<PAGE> 1
Form 10-Q/A
(Amendment No. 1)
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
(X) Quarterly amended report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 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
Waukegan, Illinois 60085
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: 847-689-6200
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 ___
Number of shares of Common Stock of $0.01 par value outstanding at June 30, 1998
was 20,425,554 shares.
<PAGE> 2
EXPLANATORY NOTE
----------------
This Amendment No. 1 on Form 10-Q/A to the Quarterly Report of Outboard
Marine Corporation (the "Company") amends and restates in its entirety Item 7
(Management's Discussion and Analysis of Financial Condition and Results of
Operations) and Item 8 (Financial Statements and Supplementary Data) of Part II
in connection with the restatement of the Company's financial statements for its
fiscal year ended September 30, 1997 and period ended June 30, 1998 to revise
the accounting of its acquisition by Greenmarine Holdings LLC in September 1997.
(See Note 2 to the Notes to Consolidated Financial Statements).
1
<PAGE> 3
OUTBOARD MARINE CORPORATION
FORM 10-Q
PART 1, ITEM 1
FINANCIAL INFORMATION
FINANCIAL STATEMENTS
June 30, 1998
Financial statements required by this form:
<TABLE>
<CAPTION>
Page
<S> <C>
Statements of Consolidated Earnings....................... 3
Condensed Statements of Consolidated Financial Position .. 4
Statements of Consolidated Cash Flows..................... 5
Notes to Consolidated Financial Statements................ 6
</TABLE>
2
<PAGE> 4
OUTBOARD MARINE CORPORATION
CONDENSED STATEMENTS OF CONSOLIDATED EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30 June 30
----------------------- -----------------------
Post-Merger Pre-Merger Post-Merger Pre-Merger
Company Company Company Company
----------- ---------- ----------- ----------
1998 1997 1998 1997
----------- ---------- ----------- ----------
(As Restated) (As Restated)
(Dollars in millions amounts per share)
<S> <C> <C> <C> <C>
Net sales............... $ 282.4 $ 275.8 $ 754.1 $ 709.9
Cost of goods sold...... 212.9 221.0 590.8 595.9
------- ------- ------- -------
Gross earnings........ 69.5 54.8 163.3 114.0
Selling, general and
administrative expense. 67.4 59.8 175.4 151.7
------- ------- ------- -------
Earning (loss) from
operations........... 2.1 (5.0) (12.1) (37.7)
Non-operating expense (income):
Interest expense...... 8.2 4.3 22.6 12.7
Other, net............ (3.7) (4.6) (8.6) (25.9)
------- ------- ------- -------
4.5 (0.3) 14.0 (13.2)
------- ------- ------- -------
Earnings (loss) before
provision for income
taxes................ (2.4) (4.7) (26.1) (24.5)
Provision for income taxes 1.4 0.4 3.2 2.2
------- ------- ------- -------
Net earnings (loss).. $ (3.8) $ (5.1) $ (29.3) $ (26.7)
======= ======= ======= =======
Net earnings (loss) per
share of common stock
Basic................. $ (0.19) $ (0.25) $ (1.44) $ (1.32)
======= ======= ======== =======
Diluted............... $ (0.19) $ (0.25) $ (1.44) $ (1.32)
======= ======= ======== =======
Average shares of
common stock
outstanding............ 20.4 20.2 20.4 20.2
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 5
OUTBOARD MARINE CORPORATION
CONDENSED STATEMENTS OF CONSOLIDATED FINANCIAL POSITION
<TABLE>
<CAPTION>
(Unaudited)
-----------
Post-Merger Post-Merger
Company Company
----------- ------------
June 30, September 30,
1998 1997
----------- ------------
(As Restated) (As Restated)
(Dollars In Millions)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents... $ 35.5 $ 54.4
Receivables................. 149.8 153.2
Inventories
Finished products.......... 64.2 62.1
Raw material, work in
process and service parts. 110.3 114.8
-------- --------
Total inventories......... 174.5 176.9
Other current assets......... 40.2 86.5
-------- --------
Total current assets...... 400.0 471.0
Restricted cash............... 28.6 --
Product tooling, net.......... 33.7 34.2
Goodwill...................... 124.9 127.3
Trademarks, patents and
other intangibles............ 81.7 83.9
Other assets.................. 165.5 168.2
Plant and equipment at cost 219.6 210.2
Less accumulated
depreciation .............. (20.1) --
-------- --------
199.5 210.2
-------- --------
Total assets............. $1,033.9 $1,094.8
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Short-term debt............ $ 30.0 $ 96.0
Accounts payable........... 76.7 142.0
Accrued and other.......... 164.1 139.3
Accrued income taxes....... 5.8 6.6
Current maturities and
sinking fund requirements
of long-term debt......... 11.2 72.9
-------- --------
Total current liabilities. 287.8 456.8
Long-term debt ............... 248.2 103.8
Postretirement benefits
other than pensions 95.0 96.0
Other non-current liabilities 160.8 161.2
Shareholders' investment:
Common stock and capital
surplus................... 277.1 277.0
Accumulated earnings employed
in the business........... (29.3) --
Cumulative translation
adjustments............... (5.7) --
-------- --------
Total shareholders'
investment.............. 242.1 277.0
-------- --------
Total liabilities and
shareholders'
investment.............. 1,033.9 1,094.8
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 6
OUTBOARD MARINE CORPORATION
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
June 30
--------------------------
Post-Merger Pre-Merger
Company Company
----------- ----------
1998 1997
(As Restated)
(Dollars In Millions)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss).................................. $(29.3) $(26.7)
Adjustments to reconcile net earnings (loss)
to net cash provided by operations:
Depreciation and amortization...................... 38.1 41.2
Changes in current accounts excluding the
effects of acquisitions and noncash transactions:
Decrease in receivables........................... 2.2 8.3
Decrease in inventories........................... 0.8 2.0
Decrease in other current assets.................. 46.2 0.7
Decrease in accounts payable and accrued
liabilities...................................... (40.5) (13.1)
Other, net........................................ (4.7) (0.5)
------- -------
Net cash provided by operating activities......... 12.8 11.9
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for plant and equipment, and tooling... (23.7) (30.1)
Proceeds from sale of plant and equipment............. 6.6 14.4
Other, net............................................ 0.7 (0.6)
------- -------
Net cash used for investing activities............ (16.4) (16.3)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in short-term debt....................... (66.0) --
Proceeds from issuance of long-term debt.............. 155.2 --
Increase in restricted cash........................... (28.6) --
Payments of long-term debt, including current
maturities........................................... (75.2) --
Cash dividends paid................................... -- (6.0)
Other, net............................................ 0.1 (0.4)
------- -------
Net cash used for financing activities............ (14.5) (6.4)
Exchange Rate Effect on Cash.......................... (0.8) (0.9)
------- -------
Net decrease in Cash and Cash Equivalents............. (18.9) (11.7)
Cash and Cash Equivalents at Beginning of Period...... 54.4 95.5
------- -------
Cash and Cash Equivalents at End of Period............ $ 35.5 $ 83.8
======= =======
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid..................................... $ 21.8 $ 11.7
Income taxes paid................................. $ 4.5 $ 3.2
======= =======
</TABLE>
The accompany notes are an integral part of these statements.
5
<PAGE> 7
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 surviving entity of the
merger with Greenmarine (the "Post-Merger Company") (in either case, unless
specifically referenced, Pre-Merger Company or Post-Merger Company are also
defined as "OMC" 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 Post-Merger Company Condensed Statement of Consolidated Financial Position
as of June 30, 1998 and the related Post-Merger Company Statements of
Consolidated Earnings and Consolidated Cash Flow for the nine months ended June
30, 1998 are not comparable to the prior year because of purchase accounting
adjustments. The acquisition and the merger were accounted for using the
purchase method of accounting. Accordingly, the purchase price at September 30,
1997 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. As of June 30,
1998, the allocation of purchase price to assets acquired and liabilities
assumed has not been finalized. The preliminary purchase price allocation
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. As of
June 30, 1998, $1.6 million of charges have been recorded against these
reserves. Subsequent adjustments to reduce the reserves by $1.4 million as part
of the finalization of the purchase price allocation were recorded at September
30, 1998 in accordance with EITF 95-3. 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 at September 30,
1997. The goodwill related to the acquisition will be amortized using the
straight-line method over a period of 40 years.
2. RESTATEMENT AND RECLASSIFICATION
The Company has restated and reclassified its Statement of Consolidated
Financial Position at September 30, 1997 and June 30, 1998, and its Statement of
Consolidated Earnings for the three- and-nine month periods ended June 30, 1998
to revise the accounting for its acquisition by Greenmarine. Except as otherwise
stated herein, all information presented in the Consolidated Financial
Statements and related notes includes all of the restatements and
reclassifications.
6
<PAGE> 8
The restatements result from management's reconsideration of the periods to
which the reorganization plan expenses incurred in connection with the
acquisition by Greenmarine should be charged. As of September 30, 1997
management had recorded these expenses as purchase accounting adjustments. Upon
further consideration, management believes that these charges are 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, result in a decision that these expenses are, using interpretations
of authoritative accounting literature, more appropriately reported in the 1998
fiscal year. As a result, the Company's September 30, 1997 financial statements
have been restated to reverse $122.9 million of previously recorded accrued
liabilities and contingencies with a corresponding reduction in goodwill. The
Company will recognize approximately $149 million in operating expenses and
restructuring costs in its Statements of Consolidated Earnings for fiscal year
1998 (for each of the respective quarterly periods and the fiscal year-end, as
appropriate) to record its reorganization plan and contingencies. (See Note 8
for further information on the Company's business reorganization plan.)
In addition, the Company restated its Statement of Consolidated Earnings for the
three- and nine-month periods ended June 30, 1998 to reflect $16.9 million and
$27.7 million of charges as period costs, respectively. The primary components
of the charges recorded in the three-month period ended June 30, 1998 as a
result of the restatements include (i) $6.0 million for potential legal costs
related to claims known, but not quantifiable at the end of fiscal 1997, related
to contractual disputes, (ii) $4.2 million for increased warranty expense
associated with upgrading engines designed prior to September 30, 1997, (iii)
$2.2 million in incentives offered to dealers as part of a to-be-terminated
incentive program that the Company was contractually obligated to fund, and (iv)
$1.0 million of special rebates offered to dealers to sell brands and models
that were discontinued as part of the Company's boat brand realignment strategy.
The primary components of the charges recorded for the nine-month period ended
June 30, 1998 as a result of the restatements include (i) $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, (ii) $6.0 million in incentives offered to dealers as
part of a to-be-terminated incentive program that the Company was contractually
obligated to fund, (iii) $2.0 million of costs associated with implementing the
Company's boat group reorganization plan, (iv) $6.0 million for potential legal
costs related to claims known, but not quantifiable at the end of fiscal 1997,
related to contractual disputes, (v) $4.2 million for increased warranty expense
associated with upgrading engines designed prior to September 30, 1997, and (vi)
$1.0 million of special rebates offered to dealers to sell brands and models
that were discontinued as part of the Company's boat brand realignment strategy.
The costs described in the preceding two sentences were previously recorded as
liabilities in purchase accounting. The special rebate and dealer incentive
accruals have been recorded as a reduction of net sales in the Statement of
Consolidated Earnings and the other costs have been recorded as increases in
selling, general, and administrative expenses in the Statement of Consolidated
Earnings. Separately, goodwill amortization expense was reduced by $0.8 million
and $2.3 million, respectively, for the three- and nine-month periods ended June
30, 1998.
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.
7
<PAGE> 9
The cumulative effect of such reclassifications and the restatement discussed
above on the Statement of Consolidated Financial Position as of June 30, 1998
is shown in the following table:
<TABLE>
<CAPTION>
AS PREVIOUSLY
REPORTED RECLASSIFICATIONS RESTATEMENT AS RESTATED
------------ ----------------- ----------- -----------
<S> <C> <C> <C> <C>
Goodwill $ 245.5 $ -- $ (120.6) $ 124.9
Other current assets 40.2 -- -- 40.2
Other assets 126.8 44.5 -- 165.5
(5.8)
Accrued Liabilities 179.1 (5.8) (9.2) 164.1
Other non-current liabilities 202.3 44.5 (86.0) 160.8
Total Shareholders' Investment 267.5 -- (25.4) 242.1
</TABLE>
The restatement also had the effect of reducing net earnings and earnings per
share in the Statement of Consolidated Earnings for the three-month period ended
June 30, 1998 as shown in the following table:
<TABLE>
<CAPTION>
AS PREVIOUSLY
REPORTED RESTATEMENT AS RESTATED
------------- ----------- -----------
<S> <C> <C> <C>
Net sales $ 284.6 $ (2.2) $ 282.4
Cost of goods sold 212.9 -- 212.9
--------- -------- ---------
Gross earnings 71.7 (2.2) 69.5
Selling, general, and
administrative expenses 53.5 13.9 67.4
--------- -------- ---------
Earnings (loss) from operations 18.2 (16.1) 2.1
Non-operating expenses 4.5 -- 4.5
--------- -------- ---------
Earnings (loss) before provision
for income taxes 13.7 (16.1) (2.4)
Provision for income taxes 1.4 -- 1.4
--------- -------- ---------
Net earnings(loss) $ 12.3 $ (16.1) $ (3.8)
========= ======== =========
Net loss per share
Basic $ 0.60 $ (.79) $ (.19)
========= ======== =========
Diluted $ 0.60 $ (.79) $ (.19)
========= ======== =========
</TABLE>
8
<PAGE> 10
The restatement also had the effect of increasing the net loss and net loss per
share in the Statement of Consolidated Earnings for the nine-month period ended
June 30, 1998 as shown in the following table:
<TABLE>
<CAPTION>
AS PREVIOUSLY
REPORTED RESTATEMENT AS RESTATED
------------- ----------- -----------
<S> <C> <C> <C>
Net sales $ 760.1 $ (6.0) $ 754.1
Cost of goods sold 590.8 -- 590.8
--------- -------- ---------
Gross earnings 169.3 (6.0) 163.3
Selling, general, and
administrative expenses 156.0 19.4 175.4
--------- -------- ---------
Earnings (loss) from operations 13.3 (25.4) (12.1)
Non-operating expenses 14.0 -- 14.0
--------- -------- ---------
Loss before provision
for income taxes (0.7) (25.4) (26.1)
Provision for income taxes 3.2 -- 3.2
--------- -------- ---------
Net earnings (loss) $ (3.9) $ (25.4) $ (29.3)
========= ======== =========
Net loss per share
Basic $ (.19) $ (1.25) $ (1.44)
========= ======== =========
Diluted $ (.19) $ (1.25) $ (1.44)
========= ======== =========
</TABLE>
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).
3. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements present
information in accordance with generally accepted accounting principles for
interim financial information and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all information or footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, the
information furnished reflects all adjustments necessary for a fair statement of
the results of the interim periods and all such adjustments are of a normal
recurring nature. These financial statements should be read in conjunction with
the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K/A (Amendment No. 2) for the year ended September 30, 1997.
The 1998 interim results are not necessarily indicative of the results which may
be expected for the remainder of the year.
4. SHORT-TERM BORROWINGS
The Company became obligated under a credit agreement, as amended, which
provides for loans of up to $150 million (the "Acquisition Debt"). Amounts
outstanding under this credit agreement are secured by 20.4 million 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. The
full amount of the Acquisition Debt was paid on May 27, 1998 from the proceeds
of newly issued long-term debt (as described below).
Effective January 6, 1998, the Company entered into a $150 million Amended and
Restated Loan and Security Agreement which expires December 31, 2000 and at
March 31, 1998, $70.7 million was outstanding. Any loans outstanding under this
agreement will be secured by the Company's inventory, receivables, intellectual
property and other current assets and are guaranteed by certain of the Company's
operating subsidiaries.
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 $155.2
million and $150.0 million was used to repay the Acquisition Debt. 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 June 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
or the Senior Notes are paid in full.
Under the various credit agreements, the Company is required to meet certain
financial covenants throughout the year.
9
<PAGE> 11
5. 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 $40 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.
10
<PAGE> 12
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 Statement of Consolidated Financial Position or the Statement of
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.
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 June 30, 1998, the Company has accrued
approximately $21 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.
In the nine months ended June 30, 1997, the Company recovered insurance proceeds
of $6.1 million for prior environmental charges which is included in
non-operating expense (income) in the Statement of Consolidated Earnings.
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.
6. STOCK OPTION PLAN
On March 10, 1998, 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 the Companies employees. All
employees are eligible to participate in PROP. The aggregate number of shares of
stock available for equity awards under PROP is 1,500,000 shares currently
authorized common stock of the Company. Grants under PROP are discretionary.
Stock option grants under PROP through June 30, 1998 were 587,245, of which,
96,133 were vested upon grant. The remaining grants vests as follows: 94,445 in
fiscal 1998, 176,667 in fiscal 1999, 121,115 in fiscal 2000, and 98,885
thereafter. The grants are exercisable at $18 per share and expire ten years
after date of grant. The Company accounts for PROP under APB Opinion No. 25, and
has not recorded any compensation expense for grants through June 30, 1998 as
the exercise price of the stock option approximates the estimated fair market
value of the Company's stock on the date of grant.
11
<PAGE> 13
7. PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (UNAUDITED)
The following unaudited pro forma Condensed Statement of Consolidated Earnings
(the "Pro Forma Statement") was prepared to illustrate the estimated effects of
the acquisition by Greenmarine Holdings as if the transaction had occurred for
statement of consolidated earnings purposes as of the beginning of fiscal 1997.
The pro forma adjustments are based upon available information and upon certain
assumptions that the Company believes are reasonable. The Pro Forma Statement
does 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 Statement includes adjustments, with respect to the merger, to
reflect additional interest expense, depreciation expense and amortization of
goodwill.
<TABLE>
<CAPTION>
Nine Months Ended
June 30, 1997
(In millions, except per share data) (Unaudited)
<S> <C>
Net sales $ 709.9
Cost of goods sold 594.8
---------
Gross earnings 115.1
Selling, general and administrative expense 155.0
---------
Earnings (Loss) from operations (39.9)
Interest expense 21.9
Other (income) expense, net (25.9)
---------
Loss before provision for income taxes (35.9)
Provision for income taxes 1.8
---------
Net loss $ (37.7)
=========
Net loss per share of common stock
(basic and diluted) $ (1.85)
=========
Shares outstanding 20.4
=========
</TABLE>
8. SUBSEQUENT EVENTS
The Company expects to report a net loss of approximately $150 million in fiscal
year 1998. The net loss will include approximately $51 million of operating
expenses and approximately $98 million of restructuring expenses that were
previously recorded as part of purchase accounting prior to the restatement
discussed in Note 2.
In January 1998, the Company announced the closing of its Old Hickory, TN
facility and the consolidation of its freshwater fishing operations to the
Company's Murfreesboro, TN facility.
In fiscal 1997, the Company became aware of certain problems associated with its
FICHT engines. In April 1998, the Company began to identify the causes of the
problems and an upgrade kit was prepared and distributed. The Company
established a reserve for the correction and will record this amount in its
third and fourth quarters of fiscal year 1998.
On May 27, 1998, the Company issued $160.0 million of 10-3/4 Senior Notes due
2008, with interest payable semiannually on June 1 and December 1 of each year.
The net proceeds from the issuance totaled $155.2 million, of which $150.0
million was used to repay the Acquisition Debt.
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In July 1998, the Company was provided information on the results of a
feasibility 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 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
this time that they 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 owner, it is
by statute a potentially responsible party (PRP). Based on its experience with
Superfund Sites, the Company calculated a range of potential allocations and
will record an amount related to the most probable outcome in its September 1998
financial statements.
On July 22, 1998, the Board of Directors of the Company resolved to amend
Article X of its Bylaws to reflect a change in its fiscal year from the twelve
month period of October 1 through September 30 of each year to a twelve month
calendar year of January 1 through December 31 of each year.
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 will be recognized in the
fourth fiscal quarter of 1998 and includes charges for the costs associated with
closing these two facilities (Milwaukee, WI and Waukegan, IL engine plants), and
the related employee termination benefits for approximately 900 employees. The
Company plans to
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outsource 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 year 2000. Separately, as part of the restatements, the Company
recognized liabilities for certain contingencies related to a patent claim, an
environmental remediation site and certain engine warranty claims.
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 (the "Sourcing Contract") which will control the future purchase and
sale obligations of various specified goods between certain of the parties.
As of September 30, 1998, the Company was not in compliance with 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 non-compliance and the Company reached an understanding with
NationsBank, as agent for the lenders under the credit agreement, regarding
revised covenants and waivers of any past violations. The Company is currently
negotiating the third amendment to the credit agreement to formalize the
amendment and it is expected the amendment will be finalized prior to the
Company's filing its Annual Report on Form 10-K for its fiscal year ended
September 30, 1998.
9. RECENTLY ADOPTED ACCOUNTING STANDARDS
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 to selling, general and administrative expense in the quarter
ended September 30, 1997.
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. However, the Company believes adoption will have no
material effect on its financial position or results of operations based on
current levels of financial instruments.
In fiscal 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 they require only
changes in or additions to current disclosures.
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PART I, ITEM 2
FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
JUNE 30, 1998
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
announced that it is restating its post-merger consolidated financial statements
for its fiscal quarter ended June 30, 1998 in connection with its revising the
accounting for its acquisition by Greenmarine Holdings LLC ("Greenmarine
Holdings") in September 1997. The Company has also restated its financial
statements for its fiscal year ended September 30, 1997 and for each of its
fiscal quarters ended December 31, 1997 and March 31, 1998. The restatements
result 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 believes that these charges are 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,
result in a decision that these expenses are, using interpretations of
authoritative accounting literature, more appropriately reported in the 1998
fiscal year. As a result, the Company's financial statements for the fiscal year
ended September 30, 1997 have been restated to reverse $122.9 million of
previously recorded accrued liabilities and contingencies with a corresponding
reduction in goodwill. The Company will recognize approximately $149 million in
operating expenses and restructuring costs in its Statements of Consolidated
Earnings for fiscal year 1998 (for each of the respective quarterly periods and
the fiscal year-end, as appropriate) to record its reorganization plan and
contingencies. (See Note 8 of the Notes to the Consolidated Financial Statements
contained elsewhere herein for further information on the Company's business
reorganization plan.) The restatements to the Company's financial statements at
and for the three- and nine-month periods ended June 30, 1998 include the
reversal of the items listed above for the September 30, 1997 period as well as
certain adjustments to reflect items formerly charged against purchase
accounting reserves in the fiscal quarter ended June 30, 1998 as period costs
(See Note 2 of the Notes to the Consolidated Financial Statements contained
elsewhere herein). The primary components of the charges recorded in the
three-month period ended June 30, 1998 as a result of the restatements include
(i) $6.0 million for potential legal costs related to claims known, but not
quantifiable at the end of fiscal 1997, related to contractual disputes, (ii)
$4.2 million for increased warranty expense associated with upgrading engines
designed prior to September 30, 1997, (iii) $2.2 million in incentives offered
to dealers as part of a to-be-terminated incentive program that the Company was
contractually obligated to fund, and (iv) $1.0 million of special rebates
offered to dealers to sell brands and models that were discontinued as part of
the Company's boat brand realignment strategy. The primary components of the
charges recorded for the nine-month period ended June 30, 1998 as a result of
the restatements include (i) $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, (ii) $6.0 million in incentives offered to dealers as part of a
to-be-terminated incentive program that the Company was contractually obligated
to fund, (iii) $2.0 million of costs associated with implementing the Company's
boat group reorganization plan, (iv) $6.0 million for potential legal costs
related to claims known, but not quantifiable at the end of fiscal 1997, related
to contractual disputes, (v) $4.2 million for increased warranty expense
associated with upgrading engines designed prior to September 30, 1997, and (vi)
$1.0 million of special rebates offered to dealers to sell brands and models
that were discontinued as part of the Company's boat brand realignment strategy.
The costs described in the preceding two sentences were previously recorded as
liabilities in purchase accounting. The special rebate and dealer incentive
accruals have been recorded as a reduction of net sales in the Statement of
Consolidated Earnings and the other costs have been recorded as increases in
selling, general, and administrative expenses in the Statement of Consolidated
Earnings. 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. 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). Further information regarding the restatement is provided in
Note 1 and 2 of the Notes to the
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Consolidated Financial Statements contained elsewhere herein.
Industry Overview. According to data published by the National Marine
Manufacturers' Association ("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, Marine Retailers
Association of America 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. In general, 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 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, when reported U.S. sales of boats and engines each totaled 304,600. The
Company believes these declines were partially due to adverse weather
conditions.
The recreational marine industry, in general, and the business of the Company is
seasonal due to the impact of the buying patterns of its 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
business, 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
$2.9 million in 1997, with month-end peak borrowings of $29.0 million in
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February 1997. 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,
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. As of September 30, 1997, the allocation of
purchase price to assets acquired and liabilities assumed in the Greenmarine
Acquisition has not been finalized. The preliminary purchase price allocation
included $8.1 million of reserves for (i) severance costs associated with
closing the Company's Old Hickory, Tennessee facility, (ii) guaranteed payments
in connection with terminating a supply agreement and (iii) severance costs for
certain former corporate employees. The goodwill related to the acquisition will
be amortized using the straight-line method over a period of 40 years.
New Management Initiatives. As discussed above, on September 12, 1997,
Greenmarine Holdings acquired control of the Company. Since that time, the
Company has assembled a new, highly-experienced senior management team
led by David D. Jones. As of September 30, 1997, the new senior management team
began developing, and, as of June 30, 1998, is still developing, 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. In addition, as part of the Greenmarine
Acquisition, the Company is developing a business reorganization plan to realign
and consolidate its products offered in the marketplace, and
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to improve existing manufacturing processes that will enable the Company to
increase production efficiency and asset utilization. This turnaround strategy
and reorganization plan may include the elimination and/or consolidation of
certain of the Company's products and may include the closing and/or
consolidation of certain of the Company's manufacturing facilities located
primarily in the United States and corresponding involuntary employee
terminations.
In January 1998, the Company began 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 substantially
all of its saltwater fishing operations at its Columbia, South Carolina
facility. In addition, as part of the Company's plan to improve operating
efficiencies and reduce costs, the Company reduced its workforce by
approximately 540 employees as of March 31, 1998, primarily within the Company's
boat operations. In April 1998, the Company announced that it would close its
research facility in Waukesha, Wisconsin and relocate these operations to other
facilities.
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 substantially reduce costs, shorten production times,
lower inventory and dramatically improve the Company's responsiveness to dealer
and consumer demand. The Company has also implemented a strategic purchasing
program which was announced 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 June 1998, the Company announced the realignment of its aluminum boat brands.
Consolidating the most popular models from the Grumman, Roughneck and Sea Nymph
lines, the Lowe brand will be positioned to offer a full line of aluminum boats.
The consolidation is another step the Company is taking to reduce the
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 to meet 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 unveiled a new brand strategy for its Johnson and
Evinrude engines. Johnson and Evinrude had become identical engines that were
marketed under different names. Under the new strategy, they will be readily
distinguishable from each other and will be marketed to different consumers. The
Johnson brand will continue as a full line of carbureted two-strokes and will be
marketed as the reliable engine it always has been. Evinrude will offer a full
line of FICHT fuel injected technology engines and four-stroke engines marketed
as the premium OMC
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brand. As a result, while OMC dealers previously sold either Johnson and
Evinrude, they will now sell both engine lines.
Introduction of FICHT Engines; Regulatory Compliance. The United States
Environmental Protection Agency (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 new Johnson and 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 June 30, 1998, the Company estimates that it
has spent approximately $50.0 million on low-emission 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 emission standards. The Company expenses its
research and development costs as they are incurred.
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 an amount in its June 1998 financial
statements.
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.
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, the would
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.
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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")
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 June 30, 1998, the Company has accrued
approximately $21 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 5 to the Consolidated Financial Statements
included elsewhere herein.
RESULTS OF OPERATIONS
PERIODS ENDED JUNE 30, 1998 COMPARED TO PERIODS ENDED JUNE 30, 1997
Net Sales. Net sales increased to $282.4 million in the three months ended
June 30, 1998 from $275.8 million in the three months ended June 30 1997, an
increase of 2.4%. Net sales increased to $754.1 million in the nine months ended
June 30, 1998 from $709.9 million in the nine months ended June 30, 1997, an
increase of 6.2%. The Company's sales increase was attributable primarily to
higher volume sales in the United States of marine engines in the current
quarter and fiscal year, which increased over prior periods. Engine sales were
depressed 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. This production suspension adversely affected the Company's
sales and margins in the first half of fiscal 1997. The quarter increase was not
as favorable as the nine month increase because sales of boats in the three
months ended June 30, 1998 were lower than the previous year as a result of the
boat brand strategy which refocused each brand into its market niche and
resulted in the elimination of many lower end and lower gross margin boat
models.
Cost of Goods Sold. Cost of goods sold decreased to $212.9 million in the
three months ended June 30, 1998 from $221.0 million in the three months ended
June 30, 1997, a decrease of $8.1 million or 3.7%. Cost of goods sold was 75.4%
of net sales in the three months ended June 30, 1998 as compared with 80.1% of
net sales in the three months ended June 30, 1997. Cost of goods sold decreased
to $590.8 million in the nine months ended June 30, 1998 from $595.9 in the nine
months ended in June 30, 1997, a decrease of $5.1 million or 0.9%. Cost of goods
sold was 78.3% of net sales in the nine months ended June 30, 1998 as compared
with 83.9% of net sales in the nine months ended June 30, 1997. The improvements
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in the Company's gross margin in the current quarter and fiscal year reflected
increased manufacturing efficiencies at engine plants and a better absorption of
fixed costs, primarily due to higher sales volume. In addition, in the first
quarter of fiscal 1997, the Company's cost of goods sold was negatively impacted
by the production suspension discussed above in Net Sales.
Selling, General and Administrative ("SG&A") Expense. SG&A expense
increased to $67.4 million in the three months ended June 30, 1998 from $59.8
million in the three months ended June 30, 1997, an increase of $7.6 million or
12.7%. SG&A expense as a percentage of net sales increased to 23.9% in the three
months ended June 30, 1998 from 21.7% in the three months ended June 30, 1997.
SG&A expense increased to $175.4 million in the nine months ended June 30, 1998
from $151.7 million in the nine months ended June 30, 1997, an increase of $23.7
million or 15.6%. SG&A expense as a percentage of net sales increased to 23.3%
in the nine months ended June 30, 1998 from 21.4% in the nine months ended June
30, 1997. The three months ended June 30, 1997 included an adjustment to
increase boat warranty reserves $8.0 million as a result of changes in the
method used to estimate warranty reserves. SG&A expense increased in the three
months ended June 30, 1998 due to $6.0 million for potential legal costs related
to claims known, but not quantifiable at the end of fiscal 1997, related to
contractual disputes, and $4.2 million for increased warranty expense associated
with upgrading engines designed prior to September 30, 1997. For the nine-month
period ended June 30, 1998, SG&A expense increased due to factors discussed
above for the three months ended June 30, 1998 and due to $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 $2.0 million of costs associated with implementing
the Company's boat group reorganization plan. All of these costs discussed in
the preceding two sentences were previously recorded as liabilities in purchase
accounting prior to the restatement discussed above and in Note 2 to the
Consolidated Financial Statements included elsewhere herein. Additionally, the
SG&A expense in the current quarter and fiscal year reflected higher
amortization of goodwill and intangibles due to purchase accounting.
Earnings (Loss) from Operations. Earnings from operations was $2.1 million in
the three months ended June 30, 1998 compared with a loss of $5.0 million in the
three months ended June 30, 1997, an improvement of $7.1 million. Loss from
operations decreased to $12.1 million for the nine months ended June 30, 1998
from a loss of $37.7 million for the nine months ended June 30, 1997, an
improvement of $25.6 million. The improvements were primarily attributable to
increased sales coupled with better absorption of fixed costs.
Non-Operating Expense (Income). Interest expense increased to $8.2 million
in the three months ended June 30, 1998 from $4.3 million in the three months
ended June 30, 1997, an increase of $3.9 million. Interest expense increased to
$22.6 million in the nine months ended June 30, 1998 from $12.7 million in the
nine months ended June 30, 1997, an increase of $9.9 million. The increase
resulted from the new debt structure in place after the Greenmarine Acquisition.
Other non-operating income was $3.7 million in the three months ended June 30,
1998 compared to $4.6 million in the three months ended June 30, 1997. Other
non-operating income was $8.6 million in the nine months ended June 30, 1998
compared to $25.9 million in the nine months ended June 30, 1997. The nine
months ended June 30, 1997 amount included non-recurring income, including
insurance recovery and a lawsuit settlement, as well as gains on disposition of
fixed assets.
Provision (Credit) for Income Taxes. The provision for income taxes was
$1.4 million in the three months ended June 30, 1998 and $0.4 million in the
three months ended June 30, 1997. The provision for income taxes was $3.2
million in the nine months ended June 30, 1998 and $2.2 million in the nine
months ended June 30, 1997. The provision for income taxes for the three and
nine months ended June 30, 1998 and 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 realizable, at this
time, under Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes."
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
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acquisition cost over the estimated fair value of assets acquired and
liabilities assumed at the date of acquisition was $127.3 million.
The Post-Merger Company Statement of Condensed Consolidated Financial Position
as of June 30, 1998 is not comparable to the prior year because of the purchase
accounting adjustments.
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
June 30, 1998 decreased $71.0 million from September 30, 1997. Cash and cash
equivalents at June 30, 1998 decreased $18.9 million from September 1997, while
receivables decreased $3.4 million due to lower European receivables due to a
change in European sales channels and lower miscellaneous receivables partially
offset by a significant increase in engine sales versus last year. Inventories
at June 30, 1998 decreased $2.4 million from September 30, 1997 due to better
inventory management. Other current assets at June 30, 1998 decreased $46.3
million from September 30, 1997 primarily due to a reduction in a trust
depository that funded the remaining untendered outstanding shares of the
Company's common stock and due to the redemption of deposits for letters of
credit. Accounts payable at June 30, 1998 decreased $65.3 million from September
30, 1997 due to payments to Company shareholders for untendered outstanding
stock and to other payments relating to the change of control. Cash provided by
operations was $12.8 million for the nine months ended June 30, 1998 compared
with $11.9 million for the nine months ended June 30, 1997.
Expenditures for plant, equipment and tooling were $23.7 million for the
nine months ended June 30, 1998, representing a $6.4 million decrease from the
prior year period level of $30.1 million, primarily as a result of deferred
capital expenditures. The low level of spending to date is related primarily to
the Company's capital appropriation process. Capital spending related to any
approved capital expenditure is realized, on average, approximately nine months
after approval. A lower level of capital spending was appropriated in fiscal
1997 as compared to prior years due to the Company's pending sale, which was
completed in September 1997. The Company estimates that total capital
expenditures for fiscal 1998 will be approximately $30 million, which includes
capital expenditures and various planned and potential projects designed to
increase efficiencies and enhance the Company's competitiveness and
profitability. Specifically, these capital expenditures include 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 and repairs.
Loan payable was $30.0 million at June 30, 1998. Current maturities and
sinking fund requirements of long-term debt decreased by $61.7 million from
September 30, 1997 due primarily to the redemption of the Company's 7%
Convertible Subordinated Debentures due 2002. The Company also borrowed
approximately $30.0 million from certain wholly-owned foreign subsidiaries.
Approximately $2.0 million, net of offsets, is due in fiscal 1998, and
approximately $20.2 million is due at the end of fiscal 1999.
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The Company entered into an Amended and Restated Loan and Security Agreement,
effective as of January 6, 1998 (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 March 31, 1998,
outstanding borrowings under the Credit Agreement aggregated $70.7 million and
six letters of credit were outstanding totaling $17.2 million. The level of
borrowings as of March 31, 1998 was due primarily to the seasonality of the
Company's business, as inventory and receivables levels increase during the
Company's first and second fiscal quarters in preparation for the heavy selling
season in the Spring and Summer. The level of outstanding borrowings as of March
31, 1998 was also due in part to payments of certain change of control expenses.
Although there can be no assurance, the Company expects to use the cash from the
anticipated sales of products and collection of receivables to repay all amounts
outstanding under the Revolving Credit Facility by the end of fiscal 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 became obligated under a credit agreement, as amended, which
provided for loans of up to $150 million (the "Acquisition Debt"). Amounts
outstanding under this credit agreement were secured by 20.4 million shares of
common stock of the Post-Merger Company with 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. The
full amount of the Acquisition Debt was paid on May 27, 1998 from the proceeds
of newly issued long-term
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debt.
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 $155.2
million and $150.0 million was used to repay the Acquisition Debt. 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 June 30, 1998, the interest reserve "Restricted Cash" was
$28.6 million and must be maintained for a minimum of three years.
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 $40.0 million per
model year for a period not to exceed 30 months from the date of invoice. The
Company resells any repurchased products. Losses incurred under this program
have not been material. In fiscal 1997, the Company repurchased approximately
$3.9 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.
YEAR 2000 MATTERS
During fiscal 1997, 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 completed,
the Company is in the process of implementing and testing remedies of issues
identified during the assessment phase. 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)
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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 has begun to 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 noncompliant vendor. In addition, in connection with the Company's
initiative to outsource non-core capabilities, a potential vendor's Year 2000
readiness is one criteria the Company will consider in selecting the vendor for
such outsourcing activity.
In addition, the Company has reviewed the goods 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.
Through June 30, 1998, the Company spent a total of approximately $2.2
million on personal computer and network, mainframe and telecommunication
solutions for issues related with the Year 2000 and estimates that it will spend
up to a total of $11.1 million, 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
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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 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 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 service 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 material adverse
effect on the Company's business, results of operations, or financial condition.
RECENTLY ADOPTED ACCOUNTING STANDARDS
In fiscal 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 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. However, the Company believes adoption will have no
material effect on its financial position or results of operations based on
current levels of financial instruments.
CHANGE IN FISCAL YEAR
On July 22, 1998, the Board of Directors of the Company resolved to amend
Article X of its Bylaws to reflect a change in its fiscal year from the twelve
month period of October 1 through September 30 of each year to a twelve month
calendar year of January 1 through December 31 of each year.
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FORWARD-LOOKING STATEMENTS
Some of the foregoing statements are forward-looking in nature and made in
reliance upon the Safe Harbor provisions of the Private Securities Litigation
Reform Act of 1995. These statements involve risks and uncertainties, including
but 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 documents filed by the Company with the Securities and Exchange
Commission. The Company assumes no obligation to update the information included
in this statement.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amended report to be signed on its behalf by the
undersigned thereunto duly authorized.
OUTBOARD MARINE CORPORATION
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
By /s/ Andrew P. Hines Executive Vice President & December 21, 1998
- ------------------------ Chief Financial Officer
ANDREW P. HINES
</TABLE>
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