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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (D) OF THE
SECURITIES
EXCHANGE ACT OF 1934 {NO FEE REQUIRED]
For fiscal year ended June 30, 1998
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
The aggregate market value of the voting stock held by non-affiliates of
the registrant was $ 15,313,752 at September 9, 1998 based upon a closing price
of $6.00 per share on such date for the Company's Common Stock.
As of September 9, 1998 there were 4,702,608 shares of the Company's
Common Stock issued of which 15,000 shares are owned by the Company's
subsidiary Fountain Powerboats, Inc. and are regarded as treasury shares.
Documents incorporated by reference: None.
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 achieve performance and stability standards, which the Company believes are
greater than those offered by any of its competitors, worldwide. As a result,
the Company maintains that its boats are among the fastest, best-handling, and
safest boats of their kind.
In Fiscal 1994, the Company developed a new, high performance hull design
for its boats. These new "positive-lift" designs increase speed significantly
and give a softer ride by incorporating radically different keel lines with
steps in the hull bottoms. Handling and fuel economy are also substantially
improved with the new designs.
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 310 HP to more than 900 HP
each. Fountain also builds custom racing boats designed specifically for
competition. The Company also produces outboard powered center consoles and
outboard or stern drive cabin model offshore sport fishing boats ranging from
25' through 32'. Furthermore, the Company builds 29', 32', 38' and 47' sport
cruisers. During the first half of Fiscal 1999, the company will introduce a
Super Cruiser, 65 foot in length with a 16' beam. This is the first of a
family of Super Cruisers to be introduced during the next several years.
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 $328,000 to $394,000.
The Company's 47' Lightning Sport Boat has been newly redesigned and
restyled and operates at maximum speeds of 75 to 100 mph and is very stable and
suited for long range cruising in offshore waters. Its sleek styling makes it
particularly attractive. Depending primarily upon the type of engines and
options selected, this boat retails at prices ranging from $343,000 to
$648,000. 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. 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 $208,000 to
$248,000.
The 38' Fever Sport Boat operates at maximum speeds of between 70 and 100
mph. Its retail price ranges from $189,000 to $229,000, 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 35' Lightning was named by Powerboat
Magazine "Offshore Boat of the Year" for 1981 and 1995. It has also captured
that magazine's title, "Outstanding Offshore Performance Boat" for
1980,1981,1982,1983,1984, and 1987. This boat retails at prices ranging from
$150,000 to $192,000, 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 $118,000 to $150,000.
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 $79,000 and
$100,000 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 powerboat at a very affordable price. This model won an
award from Powerboat Magazine for "The Full Size Boat of the Year" for 1991 and
1992. It also captured that magazine's award for "Outstanding full-size
Workmanship" for 1995. Depending primarily upon the type of engine selected
the retail price of this boat is from $65,000 to $81,000.
In 1990, the Company began its offshore sport fishing program with a 31'
sport fishing model which features a center console design and incorporates the
same high performance, styling, and structural integrity as its sport boat
models. It has a deck configuration engineered for the knowledgeable,
experienced sport fisherman. This boat has won the Southern Kingfish
Association's World Championship for five of the last 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.
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 were the 25' and 29' walk around cabin model fishing boats with
inboard power.
For Fiscal 1998, the Company introduced an all-new surface drive sport
boat, the 51' Lightning. This boat comes with the Company's new second-
generation positive lift hull. The 42' Lightning was also new for 1998. It
comes with the new style deck with full wrap around windshield, canvas top and
the 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 during the first half of Fiscal 1999. 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
and less component parts and gears for 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
1998 1997 1996
Sport boats . 324 336 295
Sport cruisers . 9 14 20
Sport fishing boats . 116 128 109
------ ------ ------
Total 449 478 424
==== ==== ====
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 62 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 1998 ..... $575,918 $2,010,634
Fiscal 1997 ..... 635,652 1,684,274
Fiscal 1996 ..... 234,425 878,274
For Fiscal 1999, planned design research and development expenses are
$700,000 and plug and mold construction expenditures are approximately
$1,500,000. These expenditures will be primarily to complete the tooling for
new sport boat decks and interiors plus initiation of the first in the new mid-
line cruiser line along with the second model in the new Supercruiser line.
Details are not yet complete and will be released in the near future.
Manufacturing capacity is sufficient to accommodate approximately 30 to 40
boats in various stages of construction at any one time.
Construction of a boat currently made, depending on size, takes
approximately three to five weeks. Construction of the all new wide beam Super
Cruisers is expected as follows: A 40' in six weeks, a 50' in ten weeks and a
65' in twelve weeks. The Company, with additional personnel, currently has the
ability to manufacture approximately 500 sport and fishing boats and 15-20
yachts per year. 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 hand "laying-up" of vinylester resins and high quality stitched, bi-
directional and quad-directional fiberglass over a foam core in the molds
designed and constructed by the Company's engineering and tooling department.
This creates a composite structure with strong outer and inner skins with a
thicker, light core in between. The "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 resins used by most other fiberglass boat manufacturers.
Decks are bonded to the hulls using bonding agents, rivets, screws and
fiberglass to achieve a strong, unitized construction.
As one of the most highly integrated manufacturers in the marine industry,
the Company manufactures many metal, 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 costs as it receives parts
just in time for assembly and achieves considerable savings. All other
component parts and materials used in the manufacture of the Company's boats
are readily available from a variety of suppliers at comparable prices
exclusive of discounts. However, where practicable, the Company purchases
certain supplies and materials from a limited number of suppliers in order to
obtain the benefit of volume discounts.
Certain materials used in boat manufacturing, including the resins used to
make the decks and hulls, are toxic, flammable, corrosive, or reactive and are
classified by the federal and state governments as "hazardous materials."
Control of these substances is regulated by the Environmental Protection Agency
and state pollution control agencies which require reports and inspect
facilities to monitor compliance with their regulations. The Company's cost of
compliance with environmental regulations has not been material. The Company's
manufacturing facilities are regularly inspected by the Occupational Safety and
Health Administration and by state and local inspection agencies and
departments. The Company believes that its facilities comply with
substantially all regulations. The Company, however, has been informed that it
may incur or may have incurred liability for re-mediation of ground water
contamination at two hazardous waste disposal sites resulting from the disposal
of a hazardous substance at those sites by a third-party contractor of the
Subsidiary. (See item 3. Legal Proceedings.)
Recreational powerboats must be certified by the manufacturer to meet U.S.
Coast Guard specifications. In addition, their safety is subject to federal
regulation under the Boat Safety Act of 1971, as amended, pursuant to which
boat manufacturers may be required to recall products for replacement of parts
or components that have demonstrated defects affection safety. The Company has
never had to conduct a product recall.
Sales and Marketing.
Sales are made through approximately 50 dealers throughout the United
States. The Company also has 14 international dealers. These dealers are not
exclusive to the Company and carry the boats of other companies including some,
which may be competitive with the Company's products. The territories served
by any dealer are not exclusive to the dealer. However, the Company uses
discretion in locating new dealers in an effort to protect the interests of the
existing dealers.
Following is a table of sales by geographic area for the last three fiscal
years:
Fiscal `98 Fiscal `97 Fiscal `96
United States ........$46,068,495 $48,346,485 $40,545,235
Canada, Mexico, Central
and South America .....$2,639,523 $ 1,047,913 $ 658,738
Europe and
the Middle East ...... $1,834,524 $ 752,801 $ 394,078
Asia .................. $ 109,495 $ 367,126 $ -0-
------------- ------------- ----------
Total ...........$50,652,037 $50,514,325 $ 41,598,051
======== ======== =======
The Company has a growing international advertising program and is seeking
additional distribution for its products in foreign markets through its own
sales representative. In general, the Company requires payment in full or an
irrevocable letter of credit from a domestic bank before it will ship a boat
overseas. Consequently, there is no credit risk associated with its foreign
sales nor risk related to foreign currency fluctuation. The Company believes
that within several years, foreign sales could account for up to 10-20% of its
total sales.
For Fiscal 1998 one dealer accounted for 6.7% of sales, one for 6.3% and
one other dealer accounted for more than 5% of sales. For Fiscal 1997 one
dealer accounted for 6.6% of sales and two other dealers each accounted for
more than 5% of sales. For Fiscal 1996 one dealer accounted for 10.2% of sales
and three other dealers each accounted for more than 5% of sales. The Company
believes that the loss of any particular dealer would not have a materially
adverse effect on sales. As sales continue to grow through more dealers, it is
reasonable to assume the Company will grow less dependent on any one dealer.
Field sales representatives call upon existing dealers and develop new
dealers. The field sales force is headed by the Fountain National Director of
Sales who is responsible for developing a full dealer organization for sport
boats, sport cruisers, sport fishing boats and 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.
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 up to six months.
This and other incentives to the dealers have resulted in relatively level
month to month production and sales. After six months, the free interest
program ends and interest 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 who have financing
arrangements with more than one lender. Except as described above, or where it
has a direct repurchase agreement with a dealer, the Company is under no
material obligation to repurchase boats from its dealers. From time to time
the Company will voluntarily repurchase a boat for the convenience of the
dealer or for another dealer who needs a particular model not readily available
from the factory. The marketing of boats to retail customers is primarily the
responsibility of the dealer, whose efforts are supplemented by the Company
through advertising in boating magazines and participation in regional,
national, and international boat shows. Additionally, in order to further
promote its products, the Company developed a racing program to participate in
the major classes of offshore powerboat races, many of which are regularly
televised on programs such as ESPN. Additionally, Fountain single, twin and
triple engine racing boats currently hold their respective world speed records.
The result of these racing victories and world speed records has established
the Company's products as the highest performing and safest designed offshore
boats. The Company believes that the favorable publicity generated by its
performance programs contribute to its sales volume. 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 constructed two race boats during Fiscal 1997 and
implemented a racing program during Fiscal 1998, of which a major engine
manufacturer is a sponsor. In Fiscal 1998, the company completed the structure
of its racing program with a third boat and captured several world speed
records through the summer of calendar 1998 with the 100th victory completed by
Reggie Fountain in New York City in September.
As part of the marketing program for its new line of sport fishing
boats, the Company sponsors 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, a Fountain fisherman took
first place. 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.
Sales Order Backlog.
The sales order backlog as of mid September 1998 was for approximately 200
boats having an estimated sales value of $20,000,000. All of the backlog is
generally shipped within 6 months. This compares to an equivalent backlog at
this time in September 1997 and 1996. During the last year, the Company's
performance boats' increase in sales value to a greater degree than fishing
boats has increased the overall average unit price. Later this year, with the
formal introduction of the new 65' yacht, which has 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 prime spring and summer selling seasons.
Product Warranty.
The Company warrants its boats against defects in material and workmanship
for a period of three years. The engine manufacturer warrants engines included
in the boats. Warranty expenses of $531,062 were incurred in Fiscal 1998 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, 1998. For 1997, warranty costs were $707,202 or 1.4 percent of sales.
Warranty cost as a percentage of sales are among the lowest in the marine
industry thereby reflecting the Company's superior construction of its boats.
Competition.
Competition within the powerboat manufacturing industry is intense. While
the high performance sports boat market comprises only a small segment of all
boats manufactured, the higher prices commanded by these boats make it a
significant market in terms of total dollars spent. The manufacturers that
compete directly with the Company in its market segment include:
Wellcraft Division of Genmar Industries, Inc.
Formula, a Division of Thunderbird Products Corporation
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.
The market for fishing boats is much larger than the one for sport boats,
but there are many more fishing boat manufacturers than there are sport boat
manufacturers.
The Company believes that its current owners, many whom have purchased
multiple and increasingly larger boats from the Company regenerate a ready
waiting market for its expansion into the cruiser and yacht market.
Employees.
As of September 1, 1998 the Company had 376 employees, of whom ten were
executive and management personnel. Twenty-three were engaged primarily in
administrative positions including accounting, personnel, marketing and sales
activities. None of the Company's employees are party to a collective
bargaining agreement. The Company considers its employee relations to be
satisfactory. The Company is an affirmative action, equal opportunity employer.
Item 2. Properties.
The Company's executive offices and manufacturing facilities are located
on 66 acres along the Pamlico River in Beaufort County, North Carolina. All of
the land, buildings and improvements are owned by the Company and are held as
collateral on notes and mortgages payable having a balance of $9,129,622 at
June 30, 1998
The operating facility contains buildings totaling 229,280 square feet
located on fifteen acres. The buildings consist of the following:
Approximate
Square Footage Principal Use
Building 1 .......... 13,200 Executive offices, shipping and
receiving, and paint shop.
Building 2 .......... 7,200 Final prep shop.
Building 3 .......... 75,800 Lamination, upholstery, final,
assembly, inventory, and
cafeteria.
Building 4 .......... 14,250 Woodworking.
Building 5 .......... 26,800 Mating, small parts lamination.
Building 6 .......... 23,800 Metal fabrication.
Building 7 .......... 15,720 Racing, service, and warranty.
Building 8 .......... 8,750 Lamination extension area.
Building 9... 4,800 Mold Storage.
Building 10.... 26,960 Fabrication, sportswear sales.
Building 11.... 12,000 Yacht manufacturing.
----------
Total ............. 229,280
======
The results of the heavy expenditures in property, plant and equipment
also include additions of a travellift bay, boat ramp and docking facilities
along a 600-foot canal leading to the Pamlico River. In addition,
approximately 200,000 square feet of concrete paving surrounds the buildings
and provides for employee parking. The present site can accommodate an
addition of up to 300,000 square feet of manufacturing space.
Item 3. Legal Proceedings.
The Company's subsidiary was notified by the United States Environmental
Protection Agency ("EPA") and the North Carolina Department of Environment,
Health and Natural Resources (NCDEHNR") that it has been identified as a
potentially responsible party ("PRP") and may incur, or may have incurred,
liability for remediation of contamination at the Spectron/Galaxy Waste
Disposal Site in Elkton, Maryland, and the Seaboard Disposal Site, in High
Point, North Carolina, also referred to as the Jamestown, North Carolina site,
respectively, resulting from the disposal of hazardous substances at those
sites by a third party contractor of the Company, which has been informed the
EPA and NCDEHNR ultimately may identify a total of 1,000 to 2,000, or more,
PRP's with respect to each site. The amounts of hazardous substances generated
by the Company and disposed of at these sites are believed to be minimal in
relation to the total amount of hazardous substances disposed of by all PRP's
at such sites. At present, the environmental conditions at the sites and the
cost of remediation, to the best of the Company's knowledge, have not been
determined fully 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
ultimately have in connection with remediation at either site. Without any
acknowledgement or admission of liability, the Company has made payments as a
non-performing cash-out participant in an EPA-supervised response and removal
program at the Spectron/Galaxy Site, and in NCDEHNR-supervised removal and
preliminary assessment program at the Seaboard Disposal Site. A cash-out
proposal for the next phase of the project is expected to be forthcoming from
the PRP Group for the Spectron/Galaxy Site. According to the PRP Group, the
Company's full cash-out amount is estimated to be approximately $10,000 for the
Spectron/Galaxy Site in Elkton, Maryland, based on 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 Seaboard Disposal Site in North Carolina following
completion of a Remedial Investigation and Feasibility Study in late 1998,
according to the PRP Group administrator. Any cash-out agreement will be
subject to approval by EPA and NCDEHNR, respectively.
As of June 30, 1998, the Company's chief operating subsidiary was a
defendant in six product liability suits. In the Company's opinion, these
lawsuits are without merit and, therefore, the Company is vigorously defending
its interests in such suits. The Company carries sufficient product liability
insurance to cover attorney's fees and any losses that may occur from such
suits, over and above applicable insurance deductibles.
On June 9, 1998, and Order was entered in U. S. District Court for the
Eastern District of North Carolina, regarding a settlement among the parties in
a trademark infringement suit involving the Company's chief operating
subsidiary, Fountain Powerboats, Inc., Mark Spencer, Spencer Communications,
and Michael Jordan, a professional basketball player. A description of the
litigation is contained in the Company's Annual Report on Form 10-K for June
30, 1997, filed with the Commission on October 14, 1997, which description is
incorporated by reference herein.
On June 16, 1998, a court-mediated settlement was reached among the
Company and Gary D. Garbrecht, Marcia K. Garbrecht, and Mach Performance, Inc.,
of a lawsuit filed by the Company and its subsidiary in U. S. District Court
for the Eastern District of North Carolina; the settlement also concludes
another suit filed by the Company in Beaufort County Superior Court,
Washington, North Carolina, against an affiliate of the Garbrechts, P.R.O.P.
Tour, Inc. A description is incorporated by reference herein.
The Company is involved in litigation in Texas and North Carolina with one
of its dealers in Austin, Texas, concerning termination of the dealer
agreement. The Company's position is that the dealer agreement is non-
exclusive, allowing the Company to have other dealers in the Austin, Texas
area. The Company is seeking a declaratory judgment that the dealer terminated
the agreement or, alternatively, that the dealer is bound by the agreement and
should fulfill its inventory-stocking obligation. The Company intends to
vigorously defend its interests in this matter.
Item 4. Submission of Matters to a Vote of Security Holders.
The only matter submitted to the Shareholders for a vote during the last
quarter of Fiscal 1998 was the notice of annual meeting with revocable proxy
for election of Director Nominees and ratification of the Board's selection of
Pritchett, Siler & Hardy, P.C., Certified Public Accountants, as the Company's
independent public accountants.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's common stock, $.01 per value, was listed and began trading
on the NASDAQ National Market System (under the symbol "FPWR") on August
28,1996. Prior to that time the Company's common stock was traded on the
American Stock Exchange (under the symbol "FPI").
The following table contains certain historical high and low price
information 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, 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
September 30, 1997 ... 14.88 9.00
December 31, 1997 ... 15.38 8.88
March 31, 1998 ... 12.75 8.50
June 30, 1998 ... 13.00 8.93
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 9, 1998 was approximately 1500.
Item 6. Selected Financial Data
Fountain Powerboat Industries, Inc. and Subsidiary
Selected Financial Data
Fiscal Years 1994 through 1998
Year Ended June 30,
Operations Statement Data: -------------------------------------------------------------------
(Period Ended) 1998 1997 1996 1995 1994
- ----------------------- -------------- ----------- -------- ------- ----------
Sales ........................ $50,652,037 $50,514,325 $41,598,051 $38,727,329 $22,240,212
Net Income (loss) ........... $ 2,740,487 $ 1,239,951 $ 3,680,034 $ 2,047,876 $(2,993,344)
Income (loss) per share .. $ .58 $ .27 $ .81 $ .45 $ (.67)
Weight average shares
outstanding .......... 4,751,779 4,664,251 4,528,608 4,528,608 4,452,856
Fully diluted earnings (loss)
per share .............. $ .54 $ .24 $ .77 $ .45 N/A
Fully diluted weighted average
shares outstanding ... 5,110,090 5,093,289 4,573,153 4,539,694 N/A
Balance Sheet Data
(At Period End)
- -----------------------------------
Current assets ............... $12,718,535 $10,997,133 $ 8,378,341 $ 6,185,727 $ 5,365,619
Total Assets ................. $32,497,393 $23,713,896 $18,498,104 $16,334,757 $16,266,787
Current Liabilities .......... $10,289,985 $ 6,305,212 $ 6,180,476 $ 6,081,298 $14,976,570
Long-term debt ............... $ 9,499,895 $ 8,047,039 $ 5,433,184 $ 7,049,049 $ 133,683
Stockholders' equity (1) .... $11,780,706 $ 9,361,645 $ 6,884,444 $ 3,204,410 $ 1,156,534
- -----------------(1) The Company has not paid any cash dividends since its inception.
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 was
C.O.D. or payment prior to shipment.
Generally, the Company recognizes a sale when a boat is shipped to a
customer, legal title and all other incidents of ownership have passed from the
Company to the customer, and payment is received from the customers' third-
party commercial lender or from the customer. This is the method of sales
recognition believed to be in use by most boat manufacturers.
The Company has developed criteria for determining whether a shipment
should be recorded as a sale or as a deferred sale (a balance sheet liability).
The criteria for recording a sale are that the boat has been completed and
shipped to a customer, that title and all other incidents of ownership have
passed to the customer, and that there is no direct commitment to repurchase
the boat or to pay floor plan interest beyond the normal sales program terms.
At June 30, 1995, the Company estimated the balances in deferred sales to
be $197,541 and in deferred cost of sales to be $183,393. At June 30, 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, 1998, 1997 and 1996, there were no commitments to dealers to
pay the interest on floor plan financed boats in excess of the time period
specified in the Company's written sales program and there were no direct
repurchase agreements. This was because of 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, 1998, 1997, and 1996. The
differences between the estimates for deferred sales and deferred cost of sales
at June 30, 1995 and June 30, 1996 had the effect of increasing the gross
margin on sales and net income after taxes for the year by $14,148. There was
no such effect on Fiscal 1998 and 1997.
The Company has a contingent liability to repurchase boats where it
participates in the floor plan financing made available to its dealers by third-
party finance companies. Sales to participating dealers are approved by the
respective finance companies. If a participating dealer does not satisfy its
obligation to the lender and the boat is subsequently repossessed by the
lender, then the Company may be required to repurchase the boat. The Company
had a contingent liability of approximately $8,600,000 at June 30, 1998,
$8,600,000 at June 30, 1997 and $7,200,000 at June 30, 1996 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, 1998,
1997 and 1996, the Company had recorded reserves of $200,000, $200,000 and
$207,359, which represent losses which may be reasonably expected to be
incurred on boat repurchases in future years.
Business Environment.
The Company's Sales have continued to increase each year. Sales for 1998
were $50,652,037. The sales volume for Fiscal 1998 was in line with the stable
environment in the overall recreational boating industry. Plant utilization
stands at about 80% until full production of the new 65' yacht is achieved.
Sales for Fiscal 1997 were $50,514,325, a 21% increase from sales for
Fiscal 1996. Sales for Fiscal 1996 were $41,598,051.
In Fiscal 1998, the Company continued to advertise and market
aggressively. Management believes that the Company's advertising, marketing,
racing, and tournament fishing programs, as well as, its reputation as the
builder of the highest quality, best performing, and safest high performance
boats in the industry, all contributed in maintaining our performance market
share.
Typically, each dealer's floor plan credit facilities are secured by the
dealer's inventory, and, perhaps, other personal and real property. In
connection with the dealers' floor plan arrangements, the Company (as well as
substantially all other major manufacturers) has agreed in most instances to
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 1998, 1997 and Fiscal 1996 in
connection with floor plan arrangements. Five boats were repurchased during
Fiscal 1995 in connection with floor plan arrangements. At June 30, 1998 and
1997, the Company had recorded a $200,000 reserve for losses which may be
reasonably expected to be incurred on boat repurchases in future years.
Results of Operations.
Net income for Fiscal 1998 was $2,740,487 or $.58 per share outstanding.
This compares to net income for Fiscal 1997 of $1,239,951, or $.27 per share.
The change in net income was primarily due to a discontinued operations loss
and write-down of assets of a Subsidiary, Fountain Power, Inc. for $2,829,881
in Fiscal 1997. (See Note #14).
Operating income decreased slightly from $4,520,333 in Fiscal 1997 to
$4,084,388 in Fiscal 1998. Income from continuing operations (before the loss
and write-down due to Fountain Power, Inc.) decreased (primarily due the
Company's current tax liability) in Fiscal 1998 to $2,439,556 from $4,069,832
in Fiscal 1997.
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.
The Company's gross profit margin as a percentage of sales changed
slightly to 24.8% in Fiscal 1998 from 26.8% in Fiscal 1997 and 22.3% in Fiscal
1996. The change in the gross margin percentage was due to the overall sales
mix of boats and production efficiencies.
Depreciation expense was $1,953,207 for Fiscal 1998, $1,642,975 for Fiscal
1997, and $1,536,479 for Fiscal 1996. Depreciation expense by asset category
was as follows:
Fiscal Fiscal Fiscal
1998 1997 1996
Land improvements ........ $ 29,504 $ 22,468 $ 20,595
Buildings ................ $ 239,187 $ 231,546 $ 260,580
Molds & plugs ........ $1,112,705 $ 1,041,217 $ 980,104
Machinery & Equipment ... $ 353,102 $ 295,829 $ 225,654
Furniture & fixtures ....$ 15,238 $ 24,572 $ 11,114
Transportation equipment ..$ 129,722 $ 27,343 $ 38,432
Racing Equipment..... $ 73,749
---------- ----------- ---------
Total $1,953,207 $ 1,642,975 $1,536,479
======== ======== ========
Following is a schedule of the net fixed asset additions during
Fiscal 1998 and Fiscal 1997.
Fiscal 1998 Fiscal 1997
Buildings ............. $ 240,003 $ 360,231
Land and Improvements.... $ 35,537 $ 315,605
Molds and plugs ...... $2,050,745 $1,684,274
Construction in Progress.. $3,139,725 $ 809,506
Machinery & equipment .....$ 512,933 $ 649,895
Furniture & fixtures .....$ 24,495 $ 18,767
Transportation equipment ...$1,458,079 $ 41,718
Racing equipment...... $1,335,163 $ -0-
----------- -----------
Total $ 8,796,680 $ 3,879,996
========= =========
Selling expenses were $5,687,097 for Fiscal 1998, $6,463,875 for Fiscal
1997, and $4,285,923 for Fiscal 1996. The Company continued to promote its
products primarily by magazine advertising in Fiscal 1998. Advertising expense
was $1,166,633 for Fiscal 1998, $1,267,822 for Fiscal 1997, and $849,627 for
Fiscal 1996. These advertising expenditures continue to promote the Company's
visibility in the recreational marine industry and its boat sales. Management
believes that advertising is necessary in order to maintain the Company's sales
volume and dealer base.
Additionally, in an effort to further promote its products, the Company
continued its offshore racing and tournament fishing programs. These programs
cost $953,928 in Fiscal 1998, $1,256,631 in Fiscal 1997 and $867,743 in Fiscal
1996. As previously noted, the Company curtailed its offshore racing program
in Fiscal 1992 and sold its last remaining race boat, but continued a limited
racing program and its tournament fishing program through Fiscal 1997. The
Company commenced construction of two race boats during late Fiscal 1997 and
began a racing program during Fiscal 1998.
Selling expenses compared for the past three fiscal years were as follows:
Fiscal 1998 Fiscal 1997 Fiscal 1996
Offshore racing and
tournament fishing ..$ 953,928 $ 1,256,631 $ 867,743
Advertising ...........$ 1,166,633 $ 1,267,822 $ 849,627
Salaries & commissions ..$ 939,541 $ 1,029,810 $ 578,170
Boat Shows ............$ 446,706 $ 452,859 $ 285,321
Dealer incentives ......$ 1,031,611 $ 1,286,649 $ 285,321
Other selling expenses ..$ 1,148,678 $ 1,170,104 $ 750,828
----------- ----------- ----------
Total $ 5,687,097 $ 6,463,875 $4,285,923
========= ========= =========
General and administrative expenses include the finance, accounting,
legal, personnel, data processing, and administrative operating expenses of the
Company. These expenses were $2,725,146 for Fiscal 1998, $2,553,870 for Fiscal
1997, and $1,904,988 for Fiscal 1996. Most of the increase for Fiscal 1998
over Fiscal 1997 was in attorneys' fees. (See Item 3-Legal Proceedings)
Interest expense was $833,932 for Fiscal 1998, $557,768 for Fiscal 1997,
and $747,337 for Fiscal 1996. The increase in interest expense for Fiscal 1998
was primarily due to an overall increase in loan debt from the Fiscal 1997
consolidation loan from General Electric Capital Corporation.
For Fiscal 1998, the Company recorded $500,000 in racing participation
fees, which reduced our overall program cost for the year. 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. 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. Under the terms of the consulting
contract, the consulting fees ended entirely after Fiscal 1997.
Liquidity and Financial Resources.
Operations in Fiscal 1998 provided $3,869,619 in cash. Net income plus
depreciation expense provided cash amounting to $4,693,694. However,
relatively large amounts were needed to finance investment activities in
purchasing property, plant, equipment, inventory and molds. In addition, the
new yacht construction with associated development costs added to the heavy use
of cash. The ending cash balance was $1,376,984.
Operations for the prior fiscal year 1997 provided $5,474,162 in cash.
Net income plus depreciation expense provided cash amounting to $2,882,920.
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. The ending cash balance was
$2,994,503.
Operations for the 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.
Investing activities for Fiscal 1998 required $8,218,341, including
expenditures for additional molds and plugs amounting to $2,050,745 and for
property, plant and equipment for $6,745,936. Also, increases in other assets
required $124,396.
Investing activities for Fiscal 1997 required $4,936,129, including
expenditures for additional molds and plugs amounting to $1,684,274 and for
property, plant and equipment for $2,249,670. Also, increases in other assets
required $306,030.
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.
Financing activities for Fiscal 1998 provided $2,731,203. Included in
this amount are proceeds from issuance of notes payable and long term-debt to
G. E. Capital Corporation for $3,362,137 and the retirement of previous long-
term debt of $738,434.
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.
The net decrease in cash for Fiscal 1998 was $1,633,884, primarily due to
the investment in facilities, equipment and molds. During Fiscal 1998, the
Company borrowed the remaining $1,500,000 against the initial General Electric
Capital Corporation loan, bringing the balance to $10,000,000, less the
scheduled monthly principal reductions. During the first quarter of Fiscal
1999, the Company concluded negotiations for a new $4,000,000 promissory note
with Transamerica Business Credit Corporation, which included restatement and
amendment of certain existing promissory notes with General Electric Capital
Corporation. For Fiscal 1999, the Company anticipates that the $1,376,984
beginning cash balance along with the proceeds of the additional financing and
net income from Fiscal 1999 operations will be sufficient to meet most of the
Company's liquidity needs of the year. The Company intends to concentrate on
developing the new yacht assembly line in Fiscal 1999.
Effective December 31, 1996, the Company concluded a new $10,000,000 term
loan agreement with General Electric Capital Corporation repaying previous
indebtedness to MetLife Capital Corporation, Deutsche Financial Services and
others. At June 30, 1997, the total outstanding amount was $8,500,000 less
scheduled monthly principal reductions.
Effects of Inflation.
The Company has not been materially affected by the moderate inflation of
recent years. Since most of the Company's plant and its equipment are
relatively new, expenditures for replacements are not expected to be a factor
in the near-term future.
When raw material costs increase because of inflation, the Company
attempts to minimize the effect of these increases by using alternative, less
costly materials, or by finding less costly sources for the materials it uses.
When the foregoing measures are not possible, its selling prices are increased
to recover the cost increases.
The Company's products are targeted at the segment of the powerboat market
where retail purchasers are generally less significantly affected by price or
other economic conditions. Consequently, management believes that the impact
of inflation on sales and the results of operations will not be material.
The Year 2000.
A current concern, known as the "Year 2000" or "Y2K" Bug is expected to
effect a large number of computer systems and software during or after the year
1999. The concern is that any computer function that requires a date
calculation may produce errors. The Year 2000 issue affects virtually all
companies and organizations, including the Company. The Company plans on
taking all steps necessary to prevent these errors from occurring. With
respect to third party providers whose services are critical to the Company,
the Company intends to monitor the efforts of such vendors, as they become Year
2000 compliant. Management is not presently aware of any Year 2000 issues that
have been encountered by any such third party, which could materially affect
the Company's operations. At present, the Company anticipates the costs of
upgrading some of its software and hardware in order to avoid any problems
resulting from the Millennium bug will cost approximately $300,000. There is
no assurance that the Company will not experience operational difficulties as a
result of Year 2000 issues.
Cautionary Statement for Purposes of "Safe Harbor" Under the Private Securities
Reform Act of 1995.
The Company may from time to time make forward-looking statements,
including statements projecting, forecasting, or estimating the Company's
performance and industry trends. The achievement of the projections,
forecasts, or estimates contained in these statements is subject to certain
risks and uncertainties, and actual results and events may differ materially
from those projected, forecast, or estimated.
The applicable risks and uncertainties include general economic and
industry conditions that affect all businesses, as well as matters that are
specific to the Company and the markets it serves. For example, the
achievement of projections, forecasts, or estimates contained in the Company's
forward-looking statements may be impacted by national and international
economic conditions; compliance with governmental laws and regulations;
accidents and acts of God; and all of the general risks associated with doing
business.
Risks that are specific to the Company and its markets include but are not
limited to compliance with increasingly stringent environmental laws and
regulations; the cyclical nature of the industry; competition in pricing and
new product development from larger companies with substantial resources; the
concentration of a substantial percentage of the Company's sales with a few
major customers, the loss of, or change in demand from dealers, any of which
could have a material impact upon the Company; labor relations at the Company
and at its customers and suppliers; and the Company's single-source supply and
just-in-time inventory strategies for some critical boat components, including
high performance engines, which could adversely affect production if a single-
source supplier is unable for any reason to meet the Company's requirements on
a timely basis.
Item 8. Financial Statements and Supplementary Data.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There were no changes in or disagreements with the independent auditors on
accounting and financial disclosure matters.
Part III
Item 10. Directors and Executive Officers of Registrant.
The Current directors of Registrant and its Subsidiary are as Follows:
REGINALD M. FOUNTAIN, JR., age 58, 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.
DARRYL M. DIAMOND, M. D., age 61, is a retired physician. From 1984 to 1986,
Dr. Diamond served as a director of the Company's subsidiary.
GEORGE L. DEICHMANN, III, age 54, is the President and owner of Trent
Olds/Cadillac/Buick/GMC, an automobile dealership located in New Bern, North
Carolina.
CRAIG F. GOESS, age 44, is the President and General Manager of Greenville
Toyota, an automobile dealership located in Greenville, North Carolina.
GARY E. MAZZA, III, age 60, 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.
FEDERICO PIGNATELLI, age 45, 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, an 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 53, 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.
BLANCHE C. WILLIAMS, age 64, 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.
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 1998, 1997, and
1996.
Name and Principal Fiscal Annual Compensation Long-term Stock
--------------------- ---------------------
Position Year Salary(1) Bonus(2) Compensation Options
- --------------------- ----- -------- -------- --------- ------
Reginald M. Fountain Jr. 1998 $350,000 $218,017 $ -0- -0-
Chairman, President,Chief 1997 $350,000 $ 78,519 $ -0- -0-
Executive Officer,and 1996 $232,154 $199,984 $ -0- -0-
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 forward. 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 1996,1997 and 1998 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
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, 1998 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, 1998,
Exercisable......................................$ 3,121,599 (1)
(1) The closing sale price of the Common stock on Tuesday, June 30, 1998 was
$11.125. 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 adopted 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 disclosed in the "Notes To Consolidated
Financial Statements" contained within this report.
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 and Mr. Spencer retain their issued
stock options of 30,000 shares each. Mr. Garbrecht resigned as a director in
April 1997.
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 $218,017 for
Fiscal 1998, $78,519 for Fiscal 1997 and $199,984 for Fiscal 1996 were earned
by 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 1998 or Fiscal 1997. 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.
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 should 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.
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. On June 16, 1998, an order was
entered in U. S. District Court for the Eastern District of North Carolina,
whereas the above options were cancelled as part of an overall settlement
agreement.
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 post-retirement 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, 1993 to be
equal to $100.00 Accumulated returns are noted through June 30, 1998. 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 Return To Shareholder's - Dividends Reinvested
ANNUAL PERCENTAGE RETURN
YEARS ENDING
Company / Index Jun94 Jun95 Jun96 Jun97 Jun98
FOUNTAIN POWERBOAT INDS -55.82 142.14 100.03 28.25 13.14
INC
S&P 500 INDEX 1.41 26.07 26.00 34.70 30.16
LEISURE TIME (PRODUCTS)- 0.87 21.45 30.63 25.61 20.51
500
INDEXED RETURNS
Base Years Ending
Period
Company / Index Jun93 Jun94 Jun95 Jun96 Jun97 Jun98
FOUNTAIN POWERBOAT INDS 100 44.18 106.98 213.98 274.43 310.49
INC
S&P 500 INDEX 100 101.41 127.84 161.08 216.98 282.42
LEISURE TIME (PRODUCTS)- 100 100.87 122.51 160.03 201.02 242.26
500
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.
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
earned by Mr. Fountain for Fiscal 1998 were $218,017, for Fiscal 1997 amounted
to $78,519 and for Fiscal 1996 amounted to $199,984.
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) 54.81%
Triglova Finanz, A.G.
P.O. Box 1824
52nd Street
Urbanization Obarrio
Torre Banco Sur, 10th Floor
Panama City, Republic of Panama 266,500(2) 5.69%
(1) Mr. Fountain has sole voting and investment power with respect to all
shares shown as beneficially owned. Includes options to acquire 480,000
shares of common stock.
(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, 1998, for each of
the Company's current directors, and for all directors and officers of the
Company as a group.
Name and Address Amount of Percent
Beneficial of
Ownership Class (3)
Reginald M. Fountain, Jr.(1) 2,569,372(2) 54.81%
Mark L. Spencer (1) 33,400(2) (3)
Federico Pignatelli (1) 10,000(2) (3)
Gary E. Mazza III (1) 46,744 (3)
Blanche C. Williams (1) 800 (3)
Darryl M. Diamond, M.D.(1) -0- (3)
George L. Deichmann, III(1) -0- (3)
Craig F. Goess (1) -0- (3)
Joseph F. Schemenauer (1) -0- (3)
All directors and officers as
a group (6 persons) 2,660,316 (2) 56.75%
(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.
(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 one-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 $2.333 per share was fair to the Company after
consideration of such factors as the common stock's book value, its then
current market price, and recent private placements.
No interest was paid to Mr. Fountain in Fiscal 1997, or 1995. The Company
also paid rentals at what it believes to be their fair market values during the
last three fiscal years to Mr. Fountain or to entities owned by him as follows:
Fiscal Fiscal Fiscal
1998 1997 1996
Apartment Rentals...........$ 6,717 $ 17,260 $ 15,380
R. M. Fountain, Jr.
- airplane rentals ....$ 107,312 $296,498 $ 155,499
- interest ........ $ 26,509 -0- -0-
--------- ------- ---------
$ 140,583 $313,758 $170,879
======= ======= ======
(See Note 12)
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. The airplane rentals ended in
September 1997. 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 with
a second note payable to Mr. Fountain for $415,821.
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.
At the end of Fiscal 1997, the Company ceased operations of Fountain Power,
Inc., the operating Company into which Mach Performance was contained and filed
suit during Fiscal 1998 seeking rescission of the acquisition and merger
agreement. On June 10, 1998, a Court mediated legal settlement was reached
between the parties. Refer to note 14 - Acquisition and Discontinued
Operations in the Consolidated Financial Statements contained herein.
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. $288,915 in Fiscal 1998, $547,436 in Fiscal 1997 and
$265,985 in Fiscal 1996.
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.
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 Previously
Company's Registration Statement field on December 2,1986) .........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 Previously
ended June 30, 1991)................................................Filed
3.4 By-laws of the Company (Incorporated by reference to Amendment
No. 1 to the Company's Registration Statement filed on Previously
December 2, 1986)...................................................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 Previously
for the one-for-two reverse stock split of February 4, 1994.... Filed
4.1 Form of Warrant Agreement (Incorporated by reference to Amendment
No. 2 to the Company's Registration Statement filed on Previously
December 10, 1986).................................................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 Previously
fiscal year ended October 1, 1989)............................ Filed
10.1 1986 Incentive Stock Option Plan (Incorporated by reference to
Amendment No. 1 to the Company's Registration Statement filed on Previously
December 2, 1986)...........................................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 Previously
on Form 10K for the fiscal year ended October 1, 1989).......... 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 Previously
on Form 10K for the fiscal year ended March 22, 1994)............. Filed
10.4 Loan and Security Agreement with MetLife Capital Corporation Previously
dated December 31, 1993............................................ Filed
10.5 Consulting and Marketing Agreement with the Mercury Marine Previously
Division of the Brunswick Corporation dated July 11, 1994.... Filed
10.6 Loan Extension and Amendment Agreement with the Mercury
Marine division of the Brunswick Corporation dated Previously
July 11, 1994.................................................. Filed
10.7 Amendment to Consulting and Marketing Agreement with the
Mercury marine division of the Brunswick Corporation dated Previously
July 11, 1994.................................................. Filed
10.8 Standstill Agreement with the Mercury Marine division of the Previously
Brunswick Corporation dated July 11, 1994....................... Filed
10.9 Amendment No. One dated September 24, 1994 to Loan and
Security Agreement of December 31, 1993 with MetLife Previously
Capital Corporation...............................................Filed
10.10 Consent to Loan Restructure dated January 1, 1995 from MetLifePreviously
Capital Corporation........................................Filed
10.11 Amendment No. Two dated January 1, 1995 to Loan and
Security Agreement dated of December 31, 1993 with MetLife Previously
Capital Corporation............................................Filed
10.12 Second Loan Extension, Consolidation and Amendment
Agreement dated February 24, 1995 with Brunswick Corporation, Previously
Mercury Marine Division...........................................Filed
10.13 Modification of Deeds and Trust and Assignment of Rents, Issues
and Profits dated February 24, 1995 with Brunswick Corporation, Previously
Mercury Marine Division
.................................................................... Filed
10.14 Consulting and Marketing Agreement dated February 24, 1995 Previously
with Brunswick Corporation, Mercury Marine Division............. Filed
10.15 Supply agreement dated February 24, 1995 with BrunswickPreviously
Filed
10.16 Master Security Agreement dated December 21, 1995 Previously
with G.E. Capital Corporation...................... 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....... Previously
Filed
10.21 Loan Agreement dated December 31, 1996 with
General Electric Capital Corporation............ Previously
Filed
10.22 Omnibus Loan Agreement dated September 2, 1998 with General
Electric Capital Corporation and
Transamerica Business Credit Corporation................ Filed Within
(b) Form 8K was filed on June 3, 1998:
On June 9, 1998, an Order was entered in the United States District Court
for the Eastern District of North Carolina concerning a settlement among the
parties in a lawsuit involving the Registrant's chief operating subsidiary,
Fountain Powerboats, Inc., Mark Spencer, Spencer Communications, and Michael
Jordan. A description of this litigation is contained in the Registrant's
Annual Report on Form 10-K, filed with the Commission on October 14, 1997,
which is incorporated by reference herein.
On June 16, 1998, a court-mediated settlement was reached among the
Registrant and Gary D. Garbrecht, Marcia K. Garbrecht, and Mach Performance,
Inc. of a lawsuit filed by the Registrant in the United States District Court
for the Eastern District of North Carolina; the settlement also will conclude
another suit filed by the Registrant in Beaufort County Superior Court,
Washington, North Carolina, against an affiliate of the Garbrechts, P.R.O.P.
Tour, Inc. A description of the litigation is contained in the Registrant's
Annual Report on Form 10-K filed with the Commission on October 14, 1997, which
is incorporated by reference herein.
On June 15, 1998, Registrant engaged CIBC Oppenheimer Corp. (Oppenheimer)
to assist the Registrant in evaluating its strategic alternatives to maximize
shareholder value, pursuant to an agreement between the two parties for such
services. On June 25, 1998, the Registrant issued a press release concerning
its engagement of Oppenheimer, a copy of which is included as an exhibit to
this Report and is incorporated by reference herein.
The Registrant's Board of Directors has approved a change in the
Registrant's stock transfer agent and registrar to Firstar Trust Company,
Milwaukee, Wisconsin (Firstar). Firstar will replace the Registrant's current
stock transfer agent and registrar, Registrar and Transfer Company, New York,
New York. The Registrant currently is in the process of effecting such change,
which is projected to be effective on June 30, 1998.
The Board of Directors of the Registrant on June 3, 1998, elected officers
of the Registrant and its operating subsidiary, Fountain Powerboats, Inc., and
elected four of its outside directors as the members of Registrant's Audit
Committee, as follows:
Officers:
Reginald M. Fountain, Jr. - Chairman, President and Chief Executive Officer
Donald J. Abel - Vice President, Chief Operating Officer and General Manager
Gary G. Baltz, Jr. - Vice President/Sales
Joseph F. Schemenauer - Vice President/Finance and Chief Financial Officer
Blanche C. Williams - Secretary/Treasurer
Carol J. Price - Assistant Secretary
Audit Committee: Darryl M. Diamond, M.D., George L. Deichmann, III,
Craig F. Goess, Federico Pignatelli
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.
By: /s/ Reginald M. Fountain, Jr. September 23, 1998
Chairman, President, and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Reginald M. Fountain, Jr. September 23, 1998
Chairman, President, and Chief Executive Officer
(Principal Executive Officer)
/s/ Darryl M. Diamond, M. D. September 25, 1998
Director
/s/ George L. Deichmann, III September 21, 1998
Director
/s/ Craig F. Goess September 21, 1998
Director
/s/ Gary E. Mazza, III September 21, 1998
Director
/s/ Federico Pignatelli September 21, 1998
Director
/s/ Mark L Spencer September 21, 1998
Director
/s/ Joseph F. Schemenauer September 21, 1998
Chief Financial Officer
(Principal Accounting and Financial Officer)
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
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, 1998
and 1997 2
- Consolidated Statements of Operations, for the years
ended June 30, 1998, 1997 and 1996. 3 - 4
- Consolidated Statement of Stockholders' Equity, for the
years ended June 30, 1998, 1997 and 1996. 5
- Consolidated Statements of Cash Flows, for the years
ended June 30, 1998, 1997 and 1996. 6 - 7
- Notes to the Consolidated Financial Statements 8 - 26
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
Washington, North Carolina
We have audited the accompanying consolidated balance sheets of
Fountain Powerboat Industries, Inc. and Subsidiary as of June 30,
1998 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years
ended June 30, 1998, 1997 and 1996. These consolidated financial
statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements audited by
us present fairly, in all material respects, the consolidated
financial position of Fountain Powerboat Industries, Inc. and
Subsidiary as of June 30, 1998 and 1997, and the consolidated
results of their operations and their cash flows for the years
ended June 30, 1998, 1997 and 1996 in conformity with generally
accepted accounting principles.
/s/ Pritchett, Siler & Hardy, P.C.
PRITCHETT, SILER & HARDY, P.C.
Salt Lake City, Utah
July 31, 1998
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30,
__________________________
1998 1997
____________ ____________
CURRENT ASSETS:
Cash & cash equivalents $1,376,984 $2,994,503
Certificates of deposit - held to maturity - 696,155
Accounts receivable, less allowance for doubtful
accounts of $30,000 for 1998 and 1997 2,715,754 1,867,747
Inventories 7,077,540 3,937,757
Prepaid expenses 489,290 1,131,703
Current tax assets 1,058,967 369,268
____________ ____________
Total Current Assets 12,718,535 10,997,133
PROPERTY, PLANT AND EQUIPMENT, net 19,156,855 12,219,156
OTHER ASSETS 622,003 497,607
____________ ____________
$32,497,393 $23,713,896
____________ ____________
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable - related party $ 415,821 $ -
Current maturities of long-term debt 981,365 595,607
Accounts payable 3,591,489 1,987,508
Accrued expenses 1,939,791 860,786
Dealer territory service accrual 2,046,939 1,637,572
Customer deposits 510,967 310,042
Allowance for boat repurchases 200,000 200,000
Warranty reserve 500,000 500,000
Net liabilities of discontinued operations 103,612 213,697
____________ ____________
Total Current Liabilities 10,289,984 6,305,212
LONG-TERM DEBT, less current maturities 9,499,895 7,677,771
DEFERRED TAX LIABILITY 926,807 369,268
COMMITMENTS AND CONTINGENCIES (See Note 10) - -
____________ ____________
Total Liabilities 20,716,686 14,352,251
____________ ____________
STOCKHOLDERS' EQUITY [Restated]
Common stock, par value $.01 per share,
authorized 200,000,000 shares; issued
4,702,608 and 4,725,108 shares 47,026 47,251
Additional paid-in capital 10,196,540 10,517,740
Accumulated earnings (deficit) 1,647,889 (1,092,598)
____________ ____________
11,891,454 9,472,393
Less: Treasury Stock, at cost 15,000
shares (110,748) (110,748)
____________ ____________
11,780,707 9,361,645
____________ ____________
$ 32,497,393 $ 23,713,896
____________ ____________
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,
________________________________________
1998 1997 1996
____________ ____________ ____________
NET SALES $ 50,652,037 $ 50,514,325 $ 41,598,051
COST OF SALES 38,084,034 36,976,247 32,326,371
____________ ____________ ____________
Gross Profit 12,568,003 13,538,078 9,271,680
____________ ____________ ____________
EXPENSES:
Selling expense 5,687,097 6,463,375 4,285,923
Selling expense - related party - 500 -
General and administrative 2,722,665 2,240,112 1,729,399
General and administrative - related
parties 73,853 313,758 175,589
____________ ____________ ____________
Total expenses 8,483,615 9,017,745 6,190,911
____________ ____________ ____________
OPERATING INCOME 4,084,388 4,520,333 3,080,769
NON-OPERATING INCOME (EXPENSE):
Other income 252,967 437,694 1,404,500
Interest expense (807,423) (557,768) (744,627)
Interest expense - related parties (26,509) - (2,710)
Gain on disposal of assets 4,637 - 22,906
____________ ____________ ____________
(576,328) (120,074) 680,069
INCOME BEFORE INCOME TAXES 3,508,060 4,400,259 3,760,838
CURRENT TAX EXPENSE 1,057,640 330,427 80,804
DEFERRED TAX EXPENSE 10,864 - -
____________ ____________ ____________
INCOME FROM CONTINUING OPERATIONS 2,439,556 4,069,832 3,680,034
DISCONTINUED OPERATIONS (See Note 14):
(Loss) from Operations of Fountain
Power, Inc. and Mach Performance,
Inc.(Net of no income tax effect) - (2,389,480) -
Estimated income (loss) on disposal
of the operations of Fountain
Power, Inc. and Mach Performance,
Inc. (Net of $282,512 income tax
benefit) 300,931 (440,401) -
____________ ____________ ____________
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS 300,931 (2,829,881) -
____________ ____________ ____________
NET INCOME $ 2,740,487 $ 1,239,951 $ 3,680,034
____________ ____________ ____________
[Continued]
-3-
FOUNTAIN POWERBOAT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
[CONTINUED]
Year Ended June 30,
________________________________________
1998 1997 1996
____________ ____________ ____________
BASIC EARNINGS PER SHARE:
Continuing operations $ .51 $ .87 $ .81
Loss from operations of
discontinued segments - (.51) -
Estimated income (loss) on
disposal of discontinued
segments .07 (.09) -
____________ ____________ ____________
BASIC EARNINGS PER SHARE $ .58 $ .27 $ .81
____________ ____________ ____________
WEIGHTED AVERAGE SHARES
OUTSTANDING 4,751,779 4,664,251 4,528,608
____________ ____________ ____________
DILUTED EARNINGS PER SHARE:
Continuing operations $ .48 $ .80 $ .77
Loss from operations of discontinued
segments - (.47) -
Estimated income (loss) on disposal
of discontinued segments .06 (.09) -
____________ ____________ ____________
DILUTED EARNINGS PER SHARE: $ .54 $ .24 $ .77
____________ ____________ ____________
DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 5,110,090 5,093,289 4,573,153
____________ ____________ ____________
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, 1995 THROUGH JUNE 30, 1998 [RESTATED]
Common Stock Additional Treasury Stock Total
___________________ Paid-in Accumulated ________________ Stockholders'
Shares Amount Capital Earnings Shares Amount Equity
_________ ________ ___________ ___________ ______ ________ __________
BALANCE, June
30, 1995 4,543,608 $45,436 $ 9,282,305 $(6,012,583) 15,000 $110,748 $ 3,204,410
Net income 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 income for the
year ended June
30, 1997 - - - 1,239,951 - - 1,239,951
_________ _______ __________ _________ _______ _______ _________
BALANCE, June
30, 1997 4,725,108 47,251 10,517,740 (1,092,598) 15,000 110,748 9,361,645
Cancellation of
common stock previously
issued in acquisition
of Mach Performance
during June 1998
at $8.17
per share (52,500) (525) (428,400) - - - (428,925)
Issuance of common
stock upon exercise
of options at $3.58
per share by a
director of the
Company during
July 1997. 30,000 300 107,200 - - - 107,500
Net income for
the year ended
June 30, 1998 - - - 2,740,487 - - 2,740,487
____________ _______ ___________ _________ _______ _______ _________
BALANCE, June
30, 1998 4,702,608 $47,026 $10,196,540 $1,647,889 15,000 $110,748 $11,780,707
____________ _______ ___________ _________ _______ _______ ___________
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,
______________________________________
1998 1997 1996
__________ __________ __________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,740,487 $1,239,951 $3,680,034
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation expense 1,953,207 1,642,974 1,536,479
Gain on disposal of property,
plant, and equipment (4,637) - (22,906)
Net effect of Acquired Subsidiary (525,095) 1,041,250 -
Change in assets and liabilities:
Accounts receivable (848,007) 985,937 (954,830)
Inventories (3,139,783) 71,438 (601,469)
Prepaid expenses 642,413 (976,860) 50,104
Net tax asset (132,160) - -
Accounts payable 1,603,982 273,748 (86,832)
Accounts payable-related parties - - (4,769)
Accrued expenses 1,079,005 (53,946) (237,757)
Dealer territory service accrual 409,367 871,898 765,674
Customer deposits 200,925 81,434 (184,201)
Allowance for boat returns - (7,359) -
Warranty reserve - 90,000 10,000
Deferred sale net of deferred cost
of sales - - (14,148)
Net liabilities of discontinued
operations (110,085) 213,697 -
__________ __________ __________
Net Cash Provided by Operating
Activities $3,869,619 $5,474,162 $3,935,379
__________ __________ __________
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchase) sale of certificates of
deposits, net 696,155 (696,155) -
Proceeds from sale of property, plant
and equipment 6,581 - 31,203
Investment in additional molds and
related plugs 2,050,745) (1,684,274) (878,513)
Purchase of other property, plant
and equipment (6,745,936) (2,249,670) (604,367)
Increase in other assets (124,396) (306,030) (32,629)
____________ ____________ ____________
Net Cash (Used in) Investing
Activities $(8,218,341) $(4,936,129) $(1,484,306)
____________ ____________ ____________
[Continued]
-6-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
[CONTINUED]
Year Ended June 30,
________________________________________
1998 1997 1996
____________ ____________ ____________
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on
engine floor plan agreement $ - $(1,173,089) $ 638,904
Proceeds from issuance of common
stock 107,500 196,000 -
Proceeds from issuance of notes
payable and long-term debt 3,362,137 8,500,000 600,000
Repayment of long-term debt (738,434) (6,427,060) (2,820,165)
____________ ____________ ____________
Net Cash Provided by (Used in)
Financing Activities $ 2,731,203 $ 1,095,851 $(1,581,261)
____________ ____________ ____________
Net increase (decrease) in cash &
cash equivalents $(1,617,519) $ 1,633,884 $ 869,812
Beginning cash & cash equivalents
balance 2,994,503 1,360,619 490,807
____________ ____________ ____________
Ending cash & cash equivalents
balance $ 1,376,984 $ 2,994,503 $ 1,360,619
____________ ____________ ____________
Supplemental Disclosures of Cash Flow information:
Cash paid during the period for:
Interest:
Unrelated parties $ 767,867 $ 557,768 $ 744,627
Related parties 26,509 - 2,710
____________ ____________ ____________
$ 794,376 $ 557,768 $ 747,337
____________ ____________ ____________
Income taxes $ 825,570 $ 395,796 $ 42,641
____________ ____________ ____________
Supplemental schedule of Non-cash Investing and Financing
Activities:
For the year ended June 30, 1998:
The Company entered into an agreement whereby 52,500 shares of
stock previously issued in the acquisition of Mach Performance
at $8.17 per share were returned for cancellation.
The Company purchased an airplane for $1,375,000 by assuming a
$959,179 loan and issuing a $415,821 note payable (See Note 4).
The Company borrowed $47,079 for the purchase of a vehicle.
For the year ended June 30, 1997:
The Company issued 127,500 shares of common stock in the
acquisition of Mach Performance. Valued at $1,041,250 or $8.17
per share (See Notes 7 and 14).
For the year ended June 30, 1996:
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 the Company's
worldwide
network of approximately sixty dealers. The Company's offices and
manufacturing facilities are located in Washington, North
Carolina and the Company has been in business since 1979. The Company
employs approximately 370 people and is an equal opportunity,
affirmative action employer.
Principles of Consolidation: The consolidated financial
statements include the accounts of the Company and its wholly-
owned subsidiary, Fountain Powerboats, Inc. together with its
subsidiary, Fountain Power, 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 1998 and 1997
and were 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 as of 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, 1998 and 1997, the Company had
$905,115 and $3,590,658, 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
dealer's service performance rating. The Company has accrued
estimated dealer territory service awards at June 30, 1998 and
1997 of $2,046,939 and $1,637,572, 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 generally sells boats only to
authorized dealers and to the U.S. Government. A sale is
recorded when a boat is shipped to a dealer or to the
Government, legal title and all other incidents of ownership
have passed from the Company to the dealer or to the
Government, and an account receivable is recorded or payment
is received from the dealer, from the Government, or from the
dealer's third-party commercial lender. This is the method of
sales recognition in use by most boat manufacturers.
The Company has developed criteria for determining whether a
shipment should be recorded as a sale or as a deferred sale (a
balance sheet liability). The criteria for recording a sale
are that the boat has been completed and shipped to a dealer
or to the Government, that title and all other incidents of
ownership have passed to the dealer or to the Government, and
that there is no direct or indirect commitment to the dealer
or to the Government to repurchase the boat or to pay floor
plan interest for the dealer beyond the normal, published
sales program terms.
The sales incentive floor plan interest expense for each
individual boat sale is accrued for the maximum six month (180
days) interest payment period in the same fiscal accounting
period that the related boat sale is recorded. The entire six
months' interest expense is accrued at the time of the sale
because the Company considers it a selling expense (See Note
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 $1,166,633,
$1,267,822 and $849,627 for the years ended 1998, 1997 and
1996.
Earnings Per Share: In February 1997, the Financial
Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 128 "Earnings Per Share,"
which requires the Company to present basic and diluted
earnings per share, instead of the primary and fully diluted
earning per share. The computation of basic earning per share
is based on the weighted average number of shares outstanding
during the periods presented. The computation of diluted
earnings per shares is based on the weighted average number of
outstanding common shares during the year plus, when their
effect is dilutive, additional shares assuming the exercise of
certain vested and non-vested stock options and warrants,
reduced by the number of shares which could be purchased from
the proceeds. Prior period earnings per share and weighted
average shares have been restated to reflect the adoption of
SFAS No. 128. (See Note 15)
Stock Based Compensation: The Company accounts for its stock
based compensation in accordance with Statement of Financial
Accounting Standards 123 "Accounting for Stock-Based
Compensation". This statement establishes an accounting
method based on the fair value of equity instruments awarded
to employees as compensation. However, companies are
permitted to continue applying previous accounting standards
in the determination of net income with disclosure in the
notes to the financial statements of the differences between
previous accounting measurements and those formulated by the
new accounting standard. The Company has adopted the
disclosure only provisions of SFAS No. 123; accordingly, the
Company has elected to determine net income using previous
accounting standards.
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).
Reclassifications: The financial statements for years prior
to June 30, 1998 have been reclassified to conform with the
headings and classifications used in the June 30, 1998
financial statements.
Recently Enacted Accounting Standards: In June 1997, SFAS
Nos. 130, "Reporting Comprehensive Income" and 131,
"Disclosures about Segments of an Enterprise and Related
Information" were issued. SFAS No. 130 requires that all
items that are required to be recognized as comprehensive
income be reported in a financial statement that is displayed
with the same prominence as the other financial statements.
SFAS No. 131 sets standards for reporting information about
operating segments in the financial statements. SFAS No. 131
also sets standards for the disclosure about products, major
customers, and geographical areas. SFAS No. 132 provides for
disclosures about pensions and other post-retirement benefits.
Although such statements are not effective until fiscal years
beginning after December 15, 1997, had such statements been
adopted for the periods presented, their effect on the
financial statements would not have been significant.
-10-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Certificates of Deposit.
During the year ended June 30, 1998, the Company included in
interest income $4,940 from the sale of certificate of
deposits with an amortized cost of $701,095 on the date of the
sale and an amortized cost of $696,155 as of June 30, 1997.
The proceeds from the sale of the certificates of deposit were
used to provide additional working capital to the Company.
Note 3. Inventories.
Inventories consist of the following:
June 30,
__________________________
1998 1997
____________ ____________
Parts and supplies $ 4,510,373 $ 2,820,414
Work-in-process 2,235,394 882,323
Finished goods 451,773 335,020
____________ ____________
7,197,540 4,037,757
Reserve for obsolescence (120,000) (100,000)
____________ ____________
$ 7,077,540 $ 3,937,757
____________ ____________
Note 4. Property, Plant, and Equipment.
Property, plant, and equipment consists of the following:
Estimated
Useful June 30,
Lives __________________________
in Years 1998 1997
_______ ____________ ____________
Land and related improvements 10-30 $ 1,416,429 $ 1,301,721
Buildings and related improvements 10-30 6,720,762 6,559,930
Construction-in-progress N/A 3,955,544 815,793
Production molds and related plugs 8 13,669,394 11,658,760
Machinery and equipment 3-5 4,063,677 3,493,375
Furniture and fixtures 5 538,516 483,699
Transportation equipment 5 1,711,526 241,044
Racing boats 5 1,335,163 -
____________ ____________
$ 33,411,011 $ 24,554,322
Accumulated depreciation (14,254,156) (12,335,166)
____________ ____________
$ 19,156,855 $ 12,219,156
____________ ____________
Depreciation expense amounted to $1,953,207, $1,642,975 and
$1,536,479 for the years ended June 30, 1998, 1997 and 1996,
respectively.
-11-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Property, Plant, and Equipment. [Continued]
During fiscal 1998, the Company purchased an airplane from its
executive officer for $1,375,000 by assuming the loan on the
airplane from GE Capital Services, and issuing a note to the
Company's CEO. The balance owing to GE Capital Services and
to the Company's CEO on June 30, 1998, was $959,199 and
$415,821, respectively.
Construction costs of production molds for new and existing
product lines are capitalized and depreciated over an
estimated useful life of eight years. Depreciation starts
when the production mold is placed in service to manufacture
the product. The costs include the direct materials, direct
labor, and an overhead allocation based on a percentage of
direct labor. Production molds under construction amounted to
$914,886 and 219,227 at June 30, 1998 and 1997.
During Fiscal 1998 and 1996, the Company sold fixed assets and
realized gains amounting to $4,637 and $22,900, respectively.
During Fiscal 1997, the Company did not realize any gain or
loss from the sale or disposition of any of its fixed assets.
Note 5. Notes Payable - Related Party.
The Company issued a $415,821 note payable to an officer and
director of the Company, in connection with the purchase of an
airplane. The note accrues interest at a fixed rate of 8.5%,
which is payable monthly. The principle amount is due in a
balloon payment on March 31, 1999.
-12-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Long-term Debt and Pledged Assets.
The following is a summary of long-term debt at:
June 30,
_____________________
1998 1997
__________ ________
Loan payable to General Electric Capital Corporation
assumed on an airplane purchased by the Company from
an officer and director during September, 1997 with a carrying
value of $959,179 on that date. The loan has a variable
interest rate with the rate being 8.35% on June 30, 1998.
Monthly payments of $15,181. Matures August 1, 2004. The
Loan was subsequently amended and restated. (See Note 16) $872,881 $ -
7.15% loan payable to 1st Citizens Bank for the purchase
of a vehicle, monthly payments of $1,055 through October,
2002, secured by the vehicle purchased. 47,079 -
Amounts borrowed against the cash surrender value of key-
man life insurance policies during June 1998, fixed interest
rate of 8% on $356,476 and variable interest rate of 7.39%
at June 30, 1998 on the remaining $75,202, monthly payments
of $10,000. 431,678 -
$10,000,000 credit agreement with General Electric Capital
Corporation. (See Below). 9,129,622 8,273,378
__________ __________
10,481,260 8,273,378
Less:Current maturities included in current liabilities:(981,365) (595,607)
__________ _________
$9,499,895 $7,677,771
__________ _________
On December 31, 1996, the Company concluded a $10,000,000
credit agreement with General Electric Capital Corporation.
Under the terms of the new credit agreement, the Company
refinanced substantially all of its interest bearing debts and
had additional funds made available to it for expansion.
Initially, the Company borrowed $7,500,000 to primarily
refinance existing debts. All of the Company's prior interest
bearing debts to MetLife Capital Corporation, Deutsche
Financial Services, GE Capital Corporation, Branch Bank &
Trust Leasing Corp., and other smaller creditors were paid off
entirely. During 1998 and 1997 the Company borrowed the
additional $1,500,000 and $1,000,000, respectively, to fund
plant and equipment additions. The credit agreement has a
variable interest rate with the rate ranging from 8.06% to
8.29% during 1998, with a rate of 8.29% on June 30, 1998. The
agreement calls for monthly payments of $123,103 and has a ten-
year amortization with a five-year call. The credit agreement
is secured by all of the Company's real and personal property
and by the Company's assignment of a $1,000,000 key man life
insurance policy. The credit agreement was subsequently
amended and restated (See Note 16).
-13-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Long-term Debt and Pledged Assets. [Continued]
The estimated aggregate maturities required on long-term debt
at June 30, 1998 are as follows:
1999 $ 981,365
2000 1,063,643
2001 1,152,824
2002 6,892,694
2003 192,870
Thereafter 197,864
____________
$10,481,260
____________
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
subsequently filed a lawsuit asking for the rescission of the
acquisition agreement from Mach Performance, Inc. to recover
the 127,500 restricted common shares. During July, 1998 the
parties entered into a settlement agreement resulting in the
recovery and cancellation of 52,500 shares of common stock.
(See Note 14).
Restatement: During the year ended June 30, 1998, and
reflected in the accompanying financial statements, the
Company effected 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 issued 30,000 options to a
former officer of Fountain Power, Inc. and a former director
of the Company under the Company's qualified 1986 employee
incentive stock option plan. During June 1998, the options
were cancelled in connection with the settlement agreement
(See Note 14).
-14-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Common Stock, Options, and Treasury Stock. [Continued]
On June 21, 1995, the shareholders voted to adopt the 1995
stock option plan. The plan allowed up to 450,000 common
stock options to be granted by the Board of Directors to
employees or directors of the Company. On August 4, 1995, the
Board of Directors voted to grant the 450,000 stock options to
Mr. Reginald M. Fountain, Jr. at $4.67 per share, exercisable
for 10 years from the date granted, on a non-qualified basis.
As of June 30, 1998, none of these options have been
exercised.
Effective March 23, 1995, the Board of Directors authorized
the issuance of 30,000 stock options to each of the Company's
four outside directors at $3.58 per share on a non-qualified
basis. During the year ended to June 30, 1998, a director
exercised 30,000 stock options for $110,000. During Fiscal
1997, a director exercised his options for 24,000 shares for
$86,000 and assigned, with the specific consent of the
Company's Board of Directors, the remaining 6,000 options to
another party.
A summary of the status of the options granted under the
Company's stock option plans and other agreements at June 30,
1998, 1997 and 1996, and changes during the periods then ended
is presented in the table below:
1998 1997 1996
____________________ _______________ ________________
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
_________ _______ _____ ______ _______ _______
Outstanding at
beginning
of period 606,000 4.63 630,000 $6.54 198,750 $4.01
Granted - - 30,000 8.17 450,000 4.67
Exercised (30,000) 3.58 (54,000) 3.63 - -
Forfeited - - - - - -
Canceled (30,000) 8.17 - - (18,750) 7.44
_______________________________________________________
Outstanding at end
of Period 546,000 4.50 606,000 $4.63 630,000 $4.38
______________________________________________________
Exercisable at end
of period 546,000 4.50 576,000 $4.45 630,000 $4.38
_______________________________________________________
Weighted average
fair value of options
granted - - 30,000 $ .28 450,000 $ .22
_______________________________________________________
The fair value of each option granted is estimated on the date
granted using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants during
the years ended June 30, 1997 and 1996, respectively: risk-free
interest rates of 6.6% and 6.3%, expected dividend yields of
zero for all periods, expected lives of 4 and 2 years, and
expected volatility of 83% and 85%. No options were granted
during the year ended June 30, 1998.
-15-
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 outstanding under the
Company's stock option plans and other agreements at June 30,
1998 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 96,000 6.9 years 3.67 96,000 3.67
$4.67 450,000 7.1 years 4.67 450,000 4.67
The Company accounts for its option plans and other option
agreements under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related
interpretations. Accordingly, since all options granted were
granted with exercise prices at market value or above, no
compensation cost has been recognized in the accompanying
financial statements. Had compensation cost for these options
been determined based on the fair value at the grant dates for
awards under these plans and other option agreements
consistent with the method prescribed by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation", the Company's net income and earnings per
common share would have been the proforma amounts as indicated
below:
Year Ended June 30,
________________________________
1998 1997 1996
__________ _________ _________
Net Income As reported $2,740,487 $1,239,951 $3,680,034
Proforma $2,740,487 $1,234,605 $3,617,601
Earnings
per share As reported $.58 $ .25 $ .81
Proforma $.58 $ .25 $ .80
Treasury Stock: The Company holds 15,000 shares of its common
stock. This common stock is accounted for as treasury stock
at its acquisition cost of $110,748 ($7.38 per share) in the
accompanying financial statements.
Note 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.
-16-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Income Taxes. [Continued]
At June 30, 1998 and 1997, the totals of all deferred tax
assets were $1,328,619 and $1,462,432. The totals of all
deferred tax liabilities were $1,196,459 and $1,037,362. 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 $0 and $425,070 as of June
30, 1998 and 1997, respectively, which have been offset
against the deferred tax assets. The net decrease in the
valuation allowance during the years ended June 30, 1998 and
1997, were $425,070 and $599,075.
The Company has no unused operating loss carryforwards at June
30, 1998.
As a result of the federal alternative minimum income tax, the
Company incurred current tax expense amounting to $258,371 for
Fiscal 1997 and $80,804 for Fiscal 1996. The components of
federal income tax expense from continuing operations consist
of the following:
Year Ended June 30,
___________________________________
1998 1997 1996
____________________________________
Current income tax expense:
Federal $ 783,508 $258,371 $ 80,804
State 274,132 72,056 -
____________________________________
Net current tax expense $1,057,640 $330,427 $ 80,804
____________________________________
Deferred tax expense (benefit) resulted from:
Excess of tax over financial
accounting depreciation. $303,782 $144,013 $ (18,130)
Warranty reserves - (42,300) (4,200)
Accrued vacations (3,850) (8,107) (3,765)
Dealer incentive reserves (293,662) (37,500) 42,000
Bad debt reserves - (28,686) 1,260
Deferred sales and cost, net - - 5,942
Excess contributions carryforwards - - -
Inventory adjustment-Sec.263A (131,941) (6,366) (12,304)
Decrease in NOL carryforwards 204,380 1,014,168 1,646,237
Decrease in valuation allowance (316,948) (599,075) (1,573,833)
Allowance for obsolete inventory (7,800) 3,000 (4,200)
Alternative minimum tax credits 186,947 (256,982) (79,007)
Reserve for loss on disposition - (171,756) -
Investment tax credits 86,294 - -
Allowance for boat repurchases - (10,409) -
Accrued executive compensation (16,338) - -
_______________________________________
Net deferred tax expense $ 10,864 $ - $ -
_____________________________________
Deferred income tax expense results primarily from the
reversal of temporary timing differences between tax and
financial statement income.
-17-
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,
_____________________________________________
1998 1997 1996
______________________________________
Computed tax at the expected
federal statutory rate. 34.00% 34.00% 34.00%
State income taxes, net of
federal benefit 5.00 5.00 5.28
Compensation from stock options (2.77) (3.85) -
(Increase) decrease in NOL
carryforwards 4.86 (14.48) (38.82)
Officer's life insurance .36 .78 -
Valuation allowance (9.03) (16.08) -
Net effect of alternative minimum
taxes (.34) .03 1.86
Other (1.62) 2.11 (.17)
_______________________________________
Effective income tax rates 30.46% 7.51% 2.15%
_______________________________________
The temporary differences gave rise to the following deferred
tax asset (liability):
June 30,
___________________________
1998 1997
________________________
Excess of tax over financial
accounting depreciation $(1,196,460) $(1,037,362)
Warranty reserve 214,500 214,500
Obsolete inventory reserve 46,800 39,000
Accrued vacations 51,914 48,063
Allowance for boat repurchases 96,972 97,500
Dealer incentive reserves 352,162 58,500
Bad debt reserve 23,349 40,026
Reserve for loss on disposition - 171,756
Inventory adjustments - Sec. 253A 269,652 124,992
NOL carryforwards - 204,380
Alternative minimum tax credits 259,233 377,421
Investment tax credits - 86,294
Accrued executive compensation 16,338 -
Note 9. Research and Development.
The Company expenses the costs of research and develop for new
products and components as the costs are incurred. Research
and development costs are included in the cost of sales and
amounted to $575,918 for fiscal 1998, $635,652 for Fiscal 1997
and $234,425 for Fiscal 1996.
-18-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $1,031,611 for
fiscal 1998, $1,009,285 for Fiscal 1997 and $704,736 for
Fiscal 1996. They are included in the accompanying
consolidated statements of operations as part of selling
expense. At June 30, 1998 and 1997 the estimated unpaid
dealer incentive interest included in accrued expenses
amounted to $160,000 and $150,000, 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, 1998 and 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 at each year end. 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, 1998 and 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.
Litigation: A suit was filed against the Company on May 1,
1998 in the Circuit Court for Lake County, Illinois. The
plaintiff seeks to collect fees of $6,641 for advertising
services allegedly earned from employment with the Company. A
motion to dismiss the suit has been filed on the Company's
behalf, due to incorrect designation of the defendant in this
matter. The Company intends to vigorously defend its
interests in this matter.
-19-
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 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. 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 late 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: A suit was filed against the Company in District
Court, Travis County, Austin, Texas on February 5, 1998,
alleging that the Company wrongfully attempted to terminate
its dealer agreement with one of its dealers ("Dealer") in
Texas, or breached the agreement by attempting to change to a
different dealer in the Austin, Texas area. In an Answer
filed on March 10, 1998, the Company asserted that on February
24, 1998, it had filed a related declaratory judgement action
in Beaufort County Superior Court, Washington, North Carolina,
and that the dealer agreement by its terms was governed by
North Carolina law. The company asked the Texas Court to
abate the Texas suit pending the outcome of the North Carolina
declaratory judgement action. On May 6, 1998, the Texas
District Court ordered the Texas case abated pending the
results of the North Carolina action, but allowed discovery to
proceed in the Texas case. In the North Carolina action, the
Company's position is that the dealer agreement is non-
exclusive, allowing the Company to have other dealers in the
Austin, Texas area, and the company is seeking a declaration
judgement that the Dealer terminated the agreement or,
alternatively, that it is bound by the agreement and should
fulfill its inventory-stocking obligation. A court-mediated
settlement conference has been scheduled for August 11, 1998.
The client intends to vigorously defend its interests in this
matter, unless an 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 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. Shortly after the
Company filed suit in North Carolina, the Player and
affiliated company filed suit against the Company and its
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 without
prejudice. The North Carolina suit then proceeded through the
discovery stage and, as a result of a court mediated
settlement conference held during June 1998, the parties
reached a confidential settlement of the matter, which was
approved by the Court. A formal settlement agreement has been
drafted and currently is being circulated to counsel for the
various parties for their comments. The final settlement is
to be concluded during September, 1998.
Product Liability and Other Litigation: There were various
product liability lawsuits brought against the Company at June
30, 1998. The Company intends to vigorously defend its
interests in these matters. The Company carries sufficient
product liability insurance to cover attorney's fees and any
losses which may occur from these lawsuits over and above the
insurance deductibles. The Company is also involved from time
to time in other litigation through the normal course of its
business. Management believes there are no such undisclosed
claims which would have a material effect on the financial
position of the Company.
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.
-21-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Commitments and Contingencies. [Continued]
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 post-retirement benefits plans in effect.
Note 11. Export Sales.
The Company had export sales of $4,583,542 for Fiscal 1998,
$2,167,840 for Fiscal 1997 and $1,052,816 for Fiscal 1996.
Export sales were to customers in the following geographic
areas:
Year Ended June 30,
______________________________________
1998 1997 1996
_______________________________________
Americas $2,639,523 $1,047,913 $ 658,738
Asia 1,834,524 367,126 -
Middle East and Europe. 109,495 752,801 394,078
_______________________________________
$4,583,542 $2,167,840 $1,052,816
_______________________________________
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,
____________________________
1998 1997 1996
____________________________
Apartments rentals $ 6,717 $ 17,260 $ 15,380
R.M. Fountain, Jr.- airplane rentals 107,312 296,498 155,499
R.M. Fountain, Jr. - interest on loans 26,509 - 2,710
R.M. Fountain, Jr. - other misc. - 500 2,000
_____________________________
$ 140,538 $314,258 $175,589
_____________________________
During the year ended June 30, 1998 the Company purchased an
airplane from Mr. Fountain for $1,375,000 by assuming the loan
on the airplane from GE Capital Services for $959,179, (See
Note 6) and issuing a note to Mr. Fountain in the amount of
$415,821 (See Note 5).
As of June 30,1998 and 1997 the Company had receivables and
advances from employees of the Company amounting to $77,574
and $165,936 which includes $48,624 and $147,081 from Mr.
Fountain.
-22-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Transactions with Related Parties. [Continued]
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 $288,915, $547,436 and $265,985 for the years
ended June 30, 1998, 1997 and 1996 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 14).
During the years ended 1997 and 1996 the Company paid $1,709
and $11,079 in legal fees to a firm associated with a director
of the Company. There were no such payments during 1998.
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 and $610,420 for Fiscal 1996. The consulting
agreement expired on June 30, 1997 and has not been re-
negotiated.
Note 13. Concentration of Credit Risk.
Concentration of credit risk arises due to the Company
operating in the marine industry, particularly in the United
States. For Fiscal 1998 one dealer accounted for 6.7% of
sales, another for 6.3%, and one other dealer for 5% of sales.
For Fiscal 1997 one dealer accounted for 6.6% of sales and two
other dealers each accounted for more than 5% of sales. For
Fiscal 1996 one dealer accounted for 10.2% of sales and three
other dealers each accounted for more than 5% of sales.
Note 14. Acquisition and Discontinued Operations.
On October 11, 1996 Fountain Power, Inc acquired Mach
Performance, Inc. 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 of
the Company 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 moved from Lake Hamilton, Florida to the Company's plant
site near Washington, North Carolina in December, 1996.
-23-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14. Acquisition and Discontinued Operations. [Continued]
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 for June 30, 1997 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 reclassified $539,457 in fixed assets to net
liabilities of discontinued operations and accrued a $440,401
for estimated future losses expected to be incurred in the
disposition.
The Company filed suit on July 21, 1997, against the former
officer and director, his wife, Mach, Inc., and Mach
Performance, Inc. seeking a rescission of the Mach
Performance, Inc acquisition and merger agreement and
voidance of the resulting transaction on grounds of fraud and
material breach of contract. The former director and his wife
filed counterclaims alleging breach of contract regarding the
failure to merge the Company and regarding options issued to
the former employee and director. In a related action, a
corporate affiliate of the former director was sued by the
Company in a declaratory judgement action filed on September
3, 1997, regarding a racing sponsorship contract. The parties
involved reached a confidential settlement of both lawsuits
during June 1998, and settlement documents are currently being
circulated for execution. As a result of the settlement
agreement, 52,500 shares of common stock valued at $428,925
have been returned and cancelled by the Company and the 30,000
options issued in connection with the former officer's
employment were cancelled.
During the year ended June 30, 1998, the Company adjusted it
estimates for loss on disposal resulting in a gain on the
disposal of discontinued operations of $290,512 (net of a tax
benefit of $272,093). The gain was a result of the return of
52,500 shares of common stock valued at $428,925, less
associated legal fees of approximately $486,399 plus
adjustments to the estimated loss on disposal of approximately
$75,893.
The following is a condensed proforma statement of operations
that reflects what the presentation would have been for the
years ended June 30, 1998 and 1997 without the
reclassifications required by "discontinued operations"
accounting principles:
1998 1997
_________________________
Net Sales $50,652,037 $ 50,954,753
Cost of goods sold (38,084,034) (39,132,978)
Other operating expenses (8,894,121) (10,127,760)
Other income (expense) (147,403) (123,637)
Provision for taxes (785,992) (330,427)
_________________________
Net income $2,740,487 $1,239,951
_________________________
Earnings per share $ .58 $ .25
_________________________
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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, 1998
and 1997 consisted of the following:
1998 1997
________________________
Accounts receivables $ - $ 4,174
Prepaid expenses - 14,371
Equipment, net - 539,457
Accounts payable - (226,332)
Warranty & returns reserve(98,646) (100,000)
Customer deposits (4,966) (4,966)
Estimated loss on disposal - (440,401)
__________ _________
$(103,612) $(213,697)
__________ _________
Note 15 - Earnings Per Share.
The following data shows the amounts used in computing
earnings per share and the effect on income and the weighted
average number of shares of potential dilutive common stock
for the years ended June 30, 1998, 1997 and 1996:
For the years ended June 30,
_____________________________________
1998 1997 1996
_____________ __________ __________
Income from continuing
operations available to
common stockholders $2,439,556 $4,069,832 $3,680,034
_____________ __________ __________
Weighted average number of
common shares outstanding
used in basic earnings per
share 4,751,779 4,664,251 4,543,608
Effect of dilutive securities:
Stock options 358,311 429,038 209,545
Weighted number of common
shares and potential dilutive
common shares outstanding
used in dilutive earning
per share 5,110,090 5,093,289 4,573,153
_____________ __________ __________
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FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16. Subsequent Events.
During September, 1998 the Company concluded negotiations for
a new $4,000,000 promissory note with Transamerica Business
Credit Corporation which included restatement and amendment of
certain existing promissory notes with General Electric
Capital Corporation ("GECC"). An omnibus Agreement was
entered into which provides that all the underlying collateral
and encumbered property would apply ratably to all of the
Notes Payable. The $4,000,000 promissory note provides for
thirty-nine monthly principal payments in the amount of
$100,000 beginning October 1, 1998 with a final payment of the
entire outstanding payment due on January 2, 2002. Accrued
interest will be paid monthly in addition to the principal
payment. Interest will be calculated at 2.7% per annum above
the published LIBOR Rate (London Interbank Offered Rates) and
is calculated monthly. The Company executed a restated and
amended Note to GECC in the amount of $9,007,797, which
replaces a previous note with the same outstanding balance.
The note provides for thirty-nine monthly payments of $123,103
which includes principal and interest. A final payment of the
outstanding balance will be due on January 2, 2002. Interest
is calculated at 2.7% per annum above the published LIBOR
Rate. The Company also executed a restated and amended Note to
GECC in the amount of $855,050, which replaces a previous note
with the same outstanding balance. The note provides for
seventy monthly payments of $15,181 which includes principal
and interest. A final payment of the outstanding balance will
be due on August 1, 2004. Interest is calculated at 2.7% per
annum above the published LIBOR Rate. All of the notes
provide for prepayment penalties according to a predefined
time table.
-26-