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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 2, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 0-16255
JOHNSON WORLDWIDE ASSOCIATES, INC.
(Exact name of Registrant as specified in its charter)
Wisconsin 39-1536083
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1326 Willow Road, Sturtevant, Wisconsin 53177
(Address of principal executive offices)
(414) 884-1500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Class A common stock, $.05 par value
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 to
this Form 10-K. [ ]
As of November 16, 1998, 6,870,045 shares of Class A and 1,223,861 shares of
Class B common stock of the Registrant were outstanding. The aggregate market
value of voting stock of the Registrant held by nonaffiliates of the Registrant
was approximately $36,015,000 on November 16, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Part and Item Number of Form 10-K
Document into which Incorporated
- --------------------------------- ---------------------------------
Johnson Worldwide Associates, Inc. Part III, Items 10, 11, 12 and 13
Notice of Annual Meeting of
Shareholders and Proxy Statement
for the Annual Meeting of
Shareholders to be held January
26, 1999
Table of Contents
Page
Business .......................................... 1
Properties ........................................ 5
Legal Proceedings ................................. 5
Submission of Matters to a Vote of Security Holders 5
Market for Registrant's Common Equity and
Related Stockholder Matters ....................... 5
Selected Financial Data ........................... 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations ..... 7
Quantitative and Qualitative Disclosures
about Market Risk ................................. 11
Financial Statements and Supplementary Data ....... 11
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ............... 11
Directors and Executive Officers of the Registrant 12
Executive Compensation ............................ 12
Security Ownership of Certain Beneficial Owners
and Management .................................... 12
Certain Relationships and Related Transactions .... 12
Exhibits, Financial Statement Schedules and
Reports on Form 8-K ............................... 12
Signatures ........................................ 13
Exhibit Index ..................................... 14
Consolidated Financial Statements ................. F-1
PART I
ITEM 1. BUSINESS
Johnson Worldwide Associates, Inc. and its subsidiaries (hereinafter the
Company) are engaged in the design, manufacture and marketing of recreation
products. The Company's primary focus is product design, product innovation and
marketing to maintain its strong brand names and consumer recognition. Research
and development activities for each of the Company's five principal businesses
emphasize new products and innovation to differentiate the Company's products
from those of its competitors. The Company is controlled by Samuel C. Johnson,
members of his family and related entities.
The Company was, until January 1997, a leading supplier in Europe of marine
products and accessories, which the Company sold under the Plastimo name. The
Plastimo business was sold in January 1997.
Diving
The Company is one of the world's largest manufacturers and distributors of
technical underwater diving products which it sells under the Scubapro and
SnorkelPro names. The Company markets a full line of underwater diving and
snorkeling equipment, including regulators, stabilizing jackets, tanks, depth
gauges, masks, fins, snorkels, diving electronics and other accessories. In
1997, the Company acquired the stock of Uwatec AG, a leading manufacturer of
dive computers and other electronics, which are sold under the Aladin and Uwatec
brands. Scubapro, Aladin and Uwatec products are marketed globally to the high
quality, premium priced segment of the market. The Company maintains a marketing
strategy of limited distribution, selling primarily through independent
specialty diving shops worldwide. These diving shops generally provide a wide
range of services to divers, including instruction and repair service.
The Company focuses on maintaining Scubapro, Aladin and Uwatec as the market
leaders in innovation and new products. The Company maintains research and
development functions both in the United States and Europe and holds several
patents on products and features. Consumer advertising focuses on building the
brand names and position as the high quality and innovative leader in the
industry. The Company advertises its equipment in diving magazines and through
in-store displays.
In October 1997, the Company acquired certain assets of Soniform, Inc., a
manufacturer of diving buoyancy compensators primarily for the original
equipment market, which expanded the Company's manufacturing capability for
these products.
The Company maintains manufacturing and assembly facilities in the United
States, Switzerland, Mexico, Italy and Indonesia. The Company procures a
majority of its rubber and plastic products and components from third-party
manufacturers.
Watercraft
The Company's original watercraft company is Old Town Canoe. Whitewater,
tripping, touring and general recreational purpose canoes for the high quality
and mid-price segments of the canoe market and both entry level and higher
performance kayaks are produced under the Old Town name. The Company uses a
patented rotational-molding process for manufacturing polyethylene canoes to
compete in the higher volume, mid-priced range of the market. These canoes
feature many of the design and durability characteristics of higher priced
canoes. The Company also manufactures canoes from fiberglass, Royalex (ABS) and
wood. Carlisle Paddles, a manufacturer of canoe and kayak paddles and rafting
oars, supplies paddles that are sold by the Company's other watercraft
businesses as well as products distributed directly through the same channels as
the Company's watercraft.
In 1998, the Company completed the acquisition of the common stock of Leisure
Life Limited, a privately held manufacturer and marketer of small thermoformed
recreational boats, including canoes, pedal boats, deck boats and tenders. In
1998, the Company also acquired the stock of Plastiques L.P.A. Limitee, the
manufacturer of the Dimension brand of kayaks. In 1997, the Company acquired
Ocean Kayak, a leading manufacturer of sit-on-top kayaks.
The Company's canoes and kayaks are sold primarily to sporting goods stores,
catalog and mail order houses such as L. L. Bean/R/, canoe specialty stores and
marine dealers in the United States and Europe. Leisure Life products are sold
through marine dealers and large retail chains.
1
The North American market for kayaks is exhibiting strong growth, while the
canoe market is relatively constant. The Company believes, based on industry and
other data, that it is the leading manufacturer of canoes and kayaks in the
United States in both unit and dollar sales.
Motors and Fishing
The overall motors and fishing markets in which the Company competes have been
stagnant in recent years. The Company believes it has been able to maintain its
share of most markets primarily as a result of emphasis on marketing and product
innovation. The Company controls the leading market share of the electric
fishing motor market.
Motors
The Company manufactures, under its Minn Kota and Neptune names, battery powered
motors used on fishing boats and other boats for quiet trolling power or primary
propulsion. The Company's Minn Kota and Neptune motors and related accessories
are sold in the United States, Canada, Europe and the Pacific Basin through
large retail store chains such as Wal Mart and K-Mart, catalogs, such as Bass
Pro Shops and Cabelas, sporting goods specialty stores, marine dealers, and
original equipment boat manufacturers. Consumer advertising and promotion
include advertising on regional television and in outdoor, general interest and
sports magazines. Packaging and point-of-purchase materials are used to increase
consumer appeal and sales.
In 1998, the Company entered into an arrangement with Ranger/R/ Boats, a
premier manufacturer, to supply Minn Kota motors on original equipment boats. In
1998, the Company also entered into an arrangement with Outboard Marine
Corporation (OMC) to manufacture all Evinrude/R/ branded electric trolling
motors for use on original equipment and to service the aftermarket through
their dealer base. The Company's Lake Electric Motors division manufactures
components for Minn Kota and electric motors for original equipment
manufacturers.
The Company's line of Airguide marine, weather and automotive instruments is
distributed primarily in the United States through large retail store chains and
original equipment manufacturers. Airguide products are manufactured by the
Company or sourced from third-party manufacturers.
Fishing
The Company's fishing products include Mitchell and Spidercast reels and rods,
Johnson reels, Beetle Spin soft body lures, Johnson Silver Minnow spoons and
SpiderWire, a leading brand in the "superline" and monofilament segments of the
fishing line market.
The Company markets Johnson fishing reels, which are primarily closed-face
spincast reels, as well as Mitchell reels, primarily open-faced spinning and
bait casting reels. Reels are sold individually and in rod and reel
combinations, primarily through large retail store chains, catalogs and
specialty fishing shops in the United States, Canada, Europe and the Pacific
Basin. The Company's reels compete in a segment of the U.S. fishing reel market
which is dominated by larger manufacturers. Marketing support for the Company's
reels is focused on building brand names, emphasizing product features and
innovation and on developing specific segments of the reel market through
advertising on television, in national outdoor magazines and through trade and
consumer support at retail. The Company's rods and reels are produced by
third-party manufacturing sources.
The Company purchases, from third-party manufacturers, its SpiderWire premium
braided line and SpiderWire Fusion products, which have performance
characteristics superior to those of monofilament fishing line. SpiderWire
premium braided line competes in the "superline" segment of the fishing line
category, while SpiderWire Fusion is positioned just above the high end of the
monofilament market. In 1997, the Company introduced a monofilament product
under the SpiderWire brand. These products are sold through large retail store
chains, catalogs and specialty stores.
The Company's artificial lure products are manufactured by third parties. These
products are sold primarily through large retail store chains.
2
Outdoor Equipment
The Company's outdoor equipment products include Eureka! and Camp Trails camping
tents and backpacks, Jack Wolfskin camping tents, backpacks and outdoor
clothing, and Silva field compasses.
Eureka! and Camp Trails camping tents and backpacks compete primarily in the
mid- to high-price range within their respective markets and are sold in the
United States and Canada through independent sales representatives primarily to
sporting goods stores, catalog and mail order houses and camping and backpacking
specialty stores. Marketing of the Company's tents and backpacks is focused on
building the Eureka! and Camp Trails brand names and establishing the Company as
a leader in product design and innovation. The Company's camping tents and
backpacks are produced primarily by third-party manufacturing sources.
The Company's Eureka! camping tents have outside self-supporting aluminum
frames, allowing quicker and easier set-up, a design approach first introduced
by the Company. Most Eureka! tents are made from breathable nylon. Eureka!
camping products are sold under license in Japan and Korea.
Camp Trails backpacks consist primarily of internal and external frame backpacks
for hiking and mountaineering, but also include soft back bags, day packs and
travel packs. Jack Wolfskin, a German marketer of camping tents, backpacks and
outdoor clothing, distributes its products primarily through camping and
backpacking specialty stores in Germany with additional distribution in other
European countries, Canada and the United States and, under license, in Japan.
Certain of these stores sell Jack Wolfskin products exclusively.
The Company's Eureka! commercial tents include party tents, sold primarily to
general rental stores, and other commercial tents sold directly to tent
erectors. Commercial tents are manufactured by the Company in the United States.
The Company was awarded several contracts for production of both camping and
commercial tents by the U.S. Armed Forces in 1997.
Silva field compasses, which are manufactured by third parties, are marketed
exclusively in North America, the area for which trademark rights for the Silva
brand are owned.
Sales by Principal Business
See Note 12 to the Consolidated Financial Statements for financial information
comparing sales by major product category.
International Operations
See Note 12 to the Consolidated Financial Statements for financial information
comparing the Company's domestic and international operations.
Research and Development
The Company commits significant resources to research and new product
development. The Company expenses research and development costs as incurred.
The amounts expended by the Company in connection with research and development
activities for each of the last three fiscal years are set forth in the
Consolidated Statements of Operations.
Competition
The markets for the Company's products are very competitive. The Company
believes its products compete favorably on the basis of product innovation,
product performance and marketing support and, to a lesser extent, price.
Employees
At October 2, 1998, the Company had approximately 1,400 employees working in its
businesses. The Company considers its employee relations to be excellent.
Temporary employees are utilized to manage peaks in the seasonal manufacturing
of products.
Backlog
The Company's recreation businesses do not receive significant orders in advance
of expected shipment dates for the majority of its products. Unfilled orders for
future delivery of tents to the United States Armed Forces and other governments
totaled $7.2 million at October 2, 1998.
3
Patents, Trademarks and Proprietary Rights
The Company owns no single patent which is material to its business as a whole.
However, the Company holds several patents, principally for diving products,
rotational-molded canoes and electric motors, and has filed several applications
for patents. The Company has numerous trademarks and trade names which it
considers important to its business, many of which are discussed on the
preceding pages.
Sources and Availability of Materials
The Company's products use materials that are generally in adequate supply.
Seasonality
The Company's business is seasonal. The following table shows total net sales
and operating profit or loss of the Company for each quarter, as a percentage of
the total year. Inventory writedowns of $10.3 million in 1996 are included as
components of the fourth quarter operating losses. Nonrecurring charges totaling
$1.4 million, $0.3 million and $6.8 million impacted operating results in 1998,
1997 and 1996, respectively.
Year Ended
October 2, 1998 October 3, 1997 September 27, 1996
Net Operating Net Operating Net Operating
Sales Profit (Loss) Sales Profit (Loss) Sales Profit (Loss)(1)
Quarter Ended
December 16% (14)% 17% (32)% 17% NM
March 30 57 32 81 32 NM
June 32 60 29 66 32 NM
September 22 (3) 22 (15) 19 NM
100% 100% 100% 100% 100% NM
(1)Results not meaningful.
Executive Officers
The following list sets forth certain information, as of November 16, 1998,
regarding the executive officers of the Company.
R. C. Whitaker, age 51, became President and Chief Executive Officer of the
Company in October 1996. From December 1995 to October 1996, Mr. Whitaker was
President and Chief Executive Officer of EWI, Inc., a supplier to the automotive
industry. From 1992 to September 1995, Mr. Whitaker was Chairman, President and
Chief Executive Officer of Colt's Manufacturing Company, Inc., a manufacturer of
firearms.
Carl G. Schmidt, age 42, became Senior Vice President of the Company in May 1995
and has been Chief Financial Officer, Secretary and Treasurer of the Company
since July 1994. From July 1994 until May 1995, Mr. Schmidt was a Vice President
of the Company. From 1988 to July 1994, he was a partner in the firm of KPMG
Peat Marwick LLP.
Mamdouh Ashour, age 60, became a Group Vice President of the Company in October
1997 and President - Worldwide Diving in August 1996. From 1994 to August 1996,
he served as President of Scubapro Europe.
There are no family relationships between the above executive officers.
4
ITEM 2. PROPERTIES
The Company maintains both leased and owned manufacturing, warehousing,
distribution and office facilities throughout the world. The Company believes
that its facilities are well maintained and have capacity adequate to meet its
current needs.
See Note 5 to the Consolidated Financial Statements for a discussion of lease
obligations.
The Company's principal manufacturing (identified with an asterisk) and other
locations are:
Antibes, France Genoa, Italy* Mansonville, Quebec, Canada*
Bad Sekingen, Germany Grand Rapids, Michigan* Marignier, France
Batam, Indonesia* Grayling, Michigan* NykUping, Sweden
Barcelona, Spain Hallwil, Switzerland* Old Town, Maine*
Basingstoke, Hampshire, England Hamburg, Germany Racine, Wisconsin*
Binghamton, New York* Henggart, Switzerland El Cajon, California*
Burlington, Ontario, Canada Honolulu, Hawaii Silverwater, Australia
Chi Wan, Hong Kong Idstein, Germany Tijuana, Mexico*
Ferndale, Washington* Mankato, Minnesota* Tokyo (Kawasaki), Japan
The Company's corporate headquarters is located in Mount Pleasant, Wisconsin.
The Company's mailing address is Sturtevant, Wisconsin.
ITEM 3. LEGAL PROCEEDINGS
See Note 15 to the Consolidated Financial Statements for a discussion of legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the last
quarter of the year ended October 2, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Certain information with respect to this item is included in Notes 4, 8, 9 and
10 to the Consolidated Financial Statements. The Company's Class A common stock
is traded on The Nasdaq Stock Market(R) under the symbol: JWAIA. There is no
public market for the Company's Class B common stock. However, the Class B
common stock is convertible at all times at the option of the holder into shares
of Class A common stock on a share for share basis. As of November 16, 1998, the
Company had 722 holders of record of its Class A common stock and 61 holders of
record of its Class B common stock. The Company has never paid a dividend on its
common stock.
A summary of the high and low prices for the Company's Class A common stock
during each quarter of the years ended October 2, 1998 and October 3, 1997 is as
follows:
First Second Third Fourth
1998 1997 1998 1997 1998 1997 1998 1997
Stock prices:
High $17.75 $15.00 $17.28 $14.00 $16.38 $13.25 $14.00 $17.50
Low 14.50 10.75 15.50 12.00 12.25 10.50 8.00 12.25
5
ITEM 6. SELECTED FINANCIAL DATA
A summary of the Company's operating results and key balance sheet data for each
of the years in the five-year period ended October 2, 1998 is as follows:
(thousands, except
per share data) Year Ended
October 2, October 3, September 27, September 29, September 30,
1998 1997 1996 1995 1994
Operating Results(1)(2)
Net sales $328,525 $303,121 $344,373 $347,190 $284,343
Gross profit 125,964 111,332 119,724 138,155 110,474
Operating expenses(3) 107,241 99,321 121,200 114,411 91,536
------ ----- ------ ------- ------
Operating profit (loss) 18,723 12,011 (1,476) 23,744 18,938
Interest expense 9,829 8,780 10,181 7,613 6,845
Other income, net (255) (728) (496) (861) (391)
---- ---- ---- ---- ----
Income (loss) from
continuing operations
before income taxes 9,149 3,959 (11,161) 16,992 12,484
Income tax expense 3,937 1,903 194 6,903 4,338
----- ----- --- ----- -----
Income (loss) from
continuing operations 5,212 2,056 (11,355) 10,089 8,146
----- ----- ------- ------ -----
Gain on disposal of
discontinued operations - - - - 4,052
------ ----- ------- ------ -----
Net income (loss) $5,212 $2,056 $(11,355) $10,089 $12,198
====== ====== ======== ======= =======
Basic earnings (loss)
per common share:
Continuing operations $0.64 $0.25 $(1.40) $1.25 $1.01
Discontinued
operations - - - - 0.51
----- ----- ------ ----- -----
Net income (loss) $0.64 $0.25 $(1.40) $1.25 $1.52
===== ===== ====== ===== =====
Diluted earnings (loss)
per common share:
Continuing operations $0.64 $0.25 $(1.40) $1.24 $1.00
Discontinued
operations - - - - 0.50
----- ----- ------ ----- -----
Net income (loss) $0.64 $0.25 $(1.40) $1.24 $1.50
===== ===== ====== ===== =====
Diluted average common
shares outstanding 8,114 8,115 8,130 8,117 8,143
===== ===== ===== ===== =====
Balance Sheet Data(1)
Total assets $296,017 $277,019 $280,768 $278,353 $219,681
Long-term debt,
less current maturities 82,066 88,753 61,501 68,948 31,190
Shareholders' equity 124,386 117,731 126,424 141,262 128,197
======= ======= ======= ======= =======
(1)All periods have been reclassified to reflect the discontinuation of the
Company's Marking Systems group.
(2)The year ended October 3, 1997 includes 53 weeks. All other years include 52
weeks.
(3)Includes nonrecurring charges of $1,424, $335 and $6,768 in 1998, 1997 and
1996, respectively.
6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion includes comments and analysis relating to the
Company's results of operations and financial condition for the three years
ended October 2, 1998. This discussion should be read in conjunction with the
Consolidated Financial Statements and related notes thereto.
Forward Looking Statements
Certain matters discussed in this 1998 Form 10-K are "forward-looking
statements," intended to qualify for the safe harbors from liability established
by the Private Securities Litigation Reform Act of 1995. These forward-looking
statements can generally be identified as such because the context of the
statement includes phrases such as the Company "expects," "believes" or other
words of similar import. Similarly, statements that describe the Company's
future plans, objectives or goals are also forward-looking statements. Such
forward-looking statements are subject to certain risks and uncertainties which
could cause actual results or outcomes to differ materially from those currently
anticipated. Factors that could affect actual results or outcomes include
changes in consumer spending patterns, the success of the Company's EVA program,
actions of companies that compete with JWA, the Company's success in managing
inventory, movements in foreign currencies or interest rates, the success of
suppliers, customers and others regarding compliance with year 2000 issues, and
adverse weather conditions. Shareholders, potential investors and other readers
are urged to consider these factors in evaluating the forward-looking statements
and are cautioned not to place undue reliance on such forward-looking
statements. The forward-looking statements included herein are only made as of
the date of this 1998 Form 10-K and the Company undertakes no obligations to
publicly update such forward-looking statements to reflect subsequent events or
circumstances.
Results of Operations
Summary consolidated financial results are as follows:
(millions, except per share data) 1998 1997 1996
Net sales $328.5 $303.1 $344.4
Gross profit 126.0 111.3 119.7
Operating expenses(1) 107.2 99.3 121.2
Operating profit (loss) 18.7 12.0 (1.5)
Interest expense 9.8 8.8 10.2
Net income (loss) 5.2 2.1 (11.4)
Diluted earnings (loss) per common share 0.64 0.25 (1.40)
(1)Includes nonrecurring charges of $1.4 million, $0.3 million and $6.8 million
in 1998, 1997 and 1996, respectively.
1998 vs 1997
Net Sales
Net sales totaled $328.5 million in 1998 compared to $303.1 million in 1997, an
increase of 8%. Sales as measured in U.S. dollars were negatively impacted by
the effect of weaker foreign currencies relative to the U.S. dollar in
comparison to 1997. Excluding the effects of foreign currency movements and the
sale of the Plastimo business in January 1997, worldwide sales increased $40.6
million, or 13%, from 1997. The increase was due primarily to sales of products
of businesses the Company acquired in 1998 and 1997 and strong growth in sales
of watercraft, which more than offset a decline in fishing sales and weaker
diving equipment sales in Asia.
Operating Results
The Company recognized an operating profit of $18.7 million in 1998 compared to
an operating profit of $12 million in 1997. Gross profit margins increased from
36.7% in 1997 to 38.3% in 1998, primarily as a result of businesses acquired by
the Company in 1998 and 1997. The Company continues to experience margin
pressure in all of its businesses due to competition.
7
Operating expenses, excluding nonrecurring charges, totaled $105.8 million, or
32.2% of sales, in 1998 compared to $99 million, or 32.7% of sales, in 1997. The
improvement in the operating expense ratio was attributable to management's
efforts to control such expenses and the impact of weaker foreign currencies for
much of the year. These factors were partially offset by operating expenses of
businesses acquired in 1998 and 1997 and unusual legal expenses incurred to
successfully defend certain of the Company's key outdoor equipment, diving and
motors patents and trademarks.
The Company recognized nonrecurring charges totaling $1.4 million in 1998 and
$0.3 million in 1997. These charges resulted primarily from severance and other
costs related to the integration of acquired businesses, primarily in the diving
business. The Company anticipates additional nonrecurring charges of
approximately $2 million will be incurred in 1999 to further integrate recent
acquisitions into its business.
Other Income and Expenses
Interest expense increased $1 million in 1998, reflecting higher debt levels
resulting from the acquisition of five businesses since July 1997, which was
partially offset by lower levels of working capital, primarily inventory, and a
favorable interest rate environment.
Overall Results
The Company recognized net income of $5.2 million in 1998, or $0.64 per diluted
share, compared to net income of $2.1 million, or $0.25 per diluted share, in
1997. The Company recorded income tax expense of $3.9 million in 1998, an
effective rate of 43%, due to earnings in foreign jurisdictions that are taxed
at higher rates than in the United States. The tax benefit of operating losses
generated in the United States did not fully offset the taxes in these foreign
jurisdictions. The Company's effective tax rate improved from 48.1% in the prior
year due to a rate reduction in Italy and an increase in profits in Switzerland,
which has lower overall tax rates.
1997 vs 1996
Net Sales
Net sales were $303.1 million in 1997 compared to $344.4 million in 1996, a
decrease of 12%. The sale of the Company's Plastimo business in January 1997
accounted for $28.5 million of the shortfall in sales. Sales as measured in U.S.
dollars were also negatively impacted by the effect of weaker foreign currencies
relative to the U.S. dollar in comparison to 1996. Excluding the effects of
foreign currency movements and the sale of the Plastimo business, worldwide
sales decreased $0.2 million from 1996. The remainder of the shortfall was due
primarily to decreases in sales of motors and fishing products, as the overall
market for such products declined, offset by sales of businesses acquired in
1997.
Operating Results
The Company recognized an operating profit of $12 million in 1997 compared to an
operating loss of $1.5 million in 1996. Several factors accounted for the
turnaround. Gross profit margins increased from 34.8% in 1996 to 36.7% in 1997.
Unusual charges related to reduction of inventories to their net realizable
value reduced the 1996 gross profit by $10.3 million and the related margin by
3%. Underabsorption of overhead expenses due to lower sales volume and sales of
excess inventory at lower than normal margins mitigated the increase in gross
profit margins in 1997.
Operating expenses, excluding nonrecurring charges, totaled $99 million, or
32.7% of sales, in 1997 compared to $114.4 million, or 33.2% of sales, in 1996.
The sale of the Company's Plastimo marine business accounted for $8 million of
the reduction in operating expenses. The remainder of the decrease was
attributable to management's efforts to control such expenses and the impact of
weaker foreign currencies, which were partially offset by operating expenses of
businesses acquired in 1997. Virtually all categories of expenses declined in
the aggregate and as a percentage of sales.
The Company recognized nonrecurring charges totaling $0.3 million in 1997. These
charges resulted primarily from severance and other costs related to the
integration of acquired businesses.
Other Income and Expenses
Interest expense decreased $1.4 million in 1997, reflecting lower debt levels
resulting from the sale of the Plastimo marine business and due to lower levels
of working capital, primarily inventory. Partially offsetting the decline was
additional interest expense from debt used to consummate acquisitions and from
debt assumed in those acquisitions.
8
Overall Results
The Company recognized net income of $2.1 million in 1997, or $0.25 per diluted
share, compared to a loss of $11.4 million, or $1.40 per diluted share, in 1996.
The Company recorded income tax expense of $1.9 million in 1997, an effective
rate of 48.1%, due to earnings in foreign jurisdictions that are taxed at higher
rates than in the U.S. The tax benefit of operating losses generated in the
United States did not fully offset the taxes in these foreign jurisdictions.
Financial Condition
The following discusses changes in the Company's liquidity and capital
resources.
Operations
The following table sets forth the Company's working capital position at the end
of each of the past three years:
(millions) 1998 1997 1996
Current assets $154.5 $152.7 $189.7
Current liabilities 85.0 66.1 88.4
---- ---- ----
Working capital $69.5 $86.6 $101.3
===== ===== ======
Current ratio 1.8 to 1 2.3 to 1 2.1 to 1
Cash flows provided by operations totaled $20.5 million in 1998 and $20 million
in 1997. Proactive management efforts, which led to reduction of inventories of
$6.6 million in 1998 and $13.1 million in 1997, accounted for a significant
amount of the cash flows. The Company's profitability in 1998 and 1997 also
contributed to the positive cash flow. Growth in inventories and net losses were
primarily responsible for the $6.5 million of cash used for operations in 1996.
Depreciation and amortization charges were $14.0 million in 1998, $11.9 million
in 1997 and $10.6 million in 1996. Amortization of intangible assets arising
from the Company's 1998 and 1997 acquisitions and increased depreciation from
capital spending in all years accounted for the increases in these charges.
Investing Activities
Expenditures for property, plant and equipment were $14.2 million in 1998, $10.8
million in 1997, and $10.7 million in 1996. The Company's recurring investments
are primarily related to tooling for new products, facilities and information
systems improvements. In 1999, capital expenditures are anticipated to total
approximately $12 million. These expenditures are expected to be funded by
working capital or existing credit facilities.
The Company completed the acquisitions of three businesses in 1998 and two
businesses in 1997, which increased tangible and intangible assets and debt by
$12.8 million and $37.2 million, respectively. The sale of the Company's
Plastimo business in January 1997 provided $13.9 million of cash, which was used
to reduce short-term debt.
Financing Activities
The following table sets forth the Company's debt and capital structure at the
end of the past three years:
(millions) 1998 1997 1996
Current debt $42.6 $26.1 $43.1
Long-term debt 82.1 88.7 61.5
---- ---- ----
Total debt 124.7 114.8 104.6
Shareholders' equity 124.4 117.7 126.4
----- ----- -----
Total capitalization $249.1 $232.5 $231.0
====== ====== ======
Total debt to total capital ratio 50.1% 49.4% 45.3%
Cash flows from financing activities totaled $7.8 million in 1998, $6.9 million
in 1997 and $17.6 million in 1996. In 1998, the Company consummated a private
placement of long-term debt totaling $25 million. In anticipation of this
financing, short-term debt to be repaid totaling $25 million at October 3, 1997
was classified as long-term. Payments on long-term debt required to be made in
1999 total $7.8 million. At October 2, 1998, the Company had available unused
credit facilities in excess of $79 million, which is believed to be adequate for
its needs.
9
Market Risk Management
The Company is exposed to market risk stemming from changes in foreign exchange
rates, interest rates and, to a lesser extent, commodity prices. Changes in
these factors could cause fluctuations in earnings and cash flows. In the normal
course of business, exposure to these market risks is managed by entering into
hedging transactions authorized under Company policies that place controls on
these activities. Hedging transactions involve the use of a variety of
derivative financial instruments. Derivatives are used only where there is an
underlying exposure: not for trading or speculative purposes.
Foreign Operations
The Company has significant foreign operations, for which the functional
currencies are denominated primarily in Swiss and French francs, German marks,
Italian lire, Japanese yen and Canadian dollars. As the values of the currencies
of the foreign countries in which the Company has operations increase or
decrease relative to the U.S. dollar, the sales, expenses, profits, assets and
liabilities of the Company's foreign operations, as reported in the Company's
Consolidated Financial Statements, increase or decrease, accordingly. The
Company mitigates a portion of the fluctuations in certain foreign currencies
through the purchase of foreign currency swaps, forward contracts and options to
hedge known commitments, primarily for purchases of inventory and other assets
denominated in foreign currencies. The significant appreciation of the U.S.
dollar and the sale of the Plastimo business reduced the cumulative translation
component of shareholders' equity by $10.5 million in 1997. The impact of
foreign currency movements were less significant in 1998 and 1996.
Interest Rates
The Company's debt structure and interest rate risk are managed through the use
of fixed and floating rate debt. The Company's primary exposure is to United
States interest rates. The Company also periodically enters into interest rate
swaps, caps or collars to hedge its exposure and lower financing costs.
Commodities
Certain components used in the Company's products are exposed to commodity price
changes. The Company manages this risk through instruments such as purchase
orders and non-cancelable supply contracts. Primary commodity price exposures
are metals and packaging materials.
Sensitivity to Changes in Value
The estimates that follow are intended to measure the maximum potential fair
value or earnings the Company could lose in one year from adverse changes in
foreign exchange rates or market interest rates under normal market conditions.
The calculations are not intended to represent actual losses in fair value or
earnings that the Company expects to incur. The estimates do not consider
favorable changes in market rates. Further, since the hedging instrument (the
derivative) inversely correlates with the underlying exposure, any loss or gain
in the fair value of derivatives would be generally offset by an increase or
decrease in the fair value of the underlying exposures. The positions included
in the calculations are foreign exchange forwards, currency swaps and fixed rate
debt. The calculations do not include the underlying foreign exchange positions
that are hedged by these market risk sensitive instruments. The table below
presents the estimated maximum potential one year loss in fair value and
earnings before income taxes from a 10% movement in foreign currencies and a 100
basis point movement in interest rate market risk sensitive instruments
outstanding at October 2, 1998:
Estimated Impact on
Earnings Before
(millions) Fair Value Income Taxes
Foreign exchange rate instruments $3.3 $0.6
Interest rate instruments 3.9 0.8
10
Other Factors
The Company has not been significantly impacted by inflationary pressures over
the last several years. The Company anticipates that changing costs of basic raw
materials may impact future operating costs and, accordingly, the prices of its
products. Fluctuations in foreign currencies may also impact the cost of the
Company's products. The Company is involved in continuing programs to mitigate
the impact of cost increases through changes in product design, identification
of sourcing and manufacturing efficiencies and foreign currency hedges. Price
increases and, in certain situations, price decreases are implemented for
individual products, when appropriate.
Year 2000
The year 2000 issue is the result of computer programs using two digits (rather
than four) to define years. Computers or other equipment with date sensitive
software may recognize "00" as the year 1900 rather than 2000. This could result
in system failures or miscalculations. If the Company or its significant
customers or suppliers fail to correct year 2000 issues, the Company's ability
to operate could be materially affected.
The Company has assessed the impact of year 2000 issues on the processing of
date-related information for all of its information systems infrastructure and
non-technical assets, such as production equipment. All systems and
non-technical assets are in the process of being inventoried and classified as
to their compliance with year 2000 data processing. Any systems found year 2000
deficient will be modified, upgraded or replaced. Project plans anticipate all
existing, critical information systems infrastructure and non-technical assets
to be year 2000 compliant before failure to comply would significantly disrupt
the Company's operations. Contingency plans will be developed to address any
failures resulting from relationships with customers, suppliers or other third
parties. The Company has made inquiries of its suppliers, customers and other
organizations which impact the Company's business, but cannot guarantee that
circumstances beyond its control will not have an adverse impact on its
operations.
Since 1993, the Company has invested approximately $10 million in information
systems improvements and has been migrating its businesses to systems that are
year 2000 compliant. Based on assessments and testing to date, the financial
impact of addressing any potential remaining internal system issues should not
be material to the Company's financial position, results of operations or cash
flows.
Pending Accounting Changes
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
133, Accounting for Derivative Instruments and Hedging Activities. This
Statement requires companies to record derivatives on the balance sheet as
assets and liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives will be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. The
Company has not yet determined the impact of Statement 133 on the Consolidated
Financial Statements. Statement 133 is effective for fiscal years beginning
after June 15, 1999. The Company will adopt this accounting standard for the
year beginning October 1999.
The FASB has issued a number of other pronouncements related to financial
statement disclosure. These pronouncements will not impact the financial
position, results of operations or cash flows of the Company, when adopted.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information with respect to this item is included in Management's Discussion and
Analysis of Financial Condition and Results of Operations under the heading
"Market Risk Management."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to this item is included on pages F-1 to F-18.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
11
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to this item, except for certain information on
executive officers (which appears at the end of Part I of this report) is
included in the Company's January 26, 1999 Proxy Statement, which is
incorporated herein by reference, under the headings "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item is included in the Company's January 26,
1999 Proxy Statement, which is incorporated herein by reference, under the
headings "Election of Directors - Compensation of Directors" and "Executive
Compensation" provided, however, that the subsection entitled "Executive
Compensation - Compensation Committee Report on Executive Compensation" shall
not be deemed to be incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information with respect to this item is included in the Company's January 26,
1999 Proxy Statement, which is incorporated herein by reference, under the
heading "Stock Ownership of Management and Others."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item is included in the Company's January 26,
1999 Proxy Statement, which is incorporated herein by reference, under the
heading "Certain Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The
following documents are filed as a part of this Form 10-K:
Financial Statements
Included in Item 8 of Part II of this Form 10-K are the following:
Independent Auditors' Report
Consolidated Balance Sheets - October 2, 1998 and October 3, 1997
Consolidated Statements of Operations - Years ended October 2, 1998, October 3,
1997 and September 27, 1996 Consolidated Statements of Shareholders' Equity -
Years ended October 2, 1998, October 3, 1997 and September 27, 1996 Consolidated
Statements of Cash Flows - Years ended October 2, 1998, October 3, 1997 and
September 27, 1996 Notes to Consolidated Financial Statements
Financial Statement Schedules
All schedules are omitted because they are not applicable, are not required or
equivalent information has been included in the Consolidated Financial
Statements or notes thereto.
Exhibits
See Exhibit Index.
Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended October 2, 1998.
12
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, in the Town of Mount
Pleasant and State of Wisconsin, on the 16th day of December 1998.
JOHNSON WORLDWIDE ASSOCIATES, INC.
(Registrant)
By /s/ R. C. Whitaker
R. C. Whitaker
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities indicated on the 16th
day of December 1998.
/s/ Samuel C. Johnson Chairman of the Board and Director
(Samuel C. Johnson)
/s/ Thomas F. Pyle, Jr. Vice Chairman of the Board and
(Thomas F. Pyle, Jr.) Director
/s/ R. C. Whitaker President and Chief Executive Officer
(R. C. Whitaker) and Director (Principal Executive
Officer)
/s/ Helen P. Johnson-Leipold Director
(Helen P. Johnson-Leipold)
/s/ Gregory E. Lawton Director
(Gregory E. Lawton)
/s/ Glenn N. Rupp Director
(Glenn N. Rupp)
/s/ Carl G. Schmidt Senior Vice President and Chief
(Carl G. Schmidt) Financial Officer, Secretary and
Treasurer
(Principal Financial and Accounting
Officer)
13
EXHIBIT INDEX
Exhibit Title Page
3.1 Articles of Incorporation of the Company. *
(Filed as Exhibit 3.1 to the Company's Form S-1 Registration
Statement No. 33-16998 and incorporated herein by reference.)
3.2 Bylaws of the Company as amended through October 7, 1997 *
(Filed as Exhibit 3.3 to the Company's Form 10-K for the year
ended October 3, 1997 and incorporated herein by reference.)
4.1 Note Agreement dated May 1, 1993. *
(Filed as Exhibit 4 to the Company's Form 10-Q for
the quarter ended July 2, 1993 and incorporated herein by
reference.)
4.2 Letter Amendment dated September 30, 1993 to Note Agreement *
dated May 1, 1993. (Filed as Exhibit 4.8 to the Company's Form
10-K for the year ended October 1, 1993 and incorporated herein
by reference.)
4.3 Second Amendment dated October 31, 1996 to Note Agreement *
dated May 1, 1993. (Filed as Exhibit 4.2 to the Company's Form 10-Q
for the quarter ended December 27, 1996 and incorporated herein by
reference.)
4.4 Third Amendment dated September 30, 1997 to Note Agreement *
dated May 1, 1993. (Filed as Exhibit 4.4 to the Company's Form 10-K
for the year ended October 3, 1997 and incorporated herein by
reference.)
4.5 Fourth Amendment dated October 3, 1997 to Note Agreement dated *
May 1, 1993. (Filed as Exhibit 4.5 to the Company's Form 10-K for
the year ended October 3, 1997 and incorporated herein by
reference.)
4.6 Note Agreement dated October 1, 1995. (Filed as Exhibit 4.1 to the *
Company's Form 10-Q for the quarter ended December 29, 1995 and
incorporated herein by reference.)
4.7 First Amendment dated October 31, 1996 to Note Agreement dated *
October 1, 1995. (Filed as Exhibit 4.3 to the Company's Form 10-Q
for the quarter ended December 27, 1996 and incorporated herein by
reference.)
4.8 Second Amendment dated September 30, 1997 to Note Agreement dated *
October 1, 1995. (Filed as Exhibit 4.8 to the Company's Form 10-K for
the year ended October 3, 1997 and incorporated herein by reference.)
4.9 Third Amendment dated October 3, 1997 to Note Agreement dated *
October 1, 1995. (Filed as Exhibit 4.9 to the Company's Form 10-K for
the year ended October 3, 1997 and incorporated herein by reference.)
4.10 Note Agreement dated as of September 15, 1997. (Filed as Exhibit 4.15 *
to the Company's Form 10-K for the year ended October 3, 1997 and
incorporated herein by reference.)
4.11 Amended and Restated Credit Agreement dated as of April 3, 1998. *
(Filed as Exhibit 4.16 to the Company's Form 10-Q for the quarter
ended April 3, 1998 and incorporated herein by reference.)
9. Johnson Worldwide Associates, Inc. Class B common stock Voting * Trust
Agreement, dated December 30, 1993 (Filed as Exhibit 9 to the Company's
Form 10-Q for the quarter ended December 31, 1993 and incorporated
herein by reference.)
10.1 Asset Purchase Agreement between Johnson Worldwide Associates, Inc. *
and Safari Land Ltd., Inc. dated as of March 31, 1995 (Filed as Exhibit
2 to the Company's Form 10-Q for the quarter ended March 31, 1995 and
incorporated herein by reference.)
10.2 Share Purchase Agreement by and between Johnson Worldwide *
Associates, Inc., Societe Figeacoise de Participations and Plastimo,
S.A., dated as of January 30, 1997. (Filed as Exhibit 2 to the
Company's Form 8-K dated January 30, 1997 and incorporated herein
by reference.)
10.3 Share Purchase Agreement by and between Johnson *
Beteiligungsgesellschaft mbH, Johnson Worldwide Associates, Inc. and
Heinz Ruchti and Karl Leeman (the selling shareholders of Uwatec AG),
dated July 11, 1997. (Filed as Exhibit 2 to the Company's Form 8-K
dated July 11, 1997 and incorporated herein by reference.)
14
Exhibit Title Page
10.4+ Johnson Worldwide Associates, Inc. Amended and Restated 1986 *
Stock Option Plan. (Filed as Exhibit 10 to the Company's Form
10-Q for the quarter ended July 2, 1993 and incorporated herein
by reference.)
10.5 Registration Rights Agreement regarding Johnson Worldwide *
Associates, Inc. common stock issued to the Johnson family prior
to the acquisition of Johnson Diversified, Inc. (Filed as
Exhibit 10.6 to the Company's Form S-1 Registration
Statement No. 33-16998 and incorporated herein by reference.)
10.6 Registration Rights Agreement regarding Johnson Worldwide *
Associate, Inc. Class A common stock held by Mr. Samuel C.
Johnson. (Filed as Exhibit 28 to the Company's Form 10-Q for
the quarter ended March 29, 1991 and incorporated herein
by reference.)
10.7+ Form of Restricted Stock Agreement. (Filed as Exhibit 10.8 to *
the Company's Form S-1 Registration Statement No. 33-23299 and
incorporated herein by reference.)
10.8+ Form of Supplemental Retirement Agreement of Johnson Diversified, *
Inc. (Filed as Exhibit 10.9 to the Company's Form S-1
Registration Statement No. 33-16998 and incorporated herein
by reference.)
10.9+ Johnson Worldwide Associates Retirement and Savings Plan. *
(Filed as Exhibit 10.9 to the Company's Form 10-K for the year
ended September 29, 1989 and incorporated herein by reference.)
10.10+ Form of Agreement of Indemnity and Exoneration with Directors and *
Officers. (Filed as Exhibit 10.11 to the Company's Form S-1
Registration Statement No. 33-16998 and incorporated herein by
reference.)
10.11 Consulting and administrative agreements with S. C. Johnson & *
Son, Inc. (Filed as Exhibit 10.12 to the Company's Form S-1
Registration Statement No. 33-16998 and incorporated herein
by reference.)
10.12+ Johnson Worldwide Associates, Inc. 1994 Long-Term Stock *
Incentive Plan. (Filed as Exhibit 4 to the Company's S-8
Registration Statement No. 33-59325 and incorporated herein
by reference.)
10.13+ Johnson Worldwide Associates, Inc. 1994 Non-Employee Director
* Stock Ownership Plan. (Filed as Exhibit 4 to the Company's
Form S-8 Registration Statement No. 33-52073 and incorporated
herein by reference.)
10.14+ Johnson Worldwide Associates Economic Value Added Bonus Plan *
(Filed as Exhibit 10.15 to the Company's Form 10-K for the year
ended October 3, 1997 and incorporated herein by reference.)
11. Statement regarding computation of per share earnings. *
(Incorporated by reference to Note 14 to the Consolidated
Financial Statements on page F-17 of the Company's 1998 Form
10-K.)
21. Subsidiaries of the Company as of October 2, 1998. -
23. Consent of KPMG Peat Marwick LLP. -
27. Financial Data Schedule (EDGAR version only) -
99. Definitive Proxy Statement for the 1999 Annual Meeting of *
Shareholders (Previously filed via the EDGAR system and
incorporated herein by reference.) Except to the extent
incorporated herein by reference, the Proxy Statement
for the 1999 Annual Meeting of Shareholders shall not be
deemed to be filed with the Securities and Exchange Commission
as part of this Form 10-K.
* Incorporated herein by reference.
+ A management contract or compensatory plan or arrangement.
15
Consolidated Financial Statements
Page
Report of Management .............................................. F-1
Independent Auditors' Report ...................................... F-1
Consolidated Balance Sheets ....................................... F-2
Consolidated Statements of Operations ............................. F-3
Consolidated Statements of Shareholders' Equity ................... F-4
Consolidated Statements of Cash Flows ............................. F-5
Notes to Consolidated Financial Statements ........................ F-6
REPORT OF MANAGEMENT
The management of Johnson Worldwide Associates, Inc. is responsible for the
preparation and integrity of all financial statements and other information
contained in this Form 10-K. We rely on a system of internal financial controls
to meet the responsibility of providing accurate financial statements. The
system provides reasonable assurances that assets are safeguarded, that
transactions are executed in accordance with management's authorization and that
the financial statements are prepared on a worldwide basis in accordance with
generally accepted accounting principles.
The financial statements for each of the years covered in this Form 10-K have
been audited by independent auditors, who have provided an independent
assessment as to the fairness of the financial statements, after obtaining an
understanding of the Company's systems and procedures and performing such other
tests as deemed necessary.
The Audit Committee of the Board of Directors, which is composed solely of
directors who are not officers of the Company, meets with management and the
independent auditors to review the results of their work and to satisfy itself
that their respective responsibilities are being properly discharged. The
independent auditors have full and free access to the Audit Committee and have
regular discussions with the Committee regarding appropriate auditing and
financial reporting matters.
/S/R.C. Whitaker /S/Carl G. Schmidt
R. C. Whitaker Carl G. Schmidt
President and Chief Executive Officer Senior Vice President and
Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
Johnson Worldwide Associates, Inc.:
We have audited the consolidated balance sheets of Johnson Worldwide Associates,
Inc. and subsidiaries as of October 2, 1998 and October 3, 1997, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the three-year period ended October 2, 1998. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the Consolidated Financial Statements referred to above present
fairly, in all material respects, the financial position of Johnson Worldwide
Associates, Inc. and subsidiaries as of October 2, 1998 and October 3, 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended October 2, 1998, in conformity with generally
accepted accounting principles.
/S/KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Milwaukee, Wisconsin
November 10, 1998
F-1
CONSOLIDATED BALANCE SHEETS
October 2, October 3,
(thousands, except share data) 1998 1997
Assets
Current assets:
Cash and temporary cash investments $11,496 $7,130
Accounts receivable, less allowance for doubtful
accounts of $2,570 and $2,693, respectively 53,421 51,168
Inventories 76,603 78,694
Deferred income taxes 6,067 7,976
Other current assets 6,933 7,781
----- -----
Total current assets 154,520 152,749
------- -------
Property, plant and equipment 35,469 31,360
Deferred income taxes 15,435 10,221
Intangible assets 90,101 82,127
Other assets 492 562
--- ---
Total assets $296,017 $277,019
======== ========
Liabilities And Shareholders' Equity
Current liabilities:
Short-term debt and current maturities
of long-term debt $42,614 $26,082
Accounts payable 11,681 10,672
Accrued liabilities:
Salaries and wages 6,213 4,974
Income taxes 3,019 2,076
Other 21,492 22,305
------ ------
Total current liabilities 85,019 66,109
Long-term debt, less current maturities 82,066 88,753
Other liabilities 4,546 4,426
----- -----
Total liabilities 171,631 159,288
------- -------
Shareholders' equity:
Preferred stock: none issued - -
Common stock:
Class A shares issued:
October 2, 1998, 6,909,577;
October 3, 1997, 6,905,523 345 345
Class B shares issued (convertible into
Class A):
October 2, 1998, 1,223,861;
October 3, 1997, 1,227,915 61 61
Capital in excess of par value 44,205 44,186
Retained earnings 85,068 79,882
Contingent compensation (27) (85)
Cumulative translation adjustment (4,651) (6,356)
Treasury stock, Class A shares, at cost:
October 2, 1998, 39,532;
October 3, 1997, 23,600 (615) (302)
-------- --------
Total shareholders' equity 124,386 117,731
------- -------
Total liabilities and shareholders' equity $296,017 $277,019
======== ========
The accompanying notes are an integral part of the Consolidated Financial
Statements.
F-2
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended
October 2, October 3, September 27,
(thousands, except per share data) 1998 1997 1996
Net sales $328,525 $303,121 $344,373
Cost of sales 202,561 191,789 224,649
------- ------- -------
Gross profit 125,964 111,332 119,724
------- ------- -------
Operating expenses:
Marketing and selling 67,567 66,259 78,348
Finance, information systems and
administrative management 25,981 23,031 26,139
Research and development 7,033 5,453 6,537
Amortization of acquisition costs 3,789 2,631 2,500
Profit sharing 1,447 1,612 908
Nonrecurring charges 1,424 335 6,768
----- --- -----
Total operating expenses 107,241 99,321 121,200
------- ------ -------
Operating profit (loss) 18,723 12,011 (1,476)
Interest income (363) (471) (612)
Interest expense 9,829 8,780 10,181
Other (income) expense, net 108 (257) 116
--- ---- ---
Income (loss) before income taxes 9,149 3,959 (11,161)
Income tax expense 3,937 1,903 194
----- ----- ---
Net income (loss) $5,212 $2,056 $(11,355)
====== ====== ========
Basic Earnings (Loss) Per Common Share $0.64 $0.25 $(1.40)
===== ===== ======
Diluted Earnings (Loss) Per Common Share $0.64 $0.25 $(1.40)
===== ===== ======
The accompanying notes are an integral part of the Consolidated Financial
Statements.
F-3
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Capital in Cumulative
Common Excess of Retained Contingent Translation Treasury
(thousands) Stock Par Value Earnings Compensation Adjustment Stock
Balance at September 29, 1995 $406 $43,968 $89,525 $(264) $7,869 $(242)
Net loss - - (11,355) - - -
Exercise of stock options - - (98) - - 295
Tax benefit of stock options exercised - 61 - - - -
Issuance of restricted stock - - - (67) - 67
Issuance of stock under employee
stock purchase plan - 55 (132) - - 291
Amortization of contingent compensation - - - 210 - -
Other treasury stock transactions - - - - - (411)
Translation adjustment - - - - (3,754) -
--- ------ ------ --- ------ -----
Balance at September 27, 1996 406 44,084 77,940 (121) 4,115 -
Net income - - 2,056 - - -
Exercise of stock options - - (114) - - 284
Tax benefit of stock options exercised - 58 - - - -
Issuance of restricted stock - 44 - (67) - 23
Amortization of contingent compensation - - - 103 - -
Other treasury stock transactions - - - - - (609)
Translation adjustment - - - - (10,471) -
--- ------ ------ --- -------- -----
Balance at October 3, 1997 406 44,186 79,882 (85) (6,356) (302)
Net income - - 5,212 - - -
Exercise of stock options - - (4) - - 146
Tax benefit of stock options exercised - 6 - - - -
Issuance of restricted stock - 13 - (32) - 32
Issuance of stock under employee
stock purchase plan - - (22) - - 177
Amortization of contingent compensation - - - 90 - -
Other treasury stock transactions - - - - - (668)
Translation adjustment - - - - 1,705 -
----- ------- ------- ---- ------- ------
Balance at October 2, 1998 $406 $44,205 $85,068 $(27) $(4,651) $(615)
==== ======= ======= ==== ======== ======
The accompanying notes are an integral part of the Consolidated Financial
Statements.
F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
October 2, October 3, September 27,
(thousands) 1998 1997 1996
Cash Provided By (Used For) Operations
Net income (loss) $5,212 $2,056 $(11,355)
Noncash items:
Depreciation and amortization 14,038 11,949 10,561
Provision for doubtful accounts receivable 918 1,604 1,662
Provision for inventory reserves 343 445 12,202
Deferred income taxes (3,355) (4,127) (6,842)
Writedown of property, plant and equipment - - 1,846
Writedown of intangible assets - - 1,070
Loss on sale of business - - 2,000
Change in assets and liabilities, net of effect
of businesses acquired or sold:
Accounts receivable (1,743) (2,747) 2,412
Inventories 6,583 13,071 (17,571)
Accounts payable and
other accrued liabilities (2,170) (3,749) (1,128)
Other, net 685 1,489 (1,332)
--- ----- ------
20,511 19,991 (6,475)
------ ------ ------
Cash Used For Investing Activities
Net assets of businesses acquired, net of cash (12,772) (37,169) -
Proceeds from sale of business, net of cash - 13,937 -
Additions to property, plant and equipment (14,202) (10,816) (10,685)
Sales of property, plant and equipment 2,686 2,596 3,583
----- ----- -----
(24,288) (31,452) (7,102)
------- ------- ------
Cash Provided By Financing Activities
Issuance of senior notes 25,000 - 45,000
Issuance of other long-term notes - 10,543 -
Principal payments on senior notes and other
long-term notes (8,381) (7,358) (7,341)
Repayment of revolving credit facilities - - (13,412)
Net change in short-term debt (8,424) 4,085 (6,717)
Common stock transactions (352) (382) 61
---- ---- --
7,843 6,888 17,591
Effect of foreign currency fluctuations on cash 300 (994) (261)
--- ---- ----
Increase (decrease) in cash and temporary
cash investments 4,366 (5,567) 3,753
Cash And Temporary Cash Investments
Beginning of year 7,130 12,697 8,944
----- ------ -----
End of year $11,496 $7,130 $12,697
======= ====== =======
The accompanying notes are an integral part of the Consolidated Financial
Statements.
F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Johnson Worldwide Associates, Inc. is an integrated, global outdoor recreation
products company engaged in the design, manufacture and marketing of brand name
motors and diving, watercraft, outdoor equipment and fishing products.
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
All monetary amounts, other than share and per share amounts, are stated in
thousands.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of Johnson Worldwide
Associates, Inc. and all majority owned subsidiaries (the Company). Significant
intercompany accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
impact the reported amounts of assets, liabilities and operating results and the
disclosure of commitments and contingent liabilities. Actual results could
differ significantly from those estimates. For the Company, significant
estimates include the allowance for doubtful accounts receivable, reserves for
inventory valuation and the valuation allowance for deferred tax assets.
The Company's fiscal year ends on the Friday nearest September 30. The fiscal
years ended October 2, 1998 (hereinafter 1998) and September 27, 1996
(hereinafter 1996) each comprise 52 weeks. The fiscal year ended October 3, 1997
(hereinafter 1997) comprises 53 weeks.
Cash and Temporary Cash Investments
For purposes of the consolidated statements of cash flows, the Company considers
all short-term investments in interest-bearing bank accounts, securities and
other instruments with an original maturity of three months or less, to be
equivalent to cash. The Company maintains cash in bank accounts in excess of
insured limits. The Company has not experienced any losses as a result of this
practice and does not believe that significant credit risk exists.
Inventories
Inventories are stated at the lower of cost (determined using the first-in,
first-out method) or market.
Inventories at the end of the respective years consist of the following:
1998 1997
Raw materials $27,834 $27,032
Work in process 4,753 5,036
Finished goods 49,875 56,846
------ ------
82,462 88,914
Less reserves 5,859 10,220
----- ------
$76,603 $78,694
======= =======
In 1996, the Company recorded charges totaling $10,304 to reduce the carrying
value of certain elements of inventory to their net realizable value.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation.
Depreciation of plant and equipment is determined by straight-line and
accelerated methods over estimated useful lives, which range from 3 to 30 years.
Upon retirement or disposition, cost and the related accumulated depreciation
are removed from the accounts and any resulting gain or loss is recognized in
operating results.
Property, plant and equipment at the end of the respective years consist of the
following:
1998 1997
Property and improvements $ 912 $ 956
Buildings and improvements 16,827 16,086
Furniture, fixtures and equipment 78,351 63,853
------ ------
96,090 80,895
Less accumulated depreciation 60,621 49,535
------ ------
$35,469 $31,360
======= =======
F-6
Intangible Assets
Intangible assets are stated at cost less accumulated amortization. Amortization
is computed using the straight-line method with periods ranging from 15 to 40
years for goodwill and 3 to 16 years for patents, trademarks and other
intangible assets.
The Company annually assesses the recoverability of intangible assets, primarily
by determining whether the amortization of the balance over its remaining life
can be recovered through projected undiscounted future operating cash flows of
the acquired business. The amount of impairment, if any, is measured primarily
based on the deficiency of projected discounted future operating cash flows
relative to the value of the asset, using a discount rate reflecting the
Company's cost of capital, which is currently approximately 11%.
Intangible assets at the end of the respective years consist of the following:
1998 1997
Goodwill $105,829 $94,274
Patents, trademarks and other 4,683 4,113
----- -----
110,512 98,387
Less accumulated amortization 20,411 16,260
------ ------
$90,101 $82,127
======= =======
Income Taxes
The Company provides for income taxes currently payable, and deferred income
taxes resulting from temporary differences between financial statement and
taxable income, using the asset and liability method.
Federal and state income taxes are provided on foreign subsidiary income
distributed to or taxable in the United States during the year. At October 2,
1998, net undistributed earnings of foreign subsidiaries total approximately
$51,400. A substantial portion of these unremitted earnings have been
permanently invested abroad and no provision for federal or state taxes is made
on these amounts. With respect to that portion of foreign earnings which may be
returned to the United States, provision is made for taxes if the amounts are
significant.
The Company's United States entities file a consolidated federal income tax
return.
Employee Benefits
The Company and certain of its subsidiaries have various retirement and profit
sharing plans. United States pension obligations, which are generally based on
compensation and years of service, are funded by payments to pension fund
trustees. Other foreign pensions are funded as expenses are incurred. The
Company's policy is generally to fund the minimum amount required under the
Employee Retirement Income Security Act of 1974 for plans subject thereto.
Profit sharing costs are funded at least annually.
Foreign Operations and Derivative Financial Instruments
The Company operates internationally, which gives rise to exposure to market
risk from movements in foreign exchange rates. The Company uses foreign currency
forward contracts and options in its selective hedging of foreign exchange
exposure. Gains and losses on contracts that qualify as hedges are recognized as
an adjustment of the carrying amount of the item hedged. The Company primarily
hedges assets, inventory purchases and loans denominated in foreign currencies.
The Company does not enter into foreign exchange contracts for trading purposes.
Gains and losses on unhedged exposures are recorded in operating results.
At October 2, 1998, foreign currency forward contracts and options with a
notional value of approximately $6,700 are in place, hedging existing and
anticipated transactions. Substantially all of these contracts mature in 1999.
Failure of the counterparties to perform their obligations under these contracts
would expose the Company to the risk of foreign currency rate movements for
those contracts. The Company does not believe the risk is significant. At
October 2, 1998, the fair value of these instruments is not significant.
Foreign currency swaps effectively denominate, in foreign currencies, existing
U.S. dollar denominated debt of the Company. This foreign currency debt serves
as a hedge of foreign assets. Accordingly, gains and losses on such swaps are
recorded in shareholders' equity.
Assets and liabilities of foreign operations are translated into U.S. dollars at
the rate of exchange existing at the end of the year. Results of operations are
translated at monthly average exchange rates. Gains and losses resulting from
the translation of foreign currency financial statements are classified as a
separate component of shareholders' equity.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenue Recognition
Revenue from sales is recognized on the accrual basis, primarily upon the
shipment of products, net of estimated costs of returns and allowances.
Advertising
The Company expenses substantially all costs related to production of
advertising the first time the advertising takes place. Cooperative promotional
arrangements are accrued in relation to sales.
Advertising expense in 1998, 1997 and 1996 totals $18,475, $21,512 and $26,657,
respectively. Capitalized costs at October 2, 1998 and October 3, 1997 total
$1,635 and $1,947, respectively, and primarily include catalogs and costs of
advertising which has not yet run for the first time.
Research and Development
Research and development costs are expensed as incurred.
Stock-Based Compensation
The Company accounts for stock options using the intrinsic value based method.
Accordingly, compensation cost is generally recognized only for stock options
issued with an exercise price lower than the market price on the date of grant.
The fair value of restricted shares awarded in excess of the amount paid for
such shares is recognized as contingent compensation and is amortized over 1 to
3 years from the date of award, the period after which all restrictions
generally lapse.
Pending Accounting Changes
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
133, Accounting for Derivative Instruments and Hedging Activities. This
Statement requires companies to record derivatives on the balance sheet as
assets and liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives will be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. The
Company has not yet determined the impact of Statement 133 on the Consolidated
Financial Statements. Statement 133 is effective for fiscal years beginning
after June 15, 1999. The Company will adopt this accounting standard for the
year beginning October 1999.
The FASB has issued a number of other pronouncements related to financial
statement disclosure. These pronouncements will not impact the financial
position, results of operations or cash flows of the Company, when adopted.
2 NONRECURRING CHARGES
In 1998 and 1997, the Company recorded severance and other exit costs totaling
$1,424 and $335, respectively, related to the integration of acquired
businesses. 1998 severance costs totaled $781 and approximately 80 employees
were impacted by these actions.
In 1996, the Company recorded involuntary severance and other exit costs
totaling $1,852 related to the relocation of one of its manufacturing locations
and the outsourcing of the distribution function of another business.
Substantially all of the $1,389 remaining accrued liability at September 27,
1996 was disbursed in 1997. Approximately 80 employees were impacted by these
actions.
In 1996, the Company adopted FASB Statement 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and determined
that certain of its products would be discontinued. As a result, assets totaling
$1,846, consisting primarily of tooling, were written off. The Company also
determined that the carrying value of goodwill of one of its subsidiaries, which
the Company subsequently closed, could not be recovered through undiscounted
future cash flows. Accordingly, the related intangible assets, totaling $1,070,
were written off.
In 1996, the Board of Directors approved a plan to divest the Company's Plastimo
business. The Company estimated the sale of this business would result in a loss
of $2,000. Accordingly, this loss was recognized in 1996 operating results. The
Company completed the sale of this business in 1997 without recognizing any
additional gain or loss. Net sales and operating losses of this business, to the
date of disposition, were $7,910 and $1,184, respectively, in 1997. 1996 net
sales and operating profit of the Plastimo business totaled $36,391 and $2,002,
respectively.
F-8
3 ACQUISITIONS
In February 1998, the Company completed the acquisition of the common stock of
Leisure Life Limited, a privately held manufacturer and marketer of recreational
watercraft. The purchase price, including direct expenses, for the acquisition
was approximately $10,300, of which approximately $7,300 was recorded as
intangible assets and is being amortized over 25 years.
In October 1997, subsequent to the end of the 1997 fiscal year, the Company
completed the acquisitions of certain assets of Soniform, Inc., a manufacturer
of diving buoyancy compensators, and the common stock of Plastiques L.P.A.
Limitee, a privately held Canadian manufacturer of kayaks. The purchase prices
for the acquisitions total approximately $3,400.
The following pro forma operating results are unaudited and reflect purchase
accounting adjustments assuming all 1998 acquisitions had been consummated at
the beginning of each year presented:
1998 1997
Net sales $329,779 $322,506
Net income 4,392 1,947
Diluted earnings per common share 0.54 0.24
In July 1997, the Company completed the acquisition of the common stock of
Uwatec AG (hereinafter Uwatec), a privately held manufacturer and marketer of
diving computers and other electronic instruments. The initial purchase price,
including direct expenses, for the acquisition was approximately $33,500, of
which $32,800 was recorded as intangible assets and is being amortized over 25
years. Additional payments in 1999 and 2000 are dependent upon achievement of
specified levels of profitability of the acquired business or upon utilization
of certain acquired inventories. An additional payment of $432 was made in
October 1998. In connection with the acquisition, the Company entered into a
long-term product development and intellectual property agreement with an
unaffiliated party with which Uwatec conducts business.
In July 1997, the Company completed the acquisition of substantially all of the
assets of Ocean Kayak, Inc., a privately held manufacturer and marketer of
kayaks. The initial purchase price, including direct expenses, for the
acquisition was approximately $5,000, of which $2,700 was recorded as intangible
assets and is being amortized over 25 years. An additional payment in 1999 is
dependent upon achievement of specified levels of sales of the acquired
business. An additional payment of $600 was accrued in 1998.
Additional payments in the years 1999 through 2001 related to acquisitions
consummated in 1995 are dependent upon the achievement of specified levels of
sales and/or profitability of certain of the acquired products. No additional
payments were required in 1998, 1997 or 1996.
All acquisitions were accounted for using the purchase method and, accordingly,
the Consolidated Financial Statements include the results of operations since
the respective dates of acquisition. Additional payments, if required, will
increase intangible assets in future years.
4 INDEBTEDNESS
Short-term debt at the end of the respective years consists of the following:
1998 1997
Commercial paper and bank loans $34,846 $43,118
Current maturities of long-term debt 7,768 7,964
----- -----
42,614 51,082
Less short-term debt to be refinanced - 25,000
------- ------
$42,614 $26,082
======= ======
Short-term credit facilities provide for borrowings with interest rates set
periodically by reference to market rates. Commercial paper rates are set by
competitive bidding. The weighted average interest rate on short-term
indebtedness was 6.0% and 5.6% at October 2, 1998 and October 3, 1997,
respectively. The Company's primary facility is a $100,000 revolving credit
agreement expiring in 2001, which includes a maximum amount of $80,000 in
support of commercial paper issuance. The Company has lines of credit, both
foreign and domestic, totaling $127,000 of which $79,000 is available at October
2, 1998. The Company also utilizes letters of credit for trade financing
purposes.
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Long-term debt at the end of the respective years consists of the following:
1998 1997
1998 senior notes $27,369 $ -
1996 senior notes 45,000 45,000
1993 senior notes 7,500 15,000
Short-term debt to be refinanced - 25,000
Other long-term notes, 1.8% to 10.9%,
maturing through December 2005 9,965 11,717
----- ------
89,834 96,717
Less current maturities 7,768 7,964
----- -------
$82,066 $88,753
======= =======
In October 1997, the Company issued unsecured senior notes totaling $25,000 with
an interest rate of 7.15%. Simultaneous with the commitment of the 1998 senior
notes, the Company executed a foreign currency swap, denominating in Swiss
francs all principal and interest payments required under the 1998 senior notes.
The fixed, effective interest rate to be paid on the 1998 senior notes as a
result of the currency swap is 4.32%. The 1998 senior notes have annual
principal payments of $2,189 to $7,663 beginning October 2001 with a final
payment due October 2007. Proceeds from issuance of the 1998 senior notes were
used to reduce outstanding indebtedness under the Company's primary revolving
credit facility. The funding commitment for the 1998 senior notes was received
in July 1997. Outstanding short-term debt totaling $25,000 at October 3, 1997
was classified as long-term in anticipation of refinancing with the proceeds of
the 1998 senior notes.
$8,978 of the initial purchase price of Uwatec is deferred with principal
payments of $427 and $8,551 due in 2000 and 2002, respectively. Interest on the
deferred amounts is payable annually at 6%. This obligation is denominated in
Swiss francs. The obligation was reduced by $1,711 in 1998 from liabilities to
third parties paid or accrued by the Company on behalf of the selling
shareholders. A corresponding amount of the Company's primary revolving credit
facility is reserved in support of this obligation through issuance of a letter
of credit.
In 1996, the Company issued unsecured senior notes totaling $30,000 with an
interest rate of 7.77% and $15,000 with an interest rate of 6.98%. Total annual
principal payments ranging from $5,500 to $7,500 are due beginning in 2000
through 2006.
In 1993, the Company issued unsecured senior notes totaling $15,000 with an
interest rate of 6.58%. The final principal payment of $7,500 is due in 1999.
Aggregate scheduled maturities of long-term debt in each of the five years
ending September 2003 are as follows:
Year
1999 $ 7,800
2000 6,100
2001 6,200
2002 16,900
2003 8,400
Interest paid was $9,119, $9,046 and $8,853 for 1998, 1997 and 1996,
respectively.
Based on the borrowing rates currently available to the Company for debt with
similar terms and average maturities, the fair value of the Company's long-term
debt as of October 2, 1998 and October 3, 1997 is approximately $92,300 and
$98,700, respectively. The carrying value of all other financial instruments
approximates the fair value.
Certain of the Company's loan agreements require that Samuel C. Johnson, members
of his family and related entities (hereinafter the Johnson Family) continue to
own stock having votes sufficient to elect a 51% majority of the directors. At
October 2, 1998, the Johnson Family held approximately 3,099,000 shares or 45%
of the Class A common stock,
F-10
approximately 1,168,000 shares or 95% of the Class B common stock and
approximately 77% of the voting power of both classes of common stock taken as a
whole. The agreements also contain restrictive covenants regarding the Company's
net worth, indebtedness, fixed charge coverage and distribution of earnings. The
Company is in compliance with the restrictive covenants of such agreements, as
amended from time to time.
5 LEASES AND OTHER COMMITMENTS
The Company leases certain operating facilities and machinery and equipment
under long-term, noncancelable operating leases. Future minimum rental
commitments under noncancelable operating leases having an initial term in
excess of one year at October 2, 1998 are as follows:
Year
1999 $5,900
2000 5,000
2001 4,400
2002 4,000
2003 2,200
Thereafter 4,500
Rental expense under all leases was approximately $6,101, $4,338 and $5,309 for
1998, 1997 and 1996, respectively.
In November 1998, the Company executed a guarantee of $1,300 of debt of one of
its suppliers. The guarantee is supported by a priority lien on equipment owned
by the supplier.
The Company makes commitments in a broad variety of areas, including capital
expenditures, contracts for services, sponsorship of broadcast media and supply
of finished products and components, all of which are in the ordinary course of
business.
6 INCOME TAXES
Income tax expense (benefit) for the respective years consists of the following:
1998 1997 1996
Current:
Federal $56 $242 $518
State 514 (11) 346
Foreign 6,672 5,847 6,239
Deferred (3,305) (4,175) (6,909)
------ ----- -----
$3,937 $1,903 $194
====== ====== ====
The significant components of deferred tax expense (benefit) are as follows:
1998 1997 1996
Deferred tax benefit (exclusive of
effects of other components
listed below) $(3,045) $(4,121) $(7,304)
Increase (decrease) in beginning of
the year balance of the
valuation allowance for
deferred tax assets (260) (54) 395
------- ------ --------
$(3,305) $(4,175) $(6,909)
======= ======= =======
In assessing the realizability of deferred tax assets, the Company considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the years in which
those temporary differences become deductible. The Company considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment.
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities at the end of the respective
years are presented below:
1998 1997
Deferred tax assets:
Inventories $3,299 $4,773
Compensation 2,205 2,555
Foreign income taxes 1,212 1,100
Foreign tax credit carryforwards 4,211 4,211
Net operating loss carryforwards 15,986 9,487
Other 4,152 3,645
----- -----
Total gross deferred tax assets 31,065 25,771
Less valuation allowance 5,911 4,417
----- -----
25,154 21,354
------ ------
Deferred tax liabilities:
Foreign statutory reserves 2,334 2,041
Acquisition accounting 1,318 1,116
----- -----
Total deferred tax liabilities 3,652 3,157
----- -----
Net deferred tax asset $21,502 $18,197
======= =======
Following is the income (loss) before income taxes for domestic and foreign
operations:
1998 1997 1996
United States $(6,503) $(6,998) $(25,276)
Foreign 15,652 10,957 14,115
------ ------ ------
$9,149 $3,959 $(11,161)
====== ====== ========
The significant differences between the statutory federal tax rate and the
effective income tax rates are as follows:
1998 1997 1996
Statutory U.S. federal income tax rate 34.0% 34.0% (34.0)%
State income taxes, net of federal
income tax benefit (3.0) (6.2) (3.4)
Foreign rate differential 12.7 23.9 22.8
Basis difference on divestiture of
business - - 7.5
Change in beginning of year valuation
allowance for foreign tax credits - - 3.9
Foreign operating losses (benefit) (1.4) (2.0) 1.2
Other 0.7 (1.6) 3.7
--- ---- ---
43.0% 48.1% 1.7%
==== ==== ====
At October 2, 1998, the Company has $4,211 of foreign tax credit carryforwards
available to be offset against future U.S. tax liability. The credits expire in
1999 through 2003 if not utilized.
F-12
During 1998, 1997 and 1996, foreign net operating loss carryforwards were
utilized, resulting in a reduction in income tax expense of $260, $54 and $34,
respectively. At October 2, 1998, the Company has a U.S. federal operating loss
carryforward of $31,736. In addition, certain of the Company's foreign
subsidiaries have net operating loss carryforwards totaling $1,593. These
amounts are available to offset future taxable income over the next 14 to 20
years and are anticipated to be utilized during this period.
Taxes paid were $6,299, $8,328 and $6,816 for 1998, 1997 and 1996, respectively.
7 EMPLOYEE BENEFITS
Net periodic pension cost for noncontributory pension plans includes the
following components:
1998 1997 1996
Service cost $301 $292 $282
Interest on projected benefit obligation 697 638 599
Return on plan assets (520) (1,075) (436)
Net amortization and deferral (40) 547 (72)
--- --- ---
$438 $402 $373
==== ==== ====
The funded status of the plans is as follows at the end of each year:
1998 1997
Actuarial present value of benefit obligations:
Vested benefits $7,416 $6,962
Non-vested benefits 365 234
--- ---
Accumulated benefit obligation 7,781 7,196
Effect of projected compensation levels 1,671 1,466
----- -----
Projected benefit obligation 9,452 8,662
Less plan assets at fair value 7,516 6,998
----- -----
Projected benefit obligation in excess of plan assets 1,936 1,664
Less unrecognized net loss 576 605
Less unrecognized prior service cost 200 226
Unrecognized net asset 453 534
--- ---
Pension liability recognized in the consolidated balance sheets $1,613 $1,367
====== ======
Plan assets are invested primarily in stock and bond mutual funds and insurance
contracts.
Actuarial assumptions used to determine the projected benefit obligation and the
expected net periodic pension cost are as follows:
1998 1997 1996
Discount rate 8% 8% 8%
Rate of increase in compensation levels 5 5 5
Expected long-term rate of return on plan assets 8 8 8
A majority of the Company's full-time employees are covered by profit sharing
and defined contribution programs. Participating entities determine profit
sharing distributions under various performance and service based formulas.
8 PREFERRED STOCK
The Company is authorized to issue 1,000,000 shares of preferred stock in
various classes and series, of which there are none currently issued or
outstanding.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9 COMMON STOCK
Common stock at the end of the respective years consists of the following:
1998 1997
Class A, $.05 par value:
Authorized 20,000,000 20,000,000
Outstanding 6,870,045 6,881,923
Class B, $.05 par value:
Authorized 3,000,000 3,000,000
Outstanding 1,223,861 1,227,915
Holders of Class A common stock are entitled to elect 25% of the members of the
Board of Directors and holders of Class B common stock are entitled to elect the
remaining directors. With respect to matters other than the election of
directors or any matters for which class voting is required by law, holders of
Class A common stock are entitled to one vote per share while holders of Class B
common stock are entitled to ten votes per share. If any dividends (other than
dividends paid in shares of the Company) are paid by the Company on its common
stock, a dividend would be paid on each share of Class A common stock equal to
110% of the amount paid on each share of Class B common stock. Each share of
Class B common stock is convertible at any time into one share of Class A common
stock. During 1998, 1997 and 1996, respectively, 4,054, 222 and 476 shares of
Class B common stock were converted into Class A common stock.
10 STOCK OWNERSHIP PLANS
The Company's current stock ownership plans provide for issuance of options to
acquire shares of Class A common stock by key executives and non-employee
directors. All stock options have been granted at a price not less than fair
market value at the date of grant and become exercisable over periods of one to
four years from the date of grant. Stock options generally have a term of 10
years. Current plans also allow for issuance of restricted stock or stock
appreciation rights in lieu of options. Grants of restricted shares are not
significant in any year presented. No stock appreciation rights have been
granted.
A summary of stock option activity related to the Company's plans is as follows:
Weighted Average
Shares Exercise Price
Outstanding at September 29, 1995 598,946 $19.74
Granted 162,000 22.88
Exercised (12,567) 19.35
Cancelled (182,158) 20.59
-------- -----
Outstanding at September 27, 1996 566,221 20.37
Granted 256,000 12.09
Exercised (24,400) 6.93
Cancelled (111,300) 16.95
-------- -----
Outstanding at October 3, 1997 686,521 18.32
Granted 247,000 17.01
Exercised (10,243) 13.96
Cancelled (321,217) 19.11
-------- -----
Outstanding at October 2, 1998 602,061 $17.43
======= ======
F-14
Other information regarding the Company's stock option plans is as follows:
1998 1997 1996
Options exercisable at end of year 257,055 388,264 356,756
Weighted average exercise price of
exercisable options $19.14 $20.75 $19.54
Weighted average fair value of options
granted during year 6.82 4.87 8.85
At October 2, 1998, the weighted average remaining contractual lives of stock
options outstanding and those currently exercisable are approximately 7.6 years
and 5.9 years, respectively. Exercise prices of outstanding stock options range
from $11.25 to $25.31 at October 2, 1998.
Had compensation cost for the Company's stock options been determined using the
fair value method, the Company's pro forma operating results would have been as
follows:
1998 1997 1996
Net income (loss) $4,542 $1,659 $(11,608)
Earnings (loss) per common share 0.56 0.20 (1.43)
For purposes of calculating pro forma operating results, the fair value of each
option grant was estimated using the Black-Scholes option pricing model with an
expected volatility of 35%, a risk free rate equivalent to five year U.S.
Treasury securities and an expected life of five years. The pro forma operating
results reflect only options granted after 1995.
The Company's employee stock purchase plan provides for the issuance of up to
150,000 shares of Class A common stock at a purchase price of not less than 85%
of the fair market value at the date of grant. During 1998 and 1996, 11,325 and
17,375 shares, respectively, were issued under this plan. No shares were issued
under this plan in 1997.
11 RELATED PARTY TRANSACTIONS
Various transactions are conducted between the Company and organizations
controlled by the Johnson Family. These include consulting services, office
rental and certain administrative activities. Total costs of these transactions
are $248, $489 and $440 for 1998, 1997 and 1996, respectively.
12 SEGMENTS OF BUSINESS
The Company conducts its worldwide recreation operations through five separate
global business units which represent major product lines. Operations are
conducted in the United States and various foreign countries, primarily in
Europe, Canada and the Pacific Basin.
Net sales and operating profit include both sales to customers, as reported in
the Company's consolidated statements of operations, and interunit transfers,
which are priced to recover cost plus an appropriate profit margin.
Identifiable assets represent assets that are used in the Company's operations
in each business unit at the end of the years presented.
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A summary of the Company's operations by business units, based on the
requirements of FASB Statement 131, Disclosure about Segments of an Enterprise
and Related Information, which the Company adopted in 1998, is presented below:
1998 1997 1996
Net sales:
Diving:
Unaffiliated customers $ 90,116 $ 77,393 $ 78,371
Interunit transfers 10 421 138
Outdoor equipment:
Unaffiliated customers 77,566 74,162 77,267
Interunit transfers 28 12 242
Fishing:
Unaffiliated customers 58,508 63,799 69,737
Interunit transfers 745 1,021 1,362
Motors:
Unaffiliated customers 53,249 53,700 62,041
Interunit transfers 1,678 1,412 1,826
Watercraft:
Unaffiliated customers 47,517 22,885 18,050
Interunit transfers 266 364 717
Other 1,569 11,182 38,907
Eliminations (2,727) (3,230) (4,285)
------ ------ ------
$ 328,525 $ 303,121 $ 344,373
========= ========= =========
Operating profit (loss):
Diving $ 10,193 $ 9,644 $ 8,130
Outdoor equipment 1,987 2,824 3,525
Fishing 367 (1,870) (12,380)
Motors 1,156 1,537 291
Watercraft 8,658 4,152 3,189
Other (3,638) (4,276) (4,231)
------ ------ ------
$ 18,723 $ 12,011 $ (1,476)
========= ========= =========
Identifiable assets:
Diving $ 104,344 $ 92,468
Outdoor equipment 49,090 50,879
Fishing 62,099 70,471
Motors 22,905 22,985
Watercraft 29,340 16,900
Other 28,239 23,316
------ ------
$ 296,017 $ 277,019
========= =========
Sales and operating results of the Plastimo business, which was sold in January
1997, and operating expenses of the Company's corporate headquarters are
included above in the caption "Other."
F-16
A summary of the Company's operations by geographic area is presented below:
1998 1997 1996
Net sales:
United States:
Unaffiliated customers $ 195,727 $ 175,675 $ 184,372
Interarea transfers 6,357 6,426 6,718
Europe:
Unaffiliated customers 110,863 101,751 134,048
Interarea transfers 6,830 3,922 3,107
Other 22,012 25,701 25,976
Eliminations (13,264) (10,354) (9,848)
------- ------- ------
$ 328,525 $ 303,121 $344,373
========= ========= ========
Identifiable assets:
United States $ 151,864 $ 138,612
Europe 128,711 118,577
Other 15,442 19,830
--------- ---------
$ 296,017 $ 277,019
========= =========
The Company's fishing, motors and watercraft businesses recognized sales to a
single customer and its affiliated entities totaling $37,200 and $33,800 in 1998
and 1997, respectively. No customer accounted for 10% or more of sales in 1996.
13 VALUATION AND QUALIFYING ACCOUNTS
The following summarizes changes to valuation and qualifying accounts:
Additions Reserves of
Balance at Charged to Businesses Balance
Beginning Costs and Acquired Less at End
of Year Expenses or Sold Deduction of Year
Year ended October 2, 1998:
Allowance for doubtful accounts $ 2,693 $ 918 $ 35 $ 1,076 $ 2,570
Inventory reserves 10,220 343 120 4,824 5,859
Year ended October 3, 1997:
Allowance for doubtful accounts 2,235 1,604 217 1,363 2,693
Inventory reserves 13,665 445 1,100 4,990 10,220
Year ended September 27, 1996:
Allowance for doubtful accounts 2,610 1,662 -- 2,037 2,235
Inventory reserves 5,118 12,202 -- 3,655 13,665
Deductions include the impact of foreign currency fluctuations on the respective
accounts.
14 EARNINGS PER SHARE
In 1998, the Company adopted FASB Statement 128, Earnings Per Share, which
replaced the previously reported earnings per share with basic and diluted
earnings per share. Basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is
similar to the previously reported fully diluted earnings per share. Per share
amounts for 1997 and 1996 were not impacted by the computational changes
required under Statement 128.
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following sets forth the computation of basic and diluted earnings per
common share:
1998 1997 1996
Net income (loss) for basic and
diluted earnings per share $ 5,212 $ 2,056 $ (11,355)
Weighted average common
shares outstanding 8,100,415 8,111,322 8,113,776
Less nonvested restricted stock 5,509 9,222 12,212
----- ----- ------
Basic average common shares 8,094,906 8,102,100 8,101,564
Dilutive stock options and restricted
stock 18,924 13,218 27,979
------ ------ ------
Diluted average common shares 8,113,830 8,115,318 8,129,543
========= ========= =========
Basic earnings (loss) per common share $ 0.64 $ 0.25 $ (1.40)
=========== =========== ===========
Diluted earnings (loss) per common share $ 0.64 $ 0.25 $ (1.40)
=========== =========== ===========
15 LITIGATION
In 1998, certain businesses acquired by the Company became subject to judgments
in civil liability cases in the amount of $2,000. The judgments are being
appealed. The Company believes that any payments made as a result of these
judgments, including costs and expenses, will reduce payments otherwise due to
selling shareholders of the businesses acquired.
The Company is subject to various legal actions and proceedings in the normal
course of business, including those related to environmental matters. The
Company is insured against loss for certain of these matters. Although
litigation is subject to many uncertainties and the ultimate exposure with
respect to these matters cannot be ascertained, management does not believe the
final outcome will have a material adverse effect on the financial condition,
results of operations, liquidity or cash flows of the Company.
16 QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
The following summarizes quarterly operating results:
First Second Third Fourth
1998 1997 1998 1997 1998 1997 1998 1997
Net sales $51,841 $51,817 $97,938 $96,111 $106,757 $86,894 $71,989 $68,299
Gross profit 19,194 18,129 39,728 37,133 42,536 32,472 24,506 23,598
Operating profit (loss) (2,672) (3,787) 10,623 9,691 11,282 7,909 (510) (1,802)
Net income (loss) (2,784) (3,866) 4,739 4,328 4,904 3,286 (1,647) (1,692)
====== ====== ===== ===== ===== ===== ====== ======
Basic earnings (loss)
per common share $(0.34) $(0.48) $0.59 $0.53 $0.61 $0.41 $(0.20) $(0.21)
====== ====== ===== ===== ===== ===== ====== ======
Diluted earnings (loss)
per common share $(0.34) $(0.48) $0.58 $0.53 $0.61 $0.41 $(0.20) $(0.21)
====== ====== ===== ===== ===== ===== ====== ======