<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 March 31, 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)
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)
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 March 31,
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 March 31, 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 I, ITEM 1
FINANCIAL INFORMATION
FINANCIAL STATEMENTS
March 31, 1998
Financial statements required by this form:
Page
Statements of Consolidated Earnings 3
Condensed Statements of Consolidated Financial Position 4
Statements of Consolidated Cash Flows 5
Notes to Consolidated Financial Statements 6
2
<PAGE> 4
OUTBOARD MARINE CORPORATION
CONDENSED STATEMENTS OF CONSOLIDATED EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31 MARCH 31
------------------------- -------------------------
POST-MERGER PRE-MERGER POST-MERGER PRE-MERGER
COMPANY COMPANY COMPANY COMPANY
------- ------- ------- -------
(DOLLARS IN MILLIONS EXCEPT AMOUNTS PER SHARE) 1998 1997 1998 1997
------ ------ ------ ------
(As Restated) (As Restated)
<S> <C> <C> <C> <C>
Net sales............................................. $262.2 $237.0 $471.7 $434.1
Cost of goods sold.................................... 204.2 200.5 377.9 374.9
------ ------ ------ ------
Gross earnings...................................... 58.0 36.5 93.8 59.2
Selling, general and administrative expense........... 61.2 49.5 108.0 91.9
------ ------ ------ ------
Earnings (loss) from operations..................... (3.2) (13.0) (14.2) (32.7)
Non-operating expense (income):
Interest expense.................................... 6.7 4.0 14.4 8.4
Other, net.......................................... (2.5) (10.7) (4.9) (21.3)
------ ------ ------ ------
4.2 (6.7) 9.5 (12.9)
------ ------ ------ ------
Earnings (loss) before provision for income taxes... (7.4) (6.3) (23.7) (19.8)
Provision for income taxes............................ 1.0 1.0 1.8 1.8
------ ------ ------ ------
Net earnings (loss)................................. $ (8.4) $ (7.3) $(25.5) $(21.6)
====== ====== ====== ======
Net earnings (loss) per share of common stock
Basic............................................... $(0.41) $(0.36) $(1.25) $(1.07)
====== ====== ====== ======
Diluted............................................. $(0.41) $(0.36) $(1.25) $(1.07)
====== ====== ====== ======
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
March 31, September 30,
(DOLLARS IN MILLIONS) 1998 1997
----------- -------------
(As Restated) (As Restated)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................................... $ 49.1 $ 54.4
Receivables.................................................. 179.3 153.2
Inventories
Finished products.......................................... 79.4 62.1
Raw material, work in process
and service parts........................................ 114.4 114.8
-------- --------
Total inventories.......................................... 193.8 176.9
Other current assets......................................... 40.7 86.5
-------- --------
Total current assets....................................... 462.9 471.0
Product tooling, net.......................................... 33.1 34.2
Goodwill...................................................... 125.7 127.3
Trademarks, patents and other intangibles..................... 82.3 83.9
Other assets.................................................. 166.5 168.2
Plant and equipment at cost................................... 210.2 210.2
less accumulated depreciation.............................. (11.2) --
-------- --------
199.0 210.2
-------- --------
Total assets............................................. $1,069.5 $1,094.8
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Loan payable................................................. $220.7 $ 96.0
Accounts payable............................................. 66.6 142.0
Accrued and other............................................ 168.3 139.3
Accrued income taxes......................................... 5.9 6.6
Current maturities and sinking fund
requirements of long-term debt............................. 11.2 72.9
-------- --------
Total current liabilities.................................. 472.7 456.8
Long-term debt................................................ 92.9 103.8
Postretirement benefits other than pensions................... 95.4 96.0
Other non-current liabilities................................. 160.7 161.2
Shareholders' investment:
Common stock and capital surplus............................. 277.1 277.0
Accumulated earnings employed in the business................ (25.5) --
Cumulative translation adjustments........................... (3.8) --
-------- --------
Total shareholders' investment.............................. 247.8 277.0
-------- --------
Total liabilities and shareholders' investment............ $1,069.5 $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>
Six Months Ended
March 31
-----------------------------
Post-Merger Pre-Merger
Company Company
----------- ----------
1998 1997
(Dollars in millions) ---- ----
(As Restated)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (25.5) $ (21.6)
Adjustments to reconcile net earnings (loss) to net cash
provided by operations:
Depreciation and amortization 25.9 27.0
Changes in current accounts excluding the effects of
acquisitions and noncash transactions:
Decrease (increase) in receivables (27.6) 3.9
Increase in inventories (17.8) (9.3)
Decrease in other current assets 45.7 0.8
Decrease in accounts payable and accrued
liabilities (46.3) (3.8)
Other, net (3.9) (5.9)
------ -------
Net cash provided by (used for) operating activities (49.5) (8.9)
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for plant and equipment and tooling (11.9) (22.7)
Proceeds from sale of plant and equipment 6.3 12.3
Other, net 0.5 (0.3)
------ -------
Net cash used for investing activities (5.1) (10.7)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in short-term debt 124.7 --
Payments of long-term debt, including current maturities (75.1) --
Cash dividends paid -- (6.0)
Other, net 0.1 0.1
------ -------
Net cash used for financing activities 49.7 (5.9)
Exchange Rate Effect on Cash (0.4) (0.5)
------ -------
Net decrease in Cash and Cash Equivalents (5.3) (26.0)
Cash and Cash Equivalents at Beginning of Period 54.4 95.5
------ -------
Cash and Cash Equivalents at End of Period $ 49.1 $ 69.5
====== =======
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 12.8 $ 8.0
Income taxes paid $ 2.4 $ 3.3
====== =======
</TABLE>
The accompanying 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 March 31, 1998 and the related Post-Merger Company Statements of
Consolidated Earnings and Consolidated Cash Flow for the six months ended March
31, 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 March 31,
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
March 31, 1998, $0.7 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 March 31, 1998, and its Statement
of Consolidated Earnings for the three- and six-month periods ended March 31,
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 herein 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 six-month periods ended March 31, 1998 to reflect $5.8 million and
$10.8 million of charges as period costs, respectively. The primary components
of the charges recorded in the three-month period ended March 31, 1998 as a
result of the restatements include $1.0 million of costs associated with
developing the Company's engine manufacturing reorganization plan, $2.0 million
of costs associated with implementing the Company's boat group reorganization
plan, and $2.1 million in incentives offered to dealers as part of a
to-be-terminated incentive program that the Company was contractually obligated
to fund. The primary components of the charges recorded for the six-month period
ended March 31, 1998 as a result of the restatements include $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, $3.8 million in incentives offered to dealers as part
of a to-be-terminated incentive program that the Company was contractually
obligated to fund, and $2.0 million of costs associated with implementing the
Company's boat group reorganization plan. The costs described in the preceding
two sentences were previously recorded as part of purchase accounting. The
compensation and engine and boat group reorganization costs have been reflected
as increases in selling, general, and administrative expenses and the dealer
incentive accrual has been recorded as a reduction of net sales in the Statement
of Consolidated Earnings. Separately, goodwill amortization expense was reduced
by $0.7 million and $1.5 million, respectively, for the three- and six-month
periods ended March 31, 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.
The cumulative effect of such reclassifications and the restatement discussed
above on the Statement of Consolidated Financial Position as of March 31,
1998 is shown in the following table:
<TABLE>
<CAPTION>
As Previously Reported Reclassifications Restatement As Restated
---------------------- ----------------- ----------- -----------
<S> <C> <C> <C> <C>
Goodwill $ 247.1 $ -- $ (121.4) $ 125.7
Other current assets 40.7 -- -- 40.7
Other assets 127.8 44.5 -- 166.5
(5.8)
Accrued liabilities 200.2 (5.8) (26.1) 168.3
Other non-current liabilities 202.2 44.5 (86.0) 160.7
Total shareholders' investment 257.1 -- (9.3) 247.8
</TABLE>
The restatement also had the effect of increasing the net loss and net loss per
share in the Statement of Consolidated Earnings for the three-month period ended
March 31, 1998 as shown in the following table:
7
<PAGE> 9
<TABLE>
<CAPTION>
As Previously Reported Restatement As Restated
---------------------- ----------- -----------
<S> <C> <C> <C>
Net sales $ 264.3 $ (2.1) $ 262.2
Cost of goods sold 204.2 -- 204.2
--------- ------- ---------
Gross earnings 60.1 (2.1) 58.0
Selling, general, and
administrative expenses 58.2 3.0 61.2
--------- ------- ---------
Earnings (loss) from operations 1.9 (5.1) (3.2)
Non-operating expenses 4.2 -- 4.2
--------- ------- ---------
Loss before provision
for income taxes (2.3) (5.1) (7.4)
Provision for income taxes 1.0 -- 1.0
--------- ------- ---------
Net earnings(loss) $ (3.3) $ (5.1) $ (8.4)
========= ======= =========
Net loss per share
Basic $ (.16) $ (.25) $ (.41)
Diluted $ (.16) $ (.25) $ (.41)
</TABLE>
The restatement also had the effect of increasing the net loss and net loss per
share in the Statement of Consolidated Earnings for the six-month period ended
March 31, 1998 as shown in the following table:
<TABLE>
<CAPTION>
As Previously Reported Restatement As Restated
----------------------- ----------- -----------
<S> <C> <C> <C>
Net sales $ 475.5 $ (3.8) $ 471.7
Cost of goods sold 377.9 -- 377.9
--------- ------- ---------
Gross earnings 97.6 (3.8) 93.8
Selling, general, and
administrative expenses 102.5 5.5 108.0
--------- ------- ---------
Earnings (loss) from operations (4.9) (9.3) (14.2)
Non-operating expenses 9.5 -- 9.5
--------- ------- ---------
Loss before provision
for income taxes (14.4) (9.3) (23.7)
Provision for income taxes 1.8 -- 1.8
--------- ------- ---------
Net earnings(loss) $ (16.2) $ (9.3) $ (25.5)
========= ======= =========
Net loss per share
Basic $ (.79) $ (.46) $ (1.25)
Diluted $ (.79) $ (.46) $ (1.25)
</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).
8
<PAGE> 10
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%. The
Acquisition Debt matures on June 16, 1998. 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. At March
31, 1998, the full $150 million principal amount of the Acquisition Debt was
outstanding.
The full amount of the Acquisition Debt matures on June 16, 1998. The
Company and its Parent believe the Company will be able to raise funds to
refinance such debt through the sale of debt or equity in the public or
private markets by the maturity date of the Acquisition Debt.
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.
Under the various credit agreements, the Company is required to meet certain
financial covenants throughout the year.
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.
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
9
<PAGE> 11
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 March 31, 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 six months ended March 31,1997, 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.
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.
10
<PAGE> 12
<TABLE>
<CAPTION>
Six Months Ended
March 31, 1997
(In millions, except per share data) (Unaudited)
<S> <C>
Net sales $ 434.1
Cost of goods sold 374.2
---------
Gross earnings 59.9
Selling, general and administrative expense
94.1
---------
Earnings (Loss) from operations (34.2)
Interest expense 14.5
Other (income) expense, net (21.3)
---------
Loss before provision for income taxes (27.4)
Provision for income taxes 1.8
---------
Net loss $ (29.2)
=========
Net loss per share of common stock
(basic and diluted) $ (1.43)
=========
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 the 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.
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 through December 31 of each year.
11
<PAGE> 13
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 and recorded an amount in its June 1998 financial statements.
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 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.
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OUTBOARD MARINE CORPORATION
FORM 10-Q
PART I, ITEM 2
FINANCIAL INFORMATION MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 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 March 31, 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 its fiscal quarter ended December 31,
1997. 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 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 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
six-month periods ended March 31, 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 March 31, 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 March 31,
1998 as a result of the restatements include $1.0 million of costs associated
with developing the Company's engine manufacturing reorganization plan, $2.0
million of costs associated with implementing the Company's boat group
reorganization plan, and $2.1 million in incentives offered to dealers as part
of a to-be-terminated incentive program that the Company was contractually
obligated to fund. The primary components of the charges recorded for the
six-month period ended March 31, 1998 as a result of the restatements include
$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, $3.8 million in incentives
offered to dealers as part of a to-be-terminated incentive program that the
Company was contractually obligated to fund, and $2.0 million of costs
associated with implementing the Company's boat group reorganization plan. The
costs described in the preceding two sentences were previously recorded as part
of purchase accounting. The compensation and engine and boat group
reorganization costs have been reflected as increases in selling, general, and
administrative expenses and the dealer incentive accrual has been recorded as a
reduction of net sales 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 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
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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 borrowing averaged $2.9 million in 1997, with month-end
peak borrowing of $29.0 million in 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.
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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 excess purchase price over fair value of
the net assets acquired was $127.3 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.
New Management Initiatives. As discussed above, on September 12, 1997,
Greenmarine Holdings acquired control of the Company. Since that time, the
Company has begun to assemble 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 March 31, 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 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.
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
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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. The Company
expenses its research and development costs as they are incurred.
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,
2000 and prohibit all gasoline engine use effective January 1, 2000. 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 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.
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
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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 March 31, 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 MARCH 31, 1998 COMPARED TO PERIODS ENDED MARCH 31, 1997
Net Sales. Net sales increased to $262.2 million in the three months ended
March 31, 1998 from $237.0 million in the three months ended March 31, 1997,
an increase of 10.6%. Net sales increased to $471.7 million in the six
months ended March 31, 1998 from $434.1 million in the six months ended March
31, 1997, an increase of 8.7%. U.S. revenues, which accounted for 75% of
total sales, increased 11.1% during the six months ended March 31, 1998 while
international sales increased 5.3%. The Company's sales increase was
attributable primarily to higher volume sales in the United States of marine
engines in the current fiscal year, which increased 25.1% over the prior year
period. 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.
Cost of Goods Sold. Cost of goods sold increased to $204.2 million in the
three months ended March 31, 1998 from $200.5 million in the three months
ended March 31, 1997, an increase of $3.7 million or 1.8%. Cost of goods
sold was 77.9% of net sales in the three months ended March 31, 1998 as
compared with 84.6% of net sales in the three months ended March 31, 1997.
Cost of goods sold increased to $377.9 million in the six months ended March
31, 1998 from $374.9 million in the six months ended in March 31, 1997, an
increase of $3.0 million or 0.8%. Cost of goods sold was 80.1% of net sales
in the six months ended March 31, 1998 as compared with 86.4% of net sales in
the six months ended March 31, 1997. The improvements in the Company's gross
margin in the current year reflected increased manufacturing efficiencies at
engine plants and a better absorption of 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"). SG&A expense increased to
$61.2 million in the three months ended March 31, 1998 from $49.5 million in
the three months ended March 31, 1997, an increase of $11.7 million or
23.6%. SG&A expense as a percentage of net sales increased
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to 23.3% in the three months ended March 31, 1998 from 20.9% in the three
months ended March 31, 1997. SG&A expense increased to $108.0 million in the six
months ended March 31, 1998 from $91.9 million in the six months ended March 31,
1997, an increase of $16.1 million or 17.5%. SG&A expense as a percentage of net
sales increased to 22.9% in the six months ended March 31, 1998 from 21.2% in
the six months ended March 31, 1997. The changes in SG&A expense in the current
year reflected higher amortization of goodwill and intangibles due to purchase
accounting and higher warranty expense due to extended warranty coverage on
certain new models. In addition, SG&A expense increased 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. These costs were previously
recorded as part of purchase accounting. Furthermore, the Company experienced
increased costs associated with the boat strategy to realign its boat brands to
lower its manufacturing costs and better focus each of its brands on a
particular niche in the boating industry.
Earnings (Loss) from Operations. Loss from operations was $3.2 million in
the three months ended March 31, 1998 compared with a loss of $13.0 million
in the three months ended March 31, 1997, an improvement of $9.8 million.
Loss from operations decreased to $14.2 million for the six months ended
March 31, 1998 from a loss of $32.7 million for the six months ended March
31, 1997, a decrease of $18.5 million. The improvements were primarily
attributable to the increase in sales coupled with better absorption of costs
as described above.
Non-Operating Expense (Income). Interest expense increased to $6.7 million
in the three months ended March 31, 1998 from $4.0 million in the three
months ended March 31, 1997, an increase of $2.7 million. Interest expense
increased to $14.4 million in the six months ended March 31, 1998 from $8.4
million in the six months ended March 31, 1997, an increase of $6.0 million.
The increase resulted from the new debt structure in place after the
Greenmarine Acquisition. Other non-operating income was $2.5 million in the
three months ended March 31, 1998 compared to $10.7 million in the three
months ended March 31, 1997. Other non-operating income was $4.9 million in
the six months ended March 31, 1998 compared to $21.3 million in the six
months ended March 31, 1997. The three months ended March 31, 1997 amount
included non-recurring income of $8.8 million which was due primarily to a
favorable lawsuit settlement and gain on the sale of fixed assets. The six
months ended March 31, 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. Provision (credit) for income taxes
was $1.0 million in the three months ended March 31, 1998 and $1.0 million in
the three months ended March 31, 1997. Provision (credit) for income taxes
was $1.8 million in the six months ended March 31, 1998 and $1.8 million in
the six months ended March 31, 1997. The provision for income taxes for the
three and six months ended March 31, 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 March 31, 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
March 31, 1998 decreased $8.1 million from September 30, 1997. Cash and cash
equivalents at March 31, 1998 decreased $5.3 million from September 1997, while
receivables increased $26.1 million due primarily to higher sales in line with
the seasonal nature of the Company's business. Inventories at March 31, 1998
increased $16.9 million from September 30, 1997 also due to seasonality. Other
current assets at March 31, 1998 decreased $45.8 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 March 31, 1998
decreased $75.4 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. Accrued liabilities increased $29.0 million due to
higher dealer incentive accruals relating to the seasonality of sales. Cash
used by operations was $49.5 million for the six months ended March 31, 1998
compared with $8.9 million for the six months ended March 31, 1997.
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Expenditures for plant, equipment and tooling were $11.9 million for the six
months ended March 31, 1998, representing a $10.8 million decrease from the
prior year period level of $22.7 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 was appropriated in fiscal 1997 as compared
to prior years due to the Company's pending sale, which was completed in
September 1997. Since the Greenmarine Acquisition, the Company's new senior
management team has evaluated and continues to evaluate its internal systems
and controls. Although the Company believes that such systems and controls
are adequate, the Company will upgrade them as it deems necessary to improve
the overall efficiency of the Company's operations. The Company estimates
that total capital expenditures for fiscal 1998 will be approximately $30
million, which includes maintenance 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.
Short-term debt was $220.7 million at March 31, 1998, including the $150.0
million principal amount of the credit agreement dated August 13, 1997, with
American Annuity Group, Inc. and Great American Insurance Company as lenders
(the 'Acquisition Debt"). The Company assumed the obligations under the Term
Loan in connection with the Greenmarine Acquisition. The full amount of the
Term Loan matures on June 16, 1998. The Company and Greenmarine Holdings
believe the Company will be able to raise funds to refinance such debt through
the sale of debt or equity in the public or private markets by the maturity date
of the Acquisition Debt. 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.
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 $25.0
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
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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.
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)
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
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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.
As of March 31, 1998, the Company has spent a total of approximately $0.8
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 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
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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.
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
Signature Title Date
--------- ----- ----
By /s/ Andrew P. Hines Executive Vice President & December 21, 1998
-----------------------
ANDREW P. HINES
Chief Financial Officer
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