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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, 2002
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. [ ] Yes [ X ] No
The aggregate market value of the voting stock held by non-affiliates
of the registrant was $7,602,506 at September 18, 2002 based upon a
closing price of $3.29 per share on such date for the Company's Common
Stock.
As of September 18, 2002 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: The Company's definitive
proxy statement to be filed with the Commission in connection with its
annual meeting of shareholders.
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 fishing boats
and sport cruisers intended for that segment of the recreational power
boat market where speed, performance, and quality are the main criteria
for purchase. The Company also produces 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.
Products.
The majority of the company's recreational products are based upon a
deep V-shaped fiberglass hull with a V-shaped pad, a notched transom, and
a positive lift step hull. 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, smoothest, safest,
and best-handling boats of their kind.
The Company's sport boats, ranging from 27' to 47' are of
inboard/outboard design. These boats are propelled by single, twin, or
triple gasoline or diesel engines ranging from 300 HP to more than 900 HP
each. The Company also builds custom racing boats, outboard powered
center consoles, and outboard or stern drive cabin model offshore sport
fishing boats ranging from 23' through 38'. During Fiscal 2001, the
Company completed tooling and design of a 38' wide-beam cruiser, and a 38'
wide-beam fishing boat. During Fiscal 2002, the Company completed the
development of a 48' wide-beam cruiser and a 34' wide-beam fishing boat.
These wide-beam models form a new product line aimed at the important
middle market of family oriented cruisers.
In addition to Sportboats, Fishing boats, and the new Cruiser Lines,
the Company also produces a line of military/governmental boats of various
configurations. These boats are commercial versions of the large
sportboats and fishing boats, and along with the rigid inflatable boats
(RIB), form a separate military/commercial product line. The Company also
has a joint agreement with Marine Technologies Inc. (MTI) to produce the
Fountain Scism 42' High Performance Catamaran boat designed and tooled by
Randy Scism. The Company produces race boat hulls and decks which Mr.
Scism completes and sells. The Company builds a pleasure boat version of
this Catamaran that is sold to its dealer network.
The Company's 47' Lightning Sport Boat 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 $437,000 to $664,000. This boat's standard
features include a custom windshield, 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".
The Company's 42' Lightning, designed with the second-generation
positive lift hull, comes with a full wrap around windshield, as well as
an impressive range of speed, stability and ride comfort. This top
selling model equipped with special engines currently holds the world
speed record for V-bottom boats at 143.946 mph.
2
The 38' Lightning or Fever operates at speeds of between 70 and 100
mph. The retail price ranges from $270,000 to $341,000, 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". In
Fiscal 2002, the 38' Lightning incorporated a new superventilated hull
that is the most advanced superventilated hull produced by Fountain to
date and it is based on their successful design, enhancing performance and
interior space.
The 35' Lightning Sport Boat was totally redesigned and introduced in
Fiscal 2000 to go with a higher freeboard, new twin-step design, and new
deck and interior. It operates at speeds between 70 and 100 mph. This
boat won the 2001 Offshore Boat of the Year and has proven itself as the
fastest boat in Factory II history, setting the kilo record at 94.187 mph.
This boat's retail price ranges from $220,000 to $290,000, depending
primarily upon the type of engines selected.
The 29' Fever is one of the most popular boats. It operates at
speeds of 65 to 85 mph and retails between $113,000 and $150,000 depending
on engine size. It has great balance and speed for a single engine and
operates in offshore sea conditions with superior safety and handling.
This boat is also offered with twin small block engines. The Company
introduced a new 29' deck in Fiscal 2001. This model has been awarded the
2001 Outstanding Sport Boat Performance Award and has set the 2000 APBA F-
1 record at 89.873 mph.
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 the 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
eleven years.
The additional models include the 29' twin engine center console
model and 23' single engine center console model. The design,
construction, and performance of these models, together with the proven
features of the 31' center console model, makes a line that appeals to
many experienced sport fishermen, in addition to the weekend warrior.
To further enhance its sport fishing 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 that incorporates a cabin with
standup headroom, an enclosed head with shower, and a full galley. With
twin outboard engine power, this model is produced either as a fishing
machine or as a recreational cruiser.
The Company also produces both a 23' and a 29' walk around cabin
fishing boat with outboard engine power and a single stern drive 29' and a
32' walk around cabin fishing model with twin stern drive power.
During Fiscal 2001, the Company launched its new wide beam craft.
The 38' fish boat was introduced in the latter part of calendar 2000. The
38' fish boats feature triple engines and speeds above 69 mph. At cruise
speed, the boat has a 500 mile range. The 38' Cruiser was introduced at
the Miami Boat Show in February of 2001. The 38' Express Cruiser offers
the customer the luxury and space of a full Cruiser while maintaining the
performance and handling of a Fountain sport boat. Both boats have been
extremely well received by the market.
In Fiscal 2002, the Company introduced the latest in their cruiser
and wide-beam lines. The 48' wide-beam cruiser debuted offering a whole
new level of comfort and luxury. With speeds of up to 65 mph, the 48'
Express Cruiser launched the Company into a new expanding market segment
with an edge in performance and class. This boat retails between $650,000
- - $824,000, depending upon engine choice and option configurations. The
34' wide-beam fish boat introduced in Fiscal 2002 retails between $168,000
- - $193,000 depending upon engine selection, and will reach speeds in
excess of 68 miles per hour. This model has been sold out since
introduction, and orders for this model extend into January 2003.
3
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
2002 2001 2000
------ ------ ------
Sport boats 115 219 325
Wide Beam Fish 44 16 -
Wide Beam Cruisers 21 10 -
Sport fishing boats 48 84 112
Other 3 1 9
------ ------ ------
Total 231 330 446
====== ====== ====
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 21 full-time employees. Amounts spent on design, research,
and development to build new plugs and molds in recent years were:
Design Construction
Research & of New Plugs
Development and Molds
----------- ------------
Fiscal 2002 $952,332 $1,370,526
Fiscal 2001 $813,710 $2,819,252
Fiscal 2000 $926,486 $1,154,908
For Fiscal 2003, design, research and development planned expenses
are estimated to be $500,000 and plug and mold construction expenditures
are estimated to be $750,000. These expenditures will complete work
already in progress to update existing tooling and finalize a new deck
modification for the Company's 38' wide beam cruiser.
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 450
sport and fishing boats, and 100 cruisers 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.
4
As one of the most highly integrated manufacturers in the marine
industry, the Company manufactures many metal, plexiglass, plastic, and
small parts (such as fuel tanks, seat frames, instrument panels, bow
rails, brackets, T-tops, and windscreens) to assure that its quality
standards are met. In addition, the Company also manufactures all of its
upholstery to its own custom specifications and benefits from receiving
these 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, 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 a hazardous waste disposal site resulting from the disposal of a
hazardous substance at those sites by a third-party contractor of the
Subsidiary. (See Legal Proceedings.)
Recreational powerboats must be certified by the manufacturer to meet
U.S. Coast Guard specifications. Their safety is subject to federal
regulation under the Boat Safety Act of 1971, as amended, pursuant to
which boat manufacturers may be required to recall products for
replacement of parts or components that have demonstrated defects
affecting safety. The Company has never had to conduct a product recall.
In addition, boats manufactured for sale in the European Community must
meet CE Certification Standards.
Sales and Marketing.
Sales are made through approximately 32 dealer shipping locations
throughout the United States. The Company also has 3 international
dealers. Most of these dealers are not exclusive to the Company and carry
the boats of other companies, including some boats that 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 2002 Fiscal 2001 Fiscal 2000
----------- ----------- -----------
United States.......... $36,046,547 $43,191,806 $55,777,049
Canada, Mexico, Central
and South America..... $ 1,500,145 $ 2,509,638 $ 1,485,615
Europe and
the Middle East....... $ - $ 380,190 $ 269,797
Asia................... $ - $ - $ -
----------- ----------- -----------
Total.................. $37,546,692 $46,081,634 $57,532,461
=========== =========== =========
The Company targets a portion of its advertising program into foreign
countries through various advertising media. It continues to seek new
dealers throughout Europe, South America, the Far East and the Middle
East. 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.
5
For Fiscal 2002, one dealer accounted for 11.8% of sales, one
accounted for 11.7% of sales and two each accounted for 8.0% of sales.
For Fiscal 2001, one dealer accounted for 11.5% of sales, one for 10.5% of
sales and one for 6.0% of sales. For Fiscal 2000 one dealer accounted for
7.4% of sales, one for 6.1% of sales and one for 5.7% of sales. The
Company believes that the loss of any particular dealer would not have a
materially adverse affect on sales, and is actively pursuing the addition
of new, quality dealers. As sales continue to grow through dealer
additions, 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 National Director of
Sales who is responsible for developing a full dealer organization for
sport boats, sport fishing boats and express cruisers. The Company is
seeking to establish separate sport boat, fishing boat, and cruiser
dealers in most marketing areas due to the specialization of each type of
boat and the different sales programs required.
Although a sales order can be cancelled at any time, most boats are
pre-sold to a dealer before entering the production line. To date,
cancellations have not had a material effect on the Company. The Company
normally does not manufacture boats for its own inventory.
The Company ships boats to some dealers on a cash-on-delivery basis.
However, the majority 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 directly to the Company.
Generally, payment is made to the Company within five business days. When
the dealer sells the boat to a retail customer, the dealer repays the
lender, thereby restoring its available credit line. The dealers make
curtailment payments (principal payments) on the boats when required by
their particular commercial lenders. Similar sales promotion programs
were in effect during fiscal years 2001 and 2000.
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 a new or like new condition. 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
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 by participation in 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, Outdoor Channel 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 contributes 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.
As part of the marketing program for its line of sport fishing
boats, the Company sponsors several outstanding sport fishermen. One
Fountain fisherman, Clayton Kirby, placed in the top ten in the prominent
Southern Kingfish Association, eight out of the last ten years. He also
won the coveted King Mackerel Tournament in 2000, and is a four-time
6
winner of the Greater Jacksonville King Fish Tournament. Fountain
fishermen have won the coveted SKA `Angler of the Year' title 5 out of the
last 11 years, more than any other boat manufacturer. Another Fountain
fisherman, Chuck Arnold, has won the brand new Division Four American
Striper Association (ASA). The ASA is held throughout the northeast in
areas ranging from Virginia to Maine. The Fountain fishing teams winning
records have given the sport fishing boats favorable exposure to serious
sport fishermen, in particular with respect to the superior performance of
Fountain's fishing boat line.
Product Warranty.
The Company warrants its boat hull and deck structure against defects
in material and workmanship for a period of six years. Other boat
components are covered in accordance with the manufacturer's warranty
through the Company. The engine manufacturer warrants engines included in
the boats. Warranty expenses of $1,936,600 or 5.16% of sales were
incurred in Fiscal 2002, and $1,380,800 of expense or 3.00% of sales were
incurred in Fiscal 2001 and charged against net income. A $870,000
reserve for warranty expenses estimated to be incurred in future years had
been established at June 30, 2002.
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:
Formula, a Division of Thunderbird Products Corporation
Baja Boats, a Division of Brunswick Corporation
Cigarette Racing Team, Inc.
Donzi, American Marine Holdings
The Company believes that in its market segment, speed, performance,
quality, image, and safety are the main competitive factors, with style
and price also being a consideration.
Market demographics and industry experience indicate that the cruiser
market is the best potential growth market. Next in line are fishing
boats; however, there are more fishing boat manufacturers than there are
sport boat manufacturers.
The Company believes the current product owners, many of whom have
purchased multiple and increasingly larger boats from the Company,
regenerate a market ready for expansion into the cruiser segment.
Employees.
As of September 2002 the Company had 348 employees, of whom ten were
executive and management personnel. Seventeen 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 excellent. 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 $9,640,808 at June 30, 2002. The operating facility contains
buildings totaling 235,040 square feet located on fifteen acres. The
buildings consist of the following:
7
Approximate
Square Footage Principal Use
-------------- -----------------------------------
Building 1..... 13,200 Executive offices, shipping,
receiving, and paint shop.
Building 2..... 7,200 Final prep.
Building 3..... 75,800 Lamination, upholstery, assembly,
inventory, 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 Cruiser manufacturing.
Building 12.... 5,760 Maintenance and storage.
--------------
Total ......... 235,040
============
Over the last several years there have been significant expenditures
for property, plant and equipment, which include plant additions, a travel
lift bay, a boat ramp, and docking facilities along a 600-foot canal
leading to the Pamlico River. In addition, the Company has approximately
200,000 square feet of concrete paving surrounding the buildings and
providing guest or employee parking. The present plant site can
accommodate an addition of up to 300,000 square feet of manufacturing
space.
Item 3. Legal Proceedings.
As of June 30, 2002, the Company's chief operating subsidiary was a
defendant in 1 product liability suit and 4 alleged breach of warranty
suits. In the Company's opinion these lawsuits are without merit and,
therefore, the Company intends to vigorously defend its interest in such
suits. The Company carries sufficient liability and product liability
insurance to cover attorney's fees and any losses that may occur from a
product liability or breach of contract suit, over and above applicable
insurance deductibles. The management of the Company believes that none
of such current proceedings will have a material adverse effect.
The Company's subsidiary was notified by the United States
Environmental Protection Agency (EPA) and the North Carolina Department of
Environmental Health and Natural Resources that it had been identified as
a potentially responsible party in the remediation of contamination at two
clean up sites. The Group Administrator/Counsel estimated the Company's
future share of remediation cost not to exceed approximately $20,000.
Item 4. Submission of Matters to a Vote of Security Holders.
None applicable.
8
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
The Company's common stock, $.01 par value, trades on the NASDAQ
National Market System under the symbol "FPWR".
The following table lists certain historical price information the
Company's common stock for each quarterly period during the Company's past
two fiscal years. Amounts shown reflect high and low sales prices of the
common stock on the NASDAQ National Market System.
Quarter Ending High Low
September 2000 2.44 2.03
December 2000 1.66 1.00
March 2001 2.63 2.00
June 2001 2.25 1.64
September 2001 2.10 1.51
December 2001 1.83 1.16
March 2002 3.50 2.50
June 2002 2.95 1.41
The Company has not declared or paid any cash dividends since it
began operations. Any decision as to the future payment of dividends will
depend on the Company's earnings, financial position and such other
factors as the Company's Board of Directors deems relevant.
On September 15, 2002, there were approximately 200 holders of record
for the Company's common stock.
9
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
As described more fully below at "Business Environment", most of the
Company's shipments to dealers were financed through floor plan
arrangements with third-party lenders pursuant to which the Company may be
required to repurchase boats repossessed by the lenders if the dealer
defaults under his credit arrangement. The balance of shipments was
C.O.D. or payment prior to shipment, in which case, the Company has no
repurchase liability.
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 has passed to the
customer, and that there is no direct commitment to repurchase the boat or
to pay floor plan interest beyond the sales program terms. This is the
method of sales recognition believed to be in use by most boat
manufacturers.
At June 30, 2002, 2001, and 2000, 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. There were no deferred sales or
cost of sales estimated at June 30, 2002, 2001, and 2000.
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. This liability amounted to approximately
$16,066,953 and $23,747,900 at June 30, 2002 and 2001, respectively.
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.
Business Environment.
Fiscal 2002 presented the Company with an assortment of difficult
challenges. Indicators early in the year led management to expect a
complicated sales scenario for the 2002 fiscal period. Other challenges
faced the Company in the form of an aging dealer inventory and a sales mix
that obliged the Company to build a heavier percentage of fish boats than
ever before.
Fiscal year sales were down from Fiscal 2001 over 19%, from
$46,081,634 to $37,546,692 in Fiscal 2002. The Company made the decision
to assist its dealers in retailing their aged inventory, issuing over
$2,000,000 in special discounts, approximately 23% of the Fiscal 2002
decrease.
Dealer inventory levels were monitored and managed with the Company
ending the year at a dealer inventory level that was the lowest of the
last six years, costing the Company during the Fiscal 2002 year, but
setting the stage for Fiscal 2003 new product sales.
During the year, the Company completed the tooling and design of
their two newest models in the wide-beam line, the 34' wide-beam fish boat
and the 48' wide-beam cruiser. These units were first introduced into the
market in February 2002 at the Miami International Boat Show. These two
lines were well accepted by the market. Since their introduction in
February 2002, sales of these two models accounted for approximately 10%
of 2002 annual sales. Sales from the new lines introduced in the Miami
2001 Show sold strong during the year, with the 38' wide-beam fish and the
38' wide-beam cruiser generating over 20% of the Fiscal 2002 total sales.
The sales mix was perhaps the biggest challenge. While the new
larger fish boats show profitable margins, the previously existing
fishboat models tended toward a very small profit for the Company. Ending
the year with total mix at almost 40% fish boats in an overall low volume
fiscal year, the Company faced significant difficulties operating with low
gross margins from their sales.
10
No boats were repurchased in Fiscal 2002, 2001, and 2000 in
connection with floor plan arrangements. At June 30, 2002, 2001, and
2000, the Company had recorded a $200,000 reserve for losses which may be
reasonably expected to be incurred on boat repurchases in future years.
The Company also completed refinancing its long-term debt in
November 2001. Total proceeds from the note were $10,000,000 which was
used to payoff an existing note, to provide working capital, and to
complete the cruiser tooling projects.
For the coming year, Fiscal 2003, the Company has established a
management team from its top level, senior managers. This team has
launched the year with a plan for significant improvement. The plan
requires strict administration of cost savings and expense cuts, but a new
sales strategy provides the essential basis for the plan's success, hence
a profitable and successful Fiscal 2003.
Results of Operations.
Fiscal 2002 net loss for the Company was ($7,031,593) or ($1.49) per
share. This compares to a net loss of ($899,526) or ($.19) per share for
Fiscal 2001. The discounts issued to move aging dealer inventory, the low
sales volume and poor sales mix resulted in the Fiscal 2002 loss.
Operating losses increased to ($5,238,138) from ($2,443,431) Fiscal
2001. The reduction in income was driven by the market decline, and a
less favorable sales mix as shipments of smaller fish boats, which are
lower margin, proved strong during the year.
Overhead expenses increased slightly as a percent of sales, a result
of the drop in the volume level required to cover fixed factory overhead.
This volume decrease is reflected in the decline in gross margins from
13.46% in 2001 to 4.14% in Fiscal 2002.
Depreciation expense was $2,294,254 for Fiscal 2002, $2,293,284 for
Fiscal 2001, and $2,397,085 for Fiscal 2000. Depreciation expense by
asset category was as follows:
Fiscal Fiscal Fiscal
2002 2001 2000
---------- ---------- ----------
Land improvements $ 126,037 $ 121,857 $ 116,350
Buildings $ 294,921 $ 294,354 $ 290,825
Molds & plugs $1,350,466 $1,184,807 $1,178,138
Machinery & Equipment $ 412,493 $ 473,496 $ 481,074
Furniture & fixtures $ 53,809 $ 57,663 $ 57,677
Transportation equipment $ 56,533 $ 161,107 $ 246,139
Racing Equipment $ -0- $ -0- $ 26,882
---------- ---------- ----------
Total $2,294,254 $2,293,284 $2,397,085
========== ========== =======
11
Following is a schedule of the net fixed asset additions (deletions)
during Fiscal 2002 and Fiscal 2001.
Fiscal 2002 Fiscal 2001
----------- -----------
Buildings $ -0- $ 201,207
Land and Improvements $ 36,214 $ -0-
Molds and plugs $ 2,099,710 $ 2,661,242
Construction in Progress $ (729,182) $ 443,433
Machinery & equipment $ 154,286 $ 89,243
Furniture & fixtures $ 5,090 $ 508
Transportation equipment $ 35,490 $(1,729,438)
Racing equipment $ (65,960) $ -0-
----------- -----------
Total $ 1,535,648 $ 1,666,195
=========== =========
Overall selling and administrative expenses were reduced by $670,612
in Fiscal 2002 from $8,646,929 in Fiscal 2001 to $7,976,317 in Fiscal
2002, after additional expense of $1,182,320 for impairment of long-lived
assets in Fiscal 2002.
Selling expenses were $4,758,384 for Fiscal 2002, $5,955,103 for
Fiscal 2001 and $7,370,319 for Fiscal 2000. The Company continued its
product promotions in Fiscal 2002, with focus on the new cruiser and wide-
beam models. The Company also maintained a presence in the offshore
racing circuit and tournament fishing programs, but significantly reducing
its expenditures relative to the prior year. More customers are racing
Fountain boats under their own sponsorship while still maintaining the
Company's leadership position.
Major selling expenses for the past three fiscal years were as
follows:
Fiscal 2002 Fiscal 2001 Fiscal 2000
----------- ----------- -----------
Fishing & racing $ 1,011,007 $ 1,508,162 $ 2,424,918
Advertising $ 775,524 $ 1,123,977 $ 1,456,592
Salaries & commissions $ 599,337 $ 705,249 $ 788,108
Boat shows $ 634,767 $ 568,806 $ 563,536
Dealer incentives $ 684,311 $ 1,171,067 $ 1,421,703
Other selling expenses $ 1,053,438 $ 877,842 $ 715,462
----------- ----------- -----------
Total $ 4,758,384 $ 5,955,103 $ 7,370,319
=========== =========== =========
General and administrative expenses include the executive, finance,
personnel, information technology, legal and administrative operating
expenses of the Company. These expenses were $2,035,613 for Fiscal 2002,
$2,691,826 for Fiscal 2001, and $3,260,571 for Fiscal 2000.
In Fiscal 2002, the Company recorded an impairment loss and wrote
down certain long-lived assets to realizable values. For Fiscal 2001, the
Company received $118,503 in other income and there was a gain of $500,446
on the disposal of assets. For Fiscal 2001, the Company recorded a gain
of $1,107,819 on insurance claims related to final insurance settlement
from hurricane damages.
12
Interest expense net of amounts capitalized was $809,571 for Fiscal
2002, $700,965 for Fiscal 2001, and $1,065,514 for Fiscal 2000. Interest
expense increased slightly in Fiscal 2002 primarily from the new long-term
debt amortization.
Based upon the Company experiencing consecutive operating losses, the
Company established a valuation allowance of approximately $2,600,000
against deferred tax assets because of the uncertainty surrounding the
realization of the Company's net operating loss carryforwards. The amount
of and ultimate realization of the benefits from the net operating loss
carryforwards 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. Management recognizes that
these net operating loss carryforwards will be available to offset future
taxable income upon their return to profitability.
Liquidity and Financial Resources.
Net cash used by operations in Fiscal 2002 amounted to ($1,734,962).
Net loss plus adjustments to reconcile net loss to net cash used by
operating activities including depreciation expense of $2,294,254 and an
impairment on the long-lived assets of $1,182,320 and other non-cash
transactions used ($2,635,695) before other changes in assets and
liability accounts. $1,395,518 was provided by decrease in inventories.
The ending cash balance was $329,640.
Net cash provided by operations in Fiscal 2001 amounted to
$4,284,701. Net loss plus adjustments to reconcile net loss to net cash
provided by operating activities including depreciation expense of
$2,293,284 changes in deferred taxes and gain on sale of assets
contributed $500,446 and provided net cash of $483,801 before changes in
asset and liability accounts. However, relatively large amounts were
needed to continue investment activities in constructing property, plant,
equipment, and molds. The ending cash balance was $796,606.
Net cash provided by operations in Fiscal 2000 amounted to
$3,989,220. Net income plus adjustments to reconcile net income to net
cash provided by operating activities including depreciation expense of
$2,397,085 changes in deferred taxes of $1,020,970 and loss on sale of
assets of $12,846 provided net cash of $4,689,243 before changes in asset
and liability accounts. However, relatively large amounts were needed to
complete investment activities in purchasing property, plant, equipment,
inventory and molds. The ending cash balance was $1,983,439.
Investing activities for Fiscal 2002 required $1,820,959, of which
$1,370,526 was used to complete construction of new molds and plugs,
$231,080 was used to purchase property, plant and equipment, and $219,536
was used for payments increasing the cash surrender value of certain key
man life insurance policies.
Investing activities for Fiscal 2001 required $1,875,972, including
$590,591 used for property, plant and equipment, $2,819,252 used for
construction of molds and plugs, $216,849 used for payments increasing the
cash surrender value of life insurance policies and proceeds of $1,750,720
generated from the sale of property and equipment.
Investing activities for Fiscal 2000 required $2,400,549, including
$1,678,236 for property, plant and equipment, $1,154,908 for additional
molds and plugs, $122,637 for payments increasing the cash surrender value
of life insurance policies and proceeds of $555,232 from the sale of
equipment.
Financing activities for Fiscal 2002 provided $3,088,955. The
proceeds from the notes payable and long term debt contributed $3,955,644.
Payments on long-term debt used $560,181, and payments of deferred loan
costs were $306,508.
Financing activities for Fiscal 2001 used $3,595,562. Included in
this amount are proceeds from issuance of notes payable from Northwestern
Mutual Life for $150,000 and debt repayment to General Electric Capital
Corporation and others in the amount of $3,745,562.
Financing activities for Fiscal 2000 used $1,822,534. Included in
this amount are proceeds from issuance of notes payable and long-term debt
to Northwestern Mutual Life Insurance and General Electric Capital
Corporation for $760,212 and debt repayment in the amount of $2,582,746.
13
The net decrease in cash for Fiscal 2002 was $466,966, primarily due
to the net loss resulting from decreased sales volume and sales discounts
issued to move aging dealer inventory. The net decrease in cash for
Fiscal 2001 was $1,186,833, primarily due to the repayment of long-term
debt, and the investment in equipment and molds. The net decrease in cash
for Fiscal 2000 was $233,862, primarily due to the investment in
facilities, equipment, and molds. The Company has implemented an
aggressive budget for Fiscal 2003 that they believe will result in
significant improvement in sales and yield improved net results during the
year and at their year-end.
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, 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.
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.
14
Item 8. Financial Statements and Supplementary Data.
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, 2002 and 2001,
and the related consolidated statements of operations, stockholders'
equity and cash flows for the years ended June 30, 2002, 2001 and 2000.
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 in the United States of America. 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, 2002 and 2001, and the consolidated results of their operations and
their cash flows for the years ended June 30, 2002, 2001 and 2000 in
conformity with generally accepted accounting principles in the United
States of America.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 16 to the
financial statements, the Company, has current liabilities in excess of
current assets and has incurred recent losses. These factors raise
substantial doubt about the ability of the Company to continue as a going
concern. Management's plans in regards to these matters are also
described in Note 16. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
July 26, 2002
Salt Lake City, Utah
15
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30,
__________________________
2002 2001
____________ ____________
CURRENT ASSETS:
Cash & cash equivalents $ 329,640 $ 796,606
Accounts receivable, less allowance for doubtful
accounts of $27,841 for 2002 and 2001 3,003,992 1,939,886
Inventories 3,090,451 4,555,969
Prepaid expenses 328,783 172,538
Current tax assets 1,132,181 1,469,937
____________ ____________
Total Current Assets 7,885,047 8,934,936
PROPERTY, PLANT AND EQUIPMENT, net 17,114,661 18,919,634
CASH SURRENDER VALUE OF LIFE INSURANCE 1,179,223 959,687
OTHER ASSETS 355,765 133,495
____________ ____________
$ 26,534,696 $ 28,947,752
____________ ____________
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 919,182 $ 722,661
Current maturities of capital lease 15,674 13,989
Accounts payable 6,877,394 5,545,266
Accounts payable-related party 147,234 137,463
Accrued expenses 1,193,672 1,006,459
Dealer incentives 921,707 2,030,126
Customer deposits 631,090 321,175
Allowance for boat repurchases 200,000 200,000
Warranty reserve 870,000 590,000
____________ ____________
Total Current Liabilities 11,775,953 10,567,139
LONG-TERM DEBT, less current maturities 9,791,949 6,580,299
CAPITAL LEASE, less current maturities 35,212 49,605
DEFERRED TAX LIABILITY 962,880 759,577
COMMITMENTS AND CONTINGENCIES (See Note 9) - -
____________ ____________
Total Liabilities 22,565,994 17,956,620
____________ ____________
STOCKHOLDERS' EQUITY
Common stock, $.01 par value,
200,000,000 shares authorized,
4,732,608 shares issued and outstanding 47,326 47,326
Additional paid-in capital 10,343,935 10,303,640
Retained earnings (deficit) (6,280,679) 750,914
____________ ____________
4,110,582 11,101,880
Less: Treasury Stock, at cost, 15,000 shares (110,748) (110,748)
Deferred compensation for stock options issued (31,132) -
____________ ____________
3,968,702 10,991,132
____________ ____________
$ 26,534,696 $ 28,947,752
____________ ____________
The accompanying notes are an integral part of these consolidated financial
statements.
16
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30,
________________________________________
2002 2001 2000
____________ ____________ ____________
NET SALES $ 37,546,692 $ 46,081,634 $ 57,532,461
COST OF SALES 35,990,833 39,878,136 46,156,464
____________ ____________ ____________
Gross Profit 1,555,859 6,203,498 11,375,997
____________ ____________ ____________
EXPENSES:
Selling expense 4,758,384 5,955,103 7,370,319
General and administrative 2,035,613 2,691,826 3,260,571
Impairment of long-lived assets 1,182,320 - -
____________ ____________ ____________
Total expenses 7,976,317 8,646,929 10,630,890
____________ ____________ ____________
OPERATING INCOME (LOSS) (6,420,458) (2,443,431) 745,107
____________ ____________ ____________
NON-OPERATING INCOME (EXPENSE):
Other income 21,512 118,503 106,239
Interest expense (809,571) (700,965) (1,065,514)
Gain (loss) on disposal of assets - 500,446 (12,846)
Gain on insurance claims from
hurricane - 1,107,819 1,065,725
____________ ____________ ____________
788,059 1,025,803 93,604
____________ ____________ ____________
INCOME (LOSS) BEFORE INCOME TAXES (7,208,517) (1,417,628) 838,711
CURRENT TAX EXPENSE (BENEFIT) (717,983) (108,590) -
DEFERRED TAX EXPENSE (BENEFIT) 541,059 (409,512) 370,410
____________ ____________ ____________
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE EXTRAORDINARY
ITEMS (7,031,593) (899,526) 468,301
____________ ____________ ____________
GAIN ON SETTLEMENT OF LAWSUIT (net
of $523,183 in income taxes) - - 790,041
____________ ____________ ____________
NET INCOME (LOSS) $ (7,031,593) $ (899,526) $ 1,258,342
____________ ____________ ____________
[Continued]
17
FOUNTAIN POWERBOAT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
[CONTINUED]
Year Ended June 30,
________________________________________
2002 2001 2000
____________ ____________ ____________
BASIC EARNINGS (LOSS) PER SHARE:
Continuing operations $ (1.49) $ (.19) $ .10
Gain from lawsuit - - .17
____________ ____________ ____________
BASIC EARNINGS PER SHARE $ (1.49) $ (.19) $ .27
____________ ____________ ____________
WEIGHTED AVERAGE SHARES
OUTSTANDING 4,732,608 4,732,608 4,732,608
____________ ____________ ____________
DILUTED EARNINGS PER SHARE:
Continuing operations $ (1.49) $ (.19) $ .10
Gain from lawsuit - - .17
____________ ____________ ____________
DILUTED EARNINGS PER SHARE $ (1.49) $ (.19) $ .27
____________ ____________ ____________
DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 4,732,608 4,732,608 4,732,651
____________ ____________ ____________
The accompanying notes are an integral part of these consolidated financial
statements.
18
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FROM JUNE 30, 1999 THROUGH JUNE 30, 2002
Common Stock Additional Retained Treasury Stock Deferred
_________________ Paid-in Earnings _______________ Compen-
Shares Amount Capital (Deficit) Shares Amount sation
_________ _______ ___________ __________ ______ ________ ________
BALANCE, June
30, 1999 4,732,608 $47,326 $10,303,640 $ 392,098 15,000 $110,748 $ -
Net income for
the year ended
June 30, 2000 - - - 1,258,342 - - -
_________ _______ ___________ __________ ______ ________ ________
BALANCE, June
30, 2000 4,732,608 47,326 10,303,640 1,650,440 15,000 110,748 $ -
Net loss for
the year ended
June 30, 2001 - - - (899,526) - - -
_________ _______ ___________ __________ ______ ________ ________
BALANCE, June
30, 2001 4,732,608 47,326 10,303,640 750,914 15,000 110,748 $ -
Issuance of
options to
purchase
30,000
shares common
stock at $1.45
to $1.67 per
share for
consulting
services
vesting
through
December 2004 - - 40,295 - - - (31,132)
Net loss for
the year ended
June 30, 2002 - - - (7,031,593) - - -
_________ _______ ___________ __________ ______ ________ ________
BALANCE, June
30, 2002 4,732,608 $47,326 $10,343,935 $6,280,679 15,000 $110,748 $(31,132)
_________ _______ ___________ __________ ______ ________ ________
The accompanying notes are an integral part of this consolidated financial
statement.
19
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30,
________________________________________
2002 2001 2000
____________ ____________ ____________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (7,031,593) $ (899,526) $ 1,258,342
Adjustments to reconcile net income
(loss) to net cash provided (used)
by operating activities:
Non-cash expense 9,162 - -
Amortization of deferred loan costs 89,098 - -
Depreciation expense 2,294,254 2,293,284 2,397,085
Impairment of long-lived assets 1,182,320 - -
(Gain) loss on disposal of
equipment - (500,446) 12,846
Warranty reserve 280,000 - -
(Increase) decrease in net tax
asset 541,059 (409,511) 1,020,970
Change in assets and liabilities:
(Increase) decrease in accounts
receivable (1,064,107) (238,243) (124,931)
(Increase) decrease in
inventories 1,395,518 3,324,167 (572,246)
(Increase) decrease in prepaid
expenses (161,286) 402,077 186,871
Increase in accounts payable 1,341,929 689,012 1,032,201
Increase (decrease) in accrued
expenses 2,654 (261,314) 273,542
Increase (decrease) in dealer
incentives (923,885) (113,935) (1,129,940)
Increase (decrease) in customer
deposits 309,915 (864) (365,520)
____________ ____________ ____________
Net Cash Provided (Used) by
Operating Activities (1,734,962) 4,284,701 3,989,220
____________ ____________ ____________
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment - 1,750,720 555,232
Investment in molds and related plugs (1,370,526) (2,819,252) (1,154,908)
Purchase of property, plant and
equipment (231,080) (590,591) (1,678,236)
Increase in cash surrender value of
life Insurance (219,536) (216,849) (122,637)
Decrease in other assets 183 - -
____________ ____________ ____________
Net Cash (Used) by Investing
Activities (1,820,959) (1,875,972) (2,400,549)
____________ ____________ ____________
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and
long-term debt 3,955,644 150,000 760,212
Payments of long-term debt (545,788) (3,732,563) (2,570,958)
Payments on capital lease (14,393) (12,999) (11,788)
Payments of deferred loan cost (306,508) - -
____________ ____________ ____________
Net Cash Provided (Used) by
Financing Activities 3,088,955 (3,595,562) (1,822,534)
____________ ____________ ____________
Net increase (decrease) in cash & cash
equivalents $ (466,966) $ (1,186,833) $ (233,862)
Beginning cash & cash equivalents
balance 796,606 1,983,439 2,217,301
____________ ____________ ____________
Ending cash & cash equivalents balance $ 329,640 $ 796,606 $ 1,983,439
____________ ____________ ____________
[Continued]
20
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
[CONTINUED]
Year Ended June 30,
________________________________________
2002 2001 2000
____________ ____________ ____________
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the period for:
Interest:
Unrelated parties, net of amounts
capitalized $ 798,700 $ 709,585 $ 1,088,857
Income taxes $ 45,424 $ 12,016 $ -
Supplemental Schedule of Non-cash Investing and Financing Activities:
For the year ended June 30, 2002:
The Company issued 10,000 options to purchase common stock to a
consultant for services to be rendered valued at $12,342. The
options are exercisable at $1.45 per share, vest through December
2004 and expire December 2009. As of June 30, 2002, the Company
has recorded consulting expense of $2,313.
The Company issued 20,000 options to purchase common stock to a
consultant for services to be rendered valued at $27,953. The
options are exercisable at $1.67 per share, vest through January
2004 and expire January 2009. As of June 30, 2002, the Company has
recorded consulting expense of $6,850.
For the year ended June 30, 2001:
None
For the year ended June 30, 2000:
None
The accompanying notes are an integral part of these consolidated financial
statements.
21
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) manufacture high-performance 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 32 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 350 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
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 in the United
States of America 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,
2002 and 2001, the Company had $229,640 and $694,606, 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 are 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.
Dealer Territory Service Accrual: The Company had, in prior periods,
established a sales 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 dollar amount based on the model of the
boat sold, combined with a factor for the dealer's service performance
rating. The Company had accrued estimated dealer territory service
awards at June 30, 2002 and 2001 of $491,710 and $958,581,
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).
Internal Use Software: The Company accounts for internal use software
and development cost in accordance with the Statement of Position (SOP)
98-1, "Accounting for Computer Software Developed for or Obtained for
Internal Use". The SOP requires the capitalization of certain cost
incurred in connection with developing or obtaining software for
internal use.
22
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of the Business and Significant Accounting Policies.
[Continued]
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 six months (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.
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).
Advertising Cost: Cost incurred in connection with advertising and
promotion of the Company's products are expensed as incurred. Such
costs amounted to $775,524, $1,123,976 and $1,456,592 for the years
ended 2002, 2001 and 2000, respectively.
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 (See Note 14).
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 six years. The Company has
accrued a reserve for these anticipated future warranty costs.
Stock Based Compensation: The Company has adopted the disclosure only
provisions of SFAS No. 123 "Accounting for Stock-Based Compensation" to
account for stock based compensation accordingly, the Company has
elected to determine net income using previous accounting standards.
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.
Reclassifications: The financial statements for years prior to June
30, 2002 have been reclassified to conform with headings and
classifications used in the June 30, 2002 financial statements.
23
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of the Business and Significant Accounting Policies.
[Continued]
Recently Enacted Accounting Standards: Statement of Financial
Accounting Standards ("SFAS") No. 141, "Business Combinations", SFAS
No. 142, "Goodwill and Other Intangible Assets", SFAS No. 143,
"Accounting for Asset Retirement Obligations", SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", SFAS
No. 145, "Recission of SFAS No. 4, 44, and 64, Amendment of SFAS No. 13
and Technical Corrections, and SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" were recently issued. SFAS
No. 141, 142, 143, 144, 145 and 146 have no current applicability to the
Company or their effect on the financial statements would not have been
significant. During the year ended June 30, 2002 Emerging Issue Task
Force 01-9 "Accounting consideration given by a Vendor to a Customer
(Including a Reseller of the Vendor's Products)" was issued requiring
the Company beginning the first quarter of fiscal 2003 to reclassify
dealer incentive interest paid to resellers from selling expense to net
sales. If the Company had elected to adopt EITF 01-9, the Company's
net sales and selling expense for the years ended June 30, 2002, 2001
and 2000 would be as follows:
Year Ended June 30,
________________________________________
2002 2001 2000
____________ ____________ ____________
Net sales as reported $ 37,546,692 $ 46,081,634 $ 57,532,461
Less dealer incentive interest (596,111) (953,600) (1,164,561)
____________ ____________ ____________
Net sales $ 36,950,581 $ 45,128,034 $ 56,367,900
____________ ____________ ____________
Selling expense as reported $ 4,758,384 $ 5,955,103 $ 7,370,319
Less dealer incentive interest (596,111) (953,600) (1,164,561)
____________ ____________ ____________
Selling expense $ 4,162,273 $ 5,001,503 $ 6,205,758
____________ ____________ ____________
Note 2. Inventories.
Inventories consist of the following:
June 30,
__________________________
2002 2001
____________ ____________
Parts and supplies $ 2,071,709 $ 2,829,705
Work-in-process 1,047,154 1,308,998
Finished goods 278,981 567,266
____________ ____________
3,397,844 4,705,969
Reserve for obsolescence (307,393) (150,000)
____________ ____________
$ 3,090,451 $ 4,555,969
____________ ____________
24
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 June 30,
Useful Lives __________________________
in Years 2002 2001
____________ ____________ ____________
Land and related improvements 10-30 $ 4,544,278 $ 4,508,064
Buildings and related
improvements 10-30 8,748,746 8,748,746
Construction-in-progress N/A 117,673 165,327
Production molds and related
plugs 8 19,967,872 18,549,691
Machinery and equipment 3-5 5,958,160 5,803,875
Furniture and fixtures 5 771,133 766,043
Transportation equipment 5 537,926 502,436
Racing boats N/A 242,095 308,054
____________ ____________
$ 40,887,883 $ 39,352,236
Accumulated depreciation (23,773,222) (20,432,602)
____________ ____________
$ 17,114,661 $ 18,919,634
____________ ____________
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 $9,640,808 at June 30, 2002. Depreciation expense amounted
to $2,294,254, $2,293,284, and $2,397,085, for the years ended June 30,
2002, 2001 and 2000, respectively. During Fiscal 2002, the Company
recorded a loss on impairment of $1,112,320 in accordance with SFAS No.
121 "Accounting for Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed of" on certain molds and racing boats to adjust
the respective assets to their net realizable value.
Construction costs of production molds for new and existing product
lines are capitalized and depreciated over an estimated useful life of
ten 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.
Note 4. Capital Lease.
The Company is the lessee of equipment under a capital lease expiring
in May 2004. The assets and liabilities under the capital leases were
recorded at the lower of the present value of the minimum lease
payments or the fair value of the assets at the time of purchase.
Equipment under capital lease obligation is as follows:
June 30,
__________________________
2002 2001
____________ ____________
Equipment $ 83,067 $ 83,067
Less: Accumulated amortization (47,071) (30,458)
____________ ____________
$ 35,996 $ 52,609
____________ ____________
25
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Capital Lease. [Continued]
Total future minimum lease payments, executory costs and current
portion of capital lease obligations are as follows:
Year ending June 30, Lease Payments
____________________ ______________
2003 $ 39,552
2004 39,552
2005 14,588
______________
Total future minimum lease payments $ 93,692
Less: amounts representing maintenance and usage
fee, interest and executory costs (42,806)
______________
Present value of the future minimum lease payments 50,886
Less: Lease current portion (15,674)
______________
Capital lease obligations - long term $ 35,212
______________
Note 5. Long-term Debt and Pledged Assets.
The following is a summary of long-term debt:
June 30,
__________________________
2002 2001
____________ ____________
9.50% loan payable to a financial institution
for the purchase of a vehicle, monthly payment
of $1,765 through October 2003, secured by the
vehicle purchased. 26,291 44,056
9.99% loans payable to a financial institution
for the purchase of vehicles, monthly payments
totaling $1,383 through August 2002, secured by
the vehicles purchased. 44,337 56,365
6.30% loan payable to a financial institution
for the purchase of a vehicle, monthly payment
of $771 through December 2002, secured by the
vehicle purchased. 4,435 13,203
7.15% loan payable to a financial institution
for the purchase of a vehicle, monthly payments
of $1,055 through October 2002, secured by the
vehicle purchased. 3,990 16,083
8.25% loan payable to a financial institution
for the purchase of a vehicle, monthly payments
of $726 through October 2004, secured by the
vehicle purchased. 31,735 -
7.50% loan payable to a financial institution
for the purchase of land, monthly payments of
$371 through December 2002, secured by the
vehicle purchased. 33,823 -
7.93% to 8% loans payable borrowed against the
cash surrender value of key-man life insurance
policies during 1998, 2001, and 2002, monthly
payments of $25,004. 925,712 476,848
$10,000,000 credit agreement with a financial
Corporation (See Below). 9,640,808 6,696,405
____________ ____________
10,711,131 7,302,960
Less: Current maturities included in current
liabilities: (919,182) (722,661)
____________ ____________
$ 9,791,949 $ 6,580,299
____________ ____________
26
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Long-term Debt and Pledged Assets. [Continued]
On November 2, 2001, the Company signed 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 debt and borrowed additional funds to complete tooling
projects and for working capital. The credit agreement involves two
notes, both with an interest rate of prime plus 2%. Combined monthly
payments are $128,005. The $7,000,000 note has monthly payments of
approximately $85,000 and a ten year amortization with a five-year
balloon payment and is secured by a first lien on the Company's plant
and property. The second note of $3,000,000 has monthly payments of
approximately $45,000, a seven year amortization with a five-year
balloon payment, and is secured by a second lien on the Company's plant
and property. This second note is guaranteed by the United States
Department of Agriculture. These notes are further secured by an
assignment of a $1,000,000 key man life insurance policy to the lender
and the personal guarantee of the Company's President with real estate
valued at approximately $1,000,000.
The estimated aggregate maturities required on long-term debt for each
of the individual years at June 30, 2002 are as follows:
2003 $ 919,182
2004 964,321
2005 1,031,733
2006 1,093,376
2007 4,951,543
Thereafter 1,750,976
____________
$ 10,711,131
____________
Note 6. Common Stock, Stock Options, and Treasury Stock.
Common Stock: The Company has authorized 200,000,000 shares of common
stock, $.01 par value. 4,732,608 shares were issued and outstanding at
June 30, 2002, 2001 and 2000.
Stock Options: During 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 options to purchase up
to 120,000 shares of common stock 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).
During 2000, the Company granted options to purchase 10,000 shares of
common stock under the Plan. The options are exercisable at $3.18 to
$6.00 per share and vested on issuance. The options expire on May 8,
2005. As of June 30, 2002 none of the options have been exercised.
During 2001, the Company granted options to purchase 35,000 shares of
common stock. The options are exercisable at $1.34 per share and vest
through December 31, 2002. The options expire December 12, 2007. As
of June 30, 2002 none of the options have been exercised.
During 2002, the Company granted options to purchase 30,000 shares of
common stock for consulting services. The options have been valued at
$40,295 and are being expensed ratably over the vesting period. As of
June 30, 2002, the Company has recorded deferred compensation of
$31,132 and $9,163 in consulting expense. The options are exercisable
at $1.45 to $1.67 per share and vest five years from the date they were
granted. The options expire through December 29, 2009. At June 30,
2002, none of these options had been exercised.
27
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Common Stock, Stock Options, and Treasury Stock. [Continued]
During Fiscal 2002, the Company granted options to purchase 75,000
shares of common stock to employees with exercise prices ranging from
$1.45 to $1.60 per share and vested through June 2005. These shares
expire five years from the date of vesting. As of June 30, 2002 none
of the options have been exercised.
On June 21, 1995, the shareholders voted to adopt the 1995 stock option
plan. The plan allowed up to 450,000 options to purchase the common
stock 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, 2002, none of these options have
been exercised.
Effective March 23, 1995, the Board of Directors authorized the
issuance of options to purchase up to 30,000 shares of common stock to
each of the Company's four outside directors at $3.58 per share on a
non-qualified basis, exercisable for 10 years. Through June 30, 2002,
84,000 of the options had been exercised and 36,000 options remain
outstanding.
28
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Common Stock, Stock Options, and Treasury Stock. [Continued]
A summary of the status of the options granted under the Company's
stock option plans and other agreements at June 30, 2002, 2001 and
2000, and changes during the periods then ended is presented in the
table below:
2002 2001 2000
__________________ __________________ __________________
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
________ ________ ________ ________ ________ ________
Outstanding at
beginning of
period 551,000 $ 4.40 526,000 $ 4.61 546,000 $ 4.57
Granted 105,000 1.56 35,000 1.34 10,000 4.59
Exercised - - - - - -
Forfeited - - (10,000) 4.59 - -
Canceled - - - - (30,000) 3.94
________ ________ ________ ________ ________ ________
Outstanding at end
of period 656,000 $ 3.95 551,000 $ 4.40 526,000 $ 4.61
________ ________ ________ ________ ________ ________
Exercisable at end
of period 568,500 $ 4.32 516,000 $ 4.61 521,000 $ 4.61
________ ________ ________ ________ ________ ________
Weighted average fair
value of options
granted 105,000 $ 1.22 35,000 $ .10 10,000 $ .28
________ ________ ________ ________ ________ ________
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 year ended June
30, 2002, 2001, and 2000; risk-free interest rates of 4.5%, 5.3%, and
6.7%, respectively, expected dividend yields of zero for all periods,
expected lives of 6.25, 7.5, and 5 years, respectively, and expected
volatility of 94%, 132%, and 128%, respectively.
A summary of the status of the options outstanding under the Company's
stock option plans and other agreements at June 30, 2002 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
_____________ ___________ ___________ ________ ___________ ________
$1.34 to 1.67 140,000 6 years 1.51 52,500 1.49
$3.58 36,000 3 years 3.58 36,000 3.58
$4.67 450,000 3 years 4.67 450,000 4.67
$5.00 30,000 1.5 years 5.00 30,000 5.00
29
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Common Stock, Stock Options, and Treasury Stock. [Continued]
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 pro forma amounts as
indicated below:
Year Ended June 30,
________________________________________
2002 2001 2000
____________ ____________ ____________
Net Income (loss) As reported $ (7,031,593) $ (899,526) $ 1,258,342
Pro forma $ (7,059,106) $ (900,426) $ 1,255,537
Earnings (loss) per share
As reported $ (1.49) $ (.19) $ .27
Pro forma $ (1.49) $ (.19) $ .27
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.
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, 2002 and 2001, the totals of all deferred tax assets were
$1,132,181 and $1,469,937, respectively. The totals of all deferred
tax liabilities were $962,879 and $759,577, respectively. 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 Company has an unused federal and state operating loss
carryforwards at June 30, 2002 of approximately $6,269,213 and
$9,368,943, respectively, which expires in various years through 2022.
30
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Income Taxes. [Continued]
The components of federal income tax expense from continuing operations
consist of the following:
Year Ended June 30,
________________________________________
2002 2001 2000
____________ ____________ ____________
Current income tax expense:
Federal $ (717,983) $ (108,590) $ -
State - - -
____________ ____________ ____________
Net current tax (benefit) $ (717,983) $ (108,590) $ -
____________ ____________ ____________
Deferred tax expense (benefit)
resulted from:
Excess of tax over financial
accounting depreciation $ (14,929) $ (81,110) $ 197,521
Donations (2,374) (1,008) 1,059
Warranty reserves (109,200) - -
Reserve for obsolete
inventory (61,383) - (11,700)
Accrued vacation 5,945 (2,184) (8,652)
Dealer incentive reserves 230,631 (9,410) 46,534
Bad debt reserves - - -
Accrued dealer incentive
interest 9,046 66,312 (34,000)
Accrued executive
compensation 6,352 39,777 (31,069)
Accrued dealer service
incentives 180,492 (120,708) (17,751)
Inventory adjustment-Sec.263A (32,048) 123,579 61,057
Health insurance reserve 17,238 (12,168) (50,310)
Decrease in NOL carryforwards (2,506,922) (72,461) 453,148
Alternative minimum tax
credits 218,232 (253,837) (153,882)
Investment tax credits - (86,294) (81,545)
Valuations allowance 2,599,979 - -
____________ ____________ ____________
Net deferred tax expense (benefit)$ 541,059 $ (409,512) $ 370,410
____________ ____________ ____________
Deferred income tax expense results primarily from the reversal of
temporary timing differences between tax and financial statement
income.
The reconciliation of income tax from continuing operations computed at
the U.S. federal statutory tax rate to the Company's effective rate is
as follows:
Year Ended June 30,
________________________________________
2002 2001 2000
____________ ____________ ____________
Computed tax at the expected
federal statutory rate 34.00% 34.00% 34.00%
State income taxes, net of
federal benefit 5.00 5.00 5.00
Valuations allowance (36.07) - -
Compensation from stock options - - -
(Increase) decrease in NOL
carryforwards - (1.45) 3.78
Officer's life insurance - .11 1.03
Net effect of alternative minimum
taxes (.07) - -
Other (.41) (1.11) 1.04
____________ ____________ ____________
Effective income tax rates 2.45% 36.55% 44.85%
____________ ____________ ____________
31
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Income Taxes. [Continued]
The temporary differences gave rise to the following deferred tax
asset (liability):
June 30,
__________________________
2002 2001
____________ ____________
Excess of tax over financial
accounting depreciation $ (1,168,222) $ (1,183,152)
Warranty reserve 339,300 230,100
Obsolete inventory reserve 119,883 58,500
Accrued vacations 59,122 65,067
Allowance for boat repurchases 78,000 78,000
Dealer incentive reserves 97,944 328,575
Bad debt reserve 10,858 10,858
Accrued Dealer incentive interest 57,832 66,878
Inventory adjustments - Sec. 253A 117,516 85,468
State NOL carryforwards 468,447 82,366
Federal NOL carryforwards 2,131,532 10,690
Alternative minimum tax credits 119,049 337,281
Accrued executive compensation 9,750 16,102
Donations carryforwards 3,382 1,008
Accrued dealer service incentives 193,354 373,846
Health insurance reserve 45,240 62,478
Investment tax credits 86,294 86,294
Note 8. Research and Development.
The Company expenses the costs of research and development for new
products and components as the costs are incurred. Research and
development costs are included in the cost of sales and amounted to
$952,332 for Fiscal 2002, $813,710 for Fiscal 2001, and $926,486 for
Fiscal 2000.
Note 9. Commitments and Contingencies.
Employment Agreement: The Company entered into a one-year employment
agreement in 1989 with its Chairman, Mr. Reginald M. Fountain, Jr. The
agreement provides for automatic one-year renewals at the end of each
year subject to Mr. Fountain's continued employment. During 1998, the
Company entered into a three year employment agreement with the
Company's Chief Operating Officer and Executive Vice President.
Dealer Interest: The Company regularly pays a portion of dealers'
interest charges for floor plan financing. These interest charges
amounted to $596,111 for Fiscal 2002, $953,600 for Fiscal 2001 and
$1,164,561 for Fiscal 2000. They are included in the accompanying
consolidated statements of operations as part of selling expense. At
June 30, 2002 and 2001 the estimated unpaid dealer incentive interest
included in accrued dealer incentives amounted to $178,857 and
$224,098, respectively.
Product Liability and Other Litigation: There were various product
liability and warranty lawsuits brought against the Company at June 30,
2002. The Company intends to vigorously defend its interests in these
matters. The Company carries sufficient product liability insurance to
cover attorney's fees and any losses, which may occur from these
lawsuits over and above the insurance deductibles. The Company is also
involved from time to time in other litigation through the normal
course of its business. Management believes there are no such
undisclosed claims which would have a material effect on the financial
position of the Company.
32
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Manufacturer Repurchase Agreements: The Company makes available through
third-party finance companies floor plan financing for many of its
dealers. Sales to participating dealers are approved by the respective
finance companies. If a participating dealer does not satisfy its
obligations under the floor plan financing agreement in effect with its
commercial lender(s) and boats are subsequently repossessed by the
lender(s), then under certain circumstances the Company may be required
to repurchase the repossessed boats if it has executed a repurchase
agreement with the lender(s). At June 30, 2002 and 2001, the Company
had a contingent liability to repurchase boats in the event of dealer
defaults and if repossessed by the commercial lenders amounting to
approximately $16,066,953 and $23,747,900, respectively. The Company
has reserved for the future losses it might incur upon the repossession
and repurchase of boats from commercial lenders. The amount of the
reserve is based upon probable future events, which can be reasonably
estimated. At June 30, 2002 and 2001, the allowance for boat
repurchases was $200,000.
401 (k) Payroll Savings Plan: During Fiscal 1991, the Company initiated
a 401(k) Payroll Savings Plan (the 401(k) Plan) for all employees.
Eligible employees may elect to defer up to fifteen percent of their
salaries. The amounts deferred by the employees are fully vested at
all times. The Company currently matches fifty percent of the
employee's deferred salary amounts limited to a maximum of six percent
of their salaried amounts, or a maximum of three percent of their
salaries. Amounts contributed by the Company vest at a rate of twenty
percent per year of service. Mr. Fountain, by his own election, does
not participate in the 401(k) Plan. There are no post-retirement
benefit plans in effect.
Environmental: The Company was notified by the United States
Environmental Protection Agency (the EPA) that it has been identified
as a potentially responsible party (a PRP) and may incur, or may have
incurred, liability for the remediation of contamination at the
Seaboard waste disposal site, located in High Point, North Carolina,
also referred to as the Jamestown, North Carolina site resulting from
the disposal of hazardous substances at those sites by a third party
contractor of the Company. The Company disposed of approximately
19,000 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 .148% of the total estimated assessment of cleanup cost or
approximately $40,000. The Group Administrator has confirmed that this
is a revised estimate and that, under worst case conditions, the
Company's potential liability at this site is now expected to be no
more than $20,000, and could be less if eligible for a settlement
agreement likely to be proposed by the EPA in early 2003. If approved
by the North Carolina Department of Environment and Natural Resources
and EPA, the Company's share could be as low as $18,000 according to
the Group Administrator.
33
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Export Sales.
The Company had export sales of $1,500,145 for Fiscal 2002, $2,889,828
for Fiscal 2001, and $1,755,412 for Fiscal 2000. Export sales were to
customers in the following geographic areas:
Year Ended June 30,
________________________________________
2002 2001 2000
____________ ____________ ____________
Canada, Central and South America $ 1,500,145 $ 2,509,638 $ 1,485,615
Middle East, and Europe - 380,190 269,797
____________ ____________ ____________
$ 1,500,145 $ 2,889,828 $ 1,755,412
____________ ____________ ____________
Note 11. Transactions with Related Parties.
The Company expensed the following amounts for apartment rentals owned
or controlled by Reginald M. Fountain, Jr., the Company's Chairman,
President, and Chief Executive Officer: for Fiscal 2002, $22,013; in
Fiscal 2001, $22,734; and in Fiscal 2000, $9,880. At June 30, 2002,
the Company owed Reginald M. Fountain, Jr. $1,100 for these rentals.
The Company paid $41,361, $199,442, and $345,049 for the year ended
June 30, 2002, 2001 and 2000 for advertising and public relations
services from an entity owned by a director of the Company. At June
30, 2002, the Company owed an entity owned by a director $145,257 for
these services.
A Director of the Company is an owner of a marine dealership, which
accounted for 4% of the Company's sales in Fiscal 2002.
Note 12. Concentration of Credit Risk.
Concentration of credit risk arises due to the Company operating in the
marine industry, particularly in the United States. In Fiscal 2002, one
dealer accounted for 11.8% of sales, one dealer for 11.7%, and two
other dealers for 8% individually. For Fiscal 2001 one dealer
comprised 11.5% of sales, one dealer 10.5% of sales, and four other
dealers 4 to 6% of sales individually. For Fiscal 2000, one dealer
accounted for 7.4% of sales, a dealer accounted for 6.1% of sales, and
a dealer accounted for 5.7% of sales.
Note 13. Gain on Insurance Claims from Hurricanes.
During September 1999, the Company experienced flooding and the
temporary closure of the production facility as a result of Hurricanes
"Dennis" and "Floyd" hitting Eastern North Carolina. As a result of
the hurricanes, the Company sustained damages of $277,172 to inventory
and $389,063 to property, plant and equipment, which includes $300,000
in damages to the Company's yacht mold and $51,658 in additional
expenses. The Company filed a business interruption claim for damages
due to loss revenues from the closure of the production facility and
inefficiencies due to storm preparation, cleanup and work force
shortages. During 2000, the insurance carriers paid $1,058,618 for
damages to the inventory, property plant, and equipment including the
Yacht Mold and other expenses, and $725,000 towards the business
interruption claim. During October 2000, the Company received an
additional $1,350,000 as final and full payment of business
interruption claims. During the years ended June 30, 2001 and 2000 the
Company recorded a gain on insurance claims from the hurricanes of
$1,107,819 and $1,065,725, respectively.
34
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14. - Earnings Per Share.
The following data show the amounts used in computing earnings per
share and the effect on income and the weighted average number of
shares of potential dilutive common stock for the years ended June 30,
2002, 2001 and 2000:
2002 2001 2000
____________ ____________ ____________
Income (loss) from continuing
operations available to common
stockholders $ (7,031,593) $ (899,526) $ 468,301
____________ ____________ ____________
Gain on Settlement of a lawsuit $ - $ - $ 790,041
____________ ____________ ____________
Weighted average number of common
shares outstanding used in basic
earnings (loss) per share 4,732,608 4,732,608 4,732,608
Effect of dilutive stock options - - 43
Weighted number of common shares and
potential dilutive common shares
outstanding used in dilutive
earnings (loss) per share 4,732,608 4,732,608 4,732,651
____________ ____________ ____________
The Company had at June 30, 2002 options to purchase 135,000 shares of
common stock at prices ranging from $1.34 to $5.00 per share that were
not included in the computation of loss per share because their effect
was anti-dilutive.
Note 15. Extraordinary Item / Gain on Settlement of Lawsuit
During April 2000, the Company recognized an extraordinary gain of
$790,041 net of income taxes of $523,183 from the settlement of a class
action lawsuit alleging antitrust violations against a vender of the
Company who is in the sterndrive and inboard engine business.
Note 16. Going Concern
During the current fiscal year, the Company incurred significant
expenses associated with the new product development of their 34 and 48
foot wide beam cruisers. The resulting working capital deficiencies
and net loss raise substantial doubt about the Company's ability to
continue as a going concern. Having completed these capital projects,
the Company has halted all major capital expenditures, choosing to
focus their resources on existing sales order backlogs and improving
their production processes. The Company is further seeking to obtain
additional debt financing. While there is no assurance that the
Company will be successful in implementing these plans, the Company
believes it is able to improve its position with proper management and
expects evidence of such will result from the production of existing
retail sales orders and continued progress with aged dealer
inventories. The consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
35
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There were no changes in or disagreements with the independent
auditors on accounting and financial disclosure matters.
Part III
Item 10. Directors and Executive Officers of Registrant.
Incorporated herein by reference from the Company's definitive Proxy
Statement to be filed with the Commission in connection with the Company's
annual meeting of shareholders (under the following captions: (a)
"Section 16(a) Beneficial Ownership Reporting Compliance," (b) "Proposal
1: Election of Directors," and (c) "Executive Officers").
Item 11. Executive Compensation.
Incorporated herein by reference from the Company's definitive Proxy
Statement to be filed with the Commission in connection with the Company's
annual meeting of shareholders (under the following captions: (a)
"Compensation Committee Interlocks and Insider Participation," (b) "Board
Report on Executive Compensation," (c) "Executive Compensation," (d)
"Employment Contracts and Termination of Employment and Change-in-Control
Arrangements," and (e) "Employee Stock Options."
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.
Incorporated herein by reference from the Company's definitive Proxy
Statement to be filed with the Commission in connection with the Company's
annual meeting of shareholders (under the captions (a) "Beneficial
Ownership of Securities" and (b) "Securities Authorized for Issuance under
Equity Compensation Plans."
Item 13. Certain Relationships and Related Transactions.
Incorporated herein by reference from the Company's definitive Proxy
Statement to be filed with the Commission in connection with the Company's
annual meeting of shareholders (under the caption "Compensation Committee
Interlocks and Insider Participation").
36
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8
and Form 8-K.
(a) Documents filed with Report:
(1)Financial Statements. The following consolidated financial
statements of Registrant are contained in Item 8 of this Report.
Independent auditor's report
Consolidated balance sheets at June 30, 2002 and 2001
Consolidated statements of operations for the years ended June 30,
2002, 2001 and 2000
Consolidated statements of stockholder's equity for the years ended
June 30, 2002, 2001 and 2000
Consolidated statements of cash flows for the years ended June 30,
2002, 2001 and 2000
Notes to consolidated financial statements
(2)Financial Statement Schedules.
Not applicable.
(3)Exhibits. An index of exhibits that are a part of this Form 10-K
appears following the signature page and is incorporated herein by
reference.
(b) Reports on Form 8-K. During the last quarter of the period covered
by this Report, no Current Reports on Form 8-K were filed by Registrant.
37
Signatures
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FOUNTAIN POWERBOAT INDUSTRIES, INC.
By: /S
September 24, 2002
Reginald M. Fountain, Jr.
Chairman, President, and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
/S
September 24, 2002
Reginald M. Fountain, Jr.
Chairman, President, and Chief Executive Officer
(Principal Executive Officer)
/S
September 24, 2002
Anthony J. Romersa
Executive Vice President, and
Chief Operating Officer
/S
September 24, 2002
George L. Deichmann, III
Director
/S
September 24, 2002
Guy L. Hecker, Jr.
Director
/S
September 24, 2002
Robert L. Henkel
Director
38
/S
September 24, 2002
Mark L. Spencer
Director
/S
September 24, 2002
David L. Woods
Director
/S
September 24, 2002
Hannah Hale
Chief Financial Officer
39
Certifications
I, Reginald M. Fountain, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of Fountain Powerboat
Industries, Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the period presented in
this annual report.
September 27, 2002 ____________________________________
Reginald M. Fountain, Jr.
President and Chief Executive Officer
I, Hannah R. Hale, certify that:
1. I have reviewed this annual report on Form 10-K of Fountain Powerboat
Industries, Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the period presented in
this annual report.
September 27, 2002 ____________________________________
Hannah R. Hale
Chief Financial Officer
(Certification Pursuant to 18 U.S.C. Section 1350)
The undersigned hereby certifies that (i) the foregoing annual report
on Form 10-K filed by Fountain Powerboat Industries, Inc. (the "Company")
for the year ended June 30, 2002, fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii)
the information contained in that Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
Date: September 27, 2002 _______________________________________
Reginald M. Fountain, Jr.
President and Chief Executive Officer
Date: September 27, 2002 _______________________________________
Hannah R. Hale
Chief Financial Officer
40
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
3.1 Registrant's Articles of Incorporation, as amended (incorporated
herein by reference to exhibits to Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 2001)
3.2 Registrant's Bylaws, as amended (incorporated herein by
reference to exhibits to Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 2001)
4.1 Form of stock certificate (incorporated herein by reference to
exhibits to Registrant's Annual Report on Form 10-K for the
fiscal year ended October 1, 1989)
10.1 * Employment Agreement dated March 31, 1989, between Reginald M.
Fountain, Jr. and Fountain Powerboats, Inc. (incorporated herein
by reference from Exhibits to Registrant's Annual Report on
Form 10-K for the fiscal year ended October 1, 1989)
10.2 * Employment Agreement dated August 24, 1998, between Fountain
Powerboats, Inc. and Anthony J. Romersa (incorporated herein by
reference from exhibits to Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 1999)
10.3 * Stock Option Agreement dated August 4, 1995, between
Registrant and Reginald M. Fountain, Jr. (incorporated herein by
reference to exhibits to Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 2001)
10.4 * 1999 Employee Stock Option Plan (incorporated herein by
reference to exhibits to Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 1999)
10.5 * Stock Option Agreement dated January 12, 1999, between
Registrant and Anthony J. Romersa (incorporated herein by
reference from Exhibits to Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 1999)
10.6 * Stock Option Agreement dated March 17, 1995, between Registrant
and Mark L. Spencer (incorporated herein by reference to
exhibits to Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 2001)
41
10.7 * Stock Option Agreement dated February 7, 2001, between
Registrant and David L. Woods (filed herewith).
10.8 * Stock Option Agreement dated December 19, 2001, between
Registrant and Anthony J. Romersa (filed herewith).
99 Definitive proxy statement to be filed with the Commission.
______________________________
* Denotes a management compensation plan or compensatory plan or
arrangement.
42