-----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, KIOKeE9NUWQldbOWCgjVMEbTvQE4xhexQmw0KTkVBPOE5dYAifJHnYcNF8epabP+ aQKelh59PqKJpOnvIDG2WQ== 0000950123-99-001819.txt : 19990304 0000950123-99-001819.hdr.sgml : 19990304 ACCESSION NUMBER: 0000950123-99-001819 CONFORMED SUBMISSION TYPE: 10KT405 PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990303 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: 10KT405 SEC ACT: SEC FILE NUMBER: 001-02883 FILM NUMBER: 99555916 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 10KT405 1 OUTBOARD MARINE CORPORATION 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ (MARK ONE) [ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM OCTOBER 1, 1998 TO DECEMBER 31, 1998 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 60085 WAUKEGAN, ILLINOIS (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (847) 689-6200 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED 7% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2002 NEW YORK STOCK EXCHANGE & CHICAGO STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. [X] The aggregate market value of voting stock held by non-affiliates at December 31, 1998 was $0. Number of shares of Common Stock of $0.01 par value outstanding at December 31, 1998 was 20,425,554 shares. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
ITEM NO. PAGE - ---- ---- PART I 1 Business.................................................... 3 2 Properties.................................................. 16 3 Legal Proceedings........................................... 17 4 Submission of Matters to a Vote of Security Holders......... 17 PART II 5 Market for Registrant's Common Equity and Related 17 Shareholder Matters......................................... 6 Selected Financial Data..................................... 17 7 Management's Discussion and Analysis of Financial Condition 19 and Results of Operations................................... 7A Quantitative and Qualitative Disclosures About Market 35 Risk........................................................ 8 Financial Statements and Supplementary Data................. 37 9 Changes in and Disagreements on Accounting and Financial 71 Disclosure.................................................. PART III 10 Directors and Executive Officers of the Registrant.......... 72 11 Executive Compensation...................................... 76 12 Security Ownership.......................................... 86 13 Certain Relationships and Related Transactions.............. 88 PART IV 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................................... Signatures.................................................. Exhibit Index...............................................
2 3 PART I ITEM 1. BUSINESS Unless the context otherwise requires, all references herein to the "Company" or "OMC" shall mean Outboard Marine Corporation, a Delaware corporation, and its consolidated subsidiaries. Unless otherwise indicated, all domestic industry statistics referenced herein are derived from data published by the National Marine Manufacturers' Association ("NMMA"), which the Company has not independently verified but believes to be reliable. All foreign industry data referenced herein are estimates prepared internally by the Company based in part on publicly-available sources, which the Company has not independently verified but believes to be reliable. Prior to October 1, 1998, the Company's fiscal year ended each September 30. Therefore, for example, references herein to fiscal 1998 or fiscal year 1998 refer to the Company's fiscal year ended September 30, 1998. However, effective October 1, 1998, the Company's fiscal year-end changed from September 30 to December 31. GENERAL Outboard Marine Corporation believes it is the world's largest dedicated manufacturer of outboard marine engines and boats. As of December 31, 1998, the Company had an approximate 35% share of the United States outboard marine engine market and estimated it had an approximate 26% share of the worldwide market. Sold under the Johnson and Evinrude brand names, the Company offers one of the industry's widest ranges of outboard engines, with models ranging from two to 250-horsepower. The Company's boat brands are also among the most recognized in the industry and are one of the market leaders in several categories, including the fishing, aluminum and recreational boat segments. OMC's primary boat brands include Chris*Craft, Four Winns, Seaswirl, Stratos, Javelin, Hydra-Sports, Lowe and Princecraft. The Company also generates a significant, recurring stream of revenue in replacement parts and accessories from its large installed base of over seven million engines. The Company believes that its marine dealer network of approximately 6,500 independent authorized dealers worldwide, approximately 4,300 of which are located in North America, is one of the largest marine dealer networks in the world. The Company currently has several important strategic alliances with respect to marine engines, including for the development of the FICHT fuel-injection technology, a supply arrangement with Suzuki Motor Corporation relating to certain four-stroke outboard engines, and a supply arrangement with Volvo Penta of the Americas, Inc. relating to gasoline sterndrive and inboard marine power systems. The Company was incorporated in 1936 by members of the Briggs and Evinrude families. Prior to the late 1980s, the focus of the Company's strategy was to be the industry leader in the two-cycle engine market by manufacturing engines and a variety of products powered by small gasoline engines. In addition to outboard engines, the Company's products included lawnmowers, chainsaws, snowmobiles, light industrial vehicles and turf care products. In the late 1980s, a structural shift occurred in the marine industry as engine manufacturers, including the Company, began to package their engines with boats from boat manufacturers. Marine dealers found it more efficient and economical to buy boats "packaged" with engines rather than buy engines and boats separately. In line with this trend, the Company acquired 15 boat companies by 1990 and divested its non-marine product lines, thereby transforming itself from an engine company to a marine company. On September 12, 1997, Greenmarine Holdings LLC ("Greenmarine Holdings") acquired control of approximately 90% of the then outstanding shares of common stock ("Pre-Merger Company Shares") of Outboard Marine Corporation 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 an acquisition subsidiary with and into the Company (the "Merger"). As a result of the Merger, OMC 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 Tender Offer and the Merger are collectively referred to herein as the "Greenmarine Acquisition." 3 4 Since the Greenmarine Acquisition, the Company has recruited a new senior management team led by David D. Jones, Jr. as President and Chief Executive Officer. Mr. Jones was previously President of the Mercury Marine Division of Brunswick Corporation, where, under his direction, the division gained substantial market share in several key marine segments. Mr. Jones has more than twenty years of experience in the marine industry. The new management team also includes Andrew P. Hines who joined the Company as Executive Vice President and Chief Financial Officer. Mr. Hines has extensive experience in turnaround situations. In addition, the Company has added a substantial number of new members to its management team to fill key operational and administrative positions, including new heads of most of its boat divisions, its engine manufacturing operations, its purchasing and supply operations, and its sales, marketing and advertising operations. The new senior management team has developed several key initiatives to turn around and substantially improve the Company's operations. The Company owns a majority interest in FICHT GmbH & Co. KG, which has developed a patented, highly innovative fuel-injection technology designed for two-stroke engines. The FICHT fuel-injection technology utilizes advanced electronic microprocessors to directly inject high-pressure fuel into a sealed combustion chamber, eliminating the escape of any unburned fuel. The FICHT fuel-injection system uses fewer mechanical parts, is smaller and, the Company believes, more reliable than any other low-emission engine. The FICHT fuel-injection technology possesses several advantages over standard two-stroke engines, including smoother and quieter operation, 35% better fuel economy on average, up to 80% reduction in hydrocarbon emissions and virtually no smoke on start-up. In addition, two-stroke engines based on the FICHT fuel-injection technology offer several benefits relative to four-stroke engines, including increased low-end power, lighter weight and smaller size. Furthermore, the FICHT fuel-injection technology meets emissions standards mandated by the United States Environmental Protection Agency (the "EPA") set for the year 2006. The Company has already introduced outboard engines incorporating the FICHT fuel-injection technology in six separate horsepower categories. To date, the Company has received several awards relating to its FICHT fuel-injection technology, including the 1996 Popular Mechanics Design & Engineering Award for marine engines, the 1997 International Marine Trades Exposition and Conference Innovation Award, the 1997 Motor Boating and Sailing Magazine Innovation Award, the 1997 Society of Automotive Engineers International Off-Highway & Powerplant Company of the Year Award and the 1997 Euromot Award. INDUSTRY OVERVIEW The recreational boating industry generated approximately $19.2 billion in domestic retail sales in 1998, including approximately $8.7 billion in sales of boats, engines and trailers. 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. Recreational marine industry sales are impacted by the general state of the economy, interest rates, consumer spending, technology, dealer effectiveness, demographics, weather conditions, fuel availability and government regulations and other factors. See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Cyclicality; Seasonality; Weather Conditions." During the period from 1983 to 1992, the recreational marine industry experienced both its largest growth (from 1983 to 1988) and its largest downturn (from 1988 to 1992) in over 30 years. The growth was stimulated not only by increasing real disposable income, but also by the emerging trend within the marine industry of packaging engines with boats, which resulted in boat packages that were more affordable to consumers, and easily obtainable marine loans that required no money down and could be financed over a term of over ten years. The contraction in sales from 1988 to 1992 was due to the recession during the early 1990s, as well as to the fact of the accentuated level of sales in the late 1980s. Many boat owners had loan balances in the early 1990s that exceeded the value of the boats, which made trade-up sales more difficult to obtain. In addition, the U.S. government imposed a luxury tax in 1990 on boats sold at prices in excess of $100,000. The Company believes that many consumers were under the impression that this luxury tax applied to all boats and that this depressed sales of boats in all price segments. The luxury tax was repealed in 1993. Since 1992, domestic sales of recreational boats have increased from $2.2 billion to $3.6 billion in 1998. 4 5 PRODUCTS The Company manufactures a wide variety of outboard engines, including marine parts and accessories, and boats and distributes these products throughout the world. The following table sets forth, for the periods indicated, information concerning the Company's net sales by product category expressed in dollars in millions and as a percentage of net sales.
THREE MONTHS ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED DECEMBER 31, 1998 SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 ------------------ ------------------ ------------------ ------------------ Engines................ $111.9 56.1% $ 636.5 62.1% $560.4 57.2% $ 628.5 56.0% Boats.................. 87.5 43.9 389.2 37.9 419.1 42.8 493.0 44.0 ------ ----- -------- ----- ------ ----- -------- ----- Total.................. $199.4 100.0% $1,025.7 100.0% $979.5 100.0% $1,121.5 100.0% ====== ===== ======== ===== ====== ===== ======== =====
The following table sets forth, for the periods indicated, information concerning the Company's net sales by geographic region expressed in dollars in millions and as a percentage of net sales (for additional information concerning the Company's sales by geographic region, see Note 16 of the Notes to the Consolidated Financial Statements contained in Item 8 elsewhere herein).
THREE MONTHS ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED DECEMBER 31, 1998 SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 ------------------ ------------------ ------------------ ------------------ United States......... $152.0 76.2% $ 769.7 75.0% $721.0 73.6% $ 813.3 72.5% Europe................ 15.6 7.8 91.9 9.0 90.9 9.3 114.8 10.2 Other................. 31.8 16.0 164.1 16.0 167.6 17.1 193.4 17.3 ------ ----- -------- ----- ------ ----- -------- ----- Total................. $199.4 100.0% $1,025.7 100.0% $979.5 100.0% $1,121.5 100.0% ====== ===== ======== ===== ====== ===== ======== =====
OUTBOARD ENGINES The Company's Johnson and Evinrude brands are two of the most recognized outboard engine brands worldwide. Johnson and Evinrude are competitively priced with other premium priced outboard engines and include offerings in virtually every segment of the outboard engine market. In July 1998, the Company announced its new brand strategy for its Johnson and Evinrude outboard engines. This strategy is designed to differentiate the Johnson and Evinrude lines, which had become identical engines. Johnson and Evinrude engines are now readily distinguishable from each other and are being marketed to target different consumers. The Company's Evinrude brand comprises two-stroke models incorporating the Company's FICHT fuel-injection technology and certain four-stroke engines. The Evinrude brand is being marketed as the Company's "premium" outboard marine engine brand. The Company's Johnson brand comprises a full line of traditional carbureted two-stroke models. In addition, the Company has entered into a supply agreement with an affiliate of Suzuki Motor Corporation under which Suzuki manufactures certain other four-stroke engines for sale by the Company under its Evinrude brand. In 1997, the Company introduced a 150-horsepower outboard engine with FICHT fuel-injection technology. Through its Evinrude brand line, the Company currently offers engines incorporating its innovative FICHT fuel-injection technology in the 90, 115, 150, 175, 200 and 225-horsepower categories and is reviewing expanding this technology across the remainder of the Evinrude outboard engine product line. The FICHT fuel-injection system uses an electronically driven fuel injector, controlled by a powerful microprocessor-based engine management system, to blast short bursts of highly pressurized fuel directly into the combustion chamber at rates of up to 100 times per second. This high-pressure fuel pulse atomizes and positions each burst of gasoline in the cylinder for complete ignition once the exhaust port has been closed by the rising piston resulting in no unburned fuel escaping prior to combustion. The FICHT fuel-injection technology possesses several advantages over standard two-stroke engines, including smoother and quieter operation, 35% better fuel economy on average, up to 80% reduction in hydrocarbon emissions and virtually no 5 6 smoke on start-up. In addition, two-stroke engines based on the FICHT fuel-injection technology offer several benefits relative to four-stroke engines, including increased low-end power, lighter weight and smaller size. Engines with FICHT fuel-injection technology meet the EPA emissions standards set for the year 2006. The Company has developed and is implementing strategies to address performance issues that have been identified in certain applications of several of its FICHT engines. These strategies include modifications to the 1999 model-year FICHT engines and changes to the production processes for FICHT engines. In addition, upgrade kits are being provided to dealers for certain previously sold FICHT engines. See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- General Introduction of FICHT Engines; Regulatory Compliance" and "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- Three Months Ended December 31, 1998 Compared to Three Months Ended December 31, 1997." Since the Company originally acquired the FICHT technology, it has been actively engaged in research and development efforts aimed at improving the FICHT technology. See "-- Research and Development" below. The Company, directly or through its FICHT GmbH & Co. KG subsidiary, has entered into arrangements to sublicense the FICHT fuel-injection technology to manufacturers of snowmobiles, personal watercraft, motorcycles and lawn equipment, including Polaris Industries, Inc., Arctic Cat, Inc., Kawasaki Heavy Industries, Ltd., and two lawn and garden-care equipment manufacturers. See "-- Strategic Alliances -- FICHT Joint Venture" and "-- Intellectual Property" below. The Company is currently evaluating other opportunities to sublicense the FICHT fuel-injection technology to manufacturers of non-automotive engines. The following table sets forth the number of engine models and price range by size of engine in terms of horsepower:
NUMBER OF RETAIL PRICE HORSEPOWER RANGE MODELS RANGE($) - ---------------- --------- ------------ 2-24 horsepower............................................. 60 676-3,060 25-99 horsepower............................................ 83 2,534-8,454 100-250 horsepower.......................................... 76 7,836-16,076 --- Total.................................................. 219 ===
Parts and Accessories The Company also offers a wide line of marine parts and accessories through its Johnson and Evinrude dealers. Key products include engine parts, propellers and engine oil. Most of the parts business consists of replacement parts for outboard motors. The Company estimates that there are approximately seven million Johnson and Evinrude outboard motors in use, which produce a steady demand for high-margin replacement parts. In addition, in 1996, OMC launched a new value-line of marine accessories under the Nautic Pro brand name. This brand is marketed in part through a new distribution channel of marine and discount retailers, and is priced to compete with other private label and discount brands. Marine parts and accessories comprised approximately 18% and 13% of OMC's sales in fiscal year 1998 and the three months ended December 31, 1998, respectively. In June 1998, the Company announced that it had entered into a long-term strategic business agreement with Johnson Worldwide Associates, Inc. to supply a range of private-label, electric trolling motors designed to the Company's specifications. This arrangement allows the Company to offer its dealers a full line of industry leading electric trolling motors with state-of-the-art technology. BOATS The Company's boat brands are among the most recognized in the industry and are one of the market leaders in several categories, including the fishing, aluminum and recreational boat segments. OMC's primary boat brands include Chris*Craft, Four Winns, Seaswirl, Stratos, Javelin, Hydra-Sports, Lowe and Princecraft. 6 7 The Company offers products that cover most segments in the recreational and fishing boat market, from ten foot aluminum boats to 33-foot luxury cruisers, and is the largest producer of boats in units and one of the two largest in dollars. In fiscal year 1998, the Company began rationalizing and realigning its boat brands to lower its manufacturing costs and better focus each of its brands on a particular niche in the boating industry, thereby reducing competition and inefficient overlap among its brands. As part of this rationalization plan, the Hydra-Sports brand became the Company's flagship saltwater fishing boat line, the Stratos brand became the Company's top-of-the-line, tournament-style freshwater fishing boat line and the Javelin brand became the Company's entry to mid-level recreational fishing boat line. Production of the Company's Sunbird brand runabout boats for the 1999 model year was suspended, and the Sunbird Neptune series saltwater fishing boat products were incorporated into the Hydra-Sports brand. Hydra-Sports brand freshwater fishing boats and Stratos brand saltwater fishing boats have been discontinued. The Company has realigned its aluminum boat brands by consolidating the most popular models from its Grumman, Roughneck and Sea Nymph lines and incorporating them into the Lowe brand. The Lowe brand is now positioned to offer a full line of aluminum boats. The following table provides a brief description of the Company's 1999 model year boat products by category, including product line and trade name, overall length, retail price range, and a brief description of boats manufactured:
PRODUCT LINE OVERALL RETAIL & TRADE NAME LENGTH(FT) PRICE RANGE($) DESCRIPTION - ------------ ---------- -------------- ----------- RECREATIONAL: Chris*Craft.................... 19-32 19,993-122,947 Chris*Craft is one of the world's most recognized brands in the marine industry, serving the "prestige" market for boaters seeking a "top-of-the-line" boat. In 1997, Powerboat Magazine named the Chris*Craft 210 Bowrider "Boat of the Year." Four Winns..................... 17-33 11,600-148,056 Four Winns is the nation's third most popular boat brand. Four Winns offers a premium line of family-oriented recreational boats. Seaswirl....................... 17-26 13,900-59,500 Seaswirl is a mid-priced boat line, and is one of the leading boat brands in the Western United States. FISHING: Stratos........................ 16-21 17,047-34,457 Stratos is a performance line of freshwater fishing boats designed for the discriminating angler. The line includes bass and fish-'n-ski boats. Javelin........................ 17-20 12,533-27,823 Javelin is a value-priced freshwater fishing boat line. Products include bass and fish-'n-ski boats. Hydra-Sports................... 16-31 14,325-101,370 Hydra-Sports is a full line of saltwater fishing boats designed for the fishing enthusiast. ALUMINUM: Lowe........................... 10-25 385-22,828 Lowe offers aluminum jon, fishing, pontoon and deck boats. Princecraft.................... 10-24 473-28,634 Princecraft is a premium line of aluminum boats manufactured in Canada and sold throughout North America. Products include jon, fishing, fish-'n-ski, pontoon and deck boats.
7 8 STRATEGIC ALLIANCES FICHT Joint Venture On April 30, 1992, the Company and FICHT GmbH of Kirchseeon, Germany entered into a license agreement (the "1992 License Agreement") pursuant to which FICHT granted to the Company an exclusive, worldwide right and license to manufacture, use, sell and sublicense marine engines that utilize the FICHT fuel-injection system. The 1992 License Agreement provides that the Company shall pay royalties to FICHT GmbH on a per cylinder basis for each marine engine that is sold by the Company which utilizes the FICHT fuel-injection system. The term of the license is for the duration of each patent that relates to the FICHT fuel-injection system existing at the time that the 1992 License Agreement was executed or filed within one year thereafter. Since certain patents related to the FICHT technology have not been formally issued to date by certain foreign jurisdictions, the ultimate term of the 1992 License Agreement cannot be determined until each such unissued patent is issued. However, assuming that none of such unissued patents were to issue, the 1992 License Agreement would expire on July 25, 2015. On July 21, 1995, the Company acquired a majority ownership interest in FICHT GmbH to promote the development and worldwide manufacturing and marketing of the FICHT fuel-injection system. FICHT GmbH was subsequently converted to a limited partnership known as FICHT GmbH & Co. KG (together with any predecessor in interest, "FICHT GmbH"), in which the Company is the general partner and holds a 51% interest and in which members of the Ficht family collectively hold a 49% interest. The partnership agreement contains certain supermajority provisions which provide that the partnership may not sell the business of FICHT GmbH as a whole or in substantial parts, including licensing, sublicensing or sale of patents and other intellectual property related to the FICHT fuel-injection technology, without a unanimous vote of the partners and may not effect certain other actions, including acquisitions of other enterprises, without a majority of 75% of the votes of the partners. All ordinary course of business matters require only a simple majority vote. As part of the Company's 1995 acquisition of a majority ownership in FICHT GmbH, the 1992 License Agreement was assigned to FICHT GmbH & Co. KG. On February 7, 1997, the Company and FICHT GmbH entered into a license agreement (the "1997 License Agreement") pursuant to which FICHT GmbH granted to the Company an exclusive, worldwide license to manufacture, use, sell and sublicense the FICHT fuel-injection system for all non-marine, non-automotive applications, including but not limited to, snowmobiles, all-terrain vehicles, scooters, motorcycles, forest and garden equipment, lawn equipment and utility equipment. The terms of the 1997 License Agreement provide that the Company shall pay to FICHT GmbH a basic license fee in monthly installments through February 2000. The term of the license is for the duration of each patent that relates to the FICHT fuel-injection system existing at the time that the 1997 License Agreement was executed or filed within one year thereafter. Since certain patents related to the FICHT technology have not been formally issued to date by certain foreign jurisdictions, the ultimate term of the 1997 License Agreement cannot be determined until each such unissued patent is issued. However, assuming that none of such unissued patents were to issue, the 1997 License Agreement would expire on July 25, 2015. Prior to the execution of the 1997 License Agreement, FICHT GmbH entered into non-exclusive sublicense agreements with two lawn and garden equipment manufacturers, pursuant to which FICHT GmbH granted non-exclusive licenses for the manufacture and sale of non-marine engines that utilize the FICHT fuel-injection system in return for certain royalty payments, of which the Company is entitled to a 51% interest. In addition, since entering into the 1997 License Agreement, the Company has executed separate sublicense agreements with each of Kawasaki Heavy Industries, Ltd., Arctic Cat, Inc. and Polaris Industries, Inc. Under these sublicense agreements, which, subject to certain exceptions, may be terminated by each sublicensee after five years, the Company has granted a non-exclusive license for the manufacture and sale of certain non-automotive, marine and non-marine applications of the FICHT fuel-injection system in return for certain license fees and/or royalty payments. 8 9 OMC/Volvo Sterndrive Joint Venture On December 8, 1998 the Company sold its interest in the joint venture Volvo Penta Marine Products L.P. (the "Volvo Penta Joint Venture") to Volvo Penta of the Americas, Inc. ("Volvo"). The joint venture was formed by the Company, AB Volvo Penta and Volvo Penta North America, Inc. in 1993 to manufacture sterndrive engines for boats. Separately, the Company and Volvo entered into an agreement whereby Volvo will supply to the Company sterndrives through June 30, 2001 and component parts through June 30, 2011 and the Company will supply component parts to Volvo through June 30, 2011. Suzuki Agreement On June 13, 1997, the Company entered into a five-year Original Equipment Manufacturer Supply/ Purchase Agreement with an affiliate of Suzuki Motor Corporation for the purchase of certain four-stroke outboard engines and related parts and accessories. The products are manufactured by Suzuki and marketed and sold under the Evinrude brand. The Company and Suzuki have recently participated in a joint evaluation of respective product performance characteristics. The Company and Suzuki are currently negotiating an agreement for the supply/purchase of OMC-manufactured engines and parts and accessories to be branded and sold under the Suzuki name. There can be no assurance that these negotiations will result in a binding agreement between the Company and Suzuki. SALES AND DISTRIBUTION The Company believes that it has one of the world's largest marine dealer networks with approximately 6,500 dealers worldwide, approximately 4,300 of the dealers are in North America, and many of them sell both the Company's boats and its engines. The Company's outboard engines and parts and accessories are distributed in the United States and Canada through a dealer network. The majority of these dealers purchase the Company's products directly from the Company. The Company's boats are sold, for the most part, directly to dealerships. Distribution of the Company's products outside the United States and Canada is handled by various divisions and subsidiaries of the Company, which sell to dealers and wholesale distributors throughout the world. The Company's dealership agreements are typically nonexclusive and are executed on an annual basis. The Company sponsors various programs to provide its dealers with marketing and financial assistance and to encourage them to offer broader lines of the Company's products. Such programs include "cooperative" advertising, boat-show promotions, dealer rebate programs and "floor plan" financing assistance and various other credit arrangements. In a typical "floor plan" financing arrangement, an institutional lender agrees to provide a dealer with a line of credit in a specified amount for the purchase of inventory which secures such credit. For certain lenders the Company, in turn, agrees to repurchase products up to a specified amount in the event of repossession by the lender upon a dealer's default. The Company's "floor plan" financing arrangements contain provisions that limit the Company's obligations to approximately $32 million per model year for a period not to exceed 30 months from the date of invoice. This obligation automatically reduces over the 30-month period. For the three-month period ended December 31, 1998 and for fiscal 1998, the Company repurchased approximately $1.4 million and $4.1 million of products, respectively, all of which were resold at a discounted price. The Company accrues for losses that are anticipated in connection with expected repurchases. The Company does not expect these repurchases to materially affect its results of operations. The Company augments its dealers' marketing efforts by, among other methods, advertising in boating and other recreational magazines, by furnishing displays at regional, national or international boat shows and by sponsoring various fishing tournaments and fishing professionals. In fiscal year 1998, the Company refocused its marketing efforts to emphasize and reinforce its new brand-realignment strategies. As part of its sales efforts, the Company actively pursues original equipment manufacturer ("OEM") and pre-rig arrangements relating to its outboard engines. Among the Company's OEM arrangements are those with Mako Marine International, Inc., Smoker Craft, Inc., Alumacraft Boat Company, Triton Boats and Godfrey Conveyer Company. The Company also has pre-rig arrangements with certain boat manufacturers, including Genmar Holdings, Inc. and Pro Line. Each of these manufacturers has agreed to pre-rig certain of 9 10 its products for outboard engines sold by OMC to such manufacturer's dealers. In return, OMC pays a fee to the boat manufacturer based on the number of pre-rigged boats sold by the manufacturer. MANUFACTURING OPERATIONS The Company's principal outboard engine manufacturing and assembly facilities are located in Illinois, Wisconsin, Georgia, North Carolina, Mexico, China, Brazil and Hong Kong. Its principal boat manufacturing facilities are located in Michigan, Florida, Tennessee, South Carolina, Oregon, Indiana, Missouri, Australia and Canada. See "Item 2 -- Properties." The Company has taken significant steps to improve the efficiency of its manufacturing operations. In February 1998, the Company closed its Old Hickory, Tennessee plant and moved its production to the Company's Murfreesboro, Tennessee plant. In connection with this closure, the Company has accrued $1.3 million in severance costs in its allocation of purchase price in connection with the Greenmarine Acquisition. The Murfreesboro plant now focuses on the production of fiberglass, freshwater fishing boats. Concurrently, production of certain of the Company's saltwater fishing boats was moved to the Company's Columbia, South Carolina manufacturing facility. This move focused the Columbia facility exclusively on saltwater fishing boats and located production of the Company's saltwater fishing boats closer to the retail market for these boats. In September 1998, the Company announced that it will be closing its engine manufacturing facilities located in Milwaukee, Wisconsin and Waukegan, Illinois by the end of the year 2000. In connection with these closures, the Company recorded a restructuring charge of $98.5 million in fiscal year 1998. See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operation -- General" and Note 4 of the Notes to the Consolidated Financial Statements contained in Item 8 elsewhere herein. As part of the Company's plan to close these facilities, substantially all of the production operations currently conducted at these facilities will be outsourced to third-party vendors with the balance being relocated to other facilities of the Company. These plant closures will be effected in phases, and the production transfers associated therewith already have begun and are expected to be completed by December 2000. The Company has begun several important initiatives aimed at reducing costs in its engine manufacturing facilities. These initiatives include: (i) measures aimed at reducing purchasing costs through consolidation of vendors and improvement of the design process; (ii) improving factory layouts and work flows; (iii) standardizing labor inputs; (iv) outsourcing non-core capabilities; and (v) improving quality control. The Company has implemented the first phase of its lean manufacturing initiative at its main outboard engine manufacturing and assembly facility in Calhoun, Georgia. The second phase of this initiative is currently being implemented at additional sub-assembly facilities. The Company has also identified potential vendors for outsourcing the production of certain engine components. Foreign Operations For the three months ended December 31, 1998 and for fiscal year 1998, approximately 24% and 25%, respectively of the Company's net sales were derived from operations conducted outside the United States. As of December 31, 1998 and as of September 30, 1998, approximately 3% of the Company's long-lived assets (primarily property, plant and equipment) were located outside the United States. Foreign operations are subject to special risks that can materially affect sales of the Company and the value of the Company's foreign assets, including currency exchange rate fluctuations, the impact of inflation, government expropriation, exchange controls and other restrictions on the repatriation of earnings, political instability, civil insurrection and other risks. Changes in certain exchange rates could have an adverse effect on the relative prices at which the Company and foreign competitors sell their products in the same market and on the Company's ability to meet interest and principal obligations with respect to its U.S. dollar-denominated debt (see "Item 7A -- Quantitative and Qualitative Disclosures About Market Risk"). Similarly, the cost of certain items required in the Company's operations may be affected by changes in the value of the relevant currencies. Specifically, the substantial devaluation of the Japanese yen since the beginning of the fourth quarter of fiscal year 1997 has improved the competitive position of several of the Company's Japanese competitors by decreasing the sales price in U.S. dollars of their Japanese products in the U.S. market. While the Company hedges certain 10 11 exposures to foreign currency exchange rate changes arising in the ordinary course of business, there can be no assurance that the Company will be successful and that shifts in currency exchange rates will not have a material adverse effect on the Company. See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Resources" and Note 10 of the Notes to the Consolidated Financial Statements contained in Item 8 elsewhere herein. Quality Assurance The Company maintains rigid quality controls and extensively tests its products and components in each of its manufacturing and assembly facilities. In addition to on-site testing, the Company maintains year-round, on-water testing facilities in Illinois and Florida. The Company continuously monitors and endeavors to improve its quality assurance programs and further intends to expand these programs and further motivate its workforce towards achieving increasing quality standards. COMPETITION The Company faces competition on international, national, regional and local levels. Each of the markets in which the Company participates is highly competitive. In addition, the Company faces competition generally from other forms of recreational products and activities such as golf, camping and recreational vehicles. Management believes that the Company is the world's second largest manufacturer of outboard engines, with an approximate 35% share of the United States outboard marine engine market and an estimated 26% share of the worldwide market. Management also believes that the Company is the world's largest manufacturer of aluminum boats and freshwater fiberglass fishing boats, and the third largest manufacturer of recreational boats. The marine engine market has high barriers to entry due to the capital investment and technological expertise required in manufacturing marine engines. As a result, the marine engine market is concentrated with two main U.S.-based competitors, OMC and Brunswick Corporation, and three main Japan-based manufacturers, Yamaha Motor Co., Ltd., American Honda Motor Co., Inc. and Suzuki Motor Corporation. There are hundreds of manufacturers of boats which compete with the Company, the largest of which in the United States are Brunswick, Genmar Industries, Inc. and Tracker Marine, L.P. Many of the Company's competitors in the boat manufacturing industry are smaller, regional builders who may possess cost advantages over the Company's boat manufacturing operations. Although the recreational boat market is fragmented, the top four boat builders (including the Company) accounted for approximately 45% of the U.S. market in 1997 in terms of unit sales. Many of the Company's competitors, including Brunswick and Yamaha, are large, vertically integrated companies that may have greater resources, including financial resources, than the Company. However, the Company believes it is well positioned within the recreational boating industry, as it is one of only two integrated domestic manufacturers of both marine engines and boats. The Company believes that this integration is a competitive advantage as the industry continues to trend towards sales of integrated boat and engine packages. INTELLECTUAL PROPERTY The Company's engine manufacturing business relies heavily on patented and other proprietary technology. The Company relies upon a combination of patent, trademark and trade secret laws, together with licenses, confidentiality agreements and other contractual covenants to establish and protect its technology and other intellectual property rights. Wherever legally permissible and appropriate, the Company files applications to acquire its patents and register its trademarks and service marks in the United States and many foreign countries where the Company currently sells its products or could reasonably be expected to sell products in future years. There can be no assurance that the patent applications submitted by the Company or its licensors will result in patents being issued or that, if issued, such patents or pre-existing patents will afford adequate protection against competitors with similar technology. There can also be no assurance that any patents issued to or licensed by the Company will not be infringed upon or designed around by others, that others will not obtain patents that the Company will need to license or design around, that the Company's 11 12 products will not inadvertently infringe upon the valid patents of others or that others will not manufacture and distribute the Company's patented products upon expiration of such patents. In addition, there can be no assurance that key patents of the Company will not be invalidated or that the Company or its licensors will have adequate funds to finance the high cost of prosecuting or defending patent validity or infringement issues. 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 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 sale of FICHT engines accounted for approximately 8% and 16.2% of the Company's revenues for the fiscal year ended 1998 and the three-month period ended December 31, 1998, respectively. The Company also uses a number of trade names and trademarks in its business, including Chris*Craft, Evinrude, FFI, FICHT, Four Winns, Grumman, Hydra-Sports, Javelin, Johnson, Lowe, OMC, Princecraft, Roughneck, Sea Horse, Sea Nymph, Seaswirl and Stratos. Wherever legally permissible and appropriate, the Company files applications to acquire its patents and register its trademarks and service marks in the United States and many foreign countries where the Company currently sells its products or could reasonably be expected to sell products in future years. The Company has license agreements with FICHT GmbH & Co. KG (a majority-owned subsidiary of the Company), Chris Craft Industries, Inc. and Northrop Grumman Corporation. The Company has an exclusive, worldwide license with its majority-owned subsidiary FICHT GmbH for the marine industry for the FICHT fuel-injection system. This license is royalty bearing and is active for the duration of each patent existing at the time that the license agreement was executed in April 1992 or filed within one year thereafter. The Company also has an exclusive, worldwide license with its majority-owned subsidiary FICHT GmbH for all non-automotive applications of the FICHT fuel-injection technology. This license is royalty bearing and is active for the duration of each patent existing at the time that the license agreement was executed in February 1997 or filed within one year thereafter. The Company's license with Chris Craft Industries, Inc. is an exclusive, perpetual, royalty bearing license to use the Chris*Craft trade name and trademark for boats and certain boat products worldwide. The Company's Grumman license is an exclusive, royalty-free license to use the Grumman trade name and trademark for recreational aluminum boats and canoes in territories which include the United States and Europe. This license expires on December 31, 1999, however it is subject to unlimited ten year renewal terms at the Company's option. RESEARCH AND DEVELOPMENT In the three-month period ended December 31, 1998 and the fiscal years 1998, 1997 and 1996, OMC spent $10.2 million, $36.8 million, $38.2 million and $41.8 million, respectively, on research and development activities relating to the development of new products and improvement of existing products, including the FICHT fuel-injection technology. All of these activities were financed by OMC. The EPA has adopted regulations governing emissions from marine engines. The regulations relating to outboard engines phase in over nine years, beginning in model year 1998 and concluding in model year 2006. With respect to personal watercraft, the regulations phase in over eight years, beginning in model year 1999 and concluding in model year 2006. Marine engine manufacturers are required to reduce hydrocarbon emissions from outboard engines, on average, by 8.3% per year beginning with the 1998 model year, and emissions from personal watercraft by 9.4% per year beginning in model year 1999. In 1994, the Company announced Project LEAP, a project to develop new low-emission technologies and to convert its entire outboard product line to low-emission 12 13 products within the next decade. To date, the Company estimates that it has spent approximately $54.0 million on Project LEAP, including the introduction of its new FICHT fuel-injection technology and four-stroke outboard engines, 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. Compliance with these standards adds cost to the Company's engine products in the short-term. However, this situation is not seen as a major deterrent to sales since value will be added to its products at the same time that the entire industry is faced with developing solutions to the same regulatory requirements. The Company believes this situation will not have a material impact on future results of operations or the financial condition of the Company. See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations." ENVIRONMENTAL AND REGULATORY MATTERS 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) clean-up of environmental contamination at its owned or operated sites and at facilities where its waste is or has been disposed. Permits are required for operation of the Company's business (particularly air emission permits), and these permits are subject to renewal, modification and, in certain circumstances, revocation. The Company believes that it is in substantial compliance with such laws and permit requirements, except where such non-compliance is not expected to have a material adverse effect. The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA" or "Superfund") and earlier 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. A majority of states have adopted Superfund statutes comparable to, and in some cases more stringent than, CERCLA. 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. 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, 1998, the Company accrued approximately $25.0 million for costs relating 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. Each site, whether or not remediation studies have commenced, is reviewed on a quarterly basis and the aggregate environmental contingent liability accrual is adjusted 13 14 accordingly. Therefore, the Company believes the accruals accurately reflect the Company's liability based upon current information. The EPA has adopted regulations governing emissions from marine engines. The regulations relating to outboard engines phase in over nine years, beginning in model year 1998 and concluding in model year 2006. With respect to personal watercraft, the regulations phase in over eight years, beginning in model year 1999 and concluding in model year 2006. Marine engine manufacturers are required to reduce hydrocarbon emissions from outboard engines, on average, by 8.3% per year beginning with the 1998 model year, and emissions from personal watercraft by 9.4% per year beginning in model-year 1999. In 1994, the Company announced Project LEAP, a project to convert its entire outboard product line to low-emission products within the next decade. Through December 31, 1998, the Company estimates that it has spent approximately $54.0 million on low emissions 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 emissions standards. The Company does not believe that compliance with these 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. The Company does not believe that compliance with these new EPA regulations will have a material adverse effect on its financial condition or future results of operations. On December 10, 1998 the California Air Resources Board ("CARB") adopted emissions standards for outboard engines and personal watercraft sold in the State of California that would require compliance with the EPA's year 2006 emissions standards in 2001, and significantly more stringent standards in 2004 and 2008. All manufacturers of outboard engines and personal watercraft will be affected by the regulations. While the Company has not been able to fully assess the impact that such standards will have on its business, the Company has begun to assess possible responses to these standards, including a possible legal challenge. The Company's FICHT fuel-injection and four-stroke outboard engines currently comply with CARB's 2001 standards, and all but one of these engines comply with CARB's 2004 standard. The Company believes that this one engine will be in compliance by 2004. In addition, based on current technology, CARB's year 2008 standards would require the Company to turn to untested technologies in an attempt to achieve compliance. The California market represents only an approximate 3% of the Company's North American sales of outboard engines. Additionally, certain states have required or are considering requiring a license to operate a recreational boat. While such licensing requirements are not expected to be unduly restrictive, regulations may discourage potential first-time buyers, which could affect the Company's business, financial condition and results of operations. In addition, certain state and local government authorities are contemplating regulatory efforts to restrict boating activities, including the use of engines, on certain inland bodies of water. In one instance, the East Bay Municipal Utility District, located near Oakland, California, has adopted regulations that, on one of the three water bodies under its jurisdiction, will limit certain gasoline engine use effective January 1, 2002. While the Company cannot assess the impact that any such contemplated regulations would have on its business until such regulations are formally enacted, depending upon the scope of any such regulations, they may have a material adverse effect on the Company's business. The Company, however, does not believe that the regulations adopted by the East Bay Municipal Utility District will have a material adverse effect on the Company's business. The Company cannot predict the environmental legislation or regulations that may be enacted in the future or how existing or future laws or regulations will be administered or interpreted. Compliance with more stringent laws or regulations, as well as more vigorous enforcement policies of the regulatory agencies or stricter interpretation of existing laws, may require additional expenditures by the Company, some or all of which may be material. In 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 14 15 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. See Note 18 of the Notes to the Consolidated Financial Statements contained in Item 8 elsewhere herein. RAW MATERIALS The principal raw materials required in the Company's manufacturing operations are aluminum, resin and fiberglass, all of which are purchased at competitive or prevailing market prices. The Company has supply arrangements for the purchase of resin and aluminum. From time to time, the Company has also purchased commodity options to hedge anticipated price fluctuations with respect to purchases of aluminum. See "Item 7A -- Quantitative and Qualitative Disclosures About Market Risk" and Note 10 of the Notes to the Consolidated Financial Statements contained in Item 8 elsewhere herein. The Company believes that adequate sources of supply exist and will continue to exist, at competitive prices, for all of the Company's raw material requirements. EMPLOYEES As of December 31, 1998, approximately 7,273 people were employed by OMC and its subsidiaries worldwide (6,200 domestic employees), consisting of 1,474 salaried and 5,799 hourly employees. Approximately 17% of the Company's employees are represented by one of three unions. The Laborers International Union of North America ("LIUNA") represents approximately 476 employees at the Calhoun, Georgia facility; the independent Marine Machinists Association ("IMMA") represents approximately 378 employees at the Waukegan, Illinois facility; and the United Steel Workers of America ("USWA") represents approximately 371 employees at the Milwaukee, Wisconsin facility. The Company's agreements with the LIUNA, IMMA and USWA are effective through September 30, 2000, October 30, 1999 and March 31, 2003, respectively. The Company believes that its labor relations are satisfactory. In connection with the Company's planned closure of its manufacturing facilities in Milwaukee, Wisconsin and in Waukegan, Illinois, the Company's workforce will be reduced by approximately 950 salaried and hourly employees by the end of the year 2000. See Note 4 of the Notes to the Consolidated Financial Statements contained in Item 8 elsewhere herein. ITEM 2. PROPERTIES The following table sets forth the Company's material facilities as of December 31, 1998.
OWNED OR LEASED SQUARE LOCATION FACILITY TYPE/USE (LEASE EXPIRATION) FOOTAGE - -------- ----------------- ------------------- --------- Waukegan, IL......................... Worldwide headquarters; Owned 1,400,000 outboard engine component manufacturing Delavan, WI.......................... Outboard engine component Leased (Aug. 2006) 40,000 manufacturing Milwaukee, WI........................ Outboard engine component Owned 375,000 manufacturing Burnsville, NC....................... Outboard engine component Owned 290,000 manufacturing Spruce Pine, NC...................... Outboard engine component Owned 100,000 manufacturing Andrews, NC.......................... Outboard engine component Owned 150,000 manufacturing Calhoun, GA.......................... Outboard engine assembly Owned 290,000
15 16
OWNED OR LEASED SQUARE LOCATION FACILITY TYPE/USE (LEASE EXPIRATION) FOOTAGE - -------- ----------------- ------------------- --------- Beloit, WI........................... Worldwide parts and Owned 483,000 accessories distribution center Waukegan, IL......................... Distribution center Leased (Jan. 2003) 180,000 Morrow, GA........................... Distribution center Owned 86,000 Parsippany, NJ....................... Distribution center Owned 88,000 Dallas, TX........................... Distribution center Owned 86,000 Kent, WA............................. Distribution center Leased (Dec. 2000) 56,000 Sunrise, FL.......................... Sales Office Leased (Sept. 2001) 8,000 Cadillac, MI......................... Boat manufacturing Owned 364,000 Lebanon, MO.......................... Boat manufacturing Owned 227,000 Murfreesboro, TN..................... Boat manufacturing Owned 275,000 Columbia, SC......................... Boat manufacturing Owned 178,000 Culver, OR........................... Boat manufacturing Owned 166,000 Syracuse, IN......................... Boat manufacturing Owned 235,000 Sarasota, FL......................... Boat manufacturing Owned 153,000 Princeville, Quebec, Canada.......... Boat manufacturing Owned 417,000 Juarez, Chihuahua, Mexico............ Outboard engine component Owned 200,000 manufacturing Dongguan, China...................... Outboard engine component Leased (Dec. 2002) 65,000 manufacturing Hong Kong............................ Outboard engine and Leased (Jun. 2047) 35,000 component manufacturing and distribution center Manaus, Brazil....................... Outboard engine and Leased (Aug. 1999) 46,000 component assembly and fabrication Altona, Australia.................... Boat manufacturing and Owned 28,000 assembly Yatala, Australia.................... Boat manufacturing and Owned 37,000 assembly Bankstown, Australia................. Office; distribution center Leased (Dec. 2004) 54,000 Gent, Belgium........................ Office; distribution center Leased (Apr. 2003) 121,000
ITEM 3. LEGAL PROCEEDINGS The Company is engaged in a substantial number of legal proceedings arising in the ordinary course of business. While the result of these proceedings cannot be predicted with any certainty, based upon the information presently available, the Company is of the opinion that the final outcome of all such proceedings should not have a material adverse effect on the financial condition or the results of operations of the Company. See also "Item 1 -- Business -- Environmental Matters." For a discussion of certain allegations relating to the FICHT technology, see "Item 1 -- Business -- Intellectual Property." Products sold or serviced by the Company may expose it to potential liability for personal injury or property damage claims relating to the use of those products. Historically, the resolution of product liability claims has not materially affected the Company. The Company maintains a Domestic Products Liability/ Protection and Indemnity Self-Insured Retention Program. The Company has a Primary Self-Insured Retention for any one accident or occurrence of $250,000 with an underlying Self-Insured Retention of $2,000,000 per accident with a $2,000,000 per year aggregate. Product liability claims occurring outside the United States are covered by insurance with a limit of $1,000,000 per occurrence, $2,000,000 aggregate. In the 16 17 event that the underlying products liability insurance or retentions are exhausted, there is excess coverage up to $100,000,000 per occurrence and in the aggregate. See also Note 18 of the Notes to the Consolidated Financial Statements contained in Item 8 elsewhere herein. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the three-month period ended December 31, 1998, there were no matters submitted to a vote of security holders. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS There were two record holders of common stock of OMC at December 31, 1998. There is no established public trading market for the Company's common stock. During calendar year 1998, the Company granted an aggregate of 858,640 options to 160 employees. ITEM 6. SELECTED FINANCIAL DATA The following summary represents certain financial information for the three months ended December 31, 1998 and December 31, 1997, and the five fiscal years ended September 30, 1998, 1997, 1996, 1995, and 1994. 17 18
POST-MERGER COMPANY ----------------------------------------- AT OR FOR THE THREE MONTHS PRE-MERGER COMPANY ENDED ----------------------------------------- DECEMBER 31, ------------------ AT OR FOR THE FISCAL AT OR FOR THE FISCAL YEARS ENDED YEAR ENDED SEPTEMBER 30, (DOLLARS IN MILLIONS, EXCEPT PER SHARE 1997 SEPTEMBER 30, ----------------------------------------- AMOUNTS AND RATIOS) 1998 UNAUDITED 1998 1997(1) 1996 1995 1994 - -------------------------------------- ------ --------- -------------------- -------- -------- -------- -------- Net sales.......................... $199.4 $209.5 $1,025.7 $ 979.5 $1,121.5 $1,229.2 $1,078.4 Net earnings (loss)................ (47.1) (17.1) (150.5) (79.1) (7.3) 51.4 48.5 Average number of shares of common stock outstanding and common stock equivalents, if applicable....... 20.4 20.4 20.4 20.2 20.1 20.1 20.0 Per average share of common stock-- Net earnings (loss) Basic.......................... (2.31) (0.84) (7.38) (3.91) (0.36) 2.56 2.42 Diluted........................ (2.31) (0.84) (7.38) (3.91) (0.36) 2.33 2.22 Dividends declared................. -- -- -- 0.20 0.40 0.40 0.40 Total assets(2) 916.2 977.5 949.9 1,050.2 873.7 907.0 817.1 Long-term debt..................... 247.0 102.8 247.9 103.8 177.6 177.4 178.2 OTHER DATA: EBITDA (as defined)(3)............. (30.1) 0.9 20.0 (0.9) 77.3 118.7 93.4 Net cash provided by operating activities..................... (53.3) (36.6) 60.3 (9.2) 91.1 51.4 57.3 Net cash provided by investing activities..................... (9.6) (5.4) (24.0) (26.1) (50.5) (65.8) (63.0) Net cash provided by financing activities 31.2 12.0 (45.1) (3.7) (2.9) (8.1) (19.7) Depreciation and amortization (including amortization of debt discount)........................ 12.4 12.5 50.1 57.0 54.7 47.6 44.0 Amortization of debt discount...... 0.1 0.3 0.8 2.7 0.8 1.0 0.8 Capital expenditures............... 15.1 6.3 34.4 36.3 52.7 66.5 68.2 Ratio of earnings to fixed charges... N/A N/A N/A N/A N/A 3.5x 4.3x
- --------------- (1) September 30, 1997 data includes Post-Merger Company data for total assets and long-term debt. (2) Total assets at December 31, 1998, September 30, 1998 and September 30, 1997 are not comparable with 1996, 1995 and 1994 due to the application of purchase accounting in respect of the Greenmarine Acquisition. See Notes 1 and 2 of the Notes to the Consolidated Financial Statements contained in Item 8 elsewhere herein for further information on purchase accounting and certain reclassifications made to the Company's Statements of Consolidated Financial Position. (3) "EBITDA" represents earnings from operations (including income derived from the Company's sterndrive joint venture, net of joint venture expenses) before depreciation and amortization (excluding debt discount amortization) and restructuring charges. For the fiscal years ended September 30, 1998 and September 30, 1996, "EBITDA" does not include restructuring charges of $98.5 million and $25.6 million, respectively. See Note 4 of the Notes to the Consolidated Financial Statements contained in Item 8 elsewhere herein. For fiscal year ended September 30, 1997, "EBITDA" does not include a one-time $11.8 million charge due to a change of control expense related to compensation expenses resulting from the change of control as a result of the Greenmarine Acquisition. The Company accrued for income from the sterndrive joint venture, net of joint venture expenses, in Other Income and has included it in EBITDA because it reflects a recurring stream of revenue from the sale of the Company's sterndrive parts and accessories products. Income (loss) from the sterndrive joint venture, net of joint venture expenses, was $4.1 million, $4.9 million, $4.4 million, $7.2 million, $4.8 million, $1.2 million and $(0.3) million for the fiscal years ended 1994, 1995, 1996, 1997, 1998, and for the three months ended December 31, 1998 and 1997, respectively. EBITDA is widely used by securities analysts and is presented here to provide additional information about the Company's ability to meet its future debt service, capital expenditures and working capital requirements. While management believes that EBITDA is an appropriate approximation of the Company's liquidity, EBITDA should not be considered as an alternative to, or more meaningful than, income from operations or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles), as a measure of liquidity, and should not be construed as a measure of liquidity or as an indication of a company's operating performance. EBITDA as presented herein may be calculated differently by other companies and, accordingly, the amounts presented herein may not be comparable to similarly titled measurements of other companies. 18 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 in Item 8 elsewhere herein. GENERAL The Company restated its consolidated financial statements for its fiscal year ended September 30, 1997 in connection with its revising the accounting for its acquisition by Greenmarine Holdings. The Company also restated its financial statements for its fiscal quarters ended December 31, 1997, March 31, 1998, and June 30, 1998. The restatement resulted 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 believed that these charges were more appropriately reported in fiscal year 1998. Operational refinements during fiscal year 1998, including 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, resulted in a decision that these expenses were, using interpretations of authoritative accounting literature, more appropriately reported in fiscal year 1998. As a result, the Company's September 30, 1997 financial statements were restated to reverse $122.9 million of previously recorded accrued liabilities and contingencies with a corresponding reduction in goodwill. The Company recognized approximately $149 million in operating expenses and restructuring costs in fiscal year 1998 to record its reorganization plan and contingencies, including a restructuring charge of $98.5 million, and additional operating expenses of $53.3 million, which was offset partially by an approximate $3.0 million reduction in amortization expense. The Company also reclassified certain deferred tax liabilities to a corresponding liability account. These deferred tax liabilities were previously offset against deferred tax assets associated with certain purchase accounting reserves that were subsequently reversed in the restatements. 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 in the Statement of Consolidated Earnings for the fiscal year ended September 30, 1997 and September 30, 1998. 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) for fiscal year 1997 or fiscal year 1998. Effective October 1, 1998, the Company's fiscal year-end changed from September 30 to December 31. Accordingly, the Company is filing with the Securities and Exchange Commission this transition report on Form 10-K for the transition period of October 1, 1998 through December 31, 1998. Industry Overview. According to data published by the NMMA, the recreational boating industry generated approximately $19.2 billion in domestic retail sales in 1998, including approximately $8.7 billion in sales of boats, engines, trailers and accessories. In addition, according to statistics compiled by the U.S. Department of Commerce, recreational products and services represent one of the fastest growing segments of U.S. expenditures. Cyclicality; Seasonality; Weather Conditions. The recreational marine industry is highly cyclical. Industry sales, including sales of the Company's products, are closely linked to the conditions of the overall economy and are influenced by local, national and international economic conditions, as well as interest rates, consumer spending, technology, dealer effectiveness, demographics, fuel availability and government regulations. In an economic downturn, consumer discretionary spending levels are reduced, often resulting in disproportionately large declines in the sale of relatively expensive items such as recreational boats. Similarly, rising interest rates could have a negative impact on consumers' ability, or willingness to obtain financing from lenders, which could also adversely affect the ability of the Company to sell its products. Even if prevailing economic conditions are positive, consumer spending on non-essential goods such as recreational boats can be adversely affected due to declines in consumer confidence levels. According to data published by the NMMA, total unit sales of outboard boats in the United States fell from a high of 355,000 units in 1988 to 192,000 units 19 20 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 and 1997, when reported U.S. sales of boats and engines were 320,850 and 308,000, and 304,600 and 302,000, respectively. The Company believes these declines were due partially to adverse weather conditions. In 1998, U.S. unit sales of boats and engines increased to 305,400 and 314,000, respectively. The recreational marine industry, in general, and the business of the Company are seasonal due to the impact of the buying patterns of dealers and consumers. The Company's peak revenue periods historically have been its fiscal quarters ending June 30 and September 30, respectively. Accordingly, the Company's receivables, inventory and accompanying short-term borrowing to satisfy working capital requirements are usually at their highest levels in the Company's fiscal quarter ending March 31 and decline thereafter as the Company's products enter the peak consumer selling seasons. Short-term borrowings averaged $35.7 million in fiscal year 1998, with month-end peak borrowings of $70.7 million in February and March 1998. 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, at September 30, 1997, respectively. In addition, $83.9 million of the purchase price was allocated to intangible assets for trademarks, patents and dealer network. The final excess purchase price over fair value of the net assets acquired was approximately $120 million and has been classified as goodwill in the Company's Statement of Consolidated Financial Position at September 30, 1998. New Management Initiatives. Since the Greenmarine Acquisition, the Company has assembled a new senior management team led by David D. Jones. The new senior management team has developed a turnaround strategy to capitalize on the Company's strong market position and leading, well-recognized brand names and to take advantage of anticipated growth in the recreational marine industry. Under its new management, the Company has also developed a business reorganization plan to realign and consolidate its products offered in the marketplace, and to improve existing manufacturing processes that will enable the Company to increase production efficiency and asset utilization. This turnaround strategy and reorganization 20 21 plan includes the elimination and consolidation of certain of the Company's products, and the closing and consolidation of certain of the Company's manufacturing facilities with corresponding involuntary employee terminations. However, there can be no assurance that the Company's turnaround strategy will be fully implemented or that its anticipated benefits will be realized. In January 1998, the Company began implementing its turnaround 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 certain of its saltwater fishing operations. In addition, the Company reduced its workforce by approximately 540 employees (in addition to the 950 employees discussed below), primarily within the Company's boat operations. The Company has accounted for liabilities assumed in connection with the severance benefits associated with the closure of the Old Hickory facility ($1.3 million) as part of the purchase price allocation at September 30, 1997. The Company has incurred approximately $0.8 million in severance costs through December 31, 1998. In March 1998, the Company announced a lean manufacturing initiative for its marine power manufacturing operations. Lean manufacturing is a disciplined approach for implementing proven manufacturing methodologies in order to reduce manufacturing costs through improved employee productivity and reduced inventory. The first phase of this initiative was introduced at the Company's final assembly plant in Calhoun, Georgia and, as a second phase, this initiative has been expanded to certain of the Company's sub-assembly facilities. This initiative is expected to reduce costs, shorten production times, lower inventory and improve the Company's responsiveness to dealer and consumer demand. The Company also began implementing a strategic purchasing program in January 1998. This program is designed to reduce purchasing costs by consolidating purchasing across vendors, integrating suppliers into the product design process at an early stage and designing products for lower cost. In April 1998, the Company announced that it would close its research facility in Waukesha, Wisconsin and relocate these operations to other facilities. The Company has accounted for its closure of the Waukesha, Wisconsin facility in its fiscal year ended September 30, 1998 results by recording approximately $2.5 million of expenses in its Statement of Consolidated Earnings. In June 1998, the Company announced the realignment of its aluminum boat brands. The most popular models from the Grumman, Roughneck and Sea Nymph lines were consolidated into the Lowe brand, which has been positioned to offer a full line of aluminum boats. The consolidation is a further step in the Company's efforts to reduce 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 Associates, Inc. to supply a range of private labeled electric trolling motors designed to OMC's specifications. This gives the Company a full line of industry leading, current technology electric trolling motors to offer its dealers. In July 1998, the Company announced a new brand strategy for its Johnson and Evinrude outboard engines. This strategy is designed to differentiate the Company's Johnson and Evinrude lines, which had become identical engines that were marketed under different names. Johnson and Evinrude engines are now readily distinguishable from each other and are being marketed to target different consumers. The Company's Evinrude brand comprises two-stroke models incorporating the Company's FICHT fuel-injection technology and certain four-stroke engines. The Evinrude brand is being marketed as the Company's "premium" outboard marine engine brand. The Company's Johnson brand comprises a full line of traditional carbureted two-stroke models. As a result, while OMC dealers previously sold either Johnson or Evinrude engines, they are now able to sell both engine lines. On September 24, 1998, the Company announced that it would be closing its Milwaukee, Wisconsin and Waukegan, Illinois facilities by the end of the year 2000. A restructuring charge of $98.5 million was recognized in the fourth quarter of fiscal 1998 and includes charges for the costs associated with closing these two facilities, and the related employee termination benefits for approximately 950 employees. As of 21 22 December 31, 1998, the Company has not incurred any costs against the restructuring charge established in the prior fiscal year. See Note 4 of the Notes to the Condensed Consolidated Financial Statements contained in Item 8 elsewhere herein. The Company plans to outsource substantially all of the manufacturing of parts currently produced by these two facilities to third party vendors with the balance being relocated to other facilities of the Company. The Company has already transferred the manufacture of certain components, accessories and service parts and continues to obtain and review proposals from vendors in anticipation of outsourcing the remainder of the production. The Company has begun negotiations with the unions representing employees at the Milwaukee and Waukegan facilities regarding shutdown agreements. Although there can be no assurance, the Company believes that these negotiations will result in satisfactory shutdown agreements with the respective unions and anticipates substantial completion of the restructuring plan by the end of year 2000. Market Share. Since 1993, the Company's twelve-month rolling domestic outboard engine market share has gradually declined from 49% as of December 31, 1993 to 35% as of December 31, 1998, and its domestic boat market share has also declined from 20% to 13% for the same period. The primary causes for these declines have been the loss of key dealers to competitors and the rationalization of boat brands. In addition, competitors have offered products in certain categories for which the Company does not have a competitive product. Although there can be no assurance that the Company's market share will not continue to decline, the Company believes that its business strategies, including plans for future products and for products currently being offered, such as FICHT, will improve its market share. Introduction of FICHT Engines; Regulatory Compliance. The EPA has adopted regulations governing emissions from two-stroke marine engines. As adopted, the regulations as they relate to outboard engines phase in over nine years, beginning in model year 1998 and concluding in model year 2006. With respect to personal watercraft, the regulations phase in over eight years, beginning in model year 1999 and concluding in model year 2006. Marine engine manufacturers are required to reduce hydrocarbon emissions from outboard engines, on average by 8.3% per year through model year 2006 beginning with the 1998 model year, and emissions from personal watercraft by 9.4% per year through model year 2006 beginning in model year 1999. In 1994, the Company announced "Project LEAP", a project to convert its entire outboard product line to low-emissions products within the next decade. Partly in response to these EPA emission standards, the Company introduced its Evinrude engines with FICHT fuel-injection technology, which offer an average hydrocarbon emission reduction of 80% and an approximate 35% increase in fuel economy depending on the application. The higher manufacturing costs of the FICHT fuel-injected engines will result initially in a lower margin to the Company; however, the Company has implemented several initiatives to reduce the manufacturing costs of its new engines. Because of the higher retail costs of engines incorporating the FICHT technology, consumer acceptance of the new engines may be restrained as long as less expensive engine models, which may or may not meet the new EPA standards, continue to be available. Through December 31, 1998, the Company estimates that it has spent approximately $54 million on low-emission technology, and by the year 2006 the Company is expected to spend an aggregate of approximately $90.0 million to meet the EPA's new emission standards. In fiscal year 1997, the Company became aware of certain performance issues associated with its FICHT engines. In April 1998, the Company began to identify the causes of these performance issues and an upgrade kit was prepared and distributed. This upgrade kit included certain performance enhancements to the FICHT engines, including, among other things, improvements to the mapping contained in the software of the engine-management module. The Company established a reserve for the correction of the identified problems in fiscal year 1998, which resulted in an approximate $7.0 million increase in the Company's warranty reserve for fiscal year 1998. In January 1999, the Company completed its analysis and determined that certain technological improvements were needed to improve the overall performance of the FICHT engines. As part of this strategy, an upgrade kit for previously sold models, which will contain additional performance enhancements to the FICHT engines, will be provided to dealers in April 1999. The Company expects the cost of the April 1999 upgrade kits to be approximately $4.3 million and has recorded an expense and a corresponding reserve for such costs in its financial statements as of December 31, 1998. The Company believes that the April 1999 upgrade kits will significantly improve the overall performance of its FICHT engines and reduce the 22 23 Company's overall warranty expense experienced for such engines. In addition, the Company will implement engine modifications and changes in production for the affected FICHT models. These engine modifications and production charges will be implemented during a planned two-week suspension of the Company's operations at certain of its engine-manufacturing facilities in March 1999. See "-- Temporary Plant Shutdown" below. Also, a limited warranty extension, from two to three years, will be provided on all FICHT engines purchased by customers between January 1, 1999 and March 31, 1999 that had been sold by the Company to its dealers as of December 31, 1998, which is intended to demonstrate the Company's confidence in the improved FICHT engines. The Company expects this warranty-extension program to cost approximately $1.3 million and, accordingly, has recorded an expense and a corresponding reserve for such costs in its December 31, 1998 financial statements. The Company also expects that actions to be taken to address the FICHT performance issues will result in additional expenses in 1999, primarily in the quarter ending March 31, 1999 due to higher levels of unabsorbed overhead costs, and a reduced level of engine sales in the March 31, 1999 quarter as compared to the same quarter in 1998, as production facilities are modified for the changes in the FICHT-engine production processes. 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 for this matter and recorded a liability in its September 1998 financial statements (See Note 18 of the Notes to the Consolidated Financial Statements contained elsewhere in Item 8 herein). The sale of FICHT engines accounted for approximately 8% and 16.2% of the Company's revenues in fiscal year 1998 and for the three months ended December 31, 1998, respectively. The Company does not believe that compliance with the EPA's new emission standards, which will add cost to the Company's engine products and will initially result in a lower margin to the Company, will be a major deterrent to sales. The Company believes that its new compliant technology will add value to its products at the same time that the entire industry is faced with developing solutions to the same regulatory requirements. In addition, the Company has implemented several initiatives to reduce the manufacturing costs of its new engines. Although there can be no assurance, the Company does not believe that compliance with these new EPA regulations will have a material adverse effect on future results of operations or the financial condition of the Company. On December 10, 1998, the California Air Resources Board ("CARB") adopted emissions standards for outboard engines and personal watercraft sold in the State of California that would require compliance with the EPA's year 2006 emissions standards in 2001, and significantly more stringent standards in 2004 and 2008. All manufacturers of outboard engines and personal watercraft will be affected by the regulations. While the Company has not been able to fully assess the impact that such standards will have on its business, the Company has begun to assess possible responses to these standards, including a possible legal challenge. The Company's FICHT fuel-injection and four-stroke outboard engines currently comply with CARB's 2001 standards, and all but one of these engines comply with CARB's 2004 standard. The Company believes that this one engine will be in compliance by 2004. In addition, based on current technology, CARB's year 2008 standards would require the Company to turn to untested technologies in an attempt to achieve compliance. The California market represents an approximate 3% of the Company's domestic sales of outboard engines. Additionally, certain states have required or are considering requiring a license to operate a recreational boat. While such licensing requirements are not expected to be unduly restrictive, regulations may discourage 23 24 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, they may have a material adverse effect on the Company's business. The Company, however, does not believe that the regulations adopted by the East Bay Municipal Utility District will have a material adverse effect on the Company's business. The Company cannot predict the environmental legislation or regulations that may be enacted in the future or how existing or future laws or regulations will be administered or interpreted. Compliance with more stringent laws or regulations as well as more vigorous enforcement policies of the regulatory agencies or stricter interpretation of existing laws, may require additional expenditures by the Company, some or all of which may be material. OMC/Volvo Sterndrive Joint Venture. On December 8, 1998 the Company sold its interest in the joint venture Volvo Penta Marine Products L.P. (the "Volvo Penta Joint Venture") to Volvo Penta of the Americas, Inc. ("Volvo"). The joint venture was formed by the Company, AB Volvo Penta and Volvo Penta North America, Inc. in 1993 to manufacture sterndrive engines for boats. Separately, the Company and Volvo entered into an agreement whereby Volvo will supply to the Company sterndrives through June 30, 2001 and component parts through June 30, 2011 and the Company will supply component parts to Volvo through June 30, 2011. See Note 3 of the Consolidated Financial Statements contained in Item 8 elsewhere herein. Research and Development. In the three-month periods ended December 31, 1998 and December 31, 1997, OMC spent approximately $10.2 million, and $9.0 million, respectively, on research and development activities relating to the development of new products and improvement of existing products, including FICHT fuel-injection technology. In fiscal years ended September 30, 1998, 1997, and 1996, the Company spent approximately $36.8 million, $38.2 million, and $41.8 million for research and development activities, respectively. The Company expenses its research and development costs as they are incurred. 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, 1998, the Company has accrued approximately $25 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 18 of the Notes to the Consolidated Financial Statements included in Item 8 elsewhere herein. 24 25 Reclassification. Beginning in October 1998, warranty expense, which was previously reflected as a component of selling, general, and administrative expenses, is included as another component of cost of goods sold in the Company's Consolidated Statements of Earnings and Comprehensive Income. In addition, research and development expense, which was previously reflected as a component of cost of goods sold, is included as a selling, general and administrative expense in the Company's Consolidated Statements of Earnings and Comprehensive Income. Amounts reported for the prior periods have been reclassified to conform to the new presentation. RESULTS OF OPERATION The following table sets forth, for the periods indicated, selected financial information expressed in dollars (millions) and as a percentage of net sales:
THREE MONTHS ENDED DECEMBER 31, FISCAL YEARS ENDED SEPTEMBER 30, ------------------------------------ ---------------------------------------------------------- 1997 1996 1997 1998 (UNAUDITED) 1998 ----------------- --------------- ----------------- ---------------- --------------- Net sales.............. $1,121.5 100.0% $979.5 100.0% $1,025.7 100.0% $209.5 100.0% $199.4 100.0% Cost of goods sold..... 877.6 78.3 822.0 83.9 793.6 77.4 171.7 82.0 180.7 90.6 -------- ------ ------ ------ -------- ------ ------ ------- ------ ------ Gross earnings......... 243.9 21.7 157.5 16.1% 232.1 22.6 37.8 18.0 18.7 9.4 Selling, general and adminstrative expense.............. 224.9 20.1 219.9 22.5 266.2 26.0 48.8 23.3 62.3 31.2 Restructuring charges.............. 25.6 2.3 -- -- 98.5 9.6 -- -- -- -- Change in control expenses-compensation.. -- -- 11.8 1.2 -- -- -- -- -- -- -------- ------ ------ ------ -------- ------ ------ ------- ------ ------ Loss from operations... (6.6) (0.7) (74.2) (7.6) (132.6) (13.0) (11.0) (5.3) (43.6) (21.8) Non-operating expense, net.................. 3.8 0.3 2.1 0.2 14.5 1.4 5.3 2.5 3.5 1.8 Provision (credit) for income taxes......... (3.1) (0.3) 2.8 0.3 3.4 0.3 0.8 0.4 -- -- -------- ------ ------ ------ -------- ------ ------ ------- ------ ------ Net loss............... $ (7.3) (0.7)% $(79.1) (8.1)% $ (150.5) (14.7)% $(17.1) (8.2)% $(47.1) (23.6)% ======== ====== ====== ====== ======== ====== ====== ======= ====== ======
THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 1997 Net Sales. Net sales were $199.4 million in the three months ended December 31, 1998, a decrease of $10.1 million or 4.8% from $209.5 million in the three months ended December 31, 1997. Worldwide engine sales in the December 31, 1998 quarter were lower than in the comparable quarter in 1997 due primarily to lower demand for certain of the Company's outboard engines, loss of business with certain dealers and increased promotional pricing offered by competitors. International engine sales were also lower than the prior year period due to increased competition in Australia and deteriorating economic conditions in Latin America and Asia. In addition, boat sales were slightly lower than last year primarily as a result of the Company discontinuing certain product lines in the second and third quarters of fiscal year 1998. Cost of Goods Sold. Cost of goods sold increased to $180.7 million in the three months ended December 31, 1998 from $171.7 million in the three months ended December 31, 1997, an increase of $9.0 million or 5.2%. Cost of goods sold was 90.6% of net sales during the three months ended December 31, 1998 as compared with 82.0% of net sales during the comparable period in 1997. The increase in cost of goods sold as a percent of net sales was primarily due to a $8.6 million increase in warranty expense in the period related primarily to actions taken by the Company to address certain performance issues identified with the Company's FICHT engines, including a reserve for upgrade kits that are being provided in April 1999 for previously sold FICHT engines and a limited warranty extension, from two to three years, on FICHT engines sold by dealers to customers between January 1, 1999 and March 31, 1999. See "-- General -- Introduction of FICHT Engines; Regulatory Compliance" above. Selling, General and Administrative ("SG&A"). SG&A expense increased to $62.3 million in the three months ended December 31, 1998 from $48.8 million in the three months ended December 31, 1997, an increase of $13.5 million or 27.7%. The increase is due primarily to higher selling expense of approximately 25 26 $6.0 million during the three months ended December 31, 1998 related to new sales promotions and increased advertising expenses for the Company's new model year engines and boats. The SG&A expense increase was also due in part to costs related to a number of actions incurred during the December 31, 1998 quarter, including charges resulting from the Company's efforts to eliminate old and discontinued boat models in dealer channels and to reduce field engine inventories held by dealers. The aggregate amount of these charges was $4.1 million. Finally, the Company incurred approximately $2.9 million in costs associated with its Year 2000-compliance initiatives in the period ended December 31, 1998. The Company did not incur these type of Year 2000 compliance costs in the comparable period during 1997. Loss from Operations. Loss from operations was $43.6 million in the three months ended December 31, 1998 compared with a loss of $11.0 million in the three months ended December 31, 1997, an increase of $32.6 million. The increase in the loss from operations was primarily attributable to the decrease in sales and increases in certain components of costs of goods sold and SG&A expense described above. Non-Operating Expense (Income). Interest expense decreased to $6.8 million in the three months ended December 31, 1998 from $7.7 million in the three months ended December 31, 1997, a decrease of $0.9 million. Other non-operating income was $3.3 million in the three months ended December 31, 1998 compared to $2.4 million in the three months ended December 31, 1997. This increase in non-operating income was due primarily to certain product development expenses related to the sterndrive joint venture not being incurred in the December 31, 1998 quarter as a result of the Company's sale of its joint-venture interest in the sterndrive joint venture with AB Volvo Penta and Volvo Penta of the Americas, Inc. Provision (Credit) for Income Taxes. No provision for income taxes was made in the three months ended December 31, 1998 as compared to a $0.8 million provision in the three months ended December 31, 1997. The provision for income taxes for the three months ended December 31, 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 deemed realizable, at this time, under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." FISCAL YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1997 Net Sales. Net sales increased to $1,025.7 million in fiscal year 1998 from $979.5 million in the fiscal year 1997, an increase of 4.7%. The Company's sales increase was attributable primarily to higher volume sales in the United States of marine engines in fiscal year 1998, resulting in a 25% increase in net sales as compared to fiscal year 1997. The increase in U.S. marine engine sales in 1998 was partially offset by reductions in international sales due to the poor economic conditions in Asia and due to tighter credit controls in Russia. Engine sales were lower 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. Finally, boat sales declined, as planned, by approximately 5% due to certain model and brand eliminations. Cost of Goods Sold. Cost of goods sold decreased to $793.6 million in fiscal year 1998 from $822.0 million in fiscal year 1997, a decrease of $28.4 million or 3.5%. Cost of goods sold was 77.4% of net sales in fiscal year 1998 as compared with 83.9% of net sales in fiscal year 1997. The improvements in the Company's gross margin in the current fiscal year reflected increased manufacturing efficiencies at engine and boat plants and a better absorption of fixed costs, due primarily to higher engine sales volume. In addition, in fiscal 1997, the Company's cost of goods sold was impacted negatively by the production suspension discussed above and by certain expenses discussed below in the comparison of fiscal year 1997 and fiscal year 1996. Selling, General and Administrative ("SG&A") Expense. SG&A expense increased to $266.2 million in fiscal year 1998 from $219.9 million in fiscal year 1997, an increase of $46.3 million or 21.1%. SG&A expense as a percentage of net sales increased to 26.0% in fiscal year 1998 from 22.5% in fiscal year 1997. SG&A expense increased in fiscal year 1998 due primarily to: (i) $10.9 million for potential legal expenses related to claims known, but not quantifiable at the end of fiscal 1997, (ii) $2.8 million in compensation expense primarily related to forfeitures resulting from the termination of an executive's employment agreement with a 26 27 former employer in connection with the Company's hiring the executive concurrently with the acquisition of the Company by Greenmarine Holdings, and (iii) $17.6 million of expenses associated with implementing the Company's boat group reorganization plan. Additionally, the SG&A expense in the current fiscal year reflected higher amortization of goodwill and intangibles due to purchase accounting. Finally, the Company recognized approximately $7.0 million in additional expenses in fiscal year 1998 associated with its marketing and advertising of model year 1999 boats and engines. Restructuring Charge. During the fourth quarter of fiscal year 1998, management finalized a restructuring plan for the closure/consolidation of its Milwaukee and Waukegan engine facilities. The Company announced the closure of the Milwaukee and Waukegan facilities on September 24, 1998. The Company recorded a $98.5 million restructuring charge which included: (i) costs to recognize severance and benefits for approximately 950 employees to be terminated ($14.0 million); (ii) curtailment losses associated with the acceleration of pension and postretirement benefits for employees at the two facilities ($72.1 million); (iii) costs to clean and close the facilities ($6.5 million); (iv) costs to ready machinery and equipment for disposal and costs to dispose of machinery and equipment at the facilities ($3.9 million); and (v) costs to write-down certain replacement parts for machinery and equipment at the facilities to net realizable value ($2.0 million). The Company's plan includes outsourcing substantially all of its sub-assembly production currently performed in its Milwaukee and Waukegan facilities to third-party vendors. See Note 4 of the Notes to the Consolidated Financial Statements contained in Item 8 elsewhere herein. Change in Control Expenses. In fiscal year 1997, the Company recorded $11.8 million in compensation expenses associated with certain officer agreements and the executive incentive plan which required settlement payments to certain current and former management team members at the time of the Greenmarine Acquisition. Loss from Operations. Loss from operations was $132.6 million in fiscal year 1998 compared with a loss of $74.2 million in fiscal year 1997, an increase of $58.4 million. Excluding the restructuring charge and change in control expenses recorded in 1998 and 1997, the loss from operations was $34.1 million in fiscal year 1998, an improvement of $28.3 million compared to the loss of $62.4 million in fiscal year 1997. Non-Operating Expense, Net. Interest expense increased to $30.1 million in fiscal year 1998 from $16.2 million in fiscal year 1997, an increase of $13.9 million. The increase resulted from the new debt structure in place after the Greenmarine Acquisition (see "-- Financial Condition; Liquidity and Capital Resources" below). Other non-operating income was $15.6 million in fiscal year 1998 compared to $14.1 million in fiscal year 1997. The non-operating income in fiscal year 1998 included interest income of $4.3 million, gains from disposition of certain fixed assets of $2.9 million, and favorable foreign exchange transactions of $0.7 million. The non-operating income in fiscal year 1997 included an insurance recovery and a lawsuit settlement ($10.7 million), as well as gains on disposition, of fixed assets ($5.8 million), which were offset by $15.1 million in change in control expenses associated with the Greenmarine Acquisition. These expenses included $7.5 million in payments to a potential buyer of the Company for "breakage fees" as a result of the Company being acquired by Greenmarine Holdings. See Note 14 of the Notes to the Consolidated Financial Statements contained in Item 8 elsewhere herein. Provision (Credit) for Income Taxes. The provision for income taxes was $3.4 million in fiscal year 1998 and $2.8 million in fiscal year 1997. The provision for income taxes for fiscal year 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 deemed realizable, at this time, under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." FISCAL YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1996 Net Sales. Net sales decreased to $979.5 million in fiscal year 1997 from $1,121.5 million in fiscal year 1996, a decrease of $142.0 million or 12.7%. U.S. revenues, which accounted for 74% of total net sales, declined 11.3% in fiscal year 1997 while international sales decreased 16.1%. Industry unit volume in the U.S. declined for outboard motors and boats in fiscal year 1997 compared to fiscal year 1996. The Company's sales of outboard motor units in the U.S. declined by 19.5% in fiscal year 1997 as compared to fiscal year 1996. 27 28 These declines were due primarily to the planned reduction in dealer inventories, disruptions in marketing efforts and customer demand resulting from the announcement in April 1997 concerning the possible sale of the Company, as well as an overall decline in the industry for sales of outboard engines. Cost of Goods Sold. Cost of goods sold decreased 6.3% to $822.0 million in fiscal year 1997 from $877.6 in fiscal year 1996. Cost of goods sold was 83.9% of net sales in fiscal 1997 as compared with 78.3% of net sales in fiscal year 1996. Cost of goods sold in fiscal year 1997 included approximately $17.9 million of expenses comprised of the following: (i) an additional accrual relating to salt water intrusion issues on certain engines sold in international markets, which have since been resolved ($1.0 million); (ii) the write-off of impaired assets (based on adoption of the Financial Accounting Standards Board's Statement of Accounting Standards No. 121, "Accounting for Impairment of long-lived Assets and long-lived Assets to be Disposed of.") relating to the Chris*Craft line of boats as a result of the Company's analysis of the Chris*Craft division's undiscounted future cash flows being insufficient to recover the carrying value of the division's long-lived assets ($2.0 million); (iii) the write-offs of inventory and tooling relating to discontinued or obsolete products and technology the Company is not going to use ($2.6 million); (iv) additional reserves relating to changes in the method of estimating surplus parts and accessories inventory over known or anticipated requirements and recognizing certain pre-rigging rebate expenses ($1.8 million); (v) certain expenses associated with the introduction of the FICHT technology were incurred for the new product, including incremental expenses and additional product testing to ensure quality ($0.8 million); and (vi) additional accruals for warranty expenses at the Company's Boat Group that resulted from the Company extending the warranty claim acceptance period on certain models and revising the lag factor (i.e., the period of time between the sale of products to a dealer or distributor and the ultimate payment by the Company of a warranty claim made to repair products) used to estimate the warranty reserve ($9.7 million). Excluding these charges, cost of goods sold in fiscal year 1997 would have been $804.1 million or 82.1% of net sales. Selling, General and Administrative Expense. SG&A expense decreased to $219.9 million in fiscal year 1997 from $224.9 million in fiscal year 1996, a decrease of $5.0 million or 2.2%. SG&A expense, as a percentage of net sales increased to 22.5% in fiscal year 1997 from 20.1% in fiscal year 1996. The SG&A expenses in fiscal year 1997 included changes in accounting estimate resulting from the early adoption of the AICPA Statement of Position 96-1, "Environmental Remediation Liabilities", which required the Company to accrue for future normal operating and maintenance costs for site monitoring and compliance requirements at particular sites ($7.0 million). Excluding these charges, SG&A expense for fiscal year 1997 would have been $212.9 million or 21.7% of net sales. These charges were partially offset by reductions of costs resulting from the restructuring programs initiated in fiscal year 1996. Change in Control Expenses. In fiscal year 1997, the Company recorded $11.8 million in compensation expenses associated with certain officer agreements and the executive incentive plan which required settlement payments to certain current and former management team members at the time of the Greenmarine Acquisition. Loss from Operations. Operating loss increased to $74.2 million in fiscal year 1997 from a loss of $6.6 million in fiscal year 1996. Fiscal year 1997 includes $11.8 million in compensation expenses resulting from the change in control as a result of the Greenmarine Acquisition. The increase in operating loss was primarily a result of the decline in net sales, higher costs for product and higher SG&A expense, each as described above. Fiscal year 1996 included restructuring charges of $25.6 million, primarily related to the closing of distribution operations and the write-down of manufacturing facilities outside the United States. Excluding the $11.8 million change in control compensation expense in fiscal year 1997 and the unusual expenses and charges referred to in the discussion of Cost of Goods Sold and Selling, General and Administrative Expense above, respectively, operating loss would have been $37.5 million for fiscal year 1997. Non-Operating Expense (Income). Interest expenses in fiscal 1997 increased by $3.9 million to $16.2 million in fiscal year 1997 from $12.3 million in fiscal year 1996. The increase in fiscal year 1997 was primarily attributable to a $5.0 million favorable interest adjustment for past tax liabilities which was recorded in fiscal year 1996. Other non-operating income was $14.1 million in fiscal year 1997 as compared to $8.5 million in fiscal year 1996. Included in non-operating expense in fiscal year 1997 was $15.1 million of 28 29 change of control expenses associated with the Greenmarine Acquisition. The fiscal year 1997 amount included insurance recovery and a lawsuit settlement ($10.7 million), as well as higher gains on disposition of fixed assets ($5.8 million). See Note 14 of the Notes to the Consolidated Financial Statements included in Item 8 elsewhere herein. Provision (Credit) for Income Taxes. Provision (credit) for income taxes was $2.8 million in fiscal 1997 and $(3.1) million in fiscal year 1996, and is explained in Note 15 of the Notes to the Consolidated Financial Statements included in Item 8 elsewhere herein. The provision for income taxes for fiscal year 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 deemed realizable, at this time. FINANCIAL CONDITION; LIQUIDITY AND CAPITAL RESOURCES The Company's business is seasonal with inventory levels normally increasing in the Company's fiscal quarter ending December 31 and peaking in the Company's fiscal quarter ending March 31. Current assets at December 31, 1998 decreased $31.1 million from September 30, 1998. Receivables at December 31, 1998 decreased $23.0 million from September 30, 1998 due primarily to lower net sales in the three months ended December 31, 1998 as compared to net sales during the Company's fourth quarter of fiscal year 1998. Inventories at December 31, 1998 increased $22.8 million from September 30, 1998 due to the seasonal nature of OMC's business and excess inventories resulting from lower than anticipated sales of the Company's outboard engines during the three months ended December 31, 1998. In addition, the Company had $28.6 million in "Restricted Cash" at December 31, 1998, which cash is held in interest reserve accounts for the benefit of the Company's senior lenders (as discussed below). Short-term debt was $32.4 million at December 31, 1998 comprising borrowings under the Company's revolving credit facility during the three-month period ended December 31, 1998. These borrowings were used to fund an overall increase in inventory levels due to both the seasonality of the Company's business and excess inventory resulting from lower than anticipated sales of the Company's outboard engines. The borrowings were also used to fund capital expenditures of $15.1 million during the three months ended December 31, 1998, which expenditures increased $8.8 million from $6.3 million for the comparable period in 1997. The higher level of expenditures is due partially to increased spending for new machinery and equipment for certain of the Company's engine-manufacturing facilities. Cash used for operations was $53.3 million for the three months ended December 31, 1998 compared with $36.6 million for the three months ended December 31, 1997. The significant increase in cash used for operations during the three-month period ended December 31, 1998 was due to increased inventory manufacturing for the upcoming 1999 selling season and due to the Company's net loss from operations as explained above in the discussion of the Company's results of operations for the December 31, 1998 quarter. The Company anticipates that short-term debt will increase approximately $50 million during the fiscal quarter ending March 31, 1999. The increase is expected to be attributable to anticipated revolving credit borrowings to fund inventory buildup for new model year products and capital expenditures planned for the March 31, 1999 quarter. The Company entered into an Amended and Restated Loan and Security Agreement, effective as of January 6, 1998 (as amended, the "Credit Agreement"), with a syndicate of lenders for which NationsBank of Texas, N.A. is administrative and collateral agent (the "Agent"). The Credit Agreement provides a revolving credit facility (the "Revolving Credit Facility") of up to $150.0 million, subject to borrowing base limitations, to finance working capital with a $50.0 million sublimit for letters of credit. The Revolving Credit Facility expires on December 31, 2000. The Revolving Credit Facility is secured by a first and only security interest in all of the Company's existing and hereafter acquired accounts receivable, inventory, chattel paper, documents, instruments, deposit accounts, contract rights, patents, trademarks and general intangibles and is guaranteed by the Company's four principal domestic operating subsidiaries. On December 31, 1998, the Company had outstanding borrowings under the Credit Agreement of $32.4 million, and had $37.6 million of letter of credit obligations outstanding under the Credit Agreement. The Credit Agreement contains a number of financial covenants, including those requiring the Company to satisfy specific levels of (i) consolidated tangible net 29 30 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 and subsequent actual compliance therewith at such time, (ii) the Company's consolidated tangible net worth requirement for the period ended September 30, 1998 was amended to better align such covenant with the Company's then anticipated financial performance for the remainder of fiscal year 1998, (iii) the borrowing base was amended to allow for borrowings against eligible intellectual property, thereby increasing borrowing capacity, (iv) the sublimit for the issuance of letters of credit was increased from $25.0 million to $30.0 million, and (v) the lenders consented to certain matters relating to the Company's offering of $160.0 million of 10 3/4% Senior Notes due 2008, including the establishment of an interest reserve account. The Company entered into a Second Amendment to Amended and Restated Loan and Security Agreement, effective as of August 31, 1998, with the lenders under the Credit Agreement, pursuant to which, among other things, the sublimit for the issuance of letters of credit was increased from $30.0 million to $50.0 million to enable the Company to replace cash collateral obligations under a letter of credit, which obligations arose following the change in control resulting from the Greenmarine Acquisition. The Company entered into a Third Amendment to Amended and Restated Loan and Security Agreement, effective as of December 21, 1998 (the "Third Amendment"), with the lenders under the Credit Agreement, pursuant to which, among other things, (i) the Company's non-compliance with the consolidated tangible net worth, consolidated interest coverage ratio and consolidated leverage ratio covenants was waived for the period ended September 30, 1998 and (ii) the Company's consolidated tangible net worth, consolidated interest coverage ratio and consolidated leverage ratio covenants for future periods were amended. The Third Amendment modified the Company's financial covenant compliance requirements under the Credit Agreement to give effect to the restatements of the Company's financial statements for fiscal year 1997 and for the first three quarters of fiscal year 1998 and their anticipated impact on the Company's future results of operations. As of December 31, 1998, the Company was in violation of the Credit Agreement's leverage coverage ratio covenant. The Company informed the lenders under the Credit Agreement of the circumstances causing the violation and entered into the Fourth Amendment to Amended and Restated Loan and Security Agreement, effective as of February 1, 1999, pursuant to which (i) the Company's non-compliance with the consolidated leverage covenant for the period ended December 31, 1998 was waived, (ii) work-in-process inventory is included in the borrowing base calculation through June 30, 1999, and (iii) the Company's borrowing base capacity was increased by $10 million for certain intellectual property. The Company entered into the Fifth Amendment to Amended and Restated Loan and Security Agreement, effective as of February 25, 1999, which among other things, amended the Company's consolidated tangible net worth, consolidated leverage and consolidated interest coverage ratios for future periods in order to bring the covenants in line with anticipated results of operations, including the effect of the costs incurred and to be incurred to address the FICHT performance issues discussed above. The Company became obligated under a credit agreement, as amended, which provided for loans of up to $150 million (the "Acquisition Debt"). The Acquisition Debt was used to finance a portion of the funds required to effect the Greenmarine Acquisition. Amounts outstanding under this credit agreement were secured by 20.4 million shares of common stock of the post-Merger Company and bore 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 due 2002, which the Company was required to offer to repurchase as a result of the Greenmarine Acquisition (as discussed below). The full amount of the Acquisition Debt was paid on May 27, 1998 from the proceeds of the sale of the Company's 10 3/4% Senior Notes (as described below). On May 27, 1998, the Company issued $160.0 million of 10 3/4% Senior Notes due 2008 ("Senior Notes"), with interest payable semiannually on June 1 and December 1 of each year. The net proceeds from the issuance of the Senior Notes totaled $155.2 million, of which $150.0 million was used to repay the Acquisition Debt. The Senior Notes will be redeemable at the option of the Company, in whole or in part, at any time on or after June 1, 2003 in cash at prescribed redemption prices set forth in the indenture governing the Senior Notes. In addition, at any time prior to June 1, 2001, the Company may on any one or more 30 31 occasions redeem up to an aggregate of 35% of the original principal amount of the Senior Notes at a redemption price of 110.750% of the principal amount thereof, plus accrued and unpaid interest, with the net proceeds of one or more equity public offerings, provided that at least 65% of the aggregate principal amount of Senior Notes originally issued remains outstanding immediately after the occurrence of any such redemption. The Senior Notes are guaranteed on a joint and several basis by each of the Company's principal domestic operating subsidiaries. The Indenture governing the Senior Notes contains certain covenants that limit, among other things, the ability of the Company and its restricted subsidiaries to (i) pay dividends, redeem capital stock or make certain other restricted payments or investments; (ii) incur additional indebtedness or issue certain preferred equity interests; (iii) merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its assets; (iv) create liens on assets; and (v) enter into certain transactions with affiliates or related persons. Concurrently with the issuance of the Senior Notes, the Company entered into a depositary agreement which provided for the establishment and maintenance of an interest reserve account for the benefit of the holders of the Senior Notes and an interest reserve account for the benefit of the other senior creditors of the Company. An aggregate amount of cash equal to one year's interest due to these lenders was deposited into these interest reserve accounts. At December 31, 1998, the "Restricted Cash" held in these interest reserve accounts totaled $28.6 million. The "Restricted Cash" must remain in such accounts until at least May 27, 2001. At December 31, 1998, $62.8 million principal amount of the Company's 9 1/8% Debentures due 2017 (the "9 1/8% Debentures") was outstanding. The 9 1/8% Debentures mature on April 15, 2017, and interest thereon is payable semi-annually on April 15 and October 15 of each year. The 9 1/8% Debentures are redeemable through the operation of a sinking fund beginning on April 15, 1998, and each year thereafter to and including April 15, 2016 at a sinking fund redemption price equal to 100% of the principal amount thereof plus accrued interest to the redemption date. On or prior to April 15 in each of the years 1998 to 2016 inclusive, the Company is required to make a mandatory sinking fund payment in cash in an amount sufficient to redeem 9 1/8% Debentures in the aggregate principal amount of $5,000,000 plus accrued interest thereon. However, 9 1/8% Debentures reacquired or redeemed by the Company may be used at the principal amount thereof to reduce the amount of any one or more mandatory Sinking Fund payments. As of December 31, 1998, the Company had repurchased and deposited with the trustee for the 9 1/8% Debentures $34.8 million principal amount of 9 1/8% Debentures, which will be used to satisfy its mandatory sinking fund obligations through April 15, 2004. The Company at its option may make an optional sinking fund payment in cash in each year from 1998 to 2016 inclusive in an amount sufficient to redeem up to an additional $10,000,000 principal amount of 9 1/8% Debentures. At December 31, 1998, an aggregate of approximately $20.9 million principal amount of the Company's Medium-Term Notes Series A (the "Medium-Term Notes") was outstanding. Interest rates on the Medium-Term Notes range from 8.160% to 8.625%. The maturity dates of the Medium-Term Notes include March 15, 1999, March 15, 2000 and March 15, 2001. Interest on each of the outstanding Medium-Term Notes is payable semi-annually each March 30 and September 30 and at maturity. At December 31, 1998, $7.1 million principal amount of the Company's 7% Convertible Subordinated Debentures due 2002 (the "Convertible Debentures") was outstanding. Following the Merger, the Company was required to offer to purchase for cash any and all of the then outstanding Convertible Debentures at a purchase price equal to 100% of the outstanding principal amount of each Convertible Debenture plus any accrued and unpaid interest thereon. On November 12, 1997, the Company consummated such offer to purchase and, as a result thereof, purchased $67.7 million principal amount of Convertible Debentures. Immediately prior to the Merger, the Convertible Debentures were convertible into shares of common stock of the Company at the conversion price of $22.25 per share. As a result of the Merger, the remaining $7.1 million principal amount of outstanding Convertible Debentures are no longer convertible into shares of common stock of the Company. Each holder of the remaining outstanding Convertible Debentures now has the right to convert (at $22.25 per share) such holder's Convertible Debentures and receive cash in an amount equal to what each holder would have received had they converted the Convertible Debentures into common stock immediately prior to the Merger ($18.00 per share). Accordingly, the remaining outstanding Convertible 31 32 Debentures are convertible into the right to receive a cash payment equal to $809 for each $1,000 principal amount of Convertible Debentures so converted (i.e., ($18.00/$22.25) x $1,000). The outstanding Convertible Debentures are convertible at any time prior to their maturity on July 1, 2002. The Company has various Industrial Revenue Bonds outstanding in an aggregate principal amount of approximately $11.9 million. The Industrial Revenue Bonds have various maturity dates between 2002 and 2007. Interest rates on the Industrial Revenue Bonds range from 6% to 12.037%. In 1999, the Company will be required to pay approximately $10 million in cash to satisfy obligations that will become due on the Medium-Term Notes. See Note 9 of the Notes to the Consolidated Financial Statements contained in Item 8 elsewhere herein. In addition, the Company will be required to pay approximately $1.2 million in cash to satisfy obligations that will become due at various times in 1999 under certain of its Industrial Revenue Bonds. As a normal business practice, the Company has made arrangements with financial institutions by which qualified retail dealers may obtain inventory financing. Under these arrangements, the Company will repurchase products in the event of repossession upon a retail dealer's default. These arrangements contain provisions that limit the Company's repurchase obligation to approximately $32 million per model year for a period not to exceed 30 months from the date of invoice. The Company resells any repurchased products. Losses incurred under this program have not been material. For the three-month periods ended December 31, 1998 and 1997 and for fiscal year 1998, the Company repurchased approximately $1.4 million, $1.5 million and $4.1 million of products, respectively, all of which were resold at a discounted price. The Company accrues for losses that are anticipated in connection with expected repurchases. The Company does not expect these repurchases to materially affect its results of operations. Based upon the current level of operations and anticipated cost savings, the Company believes that its cash flow from operations, together with borrowings under the Credit Agreement, the interest reserve accounts and its other sources of liquidity, will be adequate to meet its presently anticipated requirements for working capital and accrued liabilities, capital expenditures, interest payments and scheduled principal payments over the next several years. There can be no assurance, however, that the Company's business will continue to generate cash flow at or above current levels or that anticipated costs savings can be fully achieved. If the Company is unable to generate sufficient cash flow from operations in the future to service its debt and accrued liabilities and make necessary capital expenditures, or if its future earnings growth is insufficient to amortize all required principal payments out of internally generated funds, the Company may be required to refinance all or a portion of its existing debt, sell assets or obtain additional financing. There can be no assurance that any such refinancing or asset sales would be possible or that any additional financing could be obtained on attractive terms, particularly in view of the Company's high level of debt. TEMPORARY PLANT SHUTDOWN The Company determined that it will temporarily suspend manufacturing operations for approximately two weeks in March 1999 at certain of its engine facilities. This operations shutdown will enable the Company to reduce excess field inventories held by dealers caused by lower than anticipated engine sales in the three-month period ended December 31, 1998. In addition, the manufacturing suspension will allow the Company to better coordinate production schedules with new marketing programs. Finally, the shutdown will afford the Company the opportunity to implement the strategies designed to address the FICHT engine performance issues, including modifications to the 1999 FICHT engines and changes in the FICHT engine production processes. The Company expects that this temporary plant shutdown will result in additional expenses in 1999, primarily in the quarter ending March 31, 1999 due to higher levels of unabsorbed overhead costs, and a reduced level of sales in the March 31, 1999 quarter. YEAR 2000 MATTERS During 1997 and 1998, the Company assessed the steps necessary to address issues raised by the coming of Year 2000. The steps to be taken 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 32 33 services. Based on these reviews, the Company developed a strategy for attaining Year 2000 compliance that includes modifying and replacing software, acquiring new hardware, educating its dealers and distributors and working with vendors of both goods and services. With the assessment phase of the strategy completed, the Company is in the process of implementing and testing remedies of issues identified during the assessment phase. To date, all applications on the Company's mainframe have been reprogrammed and initial testing will be conducted through the first quarter of calendar 1999. Issues raised relative to personal computers and local and wide area networks are in the process of being remedied through the acquisition of new software and hardware. The Company has found very few embedded processors contained in its manufacturing equipment that would be affected by the Year 2000 and those which were identified are in the process of being modified. Most of the Company's telecommunications equipment is currently Year 2000 compliant and in cases where it is not, the equipment has either been replaced or appropriation requests for the replacement have been prepared and are being processed. The Company anticipates completing all implementation and testing of internal remedies by June 30, 1999. As part of the Company's Year 2000 compliance efforts, it has substantially reviewed all vendors of goods and is currently reviewing vendors providing services and prioritized them 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 involved sending a letter notifying the vendor of the potential Year 2000 issues, which was followed by a questionnaire to be completed by the vendor. In the event a non-critical supplier either did not respond or responded inadequately, follow-up questionnaires were sent and calls made in order to further clarify the vendor situation. In the event that a critical vendor did not respond or responded inadequately, the Company not only follows up with additional questionnaires and telephone calls but also schedules on-site meetings with the vendor in order to satisfy itself that the vendor is or will be prepared to operate into the Year 2000. The Company believes that the unresponsive critical vendors create the most uncertainty in the Company's Year 2000 compliance efforts. In the event that the Company is not satisfied that a critical vendor will be able to provide its goods or services into the Year 2000, the Company will review alternate suppliers who are in a position to assure the Company that they are or will be Year 2000 ready. The timing of the Company's decision to change vendors will depend on what type of goods or service the non-responsive or non-compliant vendor provides and the lead time required for an alternate vendor to begin supplying. The Company has reviewed those critical vendors that have not responded adequately and has been reviewing the timing of replacing, if necessary, any such non-compliant vendor. In connection with the Company's initiative to outsource non-core capabilities, a potential vendor's Year 2000 readiness is one criteria the Company will consider in selecting the vendor for such outsourcing activity. In addition, the Company has reviewed the outboard motors, sterndrives and parts and accessories, including electric trolling motors, which it previously manufactured and currently manufactures for sale to its dealers, distributors and original equipment manufacturers and has determined that those products are Year 2000 compliant. In preparing for the advent of the Year 2000, the Company has taken steps to heighten the awareness among its dealer and distributor network of the issues associated with the Year 2000. The issue is covered in monthly publications which are distributed to the dealers and also by the sales force that is responsible for the regular communications with the dealer and distributor network. To date, the Company has spent a total of approximately $6.7 million on personal computer and network, mainframe and telecommunication solutions to issues related with the Year 2000 and estimates that it will spend up to a total of $11 million, approximately half of which is associated with personal computers and networks, to remedy all of the issues associated with ensuring that its hardware and software worldwide, and the systems associated therewith, are able to operate into the Year 2000. The Company has expensed these 33 34 items, except for hardware costs incurred in the normal course of business, which have been capitalized, in the Company's Statement of Consolidated Earnings and Comprehensive Income for the applicable period. The Company believes that its owned or licensed hardware and software will be able to operate into the Year 2000. However, the Company relies on the goods and services of other companies in order to manufacture and deliver its goods to the market. Although the Company is taking every reasonable step to determine that these vendors will be able to continue to provide their goods or services, there can be no assurance that, even upon indications 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 services in a more timely manner. In the event that the vendor is critical and either no alternate vendor is available or is able to operate into the Year 2000, this could have a negative impact on the Company's business, results of operations, or financial condition. EURO CURRENCY CONVERSION On January 1, 1999, eleven of the fifteen member countries of the European Union adopted the "euro" as their common legal currency. The euro trades on currency exchanges and is available for non-cash transactions. From January 1, 1999 through January 1, 2002, each of the participating countries are scheduled to maintain their national ("legacy") currencies as legal tender for goods and services. Beginning January 1, 2002, new euro-denominated bills and coins will be issued, and legacy currencies will be withdrawn from circulation no later than July 1, 2002. The Company's foreign operating subsidiaries that will be affected by the euro conversion have established plans to address any business issues raised, including the competitive impact of cross-border price transparency. It is not anticipated that there will be any near term business ramifications; however, the long-term implications, including any changes or modifications that will need to be made to business and financial strategies are still being reviewed. From an accounting, treasury and computer system standpoint, the impact from the euro currency conversion is not expected to have a material impact on the financial position or results of operations of the Company. RECENTLY ADOPTED ACCOUNTING STANDARDS To date in 1999, the Company has implemented 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." See Note 2 of the Notes to the Consolidated Financial Statements contained in Item 8 elsewhere herein. 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. 34 35 INFLATION Inflation may cause or may be accompanied by increases in gasoline prices and interest rates. Such increases may adversely affect the sales of the Company's products. Inflation has not had a significant impact on operating results during the past three fiscal years. FORWARD-LOOKING STATEMENTS This transition report on Form 10-K contains forward-looking statements, which may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Company wishes to ensure that all such forward-looking statements are accompanied by meaningful cautionary statements pursuant to the safe harbor established in such act. All statements other than statements of historical facts included in this Form 10-K may constitute forward-looking statements. Forward-looking statements include the intent, belief or current expectations of the Company and members of its senior management team. All forward-looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties that could cause actual events or results to differ materially from those projected and that include, but are not limited to, the impact of competitive products and pricing, successful implementation of turnaround strategies, product demand and market acceptance, new product development, Year 2000 issues, availability of raw materials, the availability of adequate financing on terms and conditions acceptable to the Company, and general economic conditions including interest rates and consumer confidence. Investors are also directed to other risks discussed in this transition report on Form 10-K and documents filed by the Company with the Securities and Exchange Commission. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk from changes in interest and foreign exchange rates and commodity prices and enters into financial contracts in the ordinary course of business to hedge these exposures. The Company does not use financial instruments for trading or speculative purposes. Derivative instruments are matched to existing assets, liabilities or transactions with the objective of reducing the impact of adverse movements in interest rates, currency exchange rates or commodity prices. Generally, the amounts of the instruments are less than or equal to the amount of the underlying assets, liabilities or transactions and are held to maturity. Instruments are either traded over authorized exchanges or with counterparties of high credit standing. As a result of these factors, the Company's exposure to market and credit risks from financial derivative instruments is considered to be negligible. 35 36 The Company has used interest rate swaps to adjust the ratio of fixed and floating rates in the Company's debt portfolio. The following table provides information about the Company's derivative financial instruments and other financial instruments that are sensitive to changes in interest rates, including interest rate swaps and debt obligations. The table presents principal cash flows and related weighted average interest rates by expected maturity dates. For interest rate swaps, the table presents notional amounts and weighted average interest rates by expected (contractual) maturity date. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. Weighted average variable rates are based on implied forward rates in the yield curve at the reporting date.
EXPECTED MATURITY DATE ----------------------------------------------------------------------------------- FAIR DECEMBER 31, 1998 12/31/99 12/31/00 12/31/01 12/31/02 12/31/03 THEREAFTER TOTAL VALUE - ----------------- -------- -------- -------- -------- -------- ---------- ------ ------ (IN MILLIONS, EXCEPT RATES) Liabilities Debt: Fixed Rate ($US)..................... $ 11.2 $ 7.0 $ 6.3 $ 8.4 $ 0.4 $226.2 $259.5 $244.7 Average Interest Rate.............. 10.00% 10.07% 10.13% 10.22% 10.29% 9.54% 9.94% Variable Rate ($US).................. -- -- -- -- $ 5.5 $ 5.5 $ 5.5 $ 5.5 Average Interest Rate.............. -- -- -- -- -- 4.56% 3.41% Interest Rate Derivatives Interest Rate Swaps: Variable to Fixed ($US).............. $ 5.0 -- -- -- -- -- $ 5.0 $ (0.1) Average Pay Rate................... 10.20% -- -- -- -- -- 10.20% Average Receive Rate............... 5.11% -- -- -- -- -- 5.11%
The Company uses forward and option contracts to reduce the earnings and cash flow impact of nonfunctional currency denominated receivables and payables. The contract maturities are matched with the settlement dates of the related transactions. As of December 31, 1998, there were net unrealized gains on forward contracts of $4.4 million, calculated as the difference between the contract rate and the rate available to terminate the contracts. Assuming a 10% appreciation in the U.S. dollar at December 31, 1998, the potential unrealized gains on forward contracts of $4.4 million, would have been reduced by $2.5 million. As these contracts are used for hedging purposes, the Company feels that these losses would be largely offset by gains on the underlying firm commitments or anticipated transactions. The Company's exposure to commodity price changes relates to certain manufacturing operations that utilize various commodity-based components, primarily aluminum. The Company manages its exposure to changes in prices through the terms of its supply and procurement contracts and the use of exchange-traded and over-the-counter commodity contracts. As of December 31, 1998, there were unrealized losses on aluminum futures of $0.1 million. Assuming a 10% change in market prices at December 31, 1998, additional potential losses in the net fair value of these contracts would have been $0.1 million. The estimated losses mentioned above assume the occurrence of certain adverse market conditions. They do not consider the potential effect of favorable changes in the market factors. 36 37 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Outboard Marine Corporation: We have audited the accompanying Statements of Consolidated Financial Position of Outboard Marine Corporation (a Delaware corporation) and subsidiaries ("Post-Merger Company" or "Company") as of December 31, 1998, September 30, 1998 and 1997 and the related Statements of Consolidated Earnings and Comprehensive Income, Consolidated Cash Flows and Changes in Consolidated Shareholders' Investment for the three-month period ended December 31, 1998 and the year in the period ended September 30, 1998, and the related Statements of Consolidated Cash Flows and Changes in Consolidated Shareholders' Investment from inception (see Note 1) to September 30, 1997. We have also audited the accompanying Statements of Consolidated Earnings and Comprehensive Income, Consolidated Cash Flows and Changes in Consolidated Shareholders' Investment of Outboard Marine Corporation (a Delaware corporation) and subsidiaries ("Pre- Merger Company") for each of the two years in the period ended September 30, 1997. These financial statements are the responsibility of the Post-Merger and Pre-Merger Company's management. Our responsibility is to express an opinion on these financial statements based upon our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Post-Merger Company as of December 31, 1998, September 30, 1998 and 1997 and the results of their operations and their cash flows for the three-month period ended December 31, 1998, and for the year in the period ended September 30, 1998 and their cash flows from inception to September 30, 1997, and the results of operations and cash flows of the Pre-Merger Company for each of the two years in the period ended September 30, 1997, in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II "Valuation and Qualifying Accounts", as listed in the index of financial statements, is presented for purposes of complying with the Securities and Exchange Commissions rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Chicago, Illinois February 25, 1999 37 38 OUTBOARD MARINE CORPORATION STATEMENTS OF CONSOLIDATED FINANCIAL POSITION
POST-MERGER COMPANY ----------------------------------- SEPTEMBER 30, DECEMBER 31, ------------------- (DOLLARS IN MILLIONS, EXCEPT AMOUNTS PER SHARE) 1998 1998 1997 - ----------------------------------------------- ------------ ------- -------- Assets Current assets: Cash and cash equivalents................................ $ 13.6 $ 45.2 $ 54.4 Receivables (less reserve for doubtful receivables of $9.2 million at December 31, 1998 and $9.5 million and $6.7 million at September 30, 1998 and 1997, respectively)......................................... 130.5 153.5 153.2 Inventories.............................................. 197.2 174.4 176.9 Deferred income tax benefits............................. 3.4 3.4 0.9 Other current assets..................................... 20.4 19.7 67.7 ------- ------- -------- Total current assets.................................. 365.1 396.2 453.1 Restricted cash............................................ 28.6 28.6 -- Product tooling, net....................................... 30.0 32.4 34.2 Plant and equipment, net................................... 197.1 194.5 210.2 Goodwill................................................... 115.5 116.3 127.3 Trademarks, patents and other intangibles.................. 80.9 81.6 83.9 Pension asset.............................................. 46.4 45.6 74.4 Deferred income tax benefits............................... 40.5 41.1 39.2 Other assets............................................... 12.1 13.6 27.9 ------- ------- -------- Total assets.......................................... $ 916.2 $ 949.9 $1,050.2 ======= ======= ======== Liabilities and Shareholders' Investment Current liabilities: Loan payable............................................. $ 32.4 $ -- $ 96.0 Accounts payable......................................... 90.0 115.1 142.0 Accrued liabilities...................................... 185.1 177.3 139.3 Accrued income taxes..................................... 6.5 7.8 6.4 Current maturities and sinking fund requirements of long-term debt........................................ 11.2 11.2 72.9 ------- ------- -------- Total current liabilities............................. 325.2 311.4 456.6 Long-term debt............................................. 247.0 247.9 103.8 Postretirement benefits other than pensions................ 124.4 123.7 96.0 Other non-current liabilities.............................. 162.4 172.2 116.8 Shareholders' investment: Common stock -- 25 million shares authorized at $.01 par value with 20.4 million shares outstanding in all periods presented..................................... 0.2 0.2 0.2 Capital in excess of par value of common stock........... 276.9 276.9 276.8 Accumulated deficit-employed in the business............. (197.6) (150.5) -- Accumulated other comprehensive income................... (22.3) (31.9) -- ------- ------- -------- Total shareholders' investment........................ 57.2 94.7 277.0 ------- ------- -------- Total liabilities and shareholders' investment...... $ 916.2 $ 949.9 $1,050.2 ======= ======= ========
The accompanying notes are an integral part of these statements. 38 39 OUTBOARD MARINE CORPORATION STATEMENTS OF CONSOLIDATED EARNINGS AND COMPREHENSIVE INCOME
POST-MERGER COMPANY PRE-MERGER COMPANY -------------------------- --------------------- THREE MONTHS TWELVE MONTHS ENDED ENDED DECEMBER 31, SEPTEMBER 30, --------------- -------------------------------- (DOLLARS IN MILLIONS EXCEPT AMOUNTS PER SHARE) 1998 1997 1998 1997 1996 - ---------------------------------------------- ------ ------ -------- ---------- -------- (UNAUDITED) Net sales....................................... $199.4 $209.5 $1,025.7 $979.5 $1,121.5 Cost of goods sold.............................. 180.7 171.7 793.6 822.0 877.6 ------ ------ -------- ------ -------- Gross earnings................................ 18.7 37.8 232.1 157.5 243.9 Selling, general and administrative expense..... 62.3 48.8 266.2 219.9 224.9 Restructuring charges........................... -- -- 98.5 -- 25.6 Change of control expenses -- compensation...... -- -- -- 11.8 -- ------ ------ -------- ------ -------- Loss from operations.......................... (43.6) (11.0) (132.6) (74.2) (6.6) ------ ------ -------- ------ -------- Non-operating expense (income) Interest expense.............................. 6.8 7.7 30.1 16.2 12.3 Change of control expenses.................... -- -- -- 15.1 -- Other, net.................................... (3.3) (2.4) (15.6) (29.2) (8.5) ------ ------ -------- ------ -------- 3.5 5.3 14.5 2.1 3.8 ------ ------ -------- ------ -------- Loss before provision for income taxes........ (47.1) (16.3) (147.1) (76.3) (10.4) Provision (benefit) for Income Taxes............ -- 0.8 3.4 2.8 (3.1) ------ ------ -------- ------ -------- Net loss...................................... $(47.1) $(17.1) $ (150.5) $(79.1) $ (7.3) ====== ====== ======== ====== ======== Other comprehensive income (expense), net of tax Foreign currency translation adjustments...... 0.4 (3.4) (7.2) 8.5 (3.0) Minimum pension liability..................... 9.2 -- (24.7) 3.1 (3.1) ------ ------ -------- ------ -------- Other comprehensive income (loss).......... 9.6 (3.4) (31.9) 11.6 (6.1) ------ ------ -------- ------ -------- Comprehensive loss....................... $(37.5) $(20.5) $ (182.4) $(67.5) $ (13.4) ====== ====== ======== ====== ======== Net loss per share of common stock Basic......................................... $(2.31) $(0.84) $ (7.38) $(3.91) $ (0.36) ====== ====== ======== ====== ======== Diluted....................................... $(2.31) $(0.84) $ (7.38) $(3.91) $ (0.36) ====== ====== ======== ====== ========
The accompanying notes are an integral part of these statements. 39 40 OUTBOARD MARINE CORPORATION STATEMENTS OF CONSOLIDATED CASH FLOWS
PRE-MERGER COMPANY POST-MERGER COMPANY AND ------------------------- POST-MERGER PRE-MERGER THREE MONTHS COMPANY COMPANY ENDED ----------- ---------- DECEMBER 31, YEAR ENDED SEPTEMBER 30, --------------- ---------------------------------- (DOLLARS IN MILLIONS) 1998 1997 1998 1997 1996 - --------------------- ------ ------ ------- ----------- ---------- (UNAUDITED) Cash Flows from Operating Activities: Net loss................................................. $(47.1) $(17.1) $(150.5) $(79.1) $(7.3) Adjustments to reconcile net loss to net cash provided by operations: Depreciation and amortization.......................... 12.4 12.5 50.1 57.0 54.7 Restructuring charges.................................. -- -- 98.5 -- 21.6 Changes in current accounts excluding the effects of acquisitions and noncash transactions: Decrease (increase) in receivables................... 26.4 24.4 (0.9) 9.6 32.4 Decrease (increase) in inventories................... (22.9) (21.3) 1.9 26.5 27.3 Decrease (increase) in other current assets.......... 4.7 31.8 45.4 (0.4) (3.6) Increase (decrease) in accounts payable, accrued liabilities and income taxes....................... (24.0) (63.5) (46.7) (5.3) (15.1) Increase (decrease) in deferred items................ (3.6) -- 66.7 (15.8) (20.6) Other, net........................................... 0.8 (3.4) (4.2) (1.7) 1.7 ------ ------ ------- ------ ----- Net cash provided by (used for) operating activities....................................... (53.3) (36.6) 60.3 (9.2) 91.1 Cash Flows from Investing Activities: Expenditures for plant and equipment, and tooling........ (15.1) (6.3) (34.4) (36.3) (52.7) Proceeds from sale of plant and equipment................ 2.3 0.1 9.6 13.0 2.7 Proceeds from sale of joint venture...................... 3.2 -- -- -- -- Other, net............................................... -- 0.8 0.8 (2.8) (0.5) ------ ------ ------- ------ ----- Net cash used for investing activities............. (9.6) (5.4) (24.0) (26.1) (50.5) Cash Flows from Financing Activities: (Payments) issuance of short-term debt................... 32.4 79.7 (96.0) -- -- Payments of long-term debt, including current maturities............................................. (1.2) (67.7) (75.0) -- (0.2) Proceeds from the issuance of long-term debt............. -- -- 155.4 -- -- Cash dividends paid...................................... -- -- -- (6.0) (6.1) Restricted cash.......................................... -- -- (28.6) -- -- Other, net............................................... -- -- (0.9) 2.3 3.4 ------ ------ ------- ------ ----- Net cash provided by (used for) financing activities....................................... 31.2 12.0 (45.1) (3.7) (2.9) Exchange rate effect on cash............................. 0.1 (0.3) (0.4) (2.1) (0.5) ------ ------ ------- ------ ----- Net increase (decrease) in cash and cash equivalents..... (31.6) (30.3) (9.2) (41.1) 37.2 Cash and cash equivalents at beginning of year........... 45.2 54.4 54.4 95.5 58.3 ------ ------ ------- ------ ----- Cash and cash equivalents at end of year................. $ 13.6 $ 24.1 $ 45.2 $ 54.4 $95.5 ====== ====== ======= ====== ===== Restricted cash.......................................... $ 28.6 $ -- $ 28.6 $ -- $ -- ====== ====== ======= ====== ===== Post-Merger Company cash and cash equivalents prior to merger -- September 30, 1997........................... $ 54.4 Cash Flows from Financing Activities (Post-Merger Company): Proceeds from short-term borrowings...................... 96.0 Issuance of Post-Merger Company common stock............. 277.0 Purchase of Pre-Merger Company common stock.............. (373.0) ------ Post-Merger Company cash and cash equivalents -- September 30, 1997..................................... $ 54.4 ====== Supplemental Cash Flow Disclosures: Interest paid.......................................... $ 12.5 $ 7.2 $ 23.5 $ 21.0 $15.4 ====== ====== ======= ====== ===== Income taxes paid (refunded)........................... $ (1.4) $ 1.3 $ 0.0 $ 3.4 $ 3.5 ====== ====== ======= ====== =====
The accompanying notes are an integral part of these statements. 40 41 OUTBOARD MARINE CORPORATION STATEMENTS OF CHANGES IN CONSOLIDATED SHAREHOLDERS' INVESTMENT
ACCUMULATED EARNINGS ISSUED CAPITAL IN EXCESS (DEFICIT) ACCUMULATED COMMON STOCK OF PAR VALUE EMPLOYED OTHER --------------- OF COMMON IN THE COMPREHENSIVE TREASURY SHARES AMOUNT STOCK BUSINESS INCOME STOCK ------ ------ ----------------- ----------- ------------- -------- (IN MILLIONS) Balance -- September 30, 1995.................. 20.2 $ 3.0 $ 112.2 $ 149.7 $ (5.5) $ (3.6) Net loss....................................... -- -- -- (7.3) -- -- Dividends declared -- 40 cents per share....... -- -- -- (8.0) -- -- Minimum pension liability adjustment........... -- -- -- -- (3.1) -- Shares issued under stock plans................ -- -- 1.9 -- -- 1.3 Translation adjustments........................ -- -- -- -- (3.0) -- ----- ----- ------- ------- ------- ------ Balance -- September 30, 1996.................. 20.2 $ 3.0 $ 114.1 $ 134.4 $ (11.6) $ (2.3) Net loss....................................... -- -- -- (79.1) -- -- Dividends declared -- 20 cents per share....... -- -- -- (4.0) -- -- Minimum pension liability adjustment........... -- -- -- -- (0.4) -- Shares issued under stock plans................ 0.3 0.1 3.8 -- -- -- Translation adjustments........................ -- -- -- -- (7.3) -- ----- ----- ------- ------- ------- ------ Balance -- September 30, 1997 -- Pre-Merger Company........................... 20.5 $ 3.1 $ 117.9 $ 51.3 $ (19.3) $ (2.3) Balance -- September 30, 1997 -- Post-Merger Company prior to merger.......... 20.5 3.1 117.9 51.3 (19.3) (2.3) Cancellation of Pre-Merger Company share upon merger....................................... (20.5) (3.1) (117.9) (51.3) 19.3 2.3 Issuance of Post-Merger Company shares upon merger....................................... 20.4 0.2 276.8 -- -- -- ----- ----- ------- ------- ------- ------ Balance -- September 30, 1997 -- Post-Merger Company.......................... 20.4 $ 0.2 $ 276.8 $ -- $ -- $ -- Net loss....................................... -- -- -- (150.5) -- -- Minimum pension liability adjustment........... -- -- -- -- (24.7) -- Shares issued under stock plans................ -- -- 0.1 -- -- -- Translation adjustments........................ -- -- -- -- (7.2) -- ----- ----- ------- ------- ------- ------ Balance -- September 30, 1998 -- Post-Merger Company.......................... 20.4 $ 0.2 $ 276.9 $(150.5) $ (31.9) $ -- Net loss....................................... -- -- -- (47.1) -- -- Minimum pension liability adjustment........... -- -- -- -- 9.2 -- Translation adjustments........................ -- -- -- -- 0.4 -- ----- ----- ------- ------- ------- ------ Balance -- December 31, 1998 -- Post-Merger Company.......................... 20.4 $ 0.2 $ 276.9 $(197.6) $ (22.3) $ -- ===== ===== ======= ======= ======= ======
The accompanying notes are an integral part of these statements. 41 42 OUTBOARD MARINE CORPORATION 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 sole surviving entity of the merger with Greenmarine (the "Post-Merger Company" 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 acquisition and the merger were accounted for using 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. 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. At September 30, 1997, the preliminary allocation of purchase price to assets acquired and liabilities assumed 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. At September 30, 1998, the allocation of purchase price to assets acquired and liabilities assumed in the Greenmarine Acquisition was finalized. The adjustments from the preliminary purchase price allocation at September 30, 1997 included $5.3 million to reverse a portion of a valuation allowance (and related goodwill) established for the disposition of the Company's joint venture (see Note 3). In addition, the Company reduced its purchase accounting reserves and corresponding goodwill by $1.4 million for revisions of certain estimates. The adjusted September 30, 1998 excess purchase price over fair value of the net assets acquired was approximately $120 million (prior to goodwill amortization) and has been classified as goodwill in the Statement of Consolidated Financial Position. The goodwill related to the acquisition will be amortized using the straight-line method over a period of 40 years. The acquisition and the merger have been accounted for as if the acquisition and merger had taken place simultaneously on September 30, 1997. In the opinion of management, accounting for the acquisition and the merger as of September 30, 1997, as opposed to accounting for the acquisition and the merger on September 12, 1997, did not materially impact the Statement of Consolidated Earnings. Unaudited pro forma combined results of operations of the Company and Greenmarine on the basis that the acquisition had taken place at the beginning of fiscal year 1997 and 1996 are presented in Note 19. 2. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS. The Company, and its subsidiaries, is a multinational company which operates in the marine recreation business. The Company manufactures and markets marine engines, boats and marine parts and accessories. CHANGE IN FISCAL YEAR. Effective October 1, 1998, the Company's fiscal year-end changed from September 30 to December 31. BASIS OF PRESENTATION. The consolidated financial statements for the Post-Merger Company were prepared using a new basis of purchase accounting. The Pre-Merger Company's historical basis of accounting was used prior to September 30, 1997. Unaudited Statements of Consolidated Earnings and Comprehensive Income and Consolidated Cash Flows for the three months ended December 31, 1997 have been included for comparative purposes. 42 43 OUTBOARD MARINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) RECLASSIFICATION. Beginning in October 1998, warranty expense, which was previously reflected as Selling, General, and Administrative expenses ("SG&A"), is included as another component of cost of goods sold in the Consolidated Statement of Earnings. In addition, research and development expense, which was previously reflected as cost of goods sold, is included as SG&A expenses in the Consolidated Statement of Earnings. Also in the Statements of Consolidated Financial Position, the valuation allowance associated with certain deferred tax assets has been reclassified from other long-term liabilities to both short-term deferred tax assets and a new category entitled deferred income tax benefits (long-term) to reflect the short-term and long-term deferred tax assets net of the short-term and long-term valuation allowance. In addition, in the Statements of Consolidated Financial Position, pension assets associated with one of the Company's pension plans has been reclassified from other assets to long-term liabilities, where the related pension benefit obligation is recorded, to reflect the net underfunded obligation in such plan. PRINCIPLES OF CONSOLIDATION. The accounts of all significant subsidiaries were included in the Consolidated Financial Statements. Intercompany activity and account balances have been eliminated in consolidation. At December 31, 1998, all subsidiaries were wholly owned except those referred to in Note 3 to the Consolidated Financial Statements. ACCOUNTING ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS. For purposes of the Statements of Consolidated Financial Position and Consolidated Cash Flows, marketable securities with an original maturity of three months or less are considered cash equivalents. The Company's domestic banking system provides for the daily replenishment of major bank accounts for check clearing requirements. Accordingly, outstanding checks of $22.4 million, $26.4 million and $18.3 million which had not yet been paid by the banks at December 31, 1998, and September 30, 1998 and 1997, respectively, were reflected in trade accounts payable in the Statements of Consolidated Financial Position. RESTRICTED CASH. On May 27, 1998, the Company issued $160.0 million of 10 3/4% Senior Notes ("Senior Notes") due 2008. 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 ("Restricted Cash") 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 December 31, 1998 and September 30, 1998, the Restricted Cash was $28.6 million and must be maintained until the later of May 27, 2001 or until such time as the Company's fixed coverage ratio is greater than 2.5 to 1.0 (as determined under the depositary agreement), or such time as the Senior Notes are paid in full. INVENTORIES. The Company's domestic inventory is carried at the lower of cost or market using principally the last-in, first-out (LIFO) cost method. All other inventory (23% at December 31, 1998 and September 30, 1998 and 22% at September 30, 1997) is carried at the lower of first-in, first-out (FIFO) cost or market. In the fiscal year ending September 30, 1998, the Company changed its accounting for the absorption of certain manufacturing overhead costs to better reflect the costs to manufacture such inventory. The effect of this change was to decrease cost of goods sold and increase its earnings from operations by approximately $3.6 million. During 1997 and 1996, the liquidation of LIFO inventory quantities acquired at lower costs prevailing in prior years as compared with the costs of 1997 and 1996 purchases, increased earnings before tax by $1.0 million and $1.3 million, respectively. 43 44 OUTBOARD MARINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) PRODUCT TOOLING, PLANT AND EQUIPMENT AND DEPRECIATION. Product tooling costs are amortized over a period not exceeding five years, beginning the first year the related product is sold. Plant and equipment are recorded at cost and depreciated substantially on a straight-line basis over their estimated useful lives as follows: buildings, 10 to 40 years; machinery and equipment, 3 to 12 1/2 years. Depreciation is not provided on construction in progress until the related assets are placed into service. Amortization of tooling and depreciation of plant and equipment on the Post-Merger Company was $10.9 million and $43.1 million for the three month period ending December 31, 1998 and for the twelve month period ending September 30, 1998, respectively, and on the Pre-Merger Company was $52.7 million and $52.1 million for 1997 and 1996, respectively. When plant and equipment is retired or sold, its cost and related accumulated depreciation are written-off and the resulting gain or loss is included in other (income) expenses net in the Statements of Consolidated Earnings. Maintenance and repair costs are charged directly to earnings as incurred and Post-Merger company expenses were $6.8 million and $27.0 million for the three month period ending December 31, 1998 and for the twelve month period ending September 30, 1998 and Pre-Merger Company expenses were $26.5 million and $29.4 million for 1997 and 1996, respectively. Major rebuilding costs which substantially extend the useful life of an asset are capitalized and depreciated accordingly. INTANGIBLES. The Statements of Consolidated Financial Position at December 31, 1998, September 30, 1998 and September 30, 1997 included goodwill, net of amortization expense, of $115.5 million, $116.3 million and $127.3 million, respectively, and trademarks, patents and other intangibles of $80.9 million, $81.6 million and $83.9 million, respectively. Intangibles are amortized over 15 to 40 years. The carrying value of the intangible assets is periodically reviewed by the Company based on the expected future operating earnings of the related units. Amortization of intangibles on the Post-Merger Company was $1.4 million and $6.2 million for the three months ending December 31, 1998 and for the twelve month period ending September 30, 1998 and on the Pre-Merger Company was $1.6 million and $1.8 million for 1997 and 1996, respectively. Accumulated amortization was $7.6, $6.2 million and $0.0 at December 31, 1998, September 30, 1998, and September 30, 1997, respectively. REVENUE RECOGNITION. The Company recognizes sales and related expenses including estimated warranty costs upon shipment of products to unaffiliated customers. ADVERTISING COSTS. Advertising costs are charged to expense as incurred and were $8.9 million, and $27.6 million on the Post-Merger Company for the three-month period ending December 31, 1998 and the twelve month period ending September 30, 1998, and $33.7 million and $31.8 million on the Pre-Merger Company for 1997 and 1996, respectively. WARRANTY. The Company generally provides the ultimate consumer a warranty with each product and accrues warranty expense at time of sale based upon actual claims history. Actual warranty costs incurred are charged against the accrual when paid. RESEARCH AND DEVELOPMENT COSTS. Expenditures relating to the development of new products and processes, including certain improvements and refinements to existing products, are expensed as incurred. Such Post-Merger Company expenditures were $10.2 million and $36.8 million for the three-month period ending December 31, 1998 and for the twelve-month period ending September 30, 1998, and Pre-Merger Company expenditures were $38.2 million and $41.8 million for 1997 and 1996, respectively. TRANSLATION OF NON-U.S. SUBSIDIARY FINANCIAL STATEMENTS. The financial statements of non-U.S. subsidiaries are translated to U.S. dollars substantially as follows: all assets and liabilities at year-end 44 45 OUTBOARD MARINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) exchange rates; sales and expenses at average exchange rates; shareholders' investment at historical exchange rates. Gains and losses from translating non-U.S. subsidiaries' financial statements are recorded directly in shareholders' investment. The Statements of Consolidated Earnings for the Post-Merger Company for the three-month period ended December 31, 1998 and for the twelve-month period ended September 30, 1998 and the Pre-Merger Company in 1997 include foreign exchange losses (gains) of $(0.7) million, $(0.7) million and $1.0 million, respectively, which resulted primarily from commercial transactions and forward exchange contracts. IMPAIRMENT OF LONG-LIVED ASSETS. Effective October 1, 1996, the Pre-Merger Company adopted the Financial Accounting Standards Board's Statement of Accounting Standards No. 121 (SFAS 121), "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of." SFAS 121 requires that long-lived assets and certain identifiable intangibles held and used by a company be reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS 121 also requires that long-lived assets and certain identifiable intangibles held for sale, other than those related to discontinued operations, be reported at the lower of carrying amount or fair value less cost to sell. The Company evaluates the long-lived assets and certain identifiable intangibles for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment charge of $2.0 million for the Pre-Merger Company was recognized in the year ended September 30, 1997. The Company periodically evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived tangible or intangible assets may warrant revision or that the remaining balance may not be recoverable. If factors indicate that such assets should be evaluated for possible impairment, the Company would use an estimate of the relative business unit's expected undiscounted operating cash flow over the remaining life of the tangible and intangible assets in measuring whether such assets are recoverable. EARNINGS PER SHARE OF COMMON STOCK. The Financial Accounting Standards Board's Statement No. 128 (SFAS 128), "Earnings per Share" was issued in February, 1997. The new standard simplifies the computation of earnings per share (EPS) and provides improved comparability with international standards. SFAS 128 replaces primary EPS with "Basic" EPS, which excludes stock option dilution and is computed by dividing net earnings or (loss) by the weighted-average number of common shares outstanding for the period. "Diluted" EPS (which replaces fully-diluted EPS) is computed similarly to fully-diluted EPS by reflecting the potential dilution that occurs if securities or other contracts to issue common stock were exercised or converted to common stock or resulted in the issuance of common stock that then shared in the earnings. Basic earnings (loss) per share of common stock is computed based on the weighted average number of shares of common stock outstanding of 20.4 million, 20.4 million, 20.4 million, 20.2 million and 20.1 million for the three-month periods ended December 31, 1998 and 1997, and the fiscal years ended September 30, 1998, 1997 and 1996, respectively. The computation of diluted earnings (loss) per share of common stock assumed conversion of the 7% convertible subordinated debentures due 2002; accordingly, net earnings (loss) were increased by after-tax interest and related expense amortization on the debentures. For the diluted earnings (loss) per share computations for the three-month periods ended December 31, 1998 and 1997, and the fiscal years ended September 30, 1998, 1997 and 1996 fiscal years, shares were computed to be 20.4 million, 20.4 million, 20.4 million, 23.6 million and 23.6 million, respectively. For all periods, the computation of diluted earnings (loss) per share was antidilutive; therefore, the amounts reported for basic and diluted earnings (loss) per share are identical. On September 30, 1997, all of the Pre-Merger Company outstanding common stock was cancelled and 20.4 million shares of new common stock were issued. See Note 9 concerning the redemption of the 7% convertible subordinated debentures due 2002. 45 46 OUTBOARD MARINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NEW ACCOUNTING STANDARDS. In the fiscal year 1999, the Company implemented 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." 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. COMPREHENSIVE INCOME. The Company has chosen to present Other Comprehensive Income in the Statement of Consolidated Earnings. Accumulated Other Comprehensive Income consists of the following:
ACCUMULATED MINIMUM FOREIGN OTHER PENSION CURRENCY COMPREHENSIVE LIABILITY TRANSLATION INCOME --------- ----------- ------------- Balance at September 30, 1995.................. $ -- $ (5.5) $ (5.5) Fiscal year activity........................... (3.1) (3.0) (6.1) --------------- --------------- --------------- Balance at September 30, 1996.................. $ (3.1) $ (8.5) $ (11.6) Fiscal year activity........................... (0.4) (7.3) (7.7) --------------- --------------- --------------- Balance at September 30, 1997 -- Pre-Merger Company...................................... $ (3.5) $ (15.8) $ (19.3) Merger activity................................ 3.5 15.8 19.3 --------------- --------------- --------------- Balance at September 30, 1997 -- Post-Merger Company...................................... $ -- $ -- $ -- Fiscal year activity........................... (24.7) (7.2) (31.9) --------------- --------------- --------------- Balance at September 30, 1998.................. $ (24.7) $ (7.2) $ (31.9) Period activity................................ 9.2 0.4 9.6 --------------- --------------- --------------- Balance at December 31, 1998................... $ (15.5) $ (6.8) $ (22.3) =============== =============== ===============
3. JOINT VENTURE AND INVESTMENTS In July 1995, the Pre-Merger Company and FICHT GmbH of Kirchseeon, Germany announced the formation of a strategic alliance for the development and worldwide manufacturing and marketing of high pressure fuel injection systems and other technologies. Under the terms of the strategic alliance, the Pre- Merger Company acquired a 51% interest in FICHT GmbH. The Ficht family retained a 49% interest and continues to operate the business. The Company has an exclusive license for the marine industry for the FICHT fuel injection system. In addition, the Company has an exclusive worldwide license agreement for all non-automotive applications. Royalty income, if any, resulting from other licensing of the technology will be distributed through FICHT. 46 47 OUTBOARD MARINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In July 1993, the Pre-Merger Company and AB Volvo Penta and Volvo Penta of the Americas, Inc. formed a joint venture company to produce gasoline stern drive and gasoline inboard marine power systems. The joint venture was 60% owned by Volvo Penta of the Americas, Inc. (Volvo Penta) and 40% owned by the Company. The jointly produced marine power systems were marketed by Volvo Penta to independent boat builders worldwide and are used in boats manufactured by subsidiaries of the Company. The units carried the Volvo Penta and SX Cobra brand names. The equity method of accounting was used to account for the Company's investment in the joint venture. At September 30, 1998 and 1997, the Company's investment, including current net accounts receivable, was $24.0 and $13.9 million, respectively. The joint venture was a manufacturing and after-market joint venture. The Company recognized gross profit relating to certain parts sales and incurred expenses for product development that were part of the joint venture. The Post-Merger Company's share of the joint venture's earnings (including income derived from the Company's stern-drive joint venture net of joint venture expenses) was $1.2 million for the three-month period ending December 31, 1998 and $4.8 million for the fiscal year ending September 30, 1998, and the Pre-Merger Company's was $7.2 million and $4.4 million in fiscal years 1997 and 1996, respectively, which were included in other (income) expense, net in the Statements of Consolidated Earnings. On December 8, 1998, the Company sold its joint venture with AB Volvo Penta and Volvo Penta of the Americas, Inc. ("Volvo") and entered into a Product Sourcing Contract which will control the future purchase and sale obligations of various specified goods between certain of the parties. As a result, the Company sold its ownership interest to Volvo for approximately $3.2 million, realizing a $0.5 million loss. The loss was accrued for as part of the Company's purchase allocation. 4. RESTRUCTURING CHARGES During the fourth quarter of fiscal year 1998, the Company finalized a restructuring plan for the closure/consolidation of its Milwaukee and Waukegan engine facilities. The Company announced the closure of the Milwaukee and Waukegan facilities on September 24, 1998. The Company recorded a $98.5 million restructuring charge which includes: 1) costs to recognize severance and benefits for approximately 950 employees to be terminated ($14.0 million), 2) curtailment losses associated with the acceleration of pension and postretirement benefits for employees at the two facilities ($72.1 million), 3) costs to clean and close the facilities ($6.5 million), 4) costs to ready machinery and equipment for disposal and costs to dispose of machinery and equipment at the facilities ($3.9 million), and 5) costs to write-down certain replacement parts for machinery and equipment at the facilities to net realizable value ($2.0 million). The Company's plan includes outsourcing the substantial portion of its sub-assembly production currently performed in its Milwaukee and Waukegan facilities to third-party vendors or transferring such production to other facilities of the Company. The Company anticipates substantial completion of such plan by the end of year 2000. No costs have been charged to this reserve as of December 31, 1998. During fiscal year 1996, the Pre-Merger Company recorded $25.6 million in restructuring charges. Included was $20.1 million for closings of distribution operations and write-down of manufacturing facilities outside the United States. The Company recognized $0.3 million, $1.4 million, and $12.5 million against this reserve for the three months ended December 31, 1998, and the fiscal years ending September 30, 1998 and 1997, respectively. The North American and European sales and marketing operations were realigned to more effectively meet market needs. 47 48 OUTBOARD MARINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. INVENTORIES The components of inventory were as follows:
SEPTEMBER 30, DECEMBER 31, ---------------- 1998 1998 1997 ------------ ------ ------ (DOLLARS IN MILLIONS) Finished product............................................ $ 83.9 $ 55.8 $ 62.1 Raw material, work in process and service parts............. 114.5 118.6 114.8 ------ ------ ------ Inventory at current cost which is less than market....... 198.4 174.4 176.9 Excess of current cost over LIFO cost....................... 1.2 -- -- ------ ------ ------ Net inventory............................................. $197.2 $174.4 $176.9 ====== ====== ======
6. PLANT AND EQUIPMENT Plant and equipment components were as follows:
SEPTEMBER 30, DECEMBER 31, ---------------- 1998 1998 1997 ------------ ------ ------ (DOLLARS IN MILLIONS) Land and improvements....................................... $ 12.0 $ 11.9 $ 13.2 Buildings................................................... 60.2 62.6 65.0 Machinery and equipment..................................... 132.4 129.0 126.1 Construction in progress.................................... 16.2 8.5 5.9 ------ ------ ------ 220.8 212.0 210.2 Accumulated depreciation.................................... 23.7 17.5 -- ------ ------ ------ Plant and equipment, net.................................... $197.1 $194.5 $210.2 ====== ====== ======
7. ACCRUED LIABILITIES AND OTHER NON-CURRENT LIABILITIES
SEPTEMBER 30, DECEMBER 31, ---------------- 1998 1998 1997 ------------ ------ ------ (DOLLARS IN MILLIONS) Accrued liabilities were as follows: Compensation, pension programs and current postretirement medical................................................... $ 20.9 $ 25.7 $ 24.2 Warranty.................................................... 40.9 36.3 24.6 Marketing programs.......................................... 52.9 36.2 32.8 Restructuring reserves...................................... 10.3 10.6 6.0 Other....................................................... 60.1 68.5 51.7 ------ ------ ------ Accrued liabilities....................................... $185.1 $177.3 $139.3 ====== ====== ======
48 49 OUTBOARD MARINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, DECEMBER 31, ---------------- 1998 1998 1997 ------------ ------ ------ (DOLLARS IN MILLIONS) Other non-current liabilities were as follows: Pension programs............................................ $ 35.5 $ 42.9 $ 17.3 Environmental remediation................................... 18.0 18.1 18.4 Warranty.................................................... 20.6 20.4 15.2 Restructuring reserves...................................... 20.4 20.4 -- Other....................................................... 67.9 70.4 65.9 ------ ------ ------ Accrued non-current liabilities........................... $162.4 $172.2 $116.8 ====== ====== ======
As described in Note 4, the Company recorded a $98.5 million restructuring reserve in the fourth quarter of the fiscal year ending September 30, 1998. The Company has classified $6.0 million as accrued liabilities which represents the Company's anticipated expenditures in fiscal year 1999 for severance costs associated with the closing of its Milwaukee and Waukegan facilities. In addition, the Company has recorded $20.4 million as other non-current liabilities for severance and closing costs associated with the closing of the Milwaukee and Waukegan facilities that will be incurred in the year 2000. 8. SHORT-TERM BORROWINGS AND ACCOUNTS RECEIVABLE SALES AGREEMENTS A summary of short-term borrowing activity was as follows:
SEPTEMBER 30, DECEMBER 31, ---------------- 1998 1998 1997 ------------ ------ ------ (DOLLARS IN MILLIONS) Outstanding: Credit agreement.......................................... $ -- $ -- $ 96.0 Bank borrowing............................................ $ 32.4 $ -- $ -- Average bank borrowing for the period Borrowing................................................. $ 8.9 $ 35.7 $ 2.9 Interest rate............................................. 8.2% 8.0% 7.1% Maximum month end borrowing................................. $ 32.4 $ 70.7 $ 29.0 ====== ====== ======
The Company became obligated under a credit agreement, as amended, with American Fidelity Group ("AFG") which provided for loans of up to $150 million (the "Acquisition Debt"). The Acquisition Debt was used to finance a portion of the funds received to effect Greenmarine's acquisition of the Company. Amounts outstanding under this credit agreement were 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 (see Note 9). The full amount of the Acquisition Debt was paid on May 27, 1998 from the proceeds of newly issued long-term debt (see Note 9). In addition to the Company's credit agreements, the Company's non-U.S. subsidiaries had additional uncommitted lines of credit of approximately $0.9 million on December 31, 1998, September 30, 1998 and September 30, 1997. 49 50 OUTBOARD MARINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company entered into a Financing and Security Agreement effective November 12, 1997, which provided for loans of up to $50 million. Effective January 6, 1998, the Company entered into a $150 million Amended and Restated Loan and Security Agreement (the "Credit Agreement") expiring December 31, 2000 which replaced the November 12, 1997 agreement. The Credit Agreement provides a revolving credit facility (the "Revolving Credit Facility") of up to $150.0 million, subject to borrowing base limitations, to finance working capital with a $50.0 million sublimit for letters of credit. The Revolving Credit Facility 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. 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 and subsequent actual compliance therewith at such time, (ii) the Company's consolidated tangible net worth requirement for the period ended September 30, 1998 was amended to better align such covenant with the Company's then anticipated financial performance for the remainder of fiscal year 1998, (iii) the borrowing base was amended to allow for borrowings against eligible intellectual property, thereby increasing borrowing capacity, (iv) the sublimit for the issuance of letters of credit was increased from $25.0 million to $30.0 million, and (v) the lenders consented to certain matters relating to the Company's offering of $160.0 million of 10 3/4% Senior Notes due 2008, including the establishment of an interest reserve account. The Company entered into a Second Amendment to Amended and Restated Loan and Security Agreement, effective as of August 31, 1998, with the lenders under the Credit Agreement, pursuant to which, among other things, the sublimit for the issuance of letters of credit was increased from $30.0 million to $50.0 million to enable the Company to replace cash collateral obligations under a letter of credit, which obligations arose following the change in control resulting from the Greenmarine Acquisition. The Company entered into a Third Amendment to Amended and Restated Loan and Security Agreement, effective as of December 21, 1998 with the lenders under the Credit Agreement, pursuant to which, among other things, (i) the Company's non-compliance with the consolidated tangible net worth, consolidated interest coverage ratio and consolidated leverage ratio covenants for the period ended September 30, 1998 was waived and (ii) the Company's consolidated tangible net worth, consolidated leverage ratio and consolidated interest coverage ratio covenants for future periods were amended. The Third Amendment modified the Company's financial covenant compliance requirements under the Credit Agreement to give effect to the restatements of the Company's financial statements for fiscal year 1997 and for the first three quarters of fiscal year 1998 and their anticipated impact on the Company's future results of operations. As of December 31, 1998, the Company was in violation of the Credit Agreement leverage coverage ratio covenant. The Company informed the lenders under the Credit Agreement of the circumstances causing the violation and entered into the Fourth Amendment to Amended and Restated loan and Security Agreement effective as of February 1, 1999 pursuant to which (i) the Company's non-compliance with the consolidated leverage covenant for the period ended December 31, 1998 was waived, (ii) work-in-process inventory is included in the borrowing base calculation through June 30, 1999, and (iii) the Company's borrowing base capacity was increased by $10 million for certain intellectual property. The Company entered into the Fifth Amendment to Amended and Restated Loan and Security Agreement, effective as of February 25, 1999, which among other things, amended the Company's consolidated tangible net worth, consolidated leverage and consolidated interest coverage ratios for future periods in order to bring the covenants in line with anticipated results of operations, including the effect of the costs incurred and to be incurred to address performance issues identified with respect to the Company FICHT engines. 50 51 OUTBOARD MARINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 seek further amendments, 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. The Pre-Merger Company had a $55 million receivable sales agreement whereby it agreed to sell an ownership interest in a designated pool of domestic trade accounts receivable ("Receivables"). These receivable sales agreements were terminated as of April 30, 1997. During the course of fiscal year 1997, monthly sales of receivables averaged $7.4 million with maximum sales of $29.0 million in February 1997. The Pre-Merger Company retained substantially the same credit risk as if the Receivables had not been sold. The costs associated with the receivable sales agreements were included in non-operating expense -- other, net in the Statements of Consolidated Earnings for the years ended September 30, 1997 and 1996. 9. LONG-TERM DEBT Long-term debt at December 31, 1998, September 30, 1998 and 1997, net of sinking fund requirements included in current liabilities, consisted of the following:
SEPTEMBER 30, DECEMBER 31, ---------------- 1998 1998 1997 ------------ ------ ------ (DOLLARS IN MILLIONS) 10 3/4% senior notes due 2008............................... $155.5 $155.4 $ -- 7% convertible subordinated debentures due 2002............. 7.1 7.1 74.8 9 1/8% sinking fund debentures due through 2017............. 62.8 62.6 62.6 Medium-term notes due 1999 through 2001 with rates ranging from 8.16% to 8.625%...................................... 20.9 21.1 26.2 Industrial revenue bonds and other debt due 2002 through 2007 with rates ranging from 6.0% to 12.037%.............. 11.9 12.9 13.1 ------ ------ ------ 258.2 259.1 176.7 Less current maturities..................................... (11.2) (11.2) (72.9) ------ ------ ------ $247.0 $247.9 $103.8 ====== ====== ======
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 $155.4 million, of which, $150.0 million was used to prepay the Acquisition Debt. Unamortized debt discount costs of $4.5 million remained at December 31, 1998. The Senior Notes are guaranteed by certain of the Company's U.S. operating subsidiaries. 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 December 31, 1998, the interest reserve Restricted Cash totaled $28.6 million. The Restricted Cash must remain in the interest reserve account until at least May 27, 2001. The Indenture governing the Senior Notes contains certain covenants that limit, among other things, the ability of the Company and its restricted subsidiaries to (i) pay dividends, redeem capital stock or make certain other restricted payments or investments; (ii) incur additional indebtedness or issue certain preferred equity interests; (iii) merge or consolidate with any other 51 52 OUTBOARD MARINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its assets; (iv) create liens on assets; and (v) enter into certain transactions with affiliates or related persons. Due to the change of control and the merger with Greenmarine, the Company was required to offer to purchase its 7% convertible subordinated debentures due 2002. Debentures tendered and repurchased on November 12, 1997 totaled $67.7 million leaving $7.1 million outstanding and a continuing obligation of the Company. As a result of the merger, the remaining $7.1 million principal amount of outstanding Convertible Debentures are no longer convertible into shares of common stock of the Company. Each holder of the remaining outstanding Convertible Debentures has the right to convert such holder's Convertible Debentures into the cash that was payable to holders of common stock in the merger for each share of common stock into which such Convertible Debentures might have been converted immediately prior to the Merger. At September 30, 1997, $67.7 million was reflected as current maturities of debt. On December 31, 1998, September 30, 1998 and 1997, the Company held $34.8 million of its 9 1/8% sinking fund debentures, which will be used to meet sinking fund requirements of $5.0 million per year in the years 1999 through 2004. Amounts are recorded as a reduction of outstanding debt. At December 31, 1998, an aggregate of $20.9 million principal amount of Medium-Term Notes Series A (the "Medium-Term Notes") were outstanding. Rates on the Medium-Term Notes range from 8.160% to 8.125%. Interest on each of the outstanding Medium-Term Notes is payable semiannually each March 30 and September 30 and at maturity. The agreements covering the Company's revolving credit agreement (see Note 8) and one industrial revenue bond have restrictive financial covenants. Maturities and sinking fund requirements of long-term debt for each of the next five calendar years is as follows:
(DOLLARS IN MILLIONS) --------------------- 1999................................................... $ 11.2 2000................................................... 7.0 2001................................................... 6.3 2002................................................... 8.4 2003................................................... 0.4
10. FINANCIAL INSTRUMENTS The carrying values of cash and cash equivalents, receivables, accounts payable, and current maturities of long-term debt approximate fair values due to the short term nature of these instruments. The fair value of the long-term debt was $239.0 million, $237.1 million and $103.8 million at December 31, 1998, September 30, 1998 and 1997, respectively, versus carrying amounts of $247.0 million, $247.9 million and $103.8 million at December 31, 1998, September 30, 1998 and 1997, respectively. The fair value of long-term debt was based on quoted market prices where available or discounted cash flows using market rates available for similar debt of the same remaining maturities. The Company uses various financial instruments to manage interest rate, foreign currency, and commodity pricing exposures. The agreements are with major financial institutions which are expected to fully perform under the terms of the instruments, thereby mitigating the credit risk from the transactions. The Company does not hold or issue financial instruments for trading purposes. The notional amounts of these contracts do not represent amounts exchanged by the parties and, thus, are not a measure of the Company's risk. The net amounts exchanged are calculated on the basis of the notional amounts and other terms of the contracts, such as interest rates or exchange rates, and only represent a small portion of the notional amounts. 52 53 OUTBOARD MARINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Pre-Merger Company had entered into several interest rate swap agreements as a means of managing its proportion of fixed to variable interest rate exposure. The differential to be paid or received is accrued consistent with the terms of the agreements and market interest rates and is recognized in net earnings as an adjustment to interest expense. Also at December 31, 1998, September 30, 1998 and 1997, the Company had an outstanding variable to fixed interest rate swap agreement having a total notional principal amount of $5 million expiring February 15, 1999. The fair value of the interest rate swap agreement at December 31, 1998, September 30, 1998 and 1997 was an estimated termination liability of $0.1 million, $0.1 million and $0.3 million, respectively. This potential expense at each fiscal year end had not yet been reflected in net earnings as it represents the hedging of long-term activities to be amortized in future reporting periods. The fair value was the estimated amount the Company would have paid to terminate the swap agreements. The Company enters into foreign exchange forward contracts and options to hedge particular anticipated transactions expected to be denominated in such currencies. The recognition of gains or losses on these instruments is accrued as foreign exchange rates change and is recognized in net earnings unless the gains or losses are related to qualifying hedges on firm foreign currency commitments which are deferred. At September 30, 1997, the Company had $32.1 million Belgian franc put options with a market value of $4.3 million and a $10 million French franc put option with a market value of $1.0 million, both of which settled October 2, 1997. This income had been reflected in net earnings as cost of goods sold at September 30, 1997, as it represented a hedge of fiscal 1997 activities. At September 30, 1998, the Company had entered into foreign currency forward exchange contracts to receive 11.0 million Australian dollars and 29.0 million Canadian dollars for $25.7 million with a fair market value of $25.5 million. The $0.2 million loss was recognized in 1998. The Company also entered into foreign currency forward exchange contracts to receive $0.6 million (also fair market value) for 0.9 million Canadian dollars. Finally, at September 30, 1998, the Company had Canadian dollar put options for $1.3 million (also fair market value). The Company also entered into foreign currency forward exchange contracts to receive 3,165.5 million Japanese yen for $22.9 million with a fair market value of $23.7 million at September 30, 1998. The gains on these Japanese yen contracts has been deferred at September 30, 1998 because they relate to qualifying hedges on firm foreign currency commitments which are deferred and included as a component of the related hedged transaction, when incurred. At December 31, 1998, the Company had entered into foreign currency forward exchange contracts to receive 11.0 million Australian dollars and 29.0 million Canadian dollars for $25.7 million with a fair market value of $25.7 million. The Company also entered into foreign currency forward exchange contracts to receive $25.2 million for 28.3 million Australian dollars and 39.2 million French francs with a fair market value of $24.4 million. The Company records the fair market value of these transactions in its financial statements as this activity represents hedges against intercompany transactions. Gains and losses on the adjustment to the fair market value of such instruments is reflected in the Consolidated Statement of Earnings. The Company also entered into foreign currency forward exchange contracts to receive 2,633.6 million Japanese yen for $19.1 million with a fair market value of $23.5 million at December 31, 1998. The gains on these Japanese yen contracts has been deferred at December 31, 1998 because they relate to qualifying hedges on firm foreign currency commitments which are deferred off-balance sheet and included as a component of the related hedged transaction, when incurred. The foreign currency contracts and options outstanding at December 31, 1998 all mature in one year or less. The fair values were obtained from major financial institutions based upon the market values as of December 31, 1998, and September 30, 1998 and 1997. 53 54 OUTBOARD MARINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company purchases commodity futures to hedge anticipated purchases of aluminum. Gains and losses on open hedging transactions are deferred until the futures are closed. Upon closing, gains and losses are included in inventories as a cost of the commodities and reflected in net earnings when the product is sold. At December 31, 1998, the Company had futures covering approximately 3% of annual forecasted aluminum purchases. The fair market value of these aluminum options resulted in a $0.1 million and $0.1 million deferred loss at December 31, 1998 and September 30, 1998, respectively, and $0.3 million deferred gain at September 30, 1997. The fair market value was obtained from a major financial institution based upon the market value of those futures at December 31, 1998. 11. PREFERRED STOCK AND SHAREHOLDER RIGHTS PLAN Due to the change of control and the merger with Greenmarine, all rights existing under the shareholder rights plan adopted by the Pre-Merger Company on April 24, 1996 expired on September 30, 1997. In addition, as a result of the merger, all of the Pre-Merger Company's preferred stock, including those reserved for issuance under the shareholder rights plan, were cancelled. 12. COMMON STOCK On September 30, 1997, all of the outstanding common stock of the Pre-Merger Company was cancelled and 20.4 million shares of common stock of the Post-Merger Company were issued. In 1992, the Pre-Merger Company issued $74.75 million, principal amount, of 7% subordinated convertible debentures. The debentures were convertible into 3,359,550 shares of the Pre-Merger Company's common stock (which were reserved) at a conversion price of $22.25 per share. Due to the change of control and the merger with Greenmarine, each holder of debentures had the right, at such holder's option, to require the Company to repurchase all of the then outstanding debentures at a purchase price equal to 100% of the outstanding principal amount of each debenture plus any accrued and unpaid interest thereon. On November 12, 1997, the Company consummated such offer to purchase, and, as a result thereof, all but $7.1 million of the principal amount was tendered to, and purchased by, the Company. As a result of the merger, the remaining $7.1 million of convertible debentures are no longer convertible into common stock (see Note 9). Due to the merger with Greenmarine, all stock options, stock appreciation rights and restricted stock granted under the OMC Executive Equity Incentive Plan and the OMC 1994 Long-Term Incentive Plan were fully vested and payable in accordance with the terms of the Plans or as provided in the terms of the grants, as amended. In the case of stock options, participants in the plans were entitled to receive in cash the difference, if any, between the purchase price of $18.00 per share (or limited stock appreciation rights at $19.50 per share as computed for officers) and the stock option purchase price. With regard to restricted stock granted under either of the plans, participants were entitled to receive the cash value of the grants based on $18.00 per share or as may have otherwise been agreed to between the participant and the Pre-Merger Company. All amounts with respect to the above plans have been expensed and included in the category "change of control expenses -- compensation" in the September 30, 1997 Statement of Consolidated Earnings. The Pre-Merger Company adopted the disclosure-only provision under Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," as of September 30, 1997, while continuing to measure compensation cost under APB Opinion No. 25, "Accounting for Stock Issued to Employees." If the accounting provisions of SFAS 123 had been adopted as of the beginning of 1996, the effect on net earnings for 1997 and 1996 would have been immaterial. On March 10, 1998, the Post-Merger 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 54 55 OUTBOARD MARINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) employees of the Company. All employees are eligible to participate in PROP. PROP replaced all long and short-term incentive plans of the Company. PROP provides for (i) cash and/or equity annual bonuses based on performance targets, and (ii) grants of stock options, shares of restricted stock, stock units or stock appreciation rights. The aggregate number of shares of stock available for equity awards under PROP is 1,500,000 shares of currently authorized common stock of the Company. Grants under PROP are discretionary. Stock option grants under PROP through December 31, 1998 were 1,073,745. The grants expire ten years after date of grant and are exercisable at $18.00 per share, except for 105,000 stock options granted to certain participants that are exercisable at $22.00 per share. The Company accounts for PROP under APB Opinion No. 25, and has not recorded any compensation expense for grants through December 31, 1998 as the exercise price of the stock option approximates management's estimate of fair market value of the Company's stock on the date of grant. If the accounting provisions of SFAS 123 had been adopted, the effect on net earnings for the three month period ending December 31, 1998 and the fiscal year ending September 30, 1998 would have been a reduction of pretax earnings of $0.1 million, and $0.7 million on a proforma basis and a reduction of basic and diluted earnings per share of $0.01 and $0.03 per share. A summary of option data for all plans was as follows:
WEIGHTED AVERAGE EXERCISE NUMBER OF PRICE OPTION SHARES PER SHARE ------------- --------- Options outstanding and unexercised at September 30, 1997* -- Pre-Merger Company........................................ -- Options granted............................................. 991,745 $18.00 --------- Options outstanding and unexercised at September 30, 1998... 991,745 $18.00 ========= Options granted............................................. 110,500 $21.80 Options cancelled........................................... 28,500 -- --------- Options outstanding and unexercised at December 31, 1998.... 1,073,745 $18.86 ========= Exercisable at December 31, 1998............................ 267,190 $18.00 ---------
- --------------- * Due to the merger with Greenmarine, all options outstanding prior to September 30, 1997 were paid out in cash and cancelled at September 30, 1997. The weighted average fair value per option granted during 1998, estimated on the date of grant using the Black-Scholes option-pricing model was $3.75. The fair value of 1998 options granted is estimated on the date of grant using the following assumptions: risk-free interest rate 4.7%, and an expected life of five years. The Company has used the "minimum value" method of valuing stock options based upon SFAS 123. 13. RETIREMENT BENEFIT AND INCENTIVE COMPENSATION PROGRAMS The Company and its subsidiaries have retirement benefit plans covering a majority of its employees. Worldwide pension calculations resulted in expense (income) of $(0.3) million, and $(5.0) million for the three month period ending December 31, 1998 and the twelve month period ending September 30, 1998, and on the Pre-Merger Company were $2.4 million and $(0.3) million in 1997 and 1996, respectively. In addition, the Company recorded a $42.2 million curtailment loss (as part of its September 1998 restructuring -- see Note 4) associated with the acceleration of pension benefits for employees at the Milwaukee and Waukegan facilities. 55 56 OUTBOARD MARINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following schedule of pension expense (income) presents amounts relating to the Company's material pension plans: (the 1997 and 1996 fiscal years refer to the Pre-Merger Company):
THREE MONTHS FISCAL YEARS ENDED SEPTEMBER 30, ENDED --------------------------------- DECEMBER 31, 1998 1998 1997 1996 ----------------- --------- --------- --------- (DOLLARS IN MILLIONS) Benefits earned during the period................. $ 1.9 $ 6.6 $ 6.6 $ 6.2 Interest cost on projected benefit obligation..... 8.3 28.8 28.5 25.4 Return on pension assets.......................... (10.8) (41.3) (88.5) (46.5) Net amortization and deferral..................... -- (0.1) 54.3 15.7 ------ ------ ------ ------ Net periodic pension expense (income)............. $ (0.6) $ (6.0) $ 0.9 $ 0.8 ====== ====== ====== ======
Actuarial assumptions used for the Company's principal defined benefit plans:
SEPTEMBER 30, DECEMBER 31, -------------------- 1998 1998 1997 1996 ------------ ---- ---- ---- Discount rates......................................... 7% 7% 7 1/2% 8% Rate of increase in compensation levels (salaried employee plans)...................................... 5% 5% 5% 5% Expected long-term rate of return on assets............ 9 1/2% 9 1/2% 9 1/2% 9 1/2%
56 57 OUTBOARD MARINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following provides a reconciliation of benefit obligations, plan assets and funded status within the guidelines of SFAS 132:
SEPTEMBER 30, DECEMBER 31, ---------------- 1998 1998 1997 ------------ ------ ------ (DOLLARS IN MILLIONS) Change in Benefit Obligation: Benefit obligation at beginning of period................... $476.3 $398.2 $368.8 Service cost................................................ 1.9 6.6 6.6 Interest cost............................................... 8.3 28.8 28.5 Curtailment loss............................................ -- 42.2 -- Acturarial (gain) loss...................................... 4.2 34.7 21.1 Benefits paid............................................... (7.4) (32.4) (26.8) Foreign exchange translation................................ -- (1.8) -- ------ ------ ------ Benefit obligation at end of period:........................ $483.3 $476.3 $398.2 ====== ====== ====== Change in plan assets: Fair value of plan assets at beginning of period............ $440.2 $455.2 $388.5 Actual return on plan assets................................ 41.0 18.0 92.2 Employer contribution....................................... 0.5 1.4 1.3 Benefits paid............................................... (7.4) (32.4) (26.8) Foreign exchange translation................................ -- (2.0) -- ------ ------ ------ Fair value of plan assets at end of period.................. $474.3 $440.2 $455.2 ====== ====== ====== Reconciliation: Funded status............................................... $ (9.0) $(36.1) $ 57.0 Unrecognized net actuarial loss............................. 19.2 36.0 -- ------ ------ ------ Prepaid (accrued) benefit cost.............................. $ 10.2 $ (0.1) $ 57.0 ====== ====== ====== Amounts recognized in the Statements of Financial Position consist of: Prepaid benefit cost........................................ $ 46.4 $ 45.6 $ 74.4 Accrued benefit liability................................... (20.7) (21.0) (17.4) Minimum pension liability................................... (15.5) (24.7) -- ------ ------ ------ Net amount recognized....................................... $ 10.2 $ (0.1) $ 57.0 ====== ====== ======
The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for pension plans with accumulated benefit obligation in excess of plan assets were $232.5 million, $231.4 million and $196.3 million, respectively, as of December 31, 1998, $227.0 million, $226.0 million and $181.4 million, respectively, as of September 30, 1998, and $17.4 million, $16.4 million and $0.0 million, respectively, as of September 30, 1997. At September 30, 1997 in accordance with purchase accounting, plan assets in excess of or less than the projected benefit obligation have been recorded. The provisions of SFAS No. 87, "Employers' Accounting for Pensions", require the recognition of an additional minimum liability for each defined benefit plan for which the accumulated benefit obligation exceeds plan assets. In 1998, because the accumulated benefit obligation exceeded the plan assets and because, due to the application of purchase accounting, the Company did not have any unrecognized prior service cost at the beginning of the fiscal year, the balance of $24.7 million is 57 58 OUTBOARD MARINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) reported as a separate reduction of shareholders' investment at September 30, 1998. At December 31, 1998, the reduction of shareholders' investment is $15.5 million with the change of $9.2 million reported as a component of other comprehensive income in the three months ended December 31, 1998. The Company's major defined benefit plans had provided that upon a change of control of the Company and upon certain other actions by the acquirer, all participants of these plans would become vested in any excess of plan assets over total accumulated benefit obligations. Pursuant to the terms of the plan, this provision was deleted to avoid being triggered by the change of control which took place at the Acquisition Date. The Company provides certain health care and life insurance benefits for eligible retired employees, primarily employees of the Milwaukee, Wisconsin; Waukegan, Illinois; and former Galesburg, Illinois plants as well as North American Engine Operations and the Corporate office. Employees at these locations become eligible if they have fulfilled specific age and service requirements. These benefits are subject to deductible, co-payment provisions and other limitations, which are amended periodically. The Company reserves the right to make additional changes or terminate these benefits in the future. In addition, as part of the Company's restructuring charge (See Note 4), the Company recorded a curtailment loss of $29.9 million associated with the acceleration of postretirement benefits for employees at the Milwaukee and Waukegan facilities. On January 1, 1994, and to be effective in 1998, the Pre-Merger Company introduced a cap for the employer-paid portion of medical costs for non-union active employees. The cap is tied to the Consumer Price Index. The net cost of providing postretirement health care and life insurance benefits included the following components (1997 and 1996 were Pre-Merger Company):
THREE MONTHS FISCAL YEARS ENDED SEPTEMBER 30, ENDED -------------------------------- DECEMBER 31, 1998 1998 1997 1996 ----------------- -------- -------- -------- (DOLLARS IN MILLIONS) Service cost-benefits attributed to service during the period........................... $ 0.2 $ 0.7 $ 1.1 $ 1.0 Interest cost on accumulated postretirement benefit obligation.......................... 2.2 6.6 7.3 6.4 Amortization of prior service cost and actuarial gain.............................. -- (0.2) (1.8) (1.9) ------ ------ ------ ------ Net periodic postretirement benefit cost...... $ 2.4 $ 7.1 $ 6.6 $ 5.5 ====== ====== ====== ======
58 59 OUTBOARD MARINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following provides a reconciliation of benefit obligations, plan assets and funded status within the guidelines of SFAS 132:
SEPTEMBER 30, 1998 DECEMBER 31, ------------------ 1998 1998 1997 ------------ ------- ------- (DOLLARS IN MILLIONS) Change in benefit obligation: Benefit obligation at beginning of period................ $ 131.4 $ 102.8 $ 95.3 Service cost............................................. 0.2 0.7 1.1 Interest cost............................................ 2.2 6.6 7.3 Curtailment loss......................................... -- 29.9 -- Actuarial gain........................................... 3.7 (0.3) 6.9 Benefits paid............................................ (2.5) (8.3) (7.8) ------- ------- ------- Benefit obligation at end of period...................... $ 135.0 $ 131.4 $ 102.8 ======= ======= ======= Change in plan assets: Fair value of plan assets at beginning of period......... $ -- $ -- $ -- Actual return on plan assets............................. -- -- -- Employer contribution.................................... 2.5 8.3 7.8 Benefits paid............................................ (2.5) (8.3) (7.8) ------- ------- ------- Fair value of plan assets at end of period............... $ -- $ -- $ -- ------- ------- ------- Funded status............................................ $(135.0) $(131.4) $(102.8) Unrecognized net actuarial loss.......................... 3.4 (0.4) -- ------- ------- ------- Prepaid(accrued)benefit cost............................. (131.6) (131.8) (102.8) Less: Current portion of Postretirement obligation..... (8.0) (9.0) (8.0) ------- ------- ------- Net long-term postretirement obligation.................. (123.6) (122.8) (94.8) Former officer life insurance obligation................. (0.8) (0.9) (1.2) ------- ------- ------- Total postretirement benefits other than pension......... $(124.4) $(123.7) $ (96.0) ======= ======= =======
The accumulated postretirement benefit obligation was determined using a 7%, 7% and 7 1/2% weighted average discount rate at December 31, 1998, September 30, 1998 and 1997, respectively. The health care cost trend rate was assumed to be 7% in fiscal year 1998, and remaining constant thereafter. In fiscal year 1997, the health care cost trend rate was assumed to be 8%, declining to 7% in one year and remaining constant thereafter. A one percentage point increase of this annual trend rate would increase the accumulated postretirement benefit obligation at December 31, 1998, September 30, 1998, and September 30, 1997 by approximately $11.3 million, $11.0 million, and $8.6 million and the total service and interest cost components by $0.2 million, $0.6 million, and $0.6 million, respectively. A one percentage point decrease of this annual trend rate would decrease the accumulated postretirement benefit obligation at December 31, 1998, September 30, 1998, and September 30, 1997 by approximately $9.5 million, $9.3 million, and $7.2 million, and the total service and interest cost components by $0.2 million, $0.5 million, and $0.5 million, respectively. Under the OMC Executive Bonus Plan, the Pre-Merger Company's compensation committee of the board of directors, which administered the plan and whose members were not participants in the plan, had authority to determine the extent to which the Pre-Merger Company meets, for any fiscal year, the performance targets for that fiscal year which were set by the committee no later than the third month of the 59 60 OUTBOARD MARINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) fiscal year. In fiscal 1997, no incentive compensation was paid or provided under this plan. In fiscal year 1996, $5.1 million was charged to earnings under this plan. The 1994 OMC Long-Term Incentive Plan and its predecessor plan authorized the awarding of performance units or performance shares, each with a value equal to the value of a share of common stock at the time of award. Performance shares for the three year cycle ended September 30, 1997 were earned and paid based upon the judgment of the compensation committee of the Pre-Merger Company's board of directors whose members were not participants in the plan, as to the achievement of various goals over multi-year award cycles. In 1997 and 1996, respectively, $(0.2) million and $(0.4) million were credited to earnings for the estimated cost of performance units earned under the plan. 14. OTHER EXPENSE (INCOME), NET Other non-operating expense (income) in the Statements of Consolidated Earnings consisted of the following items (1997 and 1996 were Pre-Merger Company):
THREE MONTHS FISCAL YEARS ENDED SEPTEMBER 30, ENDED -------------------------------- DECEMBER 31, 1998 1998 1997 1996 ----------------- -------- -------- -------- (DOLLARS IN MILLIONS) Expense (Income) Interest earned............................... $ (0.9) $ (4.3) $ (4.5) $ (4.1) Insurance recovery and lawsuit settlement..... -- -- (10.7) -- Foreign exchange losses (gains)............... (0.7) (0.7) 1.0 -- (Gain) loss on disposition of plant and equipment.................................. 0.7 (2.9) (5.8) 0.9 Joint venture earnings........................ (1.2) (4.8) (7.2) (4.4) Discount charges -- Accounts receivable sales...................................... -- -- 0.6 1.7 Miscellaneous, net............................ (1.2) (2.9) (2.6) (2.6) ------ ------ ------ ------ $ (3.3) $(15.6) $(29.2) $ (8.5) ====== ====== ====== ======
15. INCOME TAXES The provision for income taxes consisted of the following components (1997 and 1996 were Pre-Merger Company):
THREE MONTHS FISCAL YEARS ENDED SEPTEMBER 30, ENDED -------------------------------- DECEMBER 31, 1998 1998 1997 1996 ----------------- -------- -------- -------- (DOLLARS IN MILLIONS) Provision for income taxes Federal....................................... $(17.9) $(29.4) $(36.7) $ (5.6) State......................................... (1.7) (7.1) (2.3) -- Non-U.S....................................... 0.4 3.1 2.8 2.5 ------ ------ ------ ------ Total current.............................. (19.2) (33.4) (36.2) (3.1) Valuation allowance............................. 19.2 36.8 39.0 -- ------ ------ ------ ------ Total provision............................ $ -- $ 3.4 $ 2.8 $ (3.1) ====== ====== ====== ======
60 61 OUTBOARD MARINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The significant short-term and long-term deferred tax assets and liabilities were as follows:
SEPTEMBER 30, ---------------- DECEMBER 31, 1998 1998 1997 ----------------- ------ ------ (DOLLARS IN MILLIONS) Deferred tax assets Litigation and claims................................... $ 21.4 $ 21.1 $ 18.4 Product warranty........................................ 22.7 21.0 14.6 Marketing programs...................................... 22.8 15.1 13.7 Postretirement medical benefits......................... 52.3 52.3 41.2 Restructuring........................................... 16.8 17.5 7.3 Loss carryforwards...................................... 77.0 67.5 55.0 Other................................................... 57.7 57.5 58.6 Valuation allowance..................................... (137.8) (118.6) (81.8) ------ ------ ------ Total deferred tax assets............................ $132.9 $133.4 $127.0 ------ ------ ------ Deferred tax liabilities Depreciation and amortization........................... $(14.5) $(13.5) (13.9) Employee benefits....................................... -- (0.8) (12.8) Purchase accounting asset revaluations.................. (39.0) (40.3) (44.5) Other................................................... (35.5) (34.3) (15.7) ------ ------ ------ Total deferred tax liabilities....................... (89.0) (88.9) (86.9) ------ ------ ------ Net deferred tax assets............................ $ 43.9 $ 44.5 $ 40.1 ====== ====== ====== Reconciliation to Statement of Consolidated Financial Position: Net -- current deferred tax assets -- (net of current valuation allowance)................................. $ 3.4 $ 3.4 $ 0.9 Net -- long-term deferred tax assets -- (net long-term valuation allowance)................................. 40.5 41.1 39.2 ------ ------ ------ Total net deferred tax assets........................ $ 43.9 $ 44.5 $ 40.1 ====== ====== ======
61 62 OUTBOARD MARINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company believes the recorded net deferred tax assets of $43.9 million will be realized. A valuation allowance of $137.8 million has been recorded at December 31, 1998, to reduce the deferred tax assets to their estimated net realizable value. Of this valuation allowance, $23.8 million relates to deferred tax assets established for foreign and state loss carryforwards. As of December 31, 1998, certain non-U.S. subsidiaries of the Company had net operating loss carryforwards for income tax purposes of $36.1 million. Of this amount, $3.3 million will expire by 2004 with the remaining balance being unlimited. In addition, the Company has $151.3 million of Federal net operating loss carryforwards expiring between 2008 and 2019 and $178.3 million of state net operating loss carryforwards expiring between 1999 and 2014. These carryforwards are entirely offset by the valuation allowance. No benefit has been recognized in the Consolidated Financial Statements. Under SFAS 109, "Accounting for Income Taxes", the Company is required to consider several factors in order to determine if it is "more likely than not" that deferred tax assets will be realized. Those factors include an examination of the Company's historical profitability, forecasted earnings, etc. Based upon the Company's historical results as well as forecasted earnings, it is unlikely that the valuation allowance will be reversed in calendar year 1999. The following summarizes the major differences between the actual provision for income taxes on earnings (losses) and the provision (credit) based on the statutory United States Federal income tax rate (1997 and 1996 were Pre-Merger Company):
THREE MONTHS ENDED FISCAL YEARS ENDED SEPTEMBER 30, DECEMBER 31, -------------------------------- 1998 1998 1997 1996 ------------ -------- -------- -------- (% TO PRETAX EARNINGS) At statutory rate................................. (35.0)% (35.0)% (35.0)% (35.0)% State income taxes, net of Federal tax deduction....................................... (3.7) (3.6) (3.0) (0.2) Tax effect of non-U.S. subsidiary earnings (loss) taxed at other than the U.S. rate............... (1.3) -- 0.1 11.4 Tax benefit not provided on domestic and foreign operating losses................................ 39.4 33.0 41.8 20.6 Tax effect of goodwill amortization and write-offs...................................... 0.6 1.4 0.4 3.3 Federal tax effect prior year's state income taxes paid............................................ -- -- (0.2) 13.6 Tax effects of audit settlements.................. -- -- -- (50.5) Tax effect of Foreign Investment in U.S. Property........................................ -- 6.4 -- -- Other............................................. -- 0.1 (0.5) 7.0 Actual provision................................ N.M.% N.M.% N.M.% N.M.%
62 63 OUTBOARD MARINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Domestic and non-U.S. losses before provision (credit) for income taxes consisted of the following (1997 and 1996 were Pre-Merger Company):
THREE MONTHS ENDED FISCAL YEARS ENDED SEPTEMBER 30, DECEMBER 31, --------------------------------- 1998 1998 1997 1996 ------------ --------- -------- -------- (DOLLARS IN MILLIONS) Loss before provision for income taxes United States.................................. $(46.3) $(144.8) $(68.7) $ (8.1) Non-U.S........................................ (0.8) (2.3) (7.6) (2.3) ------ ------- ------ ------ Total....................................... $(47.1) $(147.1) $(76.3) $(10.4) ====== ======= ====== ======
The above non-U.S. loss of $.8 million is a net amount that includes both earnings and losses. Due to the integrated nature of the Company's operations, any attempt to interpret the above pretax losses as resulting from stand-alone operations could be misleading. No U.S. deferred taxes have been provided on $65.7 million of undistributed non-U.S. subsidiary earnings. The Company has no plans to repatriate these earnings and, as such, they are considered to be permanently invested. While no detailed calculations have been made of the potential U.S. income tax liability should such repatriation occur, the Company believes that it would not be material in relation to the Company's Consolidated Financial Position or Consolidated Earnings. 16. SEGMENT AND RELATED INFORMATION The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information", in 1999, changing the way the Company reports information about its operating segments. The Company has two reportable segments: Marine Engines and Boats. The Company markets its products primarily through dealers in the United States and Canada, through distributors and dealers in Europe and through distributors in the rest of the world. 63 64 OUTBOARD MARINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Summarized financial information concerning the Company's reportable segments is shown in the following table. The "Other Column" includes primarily corporate related items. Earnings before taxes included in the "Other Column" comprise primarily corporate staffing expense, interest expense on the Company's current and long-term debt obligations, and amortization expense on the Company's intangible assets. Total Assets included in the "Other Column" are comprised primarily of cash, intangible assets associated with the purchase of the Company that have not been allocated to the reportable segments, deferred income tax assets, certain property, plant and equipment, and the pension assets associated with one of the Company's pension plans.
MARINE ENGINES BOATS OTHER TOTAL -------------- ------- ------- -------- (DOLLARS IN MILLIONS) THREE MONTHS ENDED DECEMBER 31, 1998 Revenues......................................... $111.9 $ 87.5 $ -- $ 199.4 Earnings Before Taxes............................ (18.9) (12.0) (16.2) (47.1) Total Assets..................................... 608.2 116.2 191.8 916.2 Capital Expenditures............................. 11.0 2.3 1.8 15.1 Depreciation and Amortization.................... 9.5 1.3 1.6 12.4 FISCAL YEAR ENDED SEPTEMBER 30, 1998 Revenues......................................... $636.5 $ 389.2 $ -- $1,025.7 Earnings Before Taxes............................ (27.8) (36.4) (82.9) (147.1) Total Assets..................................... 612.5 126.1 211.3 949.9 Capital Expenditures............................. 25.8 8.0 0.6 34.4 Depreciation and Amortization.................... 36.0 6.3 7.8 50.1 FISCAL YEAR ENDED SEPTEMBER 30, 1997 Revenues......................................... $560.4 $ 419.1 $ -- $ 979.5 Earnings Before Taxes............................ 19.1 (57.2) (38.2) (76.3) Total Assets..................................... 607.2 151.2 291.8 1,050.2 Capital Expenditures............................. 33.2 2.6 0.5 36.3 Depreciation and Amortization.................... 42.6 9.2 5.2 57.0 FISCAL YEAR ENDED SEPTEMBER 30, 1996 Revenues......................................... $628.5 $ 493.0 $ -- $1,121.5 Earnings Before Taxes............................ 9.8 (5.3) (14.9) (10.4) Total Assets..................................... 592.1 161.7 119.9 873.7 Capital Expenditures............................. 45.6 5.3 1.8 52.7 Depreciation and Amortization.................... 44.1 7.1 3.5 54.7
64 65 OUTBOARD MARINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Information by geographic area was as follows (1997 and 1996 were Pre-Merger Company):
THREE MONTHS FISCAL YEARS ENDED ENDED SEPTEMBER 30, DECEMBER 31, ------------------------------ 1998 1998 1997 1996 ------------ -------- -------- -------- (DOLLARS IN MILLIONS) Net sales United States................................. $152.0 $ 769.7 $ 721.0 $ 813.3 Asia.......................................... 2.3 11.5 20.3 24.8 Australia..................................... 10.1 38.3 45.4 48.8 Canada........................................ 8.5 56.7 44.4 61.7 Europe........................................ 15.6 91.9 90.9 114.8 Latin America (including Brazil and Mexico)... 10.9 57.6 57.5 58.1 ------ -------- -------- -------- Total...................................... $199.4 $1,025.7 $ 979.5 $1,121.5 ====== ======== ======== ======== Total Long-lived assets United States................................. $378.5 $ 379.0 $ 407.5 $ 234.5 Asia.......................................... 6.1 4.5 3.3 4.4 Australia..................................... 2.1 2.1 2.7 2.8 Canada........................................ 2.9 3.1 3.1 7.2 Europe........................................ 1.2 1.1 1.4 4.9 Latin America (including Brazil and Mexico)... 2.7 2.6 3.4 3.4 ------ -------- -------- -------- Total...................................... $393.5 $ 392.4 $ 421.4 $ 257.2 ====== ======== ======== ========
65 66 OUTBOARD MARINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 17. QUARTERLY INFORMATION -- (UNAUDITED) A summary of pertinent quarterly data for the quarter ended December 31, 1998 and fiscal years 1998 and 1997 was as follows:
QUARTER ENDED DECEMBER 31, 1998 ------------------------- DOLLARS IN MILLIONS, EXCEPT AMOUNTS PER SHARE) Quarter Ended December 31, 1998 Net sales........................................ $199.4 Gross earnings................................... 18.7 Net loss......................................... (47.1) Net loss per share: Basic............................................ $(2.31) ------ Diluted.......................................... $(2.31) ------
QUARTER ENDED --------------------------------------------------- DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, ------------ --------- -------- ------------- (DOLLARS IN MILLIONS, EXCEPT AMOUNTS PER SHARE) Fiscal 1998 Net sales.................................... $ 209.5 $ 262.2 $ 282.4 $ 271.6 Gross earnings............................... 37.8 59.3 67.6 67.4 Net loss..................................... (17.1) (8.4) (3.8) (121.2) Net loss per share: Basic........................................ $ (0.84) $ (0.41) $ (0.19) $ (5.94) ------- ------- ------- ------- Diluted...................................... $ (0.84) $ (0.41) $ (0.19) $ (5.94) ------- ------- ------- -------
QUARTER ENDED --------------------------------------------------- DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, ------------ --------- -------- ------------- (DOLLARS IN MILLIONS, EXCEPT AMOUNTS PER SHARE) Fiscal 1997 -- Pre-Merger Company Net sales.................................... $ 197.1 $ 237.0 $ 275.8 $ 269.6 Gross earnings............................... 27.9 40.8 49.0 39.8 Net loss..................................... (14.3) (7.3) (5.1) (52.4) Net loss per share: Basic........................................ $ (0.71) $ (0.36) $ (0.25) $ (2.58) ------- ------- ------- ------- Diluted...................................... $ (0.71) $ (0.36) $ (0.25) $ (2.58) ------- ------- ------- -------
In the fourth fiscal quarter of fiscal year 1997 and fiscal year 1998, the Company recorded approximately $27 million for change of control expenses and $98.5 million for restructuring charges (see Note 4), respectively. Earnings per share amounts for each quarter are required to be computed independently and, therefore, may not equal the amount computed for the total year. Due to the seasonal nature of the Company's business, it is not appropriate to compare the results of operations of different fiscal quarters. Shares of common stock of the Pre-Merger Company were cancelled September 30, 1997 and shares of common stock of the Post-Merger Company were issued and are not publicly traded. 66 67 OUTBOARD MARINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 18. COMMITMENTS AND 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 that limit the Company's repurchase obligation to approximately $32 million per model year for a period not to exceed 30 months from the date of invoice. This obligation automatically reduces over the 30-month period. The Company resells any repurchased products. Losses incurred under this program have not been material. The Company accrues for losses which are anticipated in connection with expected repurchases. Minimum commitments under operating leases having initial or remaining terms greater than one year are $5.6 million, $5.2 million, $4.0 million, $3.4 million, $2.6 million and $4.6 million for the years ending December 31, 1999 through 2003 and after 2003, respectively. 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 Consolidated Financial Position or the 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. In October 1996, the AICPA 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 has elected early adoption of 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. 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 Decem- 67 68 OUTBOARD MARINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ber 31, 1998 the Company has accrued approximately $25 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. 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. 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 July 1998 that the Company became aware of the scope and extent of the contamination and the associated remedial alternatives. Although the Company believes that it was not a generator of hazardous substances at the site, as a land owner it is, by statute, a PRP. Based on its experience with Superfund Sites, the Company calculated a range of potential allocations and recorded an amount related to the most probable outcome in its September 1998 financial statements. In fiscal year 1997, the Company became aware of certain performance issues associated with its FICHT engines. In April 1998, the Company began to identify the causes of these performance issues and an upgrade kit was prepared and distributed. This upgrade kit included certain performance enhancements to the FICHT engines, including, among other things, improvements to the mapping contained in the software of the engine-management module. The Company established a reserve for the correction of the identified problems in fiscal year 1998, which resulted in an approximately $7.0 million increase in the Company's warranty reserve for fiscal year 1998. In January 1999, the Company completed its analysis and determined that certain technological improvements were needed to improve the overall performance of the FICHT engines. As part of this strategy, an upgrade kit for previously sold models, which will contain additional performance enhancements to the FICHT engines, will be provided to dealers in April 1999. The Company expects the cost of the April 1999 upgrade kits to be approximately $4.3 million and has recorded an expense and a corresponding reserve for such costs in its financial statements as of December 31, 1998. The Company believes that the April 1999 upgrade kits will significantly improve the overall performance of its FICHT engines and reduce the Company's overall warranty expense experienced on such engines. In addition, the Company will implement engine modifications and changes in production for the affected FICHT models. These engine modifications and production charges will be implemented during a planned two-week suspension of the Company's operations at its engine-manufacturing facilities in March 1999. Also, a limited warranty extension, from two to three years, will be provided on all FICHT engines purchased by customers between January 1, 1999 and March 31, 1999 that had been sold by the Company to its dealers as of December 31, 1998, which is intended to demonstrate the Company's confidence in the improved FICHT engines. The Company expects this warranty-extension program to cost approximately $1.3 million and, accordingly, has recorded an expense and a corresponding reserve for such costs in its December 31, 1998 financial statements. The Company also expects that actions to be taken to address the FICHT performance issues will result in additional charges and expenses in 1999, primarily in the quarter ending March 31, 1999 due to higher levels of unabsorbed overhead costs, and a reduced level of engine sales in the March 31, 1999 quarter as compared to the same quarter in 1998, as production facilities are modified for the changes in the FICHT engine production processes. 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 68 69 OUTBOARD MARINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 a liability in its September 1998 financial statements. The sale of FICHT engines accounted for approximately 8% of the Company's revenues in fiscal 1998 and 16.2% for the three months ended December 31, 1998. 19. PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (UNAUDITED) The following unaudited pro forma Condensed Statements of Consolidated Earnings (the "Pro Forma Statements") were prepared to illustrate the estimated effects of the merger with Greenmarine Acquisition Corp. as if the transaction had occurred for statements of consolidated earnings purposes as of the beginning of the period presented. The pro forma adjustments are based upon available information and upon certain assumptions that the Company believes are reasonable. The Pro Forma Statements do 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. 69 70 OUTBOARD MARINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Pro Forma Statements include adjustments, with respect to the merger, to reflect additional interest expense and depreciation expense, amortization of goodwill, and elimination of non-recurring fees and expenses incurred by the Pre-Merger Company in 1997 in connection with the merger.
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, ---------------------- 1997 1996 --------- --------- (UNAUDITED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) Net sales................................................... $ 979.5 $1,121.5 Cost of goods sold.......................................... 825.1 890.8 -------- -------- Gross earnings.............................................. 154.4 230.7 Selling, general and administrative expense................. 219.8 214.5 Restructuring charges....................................... -- 25.6 -------- -------- Earnings (loss) from operations............................. (65.4) (9.4) Interest expense............................................ 28.4 24.3 Other (income) expense, net................................. (29.2) (8.5) -------- -------- Loss before provision for income taxes...................... (64.6) (25.2) Provision (credit) for income taxes......................... 2.8 (3.1) -------- -------- Net loss.................................................... $ (67.4) $ (22.1) ======== ======== Net loss per share of common stock (primary and fully diluted).................................................. $ (3.30) $ (1.08) ======== ======== Shares outstanding.......................................... 20.4 20.4 ======== ========
70 71 SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO DEDUCTIONS -- BALANCE BEGINNING COSTS AND COSTS AT END DESCRIPTION OF PERIOD EXPENSES INCURRED OF PERIOD - ----------- ---------- ---------- ------------- --------- (IN MILLIONS) Restructuring reserves December 1998................................ $ 31.0 $ -- $ 0.3 $ 30.7 ====== ====== ====== ====== September 1998............................... $ 6.0 $ 26.4 $ (1.4) $ 31.0 ====== ====== ====== ====== 1997......................................... $ 18.5 $ -- $ 12.5 $ 6.0 ====== ====== ====== ====== 1996......................................... $ 11.4 $ 25.6 $(18.5) $ 18.5 ====== ====== ====== ======
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No disclosure is required pursuant to this item. 71 72 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below is certain information regarding each director and executive officer of the Company as of March 1, 1999:
NAME AGE POSITION - ---- --- -------- Alfred D. Kingsley........................... 56 Chairman of the Board Gary K. Duberstein........................... 44 Vice Chairman of the Board and Assistant Secretary Richard Katz................................. 56 Vice Chairman of the Board Ron Hiram.................................... 46 Director Frank V. Sica................................ 47 Director David D. Jones, Jr........................... 55 President and Chief Executive Officer; Director Andrew P. Hines.............................. 59 Executive Vice President and Chief Financial Officer; Director Johan Arzbach................................ 53 Vice President of OMC and President of International Operations Kimberly K. Bors............................. 38 Vice President, Human Resources Robert B. Gowens, Jr......................... 50 Vice President of OMC and President, North American Engine Operations Robert S. Romano............................. 44 Vice President, General Counsel and Secretary Eric T. Martinez............................. 35 Vice President and Treasurer Joseph P. Tomczak............................ 43 Vice President and Controller
ALFRED D. KINGSLEY has been Chairman of the Board of Directors since September 12, 1997. Since 1993, Mr. Kingsley has been Senior Managing Director of Greenway Partners, L.P., an investment partnership. Prior to that, Mr. Kingsley held various positions at Icahn & Co., Inc., including senior adviser until 1992. Mr. Kingsley is also a director of ACF Industries, Incorporated. Mr. Kingsley is Chairman of the Compensation and Benefits Committee and a member of the Audit Committee. GARY K. DUBERSTEIN has been Vice Chairman of the Board of Directors and Assistant Secretary since September 12, 1997. Since 1993, Mr. Duberstein has been a Managing Director of Greenway Partners, L.P., an investment partnership. Prior to that, Mr. Duberstein served as general counsel to Icahn & Co., Inc., and as vice president of certain companies operated by Carl Icahn from 1985 to 1993. Mr. Duberstein is a member of the Compensation and Benefits Committee and Chairman of the Audit Committee. RICHARD KATZ has been Vice Chairman of the Board of Directors since September 12, 1997. From 1977 to 1993, Mr. Katz was a director of NM Rothschild & Sons Limited, London, England. Since 1986, he has served as a Supervisory Director for a number of entities affiliated with Soros Fund Management LLC. Mr. Katz is also a director of Apex Silver Mines Limited. Mr. Katz is a member of the Compensation and Benefits Committee. RON HIRAM has been a director since September 30, 1997. Mr. Hiram has been associated with Soros Fund Management LLC, an investment management company, since 1995 and has been a Managing Director thereof since 1997. From 1992 to 1995, Mr. Hiram was a Managing Director of Lehman Brothers Incorporated. Mr. Hiram is a member of the Compensation and Benefits Committee and Audit Committee. FRANK V. SICA has been a director since July 22, 1998. Mr. Sica has been a Managing Director of Soros Fund Management LLC and head of its private equity operations since May 1, 1998. Prior to joining Soros Fund Management LLC, Mr. Sica held various positions during his 18-year tenure at Morgan Stanley Dean Witter & Co. Mr. Sica is also a director of Emmis Broadcasting Corporation, CSG Systems International, Inc. and Kohl's Corporation. 72 73 DAVID D. JONES, JR. has been President and Chief Executive Officer and a director since September 25, 1997. From 1990 to 1997, Mr. Jones held numerous positions with the Mercury Marine Division of Brunswick Corporation and most recently as President of the Mercury Marine Division. Mr. Jones is also a director of National Exchange Bank, Fond du Lac, WI, and the ASHA Corporation, Santa Barbara, CA. ANDREW P. HINES has been the Executive Vice President and Chief Financial Officer since October 6, 1997. Mr. Hines has been a director since October 7, 1997. Prior to joining the Company, Mr. Hines held the position of Senior Vice President and Chief Financial Officer for Woolworth Corporation since 1994. During 1993, Mr. Hines was a consultant to Pentland PLC, England. From 1989 to 1992, Mr. Hines held the position of Executive Vice President and Chief Financial Officer with Adidas USA. Prior to that, Mr. Hines held various senior financial positions with RJR Nabisco, Inc. from 1976 to 1989. JOHAN ARZBACH has been Vice President of OMC and President of OMC's International Operations since January 5, 1999. Prior to joining the company, Mr. Arzbach spent twenty-three years at Ingersoll Rand in positions of increasing responsibility, where he most recently served as Vice President and General Manager of the Asia-Pacific operations of Ingersoll Rand's air compressor group. KIMBERLY K. BORS has been Vice President, Human Resources since October 1, 1997. Prior to her election to such position, Ms. Bors held the position of Director, Compensation and Organizational Development with the Company since 1995. Prior to joining the Company, Ms. Bors held the position of Director of Compensation and Human Resources Services with Browning-Ferris Industries, Inc. since 1990. ROBERT B. GOWENS, JR. has been Vice President of OMC and President, North American Engine Operations since October 1, 1998. Prior to his appointment to such position, Mr. Gowens held the position of Vice President and General Manager of the Quicksilver Unit of the Mercury Marine Division of Brunswick Corporation since and, prior thereto, Vice President of Sales of Mercury Marine's Mercruiser Unit. From 1984 to 1992, Mr. Gowens served as President and Chief Executive Officer of Cigarette Racing Team, Inc., which specialized in high performance boat manufacturing. Prior thereto, Mr. Gowens served as a Vice President of A.T. Kearney, Inc. from 1980 to 1983. ERIC T. MARTINEZ has been Vice President and Treasurer since March 1, 1999. Prior to that, Mr. Martinez was the Assistant Treasurer for Favorite Brands International Inc. since July 1998. From 1997 to June 1998, Mr. Martinez served as Assistant Treasurer of Corporate Finance and Global Capital Markets for IMC Global Inc. Prior to that, from 1996 to 1997, Mr. Martinez was the mergers and acquisitions finance leader for GE Plastics, a division of General Electric Company. From 1991 to 1996, he was financial evaluations and analysis supervisor for Amoco Corporation. ROBERT S. ROMANO has been Vice President, General Counsel and Secretary since October 9, 1997. Prior to his election to such position, Mr. Romano was appointed Assistant Secretary and Assistant General Counsel in 1996 and 1994, respectively. Mr. Romano has held various positions within the Company's legal department since joining the Company in 1980. JOSEPH P. TOMCZAK was named Vice President and Controller on May 1, 1998 and formally joined the Company on June 1, 1998. Mr. Tomczak previously served as Vice President and Corporate Controller for Alliant Foodservice, Inc. from July 1990 to May 1998. To the knowledge of the Company, there are no family relationships between any director or executive officer and any other director or executive officer. 73 74 ADDITIONAL KEY PERSONNEL Since the Greenmarine Acquisition, numerous key positions have been filled or replaced with members of the new management team. The following sets forth certain information with respect to certain key personnel of the Company who are not executive officers:
NAME AGE POSITION - ---- --- -------- John A. Anderson.......................... 47 President and General Manager, Four Winns John T. Aylsworth......................... 55 Vice President, Marketing Support and Advertising Robert L. Beagle.......................... 36 General Manager, Freshwater Fishing Operations Leslie E. Crawford........................ 50 President and General Manager, OMC Aluminum Boat Group, Inc. Charles D. Eckert......................... 53 President and General Manager, OMC Europe Paul A. Luck.............................. 45 Division Vice President, Finance, Boats Rand E. McNally........................... 46 Senior Vice President, North American Marketing, Sales and Service William J. Miller......................... 51 Vice President, Manufacturing Susan M. Opeka............................ 41 Division Vice President, Finance John A. Roush............................. 33 Vice President, General Manager FICHT Fuel Injection Peter J. VanLancker....................... 46 Division Vice President, Product Design and Engineering, Boat Group Russell J. VanRens........................ 50 Vice President, Quality Chris R. Wainscott........................ 43 President and General Manager, Saltwater Fishing Boats Division Robert J. Werner.......................... 40 Vice President, Supply Management and Logistics Jack J. White, Jr......................... 61 President, Freshwater Division Donald P. Wood............................ 54 Division Vice President, North American Sales Robert F. Young........................... 48 Division Vice President, Product Development and Research
JOHN A. ANDERSON is President and General Manager of the Company's Four Winns boat division. Mr. Anderson joined the Company in November 1997, and prior thereto served as President of Shamrock, a division of KCS International which manufactures inboard sport fishing boats from 1996 to 1997. Mr. Anderson has also previously served as Director of Sales for Sea Doo, a division of Bombardier Motor Corporation of America (from 1992 to 1996), and as Senior Vice President, Marketing at Sea Ray Boats, Inc., a wholly-owned subsidiary of Brunswick Corporation (from 1965 to 1992). JOHN T. AYLSWORTH is Vice President of Marketing Support and Advertising for the Company's engine and boat brands. Mr. Aylsworth joined the Company in December 1997, and prior thereto spent five years with Tuzee and Associates developing programs to support marketing efforts for some of the industry's most prominent companies. ROBERT L. BEAGLE is General Manager of the Company's Freshwater Fishing Operations. Mr. Beagle joined the Company in February 1998, and prior thereto served as General Manager of Marine Group LLC, a manufacturer and distributor of Procraft and Astro bass boats (from 1996 to 1998). From 1992 to 1996, Mr. Beagle was Vice President of Manufacturing of the Marine Group Division of the Brunswick Corporation. LESLIE E. CRAWFORD is President and General Manager -- OMC Aluminum Boat Group, Inc. Mr. Crawford joined the Company in March 1998, and prior thereto served as President of Wellcraft Marine (from 1995 to 1998), a division of Genmar Holdings, Inc., where he had earlier served as Vice President for the fishing boat group (from 1994 to 1995). Prior to that, Mr. Crawford was Executive Vice President of Tracker Marine, L.P. (from 1985 to 1994). 74 75 CHARLES D. ECKERT is President and General Manager -- OMC Europe. Prior to assuming this position in March 1998, Mr. Eckert held various positions of increasing responsibility during his thirty years with the Company, including, most recently, Controller of the International Group. PAUL A. LUCK is Division Vice President, Finance -- Boats. Prior to joining the Company on August 18, 1998, Mr. Luck held the position of Vice President, Finance at SPX Corporation since 1997. Between 1996 and 1997, Mr. Luck was the International Finance Manager at Federal Mogul. Prior to that, Mr. Luck was Vice President -- Finance and Chief Financial Officer of FTD, Inc. from 1995 to 1996, and Vice President -- Financial Planning and Analysis at Dun & Bradstreet Corporation from 1993 to 1995. RAND E. MCNALLY is Senior Vice President, North American Marketing, Sales and Service. Mr. McNally joined the Company in January 1999, and prior thereto spent eleven years at Aqua-Chem Corporation, in positions of increasing responsibility, where he most recently served as Executive Vice President and General Manager of the Cleaver-Brooks Division. Prior to that, Mr. McNally served as General Manager of Giles and Ransome in Philadelphia, PA. WILLIAM J. MILLER is Vice President, Manufacturing and is responsible for North American Engine Manufacturing. Prior to joining the Company in March 1998, Mr. Miller served as Vice President, Operations at the Toro Company (from 1997 to 1998), where he was responsible for 12 U.S. manufacturing facilities. Prior to that Mr. Miller held positions of increasing responsibility at Frigidaire Company from 1992 to 1997, most recently as Vice President, Refrigeration. SUSAN M. OPEKA is Division Vice President, Finance. Prior to joining the Company in January 1998, Ms. Opeka spent twelve years at Tenneco Automotive, a Division of Tenneco, Inc., most recently as Executive Director Strategic Planning. JOHN A. ROUSH is Vice President, General Manager -- FICHT Fuel Injection. Prior to joining the Company in July 1998, Mr. Roush was a Vice President of Allied Signal, Inc. since 1996. Prior to that, Mr. Roush was an Engagement Manager at McKinsey & Company, Inc. from 1992 to 1996. PETER J. VANLANCKER is Division Vice President, Product Design and Engineering -- Boat Group. Mr. VanLancker joined the Company in July 1996. Prior thereto, Mr. VanLancker served as Vice President, Design and Advanced Technology of Boston Whaler Company from 1969 to 1996. RUSSELL J. VAN RENS is Vice President -- Quality. Prior to assuming this position in February 1998, Mr. Van Rens served as OMC's Vice President, Engine Manufacturing. He has been with the Company since 1971, serving in increasingly responsible positions. CHRIS R. WAINSCOTT is President and General Manager of the Company's Saltwater Fishing boat division. Prior to assuming this position in February 1998, Mr. Wainscott served as Vice President of Sales and Marketing for the Company's fishing boat products, including the Stratos, Javelin and Hydra-Sports freshwater and saltwater brands (from 1996 to 1998). Prior to that, Mr. Wainscott was Regional Sales Manager, Hydra-Sports from 1991 to 1996. Mr. Wainscott has over 11 years of experience with the Company's products. ROBERT J. WERNER is Vice President -- Supply Management and Logistics. Prior to joining the Company in April 1998, Mr. Werner served as Manager, Sourcing, Global Services Operation for General Electric Corporation from 1997 to 1998. For eight years prior to that, Mr. Werner held various sourcing positions of increasing responsibility with General Electric Corporation. He has over 18 years of hands-on international experience, with a focus on identification, development, and expansion of worldwide sources of supply. JACK J. WHITE, JR. is President of the Company's Freshwater boat division. Prior to joining the Company in April 1998, Mr. White owned the Marine Group, LLC, a manufacturer and distributor of Procraft and Astro bass boats from 1996 to 1998. Prior to that, Mr. White was general manager of and a consultant to the Fishing Boat Division of the Brunswick Corporation from 1988 to 1995. DONALD P. WOOD is Division Vice President, North American Sales. Mr. Wood returned to the Company in November 1997 from Tracker Marine, L.P., a manufacturer of aluminum boats, where he was Vice President of Sales from 1989 to 1994. Between leaving Tracker Marine and rejoining the Company, Mr. Wood 75 76 helped establish Horizon Marine Company and worked for the Company in various positions of increasing responsibility. ROBERT F. YOUNG is Division Vice President, Product Development Engineering and Research. Prior to assuming this position in January 1997, Mr. Young held numerous positions of increasing responsibility during his 27-year tenure with OMC within its Engineering and Product Development departments, including most recently, Vice President, Engineering. CONTROL BY GREENMARINE HOLDINGS Greenmarine Holdings holds 99.9% of the outstanding common stock of the Company. Accordingly, Greenmarine Holdings can elect all of the Board of Directors of the Company and controls all corporate transactions or other matters required to be submitted to stockholders for approval, including any merger, consolidation, or sale of all or substantially all of the Company's assets. See "Item 12 -- Security Ownership of Certain Beneficial Owners and Management" (including Footnote 1 thereto). The members of Greenmarine Holdings are Greenlake Holdings LLC ("Greenlake"), Quasar Strategic Partners LDC ("QSP") and Quantum Industrial Partners LDC ("QIP"). Greenlake, QSP and QIP have approximately a 30.5%, 34.75% and 34.75% interest in Greenmarine Holdings, respectively. Pursuant to the Operating Agreement of Greenmarine Holdings, Greenlake has the right to appoint two designees to Greenmarine Holdings' Management Committee and the holders of a majority of Greenmarine Holdings' interest held by QSP and QIP have the right to appoint two members of Greenmarine Holdings' Management Committee. Greenmarine Holdings' Management Committee is currently comprised of Messrs. Alfred D. Kingsley, Gary K. Duberstein and Richard Katz. From and after September 12, 1998, the holders of a majority of Greenmarine Holdings' interest held by QSP and QIP may elect to increase the size of Greenmarine Holdings' Management Committee to five members, three of whom will be designated by the holders a majority of Greenmarine Holdings's interest held by QSP and QIP and two of whom will be designated by Greenlake. The vote of three of the members of Greenmarine Holdings' Management Committee is required for action by the Management Committee. Pursuant to the Operating Agreement of Greenmarine Holdings, the board of directors of the Company is to be comprised of members approved by the Management Committee of Greenmarine Holdings, provided that Greenlake shall have the right to designate at least one member of the board of directors. ITEM 11. EXECUTIVE COMPENSATION PERSONAL REWARDS AND OPPORTUNITIES PROGRAM On March 10, 1998, the Board of Directors of 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 key employees of the Company, both individually and as members of the management and key employee team. All employees of the Company and its subsidiaries are eligible to participate in PROP. PROP replaced all prior long and short-term incentive plans of the Company. PROP provides for (i) cash and/or equity annual bonuses based on performance targets, and (ii) grants of stock options, shares of restricted stock, stock units or stock appreciation rights. The aggregate number of shares of stock available for equity awards under PROP is 1,500,000 shares of currently authorized common stock of the Company. PROP is administered by the Board of Directors of the Company or a committee or subcommittee of the Board appointed by the Board among its members, which, in either case, has authority, at its discretion, to determine the persons to whom equity awards will be granted and the specifics of those grants. As of December 31, 1998, the Company had granted and outstanding stock options relating to 1,061,245 shares of common stock. Of these options, 112,800 vested at the time of grant. The other 948,445 options have vested or will vest as follows: 154,445 as of December 31, 1998; 286,708 in the Company's fiscal year ending December 31, 1999; 259,073 in the Company's fiscal year ending December 31, 2000; and 248,219 thereafter. All of these stock options expire ten years after the date of grant and are exercisable at $18.00 per share except for 105,000 stock options granted to certain participants that are exercisable at $22.00 per share. 76 77 SUMMARY COMPENSATION TABLE The following table sets forth information concerning the annual and long-term compensation paid or to be paid to those persons who were, at December 31, 1998, (i) the Chief Executive Officer or served in such capacity during calendar 1998, (ii) the other four most highly compensated Executive Officers of the Company, who were serving in such capacity as of December 31, 1998 and (iii) individuals who would have been one of the four most highly paid Executive Officers but for the fact that they were not serving as an Executive Officer on December 31, 1998 (collectively the "Named Executives") for services rendered in all capacities to the Company for the 1998 calendar year ("1998C") and the 1998, 1997 and 1996 fiscal years. For a discussion of compensation payable to each of Messrs. Jones, Hines and Gowens, see "Item 10 -- Directors and Executive Officers of Registrant -- Employment Contracts and Severance Agreements".
LONG-TERM COMPENSATION ANNUAL COMPENSATION --------------------------------------------------- ---------------------------------------- RESTRICTED SECURITIES OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER SALARY BONUS COMPENSATION AWARDS OPTIONS/ SARS PAYOUTS COMPENSATION NAME AND PRINCIPAL POSITION YEAR ($) ($)(1) ($)(2) ($) ($)(3) ($)(4) ($)(5) - --------------------------- ----- ------- ------- ------------ ---------- ------------- ------- ------------ D.D. Jones, Jr.(6)............... 1998C 597,309 900,000 63,358 -- 346,140 -- 649,019 President and Chief 1998 556,925 900,000 114,736 -- 407,245 -- 2,578,014 Executive Officer 1997 7,692 -- -- -- -- -- -- 1996 -- -- -- -- -- -- -- A.P. Hines(7).................... 1998C 375,000 468,745 119,215 -- 180,000 -- -- Executive Vice 1998 349,708 468,745 -- -- 180,000 -- -- President and Chief 1997 -- -- -- -- -- -- -- Financial Officer 1996 -- -- -- -- -- -- -- J. P. Tomczak(8)................. 1998C 119,231 11,500 -- -- 11,000 -- 40,577 Vice President and 1998 65,385 -- -- -- 11,000 -- 40,000 Controller 1997 -- -- -- -- -- -- -- 1996 -- -- -- -- -- -- -- R.S. Romano...................... 1998C 197,307 19,000 -- -- 8,000 2,928 2,230 Vice President, General 1998 190,000 19,000 -- -- 8,000 19,353 1,974 Counsel and Secretary 1997 143,917 11,488 -- -- -- -- 4,320 1996 126,250 55,783 -- -- -- -- 1,610 K.K. Bors........................ 1998C 145,385 14,000 -- -- 7,000 5,855 1,662 Vice President, Human 1998 137,308 14,000 -- -- 7,000 5,855 1,373 Resources 1997 103,231 6,738 -- -- -- -- -- 1996 87,087 23,958 -- -- -- -- 5,212 P.R. Rabe(9)..................... 1998C 201,000 24,000 -- -- 10,000 3,800 1,948 Vice President, North 1998 270,270 24,000 -- -- 10,000 3,800 1,948 American Sales and Marketing 1997 193,977 25,000 -- -- -- -- -- 1996 20,455 -- -- -- -- -- 30,000
- --------------- (1) Calendar and fiscal 1998 bonuses for Mr. Jones include $225,000 and 37,500 shares of Stock Units under PROP valued at $18.00 per share. Calendar and fiscal 1998 bonuses for Mr. Hines include $117,187 and 19,531 shares of Stock Units under PROP valued at $18.00 per share. All fiscal 1998, 1997 and 1996 and calendar 1998 bonuses to Messrs. Tomczak, Romano and Rabe and Ms. Bors were paid in cash. (2) For calendar year 1998, other annual compensation for Mr. Jones, includes $13,810 for moving expense, $5,818 for financial services, $10,940 for company car, $5,466 as payment for interest on a loan from the Company, and $27,324 for tax gross-up; and for Mr. Hines, includes $58,258 for moving expense, $9,587 for company car and $51,370 for tax gross-up. For fiscal year 1998, other annual compensation for Mr. Jones includes $89,023 for moving expense, $5,250 for financial services, $19,553 for company car and $910 as payment for interest on a loan from the Company (see "Item 13 -- Certain Relationships and Related Transactions"). Each of Messrs Hines, Romano and Rabe in fiscal 1998, and Messrs. Romano and Rabe in calendar 1998, received a de minimis amount of perquisites and other personal benefits, the value of which did not exceed either $50,000 or 10% of the total amount of annual salary and bonus received by each during fiscal or calendar 1998, as applicable. (3) See Option Grants in Fiscal Year 1998 below. (4) For Ms. Bors and Mr. Rabe, the amounts consist entirely of cash payouts for restricted stock of the pre-merger Company following the change of control. For Mr. Romano, the amount in fiscal year 1998 consists of $9,000 payment for options, $7,425 payment for 77 78 performance units and $2,928 payment of restricted stock of the pre-merger Company following the change of control, with only the $2,928 payment made in calendar year 1998. (5) For calendar year 1998, all other compensation for Mr. Jones includes $643,470 as a cash sign-on bonus, $1,415 as a Company contribution under the Company's 401(k) retirement plan and $4,134 for life insurance premiums. For fiscal year 1998, for Mr. Jones, (i) $2,573,880 represents an amount equal to incentives that Mr. Jones was to receive from his prior employer, but were forfeited by Mr. Jones in connection with his being hired by the Company, which amount included $643,470, paid to Mr. Jones as a cash sign-on bonus, and (ii) $4,134 for life insurance premiums. For Mr. Tomczak, the amounts in calendar 1998 and fiscal year 1998 include a $40,000 cash sign-on bonus and a $577 Company contribution under the Company's 401(k) retirement plan in calendar 1998. For Mr. Romano, all other compensation includes a life insurance premium of $68 in calendar year 1998 and contributions by the Company under the Company's 401(k) retirement plan of $2,162 in calendar year 1998, and of $1,974, $4,320, and $1,610 in fiscal years 1998, 1997 and 1996, respectively. For Ms. Bors, all other compensation includes a life insurance premium of $68 in calendar year 1998, a $5,000 cash sign-on bonus in fiscal year 1996, and Company contributions under the Company's 401(k) retirement plan of $1,594 for calendar 1998 and of $1,373 and $212 in fiscal years 1998 and 1996, respectively. For Mr. Rabe, $1,948 in fiscal and calendar 1998 was a Company contribution under the Company's 401(k) retirement plan and $30,000 in fiscal year 1996 was a cash sign-on bonus. (6) Mr. Jones was hired by the Company on September 25, 1997 and, therefore, information prior to that date does not exist. (7) Mr. Hines was hired by the Company on October 6, 1997 and, therefore, information prior to that date does not exist. (8) Mr. Tomczak was hired by the Company on June 1, 1998 and, therefore, information prior to that date does not exist. (9) Effective October 1, 1998, Mr. Rabe was no longer employed by the Company. OPTION GRANTS IN FISCAL YEAR 1998 The following table provides information on the grants of options to purchase common stock of the Company given to the Named Executives in fiscal year 1998. No options to purchase common stock of the Company were granted to the Named Executives in the three-month period ended December 31, 1998.
% OF TOTAL NUMBER OF OPTIONS SECURITIES GRANTED TO POTENTIAL UNDERLYING ALL EXERCISE REALIZABLE OPTIONS/SARS EMPLOYEES PRICE VALUE ($)(4) GRANTED IN FISCAL PER SHARE EXPIRATION --------------------- NAME GRANT DATE (#)(1) 1998(2) $(3) DATE 5% 10% - ---- ---------- ------------ ---------- --------- ---------- --------- --------- D.D. Jones, Jr.................... 3/10/98 238,895 22% $18.00 3/10/08 2,704,316 6,853,268 3/10/98 107,245 10% $18.00 3/10/08 1,214,024 3,076,576 12/30/97 61,105 6% $18.00 12/30/07 691,715 1,752,941 A.P. Hines........................ 10/6/97 180,000 16% $18.00 10/06/07 2,037,616 5,163,726 R.S. Romano....................... 7/22/98 8,000 * $18.00 7/22/08 90,561 229,499 J.P. Tomczak...................... 7/22/98 11,000 1% $18.00 7/22/08 124,521 315,561 K.K. Bors......................... 7/22/98 7,000 * $18.00 7/22/08 79,241 200,812 P.R. Rabe......................... 7/22/98 10,000 * $18.00 9/30/98 0 0
- --------------- (1) All options vest over a four year period; 25% of the option grant being exercisable at the end of the first year after the grant date and then an additional 25% each year thereafter, except for Mr. Hines whose options vest in equal proportions over a three year period, and for Mr. Jones for which the 107,245 options vested upon grant, the 238,895 options vest over a three-year period (88,890 on 9/25/98, 94,445 on 9/25/99 and 55,560 on 9/25/00) and the 61,105 incentive stock options granted in accordance with Section 422 of the Internal Revenue Code of 1986, as amended, vest in increments of 5,500 beginning on the date of grant and every January 1 thereafter. (2) In fiscal year 1998 and calendar year 1998, 156 and 160 employees respectively, received stock options. An "*" denotes less than 1%. (3) Assumes a fair market value of $18.00 per share at the date of grant. As the Company's common stock is not a publicly-traded equity, the grant price was based on the per share consideration paid for the Company's then outstanding common stock in connection with the Greenmarine Acquisition in September, 1997. (4) The amounts set forth reflect the potential realizable value of the options granted at assumed annual rates of stock price appreciation of 5% and 10% through the expiration date of the options (ten years). The use of 5% and 10% is pursuant to Securities and Exchange Commission requirements and is not intended by the Company to forecast possible future appreciation. 78 79 OPTION EXERCISES IN THE 1998 CALENDAR YEAR AND CALENDAR YEAR END OPTION VALUES No options were exercised by the Named Executives during calendar and fiscal year 1998. The per share fair market value of the Company's common stock used to make the calculations in the following table is $18.00, which is the per share consideration paid by Greenmarine Acquisition Corp. for the Company's stock in September, 1997 in connection with the Greenmarine Acquisition. Accordingly, the table indicates that the options had no value at the end of calendar year 1998 because the exercise price was equal to such fair market value.
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS/SARS AT OPTIONS/SARS AT SHARES CALENDAR 1998 CALENDAR 1998 ACQUIRED VALUE YEAR END(#) YEAR END($) ON EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/ NAME (#) ($) UNEXERCISABLE UNEXERCISABLE - ---- ----------- -------- -------------------- -------------------- D.D. Jones, Jr....................... 0 0 207,245/200,000 0 A.P. Hines........................... 0 0 60,000/120,000 0 J.P. Tomczak......................... 0 0 0/11,000 0 R.S. Romano.......................... 0 0 0/8,000 0 K.K. Bors............................ 0 0 0/7,000 0 P.R. Rabe............................ 0 0 0/10,000 0
LONG-TERM INCENTIVE PLAN AWARDS IN CALENDAR YEAR 1998 There were no amounts paid in calendar year 1998 to any employee, including the Named Executives in the form of an LTIP under PROP. RETIREMENT PLANS The approximate total annual benefit for the Named Executive participants payable from the Outboard Marine Corporation Employees Retirement Plan (the "Retirement Plan") and the supplemental non-qualified retirement plan is shown in the table below for selected average base earnings levels and years of service based upon certain assumptions including all years of credited service as an Executive Officer, retirement at age 65 and election of a single life annuity for the benefit payment.
YEARS OF SERVICE ---------------------------------------------- AVERAGE ANNUAL BASE EARNINGS 5 10 15 20 OR MORE - ---------------------------- -------- -------- -------- ---------- $ 150,000.................................... $ 19,125 $ 38,250 $ 57,375 $ 76,500 $ 250,000.................................... $ 31,875 $ 63,750 $ 95,625 $127,500 $ 300,000.................................... $ 38,250 $ 76,500 $114,750 $153,000 $ 500,000.................................... $ 63,750 $127,500 $191,250 $255,000 $ 900,000.................................... $114,750 $229,500 $344,250 $459,000 $1,300,000................................... $165,750 $331,500 $497,250 $663,000 $1,900,000................................... $242,250 $484,500 $726,750 $969,000
The Retirement Plan provides a fixed benefit determined on the basis of years of service and final average base earnings. The approximate annual benefits shown in the table above are not subject to social security offset but are subject to offset for any benefits payable from retirement programs of the Company's foreign subsidiaries. In addition to the benefits from the Retirement Plan, certain participants in the Company's annual incentive compensation plan(s) are eligible for retirement benefits from the supplemental non-qualified retirement plan. The retirement benefits under the non-qualified plan are based upon amounts paid under the 79 80 annual bonus plan as well as salary, and the total retirement benefits payable under both plans may exceed the maximum benefits payable under the Employee Retirement Income Security Act of 1974, as amended. The basis for benefits under both plans are those amounts contained in the Summary Compensation Table above, for Salary and Bonus, if the years disclosed are one or more of the three highest annual earnings in the last ten years as discussed below. Participants in the plans who are not Executive Officers receive an aggregate benefit equal to 1.20% of total pay and 0.5% above social security covered compensation for each year of credited service times the average of the five highest consecutive annual earnings (base annual salary rate plus incentive compensation earned in the same year under an annual incentive compensation plan) during such participant's last ten years of employment. An Executive Officer who participates in the plans will receive the 1.20% of total pay and 0.5% above social security covered compensation for each year of credited service as a non-Executive Officer and 2.55% for each year of credited service as an Executive Officer times the average of the three highest annual earnings during such participant's last ten years of employment. As of December 31, 1998, Messrs. Jones, Hines, Tomczak, Romano, Rabe and Ms. Bors had 1.33, 1.25, 0.58, 1.25, 1.25 and 1.25, respectively, credited years of officer service and 0.0, 0.0, 0.0, 17.91, 1.17 and 2.0, respectively, credited years of non-officer service under the Company's retirement plans. The total estimated vested annual benefit payable from these two plans for Messrs. Jones, Hines, Tomczak, Romano, Rabe and Ms. Bors based upon certain assumptions including actual years of credited service as a non-Executive Officer and Executive Officer, as the case may be, current age and base earning levels, and election of a single life annuity for the benefit payment is $18,699, $11,156, $3,146, $65,593, $8,678 and $8,486, respectively, which payments are not subject to social security offset but are subject to offset for any benefits payable from retirement programs of the Company's foreign subsidiaries. COMPENSATION OF DIRECTORS Directors of the Company do not receive any compensation for services provided to the Company as a Director, including participation on any committees. Directors may be entitled to reimbursement for travel expenses associates with Board activities. EMPLOYMENT CONTRACTS AND SEVERANCE AGREEMENTS DAVID D. JONES, JR. The Company and David D. Jones, Jr. have entered into an employment agreement, dated as of March 10, 1998 and effective as of September 25, 1997 (the "Jones Employment Agreement"). Pursuant to the Jones Employment Agreement, Mr. Jones will serve as President and Chief Executive Officer of the Company and as a member of the Board of Directors of the Company. The term of Mr. Jones's employment under the Jones Employment Agreement expires on September 30, 2000, or, if OMC changes its fiscal year to a calendar year, on December 31, 2000 (in either case, the "Jones Initial Term"), which term shall automatically renew for an additional two years on the initial expiration date and each expiration date thereafter until the end of the fiscal year during which Mr. Jones attains age 65, unless Mr. Jones's employment is otherwise terminated pursuant to the terms of the Jones Employment Agreement. In exchange for his services, Mr. Jones will receive (1) a base salary of $500,000 per annum for the first six months of his employment and $600,000 per annum for the remainder of the term of Mr. Jones's employment subject to increases at the discretion of the Board of Directors, (2) an annual bonus of up to 200% of base salary contingent on OMC achieving certain financial performance goals, of which, during the Jones Initial Term, one-fourth shall be paid in cash and three-fourths shall be paid in common stock of OMC using a value of $18.00 per share, or at Mr. Jones' election, the three-fourths, or any portion thereof, shall be paid in the form of a cash deferral (subject to reduction in the event the per share value of the common stock of OMC declines below $18.00) in which case Mr. Jones will receive a fully vested and immediately exercisable option, at a per share exercise price equal to $18.00 with respect to the total number of shares of the bonus stock, (3) an incentive option to purchase 61,105 shares of common stock of OMC at an exercise price of $18.00 per share, 5,555 shares of which vested upon grant, and with annual vesting of 5,555 shares each January 1st until fully exercisable, (4) a non-qualified option to purchase 238,895 shares of common stock of OMC at an exercise price of $18.00 per share with scheduled annual vesting each year over a three-year period, and 80 81 (5) (i) payment by OMC of $643,470 in cash, (ii) the issuance of a non-qualified stock option to purchase 107,245 shares of common stock of OMC at an exercise price of $18.00 per share, 90,578 shares of which vested upon grant, with the remaining 16,667 shares vesting on December 31, 1998, and (iii) a deferred compensation obligation of the Company to him in the amount of $1,930,410 reduced by the product of (A) any decrease in the per share value of the common stock of OMC below $18.00 per share and (B) 107,245, in consideration of the incentive compensation, unvested options and restricted stock forfeited by Mr. Jones solely as a result of his severance from Brunswick Corporation to accept employment with the Company. The Jones Employment Agreement provides that Mr. Jones will be entitled to participate in or receive benefits under any employee benefit plan, program or arrangement made available generally by OMC to its similarly situated executives and that Mr. Jones is entitled to participate in OMC's Supplemental Non-Qualified Retirement Plan for Elected Officers. If OMC terminates Mr. Jones's employment for cause or Mr. Jones voluntarily resigns from his employment with OMC other than for good reason, OMC will be obligated to pay Mr. Jones his base salary through the date of termination. If OMC terminates Mr. Jones's employment with OMC without cause or Mr. Jones terminates his employment with OMC for good reason, Mr. Jones will be entitled to receive (1) his base salary through the date of termination plus any accrued vacation, (2) his annual bonus, if any, for the fiscal year in which such termination occurred prorated for the number of full months Mr. Jones was employed during such fiscal year, (3) an amount equal to the greater of his base salary for one year or his base salary for the remainder of the term of the Jones Employment Agreement, (4) the benefit of continued participation in the OMC employee benefit plans, programs or arrangements in which Mr. Jones participated prior to his termination until the greater of one year or the end of the then remaining term of the Jones Employment Agreement, and (5) any remaining unvested stock options granted by OMC to Mr. Jones pursuant to the Jones Employment Agreement, which stock options shall automatically vest as of the date of termination and be exercisable for 90 days thereafter. If Mr. Jones's employment with OMC terminates as a result of his death, (1) OMC will be obligated to pay to Mr. Jones's estate his base salary to the date of his death plus any accrued vacation, and Mr. Jones's annual bonus, if any, for the fiscal year in which his death occurs prorated for the number of full months Mr. Jones was employed during such fiscal year, (2) in the event Mr. Jones dies during any twelve-month period during the term of his employment, any unvested stock options granted by OMC to Mr. Jones pursuant to the Jones Employment Agreement which would have become vested if Mr. Jones continued his employment during such twelve-month vesting period shall vest pro-rata for the number of full months Mr. Jones was employed during such twelve-month period in which his death occurs and be exercisable for 12 months after Mr. Jones's death, and (3) Mr. Jones's surviving spouse shall be entitled to participate in OMC's group medical and dental plans for the remainder of the term of the Jones Employment Agreement. If Mr. Jones's employment with OMC is terminated as a result of his total disability, (1) OMC will be obligated to pay Mr. Jones his base salary to the date on which total disability is deemed to have occurred plus any accrued vacation, and Mr. Jones's annual bonus, if any, for the fiscal year in which his total disability occurs prorated for the number of full months Mr. Jones was employed during such fiscal year, (2) in the event total disability occurs during any twelve-month period during the term of Mr. Jones's employment, any unvested stock options granted by OMC to Mr. Jones pursuant to the Jones Employment Agreement which would have become vested if Mr. Jones continued his employment during such twelve-month vesting period shall vest pro rata for the number of full months Mr. Jones was employed during such twelve-month period in which his total disability occurs and be exercisable for 12 months after Mr. Jones's total disability, and (3) Mr. Jones shall be permitted to participate in OMC's employee benefit plans, programs or arrangements in which he participated prior to he termination of his employment until the end of the then remaining term of the Jones Employment Agreement. Pursuant to the Jones Employment Agreement, OMC will have the right to repurchase all shares of common stock of OMC owned by Mr. Jones and vested stock options granted by OMC to Mr. Jones upon the termination of Mr. Jones's employment with OMC for any reason. Upon the termination by OMC of Mr. Jones's employment without cause, the termination by Mr. Jones of his employment for good reason, the voluntary termination by Mr. Jones of his employment at or after the expiration of the term of the Jones Employment Agreement, the voluntary termination by Mr. Jones of his employment at or after his attaining age 62, or the termination of Mr. Jones's employment as a result of his death or total disability, Mr. Jones or 81 82 his estate, as applicable, will have the right to require OMC purchase all shares of common stock of OMC owned by Mr. Jones and vested stock options granted by OMC to Mr. Jones. Mr. Jones is prohibited from disposing his shares of OMC common stock without the prior written consent of OMC. However, pursuant to the Jones Employment Agreement, Mr. Jones will have a tag-along right, subject to certain exceptions, with respect to certain dispositions of common stock of OMC by Greenmarine Holdings. Greenmarine Holdings will have certain take-along rights to require Mr. Jones to sell his shares of OMC common stock if Greenmarine Holdings proposes to sell not less than 50% of the OMC common stock owned by Greenmarine Holdings. Mr. Jones is subject to confidentiality, non-competition and non-solicitation provisions, which are enforceable during the term of the Jones Employment Agreement and for a one-year period commencing on the expiration or termination of Mr. Jones's employment with OMC. See also "Item 13 -- Certain Relationships and Related Transactions." ANDREW P. HINES. The Company and Andrew P. Hines have entered into an employment agreement, effective as of October 6, 1997 (the "Hines Employment Agreement"). Pursuant to the Hines Employment Agreement, Mr. Hines will serve as Executive Vice President and Chief Financial Officer of the Company and as a member of the Board of Directors of the Company. The term of Mr. Hines's employment under the Hines Employment Agreement expires on October 6, 2000, which term shall automatically renew for an additional year on the initial expiration date and each expiration date thereafter, unless Mr. Hines's employment is otherwise terminated pursuant to the terms of the Hines Employment Agreement. In exchange for his services, Mr. Hines will receive (1) a base salary of $325,000 per annum, which was increased to $375,000 per annum by the Board of Directors in June 1998 and may be increased at the discretion of the Board of Directors and (2) a non-qualified option to purchase 180,000 shares of common stock of OMC at an exercise price of $18.00 per share with annual vesting in equal proportions over a three-year period. Simultaneously with the execution of the Hines Employment Agreement, Mr. Hines purchased from OMC 14,444 shares of OMC common stock, of which 2,777 shares were issued in consideration of a $50,000 cash payment and 11,667 shares were issued in consideration of Mr. Hines issuing a promissory note in favor of OMC in the principal amount of $210,000. On April 6, 1998, Mr. Hines purchased an additional 5,556 shares of common stock issued in consideration of a $100,000 cash payment. The Hines Employment Agreement provides that Mr. Hines, in certain circumstances, will be entitled to participate in the short-term and long-term incentive and stock option or other equity or quasi-equity participation plans, programs or arrangements in which similarly situated executives are entitled to participate. Mr. Hines will also be entitled to receive benefits under any employee benefit plan, program or arrangement made available generally by OMC to its similarly situated executives. If OMC terminates Mr. Hines's employment for cause or Mr. Hines voluntarily resigns from his employment with OMC other than for good reason, OMC will be obligated to pay Mr. Hines's base salary through the date of termination. If OMC terminates Mr. Hines's employment with OMC without cause or Mr. Hines terminates his employment with OMC for good reason, Mr. Hines will be entitled to receive (1) his base salary through the date of termination plus any accrued vacation, (2) an amount equal to the greater of his base salary for one year or his base salary for the remainder of the term of the Hines Employment Agreement, (3) the benefit of continued participation in OMC's employee benefit plans, programs or arrangements in which Mr. Hines participated prior to his termination until the greater of one year or the end of the then remaining term of the Hines Employment Agreement, and (4) any remaining unvested stock options granted by OMC to Mr. Hines, which stock options shall automatically vest as of the date of termination and be exercisable for 90 days thereafter. If Mr. Hines's employment with OMC terminates as a result of his death, (1) OMC will be obligated to pay to Mr. Hines's estate Mr. Hines's base salary to the date of his death plus any accrued vacation, and any bonus for the fiscal year in which his death occurs prorated for the number of full months Mr. Hines was employed during such fiscal year, and (2) Mr. Hines's estate will have one year from the date of Mr. Hines's death to exercise all vested and unexercised stock options granted by OMC to Mr. Hines. If Mr. Hines's employment with OMC is 82 83 terminated as a result of his total disability, (1) OMC will be obligated to pay Mr. Hines his base salary to the date on which total disability is deemed to have occurred plus any accrued vacation, and any bonus for the fiscal year in which his total disability occurs prorated for the number of full months Mr. Hines was employed during such fiscal year, (2) any stock options granted by OMC to Mr. Hines that have vested as of the date of such total disability shall be exercisable for 90 days after the date of such termination, and (3) Mr. Hines shall be permitted to participate in OMC's employee benefit plans, programs or arrangements in which he participated prior to he termination of his employment until the end of the then remaining term of the Hines Employment Agreement. Pursuant to the Hines Employment Agreement, OMC will have the right to repurchase all shares of common stock of OMC owned by Mr. Hines and vested stock options granted by OMC to Mr. Hines upon the termination of Mr. Hines's employment with OMC for any reason. Upon the termination by OMC of Mr. Hines' employment without cause, the termination by Mr. Hines of his employment for good reason, the voluntary termination by Mr. Hines of his employment at or after the expiration of the term of the Hines Employment Agreement, the voluntary termination by Mr. Hines of his employment at or after his attaining age 62, or the termination of Mr. Hines's employment as a result of his death or total disability, Mr. Hines or his estate, as applicable, will have the right to require OMC purchase all shares of common stock of OMC owned by Mr. Hines and stock options granted by OMC to Mr. Hines. Mr. Hines is prohibited from disposing his shares of OMC common stock without the prior written consent of OMC. However, pursuant to the Hines Employment Agreement, Mr. Hines will have a tag-along right, subject to certain exceptions, with respect to certain dispositions of common stock of OMC by Greenmarine Holdings. Greenmarine Holdings will have certain take-along rights to require Mr. Hines to sell his shares of OMC common stock if Greenmarine Holdings proposes to sell not less than 50% of the OMC common stock owned by Greenmarine Holdings. Mr. Hines is subject to confidentiality, non-competition and non-solicitation provisions, which are enforceable during the term of the Hines Employment Agreement and for a one-year period commencing on the expiration or termination of Mr. Hines's employment with OMC. See also "Item 13 -- Certain Relationships and Related Transactions." ROBERT B. GOWENS, JR. The Company and Robert B. Gowens, Jr. have entered into an Employment Agreement effective as of October 1, 1998 (the "Gowens Employment Agreement"). Pursuant to the Gowens Employment Agreement, Mr. Gowens will serve as Vice President of the Company and President, North American Engine Operations. The term of the Gowens Employment Agreement commenced on October 1, 1998 and shall continue through the earlier of its third anniversary or Mr. Gowens' death or total disability or as otherwise terminated pursuant to the terms of the Gowens Employment Agreement. In exchange for his services, Mr. Gowens will receive (1) a base salary of $300,000 per annum and (2) a non-qualified option to purchase 100,000 shares of common stock of OMC at an exercise price of $22.00 per share with annual vesting in equal proportions over a three year period. The Gowens Employment Agreement provides that Mr. Gowens shall be eligible to participate in the Company's bonus and incentive compensation programs applicable, generally, to similarly situated senior executive officers. The Gowens Employment Agreement also provides for a loan from the Company in order to assist Mr. Gowens in purchasing a new, permanent residence in the Chicago, Illinois geographic vicinity. Mr. Gowens will also be entitled to receive benefits under any employee benefit plan, program or arrangement made available, generally, by OMC to similarly situated executive officers. If OMC terminates Mr. Gowens' employment without cause or Mr. Gowens voluntarily resigns his employment with good reason, Mr. Gowens will be entitled to receive (1) his accrued and unpaid base salary and vacation as of the date of his termination of employment; (2) a lump sum payment in the amount equal to the greater of (a) Mr. Gowens' base salary for one year and (b) his base salary for the remainder of the term of the Gowens Employment Agreement; and (3) OMC shall pay to Mr. Gowens, within sixty (60) days of the end of the fiscal year, his bonus for the fiscal year in which such termination occurred, based upon the Company's level of actual attainment of his bonus target for such fiscal year, prorated for the number of full months Mr. Gowens was employed during that fiscal year. In addition, OMC shall, at its expense, continue for one year Mr. Gowens' participation on the same basis as active employees in the Company's group, medical 83 84 and life insurance plans in which he participated prior to the termination of his employment. Any unvested stock options granted to Mr. Gowens shall automatically vest as the date of termination and shall be exercisable, along with other vested options, in accordance with the terms of the plan. If OMC terminates Mr. Gowens' employment for cause or Mr. Gowens voluntarily resigned without good reason, Mr. Gowens shall be entitled his accrued and unpaid base salary through such date of termination. In the event of Mr. Gowens' death, OMC shall pay to his estate his base salary and vacation owed through the date of death and any bonus for the fiscal year in which his death occurs, prorated for the number of full months Mr. Gowens was employed during such fiscal year and any restricted stock grant shall become fully vested. In the event that the Gowens Employment Agreement terminates as a result of Mr. Gowens' total disability, OMC shall pay to Mr. Gowens his base salary through the date in which he is determined to have become totally disabled and any bonus for the fiscal year in which his total disability occurs, prorated for the number of full months he was employed during such fiscal year, provided, however, that OMC shall only be required to pay such amounts to Mr. Gowens that are not covered by long term disability payments, if any, to Mr. Gowens pursuant to any long term disability policy or plan of the Company. Pursuant to the Gowens Employment Agreement, OMC will have the right to repurchase, at fair market value, all shares of common stock of OMC owned by Mr. Gowens, and vested stock options granted by OMC to Mr. Gowens upon the termination of Mr. Gowens' employment with OMC for any reason. Upon the termination by OMC of Mr. Gowens' employment without cause, for good reason, a voluntary termination by Mr. Gowens, a voluntary termination by Mr. Gowens at or after attaining his age 62 or as a result of total disability or death, Mr. Gowens or his estate, as applicable, will have the right to require OMC to purchase all shares of common stock of OMC owned by Mr. Gowens and stock options granted by OMC to Mr. Gowens. Mr. Gowens is subject to a confidentiality provision which is enforceable during the term of the Gowens Employment Agreement and thereafter and a non-competition provision which is enforceable during the term of the Gowens Employment Agreement and for a period of one year commencing on the expiration or termination of Mr. Gowens' employment with OMC. See also "Item 13 -- Certain Relationships and Related Transactions." CERTAIN SEVERANCE ARRANGEMENTS. Company has severance agreements with George L. Broughton, Raymond M. Cartade, John D. Flaig, Grainger B. McFarlane, James P. Murphy, Robert S. Romano, Peter J. VanLancker and Robert F. Young. Each of these agreements was entered into prior to the Greenmarine Acquisition, and the Company's potential severance obligations thereunder became effective upon the change in control of the Company resulting from the Greenmarine Acquisition. The agreements provide that if such employee elects to resign his employment for specified reasons, or is terminated by the Company other than for cause, the Company will pay such employee an amount in cash equal to not more than one times (except for Mr. Flaig who will be paid two times) (1) salary plus (2) the amount of the highest annual incentive compensation received by such employee in the five fiscal years preceding the fiscal year of the change in control (or, for certain employees, the two fiscal years immediately following the fiscal year of the change in control, if greater). Additionally, for certain employees for a period of 12 months following the termination date (the "Continuation Period"), the Company will arrange to provide the employee with benefits substantially similar to those the employee was receiving or entitled to receive immediately prior to the termination date. Further, the Company will pay to certain employees a lump sum cash payment in an amount equal to the actuarial equivalent of the excess of (1) the retirement, pension, medical, life and other benefits that will be payable to the employee under the Company's retirement plans if the employee continued to be employed through the Continuation Period given the employee's base salary over (2) the retirement, pension, medical, life and other benefits that employee is entitled to receive under the Company's retirement plans. As a result of the Greenmarine Acquisition, the severance agreements have, or will be, paid in accordance with their terms for those employees who have satisfied the conditions discussed above. The terms of these severance agreements will remain in force until September 12, 2000, or as otherwise may be negotiated by the employee and the Company. 84 85 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Messrs. Kingsley, Duberstein, Katz and Hiram served on the Compensation Committee of the Company's Board of Directors during calendar year 1998. Mr. Kingsley served as the Company's Chairman of the Board during calendar year 1998. Messrs. Duberstein and Katz served as Vice Chairmen of the Board in calendar year 1998. Mr. Hiram did not serve as an officer or employee of the Company or any of its subsidiaries during calendar year 1998. Messrs. Kingsley and Duberstein control Greenlake Holdings LLC, which has approximately a 30.5% interest in Greenmarine Holdings, the Company's sole shareholder. Mr. Hiram is a Managing Director of Soros Fund Management LLC, which serves as the principal investment adviser to the indirect parent entities of Quasar Strategic Partners LDC and Quantum Industrial Partners LDC, each of which are the owners of approximately 34.75% of Greenmarine Holdings. Mr. Katz is also affiliated with Quantum Industrial Partners LDC and Quasar Strategic Partners LDC. In fiscal year 1998, Greenmarine Holdings was controlled by a Management Committee comprised by Messrs. Kingsley, Duberstein and Katz. See "Item 12 -- Security Ownership". 85 86 ITEM 12. SECURITY OWNERSHIP The following table sets forth information with respect to the beneficial ownership of common stock of the Company as of March 1, 1999 by (i) any person or group who beneficially owns more than 5% of the outstanding common stock of OMC and (ii) each director and executive officer of OMC and all directors and executive officers of OMC as a group. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock of OMC subject to options currently exercisable, or exercisable within 60 days of the date of this Prospectus, are deemed outstanding for computing the percentage of the person holding such options but are not deemed outstanding for computing the percentage of any other person. Except as otherwise indicated, beneficial ownership in the following tables includes sole voting and dispositive power.
SHARES BENEFICIALLY PERCENT NAME AND ADDRESS OWNED OF CLASS - ---------------- ------------ -------- Greenmarine Holdings LLC(1)................................. 20,400,000 99.9% 277 Park Avenue, 27th Floor New York, New York 10172 Alfred D. Kingsley(2)....................................... 20,400,000 99.9% 277 Park Avenue, 27th Floor New York, New York 10172 Gary K. Duberstein(2)....................................... 20,400,000 99.9% 277 Park Avenue, 27th Floor New York, New York 10172 Richard Katz(3)............................................. 20,400,000 99.9% Villa La Sirena Vico dell'Olivetta 12 18039 Martola Inferiore Ventimiglia, Italy Ron Hiram(4)................................................ -- -- 888 Seventh Avenue, 33rd Floor New York, New York 10106 Frank V. Sica(5)............................................ -- -- 888 Seventh Avenue, 33rd Floor New York, New York 10106 David D. Jones, Jr.(6)...................................... 212,800 * c/o Outboard Marine Corporation 100 Sea Horse Drive Waukegan, Illinois 60085 Andrew P. Hines(7).......................................... 80,000 * c/o Outboard Marine Corporation 100 Sea Horse Drive Waukegan, Illinois 60085 Directors and Executive Officers as a group (12 20,692,800 100.0% persons)(8)...............................................
- --------------- * Less than 1%. (1) The members of Greenmarine Holdings are Greenlake Holdings LLC, a Delaware limited liability company ("Greenlake"), Quasar Strategic Partners LDC, a Cayman Islands limited duration company ("QSP"), and Quantum Industrial Partners LDC, a Cayman Islands limited duration company ("QIP"). Greenlake, QSP and QIP have approximately a 30.5%, 34.75% and 34.75% interest in Greenmarine Holdings, respectively. Greenlake is controlled by Mr. Alfred D. Kingsley and Mr. Gary K. Duberstein. QSP is an indirect subsidiary of Quasar International Fund N.V., a Netherlands Antilles limited liability company ("Quasar"). QIP is the principal operating subsidiary of Quantum Industrial Holdings Ltd., a British Virgin Islands corporation ("QIH"). The principal business of QIP and QSP is investing in securities. Quasar and QIH are investment funds which have as their principal investment advisors Soros Fund Management LLC ("SFM LLC"). Mr. George Soros is the Chairman of SFM LLC. Mr. Stanley Druckenmiller is the Lead Portfolio Manager and a Member of the Management Committee of SFM LLC. QIH Management Investor, L.P. ("QIHMI"), an investment advisory firm, is a minority shareholder of QIP and QSP. Pursuant to constituent documents of QIP and QSP, QIHMI is vested with investment discretion with respect to the portfolio assets held for the accounts of each of QIP and QSP. The principal business of QIHMI is to provide management and advisory services to, and to invest in, QIP and QSP. Mr. Soros is the sole shareholder of QIH Management, Inc. ("QIH Management"), which is the sole general partner of QIHMI. The principal business of QIH Management is to serve as the sole general partner of QIHMI. Mr. Soros has entered into an 86 87 agreement pursuant to which he has agreed to use his best efforts to cause QIH Management, as the general partner of QIHMI, to act at the discretion of SFM LLC. The address of each of Mr. George Soros and Mr. Stanley Druckenmiller is 888 Seventh Avenue, 33rd Floor, New York, New York 10106. Greenmarine Holdings is controlled by a Management Committee comprised of up to a total of four Managers. Pursuant to the Operating Agreement of Greenmarine Holdings, Greenlake has the right to appoint two designees to Greenmarine Holdings's Management Committee and the holders of a majority of Greenmarine Holdings' interest held by QSP and QIP have the right to appoint two members of Greenmarine Holdings' Management Committee. Greenmarine Holdings' Management Committee is currently comprised of Messrs. Alfred D. Kingsley, Gary K. Duberstein and Richard Katz. From and after September 12, 1998, the holders of a majority of Greenmarine Holdings' interests held by QSP and QIP may elect to increase the size of Greenmarine Holdings' Management Committee to five members, three of whom will be designated by the holders a majority of Greenmarine Holdings' interests held by QSP and QIP and two of whom will be designated by Greenlake. The vote of three of the members of Greenmarine Holdings's Management Committee is required for action by the Management Committee. (2) Each of Alfred D. Kingsley and Gary K. Duberstein is a director of the Company. In addition, each of Messrs. Kingsley and Duberstein are members of Greenmarine Holdings's Management Committee and they control Greenlake. All of the shares indicated as owned by each of Messrs. Kingsley and Duberstein are owned directly by Greenmarine Holdings and are included because of their affiliation with Greenmarine Holdings. As such, Messrs. Kingsley and Duberstein may be deemed to have beneficial ownership of these shares within the meaning of Rule 13d-3 under the Exchange Act. (3) Richard Katz is a director of the Company. In addition, Mr. Katz is a member of Greenmarine Holdings's Management Committee. All of the shares indicated as owned by Mr. Katz are owned directly by Greenmarine Holdings and are included because of his affiliation with Greenmarine Holdings. The reference to such shares shall not be deemed admission that Mr. Katz may be deemed to have beneficial ownership of these shares within the meaning of Rule 13d-3 under the Exchange Act. (4) Ron Hiram is a director of the Company. Mr. Hiram is a Managing Director of Soros Fund Management LLC. Soros Fund Management LLC is the principal investment advisor to Quasar and QIH. See footnote 1 above and "Item 10 -- Directors and Executive Officers of the Registrant." (5) Frank V. Sica is a director of the Company. Mr. Sica is a Managing Director of Soros Fund Management LLC. Soros Fund Management LLC is the principal investment advisor to Quasar and QIH. See footnote 1 above and "Item 10 -- Directors and Executive Officers of the Registrant." (6) Represents 212,800 shares of OMC common stock issuable upon exercise of options granted to Mr. Jones pursuant to the Jones Employment Agreement, which options are currently exercisable. Does not include 194,445 shares of OMC common stock issuable upon exercise of options granted to Mr. Jones pursuant to the Jones Employment Agreement, which options will not become exercisable within 60 days of the date of this Form 10-K. See "Item 10 -- Directors and Executive and Registrant -- Employment Contracts and Severance Agreements." (7) Of the 80,000 shares indicated as owned by Mr. Hines, 8,333 were purchased in consideration of $150,000 in cash payments and 11,667 were purchased in consideration of Mr. Hines issuing a promissory note in favor of the Company in the principal amount of $210,000. Mr. Hines has pledged 20,000 shares to the Company to secure his obligations under such promissory note. Does not include 120,000 shares of OMC common stock issuable upon exercise of options granted to Mr. Hines pursuant to the Hines Employment Agreement, which options will not become exercisable within 60 days of the date of this Form 10-K. See "Employment Contracts and Severance Agreements." (8) Includes 20,400,000 shares indicated as owned by Messrs. Kingsley, Duberstein and Katz as a result of their affiliation with Greenmarine Holdings. 87 88 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company is party to an employment agreement with each of David D. Jones, Jr., Andrew P. Hines, and Robert B. Gowens, Jr. and to severance agreements with certain other personnel. See "Item 10 -- Directors and Executives Officers of the Registrant -- Employment Contracts and Severance Agreements." OMC has agreed to reimburse Mr. Jones for his reasonable moving expenses incurred in connection with his relocation to the vicinity of Chicago, Illinois. Through December 31, 1998, such expenses have been approximately $89,000. In addition, on August 14, 1998, OMC loaned to Mr. Jones the amount of $280,322 for the purchase of property in Lake Forest, Illinois for the construction of a new residence. During the term of Mr. Jones' employment with OMC, OMC will pay to Mr. Jones an amount equal to the interest payable on any such loan, which is being charged a rate of 6.5% per annum. This loan is evidenced by a promissory note and secured by a second mortgage in favor of OMC. OMC has agreed to bear the "first-loss" position in the event that Mr. Jones' new residence is sold for an amount less than its original cost, plus improvements. In the event Mr. Jones' employment with OMC is terminated for any reason and such new residence has not been sold, within 120 days after such termination, Mr. Jones will be obligated to repay such loan or repurchase such equity investment, as the case may be, at an appraised value to be determined by an independent appraiser. OMC has also agreed to reimburse Mr. Jones for any loss he incurs on the sale of his current residence. To enable Mr. Jones to exercise at any time during his employment with OMC all or any portion of the non-qualified option to purchase 238,895 shares of OMC common stock granted by OMC to Mr. Jones pursuant to the Jones Employment Agreement, OMC has agreed to loan to Mr. Jones an amount equal to the aggregate exercise price of the portion of such option being exercised. Any such loan shall be due and payable in full within 30 days following Mr. Jones' termination of employment for any reason. In addition, pursuant to the Jones Employment Agreement, OMC has purchased for the benefit of Mr. Jones and his heirs a term life insurance policy with a death benefit of $1,500,000. OMC has agreed to reimburse Mr. Hines until the date he permanently relocates to the Chicago, Illinois vicinity, Mr. Hines' rental fees for a temporary residence in the Chicago, Illinois area, including all utilities, and for round trip coach airfares between New Jersey and Chicago for reasonable travel between such locations by Mr. Hines. Through December 31, 1998, such expenses have been approximately $62,400. On December 18, 1998 the Company purchased Mr. Hines' home located in New Jersey for the amount of $860,000. The Company issued to Mr. Hines a demand promissory note in the amount of $860,000, secured by a mortgage, bearing interest at a rate of 6.5%. Concurrently with the transfer of the property, Mr. Hines entered into a lease of the home from the Company through March 31, 1999. OMC shall have the right to sell such residence and shall assume all mortgage payment obligations for such residence. OMC will be entitled to any profits and will suffer any losses that result from the actual sale price of Mr. Hines' New Jersey residence. Pursuant to the Hines Employment Agreement, the Company loaned to Mr. Hines the amount of $210,000 for the sole purpose of purchasing 11,666.66 shares of common stock of the Company. The loan is evidenced by a promissory note bearing interest at a rate of 5.81% per annum and secured by a pledge and security agreement with the shares of OMC common stock issued to Mr. Hines as collateral. On December 8, 1998, the Company loaned to Mr. Gowens the amount of $100,000 for the purchase of his principal residence located in the Chicago vicinity, secured by a second mortgage. The promissory note bears interest at a rate of 6.5% per annum with payments of interest only. The note is payable if (1) Mr. Gowens leaves the employment of OMC before October 1, 2001 without good reason or as a result of termination for cause as defined in the Gowens Employment Agreement; (2) Mr. Gowens is required by OMC to relocate his residence any time prior to October 1, 2001 or (3) Mr. Gowens dies before October 1, 2001, all subject to extension as agreed to between Mr. Gowens and OMC. In the event that Mr. Gowens is required by OMC to relocate his residence prior to October 1, 2001, OMC shall bear the loss, if any, on the note if the gross sale price of the mortgaged property or the fair market value of the mortgaged property, whichever is greater, is greater than the purchase price of the mortgaged property, plus documented improvements. In fiscal 1998, OMC loaned Paul R. Rabe $83,500 to assist him in the purchase of a new permanent residence. The loan was interest free. Mr. Rabe repaid the loan in full upon the termination of his employment with the Company on October 1, 1998. 88 89 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this Transition Report on Form 10-K: 1. Report of Independent Public Accountants 2. Financial statement schedules required to be filed by Item 8 of this Transition Report on Form 10-K: All schedules are omitted as the information is not required, is inapplicable or is included in the Consolidated Financial Statements or Notes thereto. Individual financial statements for the Company's subsidiaries and partnerships have been omitted because consolidated statements have been prepared for all of the Company's wholly-owned subsidiaries and limited partnerships. 3. An exhibit index is set forth below:
EXHIBIT NUMBER DESCRIPTION -------------- ----------- 3.1(a) -- Restated Certificate of Incorporation of the Company (filed as Exhibit 3(a) to the Company's Annual Report on Form 10-K/A for the year ended September 30, 1997 (the "1997 10-K"))* 3.2(a) -- Amended and Restated by-laws of the Company (filed as Exhibit 3(B) to the 1997 10-K)* (a)(1) -- Amended and Restated by-laws of the Company (adopted July 23, 1998) (filed as Exhibit 3.2(a)(1) to the Company's Registration Statement on Form S-4 (Registration No. 333-57949) (the "Form S-4"))* 4.1 -- Indenture for the 10 3/4% Senior Notes due 2008, Series A (the "Old Notes") and 10 3/4% Senior Notes due 2008, Series B (the "Exchange Notes"), dated as of May 27, 1998 among the Company, the Subsidiary Guarantors and State Street Bank and Trust Company, as trustee (filed as Exhibit 4.1 to the Form S-4)* 4.2 -- Form of Old Note (included in Exhibit 4.1) (filed as Exhibit 4.1 to the Form S-4)* 4.3 -- Form of Exchange Note (filed as Exhibit 4.2 to the Form S-4)* 4.4 -- Form of Subsidiary Guarantee of the Old Notes and the Exchange Notes (included in Exhibit 4.1) (filed as Exhibit 4.1 to the Form S-4)* 4.5 -- Registration Rights Agreement dated as of May 27, 1998 among the Company, the Subsidiary Guarantors and Donaldson, Lufkin & Jenrette Securities Corporation and Bear, Stearns & Co., Inc. (filed as Exhibit 4.5 to the Form S-4)* 4.6 -- Depositary Agreement dated as of May 27, 1998 among the Company, State Street Bank and Trust Company, as trustee, NationsBank, N.A., as administrator agent, and State Street Bank And Trust Company, as depositary agent (filed as Exhibit 4.6 to the Form S-4)* 4.7 -- With respect to rights of holders of the Company's 9 1/8% Sinking Fund Debentures due 2017, reference is made to Exhibit 4(A) to the Company's Registration Statement Number 33-12759 filed on March 20, 1987* 4.8 -- With respect to rights of holders of the Company's 7% Convertible Subordinated Debentures due 2002, reference is made to the Company's Registration Statement Number 33-47354 filed on April 28, 1992* 4.9 -- With respect to the Supplemental Indenture dated September 30, 1997 related to the Company's 7% Convertible Subordinated Debentures due 2002, reference is made to Exhibit 4(c) to the 1997 10-K* 10.1 -- With respect to Severance Agreement between the Company and certain elected and appointed officers and certain other executives of the Company, reference is made to Exhibit 99.3 and 99.4 of the Company's Schedule 14D-9 filed with the Securities and Exchange Commission on July 15, 1997*
90
EXHIBIT NUMBER DESCRIPTION -------------- ----------- 10.2 -- With respect to the Consulting Agreement for Mr. Bowman dated September 24, 1997, reference is made to Exhibit 10(I) to the 1997 10-K* 10.3 -- With respect to the Employment Agreement of Mr. Hines dated October 6, 1997, reference is made to Exhibit 10(J) to the 1997 10-K* 10.4 -- With respect to the Amended and Restated Loan and Security Agreement between the Company and NationsBank of Texas, N.A. dated January 6, 1998, reference is made to Exhibit 10(E) to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 1997* 10.5 -- First Amendment to Amended and Restated Loan and Security Agreement between the Company and NationsBank of Texas, N.A. dated May 21, 1998 (filed as Exhibit 10.5 to the Form S-4)* 10.6 -- With respect to the Employment Agreement of Mr. Jones dated March 10, 1998, reference is made to Exhibit 10(F) to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998* 10.7 -- With respect to the Personal Rewards and Opportunity Program, reference is made to Exhibit 10(G) to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998* 10.8 -- Employment Agreement of Robert Gowens dated October 1, 1998 (filed as Exhibit 10.8 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998 (the "1998 10-K"))* 10.9 -- Second Amendment to Amended and Restated Loan and Security Agreement between the Company and NationsBank of Texas, N.A. dated effective as of August 31, 1998 (filed as Exhibit 10.9 to the 1998 10-K)* 10.10 -- Third Amendment to Amended and Restated Loan and Security Agreement between the Company and NationsBank of Texas, N.A. dated effective as of December 21, 1998 (filed as Exhibit 10.10 to the 1998 10-K)* 10.11 -- Fourth Amendment to Amended and Restated Loan and Security Agreement between the Company and NationsBank of Texas, N.A. dated effective as of February 1, 1999 10.12 -- Fifth Amendment to Amended and Restated Loan and Security Agreement between the Company and NationsBank of Texas, N.A. dated effective as of February 25, 1999 10.13 -- Lease Agreement dated December 18, 1998 from the Company, as landlord, to Andrew Hines, as tenant 10.14 -- Mortgage Note dated December 18, 1998 between the Company, as Borrower, and Andrew Hines, as Lender 10.15 -- Mortgage dated December 18, 1998 between the Company, as Borrower, and Andrew Hines, as Lender 10.16 -- Promissory Note dated December 4, 1998 with Robert Gowens, Jr. and Donna Gowens, as Maker, and the Company, as Payee 10.17 -- Second Mortgage dated December 4, 1998 with Robert Gowens, Jr. and Donna Gowens, as Mortgagor, and the Company, as Mortgagee 10.18 -- Nonqualified Stock Option Agreement dated October 1, 1998 between the Company and Robert B. Gowens 10.19 -- Secured Promissory Note dated October 6, 1998 with Andrew Hines, as Maker, and the Company, as Maker 10.20 -- Pledge and Security Agreement dated October 6, 1997 between Andrew Hines, as Debtor, and the Company, as the Secured Party 10.21 -- Nonqualified Stock Option Grant Agreement dated October 6, 1997 between the Company and Andrew Hines 10.22 -- Incentive Stock Option Grant Agreement dated December 30, 1997 between the Company and David Jones 10.23 -- Nonqualified Stock Option Grant Agreement dated March 10, 1998 between the Company and David Jones
91
EXHIBIT NUMBER DESCRIPTION -------------- ----------- 10.24 -- Nonqualified Stock Option Grant Agreement dated March 10, 1998 between the Company and David Jones 11 -- Computation of per share earnings (loss) 12 -- Statement of Computation of Ratios of Earnings (Loss) to Fixed Charges 21 -- Subsidiaries of Registrant (filed as Exhibit 21 to the 1997 10-K)* 27 -- Financial Data Schedule
- --------------- * Incorporated herein by reference. (b) During the fourth quarter of the year ended September 30, 1998, the Company filed one report on Form 8-K on July 31, 1998 announcing, effective January 1, 1999, the change of its fiscal year to a calendar year. No reports on Form 8-K were filed during the transition period from October 1, 1998 to December 31, 1998. (c) Exhibits are attached hereto. (d) None. 92 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OUTBOARD MARINE CORPORATION /s/ DAVID D. JONES, JR. By: -------------------------------------- David D. Jones, Jr. President, Chief Executive Officer and Director Date: March 2, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the registrant and in the capacities and on the dates indicated.
DATE ---- /s/ ALFRED D. KINGSLEY March 2, 1999 - --------------------------------------------- Alfred D. Kingsley Chairman of the Board /s/ GARY K. DUBERSTEIN March 2, 1999 - --------------------------------------------- Gary K. Duberstein Vice Chairman and Assistant Secretary of the Board /s/ RICHARD KATZ March 2, 1999 - --------------------------------------------- Richard Katz Vice Chairman of the Board /s/ RON HIRAM March 2, 1999 - --------------------------------------------- Ron Hiram Director /s/ FRANK V. SICA March 2, 1999 - --------------------------------------------- Frank V. Sica Director /s/ DAVID D. JONES, JR. March 2, 1999 - --------------------------------------------- David D. Jones, Jr. President, Chief Executive Officer and Director /s/ ANDREW P. HINES March 2, 1999 - --------------------------------------------- Andrew P. Hines Executive Vice President and Chief Financial Officer, Director (Principal Financial Officer) /s/ JOSEPH P. TOMCZAK March 2, 1999 - --------------------------------------------- Joseph P. Tomczak Vice President and Controller (Principal Accounting Officer)
93 OUTBOARD MARINE CORPORATION EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION -------------- ----------- 3.1(a) -- Restated Certificate of Incorporation of the Company (filed as Exhibit 3(a) to the Company's Annual Report on Form 10-K/A for the year ended September 30, 1997 (the "1997 10-K"))* 3.2(a) -- Amended and Restated by-laws of the Company (filed as Exhibit 3(B) to the 1997 10-K)* (a)(1) -- Amended and Restated by-laws of the Company (adopted July 23, 1998) (filed as Exhibit 3.2(a)(1) to the Company's Registration Statement on Form S-4 (Registration No. 333-57949) (the "Form S-4"))* 4.1 -- Indenture for the 10 3/4% Senior Notes due 2008, Series A (the "Old Notes") and 10 3/4% Senior Notes due 2008, Series B (the "Exchange Notes"), dated as of May 27, 1998 among the Company, the Subsidiary Guarantors and State Street Bank and Trust Company, as trustee (filed as Exhibit 4.1 to the Form S-4)* 4.2 -- Form of Old Note (included in Exhibit 4.1) (filed as Exhibit 4.1 to the Form S-4)* 4.3 -- Form of Exchange Note (filed as Exhibit 4.2 to the Form S-4)* 4.4 -- Form of Subsidiary Guarantee of the Old Notes and the Exchange Notes (included in Exhibit 4.1) (filed as Exhibit 4.1 to the Form S-4)* 4.5 -- Registration Rights Agreement dated as of May 27, 1998 among the Company, the Subsidiary Guarantors and Donaldson, Lufkin & Jenrette Securities Corporation and Bear, Stearns & Co., Inc. (filed as Exhibit 4.5 to the Form S-4)* 4.6 -- Depositary Agreement dated as of May 27, 1998 among the Company, State Street Bank and Trust Company, as trustee, NationsBank, N.A., as administrator agent, and State Street Bank And Trust Company, as depositary agent (filed as Exhibit 4.6 to the Form S-4)* 4.7 -- With respect to rights of holders of the Company's 9 1/8% Sinking Fund Debentures due 2017, reference is made to Exhibit 4(A) to the Company's Registration Statement Number 33-12759 filed on March 20, 1987* 4.8 -- With respect to rights of holders of the Company's 7% Convertible Subordinated Debentures due 2002, reference is made to the Company's Registration Statement Number 33-47354 filed on April 28, 1992* 4.9 -- With respect to the Supplemental Indenture dated September 30, 1997 related to the Company's 7% Convertible Subordinated Debentures due 2002, reference is made to Exhibit 4(c) to the 1997 10-K* 10.1 -- With respect to Severance Agreement between the Company and certain elected and appointed officers and certain other executives of the Company, reference is made to Exhibit 99.3 and 99.4 of the Company's Schedule 14D-9 filed with the Securities and Exchange Commission on July 15, 1997* 10.2 -- With respect to the Consulting Agreement for Mr. Bowman dated September 24, 1997, reference is made to Exhibit 10(I) to the 1997 10-K* 10.3 -- With respect to the Employment Agreement of Mr. Hines dated October 6, 1997, reference is made to Exhibit 10(J) to the 1997 10-K* 10.4 -- With respect to the Amended and Restated Loan and Security Agreement between the Company and NationsBank of Texas, N.A. dated January 6, 1998, reference is made to Exhibit 10(E) to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 1997* 10.5 -- First Amendment to Amended and Restated Loan and Security Agreement between the Company and NationsBank of Texas, N.A. dated May 21, 1998 (filed as Exhibit 10.5 to the Form S-4)*
94
EXHIBIT NUMBER DESCRIPTION -------------- ----------- 10.6 -- With respect to the Employment Agreement of Mr. Jones dated March 10, 1998, reference is made to Exhibit 10(F) to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998* 10.7 -- With respect to the Personal Rewards and Opportunity Program, reference is made to Exhibit 10(G) to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998* 10.8 -- Employment Agreement of Robert Gowens dated October 1, 1998 (filed as Exhibit 10.8 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998 (the "1998 10-K"))* 10.9 -- Second Amendment to Amended and Restated Loan and Security Agreement between the Company and NationsBank of Texas, N.A. dated effective as of August 31, 1998 (filed as Exhibit 10.9 to the 1998 10-K)* 10.10 -- Third Amendment to Amended and Restated Loan and Security Agreement between the Company and NationsBank of Texas, N.A. dated effective as of December 21, 1998 (filed as Exhibit 10.10 to the 1998 10-K)* 10.11 -- Fourth Amendment to Amended and Restated Loan and Security Agreement between the Company and NationsBank of Texas, N.A. dated effective as of February 1, 1999 10.12 -- Fifth Amendment to Amended and Restated Loan and Security Agreement between the Company and NationsBank of Texas, N.A. dated effective as of February 25, 1999 10.13 -- Lease Agreement dated December 18, 1998 from the Company, as landlord, to Andrew Hines, as tenant 10.14 -- Mortgage Note dated December 18, 1998 between the Company, as Borrower, and Andrew Hines, as Lender 10.15 -- Mortgage dated December 18, 1998 between the Company, as Borrower, and Andrew Hines, as Lender 10.16 -- Promissory Note dated December 4, 1998 with Robert Gowens, Jr. and Donna Gowens, as Maker, and the Company, as Payee 10.17 -- Second Mortgage dated December 4, 1998 with Robert Gowens, Jr. and Donna Gowens, as Mortgagor, and the Company, as Mortgagee 10.18 -- Nonqualified Stock Option Agreement dated October 1, 1998 between the Company and Robert B. Gowens 10.19 -- Secured Promissory Note dated October 6, 1998 with Andrew Hines, as Maker, and the Company, as Maker 10.20 -- Pledge and Security Agreement dated October 6, 1997 between Andrew Hines, as Debtor, and the Company, as the Secured Party 10.21 -- Nonqualified Stock Option Grant Agreement dated October 6, 1997 between the Company and Andrew Hines 10.22 -- Incentive Stock Option Grant Agreement dated December 30, 1997 between the Company and David Jones 10.23 -- Nonqualified Stock Option Grant Agreement dated March 10, 1998 between the Company and David Jones 10.24 -- Nonqualified Stock Option Grant Agreement dated March 10, 1998 between the Company and David Jones 11 -- Computation of per share earnings (loss) 12 -- Statement of Computation of Ratios of Earnings (Loss) to Fixed Charges 21 -- Subsidiaries of Registrant (filed as Exhibit 21 to the 1997 10-K)* 27 -- Financial Data Schedule
* Incorporated herein by reference. EX-10.11 2 FOURTH AMENDEMENT TO LOAN AND SECURITY AGREEMENT 1 EXHIBIT 10.11 NationsBank NationsBank, N.A. FOURTH AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT among OUTBOARD MARINE CORPORATION, OMC ALUMINUM BOAT GROUP, INC., OMC FISHING BOAT GROUP, INC., OMC LATIN AMERICA/CARIBBEAN, INC., and RECREATIONAL BOAT GROUP LIMITED PARTNERSHIP as Borrowers and Guarantors, and OMC RECREATIONAL BOAT GROUP, INC., and (and the other Borrowers and/or Guarantors, if any, from time to time party hereto), NATIONSBANK, N.A., as Agent and a Lender, (and the other Lenders, if any, from time to time party hereto), as Lenders Dated effective as of February 1, 1999 2 FOURTH AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT THIS FOURTH AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT ("Amendment"), dated effective as of February 1, 1999, is executed and entered into by and among OUTBOARD MARINE CORPORATION, a Delaware corporation ("OMC"), OMC ALUMINUM BOAT GROUP, INC., a Delaware corporation OMC FISHING BOAT GROUP, INC., a Delaware corporation, OMC LATIN AMERICA/CARIBBEAN, INC., a Delaware corporation, RECREATIONAL BOAT GROUP LIMITED PARTNERSHIP, a Delaware limited partnership, OMC RECREATIONAL BOAT GROUP, INC., a Delaware corporation (collectively all of the "Loan Parties," as of the effective date hereof, under the Amended and Restated Loan and Security Agreement referenced under the Recitals hereinbelow; herein called the "Loan Parties"), each of the lending institutions signatory hereto (collectively all of the "Lenders," as of the effective date hereof, under the Amended and Restated Loan and Security Agreement referenced under the Recitals hereinbelow; herein called the "Lenders") and NATIONSBANK, N.A., a national banking association and successor in interest by merger to NationsBank of Texas, N.A., in its capacity as agent for itself and the other Lenders (in such capacity, together with its successors and assigns in such capacity, herein called "Agent"). RECITALS: A. The Loan Parties, the Lenders and Agent are parties to the certain Amended and Restated Loan and Security Agreement dated effective as of January 6, 1998, as amended by the certain First Amendment to Loan and Security Agreement dated effective as of May 21, 1998, the Second Amendment to Amended and Restated Loan and Security Agreement dated effective as of August 31, 1998, and the Third Amendment to Amended and Restated Loan and Security Agreement dated effective as of December 21, 1998 (hereinafter called the "Agreement"). Unless otherwise defined in this Amendment, terms defined by the Agreement, where used in this Amendment, shall have the same meanings as are prescribed by the Agreement, as amended by this Amendment. B. The Loan Parties, the Lenders and Agent have agreed to amend the Agreement as provided hereinbelow. NOW THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto hereby agree as follows: ARTICLE 1 Definitions Section 1.1 Definitions. Unless otherwise defined in this Amendment, each capitalized term used in this Amendment, shall have the same meaning given to such term in the Agreement, as amended by this Amendment. 3 ARTICLE 2 Amendments Section 2.1 Amendment to Definition of "Borrowing Base" in Article 1 of the Agreement. Effective as of February 1, 1999, the definition of "Borrowing Base" in Article 1 of the Agreement is hereby amended and restated in its entirety to read as follows: "Borrowing Base" means, at any time, an amount equal to the lesser of: (a) the maximum principal amount of the Revolving Credit Facility, minus the sum of (i) the Letter of Credit Reserve, plus (ii) the Reserve, or (b) an amount equal to the sum of (i) 85% (or such lesser percentage as Agent may determine pursuant to Section 2.5) of the face value of Eligible Receivables that are determined by Agent in its discretion to be Qualified L/C Supported Receivables at such time, plus (ii) 85% (or such lesser percentage as Agent may determine pursuant to Section 2.5) of the face value of Eligible Receivables that are determined by Agent in its discretion to be Qualified Guaranteed Receivables at such time, plus (iii) 85% (or such lesser percentage as Agent may determine pursuant to Section 2.5) of the face value of Eligible Domestic Receivables (other than Qualified L/C Supported Receivables or Qualified Guaranteed Receivables) at such time, plus (iv) 75% (or such lesser percentage as Agent may determine pursuant to Section 2.5) of the Dollar Equivalent face value of Eligible Foreign Receivables (other than Qualified L/C Supported Receivables or Qualified Guaranteed Receivables) at such time, plus (v) the lesser of (A) 60% with respect to Eligible Domestic Inventory and 50% with respect to Eligible Foreign Inventory (or such lesser percentage as Agent may determine pursuant to Section 2.5) of the lesser of cost determined on a FIFO (or first-in-first-out) accounting basis or fair market value of such Eligible Inventory, as applicable, net of the Loan Parties' reserve for obsolescence (if any), at such time, plus, during the 2 4 period of January 1, 1998 through April 30, 1998, the period of January 1, 1999 through June 30, 1999, and the period of January 1 through April 30 of any calendar year thereafter, 35% (or such lesser percentage as Agent may in its discretion determine from time to time) of the lesser of cost determined on a FIFO (or first-in-first-out) accounting basis or fair market value of Eligible Work-In-Process Inventory, net of the Loan Parties' reserve for obsolescence (if any), at such time or (B) $75,000,000, minus (vi) the Letter of Credit Reserve; plus (vii) provided that the representations of Borrowers under Section 7.1(z) are and remain true and correct, during any single period commencing during any calendar year, determined as provided hereinbelow (herein called a "Designated Period"), (i) $30,000,000 at any time during the period from the Agreement Date through December 30, 1998, (ii) $20,000,000 at any time during any portion of a Designated Period that occurs during the period December 31, 1998 through January 31, 1999 or $30,000,000 at any time during any portion of such Designated Period that occurs during the period February 1, 1999 through December 30, 1999, (ii) $10,000,000 at any time during the period from December 31, 1999 through December 30, 2000 and (iv) $0.00 on or at any time after December 31, 2000; provided, that any such Designated Period for any calendar year shall begin on the Business Day, if any, during such year on which the aggregate outstanding balance of Loans first exceeds an amount equal to the aggregate amount determined under paragraph (b) of this definition without regard to this subparagraph (vii), and shall terminate on the earlier of (a) the expiration of one hundred eighty (180) days thereafter or (b) December 31 of such year; provided that with respect to clause (b) preceding, Agent may deduct any Reserve prior to application of the relevant percentages used to calculate the Borrowing Base as set forth herein. ARTICLE 3 Miscellaneous Section 3.1 Limited Waiver. Agent and the Lenders hereby waive any Event of Default resulting solely from noncompliance with Subsection (c) ("Leverage Ratio") of Section 12.1 ("Financial Ratios") of the Agreement for the period ending December 31, 1998, 3 5 provided, that such waiver is expressly limited as provided herein and shall not impair the requirements of such Subsection with respect to any other time or period. Section 3.2 Conditions Precedent. The effectiveness of this Amendment is subject to the satisfaction of each of the following conditions precedent: (a) Agent shall have received all of the following, each dated the date of this Amendment (unless otherwise indicated), in form and substance satisfactory to Agent: (i) Amendment Documents. This Amendment, the certain amendment fee letter agreement in connection therewith and any other instrument, document or certificate required by Agent to be executed or delivered by any of the Loan Parties, Agent or the Lenders in connection with this Amendment, in each case duly executed (the "Amendment Documents"); (ii) Fees and Expenses. Evidence that the costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) incurred by Agent incident to this Amendment or otherwise required to be paid in accordance with Section 16.2 of the Agreement, to the extent incurred and submitted to the Loan Parties, shall have been paid in full; (iii) Additional Information. Agent shall have received such additional documents, instruments and information as Agent may reasonably request to effect the transactions contemplated hereby; and (iv) Consents. All consents required by Section 16.9 of the Agreement shall have been obtained (it being understood that, pursuant to Section 16.9 of the Agreement, consent of Agent and all Lenders shall be required for effectiveness of Section 2.1 and consent of Agent and Required Lenders shall be required for effectiveness of all other provisions of this Agreement. (b) The representations and warranties contained herein, in the Agreement and in all other Loan Documents, as amended hereby, shall be true and correct as of the date hereof as if made on the date hereof (except those, if any, which by their terms specifically relate only to a different date). (c) All corporate proceedings taken in connection with the transactions contemplated by this Amendment and all other agreements, documents and instruments executed and/or delivered pursuant hereto, and all legal matters incident thereto, shall be satisfactory to Agent. (d) After giving effect to Section 3.1, no Default or Event of Default shall have occurred and be continuing. Section 3.3 Representations and Warranties. The Loan Parties hereby represent and warrant to, and agree with, Agent, for benefit of the Lenders, that, as of the date of and after 4 6 giving effect to this Amendment, (a) the execution, delivery and performance of this Amendment and any and all other Amendment Documents executed and/or delivered in connection herewith have been authorized by all requisite corporate action on the part of each of the Loan Parties (as applicable) and will not violate any of such Loan Party's certificate of incorporation or bylaws (or, in the case of Recreational Boat Group Limited Partnership, its certificate of limited partnership or its limited partnership agreement), (b) all representations and warranties set forth in the Agreement and in any other Loan Document are true and correct as if made again on and as of such date (except those, if any, which by their terms specifically relate only to a different date) in the Agreement), (d) no Default or Event of Default has occurred and is continuing, (e) the Agreement (as amended by this Amendment), and all other Loan Documents are and remain legal, valid, binding and enforceable obligations in accordance with the terms thereof, and (f) the certifications delivered to Agent under clause (i), clause (ii) and clause (iii) of Section 6.1(c) of the Agreement (in the case of the certification required by such clause (iii), as subsequently modified pursuant to Section 6.1(b) of the Agreement) remain true, correct and complete as of the effective date of this Amendment. Section 3.4 Survival of Representations and Warranties. All representations and warranties made in this Amendment or any other Loan Document shall survive the execution and delivery of this Amendment and the other Loan Documents, and no investigation by Agent or any Lender, or any closing, shall affect the representations and warranties or the right of Agent and the Lenders to rely upon them. Section 3.5 Reference to Agreement. Each of the Loan Documents, including the Agreement, the Amendment Documents and any and all other agreements, documents or instruments now or hereafter executed and/or delivered pursuant to the terms hereof or pursuant to the terms of the Agreement as amended hereby, are hereby amended so that any reference in such Loan Documents to the Agreement, whether direct or indirect, shall mean a reference to the Agreement as amended hereby. Section 3.6 Severability. Any provision of this Amendment held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Amendment and the effect thereof shall be confined to the provision so held to be invalid or unenforceable. Section 3.7 Successors and Assigns. This Amendment is binding upon and shall inure to the benefit of the Credit Parties and the Loan Parties and their respective successors and assigns, except each of the Loan Parties may not assign or transfer any of its rights or obligations hereunder without the prior written consent of Agent and the Lenders. Section 3.8 General. This Amendment, when signed by each signatory as provided hereinbelow (i) shall be deemed effective prospectively as of the effective date specified in the preamble of this Amendment, (ii) contains the entire agreement among the parties and may not be amended or modified except in writing signed by all parties, (iii) shall be governed and construed according to the laws of the State of Texas, and (iv) may be executed in any number of counterparts, each of which shall be valid as an original and all of which shall be one and the same agreement. A telecopy or other electronic transmission of any executed counterpart shall be deemed valid as an original. 5 7 THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO ORAL AGREEMENTS BETWEEN THE PARTIES. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers in several counterparts, signed on or about February 11, 1998 but effective as of the date specified in the preamble hereof. BORROWERS: OUTBOARD MARINE CORPORATION By: /s/ Andrew P. Hines Name: Andrew P. Hines Title: Executive Vice President and Chief Financial Officer By: /s/ Gordon G. Repp Name: Gordon G. Repp Title: Senior Counsel and Assistant Secretary OMC ALUMINUM BOAT GROUP, INC. By: /s/ Gordon G. Repp Name: Gordon G. Repp Title: Assistant Secretary and Treasurer By: /s/ Andrew P. Hines Name: Andrew P. Hines Title: Chief Financial Officer 6 8 OMC FISHING BOAT GROUP, INC. By: /s/ Gordon G. Repp Name: Gordon G. Repp Title: Assistant Secretary and Treasurer By: /s/ Andrew P. Hines Name: Andrew P. Hines Title: Chief Financial Officer OMC LATIN AMERICA/CARIBBEAN, INC. By: /s/ Andrew P. Hines Name: Andrew P. Hines Title: Chief Financial Officer By: /s/ Gordon G. Repp Name: Gordon G. Repp Title: Assistant Secretary RECREATIONAL BOAT GROUP LIMITED PARTNERSHIP By: OMC Recreational Boat Group, Inc. General Partner By: /s/ Gordon G. Repp Name: Gordon G. Repp Title: Assistant Secretary and Treasurer By: /s/ Andrew P. Hines Name: Andrew P. Hines Title: Chief Financial Officer 7 9 GUARANTOR: OMC RECREATIONAL BOAT GROUP, INC. By: /s/ Gordon G. Repp Name: Gordon G. Repp Title: Assistant Secretary and Treasurer By: /s/ Andrew P. Hines Name: Andrew P. Hines Title: Chief Financial Officer 8 10 AGENT: NATIONSBANK, N.A. successor in interest by merger to NationsBank of Texas, N.A. By: /s/ Stacy Wills Name: Stacy Wills Title: Vice President 9 11 LENDERS: NATIONSBANK, N.A. successor in interest by merger to NationsBank of Texas, N.A. By: /s/ Stacy Wills Name: Stacy Wills Title: Vice President 10 12 AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO By: /s/ Donna H. Evans Name: Donna H. Evans Title: Vice President 11 13 FLEET CAPITAL CORPORATION By: /s/ Thomas Maiale Name: Thomas Maiale Title: Vice President 12 14 THE CIT GROUP/BUSINESS CREDIT, INC. By: /s/ Pamela Wozniak Name: Pamela Wozniak Title: Vice President 13 15 TRANSAMERICA BUSINESS CREDIT CORPORATION By: /s/ Robert Heinz Name: Robert Heinz Title: Senior Vice President 14 16 FLEET CAPITAL CORPORATION f/k/a SANWA BUSINESS CREDIT CORPORATION By: /s/ Thomas Maiale Name: Thomas Maiale Title: Vice President 15 EX-10.12 3 FIFTH AMENDMENT TO LOAN AND SECURITY AGREEMENT 1 Exhibit 10.12 FIFTH AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT among OUTBOARD MARINE CORPORATION, OMC ALUMINUM BOAT GROUP, INC., OMC FISHING BOAT GROUP, INC., OMC LATIN AMERICA/CARIBBEAN, INC., and RECREATIONAL BOAT GROUP LIMITED PARTNERSHIP as Borrowers and Guarantors, and OMC RECREATIONAL BOAT GROUP, INC., and (AND THE OTHER BORROWERS AND/OR GUARANTORS, IF ANY, FROM TIME TO TIME PARTY HERETO), NATIONSBANK, N.A., as Agent and a Lender, (AND THE OTHER LENDERS, IF ANY, FROM TIME TO TIME PARTY HERETO), as Lenders Dated effective as of February 25, 1999 2 FIFTH AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT THIS FIFTH AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT ("Amendment"), dated effective as of February 25, 1999 (the "Effective Date"), is executed and entered into by and among OUTBOARD MARINE CORPORATION, a Delaware corporation ("OMC"), OMC ALUMINUM BOAT GROUP, INC., a Delaware corporation OMC FISHING BOAT GROUP, INC., a Delaware corporation, OMC LATIN AMERICA/CARIBBEAN, INC., a Delaware corporation, RECREATIONAL BOAT GROUP LIMITED PARTNERSHIP, a Delaware limited partnership, OMC RECREATIONAL BOAT GROUP, INC., a Delaware corporation (collectively all of the "Loan Parties," as of the effective date hereof, under the Amended and Restated Loan and Security Agreement referenced under the Recitals hereinbelow; herein called the "Loan Parties"), each of the lending institutions signatory hereto (collectively all of the "Lenders," as of the effective date hereof, under the Amended and Restated Loan and Security Agreement referenced under the Recitals hereinbelow; herein called the "Lenders") and NATIONSBANK, N.A., a national banking association and successor in interest by merger to NationsBank of Texas, N.A., in its capacity as agent for itself and the other Lenders (in such capacity, together with its successors and assigns in such capacity, herein called "Agent"). RECITALS: A. The Loan Parties, the Lenders and Agent are parties to the certain Amended and Restated Loan and Security Agreement dated effective as of January 6, 1998, as amended by the certain First Amendment to Loan and Security Agreement dated effective as of May 21, 1998, the Second Amendment to Amended and Restated Loan and Security Agreement dated effective as of August 31, 1998, the Third Amendment to Amended and Restated Loan and Security Agreement dated effective as of December 21, 1998 and the Fourth Amendment to Amended and Restated Loan and Security Agreement dated effective as of February 1, 1999 (hereinafter called the "Agreement"). Unless otherwise defined in this Amendment, terms defined by the Agreement, where used in this Amendment, shall have the same meanings as are prescribed by the Agreement, as amended by this Amendment. B. The Loan Parties, the Lenders and Agent have agreed to amend the Agreement as provided hereinbelow. NOW THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto hereby agree as follows: ARTICLE 1 Amendments Section 1.1 Amendment to Definitions in Article 1 of the Agreement. Effective as of the date hereof, the following definitions in Article 1 of the Agreement are hereby amended and restated in their entirety to read as follows: 3 "Applicable Margin" means, for the period through the end of the fiscal quarter of OMC in which Agent receives OMC's financial statements dated December 31, 1999, pursuant to Section 11.1(a), two percent (2%) with respect to Eurodollar Loans and one-half percent (0.5%) with respect to Base Rate Loans, subject to adjustment from time to time thereafter to the percentage specified for each Type of Loan, corresponding to the Leverage Ratio, as set forth below, respectively:
Leverage Ratio Eurodollar Loans Base Rate Loans -------------- ---------------- --------------- Greater than or equal to 3.5 to 1.0 2.00% 0.50% Less than 3.5 to 1.0 but greater than or 1.75% 0.00% equal to 2.5 to 1.0 Less than 2.5 to 1.0 1.25% 0.00%
provided, that notwithstanding the forgoing, with respect to the amount, if any, of Loans at any time funded and outstanding in excess of the aggregate amount determined under paragraph (b) of the definition of "Borrowing Base" without giving effect to subparagraph (vii) thereof, "Applicable Margin" means two and one half percent (2.50%) with respect to Eurodollar Loans and one percent (1.00%) with respect to Base Rate Loans. For the purpose of determining the Applicable Margin, OMC's Leverage Ratio shall be determined based upon OMC's Consolidated financial statements for the months of March, June, September and December delivered to Agent as required by Section 11.1, and any resulting change, if any, in the Applicable Margin, shall become effective (i) as to Base Rate Loans, as of the first day of the calendar month following the month in which such financial statements are delivered to Agent and (ii) as to Eurodollar Loans, as of the date (on or after the effective date as referenced in clause (i) preceding) when any such Eurodollar Loan is made, Continued or Converted, as the case may be. "Leverage Ratio" means, as of the last day of any fiscal quarter of OMC, the ratio of (i) the sum of (A) Indebtedness for Money Borrowed (excluding Reimbursement Obligations) of OMC and its Subsidiaries outstanding on such date and (B) twenty percent (20%) of the notional amount of any Indebtedness of OMC and its Subsidiaries evidenced by Interest Rate Protection Agreements outstanding on such date to (ii) EBITDA of OMC and its Subsidiaries for the twelve-month period ending on such date; provided, however, EBITDA of OMC and its Subsidiaries shall be calculated (A) as of June 30, 1999, for the six-month period ending on such date and (B) as of September 30, 1999, for the nine-month period ending on such date. Section 1.2 Amendment to Section 12.1. As of the Effective Date Section 12.1 ("Financial Ratios") hereby is amended and restated to read in its entirety as follows: 2 4 Section 12.1 Financial Ratios. (a) Tangible Net Worth. The Loan Parties will not directly or indirectly permit Tangible Net Worth, on any date set forth below to be less than the amounts, set forth opposite such date:
PERIOD END DATE REQUIREMENT --------------- ----------- June 30, 1999 ($130,000,000) September 30, 1999 ($120,000,000) June 30, 2000 An amount equal to Tangible Net Worth as of September 30, 1999 September 30, 2000 An amount equal to the sum of (i) Tangible Net Worth as of September 30, 1999 plus (ii) 18,000,000 June 30, 2001 and the last day of each fiscal An amount equal to Tangible Net quarter thereafter Worth as of September 30, 2000
(b) Minimum Interest Coverage. The Loan Parties will not permit OMC's Consolidated Interest Coverage Ratio, determined in accordance with GAAP and based on the financial statements delivered pursuant to Section 11.1, as applicable, measured as of each fiscal quarter ending on each date specified below, for the twelve month period ending on such date (or in the case of September 30, 1999, the nine month period ending on such date) to be less than the ratio set forth opposite such date:
PERIOD END DATE REQUIREMENT --------------- ----------- September 30, 1999 1.60 to 1.0 December 31, 1999 1.00 to 1.0 March 31, 2000 1.30 to 1.0 June 30, 2000 1.30 to 1.0 September 30, 2000 1.30 to 1.0 December 31, 2000 and the last day of each fiscal 1.50 to 1.0 quarter thereafter
3 5 (c) Leverage Ratio. The Loan Parties will not permit OMC's Consolidated Leverage Ratio, determined in accordance with GAAP and based on the financial statements delivered pursuant to Section 11.1, as applicable, measured as of the end of each fiscal quarter ending on each date set forth below, to be greater than the ratio set forth opposite such date:
PERIOD END DATE REQUIREMENT --------------- ----------- June 30, 1999 7.5 to 1.0 September 30, 1999 4.0 to 1.0 December 30, 1999 4.0 to 1.0 March 31, 2000 4.0 to 1.0 June 30, 2000 4.0 to 1.0 September 30, 2000 and the last day of each fiscal 3.5 to 1.0 quarter thereafter
(d) Minimum EBITDA. The Loan Parties will not permit OMC's Consolidated EBITDA calculated for the three (3) month period ended as of March 31, 1999, to be less than zero Dollars ($0.00). ARTICLE 2 Miscellaneous Section 2.1 Conditions Precedent. The effectiveness of this Amendment is subject to the satisfaction of each of the following conditions precedent: (a) Agent shall have received all of the following, each dated the date of this Amendment (unless otherwise indicated), in form and substance satisfactory to Agent: (i) Amendment Documents. This Amendment, the certain amendment fee letter agreement in connection therewith and any other instrument, document or certificate required by Agent to be executed or delivered by any of the Loan Parties, Agent or the Lenders in connection with this Amendment, in each case duly executed (the "Amendment Documents"); 4 6 (ii) Fees and Expenses. Evidence that the costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) incurred by Agent incident to this Amendment or otherwise required to be paid in accordance with Section 16.2 of the Agreement, to the extent incurred and submitted to the Loan Parties, shall have been paid in full; (iii) Additional Information. Agent shall have received such additional documents, instruments and information as Agent may reasonably request to effect the transactions contemplated hereby; and (iv) Consents. All consents required by Section 16.9 of the Agreement shall have been obtained. (b) The representations and warranties contained herein, in the Agreement and in all other Loan Documents, as amended hereby, shall be true and correct as of the date hereof as if made on the date hereof (except those, if any, which by their terms specifically relate only to a different date). (c) All corporate proceedings taken in connection with the transactions contemplated by this Amendment and all other agreements, documents and instruments executed and/or delivered pursuant hereto, and all legal matters incident thereto, shall be satisfactory to Agent. (d) No Default or Event of Default shall have occurred and be continuing. Section 2.2 Representations and Warranties. The Loan Parties hereby represent and warrant to, and agree with, Agent, for the benefit of the Lenders, that, as of the date of and after giving effect to this Amendment, (a) the execution, delivery and performance of this Amendment and any and all other Amendment Documents executed and/or delivered in connection herewith have been authorized by all requisite corporate action on the part of each of the Loan Parties (as applicable) and will not violate any of such Loan Party's certificate of incorporation or bylaws (or, in the case of Recreational Boat Group Limited Partnership, its certificate of limited partnership or its limited partnership agreement), (b) all representations and warranties set forth in the Agreement and in any other Loan Document are true and correct as if made again on and as of such date (except those, if any, which by their terms specifically relate only to a different date) in the Agreement), (d) no Default or Event of Default has occurred and is continuing, (e) the Agreement (as amended by this Amendment), and all other Loan Documents are and remain legal, valid, binding and enforceable obligations in accordance with the terms thereof, and (f) the certifications delivered to Agent under clause (i), clause (ii) and clause (iii) of Section 6.1(c) of the Agreement (in the case of the certification required by such clause (iii), as subsequently modified pursuant to Section 6.2(b) of the Agreement) remain true, correct and complete as of the effective date of this Amendment. Section 2.3 Survival of Representations and Warranties. All representations and warranties made in this Amendment or any other Loan Document shall survive the execution and delivery of this Amendment and the other Loan Documents, and no investigation by Agent or any 5 7 Lender, or any closing, shall affect the representations and warranties or the right of Agent and the Lenders to rely upon them. Section 2.4 Reference to Agreement. Each of the Loan Documents, including the Agreement, the Amendment Documents and any and all other agreements, documents or instruments now or hereafter executed and/or delivered pursuant to the terms hereof or pursuant to the terms of the Agreement as amended hereby, are hereby amended so that any reference in such Loan Documents to the Agreement, whether direct or indirect, shall mean a reference to the Agreement as amended hereby. Section 2.5 Severability. Any provision of this Amendment held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Amendment and the effect thereof shall be confined to the provision so held to be invalid or unenforceable. Section 2.6 Successors and Assigns. This Amendment is binding upon and shall inure to the benefit of the Credit Parties and the Loan Parties and their respective successors and assigns, except each of the Loan Parties may not assign or transfer any of its rights or obligations hereunder without the prior written consent of Agent and the Lenders. Section 2.7 General. This Amendment, when signed by each signatory as provided hereinbelow (i) shall be deemed effective prospectively as of the effective date specified in the preamble of this Amendment, (ii) contains the entire agreement among the parties and may not be amended or modified except in writing signed by all parties, (iii) shall be governed and construed according to the laws of the State of Texas, and (iv) may be executed in any number of counterparts, each of which shall be valid as an original and all of which shall be one and the same agreement. A telecopy or other electronic transmission of any executed counterpart shall be deemed valid as an original. THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO ORAL AGREEMENTS BETWEEN THE PARTIES. 6 8 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers in several counterparts. BORROWERS: OUTBOARD MARINE CORPORATION By: /s/ Andrew P. Hines ----------------------------------------- Name: Andrew P. Hines ----------------------------------------- Title: Executive Vice President and Chief Financial ----------------------------------------- Officer ----------------------------------------- Authorized Officer By: /s/ Gordon G. Repp ----------------------------------------- Name: Gordon G. Repp ----------------------------------------- Title: Assistant Secretary ----------------------------------------- Authorized Officer OMC ALUMINUM BOAT GROUP, INC. By: /s/ Andrew P. Hines ----------------------------------------- Name: Andrew P. Hines ----------------------------------------- Title: Chief Financial Officer ----------------------------------------- Authorized Officer By: /s/ Gordon G. Repp ----------------------------------------- Name: Gordon G. Repp ----------------------------------------- Title: Assistant Secretary and Treasurer ----------------------------------------- Authorized Officer OMC FISHING BOAT GROUP, INC. By: /s/ Andrew P. Hines ----------------------------------------- Name: Andrew P. Hines ----------------------------------------- Title: Chief Financial Officer ----------------------------------------- Authorized Officer By: /s/ Gordon G. Repp ----------------------------------------- Name: Gordon G. Repp ----------------------------------------- Title: Assistant Secretary and Treasurer ----------------------------------------- Authorized Officer 7 9 OMC LATIN AMERICA/CARIBBEAN, INC. By: /s/ Andrew P. Hines ----------------------------------------- Name: Andrew P. Hines ----------------------------------------- Title: Chief Financial Officer ----------------------------------------- Authorized Officer By: /s/ Gordon G. Repp ----------------------------------------- Name: Gordon G. Repp ----------------------------------------- Title: Assistant Secretary ----------------------------------------- Authorized Officer RECREATIONAL BOAT GROUP LIMITED PARTNERSHIP By: OMC Recreational Boat Group, Inc., General Partner By: /s/ Andrew P. Hines -------------------------------- Name: Andrew P. Hines -------------------------------- Title: Chief Financial Officer -------------------------------- Authorized Officer By: /s/ Gordon G. Repp -------------------------------- Name: Gordon G. Repp -------------------------------- Title: Assistant Secretary and Treasurer -------------------------------- Authorized Officer 8 10 GUARANTOR: OMC RECREATIONAL BOAT GROUP, INC. By: /s/ Andrew P. Hines ---------------------------------------- Name: Andrew P. Hines ---------------------------------------- Title: Chief Financial Officer ---------------------------------------- Authorized Officer By: /s/ Gordon G. Repp ---------------------------------------- Name: Gordon G. Repp ---------------------------------------- Title: Assistant Secretary and Treasurer ---------------------------------------- Authorized Officer 9 11 AGENT: NATIONSBANK, N.A., successor in interest by merger to NationsBank of Texas, N.A. By: /s/ Stacy Wills ---------------------------------------- Name: Stacy Wills ---------------------------------------- Title: Vice President ---------------------------------------- Authorized Officer 10 12 LENDERS: NATIONSBANK, N.A. successor in interest by merger to NationsBank of Texas, N.A. By: /s/ Stacy Wills ---------------------------------------- Name: Stacy Wills ---------------------------------------- Title: Vice President ---------------------------------------- Authorized Officer 11 13 AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO By: /s/ David Weislogel ---------------------------------------- Name: David Weislogel ---------------------------------------- Title: Vice President ---------------------------------------- Authorized Officer 12 14 FLEET CAPITAL CORPORATION By: /s/ Thomas Maiale ---------------------------------------- Name: Thomas Maiale ---------------------------------------- Title: Vice President ---------------------------------------- Authorized Officer 13 15 THE CIT GROUP/BUSINESS CREDIT, INC. By: /s/ Lan K. Haverfield ---------------------------------------- Name: Lan K. Haverfield ---------------------------------------- Title: Senior Vice President ---------------------------------------- Authorized Officer 14 16 TRANSAMERICA BUSINESS CREDIT CORPORATION By: /s/ Ari Kaplan ---------------------------------------- Name: Ari Kaplan ---------------------------------------- Title: Senior Account Executive ---------------------------------------- Authorized Officer 15 17 SANWA BUSINESS CREDIT CORPORATION By: /s/ Thomas Maiale ---------------------------------------- Name: Thomas Maiale ---------------------------------------- Title: Vice President ---------------------------------------- Authorized Officer 16 EX-10.13 4 LEASE AGREEMENT 1 EXHIBIT 10.13 LEASE AGREEMENT FROM OUTBOARD MARINE CORPORATION LANDLORD TO ANDREW P. HINES TENANT PREMISES: 20 Saddle Hills Road, Mendham Township, New Jersey 07931 2 L E A S E THIS AGREEMENT OF LEASE made this 18th day of December, 1998 between OUTBOARD MARINE CORPORATION ("Landlord"), and ANDREW P. HINES ("Tenant"). WITNESSETH: 1. Premises Demised. The Landlord leases and demises to the Tenant the residential property commonly known as 20 Saddle Hill Road, Mendham Township, New Jersey (hereinafter the "Premises"). 2. Term. The term of this Lease shall be month-to-month beginning on the date above and terminating on March 31, 1998, unless terminated earlier by Tenant by providing prior written notice to Landlord. 3. Rental. The Tenant covenants and agrees to pay to the Landlord by cash or check, at the address for notice provided below, or as an offset to an equal amount due from Landlord to Tenant as and for interest on a demand note of even date herewith from Landlord to Tenant, the amount of Four Thousand Six Hundred Fifty-Eight and 33/100 Dollars ($4,658.33) per month, payable on or before the first of each and every month of the Term. 4. Repairs and Maintenance. During the Term, Tenant agrees, at its sole cost and expense, to make all repairs caused by its negligence, to keep the Premises free from debris and litter and to perform all necessary noncapital maintenance, repairs and replacements to the premises. 5. Alterations. Tenant shall make no changes, alterations, additions or improvements to the Premises ("Alterations"). 6. Subletting and Assignment. (a) Tenant may not assign this Lease or sublet the whole or any part of the Premises. (b) Any assignment of this Lease or any sublease of the Premises shall not relieve Tenant of any of its obligations under this Lease. 3 7. Damage or Destruction. (a) If, in Tenant's good faith judgment, the Premises shall be so damaged or destroyed by fire, other casualty, acts of God or the elements so that they cannot be restored or made tenantable or suitable for Tenant's use within thirty (30) days from the date of such damage or destruction ("Substantial Damage") or prior to the termination hereof, either party may terminate this Lease by written notice given to the other after the date of such Substantial Damage. Such termination shall be effective as of the date of the Substantial Damage and the rent and all other charges which are Tenant's responsibility shall abate from that date and any rent and other charges paid for any period beyond such date shall be repaid to Tenant. (b) If this Lease is not terminated as provided in Paragraph (a) of this Section, then the Tenant shall, at its sole cost and expense, with due diligence restore and repair the Premises as speedily as practical. During the restoration and repair period, the rent and other charges which are Tenant's responsibility shall be abated or reduced from the date of the Substantial Damage depending upon the period for which and the extent to which the Premises are not tenantable, accessible or suitable for Tenant's business needs. 8. Eminent Domain. (a) If there is a Substantial Taking of the Premises by right or threat of eminent domain, this Lease shall terminate and the rent and all other charges which are Tenant's responsibility shall abate from the date of Substantial Taking and any rent and other charges paid for any period beyond such date shall be repaid to Tenant. "Substantial Taking" means the remainder of the Premises cannot, as substantiated by Tenant, be restored or made tenantable, accessible or suitable for Tenant's business needs within thirty (30) days from the date of the taking or prior to the termination of this Lease. (b) If a portion of the Premises shall be taken by right or threat of eminent domain but the taking does not constitute a Substantial Taking, this Lease shall not terminate but Landlord shall, at its sole cost and expense, with due diligence, restore and repair the Premises as speedily as practical. During the restoration and repair period, the rent and other charges which are Tenant's responsibility shall be abated or reduced form the date of the taking depending upon the period for which and the extent to which the Premises are not tenantable or suitable for Tenant's business needs. (c) Tenant shall not be entitled to any part of the payment or award for any such taking provided, however, that Tenant may file a claim for any taking of Tenant Property or moving expense. 9. Indemnity. Each party shall, to the extent they have insurance coverage therefor, defend, indemnify and save harmless the other against all claims, liabilities, losses, damages, 2 4 costs and expenses (including reasonable attorneys' fees and other costs of defense) because of injury, including death, to any person, or damage or loss of any kind to any property caused by the negligence or misconduct of the defaulting party, its agents, employees or contractors in connection with Tenant's use of the Premises and equipment located thereon, or by such party's failure to perform its obligations under this agreement. 10. Subordination. Landlord is hereby vested with full power and authority to subordinate Tenant's interest hereunder to the lien of any mortgage or deed of trust which may now or hereafter be placed on the Building or underlying leasehold estate and to all renewals, modifications, consolidations and replacement of such mortgage or deed of trust. 11. Landlord's Right of Entry. Landlord has the right to enter the Premises at any reasonable time upon prior written notice to Tenant, or without notice in case of emergency, for the purpose of performing such maintenance, repairs, replacements and Alterations to the Premises as are required under this Lease. 12. Taxes and Insurance. (a) Tenant shall pay all real property taxes and Assessments payable for the period of the Term levied upon the Premises. (b) Tenant shall carry, throughout the Term, with solvent and responsible companies, a renters insurance policy, covering the contents of the premises and liability resulting from the acts or failure to act of Tenant. 13. Waiver of Subrogation. The parties release each other and their respective authorized representatives from any claims for damage to any person or to the Building or the Premises that are caused by or result from risks insured against under any insurance policies carried by either of the parties. Any liability that either party may have against the other shall be limited to the amount that exceeds the amount of insurance proceeds received or if a party is to be indemnified under the terms of this Lease the amount which exceeds the insurance proceeds received by the indemnified party. Each party to the extent possible shall obtain, for each policy of insurance, provisions permitting waiver of any claim against the other party for loss or damage within the scope of the insurance and each party to the extent permitted for itself and its insurer, waives all such insured claims against the other party. 14. Access. Tenant shall have full and unimpaired access to the Premises. 15. Default; Rights and Remedies. (a) The occurrence of any one or more of the following matters constitutes a Default by Tenant under this Lease: 3 5 (i) failure by Tenant to pay rent within ten (10)days after receipt of written notice of such failure to pay the same on the due date; (ii) failure by Tenant to pay within ten (10) days after receipt of written notice from Landlord to Tenant, any other moneys required to be paid by Tenant under the Lease; or (iii) failure by Tenant to observe or perform any other covenant, agreement, condition or provision of this Lease, if such failure shall continue for thirty (30) days after receipt of written notice from Landlord to Tenant, except that if such default cannot be cured within such thirty (30) day period, this period shall be extended, provided that Tenant commences to cure such default within such thirty (30) day period and proceeds diligently thereafter to effect such cure. (b) The occurrence of any one or more of the following matters constitutes a Default by Landlord under this Lease: (i) failure by Landlord to pay, within ten (10) days after receipt of written notice from Tenant to Landlord, any moneys required to be paid by Landlord under this Lease; or (ii) failure by Landlord to observe or perform any other covenant, agreement, condition or provision of this Lease, if such failure shall continue for thirty (30) days after receipt of written notice from Tenant to Landlord, except that if such default cannot be cured within such thirty (30) day period, this period shall be extended, provided that Landlord commences to cure such default within such thirty (30) day period and proceeds diligently thereafter to affect such cure. (c) The occurrence of any one or more of the matters described in Paragraph (a) or (b) of this section shall be referred to as a "Default" by Tenant or Landlord, as the case may be. (d) If a Default occurs, the Parties shall have the rights and remedies hereinafter set forth, which shall be distinct, separate and cumulative, and shall not operate to exclude or deprive them of any other right or remedy allowed it by law: (i) Landlord or Tenant may terminate this Lease by giving the other party not less than ten (10) days written notice of their election to do so, in which event the Term shall end, and all right, title and interest of the Parties hereunder shall expire, on the date stated in such notice; (ii) Landlord may terminate the right of the Tenant to possession of the Premises without terminating the Lease by giving not less than ten (10) days' advance notice to Tenant. 4 6 (e) Each party shall defend, indemnify and save harmless the other against all claims, liabilities, losses, damages, costs and expenses (including reasonable attorneys' fees and other costs of defense) incurred or sustained in connection with such party's breach of any representations, warranties, covenants, agreements or guarantees under this Lease. 16. Holding Over. Should Tenant remain in possession of the Premises, or part thereof, after the expiration of this Lease without the execution of a new lease by Landlord and Tenant, Tenant shall become a tenant from month-to-month of the Premises, or part thereof, under all the terms, conditions, provisions and obligations of this Lease and such month-to-month tenancy may be terminated by either Landlord or Tenant as of the end of any calendar month upon five (5) business days prior written notice. 17. Quiet Enjoyment. Landlord covenants that if and for so long as Tenant pays the rent and performs the covenants and conditions hereof, Tenant shall peaceably and quietly have, hold and enjoy the Premises for the Term. 18. Real Estate Brokers. The parties acknowledge that no Broker's commissions are due as a result of this transaction. 19. Attorneys' Fees. In the event either party institutes legal proceedings against the other for breach of or interpretation of any of the terms, conditions or covenants of this Lease, the party against whom a judgment is entered, shall pay all reasonable costs and expenses relative thereto, including reasonable attorneys' fees of the prevailing party. 20. Estoppel Certificate. Tenant agrees, upon not less than ten (10) days prior written request by Landlord, to deliver to Landlord a correct and complete statement in writing signed by Tenant certifying (i) that this Lease is unmodified and in full force and effect (or if there have been modifications, that the Lease as modified is in full force and effect and identifying the modifications); (ii) the date upon which Tenant began paying rent and the dates to which the rent and other charges have been paid; (iii) that, to the best of Tenant's knowledge, the Landlord is not in default under any provision of this Lease, or, if in default, the nature thereof; and (iv) that there has been no prepayment of rent other than that provided for in this Lease. Landlord, upon not less than twenty (20) days prior written request of Tenant, shall furnish a similar statement in writing to Tenant, covering the matters set forth above, to the extent applicable to Landlord. 21. Notices. Any notice by either party to the other shall be in writing and shall be deemed to be duly given only if delivered personally or mailed by registered or certified mail in a postpaid envelope to the following: 5 7 If to Landlord: OUTBOARD MARINE CORPORATION 100 Sea Horse Drive Waukegan, IL 60085 Attn: Vice President and Controller If to Tenant: ANDREW P. HINES 100 Sea Horse Drive Waukegan, IL 60085 Notice shall be deemed to have been given, if delivered personally, delivery thereof, and, if mailed, upon the date postmarked. 22. Entire Agreement. This Lease contains the entire agreement between the parties, there being no other terms, oral or written, except as herein expressed. No modification of this Lease shall be binding on the parties unless it is in writing and signed by both parties hereto. 23. Controlling Law. This agreement shall be construed in accordance with the laws of the State of New Jersey and jurisdiction shall lie within the federal, state or county courts located therein. IN WITNESS WHEREOF, the parties hereto have duly executed this Lease as of the day and year first above written. ATTEST: OUTBOARD MARINE CORPORATION /s/ Gordon G. Repp By:/s/ Robert S. Romano - ------------------------------ --------------------------------------- Title:Vice President and General Counsel WITNESS: ANDREW P. HINES /s/ Gordon G. Repp By:/s/ Andrew P. Hines - ------------------------------ --------------------------------------- 6 EX-10.14 5 MORTGAGE NOTE 1 EXHIBIT 10.14 MORTGAGE NOTE This Mortgage Note is made on December 18, 1998 between the Borrower(s) Outboard Marine Corporation, whose address is 100 Sea Horse Drive, Waukegan, Illinois 60085 referred to as "I," and the Lender Andrew P. Hines, whose address is 20 Saddle Hill Road, Mendham, New Jersey 07931 referred to as the "Lender." If more than one Borrower signs this Note, the word "I" shall mean each Borrower named above. The word "Lender" means the original Lender and anyone else who takes this Note by transfer. 1. Borrower(s) Promise to Pay Principal and Interest. In return for a loan that I received, I promise to pay $860,000.00 (called "principal"), plus interest to the order of the Lender. Interest, at a yearly rate of six and 1/2% will be charged on that part of the principal which has not been paid from the date of this Note until all principal has been paid. 2. Payments. I will pay principal and interest based on a on demand year payment schedule with monthly payments of $ on demand on the day of each month beginning on on demand I will pay all amounts owed under this Note no later than on demand. All payments will be made to the Lender at the address shown above or to a different place if required by the Lender. 3. Early Payments. I have the right to make payments at any time before they are due. These early payments will mean that this Note will be paid in less time. However, unless I pay this Note in full, my monthly payments will remain the same. 4. Late Charge for Overdue Payments. If the Lender has not received any payment within on demand days after its due date, I will pay the Lender a late charge of none % of the payment. This charge will be paid with the late payment. 5. Mortgage to Secure Payment. The Lender has been given a Mortgage dated December 18, 1998, to protect the Lender if the promises made in this Note are not kept. I agree to keep all promises made in the Mortgage covering property I own located at 20 Saddle Hill Road in the Township of Mendham in the County of Morris and the State of New Jersey. All terms of the Mortgage are made part of this Note. 6. Default. If I fail to make any payment required by this Note within one day after its due date, or if I fail to keep any other promise I make in this Note or in the Mortgage, the Lender may declare that I am in default on the Mortgage and this Note. Upon default, I must immediately pay the full amount of all unpaid principal, interest, other amounts due on the Mortgage and this Note and the Lender's costs of collection and attorney fees of twenty (20%) percent of outstanding balance. 7. Waivers. I give up my right to require that the Lender do the following: (a) to demand payment (called "presentment"); (b) to notify me of nonpayment (called "notice of dishonor"); and (c) to obtain an official certified statement showing nonpayment (called a "protest"). The Lender may exercise any right under this Note, the Mortgage or under any law, even if Lender has delayed in exercising that right or has agreed in an earlier instance not to exercise that right. Lender does not waive its right to declare that I am in default by making payments or incurring expenses on my behalf. Outboard Marine Corporation and the signatories hereto represent that any necessary corporate resolution and approvals for execution of this Demand Promissory Note have been obtained. 8. Each Person Liable. The Lender may enforce any of the provisions of this Note against any one or more of the Borrowers who sign this Note. 9. No Oral Changes. This Note can only be changed by an agreement in writing signed by both the Borrower(s) and the Lender. 1 2 10. Signatures. I agree to the terms of this Note. If the Borrower is a corporation, its proper corporate officers sign and its corporate seal is affixed. OUTBOARD MARINE CORPORATION /s/ Robert S. Romano (SEAL) ------------------------------------------ Robert S. Romano, Vice President Witnessed or Attested by: (SEAL) ----------------------------------------- /s/ Gordon G. Repp - ------------------------------------- Gordon G. Repp, Assistant Secretary 2 EX-10.15 6 MORTGAGE 1 EXHIBIT 10.15 MORTGAGE This Mortgage is made on December 18, 1998 between the Borrower(s) Outboard Marine Corporation, whose address is 100 Sea Horse Drive, Waukegan, Illinois 60085 referred to as "I," and the Lender Andrew P. Hines, whose address is 20 Saddle Hill Road, Mendham, New Jersey 07931 referred to as the "Lender." If more than one Borrower signs this Mortgage, the word "I" shall mean each Borrower named above. The word "Lender" means the original Lender and anyone else who takes this Mortgage by transfer. 1. Mortgage Note. In return for a loan that I received, I promise to pay $860,000 (called "Principal"), plus interest in accordance with the terms of a Mortgage Note dated December 18, 1998 (referred to as the "Note"). The Note provides for monthly payments of $ on demand yearly interest rate of six and 1/2%. All sums owed under the Note are due no later than on demand. All terms of the Note are made part of this Mortgage. 2. Property Mortgaged. The property mortgaged to the Lender (called the "Property") is located in the Township of Mendham, County of Morris, and State of New Jersey. The Property includes (a) the land; (b) all buildings that are now, or will be, located on the land; (c) all fixtures that are now, or will be, attached to the land or building(s) (for example, furnaces, bathroom fixtures and kitchen cabinets); (d) all condemnation awards and insurance proceeds relating to the land and building(s); and (e) all other rights that I have, or will have, as owner of the Property. The legal description is: /X/ Please see attached Legal Description annexed hereto and made a part of hereof (check box if applicable). Being commonly known as 20 Saddle Hill Road, Mendham, New Jersey 07931. Being same premises conveyed to Borrower herein by deed of lender herein intended to be recorded simultaneously herewith. This Mortgage is a First Purchase Money Mortgage given to secure a portion of the purchase price. 3. Rights Given to Lender. I mortgage the Property to the Lender. This means that I give the Lender those rights stated in this Mortgage and also those rights the law gives to lenders who hold mortgages on real property. When I pay all amounts due to the Lender under the Note and this Mortgage, the Lender's rights under this Mortgage will end. The Lender will then cancel this Mortgage at my expense. 4. Promises. I make the following promises to the Lender: a. Note and Mortgage. I will comply with all of the terms of the Note and this Mortgage. b. Payments. I will make all payments required by the Note and this Mortgage. c. Ownership. I warrant title to the premises (N.J.S.A. 46:9-2). This means I own the Property and will defend my ownership against all claims. d. Liens and Taxes. I will pay all liens, taxes, assessments and other government charges made against the Property when due. I will not claim any deduction from the taxable value of the Property because of this Mortgage. I will not claim any credit against the Principal and interest payable under the Note and this Mortgage for any taxes paid on the Property. e. Insurance. I must maintain extended coverage insurance on the Property. The Lender may also require that I maintain flood insurance or other types of insurance. The insurance companies, policies, amounts, and types of coverage must be acceptable to the Lender. I will notify the Lender in the event of any substantial loss or damage. The Lender may then settle the claim on my behalf if I fail to do so. All payments from the insurance company must be payable to the Lender under a "standard mortgage clause" in the insurance policy. The Lender may use any proceeds to repair and restore the 2 Property or to reduce the amount due under the Note and this Mortgage. This will not delay the due date for any payment under the Note and this Mortgage. f. Repairs. I will keep the Property in good repair, neither damaging nor abandoning it. I will allow the Lender to inspect the Property upon reasonable notice to me. g. Statement of Amount Due. Upon request of the Lender, I will certify to the Lender in writing: (a) the amount due on the Note and this Mortgage; and (b) whether or not I have any defense to my obligations under the Note and this Mortgage. h. Rent. I will not accept rent from any tenant for more than one month in advance. i. Lawful Use. I will use the Property in compliance with all laws, ordinances and other requirements of any governmental authority. 5. Eminent Domain. All or part of the Property may be taken by a government entity for public use. If this occurs, I agree that any compensation be given to the Lender. The Lender may use this to repair and restore the Property or to reduce the amount owed on the Note and this Mortgage. This will not delay the due date for any further payment under the Note and this Mortgage. Any remaining balance will be paid to me. 6. Tax and Insurance Escrow. If the Lender requests, I will make regular monthly payments to the Lender of: (a) 1/12 of the yearly real estate taxes and assessments on the Property; and (b) 1/12 of the yearly cost of insurance on the Property. These payments will be held by the Lender without interest to pay the taxes, assessments and insurance premiums as they become due. 7. Payments Made for Borrower(s). If I do not make all of the repairs or payments as agreed in this Mortgage, the Lender may do so for me. The cost of these repairs and payments will be added to the Principal, will bear interest at the same rate provided in the Note and will be repaid to the Lender upon demand. 8. Default. The Lender may declare that I am in default on the Note and this Mortgage if: a. I fail to make any payment required by the Note and this Mortgage within on demand days after its due date; b. I fail to keep any other promise I make in this Mortgage; c. The ownership of the Property is changed for any reason; d. The holder of any lien on the Property starts foreclosure proceedings; or e. Bankruptcy, insolvency or receivership proceedings are started by or against any of the Borrower(s). 9. Payments Due Upon Default. If the Lender declares that I am in default, I must immediately pay the full amount of all unpaid Principal, interest, other amounts due on the Note and this Mortgage and the Lender=s costs of collection and reasonable attorney fees. 10. Lender's Rights Upon Default. If the Lender declares that the Note and this Mortgage are in default, the Lender will have all rights given by law or set forth in this Mortgage. This includes the right to any one or more of the following: a. take possession of and manage the Property, including the collection of rents and profits; b. have a court appoint a receiver to accept rent for the Property (I consent to this); c. start a court action, known as foreclosure, which will result in a sale of the Property to reduce my obligations under the Note and this Mortgage; and d. Sue me for any money that I owe the Lender. 11. Notices. All notices must be in writing and personally delivered or sent by certified mail, return receipt requested, to the address given in this Mortgage. Address changes may be made upon notice to the other party. 2 3 12. No Waiver by Lender. Lender may exercise any right under this Mortgage or under any law, even if Lender has delayed in exercising that right or has agreed in an earlier instance not to exercise that right. Lender does not waive its right to declare that I am in default by making payments or incurring expenses on my behalf. 13. Each Person Liable. This Mortgage is legally binding upon each Borrower and all who succeed to their responsibilities (such as heirs and executors). The Lender may enforce any of the provisions of the Note and this Mortgage against any one or more of the Borrowers who sign this Mortgage. 14. No Oral Changes. This Mortgage can only be changed by an agreement in writing signed by both the Borrower(s) and the Lender. 15. Signatures. I agree to the terms of this Mortgage. If the Borrower is a corporation, its proper corporate officers sign and its corporate seal is affixed. OUTBOARD MARINE CORPORATION /s/ Robert S. Romano (SEAL) ------------------------------------- Robert S. Romano, Vice President Witnessed or Attested by: (SEAL) ------------------------------------- /s/ Gordon G. Repp - ------------------------------------- Gordon G. Repp, Assistant Secretary 3 4 STATE OF NEW JERSEY, COUNTY OF MORRIS SS.: I certify that on personally came before me and stated to my satisfaction that this person (or if more than one, each person): (a) was the maker of the attached instrument; and, (b) executed this instrument as his or her own act. --------------------------------------------- (Print name and title below signature) STATE OF ILLINOIS COUNTY OF LAKE SS.: I certify that on December 18, 1998 Robert S. Romano personally came before me and stated to my satisfaction that this person (or if more than one, each person): (a) was the maker of the attached instrument; and, (b) executed this instrument as Vice President of Outboard Marine Corporation the entity named in this instrument; and, (c) executed this instrument as the act of the entity named in this instrument. /s/ Kathleen A. Needham -------------------------------------------- Kathleen A. Needham A Notary Public of the State of Illinois My commission expires 3/25/00 (SEAL) 5 SCHEDULE A NUMBER 4 (Continued) DESCRIPTION All that certain trace lot and parcel of land lying and being in the Township of Mendham County of Morris and State of New Jersey being more particularly described as follows: BEING known as Lot 61 Block 2 as shown on map Entitled "Final Plat-Section 2 of Hills of Roxiticus, Township of Mendham, Morris County, New Jersey" made by Osborne M. Campbell & Associates, Consulting Engineers and Land Surveyors, Mendham, New Jersey, dated July, 1974, scale 1" 100' which aforesaid Map was finally revised September 15, 1976 and was filed in the Morris County Clerk's Office on October 18, 1976 as Map #3511. BEING also known as Lot 47 in Block 100 on the current Tax Map of the Township of Mendham, Morris County, New Jersey. EX-10.16 7 PROMISSORY NOTE 1 EXHIBIT 10.16 PROMISSORY NOTE $ 100,000.00 Date: December 4, 1998 FOR VALUE RECEIVED, Robert B. Gowens, Jr. and Donna G. Gowens, husband and wife,("Maker"), having an address at 55 Trowbridge Circle, Lake Bluff, IL 60044, promise to pay to the order of Outboard Marine Corporation, a Delaware Corporation ("Payee") having an address at 100 Sea Horse Drive, Waukegan, Illinois 60085, without defalcation or offset and without relief from valuation or appraisement laws, the principal sum of One Hundred Thousand and no/100 ($100,000.00) Dollars in lawful money of the United States of America together with interest thereon at a rate of six and one-half (6.5%) percent per Annum. Maker shall make payments of interest only of Five Hundred Forty-One and 66/100 ($541.66) Dollars each month commencing on December 9, 1998 and continuing on the first day of each month thereafter until such time as Maker repays the loan evidenced by this Note as provided for herein. Monthly installments shall be equal to interest due on the amounts outstanding hereunder at any time. Partial months shall be prorated based on the actual number of days in that month. All amounts required to be paid hereunder shall be payable to Outboard Marine Corporation, 100 Sea Horse Drive, Waukegan 60085, attention Treasurer or at such other place as Payee from time to time may designate in writing. Notwithstanding any provision herein or in any instrument now or hereafter securing this Note, the total liability for payments of interest or in the nature of interest, shall not exceed the limits now imposed by the applicable usury law, if any, including the choice of law rules. In the event of the acceleration of this Note, the total charges for interest and in the nature of interest shall not exceed the maximum amount allowed by law and any excess portion of such charges that may have been prepaid shall be refunded to the Maker hereof. Such refund shall be made by application of the amount involved against the sums due hereunder, but such crediting shall not cure or waive the default occasioning acceleration. Payment of this Note is secured by a Second Mortgage (referred to as the "Mortgage") of even date herewith, from Maker to Payee, secured upon all of Maker's right, title and interest in and to, but not by way of limitation, those certain parcels of land together with buildings and other improvements constructed and to be constructed on the property described on Exhibit A attached hereto (herein referred to as the "Mortgaged Property"). 2 All of the agreements, conditions, covenants, provisions and stipulations contained in the Mortgage and which are to be kept and performed by Maker, are hereby made a part of this Note to the same extent and with the same force and effect as if they were fully set forth herein, and Maker covenants and agrees to keep and perform them, or cause them to be kept and performed, strictly in accordance with their terms. This Note is repayable as follows: (A) If Mr. Gowens leaves the employ of Payee before October 1, 2001, or as that date may be extended or modified in writing between the parties, without Good Reason or as a result of a termination For Cause, as those terms are defined in paragraph 9 of the Employment Agreement entered into between Payee and Mr. Gowens dated October 1, 1998 (the "Employment Agreement"), Maker will repay this Note in full 60 days after termination of his employment. (B) Should Maker be required by Payee to relocate his residence at any time prior to October 1, 2001, or as that date may be extended or modified in writing between the parties, Maker will repay the Note in full out of the proceeds at the time of closing on the sale of the Mortgaged Property, PROVIDED that the amount of any Loss on sale, as defined below, will be deducted from the principal which Maker would otherwise be obligated to repay. Should Maker be required to relocate his residence at any time after September 30, 2001, Maker will repay the Note in full out of the proceeds at the time of closing on the sale of the Mortgaged Property. (C) If Mr. Gowens dies before October 1, 2001, or as that date may be extended or modified in writing between the parties, while an employee of Payee, or leaves Payee before that date with Good Reason or as a result of a termination without Cause, as those terms are defined in paragraph 9 of the Employment Agreement, or if he ceases being an employee at or after the termination of the Employment Agreement, Maker (or his estate) will repay the Note, less the amount of any Loss, as defined below, within 180 days of his death or the termination of his employment. (D) Maker shall, at any time, have the right to prepay, without penalty or premium, all or any portion of the loan evidenced by this Note. Partial prepayments shall be applied to installments due in the reverse order of their maturity. The term "Loss" as used above means, if positive, the amount derived by subtracting the greater of (i) the gross sale price of the Mortgaged Property and (ii) the fair market value of the 2 3 Mortgaged Property, from the amount for which Maker purchased the Mortgaged Property, plus documented improvements. If any installment of interest or principal or any other payment is not paid by Maker within the time periods hereinafter set forth, then there shall also be immediately due and payable a late charge equal to four percent (4%) of the amount of the delinquent payment. It is further understood that, subject to the provisions hereinafter set forth with regard to grace periods of such default, should there be any default in the payment of any installment of interest or principal on the date on which it shall fall due, or in the performance of any of the agreements, conditions, covenants, provisions or stipulations contained in this Note, or should there be a default under the Mortgage, then Payee, at its option and after the expiration of the grace period, if any, hereinafter set forth, may declare immediately due and payable the entire unpaid balance of principal with interest accrued thereon from the date of default at the rate of eighteen percent (18%) per annum (the "Default Rate"); and payment thereof may be enforced and recovered in whole or in part at any time by one or more of the remedies provided to Payee in this Note or in the Mortgage. In such case, Payee may also recover all costs of suit and other expenses in connection therewith, together with reasonable attorney's fees. Maker hereby waives and releases, to the extent allowed by applicable law, all benefit that might accrue to Maker by virtue of any present or future laws exempting the Mortgaged Property, or any other property, real or personal, or any part of the proceeds arising from any sale of any such property, from attachment, levy, or sale under execution, or providing for any stay of execution, exemption from civil process, or extension of time for payment; and Maker agrees that any real estate that may be levied upon pursuant to a judgment obtained by virtue hereof, or any writ of execution issued thereon and may be sold upon any such writ in whole or in part in any order desired by Payee. Maker and all endorsers, sureties and, guarantors hereby jointly and severally waive presentment for payment, demand, notice of demand, notice of nonpayment or dishonor, protest and notice of protest of this Note, and all other notices in connection with the delivery, acceptance, performance, default, or enforcement of the payment of this Note, and they agree that the liability of each of them shall be unconditional, without regard to the liability of any other party, and shall not be affected in any manner by any indulgence, extension of time, renewal, waiver or modification granted or consented to by Payee. Maker and all endorsers, sureties, and guarantors consent to any and all extensions of time, renewals, waivers, or modifications that may be granted by Payee with respect to the payment or other provisions of this Note, and to the release of the collateral or any part thereof, with or without substitution, and agree that additional makers, endorsers, guarantors, or sureties may become parties hereto without notice to them or affecting their liability hereunder. 3 4 Payee shall not be deemed, by any act of omission or commission, to have waived any of its rights or remedies hereunder unless such waiver is in writing and signed by Payee, and then only to the extent specifically set forth in writing. A waiver of one event shall not be construed as continuing or as a bar to or waiver of any right or remedy to a subsequent event. Payee will not exercise any right or remedy provided for in this Note or in the Mortgage because of any default of Maker, unless: (a) the default consists of the failure to pay money and, Maker shall have failed to pay the sum or sums due within a period of five (5) days after the due date; or (b) the default consists of something other than the nonpayment of the money and, Payee shall have given written notice of the default to Maker and Maker shall have failed within thirty (30) days after the effective date of such notice to cure the default except that if the default is such that is not susceptible of being cured with due diligence within the thirty (30) days and Maker shall have commenced to cure within such period and diligently and continuously prosecutes the cure to completion, then the cure period shall be extended for a reasonable period of time to allow completion of the cure but in no event longer than ninety (90) days from the date of original notice; provided however, that no such notice from Payee shall be required nor shall Payee be required to allow any part of the said grace period: (i) if a petition in bankruptcy or for reorganization shall have been filed by Maker, or if a Receiver or a Trustee is appointed for Maker or if Maker makes an assignment for the benefit of creditors, or if Maker is levied upon and is about to be sold out upon the Mortgaged Property; or (ii) if a petition in bankruptcy or for reorganization shall been filed against Maker and shall not be dismissed for thirty (30) days after such filing. This instrument shall be governed by and construed according to the laws of the State of Illinois and the parties hereby consent to jurisdiction for any action brought hereunder or pursuant hereto in any federal, state or county court, as applicable. 4 5 IN WITNESS WHEREOF, Maker, intending to be legally bound hereby, has duly executed this Note and has caused it to be duly attested, effective as of the day and year first above written. WITNESS: ROBERT B. GOWENS, JR. /s/ Michael C. Dorf SIGNATURE:/s/ Robert B. Gowens, Jr. - --------------------------- --------------------------------- WITNESS DONNA G. GOWENS /s/ Michael C. Dorf SIGNATURE:/s/ Donna G. Gowens - --------------------------- --------------------------------- Prepared by: Gordon G. Repp Outboard Marine Corporation 100 Sea-Horse Drive Waukegan, IL 60085 5 6 EXHIBIT "A" Mortgaged Property EX-10.17 8 SECOND MORTGAGE 1 EXHIBIT 10.17 SECOND MORTGAGE When Recorded Mail to: X X Gordon G. Repp X Outboard Marine Corporation X 100 Sea-Horse Drive X Waukegan, IL 60085 X X Space Above for Recorder's Use Made as of the 4th day of December, 1998 between Robert B. Gowens, Jr. and Donna G. Gowens, husband and wife, with an address of 55 Trowbridge Circle, Lake Bluff, IL 60044 (hereinafter referred to as "Mortgagor"), and Outboard Marine Corporation, a Delaware corporation with an office at 100 Sea-Horse Drive, Waukegan, Illinois 60085 (hereinafter referred to as the "Mortgagee"). W I T N E S S E T H WHEREAS, Mortgagor is justly indebted to the Mortgagee for money borrowed, as evidenced by a certain Promissory Note (hereinafter called the "Note") of even date herewith, the terms, covenants, and conditions of which are specifically incorporated herein by reference, duly executed and delivered by Mortgagor, payable to the order of Mortgagee at its office aforesaid, or at such other place as may be designated in writing by the holder of said Note, in the principal sum of One Hundred Thousand and no/100 ($100,000.00) dollars advanced by the Mortgagee to the Mortgagor, with interest thereon from the date thereof at the rate set forth therein, such principal and interest being payable at the times and in the manner as therein more particularly set forth. NOW, THEREFORE, in consideration of the principal advances made by the Mortgagee to the Mortgagor and other valuable consideration, and for the purpose of securing the prompt repayment by Mortgagor of said indebtedness and all other sums payable hereunder and under said Note (including, without limitation, costs of collection and reasonable attorney's fees) and also for the purpose of securing the performance of and compliance with all of the terms, covenants, conditions, and warranties herein contained and contained in the Note, the Mortgagor does hereby bargain, sell, give, grant, convey and Mortgage unto the Mortgagee, its successors and assigns all the property lying and being in the town of Lake Bluff, COUNTY OF Lake, STATE OF Illinois as more fully described in Exhibit A attached hereto and made a part 2 hereof, TOGETHER WITH all interest which Mortgagor now has or may hereafter acquire in or to said property and in and to: (a) all easements and rights of way appurtenant thereto; (b) all buildings, structures, improvements, fixtures, appliances, equipment, and other articles of real property of every kind and nature, whether or not physically attached or affixed to said property and now or hereafter installed or placed thereon, and used in connection with any future operation thereof (including, but not limited to, all apparatus and equipment used to provide or supply air-cooling, air-conditioning, heat, gas, water, light, power, laundry, garbage disposal; and fire prevention and extinguishing equipment, elevators, antennas) it being intended and agreed that such items be conclusively deemed to be affixed to and to be part of the property that is mortgaged hereby; (c) all water and water rights (whether or not appurtenant) and shares of stock pertaining to such water or water rights, ownership of which affects said property; (d) all shrubs, trees, crops, and plants; (e) all adjacent lands included in enclosure or occupied by buildings located partly on the above described property; and (f) all claims, demands or causes of actions of every kind (including proceeds of settlements of any such claim, demand, or cause of action of any kind) which Mortgagor now has or may hereafter acquire arising out of acquisition or ownership of the property, including any award of damages or compensation for injury to or in connection with any condemnation for public use of the property to any part thereof (whether or not eminent domain proceedings have been instituted); however, Mortgagee shall have no duty to prosecute any such claim, demand or cause of action; ALSO TOGETHER WITH all rents, issues, profits, royalties, tools, earnings, and incomes therefrom and installments of money payable pursuant to any agreement for sale of said property or any party thereof. (For the purpose of this instrument, including all provisions incorporated by reference herein, all of the foregoing described property, property rights, and interest shall be referred to as the "Property" or the "Premises"). 2 3 TO HAVE AND TO HOLD the same unto the Mortgagee, its successors and assigns forever, subject as aforesaid. AND MORTGAGOR represents, warrants, and covenants that it is the lawful owner of the Property free from all encumbrances and liens, whatsoever, except those items as set forth herein. TO PROTECT THE SECURITY OF THIS MORTGAGE, MORTGAGOR AGREES AS FOLLOWS: 1. REPAIR AND MAINTENANCE OF PROPERTY. Mortgagor shall keep the Property in good condition and repair; not to substantially alter, remove, or demolish any buildings thereon; to restore promptly and in good workmanlike manner any buildings or other improvements which may be damaged or destroyed, to pay when due all claims for labor performed and materials furnished in connection with the Property and not to permit any mechanics lien against the Property; to comply with all laws affecting the Property or requiring any alterations or improvements to be made thereon; not to commit or permit waste thereon; not to commit, suffer, or permit any act upon the Property in violation of law; and to do all other acts that from the character or use of such property may be reasonably necessary to keep the Property in the same condition (reasonable wear and tear excepted) as at the date of this Mortgage; to perform and keep each of the covenants and agreements required to be kept and performed by Mortgagor pursuant to the terms of the Lease and any and all other instruments creating Mortgagor's interest in or defining Mortgagor's rights in respect to the Property. 2. INSURANCE. Mortgagor shall provide and maintain in force, at all times, fire, casualty, mortgage, and other types of insurance with respect to the Property or loan as may reasonably be required by Mortgagee. Each policy of such insurance shall be in an amount, for a term and in form and content by such companies, as may be satisfactory to Mortgagee, with loss payable to Mortgagee, and shall, if required by Mortgagee, be delivered to and remain in possession of Mortgagee as further security for the faithful performance of this Mortgage. Until advised to the contrary by the Mortgagee, such insurance shall include insurance against loss or damage to the buildings and improvements on the Property by fire and any risks covered by insurance of the type known as "fire and extended coverage," in an amount not less than the original amount of the Note or the full replacement cost of the buildings and improvements, whichever is greater. Mortgagor shall furnish Mortgagee with written evidence showing payment of all premiums therefor. At least 30 days prior to the expiration of any insurance policy, a policy renewing or extending such expiring insurance shall be delivered to Mortgagee with written evidence showing payment of the premium therefor, and in the event any such premium is not so delivered to Mortgagee, if required, Mortgagor by executing this Mortgage specifically 3 4 requests Mortgagee to obtain such insurance. Mortgagee, but without obligation so to do, without notice to or demand upon Mortgagor and without releasing Mortgagor from any obligation hereof, may obtain such insurance through or from any insurance agency or company acceptable to it, and pay the premium therefor. Mortgagee shall not be chargeable with obtaining or maintaining such insurance or for the collection of any insurance monies or for any insolvency of any insurer or insurance underwriter. Mortgagee, from time to time may furnish to any insurance agency or company, or any other person, any information contained in or extracted from any insurance policy theretofore delivered to Mortgagee pursuant hereto, and any information concerning the loan secured hereby. Mortgagor hereby assigns to Mortgagee all unearned premiums on any such policy, and agrees that any and all unexpired insurance shall inure to the benefit of, and pass to, the purchaser of the Property conveyed at any sale held hereunder. 3. CASUALTY OR CONDEMNATION. (a) In the event of any casualty to the Property or any part thereof or should the Property or any part thereof or interest thereon be taken or damaged by reason of any public improvement or condemnation proceeding, or in any other manner, or should Mortgagor receive any notice or other information regarding such proceeding, Mortgagor shall give prompt written notice thereof to the Mortgagee. (b) In the event of any damage or destruction to all or any part of the improvements, Mortgagee shall have the option, in its sole discretion, of applying all or part of the insurance proceeds (i) to any indebtedness secured hereby and in such order as Mortgagee may determine, or (ii) to the restoration of the improvements, or (iii) a payment to the Mortgagor. (c) In the event of such loss or damage, all proceeds or insurance shall be payable to Mortgagee and Mortgagor hereby authorizes and directs any affected insurance company to make payment of such proceeds directly to Mortgagee. Mortgagee is hereby authorized and empowered by Mortgagor to settle, adjust, or compromise any claims for loss, damage, or destruction under any policy or policies of insurance. (d) Except to the extent that insurance proceeds are received by Mortgagee and applied to the indebtedness secured hereby, nothing herein contained shall be deemed to excuse Mortgagor from repairing or maintaining the Property as provided herein or restoring all damage or destruction to the Property, regardless of whether or not there are insurance proceeds available or whether any such proceeds are sufficient in amount, and the application or release by Mortgagee or any insurance proceeds shall not cure or waive any default or notice of default under this Mortgage or invalidate any act done pursuant to such notice. 4 5 (e) In the event of a condemnation or other taking, Mortgagee shall be entitled to all compensation, awards, and other payments or relief, up to the amount of its debt and accrued interest thereon, and shall be entitled at its option to commence, appear in, and prosecute in its own name any compromise or settlement in connection with such taking or damage. All such compensation, awards, damages, rights or action, and proceeds awarded to Mortgagor ,up to the amount of its debt and accrued interest thereon, (the "Proceeds") are hereby assigned to the Mortgagee and the Mortgagor agrees to execute such further assignments of the Proceeds as Mortgagee may require. (f) In the event any portion of the Property is so taken or damaged, Mortgagee shall have the option to apply all such Proceeds, after deducting therefrom all costs and expenses (regardless of the particular nature thereof and whether incurred with or without suit), including attorneys' fees, incurred by Mortgagee in connection with such Proceeds, upon any indebtedness secured hereby and in such order as Mortgagee may determine, or to apply all such Proceeds, after such deductions, to the restoration of the Property upon such conditions Mortgagee may determine. Such application or release shall not cure or waive any default or notice of default hereunder or invalidate any act done pursuant to such notice. 4. TAXES, LIENS, AND OTHER SUMS DUE. To pay, satisfy and discharge: (a) all general and special taxes on the Property, and all assessments affecting the Property, at least 10 days before delinquency, (b) all special assessments for public improvements on the Property, when due, without permitting any improvement bond to issue for any special assessment, (c) on demand of Mortgagee, but in no event later than the date such amounts become due, (1) all encumbrances, charges and liens (including without limitation, income tax liens or liens of a similar character, to be impressed or levied by the United States Government, or the State, Municipality, or county, where the Property is located or an agency of any of them), with interest, on such Property, or any part thereof, which are, or appear to Mortgagee to be, prior to or superior hereto, (2) Mortgagee's fees, charges, and expenses for any other statement, information, or services furnished by Mortgagee in connection with the obligations secured hereby (said service may include, but not limited to, the processing by Mortgagee of assumptions, substitutions, changes of owners, recordation of map, plat, or record of survey, grants of easements, and full and partial reconveyances, and the obtaining by Mortgagee of any policies of insurance pursuant to any of the provisions contained in this Mortgage), (3) if the Property includes a leasehold estate, all payments and obligations required of the Mortgagor or his successor in interest under the terms of the instrument or instruments creating such leasehold, (4) all payments and monetary obligations required of the owner of such Property under any easement pertaining to the Property or any modification thereof, and (5) any sums advanced or paid by Mortgagee under any clause or provision of this Mortgage. Should Mortgagor fail to make any such payment, Mortgagee, without contesting the validity or amount, may elect to make or advance such payment together with any costs, 5 6 expenses, fees, or charges relating thereto, including employing counsel and paying his reasonable fees. Any such sum, until so repaid, shall be secured hereby and bear interest from the date it was advanced or paid at 18% per annum and shall be secured by this Mortgage. Mortgagor agrees to notify Mortgagee immediately upon receipt by Mortgagor of notice of an increase in the assessed value of the Property and agrees that Mortgagee, in the name of Mortgagor, may contest by appropriate proceedings such increase in assessment. Mortgagor agrees to notify Mortgagee and appropriate taxing authorities immediately upon the happening of any event which does or may affect the value of the Property, the amount or basis of assessment of the Property, or the availability of any exemption to which Mortgagor is or may be entitled. 5. CLAIMS, DEMANDS AND ACTIONS. (a) To defend any action or proceeding purporting to affect the Property or the condition and integrity of any improvements constructed thereon or purporting to affect the security hereof (whether or not it actually affects the security hereof), or purporting to affect the rights or powers of Mortgagee, and (b) to file and prosecute all necessary claims and actions to prevent or recover for any damage to or destruction of the Property, and enforce against others each and every obligation to be performed by them under any easement pertaining to the Property. Mortgagee is hereby authorized without obligation so to do, to commence, appear in, or defend any action or proceeding, whether or not brought by or against Mortgagor, and with or without action or suit, to exercise or enforce any other right, remedy, or power available or conferred hereunder, whether or not judgment be entered in any action or proceeding. Mortgagee may appear or intervene in any action or proceeding, and retain counsel therein, and take such action therein, as may be advised, and may settle, compromise, or pay the same or any other claims and, in that behalf and for any of said purposes, may expend and advance such sums of money as either may deem necessary. If any action or proceeding be commenced (including an action in connection with the sale of the Property or to collect the debt secured hereby) to which action or proceeding the Mortgagee is made a party, or which it becomes necessary to defend or uphold the lien or the Mortgage, all sums paid or incurred by the Mortgagee (including reasonable counsel fees and all applicable statutory costs, allowances and disbursements), shall be paid by Mortgagor on demand, together with interest thereon at the rate of 18% per annum and any such sum and the interest thereon shall be a lien on the Property prior to any right, or title to, interest in, or claim upon the Property attaching or accruing subsequent to the lien of this Mortgage, and if the Mortgagor shall fail to comply with or perform any warranty or covenant herein, the Mortgagee, at its option, may comply with or perform the same, and the cost thereof, together with interest thereon at the rate of 18% per annum, shall be secured by this Mortgage and shall be paid by the Mortgagor to the Mortgagee. If Mortgagee employs an attorney to collect any or all of the unpaid indebtedness hereof or to enforce any other provision hereof or in connection with the sale of the Property, Mortgagee, in addition to all other costs and fees allowed according to law, shall be reimbursed by Mortgagor 6 7 immediately for all reasonable costs and attorneys' fees incurred by the Mortgagee and the same shall be secured by this Mortgage. 6. LEASES. Mortgagor will not, without the consent of Mortgagee, consent to the cancellation or surrender of, or accept prepayment of rents other than rent paid at the signing of, any lease now or hereinafter covering the Property or any part thereof, nor modify any such lease so as to shorten the term, decrease the rent, accelerate the payment of rent, or change the terms of any renewal option; and any such purported assignment, cancellation, surrender, prepayment, or modification made without the written consent of the Mortgagee shall be void as against the Mortgagee and with respect to this Mortgage. The Mortgagor covenants to keep, observe, and perform all of the covenants on its part to be kept, observed, and performed and to require the tenants to keep, observe, and perform all of the covenants on the part of said tenants to be kept, observed, and performed under any Leases; and in default thereof the Mortgagee shall have the right to perform or to require performance of such Lease covenants, to add any expense incurred in connection therewith to the debt secured hereby, which such expense shall bear interest from the date of payment at the rate of 18% per annum and shall be recoverable as part of the debt secured hereby and shall be immediately due and payable. Mortgagor agrees to furnish to Mortgagee a copy of any modification of any Lease presently in effect and copies of all future leases affecting the Property, and failure to furnish to Mortgagee a copy of any future lease affecting the Property shall be deemed a default under this Mortgage for which the Mortgagee may, at its option, declare the entire unpaid balance of the note secured hereby, to be immediately due and payable. In the event that tenant under the Lease shall elect to terminate the Lease, the proceeds of any termination payment shall be applied first to satisfy the indebtedness secured by each mortgage to which this Mortgage is subordinate, then this Mortgage shall be satisfied and any remaining balance shall be paid to the Mortgagor. 7. INSPECTION AND BUSINESS RECORDS. Mortgagee at any time during the continuation of this Mortgage may enter and inspect the Property at any reasonable time and if the Property is now or hereafter used for commercial or residential income purposes, Mortgagor will promptly deliver to Mortgagee such financial statements, gross income statements, and profit and loss statements of such types and at such intervals as may be required by Mortgagee which will be certified and prepared according to the usual and acceptable accounting principles and practices, which statements shall cover the financial operations relating to the Property, and Mortgagor further agrees when requested by Mortgagee to promptly deliver in writing such further additional information as required by Mortgagee relating to any such financial statements. The provisions of this paragraph 7 shall be subject to the rights of the lessee under the Lease. 7 8 8. RIGHT TO COLLECT AND RECEIVE RENTS AND PROFITS. Upon default by Mortgagor in payment of any indebtedness secured hereby or in the performance of any agreement hereunder, Mortgagee may any time without notice, either in person, by agent, or by receiver to be appointed by the court, and without regard to the adequacy of any security for the indebtedness hereby secured, enter upon the take possession of the Property or any part thereof, make, cancel, enforce, or modify leases, obtain and eject tenants, set or modify rents in its own name, sue for or otherwise collect the rents, income, issues, and profits thereof, including those past due and unpaid, and apply the same, less costs and expenses of operation and collection, including reasonable attorney's fees, upon any indebtedness secured hereby and in such order as Mortgagee may determine, and except for such application, Mortgagee shall not be liable to any person for the collection or non-collection of any rents, income, issues, or profits, nor with failure to assert or enforce any of the foregoing rights. The entering upon and taking possession of such property, the collection of such rents, income, issues, or profits, the doing of other acts herein authorized, and the application thereof as aforesaid shall not cure or waive any default or notice of default hereunder or invalidate any act done pursuant to such notice. The provisions of this paragraph 8 shall be subject to the rights of the lessee under the Lease. 9. EVENTS OF DEFAULT. It shall be an Event of Default if Mortgagor or any subsequent owner of the Property: fails to make any payment of interest or principal or any other sum of money within five (5) days of its due date; or if Mortgagor or any subsequent owner of the property takes any action prohibited by this Mortgage, or fails to perform any obligation secured or required by this Mortgage within thirty (30) days after Mortgagee shall have given written notice to Mortgagor of such default, except that if the default is such that it is not susceptible of being cured with due diligence within the thirty (30) day period and Mortgagor shall have commenced to cure within such period and shall diligently and continuously prosecute the cure to completion, then the cure period shall be extended for a reasonable period of time to allow completion of the cure but in no event longer than ninety (90) days from the date of the original notice; or files a voluntary petition in bankruptcy or shall be adjudicated a bankrupt or insolvent, or shall file any petition or answer seeking or acquiescing in any reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief; or shall seek or consent to the appointment of any trustee, receiver, or liquidator of all or any part of the Property, or of any or all of the revenues, rents, issues, or profits thereof or shall make any general assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they become due; or has entered against it an order, judgment, or decree approving a petition filed against it seeking any reorganization, dissolution, or similar relief under any statute, law, or regulation relating to relief for debtors, which shall remain in effect for 60 days; or has entered against it a writ of execution or attachment or any similar process against all or any part of or interest in the Property, or any judgment involving monetary damages shall be entered against it which shall become a lien on 8 9 the Property or any portion thereof or interest therein which remains in effect for 60 days after its entry or levy. 10. REMEDIES UPON DEFAULT. A. If an Event of Default shall occur, Mortgagee may declare all indebtedness secured hereby to be immediately due and payable and the same shall thereupon become due and payable without any presentment, demand, protest or notice of any kind. Thereafter Mortgagee may: (i) Either in person or by agent, with or without bringing any action or proceeding, enter upon and take possession of the Property, or any part thereof, in its own name, and do any acts which it deems necessary or desirable to preserve the value, marketability, or rentability of the Property, or any part thereof or interest therein, increase the income therefrom with or without taking possession of the Property, sue for or otherwise collect the rents, issues and profits thereof, including those past due and unpaid. The entering upon and taking possession of the Property shall not cure or waive any default or notice of default hereunder or invalidate any act done in response to such default and Mortgagee shall be entitled to exercise every right provided for in the Mortgage or by law upon occurrence of any Event of Default, including the right to exercise any available power of sale; (ii) Commence an action to foreclose this Mortgage, appoint a receiver, or specifically enforce any of the covenants hereof; (iii) Exercise any or all of the remedies available to a secured party under the applicable Uniform Commercial Code. (iv) Sell the Property at public auction for cash, after having first given such notice of hearing as to commencement of foreclosure proceedings and obtained such findings or leave of court as may then be required by law and relating to foreclosure proceedings under power of sale to convey title to the purchase in as full and simple a manner as is permitted by law. B. When the indebtedness hereby secured, or any part thereof, shall become due, whether by acceleration or otherwise, Mortgagee shall have the right to foreclose the lien hereof for such indebtedness or part thereof. In any suit to foreclose the lien hereof or enforce any other remedy of Mortgagee under this Mortgage or the Note, there shall be allowed and 9 10 included as additional indebtedness in the decree for sale or other judgment or decree all expenditures and expenses which may be paid or incurred by or on behalf of Mortgagee including but not limited to attorneys' fees. All expenditures and expenses as may be incurred in the protection of the Property and the maintenance of the lien of this Mortgage, including the fees of any attorney employed by Mortgagee in any litigation or proceeding affecting this Mortgage, or the Note shall be immediately due and payable by Mortgagor, with interest thereon at 18% per annum and shall be secured by this Mortgage. C. No remedy herein provided shall be exclusive of any other remedy herein, or now or hereafter existing by law, but shall be cumulative. Every power or remedy hereby given to Mortgagee or to which Mortgagee may be otherwise entitled may be exercised from time to time and as often as may be deemed expedient, and Mortgagee may pursue inconsistent remedies. If Mortgagee holds any additional security for any obligation secured hereby, it may enforce the sale thereof at its option, either before, contemporaneously with, or after the sale is made hereunder. On any default of Mortgagor, Mortgagee may, at its option, offset against an indebtedness owing by it to Mortgagor, the whole or any part of the indebtedness secured hereby, and the Mortgagee is hereby authorized and empowered, at its option, without any obligation so to do, and without affecting the obligations hereof, to apply toward the payment of any indebtedness secured hereby and of the Mortgagor to the Mortgagee, any and all sums of money which the Mortgagee may have in its possession or under its control, including without limiting the generality of the foregoing, the indebtedness evidenced by an investment certificate or any escrow or trust funds. In order to assure the definiteness and certainty of the rights and obligations herein provided, Mortgagor waives any and all rights of offset of claims and no offset shall relieve Mortgagor from paying installments on the obligations secured hereby as they become due. 11. OBLIGATIONS OF MORTGAGOR. The Mortgagor shall pay when due all interest and principal due on the First Mortgage. 12. NO WAIVER OR MODIFICATION UNLESS IN WRITING. No modification or waiver by Mortgagee of any right under this Mortgage shall be effective unless in writing. Waiver by Mortgagee of any right granted to Mortgagee under this Mortgage or of any provision of this Mortgage as to any transaction or occurrence shall not be deemed a waiver as to any future transaction or occurrence. By accepting payment of any sum secured hereby after its due date, or by making any payment or performing any act on behalf of Mortgagor that Mortgagor was obligated hereunder but failed to make or perform, or by adding any payment so made by Mortgagee to the indebtedness secured hereby, Mortgagee does not waive its right to require prompt payment when due of all sums so secured or to require prompt performance of all other acts required hereunder, or to declare a default for failure so to pay. 10 11 13. CREATION OF SECURITY INTEREST. Mortgagor hereby grants to Mortgagee a security interest in the personal property located on or at the Property, including without limitation any and all property of similar type or kind hereafter located on or at the Property for the purpose of securing all obligations of Mortgagor contained in the Note and this Mortgage. 14. HAZARDOUS OR TOXIC MATERIALS. The Mortgagor shall ensure that the Property is maintained in compliance with, and shall not cause or permit the Property to be in violation of, any federal, state, or local laws, ordinances, or regulations relating to industrial hygiene or to the environmental conditions ("Hazardous Materials Laws") on, under, about, or affecting the Property. Neither the Mortgagor nor any of its tenants shall use, generate, manufacture, store, or dispose of on, under or about the Property or transport to or from the Property any flammable explosives, radioactive materials, hazardous wastes, toxic substances, or related materials, including without limitation any substances defined or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," or "toxic substances," under any applicable federal or state laws or regulations. The Mortgagor shall advise the Mortgagee in writing promptly upon notice of: (i) any and all enforcement, cleanup, removal, or other governmental or regulatory actions instituted, completed, or threatened pursuant to any applicable Hazardous Materials Laws; (ii) all claims made or threatened by any third party against the Mortgagor, the Lessee, or the Property relating to damage, contribution, cost recovery compensation, loss, or injury resulting from any Hazardous Materials, and (iii) the Mortgagor's discovery of any occurrence or condition on any real property adjoining or in the vicinity of the Property that could cause the Property or any part thereof to be subject to any restrictions on the ownership, occupancy, transferability, or use of the Property under any Hazardous Materials Laws. The Mortgagor shall, at its expense, and after obtaining the written consent of the Mortgagee, take all necessary remedial action(s) in response to the presence of any Hazardous Materials on, under, or about the Property. 15. GENERAL PROVISIONS. (a) This Mortgage applies to, inures to the benefit of, and binds all parties hereto, their heirs, legatees, devisees, administrators, executors, successors, and assign. (b) The term "Mortgagee" shall mean the owner and holder, including a pledgee, on any note secured hereby, whether or not named as Mortgagee herein. (c) Wherever the context so requires, the masculine gender includes the feminine and neuter, the singular number includes the plural, and visa versa. (d) Captions and paragraph headings used herein are for convenience only, are not a part of this Mortgage, and shall not be used in construing it. 16. RECEIVER. Upon the commencement of any action to enforce any remedy available hereunder, the Mortgagee shall be entitled as a matter of right without notice, without bond, without regard to the solvency of the Mortgagor, or waste of the Property or adequacy of the security of the Property, to have a receiver appointed for the Property with such powers and 11 12 rights as may be incident to the making of such appointment and the Mortgagor does hereby irrevocably consent to such appointment. 17. GOVERNING LAW. This Mortgage shall be construed according to the laws of the State of Illinois. 18. SALE OR TRANSFER OF PREMISES. Mortgagor agrees that if the Property or any part thereof or any interest therein is sold, assigned, transferred, conveyed or otherwise alienated by Mortgagor, whether voluntarily or involuntarily, or by operation of law other than the First Mortgage or creation of a lien or other encumbrance subordinate to this Mortgage which does not relate to a transfer of rights of occupancy in the Premises, without the prior written consent of Mortgagee, then Mortgagee may declare the Note secured hereby and all other obligations hereunder to be forthwith due and payable. Any change in the legal or equitable title of the Premises or the beneficial ownership of the Premises, including the sale, conveyance or disposition of a majority interest in the Mortgagor, if a corporation or partnership, whether or not of record and whether or not for consideration, shall be deemed to be a transfer of interest in the Premises. IN WITNESS WHEREOF, this Mortgage has been duly executed on the date indicated above. WITNESS: ROBERT B. GOWENS, JR. /s/ Michael C. Dorf SIGNATURE:/s/ Robert B. Gowens, Jr. - -------------------------- ---------------------------------- WITNESS DONNA G. GOWENS /s/ Michael C. Dorf SIGNATURE:/s/ Donna G. Gowens - -------------------------- ---------------------------------- Prepared by: Gordon G. Repp Outboard Marine Corporation 100 Sea Horse Drive Waukegan, IL 60085 12 13 STATE OF ILLINOIS ) ) ss. COUNTY OF COOK ) I, Michael C. Dorf, a Notary Public in and for said County, in the State aforesaid, DO HEREBY CERTIFY, that Robert B. Gowens, Jr. and Donna G. Gowens, husband and wife, personally known to me to be the same persons whose names are subscribed to the foregoing instrument, respectively, appeared before me this day in person and acknowledged that they signed and delivered the said instrument as their own free and voluntary act, for the uses and purposes therein set forth. GIVEN Under my hand and Notarial Seal this 4th day of December, 1998. /s/ Michael C. Dorf ----------------------------------- Notary Public My commission expires: May 7, 2000 14 EXHIBIT "A" PROPERTY EX-10.18 9 NONQUALIFIED STOCK OPTION AGREEMENT 1 EXHIBIT 10.18 NONQUALIFIED STOCK OPTION GRANT AGREEMENT GRANTED TO: Robert B. Gowens DATE OF GRANT: October 1, 1998 GRANTED PURSUANT TO: Outboard Marine Corporation Personal Rewards and Opportunities Program NUMBER OF UNDERLYING SHARES: 100,000 shares EXERCISE PRICE: $22.00 per share VESTING SCHEDULE: 33,333 shares become exercisable on October 1, 1999, an additional 33,333 shares become exercisable on October 1, 2000, and an additional 33,334 shares become exercisable on October 1, 2001. 1. This Nonqualified Stock Option Grant Agreement (the "Agreement") is made and entered into as of October 1, 1998 (the "Date of Grant") between Outboard Marine Corporation, a Delaware corporation (the "Company"), and Robert B. Gowens (the "Employee") pursuant to an employment agreement between the Company and the Employee dated October 1, 1998 ("Employment Agreement"). It is the intent of the Company and the Employee that the Option (as defined in Paragraph 2 below) will not qualify as an "incentive stock option" under Section 422 of the Internal Revenue Code of 1986, as amended from time to time. 2. The Employee is granted an option to purchase 100,000 shares of the common stock of the Company (the "Option"). The Option is granted under the Outboard Marine Corporation Personal Rewards and Opportunities Program ("PROP"), a copy of which is enclosed herewith, and is subject to the terms of PROP and of this Agreement. Terms not defined herein shall have the meanings ascribed thereto 2 in PROP. The Option granted hereunder is a matter of separate inducement and is not in lieu of salary or other compensation for the Employee's services. 3. The Option's Exercise Price is $22.00 per share. 4. The Option, unless sooner terminated or exercised in full, shall expire on the 10th anniversary of the Date of Grant and, notwithstanding anything contained in this Agreement to the contrary, no portion of the Option may be exercised after such date. 5. Subject to Paragraph 4 above and Paragraph 6 below, the Option shall become exercisable according to the exercisability schedule set forth below; provided, that the Employee remains continuously employed by the Company during and through the following consecutive periods. 33,333 shares shall become exercisable on October 1, 1999 and shall remain exercisable until the 10th anniversary of the Date of Grant; 33,333 shares shall become exercisable on October 1, 2000 and shall remain exercisable until the 10th anniversary of the Date of Grant; and 33,334 shares shall become exercisable on October 1, 2001 and shall remain exercisable until the 10th anniversary of the Date of Grant. 6. (a) Death or Disability of Employee. In the event of the death of the Employee, or if the Employee's employment is terminated due to the Employee's disability (as defined in the Employment Agreement), the unexercisable portion of the Option held by the Employee on the date of the Employee's death or the date of the termination of the Employee's employment due to disability, as the case may be, (i) shall vest for the applicable 12-month vesting period in a pro rata amount for the number of full months the Employee was employed during such 12-month vesting period in which his death or disability occurs and (ii) the remainder of the unexercisable portion of the Option shall immediately be forfeited by the Employee as of such date. The exercisable portion of the Option held by the Employee on such date shall 2 3 remain exercisable until the earlier of (i) the end of the 12-month period following the date of the Employee's death or the date of the termination of the Employee's employment due to disability, as the case may be, or (ii) the date the Option would otherwise expire. (b) Termination of Employee's Employment for Cause. If the Employee's employment is terminated by the Company or any of its subsidiaries for Cause, the entire Option (both the exercisable and unexercisable portions of the Option) held by the Employee on the date of the termination of his employment shall immediately be forfeited by the Employee as of such date. (c) Termination of Employee's Employment Without Cause or for Good Reason. If the Employee's employment is terminated by the Company other than for Cause or the Employee's death or disability (as defined in the Employment Agreement), or by the Employee for Good Reason, the unexercisable portion of the Option held by the Employee on the date of the termination of his employment shall become immediately exercisable by the Employee as of such date and the entire Option held by the Employee on such date shall remain exercisable until the earlier of (i) the end of the 90-day period following the date of the termination of the Employee's employment, or (ii) the date the Option would otherwise expire. (d) Termination of Employee's Employment for Other Reasons. If the Employee's employment is terminated by the Company or the Employee resigns for any reason other than described in subsections (a)-(c) of this Section 6, the unexercisable portion of the option held by the Employee on the date of the termination of his employment shall be forfeited by the Employee and the exercisable portion of the Option held by the Employee on such date shall remain exercisable until the earlier of (i) the end of the 90-day period following the date of the termination of the Employee's employment, or (ii) the date the Option would otherwise expire. (e) "Cause" and "Good Reason." For purposes of this Agreement, the terms "Cause" and "Good Reason" shall have the meanings ascribed thereto in the Employment Agreement between the Employee and the Company dated October 1, 1998. 3 4 7. The call and put provisions contained in paragraphs 10 and 11, respectively, of the Employment Agreement are hereby incorporated herein. 8. During the Employee's lifetime, the Option shall not be subject in any manner to alienation, anticipation, sale, assignment, pledge, encumbrance or other transfer and shall be exercisable only by the Employee. Upon the death of the Employee, (i) the Option shall be exercisable only by the executor or administrator of the estate of the deceased Employee or the person or persons to whom the deceased Employee's rights with respect to the Option shall pass by will or the laws of descent and distribution and (ii) the Option shall be exercisable (x) during the period specified in Paragraph 6(a) above, if the Employee's employment terminated as a result of his death or (y) during the same period that the Option would have been exercisable by the Employee if he had survived, if the Employee's death occurred after the Employee's employment terminated. 9. The Employee may exercise the exercisable portion of the Option regardless of whether any other stock option that the Employee has been granted by the Company remains unexercised. In no event may the Employee exercise the Option for a fraction of a share or for less than 100 shares (unless the number purchased is the total balance for which the Option is then exercisable). 10. Any exercise of the Option shall be in writing addressed to the Corporate Secretary of the Company at the principal business office of the Company, specifying the Option being exercised and the number of shares of Stock to be purchased, and specifying a business day not more than 10 days from the date such notice is given for the payment of the purchase price against delivery of the shares of Stock being purchased. Subject to the terms of PROP and this Agreement, the Company shall cause certificates for the shares so purchased to be delivered at the principal business office of the Company, against payment of the full purchase price, on the date specified in the notice of exercise. The Option's Exercise Price shall be paid by the Employee in cash or, if permitted by the Committee in its sole discretion at the time of exercise, in shares of Common Stock currently held by the Employee at the time of exercise, or by a combination of cash and such currently held shares. Any shares of Common Stock delivered in payment of the Exercise Price shall be valued at their then fair market value. 4 5 11. By his acceptance of this Agreement, the Employee agrees to reimburse the Company for any taxes required by any government to be withheld or otherwise deducted and paid by the Company with respect to the issuance or disposition of the shares subject to the Option. In lieu thereof, the Company shall have the right to withhold the amount of such taxes from any other sums due or to become due from the Company to the Employee. The Company may, in its discretion, hold the stock certificate or certificates to which the Employee is entitled upon the exercise of the Option as security for the payment of such withholding tax liability until cash sufficient to pay that liability has been accumulated. In addition, at any time that the Company becomes subject to a withholding obligation under applicable law with respect to the exercise of a Non-Qualified Option (the "Tax Date"), except as set forth below, a holder of a Non-Qualified Option may elect to satisfy, in whole or in part, the holder's related personal tax liabilities (an "Election") by (a) directing the Company to withhold from shares of Stock issuable in the related exercise either a specified number of shares of Stock or shares of Stock having a specified value (in each case not in excess of the related personal tax liabilities), (b) tendering shares of Stock previously issued pursuant to the exercise of a stock option or other shares of Stock owned by the holder, or (c) combining any or all of the foregoing Elections in any fashion. An Election shall be irrevocable. The withheld shares and other shares of Stock and other shares of Stock tendered in payment shall be valued at their fair market value on the Tax Date. The Committee may disapprove of any Election, suspend or terminate the right to make Elections or provide that the right to make Elections shall not apply to particular shares of Stock or exercises. The Committee may impose any additional conditions or restrictions on the right to make an Election as it shall deem appropriate, including any limitations necessary to comply with Section 16 of the Exchange Act. 12. The Employee shall not have any of the rights of a shareholder with respect to the shares of Common Stock underlying the Option until the Option is exercised and the Employee receives such shares. 13. If the Company, in its sole discretion, shall determine that it is necessary, to comply with applicable securities laws, the certificate or certificates representing the shares purchased pursuant to the exercise of the Option shall bear an appropriate legend in form and substance, as 5 6 determined by the Company, giving notice of applicable restrictions on transfer under or with respect to such laws. 14. The Employee covenants and agrees with the Company that if, at the time of exercise of the Option, there does not exist a Registration Statement on an appropriate form under the Securities Act of 1933, as amended (the "Act"), which Registration Statement shall have become effective and shall include a prospectus that is current with respect to the shares subject to the Option, then the Employee shall execute and deliver a certificate to the Company indicating (i) that he is purchasing the shares for his own account and not with a view to the resale or distribution thereof, (ii) that any subsequent offer for sale or sale of any such shares shall be made either pursuant to (x) a Registration Statement on an appropriate form under the Act, which Registration Statement shall have become effective and shall be current with respect to the shares being offered and sold, or (y) a specific exemption from the registration requirements of the Act and any rules and regulations thereunder and applicable state securities laws and regulations, but in claiming such exemption, the Employee shall, prior to any offer for sale or sale of such shares, obtain a favorable written opinion from counsel for or approved by the Company as to the applicability of such exemption and (iii) that the Employee agrees that the certificate or certificates evidencing such shares shall bear a legend to the effect of the foregoing. 15. The Committee may, in its sole discretion, require that the certificate or certificates representing the shares of Common Stock purchased pursuant to the exercise of the Option shall bear an appropriate legend in form and substance, as determined by the Company, giving notice of such conditions and/or restrictions. 16. This Agreement is subject to all terms, conditions, limitations and restrictions contained in PROP, which shall be controlling in the event of any conflicting or inconsistent provisions. 17. This Agreement is not a contract of employment and the terms of the Employee's employment shall not be affected hereby or by any agreement referred to herein except to the extent specifically so provided herein or therein. Nothing herein shall be construed to impose any obligation on the Company to continue the Employee's employment, and it shall not impose any obligation on the Employee's part to remain in the employ of the Company. 6 7 18. The Employee acknowledges and agrees that neither the Company, its shareholders nor its directors and officers, has any duty or obligation to disclose to the Employee any material information regarding the business of the Company or affecting the value of the Common Stock before or at the time of a termination of the employment of the Employee by the Company, including, without limitation, any information concerning plans for the Company to make a public offering of its securities or to be acquired by or merged with or into another firm or entity. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date written below. OUTBOARD MARINE CORPORATION DATED: January 29, 1999. By /s/ David D. Jones, Jr. ------------------------------- David D. Jones, Jr. ACCEPTED this 29 day of January 1999: /s/ Robert B. Gowens - ------------------------------------ Robert B. Gowens 7 EX-10.19 10 SECURED PROMISSORY NOTE 1 EXHIBIT 10.19 $210,000.00 October 6, 1997 SECURED PROMISSORY NOTE FOR VALUE RECEIVED, the undersigned, Andrew Hines (the "Maker"), hereby promises to pay to Outboard Marine Corporation (the "Payee"), at its offices located at 100 Sea-Horse Drive, Waukegan, Illinois 60085 or at such other place as Payee or any holder hereof may from time to time designate to Maker in writing, the principal sum of two hundred and ten thousand dollars ($210,000) plus accrued and unpaid interest on the unpaid principal amount hereof as provided herein, in lawful money of the United States, in accordance with the terms hereafter set forth. Terms used herein and not defined herein shall have the meanings ascribed to them in the Pledge and Security Agreement (as defined below). Interest shall be payable quarterly on March 31, June 30, September 30, and December 31 of each calendar year at an annual rate of 5.81% from the date hereof until payment of the principal amount hereof in full. The principal amount shall be due and payable in full on the earliest of (i) October 6, 2000, (ii) termination of the Maker's employment for any reason with the Payee, or (iii) the Maker's sale, transfer, pledge, hypothecation or other disposal of (a "Sale") any of the Pledged Collateral or the Released Shares under the Pledge and Security Agreement of even date herewith between the Maker and the Payee (the "Pledge and Security Agreement"), provided that if Maker sells, transfers, pledges, hypothecates or otherwise disposes of any of the Pledged Collateral or the Released Shares, the amount of principal and accrued interest hereunder due and payable to Payee as a result of such Sale shall only equal the amount of the net proceeds resulting from such Sale. If for any reason Maker sells, transfers, pledges, hypothecates or otherwise disposes of any of the Pledged Collateral or the Released Shares, the net proceeds resulting from such Sale shall be applied to reduce the principal and all accrued and unpaid interest hereunder. Interest hereunder shall be computed on the basis of the actual number of days elapsed over the period of a 365-day year. This Note may be prepaid in whole or in part without premium or penalty. Maker hereby waives diligence, demand, presentment, protest and (except as herein provided) notice, and assent to extensions of time of 2 payments, releases, surrender or substitution of security or forbearance or other indulgence, without notice. All payments shall be applied first to accrued and unpaid interest hereunder and then to the principal balance hereof. If the Maker shall default in the punctual payment of any sum payable hereunder or upon the occurrence of any Event of Default under the Pledge and Security Agreement, after ten (10) days' notice of such default is given, Payee or any holder hereof may exercise any and all of its rights and remedies at law or in equity or otherwise, including any rights arising under the Pledge and Security Agreement, all such rights and remedies being cumulative, nonexclusive and enforceable alternatively, successively and concurrently. Payee shall have the right to set off all or a portion of any amounts due to Maker by the Payee or its subsidiaries against the amounts due to Payee from Maker with respect to due and unpaid interest or principal. Maker acknowledges and agrees that Maker's obligation to pay principal and interest hereunder shall not be subject to any counterclaims, offsets or defenses against Payee or any holder of this Note that are presently existing or which may arise in the future. If, after the due date for the payment of any principal or interest hereunder, this Note is referred to an attorney for collection, Maker shall be liable for reasonable attorneys' fees and expenses and other reasonable expenses and costs of collection. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICT OF LAWS THEREUNDER AND SHALL BE BINDING UPON THE SUCCESSORS AND ASSIGNS OF MAKER AND SHALL INURE TO THE BENEFIT OF PAYEE, ITS SUCCESSORS, ENDORSEES AND ASSIGNS. The Maker hereby irrevocably consents to the jurisdiction of the Courts of the State of New York and of any Federal Court located in such State in connection with any action or proceeding arising out of or relating to this Note. The Maker further agrees that Maker will not commence or move to transfer any action or proceeding, arising out or relating to the provisions of this Note, in any Court other than one located in the State of New York. In any such litigation, the Maker waives personal service of any summons, complaint or other process and agrees that the service thereof may be made by certified mail directed to 2 3 the Maker at Maker's address as specified for the purposes of notice under Section 6.2 of the Pledge and Security Agreement. This Note may not be changed, modified or terminated orally, but only by an agreement in writing signed by the party to be charged. No extension of the date on which payment is due shall be effective unless signed by Payee. If any term or provision of this Note shall be held invalid, illegal or unenforceable, the validity of all other terms and provisions hereof shall in no way be affected. /s/ Andrew Hines -------------------------- Andrew Hines 3 EX-10.20 11 PLEDGE AND SECURITY AGREEMENT 1 EXHIBIT 10.20 PLEDGE AND SECURITY AGREEMENT THIS PLEDGE AND SECURITY AGREEMENT (this "Agreement") is made as of the 6th day of October, 1997 by and between Andrew Hines, an individual residing at 20 Saddle River Road, Far Hills, New Jersey 07931 (the "Debtor"), and Outboard Marine Corporation, a Delaware corporation with an office at 100 Sea Horse Drive, Waukegan, Illinois 60085 (the "Secured Party"). W I T N E S S E T H: WHEREAS, the Secured Party has loaned the Debtor, in the aggregate, $210,000 (the "Loan") to purchase 11,666.66 shares (together with any and all dividends, distributions, conversions and substitutions thereof, the "Purchase Money Shares") of the common stock, par value $.01 per share (the "Common Stock"), of the Secured Party, and the Debtor has delivered to the Secured Party a promissory note of even date herewith in the principal amount of $210,000 due October 6, 2000, substantially in the form of Exhibit A hereto (the "Note"); WHEREAS, the Secured Party desires security for the payment of the Note in the form of a pledge to the Secured Party by the Debtor of (i) the Purchase Money Shares, (ii) the 2,777.78 shares of Common Stock purchased by the Debtor pursuant to Section 5(a) of his Employment Agreement (as defined below) (such shares, together with any and all dividends, distributions, conversions and substitutions thereof, the "Supplemental Shares", and collectively with the Purchase Money Shares, the "Pledged Shares") of, and (iii) any and all other shares of Common Stock hereafter acquired by Debtor as a result of the exercise of stock options granted to Debtor by the Secured Party or otherwise (together with any and all dividends, distributions, conversions and substitutions thereof, "Additional Shares", and collectively with the Pledged Shares, the "Pledged Collateral"), and the Debtor is willing to pledge the Pledged Collateral upon the terms and conditions hereinafter set forth; and WHEREAS, in order to induce the Secured Party to make the Loan and accept the Note, the Debtor has made certain representations, warranties and covenants to Secured Party, as set forth herein; NOW, THEREFORE, to induce the Secured Party to make the Loan and accept the Note and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the Debtor and the Secured Party hereby agree as follows: 2 1. PLEDGE OF SECURITIES 1.1. Pledge. As security for the prompt payment of all indebtedness, in the aggregate, due under the Note (the "Indebtedness"), the Debtor hereby pledges, assigns, hypothecates, transfers and delivers to the Secured Party, and grants to the Secured Party a first lien on and perfected security interest in the Pledged Shares of the Secured Party which constitute all of the shares of the Secured Party currently owned by the Debtor. As further security for the Indebtedness, the Debtor hereby agrees to pledge, assign, hypothecate, transfer and deliver to the Secured Party, and grant to the Secured Party a first lien on and a perfected security interest in any Additional Shares upon becoming the record owner thereof. 1.2. Stock Dividends; Distributions. If, while this Agreement is in effect, the Debtor or any permitted transferee(s) of the Pledged Collateral shall become entitled to receive or do receive any stock certificate (including, without limitation, any certificate representing a stock dividend or distribution in connection with any reclassification, increase or reduction of capital or issued in connection with any reorganization), option or rights, whether in substitution of or in exchange for any shares of Pledged Collateral, the Debtor and its transferee(s) agree to accept the same as the Secured Party's agent and to hold the same in trust on behalf of the Secured Party and to deliver the same forthwith to the Secured Party in the exact form received, with the endorsement of the Debtor or its transferee(s), as applicable, when necessary, together with undated stock powers duly executed in blank and signature guarantees (if requested by the Secured Party), to be held by the Secured Party subject to the terms of this Agreement, as collateral security for satisfaction of the Indebtedness. Any sums paid upon or in respect of the Pledged Collateral upon the partial or full liquidation or dissolution of the Secured Party shall be paid to the Secured Party and shall be applied to reduce the Indebtedness; and in case any distribution of capital is made on or in respect of the Pledged Collateral or any property shall be distributed upon or with respect to the Pledged Collateral pursuant to a recapitalization or reclassification of the capital of the Secured Party or pursuant to the reorganization thereof, the property so distributed will be duly retained by the Secured Party as collateral security for payment of the Indebtedness. 1.3. Cash Dividends; Voting Rights. Unless an Event of Default, as defined in Section 5, has occurred and is continuing, (i) the Debtor or any transferee of the Pledged Collateral shall be entitled to receive all cash dividends paid in 2 3 respect of the Pledged Collateral, subject to the Debtor's obligation to apply any such payments (net of taxes thereon) to the prepayment of the Indebtedness as set forth in Section 5(a) hereof and (ii) the Debtor or any transferee of the Pledged Collateral shall have the right, from time to time, to vote and give consents with respect to the Pledged Collateral or any part thereof for all purposes not inconsistent with the provision of this Agreement. 1.4. Delivery of Pledged Collateral. Immediately upon execution of this Agreement, the Debtor shall deliver to the Secured Party certificates representing all of the Pledged Stock, together with appropriate undated stock powers duly executed in blank. Immediately upon becoming a record owner of any and all Additional Shares, the Debtor hereby agrees to deliver to the Secured Party certificates representing all such Additional Shares, together with appropriate undated stock powers duly executed in blank. 2. WARRANTY OF OWNERSHIP The Debtor will be the beneficial owner of the Pledged Shares, free and clear of all liens, claims, encumbrances or other rights of third parties of whatever kind or nature, other than the pledge created by this Agreement. There are no outstanding options, rights, warrants or any agreements or commitments with respect to the purchase or transferability of the Pledged Shares. The Debtor has full power, authority and legal right to pledge all of the Pledged Shares and grant the security interest therein pursuant to this Agreement. The pledge, assignment and delivery of the Pledged Shares will create a valid first lien on and a first perfected security interest in such shares of the Pledged Shares and the proceeds thereof and the pledge made pursuant thereto will not be in violation of any existing restrictions upon transfer of the Pledged Shares, or, alternatively, there has been compliance with all such applicable restrictions. 3. ADDITIONAL SHARES The Debtor agrees that it will (a) pledge hereunder, immediately upon its acquisition thereof, any and all Additional Shares, and (b) promptly (and in any event within three business days) deliver to the Secured Party an amendment hereto, duly executed by the Debtor, substantially in the form of Exhibit B attached hereto, in respect of the Additional Shares (each, a "Pledge Amendment"), together with all certificates or instruments representing or evidencing the same. The Debtor 3 4 hereby (i) authorizes the Secured Party to attach each Pledge Amendment to this Agreement, (ii) agrees that all Additional Shares listed on any Pledge Amendment delivered to the Secured Party shall for all purposes hereunder constitute Pledged Collateral, and (iii) is deemed to have made, upon such delivery, the representations and warranties contained in Section 2 hereof with respect to such Additional Shares. 4. TRANSFERABILITY OF PLEDGED COLLATERAL 4.1. Permitted Transfers; Liability of Transferees. Notwithstanding anything to the contrary herein, in the Note, or in the Employment Agreement, the Debtor and any of its successors, transferees or assignees may not sell, assign or transfer record and beneficial ownership of any or all of the Pledged Collateral or the Released Shares (a "Sale") to any third party, without the express prior written consent of the Secured Party; provided, however, that the net proceeds resulting from such Sale shall be applied to reduce the Indebtedness in accordance with the terms of the Note. 4.2. Covenant Against Encumbrances. The Debtor and its permitted successors, transferees and assignees shall not repledge or hypothecate any of the Pledged Collateral or otherwise create, assume or permit to exist any claim or lien on or security interest in any of the Pledged Collateral. 5. DEFAULT AND REMEDIES (a) The following shall constitute an Event of Default under this Agreement: (i) the Debtor fails to make any payment of principal or interest under the Note and such default continues unremedied for ten (10) days after notice thereof is given by the Secured Party to the Debtor, or the Note becomes due as a result of the termination of the Debtor's employment with the Secured Party; (ii) the Debtor (i) fails or is unable to pay its debts generally as they become due, (ii) commences a voluntary case in bankruptcy or any other action or proceeding for any other relief under any law affecting creditors' rights that is similar to a bankruptcy law, (iii) consents by answer or otherwise to the 4 5 commencement against him of any involuntary case in bankruptcy or any other such action or proceeding, (iv) applies for or consents to the appointment of, or the taking of possession by, a receiver, liquidator, assignee, custodian, trustee, conservator, sequestrator or other similar official of or of any substantial part of his property, (v) a receiver, liquidator, assignee, custodian, trustee, conservator, sequestrator or other similar official is appointed to take possession of any substantial part of the Debtor's property without his consent, or (vi) a court enters an order for relief or a decree in an involuntary case in bankruptcy or any other action or proceeding in respect of Debtor or any substantial part of his property under any law affecting creditors' rights that is similar to bankruptcy law; (iii) the Debtor defaults in the performance of any covenant contained herein and such default is not cured within thirty (30) days after notice thereof; or (iv) any of the warranties or representations contained in this Agreement shall have been untrue in any material respect when made. (b) Upon the occurrence of an Event of Default the Secured Party shall have the right to take the following actions with respect to the Pledged Collateral and any other collateral held as security for the Indebtedness: (i) collect by legal proceedings or otherwise all dividends and other sums now or hereafter payable on account of the Pledged Collateral and any other collateral held as security for the Indebtedness; (ii) apply, set off, collect, or sell in one or more sales upon the sending of ten (10) days' notice to the Debtor (which notice Debtor agrees is commercially reasonable), the whole or any part of the Pledged Collateral and any other collateral held as security for the Indebtedness in such order as the Secured Party or any holder of the 5 6 Note may elect, and any such sale may be made either in a public or private sale at its place of business or elsewhere, or at any broker's board or securities exchange, either for cash or upon credit or for future delivery, and the Secured Party or any other holder of the Note may be the purchaser of any or all of the Pledged Collateral or any such other collateral so sold and hold the same thereafter in its own right free from any claim of the Debtor. Each sale shall be made to the highest bidder, but the Secured Party reserves the right to reject any and all bids at such sale which, in its sole discretion, it shall deem inadequate. Demands of performance, except as otherwise herein specifically provided for, notices of sale, advertisements and the presence of property at sale are hereby waived and any sale hereunder may be conducted by any auctioneer or any officer or agent of the Secured Party; and (iii) between the time of the occurrence of the Event of Default and the date of sale of the Pledged Collateral, exercise as to the Pledged Collateral all the rights, powers and remedies of an owner other than the right to vote the Pledged Collateral. Proceeds of the sale of any of the Pledged Collateral and any other collateral held as security for the Indebtedness and all sums received or collected by the Secured Party or any holder of the Note from or on account of the Pledged Collateral shall be applied to the payment of reasonable expenses incurred or paid in connection with any sale, transfer or delivery of the Pledged Collateral or such other collateral, to the payment of any other reasonable costs, charges, attorneys' fees or expenses mentioned herein, and to the payment of the Indebtedness of the Debtor or any part thereof, all in such order and manner as Secured Party or any holder of the Note in its discretion may determine. The balance of such proceeds, if any, shall be returned to the record owner of the Pledged Collateral. 6. RELEASE OF STOCK 6.1. Upon the termination of the employment of the Debtor with the Secured Party as a result of an event 6 7 specified in clause (c), (d) or (e) of Section 9 of the Employment Agreement, dated as of October 6, 1997, between the Debtor and the Secured Party (the "Employment Agreement"), or as a result of the death of the Debtor, the Secured Party or any other holder of the Note shall release both the Supplemental Shares and the Additional Shares (collectively, upon such release, the "Released Shares") from the lien and security interest of this Agreement. 6.2. Upon payment in full of all Indebtedness due under the Note, the Secured Party or any other holder of the Note shall release the Pledged Collateral and any other collateral then held as security for the Indebtedness from the lien and security interest of this Agreement. 7. MISCELLANEOUS 7.1. The Debtor hereby waives any and all rights which he may have to require the Secured Party to proceed against any person or any collateral or to pursue any other remedy prior to enforcing his rights hereunder as well as any and all rights which he may have as a result of any extension or postponement of the time of payment or any other indulgence by the Secured Party or release of collateral, and hereby consents to any or all such action taken by the Secured Party. The Debtor hereby releases the Secured Party from any claims, causes of action and demands at any time arising out of or with respect to this Agreement, the Note, the use of the Pledged Collateral or any other collateral pledged to secure the Indebtedness and/or any actions taken or omitted to be taken by Secured Party with respect thereto, and the Debtor agrees to hold Secured Party harmless from and with respect to any and all such claims, causes of action and demands, except with respect to acts or omissions constituting gross negligence or willful misconduct. The Secured Party's prior recourse to any part or all of the Pledged Collateral or any other collateral pledged to secure the Indebtedness shall not constitute a condition of any demand, suit or proceeding for payment or collection of the Note, nor shall any demand, suit or proceeding for payment or collection of the Note constitute a condition of any recourse by Secured Party to the Pledged Collateral or such other collateral. No act, failure or delay by Secured Party shall constitute a waiver of its rights and remedies hereunder or otherwise. No single or partial waiver by Secured Party of any covenant, warranty, representation, default, right or remedy which Secured Party may have shall operate as a waiver of any other covenant, warranty, representation, default, right or remedy or of the same covenant, 7 8 warranty, representation, default, right or remedy on a future occasion. 7.2. All notices hereunder shall be in writing and hand-delivered, telecopied or sent by overnight courier service or registered or certified mail, postage prepaid, to the address of the parties set forth hereinabove or to the address of any transferee of the Pledged Collateral provided to the Debtor, or to such other address as way be designated in a notice pursuant hereto; provided, that a copy of all notices hereunder sent to the Secured Party shall be sent to Greenmarine Holdings LLC, 277 Park Avenue, 27th Floor, New York, New York 10172, attention: Gary Duberstein. All such notices shall be deemed duly given upon receipt or upon refusal if properly delivered. 7.3. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns in interest, and this Agreement is to be construed and performed in accordance with the laws of New York without giving effect to the principles of conflicts of law thereunder. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original and one and the same agreement. 7.4. This Agreement may not be changed orally, but only by an agreement in writing and signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. 7.5. The parties hereto agree that each section and provision herein shall be treated as a separate and independent clause, and the enforceability of any one clause shall in no way impair the enforceability of any other clauses herein. If at any time in the future any one or more of the sections or provisions contained in this Agreement shall for any reason be held to be excessively broad as to scope, activity or subject so as to be unenforceable, such sections or provisions shall be construed by limiting and reducing them, so as to be enforceable to the extent compatible with the applicable law as it shall then appear. 8 9 IN WITNESS WHEREOF, the undersigned have caused this Pledge and Security Agreement to be executed the day and year first above written. /s/ Andrew Hines ------------------------------------ Debtor: Andrew Hines Secured Party: OUTBOARD MARINE CORPORATION By: /s/ Gary K. Duberstein -------------------------------- Name: Gary K. Duberstein Title: Vice Chairman of the Board 9 10 Exhibit B FORM OF PLEDGE AMENDMENT This Pledge Amendment, dated ____________________, ____, is delivered pursuant to Section 3 of the Pledge and Security Agreement referred to below. The undersigned hereby agrees that this Pledge Amendment may be attached to the Pledge and Security Agreement, dated as of October 6, 1997, between the undersigned and Outboard Marine Corporation and that the Additional Shares listed on this Pledge Amendment shall be and become part of the Pledged Collateral referred to in the Pledge and Security Agreement and shall secure all Indebtedness of the undersigned. The terms defined in the Pledge and Security Agreement are being used herein as therein defined. By: ________________________________ name: Stock Certificate Number Issuer Class of Stock No(s). Par Value of Shares - ------ -------------- ------ --------- --------- 10 EX-10.21 12 NONQUALIFIED STOCK OPTION GRANT AGREEMENT 1 Exhibit 10.21 Outboard Marine Corporation 100 Sea Horse Drive Waukegan, Illinois 60085 October 6, 1997 Mr. Andrew Hines 20 Saddle River Road Far Hills, New Jersey 07931 Re: Grant of Nonqualified Options Dear Mr. Hines: Reference is made hereby to that certain Employment Agreement between you and Outboard Marine Corporation (the "Company"), of even date herewith (the "Employment Agreement"), which, among other things, provides for the grant to you of two nonqualified options to purchase shares of common stock, par value $.01 per share, of the Company (the "Shares") on the terms and subject to the conditions set forth in the Employment Agreement and in this letter agreement (the "Option Agreement"). For purposes of Section 280G of the Internal Revenue Code of 1986, as amended, this Option Agreement is subject to ratification by the affirmative vote of stockholders of the Company representing a majority of the Shares outstanding. A copy of the Employment Agreement is annexed hereto as Exhibit A and shall be deemed a part hereof as if fully set forth herein. Unless the context otherwise requires, all terms defined in the Employment Agreement shall have the same meanings when used herein. 1. Option. (a) The Company hereby grants to you, as a matter of separate inducement and not in lieu of any salary or other compensation for your services, the right and option (the "Option") to purchase, in accordance with the terms and subject to the conditions set forth in the Employment Agreement and in this Option Agreement, an aggregate of 180,000 Shares at a cash price of $18.00 per 2 Share, such option price being, in the judgment of the Board of Directors, not less than one hundred percent (100%) of the fair market value of such Share at the date hereof. The Option is not intended to qualify as an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended. (b) During a period commencing on the first anniversary of the date of this Option Agreement and terminating at the close of business on the tenth anniversary hereof of the date of this Option Agreement of the date of this Option Agreement (the "Expiration Date", this Option may be exercised by you from time to time in whole or in part to the extent set forth below: i) this Option may not be exercised by you prior to the first anniversary of the date of this Option Agreement; ii) up to thirty-three and a third percent (33 1/3%) of the total number of Shares subject to this Option may be purchased by you beginning on the first anniversary of the date of this Option Agreement; iii) up to an additional thirty-three and a third percent (33 1/3%) of the total number of Shares subject to this Option may be purchased by you beginning on the second anniversary of the date of this Option Agreement; and iv) the balance of the total number of Shares subject to this Option may be purchased by you beginning on the third anniversary of the date of this Option Agreement; provided, however, that to the extent Executive dies during any such twelve-month period referred to above, any unvested portion of the Option shall vest prorata for the number of full months Executive was employed during such twelve-month period in which his death occurs. 2. Termination of Options. The unexercised portion of the Option granted herein will automatically and without notice terminate and become null and void upon the earliest to occur of the following: (a) on the Expiration Date; 2 3 (b) the date of termination of your employment if your employment is terminated by you other than for Good Reason (as defined in the Employment Agreement) or is terminated by the Company for Cause (as defined in the Employment Agreement); (c) the expiration of 90 days after the date of termination by the Company of your employment other than for Cause or the termination by you of your employment for Good Reason, during which period the Option will be exercisable only to the extent that it had been exercisable immediately prior to the termination of your employment; (d) the expiration of one (1) year after your death if your death occurs during your employment, during which period the Option will be exercisable only to the extent that it had been exercisable immediately prior to and as a result of your death; or (e) the expiration of 90 days after termination of your employment as a result of your Total Disability (as defined in the Employment Agreement), during which period the Option will be exercisable only to the extent that it would have been exercisable immediately prior to your termination of Employment. 3. Non-transferability of Options. The Option is not transferable by you otherwise than by will or the laws of descent and distribution or to a trust exclusively for the benefit of members of your family, and are exercisable, during your lifetime, only by you or the trustee of any such trust to which you shall have transferred the Option. The Option may not be assigned, transferred (except by will or the laws of descent and distribution or to such a trust), pledged or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to execution, attachment or similar proceeding. Any attempted assignment, transfer, pledge, hypothecation or other disposition of the Option contrary to the provisions hereof, and the levy of any attachment or similar proceeding upon the Option, shall be null and void and without effect. 4. Exercise of the Option. (a) Purchase of Shares. Any exercise of the Option shall be in writing addressed to the Secretary of the Company at the principal place of business of the Company, 3 4 shall be substantially in the form attached hereto as Exhibit B and shall be accompanied by a certified or bank cashier's check to the order of the Company in the full amount of the purchase price of the Shares so purchased. (b) Legends. If the Company, in its sole discretion, shall determine that it is necessary, to comply with applicable securities laws, the certificate or certificates representing the Shares purchased pursuant to the exercise of the Option shall bear an appropriate legend in form and substance, as determined by the Company, giving notice of applicable restrictions on transfer under or in respect of such laws. (c) Investment Intent. You hereby covenant and agree with the Company that if, at the time of exercise of the Option, there does not exist a Registration Statement on an appropriate form under the Securities Act of 1933, as amended (the "Act"), which Registration Statement shall have become effective and shall include a prospectus which is current with respect to the Shares subject to the Option, (i) that you will represent that you are purchasing the Shares for your own account and not with a view to the resale or distribution thereof and (ii) that any subsequent offer for sale or sale of any such Shares shall be made either pursuant to (x) a Registration Statement on an appropriate form under the Act, which Registration Statement shall have become effective and shall be current with respect to the Shares being offered and sold, or (y) a specific exemption from the registration requirements of the Act, but in claiming such exemption, you shall, if requested by the Company, prior to any offer for sale or sale of such Shares, obtain a favorable written opinion from counsel for or approved by the Company as to the applicability of such exemption. (d) The exercise of the Option after termination of your employment with the Company shall be subject to satisfaction of the conditions precedent that you neither (i) compete with, or take other employment with or render services to a competitor of, the Company, its subsidiaries or affiliates without the written consent of the Company, nor (ii) conduct yourself in a manner adversely affecting the Company, as determined in good faith by the Company's Board of Directors. 5. Adjustment Provisions; Change in Control. 4 5 (a) If there shall be any change in the Shares, through merger, consolidation, reorganization, recapitalization, stock dividend, stock split, reverse stock split, split up, spinoff, combination of shares, exchange of shares, dividend in kind or other like change in capital structure or distribution (other than normal cash dividends) to all holders of Shares, an adjustment shall be made to the Option such that the Option shall thereafter be exercisable for such securities, cash and/or other property as would have been received in respect of the Shares subject to the Option had it been exercised in full immediately prior to such change or distribution, and such an adjustment shall be made successively each time any such change shall occur. In addition, in the event of any such change or distribution, in order to prevent dilution or enlargement of your rights hereunder, the Company will have authority to adjust, in an equitable manner, the number and kind of shares that may be issued with respect to the Option hereunder, the number and kind of shares subject to the Option, the exercise price applicable to the Option, and the Market Value (as hereinafter defined) of the Shares and other value determinations applicable to the Option. Appropriate adjustments may also be made by the Company in the terms of the Option to reflect such changes or distributions and to modify any other terms of the Option on an equitable basis. In addition, the Company is authorized to make adjustments to the terms and conditions of the Option, in recognition of unusual or nonrecurring events affecting the Company or the financial statements of the Company, or in response to changes in applicable laws, regulations, or accounting principles. (b) Notwithstanding any other provision hereunder, if there is a "Change in Control" (as hereinafter defined) of the Company, the Option shall immediately become exercisable. For purposes of this Section 7(b), a "Change in Control" of the Company shall be deemed to have occurred upon any of the following events: (i) The consummation of a direct or indirect sale, lease, exchange or other transfer of all or substantially all of the assets of the Company to any person or entity or group of persons or entities acting in concert as a partnership or other group (a "Group of Persons") other than a subsidiary of the Company; (ii) The replacement of a majority of the Board of Directors of the Company and such replacement 5 6 shall not have been approved by a majority of the directors on the Board of Directors at such time; or (iii) A Group of Persons (other than Greenmarine Holdings LLC, one or more of its members or any affiliate (as defined in the Exchange Act) of any such member) shall, as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise, have become the beneficial owner (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of securities of the Company representing more than 50% of the combined voting power of the then outstanding securities of the Company ordinarily (and apart from rights arising under special circumstances) having the right to vote in the election of directors. Notwithstanding the foregoing, (A) changes in the relative beneficial ownership among members of Greenmarine Holdings LLC shall not, by themselves, constitute a Change in Control of the Company, and (B) any event listed in clauses (i) through (iii) above that the Board of Directors determines in good faith not to be a Change in Control of the Company, shall not constitute a Change in Control of the Company. The Company, in its discretion, may determine that, upon the occurrence of a Change in Control of the Company, the Option shall terminate within a specified number of days after notice to you, and you shall receive, with respect to each Share subject to the Option, an amount equal to the excess, if any, of the Market Value of such Shares immediately prior to the occurrence of such Change in Control over the exercise price per share of the Option; such amount to be payable in cash, in one or more kinds of property (including the property, if any, payable in the transaction) or in a combination thereof, as the Company, in its discretion, shall determine. (c) "Market Value" shall mean the fair market value of the Shares determined in good faith by the Board of Directors of the Company, provided that in the event Shares shall be traded on a national stock exchange or a public market shall exist for the Shares on a national quotation system, the fair market value for the Shares shall be the average closing price for the Shares for the 20 trading days immediately preceding the date on which Market Value is to be determined. 6 7 6. Withholding Taxes. The Company may withhold or cause to be withheld from sums due or to become due to you from the Company or a subsidiary or affiliate thereof an amount necessary to satisfy its obligation (if any) to withhold taxes incurred by reason of the exercise of these Options, or may require you to reimburse the Company in such amount and may make such reimbursement a condition to the delivery of the Shares pursuant to the exercise of this Option Agreement. 7. Tenure. Your right to continue to serve the Company or any of its subsidiaries as an officer, employee, or otherwise, shall not be enlarged or otherwise affected by his award hereunder. 8. Notices. Any notice required or permitted under this Option Agreement shall be deemed to have been duly given if delivered, telecopied or mailed, certified or registered mail, return receipt requested to you, in any case, in accordance with Section 29 of the Employment Agreement. 9. Failure to Enforce Not a Waiver. The failure of the Company to enforce at any time any provision of the this Option Agreement shall in no manner be construed to be a waiver of such provision or of any other provision hereof. 10. Governing Law. This Option Agreement shall be governed by and construed according to the laws of the State of Delaware, applicable to agreements made and performed in that state. 11. Partial Invalidity. The invalidity or illegality of any provision herein shall not be deemed to affect the validity of any other provision. 12. Counterparts. This Option Agreement may be executed in counterparts each of which taken together shall constitute one and the same instrument. 13. Amendment. This Option Agreement may not be amended except by an instrument in writing making specific reference hereto signed by each of the parties hereto; provided, however, the provisions of Section 1 hereof may not be amended more than once every six (6) months, other than to comport with changes in the Internal Revenue Code of 1986, as amended, or the rules and regulations thereunder, 7 8 or the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder. Please indicate your acceptance of all the terms and conditions of this Option Agreement by signing and returning a copy hereof. Very truly yours, OUTBOARD MARINE CORPORATION By: /s/ Gary K. Duberstein Name: Gary K. Dubertstein Title: Vice Chairman of the Board ACCEPTED as of the date and year first written above: /s/ Andrew Hines Andrew Hines 8 9 Exhibit A Employment Agreement (see attached) 9 10 Exhibit B Exercise Letter [Date] Outboard Marine Corporation 100 Sea Horse Drive Waukegan, Illinois 60085 Attention: Corporation Secretary Re: Nonqualified Stock Option Granted Pursuant to Employment Agreement Dear Sir: I am the holder of a Nonqualified Stock Option granted to me pursuant to the above-referenced Employment Agreement, dated as October 6, 1997, between Outboard Marine Corporation (the "Company") and me to purchase 180,000 shares of common stock of the Company ("Shares") at a price of $18.00 per Share. I hereby exercise that option with respect to ______ Shares, the total purchase price for which is $_____________________. On _______________ [a business day not more than 15 days from the date of this letter], I will present a certified check payable to the order of the Company in the amount of $____________ [and ___________ Shares (in proper form for transfer and accompanied by all requisite stock transfer stamps or cash in lieu thereof) having a fair market value equal to $______________] representing the total purchase price for the Shares. The certificate or certificates representing the Shares should be registered in my name and upon the presentation of that check [and ___________ Shares] the Shares should be [delivered to me] [forwarded to me at the address indicated below]. I hereby agree to pay the full amount of all withholding taxes which the Company or any subsidiary or parent corporation is required to withhold in connection with the exercise of this option and further authorize the Company, or the subsidiary or parent corporation, to withhold from any cash compensation paid to me or in my behalf an amount sufficient to discharge the Federal, State or local income or employment tax withholding obligation to 10 11 which the Company, or the subsidiary or parent corporation, becomes subject by reason of the exercise of this option. I agree that the corporation by which I am employed may, in its discretion, hold the stock certificate to which I become entitled upon exercise of this option, as security for the payment of the aforementioned withholding tax liability, until cash sufficient to pay that liability has been accumulated. Please acknowledge receipt of the exercise of my stock option on the attached copy of this letter. Very truly yours, Andrew Hines Address Social Security Number RECEIPT ACKNOWLEDGED: OUTBOARD MARINE CORPORATION By: Name: Title: 11 EX-10.22 13 INCENTIVE STOCK OPTION GRANT AGREEMENT 1 EXHIBIT 10.22 INCENTIVE STOCK OPTION GRANT AGREEMENT GRANTED TO: David D. Jones, Jr. DATE OF GRANT: December 30, 1997 GRANTED PURSUANT TO: (i) Paragraph 6 of an employment agreement dated March 10, 1998 between the Company and David D. Jones, Jr. and (ii) Outboard Marine Corporation Personal Rewards and Opportunities Program NUMBER OF UNDERLYING SHARES: 61,105 shares EXERCISE PRICE: $18.00 per share VESTING SCHEDULE: 5,555 shares become exercisable on the Date of Grant and an additional 5,555 shares become exercisable on each of the next 10 January 1sts following the Date of Grant 1. This Incentive Stock Option Grant Agreement (the "Agreement") is made and entered into as of December 30, 1997 (the "Date of Grant") between Outboard Marine Corporation, a Delaware corporation (the "Company"), and David D. Jones, Jr. (the "Employee") pursuant to Paragraph 6 of an employment agreement dated March 10, 1998 between the Company and the Employee (the "Employment Agreement "). It is the intent of the Company and the Employee that the Option (as defined in Paragraph 2 below) shall qualify as an "incentive stock option" ("ISO") under Section 422 of the Internal Revenue Code of 1986, as amended from time to time, but the Company makes no warranty as to the qualification of the Option as an ISO. Moreover, to the extent that the aggregate fair market value of the shares with respect to which the Option and all other ISOs granted to the Employee by the Company are exercisable for the first time during any calendar year exceeds $100,000, such options shall not qualify as ISOs. 2. The Employee is granted an option to purchase 61,105 shares of the common stock of the Company (the "Option"). The Option is granted under the Outboard Marine Corporation Personal Rewards and Opportunities Program ("PROP"), a copy of which is enclosed herewith and to the extent directly relating to the Option, under Paragraphs 6, 11, 12 and 13 of the Employment Agreement, the provisions of which are incorporated herein. The Option granted hereunder is a matter of separate inducement and is not in lieu of salary or other compensation for the Employee's services. 3. The Option's Exercise Price is $18.00 per share. 4. The Option, unless sooner terminated or exercised in full, shall expire on the 10th anniversary of the Date of Grant and, notwithstanding anything contained in this Agreement to the contrary, no portion of the Option may be exercised after such date. 5. Subject to Paragraph 4 above and the terms of the Employment Agreement incorporated herein, the Option shall become exercisable according to the exercisability schedule set forth below: 2 5,555 shares shall become exercisable on the Date of Grant and shall remain exercisable until the 10th anniversary of the Date of Grant; 5,555 shares shall become exercisable on January 1, 1998 and shall remain exercisable until the 10th anniversary of the Date of Grant; 5,555 shares shall become exercisable on January 1, 1999 and shall remain exercisable until the 10th anniversary of the Date of Grant; 5,555 shares shall become exercisable on January 1, 2000 and shall remain exercisable until the 10th anniversary of the Date of Grant; 5,555 shares shall become exercisable on January 1, 2001 and shall remain exercisable until the 10th anniversary of the Date of Grant; 5,555 shares shall become exercisable on January 1, 2002 and shall remain exercisable until the 10th anniversary of the Date of Grant; 5,555 shares shall become exercisable on January 1, 2003 and shall remain exercisable until the 10th anniversary of the Date of Grant; 5,555 shares shall become exercisable on January 1, 2004 and shall remain exercisable until the 10th anniversary of the Date of Grant; 5,555 shares shall become exercisable on January 1, 2005 and shall remain exercisable until the 10th anniversary of the Date of Grant; 5,555 shares shall become exercisable on January 1, 2006 and shall remain exercisable until the 10th anniversary of the Date of Grant; and 5,555 shares shall become exercisable on January 1, 2007 and shall remain exercisable until the 10th anniversary of the Date of Grant. 6. During the Employee's lifetime, the Option shall not be subject in any manner to alienation, anticipation, sale, assignment, pledge, encumbrance or other transfer and shall be exercisable only by the Employee. Upon the death of the Employee, the Option shall be exercisable only by the executor or administrator of the estate of the deceased Employee or the person or persons to whom the deceased Employee's rights with respect to the Option shall pass by will or the laws of descent and distribution. 7. The Employee may exercise the exercisable portion of the Option regardless of whether any other stock option that the Employee has been granted by the Company remains unexercised. In no event may the Employee exercise the Option for a fraction of a share or for less than 100 shares (unless the number purchased is the total balance for which the Option is then exercisable). 8. Any exercise of the Option shall be in writing addressed to the Corporate Secretary of the Company at the principal business office of the Company, specifying the Option being exercised and the number of shares of Stock to be purchased, and specifying a business day not more than 10 days from the date such notice is given for the payment of the purchase price against delivery of the shares of Stock being purchased. Subject to the terms of PROP and this Agreement, the Company shall cause certificates for the shares so purchased to be delivered at the principal business office of the Company, against payment of the full purchase price, on the date specified in the notice of exercise. The Option's Exercise Price shall be paid by the Employee in cash or, if permitted by the Committee in its sole discretion at the time of exercise, in shares of Common Stock currently held by the Employee at the time of exercise, or by a combination of 2 3 cash and such currently held shares. Any shares of Common Stock delivered in payment of the Exercise Price shall be valued at their then fair market value. 9. By his acceptance of this Agreement, the Employee agrees to reimburse the corporation employing the Employee for any taxes required by any government to be withheld or otherwise deducted and paid by such corporation with respect to the issuance or disposition of the shares subject to the Option. In lieu thereof, the corporation that employs the Employee shall have the right to withhold the amount of such taxes from any other sums due or to become due from such corporation to the Employee. The corporation that employs the Employee may, in its discretion, hold the stock certificate or certificates to which the Employee is entitled upon the exercise of the Option as security for the payment of such withholding tax liability until cash sufficient to pay that liability has been accumulated. In addition, at any time that the Company becomes subject to a withholding obligation under applicable law with respect to the exercise of a Non-Qualified Option (the "Tax Date"), except as set forth below, a holder of a Non-Qualified Option may elect to satisfy, in whole or in part, the holder's related personal tax liabilities (an "Election") by (a) directing the Company to withhold from shares of Stock issuable in the related exercise either a specified number of shares of Stock or shares of Stock having a specified value (in each case not in excess of the related personal tax liabilities), (b) tendering shares of Stock previously issued pursuant to the exercise of a stock option or other shares of Stock owned by the holder, or (c) combining any or all of the foregoing Elections in any fashion. An Election shall be irrevocable. The withheld shares and other shares of Stock and other shares of Stock tendered in payment shall be valued at their fair market value on the Tax Date. The Committee may disapprove of any Election, suspend or terminate the right to make Elections or provide that the right to make Elections shall not apply to particular shares of Stock or exercises. The Committee may impose any additional conditions or restrictions on the right to make an Election as it shall deem appropriate, including any limitations necessary to comply with Section 16 of the Exchange Act. 10. The Employee shall not have any of the rights of a shareholder with respect to the shares of Common Stock underlying the Option until the Option is exercised and the Employee receives such shares. 11. If the Company, in its sole discretion, shall determine that it is necessary, to comply with applicable securities laws, the certificate or certificates representing the shares purchased pursuant to the exercise of the Option shall bear an appropriate legend in form and substance, as determined by the Company, giving notice of applicable restrictions on transfer under or with respect to such laws. 12. The Employee covenants and agrees with the Company that if, at the time of exercise of the Option, there does not exist a Registration Statement on an appropriate form under the Securities Act of 1933, as amended (the "Act"), which Registration Statement shall have become effective and shall include a prospectus that is current with respect to the shares subject to the Option, then the Employee shall execute and deliver a certificate to the Company indicating (i) that he is purchasing the shares for his own account and not with a view to the resale or distribution thereof, (ii) that any subsequent offer for sale or sale of any such shares shall be made either pursuant to (x) a Registration Statement on an appropriate form under the Act, which Registration Statement shall have become effective and shall be current with respect to the shares being offered and sold, or (y) a specific exemption from the registration requirements of the Act and any rules and regulations thereunder and applicable state securities laws and regulations, but in claiming such exemption, the Employee shall, prior to any offer for sale or sale of such shares, obtain a favorable written opinion from counsel for or approved by the Company as to the applicability of such exemption and (iii) that the Employee agrees that the certificate or certificates evidencing such shares shall bear a legend to the effect of the foregoing. 13. This Agreement is not a contract of employment and the terms of the Employee's employment shall not be affected hereby or by any agreement referred to herein except to the extent specifically so provided herein or therein. Nothing herein shall be construed to impose any obligation on the Company to continue the Employee's employment, and it shall not impose any obligation on the Employee's part to remain in the employ of the Company. 3 4 14. The Employee acknowledges and agrees that neither the Company, its shareholders nor its directors and officers, has any duty or obligation to disclose to the Employee any material information regarding the business of the Company or affecting the value of the Common Stock before or at the time of a termination of the employment of the Employee by the Company, including, without limitation, any information concerning plans for the Company to make a public offering of its securities or to be acquired by or merged with or into another firm or entity. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date written below. OUTBOARD MARINE CORPORATION By /s/ Gary K. Duberstein __________________________ Gary K. Duberstein ACCEPTED: Signature of Employee /s/ David D. Jones, Jr. ______________________________ DAVID D. JONES, JR. Name of Employee (please print) Date: 12/21/98 4 EX-10.23 14 NONQUALIFIED STOCK OPTION GRANT AGREEMENT 1 EXHIBIT 10.23 NONQUALIFIED STOCK OPTION GRANT AGREEMENT GRANTED TO: David D. Jones, Jr. DATE OF GRANT: March 10, 1998 GRANTED PURSUANT TO: (i) Paragraph 6 of an employment agreement dated March 10, 1998 between the Company and David D. Jones, Jr. and (ii) Outboard Marine Corporation Personal Rewards and Opportunities Program NUMBER OF UNDERLYING SHARES: 238,895 shares EXERCISE PRICE: $18.00 per share VESTING SCHEDULE: 88,890 shares become exercisable on September 25, 1998, an additional 94,445 shares become exercisable on September 25, 1999, and an additional 55,560 shares become exercisable on September 25, 2000. 1. This Nonqualified Stock Option Grant Agreement (the "Agreement") is made and entered into as of March 10, 1998 (the "Date of Grant") between Outboard Marine Corporation, a Delaware corporation (the "Company"), and David D. Jones, Jr. (the "Employee") pursuant to Paragraph 6 of an employment agreement between the Company and the Employee dated March 10, 1998 ("Employment Agreement"). It is the intent of the Company and the Employee that the Option (as defined in Paragraph 2 below) will not qualify as an "incentive stock option" under Section 422 of the Internal Revenue Code of 1986, as amended from time to time. 2. The Employee is granted an option to purchase 238,895 shares of the common stock of the Company (the "Option"). The Option is granted under the Outboard Marine Corporation Personal Rewards and Opportunities Program ("PROP"), a copy of which is enclosed herewith and to the extent directly relating to the Option, under Paragraphs 6, 11, 12 and 13 of the Employment Agreements, the provisions of which are incorporated herein by reference. The Option granted hereunder is a matter of separate inducement and is not in lieu of salary or other compensation for the Employee's services. 3. The Option's Exercise Price is $18.00 per share. 4. The Option, unless sooner terminated or exercised in full, shall expire on the 10th anniversary of the Date of Grant and, notwithstanding anything contained in this Agreement to the contrary, no portion of the Option may be exercised after such date. 5. Subject to Paragraph 4 above and the terms of the Employment Agreement incorporated herein, the Option shall become exercisable according to the exercisability schedule set forth below. 88,890 shares shall become exercisable on September 25, 1998 and shall remain exercisable until the 10th anniversary of the Date of Grant; 2 94,445 shares shall become exercisable on September 25, 1999 and shall remain exercisable until the 10th anniversary of the Date of Grant; and 55,560 shares shall become exercisable on September 25, 2000 and shall remain exercisable until the 10th anniversary of the Date of Grant. 6. During the Employee's lifetime, the Option shall not be subject in any manner to alienation, anticipation, sale, assignment, pledge, encumbrance or other transfer and shall be exercisable only by the Employee. Upon the death of the Employee, the Option shall be exercisable only by the executor or administrator of the estate of the deceased Employee or the person or persons to whom the deceased Employee's rights with respect to the Option shall pass by will or the laws of descent and distribution. Notwithstanding the preceding two sentences, the Option may be transferred by the Employee solely to his spouse, siblings, parents, children and/or grandchildren or trusts for the benefit of such persons or partnerships, limited liability companies or other entities owned soley by such persons subject to any restrictions otherwise applicable to the Option. 7. The Employee may exercise the exercisable portion of the Option regardless of whether any other stock option that the Employee has been granted by the Company remains unexercised. In no event may the Employee exercise the Option for a fraction of a share or for less than 100 shares (unless the number purchased is the total balance for which the Option is then exercisable). 8. Any exercise of the Option shall be in writing addressed to the Corporate Secretary of the Company at the principal business office of the Company, specifying the Option being exercised and the number of shares of Stock to be purchased, and specifying a business day not more than 10 days from the date such notice is given for the payment of the purchase price against delivery of the shares of Stock being purchased. Subject to the terms of PROP and this Agreement, the Company shall cause certificates for the shares so purchased to be delivered at the principal business office of the Company, against payment of the full purchase price, on the date specified in the notice of exercise. The Option's Exercise Price shall be paid by the Employee in cash or, if permitted by the Committee in its sole discretion at the time of exercise, in shares of Common Stock currently held by the Employee at the time of exercise, or by a combination of cash and such currently held shares. Any shares of Common Stock delivered in payment of the Exercise Price shall be valued at their then fair market value. 9. By his acceptance of this Agreement, the Employee agrees to reimburse the Company for any taxes required by any government to be withheld or otherwise deducted and paid by the Company with respect to the issuance or disposition of the shares subject to the Option. In lieu thereof, the Company shall have the right to withhold the amount of such taxes from any other sums due or to become due from the Company to the Employee. The Company may, in its discretion, hold the stock certificate or certificates to which the Employee is entitled upon the exercise of the Option as security for the payment of such withholding tax liability until cash sufficient to pay that liability has been accumulated. In addition, at any time that the Company becomes subject to a withholding obligation under applicable law with respect to the exercise of a Non-Qualified Option (the "Tax Date"), except as set forth below, a holder of a Non-Qualified Option may elect to satisfy, in whole or in part, the holder's related personal tax liabilities (an "Election") by (a) directing the Company to withhold from shares of Stock issuable in the related exercise either a specified number of shares of Stock or shares of Stock having a specified value (in each case not in excess of the related personal tax liabilities), (b) tendering shares of Stock previously issued pursuant to the exercise of a stock option or other shares of Stock owned by the holder, or (c) combining any or all of the foregoing Elections in any fashion. An Election shall be irrevocable. The withheld shares and other shares of Stock and other shares of Stock tendered in payment shall be valued at their fair market value on the Tax Date. The Committee may disapprove of any Election, suspend or terminate the right to make Elections or provide that the right to make Elections shall not apply to particular shares of Stock or exercises. The Committee may impose any additional conditions or restrictions on the right to make an Election as it shall deem appropriate, including any limitations necessary to comply with Section 16 of the Exchange Act. 2 3 10. The Employee shall not have any of the rights of a shareholder with respect to the shares of Common Stock underlying the Option until the Option is exercised and the Employee receives such shares. 11. If the Company, in its sole discretion, shall determine that it is necessary, to comply with applicable securities laws, the certificate or certificates representing the shares purchased pursuant to the exercise of the Option shall bear an appropriate legend in form and substance, as determined by the Company, giving notice of applicable restrictions on transfer under or with respect to such laws. 12. The Employee covenants and agrees with the Company that if, at the time of exercise of the Option, there does not exist a Registration Statement on an appropriate form under the Securities Act of 1933, as amended (the "Act"), which Registration Statement shall have become effective and shall include a prospectus that is current with respect to the shares subject to the Option, then the Employee shall execute and deliver a certificate to the Company indicating (i) that he is purchasing the shares for his own account and not with a view to the resale or distribution thereof, (ii) that any subsequent offer for sale or sale of any such shares shall be made either pursuant to (x) a Registration Statement on an appropriate form under the Act, which Registration Statement shall have become effective and shall be current with respect to the shares being offered and sold, or (y) a specific exemption from the registration requirements of the Act and any rules and regulations thereunder and applicable state securities laws and regulations, but in claiming such exemption, the Employee shall, prior to any offer for sale or sale of such shares, obtain a favorable written opinion from counsel for or approved by the Company as to the applicability of such exemption and (iii) that the Employee agrees that the certificate or certificates evidencing such shares shall bear a legend to the effect of the foregoing. 13. This Agreement is not a contract of employment and the terms of the Employee's employment shall not be affected hereby or by any agreement referred to herein except to the extent specifically so provided herein or therein. Nothing herein shall be construed to impose any obligation on the Company to continue the Employee's employment, and it shall not impose any obligation on the Employee's part to remain in the employ of the Company. The Employee acknowledges and agrees that neither the Company, its shareholders nor its directors and officers, has any duty or obligation to disclose to the Employee any material information regarding the business of the Company or affecting the value of the Common Stock before or at the time of a termination of the employment of the Employee by the Company, including, without limitation, any information concerning plans for the Company to make a public offering of its securities or to be acquired by or merged with or into another firm or entity. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date written below. OUTBOARD MARINE CORPORATION DATED: December 21, 1998. By /s/ Gary K. Duberstein _________________________ Gary K. Duberstein ACCEPTED this 21 day of December, 1998: /s/ David D. Jones, Jr. _______________________________ DAVID D. JONES, JR. 3 EX-10.24 15 NONQUALIFIED STOCK OPTION GRANT AGREEMENT 1 EXHIBIT 10.24 NONQUALIFIED STOCK OPTION GRANT AGREEMENT GRANTED TO: David D. Jones, Jr. DATE OF GRANT: March 10, 1998 GRANTED PURSUANT TO: (i) Paragraph 7 of an employment agreement dated March 10, 1998 between the Company and David D. Jones, Jr. and (ii) Outboard Marine Corporation Personal Rewards and Opportunities Program NUMBER OF UNDERLYING SHARES: 107,245 shares EXERCISE PRICE: $18.00 per share VESTING SCHEDULE: Option is immediately exercisable. 1. This Nonqualified Stock Option Grant Agreement (the "Agreement") is made and entered into as of March 10, 1998 (the "Date of Grant") between Outboard Marine Corporation, a Delaware corporation (the "Company"), and David D. Jones, Jr. (the "Employee") pursuant to Paragraph 7 of an employment agreement dated March 10, 1998 between the Company and the Employee ("Employment Agreement"). It is the intent of the Company and the Employee that the Option (as defined in Paragraph 2 below) will not qualify as an "incentive stock option" under Section 422 of the Internal Revenue Code of 1986, as amended from time to time. 2. The Employee is granted an option to purchase 107,245 shares of the common stock of the Company (the "Option"). The Option is granted under the Outboard Marine Corporation Personal Rewards and Opportunities Program ("PROP"), a copy of which is enclosed herewith and to the extent directly relating to the Option, under Paragraphs 7, 11, 12 and 13 of the Employment Agreement, the provisions of which are incorporated herein by reference. The Option granted hereunder is a matter of separate inducement and is not in lieu of salary or other compensation for the Employee's services. 3. The Option's Exercise Price is $18.00 per share. 4. The Option, unless sooner terminated or exercised in full, shall expire on the 10th anniversary of the Date of Grant and, notwithstanding anything contained in this Agreement to the contrary, no portion of the Option may be exercised after such date. 5. Subject to Paragraph 4 above and the terms of the Employment Agreement incorporated herein, the Option shall become exercisable on the Date of Grant. 6. During the Employee's lifetime, the Option shall not be subject in any manner to alienation, anticipation, sale, assignment, pledge, encumbrance or other transfer and shall be exercisable only by the Employee. Upon the death of the Employee, the Option shall be exercisable only by the executor or administrator of the estate of the deceased Employee or the person or persons to whom the deceased Employee's rights with respect to the Option shall pass by will or the laws of descent and distribution. Notwithstanding the preceding two sentences, the Option may be transferred by the Employee 2 solely to his spouse, siblings, parents, children and/or grandchildren or trusts for the benefit of such persons or partnerships, limited liability companies or other entities owned soley by such persons subject to any restrictions otherwise applicable to the Option. 7. The Employee may exercise the exercisable portion of the Option regardless of whether any other stock option that the Employee has been granted by the Company remains unexercised. In no event may the Employee exercise the Option for a fraction of a share or for less than 100 shares (unless the number purchased is the total balance for which the Option is then exercisable). 8. Any exercise of the Option shall be in writing addressed to the Corporate Secretary of the Company at the principal business office of the Company, specifying the Option being exercised and the number of shares of Stock to be purchased, and specifying a business day not more than 10 days from the date such notice is given for the payment of the purchase price against delivery of the shares of Stock being purchased. Subject to the terms of PROP and this Agreement, the Company shall cause certificates for the shares so purchased to be delivered at the principal business office of the Company, against payment of the full purchase price, on the date specified in the notice of exercise. The Option's Exercise Price shall be paid by the Employee in cash or, if permitted by the Committee in its sole discretion at the time of exercise, in shares of Common Stock currently held by the Employee at the time of exercise, or by a combination of cash and such currently held shares. Any shares of Common Stock delivered in payment of the Exercise Price shall be valued at their then fair market value. 9. By his acceptance of this Agreement, the Employee agrees to reimburse the Company for any taxes required by any government to be withheld or otherwise deducted and paid by the Company with respect to the issuance or disposition of the shares subject to the Option. In lieu thereof, the Company shall have the right to withhold the amount of such taxes from any other sums due or to become due from the Company to the Employee. The Company may, in its discretion, hold the stock certificate or certificates to which the Employee is entitled upon the exercise of the Option as security for the payment of such withholding tax liability until cash sufficient to pay that liability has been accumulated. In addition, at any time that the Company becomes subject to a withholding obligation under applicable law with respect to the exercise of a Non-Qualified Option (the "Tax Date"), except as set forth below, a holder of a Non-Qualified Option may elect to satisfy, in whole or in part, the holder's related personal tax liabilities (an "Election") by (a) directing the Company to withhold from shares of Stock issuable in the related exercise either a specified number of shares of Stock or shares of Stock having a specified value (in each case not in excess of the related personal tax liabilities), (b) tendering shares of Stock previously issued pursuant to the exercise of a stock option or other shares of Stock owned by the holder, or (c) combining any or all of the foregoing Elections in any fashion. An Election shall be irrevocable. The withheld shares and other shares of Stock and other shares of Stock tendered in payment shall be valued at their fair market value on the Tax Date. The Committee may disapprove of any Election, suspend or terminate the right to make Elections or provide that the right to make Elections shall not apply to particular shares of Stock or exercises. The Committee may impose any additional conditions or restrictions on the right to make an Election as it shall deem appropriate, including any limitations necessary to comply with Section 16 of the Exchange Act. 10. The Employee shall not have any of the rights of a shareholder with respect to the shares of Common Stock underlying the Option until the Option is exercised and the Employee receives such shares. 11. If the Company, in its sole discretion, shall determine that it is necessary, to comply with applicable securities laws, the certificate or certificates representing the shares purchased pursuant to the exercise of the Option shall bear an appropriate legend in form and substance, as determined by the Company, giving notice of applicable restrictions on transfer under or with respect to such laws. 12. The Employee covenants and agrees with the Company that if, at the time of exercise of the Option, there does not exist a Registration Statement on an appropriate form under the Securities Act of 1933, as amended (the "Act"), which Registration Statement shall have become effective and shall include a prospectus that is current with respect to the shares subject to the Option, then the Employee shall execute and deliver a certificate to the Company indicating (i) that he is purchasing the shares for his own account 2 3 and not with a view to the resale or distribution thereof, (ii) that any subsequent offer for sale or sale of any such shares shall be made either pursuant to (x) a Registration Statement on an appropriate form under the Act, which Registration Statement shall have become effective and shall be current with respect to the shares being offered and sold, or (y) a specific exemption from the registration requirements of the Act and any rules and regulations thereunder and applicable state securities laws and regulations, but in claiming such exemption, the Employee shall, prior to any offer for sale or sale of such shares, obtain a favorable written opinion from counsel for or approved by the Company as to the applicability of such exemption and (iii) that the Employee agrees that the certificate or certificates evidencing such shares shall bear a legend to the effect of the foregoing. 13. This Agreement is not a contract of employment and the terms of the Employee's employment shall not be affected hereby or by any agreement referred to herein except to the extent specifically so provided herein or therein. Nothing herein shall be construed to impose any obligation on the Company to continue the Employee's employment, and it shall not impose any obligation on the Employee's part to remain in the employ of the Company. 14. The Employee acknowledges and agrees that neither the Company, its shareholders nor its directors and officers, has any duty or obligation to disclose to the Employee any material information regarding the business of the Company or affecting the value of the Common Stock before or at the time of a termination of the employment of the Employee by the Company, including, without limitation, any information concerning plans for the Company to make a public offering of its securities or to be acquired by or merged with or into another firm or entity. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date written below. OUTBOARD MARINE CORPORATION DATED: December 21, 1998. By /s/ Gary K. Duberstein ------------------------ Gary K. Duberstein ACCEPTED this 21 day of December, 1998: /s/ David D. Jones, Jr. - ---------------------------- DAVID D. JONES, JR. 3 EX-11 16 COMPUTATION OF PER SHARE EARNINGS (LOSS) 1 EXHIBIT 11 OUTBOARD MARINE CORPORATION COMPUTATION OF PER SHARE EARNINGS
POST-MERGER COMPANY PRE-MERGER COMPANY ---------------------------------------- ----------------------- THREE MONTHS ENDED TWELVE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, ------------------------- -------------------------------------- 1998 1997 1998 1997 1996 ----------- ---------- ----------- ---------- ---------- (In millions except amounts per share) Basic Earnings (Loss) Per Share: Net Earnings (Loss)........................ $ (47.1) $(17.1) $(150.5) $(79.1) $ (7.3) ------- ------ ------- ------ ------- Weighted Average Number of Shares.......... 20.4 20.4 20.4 20.2 20.1 ------- ------ ------- ------ ------- Basic Earnings (Loss) Per Share............ $ (2.31) $(0.84) $ (7.38) $(3.91) $ (0.36) ------- ------ ------- ------ ------- Diluted Earnings Per Share: Net Earnings (Loss)........................ $ (47.1) $(17.1) $(150.5) $(79.1) $ (7.3) Add: After-Tax Interest and Related Expense Amortization on 7% Convertible Subordinated Debentures................. -- -- -- 3.3 3.3 ------- ------ ------- ------ ------ Net Earnings (Loss) Adjusted............... $ (47.1) $(17.1) $(150.5) $(75.8) $ (4.0) ------- ------ ------- ------ ------ Weighted Average Number of Shares............ 20.4 20.4 20.4 20.1 20.1 Common Stock Equivalents (Stock Options)..... -- -- -- 0.1 0.1 Weighted Average Common Shares Assuming Conversion of 7% Convertible Subordinated Debentures................................. -- -- -- 3.4 3.4 ------- ------ ------- ------ ------ Average Shares Outstanding................... 20.4 20.4 20.4 23.6 23.6 ------- ------ ------- ------ ------ Diluted Earnings (Loss) Per Share............ $ (2.31) $(0.84) $ (7.38) $ * $ * ======= ====== ======= ====== ====== - ------------ * The computation of diluted earnings per share of common stock is antidilutive; therefore, the amount reported for basic and diluted earnings per share is the same.
EX-12 17 STATEMENT OF COMPUTATION OF RATIO OF EARNINGS 1 EXHIBIT 12 OUTBOARD MARINE CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS (LOSS) TO FIXED CHARGES
Three Months Ended December 31 Years ended September 30 ------------------- ------------------------------------------------ Post-Merger Company Pre-Merger Company ------------------------------ ------------------------------------ 1998 1997 1998 1997 1996 1995 1994 -------- ------- ------- ------- ------- ----- ----- (In millions except ratios) Earnings (loss): Earnings (loss) before provision for income taxes................................... $(47.1) $(16.3) $(147.1) $(76.3) $(10.4) $60.8 $53.4 Interest expense........................... 6.8 7.7 30.1 16.2 12.3 23.1 15.1 Interest portion of rent expense........... 0.3 0.3 1.2 1.1 1.2 1.3 1.3 ------ ------ ------- ------ ------ ----- ----- Earnings (loss)......................... $(40.0) $ (8.3) $(115.8) $(59.0) $ 3.1 $85.2 $69.8 ====== ====== ======= ====== ====== ===== ===== Fixed Charges: Interest expense........................... 6.8 7.7 30.1 16.2 12.3 23.1 15.1 Interest portion of rent expense........... 0.3 0.3 1.2 1.1 1.2 1.3 1.3 ------ ------ ------- ------ ------ ----- ----- Fixed Charges........................... $ 7.1 $ 8.0 $ 31.3 $ 17.3 $ 13.5 $24.4 $16.4 ====== ====== ======= ====== ====== ===== ===== Ratio of earnings to fixed charges........... 3.5 4.3 ===== ===== Excess of fixed charges over earnings........ $ 47.1 $ 16.3 $ 147.1 $ 76.3 $ 10.4 ====== ====== ======= ====== ======
EX-27 18 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1998 DEC-31-1998 13,600 0 139,700 9,200 197,200 365,100 220,800 23,700 916,200 325,200 247,000 0 0 200 57,000 916,200 199,400 199,400 180,700 180,700 59,000 0 6,800 (47,100) 0 (47,100) 0 0 0 (47,100) (2.31) (2.31)
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