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JOHNSON OUTDOORS INC - Annual Report: 2007 (Form 10-K)

johnsonsept282007form10k.htm

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 28, 2007
 
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
 
39-1536083
(State or other jurisdiction of
 incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
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:
 
 
Title of Each Class
 
Name of Exchange on
Which Registered
Class A Common Stock, $.05 par value
 
NASDAQ Global MarketSM

Securities registered pursuant to section 12(g) of the Act:  None
 
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 a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check one):
Large Accelerated Filer  [     ]                              Accelerated Filer  [ X ]                                 Non-Accelerated Filer  [     ]
 
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, 2007, 7,959,617 shares of Class A and 1,217,409 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 $83,578,748 on March 30, 2007 (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 $18.58 per share, the closing price of the Class A common stock as reported on the NASDAQ Global MarketSM on March 30, 2007. 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.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the Proxy Statement for the 2008 Annual Meeting of the Shareholders of the Registrant are incorporated by reference into Part III of this report.
 
As used in this report, the terms "we," "us," "our," "Johnson Outdoors" and the "Company" mean Johnson Outdoors Inc. and its subsidiaries, unless the context indicates another meaning.
 


 
TABLE OF CONTENTS
 
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F-1
 
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 the matters described under the caption "Risk Factors" in Item 1A of this report and the following:  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; successful integration of acquisitions; and adverse weather conditions. Shareholders, potential investors and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included herein are only made as of the date of this filing. 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®, Bottom Line®, Fishin' Buddy®, Silva®, Eureka!®, Geonav®, Old Town®, Ocean Kayak, Necky®, Escape®, Lendal, Extrasport®, Carlisle®, Scubapro®, UWATEC® and Seemann.
 

1


PART I
 
ITEM 1.
 
The Company designs, manufactures and markets outdoor recreation products in four businesses: Marine Electronics, Outdoor Equipment, Watercraft, and Diving. The Company’s primary focus is market leading innovation - meeting consumer needs with breakthrough products that stand apart from the competition and advance the Company’s strong brand names. Our subsidiaries operate as 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 (our Chairman and Chief Executive Officer), 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 electric motors used on fishing boats and other boats for quiet trolling power or primary propulsion, under its Humminbird brand, underwater sonar and GPS technology equipment and under its Cannon brand, downriggering fishing equipment. Together these brands comprise the Marine Electronics segment. The Company’s Marine Electronics brands and related accessories are sold in the United States (U.S.), Canada, Europe, South America and the Pacific Basin through large outdoor specialty store chains such as Bass Pro Shops and Cabelas, large retail store chains, marine distributors, international distributors and original equipment manufacturers (OEM) including Ranger® Boats, Skeeter Boats, and Stratos/Champion. Consumer advertising and promotion includes advertising on television and in outdoor, general interest and sports magazines, as well as tournament sponsorships. Packaging and point-of-purchase materials are used to increase consumer appeal and sales. The Company has been able to gain market share by emphasizing marketing, product innovation and quality.
 
On November 16, 2007, the Company acquired Geonav S.r.l. (Geonav), a marine electronics company in Europe for approximately $6.3 million, including assumed debt and transaction costs. Geonav is a major European brand of chart plotters based in Viareggio, Italy. Also sold under the Geonav brand are marine autopilots, VHF radios and fish finders
 
On October 3, 2005, the Company acquired the Cannon downrigger and Bottom Line fishfinder brands and related assets for $9.9 million from Computrol, Inc., a wholly owned subsidiary of Armstrong International. The Cannon and Bottom Line brands are sold through the same channels as the Company’s other products in its 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 and Tech40 performance measurement 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. 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 Company's Binghamton, New York business location. Eureka! camping products are sold under license in Japan, Australia and Europe.
 
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.
 

2


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 four season tent; and a modular, general purpose tent.
 
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.
 
Watercraft
 
The Company manufactures and markets kayaks, canoes, paddles, oars, specialty watercraft, 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, Lendal Paddle, and Dimension.
 
The Company’s Old Town Canoe business 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.
 
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.
 
The Company designs and markets thermoformed recreational canoes, under the Rogue River name, small electric powered boats under the Escape name, and other paddle and watercraft accessory brands, including Extrasport personal flotation devices and wearable paddle gear, as well as Carlisle and Lendal branded paddles. These products are produced primarily by third-party sources.
 
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 products are sold through marine dealers, resort and rental outlets and large retail chains.
 
The Company manufactures its Watercraft products in two locations in the U.S. and one in New Zealand. The Company also contracts for manufacturing of Watercraft products with third parties in Michigan, Tunisia and the Czech Republic.
 
The Company believes, based on industry and other data, that it has grown global market share and continues to be a leading manufacturer of kayaks and canoes in the U.S. in both unit and dollar sales.
 
On October 3, 2006, the Company acquired all of the outstanding common stock of Lendal Products Ltd. (Lendal) from that company’s founders for $1.4 million, plus $0.1 million in transaction costs. Lendal, which was located in Scotland, manufactures and markets premium performance sea touring, whitewater and surf paddles and blades. Lendal products are sold through the same channels as the Company’s other products in its Watercraft business. During 2007, the Company ceased manufacturing operations in Scotland, relocating the manufacturing of the Lendal product to one of its existing U.S. manufacturing locations.
 
Diving
 
The Company manufactures and markets underwater diving products for technical and recreational divers, which it sells and distributes under the SCUBAPRO, UWATEC and Seemann brand names. On April 2, 2007, the Company purchased the business assets and related liabilities of Seemann Sub GmbH & Co. KG (Seemann) from Seemann’s founders for $7.8 million, plus $0.1 million in transaction costs. The purchase agreement provides for up to $0.7 million in additional purchase price consideration based on the attainment of specific integration success criteria. Seemann, located in Wendelstein, Germany, is one of that country’s largest dive equipment providers. The purchase of the Seemann Sub brand will expand the Company’s product line with dive gear for the price-driven consumer.
 
 
3

 
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 accessories. SCUBAPRO and UWATEC quality diving equipment is marketed to the premium segment of the market for both diving enthusiasts and more technical, advanced divers. Seemann products are marketed to the recreational diver interested in owning quality equipment at an affordable price. Products are sold 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.
 
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 markets its equipment in diving magazines, via websites and through dive specialty stores. Seemann’s full-line of dive equipment and accessories are marketed and sold primarily in Europe. Seemann products compete in the mid-market on the basis of quality at an affordable price.
 
The Company maintains manufacturing and assembly facilities in Switzerland, Italy and Indonesia. The Company sources stabilizing jackets from a third-party manufacturer in Mexico. The majority of the Company’s rubber, proprietary materials, plastic products and other components are also sourced from third-parties.
 
Financial Information for Business Segments
 
As noted above, the Company has four reportable business segments. See Note 12 to the Consolidated Financial Statements included elsewhere in this report for financial information concerning each business segment.
 
International Operations
 
See Note 12 to the Consolidated Financial Statements included elsewhere in this report for financial information regarding the Company’s domestic and international operations. See Note 1, subheading “Foreign Operations and Related Derivative Financial Instruments,” to the Consolidated Financial Statements included elsewhere in this report 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 Company’s Consolidated Statements of Income included elsewhere in this report.
 
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 fishfinder market are Lowrance, Garmin, Navman, and Ray Marine. Competition in this business is focused on quality of sonar imaging and display as well as the integration of mapping and GPS technology. The main competitors in the downrigger market are Big Jon, Walker and Scotty. Competition in this business focuses on ease of operation, speed and durability.
 
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 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 Base-X, DHS Systems and Alaska Structures, Camel, Outdoor Ventures, and Diamond Brands.
 
 
4

 
Watercraft:  The Company primarily competes in the paddle sport segment of kayaks and canoes. The main competitors are Confluence Watersports, Pelican, Wenonah Canoe and Legacy Paddlesports which compete on the basis of their design, performance and quality.
 
Diving:  The main competitors in Diving include Aqualung/U.S. Divers, Oceanic, Mares, Cressi-sub, and Suunto, each of which competes on the basis of product innovation, performance, quality and safety.
 
Employees
 
At September 28, 2007, the Company had approximately 1,400 regular, full-time 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 $36.0 million at September 28, 2007 and $44.8 million September 29, 2006. 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. Historically, the Company has vigorously defended its intellectual property rights. and the Company expects to continue to do so.
 
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 these materials could have a material adverse impact on the sales and operating results of the Company’s Outdoor Equipment business.
 

5


Seasonality
 
The Company’s products are outdoor recreation related which results in seasonal variations in sales and profitability. This seasonal variability is due to customers increasing their inventories in the quarters ending March and June, the primary selling season for the Company's outdoor recreation products. 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
 
   
September 28, 2007
   
September 29, 2006
   
September 30, 2005
 
Quarter Ended
 
Net
 Sales
   
Operating
Profit (Loss)
   
Net
 Sales
   
Operating
Profit (Loss)
   
Net
 Sales
   
Operating
Profit (Loss)
 
December
    17 %     (15 )%     19 %     (4 )%     20 %     %
March
   
28
     
23
     
27
     
40
     
28
     
54
 
June
   
35
     
82
     
34
     
67
     
32
     
76
 
September
   
20
     
10
     
20
      (3 )    
20
      (30 )
      100 %     100 %     100 %     100 %     100 %     100 %
 
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 Business Conduct; (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 we face. Additional risks that we do not yet know of or that we currently think are immaterial may also impair our future business operations. If any of the events or circumstances described in the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected. In such cases, the trading price of our common stock could decline.
 
Our net sales and profitability depend on our ability to continue to conceive, design and market products that appeal to our consumers.
 
The introduction of new products is critical in our industry and to our growth strategy. Our business depends on our ability to continue to conceive, design, manufacture and market new products and upon continued market acceptance of our product offering. Rapidly changing consumer preferences and trends make it difficult to predict how long consumer demand for our existing products will continue or what new products will be successful. Our current products may not continue to be popular or new products that we may introduce may not achieve adequate consumer acceptance for us to recover development, manufacturing, marketing and other costs. A decline in consumer demand for our products, our failure to develop new products on a timely basis in anticipation of changing consumer preferences or the failure of our new products to achieve and sustain consumer acceptance could reduce our net sales and profitability.
 
Competition in our markets could reduce our net sales and profitability.
 
We operate in highly competitive markets. We compete with several large domestic and foreign companies such as Brunswick, Lowrance, Confluence and Aqualung/U.S. Divers, with private label products sold by many of our retail customers and with other producers of outdoor recreation products. Some of our competitors have longer operating histories, stronger brand recognition and greater financial, technical, marketing and other resources than us. In addition, we may face competition from new participants in our markets because the outdoor recreation product industries have limited barriers to entry. We experience price competition for our products, and competition for shelf space at retailers, all of which may increase in the future. If we cannot compete successfully in the future, our net sales and profitability will likely decline.
 
 
6

 
Trademark infringement or other intellectual property claims relating to our products could increase our costs.
 
Our industry is susceptible to litigation regarding trademark and patent infringement and other intellectual property rights. We 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 our management even if the claim or defense against us is without merit. We could also be required to pay substantial damages or settlement costs to resolve intellectual property litigation.
 
In July 2007, we reached a settlement agreement with Confluence Holdings Corp. that ended a long-standing intellectual property dispute between the two companies. While the terms of the agreement are confidential, the settlement did not constitute an admission of wrongdoing by either party and included a one-time payment by Johnson Outdoors of $4.4 million which had an unfavorable impact on our earnings in the third fiscal quarter.
 
Sales of our products are seasonal, which causes our operating results to vary from quarter to quarter.
 
Sales of our products are seasonal. Historically, our net sales and profitability have peaked in the second and third fiscal quarters due to the buying patterns of our customers. Seasonal variations in operating results may cause our results to fluctuate significantly in the first and fourth quarters and may tend to depress our stock price during the first and fourth quarters.
 
The trading price of shares of our common stock fluctuates and investors in our common stock may experience substantial losses.
 
The trading price of our common stock has been volatile and may continue to be volatile in the future. The trading price of our common stock could decline or fluctuate in response to a variety of factors, including:
 
the timing of our announcements or those of our competitors concerning significant product developments, acquisitions or financial performance;
fluctuation in our quarterly operating results;
announcements concerning new contracts with the U.S. Military;
substantial sales of our 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 our shareholders can exert significant influence over the Company.
 
As of November 1, 2007, Helen P. Johnson-Leipold, members of her family and related entities (hereinafter the Johnson Family) held approximately 78% of the voting power of both classes of our 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.
 
We may experience difficulties in integrating strategic acquisitions.
 
As part of our growth strategy, we intend to pursue acquisitions that are consistent with our mission and that will enable us to leverage our competitive strengths. We have acquired:
 
Certain assets of Computrol, Inc. on October 3, 2005, including, without limtiationcertain intallectual property used in its business.
 
 
 
7


Lendal Products Ltd. on October 3, 2006, including, without limitation certain intellectual property used in its business.
Seemann Sub GmbH & Co. KG on April 2, 2007, including, without limitation certain intellectual property used in its business.
Geonav S.r.l. on November 16, 2007, including without limitation certain intellectual property used in its business.
 
Risks associated with integrating strategic acquisitions include:
 
the acquired business may experience losses which could adversely affect our profitability;
unanticipated costs elating to the integration of acqjired businesses may increase our 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 our expenses;
diversion of our management’s attention could impair their ability to effectively manage our other business operations; and
unanticipated management or operational problems or liabilities may adversely affect our profitability and financial condition.
 
We are dependent upon certain key members of management.
 
Our success will depend to a significant degree on the abilities and efforts of our senior management. Moreover, our success depends on our 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 we may lose key employees or be forced to increase their compensation to retain these people. Employee turnover could significantly increase our 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 our business, financial condition or results of operations and on the value of our securities.
 
Sources of and fluctuations in market prices of raw materials can affect our operating results.
 
The primary raw materials we use are metals, resins and packaging materials. These materials are generally available from a number of suppliers, but we have chosen to concentrate our sourcing with a limited number of vendors for each commodity or purchased component. We believe our sources of raw materials are reliable and adequate for our 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 our financial results.
 
We are subject to environmental and safety regulations.
 
We are 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 our 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). We believe that our existing environmental management system is adequate and we have no current plans for substantial capital expenditures in the environmental area. We do not currently anticipate any material adverse impact on our 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 our business and there is no assurance that material liabilities or changes would not arise.
 
 
8

 
Our debt covenants may limit our ability to complete acquisitions, incur debt, make investments, sell assets, merge or complete other significant transactions.
 
Our credit agreement and certain other of our debt instruments includes provisions that place limitations on a number of our activities, including our ability to:
 
incur additional debt;
create liens on our 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 our ability to pursue opportunities to expand our business operations, including engaging in strategic acquisitions.
 
Our shares of common stock are thinly traded and our stock price may be more volatile.
 
Because our common stock is thinly traded, its market price may fluctuate significantly more than the stock market in general or the stock prices of similar companies, which are exchanged, listed or quoted on NASDAQ. We believe there are 4,370,113 shares of our Class A common stock held by nonaffiliates. Thus, our common stock will be less liquid than the stock of companies with broader public ownership, and as a result, the trading prices for our shares of common stock may be more volatile. Among other things, trading of a relatively small volume of our common stock may have a greater impact on the trading price for our stock than would be the case if our public float were larger.
 
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 included elsewhere in this report for a discussion of the Company’s lease obligations.
 
The Company’s principal manufacturing (identified with an asterisk) and other locations are:
 
Alpharetta, Georgia (Marine Electronics)
Eufaula, Alabama* (Marine Electronics)
Antibes, France (Diving)
Ferndale, Washington* (Watercraft)
Bad Säkingen, Germany (Diving)   (1)
Genoa, Italy* (Diving)
Barcelona, Spain (Diving)
Grand Rapids, Michigan (Watercraft)
Basingstoke, Hampshire, England (Diving)
Great Yarmouth, Norfolk, United Kingdom (Watercraft)
Batam, Indonesia* (Diving and Outdoor Equipment)
Hallwil, Switzerland* (Diving)
Binghamton, New York* (Outdoor Equipment)
Henggart, Switzerland (Diving)
Brignais, France (Watercraft)
Mankato, Minnesota* (Marine Electronics)
Brussels, Belgium (Diving)
Napier, New Zealand* (Watercraft)
Burlington, Ontario, Canada (Marine Electronics, Outdoor Equipment)
Old Town, Maine* (Watercraft)
Prestwick, Ayrshire, United Kingdom* (Watercraft)  (2)
Chatswood, Australia (Diving)
Silverdale, New Zealand* (Watercraft)
Chai Wan, Hong Kong (Diving)
Wendelstein, Germany (Diving)   (1)
El Cajon, California (Diving)
Yokohama, Japan (Diving)
   
(1)This facility was closed at the end of fiscal 2007 and sales, service and back office support was relocated to the Seemann Sub facility in
Wendelstein, Germany.
(2)This facility will be vacated as of October 31, 2007 and the lease will be terminated as of that date. Manufacturing operations formerly
engaged in at this facility are being transferred to our Old Town, Maine facility.
 
 
9

 
The Company’s corporate headquarters is located in a leased facility in Racine, Wisconsin.
 
ITEM 3.
 
See Note 14 to the Consolidated Financial Statements included elsewhere in this report for a discussion of legal proceedings.
 
ITEM 4.
 
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended September 28, 2007.
 

10

 
PART II
 
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Certain information with respect to this item is included in Notes 9 and 10 to the Company's Consolidated Financial Statements included elsewhere in this report. The Company’s Class A common stock is traded on the NASDAQ Global MarketSM 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, 2007, the Company had 734 holders of record of its Class A common stock and 51 holders of record of its Class B common stock. We believe the beneficial owners of our Class A common stock on that date were substantially greater.
 
A summary of the high and low prices for the Company’s Class A common stock during each quarter of the years ended September 28, 2007 and September 29, 2006 is as follows:
                                         
    
First Quarter
    
Second Quarter
    
Third Quarter
    
Fourth Quarter
 
     
2007
    
2006
    
2007
    
2006
    
2007
    
2006
    
2007
    
2006
 
Stock prices:
                                               
High
  $
19.13
    $
17.47
    $
18.83
    $
18.24
    $
20.25
    $
18.35
    $
23.91
    $
17.81
 
Low
    
17.06
      
16.05
      
17.00
      
16.69
      
18.02
        
15.97
      
17.00
      
16.52
 

In fiscal 2007, the Company declared the following dividends:
 
A cash dividend declared on June 14, 2007, with a record date of July 12, 2007, payable on July 26, 2007 of $0.055 per share to Class A common stockholders and $0.05 per share to Class B common stockholders.
 
A cash dividend declared on September 19, 2007, with a record date of October 11, 2007, payable on October 25, 2007 of $0.055 per share to Class A common stockholders and $0.05 per share to Class B common stockholders.
 
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 JPMorgan Chase Bank N.A., the Company is limited in the amount of restricted payments (primarily dividends and purchases of treasury stock) made during each fiscal year. The limitation was approximately $27 million for the fiscal year ending September 28, 2007.
 
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.
 
 
11

 
Total Shareholder Return
 
The graph below compares on a cumulative basis the yearly percentage change since September 27, 2002 in the total return (assuming reinvestment of dividends) to shareholders on the Class A common stock with (a) the total return (assuming reinvestment of dividends) on The NASDAQ Stock Market-U.S. Index; (b) the total return (assuming reinvestment of dividends) on the Russell 2000 Index; and (c) the total return (assuming reinvestment of dividends) on a self-constructed peer group index. This year, the Company is transitioning to a new peer group which consists of Arctic Cat Inc., Brunswick Corporation, Callaway Golf Company, Escalade Inc., Marine Products Corporation and Nautilus, Inc. In previous years, the peer group consisted of Arctic Cat Inc., Brunswick Corporation, Callaway Golf Company, K2 Inc., and Nautilus, Inc. The graph assumes $100 was invested on September 27, 2002 in Class A common stock, The NASDAQ Stock Market-U.S. Index, the Russell 2000 Index and the peer group indices.
 
 
                                           
    
9/27/02
    
10/3/03
    
10/1/04
    
9/30/05
    
9/29/06
    
9/28/07
 
Johnson Outdoors
   
100.00
     
123.85
     
177.06
     
152.84
     
158.62
     
199.22
 
NASDAQ Composite
   
100.00
     
151.68
     
163.78
     
186.68
     
197.57
     
237.83
 
Russell 2000 Index
   
100.00
     
136.50
     
162.12
     
191.23
     
210.20
     
236.14
 
Old Peer Group
   
100.00
     
120.75
     
173.44
     
160.24
     
131.75
     
111.92
 
New Peer Group
    
100.00
      
121.98
      
177.03
      
163.28
      
134.75
      
115.47
 
 
The information in this section titled "Total Shareholder Return" shall not be deemed to be "soliciting material" or "filed" with the Securities and Exchange Commission or subject to Regulation 14A or 14C promulgated by the Securities and Exchange Commission or subject to the liabilities of section 18 of the Securities Exchange Act of 1934, as amended, and this information shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended."
 
 
12


ITEM 6.                  SELECTED CONSOLIDATED FINANCIAL DATA
 
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 and with “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” included or referred to elsewhere in this report. The consolidated statements of income for the years ended September 28, 2007, September 29, 2006 and September 30, 2005, and the consolidated balance sheet data as of September 28, 2007 and September 29, 2006, are derived from the Company’s audited consolidated financial statements included elsewhere herein. The consolidated statements of income for the years ended October 1, 2004 and October 3, 2003, and the consolidated balance sheet data as of September 30, 2005, October 1, 2004 and October 3, 2003, are derived from the Company’s audited consolidated financial statements which are not included herein.
                                
                            
Year Ended
 
 
(thousands, except per share data)
 
September 28
2007
 (6)  
September 29
 2006
(5)   
September 30
2005
   
October 1
2004
 (4)  
October 3
2003
 
Operating Results (1)
                             
Net sales
  $
432,060
    $
395,790
    $
380,690
    $
355,274
     $
315,892
 
Gross profit
   
174,883
     
165,216
     
156,354
     
147,618
     
127,989
 
Operating expenses
   
156,944
     
144,591
     
140,710
     
128,269
     
116,167
 
Operating profit
   
17,939
     
20,625
     
15,644
     
19,349
     
11,822
 
Interest expense
   
5,162
     
4,989
     
4,792
     
5,283
     
5,374
 
Other income
    (193 )     (128 )     (1,250 )     (670 )     (3,254 )
Income before income taxes
   
13,708
     
15,764
     
12,102
     
14,736
     
9,702
 
Income tax expense
   
4,474
     
7,049
     
5,001
     
6,047
     
4,281
 
Net income
  $
9,234
    $
8,715
    $
7,101
    $
8,689
    $
5,421
 
Basic earnings per common share
  $
1.02
    $
0.97
    $
0.82
    $
1.01
    $
0.64
 
Diluted earnings per common share
  $
1.00
    $
0.95
    $
0.81
    $
0.99
    $
0.63
 
Diluted average common shares outstanding
   
9,254
     
9,161
      
8,795
     
8,774
     
8,600
 
Balance Sheet Data
                                       
Current assets (2)
  $
204,951
    $
184,897
    $
186,035
    $
194,641
    $
195,135
 
Total assets
   
319,679
     
284,226
     
283,318
     
293,714
     
277,657
 
Current liabilities (3)
   
66,255
     
57,650
     
56,196
     
59,110
     
50,031
 
Long-term debt, less current maturities
   
10,006
     
20,807
     
37,800
     
50,797
     
67,886
 
Total debt
   
42,806
     
37,807
     
50,800
     
67,019
     
77,473
 
Shareholders’ equity
   
200,165
     
180,881
     
166,434
     
160,644
     
144,194
 
 
(1)
The year ended October 3, 2003 included 53 weeks. All other years include 52 weeks.
(2)
Includes cash and temporary cash investments of $39,232, $51,689, $72,111, $69,572 and $88,910, as of the years ended 2007, 2006, 2005, 2004 and 2003, respectively.
(3)
Excluding short-term debt and current maturities of long-term debt.
(4)
The results in 2004 contain five months of operating results of the acquired Humminbird business.
(5)
The results in 2006 contain a full year of operating results of the acquired Cannon/Bottom Line business.
(6)
The results in 2007 contain a full year of operating results of the acquired Lendal Products Ltd. business and six months of operating results of the acquired Seemann Sub Gmbh & Co. business.


13

 
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Executive Overview
 
The Company designs, manufactures and markets top-quality recreational products for the outdoor enthusiast. 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 operate as 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.
 
Total Company net sales were $432.1 million, a 9.2% increase over $395.8 million in the prior year. Key factors impacting the year-over-year sales results included:
 
 
In Marine Electronics, strong new product introductions and marketing programs drove a 20.4% increase in net sales over the prior year.
 
In Diving, stabilization and growth in Europe, including a successful new diving computer launch, the addition of Seemann Sub and favorable currency translation together contributed to a 13.0% increase in net sales over the prior year.
 
In Watercraft, favorable response to new paddle sport innovations and double-digit growth in key international markets led to a 3.4% increase in net sales for the year.
 
In Outdoor Equipment, net sales fell 15.3% due to the expected slow-down in military tent sales, and non-recurring specialty market sales of $5.3 million in the prior year.
 
Operating profit for the year was $17.9 million compared to $20.6 million in the prior year. Key factors driving the year-over-year changes in operating profit included:
 
 
A one-time $4.4 million litigation settlement payment in Watercraft partially off-set by increased paddle sport brand sales.
 
The recovery of $2.9 million in flood-related costs in Outdoor Equipment.
 
The anticipated 20.9% decline in military sales.
 
Lower gross margins in Marine Electronics due to increased labor costs incurred to meet high demand for new product.
 
Corporate expenditures of $2.0 million, investing in strategic profitable growth initiatives.
 
Income tax expense was $4.5 million in fiscal 2007, an effective rate of 32.6%, compared to $7.0 million in fiscal 2006, an effective rate of 44.7%. Key factors driving the year-over-year changes in the effective tax rate included:
 
 
Benefit from a German tax law change
 
An increased tax rate used to record federal deferred tax assets and research and development tax credits.
 
Net income was $9.2 million, or $1.00 per diluted share, versus net income of $8.7 million, or $0.95 per diluted share, in the prior year.
 
Debt-to-total capitalization stood at 18% at September 28, 2007, up from 17% at September 29, 2006. Debt net of cash, decreased $17.5 million to $3.6 million by year end. Depreciation and amortization expenses were $9.4 million in 2007 compared with $9.2 million in the prior year. Capital spending totaled $13.4 million in 2007 compared with last year’s $8.9 million.
 
The following discussion includes comments and analysis relating to the Company’s results of operations and financial condition for the three years ended September 28, 2007. This discussion should be read in conjunction with the Consolidated Financial Statements and related notes thereto attached to this report.
 

14


Results of Operations
 
Summary consolidated financial results from continuing operations for the fiscal years presented were as follows:
                    
(millions, except per share data)
  
2007
 (1)  
2006
 (2)  
2005
 
Operating Results
                 
Net sales
  $
432.1
    $
395.8
    $
380.7
 
Gross profit
   
174.9
     
165.2
     
156.4
 
Operating expenses
   
156.9
     
144.6
     
140.7
 
Operating profit
   
17.9
     
20.6
     
15.6
 
Interest expense
   
5.2
     
5.0
     
4.8
 
Net income
   
9.2
     
8.7
     
7.1
 
Diluted earnings per common share
  $
1.00
    $
0.95
    $
0.81
 
 
(1)
The results in 2007 contain a full year of operating results of the acquired Lendal Products Ltd. business and six months of operating results of the acquired Seemann Sub Gmbh & Co. business.
(2)
The results in 2006 contain a full year of operating results of the acquired Cannon/Bottom Line business.

The Company’s sales and operating earnings by business segment are summarized as follows:
                   
(millions)
 
2007
   
2006
   
2005
 
Net sales:
                 
Marine Electronics
  $
198.0
    $
164.5
    $
145.2
 
Outdoor Equipment
   
55.9
     
65.9
     
75.3
 
Watercraft
   
90.3
     
87.3
     
80.8
 
Diving
   
88.7
     
78.5
     
79.4
 
Other/Corporate/eliminations
    (0.8 )     (0.4 )    
 
Total
  $
432.1
    $
395.8
    $
380.7
 
Operating profit:
                       
Marine Electronics
  $
22.9
    $
21.6
    $
21.6
 
Outdoor Equipment
   
8.5
     
8.2
     
11.2
 
Watercraft
    (6.3 )     (2.6 )     (4.4 )
Diving
   
6.9
     
5.6
     
4.9
 
Other/Corporate/eliminations
    (14.1 )     (12.2 )     (17.7 )
Total
  $
17.9
    $
20.6
    $
15.6
 

See Note 12 in the notes to the consolidated financial statements included elsewhere in this report for the definition of segment net sales and operating profits.
 
2007 vs 2006
 
Net Sales
 
Net sales totaled $432.1 million in 2007 compared to $395.8 million in 2006, an increase of 9.2% or $36.3 million. Foreign currency translations favorably impacted 2007 net sales by $3.9 million in comparison to 2006. Sales growth in the Company’s Marine Electronics, Watercraft and Diving business units overcame a decline in the Outdoor Equipment business unit.
 
Net sales for the Marine Electronics business increased $33.5 million, or 20.4% primarily due to the successful launch of new products across the Marine Electronics brands. Net sales for the Company’s Watercraft business increased $3.0 million, or 3.4%, as a result of new product introductions and product offerings in the U.S. and improved volumes in international markets. Net sales for the Diving business increased $10.2 million, or 13.0% primarily due to an increase of $4.6 million from the acquired Seemann Sub business, increased volume in Europe and the far east and a $2.8 million favorable currency translation. Net sales in the Company’s Outdoor Equipment business declined $10.0 million, or 15.2%, primarily due to the expected decline in total military tent sales and a $5.3 million decline in specialty market sales. The declines in military tent sales and specialty market sales were partially offset by strong sales in the Consumer and Commercial businesses.
 
 
15

 
Operating Results
 
The Company recognized an operating profit of $17.9 million in fiscal 2007 compared to an operating profit of $20.6 million in fiscal 2006. Company gross profit margins decreased to 40.5% in fiscal 2007 from 41.7% in fiscal 2006. Primary factors driving the decrease in gross profit margins were production inefficiencies in Marine Electronics and Diving supply chain challenges in Europe. Operating expenses totaled $156.9 million, or 36.3% of net sales in fiscal 2007 compared to $144.6 million, or 36.5% of net sales in fiscal 2006.
 
Marine Electronics operating profit improved by $1.3 million, or 6.0%, in fiscal 2007 from the prior year. The increase was driven by favorable net sales volume on successful launch of new products across the Marine Electronics brands, slightly offset by increased labor due to production inefficiencies incurred in meeting higher new product demand.
 
Diving operating profit increased $1.3 million, or 23.7%, due primarily to operating profit provided by the acquired Seemann Sub business along with improved profitability on increased sales volume in far east markets. Additionally, the Diving business incurred $0.6 million in restructuring costs related to the closure of its Wendelstein, Germany facility.
 
Outdoor Equipment operating profit increased $0.3 million, or 3.7%, mainly due to the insurance recoveries related to the 2006 Binghamton, New York flood. The Company recognized gains on the recoveries of $2.9 million compared to losses incurred in the prior year of $1.5 million. No additional costs or recoveries are expected related to this event. Without the insurance recoveries the Outdoor Equipment business operating profits would have declined as a result of lower military tent sales and $5.3 million of specialty market sales occurring in 2006 which did not recur in 2007.
 
Watercraft operating losses widened by $3.7 million from the prior year to $6.3 million for fiscal 2007. However fiscal 2007 operating losses for this segment included a one-time legal settlement of $4.4 million,. Nonetheless, Watercraft saw improvements in its core Paddlesports business and continues to strategically invest in the Escape business and product line.
 
Other Income and Expenses
 
Interest income in 2007 increased $0.2 million to $0.7 million in fiscal 2007. Interest expense increased $0.2 million to $5.2 million. Favorability resulting from lower amounts of term debt outstanding for the year was offset by higher short term borrowings incurred to fund working capital needs. The Company realized currency losses of $0.6 million in fiscal 2007 as compared to $0.2 million in fiscal 2006.
 
Pretax Income and Income Taxes
 
The Company recognized pretax income of $13.7 million in fiscal 2007, compared to $15.8 million in fiscal 2006. The Company recorded income tax expense of $4.5 million in fiscal 2007, an effective rate of 32.6%, compared to $7.0 million in fiscal 2006, an effective rate of 44.7%. The effective tax rate for 2007 benefited from a German tax law change, an increased tax rate used to record federal deferred tax assets and research and development tax credits.
 
At September 28, 2007, the Company had U.S. federal operating loss carryforwards of approximately $4.0 million, which begin to expire in 2013, as well as various state net operating loss carryforwards. In addition, certain of the Company’s foreign subsidiaries have operating loss carryforwards totaling $1.5 million. These operating loss carryforwards are available to offset future taxable income over the next 3 to approximately 20 years. The Company believes it will realize its deferred tax assets, net of the valuation allowance, through the generation of future taxable income, tax planning strategies and reversals of deferred tax liabilities.
 

16


Net Income
 
The Company recognized net income of $9.2 million in fiscal 2007, or $1.00 per diluted share, compared to net income of $8.7 million in fiscal 2006, or $0.95 per diluted share.
 
2006 vs 2005
 
Net Sales
 
 
Net sales totaled $395.8 million in 2006 compared to $380.7 million in 2005, an increase of 4.0% or $15.1 million. Foreign currency translations unfavorably impacted 2006 net sales by $1.2 million in comparison to 2005. Sales growth in the Company’s Marine Electronics and Watercraft business units overcame declines in the Outdoor Equipment and Diving business units.
 
Net sales for the Marine Electronics business increased $19.2 million, or 13.2% primarily due to the successful integration of the Cannon and Bottom Line brands, which added $9.8 million, and 19.2% growth in the Humminbird brand. Net sales for the Company’s Watercraft business increased $6.5 million, or 8.0%, as a result of a strong line-up of new canoe, kayak and paddle sport product offerings. The Company believes this growth in its core brands is reflective of solid product innovation in those categories.
 
Net sales in the Company’s Outdoor Equipment business declined $9.4 million, or 12.5%, primarily due to the decline in total military tent sales. The declines in military tent sales were partially offset by strong sales in the Consumer and Commercial businesses. The Consumer business specifically benefited from strong sales in its specialty markets totaling $6.8 million which are not expected to recur in future years. The Diving business’ net sales in 2006 declined $0.9 million, or 1.2%, as compared to 2005. Additionally, sales growth in the U.S. and Far East for the Company's Diving business was offset by declines in European sales and a $1.9 million unfavorable currency translation impact.
 
Operating Results
 
The Company recognized an operating profit of $20.6 million in fiscal 2006 compared to an operating profit of $15.6 million in fiscal 2005. Improved results in the Watercraft and Diving business units were offset by a decline in the Outdoor Equipment business. Operating profit in the Marine Electronics business was flat as compared to the prior year. Company gross profit margins improved to 41.7% in fiscal 2006 from 41.1% in fiscal 2005. Higher commodity costs for components negatively affected all businesses. Copper increases and product mix in the Marine Electronics business and resin increases in the Watercraft business significantly pressured margins in those segments. Cost saving efforts, increased product selling prices, as well as business and product mix offset the negative effects of higher commodity costs.
 
Operating expenses totaled $144.6 million, or 36.5% of net sales, in fiscal 2006 compared to $140.7 million, or 37.0% of net sales, in fiscal 2005. Included in 2005 was $2.7 million of costs related to the terminated buy-out transaction. Additionally, declines in Sarbanes-Oxley compliance costs and lower restructuring costs in the Diving and Watercraft business units impacted the change in overall operating expenses. Included in 2006 results is $1.5 million in net costs related to the flooding of the Company’s facility in Binghamton, NY in late June of 2006.
 
Effective October 1, 2005, the Company adopted the fair value recognition and measurements provisions of SFAS No. 123(R), using the modified-prospective-transition method. As a result of adopting SFAS 123(R), the Company’s income before income taxes and net income was less than $0.1 million lower than if the Company had continued to account for share-based compensation under APB Opinion No. 25. Basic and fully diluted earnings per share would not have changed for 2006 if the Company had not adopted SFAS No. 123(R). Total share-based compensation under stock-based incentive plans, including stock options, restricted stock, phantom stock and employee stock purchase plans was $0.7 million for 2006.
 
The Marine Electronics business had operating profit of $21.6 million in fiscal 2006, which operating profit remained flat when compared to fiscal 2005. The incremental profit of the Cannon and Bottom Line brands and increase in Humminbird profits were offset by declines in the Minn Kota brand where profit reductions were primarily driven by increases in commodity costs, increased investments in research and development and increased promotional expenses.
 

17


The Outdoor Equipment business operating profit decreased by $3.0 million, or 26.5%, in fiscal 2006 when compared to fiscal 2005. The Outdoor Equipment business declines were attributable to the significant decline in total military tent sales. This decline was partially offset by improvements in profitability in the Consumer and Commercial businesses.
 
On June 29, 2006, the Company announced a temporary closing of its Binghamton, New York manufacturing facility due to extensive flooding which occurred in the State of New York in June of 2006. The Company reopened this manufacturing facility on August 25, 2006. The Company’s finished goods warehouse in Binghamton was unaffected by the floods and remained open for business. The Company incurred $4.7 million in losses and expenses associated with clean up, repair, impairment of inventory, impairment of property and equipment and payroll related to idle labor due to the flood. The Company received $3.0 million in insurance reimbursements associated with these costs, expensed $1.5 million of these costs and had a receivable of $0.2 million at September 29, 2006.
 
The Watercraft business incurred an operating loss of $2.6 million in fiscal 2006 compared to an operating loss of $4.4 million in fiscal 2005. The reduced operating loss in fiscal 2006 was the result of improvements in operating efficiencies, a decline in the impact of restructuring charges ($1.3 million in fiscal 2005) and from a strong line-up of new canoe, kayak and paddle sport product offerings. The Company continued to invest in its Escape brand.
 
The Diving business saw operating profit improve $0.7 million, or 14.3%, in fiscal 2006. Improved operating profits in the U.S. and the Far East were offset by declining profits in European markets. Restructuring charges of $0.4 million were incurred in fiscal 2006 compared to $1.1 million in 2005. These charges related to warehouse consolidation and management reorganization in the Company’s European diving operations.
 
Other Income and Expenses
 
Interest income in 2006 was flat compared to the prior year at $0.5 million. Interest expense increased $0.2 million in fiscal 2006. Favorability resulting from lower amounts of term debt outstanding for the year was offset by higher short term borrowings incurred to fund working capital needs. The Company realized currency losses of $0.2 million in fiscal 2006 as compared to gains of $0.8 million in fiscal 2005.
 
Pretax Income and  Income Taxes
 
The Company recognized pretax income of $15.8 million in fiscal 2006, compared to $12.1 million in fiscal 2005. The Company recorded income tax expense of $7.0 million in fiscal 2006, an effective rate of 44.7%, compared to $5.0 million in fiscal 2005, an effective rate of 41.3%. The effective tax rate for 2006 was negatively impacted by recognition of charges related to additional foreign tax contingency reserves and a reduction in the rate used to record deferred tax assets offset by a release of a valuation allowance for certain research and development tax credits.
 
At September 29, 2006, the Company had U.S. federal operating loss carryforwards of approximately $21.0 million, which begin to expire in 2013, as well as various state net operating loss carryforwards. In addition, certain of the Company’s foreign subsidiaries have operating loss carryforwards totaling $2.3 million. These operating loss carryforwards are available to offset future taxable income over the next 3 to approximately 20 years. The Company believes it will realize its 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 $8.7 million in fiscal 2006, or $0.95 per diluted share, compared to net income of $7.1 million in fiscal 2005, or $0.81 per diluted share.
 

18


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)
 
2007
   
2006
   
2005
 
Cash provided by (used for):
                 
Operating activities
  $
1.4
    $
7.5
    $
26.2
 
Investing activities
    (22.8 )     (18.6 )     (6.4 )
Financing activities
   
5.3
      (12.8 )     (15.0 )
Effect of exchange rate changes
   
3.6
     
3.5
      (2.3 )
Increase (decrease) in cash and temporary cash investments
  $ (12.5 )   $ (20.4 )   $
2.5
 

The Company's debt to total capitalization ratio increased to 18% as of September 28, 2007 from 17% as of September 29, 2006.
 
Operating Activities
 
The following table sets forth the Company’s working capital position at the end of each of the past three years:
                    
(millions)
 
2007
   
2006
   
2005
 
Current assets (1)
  $
205.0
    $
184.9
    $
186.0
 
Current liabilities (2)
   
66.3
     
57.7
       
56.2
 
Working capital (2)
  $
138.7
    $
127.2
    $
129.8
 
Current ratio (2)
 
3.1:1
    
3.2:1
    
3.3:1
 
 
(1)
2007, 2006 and 2005 information includes cash and temporary cash investments of $39.2, $51.7 and $72.1 million, respectively.
(2)    Excludes short-term debt and current maturities of long-term debt.
 
Cash flows provided by operations totaled $1.4 million, $7.5 million and $26.2 million in fiscal 2007, 2006 and 2005, respectively. The major driver in the decline of cash flows from operations in fiscal 2007 was created by an increase in working capital. Increases in accounts receivable of $3.1 million and inventory of $22.6 million offset by increases in accounts payable and other accrued liabilities of $5.4 million reflect the increase in working capital. The major driver in the decline of cash flows from operations in fiscal 2006 was created by an increase in working capital. Increases in accounts receivable of $3.6 million and inventory of $10.6 million offset by increases in accounts payable and other accrued liabilities of $1.2 million reflect the increase in working capital. 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 $1.3 million reflect the improved working capital management.
 
Depreciation and amortization charges were $9.4 million in fiscal 2007, $9.2 million in fiscal 2006 and $9.4 million in fiscal 2005.
 
Investing Activities
 
Cash flows used for investing activities were $22.8 million, $18.6 million and $6.4 million in fiscal 2007, 2006 and 2005, respectively. The acquisition of Lendal used $1.5 million of cash and the acquisition of Seemann used $7.9 million of cash in fiscal 2007. The acquisition of Cannon/Bottom Line used $9.9 million of cash in fiscal 2006. Expenditures for property, plant and equipment were $13.4 million, $8.9 million and $6.8 million in fiscal 2007, 2006 and 2005, respectively. The increase in expenditures for property, plant and equipment in 2007 was mainly to support tooling for new products and building of a flood wall to protect the Company’s Binghamton, New York facility. In general, the Company’s ongoing expenditures are primarily related to tooling for new products, facilities and information systems improvements. In 2008, capital expenditures are anticipated to be approximately $12.0 million, lower than the fiscal 2007 expenditures noted above.
 
 
19

 
Financing Activities
 
The following table sets forth the Company’s debt and capital structure at the end of the past three fiscal years:
                   
(millions)
 
2007
   
2006
   
2005
 
Current debt
  $
32.8
    $
17.0
    $
13.0
 
Long-term debt
   
10.0
     
20.8
     
37.8
 
Total debt
   
42.8
     
37.8
     
50.8
 
Shareholders’ equity
    
200.2
     
180.9
     
166.4
 
Total capitalization
  $
243.0
    $
218.7
    $
217.2
 
Total debt to total capitalization
    17.6 %     17.3 %     23.4 %

Cash flows provided by (used for) financing activities totaled $5.3 million, ($12.8) million and ($15.0) million in fiscal 2007, 2006 and 2005, respectively. Payments on long-term debt were $17.0 million, $13.0 million and $16.2 million in fiscal 2007, 2006 and 2005, respectively.
 
On October 7, 2005, the Company entered into a $75 million unsecured revolving credit facility agreement expiring October 7, 2010. The Company had $22.0 million in borrowings outstanding on this credit facility as of September 28, 2007.

On February 1, 2007, the Company entered into an additional $10.0 million unsecured revolving credit facility agreement to satisfy the Company's working capital requirements. The Company repaid and closed this credit facility in May 2007 as it was no longer needed.
 
Contractual Obligations and Off Balance Sheet Arrangements
 
The Company has contractual 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 28, 2007.
       
   
Payment Due by Period
 
(millions)
 
Total
    
Less than
 1 year
   
2-3 years
   
4-5 years
   
After 5 years
 
Long-term debt
  $
20.8
    $
10.8
    $
10.0
    $
    $
 
Short-term debt
   
22.0
     
22.0
     
     
     
 
Operating lease obligations
   
27.8
     
5.9
     
8.0
     
5.6
     
8.3
 
Open purchase orders
   
61.8
     
61.8
     
     
     
 
Contractually obligated interest payments
   
1.7
     
1.3
     
0.4
     
     
 
Total contractual obligations
  $
134.1
    $
101.8
    $
18.4
    $
5.6
    $
8.3
 

The Company also utilizes letters of credit for trade financing purposes. Letters of credit outstanding at September 28, 2007 totaled $2.7 million.
 
The Company anticipates making contributions to its defined benefit pension plans of $0.4 million through October 15, 2008.
 
The Company has no other off-balance sheet arrangements.
 

20


Market Risk Management
 
The Company is exposed to market risk stemming from changes in foreign currency 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 into during fiscal years 2007 and 2006.
 
Interest Rates
 
The Company uses interest rate swaps, caps or collars in order to maintain a mix of floating rate and fixed rate debt such that permanent working capital needs are largely funded with fixed rate debt and seasonal working capital needs are funded with floating rate debt. The Company’s primary exposure is to U.S. interest rates. The Company had no interest rate swaps, caps or collars outstanding as of the fiscal 2007 and 2006 year ends. On October 29, 2007 the Company entered into a forward starting interest rate swap (the “Swap”) with a notional amount of $60.0 million, receiving a floating three month LIBOR interest rate while paying at a fixed rate of 4.685% over an accruing period beginning December 14, 2007 and ending December 14, 2012. Interest will be payable quarterly. The Swap has been designated as a cash flow hedge of a forecasted floating rate debt issuance of approximately $60.0 million and is expected to be an effective hedge of the impact on interest payments due to changes in the three-month LIBOR benchmark rate.
 
Commodities
 
Certain components used in the Company’s products are exposed to commodity price changes. The Company manages this risk through instruments such as purchase orders and non-cancelable supply contracts. Primary commodity price exposures 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 income before income taxes from a 100 basis point movement in interest rates on the Company's senior notes outstanding at September 28, 2007:
   
Estimated Impact on
 
 
(millions)
  
Fair Value
    
Income Before
Income Taxes
 
Interest rate instruments
   $
0.2
     $
0.2
 

The Company has outstanding $20.8 million in unsecured senior notes as of September 28, 2007. The senior notes bear interest at rates of 7.15% or 7.82% and are to be repaid through December 2008. The fair market value of the Company’s fixed rate debt was $21.5 million as of September 28, 2007.
 

21


Other Factors
 
The Company experienced inflationary pressures during fiscal 2007 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.
 
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 by the individual operating companies based on estimates of losses related to customer accounts 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 and any specific customer collection issues the Company identifies could have a favorable or unfavorable effect on required reserve balances.
 
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 by 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 required reserve balances.
 
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 assets in the future, an adjustment to the deferred tax assets 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 assets would increase income in the period such determination was made.
 

22


Goodwill and Other Intangible Assets Impairment
 
In assessing the recoverability of the Company's goodwill and other intangible assets, the Company makes 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. Warranty reserves are estimated by the individual operating companies using standard quantitative measures based on criteria established by the Company. Estimates of costs to service its warranty obligations are 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.
 
New Accounting Pronouncements
 
In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 will be effective for the Company beginning in fiscal 2008. The Company is evaluating the requirements of FIN 48 and expects its impact on the Company’s consolidated financial statements will not be significant.
 
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 clarifies the definition of exchange price as the price between market participants in an orderly transaction to sell an asset or transfer a liability in the market in which the reporting entity would transact for the asset or liability, which is the principal or most advantageous market for the asset or liability. The Company will be required to adopt SFAS No. 157 beginning in fiscal 2009. The Company is currently assessing the effect of SFAS No. 157 on the Company’s consolidated financial statements.
 
In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Pension and Other Postretirement Plans. This Statement requires recognition of the funded status of a single-employer defined benefit postretirement plan as an asset or liability in its statement of financial position. Funded status is determined as the difference between the fair value of plan assets and the benefit obligation. Changes in that funded status will be recognized in other comprehensive income. The impact of adopting SFAS No. 158 on September 28, 2007 increased total assets by $0.5 million, increased total liabilities by $1.3 million and decreased total stockholders’ equity by $0.8 million.
 
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115. This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. The fair value option permits a company to choose to measure eligible items at fair value at specified election dates. A company will report unrealized gains and losses on items for which the fair value option has been elected in earnings after adoption. SFAS No. 159 will be effective for the Company beginning in fiscal 2009. The Company is currently assessing the effect of SFAS No. 159 on the Company’s consolidated financial statements.
 
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Information with respect to this item is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading “Market Risk Management”.
 

23


ITEM 8.                  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
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-30.
 
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
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, as of the end of such period, the Company’s disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in reports that the Company files with or submits to 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 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.”
 
ITEM 9B.
 
None.
 

24


PART III
 
ITEM 10.
 
Information with respect to this item is incorporated herein by reference to the discussion under the heading “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 2008 Annual Meeting of Shareholders, which will be filed with the Commission on or before January 28, 2008. 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 2008 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 February 28, 2008 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, 2008, under the headings –“Compensation of Directors” and “Executive Compensation.”
 
The information incorporated by reference from the “Report of the Compensation Committee” in the Company’s Proxy Statement for the 2008 Annual Meeting of Shareholders shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except as shall be expressly set forth by specific reference in such filing.
 
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
Information with respect to this item is incorporated herein by reference to the discussion under the heading “Stock Ownership of Management and Others” in the Company's Proxy Statement for the 2008 Annual Meeting of Shareholders, which will be filed with the Commission on or before January 28, 2008.
 

25


Equity Compensation Plan Information
 
The following table summarizes share information, as of September 28, 2007, 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
   
286,393
    $
8.66
      601,760 (1)
Equity compensation plans not  approved by shareholders
   
     
      
 
Total
   
286,393
    $
8.66
      601,760 (1)
 
 (1) All of the available shares under the 2003 Non-Employee Director Stock Ownership Plan (111,357) and under the 2000 Long-Term Stock Incentive Plan (425,073) 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 65,330 shares available for issuance under the Johnson Outdoors Inc. 1987 Employees’ Stock Purchase Plan, as amended.
 
ITEM 13.
 
Information with respect to this item is incorporated herein by reference to the discussion under the heading “Certain Relationships and Related Transactions” in the Company's Proxy Statement for the 2008 Annual Meeting of Shareholders, which will be filed with the Commission on or before January 28, 2008. Information regarding director independence is incorporated by reference to the discussions under “Corporate Governance Matters-Director Independence” in the Company’s Proxy Statement for the 2008 Annual Meeting of Shareholders, which will be filed with the Commission on or before January 28, 2008.
 
ITEM 14.
 
Information with respect to this item is incorporated herein by reference to the discussion under the heading “Audit Committee Matters – Fees of Independent Registered Public Accounting Firm” in the Company's Proxy Statement for the 2008 Annual Meeting of Shareholders, which will be filed with the Commission on or before January 28, 2008.
 

26

 
PART IV
 
ITEM 15.
 
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 28, 2007 and September 29, 2006
Consolidated Statements of Income - Years ended September 28, 2007, September 29, 2006 and September 30, 2005
Consolidated Statements of Shareholders’ Equity - Years ended September 28, 2007, September 29, 2006 and September 30, 2005
Consolidated Statements of Cash Flows - Years ended September 28, 2007, September 29, 2006 and September 30, 2005
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.
 

27


SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Racine and State of Wisconsin, on the 12th day of December 2007.
 
 
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 12th day of December 2007.
 
 
/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/ 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/ Edward F. Lang, III
 
Director
(Edward F. Lang, III)
   
     
/s/ David W. Johnson
 
Vice President and Chief Financial Officer
(David W. Johnson)
 
(Principal Financial and Accounting Officer)
 
 
28


EXHIBIT INDEX
 
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 7, 2005, by and among Johnson Outdoors Inc. and, among others, JPMorgan Chase Bank, N.A. (Filed as Exhibit 4.15 to the Company’s Form 10-Q for the quarter ended December 30, 2005 and incorporated herein by reference.)

 
29

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.)
 
 
30

 
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.)
 
21
 
23
 
31.1
 
31.2
 
32.1(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.
 

31


 
Table of Contents
 
Page
 
F-1
 
 
F-1
 
 
F-2
 
 
F-4
 
 
F-5
 
 
F-6
 
 
F-7
 
 
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 Securities Exchange Act of 1934. 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 28, 2007. 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 28, 2007, the Company’s internal control over financial reporting was effective based on those criteria.
 
 
/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 Johnson Outdoors Inc.’s internal control over financial reporting as of September 28, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Johnson Outdoors Inc.’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 included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
 
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, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
 
F-1

 
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, Johnson Outdoors Inc. maintained, in all material respects, effective internal control over financial reporting as of September 28, 2007, 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 28, 2007 and September 29, 2006, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended September 28, 2007 of Johnson Outdoors Inc. and our report dated December 12, 2007 expressed an unqualified opinion thereon.
 
 
 
/s/ Ernst & Young LLP                         
 
Ernst & Young LLP
Milwaukee, Wisconsin
 
December 12, 2007
 
 

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 28, 2007 and September 29, 2006, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended September 28, 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our 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 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.
 
 
F-2

 
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 28, 2007 and September 29, 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 28, 2007, in conformity with U.S. generally accepted accounting principles.
 
As discussed in Note 1 of the financial statements, in the year ended September 28, 2007, the Company changed its method of accounting for pensions and other post-retirement benefits.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Johnson Outdoors Inc.’s internal control over financial reporting as of September 28, 2007, 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 12, 2007, expressed an unqualified opinion thereon.
 
 
 
/s/ Ernst & Young LLP                           
 
Ernst & Young LLP
Milwaukee, Wisconsin
 
December 12, 2007
 

 

F-3

 
CONSOLIDATED BALANCE SHEETS
                
 
(thousands, except share data)
  
September 28
2007
    
September 29
2006
 
Assets
           
Current assets:
           
Cash and temporary cash investments
  $
39,232
    $
51,689
 
Accounts receivable less allowance for doubtful
accounts of $2,352 and $2,318, respectively
   
57,605
     
52,844
 
Inventories
   
88,833
     
63,828
 
Deferred income taxes
   
11,029
     
9,462
 
Other current assets
   
8,252
     
7,074
 
Total current assets
   
204,951
     
184,897
 
Property, plant and equipment, net
   
36,670
     
31,600
 
Deferred income taxes
   
13,097
     
14,576
 
Goodwill
   
51,454
     
42,947
 
Other intangible assets, net
   
6,638
     
4,590
 
Other assets
   
6,869
     
5,616
 
Total assets
  $
319,679
    $
284,226
 
Liabilities And Shareholders’ Equity
               
Current liabilities:
               
Short-term notes payable
  $
22,000
    $
 
Current maturities of long-term debt
   
10,800
     
17,000
 
Accounts payable
   
23,988
     
17,506
 
Accrued liabilities:
               
Salaries, wages and benefits
   
17,326
     
16,577
 
Accrued discounts and returns
   
5,524
     
5,047
 
Accrued interest payable
   
610
     
1,118
 
Income taxes payable
   
2,192
     
1,258
 
Other
   
16,615
     
16,144
 
Total current liabilities
   
99,055
     
74,650
 
Long-term debt, less current maturities
   
10,006
     
20,807
 
Other liabilities
   
10,453
     
7,888
 
Total liabilities
   
119,514
     
103,345
 
Shareholders’ equity:
               
Preferred stock: none issued
   
     
 
Common stock:
               
Class A shares issued and outstanding:
September 28, 2007, 7,949,617;
September 29, 2006, 7,858,800
   
397
     
393
 
Class B shares issued and outstanding (convertible into Class A):
September 28, 2007, 1,217,409;
September 29, 2006, 1,217,977
   
61
     
61
 
Capital in excess of par value
   
56,835
     
55,459
 
Retained earnings
   
126,253
     
118,015
 
Accumulated other comprehensive income
    
16,619
     
6,953
 
Total shareholders’ equity
   
200,165
     
180,881
 
Total liabilities and shareholders’ equity
  $
319,679
    $
284,226
 
 
The accompanying notes are an integral part of the Consolidated Financial Statements.
 

F-4


CONSOLIDATED STATEMENTS OF INCOME
       
   
Year Ended
 
 
(thousands, except per share data)
 
September 28
2007
   
September 29
2006
   
September 30
2005
 
Net sales
  $
432,060
    $
395,790
    $
380,690
 
Cost of sales
   
257,177
     
230,574
     
224,336
 
Gross profit
   
174,883
     
165,216
     
156,354
 
Operating expenses:
                       
Marketing and selling
   
101,828
     
93,002
     
85,632
 
Administrative management, finance and information systems
   
38,913
     
36,497
     
42,257
 
Research and development
   
12,448
     
11,536
     
10,481
 
Litigation settlement
   
4,400
     
     
 
(Gains) losses related to New York flood
    (2,874 )    
1,500
     
 
Profit sharing
   
2,229
     
2,056
     
2,340
 
Total operating expenses
   
156,944
     
144,591
     
140,710
 
Operating profit
   
17,939
     
20,625
     
15,644
 
Interest income
    (738 )     (504 )     (455 )
Interest expense
   
5,162
     
4,989
     
4,792
 
Other expense (income), net
   
57
     
376
      (795 )
Income before income taxes
   
13,708
     
15,764
     
12,102
 
Income tax expense
   
4,474
     
7,049
     
5,001
 
Net income
  $
9,234
    $
8,715
    $
7,101
 
Basic earnings per common share
  $
1.02
    $
0.97
     $
0.82
 
Diluted earnings per common share
  $
1.00
    $
0.95
    $
0.81
 
Cash dividends declared per Class A common share
  $
0.11
    $
    $
 
Cash dividends declared  per Class B common share
  $
0.10
    $
    $
 
 
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 October 1, 2004
  $
441
    $
52,640
    $
102,199
    $ (20 )   $
6,105
    $ (721 )      
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
   
     
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
 
Net income
   
     
     
8,715
     
     
     
    $
8,715
 
Exercise of stock options (1)
   
     
65
     
     
     
     
     
 
Issuance of stock under employee stock purchase plan
   
1
     
109
     
     
     
     
     
 
Stock-based compensation and award of restricted shares
   
2
     
604
     
     
     
     
     
 
Adoption of SFAS 123 (R)
   
      (598 )    
     
598
     
     
     
 
Translation adjustment
   
     
     
     
     
3,454
     
     
3,454
 
Additional minimum pension liability (2)
   
     
     
     
     
     
1,497
     
1,497
 
Balance at September 29, 2006
   
454
     
55,459
     
118,015
     
     
7,295
      (342 )    
13,666
 
Net income
   
     
     
9,234
     
     
     
    $
9,234
 
Dividends declared
   
     
      (996 )    
     
     
     
 
Exercise of stock options (1)
   
1
     
591
     
     
     
     
     
 
Issuance of stock under employee stock purchase plan
   
1
     
160
     
     
     
     
     
 
Stock-based compensation and award of restricted shares
   
2
     
625
     
     
     
     
     
 
Translation adjustment
   
     
     
     
     
10,379
     
     
10,379
 
Additional minimum pension liability (2)
   
     
     
     
     
     
45
     
45
 
Comprehensive income
   
     
     
     
     
     
    $
19,658
 
Adoption of SFAS 158(3)
   
     
     
     
     
      (758 )        
Balance at September 28, 2007
  $
458
    $
56,835
    $
126,253
    $
    $
17,674
    $ (1,055 )        
 
 
(1)Includes tax benefit related to exercise of stock options of $111, $25 and $336 for 2007, 2006 and 2005, respectively.
 
(2)Net of tax provision of $33, $771 and $578 for 2007, 2006 and 2005, respectively.
 
(3)Net of tax provision of $560 for 2007.
 
The accompanying notes are an integral part of the Consolidated Financial Statements.
 

F-6

 
CONSOLIDATED STATEMENTS OF CASH FLOWS
        
    
Year Ended
 
 
(thousands)
 
September 28
2007
   
September 29
2006
   
September 30
2005
 
Cash Provided By Operating Activities
                 
Net income
  $
9,234
    $
8,715
    $
7,101
 
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation
   
9,079
     
8,813
     
9,142
 
Amortization of intangible assets and deferred financing costs
   
323
     
351
     
260
 
Loss on sale of property, plant and equipment
   
12
     
107
     
73
 
Provision for doubtful accounts receivable
   
990
     
629
     
379
 
Provision for inventory reserves
   
1,687
     
2,163
     
431
 
Stock-based compensation
   
651
     
686
     
653
 
Deferred income taxes
    (88 )    
3,755
      (555 )
Change in operating assets and liabilities, net of effect of businesses acquired or sold:
                       
Accounts receivable
    (3,063 )     (3,591 )    
841
 
Inventories
    (22,550 )     (10,617 )    
7,831
 
Accounts payable and accrued liabilities
   
5,366
     
1,166
      (1,309 )
Other, net
    (247 )       (4,647 )    
1,410
 
     
1,394
     
7,530
     
26,257
 
Cash Used For Investing Activities
                       
Payments for purchase of business
    (9,409 )     (9,863 )    
 
Additions to property, plant and equipment
    (13,418 )     (8,865 )     (6,803 )
Proceeds from sale of property, plant and equipment
   
78
     
139
      
422
 
      (22,749 )     (18,589 )     (6,381 )
Cash Provided By (Used For) Financing Activities
                       
Net borrowings on short-term debt
   
22,000
     
     
 
Borrowings on long-term debt
   
     
7
     
 
Principal payments on senior notes and other long-term debt
    (17,001 )     (13,000 )     (16,223 )
Excess tax benefits from stock-based compensation
   
111
     
25
     
 
Dividends paid
    (498 )    
     
 
Common stock transactions
   
642
     
150
     
1,230
 
     
5,254
       (12,818 )     (14,993 )
Effect of foreign currency fluctuations on cash
   
3,644
     
3,455
      (2,344 )
Increase (decrease) in cash and temporary cash investments
    (12,457 )     (20,422 )    
2,539
 
Cash And Temporary Cash Investments
                       
Beginning of year
   
51,689
     
72,111
     
69,572
 
End of year
  $
39,232
    $
51,689
    $
72,111
 
 
The accompanying notes are an integral part of the Consolidated Financial Statements.
 

F-7

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 28, 2007
 
(in thousands except share and per share amounts)
 
1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Business
 
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.
 
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. Intercompany accounts and transactions have been eliminated in consolidation.
 
Use of Estimates
 
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.
 
Fiscal Year
 
The Company’s fiscal year ends on the Friday nearest September 30. The fiscal years ended September 28, 2007 (hereinafter 2007), September 29, 2006 (hereinafter 2006) and September 30, 2005 (hereinafter 2005) each comprised 52 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, when purchased, to be equivalent to cash.
 
The Company maintains cash in bank accounts in excess of insured limits. The Company has not experienced any losses and does not believe that significant credit risk exists as a result of this practice.
 
Accounts Receivable
 
Accounts receivable are stated net of an allowance for doubtful accounts. The allowance for doubtful accounts is based on a combination of factors. In circumstances where specific collection concerns exist, a reserve is established to reduce the amount recorded to an amount the Company believes will be collected. For all other customers, the Company recognizes allowances for doubtful accounts 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.
 

F-8


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:
             
   
2007
   
2006
 
Raw materials
  $
34,914
    $
24,895
 
Work in process
   
3,850
     
4,194
 
Finished goods
   
54,735
      
38,185
 
     
93,499
     
67,274
 
Less reserves for inventory valuation
   
4,666
     
3,446
 
    $
88,833
    $
63,828
 
 
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 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 the results of operations.
 
Property, plant and equipment at the end of the respective years consist of the following:
             
   
2007
   
2006
 
Property and improvements
  $
1,307
    $
1,307
 
Buildings and improvements
   
22,731
     
22,051
 
Furniture, fixtures and equipment
   
101,862
     
87,971
 
     
125,900
     
111,329
 
Less accumulated depreciation
   
89,230
     
79,729
 
    $
36,670
    $
31,600
 
 
Impairment of Goodwill and Other Indefinite 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 indefinite lived intangibles, the Company makes assumptions regarding estimated discounted future operating 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 those assets in the future. There were no goodwill impairment charges recorded during 2007, 2006 or 2005.
 
During 2007, the final allocation of the purchase price related to the Lendal Products Ltd. acquisition was completed resulting in goodwill of $710 and an indefinite lived trademark of $175 and the preliminary allocation of the purchase price related to the Seemann Sub GmbH & Co. acquisition was completed resulting in goodwill of $5,520 and an indefinite lived trademark of $935.
 
During 2006, the final allocation of the purchase price related to the Cannon/Bottom Line acquisition was completed resulting in goodwill of $4,582 and an indefinite lived trademark of $940.
 

F-9


The remaining changes in 2007 and 2006 in goodwill relates to translation adjustments for goodwill denominated in foreign currencies. There were no other changes in indefinite lived intangible assets in 2007 and 2006.
 
Other Intangible Assets
 
Intangible assets are stated at cost less accumulated amortization. Amortization is computed using the straight-line method over 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:
             
   
2007
   
2006
 
Patents
  $
3,443
    $
2,836
 
Trademarks
   
5,997
     
4,506
 
Other
   
744
     
572
 
     
10,184
     
7,914
 
Less accumulated amortization
   
3,546
     
3,324
 
Net patents, trademarks and other
  $
6,638
    $
4,590
 

Trademarks at September 28, 2007 contain $5,382 in trademarks ($4,190 at September 29, 2006) which have indefinite lives and are not amortized. Amortization of patents and other intangible assets was $150, $172 and $148 for 2007, 2006 and 2005, respectively. Amortization of these intangible assets is expected to be approximately $150 per year until fully amortized (the unamortized value of these assets was $1,256 and $400 as of September 28, 2007 and September 29, 2006, respectively).
 
Warranties
 
The Company has product warranty accruals of $4,290 and $3,844 as of September 28, 2007 and September 29, 2006, respectively. The Company provides for warranties of certain products as they are sold. The following table summarizes the warranty activity for the three years in the period ended September 28, 2007.
         
Balance 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
 
Expense accruals for warranties issued during the year
   
3,915
 
Reserve for businesses acquired
   
100
 
Less current year warranty claims paid
   
3,458
 
Balance at September 29, 2006
   
3,844
 
Expense accruals for warranties issued during the year
   
4,006
 
Less current year warranty claims paid
   
3,560
 
Balance at September 28, 2007
  $
4,290
 


F-10


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:
                   
   
2007
   
2006
   
2005
 
Net income
  $
9,234
    $
8,715
    $
7,101
 
Basic weighted average common shares outstanding
   
9,065,658
     
8,989,348
     
8,617,746
 
Dilutive stock options and restricted stock
   
188,190
     
171,480
     
177,359
 
Diluted weighted average common shares
   
9,253,848
     
9,160,828
     
8,795,105
 
Basic earnings per common
  $
1.02
    $
0.97
    $
0.82
 
Diluted earnings per common share
  $
1.00
    $
0.95
    $
0.81
 

Stock options that could potentially dilute earnings per share in the future which were not included in the fully diluted computation for 2006 and 2005 because they would have been antidilutive totaled 19,750 and 13,750, respectively. There were no antidilutive stock options for 2007.
 
Stock-Based Compensation
 
Prior to October 1, 2005, the Company accounted for its employee stock awards under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, as permitted by SFAS No. 123, Accounting for Stock-Based Compensation. See Note 10 of the Notes to Consolidated Financial Statements for information regarding the Company’s stock-based incentive plans, including stock options, restricted stock, phantom stock and employee stock purchase plans. Generally, no stock option-based employee compensation cost was recognized in the Company’s Consolidated Statements of Income prior to October 1, 2005, as stock options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. In addition, prior to October 1, 2005, the Company recorded unearned stock-based compensation for nonvested restricted stock awards as “unearned compensation” in the Company’s Consolidated Statement of Shareholders’ Equity.
 
Effective October 1, 2005, the Company adopted the fair value recognition and measurements provisions of SFAS No. 123(R), using the modified-prospective-transition method. Under that transition method, compensation cost for stock options recognized in fiscal 2006 includes compensation cost for all options granted prior to, but not vested as of October 1, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123. Compensation cost will be recorded for all options granted, if any, subsequent to October 1, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). Results for prior periods have not been restated.
 
In accordance with SFAS No. 123(R), cash flows from income tax benefits resulting from tax deductions in excess of the compensation cost recognized for stock-based awards have been classified as financing cash flows prospectively from October 1, 2005. Prior to adoption of SFAS No. 123(R), such excess income tax benefits were presented as operating cash flows.
 

F-11


Prior to adopting SFAS 123(R) on October 1, 2005, the Company’s basic and fully diluted earnings per share for 2005 would have been impacted as shown in the pro forma information shown below, 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
 
Net income
  $
7,101
 
Total stock-based compensation expense included in net income, net of tax
   
431
 
Total stock-based compensation expense determined under fair value method for all awards, net of tax
    (218 )
Pro forma net income
  $
7,314
 
Basic earnings per common share
       
As reported
  $
0.82
 
Pro forma
  $
0.85
 
Diluted earnings per common share
       
As reported
  $
0.81
 
Pro forma
  $
0.84
 

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, a risk free rate equivalent to five year U.S. Treasury securities, an expected life of five years and no dividends. Based on these assumptions, the weighted average fair market value of options granted during 2005 was $4.78. No stock options were granted in 2007 or 2006.
 
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.
 
The Company’s U.S. entities file a consolidated federal income tax return.
 
Employee Benefits
 
The Company and certain of its subsidiaries have various retirement and profit sharing plans. The Company does not have any foreign retirement 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 to annually 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 (losses) from transactions of ($584), ($221) and $781 for 2007, 2006 and 2005, respectively.
 
 
F-12

 
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 foreign currency forward contracts are used to hedge known foreign currency transactions on a continuing basis for periods consistent with the Company’s exposures. 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 ineffective portion of the gain or loss on the forward contract, if any, is recognized in current earnings during the period of changes.
 
At September 28, 2007 and September 29, 2006, the Company had no foreign currency forward contracts.
 
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 as an offset to sales when revenue is recognized.
 
Advertising
 
The Company expenses substantially all costs related to the production of advertising the first time the advertising takes place. Cooperative promotional arrangements are accrued as related revenue is earned.
 
Advertising expense in 2007, 2006 and 2005 totaled $22,835, $21,300 and $18,476, respectively. Capitalized costs at September 28, 2007 and September 29, 2006 totaled $1,194 and $1,071, 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 fees billed to customers are included in net sales. Shipping and handling costs are included in marketing and selling expense and totaled $15,246, $14,965 and $13,728 for 2007, 2006 and 2005, respectively.
 
Research and 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. The amount capitalized related to software development for new fishfinders was $2,227, less accumulated amortization of $712 at September 28, 2007. These costs are 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 Company's Consolidated Statements of Income.
 
Fair Values
 
The carrying amounts of cash, temporary cash investments, accounts receivable, and accounts payable approximated fair value at September 28, 2007 and September 29, 2006 due to the short maturities of these instruments. See Note 4 for the fair value of long-term debt.
 
New Accounting Pronouncements
 
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 will be effective for the Company beginning in fiscal 2008. The Company is evaluating the requirements of FIN 48 and expects its impact on the Company’s consolidated financial statements will not be significant.
 
 
F-13

 
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 clarifies the definition of exchange price as the price between market participants in an orderly transaction to sell an asset or transfer a liability in the market in which the reporting entity would transact for the asset or liability, which market is the principal or most advantageous market for the asset or liability. The Company will be required to adopt SFAS No. 157 beginning in fiscal 2009. The Company is currently assessing the effect of SFAS No. 157 on the Company’s consolidated financial statements.
 
In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Pension and Other Postretirement Plans. This Statement requires recognition of the funded status of a single-employer defined benefit postretirement plan as an asset or liability in its statement of financial position. Funded status is determined as the difference between the fair value of plan assets and the benefit obligation. Changes in that funded status will be recognized in other comprehensive income. The impact of adopting SFAS No. 158 on September 28, 2007 increased total assets by $502, increased total liabilities by $1,260 and decreased total stockholders’ equity by $758.
 
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115. This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. The fair value option permits a company to choose to measure eligible items at fair value at specified election dates. A company will report unrealized gains and losses on items for which the fair value option has been elected in earnings after adoption. SFAS No. 159 will be effective for the Company beginning in fiscal 2009. The Company is currently assessing the effect of SFAS No. 159 on the Company’s consolidated financial statements.
 
2
RESTRUCTURING
 
Diving
 
In May 2007, the Company announced plans to consolidate the operations of the Scubapro facility in Bad Säkingen, Germany into the recently purchased Seemann operations in Wendelstein, Germany. This closure resulted in the reduction of 21 positions. The closure related costs are included in the “Administrative management, finance and information systems” line in the Company’s Consolidated Statements of Income. Costs to complete the restructuring program, consisting of other exit costs, are estimated and will be expensed as incurred in fiscal 2008.
 
A summary of charges, payments and accruals for 2007 is as follows:
                            
    
Employee
Termination
Costs
    
Contract Exit
Costs
   
Other Exit
Costs
    
Total
 
Accrued liabilities as of September 29, 2006
  $
      $
    $
    $
 
Activity during the year ended
 September 28, 2007:
                               
Charges to earnings
   
428
     
130
     
20
     
578
 
Settlement payments
    (281 )     (14 )     (20 )     (315 )
Accrued liabilities as of September 28, 2007
  $
147
    $
116
    $
    $
263
 
Estimated completion costs
  $
    $
    $
50
    $
50
 

In September 2005, the Company approved a plan to consolidate distribution in Europe. These actions resulted in the closure of warehouses in Germany, Italy and Switzerland and office space in France during 2006. Additionally, actions were taken during 2005 to reorganize the European management structure to unify the marketing and sales efforts across Europe. This decision resulted in the reduction of 14 positions. These charges are included in the “Administrative management, finance and information systems” line in the Company's Consolidated Statement of Income.
 
 
F-14

 
A summary of charges, payments and accruals for 2006 and 2005 are as follows:
                             
    
Employee
Termination
Costs
    
Contract Exit
Costs
    
Other Exit
Costs
    
Total
 
Accrued liabilities as of October 1, 2004
  $
    $
    $
    $
 
Activity during the year ended
 September 30, 2005:
                               
Charges to earnings
   
983
     
43
     
98
     
1,124
 
Settlement payments
    (308 )    
      (98 )     (406 )
Accrued liabilities as of September 30, 2005
  $
675
    $
43
    $
    $
718
 
Activity during the year ended
 September 29, 2006:
                               
Charges to earnings
   
51
     
9
     
292
     
352
 
Settlement payments
    (726 )     (52 )     (292 )     (1,070 )
Accrued liabilities as of September 29, 2006
  $
    $
    $
    $
 
 
Watercraft
 
In July 2004, the Company announced plans to outsource manufacturing previously performed at its Grand Rapids, Michigan facility and to shift production from Mansonville, Canada to its Old Town, Maine facility as part of the Company’s ongoing efforts to increase efficiency and improve profitability of its Watercraft business unit. The Company ceased manufacturing operations at both locations in September 2004. The decision resulted in the reduction of 71 positions. Costs and charges associated with these actions were $3,794 and were incurred across fiscal years 2005 and 2004.
 
A summary of charges, payments and accruals for 2006 and 2005 were as follows:
                               
    
Employee
Termination
Costs
       
Contract Exit
Costs
    
Other Exit
Costs
    
Total
 
Accrued liabilities as of October 1, 2004
  $
501
    $
423
    $
269
    $
1,193
 
Activity during the year ended
 September 30, 2005:
                               
Charges to earnings
   
334
     
789
     
203
     
1,326
 
Settlement payments
    (835 )     (737 )     (421 )     (1,993 )
Accrued liabilities as of September 30, 2005
  $
    $
475
    $
51
    $
526
 
Activity during year ended
 September 29, 2006:
                               
Settlement payments
   
      (475 )     (51 )     (526 )
Accrued liabilities as of September 29, 2006
  $
    $
    $
    $
 
 
3
ACQUISITIONS
 
Seemann Sub GmbH & Co.
 
On April 2, 2007, the Company purchased the assets and assumed related liabilities of Seemann Sub GmbH & Co. KG (Seemann) from Seemann’s founders for $7,757, plus $142 in transaction costs. The purchase agreement provides for up to $669 in additional purchase price consideration based on the attainment of specific integration success criteria. The transaction was funded using cash on hand and was made to add to the breadth of the Diving product lines. Seemann, located in Wendelstein, Germany, is one of that country’s largest dive equipment providers. The purchase of the Seemann Sub brand will expand the Company’s product line with dive gear for the price-driven consumer. The Seemann product line will be sold through the same channels as the Company’s other diving products and will be included in the Company’s Diving segment.
 
 
F-15

 
The following table summarizes the preliminary allocation of the purchase price, fair values of the assets acquired and liabilities assumed, and the resulting goodwill acquired at the date of the Seemann acquisition.
         
Total current assets
  $
1,829
 
Property, plant and equipment
   
143
 
Trademark
   
935
 
Customer list
   
264
 
Goodwill
   
5,520
 
Total assets acquired
   
8,691
 
Total liabilities assumed
   
792
 
Net purchase price
  $
7,899
 

The goodwill acquired is deductible for tax purposes.
 
The acquisition was accounted for using the purchase method and, accordingly, the Company's Consolidated Financial Statements include the results of operations since the date of acquisition.
 
The Company is not required to present pro forma financial information with respect to the Seemann acquisition due to the materiality of the transaction.
 
Lendal Products Ltd.
 
On October 3, 2006, the Company acquired all of the outstanding common stock of Lendal Products Ltd. (Lendal) from Lendal's founders for $1,404, plus $106 in transaction costs. The transaction was funded using cash on hand and was made to add to the breadth of the Watercraft product lines. Lendal, which is located in Scotland, manufactures and markets premium performance sea touring, whitewater and surf paddles and blades. The Lendal products are sold through the same channels as the Company’s other Watercraft products and will be included in the Company’s Watercraft segment.
 
The following table summarizes the final allocation of the purchase price, fair values of the assets acquired and liabilities assumed, and the resulting goodwill acquired at the date of the Lendal acquisition.
         
Total current assets
  $
623
 
Property, plant and equipment
   
122
 
Trademark
   
175
 
Patents
   
75
 
Customer list
   
49
 
Goodwill
   
710
 
Total assets acquired
   
1,754
 
Total liabilities assumed
   
244
 
Net purchase price
  $
1,510
 

The acquisition was accounted for using the purchase method and, accordingly, the Company's Consolidated Financial Statements include the results of operations since the date of acquisition.
 
The Company is not required to present pro forma financial information with respect to the Lendal acquisition due to the materiality of the transaction.
 

F-16


Cannon/Bottom Line
 
On October 3, 2005, the Company acquired the assets of Cannon downriggers and Bottom Line fishfinders (Cannon/Bottom Line) from Computrol, Inc., a wholly owned subsidiary of Armstrong International. The cash purchase price was $9,863. The transaction was funded using cash on hand. Cannon/Bottom Line is included in the Company’s Marine Electronics segment and was acquired to add to the breadth of the Marine Electronic product lines.
 
The following table summarizes the final allocation of the purchase price, fair values of the assets acquired and liabilities assumed, and the resulting goodwill acquired at the date of the Cannon/Bottom Line acquisition.
         
Total current assets
  $
4,348
 
Property, plant and equipment
   
260
 
Trademark
   
940
 
Patents
   
195
 
Goodwill
   
4,582
 
Total assets acquired
   
10,325
 
Total liabilities assumed
   
462
 
Net purchase price
  $
9,863
 

The goodwill acquired is deductible for tax purposes.
 
The acquisition was accounted for using the purchase method and, accordingly, the Company's Consolidated Financial Statements include the results of operations since the date of acquisition.
 
The Company is not required to present pro forma financial information with respect to the Cannon/Bottom Line acquisition due to the materiality of the transaction.
 
Geonav S.r.l.
 
On November 16, 2007, the Company acquired Geonav S.r.l. (Geonav), a marine electronics company in Europe for approximately $6,300 including assumed debt and transaction costs. Geonav is a major European brand of chart plotters based in Viareggio, Italy. Also sold under the Geonav brand are marine autopilots, VHF radios and fish finders.
 
4
INDEBTEDNESS
 
The Company has in place a $75,000 unsecured revolving credit facility agreement dated October 7, 2005 which expires October 7, 2010. At September 28, 2007, the Company had borrowings outstanding under the revolving credit agreement of $22,000 ($13,000 at an interest rate of 6.25%, $7,000 at an interest rate of 6.5625% and $2,000 at an interest rate of 7.75%).
 
On February 1, 2007, the Company entered into an additional $10.0 million unsecured revolving credit facility agreement. The Company repaid and closed this credit facility in May 2007 as it was no longer needed.
 
The Company has in place $7,078 in unsecured revolving credit facilities at its foreign subsidiaries, There was no borrowing outstanding on any of these facilities during the year ended September 28, 2007
 
The Company utilizes letters of credit for trade financing purposes which totaled $2,658 at September 28, 2007.
 
The Company has total unsecured lines of credit, both foreign and domestic, with availability totaling $57,420 as of September 28, 2007.
 

F-17


Long-term debt at the end of the respective years consisted of the following:
             
   
2007
    
2006
 
2001 senior notes
  $
20,000
    $
30,000
 
1998 senior notes
   
800
     
7,800
 
Other
   
6
     
7
 
     
20,806
     
37,807
 
Less current maturities
   
10,800
     
17,000
 
    $
10,006
    $
20,807
 

The 2001 senior notes are unsecured, bear interest at 7.82%, and require annual principal payments of $10,000 through December 2008.
 
The 1998 senior notes are unsecured, bear interest at 7.15%, and require a final principal payment of $800 in October 2007.
 
The Company uses interest rate swaps in order to maintain a mix of floating rate and fixed rate debt such that permanent working capital needs are largely funded with fixed rate debt and seasonal working capital needs are funded with floating 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 meet 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 Company's Consolidated Statement of Income. The Company had no outstanding interest rate swap agreements at September 28, 2007 or September 29, 2006. On October 29, 2007 the Company entered into a forward starting interest rate swap (the “Swap”) with a notional amount of $60.0 million, receiving a floating three month LIBOR interest rate while paying at a fixed rate of 4.685% over an accruing period beginning on December 14, 2007 and ending on December 14, 2012. Interest will be payable quarterly. The Swap has been designated as a cash flow hedge of a forecasted floating rate debt issuance of approximately $60.0 million and is expected to be an effective hedge of the impact on interest payments due to changes in the three-month LIBOR benchmark rate.
 
Aggregate scheduled maturities of long-term debt are as follows:
       
Year
     
2008
  $
10,800
 
2009
   
10,004
 
2010
   
2
 

Interest paid was $5,498, $5,496 and $4,929 for 2007, 2006 and 2005, 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 28, 2007 and September 29, 2006 was approximately $21,522 and $39,635, respectively.
 
Certain of the Company’s loan agreements require that the Company’s Chief Executive Officer, 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, 2007, the Johnson Family held 3,711,960 shares or approximately 47% of the Class A common stock, 1,204,946 shares or approximately 99% of the Class B common stock and approximately 78% 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. As of the date of this report, the Company was in compliance with the restrictive covenants of such agreements, as amended from time to time.
 

F-18


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 28, 2007 were as follows:
             
Year
 
Related parties
included in total
   
Total
 
2008
  $
695
    $
5,905
 
2009
   
558
     
4,391
 
2010
   
577
     
3,613
 
2011
   
597
     
3,244
 
2012
   
     
2,309
 
Thereafter
   
     
8,318
 

Rental expense under all leases was approximately $8,257, $7,162 and $7,652 for 2007, 2006 and 2005, 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.
 
6
INCOME TAXES
 
Income tax expense for the respective years consisted of the following:
                   
   
2007
   
2006
   
2005
 
Current:
                 
Federal
  $
    $
    $ (315 )
State
   
109
     
159
     
91
 
Foreign
   
3,410
     
3,919
     
4,938
 
Deferred
   
955
     
2,971
     
287
 
    $
4,474
    $
7,049
    $
5,001
 


F-19


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:
             
   
2007
   
2006
 
Deferred tax assets:
           
Inventories
  $
3,303
    $
2,859
 
Compensation
   
7,387
     
6,151
 
Tax credit carryforwards
   
2,333
     
1,340
 
Net operating loss carryforwards
   
5,965
     
11,019
 
Depreciation and amortization
   
4,838
     
1,893
 
Accrued liabilities
   
3,762
     
3,648
 
Other
   
1,583
     
1,375
 
Total gross deferred tax assets
   
29,171
     
28,285
 
Less valuation allowance
   
3,437
     
3,260
 
     
25,734
     
25,025
 
Deferred tax liabilities:
               
Goodwill and other intangibles
   
652
     
80
 
Foreign statutory reserves
   
956
     
906
 
Net deferred tax assets
  $
24,126
    $
24,038
 

The net deferred tax assets are recorded as $11,029 in current and $13,097 in non-current assets for 2007 and $9,462 in current and $14,576 in non-current assets for 2006.
 
Income before income taxes for the respective years consists of the following:
                   
   
2007
   
2006
   
2005
 
United States
  $
3,632
    $
7,911
    $
3,794
 
Foreign
   
10,076
     
7,853
     
8,308
 
    $
13,708
    $
15,764
    $
12,102
 

The significant differences between the statutory federal tax rate and the effective income tax rates for the Company for the respective years are as follows:
                   
   
2007
   
2006
   
2005
 
Statutory U.S. federal income tax rate
    34.0 %     34.0 %     34.0 %
Foreign rate differential
   
3.9
     
8.4
     
9.2
 
Tax law change
    (4.0 )    
     
 
Reduction in valuation reserve for research and development tax credits
   
      (5.2 )    
 
Reduction (increase)  in rate utilized to record deferred taxes
    (2.9 )    
4.9
     
 
Other
   
1.6
     
2.6
      (1.9 )
      32.6 %     44.7 %     41.3 %

The foreign rate differential of 3.9%, 8.4% and 9.2% for 2007, 2006 and 2005, respectively, is comprised of several foreign tax related items including the statutory rate differential in each year, settlement of tax audits and additional contingency reserves in 2007, 2006 and 2005, respectively. Additionally, the Company increased the U.S. federal rate used in valuing deferred tax assets from 34% to 35% during 2007, positively impacting the 2007 effective tax rate by 2.9% and the Company reduced state income tax rate used in valuing deferred tax assets during December of 2006, negatively impacting the 2006 effective tax rate by 4.9%. Deferred tax assets have been recorded at the maximum federal income tax rate in effect in the future year(s), when they are anticipated to be utilized. A German tax law change (Revised Reorganization Tax Code) has resulted in a tax receivable recorded by the Company that reduced the effective tax rate by 4%.
 
 
F-20

 
At September 28, 2007, the Company has federal operating loss carryforwards of $3,977 which begin to expire in 2013, as well as various state net operating loss carryforwards. In addition, certain of the Company’s foreign subsidiaries have operating loss carryforwards totaling $1,452. These operating loss carryforwards are available to offset future taxable income over the next 3 to approximately 20 years. All operating loss carryforwards are anticipated to be fully utilized during this period except that the Company has established a valuation allowance for the expected under-utilization of certain state operating loss carryforwards and foreign tax credit carryforwards.
 
Taxes paid were $2,823, $2,074 and $5,746 for 2007, 2006 and 2005, respectively.
 
Federal and state income taxes are provided on foreign subsidiary income distributed to, or taxable in, the U.S. during the year. At September 28, 2007, net undistributed earnings of foreign subsidiaries totaled approximately $117,002. The Company considers these unremitted earnings to be permanently invested abroad and no provision for federal or state income taxes has been made on these amounts. In the future, if foreign earnings are returned to the U.S., provision for U.S. income taxes will be made.
 
7
EMPLOYEE BENEFITS
 
Effective September 28, 2007, the Company adopted SFAS No. 158 Employers’ Accounting for Defined Pension and Other Postretirement Plans. SFAS No. 158 requires the recognition of the funded status of defined benefit and other postretirement benefit plans in the accompanying Consolidated Balance Sheets, with changes in the funded status recognized through “Accumulated other comprehensive income (loss),” net of tax. SFAS No. 158 also requires the measurement of the funded status to be the same as the balance sheet date by 2008. The Company currently uses  its fiscal year-end as its measurement date. The adoption of SFAS No. 158 did not change the amount of net periodic benefit cost included in the Company’s Consolidated Statements of Income.
 
The impact of adopting SFAS No. 158 on the Consolidated Balance Sheets at September 28, 2007 is summarized in the following table:
                      
    
Before
Application of
SFAS No. 158
    
Incremental
Effect of
Application of
SFAS No. 158
     
After
Application of
SFAS No. 158
 
Deferred income taxes
  $
12,592
    $
505
    $
13,097
 
Other intangible assets, net
   
6,641
      (3 )    
6,638
 
Total assets
   
319,177
     
502
     
319,679
 
Other liabilities
   
9,193
     
1,260
     
10,453
 
Accumulated other comprehensive income
   
17,377
      (758 )    
16,619
 
Total shareholders’ equity
   
200,923
      (758 )    
200,165
 
Total liabilities and shareholders’ equity
   
319,177
     
502
     
319,679
 
 

F-21


Net periodic pension cost, for significant noncontributory defined benefit pension plans, for the respective years includes the following components:
                   
   
2007
   
2006
   
2005
 
Service cost
  $
630
    $
703
    $
628
 
Interest on projected benefit obligation
   
1,005
     
925
     
943
 
Estimated return on plan assets
    (923 )     (871 )     (825 )
Amortization of unrecognized:
                       
Net loss
   
92
     
268
     
111
 
Prior service cost
   
9
     
9
     
24
 
Transition asset
    (2 )     (2 )     (2 )
Net periodic pension cost
  $
811
    $
1,032
    $
879
 

The following provides a reconciliation of the changes in the plans’ benefit obligation and fair value of assets for 2007 and 2006 and a statement of the funded status at the end of each year:
             
   
2007
   
2006
 
Projected benefit obligation:
           
Projected benefit obligation at beginning of year
  $
16,040
    $
19,340
 
Service cost
   
630
     
703
 
Interest cost
   
1,005
     
925
 
Actuarial gain
    (266 )     (4,211 )
Benefits paid
    (733 )     (717 )
Projected benefit obligation at end of year
  $
16,676
    $
16,040
 
Fair value of plan assets:
               
Fair value of plan assets at beginning of year
  $
11,594
    $
10,860
 
Actual return on plan assets
   
1,230
     
649
 
Company contributions
   
538
     
802
 
Benefits paid
    (733 )     (717 )
Fair value of plan assets at end of year
  $
12,629
    $
11,594
 
Funded status:
               
Funded status of the plan
  $ (4,047 )   $ (4,448 )
Unrecognized net loss
   
     
2,424
 
Unrecognized prior service cost
   
     
12
 
Unrecognized transition asset
   
      (3 )
Net liability recognized
  $ (4,047 )   $ (2,015 )
Components of accumulated other comprehensive income:                 
Net actuarial loss (gain)
  $ 1,756     518  
Prior service cost (credit)
   
4
     
 
Accumulated other comprehensive income    $ 1,760     518  


F-22


The accumulated benefit obligation for all plans was $13,916 and $13,553 at September 28, 2007 and September 29, 2006, respectively.
 
At September 28, 2007, the aggregate accumulated benefit obligation and aggregate fair value of plan assets for plans with benefit obligations in excess of plan assets was $1,678 and $0, respectively, and the aggregate accumulated benefit obligation and aggregate fair value of plan assets for plans with plan assets in excess of benefit obligations was $12,238 and $12,629, respectively. At September 29, 2006, the aggregate accumulated benefit obligation and aggregate fair value of plan assets for plans with benefit obligations in excess of plan assets was $10,662 and $8,486, respectively, and the aggregate accumulated benefit obligation and aggregate fair value of plan assets for plans with plan assets in excess of benefit obligations was $2,891 and $3,108, respectively.
 
The following summarizes the components of the net liability recognized in the consolidated balance sheets at the end of the respective years:
             
   
2007
   
2006
 
Accrued benefit liability
  $ (4,047 )   $ (2,533 )
Accumulated other comprehensive income
   
1,760
     
518
 
Net liability recognized
  $ (2,287 )   $ (2,015 )

The Company anticipates making contributions to the defined benefit pension plans of $374 through October 15, 2008.
 
Estimated benefit payments from the defined benefit plans to participants for the next five years ending September 2012 and five years thereafter are as follows:
       
Year
     
2008
  $
722
 
2009
   
714
 
2010
   
708
 
2011
   
729
 
2012
   
731
 
Five years thereafter
   
4,386
 

Actuarial assumptions used to determine the projected benefit obligation are as follows:
                     
   
2007
    
2006
   
2005
 
Discount rate
    6.50 %     6.25 %     5.25 %
Long-term rate of return
   
8.00
     
8.00
     
8.00
 
Average salary increase rate
   
4.00
     
4.00
     
4.00
 

The impact of the change in discount rates resulted in an actuarial gain of $668 and $2,844 in 2007 and 2006, respectively. The remainder of the change in actuarial gains for each year results from adjustments to mortality tables, other modifications to actuarial assumptions and investment return greater than estimated.
 
To determine the discount rate assumption used in our pension valuation, the Company identified a benefit payout stream based on the demographics of the pension plans and constructed a hypothetical bond portfolio using high-quality corporate bonds with cash flows that matched that benefit payout stream.  A yield curve was calculated based on this hypothetical portfolio which was used for the discount rate determination.
 
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 reasonableness 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.
 
 
F-23

 
The Company’s pension plans weighted average asset allocations at September 28, 2007 and September 29, 2006, by asset category were as follows:
             
   
2007
   
2006
 
Equity securities
    71 %     51 %
Fixed income securities
   
27
     
47
 
Other securities
   
2
     
2
 
Total
    100 %     100 %

The Company’s primary investment objective for the Plan’s assets is to maximize the probability 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 $2,800, $2,600 and $2,700 for 2007, 2006 and 2005, respectively.
 
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
 
The number of authorized and outstanding shares of each class of the Company's common stock at the end of the respective years was as follows:
             
   
2007
   
2006
 
Class A, $.05 par value:
           
Authorized
   
20,000,000
     
20,000,000
 
Outstanding
   
7,949,617
     
7,858,800
 
Class B, $.05 par value:
               
Authorized
   
3,000,000
     
3,000,000
 
Outstanding
   
1,217,409
     
1,217,977
 

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 2007, 2006 and 2005, respectively, 568, 1,690 and 2,048 shares of Class B common stock were converted into Class A common stock.
 

F-24


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. Current plans also allow for issuance of restricted stock or stock appreciation rights in lieu of options. Shares available for grant to key executives and non-employee directors are 536,430 at September 28, 2007.
 
Stock Options
 
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 three years from the date of grant. Stock options generally have a term of 10 years.
 
All of the Company’s stock options outstanding are fully vested, with no further compensation expense expected. There were no grants of stock options in 2007 or 2006.
 
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, or approximately $241, net of taxes.
 
A summary of stock option activity related to the Company’s plans is as follows:
                        
   
Shares
   
Weighted Average
Exercise Price
 
Weighted Average
Remaining Contractual
  Term (in years)
 
Aggregate
Intrinsic Value
 
Outstanding at October 1, 2004
   
480,766
    $
8.56
         
Granted
   
11,520
     
17.07
         
Exercised
    (144,252 )    
7.44
      $
1,626
 
Cancelled
    (5,000 )    
21.75
           
Outstanding at September 30, 2005
   
343,034
    $
9.13
           
Exercised
    (6,501 )    
6.28
      $
75
 
Cancelled
    (4,000 )    
22.06
           
Outstanding at September 29, 2006
   
332,533
    $
9.03
           
Exercised
    (44,190 )    
10.94
      $
326
 
Cancelled
    (1,950 )    
19.88
           
Outstanding and exercisable at
September 28, 2007
   
286,393
    $
8.66
 
 
 3.0
  $
3,713
 

The range of options outstanding at September 28, 2007 is as follows:
                   
 Price Range
 per Share
 
Number of Options
Outstanding and Exercisable
   
Weighted Average
 Exercise Price
   
Weighted Average Remaining
 Contractual Life (in years)
 
$0.01   –    8.00
   
150,383
    $
6.87
     
3.4
 
$8.01   –  10.00
   
95,390
     
8.24
     
1.7
 
$10.01 –  20.00
   
40,620
     
16.20
     
4.3
 
     
286,393
    $
8.66
     
3.0
 
 
Restricted Stock
 
All restricted stock has been granted at fair market value on the date of grant and vests either immediately or in three  to five years. The Company granted 43,328, 69,754 and 39,094 shares of restricted stock with a total value of $798, $1,165 and $680 during 2007, 2006 and 2005, respectively. Restricted stock forfeitures totaled 7,496, 22,770 and 0 shares during 2007, 2006 and 2005, respectively. These forfeited restricted shares had an original fair market value at date of grant of $130, $385 and $0, respectively. Amortization expense related to the restricted stock was $596, $530 and $102, respectively, during 2007, 2006 and 2005. Unvested restricted stock issued and outstanding as of  September 28, 2007 and September 29, 2006 totaled 105,102 and 76,120 shares, respectively, having a gross unamortized value of $921 and $849, respectively, which will be amortized to expense through April 2012.
 
 
F-25

 
A summary of unvested restricted stock activity for 2007 and 2006 related to the Company’s plans is as follows:
             
   
Shares
   
Weighted Average
 Grant Price
 
Unvested restricted stock at September 30, 2005
   
36,164
    $
17.42
 
Restricted stock grants
   
69,754
     
16.70
 
Restricted stock cancelled
    (22,770 )    
16.91
 
Restricted stock vested
    (7,028 )    
17.78
 
Unvested restricted stock at September 29, 2006
   
76,120
    $
16.88
 
Restricted stock grants
   
43,328
     
18.42
 
Restricted stock cancelled
    (7,496 )    
17.35
 
Restricted stock vested
    (6,850 )    
18.25
 
Unvested restricted stock at September 28, 2007
   
105,102
    $
17.39
 
 
Phantom Stock Plan
 
The Company adopted a phantom stock plan during fiscal 2003. Under this plan, certain employees were entitled to earn cash bonus awards based upon the performance of the Company’s Class A common stock. The Company recognized expense under the phantom stock plan of $24, $80 and $148 during 2007, 2006 and 2005, respectively. The Company made payments of $319 and $411 to participants in the plan during 2007 and 2006, respectively. There were no grants of phantom shares by the Company in fiscal 2007, 2006 or 2005 and the Company does not anticipate grants of phantom shares in the future. No further payments are expected to be made under this Plan.
 
Employee Stock Purchase Plan
 
The Company’s employees’ stock purchase plan provides for the issuance of shares of Class A common stock at a purchase price of not less than 85% of the fair market value of such shares on the date of grant or at the end of the offering period, whichever is lower. Shares available for purchase by employees under this plan were 65,330 at September 28, 2007. The Company issued 10,227 and 7,285 shares under the plan on April 30, 2007 and April 19, 2006, respectively. The Company recognized expense under the employees’ stock purchase plan of $31 and $22, respectively during 2007 and 2006.
 
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 costs of these transactions were $1,833, $1,838 and $2,436 for 2007, 2006 and 2005, respectively. Amounts due to/from related parties were immaterial at September 28, 2007 and September 29, 2006.
 
12
SEGMENTS OF BUSINESS
 
The Company conducts its worldwide operations through separate business segments, 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 Income, 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 segment at the end of the years presented.
 

F-26


A summary of the Company’s operations by business segment is presented below:
                   
   
2007
   
2006
   
2005
 
Net sales:
                 
Marine Electronics:
                 
Unaffiliated customers
  $
197,728
    $
164,362
    $
145,051
 
Interunit transfers
   
321
     
110
     
181
 
Outdoor Equipment:
                       
Unaffiliated customers
   
55,786
     
65,903
     
75,286
 
Interunit transfers
   
76
     
45
     
55
 
Watercraft:
                       
Unaffiliated customers
   
90,088
     
87,127
     
80,374
 
Interunit transfers
   
216
     
175
     
475
 
Diving:
                       
Unaffiliated customers
   
87,881
     
77,880
     
79,363
 
Interunit transfers
   
797
     
590
     
41
 
Other/Corporate
   
577
     
518
     
616
 
Eliminations
    (1,410 )     (920 )     (752 )
    $
432,060
    $
395,790
    $
380,690
 
Operating profit (loss):
                       
Marine Electronics
  $
22,933
    $
21,583
    $
21,572
 
Outdoor Equipment
   
8,464
     
8,236
     
11,208
 
Watercraft
    (6,307 )     (2,573 )     (4,353 )
Diving
   
6,933
     
5,604
     
4,901
 
Other/Corporate
    (14,084 )     (12,225 )     (17,684 )
    $
17,939
    $
20,625
    $
15,644
 
Depreciation and amortization expense:
                       
Marine Electronics
  $
3,647
    $
3,195
    $
2,865
 
Outdoor Equipment
   
442
     
358
     
368
 
Watercraft
   
2,182
     
2,525
     
2,643
 
Diving
   
1,663
     
1,646
     
2,100
 
Other/Corporate
   
1,296
      
1,440
     
1,426
 
    $
9,230
      $
9,164
    $
9,402
 
Additions to property, plant and equipment:
                       
Marine Electronics
  $
6,149
    $
4,583
    $
2,856
 
Outdoor Equipment
   
2,615
     
321
     
217
 
Watercraft
   
1,832
     
1,336
     
2,080
 
Diving
   
1,199
     
1,547
     
776
 
Other/Corporate
   
1,623
     
1,078
     
874
 
    $
13,418
    $
8,865
    $
6,803
 
Total assets:
                       
Marine Electronics
  $
95,725
    $
75,728
         
Outdoor Equipment
   
23,739
     
25,283
         
Watercraft
   
59,014
     
56,213
         
Diving
   
114,091
     
96,968
         
Other/Corporate
   
27,110
     
30,034
         
    $
319,679
    $
284,226
         
Goodwill, net:
                       
Marine Electronics
  $
14,596
    $
14,596
         
Outdoor Equipment
   
563
     
563
         
Watercraft
   
6,586
     
5,518
         
Diving
   
29,709
     
22,270
         
    $
51,454
    $
42,947
         


F-27


A summary of the Company’s operations by geographic area is presented below:
                  
 
2007
   
2006
   
2005
 
Net sales:
               
United States:
               
Unaffiliated customers
$
334,286
    $
315,828
    $
301,796
 
Interarea transfers
 
12,890
     
11,123
     
7,294
 
Europe:
                     
Unaffiliated customers
 
59,976
     
46,192
     
48,233
 
Interarea transfers
 
13,187
     
12,527
     
13,320
 
Other:
                     
Unaffiliated customers
 
37,798
     
33,769
     
30,662
 
Interarea transfers
 
2,037
     
1,561
     
1,230
 
Eliminations
  (28,114 )     (25,210 )     (21,845 )
  $
432,060
    $
395,790
    $
380,690
  
Total assets:
                     
United States
$
180,761
    $
160,203
         
Europe
 
109,580
     
95,448
         
Other
 
29,338
      
28,575
         
  $
319,679
    $
284,226
         
Long-term assets (1):
                     
United States
$
60,327
    $
55,058
         
Europe
 
38,556
     
27,332
         
Other
 
2,748
     
2,363
         
  $
101,631
    $
84,753
         
(1)Long-term assets consist of net property, plant and equipment, net intangible assets, goodwill and other assets excluding deferred income taxes.

The Company had no single customer that accounted for more than 10% of its net sales in 2007 and 2006. The Company’s Outdoor Equipment business recognized sales to the U.S. military totaling $45,126 in 2005.
 
 
F-28

 
13
VALUATION AND QUALIFYING ACCOUNTS
 
The following summarizes changes to valuation and qualifying accounts for 2007, 2006 and 2005:
 
                               
   
Balance at
Beginning
of Year
   
Additions
Charged to
Costs and
Expenses
   
Reserves of
Businesses
Acquired
   
Less
Deductions
   
Balance
at End
of Year
 
Year ended September 28, 2007:
                             
Allowance for doubtful accounts
  $
2,318
    $
990
    $
39
    $
995
    $
2,352
 
Reserves for inventory valuation
   
3,446
     
1,687
     
     
467
     
4,666
 
Valuation of deferred tax assets
   
3,260
     
663
     
     
486
     
3,437
 
Reserves for sales returns
   
1,023
     
2,648
     
     
2,357
     
1,314
 
Year ended September 29, 2006:
                                       
Allowance for doubtful accounts
  $
2,546
    $
629
    $
    $
857
    $
2,318
 
Reserves for inventory valuation
   
2,563
     
2,163
     
     
1,280
     
3,446
 
Valuation of deferred tax assets
   
4,568
     
224
     
     
1,532
     
3,260
 
Reserves for sales returns
   
1,323
     
583
     
78
     
961
     
1,023
 
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
 
 
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 July 10, 2007, after considering the costs, risks and business distractions associated with continued litigation, the Company reached a settlement agreement with Confluence Holdings Corp. that ended a long-standing intellectual property dispute between the two companies. While the terms of the agreement are confidential, the settlement does not constitute an admission of wrongdoing by either party and includes a one-time payment by the Company to Confluence Holdings Corp. of $4,400. The Company has submitted a claim for reimbursement with its insurer for this matter, which is currently under dispute. 
 
15
SIGNIFICANT EVENT
 
On June 29, 2006, the Company announced a temporary closing of its Binghamton, New York manufacturing facility due to extensive flooding which occurred in the State of New York in June of 2006. The Company reopened this manufacturing facility on August 25, 2006. The Company recognized losses of $1,500 during the year ended September 29, 2006. During the year ended September 28, 2007, the Company recognized gains of $2,874 as a result of insurance recoveries of $1,136 related to asset losses and $1,738 related to business interruption claims from the flood The Company does not anticipate further expenses, insurance recoveries related to this matter.
 

F-29

 
16
QUARTERLY FINANCIAL SUMMARY (unaudited)
 
The following summarizes quarterly operating results:
                         
   
First Quarter
   
Second Quarter
   
Third Quarter
   
Fourth Quarter
 
   
2007
   
2006
   
2007
   
2006
   
2007
   
2006
   
2007
   
2006
 
Net sales
  $
71,701
    $
72,563
    $
122,124
    $
107,374
    $
150,570
    $
135,540
    $
87,666
    $
80,314
 
Gross profit
   
28,480
     
29,429
     
47,085
     
44,341
     
63,862
     
57,407
     
35,455
     
34,040
 
Operating profit (loss)
    (2,641 )     (812 )    
4,071
     
8,271
     
14,677
     
13,912
     
1,830
      (744 )
Net income (loss)
  $ (1,569 )   $ (1,094 )   $
1,593
    $
4,174
    $
8,268
    $
6,563
    $
942
    $ (924 )
Basic earnings (loss)
per common share:
  $ (0.18 )   $ (0.12 )   $
0.18
    $
0.46
    $
0.91
    $
0.73
    $
0.11
    $ (0.10 )
Diluted earnings (loss)
per common share:
  $ (0.18 )   $ (0.12 )   $
0.17
    $
0.46
    $
0.89
    $
0.72
    $
0.11
    $ (0.10 )

During the fourth quarter of 2007, the Company made a tax adjustment related to a tax law change in Germany. The amount of this adjustment was $543 and should have been recorded as a first quarter 2007 event. The amounts previously reported for the first and fourth quarters for net income (loss), $(2,112) and $1,485, basic earnings (loss) per common share, $(0.23) and $0.16, and diluted earnings (loss) per common share, $(0.23) and $0.16, have been restated above to reflect the impact of this adjustment.
 
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 2007 and 2006 was thirteen weeks long, ending on the Friday nearest to the calendar quarter end.
 

F-30