Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(Mark One)
(X) Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended March 31, 1999.
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,
1999 was 20,420,000 shares.
<PAGE>
OUTBOARD MARINE CORPORATION
FORM 10-Q PART I, ITEM 1
FINANCIAL INFORMATION
FINANCIAL STATEMENTS
March 31, 1999
Financial statements required by this form:
Page
Condensed Statements of Consolidated Operations and Comprehensive Income 3
Condensed Statements of Consolidated Financial Position 4
Condensed Statements of Consolidated Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
2
<PAGE>
OUTBOARD MARINE CORPORATION
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended
March 31
-----------------------
(Dollars in Millions, 1999 1998
---- ----
Except per Share Data)
Net sales $255.2 $262.2
Cost of goods sold 201.9 202.8
------ ------
Gross earnings 53.3 59.4
Selling, general and administrative
expense 57.1 62.6
------ ------
Loss from operations (3.8) (3.2)
Non-operating expense (income):
Interest expense 7.3 5.8
Other, net (0.3) (1.6)
------ ------
7.0 4.2
------ ------
Loss before provision
for income taxes (10.8) (7.4)
Provision for income taxes 1.1 1.0
------ ------
Net loss $(11.9) $ (8.4)
====== ======
Other comprehensive income(expense)
Foreign currency translation
adjustments (1.6) (0.4)
------ ------
Other comprehensive income loss (1.6) (0.4)
------ ------
Comprehensive loss $(13.5) $ (8.8)
====== ======
Net loss per share of
common stock
Basic $ (0.58) $ (0.41)
======= =======
Diluted $ (0.58) $ (0.41)
======= =======
Average shares of common stock
Outstanding, basic and diluted 20.4 20.4
The accompanying notes are an integral part of these statements.
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<PAGE>
OUTBOARD MARINE CORPORATION
CONDENSED STATEMENTS OF CONSOLIDATED FINANCIAL POSITION
(Unaudited)
-----------
March 31, December 31,
(Dollars in Millions) 1999 1998
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $ 25.6 $ 13.6
Receivables, net 148.2 130.5
Inventories, net
Finished products 73.8 83.5
Raw material, work in process
and service parts 121.5 113.7
------- -------
Total inventories 195.3 197.2
Other current assets 24.0 23.8
------- -------
Total current assets 393.1 365.1
Restricted cash 29.6 29.3
Property, plant and equipment at cost 226.0 220.8
Less accumulated depreciation (28.5) (23.7)
------- -------
Property, plant and equipment, net 197.5 197.1
Product tooling, net 30.1 30.0
Goodwill, net 114.8 115.5
Trademarks, patents and other intangibles, net 79.7 80.9
Other assets 98.6 98.3
------- -------
Total assets $ 943.4 $ 916.2
======= =======
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Loan payable $ 80.0 $ 32.4
Accounts payable 83.1 90.0
Accrued and other 192.8 185.1
Accrued income taxes 6.8 6.5
Current maturities of long-term debt 7.0 11.2
------- -------
Total current liabilities 369.7 325.2
Long-term debt 241.2 247.0
Postretirement benefits other than pensions 124.8 124.4
Other non-current liabilities 164.0 162.4
Shareholders' investment:
Common stock and capital surplus 277.1 277.1
Accumulated deficit-employed in the business (209.5) (197.6)
Accumulated other comprehensive income (23.9) (22.3)
------- -------
Total shareholders' investment 43.7 57.2
------- -------
Total liabilities and shareholders'
investment $ 943.4 $ 916.2
======= =======
The accompanying notes are an integral part of these statements.
4
<PAGE>
OUTBOARD MARINE CORPORATION
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
<TABLE>
Three Months Ended
March 31
(Dollars in Millions) 1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(11.9) $(8.4)
Adjustments to reconcile net loss to
net cash used for operations:
Depreciation and amortization 12.3 13.4
Changes in current accounts excluding the effects of
noncash transactions:
Decrease (increase) in receivables, net (20.7) (52.0)
Decrease (increase) in inventories (1.3) 3.5
Decrease (increase) in other current assets (0.2) 13.9
Decrease in accounts payable and accrued
liabilities 1.9 17.2
Other, net 5.1 (0.5)
----- ------
Net cash used for operating activities (14.8) (12.9)
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for plant and equipment and tooling (11.1) (5.6)
Proceeds from sale of plant and equipment 0.2 6.2
Other, net 0.0 (0.3)
----- ------
Net cash provided by (used for) investing activities (10.9) 0.3
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in short-term debt 47.6 45.0
Payments of long-term debt, including current maturities (10.3) (7.4)
Other, net (0.1) 0.1
------ ------
Net cash provided by financing activities 37.2 37.7
Exchange Rate Effect on Cash 0.5 (0.1)
------ ------
Net increase in Cash and Cash Equivalents 12.0 25.0
Cash and Cash Equivalents at Beginning of Period 13.6 24.1
------ ------
Cash and Cash Equivalents at End of Period $ 25.6 $ 49.1
====== ======
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 2.3 $ 5.6
====== ======
Income taxes paid $ 0.8 $ 1.1
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
The accompanying unaudited condensed consolidated 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 for the transition period from October 1,
1998 to December 31, 1998. The 1999 interim results are not necessarily
indicative of the results which may be expected for the remainder of the year.
Change in fiscal year. Effective October 1, 1998, the Company's fiscal year-end
changed from September 30 to December 31.
Reclassification. Beginning in October 1998, warranty expense, which was
previously reflected as a component of selling, general, and administrative
expenses, is included as another component of cost of goods sold in the
Company's Condensed Statements of Consolidated Operations and Comprehensive
Income. In addition, research and development expense, which was previously
reflected as a component of cost of goods sold, is included as a selling,
general and administrative expense in the Company's Condensed Statements of
Consolidated Operations and Comprehensive Income. Amounts reported for the prior
periods have been reclassified to conform to the new presentation.
2. Short-Term Borrowings
The Company entered into an Amended and Restated Loan and Security
Agreement, effective as of January 6, 1998 (as amended, the "Credit Agreement"),
with a syndicate of lenders for which NationsBank of Texas, N.A. is
administrative and collateral agent (the "Agent"). The Credit Agreement provides
a revolving credit facility (the "Revolving Credit Facility") of up to $150.0
million, subject to borrowing base limitations, to finance working capital with
a $50.0 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, chattel 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, 1999, the Company had outstanding borrowings under
the Credit Agreement of $80.0 million, and had $38.5 million of letter of credit
obligations outstanding under the Credit Agreement. 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) minimum
EBITDA as defined, (iii) interest coverage ratios, and (iv) 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, and subsequent actual
compliance therewith at such time, (ii) the Company's consolidated tangible net
worth requirement for the period ended September 30, 1998 was amended to better
align such covenant with the Company's then anticipated financial performance
for the remainder of fiscal 1998, (iii) the borrowing base was amended to allow
for borrowings against eligible intellectual property, thereby increasing
borrowing capacity, (iv) the sublimit for the issuance of letters of credit was
increased from $25.0 million to $30.0 million, and (v) the lenders consented to
certain matters relating to the Company's offering of $160.0 million of 10 3/4%
Senior Notes due 2008, including the establishment of an interest reserve
account. The Company entered into a Second Amendment to Amended and
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Restated Loan and Security Agreement, effective as of August 31, 1998, with the
lenders under the Credit Agreement, pursuant to which, among other things, the
sublimit for the issuance of letters of credit was increased from $30.0 million
to $50.0 million to enable the Company to replace cash collateral obligations
under a letter of credit, which obligations arose following the change in
control resulting from the acquisition of the Company by Greenmarine Holdings
LLC on September 12, 1997. The Company entered into a Third Amendment to Amended
and Restated Loan and Security Agreement, effective as of December 21, 1998 (the
"Third Amendment"), with the lenders under the Credit Agreement, pursuant to
which, among other things, (i) the Company's non-compliance with the
consolidated tangible net worth, consolidated interest coverage ratio and
consolidated leverage ratio covenants were waived for the period ended September
30, 1998 and (ii) the Company's consolidated tangible net worth, consolidated
interest coverage ratio and consolidated leverage ratio covenants for future
periods were amended. The Third Amendment modified the Company's financial
covenant compliance requirements under the Credit Agreement to give effect to
the restatements of the Company's financial statements and their anticipated
impact on the Company's future results of operations. As of December 31, 1998,
the Company was in violation of the Credit Agreement's leverage coverage ratio
covenant. The Company informed the lenders under the Credit Agreement of the
circumstances resulting in the violation, and entered into the Fourth Amendment
to Amended and Restated Loan and Security Agreement effective as of February 1,
1999 pursuant to which (i) the Company's non-compliance with the consolidated
leverage covenant for the period ended December 31, 1998 was waived, (ii)
work-in-process inventory is included in the borrowing base calculation through
June 30, 1999, and (iii) the Company's borrowing base capacity was increased by
$10 million for certain intellectual property owned by the Company. The Company
entered into the Fifth Amendment to Amended and Restated Loan and Security
Agreement, effective as of February 25, 1999, which among other things, amended
the Company's consolidated tangible net worth, consolidated leverage and
consolidated interest coverage ratios for future periods in order to bring the
covenants in line with anticipated results of operations, including the effect
of the costs incurred and to be incurred to address performance issues with
respect to the Company's FICHT engines. At March 31, 1999, the Company was in
compliance with the amended covenants.
In addition to the Company's credit agreements, the Company's non-U.S.
subsidiaries had additional uncommitted lines of credit (U.S. dollar equivalent)
of approximately $0.6 million and $0.9 million on March 31, 1999 and December
31, 1998, respectively.
3. 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
approximately $32 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 Condensed Statement of Consolidated Operations and
Comprehensive Income 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 as a potentially
responsible party ("PRP") at
7
<PAGE>
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 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.
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, 1999, the Company has accrued approximately $25
million for costs related to remediation at contaminated sites and operation and
maintenance forsite monitoring and compliance requirements. The possible
recovery of insurance proceeds has not been considered in estimating contingent
environmental liabilities.
Each site, whether or not remediation studies have commenced, is
reviewed on a quarterly basis and the environmental contingent liability accrual
is adjusted accordingly. Because the sites are reviewed and the accrual adjusted
quarterly, the Company is confident that the accrual accurately reflects the
Company's liability based upon the information available at the time.
In July 1998, the Company was provided information on the results of a
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 the study was being conducted, it was not until July 1998 that
the Company became aware of the scope and extent of the contamination and the
associated remedial alternatives. Although the Company believes that it was not
a generator of hazardous substances at the site, as a land owner it is, by
statute, a PRP. Based on its experience with Superfund Sites, the Company
calculated a range of potential outcomes and recorded an amount related to the
most probable outcome in September 1998 financial statements.
In fiscal year 1997, the Company became aware of certain performance
issues associated with its FICHT engines. In April 1998, the Company began to
identify the causes of these performance issues and upgrade kits were prepared
and distributed. These upgrade kits included certain performance enhancements to
the FICHT engines, including, among other things, improvements to the mapping
contained in the software of the engine-management module. The Company
established a reserve for the correction of the identified problems in fiscal
year 1998, which resulted in an approximate $7.0 million increase in the
Company's warranty reserve for fiscal year 1998. In January 1999, the Company
completed its analysis and determined that certain technological improvements
were needed to improve the overall performance of the FICHT engines. As part of
this strategy, an upgrade kit for previously sold models, which will contain
additional performance enhancements to the FICHT engines, will be installed on
motors at dealers beginning in the summer of 1999. The Company expects the cost
of these upgrade kits to be approximately $5.5 million. The Company recorded
8
<PAGE>
$4.3 million in its December 31, 1998 financial statements and recorded an
additional $1.2 million in the March 31, 1999 financial statements to reflect
refinements to the Company's original estimates. The Company believes that these
upgrade kits will significantly improve the overall performance of its FICHT
engines and reduce the Company's overall warranty expense experienced on such
engines. In addition, the Company will implement engine modifications and
changes in production for the affected FICHT models. These engine modifications
and production changes were primarily implemented during a planned two-week
suspension of the Company's operations at certain of its engine-manufacturing
facilities in March 1999. The Company began production of the new
generation of its FICHT models in late April 1999. Also, a limited warranty
extension on certain components, from two to three years, was provided on all
FICHT engines purchased by customers between January 1, 1999 and March 31, 1999,
which was intended to demonstrate the Company's confidence in the improved FICHT
engines. The Company also will add an additional year of limited warranty on
certain components to the standard two year warranty on all 1999 FICHT models
sold by June 30, 1999 and registered by July 15, 1999.
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. The Company and
Orbital are currently in the process of negotiating an agreement for use by the
Company of the patents in question. Although there can be no assurance that an
agreement will be reached and that Orbital will not commence litigation against
the Company, the Company is of the opinion that a mutually acceptable agreement
can be reached. There also can be no assurance that the failure to obtain any
such agreement or effect any redesign, or any cost associated therewith, would
not have a material adverse effect on the Company. The Company determined a
range of potential outcomes for this matter and recorded a liability in its
September 1998 financial statements. The sale of FICHT engines accounted for
approximately 8%, 16.2% and 18.9% of the Company's revenues in fiscal year 1998,
the three months ended December 31, 1998 and the three months ended March 31,
1999, respectively.
4. Restructuring Charges
During the fourth quarter of fiscal year 1998, the Company finalized a
restructuring plan for the closure/consolidation of its Milwaukee and Waukegan
engine facilities. The Company announced the closure of the Milwaukee and
Waukegan facilities on September 24, 1998. The Company recorded a $98.5 million
restructuring charge which includes: 1) costs to recognize severance and
benefits for approximately 950 employees to be terminated ($14.0 million), 2)
curtailment losses associated with the acceleration of pension and
postretirement benefits for employees at the two facilities ($72.1 million), 3)
costs to clean and close the facilities ($6.5 million), 4) costs to ready
machinery and equipment for disposal and costs to dispose of machinery and
equipment at the facilities ($3.9 million), and 5) costs to write-down certain
replacement parts for machinery and equipment at the facilities to net
realizable value ($2.0 million). The Company's plan includes outsourcing the
substantial portion of its sub-assembly production currently performed in its
Milwaukee and Waukegan facilities to third-party vendors or transferring such
production to other facilities of the Company. The Company anticipates
substantial completion of such plan by the end of year 2000. No costs have been
charged to this reserve as of March 31, 1999.
9
<PAGE>
5. Segment Data
Summarized financial information concerning the Company's reportable
segments is shown in the following table. The "Other" column includes primarily
corporate staffing expense and amortization expense on the Company's intangible
assets.
<TABLE>
Marine
Engines Boats Other Total
------- ----- ----- -----
(Dollars in millions)
Three Months Ended March 31, 1999
<S> <C> <C> <C> <C>
Revenues $140.2 $115.0 $ - $255.2
Intersegment revenues 19.9 - - 19.9
Earnings (loss) from operations 0.9 1.2 (5.9) (3.8)
Three Months Ended March 31, 1998
Revenues $152.7 $109.5 $ - $262.2
Intersegment revenues 25.8 - - 25.8
Earnings (loss) from operations 8.7 (4.6) (7.3) (3.2)
</TABLE>
A reconciliation of loss from operations for combined reportable segments
to consolidated loss before provision for income taxes is as follows:
<TABLE>
Three Months Ended March 31
1999 1998
---- ----
(Dollars in millions)
<S> <C> <C>
Loss from operations for
reportable segments $(3.8) $(3.2)
Interest expense 7.3 5.8
Other expense (income), net (0.3) (1.6)
------ -----
Loss before provision for
Income taxes $(10.8) $(7.4)
====== =====
</TABLE>
6. Subsidiary Guarantor Information
The Company issued $160,000,000 10 3/4% Senior Notes due 2008 ("Notes") on
May 27, 1998. The Company's payment obligations under the Notes are guaranteed
by certain of the Company's wholly-owned subsidiaries ("Guarantor
Subsidiaries"). Such guarantees are full, unconditional, unsecured and
unsubordinated on a joint and several basis by each of the Guarantor
Subsidiaries. As of and through March 31, 1999, the Guarantor Subsidiaries were
wholly-owned, but not the only wholly-owned, subsidiaries of the Company. The
Credit Agreement and the Indenture governing the Notes contain certain covenants
which, among other things, restrict the ability of the Company and certain of
its subsidiaries to incur additional indebtedness; pay dividends or make
distributions in respect to their capital stock; enter into certain transactions
with shareholders and affiliates; make certain investments and other restricted
payments; create liens; enter into certain sale and leaseback transactions and
sell assets. These covenants are, however, subject to a number of exceptions and
qualifications. Separate financial statements of the Guarantor Subsidiaries are
not presented because management of the Company has determined that they are not
material to investors.
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The following condensed consolidating financial data illustrates the
composition of the Company ("Parent Company"), the Guarantor Subsidiaries and
the Company's non-guarantor subsidiaries ("Other Subsidiaries"). Investments in
subsidiaries are accounted for by the Company under the equity method of
accounting for purposes of the supplemental consolidating presentation. Earnings
of subsidiaries are, therefore, reflected in the Company's investment accounts
and earnings. The Company has not allocated goodwill to the Guarantor
Subsidiaries or the other subsidiaries in association with the acquisition by
and merger with Greenmarine.
11
<PAGE>
OUTBOARD MARINE CORPORATION
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS AND COMPREHENSIVE INCOME
Three Months Ended March 31, 1999
(Unaudited)
<TABLE>
Parent Guarantor Other Consolidated
(Dollars in Millions) Company Subsidiaries Subsidiaries Eliminations Total
------- ------------ ------------ ------------ -----
<S> <C> <C> <C> <C> <C>
Net sales $ 141.7 $ 116.2 $ 68.6 $ (71.3) $ 255.2
Cost of goods sold 113.9 101.2 57.5 (70.7) 201.9
------------- ---------------- --------------- ------------ -----------
Gross earnings 27.8 15.0 11.1 (0.6) 53.3
Selling, general and administrative
expense 36.3 13.1 7.7 - 57.1
------------- ---------------- --------------- ------------ -----------
Earnings (loss) from operations (8.5) 1.9 3.4 (0.6) (3.8)
Non-operating (expense) income (9.8) (0.2) 3.0 - (7.0)
Equity earnings (loss) -- subsidiaries 7.0 - - (7.0) -
------------- ---------------- --------------- ------------ -----------
Earnings (loss) before provision for
income taxes (11.3) 1.7 6.4 (7.6) (10.8)
Provision for income taxes - - 1.1 - 1.1
------------- ---------------- --------------- ------------ -----------
Net earnings (loss) $ (11.3) $ 1.7 $ 5.3 $ (7.6) $ (11.9)
============= ================ =============== ============ ===========
Other comprehensive income (expense),
net of tax
Foreign currency translation
adjustments $ (0.2) $ - $ (1.4) $ - $ (1.6)
------------- ---------------- --------------- ------------ ---------
Other comprehensive income (loss) (0.2) - (1.4) - (1.6)
------------- ---------------- --------------- ------------ -----------
Comprehensive income (loss) $ (11.5) $ 1.7 $ 3.9 $ (7.6) $ (13.5)
============= ================ =============== ============ ===========
</TABLE>
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OUTBOARD MARINE CORPORATION
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS AND COMPREHENSIVE INCOME
Three Months Ended March 31, 1998
(Unaudited)
<TABLE>
Parent Guarantor Other Consolidated
(Dollars in Millions) Company Subsidiaries Subsidiaries Eliminations Total
------- ------------ ------------ ------------ -----
<S> <C> <C> <C> <C> <C>
Net sales $ 166.1 $ 114.5 $ 69.6 $ (88.0) $ 262.2
Cost of goods sold 129.9 103.9 57.6 (88.6) 202.8
------------- ---------------- --------------- ------------- -----------
Gross earnings 36.2 10.6 12.0 0.6 59.4
Selling, general and administrative
expense 42.8 12.1 7.7 - 62.6
------------- ---------------- --------------- ------------- -----------
Earnings (loss) from operations (6.6) (1.5) 4.3 0.6 (3.2)
Non-operating (expense) income (4.8) (0.3) 0.9 - (4.2)
Equity earnings (loss) -- subsidiaries 2.6 - - (2.6) -
------------- ---------------- --------------- ------------- -----------
Earnings (loss) before provision for
income taxes (8.8) (1.8) 5.2 (2.0) (7.4)
Provision for income taxes 0.2 - 0.8 - 1.0
------------- ---------------- --------------- ------------- -----------
Net earnings (loss) $ (9.0) $ (1.8) $ 4.4 $ (2.0) $ (8.4)
============= ================ =============== ============= ===========
Other comprehensive income (expense),
net of tax
Foreign currency translation
adjustments $ (2.4) $ - $ 2.0 $ - $ (0.4)
------------ ---------------- -------------- ------------- -----------
Other comprehensive income (loss) (2.4) - 2.0 - (0.4)
------------- ---------------- --------------- ------------- -----------
Comprehensive income (loss) $ (11.4) $ (1.8) $ 6.4 $ (2.0) $ (8.8)
============= ================ =============== ============= ===========
</TABLE>
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<PAGE>
OUTBOARD MARINE CORPORATION
CONDENSED STATEMENTS OF CONSOLIDATED FINANCIAL POSITION
March 31, 1999
(Unaudited)
<TABLE>
Parent Guarantor Other Consolidated
(Dollars in Millions) Company Subsidiaries Subsidiaries Eliminations Total
------- ------------ ------------ ------------ -----
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11.5 $ 0.4 $ 13.7 - $ 25.6
Receivables, net 66.0 35.7 46.5 - 148.2
Intercompany receivables (payables) 3.5 (16.2) 12.7 - -
Inventories 107.4 44.3 46.0 (2.4) 195.3
Other current assets 13.9 2.5 6.5 1.1 24.0
------------ ----------- ----------- ----------- -----------
Total current assets 202.3 66.7 125.4 (1.3) 393.1
Restricted cash 29.6 - - - 29.6
Property, plant and equipment, net 147.1 32.7 17.9 (0.2) 197.5
Product tooling, net 26.6 3.2 0.3 - 30.1
Intangibles 188.6 - 5.9 - 194.5
Pension and other assets 92.4 2.2 5.0 (1.0) 98.6
Intercompany notes, net (100.0) - 100.0 - -
Investment in subsidiaries 267.4 - - (267.4) -
------------ ----------- ----------- ----------- -----------
Total assets $ 854.0 $ 104.8 $ 254.5 $ (269.9) $ 943.4
============ =========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS'
INVESTMENT
Current liabilities:
Loan payable $ 80.0 - $ - - $ 80.0
Accounts payable 61.2 14.3 7.6 - 83.1
Accrued and other 147.5 31.7 21.8 (1.4) 199.6
Current maturities of long-term debt 6.8 0.2 - - 7.0
------------ ----------- ----------- ----------- -----------
Total current liabilities 295.5 46.2 29.4 (1.4) 369.7
Long-term debt 239.0 2.2 - - 241.2
Other non-current liabilities 274.7 7.8 6.3 - 288.8
Shareholders' investment 44.8 48.6 218.8 (268.5) 43.7
------------ ----------- ----------- ----------- -----------
Total liabilities and
shareholders' investment $ 854.0 $ 104.8 $ 254.5 (269.9) $ 943.4
============ =========== =========== =========== ===========
</TABLE>
14
<PAGE>
OUTBOARD MARINE CORPORATION
CONDENSED STATEMENTS OF CONSOLIDATED FINANCIAL POSITION
December 31, 1998
(Unaudited)
<TABLE>
Parent Guarantor Other Consolidated
(Dollars in Millions) Company Subsidiaries Subsidiaries Eliminations Total
------- ------------ ------------ ------------ -----
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2.2 $ 0.1 $ 11.3 $ - $ 13.6
Receivables, net 71.8 23.3 35.4 - 130.5
Intercompany receivables (payables) (93.5) (9.7) 103.2 - -
Inventories 103.4 47.8 47.8 (1.8) 197.2
Other current assets 14.0 3.2 6.6 - 23.8
------------ ----------- ----------- ----------- -----------
Total current assets 97.9 64.7 204.3 (1.8) 365.1
Restricted cash 29.3 - - - 29.3
Property, plant and equipment, net 156.9 23.9 16.5 (0.2) 197.1
Product tooling, net 26.8 2.9 0.3 - 30.0
Intangibles 189.4 - 7.0 - 196.4
Pension and other assets 91.3 2.3 4.7 - 98.3
Intercompany notes, net (97.4) - 97.4 - -
Investment in subsidiaries 339.3 - - (339.3) -
------------ ----------- ----------- ----------- -----------
Total assets $ 833.5 $ 93.8 $ 330.2 $ (341.3) $ 916.2
============ =========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS'
INVESTMENT
Current liabilities:
Loan payable $ 32.4 $ - $ - $ - $ 32.4
Accounts payable 68.1 12.8 9.1 - 90.0
Accrued and other 143.0 30.0 19.8 (1.2) 191.6
Current maturities of long-term debt 11.2 - - - 11.2
------------ ----------- ----------- ----------- -----------
Total current liabilities 254.7 42.8 28.9 (1.2) 325.2
Long-term debt 247.0 - - - 247.0
Other non-current liabilities 273.8 7.9 5.1 - 286.8
Shareholders' investment 58.0 43.1 296.2 (340.1) 57.2
------------ ----------- ----------- ----------- -----------
Total liabilities and shareholders'
investment $ 833.5 $ 93.8 $ 330.2 $ (341.3) $ 916.2
============ =========== =========== =========== ===========
</TABLE>
15
<PAGE>
OUTBOARD MARINE CORPORATION
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999
(Unaudited)
<TABLE>
Parent Guarantor Other Consolidated
(Dollars in Millions) Company Subsidiaries Subsidiaries Eliminations Total
------- ------------ ------------ ------------ -----
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (11.3) $ 1.7 $ 5.3 $ (7.6) $ (11.9)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used for) operations:
Depreciation and amortization 5.0 6.8 0.5 - 12.3
Changes in current accounts excluding the effects of
acquisitions and noncash transactions:
Decrease (increase) in receivables 5.7 (12.4) (14.0) - (20.7)
Decrease (increase) in intercompany receivables
and payables, and intercompany note receivables
and note payables (16.5) 6.5 10.0 - -
Decrease (increase) in inventories (4.2) 3.5 (1.2) 0.6 (1.3)
Decrease (increase) in other current assets (0.9) 0.6 0.1 - (0.2)
Increase (decrease) in accounts payable
and accrued liabilities (2.2) 2.9 1.3 (0.1) 1.9
Other, net 2.9 0.1 2.0 0.1 5.1
-------- -------- -------- -------- ---------
Net cash provided by (used for)
operating activities (21.5) 9.7 4.0 (7.0) (14.8)
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for plant and equipment, and tooling 6.8 (16.1) (1.8) - (11.1)
Proceeds from sale of plant and equipment 0.1 0.1 - - 0.2
Equity earnings (loss) (7.0) - - 7.0 -
Change in subsidiary investment (4.5) - - 4.5 -
Other, net - - - - -
-------- -------- -------- -------- ---------
Net cash provided by (used for)
investing activities (4.6) (16.0) (1.8) 11.5 (10.9)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in shortterm debt 47.6 - - - 47.6
Net change in longterm debt, including
current maturities (12.7) 2.4 - - (10.3)
Change in subsidiary capital 0.9 4.2 (0.6) (4.5) -
Other, net (0.1) - - - (0.1)
-------- -------- -------- -------- ---------
Net cash provided by (used for)
financing activities 35.7 6.6 (0.6) (4.5) 37.2
Exchange Rate Effect on Cash (0.3) - 0.8 - 0.5
-------- -------- -------- -------- ---------
Net increase in Cash and Cash Equivalents 9.3 0.3 2.4 - 12.0
Cash and Cash Equivalents at Beginning of Period 2.2 0.1 11.3 - 13.6
-------- -------- -------- -------- ---------
Cash and Cash Equivalents at End of Period $ 11.5 $ 0.4 $ 13.7 $ - $ 25.6
======== ======= ======== ======== =========
</TABLE>
16
<PAGE>
OUTBOARD MARINE CORPORATION
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998
(Unaudited)
<TABLE>
Parent Guarantor Other Consolidated
(Dollars in Millions) Company Subsidiaries Subsidiaries Eliminations Total
------- ------------ ------------ ------------ -----
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (9.0) $ (1.8) $ 4.4 $ (2.0) $ (8.4)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used for) operations:
Depreciation and amortization 12.4 1.2 (0.3) 0.1 13.4
Changes in current accounts excluding the effects of
acquisitions and noncash transactions:
Decrease (increase) in receivables (25.9) (12.4) (14.2) 0.5 (52.0)
Decrease (increase) in intercompany receivables
and payables, and intercompany note receivables
and note payables (3.1) (5.3) 8.5 (0.1) -
Decrease (increase) in inventories (8.5) 14.4 (5.1) 2.7 3.5
Decrease (increase) in other current assets 14.3 0.2 (0.6) - 13.9
Increase (decrease) in accounts payable
and accrued liabilities 14.0 6.1 0.9 (3.8) 17.2
Other, net (8.0) 0.1 7.4 - (0.5)
-------- -------- -------- -------- ---------
Net cash provided by (used for) operating
activities (13.8) 2.5 1.0 (2.6) (12.9)
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for plant and equipment, and tooling (4.3) (0.9) (0.4) - (5.6)
Proceeds from sale of plant and equipment 4.9 0.1 1.2 - 6.2
Equity earnings (loss) (2.6) - - 2.6 -
Other, net 2.3 (0.1) (2.5) - (0.3)
-------- -------- -------- -------- ---------
Net cash provided by (used for) investing
activities 0.3 (0.9) (1.7) 2.6 0.3
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in shortterm debt 45.0 - - - 45.0
Net change in longterm debt, including current maturities (7.4) - - - (7.4)
Other, net 0.1 - - - 0.1
-------- -------- -------- -------- ---------
Net cash provided by (used for) financing
activities 37.7 - - - 37.7
Exchange Rate Effect on Cash - - (0.1) - (0.1)
-------- -------- -------- -------- ---------
Net increase in Cash and Cash Equivalents 24.2 1.6 (0.8) - 25.0
Cash and Cash Equivalents at Beginning of Period 12.1 0.6 11.4 - 24.1
-------- -------- -------- -------- ---------
Cash and Cash Equivalents at End of Period $ 36.3 $ 2.2 $ 10.6 $ - $ 49.1
========= ========= ======== ======== ==========
</TABLE>
17
<PAGE>
OUTBOARD MARINE CORPORATION
FORM 10-Q
PART 1, ITEM 2
FINANCIAL INFORMATION MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 1999
The following discussion should be read in conjunction with the more
detailed information and Condensed Consolidated Financial Statements of the
Company, together with the notes thereto, included elsewhere herein.
General
Industry Overview. According to data published by the National Marine
Manufacturers Association, ("NMMA") the recreational boating industry generated
approximately $19.2 billion in domestic retail sales in 1998, including
approximately $8.7 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.
Cyclicality; Seasonality; Weather Conditions. The recreational marine
industry is highly cyclical. Industry sales, including sales of the Company's
products, are closely linked to the conditions of the overall economy and are
influenced by local, national and international economic conditions, as well as
interest rates, consumer spending, technology, dealer effectiveness,
demographics, fuel availability and government regulations. In an economic
downturn, consumer discretionary spending levels are reduced, often resulting in
disproportionately large declines in the sale of relatively expensive items such
as recreational boats. Similarly, rising interest rates could have a negative
impact on consumers' ability, or willingness to obtain financing from lenders,
which could also adversely affect the ability of the Company to sell its
products. Even if prevailing 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. According to data published by the
NMMA, 1995 annual U.S. purchases of boats and engines increased to 336,960 and
317,000, respectively, but unit sales declined in 1996 and 1997, when reported
U.S. sales of boats and engines were 320,850 and 308,000, and 304,600 and
302,000, respectively. The Company believes these declines were due partially to
adverse weather conditions. In 1998, U.S. sales of boats and engines increased
to 305,400 and 314,000, respectively.
The recreational marine industry, in general, and the business of the
Company are seasonal due to the impact of the buying patterns of dealers and
consumers. The Company's peak revenue periods historically have been its fiscal
quarters ending June 30 and September 30, respectively. Accordingly, the
Company's receivables, inventory and accompanying short-term borrowing to
satisfy working capital requirements are usually at their highest levels in the
Company's fiscal quarter ending March 31 and decline thereafter as the Company's
products enter the peak consumer selling seasons. Short-term borrowings averaged
$69.1 million in the quarter ended March 31, 1999, with month-end peak
borrowings of $80.0 million in March 1999. 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
18
<PAGE>
the geographic diversity of the Company's dealer network may reduce the overall
impact on the Company of adverse weather conditions in any one market area, such
conditions may continue to represent potential adverse risks to the Company's
financial performance.
Acquisition by Greenmarine Holdings LLC. On September 12, 1997,
Greenmarine Holdings acquired control of approximately 90% of the then
outstanding shares of common stock (the "Pre-Merger Company Shares") of the
Company through an $18.00 per share tender offer pursuant to Greenmarine
Holdings' Offer to Purchase dated August 8, 1997 (the "Tender Offer"). On
September 30, 1997, Greenmarine Holdings acquired the untendered Pre-Merger
Company Shares by merging its acquisition subsidiary (i.e., Greenmarine
Acquisition Corp.) with and into the Company (the "Merger", and together with
the Tender Offer, the "Greenmarine Acquisition"). As a result of the Merger, the
Company became a wholly-owned subsidiary of Greenmarine Holdings; each
untendered Pre-Merger Company Share outstanding immediately prior to the Merger
was converted into the right to receive a cash payment of $18.00 per share; and
20.4 million shares of new common stock of the Company were issued to
Greenmarine Holdings. The Greenmarine Acquisition was completed for aggregate
consideration of approximately $373.0 million and has been accounted for under
the purchase method of accounting. Accordingly, the purchase price has been
allocated to assets acquired and liabilities assumed based on fair market values
at the date of acquisition (i.e., September 30, 1997). In the opinion of
management, accounting for the purchase as of September 30, 1997 instead of
September 12, 1997 did not materially affect the Company's results of operations
for fiscal 1997. The fair values of tangible assets acquired and liabilities
assumed were $883.6 million and $817.8 million, at September 30, 1997,
respectively. In addition, $83.9 million of the purchase price was allocated to
intangible assets for trademarks, patents and dealer network. The final excess
purchase price over fair value of the net assets acquired was approximately $120
million and has been classified as goodwill in the Company's Statement of
Consolidated Financial Position at September 30, 1998.
Management Initiatives. Since the Greenmarine Acquisition, the Company
has assembled a new management team led by David D. Jones. The new senior
management team has developed a turnaround strategy to capitalize on the
Company's strong market position and leading, well-recognized brand names and to
take advantage of anticipated growth in the recreational marine industry. Under
its new management, the Company has also developed a business reorganization
plan to realign and consolidate its products offered in the marketplace, and to
improve existing manufacturing processes that will enable the Company to
increase production efficiency and asset utilization. This turnaround strategy
and reorganization plan includes the elimination and consolidation of certain of
the Company's products, and the closing and consolidation of certain of the
Company's manufacturing facilities with corresponding involuntary employee
terminations. However, there can be no assurance that the Company's turnaround
strategy will be fully implemented or that its anticipated benefits will be
realized.
In March 1998, the Company announced a lean manufacturing initiative
for its marine power manufacturing operations. Lean manufacturing is a
disciplined approach for implementing proven manufacturing methodologies in
order to reduce manufacturing costs through improved employee productivity and
reduced inventory. The first phase of this initiative was introduced at the
Company's final assembly plant in Calhoun, Georgia and, as a second phase, this
initiative has been expanded to certain of the Company's sub-assembly
facilities. This initiative is expected to reduce costs, shorten production
times, lower inventory and improve the Company's responsiveness to dealer and
consumer demand. The Company also began implementing a strategic purchasing
program in January 1998. This program is designed to reduce purchasing costs by
consolidating purchasing across vendors, integrating suppliers into the product
design process at an early stage and designing products for lower cost.
On September 24, 1998, the Company announced that it would be closing
its Milwaukee, Wisconsin and Waukegan, Illinois facilities by the end of the
year 2000. A restructuring charge of $98.5 million was recognized in the fourth
quarter of fiscal 1998 and includes charges for the costs associated with
closing these two facilities, and the related employee termination benefits for
approximately 950 employees. As of March 31, 1999, the Company has not incurred
any costs against the restructuring
19
<PAGE>
charge established in the prior fiscal year. The Company plans to outsource
substantially all of the manufacturing of parts currently produced by these two
facilities to third party vendors with the balance being relocated to other
facilities of the Company. The Company has already transferred the manufacture
of certain components, accessories and service parts and continues to obtain and
review proposals from vendors in anticipation of outsourcing the remainder of
production. The Company has entered into a closing agreement with the Waukegan
union and is in the process of negotiating one with the Milwaukee union.
Although there can be no assurance, the Company believes that the Milwaukee
negotiations will result in a satisfactory shutdown agreement and anticipates
substantial completion of the restructuring plan by the end of year 2000.
Market Share. Since 1993, the Company's twelve month rolling domestic
outboard engine retail market share has gradually declined from 49% as of
December 31, 1993 to 33% as of March 31, 1999, and its domestic boat market
share has also declined from 20% to 10% as of January 31, 1999 (data only
available as of this date). The primary causes for these declines have been the
loss of key dealers to competitors and the rationalization of boat brands. In
addition, competitors have offered products in certain categories for which the
Company does not have a competitive product. Although there can be no assurance
that the Company's market share will not continue to decline, the Company
believes that its business strategies, including plans for future products, and
for products currently being offered, such as FICHT, will improve its market
share.
Regulatory Compliance; FICHT Engines. 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 are required
to reduce hydrocarbon emissions from outboard engines, on average by 8.3% per
year through model year 2006 beginning with the 1998 model year, and emissions
from personal watercraft by 9.4% per year through model year 2006 beginning in
model year 1999. In 1994, the Company announced "Project LEAP", a project to
convert its entire outboard product line to low-emissions products within the
next decade. Partly in response to these EPA emission standards, the Company
introduced its Evinrude engines with FICHT fuel-injection technology, which
offer an average hydrocarbon emission reduction of 80% and an approximate 35%
increase in fuel economy depending on the application. The higher manufacturing
costs of the FICHT fuel injected engines will result initially in a lower margin
to the Company; however, the Company has implemented several initiatives to
reduce the manufacturing costs of its new engines. Because of the higher retail
costs of engines incorporating the FICHT technology, consumer acceptance of the
new engines may be restrained as long as less expensive engine models, which may
or may not meet the new EPA standards, continue to be available.
The Company does not believe that compliance with the EPA's new
emission standards, which will add cost to the Company's engine products and
will initially result in a lower margin to the Company, will be a major
deterrent to sales. The Company believes that its new compliant technology will
add value to its products at the same time that the entire industry is faced
with developing solutions to the same regulatory requirements. In addition, the
Company has implemented several initiatives to reduce the manufacturing costs of
its new engines. Although there can be no assurance, the Company does not
believe that compliance with these new EPA regulations will have a material
adverse effect on future results of operations or the financial condition of the
Company.
On December 10, 1998, the California Air Resources Board ("CARB")
adopted emissions standards for outboard engines and personal watercraft sold in
the State of California that would require compliance with the EPA's year 2006
emissions standards in 2001, and significantly more stringent standards in 2004
and 2008. All manufacturers of outboard engines and personal watercraft will be
affected by the regulations. While the Company has not been able to fully assess
the impact that such standards will have on its business, the Company has begun
to assess possible responses to these standards. The Company's FICHT
fuel-injection and four-stroke outboard engines currently comply with CARB's
2001 standards, and all but one of
20
<PAGE>
these engines comply with CARB's 2004 standard. The Company believes that this
one engine will be in compliance by 2004. In addition, based on current
technology, CARB's year 2008 standards would require the Company to turn to
untested technologies in an attempt to achieve compliance. The California market
represents an approximate 3% of the Company's domestic sales of outboard
engines.
Additionally, certain states have required or are considering requiring
a license to operate a recreational boat. While such licensing requirements are
not expected to be unduly restrictive, regulations may discourage potential
first-time buyers, which could affect the Company's business, financial
condition and results of operations. In addition, federal and certain state and
local government authorities are contemplating regulatory efforts to restrict
boating activities, including the use of engines, on certain inland bodies of
water. In one instance, the East Bay Municipal Utility District, located near
Oakland, California, has adopted regulations that, on one of the three water
bodies under its jurisdiction, will limit certain gasoline engine use effective
January 1, 2002. While the Company cannot assess the impact that any such
contemplated regulations would have on its business until such regulations are
formally enacted, depending upon the scope of any such regulations, they may
have a material adverse effect on the Company's business. The Company, however,
does not believe that the regulations adopted by the East Bay Municipal Utility
District will have a material adverse effect on the Company's business.
The Company cannot predict the environmental legislation or regulations
that may be enacted in the future or how existing or future laws or regulations
will be administered or interpreted. Compliance with more stringent laws or
regulations as well as more vigorous enforcement policies of the regulatory
agencies or stricter interpretation of existing laws, may require additional
expenditures by the Company, some or all of which may be material.
In fiscal year 1997, the Company became aware of certain performance
issues associated with its FICHT engines. In April 1998, the Company began to
identify the causes of these performance issues and upgrade kits were prepared
and distributed. These upgrade kits included certain performance enhancements to
the FICHT engines, including, among other things, improvements to the mapping
contained in the software of the engine-management module. The Company
established a reserve for the correction of the identified problems in fiscal
year 1998, which resulted in an approximate $7.0 million increase in the
Company's warranty reserve for fiscal year 1998. In January 1999, the Company
completed its analysis and determined that certain technological improvements
were needed to improve the overall performance of the FICHT engines. As part of
this strategy, an upgrade kit for previously sold models, which will contain
additional performance enhancements to the FICHT engines, will be installed on
motors at dealers beginning in the summer of 1999. The Company expects the cost
of these upgrade kits to be approximately $5.5 million. The Company recorded
$4.3 million in its December 31. 1998 financial statements and recorded an
additional $1.2 million in the March 31, 1999 financial statements to reflect
refinements to the Company's original estimates. The Company believes that these
upgrade kits will significantly improve the overall performance of its FICHT
engines and reduce the Company's overall warranty expense experienced on such
engines. In addition, the Company will implement engine modifications and
changes in production for the affected FICHT models. These engine modifications
and production changes were primarily implemented during a planned two-week
suspension of the Company's operations at certain of its engine-manufacturing
facilities in March 1999. See "Plant shutdown" below. The Company began
production of the new generation of its FICHT models in late April 1999. Also, a
limited warranty extension on certain components, from two to three years, was
provided on all FICHT engines purchased by customers between January 1, 1999 and
March 31, 1999, which was intended to demonstrate the Company's confidence in
the improved FICHT engines. The Company also will add an additional year of
limited warranty on certain components to the standard two year warranty on all
1999 FICHT models sold by June 30, 1999 and registered by July 15, 1999.
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. The Company and
Orbital are currently in the process of negotiating an agreement for use by the
Company of the patents in question. Although there can be no assurance that an
agreement will be reached and that Orbital will not commence litigation against
the Company, the Company is of the opinion that a mutually acceptable agreement
can be reached. There also can be no assurance that the failure to obtain any
such agreement or effect any redesign, or any cost associated therewith, would
not have a material adverse effect on the Company. The Company determined a
range of potential outcomes for this matter and recorded a liability in its
September 1998 financial statements. The sale of FICHT engines accounted for
approximately 8%, 16.2% and 18.9% of the Company's revenues in fiscal year 1998,
the three months ended December 31, 1998 and the three months ended March 31,
1999, respectively.
21
<PAGE>
OMC/Volvo Stern Drive Joint Venture. On December 8, 1998 the Company
sold its interest in the joint venture Volvo Penta Marine Products L.P. (the
"Volvo Penta Joint Venture") to Volvo Penta of the Americas, Inc. ("Volvo"). The
joint venture was formed by the Company, AB Volvo Penta and Volvo Penta North
America, Inc. in 1993 to manufacture sterndrive engines for boats. Separately,
the Company and Volvo entered into an agreement whereby Volvo will supply to the
Company sterndrives through June 30, 2001 and component parts through June 30,
2011 and the Company will supply component parts to Volvo through June 30, 2011.
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. 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 March 31, 1999, the Company has accrued
approximately $25 million for costs relating to remediation at contaminated
sites, and 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.
Reclassification. Beginning in October 1998, warranty expense, which
was previously reflected as a component of selling, general, and administrative
expenses, is included as another component of cost of goods sold in the
Company's Condensed Statements of Consolidated Operations and Comprehensive
Income. In addition, research and development expense, which was previously
reflected as a component of cost of goods sold, is included as a selling,
general and administrative expense in the Company's Condensed Statements of
Consolidated Operations and Comprehensive Income. Amounts reported for the
prior periods have been reclassified to conform to the new presentation.
22
<PAGE>
Results of Operations
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Net Sales. Net sales decreased to $255.2 million in the three months
ended March 31, 1999 from $262.2 million in the three months ended March 31,
1998, a decrease of 2.7%. The Company's sales decrease was attributable
primarily to lower volume sales of domestic marine engines in the current fiscal
quarter, which decreased 11.0% versus the same period in the prior year. In
addition, Engine Sales were lower in the March 1999 quarter versus the
comparable quarter in 1998 due primarily to lower demand for certain of the
Company's outboard engines and due to the loss of business with certain dealers.
The Company suspended production at certain engine facilities in March 1999 to
make changes to equipment and processes necessary in order to significantly
improve the quality of the Company's FICHT engines. International engine sales
were 6.5% lower than the same period in the prior year due to continued economic
hardship in Brazil and Russia. Finally, boat segment sales increased 5.7% versus
the prior year as sales increases in recreational boats showed strong sales
volume and mix improvements.
Cost of Goods Sold. Cost of goods sold decreased to $201.9 million in
the three months ended March 31, 1999 from $202.8 million in the three months
ended March 31, 1998, a decrease of $0.9 million or 0.4%. Cost of goods sold was
79.1% of net sales in the three months ended March 31, 1999 as compared to 77.3%
of net sales in the three months ended March 31, 1998. The reductions in the
Company's gross margin in the current year reflected increased unabsorbed
manufacturing overhead caused by the Company's temporary plant shutdown at
certain engine plants and $1.2 million in costs incurred for improving the
performance of the Company's FICHT engines.
Selling, General and Administrative ("SG&A"). SG&A expense decreased to
$57.1 million in the three months ended March 31, 1999 from $62.6 million in the
three months ended March 31, 1998, a decrease of $5.5 million or 8.8%. SG&A
expense as a percentage of net sales decreased to 22.4% in the three months
ended March 31, 1999 from 23.9% in the three months ended March 31, 1998. The
lower SG&A expense in the current year reflected lower marketing/selling
expenses due to the timing of certain programs versus the prior year. In
addition, the prior year period included $3.7 million in additional costs
primarily for implementing the Company's boat group reorganization plan.
Loss from Operations. Loss from operations was $3.8 million in the
three months ended March 31, 1999 compared with a loss of $3.2 million in the
three months ended March 31, 1998. The decline was driven by lower engine sales
volume and higher costs caused by the Company's temporary plant shutdown at
certain engine plants in the current fiscal quarter.
Non-Operating Expense (Income). Interest expense, net of interest
income, increased to $7.3 million in the three months ended March 31, 1999 from
$5.8 million in the three months ended March 31, 1998, an increase of $1.5
million. The increase resulted partially from higher debt levels as well as
lower interest income received from customers for finance charges on past due
payments. Other non-operating income was $0.3 million in the three months ended
March 31, 1999 compared to non-operating income of $1.6 million in the three
months ended March 31, 1998. The prior period included income related to the
Company's Volvo Penta Joint Venture interest which was sold to Volvo on December
8, 1998.
Provision for Income Taxes. Provision for income taxes was $1.1 million
in the three months ended March 31, 1999 and $1.0 million in the three months
ended March 31, 1998. 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."
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Financial Condition; Liquidity and Capital Resources
The Company's business is seasonal in nature with 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, 1999 increased $28.0 million from December 31, 1998. Receivables at March
31, 1999 increased $17.7 million due primarily to increases in net sales in the
three months ended March 31, 1999 as compared to sales during the Company's
quarter ended December 31,1998. Inventories at March 31, 1999 decreased $1.9
million from December 31, 1998 due to effective management of inventory levels
in the three months ended March 31, 1999. In addition, the Company had $29.6
million in `Restricted Cash' at March 31, 1999, which cash is held in interest
reserve accounts for the benefit of the Company's senior lenders (as discussed
below).
Cash used for operations was $14.8 million for the three months ended
March 31, 1999 compared with $12.9 million for the three months ended March 31,
1998. Expenditures for plant and equipment and tooling were $11.1 million for
the three months ended March 31, 1999 compared to $5.6 million for the three
months ended March 31, 1998. The higher level of expenditures is primarily
related to increased spending for certain new machinery and equipment for engine
and boat manufacturing facilities.
Short-term debt was $80.0 million at March 31, 1999 comprising
borrowings under the Company's Revolving Credit Facility. These borrowings were
used to fundoperations, pay $10.0 million of the Company's Medium-Term Notes
Series A which came due in March 1999, as well as funding capital expenditures.
The Company entered into an Amended and Restated Loan and Security
Agreement, effective as of January 6, 1998 (as amended, the "Credit Agreement"),
with a syndicate of lenders for which NationsBank of Texas, N.A. is
administrative and collateral agent (the "Agent"). The Credit Agreement provides
a revolving credit facility (the "Revolving Credit Facility") of up to $150.0
million, subject to borrowing base limitations, to finance working capital with
a $50.0 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, chattel 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, 1999, the Company had outstanding borrowings under
the Credit Agreement of $80.0 million, and had $38.5 million of letter of credit
obligations outstanding under the Credit Agreement. 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) minimum
EBITDA as defined, (iii) interest coverage ratios, and (iv) 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, and subsequent actual
compliance therewith at such time, (ii) the Company's consolidated tangible net
worth requirement for the period ended September 30, 1998 was amended to better
align such covenant with the Company's then anticipated financial performance
for the remainder of fiscal 1998, (iii) the borrowing base was amended to allow
for borrowings against eligible intellectual property, thereby increasing
borrowing capacity, (iv) the sublimit for the issuance of letters of credit was
increased from $25.0 million to $30.0 million, and (v) the lenders consented to
certain matters relating to the Company's offering of $160.0 million of 10 3/4%
Senior Notes due 2008, including the establishment of an interest reserve
account. The Company entered into a Second Amendment to Amended and Restated
Loan and Security Agreement, effective as of August 31, 1998, with the lenders
under the Credit Agreement, pursuant to which, among other things, the sublimit
for the issuance of letters of credit was increased from $30.0 million to $50.0
million to enable the Company to replace cash collateral obligations under a
letter of credit, which obligations arose following the change in control
resulting from the Greenmarine Acquisition. The Company entered into a Third
Amendment to
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Amended and Restated Loan and Security Agreement, effective as of December 21,
1998 (the "Third Amendment"), with the lenders under the Credit Agreement,
pursuant to which, among other things, (i) the Company's non-compliance with the
consolidated tangible net worth, consolidated interest coverage ratio and
consolidated leverage ratio covenants were waived for the period ended September
30, 1998 and (ii) the Company's consolidated tangible net worth, consolidated
interest coverage ratio and consolidated leverage ratio covenants for future
periods were amended. The Third Amendment modified the Company's financial
covenant compliance requirements under the Credit Agreement to give effect to
the restatements of the Company's financial statements and their anticipated
impact on the Company's future results of operations. As of December 31, 1998,
the Company was in violation of the Credit Agreement's leverage coverage ratio
covenant. The Company informed the lenders under the Credit Agreement of the
circumstances resulting in the violation, and entered into the Fourth Amendment
to Amended and Restated Loan and Security Agreement effective as of February 1,
1999 pursuant to which (i) the Company's non-compliance with the consolidated
leverage covenant for the period ended December 31, 1998 was waived, (ii)
work-in-process inventory is included in the borrowing base calculation through
June 30, 1999, and (iii) the Company's borrowing base capacity was increased by
$10 million for certain intellectual property owned by the Company. The Company
entered into the Fifth Amendment to Amended and Restated Loan and Security
Agreement, effective as of February 25, 1999, which among other things, amended
the Company's consolidated tangible net worth, consolidated leverage and
consolidated interest coverage ratios for future periods in order to bring the
covenants in line with anticipated results of operations, including the effect
of the costs incurred and to be incurred to address performance issues with
respect to the Company's FICHT engines. At March 31, 1999, the Company was in
compliance with the amended covenants.
On May 27, 1998, the Company issued $160.0 million of 10 3/4%
Senior Notes due 2008 ("Senior Notes"), with interest payable semiannually on
June 1 and December 1 of each year. The net proceeds from the issuance of the
Senior Notes totaled $155.2 million, of which $150.0 million was used to repay
the debt assumed by the Company as a result of the Greenmarine Acquisition. The
Senior Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after June 1, 2003 in cash at prescribed redemption
prices set forth in the indenture governing the Senior Notes. In addition, at
any time prior to June 1, 2001, the Company may on any one or more occasions
redeem up to an aggregate of 35% of the original principal amount of the Senior
Notes at a redemption price of 110.750% of the principal amount thereof, plus
accrued and unpaid interest, with the net proceeds of one or more equity public
offerings, provided that at least 65% of the aggregate principal amount of
Senior Notes originally issued remains outstanding immediately after the
occurrence of any such redemption. The Senior Notes are guaranteed on a joint
and several basis by each of the Company's principal domestic operating
subsidiaries. The Indenture governing the Senior Notes contains certain
covenants that limit, among other things, the ability of the Company and its
restricted subsidiaries to (i) pay dividends, redeem capital stock or make
certain other restricted payments or investments; (ii) incur additional
indebtedness or issue certain preferred equity interests; (iii) merge or
consolidate with any other person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of its assets; (iv) create liens
on assets; and (v) enter into certain transactions with affiliates or related
persons.
Concurrently with the issuance of the Senior Notes, the Company entered
into a depositary agreement which provided for the establishment and maintenance
of an interest reserve account for the benefit of the holders of the Senior
Notes and an interest reserve account for the benefit of the other senior
creditors of the Company. An aggregate amount of cash equal to one year's
interest due to these lenders was deposited into these interest reserve
accounts. The "Restricted Cash" must remain in such accounts until at least May
27, 2001.
On April 14, 1999, the Company completed an exchange of all of the
Senior Notes for Series B Notes which are registered under the Securities Act of
1933, pursuant to a Registration Statement on Form S-4 and an accompanying
Prospectus.
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At March 31, 1999, $65.2 million principal amount of the Company's 9
1/8% Debentures due 2017 (the "9 1/8% Debentures") was outstanding. The 9 1/8%
Debentures mature on April 15, 2017, and interest thereon is payable
semi-annually on April 15 and October 15 of each year. The 9 1/8% Debentures are
redeemable through the operation of a sinking fund beginning on April 15, 1998,
and each year thereafter to and including April 15, 2016 at a sinking fund
redemption price equal to 100% of the principal amount thereof plus accrued
interest to the redemption date. On or prior to April 15 in each of the years
1999 to 2016 inclusive, the Company is required to make a mandatory sinking fund
payment in cash in an amount sufficient to redeem 9 1/8% Debentures in the
aggregate principal amount of $5,000,000 plus accrued interest thereon. However,
9 1/8% Debentures reacquired or redeemed by the Company may be used at the
principal amount thereof to reduce the amount of any one or more mandatory
Sinking Fund payments. As of March 31, 1999, the Company had repurchased and
deposited with the trustee for the 9 1/8% Debentures $34.8 million principal
amount of 9 1/8% Debentures, which will be used to satisfy its mandatory sinking
fund obligations through April 15, 2004. The Company at its option may make an
optional sinking fund payment in cash in each year from 1999 to 2016 inclusive
in an amount sufficient to redeem up to an additional $10,000,000 principal
amount of 9 1/8% Debentures.
At March 31, 1999, an aggregate of approximately $10.8 million
principal amount of the Company's Medium-Term Notes Series A (the "Medium-Term
Notes") was outstanding. Interest rates on the Medium-Term Notes range from
8.550 % to 8.625%. The maturity dates of the Medium-Term Notes include March 15,
2000 and March 15, 2001. Interest on each of the outstanding Medium-Term Notes
is payable semi-annually each March 30 and September 30 and at maturity.
At March 31, 1999, $7.1 million principal amount of the Company's 7%
Convertible Subordinated Debentures due 2002 (the "Convertible Debentures") was
outstanding. Following the Merger, the Company was required to offer to purchase
for cash any and all of the then outstanding Convertible Debentures at a
purchase price equal to 100% of the outstanding principal amount of each
Convertible Debenture plus any accrued and unpaid interest thereon. On November
12, 1997, the Company consummated such offer to purchase and, as a result
thereof, purchased $67.7 million principal amount of Convertible Debentures.
Immediately prior to the Merger, the Convertible Debentures were convertible
into shares of common stock of the Company at the conversion price of $22.25 per
share. As a result of the Merger, the remaining $7.1 million principal amount of
outstanding Convertible Debentures are no longer convertible into shares of
common stock of the Company. Each holder of the remaining outstanding
Convertible Debentures now has the right to convert (at $22.25 per share) such
holder's Convertible Debentures and receive cash in an amount equal to what each
holder would have received had they converted the Convertible Debentures into
common stock immediately prior to the Merger ($18.00 per share). Accordingly,
the remaining outstanding Convertible Debentures are convertible into the right
to receive a cash payment equal to $809 for each $1,000 principal amount of
Convertible Debentures so converted (i.e., ($18.00/$22.25) x $1,000). The
outstanding Convertible Debentures are convertible at any time prior to their
maturity on July 1, 2002.
The Company has various Industrial Revenue Bonds outstanding in an
aggregate principal amount of approximately $11.8 million. The Industrial
Revenue Bonds have various maturity dates between 2002 and 2007.
Interest rates on the Industrial Revenue Bonds range from 6% to 12.037%.
In the remaining periods in fiscal year 1999, the Company will be
required to pay approximately $1.2 million in cash to satisfy obligations that
will become due at various times in fiscal year 1999 under certain of its
Industrial Revenue Bonds.
As a normal business practice, the Company has made arrangements with
financial institutions by which qualified retail dealers may obtain inventory
financing. Under certain 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
approximately $32.0 million per model year for a period not to exceed either 18
or 30 months from the date of invoice. The Company resells any repurchased
products. Losses incurred under this program have not been material. For the
three month period ended March 31, 1999 and
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for the fiscal year 1998, the Company repurchased approximately $1.1 million and
$4.1 million of products, respectively, all of which were resold at a discounted
price. The Company accrues for losses that are anticipated in connection with
expected repurchases. The Company does not expect these repurchases to
materially affect its results of operations.
Based upon the current level of operations and anticipated cost
savings, the Company believes that its cash flow from operations, together with
borrowings under the Credit Agreement, the interest reserve accounts and its
other sources of liquidity, will be adequate to meet its presently anticipated
requirements for working capital and accrued liabilities, capital expenditures,
interest payments and scheduled principal payments over the next several years.
There can be no assurance, however, that the Company's business will continue to
generate cash flow at or above current levels or that anticipated costs savings
can be fully achieved. If the Company is unable to generate sufficient cash flow
from operations in the future to service its debt and accrued liabilities and
make necessary capital expenditures, or if its future earnings growth is
insufficient to amortize all required principal payments out of internally
generated funds, the Company may be required to refinance all or a portion of
its existing debt, sell assets or obtain additional financing. There can be no
assurance that any such refinancing or asset sales would be possible or that any
additional financing could be obtained on attractive terms, particularly in view
of the Company's high level of debt.
Plant Shutdown
The Company determined that it would temporarily suspend manufacturing
operations for approximately two weeks in March 1999 at certain of its engine
facilities. This operations shutdown enabled the Company to reduce excess field
inventories held by dealers caused by lower than anticipated engine sales in the
three month period ended December 31, 1998. In addition, the manufacturing
suspension allowed the Company to better coordinate production schedules with
new marketing programs. Finally, the shutdown afforded the Company the
opportunity to implement the strategies designed to address the FICHT engine
performance issues, including modification to the 1999 FICHT engine and changes
in the FICHT engine production process.
Year 2000 Matters
During 1997 and 1998, the Company assessed the steps necessary to
address issues raised by the coming of Year 2000. The steps to be taken included
reviews of the Company's hardware and software requirements worldwide, including
processors embedded in its manufacturing equipment, as well as vendors of goods
and services. Based on this review, the Company developed a strategy for
attaining Year 2000 compliance that includes modifying and replacing software,
acquiring new hardware, educating its dealers and distributors and working with
vendors of both goods and services. With the assessment phase of the strategy
completed, the Company is in the process of implementing and testing remedies of
issues identified during the assessment phase. To date, all applications on the
Company's mainframe have been reprogrammed and testing was completed in the
first quarter of calendar 1999. Issues raised relative to personal computers and
local and wide area networks are in the process of being remedied through the
acquisition of new software and hardware. The Company has found very few
embedded processors contained in its manufacturing equipment that 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.
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 as either critical (i.e., vendors whose
goods or services are necessary for the Company's continued operation) or
non-critical (i.e., suppliers whose products were either not critical to the
continued operation of the Company or
27
<PAGE>
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 involved 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 followed up with additional questionnaires
and telephone calls but also schedules 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 20000, the Company will review alternate
suppliers who are in a position to assure the Company that they are or will be
Year 2000 ready. The timing of the Company's decision to change vendors will
depend on what type of goods or service the non-responsive or non-compliant
vendor provides and the lead time required for an alternate vendor to begin
supplying. The Company has reviewed those critical vendors that have not
responded adequately and has been reviewing the timing of replacing, if
necessary, any such non-compliant vendor. In 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 outboard motors, stern drives
and parts and accessories, including trolling motors, which it previously
manufactured and currently manufactures for sale to its dealers, distributors
and original equipment manufacturers and has determined that those products are
Year 2000 compliant.
In preparing for the advent of the Year 2000, the Company has taken
steps to heighten the awareness among its dealer and distributor network of the
issues associated with the Year 2000. The issue is covered in monthly
publications which are distributed to the dealers and also by the sales force
that is responsible for the regular communications with the dealer and
distributor network.
To date, the Company has spent a total of approximately $9.3 million
($2.9 million capitalized) on personal computer and network, mainframe and
telecommunication solutions to issues related with the Year 2000 and estimates
that it will spend up to a total of $12 million ($5 million capital),
approximately half of which is associated with personal computers and networks,
to remedy all of the issues associated with ensuring that its hardware and
software worldwide, and the systems associated therewith, are able to operate
into the Year 2000. The Company has expensed these items, except for hardware
costs incurred in the normal course of business, which have been capitalized, in
the Company's Condensed Statements of Consolidated Operations and Comprehensive
Income for the applicable period.
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 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, the Company may not be
able
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to produce, on a timely basis, finished goods for sale to its dealers. If
this should occur, the Company will either wait for such vendor to become Year
2000 compliant or seek an alternate vendor who can provide the applicable goods
or services in a more timely manner. In the event that the vendor is critical
and either no alternate vendor is available or is able to operate into the Year
2000, this event could have a negative impact on the Company's business, results
of operations, or financial condition.
Euro Currency Conversion
On January 1, 1999, eleven of the fifteen member countries of the
European Union adopted the "euro" as their common legal currency. The euro
trades on currency exchanges and is available for non-cash transactions. From
January 1, 1999 through January 1, 2002, each of the participating countries are
scheduled to maintain their national ("legacy") currencies as legal tender for
goods and services. Beginning January 1, 2002, new euro-denominated bills and
coins will be issued, and legacy currencies will be withdrawn from circulation
no later than July 1, 2002. The Company's foreign operating subsidiaries that
will be affected by the euro conversion have established plans to address any
business issues raised, including the competitive impact of cross-border price
transparency. It is not anticipated that there will be any near term business
ramifications; however, the long-term implications, including any changes or
modifications that will need to be made to business and financial strategies are
still being reviewed. From an accounting, treasury and computer system
standpoint, the impact from the euro currency conversion is not expected to have
a material impact on the financial position or results of operations of the
Company.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement
133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 establishes accounting and reporting standards requiring
that every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an asset
or liability measured at its fair value. SFAS 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting. SFAS 133 is effective for fiscal years beginning after June
15, 1999. The Company has not yet quantified the impacts of adopting SFAS 133 on
its financial statements and has not determined the timing of or method of its
adoption of SFAS 133.
Inflation
Inflation may cause or may be accompanied by increases in gasoline
prices and interest rates. Such increases may adversely affect the sales of the
Company's products. Inflation has not had a significant impact on operating
results during the past three fiscal years.
Market Risk
The Company is exposed to market risk from changes in interest and
foreign exchange rates and commodity prices. From time to time, the Company
enters into financial arrangements in the ordinary course of business to hedge
these exposures. The changes in this market risk related to the Company have not
significantly changed in the quarter ended March 31, 1999.
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Forward-Looking Statements
This report on Form 10-Q contains forward-looking statements, which may
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. The Company wishes to ensure that all
such forward-looking statements are accompanied by meaningful cautionary
statements pursuant to the safe harbor established in such act. All statements
other than statements of historical facts included in this Form 10-Q may
constitute forward-looking statements. Forward-looking statements include the
intent, belief or current expectations of the Company and members of its senior
management team. All forward-looking statements are inherently uncertain as they
are based on various expectations and assumptions concerning future events and
they are subject to numerous known and unknown risks and uncertainties that
could cause actual events or results to differ materially from those projected
and which include, but are not limited to, the impact of competitive products
and pricing, successful implementation of turnaround strategies, product demand
and market acceptance, new product development, Year 2000 issues, availability
of raw materials, the availability of adequate financing on terms and conditions
acceptable to the Company, and general economic conditions including interest
rates and consumer confidence. Investors are also directed to other risks
discussed in this report on Form 10-Q and documents filed by the Company with
the Securities and Exchange Commission.
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Part II-OTHER INFORMATION
Item 1. Legal Proceedings
The information required under Item 1 Part II is included in Note 3 to
the financial statements set forth in Part 1 hereof and is specifically
incorporated herein by reference thereto.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits reference is made to the Exhibit Index on Page 33
b. Reports on Form 8-K. On February 9, 1999 the Company filed a
Report on Form 8-K announcing that it would be filing a
transition report on Form 10-K for the three month period ended
December 31, 1998 instead of on a Form 10-Q as previously
announced.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OUTBOARD MARINE CORPORATION
Signature Title Date
--------- ----- ----
By /s/ ANDREW P. HINES Executive Vice President & May 11, 1999
-------------------- Chief Financial Officer
ANDREW P. HINES
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Exhibit
Number Description
------ -----------
3.1(a) Restated Certificate of Incorporation of the Company (filed as Exhibit
3(a) to the Company's Annual Report on Form 10-K/A for the year ended
September 30, 1997 (the "1997 10-K"))*
3.2(a) Amended and Restated bylaws of the Company (filed as Exhibit 3(B) to
the 1997 10-K)*
(a)(1) Amended and Restated bylaws of the Company (adopted July 23,
1998)(filed as Exhibit 3.2(a)(1) to the Company's Registration
Statement on Form S-4 (Registration No. 333-57949)(the "Form S-4"))*
4.1 Indenture for the 10 3/4 % Senior Notes due 2008, Series A (the "Old
Notes") and 10 3/4% Senior Notes due 2008, Series B (the "Exchange
Notes"), dated as of May a27, 1998 among the Company, the Subsidiary
Guarantors and State Street Bank and Trust Company, as trustee (filed
as Exhibit 4.1 to the Form S-4)*
4.2 Form of Old Note (included in Exhibit 4.1)(filed as Exhibit 4.1 to the
Form S-4)*
4.3 Form of Exchange Note (filed as Exhibit 4.2 to the Form S-4)*
4.4 Form of Subsidiary guarantee of the Old Notes and the Exchange Notes
(included in Exhibit 4.1)(filed as Exhibit 4.1 to the Form S-4)*
4.5 Registration Rights Agreement dated as of May 27, 1998 among the
Company, the Subsidiary Guarantors and Donaldson, Lufkin & Jenrette
Securities Corporation and Bear, Stearns & Co., Inc. (filed as Exhibit
4.5 to the Form S-4)*
4.6 Depository Agreement dated as of May 27, 1998 among the Company, State
Street Bank and Trust Company, as trustee, NationsBank, N.A., as
administrator agent, and State Street Bank and Trust Company, as
depositary agent (filed as Exhibit 4.6 to the Form S-4)*
4.7 With respect to rights of holders of the Company's 9 1/8% Sinking Fund
Debentures due 2017, reference is made to Exhibit 4(A) to the Company's
Registration Statement Number 33-12759 filed on March 20, 1987*
4.8 With respect to rights of holders of the Company's 7% Convertible
Subordinated Debentures due 2002, reference is made to the Company's
Registration Statement Number 33-47354 filed on April 28, 1992*
4.9 With respect to the Supplemental Indenture dated September 30, 1997
related to the Company's 7% Convertible Subordinated Debentures due
2002, reference is made to Exhibit 4(c) to the 1997 10-K*
10.1 With respect to Severance Agreement between the Company and certain
elected and appointed officers and certain other executives of the
Company, reference is made to Exhibit 99.3 and 99.4 of the Company's
Schedule 14D-9 filed with the Securities and Exchange Commission on
July 15, 1997*
10.2 With respect to the Consulting Agreement for Mr. Bowman dated September
24, 1997, reference is made to Exhibit 10(I) to the 1997 10-K*
10.3 With respect to the Employment Agreement of Mr. Hines dated October 6,
1997, reference is made to Exhibit 10(J) to the 1997 10-K*
10.4 With respect to the Amended and Restated Loan and Security Agreement
between the Company and NationsBank of Texas, N.A. dated January 6,
1998, reference is made to Exhibit 10(E) to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended December 31, 1997*
10.5 First Amendment to Amended and Restated Loan and Security Agreement
between the Company and NationsBank of Texas, N.A. dated May 21, 1998
(filed as Exhibit 10.5 to the Form S-4)*
10.6 With respect to the Employment Agreement of Mr. Jones dated March 10,
1998, reference is made to Exhibit 10(F) to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended March 31, 1998*
10.7 With respect to the Personal Rewards and Opportunity Program, reference
is made to Exhibit 10(G) to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1998*
10.8 Employment Agreement of Robert Gowens dated October 1, 1998 (filed as
Exhibit 10.8 to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1998 (the "1998 10-K"))*
33
<PAGE>
10.9 Second Amendment to Amended and Restated Loan and Security Agreement
between the Company and NationsBank of Texas, N.A. dated effective as
of August 31, 1998 (filed as Exhibit 10.9 to the 1998 10-K)*
10.10 Third Amendment to Amended and Restated Loan and Security Agreement
between the Company and NationsBank of Texas, N.A. dated effective as
of December 21, 1998 (filed as Exhibit 10.10 to the 1998 10-K)*
10.11 Fourth Amendment to Amended and Restated Loan and Security Agreement
between the Company and NationsBank of Texas, N.A. dated effective as
of February 1, 1999 (filed as Exhibit 10.11 to the Transition Report
on Form 10-K for the transition period ended December 31, 1998)*
10.12 Fifth Amendment to Amended and Restated Loan and Security Agreement
between the Company and NationsBank of Texas, N.A. dated effective as
of February 25, 1999 (filed as Exhibit 10.12 to the Transition Report
on Form 10-K for the transition period ended December 31, 1998)*
10.13 Lease Agreement dated December 18, 1998 between the Company, as
Borrower, and Andrew Hines, as Lender (filed as Exhibit 10.13 to the
Transition Report on Form 10-K for the transition period ended
December 31, 1998)*
10.14 Mortgage Note dated December 18, 1998 between the Company, as Borrower,
and Andrew Hines, as Lender (filed as Exhibit 10.14 to the Transition
Report on Form 10-K for the transition period ended December 31, 1998)*
10.15 Mortgage dated December 18, 1998 between the Company, as Borrower, and
Andrew Hines, as Lender (filed as Exhibit 10.15 to the Transition
Report on Form 10-K for the transition period ended December 31, 1998)*
10.16 Promissory Note dated December 4, 1998 with Robert Gowens, Jr. and
Donna Gowens, as Maker, and the Company, as Payee (filed as Exhibit
10.16 to the Transition Report on Form 10-K for the transition period
ended December 31, 1998)*
10.17 Second Mortgage dated December 4, 1998 with Robert Gowens, Jr. and
Donna Gowens, as Mortgagor, and the Company, as Mortgagee (filed as
Exhibit 10.17 to the Transition Report on Form 10-K for the transition
period ended December 31, 1998)*
10.18 Nonqualified Stock Option Agreement dated October 1, 1998 between the
Company and Robert B. Gowens (filed as Exhibit 10.18 to the Transition
Report on Form 10-K for the transition period ended December 31, 1998)*
10.19 Secured Promissory Note dated October 6, 1998 with Andrew Hines, as
Maker, and the Company, as Maker (filed as Exhibit 10.19 to the
Transition Report on Form 10-K for the transition period ended December
31, 1998)*
10.20 Pledge and Security Agreement dated October 6, 1997 between the Company
and Andrew Hines (filed as Exhibit 10.20 to the Transition Report
on Form 10-K for the transition period ended December 31, 1998)*
10.21 Nonqualified Stock Option Grant Agreement dated October 6, 1997 between
the Company and Andrew Hines (filed as Exhibit 10.21 to the Transition
Report on Form 10-K for the transition period ended December 31, 1998)*
10.22 Incentive Stock Option Grant Agreement dated December 30, 1997 between
the Company and David Jones (filed as Exhibit 10.22 to the Transition
Report on Form 10-K for the transition period ended December 31, 1998)*
10.23 Nonqualified Stock Option Grant Agreement dated March 10, 1998 between
the Company and David Jones (filed as Exhibit 10.23 to the Transition
Report on Form 10-K for the transition period ended December 31, 1998)*
10.24 Nonqualified Stock Option Grant Agreement dated March 10, 1998 between
the Company and David Jones (filed as Exhibit 10.24 to the Transition
Report on Form 10-K for the transition period ended December 31, 1998)*
11. Computation of per share earnings (loss)
21. Subsidiaries of Registrant (filed as Exhibit 21 to the 1997 10-K)*
27. Financial Data Schedule
- ----------
*Incorporated herein by reference.
34
EXHIBIT 11
OUTBOARD MARINE CORPORATION
COMPUTATION OF PER SHARE EARNINGS
Three Months Ended
March 31
(In millions except amounts per share) 1999 1998
---- ----
Basic Earnings Per Share:
Net Loss $ (11.9) $ (8.4)
============ ============
Weighted Average Number of Shares 20.4 20.4
============ ============
Basic Earnings (Loss) Per Share $ (0.58) $ (0.41)
============ ============
Diluted Earnings Per Share:
Net Loss $ (11.9) $ (8.4)
============ ============
Weighted Average Number of Shares 20.4 20.4
Common Stock Equivalents (Stock Options) - - - -
------------ ------------
Average Shares Outstanding 20.4 20.4
============ ============
Diluted Earnings (Loss) Per Share $ (0.58) $ (0.41)
============ ============
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 25,600
<SECURITIES> 0
<RECEIVABLES> 148,200
<ALLOWANCES> 0
<INVENTORY> 195,300
<CURRENT-ASSETS> 393,100
<PP&E> 226,000
<DEPRECIATION> 28,500
<TOTAL-ASSETS> 943,400
<CURRENT-LIABILITIES> 369,700
<BONDS> 241,200
0
0
<COMMON> 200
<OTHER-SE> 43,500
<TOTAL-LIABILITY-AND-EQUITY> 943,400
<SALES> 255,200
<TOTAL-REVENUES> 255,200
<CGS> 201,900
<TOTAL-COSTS> 201,900
<OTHER-EXPENSES> 56,800
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,300
<INCOME-PRETAX> (10,800)
<INCOME-TAX> 1,100
<INCOME-CONTINUING> (11,900)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,900)
<EPS-PRIMARY> (0.58)
<EPS-DILUTED> (0.58)
</TABLE>
