-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DypRIoJGGAol2F38twg7m75uSr5krJVI7tSnb6DIi/ZpZqj249h2BSrHwuX8Su+X kQ10hsfflV3saA89Wu4rsg== 0000950123-98-010793.txt : 19981228 0000950123-98-010793.hdr.sgml : 19981228 ACCESSION NUMBER: 0000950123-98-010793 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19981222 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OUTBOARD MARINE CORP CENTRAL INDEX KEY: 0000075149 STANDARD INDUSTRIAL CLASSIFICATION: ENGINES & TURBINES [3510] IRS NUMBER: 361589715 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 001-02883 FILM NUMBER: 98773234 BUSINESS ADDRESS: STREET 1: 100 SEA HORSE DR CITY: WAUKEGAN STATE: IL ZIP: 60085 BUSINESS PHONE: 7086896200 MAIL ADDRESS: STREET 1: 100 SEA HORSE DRIVE CITY: WAUKEGAN STATE: IL ZIP: 60085 10-Q/A 1 OUTBOARD MARINE CORPORATION 1 Form 10-Q/A (Amendment No. 1) 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 December 31, 1997. 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 December 31, 1998 was 20,425,554 shares. 2 Explanatory Note ---------------- This Amendment No. 1 on Form 10-Q/A to the Quarterly Report of Outboard Marine Corporation (the "Company") amends and restates in its entirety Item 7 (Management's Discussion and Analysis of Financial Condition and Results of Operations) and Item 8 (Financial Statements and Supplementary Data) of Part II in connection with the restatement of the Company's financial statements for its fiscal year ended September 30, 1997 and period ended December 31, 1997 to revise the accounting of its acquisition by Greenmarine Holdings LLC in September 1997. (See Note 2 to the Notes to Consolidated Financial Statements). 1 3 OUTBOARD MARINE CORPORATION FORM 10-Q PART I, ITEM 1 FINANCIAL INFORMATION FINANCIAL STATEMENTS December 31, 1997 Financial statements required by this form: Page Statements of Consolidated Earnings 3 Condensed Statements of Consolidated Financial Position 4 Statements of Consolidated Cash Flows 5 Notes to Consolidated Financial Statements 6 - 2 - 4 Outboard Marine Corporation Statements of Consolidated Earnings (Unaudited) Three Months Ended December 31 ------------------------------ Post-Merger Pre-Merger Company Company (As Restated) (Dollars in millions except amounts per share) 1997 1996 ------ ------ Net sales............................. $ 209.5 $ 197.1 Cost of goods sold.................... 173.7 174.4 ------ ------ Gross earnings....................... 35.8 22.7 Selling, general and administrative expenses............................. 46.8 42.4 ------ ------ Earnings (loss) from operations...... (11.0) (19.7) Non-operating expense (income): Interest expense..................... 7.7 4.4 Other, net........................... (2.4) (10.6) ------ ------ 5.3 (6.2) ------ ------ Earnings (loss) before provision for income taxes.................... (16.3) (13.5) Provision for income taxes............ 0.8 0.8 ------ ------ Net earnings (loss)............... $ (17.1) $ (14.3) ====== ====== Net earnings (loss) per share of common stock Basic............................ $ (0.84) $ (0.71) ====== ====== Diluted.......................... $ (0.84) $ (0.71) ====== ====== Average shares of common stock outstanding.......................... 20.4 20.2 The accompanying notes are an integral part of these statements. - 3 - 5 Outboard Marine Corporation Condensed Statements of Consolidated Financial Position
(Unaudited) Post-Merger Post-Merger Company Company December 31, September 30, (Dollars in millions) 1997 1997 ------------ ------------- (As Restated) (As Restated) ASSETS Current Assets: Cash and cash equivalents $ 24.1 $ 54.4 Receivables 127.9 153.2 Inventories Finished products 82.2 62.1 Raw material, work in process and service parts 115.0 114.8 -------- -------- Total inventories 197.2 176.9 Other current assets 54.6 86.5 -------- -------- Total current assets 403.8 471.0 Product tooling, net 33.9 34.2 Goodwill 126.5 127.3 Trademarks, patents and other intangibles 83.0 83.9 Other assets 169.4 168.2 Plant and equipment at cost 211.8 210.2 less accumulated depreciation (6.3) -- -------- -------- 205.5 210.2 -------- -------- Total assets $1,022.1 $1,094.8 ======== ======== LIABILITIES AND SHAREHOLDERS' INVESTMENT Current Liabilities: Short-term debt $ 175.7 $ 96.0 Accounts payable 67.9 142.0 Accrued and other 162.2 218.8 -------- -------- Total current liabilities 405.8 456.8 Long-term debt 102.8 103.8 Postretirement Benefits Other than Pensions 96.0 96.0 Other non-current liabilities 161.0 161.2 Shareholders' Investment: Common stock and capital surplus 277.0 277.0 Accumulated earnings employed in the business (17.1) -- Cumulative translation adjustments (3.4) -- -------- -------- Total shareholders' investment 256.5 277.0 -------- -------- Total liabilities and shareholders' investment $1,022.1 $1,094.8 ======== ========
The accompanying notes are an integral part of these statements. - 4 - 6 OUTBOARD MARINE CORPORATION STATEMENTS OF CONSOLIDATED CASH FLOWS (Unaudited)
Three Months Ended December 31 ----------------------------------------------- Post-Merger Pre-Merger Company Company ----------- ---------- (Dollars in millions) 1997 1996 ---- ---- (As Restated) (As Restated) Cash Flows from Operating Activities: Net earnings (loss) $ (17.1) $ (14.3) Adjustments to reconcile net earnings (loss ) to net cash provided by operations: 12.5 12.7 Depreciation and amortization Changes in current accounts excluding the effects of acquisitions and noncash transactions: Decrease in receivables 24.4 25.9 Increase in inventories (21.3) (9.6) Decrease (increase) in other current assets 31.8 (1.5) Decrease in accounts payable and accrued liabilities (63.5) (38.9) Other, net (3.4) 0.1 ------- ------- Net cash provided by (used for) operating activities (36.6) (25.6) Cash Flows from Investing Activities: Expenditures for plant and equipment, and tooling (6.3) (12.1) Proceeds from sale of plant and equipment 0.1 5.5 Other, net 0.8 -- ------ -------- Net cash used for investing activities (5.4) (6.6) Cash Flows from Financing Activities: Net increase in short-term debt 79.7 -- Payments of long-term debt, including current maturities (67.7) -- Cash dividends paid -- (4.0) Other, net -- 0.3 ------- -------- Net cash used for financing activities 12.0 (3.7) Exchange Rate Effect on Cash (0.3) 0.3 ------- -------- Net decrease in Cash and Cash Equivalents (30.3) (35.6) Cash and Cash Equivalents at Beginning of Period 54.4 95.5 ------- -------- Cash and Cash Equivalents at End of Period $ 24.1 $ 59.9 ======== ======== Supplemental Cash Flow Disclosures: Interest paid $ 7.2 $ 4.2 Income taxes paid $ 1.3 $ 2.7 ======== ========
The accompanying notes are an integral part of these statements -5- 7 Notes to Consolidated Financial Statements 1. MERGER WITH GREENMARINE ACQUISITION CORP. On September 12, 1997, Greenmarine Acquisition Corp. ("Greenmarine") acquired control of Outboard Marine Corporation (the "Pre-Merger Company") when shareholders tendered approximately 90 percent of the outstanding shares of the Pre-Merger Company's common stock to Greenmarine for $18 per share in cash. Greenmarine was formed solely to purchase the shares of the Pre-Merger Company and merged with and into the Pre-Merger Company in a non-taxable transaction on September 30, 1997. Outboard Marine Corporation was the surviving entity of the merger with Greenmarine (the "Post-Merger Company") (in either case, unless specifically referenced, Pre-Merger Company or Post-Merger Company are also defined as "OMC" or the "Company"). All of the outstanding Pre-Merger Company common stock was cancelled on September 30, 1997 and 20.4 million shares of new common stock were issued to Greenmarine Holdings LLC (the "Parent") the parent company of Greenmarine. Greenmarine's total purchase price of common stock and related acquisition costs amounted to $373.0 million. The Post-Merger Company Condensed Statement of Consolidated Financial Position as of December 31, 1997 and the related Post-Merger Company Statements of Consolidated Earnings and Consolidated Cash Flow for the three months ended December 31, 1997 are not comparable to the prior year because of purchase accounting adjustments. The acquisition and the merger were accounted for using the purchase method of accounting. Accordingly, the purchase price at September 30, 1997 has been allocated to assets acquired and liabilities assumed based on fair market values at the date of acquisition. The fair values of tangible assets acquired and liabilities assumed were $883.6 million and $817.8 million, respectively. In addition, $83.9 million of the purchase price was allocated to intangible assets for trademarks, patents and dealer network. As of December 31, 1997, the allocation of purchase price to assets acquired and liabilities assumed has not been finalized. The preliminary purchase price allocation included $8.1 million of reserves for: 1) severance costs associated with closing the Old Hickory, TN facility, 2) guaranteed payments for terminating a supply agreement and 3) severance costs for certain corporate employees. The Company has not incurred any costs against the reserves discussed above as of December 31, 1997. Subsequent adjustments to reduce the reserves by approximately $1.4 million as part of the finalization of the purchase price allocation were recorded at September 30, 1998 in accordance with EITF 95-3. The excess purchase price over fair value of the net assets acquired was $127.3 million and has been classified as goodwill in the Statement of Consolidated Financial Position at September 30, 1997. The goodwill related to the acquisition will be amortized using the straight-line method over a period of 40 years. 2. RESTATEMENT AND RECLASSIFICATION The Company has restated and reclassified its Statement of Consolidated Financial Position at September 30, 1997 and December 31, 1997 and its Statement of Consolidated Earnings for the three-month period ended December 31, 1997 to revise the accounting for its acquisition by Greenmarine. Except as otherwise stated herein, all information presented in the Consolidated Financial Statements and related notes herein includes all of the restatements and reclassifications. 6 8 The restatements result from management's reconsideration of the periods to which the reorganization plan expenses incurred in connection with the acquisition by Greenmarine should be charged. As of September 30, 1997 management had recorded these expenses as purchase accounting adjustments. Upon further consideration, management believes that these charges are more appropriately reported in fiscal year 1998. Operational refinements during fiscal year 1998, for example, changes in the specific plants to be closed, and the fact that certain parts of the plan were not implemented within a one year time period, result in a decision that these expenses are, using interpretations of authoritative accounting literature, more appropriately reported in the 1998 fiscal year. As a result, the Company's September 30, 1997 financial statements have been restated to reverse $122.9 million of previously recorded accrued liabilities and contingencies with a corresponding reduction in goodwill. The Company will recognize approximately $149 million in operating expenses and restructuring costs in its Statements of Consolidated Earnings for fiscal year 1998 (for each of the respective quarterly periods and the fiscal year-end, as appropriate) to record its reorganization plan and contingencies. (See Note 7 for further information on the Company's business reorganization plan.) In addition, the Company restated its Statement of Consolidated Earnings for the three months ended December 31, 1997 to reflect $5.0 million of charges as period costs. The primary components of the charges recorded in the three-month period ended December 31, 1997 as a result of the restatements include $2.8 million in compensation expense related to forfeitures resulting from the termination of an executive's employment agreement with a former employer in connection with the Company's hiring the executive concurrently with the acquisition of the Company by Greenmarine Holdings, and $1.7 million in incentives offered to dealers as part of a to-be-terminated incentive program that the Company was contractually obligated to fund. These costs were previously recorded as part of purchase accounting. The compensation expenses have been recorded as increases in selling, general, and administrative expenses and the dealer incentive accrual has been recorded as a reduction of net sales in the Statement of Consolidated Earnings. Separately, goodwill amortization expense was reduced by $0.8 million for the three months ended December 31, 1997. The Company also reclassified certain deferred tax items and a valuation reserve to more properly aggregate them in the appropriate asset and liability accounts. Separately, the Company reduced the deferred tax assets and the corresponding valuation allowance to reflect the tax impacts of the purchase accounting adjustments. As part of the purchase accounting adjustments, the Company also reclassified a valuation reserve for a joint venture investment to other assets from accrued liabilities. Such reclassifications did not change net income. The cumulative effect of such reclassifications and the restatement discussed above on the Statement of Consolidated Financial Position as of December 31, 1997 is shown in the following table:
AS PREVIOUSLY REPORTED RECLASSIFICATIONS RESTATEMENT AS RESTATED Goodwill $248.6 $ -- $(122.1) $126.5 Other current assets 54.6 -- -- 54.6 Other assets 130.7 44.5 -- 169.4 (5.8) Accrued liabilities 199.9 (5.8) (31.9) 162.2 Other non-current liabilities 202.5 44.5 (86.0) 161.0 Total shareholders' investment 260.7 -- (4.2) 256.5
The restatement also had the effect of increasing the net loss and loss per share in the Statement of Consolidated Earnings for the period ended December 31, 1997 as shown in the following table:
AS PREVIOUSLY REPORTED RESTATEMENT AS RESTATED Net Sales $ 211.2 $ (1.7) $ 209.5 Cost of goods sold 173.7 -- 173.7 ------- ------- ------- Gross earnings 37.5 (1.7) 35.8 Selling, general, and administrative expenses 44.3 2.5 46.8 ------- ------- ------- Loss from operations (6.8) (4.2) (11.0) Non-operating expenses 5.3 -- 5.3 ------- ------- ------- Loss before provision for income taxes (12.1) (4.2) (16.3) Provision for income taxes 0.8 -- 0.8 ------- ------- ------- Net earnings(loss) ($ 12.9) $ (4.2) $ (17.1) ======= ======= ======= Net loss per share Basic $ (.63) $ (.21) $ (.84) Diluted $ (.63) $ (.21) $ (.84)
7 9 The restatements did not have an affect on the Company's Statement of Consolidated Cash Flows (other than reclassifications in the cash flows from operations). 3. BASIS OF PRESENTATION The accompanying unaudited consolidated condensed financial statements present information in accordance with generally accepted accounting principles for interim financial information and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all information or footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the information furnished reflects all adjustments necessary for a fair statement of the results of the interim periods and all such adjustments are of a normal recurring nature. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K/A (Amendment No. 2) for the year ended September 30, 1997. The 1998 interim results are not necessarily indicative of the results which may be expected for the remainder of the year. 4. SHORT-TERM BORROWINGS The Company became obligated under a credit agreement, as amended, which provides for loans of up to $150 million (the "Acquisition Debt"). Amounts outstanding under this credit agreement are secured by 20.4 million shares of common stock of the Post-Merger Company and bear interest at 10%. The Acquisition Debt matures on June 16, 1998. On November 12, 1997, the Company borrowed the remaining $54.0 million principal amount of Acquisition Debt in connection with the purchase of all properly tendered 7% convertible subordinated debentures of Outboard Marine Corporation due 2002. At December 31, 1997, the full $150 million principal amount of the Acquisition Debt was outstanding. The full amount of the Acquisition Debt matures on June 16, 1998. The Company and its Parent believe the Company will be able to raise funds to refinance such debt through the sale of debt or equity in the public or private markets by the maturity date of the Acquisition Debt. The Company entered into a Financing and Security Agreement effective November 12, 1997, which provided for loans of up to $50 million and at December 31, 1997, $25.7 million was outstanding. Effective January 6, 1998, the Company entered into a $150 million Amended and Restated Loan and Security Agreement which expires December 31, 2000 which replaced the November 12, 1997 agreement. Any loans outstanding under the January 6, 1998 agreement will be secured by the Company's inventory, receivables, intellectual property and other current assets and are guaranteed by certain of the Company's operating subsidiaries. Under the various credit agreements, the Company is required to meet certain financial covenants throughout the year. 5. CONTINGENT LIABILITIES As a normal business practice, the Company has made arrangements with financial institutions by which qualified retail dealers may obtain inventory financing. Under these arrangements, the Company will repurchase its products in the event of repossession upon a retail dealer's default. These arrangements contain provisions which limit the Company's repurchase obligation to $40 million per model year for a period not to exceed 30 months from the date of invoice. This obligation automatically reduces over the 30-month period. The Company resells any repurchased products. Losses incurred under this program have not been material. The company accrues for losses which are anticipated in connection with expected repurchases. The Company is engaged in a substantial number of legal proceedings arising in the ordinary course of business. While the result of these proceedings, as well as those discussed below, cannot be predicted with any certainty, based upon the information presently available, management is of the opinion that the final outcome of all such proceedings should not have a material effect upon the Company's Statement of Consolidated Financial Position or the Statement of Consolidated Earnings of the Company. 8 10 Under the requirements of Superfund and certain other laws, the Company is potentially liable for the cost of clean-up at various contaminated sites identified by the United States Environmental Protection Agency and other agencies. The Company has been notified that it is named a potentially responsible party ("PRP") at various sites for study and clean-up costs. In some cases there are several named PRPs and in others there are hundreds. The Company generally participates in the investigation or clean-up of these sites through cost sharing agreements with terms which vary from site to site. Costs are typically allocated based upon the volume and nature of the materials sent to the site. However, under Superfund, and certain other laws, as a PRP the Company can be held jointly and severally liable for all environmental costs associated with a site. Once the Company becomes aware of its potential liability at a particular site, it uses its experience to determine if it is probable that a liability has been incurred and whether or not the amount of the loss can be reasonably estimated. Once the Company has sufficient information necessary to support a reasonable estimate or range of loss for a particular site, an amount is added to the company's aggregate environmental contingent liability accrual. The amount added to the accrual for the particular site is determined by analyzing the site as a whole and reviewing the probable outcome for the remediation of the site. This is not necessarily the minimum or maximum liability at the site but, based upon the Company's experience, most accurately reflects the Company's liability based on the information currently available. The Company takes into account the number of other participants involved in the site, their experience in the remediation of sites and the Company's knowledge of their ability to pay. As a general rule, the Company accrues remediation costs for continuing operations on an undiscounted basis and accrues for normal operating and maintenance costs for site monitoring and compliance requirements. The Company also accrues for environmental close-down costs associated with discontinued operations or facilities, including the environmental costs of operation and maintenance until disposition. At December 31, 1997, the Company has accrued approximately $21.0 million for costs related to remediation at contaminated sites including operation and maintenance for continuing and closed-down operations. The possible recovery of insurance proceeds has not been considered in estimating contingent environmental liabilities. In the quarter ended December 31, 1996, the Company recovered insurance proceeds of $6.1 million for prior environmental charges which is included in non-operating expense (income) in the Statement of Consolidated Earnings. Each site, whether or not remediation studies have commenced, is reviewed on a quarterly basis and the aggregate environmental contingent liability accrual is adjusted accordingly. Because the sites are reviewed and the accrual adjusted quarterly, the Company is confident the accrual accurately reflects the Company's liability based upon the information available at the time. 6. PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (UNAUDITED) The following unaudited pro forma Condensed Statement of Consolidated Earnings (the "Pro Forma Statement") was prepared to illustrate the estimated effects of the acquisition by Greenmarine Holdings as if the transaction had occurred for statement of consolidated earnings purposes as of the beginning of fiscal 1997. The pro forma adjustments are based upon available information and upon certain assumptions that the Company believes are reasonable. The Pro Forma Statement does not purport to represent what the Company's results of operations would actually have been if such transactions in fact had occurred at the beginning of the period indicated or to project the Company's results of operation for any future period. The Pro Forma Statement includes adjustments, with respect to the merger, to reflect additional interest expense, depreciation expense and amortization of goodwill. 9 11
Three Months Ended December 31, 1996 (In millions, except per share data) (Unaudited) Net sales $ 197.1 Cost of goods sold 174.1 ------- Gross earnings 23.0 Selling, general and administrative expense 43.5 ------- Earnings (Loss) from operations (20.5) Interest expense 7.4 Other (income) expense, net (10.6) ------- Loss before provision for income taxes (17.3) Provision for income taxes 0.8 ------- Net loss $ (18.1) ======= Net loss per share of common stock (basic and diluted) $ (0.89) ======= Shares outstanding 20.4 =======
7. SUBSEQUENT EVENTS The Company expects to report a net loss of approximately $150 million in fiscal year 1998. The net loss will include approximately $51 million of operating expenses and approximately $98 million of restructuring expenses that were previously recorded as part of purchase accounting prior to the restatement discussed in Note 2. In January 1998, the Company announced the closing of its Old Hickory, TN facility and the consolidation of its freshwater fishing operations to the Company's Murfreesboro, TN facility. On March 10, 1998, the Company adopted the Outboard Marine Corporation Personal Rewards and Opportunities Program ("PROP"). PROP was designed to recognize and reward, through cash bonuses, stock options and other equity-based awards, the personal contributions and achievements of the Company's employees. All employees are eligible to participate in PROP. The aggregate number of shares of stock available for equity awards under PROP is 1,500,000 shares currently authorized common stock of the Company. In fiscal 1997, the Company became aware of certain problems associated with its FICHT engines. In April 1998, the Company began to identify the causes of the problems and an upgrade kit was prepared and distributed. The Company established a reserve for the correction and will record this amount in its third and fourth quarters of fiscal 1998. On May 27, 1998, the Company issued $160.0 million of 10-3/4 Senior Notes due 2008, with interest payable semiannually on June 1 and December 1 of each year. The net proceeds from the issuance totaled $155.2 million, of which $150.0 million was used to repay the Acquisition Debt. In July 1998, the Company was provided information on the results of a feasibility study which was performed on the Company's owned property located in Waukegan, Illinois, commonly known as the Coke Plant. This information was provided to the Company by the two prior owners of the property -- General Motors Corporation and North Shore Gas Company. Although the Company was aware of the contamination and that the study was being conducted, it was not until this time that they became aware of the scope and extent of the contamination and the associated remedial alternatives. Although the Company believes that it was not a generator of hazardous substances at the site, as a land owner, it is by statute a potentially responsible party (PRP). Based on its experience with Superfund Sites, the Company calculated a range of potential allocations and will record an amount related to the most probable outcome in its September 1998 financial statements. On July 22,1998, the Board of Directors of the Company resolved to amend Article x of its Bylaws to reflect a change in its fiscal year from the twelve month period of October 1 through September 30 of each year to a twelve month calendar year of January 1 through December 31 of each year. The Company has received correspondence from Orbital Engine Corporation Limited ("Orbital") alleging that the Company's FICHT fuel-injected 150-horsepower engines infringe two Australian Orbital patents, which correspond to three U.S. patents and to a number of foreign patents. The Company believes that it has substantial defenses to these allegations, including that the three corresponding U.S. patents are not infringed and/or are invalid. However, there can be no assurance that Orbital will not commence litigation against the Company with respect to this matter or, if such litigation is commenced, that the Company's defenses will be successful. If Orbital is successful in an action against the Company, the Company could be required to obtain a license from Orbital to continue the manufacture, sale, use or sublicense of FICHT products and technology or it may be required to redesign its FICHT products and technology to avoid infringement. There can be no assurance that any such license could be obtained or that any such redesign would be possible. There also can be no assurance that the failure to obtain any such license or effect 10 12 any such redesign, or any cost associated therewith, would not have a material adverse effect on the Company. The Company determined a range of potential outcomes and recorded an amount in its June 1998 financial statements. On September 24, 1998, the Company announced that it would be closing its Milwaukee, Wisconsin and Waukegan, Illinois facilities by the year 2000. A restructuring charge of approximately $98 million will be recognized in the fourth fiscal quarter of 1998 and includes charges for the costs associated with closing these two facilities (Milwaukee, WI and Waukegan, IL engine plants), and the related employee termination benefits for approximately 900 employees. The Company plans to outsource the manufacturing of parts currently produced by these two facilities to third party vendors. It has started to obtain proposals from several vendors and is currently reviewing the proposals received in anticipation of outsourcing production. The Company anticipates substantial completion of the restructuring plan by the year 2000. Separately, as part of the restatements, the Company recognized liabilities for certain contingencies related to a patent claim, an environmental remediation site and certain engine warranty claims. On December 8, 1998, the Company terminated its joint venture with AB Volvo Penta and Volvo Penta of the Americas, Inc. and entered into a Product Sourcing Contract (the "Sourcing Contract") which will control the future purchase and sale obligations of various specified goods between certain of the parties. As of September 30, 1998, the Company was not in compliance with certain of the maintenance covenants contained in its credit agreement with NationsBank, N.A. The Company informed the lenders under the credit agreement of the circumstances resulting in the non-compliance and the Company reached an understanding with NationsBank, as agent for the lenders under the credit agreement, regarding revised covenants and waivers of any past violations. The Company is currently negotiating the third amendment to the credit agreement to formalize the amendment and it is expected the amendment will be finalized prior to the Company's filing its Annual Report on Form 10-K for its fiscal year ended September 30, 1998. 11 13 PART I, ITEM 2 FINANCIAL INFORMATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DECEMBER 31, 1997 The following discussion should be read in conjunction with the more detailed information and Consolidated Financial Statements of the Company, together with the notes thereto, included elsewhere herein. The Company announced that it is restating its post-merger consolidated financial statements for its fiscal quarter ended December 31, 1997 in connection with its revising the accounting for its acquisition by Greenmarine Holdings LLC ("Greenmarine Holdings") in September 1997. The Company has also restated its financial statements for its fiscal year ended September 30, 1997. The restatements result from management's reconsideration of the periods to which the reorganization plan expenses incurred in connection with the acquisition by Greenmarine Holdings should be charged. As of September 30, 1997 management had recorded these expenses as purchase accounting adjustments. Upon further consideration, management believes that these charges are more appropriately reported in fiscal year 1998. Operational refinements during fiscal year 1998, for example, changes in the specific plants to be closed, and the fact that certain parts of the plan were not implemented within a one year time period, result in a decision that these expenses are, using interpretations of authoritative accounting literature, more appropriately reported in the 1998 fiscal year. As a result, the Company's September 30, 1997 financial statements have been restated to reverse $122.9 million of previously recorded accrued liabilities and contingencies with a corresponding reduction in goodwill. The Company will recognize approximately $149 million in operating expenses and restructuring costs in its Statements of Consolidated Earnings for fiscal year 1998 (for each of the respective quarterly periods and the fiscal year-end, as appropriate) to record its reorganization plan and contingencies. (See Note 7 of the Notes to the Consolidated Financial Statements contained elsewhere herein for further information on the Company's business reorganization plan.) The restatements to the Company's financial statements at and for the fiscal quarter ended December 31, 1997 include the reversal of the items listed above for the September 30, 1997 period as well as certain adjustments to reflect items, formerly charged against purchase accounting reserves in the fiscal quarter ended December 31, 1997, as period costs (See Note 2 of the Notes to the Consolidated Financial Statements contained elsewhere herein). The primary components of the charges recorded in the three-month period ended December 31, 1997 as a result of the restatements include $2.8 million in compensation expense related to forfeitures resulting from the termination of an executive's employment agreement with a former employer in connection with the Company's hiring the executive concurrently with the acquisition of the Company by Greenmarine Holdings, and $1.7 million in incentives offered to dealers as part of a to-be-terminated incentive program that the Company was contractually obligated to fund. These costs were previously recorded as part of purchase accounting. The compensation expenses have been recorded as increases in selling, general, and administrative expenses and the dealer incentive accrual has been recorded as a reduction of net sales in the Statement of Consolidated Earnings. The Company also reclassified certain deferred tax items and a valuation reserve to more properly aggregate them in the appropriate asset and liability accounts. Separately, the Company reduced the deferred tax assets and the corresponding valuation allowance to reflect the tax impacts of the purchase accounting adjustments. As part of the purchase accounting adjustments, the Company also reclassified a valuation reserve for a joint venture investment to other assets from accrued liabilities. Such reclassifications did not change net income. The restatements did not have an effect on the Company's Statement of Consolidated Cash Flows (other than certain reclassifications in the cash flows from operations). Further information regarding the restatement is provided in Note 1 and 2 of the Notes to the Consolidated Financial Statements contained elsewhere herein. Industry Overview. According to data published by the National Marine Manufacturers' Association ("NMMA"), the recreational boating industry generated approximately $17.8 billion in domestic retail sales in 1996, including approximately $8.1 billion in sales of boats, engines, trailers and accessories. In addition, according to statistics compiled by the U.S. Department of Commerce, recreational products and services represent one of the fastest growing segments of U.S. expenditures. Although unit sales in the marine industry in recent years have been declining or flat, the Company may benefit from recent industry-wide efforts in the U.S. designed to increase the share of recreational expenditures related to boating. The NMMA, Marine Retailers Association of America and other marine industry leaders, including the Company, have formed a joint task force to implement initiatives to improve the quality of the industry's marine dealer network, improve the overall boating experience for consumers and enhance the awareness of boating as a recreational activity through various advertising programs. The Company believes that the overall shift in spending of discretionary income towards recreational products and services and recent efforts to increase the share of recreational expenditures directed towards boating may contribute to growth in the recreational boating industry over the next several years. 12 14 Cyclicality; Seasonality; Weather Conditions. In general, the recreational marine industry is highly cyclical. Industry sales, including sales of the Company's products, are closely linked to the conditions of the overall economy and are influenced by local, national and international economic conditions, as well as interest rates, consumer spending, technology, dealer effectiveness, demographics, fuel availability and government regulations. In an economic downturn, consumer discretionary spending levels are reduced, often resulting in disproportionately large declines in the sale of relatively expensive items such as recreational boats. Similarly, rising interest rates could have a negative impact on consumers' ability, or willingness to obtain financing from lenders, which could also adversely affect the ability of the Company to sell its products. Even if prevailing economic conditions are positive, consumer spending on non-essential goods such as recreational boats can be adversely affected due to declines in consumer confidence levels. According to data published by the NMMA, total unit sales of outboard boats in the United States fell from a high of 355,000 units in 1988 to 192,000 units in 1992, while total unit sales of outboard engines in the United States fell from a high of 460,000 units to 272,000 units during the same time period. The sales decline in the marine industry during this period was the worst such decline in the last 30 years. According to data published by the NMMA, 1995 annual U.S. purchases of boats and engines increased to 336,960 and 317,000, respectively, but unit sales declined in 1996, when reported U.S. sales of boats and engines each totaled 304,600. The Company believes these declines were partially due to adverse weather conditions. The recreational marine industry, in general, and the business of the Company are seasonal due to the impact of the buying patterns of its dealers and consumers. The Company's peak revenue periods historically have been its fiscal quarters ending June 30 and September 30, respectively. Accordingly, the Company's business, receivables, inventory and accompanying short-term borrowing to satisfy working capital requirements are usually at their highest levels in the Company's fiscal quarter ending March 31 and decline thereafter as the Company's products enter the peak consumer selling seasons. Short-term borrowing averaged $2.9 million in 1997, with month-end peak borrowing of $29.0 million in February 1997. Because of the seasonality of the Company's business, the results of operations for any fiscal quarter are not necessarily indicative of the results for the full year. Additionally, an event which adversely affects the Company's business during any of these peak periods could have a material adverse effect on the Company's financial condition or results of operations for the full years. The Company's business is also affected by weather patterns which may adversely impact the Company's operating results. For example, excessive rain during the Spring and Summer, the peak retail sales periods, or unseasonably cool weather and prolonged winter conditions, may curtail customer demand for the Company's products. Although the geographic diversity of the Company's dealer network may reduce the overall impact on the Company of adverse weather conditions in any one market area, such conditions may continue to represent potential adverse risks to the Company's financial performance. 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 13 15 September 30, 1997, Greenmarine Holdings acquired the untendered Pre-Merger Company Shares by merging its acquisition subsidiary (i.e. Greenmarine Acquisition Corp.) with and into the Company (the "Merger", and together with the Tender Offer, the "Greenmarine Acquisition"). As a result of the Merger, the Company became a wholly-owned subsidiary of Greenmarine Holdings; each untendered Pre-Merger Company Share outstanding immediately prior to the Merger was converted into the right to receive a cash payment of $18.00 per share; and 20.4 million shares of new common stock of the Company were issued to Greenmarine Holdings. The Greenmarine Acquisition was completed for aggregate consideration of approximately $373.0 million and has been accounted for under the purchase method of accounting. Accordingly, the purchase price has been allocated to assets acquired and liabilities assumed based on fair market values at the date of acquisition (i.e., September 30, 1997). In the opinion of management, accounting for the purchase as of September 30, 1997 instead of September 12, 1997 did not materially affect the Company's results of operations for fiscal 1997. The fair values of tangible assets acquired and liabilities assumed were $883.6 million and $817.8 million, respectively. In addition, $83.9 million of the purchase price was allocated to intangible assets for trademarks, patents and dealer network. The excess purchase price over fair value of the net assets acquired was $127.3 million and has been classified as goodwill in the Statement of Consolidated Financial Position as of September 30, 1997. As of September 30, 1997, the allocation of purchase price to assets acquired and liabilities assumed in the Greenmarine Acquisition has not been finalized. The preliminary purchase price allocation included $8.1 million of reserves for (i) severance costs associated with closing the Company's Old Hickory, Tennessee facility, (ii) guaranteed payments in connection with terminating a supply agreement and (iii) severance costs for certain former corporate employees. The goodwill related to the acquisition will be amortized using the straight-line method over a period of 40 years. New Management Initiatives. As discussed above, on September 12, 1997, Greenmarine Holdings acquired control of the Company. Since that time, the Company has begun to assemble a new, highly-experienced senior management team led by David D. Jones. As of September 30, 1997, the new senior management team began developing, and, as of December 31, 1997, is still developing, a turnaround strategy to capitalize on the Company's strong market position and leading, well-recognized brand names and to take advantage of anticipated growth in the recreational marine industry. In addition, as part of the Greenmarine Acquisition, the Company is developing a business reorganization plan to realign and consolidate its products offered in the marketplace, and to improve existing manufacturing processes that will enable the Company to increase production efficiency and asset utilization. This turnaround strategy and reorganization plan may include the elimination and/or consolidation of certain of the Company's products and may include the closing and/or consolidation of certain of the Company's manufacturing facilities located primarily in the United States and corresponding involuntary employee terminations. In connection with the implementation of the Company's turnaround strategy and reorganization plan, some key actions have already been taken. In October 1997, the Company announced that its Four Winns boat brand would be the Company's premier boat brand and a new general manager was announced to ensure that the manufacturing efficiencies of the Four Winns facilities in Cadillac, Michigan would be achieved. In December 1997, the Company announced the closing of a facility in Old Hickory, Tennessee, the consolidation of its freshwater fishing operations to its Murfreesboro, Tennessee facility, and the consolidation of substantially all of its saltwater fishing boat operations to its Columbia, South Carolina facility. These actions were done so that the Company could better focus its resources on these unique markets. In January 1998, the Company also announced that a strategic purchasing program had been put into place from which it was expected to derive substantial savings. A team of internal 14 16 managers to coordinate this program is expected to be operational by the end of February 1998. Introduction of FICHT Engines; Regulatory Compliance. The United States Environmental Protection Agency (the "EPA") has adopted regulations governing emissions from two-stroke marine engines. As adopted, the regulations as they relate to outboard engines phase in over nine years, beginning in model year 1998 and concluding in model year 2006. With respect to personal watercraft, the regulations phase in over eight years, beginning in model year 1999 and concluding in model year 2006. Marine engine manufacturers will be required to reduce hydrocarbon emissions from outboard engines, on average by 8.3% per year through model year 2006 beginning with the 1998 model year, and emissions from personal watercraft by 9.4% per year through model year 2006 beginning in model year 1999. In 1994, the Company announced "Project LEAP", a project to convert its entire outboard product line to low-emissions products within the next decade. Partly in response to these EPA emission standards, the Company introduced its new Johnson and Evinrude engines with FICHT fuel-injection technology, which offer an average hydrocarbon emission reduction of 80% and an approximate 35% increase in fuel economy depending on the application. In January 1997, the Company introduced its 150hp FICHT fuel-injected engine and, during fiscal 1998, the Company expects to introduce 175hp, 115hp and 90hp FICHT fuel-injected engines. All of the Company's fuel-injected engines are expected to meet or exceed the EPA's 2006 requirements. In addition, in February 1998, the Company debuted its FICHT technology application to personal watercraft. The higher manufacturing costs of the FICHT fuel injected engines will result initially in a lower margin to the Company; however, the Company has implemented several initiatives to reduce the manufacturing costs of its new engines. Because of the higher retail costs of engines incorporating the FICHT technology, consumer acceptance of the new engines may be restrained as long as less expensive engine models, which may or may not meet the new EPA standards, continue to be available. The Company expenses its research and development costs as they are incurred. In addition, the Company has a strategic alliance with Suzuki to produce certain four-stroke engines in specified horsepower levels to meet market demands for these products without investing in re-tooling and engineering costs. The Company believes the combination of the FICHT fuel injection technology and the addition of the four-strokes to the engine line will allow OMC to offer a broad range of low emission marine engine technology. The Company does not believe that compliance with the EPA's new emission standards, which will add cost to the Company's engine products and will initially result in a lower margin to the Company, will be a major deterrent to sales. The Company believes that its new compliant technology will add value to its products at the same time that the entire industry is faced with developing solutions to the same regulatory requirements. In addition, the Company has implemented several initiatives to reduce the manufacturing costs of its new engines. Although there can be no assurance, the Company does not believe that compliance with these new EPA regulations will have a material adverse effect on future results of operations or the financial condition of the Company. Additionally, certain states have required or are considering requiring a license to operate a recreational boat. While such licensing requirements are not expected to be unduly restrictive, regulations may discourage potential first-time buyers, which could affect the Company's business, financial condition and results of operations. In addition, certain state and local government authorities are contemplating regulatory efforts to restrict boating activities, including the use of engines, on certain inland bodies of water. 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. 15 17 Environmental Compliance. The Company is subject to regulation under various federal, state and local laws relating to the environment and to employee safety and health. These laws include those relating to the generation, storage, transportation, disposal and emission into the environment of various substances, those relating to drinking water quality initiatives and those which allow regulatory authorities to compel (or seek reimbursement for) cleanup of environmental contamination arising at its owned or operated sites and facilities where its waste is being or has been disposed. The Company believes it is in substantial compliance with such laws except where such noncompliance is not expected to have a material adverse effect. The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA" or "Superfund") and similar state laws impose joint, strict and several liability on (i) owners or operators of facilities at, from, or to which a release of hazardous substances has occurred; (ii) parties who generated hazardous substances that were released at such facilities; and (iii) parties who transported or arranged for the transportation of hazardous substances to such facilities. The Company has been notified that it is named a potentially responsible party ("PRP") at various sites for study and clean-up costs. In some cases there are several named PRPs and in others there are hundreds. The Company generally participates in the investigation or clean-up of these sites through cost sharing agreements with terms which vary from site to site. Costs are typically allocated based upon the volume and nature of the materials sent to the site. However, as a PRP, the Company can be held jointly and severally liable for all environmental costs associated with a site. As of December 31, 1997, the Company has accrued approximately $21 million for costs relating to remediation at contaminated sites, including operation and maintenance for continuing and closed-down operations. The Company believes that these reserves are adequate, although there can be no assurance that this amount will be adequate to cover such known or unknown matters. See Note 5 to the Consolidated Financial Statements included elsewhere herein. RESULTS OF OPERATIONS PERIODS ENDED DECEMBER 31, 1997 COMPARED TO PERIODS ENDED DECEMBER 31, 1996 16 18 Net Sales. Net sales increased to $209.5 million in the three months ended December 31, 1997 from $197.1 million in the three months ended December 31, 1996, an increase of 6.3%. The increase over last year was due primarily to higher marine engine sales. Softness in marine engine and boat sales in the fall of 1996 kept dealer inventories relatively high resulting in lower OMC sales while OMC assisted dealers in reducing field inventories. Cost of Goods Sold. Cost of goods sold decreased to $173.7 million in the three months ended December 31, 1997 from $174.4 million in the three months ended December 31, 1996. Cost of goods sold was 82.9 percent of sales during the first quarter of fiscal 1998 as compared with 88.5 percent of sales during the first quarter of fiscal 1997. The improvement in cost of goods sold is due primarily to better absorption of costs in the current quarter. In the previous year's first quarter the Company suspended production of many of its larger engines for nearly a month in order to make changes to equipment and processes necessary in order to significantly improve the quality of those engines. This resulted in both sales decreases and unabsorbed costs last year. Selling, General and Administrative ("SG&A"). SG&A expense increased to $46.8 million in the three months ended December 31, 1997 from $42.4 million in the three months ended December 31, 1996, an increase of $4.4 million or 10.4 percent. The increase is due primarily to higher warranty expense due to extended warranty coverage on certain new models. Earnings (Loss) from Operations. Earnings from operations was ($11.0) million in the three months ended December 31, 1997 compared with a loss of ($19.7) million in the three months ended December 31, 1996. The increase was primarily attributable to the increase in sales coupled with better absorption of costs. Non-Operating Expense (Income). Interest expense increased to $7.7 million in the three months ended December 31, 1997 from $4.4 million in the three months ended December 31, 1996, an increase of $3.3 million. The increase was a result of the new debt structure in place after the merger. Other non-operating income was $2.4 million in the three months ended December 31, 1997 compared to $10.6 million in the three months ended December 31, 1996. Other non-operating income was lower due primarily to $1.6 million in gains from the sale of assets and an insurance recovery of $6.1 million in an environmental matter both in the previous year's first quarter. Provision (Credit) for Income Taxes. Provision (credit) for income taxes was $0.8 million in the three months ended December 31, 1997 and $0.8 million in the three months ended December 31, 1996. The provision for income taxes for the three months ended December 31, 1997 and 1996 resulted from the net of expected taxes payable and benefits relating to certain international subsidiaries. No tax benefit is allowed for domestic losses because they are not realizable, at this time, under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." FINANCIAL CONDITION; LIQUIDITY AND CAPITAL RESOURCES As a result of the Greenmarine Acquisition, the Statement of Consolidated Financial Position as of September 30, 1997 was prepared using the purchase method of accounting 17 19 which reflects the fair values of assets acquired and liabilities assumed. The excess of the total acquisition cost over the estimated fair value of assets acquired and liabilities assumed at the date of acquisition was $127.3 million. The Post-Merger Company Statement of Condensed Consolidated Financial Position as of December 31, 1997 is not comparable to the prior year because of the purchase accounting adjustments. The Company's business is seasonal in nature with receivable and inventory levels normally increasing in the Company's fiscal quarter ending December 31 and peaking in the Company's fiscal quarter ending March 31. Current assets at December 31, 1997 decreased $67.2 million from September 30, 1997. Cash and cash equivalents decreased $30.3 million. Receivables decreased $25.3 million due primarily to the switch to more domestic outside financing and inter-national independent distributor sales. Inventories at December 31, 1997 increased $20.3 million from September 30, 1997 due to the seasonal nature of OMC's business but were lower than the December 31, 1996 levels due primarily to efforts to reduce quantities of work in process and service parts inventories. Other current assets decreased $31.9 million due primarily to a reduction in a trust depository that funded the remaining untendered outstanding shares of the Pre-Merger Company's common stock. Short-term debt was $175.7 million at December 31, 1997 including $150.0 million principal amount of the credit agreement dated August 13, 1997, with American Annuity Group, Inc. and Great American Insurance Company as lenders (the "Term Loan"). The Company assumed the obligations under the Term Loan in connection with the Greenmarine Acquisition. The full amount of the Term Loan matures on June 16, 1998. The Company and Greenmarine Holdings believe the Company will be able to raise funds to refinance such debt through the sale of debt or equity in the public or private markets by the maturity date of the Term Loan. See Note 3 to the Consolidated Financial Statements. Accounts payable decreased $74.1 million from September 30, 1997 due to payments to Pre-Merger Company shareholders for untendered outstanding stock and also due to payments due to change of control. Accrued liabilities decreased $56.6 million due primarily to the redemption of the Pre-Merger Company's convertible subordinated debentures due 2002. Cash provided by (used by) operations was $(36.6) million for the three months ended December 31, 1997 compared with $(25.6) million for the three months ended December 31, 1996. Expenditures for plant and equipment and tooling were $6.3 million for the three months ended December 31, 1997 compared to $12.1 million for the three months ended December 31, 1996. The lower level of expenditures is due to prior capital programs being completed while reorganization programs are in the process of being developed in the current year. In connection with the merger, the Post-Merger Company assumed the obligations under a credit agreement for up to $150 million (the "Acquisition Debt") borrowed for the purposes of acquiring shares of the Pre-Merger Company and the purchase of some $67.7 million principal amount of 7% convertible subordinated debentures due 2002 (the "Convertible Debentures"), which the Company had an obligation to offer to purchase because of the change of control at a price of 100% of the outstanding principal amount of the Acquisition Debt was outstanding. The remaining $54 million principal amount of the Acquisition Debt was borrowed on November 12, 1997 in connection with the purchase of the Convertible Debentures. The Company entered into an Amended and Restated Loan and Security Agreement, effective as of January 6, 1998 (the "Credit Agreement"), with a syndicate of lenders 18 20 for which NationsBank of Texas, N.A. is administrative and collateral agent (the "Agent"). The Credit Agreement provides a revolving credit facility (the "Revolving Credit Facility") of up to $150.0 million, subject to borrowing base limitations, to finance working capital with a $25.0 million sublimit for letters of credit. The Revolving Credit Facility expires on December 31, 2000. The Revolving Credit Facility is secured by a first and only security interest in all of the Company's existing and hereafter acquired accounts receivable, inventory, 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. Although there can be no assurance, the Company expects to use the cash from the anticipated sales of products and collection of receivables to repay all amounts outstanding under the Revolving Credit Facility by the end of fiscal 1998. The Credit Agreement contains a number of financial covenants, including those requiring the Company to satisfy specific levels of (i) consolidated tangible net worth, (ii) interest coverage ratios, and (iii) leverage ratios. As a normal business practice, the Company has made arrangements with financial institutions by which qualified retail dealers may obtain inventory financing. Under these arrangements, the Company will repurchase products in the event of repossession upon a retail dealer's default. These arrangements contain provisions which limit the Company's repurchase obligation to $40.0 million per model year for a period not to exceed 30 months from the date of invoice. The Company resells any repurchased products. Losses incurred under this program have not been material. In fiscal 1997, the Company repurchased approximately $3.9 million of products, all of which were resold at a discounted price. The Company accrues for losses that are anticipated in connection with expected repurchases. The Company does not expect these repurchases to materially affect its results of operations. 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, and its other sources of liquidity, will be adequate to meet its anticipated requirement for working capital and accrued liabilities, capital expenditures, interest payments and scheduled principal payments over the next several years. There can be no assurance, however, that the Company's business will continue to generate cash flow at or above current levels or that anticipated costs savings can be fully achieved. If the Company is unable to generate sufficient cash flow from operations in the future to service its debt and accrued liabilities and make necessary capital expenditures, or if its future earnings growth is insufficient to amortize all required principal payments out of internally generated funds, the Company may be required to refinance all or a portion of its existing debt, sell assets or obtain additional financing. There can be no assurance that any such refinancing or asset sales would be possible or that any additional financing could be obtained on attractive terms, particularly in view of the Company's high level of debt. YEAR 2000 MATTERS During fiscal 1997, the Company assessed the steps necessary to address issues raised by the coming of Year 2000. The steps to be taken include 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 19 21 hardware, educating its dealers and distributors and working with vendors of both goods and services. With the assessment phase of the strategy completed, the Company is in the process of implementing and testing remedies of issues identified during the assessment phase. Issues raised relative to personal computers and local and wide area networks are in the process of being remedied through the acquisition of new software and hardware. The Company has found very few embedded processors contained in its manufacturing equipment which would be affected by the Year 2000 and those which were identified are in the process of being modified. Most of the Company's telecommunications equipment is currently Year 2000 compliant and in cases where it is not, the equipment has either been replaced or appropriation requests for the replacement have been prepared and are being processed. The Company anticipates completing all implementation and testing of internal remedies by June 30, 1999. Also as part of the Company's Year 2000 compliance efforts, it has substantially reviewed all vendors of goods and is currently reviewing vendors providing services and prioritized them from critical (i.e., vendors whose goods or services are necessary for the Company's continued operation) to non-critical (i.e., suppliers whose products were either not critical to the continued operation of the Company or whose goods or services could otherwise be readily obtained from alternate sources) providers. These vendors range from service providers, such as banks, utility companies and benefit plan service providers to suppliers of goods required for the manufacture of the Company's products. Following this initial vendor review, the Company established a strategy to determine the readiness of those vendors for Year 2000. This initially involves sending a letter notifying the vendor of the potential Year 2000 issues, which was followed by a questionnaire to be completed by the vendor. In the event a non-critical supplier either did not respond or responded inadequately, follow-up questionnaires were sent and calls made in order to further clarify the vendor situation. In the event that a critical vendor did not respond or responded inadequately, the Company not only follows up with additional questionnaires and telephone calls but also scheduled or will schedule on-site meetings with the vendor in order to satisfy itself that the vendor is or will be prepared to operate into the Year 2000. The Company believes that the unresponsive critical vendors create the most uncertainty in the Company's Year 2000 compliance efforts. In the event that the Company is not satisfied that a critical vendor will be able to provide its goods or services into the Year 2000, the Company has begun to review alternate suppliers who are in a position to certify that they are or will be Year 2000 ready. The timing of the Company's decision to change vendors will depend on what type of goods or service the non-responsive or non-compliant vendor provides and the lead time required for an alternate vendor to begin supplying. The Company has reviewed those critical vendors that have not responded adequately and has been reviewing the timing of replacing, if necessary, any such noncompliant vendor. In addition, in connection with the Company's initiative to outsource non-core capabilities, a potential vendor's Year 2000 readiness is one criteria the Company will consider in selecting the vendor for such outsourcing activity. In addition, the Company has reviewed the goods it manufactures for sale to its dealers, distributors and original equipment manufacturers and has determined that those goods are Year 2000 compliant. Finally, in preparing for the advent of the Year 2000, the Company has taken steps to heighten the 20 22 awareness among its dealer and distributor network of the issues associated with the Year 2000. The issue is covered in monthly publications which are distributed to the dealers and also by the sales force that is responsible for the regular communications with the dealer and distributor network. Through December 31, 1997, the Company has made no expenditures on personal computer and network, mainframe and telecommunication solutions for issues related with the Year 2000 and estimates that it will spend up to a total of $11.1 million, half of which is associated with personal computers and networks, to remedy all of the issues associated with ensuring that its hardware and software worldwide, and the systems associated therewith, are able to operate into the Year 2000. The Company believes that its owned or licensed hardware and software will be able to operate into the Year 2000. However, the Company relies on the goods and services of other companies in order to manufacture and deliver its goods to the market. Although the Company is taking every reasonable step to determine that these vendors will be able to continue to provide their goods or services, there can be no assurance that, even upon assurance of their ability to do so, the Company's vendors will be able to provide their goods and services to the Company in a manner that satisfactorily addresses the Year 2000 issues. If, on or near January 1, 2000, the Company discovers that a non-critical vendor, which previously assured the Company that it would be Year 2000 compliant, is in-fact not compliant, an alternate supplier will be used by the Company and there should be no material effect on the Company's business. If, on or near January 1, 2000, the Company discovers that a critical vendor, such as a utility company or a supplier of a part, component or other goods or service that is not readily available from an alternate supplier, which previously assured the Company that it would be Year 2000 compliant is in-fact not compliant, the Company may not be able to produce on a timely basis finished goods for sale to its dealers. If this should occur, the Company will either wait for such vendor to become Year 2000 compliant or seek an alternate vendor who can provide the applicable goods or service in a more timely manner. In the event that the vendor is critical and either no alternate vendor is available or is able to operate into the Year 2000, this event could have a material adverse effect on the Company's business, results of operations, or financial condition. FORWARD-LOOKING STATEMENTS Some of the foregoing statements are forward-looking in nature and made in reliance upon the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties, including but not limited to the impact of competitive products and pricing, product demand and market acceptance, new product development, availability of raw materials, the availability of adequate financing on terms and conditions acceptable to the Company, and general economic conditions including interest rates and consumer confidence. Investors are also directed to other risks discussed in documents filed by the Company with the Securities and Exchange Commission. The Company assumes no obligation to update the information included in this statement. 21 23 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this amended report to be signed on its behalf by the undersigned thereunto duly authorized. OUTBOARD MARINE CORPORATION Signature Title Date - -------------------------- --------------------------- ------------------------ By /s/ Andrew P. Hines Executive Vice President & December 21, 1998 Chief Financial Officer - -------------------------- --------------------------- ------------------------ ANDREW P. HINES 22 -----END PRIVACY-ENHANCED MESSAGE-----