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FOUNTAIN POWERBOAT INDUSTRIES, INC.
FORM 10-K
ANNUAL REPORT
FOR THE YEAR ENDED JUNE 30, 1997
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, 1997
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 (IRS Employer
of incorporation) Identification
No.)
Post Office Drawer 457, Whichard's Beach Road.,
Washington, NC 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 requirement for the past 90 day.
[ 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. [X ]Yes [ ]No
-2-
The aggregate market value of the voting stock held by
non-affiliates of the registrant was $ 30,981,540 at October
7, 1997 based upon a closing price of $15.00 per share on
such date for the Company's Common Stock.
As of October 7, 1997 there were 4,725,108 shares of
the Company's Common Stock issued of which 15,000 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.
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 a new, high
performance hull design for its boats. These new "positive-
lift" designs increase speed significantly and gives a
softer ride 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.
-3-
All of the Company's sport boats, ranging from 25' to
51' are of inboard/outdrive or surface drive design. They
are propelled by single, twin, or triple gasoline (or
diesel) engines ranging from 415 HP to more than 1,000 HP
each. Fountain also builds custom racing boats designed
specifically for competition. The Company also produces
outboard powered center consoles and outboard or stern drive
cabin model offshore sport fishing boats ranging from 25'
through 32'. Furthermore, the Company builds 29', 32', 38'
and 47' sport cruisers. By February, 1998, the company will
introduce a Super Cruiser, 65 foot in length with a 16'
beam.
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' Super boat and 42'
manufacturer's Super-Vee boats which won 8 out of 10 races
in a recent twelve month period. The model features a walk-
in cabin, enclosed head with shower, complete galley with
refrigerator and microwave among it's 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 70 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
$348,000 to $603,000.
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 $364,000 to $618,000.
As of August, 1997, the 42' Lightning Sport Boat has
been redesigned and restyled and operates at maximum speeds
of 75 to 100 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 form $222,000 to $386,000, 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 the
boat is from $221,000 to $375,000.
-4-
The 38' Fever Sport Boat operates at maximum speeds of
between 70 and 100 mph. Its retail price ranges from
$201,000 to $354,000, 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 70 and
100 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 25' 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 $163,000 to $202,000, 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 the 35' model. Depending primarily upon the
customer's choice of engines, the retail price of this boat
is from $132,000 to $163,000.
The 29' Fever single engine is one of the most popular
boats in our line. It operates at a maximum speed of 54 to
73 mph and retails between $85,000 and $106,000 depending on
engine size. It has great balance and speed for a single
engine and for its size really handles the big waters.
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 $73,000 to $94,000.
In 1990, 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 has won the Southern
Kingfish Association's World Championship for five of the
last seven years and has won more than 50% of the top ten
positions over the same period.
In Fiscal 1992, Fountain added substantially to its
sport fishing boat line. An all new 29' twin engine center
console model and an all new 25' 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.
-5-
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 25' and
29' 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 29' walk around cabin model fishing
boats with inboard power.
For Fiscal 1998, the Company plans to introduce two all
new surface drive sport boats, the 46' and 51' Lightning.
These boats will come with the Company's new second
generation positive lift hulls. The 42' Lightning is also
new for 1998. This will have the new style deck with full
wrap around windshield and canvas top. These boats also
have an all new positive lift hull which will increase
speed, stability and ride comfort. Fountain will also
launch into the yacht market with the introduction of the
all new 65' Supercruiser. This performance yacht will be
much faster than the competition, while still providing all
the comforts of a luxury yacht through the use of Fountain's
all new super ventilated positive lift hull equipped with
Fountain's all new Surface Drive System.
During the last quarter of Fiscal 1997, the Company
introduced the Fountain Drive System. Fountain developed
this state of the art drive system which will revolutionize
performance boating. This new technology matches Fountain's
Super Ventilated Positive Lift Hull with a highly efficient
surface drive system. Born from the Fountain's racing
heritage, this revolutionary system offers increased speed
and efficiency, better rough water handling, stainless steel
components to minimize corrosion, greater horsepower
capacity, less component parts and gears and better transfer
of horsepower to the water. Fountain continues to strive to
offer the latest in performance technology in each and every
boat we build. Never before has a production boat company
offered such technology to its customers.
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
1997 1996 1995
Sport boats ....... 336 295 293
Sport cruisers .... 14 20 15
Sport fishing boats 128 109 93
------ ------ -----
Total 478 424 401
==== ==== ====
-6-
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 1997 $635,652 $1,684,274
Fiscal 1996 234,425 878,513
Fiscal 1995 134,828 767,102
For Fiscal 1998, planned design research and
development expenses are $ 750,000 and plug and mold
construction expenditures are approximately $ 3,000,000.
These expenditures will be primarily to complete the tooling
needed to produce three luxury high performance sport
yachts, a 51' model, a 58' model and a 65' model. Also,
work will be started on a 35' wide beam surface drive cabin
sport fishing boat. Tooling expenditures will also be made
for other modifications to existing models.
Manufacturing capacity is sufficient to accommodate
approximately 40 to 50 boats in various stages of
construction at any one time. The Company shipped 478 boats
in Fiscal 1997, 424 boats in Fiscal 1996 and 401 boats in
Fiscal 1995.
Construction of a boat currently made, depending on
size, takes approximately three to five weeks. Construction
of the all new wide beam Super Cruisers should be as
follows: A 51' by December, 1997, the 65' by February, 1998
and the 58' by April, 1998. The Company currently has the
ability to manufacture approximately 600 boats per year with
additional personnel. The Company can further 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 vinylester
resins and high quality stitched, bi-directional and quad-
directional fiberglass over a foam core in the 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, light core in
between. The "laying-up" of fiberglass 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
stronger, better bonding, and more flexible than the
polyester used by most other fiberglass boat manufacturers.
Decks are bonded to the hulls using bonding agents, rivets,
screw, and fiberglass to achieve a strong, unitized
construction.
-7-
As one of the most highly integrated manufacturers in
the marine industry, the Company manufactures many metal,
plexiglass, plastic, and small parts (such as gas tanks,
seat frames, steering systems, instrument panels, bow rails,
brackets, T-tops, and windscreens) to assure that its
quality standards are met. In addition, the company also
manufacturers all of its upholstery to its own custom
specifications and benefits from lower cost, receives parts
just in time for assembly and achieves savings of several
million dollars. 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 discount.
Certain materials used in boat manufacturing, including
the resins used to make the decks and hulls, are toxic,
flammable, corrosive, or reactive and are classified by the
federal and state governments as "hazardous materials."
Control of these substances is regulated by the
Environmental Protection Agency and state pollution control
agencies which require reports and inspect facilities to
monitor compliance with their regulations. The Company's
cost of compliance with environmental regulations has not
been material. The Company's manufacturing facilities are
regularly inspected by the Occupational Safety and Health
Administration and by state and local inspection agencies
and departments. The Company believes that its facilities
comply with substantially all regulations. The Company,
however, has been informed that it may incur or may have
incurred liability for remediation of ground water
contamination at two hazardous waste disposal sites
resulting from the disposal of a hazardous substance at
those sites by a third-party contractor of the Subsidiary.
(See item 3. Legal Proceedings.)
Recreational power boats must be certified by the
manufacturer to meet U.S. Coast Guard specifications. In
addition, their safety is subject to federal regulation
under the Boat Safety Act of 1971, as amended, pursuant to
which boat manufacturers may be required to recall products
for replacement of parts or components that have
demonstrated defects affection 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 14
additional dealers throughout the world. These dealers are
not exclusive to the Company and carry the boats of other
companies including some which may be competitive with the
Company's products. The territories served by any dealer
are not exclusive to the dealer. However, the Company uses
discretion in locating new dealers in an effort to protect
the interests of the existing dealers.
-8-
Following is a table of sales by geographic area for
the last three fiscal years:
Fiscal`97 Fiscal '96 Fiscal `95
United States .. $48,346,485 $40,545,235 $38,220,232
Canada, Mexico, Central
and South America ....$1,047,913 $658,738 $ -0-
Europe and
the Middle East .... $752,801 $394,078 $309,165
Asia ............... $ 367,126 $ -0- $ 197,932
-------- -------- --------
Total ........ $50,514,325 $41,598,051 $38,727,329
======== ======== =======
The Company has a growing international advertising
program and is seeking additional distribution for its
products in foreign markets through its own sales
representative who is establishing new dealers at a rapid
pace. 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 fluctuation. The Company
believes that within several years, foreign sales could
account for up to 25% of its total sales.
For Fiscal 1997 one dealer accounted for 6.6% of sales
and two other dealers each accounted for more than 5% of
sales. 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. As sales continue to grow through more dealers,
it is reasonable to assume the Company will grow less
dependent on any one dealer.
Field sales representatives call upon existing dealers
and develop new dealers. The field sales force is headed by
the Fountain's National Director of Sales who is responsible
for developing a full dealer organization for sport boats,
sport cruisers, sport fishing boats and now yachts. The
Company is seeking to establish separate sport boat and
fishing boat dealers in most marketing areas due to the
specialization of each type of boat and the different sales
programs required.
-9-
Although a sales order can be cancelled at any time,
most boats are pre-sold to a dealer before entering the
production line. The Company generally has been able to
sell to another dealer any boat for which the order has been
cancelled. 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.
For the 1998 model year (which commenced July 1, 1997),
the Company had made arrangements to pay all interest
charged to dealers 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 rates set
by the lender. The dealers will make curtailment payments
(principal payments) in the boats as required by their
particular commercial lenders. Similar sales promotion
programs were in effect during Fiscal 1997, 1996, and 1995.
Each dealer's floor plan credit facilities are secured
by the dealer's inventory, letters of credit, and perhaps,
other personal and real property. In connection with the
dealer's 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.
-10-
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,
the Company developed a racing program. This entailed the
construction of specially designed race boats which have
been entered in major national offshore boat races.
Fountain race boats won many major races. Additionally,
Fountain single, twin and triple engine racing boats
currently own world speed records. The result of this
record of victories and speed records by a major
manufacturer is that the Company's products won a reputation
for very fast and safe hull design, durable construction,
and mechanical reliability.
The Company believes that the favorable publicity
generated by its record setting and 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. From fiscal 1992 through fiscal 1996,
the Company had limited its participation in racing to
partial support of customer owned and driven Fountain race
boats. Also, the Company Founder and C.E.O., Reggie
Fountain, has raced a limited schedule since 1992, and won
numerous races in both factory and customer boats; he has
also set numerous speed records in both factory and customer
boats. These Fountain race boats were, in general, very
successful in the various racing circuits in which they
competed. The Company commenced construction of two race
boats during Fiscal 1997 and intends to again implement a
racing program during Fiscal 1998.
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 Fountain fishing
team has continued to place high in the final standings
winning five of the last seven S.K.A. world championships.
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.
-11-
Sales Order Backlog.
The sales order backlog as of the end of September 1997
was for approximately 200 boats having an estimated sales
value of $20,000,000. This compares to an equivalent
backlog at this time in September, 1996 and September, 1995.
During the last two years the Company's lower priced fishing
boat lines have led sales increases holding down the average
unit price. Later this year, with the formal introduction
of the new 46', 51' and 65' models which have not been
included in backlog numbers, the Company believes that its
average unit price and margins will increase significantly.
The Company's Fall Dealer Allocation Program is designed to
promote early replenishment of the stock in Dealer
inventories depleted throughout the spring and summer.
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 warrantied
by the engine manufacturer. Warranty expenses of $707,202
were incurred in Fiscal 1997 and were charged-off against
net income. A reserve for warranty expenses estimated to be
incurred in future years had been recorded and amounted to
$500,000 at June 30, 1997. For 1996, warranty costs were
only six-tenths of one (1) percent. Warranty cost as a
percentage of sales are among the lowest in the marine
industry thereby reflecting the Company's superior
construction of its boats.
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.
The Company believes that in its market segment, speed,
performance, quality, image, and safety are the main
competitive factors, with styling and price being somewhat
lesser considerations.
Their market for fishing boats is much larger than the
one for sport boats, but there are many more fishing boat
manufacturers than there are sport boat manufacturers. With
its winning image, Fountain will always sell its projected
budget.
-12-
For High Performance Surface Drive Super Ventilated
Positive Lift wide beam cruisers, we believe there is a
ready market waiting for our products. It is our belief
that there are no competitors that can match us in this
highly profitable area.
Employees.
As of September 30, 1997 the Company had 331 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. About one dozen are employed to expand
and maintain our facilities. The balance were engaged in
manufacturing operation. None of the Company's employees
are party to a collective bargaining agreement. The Company
considers its employee relations to be satisfactory. The
Company is an affirmative action, equal opportunity
employer.
Item 2. Properties.
The Company's executive offices and manufacturing
facilities are located on 62 acres along the Pamlico River
in Beaufort County, North Carolina. All of the land,
buildings and improvements are owned by the Company and are
held as collateral on notes and mortgages payable having a
balance of $8,273,378 at June 30, 1997
The operating facility contains seven buildings
totaling 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 Lamination, Assembly
& Engineering Offices.
Building 6 .......... 18,500 Mold storage.
Building 7 .......... 12,000 Tooling, Racing, service,
and warranty.
Building 8 .......... 8,750 Lamination extension
area.
Building 9 4,500 Mold Storage
Building 10 25,200 Mold Storage, Mold Prep
and Service
Building 11 10,500 Manufacturing and Tooling
======
Total ................. 204,200
-13-
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.
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 ("NCSEHNR") 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 form the EPA dated
July 10, 1991), resulting from the disposal of hazardous
substance 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
are 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 acknowledgment of liability, approximately $3,279
has been paid by the Company to date
as a non-performing cash-out participant in an EPA-
supervised response and removal program at the Elkton,
Maryland site, and in a NCSEHNR-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
water 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 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 was for
$1,000,000 if the claim was resolved prior to the institution
of a lawsuit, which also has been threatened. The Company
put its primary and umbrella liability insurance carriers on
notice after receiving the demand. On January 2, 1997, the
Company filed suit in U.S. District Court for the Eastern
District of North Carolina against the basketball player,
his affiliates and Spencer Communications (a company owned
by a director of the Company) claiming it did not know of or
approve of the ad using the basketball player's name. The
Company withdrew the ad after being contacted by the
basketball player's attorney. The Company further contends
that it did not state that the player was endorsing the
product and that the player has no legal claim to the usage
of a certain word within the advertisment. The Company
further claims that the player's counsel used coercion by
threatening suit and that the Company should be awarded the
costs of suit. On May 8, 1997, the player and his company
filed a response with counterclaim and crossclaim claiming
trademark infringement and unfair competition seeking
damages for $10,000,000. The Company filed a reply and
seeks dismissal. Shortly after the Company filed suit in
North Carolina, the player and an affiliated company filed suit
in the Northern District of Illinois. This matter was later
transferred to North Carolina and the Company has moved to
dismiss this suit with prejudice because it is repetitious
of the counterclaims in the Company's declaratory judgment
suit. (See Note 10)
There were seven product liability lawsuits brought
against the Company at June 30, 1997. 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.
The Company was audited during Fiscal 1997 by the State
of North Carolina under the Escheat and Unclaimed Property
Statute. The State Treasurer's audit report was received
and a small amount of escheated funds were paid. However,
the Company disputed approximately $65,000 of remaining
escheated property by appealing to the Administrative office
of the State of North Carolina. The dispute has been
resolved by the Company's payment of $3,090 to the State.
-15-
The Company filed suit on July 21, 1997 against Marcia
K. Garbrecht, Gary D. Garbrecht, Mach, Inc., and Mach
performance, Inc. Gary D. Garbrecht is a former director of
the Company and together with his wife owned Mach, Inc. and
Mach Performance, Inc. The Company acquired Mach
Performance, Inc. which manufactured propellers in order to
effectuate the Company's goals of vertical integration and
because the directors were convinced by Gary Garbrecht that
Mach Performance, Inc.'s propeller sales would grow
significantly. As a director of the Company, Gary Garbrecht
represented that Mach Performance, Inc.'s sales would exceed
$3(three)million per year. He and his wife also made
representations directly to the Company and to independent
auditors and appraisers hired to determine the value of Mach
Performance, Inc. Among those representations were
representations that Mach Performance did not have
agreements to repurchase assets previously sold, That
inventory was currently valued according to GAAP, that
warranty claims were not significant enough to require
accounting contingencies, and that the product manufactured
by mach Performance, Inc. was of high quality. After the
acquisition and the move of production to Washington, N.C.
during the spring of 1997, the Company learned that Mach
Performance, Inc. did have repurchase agreements, that its
warranty claims were significant, and that the propellers
manufactured by its equipment and processes were not of high
quality. Gary Garbrecht resigned as an employee of the
Company in April and resigned as a director in May. After
investigating the warranty claims and the quality of the
propellers built through Mach Performance, Inc.'s equipment
and processes, the Company notified the Garbrechts that the
contracts involved in and resulting from the acquisition
were rescinded. Because the Garbrechts refused to recognize
the rescission and to return the consideration they
received, the Company filed suit.This suit seeks rescission
of an Agreement and Plan of Reorganization entered into with
the Garbrechts in 1996 for the Company's acquisition of Mach
Performance, Inc. The Company seeks rescission of the
acquisition and merger agreement and voidance of the
resulting transaction on grounds of fraud and material
breach of contract. Federal securities fraud claims are
based on the Garbrechts' alleged deceptive acts in violation
of Section 10(b) of the Securities Exchange Act of 1934,
arising from the sale of Mach Performance, Inc. capital
stock to the Company in exchange for the Company's issuance
to them of 127,500 new restricted shares of its common stock
valued at $1,041,250. Other claims include breach of
fiduciary duty, based on North Carolina law, arising from
Mr. Garbrecht's alleged material misrepresentations and
omissions while serving as a director of the Company during
the time when the acquisition and merger agreement was
reached. The Company is seeking a preliminary and permanent
injunction against the sale or transfer of its 127,500 new
restricted common shares acquired by the Garbrechts in the
transaction, and is seeking monetary damages, including
trebled and punitive damages in an unspecified amount, for
the claims stated above, as well as for a number of alleged
actions by Mr. Garbrecht after the acquisition, including
usurpation of corporate opportunities and conversion. The
Garbrechts and Mach, Inc. have filed counterclaims alleging
breach of Gary D. Garbrecht's employment contract, breach of
the merger contract, and requesting a declaratory judgment
regarding the parties' rights and responsibilities under all
the contracts involved in this transaction. The company
intends to vigorously pursue its claims against the
Garbrechts and their co-defendants in this suit, and to
defend vigorously against the counterclaims brought by the
Garbrechts and their affiliates.
-16-
On September 3, 1997, the company filed suit against
P.R.O.P. Tour, Inc., an affiliate of Gary Gary Garbrecht.
P.R.O.P. tour Inc. runs a Formula One racing tour of which
the Company is the major sponsor. This sponsorship had two
components, a sponsorship of a Formula One race held in
Washington, N.C. and a separate sponsorship of the entire
series of races which made the Company's subsidiary,
Fountain Powerboats, Inc., the title sponsor of the series.
The suit results from P.R.O.P. Tour Inc.'s repeated claims
that it was damaged by alleged breaches of the sponsorship
agreement for the Washington, N.C. race by Fountain
Powerboats, Inc. The Company decided to seek a declaratory
judgment regarding its obligations under the Washington,
N.C. race contract. The suit also includes claims by the
Company involving the series sponsorship agreement based on
P.R.O.P. Tour, Inc.'s repudiation of its obligations to
provide the Company primary media exposure according to the
terms of that agreement.
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 1997.
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
The Company's common stock, $.01 per 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 relation to the common stock for
the past quarter indicated. Amounts shown reflect high and
low sales prices of the common stock on the Nasdaq National
Market System since August 28, 1996 and the American Stock
Exchange prior to such date:
Quarter Ended High Low
September 30, 1994 ... $2.92 $1.50
December 31, 1994 .. 4.42 1.83
March 31, 1995 4.83 3.50
June 30, 1995 ... 4.17 3.00
September 30, 1995 ... 5.50 3.59
December 31, 1995 ... 4.09 3.50
March 31, 1996 . 4.00 3.50
June 30, 1996 .... 7.92 3.79
September 30, 1996 ........ 8.08 5.69
December 31, 1996 . ...12.33 7.75
March 31, 1997 .. 16.08 10.65
June 30, 1997 ... 13.16 9.50
-17-
The Company has not declared or paid any cash dividends
since its inception. Any decision as to the future payment
of dividends will depend on the Company's earning, financial
position, and such other factors as the Board of Directors
deems relevant.
The number of shareholders of record for the Company's
common stock as of September 30, 1997 was approximately
1500.
-18-
Item 6. Selected Financial Data
Fountain Powerboat Industries, Inc. and Subsidiary
Selected Financial Data
Fiscal Years 1993 through 1997
Year Ended June 30,
Operations Statement Data: ------------------------------------------
- ----------------------
(Period Ended) 1997 1996 1995 1994 1993
- ----------------- ------ ----- ------ ------ ------
Sales $50,514,325 $41,598,051 $38,727,329 $22,240,212 $27,232,360
Income from continuing
operations $4,069,832 $3,680,034 $2,047,876 $ (2,993,344) $ 146,433
Loss from discontinued
operations $2,829,951 - - - -
Net Income
(loss) $ 1,239,951 $ 3,680,034 $ 2,047,876 $(2,993,344) $ 146,433
Income (loss) per share $.25 $ .81 $ .45 $( .67) $.03
Weight average shares
outstanding .. 4,995,154 4,528,608 4,528,608 4,452,856 4,398,750
Fully diluted earnings (loss)
per share ... $ N/A $ .77 $ .45 $ N/A $N/A
Fully diluted weighted average
shares outstanding N/A 4,800,238 4,539,694 N/A N/A
Balance Sheet Data
(At Period End)
- -----------------------------------
Current assets.. $10,997,133 $8,378,341 $6,185,727 $5,365,619 $5,011,591
Total Assets . $23,713,896 $18,498,104 $16,334,757 $16,266,787 $16,211,026
Current Liabilities $6,305,212 $6,180,476 $6,081,298 $14,976,570 $5,920,743
Long-term debt.. $8,047,039 $5,433,184 $7,049,049 $133,683 $6,440,403
Stockholders'
equity (1) .. $ 9,361,645 $6,884,444 $3,204,410 $1,156,534 $3,849,880
- -------------------
(1) The Company has not paid any dividends since its inception.
-19-
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 dealers defaults
under his credit
arrangement. 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
customers' 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, 1995, the Company estimated
the balances in
deferred sales to be $197,541 and in deferred
cost of sales
to be $183,393. 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, 1994 and June 30, 1995 had the
effect of increasing
the gross margin on sales and net income
after taxes for the
year by $235,852 ($.05 per share).
At June 30, 1997 and 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, 1997, and
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. There
was no such effect on
Fiscal 1997.
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
$8,600,000 at June 30,
1997, $7,200,000 at June 30, 1996 and
$7,700,000 at June 30,
1995 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. Additionally, at
June 30, 1997 and June 30, 1996
the Company had recorded a
$200,000, and $207,359 reserve for
losses which may be
reasonably expected to be incurred
on boat repurchases in
future years.
-20-
Business Environment.
The company's Sales have continued
to increase each
year. Sales for 1997 were $50,514,325,
a 21% increase from
Sales for Fiscal 1996. Improved sales
volume for Fiscal
1997 was in line with a general
improvements is 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 1997.
Sales for Fiscal 1996 were
$41,598,051, a 7% increase
from sales for Fiscal 1995. Sales
for Fiscal 1995 were
$38,727,329.
In Fiscal 1997, 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 in
increased sales for Fiscal 1997.
Typically, each dealer's floor
plan credit facilities
are secured by the dealer's inventory,
and, perhaps, the dealers letter of credit or 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 repurchases, 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 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 1997, 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, 1997 and 1996,
the Company had recorded a $200,000,
and $207,359 reserve
for losses which may be reasonably
expected to be incurred
on boat repurchases in future years.
Results of Operations.
Net income for Fiscal 1997
was $1,239,951 or $.25 per
share outstanding. This compares
to net income for Fiscal
1996 of $3,680,034, or $.81 per
share. The change in net
income was due to a discontinued
operations loss and write-
down of assets of a Subsidiary,
Fountain Power, Inc. for
$2,829,881.(See Note #10 and Note #15).
-21-
Income from continuing operations
(before the loss and
writedown due to Fountain Power, Inc,)
increased in Fiscal
1997 to $4,069,832 or 10% over fiscal
1996. Income from
continuing operations for Fiscal 1996
was $3,680,034. The
improvement in income from continuing
operations for Fiscal
1997 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.
Net income for Fiscal 1996 was up
due to an improvement
in sales volume, production efficiencies
and a favorable
sales mix. Also, income was bolstered
by inclusion of a non-
recurring $800,000 discount earned
for the early retirement
of indebtedness to a vendor.
Sales were $41,598,051 for
Fiscal 1996, or up by 7% from the previous year.
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. 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 resulting in
a loss for the year.
In Fiscal 1994, at the Miami
boat show in mid-February,
the new "positive-lift" hull
design was introduced. This
new hull design significantly
increases speed, improves
handling, and results in much
better fuel economy.
Subsequent to the introduction of
this new design, the
Company received many orders for
large, profitable sport
boats having the new "positive-lift" hull.
As the Company's sales order
volume improved, it began
to greatly increase its level
of purchases of high
performance engines and other
critical components.
Unfortunately, the high performance
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 26.8% in Fiscal 1997
from 22.3% in Fiscal
1996 and 20.1% in 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, more integrated manufacturing operations
and production efficiencies
also contributed to an
improved gross margin for Fiscal 1997.
Depreciation expense was $1,642,969
for Fiscal 1997,
$1,536,479 for Fiscal 1996, and
$1,628,867 for Fiscal 1995.
Depreciation expense by asset category was as follows:
-22-
Fiscal Fiscal Fiscal
1997 1996 1995
Land improvements $ 22,468 $20,595 $18,849
Buildings $ 231,546 $260,580 $269,460
Molds & plugs $1,041,211 $980,104 $1,076,746
Machinery & Equipment $295,829 $ 225,654 $216,089
Furniture & fixtures $24,572 $11,114 $12,094
Transportation equipment $27,343 $ 38,432 $35,629
------- ------- -------
Total $1,642,969 $1,536,479 $ 1,628,867
======== ======== ========
The $ 92,388 decrease in
depreciation expense for
Fiscal 1996 from Fiscal 1995 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 1997 and Fiscal 1996.
Fiscal 1997 Fiscal 1996
Buildings ........ $ 360,231 $ 225,781
Land and Improvements...$ 315,605 -
Molds and plugs ...... $ 1,684,274 $ 878,513
Construction in Progress...$ 809,506 -
Machinery & equipment ..$ 649,895 $ 376,241
Furniture & fixtures .. $ 18,767 $ 6,270
Transportation equipment .$ 41,718 $ (33,925)
----------- ----------
Total $ 3,879,996 $1,482,880
========= =========
-23-
Selling expenses were $6,463,875
for Fiscal 1997,
$4,285,923 for Fiscal 1996, and $3,897,086
for Fiscal 1995.
The Company continued to promote its
products primarily by
magazine advertising in Fiscal 1997.
Advertising expense
was $1,267,822 for Fiscal 1997,
$849,627 for Fiscal 1996,
and $977,787 for Fiscal 1995.
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 $1,256,631
in Fiscal 1997, $867,743 in Fiscal
1996 and $576,741 in
Fiscal 1995. 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
through Fiscal 1997. The
Company commenced construction of two
race boats during late
Fiscal 1997 and intends to again
implement a racing program
during Fiscal 1998.
Selling expenses compared for
the past three fiscal
years were as follows:
Fiscal 1997 Fiscal 1996 Fiscal 1995
Offshore racing and
tournament fishing ..$1,256,631 $867,743 $576,741
Advertising $1,267,822 $849,627 $977,787
Salaries & commissions $1,029,810 $ 578,170 $752,206
Boat Shows ... . $452,859 $285,321 $388,710
Dealer incentives $1,286,649 $ 954,234 $938,563
Other selling expenses $1,170,104 $ 750,828 $263,079
----------- ---------- ---------
Total $ 6,463,875 $4,285,923 $3,897,006
======= ========= =========
General and administrative
expenses include the
finance, accounting, legal, personnel,
data processing, and
administrative operating expenses
of the Company. These
expenses were $2,553,870 for
Fiscal 1997, $1,904,988 for
Fiscal 1996, and $1,415,637 for
Fiscal 1995. Most of the
increase for Fiscal 1997 over
Fiscal 1996 was in executive
compensation, travel expense, and attorneys' fees.
Interest expense was $557,768
for Fiscal 1997, $747,337
for Fiscal 1996, and $989,359 for
Fiscal 1995. The decrease
in interest expense for Fiscal 1997
is primarily from lower
interest rates on long term debt.
-24-
No fixed assets were sold in
Fiscal 1997. 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.
Included in other income for
Fiscal 1997 are consulting
fees earned by the use of Mr.
Fountain amounting to
$260,000, and these have been
assigned to the company.
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 the Company by the
use of Mr. Fountain. These
consulting fees amounted to
$452,911 for Fiscal 1995. Under
the terms of the current
consulting contract, the consulting
fees ended entirely
after Fiscal 1997.
Liquidity and Financial Resources.
Operations in Fiscal 1997
provided $5,474,162 in cash.
Net income plus depreciation expense
provided cash amounting
to $2,882,920. However, relatively
large amounts were
needed to finance investment
activities in purchasing
property, plant, equipment and
molds. The loss from
operations of the discontinued
subsidiaries, Fountain Power,
Inc. and Mach Performance, Inc.
also contributed to the use
of cash (See Note 15).
The ending cash balance was
$3,690,658.
Operations for the prior
fiscal year 1996, provided
$3,935,379 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.
During Fiscal year 1995
operations consumed $1,133,240
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.
Investing activities for
Fiscal 1997 required
$4,936,129, including expenditures
for additional molds and
plugs amounting to $1,684,274 and
for property, plant and
equipment for $2,249,670. Also,
increases in other assets
required $306,030.
Investing activities for
Fiscal 1996 required
$1,484,306 including expenditures
for additional molds and
plugs amounting to $878,513 and
for other property, plant
and equipment amounting to $604,367.
Investing activities for
Fiscal 1995 required
$1,169,744, including expenditures for
additional molds and
plugs amounting to $767,102 and for
other property, plant,
and equipment amounting to $431,137.
-25-
Financing activities for
Fiscal 1997 provided
$1,095,851. Included in this amount
are proceeds from
issuance of notes payable and long
term debt to G. E.
Capital Corporation for $8,500,000 and
the retirement of all
previous long term debt of $6,427,060.
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
Fiscal 1995 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 other amounted
to $928,632.
The net increase in
cash for Fiscal 1997 was
$2,330,039. For Fiscal 1998, the
Company anticipates that
the $3,690,658 beginning cash
balance and the amounts
expected to be provided from
1997 operations will be
sufficient to meet most of the
Company's liquidity needs of
the year. However, planned capital
expenditures for Fiscal
1998 are substantially greater
than for Fiscal 1997. The
Company intends to increase
its production capacity,
principally for new products,
in Fiscal 1998. Therefore,
the Company is reviewing
various financing alternatives to
provide for its increased growth.
Effective December 31, 1996,
the Company repaid its
indebtedness to MetLife
Capital Corporation, Deutsche
Financial Services, and others with
a new $10,000,000 long
term loan agreement with General
Electric Capital
Corporation, of which $7,500,000 was
initially disbursed. A
second disbursement was made during
the year for $1,000,000
bringing the total outstanding as
of June 30, 1997 to
$8,500,000 less scheduled monthly principal
reductions.
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 to
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 as
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.
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
ompany 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.
-26-
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 its
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 the 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 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 it 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.
-27-
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 dealers,
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
strategies 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.
Item 8. Financial Statements and Supplementary Data.
The financial statements are set
forth immediately following
the signature page.
Item 9. Changes in and
There were no changes in
or disagreements with the
independent auditors on accounting
and financial disclosure
matters.
Part III
Item 10. Directors and Executive Officers
Registrant.
The Current directors of
Registrant and its Subsidiary
are as Follows:
REGINALD M. FOUNTAIN, JR., age 57,
founded the Company's
Subsidiary during 1979 and has served
as its Chief Executive
Officer from its organization. He
became a director and
President of the Company upon its
acquisition of the
Subsidiary in August, 1986. Mr. Fountain presently serves
as Chairman, President, Chief Executive
Officer, and Chief
Operating Officer of the Company and
its Subsidiary. From
1971 to 1979, Mr. Fountain was a
world class race boat
driver, and was the Unlimited Class
World Champion in 1976
and 1978.
REGGIE FOUNTAIN - A BIOGRAPHY
Whether it's racing, building the world's premier
high-performance sport boats, investing in real estate
or selling life insurance, Reggie Fountain has always
been a winner at everything he does.
One only needs to spend a few minutes with Reggie
Fountain to sense the excitement of an American success
story come true. The man loves his work.
Whether it's beating a star-studded fleet of
world-class offshore racers, personally researching,
developing and manufacturing his renowned high-performance
pleasure boats, earning a business and law degree at
the University of North Carolina, joining the Million
Dollar Round Table of Life Insurance Salesmen or
completing a real estate deal in his native North
Carolina, Fountain always finds a way to win.
WORLD CHAMPION TUNNEL BOAT RACER
Reggie entered his first boat race in 1954
at the age of 14, moving quickly into professional
competition in 1970. A year later, while driving
for Glastron Boats, he was named the Houston Gulf
Coast Marathon Association Champion and the Outstanding
New Driver at the lake Havasu World Championships.
Relying on a keen sense for speed, a superstar
racing career was under way.
The following year, operating as an independent,
Fountain made boat racing history by setting two world
records earning three national closed-course
championships all in one day at the Marine Stadium
in Miami. Fountain's dominance as an independent
eventually earned him a place on the vaunted Mercury
Factory Team where he teamed with Bill Seebold and
Earl Bentz to become the most dominant trio in
tunnel outboard history.
Sporting the Mercury corporate colors, Fountain
won an amazing 20 of 31 races entered in 1973.
In 1975, he followed up by winning 10 of 19 events,
but it was the bicentennial year of 1976 that will
be remembered as the pinnacle of Fountain's tunnel
racing career. He finished first in 15 of 23 races
entered, capped by a well deserved title at the St.
Louis OZ World Championships. Fountain won the
prestigious St. Louis race again in 1978,
then retired from active competition the
following year to pursue an extensive R&D
testing program commissioned by Mercury Marine
while continuing to manage his growing real
estate interests.
FOUNTAIN POWERBOATS - THE BEST ON THE WATER
Before Reggie could begin MerCruiser's
testing program, he needed a boat. After
evaluating the market, he contracted with
Bill Farmer of Excalibur Boats in Sarasota,
Florida to use one of his 31' V-bottoms.
As the testing program progressed, Fountain
couldn't resist the temptation to tinker
with the boat. A little sandpaper on the
running surface netted a speed increase.
Hand-crafted putty strakes improved handling
and further modifications on the stern drive
height improved acceleration. Before long,
Reggie had made so many changes the boat no
longer resembled the original.
Encouraged by the noteworthy performance
gains, Fountain next attacked the deck and hull
design. As the development process continued,
Fountain noticed a growing market for the
high customized test boats. A short time
later, Fountain Powerboats was born in an
abandoned used car dealership just outside
Reggie's residence in Washington, North
Carolina near the Pamlico River.
FOUNTAIN POWERBOATS - ALWAYS ON THE GO
Growth has come rapidly at Fountain
Powerboats. What started in 1979 as a
10,000-square foot manufacturing facility
with eight employees and annual sales of
$515,000 has swelled to 200,000 square
feet, more than 300 employees and projected
sales for the 1995-96 model year in excess
of $45,000,000.
Likewise, Fountain's model line has
kept pace with the company's phenomenal
growth. Seventeen years after he started,
Fountain's Lightning Series includes 35',
42' and 47' offerings, while the award-winning
Fever Series features 27', 29', 32' and 38'
models. For cruising enthusiasts that want
more performance, Fountain's 32', 38' and 47'
Sports Cruisers are considered the best on
the water. And for those interested in getting
started in high-performance boating, Fountain
offers an award-winning 24' Competition Series.
In addition to his world-renowned sport boats,
fisherman can likewise enjoy Fountain's patented
brand of performance. Fountain entered the
bluewater fishing market at full strength in
1990. Today, the company's fishing fleet
included a diverse mix of boats from 25' to 32'
with either stern drive or outboard power in
center console, cuddy cabin and open bow configurations.
THE BEST ON THE WATER
From the outset, Fountain has insisted
on ultimate quality. A pioneer of space-age
laminates in the boating industry, Fountain
was among the first to use bi- and tri-directional
glass along with lightweight coring material.
Underneath, Fountain was one of the first to
successfully utilize a notch transom, pad
keel running surface for improved handling
and performance.
With Reggie at the helm, Fountain
Powerboats has gained an international
reputation as the world's premier high-performance
boat company. Fountain is the only builder
ever to earn Boat of the Year honors from
three different boating publications, including
Powerboat, Hot Boat and Boating. For 15
consecutive years, Fountain has been recognized
in Powerboat magazine's annual Awards of
Product Excellence program, including five
Offshore Boat of the Year awards - the most
recent in 1996. Furthermore, fishing boats
designed and built by Fountain have thoroughly
dominated competition on the Southern
Kingfish Association (SKA) tour like
no other builder in history. Anglers
in Fountain fishing boats have earned
firstplace overall honors four of the
five years, including Dave Workman's
back-to-back wins in 94'-955'. Further,
Team Fountain has never failed to place
at least five boats in the top ten spots
in the 2,000-member SKA.
A RETURN TO RACING
Certainly, a trophy case full of awards
and accolades have helped propel Fountain to
the forefront of the boating world but it's
been the achievement in offshore racing that
has truly separated Fountain from the rest
of the pack. After nearly a decade of
retirement from active competition, Reggie
Fountain returned to racing in 1990 to
campaign nationwide on the offshore circuit.
Not since the late Don Aronow has a man
designed, built, throttled and driven a
boat of his own make to such dominance on
the demanding offshore tour. Fountain
Powerboats is the only V-bottom builder
in the decade of the 90's to score a
first-place overall finish at a nationally
sanctioned offshore race. We've done it
more than a dozen times. Wellcraft,
Cigarette, Formula, Baja and Hustler
have a combined tally of zero. Further,
in a two-year stretch, Reggie Fountain
went undefeated in major offshore competition.
In addition to his complete
dominance on the racecourse, Fountain
has clearly established several times
that he builds the world's fastest, safest,
smoothest and best handling V-bottoms
on the water. In the last six years,
the most hotly contested prize on the
offshore circuit has been the kilo
record. Fountain started this seesaw
battle in 1991 with a 114.585-mph clocking
in the triple-engine 47-foot Superboat
Team Fountain. The Wellcraft got into
the act with a triple-engine 116.751-mph
blast of its own. Hell bent on returning
bragging rights to North Carolina, Fountain
upped the mark to 123.91 mph six month
later with the wrinkle that he did the
trick in a smaller, less powerful 42-foot
twin-engine boat. And then there's the
latest episode that Fountain will always
remember as icing on the cake literally.
Fountain's back to back 5/8th mile kilo
passes of 133.788 and 130.092 mph became
all the more noteworthy when you consider
they were recorded in a freezing sub-zero
snow flurry. The new 131.94-mph speed
marks the second time that Reggie has
used a twin-engine boat to break a record
held by a triple.
Perhaps Fountain's biggest milestone
achievement in offshore racing came in
New Orleans, LA, in 1990. Racing against
a star-studded fleet that included actors
Chuck Norris, Don Johnson, and Kurt
Russell, Fountain overcame amazing odds
and beat the entire field of hybrid
racing catamarans with his V-bottom.
The win was particularly sweet for
Fountain because heretofore V-bottoms
reputedly were no match for the
catamarans in slick water. To the
amazement of the "experts" Fountain
aced a fleet of the world's fastest
offshore cats in water conditions on
lake Ponchartrain that would've been
ideal for a barefoot ski tournament.
Two years later in 1992, Reggie,
throttling john Rebhan's Fountain 42'
Lightning, Ohio Steel, accomplished
the near impossible by capturing the
OPT World and National Championships
in Open V-bottom. Fountain also won
the APBA World Championship in
Manufacturer's Super Vee.
REGGIE FOUNTAIN - MR. FULL THROTTLE
Although the title on his
business card says, "Reggie Fountain,
Chief Executive Officer, Chairman of
the Board and President," it scarcely
touches upon the extent of his actual
involvement. Unlike any other CEO in
the performance boating industry,
Reggie Fountain is hands-on every step
of the way.
Drawing on over 37 years of
experience in all aspects of racing
and pleasure boating, Fountain personally
masterminds all engineering and new
product Research and Development.
Considered among the most innovative
minds in the boating world, Fountain
revolutionized the way we go fast on
the water in the late 70's when he
introduced his amazing notch-transom,
pad-keel running surface. Then in
1992, he took the state of the art
one giant step further when he
introduced Positive Lift a breakthrough
that added more than a 10 percent
performance increase to Fountain's
already superior top-end performance
while also improving handling and
cornering agility.
Once a mold is created,
Fountain performs all initial
on-the-water testing and then
collaborates with his staff on
interior design and graphic styling.
To this day, Fountain still logs
approximately 1,000 hours a year on the water.
Time permitting, Reggie continues
to offer personal instruction in
the finer points of operating a
high-performance boat to many of
the customers that visit his North
Carolina facility. Furthermore, he
personally tests many of his boats
prior to shipment to a dealer
network that expands to all
corners of the United States.
GARY E. MAZZA,III, age 59, became
a director of the
Company on December 28. 1993. Mr.
Mazza is a practicing
attorney in the business, tax and
international areas of the
law in Annapolis, Maryland. He also
practices law in New
York and Virginia. He is the Chairman
of Triangle Tractor &
Trailer, Inc., a Director of the
American Red Cross of
Maryland, and an Adjunct Professor
at the University of
Maryland. He is the founder,
Executive Vice President, and
General Counsel for Aerovias
Quisqueana, C. por A., Santo
Domingo, Dominican Republic.
Prior to entering private
practice, Mr. Mazza was the
Director of the Legal Education
Institute at the U.S. Department
of Justice from 1977 to
1981. Prior to 1977, he served
as the Director of Legal
Training for the U.S. Civil Service
Commission and as Senior
Legal Advisor for the State
Attorney General's Achievement
Award. Mr. Mazza is a highly
decorated retired United
States Army Colonel.
-28-
FEDERICO PIGNATELLI, age 44,
became a director of the
Company on April 8, 1992.
Mr. Pignatelli is the U.S.
Representative of Eurocapital
Partners, Ltd., and investment
banking firm. From 1989 to April,
1992, he was a Managing
Director at Gruntal & Company,
an investment banking firm.
From 1988 to 1989, he was General
Manager of Euromobiliar
Ltd., a subsidiary of Euromobiliare,
SpA, a publicly held
investment and merchant bank in
Italy and Senior Vice
President of New York and Foreign
Securities Corporation, an
institutional brokerage firm in
New York. From 1986 to
1988, he was Managing Director at
Ladenburg, Thalmann & Co.,
an investment banking firm. From
1980 to 1986, he was
Assistant Vice President of
E. F. Jutton International.
Prior to 1980, he was
a financial journalist. Mr.
Pignatelli was elected as a
director of the Company pursuant
to the right of Eurocapital
Partners, Ltd. to designate one
member of the Board of
Directors in connection with a
private placement of the
Company's Common Stock. Mr.
Pignatelli also serves as
chairman of BioLase Technology,
Inc., a company which produces
medical and dental lasers and
endodontic products. Formerly,
he served as a director of
MTC Electronic Technologies Co.,
Ltd., a NASDAQ/NMS company,
and of CST Entertainment Imaging,
Inc., and American Stock
Exchange Company engaged in colonizing black
and white film.
MARK SPENCER, age 42, became a
director on February 26,
1992. He founded Spencer
Communications, and advertising
public relations firm
specializing in the marine industry,
in 1987. Previously, Mr.
Spencer began his journalism
career at Powerboat Magazine
in 1976. He was named
Executive Editor of Powerboat
Magazine in 1981 and served in
that capacity until 1987. During
the last seven years Mr.
Spencer has served as on camera
expert commentator for ESPN
covering the boating industry.
In addition to Mr. Fountain,
who is listed above as a
director, other executive officers
of the Company are as
follows:
JOSEPH F. SCHEMENAUER, age 52,
was appointed Vice President - Finance and Chief Financial
Officer in September, 1997.
Mr. Schemenauer has had twenty
years experience as Chief
Financial Officer and or Controller
in the boating industry,
primarily with Chris Craft
Corporation (and its successors,
Murray Chris Craft Sportboats,
Inc. and Murray Chris Craft
Cruisers, Inc.), Donzi Marine
Corporation, Wellcraft and
Triumph Yachts Divisions of
Genmar Industries, Inc. and
Luhrs Corporation. His predecessor,
Alan Krehbiel, served
in that capacity until August, 1997.
BLANCHE C. WILLIAMS, age 63,
has been Corporate Secretary
and Treasurer of the Company
since August, 1986, and has
held the same positions with
the Company's Subsidiary since
it was formed during 1979.
Mrs. Williams also served as
Executive Assistant to the President
from 1979 to 1988 and
is currently serving in that capacity.
-29-
Item 11. Executive Compensation.
The following table
sets forth the compensation
awarded, paid to or earned by
the Company's Chief Executive
Officer, who was the only executive
officer of the Company
whose compensation exceeded
$100,000 in Fiscal 1997, 1996,
and 1995.
Name and Principal Fiscal Annual Compensation Long-term Stock
Position Year Salary(1) Bonus(2) Compensation Options
- --------------- ----- ----- ------- ---------- ------
Reginald M.
Fountain Jr. 1997 $350,000 $151,717 $ -0- -0-
Chairman,
President,Chief 1996 $232,154 $199,984 $ -0- -0-
Executive Officer,
and 1995 $221,650 $106,438 $ -0- 450,000
Chief Operating Officer (4)
(1) The Board of Directors
increased Mr. Fountain's annual
base salary to $285,000 for the
period March 30, 1995 to
March 30, 1996 and to $350,000
for Fiscal 1997. The amounts
shown do not include the
value of certain personal
benefits received in addition
to cash compensation. The
aggregate value of such personal
benefits received was less
than ten percent (10%) of the total cash
compensation paid.
(2) The bonuses paid to Mr.
Fountain for Fiscal 1995,1996
and 1997 were authorized by the
Board on May 1, 1994.
His bonus represents 5% of net
income after the profit
sharing distribution, if
any, but before income taxes
limited to a maximum of $250,000.
(3) Mr. Fountain does not
participate in the Company's 401
(k) Plan and has no other
long- term compensation, other
than stock options.
The Following table
contains information concerning the
grant of stock options to
the named executive officer in
Fiscal 1995:
Name ................... Reginald M. Fountain, Jr.
Number of securities underlying
options/SARS granted .......... 450,000
Per cent of total options/SARS
granted to employees in the
fiscal year ................. 100%
Exercise price .................. $4.667
Expiration date .............. 8/04/05
-30-
Potential realizable value of assured
stock-appreciation for
option term based on a per share market
price of the common
stock on the last trading day
prior to the day of grant of $4.667:
Five percent ... $ 1,320,678
Ten percent .... $ 3,346,859
The following table contains
information concerning the
exercise of stock options and
employment related options and
information concerning unexercised
stock options held as of
June 30, 1997 by the named executive officer:
Name ....................... Reginald M. Fountain, Jr.
Shares acquired on exercise ...... -0-
Market value at time of exercise
less exercise price, or
value realized............... -0-
Number of unexercised options & warrants:
Exercisable options ......... 480,000
Non-Exercisable ............ -0-
Value of unexercised in-the-money
options at June 30, 1997,
Exercisable ............. $ 2,479,680 (1)
(1) The closing sale price of
the Common stock on Monday,
June 30, 1997 was $9.833.
Value equals the difference
between market value and exercise price.
In October, 1995, the
Financial Accounting Standards
Board issued SFAS No. 123,
"Accounting for Stock Based
Compensation". SFAS No. 123
permits a company to choose
either a new fair value based
method of accounting for its
stock based compensation arrangements
or to comply with the
current APB Opinion 25 intrinsic
value based method adding
pro forma disclosure of net income
and earnings per share
computed as if the fair value based
method had been applied
in the financial statements. SFAS
No. 123 is effective for
fiscal years beginning after December
15, 1995. The Company
will adopt SFAS No. 123 in 1997
using pro forma disclosures
of net income and earnings per
share. The impact of stock
options on the Company's pro forma
disclosures of net income
and earnings per share calculations
is not know as the
Company has not yet implemented the provision
of the SFAS.
-31-
Directors' Compensation.
Directors of the Company
currently do not receive any
fees or other compensation for
their services as directors,
but they are reimbursed for
travel and other out-of-pocket
expenses in connection with their
attendance at meetings of
the Board of Directors.
In Fiscal 1995, each
non-employee director (Messrs.
Pignatelli, Mazza, Garbrecht,
and Spencer) was granted non-
qualified stock options to purchase
30,000 common shares at
$3.5833 per share. These
non-qualified stock options
awarded to the outside directors
were not under any of the
Company's existing stock
option plans. Mr. Pignatelli
exercised a portion of his
options to purchase 24,000 shares
during Fiscal 1997 and Mr.
Mazza exercised all of his
options during July 1997.
Mr. Garbrecht resigned as a
director in April 1997. The
Company takes the position that
Mr. Garbrecht's options terminated
upon his resignation.
These options are disputed in
the lawsuit. (See "Legal
Proceedings" and "Stock Option Plans")
Employment Agreement.
Reginald M. Fountain, Jr.
serves as the Company's
President, Chief Executive
Officer, and Chief Operating
Officer pursuant to an employment
agreement entered into
during 1989. The agreement
provides for automatic
extensions of one-year periods
until terminated. Under the
agreement, Mr. Fountain receives
a base salary approved by
the Board of Directors and an
annual cash bonus based upon
the Company's net profits before
taxes. On May 1, 1994, the
Board of Directors authorized
an increase in the annual
bonus payment to Mr. Fountain to
5% of net income after the
profit sharing distribution but
before income taxes limited
to a maximum of $250,000.
Bonuses of $151,717 for Fiscal
1997, $199,984 for Fiscal 1996
and $106,438 for Fiscal 1995
were paid to Mr. Fountain.
The agreement terminates upon
death or permanent disability.
The current agreement
replaced a similar agreement with
Mr. Fountain that had been
in effect from December, 1986 to 1989.
Profit Sharing Plan.
No Profit Sharing Plan was
authorized for Fiscal 1997
or Fiscal 1996. On May 1,
1994, the Board of Directors
authorized a Profit Sharing Plan
applicable to all eligible
employees for Fiscal 1995. The
profit sharing calculations
were based upon the consolidated
audited net income for the
full fiscal year before income
taxes. The actual profit
sharing distribution for Fiscal
1995 was $376,614 and was
paid in full to the eligible employees
on August 12, 1995.
-32-
Stock Option Plans.
During 1987, shareholders
of the Company approved the
1986 Incentive Stock Option Plan.
The Plan is administered
by the Board of Directors which
may, in its discretion, from
time to time, grant to officers
and key employees options to
purchase share of the Company's
common stock. Directors who
are not officers or employees
of the Company or its
Subsidiary are not eligible to be
granted options under the
1986 plan.
The 1986 Plan provides that
the purchase price per
share of common stock provided for
in options granted shall
not be less than 100% of the fair
market value of the stock
at the time the option is granted.
However, in the case of
an optionee who possesses more
than 10% of the total
combined voting power of all classes
of the Company's stock,
the purchase price shall not be
less than 110% of the fair
market value of the stock on the date of the
grant.
No consideration is payable
to the Company by an
optionee at the time an option
is granted. Upon exercise of
an option, payment of the purchase
price of the common stock
being purchased shall be made to
the Company in cash, or at
the discretion of the Board of
Directors, by surrender of a
promissory not from the optionee,
or by surrender of shares
of common stock already held by
the optionee which shall be
valued at their fair market value
on the date the option is
exercised, or by any combination
of the foregoing. Also,
payment may be in installments,
and upon such other terms
and conditions as the Board of
Directors, in its discretion,
shall approve.
Under the 1986 Plan, the
aggregate fair market value of
shares with respect to which
options are exercisable for the
first time by an employee in
any calendar year generally may
not exceed $100,000.
The term of each option
granted under the Plan is
determined by the Board of Directors,
but may in no event be
more than ten years from the date
such option is granted.
However, in the case of an option
granted to a person who,
at the time the option is granted,
owns stock possessing
more than 10% of the total combined
voting power of all
classes of stock of the Company, the
term of the option may
not be for a period of more than five
years from the date of
grant. Unless the Board of
Directors determines otherwise,
no option may be exercised for
one year after the date of
grant. Thereafter, an option
may be exercised either in
whole or in installments as shall
be determined by the Board
of Directors at the time of
the grant for each option
granted. All rights to purchase
stock pursuant to an
option, unless sooner terminated
or expired, shall expire
ten years from the date option was granted.
Upon the termination of
optionee's employment with the
Company, his option shall be
limited to the number of shares
for which the option is exercisable
by him on the date of
his termination of employment, and
shall terminate as to any
remaining shares. However, if the
employment of an optionee
is terminated for "cause" (as
defined in the Plan), the
optionee's rights under any
then outstanding option
immediately terminate at the
time of his termination of
employment. No option shall be
transferable by an optionee
otherwise than by will or
the laws of descent and
distribution. As part of the
employment arrangement of Gary
Garbrecht which was part
of the acquisition of Mach
Performance, Inc., Mr. Garbrecht's
contract provided for
30,000 shares of stock options.
-33-
Under the 1986 Plan, a
maximum of 300,000 shares of the
Company's common stock have been
reserved for issuance. In
the event of a stock dividend paid
in shares of the common
stock, or a recapitalization,
reclassification, split-up or
combination of shares of such stock,
the Board of Directors
shall have the authority to make
appropriate adjustments in
the members of shares subject to
outstanding options and the
option prices relating thereto,
and in the total number of
shares reserved for the future
granting of options under the
Plan.
During 1989 the Board of
Directors amended the Plan to
delete a provision requiring that
options granted to any one
employee be exercised only in the
sequential order in which
they were granted. That provision
at one time was, but is
no longer, required by the
Internal Revenue Code, as
amended, to be contained in incentive stock
option plans.
During Fiscal 1995 options
to purchase 30,000 shares
were awarded to Mr. Fountain at
$3.9417 ($3.5833 X 110%) per
share and options to purchase
30,000 share were awarded to
the Chief Financial Officer at
$3.667 per share. Of the
options granted in previous years,
all had expired by June
30, 1996. During Fiscal 1997
options to purchase 30,000
shares were exercised by the
Chief Financial Officer. The
1986 Plan terminated on December 5, 1996.
On June 21, 1995, a Spe