-----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, Rz5dqBRxSZwESCHh5EYYiZdDrvuxV4IS7P7qPmnsNYlAjYvZLtXa7FHRIpqQPUKE 18vLO0idi78KWitjND04KA== 0000950123-98-010795.txt : 19981228 0000950123-98-010795.hdr.sgml : 19981228 ACCESSION NUMBER: 0000950123-98-010795 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980630 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: 98773236 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 amended report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 1998. or ( ) Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934. Commission file number 1-2883 OUTBOARD MARINE CORPORATION (Exact name of registrant as specified in its charter) 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 June 30, 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 June 30, 1998 to revise the accounting of its acquisition by Greenmarine Holdings LLC in September 1997. (See Note 2 to the Notes to Consolidated Financial Statements). 1 3 OUTBOARD MARINE CORPORATION FORM 10-Q PART 1, ITEM 1 FINANCIAL INFORMATION FINANCIAL STATEMENTS June 30, 1998 Financial statements required by this form:
Page Statements of Consolidated Earnings....................... 3 Condensed Statements of Consolidated Financial Position .. 4 Statements of Consolidated Cash Flows..................... 5 Notes to Consolidated Financial Statements................ 6
2 4 OUTBOARD MARINE CORPORATION CONDENSED STATEMENTS OF CONSOLIDATED EARNINGS (UNAUDITED)
Three Months Ended Nine Months Ended June 30 June 30 ----------------------- ----------------------- Post-Merger Pre-Merger Post-Merger Pre-Merger Company Company Company Company ----------- ---------- ----------- ---------- 1998 1997 1998 1997 ----------- ---------- ----------- ---------- (As Restated) (As Restated) (Dollars in millions amounts per share) Net sales............... $ 282.4 $ 275.8 $ 754.1 $ 709.9 Cost of goods sold...... 212.9 221.0 590.8 595.9 ------- ------- ------- ------- Gross earnings........ 69.5 54.8 163.3 114.0 Selling, general and administrative expense. 67.4 59.8 175.4 151.7 ------- ------- ------- ------- Earning (loss) from operations........... 2.1 (5.0) (12.1) (37.7) Non-operating expense (income): Interest expense...... 8.2 4.3 22.6 12.7 Other, net............ (3.7) (4.6) (8.6) (25.9) ------- ------- ------- ------- 4.5 (0.3) 14.0 (13.2) ------- ------- ------- ------- Earnings (loss) before provision for income taxes................ (2.4) (4.7) (26.1) (24.5) Provision for income taxes 1.4 0.4 3.2 2.2 ------- ------- ------- ------- Net earnings (loss).. $ (3.8) $ (5.1) $ (29.3) $ (26.7) ======= ======= ======= ======= Net earnings (loss) per share of common stock Basic................. $ (0.19) $ (0.25) $ (1.44) $ (1.32) ======= ======= ======== ======= Diluted............... $ (0.19) $ (0.25) $ (1.44) $ (1.32) ======= ======= ======== ======= Average shares of common stock outstanding............ 20.4 20.2 20.4 20.2
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 ----------- ------------ June 30, September 30, 1998 1997 ----------- ------------ (As Restated) (As Restated) (Dollars In Millions) ASSETS Current assets: Cash and cash equivalents... $ 35.5 $ 54.4 Receivables................. 149.8 153.2 Inventories Finished products.......... 64.2 62.1 Raw material, work in process and service parts. 110.3 114.8 -------- -------- Total inventories......... 174.5 176.9 Other current assets......... 40.2 86.5 -------- -------- Total current assets...... 400.0 471.0 Restricted cash............... 28.6 -- Product tooling, net.......... 33.7 34.2 Goodwill...................... 124.9 127.3 Trademarks, patents and other intangibles............ 81.7 83.9 Other assets.................. 165.5 168.2 Plant and equipment at cost 219.6 210.2 Less accumulated depreciation .............. (20.1) -- -------- -------- 199.5 210.2 -------- -------- Total assets............. $1,033.9 $1,094.8 ======== ======== LIABILITIES AND SHAREHOLDERS' INVESTMENT Current liabilities: Short-term debt............ $ 30.0 $ 96.0 Accounts payable........... 76.7 142.0 Accrued and other.......... 164.1 139.3 Accrued income taxes....... 5.8 6.6 Current maturities and sinking fund requirements of long-term debt......... 11.2 72.9 -------- -------- Total current liabilities. 287.8 456.8 Long-term debt ............... 248.2 103.8 Postretirement benefits other than pensions 95.0 96.0 Other non-current liabilities 160.8 161.2 Shareholders' investment: Common stock and capital surplus................... 277.1 277.0 Accumulated earnings employed in the business........... (29.3) -- Cumulative translation adjustments............... (5.7) -- -------- -------- Total shareholders' investment.............. 242.1 277.0 -------- -------- Total liabilities and shareholders' investment.............. 1,033.9 1,094.8 ======== ========
The accompanying notes are an integral part of these statements. 4 6 OUTBOARD MARINE CORPORATION CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Nine Months Ended June 30 -------------------------- Post-Merger Pre-Merger Company Company ----------- ---------- 1998 1997 (As Restated) (Dollars In Millions) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss).................................. $(29.3) $(26.7) Adjustments to reconcile net earnings (loss) to net cash provided by operations: Depreciation and amortization...................... 38.1 41.2 Changes in current accounts excluding the effects of acquisitions and noncash transactions: Decrease in receivables........................... 2.2 8.3 Decrease in inventories........................... 0.8 2.0 Decrease in other current assets.................. 46.2 0.7 Decrease in accounts payable and accrued liabilities...................................... (40.5) (13.1) Other, net........................................ (4.7) (0.5) ------- ------- Net cash provided by operating activities......... 12.8 11.9 CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for plant and equipment, and tooling... (23.7) (30.1) Proceeds from sale of plant and equipment............. 6.6 14.4 Other, net............................................ 0.7 (0.6) ------- ------- Net cash used for investing activities............ (16.4) (16.3) CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in short-term debt....................... (66.0) -- Proceeds from issuance of long-term debt.............. 155.2 -- Increase in restricted cash........................... (28.6) -- Payments of long-term debt, including current maturities........................................... (75.2) -- Cash dividends paid................................... -- (6.0) Other, net............................................ 0.1 (0.4) ------- ------- Net cash used for financing activities............ (14.5) (6.4) Exchange Rate Effect on Cash.......................... (0.8) (0.9) ------- ------- Net decrease in Cash and Cash Equivalents............. (18.9) (11.7) Cash and Cash Equivalents at Beginning of Period...... 54.4 95.5 ------- ------- Cash and Cash Equivalents at End of Period............ $ 35.5 $ 83.8 ======= ======= SUPPLEMENTAL CASH FLOW DISCLOSURES: Interest paid..................................... $ 21.8 $ 11.7 Income taxes paid................................. $ 4.5 $ 3.2 ======= =======
The accompany 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 June 30, 1998 and the related Post-Merger Company Statements of Consolidated Earnings and Consolidated Cash Flow for the nine months ended June 30, 1998 are not comparable to the prior year because of purchase accounting adjustments. The acquisition and the merger were accounted for using the purchase method of accounting. Accordingly, the purchase price at September 30, 1997 has been allocated to assets acquired and liabilities assumed based on fair market values at the date of acquisition. The fair values of tangible assets acquired and liabilities assumed were $883.6 million and $817.8 million, respectively. In addition, $83.9 million of the purchase price was allocated to intangible assets for trademarks, patents and dealer network. As of June 30, 1998, the allocation of purchase price to assets acquired and liabilities assumed has not been finalized. The preliminary purchase price allocation included $8.1 million of reserves for: 1) severance costs associated with closing the Old Hickory, TN facility, 2) guaranteed payments for terminating a supply agreement, and 3) severance costs for certain corporate employees. As of June 30, 1998, $1.6 million of charges have been recorded against these reserves. Subsequent adjustments to reduce the reserves by $1.4 million as part of the finalization of the purchase price allocation were recorded at September 30, 1998 in accordance with EITF 95-3. The excess purchase price over fair value of the net assets acquired was $127.3 million and has been classified as goodwill in the Statement of Consolidated Financial Position at September 30, 1997. The goodwill related to the acquisition will be amortized using the straight-line method over a period of 40 years. 2. RESTATEMENT AND RECLASSIFICATION The Company has restated and reclassified its Statement of Consolidated Financial Position at September 30, 1997 and June 30, 1998, and its Statement of Consolidated Earnings for the three- and-nine month periods ended June 30, 1998 to revise the accounting for its acquisition by Greenmarine. Except as otherwise stated herein, all information presented in the Consolidated Financial Statements and related notes includes all of the restatements and reclassifications. 6 8 The restatements result from management's reconsideration of the periods to which the reorganization plan expenses incurred in connection with the acquisition by Greenmarine should be charged. As of September 30, 1997 management had recorded these expenses as purchase accounting adjustments. Upon further consideration, management believes that these charges are more appropriately reported in fiscal year 1998. Operational refinements during fiscal year 1998, for example, changes in the specific plants to be closed, and the fact that certain parts of the plan were not implemented within a one year time period, result in a decision that these expenses are, using interpretations of authoritative accounting literature, more appropriately reported in the 1998 fiscal year. As a result, the Company's September 30, 1997 financial statements have been restated to reverse $122.9 million of previously recorded accrued liabilities and contingencies with a corresponding reduction in goodwill. The Company will recognize approximately $149 million in operating expenses and restructuring costs in its Statements of Consolidated Earnings for fiscal year 1998 (for each of the respective quarterly periods and the fiscal year-end, as appropriate) to record its reorganization plan and contingencies. (See Note 8 for further information on the Company's business reorganization plan.) In addition, the Company restated its Statement of Consolidated Earnings for the three- and nine-month periods ended June 30, 1998 to reflect $16.9 million and $27.7 million of charges as period costs, respectively. The primary components of the charges recorded in the three-month period ended June 30, 1998 as a result of the restatements include (i) $6.0 million for potential legal costs related to claims known, but not quantifiable at the end of fiscal 1997, related to contractual disputes, (ii) $4.2 million for increased warranty expense associated with upgrading engines designed prior to September 30, 1997, (iii) $2.2 million in incentives offered to dealers as part of a to-be-terminated incentive program that the Company was contractually obligated to fund, and (iv) $1.0 million of special rebates offered to dealers to sell brands and models that were discontinued as part of the Company's boat brand realignment strategy. The primary components of the charges recorded for the nine-month period ended June 30, 1998 as a result of the restatements include (i) $2.8 million in compensation expense related to forfeitures resulting from the termination of an executive's employment agreement with a former employer in connection with the Company's hiring the executive concurrently with the acquisition of the Company by Greenmarine Holdings, (ii) $6.0 million in incentives offered to dealers as part of a to-be-terminated incentive program that the Company was contractually obligated to fund, (iii) $2.0 million of costs associated with implementing the Company's boat group reorganization plan, (iv) $6.0 million for potential legal costs related to claims known, but not quantifiable at the end of fiscal 1997, related to contractual disputes, (v) $4.2 million for increased warranty expense associated with upgrading engines designed prior to September 30, 1997, and (vi) $1.0 million of special rebates offered to dealers to sell brands and models that were discontinued as part of the Company's boat brand realignment strategy. The costs described in the preceding two sentences were previously recorded as liabilities in purchase accounting. The special rebate and dealer incentive accruals have been recorded as a reduction of net sales in the Statement of Consolidated Earnings and the other costs have been recorded as increases in selling, general, and administrative expenses in the Statement of Consolidated Earnings. Separately, goodwill amortization expense was reduced by $0.8 million and $2.3 million, respectively, for the three- and nine-month periods ended June 30, 1998. The Company also reclassified certain deferred tax items and a valuation reserve to more properly aggregate them in the appropriate asset and liability accounts. Separately, the Company reduced the deferred tax assets and the corresponding valuation allowance to reflect the tax impacts of the purchase accounting adjustments. As part of the purchase accounting adjustments, the Company also reclassified a valuation reserve for a joint venture investment to other assets from accrued liabilities. Such reclassifications did not change net income. 7 9 The cumulative effect of such reclassifications and the restatement discussed above on the Statement of Consolidated Financial Position as of June 30, 1998 is shown in the following table:
AS PREVIOUSLY REPORTED RECLASSIFICATIONS RESTATEMENT AS RESTATED ------------ ----------------- ----------- ----------- Goodwill $ 245.5 $ -- $ (120.6) $ 124.9 Other current assets 40.2 -- -- 40.2 Other assets 126.8 44.5 -- 165.5 (5.8) Accrued Liabilities 179.1 (5.8) (9.2) 164.1 Other non-current liabilities 202.3 44.5 (86.0) 160.8 Total Shareholders' Investment 267.5 -- (25.4) 242.1
The restatement also had the effect of reducing net earnings and earnings per share in the Statement of Consolidated Earnings for the three-month period ended June 30, 1998 as shown in the following table:
AS PREVIOUSLY REPORTED RESTATEMENT AS RESTATED ------------- ----------- ----------- Net sales $ 284.6 $ (2.2) $ 282.4 Cost of goods sold 212.9 -- 212.9 --------- -------- --------- Gross earnings 71.7 (2.2) 69.5 Selling, general, and administrative expenses 53.5 13.9 67.4 --------- -------- --------- Earnings (loss) from operations 18.2 (16.1) 2.1 Non-operating expenses 4.5 -- 4.5 --------- -------- --------- Earnings (loss) before provision for income taxes 13.7 (16.1) (2.4) Provision for income taxes 1.4 -- 1.4 --------- -------- --------- Net earnings(loss) $ 12.3 $ (16.1) $ (3.8) ========= ======== ========= Net loss per share Basic $ 0.60 $ (.79) $ (.19) ========= ======== ========= Diluted $ 0.60 $ (.79) $ (.19) ========= ======== =========
8 10 The restatement also had the effect of increasing the net loss and net loss per share in the Statement of Consolidated Earnings for the nine-month period ended June 30, 1998 as shown in the following table:
AS PREVIOUSLY REPORTED RESTATEMENT AS RESTATED ------------- ----------- ----------- Net sales $ 760.1 $ (6.0) $ 754.1 Cost of goods sold 590.8 -- 590.8 --------- -------- --------- Gross earnings 169.3 (6.0) 163.3 Selling, general, and administrative expenses 156.0 19.4 175.4 --------- -------- --------- Earnings (loss) from operations 13.3 (25.4) (12.1) Non-operating expenses 14.0 -- 14.0 --------- -------- --------- Loss before provision for income taxes (0.7) (25.4) (26.1) Provision for income taxes 3.2 -- 3.2 --------- -------- --------- Net earnings (loss) $ (3.9) $ (25.4) $ (29.3) ========= ======== ========= Net loss per share Basic $ (.19) $ (1.25) $ (1.44) ========= ======== ========= Diluted $ (.19) $ (1.25) $ (1.44) ========= ======== =========
The restatements did not have an effect on the Company's Statement of Consolidated Cash Flows (other than certain reclassifications in the cash flows from operations). 3. BASIS OF PRESENTATION The accompanying unaudited consolidated condensed financial statements present information in accordance with generally accepted accounting principles for interim financial information and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all information or footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the information furnished reflects all adjustments necessary for a fair statement of the results of the interim periods and all such adjustments are of a normal recurring nature. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K/A (Amendment No. 2) for the year ended September 30, 1997. The 1998 interim results are not necessarily indicative of the results which may be expected for the remainder of the year. 4. SHORT-TERM BORROWINGS The Company became obligated under a credit agreement, as amended, which provides for loans of up to $150 million (the "Acquisition Debt"). Amounts outstanding under this credit agreement are secured by 20.4 million shares of common stock of the Post-Merger Company and bear interest at 10%. On November 12, 1997, the Company borrowed the remaining $54.0 million principal amount of Acquisition Debt in connection with the purchase of all properly tendered 7% convertible subordinated debentures of Outboard Marine Corporation due 2002. The full amount of the Acquisition Debt was paid on May 27, 1998 from the proceeds of newly issued long-term debt (as described below). Effective January 6, 1998, the Company entered into a $150 million Amended and Restated Loan and Security Agreement which expires December 31, 2000 and at March 31, 1998, $70.7 million was outstanding. Any loans outstanding under this agreement will be secured by the Company's inventory, receivables, intellectual property and other current assets and are guaranteed by certain of the Company's operating subsidiaries. On May 27, 1998, the Company issued $160.0 million of 10-3/4% Senior Notes ("Senior Notes") due 2008, with interest payable semiannually on June 1 and December 1 of each year. The net proceeds from the issuance totaled $155.2 million and $150.0 million was used to repay the Acquisition Debt. Concurrently with the issuance of the Senior Notes, the Company entered into a depositary agreement which provided for the establishment and maintenance of an interest reserve account for the benefit of the holders of the Senior Notes and other senior creditors of the Company in an amount equal to one year's interest due to these lenders. At June 30, 1998, the interest reserve "Restricted Cash" was $28.6 million and must be maintained for a minimum of three years but at least until such time as the Company's fixed coverage ratio is greater than 2.5 to 1.0 or the Senior Notes are paid in full. Under the various credit agreements, the Company is required to meet certain financial covenants throughout the year. 9 11 5. CONTINGENT LIABILITIES As a normal business practice, the Company has made arrangements with financial institutions by which qualified retail dealers may obtain inventory financing. Under these arrangements, the Company will repurchase its products in the event of repossession upon a retail dealer's default. These arrangements contain provisions which limit the Company's repurchase obligation to $40 million per model year for a period not to exceed 30 months from the date of invoice. This obligation automatically reduces over the 30-month period. The Company resells any repurchased products. Losses incurred under this program have not been material. The company accrues for losses which are anticipated in connection with expected repurchases. 10 12 The Company is engaged in a substantial number of legal proceedings arising in the ordinary course of business. While the result of these proceedings, as well as those discussed below, cannot be predicted with any certainty, based upon the information presently available, management is of the opinion that the final outcome of all such proceedings should not have a material effect upon the Company's Statement of Consolidated Financial Position or the Statement of Consolidated Earnings of the Company. Under the requirements of Superfund and certain other laws, the Company is potentially liable for the cost of clean-up at various contaminated sites identified by the United States Environmental Protection Agency and other agencies. The Company has been notified that it is named a potentially responsible party ("PRP") at various sites for study and clean-up costs. In some cases there are several named PRPs and in others there are hundreds. The Company generally participates in the investigation or clean-up of these sites through cost sharing agreements with terms which vary from site to site. Costs are typically allocated based upon the volume and nature of the materials sent to the site. However, under Superfund, and certain other laws, as a PRP the Company can be held jointly and severally liable for all environmental costs associated with a site. Once the Company becomes aware of its potential liability at a particular site, it uses its experience to determine if it is probable that a liability has been incurred and whether or not the amount of the loss can be reasonably estimated. Once the Company has sufficient information necessary to support a reasonable estimate or range of loss for a particular site, an amount is added to the company's aggregate environmental contingent liability accrual. The amount added to the accrual for the particular site is determined by analyzing the site as a whole and reviewing the probable outcome for the remediation of the site. This is not necessarily the minimum or maximum liability at the site but, based upon the Company's experience, most accurately reflects the Company's liability based on the information currently available. The Company takes into account the number of other participants involved in the site, their experience in the remediation of sites and the Company's knowledge of their ability to pay. As a general rule, the Company accrues remediation costs for continuing operations on an undiscounted basis and accrues for normal operating and maintenance costs for site monitoring and compliance requirements. The Company also accrues for environmental close-down costs associated with discontinued operations or facilities, including the environmental costs of operation and maintenance until disposition. At June 30, 1998, the Company has accrued approximately $21 million for costs related to remediation at contaminated sites including operation and maintenance for continuing and closed-down operations. The possible recovery of insurance proceeds has not been considered in estimating contingent environmental liabilities. In the nine months ended June 30, 1997, the Company recovered insurance proceeds of $6.1 million for prior environmental charges which is included in non-operating expense (income) in the Statement of Consolidated Earnings. Each site, whether or not remediation studies have commenced, is reviewed on a quarterly basis and the aggregate environmental contingent liability accrual is adjusted accordingly. Because the sites are reviewed and the accrual adjusted quarterly, the Company is confident the accrual accurately reflects the Company's liability based upon the information available at the time. 6. STOCK OPTION PLAN On March 10, 1998, the Company adopted the Outboard Marine Corporation Personal Rewards and Opportunities Program ("PROP"). PROP was designed to recognize and reward, through cash bonuses, stock options and other equity-based awards, the personal contributions and achievements of the Companies employees. All employees are eligible to participate in PROP. The aggregate number of shares of stock available for equity awards under PROP is 1,500,000 shares currently authorized common stock of the Company. Grants under PROP are discretionary. Stock option grants under PROP through June 30, 1998 were 587,245, of which, 96,133 were vested upon grant. The remaining grants vests as follows: 94,445 in fiscal 1998, 176,667 in fiscal 1999, 121,115 in fiscal 2000, and 98,885 thereafter. The grants are exercisable at $18 per share and expire ten years after date of grant. The Company accounts for PROP under APB Opinion No. 25, and has not recorded any compensation expense for grants through June 30, 1998 as the exercise price of the stock option approximates the estimated fair market value of the Company's stock on the date of grant. 11 13 7. PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (UNAUDITED) The following unaudited pro forma Condensed Statement of Consolidated Earnings (the "Pro Forma Statement") was prepared to illustrate the estimated effects of the acquisition by Greenmarine Holdings as if the transaction had occurred for statement of consolidated earnings purposes as of the beginning of fiscal 1997. The pro forma adjustments are based upon available information and upon certain assumptions that the Company believes are reasonable. The Pro Forma Statement does not purport to represent what the Company's results of operations would actually have been if such transactions in fact had occurred at the beginning of the period indicated or to project the Company's results of operation for any future period. The Pro Forma Statement includes adjustments, with respect to the merger, to reflect additional interest expense, depreciation expense and amortization of goodwill.
Nine Months Ended June 30, 1997 (In millions, except per share data) (Unaudited) Net sales $ 709.9 Cost of goods sold 594.8 --------- Gross earnings 115.1 Selling, general and administrative expense 155.0 --------- Earnings (Loss) from operations (39.9) Interest expense 21.9 Other (income) expense, net (25.9) --------- Loss before provision for income taxes (35.9) Provision for income taxes 1.8 --------- Net loss $ (37.7) ========= Net loss per share of common stock (basic and diluted) $ (1.85) ========= Shares outstanding 20.4 =========
8. SUBSEQUENT EVENTS The Company expects to report a net loss of approximately $150 million in fiscal year 1998. The net loss will include approximately $51 million of operating expenses and approximately $98 million of restructuring expenses that were previously recorded as part of purchase accounting prior to the restatement discussed in Note 2. In January 1998, the Company announced the closing of its Old Hickory, TN facility and the consolidation of its freshwater fishing operations to the Company's Murfreesboro, TN facility. In fiscal 1997, the Company became aware of certain problems associated with its FICHT engines. In April 1998, the Company began to identify the causes of the problems and an upgrade kit was prepared and distributed. The Company established a reserve for the correction and will record this amount in its third and fourth quarters of fiscal year 1998. On May 27, 1998, the Company issued $160.0 million of 10-3/4 Senior Notes due 2008, with interest payable semiannually on June 1 and December 1 of each year. The net proceeds from the issuance totaled $155.2 million, of which $150.0 million was used to repay the Acquisition Debt. 12 14 In July 1998, the Company was provided information on the results of a feasibility study which was performed on the Company's owned property located in Waukegan, Illinois, commonly known as the Coke Plant. This information was provided to the Company by the two prior owners of the property -- General Motors Corporation and North Shore Gas Company. Although the Company was aware of the contamination and that the study was being conducted, it was not until this time that they became aware of the scope and extent of the contamination and the associated remedial alternatives. Although the Company believes that it was not a generator of hazardous substances at the site, as a land owner, it is by statute a potentially responsible party (PRP). Based on its experience with Superfund Sites, the Company calculated a range of potential allocations and will record an amount related to the most probable outcome in its September 1998 financial statements. On July 22, 1998, the Board of Directors of the Company resolved to amend Article X of its Bylaws to reflect a change in its fiscal year from the twelve month period of October 1 through September 30 of each year to a twelve month calendar year of January 1 through December 31 of each year. On September 24, 1998, the Company announced that it would be closing its Milwaukee, Wisconsin and Waukegan, Illinois facilities by the year 2000. A restructuring charge of approximately $98 million will be recognized in the fourth fiscal quarter of 1998 and includes charges for the costs associated with closing these two facilities (Milwaukee, WI and Waukegan, IL engine plants), and the related employee termination benefits for approximately 900 employees. The Company plans to 13 15 outsource the manufacturing of parts currently produced by these two facilities to third party vendors. It has started to obtain proposals from vendors and is currently reviewing the proposals received in anticipation of outsourcing production. The Company anticipates substantial completion of the restructuring plan by the year 2000. Separately, as part of the restatements, the Company recognized liabilities for certain contingencies related to a patent claim, an environmental remediation site and certain engine warranty claims. On December 8, 1998, the Company terminated its joint venture with AB Volvo Penta and Volvo Penta of the Americas, Inc. and entered into a Product Sourcing Contract (the "Sourcing Contract") which will control the future purchase and sale obligations of various specified goods between certain of the parties. As of September 30, 1998, the Company was not in compliance with certain of the maintenance covenants contained in its credit agreement with NationsBank, N.A. The Company informed the lenders under the credit agreement of the circumstances resulting in the non-compliance and the Company reached an understanding with NationsBank, as agent for the lenders under the credit agreement, regarding revised covenants and waivers of any past violations. The Company is currently negotiating the third amendment to the credit agreement to formalize the amendment and it is expected the amendment will be finalized prior to the Company's filing its Annual Report on Form 10-K for its fiscal year ended September 30, 1998. 9. RECENTLY ADOPTED ACCOUNTING STANDARDS In October 1996, the American Institute of Certified Public Accountants issued Statement of Position 96-1 ("SOP 96-1"), "Environmental Remediation Liabilities", which provides authoritative guidance on the recognition, measurement, display and disclosure of environmental remediation liabilities. The Company adopted SOP 96-1 in the quarter ended September 30, 1997. The change in accounting estimate required the Company to accrue for future normal operating and maintenance costs for site monitoring and compliance requirements at particular sites. The initial expense for implementation of SOP 96-1 was $7.0 million, charged to selling, general and administrative expense in the quarter ended September 30, 1997. In June 1998, the Financial Accounting Standards Board issued Statement 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS 133 is effective for fiscal years beginning after June 15, 1999. The Company has not yet quantified the impacts of adopting SFAS 133 on its financial statements and has not determined the timing of or method of its adoption of SFAS 133. However, the Company believes adoption will have no material effect on its financial position or results of operations based on current levels of financial instruments. In fiscal 1999, the Company will implement three accounting standards issued by the Financial Accounting Standards Board, SFAS 130, "Reporting Comprehensive Income," SFAS 131, "Disclosures About Segments of an Enterprise and Related Information," and SFAS 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." The Company believes that these changes will have no effect on its financial position or results of operations as they require only changes in or additions to current disclosures. 14 16 PART I, ITEM 2 FINANCIAL INFORMATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS JUNE 30, 1998 The following discussion should be read in conjunction with the more detailed information and Consolidated Financial Statements of the Company, together with the notes thereto, included elsewhere herein. The Company announced that it is restating its post-merger consolidated financial statements for its fiscal quarter ended June 30, 1998 in connection with its revising the accounting for its acquisition by Greenmarine Holdings LLC ("Greenmarine Holdings") in September 1997. The Company has also restated its financial statements for its fiscal year ended September 30, 1997 and for each of its fiscal quarters ended December 31, 1997 and March 31, 1998. The restatements result from management's reconsideration of the periods to which the reorganization plan expenses incurred in connection with the acquisition by Greenmarine Holdings should be charged. As of September 30, 1997 management had recorded these expenses as purchase accounting adjustments. Upon further consideration, management believes that these charges are more appropriately reported in fiscal year 1998. Operational refinements during fiscal year 1998, for example, changes in the specific plants to be closed, and the fact that certain parts of the plan were not implemented within a one year time period, result in a decision that these expenses are, using interpretations of authoritative accounting literature, more appropriately reported in the 1998 fiscal year. As a result, the Company's financial statements for the fiscal year ended September 30, 1997 have been restated to reverse $122.9 million of previously recorded accrued liabilities and contingencies with a corresponding reduction in goodwill. The Company will recognize approximately $149 million in operating expenses and restructuring costs in its Statements of Consolidated Earnings for fiscal year 1998 (for each of the respective quarterly periods and the fiscal year-end, as appropriate) to record its reorganization plan and contingencies. (See Note 8 of the Notes to the Consolidated Financial Statements contained elsewhere herein for further information on the Company's business reorganization plan.) The restatements to the Company's financial statements at and for the three- and nine-month periods ended June 30, 1998 include the reversal of the items listed above for the September 30, 1997 period as well as certain adjustments to reflect items formerly charged against purchase accounting reserves in the fiscal quarter ended June 30, 1998 as period costs (See Note 2 of the Notes to the Consolidated Financial Statements contained elsewhere herein). The primary components of the charges recorded in the three-month period ended June 30, 1998 as a result of the restatements include (i) $6.0 million for potential legal costs related to claims known, but not quantifiable at the end of fiscal 1997, related to contractual disputes, (ii) $4.2 million for increased warranty expense associated with upgrading engines designed prior to September 30, 1997, (iii) $2.2 million in incentives offered to dealers as part of a to-be-terminated incentive program that the Company was contractually obligated to fund, and (iv) $1.0 million of special rebates offered to dealers to sell brands and models that were discontinued as part of the Company's boat brand realignment strategy. The primary components of the charges recorded for the nine-month period ended June 30, 1998 as a result of the restatements include (i) $2.8 million in compensation expense related to forfeitures resulting from the termination of an executive's employment agreement with a former employer in connection with the Company's hiring the executive concurrently with the acquisition of the Company by Greenmarine Holdings, (ii) $6.0 million in incentives offered to dealers as part of a to-be-terminated incentive program that the Company was contractually obligated to fund, (iii) $2.0 million of costs associated with implementing the Company's boat group reorganization plan, (iv) $6.0 million for potential legal costs related to claims known, but not quantifiable at the end of fiscal 1997, related to contractual disputes, (v) $4.2 million for increased warranty expense associated with upgrading engines designed prior to September 30, 1997, and (vi) $1.0 million of special rebates offered to dealers to sell brands and models that were discontinued as part of the Company's boat brand realignment strategy. The costs described in the preceding two sentences were previously recorded as liabilities in purchase accounting. The special rebate and dealer incentive accruals have been recorded as a reduction of net sales in the Statement of Consolidated Earnings and the other costs have been recorded as increases in selling, general, and administrative expenses in the Statement of Consolidated Earnings. The Company also reclassified certain deferred tax items and a valuation reserve to more properly aggregate them in the appropriate asset and liability accounts. Separately, the Company reduced the deferred tax assets and the corresponding valuation allowance to reflect the tax impacts of the purchase accounting adjustments. As part of the purchase accounting adjustments, the Company also reclassified a valuation reserve for a joint venture investment to other assets from accrued liabilities. Such reclassifications did not change net income. The restatements did not have an effect on the Company's Statement of Consolidated Cash Flows (other than certain reclassifications in the cash flows from operations). Further information regarding the restatement is provided in Note 1 and 2 of the Notes to the 15 17 Consolidated Financial Statements contained elsewhere herein. Industry Overview. According to data published by the National Marine Manufacturers' Association ("NMMA"), the recreational boating industry generated approximately $19.3 billion in domestic retail sales in 1997, including approximately $8.8 billion in sales of boats, engines, trailers and accessories. In addition, according to statistics compiled by the U.S. Department of Commerce, recreational products and services represent one of the fastest growing segments of U.S. expenditures. Although unit sales in the marine industry in recent years have been declining or flat, the Company may benefit from recent industry-wide efforts in the U.S. designed to increase the share of recreational expenditures related to boating. The NMMA, Marine Retailers Association of America and other marine industry leaders, including the Company, have formed a joint task force to implement initiatives to improve the quality of the industry's marine dealer network, improve the overall boating experience for consumers and enhance the awareness of boating as a recreational activity through various advertising programs. The Company believes that the overall shift in spending of discretionary income towards recreational products and services and recent efforts to increase the share of recreational expenditures directed towards boating may contribute to growth in the recreational boating industry over the next several years. Cyclicality; Seasonality; Weather Conditions. In general, the recreational marine industry is highly cyclical. Industry sales, including sales of the Company's products, are closely linked to the conditions of the overall economy and are influenced by local, national and international economic conditions, as well as interest rates, consumer spending, technology, dealer effectiveness, demographics, fuel availability and government regulations. In an economic downturn, consumer discretionary spending levels are reduced, often resulting in disproportionately large declines in the sale of relatively expensive items such as recreational boats. Similarly, rising interest rates could have a negative impact on consumers' ability, or willingness to obtain financing from lenders, which could also adversely affect the ability of the Company to sell its products. Even if prevailing economic conditions are positive, consumer spending on non-essential goods such as recreational boats can be adversely affected due to declines in consumer confidence levels. According to data published by the NMMA, total unit sales of outboard boats in the United States fell from a high of 355,000 units in 1988 to 192,000 units in 1992, while total unit sales of outboard engines in the United States fell from a high of 460,000 units to 272,000 units during the same time period. The sales decline in the marine industry during this period was the worst such decline in the last 30 years. According to data published by the NMMA, 1995 annual U.S. purchases of boats and engines increased to 336,960 and 317,000, respectively, but unit sales declined in 1996, when reported U.S. sales of boats and engines each totaled 304,600. The Company believes these declines were partially due to adverse weather conditions. The recreational marine industry, in general, and the business of the Company is seasonal due to the impact of the buying patterns of its dealers and consumers. The Company's peak revenue periods historically have been its fiscal quarters ending June 30 and September 30, respectively. Accordingly, the Company's business, receivables, inventory and accompanying short-term borrowing to satisfy working capital requirements are usually at their highest levels in the Company's fiscal quarter ending March 31 and decline thereafter as the Company's products enter the peak consumer selling seasons. Short-term borrowings averaged $2.9 million in 1997, with month-end peak borrowings of $29.0 million in 16 18 February 1997. Because of the seasonality of the Company's business, the results of operations for any fiscal quarter are not necessarily indicative of the results for the full year. Additionally, an event which adversely affects the Company's business during any of these peak periods could have a material adverse effect on the Company's financial condition or results of operations for the full years. The Company's business is also affected by weather patterns which may adversely impact the Company's operating results. For example, excessive rain during the Spring and Summer, the peak retail sales periods, or unseasonably cool weather and prolonged winter conditions, may curtail customer demand for the Company's products. Although the geographic diversity of the Company's dealer network may reduce the overall impact on the Company of adverse weather conditions in any one market area, such conditions may continue to represent potential adverse risks to the Company's financial performance. Acquisition by Greenmarine Holdings LLC. On September 12, 1997, Greenmarine Holdings acquired control of approximately 90% of the then outstanding shares of common stock (the "Pre-Merger Company Shares") of the Company through an $18.00 per share tender offer pursuant to Greenmarine Holdings' Offer to Purchase dated August 8, 1997 (the "Tender Offer"). On September 30, 1997, Greenmarine Holdings acquired the untendered Pre-Merger Company Shares by merging its acquisition subsidiary (i.e., Greenmarine Acquisition Corp.) with and into the Company (the "Merger", and together with the Tender Offer, the "Greenmarine Acquisition"). As a result of the Merger, the Company became a wholly-owned subsidiary of Greenmarine Holdings; each untendered Pre-Merger Company Share outstanding immediately prior to the Merger was converted into the right to receive a cash payment of $18.00 per share; and 20.4 million shares of new common stock of the Company were issued to Greenmarine Holdings. The Greenmarine Acquisition was completed for aggregate consideration of approximately $373.0 million and has been accounted for under the purchase method of accounting. Accordingly, the purchase price has been allocated to assets acquired and liabilities assumed based on fair market values at the date of acquisition (i.e., September 30, 1997). In the opinion of management, accounting for the purchase as of September 30, 1997 instead of September 12, 1997 did not materially affect the Company's results of operations for fiscal 1997. The fair values of tangible assets acquired and liabilities assumed were $883.6 million and $817.8 million, respectively. In addition, $83.9 million of the purchase price was allocated to intangible assets for trademarks, patents and dealer network. The excess purchase price over fair value of the net assets acquired was $127.3 million and has been classified as goodwill in the Statement of Consolidated Financial Position as of September 30, 1997. As of September 30, 1997, the allocation of purchase price to assets acquired and liabilities assumed in the Greenmarine Acquisition has not been finalized. The preliminary purchase price allocation included $8.1 million of reserves for (i) severance costs associated with closing the Company's Old Hickory, Tennessee facility, (ii) guaranteed payments in connection with terminating a supply agreement and (iii) severance costs for certain former corporate employees. The goodwill related to the acquisition will be amortized using the straight-line method over a period of 40 years. New Management Initiatives. As discussed above, on September 12, 1997, Greenmarine Holdings acquired control of the Company. Since that time, the Company has assembled a new, highly-experienced senior management team led by David D. Jones. As of September 30, 1997, the new senior management team began developing, and, as of June 30, 1998, is still developing, a turnaround strategy to capitalize on the Company's strong market position and leading, well-recognized brand names and to take advantage of anticipated growth in the recreational marine industry. In addition, as part of the Greenmarine Acquisition, the Company is developing a business reorganization plan to realign and consolidate its products offered in the marketplace, and 17 19 to improve existing manufacturing processes that will enable the Company to increase production efficiency and asset utilization. This turnaround strategy and reorganization plan may include the elimination and/or consolidation of certain of the Company's products and may include the closing and/or consolidation of certain of the Company's manufacturing facilities located primarily in the United States and corresponding involuntary employee terminations. In January 1998, the Company began its strategy and reorganization plan by closing its Old Hickory, Tennessee facility and consolidating the freshwater fishing operations at the Company's Murfreesboro, Tennessee facility. The Company also began, and has now completed, the consolidation of substantially all of its saltwater fishing operations at its Columbia, South Carolina facility. In addition, as part of the Company's plan to improve operating efficiencies and reduce costs, the Company reduced its workforce by approximately 540 employees as of March 31, 1998, primarily within the Company's boat operations. In April 1998, the Company announced that it would close its research facility in Waukesha, Wisconsin and relocate these operations to other facilities. In March 1998, the Company announced a lean manufacturing initiative for its marine power manufacturing operations. Lean manufacturing is a disciplined approach for implementing proven manufacturing methodologies in order to reduce manufacturing costs through improved employee productivity and reduced inventory. The first phase of this initiative was introduced at the Company's final assembly plant in Calhoun, Georgia and, as a second phase, this initiative has been expanded to certain of the Company's sub-assembly facilities. This initiative is expected to substantially reduce costs, shorten production times, lower inventory and dramatically improve the Company's responsiveness to dealer and consumer demand. The Company has also implemented a strategic purchasing program which was announced in January 1998. This program is designed to reduce purchasing costs by consolidating purchasing across vendors, integrating suppliers into the product design process at an early stage and designing products for lower cost. In June 1998, the Company announced the realignment of its aluminum boat brands. Consolidating the most popular models from the Grumman, Roughneck and Sea Nymph lines, the Lowe brand will be positioned to offer a full line of aluminum boats. The consolidation is another step the Company is taking to reduce the competition among its own brands in every aluminum market and as a way to help its dealers offer a complete line of boats to meet customer demand, rather than having to select from multiple boat company lines. Also in June 1998, the Company announced that it had entered into a long-term strategic business agreement with Johnson Worldwide Associations, Inc. ("JWA") to supply a range of private labeled electric trolling motors to meet OMC"S specifications. This will give OMC a full line of industry leading, current technology electric trolling motors to offer its dealers. In July 1998, the Company unveiled a new brand strategy for its Johnson and Evinrude engines. Johnson and Evinrude had become identical engines that were marketed under different names. Under the new strategy, they will be readily distinguishable from each other and will be marketed to different consumers. The Johnson brand will continue as a full line of carbureted two-strokes and will be marketed as the reliable engine it always has been. Evinrude will offer a full line of FICHT fuel injected technology engines and four-stroke engines marketed as the premium OMC 18 20 brand. As a result, while OMC dealers previously sold either Johnson and Evinrude, they will now sell both engine lines. Introduction of FICHT Engines; Regulatory Compliance. The United States Environmental Protection Agency (the "EPA") has adopted regulations governing emissions from two-stroke marine engines. As adopted, the regulations as they relate to outboard engines phase in over nine years, beginning in model year 1998 and concluding in model year 2006. With respect to personal watercraft, the regulations phase in over eight years, beginning in model year 1999 and concluding in model year 2006. Marine engine manufacturers will be required to reduce hydrocarbon emissions from outboard engines, on average by 8.3% per year through model year 2006 beginning with the 1998 model year, and emissions from personal watercraft by 9.4% per year through model year 2006 beginning in model year 1999. In 1994, the Company announced "Project LEAP", a project to convert its entire outboard product line to low-emissions products within the next decade. Partly in response to these EPA emission standards, the Company introduced its new Johnson and Evinrude engines with FICHT fuel-injection technology, which offer an average hydrocarbon emission reduction of 80% and an approximate 35% increase in fuel economy depending on the application. The higher manufacturing costs of the FICHT fuel injected engines will result initially in a lower margin to the Company; however, the Company has implemented several initiatives to reduce the manufacturing costs of its new engines. Because of the higher retail costs of engines incorporating the FICHT technology, consumer acceptance of the new engines may be restrained as long as less expensive engine models, which may or may not meet the new EPA standards, continue to be available. Through June 30, 1998, the Company estimates that it has spent approximately $50.0 million on low-emission technology, and by the Year 2006 the Company is expected to have expended an aggregate of approximately $90.0 million to meet the EPA's new emission standards. The Company expenses its research and development costs as they are incurred. The Company has received correspondence from Orbital Engine Corporation Limited ("Orbital") alleging that the Company's FICHT fuel-injected 150-horsepower engines infringe two Australian Orbital patents, which correspond to three U.S. patents and to a number of foreign patents. The Company believes that it has substantial defenses to these allegations, including that the three corresponding U.S. patents are not infringed and/or are invalid. However, there can be no assurance that Orbital will not commence litigation against the Company with respect to this matter or, if such litigation is commenced, that the Company's defenses will be successful. If Orbital is successful in an action against the Company, the Company could be required to obtain a license from Orbital to continue the manufacture, sale, use or sublicense of FICHT products and technology or it may be required to redesign its FICHT products and technology to avoid infringement. There can be no assurance that any such license could be obtained or that any such redesign would be possible. There also can be no assurance that the failure to obtain any such license or effect any such redesign, or any cost associated therewith, would not have a material adverse effect on the Company. The Company determined a range of potential outcomes of this matter and recorded an amount in its June 1998 financial statements. The Company does not believe that compliance with the EPA's new emission standards, which will add cost to the Company's engine products and will initially result in a lower margin to the Company, will be a major deterrent to sales. The Company believes that its new compliant technology will add value to its products at the same time that the entire industry is faced with developing solutions to the same regulatory requirements. In addition, the Company has implemented several initiatives to reduce the manufacturing costs of its new engines. Although there can be no assurance, the Company does not believe that compliance with these new EPA regulations will have a material adverse effect on future results of operations or the financial condition of the Company. Additionally, certain states have required or are considering requiring a license to operate a recreational boat. While such licensing requirements are not expected to be unduly restrictive, regulations may discourage potential first-time buyers, which could affect the Company's business, financial condition and results of operations. In addition, certain state and local government authorities are contemplating regulatory efforts to restrict boating activities, including the use of engines, on certain inland bodies of water. In one instance, the East Bay Municipal Utility District, located near Oakland, California, has adopted regulations that, on one of the three water bodies under its jurisdiction, will limit certain gasoline engine use effective January 1, 2002. While the Company cannot assess the impact that any such contemplated regulations would have on its business until such regulations are formally enacted, depending upon the scope of any such regulations, the would have a material adverse effect on the Company's business. The Company, however, does not believe that the regulations adopted by the East Bay Municipal Utility District will have a material adverse effect on the Company's business. The Company cannot predict the environmental legislation or regulations that may be enacted in the future or how existing or future laws or regulations will be administered or interpreted. Compliance with more stringent laws or regulations as well as more vigorous enforcement policies of the regulatory agencies or stricter interpretation of existing laws, may require additional expenditures by the Company, some or all of which may be material. 19 21 Environmental Compliance. The Company is subject to regulation under various federal, state and local laws relating to the environment and to employee safety and health. These laws include those relating to the generation, storage, transportation, disposal and emission into the environment of various substances, those relating to drinking water quality initiatives and those which allow regulatory authorities to compel (or seek reimbursement for) cleanup of environmental contamination arising at its owned or operated sites and facilities where its waste is being or has been disposed. The Company believes it is in substantial compliance with such laws except where such noncompliance is not expected to have a material adverse effect. The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA" or "Superfund") and similar state laws impose joint, strict and several liability on (i) owners or operators of facilities at, from, or to which a release of hazardous substances has occurred; (ii) parties who generated hazardous substances that were released at such facilities; and (iii) parties who transported or arranged for the transportation of hazardous substances to such facilities. The Company has been notified that it is named a potentially responsible party ("PRP") at various sites for study and clean-up costs. In some cases there are several named PRPs and in others there are hundreds. The Company generally participates in the investigation or clean-up of these sites through cost sharing agreements with terms which vary from site to site. Costs are typically allocated based upon the volume and nature of the materials sent to the site. However, as a PRP, the Company can be held jointly and severally liable for all environmental costs associated with a site. As of June 30, 1998, the Company has accrued approximately $21 million for costs relating to remediation at contaminated sites, including operation and maintenance for continuing and closed-down operations. The Company believes that these reserves are adequate, although there can be no assurance that this amount will be adequate to cover such known or unknown matters. See Note 5 to the Consolidated Financial Statements included elsewhere herein. RESULTS OF OPERATIONS PERIODS ENDED JUNE 30, 1998 COMPARED TO PERIODS ENDED JUNE 30, 1997 Net Sales. Net sales increased to $282.4 million in the three months ended June 30, 1998 from $275.8 million in the three months ended June 30 1997, an increase of 2.4%. Net sales increased to $754.1 million in the nine months ended June 30, 1998 from $709.9 million in the nine months ended June 30, 1997, an increase of 6.2%. The Company's sales increase was attributable primarily to higher volume sales in the United States of marine engines in the current quarter and fiscal year, which increased over prior periods. Engine sales were depressed in the first half of fiscal 1997 as a result of the Company's program to restrain engine production in order to assist dealers in reducing inventory levels. In the first quarter of fiscal 1997, the Company suspended production of many of its larger engines for nearly a month in order to make changes to equipment and processes necessary in order to significantly improve the quality of those engines. This production suspension adversely affected the Company's sales and margins in the first half of fiscal 1997. The quarter increase was not as favorable as the nine month increase because sales of boats in the three months ended June 30, 1998 were lower than the previous year as a result of the boat brand strategy which refocused each brand into its market niche and resulted in the elimination of many lower end and lower gross margin boat models. Cost of Goods Sold. Cost of goods sold decreased to $212.9 million in the three months ended June 30, 1998 from $221.0 million in the three months ended June 30, 1997, a decrease of $8.1 million or 3.7%. Cost of goods sold was 75.4% of net sales in the three months ended June 30, 1998 as compared with 80.1% of net sales in the three months ended June 30, 1997. Cost of goods sold decreased to $590.8 million in the nine months ended June 30, 1998 from $595.9 in the nine months ended in June 30, 1997, a decrease of $5.1 million or 0.9%. Cost of goods sold was 78.3% of net sales in the nine months ended June 30, 1998 as compared with 83.9% of net sales in the nine months ended June 30, 1997. The improvements 20 22 in the Company's gross margin in the current quarter and fiscal year reflected increased manufacturing efficiencies at engine plants and a better absorption of fixed costs, primarily due to higher sales volume. In addition, in the first quarter of fiscal 1997, the Company's cost of goods sold was negatively impacted by the production suspension discussed above in Net Sales. Selling, General and Administrative ("SG&A") Expense. SG&A expense increased to $67.4 million in the three months ended June 30, 1998 from $59.8 million in the three months ended June 30, 1997, an increase of $7.6 million or 12.7%. SG&A expense as a percentage of net sales increased to 23.9% in the three months ended June 30, 1998 from 21.7% in the three months ended June 30, 1997. SG&A expense increased to $175.4 million in the nine months ended June 30, 1998 from $151.7 million in the nine months ended June 30, 1997, an increase of $23.7 million or 15.6%. SG&A expense as a percentage of net sales increased to 23.3% in the nine months ended June 30, 1998 from 21.4% in the nine months ended June 30, 1997. The three months ended June 30, 1997 included an adjustment to increase boat warranty reserves $8.0 million as a result of changes in the method used to estimate warranty reserves. SG&A expense increased in the three months ended June 30, 1998 due to $6.0 million for potential legal costs related to claims known, but not quantifiable at the end of fiscal 1997, related to contractual disputes, and $4.2 million for increased warranty expense associated with upgrading engines designed prior to September 30, 1997. For the nine-month period ended June 30, 1998, SG&A expense increased due to factors discussed above for the three months ended June 30, 1998 and due to $2.8 million in compensation expense related to forfeitures resulting from the termination of an executive's employment agreement with a former employer in connection with the Company's hiring the executive concurrently with the acquisition of the Company by Greenmarine Holdings, and $2.0 million of costs associated with implementing the Company's boat group reorganization plan. All of these costs discussed in the preceding two sentences were previously recorded as liabilities in purchase accounting prior to the restatement discussed above and in Note 2 to the Consolidated Financial Statements included elsewhere herein. Additionally, the SG&A expense in the current quarter and fiscal year reflected higher amortization of goodwill and intangibles due to purchase accounting. Earnings (Loss) from Operations. Earnings from operations was $2.1 million in the three months ended June 30, 1998 compared with a loss of $5.0 million in the three months ended June 30, 1997, an improvement of $7.1 million. Loss from operations decreased to $12.1 million for the nine months ended June 30, 1998 from a loss of $37.7 million for the nine months ended June 30, 1997, an improvement of $25.6 million. The improvements were primarily attributable to increased sales coupled with better absorption of fixed costs. Non-Operating Expense (Income). Interest expense increased to $8.2 million in the three months ended June 30, 1998 from $4.3 million in the three months ended June 30, 1997, an increase of $3.9 million. Interest expense increased to $22.6 million in the nine months ended June 30, 1998 from $12.7 million in the nine months ended June 30, 1997, an increase of $9.9 million. The increase resulted from the new debt structure in place after the Greenmarine Acquisition. Other non-operating income was $3.7 million in the three months ended June 30, 1998 compared to $4.6 million in the three months ended June 30, 1997. Other non-operating income was $8.6 million in the nine months ended June 30, 1998 compared to $25.9 million in the nine months ended June 30, 1997. The nine months ended June 30, 1997 amount included non-recurring income, including insurance recovery and a lawsuit settlement, as well as gains on disposition of fixed assets. Provision (Credit) for Income Taxes. The provision for income taxes was $1.4 million in the three months ended June 30, 1998 and $0.4 million in the three months ended June 30, 1997. The provision for income taxes was $3.2 million in the nine months ended June 30, 1998 and $2.2 million in the nine months ended June 30, 1997. The provision for income taxes for the three and nine months ended June 30, 1998 and 1997 resulted from the net of expected taxes payable and benefits relating to certain international subsidiaries. No tax benefit is allowed for domestic losses because they are not realizable, at this time, under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." FINANCIAL CONDITION; LIQUIDITY AND CAPITAL RESOURCES As a result of the Greenmarine Acquisition, the Statement of Consolidated Financial Position as of September 30, 1997 was prepared using the purchase method of accounting which reflects the fair values of assets acquired and liabilities assumed. The excess of the total 21 23 acquisition cost over the estimated fair value of assets acquired and liabilities assumed at the date of acquisition was $127.3 million. The Post-Merger Company Statement of Condensed Consolidated Financial Position as of June 30, 1998 is not comparable to the prior year because of the purchase accounting adjustments. The Company's business is seasonal in nature with receivable and inventory levels normally increasing in the Company's fiscal quarter ending December 31 and peaking in the Company's fiscal quarter ending March 31. Current assets at June 30, 1998 decreased $71.0 million from September 30, 1997. Cash and cash equivalents at June 30, 1998 decreased $18.9 million from September 1997, while receivables decreased $3.4 million due to lower European receivables due to a change in European sales channels and lower miscellaneous receivables partially offset by a significant increase in engine sales versus last year. Inventories at June 30, 1998 decreased $2.4 million from September 30, 1997 due to better inventory management. Other current assets at June 30, 1998 decreased $46.3 million from September 30, 1997 primarily due to a reduction in a trust depository that funded the remaining untendered outstanding shares of the Company's common stock and due to the redemption of deposits for letters of credit. Accounts payable at June 30, 1998 decreased $65.3 million from September 30, 1997 due to payments to Company shareholders for untendered outstanding stock and to other payments relating to the change of control. Cash provided by operations was $12.8 million for the nine months ended June 30, 1998 compared with $11.9 million for the nine months ended June 30, 1997. Expenditures for plant, equipment and tooling were $23.7 million for the nine months ended June 30, 1998, representing a $6.4 million decrease from the prior year period level of $30.1 million, primarily as a result of deferred capital expenditures. The low level of spending to date is related primarily to the Company's capital appropriation process. Capital spending related to any approved capital expenditure is realized, on average, approximately nine months after approval. A lower level of capital spending was appropriated in fiscal 1997 as compared to prior years due to the Company's pending sale, which was completed in September 1997. The Company estimates that total capital expenditures for fiscal 1998 will be approximately $30 million, which includes capital expenditures and various planned and potential projects designed to increase efficiencies and enhance the Company's competitiveness and profitability. Specifically, these capital expenditures include continued expenditures related to the introduction of the FICHT technology to the Company's various engine models, cost reduction programs, product quality improvements, improvements to and upgrades of the Company's hardware and software, and other general capital improvements and repairs. Loan payable was $30.0 million at June 30, 1998. Current maturities and sinking fund requirements of long-term debt decreased by $61.7 million from September 30, 1997 due primarily to the redemption of the Company's 7% Convertible Subordinated Debentures due 2002. The Company also borrowed approximately $30.0 million from certain wholly-owned foreign subsidiaries. Approximately $2.0 million, net of offsets, is due in fiscal 1998, and approximately $20.2 million is due at the end of fiscal 1999. 22 24 The Company entered into an Amended and Restated Loan and Security Agreement, effective as of January 6, 1998 (the "Credit Agreement"), with a syndicate of lenders for which NationsBank of Texas, N.A. is administrative and collateral agent (the "Agent"). The Credit Agreement provides a revolving credit facility (the "Revolving Credit Facility") of up to $150.0 million, subject to borrowing base limitations, to finance working capital with a $30.0 million sublimit for letters of credit. The Revolving Credit Facility expires on December 31, 2000. The Revolving Credit Facility is secured by a first and only security interest in all of the Company's existing and hereafter acquired accounts receivable, inventory, chattle paper, documents, instruments, deposit accounts, contract rights, patents, trademarks and general intangibles and is guaranteed by the Company's four principal domestic operating subsidiaries. On March 31, 1998, outstanding borrowings under the Credit Agreement aggregated $70.7 million and six letters of credit were outstanding totaling $17.2 million. The level of borrowings as of March 31, 1998 was due primarily to the seasonality of the Company's business, as inventory and receivables levels increase during the Company's first and second fiscal quarters in preparation for the heavy selling season in the Spring and Summer. The level of outstanding borrowings as of March 31, 1998 was also due in part to payments of certain change of control expenses. Although there can be no assurance, the Company expects to use the cash from the anticipated sales of products and collection of receivables to repay all amounts outstanding under the Revolving Credit Facility by the end of fiscal 1998. The Credit Agreement contains a number of financial covenants, including those requiring the Company to satisfy specific levels of (i) consolidated tangible net worth, (ii) interest coverage ratios, and (iii) leverage ratios. On May 21, 1998, the Company entered into a First Amendment to Amended and Restated Loan and Security Agreement with the lenders under the Credit Agreement, pursuant to which, among other things, (i) the Company's compliance with consolidated tangible net worth covenant for the period ended June 30, 1998 was waived, notwithstanding the Company's anticipated compliance therewith, (ii) the Company's consolidated tangible net worth requirement for the period ended September 30, 1998 was amended, (iii) the borrowing base was amended to allow for borrowings against eligible intellectual property, thereby increasing borrowing capacity, (iv) the sublimit for the issuance of letters of credit was increased from $25.0 million to $30.0 million, and (v) the lenders consented to certain matters relating to the Company's offering of $160.0 million of 10-3/4% Senior Notes due 2008, including the establishment of an interest reserve account. The Company became obligated under a credit agreement, as amended, which provided for loans of up to $150 million (the "Acquisition Debt"). Amounts outstanding under this credit agreement were secured by 20.4 million shares of common stock of the Post-Merger Company with interest at 10%. On November 12, 1997, the Company borrowed the remaining $54.0 million principal amount of Acquisition Debt in connection with the purchase of all properly tendered 7% convertible subordinated debentures of Outboard Marine Corporation due 2002. The full amount of the Acquisition Debt was paid on May 27, 1998 from the proceeds of newly issued long-term 23 25 debt. On May 27, 1998, the Company issued $160.0 million of 10-3/4% Senior Notes ("Senior Notes") due 2008, with interest payable semiannually on June 1 and December 1 of each year. The net proceeds from the issuance totaled $155.2 million and $150.0 million was used to repay the Acquisition Debt. Concurrently with the issuance of the Senior Notes, the Company entered into a depositary agreement which provided for the establishment and maintenance of an interest reserve account for the benefit of the holders of the Senior Notes and other senior creditors of the Company in an amount equal to one year's interest due to these lenders. At June 30, 1998, the interest reserve "Restricted Cash" was $28.6 million and must be maintained for a minimum of three years. As a normal business practice, the Company has made arrangements with financial institutions by which qualified retail dealers may obtain inventory financing. Under these arrangements, the Company will repurchase products in the event of repossession upon a retail dealer's default. These arrangements contain provisions which limit the Company's repurchase obligation to $40.0 million per model year for a period not to exceed 30 months from the date of invoice. The Company resells any repurchased products. Losses incurred under this program have not been material. In fiscal 1997, the Company repurchased approximately $3.9 million of products, all of which were resold at a discounted price. The Company accrues for losses that are anticipated in connection with expected repurchases. The Company does not expect these repurchases to materially affect its results of operations. YEAR 2000 MATTERS During fiscal 1997, the Company assessed the steps necessary to address issues raised by the coming of Year 2000. The steps to be taken included reviews of the Company's hardware and software requirements worldwide, including processors embedded in its manufacturing equipment, as well as vendors of goods and services. Based on this review, the Company developed a strategy for attaining Year 2000 compliance that includes modifying and replacing software, acquiring new hardware, educating its dealers and distributors and working with vendors of both goods and services. With the assessment phase of the strategy completed, the Company is in the process of implementing and testing remedies of issues identified during the assessment phase. Issues raised relative to personal computers and local and wide area networks are in the process of being remedied through the acquisition of new software and hardware. The Company has found very few embedded processors contained in its manufacturing equipment which would be affected by the Year 2000 and those which were identified are in the process of being modified. Most of the Company's telecommunications equipment is currently Year 2000 compliant and in cases where it is not, the equipment has either been replaced or appropriation requests for the replacement have been prepared and are being processed. The Company anticipates completing all implementation and testing of internal remedies by June 30, 1999. Also as part of the Company's Year 2000 compliance efforts, it has substantially reviewed all vendors of goods and is currently reviewing vendors providing services and prioritized them from critical (i.e., vendors whose goods or services are necessary for the Company's continued operation) 24 26 to non-critical (i.e., suppliers whose products were either not critical to the continued operation of the Company or whose goods or services could otherwise be readily obtained from alternate sources) providers. These vendors range from service providers, such as banks, utility companies and benefit plan service providers to suppliers of goods required for the manufacture of the Company's products. Following this initial vendor review, the Company established a strategy to determine the readiness of those vendors for Year 2000. This initially involves sending a letter notifying the vendor of the potential Year 2000 issues, which was followed by a questionnaire to be completed by the vendor. In the event a non-critical supplier either did not respond or responded inadequately, follow-up questionnaires were sent and calls made in order to further clarify the vendor situation. In the event that a critical vendor did not respond or responded inadequately, the Company not only follows up with additional questionnaires and telephone calls but also scheduled or will schedule on-site meetings with the vendor in order to satisfy itself that the vendor is or will be prepared to operate into the Year 2000. The Company believes that the unresponsive critical vendors create the most uncertainty in the Company's Year 2000 compliance efforts. In the event that the Company is not satisfied that a critical vendor will be able to provide its goods or services into the Year 2000, the Company has begun to review alternate suppliers who are in a position to assure the Company that they are or will be Year 2000 ready. The timing of the Company's decision to change vendors will depend on what type of goods or service the non-responsive or non-compliant vendor provides and the lead time required for an alternate vendor to begin supplying. The Company has reviewed those critical vendors that have not responded adequately and has been reviewing the timing of replacing, if necessary, any such noncompliant vendor. In addition, in connection with the Company's initiative to outsource non-core capabilities, a potential vendor's Year 2000 readiness is one criteria the Company will consider in selecting the vendor for such outsourcing activity. In addition, the Company has reviewed the goods it manufactures for sale to its dealers, distributors and original equipment manufacturers and has determined that those goods are Year 2000 compliant. Finally, in preparing for the advent of the Year 2000, the Company has taken steps to heighten the awareness among its dealer and distributor network of the issues associated with the Year 2000. The issue is covered in monthly publications which are distributed to the dealers and also by the sales force that is responsible for the regular communications with the dealer and distributor network. Through June 30, 1998, the Company spent a total of approximately $2.2 million on personal computer and network, mainframe and telecommunication solutions for issues related with the Year 2000 and estimates that it will spend up to a total of $11.1 million, half of which is associated with personal computers and networks, to remedy all of the issues associated with ensuring that its hardware and software worldwide, and the systems associated therewith, are able to operate into the Year 2000. The Company believes that its owned or licensed hardware and software will be able to operate into the Year 2000. However, the Company relies on the goods and services of other companies in order to manufacture and deliver its goods to the market. Although the Company is taking every reasonable step to determine that these vendors will be able to continue to provide their goods or 25 27 services, there can be no assurance that, even upon assurance of their ability to do so, the Company's vendors will be able to provide their goods and services to the Company in a manner that satisfactorily addresses the Year 2000 issues. If, on or near January 1, 2000, the Company discovers that a non-critical vendor, which previously assured the Company that it would be Year 2000 compliant, is in-fact not compliant, an alternate supplier will be used by the Company and there should be no material effect on the Company's business. If, on or near January 1, 2000, the Company discovers that a critical vendor, such as a utility company or a supplier of a part, component or other goods or service that is not readily available from an alternate supplier, which previously assured the Company that it would be Year 2000 compliant is in-fact not compliant, the Company may not be able to produce on a timely basis finished goods for sale to its dealers. If this should occur, the Company will either wait for such vendor to become Year 2000 compliant or seek an alternate vendor who can provide the applicable goods or service in a more timely manner. In the event that the vendor is critical and either no alternate vendor is available or is able to operate into the Year 2000, this event could have a material adverse effect on the Company's business, results of operations, or financial condition. RECENTLY ADOPTED ACCOUNTING STANDARDS In fiscal 1999, the Company will implement three accounting standards issued by the Financial Accounting Standards Board, SFAS 130, "Reporting Comprehensive Income," SFAS 131, "Disclosures About Segments of an Enterprise and Related Information," and SFAS 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." The Company believes that these changes will have no effect on its financial position or results of operations as they require only changes in or additions to current disclosures. In June 1998, the Financial Accounting Standards Board issued Statement 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS 133 is effective for fiscal years beginning after June 15, 1999. The Company has not yet quantified the impacts of adopting SFAS 133 on its financial statements and has not determined the timing of or method of its adoption of SFAS 133. However, the Company believes adoption will have no material effect on its financial position or results of operations based on current levels of financial instruments. CHANGE IN FISCAL YEAR On July 22, 1998, the Board of Directors of the Company resolved to amend Article X of its Bylaws to reflect a change in its fiscal year from the twelve month period of October 1 through September 30 of each year to a twelve month calendar year of January 1 through December 31 of each year. 26 28 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. 27 29 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
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