounts payable.......................................... 115.1 142.0
Accrued liabilities....................................... 177.3 139.3
Accrued income taxes...................................... 8.0 6.6
Current maturities of long-term debt...................... 11.2 72.9
-------- --------
Total current liabilities............................... 311.6 456.8
Long-term debt.............................................. 247.9 103.8
Postretirement benefits other than pensions................. 123.7 96.0
Other non-current liabilities............................... 304.2 161.2
Shareholders' investment:
Common stock -- 25 million shares authorized at $.01 par
value with 20.4 million shares issued and outstanding in
1998 and 1997........................................... 0.2 0.2
Capital in excess of par value of common stock............ 276.9 276.8
Accumulated earnings...................................... (150.5) --
Minimum pension liability adjustment...................... (24.7) --
Cumulative translation adjustments........................ (7.2) --
-------- --------
Total shareholders' investment.......................... 94.7 277.0
-------- --------
Total liabilities and shareholders' investment.......... $1,082.1 $1,094.8
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
34
<PAGE> 36
OUTBOARD MARINE CORPORATION
STATEMENTS OF CONSOLIDATED EARNINGS
<TABLE>
<CAPTION>
POST-MERGER
COMPANY PRE-MERGER COMPANY
----------- ------------------
YEARS ENDED SEPTEMBER 30,
---------------------------------
1998 1997 1996
----------- ------ --------
(DOLLARS IN MILLIONS
EXCEPT AMOUNTS PER SHARE)
<S> <C> <C> <C>
Net sales................................................... $1,025.7 $979.5 $1,121.5
Cost of goods sold.......................................... 791.4 826.5 892.2
-------- ------ --------
Gross earnings............................................ 234.3 153.0 229.3
Selling, general and administrative expense................. 268.4 215.4 210.3
Restructuring charges....................................... 98.5 -- 25.6
Change of control expenses -- compensation.................. -- 11.8 --
-------- ------ --------
Loss from operations...................................... (132.6) (74.2) (6.6)
Non-operating expense (income):
Interest expense.......................................... 30.1 16.2 12.3
Change in control expenses................................ -- 15.1 --
Other (income) expense, net............................... (15.6) (29.2) (8.5)
-------- ------ --------
14.5 2.1 3.8
-------- ------ --------
Loss before provision for income taxes.................... (147.1) (76.3) (10.4)
Provision (credit) for income taxes......................... 3.4 2.8 (3.1)
-------- ------ --------
Net loss.................................................. $ (150.5) $(79.1) $ (7.3)
======== ====== ========
Net loss per share of common stock
Basic..................................................... $ (7.38) $(3.91) $ (0.36)
======== ====== ========
Diluted................................................... $ (7.38) $(3.91) $ (0.36)
======== ====== ========
</TABLE>
The accompanying notes are an integral part of these statements.
35
<PAGE> 37
OUTBOARD MARINE CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
PRE-MERGER
COMPANY
AND
POST-MERGER POST-MERGER PRE-MERGER
COMPANY COMPANY COMPANY
----------- ----------- ----------
YEARS ENDED SEPTEMBER 30,
----------------------------------------
1998 1997 1996
----------- ----------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................ $(150.5) $(79.1) $ (7.3)
Adjustments to reconcile net loss to net cash provided
by operations:
Depreciation and amortization......................... 50.1 57.0 54.7
Restructuring charges................................. 98.5 -- 21.6
Changes in current accounts excluding the effects of
acquisitions and noncash transactions:
Decrease (increase) in receivables................. (0.9) 9.6 32.4
Decrease (increase) in inventories................. 1.9 26.5 27.3
Decrease (increase) in other current assets........ 45.4 (0.4) (3.6)
Increase (decrease) in accounts payable, accrued
liabilities and income taxes..................... (46.7) (5.3) (15.1)
Increase (decrease) in deferred items.............. 66.7 (15.8) (20.6)
Other, net......................................... (4.2) (1.7) 1.7
------- ------ ------
Net cash provided by (used for) operating
activities.................................... 60.3 (9.2) 91.1
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for plant and equipment, and tooling....... (34.4) (36.3) (52.7)
Proceeds from sale of plant and equipment............... 9.6 13.0 2.7
Other, net.............................................. 0.8 (2.8) (0.5)
------- ------ ------
Net cash used for investing activities........... (24.0) (26.1) (50.5)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of short-term debt............................. (96.0) -- --
Payments of long-term debt, including current
maturities............................................ (75.0) -- (0.2)
Proceeds from issuance of long-term debt................ 155.4 -- --
Cash dividends paid..................................... -- (6.0) (6.1)
Other, net.............................................. (29.5) 2.3 3.4
------- ------ ------
Net cash used for financing activities........... (45.1) (3.7) (2.9)
Exchange rate effect on cash............................ (0.4) (2.1) (0.5)
------- ------ ------
Net (decrease) increase in cash and cash equivalents.... (9.2) (41.1) 37.2
Cash and cash equivalents at beginning of year.......... 54.4 95.5 58.3
------- ------ ------
Cash and cash equivalents at end of year................ $ 45.2 $ 54.4 $ 95.5
======= ====== ======
Restricted cash......................................... $ 28.6* $ -- $ --
======= ====== ======
Post-Merger Company cash and cash equivalents prior to
merger -- September 30, 1997.......................... $ 54.4
CASH FLOWS FROM FINANCING ACTIVITIES (POST-MERGER
COMPANY):
Proceeds from short-term borrowings..................... 96.0
Issuance of Post-Merger Company common stock............ 277.0
Purchase of Pre-Merger Company common stock............. (373.0)
------
Post-Merger Company cash and cash equivalents --
September 30, 1997.................................... $ 54.4
======
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid......................................... $ 23.5 $ 21.0 $ 15.4
Income taxes paid..................................... $ 0.0 $ 3.4 $ 3.5
======= ====== ======
</TABLE>
- ---------------
* The Company had $45.2 million in available cash and additional $28.6 million
in Restricted Cash at September 30, 1998.
The accompanying notes are an integral part of these statements
36
<PAGE> 38
OUTBOARD MARINE CORPORATION
STATEMENTS OF CHANGES IN CONSOLIDATED SHAREHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
ISSUED CAPITAL IN MINIMUM
COMMON STOCK EXCESS OF PENSION CUMULATIVE
--------------- PAR VALUE OF ACCUMULATED LIABILITY TRANSLATION TREASURY
SHARES AMOUNT COMMON STOCK EARNINGS ADJUSTMENT ADJUSTMENTS STOCK
------ ------ ------------ ----------- ---------- ----------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance -- September 30,
1995....................... 20.2* $ 3.0 $ 112.2 $ 149.7 $ -- $ (5.5) $(3.6)
Net earnings loss............ -- -- -- (7.3) -- -- --
Dividends declared -- 40
cents per share............ -- -- -- (8.0) -- -- --
Minimum pension liability
adjustment................. -- -- -- -- (3.1) -- --
Shares issued under stock
plans...................... -- -- 1.9 -- -- -- 1.3
Translation adjustments...... -- -- -- -- -- (3.0) --
----- ----- ------- ------- ------ ------ -----
Balance -- September 30,
1996....................... 20.2* $ 3.0 $ 114.1 $ 134.4 $ (3.1) $ (8.5) $(2.3)
Net loss..................... -- -- -- (79.1) -- -- --
Dividends declared -- 20
cents per share............ -- -- -- (4.0) -- -- --
Minimum pension liability
adjustment................. -- -- -- -- (0.4) -- --
Shares issued under stock
plans...................... 0.3 0.1 3.8 -- -- -- --
Translation adjustments...... -- -- -- -- -- (7.3) --
----- ----- ------- ------- ------ ------ -----
Balance --
September 30, 1997 --
Pre-Merger Company......... 20.5* $ 3.1 $ 117.9 $ 51.3 $ (3.5) $(15.8) $(2.3)
Balance --
September 30, 1997 --
Post-Merger Company prior
to merger............... 20.5* 3.1 117.9 51.3 (3.5) (15.8) (2.3)
Cancellation of Pre-Merger
Company shares upon
merger..................... (20.5) (3.1) (117.9) (51.3) 3.5 15.8 2.3
Issuance of Post-Merger
Company shares upon
merger..................... 20.4 0.2 276.8 -- -- -- --
----- ----- ------- ------- ------ ------ -----
Balance --
September 30, 1997 --
Post-Merger Company........ 20.4 $ 0.2 $ 276.8 $ -- $ -- $ -- $ --
Net loss..................... -- $ -- $ -- $(150.5) $ -- $ -- $ --
Minimum pension liability
adjustment................. -- -- -- -- (24.7) -- --
Shares issued under stock
plans...................... -- -- 0.1 -- -- --
Translation adjustments...... -- -- -- -- -- (7.2) --
----- ----- ------- ------- ------ ------ -----
Balance --
September 30, 1998 --
Post-Merger Company........ 20.4 $ 0.2 $ 276.9 $(150.5) $(24.7) $ (7.2) $ --
===== ===== ======= ======= ====== ====== =====
</TABLE>
- ---------------
* Net of shares of treasury stock.
The accompanying notes are an integral part of these statements.
37
<PAGE> 39
OUTBOARD MARINE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. MERGER WITH GREENMARINE ACQUISITION CORP.
On September 12, 1997, Greenmarine Acquisition Corp. ("Greenmarine")
acquired control of Outboard Marine Corporation (the "Pre-Merger Company") when
shareholders tendered approximately 90 percent of the outstanding shares of the
Pre-Merger Company's common stock to Greenmarine for $18 per share in cash.
Greenmarine was formed solely to purchase the shares of the Pre-Merger Company
and merged with and into the Pre-Merger Company in a non-taxable transaction on
September 30, 1997. Outboard Marine Corporation was the sole surviving entity of
the merger with Greenmarine (the "Post-Merger Company" or the "Company"). All of
the outstanding Pre-Merger Company common stock was cancelled on September 30,
1997 and 20.4 million shares of new common stock were issued to Greenmarine
Holdings LLC (the "Parent") the parent company of Greenmarine. Greenmarine's
total purchase price of common stock and related acquisition costs amounted to
$373.0 million.
The acquisition and the merger were accounted for using the purchase method
of accounting. Accordingly, the purchase price has been allocated to assets
acquired and liabilities assumed based on fair market values at the date of
acquisition. The fair values of tangible assets acquired and liabilities assumed
were $883.6 million and $817.8 million, respectively. In addition, $83.9 million
of the purchase price was allocated to intangible assets for trademarks, patents
and dealer network. At September 30, 1997, the preliminary allocation of
purchase price to assets acquired and liabilities assumed included $8.1 million
of reserves for: 1) severance costs associated with closing the Old Hickory, TN
facility, 2) guaranteed payments for terminating a supply agreement, and 3)
severance costs for certain corporate employees. At September 30, 1998, the
allocation of purchase price to assets acquired and liabilities assumed in the
Greenmarine Acquisition was finalized. The adjustments from the preliminary
purchase price allocation at September 30, 1997 included $5.3 million to reverse
a portion of a valuation allowance (and related goodwill) established for the
disposition of the Company's joint venture (see Note 3). In addition, the
Company reduced its purchase accounting reserves and corresponding goodwill by
$1.4 million for revisions of certain estimates. The adjusted September 30, 1998
excess purchase price over fair value of the net assets acquired was
approximately $120 million (prior to goodwill amortization) and has been
classified as goodwill in the Statement of Consolidated Financial Position. The
goodwill related to the acquisition will be amortized using the straight-line
method over a period of 40 years.
The acquisition and the merger have been accounted for as if the
acquisition and merger had taken place simultaneously on September 30, 1997. In
the opinion of management, accounting for the acquisition and the merger as of
September 30, 1997, as opposed to accounting for the acquisition and the merger
on September 12, 1997, did not materially impact the Statement of Consolidated
Earnings. Unaudited pro forma combined results of operations of the Company and
Greenmarine on the basis that the acquisition had taken place at the beginning
of fiscal year 1997 and 1996 are presented in Note 19.
2. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS. The Company, and its subsidiaries, is a multinational
company which operates in the marine recreation business. The Company
manufactures and markets marine engines, boats and marine parts and accessories.
CHANGE IN FISCAL YEAR. Effective October 1, 1998, the Company's fiscal
year-end will change from September 30 to December 31. The Company will file
with the Securities and Exchange Commission a transition report on Form 10-Q for
the transition period of October 1, 1998 through December 31, 1998.
BASIS OF PRESENTATION. The consolidated financial statements for the
Post-Merger Company were prepared using a new basis of purchase accounting. The
Pre-Merger Company's historical basis of accounting was used prior to September
30, 1997.
38
<PAGE> 40
OUTBOARD MARINE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRINCIPLES OF CONSOLIDATION. The accounts of all significant subsidiaries
were included in the Consolidated Financial Statements. Intercompany activity
and account balances have been eliminated in consolidation. At September 30,
1998, all subsidiaries were wholly owned except those referred to in Note 3 to
the Consolidated Financial Statements.
ACCOUNTING ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions which affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS. For purposes of the Statements of Consolidated
Financial Position and Consolidated Cash Flows, marketable securities with an
original maturity of three months or less are considered cash equivalents.
The Company's domestic banking system provides for the daily replenishment
of major bank accounts for check clearing requirements. Accordingly, outstanding
checks of $26.4 million and $18.3 million which had not yet been paid by the
banks at September 30, 1998 and 1997, respectively, were reflected in trade
accounts payable in the Statements of Consolidated Financial Position.
RESTRICTED CASH. On May 27, 1998, the Company issued $160.0 million of
10 3/4% Senior Notes ("Senior Notes") due 2008. Concurrently with the issuance
of the Senior Notes, the Company entered into a depositary agreement which
provided for the establishment and maintenance of an interest reserve account
("Restricted Cash") for the benefit of the holders of the Senior Notes and other
senior creditors of the Company in an amount equal to one year's interest due to
these lenders. At September 30, 1998, the Restricted Cash was $28.6 million and
must be maintained until the later of June 27, 2001, such time as the Company's
fixed coverage ratio is greater than 2.5 to 1.0 (as determined under the
depositary agreement)or such time as the Senior Notes are paid in full.
INVENTORIES. The Company's domestic inventory is carried at the lower of
cost or market using principally the last-in, first-out (LIFO) cost method. All
other inventory (23% in 1998 and 22% in 1997) is carried at the lower of
first-in, first-out (FIFO) cost or market. In fiscal year 1998, the Company
changed its accounting for the absorption of certain manufacturing overhead
costs to better reflect the costs to manufacture such inventory. The effect of
this change was to decrease cost of goods sold and increase its earnings from
operations by approximately $3.6 million.
During 1997 and 1996, the liquidation of LIFO inventory quantities acquired
at lower costs prevailing in prior years as compared with the costs of 1997 and
1996 purchases, increased earnings before tax by $1.0 million and $1.3 million,
respectively.
PRODUCT TOOLING, PLANT AND EQUIPMENT AND DEPRECIATION. Product tooling
costs are amortized over a period not exceeding five years, beginning the first
year the related product is sold. Plant and equipment are recorded at cost and
depreciated substantially on a straight-line basis over their estimated useful
lives as follows: buildings, 10 to 40 years; machinery and equipment, 3 to
12 1/2 years. Depreciation is not provided on construction in progress until the
related assets are placed into service.
Amortization of tooling and depreciation of plant and equipment on the
Post-Merger Company was $43.1 million for 1998 and on the Pre-Merger Company was
$52.7 million and $52.1 million for 1997 and 1996, respectively.
When plant and equipment is retired or sold, its cost and related
accumulated depreciation are written-off and the resulting gain or loss is
included in other (income) expenses net in the Statements of Consolidated
Earnings.
39
<PAGE> 41
OUTBOARD MARINE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Maintenance and repair costs are charged directly to earnings as incurred
and Post-Merger company expenses were $27.0 million for 1998 and Pre-Merger
Company expenses were $26.5 million and $29.4 million for 1997 and 1996,
respectively. Major rebuilding costs which substantially extend the useful life
of an asset are capitalized and depreciated accordingly.
INTANGIBLES. The Statements of Consolidated Financial Position at
September 30, 1998 and 1997 included goodwill, net of amortization expense, of
$116.3 million and $127.3 million and trademarks, patents and other intangibles
of $81.6 million and $83.9 million, respectively. Intangibles are amortized over
15 to 40 years. The carrying value of the intangible assets is periodically
reviewed by the Company based on the expected future operating earnings of the
related units.
Amortization of intangibles on the Post-Merger Company was $6.2 million for
1998 and on the Pre-Merger Company was $1.6 million and $1.8 million for 1997
and 1996, respectively. Accumulated amortization was $6.2 million and $0.0 for
1998 and 1997, respectively.
REVENUE RECOGNITION. The Company recognizes sales and related expenses
including estimated warranty costs upon shipment of products to unaffiliated
customers.
ADVERTISING COSTS. Advertising costs are charged to expense as incurred
and were $27.6 million on the Post-Merger Company for 1998, $33.7 million and
$31.8 million on the Pre-Merger Company for 1997 and 1996, respectively.
WARRANTY. The Company generally provides the ultimate consumer a warranty
with each product and accrues warranty expense at time of sale based upon actual
claims history. Actual warranty costs incurred are charged against the accrual
when paid. In the year ended September 30, 1998, warranty accruals were
increased by approximately $17.0 million partially as a result of costs
associated with its new FICHT engines. In the year ended September 30, 1997,
warranty accruals were increased by $9.7 million due to a change in accounting
estimate.
RESEARCH AND DEVELOPMENT COSTS. Expenditures relating to the development
of new products and processes, including certain improvements and refinements to
existing products, are expensed as incurred. Such Post-Merger Company
expenditures were $36.8 million for 1998, and Pre-Merger Company expenditures
were $38.2 million and $41.8 million for 1997 and 1996, respectively.
TRANSLATION OF NON-U.S. SUBSIDIARY FINANCIAL STATEMENTS. The financial
statements of non-U.S. subsidiaries are translated to U.S. dollars substantially
as follows: all assets and liabilities at year-end exchange rates; sales and
expenses at average exchange rates; shareholders' investment at historical
exchange rates. Gains and losses from translating non-U.S. subsidiaries'
financial statements are recorded directly in shareholders' investment. The
Statements of Consolidated Earnings for the Post-Merger Company in 1998 and
Pre-Merger Company in 1997 include foreign exchange losses (gains) of $(0.7)
million and $1.0 million, respectively, which resulted primarily from commercial
transactions and forward exchange contracts.
IMPAIRMENT OF LONG-LIVED ASSETS. Effective October 1, 1996, the Pre-Merger
Company adopted the Financial Accounting Standards Board's Statement of
Accounting Standards No. 121 (SFAS 121), "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of." SFAS 121
requires that long-lived assets and certain identifiable intangibles held and
used by a company be reviewed for possible impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. SFAS 121 also requires that long-lived assets and certain
identifiable intangibles held for sale, other than those related to discontinued
operations, be reported at the lower of carrying amount or fair value less cost
to sell. The Company evaluates the long-lived assets and certain identifiable
intangibles for possible impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. An
impairment charge of $2.0 million for the Pre-Merger Company was
40
<PAGE> 42
OUTBOARD MARINE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recognized in the year ended September 30, 1997. The Company periodically
evaluates whether events and circumstances have occurred that indicate the
remaining estimated useful life of intangible assets may warrant revision or
that the remaining balance may not be recoverable. If factors indicate that
intangible assets should be evaluated for possible impairment, the Company would
use an estimate of the relative business unit's expected undiscounted operating
cash flow over the remaining life of the intangible asset in measuring whether
the intangible asset is recoverable.
EARNINGS PER SHARE OF COMMON STOCK. The Financial Accounting Standards
Board's Statement No. 128 (SFAS 128), "Earnings per Share" was issued in
February, 1997. The new standard simplifies the computation of earnings per
share (EPS) and provides improved comparability with international standards.
SFAS 128 replaces primary EPS with "Basic" EPS, which excludes stock option
dilution and is computed by dividing net earnings or (loss) by the
weighted-average number of common shares outstanding for the period. "Diluted"
EPS (which replaces fully-diluted EPS) is computed similarly to fully-diluted
EPS by reflecting the potential dilution that occurs if securities or other
contracts to issue common stock were exercised or converted to common stock or
resulted in the issuance of common stock that then shared in the earnings.
Basic earnings (loss) per share of common stock is computed based on the
weighted average number of shares of common stock outstanding of 20.4 million,
20.2 million and 20.1 million for the fiscal years ended September 30, 1998,
1997 and 1996, respectively. The computation of diluted earnings (loss) per
share of common stock assumed conversion of the 7% convertible subordinated
debentures due 2002; accordingly, net earnings (loss) were increased by
after-tax interest and related expense amortization on the debentures. For the
diluted earnings (loss) per share computations for the 1998, 1997 and 1996
fiscal years, shares were computed to be 20.4 million, 23.6 million and 23.6
million, respectively. For the 1998, 1997 and 1996 fiscal years, the computation
of diluted earnings (loss) per share was antidilutive; therefore, the amounts
reported for basic and diluted earnings (loss) per share are identical.
On September 30, 1997, all of the Pre-Merger Company outstanding common
stock was cancelled and 20.4 million shares of new common stock were issued. See
Note 9 concerning the redemption of the 7% convertible subordinated debentures
due 2002.
NEW ACCOUNTING STANDARDS. In fiscal year 1999, the Company will implement
three accounting standards issued by the Financial Accounting Standards Board,
SFAS 130, "Reporting Comprehensive Income," SFAS 131, "Disclosures About
Segments of an Enterprise and Related Information," and SFAS 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." The Company
believes that these changes will have no effect on its financial position or
results of operations (as currently reported) as they require only changes in or
additions to current disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities."
SFAS 133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting. SFAS 133 is effective for fiscal years beginning after June
15, 1999. The Company has not yet quantified the impacts of adopting SFAS 133 on
its financial statements and has not determined the timing of or method of its
adoption of SFAS 133.
41
<PAGE> 43
OUTBOARD MARINE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. JOINT VENTURE AND INVESTMENTS
In July 1995, the Pre-Merger Company and FICHT GmbH of Kirchseeon, Germany
announced the formation of a strategic alliance for the development and
worldwide manufacturing and marketing of high pressure fuel injection systems
and other technologies. Under the terms of the strategic alliance, the Pre-
Merger Company acquired a 51% interest in FICHT GmbH. The Ficht family retained
a 49% interest and continues to operate the business. FICHT GmbH and Co. KG
(FICHT) is the name of that business. The Company has an exclusive license for
the marine industry for the FICHT fuel injection system. In addition, the
Company has an exclusive worldwide license agreement for all non-automotive
applications. Royalty income, if any, resulting from other licensing of the
technology will be distributed through FICHT.
In July 1993, the Pre-Merger Company and AB Volvo Penta and Volvo Penta of
the Americas, Inc. formed a joint venture company to produce gasoline stern
drive and gasoline inboard marine power systems. The joint venture was 60% owned
by Volvo Penta of the Americas, Inc. (Volvo Penta) and 40% owned by the Company.
The jointly produced marine power systems were marketed by Volvo Penta to
independent boat builders worldwide and are used in boats manufactured by
subsidiaries of the Company. The units carry the Volvo Penta and SX Cobra brand
names. The equity method of accounting is used for the joint venture. At
September 30, 1998 and 1997, the Company's investment, including current net
accounts receivable, was $24.0 and $13.9 million, respectively. The joint
venture is a manufacturing and after-market joint venture. The Company
recognizes gross profit relating to certain parts sales and incurs expenses for
product development that are part of the joint venture. The Post-Merger
Company's share of the joint venture's earnings (including income derived from
the Company's stern-drive joint venture net of joint venture expenses) was $4.8
million for 1998, and the Pre-Merger Company's was $7.2 million and $4.4 million
in fiscal years 1997 and 1996, respectively, which were included in other
(income) expense, net in the Statements of Consolidated Earnings. On December 8,
1998, the Company terminated its joint venture with AB Volvo Penta and Volvo
Penta of the Americas, Inc. and entered into a Product Sourcing Contract which
will control the future purchase and sale obligations of various specified goods
between certain of the parties.
4. RESTRUCTURING CHARGES
During the fourth quarter of fiscal year 1998, the Company finalized a
restructuring plan for the closure/ consolidation of its Milwaukee and Waukegan
engine facilities. The Company announced the closure of the Milwaukee and
Waukegan facilities on September 24, 1998. The Company recorded a $98.5 million
restructuring charge to recognize severance and benefits for approximately 950
employees to be terminated ($14.0 million), curtailment losses associated with
the acceleration of pension and postretirement benefits for employees at the two
facilities ($72.1 million), and facility shut down costs associated with closing
the facility and disposing of certain assets ($12.4 million). The Company's plan
includes outsourcing the substantial portion of its sub-assembly production
currently performed in its Milwaukee and Waukegan facilities, to third-party
vendors. The Company anticipates substantial completion of such plan by the end
of year 2000. No costs have been charged to this reserve as of September 30,
1998.
During fiscal year 1996, the Pre-Merger Company recorded $25.6 million in
restructuring charges. Included was $20.1 million for closings of distribution
operations and write-down of manufacturing facilities outside the United States.
The Company recognized $1.4 million, $12.5 million and $7.1 million in costs
against this reserve in 1998, 1997 and 1996, respectively. The North American
and European sales and marketing operations were realigned to more effectively
meet market needs.
42
<PAGE> 44
OUTBOARD MARINE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INVENTORIES
The components of inventory were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1998 1997
--------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Finished product............................................ $ 55.8 $ 62.1
Raw material, work in process and service parts............. 118.6 114.8
------ ------
Inventory at current cost which is less than market....... 174.4 176.9
Excess of current cost over LIFO cost....................... -- --
------ ------
Net inventory............................................. $174.4 $176.9
====== ======
</TABLE>
6. PLANT AND EQUIPMENT
Plant and equipment components were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1998 1997
--------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Land and improvements....................................... $ 11.9 $ 13.2
Buildings................................................... 62.6 65.0
Machinery and equipment..................................... 129.0 126.1
Construction in progress.................................... 8.5 5.9
------ ------
212.0 210.2
Accumulated depreciation.................................... 17.5 --
------ ------
Plant and equipment, net.................................. $194.5 $210.2
====== ======
</TABLE>
7. ACCRUED LIABILITIES AND OTHER NON-CURRENT LIABILITIES
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1998 1997
--------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Accrued liabilities were as follows:
Compensation, pension programs and current postretirement
medical................................................... $ 25.7 $ 24.2
Warranty.................................................... 36.3 24.6
Marketing programs.......................................... 36.2 32.8
Restructuring reserves...................................... 10.6 6.0
Other....................................................... 68.5 51.7
------ ------
Accrued liabilities.................................... $177.3 $139.3
====== ======
</TABLE>
43
<PAGE> 45
OUTBOARD MARINE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1998 1997
--------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Other non-current liabilities were as follows:
Pension programs............................................ $ 80.7 $ 17.3
Environmental remediation................................... 18.1 18.4
Warranty.................................................... 20.4 15.2
Deferred income taxes (primarily valuation allowance)....... 124.0 80.5
Restructuring reserves...................................... 20.4 --
Other....................................................... 30.6 29.8
------ ------
Accrued non-current liabilities........................... $304.2 $161.2
====== ======
</TABLE>
As described in Note 4, the Company recorded a $98.5 million restructuring
reserve in the fourth quarter of fiscal year 1998. The Company has classified
$6.0 million as accrued liabilities which represents the Company's anticipated
expenditures in fiscal year 1999 for severance costs associated with the closing
of its Milwaukee and Waukegan facilities. In addition, the Company has recorded
$20.4 million as other non-current liabilities for severance and closing costs
associated with the closing of the Milwaukee and Waukegan facilities that will
be incurred in the year 2000. Finally, in connection with the closure of the
Milwaukee and Waukegan facilities, the Company recorded a $42.2 million
curtailment loss related to the Company's pension plan and a $29.9 million
curtailment loss related to the Company's postretirement liabilities (the
pension curtailment loss has been categorized under the heading "Pension
programs" above and the postretirement curtailment loss has been included as
"Postretirement benefits other than pensions" in the Statement of Consolidated
Financial Position). The Company anticipates that the funding of the pension
benefits for the employees at the Milwaukee and Waukegan facilities will be from
the Pension Plan's Asset Portfolio, to which the Company has contributed.
8. SHORT-TERM BORROWINGS AND ACCOUNTS RECEIVABLE SALES AGREEMENTS
A summary of short-term borrowing activity was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Outstanding at September 30
Credit agreement.......................................... $ -- $96.0 $ --
Bank borrowing............................................ $ -- $ -- $ --
Average bank borrowing for the year
Borrowing................................................. $35.7 $ 2.9 $ 5.7
Interest rate............................................. 8.0% 7.1% 6.6%
Maximum month end borrowing............................... $70.7 $29.0 $15.0
===== ===== =====
</TABLE>
The Company became obligated under a credit agreement, as amended, with
American Fidelity Group ("AFG") which provided for loans of up to $150 million
(the "Acquisition Debt"). The Acquisition Debt was used to finance a portion of
the funds received to effect Greenmarine's acquisition of the Company. Amounts
outstanding under this credit agreement were secured by 20.4 shares of common
stock of the Post-Merger Company and bear interest at 10%. On November 12, 1997,
the Company borrowed the remaining $54.0 million principal amount of Acquisition
Debt in connection with the purchase of all properly tendered 7% convertible
subordinated debentures of Outboard Marine Corporation due 2002 (see Note 9 to
the Consolidated Financial Statements). The full amount of the Acquisition Debt
was paid on May 27, 1998, from the proceeds of newly issued long-term debt (see
Note 9).
44
<PAGE> 46
OUTBOARD MARINE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition to the credit agreement, the Company's non-U.S. subsidiaries
had additional uncommitted lines of credit of approximately $ 0.9 million on
September 30, 1998 and September 30, 1997.
The Company entered into a Financing and Security Agreement effective
November 12, 1997, which provided for loans of up to $50 million. Effective
January 6, 1998, the Company entered into a $150 million Amended and Restated
Loan and Security Agreement (the "Credit Agreement") which expires December 31,
2000 which replaced the November 12, 1997 agreement. The Company entered into a
Second Amendment to Amended and Restated Loan and Security Agreement, effective
as of August 31, 1998 with the lenders under the Credit Agreement, pursuant to
which, among other things, the sublimit for the issuance of letters of credit
was increased from $30.0 million to $50.0 million. As of September 30, 1998, the
Company was in violation of certain of the maintenance covenants contained in
its credit agreement with NationsBank, N.A. The Company informed the lenders
under the credit agreement of the circumstances resulting in the violation, and
the Company entered into a Third Amendment to Amended and Restated Loan and
Security Agreement, effective as of December 21, 1998 with the lenders under the
Credit Agreement, pursuant to which, among other things, (i) the Company's
non-compliance with the consolidated tangible net worth, consolidated interest
and consolidated leverage covenants for the period ended September 30, 1998 was
waived and (ii) the Company's consolidated tangible net worth, consolidated
leverage ratio and consolidated interest coverage ratio requirements have been
amended. Separately, any loans outstanding under the Credit Agreement are
secured by the Company's inventory, receivables and intellectual property and
are guaranteed by certain of the Company's operating subsidiaries.
In connection with the change of control, the Company terminated a previous
revolving credit agreement which had provided for loans up to $150 million.
The Pre-Merger Company had a $55 million receivable sales agreement whereby
it agreed to sell an ownership interest in a designated pool of domestic trade
accounts receivable ("Receivables"). These receivable sales agreements were
terminated as of April 30, 1997. During the course of fiscal year 1997, monthly
sales of receivables averaged $7.4 million with maximum sales of $29.0 million
in February 1997. The Pre-Merger Company retained substantially the same credit
risk as if the Receivables had not been sold. The costs associated with the
receivable sales agreements were included in non-operating expense -- other, net
in the Statements of Consolidated Earnings for the years ended September 30,
1997 and 1996.
9. LONG-TERM DEBT
Long-term debt on September 30, 1998 and 1997, net of sinking fund
requirements included in current liabilities, consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1998 1997
--------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C>
10 3/4% senior notes due 2008............................... $155.4 $ --
7% convertible subordinated debentures due 2002............. 7.1 74.8
9 1/8% sinking fund debentures due through 2017............. 62.6 62.6
Medium-term notes due 1998 through 2001 with rates ranging
from 8.16% to 8.625%...................................... 21.1 26.2
Industrial revenue bonds and other debt due 2002 through
2007 with rates ranging from 6.0% to 12.037%.............. 12.9 13.1
------ ------
$259.1 $176.7
Less current maturities..................................... (11.2) (72.9)
------ ------
$247.9 $103.8
====== ======
</TABLE>
45
<PAGE> 47
OUTBOARD MARINE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On May 27, 1998, the Company issued $160.0 million of 10 3/4% Senior Notes
("Senior Notes") due 2008, with interest payable semiannually on June 1 and
December 1, of each year. The net proceeds from the issuance totaled $155.4
million, of which, $150.0 million was used to prepay the Acquisition Debt.
Unamortized debt discount costs of $4.6 million remained at September 30, 1998.
The Senior Notes are guaranteed by certain of the Company's U.S. operating
subsidiaries. Concurrently with the issuance of the Senior Notes, the Company
entered into a depositary agreement which provided for the establishment and
maintenance of an interest reserve account for the benefit of the holders of the
Senior Notes and other senior creditors of the Company in an amount equal to one
year's interest due to these lenders. At September 30, 1998, the interest
reserve Restricted Cash was $28.6 million and must be maintained for a minimum
of three years but at least until such time as the Company's fixed coverage
ratio is greater than 2.5 to 1.0 (as determined under the depository
agreement)or the Senior Notes are paid in full. The Indenture governing the
Senior Notes contains certain covenants that limit, among other things, the
ability of the Company and its restricted subsidiaries to (i) pay dividends,
redeem capital stock or make certain other restricted payments or investments;
(ii) incur additional indebtedness or issue certain preferred equity interests;
(iii) merge or consolidate with any other person or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of its assets;
(iv) create liens on assets; and (v) enter into certain transactions with
affiliates or related persons.
Due to the change of control and the merger with Greenmarine, the Company
was required to offer to purchase its 7% convertible subordinated debentures due
2002. Debentures tendered and repurchased on November 12, 1997 totaled $67.7
million leaving $7.1 million outstanding and a continuing obligation of the
Company. As a result of the merger, the remaining $7.1 million principal amount
of outstanding Convertible Debentures are no longer convertible into shares of
common stock of the Company. Each holder of the remaining outstanding
Convertible Debentures has the right to convert such holder's Convertible
Debentures into the cash that was payable to holders of common stock in the
merger for each share of common stock into which such Convertible Debentures
might have been converted immediately prior to the Merger. At September 30,
1997, $67.7 million was reflected as current maturities of debt.
On September 30, 1998, the Company held $34.8 million of its 9 1/8% sinking
fund debentures, which will be used to meet sinking fund requirements of $5.0
million per year in the years 1999 through 2004. Amounts are recorded as a
reduction of outstanding debt.
At September 30, 1998, an aggregate of $21.1 principal amount of
Medium-Term Notes Series A (the "Medium-Term Notes") were outstanding. Rates on
the Medium-Term Notes range from 8.160% to 8.125%. Interest on each of the
outstanding Medium-Term Notes is payable semiannually each March 30 and
September 30 and at maturity.
The agreements covering the Company's revolving credit agreement (see Note
8) and one industrial revenue bond have restrictive financial covenants.
Maturities and sinking fund requirements of long-term debt for each of the
next five fiscal years is as follows:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
---------------------
<S> <C>
1999..................................... $11.2
2000..................................... $ 7.0
2001..................................... $ 6.3
2002..................................... $ 8.4
2003..................................... $ 1.4
</TABLE>
46
<PAGE> 48
OUTBOARD MARINE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, receivables, accounts
payable, and current maturities of long-term debt approximate fair values due to
the short term nature of these instruments. The fair value of the long-term debt
was $237.1 million and $103.8 million at September 30, 1998 and 1997,
respectively, versus carrying amounts of $247.9 and $103.8 million at September
30, 1998 and 1997, respectively. The fair value of long-term debt was based on
quoted market prices where available or discounted cash flows using market rates
available for similar debt of the same remaining maturities.
The Company uses various financial instruments to manage interest rate,
foreign currency, and commodity pricing exposures. The agreements are with major
financial institutions which are expected to fully perform under the terms of
the instruments, thereby mitigating the credit risk from the transactions. The
Company does not hold or issue financial instruments for trading purposes. The
notional amounts of these contracts do not represent amounts exchanged by the
parties and, thus, are not a measure of the Company's risk. The net amounts
exchanged are calculated on the basis of the notional amounts and other terms of
the contracts, such as interest rates or exchange rates, and only represent a
small portion of the notional amounts.
The Pre-Merger Company had entered into several interest rate swap
agreements as a means of managing its proportion of fixed to variable interest
rate exposure. The differential to be paid or received is accrued consistent
with the terms of the agreements and market interest rates and is recognized in
net earnings as an adjustment to interest expense. Also at September 30, 1998
and 1997, the Company had an outstanding floating to fixed interest rate swap
agreement having a total notional principal amount of $5 million expiring
February 15, 1999. The fair value of the interest rate swap agreement at
September 30, 1998 and 1997 was an estimated termination liability of $0.1 and
$0.3 million, respectively. This potential expense at each fiscal year end had
not yet been reflected in net earnings as it represents the hedging of long-term
activities to be amortized in future reporting periods. The fair value was the
estimated amount the Company would have paid to terminate the swap agreements.
The Company enters into foreign exchange forward contracts and options to
hedge particular anticipated transactions expected to be denominated in such
currencies. The recognition of gains or losses on these instruments is accrued
as foreign exchange rates change and is recognized in net earnings unless the
gains or losses are related to qualifying hedges on firm foreign currency
commitments which are deferred. At September 30, 1997, the Company had $32.1
million Belgian franc put options with a market value of $4.3 million and a $10
million French franc put option with a market value of $1.0 million, both of
which settled October 2, 1997. This income had been reflected in net earnings as
cost of goods sold at September 30, 1997, as it represented a hedge of fiscal
1997 activities.
At September 30, 1998, the Company had entered into foreign currency
forward exchange contracts to receive 11.0 million Australian dollars and 29.0
million Canadian dollars for $25.7 million with a fair market value of $25.5
million. The $0.2 million loss was recognized in 1998. The Company also entered
into foreign currency forward exchange contracts to receive $0.6 million (also
fair market value) for 0.9 million Canadian dollars. Finally, at September 30,
1998, the Company had Canadian dollar put options for $1.3 million (also fair
market value).
The Company also entered into foreign currency forward exchange contracts
to receive 3,165.5 million Japanese yen for $22.9 million with a fair market
value of $23.7 million at September 30, 1998. The gains on these Japanese yen
contracts has been deferred at September 30, 1998 because they relate to
qualifying hedges on firm foreign currency commitments which are deferred
off-balance sheet and included as a component of the related hedged transaction,
when incurred.
The foreign currency contracts and options outstanding at September 30,
1998 all mature in one year or less. The fair values were obtained from major
financial institutions based upon the market values as of September 30, 1998 and
1997.
47
<PAGE> 49
OUTBOARD MARINE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company purchases commodity futures to hedge anticipated purchases of
aluminum. Gains and losses on open hedging transactions are deferred until the
futures are closed. Upon closing, gains and losses are included in inventories
as a cost of the commodities and reflected in net earnings when the product is
sold. At September 30, 1998, the Company had futures covering approximately 11%
of annual forecasted aluminum purchases. The fair market value of these options
resulted in a $0.1 million deferred loss at September 30, 1998 and a $0.3
million deferred gain at September 30, 1997. The fair market value was obtained
from a major financial institution based upon the market value of those futures
at September 30, 1998.
11. PREFERRED STOCK AND SHAREHOLDER RIGHTS PLAN
Due to the change of control and the merger with Greenmarine, all rights
existing under the shareholder rights plan adopted by the Pre-Merger Company on
April 24, 1996 expired on September 30, 1997.
In addition, as a result of the merger, all of the Pre-Merger Company's
preferred stock, including those reserved for issuance under the shareholder
rights plan, were cancelled.
12. COMMON STOCK
On September 30, 1997, all of the outstanding common stock of the
Pre-Merger Company was cancelled and 20.4 million shares of common stock of the
Post-Merger Company were issued.
In 1992, the Pre-Merger Company issued $74.75 million, principal amount, of
7% subordinated convertible debentures. The debentures were convertible into
3,359,550 shares of the Pre-Merger Company's common stock (which were reserved)
at a conversion price of $22.25 per share. Due to the change of control and the
merger with Greenmarine, each holder of debentures had the right, at such
holder's option, to require the Company to repurchase all or a portion of such
holder's debentures at the purchase price by November 12, 1997. As a result of
the offer to purchase, all but $7.1 million of the principal amount was tendered
to, and purchased by, the Company. As a result of the merger, the remaining $7.1
million of convertible debentures are no longer convertible into common stock
(see Note 9).
Due to the merger with Greenmarine, all stock options, stock appreciation
rights and restricted stock granted under the OMC Executive Equity Incentive
Plan and the OMC 1994 Long-Term Incentive Plan were fully vested and payable in
accordance with the terms of the Plans or as provided in the terms of the
grants, as amended. In the case of stock options, participants in the plans were
entitled to receive in cash the difference, if any, between the purchase price
of $18.00 per share (or limited stock appreciation rights at $19.50 per share as
computed for officers) and the stock option purchase price. With regard to
restricted stock granted under either of the plans, participants were entitled
to receive the cash value of the grants based on $18.00 per share or as may have
otherwise been agreed to between the participant and the Pre-Merger Company. All
amounts with respect to the above plans have been expensed and included in the
category "change of control expenses -- compensation" in the September 30, 1997
Statement of Consolidated Earnings.
The Pre-Merger Company adopted the disclosure-only provision under
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation," as of September 30, 1997, while continuing to measure
compensation cost under APB Opinion No. 25, "Accounting for Stock Issued to
Employees." If the accounting provisions of SFAS 123 had been adopted as of the
beginning of 1996, the effect on net earnings for 1997 and 1996 would have been
immaterial.
On March 10, 1998, the Post-Merger Company adopted the Outboard Marine
Corporation Personal Rewards and Opportunities Program ("PROP"). PROP was
designed to recognize and reward, through cash bonuses, stock options and other
equity-based awards, the personal contributions and achievements of employees of
the Company. All employees are eligible to participate in PROP. PROP replaced
all long and short-term incentive plans of the Company. PROP provides for (i)
cash and/or equity annual bonuses based on performance targets, and (ii) grants
of stock options, shares of restricted stock, phantom shares of stock or
48
<PAGE> 50
OUTBOARD MARINE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock appreciation rights. The aggregate number of shares of stock available for
equity awards under PROP is 1,500,000 shares of currently authorized common
stock of the Company. Grants under PROP are discretionary.
Stock option grants under PROP through September 30, 1998 were 991,745. The
grants are exercisable at $18 per share and expire ten years after date of
grant, except for 61,105 incentive stock options granted to an executive which
expire 11 years after the date of grant. The Company accounts for PROP under APB
Opinion No. 25, and has not recorded any compensation expense for grants through
September 30, 1998 as the exercise price of the stock option approximates
management's estimate of fair market value of the Company's stock on the date of
grant. If the accounting provisions of SFAS 123 had been adopted, the effect on
net earnings for 1998 would have been a reduction of pretax earnings of $0.7
million on a proforma basis and a reduction of basic and diluted earnings per
share of $0.03 per share.
A summary of option data for all plans was as follows:
<TABLE>
<CAPTION>
OPTION
NUMBER OF EXERCISE
OPTION SHARES PRICE PER SHARE
------------- ---------------
<S> <C> <C>
Options outstanding and unexercised at September 30,
1997* -- Pre-Merger Company............................ --
Options granted -- Post-Merger Company................... 991,745 $18.00
-------
Options outstanding and unexercised at September 30,
1998................................................... 991,745 $18.00
=======
Exercisable at September 30, 1998........................ 212,745 $18.00
=======
</TABLE>
- ---------------
* Due to the merger with Greenmarine, all options outstanding prior to September
30, 1997 were paid out in cash and cancelled at September 30, 1997.
The weighted average fair value per option granted during 1998, estimated
on the date of grant using the Black-Scholes option-pricing model was $3.75. The
fair value of 1998 options granted is estimated on the date of grant using the
following assumptions: risk-free interest rate 4.7%, and an expected life of
five years. The Company has used the 'minimum value' method of valuing stock
options based upon SFAS 123.
13. RETIREMENT BENEFIT AND INCENTIVE COMPENSATION PROGRAMS
The Company and its subsidiaries have retirement benefit plans covering a
majority of its employees. Worldwide pension calculations resulted in expense
(income) of $(5.0) million for 1998 and on the Pre-Merger Company were $2.4
million and $(0.3) million in 1997 and 1996, respectively. In addition, the
Company recorded a $42.2 million curtailment loss (as part of its 1998
restructuring -- see Note 4) associated with the acceleration of pension
benefits for employees at the Milwaukee and Waukegan facilities.
49
<PAGE> 51
OUTBOARD MARINE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following schedule of pension expense (income) presents amounts
relating to the Company's material pension plans, United States and Canada (the
1997 and 1996 fiscal years refer to the Pre-Merger Company):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------
1998 1997 1996
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Benefits earned during the period........................ $ 6.6 $ 6.6 $ 6.2
Interest cost on projected benefit obligation............ 28.8 28.5 25.4
Return on pension assets................................. (41.3) (88.5) (46.5)
Net amortization and deferral............................ (0.1) 54.3 15.7
------ ------ ------
Net periodic pension expense (income)............... $ (6.0) $ 0.9 $ 0.8
====== ====== ======
</TABLE>
Actuarial assumptions used for the Company's principal defined benefit
plans:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Discount rates.............................................. 7% 7 1/2% 8%
Rate of increase in compensation levels (salaried employee
plans).................................................... 5% 5% 5%
Expected long-term rate of return on assets................. 9 1/2% 9 1/2% 9 1/2%
</TABLE>
The funded status and pension liability were as follows:
<TABLE>
<CAPTION>
PLANS WHOSE
PLANS WHOSE ACCUMULATED
ASSETS EXCEED BENEFITS
ACCUMULATED BENEFITS EXCEED ASSETS
-------------------- ---------------
SEPTEMBER 30,
---------------------------------------
1998 1997 1998 1997
-------- -------- ------ -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligation
Vested................................................. $206.1 $331.0 $209.9 $15.2
Nonvested.............................................. 18.3 27.7 16.1 1.0
------ ------ ------ -----
Accumulated benefit obligation...................... 224.4 358.7 226.0 16.2
Excess of projected benefit obligation over accumulated
benefit obligation..................................... 24.9 22.1 1.0 1.2
------ ------ ------ -----
Projected benefit obligation........................ 249.3 380.8 227.0 17.4
Plan assets at fair market value......................... 258.8 455.2 181.4 --
------ ------ ------ -----
Plan assets (in excess of) less than projected benefit
obligation............................................. (9.5) (74.4) 45.6 17.4
Unrecognized net loss.................................... (36.1) -- (24.6) --
Adjustment required to recognize minimum liability....... -- -- 24.7 --
------ ------ ------ -----
Pension liability (asset) recognized................ $(45.6) $(74.4) $ 45.7 $17.4
====== ====== ====== =====
</TABLE>
At September 30, 1997 in accordance with purchase accounting, plan assets
in excess of or less than the projected benefit obligation have been recorded.
The provisions of SFAS No. 87, "Employers' Accounting for Pensions", require the
recognition of an additional minimum liability for each defined benefit plan for
which the accumulated benefit obligation exceeds plan assets. In 1998, because
the accumulated benefit obligation exceeded the plan assets and because, due to
the application of purchase accounting, the Company did not have any
unrecognized prior service cost at the beginning of the fiscal year, the balance
of $24.7 million is reported as a separate reduction of shareholders' investment
at September 30, 1998.
50
<PAGE> 52
OUTBOARD MARINE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's major defined benefit plans had provided that upon a change
of control of the Company and upon certain other actions by the acquirer, all
participants of these plans would become vested in any excess of plan assets
over total accumulated benefit obligations. Pursuant to the terms of the plan,
this provision was deleted to avoid being triggered by the change of control
which took place at the Acquisition Date.
The Company provides certain health care and life insurance benefits for
eligible retired employees, primarily employees of the Milwaukee, Wisconsin;
Waukegan, Illinois; and former Galesburg, Illinois plants as well as Marine
Power Products and the Corporate office. Employees at these locations become
eligible if they have fulfilled specific age and service requirements. These
benefits are subject to deductible, co-payment provisions and other limitations,
which are amended periodically. The Company reserves the right to make
additional changes or terminate these benefits in the future. In addition, as
part of the Company's restructuring charge (See Note 4), the Company recorded a
curtailment loss of $29.9 million associated with the acceleration of
postretirement benefits for employees at the Milwaukee and Waukegan facilities.
On January 1, 1994, and to be effective in 1998, the Pre-Merger Company
introduced a cap for the employer-paid portion of medical costs for non-union
active employees. The cap is tied to the Consumer Price Index.
The net cost of providing postretirement health care and life insurance
benefits included the following components (1997 and 1996 were Pre-Merger
Company):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------
1998 1997 1996
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Service cost-benefits attributed to service during the
period.................................................... $ 0.7 $ 1.1 $ 1.0
Interest cost on accumulated postretirement benefit
obligation................................................ 6.6 7.3 6.4
Amortization of prior service cost and actuarial gain....... (0.2) (1.8) (1.9)
----- ----- -----
Net periodic postretirement benefit cost............... $ 7.1 $ 6.6 $ 5.5
===== ===== =====
</TABLE>
The amounts recognized in the Statements of Consolidated Financial Position
included:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1998 1997
--------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Accumulated postretirement benefit obligation
Retirees.................................................... $ 59.9 $ 65.3
Fully eligible active plan participants..................... 56.2 13.3
Other active plan participants............................ 15.3 24.2
Unrecognized net gain..................................... 0.4 --
------ ------
Net obligation......................................... $131.8 $102.8
Less: (current portion of postretirement obligation)...... 8.1 6.8
------ ------
Net long-term postretirement obligation..................... $123.7 $ 96.0
====== ======
</TABLE>
The accumulated postretirement benefit obligation was determined using a 7%
and 7 1/2% weighted average discount rate at September 30, 1998 and 1997,
respectively. The health care cost trend rate was assumed to be 7% in fiscal
year 1998, and remaining constant thereafter. In fiscal year 1997, the health
care cost trend rate was assumed to be 8%, declining to 7% in one year and
remaining constant thereafter. A one percentage point increase of this annual
trend rate would increase the accumulated postretirement benefit
51
<PAGE> 53
OUTBOARD MARINE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
obligation at September 30, 1998 by approximately $11.2 million and the net
periodic cost by $0.8 million for the year.
Under the OMC Executive Bonus Plan, the Pre-Merger Company's compensation
committee of the board of directors, which administered the plan and whose
members were not participants in the plan, had authority to determine the extent
to which the Pre-Merger Company meets, for any fiscal year, the performance
targets for that fiscal year which were set by the committee no later than the
third month of the fiscal year. In fiscal 1997, no incentive compensation was
paid or provided under this plan. In fiscal year 1996, $5.1 million was charged
to earnings under this plan.
The 1994 OMC Long-Term Incentive Plan and its predecessor plan authorized
the awarding of performance units or performance shares, each with a value equal
to the value of a share of common stock at the time of award. Performance shares
for the three year cycle ended September 30, 1997 were earned and paid based
upon the judgment of the compensation committee of the Pre-Merger Company's
board of directors whose members were not participants in the plan, as to the
achievement of various goals over multi-year award cycles. In 1997 and 1996,
respectively, $(0.2) million and $(0.4) million were credited to earnings for
the estimated cost of performance units earned under the plan.
14. OTHER EXPENSE (INCOME), NET
Other non-operating expense (income) in the Statements of Consolidated
Earnings consisted of the following items (1997 and 1996 were Pre-Merger
Company):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------
1998 1997 1996
------ ------ -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Expense (Income)
Interest earned......................................... $ (4.3) $ (4.5) $(4.1)
Insurance recovery and lawsuit settlement............... -- (10.7) --
Foreign exchange losses (gains)......................... (0.7) 1.0 --
(Gain) loss on disposition of plant and equipment....... (2.9) (5.8) 0.9
Joint venture earnings.................................. (4.8) (7.2) (4.4)
Discount charges --
Accounts receivable sales............................ -- 0.6 1.7
Miscellaneous, net...................................... (2.9) (2.6) (2.6)
------ ------ -----
$(15.6) $(29.2) $(8.5)
====== ====== =====
</TABLE>
52
<PAGE> 54
OUTBOARD MARINE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. INCOME TAXES
The provision for income taxes consisted of the following components (1997
and 1996 were Pre-Merger Company):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------
1998 1997 1996
------ ------ -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Provision for current income taxes
Federal................................................. $ (9.0) $(36.7) $(5.6)
State................................................... (7.1) (2.3) --
Non-U.S................................................. 3.1 2.8 2.5
------ ------ -----
Total current........................................ (13.0) (36.2) (3.1)
Changes to valuation allowance............................ 16.4 39.0 --
------ ------ -----
Total provision................................. $ 3.4 $ 2.8 $(3.1)
====== ====== =====
</TABLE>
The significant short-term and long-term deferred tax assets and liabilities
were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1998 1997
--------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Deferred tax assets
Litigation and claims..................................... $ 17.6 $ 18.4
Product warranty.......................................... 21.0 14.6
Marketing programs........................................ 15.1 13.7
Postretirement medical benefits........................... 67.7 41.2
Restructuring............................................. 16.8 7.3
Loss carryforwards........................................ 67.5 55.0
Other..................................................... 57.5 58.6
Valuation allowance....................................... (98.2) (81.8)
------- -------
Total deferred tax assets.............................. $ 165.0 $ 127.0
------- -------
Deferred tax liabilities
Depreciation and amortization............................. $ (13.5) (13.9)
Employee benefits......................................... (15.0) (12.8)
Purchase accounting asset revaluations.................... (57.7) (44.5)
Other..................................................... (34.3) (15.7)
------- -------
Total deferred tax liabilities......................... (120.5) (86.9)
------- -------
Net deferred tax assets........................... $ 44.5 $ 40.1
======= =======
</TABLE>
The Company believes the recorded net deferred tax assets of $44.5 million
will be realized. A valuation allowance of $98.2 million has been recorded at
September 30, 1998, to reduce the deferred tax assets to their estimated net
realizable value. Of this valuation allowance, $23.2 million relates to deferred
tax assets established for foreign and state loss carryforwards.
As of September 30, 1998, certain non-U.S. subsidiaries of the Company had
net operating loss carryforwards for income tax purposes of $37.0 million. Of
this amount, $5.0 million will expire by 2003 with the remaining balance being
unlimited. In addition, the Company has $125.8 million of Federal net operating
53
<PAGE> 55
OUTBOARD MARINE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
loss carryforwards expiring between 2009 and 2013 and $156.6 million of state
net operating loss carryforwards expiring between 1999 and 2013. These
carryforwards are entirely offset by the valuation allowance. No benefit has
been recognized in the Consolidated Financial Statements.
Several factors would generally enable the Company to recognize the
deferred tax assets that have been offset by the valuation allowance. Historical
profitability, forecasted earnings, and management's determination "it is more
likely than not" the deferred tax assets will be realized against forecasted
earnings, all affect whether the remaining U.S. deferred tax assets may be
recognized, through a reversal of the valuation allowance. Because the deferred
tax asset realization factors were adversely affected by the 1998 and 1997
fiscal year results, it is unlikely the reversal of the valuation allowance will
occur in 1999.
The following summarizes the major differences between the actual provision
for income taxes on earnings (losses) and the provision (credit) based on the
statutory United States Federal income tax rate (1997 and 1996 were Pre-Merger
Company):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------
1998 1997 1996
------ ------ ------
(% TO PRETAX EARNINGS)
<S> <C> <C> <C>
At statutory rate........................................... (35.0)% (35.0)% (35.0)%
State income taxes, net of Federal tax deduction............ (3.6) (3.0) (0.2)
Tax effect of non-U.S. subsidiary earnings (loss) taxed at
other than the U.S. rate.................................. -- 0.1 11.4
Tax benefit not provided on domestic and foreign operating
losses.................................................... 33.0 41.8 20.6
Tax effect of goodwill amortization and write-offs.......... 1.4 0.4 3.3
Reversal of valuation allowance............................. 1.9 -- --
Federal tax effect prior year's state income taxes paid..... -- (0.2) 13.6
Tax effects of audit settlements............................ -- -- (50.5)
Tax effect of Foreign Investment in U.S. property........... 6.4 -- --
Other....................................................... 0.1 (0.5) 7.0
----- ----- -----
Actual provision....................................... N.M.% N.M.% N.M.%
===== ===== =====
</TABLE>
Domestic and non-U.S. earnings before provision (credit) for income taxes
consisted of the following (1997 and 1996 were Pre-Merger Company):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------
1998 1997 1996
------- ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Earnings (loss) before provision for income taxes
United States......................................... $(144.8) $(68.7) $ (8.1)
Non-U.S............................................... (2.3) (7.6) (2.3)
------- ------ ------
Total......................................... $(147.1) $(76.3) $(10.4)
======= ====== ======
</TABLE>
The above non-U.S. loss of $2.3 million is a net amount that includes both
earnings and losses. Due to the integrated nature of the Company's operations,
any attempt to interpret the above pretax earnings (loss) as resulting from
stand-alone operations could be misleading.
No U.S. deferred taxes have been provided on $64.6 million of undistributed
non-U.S. subsidiary earnings. The Company has no plans to repatriate these
earnings and, as such, they are considered to be permanently invested. While no
detailed calculations have been made of the potential U.S. income tax liability
should such repatriation occur, the Company believes that it would not be
material in relation to the Company's Consolidated Financial Position or
Consolidated Earnings.
54
<PAGE> 56
OUTBOARD MARINE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. GEOGRAPHIC BUSINESS DATA
The Company, which operates in a single business segment, manufactures and
distributes marine engines, boats, parts and accessories. The Company markets
its products primarily through dealers in the United States, Europe and Canada,
and through distributors in the rest of the world.
Information by geographic area was as follows (1997 and 1996 were
Pre-Merger Company):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------
1998 1997 1996
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net sales
United States...................................... $ 769.7 $ 721.0 $ 813.3
Europe............................................. 91.9 90.9 114.8
Other.............................................. 164.1 167.6 193.4
-------- -------- --------
Total........................................... $1,025.7 $ 979.5 $1,121.5
======== ======== ========
Sales between geographic areas from
United States...................................... $ 168.1 $ 152.2 $ 144.4
Europe............................................. 1.1 2.1 7.4
Other.............................................. 53.7 47.0 45.6
-------- -------- --------
Total........................................... $ 222.9 $ 201.3 $ 197.4
======== ======== ========
Total revenue
United States...................................... $ 937.8 $ 873.2 $ 957.7
Europe............................................. 93.0 93.0 122.2
Other.............................................. 217.8 214.6 239.0
Eliminations....................................... (222.9) (201.3) (197.4)
-------- -------- --------
Total........................................... $1,025.7 $ 979.5 $1,121.5
======== ======== ========
Earnings (loss) from operations
United States...................................... $ (133.9) $ (48.1) $ 5.1
Europe............................................. (4.0) (9.1) (8.2)
Other.............................................. 14.4 (7.4) 6.0
Corporate expenses................................. (9.1) (9.6) (9.5)
-------- -------- --------
Total........................................... $ (132.6) $ (74.2) $ (6.6)
======== ======== ========
Total assets at September 30
United States...................................... $ 879.8 $ 885.4 $ 593.6
Europe............................................. 54.9 53.2 76.8
Other.............................................. 116.2 124.5 134.8
Corporate assets................................... 31.2 31.7 68.5
-------- -------- --------
Total........................................... $1,082.1 $1,094.8 $ 873.7
======== ======== ========
</TABLE>
Corporate assets consist of cash, securities and property. Due to the
integrated nature of the Company's operations, any attempt to interpret the
above geographic area data as resulting from unique or stand-alone types of
operations could be misleading.
55
<PAGE> 57
OUTBOARD MARINE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. QUARTERLY INFORMATION -- (UNAUDITED)
A summary of pertinent quarterly data for the 1998 and 1997 fiscal years
was as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
------------ ---------- --------- --------------
(DOLLARS IN MILLIONS, EXCEPT AMOUNTS PER SHARE)
<S> <C> <C> <C> <C>
Fiscal 1998
Net sales.......................... $209.5 $262.2 $282.4 $ 271.6
Gross earnings..................... 35.8 58.0 69.5 71.0
Net loss........................... (17.1) (8.4) (3.8) (121.2)
Net loss per share:
Basic.............................. $(0.84) $(0.41) $(0.19) $ (5.94)
------ ------ ------ -------
Diluted............................ $(0.84) $(0.41) $(0.19) $ (5.94)
------ ------ ------ -------
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED,
-----------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
------------ ----------- ----------- -------------
(DOLLARS IN MILLIONS, EXCEPT AMOUNTS PER SHARE)
<S> <C> <C> <C> <C>
Fiscal 1997 -- Pre-Merger Company
Net sales....................... $197.1 $237.0 $275.8 $269.6
Gross earnings.................. 22.7 36.5 54.8 39.0
Net earnings (loss)............. (14.3) (7.3) (5.1) (52.4)
------ ------ ------ ------
Net earnings (loss) per share:
Basic........................... $(0.71) $(0.36) $(0.25) $(2.58)
------ ------ ------ ------
Diluted......................... $(0.71) $(0.36) $(0.25) $(2.58)
------ ------ ------ ------
</TABLE>
In the fourth fiscal quarter of fiscal year 1997 and fiscal year 1998, the
Company recorded approximately $27 million for change of control expenses and
$98.5 million for restructuring charges (see Note 4), respectively.
Earnings per share amounts for each quarter are required to be computed
independently and, therefore, may not equal the amount computed for the total
year.
Due to the seasonal nature of the Company's business, it is not appropriate
to compare the results of operations of different fiscal quarters.
Shares of common stock of the Pre-Merger Company were cancelled September
30, 1997 and shares of common stock of the Post-Merger Company were issued and
are not publicly traded.
18. COMMITMENTS AND CONTINGENT LIABILITIES
As a normal business practice, the Company has made arrangements with
financial institutions by which qualified retail dealers may obtain inventory
financing. Under these arrangements, the Company will repurchase its products in
the event of repossession upon a retail dealer's default. These arrangements
contain provisions which limit the Company's repurchase obligation to $31
million per model year for a period not to exceed 30 months from the date of
invoice. This obligation automatically reduces over the 30-month period. The
Company resells any repurchased products. Losses incurred under this program
have not been material. The Company accrues for losses which are anticipated in
connection with expected repurchases.
Minimum commitments under operating leases having initial or remaining
terms greater than one year are $6.4 million, $5.3 million, $4.0 million, $3.2
million, $2.8 million and $4.5 million for the years ending September 30, 1999
through 2003 and after 2003, respectively.
56
<PAGE> 58
OUTBOARD MARINE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is engaged in a substantial number of legal proceedings arising
in the ordinary course of business. While the result of these proceedings, as
well as those discussed below, cannot be predicted with any certainty, based
upon the information presently available, management is of the opinion that the
final outcome of all such proceedings should not have a material effect upon the
Company's Consolidated Financial Position or the Consolidated Earnings of the
Company.
Under the requirements of Superfund and certain other laws, the Company is
potentially liable for the cost of clean-up at various contaminated sites
identified by the United States Environmental Protection Agency and other
agencies. The Company has been notified that it is named a potentially
responsible party ("PRP") at various sites for study and clean-up costs. In some
cases there are several named PRPs and in others there are hundreds. The Company
generally participates in the investigation or clean-up of these sites through
cost sharing agreements with terms which vary from site to site. Costs are
typically allocated based upon the volume and nature of the materials sent to
the site. However, under Superfund, and certain other laws, as a PRP the Company
can be held jointly and severally liable for all environmental costs associated
with a site.
Once the Company becomes aware of its potential liability at a particular
site, it uses its experience to determine if it is probable that a liability has
been incurred and whether or not the amount of the loss can be reasonably
estimated. Once the Company has sufficient information necessary to support a
reasonable estimate or range of loss for a particular site, an amount is added
to the Company's aggregate environmental contingent liability accrual. The
amount added to the accrual for the particular site is determined by analyzing
the site as a whole and reviewing the probable outcome for the remediation of
the site. This is not necessarily the minimum or maximum liability at the site
but, based upon the Company's experience, most accurately reflects the Company's
liability based on the information currently available. The Company takes into
account the number of other participants involved in the site, their experience
in the remediation of sites and the Company's knowledge of their ability to pay.
In October 1996, the AICPA issued Statement of Position 96-1 (SOP 96-1),
"Environmental Remediation Liabilities", which provides authoritative guidance
on the recognition, measurement, display and disclosure of environmental
remediation liabilities. The Company has elected early adoption of SOP 96-1 in
the quarter ended September 30, 1997. The change in accounting estimate required
the Company to accrue for future normal operating and maintenance costs for site
monitoring and compliance requirements at particular sites. The initial expense
for implementation of SOP 96-1 was $7.0 million, charged to selling, general and
administrative expense in the quarter ended September 30, 1997.
As a general rule, the Company accrues remediation costs for continuing
operations on an undiscounted basis and accrues for normal operating and
maintenance costs for site monitoring and compliance requirements. The Company
also accrues for environmental close-down costs associated with discontinued
operations or facilities, including the environmental costs of operation and
maintenance until disposition. At September 30, 1998 the Company has accrued
approximately $24 million for costs related to remediation at contaminated sites
including operation and maintenance for continuing and closed-down operations.
The possible recovery of insurance proceeds has not been considered in
estimating contingent environmental liabilities.
Each site, whether or not remediation studies have commenced, is reviewed
on a quarterly basis and the aggregate environmental contingent liability
accrual is adjusted accordingly. Because the sites are reviewed and the accrual
adjusted quarterly, the Company is confident the accrual accurately reflects the
Company's liability based upon the information available at the time.
In July 1998, the Company was provided information on the results of a
study which was performed on the Company's owned property located in Waukegan,
Illinois, commonly known as the Coke plant. This information was provided to the
Company by the two prior owners of the property -- General Motors
57
<PAGE> 59
OUTBOARD MARINE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Corporation and North Shore Gas Company. Although the Company was aware of the
contamination and that the study was being conducted, it was not until July 1998
that the Company became aware of the scope and extent of the contamination and
the associated remedial alternatives. Although the Company believes that it was
not a generator of hazardous substances at the site, as a land owners it is, by
statute, a PRP. Based on its experience with Superfund Sites, the Company
calculated a range of potential allocations and recorded an amount related to
the most probable outcome in its September 1998 financial statements.
The Company has received correspondence from Orbital Engine Corporation
Limited ("Orbital") alleging that the Company's FICHT fuel-injected
150-horsepower engines infringe two Australian Orbital patents, which correspond
to three U.S. patents and to a number of foreign patents. The Company believes
that it has substantial defenses to these allegations, including that the three
corresponding U.S. patents are not infringed and/or are invalid. However, there
can be no assurance that Orbital will not commence litigation against the
Company with respect to this matter or, if such litigation is commenced, that
the Company's defenses will be successful. If Orbital is successful in an action
against the Company, the Company could be required to obtain a license from
Orbital to continue the manufacture, sale, use or sublicense of FICHT products
and technology or it may be required to redesign its FICHT products and
technology to avoid infringement. There can be no assurance that any such
license could be obtained or that any such redesign would be possible. There
also can be no assurance that the failure to obtain any such license or effect
any such redesign, or any cost associated therewith, would not have a material
adverse effect on the Company. The Company determined a range of potential
outcomes of this matter and recorded a liability in its September 1998 financial
statements. The sale of FICHT engines accounted for approximately 8% of the
Company's revenues in fiscal 1998.
19. PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (UNAUDITED)
The following unaudited pro forma Condensed Statements of Consolidated
Earnings (the "Pro Forma Statements") were prepared to illustrate the estimated
effects of the merger with Greenmarine Acquisition Corp. as if the transaction
had occurred for statements of consolidated earnings purposes as of the
beginning of the period presented.
The pro forma adjustments are based upon available information and upon
certain assumptions that the Company believes are reasonable. The Pro Forma
Statements do not purport to represent what the Company's results of operations
would actually have been if such transactions in fact had occurred at the
beginning of the period indicated or to project the Company's results of
operation for any future period.
The Pro Forma Statements include adjustments, with respect to the merger,
to reflect additional interest expense and depreciation expense, amortization of
goodwill, and elimination of non-recurring fees and expenses incurred by the
Pre-Merger Company in 1997 in connection with the merger.
58
<PAGE> 60
OUTBOARD MARINE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
SEPTEMBER 30,
-----------------------------
1997 1996
--------- -----------
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net sales................................................... $979.5 $1,121.5
Cost of goods sold.......................................... 825.1 890.8
------ --------
Gross earnings.............................................. 154.4 230.7
Selling, general and administrative expense................. 219.8 214.5
Restructuring charges....................................... -- 25.6
------ --------
Earnings (loss) from operations............................. (65.4) (9.4)
Interest expense............................................ 28.4 24.3
Other (income) expense, net................................. (29.2) (8.5)
------ --------
Loss before provision for income taxes...................... (64.6) (25.2)
Provision (credit) for income taxes......................... 2.8 (3.1)
------ --------
Net loss.................................................... $(67.4) $ (22.1)
====== ========
Net loss per share of common stock (primary and fully
diluted).................................................. $(3.30) $ (1.08)
====== ========
Shares outstanding.......................................... 20.4 20.4
====== ========
</TABLE>
59
<PAGE> 61
OUTBOARD MARINE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED DEDUCTIONS- BALANCE AT
BEGINNING TO COSTS AND COSTS END
DESCRIPTION OF PERIOD EXPENSES INCURRED OF PERIOD
----------- ---------- ------------ ----------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Restructuring reserves
1998.............................................. $ 6.0 $26.4 $ (1.4) $31.0
===== ===== ====== =====
1997.............................................. $18.5 $ -- $ 12.5 $ 6.0
===== ===== ====== =====
1996.............................................. $11.4 $25.6 $(18.5) $18.5
===== ===== ====== =====
</TABLE>
60
<PAGE> 62
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
No disclosure is required pursuant to this item.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information regarding each director and
executive officer of the Company as of September 30, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Alfred D. Kingsley..................... 56 Chairman of the Board
Gary K. Duberstein..................... 44 Vice Chairman of the Board and Assistant Secretary
Richard Katz........................... 56 Vice Chairman of the Board
Ron Hiram.............................. 45 Director
Frank V. Sica.......................... 47 Director
David D. Jones, Jr..................... 55 President and Chief Executive Officer; Director
Andrew P. Hines........................ 59 Executive Vice President and Chief Financial
Officer
Kimberly K. Bors....................... 38 Vice President -- Human Resources
Robert B. Gowens, Jr................... 50 Vice President of OMC and President, North
American Engine Operations
Paul R. Rabe........................... 50 Vice President, MPPG North American Sales &
Marketing
Robert S. Romano....................... 43 Vice President, General Counsel and Secretary
Leslie M. Savickas..................... 52 Vice President and Treasurer
Joseph P. Tomczak...................... 43 Vice President and Controller
</TABLE>
DIRECTORS
ALFRED D. KINGSLEY has been Chairman of the Board of Directors since
September 12, 1997. Since 1993, Mr. Kingsley has been Senior Managing Director
of Greenway Partners, L.P., an investment partnership. Prior to that, Mr.
Kingsley held various positions at Icahn & Co., Inc., including senior adviser
until 1992. Mr. Kingsley is also a director of ACF Industries, Incorporated, and
a director of the general partner of American Real Estate Partners, L.P. Mr.
Kingsley is Chairman of the Compensation and Benefits Committee and a member of
the Audit Committee.
GARY K. DUBERSTEIN has been Vice Chairman of the Board of Directors and
Assistant Secretary since September 12, 1997. Since 1993, Mr. Duberstein has
been a Managing Director of Greenway Partners, L.P., an investment partnership.
Prior to that, Mr. Duberstein served as general counsel to Icahn & Co., Inc.,
and as vice president of certain companies operated by Carl Icahn from 1985 to
1993. Mr. Duberstein is a member of the Compensation and Benefits Committee and
Chairman of the Audit Committee.
RICHARD KATZ has been Vice Chairman of the Board of Directors since
September 12, 1997. From 1977 to 1993, Mr. Katz was a director of NM Rothschild
& Sons Limited, London, England. Since 1986, he has served as a Supervisory
Director for a number of entities affiliated with Soros Fund Management LLC. Mr.
Katz is also a director of Apex Silver Mines Limited. Mr. Katz is a member of
the Compensation and Benefits Committee.
RON HIRAM has been a director since September 30, 1997. Mr. Hiram has been
associated with Soros Fund Management LLC, an investment management company,
since 1995 and has been a Managing Director thereof since 1997. From 1992 to
1995, Mr. Hiram was a Managing Director of Lehman Brothers Incorporated. Mr.
Hiram is a member of the Compensation and Benefits Committee and Audit
Committee.
61
<PAGE> 63
FRANK V. SICA has been a director since July 22, 1998. Mr. Sica has been a
Managing Director of Soros Fund Management LLC and head of its private equity
operations since May 1, 1998. Prior to joining Soros Fund Management LLC, Mr.
Sica held various positions during his 18-year tenure at Morgan Stanley Dean
Witter & Co. Mr. Sica is also a director of Emmis Broadcasting Corporation, CSG
Systems International, Inc. and Kohl's Corporation.
DAVID D. JONES, JR. has been President and Chief Executive Officer and a
director since September 25, 1997. From 1990 to 1997, Mr. Jones held numerous
positions with the Mercury Marine Division of Brunswick Corporation and most
recently as President of the Mercury Marine Division. Mr. Jones is also a
director of National Exchange Bank, Fond du Lac, WI, and the ASHA Corporation,
Santa Barbara, CA.
ANDREW P. HINES has been the Executive Vice President and Chief Financial
Officer since October 6, 1997. Mr. Hines has been a director since October 7,
1997. Prior to joining the Company, Mr. Hines held the position of Senior Vice
President and Chief Financial Officer for Woolworth Corporation since 1994.
During 1993, Mr. Hines was a consultant to Pentland PLC, England. From 1989 to
1992, Mr. Hines held the position of Executive Vice President and Chief
Financial Officer with Adidas USA. Prior to that, Mr. Hines held various senior
financial positions with RJR Nabisco, Inc. from 1976 to 1989.
KIMBERLY K. BORS has been Vice President -- Human Resources since October
1, 1997. Prior to her election to such position, Ms. Bors held the position of
Director, Compensation and Organizational Development with the Company since
1995. Prior to joining the Company, Ms. Bors held the position of Director of
Compensation and Human Resources Services with Browning-Ferris Industries, Inc.
since 1990.
ROBERT B. GOWENS, JR. has been Vice President -- President of North
American Operations since October 1, 1998. Prior to his appointment to such
position, Mr. Gowens held the position of Vice President and General Manager of
the Quicksilver Unit of the Mercury Marine Division of Brunswick Corporation
since and, prior thereto, Vice President of Sales of Mercury Marine's Mercruiser
unit. From 1984 to 1992, Mr. Gowens served as President and Chief Executive
Officer of Cigarette Racing Team, Inc., which specialized in high performance
boat manufacturing. Prior thereto, Mr. Gowens served as a Vice President of A.T.
Kearney, Inc. since 1980.
PAUL R. RABE served as Vice President -- MPPG North American Sales &
Marketing from December 17, 1997 through September 30, 1998. Prior to his
election to such position, Mr. Rabe held the position of Division Vice
President, MPPG since joining the Company in 1996. Prior to joining the Company,
Mr. Rabe held the position of Vice President and General Manager of Cummins
Marine Division of Cummins Engine Company since 1992. As of October 1, 1998, Mr.
Rabe was no longer employed by the Company.
ROBERT S. ROMANO has been Vice President -- General Counsel and Secretary
since October 9, 1997. Prior to his election to such position, Mr. Romano was
appointed Assistant Secretary and Assistant General Counsel in 1996 and 1994,
respectively. Mr. Romano has held various positions within the Company's legal
department since joining the Company in 1980.
LESLIE M. SAVICKAS has been Vice President -- Treasurer since March 16,
1998. Prior to that, Ms. Savickas was a treasury consultant to the Company from
December 3, 1997. From 1995 to 1997, Ms. Savickas held the position of Vice
President, Finance for The LINC Group, Inc. Ms. Savickas held the position of
CEO of The Comparative Advantage, Inc. from 1994 to 1995 and, prior to that, the
position of treasurer of XL/Datacomp, Inc. from 1988 to 1993.
JOSEPH P. TOMCZAK was named Vice President -- Controller on May 1, 1998 and
formally joined the Company on June 1, 1998. Mr. Tomczak previously served as
Vice President and Corporate Controller for Alliant Foodservice, Inc. from July
1990 to May 1998.
To the knowledge of the Company, there are no family relationships between
any director or executive officer and any other director or executive officer.
62
<PAGE> 64
ADDITIONAL KEY PERSONNEL
Since the Greenmarine Acquisition, numerous key positions have been filled
or replaced with members of the new management team. The following sets forth
certain information with respect to certain key personnel of the Company who are
not executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
John A. Anderson....................... 47 President and General Manager, Four Winns
John T. Aylsworth...................... 55 Vice President, Marketing Support and Advertising
Robert L. Beagle....................... 56 General Manager, Freshwater Fishing Operations
Leslie E. Crawford..................... 50 President and General Manager, OMC Aluminum Boat
Group, Inc.
Charles D. Eckert...................... 53 President and General Manager, OMC Europe
Paul A. Luck........................... 44 Division Vice President, Finance, Boats
William J. Miller...................... 51 Vice President, Manufacturing
Susan M. Opeka......................... 41 Division Vice President, Finance
John A. Roush.......................... 33 Vice President, General Manager FICHT Fuel Injection
Peter J. VanLancker.................... 46 Division Vice President, Product Design and
Engineering, Boat Group
Russell J. VanRens..................... 50 Vice President, Quality
Chris R. Wainscott..................... 43 President and General Manager, Saltwater Fishing
Boats Division
Robert J. Werner....................... 40 Vice President, Supply Management and Logistics
Jack J. White, Jr...................... 61 President, Freshwater Division
Donald P. Wood......................... 53 Division Vice President, North American Sales
Robert F. Young........................ 48 Division Vice President, Product Development and
Research
</TABLE>
JOHN A. ANDERSON is President and General Manager of the Company's Four
Winns boat division. Mr. Anderson joined the Company in November 1997, and prior
thereto served as President of Shamrock, a division of KCS International which
manufactures inboard sport fishing boats from 1996 to 1997. Mr. Anderson has
also previously served as Director of Sales for Sea Doo, a division of
Bombardier Motor Corporation of America (from 1992 to 1996), and as Senior Vice
President, Marketing at Sea Ray Boats, Inc., a wholly-owned subsidiary of
Brunswick Corporation (from 1965 to 1992).
JOHN T. AYLSWORTH is Vice President of Marketing Support and Advertising
for the Company's engine and boat brands. Mr. Aylsworth joined the Company in
December 1997, and prior thereto spent five years with Tuzee and Associates
developing programs to support marketing efforts for some of the industry's most
prominent companies.
ROBERT L. BEAGLE is General Manager of the Company's Freshwater Fishing
Operations. Mr. Beagle joined the Company in February 1998, and prior thereto
served as General Manager of Marine Group LLC, a manufacturer and distributor of
Procraft and Astro bass boats (from 1996 to 1998). From 1992 to 1996, Mr. Beagle
was Vice President of Manufacturing of the Marine Group Division of the
Brunswick Corporation.
LESLIE E. CRAWFORD is President and General Manager -- OMC Aluminum Boat
Group, Inc. Mr. Crawford joined the Company in March 1998, and prior thereto
served as President of Wellcraft Marine (from 1995 to 1998), a division of
Genmar Holdings, Inc., where he had earlier served as Vice President for the
fishing boat group (from 1994 to 1995). Prior to that, Mr. Crawford was
Executive Vice President of Tracker Marine, L.P. (from 1985 to 1994).
CHARLES D. ECKERT is President and General Manager -- OMC Europe. Prior to
assuming this position in March 1998, Mr. Eckert held various positions of
increasing responsibility during his thirty years with the Company, including,
most recently, Controller of the International Group.
63
<PAGE> 65
PAUL A. LUCK is Division Vice President, Finance -- Boats. Prior to joining
the Company on August 18, 1998, Mr. Luck held the position of Vice President,
Finance at SPX Corporation since 1997. Between 1996 and 1997, Mr. Luck was the
International Finance Manager at Federal Mogul. Prior to that, Mr. Luck was Vice
President -- Finance and Chief Financial Officer of FTD, Inc. from 1995 to 1996,
and Vice President -- Financial Planning and Analysis at Dun & Bradstreet
Corporation from 1993 to 1995.
WILLIAM J. MILLER is Vice President, Manufacturing. Prior to joining the
Company in March 1998, Mr. Miller served as Vice President, Operations at the
Toro Company (from 1997 to 1998), where he was responsible for 12 U.S.
manufacturing facilities. Prior to that Mr. Miller held positions of increasing
responsibility at Frigidaire Company from 1992 to 1997, most recently as Vice
President, Refrigeration.
SUSAN M. OPEKA is Division Vice President, Finance. Prior to joining the
Company in January 1998, Ms. Opeka spent twelve years at Tenneco Automotive, a
Division of Tenneco, Inc., most recently as Executive Director Strategic
Planning.
JOHN A. ROUSH is Vice President, General Manager -- FICHT Fuel Injection.
Prior to joining the Company in July 1998, Mr. Roush was a Vice President of
Allied Signal, Inc. since 1996. Prior to that, Mr. Roush was an Engagement
Manager at McKinsey & Company, Inc. from 1992 to 1996.
PETER J. VANLANCKER is Division Vice President, Product Design and
Engineering -- Boat Group. Mr. VanLancker joined the Company in July 1996. Prior
thereto, Mr. VanLancker served as Vice President, Design and Advanced Technology
of Boston Whaler Company from 1969 to 1996.
RUSSELL J. VAN RENS is Vice President -- Quality. Prior to assuming this
position in February 1998, Mr. Van Rens served as OMC's Vice President, Engine
Manufacturing. He has been with the Company since 1971, serving in increasingly
responsible positions.
CHRIS R. WAINSCOTT is President and General Manager of the Company's
Saltwater Fishing boat division. Prior to assuming this position in February
1998, Mr. Wainscott served as Vice President of Sales and Marketing for the
Company's fishing boat products, including the Stratos, Javelin and Hydra-Sports
freshwater and saltwater brands (from 1996 to 1998). Prior to that, Mr.
Wainscott was Regional Sales Manager, Hydra-Sports from 1991 to 1996. Mr.
Wainscott has over 11 years of experience with the Company's products.
ROBERT J. WERNER is Vice President -- Supply Management and Logistics.
Prior to joining the Company in April 1998, Mr. Werner served as Manager,
Sourcing, Global Services Operation for General Electric Corporation from 1997
to 1998. For eight years prior to that, Mr. Werner held various sourcing
positions of increasing responsibility with General Electric Corporation. He has
over 18 years of hands-on international experience, with a focus on
identification, development, and expansion of worldwide sources of supply.
JACK J. WHITE, JR. is President of the Company's Freshwater boat division.
Prior to joining the Company in April 1998, Mr. White owned the Marine Group,
LLC, a manufacturer and distributor of Procraft and Astro bass boats from 1996
to 1998. Prior to that, Mr. White was general manager of and a consultant to the
Fishing Boat Division of the Brunswick Corporation from 1988 to 1995.
DONALD P. WOOD is Division Vice President, North American Sales. Mr. Wood
returned to the Company in November 1997 from Tracker Marine, L.P., a
manufacturer of aluminum boats, where he was Vice President of Sales from 1989
to 1994. Between leaving Tracker Marine and rejoining the Company, Mr. Wood
helped establish Horizon Marine Company and worked for the Company in various
positions of increasing responsibility.
ROBERT F. YOUNG is Division Vice President, Product Development Engineering
and Research. Prior to assuming this position in January 1997, Mr. Young held
numerous positions of increasing responsibility during his 27-year tenure with
OMC within its Engineering and Product Development departments, including most
recently, Vice President, Engineering.
64
<PAGE> 66
CONTROL BY GREENMARINE HOLDINGS
Greenmarine Holdings holds 99.9% of the outstanding common stock of the
Company. Accordingly, Greenmarine Holdings can elect all of the Board of
Directors of the Company and controls all corporate transactions or other
matters required to be submitted to stockholders for approval, including any
merger, consolidation, or sale of all or substantially all of the Company's
assets. See "Item 12 -- Security Ownership of Certain Beneficial Owners and
Management" (including Footnote 1 thereto).
The members of Greenmarine Holdings are Greenlake Holdings LLC
("Greenlake"), Quasar Strategic Partners LDC ("QSP") and Quantum Industrial
Partners LDC ("QIP"). Greenlake, QSP and QIP have approximately a 30.5%, 34.75%
and 34.75% interest in Greenmarine Holdings, respectively. Pursuant to the
Operating Agreement of Greenmarine Holdings, Greenlake has the right to appoint
two designees to Greenmarine Holdings' Management Committee and the holders of a
majority of Greenmarine Holdings' interest held by QSP and QIP have the right to
appoint two members of Greenmarine Holdings' Management Committee. Greenmarine
Holdings' Management Committee is currently comprised of Messrs. Alfred D.
Kingsley, Gary K. Duberstein and Richard Katz. From and after September 12,
1998, the holders of a majority of Greenmarine Holdings' interest held by QSP
and QIP may elect to increase the size of Greenmarine Holdings' Management
Committee to five members, three of whom will be designated by the holders a
majority of Greenmarine Holdings's interest held by QSP and QIP and two of whom
will be designated by Greenlake. The vote of three of the members of Greenmarine
Holdings' Management Committee is required for action by the Management
Committee.
Pursuant to the Operating Agreement of Greenmarine Holdings, the board of
directors of the Company is to be comprised of members approved by the
Management Committee of Greenmarine Holdings, provided that Greenlake shall have
the right to designate at least one member of the board of directors.
ITEM 11. EXECUTIVE COMPENSATION
PERSONAL REWARDS AND OPPORTUNITIES PROGRAM
On March 10, 1998, the Board of Directors of the Company adopted the
Outboard Marine Corporation Personal Rewards and Opportunities Program ("PROP").
PROP was designed to recognize and reward, through cash bonuses, stock options
and other equity-based awards, the personal contributions and achievements of
key employees of the Company, both individually and as members of the management
and key employee team. All employees of the Company and its subsidiaries are
eligible to participate in PROP. PROP replaced all prior long and short-term
incentive plans of the Company. PROP provides for (i) cash and/or equity annual
bonuses based on performance targets, and (ii) grants of stock options, shares
of restricted stock, phantom shares of stock or stock appreciation rights. The
aggregate number of shares of stock available for equity awards under PROP is
1,500,000 shares of currently authorized common stock of the Company. PROP is
administered by the Board of Directors of the Company or a committee or
subcommittee of the Board appointed by the Board among its members, which, in
either case, has authority, at its discretion, to determine the persons to whom
equity awards will be granted and the specifics of those grants. As of November
30, 1998, the Company had granted stock options relating to 971,745 shares of
common stock. Of these options, 112,745 were vested at the time of grant. The
other 859,000 options have vested or will vest as follows: 100,000 in fiscal
year 1998, 150,557 in the three-month transition period ending December 31,
1998, 311,333 in the Company's fiscal year ending December 31, 1999, 218,563 in
the Company's fiscal year ending December 31, 2000, and 78,547 thereafter. All
of these stock options are exercisable at $18.00 per share and expire ten years
after the date of grant except for 61,105 incentive stock options granted to Mr.
Jones which expire eleven years after the date of grant.
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the annual and
long-term compensation paid or to be paid to those persons who were, at
September 30, 1998, (i) the Chief Executive Officer or served in such capacity
during fiscal 1998, (ii) the other four most highly compensated Executive
Officers of the Company, who were serving in such capacity as of September 30,
1998 and (iii) individuals who would have been one of
65
<PAGE> 67
the four most highly paid Executive Officers but for the fact that they were not
serving as an Executive Officer on September 30, 1998 (collectively the "Named
Executives") for services rendered in all capacities to the Company for the
1998, 1997 and 1996 fiscal years.
For a discussion of compensation payable to each of Messrs. Jones, Hines
and Gowens, see "Management -- Employment Contracts and Severance Agreements".
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------------------- ---------------------------------
SECURITIES
RESTRICTED UNDERLYING
OTHER ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
SALARY BONUS COMPENSATION AWARDS SARS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($)(1) ($)(2) ($) (#) ($)(3) ($)(4)
- --------------------------- ---- ------- ------- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
D.D. Jones, Jr.(5)............. 1998 556,925 900,000 114,737 -- -- -- 2,578,014
President and Chief 1997 7,692 -- -- -- -- -- --
Executive Officer 1996 -- -- -- -- -- -- --
A.P. Hines(6).................. 1998 349,708 468,750 39,981 --
Executive Vice 1997 -- -- -- -- -- -- --
President and Chief 1996 -- -- -- -- -- -- --
Financial Officer
P.R. Rabe(7)................... 1998 270,270 24,000 6,437 -- -- 3,810 1,948
Vice President, North 1997 193,977 25,000 -- -- -- -- --
American Sales & Marketing 1996 20,455 -- -- -- -- -- 30,000
R.S. Romano.................... 1998 206,425 19,000 1,842 -- -- 2,928 1,974
Vice President, General 1997 143,917 11,488 -- -- -- -- 4,320
Counsel and Secretary 1996 126,250 55,783 -- -- -- -- 1,610
K.K. Bors...................... 1998 137,308 14,000 -- -- -- 5,855 1,373
Vice President, Human 1997 103,231 6,738 -- -- -- -- --
Resources 1996 87,087 23,958 -- -- -- -- 5,212
</TABLE>
- ---------------
(1) Fiscal 1998 bonus for Mr. Jones and Mr. Hines include $225,000 and 37,500
shares of Phantom Stock valued at $18.00 per share and $117,187 and 19,531
shares of stock units valued at $18.00 per share, respectively.
(2) For Mr. Jones, $89,023 for moving expense, $5,250 for financial services,
$19,553 for company car and $910 as payment for interest on a loan from the
Company (see "Item 13 -- Certain Relationships and Related Transactions").
For Mr. Hines, $22,846 for moving expense and $17,135 for company car.
(3) Consists of payout for restricted stock of the pre-merger Company following
the change of control.
(4) For Mr. Jones, $1,930,410 represents an amount equal to incentives that Mr.
Jones was to receive from his prior employer, but were forfeited by Mr.
Jones in connection with his being hired by the Company, $643,470 as sign-on
bonus and $4,134 for life insurance premiums. For Mr. Rabe $30,000 as
sign-on bonus. For Mr. Romano, all a contribution by the Company under the
Company's 401(k) retirement plan. For Ms. Bors, $5,000 as sign-on bonus in
1996 and all others a contribution by the Company under the Company's 401(k)
retirement plan.
(5) Mr. Jones was hired by the Company on September 25, 1997 and, therefore,
information prior to that date does not exist.
(6) Mr. Hines was hired by the Company on October 6, 1997 and, therefore,
information prior to that date does not exist.
(7) Effective October 1, 1998, Mr. Rabe was no longer employed by the Company.
66
<PAGE> 68
OPTION GRANTS IN THE 1998 FISCAL YEAR
The following table provides information on the grants of options to
purchase common stock of the Company given to the Named Executives in fiscal
year 1998.
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS EXERCISE POTENTIAL REALIZABLE
UNDERLYING GRANTED TO PRICE VALUE ($)(4)
OPTIONS/SARS ALL EMPLOYEES PER SHARE EXPIRATION --------------------
NAME GRANT DATE GRANTED(#)(1) IN 1998(2) $(3) DATE 5% 10%
---- ---------- ------------- ------------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
D.D. Jones, Jr. ..... 10/1/97 238,845 24% $18.00 10/01/07 215,006 430,011
10/1/97 107,245 11% $18.00 10/01/07 96,520 193,041
10/1/97 61,105 6% $18.00 10/01/09 54,994 109,989
A.P. Hines........... 10/6/97 180,000 30.93% $18.00 10/06/07 162,000 324,000
R.S. Romano.......... 7/22/98 8,000 1.37% $18.00 07/22/08 7,200 14,400
P.R. Rabe............ 7/22/98 10,000 1.72% $18.00 09/30/98 0 0
K.K. Bors............ 7/22/98 7,000 1.2% $18.00 07/22/08 6,300 12,600
</TABLE>
- ---------------
(1) All options vest over a four year period; 25% of the option grant being
exercisable at the end of the first year after the grant date and then an
additional 25% each year thereafter, except for Mr. Hines whose options vest
in equal proportions over a three year period, and for Mr. Jones for which
107,245 vested upon grant, 238,895 vested in equal proportions over a
three-year period and 61,105 incentive stock options granted in accordance
with Section 422 of the Internal Revenue Code of 1986, as amended, which
vest in increments of 5,500 beginning on the date of grant and every January
1 thereafter.
(2) In the 1998 fiscal year, 156 employees received stock options.
(3) Assumes a fair market value of $18.00 per share at the date of grant. As the
Company's common stock is not a publicly-traded equity, the grant price was
based on the per share consideration paid by Greenmarine Acquisition Corp.
for the Company's stock in September, 1997.
(4) The amounts set forth reflect the potential realizable value of the options
granted at assumed annual rates of stock price appreciation of 5% and 10%
through the expiration date of the options (eleven years). The use of 5% and
10% is pursuant to Securities and Exchange Commission requirements and is
not intended by the Company to forecast possible future appreciation.
OPTION EXERCISES IN THE 1998 FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
No options were exercised by the Named Executives during fiscal year 1998.
The per share fair market value of the Company's common stock used to make the
calculations in the following table is $18.00, which is the per share
consideration paid by Greenmarine Acquisition Corp. for the Company's stock in
September, 1997 in connection with the Greenmarine Acquisition. Accordingly, the
table indicates that the options had no value at the end of fiscal year 1998
because the exercise price was equal to such fair market value.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FISCAL YEAR END(#) FISCAL YEAR END($)
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
- ---- --------------- ----------- ------------------ ------------------
<S> <C> <C> <C> <C>
D.D. Jones, Jr. ............... 0 0 207,245/200,000 0
A.P. Hines..................... 0 0 0/180,000 0
P.R. Rabe...................... 0 0 0/10,000 0
R.S. Romano.................... 0 0 0/8,000 0
K.K. Bors...................... 0 0 0/7,000 0
</TABLE>
67
<PAGE> 69
LONG-TERM INCENTIVE PLAN AWARDS IN FISCAL YEAR 1998
There were no amounts made in fiscal year 1998 to any employee, including
the Named Executives in the form of an LTIP under PROP.
RETIREMENT PLANS
The approximate total annual benefit for the Named Executive participants
payable from the Outboard Marine Corporation Employees Retirement Plan (the
"Retirement Plan") and the supplemental non-qualified retirement plan is shown
in the table below for selected average base earnings levels and years of
service based upon certain assumptions including all years of credited service
as an Executive Officer, retirement at age 65 and election of a single life
annuity for the benefit payment.
<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------------------------------------
AVERAGE ANNUAL BASE EARNINGS 5 10 15 20 OR MORE
- ---------------------------- -------- -------- -------- ----------
<S> <C> <C> <C> <C>
$150,000....................................... $ 19,125 $ 38,250 $ 57,375 $ 76,500
$250,000....................................... $ 31,875 $ 63,750 $ 95,625 $127,500
$300,000....................................... $ 38,250 $ 76,500 $114,750 $153,000
$500,000....................................... $ 63,750 $127,500 $191,250 $255,000
$900,000....................................... $114,750 $229,500 $344,250 $459,000
$1,300,000..................................... $165,750 $331,500 $497,250 $663,000
$1,900,000..................................... $242,250 $484,500 $726,750 $969,000
</TABLE>
The Retirement Plan provides a fixed benefit determined on the basis of
years of service and final average base earnings. The approximate annual
benefits shown in the table above are not subject to social security offset but
are subject to offset for any benefits payable from retirement programs of the
Company's foreign subsidiaries.
In addition to the benefits from the Retirement Plan, certain participants
in the Company's annual incentive compensation plan(s) are eligible for
retirement benefits from the supplemental non-qualified retirement plan. The
retirement benefits under the non-qualified plan are based upon amounts paid
under the annual bonus plan as well as salary, and the total retirement benefits
payable under both plans may exceed the maximum benefits payable under the
Employee Retirement Income Security Act of 1974, as amended. The basis for
benefits under both plans are those amounts contained in the Summary
Compensation Table above, for Salary and Bonus, if the years disclosed are one
or more of the three highest annual earnings in the last ten years as discussed
below.
Participants in the plans who are not Executive Officers receive an
aggregate benefit equal to 1.20% of total pay and 0.5% above social security
covered compensation for each year of credited service times the average of the
five highest consecutive annual earnings (base annual salary rate plus incentive
compensation earned in the same year under an annual incentive compensation
plan) during such participant's last ten years of employment. An Executive
Officer who participates in the plans will receive the 1.20% of total pay and
0.5% above social security covered compensation for each year of credited
service as a non-Executive Officer and 2.55% for each year of credited service
as an Executive Officer times the average of the three highest annual earnings
during such participant's last ten years of employment.
As of December 31, 1998, Messrs. Jones, Hines, Rabe and Romano and Ms. Bors
will have 1.33, 1.25, 1.25, 1.25 and 1.25, respectively, credited years of
officer service and 0, 0, 2.91, 17.91 and 2.0, respectively, credited years of
non-officer service under the Company's retirement plans. The total estimated
vested annual benefit payable from these two plans for Messrs. Jones, Hines,
Rabe and Romano and Ms. Bors based upon certain assumptions including actual
years of credited service as a non-Executive Officer and Executive Officer, as
the case may be, current age and base earning levels, and election of a single
life annuity for the benefit payment is $5,645, $5,308, $8,162, $62,462 and
$8,172, respectively, which payments are not subject to social security offset
but are subject to offset for any benefits payable from retirement programs of
the Company's foreign subsidiaries.
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<PAGE> 70
COMPENSATION OF DIRECTORS
Directors of the Company do not receive any compensation for services
provided to the Company as a Director, including participation on any
committees. Directors may be entitled to reimbursement for travel expenses
associates with Board activities.
EMPLOYMENT CONTRACTS AND SEVERANCE AGREEMENTS
David D. Jones, Jr. The Company and David D. Jones, Jr. have entered into
an employment agreement, dated as of March 10, 1998 and effective as of
September 25, 1997 (the "Jones Employment Agreement"). Pursuant to the Jones
Employment Agreement, Mr. Jones will serve as President and Chief Executive
Officer of the Company and as a member of the Board of Directors of the Company.
The term of Mr. Jones's employment under the Jones Employment Agreement expires
on September 30, 2000, or, if OMC changes its fiscal year to a calendar year, on
December 31, 2000 (in either case, the "Jones Initial Term"), which term shall
automatically renew for an additional two years on the initial expiration date
and each expiration date thereafter until the end of the fiscal year during
which Mr. Jones attains age 65, unless Mr. Jones's employment is otherwise
terminated pursuant to the terms of the Jones Employment Agreement. In exchange
for his services, Mr. Jones will receive (1) a base salary of $500,000 per annum
for the first six months of his employment and $600,000 per annum for the
remainder of the term of Mr. Jones's employment subject to increases at the
discretion of the Board of Directors, (2) an annual bonus of up to 200% of base
salary contingent on OMC achieving certain financial performance goals, of
which, during the Jones Initial Term, one-fourth shall be paid in cash and
three-fourths shall be paid in common stock of OMC using a value of $18.00 per
share, or at Mr. Jones' election, the three-fourths, or any portion thereof,
shall be paid in the form of a cash deferral(subject to reduction in the event
the per share value of the common stock of OMC declines below $18.00) in which
case Mr. Jones will receive a fully vested and immediately exercisable option,
at a per share exercise price equal to $18.00 with respect to the total number
of shares of the bonus stock, (3) an incentive option to purchase 61,105 shares
of common stock of OMC at an exercise price of $18.00 per share, 5,555 shares of
which vested upon grant, and with annual vesting of 5,555 shares each January
1st until fully exercisable, (4) a non-qualified option to purchase 238,895
shares of common stock of OMC at an exercise price of $18.00 per share with
scheduled annual vesting each year over a three-year period, and (5) (i) payment
by OMC of $643,470 in cash, (ii) the issuance of a non-qualified stock option to
purchase 107,245 shares of common stock of OMC at an exercise price of $18.00
per share, 90,578 shares of which vested upon grant, with the remaining 16,667
shares vesting on December 31, 1998, and (iii) a deferred compensation
obligation of the Company to him in the amount of $1,930,410 reduced by the
product of (A) any decrease in the per share value of the common stock of OMC
below $18.00 per share and (B) 107,245, in consideration of the incentive
compensation, unvested options and restricted stock forfeited by Mr. Jones
solely as a result of his severance from Brunswick Corporation to accept
employment with the Company. The Jones Employment Agreement provides that Mr.
Jones will be entitled to participate in or receive benefits under any employee
benefit plan, program or arrangement made available generally by OMC to its
similarly situated executives and that Mr. Jones is entitled to participate in
OMC's Supplemental Non-Qualified Retirement Plan for Elected Officers.
If OMC terminates Mr. Jones's employment for cause or Mr. Jones voluntarily
resigns from his employment with OMC other than for good reason, OMC will be
obligated to pay Mr. Jones his base salary through the date of termination. If
OMC terminates Mr. Jones's employment with OMC without cause or Mr. Jones
terminates his employment with OMC for good reason, Mr. Jones will be entitled
to receive (1) his base salary through the date of termination plus any accrued
vacation, (2) his annual bonus, if any, for the fiscal year in which such
termination occurred prorated for the number of full months Mr. Jones was
employed during such fiscal year, (3) an amount equal to the greater of his base
salary for one year or his base salary for the remainder of the term of the
Jones Employment Agreement, (4) the benefit of continued participation in the
OMC employee benefit plans, programs or arrangements in which Mr. Jones
participated prior to his termination until the greater of one year or the end
of the then remaining term of the Jones Employment Agreement, and (5) any
remaining unvested stock options granted by OMC to Mr. Jones pursuant to the
Jones Employment Agreement, which stock options shall automatically vest as of
the date of
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<PAGE> 71
termination and be exercisable for 90 days thereafter. If Mr. Jones's employment
with OMC terminates as a result of his death, (1) OMC will be obligated to pay
to Mr. Jones's estate his base salary to the date of his death plus any accrued
vacation, and Mr. Jones's annual bonus, if any, for the fiscal year in which his
death occurs prorated for the number of full months Mr. Jones was employed
during such fiscal year, (2) in the event Mr. Jones dies during any twelve-month
period during the term of his employment, any unvested stock options granted by
OMC to Mr. Jones pursuant to the Jones Employment Agreement which would have
become vested if Mr. Jones continued his employment during such twelve-month
vesting period shall vest pro-rata for the number of full months Mr. Jones was
employed during such twelve-month period in which his death occurs and be
exercisable for 12 months after Mr. Jones's death, and (3) Mr. Jones's surviving
spouse shall be entitled to participate in OMC's group medical and dental plans
for the remainder of the term of the Jones Employment Agreement. If Mr. Jones's
employment with OMC is terminated as a result of his total disability, (1) OMC
will be obligated to pay Mr. Jones his base salary to the date on which total
disability is deemed to have occurred plus any accrued vacation, and Mr. Jones's
annual bonus, if any, for the fiscal year in which his total disability occurs
prorated for the number of full months Mr. Jones was employed during such fiscal
year, (2) in the event total disability occurs during any twelve-month period
during the term of Mr. Jones's employment, any unvested stock options granted by
OMC to Mr. Jones pursuant to the Jones Employment Agreement which would have
become vested if Mr. Jones continued his employment during such twelve-month
vesting period shall vest pro rata for the number of full months Mr. Jones was
employed during such twelve-month period in which his total disability occurs
and be exercisable for 12 months after Mr. Jones's total disability, and (3) Mr.
Jones shall be permitted to participate in OMC's employee benefit plans,
programs or arrangements in which he participated prior to he termination of his
employment until the end of the then remaining term of the Jones Employment
Agreement.
Pursuant to the Jones Employment Agreement, OMC will have the right to
repurchase all shares of common stock of OMC owned by Mr. Jones and vested stock
options granted by OMC to Mr. Jones upon the termination of Mr. Jones's
employment with OMC for any reason. Upon the termination by OMC of Mr. Jones's
employment without cause, the termination by Mr. Jones of his employment for
good reason, the voluntary termination by Mr. Jones of his employment at or
after the expiration of the term of the Jones Employment Agreement, the
voluntary termination by Mr. Jones of his employment at or after his attaining
age 62, or the termination of Mr. Jones's employment as a result of his death or
total disability, Mr. Jones or his estate, as applicable, will have the right to
require OMC purchase all shares of common stock of OMC owned by Mr. Jones and
vested stock options granted by OMC to Mr. Jones.
Mr. Jones is prohibited from disposing his shares of OMC common stock
without the prior written consent of OMC.
However, pursuant to the Jones Employment Agreement, Mr. Jones will have a
tag-along right, subject to certain exceptions, with respect to certain
dispositions of common stock of OMC by Greenmarine Holdings. Greenmarine
Holdings will have certain take-along rights to require Mr. Jones to sell his
shares of OMC common stock if Greenmarine Holdings proposes to sell not less
than 50% of the OMC common stock owned by Greenmarine Holdings.
Mr. Jones is subject to confidentiality, non-competition and
non-solicitation provisions, which are enforceable during the term of the Jones
Employment Agreement and for a one-year period commencing on the expiration or
termination of Mr. Jones's employment with OMC.
See also "Item 13 -- Certain Relationships and Related Transactions."
Andrew P. Hines. The Company and Andrew P. Hines have entered into an
employment agreement, effective as of October 6, 1997 (the "Hines Employment
Agreement"). Pursuant to the Hines Employment Agreement, Mr. Hines will serve as
Executive Vice President and Chief Financial Officer of the Company and as a
member of the Board of Directors of the Company. The term of Mr. Hines's
employment under the Hines Employment Agreement expires on October 6, 2000,
which term shall automatically renew for an additional year on the initial
expiration date and each expiration date thereafter, unless Mr. Hines's
employment is otherwise terminated pursuant to the terms of the Hines Employment
Agreement. In exchange for his services, Mr. Hines will receive (1) a base
salary of $325,000 per annum, which was increased to $375,000 per
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<PAGE> 72
annum by the Board of Directors in June 1998 and may be increased at the
discretion of the Board of Directors and (2) a non-qualified option to purchase
180,000 shares of common stock of OMC at an exercise price of $18.00 per share
with annual vesting in equal proportions over a three-year period.
Simultaneously with the execution of the Hines Employment Agreement, Mr. Hines
purchased from OMC 14,444 shares of OMC common stock, of which 2,777 shares were
issued in consideration of a $50,000 cash payment and 11,667 shares were issued
in consideration of Mr. Hines issuing a promissory note in favor of OMC in the
principal amount of $210,000. On April 6, 1998, Mr. Hines purchased an
additional 5,556 shares of common stock issued in consideration of a $100,000
cash payment. The Hines Employment Agreement provides that Mr. Hines, in certain
circumstances, will be entitled to participate in the short-term and long-term
incentive and stock option or other equity or quasi-equity participation plans,
programs or arrangements in which similarly situated executives are entitled to
participate. Mr. Hines will also be entitled to receive benefits under any
employee benefit plan, program or arrangement made available generally by OMC to
its similarly situated executives.
If OMC terminates Mr. Hines's employment for cause or Mr. Hines voluntarily
resigns from his employment with OMC other than for good reason, OMC will be
obligated to pay Mr. Hines's base salary through the date of termination. If OMC
terminates Mr. Hines's employment with OMC without cause or Mr. Hines terminates
his employment with OMC for good reason, Mr. Hines will be entitled to receive
(1) his base salary through the date of termination plus any accrued vacation,
(2) an amount equal to the greater of his base salary for one year or his base
salary for the remainder of the term of the Hines Employment Agreement, (3) the
benefit of continued participation in OMC's employee benefit plans, programs or
arrangements in which Mr. Hines participated prior to his termination until the
greater of one year or the end of the then remaining term of the Hines
Employment Agreement, and (4) any remaining unvested stock options granted by
OMC to Mr. Hines, which stock options shall automatically vest as of the date of
termination and be exercisable for 90 days thereafter. If Mr. Hines's employment
with OMC terminates as a result of his death, (1) OMC will be obligated to pay
to Mr. Hines's estate Mr. Hines's base salary to the date of his death plus any
accrued vacation, and any bonus for the fiscal year in which his death occurs
prorated for the number of full months Mr. Hines was employed during such fiscal
year, and (2) Mr. Hines's estate will have one year from the date of Mr. Hines's
death to exercise all vested and unexercised stock options granted by OMC to Mr.
Hines. If Mr. Hines's employment with OMC is terminated as a result of his total
disability, (1) OMC will be obligated to pay Mr. Hines his base salary to the
date on which total disability is deemed to have occurred plus any accrued
vacation, and any bonus for the fiscal year in which his total disability occurs
prorated for the number of full months Mr. Hines was employed during such fiscal
year, (2) any stock options granted by OMC to Mr. Hines that have vested as of
the date of such total disability shall be exercisable for 90 days after the
date of such termination, and (3) Mr. Hines shall be permitted to participate in
OMC's employee benefit plans, programs or arrangements in which he participated
prior to he termination of his employment until the end of the then remaining
term of the Hines Employment Agreement.
Pursuant to the Hines Employment Agreement, OMC will have the right to
repurchase all shares of common stock of OMC owned by Mr. Hines and vested stock
options granted by OMC to Mr. Hines upon the termination of Mr. Hines's
employment with OMC for any reason. Upon the termination by OMC of Mr. Hines'
employment without cause, the termination by Mr. Hines of his employment for
good reason, the voluntary termination by Mr. Hines of his employment at or
after the expiration of the term of the Hines Employment Agreement, the
voluntary termination by Mr. Hines of his employment at or after his attaining
age 62, or the termination of Mr. Hines's employment as a result of his death or
total disability, Mr. Hines or his estate, as applicable, will have the right to
require OMC purchase all shares of common stock of OMC owned by Mr. Hines and
stock options granted by OMC to Mr. Hines.
Mr. Hines is prohibited from disposing his shares of OMC common stock
without the prior written consent of OMC. However, pursuant to the Hines
Employment Agreement, Mr. Hines will have a tag-along right, subject to certain
exceptions, with respect to certain dispositions of common stock of OMC by
Greenmarine Holdings. Greenmarine Holdings will have certain take-along rights
to require Mr. Hines to sell
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his shares of OMC common stock if Greenmarine Holdings proposes to sell not less
than 50% of the OMC common stock owned by Greenmarine Holdings.
Mr. Hines is subject to confidentiality, non-competition and
non-solicitation provisions, which are enforceable during the term of the Hines
Employment Agreement and for a one-year period commencing on the expiration or
termination of Mr. Hines's employment with OMC. See also "Item 13 -- Certain
Relationships and Related Transactions."
Robert B. Gowens, Jr. The Company and Robert B. Gowens, Jr. have entered
into an Employment Agreement effective as of October 1, 1998 (the "Gowens
Employment Agreement"). Pursuant to the Gowens Employment Agreement, Mr. Gowens
will serve as Vice President of the Company and President, North American Engine
Operations. The term of the Gowens Employment Agreement commenced on October 1,
1998 and shall continue through the earlier of its third anniversary or Mr.
Gowens' death or total disability or as otherwise terminated pursuant to the
terms of the Gowens Employment Agreement. In exchange for his services, Mr.
Gowens will receive (1) a base salary of $300,000 per annum and (2) a
non-qualified option to purchase 100,000 shares of common stock of OMC at an
exercise price of $22.00 per share with annual vesting in equal proportions over
a three year period. The Gowens Employment Agreement provides that Mr. Gowens
shall be eligible to participate in the Company's bonus and incentive
compensation programs applicable, generally, to similarly situated senior
executive officers. The Gowens Employment Agreement also provides for a loan
from the Company in order to assist Mr. Gowens in purchasing a new, permanent
residence in the Chicago, Illinois geographic vicinity. Mr. Gowens will also be
entitled to receive benefits under any employee benefit plan, program or
arrangement made available, generally, by OMC to similarly situated executive
officers.
If OMC terminates Mr. Gowens' employment Without Cause or Mr. Gowens
voluntarily resigns his employment with Good Reason, Mr. Gowens will be entitled
to receive (1) his accrued and unpaid base salary and vacation as of the date of
his termination of employment; (2) a lump sum payment in the amount equal to the
greater of (a) Mr. Gowens' base salary for one year and (b) his base salary for
the remainder of the term of his Employment Agreement; and (3) OMC shall pay to
Mr. Gowens, within sixty (60) days of the end of the fiscal year, his bonus for
the fiscal year in which such termination occurred, based upon the Company's
level of actual attainment of his bonus target for such fiscal year, prorated
for the number of full months Mr. Gowens was employed during that fiscal year.
In addition, OMC shall, at its expense, continue for one year Mr. Gowens'
participation on the same basis as active employees in the Company's group,
medical and life insurance plans in which he participated prior to the
termination of his employment. Any unvested stock options granted to Mr. Gowens
shall automatically vest as the date of termination and shall be exercisable,
along with other vested options, in accordance with the terms of the plan.
If OMC terminates Mr. Gowens' employment for cause or Mr. Gowens
voluntarily resigned without Good Reason, Mr. Gowens shall be entitled his
accrued and unpaid base salary through such date of termination. In the event of
Mr. Gowens' death, OMC shall pay to his estate his base salary and vacation owed
through the date of death and any bonus for the fiscal year in which his death
occurs, prorated for the number of full months Mr. Gowens was employed during
such fiscal year and any restricted stock grant shall become fully vested.
In the event that the Agreement terminates as a result of Mr. Gowens' total
disability, OMC shall pay to Mr. Gowens his base salary through the date in
which he is determined to have become totally disabled and any bonus for the
fiscal year in which his total disability occurs, prorated for the number of
full months he was employed during such fiscal year, provided, however, that OMC
shall only be required to pay such amounts to Mr. Gowens that are not covered by
long term disability payments, if any, to Mr. Gowens pursuant to any long term
disability policy or plan of the Company.
Pursuant to the Gowens Employment Agreement, OMC will have the right to
repurchase, at fair market value, all shares of common stock of OMC owned by Mr.
Gowens, and vested stock options granted by OMC to Mr. Gowens upon the
termination of Mr. Gowens' employment with OMC for any reason. Upon the
termination by OMC of Mr. Gowens' employment Without Cause, for Good Reason, a
voluntary termination by Mr. Gowens, a voluntary termination by Mr. Gowens at or
after attaining his age 62 or as a result of total
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<PAGE> 74
disability or death, Mr. Gowens or his estate, as applicable, will have the
right to require OMC to purchase all shares of common stock of OMC owned by Mr.
Gowens and stock options granted by OMC to Mr. Gowens.
Mr. Gowens is subject to a confidentiality provision which is enforceable
during the term of the Gowens Employment Agreement and thereafter and a
non-competition provision which is enforceable during the term of the Gowens
Employment Agreement and for a period of one year commencing on the expiration
or termination of Mr. Gowens' employment with OMC.
See also "Item 13 -- Certain Relationships and Related Transactions."
Certain Severance Arrangements. The Company has severance agreements with
George L. Broughton, Raymond M. Cartade, Jack L. Feurig, John D. Flaig, Grainger
B. McFarlane, James P. Murphy, Robert S. Romano, Peter J. VanLancker and Robert
F. Young. Each of these agreements was entered into prior to the Greenmarine
Acquisition, and the Company's potential severance obligations thereunder became
effective upon the change in control of the Company resulting from the
Greenmarine Acquisition. The agreements provide that if such employee elects to
resign his employment for specified reasons, or is terminated by the Company
other than for cause, the Company will pay such employee an amount in cash equal
to not more than one times (except for Mr. Flaig who will be paid two times) (1)
salary plus (2) the amount of the highest annual incentive compensation received
by such employee in the five fiscal years preceding the fiscal year of the
change in control (or, for certain employees, the two fiscal years immediately
following the fiscal year of the change in control, if greater). Additionally,
for certain employees for a period of 12 months following the termination date
(the "Continuation Period"), the Company will arrange to provide the employee
with benefits substantially similar to those the employee was receiving or
entitled to receive immediately prior to the termination date. Further, the
Company will pay to certain employees a lump sum cash payment in an amount equal
to the actuarial equivalent of the excess of (1) the retirement, pension,
medical, life and other benefits that will be payable to the employee under the
Company's retirement plans if the employee continued to be employed through the
Continuation Period given the employee's base salary over (2) the retirement,
pension, medical, life and other benefits that employee is entitled to receive
under the Company's retirement plans. As a result of the Greenmarine
Acquisition, the severance agreements have, or will be, paid in accordance with
their terms for those employees who have satisfied the conditions discussed
above. The terms of these severance agreements will remain in force until
September 12, 2000, or as otherwise may be negotiated by the employee and the
Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Kingsley, Duberstein, Katz and Hiram served on the Compensation
Committee of the Company's Board of Directors during fiscal year 1998. Mr.
Kingsley served as the Company's Chairman of the Board during fiscal year 1998.
Messrs. Duberstein and Katz served as Vice Chairmen of the Board in fiscal year
1998. Mr. Hiram did not serve as an officer or employee of the Company or any of
its subsidiaries during fiscal year 1998.
Messrs. Kingsley and Duberstein control Greenlake Holdings LLC, which has
approximately a 30.5% interest in Greenmarine Holdings, the Company's sole
shareholder. Mr. Hiram is a Managing Director of Soros Fund Management LLC,
which serves as the principal investment adviser to the indirect parent entities
of Quasar Strategic Partners LDC and Quantum Industrial Partners LDC, each of
which are the owners of approximately 34.75% of Greenmarine Holdings. Mr. Katz
is also affiliated with Quantum Industrial Partners LDC and Quasar Strategic
Partners LDC. In fiscal year 1998, Greenmarine Holdings was controlled by a
Management Committee comprised by Messrs. Kingsley, Duberstein and Katz. See
"Item 12 -- Security Ownership".
ITEM 12. SECURITY OWNERSHIP
The following table sets forth information with respect to the beneficial
ownership of common stock of OMC as of November 30, 1998 by (i) any person or
group who beneficially owns more than 5% of the outstanding common stock of OMC
and (ii) each director and executive officer of OMC and all directors and
executive officers of OMC as a group. Beneficial ownership is determined in
accordance with the rules of the
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Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock of OMC subject to
options currently exercisable, or exercisable within 60 days of the date of this
Prospectus, are deemed outstanding for computing the percentage of the person
holding such options but are not deemed outstanding for computing the percentage
of any other person. Except as otherwise indicated, beneficial ownership in the
following tables includes sole voting and dispositive power.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENT
NAME AND ADDRESS OWNED OF CLASS
- ---------------- ------------ --------
<S> <C> <C>
Greenmarine Holdings LLC(1)................................. 20,400,000 99.9%
277 Park Avenue, 27th Floor
New York, New York 10172
Alfred D. Kingsley(2)....................................... 20,400,000 99.9%
277 Park Avenue, 27th Floor
New York, New York 10172
Gary K. Duberstein(2)....................................... 20,400,000 99.9%
277 Park Avenue, 27th Floor
New York, New York 10172
Richard Katz(3)............................................. 20,400,000 99.9%
Villa La Sirena
Vico dell'Olivetta 12
18039 Martola Inferiore
Ventimiglia, Italy
Ron Hiram(4)................................................ -- --
888 Seventh Avenue, 33rd Floor
New York, New York 10106
Frank V. Sica(5)............................................ -- --
888 Seventh Avenue, 33rd Floor
New York, New York 10106
David D. Jones, Jr.(6)...................................... 212,800 *
c/o Outboard Marine Corporation
100 Sea Horse Drive
Waukegan, Illinois 60085
Andrew P. Hines(7).......................................... 80,000 *
c/o Outboard Marine Corporation
100 Sea Horse Drive
Waukegan, Illinois 60085
Directors and Executive Officers as a group (12 20,692,800 100.0%
persons)(8)...............................................
</TABLE>
- ---------------
(1) The members of Greenmarine Holdings are Greenlake Holdings LLC, a Delaware
limited liability company ("Greenlake"), Quasar Strategic Partners LDC, a
Cayman Islands limited duration company ("QSP"), and Quantum Industrial
Partners LDC, a Cayman Islands limited duration company ("QIP"). Greenlake,
QSP and QIP have approximately a 30.5%, 34.75% and 34.75% interest in
Greenmarine Holdings, respectively. Greenlake is controlled by Mr. Alfred D.
Kingsley and Mr. Gary K. Duberstein. QSP is an indirect subsidiary of Quasar
International Fund N.V., a Netherlands Antilles limited liability company
("Quasar"). QIP is the principal operating subsidiary of Quantum Industrial
Holdings Ltd., a British Virgin Islands corporation ("QIH"). The principal
business of QIP and QSP is investing in securities. Quasar and QIH are
investment funds which have as their principal investment advisors Soros
Fund Management LLC ("SFM LLC"). Mr. George Soros is the Chairman of SFM
LLC. Mr. Stanley Druckenmiller is the Lead Portfolio Manager and a Member of
the Management Committee of SFM LLC. QIH Management Investor, L.P.
("QIHMI"), an investment advisory firm, is a minority shareholder of QIP and
QSP. Pursuant to constituent documents of QIP and QSP, QIHMI is vested with
investment discretion with respect to the portfolio assets held for the
accounts of each of QIP
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and QSP. The principal business of QIHMI is to provide management and
advisory services to, and to invest in, QIP and QSP. Mr. Soros is the sole
shareholder of QIH Management, Inc. ("QIH Management"), which is the sole
general partner of QIHMI. The principal business of QIH Management is to
serve as the sole general partner of QIHMI. Mr. Soros has entered into an
agreement pursuant to which he has agreed to use his best efforts to cause
QIH Management, as the general partner of QIHMI, to act at the discretion of
SFM LLC. The address of each of Mr. George Soros and Mr. Stanley
Druckenmiller is 888 Seventh Avenue, 33rd Floor, New York, New York 10106.
Greenmarine Holdings is controlled by a Management Committee comprised of up
to a total of four Managers. Pursuant to the Operating Agreement of
Greenmarine Holdings, Greenlake has the right to appoint two designees to
Greenmarine Holdings's Management Committee and the holders of a majority of
Greenmarine Holdings' interest held by QSP and QIP have the right to appoint
two members of Greenmarine Holdings' Management Committee. Greenmarine
Holdings' Management Committee is currently comprised of Messrs. Alfred D.
Kingsley, Gary K. Duberstein and Richard Katz. From and after September 12,
1998, the holders of a majority of Greenmarine Holdings' interests held by
QSP and QIP may elect to increase the size of Greenmarine Holdings'
Management Committee to five members, three of whom will be designated by
the holders a majority of Greenmarine Holdings' interests held by QSP and
QIP and two of whom will be designated by Greenlake. The vote of three of
the members of Greenmarine Holdings's Management Committee is required for
action by the Management Committee.
(2) Each of Alfred D. Kingsley and Gary K. Duberstein is a director of the
Company. In addition, each of Messrs. Kingsley and Duberstein are members of
Greenmarine Holdings's Management Committee and they control Greenlake. All
of the shares indicated as owned by each of Messrs. Kingsley and Duberstein
are owned directly by Greenmarine Holdings and are included because of their
affiliation with Greenmarine Holdings. As such, Messrs. Kingsley and
Duberstein may be deemed to have beneficial ownership of these shares within
the meaning of Rule 13d-3 under the Exchange Act.
(3) Richard Katz is a director of the Company. In addition, Mr. Katz is a member
of Greenmarine Holdings's Management Committee. All of the shares indicated
as owned by Mr. Katz are owned directly by Greenmarine Holdings and are
included because of his affiliation with Greenmarine Holdings. The reference
to such shares shall not be deemed admission that Mr. Katz may be deemed to
have beneficial ownership of these shares within the meaning of Rule 13d-3
under the Exchange Act.
(4) Ron Hiram is a director of the Company. Mr. Hiram is a Managing Director of
Soros Fund Management LLC. Soros Fund Management LLC is the principal
investment advisor to Quasar and QIH. See footnote 1 above and
"Management -- Directors and Executive Officers of the Company."
(5) Frank V. Sica is a director of the Company. Mr. Sica is a Managing Director
of Soros Fund Management LLC. Soros Fund Management LLC is the principal
investment advisor to Quasar and QIH. See footnote 1 above and
"Management -- Directors and Executive Officers of the Company."
(6) Represents 212,800 shares of OMC common stock issuable upon exercise of
options granted to Mr. Jones pursuant to the Jones Employment Agreement,
which options are currently exercisable. Does not include 194,445 shares of
OMC common stock issuable upon exercise of options granted to Mr. Jones
pursuant to the Jones Employment Agreement, which options will not become
exercisable within 60 days of the date of this Form 10-K. See "Employment
Contracts and Severance Agreements."
(7) Of the 80,000 shares indicated as owned by Mr. Hines, 8,333 were purchased
in consideration of $150,000 in cash payments and 11,667 were purchased in
consideration of Mr. Hines issuing a promissory note in favor of the Company
in the principal amount of $210,000. Mr. Hines has pledged 20,000 shares to
the Company to secure his obligations under such promissory note. Does not
include 120,000 shares of OMC common stock issuable upon exercise of options
granted to Mr. Hines pursuant to the Hines Employment Agreement, which
options will not become exercisable within 60 days of the date of this Form
10-K. See "Employment Contracts and Severance Agreements."
(8) Includes 20,400,000 shares indicated as owned by Messrs. Kingsley,
Duberstein and Katz as a result of their affiliation with Greenmarine
Holdings.
75
<PAGE> 77
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company is party to an employment agreement with each of David D.
Jones, Jr. and Andrew P. Hines, and to severance agreements with certain other
personnel. See "Management -- Employment Contracts and Severance Agreements."
OMC has agreed to reimburse Mr. Jones for his reasonable moving expenses
incurred in connection with his relocation to the vicinity of Chicago, Illinois.
Through September 30, 1998, such expenses have been approximately $89,000. In
addition, on August 14, 1998, OMC loaned to Mr. Jones the amount of $280,322 for
the purchase of property in Lake Forest, Illinois for the construction of a new
residence. During the term of Mr. Jones' employment with OMC, OMC will pay to
Mr. Jones an amount equal to the interest payable on any such loan, which is
being charged a rate of 6.5% per annum. This loan is evidenced by a promissory
note and secured by a second mortgage in favor of OMC. OMC has agreed to bear
the "first-loss" position in the event that Mr. Jones' new residence is sold for
an amount less than its original cost, plus improvements. In the event Mr.
Jones' employment with OMC is terminated for any reason and such new residence
has not been sold, within 120 days after such termination, Mr. Jones will be
obligated to repay such loan or repurchase such equity investment, as the case
may be, at an appraised value to be determined by an independent appraiser. OMC
has also agreed to reimburse Mr. Jones for any loss he incurs on the sale of his
current residence.
To enable Mr. Jones to exercise at any time during his employment with OMC
all or any portion of the non-qualified option to purchase 238,895 shares of OMC
common stock granted by OMC to Mr. Jones pursuant to the Jones Employment
Agreement, OMC has agreed to loan to Mr. Jones an amount equal to the aggregate
exercise price of the portion of such option being exercised. Any such loan
shall be due and payable in full within 30 days following Mr. Jones' termination
of employment for any reason. In addition, pursuant to the Jones Employment
Agreement, OMC has purchased for the benefit of Mr. Jones and his heirs a term
life insurance policy with a death benefit of $1,500,000.
OMC has agreed to reimburse Mr. Hines until the date he permanently
relocates to the Chicago, Illinois vicinity, Mr. Hines' rental fees for a
temporary residence in the Chicago, Illinois area, including all utilities, and
for round trip coach airfares between New Jersey and Chicago for reasonable
travel between such locations by Mr. Hines. Through September 30, 1998, such
expenses have been approximately $62,400. On December 18, 1998 the Company
purchased Mr. Hines' home located in New Jersey for the amount of $860,000. The
Company issued to Mr. Hines a demand promissory note in the amount of $860,000,
secured by a mortgage, bearing interest at a rate of 6.5%. Concurrently with the
transfer of the property, Mr. Hines entered into a lease of the home from the
Company through March 31, 1999. OMC shall have the right to sell such residence
and shall assume all mortgage payment obligations for such residence. OMC will
be entitled to any profits and will suffer any losses that result from the
actual sale price of Mr. Hines' New Jersey residence.
Pursuant to the Hines Employment Agreement, the Company loaned to Mr. Hines
the amount of $210,000 for the sole purpose of purchasing 11,666.66 shares of
common stock of the Company. The loan is evidenced by a promissory note bearing
interest at a rate of 5.81% per annum and secured by a pledge and security
agreement with the shares of OMC common stock issued to Mr. Hines as collateral.
On December 8, 1998, the Company loaned to Mr. Gowens the amount of
$100,000 for the purchase of his principal residence located in the Chicago
vicinity, secured by a second mortgage. The promissory note bears interest at a
rate of 6.5% per annum with payments of interest only. The note is payable if
(1) Mr. Gowens leaves the employment of OMC before October 1, 2001 without Good
Reason or as a result of termination for Cause as defined in the Gowens
Employment Agreement; (2) Mr. Gowens is required by OMC to relocate his
residence any time prior to October 1, 2001 or (3) Mr. Gowens dies before
October 1, 2001, all subject to extension as agreed to between Mr. Gowens and
OMC. In the event that Mr. Gowens is required by OMC to relocate his residence
prior to October 1, 2001, OMC shall suffer the loss, if any, on the note if the
gross sale price of the mortgaged property or the fair market value of the
mortgaged property, whichever is greater, is greater than the purchase price of
the mortgaged property, plus documented improvements.
76
<PAGE> 78
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of the Annual Report on Form 10-K:
1. Report of Independent Public Accountants
2. Financial statement schedules required to be filed by Item 8 of
this Annual Report on Form 10-K:
Except for Schedule II -- Valuation and Qualifying Accounts which is
included in Item 8 of this Annual Report, all other schedules are
omitted as the information is not required, is inapplicable or is
included in the Consolidated Financial Statements or Notes thereto.
Individual financial statements for the Company's subsidiaries and
partnerships have been omitted because consolidated statements have
been prepared for all of the Company's wholly-owned subsidiaries and
limited partnerships.
3. An exhibit index is set forth below:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
3.1 (a) -- Restated Certificate of Incorporation of the Company (filed
as Exhibit 3(a) to the Company's Annual Report on Form
10-K/A for the year ended September 30, 1997 (the "1997
10-K"))*
3.2 (a) -- Amended and Restated by-laws of the Company (filed as
Exhibit 3(B) to the 1997 10-K)*
(a)(1) -- Amended and Restated by-laws of the Company (adopted July
23, 1998) (filed as Exhibit 3.2(a)(1) to the Company's
Registration Statement on Form S-4 (Registration No.
333-57949) (the "Form S-4"))*
4.1 -- Indenture for the 10 3/4% Senior Notes due 2008, Series A
(the "Old Notes") and 10 3/4% Senior Notes due 2008, Series
B (the "Exchange Notes"), dated as of May 27, 1998 among the
Company, the Subsidiary Guarantors and State Street Bank and
Trust Company, as trustee (filed as Exhibit 4.1 to the Form
S-4)*
4.2 -- Form of Old Note (included in Exhibit 4.1) (filed as Exhibit
4.1 to the Form S-4)*
4.3 -- Form of Exchange Note (filed as Exhibit 4.2 to the Form
S-4)*
4.4 -- Form of Subsidiary Guarantee of the Old Notes and the
Exchange Notes (included in Exhibit 4.1) (filed as Exhibit
4.1 to the Form S-4)*
4.5 -- Registration Rights Agreement dated as of May 27, 1998 among
the Company, the Subsidiary Guarantors and Donaldson, Lufkin
& Jenrette Securities Corporation and Bear, Stearns & Co.,
Inc. (filed as Exhibit 4.5 to the Form S-4)*
4.6 -- Depositary Agreement dated as of May 27, 1998 among the
Company, State Street Bank and Trust Company, as trustee,
NationsBank, N.A., as administrator agent, and State Street
Bank And Trust Company, as depositary agent (filed as
Exhibit 4.6 to the Form S-4)*
4.7 -- With respect to rights of holders of the Company's 9 1/8%
Sinking Fund Debentures due 2017, reference is made to
Exhibit 4(A) to the Company's Registration Statement Number
33-12759 filed on March 20, 1987*
4.8 -- With respect to rights of holders of the Company's 7%
Convertible Subordinated Debentures due 2002, reference is
made to the Company's Registration Statement Number 33-47354
filed on April 28, 1992*
</TABLE>
77
<PAGE> 79
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
4.9 -- With respect to the Supplemental Indenture dated September
30, 1997 related to the Company's 7% Convertible
Subordinated Debentures due 2002, reference is made to
Exhibit 4(c) to the 1997 10-K*
10.1 -- With respect to Severance Agreement between the Company and
certain elected and appointed officers and certain other
executives of the Company, reference is made to Exhibit 99.3
and 99.4 of the Company's Schedule 14D-9 filed with the
Securities and Exchange Commission on July 15, 1997*
10.2 -- With respect to the Consulting Agreement for Mr. Bowman
dated September 24, 1997, reference is made to Exhibit 10(I)
to the 1997 10-K*
10.3 -- With respect to the Employment Agreement of Mr. Hines dated
October 6, 1997, reference is made to Exhibit 10(J) to the
1997 10-K*
10.4 -- With respect to the Amended and Restated Loan and Security
Agreement between the Company and NationsBank of Texas, N.A.
dated January 6, 1998, reference is made to Exhibit 10(E) to
the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended December 31, 1997*
10.5 -- First Amendment to Amended and Restated Loan and Security
Agreement between the Company and NationsBank of Texas, N.A.
dated May 21, 1998 (filed as Exhibit 10.5 to the Form S-4)*
10.6 -- With respect to the Employment Agreement of Mr. Jones dated
March 10, 1998, reference is made to Exhibit 10(F) to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1998*
10.7 -- With respect to the Personal Rewards and Opportunity
Program, reference is made to Exhibit 10(G) to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 1998*
10.8 -- Employment Agreement of Robert Gowens dated October 1, 1998
10.9 -- Second Amendment to Amended and Restated Loan and Security
Agreement between the Company and NationsBank of Texas,
N.A., dated effective as of August 31, 1998
10.10 -- Third Amendment to Amended and Restated Loan and Security
Agreement between the Company and NationsBank of Texas,
N.A., dated effective as of December 21, 1998
11 -- Computation of per share earnings (loss)
12 -- Statement of Computation of Ratios of Earnings (Loss) to
Fixed Charges
21 -- Subsidiaries of Registrant (filed as Exhibit 21 to the 1997
10-K)*
27 -- Financial Data Schedule
</TABLE>
- ---------------
* Incorporated herein by reference.
(b) During the fourth quarter of the year ended September 30, 1998, the
Company filed one report on Form 8-K on July 31, 1998 announcing,
effective January 1, 1999, the change of its fiscal year to a calendar
year.
(c) Exhibits are attached hereto.
(d) Schedule II -- Valuation and Qualifying Accounts is included in Item 8
of this Annual Report.
78
<PAGE> 80
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
OUTBOARD MARINE CORPORATION
<TABLE>
<S> <C> <C> <C>
Date: December 24, 1998 By: /s/ DAVID D. JONES, JR.
--------------------------------------------------------------
David D. Jones, Jr.
President, Chief Executive Officer and Director
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following person on behalf of the registrant
and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C> <C>
Date: December 24, 1998 /s/ ALFRED D. KINGSLEY
--------------------------------------------------------------
Alfred D. Kingsley
Chairman of the Board
Date: December 24, 1998 /s/ GARY K. DUBERSTEIN
--------------------------------------------------------------
Gary K. Duberstein
Vice Chairman and Assistant Secretary of the Board
Date: December 24, 1998 /s/ RICHARD KATZ
--------------------------------------------------------------
Richard Katz
Vice Chairman of the Board
Date: December 24, 1998 /s/ RON HIRAM
--------------------------------------------------------------
Ron Hiram
Director
Date: December 24, 1998 /s/ FRANK V. SICA
--------------------------------------------------------------
Frank V. Sica
Director
Date: December 24, 1998 /s/ DAVID D. JONES, JR.
--------------------------------------------------------------
David D. Jones, Jr.
President, Chief Executive Officer and Director
Date: December 24, 1998 /s/ ANDREW P. HINES
--------------------------------------------------------------
Andrew P. Hines
Executive Vice President and Chief Financial Officer,
Director (Principal Financial Officer)
Date: December 24, 1998 By: /s/ JOSEPH P. TOMCZAK
--------------------------------------------------------------
Joseph P. Tomczak
Vice President and Controller
(Principal Accounting Officer)
</TABLE>
79
<PAGE> 81
OUTBOARD MARINE CORPORATION
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
3.1 (a) -- Restated Certificate of Incorporation of the Company (filed
as Exhibit 3(a) to the Company's Annual Report on Form
10-K/A for the year ended September 30, 1997 (the "1997
10-K"))*
3.2 (a) -- Amended and Restated by-laws of the Company (filed as
Exhibit 3(B) to the 1997 10-K)*
(a)(1) -- Amended and Restated by-laws of the Company (adopted July
23, 1998) (filed as Exhibit 3.2(a)(1) to the Company's
Registration Statement on Form S-4 (Registration No.
333-57949) (the "Form S-4"))*
4.1 -- Indenture for the 10 3/4% Senior Notes due 2008, Series A
(the "Old Notes") and 10 3/4% Senior Notes due 2008, Series
B (the "Exchange Notes"), dated as of May 27, 1998 among the
Company, the Subsidiary Guarantors and State Street Bank and
Trust Company, as trustee (filed as Exhibit 4.1 to the Form
S-4)*
4.2 -- Form of Old Note (included in Exhibit 4.1) (filed as Exhibit
4.1 to the Form S-4)*
4.3 -- Form of Exchange Note (filed as Exhibit 4.2 to the Form
S-4)*
4.4 -- Form of Subsidiary Guarantee of the Old Notes and the
Exchange Notes (included in Exhibit 4.1) (filed as Exhibit
4.1 to the Form S-4)*
4.5 -- Registration Rights Agreement dated as of May 27, 1998 among
the Company, the Subsidiary Guarantors and Donaldson, Lufkin
& Jenrette Securities Corporation and Bear, Stearns & Co.,
Inc. (filed as Exhibit 4.5 to the Form S-4)*
4.6 -- Depositary Agreement dated as of May 27, 1998 among the
Company, State Street Bank and Trust Company, as trustee,
NationsBank, N.A., as administrator agent, and State Street
Bank And Trust Company, as depositary agent (filed as
Exhibit 4.6 to the Form S-4)*
4.7 -- With respect to rights of holders of the Company's 9 1/8%
Sinking Fund Debentures due 2017, reference is made to
Exhibit 4(A) to the Company's Registration Statement Number
33-12759 filed on March 20, 1987*
4.8 -- With respect to rights of holders of the Company's 7%
Convertible Subordinated Debentures due 2002, reference is
made to the Company's Registration Statement Number 33-47354
filed on April 28, 1992*
4.9 -- With respect to the Supplemental Indenture dated September
30, 1997 related to the Company's 7% Convertible
Subordinated Debentures due 2002, reference is made to
Exhibit 4(c) to the 1997 10-K*
10.1 -- With respect to Severance Agreement between the Company and
certain elected and appointed officers and certain other
executives of the Company, reference is made to Exhibit 99.3
and 99.4 of the Company's Schedule 14D-9 filed with the
Securities and Exchange Commission on July 15, 1997*
10.2 -- With respect to the Consulting Agreement for Mr. Bowman
dated September 24, 1997, reference is made to Exhibit 10(I)
to the 1997 10-K*
10.3 -- With respect to the Employment Agreement of Mr. Hines dated
October 6, 1997, reference is made to Exhibit 10(J) to the
1997 10-K*
</TABLE>
80
<PAGE> 82
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.4 -- With respect to the Amended and Restated Loan and Security
Agreement between the Company and NationsBank of Texas, N.A.
dated January 6, 1998, reference is made to Exhibit 10(E) to
the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended December 31, 1997*
10.5 -- First Amendment to Amended and Restated Loan and Security
Agreement between the Company and NationsBank of Texas, N.A.
dated May 21, 1998 (filed as Exhibit 10.5 to the Form S-4)*
10.6 -- With respect to the Employment Agreement of Mr. Jones dated
March 10, 1998, reference is made to Exhibit 10(F) to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1998*
10.7 -- With respect to the Personal Rewards and Opportunity
Program, reference is made to Exhibit 10(G) to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 1998*
10.8 -- Employment Agreement of Robert Gowens dated October 1, 1998
10.9 -- Second Amendment to Amended and Restated Loan and Security
Agreement between the Company and NationsBank of Texas,
N.A., dated effective as of August 31, 1998
10.10 -- Third Amendment to Amended and Restated Loan and Security
Agreement between the Company and NationsBank of Texas,
N.A., dated effective as of December 21, 1998
11 -- Computation of per share earnings (loss)
12 -- Statement of Computation of Ratios of Earnings (Loss) to
Fixed Charges
21 -- Subsidiaries of Registrant (filed as Exhibit 21 to the 1997
10-K)*
27 -- Financial Data Schedule
</TABLE>
- ---------------
* Incorporated herein by reference.
81
<PAGE> 1
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, dated as of the 1st day of October, 1998 ("EFFECTIVE
DATE"), is made and entered into by OUTBOARD MARINE CORPORATION, a Delaware
corporation (the "COMPANy"), and Robert B. Gowens (the "EMPLOYEE").
WHEREAS, the Company wishes to employ the Employee and the Employee wishes to be
employed by the Company; and
WHEREAS, the Employee is willing to make his services available to the Company
upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, Employee and the Company, in consideration of the mutual
covenants contained herein, hereby agree as follows:
1. Employment. During the term of this Agreement, the Company shall employ
Employee as Vice President of the Company and President, North American
Engine Operations. Employee shall perform services customarily
associated with and incident to such position as may be reasonably
determined from time to time by the President and Chief Executive
Officer of the Company (the "CEO"), including those in Attachment A
hereto. Employee shall also serve, upon the CEO's request and for no
additional compensation, as an officer and/or director of any
subsidiary of the Company. Employee shall perform his duties
faithfully, diligently and to the best of his ability, subject to
reasonable direction from the CEO. Employee shall devote his full and
undivided business time and attention to his duties and
responsibilities to the Company and its subsidiaries.
2. Term. The term of this Agreement (the "TERM") shall commence on the
Effective Date and shall continue through the earlier of the third
anniversary of the Effective Date or Employee's death or Total
Disability (as defined below).
3. Base Salary. During the Term, the Company agrees to pay Employee an
annual salary of $300,000 ("BASE SALARY") according to the Company's
standard payroll practices and subject to review annually for possible
increases at the Company's sole discretion.
4. Incentive Compensation. Employee shall be eligible to participate in
the Company's Personal Rewards and Opportunities Program ("PROP") or
other bonus or incentive compensation program applicable generally to
similarly situated senior executives as a group in accordance with and
subject to the terms thereof. "Similarly situated executives" when used
in this Agreement shall mean executive officers of the Company,
excluding the CEO and Chief Financial Officer. Employee shall be
eligible for a target bonus of 100% of Base Salary. Subject to the
provisions of Section 9b(i) and 9c(i) of this Agreement, any bonus
payments earned by Employee shall be paid as 50% cash and 50%
restricted stock of the Company subject to a vesting schedule of 25%
per year. The Compensation Committee of
<PAGE> 2
the Board of Directors of the Company ("COMMITTEE") shall determine in
its sole discretion the amount of bonus or other incentive compensation
for which Employee shall be eligible.
5. Equity-Based Compensation.
a. Upon commencement of employment, the Company shall make a
grant under the PROP to Employee of 100,000 non-qualified
stock options at an exercise price of $22.00 per share,
vesting 33% on each anniversary of employment, subject to the
provisions of Section 9b(i) of this Agreement. The stock
options shall vest as follows:
<TABLE>
<CAPTION>
Years of Vesting Service % of Vested Option Shares
------------------------ -------------------------
<S> <C>
1 33 1/3%
2 66 2/3%
3 100%
</TABLE>
For purposes of the preceding Vesting Schedule, Employee shall
be granted a Year of Vesting Service for each consecutive
twelve-month period following the Effective Date that
Executive remains continuously employed by the Company. To the
extent Executive dies during any such twelve-month period, any
unvested stock options granted under this Section 5a shall
vest prorata for the number of full months Employee was
employed during such twelve month period in which his death
occurs.
b. In addition, the Company shall permit Employee to participate
in any and all of the short-term and long-term stock option or
other equity or quasi-equity participation plans, programs or
arrangements in which similarly situated senior executives are
permitted to participate and at a level comparable to the
level at which similarly situated senior executives are
permitted to participate.
6. Purchase of Residence. To assist employee in purchasing a new permanent
residence in the Chicago, Illinois geographical vicinity, the Company
will make a loan to Employee in an amount to be agreed upon between the
Company and Employee. The loan will be evidenced by a promissory note
in the form attached hereto as Attachment B, secured by a second
mortgage in favor of the Company, and shall be repaid within 30 days
after the closing on the resale of his new permanent residence. In
addition, should Employee be required by the Company to relocate during
the Term of this Agreement, and Employee is required to sell his
residence at a loss, the amount of any such loss shall be subtracted
from the amount of the loan which the Employee would otherwise be
required to repay.
7. Vacation. Employee shall be entitled to four weeks of paid vacation
time during each calendar year in accordance with the Company's
vacation policy in effect from time to time.
2
<PAGE> 3
8. Other Benefits. Employee shall be entitled to participate in the
Company's retirement, group medical, disability and other employee
benefit programs generally applicable to similarly situated employees
as a group in accordance with and subject to the terms thereof. The
Company, at its expense, shall provide Employee with term life
insurance coverage in an amount not less than $750,000, to remain in
effect during the term of this Agreement.
9. Termination of Employment. Subject to the further provisions of this
Section, (i) the Company may terminate Employee's employment with the
Company or any of its subsidiaries at any time for any or no reason and
(ii) Employee may resign for Good Reason (as defined below) or for no
reason. Upon the termination of employment with the Company for any
reason, Employee shall be deemed, without the need to take further
action, to have resigned all positions to which he had been appointed
by the Company or any of its subsidiaries, including, but not limited
to, his position as an officer and a director of the Company and any
subsidiary thereof and as a member of any committee established by the
Company or the Board, effective on the date of termination of
employment.
a. With Cause. The Company may terminate Employee's employment
with the Company and its subsidiaries for cause (as defined
below) upon 20 days' prior written notice to Employee;
provided, however, that the Company may relieve Employee of
his duties and responsibilities as of the date of such notice
without such action constituting Good Reason (as defined
below). Unless the notice of termination is withdrawn, the
employment of Employee hereunder shall be terminated as of the
date set forth in such notice and the Company shall pay
Employee his accrued and unpaid Base Salary through such date
of termination and have no further obligation to Employee
hereunder. Employee's rights under the Company's employee
benefit plans shall be determined in accordance with the terms
of such plans.
"CAUSE" means any act or any failure to act on the part of
Employee during the Term which constitutes:
(1) fraud, theft, embezzlement or similar crime against
the Company or its affiliates,
(2) willful misconduct in the performance of Employee's
duties and responsibilities which results or could
reasonably be expected to result in material damage
to the Company or its assets, or a material liability
of the Company,
(3) a felony for which Employee is convicted or pleads
nolo contendere.
(4) willful and material breach of this Employment
Agreement or other written agreement with the
Company, and
3
<PAGE> 4
(5) willful failure to follow reasonable and good faith
directions of the Chief Executive Officer or other
manager more senior than Employee which are
consistent with Employee's position, except for
reasons beyond Employee's control.
No act or omission shall be deemed to be "willful" if Employee
reasonably believed such acts or omissions to be in the best
interests of the Company.
b. Without Cause or With Good Reason. The Company may terminate
Employee's employment with the Company and its subsidiaries
without Cause, or Employee may resign from such employment
upon 20 days' prior written notice to the Company and with
Good Reason. Unless the Company corrects or otherwise remedies
the condition constituting Good Reason within such 20 days
following receipt of such notice, upon any termination of
employment of Employee pursuant to this Section 9b, the
Company shall on the date his employment ends: (i) pay
Employee his accrued and unpaid Base Salary and vacation as of
the date of his termination of employment; (ii) make a lump
sum payment in cash to Employee in an amount equal to the
greater of (a) Employee's Base Salary for one (1) year, and
(b) his Base Salary for the remainder of the term of this
Agreement; and (iii) the Company shall pay to Employee within
60 days of the end of the fiscal year his bonus for the fiscal
year in which such termination occurred (based upon the
Company's level of actual attainment of its bonus target for
such fiscal year) prorated for the number of full months
Employee was employed during such fiscal year. In addition,
the Company shall, at its expense, continue for one year
Employee's participation on the same basis as active employees
in the group medical and life insurance plans in which he
participated prior to the termination of his employment in
accordance with the terms (other than eligibility) of such
plans from time to time (but only to the extent that Employee
is not receiving substantially the same benefits from another
employer or such continued participation is legally
permissible or, if such employee benefit involves insurance
coverage, permitted by the insurer). Employee shall have no
obligation to mitigate "damages" by making efforts to secure
other employment, nor will cash payments described under this
Section 9b be offset by amounts earned through other
employment. The compensation provided for in this Section
shall be the only compensation to which Employee shall be
entitled to upon termination.
(i) Any unvested restricted stock and stock options granted
pursuant to Sections 4 and 5a in this Agreement shall
automatically vest as of the date of termination, and other
stock options shall be exercisable in accordance with the
terms of the bonus plan or stock option grant agreement
pursuant to which they were issued.
"GOOD REASON" means any of the following events occurring
during the Term without Employee's consent:
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<PAGE> 5
(1) a change in Employee's title with the Company,
(2) the assignment to Employee of any duties or
responsibilities which are not commensurate with the
Employee's title and position with the Company or any
of its subsidiaries,
(3) a reduction in the Employee's salary or target bonus,
(4) a failure to provide Employee with employee benefits
generally provided to similarly situated senior
executives as a group,
provided, however, that the Employee must give the Company at least 20
days prior notice of his intent to resign for Good Reason and the
Company shall have the right during the 20- day period after receipt of
such notice to correct or otherwise remedy any alleged event
constituting Good Reason.
c. Death. This Agreement shall automatically terminate upon
Employee's death; provided, however, that the Company shall
pay to Employee's estate the Base Salary and vacation owed
through the date of death and any bonus for the fiscal year in
which his death occurs, prorated for the number of full months
Employee was employed during such fiscal year and subject to a
determination by the Board, acting in good faith, that the
performance criteria, if any, for such bonus would be
satisfied for such fiscal year.
(i) Upon Employee's death, restricted stock granted
pursuant to Section 4 above shall automatically vest.
d. Disability. This Agreement shall automatically terminate and
Employee's employment with the Company shall end upon
Employee's Total Disability. The Company shall pay to Employee
his Base Salary through the date on which he is determined to
have a Total Disability and any Bonus for the fiscal year in
which his Total Disability occurs, prorated for the number of
full months Employee was employed during such fiscal year, in
same manner and subject to the same conditions as applicable
to employees generally (except individual performance
objectives for Employee shall be disregarded in favor of the
generally applicable objectives); provided, however, that the
Company shall only be required to pay such amounts to Employee
that are not covered by long-term disability payments, if any,
to Employee pursuant to any long-term disability insurance
policy or benefit plan of the Company.
"TOTAL DISABILITY" shall mean any mental or physical condition
that (i) prevents Employee from reasonably discharging his
services and employment duties hereunder, (ii) is attested to
in writing by a physician mutually acceptable to Employee and
the Company, and (iii) continues, for any one or related
condition,
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<PAGE> 6
during any period of three (3) consecutive months or for a
period aggregating six (6) months in any twelve-month period.
Total Disability shall be deemed to have occurred on the last
day of such applicable three- or six-month period.
e. Delivery of a Release. The Company may, in its sole
discretion, require Employee's delivery to the Company of a
written release, in form and substance reasonably satisfactory
to the Company, pursuant to which he would release the Company
from any claims or liabilities other than amounts then owed to
him pursuant to this Section 9, any bonus plan or other
employee benefit plan or arrangement, or any vested amount
under any compensation plan or arrangement of the Company.
10. Sale on Termination of Employment (a) Upon Employee ceasing to be
employed by the company pursuant to this Agreement for any reason (a
"Termination Event"), the Company may elect, by delivering the notice
required under Section 10(c), to require (the "Repurchase Right")
Executive to sell to the Company or its designee all, but not less than
all, of the shares of Common Stock owned by Employee and vested stock
options granted to Employee, subject to the expiration or termination
or other terms of such Common Stock and stock options upon the
occurrence of a Termination Event in accordance with any grant
agreement or stock option plan pursuant to which such Common Stock
options were granted by the Company to Employee, in accordance with
Section 10(f) (such shares of Common Stock and stock options are
hereinafter referred to as (the "Repurchase Securities"). In the event
that a Termination Event occurs as a result of Employee's death, the
rights and obligations of Employee under this Section 10 shall be
deemed to be the rights and obligations of his estate, and, if such
event occurs, all references to Employee in this Section 10 shall be
deemed references to a representative of Employee's estate.
(b) The "Repurchase Price" for each Repurchased Security that
constitutes Common Stock shall be equal to the fair market
value of the Common Stock as of the date of the Repurchase
Notice determined by an independent appraiser selected by the
Board and reasonably acceptable to Employee, which
determination shall be made by evaluating the Company on the
basis of it being a stand-alone of liquidity of the Common
Stock or the fact that the Repurchased Securities may
represent a minority interest in Security that constitutes any
vested stock option granted to Employee shall be the amount by
which such fair market value per share of Common Stock subject
to such option exceeds the exercise price therefor; provided,
however, that, in the event shares of Common Stock are traded
on a national stock exchange or a public market shall exist
for the Common Stock on a national quotation system, the fair
market value for the Common Stock shall be based upon the
average closing price per share for the 20 trading days
immediately preceding the date on which the Termination Event
occurred.
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<PAGE> 7
(c) Upon the occurrence of any Termination Event, the Company or
its designee, as the case may be, may deliver written notice
(the "Repurchase Notice") to Employee within one (1) year
after such occurrence, specifying that the Company or its
designees, as the case may be, elects to exercise its
Repurchase Right pursuant to this Section 10. If the Company
or its designee elects to exercise its Repurchase Right, the
Company or its designee, as the case may be, shall specify the
Repurchase Price for each Repurchased Security in the
Repurchase Notice and consummate the purchase of such
Repurchased Securities in accordance with Section 10(f).
(d) Subject to Sections 5 and 9 hereof, it is hereby understood
and agreed that the termination, expiration or cancellation of
stock options (including shares of Common Stock underlying
such stock options) that have not been exercised, to the
extent permissible, as of the occurrence of any Termination
Event, shall be determined pursuant to any option grant
agreement or stock option plan pursuant to which such stock
options were granted by the Company to Employee.
(e) The aggregate amount of the Repurchase Price paid to Employee
for the Repurchased Securities shall be reduced by an amount
equal to the unpaid principal amount (plus accrued and unpaid
interest) of any loan made by the Company to Employee, or any
other indebtedness of the Employee to the Company, and the
principal amount of any such loan or Repurchase Price or, if
applicable, canceled.
(f) If the Company or its designee elects to exercise the
Repurchase Right, the Repurchased Securities shall be
repurchased on a date (the "Repurchase Date") not later than
90 days after the date of the Repurchase Notice. On the
Repurchase Date, Employee shall deliver to the Company or its
designee the certificate or certificates, or the instrument or
instruments, as the case may be, representing shares of Common
Stock and stock options owned or held, as the case may be, by
Employee on such date against delivery by the Company or its
designee to Employee of the Repurchase Price. All certificates
or other instruments evidencing Repurchased Securities shall
be accompanied by instruments of transfer in form and
substance written certificate, in form and substance
reasonably acceptable to the Company or its designee, pursuant
to which Employee represents and warrants that he is the
record and beneficial owner of the Repurchased Securities and
has good and valid title to the Repurchased Securities, free
and clear of any and all liens, claims, assessments, pledges,
options or other legal and equitable encumbrances of any kind
whatsoever (other than pursuant to this Agreement). If
Employee shall fail to deliver such certificate or
certificates, or such instrument or instruments, as the case
may be, and such written certification to the Company or its
designee within the terms required, the Company shall cause
its books and records to show that Repurchased Securities are
subject to the provisions of this Section 10 and that the
Repurchased Securities, until transferred to the Company or
its designee, shall not be entitled to any proxy, dividend or
other rights from the date on which such certificate or
certificates, or
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<PAGE> 8
instrument or instruments, as the case may be, and such
written certification should have been delivered to the
Company or its designee, as the case may be.
(g) The giving of the Repurchase Notice by the Company and the
receipt by Employee of such notice shall constitute an
irrevocable commitment by the Company and Employee to purchase
and sell, as the case may be, the Repurchased Securities
referred to in such Notice.
11. Put Option. (a) Upon the occurrence during the Term of any of the
events set forth in clauses (i) through (vi) below (each, a "Put
Event"), Employee may elect, by delivering the notice required under
Section 10(c), to require (the "Put Right") the Company to purchase
all, but not less than all, of the shares of Common Stock owned by
Employee and vested stock options granted to Employee, subject to the
expiration or termination or other terms of such Common Stock and stock
options upon the occurrence of a Put Event in accordance with, subject
to Sections 5 and 9 hereof, any Common Stock or grant agreement or
stock option plan pursuant to which such Common Stock or options were
granted by the Company to Employee, in accordance with Section 10(f)
(such shares of Common Stock and stock options are hereafter referred
to as the "Put Securities"):
(i) the termination by the Company of Employee's employment
hereunder without Cause;
(ii) The termination by Employee of his employment hereunder for
Good Reason;
(iii) The voluntary termination by Employee of his employment
hereunder at or after the expiration of the Term as in effect
at such time;
(iv) the voluntary termination by Employee of his employment
hereunder at or after his attaining age 62;
(v) The termination by the Company of Employee's employment
hereunder for Total Disability; or
(vi) the termination of Employee's employment as a result of his
death.
In the event that a Put Event occurs as a result of the event specified
in clause (vi) above, the rights and obligations of Employee under this
Section 11 shall be deemed to be the rights and obligations of his
estate, and, if such event occurs, all references to Employee in this
Section 11 shall be deemed references to a representative of Employee's
estate.
(b) The "Put Price" for each Put Security that constitutes Common
Stock shall be equal to the fair market value of the Common
Stock as of the date of the Put Notice determined by an
independent appraiser selected by the Board and reasonably
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<PAGE> 9
acceptable to Employee, which determination shall be made by
evaluating the Company on the basis of it being a stand-alone
enterprise and without any reduction as a result of the lack
of liquidity of the Common Stock or the fact that the Put
Securities may represent a minority interest in the Company,
and the "Put Price" for each Put Security that constitutes any
vested stock option granted to Employee shall be the amount by
which such fair market value per share of Common Stock subject
to such option exceeds the exercise price therefor; provided,
however, that in the event shares of Common Stock are traded
on a national stock exchange or a public market shall exist
for the Common Stock on a national quotation system, the fair
market value for the Common Stock shall be based upon the
average closing immediately preceding the date on which the
Put Event occurred.
(c) Upon the occurrence of any Put Event, the Employee shall
deliver written notice (the "Put Notice") to the Company
within one (1) year after such occurrence, specifying that it
elects to exercise its Put Right pursuant to this Section 11;
provided, however, that, if a Put Event occurs during the
initial Term (without giving effect to any Renewal Term) as a
result of the event specified in Section 11(a)(i), Employee
may deliver the Put Notice within two (2) years after the
occurrence of such Put Event. If Employee elects to exercise
its Put Right, the Company or its designees, as the case may
be shall, within 60 days of its receipt of the Put Notices,
deliver to Employee written notice specifying the Put Price
for each Put Security and consummate the purchase of such Put
Securities in accordance with Section 11(f).
(d) Subject to Sections 5 and 9 hereof, it is hereby understood
and agreed that the termination, expiration or cancellation of
stock options (including shares of Common Stock underlying
such stock options) that have not been exercised, to the
extent permissible, as of the occurrence of any Put Event,
shall be determined pursuant to any option grant agreement or
stock option plan pursuant to which such stock options were
granted by the Company to Employee.
(e) The aggregate amount of the Put Price paid to Employee for the
Put Securities shall be reduced by an amount equal to the
unpaid principal amount (plus accrued and unpaid interest) of
any other indebtedness of Employee to the Company, and the
principal amount of any such loan or indebtedness shall be
reduced by the amount of the Put Price or, if applicable,
canceled.
(f) If Employee elects to exercise the Put Right, the Put
Securities shall be repurchased on a date (the "Put Repurchase
Date") not later than 90 days after the date of the date of
the Put Notice. On the Put Repurchase Date, Employee shall
deliver to the Company the certificate or certificates, or the
instrument or instruments, as the case may be, representing
share of Common Stock and stock options owned or held, as the
case may be, by Employee on the Put Price. All certificates or
other instruments evidencing Put Securities shall be
accompanied by instruments of transfer in form and substance
reasonably acceptable to the Company and a written
certificate, in form and substance reasonably acceptable to
the Company, pursuant to which Employee represents and
warrants that he is the record and beneficial owner of the
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<PAGE> 10
Put Securities and has good and valid title to the Put
Securities, free and clear of any and other legal and
equitable encumbrances of any kind whatsoever (other than
pursuant to this Agreement).
(g) Notwithstanding anything in this Section 11 to the contrary,
the Company shall not be required to purchase Put Securities
pursuant to any exercise by the Employee of the Put Right to
the extent that (i) the purchase of such Put Securities
(including the occurrence of any indebtedness required to
enable it to purchase such Put Securities) would cause or
constitute a breach or default (immediately or with notice or
lapse of time or both) of any material agreement or instrument
with respect to borrowed money in existence prior to such
exercise and as to which a consent of waiver thereunder for
such purchase (or occurrence of indebtedness) has not been
obtained after reasonable best efforts by the Company, (ii)
the Board determines in its reasonable business judgment that
the purchase of such Put Securities would cause or be
reasonably likely to cause a material adverse financial effect
on the Company, or (iii) the purchase of such Put Securities
would violate any law, statue, order, writ, injunction, decree
or rule promulgated or judgment entered, by an federal, state,
local or foreign court or governmental authority applicable to
the Company or any of its subsidiaries, and (iv) the Company
gives written notice to Employee, within 30 business days
after the date of the Put Notice, that it is not required to
purchase the number of Put Securities set forth in such notice
by reason of clause (i), (ii) or (iii) above and setting forth
the facts relating thereto.
(h) The giving of the Put Notice by Employee and the receipt by
the Company of such notice shall constitute an irrevocable
commitment by Employee and the Company to sell and purchase,
as the case may be, the Put Securities referred to in such
notice unless a notice is given by the Company as provided in
Section 11(g). If the Company is permitted pursuant to Section
11(g) to purchase some, but not all of the Put Securities as
to which the Employee has exercised its Employee's rights
under Section 11(a), the Employee may, in his sole discretion,
by written notice (a "Put Withdrawal Notice") given to the
Company within 10 business days of its receipt of the notice
from the Company (the "Put Withdrawal Period") withdraw the
exercise of such right, in which event it shall not be
required to sell any Put Securities to the Company. If
Employee does not give a Put Withdrawal Notice within the Put
Withdrawal Period, Employee shall be obligated to sell, and
the Company shall be obligated to purchase, all Put Securities
that the Company is not prohibited form purchase pursuant to
Section 11(g).
(i) The Put Right shall expire and be of no force or effect
following the consummation of a bonafide public distribution
of shares of Common Stock pursuant to an effective
registration statement under the Securities Act of 1933, as
amended.
12. Confidentiality; Ownership.
(a) Employee agrees that he shall forever keep secret and retain
in strictest confidence and not divulge, disclose, discuss,
copy or otherwise use or suffer to be used in any
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<PAGE> 11
manner, except in connection with the business of the Company
and the businesses of any of its subsidiaries or affiliates,
any "Protected Information" in any "Unauthorized" manner or
for any Unauthorized purpose (as such terms are hereinafter
defined).
(i) "PROTECTED INFORMATION" means trade secrets,
confidential or proprietary information and all other
knowledge, know-how, information, documents or
materials owned, developed or possessed by the
Company or any of its subsidiaries or affiliates,
whether in tangible or intangible form, pertaining to
the business of the Company or the businesses of any
of its subsidiaries or affiliates, including, but not
limited to, research and development operations,
systems, data bases, computer programs and software,
designs, models, operating procedures, knowledge of
the organization, products (including prices, costs,
sales or content), processes, formulas, techniques,
machinery, contracts, financial information or
measures, business methods, business plans, details
of consultant contracts, new personnel acquisition
plans, business acquisition plans, customer lists,
business relationships and other information owned,
developed or possessed by the Company or its
subsidiaries or affiliates, except as required in the
course of performing duties hereunder; provided that
Protected Information shall not include information
that becomes generally known to the public or the
trade without violation of this Section.
(ii) "UNAUTHORIZED" means: (A) in contravention of the
policies or procedures of the Company or any of its
subsidiaries or affiliates; (B) otherwise
inconsistent with the measures taken by the Company
or any of its subsidiaries or affiliates to protect
their interests in any Protected Information; (C) in
contravention of any lawful instruction or directive,
either written or oral, of an employee of the Company
or any of its subsidiaries or affiliates empowered to
issue such instruction or directive; or (D) in
contravention of any duty existing under law or
contract. Notwithstanding anything to the contrary
contained in this Section, Employee may disclose any
Protected Information to the extent required by court
order or decree or by the rules and regulations of a
governmental agency or as otherwise required by law;
provided that Employee shall provide the Company with
prompt notice of such required disclosure in advance
thereof so that the Company may seek an appropriate
protective order in respect of such required
disclosure.
(b) Employee acknowledges that all developments, including,
without limitation, inventions (patentable or otherwise),
discoveries, formulas, improvements, patents, trade secrets,
designs, reports, computer software, flow charts and diagrams,
procedures, data, documentation, ideas and writings and
applications thereof relating to the business or planned
business of the Company or any of its subsidiaries or
affiliates that, alone or jointly with others, Employee may
conceive, create, make, develop, reduce to practice or acquire
during the Term (collectively, the "DEVELOPMENTS") are works
made for hire and shall remain the sole and exclusive
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<PAGE> 12
property of the Company and Employee hereby assigns to the
Company, in partial consideration of his Base Salary, all of
his right, title and interest in and to all such Developments.
Employee shall promptly and fully disclose all future material
Developments to the Board and, at any time upon request and at
the expense of the Company, shall execute, acknowledge and
deliver to the Company all instruments that the Company shall
prepare, give evidence and take all other actions that are
necessary or desirable in the reasonable opinion of the
Company to enable the Company to file and prosecute
applications for and to acquire, maintain and enforce all
letters, patent and trademark registrations or copyrights
covering the Developments in all countries in which the same
are deemed necessary by the Company. All memoranda, notes,
lists, drawings, records, files, computer tapes, programs,
software, source and programming narratives and other
documentation (and all copies thereof) made or compiled by
Employee or made available to Employee concerning the
Developments or otherwise concerning the business or planned
business of the Company or any of its subsidiaries or
affiliates shall be the property of the Company or such
subsidiaries or affiliates and shall be delivered to the
Company or such subsidiaries or affiliates promptly upon the
expiration or termination of the Term.
(c) The provisions of this Section shall, without any limitation
as to time, survive the expiration or termination of
Employee's employment hereunder, irrespective of the reason
for any termination.
13. Covenant Not to Compete. Employee agrees that during the Term and for a
period equal to the number of months for which payment is made to
Employee under Section 9b, but in no event less than 12 months,
commencing upon the expiration or termination of Employee's employment
by Company (the "Non-Compete Period"), Employee shall not, directly or
indirectly, without the prior written consent of the Company:
(a) solicit, entice, persuade or induce any employee, consultant,
agent or independent contractor of the Company or of any of
its subsidiaries or affiliates to terminate his or her
employment or relationship with the Company or such subsidiary
or affiliate, to become employed by any person, firm or
corporation other than the Company or such subsidiary or
affiliate or approach any such employee, consultant, agent or
independent contractor for any of the foregoing purposes, or
authorize or assist in the taking of any such actions by any
third party (for purposes of this Section 13(a), the terms
"employee," "consultant," "agent" and "independent contractor"
shall include any persons with such status at any time during
the six (6) months preceding any solicitation in question); or
(b) directly or indirectly engage, participate, or make any
financial investment in, or become employed by or render
consulting, advisory or other services to or for any person,
firm, corporation or other business enterprise, wherever
located, which is engaged, directly or indirectly, in
competition with the Company's business or the businesses of
its subsidiaries or affiliates as conducted or any business
proposed to be conducted at the time of the expiration or
termination of Employee's employment hereunder; provided,
however, that nothing in this Section 13(b) shall be construed
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<PAGE> 13
to preclude Employee from making any investments in the
securities of any business enterprise whether or not engaged
in competition with the Company or any of its subsidiaries or
affiliates, to the extent that such securities are actively
traded on a national securities exchange or in the
over-the-counter market in the United States or on any foreign
securities exchange and represent, at the time of acquisition,
not more than 3% of the aggregate voting power of such
business enterprise.
(c) If the Non-Compete Period begins upon the expiration of this
Agreement and the Company withholds consent to Employee
engaging in any of the activities of 13(a) or (b) hereof, and
if Employee does not engage in such activities, then Company
shall pay Employee an amount equal to Employee's most recent
annual Base Salary as additional consideration for the
Covenant Not to Compete.
14. Specific Performance. Employee acknowledges that the services to be
rendered by Employee are of a special, unique and extraordinary
character and, in connection with such services, Employee will have
access to confidential information vital to the Company's business and
the businesses of its subsidiaries and affiliates. By reason of this,
Employee consents and agrees that if Employee violates any of the
provisions of Sections 12 or 13 hereof, the Company and its
subsidiaries and affiliates would sustain irreparable injury and that
monetary damages would not provide adequate remedy to the Company and
that the Company shall be entitled to have Section 12 or 13 hereof
specifically enforced by any court having equity jurisdiction. Nothing
contained herein shall be construed as prohibiting the Company or any
of its subsidiaries or affiliates from pursuing any other remedies
available to it for such breach or threatened breach, including the
recovery of damages from Employee.
15. Assignment. The obligations of Employee may not be delegated and,
except with respect to the designation of beneficiaries in connection
with any of the benefits payable to Employee hereunder, Employee may
not assign, transfer, convey, pledge, encumber, hypothecate or
otherwise dispose of this Agreement or any interest herein. Any such
attempted delegation or disposition shall be null and void and without
effect. The Company and Employee agree that this Agreement and all of
the Company's rights and obligations hereunder may be assigned or
transferred by the Company to and shall be assumed by and be binding
upon any successor to the Company. The Company shall require any
assignee to assume and perform Company obligations under this
Agreement. The term "successor" means, with respect to the Company or
any of its subsidiaries, any corporation or other business entity
which, by merger, consolidation, purchase of the assets or otherwise
acquires all or a material part of the assets of the Company.
16. Amendment. This Agreement may not be altered, modified or amended
except by written instrument signed by each of the Company and
Employee.
17. Governing Law; Arbitration.
This Agreement shall be governed by and construed in accordance with
the laws of the State of Delaware, without giving effect to the
principles of conflict of laws of such State. Any
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<PAGE> 14
action to compel arbitration hereunder shall be brought in the State
Court of Illinois sitting in Cook County, Illinois.
In the event of disputes between the parties with respect to the terms
and conditions of this Agreement, such disputes shall be resolved by
and through an arbitration proceeding to be conducted under the
auspices of the American Arbitration Association (or any like
organization successor thereto) in Chicago, Illinois. Such arbitration
proceeding shall be conducted pursuant to the commercial arbitration
rules (formal or informal) of the American Arbitration Association in
as expedited a manner as is then permitted by such rules (the
"Arbitration"). Both the foregoing agreement of the parties to
arbitrate any and all such claims, and the results, determination,
finding, judgment and/or award rendered through such Arbitration, shall
be final and binding on the parties hereto and may be specifically
enforced by legal proceedings.
Such Arbitration may be initiated by written notice from either party
to the other which shall be a compulsory and binding proceeding on each
party. The Arbitration shall be conducted by an arbitrator selected in
accordance with the procedures of the American Arbitration Association.
Time is of the essence of this arbitration procedure, and the
arbitrator shall be instructed and required to render his or her
decision within thirty (30) days following completion of the
Arbitration. Each party shall bear its own costs of such Arbitration
proceedings.
18. Deductions. The Company shall deduct from any compensation payable to
Employee the sums which it is required by applicable law to deduct,
including, but not limited to, federal and, if applicable, state
withholding taxes, social security taxes and state disability
insurance.
19. Entire Agreement. This Agreement (together with the agreements and
instruments to be executed as contemplated hereby, the form of which
are attached hereto as appendices) constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof
and supersedes all prior agreements, understandings and arrangements,
both oral and written, between the parties hereto with respect to such
subject matter.
20. Other Representations. The Company acknowledges having been informed by
Employee that he has an agreement with a former employer to maintain
the confidentiality of that company's trade secrets and confidential
information, and that he fully intends to comply in all respects with
the agreement. Employee represents and warrants to the Company that he
does not possess any confidential or proprietary documents or other
written materials from his current or any former employer. The Company
represents and warrants to Employee that its agreement to hire Employee
is not motivated to any extent by a desire to obtain or use trade
secrets or confidential information belonging to any other entity, and
that the Company will not cause Employee to violate any agreement
protecting trade secrets and confidential information to which he is
presently a party or is otherwise bound.
21. Notices. Any notice to be given hereunder by either party to the other
shall be sufficiently given if in writing and delivered in person,
transmitted by telecopier or sent by registered or certified mail
(postage prepaid and return receipt requested) or recognized overnight
delivery
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<PAGE> 15
service (postage prepaid) addressed as follows, or to such other
address or telecopier number as either party may notify to the other in
accordance with this paragraph:
(i) if to the Company:
Outboard Marine Corporation
100 Sea Horse Drive
Waukegan, Illinois 60085
Telecopier No: (847) 689-6006
Attn: President and Chief Executive Officer
(ii) if to Employee:
Outboard Marine Corporation
100 Sea Horse Drive
Waukegan, Illinois 60085
Telecopier No: (847) 689-6200
Attn: Robert B. Gowens
With a copy to:
Randall L. Mitchell, Esq.
Adducci, Dorf, Lehner, Mitchell & Blankenship, P.C.
150 North Michigan Avenue, Suite 2130
Chicago, Illinois 60601-7524
A notice will be effective (i) if delivered in person or by overnight
courier, on the business day it is delivered, (ii) if transmitted by
telecopier, on the business day of actual confirmed receipt by the
addressee thereof, and (iii) if sent by registered or certified mail,
three (3) business days after dispatch.
22. Section Headings. The section headings contained in this Agreement are
for reference purpose only and shall not affect in any way the meaning
or interpretation of this Agreement.
23. Survival of Provisions. The provisions of Sections 12, 13 and 14 shall
survive the termination or expiration of this Agreement.
24. Counterparts. This Agreement may be executed in counterparts and when
so executed is in full force and effect as though it had been signed by
both parties.
25. Severability. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any
reason, the remaining provisions of this Agreement shall be unaffected
thereby and shall remain in full force and effect.
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IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Employment Agreement as of the day and year first above written.
OUTBOARD MARINE CORPORATION EMPLOYEE
By: /s/ David D. Jones /s/ Robert B. Gowens
------------------------------------- --------------------------------
David D. Jones, Jr. Robert B. Gowens
President and Chief Executive Officer
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<PAGE> 1
[NATIONSBANK LETTERHEAD]
Exhibit 10.9
SECOND AMENDMENT TO AMENDED AND
RESTATED LOAN AND SECURITY AGREEMENT
among
OUTBOARD MARINE CORPORATION,
OMC ALUMINUM BOAT GROUP, INC.,
OMC FISHING BOAT GROUP, INC.,
OMC LATIN AMERICA/CARIBBEAN, INC.,
and
RECREATIONAL BOAT GROUP LIMITED PARTNERSHIP
as Borrowers and Guarantors,
and
OMC RECREATIONAL BOAT GROUP, INC.,
and
(and the other Borrowers and/or Guarantors, if any,
from time to time party hereto),
NATIONSBANK, N.A.,
as Agent and a Lender,
(AND THE OTHER LENDERS, IF ANY, FROM TIME TO TIME PARTY HERETO),
as Lenders,
Dated effective as of August 31, 1998
<PAGE> 2
SECOND AMENDMENT TO AMENDED AND
RESTATED LOAN AND SECURITY AGREEMENT
THIS SECOND AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
("Amendment"), dated effective as of August 31, 1998, is executed and entered
into by and among OUTBOARD MARINE CORPORATION, a Delaware corporation ("OMC"),
OMC ALUMINUM BOAT GROUP, INC., a Delaware corporation OMC FISHING BOAT GROUP,
INC., a Delaware corporation, OMC LATIN AMERICA/CARIBBEAN, INC., a Delaware
corporation, RECREATIONAL BOAT GROUP LIMITED PARTNERSHIP, a Delaware limited
partnership, OMC RECREATIONAL BOAT GROUP, INC., a Delaware corporation
(collectively all of the "Loan Parties", as of the effective date hereof, under
the Amended and Restated Loan and Security Agreement referenced under the
Recitals hereinbelow; herein called the "Loan Parties"), each of the lending
institutions signatory hereto (collectively all of the "Lenders," as of the
effective date hereof, under the Amended and Restated Loan and Security
Agreement referenced under the Recitals hereinbelow; herein called the
"Lenders") and NATIONSBANK, N.A., a national banking association and successor
in interest by merger to NationsBank of Texas, N.A., in its capacity as agent
for itself and the other Lenders (in such capacity, together with its successors
and assigns in such capacity, herein called "Agent").
RECITALS:
A. The Loan Parties, the Lenders and Agent are parties to the certain
Amended and Restated Loan and Security Agreement dated effective as of January
6, 1998, as amended by the certain First Amendment to Loan and Security
Agreement dated effective as of May 21, 1998 (hereinafter called the
"Agreement").
B. The Loan Parties, the Lenders and Agent have agreed to amend the
Agreement as provided hereinbelow.
NOW THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereto hereby agree as follows:
ARTICLE 1
Definitions
Section 1.1 Definitions. Unless otherwise defined in this Amendment, terms
defined by the Agreement, where used in this Amendment, shall have the same
meanings as are prescribed by the Agreement, as amended by this Amendment.
<PAGE> 3
ARTICLE 2
Amendments
Section 2.1 Amendment to Definition of "Letter of Credit Facility". The
definition of Letter of Credit Facility in Section 1.1 of the Agreement hereby
is amended and restated to read in its entirety as follows:
"Letter of Credit Facility" means the facility provided under Article
3 of this Agreement for issuance of one or more Letters of Credit for the
account of a Borrower in an aggregate amount not to exceed $50,000,000 at
any time.
Section 2.2 Amendment to Section 12.3. Section 12.3 ("Guaranties") of the
Agreement hereby is amended and restated to read in its entirety as follows:
Section 12.3 Guaranties. No Loan Party will, nor will it permit any
other Loan Party to, directly or indirectly, become or remain liable with
respect to any Guaranty of any obligation of any other Person other than
pursuant to the Guaranty Agreement to be executed by such Loan Party
pursuant to the terms of this Agreement, Indebtedness permitted pursuant to
Section 12.2(a), Section 12.2(b) or Section 12.2(c), or other Indebtedness
in an aggregate amount not at any time exceeding $25,000,000.
ARTICLE 3
Miscellaneous
Section 3.1 Conditions Precedent. The effectiveness of this Amendment is
subject to the satisfaction of each of the following conditions precedent:
(a) Agent shall have received all of the following, each dated the
date of this Amendment (unless otherwise indicated), in form and substance
satisfactory to Agent:
(i) Amendment Documents. This Amendment and any other instrument,
document or certificate required by Agent to be executed or delivered
by any of the Loan Parties, each of the Lenders and or any other
Person in connection with this Amendment, duly executed by such
Persons (the "Amendment Documents").
(ii) Fees and Expenses. Evidence that the costs and expenses
(including, without limitation, attorneys' fees and expenses) incurred
by Agent incident to this Amendment or otherwise required to be paid
in accordance with Section 16.2 of the Agreement, to the extent
incurred and submitted to the Loan Parties, shall have been paid in
full; and
(iii) Additional Information. Agent shall have received such
additional documents, instruments and information as Agent may
reasonably request to effect the transactions contemplated hereby.
2
<PAGE> 4
(b) The representations and warranties contained herein, in the
Agreement and in all other Loan Documents, as amended hereby, shall be true
and correct as of the date hereof as if made on the date hereof (except
those, if any, which by their terms specifically relate only to a different
date).
(c) All corporate proceedings taken in connection with the
transactions contemplated by this Amendment and all other agreements,
documents and instruments executed and/or delivered pursuant hereto, and
all legal matters incident thereto, shall be satisfactory to Agent.
(d) No Default or Event of Default shall have occurred and be
continuing.
Section 3.2 Representations and Warranties. The Loan Parties hereby
represent and warrant to, and agree with, Agent, for the benefit of the Lenders,
that, as of the date of and after giving effect to this Amendment, (a) the
execution, delivery and performance of this Amendment and any and all other
Amendment Documents executed and/or delivered in connection herewith have been
authorized by all requisite corporate action on the part of each of the Loan
Parties (as applicable) and will not violate any of such Loan Party's
certificate of incorporation or bylaws (or, in the case of Recreational Boat
Group Limited Partnership, its certificate of limited partnership or its limited
partnership agreement), (b) all representations and warranties set forth in the
Agreement and in any other Loan Document are true and correct as if made again
on and as of such date (except those, if any, which by their terms specifically
relate only to a different date) in the Agreement), (d) no Default or Event of
Default has occurred and is continuing, (e) the Agreement (as amended by this
Amendment), and all other Loan Documents are and remain legal, valid, binding
and enforceable obligations in accordance with the terms thereof, and (f) the
certifications delivered to Agent under clause (i), clause (ii) and clause (iii)
of Section 6.1(c) of the Agreement remain true, correct and complete as of the
effective date of this Amendment.
Section 3.3 Survival of Representations and Warranties. All
representations and warranties made in this Amendment or any other Loan Document
shall survive the execution and delivery of this Amendment and the other Loan
Documents, and no investigation by Agent or any Lender, or any closing, shall
affect the representations and warranties or the right of Agent and the Lenders
to rely upon them.
Section 3.4 Reference to Agreement. Each of the Loan Documents, including
the Agreement, the Amendment Documents and any and all other agreements,
documents or instruments now or hereafter executed and/or delivered pursuant to
the terms hereof or pursuant to the terms of the Agreement as amended hereby,
are hereby amended so that any reference in such Loan Documents to the
Agreement, whether direct or indirect, shall mean a reference to the Agreement
as amended hereby.
Section 3.5 Severability. Any provision of this Amendment held by a court
of competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
3
<PAGE> 5
Section 3.6 Successors and Assigns. This Amendment is binding upon and
shall inure to the benefit of the Credit Parties and the Loan Parties and their
respective successors and assigns, except each of the Loan Parties may not
assign or transfer any of its rights or obligations hereunder without the prior
written consent of Agent and the Lenders.
Section 3.7 General. This Amendment, when signed by each signatory as
provided hereinbelow (i) shall be deemed effective prospectively as of the
effective date specified in the preamble of this Amendment, (ii) contains the
entire agreement among the parties and may not be amended or modified except in
writing signed by all parties, (iii) shall be governed and construed according
to the laws of the State of Texas, and (iv) may be executed in any number of
counterparts, each of which shall be valid as an original and all of which shall
be one and the same agreement. A telecopy or other electronic transmission of
any executed counterpart shall be deemed valid as an original.
THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE
ARE NO ORAL AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers in several counterparts.
BORROWERS:
OUTBOARD MARINE CORPORATION
By: /s/ Andrew P. Hines
------------------------------------
Name: Andrew P. Hines
Title: Executive Vice President
and Chief Financial
Officer
Authorized Officer
By: /s/ Leslie M. Savickas
------------------------------------
Name: Leslie M. Savickas
Title: Vice President and Treasurer
Authorized Officer
4
<PAGE> 6
OMC ALUMINUM BOAT GROUP, INC.
By: /s/ Robert S. Romano
----------------------------------------
Name: Robert S. Romano
Title: Vice President
Authorized Officer
By: /s/ Gordon G. Repp
----------------------------------------
Name: Gordon G. Repp
Title: Assistant Secretary and Treasurer
Authorized Officer
OMC FISHING BOAT GROUP, INC.
By: /s/ Robert S. Romano
----------------------------------------
Name: Robert S. Romano
Title: Vice President and Secretary
Authorized Officer
By: /s/ Gordon G. Repp
-----------------------------------------
Name: Gordon G. Repp
Title: Assistant Secretary and Treasurer
Authorized Officer
OMC LATIN AMERICA/CARIBBEAN, INC.
By: /s/ Robert S. Romano
-----------------------------------------
Name: Robert S. Romano
Title: Vice President and Secretary
Authorized Officer
By: /s/ Gordon G. Repp
-----------------------------------------
Name: Gordon G. Repp
Title: Assistant Secretary and
Controller
Authorized Officer
5
<PAGE> 7
RECREATIONAL BOAT GROUP
LIMITED PARTNERSHIP
By: OMC Recreational Boat Group, Inc.,
General Partner
By: /s/ Robert S. Romano
-----------------------------------------
Name: Robert S. Romano
Title: Vice President and Secretary
Authorized Officer
By: /s/ Gordon G. Repp
-----------------------------------------
Name: Gordon G. Repp
Title: Assistant Secretary and Treasurer
Authorized Officer
GUARANTOR:
OMC RECREATIONAL BOAT GROUP, INC.
By: /s/ Robert S. Romano
-----------------------------------------
Name: Robert S. Romano
Title: Vice President and Secretary
Authorized Officer
By: /s/ Gordon G. Repp
-----------------------------------------
Name: Gordon G. Repp
Title: Assistant Secretary and Treasurer
Authorized Officer
6
<PAGE> 8
AGENT:
NATIONSBANK,N.A.,
successor in interest by merger to
NationsBank of Texas, N.A.
By: /s/ Stacy Wills
- --------------------------------
Name: Stacy Wills
Title: Assistant Vice President
Authorized Officer
7
<PAGE> 9
LENDERS:
NATIONSBANK,N.A.,
successor in interest by merger to
NationsBank of Texas, N.A.
By: /s/ Stacy Wills
---------------------------
Name: Stacy Wills
Title: Assistant Vice President
Authorized Officer
8
<PAGE> 10
AMERICAN NATIONAL BANK AND
TRUST COMPANY OF CHICAGO
By: /s/ David C. Weislogel
---------------------------
Name: David C. Weislogel
Title: Vice President
Authorized Officer
9
<PAGE> 11
FLEET CAPITAL CORPORATION
By: /s/ Thomas Maiale
---------------------------
Name: Thomas Maiale
Title: Vice President
Authorized Officer
10
<PAGE> 12
THE CIT GROUP BUSINESS CREDIT, INC.
By: /s/ Pamela A. Wozniak
_________________________________
Name: Pamela A. Wozniak
Title: Asst. Vice President
Authorized Officer
11
<PAGE> 13
TRANSAMERICA BUSINESS CREDIT
CORPORATION
By: /s/ Robert L. Heinz
______________________________
Name: Robert L. Heinz
Title: Sr. Vice President
Authorized Officer
12
<PAGE> 14
SANWA BUSINESS CREDIT CORPORATION
By: /s/ Lawrence J. Placek
_______________________________
Name: Lawrence J. Placek
Title: Vice President
Authorized Officer
13
<PAGE> 1
EXHIBIT 10.10
THIRD AMENDMENT TO AMENDED AND
RESTATED LOAN AND SECURITY AGREEMENT
among
OUTBOARD MARINE CORPORATION,
OMC ALUMINUM BOAT GROUP, INC.,
OMC FISHING BOAT GROUP, INC.,
OMC LATIN AMERICA/CARIBBEAN, INC.,
and
RECREATIONAL BOAT GROUP LIMITED PARTNERSHIP
as Borrowers and Guarantors,
and
OMC RECREATIONAL BOAT GROUP, INC.,
and
(and the other Borrowers and/or Guarantors, if any,
from time to time party hereto),
NATIONSBANK, N.A.,
as Agent and a Lender,
(and the other Lenders, if any, from time to time party hereto),
as Lenders
Dated effective as of December 21, 1998
<PAGE> 2
THIRD AMENDMENT TO AMENDED AND
RESTATED LOAN AND SECURITY AGREEMENT
THIS THIRD AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
("Amendment"), dated effective as of December 21, 1998 (the "Effective Date"),
is executed and entered into by and among OUTBOARD MARINE CORPORATION, a
Delaware corporation ("OMC"), OMC ALUMINUM BOAT GROUP, INC., a Delaware
corporation OMC FISHING BOAT GROUP, INC., a Delaware corporation, OMC LATIN
AMERICA/CARIBBEAN, INC., a Delaware corporation, RECREATIONAL BOAT GROUP LIMITED
PARTNERSHIP, a Delaware limited partnership, OMC RECREATIONAL BOAT GROUP, INC.,
a Delaware corporation (collectively all of the "Loan Parties," as of the
effective date hereof, under the Amended and Restated Loan and Security
Agreement referenced under the Recitals hereinbelow; herein called the "Loan
Parties"), each of the lending institutions signatory hereto (collectively all
of the "Lenders," as of the effective date hereof, under the Amended and
Restated Loan and Security Agreement referenced under the Recitals hereinbelow;
herein called the "Lenders") and NATIONSBANK, N.A., a national banking
association and successor in interest by merger to NationsBank of Texas, N.A.,
in its capacity as agent for itself and the other Lenders (in such capacity,
together with its successors and assigns in such capacity, herein called
"Agent").
RECITALS:
A. The Loan Parties, the Lenders and Agents are parties to the certain
Amended Restated Loan and Security Agreement dated effective as of January 6,
1998, as amended by the certain First Amendment of Loan and Security Agreement
dated effective as of May 21, 1998, and the Second Amendment to Amended and
Restated Loan and Security Agreement dated effective as of August 31, 1998
(hereinafter called the "Agreement"). Unless otherwise defined in this
Amendment, terms defined by the Agreement, where used in this Amendment, shall
have the same meanings as are prescribed by the Agreement, as amended by this
Amendment.
B. The Loan Parties, the Lenders and Agent have agreed to amend the
Agreement as provided hereinbelow.
NOW THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereto hereby agree as follows:
ARTICLE 1
AMENDMENTS
Section 1.1 DEFINITIONS. As of the Effective Date the following
definitions in Section 1.1 ("Definitions") of the Agreement are hereby amended
as follows:
a. AMENDMENT TO DEFINITION OF "TANGIBLE NET WORTH". The definition
of "Tangible Net Worth" hereby is amended and restated to read in its entirety
as follows:
<PAGE> 3
"TANGIBLE NET WORTH" means the Net Worth of OMC and its Consolidated
Subsidiaries at the time in question, plus the sum of Subordinated
Indebtedness plus non-cash adjustments, excluding (i) any amounts due from
Affiliates, (ii) the amount of all intangible items reflected therein,
including, without limitation, all unamortized debt discount and expense,
unamortized research and development expense, unamortized deferred charges,
goodwill, patents, trademarks, service marks, trade names, copyrights,
unamortized excess cost of investment in non-Consolidated Subsidiaries over
equity at dates of acquisition and all similar items which should properly
be treated as intangibles in accordance with GAAP, (iii) purchase
accounting adjustments to OMC's balance sheet which would otherwise be
required pursuant to GAAP, and (iv) non-cash currency translation
adjustments which would otherwise be required pursuant to GAAP.
b. AMENDMENT TO DEFINITION OF "LEVERAGE RATIO" The definition of
"Leverage Ratio" hereby is amended and restated to read in its entirety as
follows:
"LEVERAGE RATIO" means, at any time, the ratio of (i) the sum of
Indebtedness for Money Borrowed (in the case of any Indebtedness evidenced
by an Interest Rate Protection Agreement, limited, however, to an amount
equal to twenty percent (20%) of the amount of such Indebtedness),
determined as of such time, to (ii) EBITDA, determined for the preceding
four (4) completed fiscal quarters.
c. AMENDMENT OF DEFINITIONS OF "NET INCOME" The definition of "Net
Income" hereby is amended and restated to read in its entirety as follows:
"NET INCOME" means, as applied to any Person, the net income (or net
loss) of such Person for the period in question after giving effect to
deduction of or provision for all operating expenses, all taxes and
reserves (including, without limitation, reserves for deferred taxes) and
all other proper deductions, all determined in accordance with GAAP plus,
restructuring charges to the extent deducted pursuant to the foregoing,
provided that there shall be excluded:
(a) the net income (or net loss) of any Person accrued prior to
the date it becomes a Subsidiary of, or is merged into or
Consolidated with, the Person whose Net Income is being
determined or a Consolidated Subsidiary of such Person;
(b) the net income (or net loss) of any Person in which the
Person whose Net Income is being determined or any Subsidiary of
such Person has an ownership interest, except, in the case of
net income, to the extent that any such income has actually been
received by such Person or such Subsidiary in the form of cash
dividends or similar distributions;
2
<PAGE> 4
(c) any restoration of any contingency reserve, except to the
extent that provision for such reserve was made out of income during
such period;
(d) any net gains or losses on the sale or other disposition,
not in the ordinary course of business, of Investments, Business Units
and other capital assets, provided that there shall also be excluded
any related charges for taxes thereon;
(e) any net gain arising from the collection of the proceeds
of any insurance policy;
(f) any write-up of any asset; and
(g) any other extraordinary item.
Section 1.2 Amendment of Section 12.1(a). Effective as of the Effective
Date Subsection (a) ("Tangible Net Worth") of Section 12.1 ("Financial Ratios")
of the Agreement hereby is amended and restated to read in its entirety as
follows:
(a) Tangible Net Worth. The Loan Parties will not directly or
indirectly permit OMC's Consolidated Tangible Net Worth at any time to be
less than (i) for the period ended June 30, 1999, the amount of Tangible
Net Worth as of December 31, 1998 plus $5,000,000; (ii) for the period
ended September 30, 1999, the amount of Tangible Net Worth as of June 30,
1999, plus $5,000,000; (iii) for the period ended June 30, 2000, the amount
of Tangible Net Worth as of September 30, 1999; and (iv) for the periods
ended September 30, 2000 and thereafter, the amount of Tangible Net Worth
as of September 30, 1999, plus $18,000,000.
Section 1.3 Amendment to Section 12.1(b). Effective as of the Effective
Date Subsection (b) ("Minimum Interest Coverage") of Section 12.1 ("Financial
Ratios") of the Agreement hereby is amended and restated to read in its entirety
as follows:
(b) The Loan Parties will not permit OMC's Consolidated Interest
Coverage Ratio calculated as of the end of each of OMC's fiscal quarters,
determined in accordance with GAAP and based on the financial statements
delivered pursuant to Section 11.1, as applicable, measured as of each
fiscal quarter, in each case of the preceding twelve (12) calendar months
then ending, to be less than the following specified amounts, as
applicable:
<TABLE>
<S> <S>
PERIOD END REQUIREMENT
<C> <C>
September 30, 1999 1.25 to 1.0
December 31, 1999 and thereafter 1.75 to 1.0
</TABLE>
3
<PAGE> 5
Section 1.4 Amendment to Section 12.1(c). Effective as of the Effective
Date Subsection (c) ("Leverage Ratio") of Section 12.1 ("Financial Ratios") of
the Agreement hereby is amended and restated to read in its entirety as follows:
(c) Leverage Ratio. The Loan Parties will not permit OMC's
Consolidated Leverage Ratio calculated as of the end of each of OMC's
fiscal quarters, determined in accordance with GAAP and based on the
financial statements delivered pursuant to Section 11.1, as applicable,
measured as of the end of each fiscal quarter, in each case for the
preceding twelve (12) calendar months then ending, to be greater than the
following specified amounts, as applicable:
<TABLE>
<CAPTION>
PERIOD END REQUIREMENT
- ---------- -----------
<S> <C>
September 30, 1998.............................. 15.0 to 1.0
December 31, 1998............................... 26.0 to 1.0
March 31, 1999.................................. 17.0 to 1.0
June 30, 1999................................... 8.0 to 1.0
September 30, 1999.............................. 4.0 to 1.0
December 31, 1999 through and
including June 30, 2000....................... 4.0 to 1.0
September 30, 2000 and thereafter............... 3.5 to 1.0
</TABLE>
Section 1.5 Amendment to Section 12.3. Section 12.3 ("Guaranties") of
the Agreement hereby is amended and restated to read in its entirety as follows:
Section 12.3 Guaranties. No Loan Party will, nor will it permit any
other Loan Party to, directly or indirectly, become or remain liable with
respect to any Guaranty of any obligation of any other Person other than
pursuant to the Guaranty Agreement to be executed by such Loan Party
pursuant to the terms of this Agreement, Indebtedness permitted pursuant to
Section 12.2(a), Section 12.2(b) or Section 12.2(c), a Guaranty of the
Senior Notes by ABG, FBG, LAC, RBG and GP, or other Indebtedness in an
aggregate amount not at any time exceeding $25,000,000.
Section 1.6 Amendment to Section 12.9. Effective as of the Effective
Date Section 12.9 ("Capitalized Lease Obligations and Permitted Purchase Money
Indebtedness") of the Agreement hereby is amended and restated to read in its
entirety as follows:
Section 12.9 Capitalized Lease Obligations and Permitted Purchase
Money Indebtedness. No Loan Party will, nor will it permit any other Loan
Party to, incur or permit to exist any Capitalized Lease Obligation, other
than Capitalized Lease Obligations existing on the Agreement Date, unless
such
4
<PAGE> 6
Capitalized Lease Obligation constitutes Permitted Purchase Money
Indebtedness.
Section 1.7 AMENDMENT TO SECTION 13.1. As of the Effective Date Section
13.1 ("Events of Default" is amended to (i) delete the word "and" at the end of
subsection (n), (ii) insert "and" in place of the period at the end of
subsection (o) and (iii) add a new subsection (p) which shall read as follows:
(p) INTEREST RESERVE ACCOUNTS. At any time during OMC's fiscal
quarters ending September 30, 1998 through June 30, 1999, OMC shall make
any request for a disbursement from any "Interest Reserve Account" as
defined by the Depositary Agreement.
ARTICLE 2
Waivers
Section 2.1 WAIVERS. Subject to Section 16.9 ("Amendments") of the
Agreement, any Event of Default existing as a result of noncompliance with
Subsection (a) ("Tangible Net Worth"), Subsection (b) ("Minimum Interest
Coverage") or Subsection (c) ("Leverage Ratio") of Section 12.1 ("Financial
Ratios") of the Agreement as of September 30, 1998 hereby is waived, provided,
that the waivers under this Section 2.1 are expressly limited as provided herein
and shall not apply to any other provision of the Agreement or to any other
date, it being understood that all requirements of the Agreement, as amended
hereby, shall continue in full force and effect.
ARTICLE 3
Miscellaneous
Section 3.1 CONDITIONS PRECEDENT. The effectiveness of this Amendment is
subject to the satisfaction of each of the following conditions precedent:
(a) Agent shall have received all of the following, each dated the
date of this Amendment (unless otherwise indicated), in form and substance
satisfactory to Agent:
(i) AMENDMENT DOCUMENTS. This Amendment and any other instrument,
document or certificate required by Agent to be executed or delivered
by any of the Loan Parties, each of the Lenders and or any other
Person in connection with this Amendment, duly executed by such
Persons (the "Amendment Documents").
(ii) FEES AND EXPENSES. Evidence that the costs and expenses
(including, without limitation, attorneys' fees and expenses) incurred
by Agent incident to this Amendment or otherwise required to be paid
in accordance with Section 16.2 of the Agreement, to the extent
incurred and submitted to the Loan Parties, shall have been paid in
full; and
5
<PAGE> 7
(iii) Additional Information. Agent shall have received such
additional documents, instruments and information as Agent may
reasonably request to effect the transactions contemplated hereby.
(b) The representations and warranties contained herein, in the
Agreement and in all other Loan Documents, as amended hereby, shall be true
and correct as of the date hereof as if made on the date hereof (except
those, if any, which by their terms specifically relate only to a different
date).
(c) All corporate proceedings taken in connection with the
transactions contemplated by this Amendment and all other agreements,
documents and instruments executed and/or delivered pursuant hereto, and
all legal matters incident thereto, shall be satisfactory to Agent.
(d) No Default or Event of Default shall have occurred and be
continuing.
Section 3.2 Representations and Warranties. The Loan Parties hereby
represent and warrant to, and agree with, Agent, for the benefit of the Lenders,
that, as of the date of and after giving effect to this Amendment, (a) the
execution, delivery and performance of this Amendment and any and all other
Amendment Documents executed and/or delivered in connection herewith have been
authorized by all requisite corporate action on the part of each of the Loan
Parties (as applicable) and will not violate any of such Loan Party's
certificate of incorporation or bylaws (or, in the case of Recreational Boat
Group Limited Partnership, its certificate of limited partnership or its limited
partnership agreement), (b) all representations and warranties set forth in the
Agreement and in any other Loan Document are true and correct as if made again
on and as of such date (except those, if any, which by their terms specifically
relate only to a different date) in the Agreement), (d) no Default or Event of
Default has occurred and is continuing, (c) the Agreement (as amended by this
Amendment), and all other Loan Documents are and remain legal, valid, binding
and enforceable obligations in accordance with the terms thereof, and (f) the
certifications delivered to Agent under clause (i), clause (ii) and clause (iii)
of Section 6.1(c) of the Agreement remain true, correct and complete as of the
effective date of this Amendment.
Section 3.3 Survival of Representations and Warranties. All
representations and warranties made in this Amendment or any other Loan Document
shall survive the execution and delivery of this Amendment and the other Loan
Documents, and no investigation by Agent or any Lender, or any closing, shall
affect the representations and warranties or the right of Agent and the Lenders
to rely upon them.
Section 3.4 Reference to Agreement. Each of the Loan Documents, including
the Agreement, the Amendment Documents and any and all other agreements,
documents or instruments now or hereafter executed and/or delivered pursuant to
the terms hereof or pursuant to the terms of the Agreement as amended hereby,
are hereby amended so that any reference in such Loan Documents to the
Agreement, whether direct or indirect, shall mean a reference to the Agreement
as amended hereby.
Section 3.5 Severability. Any provision of this Amendment held by a court
of competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this
6
<PAGE> 8
Amendment and the effect thereof shall be confined to the provision so held to
be invalid or unenforceable.
Section 3.6 SUCCESSORS AND ASSIGNS. This Amendment is binding upon and
shall inure to the benefit of the Credit Parties and the Loan Parties and their
respective successors and assigns, except each of the Loan Parties may not
assign or transfer any of its rights or obligations hereunder without the prior
written consent of Agent and the Lenders.
Section 3.7 GENERAL. This Amendment, when signed by the Required Lenders
(i) shall be deemed effective prospectively as of the effective date specified
in the preamble of this Amendment, (ii) contains the entire agreement among the
parties and may not be amended or modified except in writing signed by all
parties, (iii) shall be governed and construed according to the laws of the
State of Texas, and (iv) may be executed in any number of counterparts, each of
which shall be valid as an original and all of which shall be one and the same
agreement. A telecopy or other electronic transmission of any executed
counterpart shall be deemed valid as an original.
THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO ORAL AGREEMENTS
BETWEEN THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers in several counterparts.
BORROWERS:
OUTBOARD MARINE CORPORATION
By: /s/ Leslie M. Savickas
-------------------------------
Name:Leslie M. Savickas
Title:Vice President and Treasurer
Authorized Officer
By: /s/ Gordon G. Repp
-------------------------------
Name:Gordon G. Repp
Title:Assistant Secretary
Authorized Officer
7
<PAGE> 9
OMC ALUMINUM BOAT GROUP, INC.
By: /s/ Gordon G. Repp
------------------------------------
Name: Gordon G. Repp
Title: Assistant Secretary and Treasurer
Authorized Officer
By: /s/ Robert S. Romano
------------------------------------
Name: Robert S. Romano
Title: Vice President
Authorized Officer
OMC FISHING BOAT GROUP, INC.
By: /s/ Gordon G. Repp
------------------------------------
Name: Gordon G. Repp
Title: Assistant Secretary and Treasurer
Authorized Officer
By: /s/ Robert S. Romano
------------------------------------
Name: Robert S. Romano
Title: Vice President and Secretary
Authorized Officer
OMC LATIN AMERICA/CARIBBEAN, INC.
By: /s/ Gordon G. Repp
------------------------------------
Name: Gordon G. Repp
Title: Assistant Secretary and Controller
Authorized Officer
By: /s/ Robert S. Romano
------------------------------------
Name: Robert S. Romano
Title: Vice President and Secretary
Authorized Officer
8
<PAGE> 10
RECREATIONAL BOAT GROUP
LIMITED PARTNERSHIP
By: OMC Recreational Boat Group, Inc.,
General Partner
By: /s/ Gordon G. Repp
------------------------------------
Name: Gordon G. Repp
Title: Assistant Secretary and Treasurer
Authorized Officer
By: /s/ Robert S. Romano
------------------------------------
Name: Robert S. Romano
Title: Vice President and Secretary
Authorized Officer
GUARANTOR:
OMC RECREATIONAL BOAT GROUP, INC.
By: /s/ Gordon G. Repp
------------------------------------
Name: Gordon G. Repp
Title: Assistant Secretary and Treasurer
Authorized Officer
By: /s/ Robert S. Romano
------------------------------------
Name: Robert S. Romano
Title: Vice President and Secretary
Authorized Officer
9
<PAGE> 11
AGENT:
NATIONSBANK, N.A.
successor in interest by merger to
NationsBank of Texas, N.A.
By: /s/ Stewart W. Hayes
_________________________
Name: Stewart W. Hayes
Title: Senior Vice President
Authorized Officer
10
<PAGE> 12
LENDERS:
NATIONSBANK, N.A.
successor in interest by merger to
NationsBank of Texas, N.A.
By: /s/ Stewart W. Hayes
_________________________
Name: Stewart W. Hayes
Title: Senior Vice President
Authorized Officer
11
<PAGE> 13
AMERICAN NATIONAL BANK AND
TRUST COMPANY OF CHICAGO
By: /s/ Donna H. Evans
_________________________
Name: Donna H. Evans
Title: Vice President
Authorized Officer
12
<PAGE> 14
FLEET CAPITAL CORPORATION
By: /s/ Thomas Maiale
_________________________
Name: Thomas Maiale
Title: Vice President
Authorized Officer
13
<PAGE> 15
THE CIT GROUP/BUSINESS CREDIT, INC.
By:_________________________
Name:_______________________
Title:______________________
Authorized Officer
14
<PAGE> 16
TRANSAMERICA BUSINESS CREDIT
CORPORATION
By:_________________________
Name:_______________________
Title:______________________
Authorized Officer
15
<PAGE> 17
SANWA BUSINESS CREDIT CORPORATION
By: /s/ Stanley Kaminski
_________________________
Name: Stanley Kaminski
Title: Vice President
Authorized Officer
16
<PAGE> 1
EXHIBIT 11
OUTBOARD MARINE CORPORATION AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS (LOSS)
<TABLE>
<CAPTION>
POST-MERGER PRE-MERGER POST-MERGER PRE-MERGER
COMPANY COMPANY COMPANY COMPANY
----------- ---------- ----------- ----------
THREE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ---------- ----------- ----------
(In millions except amounts per share) (UNAUDITED)
<S> <C> <C> <C> <C>
Basic Earnings (Loss) Per Share:
Net (Loss)................................. $(121.2) $(52.4) $(150.5) $(79.1)
------- ------ ------- ------
Weighted Average Number of Shares.......... 20.4 20.3 20.4 20.2
------- ------ ------- ------
Basic (Loss) Per Share..................... $ (5.94) $(2.58) $ (7.38) $(3.91)
------- ------ ------- ------
Diluted (Loss) Per Share:
Net (Loss)................................. $(121.2) $(52.4) $(150.5) $(79.1)
Add: After-Tax Interest and Related Expense
Amortization on 7% Convertible
Subordinated Debentures................. -- 0.8 -- 3.3
------- ------ ------- ------
Net (Loss) Adjusted........................ $(121.2) $(51.5) $(150.5) $(75.8)
------- ------ ------- ------
Weighted Average Number of Shares............ 20.4 20.2 20.4 20.1
Common Stock Equivalents (Stock Options)..... -- 0.1 -- 0.1
Weighted Average Common Shares Assuming
Conversion of 7% convertible Subordinated
Debentures................................. -- 3.4 -- 3.4
------- ------ ------- ------
Average Shares Outstanding................... 20.4 23.7 20.4 23.6
------- ------ ------- ------
Diluted (Loss) Per Share..................... $ (5.94) $(2.58) $ (7.38) $(3.91)
======= ====== ======= ======
</TABLE>
<PAGE> 1
EXHIBIT 12
OUTBOARD MARINE CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS (LOSS) TO FIXED CHARGES
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------------------
POST-MERGER
COMPANY PRE-MERGER COMPANY
----------- ----------------------------------
1998 1997 1996 1995 1994
----------- ------ ------ ----- -----
(IN MILLIONS EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C>
Earnings (loss):
Earnings (loss) before provision for income
taxes................................... $(147.1) $(76.3) $(10.4) $60.8 $53.4
Interest expense........................... 30.1 16.2 12.3 23.1 15.1
Interest portion of rent expense........... 1.2 1.1 1.2 1.3 1.3
------- ------ ------ ----- -----
Earnings (loss)......................... $(115.8) $(59.0) $ 3.1 $85.2 $69.8
------- ------ ------ ----- -----
Fixed Charges:
Interest expense........................... 30.1 16.2 12.3 23.1 15.1
Interest portion of rent expense........... 1.2 1.1 1.2 1.3 1.3
------- ------ ------ ----- -----
Fixed Charges........................... $ 31.3 $ 17.3 $ 13.5 $24.4 $16.4
======= ====== ====== ===== =====
Ratio of earnings to fixed charges........... 3.5 4.3
===== =====
Excess of fixed charges over earnings........ $ 147.1 $ 76.3 $ 10.4
======= ====== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 45,200
<SECURITIES> 0
<RECEIVABLES> 163,000
<ALLOWANCES> 9,500
<INVENTORY> 174,400
<CURRENT-ASSETS> 418,100
<PP&E> 212,000
<DEPRECIATION> 17,500
<TOTAL-ASSETS> 1,082,100
<CURRENT-LIABILITIES> 311,600
<BONDS> 247,900
0
0
<COMMON> 200
<OTHER-SE> 94,500
<TOTAL-LIABILITY-AND-EQUITY> 1,082,100
<SALES> 1,025,700
<TOTAL-REVENUES> 1,025,700
<CGS> 791,400
<TOTAL-COSTS> 791,400
<OTHER-EXPENSES> 351,300
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,100
<INCOME-PRETAX> (147,100)
<INCOME-TAX> 3,400
<INCOME-CONTINUING> (150,500)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (150,500)
<EPS-PRIMARY> (7.38)
<EPS-DILUTED> (7.38)
</TABLE>
