ITEM 1. BUSINESS
GENERAL
Meridian Sports Incorporated ("Meridian" or the "Company") was incorporated in Delaware in 1994 in connection with an initial public offering of its common stock to succeed to the assets and liabilities of the water sports businesses then owned by Meridian Sports Holdings Inc. (the "Water Sports Businesses") and BW Sale Corp. ("BW"), formerly Boston Whaler, Inc. ("Boston Whaler"). Meridian Sports Holdings Inc. ("Old Meridian") is an indirect wholly-owned subsidiary of MacAndrews & Forbes Holdings Inc. (together with its affiliates, "MacAndrews & Forbes").
On October 19, 1994, the Company completed an initial public offering (the "IPO") in which it issued and sold 2,800,000 shares of its common stock. The net proceeds to the Company from the IPO were used to repay borrowings outstanding under the Company's former bank credit agreement (the "Old Meridian Credit Agreement") and certain debt payable to affiliates ("Affiliate Debt"). The IPO reduced MacAndrews & Forbes' ownership of the Company to approximately 65%.
On October 8, 1997, the Company entered into and consummated an agreement with Johnson Worldwide Associates, Inc. ("JWA") pursuant to which JWA purchased certain assets and assumed certain liabilities of the Company's Soniform scuba equipment business ("Soniform") (the "Soniform Sale"), for approximately $1.8 million.
On July 31, 1997, the Company entered into and consummated an agreement with Earth and Ocean Sports, Inc. ("EOS") pursuant to which EOS purchased certain assets and assumed certain liabilities of the Company's O'Brien towable watersports business ("O'Brien") (the "O'Brien Sale"), for approximately $4.9 million.
On May 31, 1996, the Company consummated a transaction with Brunswick Corporation ("Brunswick") pursuant to which Brunswick purchased certain assets and assumed certain liabilities of BW for approximately $26.2 million, net of adjustments (the "BW Sale").
On January 31, 1996, the Company sold all of the capital stock of its wholly-owned subsidiary Skeeter Products, Inc. ("Skeeter") to Yamaha Motor Corporation, U.S.A. ("Yamaha") pursuant to a Stock Purchase Agreement by and between Yamaha and the Company for $33.9 million, net of adjustments (the "Skeeter Sale").
The results of operations of O'Brien, Soniform, Skeeter and Boston Whaler are included in "Former Operations" in the accompanying consolidated statements of operations for all periods presented through their respective sale dates.
Meridian is a holding company which operates through its wholly-owned subsidiary MasterCraft Boat Company ("MasterCraft"). MasterCraft is a designer, manufacturer and marketer of specialized ski boats targeted principally at boating and waterskiing enthusiasts.
PRODUCTS AND BUSINESSES
The following table sets forth the net sales of the Company's principal businesses for the years ended December 31, 1997, 1996 and 1995.
Year Ended December 31, ----------------------- 1997 1996 1995 ---- ---- ---- (In millions) Ongoing operations................... $52.6 $ 47.6 $ 54.3 Former operations.................... 22.8 54.8 153.9 ------ -------- ------- $75.4 $102.4 $208.2 ===== ====== ======
MASTERCRAFT. Founded in 1968, MasterCraft is the largest producer of premium inboard tournament ski boats and a growing manufacturer of luxury performance V-Drive runabouts. MasterCraft models range in size from 19 to 22 feet, range in price from $19,995 to $37,100 and are sold both domestically and internationally through more than 125 independent dealers. The boats are primarily powered by fuel-injected inboard motors built by General Motors Corporation. During 1997, MasterCraft introduced seven totally new models and three fully updated models under the ProStar, MariStar and PowerStar brands as part of its continuing commitment toward increasing its share of the premium inboard tournament ski boat market and broadening its line of recreational boats. This was the largest product introduction in MasterCraft's history. In 1996, MasterCraft began offering a wakeboard option aimed at the rapidly growing wakeboard market. MasterCraft is committed to continuing its legacy as an innovator in the ski boat market and plans to increase its presence in the family market through new product introductions, innovative technological improvements, and distribution through additions to and upgrading of its dealer network.
In 1995, the Company began a restructuring of its personal watercraft business ("WetJet"). In 1997, the Company substantially completed the program and has discontinued the manufacture of personal watercraft.
MANUFACTURING
The Company manufactures its MasterCraft products at one plant in the United States in Vonore, Tennessee ("Cherokee Cove").
The Company uses a variety of materials and products in the manufacture of its boats. The resins used in the manufacturing of its boat hulls are available from various suppliers. Engines and other components used in the manufacture of the Company's products are produced to the Company's specifications and are available from multiple sources.
EMPLOYEES
As of December 31, 1997, the Company employed approximately 380 people full time. None of the Company's employees are represented by unions.
The Company believes that its relations with its employees are satisfactory and that its employees, many of whom have long experience with the Company, represent a valuable resource. Management conducts regularly scheduled meetings with its employees to inform them about developments in the Company's businesses and to respond to employee questions and concerns.
ITEM 2.
ITEM 2. PROPERTIES
The Company's principal property is a manufacturing facility in Vonore, Tennessee comprised of approximately 156,000 square feet.
The Vonore, Tennessee facility is owned by the Company. The Vonore, Tennessee facility is pledged as collateral under a credit facility entered into in 1997 between the Company and an affiliate (the "M&F Facility"). The Company's facilities in Redmond, Washington, Kilgore, Texas, Edgewater, Florida and Amsterdam, Netherlands were sold to third parties as part of the O'Brien Sale, Skeeter Sale and BW Sale. The New York office was closed in 1996 in connection with the restructuring of the headquarters office.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On August 29, 1996, an action known as Shelton Smith, on behalf of himself and others similarly situated v. Sunchaser Marine, MasterCraft Boat Company, Inc., WetJet, A Division of MasterCraft and Meridian Sports Incorporated, was brought in the 207th District Court of Comal County, Texas by Shelton Smith on behalf of himself and a putative nationwide class of WetJet personal watercraft consumers, asserting claims against the Company, WetJet, MasterCraft, and Sunchaser Marine, Inc. ("Sunchaser") under the Texas Deceptive Trade Practices Act ("DTPA") and the Uniform Commercial Code for alleged breaches of express and implied warranties with respect to the sale of the WetJet personal watercraft units. The complaint also alleges that MasterCraft and/or WetJet were utilized as alter egos or mere instrumentalities of the Company. Shortly thereafter, Sunchaser, a WetJet dealer, filed a cross-action against MasterCraft, WetJet, and the Company asserting various causes of action based on allegations that the cross-defendants breached various warranties and representations relating to the dealer contract and the supply of merchantable WetJet units to the dealer. Sunchaser subsequently amended its third-party petition to add those allegations on behalf of a class of all entities who were retailers, dealers or distributors of the WetJet units or who performed warranty work on the units. Sunchaser also seeks to hold the Company liable under alter ego theories of liability. Finally, Watercraft Rentals, Inc., Randow L. Knodel and Harriet Fortson ("WaterCraft Rentals") intervened in the lawsuit and now assert, on behalf of themselves and a putative class of entities who purchased the WetJet units for purposes of renting or leasing them, causes of action for violations of the Texas DTPA, breach of express and implied warranties, and breach of contract. Watercraft Rentals, et al., also seek to hold the Company liable under alter ego theories of liability.
Meridian has filed a special appearance in the case, contending that the Texas court cannot assert personal jurisdiction over Meridian. MasterCraft and WetJet have filed answers and a Motion to Deny
Class Certification and Smith, Sunchaser and WaterCraft Rentals have filed motions to certify the class they purport to represent. The case is presently in the early stages of discovery. Management of the Company and of MasterCraft intend to vigorously defend the claims against them.
The Company is involved in certain other claims and legal actions arising in the ordinary course of business. The Company does not believe that the outcome of such other claims and lawsuits, individually or in the aggregate, will have a material adverse effect on the Company's financial condition or results of operations.
PRODUCT LIABILITY MATTERS
The Company is party to various product liability lawsuits relating to its products and incidental to its business. The Company believes that many of the personal injury and damage claims brought against it arise from the misuse or misapplication of the Company's products. In such cases, the Company vigorously defends against such actions. Historically, product liability awards have not had a material impact on the Company. There can be no assurance, however, that the Company's future product liability experience will be consistent with its past experience. The Company believes that the ultimate conclusion of the various pending claims and lawsuits against the Company will not exceed accruals, net of insurance recoveries, for such product liability claims recorded on the consolidated balance sheet and will not have a material adverse effect on the financial condition or results of operations of the Company.
The Company independently purchases third-party liability insurance as well as participates in insurance programs maintained by MacAndrews & Forbes, and reimburses MacAndrews & Forbes for its allocable share of the cost of such coverage. Such liability insurance is written on an occurrence basis. The Company believes that the level of coverage is adequate.
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state and local laws and regulations relating to the environment, health and safety and other regulatory matters. The Company's operations may from time to time involve the use of substances that are classified as toxic or hazardous within the meaning of these laws and regulations.
The Company's operations may be considered "major sources" of air emissions, particularly volatile organic compounds, under the Clean Air Act, and therefore will be required to obtain an operating permit pursuant to Title V of the 1990 Amendments to the Clean Air Act. In addition, the Company's facility emits styrene, which is designated as a hazardous air pollutant, and these facilities will be subject to maximum achievable control technology ("MACT") emission standards. Compliance with MACT standards will be phased in over the next five to ten years.
The Company believes that it has obtained all material permits and that its operations are in substantial compliance with all material applicable environmental laws and regulations. Any non-compliance with environmental laws and regulations is not likely to have a material adverse effect on the Company, its results of operations or its liquidity. Nevertheless, future events, such as changes in, or modified interpretations of, existing laws or regulations or enforcement policies may give rise to additional compliance and other costs that could have a material adverse effect on the Company.
Pursuant to the 1990 Amendments to the Clean Air Act, the EPA has been studying the impact of marine engines on the environment. The EPA has proposed regulations establishing air emission standards for new marine engines. To the extent that such regulations, when finally adopted, make it more costly to acquire a marine vessel and engine, such regulations could have a material adverse effect on the Company's business.
OTHER REGULATORY REQUIREMENTS
The Company's boats must be certified as meeting U.S. Coast Guard specifications. In addition, boat safety is subject to federal regulation under the Boat Safety Act of 1971, as amended, pursuant to which boat manufacturers may be required to recall products for replacement of parts or components that have demonstrated defects affecting safety. The Company believes its operations and products are in substantial compliance with all such regulations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth quarter of 1997.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the over-the-counter bulletin board under the symbol "MSPO". Prior to the second quarter of 1997, the Company's Common Stock was listed and traded on the Nasdaq National Market. The following table sets forth the high and low sales prices as reported on the over-the-counter bulletin board for the Company's Common Stock for the second through the fourth fiscal quarter of 1997 and as reported on the Nasdaq National Market for the first fiscal quarter of 1996 through the first fiscal quarter of 1997.
High Low ---- --- ---- First Quarter........................ $1 5/8 $ 15/16 Second Quarter....................... 1 17/32 3/8 Third Quarter........................ 1 1/2 3/4 Fourth Quarter....................... 1 9/32 1/2
First Quarter........................ $6 7/8 $3 7/8 Second Quarter....................... 5 1/8 2 1/2 Third Quarter........................ 4 1/4 1 3/8 Fourth Quarter....................... 2 3/4
As of the close of business on March 10, 1998, there were approximately 100 holders of record of the Company's Common Stock.
The Company did not declare a cash dividend on its Common Stock in 1997 or in 1996. The Company does not anticipate that any dividends will be declared on its Common Stock in the foreseeable future. Any future declaration of dividends would be subject to the discretion of the board of directors of the Company and subject to certain limitations under the General Corporation Law of the State of Delaware. The timing, amount and form of dividends, if any, will depend, among other things, on the Company's results of operations, financial condition, cash requirements and other factors deemed relevant by the board of directors. Meridian receives cash distributions from its subsidiaries to finance corporate liquidity requirements. See Management's Discussion and Analysis of Financial Condition--Liquidity and Capital Resources.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented herein relate to the Water Sports Businesses, including the results of O'Brien through July 31, 1997, Soniform through October 8, 1997, Skeeter through January 31, 1996, and, from July 30, 1993 through May 31, 1996, the results of BW. O'Brien and Soniform were sold on July 31, 1997 and October 8, 1997, respectively. Skeeter and BW were sold on January 31, 1996 and May 31, 1996, respectively.
The following selected consolidated financial data for the years presented in the table below were derived from the Consolidated Financial Statements. The selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and the notes thereto included elsewhere herein.
- --------------------- (1) In 1996 and 1995, includes charges of $18,200 and $22,581, respectively, related to WetJet which include: (a) writedowns of inventory to estimated net realizable value; (b) provisions for expected warranty costs on product sold; and (c) the writedown of tooling and equipment to estimated net realizable value.
(2) In 1996, includes a charge of $1,600 related to the restructuring of the corporate office. In 1996 and 1995, includes charges of $3,800 and $10,617, respectively, related to WetJet which include: (a) provisions for expected costs to ensure sell-through of products in retail dealer inventories; (b) writedowns of accounts receivable to estimated net realizable value; and (c) estimated costs of litigation.
(3) In 1995, includes a charge of $1,893 to writeoff all remaining goodwill related to WetJet.
(4) In 1997, includes a gain of $200 resulting from the O'Brien Sale and a loss of $750 resulting from the Soniform Sale. In 1996, includes gains resulting from the Skeeter Sale of $13,289 and BW Sale of $4,900, net of a valuation adjustment of $1,339 related to O'Brien.
SEE NOTES ON SUCCEEDING PAGE
(a) Includes the results of O'Brien and Soniform through July 31, 1997 and October 8, 1997, respectively. (b) Includes the results of operations of Skeeter and BW through January 31, 1996 and May 31, 1996, respectively. (c) Includes the results of operations of BW since July 30, 1993, the date of acquisition. (d) Depreciation expense is allocated within the historical statements of operations data between cost of sales and selling, general and administrative expenses. Selling, general and administrative expenses includes fees to affiliates of $2,034, $200, $200 and $50 for the years ended December 31, 1993 through 1996, respectively and amortization of intangibles of $524, $615, $2,464 and $116 for the years ended December 31, 1993 through 1996, respectively. (e) Basic and diluted earnings per share is calculated based upon weighted average shares outstanding for the year (8,000,000 for 1997, 1996 and 1995, 5,768,000 shares for 1994 and 5,200,000 shares for 1993.) (f) Capital expenditures in 1994 include: approximately $900 related to the completion of the relocation to Cherokee Cove and approximately $800 related to the completion of O'Brien's plant reorganization. (g) Capital expenditures in 1993 include: approximately $4,600 related to the acquisition of Cherokee Cove, approximately $900 for the initial tooling and machinery purchases at WetJet and approximately $200 related to the reorganization of O'Brien's manufacturing facility.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Net sales were $75.4 million and $102.4 million for 1997 and 1996, respectively, a decrease of $27.0 million, comprised of a 10% increase in ongoing operations of $5.0 million, offset by a decrease of $32.0 million related to sales of former operations. Ongoing operations increased primarily because of higher dealer demand for newly introduced models and dealer reorders to maintain desired inventory levels. Sales of former operations decreased from $54.8 million in 1996 to $22.8 million in 1997, reflecting the effect of the Skeeter Sale and the BW Sale in 1996 and the O'Brien Sale in July 1997.
Gross profit was $17.4 million and $4.7 million for the 1997 and 1996 periods, respectively, an increase of $12.7 million. Gross profit in 1996 is net of $18.2 million related to the Company's restructuring of its personal watercraft business. No restructuring charges were recorded in 1997. Gross profit of former operations, excluding restructuring charges, was reduced by $8.3 million in 1997 primarily due to the sale of two businesses in each of 1996 and 1997. Ongoing operations produced $11.2
million and $8.4 million of gross profit in 1997 and 1996, respectively, due to sales increases, improvements in material usage and reduced warranty spending.
Selling, general and administrative expenses ("SG&A") were $16.8 million and $32.9 million for 1997 and 1996, respectively. SG&A in 1996 included $3.8 million of charges related to the Company's restructuring of its personal watercraft business. Such charges include: (i) provisions for management's estimate of expected costs to ensure sell-through of products in retail dealer inventories; (ii) writedowns of accounts receivable to estimated net realizable value; and (iii) estimated costs of litigation. No restructuring charges were recorded in 1997. Ongoing businesses recorded $2.0 million lower SG&A in 1997 primarily due to lower compensation expense of the headquarters office. The remaining decrease of $10.3 million principally related to the sale of businesses and the reduction of WetJet SG&A.
Interest and related amortization expense of $2.2 million in 1997 was approximately $0.7 million above 1996 levels due to the effect of higher average outstanding borrowings.
The O'Brien Sale resulted in a pre-tax gain of approximately $0.2 million in 1997. The Soniform Sale resulted in a pre-tax loss of approximately $0.7 million in 1997. In 1996, the Skeeter Sale resulted in a pre-tax gain of $13.3 million, net of a goodwill writeoff of $10.1 million and the BW Sale resulted in a pre-tax gain of $4.9 million. The Company, in 1996, also recorded a valuation adjustment of $1.3 million related to its O'Brien business.
In connection with the permanent reduction of outstanding commitments under the O'Brien Credit Agreement in 1997 resulting from the O'Brien Sale, and under the Company Credit Agreement in 1996 resulting from the Skeeter Sale and the BW Sale, the Company recorded extraordinary charges of $0.4 million and $1.3 million, respectively, to writeoff deferred financing costs.
The Company incurred a loss in 1997 and as such did not record an income tax benefit as the Company was not assured it would be able to realize a benefit for such loss in the future. The Company recorded an income tax provision of $7.0 million in 1996. The income tax provision in 1996 principally includes the establishment of a valuation allowance against previously recorded deferred tax assets and a state and local provision related to the Skeeter Sale and BW Sale. Income before income taxes and extraordinary charge in 1996 is net of a non-deductible goodwill writeoff of $14.4 million recognized in connection with the Skeeter Sale and BW Sale.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Net sales were $102.4 million and $208.2 million for 1996 and 1995, respectively, a decrease of $105.8 million, of which $99.1 million relates to sales of former operations. Ongoing operations sales decreased 12% to $47.6 million primarily because of lower dealer demand resulting from higher than desired dealer inventory levels. The effect of high dealer inventory levels was accentuated due to generally unfavorable weather conditions during the selling season in 1996. Sales of former operations decreased from $153.9 million in 1995 to $54.8 million in 1996, reflecting the effect of the Skeeter Sale on January 31, 1996, the BW Sale on May 31, 1996 and the reduction of WetJet sales due to its restructuring.
Gross profit was $4.7 million and $17.0 million for the 1996 and 1995 periods, respectively, a decrease of $12.3 million. Gross profit in 1996 and 1995 is net of $18.2 million and $22.6 million, respectively, related to the Company's restructuring of its personal watercraft business. The restructuring charge in 1996 reflects a revision of management's estimate to repair previously manufactured product,
reflecting the cost of additional warranty parts and labor and lower estimates on realizable value of inventories. Gross profit of former operations was reduced by $16.1 million in 1996 primarily due to less than a full year's results of operations of Skeeter and BW being included in the consolidated results of operations of the Company. Ongoing operations produced $8.4 million and $9.0 million of gross profit in 1996 and 1995, respectively, as declines in sales were offset by improvements in material usage and reduced warranty spending.
SG&A were $32.9 million and $56.7 million for 1996 and 1995, respectively. SG&A in 1996 and 1995 included $3.8 million and $10.6 million, respectively, of charges related to the Company's restructuring of its personal watercraft business. Such charges include: (i) provisions for management's estimate of expected costs to ensure sell-through of products in retail dealer inventories; (ii) writedowns of accounts receivable to estimated net realizable value; and (iii) estimated costs of litigation. Ongoing operations recorded $3.6 million lower SG&A in 1996, before one-time charges, due to lower compensation expense and reduced costs related to the closure of the headquarters office. In 1996, SG&A included a one-time charge of $1.6 million related to the restructuring of the New York headquarters office. The remaining decrease of $15.0 million principally related to the Skeeter Sale, the BW Sale and the reduction of WetJet SG&A.
Interest and related amortization expense of $1.5 million in 1996 was approximately $1.9 million below 1995 levels due to the effect of lower outstanding borrowings.
The Skeeter Sale resulted in a pre-tax gain of $13.3 million, net of a goodwill writeoff of $10.1 million. The BW Sale resulted in a pre-tax gain of $4.9 million. The Company also recorded a valuation adjustment of $1.3 million related to its Equipment businesses.
In 1996, in connection with the permanent reduction of outstanding commitments under the Company Credit Agreement resulting from the Skeeter Sale and the BW Sale, the Company recorded an extraordinary charge of $1.3 million to writeoff deferred financing costs.
The Company recorded an income tax provision (benefit) of $7.0 million and ($5.6) million in 1996 and 1995, respectively. The income tax provision in 1996 principally includes the establishment of a valuation allowance against previously recorded deferred tax assets and a state and local provision related to the Skeeter Sale and BW Sale. Income before income taxes and extraordinary charge in 1996 is net of a non-deductible goodwill writeoff of $14.4 million recognized in connection with the Skeeter Sale and BW Sale. In 1995, the Company recorded a federal tax benefit of $5.9 million on its loss for the year to the extent that it projected income before income taxes in 1996, due to the expected gain from the Skeeter Sale. In 1995, the income tax provision includes state and local taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash flows from operating activities were ($3.8) million, ($31.9) million and ($4.3) million for the years ended December 31, 1997, 1996 and 1995, respectively. The Company's cash flows from operating activities in 1997 and 1996 reflect cash used to fund operating losses and interest expense and the payment of $9.2 million in 1997, $23.0 million in 1996 and $4.1 million in 1995, of WetJet and corporate restructuring liabilities.
The Company's net capital expenditures were $1.2 million, $2.4 million and $5.3 million in the years ended December 31, 1997, 1996 and 1995, respectively. Capital expenditures in 1997 were $0.4
million less than depreciation as the Company's former operations had lower expenditures related to new products. Capital expenditures in 1996 were $0.2 million less than depreciation as the Company curtailed capital spending. Capital expenditures in 1995 slightly exceeded depreciation expense due to the retooling of the WetJet product line and the addition of molds to expand capacity in the boat businesses. Capital expenditures during these periods were funded by bank financings and loans from affiliates. The Company anticipates that its capital expenditures requirements in 1998 will approximate its annual depreciation expense. In 1997 and 1996, cash flows from investing activities included proceeds from the sale of businesses of $6.3 million and $58.4 million, respectively. Such proceeds were used to repay indebtedness of the Company.
At December 31, 1997, total debt was approximately $17.5 million, which amount represents a $1.8 million decrease from December 31, 1996. The Company's working capital requirements are currently funded by borrowings under the M&F Facility. In 1995 and 1996, through May 31, 1996, the Company's working capital and other requirements were funded by borrowings under a bank credit agreement, which was effectively terminated subsequent to the BW Sale, and borrowings from an affiliate.
The Company continues to assess its liquidity needs, both immediate and longer-term. As of March 10, 1998, outstanding borrowings under the M&F Facility were approximately $16.6 million. The M&F Facility provides for borrowings on a revolving basis of up to $20 million, bears interest at the prime rate plus 1% and matures at December 1, 1999. Borrowings under the M&F Facility are guaranteed by the subsidiaries of the Company and a pledge of Cherokee Cove. Although none of the Company's affiliates are required to provide funding to the Company other than pursuant to the M&F Facility, the Company anticipates that additional liquidity needs, if any, will be met by additional loans from affiliates.
EFFECT OF YEAR 2000
Some of the Company's computer programs were written using two digits rather than four digits to define the applicable year. As a result, those computer programs have time-sensitive software that recognizes a date using "00" as the year 1900 rather than the year 2000. In 2000, this could cause a system failure or miscalculations causing disruptions of operations, including among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company is in the process of replacing all such software as part of an overall systems upgrading, the estimated cost of which is approximately $500,000. Upon completion of the systems upgrading, its computer systems will function properly with respect to dates in the year 2000 and thereafter. The project is estimated to be substantially completed during 1998. The Company believes that with conversions to new software, the year 2000 issue will not pose significant operations problems.
SEASONALITY AND BACKLOG
The marine industry is seasonal, with retail sales generally strongest in the months of April through September. Between October and March, manufacturers' shipments depend on dealer restocking activity and requests for new season models presented at trade shows and through promotional programs. New product introductions and fluctuations in demand due to the popularity of the Company's products may also contribute to quarterly or other periodic fluctuations. In 1997, new products introduced in the third quarter contributed to strong sales in the last two quarters. Sales of new products in connection with model changeovers have traditionally caused third quarter sales to be strong. In 1995, unfavorable climate and an uncertain economy in the second quarter caused some delay in marine sales until the third quarter.
In the fourth quarter of 1995, MasterCraft deliberately reduced production to balance field inventories at dealers.
The following table sets forth net sales for each quarter from January 1, 1995 through December 31, 1997 (in millions) and includes the results of O'Brien through July 31, 1997, Soniform through October 8, 1997, Skeeter through January 31, 1996, and through May 31, 1996, the results of BW. O'Brien and Soniform were sold on July 31, 1997 and October 8, 1997, respectively. Skeeter and BW were sold on January 31, 1996 and May 31, 1996, respectively.
- ----------- At December 31, 1997 and 1996, the Company had order backlog of approximately $8 million and $9 million (which excludes backlog of former operations), respectively.
INFLATION
In general, manufacturing costs are affected by inflation and the effects of inflation may be experienced by the Company in future periods. Management believes, however, that such effect has not been material to the Company during the past three years.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for certain forward-looking statements. The forward-looking statements contain in this Form 10-K, specifically, the anticipation of future results, are subject to certain risks and uncertainties. Actual results could differ materially from current expectations. Among the factors which could affect the Company's actual results and could cause results to differ from those contained in the forward-looking statements are customer's acceptance of the Company's new model year products, the ability of boat dealers to obtain financing for their purchases of boats and the satisfaction of the WetJet liabilities within the reserves established.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the consolidated financial statements and supplementary data listed in the accompanying Index to Financial Statements and Schedule on Page herein.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
The information required by Part III, Items 10 through 13, of Form 10-K is incorporated by reference from the registrant's definitive proxy statement for its 1998 annual meeting of shareholders, which is to be filed pursuant to Regulation 14A no later than 120 days following the end of the fiscal year reported upon.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) (1) and (2) Financial Statements and Schedule.
See Index to Financial Statements and Schedule which appears on page herein.
(3) Exhibits
Exhibit No. Description ----------- ----------- 2.1 Stock Purchase Agreement by and between Yamaha and the Company dated January 22, 1996. (Incorporated by reference to Exhibit 1 to Form 8-K dated February 14, 1996) 2.2 Amendment No. 1 to Stock Purchase Agreement by and between Yamaha and the Company dated January 31, 1996. (Incorporated by reference to Exhibit 2 to Form 8-K dated February 14, 1996) 2.3 Asset Purchase Agreement, dated March 29, 1996, among Brunswick Corporation, Boston Whaler, Inc. (now known as BW Sale Corp.) and the Company. (Incorporated by reference to Exhibit 2.3 to Form 10-K for the year ended December 31, 1995) 2.4 Asset Purchase Agreement among Earth and Ocean Sports, Inc., O'Brien International, Inc. (now known as OB Sale Corp.) and the Company dated July 31, 1997. (*) 2.5 Asset Purchase Agreement among Johnson Worldwide Associates, Inc., Soniform, Inc. (now known as GK Sale Corp.) and the Company dated October 8, 1997. (*) 3.1 Certificate of Incorporation of the Company. (Incorporated by reference from Form S-1 dated July 7, 1994) 3.1.1 Certificate of Amendment of the Certificate of Incorporation of the Company, filed with the Delaware Secretary of State on July 22, 1994. (Incorporated by reference to Exhibit 3.1.1 to Amendment No.1 to Form S-1 dated September 21, 1994) 3.2 By-laws of the Company. (Incorporated by reference to Exhibit 3.2 to Form S-1 dated July 7, 1994) 4.1 Articles of Incorporation of the Company. (See Exhibit 3.1) 4.2 By-laws of the Company. (See Exhibit 3.2) 10.1 Subordinated Revolving Credit Agreement between the Company and Revlon Group Incorporated, now known as RGI Group Incorporated, dated as of January 11, 1996 (Incorporated by reference to Exhibit 10.7 to Form 10-K for the year ended December 31, 1995) 10.2 Meridian Sports Incorporated 1994 Stock Option Plan (Incorporated by reference to Exhibit 10.6 to Amendment No.1 to Form S-1 dated September 21, 1994)
Exhibit No. Description ----------- ----------- 10.3 Registration Rights Agreement between Old Meridian and Meridian Sports Incorporated. (Incorporated by reference to Exhibit 10.13 to Form 10-K for the year ended December 31, 1994) 10.4 Cross-Indemnification Agreement Between National Health Care Group, Inc. and Meridian Sports Incorporated. (Incorporated by reference to Exhibit 10.14 to Form 10-K for the year ended December 31, 1994) 10.5 Tax Indemnification Agreement among Mafco Holdings Inc., MacAndrews & Forbes Holdings Inc., New Coleman Holdings Inc., Old Meridian, Meridian Sports Incorporated and the Subsidiaries of Meridian Sports Incorporated. (Incorporated by reference to Exhibit 10.15 to Form 10-K for the year ended December 31, 1994) 10.6 Revolving Credit Agreement between the Company and Revlon Group Incorporated, now known as RGI Group Incorporated, dated March 28, 1997. (Incorporated by reference to Exhibit 10.17 to Form 10-K for the year ended December 31, 1996) 10.7 First Amendment dated as of September 30, 1997 to Revolving Credit Agreement between the Company and RGI Group Incorporated, dated March 28, 1997. (*) 10.8 Second Amendment dated as of March 3, 1998 to Revolving Credit Agreement between the Company and RGI Group Incorporated, dated March 28, 1997. (*) 21.1 List of Subsidiaries of the Registrant. (*) 24.1 Powers of Attorney. (*) 27 Financial Data Schedule. (*)
(*) Filed herewith
(b) There were no reports on Form 8-K filed in the fourth quarter of 1997.
SIGNATURES
Pursuant to the requirements 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.
MERIDIAN SPORTS INCORPORATED (Registrant)
Date: March 31, 1998 By: /s/ J. Eric Hanson ------------------- -------------------------- J. Eric Hanson President and Chief Executive Officer; Director
Date: March 31, 1998 By: /s/ James A. Valkenaar ------------------- -------------------------- James A. Valkenaar Vice President and Principal Accounting Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: March 31, 1998 By: Ronald O. Perelman* ------------------- -------------------------- Ronald O. Perelman Chairman of the Board and Director
Date: March 31, 1998 By: Jerry W. Levin* ------------------- -------------------------- Jerry W. Levin Director
Date: March 31, 1998 By: John P. Murray, Jr.* ------------------- -------------------------- John P. Murray, Jr. Director
Date: March 31, 1998 By: Martin D. Payson* ------------------- -------------------------- Martin D. Payson Director
Date: March 31, 1998 By: Bruce Slovin* ------------------- -------------------------- Bruce Slovin Director
* Executed on behalf of the named director pursuant to a power of attorney.
Date: March 31, 1998 By: /s/Thomas E. Kohut ------------------- -------------------------- Thomas E. Kohut Attorney-in-fact
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) AND (2) AND (d) INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE YEAR ENDED DECEMBER 31, 1997
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
Page ----
The following consolidated financial statements of Meridian Sports Incorporated and Subsidiaries are included in Item 8:
Report of Independent Auditors...................................
Consolidated Balance Sheets as of December 31, 1997 and 1996.....
Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995...........
Consolidated Statements of Stockholders' (Deficit) Equity for the years ended December 31, 1997, 1996 and 1995...........
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995...........
Notes to Consolidated Financial Statements.......................
The following consolidated financial statement schedule of Meridian Sports Incorporated and Subsidiaries is included in Item 14(d):
Schedule II - Valuation and Qualifying Accounts and Reserves.....
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors Meridian Sports Incorporated
We have audited the accompanying consolidated balance sheets of Meridian Sports Incorporated and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' (deficit) equity, and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the consolidated financial statement schedule listed in the Index at Item 14(a). These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule 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 consolidated financial position of Meridian Sports Incorporated and Subsidiaries at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.
ERNST & YOUNG LLP
New York, New York March 5, 1998
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
December 31, ------------------ 1997 1996 --------- -------- ASSETS Current assets: Cash $ 1,123 $ 1,968 Accounts receivable, net of allowances of $401 and $2,578, respectively 3,681 8,467 Inventories 8,040 15,537 Prepaid expenses and other 3,974 3,152 ------- ------- Total current assets 16,818 29,124
Property, plant and equipment, net 6,716 13,243 Other assets 350 1,858 ------- ------- $23,884 $44,225 ======= ======= LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities: Current portion of long-term debt $ 13 Accounts payable $ 2,103 6,487 Accrued expenses and other current liabilities 8,122 23,139 -------- --------- Total current liabilities 10,225 29,639
Long-term debt 17,515 19,282 Other liabilities 5,617 2,258
Commitments and contingencies
Stockholders' deficit: Preferred stock, par value $0.01 per share; 10,000,000 shares authorized; no shares issued and outstanding Common stock, par value $0.01 per share; 50,000,000 shares authorized; 8,000,000 shares issued and outstanding 80 80 Additional paid-in capital 131,951 131,951 Accumulated deficit (141,504) (138,985) -------- --------- Total stockholders' deficit (9,473) (6,954) -------- --------- $ 23,884 $ 44,225 ======== =========
See Notes to Consolidated Financial Statements
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
See Notes to Consolidated Financial Statements
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
See Notes to Consolidated Financial Statements
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
See Notes to Consolidated Financial Statements
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
1. BACKGROUND AND BASIS OF FINANCIAL STATEMENT PRESENTATION
Meridian Sports Incorporated ("Meridian", or the "Company") was formed in June 1994. As a result of an initial public offering of its common stock (the "IPO") in October 1994, the Company is a 65% indirectly owned subsidiary of MacAndrews & Forbes Holdings Inc. ("MacAndrews Holdings"), a corporation wholly-owned through Mafco Holdings Inc. (together with its affiliates, "MacAndrews & Forbes").
On October 8, 1997, the Company entered into and consummated an agreement with Johnson Worldwide Associates, Inc. ("JWA") pursuant to which JWA purchased certain assets and assumed certain liabilities of the Company's Soniform scuba equipment business ("Soniform") for approximately $1,756 (the "Soniform Sale"). The results of operations of Soniform are included in "Former operations" in the accompanying consolidated statements of operations for all periods presented through the date of the Soniform Sale.
On July 31, 1997, the Company entered into and consummated an agreement with Earth and Ocean Sports, Inc. ("EOS") pursuant to which EOS purchased certain assets and assumed certain liabilities of the Company's O'Brien towable watersports business ("O'Brien"), for approximately $4,930 (the "O'Brien Sale"). The results of operations of O'Brien are included in "Former operations" in the accompanying consolidated statements of operations for all periods presented through the date of the O'Brien Sale.
On May 31, 1996, the Company consummated a transaction with Brunswick Corporation ("Brunswick") pursuant to which Brunswick purchased certain assets and assumed certain liabilities of BW Sale Corp., formerly Boston Whaler, Inc. ("BW") for approximately $26,155 (the "BW Sale"). The results of operations of BW are included in "Former operations" in the accompanying consolidated statements of operations for all periods presented through the date of the BW Sale.
On January 31, 1996, the Company sold all of the capital stock of its wholly-owned subsidiary Skeeter Products, Inc. ("Skeeter") to Yamaha Motor Corporation, U.S.A. ("Yamaha") for approximately $33,900 (the "Skeeter Sale"). The results of operations of Skeeter are included in "Former operations" in the accompanying consolidated statements of operations for all periods presented through the date of the Skeeter Sale.
Meridian is a holding company which operates through its wholly-owned subsidiary MasterCraft Boat Company ("MasterCraft"). MasterCraft is a designer, manufacturer and marketer of specialized ski boats targeted principally at boating and waterskiing enthusiasts.
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
2. DISPOSALS OF BUSINESSES, UNUSUAL ITEM AND EXTRAORDINARY ITEMS
On October 8, 1997, the Company entered into and consummated an agreement with JWA pursuant to which JWA purchased certain assets and assumed certain liabilities of the Company's Soniform scuba equipment business for approximately $1,756. The Soniform Sale resulted in a pre-tax loss of approximately $750. The proceeds of the Soniform Sale were used to repay indebtedness of the Company under the M&F Facility, as hereafter defined. In connection with the Soniform Sale, the Company entered into a lease with JWA, pursuant to which it will lease the Soniform manufacturing facility to JWA for a minimum one year period for $80.
On July 31, 1997, the Company entered into and consummated an agreement with EOS pursuant to which EOS purchased certain assets and assumed certain liabilities of the Company's O'Brien towable watersports business, for approximately $4,930. The O'Brien Sale resulted in a pre-tax gain of approximately $200. The proceeds of the O'Brien Sale were used to permanently repay indebtedness of the Company under a credit agreement with a bank entered into in March 1997 (the "O'Brien Credit Agreement") and to repay other indebtedness under the M&F Facility, as hereafter defined. In connection with the permanent repayment of borrowings under the O'Brien Credit Agreement, the Company recorded an extraordinary charge of $408 to write off all related deferred financing costs.
On May 31, 1996, the Company consummated a transaction with Brunswick pursuant to which Brunswick purchased certain assets and assumed certain liabilities of BW for $26,155, of which $1,250 is held in escrow through May 1998. The proceeds of the BW Sale were used to repay indebtedness of the Company. The BW Sale resulted in a pre-tax gain of $4,900. The Company also recorded, in 1996, a valuation adjustment of $1,339 related to O'Brien. Due to the permanent commitment reduction in 1996 under the Company's then existing credit agreement with a group of banks (the "Company Credit Agreement") as a result of the Skeeter Sale and BW Sale, the Company recorded an extraordinary charge of $1,332 to writeoff all remaining deferred financing costs. In January 1997, the Company Credit Agreement was terminated and all collateral thereunder was released.
On January 31, 1996, the Company sold Skeeter to Yamaha pursuant to a Stock Purchase Agreement by and between Yamaha and the Company for approximately $33,900. The proceeds of the Skeeter Sale were used to repay indebtedness of the Company. The Skeeter Sale resulted in a pre-tax gain of $13,289, net of a goodwill writeoff of $10,094.
3. RESTRUCTURING
In 1995, the Company recorded a provision for the then estimated cost of the restructuring of its personal watercraft business ("WetJet"). In 1996, the Company recorded additional provisions to reflect revisions to its earlier cost estimates due, in part, to (i) unanticipated delays in implementing the restructuring program and (ii) a longer than anticipated period of time required to complete the
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
execution of the restructuring program. Such additional time requirements coincided with a general deterioration in the overall market for personal watercraft and resulted in the Company's offering of more costly incentives to facilitate the sell-through of product in retail dealer inventories. The Company recorded charges in cost of sales of $18,200 and $22,581 in 1996 and 1995, respectively, which include: (i) writedowns of inventory to estimated net realizable value; (ii) provisions for expected warranty costs on models sold; and (iii) writedowns of tooling and equipment to estimated net realizable value. Additionally, the Company recorded charges in selling, general and administrative expenses of $3,800 and $10,617 in 1996 and 1995, respectively, which include: (i) provisions for expected costs to ensure sell-through of products in retail dealers inventories; (ii) writedowns of accounts receivable to estimated net realizable value; and (iii) estimated costs of litigation related to the personal watercraft business. In addition, the Company recorded in selling, general and administrative expenses a charge of $1,893 in 1995 to writeoff all remaining goodwill related to the personal watercraft business. In 1995, the Company began a restructuring of its WetJet business. In 1997, the Company substantially completed the program and no further charges were recorded in connection with such program. The Company no longer manufactures personal watercraft. There can be no assurance the WetJet liabilities can be satisfied within the reserves established.
In 1996, the Company recorded in selling general and administrative expenses, a one-time charge of $1,600 comprised primarily of severance costs related to the restructuring of its headquarters office. All liabilities for the headquarters restructuring were paid as of December 31, 1997.
4. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company and its subsidiaries after elimination of all material intercompany accounts and transactions.
REVENUE RECOGNITION:
The Company recognizes net sales upon shipments of merchandise when title and all other incidents of ownership transfer have been completed. Net sales are comprised of gross sales less expected customer returns and allowances.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:
Outstanding letters of credit aggregated approximately $3,342 and $1,776 at December 31, 1997 and 1996, respectively, of which letters of credit aggregating $1,745 and $1,739, respectively, are cash collateralized. Trade receivables for boats sold to dealers are generally collateralized by the related boat inventory or letters of credit. Sales made through floor plan arrangements transfer substantially all credit risk to the financing entity.
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
CONCENTRATIONS OF CREDIT RISK:
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of trade receivables. Credit risk on trade receivables is minimized as a result of the Company's floor plan arrangements, the use of trade letters of credit and the large and diversified nature of the Company's customer base, which includes customers located throughout the entire United States as well as several international customers.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amount of the Company's long-term debt approximates its fair value.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is recorded at cost and depreciated on a straight-line basis over the estimated useful lives of three to forty years. Leasehold improvements are amortized over their estimated useful lives or terms of the leases, whichever is shorter. Repairs and maintenance are charged to operations as incurred, and expenditures for additions and improvements are capitalized.
STOCK-BASED COMPENSATION:
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has elected to account for stock-based compensation plans using the intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at date of the grant over the amount an employee must pay to acquire the stock.
INCOME TAXES:
The Company accounts for income taxes in accordance with the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws.
FLOOR PLAN REIMBURSEMENT COSTS:
The Company may enter into various programs whereby it agrees to reimburse its dealers for certain floor plan interest costs incurred by such dealers for limited periods of time, in accordance with industry practice. Such costs are included in selling, general and administrative expenses in the accompanying consolidated statements of operations.
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
RESEARCH AND DEVELOPMENT:
Research and development expenditures are expensed as incurred. The amounts charged against operations for the years ended December 31, 1997, 1996 and 1995 were $1,883, $1,795, and $3,254, respectively.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
The accruals established for the WetJet restructuring are based on management's estimates of the costs of the restructuring programs. The restructuring programs are substantially complete. There can be no assurance that the programs will be completed within the reserves established.
5. INVENTORIES
Inventories are valued at the lower of cost or market. Inventory costs are determined principally by the last-in, first-out ("LIFO") method. Inventories consisted of the following:
December 31, -------------------------- 1997 1996 ---------- -------
Raw material and supplies....................... $3,394 $6,372 Work-in-process................................. 753 1,378 Finished goods.................................. 4,781 8,896 ----- ----- 8,928 16,646 Less: Lifo allowance............................ (888) (1,109) -------- --------- $8,040 $15,537 ====== =======
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
6. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consisted of the following:
December 31, ------------------ 1997 1996 ------- --------- Land .................................. $622 $1,372 Buildings and improvements............. 5,072 8,472 Machinery and equipment ............. 4,336 12,911 ------- --------- 10,030 22,755 Accumulated depreciation............... (3,314) (9,512) -------- --------- $6,716 $13,243 ======== =========
Depreciation expense was $1,587, $2,527 and $4,379 for the years ended December 31, 1997, 1996 and 1995, respectively.
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following:
December 31, ------------ 1997 1996 -------- -------- Insurance retentions....................... $2,254 $1,821 Advertising and promotion.................. 1,567 1,159 Warranty................................... 1,056 3,920 Compensation and related accruals.......... 870 1,724 Pension plans.............................. 541 1,580 Interest................................... 170 141 State income and other taxes............... 149 1,202 Payable to affiliates...................... 188 127 WetJet product sell-through................ 510 5,888 Corporate restructuring ................... -- 897 Other...................................... 817 4,680 -------- -------- $8,122 $23,139 ====== =======
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
8. LONG-TERM DEBT
Long-term debt consisted of the following: December 31, ------------ 1997 1996 -------- ------- M&F Facility (a)......................... $17,515 $ -- Borrowings from affiliates (b)........... -- 19,245 Capitalized lease obligations............ -- 50 ------- ------- 17,515 19,295 Less: Current portion................... -- (13) ------- ------- $17,515 $19,282 ======= ======= -------------------- (a) In March 1997, the Company entered into a credit agreement with an affiliate (as amended, the "M&F Facility") to refinance existing borrowings from affiliates, to finance the operations, including seasonal working capital needs and restructuring liabilities of the Company. The M&F Facility originally provided for borrowings on a revolving basis of up to $30,000. In connection with the Soniform Sale, the M&F Facility was amended to reduce the M&F Facility commitment to $20,000, reflecting the Company's lower seasonal working capital requirements. The M&F Facility bears interest at the prime rate, as defined, plus 1% (9.5% at December 31, 1997) and matures at December 1, 1999. Loans under the M&F Facility are guaranteed by the subsidiaries of the Company and a pledge of Cherokee Cove. Borrowings outstanding under the M&F Facility are required to be prepaid with the net cash proceeds of the sales of any subsidiaries of the Company. The commitment under the M&F Facility shall be reduced by such required prepayments. The M&F Facility contains a minimum net worth covenant. The M&F Facility contains typical events of default including change of control, material adverse change and non-payment of obligations.
(b) Prior to the establishment of the M&F Facility, the Company relied upon borrowings from MacAndrews & Forbes for its liquidity needs. Such borrowings were made on a revolving basis and bore interest, payable quarterly at each fiscal quarter end, at the prime rate (8.25% at December 31, 1996). Borrowings from affiliates were classified as long-term debt on the consolidated balance sheet since the Company refinanced such borrowings with borrowings under the M&F Facility.
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
9. INCOME TAXES
The Company files separate income tax returns. The Company has recorded a provision (benefit) for income taxes as follows:
Year Ended December 31, ----------------------- 1997 1996 1995 ---- ---- ---- Current: Federal................ $ -- $ -- $ -- State and local........ -- 1,147 164 Foreign................ -- -- 122 ------- ------- ------- -- 1,147 286 ------- ------- ------- Deferred: Federal................ -- 5,811 (5,906) State and local........ -- -- -- ------- ------- ------- $ -- $ 6,958 $(5,620) ======= ======= =======
During 1997, the Company incurred a loss for which it has not recorded a tax benefit as the Company is not assured it will be able to realize a benefit for such loss in the future.
During 1996, the Company recorded a valuation allowance against previously recorded deferred tax assets and a provision for state and local income taxes related to the gains arising from the Skeeter Sale and BW Sale.
During 1995, the Company recorded a federal benefit on its loss for the year ended December 31, 1995 to the extent that it projected income before income taxes in 1996, due to the gain expected from the Skeeter Sale.
At December 31, 1997, the Company had net operating loss carryforwards of approximately $41,000 expiring in the years 2005 through 2012. Certain loss carryforwards are subject to certain limitations under the separate return limitation year ("SRLY") rules. The effect of the SRLY rules is to limit the utilization of these losses to the separate income of the subsidiaries of the Company after October 19, 1994. As a result, the Company may have taxable income in future years that cannot be offset by these net operating loss carryforwards.
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The approximate effect of temporary differences as of December 31, 1997 and 1996 were as follows:
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
December 31, ------------ 1997 1996 ---- ---- Deferred tax assets: Net operating loss carryforwards................. $15,638 $10,486 Doubtful accounts................................ 156 1,000 Reserve for self insurance & warranty costs...... 1,467 2,391 Postretirement benefits and pension liabilities.. 453 330 Other restructuring reserves..................... 1,253 3,524 Other, net....................................... 1,024 2,386 ------- ------- Total deferred tax assets.................... 19,991 20,117 Valuation allowance.............................. (19,637) (18,549) ------- ------- Deferred tax asset, net..................... 354 1,568
Deferred tax liabilities: Fixed assets.................................... 354 1,568 ------- ------- Total deferred tax liability ................... 354 1,568 ------- ------- Net deferred tax asset (liability)............ $ 0 $ 0 ======= =======
The difference between the Company's effective tax rate and the Federal statutory rate is reconciled below: Year Ended December 31, ----------------------- 1997 1996 1995 ---- ---- ---- Benefit at statutory rate.............. (35.0)% (35.0)% (35.0)% Nondeductible amortization............. -- 39.4 0.4 State and local taxes, net............. -- 5.8 0.2 Increase in valuation allowance........ 32.8 44.0 21.2 Other.................................. 2.2 -- 0.2 ------ ------ ------ Effective tax rate provision (benefit). 0.0% 54.2% (13.0)% ====== ====== ======
10. PAYABLES TO AFFILIATES AND OTHER RELATED PARTY TRANSACTIONS
The Company relies upon borrowings from affiliates and operating cash flow to fund its liquidity needs. Interest expense on such borrowings from affiliates was $1,912 and $410 for the years ended December 31, 1997 and 1996, respectively and is included in interest and related amortization expense in the consolidated statement of operations. In March 1997 the Company entered into the M&F Facility with an affiliate.
The Company and certain affiliates of MacAndrews & Forbes are afforded coverage under selected common insurance policies obtained by MacAndrews & Forbes. The Company reimburses MacAndrews & Forbes its allocable portion of the cost of this insurance coverage. At December 31,
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
1997 and 1996, the Company owed $188 and $127, respectively, to MacAndrews & Forbes for services and out-of-pocket expenses. The Company purchases from and sells products to an affiliate on an arms-length basis. These amounts are not, in the aggregate, material.
MacAndrews & Forbes, certain of its affiliates and the Company are parties to a tax indemnification agreement (the "Tax Indemnification Agreement"). Pursuant to the Tax Indemnification Agreement, MacAndrews & Forbes will indemnify the Company, on an after-tax basis, against (i) any liability to the Internal Revenue Service for any consolidated federal income taxes of the Company for any period (or portion thereof) beginning on or after April 28, 1989 and ending on or before the date of the IPO, (ii) any liability to a state or local taxing authority for any combined state and local income taxes of the Company for any period (or portion thereof) beginning on or after April 28, 1989 and ending on or before the date of the IPO, to the extent such taxes arise in any return in which the Company or any affiliate thereof filed a combined return with MacAndrews & Forbes or any MacAndrews & Forbes affiliate, and (iii) any liability to the Internal Revenue Service or a state or local taxing authority, as the case may be, for any consolidated federal or combined state or local income taxes incurred by the Company as a result of the Company or any affiliate thereof being part of any consolidated or combined tax return with MacAndrews & Forbes or any MacAndrews & Forbes affiliate.
11. EMPLOYEE BENEFIT PLANS
PENSION PLANS:
The Company maintains pension and other retirement plans in various forms covering employees of the Company who meet eligibility requirements. The salaried retirement plan is a non-contributory defined benefit plan and provides benefits based on a formula of each participant's final average pay and years of service. The hourly pension plan is a non-contributory defined benefit plan and contains a flat benefit formula. The salaried and hourly plans provide reduced benefits for early retirement and the salaried plan takes into account offsets for Social Security benefits. The Company's policy is generally to contribute annually the minimum amount required pursuant to the Employee Retirement Income Security Act, as amended. Under certain circumstances, the Company may make additional contributions to the pension plans up to the maximum deductible amounts for income tax purposes.
The Skeeter Sale and the transfer of assets and related liabilities to plans established in 1996 resulted in one of the Company's plans having assets in excess of accumulated benefits as of December 31, 1996. The Skeeter Sale resulted in a curtailment of the pension plans which reduced the projected benefit obligation by $479, which was recorded in unrecognized net loss. The O'Brien Sale and Soniform Sale together resulted in a curtailment of the pension plans which reduced the projected benefit obligation by $777, which was primarily recognized in loss on sale of businesses.
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
The following tables reconcile the funded status of the Company's pension plans in 1997 and 1996 with the amount recognized in the Company's consolidated balance sheets as of the dates indicated.
The weighted-average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.50% as of December 31, 1997 and 1996. The rate of increase in future compensation levels reflected in such determination was 5% as of December 31, 1997 and 1996. The expected long-term rate of return on assets was 9% as of December 31, 1997, 1996 and 1995. Plan assets are primarily invested in U.S. government securities, corporate bond and equity funds and money market investments. Unrecognized items are amortized over the estimated remaining service lives of active employees.
Net pension expense before curtailment gains in 1997 for the Company's pension plans in 1997 and 1996 and for the Company's allocable portion of Holdings' pension plans in 1995 includes the following components:
Year Ended December 31, ----------------------- 1997 1996 1995 ---- ---- ---- Service cost-benefits attributed to service during the year................ $370 $543 $478 Interest cost on projected benefit obligation..................... 287 322 270 Actual return on plan assets.............. (437) (262) (250) Net amortization and deferrals............ 126 115 138 ---- ---- ---- Net pension expense before curtailment gains in 1997.......................... $346 $718 $636 ==== ==== ====
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
SAVINGS PLAN:
The Company maintains employee savings plans under Section 401(k) of the Internal Revenue Code. These plans cover substantially all of the Company's full-time U.S. employees and allows employees to contribute a portion of their salary to the plans. The Company matches employee contributions at predetermined rates. Amounts charged to expense for matching contributions were $114, $298 and $523 for the years ended December 31, 1997, 1996 and 1995, respectively.
STOCK OPTION PLAN:
The Company adopted the Meridian Sports Inc. 1994 Stock Option Plan (the "Stock Option Plan") prior to the effectiveness of the IPO. The Company applies APB Opinion No. 25 and related Interpretations in accounting for the Stock Option Plan. Under APB Opinion No. 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation cost has been recognized. Had compensation cost for the Stock Option Plan been determined consistent with SFAS No. 123, the effect would not be significant.
Under the terms of the Stock Option Plan, incentive stock options ("ISOs") may be granted to key employees of the Company and any of its affiliates from time to time. Such options vest ratably over three or four-year periods. The aggregate number of shares of common stock as to which options and rights may be granted under the Stock Option Plan may not exceed 500,000.
The following table summarizes the stock option transactions under the Stock Option Plan:
Option Price Shares per share ($) ------ ------------- Option outstanding at January 1, 1995...... 200,000 11.00 Canceled................................. (32,750) 11.00 -------- Options outstanding at December 31, 1995... 167,250 11.00 Granted.................................. 50,000 3.50 Canceled................................. (149,750) 11.00 -------- Options outstanding at December 31, 1996... 67,500 3.50-11.00 Granted.................................. 125,000 0.75 Canceled................................. (53,000) 3.50-11.00 -------- Options outstanding at December 31, 1997... 139,500 0.75-11.00 ========
Of such options, 10,875 were exercisable at December 31, 1997, 25,417 were exercisable at December 31, 1996, and 41,813 were exercisable at December 31, 1995. The weighted average remaining contractual life of the options outstanding was approximately 9.4 years, 8.9 years and 8.8 years at December 31, 1997, 1996 and 1995, respectively. The weighted average fair value of options granted during 1997 and 1996 was approximately $84 and $95, respectively.
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
12. COMMITMENTS AND CONTINGENCIES
On August 29, 1996, an action known as Shelton Smith, on behalf of himself and others similarly situated v. Sunchaser Marine, MasterCraft Boat Company, Inc., WetJet, A Division of MasterCraft and Meridian Sports Incorporated, was brought in the 207th District Court of Comal County, Texas by Shelton Smith on behalf of himself and a putative nationwide class of WetJet personal watercraft consumers, asserting claims against the Company, WetJet, MasterCraft, and Sunchaser Marine, Inc. ("Sunchaser") under the Texas Deceptive Trade Practices Act ("DTPA") and the Uniform Commercial Code for alleged breaches of express and implied warranties with respect to the sale of the WetJet personal watercraft units. The complaint also alleges that MasterCraft and/or WetJet were utilized as alter egos or mere instrumentalities of the Company. Shortly thereafter, Sunchaser, a WetJet dealer, filed a cross-action against MasterCraft, WetJet, and the Company asserting various causes of action based on allegations that the cross-defendants breached various warranties and representations relating to the dealer contract and the supply of merchantable WetJet units to the dealer. Sunchaser subsequently amended its third-party petition to add those allegations on behalf of a class of all entities who were retailers, dealers or distributors of the WetJet units or who performed warranty work on the units. Sunchaser also seeks to hold the Company liable under alter ego theories of liability. Finally, Watercraft Rentals, Inc., Randow L. Knodel and Harriet Fortson ("WaterCraft Rentals") intervened in the lawsuit and now assert, on behalf of themselves and a putative class of entities who purchased the WetJet units for purposes of renting or leasing them, causes of action for violations of the Texas DTPA, breach of express and implied warranties, and breach of contract. Watercraft Rentals, et al., also seek to hold the Company liable under alter ego theories of liability.
Meridian has filed a special appearance in the case, contending that the Texas court cannot assert personal jurisdiction over Meridian. MasterCraft and WetJet have filed answers and a Motion to Deny Class Certification and Smith, Sunchaser and WaterCraft Rentals have filed motions to certify the class they purport to represent. The case is presently in the early stages of discovery. Management of the Company and of MasterCraft intend to vigorously defend the claims against them.
The Company currently leases manufacturing and sales facilities and various types of equipment under operating lease agreements expiring through 2033. Rental expense was $472, $592, and $961 for the years ended December 31, 1997, 1996 and 1995, respectively. Minimum rental commitments under all noncancellable operating leases with remaining lease terms in excess of one year from December 31, 1997, was approximately $1,346; such commitments for each of the five years subsequent to December 31, 1997 are $152, $63, $63, $32 and $32 respectively.
Under certain conditions, the Company is also obligated to repurchase new inventory repossessed from distributors by financial institutions which provide credit to boat dealerships and distributors. Such inventory is generally resold to other customers of the Company, without a significant effect on the results of operations of the Company. The contingent obligation of the
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Company under such floorplanning agreements aggregated approximately $27,000 and $29,000 at December 31, 1997 and 1996, respectively.
The Company and MacAndrews Holdings are involved in certain claims and legal actions arising in the ordinary course of business, including environmental matters. In the opinion of management, the ultimate disposition of these matters is not expected to have a material adverse effect on the Company's consolidated financial condition or results of operations. The Company has entered into a cross-indemnification agreement with MacAndrews Holdings pursuant to which it will indemnify Holdings against all liabilities related to businesses transferred to the Company, and MacAndrews Holdings will indemnify the Company against all liabilities of MacAndrews Holdings other than liabilities related to the businesses transferred to the Company.
13. CASH FLOW REPORTING
The Company uses the indirect method to report cash flows from operating activities. Interest paid for the years ended December 31, 1997, 1996 and 1995 was approximately $2,119, $1,745 and $3,295, respectively. Income taxes paid were $281, $122 and $609 for the years ended December 31, 1997, 1996 and 1995, respectively.
14. PREFERRED STOCK
The Company has authorized 10,000,000 shares of preferred stock, par value $0.01 per share. The Company's Certificate of Incorporation authorizes the Board of Directors to provide for the issuance of a series of preferred stock, to establish the number of shares of each such series and to fix the designation, powers, preferences and rights of the shares of each such series and any qualifications, limitations or restrictions thereof.
15. EARNINGS PER COMMON SHARE
During the fourth quarter of 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share", the effect of which was not significant.
Basic and diluted earnings per common share has been computed based on 8,000,000 weighted average shares outstanding for the years ended December 31, 1997, 1996 and 1995, respectively. The effect of the outstanding stock options is anti-dilutive for each of the periods presented as the Company reported net losses for such periods.
MERIDIAN SPORTS INCORPORATED VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS)
- ------------------ * Includes $100 and $1,241 of restructuring charges related to the personal watercraft business in 1996 and 1995, respectively.
** The allowance for doubtful accounts was reduced by $364 in 1997 as a result of the O'Brien Sale and the Soniform Sale and by $540 in 1996 as a result of the Skeeter Sale and the BW Sale.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) (1) and (2) Financial Statements and Schedule.
See Index to Financial Statements and Schedule which appears on page herein.
(3) Exhibits
Exhibit No. Description ----------- ----------- 2.1 Stock Purchase Agreement by and between Yamaha and the Company dated January 22, 1996. (Incorporated by reference to Exhibit 1 to Form 8-K dated February 14, 1996) 2.2 Amendment No. 1 to Stock Purchase Agreement by and between Yamaha and the Company dated January 31, 1996. (Incorporated by reference to Exhibit 2 to Form 8-K dated February 14, 1996) 2.3 Asset Purchase Agreement, dated March 29, 1996, among Brunswick Corporation, Boston Whaler, Inc. (now known as BW Sale Corp.) and the Company. (Incorporated by reference to Exhibit 2.3 to Form 10-K for the year ended December 31, 1995) 2.4 Asset Purchase Agreement among Earth and Ocean Sports, Inc., O'Brien International, Inc. (now known as OB Sale Corp.) and the Company dated July 31, 1997. (*) 2.5 Asset Purchase Agreement among Johnson Worldwide Associates, Inc., Soniform, Inc. (now known as GK Sale Corp.) and the Company dated October 8, 1997. (*) 3.1 Certificate of Incorporation of the Company. (Incorporated by reference from Form S-1 dated July 7, 1994) 3.1.1 Certificate of Amendment of the Certificate of Incorporation of the Company, filed with the Delaware Secretary of State on July 22, 1994. (Incorporated by reference to Exhibit 3.1.1 to Amendment No.1 to Form S-1 dated September 21, 1994) 3.2 By-laws of the Company. (Incorporated by reference to Exhibit 3.2 to Form S-1 dated July 7, 1994) 4.1 Articles of Incorporation of the Company. (See Exhibit 3.1) 4.2 By-laws of the Company. (See Exhibit 3.2) 10.1 Subordinated Revolving Credit Agreement between the Company and Revlon Group Incorporated, now known as RGI Group Incorporated, dated as of January 11, 1996 (Incorporated by reference to Exhibit 10.7 to Form 10-K for the year ended December 31, 1995) 10.2 Meridian Sports Incorporated 1994 Stock Option Plan (Incorporated by reference to Exhibit 10.6 to Amendment No.1 to Form S-1 dated September 21, 1994)
Exhibit No. Description ----------- ----------- 10.3 Registration Rights Agreement between Old Meridian and Meridian Sports Incorporated. (Incorporated by reference to Exhibit 10.13 to Form 10-K for the year ended December 31, 1994) 10.4 Cross-Indemnification Agreement Between National Health Care Group, Inc. and Meridian Sports Incorporated. (Incorporated by reference to Exhibit 10.14 to Form 10-K for the year ended December 31, 1994) 10.5 Tax Indemnification Agreement among Mafco Holdings Inc., MacAndrews & Forbes Holdings Inc., New Coleman Holdings Inc., Old Meridian, Meridian Sports Incorporated and the Subsidiaries of Meridian Sports Incorporated. (Incorporated by reference to Exhibit 10.15 to Form 10-K for the year ended December 31, 1994) 10.6 Revolving Credit Agreement between the Company and Revlon Group Incorporated, now known as RGI Group Incorporated, dated March 28, 1997. (Incorporated by reference to Exhibit 10.17 to Form 10-K for the year ended December 31, 1996) 10.7 First Amendment dated as of September 30, 1997 to Revolving Credit Agreement between the Company and RGI Group Incorporated, dated March 28, 1997. (*) 10.8 Second Amendment dated as of March 3, 1998 to Revolving Credit Agreement between the Company and RGI Group Incorporated, dated March 28, 1997. (*) 21.1 List of Subsidiaries of the Registrant. (*) 24.1 Powers of Attorney. (*) 27 Financial Data Schedule. (*)
(*) Filed herewith
(b) There were no reports on Form 8-K filed in the fourth quarter of 1997.
SIGNATURES
Pursuant to the requirements 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.
MERIDIAN SPORTS INCORPORATED (Registrant)
Date: March 31, 1998 By: /s/ J. Eric Hanson ------------------- -------------------------- J. Eric Hanson President and Chief Executive Officer; Director
Date: March 31, 1998 By: /s/ James A. Valkenaar ------------------- -------------------------- James A. Valkenaar Vice President and Principal Accounting Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: March 31, 1998 By: Ronald O. Perelman* ------------------- -------------------------- Ronald O. Perelman Chairman of the Board and Director
Date: March 31, 1998 By: Jerry W. Levin* ------------------- -------------------------- Jerry W. Levin Director
Date: March 31, 1998 By: John P. Murray, Jr.* ------------------- -------------------------- John P. Murray, Jr. Director
Date: March 31, 1998 By: Martin D. Payson* ------------------- -------------------------- Martin D. Payson Director
Date: March 31, 1998 By: Bruce Slovin* ------------------- -------------------------- Bruce Slovin Director
* Executed on behalf of the named director pursuant to a power of attorney.
Date: March 31, 1998 By: /s/Thomas E. Kohut ------------------- -------------------------- Thomas E. Kohut Attorney-in-fact
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) AND (2) AND (d) INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE YEAR ENDED DECEMBER 31, 1997
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
Page ----
The following consolidated financial statements of Meridian Sports Incorporated and Subsidiaries are included in Item 8:
Report of Independent Auditors...................................
Consolidated Balance Sheets as of December 31, 1997 and 1996.....
Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995...........
Consolidated Statements of Stockholders' (Deficit) Equity for the years ended December 31, 1997, 1996 and 1995...........
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995...........
Notes to Consolidated Financial Statements.......................
The following consolidated financial statement schedule of Meridian Sports Incorporated and Subsidiaries is included in Item 14(d):
Schedule II - Valuation and Qualifying Accounts and Reserves.....
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors Meridian Sports Incorporated
We have audited the accompanying consolidated balance sheets of Meridian Sports Incorporated and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' (deficit) equity, and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the consolidated financial statement schedule listed in the Index at Item 14(a). These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule 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 consolidated financial position of Meridian Sports Incorporated and Subsidiaries at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.
ERNST & YOUNG LLP
New York, New York March 5, 1998
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
December 31, ------------------ 1997 1996 --------- -------- ASSETS Current assets: Cash $ 1,123 $ 1,968 Accounts receivable, net of allowances of $401 and $2,578, respectively 3,681 8,467 Inventories 8,040 15,537 Prepaid expenses and other 3,974 3,152 ------- ------- Total current assets 16,818 29,124
Property, plant and equipment, net 6,716 13,243 Other assets 350 1,858 ------- ------- $23,884 $44,225 ======= ======= LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities: Current portion of long-term debt $ 13 Accounts payable $ 2,103 6,487 Accrued expenses and other current liabilities 8,122 23,139 -------- --------- Total current liabilities 10,225 29,639
Long-term debt 17,515 19,282 Other liabilities 5,617 2,258
Commitments and contingencies
Stockholders' deficit: Preferred stock, par value $0.01 per share; 10,000,000 shares authorized; no shares issued and outstanding Common stock, par value $0.01 per share; 50,000,000 shares authorized; 8,000,000 shares issued and outstanding 80 80 Additional paid-in capital 131,951 131,951 Accumulated deficit (141,504) (138,985) -------- --------- Total stockholders' deficit (9,473) (6,954) -------- --------- $ 23,884 $ 44,225 ======== =========
See Notes to Consolidated Financial Statements
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
See Notes to Consolidated Financial Statements
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
See Notes to Consolidated Financial Statements
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
See Notes to Consolidated Financial Statements
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
1. BACKGROUND AND BASIS OF FINANCIAL STATEMENT PRESENTATION
Meridian Sports Incorporated ("Meridian", or the "Company") was formed in June 1994. As a result of an initial public offering of its common stock (the "IPO") in October 1994, the Company is a 65% indirectly owned subsidiary of MacAndrews & Forbes Holdings Inc. ("MacAndrews Holdings"), a corporation wholly-owned through Mafco Holdings Inc. (together with its affiliates, "MacAndrews & Forbes").
On October 8, 1997, the Company entered into and consummated an agreement with Johnson Worldwide Associates, Inc. ("JWA") pursuant to which JWA purchased certain assets and assumed certain liabilities of the Company's Soniform scuba equipment business ("Soniform") for approximately $1,756 (the "Soniform Sale"). The results of operations of Soniform are included in "Former operations" in the accompanying consolidated statements of operations for all periods presented through the date of the Soniform Sale.
On July 31, 1997, the Company entered into and consummated an agreement with Earth and Ocean Sports, Inc. ("EOS") pursuant to which EOS purchased certain assets and assumed certain liabilities of the Company's O'Brien towable watersports business ("O'Brien"), for approximately $4,930 (the "O'Brien Sale"). The results of operations of O'Brien are included in "Former operations" in the accompanying consolidated statements of operations for all periods presented through the date of the O'Brien Sale.
On May 31, 1996, the Company consummated a transaction with Brunswick Corporation ("Brunswick") pursuant to which Brunswick purchased certain assets and assumed certain liabilities of BW Sale Corp., formerly Boston Whaler, Inc. ("BW") for approximately $26,155 (the "BW Sale"). The results of operations of BW are included in "Former operations" in the accompanying consolidated statements of operations for all periods presented through the date of the BW Sale.
On January 31, 1996, the Company sold all of the capital stock of its wholly-owned subsidiary Skeeter Products, Inc. ("Skeeter") to Yamaha Motor Corporation, U.S.A. ("Yamaha") for approximately $33,900 (the "Skeeter Sale"). The results of operations of Skeeter are included in "Former operations" in the accompanying consolidated statements of operations for all periods presented through the date of the Skeeter Sale.
Meridian is a holding company which operates through its wholly-owned subsidiary MasterCraft Boat Company ("MasterCraft"). MasterCraft is a designer, manufacturer and marketer of specialized ski boats targeted principally at boating and waterskiing enthusiasts.
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
2. DISPOSALS OF BUSINESSES, UNUSUAL ITEM AND EXTRAORDINARY ITEMS
On October 8, 1997, the Company entered into and consummated an agreement with JWA pursuant to which JWA purchased certain assets and assumed certain liabilities of the Company's Soniform scuba equipment business for approximately $1,756. The Soniform Sale resulted in a pre-tax loss of approximately $750. The proceeds of the Soniform Sale were used to repay indebtedness of the Company under the M&F Facility, as hereafter defined. In connection with the Soniform Sale, the Company entered into a lease with JWA, pursuant to which it will lease the Soniform manufacturing facility to JWA for a minimum one year period for $80.
On July 31, 1997, the Company entered into and consummated an agreement with EOS pursuant to which EOS purchased certain assets and assumed certain liabilities of the Company's O'Brien towable watersports business, for approximately $4,930. The O'Brien Sale resulted in a pre-tax gain of approximately $200. The proceeds of the O'Brien Sale were used to permanently repay indebtedness of the Company under a credit agreement with a bank entered into in March 1997 (the "O'Brien Credit Agreement") and to repay other indebtedness under the M&F Facility, as hereafter defined. In connection with the permanent repayment of borrowings under the O'Brien Credit Agreement, the Company recorded an extraordinary charge of $408 to write off all related deferred financing costs.
On May 31, 1996, the Company consummated a transaction with Brunswick pursuant to which Brunswick purchased certain assets and assumed certain liabilities of BW for $26,155, of which $1,250 is held in escrow through May 1998. The proceeds of the BW Sale were used to repay indebtedness of the Company. The BW Sale resulted in a pre-tax gain of $4,900. The Company also recorded, in 1996, a valuation adjustment of $1,339 related to O'Brien. Due to the permanent commitment reduction in 1996 under the Company's then existing credit agreement with a group of banks (the "Company Credit Agreement") as a result of the Skeeter Sale and BW Sale, the Company recorded an extraordinary charge of $1,332 to writeoff all remaining deferred financing costs. In January 1997, the Company Credit Agreement was terminated and all collateral thereunder was released.
On January 31, 1996, the Company sold Skeeter to Yamaha pursuant to a Stock Purchase Agreement by and between Yamaha and the Company for approximately $33,900. The proceeds of the Skeeter Sale were used to repay indebtedness of the Company. The Skeeter Sale resulted in a pre-tax gain of $13,289, net of a goodwill writeoff of $10,094.
3. RESTRUCTURING
In 1995, the Company recorded a provision for the then estimated cost of the restructuring of its personal watercraft business ("WetJet"). In 1996, the Company recorded additional provisions to reflect revisions to its earlier cost estimates due, in part, to (i) unanticipated delays in implementing the restructuring program and (ii) a longer than anticipated period of time required to complete the
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
execution of the restructuring program. Such additional time requirements coincided with a general deterioration in the overall market for personal watercraft and resulted in the Company's offering of more costly incentives to facilitate the sell-through of product in retail dealer inventories. The Company recorded charges in cost of sales of $18,200 and $22,581 in 1996 and 1995, respectively, which include: (i) writedowns of inventory to estimated net realizable value; (ii) provisions for expected warranty costs on models sold; and (iii) writedowns of tooling and equipment to estimated net realizable value. Additionally, the Company recorded charges in selling, general and administrative expenses of $3,800 and $10,617 in 1996 and 1995, respectively, which include: (i) provisions for expected costs to ensure sell-through of products in retail dealers inventories; (ii) writedowns of accounts receivable to estimated net realizable value; and (iii) estimated costs of litigation related to the personal watercraft business. In addition, the Company recorded in selling, general and administrative expenses a charge of $1,893 in 1995 to writeoff all remaining goodwill related to the personal watercraft business. In 1995, the Company began a restructuring of its WetJet business. In 1997, the Company substantially completed the program and no further charges were recorded in connection with such program. The Company no longer manufactures personal watercraft. There can be no assurance the WetJet liabilities can be satisfied within the reserves established.
In 1996, the Company recorded in selling general and administrative expenses, a one-time charge of $1,600 comprised primarily of severance costs related to the restructuring of its headquarters office. All liabilities for the headquarters restructuring were paid as of December 31, 1997.
4. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company and its subsidiaries after elimination of all material intercompany accounts and transactions.
REVENUE RECOGNITION:
The Company recognizes net sales upon shipments of merchandise when title and all other incidents of ownership transfer have been completed. Net sales are comprised of gross sales less expected customer returns and allowances.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:
Outstanding letters of credit aggregated approximately $3,342 and $1,776 at December 31, 1997 and 1996, respectively, of which letters of credit aggregating $1,745 and $1,739, respectively, are cash collateralized. Trade receivables for boats sold to dealers are generally collateralized by the related boat inventory or letters of credit. Sales made through floor plan arrangements transfer substantially all credit risk to the financing entity.
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
CONCENTRATIONS OF CREDIT RISK:
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of trade receivables. Credit risk on trade receivables is minimized as a result of the Company's floor plan arrangements, the use of trade letters of credit and the large and diversified nature of the Company's customer base, which includes customers located throughout the entire United States as well as several international customers.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amount of the Company's long-term debt approximates its fair value.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is recorded at cost and depreciated on a straight-line basis over the estimated useful lives of three to forty years. Leasehold improvements are amortized over their estimated useful lives or terms of the leases, whichever is shorter. Repairs and maintenance are charged to operations as incurred, and expenditures for additions and improvements are capitalized.
STOCK-BASED COMPENSATION:
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has elected to account for stock-based compensation plans using the intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at date of the grant over the amount an employee must pay to acquire the stock.
INCOME TAXES:
The Company accounts for income taxes in accordance with the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws.
FLOOR PLAN REIMBURSEMENT COSTS:
The Company may enter into various programs whereby it agrees to reimburse its dealers for certain floor plan interest costs incurred by such dealers for limited periods of time, in accordance with industry practice. Such costs are included in selling, general and administrative expenses in the accompanying consolidated statements of operations.
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
RESEARCH AND DEVELOPMENT:
Research and development expenditures are expensed as incurred. The amounts charged against operations for the years ended December 31, 1997, 1996 and 1995 were $1,883, $1,795, and $3,254, respectively.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
The accruals established for the WetJet restructuring are based on management's estimates of the costs of the restructuring programs. The restructuring programs are substantially complete. There can be no assurance that the programs will be completed within the reserves established.
5. INVENTORIES
Inventories are valued at the lower of cost or market. Inventory costs are determined principally by the last-in, first-out ("LIFO") method. Inventories consisted of the following:
December 31, -------------------------- 1997 1996 ---------- -------
Raw material and supplies....................... $3,394 $6,372 Work-in-process................................. 753 1,378 Finished goods.................................. 4,781 8,896 ----- ----- 8,928 16,646 Less: Lifo allowance............................ (888) (1,109) -------- --------- $8,040 $15,537 ====== =======
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
6. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consisted of the following:
December 31, ------------------ 1997 1996 ------- --------- Land .................................. $622 $1,372 Buildings and improvements............. 5,072 8,472 Machinery and equipment ............. 4,336 12,911 ------- --------- 10,030 22,755 Accumulated depreciation............... (3,314) (9,512) -------- --------- $6,716 $13,243 ======== =========
Depreciation expense was $1,587, $2,527 and $4,379 for the years ended December 31, 1997, 1996 and 1995, respectively.
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following:
December 31, ------------ 1997 1996 -------- -------- Insurance retentions....................... $2,254 $1,821 Advertising and promotion.................. 1,567 1,159 Warranty................................... 1,056 3,920 Compensation and related accruals.......... 870 1,724 Pension plans.............................. 541 1,580 Interest................................... 170 141 State income and other taxes............... 149 1,202 Payable to affiliates...................... 188 127 WetJet product sell-through................ 510 5,888 Corporate restructuring ................... -- 897 Other...................................... 817 4,680 -------- -------- $8,122 $23,139 ====== =======
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
8. LONG-TERM DEBT
Long-term debt consisted of the following: December 31, ------------ 1997 1996 -------- ------- M&F Facility (a)......................... $17,515 $ -- Borrowings from affiliates (b)........... -- 19,245 Capitalized lease obligations............ -- 50 ------- ------- 17,515 19,295 Less: Current portion................... -- (13) ------- ------- $17,515 $19,282 ======= ======= -------------------- (a) In March 1997, the Company entered into a credit agreement with an affiliate (as amended, the "M&F Facility") to refinance existing borrowings from affiliates, to finance the operations, including seasonal working capital needs and restructuring liabilities of the Company. The M&F Facility originally provided for borrowings on a revolving basis of up to $30,000. In connection with the Soniform Sale, the M&F Facility was amended to reduce the M&F Facility commitment to $20,000, reflecting the Company's lower seasonal working capital requirements. The M&F Facility bears interest at the prime rate, as defined, plus 1% (9.5% at December 31, 1997) and matures at December 1, 1999. Loans under the M&F Facility are guaranteed by the subsidiaries of the Company and a pledge of Cherokee Cove. Borrowings outstanding under the M&F Facility are required to be prepaid with the net cash proceeds of the sales of any subsidiaries of the Company. The commitment under the M&F Facility shall be reduced by such required prepayments. The M&F Facility contains a minimum net worth covenant. The M&F Facility contains typical events of default including change of control, material adverse change and non-payment of obligations.
(b) Prior to the establishment of the M&F Facility, the Company relied upon borrowings from MacAndrews & Forbes for its liquidity needs. Such borrowings were made on a revolving basis and bore interest, payable quarterly at each fiscal quarter end, at the prime rate (8.25% at December 31, 1996). Borrowings from affiliates were classified as long-term debt on the consolidated balance sheet since the Company refinanced such borrowings with borrowings under the M&F Facility.
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
9. INCOME TAXES
The Company files separate income tax returns. The Company has recorded a provision (benefit) for income taxes as follows:
Year Ended December 31, ----------------------- 1997 1996 1995 ---- ---- ---- Current: Federal................ $ -- $ -- $ -- State and local........ -- 1,147 164 Foreign................ -- -- 122 ------- ------- ------- -- 1,147 286 ------- ------- ------- Deferred: Federal................ -- 5,811 (5,906) State and local........ -- -- -- ------- ------- ------- $ -- $ 6,958 $(5,620) ======= ======= =======
During 1997, the Company incurred a loss for which it has not recorded a tax benefit as the Company is not assured it will be able to realize a benefit for such loss in the future.
During 1996, the Company recorded a valuation allowance against previously recorded deferred tax assets and a provision for state and local income taxes related to the gains arising from the Skeeter Sale and BW Sale.
During 1995, the Company recorded a federal benefit on its loss for the year ended December 31, 1995 to the extent that it projected income before income taxes in 1996, due to the gain expected from the Skeeter Sale.
At December 31, 1997, the Company had net operating loss carryforwards of approximately $41,000 expiring in the years 2005 through 2012. Certain loss carryforwards are subject to certain limitations under the separate return limitation year ("SRLY") rules. The effect of the SRLY rules is to limit the utilization of these losses to the separate income of the subsidiaries of the Company after October 19, 1994. As a result, the Company may have taxable income in future years that cannot be offset by these net operating loss carryforwards.
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The approximate effect of temporary differences as of December 31, 1997 and 1996 were as follows:
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
December 31, ------------ 1997 1996 ---- ---- Deferred tax assets: Net operating loss carryforwards................. $15,638 $10,486 Doubtful accounts................................ 156 1,000 Reserve for self insurance & warranty costs...... 1,467 2,391 Postretirement benefits and pension liabilities.. 453 330 Other restructuring reserves..................... 1,253 3,524 Other, net....................................... 1,024 2,386 ------- ------- Total deferred tax assets.................... 19,991 20,117 Valuation allowance.............................. (19,637) (18,549) ------- ------- Deferred tax asset, net..................... 354 1,568
Deferred tax liabilities: Fixed assets.................................... 354 1,568 ------- ------- Total deferred tax liability ................... 354 1,568 ------- ------- Net deferred tax asset (liability)............ $ 0 $ 0 ======= =======
The difference between the Company's effective tax rate and the Federal statutory rate is reconciled below: Year Ended December 31, ----------------------- 1997 1996 1995 ---- ---- ---- Benefit at statutory rate.............. (35.0)% (35.0)% (35.0)% Nondeductible amortization............. -- 39.4 0.4 State and local taxes, net............. -- 5.8 0.2 Increase in valuation allowance........ 32.8 44.0 21.2 Other.................................. 2.2 -- 0.2 ------ ------ ------ Effective tax rate provision (benefit). 0.0% 54.2% (13.0)% ====== ====== ======
10. PAYABLES TO AFFILIATES AND OTHER RELATED PARTY TRANSACTIONS
The Company relies upon borrowings from affiliates and operating cash flow to fund its liquidity needs. Interest expense on such borrowings from affiliates was $1,912 and $410 for the years ended December 31, 1997 and 1996, respectively and is included in interest and related amortization expense in the consolidated statement of operations. In March 1997 the Company entered into the M&F Facility with an affiliate.
The Company and certain affiliates of MacAndrews & Forbes are afforded coverage under selected common insurance policies obtained by MacAndrews & Forbes. The Company reimburses MacAndrews & Forbes its allocable portion of the cost of this insurance coverage. At December 31,
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
1997 and 1996, the Company owed $188 and $127, respectively, to MacAndrews & Forbes for services and out-of-pocket expenses. The Company purchases from and sells products to an affiliate on an arms-length basis. These amounts are not, in the aggregate, material.
MacAndrews & Forbes, certain of its affiliates and the Company are parties to a tax indemnification agreement (the "Tax Indemnification Agreement"). Pursuant to the Tax Indemnification Agreement, MacAndrews & Forbes will indemnify the Company, on an after-tax basis, against (i) any liability to the Internal Revenue Service for any consolidated federal income taxes of the Company for any period (or portion thereof) beginning on or after April 28, 1989 and ending on or before the date of the IPO, (ii) any liability to a state or local taxing authority for any combined state and local income taxes of the Company for any period (or portion thereof) beginning on or after April 28, 1989 and ending on or before the date of the IPO, to the extent such taxes arise in any return in which the Company or any affiliate thereof filed a combined return with MacAndrews & Forbes or any MacAndrews & Forbes affiliate, and (iii) any liability to the Internal Revenue Service or a state or local taxing authority, as the case may be, for any consolidated federal or combined state or local income taxes incurred by the Company as a result of the Company or any affiliate thereof being part of any consolidated or combined tax return with MacAndrews & Forbes or any MacAndrews & Forbes affiliate.
11. EMPLOYEE BENEFIT PLANS
PENSION PLANS:
The Company maintains pension and other retirement plans in various forms covering employees of the Company who meet eligibility requirements. The salaried retirement plan is a non-contributory defined benefit plan and provides benefits based on a formula of each participant's final average pay and years of service. The hourly pension plan is a non-contributory defined benefit plan and contains a flat benefit formula. The salaried and hourly plans provide reduced benefits for early retirement and the salaried plan takes into account offsets for Social Security benefits. The Company's policy is generally to contribute annually the minimum amount required pursuant to the Employee Retirement Income Security Act, as amended. Under certain circumstances, the Company may make additional contributions to the pension plans up to the maximum deductible amounts for income tax purposes.
The Skeeter Sale and the transfer of assets and related liabilities to plans established in 1996 resulted in one of the Company's plans having assets in excess of accumulated benefits as of December 31, 1996. The Skeeter Sale resulted in a curtailment of the pension plans which reduced the projected benefit obligation by $479, which was recorded in unrecognized net loss. The O'Brien Sale and Soniform Sale together resulted in a curtailment of the pension plans which reduced the projected benefit obligation by $777, which was primarily recognized in loss on sale of businesses.
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
The following tables reconcile the funded status of the Company's pension plans in 1997 and 1996 with the amount recognized in the Company's consolidated balance sheets as of the dates indicated.
The weighted-average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.50% as of December 31, 1997 and 1996. The rate of increase in future compensation levels reflected in such determination was 5% as of December 31, 1997 and 1996. The expected long-term rate of return on assets was 9% as of December 31, 1997, 1996 and 1995. Plan assets are primarily invested in U.S. government securities, corporate bond and equity funds and money market investments. Unrecognized items are amortized over the estimated remaining service lives of active employees.
Net pension expense before curtailment gains in 1997 for the Company's pension plans in 1997 and 1996 and for the Company's allocable portion of Holdings' pension plans in 1995 includes the following components:
Year Ended December 31, ----------------------- 1997 1996 1995 ---- ---- ---- Service cost-benefits attributed to service during the year................ $370 $543 $478 Interest cost on projected benefit obligation..................... 287 322 270 Actual return on plan assets.............. (437) (262) (250) Net amortization and deferrals............ 126 115 138 ---- ---- ---- Net pension expense before curtailment gains in 1997.......................... $346 $718 $636 ==== ==== ====
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
SAVINGS PLAN:
The Company maintains employee savings plans under Section 401(k) of the Internal Revenue Code. These plans cover substantially all of the Company's full-time U.S. employees and allows employees to contribute a portion of their salary to the plans. The Company matches employee contributions at predetermined rates. Amounts charged to expense for matching contributions were $114, $298 and $523 for the years ended December 31, 1997, 1996 and 1995, respectively.
STOCK OPTION PLAN:
The Company adopted the Meridian Sports Inc. 1994 Stock Option Plan (the "Stock Option Plan") prior to the effectiveness of the IPO. The Company applies APB Opinion No. 25 and related Interpretations in accounting for the Stock Option Plan. Under APB Opinion No. 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation cost has been recognized. Had compensation cost for the Stock Option Plan been determined consistent with SFAS No. 123, the effect would not be significant.
Under the terms of the Stock Option Plan, incentive stock options ("ISOs") may be granted to key employees of the Company and any of its affiliates from time to time. Such options vest ratably over three or four-year periods. The aggregate number of shares of common stock as to which options and rights may be granted under the Stock Option Plan may not exceed 500,000.
The following table summarizes the stock option transactions under the Stock Option Plan:
Option Price Shares per share ($) ------ ------------- Option outstanding at January 1, 1995...... 200,000 11.00 Canceled................................. (32,750) 11.00 -------- Options outstanding at December 31, 1995... 167,250 11.00 Granted.................................. 50,000 3.50 Canceled................................. (149,750) 11.00 -------- Options outstanding at December 31, 1996... 67,500 3.50-11.00 Granted.................................. 125,000 0.75 Canceled................................. (53,000) 3.50-11.00 -------- Options outstanding at December 31, 1997... 139,500 0.75-11.00 ========
Of such options, 10,875 were exercisable at December 31, 1997, 25,417 were exercisable at December 31, 1996, and 41,813 were exercisable at December 31, 1995. The weighted average remaining contractual life of the options outstanding was approximately 9.4 years, 8.9 years and 8.8 years at December 31, 1997, 1996 and 1995, respectively. The weighted average fair value of options granted during 1997 and 1996 was approximately $84 and $95, respectively.
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
12. COMMITMENTS AND CONTINGENCIES
On August 29, 1996, an action known as Shelton Smith, on behalf of himself and others similarly situated v. Sunchaser Marine, MasterCraft Boat Company, Inc., WetJet, A Division of MasterCraft and Meridian Sports Incorporated, was brought in the 207th District Court of Comal County, Texas by Shelton Smith on behalf of himself and a putative nationwide class of WetJet personal watercraft consumers, asserting claims against the Company, WetJet, MasterCraft, and Sunchaser Marine, Inc. ("Sunchaser") under the Texas Deceptive Trade Practices Act ("DTPA") and the Uniform Commercial Code for alleged breaches of express and implied warranties with respect to the sale of the WetJet personal watercraft units. The complaint also alleges that MasterCraft and/or WetJet were utilized as alter egos or mere instrumentalities of the Company. Shortly thereafter, Sunchaser, a WetJet dealer, filed a cross-action against MasterCraft, WetJet, and the Company asserting various causes of action based on allegations that the cross-defendants breached various warranties and representations relating to the dealer contract and the supply of merchantable WetJet units to the dealer. Sunchaser subsequently amended its third-party petition to add those allegations on behalf of a class of all entities who were retailers, dealers or distributors of the WetJet units or who performed warranty work on the units. Sunchaser also seeks to hold the Company liable under alter ego theories of liability. Finally, Watercraft Rentals, Inc., Randow L. Knodel and Harriet Fortson ("WaterCraft Rentals") intervened in the lawsuit and now assert, on behalf of themselves and a putative class of entities who purchased the WetJet units for purposes of renting or leasing them, causes of action for violations of the Texas DTPA, breach of express and implied warranties, and breach of contract. Watercraft Rentals, et al., also seek to hold the Company liable under alter ego theories of liability.
Meridian has filed a special appearance in the case, contending that the Texas court cannot assert personal jurisdiction over Meridian. MasterCraft and WetJet have filed answers and a Motion to Deny Class Certification and Smith, Sunchaser and WaterCraft Rentals have filed motions to certify the class they purport to represent. The case is presently in the early stages of discovery. Management of the Company and of MasterCraft intend to vigorously defend the claims against them.
The Company currently leases manufacturing and sales facilities and various types of equipment under operating lease agreements expiring through 2033. Rental expense was $472, $592, and $961 for the years ended December 31, 1997, 1996 and 1995, respectively. Minimum rental commitments under all noncancellable operating leases with remaining lease terms in excess of one year from December 31, 1997, was approximately $1,346; such commitments for each of the five years subsequent to December 31, 1997 are $152, $63, $63, $32 and $32 respectively.
Under certain conditions, the Company is also obligated to repurchase new inventory repossessed from distributors by financial institutions which provide credit to boat dealerships and distributors. Such inventory is generally resold to other customers of the Company, without a significant effect on the results of operations of the Company. The contingent obligation of the
MERIDIAN SPORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Company under such floorplanning agreements aggregated approximately $27,000 and $29,000 at December 31, 1997 and 1996, respectively.
The Company and MacAndrews Holdings are involved in certain claims and legal actions arising in the ordinary course of business, including environmental matters. In the opinion of management, the ultimate disposition of these matters is not expected to have a material adverse effect on the Company's consolidated financial condition or results of operations. The Company has entered into a cross-indemnification agreement with MacAndrews Holdings pursuant to which it will indemnify Holdings against all liabilities related to businesses transferred to the Company, and MacAndrews Holdings will indemnify the Company against all liabilities of MacAndrews Holdings other than liabilities related to the businesses transferred to the Company.
13. CASH FLOW REPORTING
The Company uses the indirect method to report cash flows from operating activities. Interest paid for the years ended December 31, 1997, 1996 and 1995 was approximately $2,119, $1,745 and $3,295, respectively. Income taxes paid were $281, $122 and $609 for the years ended December 31, 1997, 1996 and 1995, respectively.
14. PREFERRED STOCK
The Company has authorized 10,000,000 shares of preferred stock, par value $0.01 per share. The Company's Certificate of Incorporation authorizes the Board of Directors to provide for the issuance of a series of preferred stock, to establish the number of shares of each such series and to fix the designation, powers, preferences and rights of the shares of each such series and any qualifications, limitations or restrictions thereof.
15. EARNINGS PER COMMON SHARE
During the fourth quarter of 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share", the effect of which was not significant.
Basic and diluted earnings per common share has been computed based on 8,000,000 weighted average shares outstanding for the years ended December 31, 1997, 1996 and 1995, respectively. The effect of the outstanding stock options is anti-dilutive for each of the periods presented as the Company reported net losses for such periods.
MERIDIAN SPORTS INCORPORATED VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS)
- ------------------ * Includes $100 and $1,241 of restructuring charges related to the personal watercraft business in 1996 and 1995, respectively.
** The allowance for doubtful accounts was reduced by $364 in 1997 as a result of the O'Brien Sale and the Soniform Sale and by $540 in 1996 as a result of the Skeeter Sale and the BW Sale.