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FOUNTAIN POWERBOAT INDUSTRIES, INC.
FORM 10-K
ANNUAL REPORT
FOR THE YEAR ENDED JUNE 30, 1995
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For fiscal year ended June 30, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to .
Commission File Number: 0-14712
FOUNTAIN POWERBOAT INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
NEVADA 88-0160250
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
P.O.Drawer 457, Whichard's Beach Rd., Washington, N.C. 27889
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (919) 975-
2000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, $.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Warrants - Common Stock par value $.01 per share
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.
[ X ] Yes [ ] 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.
[ ]
The aggregate market value of the voting stock held by non-
affiliates of the registrant was $8,863,681 at September 11, 1995
based upon a closing price of $5.375 per share on such date for
the Company's Common Stock.
As of September 15, 1995 there were 3,029,072 shares of the
Company's Common Stock issued of which 10,000 shares are owned by
the Company's subsidiary Fountain Powerboats, Inc. and are
regarded as treasury shares.
PART 1
Item 1. Business Background.
Fountain Powerboat Industries, Inc. (the "Company"), through
its wholly-owned subsidiary, Fountain Powerboats, Inc. (the
"Subsidiary"), designs, manufactures, and sells offshore sport
boats, sport cruisers, and sport fishing boats intended for that
segment of the recreational power boat market where speed,
performance, and quality are the main criteria for purchase. The
Company's strategy in concentrating on that segment of the market
is to maximize its use of the reputation of its Chairman and
President, Reginald M. Fountain, Jr., as an internationally
recognized power boat racer and designer. The Company also has
made specialized high performance boats for the United States
Government.
The Company's products are sold through a network of
authorized dealers worldwide. The Company has targeted that
segment of the market in which purchase decisions are generally
predicated to a relatively greater degree on the product's image,
style, speed, performance, quality, and safety and to a lesser
degree on the product's price or other economic considerations.
The Company was organized January 30, 1985 pursuant to the
laws of the State of Nevada under the name TOV Ventures,
Ltd.(TOV), and acquired Fountain Powerboats, Inc. during August,
1986. Prior to the acquisition, it had never conducted any
operations. During 1985 TOV sold, pursuant to a Registration
Statement filed with the Securities and Exchange Commission,
512,500 shares of its Common Stock (after giving effect to a one
for ten reverse stock split and the cancellation of 5,875,000
shares of its Common Stock on May 16, 1986) to its directors,
officers, and certain other individuals. All share numbers have
been adjusted for the foregoing stock split and a one-for-two
reverse stock split effected February 4, 1994.
Fountain Powerboats, Inc., a North Carolina corporation, has
been in operation since 1979 and was privately held at the time
it was acquired by TOV. At that time the two shareholders of
Fountain Powerboats, Inc. exchanged the stock of that company
held by them for 1,487,500 shares of Common Stock of TOV.
Existing shareholders of TOV retained 512,500 shares of Common
Stock. TOV then changed its name to Fountain Powerboat
Industries, Inc.
-2-
Products.
Each of the Company's products is based upon a deep V-shaped
fiberglass hull with a V-shaped pad and a notched transom. This
design enables the boat to move along the water at high speed on
its pad and achieve performance and stability standards which the
Company believes are greater than those offered by its
competitors. As a result, the Company maintains that its boats
are among the fastest, best-handling, and safest boats of their
kind.
In Fiscal 1994, the Company developed new, high performance
hull designs for its boats. These new "positive-lift" designs
increase speed significantly by incorporating radically different
keel lines with steps in the hull bottoms. Handling and fuel
economy are also substantially improved with the new designs.
The Company is seeking patent protection for these new hull
designs.
All of the Company's sport boats are of inboard/outdrive
design propelled by single, twin, or triple gasoline engines
ranging from 415 HP to more than 1,000 HP each. In addition to
its standard sport boat product line, Fountain also builds custom
race boats designed specifically for competition. The Company
also produces outboard and inboard powered center console and
cabin model offshore sport fishing boats and luxury cruisers.
Introduced early in Fiscal 1992, the 47' Sport Cruiser is
the flagship of the Fountain fleet. Its hull design is based
upon that of the Company's 47' Superboat and 42' manufacturer's
Super-Vee boats which won 8 out of 10 races in a recent twelve
month period. This model features a walk-in cabin, enclosed head
with shower, complete galley with refrigerator and microwave
oven, as well as, a very extensive list of standard equipment.
With most of the amenities of a traditional cruising yacht,
the Fountain 47' Sport Cruiser is capable of speeds in excess of
60 mph with standard triple MerCruiser 502 EFI engines. A high
performance diesel engine version is available for international
use. This boat was named "The Outstanding Offshore Performance
Boat" for 1992 and 1993 by Powerboat Magazine and "Best of the
Best" for 1992 by Boating Magazine. Depending primarily upon the
customer's choice of engines, the retail price of this boat is
from $333,000 to $450,000.
The Company's 47' Superboat model is available with a wide
range of engine options which make it suitable for organized
competitive racing or for purely recreational purposes. Its
unique hull design permits high speeds in relatively rough
offshore waters. Its sleek styling makes it particularly
attractive. Depending primarily upon the type of engines
selected, this boat retails at prices ranging from $400,000 to
$700,000.
-3-
The 42' Lightning Sport Boat operates at a maximum speed of
60 to 95 mph and is very stable even in relatively rough offshore
waters. This boat's standard features include an integrated swim
platform, flush deck hatches, and an attractively appointed
cockpit and cabin. This boat was cited by Powerboat Magazine as
"The Outstanding Offshore Performance Boat" for 1988 and 1990.
It retails at prices ranging from $137,000 to $300,000, depending
primarily upon the type of engines selected. Equipped with
special racing engines, this model set a new world speed record
for V-hulled boats in January, 1995 at 130.246 mph.
Introduced in Fiscal 1991, the 38' Sport Cruiser offers a
scaled down version of the many amenities found on the 47' Sport
Cruiser. This model has successfully incorporated the
performance type sport boat's features without compromising the
creature comforts found in a cruiser. Depending primarily upon
the customer's choice of engines, the retail price of this boat
is from $191,000 to $375,000.
The 38' Fever Sport Boat operates at maximum speeds of
between 60 and 100 mph. Its retail price ranges from $160,000 to
$276,000, depending primarily upon the type of engines selected.
This model was cited by Powerboat Magazine as "Offshore
Performance Boat of the Year" for 1989 and, again, for 1991. It
also captured an award from The Hot Boat Magazine for "Boat of
the Year" for 1991.
The 35' Lightning Sport Boat is similar in design to the 38'
Fever, but operates at maximum speeds between 66 and 105 mph.
Because of its smaller size and lighter weight, this model can
achieve greater speeds than a 38' Fever when equipped with the
same size engines. The 35' Lightning was named by Powerboat
Magazine "Offshore Boat of the Year" for 1981 and 1995. It has
also captured that magazine's title "Outstanding Offshore
Performance Boat" for 1980, 1981, 1982, 1983, 1984, and 1987.
This boat retails at prices ranging from $140,000 to $275,000,
depending primarily upon the type of engines selected.
Fountain's 32' Fever Sport Boat was introduced during Fiscal
1991 to satisfy the market's demand for a mid-size sport boat
between the 29' Fever and the 35' Lightning. This model combines
many of the advantages of both the 29' model and the 35' model.
Depending primarily upon the customer's choice of engines, the
retail price of this boat is from $121,000 to $141,000.
The 29' Fever II is the smallest twin engine boat in the
Fountain sport boat line. It operates at maximum speeds of 64 to
80 mph and retails between $106,000 and $124,000, depending
primarily upon the type of engines chosen.
-4-
Fountain's 27' Fever sport boat has a single engine. It was
added to the line in order to enable the first time offshore
performance boat buyer to acquire a Fountain power boat at a very
affordable price. This model won an award from Powerboat
Magazine for "The Full Size Boat of the Year" for 1991 and 1992.
It also captured that magazine's award for "Outstanding Full-Size
Workmanship" for 1995. Depending primarily upon the type of
engine selected, the retail price of this boat is from $65,000 to
$90,000.
The new 24' Competition Series sport boat is also a single
engine model. It was designed to resemble Fountain's sleek 47'
Superboat. This model was named "Boat of the Year" for 1993 by
Boating Magazine. Depending primarily upon the type of engine
selected, the retail price of this boat it from $50,000 to
$60,000.
For several years, the Company's sole offshore sport fishing
boat was a 31' model which featured a center console design and
incorporated the same high performance, styling, and structural
integrity as its sport boat models. It has a deck configuration
engineered for the knowledgeable, experienced sport fisherman.
This boat retails for $60,000, excluding engines.
In Fiscal 1992, Fountain added substantially to its sport
fishing boat line. An all new 27' twin engine center console
model and an all new 23' single engine center console model were
introduced to extend the product line. The design, construction,
and performance of these new models, together with the proven
features of the 31' center console model, make a line which in
management's view will appeal to many experienced sport
fishermen.
To further enhance its sport fishing boat line, the Company
introduced a new 31' walk around cabin model based upon the
proven 31' center console hull design. This model features a
deck design which incorporates a walk-in cabin, enclosed head
with shower, and a full galley. With twin outboard engine power,
this model is produced either as a fishing boat for the serious
angler or as a purely recreational sport boat type cruiser.
During Fiscal 1993, the Company introduced both 23' and 27'
walk around cabin fishing boats with outboard engine power and a
new 32' walk around cabin model fishing boat with inboard power.
Other new product introductions for Fiscal 1994 are 25' and 27'
walk around cabin model fishing boats with inboard power.
For Fiscal 1996, the Company plans to introduce a new 22'
sport boat, a 47' Lightning sport boat, a luxury 55' wide beam
sport yacht, and a 29' wide beam walk around cuddy cabin sport
fishing boat.
-5-
Following is a table showing the number of boats completed
and shipped in each of the last three fiscal years by product
line:
Fiscal Fiscal Fiscal
1995 1994 1993
Sport boats........... 293 184 156
Sport cruisers........ 15 6 19
Sport fishing boats... 93 92 135
-------- -------- --------
401 282 310
======== ======== ========
The Company conducts research and development projects for
the design of its plugs and molds for hull, deck, and small parts
production. The design, engineering, and tooling departments
currently employ approximately 16 full-time employees. Amounts
spent on design research and development and to build new plugs
and molds in recent years were:
Design Construction
Research & of New Plugs
Development and Molds
Fiscal 1995............. $ 134,828 $ 767,102
Fiscal 1994............. 157,433 674,394
Fiscal 1993............. 88,858 1,251,214
For Fiscal 1996, planned design research and development
expenses are $144,000 and plug and mold construction expenditures
are approximately $675,000. These expenditures will be primarily
to complete the tooling needed to produce a new 22' sport boat, a
47' Lightning sport boat, a luxury 55' wide beam sport yacht, and
a 29' wide beam walk around cuddy cabin sport fishing boat.
Tooling expenditures will also be made for other modifications to
existing models.
Manufacturing capacity is sufficient to accommodate
approximately 30 to 40 boats in various stages of construction at
any one time. The Company shipped 401 boats in Fiscal 1995, 282
boats in Fiscal 1994, and 310 boats in Fiscal 1993.
-6-
Construction of a boat takes approximately five weeks on a
one shift per day basis. The Company currently has the ability
to manufacture approximately 400 boats per year, using one eight-
hour manufacturing shift per day. The Company believes that it
has the potential to expand its manufacturing capacity through
additional shifts and/or by utilizing the approximately 35 acres
of unimproved land owned by the Company at its manufacturing site
to expand the size of the physical plant. Should the demand
dictate, the capacity of the existing plant could be increased to
approximately 800 boats per year by employing second and third
shifts.
The manufacturing process for the hulls and decks consists
primarily of the "laying-up" by hand of resins and high quality
bi-directional and tri-directional woven fiberglass mats around a
foam core in molds designed and constructed by the Company's
engineering and tooling department. This creates a composite
structure with strong outer and inner skins with a thicker core
in between. The "laying-up" of woven fiberglass mats by hand,
rather than using chopped fiberglass and mechanical blowers,
results in superior strength and appearance. The resin used to
bind the composite structure together is vinylester which is
approximately five times stronger than the polyvinyl used by most
other fiberglass boat manufacturers. Decks are bonded to the
hulls using bonding agents, rivets, screws, and fiberglass to
achieve a strong, unitized construction.
In Fiscal 1994, the Company began building some boats on a
special order basis using state-of-the-art light weight materials
and epoxy resin. The epoxy resin is stronger than the vinylester
so that less of it is required to achieve the needed construction
strength. Since less epoxy resin is needed, the result is less
weight. Less weight contributes substantially to improved
performance, especially when combined with the Company's newly
developed "positive-lift" hull design. The Company is committed
to continuous product improvement.
Pursuant to an agreement dated February 24, 1995, and
effective January 1, 1995, among the Company, Mr. Fountain, and
the Mercury Marine Division of the Brunswick Corporation, the
Company is required to use Mercury engines and accessories
exclusively until the earliest of December 1, 1999, or until
12,000 engines have been purchased, or until the Company's
indebtedness to Mercury is paid in full. Also, as part of the
agreement, Mercury pays the Company for certain consulting
services provided by Mr. Fountain and for appropriate
endorsements for Mercury's products at the rate of 5.5% of
products purchased until June 30, 1996, and at 2.0% until the end
of the consulting agreement on June 30, 1997. Mercury has
extended credit to the Company which is secured by a subordinated
lien on the Company's assets and a pledge by Mr. Fountain of
substantially all of his shares of Common Stock of the Company.
See also Item 7, "Management's Discussion and Analysis".
-7-
The Company manufactures many metal and plastic parts (such
as brackets, T-tops, and windscreens) to assure its quality
standards are met. All other component parts and materials used
in the manufacture of the Company's boats are readily available
from a variety of suppliers at comparable prices exclusive of
discounts. However, where practicable, the Company purchases
certain supplies and materials from a limited number of suppliers
in order to obtain the benefit of volume discounts.
Certain materials used in boat manufacturing, including the
resins used to make the decks and hulls, are toxic, flammable,
corrosive, or reactive and are classified by the federal and
state governments as "hazardous materials." Control of these
substances is regulated by the Environmental Protection Agency
and state pollution control agencies which require reports and
inspect facilities to monitor compliance with their regulations.
The Company's cost of compliance with environmental regulations
has not been material. The Company's manufacturing facilities
are regularly inspected by the Occupational Safety and Health
Administration and by state and local inspection agencies and
departments. The Company believes that its facilities comply
with substantially all regulations. The Company, however, has
been informed that it may incur or may have incurred liability
for remediation of ground water contamination at two hazardous
waste disposal sites resulting from the disposal of a hazardous
substance at those sites by a third-party contractor of the
Subsidiary. (See Item 3. Legal Proceedings.)
Recreational power boats must be certified by the
manufacturer to meet U.S. Coast Guard specifications. In
addition, their safety is subject to federal regulation under the
Boat Safety Act of 1971, as amended, pursuant to which boat
manufacturers may be required to recall products for replacement
of parts or components that have demonstrated defects affecting
safety. The Company has never had to conduct a product recall.
Sales and Marketing.
Sales are made through approximately 60 dealers throughout
the United States. The Company also has an international dealer
network with one dealer in Canada, three in Europe, and three in
Asia. These dealers are not exclusive to the Company and carry
the boats of other companies including some which may be
competitive with the Company's products. The territories served
by any dealer are not exclusive to the dealer. However, the
Company uses discretion in locating new dealers in an effort to
protect the interests of the existing dealers.
-8-
Following is a table of sales by geographic area for the
last three fiscal years:
Fiscal '95 Fiscal '94 Fiscal '93
United States.............$38,220,232 $21,416,888 $23,855,054
Canada, Mexico, Central
and South America.... -0- 187,458 163,886
Europe and
the Middle East..... 309,165 635,866 415,889
Asia..................... 197,932 -0- 2,797,532
---------- ---------- ----------
Total.................... $38,727,329 $22,240,212 $27,232,361
========== ========== ==========
The decline in sales to Asia is accounted for by one
customer account in south Asia which ceased buying boats entirely
in Fiscal 1994.
The Company has a limited international advertising program
and is seeking additional distribution for its products in
foreign markets. In general, the Company requires payment in
full or an irrevocable letter of credit from a domestic bank
before it will ship a boat overseas. Consequently, there is no
credit risk associated with its foreign sales nor risk related to
foreign currency fluctuations.
No single dealer accounted for more than 10% of the
Company's revenues in Fiscal 1995. The Company believes that the
loss of any particular dealer would not have a materially adverse
effect on sales.
Field sales representatives call upon existing dealers and
develop new dealers. The field sales force is headed by the
Subsidiary's Vice President of Sales who is responsible for
developing a full dealer organization for both sport boats,
including sport cruisers, and sport fishing boats. The Company
is seeking to establish separate sport boat and fishing boat
dealers in most marketing areas due to the specialization of each
type of boat and the different sales programs required.
-9-
Although a sales order can be cancelled at any time, most
boats are pre-sold to a dealer before entering the production
line. The Company generally has been able to sell any boat for
which the order has been cancelled to another dealer. To date,
cancellations have not had any material effect on the Company.
The Company normally does not manufacture boats for inventory.
The Company's sales are somewhat seasonal. In an effort to
minimize the carrying costs of their inventories, some dealers
take delivery of boats during their April through July peak sales
season. Therefore, the Company's sales generally begin to
increase during the Spring to a peak during the Summer. Sales
then begin to decline to their lowest levels during the Fall and
Winter.
The Company ships boats to its dealers on a cash on delivery
basis. However, approximately one-half of the Company's
shipments are made pursuant to commercial dealer "floor plan
financing" programs in which the Company participates on behalf
of its dealers. Under these arrangements, a dealer establishes
lines of credit with one or more third-party lenders for the
purchase of showroom inventory.
When a dealer purchases a boat pursuant to a floor plan
arrangement, it draws against its line of credit and the lender
pays the invoice cost of the boat, net of shipping charges,
directly to the Company. Generally, payment is made to the
Company within five to fifteen business days. When the dealer in
turn sells the boat to a retail customer, the dealer repays the
lender, thereby restoring its available credit line.
For the 1996 model year (which commenced July 1, 1995), the
Company has made arrangements to pay all interest charged by
certain floor plan lenders for as long as six months. After six
months, the free interest program ends and interest will be
charged to the dealer at the rate set by the lender. The dealer
will make curtailment payments (equity investments in the boats)
as required by his particular commercial lender. Similar sales
promotion programs were in effect during Fiscal 1995, 1994, and
1993.
Each dealer's floor plan credit facilities are secured by
the dealer's inventory, and, perhaps, other personal and real
property. In connection with the dealers' floor plan
arrangements, the Company (together with substantially all other
major manufacturers) has agreed to repurchase any of its boats
which a lender repossesses from a dealer and returns to the
Company. In the event that a dealer defaults under a credit
line, the lender may then
-10-
invoke the manufacturers' repurchase agreements with respect to
that dealer. In that event, all repurchase agreements of all
manufacturers supplying a defaulting dealer are generally invoked
regardless of the boat or boats with respect to which the dealer
has defaulted (See also Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations).
The Company participates in floor plan arrangements with
several major third-party lenders on behalf of its dealers, most
of whom have financing arrangements with more than one lender.
Except as described above or where it has a direct
repurchase agreement with a dealer, the Company is under no
material obligation to repurchase boats from its dealers. From
time to time the Company will voluntarily repurchase a boat for
the convenience of the dealer or for another dealer who needs a
particular model not readily available from the factory.
The marketing of boats to retail customers is primarily the
responsibility of the dealer, whose efforts are supplemented by
the Company through advertising in boating magazines and
participation in regional, national, and international boat
shows.
Additionally, in order to further promote its products, for
Fiscal 1990 and 1991 the Company developed a racing program.
This entailed the construction of specially designed race boats
which were entered in major national offshore boat races. As of
August 30, 1991, Fountain race boats won 8 of 10 major races.
The result of this record of victories by a major manufacturer is
that the Company's products won a reputation for very fast and
safe hull designs, durable construction, and mechanical
reliability.
The Company believes that the favorable publicity generated
by its winning race boats has contributed significantly to its
sales volume. Although the Company curtailed its racing program
for Fiscal 1992 and sold all of its race boats, the fact that its
racing program was so successful in Fiscal 1990 and Fiscal 1991
has, the Company believes, significantly benefited its sales
volume in subsequent years. For Fiscal 1993, 1994, and 1995, the
Company limited its participation in racing to partial support of
customer owned and driven Fountain race boats. These Fountain
race boats were, in general, very successful in the various
racing circuits in which they competed.
As part of the marketing program for its new line of sport
fishing boats, the Company sponsored several outstanding sport
fishermen in the Southern Kingfish Association's King Mackerel
Tournaments. This competitive circuit is held throughout the
Southeast. In Fiscal 1992, the Company's boats and sponsored
-11-
fishermen dominated the tournaments by winning four of the top
five spots. One Fountain fisherman, Clayton Kirby, was named
"Angler of the Year" and finished in first place. Again, in
Fiscal 1993, first place was taken by a Fountain fisherman.
Fountain fishermen also won second place and 11 of the top 15
spots in Fiscal 1993.
In Fiscal 1994 and 1995, the Foutain fishing team also placed
high in the final standings. The Southern Kingfish Association's
tournaments are held weekly and attract from one hundred to one
thousand entrants with prizes ranging up to $350,000. The
winning participation by Fountain sport fishing boats has given
them favorable exposure to serious sport fishermen, in particular
with respect to the superior performance of Fountain's fishing
boat line.
Sales Order Backlog.
The sales order backlog as of the end of August, 1995 was
for approximately 200 boats having an estimated sales value of
$20,000,000. This compares to the sales order backlog as of the
end of August, 1994 for 84 boats having an approximate sales
value of $8,567,000 and to the backlog as of the end of August,
1993 for 100 boats having an approximate sales value of
$8,145,000.
Product Warranty.
The Company warrants the deck and hull of its boats against
defects in material and workmanship for a period of three years.
Engines included in the boats are warranted by the engine
manufacturer. Warranty expenses of $397,517 were incurred in
Fiscal 1995 and were charged-off against net income. A reserve
for warranty expenses estimated to be incurred in future years
has been recorded and amounted to $400,000 at June 30, 1995.
Competition.
Competition within the power boat manufacturing industry is
intense. While the high performance sports boat market comprises
only a small segment of all boats manufactured, the higher prices
commanded by these boats make it a significant market in terms of
total dollars spent. The manufacturers that compete directly
with the Company in its market segment include:
-12-
Wellcraft Division of Genmar Industries, Inc.
Formula, a division of Thunderbird Products Corporation
Cigarette Racing Team, Inc.
Baja Boats, Inc.
Apache Boats, Inc.
The Company believes that in its market segment, speed,
performance, quality, and safety are the main competitive
factors, with styling and price being somewhat lesser
considerations.
Employees.
At August 20, 1995 the Company had 330 employees, of whom
seven were executive and management personnel. Sixteen were
engaged primarily in administrative positions including
accounting, personnel, marketing and sales activities. Sixteen
were employed in engineering, tooling, and design. The balance
were engaged in manufacturing operations. None of the Company's
employees are party to a collective bargaining agreement. The
Company considers its employee relations to be satisfactory. The
Company is an affirmative action, equal opportunity employer.
Item 2. Properties.
The Company's executive offices and manufacturing facilities
are located on 62 acres along the Pamlico River in Beaufort
County, North Carolina. All of the land, buildings and
improvements are owned by the Company and are held as collateral
on notes and mortgages payable having a balance of $6,003,799 at
June 30, 1995.
The operating facility contains seven buildings totalling
155,250 square feet located on fifteen acres. The buildings
consist of the following:
-13-
Approximate
Square Footage Principal Use
Building 1.......... 13,200 Executive offices, shipping
and receiving, and paint shop.
Building 2.......... 7,200 Final prep shop.
Building 3.......... 63,800 Lamination, woodworking,
upolstery, final assembly,
inventory, and cafeteria.
Building 4.......... 14,250 Metal fabrication shop.
Building 5.......... 26,300 Tooling and research &
development.
Building 6.......... 18,500 Mold storage.
Building 7.......... 12,000 Racing, service, and warranty.
Total............... 155,250
========
Site improvements include a boat ramp and docking facilities
along a 600 foot canal leading to the Pamlico River. In
addition, approximately 182,000 square feet of concrete paving
surrounds the buildings and provides for employee parking.
Thirty-five unimproved acres are owned and available for future
expansion.
Item 3. Legal Proceedings.
The Company has been notified by the United States
Environmental Protection Agency (the "EPA") and the North
Carolina Department of Environment, Health and Natural Resources
("NCDEHNR") that it has been identified as a potentially
responsible party (a "PRP") and may incur, or may have incurred,
liability for the remediation of ground water contamination at
the Spectron/Galaxy Waste Disposal Site located in Elkton,
Maryland (notice from the EPA dated June 7, 1989) and the
Seaboard Disposal Site, located in
-14-
High Point, North Carolina, also referred to as the Jamestown,
North Carolina site (notice from the EPA dated July 10, 1991),
resulting from the disposal of hazardous substances at those
sites by a third-party contractor of the Company. The Company
has been informed that the EPA and NCDEHNR ultimately may
identify a total of between 1,000 and 2,000, or more, PRP's with
respect to each site. The amounts of the hazardous substances
generated by the Company, which were disposed of at both sites,
are believed to be minimal in relation to the total amount of
hazardous substances disposed of by all PRP's at the sites. At
present, the environmental conditions at the sites, to the
Company's knowledge, have not been fully determined by the EPA
and NCDEHNR, respectively, and the Company is not able to
determine at this time the amount of any potential liability it
may have in connection with remediation at either site. Without
any acknowledgement or admission of liability, the Company has
made payments of approximately $3,000 to date as a nonperforming
cash-out participant in an EPA-supervised response and removal
program at the Elkton, Maryland site, and in a NCDEHNR-supervised
removal and preliminary assessment program at the Jamestown,
North Carolina site. A cash-out proposal for the next phase of
the project is expected to be forthcoming from the PRP Group for
the Elkton, Maryland site within the near future. The Company's
full cash-out amount is likely to be less than $10,000 for the
Elkton, Maryland site, based upon an estimated 3,304 gallons of
waste disposed of at that site by the Company. A cash-out
proposal is expected to be forthcoming from the PRP Group for the
Jamestown, North Carolina site by mid-1996, following completion
of a remedial investigation and feasibility study. No estimate
of the likely cash-out amount for the Company for the Jamestown,
North Carolina site is available at present. Any such cash-out
agreement will be subject to approval by EPA and NCDEHNR,
respectively.
In June, 1995, the Company settled an assessment from the
North Carolina Department of Revenue (NCDR) for unpaid sales and
use taxes for the period April 1, 1988 through May 31, 1991. The
Company paid the NCDR $116,187 in full settlement of the recorded
tax assessment, penalties, and interest amounting to $285,739.
The difference between the amount of the tax liability recorded
and the amount actually paid, or $169,552 was recorded in the
Company's financial statements as other income.
There were six product liability lawsuits brought against
the Company at June 30, 1995. In the Company's opinion, these
lawsuits are without merit. Therefore, these lawsuits are being
defended vigorously. The Company carries sufficient product
liability insurance to cover attorney's fees and any losses which
may occur from these lawsuits over and above the insurance
deductibles.
-15-
Item 4. Submission of Matters to a Vote of Security Holders.
At a Special Meeting of the Shareholders held on June 21,
1995, the Shareholders voted to approve the 1995 Stock Option
Plan.
The shareholders vote was as follows:
FOR........................1,512,557
AGAINST.................... 48,125
ABSTAIN.................... 3,300
The 1995 Stock Option Plan provided for the issuance of
300,000 common stock options to the Company's directors and key
employees. Subsequently, on August 4, 1995, the Board of
Directors voted unanimously to award the 300,000 stock options to
Mr. R.M. Fountain, Jr., the Company's Chairman, President, Chief
Exective Officer, and Chief Operating Officer. The exercise
price of the 300,000 stock options awarded to Mr. Fountain is
$7.00 per share, which was the closing market value on August 3,
1995. To date, none of the 300,000 stock options awarded to Mr.
Fountain have been exercised by him. The expiration date of the
options awarded to Mr. Fountain is August 4, 2005.
-16-
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
The Company's common stock, $.01 par value, was listed and
began trading on the American Stock Exchange (under the symbol
"FPI") on September 1, 1989. Prior to that time the Company's
common stock was traded in the over-the-counter market and was
quoted on the NASDAQ National Market System (under the symbol
"FPBT").
The following table contains certain historical high and low
price information relating to the common stock for the past
quarters indicated. Amounts shown reflect high and low sales
prices of the common stock on the American Stock Exchange:
Quarter Ended High Low
September 30, 1993..... $4.75 $4.00
December 31, 1993...... 3.75 3.25
March 31, 1994......... 3.38 3.13
June 30, 1994.......... 2.88 2.38
September 30, 1994..... 4.38 2.25
December 31, 1994...... 6.63 2.75
March 31, 1995......... 7.25 5.25
June 30, 1995.......... 6.25 4.50
The Company has not declared or paid any dividends since its
inception. Any decision as to the future payment of dividends
will
depend on the Company's earnings, financial position, and such
other factors as the Board of Directors deems relevant. The
payment of dividends by the Company is restricted by the terms of
its loan agreement with MetLife Capital Corporation which
provides that, without the consent of the lender, and other than
for reasonable operating costs, expenses and liabilities, the
Company may not pay any dividends on its capital stock in excess
of its net profits after taxes plus depreciation and less current
maturities of long term debt (See Note 5 to the Company's
Consolidated Financial Statements included herein). Also, a
North Carolina corporation generally may not pay a dividend or
make any other shareholder distribution if thereafter it would
not be able to pay its debts as they become due in the usual
course of business, or its total assets would be less than the
sum of its total liabilities.
The number of shareholders of record for the Company's common
stock as of September 6, 1995 was 215.
-17-
Item 6. Selected Financial Data.
Fountain Powerboat Industries, Inc. and Subsidiary
SELECTED FINANCIAL DATA
Fiscal Years 1991 through 1995
YEAR ENDED JUNE 30,
Operations Statement Data: -------------------------------------------------------------------------
(Period Ended) 1995 1994 1993 1992 1991
- ----------------------------------- ------------- ------------- ------------- ------------- -------------
Sales.............................. $ 38,727,329 $ 22,240,212 $ 27,232,360 $ 27,783,378 $ 18,661,900
Net income (loss).................. 2,047,876 (2,993,344) 146,433 (1,529,930) (3,336,861)
Income (loss) per share............ .68 (1.00) .04 (.66) (1.50)
Weighted average shares outstanding 3,019,072 2,968,571 2,932,500 2,311,185 2,220,000
Balance Sheet Data
(At Period End)
- -----------------------------------
Current assets..................... $ 6,185,727 $ 5,635,619 $ 5,011,591 $ 6,607,386 $ 6,260,223
Total assets....................... 16,334,757 16,266,787 16,211,026 17,957,207 17,675,139
Current liabilities................ 6,081,298 14,976,570 5,920,743 8,878,176 9,460,801
Long-term debt..................... 7,049,049 133,683 6,440,403 5,377,084 5,767,773
Stockholders' equity (1)........... 3,204,410 1,156,534 3,849,880 3,701,947 2,446,565
- -----------------------------------
(1) The Company has not paid any dividends since its inception.
-18-
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
As described more fully below at "Business Environment",
approximately half of the Company's shipments to dealers were
financed through so-called "100% floor plan arrangements" with
third-party lenders pursuant to which the Company may be required
to repurchase boats repossessed by the lenders if the dealer
defaults under his credit arrangements. The other half of
shipments were C.O.D. or payment prior to shipment.
Generally, the Company recognizes a sale when a boat is
shipped to a customer, legal title and all other incidents of
ownership have passed from the Company to the customer, and
payment is received from the dealer's third-party commercial
lender or from the customer. This is the method of sales
recognition believed to be in use by most boat manufacturers.
The Company has developed criteria for determining whether a
shipment should be recorded as a sale or as a deferred sale (a
balance sheet liability). The criteria for recording a sale are
that the boat has been completed and shipped to a customer, that
title and all other incidents of ownership have passed to the
customer, and that there is no direct commitment to repurchase
the boat or to pay floor plan interest beyond the normal sales
program terms.
At June 30, 1992, the Company estimated the balances in
deferred sales to be $1,062,887 and in deferred cost of sales to
be $760,957. As of June 30, 1993, the Company estimated the
balances in deferred sales to be $242,230 and in deferred cost of
sales to be $191,229. The differences between the estimates for
deferred sales and deferred cost of sales at June 28, 1992 and
June 30, 1993 had the effect of increasing the gross margin on
sales and net income after taxes for the year by $250,929 ($0.08
per share). The allowance for estimated losses to be incurred on
boats repurchased was reduced by $50,000 to $250,000.
The decrease in deferred sales from $1,062,887 at June 28,
1992 to $242,230 at June 30, 1993 was because of a decrease in
the number of instances in which the Company made commitments to
dealers to pay the interest on floor plan financed boats in
excess of the time period specified in its written sales program
for the year and to a decrease in the number of direct repurchase
agreements the Company had in effect with its dealers.
-19-
At June 30, 1994, the Company estimated the balances in
deferred sales to be $1,100,000 and in deferred cost of sales to
be $850,000. The differences between the estimates for deferred
sales and deferred cost of sales at June 30, 1993 and June 30,
1994 had the effect of decreasing the gross margin on sales and
net income after taxes for the year by $198,999 ($.07 per share).
At June 30, 1995, the Company estimated the balances in
deferred sales to be $197,541 and in deferred cost of sales to be
$183,393. The differences between the estimates for deferred
sales and deferred cost of sales at June 30, 1994 and June 30,
1995 had the effect of increasing the gross margin on sales and
net income after taxes for the year by $235,852 ($.08 per share).
Additionally, the Company has a contingent liability to
repurchase boats where it participates in the floor plan
financing made available to its dealers by third-party finance
companies. Sales to participating dealers are approved by the
respective finance companies. If a participating dealer does not
satisfy its obligation to the lender and the boat is subsequently
repossessed by the lender, then the Company can be required to
repurchase the boat. The Company had a contingent liability of
approximately $7,700,000 at June 30, 1995, $8,400,000 at June 30,
1994, and $6,300,000 at June 30, 1993 for the shipment of boats
which remained uncollected by the finance companies at those
dates. The lesser contingent liability at June 30, 1995 is due
to fewer boats being floor planned by dealers with finance
companies. Of the foregoing contingent liability amounts,
$197,541 and $1,100,000 are reflected as deferred sales in the
accompanying consolidated balance sheets as of June 30, 1995 and
June 30, 1994, respectively (See Note 9 to the Consolidated
Financial Statements). Additionally, at June 30, 1995 the
Company had recorded a $207,359 reserve for losses which may be
reasonably expected to be incurred on boat repurchases in future
years. At June 30, 1994, the amount of the reserve was $250,000,
reflecting a larger number of boats floor planned by dealers with
finance companies.
Business Environment.
Sales for Fiscal 1995 were $38,727,329, a 74% increase from
sales for Fiscal 1994. Sales for Fiscal 1995 excluded $197,541
of deferred sales as of June 30, 1995 but included $1,100,000 of
deferred sales as of June 30, 1994. Improved sales volume for
Fiscal 1995 was in line with a general improvement in the overall
recreational boating industry. Also, the Company continued its
highly effective advertising and marketing programs throughout
Fiscal 1995.
-20-
Sales for Fiscal 1994 were $22,240,212, an 18% decrease from
sales for Fiscal 1993. Sales for Fiscal 1994 excluded $1,100,000
of deferred sales as of June 30, 1994 but included $242,230 of
deferred sales as of June 30, 1993. In Fiscal 1994, no boats
were sold to the U.S. Government. For the last five months of
Fiscal 1994, the Company was unable to obtain the high
performance engines it needed. The shortage of high performance
engines seriously reduced the Company's sales volume over the
last five months of the year. The engine supply problem was
solved in July, 1994.
Sales for Fiscal 1993 were $27,232,360. Fiscal 1993 sales
excluded $242,230 of deferred sales as of June 30, 1993 but
included $1,062,887 of deferred sales as of June 30, 1992. Sales
for Fiscal 1993 included 27 boats sold to the U.S. Government
amounting to $1,457,880.
In Fiscal 1995, the Company continued to advertise and
market aggressively. Management believes that the Company's
advertising, marketing, racing, and tournament fishing programs,
as well as, its reputation as the builder of the highest quality,
best performing, and safest high performance boats in the
industry, all contributed
to increased sales for Fiscal 1995. Management also believes
that the repeal effective January 1, 1993 of the federal luxury
tax on boats sold for more than $100,000 has had and will have a
very beneficial effect upon the Company's sales of large boats.
Typically, each dealer's floor plan credit facilities are
secured by the dealer's inventory, and, perhaps, other personal
and real property. In connection with the dealers' floor plan
arrangements, the Company (as well as substantially all other
major manufacturers) has agreed in most instances to repurchase,
under
certain circumstances, any of its boats which a lender
repossesses from a dealer and returns to the Company. In the
event that a dealer defaults under a credit line, the lender may
invoke the manufacturers' repurchase agreements with respect to
that dealer. In that event, all repurchase agreements of all
manufacturers supplying a defaulting dealer are generally invoked
regardless of the boat or boats with respect to which the dealer
has defaulted.
Except where there is a direct repurchase agreement with the
customer, the Company is under no obligation to repurchase boats
from its dealers, although it will on occasion voluntarily assist
a dealer in selling a boat or repurchase a boat for the
convenience of a dealer.
Five boats were repurchased during Fiscal 1995 in connection
with floor plan arrangements. No boats were repurchased in
Fiscal 1994 in connection with floor plan arrangements. Twelve
boats were repurchased in Fiscal 1993. At June 30, 1995, the
Company had recorded a $207,359 reserve for losses which may be
reasonably expected to be incurred on boat repurchases in future
years.
-21-
Results of Operations.
The net income for Fiscal 1995 was $2,047,876, or $.68 per
share outstanding. This compares to a net loss for Fiscal 1994
of $2,993,344, or $1.00 per share. Net inome for Fiscal 1993 was
$146,433, or $.04 per share.
The improvement in earnings for Fiscal 1995 was the result
of much greater sales volume. Sales were $38,727,329, up by 74%
from the previous year. The mix of sales was heavily weighted
with sales of the Company's larger, higher margin sport boats.
Price increases and production efficiencies also contributed to
increased earnings for the year.
The loss for Fiscal 1994 is primarily attributable to lesser
sales volume. Sales for Fiscal 1994 were $22,240,212, or down by
18% from Fiscal 1993 sales. The sales mix for Fiscal 1994 was
unfavorable and overall sales volume through February, 1994 was
less than anticipated. Fewer boats were sold and they were
generally smaller and less profitable.
Last year, in Fiscal 1994, at the Miami boat show in mid-
February, the new "positive-lift" hull design was introduced.
This new hull design significantly increases speed, improves
handling, and results in much better fuel economy. Subsequent to
the introduction of this new design, the Company received many
orders for large, profitable sport boats having the new "positive-
lift" hull.
As the Company's sales order volume improved, it began to
greatly increase its level of purchases of high performance
engines and other critical components. Unfortunately, the high
perfomance engines and certain other critical components were not
available on a timely basis. This caused serious and prolonged
delays in the Company's boat production. Many costly
inefficiencies were incurred in its manufacturing operations as a
consequence of not having the necessary high performance engines
and components on a timely basis. By July, 1994, most of these
supply problems had been resolved. Most of the sales orders that
were not completed in the fourth quarter of Fiscal 1994 because
of delayed deliveries of critical components were completed in
the first quarter of Fiscal 1995.
The Company's gross profit margin as a percentage of sales
increased to 20.07% from 7.79% for Fiscal 1994. The increase in
the gross margin percentage was due to price increases and the
sales mix of larger, higher margin sport boats. Greater sales
volume and production efficiencies also contributed to an
improved gross margin for Fiscal 1995.
-22-
The Company's gross profit margin as a percentage of net
sales decreased to 7.79% for Fiscal 1994 as compared to 16.74%
for Fiscal 1993. The decline in gross margin for Fiscal 1994 was
due to lesser sales volume, manufacturing inefficiencies caused
by shortages of critical components, and an unfavorable sales mix
of smaller, less profitable boats earlier in the year.
Depreciation expense was $1,628,867 for Fiscal 1995,
$1,527,042 for Fiscal 1994, and $1,407,180 for Fiscal 1993.
Depreciation expense by asset category was as follows:
Fiscal Fiscal Fiscal
1995 1994 1993
Land improvements......$ 18,849 $ 18,849 $ 18,711
Buildings.............. 269,460 268,945 268,135
Molds & plugs.......... 1,076,746 1,007,534 832,174
Machinery & equipment.. 216,089 171,053 208,416
Furniture & fixtures... 12,094 17,838 29,206
Transportation equip... 35,629 42,823 50,538
---------- ---------- ----------
$ 1,628,867 $ 1,527,042 $ 1,407,180
========== ========== ==========
The $101,825 increase in depreciation expense for Fiscal
1995 is due to increased product molds being completed and put
into service during the year and to purchases of additional
machinery and equipment. The depreciation expense associated
with product molds increased by $69,212 and with machinery and
equipment by $43,095 in Fiscal 1995. The $119,862 increase in
depreciation expense for Fiscal 1994 was due to additional
product molds completed and put into service during the year.
Following is a schedule of the net fixed asset additions
during Fiscal 1995:
Buildings......................................$ 80,560
Molds and plugs................................ 767,102
Machinery & equipment.......................... 348,533
Furniture & fixtures........................... 2,044
----------
$1,198,239
==========
-23-
Selling expenses were $3,897,086 for Fiscal 1995, $2,854,476
for Fiscal 1994, and $2,909,935 for Fiscal 1993. The Company
continued to promote its products primarily by magazine
advertising in Fiscal 1995. Advertising expense was $977,787 for
Fiscal 1995, $837,973 for Fiscal 1994, and $762,194 for Fiscal
1993. These advertising expenditures increased the Company's
visibility in the recreational marine industry and promoted its
boat sales. Management believes that advertising is necessary in
order to maintain the Company's sales volume and dealer base.
Additionally, in an effort to further promote its products,
the Company continued its offshore racing and tournament fishing
programs. These programs cost $576,741 in Fiscal 1995, $341,735
in Fiscal 1994, and $348,623 in Fiscal 1993. As previously
noted, the Company curtailed its offshore racing program in
Fiscal 1992 and sold its last remaining race boat, but continued
a limited racing program and its tournament fishing program. The
Company believes that its highly successful racing and tournament
fishing programs for Fiscal 1995 and prior years will benefit
future years as well.
Selling expenses compared for the past three fiscal years
were as follows:
Fiscal '95 Fiscal '94 Fiscal '93
Offshore racing and
tournament fishing...$ 576,741 $ 341,735 $ 348,623
Advertising............. 977,787 837,973 762,194
Salaries & commissions.. 752,206 363,610 541,689
Boat shows............. 388,710 260,719 332,781
Dealer incentives....... 938,563 740,722 682,933
Other selling expenses.. 263,079 309,717 241,715
--------- --------- ---------
$3,897,086 $2,854,476 $2,909,935
========= ========= =========
General and administrative expenses include the finance,
accounting, legal, personnel, data processing, and administrative
operating expenses of the Company. These expenses were
$1,415,637 for Fiscal 1995, $1,433,449 for Fiscal 1994, and
$1,349,058 for Fiscal 1993. Most of the decrease for Fiscal 1995
over Fiscal 1994 was in legal fees.
Interest expense was $989,359 for Fiscal 1995, $739,224 for
Fiscal 1994, and $527,239 for Fiscal 1993. Most of the increase
in interest expense for Fiscal 1994 is from interest paid to
Mercury Marine prior to the refinancing of the indebtedness to
Mercury in February, 1995. After the February refinancing of the
Mercury debt the interest rate paid was less.
-24-
During Fiscal 1995 some miscellaneous fixed assets were sold
yielding a gain amounting to $23,015. No fixed assets were sold
in Fiscal 1994. The net gain on the sale of fixed assets for
Fiscal 1993 amounted to $112,189.
Included in other income for Fiscal 1995 is the gain on the
settlement of a state sales and use tax assessment amounting to
$169,552. Also included in other income are $452,911 of
consulting fees paid by Mercury Marine for Mr. Fountain's
services as a technical consultant to Mercury. These consulting
fees amounted to $294,437 for Fiscal 1994 and to $237,520 for
Fiscal 1993.
Liquidity and Financial Resources.
Operations in Fiscal 1995 consumed $1,138,745 in cash. Net
income plus depreciation expense provided cash amounting to
$3,676,743. However, relatively large amounts were needed to
finance an increase in accounts receivable, a decrease in
accounts payable, and a reduction in customer deposits. The
ending cash balance was $490,807.
For the prior fiscal year, operations provided $1,069,797 in
cash. This combined with the beginning cash balance of $711,523
was sufficient to meet the Company's needs for the year. The
ending cash balance was $675,711. For Fiscal 1993, operations
provided $649,601 and the ending cash balance was $711,523.
Investing activities for Fiscal 1995 required $1,164,239,
including expenditures for additional molds and plugs amounting
to $767,102 and for other property, plant, and equipment
amounting to $431,137.
For the prior fiscal year, investing activities required
$1,013,400, including expenditures for additional molds and plugs
amounting to $677,394 and for other property, plant, and
equipment amounting to $336,006. For Fiscal 1993, investing
activities required $1,102,203.
Financing activities for Fiscal 1995 provided $2,118,080.
Included in this amount is $2,600,000 of indebtedness to Mercury
Marine which was converted from a short-term trade payable to a
long-term note payable. Debt repayments to Mercury Marine,
MetLife Capital Corporation, and others amounted to $928,632.
-25-
For the prior fiscal year, financing activities used
$92,209. Additional long-term debt, primarily from capitalized
lease obligations, provided $169,838. A new line of credit with
ITT Commercial Finance secured by engines provided an additional
$152,287. The Company also cancelled $300,000 of indebtedness to
a shareholder, Mr. R. M. Fountain, Jr., with the issuance of
86,572 additional common shares to Mr. Fountain and to Triangle
Finance Ltd. Debt repayments amounted to $414,394. For Fiscal
1993, financing activities used $665,471.
The net decrease in cash for Fiscal 1995 was $184,904. For
Fiscal 1996, the Company anticipates that the $490,807 beginning
cash balance and the amounts expected to be provided from Fiscal
1996 operations will be sufficient to meet the Company's
liquidity needs for the year. Planned capital expenditures for
Fiscal 1996 are $1,012,000.
Effective December 31, 1993, the Company refinanced its
indebtedness to MetLife Capital Corporation. A $2,000,000
revolving loan was incorporated into the long-term debt and the
total amount was amortized over ten years with a call at the end
of the fifth year. The interest rate on the debt was fixed at 8
1/2%. The new monthly payment amounts very closely approximate
what the principal and interest payment amounts were prior to the
refinancing. The indebtedness is secured by a first lien on all
of the Company's assets, except engines manufactured by Mercury
Marine. An additional $76,194 was borrowed in the transaction.
The total amount of the debt to MetLife at December 31, 1993 was
$6,683,200 after the refinancing. The indebtedness to MetLife
was $6,466,253 at June 30, 1994 and $6,003,799 at June 30, 1995.
The loan agreement with MetLife was amended January 1, 1995,
to revise certain financial ratio requirements that the Company
had previously not attained. After, the revision of the
financial ratio requirements and at June 30, 1995, the Company
was in compliance with all of the MetLife financial ratio
requirements.
By agreements dated February 24, 1995, but effective January
1, 1995, the Company refinanced its indebtedness to Mercury
Marine. The new loan agreement provides for fixed monthly
payments over a five year term, for additional quarterly payments
based upon the volume of engine purchases from Mercury, and for
annual payments commencing on August 25, 1995, equal to 5% of the
net income before interest, taxes, and depreciation expense for
the fiscal year ending immediately prior to the payment date.
The interest rate on this indebtedness is fixed at 8 1/2%.
However, in the restucture of its loan agreement with MetLife
described in the preceding
-26-
paragraph, the Company agreed not to make this annual payment if
it were not in compliance with, or such payment would cause it to
violate, the MetLife financial ratio covenants. All amounts not
previously repaid are due and payable on December 1, 1999. If
the Company has met its payment obligations in a timely manner
and reduces the principal amount of the debt to $800,000 by
December 1, 1997, the last $800,000 of the loan shall be forgiven
by Mercury. The debt is secured by a subordinated lien on the
Company's assets, a pledge by Mr. Fountain of substantially all
of his shares of the Company's common stock, and by a personal
guarantee from Mr. Fountain for the amount of the indebtedness
not to exceed $1,000,000.
In June of 1994, the Company arranged for a line of credit
from Deutsche Financial Services for engine purchases. At June
30, 1994 the amount owed to Deutsche was $152,287 and at June 30,
1995 the amount owed was $534,185. The maximum amount of the
line of credit from Deutsche is $750,000. The debt is secured by
a first lien on all engine inventory and by a $200,000
irrevocable letter of credit.
Effects of Inflation.
The Company has not been materially affected by the moderate
inflation of recent years. Since most of the Company's plant and
equipment are relatively new, expenditures for replacements are
not expected to be a factor in the near-term future.
When raw material costs increase because of inflation, the
Company attempts to minimize the effect of these increases by
using alternative, less costly materials, or by finding less
costly sources for the materials it uses. When the foregoing
measures are not possible, its selling prices are increased to
recover the cost increases.
The Company's products are targeted at that segment of the
power boat market where retail purchasers are generally less
significantly affected by price or other economic conditions.
Consequently, management believes that the impact of inflation on
sales and the results of operations will not be material.
-27-
Item 8. Financial Statements and Supplementary Data.
INDEX
Page No.
Independent Auditors' Report........................ 29
Consolidated Balance Sheets -
June 30, 1995 and 1994........................... 30
Consolidated Statements of Operations -
Years Ended June 30, 1995, 1994, and 1993........ 31
Consolidated Statements of Stockholders' Equity -
Years Ended June 30, 1995, 1994, 1993............ 32
Consolidated Statements of Cash Flows -
Years Ended June 30, 1995, 1994, 1993............ 33-34
Notes to Consolidated Financial Statements.......... 35-51
-28-
PETERSON, SILER & STEVENSON, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
430 East 400 South
Salt Lake City, Utah 84111
To the Board of Directors
FOUNTAIN POWERBOAT INDUSTRIES, INC.
Washington, North Carolina
We have audited the accompanying consolidated balance sheets of
Fountain Powerboat Industries, Inc. and Subsidiary as of June 30,
1995 and 1994, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years
ended June 30, 1995, 1994 and 1993. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements audited by
us present fairly, in all material respects, the financial
position of Fountain Powerboat Industries, Inc. and Subsidiary as
of June 30, 1995 and 1994, and the results of their operations
and their cash flows for the years ended June 30, 1995, 1994 and
1993 in conformity with generally accepted accounting principles.
/s/ PETERSON, SILER & STEVENSON, P.C.
August 4, 1995
-29-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, 1995 and June 30, 1994
ASSETS 1995 1994
----------- -----------
CURRENT ASSETS:
Cash................................................ $ 490,807 $ 675,711
Accounts receivable, less allowance for doubtful
accounts at $30,000 (Note 4)..................... 1,898,854 412,379
Inventories (Notes 1, 2, and 4)..................... 3,407,726 3,496,950
Deferred cost of sales (Note 1)..................... 183,393 850,000
Prepaid expenses.................................... 204,947 200,579
----------- -----------
Total current assets......................... $ 6,185,727 $ 5,635,619
----------- -----------
PROPERTY, PLANT, AND EQUIPMENT, NET (Notes 3 and 5).... $ 9,990,082 $10,477,725
----------- -----------
OTHER ASSETS........................................... $ 158,948 $ 153,443
----------- -----------
$ 16,334,757 $16,266,787
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (Note 4).............................. $ 534,185 $ 152,287
Current maturities of long-term debt (Note 5)....... 1,371,554 6,550,738
Accounts payable.................................... 1,800,592 4,930,149
Accounts payable - related parties (Note 11)........ 4,769 12,800
Accrued expenses.................................... 1,109,848 805,771
Accrued income taxes................................ 42,641 0
Customer deposits................................... 412,809 859,825
Allowance for boat repurchases (Note 9)............. 207,359 250,000
Warranty reserve.................................... 400,000 315,000
Deferred sales (Note 1)............................. 197,541 1,100,000
----------- -----------
Total current liabilities.................... $ 6,081,298 $14,976,570
----------- -----------
LONG-TERM DEBT, less current maturities (Note 5)....... $ 7,049,049 $ 133,683
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY (Note 6):
Common stock, par value $.01 per share,
authorized 200,000,000 shares;
issued 3,029,072 shares.......................... $ 30,291 $ 30,291
Additional paid-in capital.......................... 9,297,450 9,297,450
Accumulated deficit................................. (6,012,583) (8,060,459)
----------- -----------
$ 3,315,158 $ 1,267,282
Less treasury stock, at cost, 10,000 shares............ (110,748) (110,748)
----------- -----------
$ 3,204,410 $ 1,156,534
----------- -----------
$ 16,334,757 $16,266,787
=========== ===========
See Notes to Consolidated Financial Statements.
-30-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended
-----------------------------------------
June 30, June 30, June 30,
1995 1994 1993
----------- ----------- -----------
Net sales................................. $38,727,329 $22,240,212 $27,232,360
Cost of sales............................. 30,953,992 20,507,755 22,674,944
----------- ----------- -----------
Gross margin.............................. $ 7,773,337 $ 1,732,457 $ 4,557,416
----------- ----------- -----------
Selling expense........................... $ 3,897,086 $ 2,831,924 $ 2,891,064
Selling expense - related parties (Note 11) 0 22,552 18,871
General & administrative expense.......... 1,297,173 1,324,901 1,290,943
General & admin. - related parties (Note 11) 118,464 108,548 58,115
----------- ----------- -----------
$ 5,312,723 $ 4,287,925 $ 4,258,993
----------- ----------- -----------
Operating income (loss)................... $ 2,460,614 $(2,555,468) $ 298,423
----------- ----------- -----------
Non-operating (income) / expense:
Other income ........................ $ (642,277) $ (301,348) $ (263,060)
Interest expense..................... 989,359 721,224 505,185
Interest expense -
related parties (Note 11)........ 0 18,000 22,054
(Gain) loss on disposal of assets
(Note 3)......................... 23,015 0 (112,189)
----------- ----------- -----------
$ 370,097 $ 437,876 $ 151,990
----------- ----------- -----------
Income (loss) before income taxes......... $ 2,090,517 $(2,993,344) $ 146,433
Current tax expense (benefit) (Note 7).... 42,641 0 0
Deferred tax expense (benefit) (Note 7)... 0 0 0
----------- ----------- -----------
Net income (loss)......................... $ 2,047,876 $(2,993,344) $ 146,433
=========== =========== ===========
Earnings (loss) per share (Note 6)........ $ .68 $ (1.00) $ .04
=========== =========== ===========
Weighted average shares outstanding (Note 6) 3,019,072 2,968,571 2,932,500
=========== =========== ===========
See Notes to Consolidated Financial Statements.
-31-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended June 30, 1995, 1994, and, 1993
Total
Common Stock Additional Treasury Stock Stock-
--------------------- Paid-in Accumulated ------------------- holders'
Shares Amount Capital deficit Shares Amount Equity
----------- -------- ----------- ------------ -------- --------- -----------
Balance, June 30, 1992........ 2,942,500 $ 29,425 $ 8,996,816 $ (5,213,546) 10,000 $ 110,748 $ 3,701,947
Refund of stock issuance costs 0 0 1,500 0 0 0 1,500
Net profit for the year ended
June 30, 1993.............. 0 0 0 146,433 0 0 146,433
Other adjustments............. 0 0 0 0 0 0 0
----------- -------- ----------- ------------ -------- --------- -----------
Balance, June 30, 1993........ 2,942,500 $ 29,425 $ 8,998,316 $ (5,067,113) 10,000 $ 110,748 $ 3,849,880
Additional common stock shares
issued January 31, 1994, net
of costs of issuance.... 86,572 866 299,134 0 0 0 300,000
Net loss for the year ended
June 30, 1994.............. 0 0 0 (2,993,344) 0 0 (2,993,344)
Other adjustments............. 0 0 0 (2) 0 0 (2)
----------- -------- ----------- ------------ -------- --------- -----------
Balance, June 30, 1994........ 3,029,072 $ 30,291 $ 9,297,450 $ (8,060,459) 10,000 $ 110,748 $ 1,156,534
Net profit for the year ended
June 30, 1995.............. 0 0 0 2,047,876 0 0 2,047,876
----------- -------- ----------- ------------ -------- --------- -----------
Balance, June 30, 1995........ 3,029,072 $ 30,291 $ 9,297,450 $ (6,012,583) 10,000 $ 110,748 $ 3,204,410
=========== ======== =========== ============ ======== ========= ===========
See Notes to Consolidated Financial Statements.
-32-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
-----------------------------------------
June 30, June 30, June 30,
1995 1994 1993
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...................... $ 2,047,876 $(2,993,344) $ 146,433
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation expense.............. 1,628,867 1,527,042 1,407,180
(Gain) loss on disposal of
property, plant, and equipment 23,015 0 (111,330)
Non-cash expenses................. 0 0 0
Change in assets and liabilities:
Accounts receivable............ (1,486,475) 1,134,853 (411,749)
Inventories.................... 89,224 (1,245,651) 544,268
Prepaid expenses............... (4,369) 109,729 (224,525)
Other assets................... (5,505) 54,625 (43,261)
Accounts payable............... (3,129,557) 1,553,863 (323,688)
Accounts payable -
related parties............ (8,031) 12,800 0
Accrued expenses............... 304,078 79,945 (192,484)
Accrued expenses -
related parties............ 0 (15,673) 15,673
Accrued income taxes........... 42,641 0 0
Customer deposits.............. (447,016) 587,609 144,013
Allowance for boat returns..... (42,641) 0 (50,000)
Warranty reserve............... 85,000 65,000 0
Deferred sales net of deferred
cost of sales............... (235,852) 198,999 (250,929)
----------- ----------- -----------
Net cash provided by (used in)
operating activities........ $(1,138,745) $ 1,069,797 $ 649,601
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property,
plant, and equipment................ $ 34,000 $ 0 $ 475,231
Investment in additional molds and
related plugs....................... (767,102) (677,394) (1,251,214)
Purchases of other property, plant,
and equipment....................... (431,137) (336,006) (326,220)
----------- ----------- -----------
Net cash (used in) investing
activities.................. $(1,164,239) $(1,013,400) $(1,102,203)
----------- ----------- -----------
-33-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Year Ended
-----------------------------------------
June 30, June 30, June 30,
1995 1994 1993
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on
engine floor plan agreement......... $ 390,136 $ 152,287 $ 0
Net borrowings (repayments) on
advance from shareholder............ 0 (100,000) 300,000
Proceeds from issuance of
additional common stock............. 0 100,000 0
Costs of issuance of
additional common stock............. 0 0 1,500
Proceeds from issuance of
long-term debt...................... 2,656,576 169,898 0
Repayment of long-term debt............ (928,632) (414,394) (966,971)
----------- ----------- -----------
Net cash provided by (used in)
financing activities............ $ 2,118,080 $ (92,209) $ (665,471)
----------- ----------- -----------
Net increase (decrease) in cash........... $ (184,904) $ (35,812) $(1,118,073)
Beginning cash balance.................... 675,711 711,523 1,829,596
----------- ----------- -----------
Ending cash balance....................... $ 490,807 $ 675,711 $ 711,523
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash payments (receipts) for:
Interest - unrelated parties..... $ 989,359 $ 730,510 $ 545,805
- related parties....... 0 18,000 22,054
- capitalized........... 0 (9,286) (40,620)
----------- ----------- -----------
$ 989,359 $ 739,224 $ 527,239
=========== =========== ===========
Income taxes..................... $ 0 $ 0 $ 0
=========== =========== ===========
Non-cash transactions:
On January 31, 1994, the Company issued 57,715 shares of common stock valued at
$200,000 as payment on an advance from a shareholder (Notes 6 & 11).
See Notes to Consolidated Financial Statements.
-34-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of the Business and Significant Accounting Policies.
Nature of the Business:
The Company manufactures high-performance deep water sport
boats which it sells to dealers. Its offices and plant are
located in Washington, North Carolina and it has been in business
since 1979. The Company employs approximately 330 people and is
an equal opportunity, affirmative action employer. For Fiscal
1995 one dealer accounted for 9.8% of sales and four other dealers
each accounted for more than 5% of sales. For Fiscal 1994 one
dealer accounted for 9% of sales.
A summary of the Company's significant accounting policies
follows:
Principles of consolidation:
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary, Fountain Powerboats,
Inc. together with its three subsidiaries, as follows:
Fountain Aviation, Inc.
Fountain Sportswear, Inc.
Fountain Trucking, Inc.
All significant intercompany accounts and transactions have
been eliminated in consolidation. Fountain Aviation, Inc. was not
active after April, 1995.
Fiscal year:
The Company's fiscal year-end is June 30th, which is its
natural business year-end.
Revenue recognition:
Income from the sale of boats is recognized at the time of
shipment when title and all other incidents of ownership transfer
to a dealer or other customer. If not all of the criteria for
recording a sale are met, then the recognition of the sale and the
related cost of the sale are deferred until such time as all of
the criteria are, in fact, met. At fiscal year-end June 30, 1992,
the Company deferred the recognition of revenues amounting to
$1,062,887 (recorded as a balance sheet liability) and the related
cost of sales amounting to $760,957 (recorded as a balance sheet
asset). Recognition of these
-35-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition (Continued).
revenues was deferred because the boat sales did not meet all of
the criteria for recognition as sales. At June 30,
1993, the Company estimated the balances in deferred sales to
be $242,230 and in deferred cost of sales to be $ 191,119. The
differences between the estimates for deferred sales and deferred
cost of sales at June 30, 1992 and June 30, 1993 had the effect of
increasing the gross margin on sales and net income after taxes
for Fiscal 1993 by $250,929 ($.08 per share). At June 30, 1994,
the Company estimated the balances in deferred sales to be
$1,100,000 and in deferred cost of sales to be $850,000. The
differences between the estimates for deferred sales and deferred
cost of sales at June 30, 1993 and June 30, 1994 had the effect of
decreasing the gross margin on sales and net income after taxes
for Fiscal 1994 by $198,999 ($.07 per share). At June 30, 1995,
the Company estimated the balances in deferred sales to be
$197,541 and in deferred cost of sales to be $183,393. The
differences between the estimates for deferred sales and deferred
cost of sales at June 30, 1994 and June 30, 1995 had the effect of
increasing the gross margin on sales and net income after taxes
for Fiscal 1995 by $235,852 ($.08 per share).
Cash and Cash Equivalents:
For purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments with a maturity of
three months or less to be cash equivalents. The Company had
$390,807 and $575,711 in excess of federally insured amounts in
its bank accounts at June 30, 1995 and 1994, respectively.
Inventories:
Inventories are stated at the lower of cost or market. Cost
is determined by the first-in, first-out method.
Property, Plant, and Equipment and Depreciation:
Property, plant, and equipment is carried at cost.
Depreciation on property, plant, and equipment is calculated using
the straight-line method and is based upon the estimated useful
lives of the assets.
-36-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Allowance for Boat Repurchases:
The Company provides an allowance for boats financed by
dealers under floor plan finance arrangements that may be
repurchased from finance companies under certain circumstances
where the Company has a repurchase agreement with the lender. The
allowance provides for all reasonably anticipated future losses to
be incurred on boat repurchases including the cost of bringing
repurchased boats to saleable condition (see also Note 9).
Warranties:
The Company warrants the entire deck and hull, including its
supporting bulkhead and stringer system, against defects in
materials and workmanship for a period of three years. The
Company has accrued a reserve for these anticipated future
warranty costs.
Income Taxes:
Effective for the year ended June 30, 1994, the Company
adopted FASB Statement No. 109, "Accounting for Income Taxes."
There was no cumulative effect for the change in accounting
principle (see Note 7).
Earnings (Loss) Per Share:
Earnings (loss) per share amounts are based on the weighted
average number of shares and share equivalents outstanding during
the periods. The per share amounts are computed based upon the
number of shares outstanding after the February 4, 1994 one-for-
two reverse stock split. After the one-for-two reverse stock
split the weighted average shares outstanding were 3,019,072 for
1995, 2,968,571 for 1994, and 2,932,500 for 1993.
Restatement:
The financial statements have been restated for all periods
presented to reflect a one-for-two reverse stock split effected
February 4, 1994 (see Note 6).
-37-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Inventories.
Inventories consist of the following:
June 30, June 30,
1995 1994
---------- ----------
Parts and supplies.........................$2,707,702 $1,607,872
Work-in-process............................ 704,354 1,432,233
Trailers................................... 37,158 28,570
Finished goods............................. 48,512 478,275
---------- ----------
$3,497,726 $3,546,950
Reserve for obsolescence................... (90,000) (50,000)
---------- ----------
$3,407,726 $3,496,950
========== ==========
Note 3. Property, Plant, and Equipment.
Property, plant, and equipment consists of the following:
Estimated
Useful
Lives June 30, June 30,
in Years 1994 1994
-------- ----------- ----------
Land and related improvements..... 10-30 $ 986,116 $ 986,116
Buildings and related improvements 10-30 5,943,918 5,863,358
Construction-in-progress.......... N/A 7,466 9,763
Production molds and related plugs 8 9,095,973 8,328,871
Machinery and equipment........... 3-5 2,467,986 2,149,276
Furniture and fixtures............ 5 458,650 481,501
Transportation equipment.......... 5 239,634 239,634
----------- -----------
$19,199,743 $18,058,519
Accumulated depreciation.................. 9,209,661 7,580,794
----------- -----------
$ 9,990,082 $10,477,725
=========== ===========
-38-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property, Plant, and Equipment (Continued).
Construction costs of production molds for new and existing
product lines are capitalized and depreciated over an estimated
useful life of eight years. Depreciation starts when the
production mold is placed in service to manufacture the product.
The costs include the
direct materials, direct labor, and an overhead allocation
based on a percentage of direct labor. Production molds not yet
put into service amounted to $7,466 at June 30, 1995 and $9,763 at
June 30, 1994.
Effective July 1, 1992, the Company changed its estimate of the
useful lives of its production molds from 5 years to 8 years.
This had the effect of reducing the depreciation expense
associated with the Company's investment in molds by approximately
$500,000 for Fiscal 1993.
As part of the acquisition cost of property, plant, and
equipment, interest expense was capitalized amounting to $9,286
for Fiscal 1994 and $40,620 for Fiscal 1993. No interest was
capitalized for Fiscal 1995.
During Fiscal 1995, the Company sold or otherwise disposed of
fixed assets and incurred losses upon the disposals amounting to
$23,015. During Fiscal 1994, the Company did not sell or
otherwise dispose of any of its fixed assets. During Fiscal 1993,
the Company sold its airplane and a deep-water testing facility
located at Morehead, North Carolina to Mr. Fountain (See Note 11).
The sales of these two assets resulted in a gain to the Company
amounting to $117,126 which was included in other income.
Note 4. Accounts and Notes Payable.
Pursuant to an agreement dated March 22, 1991, among the
Company, Mr. Reginald M. Fountain, Jr., and the Mercury Marine
Division of the Brunswick Corporation, Mercury Marine established
a purchasing line of credit for the Company which is secured by a
subordinated lien on the Company's assets and a pledge by Mr.
Fountain of substantially all of his shares of the Company's
common stock. At June 30, 1994, the purchasing line of credit
from Mercury Marine was temporarily increased from $2,000,000 to a
maximum of $2,900,000.
-39-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts and Notes Payable (Continued).
Of this amount, $2,847,516 was utilized at June 30, 1994.
The agreement expired on June 30, 1994 and was extended until
February 24, 1995. A new agreement was entered into on February
24, 1995, and took effect on January 1, 1995. The new agreement
requires the Company to use Mercury engines and accessories
exclusively until the earliest of December 1, 1999, or until
12,000 engines have been purchased, or until the Company's
indebtedness to Mercury is paid in full. Also, as part of the
agreement, Mercury pays the Company for certain consulting
services provided by Mr. Fountain and for appropriate endorsements
for Mercury's products at the rate of 5.5% of products purchased
until June 30, 1996 and at the rate of 2.0% until the end of the
consulting agreement on June 30, 1997. The new loan agreement
provides for fixed monthly payments over a five year term, for
additional quarterly payments based upon the volume of engine
purchases from Mercury, and for annual payments commencing on
August 25, 1995, amounting to five percent of net income before
interest, taxes, and depreciation expense for the fiscal year
ending immediately prior to the payment date. The interest rate
on this indebtedness is fixed at 8 1/2%. However, in the
restructure of its loan agreement with MetLife described below,
the Company agreed not to make this annual payment if it were not
in compliance with, or such payment would cause it to violate, the
MetLife financial ratio requirements. All amounts not previously
repaid are due and payable on December 1, 1999. If the Company
has met its payment obligations in a timely manner and reduces the
principal amount of the debt to $800,000 by December 1, 1997, then
the last $800,000 of the loan shall be forgiven by Mercury. The
debt is secured in the same manner as the previously established
purchasing line of credit, and, additionally, Mr. R.M. Fountain,
Jr. has personally guaranteed it up to a maximum of $1,000,000.
At June 30, 1994, the Company had a note amounting to
$152,287 payable to ITT Commercial Finance (now Deutsche Financial
Services) for engine purchases financed by Deutsche. At June 30,
1995 the amount of this note was $534,185.
-40-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Long-term Debt and Pledged Assets.
Effective December 31, 1993, the Company refinanced its
indebtedness to MetLife Capital Corporation. The $2,000,000 short-
term revolving loan was incorporated into the long-term debt and
the total amount was amortized over ten years with a call at the
end of the fifth year. The interest rate on the debt was fixed at
8 1/2%. The new monthly payment amounts very closely approximated
what the principal and interest payment amounts were prior to the
refinancing. An additional $76,194 was borrowed in the
transaction. The total amount of the debt to MetLife at December
31, 1993 was $6,683,200 after the refinancing.
The indebtedness to MetLife was $6,003,799 at June 30, 1995,
$6,466,253 at June 30, 1994, and $6,824,099 at June 30, 1993. The
indebtedness to MetLife is secured by a first deed of trust on all
real property owned by the Company, a first lien security interest
in all machinery, equipment, furniture, and fixtures, and by the
assignment of a $1,000,000 life insurance policy.
The loan agreement with MetLife provides, among other things,
that the Company may not:
1. Pay dividends in excess of net income plus
depreciation expense less the current maturities of
long-term debt.
2. Purchase fixed assets during any year costing
more than $500,000 (excluding production molds).
3. Dispose of any assets outside the ordinary
course of business in excess of $20,000 per
transaction, or $200,000 annually.
4. Guarantee, assume, or endorse the obligation of
any person, firm, or corporation in excess of
$1,000,000.
The loan agreement was amended effective December 31, 1994 to
require the Company to attain the following financial ratios as of
the fiscal year-end June 30, 1995:
1. Minimum stockholders' equity of at least
$3,000,000.
2. Current ratio of not less than 1.0 to 1.
-41-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-Term Debt and Pledged Assets (Continued).
3. Maximum debt to net worth ratio of 5.0 to 1.
4. Minimum debt and capital expenditure service
coverage (net income plus depreciation divided by the
current portion of the long-term debt plus capital
expenditures) of at least 1.25 times.
5. Minimum interest and rent service coverage
(earnings before interest and taxes plus rent expense
divided by interest expense plus rent expense) of at
least 2.00 times.
The Company was in compliance with all of the foregoing
financial ratio requirements as of June 30, 1995. For Fiscal 1994
and 1993, the Company received waivers of the financial ratio
requirements from MetLife. The Company has been current on all of
its scheduled payments of both principal and interest to MetLife.
The Company has various other long-term contracts payable,
which for the most part are capital lease obligations for periods
ranging from three to five years. These obligations have imputed
interest rates ranging from 5% to 14% and amounted to $216,038 at
June 30, 1995 and and $218,168 at June 30, 1994. These other
obligations are secured by the leased assets, which consist of
specific vehicles, machines, and items of equipment.
The current portion of long-term debt was $1,371,554 at June
30, 1995 and $6,550,738 at June 30, 1994. The estimated aggregate
maturities required on long-term debt at June 30, 1995 are as
follows:
Fiscal 1996...................$ 1,371,554
" 1997................... 1,488,697
" 1998................... 1,152,769
" 1999................... 4,407,583
" 2000................... -0-
Later years................... -0-
----------
$ 8,420,603
==========
-42-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Common Stock, Options, and Treasury Stock.
The Company issued no additional common shares during Fiscal
1995. In Fiscal 1994, the Company's Board of Directors authorized
the issuance of 86,572 additional common shares to Mr. Reginald M.
Fountain, Jr., the Company's Chairman, President, Chief Executive
Officer, and Chief Operating Officer in consideration for the
cancellation of a $300,000 debt to Mr. Fountain. He had loaned
the Company $300,000 in November, 1992 on an unsecured basis to
supplement its working capital. The additional shares were issued
at a price of $3.50 per share to Mr. Fountain and to Triangle
Finance Ltd., a client of Eurocapital, Inc. Mr. Federico
Pignatelli is the U.S. representative of Eurocapital, Inc. and
also is a director of the Company. Mr. Fountain cancelled two-
thirds of the total amount of the debt ($202,000, including
$200,000 principal and $2,000 of accrued interest) for 57,715
common shares. Triangle Finance Ltd. repaid one-third of the
total amount of the debt ($101,000, including $100,000 principal
and $1,000 of accrued interest for 28,857 common shares. The
Board of Directors determined that the price of $3.50 per share
was fair to the Company after consideration of such factors as the
common stock's book value, its then current market price, and
previous private placements.
Effective February 4, 1994, the Company amended its Articles
of Incorporation and effectuated a one-for-two reverse stock split
of its common stock. The total number of authorized shares was
not changed, but remained at 200,000,000 and the par value per
share remained at $.01. The earnings per share computations in
the accompanying consolidated statements of operations reflect the
reverse split for all periods presented. Elsewhere in the
accompanying consolidated financial statements and notes thereto,
the per share amounts and number of shares amounts are also based
upon the number of shares after the one-for-two reverse stock
split. Following the reverse split, the weighted average shares
outstanding were 3,019,072 for Fiscal 1995, 2,968,571 for Fiscal
1994, and 2,932,500 for Fiscal 1993.
Under the terms of the Company's 1986 stock option plan,
options may be granted to purchase up to 200,000 shares of the
Company's common stock at a price of no less than 100% of the fair
market value on the date of grant as determined by the Board of
Directors. Options may be exercised for a ten-year period from
the date of grant. During Fiscal 1995, options to purchase 20,000
shares were granted to each of two key employees. No options have
been exercised.
-43-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Common Stock, Options, and Treasury Stock (Continued).
The following table summarizes the activity relating to the
Company's 1986 stock option plan:
Price Range 1995 1994 1993
------------- ------- ------- --------
Options outstanding,
beginning of the year $7.90-$13.94 16,250 17,500 21,250
Granted.................$5.38-$ 5.50 40,000 -0- -0-
Cancelled.............. $7.90-$ 8.30 3,750 1,250 3,750
------ ------- -------
Options outstanding,
end of the year...... $5.38-$13.94 52,500 16,250 17,500
====== ====== ======
Options exercisable,
end of the year.................... 52,500 16,250 17,500
====== ====== ======
Remaining options available
under the plan..................... 147,500 183,750 182,500
======= ======= =======
The 1986 stock option plan terminates on December 5, 1996,
and, accordingly, no additional options may be granted under the
1986 plan after that date.
On June 21, 1995, a special meeting of the shareholders was
held to vote upon the adoption of the 1995 stock option plan. The
new plan as adopted by the shareholders allowed up to 300,000
common stock options to be granted by the Board of Directors to
employees or directors of the Company on either a qualified or non-
qualified basis. Subsequently, on August 4, 1995, the Board
unanimously voted to grant the entire 300,000 stock options
authorized under the 1995 stock option plan to Mr. Reginald M.
Fountain, Jr. at $7.00 per share on a non-qualified basis. None
of the options granted to Mr. Fountain under the 1995 stock option
plan have been exercised.
Effective March 23, 1995, the Board of Directors authorized
the issuance of 20,000 shares stock options to each of the
Company's four outside directors at $5.375 per share on a non-
qualified basis. Since the 80,000 total stock options authorized
represented less than five percent of the Company's outstanding
common stock, no shareholder or regulatory approval was required
for the issuance of these options.
-44-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Common Stock, Options, and Treasury Stock (Continued).
The Company's subsidiary, Fountain Powerboats, Inc., owns
10,000 shares of its common stock. This common stock is accounted
for as treasury stock at its acquisition cost of $110,748 ($11.07
per share) in these financial statements.
Note 7. Income Taxes.
The Company adopted Statement of Financial Accounting
Standards No. 109 Accounting for Income Taxes (FASB 109) during
Fiscal 1994. FASB 109 requires the Company to provide a net
deferred tax asset or liability equal to the expected future tax
benefit or expense of temporary reporting differences between book
and tax accounting and any available operating loss or tax credit
carryforwards. The financial statements for years prior to 1994
have not been restated and there was no cumulative effect for the
change in accounting principle.
At June 30, 1995 and 1994, the totals of all deferred tax
as