JOHNSON OUTDOORS INC - Annual Report: 2005 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
[
X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES
EXCHANGE ACT OF 1934
For
the
fiscal year ended September 30, 2005
OR
[____]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the
transition period from ______
to
______
Commission
file number 0-16255
JOHNSON
OUTDOORS INC.
(Exact
name of registrant as specified in its charter)
|
Wisconsin
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39-1536083
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|
|
(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer Identification No.)
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555
Main Street, Racine, Wisconsin 53403
(Address
of principal executive offices, including zip code)
(262)
631-6600
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to section 12(g) of the Act:
Class
A common stock, $.05 par value
(Title
of
Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes
[ ] No [ X ]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes
[ ] No [ X ]
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes
[ X
] No [ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. [ ]
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Exchange Act Rule 12b-2).
Yes
[ X
] No [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
[ ] No [ X ]
As
of
November 1, 2005, 7,796,841 shares
of
Class A and 1,219,667 shares
of
Class B common stock of the registrant were outstanding. The aggregate market
value of voting and non-voting common stock of the registrant held by
nonaffiliates of the registrant was approximately $82,553,084 on April 1, 2005
(the last business day of the registrant’s most recently completed second
quarter). For purposes of this calculation only, shares of all voting stock
are
deemed to have a market value of $18.57 per share, the closing price of the
Class A common stock as reported on the NASDAQ National Market on April 1,
2005.
Shares
of
common stock held by any executive officer or director of the registrant and
any
person who beneficially owns 10% or more of the outstanding common stock have
been excluded from this computation because such persons may be deemed to be
affiliates. This determination of affiliate status is not a conclusive
determination for other purposes.
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TABLE
OF CONTENTS
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F-1
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Forward
Looking Statements
Certain
matters discussed in this Form 10-K are “forward-looking statements,” and the
Company intends these forward-looking statements to be covered by the safe
harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995 and is including this statement for
purposes of those safe harbor provisions. These forward-looking statements
can
generally be identified as such because the context of the statement includes
phrases such as the Company “expects,” “believes” or other words of similar
meaning. Similarly, statements that describe the Company’s future plans,
objectives or goals are also forward-looking statements. Such forward-looking
statements are subject to certain risks and uncertainties which could cause
actual results or outcomes to differ materially from those currently
anticipated. Factors that could affect actual results or outcomes include
changes in consumer spending patterns; the Company’s success in implementing its
strategic plan, including its focus on innovation; actions of companies that
compete with the Company; the Company’s success in managing inventory; movements
in foreign currencies or interest rates; unanticipated issues related to the
Company’s military tent business; the success of suppliers and customers; the
ability of the Company to deploy its capital successfully; unanticipated
outcomes related to outsourcing certain manufacturing processes; unanticipated
outcomes related to outstanding litigation matters; adverse weather conditions;
and unanticipated events related to the terminated buy-out proposal.
Shareholders, potential investors and other readers are urged to consider these
factors in evaluating the forward-looking statements and are cautioned not
to
place undue reliance on such forward-looking statements. The forward-looking
statements included herein are only made as of the date of this Form 10-K.
The
Company assumes no obligation, and disclaims any obligation, to update such
forward-looking statements to reflect subsequent events or
circumstances.
Trademarks
We
have
registered the following trademarks, which are used in this Form 10-K: Minn
Kota®, Cannon®, Humminbird®, Bottomline®, Fishin' Buddy®, Silva®, Eureka!®, Old
Town®, Ocean Kayak®, Necky®, Escape®, Extrasport®, Carlisle®, SCUBAPRO®, and
UWATEC®.
PART
I
|
ITEM
1.
|
Johnson
Outdoors Inc. and its subsidiaries (the “Company”) design, manufacture and
market outdoor recreation products in four businesses: Marine Electronics,
Outdoor Equipment, Watercraft, and Diving. The Company’s primary focus is
innovation - meeting consumer needs with breakthrough products that stand apart
from the competition and advance the Company’s strong brand names. Its
subsidiaries are organized in a network that is intended to promote
entrepreneurialism and leverage best practices and synergies, following the
strategic vision set by senior managers and approved by the Company’s Board of
Directors. The Company is controlled by Helen P. Johnson-Leipold, members of
her
family and related entities.
The
Company was incorporated in Wisconsin in 1987 as successor to various
businesses.
Marine
Electronics
The
Company manufactures, under its Minn
Kota
brand,
battery-powered motors used on fishing boats and other boats for quiet trolling
power or primary propulsion. The Company’s Minn
Kota
motors
and related accessories are sold in the United States (U.S.), Canada, Europe
and
the Pacific Basin through large retail store chains such as Wal-Mart, catalogs
such as Bass Pro Shops and Cabelas, sporting goods specialty stores, marine
distributors, and original equipment manufacturers (OEM) including Ranger®
Boats, Skeeter Boats, Triton, and Stratos/Javilin. Consumer advertising and
promotion include advertising on regional television and in outdoor, general
interest and sports magazines. Packaging and point-of-purchase materials are
used to increase consumer appeal and sales.
The
Company has the leading market share of the U.S. electric fishing motor market;
while this market has generally been flat over a number of years, the Company
has been able to gain share by emphasizing marketing, product innovation and
original equipment manufacturer sales.
On
October 3, 2005, the Company acquired the Cannon downriggers and Bottomline
fishfinders brands and related assets for $10.4 million from Computrol, Inc.
of
Boise, Idaho, a wholly owned subsidiary of Armstrong International. The Company
expects that the Cannon and Bottomline brands will continue to be sold through
the same channels as the Company’s other products in its Marine Electronics
business.
On
May 5,
2004, the Company acquired all of the outstanding common stock of Techsonic
Industries, Inc. (Techsonic), and certain other assets from the parent company
of Techsonic, Teleflex Incorporated, for $28.2 million. Techsonic is a
manufacturer and marketer of underwater sonar and GPS technology equipment.
The
acquisition added the Humminbird
fishfinders brand to the Company’s Marine Electronics portfolio. The Humminbird
brand was subsequently consolidated with the Company’s Motors segment. The
Motors segment was renamed the Marine Electronics Group and was reported as
such
beginning with the quarter ending July 2, 2004. The Humminbird brands are sold
through the same channels as the Company’s other Marine Electronics
business.
Outdoor
Equipment
The
products sold by the Company’s Outdoor Equipment business include Eureka!
military, commercial and consumer tents, sleeping bags and backpacks and
Silva
field
compasses and digital instruments.
Eureka!
consumer
tents, sleeping bags and backpacks compete primarily in the mid- to high-price
range and are sold in the U.S. and Canada through independent sales
representatives, primarily to sporting goods stores, catalog and mail order
houses and camping and backpacking specialty stores. Marketing of the Company’s
tents, sleeping bags and backpacks is focused on building the Eureka!
brand
name and establishing the Company as a leader in tent design and innovation.
The
Company is no longer pursuing a mass market strategy for consumer tents.
Although the Company’s camping tents, sleeping bags and backpacks are produced
primarily by third-party manufacturing sources, design and innovation is
conducted at the Binghamton, New York business location. Eureka!
camping
products are sold under license in Japan, Australia and Europe.
1
Eureka!
commercial tents include party tents, sold primarily to general rental stores,
and other commercial tents sold directly to tent erectors. Commercial tents
are
manufactured by the Company in the U.S. and the Company’s tent products range
from 10’x10’ canopies to 120’ wide pole tents and other large scale frame
structures.
Eureka!
also
designs and manufactures large, heavy-duty tents and lightweight backpacking
tents for the military. Current tents in production are a lightweight one-person
tent, a four-person 4 season tent; and a modular, general purpose tent. During
2005 and 2004, sales to the U.S. military accounted for 11.9% and 15.7% of
total
Company net sales, respectively. While there is potential for volume from other
contracts on which the Company is currently bidding, total military tent sales
are expected to decline to $30 to $40 million in fiscal 2006.
Silva
field
compasses and digital instruments, which are manufactured by third parties,
are
marketed exclusively in North America, the area for which the Company owns
Silva
trademark rights.
In
September 2002, the Company sold its Jack Wolfskin business (a marketer of
high
quality technical outdoor clothing, footwear, camping tents, backpacks, travel
gear and accessories). The Company’s North American Jack Wolfskin operations
were not included in the sale. The Company exited this business during the
2002
and 2003 fiscal years.
Watercraft
The
Company manufactures and markets kayaks, canoes, paddles, oars, specialty
watercraft, recreational sailboats, personal flotation devices and small
thermoformed recreational boats under the brand names Old
Town,
Carlisle
Paddles,
Ocean
Kayak, Pacific
Kayak,
Canoe
Sports, Necky,
Escape,
Extrasport,
Waterquest
and
Dimension.
The
Company’s Old
Town
Canoe
subsidiary produces high quality kayaks, canoes and accessories for family
recreation, touring and tripping. The Company uses a rotational-molding process
for manufacturing polyethylene kayaks and canoes to compete in the high volume,
low and mid-priced range of the market. These kayaks and canoes feature stiffer
and more durable hulls than higher priced boats. The Company also manufactures
canoes from fiberglass, Royalex (ABS) and wood. Carlisle
Paddles,
a
marketer of canoe and kayak paddles and rafting oars, supplies paddles and
oars
to the Company’s other watercraft businesses and also distributes directly to
the Company’s customers.
The
Company is a leading manufacturer of sit-on-top kayaks under the Ocean
Kayak
brand.
In addition, the
Company
manufactures and markets high
quality Necky
sea
touring and whitewater kayaks; Extrasport
personal
flotation devices; small
thermoformed recreational boats, including canoes, pedal boats, deck boats
and
tenders, under the Waterquest
and
Escape
brands;
the Dimension
brand of
kayaks; and other paddle and watercraft accessory brands.
The
Company’s kayaks, canoes and accessories are sold primarily to specialty stores
and marine dealers, sporting goods stores and catalog and mail order houses
such
as L. L. Bean® in the U.S. and Europe. Escape
and
Waterquest
products
are sold through marine dealers and large retail chains under several brand
identities.
The
Company manufactures its Watercraft products in two locations in the U.S. and
one in New Zealand. The Company is also active in Europe with most of the brands
noted above. The Company also contracts for manufacturing of Watercraft products
with third parties in Michigan, Tunisia and the Czech Republic.
The
North
American market for kayaks and canoes has solidified over the past year. The
Company believes, based on industry and other data, that it has grown market
share and continues to be a leading manufacturer of kayaks and canoes in the
U.S. in both unit and dollar sales.
Diving
The
Company manufactures and distributes underwater diving products for technical
and recreational divers, which it sells under the SCUBAPRO
and
UWATEC
brand
names. The Company markets a complete line of underwater diving and snorkeling
equipment, including regulators, stabilizing jackets, dive computers and gauges,
wetsuits, masks, fins, snorkels and other accessories. SCUBAPRO
and
UWATEC
products
are marketed to the high quality, premium segment of the market via selected
distribution to independent specialty dive stores worldwide. These specialty
dive stores generally provide a wide range of services to divers, including
sales, service and repair, diving education and travel.
2
The
Company focuses on maintaining SCUBAPRO
and
UWATEC
as the
market leaders in innovation. The Company maintains research and development
functions in the U.S. and Europe and holds a number of patents on
proprietary products. The Company’s consumer communication focuses on building
the brand and highlighting exclusive product features and consumer benefits
of
the SCUBAPRO
and
UWATEC
product
lines. The Company’s communication and distribution reinforce the SCUBAPRO
and
UWATEC
brands’
position as the industry’s quality and innovation leader. The Company
communicates its equipment in diving magazines, via websites and through dive
specialty stores.
The
Company maintains manufacturing and assembly facilities in Switzerland, Mexico,
Italy and Indonesia and procures a majority of its proprietary rubber and
plastic products and components from third-party manufacturers.
Financial
Information for Business Segments
As
noted
above, the Company has four reportable business segments. See Note 12 to the
Consolidated Financial Statements for financial information concerning each
business segment.
International
Operations
See
Note
12 to the Consolidated Financial Statements for financial information comparing
the Company’s domestic and international operations. See Note 1, subheading
“Foreign Operations and Related Derivative Financial Instruments,” to the
Consolidated Financial Statements for information respecting risks related
to
the Company’s foreign operations.
Research
and Development
The
Company commits significant resources to research and new product development.
The Company expenses research and development costs as incurred except for
costs
of software development for new fishfinder products which are capitalized once
technological feasibility is established. These costs are then amortized over
the expected life of the software. The amounts expensed by the Company in
connection with research and development activities for each of the last three
fiscal years are set forth in the Consolidated Statements of
Operations.
Competition
The
Company believes its products compete favorably on the basis of product
innovation, product performance and marketing support and, to a lesser extent,
price.
Marine
Electronics:
The main competitor in electric trolling motors is Motor Guide, owned by
Brunswick Corporation, which manufactures and sells a full range of trolling
motors and accessories. Competition in this business is focused on product
quality/durability as well as product benefits and features for fishing. The
main competitors in the charger market are Dual Pro from Charging Systems
International, Guest from Marinco and ProMariner from Professional Mariner.
Competition in this segment is focused on charging time, safety, performance
and
durability. The main competitors in the fishfinder market are Lowrance, Garmin,
Navman, and Ray Marine. Competition in this segment is focused on quality of
sonar imaging and display as well as the integration of mapping and GPS
technology.
Outdoor
Equipment:
The Company’s brands and products compete in the sporting goods and specialty
segments of the outdoor equipment market. Competitive brands with a strong
position in the sporting goods channel include Coleman and private label brands.
The Company also competes with the specialty companies such as The North Face
and Kelty on the basis of materials and innovative designs for consumers who
want performance products priced at a value. The Company also competes in the
commercial tent market with Anchor Industries and Aztec for tension and frame
tents along with canopies based on structure and styling. The Company also
competes for military tent contracts under the U.S. Government bidding process;
competitors include Camel, AC Industries, Outdoor Ventures, and Diamond
Brands.
3
Watercraft:
The Company primarily competes in the paddle sport segment of kayaks and canoes.
The main competitors are Confluence/Watermark and Wenonah which compete on
the
basis of their design, performance and quality.
Diving:
The main competitors in Diving include Aqualung, Oceanic, Mares, Cressi, and
Suunto, each of which competes on the basis of product innovation, performance,
quality and safety.
Employees
At
September 30, 2005, the Company had approximately 1,300 permanent employees.
The
Company considers its employee relations to be excellent. Temporary employees
are utilized to manage peaks in the seasonal manufacturing of
products.
Backlog
Unfilled
orders for future delivery of products totaled approximately $37.5 million
at
September 30, 2005 and $67.3 million at October 1, 2004. For the majority of
its
products, the Company’s businesses do not receive significant orders in advance
of expected shipment dates, with the exception of the military tent business
which has orders outstanding based on contractual agreements.
Patents,
Trademarks and Proprietary Rights
The
Company owns no single patent that is material to its business as a whole.
However, the Company holds various patents, principally for diving products,
electric motors and fishfinders, and regularly files applications for patents.
The Company has numerous trademarks and trade names which it considers important
to its business, many of which are noted on the preceding pages. The Company
vigorously defends its intellectual property rights.
Sources
and Availability of Materials
The
Company’s products are made using materials that are generally in adequate
supply and are available from a variety of third-party suppliers.
The
Company has an exclusive supply contract with a single vendor for materials
used
in its military tent business. Interruption or loss in the availability of
this
material could have a material adverse impact on sales and operating results
of
the Company’s Outdoor Equipment business.
Seasonality
The
Company’s business is seasonal. The following table shows, for the past three
fiscal years, the total net sales and operating profit or loss of the Company
for each quarter, as a percentage of the total year.
|
Year Ended
|
|||||||||||||||||||
|
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September
30, 2005
|
October
1, 2004
|
October
3, 2003
|
||||||||||||||||
|
Quarter
Ended
|
Net
Sales
|
|
|
Operating
Profit
(Loss)
|
|
|
Net
Sales
|
|
|
Operating
Profit
(Loss)
|
|
|
Net
Sales
|
|
|
Operating
Profit
(Loss)
|
|
||
|
December
|
20
|
%
|
0
|
%
|
18
|
%
|
7
|
%
|
17
|
%
|
1
|
%
|
|||||||
|
March
|
28
|
54
|
27
|
45
|
27
|
53
|
|||||||||||||
|
June
|
32
|
76
|
34
|
72
|
34
|
77
|
|||||||||||||
|
September
|
20
|
(30
|
)
|
21
|
(24
|
)
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22
|
(31
|
)
|
||||||||||
|
100
|
%
|
100
|
%
|
100
|
%
|
100
|
%
|
100
|
%
|
100
|
%
|
||||||||
4
Available
Information
The
Company maintains a website at www.johnsonoutdoors.com. On its website, the
Company makes available, free of charge, its Annual Report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments
to
those reports, as soon as reasonably practical after the reports have been
electronically filed or furnished to the Securities and Exchange Commission.
In
addition, the Company makes available on its website, free of charge, its (a)
Code of Ethics; (b) Code of Ethics for its Chief Executive Officer and Senior
Financial and Accounting Officers; and (c) the charters for the following
committees of the Board of Directors: Audit; Compensation; Executive; and
Nominating and Corporate Governance. The Company is not including the
information contained on or available through its website as a part of, or
incorporating such information by reference into, this Annual Report on Form
10-K. This
report includes all material information about the Company that is included
on
the Company’s website and is otherwise required to be included in this
report.
|
ITEM
1A.
|
The
risks
described below are not the only risks the Company faces. Additional risks
that
the Company does not yet know of or that the Company currently thinks are
immaterial may also impair the Company's business operations. If any of the
events or circumstances described in the following risks actually occur, the
Company's business, financial condition or results of operations could be
materially adversely affected. In such cases, the trading price of the Company's
common stock could decline.
The
Company's net sales and profitability depend on its ability to continue to
conceive, design and market products that appeal to
consumers.
The
introduction of new products is critical in the Company's industry and to its
growth strategy. The Company's business depends on its ability to continue
to
conceive, design, manufacture and market new products and upon continuing market
acceptance of its product offering. Rapidly changing consumer preferences and
trends make it difficult to predict how long consumer demand for the Company's
existing products will continue or what new products will be successful. The
Company's current products may not continue to be popular or new products that
the Company may introduce may not achieve adequate consumer acceptance for
the
Company to recover development, manufacturing, marketing and other costs. A
decline in consumer demand for the Company's products, its failure to develop
new products on a timely basis in anticipation of changing consumer preferences
or the failure of the Company's new products to achieve and sustain consumer
acceptance could reduce the Company's net sales and profitability.
Competition
in the Company's markets could reduce its net sales and
profitability.
The
Company operates in highly competitive markets. It competes with several large
domestic and foreign companies such as Brunswick, Lowrance, Confluence and
Aqualung, with private label products sold by many of the Company's retail
customers and with other producers of outdoor recreation products. Some of
the
Company's competitors have longer operating histories, greater brand recognition
and greater financial, technical, marketing and other resources than the
Company. In addition, the Company may face competition from new participants
in
its markets because the outdoor recreation product industries have limited
barriers to entry. The Company experiences price competition for its products,
and competition for shelf space at retailers, all of which may increase in
the
future. If the Company cannot compete successfully in the future, its net sales
and profitability will likely decline.
Trademark
infringement or other intellectual property claims relating to the Company's
products could increase its costs.
The
Company's industry is susceptible to litigation regarding trademark and patent
infringement and other intellectual property rights. The Company could be either
a plaintiff or defendant in trademark and patent infringement claims and claims
of breach of license from time to time. The prosecution or defense of
intellectual property litigation is both costly and disruptive of the time
and
resources of the Company's management even if the claim against the Company
is
without merit. The Company could also be required to pay substantial damages
or
settlement costs to resolve intellectual property litigation.
5
Sales
of the Company's products are seasonal, which causes its operating results
to
vary from quarter to quarter.
Sales
of
the Company's products are seasonal. Historically, the Company's net sales
and
profitability have peaked in the second and third fiscal quarters due to the
buying patterns of its customers. Seasonal variations in operating results
may
cause the Company’s results to fluctuate significantly in the first and fourth
quarters and may tend to depress the Company's stock price during the first
and
fourth quarters.
The
trading price of the Company's common stock fluctuates and investors in the
Company's common stock may experience substantial losses.
The
trading price of the Company's common stock has been volatile and may continue
to be volatile in the future. The trading price of the Company's common stock
could decline or fluctuate in response to a variety of factors,
including:
|
·
|
changes
in financial estimates of the Company's net sales and operating results
or
buy/sell recommendations by securities
analysts;
|
|
·
|
the
timing of announcements by the Company or its competitors concerning
significant product developments, acquisitions or financial
performance;
|
|
·
|
fluctuation
in the Company's quarterly operating
results;
|
|
·
|
substantial
sales of the Company's common
stock;
|
|
·
|
general
stock market conditions; or
|
|
·
|
other
economic or external factors.
|
You
may
be unable to sell your stock at or above your purchase price.
A
limited number of the Company's shareholders can exert significant influence
over the Company.
As
of
November 1, 2005, Helen P. Johnson-Leipold, members of her family and related
entities (hereinafter the Johnson Family) held approximately 77% of the voting
power of both classes of common stock taken as a whole This voting power would
permit these shareholders, if they chose to act together, to exert significant
influence over the outcome of shareholder votes, including votes concerning
the
election of directors, by-law amendments, possible mergers, corporate control
contests and other significant corporate transactions.
The
Company may experience difficulties in integrating strategic
acquisitions.
As
part
of the Company's growth strategy, it intends to pursue acquisitions that are
consistent with its mission and that will enable it to leverage its competitive
strengths. The Company acquired Techsonic Industries, Inc. effective May 5,
2004, including, without limitation certain intellectual property used in its
business, and on October 3, 2005, the Company acquired certain assets from
Computrol, Inc. The integration of acquired companies and their operations
into
the Company's operations involves a number of risks including:
|
·
|
the
acquired business may experience losses which could adversely affect
the
Company's profitability;
|
|
·
|
unanticipated
costs relating to the integration of acquired businesses may increase
the
Company's expenses;
|
|
·
|
possible
failure to obtain any necessary consents to the transfer of licenses
or
other agreements of the acquired
company;
|
|
·
|
possible
failure to maintain customer, licensor and other relationships after
the
closing of the transaction of the acquired
company;
|
|
·
|
difficulties
in achieving planned cost-savings and synergies may increase the
Company's
expenses;
|
|
·
|
diversion
of management’s attention could impair their ability to effectively manage
the Company's business operations;
and
|
|
·
|
unanticipated
management or operational problems or liabilities may adversely affect
the
Company's profitability and financial
condition.
|
6
The
Company is dependent upon certain key members of
management.
The
Company's success will depend to a significant degree on the abilities and
efforts of its senior management. The Company's success will depend on its
ability to attract, retain and motivate qualified management, marketing,
technical and sales personnel. These people are in high demand and often have
competing employment opportunities. The labor market for skilled employees
is
highly competitive due to limited supply, and the Company may lose key employees
or be forced to increase their compensation. Employee turnover could
significantly increase the Company's training and other related employee costs.
The loss of key personnel, or the failure to attract additional personnel,
could
have a material adverse effect on the Company's business, financial condition
or
results of operations and on the value of its securities.
Sources
of and fluctuations in market prices of raw materials can affect the Company's
operating results.
The
primary raw materials used by the Company are metals, resins and packaging
materials. These materials are generally available from a number of suppliers,
but the Company has chosen to concentrate its sourcing with a limited number
of
vendors for each commodity or purchased component. The Company believes its
sources of raw materials are reliable and adequate for its needs. However,
the
development of future sourcing issues related to the availability of these
materials as well as significant fluctuations in the market prices of these
materials may have an adverse affect on the Company’s financial
results.
The
Company is subject to environmental and safety
regulations.
The
Company is subject to federal, state, local and foreign laws and other legal
requirements related to the generation, storage, transport, treatment and
disposal of materials as a result of its manufacturing and assembly operations.
These laws include the Resource Conservation and Recovery Act (as amended),
the
Clean Air Act (as amended) and the Comprehensive Environmental Response,
Compensation and Liability Act (as amended). The Company believes that its
existing environmental management system is adequate and it has no current
plans
for substantial capital expenditures in the environmental area. The Company
does
not currently anticipate any material adverse impact on its results of
operations, financial condition or competitive position as a result of
compliance with federal, state, local and foreign environmental laws or other
legal requirements. However, risk of environmental liability and changes
associated with maintaining compliance with environmental laws is inherent
in
the nature of the Company’s business and there is no assurance that material
liabilities or changes could not arise.
The
Company's debt covenants may limit its ability to complete acquisitions, incur
debt, make investments, sell assets, merge or complete other significant
transactions.
The
Company's credit agreement includes provisions that place limitations on a
number of the Company's activities, including its ability to:
|
·
|
incur
additional debt;
|
|
·
|
create
liens on its assets or make
guarantees;
|
|
·
|
make
certain investments or loans;
|
|
·
|
pay
dividends; or
|
|
·
|
dispose
of or sell assets or enter into a merger or similar
transaction.
|
These
debt covenants could restrict the Company's ability to pursue opportunities
to
expand its business operations.
|
ITEM
1B.
|
None.
|
ITEM
2.
|
The
Company maintains both leased and owned manufacturing, warehousing, distribution
and office facilities throughout the world. The Company believes that its
facilities are well maintained and have capacity adequate to meet its current
needs.
See
Note
5 to the Consolidated Financial Statements for a discussion of the Company’s
lease obligations.
7
The
Company’s principal manufacturing (identified with an asterisk) and other
locations are:
|
Albany,
New Zealand* (Watercraft)
|
El
Cajon, California (Diving)
|
|
Alpharetta,
Georgia (Marine Electronics)
|
Eufaula,
Alabama* (Marine Electronics)
|
|
Antibes,
France (Diving)
|
Ferndale,
Washington* (Watercraft)
|
|
Bad
Säkingen,
Germany (Diving)
|
Genoa,
Italy* (Diving)
|
|
Barcelona,
Spain (Diving)
|
Grand
Rapids, Michigan (Watercraft)
|
|
Basingstoke,
Hampshire, England (Diving)
|
Hallwil,
Switzerland* (Diving)
|
|
Batam,
Indonesia* (Diving and Outdoor Equipment)
|
Henggart,
Switzerland (Diving)
|
|
Binghamton,
New York* (Outdoor Equipment)
|
Mankato,
Minnesota* (Marine Electronics)
|
|
Burlington,
Ontario, Canada (Marine Electronics, Outdoor Equipment)
Chatswood,
Australia (Diving)
|
Napier,
New Zealand* (Watercraft)
|
|
Old
Town, Maine* (Watercraft)
|
|
|
Chi
Wan, Hong Kong (Diving)
|
Tokyo
(Kawasaki), Japan (Diving)
|
The
Company’s corporate headquarters is located in Racine, Wisconsin.
|
ITEM
3.
|
See
Note
14 to the Consolidated Financial Statements for a discussion of legal
proceedings.
The
annual meeting of the Company’s shareholders was held on July 26, 2005. The
matters submitted to a vote of the shareholders of the Company and the results
of such vote were previously disclosed in the Company’s quarterly report on Form
10-Q for the quarter ended July 1, 2005. There were no other matters submitted
to a vote of security holders during the fourth quarter of the fiscal year
ended
September 30, 2005.
PART
II
Certain
information with respect to this item is included in Notes 9 and 10 to the
Consolidated Financial Statements. The Company’s Class A common stock is traded
on the NASDAQ National Market under the symbol: JOUT. There is no public market
for the Company’s Class B common stock. However, the Class B common stock is
convertible at all times at the option of the holder into shares of Class A
common stock on a share for share basis. As of November 1, 2005, the Company
had
720 holders of record of its Class A common stock and 56 holders of record
of
its Class B common stock. The Company has never paid a dividend on its common
stock.
A
summary
of the high and low prices for the Company’s Class A common stock during each
quarter of the years ended September 30, 2005 and October 1, 2004 is as
follows:
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
||||||||||||||||||||||
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
||||
|
Stock
prices:
|
|||||||||||||||||||||||||
|
High
|
$
|
20.70
|
$
|
16.14
|
$
|
20.64
|
$
|
20.21
|
$
|
20.45
|
$
|
20.12
|
$
|
20.51
|
$
|
19.81
|
|||||||||
|
Low
|
19.02
|
12.30
|
17.85
|
15.25
|
16.64
|
18.79
|
16.40
|
19.15
|
|||||||||||||||||
The
following limitations apply to the ability of the Company to pay
dividends:
|
·
|
Pursuant
to the Company’s revolving credit agreement, dated as of October 7, 2005,
by and among the Company, the subsidiary borrowers from time to time
parties thereto and JP Morgan Chase Bank N.A., the Company is limited
in
the amount of restricted payments (primarily dividends and purchase
of
treasury stock) made during the next fiscal year. The current limitation
is approximately $18 million for the fiscal year ending September
29,
2006.
|
|
·
|
The
Company’s Articles of Incorporation provide that no dividend, other than
a
dividend payable in shares of the Company’s common stock, may be declared
or paid upon the Class B common stock unless such dividend is declared
or
paid upon both classes of common stock. Whenever a dividend (other
than a
dividend payable in shares of Company common stock) is declared or
paid
upon any shares of Class B common stock, at the same time there must
be
declared and paid a dividend on shares of Class A common stock equal
in
value to 110% of the amount per share of the dividend declared and
paid on
shares of Class B common stock. Whenever a dividend is payable in
shares
of Company common stock, such dividend must be declared or paid at
the
same rate on the Class A common stock and the Class B common
stock.
|
8
The
following table presents selected consolidated financial data, which should
be
read along with the Company’s consolidated financial statements and the notes to
those statements with “Item 7 - Management’s Discussion and Analysis of
Financial Condition and Results of Operations.” The consolidated statements of
operations for the years ended September 30, 2005, October 1, 2004 and October
3, 2003, and the consolidated balance sheet data as of September 30, 2005 and
October 1, 2004, are derived from the Company’s audited consolidated financial
statements included elsewhere herein. The consolidated statements of operations
for the years ended September 27, 2002 and September 28, 2001, and the
consolidated balance sheet data as of October 3, 2003, September 27, 2002 and
September 28, 2001, are derived from the Company’s audited consolidated
financial statements which are not included herein.
|
|
Year
Ended
|
|||||||||||||||
|
(thousands,
except per share data)
|
September
30 2005
|
|
October
1
2004(5)
|
|
|
October
3
2003
|
|
|
September
27
2002
|
|
September
28
2001
|
|||||
|
OPERATING
RESULTS(1)
|
||||||||||||||||
|
Net
sales
|
$
|
380,690
|
$
|
355,274
|
$
|
315,892
|
$
|
342,532
|
$
|
345,637
|
||||||
|
Gross
profit
|
156,354
|
147,618
|
127,989
|
141,054
|
138,781
|
|||||||||||
|
Operating
expenses
|
140,822
|
128,490
|
116,376
|
121,303
|
123,063
|
|||||||||||
|
Operating
profit
|
15,532
|
19,128
|
11,613
|
19,751
|
15,718
|
|||||||||||
|
Interest
expense
|
4,680
|
5,062
|
5,165
|
6,630
|
9,085
|
|||||||||||
|
Other
expense (income), net
(2)
|
(1,250
|
)
|
(670
|
)
|
(3,254
|
)
|
(27,372
|
)
|
543
|
|||||||
|
Income
from continuing operations before
income taxes and before cumulative effect
of change in accounting principle
|
12,102
|
14,736
|
9,702
|
40,493
|
6,090
|
|||||||||||
|
Income
tax expense
|
5,001
|
6,047
|
4,281
|
10,185
|
2,480
|
|||||||||||
|
Income
from continuing operations before
cumulative effect of change in accounting
principle
|
7,101
|
8,689
|
5,421
|
30,308
|
3,610
|
|||||||||||
|
Income
on disposal of discontinued operations
|
—
|
—
|
—
|
495
|
—
|
|||||||||||
|
Income
(loss) from change in accounting principle
|
—
|
—
|
—
|
(22,876
|
)
|
1,755
|
||||||||||
|
Net
income
|
$
|
7,101
|
$
|
8,689
|
$
|
5,421
|
$
|
7,927
|
$
|
5,365
|
||||||
|
Basic
earnings (loss) per common share:
|
||||||||||||||||
|
Continuing
operations
|
$
|
0.82
|
$
|
1.01
|
$
|
0.64
|
$
|
3.69
|
$
|
0.44
|
||||||
|
Discontinued
operations
|
—
|
—
|
—
|
0.06
|
—
|
|||||||||||
|
Effect
of change in accounting principle
|
—
|
—
|
—
|
(2.79
|
)
|
0.22
|
||||||||||
|
Net
income
|
$
|
0.82
|
$
|
1.01
|
$
|
0.64
|
$
|
0.96
|
$
|
0.66
|
||||||
|
Diluted
earnings (loss) per common share:
|
||||||||||||||||
|
Continuing
operations
|
$
|
0.81
|
$
|
0.99
|
$
|
0.63
|
$
|
3.59
|
$
|
0.44
|
||||||
|
Discontinued
operations
|
—
|
—
|
—
|
0.06
|
—
|
|||||||||||
|
Effect
of change in accounting principle
|
—
|
—
|
—
|
(2.71
|
)
|
0.22
|
||||||||||
|
Net
income
|
$
|
0.81
|
$
|
0.99
|
$
|
0.63
|
$
|
0.94
|
$
|
0.66
|
||||||
|
Diluted
average common shares outstanding
|
8,795
|
8,774
|
8,600
|
8,430
|
8,170
|
|||||||||||
| BALANCE SHEET DATA | ||||||||||||||||
|
Current
assets (3)
|
$
|
186,035
|
$
|
194,641
|
$
|
195,135
|
$
|
192,137
|
$
|
133,180
|
||||||
|
Total
assets
|
283,318
|
293,714
|
277,657
|
271,285
|
244,913
|
|||||||||||
|
Current
liabilities (4)
|
56,196
|
59,110
|
50,031
|
53,589
|
36,568
|
|||||||||||
|
Long-term
debt, less current maturities
|
37,800
|
50,797
|
67,886
|
80,195
|
84,550
|
|||||||||||
|
Total
debt
|
50,800
|
67,019
|
77,473
|
88,253
|
97,535
|
|||||||||||
|
Shareholders’
equity
|
166,434
|
160,644
|
144,194
|
124,145
|
105,779
|
|||||||||||
|
(1)
|
The
year ended October 3, 2003 includes 53 weeks. All other years include
52
weeks. The Company sold its European Jack Wolfskin business during
2002;
2002 includes ten months of results from this
business.
|
|
(2)
|
Includes
gain on sale of the European Jack Wolfskin business of $27,251 in
2002.
|
|
(3)
|
Includes
cash of $72,111, $69,572, $88,910, $100,830 and $16,069 in 2005,
2004,
2003, 2002, and 2001, respectively.
|
|
(4)
|
Excluding
short-term debt and current maturities of long-term
debt.
|
|
(5)
|
The
results in 2004 contain five months of operating results of the acquired
Humminbird business.
|
9
Executive
Overview
The
Company designs, manufactures and markets top-quality outdoor recreational
products for the whole family. Through a combination of breakthrough products,
strong marketing and key distribution relationships, the Company meets the
needs
of the consumer, setting itself apart from the competition. Its subsidiaries
comprise a network that promotes entrepreneurialism and leverages best practices
and synergies, following the strategic vision set by executive management and
approved by the Company’s Board of Directors.
The
7%
increase in net sales for the 2005 fiscal year resulted primarily from a full
year of sales from the Humminbird business acquired in May 2004 and growth
in
the Watercraft business. Growth in both businesses was driven by an expansion
in
international markets and a strong line of innovative new products including
the
new Matrix™ 900 fishfinder series and the Old Town Dirigo™ kayak. This growth
more than offset the 21% decline in total military tent sales in the Company’s
Outdoor Equipment business segment. The Company expects that sales of total
military tents will likely decline further in fiscal 2006 to between $30 and
$40
million or as much as 40% from fiscal 2005.
Though
it
remains a strong brand, our Eureka! consumer line of camping products continues
to face a declining market for its high quality consumer tents, as the shift
to
lower priced and private label products continues in its retail channels. The
Eureka! commercial line of tents maintained its position in fiscal 2005 in
a
flat market.
Profitability
of the Company in fiscal 2005 was impacted by $2.7 million of costs incurred
by
the Company in connection with the terminated buy-out proposal (compared to
$1.5
million in fiscal 2004), by $1.2 million in external fees to comply with the
Sarbanes Oxley Section 404 provisions and by restructuring, severance and
integration costs totaling $4.1 million in our Watercraft, Diving, and Outdoor
Equipment business units and in our Corporate offices (compared to $2.9 million
in fiscal 2004).
During
fiscal 2005, the Company completed the Watercraft restructuring actions
announced in July 2004. These efforts resulted in charges of $3.8 million across
fiscal years 2004 and 2005. The Company believes these changes will make
Watercraft leaner, yet more flexible, more focused, and more competitive going
forward. Moreover, the Company believes the restructuring actions should also
make the Watercraft business better prepared to deliver financial performance
equal to the strength of the Company’s winning brands. In September 2005, the
European Diving business announced the planned consolidation of several European
warehouses as well as continued efforts to reorganize European management.
These
efforts cost $1.1 million in fiscal 2005 and are expected to cost another $0.4
million in fiscal 2006. The Company believes that continued investment is needed
to ensure that the Company has the right people, systems and infrastructure
in
place to lessen the impact of softness in this market and to improve the
performance of the Diving business.
Debt-to-total
capitalization stands at 23% at September 30, 2005, which was well below
historical levels. Working capital excluding cash and short-term debt moved
to
its annual low at the end of September 2005. Net inventories and net trade
receivables were managed significantly lower than their finish at the end of
fiscal 2004 and helped the Company generate over $26 million in cash from
operations in fiscal 2005.
The
following discussion includes comments and analysis relating to the Company’s
results of operations and financial condition for the three years ended
September 30, 2005. This discussion should be read in conjunction with the
Consolidated Financial Statements and related notes thereto attached to this
report.
10
Results
of Operations
Summary
consolidated financial results from continuing operations are as
follows:
|
(millions,
except per share data)
|
2005
|
|
|
2004(2)
|
|
|
2003
|
|||
|
OPERATING
RESULTS(1)
|
||||||||||
|
Net
sales
|
$
|
380.7
|
$
|
355.3
|
$
|
315.9
|
||||
|
Gross
profit
|
156.4
|
147.6
|
128.0
|
|||||||
|
Operating
expenses
|
140.8
|
128.5
|
116.4
|
|||||||
|
Operating
profit
|
15.5
|
19.1
|
11.6
|
|||||||
|
Interest
expense
|
4.7
|
5.1
|
5.2
|
|||||||
|
Net
income
|
7.1
|
8.7
|
5.4
|
|||||||
|
Diluted
earnings per common share
|
$
|
0.81
|
$
|
0.99
|
$
|
0.63
|
|
(1)
|
The
year ended October 3, 2003 includes 53 weeks. All other years include
52
weeks.
|
|
(2)
|
The
results in 2004 contain five months of operating results of the acquired
Humminbird business.
|
The
Company’s sales and operating earnings by business segment are summarized as
follows:
|
(millions)
|
|
|
2005
|
2004
|
2003
|
|||||
|
Net
sales:
|
||||||||||
|
Marine
Electronics
|
$
|
145.2
|
$
|
109.8
|
$
|
86.6
|
||||
|
Outdoor
Equipment
|
75.3
|
90.2
|
72.8
|
|||||||
|
Watercraft
|
80.8
|
76.0
|
79.9
|
|||||||
|
Diving
|
79.4
|
80.1
|
78.0
|
|||||||
|
Other/eliminations
|
-
|
(0.7
|
)
|
(1.4
|
)
|
|||||
|
Total
|
$
|
380.7
|
$
|
355.3
|
$
|
315.9
|
||||
|
Operating
profit:
|
||||||||||
|
Marine
Electronics
|
$
|
21.6
|
$
|
17.8
|
$
|
12.0
|
||||
|
Outdoor
Equipment
|
11.2
|
16.4
|
12.1
|
|||||||
|
Watercraft
|
(4.4
|
)
|
(9.8
|
)
|
(9.0
|
)
|
||||
|
Diving
|
4.9
|
9.9
|
8.6
|
|||||||
|
Other/eliminations
|
(17.8
|
)
|
(15.2
|
)
|
(12.1
|
)
|
||||
|
Total
|
$
|
15.5
|
$
|
19.1
|
$
|
11.6
|
See
Note
12 in the notes to the consolidated financial statements for the definition
of
segment net sales and operating profits.
2005
vs 2004
Net
Sales
Net
sales
totaled $380.7 million in 2005 compared to $355.3 million in 2004, an increase
of 7.2% or $25.4 million. Foreign currency translations favorably impacted
year-to-date sales by $3.3 million in comparison to 2004. Sales growth in the
Company’s Marine Electronics and Watercraft business units overcame a 20.9%
decline in total military tent sales and the continued decline in consumer
tent
sales. The decline in military tent sales was less than expected due to the
award of new contracts during fiscal 2005. While the camping market continued
to
decline in 2005, the diving market was flat and the Company saw growth in the
marine electronics and watercraft markets.
11
Net
sales
for the Marine Electronics business increased $35.4 million (32.3%) primarily
from the addition of the Humminbird business, which added $33.4 million in
incremental sales for the full year compared with five months in fiscal 2004.
Net sales for the Company’s Watercraft business increased $4.8 million, or 6.4%,
as a result of a strong line-up of new canoe, kayak and paddle sport accessories
as well as successful new boat offerings. The Company believes much of its
growth in the Watercraft and Marine electronics business units exceeded the
market due to solid product innovation in those categories.
Net
sales
in the Company’s Outdoor Equipment business declined $14.9 million, or 16.5%,
primarily due to the decline in total military tent sales and the consumer
tent
business. The Diving business’ net sales declined $0.7 million (0.8%) despite a
$2.0 million favorable currency translation impact and strong sales growth
in
North America. Weak sales in the European Diving business continued to challenge
this business segment. Overall, the Company benefited from a $3.3 million in
favorable currency translation impact on net sales as reported.
Operating
Results
The
Company recognized an operating profit of $15.5 million in fiscal 2005 compared
to an operating profit of $19.1 million in fiscal 2004. Improved results in
the
Marine Electronics and Watercraft business segments were offset by declines
in
the Outdoor Equipment and Diving business units. The Marine Electronics business
benefited from the inclusion of the Humminbird business for the full year
compared with five months during fiscal 2004. Company gross profit margins
fell
to 41.1% in fiscal 2005 from 41.6% in fiscal 2004. Significant commodity cost
increases negatively impacted the Marine Electronics and Watercraft businesses.
However, the Watercraft business showed a net improvement due to operational
efficiencies arising from restructuring actions and the favorable impact of
new
product sales. Outdoor Equipment gross margins declined as higher priced urgent
need military tent orders expired and Diving gross margins were down slightly
due to unfavorable geographical mix and close out pricing on older model
products.
Operating
expenses totaled $140.8 million, or 37.0% of net sales, in fiscal 2005 compared
to $128.5 million, or 36.2% of net sales, in fiscal 2004 which benefited from
a
$2.0 million litigation settlement from a former employee. Operating expenses
in
fiscal 2005 included $4.1 million in restructuring, severance and integration
costs in the Watercraft, Diving and Outdoor Equipment businesses and in the
Corporate offices (compared to $2.9 million in fiscal 2004), $2.7 million of
costs related to the terminated buy-out transaction (compared with $1.5 in
fiscal 2004) and $1.2 million paid to external auditors and consultants related
to Sarbanes-Oxley Section 404 compliance.
The
Marine Electronics business had operating profit
of $21.6 million in fiscal 2005 compared to $17.8 million in fiscal 2004.
This increase was due to the profitability of the Humminbird business which
added $4.5 million in incremental profit in fiscal 2005. Additionally,
product innovations drove success in both of the Company's Minn Kota and
Humminbird brands. The Marine Electronics business was negatively affected
by $2.6 million in higher commodity costs but continued to deliver significant
profit for the Company.
The
Outdoor Equipment business operating profit decreased by $5.2 million, or 31.5%,
in fiscal 2005. The Outdoor Equipment business declines were mainly attributable
to the significant decline in total military tent sales and the related
personnel layoff costs of $0.4 million as well as continued softness in sales
of
consumer tents.
The
Watercraft business incurred an operating loss of $4.4 million in fiscal 2005
compared to an operating loss of $9.8 million in fiscal 2004. The reduced
operating loss in fiscal 2005 was the result of improvements in operating
efficiencies, a decline in the impact of restructuring charges (from $2.5
million last year to $1.3 million in fiscal 2005) and from successful new
product launches. The restructuring charges were in accordance with the plan
to
outsource manufacturing at the Company’s Grand Rapids, Michigan facility and to
shift production from Mansonville, Canada to the Company’s Old Town, Maine
operation. Total restructuring charges in fiscal 2005 included $0.3 million
from
one-time termination costs, $0.8 million in costs associated with lease
terminations and $0.2 million from impairment or disposal of equipment and
inventory.
The
Diving business saw operating profit decline $5.0 million in fiscal 2005 due
in
part to a favorable $2.0 million legal settlement from a former employee
received in fiscal 2004. Operating profit declines versus fiscal 2004 were
also
the result of weak demand in international markets and $1.1 million spent to
start warehouse consolidation and management reorganization in the Company’s
European operations. The Company expects to incur an additional $0.4 million
related to this restructuring in fiscal 2006.
12
Other
Income and Expenses
Interest
income was flat compared to the prior year at $0.5 million. Interest expense
decreased $0.4 million in fiscal 2005, resulting from lower amounts of debt
outstanding for the year. The Company realized currency gains of $0.8 million
in
fiscal 2005 as compared to $0.1 million in fiscal 2004.
Pretax
Income and Income Taxes
The
Company recognized pretax income of $12.1 million in fiscal 2005, compared
to
$14.7 million in fiscal 2004. The Company recorded income tax expense of $5.0
million in fiscal 2005, an effective rate of 41.3%, compared to $6.0 million
in
fiscal 2004, an effective rate of 41.0%.
At
September 30, 2005, the Company has U.S. federal operating loss carryforwards
of
$31.4 million, which begin to expire in 2012, as well as various state net
operating loss carryforwards. In addition, certain of the Company’s foreign
subsidiaries have net operating loss carryforwards totaling $1,734. These
operating loss carryforwards are available to offset future taxable income
over
the next 7 to approximately 20 years. The Company believes it will realize
the
net deferred tax assets through the generation of future taxable income, tax
planning strategies and reversals of deferred tax liabilities.
Net
Income
The
Company recognized net income of $7.1 million in fiscal 2005, or $0.81 per
diluted share, compared to net income of $8.7 million in fiscal 2004, or $0.99
per diluted share.
2004
vs 2003
Net
Sales
Net
sales
totaled $355.3 million in fiscal 2004 compared to $315.9 million in fiscal
2003,
an increase of 12.5% or $39.4 million. On May 5, 2004, the Company acquired
all
of the outstanding common stock of Techsonic Industries, Inc., a manufacturer
and marketer of underwater sonar and GPS technology equipment under the
Humminbird brand. During fiscal 2004, the Humminbird business contributed $13.6
million to net sales. Foreign currency translations favorably impacted
year-to-date sales by $8.1 million in comparison to fiscal 2003. Three of the
Company’s business units experienced sales growth over the prior year. The
markets in which the Company’s business units participate were relatively flat
versus fiscal 2003, however, the Company was able to maintain or increase its
share in those markets. The Marine Electronics business sales increased $23.2
million, or 26.8%, to $109.8 million as a result of the addition of the
Humminbird business, strength in new products and continued market share
strength. Sales for the Company’s Outdoor Equipment business increased $17.4
million, or 23.9%, as a result of strength in total military tent sales. The
consumer tent business continued to experience competition from the low-price
mass market and private label segment of the category. The Watercraft business
sales declined $3.9 million, or 4.9%, to $76.0 million primarily due to a sales
decline to Sam’s Club, excess capacity and softness in consumer markets. The
Diving business sales increased $2.1 million, or 2.7%, to $80.1 million.
Included in the increase was $6.2 million in favorable currency impacts
resulting from strengthening of the Euro and Swiss Franc against the U.S.
Dollar. This favorable currency impact offset sales declines due to continued
weakness in the global economy and travel.
Operating
Results
The
Company recognized an operating profit of $19.1 million in fiscal 2004 compared
to an operating profit of $11.6 million in fiscal 2003. Improvements in the
Marine Electronics, Outdoor Equipment, and Diving businesses were offset by
declines in the Watercraft business. The Humminbird business, which is part
of
the Marine Electronics business, incurred an operating loss of $0.4 million
during the period from the date of its acquisition through the end of fiscal
2004. Company gross profit margins improved to 41.6% in fiscal 2004 from 40.5%
in fiscal 2003. The Marine Electronics, Watercraft and Diving businesses
improved gross margins by 2.9, 1.7 and 1.8 percentage points, respectively.
The
Outdoor Equipment business had a slight decline in gross margin by 2.6
percentage points, which was expected due to the expiration of higher margin
emergency orders for the U.S. military early in 2004.
13
Operating
expenses totaled $128.5 million, or 36.2% of net sales, in fiscal 2004 compared
to $116.4 million, or 36.8% of net sales, in fiscal 2003. Operating expenses
in
fiscal 2004 included $4.2 million of expenses from the Humminbird business,
offset in part by a $2.0 million legal recovery from a former employee. Other
factors that contributed to operating expense increases in fiscal 2004 included
increases in sales and marketing expenses to support the Company’s brands,
increased research and development activities, restructuring expenses in the
Watercraft business, the costs of the terminated buy-out proposal, and bonus
and
profit sharing increases commensurate with Company performance.
The
Marine Electronics business had operating profit of $17.8 million in fiscal
2004
compared to $12.0 million in fiscal 2003. The increase in this business was
driven by higher net sales and improved gross profit related to production
efficiencies from higher volume, cost savings and improved pricing yield
resulting from favorable changes in product mix and the impact of new products,
offset by the Humminbird business which contributed a loss of $0.4 million
to
operating profit in fiscal 2004.
The
Outdoor Equipment business operating profit increased by $4.3 million, or 35.5%,
in fiscal 2004 compared to $12.1 million in fiscal 2003. The Outdoor Equipment
business benefited from strength in military and commercial tents, partially
offset by softness in other Outdoor Equipment products such as backpacks. The
Diving business saw operating profit improve by $1.3 million in fiscal 2004,
resulting in an operating profit margin of 12.4% of net sales in 2004 compared
to 11.0% of sales in fiscal 2003.
The
Watercraft business incurred an operating loss of $9.8 million in fiscal 2004
compared to an operating loss of $9.0 million in fiscal 2003. The increase
in
operating loss in fiscal 2004 was primarily related to declines in net sales,
unfavorable manufacturing variances and costs associated with the closure of
the
Grand Rapids, Michigan manufacturing facility of $2.5 million. The restructuring
charges related to plans to outsource manufacturing at its Grand Rapids,
Michigan facility and to shift production from Mansonville, Canada to its Old
Town, Maine operation. Total restructuring charges in fiscal 2004 include $1.0
million from one-time termination costs, $0.4 million from contract termination
and $1.1 million from impairment or disposal of equipment.
Other
Income and Expenses
Interest
income decreased $0.3 million to $0.5 million in fiscal 2004 due to lower
average invested cash balances during the year.
Interest
expense decreased $0.1 million in fiscal 2004, resulting from lower amounts
of
debt outstanding for the year, offset by an increase in interest rates. The
Company realized currency gains of $0.1 million in fiscal 2004.
Pretax
Income and Income Taxes
The
Company recognized pretax income of $14.7 million in fiscal 2004, compared
to
$9.7 million in fiscal 2003. The Company recorded income tax expense of $6.0
million in fiscal 2004, an effective rate of 41.0%, compared to $4.3 million
in
fiscal 2003, an effective rate of 44.1%. The effective tax rate in fiscal 2003
was negatively impacted by a $0.5 million provision made to account for an
ongoing income tax audit in Germany.
Net
Income
The
Company recognized net income of $8.7 million in fiscal 2004, or $0.99 per
diluted share, compared to net income of $5.4 million in fiscal 2003, or $0.63
per diluted share.
Terminated
Buy-out Proposal
On
October 28, 2004, the Company entered into a definitive Agreement and Plan
of
Merger (the “Merger Agreement”) with JO Acquisition Corp., an entity established
by members of the family of the late Samuel C. Johnson, including Helen P.
Johnson-Leipold, Chairman and Chief Executive Officer of the Company. Under
the
terms of the merger proposed by the Merger Agreement (the “Merger”), public
shareholders of the Company would have received $20.10 per share in cash, and
the members of the Johnson family would have acquired 100% ownership of the
Company.
14
The
Merger was subject to a number of conditions contained in the Merger Agreement,
including shareholder approval of the Merger Agreement. On March 22, 2005,
a
special meeting of the shareholders of the Company was held in order to vote
upon a proposal to approve the Merger Agreement. The required shareholder vote
was not obtained at such meeting and the Merger Agreement was terminated on
March 31, 2005 by the Company and the Purchaser pursuant to the terms of the
Merger Agreement. The termination of the Merger Agreement did not result in
the
imposition of any penalties on the Company.
Reconciliation
of Results Adjusted for Sale of Subsidiary
The
following tables show the adjusted results of the Company’s continuing
businesses excluding the gain on the sale, the North America exit costs and
the
operating results of the Jack Wolfskin subsidiaries.
The
Company reports its financial results of operations in accordance with generally
accepted accounting principles (“GAAP”). The Company has also provided in this
Form 10-K certain non-GAAP financial measures to complement its financial
information presented in accordance with GAAP. These non-GAAP financial measures
relate to the Company’s results excluding the Jack Wolfskin business, which was
sold in the fourth quarter of fiscal 2002. The Company believes the non-GAAP
financial information is useful to the readers of this Form 10-K because it
(a)
provides comparable year over year financial information based on the Company’s
continuing businesses and (b) better enables the reader to evaluate the
performance of these businesses.
The
presentation of the non-GAAP financial information should not be considered
in
isolation or in lieu of the results prepared in accordance with GAAP, but should
be considered in conjunction with the results prepared in accordance with
GAAP.
Adjusted
Results of Continuing Businesses:
| (thousands, except per share data) |
2005
|
2004
|
2003
|
|||||||
|
Net
sales
|
$
|
380,690
|
$
|
355,274
|
$
|
315,546
|
||||
|
Gross
profit
|
156,354
|
147,618
|
127,982
|
|||||||
|
Operating
profit
|
15,532
|
19,128
|
11,675
|
|||||||
|
Net
income
|
7,101
|
8,689
|
5,461
|
|||||||
|
Diluted
EPS - Continuing businesses
|
$
|
0.81
|
$
|
0.99
|
$
|
0.64
|
Reconciliation
of Adjusted Results to Reported Results for 2005:
|
(thousands,
except per share data)
|
As
Reported
Results
|
Jack
Wolfskin
|
Continuing
Results
|
|||||||
|
Net
sales
|
$
|
380,690
|
$
|
—
|
$
|
380,690
|
||||
|
Gross
profit
|
156,354
|
—
|
156,354
|
|||||||
|
Operating
profit
|
15,532
|
—
|
15,532
|
|||||||
|
Net
income
|
7,101
|
—
|
7,101
|
|||||||
|
Diluted
EPS
|
$
|
0.81
|
$
|
—
|
$
|
0.81
|
15
Reconciliation
of Adjusted Results to Reported Results for 2004:
|
(thousands,
except per share data)
|
As
Reported
Results
|
Jack
Wolfskin
|
Continuing
Results
|
|||||||
|
Net
sales
|
$
|
355,274
|
$
|
—
|
$
|
355,274
|
||||
|
Gross
profit
|
147,618
|
—
|
147,618
|
|||||||
|
Operating
profit
|
19,128
|
—
|
19,128
|
|||||||
|
Income
from continuing operations before cumulative
effect of change in accounting principle
|
8,689
|
—
|
8,689
|
|||||||
|
Diluted
EPS
|
$
|
0.99
|
$
|
—
|
$
|
0.99
|
||||
Reconciliation
of Adjusted Results to Reported Results for 2003:
|
(thousands,
except per share data)
|
As
Reported
Results
|
Jack
Wolfskin
|
Continuing
Results
|
|||||||
|
Net
sales
|
$
|
315,892
|
$
|
346
|
$
|
315,546
|
||||
|
Gross
profit
|
127,989
|
7
|
127,982
|
|||||||
|
Operating
profit
|
11,613
|
62
|
11,675
|
|||||||
|
Income
from continuing operations before cumulative
effect of change in accounting principle
|
5,421
|
(40
|
)
|
5,461
|
||||||
|
Diluted
EPS
|
$
|
0.63
|
$
|
(0.01
|
)
|
$
|
0.64
|
Reconciliation
of Adjusted Earnings per Diluted Share:
|
2005
|
|
|
2004
|
|
|
2003
|
||||
|
Income
from continuing operations
(according to GAAP)
|
$
|
0.81
|
$
|
0.99
|
$
|
0.63
|
||||
|
Add
back:
|
||||||||||
|
Jack
Wolfskin operating results
|
—
|
—
|
0.01
|
|||||||
|
Adjusted
income from continuing businesses
|
$
|
0.81
|
$
|
0.99
|
$
|
0.64
|
Financial
Condition, Liquidity and Capital Resources
The
Company’s cash flow from operating, investing and financing activities, as
reflected in the consolidated statements of cash flows, is summarized in the
following table:
|
(millions)
|
2005
|
|
|
2004
|
|
|
2003
|
|||
|
Cash
provided by (used for):
|
||||||||||
|
Operating
activities
|
$
|
26.2
|
$
|
22.2
|
(3.5
|
)
|
||||
|
Investing
activities
|
(6.4
|
)
|
(35.5
|
)
|
(9.6
|
)
|
||||
|
Financing
activities
|
(15.0
|
)
|
(7.7
|
)
|
(6.1
|
)
|
||||
|
Effect
of exchange rate changes
|
(2.3
|
)
|
1.7
|
7.2
|
||||||
|
Increase
(decrease) in cash and temporary cash
investments
|
$
|
2.5
|
$
|
(19.3
|
)
|
(11.9
|
)
|
The
Company's debt to total capitalization ratio declined to 23% as of September
30,
2005 from 29% as of October 1, 2004.
16
Operating
Activities
The
following table sets forth the Company’s working capital position at the end of
each of the past three years:
|
(millions)
|
2005
|
|
|
2004
|
|
|
2003
|
|||
|
Current
assets (1)
|
$
|
186.0
|
$
|
194.6
|
$
|
195.1
|
||||
|
Current
liabilities (2)
|
56.2
|
59.1
|
50.0
|
|||||||
|
Working
capital (2)
|
$
|
129.8
|
$
|
135.5
|
$
|
145.1
|
||||
|
Current
ratio (2)
|
3.3:1
|
3.3:1
|
3.9:1
|
|||||||
(1) 2005,
2004 and 2003 information includes cash of $72.1, $69.6 and $88.9 million,
respectively.
(2) Excludes
short-term debt and current maturities of long-term debt.
Cash
flows provided by (used for) operations totaled $26.2 million in fiscal 2005,
$22.2 million in fiscal 2004 and ($3.5) million in fiscal 2003. The major driver
in the improvement of cash flows from operations in fiscal 2005 was created
by
internal working capital management. Decreases in accounts receivable of $0.8
million and inventory of $7.8 million offset by decreases in accounts payable
and other accrued liabilities of $1.2 million reflect the improved working
capital management. Major drivers in the improvement of cash flows from
operations in fiscal 2004 were improved profitability, increases in accounts
payable and other accrued liabilities of $2.7 million and a decrease in accounts
receivable of $3.4 million; these improvements were offset by an increase in
inventory of $3.6 million. Declines in accounts payable and other accrued
liabilities of $8.1 million and increases in inventory of $9.0 million and
accounts receivable of $1.9 million contributed to the overall cash flows used
for operations in fiscal 2003.
Depreciation
and amortization charges were $9.5
million
in fiscal 2005, $8.7 million in fiscal 2004 and $8.2 million in fiscal 2003.
Investing
Activities
Cash
flows used for investing activities were $6.4 million, $35.5 million and $9.6
million in fiscal 2005, 2004 and 2003, respectively. The acquisition of
Humminbird used $28.2 million in fiscal 2004. Expenditures for property, plant
and equipment were $6.8 million in fiscal 2005, $7.8 million in fiscal 2004
and
$9.8 million in fiscal 2003. The Company’s recurring expenditures are primarily
related to tooling for new products, facilities and information systems
improvements. In 2006, capital expenditures are anticipated to be somewhat
higher than in 2005 due to systems work in the U.S. and Europe. These
expenditures are expected to be funded by working capital or existing credit
facilities.
Financing
Activities
The
following table sets forth the Company’s debt and capital structure at the end
of the past three fiscal years:
|
(millions)
|
2005
|
|
|
2004
|
|
|
2003
|
|||
|
Current
debt
|
$
|
13.0
|
$
|
16.2
|
$
|
9.6
|
||||
|
Long-term
deb
|
37.8
|
50.8
|
67.9
|
|||||||
|
Total
debt
|
50.8
|
67.0
|
77.5
|
|||||||
|
Shareholders’
equity
|
166.4
|
160.6
|
144.2
|
|||||||
|
Total
capitalization
|
$
|
217.2
|
$
|
227.6
|
$
|
221.7
|
||||
|
Total
debt to total capitalization
|
23.4
|
%
|
29.4
|
%
|
35.0
|
%
|
||||
Cash
flows used for financing activities totaled $15.0 million in fiscal 2005, $7.7
million in fiscal 2004 and $6.1 million in fiscal 2003. Payments on long-term
debt were $16.2 million, $9.6 million and $8.0 million in fiscal 2005, 2004
and
2003, respectively.
On
October 7, 2005, the Company entered into a new $75 million
unsecured revolving credit facility agreement expiring October 7, 2010.
Available credit under this agreement, along with cash provided by operating
activities, is expected to provide adequate funding for the Company’s operations
through October 7, 2010.
17
Obligations
and Off Balance Sheet Arrangements
The
Company has obligations and commitments to make future payments under its
existing credit facility, including interest, operating leases and open purchase
orders. The following schedule details these significant contractual obligations
at September 30, 2005.
|
Payment
Due by Period
|
||||||||||||||||
|
(millions)
|
Total
|
|
|
Less
than
1
year
|
|
|
2-3
years
|
|
|
4-5
years
|
|
|
After
5 years
|
|||
|
Long-term
debt
|
$
|
50.8
|
$
|
13.0
|
$
|
27.8
|
$
|
10.0
|
$
|
—
|
||||||
|
Operating
lease obligations
|
19.4
|
5.4
|
6.4
|
4.4
|
3.2
|
|||||||||||
|
Open
purchase orders
|
34.4
|
34.4
|
—
|
—
|
—
|
|||||||||||
|
Contractually
obligated interest payments
|
7.3
|
3.4
|
3.5
|
0.4
|
—
|
|||||||||||
|
Total
contractual obligations
|
$
|
111.9
|
$
|
56.2
|
$
|
37.7
|
$
|
14.8
|
$
|
3.2
|
||||||
The
Company also utilizes letters of credit for trade financing purposes. Letters
of
credit outstanding at September 30, 2005 totaled $2.5 million.
The
Company has entered into an inventory purchase agreement with one of its
suppliers. Under the terms of this agreement, the Company guarantees that upon
the occurrence of an event of default with respect to the credit facilities
between the supplier and its bank, the Company will purchase up to a maximum
declining amount of good quality inventory over the period through August 1,
2006. The schedule of obligations in the event of default is as
follows:
|
·
|
Through
February 28, 2006 - Up to $2.5
million.
|
|
·
|
From
March 1, 2006 to May 31, 2006 - Up to $2.0
million
|
|
·
|
From
June 1, 2006 to August 1, 2006 - Up to $1.5 million.
|
The
Company anticipates making contributions to the deferred benefit pension plans
of $0.9 million through October 15, 2006.
The
Company has no other off-balance sheet arrangements.
Market
Risk Management
The
Company is exposed to market risk stemming from changes in foreign exchange
rates, interest rates and, to a lesser extent, commodity prices. Changes in
these factors could cause fluctuations in earnings and cash flows. The Company
may reduce exposure to certain of these market risks by entering into hedging
transactions authorized under Company policies that place controls on these
activities. Hedging transactions involve the use of a variety of derivative
financial instruments. Derivatives are used only where there is an underlying
exposure, not for trading or speculative purposes.
Foreign
Operations
The
Company has significant foreign operations, for which the functional currencies
are denominated primarily in Euros, Swiss Francs, Japanese Yen and Canadian
Dollars. As the values of the currencies of the foreign countries in which
the
Company has operations increase or decrease relative to the U.S. Dollar, the
sales, expenses, profits, assets and liabilities of the Company’s foreign
operations, as reported in the Company’s Consolidated Financial Statements,
increase or decrease, accordingly. In the past, the Company has mitigated a
portion of the fluctuations in certain foreign currencies through the purchase
of foreign currency swaps, forward contracts and options to hedge known
commitments, primarily for purchases of inventory and other assets denominated
in foreign currencies. However, no significant transactions of these types
were
entered during fiscal years 2005 and 2004.
18
Interest
Rates
The
Company’s debt structure and interest rate risk are managed through the use of
fixed and floating rate debt. The Company’s primary exposure is to U.S. interest
rates. The Company also periodically enters into interest rate swaps, caps
or
collars to hedge its exposure and lower financing costs. The Company had no
interest rate swaps outstanding as of the fiscal 2005 year end.
Commodities
Certain
components used in the Company’s products are exposed to commodity price
changes. The Company manages this risk as possible through instruments such
as
purchase orders and non-cancelable supply contracts. Primary commodity price
exposures include costs associated with metals, resins and packaging
materials.
Sensitivity
to Changes in Value
The
estimates that follow are intended to measure the maximum potential fair value
or earnings the Company could lose in one year from adverse changes in market
interest rates. The calculations are not intended to represent actual losses
in
fair value or earnings that the Company expects to incur. The estimates do
not
consider favorable changes in market rates. The table below presents the
estimated maximum potential loss in fair value and annual earnings before income
taxes from a 100 basis point movement in interest rates on the senior notes
outstanding at September 30, 2005:
|
|
|||||||
|
Estimated
Impact on
|
|||||||
|
(millions)
|
Fair
Value
|
|
|
Earnings
Before Income
Taxes
|
|||
|
Interest
rate instruments
|
$
|
0.6
|
$
|
0.5
|
|||
The
Company has outstanding $50.8 million in unsecured senior notes as of September
30, 2005. The senior notes bear interest at rates that range from 7.15% to
7.82%
and are to be repaid through December 2008. The fair market value of the
Company’s fixed rate debt was $54.7 million as of September 30,
2005.
Other
Factors
The
Company experienced inflationary pressures during fiscal 2005 on energy, metals,
resins and freight charges. The Company anticipates that changing costs of
basic
raw materials may impact future operating costs and, accordingly, the prices
of
its products. The Company is involved in continuing programs to mitigate the
impact of cost increases through changes in product design and identification
of
sourcing and manufacturing efficiencies. Price increases and, in certain
situations, price decreases are implemented for individual products, when
appropriate.
Critical
Accounting Policies and
Estimates
The
Company’s management discussion and analysis of its financial condition and
results of operations are based upon the Company’s consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the U.S. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of its assets, liabilities, sales and expenses, and related footnote
disclosures. On an on-going basis, the Company evaluates its estimates for
product returns, bad debts, inventories, intangible assets, income taxes,
warranty obligations, pensions and other post-retirement benefits, and
litigation. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
19
The
Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements. Management has discussed these policies with the Audit
Committee of the Company’s Board of Directors.
Allowance
for Doubtful Accounts
The
Company recognizes revenue when title and risk of ownership have passed to
the
buyer. Allowances for doubtful accounts are estimated at the individual
operating companies based on estimates of losses related to customer receivable
balances. Estimates are developed by using standard quantitative measures based
on historical losses, adjusting for current economic conditions and, in some
cases, evaluating specific customer accounts for risk of loss. The establishment
of reserves requires the use of judgment and assumptions regarding the potential
for losses on receivable balances. Though the Company considers these balances
adequate and proper, changes in economic conditions in specific markets in
which
the Company operates could have a favorable or unfavorable effect on reserve
balances required.
Inventories
The
Company values inventory at the lower of cost (determined using the first-in
first-out method) or market. Management’s judgment is required to determine the
reserve for obsolete or excess inventory. Inventory on hand may exceed future
demand either because the product is outdated or because the amount on hand
is
more than will be used to meet future needs. Inventory reserves are estimated
at
the individual operating companies using standard quantitative measures based
on
criteria established by the Company. The Company also considers current forecast
plans, as well as, market and industry conditions in establishing reserve
levels. Though the Company considers these balances to be adequate, changes
in
economic conditions, customer inventory levels or competitive conditions could
have a favorable or unfavorable effect on reserve balances
required.
Deferred
Taxes
The
Company records a valuation allowance to reduce its deferred tax assets to
the
amount that is more likely than not to be realized. While the Company has
considered future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance, in the event
the
Company were to determine that it would not be able to realize all or part
of
its net deferred tax asset in the future, an adjustment to the deferred tax
asset would be charged to income in the period such determination was made.
Likewise, should the Company determine that it would be able to realize its
deferred tax assets in the future in excess of its net recorded amount, an
adjustment to the deferred tax asset would increase income in the period such
determination was made.
Goodwill
and Intangible Impairment
In
assessing the recoverability of the Company's goodwill and other intangibles,
the Company must make assumptions regarding estimated future cash flows and
other factors to determine the fair value of the respective assets. If these
estimates or their related assumptions change in the future, the Company may
be
required to record impairment charges for these assets not previously recorded.
Warranties
The
Company accrues a warranty reserve for estimated costs to provide warranty
services. The Company’s estimate of costs to service its warranty obligations is
based on historical experience, expectation of future conditions and known
product issues. To the extent the Company experiences increased warranty claim
activity or increased costs associated with servicing those claims, revisions
to
the estimated warranty reserve would be required. The Company engages in product
quality programs and processes, including monitoring and evaluating the quality
of its suppliers, to help minimize warranty obligations.
20
New
Accounting Pronouncements
In
December 2004, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 123(R), Share-Based
Payment,
a
revision to SFAS 123, Accounting
for Stock-Based Compensation.
This
statement supersedes APB Opinion No. 25, Accounting
for Stock Issued to Employees.
SFAS
No. 123(R) establishes standards for the accounting for transactions in which
an
entity exchanges its equity instruments for goods or services. This statement
requires that the cost of share based payment transactions be recorded as an
expense at their fair value determined by applying a fair value measurement
method. The provisions of this statement are effective for fiscal years
beginning after June 15, 2005. The Company will adopt this statement for fiscal
2006 using the modified prospective approach. This statement is not expected
to
have a material impact on the financial results of the Company.
Information
with respect to this item is included in Management’s Discussion and Analysis of
Financial Condition and Results of Operations under the heading “Market Risk
Management.”
Information
with respect to this item is included in the Company’s consolidated financial
statements attached to this report on pages F-1 to F-26.
None.
|
ITEM
9A.
|
|
(a)
|
Evaluation
of Disclosure Controls and
Procedures
|
As
of the
end of the period covered by this report, the Company carried out an evaluation
under the supervision and with the participation of the Company’s management,
including the Company’s Chief Executive Officer and Chief Financial Officer, of
the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based
on
this evaluation, the Company’s Chief Executive Officer and Chief Financial
Officer concluded that the Company’s disclosure controls and procedures were
effective in timely alerting them to material information relating to the
Company required to be included in the Company’s periodic filings with the
Securities and Exchange Commission. It should be noted that in designing and
evaluating the disclosure controls and procedures, management recognized that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and management necessarily was required to apply its judgment in evaluating
the
cost-benefit relationship of possible controls and procedures. The Company
has
designed its disclosure controls and procedures to reach a level of reasonable
assurance of achieving the desired control objectives and based on the
evaluation described above, the Company’s Chief Executive Officer and Chief
Financial Officer concluded that the Company’s disclosure controls and
procedures were effective at reaching that level of reasonable
assurance.
|
(b)
|
Changes
in Internal Control over Financial
Reporting.
|
There
was
no change in the Company’s internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934,
as
amended) during the Company’s most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.
|
(c)
|
Management’s
Annual Report on Internal Control over Financial
Reporting
|
The
annual report of management required under this Item 9A is contained in the
section titled “Item 8. Financial Statements and Supplementary Data” under the
heading “Management’s Report on Internal Control over Financial
Reporting”.
|
(d)
|
Attestation
Report of Independent Registered Public Accounting
Firm
|
Ernst
& Young LLP, the independent registered public accounting firm who audited
the Company's consolidated financial statements, has issued an attestation
report on management's assessment of the Company's internal control over
financial reporting, which is contained in the Company's consolidated financial
statements under the heading “Report of Independent Registered Public Accounting
Firm on Internal Control over Financial Reporting.”
21
|
ITEM
9B.
|
None.
PART
III
Information
regarding the executive officers and directors of the Company is incorporated
herein by reference to the discussions under “Election of Directors,” “Executive
Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Audit
Committee Matters-Audit Committee Financial Expert” in the Company’s Proxy
Statement for the 2006 Annual Meeting of Shareholders, which will be filed
with
the Securities and Exchange Commission (the “Commission”) on or before January
28, 2006. Information regarding the Company’s Code of Business Ethics is
incorporated herein by reference to the discussion under “Corporate Governance
Matters - Employee Code of Conduct and Code of Ethics and Procedures for
Reporting of Accounting Concerns” in the Company’s Proxy Statement for the 2006
Annual Meeting of Shareholders.
The
Audit
Committee of the Company's Board of Directors is an “audit committee” for
purposes of Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The
members of the Audit Committee are Terry E. London (Chairman), Thomas F. Pyle,
Jr. and John M. Fahey, Jr.
|
ITEM
11.
|
Information
with respect to this item is included in the Company’s Proxy Statement for its
March 1, 2006 Annual Meeting of Shareholders, which, upon filing with the
Securities and Exchange Commission, will be incorporated herein by reference
and
will be filed with the Commission on or before January 28, 2006, under the
headings -“Compensation of Directors” and “Executive Compensation;” provided,
however, that the subsection entitled “Executive Compensation - Compensation
Committee Report on Executive Compensation” shall not be deemed to be
incorporated herein by reference.
|
ITEM
12.
|
Information
with respect to this item is included in the Company’s Proxy Statement for its
March 1, 2006 Annual Meeting of Shareholders, which, upon filing with the
Securities and Exchange Commission, will be incorporated herein by reference
and
will be filed with the Commission on or before January 28, 2006, under the
heading “Stock Ownership of Management and Others”.
22
Equity
Compensation Plan Information
The
following table summarizes share information, as of September 30, 2005, for
the
Company’s equity compensation plans, including the Johnson Outdoors Inc. 2003
Non-Employee Director Stock Ownership Plan, the Johnson Outdoors Inc. 2000
Long-Term Stock Incentive Plan, and the Johnson Outdoors Inc. 1987 Employees’
Stock Purchase Plan. All of these plans have been approved by the Company’s
shareholders.
|
Plan
Category
|
Number
of
Common
Shares to Be
Issued
Upon Exercise
of
Outstanding
Options,
Warrants
and Rights
|
|
|
Weighted-average
Exercise
Price of
Outstanding
Options,
Warrants
and Rights
|
|
|
Number
of
Common
Shares
Available
for Future
Issuance
Under
Equity
Compensation
Plans
|
|||
|
Equity
compensation plans
approved by shareholders
|
343,034
|
$
|
9.13
|
700,138(1)
|
||||||
|
Equity
compensation plans not
approved
by shareholders
|
—
|
—
|
—
|
|||||||
|
Total
|
343,034
|
$
|
9.13
|
700,138(1)
|
|
(1) All
of
the available shares under the 2003 Non-Employee Director Stock Ownership Plan
(123,285) and under the 2000 Long-Term Stock Incentive Plan (494,011) may be
issued upon the exercise of stock options or granted as restricted stock, and,
in the case of the 2000 Long-Term Stock Incentive Plan, as share units. There
are 82,842 shares available for issuance under the Johnson Outdoors Inc. 1987
Employees’ Stock Purchase Plan, as amended.
Information
with respect to this item is included in the Company’s Proxy Statement for its
March 1, 2006 Annual Meeting of Shareholders, which, upon filing with the
Securities and Exchange Commission, will be incorporated herein by reference
and
will be filed with the Commission on or before January 28, 2006, under the
heading “Certain Relationships and Related Transactions.”
Information
with respect to this item is included in the Company’s Proxy Statement for its
March 1, 2006 Annual Meeting of Shareholders, which, upon filing with the
Securities and Exchange Commission, will be incorporated herein by reference
and
will be filed with the Commission on or before January 28, 2006, under the
heading “Audit Committee Matters - Fees of Independent Registered Public
Accounting Firm.”
23
PART
IV
The
following documents are filed as a part of this Form 10-K:
Financial
Statements
Included
in Item 8 of Part II of this Form 10-K are the following:
Management’s
Report on Internal Control over Financial Reporting
Report
of
Independent Registered Public Accounting Firm on Internal Control over Financial
Reporting
Report
of
Independent Registered Public Accounting Firm on Consolidated Financial
Statements
Consolidated
Balance Sheets - September 30, 2005 and October 1, 2004
Consolidated
Statements of Operations - Years ended September 30, 2005, October 1, 2004
and
October 3, 2003
Consolidated
Statements of Shareholders’ Equity - Years ended September 30, 2005, October 1,
2004 and October 3, 2003
Consolidated
Statements of Cash Flows - Years ended September 30, 2005, October 1, 2004
and
October 3, 2003
Notes
to
Consolidated Financial Statements
Financial
Statement Schedules
All
schedules are omitted because they are not applicable, are not required or
equivalent information has been included in the Consolidated Financial
Statements or notes thereto.
Exhibits
See
Exhibit Index.
24
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized, in the City of Racine and State
of
Wisconsin, on the
8th
day of
December 2005.
JOHNSON
OUTDOORS INC.
(Registrant)
By
/s/
Helen P.
Johnson-Leipold
Helen
P.
Johnson-Leipold
Chairman
and Chief Executive Officer
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed by the following persons on behalf of the registrant and in the
capacities indicated on the
8th
day of
December 2005.
|
/s/
Helen P. Johnson-Leipold
|
Chairman
and Chief Executive Officer
|
|
|
(Helen
P. Johnson-Leipold)
|
and
Director
|
|
|
(Principal
Executive Officer)
|
||
|
/s/
Thomas F. Pyle, Jr.
|
Vice
Chairman of the Board
|
|
|
(Thomas
F. Pyle, Jr.)
|
and
Director
|
|
|
/s/
Gregory E. Lawton
|
Director
|
|
|
(Gregory
E. Lawton)
|
||
|
/s/
Terry E. London
|
Director
|
|
|
(Terry
E. London)
|
||
|
/s/
John M. Fahey, Jr.
|
Director
|
|
|
(John
M. Fahey, Jr.)
|
||
|
/s/
W. Lee McCollum
|
Director
|
|
|
(W.
Lee McCollum)
|
||
|
/s/
David W. Johnson
|
Vice
President and Chief Financial Officer
|
|
|
(David
W. Johnson)
|
(Principal
Financial and Accounting Officer)
|
25
|
Exhibit
|
Title
|
|
2
|
Agreement
and Plan of Merger, dated October 28, 2004, by and between JO
Acquisition
Corp. and Johnson Outdoors Inc (Filed as Exhibit 2 to the Company’s Form
8-K dated October 28, 2004 and incorporated herein by
reference.)
|
|
3.1
|
Articles
of Incorporation of the Company as amended
through February 17, 2000.
(Filed as Exhibit 3.1(a) to the Company’s Form 10-Q for the quarter ended
March 31, 2000 and incorporated herein by reference.)
|
|
3.2
|
Bylaws
of the Company as amended through December 4, 2003.
(Filed as Exhibit 3.2(a) to the Company’s Form 10-K for the year ended
October 3, 2003
and incorporated herein by reference.)
|
|
4.1
|
Note
Agreement dated October 1, 1995. (Filed as Exhibit 4.1 to the
Company’s
Form 10-Q for the quarter ended December 29, 1995 and incorporated
herein
by reference.)
|
|
4.2
|
First
Amendment dated October 11, 1996 to Note Agreement dated October
1, 1995.
(Filed as Exhibit 4.3 to the Company’s Form 10-Q for the quarter ended
December 27, 1996 and incorporated herein by reference.)
|
|
4.3
|
Second
Amendment dated September 30, 1997 to Note Agreement dated October
1,
1995. (Filed as Exhibit 4.8 to the Company’s Form 10-K for the year ended
October 1, 1997 and incorporated herein by reference.)
|
|
4.4
|
Third
Amendment dated October 1, 1997 to Note Agreement dated October
1, 1995.
(Filed as Exhibit 4.9 to the Company’s Form 10-K for the year ended
October 1, 1997 and incorporated herein by reference.)
|
|
4.5
|
Fourth
Amendment dated January 10, 2000 to Note Agreement dated October
1, 1995.
(Filed as Exhibit 4.9 to the Company’s Form 10-Q for the quarter ended
March 31, 2000 and incorporated herein by reference.)
|
|
4.6
|
Fifth
Amendment dated December 13, 2001 to Note Agreement dated October
1, 1995.
(Filed as Exhibit 4.6 to the Company’s Form 10-K for the year ended
October 3, 2003 and incorporated herein by reference.)
|
|
4.7
|
Consent
and Amendment dated September 6, 2002 to Note Agreement dated October
1, 1995. (Filed as Exhibit 4.7 to the Company’s Form 10-K for the year
ended October 3, 2003 and incorporated herein by reference.)
|
|
4.8
|
Note
Agreement dated as of September 15, 1997. (Filed as Exhibit 4.15
to the
Company’s Form 10-K for the year ended October 1, 1997 and incorporated
herein by reference.)
|
|
4.9
|
First
Amendment dated January 10, 2000 to Note Agreement dated September
15,
1997. (Filed as Exhibit 4.10 to the Company’s Form 10-Q for the quarter
ended March 31, 2000 and incorporated herein by reference.)
|
|
4.10
|
Second
Amendment dated December 13, 2001 to Note Agreement dated September
15,
1997. (Filed as Exhibit 4.9 to the Company’s Form 10-K for the year ended
October 3, 2003 and incorporated herein by reference.)
|
|
4.11
|
Consent
and Amendment dated as of September 6, 2002 to Note Agreement dated
September 15, 1997. (Filed as Exhibit 4.11 to the Company’s Form 10-K for
the year ended October 3, 2003 and incorporated herein by
reference.)
|
|
4.12
|
Note
Agreement dated as of December 13, 2001. (Filed as Exhibit 4.12
to the
Company’s Form 10-K for the year ended October 3, 2003 and incorporated
herein by reference.)
|
|
4.13
|
Consent
and Amendment dated of September 6, 2002 to Note Agreement dated as
of December 13, 2001. (Filed as Exhibit 4.15 to the Company’s Form 10-K
for the year ended October 3, 2003 and incorporated herein by
reference.)
|
|
4.14
|
Revolving
Credit Agreement, dated as of October 29, 2004, by and among
Johnson
Outdoors Inc. (Filed as Exhibit 10.1 to the Company’s Form 8-K dated
October 29, 2004 and incorporated herein by reference.)
|
26
|
9.1
|
Johnson
Outdoors Inc. Class B common stock Voting Trust Agreement, dated
December
30, 1993 (Filed as Exhibit 9 to the Company’s Form 10-Q for the quarter
ended December 31, 1993 and incorporated herein by reference.)
|
|
9.2
|
Amendment
to Johnson Outdoors Inc. Class B common stock Voting Trust Agreement,
dated December 30, 1993. (Filed as Exhibit 99.7 to Amendment No.
4 to the
Schedule 13D filed jointly by Helen P. Johnson-Leipold, Imogene P.
Johnson
and the Samuel C. Johnson 1988 Trust Number One u/a September 14,
1988 on
June 28, 2004 and incorporated herein by reference.)
|
|
10.1
|
Stock
Purchase Agreement, dated as of January 12, 2000, by and between
Johnson
Outdoors Inc. and Berkley Inc. (Filed as Exhibit 2.1 to the Company’s Form
8-K dated March 31, 2000 and incorporated herein by
reference.)
|
|
10.2
|
Amendment
to Stock Purchase Agreement, dated as of February 28, 2000, by and
between
Johnson Outdoors Inc. and Berkley Inc. (Filed as Exhibit 2.2 to the
Company’s Form 8-K dated March 31, 2000 and incorporated herein by
reference.)
|
|
10.3+
|
Johnson
Outdoors Inc. Amended and Restated 1986 Stock Option Plan. (Filed
as
Exhibit 10 to the Company’s Form 10-Q for the quarter ended July 2, 1993
and incorporated herein by reference.)
|
|
10.4
|
Registration
Rights Agreement regarding Johnson Outdoors Inc. common stock issued
to
the Johnson family prior to the acquisition of Johnson Diversified,
Inc.
(Filed as Exhibit 10.6 to the Company’s Form S-1 Registration Statement
No. 33-16998 and incorporated herein by reference.)
|
|
10.5
|
Registration
Rights Agreement regarding Johnson Outdoors Inc. Class A common stock
held
by Mr. Samuel C. Johnson. (Filed as Exhibit 28 to the Company’s Form 10-Q
for the quarter ended March 29, 1991 and incorporated herein by
reference.)
|
|
10.6+
|
Form
of Restricted Stock Agreement. (Filed as Exhibit 10.8 to the Company’s
Form S-1 Registration Statement No. 33-23299 and incorporated herein
by
reference.)
|
|
10.7+
|
Form
of Supplemental Retirement Agreement of Johnson Diversified, Inc.
(Filed
as Exhibit 10.9 to the Company’s Form S-1 Registration Statement No.
33-16998 and incorporated herein by reference.)
|
|
10.8+
|
Johnson
Outdoors Retirement and Savings Plan. (Filed as Exhibit 10.9 to the
Company’s Form 10-K for the year ended September 29, 1989 and incorporated
herein by reference.)
|
|
10.9+
|
Form
of Agreement of Indemnity and Exoneration with Directors and Officers.
(Filed as Exhibit 10.11 to the Company’s Form S-1 Registration Statement
No. 33-16998 and incorporated herein by reference.)
|
|
10.10
|
Consulting
and administrative agreements with S. C. Johnson & Son, Inc. (Filed as
Exhibit 10.12 to the Company’s Form S-1 Registration Statement No.
33-16998 and incorporated herein by reference.)
|
|
10.11+
|
Johnson
Outdoors Inc. 1994 Long-Term Stock Incentive Plan. (Filed as Exhibit
4 to
the Company’s Form S-8 Registration Statement No. 333-88091 and
incorporated herein by reference.)
|
|
10.12+
|
Johnson
Outdoors Inc. 1994 Non-Employee Director Stock Ownership Plan. (Filed
as
Exhibit 4 to the Company’s Form S-8 Registration Statement No. 333-88089
and incorporated herein by reference.)
|
|
10.13+
|
Johnson
Outdoors Economic Value Added Bonus Plan (Filed as Exhibit 10.15
to the
Company’s Form 10-K for the year ended October 1, 1997 and incorporated
herein by reference.)
|
|
10.14+
|
Johnson
Outdoors Inc. 2000 Long-Term Stock Incentive Plan. (Filed as Exhibit
99.1
to the Company’s Current Report on Form 8-K dated July 29, 2005 and
incorporated herein by reference.)
|
27
|
10.15+
|
Share
Purchase and Transfer Agreement, dated as of August 28, 2002, by
and
between, among others, Johnson Outdoors Inc. and an affiliate of
Bain
Capital Fund VII-E (UK), Limited Partnership. (Filed as Exhibit 2.1
to the
Company’s Form 8-K dated September 9, 2002 and incorporated herein by
reference.)
|
|
10.16+
|
Johnson
Outdoors Inc. Worldwide Key Executive Phantom Share Long-Term Incentive
Plan
(Filed as Exhibit 10.1 to the Company’s Form 10-Q dated March 28, 2003 and
incorporated herein by reference.)
|
|
10.17+
|
Johnson
Outdoors Inc. Worldwide Key Executives’ Discretionary Bonus
Plan.
(Filed as Exhibit 99.3 to the Company’s Current Report on Form 8-K dated
July 29, 2005 and incorporated herein by reference.)
|
|
10.18
|
Stock
Purchase Agreement by and between Johnson Outdoors Inc. and TFX Equities
Incorporated. (Filed as Exhibit 2.1 to the Company’s Form 10-Q dated April
2, 2004 and incorporated herein by reference.)
|
|
10.19
|
Intellectual
Property Purchase Agreement by and among Johnson Outdoors Inc., Technology
Holding Company II and Teleflex Incorporated. (Filed as Exhibit 2.2
to the
Company’s Form 10-Q dated April 2, 2004 and incorporated herein by
reference.)
|
|
10.20+
|
Johnson
Outdoors Inc. 1987 Employees’ Stock Purchase Plan as amended. (Filed as
Exhibit 99.2 to the Company’s Current Report on Form 8-K dated July 29,
2005 and incorporated herein by reference.)
|
|
10.21+
|
Johnson
Outdoors Inc. 2003 Non-Employee Director Stock Ownership Plan. (Filed
as
Exhibit 10.2 to the Company’s Form 10-Q dated April 2, 2004 and
incorporated herein by reference.)
|
|
10.22+
|
Form
of Restricted Stock Agreement under Johnson Outdoors Inc. 2003
Non-Employee Director Stock Ownership Plan. (Filed as Exhibit 4.2
to the
Company’s Form S-8 Registration Statement No. 333-115298 and incorporated
herein by reference.)
|
|
10.23+
|
Form
of Stock Option Agreement under Johnson Outdoors Inc. 2003 Non-Employee
Director Stock Ownership Plan. (Filed as Exhibit 10.2 to the Company’s
Form S-8 Registration Statement No. 333-115298 and incorporated herein
by
reference.)
|
|
11
|
Statement
regarding computation of per share earnings. (Note 15 to the Consolidated
Financial Statements of the Company’s 2001 Form 10-K is incorporated
herein by reference.)
|
|
21
|
|
|
23
|
|
|
31.1
|
|
|
31.2
|
|
|
32.1(1)
|
|
|
32.2(1)
|
|
+
A
management contract or compensatory plan or arrangement.
(1) This
certification is not “filed” for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, or incorporated by reference into any filing
under the Securities Act of 1933, as amended, or the Securities Exchange Act
of
1934, as amended.
28
|
|
||
|
Table
of Contents
|
Page
|
|
|
Management’s
Report on Internal Control over Financial Reporting
|
F-1
|
|
|
Report
of Independent Registered Public Accounting Firm on Internal Control
over
Financial Reporting
|
F-1
|
|
|
Report
of Independent Registered Public Accounting Firm on Consolidated
Financial
Statements
|
F-2
|
|
|
Consolidated
Balance Sheets
|
F-4
|
|
|
Consolidated
Statements of Operations
|
F-5
|
|
|
Consolidated
Statements of Shareholders’ Equity
|
F-6
|
|
|
Consolidated
Statements of Cash Flows
|
F-7
|
|
|
Notes
to Consolidated Financial Statements
|
F-8
|
|
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The
management of Johnson Outdoors Inc. is responsible for establishing and
maintaining adequate internal control over financial reporting, as such term
is
defined in Rule 13a-15(f) of the Exchange Act. The Company’s internal control
over financial reporting is designed to provide reasonable assurance to the
Company’s management and board of directors regarding the preparation and fair
presentation of published financial statements. The Company’s internal control
over financial reporting includes those policies and procedures
that:
|
(a)
|
pertain
to the maintenance of records that, in reasonable detail, accurately
and
fairly reflect the transactions and dispositions of the assets of
the
Company;
|
|
(b)
|
provide
reasonable assurance that transactions are recorded as necessary
to permit
preparation of financial statements in accordance with generally
accepted
accounting principles, and that receipts and expenditures of the
Company
are being made only in accordance with authorizations of management
and
directors of the Company; and
|
|
(c)
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s assets that
could have a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Therefore, even those systems determined to
be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation. Also, projections of any evaluation
of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of September 30, 2005. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal
Control-Integrated Framework. Based
on
our assessment, management believes that, as of September 30, 2005, the
Company’s internal control over financial reporting was effective based on those
criteria.
The
Company’s auditors, Ernst & Young, LLP, have issued an attestation report on
management’s assessment of the Company’s internal control over financial
reporting. This attestation report is set forth immediately following this
report.
|
/s/
Helen P.
Johnson-Leipold
|
/s/
David W.
Johnson
|
|
Helen
P. Johnson-Leipold
|
David
W. Johnson
|
|
Chairman
and Chief Executive Officer
|
Vice
President and Chief Financial Officer
|
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
Shareholders
and Board of Directors
Johnson
Outdoors Inc.:
We
have
audited management’s assessment, included in the accompanying Management’s
Report on Internal Control over Financial Reporting, that Johnson Outdoors
Inc.
(the Company) maintained effective internal control over financial reporting
as
of September 30, 2005, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria). The Company’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management’s
assessment and an opinion on the effectiveness of the Company’s internal control
over financial reporting based on our audit.
F-1
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management’s assessment that the Company maintained effective internal
control over financial reporting as of September 30, 2005, is fairly stated,
in
all material respects, based on the COSO criteria. Also, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of September 30, 2005, based on the COSO criteria.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Johnson
Outdoors Inc. as of September 30, 2005 and October 1, 2004, and the related
consolidated statements of operations, shareholders’ equity and cash flows for
each of the three years in the period ended September 30, 2005 of Johnson
Outdoors Inc. and our report dated December 13,
2005
expressed an unqualified opinion thereon.
|
/s/
Ernst & Young
LLP
|
|
|
Ernst
& Young LLP
|
|
|
Milwaukee,
Wisconsin
|
|
|
December
13, 2005
|
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON CONSOLIDATED FINANCIAL
STATEMENTS
Shareholders
and Board of Directors
Johnson
Outdoors Inc.:
We
have
audited the accompanying consolidated balance sheets of Johnson Outdoors Inc.
as
of September 30, 2005 and October 1, 2004, and the related consolidated
statements of operations, shareholders’ equity, and cash flows for each of the
three years in the period ended September 30, 2005. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
F-2
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Johnson Outdoors
Inc.
as of September 30, 2005 and October 1, 2004 and the consolidated results of
its
operations and its cash flows for each of the three years in the period ended
September 30, 2005 in conformity with U.S. generally accepted accounting
principles.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company’s internal
control over financial reporting as of September 30, 2005, based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission and our report dated
December 13, 2005 expressed an unqualified opinion thereon.
|
/s/
Ernst & Young
LLP
|
|
|
Ernst
& Young LLP
|
|
|
Milwaukee,
Wisconsin
|
|
|
December
13, 2005
|
F-3
CONSOLIDATED
BALANCE SHEETS
|
(thousands,
except share data)
|
September
30
2005
|
October
1
2004
|
|||||
|
ASSETS
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and temporary cash investments
|
$
|
72,111
|
$
|
69,572
|
|||
|
Accounts
receivable less allowance for doubtful
accounts
of $2,546 and $2,807, respectively
|
48,274
|
49,727
|
|||||
|
Inventories
|
51,885
|
60,426
|
|||||
|
Income
taxes refundable
|
746
|
—
|
|||||
|
Deferred
income taxes
|
8,118
|
8,737
|
|||||
|
Other
current assets
|
4,901
|
6,179
|
|||||
|
Total
current assets
|
186,035
|
194,641
|
|||||
|
Property,
plant and equipment, net
|
31,393
|
34,355
|
|||||
|
Deferred
income taxes
|
19,675
|
16,939
|
|||||
|
Goodwill
|
37,733
|
39,858
|
|||||
|
Other
intangible assets, net
|
3,780
|
3,993
|
|||||
|
Other
assets
|
4,702
|
3,928
|
|||||
|
Total
assets
|
$
|
283,318
|
$
|
293,714
|
|||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|||||||
|
Current
liabilities:
|
|||||||
|
Current
maturities of long-term debt
|
$
|
13,000
|
$
|
16,222
|
|||
|
Accounts
payable
|
17,872
|
16,634
|
|||||
|
Accrued
liabilities:
|
|||||||
|
Salaries,
wages and benefits
|
17,052
|
16,700
|
|||||
|
Accrued
discounts and returns
|
4,613
|
4,395
|
|||||
|
Accrued
interest payable
|
1,804
|
2,053
|
|||||
|
Income
taxes payable
|
—
|
286
|
|||||
|
Other
|
14,855
|
19,042
|
|||||
|
Total
current liabilities
|
69,196
|
75,332
|
|||||
|
Long-term
debt, less current maturities
|
37,800
|
50,797
|
|||||
|
Other
liabilities
|
9,888
|
6,941
|
|||||
|
Total
liabilities
|
116,884
|
133,070
|
|||||
|
Shareholders’
equity:
|
|||||||
|
Preferred
stock: none issued
|
—
|
—
|
|||||
|
Common
stock:
|
|||||||
|
Class
A shares issued:
September
30, 2005, 7,796,340;
October
1, 2004, 7,599,831
|
390
|
380
|
|||||
|
Class
B shares issued (convertible into Class A):
September
30, 2005, 1,219,667;
October
1, 2004, 1,221,715
|
61
|
61
|
|||||
|
Capital
in excess of par value
|
55,279
|
52,640
|
|||||
|
Retained
earnings
|
109,300
|
102,199
|
|||||
|
Deferred
compensation
|
(598
|
)
|
(20
|
)
|
|||
|
Accumulated
other comprehensive income
|
2,002
|
5,384
|
|||||
|
Total
shareholders’ equity
|
166,434
|
160,644
|
|||||
|
Total
liabilities and shareholders’ equity
|
$
|
283,318
|
$
|
293,714
|
The
accompanying notes are an integral part of the Consolidated Financial
Statements.
F-4
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
Year
Ended
|
|||||||||
|
(thousands,
except per share data)
|
September
30
2005
|
October
1
2004
|
October
3
2003
|
|||||||
|
Net
sales
|
$
|
380,690
|
$
|
355,274
|
$
|
315,892
|
||||
|
Cost
of sales
|
224,336
|
207,656
|
187,903
|
|||||||
|
Gross
profit
|
156,354
|
147,618
|
127,989
|
|||||||
|
Operating
expenses:
|
||||||||||
|
Marketing
and selling
|
85,632
|
79,900
|
74,555
|
|||||||
|
Administrative
management, finance and information systems
|
42,167
|
37,121
|
33,438
|
|||||||
|
Research
and development
|
10,481
|
9,023
|
6,682
|
|||||||
|
Profit
sharing
|
2,340
|
2,121
|
1,397
|
|||||||
|
Amortization
of intangible assets
|
202
|
325
|
304
|
|||||||
|
Total
operating expenses
|
140,822
|
128,490
|
116,376
|
|||||||
|
Operating
profit
|
15,532
|
19,128
|
11,613
|
|||||||
|
Interest
income
|
(455
|
)
|
(464
|
)
|
(798
|
)
|
||||
|
Interest
expense
|
4,680
|
5,062
|
5,165
|
|||||||
|
Other
income, net
|
(795
|
)
|
(206
|
)
|
(2,456
|
)
|
||||
|
Income
before income taxes
|
12,102
|
14,736
|
9,702
|
|||||||
|
Income
tax expense
|
5,001
|
6,047
|
4,281
|
|||||||
|
Net
income
|
$
|
7,101
|
$
|
8,689
|
$
|
5,421
|
||||
|
Basic
earnings per common share:
|
$
|
0.82
|
$
|
1.01
|
$
|
0.64
|
||||
|
Diluted
earnings per common share:
|
$
|
0.81
|
$
|
0.99
|
$
|
0.63
|
||||
The
accompanying notes are an integral part of the Consolidated Financial
Statements.
F-5
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
|
|
Accumulated
Other Comprehensive Income (loss)
|
|||||||||||||||||||||
|
(thousands)
|
Common
Stock
|
Capital
in Excess
of Par
Value
|
|
Retained
Earnings
|
|
|
Deferred
Compensation
|
|
|
Cumulative
Translation
Adjustment
|
|
|
Minimum
Pension
Liability
|
|
|
Comprehensive
Income
(Loss)
|
|
|||||
|
BALANCE
AT SEPTEMBER 27, 2002
|
$
|
416
|
$
|
47,583
|
$
|
88,089
|
$
|
(22
|
)
|
$
|
(11,723
|
)
|
$
|
(198
|
)
|
|||||||
|
Net
income
|
—
|
—
|
5,421
|
—
|
—
|
—
|
$
|
5,421
|
||||||||||||||
|
Issuance
of restricted stock
|
—
|
50
|
—
|
(50
|
)
|
—
|
—
|
—
|
||||||||||||||
|
Exercise
of stock options (1)
|
13
|
2,378
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||
|
Issuance
of stock under employee stock purchase plan
|
1
|
82
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||
|
Amortization
of deferred compensation
|
—
|
—
|
—
|
52
|
—
|
—
|
—
|
|||||||||||||||
|
Translation
adjustment
|
—
|
—
|
—
|
—
|
12,174
|
—
|
12,174
|
|||||||||||||||
|
Additional
minimum pension liability (2)
|
—
|
—
|
—
|
—
|
—
|
(72
|
)
|
(72
|
)
|
|||||||||||||
|
BALANCE
AT OCTOBER 3, 2003
|
430
|
50,093
|
93,510
|
(20
|
)
|
451
|
(270
|
)
|
$
|
17,523
|
||||||||||||
|
Net
income
|
—
|
—
|
8,689
|
—
|
—
|
—
|
$
|
8,689
|
||||||||||||||
|
Issuance
of restricted stock
|
—
|
50
|
—
|
(50
|
)
|
—
|
—
|
—
|
||||||||||||||
|
Exercise
of stock options (1)
|
10
|
2,119
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||
|
Issuance
of stock under employee stock purchase plan
|
1
|
378
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||
|
Amortization
of deferred compensation
|
—
|
—
|
—
|
50
|
—
|
—
|
—
|
|||||||||||||||
|
Translation
adjustment
|
—
|
—
|
—
|
—
|
5,654
|
—
|
5,654
|
|||||||||||||||
|
Additional
minimum pension liability (2)
|
—
|
—
|
—
|
—
|
—
|
(451
|
)
|
(451
|
)
|
|||||||||||||
|
BALANCE
AT OCTOBER 1, 2004
|
441
|
52,640
|
102,199
|
(20
|
)
|
6,105
|
(721
|
)
|
$
|
13,892
|
||||||||||||
|
Net
income
|
—
|
—
|
7,101
|
—
|
—
|
—
|
$
|
7,101
|
||||||||||||||
|
Issuance
of restricted stock
|
2
|
678
|
—
|
(680
|
)
|
—
|
—
|
—
|
||||||||||||||
|
Exercise
of stock options (1)
|
7
|
1,400
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||
|
Issuance
of stock under employee stock purchase plan
|
1
|
158
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||
|
Non-cash
compensation (Note 10)
|
—
|
403
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||
|
Amortization
of deferred compensation
|
—
|
—
|
—
|
102
|
—
|
—
|
—
|
|||||||||||||||
|
Translation
adjustment
|
—
|
—
|
—
|
—
|
(2,264
|
)
|
—
|
(2,264
|
)
|
|||||||||||||
|
Additional
minimum pension liability (2)
|
—
|
—
|
—
|
—
|
—
|
(1,118
|
)
|
(1,118
|
)
|
|||||||||||||
|
BALANCE
AT SEPTEMBER 30, 2005
|
$
|
451
|
$
|
55,279
|
$
|
109,300
|
$
|
(598
|
)
|
$
|
3,841
|
$
|
(1,839
|
)
|
$
|
3,719
|
||||||
|
(1)
|
Includes
tax benefit related to exercise of stock options of $336, $565 and
$480
for 2005, 2004 and 2003,
respectively.
|
|
(2)
|
Net
of tax provision of $578, $232, and $37 for 2005, 2004 and 2003,
respectively.
|
The
accompanying notes are an integral part of the Consolidated Financial
Statements.
F-6
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Year
Ended
|
||||||||||
|
(thousands)
|
September
30
2005
|
|
|
October
1
2004
|
|
|
October
3
2003
|
|||
|
CASH
PROVIDED BY (USED FOR) OPERATIONS
|
||||||||||
|
Net
income
|
$
|
7,101
|
$
|
8,689
|
$
|
5,421
|
||||
|
Adjustments
to reconcile net income to net cash provided by
(used
for) operating activities:
|
||||||||||
|
Depreciation
and amortization
|
9,504
|
8,708
|
8,198
|
|||||||
|
Loss
on sale of property, plant and equipment
|
73
|
1,243
|
296
|
|||||||
|
Provision
(benefit) for doubtful accounts receivable
|
379
|
(16
|
)
|
1,216
|
||||||
|
Provision
for inventory reserves
|
431
|
1,073
|
3,296
|
|||||||
|
Non-cash
compensation (Note 10)
|
403
|
—
|
—
|
|||||||
|
Deferred
income taxes
|
(555
|
)
|
97
|
(358
|
)
|
|||||
|
Change
in operating assets and liabilities, net of effect
of
businesses acquired or sold:
|
||||||||||
|
Accounts
receivable
|
841
|
3,410
|
(1,878
|
)
|
||||||
|
Inventories
|
7,831
|
(3,568
|
)
|
(8,983
|
)
|
|||||
|
Accounts
payable and accrued liabilities
|
(1,161
|
)
|
2,731
|
(8,142
|
)
|
|||||
|
Other,
net
|
1,410
|
(210
|
)
|
(2,549
|
)
|
|||||
|
26,257
|
22,157
|
(3,483
|
)
|
|||||||
|
CASH
USED FOR INVESTING ACTIVITIES
|
||||||||||
|
Payments
for purchase of business
|
—
|
(28,187
|
)
|
—
|
||||||
|
Additions
to property, plant and equipment
|
(6,803
|
)
|
(7,844
|
)
|
(9,767
|
)
|
||||
|
Proceeds
from sale of property, plant and equipment
|
422
|
532
|
187
|
|||||||
|
(6,381
|
)
|
(35,499
|
)
|
(9,580
|
)
|
|||||
|
CASH
USED FOR FINANCING ACTIVITIES
|
||||||||||
|
Principal
payments on senior notes and other long-term debt
|
(16,223
|
)
|
(9,572
|
)
|
(8,044
|
)
|
||||
|
Common
stock transactions
|
1,230
|
1,887
|
1,994
|
|||||||
|
(14,993
|
)
|
(7,685
|
)
|
(6,050
|
)
|
|||||
|
Effect
of foreign currency fluctuations on cash
|
(2,344
|
)
|
1,689
|
7,193
|
||||||
|
Increase
(decrease) in cash and temporary cash investments
|
2,539
|
(19,338
|
)
|
(11,920
|
)
|
|||||
|
CASH
AND TEMPORARY CASH INVESTMENTS
|
||||||||||
|
Beginning
of year
|
69,572
|
88,910
|
100,830
|
|||||||
|
End
of year
|
$
|
72,111
|
$
|
69,572
|
$
|
88,910
|
||||
The
accompanying notes are an integral part of the Consolidated Financial
Statements.
F-7
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Johnson
Outdoors Inc. is an integrated, global outdoor recreation products company
engaged in the design, manufacture and marketing of brand name outdoor
equipment, diving, watercraft and marine
electronics
products.
All
monetary amounts, other than share and per share amounts, are stated in
thousands.
|
1
|
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES
|
Principles
of Consolidation
The
Consolidated Financial Statements include the accounts of Johnson Outdoors
Inc.
and all majority owned subsidiaries (the Company) and are stated in conformity
with U.S. generally accepted accounting principles. Significant intercompany
accounts and transactions have been eliminated in consolidation.
The
preparation of financial statements requires management to make estimates and
assumptions that impact the reported amounts of assets, liabilities and
operating results and the disclosure of commitments and contingent liabilities.
Actual results could differ significantly from those estimates. For the Company,
significant estimates include the allowance for doubtful accounts receivable,
reserves for inventory valuation, recoverability of goodwill, reserves for
sales
returns, reserves for warranty service, pension actuarial assumptions and the
valuation allowance for deferred tax assets.
The
Company’s fiscal year ends on the Friday nearest September 30. The fiscal years
ended September 30, 2005 (hereinafter 2005) and October 1, 2004 (hereinafter
2004) each comprised 52 weeks. The fiscal year ended October 3, 2003
(hereinafter 2003) comprised 53 weeks.
Cash
and Temporary Cash Investments
The
Company considers all short-term investments in interest-bearing bank accounts,
securities and other instruments with an original maturity of three months
or
less to be equivalent to cash.
The
Company maintains cash in bank accounts in excess of insured limits. The Company
has not experienced any losses as a result of this practice and does not believe
that significant credit risk exists.
Accounts
Receivable
Accounts
receivable are stated net of an allowance for doubtful accounts. The valuation
of the allowance for doubtful accounts is based on a combination of factors.
In
circumstances where specific identification exists, a reserve is established
to
value the account receivable to what is believed will be collected. For all
other customers, the Company recognizes allowances for bad debts based on
historical experience of bad debts as a percent of accounts receivable for
each
business unit. Uncollectible accounts are written off against the allowance
for
doubtful accounts after collection efforts have been exhausted. The Company
typically does not require collateral on its accounts receivable.
Inventories
Inventories
are stated at the lower of cost (determined using the first-in, first-out
method) or market.
Inventories
at the end of the respective years consist of the following:
|
2005
|
2004
|
||||||
|
Raw
materials
|
$
|
20,195
|
$
|
24,194
|
|||
|
Work
in process
|
2,886
|
2,106
|
|||||
|
Finished
goods
|
31,367
|
36,768
|
|||||
|
54,448
|
63,068
|
||||||
|
Less
reserves
|
2,563
|
2,642
|
|||||
|
$
|
51,885
|
$
|
60,426
|
F-8
Property,
Plant and Equipment
Property,
plant and equipment are stated at cost less accumulated depreciation.
Depreciation of plant and equipment is determined by straight-line and
accelerated methods over the following estimated useful lives:
|
Property
improvements
|
5-20
years
|
|
Buildings
and improvements
|
20-40
years
|
|
Furniture,
fixtures and equipment
|
3-10
years
|
Upon
retirement or disposition, cost and the related accumulated depreciation are
removed from the accounts and any resulting gain or loss is recognized in
operating results.
Property,
plant and equipment at the end of the respective years consist of the following:
|
2005
|
2004
|
||||||
|
Property
and improvements
|
$
|
1,355
|
$
|
1,370
|
|||
|
Buildings
and improvements
|
21,460
|
22,690
|
|||||
|
Furniture,
fixtures and equipment
|
81,972
|
78,873
|
|||||
|
104,787
|
102,933
|
||||||
|
Less
accumulated depreciation
|
73,394
|
68,578
|
|||||
|
$
|
31,393
|
$
|
34,355
|
Impairment
of Property, Plant and Equipment
The
Company assesses annually or on an interim basis, if indicators of impairment
are identified, the recoverability of property, plant and equipment, by
determining whether the net book value of the underlying assets can be recovered
through projected undiscounted future operating cash flows of the related
businesses. The amount of impairment, if any, is measured primarily based on
the
deficiency of projected discounted future operating cash flows relative to
the
value of the assets, using a discount rate reflecting the Company’s cost of
capital, which approximates 10%. There was no impairment of property, plant
and
equipment during 2005, 2004 or 2003, except as discussed in Note 2.
Impairment
of Goodwill and Other Indefinitely Lived Intangibles
The
Company annually assesses the carrying value of goodwill using a number of
criteria, including the value of the overall enterprise as of the end of each
fiscal year. In assessing the recoverability of the Company's goodwill and
other
intangibles, the Company must make assumptions regarding estimated future cash
flows and other factors to determine the fair value of the respective assets.
If
these estimates or their related assumptions change in the future, the Company
may be required to record impairment charges for these assets not previously
recorded. There were no goodwill impairment charges recorded during 2005, 2004
or 2003.
During
2005, the final allocation of the purchase price related to the Techsonic
acquisition was completed resulting in a decrease to goodwill of $1,495 and
an
increase to deferred tax assets for a similar amount. The remaining change
in
2005 in goodwill relates to translation adjustments for goodwill denominated
in
foreign currencies.
F-9
Other
Intangible Assets
Intangible
assets are stated at cost less accumulated amortization. Amortization is
computed using the straight-line method with periods ranging from 3 to 16 years
for patents and other intangible assets. Intangible assets at the end of the
respective years consist of the following:
|
2005
|
2004
|
||||||
|
Patents,
trademarks and other
|
$
|
8,254
|
$
|
8,205
|
|||
|
Less
accumulated amortization
|
4,474
|
4,212
|
|||||
|
Net
patents, trademarks and other
|
$
|
3,780
|
$
|
3,993
|
Patents,
trademarks and other contains $3,250 in trademarks which have indefinite lives
and are not amortized. Amortization of non-indefinite lived patents and other
intangible assets was $202, $325 and $304 for 2005, 2004 and 2003, respectively.
Amortization of these intangible assets is expected to continue at a level
in
2006 that is consistent with 2005, followed by a decline in subsequent years
through 2010 (subsequent amortization of $530 in 2006 to 2010).
Warranties
The
Company has recorded product warranty accruals of $3,287 and $3,177 as of
September 30, 2005 and October 1, 2004. The Company provides for warranties
of
certain products as they are sold. The following table summarizes the warranty
activity for the years ended September 30, 2005 and October 1,
2004.
|
Balance
October 3, 2003
|
$
|
2,680
|
||
|
Expense
accruals for warranties issued during the year
|
3,152
|
|||
|
Reserves
for business acquired
|
171
|
|||
|
Less
current year warranty claims paid
|
2,826
|
|||
|
Balance
at October 1, 2004
|
3,177
|
|||
|
Expense
accruals for warranties issued during the year
|
2,999
|
|||
|
Less
current year warranty claims paid
|
2,889
|
|||
|
Balance
at September 30, 2005
|
$
|
3,287
|
Earnings
per Share
Basic
earnings per share is computed by dividing net income by the weighted-average
number of common shares outstanding. Diluted earnings per share is computed
by
dividing net income by the weighted-average number of common shares outstanding,
adjusted for the net effect of dilutive stock options and restricted
stock.
The
following table sets forth the computation of basic and diluted earnings per
common share:
|
2005
|
|
|
2004
|
|
|
2003
|
||||
|
Net
income
|
$
|
7,101
|
$
|
8,689
|
$
|
5,421
|
||||
|
Weighted
average shares outstanding
|
8,631,397
|
8,567,246
|
8,411,713
|
|||||||
|
Less
nonvested restricted stock
|
13,651
|
3,268
|
5,367
|
|||||||
|
Basic
average common shares
|
8,617,746
|
8,563,978
|
8,406,346
|
|||||||
|
Dilutive
stock options and restricted stock
|
177,359
|
209,877
|
193,816
|
|||||||
|
Diluted
average common shares
|
8,795,105
|
8,773,855
|
8,600,162
|
|||||||
|
Basic
earnings per common
|
$
|
0.82
|
$
|
1.01
|
$
|
0.64
|
||||
|
Diluted
earnings per common share
|
$
|
0.81
|
$
|
0.99
|
$
|
0.63
|
F-10
Stock
options that could potentially dilute earnings per share in the future that
were
not included in the fully diluted computation for 2005, 2004 and 2003 because
they would have been antidilutive totaled 13,750,
18,750
and 87,500, respectively.
Stock-Based
Compensation
The
Company accounts for stock options using the intrinsic value based method of
Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees.
Accordingly, compensation cost is generally recognized only for stock options
granted with an exercise price lower than the market price on the date of grant.
The Company’s practice is to grant options with an exercise price equal to the
fair market value on the date of the grant. The fair value of restricted shares
awarded in excess of the amount paid for such shares is recognized as
compensation and is amortized over 1 to 3 years from the date of award, the
period after which all restrictions generally lapse.
The
pro
forma information below was determined using the fair value method based on
provisions of SFAS No. 123, Accounting
for Stock-Based Compensation,
as
amended by SFAS No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosure.
|
2005
|
|
|
2004
|
|
|
2003
|
||||
|
Net
income
|
$
|
7,101
|
$
|
8,689
|
$
|
5,421
|
||||
|
Total
stock-based compensation expense included in net
income,
net of tax
|
334
|
106
|
52
|
|||||||
|
Total
stock-based compensation expense determined under fair
value
method for all awards, net of tax
|
(121
|
)
|
(116
|
)
|
(325
|
)
|
||||
|
Pro
forma net income
|
$
|
7,314
|
$
|
8,679
|
$
|
5,148
|
||||
|
Basic
earnings per common share
|
||||||||||
|
As
reported
|
$
|
0.82
|
$
|
1.01
|
$
|
0.64
|
||||
|
Pro
forma
|
$
|
0.85
|
$
|
1.01
|
$
|
0.61
|
||||
|
Diluted
earnings per common share
|
||||||||||
|
As
reported
|
$
|
0.81
|
$
|
0.99
|
$
|
0.63
|
||||
|
Pro
forma
|
$
|
0.84
|
$
|
0.99
|
$
|
0.60
|
For
purposes of calculating pro forma operating results, the fair value of each
option grant was estimated using the Black-Scholes option pricing model with
an
expected volatility of approximately 21% in 2005 and ranging from 30% to 50%
in
2004 and 2003, a risk free rate equivalent to five year U.S. Treasury
securities, an expected life of five years and no dividends. The pro forma
operating results reflect only options granted after 1995. Based on these
assumptions, the weighted average fair market value of options granted during
the year was $4.78 in 2005, $5.13 in 2004 and $5.30 in 2003.
The
Company’s employee stock purchase plan provides for the issuance of Class A
common stock at a purchase price of not less than 85% of the fair market value
at the date of grant. During 2005, 2004 and 2003, 11,115, 22,872 and 9,585
shares, respectively, were issued under this plan. Shares available for purchase
by employees under this plan were 82,842 at
September 30, 2005.
Income
Taxes
The
Company provides for income taxes currently payable and deferred income taxes
resulting from temporary differences between financial statement and taxable
income.
In
assessing the realizability of deferred tax assets, the Company considers
whether it is more likely than not that some portion, or all of the deferred
tax
assets, will not be realized. The ultimate realization of deferred tax assets
is
dependent upon the generation of future taxable income during the years in
which
those temporary differences become deductible. The Company considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment.
F-11
Federal
and state income taxes are provided on foreign subsidiary income distributed
to,
or taxable in, the U.S. during the year. At September 30, 2005, net
undistributed earnings of foreign subsidiaries total approximately $91,546.
The
Company considers these unremitted earnings to be permanently invested abroad
and no provision for federal or state income taxes have been made on these
amounts. In the future, if foreign earnings are returned to the U.S., provision
for income taxes will be made.
The
Company’s U.S. entities file a consolidated federal income tax
return.
Impact
of Tax Legislation
On
October 22, 2004, the American Jobs Creation Act (the “Act”) was passed,
providing for a special one-time deduction of 85% of certain foreign earnings
that are repatriated to the U.S. provided certain criteria are met, including
the implementation of a qualifying reinvestment plan. Based on preliminary
review, it is reasonably possible that the Company may qualify to receive a
tax
benefit with respect to the repatriation of foreign earnings. If the Company
is
able to implement a qualifying reinvestment plan, a significant tax benefit
could be realized. The Company continues to evaluate the impact of the
Act.
Employee
Benefits
The
Company and certain of its subsidiaries have various retirement and profit
sharing plans. Pension obligations, which are generally based on compensation
and years of service, are funded by payments to pension fund trustees. The
Company’s policy is generally to fund the minimum amount required under the
Employee Retirement Income Security Act of 1974 for plans subject thereto.
Profit sharing and other retirement costs are funded at least
annually.
Foreign
Operations and Related Derivative Financial Instruments
The
functional currencies of the Company’s foreign operations are the local
currencies. Accordingly, assets and liabilities of foreign operations are
translated into U.S. Dollars at the rate of exchange existing at the end of
the
year. Results of operations are translated at monthly average exchange rates.
Adjustments resulting from the translation of foreign currency financial
statements are classified as accumulated other comprehensive income (loss),
a
separate component of shareholders’ equity.
Currency
gains and losses are realized as assets and liabilities of foreign operations,
denominated in other than the local currency, are first adjusted based on the
denominated currency. Additionally, currency gains and losses are realized
through the settlement of transactions denominated in other than the local
currency. The Company realized currency gains from transactions of $781, $119
and $2,791 for 2005, 2004 and 2003, respectively.
The
Company operates internationally, which gives rise to exposure to market risk
from movements in foreign currency exchange rates. To minimize the effect of
fluctuating foreign currencies on its income, the Company periodically enters
into foreign currency forward contracts. The Company primarily hedges assets,
inventory purchases and loans denominated in foreign currencies. The Company
does not enter into foreign exchange contracts for trading purposes. Gains
and
losses on unhedged exposures are recorded in operating results.
The
contracts are used to hedge known foreign currency transactions on a continuing
basis for periods consistent with the Company’s exposures. Beginning September
30, 2000 upon the adoption of SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities,
as
amended by SFAS No. 137, Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of SFAS Statement No. 133
and SFAS
No. 138, Accounting
for Certain Derivative Instruments and Certain Hedging
Activities,
the
effective portion of the gain or loss on the foreign currency forward contract
is reported as a component of other comprehensive income and reclassified into
earnings in the same period during which the hedged transaction affects
earnings. The remaining gain or loss on the futures contract, if any, is
recognized in current earnings during the period of changes.
At
September 30, 2005 and October 1, 2004, the Company had no foreign currency
forward contracts.
F-12
Revenue
Recognition
Revenue
from sales is recognized when all substantial risk of ownership transfers to
the
customer, which is generally upon shipment of products. Estimated costs of
returns and allowances are accrued when revenue is recognized.
Advertising
The
Company expenses substantially all costs related to production of advertising
the first time the advertising takes place. Cooperative promotional arrangements
are accrued in relation to sales.
Advertising
expense in 2005, 2004 and 2003 totaled $18,476, $16,612 and $14,909,
respectively. Capitalized costs at September 30, 2005 and October 1, 2004
totaled $984
and $740,
respectively, and primarily include catalogs and costs of advertising which
have
not yet run for the first time.
Shipping
and Handling Costs
Shipping
and handling expense included in marketing and selling expense was $13,728,
$11,990 and $11,723 for 2005, 2004 and 2003, respectively.
Research
and Development
Research
and development costs are expensed as incurred.
New
Accounting Pronouncements
In
December 2004, the FASB issued SFAS No. 123(R), Share-Based
Payment,
a
revision to SFAS 123, Accounting
for Stock-Based Compensation.
This
statement supersedes APB Opinion No. 25, Accounting
for Stock Issued to Employees.
SFAS
No. 123(R) establishes standards for the accounting for transactions in which
an
entity exchanges its equity instruments for goods or services. This statement
requires that the cost of share based payment transactions be recorded as an
expense at their fair value determined by applying a fair value measurement
method. The provisions of this statement are effective for fiscal years
beginning after June 15, 2005. The Company will adopt this statement for fiscal
2006 using the modified prospective approach. This statement is not expected
to
have a material impact on the financial results of the Company.
Reclassifications
Certain
reclassifications have been made to prior years’ amounts to conform with the
current year presentation.
|
2
|
RESTRUCTURING
|
Diving
In
September 2005, the Company’s Diving business approved a plan to consolidate
distribution in Europe. These actions will result in the closure of warehouses
in Germany, Italy and Switzerland and office space in France over the first
and
second quarters of fiscal 2006. Additionally, actions were taken during fiscal
2005 to reorganize the European management structure to unify the marketing
and
sales efforts across Europe. Total charges in 2005 were $1,124 consisting of
$983 in employee termination benefits and related costs and $141 in consulting
fees and losses on assets disposed. These charges are included in the
“Administrative management, finance and information systems” line in the
Consolidated Statement of Operations. The Company expects that this decision
will result in the reduction of 14 positions. The Company anticipates additional
charges of approximately $410 will be incurred in fiscal 2006 for lease
termination costs, asset disposal and employee severance and benefit costs
related to these actions.
F-13
A
summary
of charges, payments and accruals for the fiscal 2005 year are as
follows:
|
Actual
charges during the year ended September 30, 2005
|
$
|
1,124
|
||
|
Settlement
payments
|
406
|
|||
|
Accrued
liabilities as of September 30, 2005
|
718
|
|||
|
Additional
anticipated 2006 charges
|
410
|
|||
|
Total
anticipated remaining restructuring payments
|
$
|
1,128
|
Watercraft
On
July
27, 2004, the Company announced plans to outsource manufacturing of its Grand
Rapids, Michigan facility, and to shift production from Mansonville, Canada
to
its Old Town, Maine operation, as part of the Company's on-going efforts to
increase efficiency and improve profitability of its Watercraft business unit.
The Company ceased manufacturing operations at both locations in September
2004.
Costs and charges associated with these actions were $3.8 million and were
incurred across fiscal years 2004 and 2005. The decision resulted in the
reduction of 71 positions.
Total
charges incurred in 2005 were $1,326 and consisted of the following major
categories of costs: one-time employee termination benefits of $335, lease
termination costs of $789, other costs primarily related to impairment of
equipment and inventory of $202. Total charges incurred in 2004 were $2,468
and
consisted of the following major categories of costs: one-time employee
termination benefits of $969, lease termination costs of $423, other costs
primarily related to impairment of equipment and inventory of $1,076. These
charges are included in the “Administrative management, finance and information
systems” and “Cost of sales” lines in the Consolidated Statements of
Operations.
A
summary
of charges, payments and accruals for fiscal 2005 and 2004 were as follows:
|
Actual
charges during the year ended October 1, 2004
|
$
|
2,468
|
||
|
Settlement
payments
|
1,275
|
|||
|
Accrued
liabilities as of October 1, 2004
|
1,193
|
|||
|
Actual
charges during the year ended September 30, 2005
|
1,326
|
|||
|
Settlement
payments
|
(1,993
|
)
|
||
|
Accrued
liabilities as of September 30, 2005
|
526
|
|||
|
Additional
anticipated 2006 charges
|
—
|
|||
|
Total
anticipated remaining restructuring payments
|
$
|
526
|
|
3
|
ACQUISITIONS
|
On
May 5,
2004, the Company acquired all of the issued and outstanding capital stock
of
Techsonic Industries, Inc. (Techsonic) and certain registered patents and
trademarks used by Techsonic in its business of manufacturing and marketing
underwater sonar and GPS technology equipment under the Humminbird
brand. The final purchase price paid was $28,187, including acquisition
expenses. Techsonic is part of the Company’s Marine Electronics Group and is
commonly referred to as the Humminbird business.
F-14
The
following table summarizes the final allocation of the purchase price, fair
values of the assets acquired and liabilities assumed, and the resulting net
intangible assets acquired at the date of the acquisition. No additional
purchase price adjustments are expected with regard to this
transaction.
|
Total
current assets
|
$
|
16,963
|
||
|
Property,
plant and equipment
|
5,649
|
|||
|
Trademark
|
3,250
|
|||
|
Goodwill
|
8,387
|
|||
|
Other
assets
|
276
|
|||
|
Net
assets acquired
|
34,525
|
|||
|
Total
liabilities assumed
|
6,338
|
|||
|
Net
purchase price
|
$
|
28,187
|
The
acquisition was accounted for using the purchase method and, accordingly, the
Consolidated Financial Statements include the results of operations since the
date of acquisition.
The
Company is not required to prepare pro forma financial information with respect
to the Techsonic acquisition due to the materiality of the
transaction.
On
October 3, 2005, subsequent to year end, the Company acquired the assets of
Cannon downriggers and Bottomline fishfinders (Cannon/Bottomline) from
Computrol, Inc., a wholly owned subsidiary of Armstrong International. The
initial purchase price paid was $10,400. An adjustment to the purchase price
based on closing working capital values is expected, but is not expected to
be
material. The transaction was funded using existing cash on hand.
Cannon/Bottomline will be included in the Company’s Marine Electronics
Group.
|
4
|
INDEBTEDNESS
|
Short-term
credit facilities provide for borrowings with interest rates set periodically
by
reference to market rates. Subsequent to year-end, on October 7, 2005, the
Company entered into a new $75,000 unsecured revolving credit agreement expiring
in October 2010. This new revolving credit agreement replaces the former $30,000
unsecured revolving credit agreement that was set to expire on December 29,
2005. The interest rate on this new revolving credit agreement equals the sum
of
(a) the London Interbank Rate (LIBOR) and (b) a range of 1.25% and 1.50%,
depending on the Company’s leverage ratio.
The
Company utilizes letters of credit for trade financing purposes. Letters of
credit outstanding at September 30, 2005 totaled $2,544.
At
September 30, 2005 and October 1, 2004, the Company had no outstanding
borrowings under its then existing revolving credit agreement. The Company
has
lines of credit, both foreign and domestic, with availability totaling $34,819
as of September 30, 2005.
Long-term
debt at the end of the respective years consisted of the following:
|
2005
|
|
|
2004
|
||||
|
2001
senior notes
|
$
|
40,000
|
$
|
50,000
|
|||
|
1998
senior notes
|
10,800
|
12,800
|
|||||
|
1996
senior notes
|
─
|
4,200
|
|||||
|
Other
|
─
|
23
|
|||||
|
50,800
|
67,023
|
||||||
|
Fair
value adjustment of hedged debt
|
─
|
(4
|
)
|
||||
|
50,800
|
67,019
|
||||||
|
Less
current maturities
|
13,000
|
16,222
|
|||||
|
$
|
37,800
|
$
|
50,797
|
F-15
In
December 2001, the Company issued unsecured senior notes with an interest rate
of 7.82%. The 2001 senior notes have annual principal payments of $10,000 with
a
final payment due December 2008.
In
1998,
the Company issued unsecured senior notes with an interest rate of 7.15%. The
1998 senior notes have annual principal payments of $800 to $7,000 with a final
payment due October 2007.
The
Company’s policy is to manage interest cost using a mix of fixed and
variable-rate debt. To manage this risk in a cost efficient manner, the Company
enters into interest rate swaps in which the Company agrees to exchange, at
specified intervals, the difference between fixed and variable interest amounts
calculated by reference to an agreed upon notional principal amount. The Company
formally documents all relationships between hedging instruments and hedged
items, as well as its risk-management objectives and strategies for
understanding hedge transactions. Interest rate swaps that met specific
conditions under SFAS No. 133 are accounted for as fair value hedges. The
mark-to-market values of both the fair value hedging instruments and the
underlying debt obligations are recorded as equal and offsetting gains and
losses in the interest expense component of the Statement of Operations.
The
fair
value of the Company’s interest rate swap agreements was approximately $(4) at
October 1, 2004 and included in other assets on the consolidated balance sheet.
All prior fair value hedges were 100% effective. As a result, there was no
impact to earnings due to hedge ineffectiveness.
On
November 6, 2003, the Company terminated the swap instruments relating to the
1998 and 2001 debt instruments and realized gains of $161 and $747,
respectively, which are being amortized as a reduction in interest expense
over
the remaining life of the underlying debt instruments. The unamortized gain
related to the 1998 and 2001 instruments was $15 and $328 as of September 30,
2005 and October 1, 2004, respectively.
The
Company had no outstanding interest rate swap agreements at September 30,
2005.
Aggregate
scheduled maturities of long-term debt in each of the next four years ending
September 2009 are as follows:
|
Year
|
||||
|
2006
|
$
|
13,000
|
||
|
2007
|
17,000
|
|||
|
2008
|
10,800
|
|||
|
2009
|
10,000
|
Interest
paid was $4,929, $5,577 and $4,762 for 2005, 2004 and 2003,
respectively.
Based
on
the borrowing rates currently available to the Company for debt with similar
terms and maturities, the fair value of the Company’s long-term debt as of
September 30, 2005 and October 1, 2004 was approximately $54,696 and $73,915,
respectively. The carrying value of all other financial instruments approximates
their fair value.
Certain
of the Company’s loan agreements require that Helen P. Johnson-Leipold, members
of her family and related entities (hereinafter the Johnson Family) continue
to
own stock having votes sufficient to elect a 51% majority of the directors.
At
November 1, 2005, the Johnson Family held approximately 3,437,584 shares or
approximately 43% of the Class A common stock, approximately 1,204,946 shares
or
approximately 99% of the Class B common stock and approximately 77% of the
voting power of both classes of common stock taken as a whole. The agreements
also contain restrictive covenants regarding the Company’s net worth,
indebtedness, fixed charge coverage and distribution of earnings. The Company
is
in compliance with the restrictive covenants of such agreements, as amended
from
time to time.
F-16
|
5
|
LEASES
AND OTHER COMMITMENTS
|
The
Company leases certain facilities and machinery and equipment under long-term,
noncancelable operating leases. Future minimum rental commitments under
noncancelable operating leases with an initial lease term in excess of one
year
at September 30, 2005 were as follows:
|
Year
|
Related
parties
included
in total
|
|
|
Total
|
|||
|
2006
|
$
|
683
|
$
|
5,401
|
|||
|
2007
|
520
|
3,436
|
|||||
|
2008
|
539
|
2,994
|
|||||
|
2009
|
558
|
2,503
|
|||||
|
2010
|
577
|
1,927
|
|||||
|
Thereafter
|
597
|
3,167
|
|||||
Rental
expense under all leases was approximately $7,652, $7,814 and $6,926 for 2005,
2004 and 2003, respectively.
The
Company makes commitments in a broad variety of areas, including capital
expenditures, contracts for services, sponsorship of broadcast media and supply
of finished products and components, all of which are in the ordinary course
of
business.
The
Company has entered into an inventory purchase agreement with one of its
suppliers. Under the terms of this agreement, the Company guarantees that upon
the occurrence of an event of default with respect to the credit facilities
between the supplier and its bank, the Company will purchase up to a maximum
declining amount of good quality inventory over the period through August 1,
2006. The schedule of obligations in the event of default is as
follows:
|
·
|
Through
February 28, 2006 - Up to $2,500.
|
|
·
|
From
March 1, 2006 to May 31, 2006 - Up to
$2,000
|
|
·
|
From
June 1, 2006 to August 1, 2006 - Up to $1,500.
|
|
6
|
INCOME
TAXES
|
Income
tax expense (benefit) for the respective years consisted of the
following:
|
2005
|
|
|
2004
|
|
|
2003
|
||||
|
Current:
|
||||||||||
|
Federal
|
$
|
(247
|
)
|
$
|
315
|
$
|
23
|
|||
|
State
|
91
|
48
|
71
|
|||||||
|
Foreign
|
4,870
|
4,346
|
4,545
|
|||||||
|
Deferred
|
287
|
1,338
|
(358
|
)
|
||||||
|
$
|
5,001
|
$
|
6,047
|
$
|
4,281
|
|||||
The
net
deferred tax asset was increased $1,495 and $691 for 2005 and 2004,
respectively, as a result of the allocation of the purchase price on the
Techsonic acquisition.
F-17
The
tax
effects of temporary differences that give rise to deferred tax assets and
deferred tax liabilities at the end of the respective years are presented
below:
|
2005
|
2004
|
||||||
|
Deferred
tax assets:
|
|||||||
|
Inventories
|
$
|
2,316
|
$
|
2,426
|
|||
|
Compensation
|
6,956
|
6,654
|
|||||
|
Foreign
tax credit carryforwards
|
—
|
225
|
|||||
|
Goodwill
and other intangibles
|
424
|
1,128
|
|||||
|
Net
operating loss carryforwards
|
17,330
|
15,486
|
|||||
|
Other
|
6,212
|
5,709
|
|||||
|
Total
gross deferred tax assets
|
33,238
|
31,628
|
|||||
|
Less
valuation allowance
|
4,568
|
5,353
|
|||||
|
28,670
|
26,275
|
||||||
|
Deferred
tax liabilities:
|
|||||||
|
Foreign
statutory reserves
|
877
|
599
|
|||||
|
Net
deferred tax asset
|
$
|
27,793
|
$
|
25,676
|
|||
The
net
deferred tax asset is recorded as $8,118 in current and $19,675 in non-current
assets for 2005 and $8,737 in current and $16,939 in non-current assets for
2004.
Following
is the income before income taxes for domestic and foreign
operations:
|
2005
|
|
|
2004
|
|
|
2003
|
||||
|
United
States
|
$
|
3,794
|
$
|
5,399
|
$
|
110
|
||||
|
Foreign
|
8,308
|
9,337
|
9,592
|
|||||||
|
$
|
12,102
|
$
|
14,736
|
$
|
9,702
|
|||||
The
significant differences between the statutory federal tax rate and the effective
income tax rates are as follows:
|
2005
|
|
|
2004
|
|
|
2003
|
||||
|
Statutory
U.S. federal income tax rate
|
34.0
|
%
|
34.0
|
%
|
34.0
|
%
|
||||
|
Foreign
rate differential
|
9.2
|
5.2
|
11.0
|
|||||||
|
Foreign
operating losses
|
0.1
|
0.2
|
0.1
|
|||||||
|
Other
|
(2.0
|
)
|
1.6
|
(1.0
|
)
|
|||||
|
41.3
|
%
|
41.0
|
%
|
44.1
|
%
|
|||||
The
foreign rate differential of 9.2, 5.2 and 11.0 for 2005, 2004 and 2003,
respectively, is comprised of several foreign tax related items including the
statutory rate differential in each year and a German income tax audit in 2003
and 2005.
At
September 30, 2005, the Company has U.S. federal operating loss
carryforwards of $31,365 which begin to expire in 2012, as well as various
state
net operating loss carryforwards. In addition, certain of the Company’s foreign
subsidiaries have net operating loss carryforwards totaling $1,734. These
operating loss carryforwards are available to offset future taxable income
over
the next 7 to approximately 20 years. They are anticipated to be utilized during
this period except to the degree the Company has established a valuation
allowance for the expected under-utilization of state operating loss
carryforwards and tax credit carryforwards. During 2005, 2004 and 2003, state
and foreign net operating loss carryforwards were utilized, resulting in a
reduction in income tax expense of $532, $539 and $384, respectively.
Taxes
paid were $5,746, $4,922 and $10,708 for 2005, 2004 and 2003,
respectively.
F-18
|
7
|
EMPLOYEE
BENEFITS
|
Net
periodic pension cost, for significant noncontributory defined benefit pension
plans, include the following components.
|
2005
|
|
2004
|
|
2003
|
||||||
|
Service
cost
|
$
|
628
|
$
|
574
|
$
|
464
|
||||
|
Interest
on projected benefit obligation
|
943
|
886
|
878
|
|||||||
|
Less
estimated return on plan assets
|
825
|
764
|
676
|
|||||||
|
Amortization
of unrecognized:
|
||||||||||
|
Net
loss
|
111
|
100
|
11
|
|||||||
|
Prior
service cost
|
24
|
26
|
26
|
|||||||
|
Transition
asset
|
(2
|
)
|
(42
|
)
|
(71
|
)
|
||||
|
Net
amount recognized
|
$
|
879
|
$
|
780
|
$
|
632
|
||||
The
following provides a reconciliation of the changes in the plans benefit
obligation and fair value of assets for 2005 and 2004 and a statement of the
funded status at the end of each year:
|
2005
|
|
|
2004
|
||||
|
Projected
benefit obligation:
|
|||||||
|
Projected
benefit obligation at beginning of year
|
$
|
15,317
|
$
|
13,153
|
|||
|
Service
cost
|
628
|
574
|
|||||
|
Interest
cost
|
943
|
886
|
|||||
|
Actuarial
loss
|
3,147
|
1,385
|
|||||
|
Benefits
paid
|
(695
|
)
|
(681
|
)
|
|||
|
Projected
benefit obligation at end of year
|
$
|
19,340
|
$
|
15,317
|
|||
|
Fair
value of plan assets:
|
|||||||
|
Fair
value of plan assets at beginning of year
|
$
|
9,989
|
$
|
8,459
|
|||
|
Actual
return on plan assets
|
940
|
997
|
|||||
|
Company
contributions
|
626
|
1,214
|
|||||
|
Benefits
paid
|
(695
|
)
|
(681
|
)
|
|||
|
Fair
value of plan assets at end of year
|
$
|
10,860
|
$
|
9,989
|
|||
|
Funded
status:
|
|||||||
|
Funded
status of the plan
|
$
|
(8,480
|
)
|
$
|
(5,328
|
)
|
|
|
Unrecognized
net loss
|
6,681
|
3,760
|
|||||
|
Unrecognized
prior service cost
|
21
|
45
|
|||||
|
Unrecognized
transition asset
|
(5
|
)
|
(8
|
)
|
|||
|
Net
liability recognized
|
$
|
(1,783
|
)
|
$
|
(1,531
|
)
|
|
The
accumulated benefit obligation for the plans was $15,452 and $12,611 at
September 30, 2005 and October 1, 2004, respectively.
The
following summarizes the components of the net liability recognized in the
consolidated balance sheets at the end of the respective years:
|
2005
|
|
|
2004
|
|
|||
|
Accrued
benefit liability
|
$
|
(4,592
|
)
|
$
|
(2,664
|
)
|
|
|
Intangible
asset
|
21
|
41
|
|||||
|
Accumulated
other comprehensive income
|
2,788
|
1,092
|
|||||
|
Net
liability recognized
|
$
|
(1,783
|
)
|
$
|
(1,531
|
)
|
F-19
The
Company anticipates making contributions to the defined benefit pension plans
of
$871 through October 15, 2006.
Estimated
benefit payments from the defined benefit plans to participants for the next
five years ending September 2010 and five years thereafter are as
follows:
|
Year
|
||||
|
2006
|
$
|
683
|
||
|
2007
|
677
|
|||
|
2008
|
669
|
|||
|
2009
|
657
|
|||
|
2010
|
644
|
|||
|
Thereafter
|
3,798
|
|||
Actuarial
assumptions used to determine the projected benefit obligation are as
follows:
|
2005
|
|
|
2004
|
|
|
2003
|
||||
|
Discount
rate
|
5.25
|
%
|
6.25
|
%
|
7.25
|
%
|
||||
|
Long-term
rate of return
|
8
|
8
|
8
|
|||||||
|
Average
salary increase rate
|
4
|
4
|
5
|
|||||||
The
impact of the change in discount rates resulted in an actuarial loss of $3,029
in 2005 and $1,278 in 2004.
To
determine the long-term rate of return assumption for plan assets, the Company
studies historical markets and preserves the long-term historical relationships
between equities and fixed-income securities consistent with the widely accepted
capital market principle that assets with higher volatility generate a greater
return over the long run. The Company evaluates current market factors such
as
inflation and interest rates before it determines long-term capital market
assumptions and reviews peer data and historical returns to check for
reasonability and appropriateness. The Company uses measurement dates of October
1 to determine pension expenses for each year and August 31 to determine the
fair value of the pension assets.
The
Company’s pension plans weighted average asset allocations at September 30, 2005
and October 1, 2004, by asset category were as follows:
|
2005
|
|
|
2004
|
||||
|
Equity
securities
|
54
|
%
|
53
|
%
|
|||
|
Fixed
income securities
|
44
|
44
|
|||||
|
Other
securities
|
2
|
3
|
|||||
|
Total
|
100
|
%
|
100
|
%
|
|||
The
Company’s primary investment objective for the Plan’s assets is to maximize the
profitability of meeting the Plans’ actuarial target rate of return of 8%, with
a secondary goal of returning 4% above the rate of inflation. These return
objectives are targeted while simultaneously striving to minimize risk to the
Plans’ assets. The investment horizon over which the investment objectives are
expected to be met is a full market cycle or five years, whichever is
greater.
The
Company’s investment strategy for the Plans’ is to invest in a diversified
portfolio that will generate average long-term returns commensurate with the
aforementioned objectives while minimizing risk.
A
majority of the Company’s full-time employees are covered by defined
contribution programs. Expense attributable under the defined contribution
programs was approximately $2,700, $2,600 and $2,500 for 2005, 2004 and 2003,
respectively.
F-20
|
8
|
PREFERRED
STOCK
|
The
Company is authorized to issue 1,000,000 shares of preferred stock in various
classes and series, of which there are none currently issued or
outstanding.
|
9
|
COMMON
STOCK
|
Common
stock at the end of the respective years was as follows:
|
2005
|
2004
|
||||||
|
Class
A, $.05 par value:
|
|||||||
|
Authorized
|
20,000,000
|
20,000,000
|
|||||
|
Outstanding
|
7,796,340
|
7,599,831
|
|||||
|
Class
B, $.05 par value:
|
|||||||
|
Authorized
|
3,000,000
|
3,000,000
|
|||||
|
Outstanding
|
1,219,667
|
1,221,715
|
|||||
Holders
of Class A common stock are entitled to elect 25% of the members of the Board
of
Directors and holders of Class B common stock are entitled to elect the
remaining directors. With respect to matters other than the election of
directors or any matters for which class voting is required by law, holders
of
Class A common stock are entitled to one vote per share while holders of Class
B
common stock are entitled to ten votes per share. If any dividends (other than
dividends paid in shares of the Company’s Stock) are paid by the Company on its
common stock, a dividend would be paid on each share of Class A common stock
equal to 110% of the amount paid on each share of Class B common stock. Each
share of Class B common stock is convertible at any time into one share of
Class
A common stock. During 2005, 2004 and 2003, respectively, 2,048, 932 and 82
shares of Class B common stock were converted into Class A common
stock.
|
10
|
STOCK
OWNERSHIP PLANS
|
The
Company’s current stock ownership plans provide for issuance of options to
acquire shares of Class A common stock by key executives and non-employee
directors. All stock options have been granted at a price not less than fair
market value at the date of grant and become exercisable over periods of one
to
four years from the date of grant. Stock options generally have a term of 10
years. Current plans also allow for issuance of restricted stock or stock
appreciation rights in lieu of options. The Company granted 39,094, 2,515 and
4,830 shares with a total value of $680, $50 and $50 in restricted stock during
2005, 2004 and 2003, respectively. Amortization expense related to the
restricted stock was $102, $50 and $52, respectively, during 2005, 2004 and
2003. In December 2002, the Company adopted a phantom share plan to provide
an
alternative vehicle for the granting of long-term incentives. In 2005, 2004
and
2003, expense recorded under the phantom share plan totaled $148, $410 and
$69,
respectively. There were no grants of phantom shares in 2005 and the Company
does not anticipate further grants of phantom shares going forward. No stock
appreciation rights have been granted.
During
2005, the terms of options granted to a former officer of the Company were
modified. These modifications resulted in non-cash compensation expense of
$403.
F-21
A
summary
of stock option activity related to the Company’s plans is as
follows:
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
||||
|
Outstanding
at September 27, 2002
|
1,064,019
|
$
|
9.06
|
||||
|
Granted
|
20,750
|
10.36
|
|||||
|
Exercised
|
(256,327
|
)
|
7.26
|
||||
|
Cancelled
|
(137,557
|
)
|
13.79
|
||||
|
Outstanding
at October 3, 2003
|
690,885
|
8.80
|
|||||
|
Granted
|
9,750
|
19.88
|
|||||
|
Exercised
|
(189,201
|
)
|
8.21
|
||||
|
Cancelled
|
(30,668
|
)
|
19.63
|
||||
|
Outstanding
at October 1, 2004
|
480,766
|
8.56
|
|||||
|
Granted
|
11,520
|
17.07
|
|||||
|
Exercised
|
(144,252
|
)
|
7.44
|
||||
|
Cancelled
|
(5,000
|
)
|
21.75
|
||||
|
Outstanding
at September 30, 2005
|
343,034
|
$
|
9.13
|
||||
Shares
available for grant to key executives and non-employee directors are 617,296
at
September 30, 2005.
The
range
of options outstanding at September 30, 2005 is as follows:
The
range
of options outstanding at September 30, 2005 is as follows:
|
Price
Range per
Share
|
Number
of Options
Outstanding/Exercisable
|
|
Weighted
Average Exercise
Price
Outstanding/Exercisable
|
|
|
Weighted
Average Remaining
Contractual
Life
(in
years)
|
|
||||
|
$ 5.31
- 7.65
|
166,384/166,384
|
$
|
6.83/6.83
|
5.3
|
|||||||
|
7.66 - 10.00
|
106,780/106,780
|
8.33/8.33
|
3.8
|
||||||||
|
10.01
- 22.06
|
69,870/58,350
|
15.80/15.56
|
5.1
|
||||||||
|
343,034/331,514
|
$
|
9.13/8.85
|
4.8
|
||||||||
|
11
|
RELATED
PARTY TRANSACTIONS
|
The
Company conducts transactions with certain related parties including
organizations controlled by the Johnson Family and other related parties. These
include consulting services, aviation services, office rental, royalties and
certain administrative activities. Total net costs of these transactions were
$2,436, $1,865 and $2,106 for 2005, 2004 and 2003, respectively.
|
12
|
SEGMENTS
OF BUSINESS
|
The
Company conducts its worldwide operations through separate global business
units, each of which represent major product lines. Operations are conducted
in
the U.S. and various foreign countries, primarily in Europe, Canada and the
Pacific Basin.
Net
sales
and operating profit include both sales to customers, as reported in the
Company’s Consolidated Statements of Operations, and interunit transfers, which
are priced to recover costs plus an appropriate profit margin. Total assets
represent assets that are used in the Company’s operations in each business unit
at the end of the years presented.
F-22
A
summary
of the Company’s operations by business segment is presented below:
|
2005
|
|
|
2004
|
|
|
2003
|
||||
|
Net
sales:
|
||||||||||
|
Marine
Electronics:
|
||||||||||
|
Unaffiliated
customers
|
$
|
145,051
|
$
|
109,317
|
$
|
85,703
|
||||
|
Interunit
transfers
|
181
|
461
|
867
|
|||||||
|
Outdoor
Equipment:
|
||||||||||
|
Unaffiliated
customers
|
75,286
|
90,139
|
72,704
|
|||||||
|
Interunit
transfers
|
55
|
54
|
82
|
|||||||
|
Watercraft:
|
||||||||||
|
Unaffiliated
customers
|
80,374
|
75,172
|
78,971
|
|||||||
|
Interunit
transfers
|
475
|
791
|
946
|
|||||||
|
Diving:
|
||||||||||
|
Unaffiliated
customers
|
79,363
|
80,059
|
77,974
|
|||||||
|
Interunit
transfers
|
41
|
15
|
38
|
|||||||
|
Other
|
616
|
587
|
540
|
|||||||
|
Eliminations
|
(752
|
) |
(1,321
|
)
|
(1,933
|
) | ||||
|
$
|
380,690
|
$
|
355,274
|
$
|
315,892
|
|||||
|
Operating
profit (loss):
|
||||||||||
|
Marine
Electronics
|
$
|
21,572
|
$
|
17,762
|
$
|
11,993
|
||||
|
Outdoor
Equipment
|
11,208
|
16,365
|
12,136
|
|||||||
|
Watercraft
|
(4,353
|
)
|
(9,787
|
)
|
(8,983
|
)
|
||||
|
Diving
|
4,901
|
9,949
|
8,579
|
|||||||
|
Other
|
(17,796
|
)
|
(15,161
|
)
|
(12,112
|
)
|
||||
|
$
|
15,532
|
$
|
19,128
|
$
|
11,613
|
|||||
|
Depreciation
and amortization expense:
|
||||||||||
|
Marine
Electronics
|
$
|
2,865
|
$
|
1,950
|
$
|
1,536
|
||||
|
Outdoor
Equipment
|
368
|
380
|
367
|
|||||||
|
Watercraft
|
2,643
|
2,896
|
3,167
|
|||||||
|
Diving
|
2,100
|
2,170
|
2,020
|
|||||||
|
Other
|
1,528
|
1,312
|
1,108
|
|||||||
|
$
|
9,504
|
$
|
8,708
|
$
|
8,198
|
|||||
|
Additions
to property, plant and equipment:
|
||||||||||
|
Marine
Electronics
|
$
|
2,856
|
$
|
1,918
|
$
|
1,773
|
||||
|
Outdoor
Equipment
|
217
|
408
|
529
|
|||||||
|
Watercraft
|
2,080
|
2,569
|
3,102
|
|||||||
|
Diving
|
776
|
1,793
|
2,598
|
|||||||
|
Other
|
874
|
1,156
|
1,765
|
|||||||
|
$
|
6,803
|
$
|
7,844
|
$
|
9,767
|
|||||
|
Total
assets:
|
||||||||||
|
Marine
Electronics
|
$
|
56,926
|
$
|
57,793
|
||||||
|
Outdoor
Equipment
|
23,901
|
31,156
|
||||||||
|
Watercraft
|
50,096
|
55,943
|
||||||||
|
Diving
|
91,488
|
95,280
|
||||||||
|
Other
|
60,907
|
53,541
|
||||||||
|
$
|
283,318
|
$
|
293,714
|
|||||||
|
Goodwill,
net:
|
||||||||||
|
Marine
Electronics
|
$
|
10,013
|
$
|
11,508
|
||||||
|
Outdoor
Equipment
|
563
|
563
|
||||||||
|
Watercraft
|
5,600
|
5,533
|
||||||||
|
Diving
|
21,557
|
22,254
|
||||||||
|
$
|
37,733
|
$
|
39,858
|
|||||||
F-23
A
summary
of the Company’s operations by geographic area is presented below:
|
2005
|
|
|
2004
|
|
|
2003
|
||||
|
Net
sales:
|
||||||||||
|
United
States:
|
||||||||||
|
Unaffiliated
customers
|
$
|
301,796
|
$
|
276,893
|
$
|
242,100
|
||||
|
Interarea
transfers
|
7,294
|
7,016
|
6,760
|
|||||||
|
Europe:
|
||||||||||
|
Unaffiliated
customers
|
48,233
|
48,919
|
46,792
|
|||||||
|
Interarea
transfers
|
13,320
|
11,601
|
10,593
|
|||||||
|
Other:
|
||||||||||
|
Unaffiliated
customers
|
30,662
|
29,462
|
27,000
|
|||||||
|
Interarea
transfers
|
1,230
|
2,480
|
3,170
|
|||||||
|
Eliminations
|
(21,845
|
)
|
(21,097
|
)
|
(20,523
|
)
|
||||
|
$
|
380,690
|
$
|
355,274
|
$
|
315,892
|
|||||
|
Total
assets:
|
||||||||||
|
United
States
|
$
|
166,901
|
$
|
177,354
|
||||||
|
Europe
|
91,374
|
90,718
|
||||||||
|
Other
|
25,043
|
25,642
|
||||||||
|
$
|
283,318
|
$
|
293,714
|
|||||||
|
Long-term
assets(1):
|
||||||||||
|
United
States
|
$
|
47,559
|
$
|
51,326
|
||||||
|
Europe
|
27,461
|
28,166
|
||||||||
|
Other
|
2,588
|
2,642
|
||||||||
|
$
|
77,608
|
$
|
82,134
|
|||||||
|
(1) Long-term
assets consist of net property, plant and equipment, net intangible
assets, goodwill and other assets excluding deferred income
taxes.
|
||||||||||
The
Company’s Outdoor Equipment business recognized sales to the U.S. military
totaling $45,126, $55,678 and $42,444 in 2005, 2004 and 2003,
respectively.
F-24
|
13
|
VALUATION
AND QUALIFYING ACCOUNTS
|
The
following summarizes changes to valuation and qualifying accounts:
|
Balance
at Beginning
of
Year
|
|
|
Additions
Charged
to
Costs
and Expenses
|
|
|
Reserves
of Businesses
Acquired
or
Sold
|
|
|
Less
Deductions
|
|
|
Balance
at
End
of
Year
|
||||
|
Year
ended September 30, 2005:
|
||||||||||||||||
|
Allowance
for doubtful accounts
|
$
|
2,807
|
$
|
379
|
$
|
—
|
$
|
640
|
$
|
2,546
|
||||||
|
Reserves
for inventory valuation
|
2,642
|
431
|
—
|
510
|
2,563
|
|||||||||||
|
Valuation
of deferred tax assets
|
5,353
|
—
|
—
|
785
|
4,568
|
|||||||||||
|
Reserves
for sales returns
|
1,456
|
1,023
|
—
|
1,156
|
1,323
|
|||||||||||
|
Year
ended October 1, 2004:
|
||||||||||||||||
|
Allowance
for doubtful accounts
|
4,214
|
(16
|
)
|
269
|
1,660
|
2,807
|
||||||||||
|
Reserves
for inventory valuation
|
3,842
|
1,073
|
2,273
|
2,642
|
||||||||||||
|
Valuation
of deferred tax assets
|
6,527
|
—
|
—
|
1,174
|
5,353
|
|||||||||||
|
Reserves
for sales returns
|
1,016
|
1,112
|
526
|
1,198
|
1,456
|
|||||||||||
|
Year
ended October 3, 2003:
|
||||||||||||||||
|
Allowance
for doubtful accounts
|
4,028
|
1,216
|
—
|
1,030
|
4,214
|
|||||||||||
|
Reserves
for inventory valuation
|
2,183
|
3,296
|
—
|
1,637
|
3,842
|
|||||||||||
|
Valuation
of deferred tax assets
|
8,398
|
—
|
—
|
1,871
|
6,527
|
|||||||||||
|
Reserves
for sales returns
|
852
|
690
|
—
|
526
|
1,016
|
|||||||||||
|
Deductions
include the net impact of foreign currency fluctuations on the respective
accounts.
|
||||||||||||||||
|
14
|
LITIGATION
|
The
Company is subject to various legal actions and proceedings in the normal course
of business, including those related to product liability, intellectual property
and environmental matters. The Company is insured against loss for certain
of
these matters. Although litigation is subject to many uncertainties and the
ultimate exposure with respect to these matters cannot be ascertained,
management does not believe the final outcome of any pending litigation will
have a material adverse effect on the financial condition, results of
operations, liquidity or cash flows of the Company.
On
December 22, 2003, the Company entered into a confidential settlement agreement
with a former employee. Under the terms of the agreement the Company was
entitled to receive up to $2.0 million. The funds related to the settlement
were
received and recorded during fiscal 2004 and are reflected in the operating
results of the Company for fiscal 2004.
15 TERMINATED
BUY-OUT PROPOSAL
On
October 28, 2004, the Company entered into a definitive Agreement and Plan
of
Merger (the “Merger Agreement”) with JO Acquisition Corp., an entity established
by members of the family of the late Samuel C. Johnson, including Helen P.
Johnson-Leipold, Chairman and Chief Executive Officer of the Company. Under
the
terms of the merger proposed by the Merger Agreement (the “Merger”), public
shareholders of the Company would have received $20.10 per share in cash, and
the members of the Johnson family would have acquired 100% ownership of the
Company.
The
Merger was subject to a number of conditions contained in the Merger Agreement,
including shareholder approval of the Merger Agreement. On March 22, 2005,
a
special meeting of the shareholders of the Company was held in order to vote
upon a proposal to approve the Merger Agreement. The required shareholder vote
was not obtained at such meeting and the Merger Agreement was terminated on
March 31, 2005 by the Company and the Purchaser pursuant to the terms of the
Merger Agreement. The termination of the Merger Agreement did not result in
the
imposition of any penalties on the Company.
F-25
|
16
|
QUARTERLY
FINANCIAL SUMMARY (unaudited)
|
The
following summarizes quarterly operating results:
|
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
|||||||||||||||||||||
|
2005
|
2004
|
2005
|
2004
|
2005
|
2004
|
2005
|
2004
|
||||||||||||||||||
|
Net
sales
|
$
|
74,982
|
$
|
62,941
|
$
|
106,168
|
$
|
95,595
|
$
|
122,445
|
$
|
121,166
|
$
|
77,095
|
$
|
75,572
|
|||||||||
|
Gross
profit
|
30,272
|
26,970
|
45,774
|
42,279
|
51,718
|
50,202
|
28,590
|
28,167
|
|||||||||||||||||
|
Operating
profit (loss)
|
(75
|
)
|
1,346
|
8,398
|
8,686
|
11,820
|
13,687
|
(4,611
|
)
|
(4,589
|
)
|
||||||||||||||
|
Net
income (loss)
|
$
|
(1,031
|
)
|
$
|
160
|
$
|
4,738
|
$
|
4,796
|
$
|
6,794
|
$
|
7,491
|
$
|
(3,398
|
)
|
$
|
(3,758
|
)
|
||||||
|
Basic
earnings (loss) per
common
share:
|
$
|
(0.12
|
)
|
$
|
0.02
|
$
|
0.55
|
$
|
0.56
|
$
|
0.79
|
$
|
0.87
|
$
|
(0.39
|
)
|
$
|
(0.44
|
)
|
||||||
|
Diluted
earnings (loss) per
common
share:
|
$
|
(0.12
|
)
|
$
|
0.02
|
$
|
0.54
|
$
|
0.55
|
$
|
0.77
|
$
|
0.85
|
$
|
(0.39
|
)
|
$
|
(0.44
|
)
|
||||||
Due
to
changes in stock prices during the year and timing of issuance of shares, the
cumulative total of quarterly net income (loss) per share amounts may not equal
the net income per share for the year. Each of the fiscal quarters in 2005
and
2004 was thirteen weeks long, ending on the Friday nearest to the calendar
quarter end.
F-26