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FOUNTAIN POWERBOAT INDUSTRIES, INC.
FORM 10-K
ANNUAL REPORT
FOR THE YEAR ENDED JUNE 30, 1997
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 or
15 (D)OF THE SECURITIES EXCHANGE ACT OF 1934
[FEE REQUIRED]
For fiscal year ended June 30, 1997
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE
REQUIRED]
__________For the transition period from _____ to _____.
Commission File Number: 0-14712
FOUNTAIN POWERBOAT INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
NEVADA 88-0160250
(State or other jurisdiction (IRS Employer
of incorporation) Identification
No.)
Post Office Drawer 457, Whichard's Beach Road.,
Washington, NC 27889
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number,
including area code: (919) 975-2000
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $ .01 per share
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15
(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has
been subject to such filing requirement for the past 90 day.
[ X ]Yes [ ] No
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X ]Yes [ ]No
-2-
The aggregate market value of the voting stock held by
non-affiliates of the registrant was $ 30,981,540 at October
7, 1997 based upon a closing price of $15.00 per share on
such date for the Company's Common Stock.
As of October 7, 1997 there were 4,725,108 shares of
the Company's Common Stock issued of which 15,000 shares are
owned by the Company's subsidiary Fountain Powerboats, Inc.
and are regarded as treasury shares.
Documents incorporated by reference: None.
Part I
Item 1. Business.
Background
Fountain Powerboat Industries, Inc. (the "Company"),
through its wholly-owned subsidiary, Fountain Powerboats,
Inc. (the "Subsidiary"), designs, manufactures, and sells
offshore sport boats, sport cruisers, and sport fishing
boats intended for that segment of the recreational power
boat market where speed, performance, and quality are the
main criteria for purchase. The Company's strategy in
concentrating on that segment of the market is to maximize
its use of the reputation of its Chairman and President,
Reginald M. Fountain, Jr., as an internationally recognized
power boat racer and designer. The Company also has made
specialized high performance boats for the United States
Government.
The Company's products are sold through a network of
authorized dealers worldwide. The Company has targeted that
segment of the market in which purchase decisions are
generally predicated to a relatively greater degree on the
product's image, style, speed, performance, quality, and
safety and to a lesser degree on the product's price or
other economic considerations.
Products.
Each of the Company's products is based upon a deep V-
shaped fiberglass hull with a V-shaped pad and a notched
transom. This design enables the boat to move along the
water at high speed on its pad and achieve performance and
stability standards which the Company believes are greater
than those offered by its competitors. As a result, the
Company maintains that its boats are among the fastest, best-
handling, and safest boats of their kind.
In Fiscal 1994, the Company developed a new, high
performance hull design for its boats. These new "positive-
lift" designs increase speed significantly and gives a
softer ride by incorporating radically different keel lines
with steps in the hull bottoms. Handling and fuel economy
are also substantially improved with the new designs. The
Company is seeking patent protection for these new hull
designs.
-3-
All of the Company's sport boats, ranging from 25' to
51' are of inboard/outdrive or surface drive design. They
are propelled by single, twin, or triple gasoline (or
diesel) engines ranging from 415 HP to more than 1,000 HP
each. Fountain also builds custom racing boats designed
specifically for competition. The Company also produces
outboard powered center consoles and outboard or stern drive
cabin model offshore sport fishing boats ranging from 25'
through 32'. Furthermore, the Company builds 29', 32', 38'
and 47' sport cruisers. By February, 1998, the company will
introduce a Super Cruiser, 65 foot in length with a 16'
beam.
Introduced early in Fiscal 1992, the 47' Sport Cruiser
is the flagship of the Fountain fleet. Its hull design is
based upon that of the Company's 47' Super boat and 42'
manufacturer's Super-Vee boats which won 8 out of 10 races
in a recent twelve month period. The model features a walk-
in cabin, enclosed head with shower, complete galley with
refrigerator and microwave among it's very extensive list of
standard equipment.
With most of the amenities of a traditional cruising
yacht, the Fountain 47' Sport Cruiser is capable of speeds
in excess of 70 mph with standard triple MerCruiser 502 EFI
engines. A high performance diesel engine version is
available for international use. This boat was named "The
Outstanding Offshore Performance Boat" for 1992 and 1993 by
Powerboat Magazine and "Best of the Best" for 1992 by
Boating Magazine. Depending primarily upon the customer's
choice of engines, the retail price of this boat is from
$348,000 to $603,000.
The Company's new 47' Lightning Sport Boat is available
with a wide range of engine options and amenities which make
it suitable for long range cruising at high speeds in
relatively rough offshore waters. Its sleek styling makes
it particularly attractive. Depending primarily upon the
type of engines selected, this boat retails at prices
ranging from $364,000 to $618,000.
As of August, 1997, the 42' Lightning Sport Boat has
been redesigned and restyled and operates at maximum speeds
of 75 to 100 mph and is very stable even in relatively rough
offshore waters. This boat's standard features include an
integrated swim platform, flush deck hatches, and an
attractively appointed cockpit and cabin. This boat was
cited by Powerboat Magazine as "The Outstanding Offshore
Performance Boat" for 1988 and 1990. It retails at prices
ranging form $222,000 to $386,000, depending primarily upon
the type of engines selected. Equipped with special racing
engines, this model set a new world speed record for V-
hulled boats in February, 1996 at 131.941 mph.
Introduced in Fiscal 1991, the 38' Sport Cruiser offers
a scaled down version of the many amenities found on the 47'
Sport Cruiser. This model has successfully incorporated the
performance type sport boat's features without compromising
the comforts found in a cruiser. Depending primarily upon
the customer's choice of engines, the retail price of the
boat is from $221,000 to $375,000.
-4-
The 38' Fever Sport Boat operates at maximum speeds of
between 70 and 100 mph. Its retail price ranges from
$201,000 to $354,000, depending primarily upon the type of
engines selected. This model was cited by Powerboat
Magazine as "Offshore Performance Boat of the Year" for 1989
and, again, for 1991. It also captured an award from The
Hot Boat Magazine for "Boat of the Year" for 1991.
The 35' Lightning Sport Boat is similar in design to
the 38' Fever, but operates at maximum speeds between 70 and
100 mph. Because of its smaller size and lighter weight,
this model can achieve greater speeds than a 38' Fever when
equipped with the same size engines. The 25' Lightning was
named by Powerboat Magazine "Offshore Boat of the Year" for
1981 and 1995. It has also captured that magazine's title
"Outstanding Offshore Performance Boat" for
1980,1981,1982,1983,1984, and 1987. This boat retails at
prices ranging from $163,000 to $202,000, depending
primarily upon the type of engines selected.
Fountain's 32' Fever Sport Boat was introduced during
Fiscal 1991 to satisfy the market's demand for a mid-size
sport boat between the 29' Fever and the 35' Lightning.
This model combines many of the advantages of both the 29'
model the 35' model. Depending primarily upon the
customer's choice of engines, the retail price of this boat
is from $132,000 to $163,000.
The 29' Fever single engine is one of the most popular
boats in our line. It operates at a maximum speed of 54 to
73 mph and retails between $85,000 and $106,000 depending on
engine size. It has great balance and speed for a single
engine and for its size really handles the big waters.
Fountain's 27' Fever sport boat has a single engine.
It was added to the line in order to enable the first time
offshore performance boat buyer to acquire a Fountain power
boat at a very affordable price. This model won an award
from Powerboat Magazine for "The Full Size Boat of the Year"
for 1991 and 1992. It also captured that magazine's award
for "Outstanding full-size Workmanship" for 1995. Depending
primarily upon the type of engine selected the retail price
of this boat is from $73,000 to $94,000.
In 1990, the Company's sole offshore sport fishing boat
was a 31' model which featured a center console design and
incorporated the same high performance, styling, and
structural integrity as its sport boat models. It has a
deck configuration engineered for the knowledgeable,
experienced sport fisherman. This boat has won the Southern
Kingfish Association's World Championship for five of the
last seven years and has won more than 50% of the top ten
positions over the same period.
In Fiscal 1992, Fountain added substantially to its
sport fishing boat line. An all new 29' twin engine center
console model and an all new 25' single engine center
console model were introduced to extend the product line.
The design, construction, and performance of these new
models, together with the proven features of the 31' center
console model, make a line which in management's view will
appeal to many experienced sport fishermen.
-5-
To further enhance its sport fishing boat line, the
Company introduced a new 31' walk around cabin model based
upon the proven 31' center console hull design. This model
features a deck design which incorporates a walk-in cabin,
enclosed head with shower, and a full galley. With twin
outboard engine power, this model is produced either as a
fishing boat for the serious angler or as a purely
recreational sport boat type cruiser.
During Fiscal 1993, the Company introduced both 25' and
29' walk around cabin fishing boats with outboard engine
power and a new 32' walk around cabin model fishing boat
with inboard power. Other new product introductions for
Fiscal 1994 are 25' and 29' walk around cabin model fishing
boats with inboard power.
For Fiscal 1998, the Company plans to introduce two all
new surface drive sport boats, the 46' and 51' Lightning.
These boats will come with the Company's new second
generation positive lift hulls. The 42' Lightning is also
new for 1998. This will have the new style deck with full
wrap around windshield and canvas top. These boats also
have an all new positive lift hull which will increase
speed, stability and ride comfort. Fountain will also
launch into the yacht market with the introduction of the
all new 65' Supercruiser. This performance yacht will be
much faster than the competition, while still providing all
the comforts of a luxury yacht through the use of Fountain's
all new super ventilated positive lift hull equipped with
Fountain's all new Surface Drive System.
During the last quarter of Fiscal 1997, the Company
introduced the Fountain Drive System. Fountain developed
this state of the art drive system which will revolutionize
performance boating. This new technology matches Fountain's
Super Ventilated Positive Lift Hull with a highly efficient
surface drive system. Born from the Fountain's racing
heritage, this revolutionary system offers increased speed
and efficiency, better rough water handling, stainless steel
components to minimize corrosion, greater horsepower
capacity, less component parts and gears and better transfer
of horsepower to the water. Fountain continues to strive to
offer the latest in performance technology in each and every
boat we build. Never before has a production boat company
offered such technology to its customers.
Following is a table showing the number of boats
completed and shipped in each of the last three fiscal years
by product line:
Fiscal Fiscal Fiscal
1997 1996 1995
Sport boats ....... 336 295 293
Sport cruisers .... 14 20 15
Sport fishing boats 128 109 93
------ ------ -----
Total 478 424 401
==== ==== ====
-6-
The Company conducts research and development projects
for the design of its plugs and molds for hull, deck, and
small parts production. The design, engineering, and
tooling departments currently employ approximately 29 full-
time employees. Amounts spent on design research and
development and to build new plugs and molds in recent years
were:
Design Construction
Research & of New Plugs
Development and Molds
Fiscal 1997 $635,652 $1,684,274
Fiscal 1996 234,425 878,513
Fiscal 1995 134,828 767,102
For Fiscal 1998, planned design research and
development expenses are $ 750,000 and plug and mold
construction expenditures are approximately $ 3,000,000.
These expenditures will be primarily to complete the tooling
needed to produce three luxury high performance sport
yachts, a 51' model, a 58' model and a 65' model. Also,
work will be started on a 35' wide beam surface drive cabin
sport fishing boat. Tooling expenditures will also be made
for other modifications to existing models.
Manufacturing capacity is sufficient to accommodate
approximately 40 to 50 boats in various stages of
construction at any one time. The Company shipped 478 boats
in Fiscal 1997, 424 boats in Fiscal 1996 and 401 boats in
Fiscal 1995.
Construction of a boat currently made, depending on
size, takes approximately three to five weeks. Construction
of the all new wide beam Super Cruisers should be as
follows: A 51' by December, 1997, the 65' by February, 1998
and the 58' by April, 1998. The Company currently has the
ability to manufacture approximately 600 boats per year with
additional personnel. The Company can further expand its
manufacturing capacity by adding additional personnel,
plant, equipment, and tooling.
The manufacturing process for the hulls and decks
consists primarily of the "laying-up" by hand of vinylester
resins and high quality stitched, bi-directional and quad-
directional fiberglass over a foam core in the molds
designed and constructed by the Company's engineering and
tooling department. This creates a composite structure with
strong outer and inner skins with a thicker, light core in
between. The "laying-up" of fiberglass by hand rather than
using chopped fiberglass and mechanical blowers, results in
superior strength and appearance. The resin used to bind
the composite structure together is vinylester which is
stronger, better bonding, and more flexible than the
polyester used by most other fiberglass boat manufacturers.
Decks are bonded to the hulls using bonding agents, rivets,
screw, and fiberglass to achieve a strong, unitized
construction.
-7-
As one of the most highly integrated manufacturers in
the marine industry, the Company manufactures many metal,
plexiglass, plastic, and small parts (such as gas tanks,
seat frames, steering systems, instrument panels, bow rails,
brackets, T-tops, and windscreens) to assure that its
quality standards are met. In addition, the company also
manufacturers all of its upholstery to its own custom
specifications and benefits from lower cost, receives parts
just in time for assembly and achieves savings of several
million dollars. All other component parts and materials
used in the manufacture of the Company's boats are readily
available from a variety of suppliers at comparable prices
exclusive of discounts. However, where practicable, the
Company purchases certain supplies and materials from a
limited number of suppliers in order to obtain the benefit
of volume discount.
Certain materials used in boat manufacturing, including
the resins used to make the decks and hulls, are toxic,
flammable, corrosive, or reactive and are classified by the
federal and state governments as "hazardous materials."
Control of these substances is regulated by the
Environmental Protection Agency and state pollution control
agencies which require reports and inspect facilities to
monitor compliance with their regulations. The Company's
cost of compliance with environmental regulations has not
been material. The Company's manufacturing facilities are
regularly inspected by the Occupational Safety and Health
Administration and by state and local inspection agencies
and departments. The Company believes that its facilities
comply with substantially all regulations. The Company,
however, has been informed that it may incur or may have
incurred liability for remediation of ground water
contamination at two hazardous waste disposal sites
resulting from the disposal of a hazardous substance at
those sites by a third-party contractor of the Subsidiary.
(See item 3. Legal Proceedings.)
Recreational power boats must be certified by the
manufacturer to meet U.S. Coast Guard specifications. In
addition, their safety is subject to federal regulation
under the Boat Safety Act of 1971, as amended, pursuant to
which boat manufacturers may be required to recall products
for replacement of parts or components that have
demonstrated defects affection safety. The Company has
never had to conduct a product recall.
Sales and Marketing.
Sales are made through approximately 50 dealers
throughout the United States. The Company also has 14
additional dealers throughout the world. These dealers are
not exclusive to the Company and carry the boats of other
companies including some which may be competitive with the
Company's products. The territories served by any dealer
are not exclusive to the dealer. However, the Company uses
discretion in locating new dealers in an effort to protect
the interests of the existing dealers.
-8-
Following is a table of sales by geographic area for
the last three fiscal years:
Fiscal`97 Fiscal '96 Fiscal `95
United States .. $48,346,485 $40,545,235 $38,220,232
Canada, Mexico, Central
and South America ....$1,047,913 $658,738 $ -0-
Europe and
the Middle East .... $752,801 $394,078 $309,165
Asia ............... $ 367,126 $ -0- $ 197,932
-------- -------- --------
Total ........ $50,514,325 $41,598,051 $38,727,329
======== ======== =======
The Company has a growing international advertising
program and is seeking additional distribution for its
products in foreign markets through its own sales
representative who is establishing new dealers at a rapid
pace. In general, the Company requires payment in full or
an irrevocable letter of credit from a domestic bank before
it will ship a boat overseas. Consequently, there is no
credit risk associated with its foreign sales nor risk
related to foreign currency fluctuation. The Company
believes that within several years, foreign sales could
account for up to 25% of its total sales.
For Fiscal 1997 one dealer accounted for 6.6% of sales
and two other dealers each accounted for more than 5% of
sales. For Fiscal 1996 one dealer accounted for 10.2% of
sales and three other dealers each accounted for more than
5% of sales. For Fiscal 1995 one dealer accounted for 9.8%
of sales and four other dealers each accounted for more than
5% of sales. The Company believes that the loss of any
particular dealer would not have a materially adverse effect
on sales. As sales continue to grow through more dealers,
it is reasonable to assume the Company will grow less
dependent on any one dealer.
Field sales representatives call upon existing dealers
and develop new dealers. The field sales force is headed by
the Fountain's National Director of Sales who is responsible
for developing a full dealer organization for sport boats,
sport cruisers, sport fishing boats and now yachts. The
Company is seeking to establish separate sport boat and
fishing boat dealers in most marketing areas due to the
specialization of each type of boat and the different sales
programs required.
-9-
Although a sales order can be cancelled at any time,
most boats are pre-sold to a dealer before entering the
production line. The Company generally has been able to
sell to another dealer any boat for which the order has been
cancelled. To date, cancellations have not had any material
effect on the Company. The Company normally does not
manufacture boats for inventory.
The Company ships boats to its dealers on a cash on
delivery basis. However, approximately one-half of the
Company's shipments are made pursuant to commercial dealer
"floor plan financing" programs in which the Company
participates on behalf of its dealers. Under these
arrangements, a dealer establishes lines of credit with one
or more third-party lenders for the purchase of showroom
inventory.
When a dealer purchases a boat pursuant to a floor plan
arrangement, it draws against its line of credit and the
lender pays the invoice cost of the boat, net of shipping
charges, directly to the Company. Generally, payment is
made to the Company within seven business days. When the
dealer in turn sells the boat to a retail customer, the
dealer repays the lender, thereby restoring its available
credit line.
For the 1998 model year (which commenced July 1, 1997),
the Company had made arrangements to pay all interest
charged to dealers by certain floor plan lenders for as long
as six months. This and other incentives to the dealers
have resulted in relatively level month to month production
and sales. After six months, the free interest program ends
and interest will be charged to the dealer at the rates set
by the lender. The dealers will make curtailment payments
(principal payments) in the boats as required by their
particular commercial lenders. Similar sales promotion
programs were in effect during Fiscal 1997, 1996, and 1995.
Each dealer's floor plan credit facilities are secured
by the dealer's inventory, letters of credit, and perhaps,
other personal and real property. In connection with the
dealer's floor plan arrangements, the Company (together with
substantially all other major manufacturers) has agreed to
repurchase any of its boats which a lender repossesses from
a dealer and returns to the Company. In the event that a
dealer defaults under a credit line, the lender may then
invoke the manufacturers' repurchase agreements with respect
to that dealer. In that event, all repurchase agreements of
all manufacturers supplying a defaulting dealer are
generally invoked regardless of the boat or boats with
respect to which the dealer has defaulted (See also Item 7,
Management's Discussion and Analysis of Financial Condition
and Results of Operations).
The Company participates in floor plan arrangements
with several major third-party lenders on behalf of its
dealers, most of whom have financing arrangements with more
than one lender.
Except as described above or where it has a direct
repurchase agreement with a dealer, the Company is under no
material obligation to repurchase boats from its dealers.
From time to time the Company will voluntarily repurchase a
boat for the convenience of the dealer or for another dealer
who needs a particular model not readily available from the
factory.
-10-
The marketing of boats to retail customers is primarily
the responsibility of the dealer, whose efforts are
supplemented by the Company through advertising in boating
magazines and participation in regional, national, and
international boat shows.
Additionally, in order to further promote its products,
the Company developed a racing program. This entailed the
construction of specially designed race boats which have
been entered in major national offshore boat races.
Fountain race boats won many major races. Additionally,
Fountain single, twin and triple engine racing boats
currently own world speed records. The result of this
record of victories and speed records by a major
manufacturer is that the Company's products won a reputation
for very fast and safe hull design, durable construction,
and mechanical reliability.
The Company believes that the favorable publicity
generated by its record setting and winning race boats has
contributed significantly to its sales volume. Although the
Company curtailed its racing program for Fiscal 1992 and
sold all of its race boats, the fact that its racing program
was so successful in Fiscal 1990 and Fiscal 1991 has, the
Company believes, significantly benefited its sales volume
in subsequent years. From fiscal 1992 through fiscal 1996,
the Company had limited its participation in racing to
partial support of customer owned and driven Fountain race
boats. Also, the Company Founder and C.E.O., Reggie
Fountain, has raced a limited schedule since 1992, and won
numerous races in both factory and customer boats; he has
also set numerous speed records in both factory and customer
boats. These Fountain race boats were, in general, very
successful in the various racing circuits in which they
competed. The Company commenced construction of two race
boats during Fiscal 1997 and intends to again implement a
racing program during Fiscal 1998.
As part of the marketing program for its new line of
sport fishing boats, the Company sponsored several
outstanding sport fishermen in the Southern Kingfish
Association's King Mackerel Tournaments. This competitive
circuit is held throughout the Southeast. In Fiscal 1992,
the Company's boats and sponsored fishermen dominated the
tournaments by winning four of the top five spots. One
Fountain fisherman, Clayton Kirby, was named "Angler of the
Year" and finished in first place. Again, in Fiscal 1993,
first place was taken by a Fountain fisherman. Fountain
fishermen also won second place and 11 of the top 15 spots
in Fiscal 1993. Since Fiscal 1993, the Fountain fishing
team has continued to place high in the final standings
winning five of the last seven S.K.A. world championships.
The Southern Kingfish Association's tournaments are held
weekly and attract from one hundred to one thousand entrants
with prizes ranging up to $350,000. The winning
participation by Fountain sport fishing boats has given them
favorable exposure to serious sport fishermen, in particular
with respect to the superior performance of Fountain's
fishing boat line.
-11-
Sales Order Backlog.
The sales order backlog as of the end of September 1997
was for approximately 200 boats having an estimated sales
value of $20,000,000. This compares to an equivalent
backlog at this time in September, 1996 and September, 1995.
During the last two years the Company's lower priced fishing
boat lines have led sales increases holding down the average
unit price. Later this year, with the formal introduction
of the new 46', 51' and 65' models which have not been
included in backlog numbers, the Company believes that its
average unit price and margins will increase significantly.
The Company's Fall Dealer Allocation Program is designed to
promote early replenishment of the stock in Dealer
inventories depleted throughout the spring and summer.
Product Warranty.
The Company warrants the deck and hull of its boats
against defects in material and workmanship for a period of
three years. Engines included in the boats are warrantied
by the engine manufacturer. Warranty expenses of $707,202
were incurred in Fiscal 1997 and were charged-off against
net income. A reserve for warranty expenses estimated to be
incurred in future years had been recorded and amounted to
$500,000 at June 30, 1997. For 1996, warranty costs were
only six-tenths of one (1) percent. Warranty cost as a
percentage of sales are among the lowest in the marine
industry thereby reflecting the Company's superior
construction of its boats.
Competition.
Competition within the power boat manufacturing
industry is intense. While the high performance sports boat
market comprises only a small segment of all boats
manufactured, the higher prices commanded by these boats
make it a significant market in terms of total dollars
spent. The manufacturers that compete directly with the
Company in its market segment include:
Wellcraft Division of Genmar Industries, Inc.
Formula, a Division of Thunderbird Products Corporation
Cigarette Racing Team, Inc.
Baja Boats, Inc.
The Company believes that in its market segment, speed,
performance, quality, image, and safety are the main
competitive factors, with styling and price being somewhat
lesser considerations.
Their market for fishing boats is much larger than the
one for sport boats, but there are many more fishing boat
manufacturers than there are sport boat manufacturers. With
its winning image, Fountain will always sell its projected
budget.
-12-
For High Performance Surface Drive Super Ventilated
Positive Lift wide beam cruisers, we believe there is a
ready market waiting for our products. It is our belief
that there are no competitors that can match us in this
highly profitable area.
Employees.
As of September 30, 1997 the Company had 331 employees,
of whom seven were executive and management personnel.
Sixteen were engaged primarily in administrative positions
including accounting, personnel, marketing and sales
activities. Twenty-nine were employed in engineering,
tooling, and design. About one dozen are employed to expand
and maintain our facilities. The balance were engaged in
manufacturing operation. None of the Company's employees
are party to a collective bargaining agreement. The Company
considers its employee relations to be satisfactory. The
Company is an affirmative action, equal opportunity
employer.
Item 2. Properties.
The Company's executive offices and manufacturing
facilities are located on 62 acres along the Pamlico River
in Beaufort County, North Carolina. All of the land,
buildings and improvements are owned by the Company and are
held as collateral on notes and mortgages payable having a
balance of $8,273,378 at June 30, 1997
The operating facility contains seven buildings
totaling 167,250 square feet located on fifteen acres. The
buildings consist of the following:
Approximate
Square Footage Principal Use
Building 1 .......... 13,200 Executive offices,
shipping and
receiving, and paint
shop.
Building 2 .......... 7,200 Final prep shop.
Building 3 .......... 63,800 Lamination, woodworking,
upholstery, final
assembly,
inventory, and
cafeteria.
Building 4 .......... 14,250 Metal fabrication shop.
Building 5 .......... 26,300 Lamination, Assembly
& Engineering Offices.
Building 6 .......... 18,500 Mold storage.
Building 7 .......... 12,000 Tooling, Racing, service,
and warranty.
Building 8 .......... 8,750 Lamination extension
area.
Building 9 4,500 Mold Storage
Building 10 25,200 Mold Storage, Mold Prep
and Service
Building 11 10,500 Manufacturing and Tooling
======
Total ................. 204,200
-13-
Site improvements include a boat ramp and docking
facilities along a 600 foot canal leading to the Pamlico
River. In addition, approximately 200,000 square feet of
concrete paving surrounds the buildings and provides for
employee parking. Thirty-five unimproved acres are owned
and available for future expansion.
Item 3. Legal Proceedings.
The Company has been notified by the United States
Environmental Protection Agency (the "EPA") and the North
Carolina Department of Environment, Health and Natural
Resources ("NCSEHNR") that it has been identified as a
potentially responsible party (a "PRP") and may incur, or
may have incurred, liability for the remediation of ground
water contamination at the Spectron/Galaxy Waste Disposal
Site located in Elkton, Maryland (notice from the EPA dated
June 7, 1989) and the Seaboard Disposal Site, located in
High Point, North Carolina, also referred to as the
Jamestown, North Carolina site (notice form the EPA dated
July 10, 1991), resulting from the disposal of hazardous
substance at those sites by a third-party contractor of the
Company. The Company has been informed that the EPA and
NCDEHNR ultimately may identify a total of between 1,000 and
2,000, or more PRP's with respect to each site. The amounts
of the hazardous substances generated by the Company, which
are disposed of at both sites, are believed to be minimal in
relation to the total amount of hazardous substances
disposed of by all PRP's at the sites. At present, the
environmental conditions at the sites, to the Company's
knowledge, have not been fully determined by the EPA and
NCDEHNR, respectively, and the Company is not able to
determine at this time the amount of any potential liability
it may have in connection with remediation at either site.
Without any acknowledgment of liability, approximately $3,279
has been paid by the Company to date
as a non-performing cash-out participant in an EPA-
supervised response and removal program at the Elkton,
Maryland site, and in a NCSEHNR-supervised removal and
preliminary assessment program at the Jamestown, North
Carolina site. A cash-out proposal for the next phase of
the project is expected to be forthcoming from the PRP Group
for the Elkton, Maryland site within the near future.
According to the PRP Group, The Company's full cash-out
amount is estimated to be approximately $10,000 for the
Elkton, Maryland site based upon an estimated 3,304 gallons
of waste disposed of at that site by the Company's third
party contractor. A cash-out proposal in the approximate
amount of $66,000 based upon an estimated 19,245 gallons of
water is anticipated from the PRP Group for the Jamestown,
North Carolina site following completion of a remedial
investigation and feasibility study in early 1998,
according to the PRP Group administrator. Any such cash-out
agreement will be subject to approval by EPA and NCDEHNR,
respectively. The Company has accrued the estimated $76,000
liability related to these matters in the accompanying
financial statements.
-14-
The Company received a demand letter dated February 22,
1996, from the representative and agent for a famous
professional basketball player, for damages in connection
with an advertisement for the Company which used the
basketball player's name. The monetary demand was for
$1,000,000 if the claim was resolved prior to the institution
of a lawsuit, which also has been threatened. The Company
put its primary and umbrella liability insurance carriers on
notice after receiving the demand. On January 2, 1997, the
Company filed suit in U.S. District Court for the Eastern
District of North Carolina against the basketball player,
his affiliates and Spencer Communications (a company owned
by a director of the Company) claiming it did not know of or
approve of the ad using the basketball player's name. The
Company withdrew the ad after being contacted by the
basketball player's attorney. The Company further contends
that it did not state that the player was endorsing the
product and that the player has no legal claim to the usage
of a certain word within the advertisment. The Company
further claims that the player's counsel used coercion by
threatening suit and that the Company should be awarded the
costs of suit. On May 8, 1997, the player and his company
filed a response with counterclaim and crossclaim claiming
trademark infringement and unfair competition seeking
damages for $10,000,000. The Company filed a reply and
seeks dismissal. Shortly after the Company filed suit in
North Carolina, the player and an affiliated company filed suit
in the Northern District of Illinois. This matter was later
transferred to North Carolina and the Company has moved to
dismiss this suit with prejudice because it is repetitious
of the counterclaims in the Company's declaratory judgment
suit. (See Note 10)
There were seven product liability lawsuits brought
against the Company at June 30, 1997. In the Company's
opinion, these lawsuits are without merit. Therefore, these
lawsuits are being defended vigorously. The Company carries
sufficient product liability insurance to cover attorney's
fees and any losses which may occur from these lawsuits over
and above the insurance deductibles.
The Company was audited during Fiscal 1997 by the State
of North Carolina under the Escheat and Unclaimed Property
Statute. The State Treasurer's audit report was received
and a small amount of escheated funds were paid. However,
the Company disputed approximately $65,000 of remaining
escheated property by appealing to the Administrative office
of the State of North Carolina. The dispute has been
resolved by the Company's payment of $3,090 to the State.
-15-
The Company filed suit on July 21, 1997 against Marcia
K. Garbrecht, Gary D. Garbrecht, Mach, Inc., and Mach
performance, Inc. Gary D. Garbrecht is a former director of
the Company and together with his wife owned Mach, Inc. and
Mach Performance, Inc. The Company acquired Mach
Performance, Inc. which manufactured propellers in order to
effectuate the Company's goals of vertical integration and
because the directors were convinced by Gary Garbrecht that
Mach Performance, Inc.'s propeller sales would grow
significantly. As a director of the Company, Gary Garbrecht
represented that Mach Performance, Inc.'s sales would exceed
$3(three)million per year. He and his wife also made
representations directly to the Company and to independent
auditors and appraisers hired to determine the value of Mach
Performance, Inc. Among those representations were
representations that Mach Performance did not have
agreements to repurchase assets previously sold, That
inventory was currently valued according to GAAP, that
warranty claims were not significant enough to require
accounting contingencies, and that the product manufactured
by mach Performance, Inc. was of high quality. After the
acquisition and the move of production to Washington, N.C.
during the spring of 1997, the Company learned that Mach
Performance, Inc. did have repurchase agreements, that its
warranty claims were significant, and that the propellers
manufactured by its equipment and processes were not of high
quality. Gary Garbrecht resigned as an employee of the
Company in April and resigned as a director in May. After
investigating the warranty claims and the quality of the
propellers built through Mach Performance, Inc.'s equipment
and processes, the Company notified the Garbrechts that the
contracts involved in and resulting from the acquisition
were rescinded. Because the Garbrechts refused to recognize
the rescission and to return the consideration they
received, the Company filed suit.This suit seeks rescission
of an Agreement and Plan of Reorganization entered into with
the Garbrechts in 1996 for the Company's acquisition of Mach
Performance, Inc. The Company seeks rescission of the
acquisition and merger agreement and voidance of the
resulting transaction on grounds of fraud and material
breach of contract. Federal securities fraud claims are
based on the Garbrechts' alleged deceptive acts in violation
of Section 10(b) of the Securities Exchange Act of 1934,
arising from the sale of Mach Performance, Inc. capital
stock to the Company in exchange for the Company's issuance
to them of 127,500 new restricted shares of its common stock
valued at $1,041,250. Other claims include breach of
fiduciary duty, based on North Carolina law, arising from
Mr. Garbrecht's alleged material misrepresentations and
omissions while serving as a director of the Company during
the time when the acquisition and merger agreement was
reached. The Company is seeking a preliminary and permanent
injunction against the sale or transfer of its 127,500 new
restricted common shares acquired by the Garbrechts in the
transaction, and is seeking monetary damages, including
trebled and punitive damages in an unspecified amount, for
the claims stated above, as well as for a number of alleged
actions by Mr. Garbrecht after the acquisition, including
usurpation of corporate opportunities and conversion. The
Garbrechts and Mach, Inc. have filed counterclaims alleging
breach of Gary D. Garbrecht's employment contract, breach of
the merger contract, and requesting a declaratory judgment
regarding the parties' rights and responsibilities under all
the contracts involved in this transaction. The company
intends to vigorously pursue its claims against the
Garbrechts and their co-defendants in this suit, and to
defend vigorously against the counterclaims brought by the
Garbrechts and their affiliates.
-16-
On September 3, 1997, the company filed suit against
P.R.O.P. Tour, Inc., an affiliate of Gary Gary Garbrecht.
P.R.O.P. tour Inc. runs a Formula One racing tour of which
the Company is the major sponsor. This sponsorship had two
components, a sponsorship of a Formula One race held in
Washington, N.C. and a separate sponsorship of the entire
series of races which made the Company's subsidiary,
Fountain Powerboats, Inc., the title sponsor of the series.
The suit results from P.R.O.P. Tour Inc.'s repeated claims
that it was damaged by alleged breaches of the sponsorship
agreement for the Washington, N.C. race by Fountain
Powerboats, Inc. The Company decided to seek a declaratory
judgment regarding its obligations under the Washington,
N.C. race contract. The suit also includes claims by the
Company involving the series sponsorship agreement based on
P.R.O.P. Tour, Inc.'s repudiation of its obligations to
provide the Company primary media exposure according to the
terms of that agreement.
Item 4. Submission of Matters to a Vote of Security
Holders.
No matters were submitted to the Shareholders for a vote
during the last quarter of Fiscal 1997.
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
The Company's common stock, $.01 per value, was listed
and began trading on the NASDAQ National Market System
(under the symbol "FPWR") on August 28,1996. Prior to that
time the Company's common stock was traded on the American
Stock Exchange (under the symbol "FPI").
The following table contains certain historical high
and low price information relation to the common stock for
the past quarter indicated. Amounts shown reflect high and
low sales prices of the common stock on the Nasdaq National
Market System since August 28, 1996 and the American Stock
Exchange prior to such date:
Quarter Ended High Low
September 30, 1994 ... $2.92 $1.50
December 31, 1994 .. 4.42 1.83
March 31, 1995 4.83 3.50
June 30, 1995 ... 4.17 3.00
September 30, 1995 ... 5.50 3.59
December 31, 1995 ... 4.09 3.50
March 31, 1996 . 4.00 3.50
June 30, 1996 .... 7.92 3.79
September 30, 1996 ........ 8.08 5.69
December 31, 1996 . ...12.33 7.75
March 31, 1997 .. 16.08 10.65
June 30, 1997 ... 13.16 9.50
-17-
The Company has not declared or paid any cash dividends
since its inception. Any decision as to the future payment
of dividends will depend on the Company's earning, financial
position, and such other factors as the Board of Directors
deems relevant.
The number of shareholders of record for the Company's
common stock as of September 30, 1997 was approximately
1500.
-18-
Item 6. Selected Financial Data
Fountain Powerboat Industries, Inc. and Subsidiary
Selected Financial Data
Fiscal Years 1993 through 1997
Year Ended June 30,
Operations Statement Data: ------------------------------------------
- ----------------------
(Period Ended) 1997 1996 1995 1994 1993
- ----------------- ------ ----- ------ ------ ------
Sales $50,514,325 $41,598,051 $38,727,329 $22,240,212 $27,232,360
Income from continuing
operations $4,069,832 $3,680,034 $2,047,876 $ (2,993,344) $ 146,433
Loss from discontinued
operations $2,829,951 - - - -
Net Income
(loss) $ 1,239,951 $ 3,680,034 $ 2,047,876 $(2,993,344) $ 146,433
Income (loss) per share $.25 $ .81 $ .45 $( .67) $.03
Weight average shares
outstanding .. 4,995,154 4,528,608 4,528,608 4,452,856 4,398,750
Fully diluted earnings (loss)
per share ... $ N/A $ .77 $ .45 $ N/A $N/A
Fully diluted weighted average
shares outstanding N/A 4,800,238 4,539,694 N/A N/A
Balance Sheet Data
(At Period End)
- -----------------------------------
Current assets.. $10,997,133 $8,378,341 $6,185,727 $5,365,619 $5,011,591
Total Assets . $23,713,896 $18,498,104 $16,334,757 $16,266,787 $16,211,026
Current Liabilities $6,305,212 $6,180,476 $6,081,298 $14,976,570 $5,920,743
Long-term debt.. $8,047,039 $5,433,184 $7,049,049 $133,683 $6,440,403
Stockholders'
equity (1) .. $ 9,361,645 $6,884,444 $3,204,410 $1,156,534 $3,849,880
- -------------------
(1) The Company has not paid any dividends since its inception.
-19-
Item 7. Management's Discussion and
Analysis of Financial
Condition and Results of Operations.
As described more fully
below at "Business
Environment", approximately half of the
Company's shipments
to dealers were financed through so-called
"100% floor plan
arrangements" with third-party lenders
pursuant to which
the Company may be required to repurchase
boats repossessed
by the lenders if the dealers defaults
under his credit
arrangement. The other half of shipments
were C.O.D. or
payment prior to shipment.
Generally, the Company recognizes a sale
when a boat is
shipped to a customer, legal title and
all other incidents
of ownership have passed from the Company
to the customer,
and payment is received from the
customers' third-party
commercial lender or from the customer.
This is the method
of sales recognition believed to be in
use by most boat
manufacturers.
The Company has developed criteria
for determining
whether a shipment should be recorded as
a sale or as a
deferred sale (a balance sheet liability).
The criteria for
recording a sale are that the boat has
been completed and
shipped to a customer, that title and all
other incidents of
ownership have passed to the customer, and
that there is no
direct commitment to repurchase the boat
or to pay floor
plan interest beyond the normal sales program terms.
At June 30, 1995, the Company estimated
the balances in
deferred sales to be $197,541 and in deferred
cost of sales
to be $183,393. At June 30, 1994, the
Company estimated the
balances in deferred sales to be $1,100,000
and in deferred
cost of sales to be $850,000. The
differences between the
estimates for deferred sales and deferred
cost of sales at
June 30, 1994 and June 30, 1995 had the
effect of increasing
the gross margin on sales and net income
after taxes for the
year by $235,852 ($.05 per share).
At June 30, 1997 and 1996, there
were no commitments to
dealers to pay the interest on floor
plan financed boats in
excess of the time period specified in
the Company's written
sales program and there were
no direct repurchase
agreements. This was because of
much improved market
conditions and strong ongoing consumer
demand for boats.
Therefore, there were no deferred sales
or cost of sales
estimated at June 30, 1997, and
1996. The differences
between the estimates for deferred sales
and deferred cost
of sales at June 30, 1995 and June 30,
1996 had the effect
of increasing the gross margin on sales
and net income after
taxes for the year by $14,148. There
was no such effect on
Fiscal 1997.
The Company has a contingent
liability to repurchase
boats where it participates in the
floor plan financing made
available to its dealers by third-party
finance companies.
Sales to participating dealers are
approved by the
respective finance companies. If a
participating dealer
does not satisfy its obligation to the
lender and the boat
is subsequently repossessed by the lender,
then the Company
can be required to repurchase the boat.
The Company had a
contingent liability of approximately
$8,600,000 at June 30,
1997, $7,200,000 at June 30, 1996 and
$7,700,000 at June 30,
1995 for the shipment of boats which
remained uncollected by
the finance companies at those dates.
The lesser contingent
liability at June 30, 1996 is due to
fewer boats being floor
planned by dealers with finance
companies. Additionally, at
June 30, 1997 and June 30, 1996
the Company had recorded a
$200,000, and $207,359 reserve for
losses which may be
reasonably expected to be incurred
on boat repurchases in
future years.
-20-
Business Environment.
The company's Sales have continued
to increase each
year. Sales for 1997 were $50,514,325,
a 21% increase from
Sales for Fiscal 1996. Improved sales
volume for Fiscal
1997 was in line with a general
improvements is the overall
recreational boating industry and the
result of additional
production capacity. Also, the Company
continued its highly
effective advertising and marketing
programs throughout
Fiscal 1997.
Sales for Fiscal 1996 were
$41,598,051, a 7% increase
from sales for Fiscal 1995. Sales
for Fiscal 1995 were
$38,727,329.
In Fiscal 1997, the Company
continued to advertise and
market aggressively. Management believes
that the Company's
advertising, marketing, racing, and
tournament fishing
programs, as well as, its reputation as
the builder of the
highest quality, best performing,
and safest high
performance boats in the industry,
all contributed in
increased sales for Fiscal 1997.
Typically, each dealer's floor
plan credit facilities
are secured by the dealer's inventory,
and, perhaps, the dealers letter of credit or other
personal and real property. In connection
with the dealers'
floor plan arrangements, the Company
(as well as
substantially all other major manufacturers)
has agreed in
most instances to repurchases, under
certain circumstances,
any of its boats which a lender
repossesses from a dealer
and returns to the Company. In the
event that a dealer
defaults under credit line, the
lender may invoke the
manufacturers' repurchase agreements
with respect to that
dealer. In that event, all repurchase
agreements of all
manufacturers supplying a defaulting
dealer are generally
invoked regardless of the boat or
boats with respect to
which the dealer has defaulted.
Except where there is a
direct repurchase agreement
with the customer, the Company is
under no obligation to
repurchase boats from its dealers,
although it will on
occasion voluntarily assist a dealer
in selling a boat or
repurchase a boat for the convenience of a dealer.
No boats were repurchased
in Fiscal 1997, 1996 and
Fiscal 1994 in connection with
floor plan arrangements.
Five boats were repurchased during
Fiscal 1995 in connection
with floor plan arrangements. At
June 30, 1997 and 1996,
the Company had recorded a $200,000,
and $207,359 reserve
for losses which may be reasonably
expected to be incurred
on boat repurchases in future years.
Results of Operations.
Net income for Fiscal 1997
was $1,239,951 or $.25 per
share outstanding. This compares
to net income for Fiscal
1996 of $3,680,034, or $.81 per
share. The change in net
income was due to a discontinued
operations loss and write-
down of assets of a Subsidiary,
Fountain Power, Inc. for
$2,829,881.(See Note #10 and Note #15).
-21-
Income from continuing operations
(before the loss and
writedown due to Fountain Power, Inc,)
increased in Fiscal
1997 to $4,069,832 or 10% over fiscal
1996. Income from
continuing operations for Fiscal 1996
was $3,680,034. The
improvement in income from continuing
operations for Fiscal
1997 was the result of greater
sales volume, price
increases, production efficiencies, and
a favorable sales
mix. The mix of sales continued to
be weighted with sales
of the Company's larger, higher margin sport boats.
Net income for Fiscal 1996 was up
due to an improvement
in sales volume, production efficiencies
and a favorable
sales mix. Also, income was bolstered
by inclusion of a non-
recurring $800,000 discount earned
for the early retirement
of indebtedness to a vendor.
Sales were $41,598,051 for
Fiscal 1996, or up by 7% from the previous year.
Net income for Fiscal 1995 was
up primarily because of
substantially improved sales volume.
Sales were $38,
727,329, or up by 74% from the
previous year. Sales for
Fiscal 1994 were $22,240,212. The
sales mix for Fiscal 1994
was unfavorable and overall sales
volume through February,
1994 was less than anticipated.
Fewer boats were sold and
they were generally smaller and
less profitable resulting in
a loss for the year.
In Fiscal 1994, at the Miami
boat show in mid-February,
the new "positive-lift" hull
design was introduced. This
new hull design significantly
increases speed, improves
handling, and results in much
better fuel economy.
Subsequent to the introduction of
this new design, the
Company received many orders for
large, profitable sport
boats having the new "positive-lift" hull.
As the Company's sales order
volume improved, it began
to greatly increase its level
of purchases of high
performance engines and other
critical components.
Unfortunately, the high performance
engines and certain
other critical components were not
available on a timely
basis. This caused serious and
prolonged delays in the
Company's boat production. Many
costly inefficiencies were
incurred in its manufacturing
operations as a consequence of
not having the necessary high
performance engines and
components on a timely basis. By
July, 1994 most of these
supply problems had been resolved.
Most of the sales orders
that were not completed in the fourth
quarter of Fiscal 1994
because of delayed deliveries of
critical components were
completed in the first quarter of Fiscal 1995.
The Company's gross profit
margin as a percentage of
sales increased to 26.8% in Fiscal 1997
from 22.3% in Fiscal
1996 and 20.1% in Fiscal 1995. The
increase in the gross
margin percentage was due to price
increases and the sales
mix of larger, higher margin sport
boats. Greater sales
volume, more integrated manufacturing operations
and production efficiencies
also contributed to an
improved gross margin for Fiscal 1997.
Depreciation expense was $1,642,969
for Fiscal 1997,
$1,536,479 for Fiscal 1996, and
$1,628,867 for Fiscal 1995.
Depreciation expense by asset category was as follows:
-22-
Fiscal Fiscal Fiscal
1997 1996 1995
Land improvements $ 22,468 $20,595 $18,849
Buildings $ 231,546 $260,580 $269,460
Molds & plugs $1,041,211 $980,104 $1,076,746
Machinery & Equipment $295,829 $ 225,654 $216,089
Furniture & fixtures $24,572 $11,114 $12,094
Transportation equipment $27,343 $ 38,432 $35,629
------- ------- -------
Total $1,642,969 $1,536,479 $ 1,628,867
======== ======== ========
The $ 92,388 decrease in
depreciation expense for
Fiscal 1996 from Fiscal 1995 is due to an excess of
molds becoming fully
depreciated over new molds commencing
to be depreciated
during the year. Those particular molds
which are now fully
depreciated are still in active service.
Following is a schedule of
the net fixed asset
additions during Fiscal 1997 and Fiscal 1996.
Fiscal 1997 Fiscal 1996
Buildings ........ $ 360,231 $ 225,781
Land and Improvements...$ 315,605 -
Molds and plugs ...... $ 1,684,274 $ 878,513
Construction in Progress...$ 809,506 -
Machinery & equipment ..$ 649,895 $ 376,241
Furniture & fixtures .. $ 18,767 $ 6,270
Transportation equipment .$ 41,718 $ (33,925)
----------- ----------
Total $ 3,879,996 $1,482,880
========= =========
-23-
Selling expenses were $6,463,875
for Fiscal 1997,
$4,285,923 for Fiscal 1996, and $3,897,086
for Fiscal 1995.
The Company continued to promote its
products primarily by
magazine advertising in Fiscal 1997.
Advertising expense
was $1,267,822 for Fiscal 1997,
$849,627 for Fiscal 1996,
and $977,787 for Fiscal 1995.
These advertising
expenditures increased the Company's
visibility in the
recreational marine industry and promoted
its boat sales.
Management believes that advertising
is necessary in order
to maintain the Company's sales volume and dealer
base.
Additionally, in an effort to
further promote its
products, the Company continued its
offshore racing and
tournament fishing programs. These
programs cost $1,256,631
in Fiscal 1997, $867,743 in Fiscal
1996 and $576,741 in
Fiscal 1995. As previously noted,
the Company curtailed its
offshore racing program in Fiscal
1992 and sold its last
remaining race boat, but continued
a limited racing program
and its tournament fishing program
through Fiscal 1997. The
Company commenced construction of two
race boats during late
Fiscal 1997 and intends to again
implement a racing program
during Fiscal 1998.
Selling expenses compared for
the past three fiscal
years were as follows:
Fiscal 1997 Fiscal 1996 Fiscal 1995
Offshore racing and
tournament fishing ..$1,256,631 $867,743 $576,741
Advertising $1,267,822 $849,627 $977,787
Salaries & commissions $1,029,810 $ 578,170 $752,206
Boat Shows ... . $452,859 $285,321 $388,710
Dealer incentives $1,286,649 $ 954,234 $938,563
Other selling expenses $1,170,104 $ 750,828 $263,079
----------- ---------- ---------
Total $ 6,463,875 $4,285,923 $3,897,006
======= ========= =========
General and administrative
expenses include the
finance, accounting, legal, personnel,
data processing, and
administrative operating expenses
of the Company. These
expenses were $2,553,870 for
Fiscal 1997, $1,904,988 for
Fiscal 1996, and $1,415,637 for
Fiscal 1995. Most of the
increase for Fiscal 1997 over
Fiscal 1996 was in executive
compensation, travel expense, and attorneys' fees.
Interest expense was $557,768
for Fiscal 1997, $747,337
for Fiscal 1996, and $989,359 for
Fiscal 1995. The decrease
in interest expense for Fiscal 1997
is primarily from lower
interest rates on long term debt.
-24-
No fixed assets were sold in
Fiscal 1997. During Fiscal
1996 some trucks were sold yielding
a gain of $22,906.
During Fiscal 1995 some miscellaneous
fixed assets were sold
yielding a loss amounting to $23,015.
Included in other income for
Fiscal 1997 are consulting
fees earned by the use of Mr.
Fountain amounting to
$260,000, and these have been
assigned to the company.
Included in other income for Fiscal
1996 is a non-recurring
$800,000 discount earned for the
early retirement of
indebtedness to a vendor. Included
in other income for
Fiscal 1995 is the non-recurring gain
on the settlement of a
state sales and use tax assessment
amounting to $169,552.
Also included in other income for
Fiscal 1996 are $610,420
of technical consulting fees earned
by the Company by the
use of Mr. Fountain. These
consulting fees amounted to
$452,911 for Fiscal 1995. Under
the terms of the current
consulting contract, the consulting
fees ended entirely
after Fiscal 1997.
Liquidity and Financial Resources.
Operations in Fiscal 1997
provided $5,474,162 in cash.
Net income plus depreciation expense
provided cash amounting
to $2,882,920. However, relatively
large amounts were
needed to finance investment
activities in purchasing
property, plant, equipment and
molds. The loss from
operations of the discontinued
subsidiaries, Fountain Power,
Inc. and Mach Performance, Inc.
also contributed to the use
of cash (See Note 15).
The ending cash balance was
$3,690,658.
Operations for the prior
fiscal year 1996, provided
$3,935,379 in cash. Net income
plus depreciation expense
provided cash amounting to
$5,216,513. However, relatively
large amounts were needed to
finance increases in accounts
receivable and inventories. The
ending cash balance was
$1,360,619.
During Fiscal year 1995
operations consumed $1,133,240
in cash. Net income plus
depreciation expense provided cash
amounting to $3,676,743. However,
relatively large amounts
were needed to finance an increase
in accounts receivable, a
decrease in accounts payable and
a reduction in customer
deposits. The ending cash balance was $490,807.
Investing activities for
Fiscal 1997 required
$4,936,129, including expenditures
for additional molds and
plugs amounting to $1,684,274 and
for property, plant and
equipment for $2,249,670. Also,
increases in other assets
required $306,030.
Investing activities for
Fiscal 1996 required
$1,484,306 including expenditures
for additional molds and
plugs amounting to $878,513 and
for other property, plant
and equipment amounting to $604,367.
Investing activities for
Fiscal 1995 required
$1,169,744, including expenditures for
additional molds and
plugs amounting to $767,102 and for
other property, plant,
and equipment amounting to $431,137.
-25-
Financing activities for
Fiscal 1997 provided
$1,095,851. Included in this amount
are proceeds from
issuance of notes payable and long
term debt to G. E.
Capital Corporation for $8,500,000 and
the retirement of all
previous long term debt of $6,427,060.
Financing activities for Fiscal
1996 used $1,581,261.
Included in this amount is $2,192,528
of indebtedness to a
vendor which was retired entirely
during the year. Debt
repayments to MetLife Capital
Corporation and others
amounted to $627,637.
Financing activities for
Fiscal 1995 provided
$2,118,080. Included in this
amount is $2,600,000 of
indebtedness to a vendor which was
converted from a short-
term trade payable to a
long-term note payable. Debt
repayments to MetLife Capital
Corporation and other amounted
to $928,632.
The net increase in
cash for Fiscal 1997 was
$2,330,039. For Fiscal 1998, the
Company anticipates that
the $3,690,658 beginning cash
balance and the amounts
expected to be provided from
1997 operations will be
sufficient to meet most of the
Company's liquidity needs of
the year. However, planned capital
expenditures for Fiscal
1998 are substantially greater
than for Fiscal 1997. The
Company intends to increase
its production capacity,
principally for new products,
in Fiscal 1998. Therefore,
the Company is reviewing
various financing alternatives to
provide for its increased growth.
Effective December 31, 1996,
the Company repaid its
indebtedness to MetLife
Capital Corporation, Deutsche
Financial Services, and others with
a new $10,000,000 long
term loan agreement with General
Electric Capital
Corporation, of which $7,500,000 was
initially disbursed. A
second disbursement was made during
the year for $1,000,000
bringing the total outstanding as
of June 30, 1997 to
$8,500,000 less scheduled monthly principal
reductions.
Effective December 31, 1993,
the Company refinanced its
indebtedness to Metlife Capital
Corporation. A $2,000,000
revolving loan was incorporated into
the long-term debt and
the total amount was amortized over
ten years with a call at
the end of the fifth year. The
interest rate on the debt
was fixed at 8 1/2%. The new
monthly payment amounts very
closely approximate what the
principal and interest payment
amounts were prior to the
refinancing. The indebtedness is
secured by a first lien to
the Company's assets, except
engines manufactured by Mercury
Marine. An additional
$76,194 was borrowed in the
transaction. The total amount
of the debt to MetLife as
December 31, 1993 was $6,683,200
after the refinancing. The
indebtedness to MetLife was
$6,003,799 at June 30, 1995 and $5,500,467
at June 30, 1996.
The Loan agreement with
MetLife was amended January 1,
1995, to revise certain financial
ratio requirements that
the Company had previously not
attained. After the revision
of the financial ratio requirements
and at June 30, 1995 and
1996, the Company was in compliance
with all of the MetLife
financial ratio requirements.
In June of 1994, the
ompany arranged for a line of
credit from Deutsche Financial
Services for engine
purchases. At June 30, 1994 the
amount owed to Deutsche was
$152,287, at June 30, 1995 the
amount owed was $534,185 and
at June 30, 1996 the amount
owed was $1,173,089. The
maximum amount of the line
of credit from Deutsche is
$1,200,000. The debt is secured
by a first lien on all
engine inventory and by a
$200,000 irrevocable letter of
credit.
-26-
In December, 1995 the
Company borrowed $600,000 from G.
E. Capital Corporation for
the purpose of retiring its
indebtedness to a vendor. This
debt to G. E. Capital
Corporation is scheduled for
repayment over forty months at
9.00% interest. It is secured
by various boat molds and
product tooling and by an irrevocable
bank letter of credit
for $200,000. The unpaid balance
at June 30, 1996 was
$538,044.
Effects of Inflation.
The Company has not been
materially affected by the
moderate inflation of recent
years. Since most of the
Company's plant and its
equipment are relatively new,
expenditures for replacements
are not expected to be a
factor in the near-term future.
When raw material costs
increase because of inflation,
the Company attempts to minimize
the effect of these
increases by using alternative,
less costly materials, or
by finding less costly sources
for the materials it uses.
When the foregoing measures are
not possible, its selling
prices are increased to recover the cost
increases.
The Company's products are
targeted at the segment of
the power boat market where
retail purchasers are generally
less significantly affected by
price or other economic
conditions. Consequently, management
believes that the
impact of inflation on sales and
the results of operations
will not be material.
Cautionary Statement for Purposes
of "Safe Harbor" Under the
Private Securities Reform Act of 1995.
The Company may from time
to time make forward-looking
statements, including statements
projecting, forecasting, or
estimating the Company's performance
and industry trends.
The achievement of the projections,
forecasts, or estimates
contained in these statements is
subject to certain risks
and uncertainties, and actual results
and events may differ
materially from those projected, forecasted,
or estimated.
The applicable risks and
uncertainties include general
economic and industry conditions
that affect all businesses,
as well as matters that are
specific to the Company and the
markets it serves. For example,
the achievement of
projections, forecasts, or
estimates contained in the
Company's forward-looking statements
may be impacted by
national and international economic
conditions; compliance
with governmental laws and regulations;
accidents and acts
of God; and all of the general risks
associated with doing
business.
-27-
Risks that are specific to
the Company and its markets
include but are not limited to
compliance with increasingly
stringent environmental laws and
regulations; the cyclical
nature of the industry; competition
in pricing and new
product development from larger
companies with substantial
resources; the concentration of
a substantial percentage of
the Company's sales with a few
major customers, the loss of,
or change in demand from dealers,
any of which could have a
material impact upon the Company;
labor relations at the
Company and at its customers
and suppliers; and the
Company's single-source supply
and just-in-time inventory
strategies for some critical
boat components, including high
performance engines, which
could adversely affect production
if a single-source supplier is
unable for any reason to meet
the Company's requirements on a timely
basis.
Item 8. Financial Statements and Supplementary Data.
The financial statements are set
forth immediately following
the signature page.
Item 9. Changes in and
There were no changes in
or disagreements with the
independent auditors on accounting
and financial disclosure
matters.
Part III
Item 10. Directors and Executive Officers
Registrant.
The Current directors of
Registrant and its Subsidiary
are as Follows:
REGINALD M. FOUNTAIN, JR., age 57,
founded the Company's
Subsidiary during 1979 and has served
as its Chief Executive
Officer from its organization. He
became a director and
President of the Company upon its
acquisition of the
Subsidiary in August, 1986. Mr. Fountain presently serves
as Chairman, President, Chief Executive
Officer, and Chief
Operating Officer of the Company and
its Subsidiary. From
1971 to 1979, Mr. Fountain was a
world class race boat
driver, and was the Unlimited Class
World Champion in 1976
and 1978.
REGGIE FOUNTAIN - A BIOGRAPHY
Whether it's racing, building the world's premier
high-performance sport boats, investing in real estate
or selling life insurance, Reggie Fountain has always
been a winner at everything he does.
One only needs to spend a few minutes with Reggie
Fountain to sense the excitement of an American success
story come true. The man loves his work.
Whether it's beating a star-studded fleet of
world-class offshore racers, personally researching,
developing and manufacturing his renowned high-performance
pleasure boats, earning a business and law degree at
the University of North Carolina, joining the Million
Dollar Round Table of Life Insurance Salesmen or
completing a real estate deal in his native North
Carolina, Fountain always finds a way to win.
WORLD CHAMPION TUNNEL BOAT RACER
Reggie entered his first boat race in 1954
at the age of 14, moving quickly into professional
competition in 1970. A year later, while driving
for Glastron Boats, he was named the Houston Gulf
Coast Marathon Association Champion and the Outstanding
New Driver at the lake Havasu World Championships.
Relying on a keen sense for speed, a superstar
racing career was under way.
The following year, operating as an independent,
Fountain made boat racing history by setting two world
records earning three national closed-course
championships all in one day at the Marine Stadium
in Miami. Fountain's dominance as an independent
eventually earned him a place on the vaunted Mercury
Factory Team where he teamed with Bill Seebold and
Earl Bentz to become the most dominant trio in
tunnel outboard history.
Sporting the Mercury corporate colors, Fountain
won an amazing 20 of 31 races entered in 1973.
In 1975, he followed up by winning 10 of 19 events,
but it was the bicentennial year of 1976 that will
be remembered as the pinnacle of Fountain's tunnel
racing career. He finished first in 15 of 23 races
entered, capped by a well deserved title at the St.
Louis OZ World Championships. Fountain won the
prestigious St. Louis race again in 1978,
then retired from active competition the
following year to pursue an extensive R&D
testing program commissioned by Mercury Marine
while continuing to manage his growing real
estate interests.
FOUNTAIN POWERBOATS - THE BEST ON THE WATER
Before Reggie could begin MerCruiser's
testing program, he needed a boat. After
evaluating the market, he contracted with
Bill Farmer of Excalibur Boats in Sarasota,
Florida to use one of his 31' V-bottoms.
As the testing program progressed, Fountain
couldn't resist the temptation to tinker
with the boat. A little sandpaper on the
running surface netted a speed increase.
Hand-crafted putty strakes improved handling
and further modifications on the stern drive
height improved acceleration. Before long,
Reggie had made so many changes the boat no
longer resembled the original.
Encouraged by the noteworthy performance
gains, Fountain next attacked the deck and hull
design. As the development process continued,
Fountain noticed a growing market for the
high customized test boats. A short time
later, Fountain Powerboats was born in an
abandoned used car dealership just outside
Reggie's residence in Washington, North
Carolina near the Pamlico River.
FOUNTAIN POWERBOATS - ALWAYS ON THE GO
Growth has come rapidly at Fountain
Powerboats. What started in 1979 as a
10,000-square foot manufacturing facility
with eight employees and annual sales of
$515,000 has swelled to 200,000 square
feet, more than 300 employees and projected
sales for the 1995-96 model year in excess
of $45,000,000.
Likewise, Fountain's model line has
kept pace with the company's phenomenal
growth. Seventeen years after he started,
Fountain's Lightning Series includes 35',
42' and 47' offerings, while the award-winning
Fever Series features 27', 29', 32' and 38'
models. For cruising enthusiasts that want
more performance, Fountain's 32', 38' and 47'
Sports Cruisers are considered the best on
the water. And for those interested in getting
started in high-performance boating, Fountain
offers an award-winning 24' Competition Series.
In addition to his world-renowned sport boats,
fisherman can likewise enjoy Fountain's patented
brand of performance. Fountain entered the
bluewater fishing market at full strength in
1990. Today, the company's fishing fleet
included a diverse mix of boats from 25' to 32'
with either stern drive or outboard power in
center console, cuddy cabin and open bow configurations.
THE BEST ON THE WATER
From the outset, Fountain has insisted
on ultimate quality. A pioneer of space-age
laminates in the boating industry, Fountain
was among the first to use bi- and tri-directional
glass along with lightweight coring material.
Underneath, Fountain was one of the first to
successfully utilize a notch transom, pad
keel running surface for improved handling
and performance.
With Reggie at the helm, Fountain
Powerboats has gained an international
reputation as the world's premier high-performance
boat company. Fountain is the only builder
ever to earn Boat of the Year honors from
three different boating publications, including
Powerboat, Hot Boat and Boating. For 15
consecutive years, Fountain has been recognized
in Powerboat magazine's annual Awards of
Product Excellence program, including five
Offshore Boat of the Year awards - the most
recent in 1996. Furthermore, fishing boats
designed and built by Fountain have thoroughly
dominated competition on the Southern
Kingfish Association (SKA) tour like
no other builder in history. Anglers
in Fountain fishing boats have earned
firstplace overall honors four of the
five years, including Dave Workman's
back-to-back wins in 94'-955'. Further,
Team Fountain has never failed to place
at least five boats in the top ten spots
in the 2,000-member SKA.
A RETURN TO RACING
Certainly, a trophy case full of awards
and accolades have helped propel Fountain to
the forefront of the boating world but it's
been the achievement in offshore racing that
has truly separated Fountain from the rest
of the pack. After nearly a decade of
retirement from active competition, Reggie
Fountain returned to racing in 1990 to
campaign nationwide on the offshore circuit.
Not since the late Don Aronow has a man
designed, built, throttled and driven a
boat of his own make to such dominance on
the demanding offshore tour. Fountain
Powerboats is the only V-bottom builder
in the decade of the 90's to score a
first-place overall finish at a nationally
sanctioned offshore race. We've done it
more than a dozen times. Wellcraft,
Cigarette, Formula, Baja and Hustler
have a combined tally of zero. Further,
in a two-year stretch, Reggie Fountain
went undefeated in major offshore competition.
In addition to his complete
dominance on the racecourse, Fountain
has clearly established several times
that he builds the world's fastest, safest,
smoothest and best handling V-bottoms
on the water. In the last six years,
the most hotly contested prize on the
offshore circuit has been the kilo
record. Fountain started this seesaw
battle in 1991 with a 114.585-mph clocking
in the triple-engine 47-foot Superboat
Team Fountain. The Wellcraft got into
the act with a triple-engine 116.751-mph
blast of its own. Hell bent on returning
bragging rights to North Carolina, Fountain
upped the mark to 123.91 mph six month
later with the wrinkle that he did the
trick in a smaller, less powerful 42-foot
twin-engine boat. And then there's the
latest episode that Fountain will always
remember as icing on the cake literally.
Fountain's back to back 5/8th mile kilo
passes of 133.788 and 130.092 mph became
all the more noteworthy when you consider
they were recorded in a freezing sub-zero
snow flurry. The new 131.94-mph speed
marks the second time that Reggie has
used a twin-engine boat to break a record
held by a triple.
Perhaps Fountain's biggest milestone
achievement in offshore racing came in
New Orleans, LA, in 1990. Racing against
a star-studded fleet that included actors
Chuck Norris, Don Johnson, and Kurt
Russell, Fountain overcame amazing odds
and beat the entire field of hybrid
racing catamarans with his V-bottom.
The win was particularly sweet for
Fountain because heretofore V-bottoms
reputedly were no match for the
catamarans in slick water. To the
amazement of the "experts" Fountain
aced a fleet of the world's fastest
offshore cats in water conditions on
lake Ponchartrain that would've been
ideal for a barefoot ski tournament.
Two years later in 1992, Reggie,
throttling john Rebhan's Fountain 42'
Lightning, Ohio Steel, accomplished
the near impossible by capturing the
OPT World and National Championships
in Open V-bottom. Fountain also won
the APBA World Championship in
Manufacturer's Super Vee.
REGGIE FOUNTAIN - MR. FULL THROTTLE
Although the title on his
business card says, "Reggie Fountain,
Chief Executive Officer, Chairman of
the Board and President," it scarcely
touches upon the extent of his actual
involvement. Unlike any other CEO in
the performance boating industry,
Reggie Fountain is hands-on every step
of the way.
Drawing on over 37 years of
experience in all aspects of racing
and pleasure boating, Fountain personally
masterminds all engineering and new
product Research and Development.
Considered among the most innovative
minds in the boating world, Fountain
revolutionized the way we go fast on
the water in the late 70's when he
introduced his amazing notch-transom,
pad-keel running surface. Then in
1992, he took the state of the art
one giant step further when he
introduced Positive Lift a breakthrough
that added more than a 10 percent
performance increase to Fountain's
already superior top-end performance
while also improving handling and
cornering agility.
Once a mold is created,
Fountain performs all initial
on-the-water testing and then
collaborates with his staff on
interior design and graphic styling.
To this day, Fountain still logs
approximately 1,000 hours a year on the water.
Time permitting, Reggie continues
to offer personal instruction in
the finer points of operating a
high-performance boat to many of
the customers that visit his North
Carolina facility. Furthermore, he
personally tests many of his boats
prior to shipment to a dealer
network that expands to all
corners of the United States.
GARY E. MAZZA,III, age 59, became
a director of the
Company on December 28. 1993. Mr.
Mazza is a practicing
attorney in the business, tax and
international areas of the
law in Annapolis, Maryland. He also
practices law in New
York and Virginia. He is the Chairman
of Triangle Tractor &
Trailer, Inc., a Director of the
American Red Cross of
Maryland, and an Adjunct Professor
at the University of
Maryland. He is the founder,
Executive Vice President, and
General Counsel for Aerovias
Quisqueana, C. por A., Santo
Domingo, Dominican Republic.
Prior to entering private
practice, Mr. Mazza was the
Director of the Legal Education
Institute at the U.S. Department
of Justice from 1977 to
1981. Prior to 1977, he served
as the Director of Legal
Training for the U.S. Civil Service
Commission and as Senior
Legal Advisor for the State
Attorney General's Achievement
Award. Mr. Mazza is a highly
decorated retired United
States Army Colonel.
-28-
FEDERICO PIGNATELLI, age 44,
became a director of the
Company on April 8, 1992.
Mr. Pignatelli is the U.S.
Representative of Eurocapital
Partners, Ltd., and investment
banking firm. From 1989 to April,
1992, he was a Managing
Director at Gruntal & Company,
an investment banking firm.
From 1988 to 1989, he was General
Manager of Euromobiliar
Ltd., a subsidiary of Euromobiliare,
SpA, a publicly held
investment and merchant bank in
Italy and Senior Vice
President of New York and Foreign
Securities Corporation, an
institutional brokerage firm in
New York. From 1986 to
1988, he was Managing Director at
Ladenburg, Thalmann & Co.,
an investment banking firm. From
1980 to 1986, he was
Assistant Vice President of
E. F. Jutton International.
Prior to 1980, he was
a financial journalist. Mr.
Pignatelli was elected as a
director of the Company pursuant
to the right of Eurocapital
Partners, Ltd. to designate one
member of the Board of
Directors in connection with a
private placement of the
Company's Common Stock. Mr.
Pignatelli also serves as
chairman of BioLase Technology,
Inc., a company which produces
medical and dental lasers and
endodontic products. Formerly,
he served as a director of
MTC Electronic Technologies Co.,
Ltd., a NASDAQ/NMS company,
and of CST Entertainment Imaging,
Inc., and American Stock
Exchange Company engaged in colonizing black
and white film.
MARK SPENCER, age 42, became a
director on February 26,
1992. He founded Spencer
Communications, and advertising
public relations firm
specializing in the marine industry,
in 1987. Previously, Mr.
Spencer began his journalism
career at Powerboat Magazine
in 1976. He was named
Executive Editor of Powerboat
Magazine in 1981 and served in
that capacity until 1987. During
the last seven years Mr.
Spencer has served as on camera
expert commentator for ESPN
covering the boating industry.
In addition to Mr. Fountain,
who is listed above as a
director, other executive officers
of the Company are as
follows:
JOSEPH F. SCHEMENAUER, age 52,
was appointed Vice President - Finance and Chief Financial
Officer in September, 1997.
Mr. Schemenauer has had twenty
years experience as Chief
Financial Officer and or Controller
in the boating industry,
primarily with Chris Craft
Corporation (and its successors,
Murray Chris Craft Sportboats,
Inc. and Murray Chris Craft
Cruisers, Inc.), Donzi Marine
Corporation, Wellcraft and
Triumph Yachts Divisions of
Genmar Industries, Inc. and
Luhrs Corporation. His predecessor,
Alan Krehbiel, served
in that capacity until August, 1997.
BLANCHE C. WILLIAMS, age 63,
has been Corporate Secretary
and Treasurer of the Company
since August, 1986, and has
held the same positions with
the Company's Subsidiary since
it was formed during 1979.
Mrs. Williams also served as
Executive Assistant to the President
from 1979 to 1988 and
is currently serving in that capacity.
-29-
Item 11. Executive Compensation.
The following table
sets forth the compensation
awarded, paid to or earned by
the Company's Chief Executive
Officer, who was the only executive
officer of the Company
whose compensation exceeded
$100,000 in Fiscal 1997, 1996,
and 1995.
Name and Principal Fiscal Annual Compensation Long-term Stock
Position Year Salary(1) Bonus(2) Compensation Options
- --------------- ----- ----- ------- ---------- ------
Reginald M.
Fountain Jr. 1997 $350,000 $151,717 $ -0- -0-
Chairman,
President,Chief 1996 $232,154 $199,984 $ -0- -0-
Executive Officer,
and 1995 $221,650 $106,438 $ -0- 450,000
Chief Operating Officer (4)
(1) The Board of Directors
increased Mr. Fountain's annual
base salary to $285,000 for the
period March 30, 1995 to
March 30, 1996 and to $350,000
for Fiscal 1997. The amounts
shown do not include the
value of certain personal
benefits received in addition
to cash compensation. The
aggregate value of such personal
benefits received was less
than ten percent (10%) of the total cash
compensation paid.
(2) The bonuses paid to Mr.
Fountain for Fiscal 1995,1996
and 1997 were authorized by the
Board on May 1, 1994.
His bonus represents 5% of net
income after the profit
sharing distribution, if
any, but before income taxes
limited to a maximum of $250,000.
(3) Mr. Fountain does not
participate in the Company's 401
(k) Plan and has no other
long- term compensation, other
than stock options.
The Following table
contains information concerning the
grant of stock options to
the named executive officer in
Fiscal 1995:
Name ................... Reginald M. Fountain, Jr.
Number of securities underlying
options/SARS granted .......... 450,000
Per cent of total options/SARS
granted to employees in the
fiscal year ................. 100%
Exercise price .................. $4.667
Expiration date .............. 8/04/05
-30-
Potential realizable value of assured
stock-appreciation for
option term based on a per share market
price of the common
stock on the last trading day
prior to the day of grant of $4.667:
Five percent ... $ 1,320,678
Ten percent .... $ 3,346,859
The following table contains
information concerning the
exercise of stock options and
employment related options and
information concerning unexercised
stock options held as of
June 30, 1997 by the named executive officer:
Name ....................... Reginald M. Fountain, Jr.
Shares acquired on exercise ...... -0-
Market value at time of exercise
less exercise price, or
value realized............... -0-
Number of unexercised options & warrants:
Exercisable options ......... 480,000
Non-Exercisable ............ -0-
Value of unexercised in-the-money
options at June 30, 1997,
Exercisable ............. $ 2,479,680 (1)
(1) The closing sale price of
the Common stock on Monday,
June 30, 1997 was $9.833.
Value equals the difference
between market value and exercise price.
In October, 1995, the
Financial Accounting Standards
Board issued SFAS No. 123,
"Accounting for Stock Based
Compensation". SFAS No. 123
permits a company to choose
either a new fair value based
method of accounting for its
stock based compensation arrangements
or to comply with the
current APB Opinion 25 intrinsic
value based method adding
pro forma disclosure of net income
and earnings per share
computed as if the fair value based
method had been applied
in the financial statements. SFAS
No. 123 is effective for
fiscal years beginning after December
15, 1995. The Company
will adopt SFAS No. 123 in 1997
using pro forma disclosures
of net income and earnings per
share. The impact of stock
options on the Company's pro forma
disclosures of net income
and earnings per share calculations
is not know as the
Company has not yet implemented the provision
of the SFAS.
-31-
Directors' Compensation.
Directors of the Company
currently do not receive any
fees or other compensation for
their services as directors,
but they are reimbursed for
travel and other out-of-pocket
expenses in connection with their
attendance at meetings of
the Board of Directors.
In Fiscal 1995, each
non-employee director (Messrs.
Pignatelli, Mazza, Garbrecht,
and Spencer) was granted non-
qualified stock options to purchase
30,000 common shares at
$3.5833 per share. These
non-qualified stock options
awarded to the outside directors
were not under any of the
Company's existing stock
option plans. Mr. Pignatelli
exercised a portion of his
options to purchase 24,000 shares
during Fiscal 1997 and Mr.
Mazza exercised all of his
options during July 1997.
Mr. Garbrecht resigned as a
director in April 1997. The
Company takes the position that
Mr. Garbrecht's options terminated
upon his resignation.
These options are disputed in
the lawsuit. (See "Legal
Proceedings" and "Stock Option Plans")
Employment Agreement.
Reginald M. Fountain, Jr.
serves as the Company's
President, Chief Executive
Officer, and Chief Operating
Officer pursuant to an employment
agreement entered into
during 1989. The agreement
provides for automatic
extensions of one-year periods
until terminated. Under the
agreement, Mr. Fountain receives
a base salary approved by
the Board of Directors and an
annual cash bonus based upon
the Company's net profits before
taxes. On May 1, 1994, the
Board of Directors authorized
an increase in the annual
bonus payment to Mr. Fountain to
5% of net income after the
profit sharing distribution but
before income taxes limited
to a maximum of $250,000.
Bonuses of $151,717 for Fiscal
1997, $199,984 for Fiscal 1996
and $106,438 for Fiscal 1995
were paid to Mr. Fountain.
The agreement terminates upon
death or permanent disability.
The current agreement
replaced a similar agreement with
Mr. Fountain that had been
in effect from December, 1986 to 1989.
Profit Sharing Plan.
No Profit Sharing Plan was
authorized for Fiscal 1997
or Fiscal 1996. On May 1,
1994, the Board of Directors
authorized a Profit Sharing Plan
applicable to all eligible
employees for Fiscal 1995. The
profit sharing calculations
were based upon the consolidated
audited net income for the
full fiscal year before income
taxes. The actual profit
sharing distribution for Fiscal
1995 was $376,614 and was
paid in full to the eligible employees
on August 12, 1995.
-32-
Stock Option Plans.
During 1987, shareholders
of the Company approved the
1986 Incentive Stock Option Plan.
The Plan is administered
by the Board of Directors which
may, in its discretion, from
time to time, grant to officers
and key employees options to
purchase share of the Company's
common stock. Directors who
are not officers or employees
of the Company or its
Subsidiary are not eligible to be
granted options under the
1986 plan.
The 1986 Plan provides that
the purchase price per
share of common stock provided for
in options granted shall
not be less than 100% of the fair
market value of the stock
at the time the option is granted.
However, in the case of
an optionee who possesses more
than 10% of the total
combined voting power of all classes
of the Company's stock,
the purchase price shall not be
less than 110% of the fair
market value of the stock on the date of the
grant.
No consideration is payable
to the Company by an
optionee at the time an option
is granted. Upon exercise of
an option, payment of the purchase
price of the common stock
being purchased shall be made to
the Company in cash, or at
the discretion of the Board of
Directors, by surrender of a
promissory not from the optionee,
or by surrender of shares
of common stock already held by
the optionee which shall be
valued at their fair market value
on the date the option is
exercised, or by any combination
of the foregoing. Also,
payment may be in installments,
and upon such other terms
and conditions as the Board of
Directors, in its discretion,
shall approve.
Under the 1986 Plan, the
aggregate fair market value of
shares with respect to which
options are exercisable for the
first time by an employee in
any calendar year generally may
not exceed $100,000.
The term of each option
granted under the Plan is
determined by the Board of Directors,
but may in no event be
more than ten years from the date
such option is granted.
However, in the case of an option
granted to a person who,
at the time the option is granted,
owns stock possessing
more than 10% of the total combined
voting power of all
classes of stock of the Company, the
term of the option may
not be for a period of more than five
years from the date of
grant. Unless the Board of
Directors determines otherwise,
no option may be exercised for
one year after the date of
grant. Thereafter, an option
may be exercised either in
whole or in installments as shall
be determined by the Board
of Directors at the time of
the grant for each option
granted. All rights to purchase
stock pursuant to an
option, unless sooner terminated
or expired, shall expire
ten years from the date option was granted.
Upon the termination of
optionee's employment with the
Company, his option shall be
limited to the number of shares
for which the option is exercisable
by him on the date of
his termination of employment, and
shall terminate as to any
remaining shares. However, if the
employment of an optionee
is terminated for "cause" (as
defined in the Plan), the
optionee's rights under any
then outstanding option
immediately terminate at the
time of his termination of
employment. No option shall be
transferable by an optionee
otherwise than by will or
the laws of descent and
distribution. As part of the
employment arrangement of Gary
Garbrecht which was part
of the acquisition of Mach
Performance, Inc., Mr. Garbrecht's
contract provided for
30,000 shares of stock options.
-33-
Under the 1986 Plan, a
maximum of 300,000 shares of the
Company's common stock have been
reserved for issuance. In
the event of a stock dividend paid
in shares of the common
stock, or a recapitalization,
reclassification, split-up or
combination of shares of such stock,
the Board of Directors
shall have the authority to make
appropriate adjustments in
the members of shares subject to
outstanding options and the
option prices relating thereto,
and in the total number of
shares reserved for the future
granting of options under the
Plan.
During 1989 the Board of
Directors amended the Plan to
delete a provision requiring that
options granted to any one
employee be exercised only in the
sequential order in which
they were granted. That provision
at one time was, but is
no longer, required by the
Internal Revenue Code, as
amended, to be contained in incentive stock
option plans.
During Fiscal 1995 options
to purchase 30,000 shares
were awarded to Mr. Fountain at
$3.9417 ($3.5833 X 110%) per
share and options to purchase
30,000 share were awarded to
the Chief Financial Officer at
$3.667 per share. Of the
options granted in previous years,
all had expired by June
30, 1996. During Fiscal 1997
options to purchase 30,000
shares were exercised by the
Chief Financial Officer. The
1986 Plan terminated on December 5, 1996.
On June 21, 1995, a Special
Meeting of the shareholders
was held to vote upon the adoption
of the 1995 Stock Option
Plan. The new Plan as adopted
by the Shareholders allowed
for up to 450,000 common stock
options to be granted by the
Board of Directors to employees
or directors of the Company
on either a qualified or
non-qualified basis. Subsequently,
on August 4, 1995, the Board
unanimously voted to grant the
entire 450,000 stock options
authorized under the 1995 Stock
Option Plan to Mr. Reginald
M. Fountain, Jr. at $4.667 per
share on a non-qualified basis.
None of the options granted
to Mr. Fountain under the
1995 Plan have been exercised.
The expiration date of the
options granted to Mr. Fountain
is August 4, 2005.
During Fiscal 1995,
each of the four non-employee
directors was granted
non-qualified stock options to
purchase 30,000 common shares at
$3.5833 per share. These
non-qualified stock options awarded
to the outside directors
were not under any of the
Company's existing stock option
plans. (See Directors' Compensation for
status)
An October 11, 1996
employment agreement with former
director Gary Garbrecht provided
him with 30,000 option
shares, pursuant to the
1986 stock option plan, on
Industries common stock exercisable
at 12.25 per share to be
granted in blocks of 5,000
option shares each year for the
four year term of the employment
contract starting October
11, 1998. Gary Garbrecht
resigned employment with the
Company April 29, 1997. The
Company takes the position that
the options were not yet granted
to Gary Garbrecht when he
resigned and, that, in any event,
options which are not yet
exercisable when employment
terminates are void under the
1986 stock option plan.
This position is disputed by Gary
Garbrecht and the options
are involved in a lawsuit between
the Company and Gary Garbrecht
which is discussed above in
the section titled "Legal Proceedings."
-34-
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 matches twenty-
five percent of the employee's
deferred salary amounts
limited to a maximum of five
percent of their salaried
amounts, or a maximum of one and
one-fourth 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 postretirement benefit plans
in effect.
Performance Table.
The following table was
prepared by Standard & Poor's
Compustant Services, Inc.
It compares the Company's
cumulative total shareholder
return with a stock market
performance indicator (S. & P.
500 Index) and an industry
index (S. & P. Leisure Time).
The table assumes a base
point of June 30, 1992 to
be equal to $100.00 Accumulated
returns are noted through June
30, 1997. Each time period
covered by the table gives
the dollar value of the
investment assuming monthly
reinvestment of dividends. The
Company has never paid any cash dividends.
Total Shareholder Returns - Dividends Reinvested
Annual Return Percentage
Years Ending
Company/Index Jun93 Jun94 Jun95 Jun96 Jun97
Fountain Powerboats
Inds. Inc. -14.01 -55.82 142.14 100.03 28.25
S&P 500 Index 13.63 1.41 26.07 26.00 34.70
Leisure Time
(Products) -500 19.55 .87 -21.45 33.63 25.61
Base Indexed Returns
Period Years Ending
Company/Index Jun92 Jun93 Jun94 Jun95 Jun96 Jun97
Fountain Powerboats
Inds. Inc. 100 85.99 37.99 91.98 183.99 235.97
S&P 500 Index 100 113.33 115.23 145.27 183.04 246.55
Leisure Time
(Products)-500 100 119.55 120.60 146.47 191.32 240.33
As can be seen from the
table, the total return to
shareholders of the Company's
common stock over the past
five years compares favorably or
is greater than the S. & P.
500 stocks and the S. & P. Leisure Time
stocks.
-35-
Board Report on Executive Compensation.
The entire Board of
Directors, including its Chairman,
Mr. Reginald M. Fountain, Jr.,
who also serves as the
Company's President, Chief
Executive Office, and Chief
Operating Officer has
prescribed unanimously the
compensation amounts for the
Company's executive officers.
These compensation amounts are
deemed adequate by the Board
based upon its judgment
as to the qualifications,
experience, and performance
of the individual executive
officers, as well as, the
Company's size, complexity,
growth, and financial performance.
During Fiscal 1995,
recognizing the Company's much
improved financial performance
under his leadership, the
Board increased Mr. Fountain's
salary to $285,000 for the
period March 30, 1995 through
March 30, 1996, and to
$350,000 thereafter.
The entire Board has
also approved Mr. Fountain's
employment agreement with the
Company, more fully described
above (Item 11), under
"Employment Agreements", which
provides for a minimum base
salary and annual cash bonus
equal to five percent of
the Company's net profits after
profit sharing distribution
but before income taxes limited
to a maximum of $250,000.
Bonuses paid to Mr. Fountain for
Fiscal 1997 were $151,717,
for Fiscal 1996 amounted to
$199,984 and for Fiscal 1995 amounted
to $106,438.
Compliance with Section 16.
Not applicable.
Item 12. Security Ownership
of Certain Beneficial Owners
and Management.
Principal Shareholders.
The following table sets forth
the beneficial ownership of
the Company's Common Stock as of
September 15, 1997, by each
person known to the Company to
beneficially own more than
five percent (5%) of the
Company's Common Stock. This
table had been prepared based
upon information provided
to the Company by each
Shareholder:
Name and Amount of Beneficial Percent of
Address Ownership Class (3)
Reginald M. Fountain, Jr.
P.O. Drawer 457
Whichard's Beach Road
Washington, N.C. 27889 2,569,372 (1) 54.38%
Triglova Finanz, A.G.
P.O. Box 1824
52nd Street
Urbanization Obarrio
Torre Banco Sur, 10th Floor
Panama City,
Republic of Panama 408,750 (2) 8.65%
(1) Mr. Fountain has sole
voting and investment power with
respect to all share
shown as beneficially owned.
Includes options to acquire 480,000
shares of common stock.
-36-
(2) The Company is informed
that the shares shown as
beneficially owned by Triglova
Finanz, A.G. are owned
directly by it, and it
claims shared voting and investment
power with respect to all
such shares held by Mr. Filippo
Dollfus De Vockersberg, C/O
Fider Service, 1 Via Degli
Amadio 6900, Lugano, Switzerland.
Mr. Dollfus had been
authorized to act as
attorney-in-fact for Triglova Finanz,
A.G., and, therefore, claims
shared voting and investment
power with respect to such shares.
(3) The percentage for each
person is calculated on the
basis of the Company's total
outstanding shares less the
15,000 shares owned by the Company's
Subsidiary.
Directors and Officers. The
following table sets forth the
beneficial ownership of the
Company's common stock as of
September 15, 1997, for
each of the Company's current
directors, and for all directors
and officers of the Company
as a group.
Name Amount of Percent
and Beneficial of
Address Ownership Class (3)
Reginald M.
Fountain, Jr. (1) 2,569,372 (2) 54.38%
Mark L. Spencer (1) 33,400 (2) (3)
Federico Pignatelli (1) 30,000 (2) (3)
Gary E. Mazza III (1) 34,500 (3)
Blanche C. Williams (1) 300 (3)
Joseph F. Schemenauer (1) -0- (3)
All directors and officers as
a group (6 persons) 2,667,572 (2) 56.46%
(1) The address of each
person is P.O. Drawer 457,
Whichard's Beach Road,
Washington, North Carolina
27889. Except as otherwise
indicated, to the best knowledge
of management of the Company,
each of the persons listed
or included in the group
has sole voting and investment
power over all shares shown
as beneficially owned.
Percentages for each person listed
and for the group are
calculated on the basis of
the Company's total
outstanding shares less the 15,000
shares owned by the
Company's Subsidiary.
-37-
(2) For Mr. Fountain, includes
options to purchase 480,000
shares of common stock held.
For Messrs. Spencer and
Pignatelli includes options to
purchase 30,000 and 6,000
common shares respectively.
Mr. Pignatelli has already
exercised 24,000 options shares.
(3) Less than 1%
Item 13. Certain Relationships and Related-Party Transactions.
During the fourth quarter
of Fiscal 1996, the Company
borrowed $170,000 from Mr.
Fountain to supplement its
working capital. This loan was
unsecured with interest at
12%. The Company paid Mr. Fountain
$2,710 in interest. The
loan was entirely repaid by June 30, 1996.
Mr. Fountain loaned the
Company $300,000 in November,
1992 to supplement the Company's
working capital. The loan
was unsecured and bore interest
at the rate of 12% per
annum. Effective January 31, 1994,
the Company's Board of
Directors authorized the
issuance of 129,858 additional
common stock shares in consideration
for the cancellation of
this $300,000 debt to Mr.
Fountain. The additional shares
were issued at a price of $2.333
per share to Mr. Fountain
and to Triangle Finance Ltd.,
a client of Eurocapital, Ltd.
Mr. Federico Pignatelli is
the U.S. representative of
Eurocapital, Ltd. and is also
a director of the Company.
Mr. Fountain cancelled two thirds
of the total amount of the
debt ($202,000, including $200,000
of principal and $2,000
of accrued interest) for 86,572
common shares. Triangle
Finance Ltd. repaid on-third of the
total amount of the debt
($101,000, including $100,000 of
principal and $1,000 of
accrued interest) for 43,286 common
shares. The Board of
Directors determined that the price
of $2.333 per share was
fair to the Company after
consideration of such factors as
the common stock's book value,
its then current market
price, and recent private placements.
No interest was paid to
Mr. Fountain in Fiscal 1997, or
1995. The Company also paid
rentals at what it believes to
be their fair market values
during the last three fiscal
years to Mr. Fountain or
to entities owned by him as
follows:
Fiscal Fiscal Fiscal
1997 1996 1995
Apartment Rentals..... $17,260 $ 15,380 $ 13,995
R. M. Fountain, Jr.
- airplane rentals ..$ 296,498 $ 155,499 $104,469
-------- -------- ---------
$ 313,758 $170,879 $118,464
======= ======= ======
(See Note 12)
-38-
The rentals paid to
Eastbrook Apartments and Village
Green Apartments are primarily
for temporary lodging for
relocating and transient Company
personnel and visitors.
The rentals paid for the
airplane are based upon the actual
hours that the airplane was used
for Company business plus a
monthly stand-by charge for
the exclusive use of the
airplane. During Fiscal 1993,
Mr. Fountain purchased the
airplane from the Company
together with a parcel of real
estate located at Morehead
City, North Carolina. The
Company recorded a profit on
these transactions with Mr.
Fountain amounting to $117,126.
During the first quarter of
Fiscal 1998 the Company
purchased an airplane from Mr.
Fountain for $1,375,000.
Principal financing for the
airplane is through General Electric Capital Corporation.
Mr. Gary D. Garbrecht
was a director of the Company
through April 1997 and the
President and sole shareholder of
Mach Performance, Inc.
which supplies the Company's
subsidiary with some of its
requirements for propellers and
other accessory items. The
Company paid Mach Performance,
Inc. $254,623 in Fiscal 1997,
$191,709 in Fiscal 1996,
$254,696 in Fiscal 1995.
The Company acquired Mach
Performance, Inc. for 127,500
shares of common stock during
Fiscal 1997.
Mr. Gary E. Mazza, III,
a distinguished attorney,
businessman, educator, and
retired United States Army
Colonel was elected to the
Board of Directors on December
28, 1993. He is Mr. Fountain's
father-in-law. The Company
paid Mr. Mazza $1,709 in Fiscal
1997, $11,079 in Fiscal 1996
and $1, 743 in Fiscal 1995.
Mr. Federico Pignatelli was
elected to the Board of
Directors as the designee of
Eurocapital, Ltd., the
Company's investment banking firm
in connection with a
private placement of the Company's
Stock. No amounts were
paid to Mr. Pignatelli or to
Eurocapital, Ltd., or to any of
their affiliates, in Fiscal 1997, 1996
or 1995.
Mr. Mark L. Spencer is
a director of the Company and
the President and sole
shareholder of Spencer
Communications, Inc. which furnishes
advertising and public
relations services the Company.
The Company paid Spencer
Communications, Inc. $547,436 in
Fiscal 1997, $265,985 in
Fiscal 1996 and $138,116 in Fiscal 1995.
The Company believes that
all of the above transactions
were on terms which were not
more favorable than would have
been obtained from non-affiliated parties.
-39-
Part IV
Item 14. Exhibits, Financial
Statement Schedules, and
Reports on Form 8 and Form 8-K.
(a) The following documents are
filed as part of this
Report:
(1) Financial Statements.
The Following consolidated
financial statements of the
Company and its
Subsidiary are included in Part II, Item 8,
herein:
Page No.
Independent Auditors'Report..................
Consolidated Balance Sheets
June 30, 1997 and 1996 ........
Consolidated Statements of Operations
Years Ended June 30, 1997, 1996, 1995 .............
Consolidated Statements of Stockholders' Equity
Years Ended June 30, 1997, 1996, 1995 ............
Consolidated Statements of Cash Flows
Years Ended June 30, 1997, 1996, 1995
...................
Notes to Consolidated Financial Statements .............
(2) Exhibits. The following exhibits are filed with this
report or incorporated by reference to a
previous filing:
3.01 Certificate of Incorporation of the Company
(Incorporated by
reference to the Company's Registration Statement filed
on Previously
October 2, 1986)
......................................................... Filed
3.2 Amendments to Certificate of Incorporation of the
Company
(Incorporated by reference to Amendment No. 1 to the
Company's Registration Statement field on December 2,1986)
.................... Previously Filed
3.3 Amendment to Certificate of Incorporation of the Company
(Incorporated by reference to the exhibit filed with the
Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1991) ..................... Previously Filed
3.4 By-laws of the Company (Incorporated by reference to Amendment
No. 1 to the Company's Registration Statement filed on
December 2, 1986) ........................... Previously Filed
3.5 Certificate of Amendment to the Articles of Incorporation, Consent
Action in Writing of the Majority Stockholders, and Resolutions
Adopted by Unanimous Written Consent of the Board of Directors
for the one-for-two reverse stock split of February 4, 1994
........................................... Previously Filed
4.1 Form of Warrant Agreement (Incorporated by reference to
Amendment
No. 2 to the Company's Registration Statement filed on
December 10, 1986) .......................... Previously Filed
4.2 Form of Stock Certificate (Incorporated by reference to the
exhibit filed with the Registrant's Annual Report on Form 10K
for the fiscal year ended October 1, 1989)........ Previously Filed
10.1 1986 Incentive Stock Option Plan (Incorporated by reference to
Amendment No. 1 to the Company's Registration Statement
filed on
December 2, 1986) ...................... Previously Filed
10.2 Employment Agreement dated May 31, 1989 between
Reginald M.
Fountain, Jr. and the Company's Subsidiary
(Incorporated by
reference to the exhibit filed with the Registrant's
Annual Report on Form 10K for the fiscal year ended October
1, 1989)
..................... Previously Filed
10.3 First Modification of Revolving Loan and Security
Agreement
dated August 29, 1990 by and between Fountain
Powerboats Inc. and
MetLife Financial Acceptance Corporation (Incorporated
by
reference to the exhibit filed with the Registrant's
Annual Report
on Form 10K for the fiscal year ended March 22, 1994)
....................... Previously Filed
10.4 Loan and Security Agreement with MetLife Capital
Corporation
dated December 31, 1993 ......... Previously Filed
10.5 Consulting and Marketing Agreement with the Mercury
Marine
division of the Brunswick Corporation dated July 11,
1994
................ Previously Filed
10.6 Loan Extension and Amendment Agreement with the Mercury
Marine division of the Brunswick Corporation dated
July 11, 1994 ........... Previously Filed
10.7 Amendment to Consulting and Marketing Agreement with the
Mercury marine division of the Brunswick Corporation dated
July 11, 1994 .................. Previously Filed
10.8 Standstill Agreement with the Mercury Marine division of the
Brunswick Corporation dated July 11, 1994
....................................... Previously Filed
10.9 Amendment No. One dated September 24, 1994 to Loan and
Security Agreement of December 31, 1993 with MetLife
Capital Corporation ......... Previously Filed
10.10 Consent to Loan Restructure dated January 1, 1995
from MetLife
Capital Corporation ............ Previously Filed
10.11 Amendment No. Two dated January 1, 1995 to Loan
and
Security Agreement dated of December 31, 1993 with MetLife
Capital Corporation ........... Previously Filed
10.12 Second Loan Extension, Consolidation and Amendment
Agreement dated February 24, 1995 with Brunswick Corporation,
Mercury Marine Division ....... Previously Filed
10.13 Modification of Deeds and Trust and Assignment of Rents, Issues
and Profits dated February 24, 1995 with Brunswick Corporation,
Mercury Marine Division ........ Previously Filed
10.14 Consulting and Marketing Agreement dated February 24, 1995
with Brunswick Corporation, Mercury Marine Division
...................... Previously Filed
10.15 Supply agreement dated February 24, 1995 with Brunswick
...............................Previously Filed
10.16 Master Security Agreement dated December 21, 1995
with G.E. Capital Corporation
........................... Previously Filed
10.17 Promissory Note dated December 21, 1995 with
G.E. Capital Corporation
.................... Previously Filed
10.18 Collateral Schedule No. 001 dated December 21, 1995
with G.E. Capital Corporation
........................... Previously Filed
10.19 Letter of Credit Agreements dated December 21,
1995
with G.E. Capital Corporation........ Previously Filed
10.20 Agreement and Plan of Reorganization with
Mach Performance, Inc...................Filed Herewith
10.21 Loan Agreement dated December 31, 1996 with
General Electric Capital Corporation........Filed Herewith
21 List of Subsidiaries ...........
(b) No Amendments on Form 8 or Current Reports on Form 8-K
were filed by the Registrant during the fiscal year
ended June 30, 1996.
-42-
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 t be signed on its behalf by the
undersigned, thereunto duly authorized.
FOUNTAIN POWERBOATS INDUSTRIES, INC.
/s/ Reginald M. Fountain, Jr.
By: __________________________________________
Reginald M. Fountain, Jr.
Chairman, President, and
Chief Executive Officer
Date: October 14, 1997
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/ Reginald M. Fountain, Jr.
____________________________________ October 14, 1997
Reginald M. Fountain, Jr.
Chairman, President, and Chief Executive Officer
(Principal Executive Officer)
/s/ Gary E. Mazza III
____________________________________ October 14, 1997
Gary E. Mazza III
Director
/s/ Federico Pignatelli
____________________________________ October 14, 1997
Federico Pignatelli
Director
/s/ Mark L. Spencer
________________________________________ October 14, 1997
Mark L. Spencer
Director
/s/ Joseph Schemenauer
____________________________________ October 14, 1997
Joseph Schemenauer
Chief Financial Officer
(Principal Accounting
and Financial Officer)
-43-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
PRITCHETT, SILER & HARDY, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONTENTS
PAGE
_ Independent Auditors' Report 1
_ Consolidated Balance Sheets, as of June 30, 1997
and 1996 2
_ Consolidated Statements of Operations, for the years
ended June 30, 1997, 1996 and 1995. 3 - 4
_ Consolidated Statement of Stockholders Equity, for the
years ended June 30, 1997, 1996 and 1995. 5
_ Consolidated Statements of Cash Flows, for the years
ended June 30, 1997, 1996 and 1995. 6 - 7
_ Notes to the Consolidated Financial Statements 8 - 24
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
FOUNTAIN POWERBOAT INDUSTRIES, INC.
Washington, North Carolina
We have audited the accompanying consolidated balance sheets of
Fountain Powerboat Industries, Inc. and Subsidiary as of June 30,
1997 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years
ended June 30, 1997, 1996 and 1995. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements audited by
us present fairly, in all material respects, the financial
position of Fountain Powerboat Industries, Inc. and Subsidiary as
of June 30, 1997 and 1996, and the results of their operations
and their cash flows for the years ended June 30, 1997, 1996 and
1995 in conformity with generally accepted accounting principles.
/s/ PRITCHETT, SILER & HARDY, P.C.
PRITCHETT, SILER & HARDY, P.C.
July 31, 1997
SALT LAKE CITY, UTAH 84111
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30,
_____________________
1997 1996
______________________
CURRENT ASSETS:
Cash & cash equivalents $2,994,503 $1,360,619
Certificates of deposit - held to maturity 696,155 -
Accounts receivable, less allowance for
doubtful accounts of $30,000 for 1997
and $27,000 for 1996 1,867,747 2,853,684
Inventories 3,937,757 4,009,195
Prepaid expenses 1,131,703 154,843
Current tax assets 369,268 -
___________ _________
Total Current Assets 10,997,133 8,378,341
PROPERTY, PLANT AND EQUIPMENT, net 12,219,156 9,928,186
OTHER ASSETS 497,607 191,577
__________ ___________
$23,713,896 $18,498,104
__________ ___________
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ - $1,173,089
Current maturities of long-term debt 595,607 767,254
Accounts payable 1,987,508 1,713,760
Accrued expenses 860,786 914,732
Dealer territory service accrual 1,637,572 765,674
Customer deposits 310,042 228,608
Allowance for boat repurchases 200,000 207,359
Warranty reserve 500,000 410,000
Net liabilities of discontinued operations 213,697 -
____________ _________
Total Current Liabilities 6,305,212 6,180,476
____________ _________
LONG-TERM DEBT, less current maturities 7,677,771 5,433,184
DEFERRED TAX LIABILITY 369,268 -
COMMITMENTS AND CONTINGENCIES (See Note 10) - -
STOCKHOLDERS' EQUITY [Restated]
Common stock, par value $.01 per share,
authorized 200,000,000 shares; issued
4,725,108 and 4,543,608 shares 47,251 45,436
Additional paid-in capital 10,517,740 9,282,305
Accumulated deficit (1,092,598) (2,332,549)
____________ __________
9,472,393 6,995,192
Less: Treasury Stock, at cost
15,000 shares (110,748) (110,748)
____________ __________
9,361,645 6,884,444
____________ __________
$23,713,896 $18,498,104
____________ __________
The accompanying notes are an integral part of these financial
statements.
-2-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30,
_____________________________________
1997 1996 1995
_____________ __________ ___________
NET SALES $ 50,514,325 $41,598,051 $38,727,329
COST OF SALES 36,976,247 32,326,371 30,953,992
_____________ __________ ___________
Gross Profit 13,538,078 9,271,680 7,773,337
_____________ __________ ___________
EXPENSES:
Selling expense 6,463,375 4,285,923 3,897,086
Selling expense - related party 500 - -
General and administrative 2,240,112 1,729,399 1,297,173
General and administrative
- related parties 313,758 175,589 118,464
_____________ ___________ __________
Total expenses 9,017,745 6,190,911 5,312,723
_____________ ___________ __________
OPERATING INCOME 4,520,333 3,080,769 2,460,614
NON-OPERATING INCOME (EXPENSE):
Other income 437,694 1,404,500 642,277
Interest expense (557,768) (744,627) (989,359)
Interest expense - related parties - (2,710) -
Gain (loss) on disposal of assets - 22,906 (23,015)
______________ ___________ _________
(120,074) 680,069 (370,097)
INCOME BEFORE INCOME TAXES 4,400,259 3,760,838 2,090,517
CURRENT TAX EXPENSE 330,427 80,804 42,641
DEFERRED TAX EXPENSE - - -
_____________ ___________ __________
INCOME FROM CONTINUING
OPERATIONS 4,069,832 3,680,034 2,047,876
DISCONTINUED OPERATIONS(See Note 14):
Loss from Operations of
Fountain Power, Inc. and
Mach Performance, Inc.(Net
of no income tax effect) 2,389,480 - -
Estimated losses on disposal
of the operations of
Fountain Power, Inc. and
Mach Performance, Inc. (Net
of no income tax effect) 440,401 - -
____________ ____________ ___________
LOSS FROM DISCONTINUED
OPERATIONS (2,829,881) - -
______________ ___________ __________
NET INCOME $1,239,951 $3,680,034 $2,047,876
______________ ___________ __________
[Continued]
-3-
FOUNTAIN POWERBOAT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
[CONTINUED]
Year Ended June 30,
______________________________________
1997 1996 1995
____________ ___________ ___________
PRIMARY EARNINGS PER SHARE:
Continuing Operations $ .82 $ .81 $ .45
Loss from Operations of
Discontinued Segments (.48) - -
Estimated Loss on Disposal
of Discontinued Segments (.09) - -
______________ __________ ___________
PRIMARY EARNINGS PER SHARE $ .25 $ .81 $ .45
______________ ___________ __________
WEIGHTED AVERAGE SHARES
OUTSTANDING 4,995,154 4,528,608 4,528,608
_____________ ____________ __________
FULLY DILUTED EARNINGS PER SHARE:
Continuing Operations $ N/A $ .77 $ .45
Loss from Operations of
Discontinued Segments N/A - -
Estimated Loss on Disposal
of Discontinued Segments N/A - -
_____________ ___________ ___________
FULLY DILUTED EARNINGS PER SHARE: $ N/A $ .77 $ .45
_____________ ___________ ___________
FULLY DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING N/A 4,800,238 4,539,694
_____________ ___________ ___________
The accompanying notes are an integral part of these financial
statements.
-4-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FROM JUNE 30, 1994 THROUGH JUNE 30, 1997
[RESTATED]
Total
Common Stock Additional Accum- Treasury Stock Stock-
__________________ Paid-in ulated _______________ holders'
Shares Amount Capital Deficit Shares Amount Equity
_________ ______ _________ ______ _______ ______ ________
BALANCE, June 30,
1994 4,543,608 $45,436 $9,282,305 $(8,060,459) 15,000 $110,748 $1,156,534
Net profit for
the year ended
June 30, 1995 - - - 2,047,876 - - 2,047,876
__________ _______ _________ _________ _____ _______ ________
BALANCE, June 30,
1995 4,543,608 45,436 9,282,305 (6,012,583) 15,000 110,748 3,204,410
Net profit for
the year ended
June 30, 1996 - - - 3,680,034 - - 3,680,034
________ _______ _________ ________ ______ _______ _________
BALANCE, June 30,
1996 4,543,608 45,436 9,282,305 (2,332,549) 15,000 110,748 6,884,444
Common stock issued
for acquisition of
Mach Performance,
October 1996, at
$8.17 per share 127,500 1,275 1,039,975 - - - 1,041,250
Additional common
stock shares
issued for options
exercised during
Fiscal 1997, at
$3.58 to $3.67
per share 54,000 540 195,460 - - - 196,000
Net profit for the
year ended
June 30, 1997 - - - 1,239,951 - - 1,239,951
__________ ______ ______ _________ ______ _____ ________
BALANCE, June 30,
1997 4,725,108 $47,251 $10,517,740 $(1,092,598)15,000 $110,748 $9,361,645
_______ _____ __________ __________ ______ ______ _________
The accompanying notes are an integral part of these financial statements.
-5-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30,
______________________________________
1997 1996 1995
_____________ ___________ ___________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $1,239,951 $3,680,034 $2,047,876
Adjustments to reconcile
net income(loss) to net
cash provided by operating
activities:
Depreciation expense 1,642,974 1,536,479 1,628,867
(Gain) loss on disposal
of property,plant,
and equipment - (22,906) 23,015
Net effect of Acquired
Subsidiary 1,041,250 - -
Change in assets and liabilities:
Accounts receivable 985,937 (954,830) (1,486,475)
Inventories 71,438 (601,469) 89,224
Prepaid expenses (976,860) 50,104 (4,369)
Accounts payable 273,748 (86,832) (3,129,557)
Accounts payable
-related parties - (4,769) (8,031)
Accrued expenses (53,946) (237,757) 346,719
Dealer territory
service accrual 871,898 765,674 -
Customer deposits 81,434 (184,201) (447,016)
Allowance for boat returns (7,359) - (42,641)
Warranty reserve 90,000 10,000 85,000
Deferred sale net of
deferred cost of sales - (14,148) (235,852)
Net liabilities of
discontinued operations 213,697 - -
______________ ___________ __________
Net Cash Provided by (Used in)
Operating Activities $5,474,162 $3,935,379 $(1,133,240)
_______________________________________
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of certificates
of deposits, net 696,155 - -
Proceeds from sale of
property, plant
and equipment - 31,203 34,000
Investment in additional
molds and related plugs (1,684,274) (878,513) (767,102)
Purchase of other property,
plant and equipment (2,249,670) (604,367) (431,137)
Increase in other assets (306,030) (32,629) (5,505)
_____________ ___________ ___________
Net Cash (Used in) Investing
Activities $(4,936,129) $(1,484,306) $(1,169,744)
____________ ____________ ___________
[Continued]
-6-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
[CONTINUED]
Year Ended June 30,
______________________________________
1997 1996 1995
_____________ __________ ___________
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments)
on engine floor plan
agreement $(1,173,089) $638,904 $ 390,136
Proceeds from issuance
of common stock 196,000 - -
Proceeds from issuance of
notes payable and
long-term debt 8,500,000 600,000 2,656,576
Repayment of long-term debt (6,427,060) (2,820,165) (928,632)
______________ ___________ _________
Net Cash Provided by (Used in)
Financing Activities $1,095,851 $(1,581,261) $2,118,080
______________ ___________ _________
Net increase (decrease) in
cash & cash equivalents $ 1,633,884 $869,812 $(184,904)
Beginning cash & cash
equivalents balance 1,360,619 490,807 675,711
_______________ __________ __________
Ending cash & cash
equivalents balance $ 2,994,503 $1,360,619 $490,807
_____________ ___________ __________
Supplemental Disclosures of Cash Flow information:
Cash paid during the period for:
Interest:
Unrelated parties $ 557,768 $744,627 $ 989,359
Related parties - 2,710 -
______________ __________ ____________
$ 557,768 $747,337 $ 989,359
______________ ___________ ___________
Income taxes $ 395,796 $ 42,641 $ -
_______________ __________ ___________
Supplemental schedule of Non-cash Investing and Financing
Activities:
For the year ended June 30, 1997:
The Company issued 127,500 shares of common stock in the
acquisition of Mach Performance. Valued at $1,041,250
or $8.17 per share (See Notes 7, 10 and 14).
For the year ended June 30, 1996:
None
For the year ended June 30, 1995:
None]
The accompanying notes are an integral part of these financial
statements.
-7-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of the Business and Significant Accounting
Policies.
Nature of the Business: The Company manufactures high-
performance deep water sport boats, sport cruisers, sport
fishing boats, custom offshore racing boats and is developing
a super cruiser yacht. These boats are sold to its worldwide
network of approximately sixty dealers. Its offices and
manufacturing facilities are located in Washington, North
Carolina and it has been in business since 1979. The Company
employs approximately 326 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. together with its
six subsidiaries, Fountain Aviation, Inc., Fountain
Sportswear, Inc., Fountain Power, Inc., Fountain Trucking,
Inc., Fountain Unlimited, Inc. and Mach Performance, Inc. All
significant inter-company accounts and transactions have been
eliminated in consolidation. Fountain Aviation, Inc. and
Fountain Unlimited, Inc. were not active during Fiscal 1997
and were subsequently dissolved effective October 1, 1997.
Also effective October 1, 1997, Fountain Trucking, Inc. and
Fountain Sportswear, Inc. were subsequently dissolved and the
operations transferred to Fountain Powerboats, Inc. The
operations of Fountain Power, Inc. and Mach Performance, Inc.
were discontinued effective June 30, 1997(see Note 14).
Fiscal year: The Company's fiscal year-end is June 30th, which
is its natural business year-end.
Accounting Estimates: The preparation of financial statements
in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the
disclosures of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimated by management.
Cash and Cash Equivalents: For purposes of the statement of
cash flows, the Company considers all highly liquid debt
instruments with a maturity of three months or less to be cash
equivalents. At June 30, 1997 and 1996, the Company had
$3,590,658 and $1,260,619, respectively, in excess of
federally insured amounts held in cash and certificates of
deposit.
Certificates of Deposit: The Company accounts for investments
in debt and equity securities in accordance with Statement of
Financial Accounting Standard (SFAS) 115, "Accounting for
certain Investments in Debt and Equity Securities,". Under
SFAS 115 the Company's certificates of deposit (debt
securities) have been classified as held-to-maturity and are
recorded at amortized cost. Held-to-maturity securities
represent those securities that the Company has both the
positive intent and ability to hold until maturity (See Note
2).
Inventories: Inventories are stated at the lower of cost or
market. Cost is determined by the first-in, first-out method
(See Note 3).
Property, Plant, and Equipment and Depreciation: Property,
plant, and equipment is carried at cost. Depreciation on
property, plant, and equipment is calculated using the
straight-line method and is based upon the estimated useful
lives of the assets (See Note 4).
-8-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of the Business and Significant Accounting
Policies. [Continued]
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 has established
a program to pay a service award to dealers for boat
deliveries into their market territory for which they will
perform service. The service award is a percentage of the
purchase price of the boat ranging from 0% to 7% based on the
dealers service performance rating. The Company has accrued
estimated dealer territory service awards at June 30, 1997 and
1996 of $1,637,572 and 765,674, 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 10).
Warranties: The Company warrants the entire deck and hull,
including its supporting bulkhead and stringer system, against
defects in materials and workmanship for a period of three
years. The Company has accrued a reserve for these
anticipated future warranty costs.
Revenue recognition: The Company sells boats only to
authorized dealers and to the U.S. Government. A sale is
recorded when a boat is shipped to a dealer or to the
Government, legal title and all other incidents of ownership
have passed from the Company to the dealer or to the
Government, and an account receivable is recorded or payment
is received from the dealer, from the Government, or from the
dealer's third-party commercial lender. This is the method of
sales recognition in use by most boat manufacturers.
The Company has developed criteria for determining whether a
shipment should be recorded as a sale or as a deferred sale (a
balance sheet liability). The criteria for recording a sale
are that the boat has been completed and shipped to a dealer
or to the Government, that title and all other incidents of
ownership have passed to the dealer or to the Government, and
that there is no direct or indirect commitment to the dealer
or to the Government to repurchase the boat or to pay floor
plan interest for the dealer beyond the normal, published
sales program terms.
The sales incentive floor plan interest expense for each
individual boat sale is accrued for the maximum six month (180
days) interest payment period in the same fiscal accounting
period that the related boat sale is recorded. The entire six
months' interest expense is accrued at the time of the sale
because the Company considers it a selling expense (See Note
10). The amount of interest accrued is subsequently adjusted
to reflect the actual number of days of remaining liability
for floor plan interest for each individual boat remaining in
the dealer's inventory and on floor plan.
Presently, the Company's normal sales program provides for the
payment of floor plan interest on behalf of its dealers for a
maximum of six months. The Company believes that this program
is currently competitive with the interest payment programs
offered by other boat manufacturers, but may from time to time
adopt and publish different programs as necessary in order to
meet competition.
-9-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of the Business and Significant Accounting
Policies. [Continued]
Income Taxes: The Company accounts for income taxes in
accordance with FASB Statement No. 109, "Accounting for Income
Taxes (see Note 8).
Advertising Cost: Costs incurred in connection with
advertising and promotion of the Company's products are
expensed as incurred. Such costs amounted to $1,267,822,
$849,627 and $977,787 for the years ended 1997, 1996 and
1995.
Earnings Per Share: The computations of primary and fully
diluted earnings per share amounts are based upon the weighted
average number of outstanding common shares during the
periods, plus, when their effect is dilutive, additional
shares assuming the exercise of certain vested stock options,
reduced by the number of shares which could be purchased from
the proceeds from the exercise of the stock options assuming
they were exercised.
Restatement: The financial statements have been restated for
all periods presented to reflect a three-for-two forward stock
split effected August 14, 1997 (see Note 7 and 15).
Reclassifications: The financial statements for years prior
to June 30, 1997 have been reclassified to conform with the
headings and classifications used in the June 30, 1997
financial statements.
Note 2. Certificates of Deposit.
Certificates of deposit are carried at amortized cost and
consisted of the following investments at June 30, 1997:
Purchase Amortized Maturity
Date AcquiredMaturity Date Value Cost Value
___________ ____________ ________ __________ __________
12/18/96 12/18/97 $50,086 $50,486 $52,641
5/4/97 5/4/98 210,373 216,187 221,312
3/28/97 3/28/98 209,275 212,077 220,157
3/28/97 3/28/98 214,533 217,405 225,688
____________ ___________ _________
$684,267 $696,155 $719,798
___________ ___________ _________
Note 3. Inventories.
Inventories consist of the following:
June 30,
______________________
1997 1996
___________ __________
Parts and supplies $2,820,414 $3,095,379
Work-in-process 882,323 715,133
Trailers - 38,414
Finished goods 335,020 260,269
____________ __________
4,037,757 4,109,195
Reserve for obsolescence (100,000) (100,000)
____________ __________
$3,937,757 $4,009,195
____________ __________
-10-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Property, Plant, and Equipment.
Property, plant, and equipment consists of the following:
Estimated
Useful June 30,
Lives ________________________
in Years 1997 1996
_______ ___________ ____________
Land and related improvements 10-30 $1,301,721 $ 986,116
Buildings and related
improvements 10-30 6,559,930 6,199,699
Construction-in-progress N/A 815,793 6,287
Production molds and
related plugs 8 11,658,760 9,974,486
Machinery and equipment 3-5 3,493,375 2,843,480
Furniture and fixtures 5 483,699 464,932
Transportation equipment 5 241,044 199,326
___________ ________
$24,554,322 $20,674,326
Accumulated depreciation (12,335,166) (10,746,140)
____________ ___________
$12,219,156 $9,928,186
____________ ___________
Depreciation expense amounted to $1,642,975, $1,536,479, and
$1,628,867 for the year ended June 30, 1997, 1996 and 1995,
respectively.
Construction costs of production molds for new and existing
product lines are capitalized and depreciated over an
estimated useful life of eight years. Depreciation starts
when the production mold is placed in service to manufacture
the product. The costs include the direct materials, direct
labor, and an overhead allocation based on a percentage of
direct labor. Production molds under construction amounted to
$219,227 and $0 at June 30, 1997 and 1996.
During Fiscal 1997, the Company did not realize any gain or
loss from the sale or disposition of any of its fixed assets.
The Company sold fixed assets and realized gains amounting to
$22,906 for Fiscal 1996. For Fiscal 1995, the Company
incurred losses on fixed assets sold amounting to $23,015.
On June 30, 1997, the Company determined to discontinue the
operations of its Fountain Power, Inc. and Mach Performance,
Inc. subsidiaries. An allowance for estimated future losses
expected to be incurred upon disposal of certain fixed assets
has been accrued in the amount of $440,401 against $539,457 in
fixed assets. These assets have been reclassified to net
liabilities of discontinued operations (See Note 14).
Note 5. Notes Payable.
The Company had no outstanding short-term notes payable at
June 30, 1997. During Fiscal 1996, the Company retired its
interest bearing indebtedness to Mercury Marine. Most of the
amount owing to Mercury Marine was repaid from the Company's
operating funds, but, additionally, $600,000 was borrowed from
G.E. Capital Corporation on a long-term basis to repay
Mercury. This indebtedness to G.E. Capital Corporation was
retired during Fiscal 1997 (See Note 6) as part of refinancing
under a new credit agreement.
-11-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Notes Payable [Continued]
The Company also retired the short-term debt to Deutsche
Financial Services during Fiscal 1997 (see Note 6). At June
30, 1996, the balance of the note amounted to $1,173,089
payable to Deutsche Financial Services for engine purchases
financed by Deutsche.
Note 6. Long-term Debt and Pledged Assets.
On December 31, 1996, the Company concluded a $10,000,000
credit agreement with General Electric Capital Corporation.
Under the terms of the new credit agreement, the Company
refinanced substantially all of its interest bearing debts and
will have additional funds made available to it for expansion.
Initially, the Company borrowed $7,500,000 from GE Capital
Services primarily to refinance existing debts. All of the
Company's prior interest bearing debts to MetLife Capital
Corporation, Deutsche Financial Services, GE Capital
Corporation, Branch Bank & Trust Leasing Corp., and other
smaller creditors were paid off entirely. The Company
borrowed another $1,000,000 to fund plant and equipment
additions. An additional $1,500,000 is available to the
Company for further expansion until December 31, 1997. The
interest rate on the indebtedness to GE Capital Services is
variable and ranged from 8.08% to 8.29% during the period with
a rate of 8.29% on June 30, 1997. There is a ten-year
amortization of the debt with a five-year call. The loan is
secured by all of the Company's real and personal property and
by the Company's assignment of a $1,000,000 key man life
insurance policy. The current portion of the debt is $595,607
at June 30, 1997.
At June 30, 1996, long-term debt consisted of $5,500,467 owing
to MetLife and 538,044 owing to GE Capital Corporation. Other
long term contracts primarily various capital leases
obligations amounted to $161,927. The current portion of these
obligations amounted to $767,254
The estimated aggregate maturities required on long-term debt
at June 30, 1997 are as follows:
1998 $ 595,607
1999 645,585
2000 699,757
2001 758,476
2002 5,573,953
Thereafter -
____________
$8,273,378
_____________
-12-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Common Stock, Options, and Treasury Stock.
Common Stock: The Company issued 127,500 new restricted
common shares at $8.17 per share to acquire Mach Performance,
Inc. in October, 1996 from a director of the Company. During
June 1997, the Company discontinued the operations and has
filed a lawsuit asking for the rescission of the acquisition
agreement from Mach Performance, Inc. to recover the 127,500
restricted common shares. (See Note 10 and 14).
Subsequent to the year ended June 30, 1997, and reflected in
the accompanying financial statements, the Company announced a
three for two forward stock split. The shareholder record
date was set at August 1, 1997, with fractional shares to be
paid in cash on the payable date, August 14, 1997.
Stock Options: Under the terms of the Company's qualified 1986
employee incentive stock option plan, which expired on
December 5, 1996, options were authorized to purchase up to
300,000 shares of the Company's common stock at a price of no
less than 100% of the fair market value on the date of grant
as determined by the Board of Directors. Options can be
exercised for a ten-year period from the date of grant.
During Fiscal 1995, 30,000 options each were granted to the
Chief Executive Officer and to the Chief Financial Officer at
$3.94 and $3.67 per share respectively. During 1997, the
Chief Financial Officer exercised his 30,000 options for
$110,000.
During October 1996, in connection with the acquisition of
Mach Performance, Inc. the Company entered into an employment
agreement with the director to continue to operate Mach
Performance, Inc. and to head up the operations of Fountain
Power, Inc.. The employment agreement provided that the
Company issue a total of 30,000 options under the Company's
qualified 1986 employee incentive stock option plan
exercisable over a four year period (7,500 options exercisable
each year on the anniversary date of the agreement). The
director resigned his position as an employee during April
1997 and as a director during May 1997. The Company has filed
a lawsuit seeking the return and cancelation of the options
(See Note 10).
On June 21, 1995, a special meeting of the shareholders was
held to vote upon the adoption of the 1995 stock option plan.
The new plan as adopted by the shareholders allowed up to
450,000 common stock options to be granted by the Board of
Directors to employees or directors of the Company on either a
qualified or non-qualified basis. Subsequently, on August 4,
1995, the Board unanimously voted to grant the entire 450,000
stock options authorized under the 1995 stock option plan to
Mr. Reginald M. Fountain, Jr. at $4.67 per share on a non-
qualified basis. None of the options granted to Mr. Fountain
under the 1995 stock option plan have been exercised.
Effective March 23, 1995, the Board of Directors authorized
the issuance of stock options to purchase 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. During Fiscal
1997, one of the directors exercised his options for 24,000
shares for $86,000 and assigned, with the specific consent of
the Company's Board of Directors, his remaining 6,000 options
to another party. Subsequent to June 30, 1997, another
director exercised his 30,000 stock options for $110,000.
-13-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Common 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,
1997, 1996 and 1995, and changes during the periods then ended
is presented in the table below:
1997 1996 1995
__________________ _______________ _______________
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
_______ _______ _______ ______ ________ ______
Outstanding at
beginning
of period 630,000 $6.54 198,750 $4.01 24,375 $7.44
Granted 30,000 8.17 450,000 4.67 180,000 3.66
Exercised (54,000) 3.63 - - - -
Forfeited - - - - - -
Canceled - - (18,750) 7.44 (5,625) 7.44
__________ ______ ________ _____ ________ ______
Outstanding at end
of Period 606,000 $4.63 630,000 $4.38 198,750 $4.01
__________ ______ ________ _____ ________ ______
Exercisable at end
of period 576,000 $4.45 630,000 $4.38 198,750 $4.01
__________ ______ ________ _____ _________ _____
Weighted average
fair value of options
granted 30,000 $.28 450,000 $.22 180,000 $ .09
________________ ______ ________ _____ _________ ______
The fair value of each option granted is estimated on the date
of granted using the Black-Scholes option pricing model with
the following weighted-average assumptions used for grants
during the year and period ended June 30, 1997, 1996 and 1995,
respectively: risk-free interest rates of 6.6%, 6.3% and
6.3%, expected dividend yields of zero for all periods,
expected lives of 4, 2 and 7 years, and expected volatility of
83%, 85% and 85%.
A summary of the status of the options outstanding under the
Company's stock option plans and other agreements at June 30,
1997 is presented below:
Options Outstanding Options Exercisable
_____________________________ _________________
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Outstanding Contractual Price Exercisable Price
Prices Life
__________ ________ __________ ______ ________ ______
$3.58 - $3.94 126,000 7.9 years $3.67 126,000 $3.67
$4.67 450,000 8.1 years $4.67 450,000 $4.67
$8.17 30,000 9.2 years $8.17 - -
Included in the options outstanding at June 30, 1997 and 1996 are
60,000 and 30,000 options issued to a former director of the
Company. The Company has filed a lawsuit seeking to have the
options returned and canceled. (See Note 10).
-14-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Common Stock, Options, and Treasury Stock. [Continued]
The Company accounts for these plans and other option
agreements under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related
interpretations. Accordingly, since all options granted were
granted with exercise prices at market value or above, no
compensation cost has been recognized in the accompanying
financial statements. Had compensation cost for these options
been determined based on the fair value at the grant dates for
awards under these plans and other option agreements
consistent with the method prescribed by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation:, the Company's net income and earnings per
common share would have been the proforma amounts as indicated
below:
Year Ended June 30,
_________________________________
1997 1996 1995
__________ _________ _________
Net Income As reported $1,239,951 $3,680,034 $2,047,876
Proforma $1,234,605 $3,617,601 $2,037,360
Earnings per share As reported $ .25 $ .81 $ .45
Proforma $ .25 $ .80 $ .45
Treasury Stock: The Company is holding 15,000 shares of its
own 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 8. Income Taxes.
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109. FASB 109
requires the Company to provide a net deferred tax asset or
liability equal to the expected future tax benefit or expense
of temporary reporting differences between book and tax
accounting and any available operating loss or tax credit
carryforwards.
At June 30, 1997 and 1996, the totals of all deferred tax
assets were $1,462,432 and $1,917,494. The totals of all
deferred tax liabilities were $1,037,362 and $893,349. The
amount of and ultimate realization of the benefits from the
deferred tax assets for income tax purposes is dependent, in
part, upon the tax laws in effect, the Company's future
earnings, and other future events, the effects of which cannot
be determined. Because of the uncertainty surrounding the
realization of the deferred tax assets, the Company has
established valuation allowances of $425,070 and $1,024,145 as
of June 30, 1997 and 1996, respectively, which have been
offset against the deferred tax assets. The net decrease in
the valuation allowance during the year ended June 30, 1997,
was $599,075.
The Company has available at June 30, 1997 unused operating
loss carryforwards of approximately $601,119, which may be
applied against future taxable income and which expire in
various years through 2010.
-15-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Income Taxes. [Continued]
The Company incurred current tax expense amounting to $258,371
for Fiscal 1997 and $80,804 for Fiscal 1996 as a result of the
federal alternative minimum income tax. The components of
federal income tax expense from continuing operations consist
of the following:
Year Ended June 30,
_____________________________________
1997 1996 1995
______________ _________ ___________
Current income tax expense:
Federal $ 258,371 $ 80,804 $ 41,431
State 72,056 - 1,210
______________ _________ ___________
Net current tax expense $ 330,427 $ 80,804 $ 42,641
______________ __________ ___________
Deferred tax expense (benefit) resulted from:
Excess of tax over financial
accounting depreciation. $144,013 $(18,130) $67,663
Warranty reserves (42,300) (4,200) (35,700)
Accrued vacations (8,107) (3,765) (5,137)
Dealer incentive reserves (37,500) 42,000 7,258
Bad debt reserves (28,686) 1,260 1,260
Deferred sales and cost, net - 5,942 99,058
Excess contributions
carryforwards - - 1,298
Inventory adjustment
-Sec.263A (6,366) (12,304) (16,648)
Decrease in NOL
carryforwards 1,014,168 1,646,237 805,215
Decrease in valuation
allowance (599,075) (1,573,833) (797,651)
Allowance for obsolete
inventory 3,000 (4,200) (16,800)
Alternative minimum tax
credits (256,982) (79,007) (41,431)
Reserve for loss on
disposition (171,756) - -
Investment tax credits - - (86,294)
Allowance for boat
repurchases (10,409) - 17,909
______________ ________ ___________
Net deferred tax expense $ - $ - $ -
______________ _________ ___________
Deferred income tax expense results primarily from the
reversal of temporary timing differences between tax and
financial statement income.
-16-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Income Taxes. [Continued]
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,
_____________________________________________
1997 1996 1995
_______________________________________
Computed tax at the expected
federal statutory rate. 34.00% 34.00% 34.00%
Excess of tax over financial
accounting depreciation - .43 (3.16)
Warranty reserves - .10 1.67
State income taxes, net of
federal benefit 5.00 5.28 5.28
Deferred sales and cost, net. - (.14) (4.62)
Compensation from stock options (3.85) - -
(Increase) decrease in NOL
carryforwards (14.48) (38.82) (37.59)
Officer's life insurance .78 - -
Valuation allowance (16.08) - -
Net effect of alternative minimum
taxes .03 1.86 1.93
Investment tax credits - - 4.03
Other 2.11 (.56) .50
_______________________________________
Effective income tax rates 7.51% 2.15% 2.04%
_______________________________________
The temporary differences gave rise to the following deferred
tax asset (liability):
June 30,
___________________________
1997 1996
________________________
Excess of tax over financial
accounting depreciation $(1,037,362) $(893,349)
Warranty reserve 214,500 72,200
Obsolete inventory reserve 39,000 42,000
Accrued vacations 48,063 9,957
Allowance for boat repurchases 97,500 7,091
Dealer incentive reserves 58,500 21,000
Bad debt reserve 40,026 1,340
Reserve for loss on disposition 171,756 -
Inventory adjustments - Sec. 253A 124,992 118,626
NOL carryforwards 204,380 1,218,548
Alternative minimum tax credits 377,421 120,438
Investment tax credits.. 86,294 86,294
-17-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Research and Development.
The Company expenses the costs of researching and developing
new products and components as the costs are incurred.
Research and development costs are included in the cost of
sales and amounted to $635,652 for Fiscal 1997, $234,425 for
Fiscal 1996, and $134,828 for Fiscal 1995.
Note 10. 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.
Dealer Interest: The Company regularly pays a portion of
dealers' interest charges for floor plan financing for up to
six months. These interest charges amounted to $1,009,285 for
Fiscal 1997, $704,736 for Fiscal 1996, and $708,655 for Fiscal
1995. They are included in the accompanying consolidated
statements of operations as part of selling expense. At June
30, 1997 and 1996 the estimated unpaid dealer incentive
interest included in accrued expenses amounted to $150,000 and
$50,000, respectively.
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, 1997, 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 $8,600,000.
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,
1997, the allowance for boat repurchases was $200,000. Also,
in connection with one of its floor plan agreements with a
lender, the Company has provided an irrevocable standby letter
of credit in the amount of $250,000 as security for the
lender.
Utility Agreement: During 1997, the Company entered into a
development agreement with Beaufort County, North Carolina.
Under the agreement, the County will provide $522,802 towards
the extension of community sewer and water service to the
Company's plant site. The Company agreed to: 1). expand it's
plant and purchase additional production equipment; 2) employ
an additional fifty people by April 30, 1999, sixty percent
whose household incomes are under low or moderate income
limits. If the number of low or moderate income newly
employed individuals falls below fifty one percent, then the
entire $522,802 amount will become due and payable by the
Company to the County. If the Company fails to create and
maintain fifty new jobs specified prior to April 30, 1999,
then the Company will reimburse the County $10,456 for each
low to moderate income job not created up to a maximum of
$522,802.
-18-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Commitments and Contingencies. [Continued]
Environmental: The Company has been notified by the United
States Environmental Protection Agency (the "EPA") and the
North Carolina Department of Environment, Health and Natural
Resources ("NCDEHNR") that it has been identified as a
potentially responsible party (a "PRP") and may incur, or may
have incurred, liability for the remediation of ground water
contamination at the Spectron/Galaxy Waste Disposal Site
located in Elkton, Maryland and the Seaboard 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 has been informed that
the EPA and NCDEHNR ultimately may identify a total of between
1,000 and 2,000, or more, PRP's with respect to each site.
The amounts of hazardous substances generated by the Company,
which were disposed of at both sites, are believed to be
minimal in relation to the total amount of hazardous
substances disposed of by all PRP's at the sites. At present,
the environmental conditions at the sites, to the Company's
knowledge, have not been fully determined by the EPA and
NCDEHNR, respectively, and the Company is not able to
determine at this time the amount of any potential liability
it may have in connection with remediation at either site.
Without any acknowledgment or admission of liability, the
Company has made payments of approximately $3,279 to date as a
non-performing cash-out participant in an EPA-supervised
response and removal program at the Elkton, Maryland site, and
in a NCDEHNR-supervised removal and preliminary assessment
program at the Jamestown, North Carolina site. A cash-out
proposal for the next phase of the project is expected to be
forthcoming from the PRP Group for the Elkton, Maryland site
within the near future. According to the PRP Group, the
Company's full cash-out amount is estimated to be
approximately $10,000 for the Elkton, Maryland site, based
upon an estimated 3,304 gallons of waste disposed of at that
site by the Company. A cash-out proposal in the approximate
amount of $66,000 based on an estimated 19,245 gallons of
waste is anticipated from the PRP Group for the Jamestown,
North Carolina site following completion of a remedial
investigation and feasibility study in early 1998, according
to the PRP Group administrator. Any such cash-out agreement
will be subject to approval by EPA and NCDEHNR, respectively.
The Company has accrued the estimated $76,000 liability
related to these matters in the accompanying financial
statements.
Litigation: The Company was audited during Fiscal 1997 by the
State of North Carolina under the Escheat and Unclaimed
Property Statute. The State Treasurer's audit report was
received and the Company paid a small amount of the escheated
funds. However, the Company filed a dispute as to the
remaining escheats property, amounting to approximately
$65,000. The matter was appealed to the Administrative Office
of the State of North Carolina. The dispute was subsequently
resolved by the Company's payment of $3,090 to the state.
-19-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Commitments and Contingencies. [Continued]
Litigation: The Company received a demand letter, dated
February 22, 1996, from a representative of a famous
basketball player (Player), claiming damages in connection
with an advertisement for the Company. The letter demanded
payment of $1,000,000 unless the claim was resolved prior to
filing suit. The Company put its primary and umbrella
insurance carriers on notice after receiving the demand. On
January 2, 1997, the Company filed suit in U.S. District Court
for the Eastern District of North Carolina against the Player
and his affiliated company and the advertising agency (an
agency owned by a director of the Company) that produced the
advertisement. The Company asserted that it had neither
previewed nor authorized an advertisement using the Player's
name and that the advertising agency had designed and run the
advertisement without the Company's prior review and consent.
The Company contends that it withdrew the advertisement after
being contacted by the Player's counsel and that Player was
not damaged by the advertisement. The Company further
contends that it did not state that the Player was endorsing
the product and that the Player has no legal claim to the
usage of a certain word within the advertisement. Further,
the Company claims that Player's counsel used coercion by
threatening suit and that the Company should be awarded the
costs of suit. On May 8, 1997, the Player and his affiliated
company filed an answer, counterclaim, and crossclaim,
alleging trademark infringement, unfair competition and
trademark dilution, and seeking damages of $10,000,000,
trebled, plus punitive and exemplary damages. On June 4,
1997, the Company filed a reply to the Counterclaim, denying
the Player's allegations and seeking dismissal of the
Counterclaims against it. A discovery plan was agreed to by
all parties and filed on July 14, 1997. Discovery is
scheduled to be completed by April, 1998, and is set for trail
on October 13, 1998. Shortly after the Company filed suit in
North Carolina, the Player and affiliated company filed suit
against the Company and advertising agency on February 24,
1997, in U.S. District Court for the Northern District of
Illinois. The Complaint alleges trademark infringement,
unfair competition and trademark dilution, and seeks damages
of $10,000,000, trebled, plus punitive and exemplary damages.
By Order dated April 30, 1997, this matter was transferred to
North Carolina. The Company has moved to dismiss the suit with
prejudice because the claims are repetitions of the
counterclaims in the Company's declaratory judgment suit. The
Player has responded by requesting that his suit be dismissed
without prejudice or consolidated with the Company's
declaratory judgment action. The Company intends to vigorously
defend its interests in these matters unless a reasonable and
equitable settlement can be reached.
-20-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Commitments and Contingencies. [Continued]
Litigation: The Company filed suit on July 21, 1997, against a
former officer and director and his wife, Mach, Inc., and Mach
Performance, Inc. This suit was filed in U.S. District Court
for the Eastern District of North Carolina, seeking rescission
of an Agreement and Plan of Reorganization entered into in
1996 for the Company's acquisition of Mach Performance, Inc.
in a merger transaction. The Company seeks rescission of the
acquisition and merger agreement and voidance of the resulting
transaction on grounds of fraud and material breach of
contract. The federal securities fraud claims are based on
the alleged deceptive acts in violation of Section 10(b) of
the Securities Exchange Act of 1934, arising from the sale of
Mach Performance, Inc. capital stock to the Company in
exchange for the Company's issuance to them of 127,500 new
restricted shares of its common stock valued at $1,041,250.
Other claims include breach of fiduciary duty, based on North
Carolina law, arising from the former director's alleged
material misrepresentations and omissions as a director of the
Company during the time when the acquisition and merger
agreement was negotiated. The Company is seeking a
preliminary and permanent injunction against the sale or
transfer of its 127,500 new restricted common shares issued in
the transaction, and is seeking monetary damages, including
trebled and punitive damages in an unspecified amount, for the
claims stated above, as well as for alleged actions by the
former director and officer after the acquisition. The former
director and his wife have filed counterclaims alleging breach
of contract regarding the failure to merge the Company and
regarding options issued to the former employee and director.
The Company intends to vigorously pursue its claims in this
suit, and to defend vigorously against any counterclaims or
suits brought by against the Company. The Company is also
seeking the return and cancelation of options to purchase
60,000 shares of common stock.
Product Liability and Other Litigation: There were seven
product liability lawsuits brought against the Company at June
30, 1997. 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 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.
Note 11. Export Sales.
The Company had export sales of $2,167,840 for Fiscal 1997,
$1,052,816 for Fiscal 1996, and $507,097 for Fiscal 1995.
Export sales were to customers in the following geographic
areas:
Year Ended June 30,
______________________________________________
1997 1996 1995
______________________________________
Americas $1,047,913 $658,738 $ -
Asia 367,126 - 197,932
Middle East and Europe. 752,801 394,078 309,165
_______________________________________
$2,167,840 $1,052,816 $ 507,097
_______________________________________
-21-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Transactions with Related Parties.
The Company paid or accrued the following amounts for services
rendered or for interest on indebtedness to Mr. Reginald M.
Fountain, Jr., the Company's Chairman, President, Chief
Executive Officer, and Chief Operating Officer, or to entities
owned or controlled by him:
Year Ended June 30,
______________________________________________
1997 1996 1995
_______________________________________
R.M. Fountain, Jr.
-Apartments rentals $ 17,260 $ 15,380 $ 13,995
R.M. Fountain, Jr.
- airplane rentals 296,498 155,499 104,469
R.M. Fountain, Jr.
- interest on loans - 2,710 -
R.M. Fountain, Jr.
- other misc. 500 2,000 -
_______________________________________
$ 314,258 $175,589 $ 118,464
_______________________________________
As of June 30, 1997 the Company had receivables and advances
from employees of the Company amounting to $165,936 which
includes $147,081 from Mr. Fountain.
During March 1997, the Company purchase 4.84 acres of land,
from Mr. Fountain for $123,000. The land is adjacent to the
land owned by the Company for anticipated future expansion
During the fourth quarter of Fiscal 1996, the Company borrowed
$170,000 from Mr. Fountain to supplement its working capital.
This loan was unsecured with interest at 12%. The loan was
entirely repaid to Mr. Fountain by June 30, 1996.
The Company paid $517,278, $265,985 and $138,116 for the year
ended June 30, 1997, 1996 and 1995 for advertising and public
relations services from a entity owned by a director of the
Company.
The Company acquired a subsidiary, Mach Performance, Inc.,
from a director of the Company for 127,500 shares of Common
Stock in a stock for stock purchase (See Note 15).
Prior to June 30, 1997, the Company received consulting fees
pursuant to a consulting agreement with a vendor of the
Company. Mr. Fountain has assigned these consulting fees to
the Company. Included in other non-operating income are
consulting fees earned by the Company amounting to $260,000
for Fiscal 1997, $610,420 for Fiscal 1996, and $452,911 for
Fiscal 1995. The consulting agreement expired on June 30, 1997
and has not been re-negotiated.
Note 13. Concentration of Credit Risk
Concentration of credit risk arise due to the Company
operating in the marine industry, particularly in the United
States. For Fiscal 1997 one dealer accounted for 6.6% of
sales and two other dealers each accounted for more than 5% of
sales. For Fiscal 1996 one dealer accounted for 10.2% of
sales and three other dealers each accounted for more than 5%
of sales. For fiscal 1995 one dealer accounted for 9.8% of
sales and four other dealers each accounted for more than 5%
of sales.
-22-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14. Acquisition and Discontinued Operations.
The Company formed Fountain Power, Inc., a subsidiary of
Fountain Powerboats, Inc. late in Fiscal 1996 to acquire Mach
Performance, Inc., a propeller manufacturer, and to engage in
the manufacturing of propellers and development of engines and
propulsion systems. Mach Performance, Inc. was acquired on
October 11, 1996, using the purchase method of accounting, in
a stock for stock exchange (from a director of the Company)
through the issuance of 127,500 restricted common shares
valued at $8.167 per share or $1,041,250, which exceeded the
fair market value of the net assets of Mach Performance, Inc.
by $411,401. The excess was recorded as goodwill and was
being amortized over 20 years. The operations were
subsequently moved from Lake Hamilton, Florida to the
Company's plant site near Washington, North Carolina in
December, 1996.
The operations never became profitable and during June, 1997,
the Company adopted a plan to discontinue the operations of
Mach Performance Inc. and Fountain Power, Inc. The
accompanying financial statements have been reclassified to
segregate the discontinued operations from continuing
operations. Included in the operating losses from the
discontinued operations is the write down of $395,761 of
remaining goodwill and $461,422 of propeller inventory which
management believes is not saleable. The Company also accrued
an allowance for estimated losses expected to be incurred in
the disposition of $440,401.
During July, 1997, the Company filed suit against a former
officer and director and his wife seeking rescission of the
acquisition and merger agreement with Mach Performance, Inc.
and voidance of the resulting transaction on grounds of fraud
and material breach of contract. The Company is further
asking that the 127,500 shares of common stock issued in the
transaction be returned to the Company and that certain stock
purchase options issued pursuant to an employment agreement
also be rescinded and canceled.
Net sales related to Mach Performance, Inc. for fiscal 1997
were $125,429.
The following is a condensed proforma statement of operations
that reflects what the presentation would have been for the
year ended June 30, 1997 without the reclassifications
required by "discontinued operations" accounting principles:
1997
_____________
Net Sales $50,954,753
Cost of goods sold (39,132,978)
Other operating expenses (10,127,760)
Other income (expense) (123,637)
Provision for taxes (330,427)
_____________
Net income $1,239,951
_____________
Earnings per share $ .25
_____________
-23-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14. Acquisition and Discontinued Operations. [Continued]
Net (liabilities) of discontinued operations at June 30,1997
consisted of the following:
1997
____________
Accounts receivables $ 4,174
Prepaid expenses 14,371
Equipment, net 539,457
Accounts payable (226,332)
Warranty & returns reserve (100,000)
Customer deposits (4,966)
Estimated loss on disposal (440,401)
____________
$213,697
____________
Note 15. Subsequent Events.
During July 1997, the Company approved a three-for-two forward
stock split of all its previously issued and outstanding
common stock including options to purchase common stock
(effectively a three share for two share stock dividend). The
split was accomplished during August. The effect of the
common stock split has been reflected in these financial
statements (See Note 1 and 7).
During July 1997, a director of the Company exercised stock
options held by him to acquire 30,000 shares of the Company's
common stock for $110,000 (See Note 7).
Prior to fiscal 1993, the Company owned and operated an
aircraft. During fiscal 1993, the aircraft was sold to
officer and director of the Company. The Company has been
leasing airplane services from the officer and director since
that time. During September 1997, the board of directors
determined to acquire an airplane for the Company and approved
the acquisition of an airplane from Mr. Fountain for
$1,375,000. The Company will issue a note payable to Mr.
Fountain for approximately $420,000 and will also assume the
remaining underlying indebtedness on the airplane.
Effective October 1, 1997, Fountain Trucking, Inc., Fountain
Sportswear, Inc., Fountain Aviation, Inc. and Fountain
Unlimited, Inc. were dissolved. In connection with the
dissolution of the subsidiaries the operations of Fountain
Trucking, Inc., and Fountain Sportswear, Inc. were transferred
to Fountain Powerboats, Inc. (See Note 1).
-24-