-----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, Vq8Er8/JGqowWOURCrKkyNX0Jmt/552l4IPdNARlwPXkeyjYWbAzFvckKKFRdzuN YXajB6u4gdXNmOrz4Cbn5Q== 0000950131-00-002178.txt : 20000331 0000950131-00-002178.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950131-00-002178 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OUTBOARD MARINE CORP CENTRAL INDEX KEY: 0000075149 STANDARD INDUSTRIAL CLASSIFICATION: ENGINES & TURBINES [3510] IRS NUMBER: 361589715 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-02883 FILM NUMBER: 584235 BUSINESS ADDRESS: STREET 1: 100 SEA HORSE DR CITY: WAUKEGAN STATE: IL ZIP: 60085 BUSINESS PHONE: 7086896200 MAIL ADDRESS: STREET 1: 100 SEA HORSE DRIVE CITY: WAUKEGAN STATE: IL ZIP: 60085 10-K405 1 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-2883 OUTBOARD MARINE CORPORATION (Exact name of Registrant as specified in its charter) Delaware 36-1589715 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 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:
Name of Each Exchange Title of Each Class on Which Registered ------------------- ----------------------- 7% Convertible Subordinated Debentures Due 2002 New York 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, 1999 was $0. Number of shares of Common Stock of $0.01 par value outstanding at December 31, 1999 was 20,439,531 shares. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 Market for Registrant's Common Equity and Related Shareholder 5 Matters........................................................... 18 6 Selected Financial Data........................................... 18 Management's Discussion and Analysis of Financial Condition and 7 Results of Operations............................................. 19 7A Quantitative and Qualitative Disclosures about Market Risk........ 30 8 Financial Statements and Supplementary Data....................... 32 Changes in and Disagreements on Accounting and Financial 9 Disclosure........................................................ 70 PART III 10 Directors and Executive Officers of the Registrant................ 70 11 Executive Compensation............................................ 72 12 Security Ownership................................................ 82 13 Certain Relationships and Related Transactions.................... 84 PART IV 14 Exhibits, Financial Statement Schedule, and Reports on Form 8-K... 86 Signatures........................................................ 90
2 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. However, effective October 1, 1998, the Company's fiscal year-end changed from September 30 to December 31. Therefore, for example, references herein to fiscal 1998 or fiscal year 1998 refer to the Company's fiscal year ended September 30, 1998 whereas references to fiscal 1999 or fiscal year 1999 refer to the fiscal year ended December 31, 1999. General Outboard Marine Corporation believes it is the world's largest dedicated manufacturer of outboard marine engines and boats. As of December 31, 1999, the Company had an approximate 32% share of the United States outboard engine market and an estimated worldwide market share of 25%. Marketed 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 represent 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. The Company believes that its marine dealer network of approximately 5,100 independent authorized dealers worldwide, approximately 3,600 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 stern drive 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 equipment. 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 3 stock of the Company were issued to Greenmarine Holdings. The Tender Offer and the Merger are collectively referred to herein as the "Greenmarine Acquisition." Since the Greenmarine Acquisition, the Company has recruited a highly experienced 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 management team also includes Andrew P. Hines who joined the Company as Executive Vice President and Chief Financial Officer and is currently Executive Vice President Strategic Planning and Business Development. 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 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 seven separate horsepower categories. Industry Overview The recreational boating industry generated approximately $23 billion in domestic retail sales in 1999, including approximately $12 billion in sales of new boats, engines, trailers and accessories. 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 cost and 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 primarily to the recession during the early 1990s. In addition, 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. Finally, 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. 4 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.
Fiscal Year Ended Three Months Ended Fiscal Year Ended December 31, 1999 December 31, 1998 September 30, 1998 ------------------- ------------------- -------------------- Engines............ $ 649.8 58.5% $111.9 56.1% $ 636.5 62.1% Boats.............. 461.1 41.5 87.5 43.9 389.2 37.9 ---------- ------- --------- -------- ---------- ------- Total............ $1,110.9 100.0% $199.4 100.0% $1,025.7 100.0% ========== ======= ========= ======== ========== =======
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 and industry segment, see Note 15 of the Notes to the Consolidated Financial Statements contained in Item 8 elsewhere herein).
Fiscal Year Ended Three Months Ended Fiscal Year Ended December 31, 1999 December 31, 1998 September 30, 1998 ------------------- ------------------- -------------------- United States...... $ 867.1 78.1% $152.0 76.2% $ 769.7 75.0% Europe............. 93.4 8.4 15.6 7.8 91.9 9.0 Other.............. 150.4 13.5 31.8 16.0 164.1 16.0 ---------- ------- --------- -------- ---------- ------- Total............ $1,110.9 100.0% $199.4 100.0% $1,025.7 100.0% ========== ======= ========= ======== ========== =======
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. The Company's Evinrude brand comprises two-stroke models incorporating the Company's FICHT Ram fuel- injection technology and certain four-stroke engines. The Evinrude brand is being marketed as the Company's "premium" outboard marine engine brand. In addition, the Company has entered into a supply agreement with an affiliate of Suzuki Motor Corporation under which Suzuki will manufacture certain other four-stroke engines for sale by the Company under its Evinrude brand. The Johnson brand comprises a full line of traditional carbureted two-stroke models. 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, 225 and 250-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 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 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. 5 In fiscal 1997, the Company became aware of certain performance issues with its FICHT engines. Since then the Company has developed and implemented strategies to address the performance issues that had been identified. These strategies included modifications to the 1999 model-year FICHT engines and changes to the production processes for FICHT engines. In addition, upgrade kits were provided for certain previously sold FICHT engines. Finally, on May 13, 1999, the Company announced an all-new line of Evinrude two-stroke direct injection outboards with FICHT Ram injection technology for model year 2000. These engines reflect certain further design refinements and improved methods of production. See "Item 7--Management's Discussion and Analysis of Financial Condition and Results of Operations--General--Introduction of FICHT Engines; General"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..................................... 71 719- 3,056 25-99 horsepower.................................... 81 2,681- 8,813 100-250 horsepower.................................. 72 7,844-17,269 --- Total............................................. 224 ===
Parts and Accessories The Company also offers a wide array 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 19% and 18% of OMC's sales in fiscal year 1999 and fiscal year 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 boat brands are Chris*Craft, Four Winns, Seaswirl, Stratos, Javelin, Hydra-Sports, Lowe and Princecraft. The 6 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 one of the largest producers of boats in units and 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 amongst 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 2000 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 21,915-150,200 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. Four Winns.... 17-33 11,900-139,589 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 12,500-65,000 Seaswirl is a mid-priced boat line, and is one of the leading boat brands in the Western United States. FISHING: Stratos....... 16-22 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.. 17-30 14,300-101,500 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... 10-26 382-28,500 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 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. 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 holds 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 requires 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 December 10, 2017. 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 OMC/Volvo Stern Drive Joint Venture On December 8, 1998 the Company sold its interest in the joint venture Volvo Penta Marine Products L.P. (the "Volvo Penta Joint Venture") to Volvo Penta of the Americas, Inc. ("Volvo"). The joint venture was formed by the Company, AB Volvo Penta and Volvo Penta North America, Inc. in 1993 to manufacture sterndrive engines for boats. Concurrently with the sale of the Company's interest in the Volvo Penta Joint Venture, the Company and Volvo entered into an agreement whereby Volvo will supply to the Company sterndrives through June 30, 2000 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. Sales and Distribution The Company believes that it has one of the world's largest marine dealer networks with approximately 5,100 dealers worldwide, approximately 3,600 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 those 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 are 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 more 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 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, which limit the Company's obligations to a total aggregate of approximately $33 million for a period not to exceed 18 months from the date of invoice. For the fiscal years 1999 and 1998, the Company repurchased approximately $5.7 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, financial position, and cash flows. 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. 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., Grady White and Pursuit. Each of these manufacturers has agreed to pre-rig certain of 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. 9 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. In September 1998, the Company announced that it would close its Illinois and Wisconsin facilities by the end of 2000 as more fully discussed below. 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 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 (Hydrasports) and located production closer to the retail market for these boats. In September 1998, the Company announced that, over the next two years, it would be closing its engine manufacturing facilities located in Milwaukee, Wisconsin and Waukegan, Illinois. 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. 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; (ii) redesign for commonality of components; (iii) improved factory layouts and work flows; (iv) outsourcing of non-core capabilities; and (v) improvements in key quality metrics. The Company has begun implementation of its lean manufacturing strategy at its main outboard engine assembly facility in Calhoun, Georgia. The second phase of this initiative will include implementation at additional manufacturing locations. The Company has also identified vendors for outsourcing of targeted engine components as the move towards "focused" factories continues. Most recently, the Company has begun implementation of demand flow technology at its final assembly facility in Calhoun, Georgia. This technology will enable the Company to be more responsive to customer needs and should result in lower work-in- process inventory and required manufacturing floor space. Foreign Operations For the fiscal years 1999 and 1998, approximately 22%, and 25%, respectively, of the Company's net sales were derived from operations conducted outside the United States. As of December 31, 1999 and December 31, 1998, approximately 4% of the Company's long-lived assets (primarily property, plant and equipment) were located outside the United States. Foreign operations are subject to unique 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 10 value of the relevant currencies. While the Company hedges certain 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 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 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 32% share of the United States outboard marine engine market and an estimated 25% 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 46% of the U.S. market in 1999 in terms of unit sales. Many of the Company's competitors, including Brunswick, Yamaha, and Honda 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 boat and engine packages. Intellectual Property The Company's engine manufacturing business relies heavily on patented and other proprietary technology. The Company employs 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 11 obtain patents that the Company will need to license or design around, that the Company's 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. In March 1998, the Company received correspondence from Orbital Engine Corporation Limited ("Orbital") alleging that the Company's FICHT fuel-injected 150-horsepower engines infringed two Australian Orbital patents, which correspond to three U.S. patents and to a number of foreign patents. In May 1999, the Company entered into a non-assert agreement with Orbital relative to engines sold by OMC and its licensees, which use FICHT fuel injection. Under the terms of the agreement, the Company will make certain payments to Orbital for the use of the patents and all foreign counterparts, as well as certain other patents, identified in the agreement. Under the terms of the agreement, the Company is not precluded from developing FICHT fuel injection for any application. The Company also uses a number of trade names and trademarks in its business, including Chris*Craft, Evinrude, FFI, FICHT, FICHT Ram Injection, 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 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 the Chris*Craft trade name and trademark for boats and certain boat products worldwide. This license continues in perpetuity as the terms of the license are complied with. 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, 2009, however it is subject to unlimited ten-year renewal terms at the Company's option. Research and Development In the fiscal years 1999 and 1998, OMC spent $42.2 million and $36.8 million, respectively, on research and development, and related engineering activities, for 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 12 product line to low-emission products within the next decade. To date, the Company estimates that it has spent approximately $65 million on Project LEAP, including the introduction of its new FICHT fuel-injection technology and four- stroke outboard engines. 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. 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 closedown costs associated with discontinued operations or facilities, including the environmental costs of operation and maintenance until disposition. At December 31, 1999, the Company has an accrual of approximately $23 million for costs relating to remediation at contaminated sites including operation and maintenance for continuing and closed-down operations. It is reasonably possible that a change in this estimate could occur in the near term. In addition, the Company has estimated that reasonably possible environmental loss contingencies may exceed amounts accrued by as much as $16.0 million at December 31, 1999. The possible recovery of insurance proceeds has not been considered in estimating contingent environmental liabilities. Each 13 site, whether or not remediation studies have commenced, is reviewed on a quarterly basis and the aggregate environmental contingent liability accrual is adjusted accordingly. Therefore, the Company believes the accruals accurately reflect the Company's liability based upon current information. 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. 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 adopted SOP 96-1 in the quarter ended September 30, 1997. The adoption 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 17 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. 14 Employees As of December 31, 1999, approximately 6,335 people were employed worldwide (5,713 domestic) by OMC and its subsidiaries, consisting of 1,209 salaried and 5,126 hourly employees. Approximately 16% of the Company's employees are represented by one of three unions. The Laborers International Union of North America ("LIUNA") represents approximately 457 employees at the Calhoun, Georgia facility; the Independent Marine Machinists Association ("IMMA") represents approximately 334 employees at the Waukegan, Illinois facility; and the United Steel Workers of America ("USWA") represents approximately 244 employees at the Milwaukee, Wisconsin facility. The Company's agreements with the LIUNA, IMMA and USWA are effective through September 30, 2000, December 31, 2000 or the closing of the facility, and March 31, 2000 or the closing of the facility, 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 such closure period. See Note 4 of the Notes to the Consolidated Financial Statements contained in Item 8 elsewhere herein. 15 Item 2. Properties The following table sets forth the Company's material facilities as of December 31, 1999.
Owned or Leased Square Location Facility Type/Use (lease expiration) Footage -------- ----------------- ------------------ ------- Waukegan, IL............ Worldwide headquarters; outboard engine component manufacturing Owned 1,519,000 Delavan, WI............. Outboard engine component manufacturing Leased (Aug. 2006) 40,000 Milwaukee, WI........... Outboard engine component manufacturing Owned 375,000 Burnsville, NC.......... Outboard engine component manufacturing Owned 290,000 Spruce Pine, NC......... Outboard engine component manufacturing Owned 100,000 Andrews, NC............. Outboard engine component manufacturing Owned 150,000 Calhoun, GA............. Outboard engine assembly Owned 356,000 Beloit, WI.............. Worldwide parts and accessories distribution center Owned 483,000 Waukegan, IL............ Distribution center Leased (Jan. 2003) 30,000 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 Cadillac, MI............ Boat manufacturing Owned 368,000 Lebanon, MO............. Boat manufacturing Owned 227,000 Murfreesboro, TN........ Boat manufacturing Owned 275,000 Columbia, SC............ Boat manufacturing Owned 223,000 Culver, OR.............. Boat manufacturing Owned 235,000 Syracuse, IN............ Boat manufacturing Owned 271,000 Sarasota, FL............ Boat manufacturing Owned 153,000 Princeville, Quebec, Boat manufacturing Canada................. Owned 417,000 Juarez, Chihuahua, Outboard engine component Mexico................. manufacturing Owned 200,000 Dongguan, China......... Outboard engine component manufacturing Leased (Apr. 2002) 65,000 Hong Kong............... Outboard engine and component manufacturing and distribution center Owned 361,000 Manaus, Brazil.......... Outboard engine and component assembly and fabrication Leased (Aug. 2001) 46,000 Campinas, Brazil........ Office; distribution center Leased (Aug. 2000) 15,000 Yatala, Australia....... Boat manufacturing and assembly Owned 37,000 Bankstown, Australia.... Office; distribution center Leased (Dec. 2004) 54,000 Gent, Belgium........... Office; warehouse Leased (Apr. 2003) 122,000 Bankstown, Australia.... Office; warehouse Leased (Apr. 2001) 54,000 Stuart, FL.............. Engineering test center Owned 53,000
16 Item 3. Legal Proceedings The Company is engaged in a 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." 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. Currently, the Company has a Self-Insured Retention for any one accident or occurrence of $1,250,000 (indemnity only) with an $8,000,000 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 event that the underlying product liability insurance or retentions are exhausted, there is excess coverage up to $100,000,000 per occurrence and in the aggregate. See Note 17 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 fiscal year ended December 31, 1999, there were no matters submitted to a vote of security holders. 17 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, 1999. There is no established public trading market for the Company's common stock. During fiscal year 1999, the Company granted an aggregate of 596,000 options to 143 employees. Item 6. Selected Financial Data The following summary represents certain financial information for the twelve months ended December 31, 1999, and December 31, 1998, the three months ended December 31, 1998 and December 31, 1997, and the three fiscal years ended September 30, 1998, 1997, and 1996.
Post-Merger Company Pre-Merger Company ---------------------------------------------------------- -------------------- At or for the At or for the At or for the three months At or for the At or for the fiscal year twelve months ended fiscal year fiscal years ended ended ended December 31, ended September 30, December 31, December 31, ---------------- September 30, -------------------- 1999 1998 (1) 1998 1997 (1) 1998 1997 (3) 1996 ------------- ------------- ------ -------- ------------- -------------------- (Dollars in millions, except per share amounts and ratios) Net sales............... $1,110.9 $1,015.6 $199.4 $209.5 $1,025.7 $ 979.5 $ 1,121.5 Net earnings (loss)..... 8.2 (180.5) (47.1) (17.1) (150.5) (79.1) (7.3) Average number of shares of common stock outstanding and common stock equivalents, if applicable............. 20.4 20.4 20.4 20.4 20.4 20.2 20.1 Per average share of common stock: Net earnings (loss) Basic.................. 0.40 (8.85) (2.31) (0.84) (7.38) (3.91) (0.36) Diluted................ 0.40 (8.85) (2.31) (0.84) (7.38) (3.91) (0.36) Dividends declared per share................. -- -- -- -- -- 0.20 0.40 Total assets (2)(4)..... 848.4 874.2 874.2 938.9 907.2 1,011.6 836.8 Long-term debt, excluding current maturities............. 241.4 247.0 247.0 102.8 247.9 103.8 177.6 Other data: Net cash provided by (used for) operating activities............ 40.6 44.3 (53.0) (36.6) (60.7) (9.2) 91.1 Net cash provided by (used for) investing activities............ (42.5) (28.2) (9.6) (5.4) (24.0) (26.1) (50.5) Net cash provided by (used for) financing activities............ 12.1 (26.6) 30.9 12.0 (45.5) (3.7) (2.9) Depreciation and amortization (including amortization of debt discount).............. 52.1 50.0 12.4 12.5 50.1 57.0 54.7 Amortization of debt discount............... 1.5 0.6 0.1 0.3 0.8 2.7 0.8 Capital expenditures.... 48.5 43.2 15.1 6.3 34.4 36.3 52.7
- -------- (1) Unaudited financial data for the twelve months ended December 31, 1998 and the three months ended December 31, 1997 have been included for comparative purposes. (2) Total assets at December 31, 1999, December 31, 1998, December 31, 1997, September 30, 1998 and September 30, 1997 are not comparable with 1996 due to the application of purchase accounting. See "Item 7--Management's Discussion and Analysis of Financial Condition and Results of Operations." (3) September 30, 1997 data includes Post-Merger Company data for total assets and long-term debt. (4) Certain historical amounts have been reclassed to conform with the 1999 presentation. 18 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 Effective October 1, 1998, the Company's fiscal year-end changed from September 30 to December 31. Therefore, for example, references herein to fiscal 1998 or fiscal year 1998 refer to the Company's fiscal year ended September 30, 1998 whereas references to fiscal 1999 or fiscal year 1999 refer to the Company's fiscal year ended December 31, 1999. Industry Overview. According to data published by the NMMA, the recreational boating industry generated approximately $23 billion in domestic retail sales in 1999, including approximately $12 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 cost and availability and government regulations. In an economic downturn, consumer discretionary spending levels are reduced, often resulting in disproportionately large declines in the sale of relatively expensive items such as recreational boats. Similarly, rising interest rates could have a negative impact on consumers' ability, or willingness to obtain financing from lenders, which could also adversely affect the ability of the Company to sell its products. Even if prevailing economic conditions are positive, consumer spending on non-essential goods such as recreational boats can be adversely affected due to declines in consumer confidence levels. According to data published by the NMMA, total unit sales of outboard boats in the United States fell from a high of 355,000 units in 1988 to 192,000 units in 1992, while total unit sales of outboard engines in the United States fell from a high of 460,000 units to 272,000 units during the same time period. The sales decline in the marine industry during this period was the worst such decline in the last 30 years. According to data published by the NMMA, 1998 annual U.S. purchases of boats and engines were 305,000 and 314,000, respectively. In 1999, U.S. unit sales of boats and engines increased to 345,000 and 331,900, 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 ended 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 ended March 31 and decline thereafter as the Company's products enter the peak consumer selling seasons. Short-term borrowings averaged $56.8 million in fiscal year 1999, with month-end peak borrowings of $80.0 million in March 1999. Because of the seasonality of the Company's business, the results of operations for any fiscal quarter are not necessarily indicative of the results for the full year. Additionally, an event which adversely affects the Company's business during any of these peak periods could have a material adverse effect on the Company's financial condition or results of operations for the full year. 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 19 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 Statement of Consolidated Financial Position at September 30, 1998. Market Share. Since 1997, the Company has seen a slight decrease in its twelve month rolling domestic outboard engine market share from 33% as of December 31, 1997 to 32% as of December 31, 1999, and a decline in its domestic boat market share from 20% to 9% for the same period. The primary causes have been the loss of key customers 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 will be able to reverse the decline in market share the Company is confident that its strategies for future products, combined with those products currently being offered, such as FICHT, will improve its market share. Introduction of FICHT Engines; General. 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 costs associated with 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 further 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, that contained additional performance enhancements to the FICHT engines, was provided to dealers in April 1999. The Company recorded costs for upgrade kits of $4.3 million and $1.2 million for the quarters ended December 31, 1998 and March 31, 1999, respectively. The Company believes these upgrade kits will significantly improve the overall performance of 1998 and 1999 model year FICHT fuel injected engines. To demonstrate the Company's confidence in the FICHT fuel injected engines as improved by the upgrade kits, the Company provided a limited warranty extension on certain components from two to three years on all 1999 model FICHT fuel injected engines purchased between January 1, 1999 and March 31, 1999 and also on those purchased by June 30, 1999 and registered by July 15, 1999. In addition, the Company implemented engine modifications and changes in production for the affected FICHT models. These engine modifications and production changes were implemented during a planned two-week suspension of the 20 Company's operations at certain of its engine-manufacturing facilities in March 1999. Finally, on May 13, 1999, the Company announced an all-new line of Evinrude two-stroke direct injection outboards with FICHT Ram injection technology for model year 2000. These engines reflect certain further design refinements and improved methods of production. In March 1998, the Company received correspondence from Orbital Engine Corporation Limited ("Orbital") alleging that the Company's FICHT fuel-injected 150 horsepower engines infringed two Australian Orbital patents, which correspond to three U.S. patents and to a number of foreign patents. In May 1999, the Company entered into a non-assert agreement with Orbital relative to engines sold by OMC and its licensees which used FICHT fuel injection. Under the terms of the agreement, the Company will make certain payments to Orbital for use of the patents and all foreign counterparts, as well as certain other patents, identified in the agreement. Under the terms of the agreement, the Company is not precluded from developing FICHT fuel injection for any application. 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:
Twelve Months ended Three Months ended Fiscal years ended December 31, December 31, September 30, -------------------------------- ----------------------------- ------------------------------- 1998 1997 1999 (unaudited) 1998 (unaudited) 1998 1997 --------------- --------------- ------------- ------------- --------------- ------------- Net sales......... $1,110.9 100.0% $1,015.6 100.0% $199.4 100.0% $209.5 100.0% $1,025.7 100.0% $979.5 100.0% Cost of goods sold............. 881.0 79.3 802.6 79.0 180.7 90.6 171.7 82.0 793.6 77.4 822.0 83.9 -------- ----- -------- ----- ------ ----- ------ ----- -------- ----- ------ ----- Gross earnings.... 229.9 20.7 213.0 21.0 18.7 9.4 37.8 18.0 232.1 22.6 157.5 16.1 Selling, general and administrative expense.......... 207.2 18.7 279.7 27.5 62.3 31.2 48.8 23.3 266.2 26.0 219.9 22.5 Restructuring charge (income).. (14.1) (1.3) 98.5 9.7 -- -- -- -- 98.5 9.6 -- -- Change in control expenses-compensation.. -- -- -- -- -- -- -- -- -- -- 11.8 1.2 -------- ----- -------- ----- ------ ----- ------ ----- -------- ----- ------ ----- Earnings (loss) from operations.. 36.8 3.3 (165.2) (16.2) (43.6) (21.8) (11.0) (5.3) (132.6) (13.0) (74.2) (7.6) Non-operating expense, net..... 18.0 1.6 12.7 1.3 3.5 1.8 5.3 2.5 14.5 1.4 2.1 0.2 Provision for income taxes..... 10.6 1.0 2.6 0.3 -- -- 0.8 0.4 3.4 0.3 2.8 0.3 -------- ----- -------- ----- ------ ----- ------ ----- -------- ----- ------ ----- Net earnings (loss)........... $ 8.2 0.7% $ (180.5) (17.8)% $(47.1) (23.6)% $(17.1) (8.2)% $ (150.5) (14.7)% $(79.1) (8.1)% ======== ===== ======== ===== ====== ===== ====== ===== ======== ===== ====== =====
Twelve Months Ended December 31, 1999 Compared to the Twelve Months Ended December 31, 1998. Net Sales. Net sales were $1,110.9 million in 1999 as compared to $1,015.6 million in 1998, representing an increase of $95.3 million or 9.4%. During this time period, the Company's worldwide engine sales, including parts and accessories increased 4.7% while boat sales increased 16.8%. The increase in engine sales was due primarily to increased domestic unit sales of both low- emission and traditional carburated engines offset partially by lower international sales due primarily to continued softness in Latin America. The increase in boat sales was due to increased consumer demand for the Company's fishing, recreational and aluminum boats, particularly, larger boat models. Cost of Goods Sold. Cost of goods sold for 1999 was $881.0 million as compared to $802.6 million in 1998, an increase of $78.4 million or 9.8%. Gross earnings for 1999 were 20.7% of net sales while gross earnings for 1998 were 21.0% of net sales. The reduction in the gross earnings percentage for the year was due to i) higher price allowances offered to dealers due to competitive pricing pressures and ii) operational inefficiencies at the engine plants that resulted in lower overhead absorption. These factors were partially offset by lower warranty and product liability expense in the current year resulting from improved claims experience. 21 Selling, General and Administrative ("SG&A"). SG&A expense for 1999 was $207.2 million versus $279.7 million in 1998 representing a decrease of $72.5 million or 25.9%. The decrease in SG&A expense was due primarily to the following: i) a curtailment gain of $15.0 million recorded in the second and third quarters of 1999 to reflect the impact of the changes made to the pension and postretirement medical plans as discussed in Note 12, ii) $17.6 million in expenses associated with implementing the Company's boat group reorganization plan which were recorded in 1998, and iii) environmental and other contingency costs recorded in 1998. Finally, the reduction in SG&A expense is also due to the continued focus on reducing discretionary expenditures across the Company. Restructuring Charge. 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 that included charges for the costs associated with closing the two facilities, and the related employee termination benefits for approximately 950 employees. In 1999, the Company completed its negotiations of the closing agreements with the unions representing the Milwaukee and Waukegan workers, respectively. These changes resulted in changes to the post-retirement medical and pension plans for union employees. The changes required a decrease in the previously recorded restructuring charge of $14.1 million. See Note 4 of the Notes to the 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 or transfer such production to other facilities of the Company. The Company has already transferred the manufacture of substantially all of the manufactured products from the Milwaukee facility and certain components, accessories and service parts from the Waukegan facility and continues to obtain and review proposals from vendors in anticipation of outsourcing the remainder of production. The Company anticipates substantial completion of the restructuring plan by the end of year 2000. As of December 31, 1999, the Company has incurred $1.0 million against the restructuring charge established in the prior fiscal year. The remaining balance will be spent in 2000 and 2001 as the plants are closed in 2000 and facilities are subsequently sold, accordingly. As part of its outsourcing efforts, the Company is negotiating with a potential vendor for the lease of space in one of its facilities in connection with this vendor possibly assuming the production of the facility. Although there can be no assurance, if the Company is successful in its negotiations, there would be a reduction of the employee severance and other costs previously recorded as part of the restructuring charge for the closure of this facility. The Company anticipates having more information regarding the negotiations early in the second quarter of 2000. Earnings/(Loss) from Operations. Earnings from operations for 1999 was $36.8 million or 3.3% of net sales versus a loss in 1998 of $165.2 million representing an increase of $202.0 million. This increase is due to the reasons discussed above including the increase in sales volume, the decrease in SG&A expense, and the restructuring charge recorded in 1998. Non-Operating Expense (Income). Interest expense decreased to $23.1 million in 1999 from $29.2 million in the twelve months ended December 31, 1998, a decrease of $6.1 million. The decrease in interest expense was due primarily to a tax-related interest accrual adjustment of $8.2 million in 1999 as a result of a favorable IRS tax audit. Other non-operating income was $5.1 million in 1999 versus $16.5 million in 1998. This decrease in non-operating income was due primarily to the Company selling its interest in the joint venture Volvo Penta Marine Products L.P. to Volvo Penta of the Americas, Inc. ("Volvo") on December 8, 1998 and the Company no longer participating in the earnings of the joint venture following the sale. In addition, the decrease in other income was due to higher foreign exchange losses as a result of certain foreign currencies appreciation against the dollar from 1998 to 1999. Provision for Income Taxes. The provision for income taxes was $10.6 million in 1999 as compared to $2.6 million in 1998. The provision for income taxes for fiscal 1999 resulted from expected taxes payable less tax benefits relating to certain international subsidiaries. No tax benefit is allowed for domestic losses because 22 they are not expected to be realizable, at this time, under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." 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; General" 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 $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 expenses 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 theses 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 this 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 as well as increases in certain components of costs of goods sold and SG&A expense as 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 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 23 expected taxes payable and benefits relating to certain international subsidiaries. No tax benefit is allowed for domestic losses because they are not realizable, at this time, under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." 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 reduce engine production in order to assist dealers in lowering 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 fiscal year 1998 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. 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 estimated legal expenses, (ii) $2.8 million in compensation expense primarily related to forfeitures resulting from the termination of an executive's employment agreement with a former employer in connection with the Company's hiring the executive concurrently with the acquisition of the Company by Greenmarine Holdings, and (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. 24 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, income from the Company's interest in the Volvo joint venture of $4.8 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), income from the Company's interest in the Volvo joint venture of $7.2 million, as well as gains on disposition of fixed assets ($5.8 million), which was offset by $15.1 million in 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 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 expected taxes payable less tax 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." Financial Condition; Liquidity and Capital Resources The Company's business is seasonal in nature with inventory levels normally increasing in the Company's fiscal quarter ending December 31 and peaking in the Company's fiscal quarter ending March 31. Current assets at December 31, 1999 decreased $27.9 million from December 31, 1998. Receivables at December 31, 1999 decreased $25.6 million from December 31, 1998 primarily due to the ongoing effort to shorten the collection cycle of receivables and due to the growth in OMC sponsored dealer financing programs from which payment is made to OMC by financing companies in five to ten days from the date of invoice. In addition, receivables were lower versus the prior year due to the collection of receivables in the current year which were owed to the Company in December 1998 from Volvo as a result of the sale of the Company's interest in the joint venture Volvo Penta Marine Products L.P. Inventories at December 31, 1999 decreased $8.6 million from December 31, 1998, primarily in finished goods inventory as a result of increased sales and shipments in 1999 versus 1998. Accounts payable increased $9.2 million from December 31, 1998 due primarily to increased production material purchases to support higher sales levels in 1999. In addition, the Company had $30.6 million in "Restricted Cash" at December 31, 1999, which cash is held in interest reserve accounts for the benefit of the Company's senior lenders (as discussed below). Cash provided by operations was $40.6 million for the twelve months ended December 31, 1999 compared with $44.3 million for the twelve months ended December 31, 1998. On January 28, 2000, the Company sold an aggregate of 650,000 shares of Series A Convertible Preferred Stock, par value $.01 per share (the "Series A Preferred Stock"), and warrants (the "Warrants") to purchase an aggregate of 5,750,000 shares of its Common Stock, par value $.01 per share (the "Common Stock"), for an aggregate consideration of $65.0 million in a private placement transaction to Greenlake Holdings II, LLC and Quantum Industrial Partners, LDC. The Series A Preferred Stock has an initial liquidation preference of $100 per share and an initial conversion price of $14 per share (in each case, subject to adjustment upon occurrence of certain events). The Series A Preferred Stock is convertible into Common Stock at any time. The Series A 25 Preferred Stock has an annual dividend rate of 15% of the then current liquidation preference, and is entitled to share ratably in any dividends paid on the Common Stock. Dividends will accrue if not paid in cash, and the liquidation preference will be increased by the amount of any accrued but unpaid dividends. The Series A Preferred Stock may be redeemed at any time after October 1, 2008, upon written request of the holders of at least 75% of the then outstanding shares. The Company may redeem all outstanding shares of the Series A Preferred Stock if, at any time, less than 10% of the total Series A Preferred Stock originally sold on January 28, 2000 remains outstanding. The Warrants are exercisable at any time until January 28, 2010, at an exercise price of $.01 per share of Common Stock, payable in cash or in shares of Common Stock. The Company intends to use the proceeds from the sale of the Series A Preferred Stock and Warrants for general corporate purposes, including funding its working capital and making capital expenditures. The Pro Forma impact of the above transaction, had it occurred on January 1, 1999, would have resulted in an approximate $65 million in proceeds, which would have been used to paydown the existing revolving credit facility. The transaction would have been recorded as a $29.1 million increase in preferred stock and a $35.9 million increase in shareholders' investment (the fair market value of the attached warrants). Expenditures for plant, equipment, and tooling were $48.5 million during the twelve months ended December 31, 1999, representing an increase of $5.3 million from $43.2 million for the twelve month period ended December 31, 1998. The higher level of expenditures is primarily related to increased spending for new machinery and equipment at the Company's engine manufacturing facilities for product improvements and due to increased spending for the Company's computer hardware and software. Loan payable was $58.0 million at December 31, 1999 comprising borrowings under the Company's Revolving Credit Facility (as discussed below). These borrowings were used to pay $10.0 million of the Company's Medium Term Notes Series A, which came due March 1999, and to fund capital expenditures. Current maturities of long-term debt decreased $2.8 million from December 1998 due to the payment of the Company's Medium-Term Notes Series A offset by the reclassification of certain long-term debt to current maturities for debt that is payable within the next 12 months. 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 Bank of America, 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 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 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. The Company entered into a Sixth Amendment to the Amended and Restated Loan and Security Agreement effective July 30, 1999, which among other things (i) extended the termination of the Revolving Credit Facility from December 31, 2000 to December 31, 2001, (ii) included work-in-process inventory in the borrowing base calculation until September 30, 1999, and (iii) extended the duration of the borrowing base capacity for intellectual property through October 31, 1999. On October 27, 1999, the Company entered into a Seventh Amendment to the Amended and Restated Loan and Security Agreement which among other things extended the duration of the borrowing base capacity for intellectual property through December 31, 1999. On February 1, 2000 the Company entered into an Eighth Amendment to the Amended and Restated Loan and Security Agreement which among other things (i) increased the borrowing capacity by increasing intellectual property availability by $10.0 million to $20.0 million and increasing the advance rate for finished goods inventory from 60% to 65%, (ii) eliminated tangible 26 net worth, interest coverage, and leverage ratio covenants, and (iii) established minimum availability requirements, maximum capital and tooling expenditures, and a minimum earnings before interest, taxes, depreciation and amortization covenant tests to reflect expected operating results. On May 27, 1998, the Company issued $160.0 million of 10 3/4% Senior Notes Series A ("Series A Notes") due 2008, with interest payable semiannually on June 1 and December 1 of each year. The net proceeds from the issuance of the Series A Notes totaled $155.2 million, of which $150.0 million was used to repay the Acquisition Debt. The Series A 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 Series A Notes. In addition, at any time prior to June 1, 2001, the Company may on any one or more occasions redeem up to an aggregate of 35% of the original principal amount of the Series A 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 Series A Notes originally issued remains outstanding immediately after the occurrence of any such redemption. The Series A Notes are guaranteed on a joint and several basis by each of the Company's principal domestic operating subsidiaries. The Indenture governing the Series A 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 Series A 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 Series A 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, 1999, the "Restricted Cash" held in these interest reserve accounts totaled $30.6 million. The "Restricted Cash" must remain in such accounts until at least May 27, 2001. These accounts may be accessed by the Company for the payment of the respective interest only, provided certain criteria are met by the Company. On April 14, 1999, the Company completed an exchange offer of all the Senior Notes Series A for the Senior Notes Series B ("Series B Notes") which are registered under the Securities Act of 1933, pursuant to a Registration Statement on Form S-4 and an accompanying Prospectus. The form and terms of the Series B Notes are the same form and terms of the Series A Notes except (i) the Series B designation, (ii) the Series B notes have been registered under the Securities Act and, therefore, will not bear legends restricting the transfer thereof, and (iii) holders of the Series B notes are not entitled to registration rights as the exchange offer was intended to satisfy such exchange and registration rights. At December 31, 1999, $62.9 million principal amount of the Company's 9 1/8% Debentures due 2017 (the "9 1/8% Debentures") was outstanding. The 9 1/8% Debentures mature on April 15, 2017, and interest thereon is payable semi- annually on April 15 and October 15 of each year. The 9 1/8% Debentures are redeemable through the operation of a sinking fund beginning on April 15, 1998, and each year thereafter to and including April 15, 2016 at a sinking fund redemption price equal to 100% of the principal amount thereof plus accrued interest to the redemption date. On or prior to April 15 in each of the years 1999 to 2016 inclusive, the Company is required to make a mandatory sinking fund payment in cash in an amount sufficient to redeem 9 1/8% Debentures in the aggregate principal amount of $5,000,000 plus accrued interest thereon. However, 9 1/8% Debentures acquired or redeemed by the Company may be used as the principal amount thereof to reduce the amount of any one or more mandatory Sinking Fund payments. As of December 31, 1999, the Company had repurchased and deposited with the trustee for the 9 1/8% Debentures $34.8 million principal amount of 9 1/8% Debentures, which will be used to satisfy its mandatory sinking fund obligations through April 15, 2004. The Company at its option may make an optional sinking fund payment in cash in each year from 1999 to 2016 inclusive in an amount sufficient to redeem up to an additional $10,000,000 principal amount of 9 1/8% Debentures. 27 At December 31, 1999, an aggregate of approximately $10.8 million principal amount of the Company's Medium-Term Notes Series A (the "Medium-Term Notes") was outstanding in two tranches. $5.8 million of the Medium-Term Notes bear interest at a rate of 8.55% while the remaining $5.0 million bear interest at 8.625%. The maturity dates of the Medium-Term Notes are 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, 1999, $7.1 million principal amount of the Company's 7% Convertible Subordinated Debentures due 2002 (the "Convertible Debentures") was outstanding. Following the Merger, the Company was required to offer to purchase for cash any and all of the then outstanding Convertible Debentures at a purchase price equal to 100% of the outstanding principal amount of each Convertible Debenture plus any accrued and unpaid interest thereon. On November 12, 1997, the Company consummated such offer to purchase and, as a result thereof, purchased $67.7 million principal amount of Convertible Debentures. Immediately prior to the Merger, the Convertible Debentures were convertible into shares of common stock of the Company at the conversion price of $22.25 per share. As a result of the Merger, the remaining $7.1 million principal amount of outstanding Convertible Debentures are no longer convertible into shares of common stock of the Company. Each holder of the remaining outstanding Convertible Debentures now has the right to convert (at $22.25 per share) such holder's Convertible Debentures and receive cash in an amount equal to what each holder would have received had they converted the Convertible Debentures into common stock immediately prior to the Merger ($18.00 per share). Accordingly, the remaining outstanding Convertible Debentures are convertible into the right to receive a cash payment equal to $809 for each $1,000 principal amount of Convertible Debentures so converted (i.e., ($18.00/$22.25) x $1,000). The outstanding Convertible Debentures are convertible at any time prior to their maturity on July 1, 2002. The Company has various Industrial Revenue Bonds outstanding in an aggregate principal amount of approximately $10.7 million as of December 31, 1999. 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 fiscal year 2000, the Company will be required to pay approximately $5.8 million in cash to satisfy obligations that will become due on the Medium Term Notes. 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 fiscal year 2000 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 which limit the Company's repurchase obligation to a total aggregate of approximately $33 million for a period not to exceed 18 months from the date of invoice. The Company resells any repurchased products at a discount. Losses incurred under this program have not been material. For the fiscal years 1999 and 1998, the Company repurchased approximately $5.7 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, financial position, or cash flows. Based upon the current level of operations and anticipated cost savings, the Company believes that its cash flow from operations together with the sale of the Series A Preferred Stock and Warrants, the available borrowing capacity under the Credit Agreement, and 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 28 necessary capital expenditures, or if its future earnings growth is insufficient to meet all required principal payments out of internally generated funds, the Company may be required to refinance all or a portion of its existing debt, sell assets or obtain additional financing. There can be no assurance that any such refinancing or asset sales would be possible or that any additional financing could be obtained on attractive terms, particularly in view of the Company's high level of debt. Year 2000 Matters The Company completed and tested all year 2000 remedies prior to December 31, 1999 and did not experience any significant malfunctions or errors in its operating or business systems when the date changed from 1999 to 2000. Based on its operations since January 1, 2000, the Company does not expect any significant impact to its ongoing business as a result of Year 2000. However, it is possible that the full impact of the date change which was of concern due to computer programs that used 2 digits instead of 4 digits to define years, has not been fully recognized. For example, it is possible that Year 2000 or similar issues such as leap year-related problems may occur with billing, payroll or financial closings at month, quarter or year-end. In addition, the Company could still be negatively affected if its vendors are adversely affected by Year 2000. The Company currently is not aware of any significant Year 2000 problems that have arisen for its vendors. The Company expended approximately $12.5 million ($4.6 million capital), to remedy all of the issues associated with ensuring that its hardware and software worldwide, and the systems associated therewith, were able to operate into the year 2000. 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. Accounting Standard 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 December 31, 2000. The Company has not yet quantified the impacts of adopting SFAS 133 on its financial statements and has not determined the timing of or method of its adoption of SFAS 133. Inflation Inflation may cause or may be accompanied by increases in gasoline prices and interest rates. Such increases may adversely affect the sales of the Company's products. Because of the low level of inflation in recent years, inflation has not had a significant impact on operating results during the past three fiscal years. 29 Forward-Looking Statements This report on Form 10-K contains "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 which could cause actual events or results to differ materially from those projected and which include, but are not limited to, the impact of competitive products and pricing, product demand and market acceptance, new product development, availability of raw materials, the availability of adequate financing on terms and conditions acceptable to the Company, and general economic conditions including interest rates and consumer confidence. Investors are also directed to other risks discussed in this annual report on Form 10-K and documents filed by the Company with the Securities and Exchange Commission. 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. The following table presents principal cash flows and related weighted average interest rates by expected maturity dates. Weighted average variable rates are based on implied forward rates in the yield curve at the reporting date.
Expected Maturity Date ---------------------------------------------------------------------- Fair December 31, 1999 12/31/00 12/31/01 12/31/02 12/31/03 12/31/04 Thereafter Total Value ----------------- -------- -------- -------- -------- -------- ---------- ------ ------ Liabilities Debt: Fixed Rate ($US)....... $8.4 $7.0 $8.6 $0.4 $0.7 $231.0 $256.1 $170.0 Average Interest Rate................. 8.1% 8.4% 7.2% 12.0% 11.0% 10.2% 10.0% Variable Rate ($US).... -- -- -- -- -- $ 5.5 $ 5.5 $ 5.5 Average Interest Rate................. 5.12% 5.12%
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. Assuming a 10% depreciation in the U.S. dollar at December 31, 1999, potential losses in the net fair value of foreign exchange contracts would have been $0.3 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 30 over-the-counter commodity contracts. As of December 31, 1999, there were unrealized gains on aluminum futures of $0.5 million. Assuming a 10% increase in market prices at December 31, 1999, potential losses in the net fair value of these contracts would have been immaterial. 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. 31 Item 8. Financial Statements and Supplementary Data INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Outboard Marine Corporation: We have audited the accompanying statements of consolidated financial position of Outboard Marine Corporation and subsidiaries (the Company) as of December 31, 1999, and the related statements of consolidated earnings and comprehensive income, consolidated cash flows, and changes in consolidated shareholders' investment for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Outboard Marine Corporation and subsidiaries as of December 31, 1999, and the results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. KPMG LLP Chicago, Illinois February 28, 2000 32 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 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 the year 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 auditing standards generally accepted in the United States. 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 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 the year in the period ended September 30, 1997, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Chicago, Illinois February 25, 1999 33 OUTBOARD MARINE CORPORATION STATEMENTS OF CONSOLIDATED FINANCIAL POSITION
December 31, December 31, 1999 1998 ------------- ------------- (Dollars in millions except amounts per share) ASSETS Current assets: Cash and cash equivalents.................. $ 25.0 $ 13.6 Receivables (less allowance for doubtful receivables of $6.2 million at December 31, 1999 and $9.2 million at December 31, 1998)..................................... 104.9 130.5 Inventories................................ 188.6 197.2 Deferred taxes............................. 1.9 1.9 Other current assets....................... 15.3 20.4 ------------- ------------- Total current assets..................... 335.7 363.6 Restricted cash.............................. 30.6 29.3 Product tooling, net......................... 29.5 30.0 Plant and equipment, net..................... 200.5 197.1 Goodwill, net................................ 107.2 115.5 Trademarks, patents and other intangibles, net......................................... 79.3 80.9 Pension asset................................ 50.8 46.4 Other assets................................. 14.8 11.4 ------------- ------------- Total assets............................. $ 848.4 $ 874.2 ============= ============= LIABILITIES AND SHAREHOLDERS' INVESTMENT Loan payable................................. $ 58.0 $ 32.4 Accounts payable............................. 99.2 90.0 Accrued liabilities.......................... 175.5 185.1 Accrued income taxes......................... 7.7 6.5 Current maturities and sinking fund requirements of long-term debt.............. 8.4 11.2 ------------- ------------- Total current liabilities................ 348.8 325.2 Long-term debt............................... 241.4 247.0 Postretirement benefits other than pensions.. 99.1 124.4 Other non-current liabilities................ 78.8 120.4 Shareholders' investment Common stock--25 million shares authorized at $.01 par value with 20.4 million shares outstanding at December 31, 1999 and 1998...................................... 0.2 0.2 Capital in excess of par value of common stock..................................... 277.3 276.9 Accumulated deficit........................ (189.2) (197.6) Accumulated other comprehensive loss....... (8.0) (22.3) ------------- ------------- Total shareholders' investment........... 80.3 57.2 ------------- ------------- Total liabilities and shareholders' investment.............................. $ 848.4 $ 874.2 ============= =============
The accompanying notes are an integral part of these statements. 34 OUTBOARD MARINE CORPORATION STATEMENTS OF CONSOLIDATED EARNINGS AND COMPREHENSIVE INCOME
Pre-Merger Post-Merger Company Company ----------------------------------------- --------------------- Twelve Months Ended Three Months Ended Twelve Months Ended December 31, December 31, September 30, --------------------- ------------------- --------------------- 1999 1998 1998 1997 1998 1997 -------- ----------- ------ ----------- ---------- --------- (unaudited) (unaudited) (Dollars in millions except amounts per share) Net sales............... $1,110.9 $1,015.6 $199.4 $209.5 $ 1,025.7 $ 979.5 Cost of goods sold...... 881.0 802.6 180.7 171.7 793.6 822.0 -------- -------- ------ ------ ---------- -------- Gross earnings........ 229.9 213.0 18.7 37.8 232.1 157.5 Selling, general, and administrative expense................ 207.2 279.7 62.3 48.8 266.2 219.9 Restructuring charge (income)............... (14.1) 98.5 -- -- 98.5 -- Change in control expenses-compensation.. -- -- -- -- -- 11.8 -------- -------- ------ ------ ---------- -------- Earnings (loss) from operations........... 36.8 (165.2) (43.6) (11.0) (132.6) (74.2) Non-operating expense (income) Interest expense...... 23.1 29.2 6.8 7.7 30.1 16.2 Change of control expenses............. -- -- -- -- -- 15.1 Other, net............ (5.1) (16.5) (3.3) (2.4) (15.6) (29.2) -------- -------- ------ ------ ---------- -------- 18.0 12.7 3.5 5.3 14.5 2.1 Earnings (loss) before provision for income taxes................ 18.8 (177.9) (47.1) (16.3) (147.1) (76.3) Provision for income taxes.................. 10.6 2.6 -- 0.8 3.4 2.8 -------- -------- ------ ------ ---------- -------- Net earnings (loss)..... $ 8.2 $ (180.5) $(47.1) $(17.1) $ (150.5) $ (79.1) ======== ======== ====== ====== ========== ======== Other comprehensive income (expense) Foreign currency translation adjustments.......... (1.2) (3.4) 0.4 (3.4) (7.2) 8.5 Minimum pension liability............ 15.5 (15.5) 9.2 -- (24.7) 3.1 -------- -------- ------ ------ ---------- -------- Other comprehensive income (expense)... 14.3 (18.9) 9.6 (3.4) (31.9) 11.6 -------- -------- ------ ------ ---------- -------- Comprehensive income (loss)...... $ 22.5 $ (199.4) $(37.5) $(20.5) $ (182.4) $ (67.5) ======== ======== ====== ====== ========== ======== Net earnings (loss) per share of common stock Basic................. $ 0.40 $ (8.85) $(2.31) $(0.84) $ (7.38) $ (3.91) ======== ======== ====== ====== ========== ======== Diluted............... $ 0.40 $ (8.85) $(2.31) $(0.84) $ (7.38) $ (3.91) ======== ======== ====== ====== ========== ========
The accompanying notes are an integral part of these statements. 35 OUTBOARD MARINE CORPORATION STATEMENTS OF CONSOLIDATED CASH FLOWS
Pre-Merger Post-Merger Company Company ----------------------------------------------- ---------- Twelve Months Three Months Twelve Months Ended Ended Ended December 31, December 31, September 30, ------------------- ------------------- ------------------- 1999 1998 1998 1997 1998 1997 ------ ----------- ------ ----------- ------- ---------- (unaudited) (unaudited) (Dollars in millions) Cash Flows from Operating Activities: Net earnings/(loss).... $ 8.2 $(180.5) $(47.1) $(17.1) $(150.5) $(79.1) Adjustments to reconcile net earnings/(loss) to net cash provided by operations: Depreciation and amortization......... 52.1 50.0 12.4 12.5 50.1 57.0 Curtailment gain...... (15.0) -- -- -- -- -- Restructuring charges (income)............. (14.1) 98.5 -- -- 98.5 -- Deferred taxes........ 6.0 -- -- -- -- -- Changes in current accounts excluding the effects of acquisitions and noncash transactions: Decrease (increase) in receivables.......... 24.5 1.1 26.4 24.4 (0.9) 9.6 Decrease (increase) in inventories.......... 4.7 0.3 (22.9) (21.3) 1.9 26.5 Decrease (increase) in other current assets............... 1.2 18.3 4.7 31.8 45.4 (0.4) Increase (decrease) in accounts payable, accrued liabilities and income taxes..... (17.2) (6.5) (24.0) (63.5) (46.3) (5.3) Increase (decrease) in other items.......... (9.8) 63.1 (2.5) (3.4) 62.5 (17.5) ------ ------- ------ ------ ------- ------- Net cash provided by (used for) operating activities.......... 40.6 44.3 (53.0) (36.6) 60.7 (9.2) Cash Flows from Investing Activities: Expenditures for plant and equipment, and tooling............... (48.5) (43.2) (15.1) (6.3) (34.4) (36.3) Proceeds from sale of plant and equipment, including assets held for sale.............. 4.6 11.8 2.3 0.1 9.6 13.0 Proceeds from sale of joint venture......... -- 3.2 3.2 -- -- -- Other, net............. 1.4 -- -- 0.8 0.8 (2.8) ------ ------- ------ ------ ------- ------- Net cash used for investing activities.......... (42.5) (28.2) (9.6) (5.4) (24.0) (26.1) Cash Flows from Financing Activities: (Payments) issuance of short-term debt, net.. 25.6 (143.3) 32.4 79.7 (96.0) -- Payments of long-term debt, including current maturities.... (12.6) (8.5) (1.2) (67.7) (75.0) -- Proceeds from the issuance of long-term debt.................. -- 155.4 -- -- 155.4 -- Cash dividends paid.... -- -- -- -- -- (6.0) Restricted cash........ (1.3) (29.3) (0.3) -- (29.0) -- Other, net............. 0.4 (0.9) -- -- (0.9) 2.3 ------ ------- ------ ------ ------- ------- Net cash provided by (used for) financing activities.......... 12.1 (26.6) 30.9 12.0 (45.5) (3.7) Exchange rate effect on cash.................. 1.2 -- 0.1 (0.3) (0.4) (2.1) ------ ------- ------ ------ ------- ------- Net increase (decrease) in cash and cash equivalents........... 11.4 (10.5) (31.6) (30.3) (9.2) (41.1) Cash and cash equivalents at beginning of period... 13.6 24.1 45.2 54.4 54.4 95.5 ------ ------- ------ ------ ------- ------- Cash and cash equivalents at end of period................ $ 25.0 $ 13.6 $ 13.6 $ 24.1 $ 45.2 $ 54.4 ====== ======= ====== ====== ======= ======= Restricted cash........ $ 30.6 $ 29.3 $ 29.3 $ -- $ 29.0 $ -- ====== ======= ====== ====== ======= ======= Post-Merger Company cash and cash equivalents prior to-- 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......... $ 30.4 $ 29.4 $ 12.5 $ 7.2 $ 23.5 $ 21.0 ====== ======= ====== ====== ======= ======= Income taxes paid (refunded), net...... $ (4.9) $ (0.1) $ (1.4) $ 1.3 $ 0.0 $ 3.4 ====== ======= ====== ====== ======= =======
The accompanying notes are an integral part of these statements. 36 OUTBOARD MARINE CORPORATION STATEMENTS OF CHANGES IN CONSOLIDATED SHAREHOLDERS' INVESTMENT
Accumulated Issued Capital in Earnings Common Stock Excess (Deficit) Accumulated Shares of Par Employed Other -------------- Value of in the Comprehensive Treasury Shares Amount Common Stock Business Income (loss) Stock ------ ------ ------------ ----------- ------------- -------- (Dollars and shares in millions) 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) Cancellation of Pre- Merger Company shares 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 $ 0.0 $ 0.0 $ -- 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) $ -- Net earnings............ 8.2 Minimum pension liability adjustment... 15.5 Shares issued under stock plans............ 0.4 Translation adjustments............ (1.2) Other................... 0.2 ----- ----- ------- ------- ------ ----- Balance--December 31, 1999--Post-Merger Company................ 20.4 $ 0.2 $ 277.3 $(189.2) $ (8.0) $ -- ===== ===== ======= ======= ====== =====
The accompanying notes are an integral part of these statements. 37 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 (the "Greenmarine Acquisition"). Outboard Marine Corporation, including its subsidiaries, 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. 2. Nature of Business and Significant Accounting Policies Nature of Business. The Company is a multinational company that 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 and the twelve months ended December 31, 1998 have been included for comparative purposes. 38 Principles of Consolidation. The accounts of all significant subsidiaries were included in the Consolidated Financial Statements. Inter-company activity and account balances have been eliminated in consolidation. At December 31, 1999, all subsidiaries were wholly owned except those referred to in Note 3 to the Consolidated Financial Statements. Reclassification. Certain amounts in 1998 have been restated to conform to the 1999 presentation. 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 banking system provides for the daily replenishment of major bank accounts for check clearing requirements. Accordingly, outstanding checks of $17.5 million and $22.4 million, which had not yet been paid by the banks at December 31, 1999 and December 31, 1998, 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, 1999 and December 31, 1998, the Restricted Cash was $30.6 million and $29.3 million, respectively. The restricted cash must be maintained until the later of May 27, 2001, or such time as the Company's fixed coverage ratio is greater than 2.5 to 1.0 (as defined 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 which comprised 21% and 23% of total inventory at December 31, 1999 and December 31, 1998, respectively, is carried at the lower of first-in, first-out (FIFO) cost or market. In the fiscal year ended 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, the liquidation of LIFO inventory quantities acquired at lower costs prevailing in prior years as compared with the costs of 1997 purchases, increased earnings before tax by $1.0 million. 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, which includes assets acquired under capital leases, 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 was $44.9 million, $43.1 million and $52.7 million for the fiscal year ended December 31, 1999, and the fiscal years ended September 30, 1998 and 1997, respectively. 39 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) expense, net, in the Statements of Consolidated Earnings. Maintenance and repair costs, which are charged directly to earnings as incurred, were $25.9 million, $27.0 million and $26.5 million for the fiscal year ended December 31, 1999, and the fiscal years ended September 30, 1998 and 1997, 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, 1999 and December 31, 1998 included goodwill, net of amortization expense, of $107.2 million and $115.5 million, respectively, and trademarks, patents and other intangibles of $79.3 million and $80.9 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. In 1999, goodwill was reduced by $6.0 million as benefits associated with certain deferred tax assets at the date of the Greenmarine Acquisition were recognized (see note 14). Amortization of intangibles was $5.7 million, $6.2 million and $1.6 million for the fiscal year ended December 31, 1999, and the fiscal years ended September 30, 1998 and 1997, respectively. Accumulated amortization was $14.3 million and $7.6 million at December 31, 1999 and December 31, 1998, respectively. Revenue Recognition. The Company generally recognizes the sale of merchandise and related expenses, including estimated warranty costs, when the following conditions have been met: i) the customer has paid for the product or willingly assumed an obligation to pay; and, ii) the customer or common carrier has physically received the product and risk of ownership has passed to the customer. Advertising Costs. Advertising costs are charged to expense as incurred and were $28.6 million, $27.6 million and $33.7 million for the fiscal year ended December 31, 1999, and the fiscal years ended September 30, 1998 and 1997, respectively. Warranty. The Company generally provides the ultimate consumer a warranty with each product and accrues warranty expense at the time of sale based upon accrual estimates, which consider 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 improvements and refinements to existing products, are expensed as incurred. Such expenditures were $42.2 million, $36.8 million and $38.2 million for fiscal year ended December 31, 1999, and the fiscal years ended September 30, 1998 and 1997, 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 exchange rates; sales and expenses at average exchange rates during the period; and, 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 Company for the fiscal year ended December 31, 1999, and the fiscal years ended September 30, 1998 and 1997 include foreign exchange losses (gains) of $1.9 million, $(0.7) million and $1.0 million, respectively, which resulted primarily from commercial transactions. Impairment of Long-Lived Assets. 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. The Company periodically evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of intangible assets may warrant revision or that the remaining balance may not be recoverable. If factors indicate that intangible 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 intangible asset in measuring whether 40 the intangible asset is recoverable. If this review indicates that the assets will not be recoverable, the carrying value of the Company's assets would be reduced to their estimated fair market value. Stock-Based Compensation. The Company continues to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Compensation cost for stock options, if any, is measured as the excess of the quoted market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. The Company has elected to remain on its current method of accounting as described above, and has adopted the disclosure requirements of SFAS No. 123. Derivative Financial Instruments and Foreign Currency Transactions. The Company uses derivative financial instruments selectively to offset exposure to market risks arising from changes in foreign exchange rates and interest rates. Derivative financial instruments currently utilized by the Company primarily include foreign currency forward contracts. Contracts are executed centrally to minimize transaction costs on currency conversions and minimize losses due to adverse changes in foreign currency markets. The Company evaluates and monitors consolidated net exposures by currency and maturity, and external derivative financial instruments to minimize that net exposure. Earnings Per Share of Common Stock. 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 for the fiscal year 1999, the twelve month period ended December 31, 1998, the three-month periods ended December 31, 1998 and 1997, and the fiscal year ended September 30, 1998, respectively, and 20.2 million for the fiscal year ended September 30, 1997. For fiscal year 1997, 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, shares were computed to be 20.6 million for fiscal year 1999 and 20.4 million for the twelve months ended December 31, 1998, the three month periods ended December 31, 1998 and 1997, and fiscal year 1998. For all periods, except fiscal year 1999, 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. Segment Information. Effective in 1999, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information", with respect to segment reporting. As a result, the Company has changed the way it reports information about its operating segments. The Company determines its reportable segments based on the strategic business units and the commonalities among the products and services within each segment, which corresponds to the manner in which the Company's management reviews and evaluates operating performance. The Company has combined certain similar operating segments that meet applicable criteria established under SFAS No. 131. 41 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, 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........................ $ 0.0 $ 0.0 $ 0.0 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) Fiscal year activity................... 15.5 (1.2) 14.3 ------ ------ ------ Balance at December 31, 1999........... $ 0.0 $ (8.0) $ (8.0) ====== ====== ======
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 worldwide 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. In July 1993, the Pre-Merger Company and AB Volvo Penta and Volvo Penta of the Americas, Inc. ("Volvo") formed a joint venture Company to produce gasoline stern drive and gasoline inboard marine power systems for OEM & after-market sales. 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 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 $4.8 million for the fiscal year ended September 1998, and the Pre-Merger Company's share was $7.2 million in fiscal year 1997 which was included in other (income) expense, net in the Statements of Consolidated Earnings. On December 8, 1998, the Company terminated 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 the Company and Volvo. As such, the Company sold its ownership interest to Volvo for approximately $3.2 million, resulting in no material gain or loss. 4. Restructuring Charges During the fiscal quarter ended September 30, 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 included: 1) costs to recognize severance and benefits for approximately 950 42 employees to be terminated ($14.0 million), 2) costs to clean and close the facilities ($6.5 million), 3) costs to ready machinery and equipment for disposal and costs to dispose of machinery and equipment at the facilities ($3.9 million), 4) costs to write-down certain replacement parts for machinery and equipment at the facilities to net realizable value ($2.0 million) and 5) curtailment losses associated with the acceleration of pension ($42.2 million) and postretirement medical benefits ($29.9 million) for employees at the two facilities. 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 and transferring the balance of production to other facilities within the Company. The Company anticipates substantial completion of such plan by the end of fiscal year 2000. By May 1999, the Company completed its negotiations of the closing agreements with the unions representing the Milwaukee and Waukegan workers, respectively. These negotiations resulted in changes to the post-retirement medical and pension plans for union employees. The changes required an adjustment in the previous estimate of the curtailment loss for the pension and postretirement medical benefits. Specifically, in the second fiscal quarter of 1999, the curtailment loss related to the postretirement medical benefit obligation was decreased by $19 million and the curtailment loss related to the pension benefit obligation was increased by $5 million, resulting in a net reduction of the previous curtailment loss from $72.1 million to $58.1 million. This adjustment was reflected in the Statement of Consolidated Operations and Comprehensive Income (in the second quarter of 1999) as a $14 million reduction in the previously recorded Restructuring Charge. The adjusted curtailment loss of $58.1 million represents the estimate of the increase in pension and postretirement medical benefit obligations due to the closure of the Milwaukee and Waukegan facilities. The cash payment for the pension benefits will be made from the assets of the pension fund while the payment for the postretirement medical benefits will be made from the general assets of the Company. As of September 30, 1999, the Company had identified suppliers and begun the transfer of manufacturing responsibilities for the outsourcing of crankshafts, propellers, drive shafts, propeller shafts, and numerous investment cast and service parts to third-party suppliers. In September 1999, the Company made two additional adjustments to the restructuring accrual. First, the severance accrual was reduced by $2.6 million due to the attrition of employees at the Waukegan and Milwaukee locations. In addition, an increase in the pension obligation of $2.5 million was recorded to reflect an increased benefit offered to the exempt employees at the Milwaukee and Waukegan locations. The impact of these entries has been reflected in the Condensed Statement of Consolidated Operations and Comprehensive Income as a $0.1 million decrease to the previously recorded Restructuring Charge. As of December 31, 1999, the Company has incurred approximately $1.0 million against the restructuring charge established in the prior fiscal year. The remaining balance will be substantially spent in 2000 as the plants are closed and the facilities are subsequently sold. As part of its outsourcing efforts, the Company is negotiating with a potential vendor for the lease of space in the facility for the supply of some of the production. Although there can be no assurance, if the Company is successful in its negotiations, there would be a reduction of the employee severance and other costs previously recorded for this facility. The Company anticipates having more information regarding the negotiations early in the second quarter of 2000. The elements of the restructuring accrual (excluding curtailment gains/losses) are as follows (in millions):
Balance at Original Accrual December 31, Accrual Utilized Changes 1999 -------- -------- ------- ------------ Fiscal 1998 Charge.................... $26.4 $ 1.0 $2.6 $22.8 Fiscal 1996 Charge.................... 25.6 23.8 -- 1.8 ----- ----- ---- ----- $52.0 $24.8 $2.6 $24.6
43 5. Inventories The components of inventory were as follows:
December 31, December 31, 1999 1998 ------------ ------------ (Dollars in million) Finished product................................. $ 67.5 $ 83.9 Raw material, work in process and service parts.. 123.6 114.5 ------ ------ Inventory at current cost which is less than market.......................................... 191.1 198.4 Excess of current cost over LIFO cost............ 2.5 1.2 ------ ------ Net inventory.................................... $188.6 $197.2 ====== ======
6. Plant and Equipment Plant and equipment components were as follows:
December 31, December 31, 1999 1998 ------------ ------------ (Dollars in million) Land and improvements.............................. $ 11.3 $ 12.0 Buildings.......................................... 63.0 60.2 Machinery and equipment............................ 146.8 132.4 Construction in progress........................... 25.0 16.2 ------ ------ 246.1 220.8 Accumulated depreciation........................... 45.6 23.7 ------ ------ Plant and equipment, net........................... $200.5 $197.1 ====== ======
7. Accrued Liabilities and Other Non-Current Liabilities
December 31, December 31, 1999 1998 ------------ ------------ (Dollars in million) Accrued liabilities were as follows: Compensation, pension programs and current postretirement Medical........................ $ 24.6 $ 20.9 Warranty....................................... 40.6 40.9 Marketing programs............................. 43.1 52.9 Restructuring reserves......................... 24.6 10.3 Other.......................................... 42.6 60.1 ------ ------ Accrued liabilities.............................. $175.5 $185.1 ====== ======
December 31, December 31, 1999 1998 ------------ ------------ (Dollars in million) Other non-current liabilities were as follows: Pension programs............................... $15.2 $ 35.5 Environmental remediation...................... 21.2 18.0 Warranty....................................... 22.7 20.6 Restructuring reserves......................... -- 20.4 Other.......................................... 19.7 25.9 ----- ------ Accrued non-current liabilities.................. $78.8 $120.4 ===== ======
44 8. Short-Term Borrowings A summary of short-term borrowing activity was as follows:
December 31, December 31, 1999 1998 ------------ ------------ (Dollars in million) Outstanding: Bank borrowing................................... $58.0 $32.4 Average bank borrowing for the period: Borrowing........................................ $56.8 $ 8.9 Interest rate.................................... 7.3% 8.2% Maximum month end borrowing........................ $80.0 $32.4
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 Bank of America, 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 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 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. In order to meet the Company's liquidity requirements, the Company entered into a Sixth Amendment to the Amended and Restated Loan and Security Agreement effective July 30, 1999, which among other things (i) extended the termination of the Revolving Credit Facility from December 31, 2000 to December 31, 2001, (ii) included work-in- process inventory in the borrowing base calculation until September 30, 1999, and (iii) extended the duration of the borrowing base capacity for intellectual property through October 31, 1999. On October 27, 1999, the Company entered into a Seventh Amendment to the Amended and Restated Loan and Security Agreement which among other things extended the duration of the borrowing base capacity for intellectual property through December 31, 1999. On February 1, 2000 the Company entered into an Eighth Amendment to the Amended and Restated Loan and Security Agreement which among other things (i) increased the borrowing capacity by increasing intellectual property availability by $10.0 million to $20.0 million and increasing the advance rate for finished goods inventory from 60% to 65%, (ii) eliminated tangible net worth, interest coverage, and leverage ratio covenants, and (iii) established minimum availability requirements, maximum capital and tooling expenditures, and included a minimum earnings before interest, taxes, depreciation, and amortization covenant test to reflect expected operating results. 45 9. Long-Term Debt Long-term debt on December 31, 1999 and December 31, 1998, net of sinking fund requirements included in current liabilities, consisted of the following:
December 31, December 31, 1999 1998 ------------ ------------ (Dollars in million) 10 3/4% senior notes due 2008..................... $156.0 $155.5 7% convertible subordinated debentures due 2002... 7.1 7.1 9 1/8% sinking fund debentures due through 2017... 62.9 62.8 Medium-term notes due 2000 through 2001 with rates ranging from 8.55% to 8.625%..................... 10.8 20.9 Industrial revenue bonds and other debt due 2002 through 2007 with rates ranging from 6.0% to 12.037%.......................................... 10.7 11.9 Other............................................. 2.3 -- ------ ------ $249.8 $258.2 Less current maturities........................... (8.4) (11.2) ------ ------ $241.4 $247.0 ====== ======
On May 27, 1998, the Company issued $160.0 million of 10 3/4% Senior Notes ("Senior Notes") due 2008, with interest payable semiannually on June 1 and December 1, of each year. The net proceeds from the issuance totaled $155.2 million, of which $150.0 million was used to prepay the acquisition debt. Unamortized debt discount costs of $4.0 million remained at December 31, 1999. 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, 1999 and December 31, 1998, the interest reserve Restricted Cash was $30.6 million and $29.3 million, respectively. Restricted cash must be maintained for a minimum of three years or at least until such time as the Company's fixed coverage ratio is greater than 2.5 to 1.0 (as defined under the depositary agreement) or the Senior Notes are paid in full. 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. At December 31, 1999, $7.1 million principal amount of the Company's 7% Convertible Subordinated Debentures due 2002 (the "Convertible Debentures") was outstanding. Following the Merger, the Company was required to offer to purchase for cash any and all of the then outstanding Convertible Debentures at a purchase price equal to 100% of the outstanding principal amount of each Convertible Debenture plus any accrued and unpaid interest thereon. On November 12, 1997, the Company consummated such offer to purchase and, as a result thereof, purchased $67.7 million principal amount of Convertible Debentures. Immediately prior to the Merger, the Convertible Debentures were convertible into shares of common stock of the Company at the conversion price of $22.25 per share. As a result of the Merger, the remaining $7.1 million principal amount of outstanding Convertible Debentures are no longer convertible into shares of common stock of the Company. Each holder of the remaining outstanding Convertible Debentures now has the right to convert (at $22.25 per share) such holder's Convertible Debentures and receive cash in an amount equal to what each holder would have received had they converted the Convertible Debentures into common stock immediately prior to the Merger ($18.00 per share). Accordingly, the remaining outstanding Convertible Debentures are convertible into the right to receive a cash payment equal to $809 for each $1,000 principal amount of 46 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. On December 31, 1999 and December 31, 1998, 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 2000 through 2004. Amounts are recorded as a reduction of outstanding debt. At December 31, 1999, an aggregate of approximately $10.8 million principal amount of the Company's Medium-Term Notes Series A (the "Medium-Term Notes") was outstanding in two tranches. $5.8 million of the Medium-Term Notes bear interest at a rate of 8.55% while the remaining $5.0 million bear interest at 8.625%. The maturity dates of the Medium-Term Notes include March 15, 2000 and March 15, 2001. Interest on each of the outstanding Medium-Term Notes is payable semi-annually each March 30 and September 30 and at maturity. 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 fiscal years is as follows:
(Dollars in millions) ----------- 2000............................................................. $8.4 2001............................................................. 7.0 2002............................................................. 8.6 2003............................................................. 0.4 2004............................................................. 0.7
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 $170.0 million and $239.0 million at December 31, 1999 and December 31, 1998, respectively, versus carrying amounts of $241.4 million and $247.0 million at December 31, 1999 and December 31, 1998, 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. Prior to 1999, the Company had entered into certain 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. At December 31, 1998 and September 30, 1998 the Company had an outstanding variable to fixed interest rate swap agreement having a total notional principal amount of $5.0 million expiring February 15, 1999. The fair value of the interest rate swap agreement at December 31, 1998 was an estimated termination liability of $0.1 million. This potential expense at each fiscal year end had not yet 47 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 intercompany or 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 reflected in the Consolidated Statement of Earnings unless the gains or losses are related to qualifying hedges on firm foreign currency commitments under which gains and losses are deferred. At December 31, 1999, the Company had entered into foreign currency forward exchange contracts to receive 11.0 million Australian dollars for $7.1 million with a fair market value of $7.2 million. The $0.1 million gain was recognized in the Statement of Comprehensive Earnings at December 31, 1999. The Company also entered into foreign currency forward exchange contracts to receive $4.0 million (also fair market value) for 5.8 million Canadian dollars. 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 inter-Company transactions. Gains and losses on the adjustment to the fair market value of such instruments are 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 gain on the Japanese yen contracts have 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, 1999 and 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, 1999 and December 31, 1998. 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, 1999, the Company had futures covering approximately 31% of annual forecasted aluminum purchases. The fair market value of these aluminum options resulted in a $0.5 million deferred gain and $0.1 million deferred loss at December 31, 1999 and December 31, 1998, respectively. The fair market value was obtained from a major financial institution based upon the market value of those futures at December 31, 1999 and December 31, 1998. 11. 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. 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 48 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 1997, the effect on net earnings for 1997 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 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 1,900,000 shares of currently authorized common stock of the Company. Grants under PROP are discretionary. Stock option grants under PROP through December 31, 1999 were 1,570,870, net of cancelled option grants. The grants are primarily exercisable at $18 and $22 per share and expire ten years after date of grant. Additionally, there were 61,105 incentive stock options granted to an executive which expire 11 years after the date of grant. The Company accounts for PROP under APB Opinion No. 25, and has not recorded any compensation expense for grants through December 31, 1999 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 fiscal year ended December 31, 1999, and the fiscal year ended September 30, 1998 would have been a reduction of pretax earnings of $1.0 million and $0.7 million, respectively, on a proforma basis and a reduction of basic and diluted earnings per share of $0.05 million and $0.03 per share, respectively. A summary of option data for all plans was as follows:
Weighted Average Number of Price Option Shares Per Share ------------- --------- Options outstanding and unexercised at September 30, 1997......................................... -- -- Options granted................................... 979,245 $18.00 --------- ------ Options outstanding and unexercised at September 30, 1998......................................... 979,245 $18.00 ========= ====== Options granted................................... 110,500 $21.80 Options cancelled................................. 28,500 -- --------- ------ Options outstanding and unexercised at December 31, 1998......................................... 1,061,245 $18.86 ========= ====== Options granted................................... 596,000 $21.75 Options cancelled................................. 86,375 -- --------- ------ Options outstanding and unexercised at December 31, 1999......................................... 1,570,870 $19.69 ========= ====== Exercisable at December 31, 1999.................. 615,703 $18.00
The weighted average fair value per option granted during 1999 and 1998, estimated on the date of grant using the Black-Scholes option-pricing model was $4.81 and $3.75, respectively. The fair value of 1999 and 1998 options granted is estimated on the date of grant using the following assumptions: risk-free interest rate of 49 5.4% in 1999 and 4.7% in 1998, and an expected life of four years in 1999 and five years in 1998. The Company has used the "minimum value' method of valuing stock options based upon SFAS 123. 12. 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 $5.4 million, $5.0 million, and $(2.4) million for the fiscal year ended December 31, 1999, and the fiscal years ended September 30, 1998, and September 30, 1997, 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. This curtailment loss was subsequently increased by $5.0 million in May 1999 and by $2.5 million in September 1999 to reflect the finalization of the curtailment loss estimate (see Note 4). In May 1999, the Company made the decision to change the pension and post- retirement medical plans for current active employees and current retirees of the Company. The pension plan changes include merging the Company's union and non-union pension plans into one consolidated pension plan. In addition, the Company decided to freeze the merged pension plan for non-union employees effective September 30, 1999. Finally, the postretirement medical plan was changed to provide new employee contribution rates, changes in benefit levels, different service providers and the elimination of post-65 retirement medical coverage for employees who retire on or after January 1, 2000. These changes in both the pension and postretirement medical plans resulted in a curtailment gain of $15.0 million which was reflected in the Company's Condensed Statement of Consolidated Operations and Comprehensive Income as a reduction in selling, general and administrative expense in fiscal year 1999. The following schedule of pension expense (income) presents amounts relating to the Company's pension plans:
Twelve Months Twelve Months Twelve Months Ended Ended Ended December 31, September 30, September 30, 1999 1998 1997 ------------- ------------- ------------- (Dollars in million) Benefits earned during the period.......................... $ 5.0 $ 6.6 $ 6.6 Interest cost on projected benefit obligation.............. 33.1 28.8 28.5 Return on pension assets......... (44.6) (41.3) (88.5) Net amortization and deferral.... -- (0.1) 54.3 ------ ------ ------ Net periodic pension expense (income)........................ $ (6.5) $ (6.0) $ 0.9 ====== ====== ====== Curtailment (gain) loss.......... (9.7) 42.2 -- Special Termination Benefits..... 7.9 -- -- Actuarial assumptions used for the Company's principal defined benefit plans: Twelve Months Twelve Months Twelve Months Ended Ended Ended December 31, September 30, September 30, 1999 1998 1997 ------------- ------------- ------------- Discount rates................... 7.5% 7.0% 7.5% Rate of increase in compensation levels (salaried employee plans).......................... 5.0% 5.0% 5.0% Expected long-term rate of return on assets....................... 9.5% 9.5% 9.5%
50 The following provides a reconciliation of benefit obligations, plan assets and funded status:
December 31, December 31, 1999 1998 ------------ ------------ (Dollars in millions) Change in Benefit Obligation: Benefit obligation at beginning of period...... $483.3 $476.3 Service cost................................... 5.0 1.9 Interest cost.................................. 33.1 8.3 Plan amendment................................. (7.5) -- Actuarial (gain) loss.......................... (29.6) 4.2 Benefits paid.................................. (31.0) (7.4) ------ ------ Benefit obligation at end of period:............. $453.3 $483.3 ====== ====== Change in plan assets: Fair value of plan assets at beginning of period........................................ $474.3 $440.2 Actual return on plan assets................... 83.6 41.0 Employer contribution.......................... 1.5 0.5 Benefits paid.................................. (31.0) (7.4) ------ ------ Fair value of plan assets at end of period....... $528.4 $474.3 ====== ====== Reconciliation: Funded status.................................. $ 75.1 $ (9.0) Unrecognized net actuarial loss................ (38.9) 19.2 Unrecognized prior service cost................ (0.5) -- ------ ------ Prepaid (accrued) benefit cost................... $ 35.7 $ 10.2 ====== ====== Amounts recognized in the Statements of Financial Position consist of: Prepaid benefit cost........................... $ 50.8 $ 46.4 Accrued benefit liability...................... (15.1) (20.7) Minimum pension liability...................... -- (15.5) ------ ------ Net amount recognized............................ $ 35.7 $ 10.2 ====== ======
At September 30, 1997 in accordance with purchase accounting, plan assets in excess of or less than the projected benefit obligation had 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 $15.5 million was reported as a separate reduction of shareholders' investment at December 31, 1998. In 1999, the minimum pension liability of $15.5 million was reversed due to the Company's decision to merge and freeze the pension plans for current and active retirees of the Company. This $15.5 million change is reported as a component of Other Comprehensive Income in fiscal year 1999. 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. This 51 curtailment loss was subsequently decreased by $19 million in May 1999 to reflect the finalization of the union agreements, which were settled with the Company's unions in 1999 (see Note 4). The net cost of providing postretirement health care and life insurance benefits included the following components:
Twelve Months Twelve Months Twelve Months Ended Ended Ended December 31, September 30, September 30, 1999 1998 1997 ------------- ------------- ------------- (Dollars in million) Service cost-benefits attributed to service during the period... $ 0.9 $0.7 $1.1 Interest cost on accumulated postretirment benefit obligation..................... 7.6 6.6 7.3 Amortization of prior service cost and actuarial gain........ (0.7) (0.2) (1.8) ----- ---- ---- Net periodic postretirement benefit cost................... $ 7.8 $7.1 $6.6 ===== ==== ==== Curtailment (gain) loss......... (24.8) 29.9 --
The following provides a reconciliation of benefit obligations, plan assets and funded status:
December 31, December 31, 1999 1998 ------------ ------------ (Dollars in millions) Change in Benefit Obligation: Benefit obligation at beginning of period...... $ 135.0 $ 131.4 Service cost................................... 0.9 0.2 Interest cost.................................. 7.6 2.2 Plan amendment................................. (24.8) -- Actuarial (gain) loss.......................... (15.2) 3.7 Benefits paid.................................. (9.5) (2.5) ------- ------- Benefit obligation at end of period.............. $ 94.0 $ 135.0 ======= ======= Change in plan assets: Fair value of plan assets at beginning of period........................................ $ -- $ -- Actual return on plan assets................... -- -- Employer contribution.......................... 8.6 2.5 Employee contribution.......................... 0.9 -- Benefits paid.................................. (9.5) (2.5) ------- ------- Fair value of plan assets at end of period....... $ -- $ -- ------- ------- Funded status.................................... $ (94.0) $(135.0) Unrecognized net actuarial loss.................. 1.5 3.4 Unrecognized prior service cost.................. (13.1) -- ------- ------- Accrued benefit cost............................. $(105.6) $(131.6) ======= ======= Less: Current portion of postretirement obligation...................................... (7.2) (8.0) ------- ------- Net long-term postretirement obligation.......... (98.4) (123.6) Ficht GMBH pension plan.......................... (0.1) -- Former officer life insurance obligation......... (0.6) (0.8) ------- ------- Total postretirement benefits other than pension......................................... $ (99.1) $(124.4) ======= =======
52 The accumulated postretirement benefit obligation was determined using a 7.5% and 7% weighted average discount rate at December 31, 1999 and December 31, 1998, respectively. The health care cost trend rate was assumed to be 7% and remaining constant thereafter. A one percentage point increase of this annual trend rate would increase the accumulated postretirement benefit obligation at December 31, 1999 and December 31, 1998 by approximately $13.6 million and $11.3 million, respectively, and the total service and interest cost components by $1.2 million and $0.2 million, respectively. A one percentage point decrease of this annual trend rate would decrease the accumulated postretirement benefit obligation at December 31, 1999 and December 31, 1998 by approximately $11.7 million and $9.5 million and the total service and interest cost components by $1.1 million and $0.2 million, respectively. The Company also sponsors a defined contribution plan. Participation in the plan is available to substantially all employees of the Company. The defined contribution plan is a Company sponsored 401(k) plan in which employees can contribute up to 15% of their eligible pay up to the IRS limit of $10,000 per year. The Company contributes in cash amounts equal to the first 3% of employee contributions and 50% the next 2% of employee contributions for non- collectively bargained employees. The amounts expensed for the Company match provision of the plan were $1.8 million, $0.9 million, and $0.4 million in the fiscal year ended December 31, 1999, and the fiscal years ended September 30, 1998 and 1997. 13. Other Expense (Income), Net Other non-operating expense (income) in the Statements of Consolidated Earnings consisted of the following items:
Twelve Months Twelve Months Twelve Months Ended Ended Ended December 31, September 30, September 30, 1999 1998 1997 ------------- ------------- ------------- (Dollars in million) Expense (Income) Interest earned................ $(2.7) $ (4.3) $ (4.5) Insurance Recovery and Lawsuit Settlement.................... -- -- (10.7) Foreign exchange losses (gains)....................... 1.9 (0.7) 1.0 (Gain) loss on disposition of plant and equipment........... (2.2) (2.9) (5.8) Joint venture earnings......... -- (4.8) (7.2) Miscellaneous, net............. (2.1) (2.9) (2.0) ----- ------ ------ $(5.1) $(15.6) $(29.2) ===== ====== ======
53 14. Income Taxes The provision for income taxes consisted of the following:
Twelve Months Twelve Months Twelve Months Ended Ended Ended December 31, September 30, September 30, 1999 1998 1997 ------------- ------------- ------------- (Dollars in millions) Current provision for income taxes: Federal........................ $ -- $ -- $ -- State.......................... 0.5 0.5 0.5 Foreign........................ 4.1 3.1 2.2 Deferred provision for income taxes: Federal........................ 1.7 (29.4) (36.7) State.......................... 1.7 (7.6) (2.8) Foreign........................ 5.1 0.0 0.6 Valuation Allowance............ (2.5) 36.8 39.0 ----- ----- ----- Total Income Tax Provision....... $10.6 $ 3.4 $ 2.8 ===== ===== =====
The significant short-term and long-term deferred tax assets and liabilities were as follows:
December 31, December 31, 1999 1998 ------------ ------------ (Dollars in millions) Deferred tax assets Litigation and claims............................ $ 17.8 $ 21.4 Product warranty................................. 23.9 22.7 Marketing programs............................... 18.7 22.8 Postretirement medical benefits.................. 41.7 52.3 Restructuring.................................... 19.2 16.8 Loss carryforwards............................... 100.2 77.0 Other............................................ 43.0 57.7 Valuation Allowance.............................. (171.3) (179.8) ------- ------- Total deferred tax assets...................... $ 93.2 $ 90.9 ------- ------- Deferred tax liabilities Depreciation and amortization.................... $ (15.2) $ (14.5) Employee benefits................................ (18.8) -- Purchase accounting asset evaluations............ (25.5) (39.0) Other............................................ (31.8) (35.5) ------- ------- Total deferred tax liabilities................. ($91.3) ($89.0) ------- ------- Net deferred tax assets...................... $ 1.9 $ 1.9 ======= =======
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 and forecasted earnings. The Company believes the recorded net deferred tax assets of $1.9 million will more likely than not be realized. A valuation allowance of $171.3 million has been recorded at December 31, 1999, to reduce the deferred tax assets to their estimated net realizable value. Of this valuation allowance, $23.9 million relates to deferred tax assets established for foreign and state loss carryforwards. 54 As of December 31, 1999, certain non-U.S. subsidiaries of the Company had net operating loss carryforwards for income tax purposes of $26.0 million. Of this amount, $2.7 million will expire by 2005 with the remaining balance being unlimited. In addition, the Company has $216.9 million of Federal net operating loss carryforwards expiring between 2008 and 2020 and $218.8 million of state net operating loss carryforwards expiring between 2000 and 2015. These carryforwards are entirely offset by the valuation allowance. No benefit has been recognized in the Consolidated Financial Statements. These NOL carryforwards, and other deferred tax assets, were provided for with a valuation allowance at the time of the Greenmarine Acquisition. Any future benefits arising from adjusting the valuation allowance for NOL carryforward utilization (limited to $15.9 million each year), or realization of the deferred tax assets will be recorded as a reduction of goodwill arising from the Greenmarine Acquisition until such balance is exhausted, and thereafter to other intangibles until exhausted, and thereafter will be recorded as a direct reduction to income tax expense. The benefit of $6 million recorded during the year ended December 31, 1999 related to a reduction in the valuation allowance and a corresponding reduction in goodwill at December 31, 1999. The following summarizes the major percentage 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:
Twelve Months Twelve Months Twelve Months Ended Ended Ended December 31, September 30, September 30, 1999 1998 1997 ------------- ------------- ------------- (% to pretax earnings) At statutory rate................. 35.0% (35.0)% (35.0)% State income taxes, net of Federal tax deduction.................... 7.6 (3.6) (3.0) Tax effect of non-U.S. subsidiary earnings and operating losses at other than the U.S. rate......... 0.9 0.1 3.0 Tax effect of goodwill amortization and write-offs...... 4.4 1.4 0.4 Federal tax effect prior year's state income taxes paid.......... -- -- (0.2) Disposal of investment not deductible for tax............... 5.2 -- -- Equity earnings of foreign affiliates subject to U.S. taxation......................... 14.9 -- -- Change in valuation allowance..... (13.3) 25.0 51.1 Tax effect of foreign investment in U.S. property................. -- 6.4 -- Other............................. 1.7 8.0 (12.8) Actual provision................ 56.4% N.M.% N.M.%
Domestic and non-U.S. earnings before provision (credit) for income taxes consisted of the following:
Twelve Months Twelve Months Twelve Months Ended Ended Ended December 31, September 30, September 30, 1999 1998 1997 ------------- ------------- ------------- (Dollars in million) Earnings (loss) before provision for income taxes United States................. $ 1.0 $(144.8) $(68.7) Non-U.S. ..................... 17.8 (2.3) (7.6) ----- ------- ------ Total....................... $18.8 $(147.1) $(76.3) ===== ======= ======
The above non-U.S. income of $17.8 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 earnings (loss) as resulting from stand-alone operations could be misleading. No U.S. deferred taxes have been provided on $77.9 million of undistributed non-U.S. subsidiary earnings. The Company has no plans to repatriate these earnings and, as such, they are considered permanently invested. While no detailed calculations have been made of the potential U.S. income tax liability should such 55 repatriation occur, the Company believes that it would not be material in relation to the Company's Consolidated Financial Position or Consolidated Earnings. During the calendar year 1999, the Company settled with the Internal Revenue Service the audits for the fiscal years 1992 through 1994. As a result of this settlement, an accrual for previously provided interest of $8.2 was no longer necessary, and upon reversal reduced the Company's total interest expense for the 1999 year. 15. Segment and Related Information The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" in 1999 which changes the way the Company reports information about its operating segments. The Company has two reportable segments: marine engines, including parts and accessories, 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. Summarized financial information concerning the Company's reportable segments is shown in the following table. The "Other Column" reflects primarily corporate related items including curtailment income, restructuring charges, corporate staff expenses, and intangible assets (including amortization expense) related to the Company's acquisition in September 1997.
Marine Engines Boats Other Total ------- ------ ------ -------- (Dollars in millions) Fiscal Year Ended December 31, 1999 Revenues................................... $649.8 $461.1 $ -- $1,110.9 Intersegment revenues...................... 75.6 0.2 -- 75.8 Earnings (loss) from operations............ 16.9 2.1 17.8 36.8 Total Assets............................... 640.4 119.5 88.5 848.4 Capital Expenditures....................... 29.0 9.1 10.4 48.5 Depreciation and Amortization.............. 39.3 5.4 7.4 52.1 Three Months Ended December 31, 1998 Revenues................................... $111.9 $ 87.5 $ -- $ 199.4 Intersegment revenues...................... 19.2 -- -- 19.2 Earnings (loss) from operations............ (20.8) (11.6) (11.2) (43.6) Total Assets............................... 596.0 111.6 166.6 874.2 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 Intersegment revenues...................... 102.2 -- -- 102.2 Earnings (loss) from operations............ 61.6 (34.6) (159.6) (132.6) Total Assets............................... 612.5 126.1 168.6 907.2 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 Intersegment revenues...................... 131.9 -- -- 131.9 Earnings (loss) from operations............ 16.0 (54.9) (35.3) (74.2) Total Assets............................... 607.2 151.2 253.2 1,011.6 Capital Expenditures....................... 33.2 2.6 0.5 36.3 Depreciation and Amortization.............. 42.6 9.2 5.2 57.0
56 The following table presents financial information by geographic region. Revenues are attributed by geographic area upon the location where the products are sold:
Fiscal Year Three Months Fiscal Year Fiscal Year Ended Ended Ended Ended December 31, December 31, September 30, September 30, 1999 1998 1998 1997 ------------ ------------ ------------- ------------- (Dollars in millions) Net sales United States.......... $ 867.1 $152.0 $ 769.7 $721.0 Hong Kong.............. 12.5 2.3 11.5 20.3 Australia.............. 42.8 10.1 38.3 45.4 Canada................. 57.6 8.5 56.7 44.4 Europe................. 93.4 15.6 91.9 90.9 Latin America (including Brazil and Mexico)............... 37.5 10.9 57.6 57.5 -------- ------ -------- ------ Total................ $1,110.9 $199.4 $1,025.7 $979.5 ======== ====== ======== ====== Intersegment revenues United States.......... $ 119.8 $ 29.8 $ 134.2 $119.2 Hong Kong.............. 23.8 9.7 32.8 29.7 Australia.............. 0.6 0.0 0.3 0.2 Canada................. 12.9 2.7 6.8 5.8 Europe................. 0.9 0.1 1.1 2.1 Latin America (including Brazil and Mexico)............... -- -- -- -- -------- ------ -------- ------ Total................ $ 158.0 $ 42.3 $ 175.2 $157.0 ======== ====== ======== ====== Earnings (loss) from operations United States.......... $ 26.4 $(43.1) $ (143.1) $(75.7) Hong Kong.............. 2.0 1.7 0.8 0.5 Australia.............. 1.0 (0.5) 0.5 3.2 Canada................. 3.9 (0.1) 4.1 1.1 Europe................. 1.9 (2.5) (0.8) (8.8) Latin America (including Brazil and Mexico)............... 1.6 0.9 5.9 5.5 -------- ------ -------- ------ Total................ $ 36.8 $(43.6) $ (132.6) $(74.2) ======== ====== ======== ====== Total Long-lived assets United States.......... $ 370.8 $378.5 $ 379.0 $407.5 Hong Kong.............. 6.9 6.1 4.5 3.3 Australia.............. 1.2 2.1 2.1 2.7 Canada................. 3.1 2.9 3.1 3.1 Europe................. 2.1 1.2 1.1 1.4 Latin America (including Brazil and Mexico)............... 2.8 2.7 2.6 3.4 -------- ------ -------- ------ Total.................. $ 386.9 $393.5 $ 392.4 $421.4 ======== ====== ======== ======
Data for Europe (which primarily includes Belgium) and Latin America (including Brazil and Mexico) is provided as supplemental information as these locations are individually immaterial. Due to the integrated nature of the Company's operations, any attempt to interpret the above geographic area data as resulting from unique or stand-alone types of operations could be misleading. 57 16. Quarterly Information--(Unaudited) A summary of pertinent quarterly data for fiscal 1999, the three month period ended December 31, 1998 and fiscal 1998 was as follows:
Quarter Ended ------------------------------------------------ March 31 June 30 September 30 December 31 ------------- -------- ------------ ------------ (Dollars in millions, except amounts per share) Fiscal 1999 Net sales............... $255.2 $315.6 $279.4 $260.7 Gross earnings.......... 53.3 70.2 62.7 43.7 Net earnings (loss)..... (11.9) 33.8 11.0 (24.7) Net loss per share: Basic................. $(0.58) $ 1.66 $ 0.54 $(1.21) ------ ------ ------ ------ Diluted............... $(0.58) $ 1.64 $ 0.53 $(1.21) ------ ------ ------ ------ Quarter Ended December 31 ------------- (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) ------ ------ ------ ------
In the fourth fiscal quarter of fiscal year 1998, the Company recorded a $98.5 million restructuring charge (see Note 4). 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 meaningful to compare the results of operations of different fiscal quarters. 17. 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 products in the event of repossession upon a retail dealer's default. These arrangements contain provisions which limit the Company's repurchase obligation to a total aggregate of approximately $33 million for a period not to exceed 18 months from the date of invoice. The Company resells any repurchased products at a discount. 58 Losses incurred under this program have not been material. For the fiscal year ended December 31, 1999 and for fiscal 1998, the Company repurchased approximately $5.7 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. Minimum commitments under operating leases having initial or remaining terms greater than one year are $7.4 million, $5.8 million, $5.1 million, $3.9 million, $3.0 million, and $4.8 million for the years ending December 31, 2000 through 2004 and after 2004, respectively. The Company is engaged in a 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 closedown costs associated with discontinued operations or facilities, including the environmental costs of operation and maintenance until disposition. At December 31, 1999 the Company has accrued approximately $23 million for costs related to remediation at contaminated sites including operation and maintenance for continuing and closed-down operations. It is reasonably possible that a change in this estimate will occur in the near term. In addition, the Company has estimated that reasonably possible environmental loss contingencies may exceed amounts accrued by as much as $16 million at December 31, 1999. The possible recovery of insurance proceeds has not been considered in estimating contingent environmental liabilities. 59 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 landowner 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 March 1998, the Company received correspondence from Orbital Engine Corporation Limited ("Orbital") alleging that the Company's FICHT fuel-injected 150 horsepower engines infringed two Australian Orbital patents, which correspond to three U.S. patents and to a number of foreign patents. In May 1999, the Company entered into a non-assert agreement with Orbital relative to engines sold by OMC and its licensees which used FICHT fuel injection. Under the terms of the agreement, the Company will make certain payments to Orbital for use of the patents and all foreign counterparts, as well as certain other patents, identified in the agreement. Under the terms of the agreement, the Company is not precluded from developing FICHT fuel injection for any application. 18. Subsequent Events On January 28, 2000, the Company sold an aggregate of 650,000 shares of Series A Convertible Preferred Stock, par value $.01 per share (the "Series A Preferred Stock"), and warrants (the "Warrants") to purchase an aggregate of 5,750,000 shares of its Common Stock, par value $.01 per share (the "Common Stock"), for an aggregate consideration of $65.0 million in a private placement transaction to Greenlake Holdings II, LLC and Quantum Industrial Partners, LDC. Approximately $15.0 million of the Series A Preferred Stock was issued in exchange for certain subordinated notes previously issued by the Company to the purchasers. The Series A Preferred Stock has an initial liquidation preference of $100 per share and an initial conversion price of $14 per share (in each case, subject to adjustment upon occurrence of certain events). The Series A Preferred Stock is convertible into Common Stock at any time. The Series A Preferred Stock has an annual dividend rate of 15% of the then current liquidation preference, and is entitled to share ratably in any dividends paid on the Common Stock. Dividends will accrue if not paid in cash, and the liquidation preference will be increased by the amount of any accrued but unpaid dividends. The Series A Preferred Stock may be redeemed at any time after October 1, 2008, upon written request of the holders of at least 75% of the then outstanding shares. The Company may redeem all outstanding shares of the Series A Preferred Stock if, at any time, less than 10% of the total Series A Preferred Stock originally sold on January 28, 2000 remains outstanding. The Warrants are exercisable at any time until January 28, 2010, at an exercise price of $.01 per share of Common Stock, payable in cash or in shares of Common Stock. The Company intends to use the proceeds from the sale of the Series A Preferred Stock and Warrants for general corporate purposes, including funding its working capital and making capital expenditures. The Pro Forma impact of the above transaction, had it occurred on January 1, 1999, would have resulted in an approximate $65 million in proceeds, which would have been used to paydown the existing revolving credit facility. The transaction would have been recorded as a $29.1 million increase in preferred stock and a $35.9 million increase in shareholders' investment (the fair market value of the attached warrants). The impact of the above transaction to the Statement of Consolidated Earnings had the transaction occurred as of January 1, 1999 would have included a decrease in interest expense of $4.7 million and an 60 increase in preferred dividend expense of $14.3 million (which includes annual dividend expense and preferred stock accretion). As a result, 1999 loss on common shares would have been $1.4 million, and loss per diluted common share would have been $0.07. 19. Subsidiary Guarantor Information The Company issued $160,000,000 10 3/4% Senior Notes due 2008 ("Notes") on May 21, 1998. The Company's payment obligations under the Notes are to be guaranteed by certain of the Company's wholly-owned subsidiaries ("Guarantor Subsidiaries"). Such guarantees are full, unconditional, unsecured and unsubordinated on a joint and several basis by each of the Guarantor Subsidiaries. As of and through December 31, 1999, the Guarantor Subsidiaries were wholly-owned, but not the only wholly-owned, subsidiaries of the Company. The Credit Agreement and the Indenture governing the Notes contain certain covenants which, among other things, will restrict the ability of the Company and certain of its subsidiaries to incur additional indebtedness; pay dividends or make distributions in respect to their capital stock; enter into certain transactions with shareholders and affiliates; make certain investments and other restricted payments; create liens; enter into certain sales and leaseback transactions and sales of assets. These covenants are, however, subject to a number of exceptions and qualifications. Separate financial statements of the Guarantor Subsidiaries are not presented because management of the Company has determined that they are not material to investors. The following consolidating financial statements include the Company ("Parent Company"), the Guarantor Subsidiaries and the Company's non-guarantor subsidiaries ("Other Subsidiaries"). Investments in subsidiaries are accounted for by the Company under the equity method of accounting for purposes of the supplemental consolidating presentation. Earnings of subsidiaries are, therefore, reflected in the Company's investment accounts and earnings. The Company has not allocated goodwill to the Guarantor Subsidiaries or the other subsidiaries in association with the acquisition by and merger with Greenmarine. 61 OUTBOARD MARINE CORPORATION STATEMENTS OF CONSOLIDATING FINANCIAL POSITION DECEMBER 31, 1999
Parent Guarantor Other Consolidated Company Subsidiaries Subsidiaries Eliminations Total ------- ------------ ------------ ------------ ------------ (Dollars in Millions) ASSETS Current assets: Cash and cash equivalents.......... $ 9.3 $ 0.5 $ 15.2 $ 0.0 $ 25.0 Receivables, net...... 58.1 16.8 30.0 0.0 104.9 Intercompany receivables (payables)........... (34.3) 1.2 33.1 0.0 0.0 Inventories........... 102.6 46.7 41.1 (1.8) 188.6 Other current assets.. 9.6 2.0 5.6 0.0 17.2 ------ ------ ------ ------- ------ Total current assets............. 145.3 67.2 125.0 (1.8) 335.7 Restricted cash......... 30.6 0.0 0.0 0.0 30.6 Product tooling, net.... 24.3 5.0 0.2 0.0 29.5 Property, plant and equipment, net......... 150.1 32.4 18.1 (0.1) 200.5 Goodwill and other in- tangibles, net......... 181.3 0.0 5.2 0.0 186.5 Other assets............ 56.0 2.5 7.1 0.0 65.6 Intercompany notes, net.................... (88.3) 0.0 88.3 0.0 0.0 Investment in subsidiar- ies.................... 256.5 0.0 0.0 (256.5) 0.0 ------ ------ ------ ------- ------ Total assets.......... $755.8 $107.1 $243.9 $(258.4) $848.4 ====== ====== ====== ======= ====== LIABILITIES AND SHAREHOLDERS' INVESTMENT Current liabilities: Loan payable.......... $ 58.0 $ 0.0 $ 0.0 $ 0.0 $ 58.0 Accounts payable...... 73.6 16.4 9.2 0.0 99.2 Accrued and other..... 133.5 29.6 21.7 (1.6) 183.2 Current maturities of long-term debt....... 8.2 0.2 0.0 0.0 8.4 ------ ------ ------ ------- ------ Total current liabilities........ 273.3 46.2 30.9 (1.6) 348.8 Long-term debt.......... 239.3 2.1 0.0 0.0 241.4 Other non-current liabilities............ 162.6 7.7 7.6 0.0 177.9 Shareholders' investment............. 80.6 51.1 205.4 (256.8) 80.3 ------ ------ ------ ------- ------ Total liabilities and shareholders' investment......... $755.8 $107.1 $243.9 $(258.4) $848.4 ====== ====== ====== ======= ======
62 OUTBOARD MARINE CORPORATION STATEMENTS OF CONSOLIDATING FINANCIAL POSITION DECEMBER 31, 1998
Parent Guarantor Other Consolidated Company Subsidiaries Subsidiaries Eliminations Total ------- ------------ ------------ ------------ ------------ (Dollars in Millions) ASSETS Current assets: Cash and cash equivalents.......... $ 2.2 $ 0.1 $ 11.3 $ 0.0 $ 13.6 Receivables, net...... 71.8 23.3 35.4 0.0 130.5 Intercompany receivables (payables)........... (93.5) (9.7) 103.2 0.0 0.0 Inventories........... 103.4 47.8 47.8 (1.8) 197.2 Other current assets.. 12.5 3.2 6.6 0.0 22.3 ------ ----- ------ ------- ------ Total current assets............. 96.4 64.7 204.3 (1.8) 363.6 Restricted cash......... 29.3 0.0 0.0 0.0 29.3 Product tooling, net.... 26.8 2.9 0.3 0.0 30.0 Property, plant and equipment, net......... 156.9 23.9 16.5 (0.2) 197.1 Goodwill and other intangibles, net....... 189.4 0.0 7.0 0.0 196.4 Other assets............ 50.8 2.3 4.7 0.0 57.8 Intercompany notes, net.................... (97.4) 0.0 97.4 0.0 0.0 Investment in subsidiaries........... 339.3 0.0 0.0 (339.3) 0.0 ------ ----- ------ ------- ------ Total assets........ $791.5 $93.8 $330.2 $(341.3) $874.2 ====== ===== ====== ======= ====== LIABILITIES AND SHAREHOLDERS' INVESTMENT Current liabilities: Loan payable.......... $ 32.4 $ 0.0 $ 0.0 $ 0.0 $ 32.4 Accounts payable...... 68.1 12.8 9.1 0.0 90.0 Accrued and other..... 143.0 30.0 19.8 (1.2) 191.6 Current maturities of long-term debt....... 11.2 0.0 0.0 0.0 11.2 ------ ----- ------ ------- ------ Total current liabilities........ 254.7 42.8 28.9 (1.2) 325.2 Long-term debt.......... 247.0 0.0 0.0 0.0 247.0 Other non-current liabilities............ 231.8 7.9 5.1 0.0 244.8 Shareholders' investment............. 58.0 43.1 296.2 (340.1) 57.2 ------ ----- ------ ------- ------ Total liabilities and shareholders' investment......... $791.5 $93.8 $330.2 $(341.3) $874.2 ====== ===== ====== ======= ======
63 OUTBOARD MARINE CORPORATION STATEMENTS OF CONSOLIDATED OPERATIONS AND COMPREHENSIVE INCOME TWELVE MONTHS ENDED DECEMBER 31, 1999
Parent Guarantor Other Consolidated Company Subsidiaries Subsidiaries Eliminations Total ------- ------------ ------------ ------------ ------------ (Dollars in Millions) Net sales............... $652.7 $466.6 $253.0 $ (261.4) $1,110.9 Cost of goods sold...... 525.5 411.3 205.8 (261.6) 881.0 ------ ------ ------ -------- -------- Gross Earnings.......... 127.2 55.3 47.2 0.2 229.9 Selling, general and administrative expense................ 116.0 51.4 39.8 0.0 207.2 Restructuring charge (income)............... (14.1) 0.0 0.0 0.0 (14.1) ------ ------ ------ -------- -------- Earnings from operations............. 25.3 3.9 7.4 0.2 36.8 Non-operating expense (income)............... 31.3 (0.1) (13.2) 0.0 18.0 Equity earnings (loss)-- subsidiaries........... 20.2 0.0 0.0 (20.2) 0.0 ------ ------ ------ -------- -------- Earnings (loss) before provision for income taxes.................. 14.2 4.0 20.6 (20.0) 18.8 Provision for income taxes.................. 6.0 0.0 4.5 0.1 10.6 ------ ------ ------ -------- -------- Net earnings (loss)... $ 8.2 $ 4.0 $ 16.1 $ (20.1) $ 8.2 ====== ====== ====== ======== ======== Other comprehensive income (expense): Foreign currency translation adjustment............. (0.4) (0.2) (0.6) 0.0 (1.2) Minimum pension liability adjustment... 15.5 0.0 0.0 0.0 15.5 ------ ------ ------ -------- -------- Other comprehensive income (expense)..... 15.1 (0.2) (0.6) 0.0 14.3 ------ ------ ------ -------- -------- Comprehensive income (loss)................. $ 23.3 $ 3.8 $ 15.5 $ (20.1) $ 22.5 ====== ====== ====== ======== ========
64 OUTBOARD MARINE CORPORATION STATEMENTS OF CONSOLIDATED OPERATIONS AND COMPREHENSIVE INCOME TWELVE MONTHS ENDED SEPTEMBER 30, 1998
Parent Guarantor Other Consolidated Company Subsidiaries Subsidiaries Eliminations Total ------- ------------ ------------ ------------ ------------ (Dollars in Millions) Net sales............... $ 668.5 $ 411.1 $256.4 $(310.3) $1,025.7 Cost of goods sold...... 505.8 391.6 211.8 (315.6) 793.6 ------- ------- ------ ------- -------- Gross Earnings.......... 162.7 19.5 44.6 5.3 232.1 Selling, general and administrative expense................ 178.0 49.4 38.8 0.0 266.2 Restructuring charge (income)............... 98.5 0.0 0.0 0.0 98.5 ------- ------- ------ ------- -------- Earnings (loss) from operations............. (113.8) (29.9) 5.8 5.3 (132.6) Non-operating expense (income)............... 12.1 1.4 1.0 0.0 14.5 Equity earnings (loss)-- subsidiaries........... (29.9) 0.0 0.0 29.9 0.0 ------- ------- ------ ------- -------- Earnings (loss) before provision for income taxes.................. (155.8) (31.3) 4.8 35.2 (147.1) Provision for income taxes.................. 0.0 0.0 3.4 0.0 3.4 ------- ------- ------ ------- -------- Net earnings (loss)... $(155.8) $ (31.3) $ 1.4 $ 35.2 $ (150.5) ======= ======= ====== ======= ======== Other comprehensive income (expense): Foreign currency translation adjustment............. 1.0 0.0 (8.2) 0.0 (7.2) Minimum pension liability adjustment... (24.7) 0.0 0.0 0.0 (24.7) ------- ------- ------ ------- -------- Other comprehensive income (expense)..... (23.7) 0.0 (8.2) 0.0 (31.9) ------- ------- ------ ------- -------- Comprehensive earnings (loss)................. $(179.5) $ (31.3) $ (6.8) $ 35.2 $ (182.4) ======= ======= ====== ======= ========
65 OUTBOARD MARINE CORPORATION STATEMENTS OF CONSOLIDATED OPERATIONS AND COMPREHENSIVE INCOME TWELVE MONTHS ENDED SEPTEMBER 30, 1997
Parent Guarantor Other Consolidated Company Subsidiaries Subsidiaries Eliminations Total ------- ------------ ------------ ------------ ------------ (Dollars in Millions) Net sales............... $607.2 $439.0 $255.4 $(322.1) $979.5 Cost of goods sold...... 505.6 437.4 197.9 (318.9) 822.0 ------ ------ ------ ------- ------ Gross earnings.......... 101.6 1.6 57.5 (3.2) 157.5 Selling, general and administrative expense................ 116.3 52.2 51.4 0.0 219.9 Change in control expenses-- compensation........... 11.8 0.0 0.0 0.0 11.8 ------ ------ ------ ------- ------ Earnings (loss) from operations............. (26.5) (50.6) 6.1 (3.2) (74.2) Non-operating expense (income)............... 10.0 0.1 (8.0) 0.0 2.1 Equity earnings (loss)-- subsidiaries........... (39.4) 0.0 0.0 39.4 0.0 ------ ------ ------ ------- ------ Earnings (loss) before provision for income taxes.................. (75.9) (50.7) 14.1 36.2 (76.3) Provision for income taxes.................. 0.0 0.0 2.8 0.0 2.8 ------ ------ ------ ------- ------ Net earnings (loss)... $(75.9) $(50.7) $ 11.3 $ 36.2 $(79.1) ====== ====== ====== ======= ====== Other comprehensive income (expense): Foreign currency translation adjustment............. 16.2 0.0 (7.7) 0.0 8.5 Minimum pension liability adjustment... 3.1 0.0 0.0 0.0 3.1 ------ ------ ------ ------- ------ Other comprehensive income (expense)..... 19.3 0.0 (7.7) 0.0 11.6 ------ ------ ------ ------- ------ Comprehensive earnings (loss)................. $(56.6) $(50.7) $ 3.6 $ 36.2 $(67.5) ====== ====== ====== ======= ======
66 OUTBOARD MARINE CORPORATION STATEMENTS OF CONSOLIDATED CASH FLOWS TWELVE MONTHS ENDED DECEMBER 31, 1999
Parent Guarantor Other Consolidated Company Subsidiaries Subsidiaries Eliminations Total ------- ------------ ------------ ------------ ------------ (Dollars in Millions) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss)...... $ 8.2 $ 4.0 $ 16.1 $(20.1) $ 8.2 Adjustments to reconcile net earnings (loss) to net cash provided by operations: Depreciation and amortization........... 38.7 10.0 3.5 (0.1) 52.1 Curtailment gain........ (15.0) -- -- -- (15.0) Restructuring charge.... (14.1) -- -- -- (14.1) Deferred taxes.......... 6.0 -- -- -- 6.0 Changes in current accounts excluding the effects of acquisitions and noncash transactions: Decrease (increase) in receivables.......... 15.2 6.5 2.8 -- 24.5 Decrease (increase) in intercompany receivables and payables, and intercompany note receivables and note payables............. 29.4 (6.9) (22.5) -- -- Decrease (increase) in inventories.......... 0.2 1.1 3.5 (0.1) 4.7 Decrease (increase) in other current assets............... (2.0) 1.2 0.9 1.1 1.2 Increase (decrease) in accounts payable and accrued liabilities.. (21.5) 3.0 1.7 (0.4) (17.2) Other, net............ (6.9) (4.4) 2.0 (0.5) (9.8) ------ ------ ------ ------ ------ Net cash provided by (used for) operating activities......... 38.2 14.5 8.0 (20.1) 40.6 CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for plant and equipment, and tooling................. (24.6) (21.2) (2.7) -- (48.5) Proceeds from sale of plant and equipment..... 4.3 0.1 0.2 -- 4.6 Equity earnings (loss)... (20.1) -- -- 20.1 -- Change in subsidiary investment.............. (0.7) -- -- 0.7 -- Other, net............... 0.7 0.5 0.2 -- 1.4 ------ ------ ------ ------ ------ Net cash provided by (used for) investing activities......... (40.4) (20.6) (2.3) 20.8 (42.5) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in short- term debt............... 25.6 -- -- -- 25.6 Net change in long-term debt, including current maturities.............. (14.9) 2.3 -- -- (12.6) Change in subsidiary capital................. (0.1) 4.2 (3.4) (0.7) -- Change in restricted cash.................... (1.3) -- -- -- (1.3) Other, net............... 0.4 -- -- -- 0.4 ------ ------ ------ ------ ------ Net cash provided by (used for) financing activities......... 9.7 6.5 (3.4) (0.7) 12.1 Exchange Rate Effect on Cash.................... (0.3) -- 1.5 -- 1.2 ------ ------ ------ ------ ------ Net increase in Cash and Cash Equivalents........ 7.2 0.4 3.8 (0.0) 11.4 Cash and Cash Equivalents at Beginning of Period.. 2.2 0.1 11.3 -- 13.6 ------ ------ ------ ------ ------ Cash and Cash Equivalents at End of Period........ $ 9.4 $ 0.5 $ 15.1 $ (0.0) $ 25.0 ====== ====== ====== ====== ======
67 OUTBOARD MARINE CORPORATION STATEMENTS OF CONSOLIDATED CASH FLOW TWELVE MONTHS ENDED SEPTMEBER 30, 1998
Parent Guarantor Other Consolidated Company Subsidiaries Subsidiaries Eliminations Total ------- ------------ ------------ ------------ ------------ (Dollars in Millions) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss)...... $(155.8) $(31.3) $ 1.4 $35.2 $(150.5) Adjustments to reconcile net earnings (loss) to net cash provided by operations: Depreciation and amortization........... 42.4 4.5 3.1 0.1 50.1 Restructuring charge.... 98.5 -- -- -- 98.5 Changes in current accounts excluding the effects of acquisitions and noncash transactions: Decrease (increase) in receivables.......... (2.4) (0.3) 5.2 (3.4) (0.9) Decrease (increase) in intercompany receivables and payables, and intercompany note receivables and note payables............. 188.2 0.3 (188.5) -- -- Decrease (increase) in inventories.......... (15.2) 24.5 (2.0) (5.4) 1.9 Decrease (increase) in other current assets............... 43.4 0.4 (1.2) 2.8 45.4 Increase (decrease) in accounts payable and accrued liabilities.. (57.6) 1.4 3.6 6.3 (46.3) Other, net............ 64.0 3.3 1.1 (5.9) 62.5 ------- ------ ------- ----- ------- Net cash provided by (used for) operating activities......... 205.5 2.8 (177.3) 29.7 60.7 CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for plant and equipment, and tooling................. (25.8) (4.7) (3.9) -- (34.4) Proceeds from sale of plant and equipment..... 8.3 1.3 -- -- 9.6 Equity earnings (loss)... 29.7 -- -- (29.7) -- Other, net............... 2.5 0.8 (2.5) -- 0.8 ------- ------ ------- ----- ------- Net cash provided by (used for) investing activities......... 14.7 (2.6) (6.4) (29.7) (24.0) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in short- term debt............... (96.0) -- -- -- (96.0) Net change in long-term debt, including current maturities.............. 80.6 -- (0.2) -- 80.4 Change in subsidiary capital................. (175.6) -- 175.6 -- -- Change in restricted cash.................... (29.0) -- -- -- (29.0) Other, net............... (0.9) -- -- -- (0.9) ------- ------ ------- ----- ------- Net cash provided by (used for) financing activities......... (220.9) -- 175.4 -- (45.5) Exchange Rate Effect on Cash.................... -- -- (0.4) -- (0.4) ------- ------ ------- ----- ------- Net increase in Cash and Cash Equivalents........ (0.7) 0.2 (8.7) 0.0 (9.2) Cash and Cash Equivalents at Beginning of Period.. 27.3 0.5 26.6 -- 54.4 ------- ------ ------- ----- ------- Cash and Cash Equivalents at End of Period........ $ 26.6 $ 0.7 $ 17.9 $ 0.0 $ 45.2 ======= ====== ======= ===== =======
68 OUTBOARD MARINE CORPORATION STATEMENTS OF CONSOLIDATED CASH FLOWS TWELVE MONTHS ENDED SEPTEMBER 30, 1997
Parent Guarantor Other Consolidated Company Subsidiaries Subsidiaries Eliminations Total ------- ------------ ------------ ------------ ------------ (Dollars in millions) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss)...... $(75.9) $(50.7) $ 11.3 $ 36.2 $(79.1) Adjustments to reconcile net earnings (loss) to net cash provided by operations: Depreciation and amortization........... 44.9 7.1 5.0 -- 57.0 Changes in current accounts excluding the effects of acquisitions and noncash transactions: Decrease (increase) in receivables.......... (39.5) (32.0) 82.7 (1.6) 9.6 Decrease (increase) in intercompany receivables and payables, and intercompany note receivables and note payables............. 45.0 56.1 (101.1) -- -- Decrease (increase) in inventories.......... 14.1 4.0 5.4 3.0 26.5 Decrease (increase) in other current assets............... (0.5) 1.0 1.9 (2.8) (0.4) Increase (decrease) in accounts payable and accrued liabilities.. 3.0 5.9 (15.8) 1.6 (5.3) Other, net............ (27.1) 7.5 (0.9) 3.0 (17.5) ------ ------ ------ ------ ------ Net cash provided by (used for) operating activities......... (36.0) (1.1) (11.5) 39.4 (9.2) CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for plant and equipment, and tooling................. (32.3) (2.4) (1.6) -- (36.3) Proceeds from sale of plant and equipment..... 10.9 1.4 0.7 -- 13.0 Equity earnings (loss)... 39.4 -- -- (39.4) -- Other, net............... (5.3) 2.0 0.5 -- (2.8) ------ ------ ------ ------ ------ Net cash provided by (used for) investing activities......... 12.7 1.0 (0.4) (39.4) (26.1) CASH FLOWS FROM FINANCING ACTIVITIES: Net change in long-term debt, including current maturities.............. 0.3 -- (0.3) -- -- Cash dividends paid...... (6.0) -- -- -- (6.0) Other, net............... 1.8 -- 0.5 -- 2.3 ------ ------ ------ ------ ------ Net cash provided by (used for) financing activities......... (3.9) -- 0.2 -- (3.7) Exchange Rate Effect on Cash.................... -- -- (2.1) -- (2.1) ------ ------ ------ ------ ------ Net increase in Cash and Cash Equivalents........ (27.2) (0.1) (13.8) 0.0 (41.1) Cash and Cash Equivalents at Beginning of Period.. 54.5 0.6 40.4 -- 95.5 ------ ------ ------ ------ ------ Cash and Cash Equivalents at End of Period........ $ 27.3 $ 0.5 $ 26.6 $ 0.0 $ 54.4 ====== ====== ====== ====== ======
69 Item 9. Changes in and Disagreements on Accounting and Financial Disclosure No disclosure is required pursuant to this item. 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 December 31, 1999:
Name Age Position - ---- --- -------- David D. Jones, Jr...... 56 Chairman, President and Chief Executive Officer Alfred D. Kingsley...... 57 Vice Chairman of the Board Richard Katz............ 57 Vice Chairman of the Board Gary K. Duberstein...... 45 Director and Assistant Secretary Ron Hiram............... 47 Director Frank V. Sica........... 48 Director Andrew P. Hines......... 60 Executive Vice President and Chief Financial Officer; Director Johan Arzbach........... 55 Vice President of OMC and President of International Operations Robert B. Gowens, Jr.... 52 Vice President of OMC and President, North American Engine Operations Eric T. Martinez........ 36 Vice President and Treasurer James B. Pekarek........ 31 Vice President and Controller Robert S. Romano........ 45 Vice President, General Counsel and Secretary
Directors David D. Jones, Jr. has been Chairman of the Board of Directors since May 1999 and 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 McLaren Engines, Inc., Livonia, Michigan. Alfred D. Kingsley has been Vice Chairman of the Board of Directors since May 1999 and prior to that was 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, and a director of the general partner of American Real Estate Partners, L.P. Mr. Kingsley is Chairman of the Compensation Committee and a member 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. Gary K. Duberstein has been a director and Assistant Secretary since September 12, 1997 and was Vice Chairman of the Board of Directors from September 12, 1997 to May, 1999. Since 1993, Mr. Duberstein has been a Managing Director of Greenway Partners, L.P., an investment partnership. Prior to that, Mr. Duberstein 70 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 Committee and Chairman of the Audit 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 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 a director of Banco Hipotecario S.A., Emmis Broadcasting Corporation, CSG Systems International, Inc., Kohl's Corporation and PointOne Telecommunications. Mr. Sica is a member of the Compensation Committee. 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. Executive Officers Johan Arzbach has been Vice President of OMC and President of OMC's International Operations since January 1999 and prior thereto 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. Robert B. Gowens, Jr. has been Vice President, President of North American 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. since 1980. 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 April, 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. James B. Pekarek has been Vice President and Controller since January, 2000. Prior to that, Mr. Pekarek was the Director of Reporting from September, 1998, to January, 2000. From September, 1995 to September, 1998, Mr. Pekarek served as Director of Reporting for Alliant Foodservice where he was responsible for all internal and external financial reporting. 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. 71 To the knowledge of the Company, there are no family relationships between any director or executive officer and any other director or executive officer. 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 1,900,000 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, 1999, the Company had granted and outstanding stock options relating to 1,570,870 shares of common stock. Of these options, 144,745 were vested at the time of grant. The other 1,426,125 options have vested or will vest as follows: 429,958 as of December 31, 1999; 404,505 in the Company's fiscal year ending December 31, 2000; 283,316 in the Company's fiscal year ending December 31, 2001 and 308,346 thereafter. All of these stock options are exercisable at their fair market value on the date of grant as determined in accordance with PROP, and expire ten years after the date of grant except for Mr. Jones', whose options were granted at a price pursuant to his employment agreement. 72 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, 1999, (i) the Chief Executive Officer or served in such capacity during calendar 1999, (ii) the other four most highly compensated Executive Officers of the Company, who were serving in such capacity as of December 31, 1999 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, 1999 (collectively the "Named Executives") for services rendered in all capacities to the Company for the 1999 and 1998 calendar years and the 1998 and 1997 fiscal years (designated with an "f"). For a discussion of compensation payable to each of Messrs. Jones, Hines and Gowens, see Item 10--"Directors and Executive Officers of Registrant".
Annual Compensation Long-Term Compensation ---------------------------- ----------------------------- Securities Other Restricted Underlying Annual Stock Options/ LTIP All Other Name and Principal Salary Bonus Compensation Awards SARS Payouts Compensation Position Year ($) ($)(1) ($)(2) ($)(3) (#)(4) ($)(5) ($)(6) - ------------------ ---- ------- ------- ------------ ---------- ---------- ------- ------------ D.D. Jones, Jr.(7)...... 1999 600,001 -- -- -- 37,500 -- 18,219 Chairman, President and 1998 597,309 900,000 63,358 -- 346,140 -- 649,019 Chief Executive Officer 1998f 556,925 900,000 114,736 -- 407,245 -- 2,578,014 1997f 7,692 -- -- -- -- -- -- A.P. Hines(8)........... 1999 374,999 -- 61,146 -- -- -- 4,083 Executive Vice 1998 375,000 117,187 119,215 351,558 180,000 -- -- President and Chief 1998f 349,708 117,187 -- 351,558 180,000 -- -- Financial Officer 1997f -- -- -- -- -- -- -- R.B. Gowens(9).......... 1999 300,000 250,000 -- -- -- -- 14,290 Vice President, OMC, & 1998 77,308 -- -- -- 100,000 -- 17,734 President, NAEO 1998f -- -- -- -- -- -- -- 1997f -- -- -- -- -- -- -- J. Arzbach(10).......... 1999 230,000 85,000 -- -- 40,000 -- 26,150 Vice President, OMC, & 1998 -- -- -- -- -- -- -- President, 1998f -- -- -- -- -- -- -- International 1997f -- -- -- -- -- -- -- Operations R. S. Romano............ 1999 209,039 75,000 -- -- 15,000 -- 2,774 Vice President, General 1998 197,307 19,000 -- -- 8,000 2,928 2,230 Counsel and Secretary 1997f 143,917 11,488 -- -- -- -- 4,320 1998f 190,000 19,000 -- -- 8,000 19,353 1,974
- -------- (1) Calendar and fiscal 1998 bonuses for Mr. Hines include $117,187 in cash and 19,531 shares of Restricted Stock under PROP valued at $18.00 per share. All fiscal 1998 and 1997 and calendar 1999 and 1998 bonuses to Messrs. Jones, Gowens, Arzbach and Romano were paid in cash. (2) For calendar year 1999, other compensation for Mr. Jones, includes $16,759 moving expenses, $16,014 for Company car, $19,451 for financial services, $18,220 as payment for interest on a loan from the Company, and $45,723 for tax gross-up; and for Mr. Hines, includes $9,997 for Company car, $22,415 for financial services, and $28,734 for tax gross-up. For calendar year 1998, other annual compensation for Mr. Jones, includes $13,810 for moving expense, $5,818 for financial services, $10,490 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. Gowens, Arzbach and Romano in 1999 and Messrs. Hines, Gowens, Arzbach and Romano in fiscal year 1998, and Messrs. Gowens, Arzbach and Romano in calendar 1998, received a de minimis amount of perquisites and other 73 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 calendar 1999 or fiscal or calendar 1998, as applicable. (3) See Footnote (1) above for Mr. Hines' Restricted Stock award. (4) See Option grants in the 1999 Fiscal Year below. (5) For Mr. Romano, the amount in fiscal year 1998 consists of $9,000 payment for options, $7,425 payment for 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. (6) For calendar year 1999, all other compensation for Mr. Jones included $13,581 for life insurance premiums and $4,638 as a Company contribution under the Company's 401(k) retirement plan. 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 calendar year 1999, all other compensation for Mr. Hines included $4,083 for life insurance premiums. For calendar year 1999, all other compensation for Mr. Gowens included $1,627 as a contribution under the Company's 401(k) retirement plan and $12,663 for a sign-on bonus. For calendar year 1999, all other compensation for Mr. Arzbach included $1,150 as a contribution under the Company's 401(k) retirement plan and $25,000 for a sign-on bonus. For Mr. Romano, all other compensation includes $1,156 for life insurance premiums and $1,618 as a contribution under the Company's 401(k) retirement plan and 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 and $4,320 in fiscal year 1998 and 1997. (7) Mr. Jones was hired by the Company on September 25, 1997 and, therefore, information prior to that date does not exist. (8) Mr. Hines was hired by the Company on October 6, 1997 and, therefore, information prior to that date does not exist. (9) Mr. Gowens was hired by the Company on October 1, 1998 and, therefore, information prior to that date does not exist. (10) Mr. Arzbach was hired by the Company on January 5, 1999 and, therefore, information prior to that date does not exist. 74 Option Grants Fiscal Year 1999 The following table provides information on the grants of options to purchase common stock of the Company given to the Named Executives in fiscal year 1999.
% of Number of Total Securities Options Underlying Granted Exercise Market Potential Options/ to all Price Price Realizable SARs Employees Per on Date Value($)(4) Grant Granted in Share of Expiration ----------------- Name Date (#)(1) 1999(2) $(3) Grant(3) Date 5% 10% - ---- ------- ---------- --------- -------- -------- ---------- ------- --------- D.D. Jones,Jr........... 9/30/99 37,500 6.29 $18.00 $22.00 9/30/09 424,504 1,075,776 A.P. Hines.............. N/A N/A N/A N/A N/A N/A N/A N/A R. B. Gowens............ N/A N/A N/A N/A N/A N/A N/A N/A J. Arzbach.............. 1/5/99 25,000 4.19 $22.00 N/A 1/5/09 345,892 876,558 12/1/99 15,000 2.51 $22.00 N/A 12/1/09 207,535 525,935 R.S. Romano............. 12/1/99 15,000 2.52 $22.00 N/A 12/1/09 207,535 525,935
- -------- (1) All options vest over a three year period; beginning one year from the date of grant except for Mr. Arzbach's January 5, 1999 grant which vests over a period of four years, 25% exercisable at the end of the first year, then an additional 25% each year thereafter. (2) In the 1999 calendar year, 143 employees received stock options. (3) Mr. Jones' options, and the exercise price therefore, are pursuant to his employment agreement with the Company. See "Employment Contracts and Severance Agreements" below. Market and grant price of $22.00 per share as determined by the Board of Directors of the Company in accordance with the terms of PROP. (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. Option Exercises in the 1999 Fiscal Year and Fiscal Year End Option Values No options were exercised by the Named Executives during fiscal year 1999. The per share fair market value of the Company's common stock used to make the calculations in the following table is $22.00, which is the fair market value as of December 31, 1999 as determined by the Board of Directors of the Company in accordance with PROP.
Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options/SARs Options/SARs Shares at Fiscal at Fiscal Acquired Value Year End(#) Year End($) on Exercise Realized Exercisable/ Exercisable/ Name (#) ($) Unexercisable Unexercisable - ---- ----------- -------- --------------- ------------------- D.D. Jones, Jr........ 0 0 344,745/100,000 7,584,390/2,200,000 A.P. Hines............ 0 0 120,000/ 60,000 2,640,000/1,320,000 R.B. Gowens........... 0 0 33,333/66,667 733,326/1,466,674 J. Arzbach............ 0 0 0/40,000 0/880,000 R.S. Romano........... 0 0 2,000/21,000 44,000/462,000
Long-term Incentive Plan Awards in Fiscal Year 1999 There were no amounts paid in fiscal year 1999 to any employee, including the Named Executives in the form of an LTIP under PROP. 75 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 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. Effective September 30, 1999, the Company froze the retirement plan. 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, Gowens, Arzbach, and Romano will have 2.08, 2.00, 1.00, 0.75, and 2.00, respectively, credited years of officer service and 0.0, 0.0, 0.0, 0.0, and 17.91, 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, Gowens, Arzbach, and Romano 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 $46,020, $18,275, $25,374, $4,399, and $7,650, 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. 76 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 (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 77 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 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 78 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 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 79 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 his 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 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 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. 80 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. The Company has a severance agreement with Robert S. Romano. This agreement 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 agreement provides that if Mr. Romano elects to resign his employment for specified reasons, or is terminated by the Company other than for cause, the Company will pay to him an amount in cash equal to not more than one times (1) salary, plus (2) the amount of the highest annual incentive compensation received by him in the five fiscal years preceding the fiscal year of the change in control. Additionally, for a period of 12 months following the termination date (the "Continuation Period"), the Company will arrange to provide to Mr. Romano benefits substantially similar to those he was receiving or entitled to receive immediately prior to the termination date. Further, the Company will provide 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 Mr. Ramano under the Company's retirement plans if he continued to be employed through the Continuation Period given his base salary over (2) the retirement, pension, medical, life and other benefits that he is entitled to receive under the Company's retirement plans. The term of this severance agreement will remain in force until September 12, 2000, or as otherwise may be negotiated by Mr. Romano and the Company. Compensation Committee Interlocks and Insider Participation Messrs. Kingsley, Duberstein, Sica and Hiram served on the Compensation Committee of the Company's Board of Directors during fiscal year 1999. Mr. Kingsley served as Vice Chairman of the Board in fiscal year 1999. Messrs Kingsley, Duberstein, Sica and Hiram did not serve as an officer or employee of the Company or any of its subsidiaries during fiscal year 1999. Messrs. Kingsley and Duberstein control Greenlake Holdings LLC, which has approximately a 30.5% interest in Greenmarine Holdings, and also control Greenlake Holdings, II LLC. Mr. Hiram is a Managing Director of Soros Fund Management LLC, which serves as the principal investment adviser to the indirect parent entity of Quantum Industrial Holdings, Ltd., which is the owner of approximately 34.75% of Greenmarine Holdings. Mr. Sica is a Managing Director of Soros Fund Management LLC. In fiscal year 1999, Greenmarine Holdings was controlled by a Management Committee comprised by Messrs. Kingsley, Duberstein, Sica, Hiram and Katz. See "Item 12--Security Ownership". 81 Item 12. Security Ownership The following table sets forth information with respect to the beneficial ownership of the Company's voting securities, by class, as of March 15, 2000 by (i) any person or group who beneficially owns more than 5% of any class of the Company's outstanding voting securities (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, beneficial ownership of which may be acquired within 60 days of March 15, 2000, 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.
Series A Convertible Common Stock Preferred Stock ------------------------ --------------------- Shares Shares Beneficially Percent Beneficially Percent Name and Address Owned of Class(1) Owned of Class - ---------------- ------------ ----------- ------------ -------- Greenmarine Holdings LLC(1).... 20,400,000 65.2% -- -- 277 Park Avenue, 27th Floor New York, New York 10172 Quantum Industrial Partners LDC(1)........................ 7,907,426 25.3% 494,554 76.1% Kaya Flamboyan 9, Villemstad Curacao Netherlands-Antilles Greenlake Holdings II LLC(2)... 2,485,430 7.9% 155,446 23.9% 277 Park Avenue, 27th Floor New York, New York 10172 Alfred D. Kingsley(3).......... 22,885,430 73.1% 155,446 23.9% 277 Park Avenue, 27th Floor New York, New York 10172 Gary K. Duberstein(3).......... 22,885,430 73.1% 155,446 23.9% 277 Park Avenue, 27th Floor New York, New York 10172 Richard Katz(4)................ 28,307,426 90.4% 494,554 76.1% Villa La Sirena Vico dell'Olivetta 12 18039 Martola Inferiore Ventimiglia, Italy Ron Hiram(5)................... 28,307,426 90.4% 494,554 76.1% 888 Seventh Avenue, 33rd Floor New York, New York 10106 Frank V. Sica(6)............... 28,307,426 90.4% 494,554 76.1% 888 Seventh Avenue, 33rd Floor New York, New York 10106 David D. Jones, Jr.(7)......... 350,300 1.1% -- -- c/o Outboard Marine Corporation 100 Sea Horse Drive Waukegan, Illinois 60085 Andrew P. Hines(8)............. 159,531 * -- -- c/o Outboard Marine Corporation 100 Sea Horse Drive Waukegan, Illinois 60085 Directors and Executive Officers as a group (12 persons)(9)................... 31,302,688 100.0% 650,000 100.0%
82 - -------- * 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 QIP. QIP is the principal operating subsidiary of Quantum Industrial Holdings Ltd., a British Virgin Islands corporation ("QIH"). The principal business of QIP is investing in securities. QIH is an investment fund which has as its principal investment advisor 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. Pursuant to constituent documents of QIP, QIHMI is vested with investment discretion with respect to the portfolio assets held for the accounts of each of QIP. The principal business of QIHMI is to provide management and advisory services to, and to invest in, QIP. 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 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 a total of five Managers. Pursuant to the Operating Agreement of Greenmarine Holdings, Greenlake has the right to appoint two designees to Greenmarine Holding's Management Committee and the holders of a majority of Greenmarine Holdings' interest held by QSP and QIP have the right to appoint three members of Greenmarine Holdings' Management Committee. Greenmarine Holdings' Management Committee is currently comprised of Messrs. Alfred D. Kingsley, Gary K. Duberstein, Frank V. Sica, Ron Hiram and Richard Katz. The vote of three of the members of Greenmarine Holdings' Management Committee is required for action by the Management Committee. 4,374,898 of the common stock shares indicated as beneficially owned by QIP are as a result of warrant to purchase and 3,532,528 of the common stock shares are beneficially owned are as a result of Series A Convertible Preferred Stock. (See Item 7) Management Discussion and Analysis of Financial Condition and Results of Operations, Financial Condition, Liability and Capital Resources. (2) Greenlake Holdings II LLC ("Greenlake II") is controlled by Mr. Alfred D. Kingsley and Mr. Gary K. Duberstein. 1,375,102 of the common stock shares indicated as beneficially owned by Greenlake II are as a result of warrant to purchase and 1,110,328 common stock shares indicated as beneficially owned as a result of Series A Convertible Preferred Stock. (See Item 7), Management's Discussion and Analysis of Financial Condition and Results of Operation, Financial Condition, Liquidity and Capital Resources. (3) 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' 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 Greenlake II, respectively and are included because of their affiliation with Greenmarine Holdings and their control of Greenlake II. 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. (4) Richard Katz is a director of the Company. In addition, Mr. Katz is a member of Greenmarine Holdings' Management Committee. Mr. Katz is also Chairman of the Board of QIH. All of the shares indicated as owned by Mr. Katz are owned directly by Greenmarine Holdings and QIP, respectively, and are included because of his affiliation with Greenmarine Holdings and QIH's relationship with QIP. 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. 83 (5) 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 QIH. In addition, Mr. Hiram is a member of Greenmarine Holdings' Management Committee. See footnote 1 above and "Management--Directors and Executive Officers of the Company." All of the shares indicated as owned by Mr. Hiram are owned directly by Greenmarine Holdings and QIP, respectively, and are included because of his affiliation with Greenmarine Holdings and QIH's relationship with QIP. The reference to such shares shall not be deemed admission that Mr. Hiram may be deemed to have beneficial ownership of these shares within the meaning of Rule 13d-3 under the Exchange Act. (6) 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 QIH. In addition, Mr. Sica is a member of Greenmarine Holdings' Management Committee. See footnote 1 above and "Management-- Directors and Executive Officers of the Company." All of the shares indicated as owned by Mr. Sica are owned directly by Greenmarine Holdings and QIP, respectively, and are included because of his affiliation with Greenmarine Holdings and QIH's relationship with QIP. The reference to such shares shall not be deemed admission that Mr. Sica may be deemed to have beneficial ownership of these shares within the meaning of Rule 13d-3 under the Exchange Act. (7) Beneficial ownership of common stock represents 350,300 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 94,445 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 March 15, 2000. See "Employment Contracts and Severance Agreements." (8) Of the 159,531 shares of common stock indicated as owned by Mr. Hines, 8,333 were purchased in consideration of $150,000 in cash payments, 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, 19,531 shares represent restricted stock granted to Mr. Hines pursuant to PROP (See "Employment Contracts and Severance Agreements") and 120,000 currently exercisable options to purchase common stock. Mr. Hines has pledged 20,000 shares to the Company to secure his obligations under the promissory note. Does not include 60,000 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 March 15, 2000. See "Employment Contracts and Severance Agreements." (9) The common stock includes 20,400,000 shares indicated as owned by Messrs. Kingsley, Duberstein, Katz, Hiram and Sica as a result of their affiliation with Greenmarine Holdings, 5,750,000 common stock shares beneficially owned by QIP and Greenlake II as a result of warrant to purchase and 4,642,856 common stock shares beneficially owned by the same group as a result of Series A Convertible Preferred Stock. The series A convertible preferred stock includes 155,446 shares indicated as owned by Messrs. Kingsley and Duberstein as a result of their affiliation with Greenlake II and 494,554 shares indicated as owned by Messrs. Katz, Hiram and Sica as a result of their affiliation with QIP. 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 agreement with Robert S. Romano. See "Management--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, 1999, 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 84 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. During fiscal year 1999, the Company replaced the second mortgage on the Lake Forest, Illinois residence for a first mortgage on a residence located in Green Lake, Wisconsin on the same terms and conditions. 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, 1999, 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%. The note was paid on March 31, 1999 and the mortgage released. 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 suffer 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. 85 PART IV Item 14. Exhibits, Financial Statement Schedule, 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"))* 3.1(a)(1) Amendment to Restated Certificate of Incorporation of the Company, attached hereto and incorporated herein as Exhibit 3.1(a)(1) 3.2(a) Amended and Restated bylaws of the Company (filed as Exhibit 3(B) to the 1997 10-K)* (a)(1) Amended and Restated bylaws of the Company (adopted July 23, 1998)(filed as Exhibit 3.2(a)(1) to the Company's Registration Statement on Form S-4 (Registration No. 333-57949)(the "Form S-4"))* 4.1 Indenture for the 10 3/4% Senior Notes due 2008, Series A (the "Old Notes") and 10 3/4% Senior Notes due 2008, Series B (the "Exchange Notes"), dated as of May 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 Exchange Note (filed as Exhibit 4.2 to the Form S-4)* 4.3 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)* 4.4 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)* 4.5 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*
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Exhibit Number Description ------- ---------------------------------------------------------------------- 4.6 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* 4.7 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* 4.8 Outboard Marine Corporation Certificate of the Powers, Designations, Preferences and Rights of the Series A Convertible Preferred Stock, Par Value $.01 Per Share, attached hereto and incorporated herein as Exhibit 4.8. 4.9 Series A Convertible Preferred Stock and Warrant Purchase Agreement, attached hereto and incorporated herein as Exhibit 4.9. 4.10 Stockholder Agreement between Outboard Marine Corporation, Quantum Industrial Partners LDC and Greenlake Holdings II LLC, attached hereto and incorporated herein as Exhibit 4.10. 4.11 Warrant to Purchase Shares of Common Stock of Outboard Marine Corporation by Quantum Industrial Partners LDC, attached hereto and incorporated herein as Exhibit 4.11. 4.12 Warrant to Purchase Shares of Common Stock of Outboard Marine Corporation by Greenlake Holdings LLC, attached hereto and incorporated herein as Exhibit 4.12. 4.13 Registration Rights Agreement between Outboard Marine Corporation, Quantum Industrial Partners LDC, Greenlake Holdings II LLC and Greenmarine Holdings LLC, attached hereto and incorporated herein as Exhibit 4.13. 10.1 Severance Agreements 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 Employment Agreement of Mr. Hines dated October 6, 1997, reference is made to Exhibit 10(J) to the 1997 10-K* 10.3 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* 10.4 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)* 10.5 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* 10.6 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* 10.7 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"))* 10.8 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)* 10.9 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)*
87
Exhibit Number Description ------- ---------------------------------------------------------------------- 10.10 Fourth Amendment to Amended and Restated Loan and Security Agreement between the Company and NationsBank of Texas, N.A. dated effective as of February 1, 1999 (filed as Exhibit 10.11 to the Transition Report on Form 10-K for the transition period ended December 31, 1998)* 10.11 Fifth Amendment to Amended and Restated Loan and Security Agreement between the Company and NationsBank of Texas, N.A. dated effective as of February 25, 1999 (filed as Exhibit 10.12 to the Transition Report on Form 10-K for the transition period December 31, 1998)* 10.12 Promissory Note dated December 4, 1998 with Robert Gowens, Jr. and Donna Gowens, as Maker, and the Company, as Payee (filed as Exhibit 10.16 to the Transition Report on Form 10-K for the transition period ended December 31, 1998)* 10.13 Second Mortgage dated December 4, 1998 with Robert Gowens, Jr. and Donna Gowens, as Mortgagor, and the Company, as Mortgagee (filed as Exhibit 10.17 to the Transition Report on Form 10-K for the transition period ended December 31, 1998)* 10.14 Nonqualified Stock Option Agreement dated October 1, 1998 between the Company and Robert B. Gowens (filed as Exhibit 10.18 to the Transition Report on Form 10-K for the transition period ended December 31, 1998)* 10.15 Secured Promissory Note dated October 6, 1997 with Andrew Hines, as Maker, and the Company, as Payee (filed as Exhibit 10.19 to the Transition Report on Form 10-K for the transition period ended December 31, 1998)* 10.16 Sixth Amendment to Amended and Restated Loan and Security Agreement between the Company and Bank of America, N.A., dated effective as of July 30, 1999 filed as Exhibit 10.16 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1999* 10.17 Pledge and Security Agreement dated October 6, 1997 between the Company and Andrew Hines (filed as Exhibit 10.20 to the Transition Report on Form 10-K for the transition period ended December 31, 1998)* 10.18 Nonqualified Stock Option Grant Agreement dated October 6, 1997 between the Company and Andrew Hines (filed as Exhibit 10.21 to the Transition Report on Form 10-K for the transition period ended December 31, 1998)* 10.19 Incentive Stock Option Grant Agreement dated December 30, 1997 between the Company and David Jones (filed as Exhibit 10.22 to the Transition Report on Form 10-K for the transition period ended December 31, 1998)* 10.20 Nonqualified Stock Option Grant Agreement dated March 10, 1998 between the Company and David Jones (filed as Exhibit 10.23 to the Transition Report on Form 10-K for the transition period ended December 31, 1998)* 10.21 Nonqualified Stock Option Grant Agreement dated March 10, 1998 between the Company and David Jones (filed as Exhibit 10.24 to the Transition Report on Form 10-K for the transition period ended December 31, 1998)* 10.22 Seventh Amendment to Amended and Restated Loan and Security Agreement between the Company and Bank of America, N.A., dated effective as of October 27, 1999 (filed as Exhibit 10.22 to the Form 10-Q for the period ended September 30, 1999)* 10.23 Eighth Amendment to Amended and Restated Loan and Security Agreement between the Company and Bank of America, N.A., dated effective as of January 31, 2000, attached hereto and incorporated herein as Exhibit 10.24.
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Exhibit Number Description ------- ---------------------------------------------------------------------- 10.24 Subordinated Promissory Note dated January 19, 2000 with Outboard Marine Corporation, as borrower, and Quantum Industrial Partners LDC, as lender, attached hereto and incorporated herein as Exhibit 10.24. 10.25 Subordinated Promissory Note dated January 19, 2000 with Outboard Marine Corporation, as borrower, and Greenlake Holdings II LLC, as lender, attached hereto and incorporated herein as Exhibit 10.25. 11. Computation of per share earnings (loss) 21. Subsidiaries of Registrant, attached hereto and incorporated herein as Exhibit 21. 27. Financial Data Schedule
- -------- * Incorporated herein by reference. (b) On February 1, 2000, the Company filed a Report on Form 8-K announcing the sale of 650,000 shares of Series A Preferred Stock and Warrants to purchase 5,750,000 shares of the Company's Common Stock. (c) Exhibits are attached hereto. (d) None. 89 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 Date: March 30, 2000 /s/ David D. Jones, Jr. By: _________________________________ David D. Jones, Jr. President, Chief Executive Officer and Chairman of the Board 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.
Signature Title Date --------- ----- ---- /s/ David D. Jones, Jr. President, Chief Executive March 30, 2000 ______________________________________ Officer and Chairman of David D. Jones, Jr. the Board /s/ Alfred D. Kingsley Vice Chairman of the Board March 30, 2000 ______________________________________ Alfred D. Kingsley /s/ Gary K. Duberstein Director and Assistant March 30, 2000 ______________________________________ Secretary of the Board Gary K. Duberstein /s/ Richard Katz Vice Chairman of the Board March 30, 2000 ______________________________________ Richard Katz /s/ Ron Hiram Director March 30, 2000 ______________________________________ Ron Hiram /s/ Frank V. Sica Director March 30, 2000 ______________________________________ Frank V. Sica /s/ Andrew P. Hines Executive Vice President March 30, 2000 ______________________________________ Strategic Planning and Andrew P. Hines Business Development and Director /s/ Eric T. Martinez Interim Chief Financial March 30, 2000 ______________________________________ Officer and Vice Eric T. Martinez President and Treasurer (Principal Financial Officer) /s/ James B. Pekarek Vice President and March 30, 2000 ______________________________________ Controller (Principal James B. Pekarek Accounting Officer)
90 EX-3.1(A)(1) 2 AMENDMENT TO RESTATED CERTIFICATE OF INCORPORATION Exhibit 3.1(a)(1) CERTIFICATE OF AMENDMENT OF THE RESTATED CERTIFICATE OF INCORPORATION OF OUTBOARD MARINE CORPORATION Pursuant to Sections 228 and 242 of the General Corporation Law of the State of Delaware ***** Outboard Marine Corporation, a Delaware corporation (hereinafter called the "Corporation"), does hereby certify as follows: FIRST: That the Board of Directors of the Corporation adopted a resolution proposing and declaring advisable the following amendment to the Restated Certificate of Incorporation of the Corporation: RESOLVED, that the Restated Certificate of Incorporation be amended by changing the fourth Article thereof so that, as amended, such Article shall be and read as follows: "FOURTH: The total number of all classes of stock which the Corporation shall have authority to issue is 37,000,000 shares, consisting of: (a) 1,000,000 shares of Preferred Stock, par value $0.01 per share; and (b) 36,000,000 shares of Common Stock, par value $0.01 per share." SECOND: That in lieu of a meeting of stockholders, the sole stockholder of the Corporation has duly adopted the amendment by written consent in accordance with the provisions of Sections 228 and 242 of the General Corporation Law of the state of Delaware. IN WITNESS WHEREOF, OUTBOARD MARINE CORPORATION has caused this certificate to be duly executed in its corporate name this 28 day of January, 2000. OUTBOARD MARINE CORPORATION By: /s/ Eric T. Martinez --------------------- Name: ERIC T. MARTINEZ Title: Vice President and Treasurer EX-4.8 3 SERIES A CONVERTIBLE PREFERRED STOCK Exhibit 4.8 OUTBOARD MARINE CORPORATION CERTIFICATE OF THE POWERS, DESIGNATIONS, PREFERENCES AND RIGHTS OF THE SERIES A CONVERTIBLE PREFERRED STOCK, PAR VALUE $.01 PER SHARE Pursuant to Section 151 of the General Corporation Law of the State of Delaware The following resolution was duly adopted by the Board of Directors of Outboard Marine Corporation, a Delaware corporation (the "Corporation"), pursuant to the provisions of Section 151 of the General Corporation Law of the State of Delaware, on January 28, 2000, by the unanimous written consent of the Board of Directors of the Corporation: WHEREAS, the Board of Directors of the Corporation is authorized, within the limitations and restrictions stated in the Certificate of Incorporation of the Corporation, to provide by resolution or resolutions for the issuance of shares of preferred stock, par value $.01 per share, of the Corporation, in one or more series with such voting powers, full or limited, or without voting powers, and such designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions as shall be stated and expressed in the resolution or resolutions providing for the issuance thereof adopted by the Board of Directors, and as are not stated and expressed in the Certificate of Incorporation, or any amendment thereto, including (but without limiting the generality of the foregoing) such provisions as may be desired concerning voting, redemption, dividends, dissolution or 2 the distribution of assets and such other subjects or matters as may be fixed by resolution or resolutions of the Board of Directors under the General Corporation Law of the State of Delaware; and WHEREAS, it is the desire of the Board of Directors of the Corporation, pursuant to its authority as aforesaid, to authorize and fix the terms of a series of preferred stock and the number of shares constituting such series; NOW, THEREFORE, BE IT RESOLVED: 1. Designation and Number of Shares. There shall be hereby -------------------------------- established a series of preferred stock designated as "Series A Convertible Preferred Stock" (such series being hereinafter referred to as the "Series A Preferred Stock"). The authorized number of shares of Series A Preferred Stock shall be 650,000. The initial liquidation preference of each share Series A Preferred Stock upon issuance shall be $100 per share (the "Initial Liquidation Preference"). As used herein, the "Liquidation Preference" of a share of Series A Preferred Stock shall be an amount equal to the Initial Liquidation Preference plus all amounts added thereto in accordance with Section 3(a) hereof. 2. Rank. The Series A Preferred Stock shall, with respect to ---- dividend distributions and distributions of assets and rights upon the liquidation, winding up and dissolution of the Corporation, rank senior to all classes of common stock of the Corporation (including, without limitation, the common stock, par value $.01 per share, of the Corporation (the "Common Stock")) and to each other class or series of capital stock of the Corporation hereafter created (the Common Stock and each 3 other class or series of capital stock of the Corporation are hereinafter collectively referred to as the "Junior Stock"). 4 3. Dividends. --------- (a) Beginning on the date of issuance of the Series A Preferred Stock, the holders of the outstanding shares of Series A Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors of the Corporation, out of funds legally available therefor, cash dividends on each share of Series A Preferred Stock at a quarterly rate equal to 3.75% of the then current Liquidation Preference, payable in arrears on each Dividend Payment Date commencing on the Initial Dividend Payment Date or the next succeeding Business Day, if the applicable Dividend Payment Date is not a Business Day. Notwithstanding the foregoing, the dividend payable on each share of Series A Preferred Stock with respect to the Initial Dividend Period shall be equal to the product of (i) 15.0% of the Initial Liquidation Preference multiplied by (ii) a fraction the numerator of which is the actual number of days from (and including) the Series A Preferred Stock Issue Date to (but excluding) the Dividend Payment Date with respect to the Initial Dividend Period, and the denominator of which is 365. If any dividend (or portion thereof) payable on any Dividend Payment Date is not declared or paid in full on such Dividend Payment Date, the amount of such dividend payable that is not paid on such date shall automatically be added to and cause to be increased the then applicable Liquidation Preference. Each distribution on the Series A Preferred Stock shall be payable to holders of record as they appear on the stock books of the Corporation on such record dates, not less than ten (10) nor more than sixty (60) days preceding the related Dividend Payment Date, as shall be fixed by the Board of Directors of the Corporation. 5 (b) All dividends paid with respect to shares of Series A Preferred Stock pursuant to Section 3(a) shall be paid pro rata and in like manner to all of the holders entitled thereto. (c) Nothing herein contained shall in any way or under any circumstances be construed or deemed to require the Board of Directors of the Corporation to declare, or the Corporation to pay or set apart for payment, any dividends on shares of the Series A Preferred Stock at any time. (d) Beginning on the Series A Preferred Stock Issue Date, if the Board of Directors of the Corporation shall declare a dividend or make any other distribution (including, without limitation, in cash or other property or assets) to holders of shares of Common Stock (other than (i) dividends payable in capital stock for which adjustment is made under Section 5(c)(i) or (ii) subscription rights or warrants for which an adjustment is made under Section 5(c)(ii)), then the holders of each share of Series A Preferred Stock shall be entitled to receive a dividend or distribution in an amount equal to the amount of such dividend or distribution received by a holder of the number of shares of Common Stock for which such share of Series A Preferred Stock is convertible on the record date for such dividend or distribution. Any such amount shall be paid to the holders of shares of Series A Preferred Stock at the same time such dividend or distribution is made to holders of Common Stock. The foregoing notwithstanding, so long as any shares of the Series A Preferred Stock are outstanding, the Corporation shall not declare, pay or set apart for payment any dividend on any shares of Junior Stock or make any payment on account of, or set apart 6 for payment money for a sinking or other similar fund for, the purchase, redemption or other retirement of, any shares of Junior Stock or any warrants, rights, calls or options exercisable for or convertible into any shares of Junior Stock, or make any distribution in respect thereof, either directly or indirectly, whether in cash, obligations or shares of the Corporation or other property unless prior to such declaration, payment and set apart, the holders of not less than 85% of the outstanding shares of Series A Preferred Stock shall have consented thereto in writing. 4. Liquidation, Dissolution or Winding Up. -------------------------------------- (a) In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, before any distribution or payment to holders of Junior Stock, the holders of shares of Series A Preferred Stock shall be entitled to be paid an amount equal to the greater of (i) the Liquidation Preference, plus an amount in cash equal to the product of (x) 15% of the then current Liquidation Preference, and (y) a fraction, the numerator of which is the actual number of days from (and including) the most recent Dividend Payment Date to (but excluding) the date fixed for liquidation, dissolution or winding-up of the Corporation, and the denominator of which is 365, and (ii) the amount that the holders of shares of Series A Preferred Stock would be entitled to receive in connection with such liquidation, dissolution or winding up if all of the holders of the Series A Preferred Stock had converted their shares immediately prior to any relevant record date or payment in connection with such liquidation, dissolution or winding up, in either case, before any payment or distribution is made to any class or series of capital stock. 7 (b) If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation available for distribution to the holders of Series A Preferred Stock shall be insufficient to permit payment in full to such holders of the sums which such holders are entitled to receive in such case, then all of the assets available for distribution to holders of the Series A Preferred Stock shall be distributed among and paid to such holders ratably in proportion to the amounts that would be payable to such holders if such assets were sufficient to permit payment in full. (c) Neither the consolidation or merger of the Corporation with or into any other Person nor the sale or other distribution to another Person of all or substantially all the assets, property or business of the Corporation, shall be deemed to be a liquidation, dissolution or winding up of the Corporation for purposes of this Section 4. 5. Conversion. ---------- (a) Stockholders' Right To Convert. Each share of Series A Preferred ------------------------------ Stock shall be convertible, at the option of the holder thereof, at any time, or from time to time, into fully paid and nonassessable shares of Common Stock at the Conversion Price. As used herein the "Conversion Price" shall be $14.00 per share, subject to adjustment as set forth in this Section 5. (b) Number of Shares of Common Stock Issuable upon Conversion. The --------------------------------------------------------- number of shares of Common Stock to be issued upon conversion of shares of Series A Preferred Stock pursuant to Section 5(a) shall be equal to the product of (i) a fraction, the numerator of which is the then current Liquidation Preference and 8 the denominator of which is the Conversion Price, and (ii) the number of shares of Series A Preferred Stock to be converted. (c) Antidilution Adjustments. The Conversion Price shall be adjusted ------------------------ from time to time in certain cases as follows: (i) Dividend, Subdivision, Combination or Reclassification of --------------------------------------------------------- Common Stock. If the Corporation shall, at any time or from time to time, (a) - ------------ declare a dividend on the Common Stock payable in shares of its capital stock (including Common Stock), (b) subdivide the outstanding Common Stock, (c) combine the outstanding Common Stock into a smaller number of shares, or (d) issue any shares of its capital stock in a reclassification of the Common Stock (excluding any such reclassification in connection with a consolidation or merger in which the Corporation is the continuing corporation), then in each such case, the Conversion Price in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification and the number and kind of shares of capital stock issuable on such date shall be proportionately adjusted so that, in connection with a conversion after such date, the holder of the Series A Preferred Stock shall be entitled to receive the aggregate number and kind of shares of capital stock which, if the conversion had occurred immediately prior to such date, the holder would have owned upon such conversion and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification. Any such adjustment shall become effective immediately after the record date of such dividend or the effective date of such subdivision, combination or reclassification. Such adjustment 9 shall be made successively whenever any event listed above shall occur. If a dividend is declared and such dividend is not paid, the Conversion Price shall be adjusted to the Conversion Price in effect immediately prior to such record date. (ii) Issuance of Rights to Purchase Common Stock Below ------------------------------------------------- Current Market Price or Conversion Price. If the Corporation shall, at any time - ---------------------------------------- or from time to time, fix a record date for the issuance of rights or warrants to all holders of Common Stock entitling them (for a period expiring within 45 calendar days after such record date) to subscribe for or purchase Common Stock or securities convertible into Common Stock at a price per share of Common Stock, or having a conversion price per share of Common Stock, if a security is convertible into Common Stock (determined by dividing (x) the sum of (A) the total consideration, if any, paid to the Corporation for such rights, warrants or other securities convertible into Common Stock, and (B) the total consideration payable to the Corporation upon exercise, conversion or exchange of such rights, warrants or other securities convertible into Common Stock (the sum of (A) and (B) being the "Conversion Consideration"), by (y) the total number of shares of Common Stock covered by such rights, warrants or other securities convertible into Common Stock), lower than either the Current Market Price per share of Common Stock on such record date (or, if an ex-dividend date has been established for such record date, on the day next preceding such ex- dividend date) or the then current Conversion Price, then the current Conversion Price shall be reduced to the price determined by multiplying (1) the Conversion Price in effect 10 immediately prior to such record date by (2) a fraction, the numerator of which shall be the sum of (I) the number of shares of Common Stock outstanding on such record date, plus (II) the quotient obtained by dividing the Conversion Consideration by the Applicable Price, and the denominator of which shall be the sum of (I) the number of shares of Common Stock outstanding on such record date plus (II) the number of additional shares of Common Stock to be offered for subscription or purchase (or the total number of shares of Common Stock covered by such rights, warrants or other securities convertible into Common Stock). In case such price for subscription or purchase may be paid in a consideration part or all of which shall be in a form other than cash, the value of such consideration shall be determined in good faith by the Board of Directors of the Corporation and shall be that value which is agreed upon by at least 75% of the members thereof; provided, that if the holders of 25% of the shares of Series A -------- Preferred Stock object to such valuation as determined by the Board of Directors within fifteen (15) days of receipt of written notice of such valuation or, if 75% of the members of the Board of Directors of the Corporation are unable to agree upon the value of such consideration, the value thereof shall be determined by an independent investment bank of nationally recognized stature that is selected by 75% of the members of the Board of Directors. Any such adjustment shall become effective immediately after the record date for such rights or warrants. Such adjustment shall be made successively whenever such a record date is fixed. If such rights or warrants are not so issued, the then current Conversion Price shall be adjusted to the Conversion Price in effect immediately prior to such record date. The determination of whether 11 any adjustment is required under this Section 5(c)(ii) by reason of the sale and issuance of rights, options, warrants or convertible or exchangeable securities and the amount of such adjustment, if any, shall be made only at the time of such issuance or sale and not at the subsequent time of issuance or sale of Common Stock upon the exercise or conversion of such rights, warrant, options or convertible or exchangeable securities. Upon the expiration of any such options, warrants or rights, the termination of any such rights to convert or exchange or the expiration of any options, warrants or rights related to such convertible or exchangeable securities, the Conversion Price, to the extent in any way affected by or computed using such options, warrants, rights or securities or options or rights related to such securities, shall be recomputed to reflect the issuance of only the number of shares of Common Stock actually issued upon the exercise of such options, warrants or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities. (iii) Issuance of Common Stock Below Current Market Price or ------------------------------------------------------ Conversion Price. If the Corporation shall, at any time or from time to time, - ---------------- sell or issue shares of Common Stock (regardless of whether originally issued or from the Corporation's treasury), or rights, options, warrants or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock (excluding (w) shares issued in any of the transactions described in Section 5(c)(i) or (ii), (x) shares issued upon the exercise or conversion of Series A Preferred Stock, and 12 (y) options issuable pursuant to bona fide employee benefit plans or arrangements approved or adopted by the Corporation's Board of Directors, and the shares of Common Stock issuable on exercise of such options, and (z) warrants issued by the Corporation pursuant to the Purchase Agreement and the shares of Common Stock issuable upon exercise of such warrants) at a price per share of Common Stock (determined, in the case of rights, options, warrants or convertible or exchangeable securities, by dividing (x) the total consideration received or receivable by the Corporation in consideration of the sale or issuance of such rights, options, warrants or convertible or exchangeable securities, plus the total consideration payable to the Corporation upon exercise or conversion or exchange thereof, by (y) the total number of shares of Common Stock covered by such rights, options, warrants or convertible or exchangeable securities) lower than either the Current Market Price per share of Common Stock or the Conversion Price immediately prior to such sale or issuance, then the Conversion Price shall be reduced to the price determined by multiplying the Conversion Price in effect immediately prior thereto by a fraction, the numerator of which shall be the sum of (I) the number of shares of Common Stock outstanding immediately prior to such sale or issuance, plus (II) the quotient obtained by dividing the aggregate consideration received (determined as provided below) for such sale or issuance by the Applicable Price, and the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such sale or issuance. Such adjustment shall be made successively whenever such sale or issuance is made. For the purposes of such adjustments, the shares of Common Stock which the 13 holder of any such rights, options, warrants, or convertible or exchangeable securities shall be entitled to subscribe for or purchase shall be deemed to be issued and outstanding as of the date of such sale or issuance and the consideration "received" by the Corporation therefor shall be deemed to be the consideration actually received or receivable by the Corporation (plus any underwriting discounts or commissions in connection therewith) for such rights, options, warrants or convertible or exchangeable securities, plus the consideration stated in such rights, options, warrants or convertible or exchangeable securities to be payable to the Corporation for the shares of Common Stock covered thereby. If the Corporation shall sell or issue shares of Common Stock for a consideration consisting, in whole or in part, of property other than cash or its equivalent, then in determining the "price per share of Common Stock" and the "consideration" received or receivable by or payable to the Corporation for purposes of the first sentence and the immediately preceding sentence of this Section 5(c)(iii), the fair value of such property shall be determined in good faith by the Board of Directors of the Corporation and shall be the value which is agreed upon by at least 75% of the members thereof or if 75% of the members of the Board of Directors of the Corporation are unable to agree upon the value of such consideration, the value thereof shall be determined by an independent investment bank of nationally recognized stature that is selected by 75% of the members of the Board of Directors. The determination of whether any adjustment is required under this Section 5(c)(iii) by reason of the sale and issuance of rights, options, warrants or convertible or exchangeable securities and the amount of such adjustment, if any, shall be made only at the time of such issuance 14 or sale and not at the subsequent time of issuance or sale of Common Stock upon the exercise or conversion of such rights, options, warrants or convertible or exchangeable securities. Upon the expiration of any such options, warrants or rights, the termination of any such rights to convert or exchange or the expiration of any options, warrants or rights related to such convertible or exchangeable securities, the then current Conversion Price, to the extent in any was affected by or computed using such options, warrants, rights or securities or options or rights related to such securities, shall be recomputed to reflect the issuance of only the number of shares of Common Stock actually issued upon the exercise of such options, warrants or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities. (d) De Minimis Adjustments. No adjustment of the then current ---------------------- Conversion Price shall be made if the amount of such adjustment would result in a change in the then current Conversion Price per share of less than $.10, but in such case any adjustment that would otherwise be required to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment, which together with any adjustment so carried forward, would result in a change in the then current Conversion Price of at least $.10 per share. Notwithstanding the provisions of the first sentence of this Section 5(d), any adjustment postponed pursuant to this Section 5(d) shall be made no later than the earlier of (i) three years from the date of the transaction that would, but for the provisions of the first sentence 15 of this Section 5(d), have required such adjustment and (ii) the date of any conversion of shares of Series A Preferred Stock into shares of Common Stock. (e) Fractional Shares. Notwithstanding any other provision of ----------------- this Certificate of Designation or the Corporation's Certificate of Incorporation, the Corporation shall not be required to issue fractions of shares upon conversion of any shares of Series A Preferred Stock or to distribute certificates which evidence fractional shares. In lieu of fractional shares, the Corporation may pay therefore, at the time of any conversion of shares of Series A Preferred Stock as herein provided, an amount in cash equal to such fraction multiplied by the greater of the Current Market Price of a share of Common Stock on such date and the Conversion Price. (f) Reorganization, Reclassification, Merger and Sale of Assets ----------------------------------------------------------- Adjustment. If there occurs any capital reorganization or any reclassification - ---------- of the Common Stock (other than a reorganization or reclassification that results in an adjustment pursuant to provisions of Section 5(c) hereof), the consolidation or merger of the Corporation with or into another Person (other than a merger or consolidation of the Corporation in which the Corporation is the continuing corporation and which does not result in any reclassification or change of outstanding shares of Common Stock) or the sale, transfer or other disposition of all or substantially all of the assets of the Corporation to another Person, then each share of Series A Preferred Stock shall thereafter be convertible into the same kind and amounts of securities (including shares of stock) or other assets, or both, which were issuable or distributable to the holders of outstanding Common Stock upon such reorganization, reclassification, consolidation, 16 merger, sale or conveyance (but only to the extent that a dividend or distribution with respect thereto was not or is not made pursuant to Section 3(d) hereof), in respect of that number of shares of Common Stock into which such share of Series A Preferred Stock might have been converted immediately prior to such reorganization, reclassification, consolidation, merger, sale or conveyance; and, in any such case, appropriate adjustments (as determined in good faith by the Board of Directors of the Corporation) shall be made to assure that the provisions set forth herein (including provisions with respect to changes in, and other adjustments of, the Conversion Price) shall thereafter be applicable, as nearly as reasonably may be practicable, in relation to any securities or other assets thereafter deliverable upon the conversion of the Series A Preferred Stock. (g) Mechanics of Conversion. The option to convert shall be ----------------------- exercised by surrendering for such purpose to the Corporation, at any place where the Corporation shall maintain a transfer agent for its Common Stock, certificates representing the shares to be converted, duly endorsed in blank or accompanied by proper instruments of transfer, and at the time of such surrender, the Person in whose name any certificate for shares of Common Stock shall be issuable upon such conversion shall be deemed to be the holder of record of such shares of Common Stock on such date, notwithstanding that the share register of the Corporation shall then be closed or that the certificates representing such Common Stock shall not then be actually delivered to such Person. 17 (h) Certificate as to Adjustments. Whenever the Conversion ----------------------------- Price and the number of shares of Common Stock issuable, or the securities or other property deliverable upon the conversion of the Series A Preferred Stock, shall be adjusted pursuant to the provisions hereof, the Corporation shall promptly give written notice thereof to each holder of shares of Series A Preferred Stock at such holder's address as it appears on the transfer books of the Corporation and shall forthwith file, at its principal executive office and with any transfer agent or agents for the Series A Preferred Stock and the Common Stock, a certificate, signed by the President or one of the Vice Presidents of the Corporation, and by its Chief Financial Officer, its Treasurer or one of its Assistant Treasurers, stating the adjusted Conversion Price, the number of shares of Common Stock issuable, or the securities or other property deliverable, per share of Series A Preferred Stock converted, calculated to the nearest one-tenth of one cent or to the nearest one-hundredth of a share and setting forth in reasonable detail the method of calculation and the facts requiring such adjustment and upon which such calculation is based. Each adjustment shall remain in effect until a subsequent adjustment hereunder is required. (i) Reservation of Common Stock. The Corporation shall at all --------------------------- times reserve and keep available for issuance upon the conversion of the shares of Series A Preferred Stock the maximum number of its authorized but unissued shares of Common Stock as is reasonably anticipated to be sufficient to permit the conversion of all outstanding shares of Series A Preferred Stock and shall take all action required to increase the authorized number of shares of Common Stock if at any time there shall be 18 insufficient authorized but unissued shares of Common Stock to permit such reservation or to permit the conversion of all outstanding shares of Series A Preferred Stock. (j) No Conversion Charge or Tax. The issuance and delivery of --------------------------- certificates for shares of Common Stock upon the conversion of shares of Series A Preferred Stock shall be made without charge to the holder of shares of Series A Preferred Stock for any issue or transfer tax, or other incidental expense in respect of the issuance or delivery of such certificates or the securities represented thereby, all of which taxes and expenses shall be paid by the Corporation. 6. Redemption. ---------- 19 (a) Redemption Demand. Upon the demand of the holders of at ----------------- least 75% of the outstanding shares of Series A Preferred Stock made in writing to the Corporation at any time after October 1, 2008 (a "Redemption Demand"), the Corporation shall be required to redeem all of the shares of Series A Preferred Stock, at a redemption price per share equal to the Liquidation Preference per share plus an amount in cash equal to the product of (x) 15% of the then current Liquidation Preference, multiplied by (y) a fraction, the numerator of which is the actual number of days from (and including) the most recent Dividend Payment Date to (but excluding) the Redemption Date, and the denominator of which is 365 (the "Redemption Price"), to the extent that (i) funds are legally available therefor and (ii) such redemption would not cause a default or event of default under any documents governing the Corporation's outstanding indebtedness or lines of credit. If at the time a Demand Notice is received by the Corporation funds are legally available to redeem some but not all of the outstanding shares of Series A Preferred Stock, then the Corporation shall redeem as many shares of Series A Preferred Stock as its legally available funds permit. (b) Redemption at Corporation's Option. On and after the date ---------------------------------- on which fewer than 10% of the shares of Series A Preferred Stock issued on the Series A Preferred Stock Issue Date remain outstanding, the Corporation shall have the right, at its sole option and election, to redeem all of the outstanding shares of Series A Preferred Stock, on not less than 30 days' notice of the date of redemption (any such redemption date pursuant to this Section 6(b) being referred to herein as an "Optional Redemption Date") at a redemption price per share equal to the Liquidation Preference 20 per share plus an amount in cash equal to the product of (x) 15% of the then current Liquidation Preference, multiplied by (y) a fraction, the numerator of which is the actual number of days from (and including) the most recent Dividend Payment Date to (but excluding) the Optional Redemption Date, and the denominator of which is 365, to the extent that funds are legally available therefor (the "Optional Redemption Price"). (c) Redemption Notice. At least 30 days and not more than 60 ----------------- days before a Redemption Date, the Corporation shall mail a notice of Redemption (the "Redemption Notice") by first class mail, postage prepaid, to each holder of record on the record date fixed for such redemption at such holder's address as it appears on the stock register of the Corporation; provided, however, that -------- ------- neither the failure to give such notice nor any deficiency therein shall affect the validity of the procedure for the redemption of any shares of Series A Preferred Stock to be redeemed except as to the holder or holders to whom the Corporation has failed to give said notice or except as to the holder or holders whose notice was defective. The Redemption Notice shall be mailed by the Corporation to the holders of the shares of Series A Preferred Stock (and in the case of a Demand Redemption, such Redemption Notice shall be mailed not later than 10 days after receipt by the Corporation of a Redemption Demand) and shall state: (i) that the Corporation is redeeming shares of Series A Preferred Stock in response to a Redemption Demand or in connection with an Optional Redemption, as the case may be; (ii) the Redemption Price; 21 (iii) in the case of a Demand Redemption, whether funds are legally available to redeem all or less than all of the outstanding shares of the Series A Preferred Stock and the total number of shares of the Series A Preferred Stock being redeemed; (iv) if, in the case of a Demand Redemption, less than all of the shares of Series A Preferred Stock held by such holder are to be redeemed, the number of shares of Series A Preferred Stock held by such holder, as of the appropriate record date, that the Corporation intends to redeem; (v) the Redemption Date; (vi) that the holder is to surrender to the Corporation, at the place or places where certificates for shares of Series A Preferred Stock are to be surrendered for redemption, in the manner and at the price designated, his or her certificate or certificates representing the shares of Series A Preferred Stock to be redeemed; and (vii) that dividends on the shares of the Series A Preferred Stock to be redeemed shall cease to accrue and increase on such Optional Redemption Date unless the Corporation defaults in the payment of the Optional Redemption Price. (d) Pro-Rata Redemption. In the event of a redemption pursuant ------------------- to Section 6(a) of less than all of the then outstanding shares of the Series A 22 Preferred Stock, the Corporation shall effect such redemption pro rata according --- ---- to the number of shares held by each holder of the Series A Preferred Stock. (e) Surrender of Shares; Payment. Each holder of Series A ---------------------------- Preferred Stock shall surrender the certificate or certificates representing such shares of Series A Preferred Stock to the Corporation, duly endorsed, in the manner and at the place designated in the Redemption Notice, and on the Redemption Date or the Optional Redemption Date the full Redemption Price or Optional Redemption Price, as the case may be, for such shares shall be payable in cash to the Person whose name appears on such certificate or certificates as the owner thereof, and each surrendered certificate shall be canceled and retired. In the event that less than all of the shares represented by any such certificate are redeemed, a new certificate shall be issued by the Corporation representing the unredeemed shares. (f) Effect on Redeemed Shares. Unless the Corporation defaults ------------------------- in the payment in full of the Redemption Price or the Optional Redemption Price, dividends on the Series A Preferred Stock called for redemption shall cease to accumulate and increase on the Redemption Date or Optional Redemption Date, as the case may be, and the holders of such redeemed shares shall cease to have any further rights with respect thereto on the Redemption Date or Optional Redemption Date, other than the right to receive the Redemption Price or Optional Redemption Price, as the case may be. 7. Voting Rights. ------------- 23 (a) The holders of Series A Preferred Stock, except as otherwise required under Delaware law or as set forth in Sections 7(b) and (c) below, shall not be entitled or permitted to vote on any matter required or permitted to be voted upon by the stockholders of the Corporation. (b) So long as the Series A Preferred Stock is outstanding, each share of Series A Preferred Stock shall entitle the holder thereof to vote, in person or by proxy, at a special or annual meeting of stockholders, on all matters entitled to be voted on by holders of Common Stock voting together as a single class with other shares entitled to vote thereon. With respect to any such vote, each share of Series A Preferred Stock shall entitle the holder thereof to cast that number of votes per share as is equal to the number of votes that such holder would be entitled to cast had such holder converted its shares of Series A Preferred Stock into shares of Common Stock on the record date for determining the stockholders of the Corporation eligible to vote on any such matters. The foregoing notwithstanding, if the acquisition by any holder of shares of Series A Preferred Stock would require such holder and/or the Corporation to comply with the pre-merger notification requirements of the Hart- Scott-Rodino Antitrust Improvement Act of 1976, as amended (the "HSR Act"), then the shares of Series A Preferred Stock acquired by such holder shall not entitle the holder thereof to vote, in person or by proxy, at any special or annual meeting of stockholders, on any matter covered by this Section 7(b), but not with respect to matters covered by Section 7(c), unless and until (i) such holder and the Corporation have complied with the 24 requirements of the HSR Act and (ii) the applicable waiting period under the HSR Act shall have expired or been terminated. (c) Unless the consent or approval of a greater number of shares shall then be required by law, the affirmative vote of the holders of at least seventy-five percent (75%) of the outstanding shares of Series A Preferred Stock, voting as a single class, in person or by proxy, at a special or annual meeting of stockholders called for the purpose or by written consent, shall be necessary to authorize, adopt or approve an amendment to this Certificate of Designation or the Certificate of Incorporation of the Corporation that would alter or change the powers, preferences or special rights of the shares of Series A Preferred Stock so as to affect the shares of Series A Preferred Stock adversely. 8. Reissuance of Series A Preferred Stock. Shares of Series A -------------------------------------- Preferred Stock that have been issued and reacquired in any manner, including shares purchased or redeemed or exchanged, shall (upon compliance with any applicable provisions of the laws of Delaware) have the status of authorized and unissued shares of preferred stock undesignated as to series and may be redesignated and reissued as part of any series of preferred stock (other than Series A Preferred Stock). 9. Business Day. If any payment or redemption shall be required by ------------ the terms hereof to be made on a day that is not a Business Day, such payment or redemption shall be made on the immediately succeeding Business Day. 10. Definitions. As used in this Certificate of Designation, the ----------- following terms shall have the following meanings (with terms defined in the singular 25 having comparable meanings when used in the plural and vice versa), unless the ---- ----- context otherwise requires: "Applicable Price" shall mean the higher of (a) the Current Market Price per share of Common Stock on the applicable record or other relevant date and (b) the then current Conversion Price. "Board of Directors" shall have the Board of Directors of the Corporation. "Business Day" means any day except a Saturday, a Sunday, or other day on which commercial banks in the State of New York are authorized or required by law or executive order to close. "Closing Price" shall mean, with respect to the Common Stock for any day, (a) the last reported sale price regular way or, in case no such sale takes place on such day, the average of the closing bid and asked prices regular way, in either case as reported on the principal national securities exchange on which such Common Stock is listed or admitted for trading or (b) if the Common Stock is not listed or admitted for trading on any national securities exchange, the last reported sale price or, in case no such sale takes place on such day, the average of the highest reported bid and the lowest reported asked quotation for the Common Stock, in either case as reported on the Nasdaq Stock Market, Inc. or a similar service if the Nasdaq Stock Market, Inc. is no longer reporting such information. 26 "Common Stock" shall have the meaning ascribed to it in Section 2 hereof. "Conversion Consideration" shall have the meaning ascribed to it in Section 5(c)(ii) hereof. "Conversion Price" shall have the meaning ascribed to it in Section 5(a). "Corporation" shall mean Outboard Marine Corporation, a Delaware corporation. "Current Market Price" shall mean, with respect to the Common Stock on any date, the average of the daily Closing Prices per share of Common Stock for the 10 consecutive trading days commencing 15 days before such date. If on any such date the shares of Common Stock are not listed or admitted for trading on any national securities exchange or quoted on the Nasdaq Stock Market, Inc. or a similar service, the Current Market Price for such shares shall be the fair market value of such shares on such date as determined in good faith by the Board of Directors of the Corporation and shall be the value which is agreed upon by 75% of the members thereof, or if 75% of the members of the Board of Directors of the Corporation are unable to agree upon the value of such consideration, the value thereof shall be determined by an independent investment bank of a nationally recognized stature that is selected by the holders of 75% of the members of the Board of Directors. "Dividend Payment Date" means each of March 31, June 30, September 30 and December 31 of each year. 27 "Dividend Period" means the Initial Dividend Period and, thereafter, each Quarterly Dividend Period. "HSR Act" shall have the meaning ascribed to it in Section 7(b). "Initial Dividend Period" means the dividend period commencing on, and including, the Series A Preferred Stock Issue Date and ending on, and excluding, the first Dividend Payment Date to occur thereafter. "Initial Liquidation Preference" shall have the meaning ascribed to it in Section 1 hereof. "Junior Stock" shall have the meaning ascribed to it in Section 2 hereof. "Liquidation Preference" shall have the meaning ascribed to it in Section 1 hereof. "Redemption Date" means, with respect to any shares of Series A Preferred Stock, the date on which such shares are to be redeemed by the Corporation pursuant to Section 6 hereof. "Redemption Demand" shall have the meaning ascribed to it in Section 6(a) "Redemption Notice" shall have the meaning ascribed to it in Section 6(c) hereof. "Redemption Price" shall have the meaning ascribed to it in Section 6(a) hereof. "Person" means any individual, firm, corporation, partnership, limited liability company, trust, incorporated 28 or unincorporated association, joint venture, joint stock company, governmental body or other entity of any kind. "Purchase Agreement" shall mean the Series A Convertible Preferred Stock and Warrant Purchase Agreement, dated January 28, 2000, by and among the Corporation, Quantum Industrial Partners LDC and Greenlake Holdings II LLC. "Quarterly Dividend Period" shall mean the quarterly periods commencing on, and including, each Dividend Payment Date and ending on, and excluding, each next Dividend Payment Date occurring immediately thereafter, respectively. "Series A Preferred Stock" shall have the meaning ascribed to it in Section 1 hereof. "Series A Preferred Stock Issue Date" means the date on which the Series A Preferred Stock is originally issued by the Corporation. EX-4.9 4 CONVERTIBLE PREFERRED STOCK & WARRANT AGREEMENT ================================================================================ SERIES A CONVERTIBLE PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT among OUTBOARD MARINE CORPORATION, QUANTUM INDUSTRIAL PARTNERS LDC and GREENLAKE HOLDINGS II LLC ______________________________ Dated: January 28, 2000 ______________________________ ================================================================================ Table of Contents -----------------
ARTICLE I DEFINITIONS.......................................................... 1 1.1 Definitions...................................................... 1 ARTICLE II PURCHASE AND SALE OF PREFERRED STOCK................................. 7 2.1 Purchase and Sale of Preferred Stock and Warrants................ 7 2.2 Certificate of Designation....................................... 7 2.3 Use of Proceeds.................................................. 7 2.4 Closing.......................................................... 7 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY........................ 8 3.1 Corporate Existence and Power.................................... 8 3.2 Authorization; No Contravention.................................. 8 3.3 Governmental Authorization; Third Party Consents................. 8 3.4 Binding Effect................................................... 8 3.5 Compliance with Laws............................................. 9 3.6 Capitalization................................................... 9 3.7 No Default or Breach; Contractual Obligations.................... 10 3.8 Financial Statements............................................. 10 3.9 No Material Adverse Change; Ordinary Course of Business.......... 10 3.10 Private Offering................................................. 11 3.11 Intellectual Property............................................ 11 3.12 Broker's, Finder's or Similar Fees............................... 11 3.13 Litigation; Observance of Statutes and Orders.................... 11 3.14 Taxes............................................................ 12 3.15 Title to Property; Leases........................................ 12 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS..................... 12 4.1 Existence and Power.............................................. 12 4.2 Authorization; No Contravention.................................. 13 4.3 Governmental Authorization; Third Party Consents................. 13 4.4 Binding Effect................................................... 13 4.5 Purchase for Own Account......................................... 13 4.6 Restricted Securities............................................ 14 4.7 Broker's, Finder's or Similar Fees............................... 14 4.8 Accredited Investor.............................................. 14 4.9 Disclosure of Information........................................ 15 4.10 Investment Experience............................................ 15 ARTICLE V CONDITIONS TO THE OBLIGATION OF THE PURCHASERS TO CLOSE.............. 15 5.1 Representations and Warranties................................... 15 5.2 Secretary's Certificate.......................................... 15
i 5.3 Filing of Charter Amendment and Certificate of Designation....... 15 5.4 Purchased Shares................................................. 16 5.5 Warrants......................................................... 16 5.6 Registration Rights Agreement.................................... 16 5.7 Stockholders Agreement........................................... 16 5.8 Opinion of Counsel............................................... 16 ARTICLE VI CONDITIONS TO THE OBLIGATION OF THE COMPANY TO CLOSE............... 16 6.1 Representations and Warranties................................... 16 6.2 Payment of Purchase Price........................................ 17 6.3 Registration Rights Agreement.................................... 17 6.4 Stockholders Agreement........................................... 17 ARTICLE VII INDEMNIFICATION..................................................... 17 7.1 Indemnification.................................................. 17 7.2 Notification..................................................... 18 7.3 Limitation on Indemnification.................................... 19 ARTICLE VIII AFFIRMATIVE COVENANTS............................................... 19 8.1 Financial Statements and Other Information....................... 19 8.2 Reservation of Common Stock...................................... 20 8.3 Books and Records................................................ 20 8.4 Inspection....................................................... 20 ARTICLE IX MISCELLANEOUS....................................................... 20 9.1 Survival of Representations and Warranties....................... 21 9.2 Notices.......................................................... 21 9.3 Successors and Assigns; Third Party Beneficiaries................ 22 9.4 Amendment and Waiver............................................. 22 9.5 Counterparts..................................................... 23 9.6 Headings......................................................... 23 9.7 GOVERNING LAW.................................................... 23 9.8 Severability..................................................... 23 9.9 Rules of Construction............................................ 23 9.10 Right to Conduct Activities...................................... 23 9.11 Entire Agreement................................................. 24 9.12 Fees............................................................. 24 9.13 Publicity........................................................ 24 9.14 Further Assurances............................................... 25
ii EXHIBITS A Form of Warrant B Form of Certificate of Designations C Form of Registration Rights Agreement D Form of OMC Opinion of Counsel E Form of Stockholders Agreement SCHEDULES 2.1 Purchased Shares, Warrant Shares and Purchase Price 3.3 Authorizations and Consents v EXHIBIT 4.9 SERIES A CONVERTIBLE PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT SERIES A CONVERTIBLE PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT, dated January 28, 2000 (this "Agreement"), among Outboard Marine Corporation, a --------- Delaware corporation (the "Company") Quantum Industrial Partners LDC ("QIP") and ------- --- Greenlake Holdings II LLC ("Greenlake" and together with QIP, the "Purchasers"). --------- ---------- WHEREAS, upon the terms and conditions set forth in this Agreement, the Company proposes to issue and sell to each of the Purchasers, for the aggregate purchase price set forth opposite such Purchaser's name on Schedule -------- 2.1 hereto, (i) the aggregate number of shares, par value $.01 per share, of - --- Series A Convertible Preferred Stock of the Company (the "Preferred Stock") set --------------- forth opposite such Purchaser's name on Schedule 2.1 hereto, and (ii) the ------------ warrant (the "Warrant") to purchase, subject to the terms and conditions ------- thereof, the aggregate number of shares (subject to adjustment) of Common Stock, par value $.01 per share, of the Company (the "Common Stock") set forth opposite ------------ such Purchaser's name on Schedule 2.1 hereto, at an exercise price of $.01 per ------------ share (subject to adjustment), containing the terms and conditions set forth in the form of warrant attached hereto as Exhibit A. --------- NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I. DEFINITIONS ----------- A. Definitions. As used in this Agreement, and unless the context ----------- requires a different meaning, the following terms have the meanings indicated: "Affiliate" shall mean any Person who is an "affiliate" (as defined in --------- Rule 12b-2 of the General Rules and Regulations under the Exchange Act) of, and any Person controlling, controlled by, or under common control with, any Purchaser. For the purposes of this Agreement, "control" includes the ability to have investment discretion through contractual means or by operation of law. "Agreement" means this Agreement as the same may be amended, --------- supplemented or modified in accordance with the terms hereof. "Audited Financial Statements" has the meaning set forth in Section ---------------------------- 3.8 of this Agreement. "Board of Directors" means the Board of Directors of the Company. ------------------ "Business Day" means any day other than a Saturday, Sunday or other ------------ day on which commercial banks in the State of New York are authorized or required by law or executive order to close. "By-laws" means the by-laws of the Company in effect on the Closing ------- Date, as the same may be amended from time to time. "Certificate of Designation" means the Certificate of Designation with -------------------------- respect to the Preferred Stock adopted by the Board of Directors and duly filed with the Secretary of State of the State of Delaware on or before the Closing Date substantially in the form attached hereto as Exhibit B. --------- "Certificate of Incorporation" means the Certificate of Incorporation ---------------------------- of the Company, as the same may be amended from time to time. "Charter Amendment" means an amendment to the Certificate of ----------------- Incorporation increasing the number of authorized shares of Common Stock from 25,000,000 to 36,000,000. "Claims" has the meaning set forth in Section 7.1 of this Agreement. ------ "Closing" has the meaning set forth in Section 2.3 of this Agreement. ------- "Closing Date" has the meaning set forth in Section 2.4 of this ------------ Agreement. "Code" means the Internal Revenue Code of 1986, as amended, or any ---- successor statute thereto. "Commission" means the United States Securities and Exchange ---------- Commission or any similar agency then having jurisdiction to enforce the Securities Act. "Common Stock" has the meaning set forth in the recitals to this ------------ Agreement. 3 "Company" has the meaning set forth in the preamble to this Agreement. ------- "Condition of the Company" means the assets, business, properties, ------------------------ prospects, operations or financial condition of the Company. "Contingent Obligation" means, as applied to any Person, any direct or --------------------- indirect liability of that Person with respect to any Indebtedness, lease, dividend, guaranty, letter of credit or other obligation, contractual or otherwise (the "primary obligation") of another Person (the "primary obligor"), ------------------ --------------- whether or not contingent, (a) to purchase, repurchase or otherwise acquire such primary obligations or any property constituting direct or indirect security therefor, (b) to advance or provide funds (i) for the payment or discharge of any such primary obligation, or (ii) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet item, level of income or financial condition of the primary obligor, (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation, or (d) otherwise to assure or hold harmless the owner of any such primary obligation against loss or failure or inability to perform in respect thereof. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof. "Contractual Obligations" means, as to any Person, any provision of ----------------------- any security issued by such Person or of any agreement, undertaking, contract, indenture, mortgage, deed of trust or other instrument to which such Person is a party or by which it or any of its property is bound. "Copyrights" means any foreign or United States copyright ---------- registrations and applications for registration thereof, and any non-registered copyrights. "Exchange Act" means the Securities Exchange Act of 1934, as amended, ------------ and the rules and regulations of the Commission thereunder. "GAAP" means United States generally accepted accounting principles in ---- effect from time to time. "Governmental Authority" means the government of any nation, state, ---------------------- city, locality or other political subdivision thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. 4 "Greenlake" has the meaning set forth in the recitals to this --------- Agreement. "Indebtedness" means, as to any Person, (a) all obligations of such ------------ Person for borrowed money (including, without limitation, reimbursement and all other obligations with respect to surety bonds, letters of credit and bankers' acceptances, whether or not matured), (b) all obligations of such Person evidenced by notes, bonds, debentures or similar instruments, (c) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable and accrued commercial or trade liabilities arising in the ordinary course of business, (d) all interest rate and currency swaps, caps, collars and similar agreements or hedging devices under which payments are obligated to be made by such Person, whether periodically or upon the happening of a contingency, (e) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (f) all obligations of such Person under leases which have been or should be, in accordance with GAAP, recorded as capital leases, (g) all indebtedness secured by any Lien (other than Liens in favor of lessors under leases other than leases included in clause (f)) on any property or asset owned or held by that Person regardless of whether the indebtedness secured thereby shall have been assumed by that Person or is non- recourse to the credit of that Person, and (h) any Contingent Obligation of such Person. "Indemnified Party" has the meaning set forth in Section 7.1 of this ----------------- Agreement. "Indemnifying Party" has the meaning set forth in Section 7.1 of this ------------------ Agreement. "Intellectual Property" has the meaning set forth in Section 3.10 of --------------------- this Agreement. "Interim Financial Statements" has the meaning set forth in Section ---------------------------- 3.8 of this Agreement. "Internet Assets" means any Internet domain names and other computer --------------- user identifiers and any rights in and to sites on the worldwide web, including rights in and to any text, graphics, audio and video files and html or other code incorporated in such sites. "Knowledge" means the knowledge of the Company. --------- 5 "Lien" means any mortgage, deed of trust, pledge, hypothecation, ---- assignment, encumbrance, lien (statutory or other) or preference, priority, right or other security interest or preferential arrangement of any kind or nature whatsoever (excluding preferred stock and equity related preferences). "Losses" has the meaning set forth in Section 7.1 of this Agreement. ------ "Material Adverse Effect" means a material adverse effect on (i) the ----------------------- business, operations, financial condition, assets, prospects or properties of the Company and its subsidiaries taken as a whole, or (ii) the ability of the Company to perform its obligations under the Transaction Documents, or (iii) the validity or enforceability of the Transaction Documents. "Notes" has the meaning set forth in Section 2.3 of this Agreement. ----- "Orders" has the meaning set forth in Section 3.2 of this Agreement. ------ "Patents" means any foreign or United States patents and patent ------- applications, including any divisions, continuations, continuations-in-part, substitutions or reissues thereof, whether or not patents are issued on such applications and whether or not such applications are modified, withdrawn or resubmitted. "Permits" has the meaning set forth in Section 3.5 of this Agreement. ------- "Person" means any individual, firm, corporation, partnership, trust, ------ incorporated or unincorporated association, joint venture, joint stock company, limited liability company, Governmental Authority or other entity of any kind, and shall include any successor (by merger or otherwise) of such entity. "Preferred Stock" has the meaning set forth in the recitals to this --------------- Agreement. "Purchased Shares" has the meaning set forth in Section 2.1 of this ---------------- Agreement. "Purchasers" has the meaning set forth in the preamble to this ---------- Agreement. "QIP" has the meaning set forth in the recitals to this Agreement. --- "Registration Rights Agreement" means the Registration Rights ----------------------------- Agreement substantially in the form attached hereto as Exhibit C. --------- 6 "Requirements of Law" means, as to any Person, any law, statute, ------------------- treaty, rule, regulation, right, privilege, qualification, license or franchise or determination of an arbitrator or a court or other Governmental Authority or stock exchange, in each case applicable or binding upon such Person or any of its property or to which such Person or any of its property is subject or pertaining to any or all of the transactions contemplated or referred to herein. "Securities" means the Purchased Shares, the shares of Common Stock ---------- issuable upon conversion of the Purchased Shares, the Warrants and the Warrant Shares. "Securities Act" means the Securities Act of 1933, as amended, and the -------------- rules and regulations of the Commission thereunder. "Software" means any computer software programs, source code, object -------- code, data and documentation, including, without limitation, any computer software programs that incorporate and run the Company's pricing models, formulae and algorithms. "Stock Equivalents" means any security or obligation which is by its ----------------- terms convertible into or exchangeable for shares of common stock or other capital stock or securities of the Company, and any option, warrant or other subscription or purchase right with respect to common stock or such other capital stock or securities. "Stockholders Agreement" means the Stockholders Agreement ---------------------- substantially in the form attached hereto as Exhibit E. --------- "Trade Secrets" means any trade secrets, research records, processes, ------------- procedures, manufacturing formulae, technical know-how, technology, blue prints, designs, plans, inventions (whether patentable and whether reduced to practice), invention disclosures and improvements thereto. "Trademarks" means any foreign or United States trademarks, service ---------- marks, trade dress, trade names, brand names, designs and logos, corporate names, product or service identifiers, whether registered or unregistered, and all registrations and applications for registration thereof. "Transaction Documents" means, collectively, this Agreement, the --------------------- Warrants, the Stockholders Agreement, the Certificate of Designation and the Registration Rights Agreement. "Warrant" has the meaning set forth in the recitals to this Agreement. ------- 7 "Warrant Shares" has the meaning set forth in Section 2.1 of this -------------- Agreement. ARTICLE II. PURCHASE AND SALE OF PREFERRED STOCK ------------------------------------ A. Purchase and Sale of Preferred Stock and Warrants. Subject to the ------------------------------------------------- terms and conditions herein set forth, the Company agrees to issue and sell to each Purchaser, and each Purchaser agrees to purchase from the Company, for the aggregate purchase price set forth opposite such Purchaser's name on Schedule 2.1 hereto, on the Closing Date (a) the number of shares of Preferred Stock set forth opposite such Purchaser's name on Schedule 2.1 hereto (all of the shares ------------ of Preferred Stock being purchased pursuant hereto being referred to herein as the "Purchased Shares"), and (ii) a Warrant to purchase the aggregate number of ---------------- shares of Common Stock set forth opposite such Purchaser's name on Schedule 2.1 ------------ hereto (all of the shares of Common Stock issuable upon exercise of the Warrants being purchased pursuant hereto being referred to herein as the "Warrant ------- Shares"). - ------ B. Certificate of Designation. The Purchased Shares shall have the -------------------------- preferences and rights set forth in the Certificate of Designation, which shall be filed by the Company prior to the Closing. C. Use of Proceeds. The Company shall use the proceeds from the sale --------------- of the Purchased Shares and the Warrants to the Purchasers for general corporate purposes, including to fund the Company's working capital, make capital expenditures and, to the extent the Subordinated Promissory Notes dated January 19, 2000 and issued by the Company to Quantum Industrial Partners LDC and Greenlake Holdings II LLC, in the principal sum of $10,424,187.73 and $4,575,812.27, respectively (the "Notes") are not exchanged for shares of ----- Preferred Stock pursuant to the terms of the Notes, to redeem the Notes. D. Closing. The closing of the sale and purchase of the Purchased ------- Shares (the "Closing") shall take place at the offices of Paul, Weiss, Rifkind, Wharton & Garrison, at 10:00 a.m., local time, on January 28, 2000 or at such other time, place and date that the Company and the Purchasers may agree in writing (the "Closing Date"). On the Closing Date, the Company shall deliver to ------------ each Purchaser (a) a certificate representing its Purchased Shares and (b) a Warrant to purchase Warrant Shares against delivery by such Purchaser to the Company of the aggregate purchase price therefor by wire transfer of immediately available funds. 8 ARTICLE III. REPRESENTATIONS AND WARRANTIES OF THE COMPANY --------------------------------------------- The Company represents and warrants to each of the Purchasers as follows: A. Corporate Existence and Power. The Company (a) is a corporation ----------------------------- duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation; (b) has all requisite power and authority to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently, or is proposed to be, engaged; and (c) is duly qualified as a foreign corporation, licensed and in good standing under the laws of each jurisdiction in which its ownership, lease or operation of property or the conduct of its business requires such qualification, except where the failure to so qualify would not, individually or in the aggregate, have a Material Adverse Effect. The Company has the corporate power and authority to execute, deliver and perform its obligations under this Agreement and each of the other Transaction Documents. B. Authorization; No Contravention. The execution, delivery and ------------------------------- performance by the Company of this Agreement and each of the other Transaction Documents and the transactions contemplated hereby and thereby, including, without limitation, the sale, issuance and delivery of the Securities, (a) have been duly authorized by all necessary corporate action of the Company; (b) do not contravene the terms of the Certificate of Incorporation or the By-laws; (c) do not violate, conflict with or result in any breach or contravention of, or the creation of any Lien under, any Contractual Obligation of the Company or any Requirement of Law applicable to the Company, except as would not have a Material Adverse Effect; and (d) do not violate any judgment, injunction, writ, award, decree or order of any nature (collectively, "Orders") of any ------ Governmental Authority against, or binding upon, the Company. C. Governmental Authorization; Third Party Consents. Except as set ------------------------------------------------ forth in Schedule 3.3 or with respect to filings that are required or permitted ------------ to be made pursuant to federal or state securities laws, no approval, consent, exemption, authorization or other action by, or notice to, or filing with, any Governmental Authority or any other Person, and no lapse of a waiting period under a Requirement of Law, is necessary or required in connection with the execution, delivery or performance (including, without limitation, the sale, issuance and delivery of the Securities) by, or enforcement against, the Company of this Agreement and the other Transaction Documents or the transactions contemplated hereby and thereby. D. Binding Effect. This Agreement and each of the other -------------- Transaction Documents have been duly executed and delivered by the Company, and 9 constitute the legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general principles of equity relating to enforceability (regardless of whether considered in a proceeding at law or in equity). E. Compliance with Laws. -------------------- (1) The Company is in compliance with all Requirements of Law and all Orders issued by any court or Governmental Authority against the Company in all material respects. (2) (i) The Company has all licenses, permits and approvals of any Governmental Authority (collectively, "Permits") that are necessary for the ------- conduct of the business of the Company; (ii) such Permits are in full force and effect; and (iii) no violations are or have been recorded in respect of any Permit, in each case, except as would not, individually or in the aggregate, have a Material Adverse Effect. F. Capitalization. On the Closing Date, after giving effect to the -------------- transactions contemplated by this Agreement (including the filing of the Charter Amendment), the authorized capital stock of the Company shall consist of (i) 36,000,000 shares of Common Stock, of which 20,439,531 shares are issued and outstanding, (ii) 650,000 shares of Preferred Stock, and (iii) 350,000 shares of undesignated "blank check" preferred stock. The Company has reserved an aggregate of 4,642,857 shares of Common Stock for issuance upon conversion of the Purchased Shares, 5,750,000 shares of Common Stock for issuance upon exercise of the Warrants and an aggregate of 2,100,000 shares of Common Stock for issuance upon the exercise of stock options issued or issuable under the Outboard Marine Corporation Personal Rewards and Opportunities Plan. Except as described in the immediately preceding sentence or as provided in the Transaction Documents, on the Closing Date, there will be no options, warrants, conversion privileges, subscription or purchase rights or other rights outstanding to purchase or otherwise acquire (i) any authorized but unissued, unauthorized or treasury shares of the Company's capital stock, (ii) any Stock Equivalents or (iii) other securities of the Company. The Purchased Shares and the Warrants are duly authorized, and when issued and sold to the Purchasers after payment therefor, will be validly issued, fully paid and non-assessable, and, assuming the accuracy of and compliance with each Purchaser's representations and warranties in Sections 4.5, 4.6, 4.8, 4.9 and 4.10 hereof, will be exempt from the registration requirements of the Securities Act. The shares of Common Stock issuable upon conversion of the Purchased Shares and exercise of the Warrants are duly authorized and, when issued in compliance with the provisions of the Certificate of Designations (in the case of the shares of Common Stock issuable upon conversion of the Purchased 10 Shares) and the Warrants (in the case of the Warrant Shares), will be validly issued, fully paid and non-assessable and not subject to any preemptive rights or similar rights that have not been satisfied. The issued and outstanding shares of Common Stock are all duly authorized, validly issued, fully paid and non-assessable. G. No Default or Breach; Contractual Obligations. The Company has --------------------------------------------- not received notice of a current or pending default and is not in default under, or with respect to, any Contractual Obligation nor, to the Company's knowledge, does any condition exist that with notice or lapse of time or both would constitute a default thereunder, except as would not have a Material Adverse Effect. All of the Contractual Obligations are valid, subsisting, in full force and effect and binding upon the Company and, to the Company's Knowledge, the other parties thereto. To the Knowledge of the Company, no other party to any such Contractual Obligation is in material default thereunder, nor does any condition exist that with notice or lapse of time or both would constitute a material default by such other party thereunder. H. Financial Statements. The consolidated balance sheet of the -------------------- Company and its subsidiaries as of December 31, 1998, and the related consolidated statements of income, stockholders equity and cash flows for the year then ended, including the notes and schedules thereto, certified by Arthur Andersen LLP, independent public accountants, that have been delivered by the Company to the Purchasers fairly present the consolidated financial position of the Company and its subsidiaries as at December 31, 1998 and the consolidated results of operations for the Company and its subsidiaries for the period then ended, in each case in accordance with generally accepted accounting principles consistently applied for the period covered thereby (the foregoing consolidated financial statements at and for the period ending December 31, 1998 are referred to herein as the "Audited Financial Statements"). The unaudited consolidated ---------------------------- balance sheet of the Company and its subsidiaries as of November 30, 1999 and the related unaudited consolidated statements of income, stockholders equity and cash flows for the eleven months then ended, that have been delivered by the Company to the Purchasers fairly present the consolidated financial position of the Company and its subsidiaries as at November 30, 1999 and the consolidated results of operations for the Company and its subsidiaries for the eleven months then ended, in each case in accordance with generally accepted accounting principles applied on a basis consistent with the Audited Financials, except for normal year-end adjustments and the absence of footnotes required by GAAP (the foregoing unaudited consolidated financial statements at November 30, 1999 and for the eleven months then ending are referred to herein as the "Interim ------- Financial Statements"). - -------------------- I. No Material Adverse Change; Ordinary Course of Business. Since ------------------------------------------------------- December 31, 1998, there has been no change in the financial condition, operations, business or properties of the Company or any of its subsidiaries except (x) as disclosed in the Company's reports under the Securities Exchange Act of 1934, 11 as amended, as filed with the Securities and Exchange Commission subsequent to December 31, 1998 and prior to the date hereof, (y) as disclosed in the Interim Financial Statements or (y) changes that individually or in the aggregate would not reasonably be expected to have a Material Adverse Effect. J. Private Offering. No form of general solicitation or general ---------------- advertising was used by the Company or its representatives in connection with the offer or sale of the Purchased Shares or the Warrants. K. Intellectual Property. --------------------- (1) Except as would not, individually or in the aggregate, have a Material Adverse Effect: (i) The Company is the owner of all, or has the license or right to use, sell and license all of, the Copyrights, Patents, Trade Secrets, Trademarks, Internet Assets, Software and other proprietary rights (collectively, "Intellectual Property") that are used in connection with its --------------------- business as presently conducted or contemplated in its business plan, free and clear of all Liens. (ii) None of the Intellectual Property of the Company is subject to any outstanding Order, and no action, suit, proceeding, hearing, investigation, charge, complaint, claim or demand is pending or, to the Knowledge of the Company, threatened, which challenges the validity, enforceability, use or ownership of the item. (iii) To the knowledge of the Company, none of the Intellectual Property currently sold or licensed by the Company to any Person or used by or licensed to the Company by any Person infringes upon or otherwise violates any Intellectual Property rights of others. (iv) No litigation is pending and no Claim has been made against the Company or, to the Knowledge of the Company, is threatened, contesting the right of the Company to sell or license to any Person or use the Intellectual Property presently sold or licensed to such Person or used by the Company. (2) To the Knowledge of the Company, no Person is infringing upon or otherwise violating the Intellectual Property rights of the Company. L. Broker's, Finder's or Similar Fees. There are no brokerage ---------------------------------- commissions, finder's fees or similar fees or commissions payable by the Company in connection with the transactions contemplated hereby based on any agreement, arrangement or understanding with the Company or any action taken by the Company. M. Litigation; Observance of Statutes and Orders. --------------------------------------------- 12 1. There are no actions, suits or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company or any subsidiary or any property of the Company or any subsidiary in any court or before any arbitrator of any kind or before or by any governmental authority that, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect. 2. Neither the Company nor any subsidiary is in default under any order, judgment, decree or ruling of any court, arbitrator or governmental authority or is in violation of any applicable law, ordinance, rule or regulation (including without limitation environmental laws) of any governmental authority, which default or violation, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect. N. Taxes. The Company and its subsidiaries have filed all income ----- tax returns that are required to have been filed in any jurisdiction, and have paid all taxes shown to be due and payable on such returns and all other taxes and assessments payable by them, to the extent such taxes and assessments have become due and payable and before they have become delinquent, except for any taxes and assessments (x) the amount of which, or the failure to file with respect to which, is not individually or in the aggregate material or (y) the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which the Company or a subsidiary, as the case may be, has established adequate reserves in accordance with generally accepted accounting principles. O. Title to Property; Leases. The Company and its subsidiaries ------------------------- have good title to their respective properties, including all such properties reflected in the audited balance sheet as of December 31, 1998 or purported to have been acquired by the Company or any subsidiary after said date (except as sold or otherwise disposed of), in each case free and clear of liens, except for (x) liens securing the Company's obligations under the Company's credit facilities and in respect of the Company's borrowings, and (y) those defects in title and liens that, individually or in the aggregate, would not have a Material Adverse Effect. All material leases are valid and subsisting and are in full force and effect in all material respects except to the extent that the failure to be so would not, individually or in the aggregate, have a Material Adverse Effect. ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS ------------------------------------------------ 13 Each of the Purchasers hereby represents and warrants, severally and not jointly, to the Company as follows: A. Existence and Power. Such Purchaser (a) is duly organized and ------------------- validly existing under the laws of the jurisdiction of its formation and (b) has the requisite power and authority to execute, deliver and perform its obligations under this Agreement and each of the other Transaction Agreements to which it is a party. B. Authorization; No Contravention. The execution, delivery and ------------------------------- performance by such Purchaser of this Agreement and each of the other Transaction Agreements to which it is a party and the transactions contemplated hereby and thereby, (a) have been duly authorized by all necessary action, (b) do not contravene the terms of such Purchaser's organizational documents, or any amendment thereof, and (c) do not violate, conflict with or result in any breach or contravention of, or the creation of any Lien under, any Contractual Obligation of such Purchaser or any Requirement of Law applicable to such Purchaser, and (d) do not violate any Orders of any Governmental Authority against, or binding upon, such Purchaser. C. Governmental Authorization; Third Party Consents. No approval, ------------------------------------------------ consent, compliance, exemption, authorization or other action by, or notice to, or filing with, any Governmental Authority or any other Person, and no lapse of a waiting period under any Requirement of Law, is necessary or required in connection with the execution, delivery or performance (including, without limitation, the purchase of the Purchased Shares and the Warrants) by, or enforcement against, such Purchaser of this Agreement and each of the other Transaction Agreements to which it is a party or the transactions contemplated hereby and thereby. D. Binding Effect. This Agreement and each of the other Transaction -------------- Agreements to which it is a party have been duly executed and delivered by such Purchaser and constitutes the legal, valid and binding obligations of such Purchaser, enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer, moratorium or similar laws affecting the enforcement of creditors' rights generally or by equitable principles relating to enforceability (regardless of whether considered in a proceeding at law or in equity). E. Purchase for Own Account. The Purchased Shares and the Warrants ------------------------ to be acquired by such Purchaser pursuant to this Agreement and any shares of Common Stock received upon conversion or exercise of the Purchased Shares or the Warrants or as a result of the ownership thereof are being or will be acquired for investment for its own account and with no intention of distributing, transferring, assigning or reselling or otherwise disposing such Purchased Shares or Warrants or Common Stock or any part thereof in any transaction that would be in violation of the 14 securities laws of the United States of America, or any state, without prejudice, however, to the rights of such Purchaser at all times to sell or otherwise dispose of all or any part of such Purchased Shares or Warrants under an effective registration statement under the Securities Act, or under an exemption from such registration available under the Securities Act, and subject, nevertheless, to the disposition of such Purchaser's property being at all times within its control. If such Purchaser should in the future decide to dispose of any of the Securities, such Purchaser understands and agrees that it may do so only once it reasonably satisfies the Company that such transfer is in compliance with the Securities Act and applicable state securities laws, as then in effect. Such Purchaser agrees to the imprinting, so long as required by law, of a legend on certificates representing all of the Securities to the following effect: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE OR RECEIVABLE UPON THE EXERCISE OR CONVERSION THEREOF OR AS A RESULT OF THE OWNERSHIP HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE. THE SECURITIES MAY NOT BE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS." "THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A STOCKHOLDERS AGREEMENT AMONG THE COMPANY AND THE ORIGINAL PURCHASERS OF THE SECURITIES REPRESENTED HEREBY. TRANSFEREES OF SUCH SECURITIES SHOULD REVIEW SUCH AGREEMENT TO DETERMINE THEIR RIGHTS AND OBLIGATIONS." F. Restricted Securities. Such Purchaser understands that the --------------------- Securities are "restricted securities" under the Securities Act and will not be registered at the time of their issuance under the Securities Act for the reason that the sale provided for in this Agreement is exempt pursuant to Section 4(2) of the Securities Act and that the reliance of the Company on such exemption is predicated in part on such Purchaser's representations set forth herein, and that such Securities may be resold without registration under the Securities Act only in certain limited circumstances defined therein. Such Purchaser represents that it is reasonably familiar with such resale restrictions in the Securities Act, Rule 144 promulgated thereunder, and the other applicable federal and state rules and regulations. 15 G. Broker's, Finder's or Similar Fees. There are no brokerage ---------------------------------- commissions, finder's fees or similar fees or commissions payable by such Purchaser in connection with the transactions contemplated hereby based on any agreement, arrangement or understanding with such Purchaser or any action taken by such Purchaser. H. Accredited Investor. Such Purchaser is an "Accredited Investor" ------------------- within the meaning of Rule 501 of Regulation D under the Securities Act, as presently in effect. I. Disclosure of Information. Such Purchaser has carefully reviewed ------------------------- the representations and warranties concerning the Company contained in this Agreement and has had adequate opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Securities and the business, assets, prospects and financial condition of the Company. J. Investment Experience. Such Purchaser is, or has been, an --------------------- investor in securities of companies similar to the Company and has or is represented by one who has such knowledge and experience in financial or business matters that it is capable of evaluation of the merits and risks of an investment in the Securities. ARTICLE V. CONDITIONS TO THE OBLIGATION OF THE PURCHASERS TO CLOSE -------------------------- The obligation of the Purchasers to purchase the Purchased Shares and the Warrants, to pay the purchase price therefor at the Closing and to perform any obligations hereunder shall be subject to the satisfaction as determined by, or waiver by, the Purchasers of the following conditions on or before the Closing Date. A. Representations and Warranties. The representations and ------------------------------ warranties of the Company contained in Article III hereof shall be true and correct in all material respects at and on the Closing Date as if made at and on such date, except to the extent that any representation and warranty expressly speaks as of an earlier date, in which case such representation and warranty is true and correct as of such date and except for any activities or transactions which may have taken place after the date hereof which are contemplated by this Agreement. B. Secretary's Certificate. The Purchasers shall have received a ----------------------- certificate from the Company, in form and substance satisfactory to the Purchasers, dated the Closing Date and signed by the Secretary or an Assistant Secretary of the Company, certifying (a) that the attached copies of the Certificate of Incorporation 16 (including the Charter Amendment and the Certificate of Designation), the By- laws, and resolutions of the Board of Directors of the Company approving this Agreement and each of the other Transaction Documents and the transactions contemplated hereby and thereby, are all true, complete and correct and remain unamended and in full force and effect and (b) as to the incumbency and specimen signature of each officer of the Company executing this Agreement, each other Transaction Document and any other document delivered in connection herewith on behalf of the Company. C. Filing of Charter Amendment and Certificate of Designation. ---------------------------------------------------------- Each of the Charter Amendment and the Certificate of Designation shall have been duly filed by the Company with the Secretary of State of the State of Delaware in accordance with the General Corporation Law of the State of Delaware, and the Purchasers shall have received evidence of each such filing in form and substance reasonably satisfactory to the Purchasers. D. Purchased Shares. The Company shall have delivered to each of ---------------- the Purchasers certificates in definitive form representing the number of Purchased Shares set forth opposite such Purchaser's name on Schedule 2.1 ------------ hereto, registered in the name of such Purchaser. E. Warrants. The Company shall have duly executed and delivered to -------- each of the Purchasers a Warrant to purchase that number of shares of Common Stock set forth opposite such Purchaser's name on Schedule 2.1 hereto in ------------ substantially the form attached hereto as Exhibit A. --------- F. Registration Rights Agreement. The Company shall have duly ----------------------------- executed and delivered the Registration Rights Agreement. G. Stockholders Agreement. The Company shall have duly executed ---------------------- and delivered the Stockholders Agreement. H. Opinion of Counsel. The Purchasers shall have received an ------------------ opinion of Senior Counsel for the Company, dated the Closing Date, relating to the transactions contemplated by or referred to herein, substantially in the form attached hereto as Exhibit D. --------- ARTICLE VI. CONDITIONS TO THE OBLIGATION OF THE COMPANY TO CLOSE ----------------------- 17 The obligation of the Company to issue and sell the Purchased Shares and the Warrants and the obligation of the Company to perform its other obligations hereunder shall be subject to the satisfaction as determined by, or waiver by, the Company of the following conditions on or before the Closing Date: A. Representations and Warranties. The representations and ------------------------------ warranties of the Purchasers contained in Article IV hereof shall be true and correct on at and on the Closing Date as if made at and on such date, except to the extent that any representation and warranty expressly speaks as of an earlier date, in which case such representation and warranty is true and correct as of such date and except for any activities or transactions which may have taken place after the date hereof which are contemplated by this Agreement. B. Payment of Purchase Price. Each Purchaser shall have paid the ------------------------- aggregate purchase price for the Purchased Shares and the Warrant to be purchased by such Purchaser. C. Registration Rights Agreement. Each Purchaser shall have duly ----------------------------- executed and delivered the Registration Rights Agreement. D. Stockholders Agreement. Each Purchaser have duly executed and ---------------------- delivered the Stockholders Agreement. ARTICLE VII. INDEMNIFICATION --------------- A. Indemnification. Except as otherwise provided in this Article --------------- VII, the Company (the "Indemnifying Party") agrees to indemnify, defend and hold ------------------ harmless each of the Purchasers and its Affiliates and their respective officers, directors, agents, employees, subsidiaries, partners, members and controlling persons (each, an "Indemnified Party") to the fullest extent ----------------- permitted by law from and against any and all losses, actions, suits, proceedings, claims, complaints, disputes, arbitrations or investigations (collectively, "Claims" or written threats thereof (including, without ------ limitation, any Claim by a third party), damages, expenses (including reasonable fees, disbursements and other charges of counsel incurred by the Indemnified Party in any action between the Indemnifying Party and the Indemnified Party or between the Indemnified Party and any third party) or other liabilities (collectively, "Losses") resulting from or arising out of any breach of any ------ representation or warranty, covenant or agreement by the Company in this Agreement or the other Transaction Documents; provided, however, that the -------- ------- Indemnifying Party shall not be liable under this Article VII to an Indemnified Party to the extent that it is finally judicially determined 18 that such Losses resulted or arose from the breach by such Indemnified Party of any representation, warranty, covenant or other agreement of such Indemnified Party contained in this Agreement or the other Transaction Documents or the willful misconduct or gross negligence of such Indemnified Party; and provided -------- further, that if and to the extent that such indemnification is unenforceable - ------- for any reason, the Indemnifying Party shall make the maximum contribution to the payment and satisfaction of such Losses which shall be permissible under applicable laws. The amount of any payment to any Indemnified Party herewith in respect of any Loss shall be of sufficient amount to make such Indemnified Party whole. In connection with the obligation of the Indemnifying Party to indemnify for expenses as set forth above, the Indemnifying Party shall, upon presentation of appropriate invoices containing reasonable detail, reimburse each Indemnified Party for all such expenses (including reasonable fees, disbursements and other charges of counsel incurred by the Indemnified Party in any action between the Indemnifying Party and the Indemnified Party or between the Indemnified Party and any third party) as they are incurred by such Indemnified Party; provided, -------- however, that if an Indemnified Party is reimbursed under this Article VII for - ------- any expenses, such reimbursement of expenses shall be refunded to the extent it is finally judicially determined that the Losses in question resulted primarily from the willful misconduct or gross negligence of such Indemnified Party. B0 Notification. Each Indemnified Party under this Article VII ------------ shall, promptly after the receipt of notice of the commencement of any Claim against such Indemnified Party in respect of which indemnity may be sought from the Indemnifying Party under this Article VII, notify the Indemnifying Party in writing of the commencement thereof. The omission of any Indemnified Party to so notify the Indemnifying Party of any such action shall not relieve the Indemnifying Party from any liability which it may have to such Indemnified Party (a) other than pursuant to this Article VII or (b) under this Article VII unless, and only to the extent that, such omission results in the Indemnifying Party's forfeiture of substantive rights or defenses. In case any such Claim shall be brought against any Indemnified Party, and it shall notify the Indemnifying Party of the commencement thereof, the Indemnifying Party shall be entitled to assume the defense thereof at its own expense, with counsel satisfactory to such Indemnified Party in its reasonable judgment; provided, -------- however, that any Indemnified Party may, at its own expense, retain separate - ------- counsel to participate in such defense at its own expense. Notwithstanding the foregoing, in any Claim in which both the Indemnifying Party, on the one hand, and an Indemnified Party, on the other hand, are, or are reasonably likely to become, a party, such Indemnified Party shall have the right to employ separate counsel and to control its own defense of such Claim if, in the reasonable opinion of counsel to such Indemnified Party, a conflict or potential conflict exists between the Indemnifying Party, on the one hand, and such Indemnified Party, on the other hand, that would make such separate representation advisable; provided, however, that the Indemnifying Party (i) shall not be -------- ------- liable for the fees and expenses of more than one counsel to all Indemnified Parties and (ii) shall 19 reimburse the Indemnified Parties for all of such fees and expenses of such counsel incurred in any action between the Indemnifying Party and the Indemnified Parties or between the Indemnified Parties and any third party, as such expenses are incurred. The Indemnifying Party agrees that it will not, without the prior written consent of the Purchasers, settle, compromise or consent to the entry of any judgment in any pending or threatened Claim relating to the matters contemplated hereby (if any Indemnified Party is a party thereto or has been actually threatened to be made a party thereto) unless such settlement, compromise or consent includes an unconditional release of each Indemnified Party from all liability arising or that may arise out of such Claim. The Indemnifying Party shall not be liable for any settlement of any Claim effected against an Indemnified Party without its written consent, which consent shall not be unreasonably withheld. The rights accorded to an Indemnified Party hereunder shall be in addition to any rights that any Indemnified Party may have at common law, by separate agreement or otherwise; provided, however, that notwithstanding the foregoing or anything to the - -------- ------- contrary contained in this Agreement, nothing in this Article VII shall restrict or limit any rights that any Indemnified Party may have to seek equitable relief. C0 Limitation on Indemnification. Anything in this Agreement to ----------------------------- the contrary notwithstanding, no payment shall be made to an Indemnified Party pursuant to Section 7.1 of this Agreement until the amounts which the Purchasers would otherwise be entitled to receive as indemnification under this Agreement aggregate at least $500,000, at which time the Purchaser shall be entitled to receive any such payments and any subsequent payments in full. Anything in this Agreement to the contrary notwithstanding, the liability of the Company under this Article shall in no event exceed the total purchase price paid for the Purchased Shares and the Warrants received by the Company pursuant to this Agreement. ARTICLE VIII. AFFIRMATIVE COVENANTS --------------------- The Company hereby covenants and agrees with each Purchaser that so long as such Purchaser holds any Purchased Shares or Warrant: A0 Financial Statements and Other Information. The Company shall ------------------------------------------ deliver to such Purchaser, in form and substance reasonably satisfactory to such Purchaser: 1 as soon as available, but not later than ninety (90) days after the end of each fiscal year of the Company, a copy of the audited balance sheet of the Company as of the end of such fiscal year and the related statements of operations and 20 cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous year, all in reasonable detail and accompanied by a management summary and analysis of the operations of the Company for such fiscal year and by the opinion of a nationally recognized independent certified public accounting firm which report shall state without qualification that such financial statements present fairly the financial condition as of such date and results of operations and cash flows for the periods indicated in conformity with GAAP applied on a consistent basis; 2 commencing with the quarterly fiscal period ending on March 31, 2000, as soon as available, but in any event not later than forty-five (45) days after the end of each of the first three fiscal quarters of each fiscal year, the unaudited balance sheet of the Company, and the related statements of operations and cash flows for such quarter and for the period commencing on the first day of the fiscal year and ending on the last day of such quarter, all certified by an appropriate officer of the Company as presenting fairly the financial condition as of such date and results of operations and cash flows for the periods indicated in conformity with GAAP applied on a consistent basis, subject to normal year-end adjustments and the absence of footnotes required by GAAP; and 3 commencing with the month ending on January 31, 2000, as soon as available, but in any event not later than thirty (30) days after the end of the first eleven months of each fiscal year, the unaudited balance sheet of the Company, and the related statements of operations and cash flows for such month and for the period commencing on the first day of the fiscal year and ending on the last day of such month, all certified by an appropriate officer of the Company as presenting fairly the financial condition as of such date and results of operations and cash flows for the periods indicated in conformity with GAAP applied on a consistent basis, subject to normal year-end adjustments and the absence of footnotes required by GAAP. B0 Reservation of Common Stock. The Company shall at all times --------------------------- reserve and keep available out of its authorized shares of Common Stock, solely for the purpose of issue or delivery upon conversion of the Purchased Shares, as provided in the Certificate of Designations, and the exercise of the Warrants the maximum number of shares of Common Stock that may be issuable or deliverable upon such conversion. Such shares of Common Stock are duly authorized and, when issued or delivered in accordance with the Certificate of Designations, shall be validly issued, fully paid and non-assessable. The Company shall issue such shares of Common Stock, in accordance with the terms of the Certificate of Designations, and otherwise comply with the terms hereof and thereof. C0 Books and Records. The Company shall keep proper books of record ----------------- and account, in which full and correct entries shall be made of all financial 21 transactions and the assets and business of the Company in accordance with GAAP consistently applied. D0 Inspection. The Company shall permit representatives of the ---------- Purchasers to visit and inspect any of its properties, to examine its corporate, financial and operating records and make copies thereof or abstracts therefrom, to discuss its affairs, finances and accounts with their respective directors, officers and independent public accountants, and shall provide the Purchasers and their representatives with reasonable access to its officers and employees, all at such reasonable times during normal business hours and as often as may be reasonably requested upon reasonable advance notice to the Company. ARTICLE IX. MISCELLANEOUS ------------- A0 Survival of Representations and Warranties. All of the ------------------------------------------ representations and warranties made herein shall survive the execution and delivery of this Agreement until the first anniversary of the Closing Date. B0 Notices. All notices, demands and other communications provided ------- for or permitted hereunder shall be made in writing and shall be by registered or certified first-class mail, return receipt requested, telecopier, courier service or personal delivery: if to the Company: Outboard Marine Corporation 100 Sea Horse Drive Waukegan, IL 60085 Telecopy: (847) 689-6200 Attention: General Counsel with a copy to: Davis Polk & Wardwell 450 Lexington Avenue New York, NY 10017 Telecopy: (212) 450-4800 Attention: Julia K. Cowles, Esq. (i) if to Quantum Industrial Partners LDC.: 22 Kaya Flamboyan 9, Villemstad Curacao Netherlands-Antilles with a copy to: Soros Fund Management LLC 888 Seventh Avenue New York, NY 10016 Telecopy: (212) 664-0544 Attention: Michael Neus, Esq. and a copy to: Paul, Weiss, Rifkind, Wharton & Garrison 1285 Avenue of the Americas New York, New York 10019-6064 Telecopy:(212) 757-3990 Attention: Richard S. Borisoff, Esq. (ii) If to Greenlake: Greenlake Holdings II LLC c/o Greenway Partners, L.P. 277 Park Avenue New York, NY 10016 Telecopy: (212) 350-5253 Attention: Gary Duberstein with a copy to: Weil, Gotshal & Manges 767 Fifth Avenue New York, New York 10153 Telecopy: (212) 310-8007 Attention: David Blittner, Esq. All such notices, demands and other communications shall be deemed to have been duly given when delivered by hand, if personally delivered; when delivered by courier, if delivered by commercial courier service; five (5) Business Days after being deposited in the mail, postage prepaid, if mailed; and when receipt is mechanically acknowledged, if telecopied. 23 C0 Successors and Assigns; Third Party Beneficiaries. This ------------------------------------------------- Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of the parties hereto. Subject to applicable securities laws and the terms and conditions thereof, the Purchasers may assign any of their rights under this Agreement or the other Transaction Documents to any of their respective Affiliates. The Company may not assign any of its rights under this Agreement without the written consent of the Purchasers. Except as provided in Article VII, no Person other than the parties hereto and their successors and permitted assigns is intended to be a beneficiary of this Agreement. D0 Amendment and Waiver. -------------------- 1 No failure or delay on the part of the Company or the Purchasers in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies provided for herein are cumulative and are not exclusive of any remedies that may be available to the Company or the Purchasers at law, in equity or otherwise. 2 Any amendment, supplement or modification of or to any provision of this Agreement, any waiver of any provision of this Agreement, and any consent to any departure by the Company or the Purchasers from the terms of any provision of this Agreement, shall be effective (i) only if it is made or given in writing and signed by the Company and the Purchasers purchasing 75% of the Purchased Shares, and (ii) only in the specific instance and for the specific purpose for which made or given. Except where notice is specifically required by this Agreement, no notice to or demand on the Company in any case shall entitle the Company to any other or further notice or demand in similar or other circumstances. E0 Counterparts. This Agreement may be executed in any number of ------------ counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. F0 Headings. The headings in this Agreement are for convenience of -------- reference only and shall not limit or otherwise affect the meaning hereof. G0 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED ------------- IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW THEREOF. 24 H0 Severability. If any one or more of the provisions contained ------------ herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, unless the provisions held invalid, illegal or unenforceable shall substantially impair the benefits of the remaining provisions hereof. I0 Rules of Construction. Unless the context otherwise requires, --------------------- "or" is not exclusive and references to sections or subsections refer to sections or subsections of this Agreement. J0 Right to Conduct Activities. The Company and each Purchaser --------------------------- hereby acknowledges that some or all of the Purchasers are professional investment funds, and as such, invest in numerous portfolio companies, some of which may be competitive with the Company's business. No Purchaser shall be liable to the Company or to any other Purchaser for any claim arising out of, or based upon, the investment activities of such Purchaser, including without limitation, any claim arising out of, or based upon, (i) the investment by Purchaser in an entity competitive to the Company, or (ii) actions taken by any partner, officer or other representative of any Purchaser to assist any such competitive company, or otherwise, and whether or not such action has a detrimental effect of the Company. K0 Entire Agreement. This Agreement, together with the exhibits ---------------- and schedules hereto, and the other Transaction Documents are intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. There are no restrictions, promises, representations, warranties or undertakings, other than those set forth or referred to herein or therein. This Agreement, together with the exhibits and schedules hereto, and the other Transaction Documents supersede all prior agreements and understandings between the parties with respect to such subject matter. L0 Fees. Upon the Closing, the Company shall reimburse each of the ---- Purchasers for all expenses incurred by each such Purchaser in the course of conducting such Purchaser's due diligence investigation of the Company (including any fees and expenses of outside consultants to such Purchaser) and for the fees, disbursements and other charges of counsel incurred in connection with the transactions contemplated by this Agreement. M0 Publicity. --------- 25 (a) Except as may be required by applicable Requirements of Law, none of the parties hereto shall issue a publicity release or public announcement or otherwise make any disclosure concerning this Agreement and the transactions contemplated hereby without prior approval by the other parties hereto. If any announcement is required by law or the rules of any securities exchange or market on which shares of Common Stock are traded to be made by any party hereto, prior to making such announcement such party will deliver a draft of such announcement to the other parties and shall give the other parties reasonable opportunity to comment thereon. (b) For so long as QIP or any of its Affiliates owns any shares of Preferred Stock or Common Stock into which it is converted, QIP shall have the opportunity to review and modify any provision of any public release, public announcement or government filing which is to be released to the public, which provision mentions QIP or any of its Affiliates, prior to the release of such document to the public, it being understood and agreed that Soros Private Equity Partners LLC will be identified as making investments on behalf of QIP. N0 Further Assurances. Each of the parties shall execute such ------------------ documents and use reasonable efforts to perform such further acts (including, without limitation, obtaining any consents, exemptions, authorizations or other actions by, or giving any notices to, or making any filings with, any Governmental Authority or any other Person) as may be reasonably required or desirable to carry out or to perform the provisions of this Agreement. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the undersigned have executed, or have caused to be executed, this Series A Convertible Preferred Stock and Warrant Purchase Agreement on the date first written above. OUTBOARD MARINE CORPORATION By: /S/ Eric T. Martinez ------------------------------- Name: Eric T. Martinez Title: Vice President and Treasurer QUANTUM INDUSTRIAL PARTNERS LDC By: /S/ Michael C. Neus ------------------------------- Name: Michael C. Neus Title: Attorney-In-Fact GREENLAKE HOLDINGS II LLC By: /S/ Gary K. Duberstein --------------------- Name: Gary K. Duberstein Title: Vice President Exhibit A --------- PURCHASE AGREEMENT ------------------ Date:____________________ TO: The undersigned, pursuant to the provisions set forth in the attached Warrant, hereby agrees to purchase_______ shares of Common Stock covered by such Warrant, makes payment herewith in full therefor at the price per share provided by this Warrant. Signature:__________________________ Address: __________________________ __________________________ __________________________ * * * ASSIGNMENT ---------- For Value Received, _______________________________________________ hereby sells, assigns and transfers all of the rights of the undersigned under the within Warrant, with respect to the number of shares of Common Stock covered by such Warrant, to: NAME OF ASSIGNEE ADDRESS NO. OF SHARES - ---------------- ------- ------------- Dated:___________________ Signature:_________________________ ___ ___ Witness:___________________________ 1 EX-4.10 5 STOCKHOLDER AGREEMENT =============================================================================== STOCKHOLDERS AGREEMENT among OUTBOARD MARINE CORPORATION QUANTUM INDUSTRIAL PARTNERS LDC and GREENLAKE HOLDINGS II LLC Dated: January 28, 2000 Table of Contents ----------------- 1. Definitions........................................................................ 1 2. Restrictions on Transfer of Shares................................................. 5 2.1 Limitation on Transfer........................................................ 5 2.2 Permitted Transfers........................................................... 5 2.3 Permitted Transfer Procedures................................................. 6 2.4 Transfers in Compliance with Law; Substitution of Transferee.................. 6 3. Right of First Offer and Tag-Along Rights.......................................... 6 3.1 Proposed Voluntary Transfers.................................................. 6 3.2 Involuntary Transfers......................................................... 10 4. Future Issuance of Shares; Preemptive Rights....................................... 12 4.1 Offering Notice............................................................... 12 4.2 Preemptive Rights; Exercise................................................... 13 4.3 Closing....................................................................... 13 4.4 Sale to Subject Purchaser..................................................... 14 5. After-Acquired Securities; Agreement to be Bound................................... 14 5.1 After-Acquired Securities..................................................... 14 5.2 Agreement to be Bound......................................................... 14 6. Miscellaneous...................................................................... 15 6.1 Notices...................................................................... 15 6.2 Successors and Assigns....................................................... 17 6.3 Amendment and Waiver......................................................... 17 6.4 Board Representation......................................................... 17 6.5 Counterparts................................................................. 17 6.6 Specific Performance......................................................... 17 6.7 Headings..................................................................... 18 6.8 GOVERNING LAW................................................................ 18 6.9 Severability................................................................. 18 6.10 Entire Agreement............................................................. 18 6.11 Term of Agreement............................................................ 18 6.12 Further Assurances........................................................... 18
EXHIBITS A-1 Form of Transfer Agreement (Previously issued shares) A-2 Form of Transfer Agreement (Newly issued shares) EXHIBIT 4.10 STOCKHOLDERS AGREEMENT STOCKHOLDERS AGREEMENT (this "Agreement") dated January 28, 2000, --------- among Outboard Marine Corporation, a Delaware corporation (the "Company"), ------- Quantum Industrial Partners LDC, a Cayman Islands limited duration company ("QIP"), and Greenlake Holdings II LLC, a Delaware limited liability company --- ("Greenlake"). --------- WHEREAS, pursuant to the Series A Convertible Preferred Stock and Warrant Purchase Agreement, dated the date hereof (the "Stock Purchase -------------- Agreement"), among the Company, QIP and Greenlake, the Company has agreed to issue and sell to QIP and Greenlake (a) an aggregate of 650,000 shares of the Company's Series A Convertible Preferred Stock, par value $.01 per share (the "Preferred Stock"), and (b) warrants (the "Warrants") to purchase, subject to - ---------------- -------- the terms and conditions thereof, 5,750,000 shares of Common Stock; and WHEREAS, the parties hereto wish to restrict the transfer of the Shares (as hereinafter defined) and the Warrants and to provide for, among other things, first offer, tag-along and preemptive rights and certain other rights under certain conditions. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions. As used in this Agreement, the following terms ----------- shall have the meanings set forth below: "Affiliate" shall mean any Person who is an "affiliate" (as --------- defined in Rule 12b-2 of the General Rules and Regulations under the Exchange Act) of, and any Person controlling, controlled by or under common control with, any Stockholder. For the purposes of this Agreement, "control" includes the ability to have investment discretion through contractual means or by operation of law. "Agreement" means this Agreement as the same may be amended, --------- supplemented or modified in accordance with the terms hereof. "Board of Directors" means the Board of Directors of the Company. ------------------ "Business Day" means any day other than a Saturday, Sunday or ------------ other day on which commercial banks in the State of New York are authorized or required by law or executive order to close. 2 "Code" means the Internal Revenue Code of 1986, as amended, or ---- any successor statute thereto. "Commission" means the Securities and Exchange Commission or any ---------- similar agency then having jurisdiction to enforce the Securities Act. "Common Stock" means the Common Stock, par value $.01 per share, ------------ of the Company or any other capital stock of the Company into which such stock is reclassified or reconstituted and any other common stock of the Company. "Common Stock Equivalents" means any security or obligation which ------------------------ is by its terms convertible into or exercisable for shares of Common Stock, including, without limitation, the Preferred Stock, and any option, warrant or other subscription or purchase right with respect to Common Stock. "Company" has the meaning set forth in the recitals to this ------- Agreement. "Company Option" has the meaning set forth in Section 3.1(b) of -------------- this Agreement. "Company Option Period" has the meaning set forth in Section --------------------- 3.1(b) of this Agreement. "Contract Date" has the meaning set forth in Section 3.1(e) of ------------- this Agreement. "Excess New Securities" has the meaning set forth in Section --------------------- 4.2(a) of this Agreement. "Excess Offered Securities" has the meaning set forth in Section ------------------------- 3.1(c) of this Agreement. "Exchange Act" means the Securities Exchange Act of 1934, as ------------ amended, and the rules and regulations of the Commission thereunder. "Fair Value" has the meaning set forth in Section 3.2(b) of this ---------- Agreement. "Governmental Authority" means the government of any nation, ---------------------- state, city, locality or other political subdivision thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to 3 government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "Initial Public Offering" means the initial public offering of the ----------------------- shares of Common Stock of the Company pursuant to an effective registration statement filed under the Securities Act. "Involuntary Transfer" means any transfer, proceeding or action -------------------- by or in which a Stockholder shall be deprived or divested of any right, title or interest in or to any of the Shares, including, without limitation, (i) any seizure under levy of attachment or execution, (ii) any transfer in connection with bankruptcy (whether pursuant to the filing of a voluntary or an involuntary petition under the United States Bankruptcy Code of 1978, or any modifications or revisions thereto) or other court proceeding to a debtor in possession, trustee in bankruptcy or receiver or other officer or agency, (iii) any transfer to a state or to a public officer or agency pursuant to any statute pertaining to escheat or abandoned property and (iv) any transfer pursuant to a divorce or separation agreement or a final decree of a court in a divorce action. "Involuntary Transferee" has the meaning set forth in Section ---------------------- 3.2(a) of this Agreement. "IPO Effectiveness Date" means the date upon which the Company ---------------------- closes its Initial Public Offering. "Liens" means any mortgage, deed of trust, pledge, hypothecation, ----- assignment, encumbrance, lien (statutory or other) or preference, priority, right or other security interest or preferential arrangement of any kind or nature whatsoever (excluding preferred stock and equity related preferences). "New Issuance Notice" has the meaning set forth in Section 4.1 of ------------------- this Agreement. "New Securities" has the meaning set forth in Section 4.1 of this -------------- Agreement. "Offer Price" has the meaning set forth in Section 3.1(a) of this ----------- Agreement. "Offered Securities" has the meaning set forth in Section 3.1(a) ------------------ of this Agreement. "Offering Notice" has the meaning set forth in Section 3.1(a) of --------------- this Agreement. 4 "Other Stockholder" means (a) any transferee of a Stockholder ----------------- (other than a Permitted Transferee thereof), who has agreed to be bound by the terms and conditions of this Agreement in accordance with Section 2.4 or to whom Shares have been transferred in accordance with Section 3.1(e) and (b) any Person other than a Stockholder who has agreed to be bound by the terms and conditions of this Agreement in accordance with Section 5.2(a). "Permitted Transferee" has the meaning set forth in Section 2.2 -------------------- of this Agreement. "Person" means any individual, firm, corporation, partnership, ------ trust, incorporated or unincorporated association, joint venture, joint stock company, limited liability company, Governmental Authority or other entity of any kind, and shall include any successor (by merger or otherwise) of such entity. "Preemptive Rightholder(s)" has the meaning set forth in Section ------------------------- 4.1 of this Agreement. "Preferred Stock" has the meaning set forth in the recitals to --------------- this Agreement. "Proportionate Percentage" has the meaning set forth in Section ------------------------ 4.2(a) of this Agreement. "Proposed Price" has the meaning set forth in Section 4.1 of this -------------- Agreement. "Rightholder(s)" has the respective meanings set forth in -------------- Sections 3.1(c) and 3.2(a) of this Agreement. "Rightholder Option Period" has the meaning set forth in Section ------------------------- 3.1(c) of this Agreement. "Securities Act" means the Securities Act of 1933, as amended, -------------- and the rules and regulations of the Commission promulgated thereunder. "Selling Stockholder" has the meaning set forth in Section 3.1(a) ------------------- of this Agreement. "Shares" means, with respect to each Stockholder, all shares, ------ whether now owned or hereafter acquired, of Common Stock and Preferred Stock, owned thereby; provided, however, for the purposes of any computation of the -------- ------- number 5 of Shares pursuant to Sections 2, 3, 4.1, 4.2 and 6.3, all outstanding Common Stock Equivalents shall be deemed converted, exercised or exchanged as applicable and the shares of Common Stock issuable upon such conversion, exercise or exchange shall be deemed outstanding, whether or not such conversion, exercise or exchange has actually been effected. "Stock Purchase Agreement" has the meaning set forth in the ------------------------ recitals to this Agreement. "Stockholders" means (a) QIP and Greenlake and any transferee ------------ thereof who has agreed to be bound by the terms and conditions of this Agreement in accordance with Section 2.4 and (b) any Person who has agreed to be bound by the terms and conditions of this Agreement in accordance with Section 5.2(a), and the term "Stockholder" shall mean any such Person. ----------- "Subject Purchaser" has the meaning set forth in Section 4.1 of ----------------- this Agreement. "Tag-Along Rightholder" has the meaning set forth in Section --------------------- 3.1(f)(i) of this Agreement. "Third Party Purchaser" has the meaning set forth in Section --------------------- 3.1(a) of this Agreement. "transfer" has the meaning set forth in Section 2.1 of this -------- Agreement. "Transferred Shares" has the meaning set forth in Section 3.2(a) ------------------ of this Agreement. "Warrants" has the meaning set forth in the recitals to this -------- Agreement. 2. Restrictions on Transfer of Shares. ---------------------------------- 2.1 Limitation on Transfer. No Stockholder shall sell, give, ---------------------- assign, hypothecate, pledge, encumber, grant a security interest in or otherwise dispose of (whether by operation of law or otherwise) (each a "transfer") any -------- Shares or any right, title or interest therein or thereto (including any Common Stock Equivalents), except in accordance with the provisions of this Agreement, including, without limitation, Section 2.4. Any attempt to transfer any Shares or any rights thereunder or therein in violation of the preceding sentence shall be null and void ab initio. 6 2.2 Permitted Transfers. Notwithstanding anything to the ------------------- contained in this Agreement, but subject to Sections 2.1, 2.3 and 2.4, at any time, each of the Stockholders may transfer all or a portion of its Shares to any of its Affiliates (each, a "Permitted Transferee"). A Permitted Transferee -------------------- of Shares pursuant to this Section 2.2 may transfer its Shares pursuant to this Section 2.2 only to the transferor Stockholder or to a Person that is a Permitted Transferee of such transferor Stockholder. 2.3 Permitted Transfer Procedures. If any Stockholder wishes to ----------------------------- transfer Shares to a Permitted Transferee under Section 2.2, such Stockholder shall give notice to the Company of its intention to make any transfer permitted under Section 2.2 not less than ten (10) days prior to effecting such transfer, which notice shall state the name and address of each Permitted Transferee to whom such transfer is proposed, the relationship of such Permitted Transferee to such Stockholder, and the number of Shares proposed to be transferred to such Permitted Transferee. 2.4 Transfers in Compliance with Law; Substitution of ------------------------------------------------- Transferee. Notwithstanding any other provision of this Agreement, no transfer - ---------- may be made pursuant to this Section 2 or Section 3 unless (a) the transferee has agreed in writing to be bound by the terms and conditions of this Agreement pursuant to an instrument substantially in the form attached hereto as Exhibit ------- C-1, (b) the transfer complies in all respects with the applicable provisions of - --- this Agreement and (c) the transfer complies in all respects with applicable federal and state securities laws, including, without limitation, the Securities Act. If requested by the Company, an opinion of counsel to such transferring Stockholder shall be supplied to the Company at such transferring Stockholder's expense, to the effect that such transfer complies with the applicable federal and state securities laws. Upon becoming a party to this Agreement, (i) the Permitted Transferee of a Stockholder shall be substituted for, and shall enjoy the same rights and be subject to the same obligations as, a Stockholder hereunder with respect to the Shares transferred to such Permitted Transferee, (ii) an Other Stockholder shall be subject to the same obligations as, but none of the rights of, the transferring Stockholder and (iii) the transferee of an Other Stockholder shall be substituted for, and shall be subject to the same obligations as, the transferring Other Stockholder hereunder with respect to the Shares transferred to such transferee. 3. Right of First Offer and Tag-Along Rights. ----------------------------------------- 3.1 Proposed Voluntary Transfers. ---------------------------- (a) Offering Notice. Subject to Section 2, if any --------------- Stockholder (a "Selling Stockholder") wishes to transfer all or any portion of ------------------- its or his Shares to any Person (other than to a Permitted Transferee) (a "Third ----- Party Purchaser"), such Selling Stockholder shall offer such Shares first to the - --------------- Company, by 7 sending written notice (an "Offering Notice") to the Company, which shall state --------------- (a) the number of Shares proposed to be transferred (the "Offered Securities"); ------------------ (b) the proposed purchase price per Share for the Offered Securities (the "Offer ----- Price"); and (c) the terms and conditions of such sale. Upon delivery of the - ----- Offering Notice, such offer shall be irrevocable unless and until the rights of first offer provided for herein shall have been waived or shall have expired. The Company shall promptly deliver a copy of the Offering Notice to each of the Stockholders. (b) Company Option; Exercise. For a period of thirty (30) days ------------------------ after the giving of the Offering Notice pursuant to Section 3.1(a) (the "Company ------- Option Period"), the Company shall have the right (the "Company Option") but not - ------------- -------------- the obligation to purchase any or all of the Offered Securities at a purchase price equal to the Offer Price and upon the terms and conditions set forth in the Offering Notice. The right of the Company to purchase any or all of the Offered Securities under this Section 3.1(b) shall be exercisable by delivering written notice of the exercise thereof, prior to the expiration of the Company Option Period, to the Selling Stockholder, with a copy to the Stockholders (other than the Selling Stockholder), which notice shall state the number of Offered Securities proposed to be purchased by the Company. The failure of the Company to respond within the Company Option Period shall be deemed to be a waiver of the Company Option, provided that the Company may waive its rights -------- under this Section 3.1(b) prior to the expiration of the Company Option Period by giving written notice to the Selling Stockholder, with a copy to the Stockholders (other than the Selling Stockholder). (c) Rightholder Option; Exercise. ---------------------------- (i) If the Company does not elect to purchase all of the Offered Securities, then for a period of thirty (30) days after the earlier to occur of (a) the expiration of the Company Option Period and (b) the date upon which the Selling Stockholder shall have received written notice from the Company of its exercise of the Company Option pursuant to Section 3.1(b) or its waiver thereof (the "Rightholder Option Period"), each of the Stockholders (other than a Selling Stockholder) (for the purpose of Section 3.1, each, a "Rightholder" and collectively, the "Rightholders") shall have the right to ----------- ------------ purchase all, but not less than all, of the remaining Offered Securities at a purchase price equal to the Offer Price and upon the terms and conditions set forth in the Offering Notice. Each such Rightholder shall have the right to purchase that percentage of the Offered Securities determined by dividing (i) the total number of Shares then owned by such Rightholder by (ii) the total number of Shares then owned by all such Rightholders. If any Rightholder does not fully subscribe for the number or amount of Offered Securities it or he is entitled to purchase, then each other participating Rightholder shall have the right to purchase that percentage of the Offered Securities not so subscribed for (for the purposes of this Section 3.1(c), the "Excess Offered Securities") ------------------------- determined by dividing (x) the total 8 number of Shares then owned by such fully participating Rightholder by (y) the total number of Shares then owned by all fully participating Rightholders who elected to purchase Offered Securities. The procedure described in the preceding sentence shall be repeated until there are no remaining Excess Offered Securities. If the Company and/or the Rightholders do not purchase all of the Offered Securities pursuant to Section 3.1(b) and/or Section 3.1(c), then the Selling Stockholder may, subject to Section 3.1(f), sell the Offered Securities to a Third Party Purchaser in accordance with Section 3.1(e). (ii) The right of each Rightholder to purchase all of the remaining Offered Securities under subsection (i) above shall be exercisable by delivering written notice of the exercise thereof, prior to the expiration of the Rightholder Option Period, to the Selling Stockholder with a copy to the Company. Each such notice shall state (a) the number of Shares held by such Rightholder and (b) the number of Shares that such Rightholder is willing to purchase pursuant to this Section 3.1(c). The failure of a Rightholder to respond within the Rightholder Option Period to the Selling Stockholder shall be deemed to be a waiver of such Rightholder's rights under subsection (i) above, provided that each Rightholder may waive its rights under subsection (ii) above - -------- prior to the expiration of the Rightholder Option Period by giving written notice to the Selling Stockholder, with a copy to the Company. (d) Closing. The closing of the purchases of Offered Securities ------- subscribed for by the Company under Section 3.1(b) and/or the Rightholders under Section 3.1(c) shall be held at the executive office of the Company at 11:00 a.m., local time, on the 60th day after the giving of the Offering Notice pursuant to Section 3.1(a) or at such other time and place as the parties to the transaction may agree. At such closing, the Selling Stockholder shall deliver certificates representing the Offered Securities, duly endorsed for transfer and accompanied by all requisite transfer taxes, if any, and such Offered Securities shall be free and clear of any Liens (other than those arising hereunder and those attributable to actions by the purchasers thereof) and the Selling Stockholder shall so represent and warrant, and shall further represent and warrant that it is the sole beneficial and record owner of such Offered Securities. The Company and/or each Rightholder, as the case may be, purchasing Offered Securities shall deliver at the closing payment in full in immediately available funds for the Offered Securities purchased by it or him. At such closing, all of the parties to the transaction shall execute such additional documents as are otherwise necessary or appropriate. (e) Sale to a Third Party Purchaser. Unless the Company and/or the ------------------------------- Rightholders elect to purchase all, but not less than all, of the Offered Securities under Sections 3.1(b) and 3.1(c), the Selling Stockholder may, subject to Section 3.1(f), sell all, but not less than all, the Offered Securities to a Third Party Purchaser on the terms and conditions set forth in the Offering Notice; provided, -------- 9 however, that such sale is bona fide and made pursuant to a contract entered - ------- into within sixty (60) days after the earlier to occur of (i) the waiver by the Company and all of the Rightholders of their options to purchase the Offered Securities and (ii) the expiration of the Rightholder Option Period (the "Contract Date"); and provided further, that such sale shall not be consummated ------------- -------- ------- unless and until (x) such Third Party Purchaser shall represent in writing to the Company and each Rightholder that it is aware of the rights of the Company, the Stockholders contained in this Agreement and (y) prior to the purchase by such Third Party Purchaser of any of such Offered Securities, such Third Party Purchaser shall become a party to this Agreement as an Other Stockholder and shall agree to be bound by the terms and conditions hereof in accordance with Section 2.4 hereof. If such sale is not consummated within 30 days after the Contract Date for any reason, then the restrictions provided for herein shall again become effective, and no transfer of such Offered Securities may be made thereafter by the Selling Stockholder without again offering the same to the Company and the Rightholders in accordance with this Section 3.1. (f) Tag-Along Rights. ---------------- (i) If a Stockholder is transferring Offered Securities to a Third Party Purchaser pursuant to Section 3.1(e), then each of the Stockholders (other than the Selling Stockholder) (each, a "Tag-Along --------- Rightholder") shall have the right to sell to such Third Party Purchaser, upon - ----------- the terms set forth in the Offering Notice, that number of Shares held by such Tag-Along Rightholder equal to that percentage of the Offered Securities determined by dividing (A) the total number of Shares then owned by such Tag-Along Rightholder by (B) the sum of (x) the total number of Shares then owned by all such Tag-Along Rightholders exercising their rights pursuant to this Section 3.1(f) and (y) the total number of Shares then owned by the Selling Stockholder. The Selling Stockholder and the Tag-Along Rightholder(s) exercising their rights pursuant to this Section 3.1(f) shall effect the sale of the Offered Securities and such Tag-Along Rightholder(s) shall sell the number of Offered Securities required to be sold by such Tag-Along Rightholder(s) pursuant to this Section 3.1(f)(i), and the number of Offered Securities to be sold to such Third Party Purchaser by the Selling Stockholder shall be reduced accordingly. (ii) The Selling Stockholder shall give notice to each Tag-Along Rightholder of each proposed sale by it of Offered Securities which gives rise to the rights of the Tag-Along Rightholders set forth in this Section 3.1(f), at least fifteen (15) days prior to the proposed consummation of such sale, setting forth the name of such Selling Stockholder, the number of Offered Securities, the name and address of the proposed Third Party Purchaser, the proposed amount and form of consideration and terms and conditions of payment offered by such Third Party Purchaser, the percentage of Shares that such Tag- Along Rightholder may sell to such Third Party Purchaser (determined in accordance with Section 3.1(f)(i)), and a 10 representation that such Third Party Purchaser has been informed of the "tag- along" rights provided for in this Section 3.1(f) and has agreed to purchase Shares in accordance with the terms hereof. The tag-along rights provided by this Section 3.1(f) must be exercised by any Tag-Along Rightholder wishing to sell its Shares within ten (10) days following receipt of the notice required by the preceding sentence, by delivery of a written notice to the Selling Stockholder indicating such Tag-Along Rightholder's wish to exercise its rights and specifying the number of Shares (up to the maximum number of Shares owned by such Tag-Along Rightholder required to be purchased by such Third Party Purchaser) it wishes to sell, provided that any Tag-Along Rightholder may waive -------- its rights under this Section 3.1(f) prior to the expiration of such 10-day period by giving written notice to the Selling Stockholder, with a copy to the Company. The failure of a Tag-Along Rightholder to respond within such 10-day period shall be deemed to be a waiver of such Tag-Along Rightholder's rights under this Section 3.1(f). If a Third Party Purchaser fails to purchase Shares from any Tag-Along Rightholder that has properly exercised its tag-along rights pursuant to this Section 3.1(f)(ii), then the Selling Stockholder shall not be permitted to consummate the proposed sale of the Offered Securities, and any such attempted sale shall be null and void ab initio. 3.2 Involuntary Transfers. --------------------- (a) Rights of First Offer upon Involuntary Transfer. If an ----------------------------------------------- Involuntary Transfer of any Shares (the "Transferred Shares") owned by any ------------------ Stockholder shall occur, then the Company and the Stockholders (unless such Stockholder is the Stockholder transferring the Transferred Shares) (for the purpose of Section 3.2, each, a "Rightholder" and collectively, the ----------- "Rightholders") shall have the same rights as specified in Sections 3.1(b) and - ------------- 3.1(c), respectively, with respect to such Transferred Shares as if the Involuntary Transfer had been a proposed voluntary transfer by a Selling Stockholder and shall be governed by Section 3.1 except that (i) the time periods shall run from the date of receipt by the Company of actual notice of the Involuntary Transfer (and the Company shall immediately give notice to the Rightholders of the date of receipt of such notice), (ii) such rights shall be exercised by notice to the transferee of such Transferred Shares (the "Involuntary Transferee") rather than to the Stockholder who suffered or will ---------------------- suffer the Involuntary Transfer and (iii) the purchase price per Transferred Share shall be agreed upon by the Involuntary Transferee and the Company and/or the purchasing Rightholders purchasing a majority of the Transferred Shares, as the case may be; provided, however, that if such parties fail to agree as to -------- ------- such purchase price, the purchase price shall be the Fair Value thereof as determined in accordance with Section 3.2(b). Notwithstanding anything to the contrary set forth in this Agreement, an Involuntary Transferee that has not agreed to be bound to the terms and conditions hereunder, in accordance with Section 5.2(a) hereof, shall not be deemed to have any rights of a Stockholder under this Agreement. 11 (b) Fair Value. If the parties fail to agree upon the ---------- purchase price of the Transferred Shares in accordance with Section 3.2(a) hereof, then the Company or the Rightholders, as the case may be, shall purchase the Transferred Shares at a purchase price equal to the Fair Value (as hereinafter defined) thereof. The Fair Value of the Transferred Shares shall be determined by a panel of three independent appraisers, which shall be nationally recognized investment banking firms or nationally recognized experts experienced in the valuation of corporations engaged in the business conducted by the Company. Within five (5) Business Days after the date the applicable parties determine that they cannot agree as to the purchase price, the Involuntary Transferee and the Board of Directors (in the case of a purchase by the Company), or the purchasing Rightholders purchasing a majority of the Transferred Shares being purchased by the purchasing Rightholders (if the Company is not purchasing any Transferred Shares), or the Board of Directors and such purchasing Rightholders jointly (in the case of a purchase by the Company and Rightholders), as the case may be, shall each designate one such appraiser that is willing and able to conduct such determination. If either the Involuntary Transferee or the Board of Directors or the purchasing Rightholders or both, as the case may be, fails to make such designation within such period, then the other party that has made the designation shall have the right to make the designation on its behalf. The two appraisers designated shall, within a period of five (5) Business Days after the designation of the second appraiser, designate a mutually acceptable third appraiser. The three appraisers shall conduct their determination as promptly as practicable, and the Fair Value of the Transferred Shares shall be the average of the determination of the two appraisers that are closer to each other than to the determination of the third appraiser, which third determination shall be discarded; provided, however, that -------- ------- if the determination of two appraisers are equally close to the determination of the third appraiser, then the Fair Value of the Transferred Shares shall be the average of the determination of all three appraisers. Such determination shall be final and binding on the Involuntary Transferee, the Company and the Rightholders. The Involuntary Transferee shall be responsible for the fees and expenses of the appraiser designated by or on behalf of it, and the Company or the purchasing Rightholders (if both the Company and the Purchasing Rightholders), or the Purchasing Rightholders (if the Company is not purchasing any Transferred Shares) for the fees and expenses of the appraiser designated by or on behalf of the Board of Directors or the purchasing Rightholders (if the Company is not purchasing any Transferred Shares), as the case may be. The Involuntary Transferee and the Company or the purchasing Rightholders, as the case may be, shall each share half the fees and expenses of the appraiser designated by the appraisers. For purposes of this Section 3.2(b), the "Fair ---- Value" of the Transferred Shares means the fair market value of such Transferred - ----- Shares determined in accordance with this Section 3.2(b) based upon all considerations that the appraisers determine to be relevant. All expenses to be shared by the Company and the purchasing Rightholders, or among the purchasing Rightholders (if the Company is not 12 purchasing any Transferred Shares), shall be shared in proportion to the number of Shares purchased. (c) Closing. The closing of any purchase under this ------- Section 3.2 shall be held at the executive office of the Company at 11:00 a.m., local time, on the earlier to occur of (a) the fifth Business Day after the purchase price per Transferred Share shall have been agreed upon by the Involuntary Transferee and the Company or the purchasing Rightholders, as the case may be, in accordance with Section 3.2(a)(iii), or (b) the fifth Business Day after the determination of the Fair Value of the Transferred Shares in accordance with Section 3.2(b), or at such other time and place as the parties to the transaction may agree. At such closing, the Involuntary Transferee shall deliver certificates, if applicable, or other instruments or documents representing the Transferred Shares being purchased under this Section 3.2, duly endorsed with a signature guarantee for transfer and accompanied by all requisite transfer taxes, if any, and such Transferred Shares shall be free and clear of any Liens (other than those arising hereunder) arising through the action or inaction of the Involuntary Transferee and the Involuntary Transferee shall so represent and warrant, and further represent and warrant that it is the beneficial owner of such Transferred Shares. The Company or each Rightholder, as the case may be, purchasing such Transferred Shares shall deliver at closing payment in full in immediately available funds for such Transferred Shares. At such closing, all parties to the transaction shall execute such additional documents as are otherwise necessary or appropriate. (d) General. In the event that the provisions of this ------- Section 3.2 shall be held to be unenforceable with respect to any particular Involuntary Transfer, the Company and the Rightholders shall have the rights specified in Sections 3.1(b) and 3.1(c), respectively, with respect to any transfer by an Involuntary Transferee of such Shares, and each Rightholder agrees that any Involuntary Transfer shall be subject to such rights, in which case the Involuntary Transferee shall be deemed to be the Selling Stockholder for purposes of Section 3.1 of this Agreement and shall be bound by the provisions of Section 3.1 and other related provisions of this Agreement. 4. Future Issuance of Shares; Preemptive Rights. -------------------------------------------- 4.1 Offering Notice. Except for (a) capital stock of the Company --------------- that may be issued to employees, consultants, officers or directors of the Company pursuant to a stock incentive plan or other employee benefit arrangement approved by the Board of Directors, (b) a subdivision of the outstanding shares of Common Stock into a larger number of shares of Common Stock, (c) capital stock issued upon exercise, conversion or exchange of any Common Stock Equivalent and (d) capital stock of the Company issued in consideration of an acquisition, approved by 13 the Board of Directors, by the Company of another Person, if the Company wishes to issue any capital stock or any other securities convertible into or exchangeable for capital stock of the Company (collectively, "New Securities" to -------------- any Person (the "Subject Purchaser"), then the Company shall offer such New ----------------- Securities first to each of the Stockholders (each, a "Preemptive Rightholder" ---------------------- and collectively, the "Preemptive Rightholders") by sending written notice (the ----------------------- "New Issuance Notice") to the Preemptive Rightholders, which New Issuance Notice ------------------- shall state (x) the number of New Securities proposed to be issued and (y) the proposed purchase price per security of the New Securities (the "Proposed -------- Price"). Upon delivery of the New Issuance Notice, such offer shall be - ----- irrevocable unless and until the rights provided for in Section 4.2 shall have been waived or shall have expired. 4.2 Preemptive Rights; Exercise. --------------------------- (a) For a period of twenty (20) days after the giving of the New Issuance Notice pursuant to Section 4.1, each of the Preemptive Rightholders shall have the right to purchase its Proportionate Percentage (as hereinafter defined) of the New Securities at a purchase price equal to the Proposed Price and upon the terms and conditions set forth in the New Issuance Notice. Each such Preemptive Rightholder shall have the right to purchase that percentage of the New Securities determined by dividing (x) the total number of Shares then owned by such Preemptive Rightholder exercising its rights under this Section 4.2 by (y) the total number of Shares (the "Proportionate ------------- Percentage"). If any Preemptive Rightholder does not fully subscribe for the - ---------- number or amount of New Securities that it or he is entitled to purchase pursuant to the preceding sentence, then each Preemptive Rightholder which elected to purchase New Securities shall have the right to purchase that percentage of the remaining New Securities not so subscribed for (for the purposes of this Section 4.2(a), the "Excess New Securities") determined by --------------------- dividing (x) the total number of Shares then owned by such fully participating Preemptive Rightholder by (y) the total number of Shares then owned by all fully participating Preemptive Rightholders who elected to purchase Excess New Securities. (b) The right of each Preemptive Rightholder to purchase the New Securities under subsection (a) above shall be exercisable by delivering written notice of the exercise thereof, prior to the expiration of the 20-day period referred to in subsection (a) above, to the Company, which notice shall state the amount of New Securities that such Preemptive Rightholder elects to purchase pursuant to Section 4.2(a). The failure of a Preemptive Rightholder to respond within such 20-day period shall be deemed to be a waiver of such Preemptive Rightholder's rights under Section 4.2(a), provided that each Preemptive -------- Rightholder may waive its rights under Section 4.2(a) prior to the expiration of such 20-day period by giving written notice to the Company. 14 4.3 Closing. The closing of the purchase of New Securities ------- subscribed for by the Preemptive Rightholders under Section 4.2 shall be held at the executive office of the Company at 11:00 a.m., local time, on (a) the 45th day after the giving of the New Issuance Notice pursuant to Section 4.1, if the Preemptive Rightholders elect to purchase all of the New Securities under Section 4.2, (b) the date of the closing of the sale to the Subject Purchaser made pursuant to Section 4.4 if the Preemptive Rightholders elect to purchase some, but not all, of the New Securities under Section 4.2 or (c) at such other time and place as the parties to the transaction may agree. At such closing, the Company shall deliver certificates representing the New Securities, and such New Securities shall be issued free and clear of all Liens (other than those arising hereunder and those attributable to actions by the purchasers thereof) and the Company shall so represent and warrant, and further represent and warrant that such New Securities shall be, upon issuance thereof to the Preemptive Rightholders and after payment therefor, duly authorized, validly issued, fully paid and non-assessable. Each Preemptive Rightholder purchasing the New Securities shall deliver at the closing payment in full in immediately available funds for the New Securities purchased by him or it. At such closing, all of the parties to the transaction shall execute such additional documents as are otherwise necessary or appropriate. 4.4 Sale to Subject Purchaser. The Company may sell to the ------------------------- Subject Purchaser all of the New Securities not purchased by the Preemptive Rightholders pursuant to Section 4.2 on terms and conditions that are no more favorable to the Subject Purchaser than those set forth in the New Issuance Notice; provided, however, that such sale is bona fide and made pursuant to a -------- ------- contract entered into within ninety (90) days following the earlier to occur of (i) the waiver by the Preemptive Rightholders of their option to purchase New Securities pursuant to Section 4.2, and (ii) the expiration of the 20-day period referred to in Section 4.2. If such sale is not consummated within such 90-day period for any reason, then the restrictions provided for herein shall again become effective, and no issuance and sale of New Securities may be made thereafter by the Company without again offering the same in accordance with this Section 4. The closing of any issuance and purchase pursuant to this Section 4.4 shall be held at a time and place as the parties to the transaction may agree. 5. After-Acquired Securities; Agreement to be Bound. ------------------------------------------------ 5.1 After-Acquired Securities. All of the provisions of this ------------------------- Agreement shall apply to all of the Shares and Common Stock Equivalents issued pursuant to the Stock Purchase Agreement. 5.2 Agreement to be Bound. The Company shall not issue any shares --------------------- of capital stock or any Common Stock Equivalents to any Person not a party to this Agreement, other than to directors, officers, employees or consultants of the 15 Company (or their heirs or beneficiaries) pursuant to a stock incentive plan or other employee benefit arrangement approved by the Board of Directors, unless either (a) such Person has agreed in writing to be bound by the terms and conditions of this Agreement pursuant to an instrument substantially in the form attached hereto as Exhibit C-2, or (b) such Person has entered into an ----------- agreement with the Company restricting the transfer of its or his Shares in form and substance reasonably satisfactory to QIP, as representative of the Stockholders (or such other representative as shall be designated by QIP or by the holder(s) of a majority of the Shares held by the Stockholders). Upon becoming a party to this Agreement, such Person shall be deemed to be, and shall be subject to the same obligations as, an Other Stockholder hereunder. Any issuance of Shares or any Common Stock Equivalents by the Company in violation of this Section 5.2 shall be null and void ab initio. 6. Miscellaneous. ------------- 6.1 Notices. All notices, demands or other communications ------- provided for or permitted hereunder shall be made in writing and shall be by registered or certified first class mail, return receipt requested, telecopier, courier service, overnight mail or personal delivery: (a) if to the Company to the attention of each of its Treasurer and General Counsel at: Outboard Marine Corporation 100 Sea-Horse Drive Waukegan, IL 60085 Telecopy: (847) 689-6246 with a copy to: David, Polk & Wardwell 450 Lexington Avenue New York, NY 10017 Telecopy: (212) 450-4800 Attention: Julia K. Cowles, Esq. (b) if to QIP: Quantum Industrial Partners LDC Kaya Flamboyan 9, Villemstad Curacao Netherlands-Antilles 16 with a copy to: Soros Fund Management LLC 888 Seventh Avenue New York, NY 10016 Telecopy: (212) 664-0544 Attention: Michael Neus, Esq. and a copy to: Paul, Weiss, Rifkind, Wharton & Garrison 1285 Avenue of the Americas New York, New York 10019-6064 Telecopy: (212) 757-3990 Attention: Richard S. Borisoff, Esq. (c) If to Greenlake: Greenlake Holdings II LLC c/o Greenway Partners, L.P. 277 Park Avenue New York, NY 10016 Telecopy: (212) 350-5253 Attention: Gary Duberstein with a copy to: Weil, Gotshal & Manges 767 Fifth Avenue New York, New York 10153 Telecopy: (212) 310-8007 Attention: David Blittner, Esq. (d) if to any other Stockholder, at its address as it appears on the record books of the Company. Any party may by notice given in accordance with this Section 6.1 designate another address or Person for receipt of notices hereunder. All such notices, demands and other communications shall be deemed to have been duly given when delivered by hand, if personally delivered; when delivered by courier, if delivered by commercial courier service; five (5) Business Days after being deposited in the mail, postage prepaid, if mailed; and when receipt is mechanically acknowledged, if telecopied. 17 6.2 Successors and Assigns. This Agreement shall be binding ---------------------- upon and inure to the benefit of the parties and their respective successors, heirs, legatees and legal representatives. This Agreement is not assignable except in connection with a transfer of Shares in accordance with this Agreement. 6.3 Amendment and Waiver. -------------------- (a) Except as specifically set forth in this Agreement, no failure or delay on the part of any party hereto in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies provided for herein are cumulative and are not exclusive of any remedies that may be available to the parties hereto at law, in equity or otherwise. (b) Any amendment, supplement or modification of or to any provision of this Agreement, any waiver of any provision of this Agreement, and any consent to any departure by any party from the terms of any provision of this Agreement, shall be effective only if it is made or given in writing and signed by (i) the Company and the Stockholders holding 75% of the voting power of the Shares held by Stockholders. Any such amendment, supplement, modification, waiver or consent shall be binding upon the Company and all of the Stockholders. 6.4 Board Representation. For so long as QIP and Greenlake or -------------------- Affiliates thereof collectively own at least 50% of the outstanding shares of Preferred Stock, the Company's Board of Directors shall be expanded to add one additional director (the "Additional Director") who shall be selected by the ------------------- holders of a majority of the outstanding shares of Preferred Stock. The Company will use its best efforts to cause the Additional Director to be nominated and to solicit proxies for his or her election. 6.5 Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed an original, and all of which taken together shall constitute one and the same instrument. 6.6 Specific Performance. The parties hereto intend that each -------------------- of the parties have the right to seek damages or specific performance in the event that any other party hereto fails to perform such party's obligations hereunder. Therefore, if any party shall institute any action or proceeding to enforce the provisions hereof, any party against whom such action or proceeding is brought hereby waives any claim or defense therein that the plaintiff party has an adequate remedy at law. 18 6.7 Headings. The headings in this Agreement are for -------- convenience of reference only and shall not limit or otherwise affect the meaning hereof. 6.8 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED AND ------------- CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW OF ANY JURISDICTION. 6.9 Severability. If any one or more of the provisions ------------ contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, unless the provisions held invalid, illegal or unenforceable shall substantially impair the benefits of the remaining provisions hereof. 6.10 Entire Agreement. This Agreement, together with the ---------------- exhibits hereto, is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein or therein. This Agreement, together with the exhibits hereto, supersede all prior agreements and understandings among the parties with respect to such subject matter. 6.11 Term of Agreement. This Agreement shall become effective ----------------- upon the execution hereof and shall terminate upon the earlier of (a) the IPO Effectiveness Date or (b) the date on which less than two Stockholders own any Shares. 6.12 Further Assurances. Each of the parties shall, and shall ------------------ cause their respective Affiliates to, execute such instruments and take such action as may be reasonably required or desirable to carry out the provisions hereof and the transactions contemplated hereby. [Remainder of Page Intentionally Left Blank] IN WITNESS WHEREOF, the undersigned have executed, or have caused to be executed, this Stockholders Agreement on the date first written above. OUTBOARD MARINE CORPORATION By: /s/ Eric T. Martinez ------------------------------------ Name: Eric T. Martinez Title: Vice President and Treasurer QUANTUM INDUSTRIAL PARTNERS LDC By: /s/ Micheal C. Neus ------------------------------------ Name: Micheal C. Neus Title: Attorney-In-Fact GREENLAKE HOLDINGS II LLC By: /s/ Gary K. Dubertein ------------------------------------ Name: Gary K. Duberstein Title: Vice President Exhibit A-1 ----------- ACKNOWLEDGMENT AND AGREEMENT The undersigned wishes to receive from __________ ("Transferor") ---------- certain shares or certain options, warrants or other rights to purchase _____ shares, par value $.01 per share, of Common Stock (the "Shares") of Outboard ------ Marine Corporation, a Delaware corporation (the "Company"); ------- The Shares are subject to the Stockholders Agreement, dated January ___, 2000 (the "Agreement"), among the Company and the other parties listed on --------- the signature pages thereto; The undersigned has been given a copy of the Agreement and afforded ample opportunity to read and to have counsel review it, and the undersigned is thoroughly familiar with its terms; Pursuant to the terms of the Agreement, the Transferor is prohibited from transferring such Shares and the Company is prohibited from registering the transfer of the Shares unless and until a transfer is made in accordance with the terms and conditions of the Agreement and the recipient of such Shares acknowledges the terms and conditions of the Agreement and agrees to be bound thereby; and The undersigned wishes to receive such Shares and have the Company register the transfer of such Shares. In consideration of the mutual promises contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and to induce the Transferor to transfer such Shares to the undersigned and the Company to register such transfer, the undersigned does hereby acknowledge and agree that (i) he[/she] has been given a copy of the Agreement and afforded ample opportunity to read and to have counsel review it, and the undersigned is thoroughly familiar with its terms, (ii) the Shares are subject to the terms and conditions set forth in the Agreement, and (iii) the undersigned does hereby agree fully to be bound thereby as a ["Stockholder"] [an ----------- "Other Stockholder"] (as therein defined). ----------------- This ________ day of ________, 20__. ____________________________________ Exhibit A-2 ----------- ACKNOWLEDGMENT AND AGREEMENT The undersigned wishes to receive from Outboard Marine Corporation, a Delaware corporation (the "Company"), _______ shares, par value $.01 per share, ------- of Common Stock, or certain newly issued options, warrants or other rights to purchase _______ shares of Common Stock (the "Shares"), of the Company; ------ The Shares are subject to the Stockholders Agreement, dated January __, 2000 (the "Agreement"), among the Company and the other parties listed on --------- the signature pages thereto; The undersigned has been given a copy of the Agreement and afforded ample opportunity to read and to have counsel review it, and the undersigned is thoroughly familiar with its terms; Pursuant to the terms of the Agreement, the Company is prohibited from issuing the Shares unless and until a transfer is made in accordance with the terms and conditions of the Agreement and the recipient of such Shares acknowledges the terms and conditions of the Agreement and agrees to be bound thereby; and The undersigned wishes to receive such Shares. In consideration of the mutual promises contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and to induce the Company to issue such Shares, the undersigned does hereby acknowledge and agree that (i) he[/she] has been given a copy of the Agreement and afforded ample opportunity to read and to have counsel review it, and the undersigned is thoroughly familiar with its terms, (ii) the Shares are subject to terms and conditions set forth in the Agreement, and (iii) the undersigned does hereby agree fully to be bound thereby as an "Other Stockholder" (as therein defined). This ________ day of ________, 20__. __________________________________ EX-4.11 6 WARRANT TO PURCHASE SHARES OF COMMON STOCK EXHIBIT 4.11 THE SECURITIES REPRESENTED BY THIS CERTIFICATE OR RECEIVABLE UPON THE EXERCISE OR CONVERSION THEREOF OR AS A RESULT OF THE OWNERSHIP HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE. THE SECURITIES MAY NOT BE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A STOCKHOLDERS AGREEMENT AMONG THE COMPANY AND THE ORIGINAL PURCHASERS OF THE SECURITIES REPRESENTED HEREBY. TRANSFEREES OF SUCH SECURITIES SHOULD REVIEW SUCH AGREEMENT TO DETERMINE THEIR RIGHTS AND OBLIGATIONS. -------------------------- Date: January 28, 2000 WARRANT TO PURCHASE 5,103,780 SHARES OF COMMON STOCK OF OUTBOARD MARINE CORPORATION Void after 5:00 P.M. (Eastern Time) on the Expiration Date (as defined herein) THIS CERTIFIES that QUANTUM INDUSTRIAL PARTNERS LDC (the "Warrant Holder"), or registered assigns, is entitled to purchase from OUTBOARD MARINE CORPORATION (the "Company"), a Delaware corporation, at any time after the date hereof and until 5:00 P.M. (Eastern Time) on the Expiration Date, FIVE MILLION, ONE HUNDRED THREE THOUSAND, SEVEN HUNDRED EIGHTY fully paid and nonassessable shares of Common Stock of the Company, $.01 par value per share (the "Common Stock"), at a purchase price of $.01 per share, in each case subject to adjustment as provided in Section 6 hereof. 1. Definitions. For the purpose of this Warrant: ----------- (a) "Expiration Date" shall mean January 28, 2010. --------------- (b) "Warrant Price" shall mean the price per share at which ------------- shares of Common Stock of the Company are purchasable hereunder, as such price may be adjusted from time to time hereunder. (c) "Warrant Shares" shall mean the Common Stock purchased upon -------------- exercise of Warrants. (d) "Warrants" shall mean this original Warrant to purchase -------- Common Stock of the Company and any and all Warrants which are issued in exchange or substitution for the Warrant pursuant to the terms of this Warrant. 2. Method of Exercise of Warrants. This Warrant may be exercised at ------------------------------ any time and from time to time after the date hereof and prior to 5:00 P.M. (Eastern Time) on the Expiration Date, in whole or in part (but not as to fractional shares), by the surrender of the Warrant, manually or by facsimile transmission, with the Purchase Agreement attached hereto as Exhibit A properly --------- completed and duly executed, at the principal office of the Company at the address set forth in Section 10(ii) hereof, or such other location which shall at that time be the principal office of the Company (the "Principal Office"), ---------------- and upon payment to it by certified check or bank draft or wire transfer of immediately available funds to the order of the Company of the purchase price for the shares to be purchased upon such exercise. The person entitled to the shares so purchased shall be treated for all purposes as the holder of such shares as of the close of business on the date of exercise and certificates for the shares of stock so purchased shall be delivered to the person so entitled within a reasonable time, not exceeding thirty (30) days, after such exercise. Unless this Warrant has expired, a new Warrant of like tenor and for such number of shares as the holder of this Warrant shall direct, representing in the aggregate the right to purchase a number of shares with respect to which this Warrant shall not have been exercised, shall also be issued to the holder of this Warrant within such time. 3. Conversion Right. ---------------- (a) In lieu of the payment of the Exercise Price, the Warrant Holder shall have the right (but not the obligation), to require the Company to convert this Warrant, in whole or in part, into shares of Common Stock (the "Conversion Right") as provided for in this Section 3. Upon exercise of the ---------------- Conversion Right, the Company shall deliver to the Warrant Holder (without payment by the Warrant Holder of any of the Warrant Price) in accordance with Section 2 that number of shares of Common Stock equal to the quotient obtained by dividing (i) the value of the Warrant at the time the Conversion Right is exercised (determined by subtracting the aggregate Warrant Price in effect immediately prior to the exercise of the Conversion Right from the aggregate Current Market Price (as defined herein) for the shares of Common Stock issuable upon exercise of the Warrant immediately prior to the exercise of the Conversion Right) by (ii) the Current Market Price of one share of Common Stock immediately prior to the exercise of the Conversion Right. 2 (b) The Conversion Right may be exercised by the Warrant Holder at any time and from time to time prior to 5:00 p.m. (Eastern Time) on the Expiration Date by surrender of the Warrant, together with notice of such exercise, to the Company, and specifying the total number of shares of Common Stock that the Warrant Holder will be issued pursuant to such conversion. (c) Current Market Price of a share of Common Stock as of a particular date (the "Determination Date") shall mean the average closing price ------------------ of the Company's Common Stock on the principal securities exchange or market on which such shares are then traded for the last thirty (30) trading days prior to the Determination Date, or if the Common Stock is not traded on any such principal securities exchange or market at the time the Conversion Right is exercised, a market price per share determined in good faith by the Board of Directors of the Company or, if such determination is not satisfactory to the Warrant Holder, by a nationally recognized investment banking firm selected by the Company and the Warrant Holder, the expenses for which shall be borne equally by the Company and the Warrant Holder. 4. Exchange. This Warrant is exchangeable, upon the surrender hereof -------- by the holder hereof at the Principal Office of the Company, for new Warrants of like tenor registered in such holder's name and representing in the aggregate the right to purchase the number of shares purchasable under the Warrant being exchanged, each of such new Warrants to represent the right to subscribe for and purchase such number of shares as shall be designated by said holder at the time of such surrender. 5. Transfer. Any transfer or assignment of this Warrant, whether in -------- whole or in part without, must be made in compliance with all applicable federal and state securities laws and the Company shall not be required to give effect to any such purported transfer or assignment unless it is reasonably satisfied that such transfer has been made in compliance with all applicable federal and state securities laws. Subject to the immediately preceding sentence, this Warrant is transferable, in whole or in part, at the Principal Office of the Company by the holder hereof, in person or by duly authorized attorney, upon presentation of this Warrant, properly endorsed, for transfer. Each holder of this Warrant, by holding it, agrees that the Warrant, when endorsed in blank, may be deemed negotiable, and that the holder hereof, when the Warrant shall have been so endorsed, may be treated by the Company and all other persons dealing with the Warrant as the absolute owner hereof for any purpose and as the person entitled to exercise the rights represented by the Warrant, or to the transfer thereof on the books of the Company, any notice to the contrary notwithstanding. 6. Certain Covenants of the Company. The Company covenants and -------------------------------- agrees that all shares which may be issued upon the exercise of this Warrant will, upon issuance, be duly authorized and validly issued, fully paid and nonassessable. The Company covenants and agrees that none of the shares which may be issued upon the exercise of this Warrant will, upon issuance, be in violation of or subject to any preemptive rights of any person. The Company further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized, and reserved for the purpose of 3 issue upon exercise of the purchase rights evidenced by this Warrant, a sufficient number of shares of its Common Stock to provide for the exercise of the rights represented by this Warrant. 7. Adjustment of Warrant Price and Number of Shares. The number and ------------------------------------------------ kind of securities purchasable upon the exercise of the Warrants and the Warrant Price shall be subject to adjustment from time to time upon the happening of certain events as follows: (a) Reclassification, Consolidation or Merger. At any time while ----------------------------------------- the Warrants remain outstanding and unexpired, in case of any reclassification or change of outstanding securities issuable upon exercise of the Warrants (other than a change in par value, or from par value to no par value, or from no par value to par value or as a result of a subdivision or combination of outstanding securities issuable upon the exercise of the Warrants) or in case of any consolidation or merger of the Company with or into another corporation (other than a merger with another corporation in which the Company is a continuing corporation and which does not result in any reclassification or change of rights of outstanding securities issuable upon exercise of the Warrants, other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination of outstanding securities issuable upon exercise of the Warrants), the Company, or such successor corporation, as the case may be, shall, without payment of any additional consideration therefor, execute new Warrants providing that the holders of the Warrants shall have the right to exercise such new Warrants (upon terms not less favorable to the holders than those then applicable to the Warrants) and to receive upon such exercise, in lieu of each share of Common Stock or other security theretofore issuable upon exercise of the Warrants, the kind and amount of shares of stock, other securities, money or property receivable upon such reclassification, change, consolidation or merger by the holder of one share of Common Stock or other security issuable upon exercise of the Warrants had the Warrants been exercised immediately prior to such reclassification, change, consolidation or merger. Such new Warrants shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 7. The provisions of this subsection 7(a) shall similarly apply to successive reclassifications, changes, consolidations and mergers. (b) Subdivision or Combination of Shares. If the Company at any ------------------------------------ time while the Warrants remain outstanding and unexpired shall subdivide or combine its Common Stock, (i) the Warrant Price shall be proportionately reduced, and the number of shares of Common Stock for which this Warrant may be exercised shall be proportionately increased, in case of subdivision of such shares, as of the effective date of such subdivision, or, if the Company shall take a record of holders of its Common Stock for the purpose of so subdividing, as of such record date, whichever is earlier, or (ii) the Warrant Price shall be proportionately increased, and the number of shares of Common Stock for which this Warrant may be exercised shall be proportionately reduced, in the case of combination of such shares, as of the effective date of such combination, or, if the Company shall take a record of holders of its Common Stock for the purpose of so combining, as of such record date, whichever is earlier. 4 (c) Stock Dividends. If the Company at any time while the Warrants --------------- remain outstanding and unexpired shall pay a dividend in shares of its Common Stock, or make other distribution to the holders of Common Stock or of options, warrants or rights to subscribe for or purchase shares of Common Stock or of evidences of indebtedness issued by the Company or any other person, then the Warrant Price shall be adjusted, as of the date the Company shall take a record of the holders of its Common Stock for the purpose of receiving such dividend or other distribution (or if no such record is taken, as at the date of such payment or other distribution), to that price determined by multiplying the Warrant Price in effect immediately prior to such payment or other distribution by a fraction (i) the numerator of which shall be the total number of shares of Common Stock outstanding immediately prior to such dividend or distribution, and (ii) the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such dividend or distribution (the "Fraction"), and the number of shares of Common Stock issuable upon exercise of this Warrant shall be adjusted by multiplying such number by the reciprocal of the Fraction. The number of shares of Common Stock at any time outstanding shall not include any shares thereof then directly or indirectly owned or held by or for the account of the Company or any wholly-owned subsidiary. The provisions of this subsection 6(c) shall not apply under any of the circumstances for which an adjustment is provided in subsections 6(a) or 6(b). (d) Liquidating Dividends, Etc. If the Company at any time while the -------------------------- Warrants remain outstanding and unexpired makes a distribution of its assets to the holders of its Common Stock as a dividend in liquidation or by way of return of capital or other than as a dividend payable out of earnings or surplus legally available for dividends under applicable law or any distribution to such holders made in respect of the sale of all or substantially all of the Company's assets (other than under the circumstances provided for in the foregoing subsections 7(a) through 7(c)), the Warrant Holder shall be entitled to receive upon the exercise hereof, in addition to the shares of Common Stock receivable upon such exercise, and without payment of any consideration other than the Warrant Price, an amount of such assets so distributed equal to the value of such distribution per share of Common Stock multiplied by the number of shares of Common Stock which, on the record date for such distribution, are issuable upon exercise of this Warrant (with no further adjustment being made following any event which causes a subsequent adjustment in the number of shares of Common Stock issuable upon the exercise hereof), and an appropriate provision therefor shall be made a part of any such distribution. The value of a distribution which is paid in other than cash shall be determined by 75% of the members of the Board of Directors of the Company, or if 75% of the members of the Board of Directors are unable to agree upon the value of such consideration, the value thereof shall be determined by an independent investment bank of nationally recognized stature that is selected by 75% of the members of the Board of Directors. (e) Notice of Adjustments. Whenever the Warrant Price or the number --------------------- of shares of Common Stock purchasable under the terms of this Warrant at the Warrant Price shall be adjusted pursuant to this Section 6, the Company shall promptly prepare a certificate signed by its President or a Vice President and by its Treasurer or Assistant Treasurer or its Secretary or Assistant Secretary, setting forth in reasonable detail the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated (including a 5 description of the basis on which the Company's Board of Directors made any determination hereunder), and the Warrant Price and number of shares of Common Stock purchasable at that Warrant Price after giving effect to such adjustment, and shall promptly cause copies of such certificate to be mailed (by first class and postage prepaid) to the registered holder of this Warrant. 8. Fractional Shares. No fractional shares of the Company's Common ----------------- Stock will be issued in connection with any purchase hereunder but in lieu of such fractional shares, the Company shall make a cash refund therefor equal in amount to the product of the applicable fraction multiplied by the Warrant Price paid by the holder for its Warrant Shares upon such exercise. 9. Loss, Theft, Destruction or Mutilation. Upon receipt by the -------------------------------------- Company of evidence reasonably satisfactory to it that any Warrant has been mutilated, destroyed, lost or stolen, and in the case of any destroyed, lost or stolen Warrant, a bond of indemnity reasonably satisfactory to the Company, or in the case of a mutilated Warrant, upon surrender and cancellation thereof, the Company will execute and deliver in the Warrant Holder's name, in exchange and substitution for the Warrant so mutilated, destroyed, lost or stolen, a new Warrant of like tenor substantially in the form thereof with appropriate insertions and variations. 10. Notices. All notices, demands and other communications provided -------- for or permitted hereunder shall be made in writing and shall be by registered or certified first class mail, return receipt requested, telecopier, courier service, overnight mail or personal delivery: (i) if to the Warrant Holder: Quantum Industrial Partners LDC Kaya Flamboyan 9 Willemstad Curacao Netherlands-Antilles with a copy to: Soros Fund Management LLC 888 Seventh Avenue New York, NY 10016 Telecopy: (212) 664-0544 Attention: Michael Neus, Esq. and a copy to: Paul, Weiss, Rifkind, Wharton & Garrison 1285 Avenue of the Americas New York, New York 10019-6064 Telecopy: (212) 757-3990 6 Attention: Richard S. Borisoff, Esq. (ii) if to the Company, to the attention of each of its Treasurer and General Counsel at: Outboard Marine Corporation 100 Sea-Horse Drive Waukegan, IL 60085 Telecopy: (847) 689-6246 with a copy to: Davis, Polk & Wardwell 450 Lexington Avenue New York, NY 10017 Telecopy: (212) 450-4800 Attention: Julia K. Cowles, Esq. All such notices and communications shall be deemed to have been duly given when hand delivered by hand, if personally delivered; when delivered by courier or overnight mail, if delivered by commercial courier service or overnight mail; five (5) business days after being deposited in the mail, postage prepaid, if mailed; and when receipt is mechanically acknowledged, if telecopied. Any party may by notice given in accordance with this Section 10 designate another address or person for receipt of notices hereunder. 11. Headings. The descriptive headings of the several sections of -------- this Warrant are inserted for convenience only and do not constitute a part of this Warrant. 12. Payment of Taxes. The issuance of certificates for Warrant ---------------- Shares shall be made without charge to the Warrant Holder for any stock transfer or other issuance tax in respect thereto; provided, however, that the Warrant -------- ------- Holder shall be required to pay any and all taxes that may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the then Warrant Holder as upon the books of the Company. 13. Binding Effect; Benefits. This Warrant shall inure to the ------------------------ benefit of and shall be binding upon the Company and the Warrant Holder and their respective successors and assigns. Nothing in this Warrant, expressed or implied, is intended to or shall confer on any person other than the Company and the Warrant Holder, or their respective successors or assigns, any rights, remedies, obligations or liabilities under or by reason of this Warrant. 14. Severability. Any term or provision of this Warrant which is ------------ invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such 7 invalidity or unenforceability without rendering invalid or unenforceable the terms and provisions of this Warrant or affecting the validity or enforceability of any of the terms or provisions of this Warrant in any other jurisdiction. 15. Governing Law. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED ------------- IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO THE CONFLICTS OF LAW PRINCIPLES THEREOF. 16. No Rights or Liabilities as Stockholders. No Warrant Holder ---------------------------------------- shall, as such, be entitled to vote or to receive dividends or be deemed the holder of Common Stock that may at any time be issuable upon exercise of this Warrant for any purpose whatsoever, nor shall anything contained herein be construed to confer upon the Warrant Holder, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issue or reclassification of stock, change of par value or change of stock to no par value, consolidation, merger or conveyance or otherwise), or to receive notice of meetings, or to receive dividends or subscription rights, until such Warrant Holder shall have exercised this Warrant and been issued Common Stock in accordance with the provisions hereof. Nothing contained in this Warrant shall be determined as imposing any liabilities on the Warrant Holder to purchase any securities, whether such liabilities are asserted by the Company or by creditors or stockholders of the Company or otherwise. 17. Compliance with Securities Laws. ------------------------------- (a) The Warrant Holder, by acceptance hereof, acknowledges that this Warrant and the shares of Common Stock to be issued upon exercise hereof are being acquired solely for the Warrant Holder's own account and not as a nominee for any other party, and for investment, and that the Warrant Holder will not offer, sell or otherwise dispose of this Warrant or any shares of Common Stock to be issued upon exercise hereof except under circumstances that will not result in a violation of the Securities Act or any state securities laws. Upon exercise of this Warrant, the Warrant Holder shall, if requested by the Company, confirm in writing, in a form satisfactory to the Company, that the shares of Common Stock so purchased are being acquired solely for the Warrant Holder's own account and not as a nominee for any other party, for investment, and not with a view toward distribution or resale. (b) This warrant and all shares of Common Stock issued upon exercise hereof shall be stamped or imprinted with a legend in substantially the following form (in addition to any legend required by state securities laws): "THE SECURITIES REPRESENTED BY THIS CERTIFICATE OR RECEIVABLE UPON THE EXERCISE OR CONVERSION THEREOF OR AS A RESULT OF THE OWNERSHIP HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE. THE SECURITIES MAY NOT BE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION 8 STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS." "THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A STOCKHOLDERS AGREEMENT AMONG THE COMPANY AND THE ORIGINAL PURCHASERS OF THE SECURITIES REPRESENTED HEREBY. TRANSFEREES OF SUCH SECURITIES SHOULD REVIEW SUCH AGREEMENT TO DETERMINE THEIR RIGHTS AND OBLIGATIONS." 18. Market Stand-Off Agreement. Each holder of this Warrant or any -------------------------- portion hereof hereby agrees that, during the period of duration specified by the Company and, in the case of an underwritten public offering, an underwriter of Common Stock or other securities of the Company, following the effective date of a registration statement of the Company filed under the Act, it shall not, to the extent requested by the Company and such underwriter, directly or indirectly sell, offer to sell, contract to sell (including, without limitation, any short sale, grant any option to purchase or otherwise transfer or dispose of (other than to donees who agree to be similarly bound) all or any portion of this Warrant or shares of Common Stock issued or issuable upon exercise of the Warrant held by it at any time during such period except common stock included in such registration; provided, however, that such market stand-off time period shall not exceed 180 days in the case of an initial public offering and 90 days in the case of all other offerings. In order to enforce the foregoing covenant, the Company may impose stop-transfer instruction with respect to the foregoing restriction until the end of such period. 9 IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer on the date of this Warrant. OUTBOARD MARINE CORPORATION By:________________________________ 10 EX-4.12 7 WARRANT TO PURCHASE SHARES OF COMMON STOCK EXHIBIT 4.12 THE SECURITIES REPRESENTED BY THIS CERTIFICATE OR RECEIVABLE UPON THE EXERCISE OR CONVERSION THEREOF OR AS A RESULT OF THE OWNERSHIP HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE. THE SECURITIES MAY NOT BE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS." "THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A STOCKHOLDERS AGREEMENT AMONG THE COMPANY AND THE ORIGINAL PURCHASERS OF THE SECURITIES REPRESENTED HEREBY. TRANSFEREES OF SUCH SECURITIES SHOULD REVIEW SUCH AGREEMENT TO DETERMINE THEIR RIGHTS AND OBLIGATIONS. -------------------------- Date: January 28, 2000 WARRANT TO PURCHASE 646,220 SHARES OF COMMON STOCK OF OUTBOARD MARINE CORPORATION Void after 5:00 P.M. (Eastern Time) on the Expiration Date (as defined herein) THIS CERTIFIES that GREENLAKE HOLDINGS II LLC (the "Warrant Holder"), or registered assigns, is entitled to purchase from OUTBOARD MARINE CORPORATION (the "Company"), a Delaware corporation, at any time after the date hereof and until 5:00 P.M. (Eastern Time) on the Expiration Date, SIX HUNDRED FORTY-SIX THOUSAND, TWO HUNDRED TWENTY fully paid and nonassessable shares of Common Stock of the Company, $.01 par value per share (the "Common Stock"), at a purchase price of $.01 per share, in each case subject to adjustment as provided in Section 6 hereof. 1. Definitions. For the purpose of this Warrant: ----------- (a) "Expiration Date" shall mean January 28, 2010. --------------- (b) "Warrant Price" shall mean the price per share at which ------------- shares of Common Stock of the Company are purchasable hereunder, as such price may be adjusted from time to time hereunder. (c) "Warrant Shares" shall mean the Common Stock purchased upon -------------- exercise of Warrants. (d) "Warrants" shall mean this original Warrant to purchase -------- Common Stock of the Company and any and all Warrants which are issued in exchange or substitution for the Warrant pursuant to the terms of this Warrant. 2. Method of Exercise of Warrants. This Warrant may be exercised at ------------------------------ any time and from time to time after the date hereof and prior to 5:00 P.M. (Eastern Time) on the Expiration Date, in whole or in part (but not as to fractional shares), by the surrender of the Warrant, manually or by facsimile transmission, with the Purchase Agreement attached hereto as Exhibit A properly --------- completed and duly executed, at the principal office of the Company at the address set forth in Section 10(ii) hereof, or such other location which shall at that time be the principal office of the Company (the "Principal Office"), ---------------- and upon payment to it by certified check or bank draft or wire transfer of immediately available funds to the order of the Company of the purchase price for the shares to be purchased upon such exercise. The person entitled to the shares so purchased shall be treated for all purposes as the holder of such shares as of the close of business on the date of exercise and certificates for the shares of stock so purchased shall be delivered to the person so entitled within a reasonable time, not exceeding thirty (30) days, after such exercise. Unless this Warrant has expired, a new Warrant of like tenor and for such number of shares as the holder of this Warrant shall direct, representing in the aggregate the right to purchase a number of shares with respect to which this Warrant shall not have been exercised, shall also be issued to the holder of this Warrant within such time. 3. Conversion Right. ---------------- (a) In lieu of the payment of the Exercise Price, the Warrant Holder shall have the right (but not the obligation), to require the Company to convert this Warrant, in whole or in part, into shares of Common Stock (the "Conversion Right") as provided for in this Section 3. Upon exercise of the ---------------- Conversion Right, the Company shall deliver to the Warrant Holder (without payment by the Warrant Holder of any of the Warrant Price) in accordance with Section 2 that number of shares of Common Stock equal to the quotient obtained by dividing (i) the value of the Warrant at the time the Conversion Right is exercised (determined by subtracting the aggregate Warrant Price in effect immediately prior to the exercise of the Conversion Right from the aggregate Current Market Price (as defined herein) for the shares of Common Stock issuable upon exercise of the Warrant immediately prior to the exercise of the Conversion Right) by (ii) the Current Market Price of one share of Common Stock immediately prior to the exercise of the Conversion Right. (b) The Conversion Right may be exercised by the Warrant Holder at any time and from time to time prior to 5:00 p.m. (Eastern Time) on the Expiration Date by 2 surrender of the Warrant, together with notice of such exercise, to the Company, and specifying the total number of shares of Common Stock that the Warrant Holder will be issued pursuant to such conversion. (c) Current Market Price of a share of Common Stock as of a particular date (the "Determination Date") shall mean the average closing price ------------------ of the Company's Common Stock on the principal securities exchange or market on which such shares are then traded for the last thirty (30) trading days prior to the Determination Date, or if the Common Stock is not traded on any such principal securities exchange or market at the time the Conversion Right is exercised, a market price per share determined in good faith by the Board of Directors of the Company or, if such determination is not satisfactory to the Warrant Holder, by a nationally recognized investment banking firm selected by the Company and the Warrant Holder, the expenses for which shall be borne equally by the Company and the Warrant Holder. 4. Exchange. This Warrant is exchangeable, upon the surrender hereof -------- by the holder hereof at the Principal Office of the Company, for new Warrants of like tenor registered in such holder's name and representing in the aggregate the right to purchase the number of shares purchasable under the Warrant being exchanged, each of such new Warrants to represent the right to subscribe for and purchase such number of shares as shall be designated by said holder at the time of such surrender. 5. Transfer. Any transfer or assignment of this Warrant, whether in -------- whole or in part without, must be made in compliance with all applicable federal and state securities laws and the Company shall not be required to give effect to any such purported transfer or assignment unless it is reasonably satisfied that such transfer has been made in compliance with all applicable federal and state securities laws. Subject to the immediately preceding sentence, this Warrant is transferable, in whole or in part, at the Principal Office of the Company by the holder hereof, in person or by duly authorized attorney, upon presentation of this Warrant, properly endorsed, for transfer. Each holder of this Warrant, by holding it, agrees that the Warrant, when endorsed in blank, may be deemed negotiable, and that the holder hereof, when the Warrant shall have been so endorsed, may be treated by the Company and all other persons dealing with the Warrant as the absolute owner hereof for any purpose and as the person entitled to exercise the rights represented by the Warrant, or to the transfer thereof on the books of the Company, any notice to the contrary notwithstanding. 6. Certain Covenants of the Company. The Company covenants and -------------------------------- agrees that all shares which may be issued upon the exercise of this Warrant will, upon issuance, be duly authorized and validly issued, fully paid and nonassessable. The Company covenants and agrees that none of the shares which may be issued upon the exercise of this Warrant will, upon issuance, be in violation of or subject to any preemptive rights of any person. The Company further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized, and reserved for the purpose of issue upon exercise of the purchase rights evidenced by this Warrant, a sufficient number of shares of its Common Stock to provide for the exercise of the rights represented by this Warrant. 3 7. Adjustment of Warrant Price and Number of Shares. The number and ------------------------------------------------ kind of securities purchasable upon the exercise of the Warrants and the Warrant Price shall be subject to adjustment from time to time upon the happening of certain events as follows: (a) Reclassification, Consolidation or Merger. At any time while ----------------------------------------- the Warrants remain outstanding and unexpired, in case of any reclassification or change of outstanding securities issuable upon exercise of the Warrants (other than a change in par value, or from par value to no par value, or from no par value to par value or as a result of a subdivision or combination of outstanding securities issuable upon the exercise of the Warrants) or in case of any consolidation or merger of the Company with or into another corporation (other than a merger with another corporation in which the Company is a continuing corporation and which does not result in any reclassification or change of rights of outstanding securities issuable upon exercise of the Warrants, other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination of outstanding securities issuable upon exercise of the Warrants), the Company, or such successor corporation, as the case may be, shall, without payment of any additional consideration therefor, execute new Warrants providing that the holders of the Warrants shall have the right to exercise such new Warrants (upon terms not less favorable to the holders than those then applicable to the Warrants) and to receive upon such exercise, in lieu of each share of Common Stock or other security theretofore issuable upon exercise of the Warrants, the kind and amount of shares of stock, other securities, money or property receivable upon such reclassification, change, consolidation or merger by the holder of one share of Common Stock or other security issuable upon exercise of the Warrants had the Warrants been exercised immediately prior to such reclassification, change, consolidation or merger. Such new Warrants shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 7. The provisions of this subsection 7(a) shall similarly apply to successive reclassifications, changes, consolidations and mergers. (b) Subdivision or Combination of Shares. If the Company at any ------------------------------------ time while the Warrants remain outstanding and unexpired shall subdivide or combine its Common Stock, (i) the Warrant Price shall be proportionately reduced, and the number of shares of Common Stock for which this Warrant may be exercised shall be proportionately increased, in case of subdivision of such shares, as of the effective date of such subdivision, or, if the Company shall take a record of holders of its Common Stock for the purpose of so subdividing, as of such record date, whichever is earlier, or (ii) the Warrant Price shall be proportionately increased, and the number of shares of Common Stock for which this Warrant may be exercised shall be proportionately reduced, in the case of combination of such shares, as of the effective date of such combination, or, if the Company shall take a record of holders of its Common Stock for the purpose of so combining, as of such record date, whichever is earlier. (c) Stock Dividends. If the Company at any time while the --------------- Warrants remain outstanding and unexpired shall pay a dividend in shares of its Common Stock, or make other distribution to the holders of Common Stock or of options, warrants or rights to subscribe for or purchase shares of Common Stock or of evidences of indebtedness issued by the Company 4 or any other person, then the Warrant Price shall be adjusted, as of the date the Company shall take a record of the holders of its Common Stock for the purpose of receiving such dividend or other distribution (or if no such record is taken, as at the date of such payment or other distribution), to that price determined by multiplying the Warrant Price in effect immediately prior to such payment or other distribution by a fraction (i) the numerator of which shall be the total number of shares of Common Stock outstanding immediately prior to such dividend or distribution, and (ii) the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such dividend or distribution (the "Fraction"), and the number of shares of Common Stock issuable upon exercise of this Warrant shall be adjusted by multiplying such number by the reciprocal of the Fraction. The number of shares of Common Stock at any time outstanding shall not include any shares thereof then directly or indirectly owned or held by or for the account of the Company or any wholly-owned subsidiary. The provisions of this subsection 6(c) shall not apply under any of the circumstances for which an adjustment is provided in subsections 6(a) or 6(b). (d) Liquidating Dividends, Etc. If the Company at any time while -------------------------- the Warrants remain outstanding and unexpired makes a distribution of its assets to the holders of its Common Stock as a dividend in liquidation or by way of return of capital or other than as a dividend payable out of earnings or surplus legally available for dividends under applicable law or any distribution to such holders made in respect of the sale of all or substantially all of the Company's assets (other than under the circumstances provided for in the foregoing subsections 7(a) through 7(c)), the Warrant Holder shall be entitled to receive upon the exercise hereof, in addition to the shares of Common Stock receivable upon such exercise, and without payment of any consideration other than the Warrant Price, an amount of such assets so distributed equal to the value of such distribution per share of Common Stock multiplied by the number of shares of Common Stock which, on the record date for such distribution, are issuable upon exercise of this Warrant (with no further adjustment being made following any event which causes a subsequent adjustment in the number of shares of Common Stock issuable upon the exercise hereof), and an appropriate provision therefor shall be made a part of any such distribution. The value of a distribution which is paid in other than cash shall be determined by 75% of the members of the Board of Directors of the Company, or if 75% of the members of the Board of Directors are unable to agree upon the value of such consideration, the value thereof shall be determined by an independent investment bank of nationally recognized stature that is selected by 75% of the members of the Board of Directors. (e) Notice of Adjustments. Whenever the Warrant Price or the --------------------- number of shares of Common Stock purchasable under the terms of this Warrant at the Warrant Price shall be adjusted pursuant to this Section 6, the Company shall promptly prepare a certificate signed by its President or a Vice President and by its Treasurer or Assistant Treasurer or its Secretary or Assistant Secretary, setting forth in reasonable detail the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated (including a description of the basis on which the Company's Board of Directors made any determination hereunder), and the Warrant Price and number of shares of Common Stock purchasable at that Warrant Price after giving effect to such adjustment, and shall promptly cause copies of such certificate to be mailed (by first class and postage prepaid) to the registered holder of this Warrant. 5 8. Fractional Shares. No fractional shares of the Company's Common ----------------- Stock will be issued in connection with any purchase hereunder but in lieu of such fractional shares, the Company shall make a cash refund therefor equal in amount to the product of the applicable fraction multiplied by the Warrant Price paid by the holder for its Warrant Shares upon such exercise. 9. Loss, Theft, Destruction or Mutilation. Upon receipt by the -------------------------------------- Company of evidence reasonably satisfactory to it that any Warrant has been mutilated, destroyed, lost or stolen, and in the case of any destroyed, lost or stolen Warrant, a bond of indemnity reasonably satisfactory to the Company, or in the case of a mutilated Warrant, upon surrender and cancellation thereof, the Company will execute and deliver in the Warrant Holder's name, in exchange and substitution for the Warrant so mutilated, destroyed, lost or stolen, a new Warrant of like tenor substantially in the form thereof with appropriate insertions and variations. 10. Notices. All notices, demands and other communications provided -------- for or permitted hereunder shall be made in writing and shall be by registered or certified first class mail, return receipt requested, telecopier, courier service, overnight mail or personal delivery: (i) if to the Warrant Holder: Greenlake Holdings II LLC c/o Greenway Partners, L.P. 277 Park Avenue New York, NY 10016 Telecopy: (212) 350-5253 Attention: Gary Duberstein with a copy to: Weil, Gotshal & Manges 767 Fifth Avenue New York, New York 10153 Telecopy: (212) 310-8007 Attention: David Blittner, Esq. (ii) if to the Company, to the attention of each of its Treasurer and General Counsel at: Outboard Marine Corporation 100 Sea-Horse Drive Waukegan, IL 60085 Telecopy: (847) 689-6246 with a copy to: 6 Davis, Polk & Wardwell 450 Lexington Avenue New York, NY 10017 Telecopy: (212) 450-4800 Attention: Julia K. Cowles, Esq. All such notices and communications shall be deemed to have been duly given when hand delivered by hand, if personally delivered; when delivered by courier or overnight mail, if delivered by commercial courier service or overnight mail; five (5) business days after being deposited in the mail, postage prepaid, if mailed; and when receipt is mechanically acknowledged, if telecopied. Any party may by notice given in accordance with this Section 10 designate another address or person for receipt of notices hereunder. 11. Headings. The descriptive headings of the several sections of -------- this Warrant are inserted for convenience only and do not constitute a part of this Warrant. 12. Payment of Taxes. The issuance of certificates for Warrant ---------------- Shares shall be made without charge to the Warrant Holder for any stock transfer or other issuance tax in respect thereto; provided, however, that the Warrant -------- ------- Holder shall be required to pay any and all taxes that may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the then Warrant Holder as upon the books of the Company. 13. Binding Effect; Benefits. This Warrant shall inure to the ------------------------ benefit of and shall be binding upon the Company and the Warrant Holder and their respective successors and assigns. Nothing in this Warrant, expressed or implied, is intended to or shall confer on any person other than the Company and the Warrant Holder, or their respective successors or assigns, any rights, remedies, obligations or liabilities under or by reason of this Warrant. 14. Severability. Any term or provision of this Warrant which is ------------ invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the terms and provisions of this Warrant or affecting the validity or enforceability of any of the terms or provisions of this Warrant in any other jurisdiction. 15. Governing Law. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED ------------- IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO THE CONFLICTS OF LAW PRINCIPLES THEREOF. 16. No Rights or Liabilities as Stockholders. No Warrant Holder ---------------------------------------- shall, as such, be entitled to vote or to receive dividends or be deemed the holder of Common Stock that may at any time be issuable upon exercise of this Warrant for any purpose whatsoever, nor shall anything contained herein be construed to confer upon the Warrant Holder, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issue or reclassification of stock, change of par value 7 or change of stock to no par value, consolidation, merger or conveyance or otherwise), or to receive notice of meetings, or to receive dividends or subscription rights, until such Warrant Holder shall have exercised this Warrant and been issued Common Stock in accordance with the provisions hereof. Nothing contained in this Warrant shall be determined as imposing any liabilities on the Warrant Holder to purchase any securities, whether such liabilities are asserted by the Company or by creditors or stockholders of the Company or otherwise. 17. Compliance with Securities Laws. ------------------------------- (a) The Warrant Holder, by acceptance hereof, acknowledges that this Warrant and the shares of Common Stock to be issued upon exercise hereof are being acquired solely for the Warrant Holder's own account and not as a nominee for any other party, and for investment, and that the Warrant Holder will not offer, sell or otherwise dispose of this Warrant or any shares of Common Stock to be issued upon exercise hereof except under circumstances that will not result in a violation of the Securities Act or any state securities laws. Upon exercise of this Warrant, the Warrant Holder shall, if requested by the Company, confirm in writing, in a form satisfactory to the Company, that the shares of Common Stock so purchased are being acquired solely for the Warrant Holder's own account and not as a nominee for any other party, for investment, and not with a view toward distribution or resale. (b) This warrant and all shares of Common Stock issued upon exercise hereof shall be stamped or imprinted with a legend in substantially the following form (in addition to any legend required by state securities laws): "THE SECURITIES REPRESENTED BY THIS CERTIFICATE OR RECEIVABLE UPON THE EXERCISE OR CONVERSION THEREOF OR AS A RESULT OF THE OWNERSHIP HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE. THE SECURITIES MAY NOT BE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS." "THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A STOCKHOLDERS AGREEMENT AMONG THE COMPANY AND THE ORIGINAL PURCHASERS OF THE SECURITIES REPRESENTED HEREBY. TRANSFEREES OF SUCH SECURITIES SHOULD REVIEW SUCH AGREEMENT TO DETERMINE THEIR RIGHTS AND OBLIGATIONS." 18. Market Stand-Off Agreement. Each holder of this Warrant or any -------------------------- portion hereof hereby agrees that, during the period of duration specified by the Company and, in the case of an underwritten public offering, an underwriter of Common Stock or other securities of the Company, following the effective date of a registration statement of the Company filed under the Act, it shall not, to the extent requested by the Company and such underwriter, directly or 8 indirectly sell, offer to sell, contract to sell (including, without limitation, any short sale, grant any option to purchase or otherwise transfer or dispose of (other than to donees who agree to be similarly bound) all or any portion of this Warrant or shares of Common Stock issued or issuable upon exercise of the Warrant held by it at any time during such period except common stock included in such registration; provided, however, that such market stand-off time period shall not exceed 180 days in the case of an initial public offering and 90 days in the case of all other offerings. In order to enforce the foregoing covenant, the Company may impose stop-transfer instruction with respect to the foregoing restriction until the end of such period. 9 IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer on the date of this Warrant. OUTBOARD MARINE CORPORATION By:___________________________________ 10 Exhibit A --------- PURCHASE AGREEMENT ------------------ Date: _________________________ TO: The undersigned, pursuant to the provisions set forth in the attached Warrant, hereby agrees to purchase __________ shares of Common Stock covered by such Warrant, and makes payment herewith in full therefor at the price per share provided by this Warrant. Signature: _________________________________ Address: _________________________________ _________________________________ _________________________________ * * * ASSIGNMENT ---------- For Value Received, __________________________________________________ hereby sells, assigns and transfers all of the rights of the undersigned under the within Warrant, with respect to the number of shares of Common Stock covered by such Warrant, to: NAME OF ASSIGNEE ADDRESS NO. OF SHARES - ---------------- ------- ------------- Dated: _______________________ Signature: ______________________________ Witness: ________________________________ 1 EX-4.13 8 REGISTRATION RIGHTS AGREEMENT ================================================================================ REGISTRATION RIGHTS AGREEMENT among OUTBOARD MARINE CORPORATION, QUANTUM INDUSTRIAL PARTNERS LDC, GREENLAKE HOLDINGS II LLC and GREENMARINE HOLDINGS LLC -------------------------- Dated: January 28, 2000 -------------------------- ================================================================================ TABLE OF CONTENTS -----------------
Page ---- 1. Definitions.............................................................. 1 2. General; Securities Subject to this Agreement............................ 5 (a) Grant of Rights................................................... 5 (b) Registrable Securities............................................ 5 (c) Holders of Registrable Securities................................. 5 3. Demand Registration...................................................... 6 (a) Request for Demand Registration................................... 6 (b) Incidental or "Piggy-Back" Rights with Respect to a Demand Registration...................................................... 6 (c) Effective Demand Registration..................................... 7 (d) Expenses.......................................................... 7 (e) Underwriting Procedures........................................... 8 (f) Selection of Underwriters......................................... 8 4. Incidental or "Piggy-Back" Registration.................................. 8 5. Form S-3 Registration.................................................... 10 (a) Request for a Form S-3 Registration............................... 10 (b) Form S-3 Underwriting Procedures.................................. 10 (c) Limitations on Form S-3 Registrations............................. 11 (d) Expenses.......................................................... 11 (e) No Demand Registration............................................ 12 6. Holdback Agreements...................................................... 12 (a) Restrictions on Public Sale by Designated Holders................. 12 (b) Restrictions on Public Sale by the Company........................ 12 7. Registration Procedures.................................................. 12 (a) Obligations of the Company........................................ 12 (b) Seller Information................................................ 15 (c) Notice to Discontinue............................................. 16 (d) Registration Expenses............................................. 16 8. Indemnification; Contribution............................................ 16 (a) Indemnification by the Company.................................... 16 (b) Indemnification by Designated Holders............................. 17 (c) Conduct of Indemnification Proceedings............................ 18 (d) Contribution...................................................... 18
i 9. Rule 144................................................................. 19 10. Miscellaneous............................................................ 19 (a) Recapitalizations, Exchanges, etc................................. 19 (b) No Inconsistent Agreements........................................ 20 (c) Remedies.......................................................... 20 (d) Amendments and Waivers............................................ 20 (e) Notices........................................................... 20 (f) Successors and Assigns; Third Party Beneficiaries................. 22 (g) Counterparts...................................................... 23 (h) Headings.......................................................... 23 (i) GOVERNING LAW..................................................... 23 (j) Severability...................................................... 23 (k) Entire Agreement.................................................. 23 (l) Further Assurances................................................ 24 (m) Other Agreements.................................................. 24
ii EXHIBIT 4.13 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT, dated January 28, 2000 (this "Agreement"), among Outboard Marine Corporation, a Delaware corporation (the "Company"), Quantum Industrial Partners LDC, a Cayman Islands limited duration company ("QIP"), Greenlake Holdings II LLC, a Delaware limited liability company --- ("Greenlake"), and Greenmarine Holdings LLC, a Delaware limited liability --------- company ("Greenmarine," and together with QIP and Greenlake, the ----------- "Stockholders"). ------------ WHEREAS, pursuant to the Series A Convertible Preferred Stock and Warrant Purchase Agreement, dated the date hereof (the "Stock Purchase -------------- Agreement"), among the Company, QIP and Greenlake, the Company has agreed to issue and sell to QIP and Greenlake, (a) an aggregate of 650,000 shares of Series A Convertible Preferred Stock, par value $.01 per share, of the Company (the "Preferred Stock") and (b) warrants (the "Warrants") to purchase, subject --------------- -------- to the terms and conditions thereof, an aggregate of 5,750,000 shares of Common Stock; WHEREAS, concurrently herewith, the Company, QIP and Greenlake are entering into the Stockholders' Agreement (as hereinafter defined), pursuant to which the parties thereto have agreed to, among other things, certain first offer and tag-along rights and preemptive rights; WHEREAS, QIP and Greenlake, or Affiliates thereof, are the members of Greenmarine, and Greenmarine is the holder of 20,400,000 shares of Common Stock; and WHEREAS, in order to induce each of QIP and Greenlake to purchase its shares of Preferred Stock and the Warrants, the Company has agreed to grant registration rights with respect to the Registrable Securities (as hereinafter defined) as set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions. As used in this Agreement the following terms have ----------- the meanings indicated: "Affiliate" shall mean any Person who is an "affiliate" (as --------- defined in Rule 12b-2 of the General Rules and Regulations under the Exchange Act) of, and any Person controlling, controlled by or under common control with, any 2 Stockholder. For the purposes of this Agreement, "control" includes the ability to have investment discretion through contractual means or by operation of law. "Approved Underwriter" has the meaning set forth in Section 3(f) -------------------- of this Agreement. "Business Day" means any day other than a Saturday, Sunday or ------------ other day on which commercial banks in the State of New York are authorized or required by law or executive order to close. "Closing Price" means, with respect to the Registrable ------------- Securities, as of the date of determination, (a) the closing price per share of a Registrable Security on such date published in The Wall Street Journal or, if ----------------------- no such closing price on such date is published in The Wall Street Journal, the ----------------------- average of the closing bid and asked prices on such date, as officially reported on the principal national securities exchange (including, without limitation, The Nasdaq Stock Market, Inc.) on which the Registrable Securities are then listed or admitted to trading; or (b) if the Registrable Securities are not then listed or admitted to trading on any national securities exchange but are designated as national market system securities by the NASD, the last trading price per share of a Registrable Security on such date; or (c) if there shall have been no trading on such date or if the Registrable Securities are not so designated, the average of the reported closing bid and asked prices of the Registrable Securities on such date as shown by The Nasdaq Stock Market, Inc. (or its successor) and reported by any member firm of The New York Stock Exchange, Inc. selected by the Company; or (d) if none of (a), (b) or (c) is applicable, a market price per share determined in good faith by the Company_s Board of Directors or, if such determination is not satisfactory to the Designated Holder for whom such determination is being made, by a nationally recognized investment banking, accounting or consulting firm selected by the Company and such Designated Holder, the expenses for which shall be borne equally by the Company and such Designated Holder. If trading is conducted on a continuous basis on any exchange, then the closing price shall be at 4:00 P.M. New York City time. "Commission" means the Securities and Exchange Commission or any ---------- similar agency then having jurisdiction to enforce the Securities Act. "Common Stock" means the Common Stock, par value $.01 per share, ------------ of the Company or any other capital stock of the Company into which such stock is reclassified or reconstituted and any other common stock of the Company. "Company" has the meaning set forth in the recitals to this ------- Agreement. 3 "Company Underwriter" has the meaning set forth in Section 4(a) ------------------- of this Agreement. "Demand Registration" has the meaning set forth in Section 3(a) ------------------- of this Agreement. "Designated Holder" means each of the Stockholders and any ---------------- transferee of any of them to whom Registrable Securities have been transferred in accordance with Section 10(f) of this Agreement, other than a transferee to whom Registrable Securities have been transferred pursuant to a Registration Statement under the Securities Act or Rule 144 or Regulation S under the Securities Act (or any successor rule thereto). "Exchange Act" means the Securities Exchange Act of 1934, as ------------ amended, and the rules and regulations of the Commission thereunder. "Greenlake" has the meaning set forth in the recitals to this --------- Agreement. "Greenmarine" has the meaning set forth in the recitals to this ----------- Agreement. "Holders' Counsel" has the meaning set forth in Section 3(d) of ---------------- this Agreement. "Incidental Registration" has the meaning set forth in Section ----------------------- 4(a) of this Agreement. "Indemnified Party" has the meaning set forth in Section 8(c) of ----------------- this Agreement. "Indemnifying Party" has the meaning set forth in Section 8(c) of ------------------ this Agreement. "Initial Public Offering" means the initial public offering of ----------------------- the shares of Common Stock of the Company pursuant to an effective Registration Statement filed under the Securities Act. "Initiating Holders" has the meaning set forth in Section 3(a) of ------------------ this Agreement. "Inspector" has the meaning set forth in Section 7(a)(vii) of --------- this Agreement. 4 "IPO Effectiveness Date" means the date upon which the Company ---------------------- closes its Initial Public Offering. "Liability" has the meaning set forth in Section 8(a) of this --------- Agreement. "Market Price" means, on any date of determination, the average ------------ of the daily Closing Price of the Registrable Securities for the immediately preceding thirty (30) days on which the national securities exchanges are open for trading. "NASD" means the National Association of Securities Dealers, Inc. ---- "Person" means any individual, firm, corporation, partnership, ------ limited liability company, trust, incorporated or unincorporated association, joint venture, joint stock company, limited liability company, government (or an agency or political subdivision thereof) or other entity of any kind, and shall include any successor (by merger or otherwise) of such entity. "Preferred Stock" has the meaning set forth in the recitals to --------------- this Agreement. "QIP" has the meaning set forth in the recitals to this --- Agreement. "Records" has the meaning set forth in Section 7(a)(vii) of this ------- Agreement. "Registrable Securities" means each of the following: (a) any ---------------------- and all shares of Common Stock owned by the Designated Holders on the date hereof or issued or issuable to such Designated Holders upon conversion of shares of Preferred Stock or exercise of the Warrants and (b) any shares of Common Stock issued or issuable to any of the Designated Holders with respect to the Registrable Securities by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise and any shares of Common Stock issuable upon conversion, exercise or exchange thereof. "Registration Expenses" has the meaning set forth in Section 7(d) --------------------- of this Agreement. "Registration Statement" means a Registration Statement filed ---------------------- pursuant to the Securities Act. 5 "S-3 Initiating Holders" has the meaning set forth in Section ---------------------- 5(a) of this Agreement. "S-3 Registration" has the meaning set forth in Section 5(a) of ---------------- this Agreement. "Securities Act" means the Securities Act of 1933, as amended, -------------- and the rules and regulations of the Commission promulgated thereunder. "Stock Purchase Agreement" has the meaning set forth in the ------------------------ recitals to this Agreement. "Stockholders" means each of QIP, Greenlake and Greenmarine ------------ and any transferee of any of them to whom Registrable Securities are transferred in accordance with Section 10(f) of this Agreement. "Stockholders' Agreement" means the Stockholders' Agreement, ------------ dated the date hereof, among the Company, QIP and Greenlake. "Warrants" has the meaning set forth in the recitals to this -------- Agreement. 2. General; Securities Subject to this Agreement. --------------------------------------------- (a) Grant of Rights. The Company hereby grants registration --------------- rights to the Designated Holders upon the terms and conditions set forth in this Agreement. (b) Registrable Securities. For the purposes of this Agreement, ---------------------- Registrable Securities will cease to be Registrable Securities as to any Designated Holder, when (i) a Registration Statement covering such Registrable Securities has been declared effective under the Securities Act by the Commission and such Registrable Securities have been disposed of pursuant to such effective Registration Statement, (ii) the entire amount of the Registrable Securities held by such Designated Holder may be sold in a single sale, in the opinion of counsel satisfactory to the Company and the Designated Holder, each in their reasonable judgment, pursuant to Rule 144 (or any successor provision then in effect) under the Securities Act, or (iii) the Registrable Securities are proposed to be sold or distributed by a Person not entitled to the registration rights granted by this Agreement. (c) Holders of Registrable Securities. A Person is deemed to --------------------------------- be a holder of Registrable Securities whenever such Person owns of record Registrable Securities, or holds an option granted by the Company to purchase, or a security issued by the Company convertible into or exercisable or exchangeable for, Registrable 6 Securities whether or not such acquisition or conversion has actually been effected. If the Company receives conflicting instructions, notices or elections from two or more Persons with respect to the same Registrable Securities, the Company may act upon the basis of the instructions, notice or election received from the registered owner of such Registrable Securities. Registrable Securities issuable upon exercise of an option or upon conversion of another security shall be deemed outstanding for the purposes of this Agreement. 3. Demand Registration . ------------------- (a) Request for Demand Registration. At any time commencing 180 ------------------------------- days after the IPO Effectiveness Date, the holders of at least 15% of the then outstanding Registrable Securities that have an aggregate offering price of at least $10,000,000 (the "Initiating Holders"), may make a written request to the ------------------ Company to register, and the Company shall register, under the Securities Act (other than pursuant to a Registration Statement on Form S-4 or S-8 or any successor thereto) (a "Demand Registration"), the number of Registrable ------------------- Securities stated in such request; provided, however, that the Company shall not -------- ------- be obligated to effect more than four such Demand Registrations on a Securities Act registration form other than Form S-3 (or any successor form thereto). If at the time of any request to register Registrable Securities pursuant to this Section 3(a), the Company is engaged in, or has fixed plans to engage in within sixty (60) days of the time of such request, a registered public offering or is engaged in any other activity which, in the good faith determination of the Board of Directors of the Company, would be adversely affected by the Demand Registration to the material detriment of the Company, then the Company may at its option direct that such request be delayed for a reasonable period not in excess of sixty (60) days from the effective date of such offering or the date of completion of such other activity, as the case may be, such right to delay a request to be exercised by the Company not more than two non-consecutive times in any twelve (12) month period; provided, that two such 60-day periods may be -------- consecutive in the event that (i) the Company would be required to disclose in the prospectus contained in the Registration Statement information not otherwise publicly disclosed, and (ii) there is a likelihood, in the reasonable judgment of the Board of Directors of the Company, that such disclosure, or any other action to be taken in connection with such prospectus, would materially and adversely affect or interfere with any financing, acquisition, merger or similar transaction involving the Company. Each request for a Demand Registration by the Initiating Holders shall state the amount of the Registrable Securities proposed to be sold and the intended method of disposition thereof. (b) Incidental or "Piggy-Back" Rights with Respect to a Demand ---------------------------------------------------------- Registration. Each of the Designated Holders (other than Initiating Holders - ------------ which have requested a registration under Section 3(a)) may offer its or his Registrable Securities under any Demand Registration pursuant to this Section 3(b). Within ten (10) days after the receipt of a request for a Demand Registration from an Initiating 7 Holder, the Company shall (i) give written notice thereof to all of the Designated Holders (other than Initiating Holders which have requested a registration under Section 3(a)) and (ii) subject to Section 3(e), include in such registration all of the Registrable Securities held by such Designated Holders from whom the Company has received a written request for inclusion therein within ten (10) days of the receipt by such Designated Holders of such written notice referred to in clause (i) above. Each such request by such Designated Holders shall specify the number of Registrable Securities proposed to be registered. The failure of any Designated Holder to respond within such 10-day period referred to in clause (ii) above shall be deemed to be a waiver of such Designated Holder's rights under this Section 3 with respect to such Demand Registration, provided that any Designated Holder may waive its rights under -------- this Section 3 prior to the expiration of such 10-day period by giving written notice to the Company, with a copy to the Initiating Holders. If a Designated Holder sends the Company a written request for inclusion of part or all of such Designated Holder's Registrable Securities in a registration, such Designated Holder shall not be entitled to withdraw or revoke such request without the prior written consent of the Company in its sole discretion unless, as a result of facts or circumstances arising after the date on which such request was made relating to the Company or to market conditions, such Designated Holder reasonably determines that participation in such registration would have a material adverse effect on such Designated Holder. (c) Effective Demand Registration. The Company shall use its ----------------------------- best efforts to cause any such Demand Registration to become and remain effective not later than sixty (60) days after it receives a request under Section 3(a) hereof. A registration shall not constitute a Demand Registration until it has become effective and remains continuously effective for the lesser of (i) the period during which all Registrable Securities registered in the Demand Registration are sold and (ii) 90 days; provided, however, that a -------- ------- registration shall not constitute a Demand Registration if (x) after such Demand Registration has become effective, such registration or the related offer, sale or distribution of Registrable Securities thereunder is interfered with by any stop order, injunction or other order or requirement of the Commission or other governmental agency or court for any reason not attributable to the Initiating Holders and such interference is not thereafter eliminated or (y) the conditions specified in the underwriting agreement, if any, entered into in connection with such Demand Registration are not satisfied or waived, other than by reason of a failure by the Initiating Holder. (d) Expenses. The Company shall pay all Registration -------- Expenses in connection with a Demand Registration (other than underwriting discounts and commissions and brokerage commissions), including the reasonable fees and expenses of one counsel selected by the Designated Holders holding a majority of the Registrable Securities being registered in such registration ("Holders Counsel") in connection therewith (not to exceed $15,000), whether or --------------- not such Demand Registration becomes effective. 8 (e) Underwriting Procedures. If the Company or the Initiating ----------------------- Holders holding a majority of the Registrable Securities held by all of the Initiating Holders so elect, the Company shall use its reasonable best efforts to cause a Demand Registration to be in the form of a firm commitment underwritten offering and the managing underwriter or underwriters selected for such offering shall be the Approved Underwriter selected in accordance with Section 3(f). In connection with any Demand Registration under this Section 3 involving an underwritten offering, none of the Registrable Securities held by any Designated Holder making a request for inclusion of such Registrable Securities pursuant to Section 3(b) hereof shall be included in such underwritten offering unless such Designated Holder accepts the terms of the offering as agreed upon by the Company, the Initiating Holders and the Approved Underwriter, and then only in such quantity as will not, in the opinion of the Approved Underwriter, be detrimental to of such offering by the Initiating Holders. If the Approved Underwriter advises the Company that the aggregate amount of such Registrable Securities requested to be included in such offering is sufficiently large to be detrimental to such offering, then the Company shall include in such registration only the aggregate amount of Registrable Securities that the Approved Underwriter believes may be sold without any such detrimental effect and shall reduce the amount of Registrable Securities to be included in such registration, first as to the Company, second as to the Designated Holders ----- ------ (who are not Initiating Holders and who requested to participate in such registration pursuant to Section 3(b) hereof) as a group, if any, and third as ----- to the Initiating Holders as a group, pro rata within each group based on the number of Registrable Securities owned by each such Designated Holder or Initiating Holder, as the case may be. (f) Selection of Underwriters. If any Demand Registration or ------------------------- S-3 Registration, as the case may be, of Registrable Securities is in the form of an underwritten offering, the Company shall use its reasonable best efforts to select and obtain an investment banking firm of national reputation to act as the managing underwriter of the offering (the "Approved Underwriter"); provided, -------------------- -------- however, that the Approved Underwriter shall, in any case, also be approved by - ------- the Initiating Holders or S-3 Initiating Holders, as the case may be, such approval not to be unreasonably withheld. 4. Incidental or "Piggy-Back" Registration. --------------------------------------- 9 (a) Request for Incidental Registration. At any time after the IPO ----------------------------------- Effectiveness Date, if the Company proposes to file a Registration Statement under the Securities Act with respect to an offering by the Company for its own account (other than a Registration Statement on Form S-4 or S-8 or any successor thereto or pursuant to Rule 415 under the Securities Act) or for the account of any stockholder of the Company other than the Designated Holders, then the Company shall give written notice of such proposed filing to each of the Designated Holders at least twenty (20) days before the anticipated filing date, and such notice shall describe the proposed registration and distribution and offer such Designated Holders the opportunity to register the number of Registrable Securities as each such Designated Holder may request (an "Incidental Registration"). The Company shall use its reasonable best efforts ----------------------- to cause the managing underwriter or underwriters in the case of a proposed underwritten offering (the "Company Underwriter") to permit each of the Designated Holders who have requested in writing to participate in the Incidental Registration to include its or his Registrable Securities in such offering on the same terms and conditions as the securities of the Company or the account of such other stockholder, as the case may be, included therein. In connection with any Incidental Registration under this Section 4(a) involving an underwritten offering, the Company shall not be required to include any Registrable Securities in such underwritten offering unless the Designated Holders thereof accept the terms of the underwritten offering as agreed upon between the Company, such other stockholders, if any, and the Company Underwriter, and then only in such quantity as the Company Underwriter believes will not be detrimental to the success of the offering by the Company and such other stockholders. If the Company Underwriter determines that the registration of all or part of the Registrable Securities which the Designated Holders have requested to be included would be detrimental to such offering, then the Company shall be required to include in such Incidental Registration, to the extent of the amount that the Company Underwriter believes may be sold without causing such detrimental effect, (i) if such offering is by the Company for its own account, then first, all of the securities to be offered for the account of the ----- Company; second, the Registrable Securities to be offered for the account of the ------ Designated Holders pursuant to this Section 4, pro rata based on the number of Registrable Securities owned by each such Designated Holder; and third, any ----- other securities requested to be included in such offering; or (ii) if such offering is for the account of any stockholder of the Company other than the Designated Holders, then first, all of the securities to be offered for the ----- account of such stockholder; and second, the Registrable Securities to be ------ offered for the account of the Designated Holders pursuant to this Section 4, pro rata based on the number of Registrable Securities owned by each such Designated Holder, and any securities to be offered for the account of the Company, ratably. (b) Expenses. The Company shall bear all Registration Expenses -------- (other than underwriting discounts and commissions and brokerage commissions), including the reasonable fees and expenses of Holders' Counsel in connection therewith (not to exceed $15,000) in connection with any Incidental 10 Registration pursuant to this Section 4, whether or not such Incidental Registration becomes effective. 5. Form S-3 Registration. --------------------- (a) Request for a Form S-3 Registration. Upon the Company ----------------------------------- becoming eligible for use of Form S-3 (or any successor form thereto) under the Securities Act in connection with a public offering of its securities, in the event that the Company shall receive from one or more of the Stockholders (the "S-3 Initiating Holders"), a written request that the Company register, under ---------------------- the Securities Act on Form S-3 (or any successor form then in effect) (an "S-3 --- Registration"), all or a portion of the Registrable Securities owned by such S-3 - ------------ Initiating Holders, the Company shall give written notice of such request to all of the Designated Holders (other than S-3 Initiating Holders which have requested an S-3 Registration under this Section 5(a)) at least thirty (30) days before the anticipated filing date of such Form S-3, and such notice shall describe the proposed registration and offer such Designated Holders the opportunity to register the number of Registrable Securities as each such Designated Holder may request in writing to the Company, given within fifteen (15) days after their receipt from the Company of the written notice of such registration. With respect to each S-3 Registration, the Company shall, subject to Section 5(b), (i) include in such offering the Registrable Securities of the S-3 Initiating Holders, and (ii) use its reasonable best efforts to (x) cause such registration pursuant to this Section 5(a) to become and remain effective as soon as practicable, but in any event not later than forty-five (45) days after it receives a request therefor and (y) include in such offering the Registrable Securities of the Designated Holders (other than S-3 Initiating Holders which have requested an S-3 Registration under this Section 5(a)) who have requested in writing to participate in such registration on the same terms and conditions as the Registrable Securities of the S-3 Initiating Holders included therein. Each S-3 Registration shall remain continuously effective for the lesser of (A) the period during which all Registrable Securities registered in such registration are sold, and (B) 90 days. (b) Form S-3 Underwriting Procedures. If the Company or the S-3 -------------------------------- Initiating Holders holding a majority of the Registrable Securities held by all of the S-3 Initiating Holders so elect, the Company shall use its reasonable best efforts to cause such S-3 Registration pursuant to this Section 5 to be in the form of a firm commitment underwritten offering and the managing underwriter or underwriters selected for such offering shall be the Approved Underwriter selected in accordance with Section 3(f). In connection with any S-3 Registration under Section 5(a) involving an underwritten offering, the Company shall not be required to include any Registrable Securities in such underwritten offering unless the Designated Holders thereof accept the terms of the underwritten offering as agreed upon between the Company, the Approved Underwriter and the S-3 Initiating Holders, and then only in such quantity as such underwriter believes will not be detrimental to of such offering by the S-3 11 Initiating Holders. If the Approved Underwriter believes that the registration of all or part of the Registrable Securities which the S-3 Initiating Holders and the other Designated Holders have requested to be included would be detrimental to the success of such public offering, then the Company shall be required to include in the underwritten offering, to the extent of the amount that the Approved Underwriter believes may be sold without causing such detrimental effect, first, all of the Registrable Securities to be offered for ----- the account of the S-3 Initiating Holders, pro rata based on the number of Registrable Securities owned by such S-3 Initiating Holders; second, the ------ Registrable Securities to be offered for the account of the other Designated Holders who requested inclusion of their Registrable Securities pursuant to Section 5(a), pro rata based on the number of Registrable Securities owned by such Designated Holders; and third, any other securities requested to be ----- included in such offering. (c) Limitations on Form S-3 Registrations. If at the time of any ------------------------------------- request to register Registrable Securities pursuant to Section 5(a), the Company is engaged in, or has fixed plans to engage in within sixty (60) days of the time of such request, a registered public offering or is engaged in any other activity which, in the good faith determination of the Board of Directors of the Company, would be adversely affected by the requested S-3 Registration to the material detriment of the Company, then the Company may at its option direct that such request be delayed for a reasonable period not in excess of sixty (60) days from the effective date of such offering, such right to delay a request to be exercised by the Company not more than two non-consecutive times in any twelve (12) month period; provided, that two such 60-day periods may be -------- consecutive in the event that (i) the Company would be required to disclose in the prospectus relating to such S-3 Registration information not otherwise publicly disclosed, and (ii) there is a likelihood, in the reasonable judgment of the Board of Directors of the Company, that such disclosure, or any other action to be taken in connection with such S-3 Registration would materially and adversely affect or interfere with any financing, acquisition, merger or similar transaction involving the Company. In addition, the Company shall not be required to effect any registration pursuant to Section 5(a), (i) within 180 days after the pricing date of the Initial Public Offering, (ii) if within the twelve (12) month period preceding the date of such request, the Company has effected two (2) registrations on Form S-3 pursuant to Section 5(a), (iii) if Form S-3 is not available for such offering by the S-3 Initiating Holders or (iv) if the S-3 Initiating Holders, together with the Designated Holders (other than S-3 Initiating Holders which have requested an S-3 Registration under Section 5(a)) registering Registrable Securities in such registration, propose to sell their Registrable Securities at an aggregate price (calculated based upon the Market Price of the Registrable Securities on the date of filing of the Form S-3 with respect to such Registrable Securities) to the public of less than $1,000,000. (d) Expenses. The Company shall bear all Registration Expenses -------- (other than underwriting discounts and commissions and brokerage 12 commissions), including the reasonable fees and expenses of Holders' Counsel (not to exceed $15,000) in connection therewith in connection with any S-3 Registration pursuant to this Section 5, whether or not such S-3 Registration become effective. (e) No Demand Registration. No registration requested by any ---------------------- Designated Holder pursuant to this Section 5 shall be deemed a Demand Registration pursuant to Section 3. 6. Holdback Agreements. ------------------- (a) Restrictions on Public Sale by Designated Holders. To the ------------------------------------------------- extent requested (i) by the Company, the Initiating Holders or the S-3 Initiating Holders, as the case may be, in the case of a non-underwritten public offering and (ii) by the Approved Underwriter or the Company Underwriter, as the case may be, in the case of an underwritten public offering, each Designated Holder of Registrable Securities agrees (x) not to directly or indirectly sell, offer to sell, contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose of (other than to donees who agree to be similarly bound) any Registrable Securities or of any securities convertible into or exchangeable or exercisable for such Registrable Securities, including a sale pursuant to Rule 144 under the Securities Act, and (y) not to make any request for a Demand Registration or S-3 Registration under this Agreement, during the ten (10) days prior to, and during the ninety (90) day period (or 180 day period in the case of the Initial Public Offering) or such shorter period, if any, mutually agreed upon by such Designated Holder, the Company and the requesting party beginning on the effective date of such Registration Statement (except as part of such registration). (b) Restrictions on Public Sale by the Company. To the extent ------------------------------------------ requested (i) by QIP or Greenlake, as the case may be, in the case of a non- underwritten public offering and (ii) by the Approved Underwriter or the Company Underwriter, as the case may be, in the case of an underwritten public offering the Company agrees not to effect any public sale or distribution of any of its securities, or any securities convertible into or exchangeable or exercisable for such securities (except pursuant to registrations on Form S-4 or S-8 or any successor thereto), during the ten (10) days prior to, and during the period beginning on the effective date of any Registration Statement in which the Designated Holders of Registrable Securities are participating and ending on the earlier of (i) the date on which all Registrable Securities registered on such Registration Statement are sold and (ii) 90 days after the effective date of such Registration Statement (except as part of such registration). 7. Registration Procedures. ----------------------- (a) Obligations of the Company. Whenever registration of -------------------------- Registrable Securities has been requested pursuant to Section 3, Section 4 or 13 Section 5 of this Agreement, the Company shall use its reasonable best efforts to effect the registration and sale of such Registrable Securities in accordance with the intended method of distribution thereof as quickly as is reasonably practicable, and in connection with any such request, the Company shall, as expeditiously as is reasonably possible: (i) prepare and file with the Commission a Registration Statement on any form for which the Company then qualifies or which counsel for the Company shall deem appropriate and which form shall be available for the sale of such Registrable Securities in accordance with the intended method of distribution thereof, and cause such Registration Statement to become effective; provided, however, that (x) before filing a Registration Statement or prospectus or any amendments or supplements thereto, the Company shall provide Holders' Counsel and any other Inspector with an adequate and appropriate opportunity to review and comment on such Registration Statement and each prospectus included therein (and each amendment or supplement thereto) to be filed with the Commission, subject to such documents being under the Company_s control, and (y) the Company shall notify the Holders_ Counsel and each seller of Registrable Securities of any stop order issued or threatened by the Commission and take all action required to prevent the entry of such stop order or to remove it if entered; (ii) prepare and file with the Commission such amendments and supplements to such Registration Statement and the prospectus used in connection therewith as may be necessary to keep such Registration Statement effective for the lesser of (x) 90 days and (y) such shorter period which will terminate when all Registrable Securities covered by such Registration Statement have been sold, and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement during such period in accordance with the intended methods of disposition by the sellers thereof set forth in such Registration Statement; (iii) furnish to each seller of Registrable Securities, prior to filing a Registration Statement, at least one copy of such Registration Statement as is proposed to be filed, and thereafter such number of copies of such Registration Statement, each amendment and supplement thereto (in each case including all exhibits thereto), and the prospectus included in such Registration Statement (including each preliminary prospectus) as each such seller may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such seller; (iv) register or qualify such Registrable Securities under such other securities or "blue sky" laws of such jurisdictions as any seller of Registrable Securities may request, and to continue such qualification in effect in such jurisdiction for as long as permissible pursuant to the laws of such jurisdiction, or for as long as any such seller requests or until all of such Registrable Securities are sold, whichever is shortest, and do any and all other acts and things which may be reasonably 14 necessary or advisable to enable any such seller to consummate the disposition in such jurisdictions of the Registrable Securities owned by such seller; provided, however, that the Company shall not be required to (x) qualify - -------- ------ generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 7(a)(iv), (y) subject itself to taxation in any such jurisdiction or (z) consent to general service of process in any such jurisdiction; (v) notify each seller of Registrable Securities at any time when a prospectus relating thereto is required to be delivered under the Securities Act, upon discovery that, or upon the happening of any event as a result of which, the prospectus included in such Registration Statement contains an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading and the Company shall promptly prepare a supplement or amendment to such prospectus and furnish to each seller of Registrable Securities a reasonable number of copies of such supplement to or an amendment of such prospectus as may be necessary so that, after delivery to the purchasers of such Registrable Securities, such prospectus shall not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (vi) enter into and perform customary agreements (including an underwriting agreement in customary form with the Approved Underwriter or Company Underwriter, if any, selected as provided in Section 3, Section 4 or Section 5, as the case may be) and take such other actions as are prudent and reasonably required in order to expedite or facilitate the disposition of such Registrable Securities, including, in the case of a firm commitment public offering, causing its officers to participate in "road shows" and other information meetings organized by the Approved Underwriter or Company Underwriter; (vii) make available at reasonable times for inspection by any seller of Registrable Securities, any managing underwriter participating in any disposition of such Registrable Securities pursuant to a Registration Statement, Holders_ Counsel and any attorney, accountant or other agent retained by any such seller or any managing underwriter (each, an "Inspector" and collectively, --------- the "Inspectors"), all financial and other records, pertinent corporate documents and properties of the Company (collectively, the "Records") as shall ------- be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Company_s officers, directors and employees, and the independent public accountants of the Company, to supply all information reasonably requested by any such Inspector in connection with such Registration Statement. Records that the Company determines, in good faith, to be confidential and which it notifies the Inspectors are confidential shall not be disclosed by the Inspectors (and the Inspectors shall confirm their agreement in writing in 15 advance to the Company if the Company shall so request) unless (x) the disclosure of such Records is necessary, in the Company_s judgment, to avoid or correct a misstatement or omission in the Registration Statement, (y) the release of such Records is ordered pursuant to a subpoena or other order from a court of competent jurisdiction after exhaustion of all appeals therefrom or (z) the information in such Records was known to the Inspectors on a non- confidential basis prior to its disclosure by the Company or has been made generally available to the public without a breach of this paragraph. Each seller of Registrable Securities agrees that it shall, upon learning that disclosure of such Records is sought in a court of competent jurisdiction, give notice to the Company and allow the Company, at the Company_s expense, to undertake appropriate action to prevent disclosure of the Records deemed confidential; (viii) if such sale is pursuant to an underwritten offering, obtain a "cold comfort" letter from the Company_s independent public accountants in customary form and covering such matters of the type customarily covered by "cold comfort" letters as Holders' Counsel or the managing underwriter reasonably requests; (ix) comply with all applicable rules and regulations of the Commission, and make available to its security holders, as soon as reasonably practicable but no later than fifteen (15) months after the effective date of the Registration Statement, an earnings statement covering a period of twelve (12) months beginning after the effective date of the Registration Statement, in a manner which satisfies the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder; (x) cause all such Registrable Securities to be listed on each securities exchange on which similar securities issued by the Company are then listed, provided that the applicable listing requirements are satisfied; -------- (xi) keep Holders_ Counsel advised in writing as to the initiation and progress of any registration under Section 3, Section 4 or Section 5 hereunder; (xii) cooperate with each seller of Registrable Securities and each underwriter participating in the disposition of such Registrable Securities and their respective counsel in connection with any filings required to be made with the NASD; and (xiii) take all other steps reasonably necessary to effect the registration of the Registrable Securities contemplated hereby. (b) Seller Information. The Company may require each seller of ------------------ Registrable Securities as to which any registration is being effected to furnish, and such seller shall furnish, to the Company such information regarding the distribution of such securities as the Company may from time to time reasonably request in writing. 16 (c) Notice to Discontinue. Each Designated Holder of Registrable --------------------- Securities agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 7(a)(v), such Designated Holder shall forthwith discontinue disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until such Designated Holder's receipt of the copies of the supplemented or amended prospectus contemplated by Section 7(a)(v) and, if so directed by the Company, such Designated Holder shall deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such Designated Holder's possession, of the prospectus covering such Registrable Securities which is current at the time of receipt of such notice. If the Company shall give any such notice, the Company shall extend the period during which such Registration Statement shall be maintained effective pursuant to this Agreement (including, without limitation, the period referred to in Section 7(a)(ii)) by the number of days during the period from and including the date of the giving of such notice pursuant to Section 7(a)(v) to and including the date when sellers of such Registrable Securities under such Registration Statement shall have received the copies of the supplemented or amended prospectus contemplated by and meeting the requirements of Section 7(a)(v). (d) Registration Expenses. The Company shall pay all expenses --------------------- (other than as set forth in Sections 3(d) and 4(b) arising from or incident to its performance of, or compliance with, this Agreement, including, without limitation, (i) Commission, stock exchange and NASD registration and filing fees, (ii) all fees and expenses incurred in complying with securities or "blue sky" laws (including reasonable fees, charges and disbursements of counsel to any underwriter incurred in connection with "blue sky" qualifications of the Registrable Securities as may be set forth in any underwriting agreement), (iii) all printing, messenger and delivery expenses and (iv) the fees, charges and disbursements of counsel to the Company and of its independent public accountants and any other accounting fees, charges and expenses incurred by the Company (including, without limitation, any expenses arising from any "cold comfort" letters or any special audits incident to or required by any registration or qualification) and any legal fees, charges and expenses incurred by the Company. All of the expenses described in the preceding sentence of this Section 7(d) are referred to herein as "Registration Expenses." --------------------- 8. Indemnification; Contribution. ----------------------------- (a) Indemnification by the Company. The Company agrees to ------------------------------- indemnify and hold harmless each Designated Holder and each Person who controls (within the meaning of Section 15 of the Securities Act) such Designated Holder from and against any and all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation) (collectively, "Liabilities"), ----------- arising out of or based upon any untrue, or allegedly untrue, statement of a material fact contained in any 17 Registration Statement, prospectus or preliminary prospectus or notification or offering circular (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto) or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading under the circumstances such statements were made, except insofar as such Liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission contained in such Registration Statement, preliminary prospectus or final prospectus in reliance upon information concerning such Designated Holder furnished in writing to the Company by such Designated Holder expressly for use therein, including, without limitation, the information furnished to the Company pursuant to Section 8(b) or failure of a Designated Holder to deliver a copy of the registration statement or prospectus or any amendments or supplements thereto after the Company has furnished such Designated Holder with copies of the same. The Company shall also provide customary indemnities to any underwriters of the Registrable Securities, their officers, directors and employees and each Person who controls such underwriters (within the meaning of Section 15 of the Securities Act) to the same extent as provided above with respect to the indemnification of the Designated Holders of Registrable Securities. (b) Indemnification by Designated Holders. In connection with ------------------------------------- any Registration Statement in which a Designated Holder is participating pursuant to Section 3, Section 4 or Section 5 hereof, each such Designated Holder shall promptly furnish to the Company in writing such information with respect to such Designated Holder as the Company may reasonably request or as may be required by law for use in connection with any such Registration Statement or prospectus and all information required to be disclosed in order to make the information previously furnished to the Company by such Designated Holder not materially misleading or necessary to cause such Registration Statement not to omit a material fact with respect to such Designated Holder necessary in order to make the statements therein not misleading. Each Designated Holder agrees to indemnify and hold harmless the Company, its affiliates and directors any underwriter retained by the Company and each Person who controls the Company or such underwriter (within the meaning of Section 15 of the Securities Act) to the same extent as the foregoing indemnity from the Company to the Designated Holders, but only with respect to any such information with respect to such Designated Holder furnished in writing to the Company by such Designated Holder expressly for use in such registration statement or prospectus, including, without limitation, the information furnished to the Company pursuant to this Section 8(b); provided, however, that the total amount -------- ------- to be indemnified by such Designated Holder pursuant to this Section 8(b) shall be limited to the net proceeds received by such Designated Holder in the offering to which the Registration Statement or prospectus relates. (c) Conduct of Indemnification Proceedings. Any Person entitled -------------------------------------- to indemnification hereunder (the "Indemnified Party") agrees to give prompt ----------------- written notice to the indemnifying party (the "Indemnifying Party") after the ------------------ receipt EX-10.23 9 AMENDED & RESTATED LOAN & SECURITY AGREEMENT - -------------------------------------------------------------------------------- EIGHTH 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), BANK OF AMERICA, 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 January 31, 2000 EIGHTH AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT THIS EIGHTH AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT ("Amendment"), dated effective as of January 31, 2000 (the "Amendment 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 Amendment Effective Date, 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 Amendment Effective Date, under the Amended and Restated Loan and Security Agreement referenced under the Recitals hereinbelow; herein called the "Lenders") and BANK OF AMERICA, N.A., (a national banking association and successor in interest to Bank of America, N.A., formerly NationsBank, N.A., successor in interest 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 Amended and Restated 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, the Fourth Amendment to Amended and Restated Loan and Security Agreement dated effective as of February 1, 1999, the Fifth Amendment to Amended and Restated Loan and Security Agreement dated effective as of February 25, 1999, the Sixth Amendment to Amended and Restated Loan and Security Agreement dated effective as of July 30, 1999 and the Seventh Amendment to Amended and Restated Loan and Security Agreement dated effective as of October 27, 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 Definitions ----------- Section 1.1 Definitions. Unless otherwise defined in this Amendment, ----------- terms defined by the Agreement, where used in this Agreement, shall have the same meanings in this Amendment as are prescribed by the Agreement. ARTICLE 2 Amendments ---------- Section 2.1 Amendment and Addition to Definitions in Article 1 of the --------------------------------------------------------- Agreement. - --------- (a) Effective as of the Amendment Effective Date, the following definitions in Article 1 of the Agreement are hereby amended and restated in --------- their entirety to read as follows: "Applicable Margin" means, for each portion of the unpaid balance of ----------------- the Revolving Credit Loans, the percentage specified for each Type of Loan adjacent to such portion as set forth below, respectively:
==================================================================================================== Unpaid Balance of Revolving Credit Loans Eurodollar Loans Base Rate Loans ==================================================================================================== $0 through the amount of the 3.50% 1.50% Trademark IP Allowance ---------------------------------------------------------------------------------------------------- All amounts over the amount of the 2.50% 1.00% Trademark IP Allowance ====================================================================================================
For purposes of determining the Applicable Margin, the unpaid balance of the Revolving Credit Loans shall be deemed to be comprised first of Eurodollar Loans outstanding and thereafter by Base Rate Loans outstanding, notwithstanding the dates on which any such Loans were funded. "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, 2 plus ---- (v) the lesser of (A) 65% with respect to Eligible Domestic Inventory consisting of finished goods, 60% with respect to Eligible Domestic Inventory consisting of raw materials and service parts 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 period of January 1 through May 31 of any calendar year, 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), 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, an -------------- amount equal to the Trademark IP Allowance; 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. (b) Effective as of the Amendment Effective Date, the following definition hereby is added to Article 1 of the Agreement, and is deemed to be --------- inserted immediately following the existing definition of "Trademark Security Agreement": "Trademark IP Allowance" means $20,000,000, reducing by $555,555 on ---------------------- the first day of each calendar month beginning January 1, 2001 and continuing on the first day of each calendar month thereafter through and including December 1, 2001. Section 2.2 Amendment to Section 4.4(a). Effective as of the Amendment --------------------------- Effective Date, paragraph (a) of Section 4.4 of the Agreement is hereby amended ------------- ----------- and restated to read in its entirety as follows: (a) Commitment Fee. Subject to the provisions of Section 16.22, in -------------- ------------- connection with and as consideration for the holding available for the use of Borrowers hereunder the full amount of the Revolving Credit Facility, Borrowers will pay a fee to Agent, for the ratable benefit of the Lenders for each day from the Agreement Date through, but not including, the Termination Date, an amount equal to .375% per annum multiplied by the unused portion of the Revolving Credit Facility for such day. Such fee shall be payable monthly in arrears on each Interest Payment Date and on the date of any permanent reduction in the Revolving Credit Facility and shall be fully earned when due and payable and shall not be subject to refund or rebate. Such fee is not, and shall not be deemed to be, interest or a charge for the use of money. Section 2.3 Amendment to Section 4.4(b). Effective as of the Amendment --------------------------- Effective Date, the first sentence of paragraph (b) of Section 4.4 of the ------------- ----------- Agreement is hereby amended and restated to read in its entirety as follows: 3 Borrowers agree to pay to Agent for the ratable benefit of the Lenders Letter of Credit fees equal to 2.50% per annum based on the average daily aggregate Letter of Credit Amount of all Letters of Credit from time to time outstanding during the term of this Agreement. Section 2.4 Amendment to Section 12.1. Effective as of the Amendment ------------------------- Effective Date, Section 12.1 of the Agreement is hereby amended and restated to ------------ read in its entirety as follows: Section 12.1 Financial Covenants. ------------------- (a) Minimum Availability. The aggregate amount calculated under -------------------- paragraph (b) of the definition of "Borrowing Base," on any date, less the ------------- unpaid balance of Revolving Credit Loans on such date, shall not be less than the amount specified for the period in which such date occurs, as follows:
Period Amount ------ ------ February 1, 2000 through April 30, 2000 $15,000,000 May 1, 2000 through June 30, 2000 $25,000,000 July 1, 2000 through September 30, 2000 $10,000,000 October 1, 2000 through December 31, 2000 $25,000,000 January 1, 2001 through April 30, 2001 $15,000,000 May 1, 2001 through June 30, 2001 $25,000,000 July 1, 2001 through September 30, 2001 $10,000,000 October 1, 2001 through December 31, 2001 $25,000,000
(b) Minimum EBITDA. OMC's Consolidated EBITDA calculated as of the -------------- end of any fiscal quarter either (i) for such fiscal quarter, shall not be ------ less than the amount specified for such quarter-end under the heading below entitled "Quarter Amount" or (ii) for the preceding four (4) fiscal quarters, shall not be less than the amount specified for such quarter-end under the heading below entitled "Preceding Four Quarters Amount," as follows:
Preceding Quarter Ending Quarter Amount Four Quarters Amount -------------- --------------- -------------------- March 31, 2000 ($8,900,000) $ 74,678,000 June 30, 2000 $ 28,000,000 $ 48,211,000 September 30, 2000 $ 34,000,000 $ 51,016,000 December 31, 2000 $ 16,000,000 $ 69,100,000 March 31, 2001 $ 4,800,000 $ 82,800,000 June 30, 2001 $ 41,000,000 $ 95,800,000 September 30, 2001 $ 41,500,000 $103,300,000 December 31, 2001 $ 21,000,000 $108,300,000
Section 2.5 Amendment to Section 12.5. Effective as of the Amendment ------------------------- Effective Date, Section 12.5 of the Agreement is hereby amended and restated to ------------ read in its entirety as follows: 4 Section 12.5 Capital and Tooling Expenditures. Capital and Tooling -------------------------------- Expenditures in the aggregate for all Loan Parties either (i) for any ------ fiscal quarter of OMC, shall not exceed the amount set forth below for such fiscal quarter under the heading below entitled "Quarter" or (ii) for the -- calendar year-to-date period ending as of the last day of such fiscal quarter, shall not exceed the amount set forth below for such fiscal quarter under the heading entitled "Cumulative YTD," as follows:
Quarter Ending Quarter Cumulative YTD -------------- ------- -------------- March 31, 2000 $21,000,000 $21,000,000 June 30, 2000 $22,000,000 $43,000,000 September 30, 2000 $20,000,000 $57,000,000 December 31, 2000 $15,000,000 $72,000,000 March 31, 2001 $26,000,000 $26,000,000 June 30, 2001 $27,500,000 $49,000,000 September 30, 2001 $25,000,000 $70,000,000 December 31, 2001 $17,500,000 $83,500,000
ARTICLE 3 Miscellaneous ------------- Section 3.1 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 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; (iv) Equity and/or Subordinated Indebtedness Contribution. ---------------------------------------------------- Evidence of receipt by OMC of cash proceeds of new equity contributions and/or Subordinated Indebtedness in an aggregate amount of at least $65,000,000, on terms in form and substance satisfactory to Agent and the Lenders; (v) Trademark Appraisal. An appraisal setting forth the ------------------- appraised value of the Proprietary Rights listed in Schedule 7.1(z-1) ----------------- to the Agreement, performed by Arthur Andersen, LLP or other credentialed appraiser acceptable to Agent, on a valuation basis, and otherwise in form and substance satisfactory to, Agent. 5 (vi) Agency Account Agreements. An Agency Account Agreement, ------------------------- duly executed, for each bank account designated in Schedule 3.2(f) to --------------- this Agreement. (vii) Amendment Fee. Payment of an amendment fee in an amount ------------- agreed upon among the Loan Parties, Agent and the Lenders. (viii) Additional Information. Agent shall have received such ---------------------- additional documents, instruments and information as Agent may reasonably request to effect the transactions contemplated hereby; (ix) 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 as a condition for effectiveness of this Amendment). (c) 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). (d) 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. (e) No Default or Event of Default shall have occurred and be continuing. Section 3.2 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 Partys 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), (c) no Default or Event of Default has occurred and is continuing, (d) 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, (e) 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 Amendment Effective Date; (f) Schedule 3.2(f) attached hereto is a correct and complete listing of all --------------- bank accounts maintained by any Loan Party into which any monies, checks, notes, drafts or other payments relating to or constituting proceeds of trade accounts receivable are directed, received or deposited, (g) Schedule 3.2(g) attached --------------- hereto is a complete listing of all agreements, warrants, instruments, notes and other documentation executed and entered into by any Loan Party in connection with the equity contribution and/or Subordinated Indebtedness referenced in Section 3.1(a)(iv), (h) no agreement, warrant, instrument, note or other - ------------------ document listed in Schedule 3.2(g), nor the execution and performance thereof by --------------- the parties thereto, shall constitute a Default or Event of Default and (i) neither the Loan Documents (including as amended by this Amendment), the performance thereof by the parties thereto, nor any consent, amendment, waiver entered into pursuant thereto nor any indebtedness refinancing thereof shall constitute a breach or default under any agreement, warrant, instrument, note or other document listed in Schedule 3.2(g). --------------- Section 3.3 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 Lender, or any closing, shall affect the representations and warranties or the right of Agent and the Lenders to rely upon them. Section 3.4 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 6 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 3.5 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 3.6 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. Without limiting the forgoing, all references in the Agreement to "NationsBank" shall be deemed to mean Bank of America, National Association (successor in interest, by merger, to NationsBank, N.A., successor in interest, by merger, to NationsBank of Texas, N.A.), and its successors and assigns. Section 3.7 General. This Amendment, when signed by each signatory as ------- provided hereinbelow (i) shall be deemed effective prospectively as of the Amendment Effective Date, (ii) contains the entire agreement among the parties and may not be amended or modified except pursuant to the Agreement 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. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers in several counterparts effective as of the date specified in the preamble hereof. BORROWERS: OUTBOARD MARINE CORPORATION By: /S/ Eric T. Martinez ------------------------------------- Name: Eric T. Martinez --------------------------------- Title: Vice President and Treasurer --------------------------------- By: /S/ Robert S. Romano ------------------------------------- Name: Robert S. Romano --------------------------------- Title: Vice President, General Counsel --------------------------------- & Secretary OMC ALUMINUM BOAT GROUP, INC. By: /S/ Eric T. Martinez ------------------------------------- Name: Eric T. Martinez --------------------------------- Title: Treasurer --------------------------------- By: /S/ Robert S. Romano ------------------------------------- Name: Robert S. Romano --------------------------------- Title: Vice President --------------------------------- 7 OMC FISHING BOAT GROUP, INC. By: /S/ Eric T. Martinez ------------------------------------- Name: Eric T. Martinez --------------------------------- Title: Treasurer --------------------------------- By: /S/ Paul A. Luck ------------------------------------- Name: Paul A. Luck --------------------------------- Title: Vice President, Finance --------------------------------- OMC LATIN AMERICA/CARIBBEAN, INC. By: /S/ Eric T. Martinez ------------------------------------- Name: Eric T. Martinez --------------------------------- Title: Vice President --------------------------------- By: /S/ Warwick Armstrong ------------------------------------- Name: Warwick Armstrong --------------------------------- Title: Assistant Treasurer --------------------------------- RECREATIONAL BOAT GROUP LIMITED PARTNERSHIP By: OMC Recreational Boat Group, Inc., General Partner By: /S/ Eric T. Martinez -------------------------------- Name: Eric T. Martinez ------------------------------ Title: Treasurer ----------------------------- By: /S/ John A. Anderson -------------------------------- Name: John A. Anderson ------------------------------ Title: Vice President ----------------------------- GUARANTOR: OMC RECREATIONAL BOAT GROUP, INC. By: /S/ Eric T. Martinez ------------------------------------- Name: Eric T. Martinez --------------------------------- Title: Treasurer --------------------------------- By: /S/ John A. Anderson ------------------------------------- Name: John A. Anderson ----------------------------------- Title: Vice President ---------------------------------- 8 AGENT: BANK OF AMERICA, N.A. In its capacity as Agent By: /S/ Larry Cannariato ------------------------------------- Name: Larry Cannariato ----------------------------------- Title: Vice President ----------------------------------- 9 LENDERS: BANK OF AMERICA, N.A. In its capacity as Lender By: /S/ Larry Cannariato ------------------------------------- Name: Larry Cannariato ----------------------------------- Title: Vice President ----------------------------------- 10 AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO By: /S/ Donna H. Evans ------------------------------------- Name: Donna H. Evans ----------------------------------- Title: Vice President ----------------------------------- 11 FLEET CAPITAL CORPORATION By: /S/ Thomas Maiale ------------------------------------- Name: Thomas Maiale ----------------------------------- Title: Vice President ---------------------------------- 12 THE CIT GROUP/BUSINESS CREDIT, INC. By: /S/ Alan R. Schnacke ------------------------------------- Name: Alan R. Schnake ----------------------------------- Title: Assistant Vice President ---------------------------------- 13 TRANSAMERICA BUSINESS CREDIT CORPORATION By: /S/ Robert Heinz ------------------------------------- Name: Robert Heinz ----------------------------------- Title: Senior Vice President ---------------------------------- 14 FLEET BUSINESS CREDIT CORPORATION By: /S/ Thomas Maiale ------------------------------------- Name: Thomas Maiale ----------------------------------- Title: Vice President ---------------------------------- 15 SCHEDULE 3.2(f) to EIGHTH AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT dated as of January 31, 2000 among Bank of America, N.A., as Agent, Outboard Marine Corporation, et al and the other Loan Parties thereto and the Lenders party thereto Following is a correct and complete listing of all bank accounts maintained by any Loan Party into which any monies, checks, notes, drafts or other payments relating to or constituting proceeds of trade accounts receivable are directed, received or deposited:
Name of Name of Account Institution Account Number ----------- ------- ------- Bank One Outboard Marine Corporation 55-05496 Bank One OMC Concentration Account 10-34198 Bank of America OMC Operating Account 81881-02233 Scotiabank OMC Canada 80002-07298-17
16 SCHEDULE 3.2(g) to EIGHTH AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT dated as of January 31, 2000 among Bank of America, N.A., as Agent, Outboard Marine Corporation, et al and the other Loan Parties thereto and the Lenders party thereto 1. Warrant to Purchase 3,995,940 Shares of Common Stock of Outboard Marine Corporation from Outboard Marine Corporation to Quantum Industrial Partners LDC. 2. Warrant to Purchase 1,754,060 Shares of Common Stock of Outboard Marine Corporation from Outboard Marine Corporation to Greenlake Holdings II LLC. 3. Outboard Marine Corporation Certificate of Powers, Designations, Preferences and Rights of the Series A Convertible Preferred Stock, Par Value $.01 Per Share. 4. Registration Rights Agreement between Outboard Marine Corporation, Quantum Industrial Partners LDC, Greenlake Holdings II LLC and Greenmarine Holdings LLC. 5. Stockholders Agreement between Outboard Marine Corporation, Quantum Industrial Partners LDC and Greenlake Holdings II LLC. 6. Series A Convertible Preferred Stock and Warrant Purchase Agreement among Outboard Marine Corporation, Quantum Industrial Partners LDC and Greenlake Holdings II LLC. 17 EX-10.24 10 SUBORDINATED PROMISSORY NOTE -1- Exhibit 10.24 OUTBOARD MARINE CORPORATION SUBORDINATED PROMISSORY NOTE $10,424,187.73 New York, New York January 19, 2000 SECTION 1. Payment of Note. --------------- OUTBOARD MARINE CORPORATION (the "Borrower"), a Delaware corporation, hereby promises to pay to the order of QUANTUM INDUSTRIAL PARTNERS LDC or its successors or assigns (the "Lender") the principal sum of Ten Million, Four Hundred Twenty-Four Thousand, One Hundred Eighty-Seven Dollars and Seventy-Three Cents ($10,424,187.73). This Promissory Note (herein, this "Note") has been delivered by the Borrower to the Lender in consideration of payment to the Borrower of $9,771,424.53 (the "Purchase Amount") on January 19, 2000 (the "Loan Date"). This Note is one of a series of notes (the "Notes") in the aggregate face amount of $15,000,000 which were issued in consideration of aggregate payments to the Borrower on the Loan Date of $14,060,699.19. All payments under this Note and the other Notes evidencing the Debt (as defined herein) shall be paid ratably to the respective holders thereof based on the respective outstanding amount of each of the Notes. The Borrower agrees to repay the entire amount of the Notes on June 30, 2000 (the "Maturity Date"). SECTION 2. Default Interest. ---------------- (a) If this Note is not paid in full on the Maturity Date, default interest shall be payable on the unpaid amount of hereof Notes at the rate of 15% per annum. All default interest on the Notes shall be calculated on the basis of a 365 or 366 day year, as the case may be, and the actual number of days elapsed. (b) Notwithstanding anything herein to the contrary, the interest (including default interest) payable by the Borrower with respect to this Note shall not exceed the maximum amount permitted by applicable law. SECTION 3. Payment. ------- Amounts payable hereunder shall be payable to the Lender without set-off or counterclaim by wire transfer of immediately available funds, in lawful money of the United States of America, to the bank account of the Lender as notified in writing to the Borrower. -2- SECTION 4. Redemption; Lender Set-Off Option. --------------------------------- (a) Optional Redemption. At its option, the Borrower may redeem this Note ------------------- at any time prior to the Maturity Date upon not less than 5 days' advance written notice to the Lender (the "Optional Redemption"). The Optional Redemption price for the Note shall be an amount equal to the face amount of the Note less, for each $1,000,000 of such face amount, $384.1721 per day for each day prior to the Maturity Date on which such Optional Redemption occurs. (b) Mandatory Redemption. If the Borrower sells any Eligible Securities -------------------- (as defined below), in any transaction or series of transactions that result in cash proceeds to the Borrower of in excess of $50,000,000 ("Minimum Amount"), the Borrower shall be required to redeem the Notes (the "Mandatory Redemption") with and to the extent that the cash proceeds from the sale of such Eligible Securities exceeds the Minimum Amount. Such Mandatory Redemption shall be made upon not more than five (5) days' advance written notice to the Lender, which notice shall be given not later than three (3) business days following the date on which the net proceeds received by the Borrower subsequent to the Loan Date from the sale of such Eligible Securities first aggregates at least the Minimum Amount. If such Mandatory Redemption occurs on or prior to the Maturity Date, the Mandatory Redemption price for the Note shall be an amount equal to the face amount of the Note less, for each $1,000,000 of such face amount, $384.1721 per day for each day prior to the Maturity Date on which such Mandatory Redemption occurs. If such Mandatory Redemption occurs subsequent to the Maturity Date, the Mandatory Redemption price for the Note shall be an amount equal to the face amount of the Note plus accrued unpaid default interest thereon from the Maturity Date to the date of the Mandatory Redemption. As used herein, "Eligible Securities" mean shares of the Borrower's capital stock, options, warrants or similar instruments exchangeable or exercisable for, convertible into or otherwise evidencing the right of the holder to acquire shares of the Borrower's capital stock, and debt securities of the Borrower (including debt securities of the Borrower that are convertible into shares of the Borrower's capital stock) that are subordinated in right of payment to all then outstanding Senior Obligations (as herein defined) to substantially the same extent as this Note is so subordinated as provided in Section 9 hereof. Nothing set forth in Section 9 of this Note shall limit or otherwise affect the Borrower's obligations or the Lender's rights under this Section 4(b). (c) Lender Set-Off Option. If, at any time while this Note remains --------------------- outstanding, the Lender agrees to purchase from the Borrower, and the Borrower agrees to issue and sell to the Lender, any Eligible Securities, and if at the time of the closing of such issuance and sale the Borrower has already received aggregate cash proceeds from the sale of Eligible Securities (or as a result of such issuance and sale of Eligible Securities to the Lender, the Borrower will have received aggregate cash proceeds from the sale of Eligible Securities) equal to at least the Minimum Amount, then, at the option of the Lender, the Lender may pay all or a portion of the purchase price for such Eligible Securities by setting-off such purchase price against the value of this Note at the closing of such issuance and sale but only to the extent that after giving effect to such set-off, the cash proceeds from the sale of all Eligible Securities from the Loan Date will have exceeded the Minimum Amount. For such purposes, the set-off value of this Note shall be -3- (i) if the issuance and sale of such Eligible Securities occurs prior to the Maturity Date, the amount which would have been payable by the Borrower to the Lender on the date of such issuance and sale if the Borrower had been required to redeem this Note on such date in accordance with the Mandatory Redemption provisions of Section 4(b) hereof, or (ii) if the issuance and sale of Eligible Securities occurs after the Maturity Date, the face amount of this Note, plus accrued default interest to the date of such sale and purchase. Nothing set forth in Section 9 of this Note shall limit or otherwise affect the Lender's rights under this Section 4(c). SECTION 5. Representations and Warranties. ------------------------------ The Borrower represents and warrants to the Lender that: (a) Organization; Power and Authority. The Borrower is a corporation duly --------------------------------- organized, validly existing and in good standing under the laws of the State of Delaware, and is duly qualified as a foreign corporation and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The Borrower has the corporate power and authority to own or hold under lease the properties it purports to own or hold under lease, to transact the business it transacts and proposes to transact, to execute and deliver this Note and to perform the provisions hereof. (b) Authorization, etc. This Note has been duly authorized by all ------------------ necessary corporate action on the part of the Borrower, and this Note constitutes a legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms, subject to (i) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). (c) Capitalization. (i) As of the Loan Date, the authorized capital stock -------------- of the Borrower consists of: 25,000,000 shares of common stock, par value $.01 per share ("Common Stock"), of which 20,439,531 shares are issued and outstanding and 2,100,000 are reserved for issuance upon the exercise of stock options issued or issuable under the Outboard Marine Corporation Personal Rewards and Opportunities Plan; and 1,000,000 shares of preferred stock, par value $.01 per share, none of which are outstanding or reserved for issuance. All shares of Common Stock issued and outstanding as of the Loan Date have been duly issued and are fully paid and non-assessable. (d) Financial Statements. (i) The consolidated balance sheet of the -------------------- Borrower and its subsidiaries as of December 31, 1998, and the related consolidated statements of income, stockholders equity and changes in financial position for the year then ended, including the notes and schedules thereto, certified by Arthur Andersen LLP, independent public accountants, that have been delivered by the Borrower to the Lender fairly present the consolidated financial position of the Borrower and its subsidiaries as at December 31, 1998 and the consolidated results -4- of operations for the Borrower and its subsidiaries for the period then ended, in each case in accordance with generally accepted accounting principles consistently applied for the period covered thereby (the foregoing consolidated financial statements at and for the year ending December 31, 1998 are referred to herein as the "Audited Financial Statements"). The unaudited consolidated balance sheets of the Borrower and its subsidiaries as of November 30, 1999 and the related unaudited consolidated statements of income, stockholders equity and changes in financial position for the months then ended, including the notes and schedules thereto, that have been delivered by the Borrower to the Lender fairly present the consolidated financial position of the Borrower and its subsidiaries as at November 30, 1999 and the consolidated results of operations for the Borrower and its subsidiaries for the eleven months then ended, in each case in accordance with generally accepted accounting principles applied on a basis consistent with the Audited Financials (the foregoing unaudited consolidated financial statements at November 30, 1999 and for the nine months then ending are referred to herein as the "Interim Financial Statements"). (ii) Since December 31, 1998, there has been no change in the financial condition, operations, business or properties of the Borrower or any of its subsidiaries except (x) as disclosed in the Borrower's reports under Section 13 of the Securities Exchange Act of 1934, as amended, as filed with the Securities and Exchange Commission subsequent to December 31, 1998 and prior to the Loan Date, (y) as disclosed in the Interim Financial Statements or (y) changes that individually or in the aggregate would not reasonably be expected to have a Material Adverse Effect. (e) Compliance with Laws, Other Instruments, etc. The execution, delivery -------------------------------------------- and performance by the Borrower of the Notes will not (i) contravene, result in any breach of, or constitute a default under, or result in the creation of any lien or other encumbrance in respect of any property of the Borrower or any subsidiary under, any indenture, mortgage, deed of trust, loan, credit agreement, corporate charter or by-laws, or any other material agreement, lease or instrument to which the Borrower or any subsidiary is a party or by which the Borrower or any subsidiary or any of their respective properties may be bound or affected, (ii) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or governmental authority applicable to the Borrower or any subsidiary or (iii) violate any provision of any statute or other rule or regulation of any governmental authority applicable to the Borrower or any subsidiary, which violation would reasonably be expected to have a Material Adverse Effect. (f) Governmental Authorizations, etc. No consent, approval or -------------------------------- authorization of, or registration, filing or declaration with, any governmental authority is required in connection with the execution, delivery or performance by the Borrower of the Notes. (g) Litigation; Observance of Statutes and Orders. (i) There are no --------------------------------------------- actions, suits or proceedings pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower or any subsidiary or any property of the Borrower or any subsidiary in any court or -5- before any arbitrator of any kind or before or by any governmental authority that, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect. (ii) Neither the Borrower nor any subsidiary is in default under any order, judgment, decree or ruling of any court, arbitrator or governmental authority or is in violation of any applicable law, ordinance, rule or regulation (including without limitation environmental laws) of any governmental authority, which default or violation, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect. (h) Taxes. The Borrower and its subsidiaries have filed all income tax ----- returns that are required to have been filed in any jurisdiction, and have paid all taxes shown to be due and payable on such returns and all other taxes and assessments payable by them, to the extent such taxes and assessments have become due and payable and before they have become delinquent, except for any taxes and assessments (x) the amount of which, or the failure to file with respect to which, is not individually or in the aggregate material or (y) the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which the Borrower or a subsidiary, as the case may be, has established adequate reserves in accordance with generally accepted accounting principles. (i) Title to Property; Leases. The Borrower and its subsidiaries have good ------------------------- title to their respective properties, including all such properties reflected in the audited balance sheet as of December 31, 1998 or purported to have been acquired by the Borrower or any subsidiary after said date (except as sold or otherwise disposed of), in each case free and clear of liens, except for (x) liens securing the Secured Obligations (as defined in the Amended and Restated Loan and Security Agreement), and (y) those defects in title and liens that, individually or in the aggregate, would not have a Material Adverse Effect. All material leases are valid and subsisting and are in full force and effect in all material respects except to the extent that the failure to be so would not, individually or in the aggregate, have a Material Adverse Effect. (j) Licenses, Permits, etc. The Borrower and its subsidiaries own or ---------------------- possess all licenses, permits, franchises, authorizations, patents, copyrights, service marks, trademarks and trade names, or rights thereto, that are material, without conflict with the rights of others, except for those conflicts that, individually or in the aggregate, would not have a Material Adverse Effect. (k) Private Offering by the Borrower. Neither the Borrower nor anyone -------------------------------- acting on its behalf has taken, or will take, any action that would subject the issuance or sale of the Notes to the registration requirements of Section 5 of the Securities Act of 1933, as amended. (l) Existing Indebtedness. Except as set forth in Borrower's disclosure --------------------- letter to Lender dated The Loan Date, neither the Borrower nor any subsidiary is in default, and no waiver of default is currently in effect, in the payment of any principal of or interest on any Indebtedness of the Borrower or such subsidiary and no event or condition exists with respect to any such Indebtedness of the Borrower or any subsidiary that would (i) permit (or that with notice or the -6- lapse of time, or both, would permit) one or more Persons to cause such Indebtedness to become due and payable before its stated maturity or before its regularly scheduled dates of payment or (ii) prevent the Borrower or any subsidiary from prepaying any such Indebtedness without prepayment penalty or premium. SECTION 6. Covenants. --------- In addition to the other undertakings herein contained, the Borrower hereby covenants to the Lender that so long as any amount payable hereunder is outstanding the Borrower shall perform the following obligations: (a) Use of Proceeds. The Borrower shall use the proceeds of the Notes to --------------- fund working capital needs of the Borrower and its subsidiaries. (b) Other Agreements. The Borrower shall perform and shall cause its ---------------- subsidiaries to perform all of its and their respective obligations as and when required pursuant and with respect to all Indebtedness of the Borrower or such subsidiary outstanding from time to time. The Borrower shall not, without the prior written consent of the Lender, amend or agree to amend any of the documents governing the Senior Obligations so as to make it a default thereunder to make payments under this Note to the extent not prohibited by the terms hereof. (c) Information. The Borrower shall furnish to the Lender: ----------- (i) promptly, such financial and other information as the Lender may from time to time reasonably request; and (ii) promptly, any financial and other information provided to any Person that has provided any Indebtedness to the Borrower or any of its subsidiaries. (d) Compliance with Law. The Borrower will and will cause each of its ------------------- subsidiaries to comply with all laws, ordinances or governmental rules or regulations to which each of them is subject, including, without limitation, environmental laws, and will obtain and maintain in effect all licenses, certificates, permits, franchises and other governmental authorizations necessary to the ownership of their respective properties or to the conduct of their respective businesses, in each case to the extent necessary to ensure that non-compliance with such laws, ordinances or governmental rules or regulations or failures to obtain or maintain in effect such licenses, certificates, permits, franchises and other governmental authorizations would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. (e) Insurance. The Borrower will and will cause each of its subsidiaries --------- to maintain, with financially sound and reputable insurers, insurance with respect to their respective properties and businesses against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are -7- maintained with respect thereto) as is customary in the case of entities of established reputations engaged in the same or a similar business and similarly situated. (f) Maintenance of Properties. The Borrower will and will cause each of ------------------------- its subsidiaries to maintain and keep, or cause to be maintained and kept, their respective properties in good repair, working order and condition (other than ordinary wear and tear), so that the business carried on in connection therewith may be properly conducted at all times, provided that this Section shall not -------- prevent the Borrower or any subsidiary from discontinuing the operation and the maintenance of any of its properties if such discontinuance is desirable in the conduct of its business and the Borrower has concluded that such discontinuance would not, individually or in the aggregate, have a Material Adverse Effect. (g) Payment of Taxes. The Borrower will and will cause each of its ---------------- subsidiaries to file all income tax or similar tax returns required to be filed in any jurisdiction and to pay and discharge all taxes shown to be due and payable on such returns and all other taxes, assessments, governmental charges, or levies payable by any of them, to the extent such taxes and assessments have become due and payable and before they have become delinquent, provided that -------- neither the Borrower nor any subsidiary need pay any such tax or assessment if (i) the amount, applicability or validity thereof is contested by the Borrower or such subsidiary on a timely basis in good faith and in appropriate proceedings, and the Borrower or a subsidiary of the Borrower has established adequate reserves therefor in accordance with generally accepted accounting principles on the books of the Borrower or such subsidiary or (ii) the nonpayment of all such taxes and assessments in the aggregate would not reasonably be expected to have a Material Adverse Effect. (h) Corporate Existence, etc. Except as provided in Section 6(i), the ------------------------ Borrower will at all times preserve and keep in full force and effect its corporate existence. Subject to Section 6(i), the Borrower will at all times preserve and keep in full force and effect the corporate existence of each of its subsidiaries (unless merged or consolidated into the Borrower or a subsidiary of the Borrower) and all rights and franchises of the Borrower and its subsidiaries unless, in the good faith judgment of the Borrower, the termination of or failure to preserve and keep in full force and effect such corporate existence, right or franchise would not, individually or in the aggregate, have a Material Adverse Effect. (i) Merger, Consolidation, etc. The Borrower shall not consolidate with -------------------------- or merge with any other corporation or convey, transfer or lease substantially all of its assets in a single transaction or series of transactions to any Person unless: (i) the successor formed by such consolidation or the survivor of such merger or the Person that acquires by conveyance, transfer or lease substantially all of the assets of the Borrower as an entirety, as the case may be, shall be a solvent corporation organized and existing under the laws of the United States or any State thereof (including the District of Columbia), and, if the Borrower is not such corporation, such corporation shall have executed and delivered to the Lender its assumption (in form satisfactory to the Lender) -8- of the due and punctual performance and observance of each covenant and condition of this Note; and (ii) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing. No such conveyance, transfer or lease of substantially all of the assets of the Borrower shall have the effect of releasing the Borrower or any successor corporation that shall theretofore have become such in the manner prescribed in this Section 6(i) from its liability under this Note. (j) Inspection. The Borrower shall permit the representatives of the ---------- Lender, at the expense of the Borrower to visit and inspect any of the offices or properties of the Borrower or any subsidiary, to examine all their respective books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers and independent public accountants (and by this provision the Borrower authorizes said accountants to discuss the affairs, finances and accounts of the Borrower and its subsidiaries), all at such times and as often as may be requested upon reasonable notice during normal business hours. (k) Further Documents. The Borrower shall execute all such other documents ----------------- and instruments and do all such other acts and things as the Lender may from time to time reasonably require to carry out the transactions contemplated herein. SECTION 7. Events of Default. ----------------- Except upon the occurrence of an event under (e) or (f) below, whereupon this Note shall become immediately due and payable without notice or declaration by the Lender, the Lender may, subject to Section 9, by written notice to the Borrower, declare this Note immediately due and payable, whereupon this Note and all sums due hereunder shall become immediately due and payable without protest, presentment, demand or notice (except the notice referred to above in this Section 7) or without petition to any court, all of which are expressly waived by the Borrower, if any of the following events (each an "Event of Default") shall occur: (a) principal or interest due under this Note shall not be paid as and when due, whether at maturity, by declaration or otherwise, except where such payment is prohibited by the terms of Section 9; or (b) any representation by the Borrower herein shall prove to be false or incorrect in any material respect as of the date made; or (c) the Borrower shall default in any material respect in the due performance of any term or covenant of this Note (which is not the subject of another subsection of this Section 7) which default, if remediable, shall continue unremedied for a period of thirty (30) days after the -9- earlier of (i) the day an officer of the Borrower obtains actual knowledge of such default, and (ii) the day the Lender gives written notice of such default to the Borrower; or (d) (i) the Borrower or any subsidiary is in default (as principal or as guarantor or other surety) in the payment of any principal of or premium or make-whole amount or interest on any Indebtedness that is outstanding in an aggregate principal amount of at least $2,000,000 beyond any period of grace provided with respect thereto, or (ii) the Borrower or any subsidiary is in default in the performance of or compliance with any term of any Indebtedness in an aggregate outstanding principal amount of at least $2,000,000 or of any mortgage, indenture or other agreement relating thereto or any other condition exists, and as a consequence of such default or condition such Indebtedness has become, or has been declared, due and payable before its stated maturity or before its regularly scheduled dates of payment; or (e) the Borrower or any subsidiary shall (i) apply for or consent to the appointment of a receiver, trustee or liquidator for itself or any of its assets or properties, (ii) admit in writing its inability to pay its debts as they mature, (iii) make a general assignment for the benefit of creditors, (iv) be adjudicated a bankrupt or insolvent, (v) file a voluntary petition in bankruptcy, or a petition or an answer seeking reorganization or an arrangement with creditors or to take advantage of any bankruptcy, reorganization, insolvency, readjustment of debt, dissolution or liquidation law or statute, or any answer admitting the material allegations of a petition filed against it in any proceeding under any such law or if action shall be taken by the Borrower or such subsidiary for the purpose of effecting any of the foregoing, (vi) have commenced against it any case, proceeding or other action of a nature described in (i) through (v) above which results in the entry of an order for relief, or which remains undismissed for a period of 60 days or (vii) take or be subject to any action similar to those specified in clauses (i) through (vi) in any jurisdiction; or (f) an order, judgment or decree shall be entered, without the application, approval or consent of the Borrower or any subsidiary, with respect to the Borrower or such subsidiary or all or a substantial part of the assets of the Borrower or any such subsidiary, appointing a receiver, trustee or liquidator of the Borrower or such subsidiary, or any similar order, judgment or decree shall be entered or appointment made in any jurisdiction, and such order, judgment or decree or appointment shall continue unstayed and in effect for a period of 60 days; or (g) a final judgment or judgments for the payment of money aggregating in excess of $2,000,000 are rendered against one or more of the Borrower and its subsidiaries and which judgments are not, within 60 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay. SECTION 8. Application of Payments. ----------------------- Each payment received by the Lender following the Maturity Date shall be applied, first, to the payment of accrued default interest on this Note to the date of such payment and second, to the payment of the principal amount of this Note. -10- SECTION 9. Subordination Agreement. ----------------------- (a) The Borrower covenants and agrees and the Lender, by the Lender's acceptance hereof, likewise covenants and agrees, for itself and any future holder of this Note or the Indebtedness evidenced hereby, that, to the extent and in the manner set forth below in this Section 9, the Company's Senior Obligations will be senior in right of payment to the Debt. The Lender by accepting this Note acknowledges and agrees that the subordination provisions set forth in this Section 9 are, and are intended to be, an inducement and a consideration to each holder of any Senior Obligation, whether such Senior Obligation was created or acquired before or after the issuance of this Note, to acquire and continue to hold, or to continue to hold, such Senior Obligation and such holder of Senior Obligations shall be deemed conclusively to have relied on such subordination provisions in acquiring and continuing to hold, or continuing to hold, such Senior Obligations. (b) As used herein, "senior in right of payment" means that unless and until the Senior Obligations have been paid in full, without the express prior written consent of all holders of such Senior Obligations, the Lender will not take, demand (including by means of any legal action) or receive from the Borrower, and the Borrower will not make, give or permit, directly or indirectly, by set-off, redemption, purchase or in any other manner, any payment of or security for the whole or any part of the Debt other than any payment constituting a Mandatory Redemption made in accordance with the terms of Section 4(b) hereof and any set-off made in accordance with Section 4(c) hereof. (c) Any payment or distribution of assets of the Borrower, whether in cash, property or securities, to which the Lender would be entitled except for the provisions hereof, shall be paid or delivered by the Lender, or any receiver, trustee in bankruptcy, liquidating trustee, disbursing agent or other Person making such payment or distribution, to the holders of the Senior Obligations or their representative, ratably in accordance with the amounts thereof, to the extent necessary to pay in full all Senior Obligations, before any payment or distribution shall be made to the Lender. (d) The expressions "prior payment in full," "payment in full," "paid in full" and any other similar terms or phrases when used herein with respect to the Senior Obligations shall mean the payment in full money or money's worth of all the Senior Obligations and the expression "any payment of or security for the whole or any part of the Debt" and any other similar terms or phrases when used herein shall not be deemed to include a payment or distribution of stock or securities of the Borrower provided for by a plan of reorganization or readjustment authorized by an order or decree of a court of competent jurisdiction in a reorganization proceeding under any applicable bankruptcy law or of any other corporation provided for by such plan of reorganization or readjustment, which stock or securities are subordinated in right of payment to all then outstanding Senior Obligations to substantially the same extent as this Note is so subordinated as provided in this Section 9. The consolidation of the Borrower with, or the merger of the Borrower into, another Person or the liquidation or dissolution of the Borrower following the conveyance or transfer of all or substantially all of its properties and assets as an entirety to another Person -11- upon the terms and conditions set forth in Section 6(i) shall not be deemed a "proceeding" for the purposes of this Section 9 if the Person formed by such consolidation or into which the Borrower is merged or the Person which acquires by conveyance or transfer such properties and assets as an entirety, as the case may be, shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions set forth in Section 6(i). (e) If any payment or distribution, whether consisting of money, property or securities, be collected or received by the Lender in respect of the Debt, except payments of principal or interest permitted hereunder, the Lender forthwith shall deliver the same to the holders of the Senior Obligations or their representative, ratably in accordance with the amounts thereof, in the form received, duly endorsed to such holders or such representative, if required, to be applied to the payment or prepayment of the Senior Obligations until the Senior Obligations are paid in full. Until so delivered, such payment or distribution shall be held in trust by the Lender as the property of such holders of Senior Obligations, segregated from other funds and property held by the Lender. (f) As used herein, "Senior Obligations" shall mean collectively the unpaid principal of, premium, if any, and interest on (including, without limitation, interest accruing after the maturity thereof and interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) the Borrower's outstanding 10-3/4% Senior Notes due 2008, and all "Secured Obligations," as defined in that certain Amended and Restated Loan and Security Agreement, dated effective as of January 6, 1998, as amended from time to time, whether before or after the Loan Date (the "Amended and Restated Loan and Security Agreement"), by and among the Borrower and the other borrowers and guarantors party thereto, the lenders party thereto, and Bank of America, N.A., as agent for such lenders, now or hereafter owing (including, without limitation, any increases thereof), and any and all renewals, extensions, restatements, replacements and refinancings thereof (whether among the same parties, or any of them, or with any other lender or lenders). (g) The provisions of this Section 9 shall apply to all Indebtedness evidenced by or arising under this Note, and any and all renewals, modifications, amendments, supplements, replacements and restatements thereof, respectively. (h) Nothing set forth in this Section 9 shall be deemed in any way to limit or prevent the holder of this Note from exercising its rights under, or the Borrower from complying with its obligations under Sections 4(b) or 4(c) hereof, regardless of whether or not any payment by the Borrower under this Note would otherwise be prohibited under the terms of this Section 9 at the time that the Lender seeks to exercise its rights under Section 4(b) or 4(c). SECTION 10. Additional Definitions. ---------------------- As used herein, the following terms have the respective meanings set forth below: -12- "Business Day" means, for the purposes of this Note, any day other than a Saturday, a Sunday or a day on which commercial banks in New York are required or authorized to be closed. "Capital Leases" means, at any time, a lease with respect to which the lessee is required concurrently to recognize the acquisition of an asset and the incurrence of a liability in accordance with generally accepted accounting principles. "Debt" means collectively the unpaid principal of and interest on (including, without limitation, default interest accruing after the maturity date of the Notes and interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) the Notes and all other indebtedness of the Borrower in respect thereof, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter incurred, in each case whether on account of principal, premium, interest, reimbursement obligations, fees, indemnities, costs, expenses or otherwise. "Default" means an event or condition the occurrence or existence of which would, with the lapse of time or the giving of notice or both, become an Event of Default. "Guaranty" means, with respect to any Person, any obligation (except the endorsement in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing or in effect guaranteeing any indebtedness, dividend or other obligation of any other Person in any manner, whether directly or indirectly, including (without limitation) obligations incurred through an agreement, contingent or otherwise, by such Person: (a) to purchase such indebtedness or obligation or any property constituting security therefor; (b) to advance or supply funds (i) for the purchase or payment of such indebtedness or obligation, or (ii) to maintain any working capital or other balance sheet condition or any income statement condition of any other Person or otherwise to advance or make available funds for the purchase or payment of such indebtedness or obligation; (c) to lease properties or to purchase properties or services primarily for the purpose of assuring the owner of such indebtedness or obligation of the ability of any other Person to make payment of the indebtedness or obligation; or (d) otherwise to assure the owner of such indebtedness or obligation against loss in respect thereof. In any computation of the indebtedness or other liabilities of the obligor under any Guaranty, the indebtedness or other obligations that are the subject of such Guaranty shall be assumed to be direct obligations of such obligor. -13- "Indebtedness" with respect to any Person, means, on any date of determination (without duplication): (a) its liabilities for borrowed money and its redemption obligations in respect of mandatorily redeemable Preferred Stock; (b) its liabilities for the deferred purchase price of property acquired by such Person (excluding accounts payable arising in the ordinary course of business consistent with past practice); (c) all liabilities appearing on its balance sheet in accordance with generally accepted accounting principles in respect of Capital Leases; (d) all liabilities for borrowed money secured by any lien with respect to any property owned by such Person (whether or not it has assumed or otherwise become liable for such liabilities); (e) all its liabilities in respect of letters of credit or instruments serving a similar function issued or accepted for its account by banks and other financial institutions (whether or not representing obligations for borrowed money); (f) Swaps of such Person; and (g) any Guaranty of such Person with respect to liabilities of a type described in any of clauses (a) through (f) hereof. "Material Adverse Effect" means a material adverse effect on (i) the business, operations, financial condition, assets or properties of the Borrower and its subsidiaries taken as a whole, or (ii) the ability of the Borrower to perform its obligations under this Note, or (iii) the validity or enforceability of this Note. "Person" means an individual, partnership, corporation, limited liability company, association, trust, unincorporated organization, or a government or agency or political subdivision thereof. "Preferred Stock" means any class of capital stock of a corporation that is preferred over any other class of capital stock of such corporation as to the payment of dividends or the payment of any amount upon liquidation or dissolution of such corporation. "subsidiary" means, as to any Person, any corporation, association or other business entity in which such Person or one or more of its subsidiaries or such Person and one or more of its subsidiaries owns sufficient equity or voting interests to enable it or them (as a group) ordinarily, in the absence of contingencies, to elect a majority of the directors (or Persons performing similar -14- functions) of such entity, and any partnership or joint venture if more than a 50% interest in the profits or capital thereof is owned by such Person or one or more of its subsidiaries or such Person and one or more of its subsidiaries. Unless the context otherwise clearly requires, any reference to a "subsidiary" is a reference to a subsidiary of the Borrower. "Swaps" means, with respect to any Person, payment obligations with respect to interest rate swaps, currency swaps and similar obligations obligating such Person to make payments, whether periodically or upon the happening of a contingency. For the purposes of this Note, the amount of the obligation under any Swap shall be the amount determined in respect thereof as of the end of the then most recently ended fiscal quarter of such Person, based on the assumption that such Swap had terminated at the end of such fiscal quarter, and in making such determination, if any agreement relating to such Swap provides for the netting of amounts payable by and to such Person thereunder or if any such agreement provides for the simultaneous payment of amounts by and to such Person, then in each such case, the amount of such obligation shall be the net amount so determined. SECTION 11. Borrower's Obligations Unconditional. ------------------------------------ Except as expressly set forth herein, the obligations of the Borrower hereunder are unconditional and neither any reference to any other document or agreement herein nor the subordination for the benefit of the holders of the Senior Obligations pursuant to Section 9 hereof is intended or shall be deemed to render the Borrower's obligations hereunder conditional as between the Borrower and the Lender. SECTION 12. Assignment, Etc. ---------------- This Note shall be binding upon each of the Borrower, the Lender and their respective successors and assigns; provided, however, the Borrower may not -------- ------- assign this Note without the prior written consent of the Lender. The Lender may sell, assign or transfer this Note without any requirement of consent by the Borrower, provided, however, that the Indebtedness evidenced by this Note shall continue to be subject to the terms of Section 9 hereof. SECTION 13. Indemnification. --------------- The Borrower shall pay, indemnify, and hold the Lender harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses (including attorneys' fees and expenses) or disbursements of any kind or nature whatsoever ("Losses") arising out of or in connection with (a) the enforcement of any rights of the Lender under this Note, and (b) any claim (whether or not asserted in any legal proceeding), litigation, investigation, arbitration or proceeding relating to this Note (collectively, "indemnified liabilities") provided that the Borrower -------- shall have no obligation hereunder to the Lender with respect to indemnified liabilities arising from the gross negligence or willful misconduct of the Lender. The agreements in this Section 13 shall survive the repayment of this Note and all other amounts payable hereunder. -15- SECTION 14. No Waiver, Cumulative Remedies. ------------------------------ The Lender shall not by any act (except by a written instrument signed by the Lender), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of the Lender, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Lender of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Lender would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any rights or remedies provided by law. SECTION 15. Waiver of Protest, Presentment, etc. ------------------------------------ The Borrower hereby waives protest, presentment, notice of dishonor and notice of acceleration of maturity and agrees to continue to remain bound for the payment of principal, interest and all other sums due under this Note notwithstanding any change or changes by way of release, surrender, exchange, modification or substitution of any security for this Note or by way of any extension or extensions of time for the payment of principal and interest. SECTION 16. Expenses. -------- The Borrower agrees to pay or reimburse, or cause to be paid or reimbursed, all of its and the Lender's costs and expenses incurred in connection with the preparation, execution, and delivery of this Note including, without limitation, the fees and disbursements of their respective counsel. SECTION 17. Notice. ------ All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be sent by registered or certified first-class mail, return receipt requested, telecopier, courier service or personal delivery: a. if to the Borrower, to the attention of each of its Treasurer and General Counsel, at: Outboard Marine Corporation 100 Sea-Horse Drive Waukegan, IL 60085 Facsimile No.: (847) 689-6246 -16- b. if to the Lender: Quantum Industrial Partners LDC Curacao Corporation Company N.V. Kaya Flamboyan 9 Willemsted, Curacao Netherlands Antilles Facsimile No.: 011-599-97-322-420 with a copy to: Soros Fund Management LLC 888 Seventh Avenue, Suite 3300 New York, NY 10106 Attention: Michael C. Neus Facsimile No.: (212) 664-0544 All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; when delivered by courier, if delivered by commercial overnight courier service; five business days after being deposited in the mail, post prepaid, if mailed; and when receipt is acknowledged, if telecopied. The Borrower or the Lender may change the address to which notices, demands and other communications hereunder are to be delivered by giving the other party notice in the manner herein set forth. SECTION 18. Governing Law. ------------- THIS NOTE AND THE LEGAL RELATIONS BETWEEN THE BORROWER AND THE HOLDER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW THEREOF. SECTION 19. Consent to Jurisdiction and Service of Process. ---------------------------------------------- Any legal action, suit or proceeding arising out of or relating to this Note or the agreements and transactions contemplated hereby may be instituted only in a state or federal court of the State of New York located in the borough of Manhattan and the Borrower agrees not to assert, by way of motion, as a defense or otherwise, in any such action, suit or proceeding, any claim that it is not subject personally to the jurisdiction of such court, that its property is exempt or immune from attachment or execution, that the action, suit or proceeding is brought in an inconvenient forum, that the venue of the action, suit or proceeding is improper or that this Note, the agreements contemplated hereby or the subject matter hereof or thereof may not be enforced in or by such court. The Borrower further irrevocably submits to the jurisdiction of any such court in any such action, suit or proceeding. Any and all service of process and any other notice in any such action, suit or proceeding shall be effective against the Borrower if given by registered -17- or certified mail, return receipt requested, or by any other means of mail that requires a signed receipt, postage prepaid, mailed to the Borrower as herein provided. SECTION 20. WAIVER OF JURY TRIAL. -------------------- THE BORROWER HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS NOTE OR ANY AGREEMENT OR TRANSACTIONS CONTEMPLATED HEREBY AND FOR ANY COUNTERCLAIM IN CONNECTION HEREWITH. OUTBOARD MARINE CORPORATION By: /s/ Andrew P. Hines ------------------- Name: Andrew P. Hines Title: Executive Vice President and Chief Financial Officer EX-10.25 11 SUBORDINATED PROMISSORY NOTE -1- Exhibit 10.25 OUTBOARD MARINE CORPORATION SUBORDINATED PROMISSORY NOTE $4,575,812.27 New York, New York January 19, 2000 SECTION 1. Payment of Note. --------------- OUTBOARD MARINE CORPORATION (the "Borrower"), a Delaware corporation, hereby promises to pay to the order of GREENLAKE HOLDINGS II LLC or its successors or assigns (the "Lender") the principal sum of Four Million, Five Hundred Seventy-Five Thousand, Eight Hundred Twelve Dollars and Twenty-Seven Cents ($4,575,812.27). This Promissory Note (herein, this "Note") has been delivered by the Borrower to the Lender in consideration of payment to the Borrower of $4,289,274.66 (the "Purchase Amount") on January 19, 2000 (the "Loan Date"). This Note is one of a series of notes (the "Notes") in the aggregate face amount of $15,000,000 which were issued in consideration of aggregate payments to the Borrower on the Loan Date of $14,060,699.19. All payments under this Note and the other Notes evidencing the Debt (as defined herein) shall be paid ratably to the respective holders thereof based on the respective outstanding amount of each of the Notes. The Borrower agrees to repay the entire amount of the Notes on June 30, 2000 (the "Maturity Date"). SECTION 2. Default Interest. ---------------- (a) If this Note is not paid in full on the Maturity Date, default interest shall be payable on the unpaid amount of hereof Notes at the rate of 15% per annum. All default interest on the Notes shall be calculated on the basis of a 365 or 366 day year, as the case may be, and the actual number of days elapsed. (b) Notwithstanding anything herein to the contrary, the interest (including default interest) payable by the Borrower with respect to this Note shall not exceed the maximum amount permitted by applicable law. SECTION 3. Payment. ------- Amounts payable hereunder shall be payable to the Lender without set-off or counterclaim by wire transfer of immediately available funds, in lawful money of the United States of America, to the bank account of the Lender as notified in writing to the Borrower. -2- SECTION 4. Redemption; Lender Set-Off Option. --------------------------------- (a) Optional Redemption. At its option, the Borrower may redeem this Note ------------------- at any time prior to the Maturity Date upon not less than 5 days' advance written notice to the Lender (the "Optional Redemption"). The Optional Redemption price for the Note shall be an amount equal to the face amount of the Note less, for each $1,000,000 of such face amount, $384.1721 per day for each day prior to the Maturity Date on which such Optional Redemption occurs. (b) Mandatory Redemption. If the Borrower sells any Eligible Securities -------------------- (as defined below), in any transaction or series of transactions that result in cash proceeds to the Borrower of in excess of $50,000,000 ("Minimum Amount"), the Borrower shall be required to redeem the Notes (the "Mandatory Redemption") with and to the extent that the cash proceeds from the sale of such Eligible Securities exceeds the Minimum Amount. Such Mandatory Redemption shall be made upon not more than five (5) days' advance written notice to the Lender, which notice shall be given not later than three (3) business days following the date on which the net proceeds received by the Borrower subsequent to the Loan Date from the sale of such Eligible Securities first aggregates at least the Minimum Amount. If such Mandatory Redemption occurs on or prior to the Maturity Date, the Mandatory Redemption price for the Note shall be an amount equal to the face amount of the Note less, for each $1,000,000 of such face amount, $384.1721 per day for each day prior to the Maturity Date on which such Mandatory Redemption occurs. If such Mandatory Redemption occurs subsequent to the Maturity Date, the Mandatory Redemption price for the Note shall be an amount equal to the face amount of the Note plus accrued unpaid default interest thereon from the Maturity Date to the date of the Mandatory Redemption. As used herein, "Eligible Securities" mean shares of the Borrower's capital stock, options, warrants or similar instruments exchangeable or exercisable for, convertible into or otherwise evidencing the right of the holder to acquire shares of the Borrower's capital stock, and debt securities of the Borrower (including debt securities of the Borrower that are convertible into shares of the Borrower's capital stock) that are subordinated in right of payment to all then outstanding Senior Obligations (as herein defined) to substantially the same extent as this Note is so subordinated as provided in Section 9 hereof. Nothing set forth in Section 9 of this Note shall limit or otherwise affect the Borrower's obligations or the Lender's rights under this Section 4(b). (c) Lender Set-Off Option. If, at any time while this Note remains --------------------- outstanding, the Lender agrees to purchase from the Borrower, and the Borrower agrees to issue and sell to the Lender, any Eligible Securities, and if at the time of the closing of such issuance and sale the Borrower has already received aggregate cash proceeds from the sale of Eligible Securities (or as a result of such issuance and sale of Eligible Securities to the Lender, the Borrower will have received aggregate cash proceeds from the sale of Eligible Securities) equal to at least the Minimum Amount, then, at the option of the Lender, the Lender may pay all or a portion of the purchase price for such Eligible Securities by setting-off such purchase price against the value of this Note at the closing of such issuance and sale but only to the extent that after giving effect to such set-off, the cash proceeds from the sale of all Eligible Securities from the Loan Date will have exceeded the Minimum Amount. For such purposes, the set-off value of this Note shall be -3- (i) if the issuance and sale of such Eligible Securities occurs prior to the Maturity Date, the amount which would have been payable by the Borrower to the Lender on the date of such issuance and sale if the Borrower had been required to redeem this Note on such date in accordance with the Mandatory Redemption provisions of Section 4(b) hereof, or (ii) if the issuance and sale of Eligible Securities occurs after the Maturity Date, the face amount of this Note, plus accrued default interest to the date of such sale and purchase. Nothing set forth in Section 9 of this Note shall limit or otherwise affect the Lender's rights under this Section 4(c). SECTION 5. Representations and Warranties. ------------------------------ The Borrower represents and warrants to the Lender that: (a) Organization; Power and Authority. The Borrower is a corporation duly --------------------------------- organized, validly existing and in good standing under the laws of the State of Delaware, and is duly qualified as a foreign corporation and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The Borrower has the corporate power and authority to own or hold under lease the properties it purports to own or hold under lease, to transact the business it transacts and proposes to transact, to execute and deliver this Note and to perform the provisions hereof. (b) Authorization, etc. This Note has been duly authorized by all ------------------- necessary corporate action on the part of the Borrower, and this Note constitutes a legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms, subject to (i) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). (c) Capitalization. (i) As of the Loan Date, the authorized capital -------------- stock of the Borrower consists of: 25,000,000 shares of common stock, par value $.01 per share ("Common Stock"), of which 20,439,531 shares are issued and outstanding and 2,100,000 are reserved for issuance upon the exercise of stock options issued or issuable under the Outboard Marine Corporation Personal Rewards and Opportunities Plan; and 1,000,000 shares of preferred stock, par value $.01 per share, none of which are outstanding or reserved for issuance. All shares of Common Stock issued and outstanding as of the Loan Date have been duly issued and are fully paid and non-assessable. (d) Financial Statements. (i) The consolidated balance sheet of the -------------------- Borrower and its subsidiaries as of December 31, 1998, and the related consolidated statements of income, stockholders equity and changes in financial position for the year then ended, including the notes and schedules thereto, certified by Arthur Andersen LLP, independent public accountants, that have been delivered by the Borrower to the Lender fairly present the consolidated financial position of the Borrower and its subsidiaries as at December 31, 1998 and the consolidated results -4- of operations for the Borrower and its subsidiaries for the period then ended, in each case in accordance with generally accepted accounting principles consistently applied for the period covered thereby (the foregoing consolidated financial statements at and for the year ending December 31, 1998 are referred to herein as the "Audited Financial Statements"). The unaudited consolidated balance sheets of the Borrower and its subsidiaries as of November 30, 1999 and the related unaudited consolidated statements of income, stockholders equity and changes in financial position for the months then ended, including the notes and schedules thereto, that have been delivered by the Borrower to the Lender fairly present the consolidated financial position of the Borrower and its subsidiaries as at November 30, 1999 and the consolidated results of operations for the Borrower and its subsidiaries for the eleven months then ended, in each case in accordance with generally accepted accounting principles applied on a basis consistent with the Audited Financials (the foregoing unaudited consolidated financial statements at November 30, 1999 and for the nine months then ending are referred to herein as the "Interim Financial Statements"). (ii) Since December 31, 1998, there has been no change in the financial condition, operations, business or properties of the Borrower or any of its subsidiaries except (x) as disclosed in the Borrower's reports under Section 13 of the Securities Exchange Act of 1934, as amended, as filed with the Securities and Exchange Commission subsequent to December 31, 1998 and prior to the Loan Date, (y) as disclosed in the Interim Financial Statements or (y) changes that individually or in the aggregate would not reasonably be expected to have a Material Adverse Effect. (e) Compliance with Laws, Other Instruments, etc. The execution, -------------------------------------------- delivery and performance by the Borrower of the Notes will not (i) contravene, result in any breach of, or constitute a default under, or result in the creation of any lien or other encumbrance in respect of any property of the Borrower or any subsidiary under, any indenture, mortgage, deed of trust, loan, credit agreement, corporate charter or by-laws, or any other material agreement, lease or instrument to which the Borrower or any subsidiary is a party or by which the Borrower or any subsidiary or any of their respective properties may be bound or affected, (ii) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or governmental authority applicable to the Borrower or any subsidiary or (iii) violate any provision of any statute or other rule or regulation of any governmental authority applicable to the Borrower or any subsidiary, which violation would reasonably be expected to have a Material Adverse Effect. (f) Governmental Authorizations, etc. No consent, approval or -------------------------------- authorization of, or registration, filing or declaration with, any governmental authority is required in connection with the execution, delivery or performance by the Borrower of the Notes. (g) Litigation; Observance of Statutes and Orders. (i) There are no --------------------------------------------- actions, suits or proceedings pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower or any subsidiary or any property of the Borrower or any subsidiary in any court or -5- before any arbitrator of any kind or before or by any governmental authority that, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect. (ii) Neither the Borrower nor any subsidiary is in default under any order, judgment, decree or ruling of any court, arbitrator or governmental authority or is in violation of any applicable law, ordinance, rule or regulation (including without limitation environmental laws) of any governmental authority, which default or violation, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect. (h) Taxes. The Borrower and its subsidiaries have filed all income tax ----- returns that are required to have been filed in any jurisdiction, and have paid all taxes shown to be due and payable on such returns and all other taxes and assessments payable by them, to the extent such taxes and assessments have become due and payable and before they have become delinquent, except for any taxes and assessments (x) the amount of which, or the failure to file with respect to which, is not individually or in the aggregate material or (y) the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which the Borrower or a subsidiary, as the case may be, has established adequate reserves in accordance with generally accepted accounting principles. (i) Title to Property; Leases. The Borrower and its subsidiaries have ------------------------- good title to their respective properties, including all such properties reflected in the audited balance sheet as of December 31, 1998 or purported to have been acquired by the Borrower or any subsidiary after said date (except as sold or otherwise disposed of), in each case free and clear of liens, except for (x) liens securing the Secured Obligations (as defined in the Amended and Restated Loan and Security Agreement), and (y) those defects in title and liens that, individually or in the aggregate, would not have a Material Adverse Effect. All material leases are valid and subsisting and are in full force and effect in all material respects except to the extent that the failure to be so would not, individually or in the aggregate, have a Material Adverse Effect. (j) Licenses, Permits, etc. The Borrower and its subsidiaries own or ---------------------- possess all licenses, permits, franchises, authorizations, patents, copyrights, service marks, trademarks and trade names, or rights thereto, that are material, without conflict with the rights of others, except for those conflicts that, individually or in the aggregate, would not have a Material Adverse Effect. (k) Private Offering by the Borrower. Neither the Borrower nor anyone -------------------------------- acting on its behalf has taken, or will take, any action that would subject the issuance or sale of the Notes to the registration requirements of Section 5 of the Securities Act of 1933, as amended. (l) Existing Indebtedness. Except as set forth in Borrower's disclosure --------------------- letter to Lender dated The Loan Date, neither the Borrower nor any subsidiary is in default, and no waiver of default is currently in effect, in the payment of any principal of or interest on any Indebtedness of the Borrower or such subsidiary and no event or condition exists with respect to any such Indebtedness of the Borrower or any subsidiary that would (i) permit (or that with notice or the lapse of time, or both, would permit) one or more Persons to cause such Indebtedness to become -6- due and payable before its stated maturity or before its regularly scheduled dates of payment or (ii) prevent the Borrower or any subsidiary from prepaying any such Indebtedness without prepayment penalty or premium. SECTION 6. Covenants. --------- In addition to the other undertakings herein contained, the Borrower hereby covenants to the Lender that so long as any amount payable hereunder is outstanding the Borrower shall perform the following obligations: (a) Use of Proceeds. The Borrower shall use the proceeds of the Notes to --------------- fund working capital needs of the Borrower and its subsidiaries. (b) Other Agreements. The Borrower shall perform and shall cause its ---------------- subsidiaries to perform all of its and their respective obligations as and when required pursuant and with respect to all Indebtedness of the Borrower or such subsidiary outstanding from time to time. The Borrower shall not, without the prior written consent of the Lender, amend or agree to amend any of the documents governing the Senior Obligations so as to make it a default thereunder to make payments under this Note to the extent not prohibited by the terms hereof. (c) Information. The Borrower shall furnish to the Lender: ----------- (i) promptly, such financial and other information as the Lender may from time to time reasonably request; and (ii) promptly, any financial and other information provided to any Person that has provided any Indebtedness to the Borrower or any of its subsidiaries. (d) Compliance with Law. The Borrower will and will cause each of its ------------------- subsidiaries to comply with all laws, ordinances or governmental rules or regulations to which each of them is subject, including, without limitation, environmental laws, and will obtain and maintain in effect all licenses, certificates, permits, franchises and other governmental authorizations necessary to the ownership of their respective properties or to the conduct of their respective businesses, in each case to the extent necessary to ensure that non-compliance with such laws, ordinances or governmental rules or regulations or failures to obtain or maintain in effect such licenses, certificates, permits, franchises and other governmental authorizations would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. (e) Insurance. The Borrower will and will cause each of its subsidiaries --------- to maintain, with financially sound and reputable insurers, insurance with respect to their respective properties and businesses against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are maintained with respect thereto) as is customary in the case of entities of established reputations engaged in the same or a similar business and similarly situated. -7- (f) Maintenance of Properties. The Borrower will and will cause each of ------------------------- its subsidiaries to maintain and keep, or cause to be maintained and kept, their respective properties in good repair, working order and condition (other than ordinary wear and tear), so that the business carried on in connection therewith may be properly conducted at all times, provided that this Section shall not -------- prevent the Borrower or any subsidiary from discontinuing the operation and the maintenance of any of its properties if such discontinuance is desirable in the conduct of its business and the Borrower has concluded that such discontinuance would not, individually or in the aggregate, have a Material Adverse Effect. (g) Payment of Taxes. The Borrower will and will cause each of its ---------------- subsidiaries to file all income tax or similar tax returns required to be filed in any jurisdiction and to pay and discharge all taxes shown to be due and payable on such returns and all other taxes, assessments, governmental charges, or levies payable by any of them, to the extent such taxes and assessments have become due and payable and before they have become delinquent, provided that -------- neither the Borrower nor any subsidiary need pay any such tax or assessment if (i) the amount, applicability or validity thereof is contested by the Borrower or such subsidiary on a timely basis in good faith and in appropriate proceedings, and the Borrower or a subsidiary of the Borrower has established adequate reserves therefor in accordance with generally accepted accounting principles on the books of the Borrower or such subsidiary or (ii) the nonpayment of all such taxes and assessments in the aggregate would not reasonably be expected to have a Material Adverse Effect. (h) Corporate Existence, etc. Except as provided in Section 6(i), the ------------------------- Borrower will at all times preserve and keep in full force and effect its corporate existence. Subject to Section 6(i), the Borrower will at all times preserve and keep in full force and effect the corporate existence of each of its subsidiaries (unless merged or consolidated into the Borrower or a subsidiary of the Borrower) and all rights and franchises of the Borrower and its subsidiaries unless, in the good faith judgment of the Borrower, the termination of or failure to preserve and keep in full force and effect such corporate existence, right or franchise would not, individually or in the aggregate, have a Material Adverse Effect. (i) Merger, Consolidation, etc. The Borrower shall not consolidate with or --------------------------- merge with any other corporation or convey, transfer or lease substantially all of its assets in a single transaction or series of transactions to any Person unless: (i) the successor formed by such consolidation or the survivor of such merger or the Person that acquires by conveyance, transfer or lease substantially all of the assets of the Borrower as an entirety, as the case may be, shall be a solvent corporation organized and existing under the laws of the United States or any State thereof (including the District of Columbia), and, if the Borrower is not such corporation, such corporation shall have executed and delivered to the Lender its assumption (in form satisfactory to the Lender) of the due and punctual performance and observance of each covenant and condition of this Note; and -8- (ii) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing. No such conveyance, transfer or lease of substantially all of the assets of the Borrower shall have the effect of releasing the Borrower or any successor corporation that shall theretofore have become such in the manner prescribed in this Section 6(i) from its liability under this Note. (j) Inspection. The Borrower shall permit the representatives of the ---------- Lender, at the expense of the Borrower to visit and inspect any of the offices or properties of the Borrower or any subsidiary, to examine all their respective books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers and independent public accountants (and by this provision the Borrower authorizes said accountants to discuss the affairs, finances and accounts of the Borrower and its subsidiaries), all at such times and as often as may be requested upon reasonable notice during normal business hours. (k) Further Documents. The Borrower shall execute all such other documents ----------------- and instruments and do all such other acts and things as the Lender may from time to time reasonably require to carry out the transactions contemplated herein. SECTION 7. Events of Default. ----------------- Except upon the occurrence of an event under (e) or (f) below, whereupon this Note shall become immediately due and payable without notice or declaration by the Lender, the Lender may, subject to Section 9, by written notice to the Borrower, declare this Note immediately due and payable, whereupon this Note and all sums due hereunder shall become immediately due and payable without protest, presentment, demand or notice (except the notice referred to above in this Section 7) or without petition to any court, all of which are expressly waived by the Borrower, if any of the following events (each an "Event of Default") shall occur: (a) principal or interest due under this Note shall not be paid as and when due, whether at maturity, by declaration or otherwise, except where such payment is prohibited by the terms of Section 9; or (b) any representation by the Borrower herein shall prove to be false or incorrect in any material respect as of the date made; or (c) the Borrower shall default in any material respect in the due performance of any term or covenant of this Note (which is not the subject of another subsection of this Section 7) which default, if remediable, shall continue unremedied for a period of thirty (30) days after the earlier of (i) the day an officer of the Borrower obtains actual knowledge of such default, and (ii) the day the Lender gives written notice of such default to the Borrower; or -9- (d) (i) the Borrower or any subsidiary is in default (as principal or as guarantor or other surety) in the payment of any principal of or premium or make-whole amount or interest on any Indebtedness that is outstanding in an aggregate principal amount of at least $2,000,000 beyond any period of grace provided with respect thereto, or (ii) the Borrower or any subsidiary is in default in the performance of or compliance with any term of any Indebtedness in an aggregate outstanding principal amount of at least $2,000,000 or of any mortgage, indenture or other agreement relating thereto or any other condition exists, and as a consequence of such default or condition such Indebtedness has become, or has been declared, due and payable before its stated maturity or before its regularly scheduled dates of payment; or (e) the Borrower or any subsidiary shall (i) apply for or consent to the appointment of a receiver, trustee or liquidator for itself or any of its assets or properties, (ii) admit in writing its inability to pay its debts as they mature, (iii) make a general assignment for the benefit of creditors, (iv) be adjudicated a bankrupt or insolvent, (v) file a voluntary petition in bankruptcy, or a petition or an answer seeking reorganization or an arrangement with creditors or to take advantage of any bankruptcy, reorganization, insolvency, readjustment of debt, dissolution or liquidation law or statute, or any answer admitting the material allegations of a petition filed against it in any proceeding under any such law or if action shall be taken by the Borrower or such subsidiary for the purpose of effecting any of the foregoing, (vi) have commenced against it any case, proceeding or other action of a nature described in (i) through (v) above which results in the entry of an order for relief, or which remains undismissed for a period of 60 days or (vii) take or be subject to any action similar to those specified in clauses (i) through (vi) in any jurisdiction; or (f) an order, judgment or decree shall be entered, without the application, approval or consent of the Borrower or any subsidiary, with respect to the Borrower or such subsidiary or all or a substantial part of the assets of the Borrower or any such subsidiary, appointing a receiver, trustee or liquidator of the Borrower or such subsidiary, or any similar order, judgment or decree shall be entered or appointment made in any jurisdiction, and such order, judgment or decree or appointment shall continue unstayed and in effect for a period of 60 days; or (g) a final judgment or judgments for the payment of money aggregating in excess of $2,000,000 are rendered against one or more of the Borrower and its subsidiaries and which judgments are not, within 60 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay. SECTION 8. Application of Payments. ----------------------- Each payment received by the Lender following the Maturity Date shall be applied, first, to the payment of accrued default interest on this Note to the date of such payment and second, to the payment of the principal amount of this Note. SECTION 9. Subordination Agreement. ----------------------- -10- (a) The Borrower covenants and agrees and the Lender, by the Lender's acceptance hereof, likewise covenants and agrees, for itself and any future holder of this Note or the Indebtedness evidenced hereby, that, to the extent and in the manner set forth below in this Section 9, the Company's Senior Obligations will be senior in right of payment to the Debt. The Lender by accepting this Note acknowledges and agrees that the subordination provisions set forth in this Section 9 are, and are intended to be, an inducement and a consideration to each holder of any Senior Obligation, whether such Senior Obligation was created or acquired before or after the issuance of this Note, to acquire and continue to hold, or to continue to hold, such Senior Obligation and such holder of Senior Obligations shall be deemed conclusively to have relied on such subordination provisions in acquiring and continuing to hold, or continuing to hold, such Senior Obligations. (b) As used herein, "senior in right of payment" means that unless and until the Senior Obligations have been paid in full, without the express prior written consent of all holders of such Senior Obligations, the Lender will not take, demand (including by means of any legal action) or receive from the Borrower, and the Borrower will not make, give or permit, directly or indirectly, by set-off, redemption, purchase or in any other manner, any payment of or security for the whole or any part of the Debt other than any payment constituting a Mandatory Redemption made in accordance with the terms of Section 4(b) hereof and any set-off made in accordance with Section 4(c) hereof. (c) Any payment or distribution of assets of the Borrower, whether in cash, property or securities, to which the Lender would be entitled except for the provisions hereof, shall be paid or delivered by the Lender, or any receiver, trustee in bankruptcy, liquidating trustee, disbursing agent or other Person making such payment or distribution, to the holders of the Senior Obligations or their representative, ratably in accordance with the amounts thereof, to the extent necessary to pay in full all Senior Obligations, before any payment or distribution shall be made to the Lender. (d) The expressions "prior payment in full," "payment in full," "paid in full" and any other similar terms or phrases when used herein with respect to the Senior Obligations shall mean the payment in full money or money's worth of all the Senior Obligations and the expression "any payment of or security for the whole or any part of the Debt" and any other similar terms or phrases when used herein shall not be deemed to include a payment or distribution of stock or securities of the Borrower provided for by a plan of reorganization or readjustment authorized by an order or decree of a court of competent jurisdiction in a reorganization proceeding under any applicable bankruptcy law or of any other corporation provided for by such plan of reorganization or readjustment, which stock or securities are subordinated in right of payment to all then outstanding Senior Obligations to substantially the same extent as this Note is so subordinated as provided in this Section 9. The consolidation of the Borrower with, or the merger of the Borrower into, another Person or the liquidation or dissolution of the Borrower following the conveyance or transfer of all or substantially all of its properties and assets as an entirety to another Person upon the terms and conditions set forth in Section 6(i) shall not be deemed a "proceeding" for the purposes of this Section 9 if the Person formed by such consolidation or into which the Borrower -11- is merged or the Person which acquires by conveyance or transfer such properties and assets as an entirety, as the case may be, shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions set forth in Section 6(i). (e) If any payment or distribution, whether consisting of money, property or securities, be collected or received by the Lender in respect of the Debt, except payments of principal or interest permitted hereunder, the Lender forthwith shall deliver the same to the holders of the Senior Obligations or their representative, ratably in accordance with the amounts thereof, in the form received, duly endorsed to such holders or such representative, if required, to be applied to the payment or prepayment of the Senior Obligations until the Senior Obligations are paid in full. Until so delivered, such payment or distribution shall be held in trust by the Lender as the property of such holders of Senior Obligations, segregated from other funds and property held by the Lender. (f) As used herein, "Senior Obligations" shall mean collectively the unpaid principal of, premium, if any, and interest on (including, without limitation, interest accruing after the maturity thereof and interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) the Borrower's outstanding 10-3/4% Senior Notes due 2008, and all "Secured Obligations," as defined in that certain Amended and Restated Loan and Security Agreement, dated effective as of January 6, 1998, as amended from time to time, whether before or after the Loan Date (the "Amended and Restated Loan and Security Agreement"), by and among the Borrower and the other borrowers and guarantors party thereto, the lenders party thereto, and Bank of America, N.A., as agent for such lenders, now or hereafter owing (including, without limitation, any increases thereof), and any and all renewals, extensions, restatements, replacements and refinancings thereof (whether among the same parties, or any of them, or with any other lender or lenders). (g) The provisions of this Section 9 shall apply to all Indebtedness evidenced by or arising under this Note, and any and all renewals, modifications, amendments, supplements, replacements and restatements thereof, respectively. (h) Nothing set forth in this Section 9 shall be deemed in any way to limit or prevent the holder of this Note from exercising its rights under, or the Borrower from complying with its obligations under Sections 4(b) or 4(c) hereof, regardless of whether or not any payment by the Borrower under this Note would otherwise be prohibited under the terms of this Section 9 at the time that the Lender seeks to exercise its rights under Section 4(b) or 4(c). SECTION 10. Additional Definitions. ---------------------- As used herein, the following terms have the respective meanings set forth below: -12- "Business Day" means, for the purposes of this Note, any day other than a Saturday, a Sunday or a day on which commercial banks in New York are required or authorized to be closed. "Capital Leases" means, at any time, a lease with respect to which the lessee is required concurrently to recognize the acquisition of an asset and the incurrence of a liability in accordance with generally accepted accounting principles. "Debt" means collectively the unpaid principal of and interest on (including, without limitation, default interest accruing after the maturity date of the Notes and interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) the Notes and all other indebtedness of the Borrower in respect thereof, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter incurred, in each case whether on account of principal, premium, interest, reimbursement obligations, fees, indemnities, costs, expenses or otherwise. "Default" means an event or condition the occurrence or existence of which would, with the lapse of time or the giving of notice or both, become an Event of Default. "Guaranty" means, with respect to any Person, any obligation (except the endorsement in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing or in effect guaranteeing any indebtedness, dividend or other obligation of any other Person in any manner, whether directly or indirectly, including (without limitation) obligations incurred through an agreement, contingent or otherwise, by such Person: (a) to purchase such indebtedness or obligation or any property constituting security therefor; (b) to advance or supply funds (i) for the purchase or payment of such indebtedness or obligation, or (ii) to maintain any working capital or other balance sheet condition or any income statement condition of any other Person or otherwise to advance or make available funds for the purchase or payment of such indebtedness or obligation; (c) to lease properties or to purchase properties or services primarily for the purpose of assuring the owner of such indebtedness or obligation of the ability of any other Person to make payment of the indebtedness or obligation; or (d) otherwise to assure the owner of such indebtedness or obligation against loss in respect thereof. In any computation of the indebtedness or other liabilities of the obligor under any Guaranty, the indebtedness or other obligations that are the subject of such Guaranty shall be assumed to be direct obligations of such obligor. -13- "Indebtedness" with respect to any Person, means, on any date of determination (without duplication): (a) its liabilities for borrowed money and its redemption obligations in respect of mandatorily redeemable Preferred Stock; (b) its liabilities for the deferred purchase price of property acquired by such Person (excluding accounts payable arising in the ordinary course of business consistent with past practice); (c) all liabilities appearing on its balance sheet in accordance with generally accepted accounting principles in respect of Capital Leases; (d) all liabilities for borrowed money secured by any lien with respect to any property owned by such Person (whether or not it has assumed or otherwise become liable for such liabilities); (e) all its liabilities in respect of letters of credit or instruments serving a similar function issued or accepted for its account by banks and other financial institutions (whether or not representing obligations for borrowed money); (f) Swaps of such Person; and (g) any Guaranty of such Person with respect to liabilities of a type described in any of clauses (a) through (f) hereof. "Material Adverse Effect" means a material adverse effect on (i) the business, operations, financial condition, assets or properties of the Borrower and its subsidiaries taken as a whole, or (ii) the ability of the Borrower to perform its obligations under this Note, or (iii) the validity or enforceability of this Note. "Person" means an individual, partnership, corporation, limited liability company, association, trust, unincorporated organization, or a government or agency or political subdivision thereof. "Preferred Stock" means any class of capital stock of a corporation that is preferred over any other class of capital stock of such corporation as to the payment of dividends or the payment of any amount upon liquidation or dissolution of such corporation. "subsidiary" means, as to any Person, any corporation, association or other business entity in which such Person or one or more of its subsidiaries or such Person and one or more of its subsidiaries owns sufficient equity or voting interests to enable it or them (as a group) ordinarily, in the absence of contingencies, to elect a majority of the directors (or Persons performing similar functions) of such entity, and any partnership or joint venture if more than a 50% interest in the -14- profits or capital thereof is owned by such Person or one or more of its subsidiaries or such Person and one or more of its subsidiaries. Unless the context otherwise clearly requires, any reference to a "subsidiary" is a reference to a subsidiary of the Borrower. "Swaps" means, with respect to any Person, payment obligations with respect to interest rate swaps, currency swaps and similar obligations obligating such Person to make payments, whether periodically or upon the happening of a contingency. For the purposes of this Note, the amount of the obligation under any Swap shall be the amount determined in respect thereof as of the end of the then most recently ended fiscal quarter of such Person, based on the assumption that such Swap had terminated at the end of such fiscal quarter, and in making such determination, if any agreement relating to such Swap provides for the netting of amounts payable by and to such Person thereunder or if any such agreement provides for the simultaneous payment of amounts by and to such Person, then in each such case, the amount of such obligation shall be the net amount so determined. SECTION 11. Borrower's Obligations Unconditional. ------------------------------------ Except as expressly set forth herein, the obligations of the Borrower hereunder are unconditional and neither any reference to any other document or agreement herein nor the subordination for the benefit of the holders of the Senior Obligations pursuant to Section 9 hereof is intended or shall be deemed to render the Borrower's obligations hereunder conditional as between the Borrower and the Lender. SECTION 12. Assignment, Etc. ---------------- This Note shall be binding upon each of the Borrower, the Lender and their respective successors and assigns; provided, however, the Borrower may not -------- ------- assign this Note without the prior written consent of the Lender. The Lender may sell, assign or transfer this Note without any requirement of consent by the Borrower, provided, however, that the Indebtedness evidenced by this Note shall continue to be subject to the terms of Section 9 hereof. SECTION 13. Indemnification. --------------- The Borrower shall pay, indemnify, and hold the Lender harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses (including attorneys' fees and expenses) or disbursements of any kind or nature whatsoever ("Losses") arising out of or in connection with (a) the enforcement of any rights of the Lender under this Note, and (b) any claim (whether or not asserted in any legal proceeding), litigation, investigation, arbitration or proceeding relating to this Note (collectively, "indemnified liabilities") provided that the Borrower -------- shall have no obligation hereunder to the Lender with respect to indemnified liabilities arising from the gross negligence or willful misconduct of the Lender. The agreements in this Section 13 shall survive the repayment of this Note and all other amounts payable hereunder. -15- SECTION 14. No Waiver, Cumulative Remedies. ------------------------------ The Lender shall not by any act (except by a written instrument signed by the Lender), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of the Lender, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Lender of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Lender would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any rights or remedies provided by law. SECTION 15. Waiver of Protest, Presentment, etc. ------------------------------------ The Borrower hereby waives protest, presentment, notice of dishonor and notice of acceleration of maturity and agrees to continue to remain bound for the payment of principal, interest and all other sums due under this Note notwithstanding any change or changes by way of release, surrender, exchange, modification or substitution of any security for this Note or by way of any extension or extensions of time for the payment of principal and interest. SECTION 16. Expenses. -------- The Borrower agrees to pay or reimburse, or cause to be paid or reimbursed, all of its and the Lender's costs and expenses incurred in connection with the preparation, execution, and delivery of this Note including, without limitation, the fees and disbursements of their respective counsel. SECTION 17. Notice. ------ All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be sent by registered or certified first-class mail, return receipt requested, telecopier, courier service or personal delivery: a. if to the Borrower, to the attention of each of its Treasurer and General Counsel, at: Outboard Marine Corporation 100 Sea-Horse Drive Waukegan, IL 60085 Facsimile No.: (847) 689-6246 b. if to the Lender: -16- Greenlake Holdings II LLC c/o Greenbelt Corporaiton 277 Park Avenue New York, NY 10172 Attention: Alfred D. Kingsley Facsimile No.: (212) 350-5253 All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; when delivered by courier, if delivered by commercial overnight courier service; five business days after being deposited in the mail, post prepaid, if mailed; and when receipt is acknowledged, if telecopied. The Borrower or the Lender may change the address to which notices, demands and other communications hereunder are to be delivered by giving the other party notice in the manner herein set forth. SECTION 18. Governing Law. ------------- THIS NOTE AND THE LEGAL RELATIONS BETWEEN THE BORROWER AND THE HOLDER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW THEREOF. SECTION 19. Consent to Jurisdiction and Service of Process. ---------------------------------------------- Any legal action, suit or proceeding arising out of or relating to this Note or the agreements and transactions contemplated hereby may be instituted only in a state or federal court of the State of New York located in the borough of Manhattan and the Borrower agrees not to assert, by way of motion, as a defense or otherwise, in any such action, suit or proceeding, any claim that it is not subject personally to the jurisdiction of such court, that its property is exempt or immune from attachment or execution, that the action, suit or proceeding is brought in an inconvenient forum, that the venue of the action, suit or proceeding is improper or that this Note, the agreements contemplated hereby or the subject matter hereof or thereof may not be enforced in or by such court. The Borrower further irrevocably submits to the jurisdiction of any such court in any such action, suit or proceeding. Any and all service of process and any other notice in any such action, suit or proceeding shall be effective against the Borrower if given by registered or certified mail, return receipt requested, or by any other means of mail that requires a signed receipt, postage prepaid, mailed to the Borrower as herein provided. SECTION 20. WAIVER OF JURY TRIAL. -------------------- THE BORROWER HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING -17- ARISING OUT OF OR RELATING TO THIS NOTE OR ANY AGREEMENT OR TRANSACTIONS CONTEMPLATED HEREBY AND FOR ANY COUNTERCLAIM IN CONNECTION HEREWITH. OUTBOARD MARINE CORPORATION By: /s/ Andrew P. Hines ------------------- Name: Andrew P. Hines Title: Executive Vice President and Chief Financial Officer EX-11 12 COMPUTATION OF PER SHARE EARNINGS OUTBOARD MARINE CORPORATION EXHIBIT 11: COMPUTATION OF PER SHARE EARNINGS
Post-Merger Company ---------------------------------------------------------------- Twelve Months Ended Three Months Ended December 31, December 31, ------------------------------- ------------------------- (Dollars and Shares in Millions Except per Share Data) 1999 1998 1998 1997 ------------- ------------- ---------- ----------- Basic Earnings per Share: Net Earnings (Loss) $ 8.2 ($180.5) ($47.1) ($17.1) Weighted Average Number of Shares 20.4 20.4 20.4 20.4 ------------- ------------- ---------- ----------- Basic Earnings (Loss) Per Share $0.40 ($8.85) ($2.31) ($0.84) ============= ============= ========== =========== Diluted Earnings Per Shares: Net Earnings (Loss) $ 8.2 ($180.5) ($47.1) ($17.1) Add: After-tax Interest and Related Expense Amortization on 7% Convertible Subordinated Debentures ------------- ------------- ---------- ----------- Net Earnings (Loss) Adjusted $ 8.2 ($180.5) ($47.1) ($17.1) ------------- ------------- ---------- ----------- Weighted Average Number of Shares 20.6 20.4 20.4 20.4 Common Stock Equivalents (Stock Options) ----- ----- ----- ----- Weighted Average Common Shares Assuming Conversion of 7% Convertible Subordinated Debentures Average Shares Outstanding 20.6 20.4 20.4 20.4 ------------- ------------- ---------- ----------- Diluted Earnings (Loss) Per Share $0.40 ($8.85) ($2.31) ($0.84) ============= ============= ========== =========== Pre-Merger Company ------------- Twelve Months Ended September 30, -------------------------------- (Dollars and Shares in Millions Except per Share Data) 1998 1997 ------------- ------------- Basic Earnings per Share: Net Earnings (Loss) ($150.5) ($79.1) Weighted Average Number of Shares 20.4 20.2 ------------- ------------- Basic Earnings (Loss) Per Share ($7.38) ($3.91) ============= ============= Diluted Earnings Per Shares: Net Earnings (Loss) ($150.5) ($79.1) Add: After-tax Interest and Related Expense Amortization on 7% Convertible Subordinated Debentures 3.3 ------------- ------------- Net Earnings (Loss) Adjusted ($150.5) ($75.8) ------------- ------------- Weighted Average Number of Shares 20.4 20.1 Common Stock Equivalents (Stock Options) ----- 0.1 Weighted Average Common Shares Assuming Conversion of 7% Convertible Subordinated Debentures 3.4 Average Shares Outstanding 20.4 23.6 ------------- ------------- Diluted Earnings (Loss) Per Share ($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-21 13 SUBSIDIARIES OF REGISTRANT EXHIBIT 21 Domestic Subsidiaries --------------------- (as of November 4, 1999) Subsidiary ---------- OMC Aluminum Boat Group, Inc. Syracuse Transportation, Inc. OMC & Co. OMC Development Inc. OMC Distributors, Inc. - San Francisco OMC Europe, Inc. OMC Fishing Boat Group, Inc. OMC Holdings, Inc. OMC Latin America/Caribbean, Inc. OMC Recreational Boat Group, Inc. Recreational Boat Group Limited Partnership OMC Venture, Inc. OMCEMA, Inc. Outboard Marine Holdings, Inc. Outboard Marine Transportation Corporation Outboard Marine Venture Capital Corporation International Subsidiaries -------------------------- Subsidiary - ---------- OMC Europe, V.O.F. OMC Holdings France, S.N.C. OMC France, S.N.C. OMC Power Boats S.A.R.L. France OMC Norge AS OMC Outboard Marine Deutschland GmbH OMC Sverige Aktiebolag Outboard Marine Corporation Asia Limited Outboard Marine Corporation (Australia), PTY, Ltd. Outboard Marine Corporation of Canada, Ltd. Altra Marine Products, Inc. Outboard Marine de Mexico, Mexico 1,000 Series A; S.A. de C.V. 8,621,000 Series B 100% OUTBOARD MARINE GmbH Germany 100% FICHT GmbH & Co. KG Germany 51%/2/ Outboard Marine Motores de Amazonia Ltda. Brazil 30,357,768,089 shares- 100% OMC Do Brazil LTDA Brazil 20 shares - Outboard Marine Motors Amazonia LTDA 1 share - Pedro Melo
__________________ /2/51% owned by Outboard Marine GmbH & 49% owned by members of the Ficht family. EX-27 14 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1999 DEC-31-1999 25,000 0 104,900 0 188,600 335,700 246,100 45,600 848,400 348,800 241,400 0 0 200 80,100 848,400 1,110,900 1,110,900 881,000 881,000 188,000 0 23,100 18,800 10,600 8,200 0 0 0 8,200 0.40 0.40
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