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FOUNTAIN POWERBOAT INDUSTRIES, INC.
FORM 10-K
ANNUAL REPORT
FOR THE YEAR ENDED JUNE 30, 1996
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, 1996
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(g) of the Act:
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 $19,310,614 at September 20,
1996 based upon a closing price of $11.875 per share on such date
for the Company's Common Stock.
As of September 15, 1996 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.
Documents incorporated by reference: None.
PART I
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 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 new 47' Lightning Sport Boat is available with a wide
range of engine options and amenities which make it suitable for long range
cruising at 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 $333,000
to $450,000.
-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 February, 1996 at 131.941 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 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.
-4-
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.
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 is
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.
-5-
For Fiscal 1997, the Company plans to introduce two luxury wide beam
sport yachts, a 57' model and a 65' model. These state-of-the-art high
performance yachts will incorporate many amenities not currently available
in competitor's models. The Company also plans to design and build a 31'
wide beam walk around cuddy cabin sport fishing boat.
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
1996 1995 1994
Sport boats........... 295 293 184
Sport cruisers........ 20 15 6
Sport fishing boats... 109 93 92
-------- -------- --------
424 401 282
======== ======== ========
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
29 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 1996............. $ 234,425 $ 878,513
Fiscal 1995............. 134,828 767,102
Fiscal 1994............. 157,433 674,394
For Fiscal 1997, planned design research and development expenses are
$240,000 and plug and mold construction expenditures are approximately
$1,014,000. These expenditures will be primarily to complete the tooling
needed to produce two luxury high performance sport yachts, a 57' model and
a 65' model. Also, work will be started on a 31' wide beam walk around
cuddy cabin sport fishing boat. Tooling expenditures will also be made for
other modifications to existing models.
-6-
Manufacturing capacity is sufficient to accommodate approximately 40
to 50 boats in various stages of construction at any one time. The Company
shipped 424 boats in Fiscal 1996, 401 boats in Fiscal 1995, and 282 boats
in Fiscal 1994.
Construction of a boat takes approximately five weeks. The Company
currently has the ability to manufacture approximately 500 boats per year.
The Company can expand its manufacturing capacity by adding additional
personnel, plant, equipment, and tooling.
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.
The Company manufactures many metal, plexiglass, plastic, and upholstery
parts (such as gas tanks, seat frames, brackets, T-tops, and windscreens) to
assure that 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.
-7-
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 50 dealers throughout the United
States. The Company also has a dealer in Canada. 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.
Following is a table of sales by geographic area for the last three
fiscal years:
Fiscal '96 Fiscal '95 Fiscal '94
United States............. $40,545,235 $38,220,232 $21,416,888
Canada, Mexico, Central
and South America.... 658,738 -0- 187,458
Europe and
the Middle East..... 394,078 309,165 635,866
Asia..................... -0- 197,932 -0-
---------- ---------- ----------
Total.................... $41,598,051 $38,727,329 $22,240,212
========== ========== ==========
-8-
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.
For Fiscal 1996 one dealer accounted for 10.2% of sales and three
other dealers each accounted for more than 5% of sales. For Fiscal 1995 one
dealer accounted for 9.8% of sales and four other dealers each accounted for
more than 5% of sales. 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 National
Director 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.
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 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 seven 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.
-9-
For the 1997 model year (which commenced July 1, 1996), the Company
has made arrangements to pay all interest charged by certain floor plan
lenders for as long as six months. This and other incentives to the dealers
have resulted in relatively level month to month production and sales.
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 1996, 1995, and 1994.
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 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.
-10-
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. Since Fiscal 1992, the
Company has 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 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. Since Fiscal 1993,
the Foutain fishing team has continued to place 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, 1996 was for
approximately 250 boats having an estimated sales value of $25,000,000.
This compares to the sales order backlog as of the end of August, 1995 for
200 boats having an approximate sales value of $20,000,000 and to the
backlog as of the end of August, 1994 for 84 boats having an approximate
sales value of $8,567,000.
-11-
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
$391,648 were incurred in Fiscal 1996 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 $410,000 at June 30, 1996.
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:
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 18, 1996 the Company had 326 employees, of whom seven were
executive and management personnel. Sixteen were engaged primarily in
administrative positions including accounting, personnel, marketing and
sales activities. Twenty-nine 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.
-12-
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 $5,500,467 at June 30, 1995.
The operating facility contains seven buildings totalling 167,250
square feet located on fifteen acres. The buildings consist of the
following:
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,
upholstery, 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.
Building 8.......... 12,000 Lamination extension area.
Total............... 167,250
========
Site improvements include a boat ramp and docking facilities along a
600 foot canal leading to the Pamlico River. In addition, approximately
200,000 square feet of concrete paving surrounds the buildings and provides
for employee parking. Thirty-five unimproved acres are owned and available
for future expansion.
-13-
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 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 $3,279 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. According to the PRP Group,
the Company's full cash-out amount is estimated to be approximately $10,000
for the Elkton, Maryland site, based upon an estimated 3,304 gallons of
waste disposed of at that site by the Company's third party contractor. A
cash-out proposal in the approximate amount of $66,000 based upon an
estimated 19,245 gallons of waste is anticipated from the PRP Group for the
Jamestown, North Carolina site following completion of a remedial
investigation and feasibility study in early 1998, according to the PRP
Group administrator. Any such cash-out agreement will be subject to
approval by EPA and NCDEHNR, respectively. The Company has accrued the
estimated $76,000 liability related to these matters in the accompanying
financial statements.
-14-
The Company has received a demand letter dated February 22, 1996, from
the representative and agent for a famous professional basketball player,
for damages in connection with an advertisement for the Company which used
the basketball player's name. The monetary demand is for $1,000,000 if
the claim is resolved prior to the institution of a lawsuit, which also has
been threatened. The Company has put its primary and umbrella liability
insurance carriers on notice, and they are researching various coverage
issues. At this time, the parties involved, including the primary insurance
carrier's representative have agreed to a meeting to discuss potential
resolution of the matter. The Company has accrued the $10,000 liability
insurance deductible for this claim in the accompanying financial
statements. The Company intends to vigorously defend its interests in this
matter unless a reasonable and equitable settlement can be made.
A former vendor has instituted a lawsuit for $10,960 plus costs and
interest. The Company has counterclaimed for damages in a greater amount
and intends to vigorously defend its interest in this matter unless an
equitable settlement can be reached.
There were four product liability lawsuits brought against the Company
at June 30, 1996. 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.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to the Shareholders for a vote during the
last quarter of Fiscal 1996.
-15-
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 NASDAQ National Market System (under the symbol "FPWR") on
August 28, 1996. Prior to that time the Company's common stock was traded
on the American Stock Exchange (under the symbol "FPI").
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, 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
September 30, 1995..... 8.25 5.38
December 31, 1995...... 6.13 5.25
March 31, 1996......... 6.00 5.25
June 30, 1996.......... 11.88 5.69
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 10, 1996 was 214.
-16-
Item 6. Selected Financial Data.
Fountain Powerboat Industries, Inc. and Subsidiary
SELECTED FINANCIAL DATA
Fiscal Years 1992 through 1996
Year Ended June 30,
Operations Statement Data: _______________________________________________________________
(Period Ended) 1996 1995 1994 1993 1992
____________________ ___________ ___________ __________ ___________ ___________
Sales............... $41,598,051 $38,727,329 $22,240,212 $27,232,360 $27,783,378
Net income (loss)... 3,680,034 2,047,876 (2,993,344) 146,433 (1,529,930)
Income (loss) per share 1.22 .68 (1.00) .04 (.66)
Weighted average shares
outstanding 3,019,072 3,019,072 2,968,571 2,932,500 2,311,185
Fully diluted earnings
(loss)per share... 1.15 .68 N/A N/A N/A
Fully diluted weighted
average shares
outstanding....... 3,200,159 3,026,463 N/A N/A N/A
Balance Sheet Data
(At Period End)
_____________________
Current assets..... $ 8,378,341 $ 6,185,727 $ 5,635,619 $ 5,011,591 $ 6,607,386
Total assets....... 18,498,104 16,334,757 16,266,787 16,211,026 17,957,207
Current liabilities 6,180,476 6,081,298 14,976,570 5,920,743 8,878,176
Long-term debt..... 5,433,184 7,049,049 133,683 6,440,403 5,377,084
Stockholders' equity (1) 6,884,444 3,204,410 1,156,534 3,849,880 3,701,947
_________________________________
(1) The Company has not paid any dividends since its inception.
-17-
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, 1993, the Company estimated the balances in deferred sales
to be $242,230 and in deferred cost of sales to be $191,229. As of 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 ($0.07 per share).
The increase in deferred sales from $242,230 at June 30, 1993 to
$1,100,000 at June 30, 1994 was because of an increase 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 an increase in the number
of direct repurchase agreements the Company had in effect with its dealers.
-18-
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).
At June 30, 1996, there were no commitments to dealers to pay the
interest on floor plan financed boats in excess of the time period specified
in the Company's written sales program and there were no direct repurchase
agreements. This was because of much improved market conditions and strong
ongoing consumer demand for boats. Therefore, there were no deferred sales
or cost of sales estimated at June 30, 1996. The differences between the
estimates for deferred sales and deferred cost of sales at June 30, 1995 and
June 30, 1996 had the effect of increasing the gross margin on sales and net
income after taxes for the year by $14,148.
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
$7,200,000 at June 30, 1996, $7,700,000 at June 30, 1995, and $8,400,000 at
June 30, 1994 for the shipment of boats which remained uncollected by the
finance companies at those dates. The lesser contingent liability at
June 30, 1996 is due to fewer boats being floor planned by dealers with
finance companies. Of the foregoing contingent liability amounts, $197,541
is reflected as deferred sales in the accompanying consolidated balance
sheets as of June 30, 1995 (See Note 9 to the Consolidated Financial
Statements). Additionally, at June 30, 1996 and 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.
Business Environment.
Sales for Fiscal 1996 were $41,598,051, a 7% increase from sales for
Fiscal 1995. Improved sales volume for Fiscal 1996 was in line with a
general improvement in the overall recreational boating industry and the
result of additional production capacity. Also, the Company continued its
highly effective advertising and marketing programs throughout Fiscal 1996.
-19-
Sales for Fiscal 1995 were $38,727,329, an 74% increase from sales for
Fiscal 1994. Sales for Fiscal 1994 were $22,240,212. 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.
Engine deliveries were resumed in July, 1994.
In Fiscal 1996, 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 1996.
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.
No boats were repurchased in Fiscal 1996 and Fiscal 1994 in connection
with floor plan arrangements. Five boats were repurchased during Fiscal
1995 in connection with floor plan arrangements. At June 30, 1996, the
Company had recorded a $207,359 reserve for losses which may be reasonably
expected to beincurred on boat repurchases in future years.
Results of Operations.
Net income for Fiscal 1996 was $3,680,034, or $1.22 per share
outstanding. This compares to net income for Fiscal 1995 of $2,047,876, or
$.68 per share. The net loss for Fiscal 1994 was $2,993,344, or $1.00 per
share.
-20-
The improvement in earnings for Fiscal 1996 was the result of greater
sales volume, price increases, production efficiencies, and a favorable
sales mix. The mix of sales continued to be weighted with sales of the
Company's larger, higher margin sport boats. Income for the year also
included a non-recurring $800,000 discount earned for the early retirement
of indebtedness to a vendor.
Net income for Fiscal 1995 was up primarily because of substantially
improved sales volume. Sales were $38,727,329, or up by 74% from the
previous year. 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. 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.
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 22.29% in Fiscal 1996 from 20.07% for Fiscal 1995. 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 1996.
-21-
The Company's gross profit margin as a percentage of net sales
increased to 20.07% for Fiscal 1995 as compared to 7.79% for Fiscal 1994.
The increase in gross margin for Fiscal 1995 was primarily due to increased
volume. Price increases and production efficiencies also contributed to
the improved margin.
Depreciation expense was $1,536,479 for Fiscal 1996, $1,628,867 for
Fiscal 1995, and $1,527,042 for Fiscal 1994. Depreciation expense by asset
category was as follows:
Fiscal Fiscal Fiscal
1996 1995 1994
Land improvements......$ 20,595 $ 18,849 $ 18,849
Buildings.............. 260,580 269,460 268,945
Molds & plugs.......... 980,104 1,076,746 1,007,534
Machinery & equipment.. 225,654 216,089 171,053
Furniture & fixtures... 11,114 12,094 17,838
Transportation equip... 38,432 35,629 42,823
---------- ---------- ----------
$1,536,479 $1,628,867 $1,407,180
========== ========== ==========
The $92,388 decrease in depreciation expense for Fiscal 1996 is due to
an excess of molds becoming fully depreciated over new molds commencing to
be depreciated during the year. Those particular molds which are now fully
depreciated are still in active service.
Following is a schedule of the net fixed asset additions during Fiscal
1996 and Fiscal 1995:
Fiscal 1996 Fiscal 1995
Buildings................... $ 255,781 $ 80,560
Molds and plugs............. 878,513 767,102
Machinery & equipment....... 376,241 348,533
Furniture & fixtures........ 6,270 2,044
Transportation equipment.... (33,925) -0-
---------- ----------
$1,482,880 $1,198,239
========== ==========
-22-
Selling expenses were $4,285,923 for Fiscal 1996, $3,897,086 for Fiscal
1995, and $2,854,476 for Fiscal 1994. The Company continued to promote its
products primarily by magazine advertising in Fiscal 1996. Advertising
expense was $849,627 for Fiscal 1996, $977,787 for Fiscal 1995, and $837,973
for Fiscal 1994. 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 $867,743 in Fiscal 1996, $576,741 in Fiscal 1995, and
$341,735 in Fiscal 1994. 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 1996 and prior years will benefit
future years as well.
Selling expenses compared for the past three fiscal years were as
follows:
Fiscal '96 Fiscal '95 Fiscal '94
Offshore racing and
tournament fishing... $ 867,743 $ 576,741 $ 341,735
Advertising............. 849,627 977,787 837,973
Salaries & commissions.. 578,170 752,206 363,610
Boat shows.............. 285,321 388,710 260,719
Dealer incentives....... 954,234 938,563 740,722
Other selling expenses.. 750,828 263,079 309,717
--------- --------- ---------
$4,285,923 $3,897,006 $2,854,476
========= ========= =========
General and administrative expenses include the finance, accounting,
legal, personnel, data processing, and administrative operating expenses of
the Company. These expenses were $1,904,988 for Fiscal 1996, $1,415,637 for
Fiscal 1995, and $1,433,449 for Fiscal 1994. Most of the increase for
Fiscal 1996 over Fiscal 1995 was in executive compensation, travel expense,
and attorneys' fees.
Interest expense was $747,337 for Fiscal 1996, $989,359 for Fiscal
1995, and $739,224 for Fiscal 1994. The decrease in interest expense for
Fiscal 1996 is from lesser outstanding indebtedness.
-23-
During Fiscal 1996 some trucks were sold yielding a gain of $22,906.
During Fiscal 1995 some miscellaneous fixed assets were sold yielding a loss
amounting to $23,015. No fixed assets were sold in Fiscal 1994.
Included in other income for Fiscal 1996 is a non-recurring $800,000
discount earned for the early retirement of indebtedness to a vendor.
Included in other income for Fiscal 1995 is the non-recurring gain on the
settlement of a state sales and use tax assessment amounting to $169,552.
Also included in other income for Fiscal 1996 are $610,420 of technical
consulting fees earned by Mr. Fountain and assigned to the Company. These
consulting fees amounted to $452,911 for Fiscal 1995 and to $294,437 for
Fiscal 1994. Under the terms of his current consulting contract, Mr.
Fountain's consulting fees will be reduced by approximately 65% for Fiscal
1997 and will end entirely after Fiscal 1997.
Liquidity and Financial Resources.
Operations in Fiscal 1996 provided $3,902,750 in cash. Net income
plus depreciation expense provided cash amounting to $5,216,513. However,
relatively large amounts were needed to finance increases in accounts
receivable and inventories. The ending cash balance was $1,360,619.
Operations for the prior fiscal year 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 Fiscal 1994, 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.
Investing activities for Fiscal 1996 required $1,451,677, including
expenditures for addtional molds and plugs amounting to $878,513 and for
other property, plant, and equipment amounting to $604,367.
Investing activities for the prior fiscal year 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.
-24-
For Fiscal 1994, 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.
Financing activities for Fiscal 1996 used $1,581,261. Included in
this amount is $2,192,528 of indebtedness to a vendor which was retired
entirely during the year. Debt repayments to MetLife Capital Corporation
and others amounted to $627,637.
Financing activities for the prior year provided $2,118,080. Included
in this amount is $2,600,000 of indebtedness to a vendor which was converted
from a short-term trade payable to a long-term note payable. Debt
repayments to MetLife Capital Corporation and others amounted to $928,632.
For Fiscal 1994, 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.
The net increase in cash for Fiscal 1996 was $869,812. For Fiscal
1997, the Company anticipates that the $1,360,619 beginning cash balance
and the amounts expected to be provided from Fiscal 1997 operations will be
sufficient to meet most of the Company's liquidity needs for the year.
However, planned capital expenditures for Fiscal 1997 are substantially
greater than for Fiscal 1996. The Company intends to increase its
production capacity, principally for new products, in Fiscal 1997.
Therefore, the Company has arranged for a substanial asset leasing line of
credit for new production equipment. The Company is also negotiating for
other additional lines of credit.
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 $6,003,799 at June 30, 1995 and $5,500,467
at June 30, 1996.
-25-
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 and 1996, the Company was in compliance with all of the
MetLife financial ratio requirements.
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, at June 30, 1995 the amount owed was
$534,185, and at June 30, 1996 the amount owed was $1,173,089. The maximum
amount of the line of credit from Deutsche is $1,200,000. The debt is
secured by a first lien on all engine inventory and by a $200,000
irrevocable letter of credit.
In December, 1995, the Company borrowed $600,000 from G.E. Capital
Corporation for the purpose of retiring its indebtedness to a vendor. This
debt to G.E. Capital Corporation is scheduled for repayment over forty
months at 9.00% interest. It is secured by various boat molds and product
tooling and by an irrevocable bank letter of credit for $200,000. The
unpaid balance at June 30, 1996 was $538,044.
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.
Cautionary Statement for Purposes of "Safe Harbor" Under the
Private Securities Reform Act of 1995.
The Company may from time to time make forward-looking statements,
including statements projecting, forecasting, or estimating the Company's
performance and industry trends. The achievement of the projections,
forecasts, or estimates contained in these statements is subject to certain
-26-
risks and uncertainties, and actual results and events may differ materially
from those projected, forecasted, or estimated.
The applicable risks and uncertainties include general economic and
industry conditions that affect all businesses, as well as, matters that are
specific to the Company and the markets its serves. For example, the
achievement of projections, forecasts, or estimates contained in the
Company's forward-looking statements may be impacted by national and
international economic conditions; compliance with governmental laws and
regulations; accidents and acts of God; and all of the general risks
associated with doing business.
Risks that are specific to the Company and its markets include but are
not limited to compliance with increasingly stringent environmental laws and
regulations; the cyclical nature of the industry; competition in pricing and
new product development from larger companies with substantial resources;
the concentration of a substantial percentage of the Company's sales with a
few major customers, the loss of, or change in demand from, any of which
could have a material impact upon the Company; labor relations at the
Company and at its customers and suppliers; and the Company's single-source
supply and just-in-time inventory stategies for some critical boat
components, including high performance engines, which could adversely affect
production if a single-source supplier is unable for any reason to meet the
Company's requirements on a timely basis.
-27-
Item 8. Financial Statements and Supplementary Data.
INDEX
Page No.
Independent Auditors' Report........................ 29
Consolidated Balance Sheets -
June 30, 1996 and 1995........................... 30
Consolidated Statements of Operations -
Years Ended June 30, 1996, 1995, and 1994........ 31
Consolidated Statements of Stockholders' Equity -
Years Ended June 30, 1996, 1995, 1994............ 32
Consolidated Statements of Cash Flows -
Years Ended June 30, 1996, 1995, 1994............ 33-34
Notes to Consolidated Financial Statements.......... 35-51
-28-
PRITCHETT, SILER & HARDY, P.C.
Certified Public Accountants
430 East 400 South
Salt Lake City, Utah 84111
(801) 328-2727
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, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity and
cash flows for the years ended June 30, 1996, 1995 and 1994. 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, 1996 and 1995, and
the results of their operations and their cash flows for the years ended
June 30, 1996, 1995 and 1994 in conformity with generally accepted
accounting principles.
/s/ PRITCHETT, SILER & HARDY, P.C.
PRITCHETT, SILER & HARDY, P.C.
August 1, 1996
-29-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, 1996 and 1995
ASSETS 1996 1995
CURRENT ASSETS:
Cash............................ $ 1,360,619 $ 490,807
Accounts receivable, less allowance for
doubtful ccounts of $27,000 for 1996
and $30,000 for1995............. 2,853,684 1,898,854
Inventories (Notes 1 and 2)....... 4,009,195 3,407,726
Deferred cost of sales (Note 1)... 0 183,393
Prepaid expenses.................. 154,843 204,947
___________ ___________
Total current assets............ $ 8,378,341 $ 6,185,727
PROPERTY, PLANT, AND EQUIPMENT,
NET (Notes 3 and 5)............... $ 9,928,186 $ 9,990,082
OTHER ASSETS....................... $ 191,577 $ 158,948
___________ ___________
$18,498,104 $16,334,757
___________ ___________
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (Note 4)............ $ 1,173,089 $ 534,185
Current maturities of
long-term debt (Note 5)......... 767,254 1,371,554
Accounts payable.................. 1,713,760 1,800,592
Accounts payable -
related parties (Note 11)....... 0 4,769
Accrued expenses.................. 1,599,602 1,109,848
Accrued income taxes.............. 80,804 42,641
Customer deposits................. 228,608 412,809
Allowance for boat
repurchases (Note 9)............ 207,359 207,359
Warranty reserve.................. 410,000 400,000
Deferred sales (Note 1)........... 0 197,541
___________ ___________
Total current liabilities....... $ 6,180,476 $ 6,081,298
LONG-TERM DEBT,
less current maturities (Note 5) $ 5,433,184 $ 7,049,049
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............... (2,332,549) (6,012,583)
___________ ___________
$ 6,995,192 $ 3,315,158
Less treasury stock,
at cost, 10,000 shares............ (110,748) (110,748)
___________ ___________
$ 6,884,444 $ 3,204,410
___________ ___________
$18,498,104 $16,334,757
___________ ___________
See Notes to Consolidated Financial Statements.
-30-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30,
____________________________________
1996 1995 1994
____ _____ ______
Net sales.................. $41,598,051 $38,727,329 $22,240,212
Cost of sales.............. 32,326,371 30,953,992 20,507,755
___________ ___________ ___________
Gross margin............... $ 9,271,680 $ 7,773,337 $ 1,732,457
___________ ___________ ___________
Selling expense............ $ 4,285,923 $ 3,897,086 $ 2,831,924
Selling expense -
related parties (Note 11) 0 0 22,552
General & administrative expense 1,729,399 1,297,173 1,324,901
General & admin. -
related parties (Note 11) 175,589 118,464 108,548
___________ ___________ ___________
$ 6,190,911 $ 5,312,723 $ 4,287,925
___________ ___________ ___________
Operating income (loss)... $ 3,080,769 $ 2,460,614 $(2,555,468)
___________ ___________ ___________
Non-operating (income) / expense:
Other income (Note 12) $(1,404,500) $ (642,277) $ (301,348)
Interest expense..... 744,627 989,359 721,224
Interest expense -
related parties (Note 11) 2,710 0 18,000
(Gain) loss on disposal of
assets (Note 3) (22,906) 23,015 0
____________ __________ ___________
$ (680,069) $ 370,097 $ 437,876
____________ __________ ___________
Income (loss) before income taxes $ 3,760,838 $ 2,090,517 $(2,993,344)
Current tax expense
(benefit) (Note 7).... 80,804 42,641 0
Deferred tax expense
(benefit) (Note 7)... 0 0 0
___________ ___________ ___________
Net income (loss).............. $ 3,680,034 $ 2,047,876 $(2,993,344)
___________ ___________ ___________
Earnings (loss) per share (Note 6) $ 1.22 $ .68 $ (1.00)
___________ ___________ ___________
Weighted average shares
outstanding (Note 6) 3,019,072 3,019,072 2,968,571
___________ ___________ ___________
Fully diluted earnings (loss)
per share (Note 6).......... $ 1.15 $ .68 $ N/A
___________ ___________ ___________
Fully diluted weighted average
shares outstanding (Note 6) 3,200,159 3,026,463 N/A
___________ ___________ ___________
See Notes to Consolidated Financial Statements.
-31-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended June 30, 1996, 1995, and 1994
Total
Common Stock Additional Treasury Stock Stock-
_____________________ Paid-in Accumulated ________________ holders'
Shares Amount Capital deficit Shares Amount Equity
___________ _______ __________ ___________ _______ ______ ___________
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
Net profit for the year
ended June 30, 1996 0 0 0 3,680,034 0 0 3,680,034
__________ _______ __________ ___________ ______ ________ __________
Balance, June 30, 1996 3,029,072 $30,291 $9,297,450 $(2,332,549) 10,000 $110,748 $6,884,444
__________ _______ __________ ___________ ______ ________ __________
See Notes to Consolidated Financial Statements.
-32-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30,
____________________________________
1996 1995 1994
__________ __________ __________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................. $ 3,680,034 $ 2,047,876 $(2,993,344)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation expense........ 1,536,479 1,628,867 1,527,042
(Gain) loss on disposal of
property, plant, and equipment (22,906) 23,015 0
Non-cash expenses........... 0 0 0
Change in assets and liabilities:
Accounts receivable....... (954,830) (1,486,475) 1,134,853
Inventories............... (601,469) 89,224 (1,245,651)
Prepaid expenses.......... 50,104 (4,369) 109,729
Other assets.............. (32,629) (5,505) 54,625
Accounts payable.......... (86,832) (3,129,557) 1,553,863
Accounts payable -
related parties........ (4,769) (8,031) 12,800
Accrued expenses.......... 489,754 304,078 79,945
Accrued expenses -
related parties........ 0 0 (15,673)
Accrued income taxes...... 38,163 42,641 0
Customer deposits......... (184,201) (447,016) 587,609
Allowance for boat returns 0 (42,641) 0
Warranty reserve.......... 10,000 85,000 65,000
Deferred sales net of deferred
cost of sales.......... (14,148) (235,852) 198,999
__________ __________ __________
Net cash provided by (used in)
operating activities... $ 3,902,750 $(1,138,745) $ 1,069,797
__________ __________ __________
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property,
plant, and equipment.......... $ 31,203 $ 34,000 $ 0
Investment in additional molds and
related plugs................. (878,513) (767,102) (677,394)
Purchases of other property,
plant, and equipment........... (604,367) (431,137) (336,006)
__________ __________ __________
Net cash (used in) investing
activities............... $(1,451,677) $(1,164,239) $(1,013,400)
__________ __________ __________
-33-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Year Ended June 30,
____________________________________
1996 1995 1994
__________ __________ __________
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on
engine floor plan agreement.... $ 638,904 $ 390,136 $ 152,287
Net borrowings (repayments) on
advance from shareholder....... 0 0 (100,000)
Proceeds from issuance of
additional common stock........ 0 0 100,000
Costs of issuance of
additional common stock........ 0 0 0
Proceeds from issuance of
long-term debt (Note 5)........ 600,000 2,656,576 169,898
Repayment of long-term debt....... (2,820,165) (928,632) (414,394)
__________ __________ __________
Net cash provided by (used in)
financing activities........ $(1,581,261) $2,118,080 $ (92,209)
__________ __________ __________
Net increase (decrease) in cash..... $ 869,812 $ (184,904) $ (35,812)
Beginning cash balance.............. 490,807 675,711 711,523
__________ __________ __________
Ending cash balance................. $ 1,360,619 $ 490,807 $ 675,711
__________ __________ __________
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash payments (receipts) for:
Interest - unrelated parties..... $ 744,627 $ 989,359 $ 730,510
- related parties....... 2,710 0 18,000
- capitalized........... 0 0 (9,286)
__________ __________ __________
$ 747,337 $ 989,359 $ 739,224
__________ __________ __________
Income taxes paid................ $ 42,641 $ 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 350 people and is
an equal opportunity, affirmative action employer. For Fiscal
1996 one dealer accounted for 10.2% of sales and three other
dealers each accounted for more than 5% of sales. For Fiscal 1995
one dealer accounted for 9.8% of sales and four other dealers each
accounted for more than 5% 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 five subsidiaries, as follows:
Fountain Aviation, Inc.
Fountain Sportswear, Inc.
Fountain Trucking, Inc.
Fountain Unlimited, Inc.
Fountain Power, Inc.
All significant intercompany accounts and transactions have
been eliminated in consolidation. Fountain Aviation, Inc.,
Fountain Unlimited, Inc., and Fountain Power, Inc. were not active
during Fiscal 1996.
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
-35-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition (Continued).
the sale are deferred until such time as all of the criteria are,
in fact, met. 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). At June 30, 1996, the Company estimated that there were
no deferred sales or deferred cost of sales. The differences
between the estimates for deferred sales and deferred cost of
sales at June 30, 1995 and June 30, 1996 had the effect of
increasing the gross margin on sales and net income after taxes
for Fiscal 1996 by $14,148.
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
$1,260,619 and $390,807 in excess of federally insured amounts in
its bank accounts at June 30, 1996 and 1995, 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:
The computations of primary and fully diluted earnings (loss)
per share amounts are based upon the weighted average number of
outstanding common shares during the periods, plus, when their
effect is dilutive, additional shares assuming the exercise of
certain vested stock options, reduced by the number of shares
which could be purchased from the proceeds from the exercise of
the stock options assuming they were exercised. The fully diluted
earnings per share for the year ended June 30, 1994 is not
presented because its effect is antidilutive.
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
Accounting Estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosures of contingent assets and
liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimated by
management.
Note 2. Inventories.
Inventories consist of the following:
June 30,
----------------------
1996 1995
---------- ----------
Parts and supplies...................... $3,095,379 $2,707,702
Work-in-process......................... 715,133 704,354
Trailers................................ 38,414 37,158
Finished goods........................ 260,269 48,512
---------- ----------
$4,109,195 $3,497,726
Reserve for obsolescence................ (100,000) (90,000)
---------- ----------
$4,009,195 $3,407,726
========== ==========
Note 3. Property, Plant, and Equipment.
Property, plant, and equipment consists of the following:
Estimated
Useful June 30,
Lives -----------------------
in Years 1996 1995
-------- ----------- ----------
Land and related improvements..... 10-30 $ 986,116 $ 986,116
Buildings and related improvements 10-30 6,199,699 5,943,918
Construction-in-progress.......... N/A 6,287 7,466
Production molds and related plugs 8 9,974,486 9,095,973
Machinery and equipment........... 3-5 2,843,480 2,467,986
Furniture and fixtures............ 5 464,932 458,650
Transportation equipment.......... 5 199,326 239,634
----------- -----------
$20,674,326 $19,199,743
Accumulated depreciation.................. 10,746,140 9,209,661
----------- -----------
$ 9,928,186 $ 9,990,082
=========== ===========
-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. All of
the Company's production molds were completed and were in service
at June 30, 1996. Production molds not put into service amounted
to $7,466 at June 30, 1995.
As part of the acquisition cost of property, plant, and equipment,
interest expense was capitalized amounting to $9,286 for Fiscal
1994. No interest was capitalized for Fiscal 1995 and 1996.
The Company sold fixed assets and realized gains amounting to
$22,906 for Fiscal 1996. For Fiscal 1995, the Company incurred
losses on fixed assets sold amounting to $23,015. During Fiscal
1994, the Company did not sell or otherwise dispose of any of its
fixed assets.
Note 4. Accounts and Notes Payable.
During Fiscal 1996, the Company retired its interest bearing
indebtedness to Mercury Marine. Most of the amount owing to
Mercury Marine was repaid from the Company's operating funds, but,
additionally, $600,000 was borrowed from G.E. Capital Corporation
on a long-term basis to repay Mercury.
At June 30, 1996, the Company had a note amounting to
$1,173,089 payable to Deutsche Financial Services for engine
purchases financed by Deutsche. At June 30, 1995 the amount of
this note was $534,185. The note bears interest from 2% to 4%
over prime and is secured by the engines purchased and by a
$200,000 irrevocable bank letter of credit.
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
-39-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Long-term Debt and Pledged Assets (Continued).
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 $5,456,566 at June 30, 1996
and $6,003,799 at June 30, 1995. 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, 1996:
1. Minimum stockholders' equity of at least
$5,500,000.
2. Current ratio of not less than 1.1 to 1.
3. Maximum debt to net worth ratio of 3.0 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 1.5
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 3.25 times.
-40-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Long-term Debt and Pledged Assets (Continued).
The Company was in compliance with all of the foregoing
financial ratio requirements as of June 30, 1996. For Fiscal
1995, it was also in compliance with the financial ratio
requirements then in effect. For Fiscal 1994, 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.
In December, 1995, the Company borrowed $600,000 from G.E.
Capital Corporation for the purpose of retiring its indebtedness
to Mercury Marine. This debt is scheduled for repayment over
forty months at 9.00% interest. It is secured by various boat
molds and product tooling and by an irrevocable bank letter of
credit for $200,000. The unpaid balance at June 30, 1996 was
$538,044.
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 $161,927 at
June 30, 1996 and $216,038 at June 30, 1995. 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 $767,254 at June
30, 1996 and $1,371,554 at June 30, 1995. The estimated aggregate
maturities required on long-term debt at June 30, 1996 are as
follows:
Fiscal 1997...................$ 767,254
" 1998................... 831,116
" 1999................... 4,602,068
" 2000................... -0-
" 2001................... -0-
Later years................... -0-
----------
$ 6,200,438
==========
Note 6. Common Stock, Options, and Treasury Stock.
The Company issued no additional common shares during Fiscal
1995 and Fiscal 1996. 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
-41-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Common Stock, Options, and Treasury Stock (Continued).
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 and Fiscal 1996, and
2,968,571 for Fiscal 1994.
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.
The following table summarizes the activity relating to the
Company's 1986 stock option plan:
-42-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Common Stock, Options, and Treasury Stock (Continued).
Fiscal
-------------------------
Price Range 1996 1995 1994
----------- ------- ------- -------
Options outstanding,
beginning of the year $5.38-$13.94 52,500 16,250 17,500
Granted.................$5.38-$ 5.50 -0- 40,000 -0-
Cancelled...............$7.90-$13.94 12,500 3,750 1,250
------ ------ ------
Options outstanding,
end of the year...... $5.38-$ 5.50 40,000 52,500 16,250
====== ====== ======
Options exercisable,
end of the year.................... 40,000 52,500 16,250
====== ====== ======
Remaining options available
under the plan..................... 160,000 147,500 183,750
======= ======= =======
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.
-43-
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, 1996 and 1995, the totals of all deferred tax
assets were $1,917,494 and $3,509,457. The totals of all deferred
tax liabilities were $893,349 and $911,479. The amount of and
ultimate realization of the benefits from the deferred tax assets
for income tax purposes is dependent, in part, upon the tax laws
in effect, the Company's future earnings, and other future events,
the effects of which cannot be determined. Because of the
uncertainty surrounding the realization of the deferred tax
assets, the Company has established valuation allowances of
$1,024,145 and $2,597,978 as of June 30, 1996 and 1995,
respectively, which have been offset against the deferred tax
assets. The net decrease in the valuation allowance during the
year ended June 30, 1996, was $1,573,833.
The Company has available at June 30, 1996, unused operating
loss carryforwards of approximately $2,900,000, which may be
applied against future taxable income and which expire in various
years through 2009.
The components of income tax expense from continuing
operations for the years ended June 30, 1996, 1995, and 1994
consist of the following:
-44-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes (Continued).
1996 1995 1994
Current income tax expense:
Federal.....................$ 80,804 $ 41,431 $ -0-
State....................... -0- 1,210 -0-
--------- - ---------- ----------
Net current tax expense.....$ 80,804 $ 42,641 $ -0-
========== ========== ==========
The Company incurred current tax expense amounting to $80,804
for Fiscal 1996 and $42,641 for Fiscal 1995 as a result of the
alternative minimum income tax.
Deferred tax expense (benefit) resulted from:
June 30,
1996 1995 1994
Excess of tax over financial
accounting depreciation...$ (18,130) $ 67,663 $ 281,789
Warranty reserves........... (4,200) (35,700) (27,300)
Accrued vacations........... (3,765) (5,137) (1,830)
Dealer incentive interest
reserves.................. 42,000 7,258 (145)
Bad debt reserves........... 1,260 1,260 (8,725)
Deferred sales and cost, net 5,942 99,058 (83,580)
Excess contributions
carryforwards............. -0- 1,298 (766)
Inventory adjustment-Sec.263A (12,304) (16,648) (30,176)
(Increase) decrease in
NOL carryforwards......... 1,646,237 805,215 (1,366,704)
Increase (decrease) in
valuation allowance....... (1,573,833) (797,651) 1,237,437
Allowance for obsolete
inventory................. (4,200) (16,800) -0-
Alternative minimum tax
credits................... (79,007) (41,431) -0-
Investment tax credits...... -0- (86,294) -0-
Allowance for boat repurchases -0- 17,909 -0-
----------- ----------- ----------
Net deferred tax expense....$ -0- $ -0- $ -0-
=========== =========== ==========
Deferred income tax expense results primarily from the
reversal of temporary timing differences between tax and financial
statement income.
-45-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes (Continued).
A reconciliation of income tax expense at the statutory rate
to income tax expense at the Company's effective rate is as
follows:
June 30,
1996 1995 1994
Computed tax at the expected
federal statutory rate...... 34.00% 34.00% 34.00%
Excess of tax over financial
accounting depreciation..... .43 (3.16) 8.94
Warranty reserves............. .10 1.67 (.87)
State income taxes, net of
federal benefit............. 5.28 5.28 5.28
Accrued vacation.............. .09 .24 (.06)
Bad debt reserve.............. (.03) (.06) (.28)
Deferred sales and cost, net.. (.14) (4.62) (2.65)
Excess contributions
carryforwards............... -0- (.06) (.02)
(Increase) decrease in
NOL carryforwards........... (38.82) (37.59) (43.10)
Obsolete inventory reserve.... .10 .78 -0-
Allowance for boat repurchases -0- (.84) -0-
Alternative minimum tax credits 1.86 1.93 -0-
Dealer incentive interest reserve (.99) (.34) -0-
Investment tax credits........ -0- 4.03 -0-
Sec. 263A inventory adjustment .29 .78 (1.24)
--------- --------- ---------
Effective income tax rates.... 2.17% 2.04% 0.00%
========= ========= =========
The following temporary differences gave rise to the deferred
tax asset (liability) at June 30, 1996 and 1995:
June 30,
1996 1995
Excess of tax over financial
accounting depreciation.............. $ (893,349) $(911,479)
Warranty reserve........................ 172,200 168,000
Obsolete inventory reserve.............. 42,000 37,800
Accrued vacations....................... 39,957 36,192
Allowance for boat repurchases.......... 87,091 87,091
Dealer incentive interest reserves...... 21,000 63,000
Bad debt reserve........................ 11,340 12,600
Deferred sales and cost, net............ -0- 5,942
Inventory adjustments - Sec. 253A....... 118,626 106,322
NOL carryforwards....................... 1,218,548 2,864,785
Alternative minimum tax credits......... 120,438 41,431
Investment tax credits.................. 86,294 86,294
-46-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Research and Development.
The Company expenses the costs of researching and developing
new products and components as the costs are incurred. Research
and development costs are included in the cost of sales and
amounted to $234,425 for Fiscal 1996, $134,828 for Fiscal 1995,
and $157,433 for Fiscal 1994.
Note 9. Commitments and Contingencies.
The Company entered into a one-year employment agreement in
1989 with its Chairman, Mr. R.M. Fountain, Jr. The a