Back to GetFilings.com
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 [NO FEE REQUIRED]
For fiscal year ended June 30, 1999
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: (252) 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
The aggregate market value of the voting stock held by non-affiliates of
the registrant was $ 9,496,906 at September 9, 1999 based upon a closing price
of $3.625 per share on such date for the Company's Common Stock.
As of September 9, 1999 there were 4,732,608 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.
1
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, sport fishing
boats and sport yachts intended for that segment of the recreational power
boat market where speed, performance, and quality are the main criteria for
purchase. In addition, the Company produces various military support craft
for domestic and international government agencies, (including the United
States Customs Service, the United States Navy and the United States Coast
Guard). The Company's strategy in concentrating on these segments of the
market is to maximize its use of the reputation of its Chairman and President,
Reginald M. Fountain, Jr., as an internationally recognized designer and
builder of high speed power boats.
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 recreational 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 achieve performance and stability standards, which the
Company believes are greater than those offered by any of its competitors,
worldwide. 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 give 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's sport boats, ranging from 27' to 51' are of
inboard/outboard or surface drive design. They are propelled by single, twin,
or triple gasoline (or diesel) engines ranging from 310 HP to more than 900 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. During the first half of Fiscal 1999, the company introduced the
first of the new Super Cruiser Line, a 65 foot long by 16' wide high speed
cruising yacht. This is the first of a family of Super Cruisers to be
introduced during the next several years.
In addition to the Sportboats, Fishing boats and Supercruising Yachts,
Fountain is producing an ever increasing line of military/governmental boats
of various configurations. These boats are based on the racing boat
technology that's incorporated into the large sportboats; along with new
models including the new rigid inflatables (RIB) in 38' and 46' design along
with additional new designs in process to meet specific governmental needs.
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 10 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 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 also
available. This boat was named "The Outstanding Offshore Performance Boat"
by Powerboat Magazine and "Best of the Best" by Boating Magazine. Depending
primarily upon the customer's choice of engines, the retail price of this boat
is from $373,000 to $416,000.
2
The Company's 47' Lightning Sport Boat has been newly redesigned and
restyled and operates at speeds of 75 to 100 mph and is very stable and suited
for long range cruising in offshore waters. Its sleek styling makes it
particularly attractive. Depending primarily upon the type of engines and
options selected, this boat retails at prices ranging from $403,000 to
$750,000. This boat's standard features include an integrated swim platform,
flush deck hatches, and an attractively appointed cockpit and cabin. This
boat has been cited by Powerboat Magazine as "The Outstanding Offshore
Performance Boat". Equipped with special racing engines, this model set a new
world speed record for V-hulled boats in February, 1996 at 131.941 mph.
The 38' Sport Cruiser offers most of the 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 $236,000 to $270,000.
The 38' Sport Boat operates at speeds of between 70 and 100 mph. The
retail price ranges from $220,000 to $263,000, depending primarily upon the
type of engines selected. This model was cited by Powerboat Magazine as
"Offshore Performance Boat of the Year". It also captured an award from The
Hot Boat Magazine for "Boat of the Year".
The 35' Lightning Sport Boat is being totally redesigned this year to go
with a higher freeboard, new 2-step design, new deck and interior. It will
operate at speeds between 70 and 100 mph. The current 35' Lightning was named
by Powerboat Magazine "Offshore Boat of the Year" for 1981 and 1995. It has
also captured that magazine's title, "Outstanding Offshore Performance Boat"
for 1980,1981,1982,1983,1984, and 1987. This boat retails at prices ranging
from $178,000 to $217,000, 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 twin engine sport boat between the
single engine 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
$146,000 to $179,000.
The 29' Fever is one of the most popular boats in our line. It operates
at speeds of 55 to 75 mph and retails between $95,000 and $111,000 depending
on engine size. It has great balance and speed for a single engine and
offshore sea conditions with superior safety and handling.
Fountain's 27' Fever and 27' Fever II Sport Boats are also equipped with
single engines. These boats represent the most affordable access tot he
Fountain line of safe, smooth, high performance boats. The 27' Fever 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 $79,000 to $100,000.
The Company also builds and markets a sport fishing line. The 31' sport
fish model features a center console with T-Top design and incorporates 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 eight years and has won
more than 50% of the top ten positions over the same period.
The additional models include the 29' twin engine center console model
and 25' single engine center console model. The design, construction, and
performance of these models, together with the proven features of the 31'
center console model, make a line which in management's view will appeal to
many experienced sport fishermen.
To further enhance its sport fishing boat line, the Company added a 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.
3
The Company also produces both, a 25' and 29' walk around cabin fishing
boats with outboard engine power and a 32' walk around cabin model fishing
boat with twin inboard power. Inboard power has been introduced to the 29'
walk-around cabin model as well.
In Fiscal 1999, the Company introduced a redesigned 27' with a new deck,
glass windshield, anchor locker and swim ladder. A new 38' Lightning sport
boat was introduced at mid-year, sporting a new glass windshield, standard
bimini top, new style engine vents along with other features standard in the
42' Lightning. Another introduction for the year was the all new 38' Rigid
Inflatable Boat (RIB), the first in a series of special purpose boats with a
rigid fiberglass hull surrounded with an inflatable collar, surface drive
technology and diesel engine power. This type of boat will primarily be sold
to Government Agencies such as the U. S. Coast Guard beginning in the first
quarter of Fiscal year 2000.
For Fiscal 1998, the Company introduced an all-new 42' Lightning. This
boat comes with the Company's new second-generation positive lift hull. It
comes with a new style deck with full wrap around windshield, canvas top and
the all-new positive lift hull, which increases speed, stability and ride
comfort. This model set a new world speed record for V-hulled boats in
August, 1999 at 140.120 mph.
Also in 1998, Fountain launched into the yacht market with the
introduction of the all-new 65' Supercruiser. This performance yacht is 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. Performance
at wide-open throttle can exceed 60 mph.
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
1999 1998 1997
Sport boats 316 324 336
Sport cruisers 1 9 14
Yachts 1 - -
Sport fishing boats 130 116 128
------ ------ ------
Total 448 449 478
====== ====== ======
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 38 full-
time employees. Amounts spent on design research and development and to build
new plugs and molds in recent years were:
4
Design Construction
Research & of New Plugs
Development and Molds
Fiscal 1999 $876,965 $1,275,182
Fiscal 1998 575,918 2,010,634
Fiscal 1997 635,652 1,684,274
Fiscal 1996 234,425 878,274
For Fiscal 2000, planned design research and development expenses are
estimated to be $ 800,000 and plug and mold construction expenditures are
estimated to be $ 1,500,000. These expenditures will be primarily to complete
the tooling for the all-new 35' sport boat plus tooling of the first in the
new mid-size cruiser line.
Manufacturing capacity is sufficient to accommodate approximately 30 to
40 boats in various stages of construction at any one time. Construction of a
current model boat, depending on size, takes approximately three to five
weeks. The Company, with additional personnel, currently has the capacity to
manufacture approximately 500 sport and fishing boats and 12 yachts per year.
The manufacturing process for the hulls and decks consists primarily of
the hand "lay-up" 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 "lay-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 resins used by most other fiberglass boat manufacturers.
Decks are bonded to the hulls using bonding agents, rivets, screws and
fiberglass to achieve a strong, unitized construction.
As one of the most highly integrated manufacturers in the marine
industry, the Company manufactures many metal, Plexiglas, 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 costs as
it receives parts just in time for assembly. All other component parts and
materials used in the manufacture of the Company's boats are readily available
from a variety of suppliers at comparable prices exclusive of discounts.
However, where practicable, the Company purchases certain supplies and
materials from a limited number of suppliers in order to obtain the benefit of
volume discounts.
Certain materials used in boat manufacturing, including the resins used
to make the decks and hulls, are toxic, flammable, corrosive, or reactive and
are classified by the federal and state governments as "hazardous materials."
Control of these substances is regulated by the Environmental Protection
Agency and state pollution control agencies which require reports and inspect
facilities to monitor compliance with their regulations. The Company's cost
of compliance with environmental regulations has not been material. The
Company's manufacturing facilities are regularly inspected by the Occupational
Safety and Health Administration and by state and local inspection agencies
and departments. The Company believes that its facilities comply with
substantially all regulations. The Company, however, has been informed that
it may incur or may have incurred liability for re-mediation 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.)
5
Recreational powerboats 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. In addition, boats
manufactured for sale in the European Community must meet CE Certification
Standards.
Sales and Marketing.
Sales are made through approximately 39 dealers throughout the United
States. The Company also has 5 international dealers. Most of these dealers
are not exclusive to the Company and carry the boats of other companies
including some, which may be competitive with the Company's products. The
territories served by any dealer are not exclusive to the dealer. However,
the Company uses discretion in locating new dealers in an effort to protect
the interests of the existing dealers.
Following is a table of sales by geographic area for the last three fiscal
years:
Fiscal `99 Fiscal `98 Fiscal `97
United States $49,711,114 $46,068,495 $48,346,485
Canada, Mexico, Central
and South America $ 2,495,048 $ 2,639,523 $ 1,047,913
Europe and
the Middle East $ 1,222,325 $ 1,834,524 $ 752,801
Asia $ - $ 109,495 $ 367,126
----------- ----------- -----------
Total $53,428,487 $50,652,037 $50,514,325
=========== =========== ===========
The Company targets a portion of its advertising program into a number of
foreign countries through various advertising media. It continues to seek new
dealers in many areas throughout Europe, South America, the Fareast and the
Mideast. 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 10% of its total
sales.
For Fiscal 1999 one dealer accounted for 6.83% of sales, one for 6.77% of
sales and one for 6.71% of sales. For Fiscal 1998 one dealer accounted for
6.7% of sales, one for 6.3% and one other dealer accounted for more than 5% of
sales. For Fiscal 1997 one dealer accounted for 6.6% of sales and two 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 National Director of
Sales who is responsible for developing a full dealer organization for sport
boats, sport cruisers, sport fishing boats and 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.
6
Beginning in Fiscal 1999, sales to Government and Defense Agencies, both
domestic and foreign are headed up by a newly hired Director of Defense
Operations, who is responsible for establishing contractual relationships with
key Armed Services and Congressional Leaders. The Company is seeking new
growth in this market.
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 has been
able to resell 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 some dealers on a cash-on-delivery basis.
However, most of the Company's shipments are made pursuant to commercial
dealer "floor plan financing" programs in which the Company participates on
behalf of its dealers. Under these arrangements, a dealer establishes lines
of credit with one or more third-party lenders for the purchase of showroom
inventory. When a dealer purchases a boat pursuant to a floor plan
arrangement, it draws against its line of credit and the lender pays the
invoice cost of the boat, net of shipping charges, directly to the Company.
Generally, payment is made to the Company within five 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 1999 model year
(which commenced July 1, 1998), the Company had made arrangements to pay all
interest charged to dealers by certain floor plan lenders for up to 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 cost reverts 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 1998, 1997, and
1996.
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 who have
financing arrangements with more than one lender. Except as described above,
or where it has a direct repurchase agreement with a dealer, the Company is
under no material obligation to repurchase boats from its dealers. From time
to time the Company will voluntarily repurchase a boat for the convenience of
the dealer or for another dealer who needs a particular model not readily
available from the factory. The marketing of boats to retail customers is
primarily the responsibility of the dealer, whose efforts are supplemented by
the Company through advertising in boating magazines and participation in
regional, national, and international boat shows.
Additionally, in order to further promote its products over the years,
the Company has developed racing programs to participate in the major classes
of offshore powerboat races, many of which are regularly televised on networks
such as ESPN, TNN and Speed Vision. Additionally, Fountain single, twin and
triple engine racing boats continue to hold their respective world speed
records. The result of these racing victories and world speed records has
established the Company's products as the highest performing and safest
designed offshore boats. The Company believes that the favorable publicity
generated by these performance programs contribute to its sales volume. The
Company Founder and C.E.O., Reggie Fountain, has 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
constructed two race boats during Fiscal 1997 and implemented a racing program
during Fiscal 1998, of which a major engine manufacturer was a sponsor. In
Fiscal 1998, the company completed the structure of its racing program with a
third boat and captured several world speed records through the summer of
calendar 1998 with the 100th victory completed by Reggie Fountain in New York
City in September. During the second quarter of Fiscal 1999, the Company
announced its withdrawal from active racing and proceeded to sell its owned
racing boats. Beginning with the 1999 racing season, the Company stopped
racing its owned boats and changed its focus to a lower cost sponsorship basis
where the Company is only involved in participating on a limited cost basis as
sponsor for selective Fountain race boat owners.
7
As part of the marketing program for its line of sport fishing boats,
the Company sponsors several outstanding sport fishermen in the Southern
Kingfish Association Circuit. This competitive circuit sanctions King
Mackerel Tournaments throughout the Atlantic and Gulf Coast from North
Carolina to Texas. In Fiscal 1991, the Company's boats and sponsored
fishermen dominated this circuit by winning 4 of the top 5 spots. One
Fountain fisherman, Clayton Kirby was named `Angler of the Year' and finished
in first place. Since Fiscal 1992, the Fountain Fishing Team has continued to
dominate the S.K.A. circuit winning no less than 5 of the top 10 spots
annually. Fountain Fishermen have won the coveted `Angler of the Year' title
5 of the last 8 years. Kirby's son, Brandon has won the coveted Jr. Angler
title 4 of the last 5 years. The S.K.A. Tournaments are held weekly and
attract from 100 - 1000 entrants with prize money in excess of $500,000. The
Fountain fishing teams winning record have given our sport fishing boats
favorable exposure to serious sport fishermen, in particular with respect to
the superior performance of Fountain's fishing boat line.
Sales Order Backlog.
The sales order backlog typically builds to approximately 200 boats
during the August-October Dealer allocation period having an estimated sales
value of $20,000,000. All of the backlog is generally shipped within 6
months. During the last year, the Company's performance boats increased in
sales value to a greater degree than fishing boats, which increased the
overall average unit boat price. In addition, the sale of the first 65'
SuperCruiser contributed to a substantial per boat increase. The Company's
Fall Dealer Allocation Program is designed to promote early replenishment of
the stock in Dealer inventories depleted throughout the prime spring and
summer selling seasons.
Product Warranty.
The Company warrants its boats against defects in material and
workmanship for a period of three years. The engine manufacturer warrants
engines included in the boats. Warranty expenses of $856,694 or 1.6% of sales
were incurred in Fiscal 1999 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 $590,000 at June 30, 1999. For 1998, warranty
costs were $531,062 or 1.0 percent of sales. 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 powerboat 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
Baja Boats, a Division of Brunswick Corporation
Cigarette Racing Team, 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.
The 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.
The Company believes that its current owners, many of whom have purchased
multiple and increasingly larger boats from the Company regenerate a ready
waiting market for its expansion into the cruiser and yacht market.
8
Employees.
As of September 1, 1999 the Company had 370 employees, of whom twelve
were executive and management personnel. Twenty were engaged primarily in
administrative positions including accounting, personnel, marketing and sales
activities. 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 66 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 $11,409,551
at June 30, 1999.
The operating facility contains buildings totaling 229,280 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 75,800 Lamination, upholstery, final
assembly, inventory, and cafeteria.
Building 4 14,250 Woodworking.
Building 5 26,800 Mating, small parts lamination.
Building 6 23,800 Metal fabrication.
Building 7 15,720 Racing, service, and warranty.
Building 8 8,750 Lamination extension area.
Building 9 4,800 Mold Storage.
Building 10 26,960 Fabrication, sportswear sales.
Building 11 12,000 Yacht manufacturing.
----------
Total 229,280
==========
9
Over the last two years there has been heavy expenditures in property, plant
and equipment, which include additions to the plant, plus a travellift bay,
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
surrounding the buildings and providing employee parking has been completed
this year. The present site can accommodate an addition of up to 300,000
square feet of manufacturing space.
Item 3. Legal Proceedings.
The Company's subsidiary was notified by the United States Environmental
Protection Agency ("EPA") and the North Carolina Department of Environment,
Health and Natural Resources ("NCDEHNR") that it has been identified as a
potentially responsible party ("PRP") and may incur, or may have incurred,
liability for remediation of contamination at the Spectron/Galaxy Waste
Disposal Site in Elkton, Maryland, and the Seaboard Disposal Site, in High
Point, North Carolina, also referred to as the Jamestown, North Carolina site,
respectively, resulting from the disposal of hazardous substances at those
sites by a third party contractor of the Company, which disposed of
approximately 3,300 gallons of hazardous waste at the Spectron/Galaxy waste
disposal site, according to PRP Group records. The Group
Administrator/Counsel for that site estimates that the Company's proportionate
share of the total assessment and cleanup costs of $40-45 million will be
approximately $10,000. The EPA is expected to circulate a draft De Minimis
(i.e., small volume contributor) Settlement Agreement to all de minimis PRPs
sometime this summer or fall. The Group Administrator indicated that the
likely "buy out" offer in the proposed settlement agreement is anticipated to
be approximately $3 per gallon. Accordingly, the Company's proportionate
share is calculated to be $9,900. If the Company accepts EPA's buyout offer
and a Consent Decree is entered in Court in a timely manner, this matter
likely will be concluded for the Company and all other de minimis PRPs by the
end of 1999, even though completion of site cleanup may take several more
years. The Company's subsidiary also disposed of approximately 19,245 gallons
of hazardous waste at the Seaboard disposal site, according to PRP Group
records. The total of estimated gallons for this site is approximately 14.3
million. Accordingly, the Company's share is .132% of the total estimated
assessment and cleanup cost of $23 million, or approximately $30,000. The
Group Administrator confirmed that this is a revised estimate and that, under
the worst case conditions, the Company's potential liability at this site is
now expected to be no more than $30,000, and could be considerably less if the
Company's subsidiary is eligible for a De Minimis Settlement Agreement likely
to be proposed by the EPA sometime next year. A remedial investigation of the
site and a feasibility study of cleanup options has been completed, which
proposes natural attenuation as the preferred remediation approach. If
approved by the State and EPA, the Company's share could be as low as $18,000
according to the Group Administrator. Completion of site cleanup could take
several years, depending on the cleanup option selected. The Group
Administrator noted that the Company already has paid amounts previously
assessed for its proportionate share of the costs.
The Company is involved in litigation in Texas and North Carolina with
one of its dealers in Austin, Texas, concerning termination of the dealer
agreement. The Company's position is that the dealer agreement is non-
exclusive, allowing the Company to have other dealers in the Austin, Texas
area. The Company is seeking a declaratory judgment that the dealer
terminated the agreement or, alternatively, that the dealer is bound by the
agreement and should fulfill its inventory-stocking obligation. The Company
intends to vigorously defend its interests in this matter.
As of June 30, 1999, the Company's chief operating subsidiary was a
defendant in two product liability suits and four alleged breach-of-warranty
suits. In the Company's opinion, these lawsuits are without merit and,
therefore, the Company is vigorously defending its interests in such suits.
The Company carries sufficient liability and product liability insurance to
cover attorney's fees and any losses that may occur from such suits, over and
above applicable insurance deductibles.
Item 4. Submission of Matters to a Vote of Security Holders.
The only matters submitted to the Shareholders for a vote during Fiscal
1999 were at the annual meeting with the election of directors, approval of
10
the 1999 Employee Stock Option Plan, and appointment and ratification of the
Board's selection of Pritchett, Siler & Hardy, P.C., Certified Public
Accountants, as the Company's independent public accountants.
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 related 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, 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
September 30, 1997 14.88 9.00
December 31, 1997 15.38 8.88
March 31, 1998 12.75 8.50
June 30, 1998 13.00 8.93
September 30, 1998 11.13 4.38
December 31, 1998 6.72 3.88
March 31,1999 7.00 4.50
June 30, 1999 5.00 3.97
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 1, 1999 was approximately 1906.
11
Item 6. Selected Financial Data
Fountain Powerboat Industries, Inc. and Subsidiary
Selected Financial Data
Fiscal Years 1995 through 1999
Year Ended June 30,
Operations Statement Data: ----------------------------------------------------------------------------
(Period Ended) 1999 1998 1997 1996 1995
- ------------------------- ------------ ------------ ------------ ------------ ------------
Sales ................... $ 53,428,487 $ 50,652,037 $ 50,514,325 $ 41,598,051 $ 38,727,329
Net Income (loss) ....... $ (1,255,791) $ 2,740,487 $ 1,239,951 $ 3,680,034 $ 2,047,876
Income (loss) per share . $ (.27) $ .58 $ .27 $ .81 $ .45
Weighted average shares
outstanding ............ 4,702,608 4,751,779 4,664,251 4,528,608 4,528,608
Diluted earnings (loss)
per share .............. $ N/A $ .54 $ .24 $ .77 $ .45
Diluted weighted average
shares outstanding ..... N/A 5,110,090 5,093,289 4,573,153 4,539,694
Balance Sheet Data
(At Period End)
- -------------------------
Current assets .......... $ 14,084,888 $ 12,718,535 $ 10,997,133 $ 8,378,341 $ 6,185,727
Total Assets ............ $ 33,930,960 $ 32,497,393 $ 23,713,896 $ 18,498,104 $ 16,334,757
Current Liabilities ..... $ 12,183,630 $ 10,289,985 $ 6,305,212 $ 6,180,476 $ 6,081,298
Long-term debt .......... $ 10,215,334 $ 9,499,895 $ 8,047,039 $ 5,433,184 $ 7,049,049
Stockholders' equity (1) $ 10,632,316 $ 11,780,707 $ 9,361,645 $ 6,884,444 $ 3,204,410
- ------------------------- (1) The Company has not paid any cash dividends since its inception.
12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
As described more fully below at "Business Environment", more than 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 balance of shipments was
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, 1999,
1998, 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 improved market conditions and strong ongoing
consumer demand for boats. Therefore, there were no deferred sales or cost of
sales estimated at June 30, 1999, 1998, 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 1999, 1998 and 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 may be required to repurchase the boat. The Company
had a contingent liability of approximately $23,350,000 at June 30, 1999 and
1998 for the shipment of boats, which remained uncollected by the finance
companies at those dates. Additionally, at June 30, 1999 and 1998, the
Company had recorded reserves of $200,000 and $200,000, which represent
losses which may be reasonably expected to be incurred on boat repurchases in
future years.
Business Environment.
The Company's Sales have continued to increase each year. Sales for 1999
were $53,428,487 up 5.5% from Fiscal 1998. The sales volume increase for
Fiscal 1999 was in line with the overall recreational boating industry. Plant
utilization stands at about 80% until full production of the new 65' yacht is
achieved.
13
Sales for Fiscal 1998 were $50,652,037, up less than 1% from sales for
Fiscal 1997. Sales for Fiscal 1997 were $50,514,325.
In Fiscal 1999, 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 maintaining our performance market
share.
Typically, each dealer's floor plan credit facilities are secured by the
dealer's inventory, and, perhaps, other personal and real property. In
connection with the dealers' floor plan arrangements, the Company (as well as
substantially all other major manufacturers) has agreed in most instances to
repurchase, under certain circumstances, any of its boats which a lender
repossesses from a dealer and returns to the Company. In the event that a
dealer defaults under its 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 1999, 1998 and Fiscal 1997 in
connection with floor plan arrangements. At June 30, 1999, 1998 and 1997, the
Company had recorded a $200,000 reserve for losses which may be reasonably
expected to be incurred on boat repurchases in future years.
Results of Operations.
During the second quarter of Fiscal 1999, the Company designed and
implemented a restructuring plan to aggressively improve the Company's cost
structure, refocus sales and marketing expenditures and divest the Company of
certain non-realizable assets. In connection with the restructuring plan the
Company reviewed components of its business for possible improvement of future
profitability through reengineering or restructuring. As part of this plan
the Company decided to eliminate its direct racing program and reduce the
yacht tooling cost (carrying value), along with other discontinued unused
tooling. The carrying value of the assets held was reduced to fair value
based on estimated realizable value based on future cash flows from use of the
asset or sale of the related assets. The resulting pretax adjustment of
$2,440,000 was recorded as a strategic charge in the statement of operations
of the Company.
During Fiscal 1999, the Company had a net loss of $(1,255,791) or $(.27)
per share. This compares to net income for Fiscal 1998 of $2,740,487, or $.58
per share. The change to a net loss from the previous year's net income is
primarily due to the restructuring charge, increased selling expenses and a
drop in margins due to the sales mix of fish boats in relation to overall
boats.
Operating income before strategic charge decreased to $819,059 in Fiscal
1999 from $4,084,388 in Fiscal 1998 and $4,520,333 in Fiscal 1997. This was
primarily due to a substantial increase in selling expenses and a drop in
margins due to a higher number of fishing boats in relation to total boats
sold.
14
The Company's gross profit margin as a percentage of sales decreased to
22.2% in Fiscal 1999 from 24.8% in Fiscal 1998 and 26.8% in Fiscal 1997. The
change in the gross margin percentage was due to the overall sales mix of
boats.
Depreciation expense was $2,280,871 for Fiscal 1999, $1,953,207 for
Fiscal 1998 and $1,642,975 for Fiscal 1997. Depreciation expense by asset
category was as follows:
Fiscal Fiscal Fiscal
1999 1998 1997
Land Improvements ........... $ 57,065 $ 29,504 $ 22,468
Buildings ................... $ 256,205 $ 239,187 $ 231,546
Molds & Plugs ............... $1,236,027 $1,112,705 $1,041,217
Machinery & Equipment ........ $ 387,732 $ 353,102 $ 295,829
Furniture & Fixtures ........ $ 30,842 $ 15,238 $ 24,572
Transportation Equipment ..... $ 194,627 $ 129,722 $ 27,343
Racing Equipment ............. $ 118,373 $ 73,749 -
---------- ---------- ----------
Total $2,280,871 $1,953,207 $1,642,975
========== ========== ===========
Following is a schedule of the net fixed asset additions during Fiscal
1999 and Fiscal 1998.
Fiscal 1999 Fiscal 1998
Buildings ............... $ 555,475 $ 240,003
Land and Improvements ... $ 804,226 $ 35,537
Molds and Plugs ......... $ 312,045 $2,050,745
Construction in Progress $ 760,052 $1,139,725
Machinery & Equipment ... $ 597,610 $ 512,933
Furniture & Fixtures .... $ 217,123 $ 24,495
Transportation Equipment $ 506,172 $1,458,079
Racing equipment ....... $ - $1,335,163
---------- ----------
Total $3,752,703 $8,796,680
========== ==========
15
Selling expenses were $7,934,683 for Fiscal 1999, $5,687,097 for Fiscal
1998 and $6,463,875 for Fiscal 1997. The Company continued to promote its
products primarily by magazine advertising in Fiscal 1999. Advertising
expense was $1,411,883 in Fiscal 1999, $1,166,633 for Fiscal 1998 and
$1,267,822 for Fiscal 1997. These advertising expenditures continue to
promote the Company's visibility in the recreational marine industry and 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 $2,503,699 in Fiscal 1999, $953,928 in Fiscal 1998 and
$1,256,631 in Fiscal 1997. The Company reentered active racing with
construction of two race boats during late Fiscal 1997 added a third one and
began a racing program during Fiscal 1998. During the second quarter of
Fiscal 1999 the Company announced its withdrawal from active racing, placed
its owned race boats for sale and changed its focus to a lower cost
sponsorship basis where the Company is only involved in participating on a
limited cost basis as sponsor for selective Fountain race boat owners.
Selling expenses compared for the past three fiscal years were as
follows:
Fiscal 1999 Fiscal 1998 Fiscal 1997
Offshore racing and
tournament fishing ......... $2,503,699 $ 953,928 $1,256,631
Advertising ............... $1,411,883 $1,166,633 $1,267,822
Salaries & commissions ...... $1,054,467 $ 939,541 $1,029,810
Boat Shows .................. $ 494,832 $ 446,706 $ 452,859
Dealer incentives .......... $1,612,415 $1,031,611 $1,286,649
Other selling expenses ...... $ 857,387 $1,148,678 $1,170,104
----------- ----------- ----------
Total $7,934,683 $5,687,097 $6,463,875
=========== =========== ==========
General and administrative expenses include the finance, accounting,
legal, personnel, data processing, and administrative operating expenses of
the Company. These expenses were $3,127,029 for Fiscal 1999, $2,796,518 for
Fiscal 1998 and $2,553,870 for Fiscal 1997. Most of the increase for Fiscal
1999 over Fiscal 1998 was due to expenses incurred for ISO 9001 Certification.
16
Interest expense was $1,023,727 for Fiscal 1999, $833,932 for Fiscal 1998
and $557,768 for Fiscal 1997. The increase in interest expense for Fiscal
1999 was primarily due to an overall increase in loan debt during the first
quarter of Fiscal 1999.
For Fiscal 1999 the Company received $130,118 in other income, primarily
from vendor discounts and a gain of $69,100 on the disposal of certain assets.
For Fiscal 1998, the Company recorded $500,000 in racing participation fees,
which reduced our overall program cost for that year. Included in other
income for Fiscal 1997 are consulting fees earned by the use of Mr. Fountain
amounting to $260,000, and these were assigned to the company.
Liquidity and Financial Resources.
Net cash provided by operations in Fiscal 1999 amounted to $2,738,206.
Net loss plus adjustment to reconcile net loss to net cash provided by
activities including $2,280,874 in depreciation, $2,440,000 in strategic
charges, and net of other of $20,900 provided net cash of $3,485,980 before
changes in assets and liabilities accounts. However, relatively large amounts
were needed to complete investment activities in purchasing property, plant,
equipment, inventory and molds. The ending cash balance was $2,217,301.
Operations in Fiscal 1998 provided $3,869,619 in cash. Net income plus
depreciation expense provided cash amounting to $4,693,694. However,
relatively large amounts were needed to finance investment activities in
purchasing property, plant, equipment, inventory and molds. In addition, the
new yacht construction with associated development costs added to the heavy
use of cash. The ending cash balance was $1,376,984.
Operations for the prior fiscal year 1997 provided $5,474,162 in cash.
Net income plus depreciation expense provided cash amounting to $2,882,925.
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. The ending cash balance was
$2,994,503.
Investing activities for Fiscal 1999 required $3,710,206, including
$2,477,520 for property, plant and equipment and $1,275,183 for additional
molds and plugs. Increases in other assets required $131,696.
Investing activities for Fiscal 1998 required $8,218,341, including
expenditures for additional molds and plugs amounting to $2,050,745 and for
property, plant and equipment for $6,745,936. Also, increases in other assets
required $124,396.
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.
Financing activities for Fiscal 1999 provided $1,812,317. Included in
this amount are proceeds from issuance of notes payable and long-term debt to
Transamerica Business Credit Corporation and General Electric Capital
Corporation for $4,000,000 along with total debt repayment of $2,547,637.
Financing activities for Fiscal 1998 provided $2,731,203. Included in
this amount are proceeds from issuance of notes payable and long term-debt to
G. E. Capital Corporation for $3,362,137 and the retirement of previous long-
term debt of $738,434.
17
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.
The net increase in cash for Fiscal 1999 was $840,317, primarily due from
a new $4,000,000 promissory note with Transamerica Business Credit
Corporation, which included restatement and amendment of certain existing
promissory notes with General Electric Capital Corporation. The net decrease
in cash for Fiscal 1998 was $1,617,519, primarily due to the investment in
facilities, equipment and molds. During Fiscal 1998, the Company borrowed the
remaining $1,500,000 against the initial General Electric Capital Corporation
loan, bringing the balance to $10,000,000, less the scheduled monthly
principal reductions. At June 30, 1997, the total outstanding amount was
$8,500,000 less scheduled monthly principal reductions. For Fiscal 2000, the
Company anticipates that the $2,217,301 beginning cash balance along with the
net projected increase in cash provided from operations will be sufficient to
meet most of the Company's liquidity needs of the year. The Company intends
to concentrate on reducing capital expenditures and building its cash reserves
during Fiscal 2000.
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 powerboat
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.
The Year 2000.
A current concern, known as the "Year 2000" or "Y2K" Bug is expected to effect
a large number of computer systems and software during or after the year 1999.
The concern is that any computer function that requires a date calculation may
produce errors. The Year 2000 issue affects virtually all companies and
organizations, including the Company. The Company is taking the steps
necessary to prevent these errors from occurring. With respect to third party
providers whose services are critical to the Company, the Company intends to
monitor the efforts of such vendors, as they become Year 2000 compliant.
Management is not presently aware of any Year 2000 issues that have been
encountered by any such third party, which could materially affect the
Company's operations. At present, the Company has spent $370,000 and
anticipates $100,000 in additional costs in upgrading some of its software and
hardware in order to avoid any problems resulting from the Millennium bug.
There is no assurance that the Company will not experience operational
difficulties as a result of Year 2000 issues.
18
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, forecast, 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.
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.
19
Item 8. Financial Statements and Supplementary Data.
CONTENTS
PAGE
- Independent Auditors' Report 21
- Consolidated Balance Sheets, as of June 30, 1999
and 1998 22
- Consolidated Statements of Operations, for the
years ended June 30, 1999, 1998 and 1997. 23 - 24
- Consolidated Statement of Stockholders' Equity,
for the years ended June 30, 1999, 1998 and 1997. 25
- Consolidated Statements of Cash Flows, for the years
ended June 30, 1999, 1998 and 1997. 26 -27
- Notes to the Consolidated Financial Statements 28 - 44
20
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
Washington, North Carolina
We have audited the accompanying consolidated balance sheets of Fountain
Powerboat Industries, Inc. and Subsidiary as of June 30, 1999 and 1998, and
the related consolidated statements of operations, stockholders' equity and
cash flows for the years ended June 30, 1999, 1998 and 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements audited by us present
fairly, in all material respects, the consolidated financial position of
Fountain Powerboat Industries, Inc. and Subsidiary as of June 30, 1999 and
1998, and the consolidated results of their operations and their cash flows
for the years ended June 30, 1999, 1998 and 1997 in conformity with generally
accepted accounting principles.
/s/ Pritchett, Siler & Hardy, P.C.
Pritchett, Sier & Hardy, P.C.
July 27, 1999
Salt Lake City, Utah
21
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30,
______________________________
1999 1998
____________ ____________
CURRENT ASSETS:
Cash & cash equivalents $ 2,217,301 $ 1,376,984
Accounts receivable, less allowance
for doubtful accounts of $30,000
for 1999 and 1998 1,576,712 2,715,754
Inventories 7,307,890 7,077,540
Prepaid expenses 761,486 489,290
Current tax assets 2,221,499 1,058,967
____________ ____________
Total Current Assets 14,084,888 12,718,535
PROPERTY, PLANT AND EQUIPMENT, net 19,065,270 19,156,855
OTHER ASSETS 780,802 622,003
____________ ____________
$33,930,960 $32,497,393
____________ ____________
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable - related party $ - $ 415,821
Current maturities of long-term debt 2,464,535 981,365
Current maturities of capital lease 11,788 -
Accounts payable 3,961,516 3,591,489
Accrued expenses 2,231,061 1,939,791
Dealer territory service accrual 2,037,170 2,046,939
Customer deposits 687,560 510,967
Allowance for boat repurchases 200,000 200,000
Warranty reserve 590,000 500,000
Net liabilities of discontinued
operations - 103,612
____________ ____________
Total Current Liabilities 12,183,630 10,289,984
LONG-TERM DEBT, less current maturities 10,138,395 9,499,895
CAPITAL LEASE, less current maturities 76,939 -
DEFERRED TAX LIABILITY 899,680 926,807
COMMITMENTS AND CONTINGENCIES (See Note 9) - -
____________ ____________
Total Liabilities 23,298,644 20,716,686
____________ ____________
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share,
authorized 200,000,000 shares; issued
$4,732,608 and 4,702,608 shares 47,326 47,026
Additional paid-in capital 10,303,640 10,196,540
Accumulated earnings 392,098 1,647,889
____________ ____________
10,743,064 11,891,455
Less: Treasury Stock, at cost
15,000 shares (110,748) (110,748)
____________ ____________
10,632,316 11,780,707
____________ ____________
$33,930,960 $32,497,393
____________ ____________
The accompanying notes are an integral part of these financial statements.
22
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30,
___________________________________________
1999 1998 1997
_____________ _____________ _____________
NET SALES $53,428,487 $50,652,037 $50,514,325
COST OF SALES 41,547,716 38,084,034 36,976,247
_____________ _____________ _____________
Gross Profit 11,880,771 12,568,003 13,538,078
_____________ _____________ _____________
EXPENSES:
Selling expense 7,934,683 5,687,097 6,463,375
Selling expense - related party - - 500
General and administrative 2,628,722 2,722,665 2,240,112
General and administrative -
related parties 498,307 73,853 313,758
_____________ _____________ _____________
Total expenses 11,061,712 8,483,615 9,017,745
_____________ _____________ _____________
OPERATING INCOME (LOSS) BEFORE
STRATEGIC CHARGE 819,059 4,084,388 4,520,333
STRATEGIC CHARGE 2,440,000 - -
_____________ _____________ _____________
OPERATING INCOME (LOSS) (1,620,941) 4,084,388 4,520,333
_____________ _____________ _____________
NON-OPERATING INCOME (EXPENSE):
Other income 130,118 252,967 437,694
Interest expense (1,003,280) (807,423) (557,768)
Interest expense - related
parties (20,447) (26,509) -
Gain on disposal of assets 69,100 4,637 -
_____________ _____________ _____________
(824,509) (576,328) (120,074)
INCOME (LOSS) BEFORE INCOME
TAXES (2,445,450) 3,508,060 4,400,259
CURRENT TAX EXPENSE - 1,057,640 330,427
DEFERRED TAX EXPENSE(BENEFIT) (1,189,659) 10,864 -
_____________ _____________ _____________
INCOME (LOSS) FROM CONTINUING
OPERATIONS (1,255,791) 2,439,556 4,069,832
DISCONTINUED OPERATIONS (See Note 14):
(Loss) from Operations of Fountain
Power, Inc. and Mach Performance,
Inc.(Net of no income tax effect) - - (2,389,480)
Estimated income (loss) on disposal
of the operations of Fountain
Power, Inc. and Mach Performance,
Inc. (Net of $282,512 income tax
benefit) - 300,931 (440,401)
_____________ _____________ _____________
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS - 300,931 (2,829,881)
_____________ _____________ _____________
NET INCOME (LOSS) $(1,255,791) $ 2,740,487 $ 1,239,951
_____________ _____________ _____________
[Continued]
23
FOUNTAIN POWERBOAT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
[CONTINUED]
Year Ended June 30,
___________________________________________
1999 1998 1997
_____________ _____________ _____________
BASIC EARNINGS (LOSS) PER SHARE:
Continuing operations $ (.27) $ .51 $ .87
Loss from operations of
discontinued segments - - (.51)
Estimated income (loss) on
disposal of discontinued
segments - .07 (.09)
_____________ _____________ _____________
BASIC EARNINGS PER SHARE $ (.27) $ .58 $ .27
_____________ _____________ _____________
WEIGHTED AVERAGE SHARES
OUTSTANDING 4,711,896 4,751,779 4,664,251
_____________ _____________ _____________
DILUTED EARNINGS PER SHARE:
Continuing operations $ N/A $ .48 $ .80
Loss from operations of
discontinued segments N/A - (.47)
Estimated income (loss) on
disposal of discontinued
segments N/A .06 (.09)
_____________ _____________ _____________
DILUTED EARNINGS PER SHARE $ N/A $ .54 $ .24
_____________ _____________ _____________
DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING N/A 5,110,090 5,093,289
_____________ _____________ _____________
The accompanying notes are an integral part of these financial statements.
24
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FROM JUNE 30, 1996 THROUGH JUNE 30, 1999
Common Stock Additional Treasury Stock Total
______________________ Paid-in Accumulated ___________________ Stockholders'
Shares Amount Capital Earnings Shares Amount Equity
___________ _________ ____________ ____________ ________ _________ ____________
BALANCE, June 30, 1996 4,543,608 $ 45,436 $ 9,282,305 $(2,332,549) 15,000 $110,748 $ 6,884,444
Common stock issued for
acquisition of Mach
Performance, October 1996,
at $8.17 per share 127,500 1,275 1,039,975 - - - 1,041,250
Additional common stock
shares issued for options
exercised during Fiscal 1997,
at $3.58 to $3.67 per share 54,000 540 195,460 - - - 196,000
Net income for the year ended
June 30, 1997 - - - 1,239,951 - - 1,239,951
___________ _________ ____________ ____________ ________ _________ ____________
BALANCE, June 30, 1997 4,725,108 47,251 10,517,740 (1,092,598) 15,000 110,748 9,361,645
Cancellation of common stock
previously issued in
acquisition of Mach
Performance during June 1998
at $8.17 per share (52,500) (525) (428,400) - - - (428,925)
Issuance of common stock
upon exercise of options at
$3.58 per share by a director
of the Company during
July 1997. 30,000 300 107,200 - - - 107,500
Net income for the year ended
June 30, 1998 - - - 2,740,487 - - 2,740,487
___________ _________ ____________ ____________ ________ _________ ____________
BALANCE, June 30, 1998 4,702,608 47,026 10,196,540 1,647,889 15,000 110,748 11,780,707
Issuance of common stock
upon exercise of options
at approximately $3.58
per share by a director of
the Company 30,000 300 107,100 - - - 107,400
Net loss for the year ended
June 30, 1999 - - - (1,255,791) - - (1,255,791)
___________ _________ ____________ ___________ _________ _________ ____________
BALANCE, June 30, 1999 4,732,608 $ 47,326 $10,303,640 $ 392,098 15,000 $110,748 $10,632,316
___________ _________ ____________ ___________ _________ _________ ____________
The accompanying notes are an integral part of these financial statements.
25
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30,
________________________________________
1999 1998 1997
____________ ____________ ____________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,255,791) $ 2,740,487 $ 1,239,951
Adjustments to reconcile net income
(loss)to net cash provided by
operating activities:
Strategic charge 2,440,000 - -
Depreciation expense 2,280,871 1,953,207 1,642,974
Gain on disposal of property,
plant, and equipment (69,100) (4,637) -
Warranty reserve 90,000 - 90,000
Net effect of acquired Subsidiary - (525,095) 1,041,250
Change in assets and liabilities:
(Increase) decrease in accounts
receivable 1,148,745 (848,007) 985,937
(Increase) decrease in inventories (959,172) (3,139,783) 71,438
(Increase) decrease in prepaid
expenses (281,492) 642,413 (976,860)
(Increase)in net tax asset (1,293,271) (132,160) -
Increase in accounts payable 370,027 1,603,982 273,748
Increase (decrease) in accrued
expenses 292,316 1,079,005 (53,946)
Increase (decrease) in Dealer
territory service accrual (1,520) 409,367 871,898
Increase (decrease) in customer
deposits (23,407) 200,925 81,434
Decrease in allowance for boat
returns - - (7,359)
Increase (decrease) in net
liabilities of discontinued
operations - (110,085) 213,697
____________ ____________ ____________
Net Cash Provided by Operating
Activities $2,738,206 $3,869,619 $5,474,162
____________ ____________ ____________
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable -
related party (36,807) - -
(Purchase) sale of certificates
of deposits, net - 696,155 (696,155)
Proceeds from sale of property,
plant and equipment 211,000 6,581 -
Investment in additional molds and
related plugs (1,275,183) (2,050,745) (1,684,274)
Purchase of other property, plant
and equipment (2,477,520) (6,745,936) (2,249,670)
Increase in other assets (131,696) (124,396) (306,030)
____________ ____________ ____________
Net Cash (Used) by investing
activities $(3,710,206) $(8,218,341) $(4,936,129)
____________ ____________ ____________
[Continued]
26
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
[CONTINUED]
Year Ended June 30,
________________________________________
1999 1998 1997
____________ ____________ ____________
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on
engine floor plan agreement $ - $ - $(1,173,089)
Proceeds from issuance of common
stock 107,400 107,500 196,000
Proceeds from issuance of notes
payable and long-term debt 4,279,554 3,362,137 8,500,000
Payments on capital lease (931) - -
Payments on related party payable (415,821) - -
Repayment of long-term debt (2,157,885) (738,434) (6,427,060)
____________ ____________ ____________
Net Cash Provided by
Financing Activities $ 1,812,317 $ 2,731,203 $ 1,095,851
____________ ____________ ____________
Net increase (decrease) in cash &
cash equivalents $ 840,317 $(1,617,519) $ 1,633,884
Beginning cash & cash equivalents
balance 1,376,984 2,994,503 1,360,619
____________ ____________ ____________
Ending cash & cash equivalents
balance $ 2,217,301 $ 1,376,984 $ 2,994,503
____________ ____________ ____________
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest:
Unrelated parties $ 996,640 $ 767,867 $ 557,768
Related parties 20,447 26,509 -
____________ ____________ ____________
$ 1,017,087 $ 794,376 $ 557,768
____________ ____________ ____________
Income taxes $ 263,345 $ 825,570 $ 395,796
____________ ____________ ____________
Supplemental Schedule of Non-cash Investing and Financing Activities:
For the year ended June 30, 1999: None
For the year ended June 30, 1998:
The Company entered into an agreement whereby 52,500 shares of stock
previously issued in the acquisition of Mach Performance at $8.17 per share
were returned for cancellation.
The Company purchased an airplane for $1,375,000 by assuming a $959,179
loan and issuing a $415,821 note payable (See Note 3).
The Company borrowed $47,079 for the purchase of a vehicle.
For the year ended June 30, 1997:
The Company issued 127,500 shares of common stock in the acquisition
of Mach Performance valued at $1,041,250 or $8.17 per share
(See Notes 6 and 13).
27
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of the Business and Significant Accounting Policies.
Nature of the Business: Fountain Powerboat Industries, Inc. and Subsidiary
(the Company) manufactures high-performance deep water sport boats, sport
cruisers, sport fishing boats, custom offshore racing boats and super
cruiser yachts. These boats are sold to the Company's worldwide network of
approximately sixty dealers. The Company's offices and manufacturing
facilities are located in Washington, North Carolina and the Company has
been in business since 1979. The Company employs approximately 370 people
and is an equal opportunity, affirmative action employer.
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiary, Fountain
Powerboats, Inc. All significant inter-company accounts and transactions
have been eliminated in consolidation. Fountain Power, Inc. was not active
during Fiscal 1999 and was dissolved effective June 30, 1999. Also
effective October 1, 1997, Fountain Trucking, Inc. and Fountain Sportswear,
Inc. were dissolved and the operations transferred to Fountain Powerboats,
Inc. The operations of Fountain Power, Inc. and Mach Performance, Inc.
were discontinued effective as of June 30, 1997(See Note 13).
Fiscal Year: The Company's fiscal year-end is June 30th, which is its
natural business year-end.
Accounting Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosures of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimated by management.
Cash and Cash Equivalents: For purposes of the statement of cash flows, the
Company considers all highly liquid debt instruments with a maturity of
three months or less to be cash equivalents. At June 30, 1999 and 1998,
the Company had $2,117,301 and $1,276,984, respectively, in excess of
federally insured amounts held in cash.
Inventories: Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out method (See Note 2).
Property, Plant, and Equipment and Depreciation: Property, plant, and
equipment is carried at cost. Depreciation on property, plant, and
equipment is calculated using the straight-line method and is based upon
the estimated useful lives of the assets (See Note 3).
Fair Value of Financial Instruments: Management estimates the carrying
value of financial instruments on the consolidated financial statements
approximates their fair values.
28
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of the Business and Significant Accounting Policies.
[Continued]
Dealer Territory Service Accrual: The Company has established a program to
pay a service award to dealers for boat deliveries into their market
territory for which they will perform service. The service award is a
percentage of the purchase price of the boat ranging from 0% to 7% based on
the dealer's service performance rating. The Company has accrued estimated
dealer territory service awards at June 30, 1999 and 1998 of $2,037,170 and
$2,046,939, respectively.
Allowance for Boat Repurchases: The Company provides an allowance for
boats, financed by dealers under floor plan finance arrangements, that may
be repurchased from finance companies under certain circumstances where the
Company has a repurchase agreement with the lender. The amount of the
allowance is based upon probable future events which can be reasonably
estimated (See Note 9).
Warranties: The Company warrants the entire deck and hull, including its
supporting bulkhead and stringer system, against defects in materials and
workmanship for a period of three years. The Company has accrued a reserve
for these anticipated future warranty costs.
Revenue Recognition: The Company generally sells boats only to authorized
dealers and to the U.S. Government. A sale is recorded when a boat is
shipped to a dealer or to the Government, legal title and all other
incidents of ownership have passed from the Company to the dealer or to the
Government, and an account receivable is recorded or payment is received
from the dealer, from the Government, or from the dealer's third-party
commercial lender. This is the method of sales recognition 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 dealer or to the Government, that title and all
other incidents of ownership have passed to the dealer or to the
Government, and that there is no direct or indirect commitment to the
dealer or to the Government to repurchase the boat or to pay floor plan
interest for the dealer beyond the normal, published sales program terms.
The sales incentive floor plan interest expense for each individual boat
sale is accrued for the maximum six month (180 days) interest payment
period in the same fiscal accounting period that the related boat sale is
recorded. The entire six months' interest expense is accrued at the time
of the sale because the Company considers it a selling expense (See Note
9). The amount of interest accrued is subsequently adjusted to reflect
the actual number of days of remaining liability for floor plan interest
for each individual boat remaining in the dealer's inventory and on floor
plan.
Presently, the Company's normal sales program provides for the payment of
floor plan interest on behalf of its dealers for a maximum of six months.
The Company believes that this program is currently competitive with the
interest payment programs offered by other boat manufacturers, but may from
time to time adopt and publish different programs as necessary in order to
meet competition.
Income Taxes: The Company accounts for income taxes in accordance with
issued Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes" (see Note 7).
29
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of the Business and Significant Accounting Policies.
[Continued]
Advertising Cost: Costs incurred in connection with advertising and
promotion of the Company's products are expensed as incurred. Such costs
amounted to $1,411,883, $1,166,633 and $1,267,822 for the years ended 1999,
1998 and 1997.
Earnings Per Share: The Company accounts for earnings per share in
accordance with the Statement of Financial Accounting Standards (SFAS)
No. 128 "Earnings Per Share," which requires the Company to present basic
and diluted earnings per share. The computation of basic earning per
share is based on the weighted average number of shares outstanding during
the periods presented. The computation of diluted earnings per shares is
based on the weighted average number of outstanding common shares during
the year plus, when their effect is dilutive, additional shares assuming
the exercise of certain vested and non-vested stock options and warrants,
reduced by the number of shares which could be purchased from the proceeds.
Prior period earnings per share and weighted average shares have been
restated to reflect the adoption of SFAS No. 128. (See Note 14)
Stock Based Compensation: The Company accounts for its stock based
compensation in accordance with Statement of Financial Accounting Standards
(SFAS) No. 123 "Accounting for Stock-Based Compensation". This statement
establishes an accounting method based on the fair value of equity
instruments awarded to employees as compensation. However, companies are
permitted to continue applying previous accounting standards in the
determination of net income with disclosure in the notes to the financial
statements of the differences between previous accounting measurements and
those formulated by the new accounting standard. The Company has adopted
the disclosure only provisions of SFAS No. 123; accordingly, the Company
has elected to determine net income using previous accounting standards.
Reclassifications: The financial statements for years prior to June 30,
1999 have been reclassified to conform with the headings and
classifications used in the June 30, 1999 financial statements.
Note 2. Inventories.
Inventories consist of the following:
June 30,
__________________________
1999 1998
____________ ____________
Parts and supplies $3,296,244 $4,510,373
Work-in-process 3,208,982 2,235,394
Finished goods 922,664 451,773
____________ ____________
7,427,890 7,197,540
Reserve for obsolescence (120,000) (120,000)
____________ ____________
$7,307,890 $7,077,540
____________ ____________
30
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Property, Plant, and Equipment.
Property, plant, and equipment consists of the following:
Estimated
Useful June 30,
Lives __________________________
in Years 1999 1998
________ ____________ ____________
Land and related improvements 10-30 $ 1,416,429 $ 1,416,429
Buildings and related improvements 10-30 11,092,771 6,720,762
Construction-in-progress N/A 760,052 3,955,544
Production molds and related plugs 8 14,527,208 13,669,394
Machinery and equipment 3-5 4,562,734 4,063,671
Furniture and fixtures 5 754,497 538,516
Transportation equipment 5 2,305,033 1,711,526
Racing boats N/A 790,860 1,335,163
____________ ____________
$36,209,584 $33,411,011
Accumulated depreciation (17,144,314) (14,254,156)
____________ ____________
$19,065,270 $19,156,855
____________ ____________
Depreciation expense amounted to $2,280,871, $1,953,207 and $1,642,975 for
the years ended June 30, 1999, 1998 and 1997, respectively.
During December 1998, as part of a strategic restructuring the Company
wrote off assets totaling $2,440,000 (See Note 15).
During fiscal 1998, the Company purchased an airplane from its executive
officer for $1,375,000 by assuming the loan on the airplane from GE Capital
Credit Corporation, and issuing a note to the Company's CEO. The balance
owing to GE Capital Credit Corporation on June 30, 1999 and 1998 was
$754,014 and $872,881, respectively. The balance owing to the Company's
CEO on June 30, 1999 and 1998, was -0- and $415,821, respectively.
Construction costs of production molds for new and existing product lines
are capitalized and depreciated over an estimated useful life of eight
years. Depreciation starts when the production mold is placed in service
to manufacture the product. The costs include the direct materials, direct
labor, and an overhead allocation based on a percentage of direct labor.
Production molds under construction amounted to $80,123 and $219,227 at
June 30, 1999 and 1998.
During Fiscal 1999 and 1998, the Company sold fixed assets and realized
gains amounting to $69,100 and $4,637, respectively.
Note 4. Notes Payable - Related Party.
The Company issued a $415,821 note payable to an officer and director of
the Company, in connection with the purchase of an airplane. The note
accrues interest at a fixed rate of 8.5%, which is payable monthly. The
principle amount was due in a balloon payment on March 31, 1999 and was
paid in full.
31
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Long-term Debt and Pledged Assets.
The following is a summary of long-term debt at:
June 30,
__________________________
1999 1998
____________ ____________
Loan payable to General Electric
Capital Corporation assumed on an
airplane purchased by the Company
from an officer and director
during September, 1997 with a
carrying value of $959,179 on that
date. The loan has a fixed
interest rate of 7.26%. Monthly
payments of $15,181. Matures
August 1, 2004. $ 754,014 $ 872,881
6.30% loan payable to Wachovia
Bank for the purchase of a vehicle,
monthly payment of $771 through
December 2002, secured by the
vehicle purchased. 28,989 -
7.15% loan payable to 1st Citizens
Bank for the purchase of a vehicle,
monthly payments of $1,055 through
October 2002, secured by the vehicle
purchased. 37,475 47,079
6.30% loan payable to Wachovia Bank
for the purchase of a vehicle,
president of the Company pays the
monthly payments of $979 through
December 2002, secured by the vehicle
purchased [See Note 11] 36,807 -
Amounts borrowed against the cash
surrender value of keyman life
insurance policies during June 1998,
fixed interest rate of 8% on $274,060
and variable interest rate of 7.39% at
June 30, 1999 on the remaining $62,033,
monthly payments of $10,000. 336,093 431,678
$14,000,000 credit agreement with
General Electric Capital Corporation.
(See Below). 11,409,552 9,129,622
____________ ____________
12,602,930 10,481,260
Less: Current maturities included in
current liabilities: (2,464,535) (981,365)
____________ ____________
$10,138,395 $ 9,499,895
____________ ____________
32
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Long-term Debt and Pledged Assets. [Continued]
On December 31, 1996, the Company concluded a $10,000,000 credit agreement
with General Electric Capital Corporation. Under the terms of the new
credit agreement, the Company refinanced substantially all of its interest
bearing debts and had additional funds made available to it for expansion.
Initially, the Company borrowed $7,500,000 to primarily refinance existing
debts. All of the Company's prior interest bearing debts to MetLife
Capital Corporation, Deutsche Financial Services, GE Capital Corporation,
Branch Bank & Trust Leasing Corp., and other smaller creditors were paid
off entirely. During 1998 and 1997 the Company borrowed the additional
$1,500,000 and $1,000,000, respectively, to fund plant and equipment
additions. The credit agreement has a fixed interest 7.02%. The agreement
calls for monthly payments of $123,103 and has a ten-year amortization with
a five-year call. The credit agreement is secured by all of the Company's
real and personal property and by the Company's assignment of a $1,000,000
key man life insurance policy. The credit agreement was amended and
restated during 1999 to include an additional $4,000,000 credit loan, with
a fixed interest rate of 7.02%, maturing January 2, 2002, monthly
payments of $100,000, and a prepayment penalty of $80,000 if paid prior to
September 1, 2000 or $40,000 if paid prior to September 1, 2001.
The estimated aggregate maturities required on long-term debt at June 30,
1999 are as follows:
2000 $ 2,464,535
2001 2,460,416
2002 7,318,362
2003 185,677
2004 173,940
Thereafter -
____________
$12,602,930
____________
Note 6. Common Stock, Options, and Treasury Stock.
Common Stock: The Company issued 127,500 new restricted common shares at
$8.17 per share to acquire Mach Performance, Inc. in October, 1996 from a
director of the Company. During June 1997, the Company discontinued the
operations and subsequently filed a lawsuit asking for the rescission of
the acquisition agreement from Mach Performance, Inc. to recover the
127,500 restricted common shares. During July, 1998 the parties entered
into a settlement agreement resulting in the recovery and cancellation of
52,500 shares of common stock. (See Note 13).
Stock Options: During March 1999, the shareholders voted to adopt the 1999
Employee Stock Option Plan (the Plan), which expires January 11, 2009.
Under the Plan, the board is empowered to grant up to 120,000 stock options
to employees, officers, directors and consultants of the Company.
Additionally, the Board will determine at the time of granting the vesting
provisions and whether the options will qualify as Incentive Stock Options
under Section 422 of the Internal Revenue Code (Section 422 provides
certain tax advantages to the employee recipients). The Plan was approved
by the shareholders of the Company during January 1999. During January
1999, the Company granted an officer of the Company 30,000 options under
the Plan. The options are exercisable at $5 per share and 5000 options
vest quarterly beginning June 30, 1999. The Options expire on January 11,
2004. As of June 30, 1999 none of the options have been exercised.
33
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Common Stock, Options, and Treasury Stock. [Continued]
Under the terms of the Company's qualified 1986 employee incentive stock
option plan, which expired on December 5, 1996, options were authorized to
purchase up to 300,000 shares of the Company's common stock at a price of
no less than 100% of the fair market value on the date of grant as
determined by the Board of Directors. Options can be exercised for a ten-
year period from the date of grant. During Fiscal 1995, 30,000 options
each were granted to the former Chief Executive Officer and to the Chief
Financial Officer at $3.94 and $3.67 per share, respectively. During fiscal
1997 the former Chief Financial Officer exercised his 30,000 options.
During June 1998, 30,000 options, issued to a former officer of the Company
in the acquisition of Mach Performance, Inc., were cancelled in connection
with the settlement agreement (See Note 13).
On June 21, 1995, the shareholders voted to adopt the 1995 stock option
plan. The plan allowed up to 450,000 common stock options to be granted by
the Board of Directors to employees or directors of the Company. On August
4, 1995, the Board of Directors voted to grant the 450,000 stock options to
Mr. Reginald M. Fountain, Jr. at $4.67 per share, exercisable for 10 years
from the date granted, on a non-qualified basis. As of June 30, 1999, none
of these options have been exercised.
Effective March 23, 1995, the Board of Directors authorized the issuance of
30,000 stock options to each of the Company's four outside directors at
$3.58 per share on a non-qualified basis. During the year ended 1999, a
former director exercised 30,000 stock options for $107,400. During the
year ended June 30, 1998, a director exercised 30,000 stock options for
$110,000. During Fiscal 1997, a director exercised his options for 24,000
shares for $86,000 and assigned, with the specific consent of the Company's
Board of Directors, the remaining 6,000 options to another party.
A summary of the status of the options granted under the Company's stock
option plans and other agreements at June 30, 1999, 1998 and 1997, and
changes during the periods then ended is presented in the table below:
1999 1998 1997
__________________ __________________ __________________
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
_________ ________ _________ ________ _________ ________
Outstanding at
beginning of
period 546,000 $4.50 606,000 $4.63 630,000 $6.54
Granted 30,000 5.00 - - 30,000 8.17
Exercised (30,000) 3.58 (30,000) 3.58 (54,000) 3.58
Forfeited - - - - - -
Canceled - - (30,000) 8.17 - -
_________ ________ _________ _________ ________ ________
Outstanding at
end of period 546,000 $4.57 546,000 $4.50 606,000 $4.63
_________ ________ _________ _________ ________ ________
Exercisable at
end of period 522,000 $4.55 546,000 $4.50 576,000 $4.45
_________ ________ _________ _________ ________ ________
Weighted average
fair value of
options granted 30,000 $ .14 - $ - 30,000 $ .28
_________ ________ _________ __________ _______ ________
34
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Common Stock, Options, and Treasury Stock. [Continued]
The fair value of each option granted is estimated on the date granted
using the Black-Scholes option pricing model with the following weighted-
average assumptions used for grants during the years ended June 30, 1999
and 1997, respectively: risk-free interest rates of 4.5% and 6.6%,
respectively, expected dividend yields of zero for all periods, expected
lives of 5 and 4 years, respectively, and expected volatility of 60% and
83%, respectively. No options were granted during the year ended June 30,
1998.
A summary of the status of the options outstanding under the Company's
stock option plans and other agreements at June 30, 1999 is presented
below:
Options Outstanding Options Exercisable
____________________________________ ______________________
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
___________ ___________ ___________ ____________ ___________ __________
$3.58-$3.94 66,000 5.9 years 3.67 66,000 3.67
$4.67 450,000 6.1 years 4.67 450,000 4.67
$5.00 30,000 4.6 years 5.00 6,000 5.00
The Company accounts for its option plans and other option agreements under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations. Accordingly, since all options
granted were granted with exercise prices at market value or above, no
compensation cost has been recognized in the accompanying financial
statements. Had compensation cost for these options been determined based
on the fair value at the grant dates for awards under these plans and other
option agreements consistent with the method prescribed by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", the Company's net income and earnings per common share would
have been the proforma amounts as indicated below:
Year Ended June 30,
______________________________________
1999 1998 1997
____________ ___________ ___________
Net Income(loss) As reported $(1,225,791) $ 2,740,487 $ 1,239,951
Proforma $(1,256,233) $ 2,740,487 $ 1,234,605
Earnings per share As reported $ (.27) $ .58 $ .25
Proforma $ (.27) $ .58 $ .25
Treasury Stock: The Company holds 15,000 shares of its common stock. This
common stock is accounted for as treasury stock at its acquisition cost of
$110,748 ($7.38 per share) in the accompanying financial statements.
35
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Income Taxes.
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109. SFAS 109 requires the
Company to provide a net deferred tax asset or liability equal to the
expected future tax benefit or expense of temporary reporting differences
between book and tax accounting and any available operating loss or tax
credit carryforwards.
At June 30, 1999 and 1998, the totals of all deferred tax assets were
$2,388,559 and $1,328,619, respectively. The totals of all deferred tax
liabilities were $1,066,740 and $1,196,459. The amount of and ultimate
realization of the benefits from the deferred tax assets for income tax
purposes is dependent, in part, upon the tax laws in effect, the Company's
future earnings, and other future events, the effects of which cannot be
determined. The net decrease in the valuation allowance during the years
ended June 30, 1999 and 1998, were $0 and $425,070, respectively.
The Company has an unused operating loss carryforwards at June 30, 1999 of
approximately $2,080,000, which expires in 2019.
As a result of the federal alternative minimum income tax, the Company
incurred current tax expense amounting to $258,371 for Fiscal 1997. The
components of federal income tax expense from continuing operations consist
of the following:
Year Ended June 30,
_____________________________________
1999 1998 1997
___________ _______