<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) February 10, 1999
MERIDIAN SPORTS INCORPORATED
----------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-24534 13-3776096
- ------------------------------- ----------- ----------------
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File No.) Identification No.)
100 Cherokee Cove Drive, Vonore, TN 37885
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 423-884-6776
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ITEM 5. OTHER EVENTS
On February 10, 1999, Meridian Sports Holdings Inc. ("Meridian
Holdings") proposed a transaction to the Board of Directors of Meridian Sports
Incorporated (the "Company") pursuant to which Meridian Holdings would acquire
all publicly held shares of the Meridian Common Stock at a price of $0.55 per
share in cash. In light of the overlapping equity ownership between Meridian
Holdings and the Company, Meridian Holdings requested that the Company form a
special committee of independent directors to consider its proposal. In response
to Meridian Holdings' proposal the Company formed a special committee of
independent directors, to be chaired by Martin D. Payson.
On February 11, 1999, the Registrant filed a Form 15 to deregister
under the Securities Exchange Act of 1934, as amended ("Exchange Act"). In
accordance with the Exchange Act rules, the Company's obligation to file
Exchange Act reports is suspended immediately and terminates 90 days after Form
15 is filed. Accordingly, this Form 8-K is being filed to provide the
information required by Rule 15c2-11 of the Exchange Act.
2
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MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
FORM 8-K
TABLE OF CONTENTS
Page
Item 5. Registered Securities.......................................... 4
Business ...................................................... 4
Properties..................................................... 6
Market for Registrant's Common Equity and
Related Stockholder Matters.............................. 7
Selected Consolidated Financial Data........................... 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................ 9
Directors and Chief Executive Officer of the Registrant........ 16
Transfer Agent................................................. 16
Financial Statements and Schedule.............................. 16
Signatures..................................................... 17
3
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ITEM 5. REGISTERED SECURITIES
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
COMMON STOCK, $.01 PAR VALUE OTC BULLETIN BOARD
BUSINESS
GENERAL
Meridian Sports Incorporated ("Meridian" or the "Company") was
incorporated in Delaware in 1994 in connection with an initial public offering
of its common stock to succeed to the assets and liabilities of the water sports
businesses then owned by Meridian Sports Holdings Inc. (the "Water Sports
Businesses") and BW Sale Corp. ("BW"), formerly Boston Whaler, Inc. ("Boston
Whaler"). Meridian Sports Holdings Inc. ("Old Meridian") is an indirect wholly
owned subsidiary of MacAndrews & Forbes Holdings Inc. (together with its
affiliates, "MacAndrews & Forbes").
On October 19, 1994, the Company completed an initial public offering
(the "IPO") in which it issued and sold 2,800,000 shares of its common stock.
The net proceeds to the Company from the IPO were used to repay borrowings
outstanding under the Company's former bank credit agreement (the "Old Meridian
Credit Agreement") and certain debt payable to affiliates ("Affiliate Debt").
The IPO reduced MacAndrews & Forbes' ownership of the Company to approximately
65%.
On February 10, 1999, Meridian Sports Holdings Inc. ("Meridian
Holdings") proposed a transaction to the Board of Directors of the Company
pursuant to which Meridian Holdings would acquire all publicly held shares of
the Meridian Common Stock at a price of $0.55 per share in cash. In light of the
overlapping equity ownership between Meridian Holdings and the Company, Meridian
Holdings requested that the Company form a special committee of independent
directors to consider its proposal. In response to Meridian Holdings' proposal
the Company formed a special committee of independent directors, to be chaired
by Martin D. Payson.
In September 1998, the Company, pursuant to an exchange agreement with
RGI Group Incorporated, issued 11,000 shares of 6% Series A Perpetual Preferred
Stock in exchange for an $11.0 million reduction in the amount outstanding under
the M&F Facility. The 6% Series A Perpetual Preferred Stock is convertible at
the option of the holder into shares of the Company's common stock at a
conversion price of $1.25 per share, subject to adjustment under certain
conditions. At the Company's option, the 6% Series A Perpetual Preferred Stock
is redeemable after September 25, 2001 at the liquidation preference of $1,000
per share plus any accrued and unpaid accumulated dividends.
On October 8, 1997, the Company entered into and consummated an
agreement with Johnson Worldwide Associates, Inc. ("JWA") pursuant to which JWA
purchased certain assets and assumed certain liabilities of the Company's
Soniform scuba equipment business ("Soniform") (the "Soniform Sale"), for
approximately $1.8 million.
4
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On July 31, 1997, the Company entered into and consummated an agreement
with Earth and Ocean Sports, Inc. ("EOS") pursuant to which EOS purchased
certain assets and assumed certain liabilities of the Company's O'Brien towable
watersports business ("O'Brien") (the "O'Brien Sale"), for approximately $4.9
million.
On May 31, 1996, the Company consummated a transaction with Brunswick
Corporation ("Brunswick") pursuant to which Brunswick purchased certain assets
and assumed certain liabilities of BW for approximately $26.2 million, net of
adjustments (the "BW Sale").
On January 31, 1996, the Company sold all of the capital stock of its
wholly-owned subsidiary Skeeter Products, Inc. ("Skeeter") to Yamaha Motor
Corporation, U.S.A. ("Yamaha") pursuant to a Stock Purchase Agreement by and
between Yamaha and the Company for $33.9 million, net of adjustments (the
"Skeeter Sale").
The results of operations of O'Brien, Soniform, Skeeter and Boston
Whaler are included in "Former Operations" in the accompanying consolidated
statements of operations for all periods presented through their respective sale
dates.
Meridian is a holding company that operates through its wholly owned
subsidiary MasterCraft Boat Company ("MasterCraft"). MasterCraft is a designer,
manufacturer and marketer of specialized ski boats targeted principally at
boating and waterskiing enthusiasts.
PRODUCTS AND BUSINESSES
The following table sets forth the net sales of the Company's principal
businesses for the years ended December 31, 1998, 1997 and 1996.
Year Ended December 31,
-----------------------------------
1998 1997 1996
---- ---- ----
(In millions)
Ongoing operations.......................$61.5 $ 52.6 $ 47.6
Former operations........................ 0.0 22.8 54.8
----- ------- ------
$61.5 $ 75.4 $102.4
===== ======= ======
MASTERCRAFT. Founded in 1968, MasterCraft is the largest producer of
premium inboard tournament ski boats and a growing manufacturer of luxury
performance V-Drive runabouts. MasterCraft models range in size from 19 to 23
feet, range in price from $20,995 to $41,995 and are sold both domestically and
internationally through more than 125 independent dealers. The boats are
primarily powered by fuel-injected inboard motors built by General Motors
Corporation. During 1998, MasterCraft introduced three totally new models and
three fully updated models under the ProStar, MariStar and PowerStar brands as
part of its continuing commitment toward increasing its share of the premium
inboard tournament ski boat market and broadening its line of recreational
boats. This follows the largest product introduction in MasterCraft's history.
In 1996, MasterCraft began offering a wakeboard option aimed at the rapidly
growing wakeboard market. This model was fully updated in 1998 to reflect
consumer demands in this rapidly growing segment of the premium inboard
tournament ski boat market. MasterCraft is committed to continuing its legacy as
an innovator in the ski boat market and plans to increase its presence in the
family market through new product introductions, innovative technological
improvements, and distribution through additions to and upgrading of its dealer
network.
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In 1995, the Company began a restructuring of its personal watercraft
business ("WetJet"). In 1997, the Company substantially completed the program
and has discontinued the manufacture of personal watercraft.
MANUFACTURING
The Company manufactures its MasterCraft products at one plant in the
United States in Vonore, Tennessee ("Cherokee Cove").
The Company uses a variety of materials and products in the manufacture
of its boats. The resins used in the manufacturing of its boat hulls are
available from various suppliers. Engines and other components used in the
manufacture of the Company's products are produced to the Company's
specifications and are available from multiple sources.
EMPLOYEES
As of December 31, 1998, the Company employed approximately 384 people
full time. None of the Company's employees are represented by unions.
The Company believes that its relations with its employees are
satisfactory and that its employees, many of whom have long experience with the
Company, represent a valuable resource. Management conducts regularly scheduled
meetings with its employees to inform them about developments in the Company's
businesses and to respond to employee questions and concerns.
PROPERTIES
The Company's principal property is a manufacturing facility in Vonore,
Tennessee comprised of approximately 156,000 square feet.
The Vonore, Tennessee facility is owned by the Company. The Vonore,
Tennessee facility is pledged as collateral under a credit facility entered into
in 1997 between the Company and an affiliate (the "M&F Facility"). The Company's
facilities in Redmond, Washington, Kilgore, Texas, Edgewater, Florida and
Amsterdam, Netherlands were sold to third parties as part of the O'Brien Sale,
Skeeter Sale and BW Sale. The New York office was closed in 1996 in connection
with the restructuring of the headquarters office.
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MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the over-the-counter bulletin
board under the symbol "MSPO". Prior to the second quarter of 1997, the
Company's Common Stock was listed and traded on the Nasdaq National Market. The
following table sets forth the high and low sales prices as reported on the
over-the-counter bulletin board for the Company's Common Stock for 1998 and the
second through the fourth fiscal quarter of 1997 and as reported on the Nasdaq
National Market for the first fiscal quarter of 1997.
<TABLE>
<CAPTION>
High Low
---- ---
1998
----
<S> <C> <C>
First Quarter.................................................... $1 9/16 $ 3/4
Second Quarter................................................... 1 1/4 1/2
Third Quarter.................................................... 1 5/16 3/8
Fourth Quarter................................................... 3/4 3/8
1997
----
First Quarter.................................................... $1 5/8 $ 15/16
Second Quarter................................................... 1 17/32 3/8
Third Quarter.................................................... 1 1/2 3/4
Fourth Quarter................................................... 1 9/32 1/2
</TABLE>
As of December 31, 1998, there were approximately 118 holders of record
of the Company's Common Stock.
The Company did not declare a cash dividend on its Common Stock in 1998
or in 1997. The Company does not anticipate that any dividends will be declared
on its Common Stock in the foreseeable future. Any future declaration of
dividends would be subject to the discretion of the board of directors of the
Company and subject to certain limitations under the General Corporation Law of
the State of Delaware. The timing, amount and form of dividends, if any, will
depend, among other things, on the Company's results of operations, financial
condition, cash requirements and other factors deemed relevant by the board of
directors. Meridian receives cash distributions from its subsidiaries to finance
corporate liquidity requirements. See Management's Discussion and Analysis of
Financial Condition--Liquidity and Capital Resources.
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented herein relate to the
Water Sports Businesses, including the results of O'Brien through July 31, 1997,
Soniform through October 8, 1997, Skeeter through January 31, 1996, and BW
through May 31, 1996. O'Brien and Soniform were sold on July 31, 1997 and
October 8, 1997, respectively. Skeeter and BW were sold on January 31, 1996 and
May 31, 1996, respectively.
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The following selected consolidated financial data for the years
presented in the table below were derived from the Consolidated Financial
Statements. The selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and the notes thereto
included elsewhere herein.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE DATA)
Year Ended December 31,
-------------------------------------------------------------------
1998 1997(a) 1996(b) 1995 1994(c)
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales $61,549 $ 75,345 $102,349 $208,188 $187,625
Cost of sales (1)(d) 50,598 57,907 97,678 191,241 140,192
Selling, general and
administrative expenses (2)(3)(d) 12,584 16,827 32,858 56,673 35,065
------ ------ ------ ------- ------
Operating income (loss) (1,633) 611 (28,187) (39,726) 12,368
Interest and related amortization expense (1,143) (2,172) (1,499) (3,449) (4,194)
(Loss) gain on sale of businesses and
unusual item (4) 1,148 (550) 16,850 -- --
----- ----- ------ ------ ------
(Loss) income before income taxes
and extraordinary charge (1,628) (2,111) (12,836) (43,175) 8,174
Provision (benefit) for income taxes -- -- 6,958 (5,620) 1,470
------ ------- ------- ------- -----
(Loss) income before extraordinary charge (1,628) (2,111) (19,794) (37,555) 6,704
Extraordinary charge -- 408 1,332 -- 1,191
------ ------- ---------- ------ -----
Net (loss) income ($1,628) ($2,519) ($21,126) ($ 37,555) $ 5,513
======= ======= ======== ========== =======
Preferred stock dividends (175) - - - - - - - -
------- ------- --------- ---------- -------
Net (loss) income on common stock ($1,803) ($2,519) ($21,126) ($ 37,555) $ 5,513
======== ======= ========= ========== =======
Basic and diluted earnings per common share (e):
(Loss) income before
extraordinary charge ($0.23) ($0.26) ($2.47) ($4.69) $ 1.17
Extraordinary charge -- (0.05) (0.17) -- (0.21)
------ ------ -------- ------- ------
Net (loss) income ($0.23) ($0.31) ($2.64) ($4.69) $ 0.96
======= ====== ======== ======= ======
</TABLE>
- -------------------
(1) In 1998, includes a charge of $400 related to warranty accruals for design
deficiencies. In 1996 and 1995, includes charges of $18,200 and $22,581,
respectively, related to WetJet which include: (a) writedowns of inventory
to estimated net realizable value; (b) provisions for expected warranty
costs on product sold; and (c) the writedown of tooling and equipment to
estimated net realizable value.
(2) In 1998, includes a charge of $250 due to the resignation of the president
of the operating subsidiary. In 1996, includes a charge of $1,600 related
to the restructuring of the corporate office. In 1996 and 1995, includes
charges of $3,800 and $10,617, respectively, related to WetJet which
include: (a) provisions for expected costs to ensure sell-through of
products in retail dealer inventories; (b) writedowns of accounts
receivable to estimated net realizable value; and (c) estimated costs of
litigation.
(3) In 1995, includes a charge of $1,893 to writeoff all remaining goodwill
related to WetJet.
(4) In 1998, includes gain of $1,387 resulting from the reevaluation of
WetJet reserves and a loss of $239 resulting from liability adjustments for
previously sold operations. In 1997, includes a gain of $200 resulting from
the O'Brien Sale and a loss of $750 resulting from the Soniform Sale. In
1996, includes gains resulting from the Skeeter Sale of $13,289 and BW Sale
of $4,900, net of a valuation adjustment of $1,339 related to O'Brien.
See notes on succeeding page
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<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT PERIOD END):
Total assets........................ $20,364 $23,884 $44,225 $ 103,827 $ 117,512
Total debt (including current portion) 5,092 17,515 19,295 42,400 35,429
Stockholders' (deficit) equity...... (342) (9,473) (6,954) 14,258 51,884
YEAR ENDED DECEMBER 31,
1998 1997(a) 1996(b) 1995 1994(c)
---- ---- ---- ---- ----
OTHER DATA:
Depreciation expense (d)............ $ 830 $1,587 $2,527 $4,379 $ 3,579
Capital expenditures................ 767 1,199 2,354 5,317 7,384(f)
</TABLE>
(a) Includes the results of O'Brien and Soniform through July 31, 1997 and
October 8, 1997, respectively.
(b) Includes the results of operations of Skeeter and BW through
January 31, 1996 and May 31, 1996, respectively.
(c) Includes the results of operations of BW.
(d) Depreciation expense is allocated within the historical statements of
operations data between cost of sales and selling, general and
administrative expenses. Selling, general and administrative expenses
includes fees to affiliates of $200, $200 and $50 for the years ended
December 31, 1994 through 1996, respectively and amortization of
intangibles of $615, $2,464 and $116 for the years ended December 31, 1994
through 1996, respectively.
(e) Basic and diluted earnings per share are calculated based upon weighted
average shares outstanding for the year (8,000,000 shares for 1998, 1997,
1996 and 1995, and 5,768,000 shares for1994.)
(f) Capital expenditures in 1994 include: approximately $900 related to the
completion of the relocation to Cherokee Cove and approximately $800
related to the completion of O'Brien's plant reorganization.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
Net sales were $61.5 million and $75.3 million for 1998 and 1997,
respectively, a decrease of $13.8 million, comprised of a 17% increase in
ongoing operations of $9.0 million, offset by a decrease of $22.8 million
related to sales of former operations. Ongoing operations increased primarily
because of higher dealer demand for newly introduced models and significant
demand within the inboard boat market. Sales of former operations were $22.8
million in 1997 reflecting the effect of the O'Brien Sale in July 1997 and the
Soniform Sale in October 1997.
Gross profit was $11.0 million and $17.4 million for the 1998 and 1997
periods, respectively, a decrease of $6.4 million. Gross profit from former
operations was reduced by $6.2 million in the 1998 period over the comparable
1997 period primarily due to the sale of two businesses in 1997. Ongoing
operations produced $11.0 million and $11.2 million of gross profit in 1998 and
1997, respectively. The decline in gross profit can be attributed to a $0.4
million additional warranty accrual for design deficiencies in previously
produced products, an increase in manufacturing variances in the third and
fourth quarters which resulted from the lack of key components from certain
suppliers and was offset by improved volume efficiencies gained through higher
production volumes.
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Selling, general and administrative expenses ("SG&A") were $12.6
million and $16.8 million for 1998 and 1997, respectively. SG&A in 1997 included
$6.0 million of charges related to former operations. Ongoing businesses
recorded a $1.8 million increase in SG&A during 1998 primarily due to additional
spending in the sales, marketing and engineering areas. The mostly planned
additional spending was used to drive early season sales and to develop product
enhancements for use on future products. Additionally, a charge of $0.3 million
was recorded due to the resignation of the president of the operating
subsidiary.
Interest and related amortization expense of $1.1 million in 1998 was
approximately $1.0 million below 1997 levels due to the effect of lower average
outstanding borrowings and the conversion of $11.0 million of outstanding debt
into preferred stock in September 1998.
In 1998, unusual charges included a gain of $1.4 million resulting from
the reevaluation of WetJet reserves and a loss of $0.2 million resulting from
liability adjustments for previously sold operations. During 1997, the O'Brien
Sale resulted in a pre-tax gain of approximately $0.2 million and the Soniform
Sale resulted in a pre-tax loss of approximately $0.7 million.
In connection with the permanent reduction of outstanding commitments
under the O'Brien Credit Agreement in 1997 resulting from the O'Brien Sale, the
Company recorded extraordinary charges of $0.4 million to write-off deferred
financing costs.
The Company incurred a loss in 1998 and 1997 and as such did not record
an income tax benefit, as the Company was not assured it would be able to
realize a benefit for such losses in the future.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Net sales were $75.4 million and $102.4 million for 1997 and 1996,
respectively, a decrease of $27.0 million, comprised of a 10% increase in
ongoing operations of $5.0 million, offset by a decrease of $32.0 million
related to sales of former operations. Ongoing operations increased primarily
because of higher dealer demand for newly introduced models and dealer reorders
to maintain desired inventory levels. Sales of former operations decreased from
$54.8 million in 1996 to $22.8 million in 1997, reflecting the effect of the
Skeeter Sale and the BW Sale in 1996 and the O'Brien Sale in July 1997.
Gross profit was $17.4 million and $4.7 million for the 1997 and 1996
periods, respectively, an increase of $12.7 million. Gross profit in 1996 is net
of $18.2 million related to the Company's restructuring of its personal
watercraft business. No restructuring charges were recorded in 1997. Gross
profit of former operations, excluding restructuring charges, was reduced by
$8.3 million in 1997 primarily due to the sale of two businesses in each of 1996
and 1997. Ongoing operations produced $11.2 million and $8.4 million of gross
profit in 1997 and 1996, respectively, due to sales increases, improvements in
material usage and reduced warranty spending.
10
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Selling, general and administrative expenses ("SG&A") were $16.8
million and $32.9 million for 1997 and 1996, respectively. SG&A in 1996 included
$3.8 million of charges related to the Company's restructuring of its personal
watercraft business. Such charges include: (i) provisions for management's
estimate of expected costs to ensure sell-through of products in retail dealer
inventories; (ii) writedowns of accounts receivable to estimated net realizable
value; and (iii) estimated costs of litigation. No restructuring charges were
recorded in 1997. Ongoing businesses recorded $2.0 million lower SG&A in 1997
primarily due to lower compensation expense of the headquarters office. The
remaining decrease of $10.3 million principally related to the sale of
businesses and the reduction of WetJet SG&A.
Interest and related amortization expense of $2.2 million in 1997 was
approximately $0.7 million above 1996 levels due to the effect of higher average
outstanding borrowings.
The O'Brien Sale resulted in a pre-tax gain of approximately $0.2
million in 1997. The Soniform Sale resulted in a pre-tax loss of approximately
$0.7 million in 1997. In 1996, the Skeeter Sale resulted in a pre-tax gain of
$13.3 million; net of goodwill write-off of $10.1 million and the BW Sale
resulted in a pre-tax gain of $4.9 million. The Company, in 1996, also recorded
a valuation adjustment of $1.3 million related to its O'Brien business.
In connection with the permanent reduction of outstanding commitments
under the O'Brien Credit Agreement in 1997 resulting from the O'Brien Sale, and
under the Company Credit Agreement in 1996 resulting from the Skeeter Sale and
the BW Sale, the Company recorded extraordinary charges of $0.4 million and $1.3
million, respectively, to write-off deferred financing costs.
The Company incurred a loss in 1997 and as such did not record an
income tax benefit, as the Company was not assured it would be able to realize a
benefit for such loss in the future. The Company recorded an income tax
provision of $7.0 million in 1996. The income tax provision in 1996 principally
includes the establishment of a valuation allowance against previously recorded
deferred tax assets and a state and local provision related to the Skeeter Sale
and BW Sale. Income before income taxes and extraordinary charge in 1996 is net
of a non-deductible goodwill write-off of $14.4 million recognized in connection
with the Skeeter Sale and BW Sale.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash flows from operating activities were $1.2
million, ($3.8) million and ($31.9) million for the years ended December 31,
1998, 1997 and 1996, respectively. The Company's cash flows from operating
activities in 1998, 1997 and 1996 reflect cash used to fund operating losses and
interest expense and the payment of $1.9 million in 1998, $9.2 million in 1997
and $23.0 million in 1996, of WetJet and corporate restructuring liabilities.
11
<PAGE>
The Company's net capital expenditures were $0.8 million, $1.2 million
and $2.4 million in the years ended December 31, 1998, 1997 and 1996,
respectively. Capital expenditures in 1998 were $0.1 million less than
depreciation as the Company's operations had lower expenditures related to new
products. Capital expenditures in 1997 were $0.4 million less than depreciation
as the Company's former operations had lower expenditures related to new
products. Capital expenditures in 1996 were $0.2 million less than depreciation
as the Company curtailed capital spending. Capital expenditures during these
periods were funded by bank financings and loans from affiliates. The Company
anticipates that its capital expenditures requirements in 1999 will approximate
its annual depreciation expense. In 1997 and 1996, cash flows from investing
activities included proceeds from the sale of businesses of $6.3 million and
$58.4 million, respectively. Such proceeds were used to repay indebtedness of
the Company.
At December 31, 1998, total debt was approximately $5.1 million, which
amount represents a $12.4 million decrease from December 31, 1997. The majority
of the decrease was attributed to the conversion of $11.0 million in outstanding
debt for the issuance of 11,000 shares of preferred stock in September 1998. The
Company's working capital requirements are currently funded by borrowings under
the M&F Facility. Through May 31, 1996, the Company's working capital and other
requirements were funded by borrowings under a bank credit agreement, which was
effectively terminated subsequent to the BW Sale, and borrowings from an
affiliate.
The Company continues to assess its liquidity needs, both immediate and
longer-term. As of March 4, 1999, outstanding borrowings under the M&F Facility
were approximately $5.9 million. The M&F Facility provides for borrowings on a
revolving basis of up to $9 million, bears interest at the prime rate plus 1%
and matures at December 1, 1999. Borrowings under the M&F Facility are
guaranteed by the subsidiaries of the Company and a pledge of Cherokee Cove.
Although none of the Company's affiliates are required to provide funding to the
Company other than pursuant to the M&F Facility, the Company anticipates that
additional liquidity needs, if any, will be met by additional loans from
affiliates.
In September 1998, the Company, pursuant to an exchange agreement with
RGI Group Incorporated, issued 11,000 shares of 6% Series A Perpetual Preferred
Stock in exchange for an $11.0 million reduction in the amount outstanding under
the M&F Facility. The 6% Series A Perpetual Preferred Stock is convertible at
the option of the holder into shares of the Company's common stock at a
conversion price of $1.25 per share, subject to adjustment under certain
conditions. At the Company's option, the 6% Series A Perpetual Preferred Stock
is redeemable after September 25, 2001 at the liquidation preference of $1,000
per share plus any accrued and unpaid accumulated dividends.
EFFECT OF YEAR 2000
The Year 2000 Issue refers to the fact that many computer systems were
originally programmed using two digits rather than four digits to identify the
applicable year. When the year 2000 occurs, these systems could interpret the
year as 1900 rather than 2000. Unless hardware, system software and applications
software are corrected to be year 2000 compliant, computers and the devices they
control could generate miscalculations and create operational problems. Various
systems could be affected ranging from complex information technology (IT)
computer systems to non-IT devices such as an individual machine's programmable
logic controller.
12
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To address this issue, the Company has initiated a complete replacement
of all hardware, system software and applications software in conjunction with
an overall systems upgrading already in process to improve operating
effectiveness. The first and second phase of this replacement has already been
completed with the implementation of new financial systems within the Company
during the second quarter of 1998. The cost to complete phase one and two was
$0.1 million.
The third phase of this project, which effectively replaces all year
2000 non-compliant IT systems, entails the installation of Enterprise Resource
Planning (ERP) software within the Company and is scheduled to be completed by
the second quarter of 1999. ERP software is an integrated suite of programs
which links together critical business activities such as production planning
and procurement, accounting, manufacturing, sales, transportation and
distribution.
The total cost of the overall systems upgrading is estimated at $0.5
million. This includes all costs relating to the resolution of the Year 2000
issue. With the completion of the third phase of the systems upgrading, the
Company's computer systems are expected to function properly with respect to the
dates in the year 2000 and thereafter.
Company shop floor manufacturing operations are primarily manual in
nature and do not entail the use of computer aided manufacturing systems. As
such, the Year 2000 issue does not pose a significant threat to continuation of
these operations by the Company. However, failure by a supplier of critical
components to continue deliveries in a timely manner or the failure of the ERP
software being implemented by the company would have a material adverse effect
on the manufacture of the Company's principal products. Accordingly, the Company
continues to review its operations for potential threats created by the Year
2000 issue on manufacturing.
The Company relies on third-party suppliers for many products and
services and the Company will be adversely affected if these suppliers do not
make the necessary changes to their own systems and products successfully and in
a timely manner. The Company is in the process of surveying its suppliers to
assess their Year 2000 readiness by requesting each supplier to complete a
comprehensive Year 2000 Compliance Questionnaire. The Company is also surveying
its customers to assess their Year 2000 readiness by requesting each customer to
complete the same questionnaire. The Company has essentially completed its
assessment of customer and supplier Year 2000 readiness, and has found that the
majority of its suppliers and customers have indicated that they expect to be
Y2K compliant by the end of 1999. The Company has implemented a structured plan
to communicate with its customers and suppliers on this issue in an effort to
minimize any potential Year 2000 compliance impact; however, it is not possible
to guarantee their compliance.
Management of the Company believes it has an effective program in place
to resolve the Year 2000 issue in a timely manner. Nevertheless, it is not
possible to anticipate all possible outcomes, especially when third parties are
involved. In addition, disruptions in the general economy resulting from Year
2000 issues could also materially adversely affect the Company. The amount of
lost revenue or potential liability cannot be reasonably estimated at this time
nor can the Company identify specifically the most likely worst case scenario.
13
<PAGE>
The Company has contingency plans for some critical applications and is
working on such plans for others. These contingency plans include such items as
manual workarounds, increasing inventories and adjusting staffing strategies.
Substantial completion of these plans is expected by mid-year 1999 with
continual refinement to the plans until all of the Company's critical systems
and all critical third party relationships have demonstrated Year 2000
compliance.
SEASONALITY AND BACKLOG
The marine industry is seasonal, with retail sales generally strongest
in the months of April through September. Between October and March,
manufacturers' shipments depend on dealer restocking activity and requests for
new season models presented at trade shows and through promotional programs. New
product introductions and fluctuations in demand due to the popularity of the
Company's products may also contribute to quarterly or other periodic
fluctuations. In 1998, new products introduced in the third quarter of 1997
contributed to strong sales in the first two quarters of 1998. Sales during the
last two quarters were unfavorably effected by the inability of certain
suppliers to provide key components.
Sales of new products in connection with model changeovers
have traditionally caused third quarter sales to be strong. In 1996, MasterCraft
deliberately reduced production to balance field inventories at dealers.
The following table sets forth net sales for each quarter from January
1, 1996 through December 31, 1998 (in millions) and includes the results of
O'Brien through July 31, 1997, Soniform through October 8, 1997, Skeeter through
January 31, 1996, and through May 31, 1996, the results of BW. O'Brien and
Soniform were sold on July 31, 1997 and October 8, 1997, respectively. Skeeter
and BW were sold on January 31, 1996 and May 31, 1996, respectively.
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------
1Q 2Q 3Q 4Q Total
------- ------ ------ ------- ------
<S> <C> <C> <C> <C> <C>
Ongoing operations........................ $15.1 $16.5 $13.6 $16.3 $61.5
Former operations ........................ -.- -.- -.- -.- -.-
------- ------ ------ ------- ------
$15.1 $16.5 $13.6 $16.3 $61.5
===== ===== ===== ===== =====
1997
-------------------------------------------------------------
1Q 2Q 3Q 4Q Total
------- ------ ------ ------- ------
Ongoing operations........................ $12.8 $11.2 $13.2 $15.4 $52.6
Former operations ........................ 9.2 10.5 3.1 -- 22.8
------- ------ ------ ------- ------
$22.0 $21.7 $16.3 $15.4 $75.4
===== ===== ===== ===== =====
1996
-------------------------------------------------------------
1Q 2Q 3Q 4Q Total
------- ------ ------ ------- ------
Ongoing operations........................ $11.2 $11.9 $13.0 $11.5 $47.6
Former operations ........................ 22.4 21.0 4.8 6.6 54.8
------ ------ ------- ------- -------
$33.6 $32.9 $17.8 $18.1 $102.4
===== ===== ===== ===== =======
</TABLE>
- ----------
At December 31, 1998 and 1997, the Company had order backlog of
approximately $22 million and $8 million (which excludes backlog of former
operations), respectively.
14
<PAGE>
INFLATION
In general, manufacturing costs are affected by inflation and the
effects of inflation may be experienced by the Company in future periods.
Management believes, however, that such effect has not been material to the
Company during the past three years.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The forward-looking statements
contained in this Form 8K are subject to certain risks and uncertainties.
Actual results could differ materially from current expectations. Among the
factors which could effect the Company's actual results and could cause results
to differ from those contained in the forward-looking statements are customer's
acceptance of the Company's new model year products, the ability of boat dealers
to obtain financing for their purchase of boats, the satisfaction of the WetJet
liabilities within the reserves established and difficulties, delays or
unanticipated costs in achieving Year 2000 compliance or unanticipated
consequences from non-compliance by the company or one or more of its customers
or suppliers. The Company assumes no responsibility to update forward-looking
information contained herein.
15
<PAGE>
DIRECTORS AND CHIEF EXECUTIVE OFFICER OF THE REGISTRANT
Chief Executive Officer - J. Eric Hanson
Directors -
Ronald O. Perelman
J. Eric Hanson
Jerry W. Levin
John P. Murray, Jr.
Martin D. Payson
Bruce Slovin
TRANSFER AGENT
American Stock Transfer & Trust Company
40 Wall St. 46 F1
New York, NY 10269-0436
FINANCIAL STATEMENTS AND SCHEDULE
See Index to Financial Statements and Schedule which appears on page
F-1 herein.
16
<PAGE>
SIGNATURES
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.
MERIDIAN SPORTS INCORPORATED
(Registrant)
Date: March 31, 1999 By: /s/ James A. Valkenaar
------------------------------- -------------------------------------
James A. Valkenaar
Vice President and Principal
Accounting Officer
17
<PAGE>
ANNUAL REPORT ON FORM 8-K
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
YEAR ENDED DECEMBER 31, 1998
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
Page
----
The following consolidated financial statements of Meridian Sports
Incorporated and Subsidiaries are included herein:
Report of Independent Auditors..................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997....... F-3
Consolidated Statements of Operations
for the years ended December 31, 1998, 1997 and 1996............. F-4
Consolidated Statements of Stockholders' (Deficit) Equity
for the years ended December 31, 1998, 1997 and 1996............. F-5
Consolidated Statements of Cash Flows
for the years ended December 31, 1998, 1997 and 1996............. F-6
Notes to Consolidated Financial Statements......................... F-7
The following consolidated financial statement schedule of Meridian
Sports Incorporated and Subsidiaries is included herein:
Schedule II - Valuation and Qualifying Accounts and Reserves...... F-21
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and, therefore, have been
omitted.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Meridian Sports Incorporated
We have audited the accompanying consolidated balance sheets of Meridian
Sports Incorporated and Subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' (deficit) equity,
and cash flows for each of the three years in the period ended December 31,
1998. Our audits also included the consolidated financial statement schedule
listed in the Index at Item 14(a). These consolidated financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Meridian Sports Incorporated and Subsidiaries at December 31, 1998 and 1997, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
consolidated financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects, the information set forth therein.
/s/ ERNST & YOUNG LLP
- -----------------------
New York, New York
March 8, 1999
<PAGE>
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
-----------------------------------
ASSETS 1998 1997
-------------- ---------------
<S> <C> <C>
Current assets:
Cash $1,205 $1,123
Accounts receivable, net of allowances of
$350 and $401, respectively 2,639 3,681
Inventories 8,958 8,040
Prepaid expenses and other 890 3,974
-------------- ---------------
Total current assets 13,692 16,818
Property, plant and equipment, net 6,653 6,716
Other assets 19 350
-------------- ---------------
$20,346 $23,884
============== ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt $5,092 --
Accounts payable 5,161 $2,103
Accrued expenses and other current liabilities 7,230 8,122
-------------- ---------------
Total current liabilities 17,483 10,225
Long-term debt -- 17,515
Other liabilities 3,223 5,617
Commitments and contingencies
Stockholders' deficit:
Preferred stock, par value $0.01 per share; 10,000,000
shares authorized; no shares issued and outstanding -- --
Common stock, par value $0.01 per share; 50,000,000 shares
authorized; 8,000,000 shares issued and outstanding 80 80
Additional paid-in capital 142,885 131,951
Accumulated deficit (143,307) (141,504)
-------------- ---------------
Total stockholders' deficit (342) (9,473)
-------------- ---------------
$20,364 $23,884
============== ===============
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
<TABLE>
<CAPTION>
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
Year Ended December 31,
------------------------------------------------------
1998 1997 1996
-------------- ---------------- ----------------
<S> <C> <C> <C>
Net sales:
Ongoing operations $61,549 $52,582 $47,631
Former operations -- 22,763 54,718
-------------- ---------------- ----------------
61,549 75,345 102,349
-------------- ---------------- ----------------
Cost of sales:
Ongoing operations 50,598 41,262 39,214
Former operations -- 16,645 58,464
-------------- ---------------- ----------------
50,598 57,907 97,678
-------------- ---------------- ----------------
Selling, general and administrative expenses:
Ongoing operations 12,584 10,857 12,801
Former operations -- 5,970 20,057
-------------- ---------------- ----------------
12,584 16,827 32,858
-------------- ---------------- ----------------
Operating income (loss):
Ongoing operations (1,633) 463 (4,384)
Former operations -- 148 (23,803)
-------------- ---------------- ----------------
(1,633) 611 (28,187)
-------------- ---------------- ----------------
(Loss) gain on sale of businesses and unusual item 1,148 (550) 16,850
Interest and related amortization expense (1,143) (2,172) (1,499)
-------------- ---------------- ----------------
Loss before income taxes and extraordinary charge (1,628) (2,111) (12,836)
(Provision) benefit for income taxes -- -- (6,958)
-------------- ---------------- ----------------
Loss before extraordinary charge (1,628) (2,111) (19,794)
Extraordinary charge -- (408) (1,332)
-------------- ---------------- ----------------
Net loss ($1,628) ($2,519) ($21,126)
-------------- ---------------- ----------------
Preferred stok dividends (175) -- --
-------------- ---------------- ----------------
Net loss on common stock ($1,803) ($2,519) ($21,126)
============== ================ ================
Basic and diluted loss per common share:
Loss before extraordinary charge ($0.23) ($0.26) ($2.47)
Extraordinary harge 0.00 (0.05) (0.17)
-------------- ---------------- ----------------
Net loss ($0.23) ($0.31) ($2.64)
============== ================ ================
Weighted average shares outstanding (000s) 8,000 8,000 8,000
============== ================ ================
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Retained
Additional Other
Preferred Common Paid-in Accumulated Comprehensive
Stock Stock Capital Deficit Income Total
----- ----- ------- ------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
December 31, 1995 -- 80 $131,951 ($117,859) 86 $14,258
Net loss (21,126) (21,126)
Currency translation adjustment (86)
---------- ---------- --------- ---------- ---------- ---------
December 31, 1996 -- 80 131,951 (138,985) -- (6,954)
Net loss (2,519) (2,519)
---------- ---------- --------- ---------- ---------- ---------
December 31, 1997 -- 80 131,951 (141,504) -- (9,473)
Net loss (1,646) (1,646)
Issuance of Series A Preferred Stock -- 11,000 11,000
Issuance expenses on capital stock (66) (66)
Dividends on preferred stock (175) (175)
---------- ---------- --------- ---------- ---------- ---------
December 31, 1998 -- 80 142,885 (143,307) -- (342)
========== ========== ========= ========== ========== =========
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
<TABLE>
<CAPTION>
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31,
--------------------------------------------------
1998 1997 1996
------------- -------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($1,628) ($ 2,519) ($21,126)
------------- -------------- -------------
Adjustments to reconcile net loss to net cash flows
from operating activities:
Depreciation and amortization 830 1.640 2,777
Loss (gain) on sale of businesses
unsual item, net of income taxes (1,148) 550 (9,892)
Restructing charges 23,600
Extraordinary charges -- 408 1,332
Change in assets and liabilities:
Decrease in receivables 1,330 4,786 1,326
Decrease (increase) in inventories (368) 3 686 (1,705)
(Decrease) increase in accounts payable and accrued expenses 3,399 (4,919) (6,034)
Payment of restructuring liabilities (1,896) (9,192) (22,988)
Other, net 712 1,734 822
------------- -------------- -------------
2,859 (1,307) (10,762)
------------- -------------- -------------
Net cash flows from operating activities 1,231 (3,826) (31,888)
------------- -------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of businesses, net of cash sold of $391 and $394 -- 6,295 58,411
Release of escrow funds from the sale of a former operation 1,282 -- --
Capital expenditures, net (767) (1,199) (2,354)
Other, net -- -- (20)
------------- -------------- -------------
Net cash flows from investing activities 515 5,096 56,037
------------- -------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net bank borrowings, net of fees -- (385) (43,363)
Net (decrease) increase in borrowings from affiliates (1,664) (1,730) 19,245
------------- -------------- -------------
Net cash flows from financing activities (1,664) (2,115) (24,118)
------------- -------------- -------------
Net (decrease) increase in cash 82 (845) 31
Cash at beginning of period 1,123 1,968 1,937
------------- -------------- -------------
Cash at end of period $1,205 $1,123 $1,968
============= ============== =============
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
1. BACKGROUND AND BASIS OF FINANCIAL STATEMENT PRESENTATION
Meridian Sports Incorporated ("Meridian", or the "Company") was formed
in June 1994. As a result of an initial public offering of its common stock (the
"IPO") in October 1994, the Company is a 65% indirectly owned subsidiary of
MacAndrews & Forbes Holdings Inc. ("MacAndrews Holdings"), a corporation
wholly-owned through Mafco Holdings Inc. (together with its affiliates,
"MacAndrews & Forbes").
On February 10, 1999, Meridian Sports Holdings Inc. ("Meridian
Holdings") proposed a transaction to the Board of Directors of the Company
pursuant to which Meridian Holdings would acquire all publicly held shares of
the Meridian Common Stock at a price of $0.55 per share in cash. In light of the
overlapping equity ownership between Meridian Holdings and the Company, Meridian
Holdings requested that the Company form a special committee of independent
directors to consider its proposal. In response to Meridian Holdings' proposal
the Company formed a special committee of independent directors, to be chaired
by Martin D. Payson.
In September 1998, the Company, pursuant to an exchange agreement with
RGI Group Incorporated, issued 11,000 shares of 6% Series A Perpetual Preferred
Stock in exchange for an $11,000 reduction in the amount outstanding under the
M&F Facility. The 6% Series A Perpetual Preferred Stock is convertible at the
option of the holder into shares of the Company's common stock at a conversion
price of $1.25 per share, subject to adjustment under certain conditions. At the
Company's option, the 6% Series A Perpetual Preferred Stock is redeemable after
September 25, 2001 at the liquidation preference of $1,000 per share plus any
accrued and unpaid accumulated dividends.
On October 8, 1997, the Company entered into and consummated an
agreement with Johnson Worldwide Associates, Inc. ("JWA") pursuant to which JWA
purchased certain assets and assumed certain liabilities of the Company's
Soniform scuba equipment business ("Soniform") for approximately $1,756 (the
"Soniform Sale"). The results of operations of Soniform are included in "Former
operations" in the accompanying consolidated statements of operations for all
periods presented through the date of the Soniform Sale.
On July 31, 1997, the Company entered into and consummated an agreement
with Earth and Ocean Sports, Inc. ("EOS") pursuant to which EOS purchased
certain assets and assumed certain liabilities of the Company's O'Brien towable
watersports business ("O'Brien"), for approximately $4,930 (the "O'Brien Sale").
The results of operations of O'Brien are included in "Former operations" in the
accompanying consolidated statements of operations for all periods presented
through the date of the O'Brien Sale.
On May 31, 1996, the Company consummated a transaction with Brunswick
Corporation ("Brunswick") pursuant to which Brunswick purchased certain assets
and assumed certain liabilities of BW Sale Corp., formerly Boston Whaler, Inc.
("BW") for approximately $26,155 (the "BW Sale"). The results of operations of
BW are included in "Former operations" in the accompanying consolidated
statements of operations for all periods presented through the date of the BW
Sale.
F-7
<PAGE>
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
On January 31, 1996, the Company sold all of the capital stock of its
wholly owned subsidiary Skeeter Products, Inc. ("Skeeter") to Yamaha Motor
Corporation, U.S.A. ("Yamaha") for approximately $33,900 (the "Skeeter Sale").
The results of operations of Skeeter are included in "Former operations" in the
accompanying consolidated statements of operations for all periods presented
through the date of the Skeeter Sale.
Meridian is a holding company that operates through its wholly owned
subsidiary MasterCraft Boat Company ("MasterCraft"). MasterCraft is a designer,
manufacturer and marketer of specialized ski boats targeted principally at
boating and waterskiing enthusiasts.
2. DISPOSALS OF BUSINESSES, UNUSUAL ITEM AND EXTRAORDINARY ITEMS
At the end of 1998, the Company reevaluated the outstanding reserves
established for the restructuring of its personal watercraft business
("WetJet"). This resulted in the recognition of $1,387 of pre-tax income.
Additionally, the Company recorded a $239 charge relating to previously sold
operations due to increases in product liability and workers compensation
estimates.
On October 8, 1997, the Company entered into and consummated an
agreement with JWA pursuant to which JWA purchased certain assets and assumed
certain liabilities of the Company's Soniform scuba equipment business for
approximately $1,756. The Soniform Sale resulted in a pre-tax loss of
approximately $750. The proceeds of the Soniform Sale were used to repay
indebtedness of the Company under the M&F Facility, as hereafter defined. In
connection with the Soniform Sale, the Company entered into a lease with JWA,
pursuant to which it will lease the Soniform manufacturing facility to JWA for a
minimum one-year period for $80.
On July 31, 1997, the Company entered into and consummated an agreement
with EOS pursuant to which EOS purchased certain assets and assumed certain
liabilities of the Company's O'Brien towable watersports business, for
approximately $4,930. The O'Brien Sale resulted in a pre-tax gain of
approximately $200. The proceeds of the O'Brien Sale were used to permanently
repay indebtedness of the Company under a credit agreement with a bank entered
into in March 1997 (the "O'Brien Credit Agreement") and to repay other
indebtedness under the M&F Facility, as hereafter defined. In connection with
the permanent repayment of borrowings under the O'Brien Credit Agreement, the
Company recorded an extraordinary charge of $408 to write off all related
deferred financing costs.
On May 31, 1996, the Company consummated a transaction with Brunswick
pursuant to which Brunswick purchased certain assets and assumed certain
liabilities of BW for $26,155, of which $1,250 was held in escrow through May
1998. The proceeds of the BW Sale were used to repay indebtedness of the
Company. The BW Sale resulted in a pre-tax gain of $4,900. The Company also
recorded, in 1996, a valuation adjustment of $1,339 related to O'Brien. Due to
the permanent commitment reduction in 1996 under the Company's then existing
credit agreement with a group of banks (the "Company Credit Agreement") as a
result of the Skeeter Sale and BW Sale, the Company recorded an extraordinary
charge of $1,332 to writeoff all remaining deferred financing costs. In January
1997, the Company Credit Agreement was terminated and all collateral thereunder
was released.
F-8
<PAGE>
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
On January 31, 1996, the Company sold Skeeter to Yamaha pursuant to a
Stock Purchase Agreement by and between Yamaha and the Company for approximately
$33,900. The proceeds of the Skeeter Sale were used to repay indebtedness of the
Company. The Skeeter Sale resulted in a pre-tax gain of $13,289, net of a
goodwill writeoff of $10,094.
3. RESTRUCTURING
In 1995, the Company recorded a provision for the then estimated cost
of the restructuring of its personal watercraft business ("WetJet"). In 1996,
the Company recorded additional provisions to reflect revisions to its earlier
cost estimates due, in part, to (i) unanticipated delays in implementing the
restructuring program and (ii) a longer than anticipated period of time required
to complete the execution of the restructuring program. Such additional time
requirements coincided with a general deterioration in the overall market for
personal watercraft and resulted in the Company's offering of more costly
incentives to facilitate the sell-through of product in retail dealer
inventories. The Company recorded charges in cost of sales of $18,200 in 1996,
which include: (i) writedowns of inventory to estimated net realizable value;
(ii) provisions for expected warranty costs on models sold; and (iii) writedowns
of tooling and equipment to estimated net realizable value. Additionally, the
Company recorded charges in selling, general and administrative expenses of
$3,800 in 1996, which include: (i) provisions for expected costs to ensure
sell-through of products in retail dealers inventories; (ii) writedowns of
accounts receivable to estimated net realizable value; and (iii) estimated costs
of litigation related to the personal watercraft business. In 1997, the Company
substantially completed the program and no further charges were recorded in
connection with such program. At the end of 1998, the Company reevaluated the
outstanding reserves established for the restructuring of its personal
watercraft business ("WetJet"). This resulted in the recognition of $1,387 of
pre-tax income. The Company no longer manufactures personal watercraft. There
can be no assurance the WetJet liabilities can be satisfied within the reserves
established.
In 1996, the Company recorded in selling general and administrative
expenses, a one-time charge of $1,600 comprised primarily of severance costs
related to the restructuring of its headquarters office. All liabilities for the
headquarters restructuring were paid as of December 31, 1997.
4. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include the accounts of the
Company and its subsidiaries after elimination of all material intercompany
accounts and transactions.
Revenue Recognition:
The Company recognizes net sales upon shipments of merchandise when
title and all other incidents of ownership transfer have been completed. Net
sales are comprised of gross sales less expected customer returns and
allowances.
F-9
<PAGE>
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
Financial Instruments with Off-Balance-Sheet Risk:
Outstanding letters of credit aggregated approximately $890 and $3,342
at December 31, 1998 and 1997, respectively. Portions of the letters of credit
in 1997 were cash collateralized in the amount of $1,745. Trade receivables for
boats sold to dealers are generally collateralized by the related boat inventory
or letters of credit. Sales made through floor plan arrangements transfer
substantially all credit risk to the financing entity.
Concentrations of Credit Risk:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables. Credit
risk on trade receivables is minimized as a result of the Company's floor plan
arrangements, the use of trade letters of credit and the large and diversified
nature of the Company's customer base, which includes customers located
throughout the entire United States as well as several international customers.
Fair Value of Financial Instruments:
The carrying amount of the Company's debt approximates its fair value.
Property, Plant and Equipment:
Property, plant and equipment is recorded at cost and depreciated on a
straight-line basis over the estimated useful lives of three to forty years.
Leasehold improvements are amortized over their estimated useful lives or terms
of the leases, whichever is shorter. Repairs and maintenance are charged to
operations as incurred, and expenditures for additions and improvements are
capitalized.
Stock-Based Compensation:
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has elected to account for stock-based compensation plans using the
intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at date of the grant over
the amount an employee must pay to acquire the stock.
Income Taxes:
The Company accounts for income taxes in accordance with the liability
method. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using enacted tax rates and laws.
F-10
<PAGE>
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
Floor Plan Reimbursement Costs:
The Company may enter into various programs whereby it agrees to
reimburse its dealers for certain floor plan interest costs incurred by such
dealers for limited periods of time, in accordance with industry practice. Such
costs are included in selling, general and administrative expenses in the
accompanying consolidated statements of operations.
Research and Development:
Research and development expenditures are expensed as incurred. The
amounts charged against operations for the years ended December 31, 1998, 1997
and 1996 were $1,623, $1,883, and $1,795, respectively.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
The accruals established for the WetJet restructuring are based on
management's estimates of the costs of the restructuring programs. The
restructuring programs are substantially complete. There can be no assurance
that the programs will be completed within the reserves established.
5. INVENTORIES
Inventories are valued at the lower of cost or market. Inventory costs
are determined principally by the last-in, first-out ("LIFO") method.
Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
---------- ---------
<S> <C> <C>
Raw material and supplies.............................................. $4,789 $3,394
Work-in-process........................................................ 1,462 753
Finished goods......................................................... 3,583 4,781
----- -----
9,834 8,928
Less: Lifo allowance................................................... (876) (888)
-------- -------
$8,958 $8,040
====== ======
</TABLE>
F-11
<PAGE>
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
6. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
---- ----
<S> <C> <C>
Land ......................................................... $622 $622
Buildings and improvements.................................... 5,165 5,072
Machinery and equipment .................................... 5,325 4,651
------- ------
11,112 10,345
Accumulated depreciation...................................... (4,459) (3,629)
-------- ---------
$6,653 $6,716
====== ======
</TABLE>
Depreciation expense was $830, $1,587 and $2,527 for the years ended
December 31, 1998, 1997 and 1996, respectively.
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the
following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
---- ----
<S> <C> <C>
Insurance retentions.......................................... $2,232 $2,254
Advertising and promotion..................................... 1,422 1,567
Warranty...................................................... 1,298 1,056
Compensation and related accruals............................. 589 870
Pension plans................................................. 735 541
Interest...................................................... 162 170
State income and other taxes.................................. 136 149
Payable to affiliates......................................... 86 188
WetJet product sell-through................................... -- 510
Other......................................................... 570 817
-------- ------
$7,230 $8,122
====== ======
</TABLE>
F-12
<PAGE>
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
8. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
---- ----
<S> <C> <C>
M&F Facility (a)(b)........................................... $5,092 $17,515
------ -------
5,092 17,515
Less: Current portion........................................ 5,092 --
------ ---------
$ -- $17,515
======== =======
</TABLE>
- --------------------
(a) In March 1997, the Company entered into a credit agreement with an
affiliate (as amended, the "M&F Facility") to refinance existing borrowings
from affiliates, to finance the operations, including seasonal working
capital needs and restructuring liabilities of the Company. The M&F
Facility originally provided for borrowings on a revolving basis of up to
$30,000. In connection with the Exchange Agreement in September 1998, the
M&F Facility was amended to reduce the M&F Facility commitment to $9,000.
The M&F Facility bears interest at the prime rate, as defined, plus 1%
(8.75% at December 31, 1998) and matures at December 1, 1999. Loans under
the M&F Facility are guaranteed by the subsidiaries of the Company and a
pledge of Cherokee Cove. Borrowings outstanding under the M&F Facility are
required to be prepaid with the net cash proceeds of the sales of any
subsidiaries of the Company. The commitment under the M&F Facility shall be
reduced by such required prepayments. The M&F Facility contains a minimum
net worth covenant. The M&F Facility contains typical events of default
including change of control, material adverse change and non-payment of
obligations.
(b) In September 1998, the Company, pursuant to an exchange agreement with RGI
Group Incorporated, issued 11,000 shares of 6% Series A Perpetual Preferred
Stock in exchange for an $11,000 reduction in the amount outstanding under
the M&F Facility. The 6% Series A Perpetual Preferred Stock is convertible
at the option of the holder into shares of the Company's common stock at a
conversion price of $1.25 per share, subject to adjustment under certain
conditions. At the Company's option, the 6% Series A Perpetual Preferred
Stock is redeemable after September 25, 2001 at the liquidation preference
of $1,000 per share plus any accrued and unpaid accumulated dividends.
F-13
<PAGE>
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
9. INCOME TAXES
The Company files separate income tax returns. The Company has recorded
a provision (benefit) for income taxes as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal......................................... $ -- $ -- $ --
State and local................................. -- -- 1,147
Foreign......................................... -- -- --
---------- --------- ---------
-- -- 1,147
---------- --------- -------
Deferred:
Federal......................................... -- -- 5,811
State and local................................. -- -- --
---------- --------- ---------
$ -- $ -- $6,958
=========== ========== ======
</TABLE>
During 1998 and 1997, the Company incurred a loss for which it has not
recorded a tax benefit as the Company is not assured it will be able to realize
a benefit for such loss in the future.
During 1996, the Company recorded a valuation allowance against
previously recorded deferred tax assets and a provision for state and local
income taxes related to the gains arising from the Skeeter Sale and BW Sale.
At December 31, 1998, the Company had net operating loss carryforwards
of approximately $47,396 expiring in the years 2005 through 2013. Certain loss
carryforwards are subject to certain limitations under the separate return
limitation year ("SRLY") rules. The effect of the SRLY rules is to limit the
utilization of these losses to the separate income of the subsidiaries of the
Company after October 19, 1994. As a result, the Company may have taxable income
in future years that cannot be offset by these net operating loss carryforwards.
F-14
<PAGE>
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The approximate
effect of temporary differences as of December 31, 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................. $18,180 $15,638
Doubtful accounts................................ 136 156
Reserve for self insurance & warranty costs...... 1,042 1,467
Postretirement benefits and pension liabilities.. 480 453
Other restructuring reserves..................... 447 1,253
Other, net....................................... 345 1,024
----- --------
Total deferred tax assets.................... 20,630 19,991
Valuation allowance.............................. (20,276) (19,637)
-------- ---------
Deferred tax asset, net..................... 354 354
Deferred tax liabilities:
Fixed assets.................................... 354 354
--------- ---------
Total deferred tax liability ................... 354 354
--------- ---------
Net deferred tax asset (liability)............ $ 0 $ 0
========== ==========
</TABLE>
The difference between the Company's effective tax rate and the Federal
statutory rate is reconciled below:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Benefit at statutory rate......................... (35.0)% (35.0)% (35.0)%
Nondeductible amortization........................ -- -- 39.4
State and local taxes, net........................ -- -- 5.8
Increase in valuation allowance................... 33.7 32.8 44.0
Other............................................. 1.3 2.2 --
------ ----- -----
Effective tax rate provision (benefit)............ 0.0% 0.0% 54.2%
===== ====== =====
</TABLE>
F-15
<PAGE>
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
10. PAYABLES TO AFFILIATES AND OTHER RELATED PARTY TRANSACTIONS
The Company relies upon borrowings from affiliates and operating cash
flow to fund its liquidity needs. Interest expense on such borrowings from
affiliates was $1,143 and $1,912 for the years ended December 31, 1998 and 1997,
respectively and is included in interest and related amortization expense in the
consolidated statement of operations. In March 1997 the Company entered into the
M&F Facility with an affiliate.
On February 10, 1999, Meridian Sports Holdings Inc. ("Meridian
Holdings") proposed a transaction to the Board of Directors of the Company
pursuant to which Meridian Holdings would acquire all publicly held shares of
the Meridian Common Stock at a price of $0.55 per share in cash. In light of the
overlapping equity ownership between Meridian Holdings and the Company, Meridian
Holdings requested that the Company form a special committee of independent
directors to consider its proposal. In response to Meridian Holdings' proposal
the Company formed a special committee of independent directors, to be chaired
by Martin D. Payson.
In September 1998, the Company, pursuant to an exchange agreement with
RGI Group Incorporated, issued 11,000 shares of 6% Series A Perpetual Preferred
Stock in exchange for an $11,000 reduction in the amount outstanding under the
M&F Facility. The 6% Series A Perpetual Preferred Stock is convertible at the
option of the holder into shares of the Company's common stock at a conversion
price of $1.25 per share, subject to adjustment under certain conditions. At the
Company's option, the 6% Series A Perpetual Preferred Stock is redeemable after
September 25, 2001 at the liquidation preference of $1,000 per share plus any
accrued and unpaid accumulated dividends.
The Company and certain affiliates of MacAndrews & Forbes are afforded
coverage under selected common insurance policies obtained by MacAndrews &
Forbes. The Company reimburses MacAndrews & Forbes its allocable portion of the
cost of this insurance coverage. At December 31, 1998 and 1997, the Company owed
$86 and $188, respectively, to MacAndrews & Forbes for services and
out-of-pocket expenses. The Company purchases from and sells products to an
affiliate on an arms-length basis. These amounts are not, in the aggregate,
material.
MacAndrews & Forbes, certain of its affiliates and the Company are
parties to a tax indemnification agreement (the "Tax Indemnification
Agreement"). Pursuant to the Tax Indemnification Agreement, MacAndrews & Forbes
will indemnify the Company, on an after-tax basis, against (i) any liability to
the Internal Revenue Service for any consolidated federal income taxes of the
Company for any period (or portion thereof) beginning on or after April 28, 1989
and ending on or before the date of the IPO, (ii) any liability to a state or
local taxing authority for any combined state and local income taxes of the
Company for any period (or portion thereof) beginning on or after April 28, 1989
and ending on or before the date of the IPO, to the extent such taxes arise in
any return in which the Company or any affiliate thereof filed a combined return
with MacAndrews & Forbes or any MacAndrews & Forbes affiliate, and (iii) any
liability to the Internal Revenue Service or a state or local taxing authority,
as the case may be, for any consolidated federal or combined state or local
income taxes incurred by the Company as a result of the Company or any affiliate
thereof being part of any consolidated or combined tax return with MacAndrews &
Forbes or any MacAndrews & Forbes affiliate.
F-16
<PAGE>
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
11. EMPLOYEE BENEFIT PLANS
Pension Plans:
The Company maintains pension and other retirement plans in various
forms covering employees of the Company who meet eligibility requirements. The
salaried retirement plan is a non-contributory defined benefit plan and provides
benefits based on a formula of each participant's final average pay and years of
service. The hourly pension plan is a non-contributory defined benefit plan and
contains a flat benefit formula. The salaried and hourly plans provide reduced
benefits for early retirement and the salaried plan takes into account offsets
for Social Security benefits. The Company's policy is generally to contribute
annually the minimum amount required pursuant to the Employee Retirement Income
Security Act, as amended. Under certain circumstances, the Company may make
additional contributions to the pension plans up to the maximum deductible
amounts for income tax purposes.
The Skeeter Sale and the transfer of assets and related liabilities to
plans established in 1996 resulted in one of the Company's plans having assets
in excess of accumulated benefits as of December 31, 1996. The Skeeter Sale
resulted in a curtailment of the pension plans that reduced the projected
benefit obligation by $479, which was recorded in unrecognized net loss. The
O'Brien Sale and Soniform Sale together resulted in a curtailment of the pension
plans that reduced the projected benefit obligation by $777, which was primarily
recognized in loss on sale of businesses.
The following tables reconcile the funded status of the Company's
pension plans in 1998 and 1997 with the amount recognized in the Company's
consolidated balance sheets as of the dates indicated.
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
----------- -----------
Assets Assets
Exceed Exceed
Accumulated Accumulated
Benefits Benefits
------------- ------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Accumulated benefit obligation, includes vested
benefits of $3,154 in 1998 and
$2,649 in 1997.......................... ($3,553) ($2,960)
======== ========
Projected benefit obligation for service
rendered to date........................ ($4,319) ($3,749)
Plan assets at fair value...................... 4,119 3,926
----- ------
Plan assets in excess of (less than)
projected benefit obligation............ (200) 177
Unrecognized prior service cost................ (8) (8)
Unrecognized net gain.......................... (527) (710)
------- ---------
Net pension liability.......................... ($735) ( $541)
====== =======
</TABLE>
F-17
<PAGE>
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
The weighted-average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.50% as of December 31,
1998 and 1997. The rate of increase in future compensation levels reflected in
such determination was 5% as of December 31, 1998 and 1997. The expected
long-term rate of return on assets was 9% as of December 31, 1998, 1997 and
1996. Plan assets are primarily invested in U.S. government securities,
corporate bond and equity funds and money market investments. Unrecognized items
are amortized over the estimated remaining service lives of active employees.
Net pension expense before curtailment gains for the Company's pension
plans in 1998, 1997 and 1996 includes the following components:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service cost-benefits attributed to
service during the year.......................... $271 $370 $543
Interest cost on projected
benefit obligation............................... 286 287 322
Actual return on plan assets........................... (345) (437) (262)
Net amortization and deferrals......................... (33) 126 115
----- ---- ----
Net pension expense before curtailment
gains............................................ $179 $346 $718
==== ==== ====
</TABLE>
SAVINGS PLAN:
The Company maintains employee savings plans under Section 401(k) of
the Internal Revenue Code. These plans cover substantially all of the Company's
full-time U.S. employees and allow employees to contribute a portion of their
salary to the plans. The Company matches employee contributions at predetermined
rates. Amounts charged to expense for matching contributions were $86, $114 and
$298 for the years ended December 31, 1998, 1997 and 1996, respectively.
STOCK OPTION PLAN:
The Company adopted the Meridian Sports Inc. 1994 Stock Option Plan
(the "Stock Option Plan") prior to the effectiveness of the IPO. The Company
applies APB Opinion No. 25 and related Interpretations in accounting for the
Stock Option Plan. Under APB Opinion No. 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation cost has been recognized. Had compensation
cost for the Stock Option Plan been determined consistent with SFAS No. 123, the
effect would not be significant.
Under the terms of the Stock Option Plan, incentive stock options
("ISOs") may be granted to key employees of the Company and any of its
affiliates from time to time. Such options vest ratably over three or four-year
periods. The aggregate number of shares of common stock as to which options and
rights may be granted under the Stock Option Plan may not exceed 500,000.
F-18
<PAGE>
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
The following table summarizes the stock option transactions under the
Stock Option Plan:
<TABLE>
<CAPTION>
Option Price
Shares per share ($)
------ -------------
<S> <C> <C> <C> <C>
Options outstanding at December 31, 1995................. 167,250 11.00
Granted............................................. 50,000 3.50
Canceled............................................ (149,750) 11.00
---------
Options outstanding at December 31, 1996................. 67,500 3.50--11.00
Granted............................................. 125,000 0.75
Canceled............................................ (53,000) 3.50-11.00
---------
Options outstanding at December 31, 1997................. 139,500 0.75-11.00
Granted............................................. -- 0.00
Canceled............................................ (24,500) 0.75-11.00
---------
Options outstanding at December 31, 1998................. 115,000 0.75
=======
</TABLE>
Of such options, 38,334 were exercisable at December 31, 1998, 10,875
were exercisable at December 31, 1997 and 25,417 were exercisable at December
31, 1996. The weighted average remaining contractual life of the options
outstanding was approximately 9.0 years, 9.4 years and 8.9 years at December 31,
1998, 1997 and 1996, respectively. The weighted average fair value of options
granted during 1998 and 1997 was approximately $0 and $84, respectively.
12. COMMITMENTS AND CONTINGENCIES
In 1996, an action known as Shelton Smith, on behalf of himself and
others similarly situated v. Sunchaser Marine, MasterCraft Boat Company, Inc.,
WetJet, A Division of MasterCraft and Meridian Sports Incorporated, was brought
in the 207th District Court of Comal County, Texas by Shelton Smith on behalf of
himself and a putative nationwide class of WetJet personal watercraft consumers.
This case was settled during
the second quarter of 1998.
The Company currently leases manufacturing and sales facilities and
various types of equipment under operating lease agreements expiring through
2033. Rental expense was $324, $472, and $592 for the years ended December 31,
1998, 1997 and 1996, respectively. Minimum rental commitments under all
noncancellable operating leases with remaining lease terms in excess of one year
from December 31, 1998, was approximately $1,221; such commitments for each of
the five years subsequent to December 31, 1998 are $155, $38, $32, $32 and $32
respectively.
Under certain conditions, the Company is also obligated to repurchase
new inventory repossessed from distributors by financial institutions that
provide credit to boat dealerships and distributors. Such inventory is generally
resold to other customers of the Company, without a significant effect on the
results of operations of the Company. The contingent obligation of the Company
under such floorplanning agreements aggregated approximately $19,000 and $27,000
at December 31, 1998 and 1997, respectively.
F-19
<PAGE>
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
The Company and MacAndrews Holdings are involved in certain claims and
legal actions arising in the ordinary course of business, including
environmental matters. In the opinion of management, the ultimate disposition of
these matters is not expected to have a material adverse effect on the Company's
consolidated financial condition or results of operations. The Company has
entered into a cross-indemnification agreement with MacAndrews Holdings pursuant
to which it will indemnify Holdings against all liabilities related to
businesses transferred to the Company, and MacAndrews Holdings will indemnify
the Company against all liabilities of MacAndrews Holdings other than
liabilities related to the businesses transferred to the Company.
13. CASH FLOW REPORTING
The Company uses the indirect method to report cash flows from
operating activities. Interest paid for the years ended December 31, 1998, 1997
and 1996 was approximately $1,143, $2,119 and $1,745, respectively. Income taxes
paid were $53, $281 and $122 for the years ended December 31, 1998, 1997 and
1996, respectively.
14. PREFERRED STOCK
The Company has authorized 10,000,000 shares of preferred stock, par
value $0.01 per share. The Company's Certificate of Incorporation authorizes the
Board of Directors to provide for the issuance of a series of preferred stock,
to establish the number of shares of each such series and to fix the
designation, powers, preferences and rights of the shares of each such series
and any qualifications, limitations or restrictions thereof.
In September 1998, the Company, pursuant to an exchange agreement with
RGI Group Incorporated, issued 11,000 shares of 6% Series A Perpetual Preferred
Stock in exchange for an $11,000 reduction in the amount outstanding under the
M&F Facility. The 6% Series A Perpetual Preferred Stock is convertible at the
option of the holder into shares of the Company's common stock at a conversion
price of $1.25 per share, subject to adjustment under certain conditions. At the
Company's option, the 6% Series A Perpetual Preferred Stock is redeemable after
September 25, 2001 at the liquidation preference of $1,000 per share plus any
accrued and unpaid accumulated dividends. Dividends paid on the 6% Series A
Perpetual Preferred Stock in the fourth quarter were $175.
15. EARNINGS PER COMMON SHARE
During the fourth quarter of 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share", the effect of
which was not significant.
Basic and diluted earnings per common share has been computed by
dividing loss after deduction of preferred stock dividends by the average number
of common and dilutive equivalent shares outstanding and is based on 8,000,000
weighted average shares outstanding for the years ended December 31, 1998, 1997
and 1996, respectively. The effect of the outstanding stock options and the
dilutive effects of a preferred stock conversion is anti-dilutive for each of
the periods presented as the Company reported net losses for such periods.
F-20
<PAGE>
MERIDIAN SPORTS INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
-----------------------------
Additions
-----------------------------
- ------------------------------------------- ------------- --------------- ------------- ---------------- --------------
(1) (2)
Balance at Charged to Charged to Balance at
Description beginning costs and other Deductions end
of year expenses * accounts ** of year
- ------------------------------------------- ------------- --------------- ------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for Doubtful Accounts $2,681 $1,165 $0 $1,268 $2,578
Year ended December 31, 1997:
Allowance for Doubtful Accounts $2,578 $210 $0 $2,387 $401
Year ended December 31, 1998:
Allowance for Doubtful Accounts $401 $60 $0 $111 $350
</TABLE>
- ------------------
* Includes $100 of restructuring charges related to the personal watercraft
business in 1996.
** The allowance for doubtful accounts was reduced by $364 in 1997 as a result
of the O'Brien Sale and the Soniform Sale and by $540 in 1996 as a result of the
Skeeter Sale and the BW Sale.
F-21
