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FOUNTAIN POWERBOAT INDUSTRIES, INC.
FORM 10-Q
QUARTERLY REPORT
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _______________
Commission File Number 0-14712
FOUNTAIN POWERBOAT INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Nevada 56-1774895
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
Whichard's Beach Road, P.O. Drawer 457, Washington, NC 27889
(Address of principal executive offices)
Registrant's telephone no. including area code: (252) 975-2000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes[ X ] No[ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act.
Yes[ ] No[ X ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
Class Outstanding at September 30, 2003
Common Stock, $.01 par value 4,757,608 shares
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
INDEX
Page No.
Part I Financial Information
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets,
September 30, 2003 and June 30, 2003 1-2
Unaudited Condensed Consolidated Statements of Operations,
for the three months ended September 30, 2003 and 2002 3
Unaudited Condensed Consolidated Statements of Cash Flows,
for the three months ended September 30, 2003 and 2002 4-5
Notes to Unaudited Condensed Consolidated Financial
Statements 6-13
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 14-15
Item 3. Quantitative and Qualitative Disclosures of Market Risk 16
Item 4. Controls and Procedures 16
Part II Other Information
Items 1, 2, 3, 4, 5 & 6 17
Signature 18
Exhibits. Management Certifications 19-21
PART I. Financial Information.
ITEM 1: Financial Statements.
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, June 30,
2003 2003
_____________ _____________
CURRENT ASSETS:
Cash and cash equivalents $ 3,111,177 $1,224,935
Accounts receivable, net 3,288,612 2,015,371
Inventories 3,328,162 3,460,286
Prepaid expenses 806,220 644,581
Current tax assets 800,716 807,315
_____________ _____________
Total Current Assets 11,334,887 8,152,488
_____________ _____________
PROPERTY, PLANT AND EQUIPMENT 41,914,183 41,676,783
Less: Accumulated depreciation (26,032,140) (25,511,099)
_____________ _____________
15,882,043 16,165,684
_____________ _____________
CASH SURRENDER VALUE LIFE INSURANCE 1,432,414 1,378,626
OTHER ASSETS 536,406 736,288
_____________ _____________
Total Assets $29,185,750 $26,433,086
_____________ _____________
[Continued]
-1-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
[Continued]
September 30, June 30,
2003 2003
_____________ _____________
CURRENT LIABILITIES:
Current maturities - long-term debt $ 1,057,604 $ 1,060,444
Current maturities - capital lease 17,709 20,118
Accounts payable 1,909,442 7,498,762
Accounts payable - related party 25,081 169,043
Accrued expenses 1,198,296 1,317,398
Dealer incentives 76,485 190,010
Customer deposits 108,947 290,658
Allowance for boat repurchases 200,000 200,000
Warranty reserve 900,000 900,000
_____________ _____________
Total Current Liabilities 5,493,564 11,646,433
LONG-TERM DEBT, less current maturities 18,211,437 8,986,160
CAPITAL LEASE, less current maturities 24,787 24,367
DEFERRED TAX LIABILITY 1,190,021 1,207,958
COMMITMENTS AND CONTINGENCIES [NOTE 5] - -
_____________ _____________
Total Liabilities 24,919,809 21,864,918
_____________ _____________
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value,
200,000,000 shares authorized,
4,757,608 shares issued and
outstanding 47,576 47,576
Additional paid-in capital 11,438,886 10,436,551
Accumulated earnings (6,146,335) (5,801,326)
_____________ _____________
5,340,127 4,682,801
Less: Treasury stock, at cost,
15,000 shares (110,748) (110,748)
Deferred compensation for
stock options issued (2,090) (3,885)
Deferred interest for options
issued for quarantee
of long-term debt (961,348) -
_____________ _____________
Total Stockholders' Equity 4,265,941 4,568,168
_____________ _____________
Total Liabilities and
Stockholders' Equity $ 29,185,750 $ 26,433,086
_____________ _____________
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
-2-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended
September 30,
___________________________
2003 2002
_____________ _____________
NET SALES $ 12,885,232 $ 12,002,119
COST OF SALES 10,853,051 10,096,168
_____________ _____________
Gross Profit 2,032,181 1,905,951
_____________ _____________
EXPENSES:
Selling expense 1,355,570 832,978
General and administrative 565,859 467,013
_____________ _____________
Total expenses 1,921,429 1,299,991
_____________ _____________
OPERATING INCOME (LOSS) 110,752 605,960
_____________ _____________
NON-OPERATING INCOME (EXPENSE):
Other income (expense) 3,059 28,576
Interest expense (470,158) (306,201)
_____________ _____________
Total non-operating
income (expense) (467,099) (277,625)
_____________ _____________
INCOME (LOSS) BEFORE INCOME TAXES (356,347) 328,335
CURRENT TAX EXPENSE - -
DEFERRED TAX EXPENSE (BENEFIT) (11,338) 159,091
_____________ _____________
NET INCOME (LOSS) $ (345,009) $ 169,244
_____________ _____________
BASIC EARNINGS (LOSS) PER SHARE $ (.07) $ .04
_____________ _____________
WEIGHTED AVERAGE SHARES
OUTSTANDING 4,757,608 4,732,608
_____________ _____________
DILUTED EARNINGS PER SHARE $ (.07) $ .04
_____________ _____________
WEIGHTED AVERAGE SHARES
OUTSTANDING ASSUMING DILUTION 4,824,089 4,782,372
_____________ _____________
The Accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
-3-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
For the Three Months Ended
September 30,
___________________________
2003 2002
_____________ ___________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (345,009) $ 169,244
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation expense 521,041 528,770
Net deferred taxes (11,338) 159,091
Gain on sale of fixed asset - 29,114
Amortization of deferred
loan cost 226,997 15,450
Non-cash expense 42,783 4,416
Change in assets and liabilities:
(Increase) decrease in
accounts receivable (1,273,241) 1,514,043
(Increase) decrease in
inventories 132,124 (525,410)
(Increase) decrease in
prepaid expenses (161,639) 14,483
Increase (decrease) in
accounts payable (5,733,283) (503,483)
Increase (decrease) in
accrued expenses (119,102) (95,683)
Increase (decrease) in
dealer incentives (113,525) (126,336)
Increase (decrease) in
customer deposits (181,711) (358,645)
_____________ ___________
Net Cash Provided (Used) by
Operating Activities $(6,670,894) $ 825,054
_____________ ___________
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant,
and equipment (34,700) (310,405)
Investment in molds and
related plugs (202,700) 110,000
(Increase) decrease in other assets 199,882 (3,000)
_____________ ___________
Net Cash Provided (Used)
by Investing Activities $ (37,518) $ (203,405)
_____________ ___________
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt $ 18,067,841 $ -
Payments of long-term debt (8,980,049) (237,598)
Payment of deferred loan cost (148,129) -
Proceeds from stock options exercised - 16,800
_____________ ___________
Net Cash Provided (Used)
by Financing Activities $ 8,939,663 $ (220,798)
_____________ ___________
Net increase (decrease) in cash
and cash equivalents $ 1,886,242 $ 400,851
Cash and cash equivalents at
beginning of year $ 1,224,935 $ 329,640
_____________ ___________
Cash and cash equivalents at
end of period $ 3,111,177 $ 730,491
[Continued]
-4-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
[Continued]
For the Three Months Ended
September 30,
___________________________
2003 2002
_____________ ___________
Supplemental Disclosures of
Cash Flow Information:
Cash paid during the period for:
Interest, net of
amounts capitalized $ 248,092 $ 275,042
Income Taxes $ - $ -
Supplemental Disclosures of Noncash Investing and Financing Activities:
For the three month period ended September 30, 2003:
The Company recorded consulting expense of $1,795 as a result of
amortization of deferred compensation from 20,000 options issued to
purchase common stock during Fiscal 2002, vesting through January
2004 and expiring through January 2009.
The Company issued 273,146 options to purchase common stock to
Brunswick Corporation as a condition for guarantying the Bank of
America loan. The options are exercisable at $.05 per share, vest
through July 2008 and expire July 2009. As of September 30, 2003 the
Company has recorded $40,988 interest expense.
For the three month period ended September 30, 2002:
The Company recorded consulting expense of $4,416 as a result of
amortization of deferred compensation from 40,000 options issued to
purchase common stock during Fiscal 2002, vesting through January
2004 and expiring through January 2009.
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
-5-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial statements have been prepared by the Company
without audit. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly
the financial position, results of operations and cash flows at
September 30, 2003 and for all periods presented have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles in the United States of America have been
condensed or omitted for purposes of filing interim financial
statements with the Securities and Exchange Commission. It is
suggested that these condensed financial statements be read in
conjunction with the financial statements and notes thereto included in
the Company's June 30, 2003 audited financial statements. The results
of operations for the period ended September 30, 2003 and 2002 are not
necessarily indicative of the operating results for the full year.
Principles of Consolidation: The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiary,
Fountain Powerboats, Inc. All significant inter-company accounts and
transactions have been eliminated in consolidation.
Accounting Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the
disclosures of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual operating results could differ
from those estimated by management.
Cash and Cash Equivalents: For purposes of the statement of cash flows,
the Company considers all highly liquid debt instruments with a
maturity of three months or less to be cash equivalents. At September
30, 2003 and June 30, 2003, the Company had $3,011,177 and $1,124,935,
respectively, in excess of federally insured amounts held in cash.
Fair Value of Financial Instruments: Management estimates the carrying
value of financial instruments on the consolidated financial statements
approximates their fair values.
-6-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION [Continued]
Financial Instruments: The Company uses derivative financial
instruments for the purpose of reducing it 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 is not a party to leveraged derivatives and does not hold or
issue financial instruments for speculative purposes.
Revenue Recognition: The Company generally sells boats only to
authorized dealers and to the U.S. Government. A sale is recorded when
a boat is shipped to a dealer or to the Government, legal title and all
other incidents of ownership have passed from the Company to the dealer
or Government, and an accounts receivable is recorded or payment
received from the dealer, the Government, or the dealer's third-party
commercial lender. This method of sales recognition is in use by most
boat manufacturers.
The Company has developed criteria for determining whether a shipment
should be recorded as a sale or as a deferred sale (a balance sheet
liability). The criteria for recording a sale are that the boat has
been completed and shipped to a dealer or to the Government, that title
and incidents of ownership have passed to the dealer or to the
Government, and that there is no direct or indirect commitment to the
dealer or to the Government to repurchase the boat save those
manufacturers repurchase agreements with lending institutions which are
more fully discussed in Note 6 to these financial statements.
The sales incentive interest payment program for each boat sale is
accrued for the entire interest period in the same fiscal accounting
period that the related sale is recorded (see Note 6 to these financial
statements). The amount of interest accrued is subsequently adjusted
to reflect the actual number of days of remaining liability for floor
plan interest for each individual boat remaining in the dealer's
inventory and on floor plan.
Stock Options: The Company has stock incentive plans that provides 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. The Company accounts for stock options
issued to employee, officer 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.
-7-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION [Continued]
During the periods presented in the accompanying financial statements
the Company has granted options under the 1995 and 1999 Stock Options
Plans and executive and other employment agreements. The Corporation
has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, compensation cost under SFAS No. 123 has
been recognized for certain stock options issued under other agreements
to non-employee and recorded in the accompanying statement of
operations, but no compensation cost under SFAS No. 123 has been
recognized for stock options issued under the plans and other
agreements with employees.
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 in three months ended 2003
and 2002 consistent with the provisions of SFAS No. 123, the Company's
net earnings net of taxes and earnings per share would have been
reduced to the pro forma amounts indicated below:
For the Quarter
Ended September 30,
__________________________
2003 2002
____________ ___________
Net Income (Loss) As reported $ (345,009) $ 169,244
Add: Stock-based employee compensation
expense included in reported net income 1,795 4,416
Deduct: Total stock-based employee
compensation expense determined under
fair value based method (5,193) (11,292)
____________ ___________
Net Income (Loss) Proforma $ (348,407) $ 162,368
____________ ___________
Basic earnings (loss) per share As reported $ (.07) $ .04
Proforma $ (.07) $ .04
Diluted earnings(loss) per share As reported $ (.07) $ .04
Proforma $ (.07) $ .04
NOTE 2 - ACCOUNTS RECEIVABLE
As of September 30, 2003, accounts receivable were $3,288,612 net of
the allowance for bad debts of $27,841. This is an increase from the
$2,015,371 in net accounts receivable recorded at June 30, 2003. Of
the balance at September 30, 2003, $2,201501 subsequently has been
collected as of October 20, 2003, and the remaining $1,087,111 is
believed to be fully collectible.
The Company has pledged its receivables as collateral for its
promissory note with Bank of America.
-8-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVENTORIES
Inventories at September 30, 2003 and June 30, 2003 consisted of the
following:
September, June 30,
2003 2003
___________ ____________
Parts and supplies $ 1,496,212 $ 1,593,057
Work-in-process 1,655,406 1,702,532
Finished goods 226,544 214,696
___________ ____________
$ 3,378,162 $ 3,510,286
Obsolete inventory reserve (50,000) (50,000)
___________ ____________
Total $ 3,328,162 $ 3,460,286
___________ ____________
The Company has pledged its inventories as collateral for its
promissory note with Bank of America.
NOTE 4 LONG-TERM DEBT AND PLEDGED ASSETS
The following is a summary of long-term debt:
September 30, June 30,
2003 2003
__________ ___________
9.99% loans payable to a
financial institution for
the purchase of vehicles,
monthly payments totaling
$1,383 through August 2005,
secured by the vehicles purchased. 26,012 32,224
6.5% loan payable to a
financial institution for
the purchase of a vehicle,
monthly payments of $726
through December 2006,
secured by the vehicle purchased. 24,097 25,306
7.93% to 8% loans payable
borrowed against the cash
surrender value of key-man
life insurance policies
1998, 2001, and 2002,
monthly payments of $25,004. 1,333,279 1,265,438
$10,000,000 credit agreement
with a financial Corporation
(See Below). - 8,723,636
$18,000,000 credit agreement
with a financial Corporation
(See Below). 17,885,653 -
__________ ___________
19,269,041 10,046,604
Less: Current maturities
included in current liabilities: (1,057,604) (1,060,444)
__________ ___________
$18,211,437 $ 8,986,160
__________ ___________
-9-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 LONG-TERM DEBT AND PLEDGED ASSETS [Continued]
On July 17, 2003, the Company obtained an $18,000,000 long-term loan
from Bank of America. The proceeds were used to refinance the two
loans with General Electric Capital Corporation totaling $10,000,000
with total remaining balance of $8,723,636 and a variable interest rate
of prime plus 2% or 6.25% as of June 30, 2003. Proceeds from the Bank
of America loan were also used to pay trade payables to current status
and provide additional operating funds. The new agreement with Bank of
America has a $9,000,000 note with a rate that is variable with the
Wall Street Libor one month floating rate as the index plus the
applicable margin. The applicable margin is based on funded debt to
earnings before income taxes and depreciation adjustment "EBITDA". The
applicable margin is as follows:
Funded Debt to EBITDA ratio Applicable Margin
___________________________ _________________
Less than or equal to 1.74 to 1.00 1.90%
1.75 to 1.00, but less than 2.50 to 1.00 2.10%
2.50 to 1.00, but less than 3.76 to 1.00 2.25%
Greater than or equal to 3.76 to 1.00 2.50%
The applicable margin for the first year is deemed to be 2.25%.
The new agreement with Bank of America further has a $9,000,000 note
under an interest rate swap to provide a fixed rate of 6.02%. The
interest rate swap is designated as a fair value hedge and is deemed
effective pursuant to SFAS 133. As a result of this swap agreement
interest expense was increased by $43,032 for the three months ended
September 30, 2003. These Bank of America loans have a fifteen year
amortization with a five year balloon payment and are secured by
certain assets of the Company and real estate of the Company's
President, Chief Executive Officer and majority shareholder, Reginald
M. Fountain, Jr. Obligations are guaranteed by the Company, an
unlimited unconditional guarantee of Mr. Fountain and by Brunswick
Corporation, pursuant to a master funding agreement with the Company.
Combined monthly payments to Bank of America will be approximately
$126,000. The Company has agreed to observe certain covenants under the
terms of its note agreements, the most restrictive of which relates to
prepayment of excess earnings, the sale of assets securing the notes
and key financial ratios.
Prepayment - The Company is obligated to pay in addition to required
monthly principle payments, an additional 50% of the excess earnings
after debt service, within 120 days after the close of the Company's
fiscal year end.
Should the Company prepay the balance of the note within one year of
the date of the note, the Company must pay one percent (1%) of the
unpaid balance on the date before the date of the prepayment is made.
If the Company prepays the balance of the note after one year of the
date of the note, the Company must pay a half of a percent (.5%) of the
unpaid balance on the date before the date the prepayment is made.
-10-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 LONG-TERM DEBT AND PLEDGED ASSETS [Continued]
Should the Company default on the provision of timely payments, a
delinquency charge of four percent (4%) of the unpaid portion of the
payment that is more than fifteen days late will be applied. Should the
Company remain in a default status, the interest rate charged to the
Company shall be an additional two percent (2%) above the rates listed
above.
Loan Guarantee - The Company entered into an agreement with Brunswick
Corporation, a division of which supplies marine engines used in the
Company's product, wherein Brunswick Corporation agreed to guarantee
the $18,000,000 in debt financing, in return the Company President
granted Brunswick the option to purchase his common shares and his
options to purchase common shares of the Company. The Company's
President further agreed to indemnify Brunswick for all amounts in
excess of $14,700,000. The Company issued 273,146 options to acquire
common shares at $.05 per share, and agreed to issue additional options
to acquire sufficient shares which would result in Brunswick owning
together with the shares purchased from the Company President 50.1% of
the Company's outstanding shares at the weighted average market closing
price for the previous 30 days. The Company further entered into an
exclusive supply agreement and agreed to restrictions on the Company
issuing any equity securities that would dilute Brunswick's potential
equity interest in the Company upon exercise of their options with the
Company and Company's President without Brunswicks prior approval.
Brunswick Corporation's options to purchase vest upon the earlier of
the repayment or default of $18,000,000 notes payable, or July 1, 2007.
Brunswick Corporation's option expires no earlier than approximately
180 days after vesting.
NOTE 5 - COMMON STOCK
During January 2002, the Company issued 10,000 options to purchase
common stock to a consultant for services to be rendered valued at
$14,254. The options are exercisable at $1.67 per share, vest through
January 2004 and expire January 2009. During the three months ended
September 30, 2003, the Company recorded consulting expense of $1,795.
During July 2003, the Company issued 273,146 options to purchase common
stock to Brunswick Corporation as a condition of guarantying the Bank
of America loan. The options are exercisable at $.05 per share, vest
through July 2007, expire in approximately July 2009 and are valued at
their fair value of $1,002,335 using the Black Scholes Pricing Model.
At September 30, 2003, the Company has recorded deferred interest of
$961,348 and interest expense of $40,988 in connection with these
Options. The Company further issued an option to acquire sufficient
shares which would result in Brunswick owning together with the shares
purchased from the Company President, 50.1% of the Company's
outstanding shares at the weighted average market closing price for the
previous 30 days. The Company also agreed not to issue any equity
instruments without prior approval of Brunswick Corporation.
If Brunswick Corporation exercised fully their options with the Company
and Company President under the loan guarantee they would own 50.1 % of
the outstanding stock of the Company.
-11-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Manufacturer Repurchase Agreements - The Company makes available
through third-party finance companies floor plan financing for many of
its dealers. Sales to participating dealers are approved by the
respective finance companies. If a participating dealer does not
satisfy its obligations under the floor plan financing agreement in
effect with its commercial lender(s) and boats are subsequently
repossessed by the lender(s), then under certain circumstances the
Company may be required to repurchase the repossessed boats if it has
executed a repurchase agreement with the lender(s). At September 30,
2003, the Company had a total contingent liability to repurchase boats
in the event of dealer defaults and if repossessed by the commercial
lenders amounting to approximately $16,625,330. The Company has
reserved for the future losses it might incur upon the repossession and
repurchase of boats from commercial lenders. The amount of the
allowance is based upon probable future events which can be reasonably
estimated. At September 30, 2003, the allowance for boat repurchases
was $200,000.
Dealer Interest - The Company regularly pays a portion of dealers'
interest charges for floor plan financing. These interest charges
amounted to approximately $156,100 for the first three months ended
September 30, 2003 and the estimated unpaid dealer interest included in
accrued dealer incentives at September 30, 2003 amounted to $79,067.
Interest Rate Risk - At September 30, 2003, the Company owed
$17,885,653 on a $18,000,000 credit agreement with Bank of America.
The credit agreement has $9,000,000 at one month LIBOR plus 2.25% or
3.77% as of September 30, 2003, and $9,000,000 under an interest rate
swap to provide a fixed rate of 6.02%. An increase in the LIBOR rate
would have a negative effect on the results of operations of the
Company. A hypothetical 50 basis point increase in interest rates
would result in an approximately $45,000 increase in interest expense.
Engine Supply Agreement - The Company entered into an Engine Supply
agreement with Brunswick Corporation, as a condition for guarantying
the Bank of America loan, to purchase all marine engines from Mercury
Marine division of Brunswick except for products in categories in which
Mercury does not manufacture or are unavailable from Mercury due to
production shortages.
NOTE 7 - TRANSACTIONS WITH RELATED PARTIES
At September 30, 2003, the Company had receivables and advances from
its employees amounting to $4,205.
During the three month period ended September 30, 2003, the Company
paid $71,207 for services rendered to entities owned or controlled by
the Company's Chairman, President, and Chief Executive Officer.
The Company's Chairman, President, and Chief Executive Officer has
guaranteed and personally pledged certain of his assets as collateral
in connection with the $18,000,000 loan with Bank of America and the
Brunswick Corporation agreement to guarantee said loan. The president
further agreed to sell certain of his common shares and options to
purchase common shares to Brunswick Corporation in connection with
their guarantee (See Note 4).
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FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8- INCOME TAXES
For the three month period ended September 30, 2003 and 2002, the
Company paid $0 and $0 for current income taxes and incurred a tax
expense/(benefit) for deferred income taxes of $(11,338) and $159,091,
respectively.
NOTE 9 - EARNINGS (LOSS) PER SHARE
The computations of earnings (loss) per share and diluted earnings per
share amounts are based upon the weighted average number of outstanding
common shares during the periods, plus, when their effect is dilutive,
additional shares assuming the exercise of certain vested stock
options, reduced by the number of shares which could be purchased from
the proceeds from the exercise of the stock options assuming they were
exercised.
The weighted average common shares and common equivalent shares
outstanding for the three month periods ended September 30, 2003 and
2002 for purposes of calculating earnings per share was as follows:
September 30, September 30,
2003 2002
__________ _____________
Weighted average common shares
outstanding used in basic
earnings per share for the
nine months ending 4,757,608 4,732,608
Effect of dilutive stock options 66,481 49,764
__________ _____________
Weighted average common shares
and potential dilutive common
equivalent shares outstanding
used in dilutive earnings
per share 4,824,089 4,782,372
__________ _____________
At September 30, 2003 there were 610,000 unexercised stock options, of
which 480,000 were held by officers and directors of the Company at
prices ranging from $3.58 to $4.67 per share that were not included in
the computation of earnings per share because the effect is anti-
dilutive.
NOTE 10 - VALUATION AND QUALIFYING ACCOUNTS
The balance in the following valuation and qualifying accounts at
September 30, 2003 and change from the year ended June 30, 2003 are as
follows:
Balance Charge to Balance
Valuation and Qualifying June 30, Expense Payments/ September
Account Description 2003 Adjustments Deductions 30, 2003
_______________________________ _________ ___________ __________ _________
Allowance for Doubtful accounts 27,841 - - 27,841
Inventory Valuation Reserve 50,000 - - 50,000
Deferred Tax Valuation Allowance 2,743,556 84,548 - 2,828,104
Warranty Expense 900,000 289,892 (289,892) 900,000
Allowance for Boat Repurchases 200,000 - - 200,000
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Item 2: Management's Discussion and Analysis of Results of Operations
and Financial Condition
Results of Operations.
The operating income for the three months ended September 30, 2003 was
$110,752 or $.02 per share and compares to the operating income of
$605,960 or $.13 per share for the three months ended September 30, 2002.
The net loss for the three months ended September 30, 2003 was $(345,009)
or $(.07) per share as compared to a net income for the three months ended
September 30, 2002 of $169,244 or $.04 per share.
Net sales were $12,885,232 for the first quarter of Fiscal 2004. Net
sales were $12,002,119 for the first quarter of Fiscal 2003. During the
first quarter of Fiscal 2004, unit volumes increased over the same period
of the prior year, with sales volume for three months ended September 30,
2003 at 92 units compared to 86 units for the prior year with a higher
than expected mix in the first quarter of Fiscal 2004 of smaller boats
versus larger boats.
Gross profits on sales for the three months ended September 30, 2003 was
$2,032,181, or 15.8% of net sales, as compared to the gross profits of
$1,905,951, or 15.9% of net sales, for the three months ended September
30, 2002. The gross margin for the three months did not increase as
expected due to higher sales of lower margin small sport boats and lower
sales of higher margin large fish boats and cruisers than expected, and
material costs were not reduced as early in the period as expected.
Selling expenses were $1,355,570 for the three months ended September 30,
2003 as compared to $832,978 for the three months ended September 30,
2002. Increased selling expense resulted from higher racing expense,
magazine advertising expense, fish team expense and marketing expense than
for the same period of the previous year.
General and administrative expenses were $565,859 for the three months
ended September 30, 2003 compared to $467,013 for the three months ended
September 30, 2002. Increase in expenditures for use of an airplane,
salaries, investor relations and legal fees, partially offset by a
reduction in consulting expense resulted in increased administrative
expenses as compared to the same period for the prior year.
Interest expense for the three months ended September 30, 2003 was
$470,158 as compared to $306,201 for the three months ended September 30,
2002. The significant increase in interest expense was due to the write-
off of the amortization of closing costs for the G. E. Capital loan and
the expensing of stock options issued to Brunswick Corporation.
Other non-operating (income)/expense for the three months September 30,
2003 was $3,059 as compared to $28,576 for the three months ended
September 30, 2002.
Liquidity and Capital Resources.
At September 30, 2003, the Company had working capital of $5,841,323 an
improvement of $9,335,268 over the ($3,493,945) working capital deficit at
June 30, 2003.
Cash increased to $3,111,177 at September 30, 2003 compared to the
$1,224,935 at June 30, 2003. The increase in cash can be generally
attributed to the $8,939,663 generated from financing activities primarily
attributed to the Bank of America loan ($18,000,000), less $8,980,049 used
to reduce existing long-term debt, $6,670,894 used by operating activities
attributable to reducing trade payables and increasing accounts receivable
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and $237,400 used by investing activities for additional capital
expenditures to build new molds and tooling.
Cash used by operations for the three months ended September 30, 2003 was
$6,670,894, a decrease of $7,495,948 compared to the $825,054 of cash
provided in operations for the three months ended September 30, 2002.
This change is primarily attributable to the reduction of trade payables
using proceeds of the Bank of America loan and increase of accounts
receivable due to the timing of collections from third party dealer
financiers.
Cash used in the three months ended September 30, 2003 to acquire
additional molds and tooling (investing activity) amounted to $202,700,
which was invested in the new 38' express fish boat and other
miscellaneous tooling projects.
For the remaining nine months of the year ending June 30, 2004 the Company
believes that it will continue to improve upon prior years operating
results. Management has developed and instituted a plan that budgets
expenses and clearly outlines certain sales goals and expectations for the
remainder of the fiscal year. Managememt believes they have sufficient
resources and can generate sufficient cash flows from operations to meet
current liquidity demands.
Cautionary Statement for Purposes of "Safe Harbor" Under the Private
Securities Reform Act of 1995.
The Company may from time to time make forward-looking statements,
including statements projecting, forecasting, or estimating the Company's
performance and industry trends. The achievement of the projections,
forecasts, or estimates contained in these statements is subject to
certain risks and uncertainties, and actual results and events may differ
materially from those projected, forecasted, or estimated.
The applicable risks and uncertainties include general economic and
industry conditions that affect all businesses, as well as, matters that
are specific to the Company and the markets it serves. For example, the
achievement of projections, forecasts, or estimates contained in the
Company's forward-looking statements may be impacted by national and
international economic conditions; compliance with governmental laws and
regulations; accidents and acts of God; and all of the general risks
associated with doing business.
Risks that are specific to the Company and its markets include but are not
limited to compliance with increasingly stringent environmental laws and
regulations; the cyclical nature of the industry; competition in pricing
and new product development from larger companies with substantial
resources; the concentration of a substantial percentage of the Company's
sales with a few major customers, the loss of, or change in demand from,
any of which could have a material impact upon the Company; labor
relations at the Company and at its customers and suppliers; and the
Company's single-source supply and just-in-time inventory strategies for
some critical boat components, including high performance engines, which
could adversely affect production if a single-source supplier is unable
for any reason to meet the Company's requirements on a timely basis.
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk - At September 30, 2003, the Company owed $17,885,653
on a $18,000,000 credit agreement with Bank of America. The credit
agreement has $9,000,000 at one month LIBOR plus 2.25% or 3.77% as of
September 30, 2003, and $9,000,000 under an interest rate swap to provide
a fixed rate of 6.02%. A hypothetical 100 basis point increase in
interest rates would result in an approximately $90,000 increase in
interest expense, resulting in a negative impact on the Company's
liquidity and results of operations.
ITEM 4: Controls and Procedures
On September 30, 2003 an evaluation was performed under the
supervision and with the participation of the Company's management,
including the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-
14. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that the design and operation of these
disclosure controls and procedures were effective. Management's review
and evaluation of disclosure and internal controls and procedures is an
ongoing and continual process. There have been no significant changes
in the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their
evaluation.
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PART II. Other Information.
ITEM 1: Legal Proceedings.
There were no legal proceedings of a material nature during the quarter
ending September 30, 2003
ITEM 2: Change in Securities.
There was no change in securities during the quarter ending September 30,
2003.
Item 3: Defaults Upon Senior Securities.
There were no defaults upon senior securities during the quarter ending
September 30, 2003.
ITEM 4: Submission of Matters to a vote of Security Holders.
There were no matters submitted to a vote of security holders securities
during the quarter ending September 30, 2003.
ITEM 5: Other Information.
None.
ITEM 6: Exhibits and Reports on Form 8 and Form 8-K.
(1) Exhibits:
(a) Exhibit 31.1, Certification pursuant to Rule 13a-14(a) by the Chief
Executive Officer
Exhibit 31.2, Certification pursuant to Rule 13a-14(a) by the
Chief Financial Officer
Exhibit 32, Certifications Pursuant to 18 U.S.C. Section 1350
(b) No Current Reports on Form 8-K were filed by the Registrant during
the first three months of Fiscal 2004.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FOUNTAIN POWERBOAT INDUSTRIES, INC.
(Registrant)
By: /s/Irving L. Smith Date: November 13, 2003
Irving L. Smith
Chief Financial Officer
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