Fountain Powerboat Industries 10-K 2007
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended June 30, 2007
Commission File Number: 0-14712
FOUNTAIN POWERBOAT INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
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:
Securities registered pursuant to Section 12 (b) of the Act:
Indicate by check mark if the registrant is a well known, seasoned issuer, as defined in Rule 405 of the Securities Act.: ¨ Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes x No
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 past 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 days. 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
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (as defined in Rule 12b-2 of the Act): Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
As of December 31, 2006 the aggregate market value of the Registrant’s voting common equity held by non-affiliates was $9,227,467.
As of September 27, 2007, the number of outstanding shares of Registrant’s Common Stock (excluding shares treated as treasury shares) was 4,829,275.
Portions of the Registrant’s definitive proxy statement to be distributed in connection with its next Annual Meeting of Shareholders are incorporated by reference into Part III of this Report.
Item 1. Business.
Fountain Powerboat Industries, Inc. (the “Company”), through its wholly owned subsidiary, Fountain Powerboats, Inc. (the “Subsidiary”), designs, manufactures and sells internationally recognized recreational offshore sport boats, sport fishing boats and sport cruisers that target a segment of the recreational powerboat market where speed, performance, quality and safety are the primary purchase criteria. The Company sells its boats and ancillary products through a worldwide network of 32 domestic and 24 international dealers.
Fountain Powerboats, based upon an innovative, award-winning design, are well branded within the boating industry. The Company markets the celebrity of its Chairman, Chief Executive Officer and founder, Reginald M. Fountain Jr., an internationally recognized designer, engineer and builder of high speed powerboats and holder of three world titles and seven national racing championships.
Fountain continuously incorporates new and improved designs in its boats. The Company believes that the best boats come from combining an intuitive management team with hardcore experience gained by boat racing in offshore conditions. Each boat is tested in the Pamlico River, located alongside the factory, before it is shipped to its new owner. This testing is unique to Fountain Powerboats, as most boat manufacturers are not located on or near the water.
Fountain maintains that its boats, with their innovative design and unitized construction, are among the fastest, smoothest, safest and best-handling boats of their kind. The expansive product line of sport cruisers, sport fishing and sport boats is based upon a deep V-shaped fiberglass hull for speed and fuel efficiency that uses less horse power. For superb handling and performance, the boats are designed with a notched transom and pad keel running surface and engineered with an innovative step-bottom design.
The Company has twenty different models that fall into three categories — express cruisers, sport fishing boats and sport boats. Initially known for its sport boats, Fountain Powerboats has evolved into a company with a wide variety of boats for the most discriminating boater.
Fountain Powerboats has captured market share approaching 50 percent of the high performance sport boat market and offers eight different sport boat models ranging from the 29’ Fever to the 47’ Lightning. These V-bottom boats carve turns at all speeds, even when being propelled at over 100 MPH by twin or triple Mercury 525 engines.
Fountain Powerboats has become well known for its upscale, high performance and elegant Express Cruisers which redefine the term “performance cruiser”. The cruiser market had been growing as the populace ages and begins to look for not only speed but luxurious amenities for the entire family. Fountain Powerboats, with its 38’ and 48’ Express Cruisers is poised with the right products to capitalize on the niche of this market that desires high performance.
A long established water sport is continuing to grow in popularity – tournament fishing. With the advent of popular sport fishing television shows and two quality sport fishing competition programs, the American Striper Association Tournaments and the Southern Kingfish Association Tournaments, the Company has significantly expanded its line of sport fishing boats, building a competitive edge in this fast growing market.
Demand for Fountain sport fish boats is on the increase. These boats are designed for the fishing aficionado who demands speed and superb amenities for his family and friends. Entering the tournament fishing market in the late 1980’s, and now considered “the boat to beat”, the Company’s fish boat product line boasts nine different models ranging from the 23’ Center Console (“CC”) to the 38’ Sport Fish Cruiser outboard.
Fountain participates in Poker Run events, which is an increasingly popular sporting event that involves large numbers of recreational boat owners. These events are sponsored by local organizations, generally including one of the Company’s dealers, and present a great opportunity to showcase its boats to an affluent audience.
During Fiscal 2007, the Company introduced a redesigned 35’ sport boat model and a new 38’ outboard cruiser fish boat model at the Company’s annual dealer meeting in October 2006 and delivered a redesigned 38’ sport boat cabin in late spring.
The 35’ sport boat was totally redesigned, including a staggered engine configuration that significantly improved performance to speeds in excess of 100 MPH. The 35’ and 38’ sport boats were outfitted with a new cabin layout that will be standard in all of the Company’s sport boats. The new cabin will be installed in the 42’ and 47’ sport boats during Fiscal 2008. The 38’ sport boat captured the coveted Powerboat Magazine “Offshore Boat of the Year” award in Fiscal 2007.
A new 38’ sport fish cruiser outboard boat was introduced at the dealer meeting in October, 2006. It is a versatile boat that can be used as a fish boat or for family cruising, with triple 275HP Verado engines it will run at speeds up to 64 MPH and cruises at 40MPH at a fuel efficient 1.4 MPG.
The 33’ sport fish cruiser outboard hull will be redesigned in Fiscal 2008 to provide that model an even smoother and more stable ride in all types of water conditions, at all speeds, and with twin outboard Mercury Verado engines to match the performance of the 38’ sport fish cruiser outboard.
A new 32’ sport boat model will be launched during Fiscal 2008, complete with the redesigned Lightning series interior and Mercury 425HP stern drives engines. It will perform at speeds approaching 90 MPH.
In Fiscal 2008 the 48’ express cruiser will be available with twin Cummins diesel engines. This option will reduce the overall cost of the boat and operating costs while maintaining high performance operating speeds.
The chart below shows the number of boats completed and shipped during the last three fiscal years by product line.
As of June 30, 2007 Fountain Powerboats had a backlog of firm orders for 76 boats, totaling sales of $16.8 million, all of which are expected to be completed during Fiscal 2008. At June 30, 2006, the sales backlog was 200 boats, totaling $43 million.
Research and Development.
Staying ahead of its competition, Fountain’s employees conduct ongoing research and development pertaining to the design of its boats’ hulls and decks and its small parts production. The Company invested approximately $1 million on the development of new plugs and molds during Fiscal 2007. Over the past three fiscal years, the investments into product development were as follows:
For fiscal 2008, design, research and development planned expenses are estimated to be $792,000, and plug and mold construction expenditures are estimated to be $900,000. Primarily, these expenditures will go to upgrading the Company’s line of sport boats in an effort to maintain its market share and enhancing its line of sport fish cruisers to continue to expand its presence in that profitable and more stable market.
Manufacturing capacity of the facility can accommodate 40 to 45 boats in various stages of construction at any one time. Construction time is approximately three to eight weeks, dependent on the product mix.
As a result of manufacturing productivity improvements and the restructuring of the production work force to be compatible with our reduced production rate our total headcount was reduced by 120 employees, primarily from attrition, during Fiscal 2007. The Company currently has the capacity to manufacture approximately 350 sport and fish boats, and 60 cruisers per year of a comparable product mix as was manufactured in fiscal 2007.
The manufacturing process is labor intensive and requires seasoned craftsmen. The process for manufacturing the hull and deck of a Fountain Powerboat is done by hand. Vinylester resins and high quality stitched, bi-directional and quad-directional fiberglass is hand laid over a foam core in molds designed and constructed by the Company’s engineers and tooling department. This artisan method creates a composite structure with strong outer and inner skins and a thicker, lighter core in between, resulting in superior strength and a finer appearance, compared to mechanically blown, chopped fiberglass used by other manufacturers.
The resin used to bind the composite structure is vinylester, which is stronger, better bonding, blister resistent and more flexible than the polyester resins used by most fiberglass boat manufacturers. Decks are bonded to the hull using a combination of bonding agents, rivets, screws and fiberglass to achieve a strong unitized construction. This manufacturing process was developed and improved upon as a result of the Company’s many years of racing experience. When a Fountain Powerboat is traveling at 177 MPH through the water, this manufacturing process provides the speed and safety the Company’s boats are known for.
As one of the most highly integrated manufacturers in the marine industry, Fountain manufactures many metal, plexiglass, plastic, and small parts (such as fuel tanks, seat frames, instrument panels, bow rails, brackets, T-tops and windscreens) to assure that its rigid quality standards are met and, if a design change is needed to improve a boat, it can be made immediately.
The Company also manufactures all of its upholstery to its own custom specifications and benefits from receiving these parts just in time for assembly. All other component parts and materials used in the manufacture of the Company’s boats are readily available from a variety of suppliers at comparable prices exclusive of discounts. The Company purchases certain supplies and materials from a limited number of suppliers in order to obtain the benefit of volume discounts.
Recreational powerboats must be certified by the manufacturer to meet U.S. Coast Guard specifications. Their safety is subject to federal regulation under the Boat Safety Act of 1971, as amended, pursuant to which boat manufacturers may be required to recall products for replacement of parts or components that have demonstrated defects affecting safety. Boats manufactured for sale in the European Community must meet CE Certification Standards.
The Company warrants the boat hull and deck structure against defects in material and workmanship for a period of six years. Warranty costs, if any, on other components of the boats are generally absorbed by the original component manufacturer. Warranty costs can vary depending on the size and number of components in the boats sold. The Company focuses on high quality manufacturing programs and processes, including actively monitoring the quality of our component suppliers and managing the dealer and customer warranty experience and reimbursements. Our estimated warranty obligation is based upon the warranty terms, the enforcement of those terms over time, defects, repair costs, and the volume and mix of boats sold. The estimate of warranty costs is regularly analyzed and is adjusted based on several factors including the actual claims that occur by model and model year. The following is a table of the Company warranty expense for fiscal years 2007 and 2006:
Sales and Marketing.
The Company sells its products through a worldwide network of 32 domestic dealers and 24 international dealers. While most of these dealers are not exclusive, the Company uses discretion in locating new dealers in an effort to protect the interests of its existing dealer network. To attract and keep the highest producing dealers, Fountain Powerboats offers a sales training program through its Fountain University.
The Fountain University program trains the Company’s dealers’ salespersons on: How to Apply Features and Benefits, Selling in Today’s Environment, How to Overcome Objections and Close the Sale, and How to Properly Deliver a Boat. The program also includes in-water, high performance boat training for the salespersons.
The following is a table of sales by geographic area for the last three fiscal years.
Fountain Powerboats targets a significant portion of revenue for its branding and advertising programs in the U.S. and internationally. The Company continues to expand its dealer network into Europe, South America and the Middle East. The Company’s International sales were $8,818,987 for fiscal 2007 and $8,291,640 for fiscal 2006. The Company requires payment in full or an irrevocable letter of credit from a domestic bank before it will ship a boat out of the U.S.
In Fiscal 2007, one dealer accounted for 13.6 percent of sales, one accounted for 9 percent of sales and four each accounted for 5.0 to 5.5 percent of sales. In fiscal 2006, one dealer accounted for 10.9 percent of sales, one accounted for 8.5 percent of sales and four each accounted for 5.8 to 6.3 percent of sales. In fiscal 2005, one dealer accounted for 10.5 percent of sales, one accounted for 6 percent of sales and three each accounted for 5.4 percent of sales.
While the loss of any particular dealer could have an adverse affect on sales, the Company believes it could find other dealers within the same geographical area to replace a lost dealer. Sales continue to grow through existing dealers and the Company continues to add new dealers with the goal of reducing the concentration risk in its distribution channel.
The Company has a strategically located team of sales representatives supporting existing dealer locations and developing new dealers in targeted locations. The sales team, headed up by the President, is responsible for developing a dealer organization for sport boats, sport fishing boats and express cruisers. The product line is extremely diverse and requires specialized sales training and service and support, so the Company’s strategy is to develop individual dealers for each of its product lines.
Fountain Powerboats does not manufacture to inventory, as its boats are pre-sold to dealers before entering the production line. The Company can ship to dealers on a cash-on-delivery basis or through floor plan financing programs in which the Company participates on behalf of its dealers. For Fiscal years 2007, 2006 and 2005, the Company has paid the interest on the floor plan, for a certain period of time, as a sales promotion program.
The dealer’s responsibility is to establish a line of credit with one or more third-party lenders for the purchase of its showroom inventory. When a dealer purchases a boat utilizing the floor plan arrangement, it draws against its line of credit and the lender pays the invoice for the boat directly to Fountain Powerboats, typically within five business days. When the boat is sold to the retail customer, the dealer repays the lender, restoring his credit line. The Company, along with most major boat manufacturers, will repurchase its boats from a lender who has repossessed them from a dealer, if the lender returns the boats to Fountain Powerboats in a new or like-new condition. The Company has no material obligation to repurchase boats from its dealers.
The marketing of boats to retail customers is the responsibility of the dealer, whose efforts are complemented by Fountain Powerboats’ advertising in boating magazines, participating in boat shows and its Sales Service Bureau responding to and tracking leads from advertisements, boat shows and internet inquiries. To assist in brand recognition, the Company has developed racing programs to participate in the major classes of offshore powerboat races in which many of Fountain’s single and twin engine racing boats continue to hold their respective world speed records. Fountain Powerboats founder and CEO Reggie Fountain, who has won numerous races in both factory and customer owned boats and has set numerous world speed records in both, in August 2004 set a V-bottom World Speed Record with a phenomenal 171.883 MPH on a Fountain 42’ Lightning.
To enhance brand recognition, Fountain Powerboats sponsors outstanding sport fishermen who own Fountain boats and fish in tournaments organized by the Southern Kingfish Association (SKA) and the American Striper Association (ASA). The Company’s fishing teams of the SKA and ASA are captained by world class anglers who can afford to purchase any boat, but choose to run a Fountain Powerboat. The Company supports the ASA tournaments held throughout the Northeast in areas ranging from Virginia to Maine, and the SKA tournaments held throughout the South and Southwest, from North Carolina to Texas. The Fountain team’s winning records have given its sport fishing boats favorable exposure to serious sport fishermen looking for superior performance.
Competition within the powerboat manufacturing industry is intense. The high performance sports, fish and cruiser boat markets, which comprises only a small segment of all boats manufactured, are significant markets in terms of total dollars spent. The manufacturers who compete with the Company in these market segments include:
The Company believes that in its market segments buyers select boats based on speed, performance, quality, image and safety, with style and price being secondary considerations.
Market demographics and industry experts indicate the fish boat market offers the best growth potential within the boating industry. Fountain Powerboats continues to expand its family of fish boats to meet the rising demand in this significant high-growth market. The Company introduced a new model in 2007 and plans to upgrade one of its existing models in 2008.
The Company had experienced strong demand for its higher priced cruisers prior to Fiscal 2007. This is due in part to a populace that not only wants speed but requires the additional space to bring along the family. The Company believes that a large number of current product owners, many of whom have purchased multiple and increasingly larger boats from the Company, provide a target market for the fast-growing cruiser segment. Sales of this product line were weak during the first three quarters of 2007 but made a revival in the fourth quarter.
As of June 30, 2007, the Company had 328 employees, of which eight were executive and management personnel. Twenty-two were engaged primarily in administrative positions, such as accounting, human resources, marketing and sales. None of the Company’s employees are party to a collective bargaining agreement. The Company considers its employee relations to be excellent. The Company is an equal opportunity employer.
Item 1A. Risk Factors.
General economic conditions in the United States may adversely affect the Company’s results. The Company’s revenues may be affected by U. S. and international market conditions and consumer confidence. Any substantial deterioration in general economic conditions which diminishes consumer confidence in any of the regions where the Company competes could reduce the Company’s sales and adversely affect its business and financial results.
The Company’s profitability may suffer as a result of competitive product offerings and pricing pressures. The introduction of lower-priced competitive products by other companies can hurt the Company’s competitive position. Such competitive pricing may limit the Company’s ability to increase prices in response to raw material and other cost increases.
The Company’s financial results may be adversely affected if the Company is unable to maintain effective distribution. The Company’s products are sold through dealers and the financial health of these dealers is critical to the Company’s continued success. The Company’s results can be negatively affected if dealers experience higher operating costs that can result from rising interest rates, higher rents, labor costs and taxes, and compliance with regulations.
Inventory adjustments by the Company’s major dealers adversely affects the Company’s operating margins. If the Company’s dealers adjust their inventories downward in response to weakness in retail demand, wholesale demand for the Company’s product diminishes. In turn, the Company must reduce production, which results in lower rates of absorption of fixed costs and thus lower margins.
Adverse weather conditions can have a negative impact on revenues. Weather conditions can have a significant impact on the Company’s operating and financial results. Sales of the Company’s products are generally stronger just before and during spring and summer, and favorable weather during these months generally has a positive effect on consumer demand. Conversely, unseasonably cool weather, excessive rainfall or drought conditions during these periods can reduce demand. Hurricanes and other storms can result in the disruption of the Company’s manufacturing operations and its distribution channel.
Higher energy costs can adversely affect the Company’s results and can hurt demand for the Company’s products. Higher energy costs increase the Company’s operating costs at its manufacturing facility and the cost of shipping its products to dealers. In addition, the Company’s products are powered by gasoline and diesel engines and any increase in the price of petroleum-based fuel, or the imposition of taxes or an interruption of supply, could reduce the demand for the Company’s products.
Higher interest rates can reduce demand. Purchases of the Company’s products are often financed. Rising interest rates can have an adverse effect on dealers’ and consumers’ ability to finance boat purchases.
Disruption of deliveries from the Company’s single-source suppliers can adversely affect production and revenues. The Company’s single-source supply and just-in-time inventory strategies of some critical boat components, including high performance marine engines, 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 1B. Unresolved Staff Comments.
Item 2. Properties.
The Company’s executive offices and manufacturing facilities are located on 65 acres along the Pamlico River in Beaufort County, North Carolina. All of the land, buildings and improvements are owned by the Company and were held as collateral on notes and mortgages payable outstanding at June 30, 2007. (See Note 5 to the Company’s consolidated financial statements contained in Item 8 of this Report). The operating facility contains buildings totaling 237,360 square feet located on fifteen acres. The buildings consist of the following:
Over the last several years there have been significant expenditures for property, plant and equipment, which include plant additions, a travel lift bay, a boat ramp, and docking facilities along a 600-foot canal leading to the Pamlico River. In addition, the Company has approximately 200,000 square feet of concrete paving surrounding the buildings and providing guest or employee parking. The present plant site can accommodate an addition of up to 300,000 square feet of manufacturing space.
Item 3. Legal Proceedings.
As of June 30, 2007, the Company’s only operating subsidiary was a defendant in lawsuits arising in the ordinary course of its business, including five alleged breach of warranty or product liability suits. In the Company’s opinion these lawsuits are without merit and, therefore, the Company intends to vigorously defend its interest in such suits. The Company carries sufficient liability and product liability insurance to cover attorney’s fees and any losses that may occur from a product liability or breach of contract suit, over and above applicable insurance deductibles. The management of the Company believes that none of such current proceedings will have a material adverse effect.
The Company’s subsidiary was notified by the United States Environmental Protection Agency (“EPA”) that it had been identified as a potentially responsible party (“PRP”) in the remediation of contamination at a clean up site. The Group administrator estimated the Company’s share of future remediation cost to be $28,105. The Company is eligible for a de Minimus Settlement Agreement, which is expected to be finalized in 2007.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The Company’s common stock, $.01 par value, trades on the American Stock Exchange (under the symbol “FPB”). The following table lists the high and low closing prices for the Company’s common stock as reported on the American Stock Exchange for each calendar quarter during its fiscal years ended June 30, 2006 and 2007.
The Company has not declared or paid any cash dividends on its common stock since it first began operations. In the future, any declaration and payment of cash dividends will be subject to the Board of Directors’ evaluation of the Company’s operating results, financial condition, future growth plans, general business and economic conditions, and other relevant considerations. Management of the Company expects that, for the foreseeable future, profits generated by the Company will be retained as additional capital to support the Company’s operations and that the Company will not pay any cash dividends.
On June 30, 2007 there were 208 holders of record for the Company’s common stock.
During Fiscal 2007, the Company sold 10,000 shares of its common stock for a consideration of $16,000 to an employee of the Company and its subsidiary upon their exercise of stock options and without registration in reliance upon the exemption from registration under Section 4(2) of the Securities Act of 1933.
Performance Graph. The following line graphs compare the cumulative total shareholder return (the “CTSR”) on the Company’s common stock during the previous five fiscal years with the CTSR over the same measurement period of the S&P 500 Index and the S&P Leisure Time (Products) Index. Each line graph assumes that $100 was invested on June 30, 2000, and that any dividends were reinvested in additional shares. We have not paid dividends on the Company’s common stock during the previous five fiscal years, so no reinvestment is included in the calculation of the CTSR on the Company’s common stock.
The following information is being furnished for purposes of Rule 14a-3. It is not deemed to be filed with
the Securities and Exchange Commission or to be incorporated by reference into any filing under
the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent
the Company specifically incorporates it by reference into such a filing
Item 6. Selected Financial Data.
Fiscal Years 2003 through 2007
Years ended June 30
Operations Statement Data
Balance Sheet Data
(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.
Certain statements in Management’s Discussion and Analysis are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations that are subject to risks and uncertainties. Actual results may differ materially from expectations as of the date of this filing because of factors discussed in Item 1A. Risk Factors in this Annual Report.
The Company’s criteria for recording a C.O.D. sale, or payments prior to shipment sale or sale financed through third-party floor plan arrangements, are that the boat has been completed and that title has passed to the dealer or to the Government, and that there is no direct commitment to repurchase the boat or to pay floor plan interest beyond the sales program terms. As described more fully below at “Business Environment”, most of the Company’s shipments to dealers were financed through floor plan arrangements with third-party lenders pursuant to which the Company is subject, for a limited time, to repurchase boats repossessed by the third-party lenders if the dealer defaults under his credit arrangement. The Company has no repurchase liability for the balance of shipments. This is the method of sales recognition believed to be in use by most boat manufacturers.
At June 30, 2007, 2006, and 2005, there were no commitments to dealers to pay the interest on floor plan financed boats in excess of the time period specified in the Company’s written sales program and there were no direct repurchase agreements. There were no deferred sales or cost of sales estimated at June 30, 2007, 2006, and 2005.
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, aggregating to $24,375,708 and $35,212,412 at June 30, 2007 and 2006, respectively. Sales to participating dealers are approved by the respective finance companies. If a participating dealer does not satisfy its obligation to the lender and the boat is subsequently repossessed by the lender, then the Company may be required to repurchase the boat.
Recreational boating is a discretionary expenditure and many purchasing decisions are influenced by interest rates, fuel prices, insurance rates, weather, general economic factors, and other socioeconomic and environmental factors.
The overall marine industry began to soften in 2005 for small fiberglass (30 feet and less) and the downturn expanded into the larger fiberglass boat segment in 2006. Demand for sport fishing boats and cruisers weakened in 2007. Attendance at major boat shows, e.g. Fort Lauderdale, New York, Chicago, Miami, in late 2006 and early 2007 were lower than the prior year.
Generally, the marine industry reported dealer inventories were higher at the end of the 2006 retail season as sales for the season had fallen short of expectations. Market analysts were reporting consumer confidence being down and a “tightening” of consumer credit. Dealers kept their orders for inventory modest going into the off season and asked boat builders for more promotions and better financing. The small boat segment sales leveled out somewhat for 2007 after the decline through 2006 and 25-50 foot fiberglass boats sales were weak in 2007 with the upper end of the cruiser market being the softest of all boat segments for 2007, reported industry analysts.
The Company entered Fiscal 2007 with approximately $43 million backlog of orders; however as orders were reconfirmed with dealers for production some dealers did not have available floor plan credit and some dealers declined to reconfirm orders as they were cautious about increasing their inventory during the off season. The Company’s sales for the second and third quarters of Fiscal 2007 in total were 20 percent lower than a total of the comparable quarters of Fiscal 2006.
Overall attendance of the 2007 season boat shows was lower than the prior year. The Company increased its participation with its dealers at regional and national boat shows with much success. At the Miami International Boat Show in February 2007 the Company recorded approximately $20 million in orders for new boats and boats from dealers’ inventory, the highest in the history of the Company.
During Fiscal 2007 the Company applied “lean manufacturing” principles and methods to its manufacturing processes, utilizing the Toyota Production System (TPS) as a model to improve production labor efficiency. Total production headcount was reduced by 27 percent as a result of improved productivity and reorganizing the work force for alignment with reduced production levels.
The Company implemented cost and expense reduction programs in Fiscal 2007 that are expected to reduce overhead costs by $2.5 million to $3 million annually. These programs, described below, had a positive effect on the results in the fourth quarter of Fiscal 2007 and will continue to do so in Fiscal 2008.
The Company’s revenue was $68,829,987 for Fiscal 2007, down 13 percent from revenue of $79,226,224 for Fiscal 2006. Revenue for the fish boat product line remained flat while the sport boat product line declined by 20 percent and the cruiser product line declined by 40 percent.
Revenue for the fourth quarter of Fiscal 2007, ended June 30, 2007, was $19,907,660, as compared to $23,332,063 for the fourth quarter of Fiscal 2006, a decrease of 14.7 percent. Operating profit for the fourth quarter was $568,004, as compared to $183,300 operating profit for the fourth quarter of Fiscal 2006. The increase in profit was primarily attributable to an adjustment made to net sales to remedy the over accrual of a newly established year end dealer incentive award. This new dealer incentive award was over accrued because the rate of accrual, established at the beginning of the year, was based upon projected annual dealer sales, the actual volume of which was not known until the fourth quarter of Fiscal 2007.
Five boats were repurchased in Fiscal 2007, from finance companies under contingent repurchase obligations for a dealer that failed to meet its obligations to those finance companies, for a total repurchase amount of $809,347. All five boats were re-sold to other dealers with a total reduction in profit of $51,394. No boats were repurchased in Fiscal 2006 or Fiscal 2005 in connection with floor plan arrangements. At June 30, 2007, the Company had recorded a $64,124 reserve for losses which may be reasonably expected to be incurred on boat repurchases in future years. At June 30, 2006 the reserve was $15,459 and at June 30, 2005 the reserve was $75,000.
Analysts are forecasting that boat sales will continue to be down through the first half of calendar 2008, and at this point they are not forecasting a turn around for the 2008 season.
The Company’s fiscal plan for 2008 is based on the same revenue level as 2007, approximately $68 million. Upgraded and new boat models will be introduced in all three product lines to boost sales. The Company’s Sales and Marketing personnel will again take a very active role with the dealers at boat shows and promotional events and increase participation in the retail sales cycle. The Company has established a subsidiary (see Note 14) to sell Fountain boats at retail in a territory that can be serviced from the Company’s location and to provide retails sales support and training for its dealers.
Further cost reduction programs are underway that will have positive effect on results for Fiscal 2008:
Results of Operations.
Net sales for Fiscal 2007 were $68,829,987, down 13 percent as compared to net sales of $79,226,224 for Fiscal 2006. The decrease in net sales is a result of the general decline in the marine industry that affected the segments of the market in which the Company’s boats are sold. Net sales of the Express Cruiser product line also suffered due to issues with the engines which were installed early during Fiscal 2007. The Company has since migrated to installing engines from a different manufacturer in our Express Cruisers.
Net Sales by product line for the Fiscal years of 2007, 2006 and 2005 are:
Gross profit on sales for Fiscal 2007 was $9,108,088, 13.2 percent of net sales, as compared to $13,073,800, 16.5% of net sales, for Fiscal 2006. Gross profit for Fiscal 2005 was $10,910,563, 15.3% of net sales. The decrease of 3.3 percentage points from 2006 to 2007 was primarily attributable to production inefficiencies due to lower production volumes, reduced fixed cost absorption from production cuts and promotional program pricing in the first half of the year. The increase in gross margin from 2005 to 2006 was the result of improvements in productivity and labor efficiency.
Operating loss was ($2,745,878) for Fiscal 2007, as compared to a profit of $2,275,355 in 2006 and $1,766,347 in Fiscal 2005. Operating profit for Fiscal 2007 was affected by the circumstances outlined above in the gross margin discussion of this report and increased selling expenses, detailed below.
Fiscal 2007 net loss for the Company was ($5,046,286) or ($1.05) per share, of which ($1,283,728) or ($.27) per share was a tax adjustment. This compares to a net income of $2,404,912 or $.50 per share for Fiscal 2006 and net income of $756,212 or $.16 per share for Fiscal 2005. The tax adjustment for Fiscal 2007 arose from the establishment of a valuation allowance to completely offset the Company’s Deferred Tax Assets (see Note 7 to the consolidated financial statements, appearing on page 32 of this report).
Depreciation expense was $2,313,807 for Fiscal 2007, $2,020,860 for Fiscal 2006, and $1,840,168 for Fiscal 2005.
Overall selling and general and administrative expense for Fiscal 2007 was $11,853,966, a $1,055,520 increase from $10,798,445 in Fiscal 2006.
Selling expenses were $8,040,083 for Fiscal 2007, $6,765,871 for Fiscal 2006 and $5,726,283 for Fiscal 2005. The increase in selling expense was primarily from an increase in advertising expenses, including an expanded international advertising program, increased salaries and commissions and increased expenses for the Company’s support of offshore racing and fishing tournament programs.
Major selling expenses for the past three fiscal years were as follows:
General and administrative expenses include the executive, finance, human resources, information technology, legal and administrative operating expenses of the Company. These expenses were $3,813,883 for Fiscal 2007, $4,032,574 for Fiscal 2006, and $3,417,933 for Fiscal 2005. The decrease in administrative expenses for 2007 was primarily attributable to reduced legal expenses. Increased administrative expenses for 2006 were generally attributable to expenses related to the restatement of 2004 and 2005 financial statements, legal expenses related to breach of warranty suits, of which the more costly suits have been settled, and consulting services for preparation of internal controls and procedures to comply with Sarbanes-Oxley Act: Section 404, all of which were non-recurring expenses.
Interest expense net of amounts capitalized was $966,784 for Fiscal 2007, $1,132,584 for Fiscal 2006, and $1,011,860 for Fiscal 2005. Interest expense decreased in Fiscal 2007 due to Fiscal 2006 having an expense of $229,801 of capitalized loan costs from the previous Bank of America loan when it was refinanced by the new $16,500,000 loan from Regions Bank. The increase in interest expenses from Fiscal 2005 to Fiscal 2006 was also caused primarily due to the write-off of $229,801 unamortized loan expenses.
Current tax provision is $1,283,728 for the year ending June 30, 2007, ($1,283,746) for the year ending June 30, 2006, and ($21,232) for the year ended June 30, 2005. The current tax provision of $0 for Fiscal 2007 is the natural consequence of the net loss incurred by the Company. Deferred tax (benefit)/provision is ($1,417,122) for the year ended June 30, 2007, $460,258 for the year ended June 30, 2006 and $355,590 for the year ended 2005. Deferred taxes arise from temporary differences between financial and income tax reporting regarding the recognition of certain items.
As of June 30, 2007 the Company had net deferred tax assets of $2,700,850 that were fully offset by a valuation allowance because, as of that date, it was Management’s conclusion that there continued to be doubt as to whether those deferred tax assets were more likely than not to be realized in the future. The deferred tax assets principally relate to the potential future benefits of tax net operating loss carryforwards, most of which had been generated during the years ended June 30, 2002 and June 30, 2007 when the Company generated substantial net losses. During the year ended June 30, 2007 the Company performed an evaluation, in accordance with Statement of Financial Accounting Standard No. 109, Accounting for Income Taxes, of the likelihood of realization of its deferred tax assets. The evaluation resulted in the application of a valuation allowance.
The Company has available federal and state operating loss carry forwards at June 30, 2007 of approximately $8,208,000 and $7,449,000, respectively, which expire at various dates through 2027. The ultimate realization of the benefits from the deferred tax assets is dependent upon the Company’s future earnings, the future tax laws in effect, and other unknown factors; all of which are uncertain. In recent years the Company elected to provide for a tax asset valuation allowance of $2,700,850 at June 30, 2007, $0 at June 30, 2006 and $1,709,951 at June 30, 2005.
Liquidity and Financial Resources.
As disclosed in the Condensed Consolidated Statement of Cash Flows, the cash balance decreased by $2,095,169 during the Fiscal Year ended June 30, 2007. By comparison, during the previous Fiscal Year the cash balance increased $461,327.
Cash used by operations was $2,063,315 in Fiscal 2007 and resulted primarily from:
Cash required for Investing activities during Fiscal 2007 was $1,635,200. As is typically the case, the largest investment made was in creation of plugs and molds. Plugs are wooden forms constructed for the purpose of creating molds. Molds are used to replicate hulls, decks and various other fiberglass parts for our boats. $1,045,057 was invested in plugs and molds during Fiscal 2007. Another $593,518 was spent on other property, plant and equipment.
Financing activities provided $1,603,346 during Fiscal 2007.
Management is of the opinion that cash flows will be sufficient to satisfy its current and future liquidity demands because Management has realigned operating costs and expenses for the reduced level of production and returned the Company to profitability in the fourth quarter of Fiscal 2007 and is expecting to continue to operate profitably through Fiscal 2008.
Effects of Inflation.
The Company has not been materially affected by the inflation of recent years. Materials that are petroleum-based (e.g. resin, gel coat, foam) have been subject to price increases, and fuel surcharges have increased freight costs. The Company has been able to minimize the effect of material price increases by negotiating favorable purchase agreements with suppliers, using alternative, less costly materials, by finding less costly sources for materials and increasing selling prices of its products 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 following table sets forth a summary of the Company’s contractual cash obligations as of June 30, 2007:
The Company has an agreement with Mercury Marine, a division of Brunswick Corporation, that the Company will purchase from Mercury all of the Company’s requirements for marine engines and other power components that Mercury manufactures. The term of this agreement is through June 30, 2012.
Off-Balance Sheet Arrangements.
Guarantees. Based on historical experience and current facts and circumstances, and in accordance with Financial Accounting Standards Board (FASB) Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others — An Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34,” the Company has reserves to cover potential losses associated with guarantees and repurchase obligations. Historical cash requirements and losses associated with these obligations have not been significant. See Note 8, Commitments and Contingencies, in the Notes to Consolidated Financial Statements, for a description of these arrangements.
The Company does not believe that compliance with federal, state, and local environmental laws will have a material adverse effect on the Company’s competitive position.
Critical Accounting Policies.
The preparation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the amount of reported assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results may differ from those estimates. The Company discussed the development and selection of the critical accounting policies with the Audit Committee of the Board of Directors and believes the following are the most critical accounting policies that could have an effect on the Company’s reported results.
Revenue Recognition and Sales Incentives. The Company’s revenue is derived primarily from the sale of boats. Revenue is recognized in accordance with the contracted terms of the sale, upon completion and legal title and all other incidents of ownership have passed to dealers or the Government, and the ability to collect is assured. The Company offers discounts and sales incentives. The estimated liability for sales incentives is recorded at the later of the time of program communication to the customer or at the time of sale in accordance with Emerging Issues Task Force (EITF) No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of a Vendor’s Products)” and EITF No. 00-22, “Accounting for Points and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to be Delivered in the Future.” The liability is estimated based on the costs for the incentive program, the planned duration of the program and historical experience. If actual costs are different from estimated costs, the recorded value of the liability would be adjusted.
Allowances for Doubtful Accounts. The Company records an allowance for uncollectible trade receivables based upon currently known bad debt risks and provides reserves based on past loss history, customer payment practices and economic conditions. Actual collection experience may differ from the current estimate of reserves. Changes to the allowance for doubtful accounts may be required if a future event or other circumstance results in a change in the estimate of the ultimate ability to collect a specific account or invoice.
Reserve for Obsolete Inventories. The Company records a reserve for obsolete inventories in order to ensure inventories are carried at the lower of cost or fair market value. Fair market value can be affected by assumptions about market demand and conditions, historical usage rates, model changes and new product introductions. If model changes or new product introductions create more or less than favorable market conditions, the reserve for obsolete inventories may need to be adjusted. Refer to Note 1, Nature of the Business and Significant Accounting Policies, in the Notes to Consolidated Financial Statements for further discussion on the basis of accounting for inventories.
Warranty Reserves. The Company records a liability for standard product warranties. The liability is recorded using historical warranty experience to estimate projected warranty costs. If necessary, the Company adjusts its liability for specific warranty matters when they become known and are reasonably estimable. The Company’s warranty reserves are affected by product failure rates and material usage and labor costs incurred in correcting a product failure. If these estimated costs differ from actual product failure rates, and actual material usage and labor costs, a revision to the warranty reserve would be required.
Income Taxes. Deferred taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting using tax rates in effect for the years in which the differences are expected to reverse. The Company estimates its probable tax obligations based on historical experience and current tax laws and litigation. The judgments made at any point in time may change based on the outcome of tax audits and settlements of tax litigation, as well as changes due to new tax laws and regulations and the Company’s interpretations of those laws and regulations. These factors may cause the tax rate for the Company to increase or decrease. As of June 30, 2007 the Company had net deferred tax assets of $2,700,850 that were fully offset by a valuation allowance because, as of that date, it was Management’s conclusion that there continued to be doubt as to whether those deferred tax assets were more likely than not to be realized in the future. The deferred tax assets principally related to the potential future benefits of tax net operating loss carryforwards, most of which had been generated during the years ended June 30, 2002 and June 30, 2007 when the Company generated substantial net losses. During the year ended June 30, 2007 the Company performed an evaluation, in accordance with Statement of Financial Accounting Standard No. 109, Accounting for Income Taxes, of the likelihood of realization of its deferred tax assets. The evaluation resulted in the application of a valuation allowance.
The Company has available federal and state operating loss carry forwards at June 30, 2007 of approximately $8,208,000 and $7,449,000, respectively, which expire at various dates through 2027.
Cautionary Statement for Purposes of “Safe Harbor” Under the Private Securities Reform Act of 1995.
Certain statements in this Annual Report are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements in this Annual Report may include words such as “expect”, “anticipate”, “believe”, “may”, “should”, “could” or “estimate”. These statements involve certain risks and uncertainties that may cause actual results to differ materially from expectations as of the date of this filing. These risks include, but are not limited to, those set forth under Item 1A – Risk Factors.
Caution should be taken not to place undue reliance on the Company’s forward-looking statements, which represent the Company’s views only as of the date this report is filed. The Company undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to market risk from changes in interest rates. The Company enters into hedging transactions to mitigate this risk in accordance with guidelines established by the Company’s management. A description of the Company’s interest rate hedging activities is presented in Note 1. to the consolidated financial statements. The Company does not use financial instruments for trading or speculative purposes.
The Company uses an interest rate swap agreement to mitigate the effect that changes in interest rates have on the fair market value of the Company’s debt and to lower the Company’s borrowing costs on long term debt. The Company’s net exposure to interest rate risk is primarily attributable to the term loan with Regions Bank, which bears interest at a floating-rate. Interest rate risk management is accomplished through the use of a floating-to-fixed interest rate swap. Both the loan and the swap are benchmarked to short-term money market interest rates.
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors
Fountain Powerboat Industries, Inc.
Washington, North Carolina
We have audited the accompanying consolidated balance sheets of Fountain Powerboat Industries, Inc. and subsidiary as of June 30, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity, cash flows and the schedule of valuation and qualifying accounts for each of the years in the three-year period ended June 30, 2007. These consolidated financial statements and schedules 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and 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 referred to above present fairly, in all material respects, the financial position of Fountain Powerboat Industries, Inc. and subsidiary at June 30, 2007 and 2006 and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2007 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedules, when considered in relation to the 2005, 2006 and 2007 basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
Greenville, North Carolina
September 26, 2007
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2007 AND 2006
LIABILITIES AND STOCKHOLDERS’ EQUITY
The accompanying notes are an integral part of these consolidated financial statements.
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2007, 2005 AND 2005
The accompanying notes are an integral part of these consolidated financial statements.
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FROM JUNE 30, 2004 THROUGH JUNE 30, 2007
The accompanying notes are an integral part of these consolidated financial statements.
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
The accompanying notes are an integral part of these consolidated financial statements.
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS [CONTINUED]
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
The accompanying notes are an integral part of these consolidated financial statements.
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
Note 1. Nature of the Business and Significant Accounting Policies.
Nature of the Business: Fountain Powerboat Industries, Inc. and Subsidiary (the Company) manufacture high-performance sport boats, sport cruisers, sport fishing boats, and custom offshore racing boats. These boats are sold worldwide to a network of 32 domestic and 24 international 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 328 people.
Principles of Consolidation: The consolidated financial statements include the accounts of Fountain Powerboat Industries, Inc. and its wholly owned subsidiary, Fountain Powerboats, Inc. All significant inter-company accounts and transactions have been eliminated in consolidation.
Fiscal Year: The Company’s fiscal year-end is June 30th, which is its natural business year-end.
Accounting Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimated by management. These estimates affect:
Estimates in these consolidated financial statements include, but are not limited to:
Cash and Cash Equivalents: For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. At June 30, 2007 and 2006, the Company had $2,379,383 and $4,474,552 respectively, held in cash.
Accounts Receivable: Accounts Receivable are customer obligations due under normal trade terms requiring payment within 7 days from the invoice date for boat sales and within 30 days for all other sales. The carrying amount of accounts receivable is reduced by an allowance that reflects management’s best estimate of the amounts that will not be collected. Management reviews each accounts receivable balance that exceeds 90 days from the invoice date and based on an assessment of the current creditworthiness, estimates the portion, if any, of the balance that will not be collected.
Inventories: Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method (See Note 3). The Company records a reserve for obsolete inventories in order to ensure inventories are carried at the lower of cost or fair market value. Fair market value can be affected by assumptions about market demand and conditions, historical usage rates, model changes and new product introductions. If model changes or new product introductions create more or less than favorable market conditions, the reserve for obsolete inventories may need to be adjusted.
Property, Plant, and Equipment and Depreciation: Property, plant, and equipment are carried at cost. Depreciation on property, plant, and equipment is calculated using the straight-line method and is based upon the estimated useful lives of the assets. The Company continually evaluates whether events and circumstances have occurred that indicate the remaining estimated useful lives of its long-lived assets may warrant revision or that the remaining balance of such assets may not be recoverable. (See Note 4)
Fair Value of Financial Instruments: Management estimates of the carrying value of financial instruments on the consolidated financial statements approximate fair values. The carrying values of the Company’s short term financial instruments, including cash and cash equivalents, accounts receivable, and debt approximate their fair values because of the short maturity of these instruments and the variability of the associated interest rates.
Dealer Incentive Accruals: The Company has established sales programs to pay service and/or other awards to dealers for boat deliveries into their market territory for which they will perform service or based upon sales of boats from their locations. These programs are based in part on the model of the boat sold, a factor for the dealer’s service performance rating, the dollar value of the sale and other factors, including total sales volume to dealers. The Company has accrued dealer incentives of $6,342,467 and $6,367,229 at June 30, 2007 and 2006, respectively. Dealer incentive accruals are recorded as a reduction to net sales. These amounts also include an accrual for dealer interest as discussed in Note 8, “Commitments and Contingencies”.
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 determined based upon the current financial status of the Company’s dealers. The Company has accrued allowance for boat repurchases of $64,124 and $15,459 at June 30, 2007 and June 30, 2006 respectively.
Revenue Recognition: The Company generally sells boats only to authorized dealers and to the U.S. Government. A sale is recorded when legal title and all other incidents of ownership have passed to the dealer or to the Government. Prior to the sale to the dealer or the Government, the Company must have received a signed Sales Order Acknowledgement from the dealer or the Government specifying the terms of the sale, including the sales price. All boat sales are Cash on Delivery basis, or with prior approval of the buyer’s third party commercial lender, thus assuring the ability to collect.
In addition to other dealer incentives, the Company offers a sales incentive plan whereby floor plan interest is paid by the Company up to six months (180 days) or until the boat is sold by the dealer. Each month the Company calculates an amount equal to the estimated potential floor plan interest payment for the remainder of the 180 day period beginning on the invoice date for each boat still in floor plan inventory. The sum of these individual calculations is accrued as a liability and recorded as a selling expense. (See Note 8) As the number of boats and the time remaining in the free floor plan interest period varies from month to month, the variation is reflected in floor plan interest expense.
Income Taxes: The Company accounts for income taxes in accordance with issued Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes” (See Note 7).
Advertising Cost: Cost incurred in connection with advertising and promotion of the Company’s products is expensed as incurred. Such costs amounted to $2,013,740, $1,412,435 and $1,264,368 for the years ended 2007, 2006 and 2005, respectively.
Earnings Per Share: The Company accounts for earnings per share in accordance with the Statement of Financial Accounting Standards (SFAS) No. 128 “Earnings Per Share,” which requires the Company to present basic and diluted earnings per share. The computation of basic earning per share is based on the weighted average number of shares outstanding during the periods presented. The computation of diluted earnings per shares is based on the weighted average number of outstanding common shares during the year plus, when their effect is dilutive, additional shares assuming the exercise of certain vested and non-vested stock options and warrants, reduced by the number of shares which could be purchased from the proceeds (See Note 12).
Warranties: The Company warrants the entire deck and hull, including its supporting bulkhead and stringer system, against defects in materials and workmanship for a period of six years. The Company has accrued a reserve for these anticipated future warranty costs.
Reclassifications: The consolidated financial statements and notes for years prior to the year ended June 30, 2007 have been reclassified to conform with headings and classifications used in the June 30, 2007 financial statements. The reclassifications had no effect on net income or shareholder’s equity as previously reported.
Cash Surrender Value of life insurance policies: - At June 30, 2007 and 2006, the Company owns six life insurance policies on Reginald M. Fountain, Jr., the Company’s Chairman and Chief Executive Officer for a total of $8,091,411 and $7,780,253 in coverage and $2,951,010 and $2,552,682 cash value, respectively. At June 30, 2007 the Company has borrowed $1,500,000 against the policies, which is shown in long term debt on the consolidated balance sheet. At June 30, 2006, the Company had no outstanding loans against the policies.
Research and Development: The Company expenses the costs of research and development for new products and components as the costs are incurred. Research and development costs are included in the cost of sales and amounted to $757,186 for Fiscal 2007, $780,520 for Fiscal 2006, and $786,129 for Fiscal 2005.
Derivative Financial Instruments: The Company uses derivative financial instruments for the purpose of reducing its exposure to adverse fluctuations in interest rates. While these hedging instruments are subject to fluctuations in value, such fluctuations are generally offset by the value of the underlying exposures being hedged. The Company has determined that the hedges’ ineffectiveness is not material and accounts for these derivative financial instruments as an effective cash flow hedge under the provisions of Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The Company is not a party to leveraged derivatives and does not hold or issue financial instruments for speculative purposes.
The Company utilizes an interest rate swap agreement to hedge exposure to fluctuations in market interest rates. Under United States GAAP, an interest rate swap agreement is considered a derivative financial instrument. Due to the nature of the derivative and the intended use by the Company, the derivative qualifies as a Cash Flow Hedge. As such, SFAS No. 133 requires that the value of the derivative be “marked-to-market” periodically and any change in the market value of the swap be reflected in the financial statements of the Company. The market value of the derivative is calculated as of the last day of the period and any change since the end of the previous period is reflected, net of tax, in an adjustment to Stockholders’ Equity in the Consolidated Balance Sheet.
Recently Enacted Accounting Standards:
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3” (SFAS No. 154). SFAS No. 154 replaces APB Opinion No. 20, “Accounting Changes” (Opinion 20), and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements,” changes the requirements for the accounting for and reporting of a change in accounting principle. Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. SFAS No. 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle. SFAS No. 154 defines retrospective application as the application of a different accounting principle to prior accounting periods as if that principle had always been used or as the adjustment of previously issued financial statements to reflect a change in the reporting entity. SFAS No. 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. We adopted the provisions of SFAS No. 154 during the fiscal year beginning July 1, 2006. The adoption of SFAS No. 154 did not significantly impact our consolidated financial statements.
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB statements No. 133 and 140” (SFAS 155). SFAS No. 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) as long as the entire instrument is valued on a fair value basis. The statement also resolves and clarifies other specific SFAS No. 133 and SFAS No. 140 related issues. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. We will be required to adopt SFAS No. 155 on July 1, 2007 and do not expect that it will have a material effect on our consolidated financial statements.
In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing a two-step method of first, evaluating whether a tax position has met a more-likely-than-not recognition threshold, and second, measuring that tax position to determine the amount of benefit to be recognized in the financial statements. FIN 48 provides guidance on the presentation of such positions within a classified statement of financial position as well as on derecognition, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for the Company beginning July 1, 2007. Compliance is not expected to significantly impact our consolidated financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157). FAS 157 enhances existing guidance for measuring assets and liabilities using fair value. Prior to the issuance of FAS 157, guidance for applying fair value was incorporated in several accounting pronouncements. FAS 157 provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. FAS 157 also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets. Under FAS 157, fair value measurements are disclosed by level within that hierarchy. While FAS 157 does not add any new fair value measurements, it does change current practice. Changes to practice include: (1) a requirement for an entity to include its own credit standing in the measurement of its liabilities; (2) a modification of the transaction price presumption; (3) a prohibition on the use of block discounts when valuing large blocks of securities for broker-dealers and investment companies; and (4) a requirement to adjust the value of restricted stock for the effect of the restriction even if the restriction lapses within one year. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company has not determined the impact of adopting FAS 157 on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, (SFAS 159). SFAS 159 allows entities to measure financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Unrealized gains and losses on items for which the fair value option has been elected must be reported in earnings at each subsequent reporting date. The fair value option can be applied instrument by instrument, however the election is irrevocable. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company does not expect the statement to have an effect on its financial position, results of operations or cash flows.
In September 2006, the SEC issued Staff Accounting Bulletin No.108 (“SAB 108”), “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB 108 was issued in order to eliminate the diversity of practice surrounding how public companies quantify financial statement misstatements. Traditionally, there have been two widely-recognized methods for quantifying the effects of financial statement misstatements: the “roll-over” method and the “iron curtain” method. The roll-over method focuses primarily on the impact of a misstatement on the income statement—including the reversing effect of prior year misstatements—but its use can lead to the accumulation of misstatements in the balance sheet. The iron curtain method focuses primarily on the effect of correcting the period-end balance sheet with less emphasis on the reversing effects of prior year’s errors on the income statement. We have previously used the roll-over method for quantifying identified financial statement misstatements.
SAB 108 establishes an approach that requires quantification of financial statement misstatements based on the effects of the misstatements on each of the Company’s consolidated financial statements and the related financial statement disclosures. This model is commonly referred to as a “dual approach” because it requires quantification of errors under both the iron curtain and the roll-over methods. SAB 108 permits public companies to initially apply its provisions either by (i) restating prior financial statements as if the “dual approach” had always been applied or (ii) recording the cumulative effect of initially applying the “dual approach” as adjustments to the carrying values of assets and liabilities as of July 1, 2006 with an offsetting adjustment recorded to the opening balance of retained earnings.
We adopted SAB 108 during the quarter ended June 30, 2007 and elected to use the cumulative effect transition method in connection with the preparation of our financial statements. The following table summarizes the effects of applying the guidance in SAB 108:
In 2006 the Emerging Issues Task Force issued EITF Issue 06-4 “Accounting for Deferred Compensation and Postretirement Benefits Aspects of Endorsement Split-Dollar Life Insurance Arrangements” requires the recognition of a liability related to the postretirement benefits covered by an endorsement split-dollar life insurance arrangement. The employer (who is also the policyholder) has a liability for the benefit it is providing to its employee. As such, if the policyholder has agreed to maintain the insurance policy in force for the employee’s benefit during his or her retirement, then the liability recognized during the employee’s active service period should be based on the future cost of insurance to be incurred during the employee’s retirement. Alternatively, if the policyholder has agreed to provide the employee with a death benefit, then the liability for the future death benefit should be recognized by following the guidance in Statement 106 or Opinion 12, as appropriate. This issue is applicable for interim or annual reporting periods beginning after December 15, 2007. The Company is currently evaluating the impact that this pronouncement will have on the consolidated financial statements.
In March 2007, the FASB ratified the consensuses reached by the EITF relating to EITF 06-10, “Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements.” EITF 06-10 established that an employer should recognize a liability for the postretirement benefit related to a collateral assignment split-dollar life insurance arrangement in accordance with either SFAS No. 106 or APB No. 12 if the employer has agreed to maintain a life insurance policy during the employee's retirement or provide the employee with a death benefit based on the substantive arrangement with the employee. EITF 06-10 is effective for fiscal years beginning after December 15, 2007 and is not expected to have a material affect on the Company’s financial position, results of operations or cash flows.
Comprehensive Income (Loss) - The Company reports as comprehensive income changes in stockholders’ equity during the year from sources other than shareholders. Other comprehensive income (loss) refers to all components (revenues, expenses, gains, and losses) of comprehensive income (loss) that are excluded from net income (loss). The Company’s only component of other comprehensive income (loss) is unrealized gains and losses related to interest rate swap agreements. For the years ended June 30, 2007, 2006 and 2005, the Company’s other comprehensive income (loss) was ($98,811), $149,997, and $19,184, respectively, resulting in total comprehensive income (loss) of ($5,145,097), $2,554,909, and $775,396 respectively for those years.
Stock Based Compensation - The Company has stock incentive plans that provide for stock-based employee compensation, including the granting of stock options, to certain key employees and other individuals. The plans are more fully described in Note 6. Prior to the year ended June 30, 2006 the Company accounted for stock options issued to employee, officers and directors under the stock incentive plan in accordance with the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Under the Company’s stock incentive plan, stock options are granted at exercise prices that equal or exceed the market value of the underlying common stock on the date of grant. Therefore, no compensation expense related to stock options is recorded in the Consolidated Statements of Income for the year ended June 30, 2005.
In December 2004, the FASB issued SFAS No. 123(R), “Accounting for Stock-Based Compensation” (SFAS No. 123(R)). SFAS No. 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods and services. The Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123(R) requires that the fair value of such equity instruments be recognized as an expense in the historical financial statements as services are performed. Prior to SFAS No. 123(R), only certain pro forma disclosures of fair value were required. The provisions of this Statement are effective for the fiscal year that begins after June 15, 2005. Accordingly, we adopted SFAS No. 123(R) on July 1, 2005 and it had no effect on net income for Fiscal 2007 or 2006 because all outstanding options vested fully prior to July 1, 2005.
Had compensation cost for stock options issued to employees under the Company’s stock option plans and agreements been determined based on the fair value at the grant date for awards prior to July 1, 2005 consistent with the provisions of SFAS No. 123, the Company’s net earnings before taxes and earnings per share would have been reduced to the pro forma amounts indicated below:
Note 2. Accounts Receivable
Accounts Receivable consists of the following:
Note 3. Inventories.
Inventories consist of the following:
All of the inventory is owned by the Company and pledged as collateral on notes and mortgages payable at June 30, 2007.
Note 4. Property, Plant and Equipment.
Property, plant and equipment consists of the following:
Depreciation expense by asset category was as follows:
All of the land, buildings and improvements are owned by the Company and are held as collateral on notes payable and long term debt at June 30, 2007.
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.
In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company continually evaluates whether events and circumstances have occurred that indicate the remaining estimated useful lives of its long-lived assets may warrant revision or that the remaining balance of such assets may not be recoverable. During 2007 and 2006, the Company reviewed its long-lived asset balances for impairment and no adjustments were recorded as a result of those reviews.
Note 5. Long-term Debt and Pledged Assets.
On September 19, 2005, the Company entered into a $16,500,000 term loan agreement (the “Loan”) with Regions Bank. The proceeds from the Loan were used to repay, and concurrently cancel, the long-term loan with Bank of America. Upon cancellation of the Bank of America loan, the Company expensed that portion of the deferred costs paid to acquire the loan which had not been amortized during the term of the loan. The amount of the deferred loan costs expensed in Fiscal 2006 is $229,801. The Loan with Regions Bank matures September 19, 2010 and is secured by accounts receivable, inventories, property, plant and equipment, death proceeds under certain life insurance policies, and common stock. Principal payments, beginning at approximately $55,000 and escalating over time, are due monthly, commencing September 30, 2005, with a final principal payment of $12,646,733 due September 19, 2010. Interest is payable monthly. The Loan includes $4,125,000 that bears interest, at the Company’s option, under one of two available methods. The first available interest computation method provides for interest at the higher of the Prime Rate or the Federal Funds rate plus 1/2%. The second available interest computation method provides for interest at the sum of (i) the one month LIBOR rate divided by 1.0 minus the Eurodollar Reserve Percentage, and (ii) 1.75%. The Company may select either of the two interest rate methodologies by providing written notification to Regions Bank. The balance of the Loan ($12,375,000 at inception) bears interest that has been set at a fixed annual rate of 6.45% through the use of an interest rate swap. The fixed annual rate of 6.45% is a blended rate that combines the 1.75% premium over one month LIBOR listed above with a fixed interest rate of 4.70% paid by the Company to the counterparty under the terms of our interest rate swap agreement, described below.
The Company utilizes interest rate swap agreements to hedge exposure to fluctuations in market interest rates. Under United States GAAP, an interest rate swap agreement is considered a derivative financial instrument. Due to the nature of the derivative and the intended use by the Company, the derivative qualifies as a Cash Flow Hedge. As such, SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities”, requires that the value of the derivative be “marked-to-market” periodically and any change in the market value of the swap be reflected in the financial statements of the Company. The market value of the derivative is calculated as of the last day of the period and any change since the end of the previous period is reflected in an adjustment to Stockholders’ Equity in the Consolidated Balance Sheet. During the quarter ended September 30, 2005, the Company terminated a then extant interest rate swap agreement with Bank of America related to the Bank of America loan, which was repaid during the period. At termination, that swap agreement with Bank of America resulted in a gain to the Company of $84,524. The Company entered into a new interest rate swap agreement (the “Swap”) with Regions Bank related to the new Regions Bank loan, taken during the period. The Swap with Regions Banks has a notional amount of $12,375,000, a term of five years and a fixed annual rate of 4.70% due to Regions Bank. The Swap has a floating interest rate due to the Company which is based on LIBOR and is reset monthly. As of June 30, 2007 and 2006 the market value adjustment for the Swap results in an unrealized gain totaling $209,809 and $370,585 respectively. SFAS No. 133 also requires periodic assessment of the effectiveness of any instrument designated as a hedge. If the assessment indicates the hedge is less than highly effective in offsetting the gains or losses incurred by the hedged transaction, the ineffective portion of the hedge must be reported currently in the Company’s Consolidated Statement of Operations. The results of the assessment as of June 30, 2007 indicate that the hedge is highly effective, and we have determined that the ineffective portion is immaterial.
The Loan contains certain restrictive covenants setting forth earnings before interest, taxes and depreciation (EBITDA) and capital expenditures, which were restructured by Regions Bank on June 27, 2007. These covenants also include a number of other limitations, including restrictions on capital expenditures, mergers or consolidations, disposal of assets, investments, incurrence of other indebtedness and payment of dividends. The Company expects to maintain compliance with these restrictive covenants, and believes that these restrictions will not have a material effect on the Company’s ability to maintain and improve its facilities and compete with other companies in the boating industry. As of June 30, 2007 the Company was in compliance with all covenants.
On July 12, 2006, the Company entered into an Agreement (the “Credit Facility”), referenced in the consolidated balance sheet as notes payable, with Regions Bank that provides for a secured, non-revolving line of credit under which the Company may obtain up to an aggregate of $5 million in loans from the lender during the one-year term of the agreement. The Company will use loans it obtains under the Credit Facility to finance its production of boats for display or demonstration at dealer meetings, boat shows, performance trials and factory demonstrations and that are of a configuration that are not available from a dealer’s stock. Boats financed with loans under the Credit Facility will be sold to dealers after they are no longer needed by the Company. At June 30, 2007 there was one loan outstanding under the Credit Facility in the amount of $799,333. That loan has been repaid subsequent to June 30, 2007.
Each loan under the Credit Facility will be repayable in full one year following the loan date or, if earlier, upon the sale or transfer of the boat that secures that loan. The Company may obtain a six (6) month extension of the maturity of any loan upon repayment of at least 20 percent (20%) of the outstanding loan amount prior to the loan maturity date. The Company has fully and unconditionally guaranteed all obligations under the Credit Facility.
At the Company’s option, and subject to the terms and conditions of the Credit Facility, each loan will bear interest from the loan date on its unpaid balance at a rate equal to (1) the higher of the federal funds rate, as in effect from time to time, plus one-half of one percent per annum, or the lender’s prime lending rate as in effect from time to time, or (2) a rate calculated as provided in the Loan Agreement based on LIBOR.
The Company’s obligations in connection with each loan under the Credit Facility will be secured by a lien on the boat for which that loan was obtained. Additionally, collateral documents that the Company entered into with the lender on September 19, 2005 to secure the Company’s obligations under a $16,500,000 term loan agreement, the Loan, (including a (1) Deed of Trust, Assignment of Rents, Security Agreement and Financing Statement, (2) Security Agreement, and (3) Pledge Agreement), have been amended to also secure loans under the Credit Facility as well. As a result, the Company’s obligations under the Credit Facility are secured by all real estate and all furniture, fixtures and equipment owned by the Company and associated with its manufacturing facilities, all of the Company’s accounts receivable, inventory and other assets, and all shares of Fountain Powerboats, Inc. (the subsidiary) capital stock that the Company owns.
Following is a summary of long-term debt at June 30, 2007:
The estimated aggregate maturities required on the long-term debt for each of the years ending June 30 are as follows:
Note 6. Stock Options.
Effective July 1, 2005 the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment,” (“SFAS No. 123R”) which was issued by the FASB in December 2004. SFAS No. 123R revised SFAS 123 “Accounting for Stock Based Compensation” and supersedes APB No. 25, “Accounting for Stock Issued to Employees,” (APB No. 25) and its related interpretations. SFAS No. 123R requires recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period). SFAS No. 123R also requires measurement of the cost of employee services received in exchange for an award based on the grant-date fair value of the award. SFAS No. 123R also amends SFAS No. 95 “Statement of Cash Flows” to require that excess tax benefits be reported as financing cash inflows, rather than as a reduction of taxes paid, which is included within operating cash flows.
The Company adopted SFAS No. 123R using the modified prospective application as permitted under SFAS No. 123R. Accordingly, prior period amounts have not been restated. Under this application, the Company is required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption.
Prior to the adoption of SFAS No. 123R, the Company used the intrinsic value method as prescribed by APB No. 25 and thus recognized no compensation expense for option granted with exercise prices equal to the fair market value of the Company’s common stock on the date of grant.
The Company has two stock option plans in effect at June 30, 2007. All options outstanding as of June 30, 2006 were fully vested and no new options were issued during the year ended June 30, 2007, therefore no option related compensation cost has been charged against income for the years ended June 30, 2007 and 2006.
On June 21, 1995, the shareholders voted to adopt the 1995 stock option plan. The plan provided 450,000 options to purchase the common stock to be granted by the Board of Directors to employees or directors of the Company. On August 4, 1995, the Board of Directors voted to grant the 450,000 stock options to Mr. Reginald M. Fountain, Jr. at $4.67 per share, exercisable for 10 years from the date granted, on a non-qualified basis. On November 9, 2004, the shareholders of Fountain Powerboats, Inc. approved an amendment to this plan to permit the Board of Directors to extend the term of this plan to August 4, 2008. As of June 30, 2007, none of these options have been exercised.
During 1999, the shareholders voted to adopt the 1999 Employee Stock Option Plan (the Plan), which expires January 11, 2009. Under the Plan, the board is empowered to grant options to purchase up to 120,000 shares of common stock to employees, officers, directors and consultants of the Company. Additionally, the Board will determine at the time of granting the vesting provisions and whether the options will qualify as Incentive Stock Options under Section 422 of the Internal Revenue Code (Section 422 provides certain tax advantages to the employee recipients). During the Company’s November 19, 2002 Annual Meeting the shareholders approved amendment of the 1999 Employee Stock Option Plan to increase the number of shares available for issuance under that plan from 120,000 to 175,000 shares. As of June 30, 2007, 88,333 options are available for grant under the plan.
The fair market value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. No options were granted during the years ended June 30, 2007 and 2006.
The risk free rate is based upon a U.S. Treasury instrument with a life that is similar to the expected life of the option grant. Expected volatility is based upon the historical volatility of the price of the Company’s common stock for a period consistent with the anticipated life of the option granted. The expected term of the options is based upon the average life of previously issued stock options. The expected dividend yield is based upon current yield on date of grant. No post-vesting restrictions exist for these options.
A summary of the status of the options granted under the Company’s 1995 and 1999 stock option plans and other agreements at June 30, 2007, 2006 and 2005, and changes during the periods then ended is presented in the table below: