Back to GetFilings.com
1
fountain10q1203final.txt
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 December 31, 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 December 31, 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,
December 31, 2003 and June 30, 2003 3 - 4
Unaudited Condensed Consolidated Statements of Operations,
for the three and six months ended December 31, 2003 and 2002 5
Unaudited Condensed Consolidated Statements of Cash Flows,
for the three and six months ended December 31, 2003 and 2002 6 - 7
Notes to Unaudited Condensed Consolidated Financial
Statements 8 - 15
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 16 - 18
Item 3. Quantitative and Qualitative Disclosures of Market Risk 18
Item 4. Controls and Procedures 18
Part II Other Information
Items 1, 2, 3, 4, 5 & 6 18 - 19
Signature 20
Exhibits
Page 2
PART I. FINANCIAL INFORMATION.
ITEM 1: Financial Statements.
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
ASSETS 2003 2003
CURRENT ASSETS:
Cash and cash equivalents $ 3,995,211 $ 1,224,935
Accounts receivable, net 2,239,123 2,015,371
Inventories 3,891,464 3,460,286
Prepaid Expenses 838,397 644,581
Current tax assets 802,366 807,315
------------ ------------
Total Current Assets 11,766,561 8,152,488
------------ ------------
PROPERTY, PLANT AND EQUIPMENT 42,268,908 41,676,783
Less: Accumulated depreciation (26,554,008) (25,511,099)
------------ ------------
15,714,900 16,165,684
------------ ------------
CASH SURRENDER VALUE LIFE INSURANCE 1,479,000 1,378,626
OTHER ASSETS 611,403 736,288
------------ ------------
TOTAL ASSETS $ 29,571,864 $ 26,433,086
============ ============
(Continued)
Page 3
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
December 31, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2003
CURRENT LIABILITIES:
Current maturities - long-term debt $ 1,070,916 $ 1,060,444
Current maturities - capital lease 17,709 20,118
Accounts payable 1,945,322 7,498,762
Accounts payable - related party 34,000 169,043
Accrued expenses 793,599 1,317,398
Dealer incentives 693,653 190,010
Customer deposits 229,937 290,658
Allowance for boat repurchases 200,000 200,000
Warranty reserve 900,000 900,000
------------ ------------
Total Current Liabilities 5,885,136 11,646,433
LONG-TERM DEBT, less current maturities 18,070,298 8,986,160
CAPITAL LEASE, less current maturities 21,249 24,367
DEFERRED TAX LIABILITY 1,176,012 1,207,958
COMMITMENTS AND CONTINGENCIES (NOTE 5)
------------ ------------
Total Liabilities 25,152,695 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 10,443,840 10,436,551
Accumulated earnings (deficit) (5,891,617) (5,801,326)
------------ ------------
4,599,799 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)
Accumulated other comprehensive income from interest rate swap (67,792) -
------------ ------------
Total Stockholders' Equity 4,419,169 4,568,168
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 29,571,864 $ 26,433,086
============ ============
The Accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
Page 4
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended For the Six Months Ended
December 31, December 31, December 31, December 31,
2003 2002 2003 2002
NET SALES $ 13,361,811 $ 12,941,227 $ 26,247,043 $ 25,016,213
COST OF SALES 11,334,711 10,570,853 22,187,762 20,739,887
------------ ------------ ------------ ------------
Gross Profit 2,027,100 2,370,374 4,059,281 4,276,326
------------ ------------ ------------ ------------
EXPENSES:
Selling expense 1,050,694 1,082,315 2,406,264 1,915,293
General and administrative 519,353 431,241 1,085,212 898,254
------------ ------------ ------------ ------------
Total Expenses 1,570,047 1,513,556 3,491,476 2,813,547
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) 457,053 856,818 567,805 1,462,779
------------ ------------ ------------ ------------
NON-OPERATING INCOME (EXPENSE):
Other income (expense) (1,962) 1,389 1,097 29,965
Interest expense (216,032) (214,475) (686,190) (520,676)
------------ ------------ ------------ ------------
Total Non-operating Income (Expense) (217,994) (213,086) (685,093) (490,711)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 239,059 643,732 (117,288) 972,068
CURRENT TAX EXPENSE (BENEFIT) - - - -
DEFERRED TAX EXPENSE (BENEFIT) (15,659) 161,273 (26,997) 320,364
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 254,718 $ 482,459 $ (90,291) $ 651,704
============ ============ ============ ============
BASIC EARNINGS (LOSS) PER SHARE $ 0.05 $ 0.10 $ (0.01) $ 0.14
============ ============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING 4,757,608 4,745,108 4,757,608 4,745,108
============ ============ ============ ============
DILUTED EARNINGS (LOSS) PER SHARE $ 0.05 $ 0.10 $ (0.01) $ 0.14
============ ============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING ASSUMING DILUTION 4,819,635 4,825,399 4,821,862 4,803,886
============ ============ ============ ============
The Accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
Page 5
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
For the Six Months Ended
December 31, December 31,
2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (90,291) $ 651,704
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation 1,042,909 1,028,308
Net deferred taxes (26,997) 320,365
Loss on sale of fixed asset - 29,613
Amortization of deferred loan cost 246,980 30,900
Non-cash expense 9,085 8,846
Change in assets and liabilities:
Decrease (increase) in accounts receivable (223,752) 2,293,396
(Increase) in inventories (431,179) (477,112)
(Increase) in prepaid expenses (193,816) (238,089)
(Decrease) in accounts payable (5,688,483) (514,714)
(Decrease) in accrued expenses (447,814) (245,572)
(Decrease) in dealer incentives 427,658 (489,937)
(Decrease) in customer deposits (60,721) (381,106)
------------ ------------
Net Cash Provided (Used) by Operating Activities (5,436,421) 2,016,602
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (110,857) (793,891)
Investment in molds and related plugs (481,269) -
Proceeds from sale of fixed assets - 110,500
(Increase) in other assets (222,468) (100,824)
------------ ------------
Net Cash Provided (Used) by Investing Activities (814,594) (784,215)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 18,067,841 95,000
Payments of long-term debt (8,898,421) (497,442)
Payment of deferred loan cost (148,129) -
Proceeds from stock options exercised - 16,800
------------ ------------
Net Cash Provided (Used) by Financing Activities 9,021,291 (385,642)
------------ ------------
Net increase in cash and cash equivalents 2,770,276 846,745
Cash and cash equivalents at beginning of year 1,224,935 329,640
------------ ------------
Cash and cash equivalents at end of period $ 3,995,211 $ 1,176,385
============ ============
(Continued)
Page 6
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(Continued)
For the Six Months Ended
December 31, December 31,
2003 2002
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest, net of amounts capitalized $ 498,339 $ 520,677
Income taxes $ - $ -
Supplemental Disclosures of Noncash Investing and Financing
Activities:
For the six month period ended December 31, 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.
For the six month period ended December 31, 2002:
The Company recorded consulting expense of $8,846 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
Page 7
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO THE 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 December 31, 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 three and six month
periods ended December 31, 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 December 31, 2003 and June 30, 2003, the Company had
$3,895,211 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.
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 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" and it has the effect of converting the
interest rate paid on the notional amount of $9,000,000 of the
Company's variable debt to a fixed rate of 6.02%. The difference
between the Company's actual variable interest rate and 6.02% on
the notional amount for the next twelve months is reclassified
from other comprehensive income and recognized as interest
expense. 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.
Page 8
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1 - BASIS OF PRESENTATION (continued)
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 manufacturer's 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 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 5. 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 Operations.
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 SFAS 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 the six
months ended December 31, 2003 and 2002 consistent with the
provisions of SFAS No. 123, the Company's net income and earnings
per share would have been reduced to the pro forma amounts
indicated below:
Page 9
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1 - BASIS OF PRESENTATION (continued)
For the Three Months Ended For the Six Months Ended
December 31, December 31, December 31, December 31,
2003 2002 2003 2002
Net Income (Loss) as Reported $ 254,718 $ 482,459 $ (90,291) $ 651,704
Add: Stock-based nonemployee compensation
expense included in reported net income - 9,117 1,795 13,533
Deduct: Total stock-based employee
compensation expense determined
under fair value based method (5,193) (24,826) (10,386) (36,118)
----------- ----------- ----------- -----------
Net Income (Loss) Proforma $ 249,525 $ 466,750 $ (98,882) $ 629,119
=========== =========== =========== ===========
Basic earnings (loss) As reported $ 0.06 $ 0.10 $ (0.01) $ 0.14
=========== =========== =========== ===========
Proforma $ 0.05 $ 0.10 $ (0.02) $ 0.13
=========== =========== =========== ===========
Diluted earnings (loss) As reported $ 0.06 $ 0.10 $ (0.01) $ 0.14
=========== =========== =========== ===========
Proforma $ 0.05 $ 0.10 $ (0.02) $ 0.13
=========== =========== =========== ===========
NOTE 2 - ACCOUNTS RECEIVABLE
As of December 31, 2003, accounts receivable were $2,239,123 net
of the allowance for bad debts of $27,841. This is an increase
from the $223,752 in net accounts receivable over the amount recorded
at June 30, 2003. Of the balance at December 31, 2003, $2,068,687
subsequently has been collected as of February 12, 2004, and the
remaining $198,277 is believed to be fully collectible.
The Company has pledged its receivables as collateral for its
promissory note with Bank of America.
NOTE 3 - INVENTORIES
Inventories at December 31, 2003 and June 30, 2003 consisted of
the following:
December 31, June 30,
2003 2003
Parts and supplies $ 1,721,675 $ 1,593,057
Work-in-process 2,112,199 1,702,533
Finished Goods 107,590 214,696
------------ ------------
3,941,464 3,510,286
Obselete inventory reserve (50,000) (50,000)
------------ ------------
Total $ 3,891,464 $ 3,460,286
============ ============
Page 10
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
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:
December 31, 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. $ 25,396 $ 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. 22,159 25,306
7.93% to 8% loans payable borrowed against
the cash surrender value of key-man life insurance
policies, monthly payments
of $25,004. 1,358,472 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). 17,735,187 -
------------ ------------
19,141,214 10,046,604
Less: Current maturities included in current liabilities (1,070,916) (1,060,444)
------------ ------------
$ 18,070,298 $ 8,986,160
============ ============
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:
Page 11
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 4 - LONG-TERM DEBT AND PLEDGED ASSETS (Continued)
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 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 cash flow hedge and is
deemed effective pursuant to SFAS 133. 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. Chief among the
covenants are:
1. Maintenance of a tangible net worth floor.
2. A current maturity coverage ratio defined as the ratio of the
current portion of long-term liabilities plus interest to "cash
flow" which is defined as net income plus depreciation,
amortization, interest and other non-cash expenditures.
3. A funded debt to earnings before interest, taxes, depreciation
and amortization (EBITDA) ratio which is defined as the ratio of
all outstanding debt both current and long-term to EBITDA.
As of December 31, 2003 the Company was in compliance with all
its required covenants.
Prepayment - The Company is obligated to pay in addition to
required monthly principle payments, and 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.
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.
Page 12
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 4 - LONG-TERM DEBT AND PLEDGED ASSETS (Continued)
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 that are exercisable in the event
of a default by the Company on its loan. In the event Brunswick
Corporation exercises its option to purchase the Company
President's shares the Company has agreed to issue additional
shares of common stock 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 and six months ended December 31, 2003, the Company
recorded consulting expense of $0 and $1,795, respectively.
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 only under conditions of default by the Company of
its loan and Brunswick having exercised its guarantee of the
loan. Should Brunswick Corporation exercise its option to
purchase the Company President's stock, the Company has agreed to
issue additional common 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.
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 December 31, 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 $11,129,254. 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 December 31, 2003, the allowance for boat
repurchases was $200,000.
Page 13
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 6 - COMMITMENTS AND CONTINGENCIES (Continued)
The Company vigilantly monitors all its dealers for solvency
issues by examining dealer inventory levels and amounts carried
under floor plan financing. At present the Company has no dealers
that it believes to be at risk of default under their floor plan
arrangements.
Dealer Interest - The Company regularly pays a portion of
dealers' interest charges for floor plan financing. These
interest charges amounted to approximately $142,331 and $374,416,
respectively for the three and six months ended December 31, 2003
and the estimated unpaid dealer interest included in accrued
dealer incentives at December 31, 2003 amounted to $77,432.
Interest Rate Risk - At December 31, 2003, the Company owed
$17,667,394 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 December 31, 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 December 31, 2003, the Company had receivables and advances
from its employees amounting to $19,294.
During the three and six month period ended December 31, 2003,
the Company paid $42,625 and $123,500 respectively, 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)
NOTE 8 - INCOME TAXES
The Company paid $0 and $0 respectively for the three and six
month periods ended December 31, 2003 and $0 and $0
respectively, for the three and six month periods ended December
31, 2002 for current income taxes and incurred a tax
expense/(benefit) for deferred income taxes for the three and six
month periods ended December 31, 2003 of $(15,659) and $(26,997),
respectively and for the three and six month periods ended
December 31, 2002 of $161,273 and $320,364, respectively.
The Company has a net operating loss carry-forward for tax
purposes that is subject to a valuation reserve as well as other
permanent and timing differences of income and expenses for tax
and financial reporting purposes. Accordingly, the deferred tax
expense (benefit) reported on the unaudited condensed
consolidated statement of operations is not calculated according
to the statutory rate but according to changes in the balances of
the timing differences and the valuation reserve in accordance
with SFAS No. 109, "Accounting for Income Taxes".
Page 14
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
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 and six month periods ended
December 31, 2003 and 2002 for purposes of calculating earnings
per share was as follows:
For the Three Months Ended For the Six Months Ended
December 31, December 31, December 31, December 31,
2003 2002 2003 2002
Weighted average common shares outstanding
used in basic earnings per share for the three
and six months ending 4,757,608 4,745,108 4,757,608 4,745,108
Effect of dilutive stock options 62,027 80,291 64,254 58,778
---------- ---------- ---------- ----------
Weighted average common shares and potential
dilutive common equivalent shares outstanding
used in dilutive earnings per share 4,819,635 4,825,399 4,821,862 4,803,886
========== ========== ========== ==========
At December 31, 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
December 31, 2003 and change from the year ended June 30, 2003 are
as follows:
Balance Charge to Payments Balance
Valuation and Qualifying June 30, Expense and Other December 31,
Account Description 2003 Adjustments Reductions 2003
Allowance for doubtful accounts 27,841 - - 27,841
Inventory valuation reserve 50,000 - - 50,000
Deferred tax valuation allowance 2,743,556 - (6,014) 2,737,542
Warranty reserve 900,000 638,018 (638,018) 900,000
Allowance for boat repurchases 200,000 - - 200,000
Page 15
ITEM 2: Management's Discussion and Analysis of Results of
Operations and Financial Condition
Results of Operations
The following tables should be read in conjunction with
management's discussion and set forth, for the periods and dates
indicated, certain financial, operating and balance sheet data
including, as applicable, the percentages of net sales:
For the Three Months Ended Change over the
December 31, 2003 December 31, 2002 Prior Period
Net sales $13,361,811 100.0% $12,941,227 100.0% $ 420,584 3.2%
Cost of sales 11,334,711 84.8% 10,570,853 81.7% 763,858 7.2%
-------------------- -------------------- -------------------
Gross profit $ 2,027,100 15.2% $ 2,370,374 18.3% $ (343,274) -14.5%
==================== ==================== ===================
Selling expense $ 1,050,694 $ 1,082,315 $ (31,621)
General and administrative $ 519,353 $ 431,241 $ 88,112
Interest expense $ 216,032 $ 214,475 $ 1,557
Net income $ 254,718 $ 482,459 $ (227,741)
Boat shipments (Units shipped) 94 103 (9)
For the Six Months Ended Change over the
December 31, 2003 December 31, 2002 Prior Period
Net sales $26,247,043 100.0% $25,016,213 100.0% $1,230,830 4.9%
Cost of sales $22,187,762 84.5% $20,739,887 82.9% 1,447,875 7.0%
-------------------- -------------------- -------------------
Gross profit $ 4,059,281 15.5% $ 4,276,326 17.1% $ (217,045) -5.1%
==================== ==================== ===================
Selling expense $ 2,406,264 $ 1,915,293 $ 490,971
General and administrative $ 1,085,212 $ 898,254 $ 186,958
Interest expense $ 686,190 $ 520,676 $ 165,514
Net income $ (90,291) $ 651,704 $ (741,995)
Boat shipments (Units shipped) 205 188 17
Net Sales - The increase in net sales of $420,584 and $1,230,830
during the three and six months ended December 31, 2003,
respectively, from the comparable periods during the previous
year was primarily attributable to increases in the unit selling
price of the boats produced by the Company.
Gross Profit - The decrease in gross profit of $343,274 and
$217,045 for the three and six months ended December 31, 2003,
respectively, as compared to the comparable periods in the
previous year is primarily attributable to the mix of boats sold
by the Company. During the current quarter and six month period
the Company sold smaller boats (which have a lower gross margin
per sales dollar) in greater numbers than during the comparable
period in the previous year.
Selling Expenses - Selling expenses for the three months ended
December 31, 2003 were $31,621 less than the amounts incurred
during the comparable period in the previous year and represent
normal expenditures for sales and marketing activities of the
Company. The increase of $490,971 in selling expenses during the
six months ended December 31, 2003 over the comparable six months
in the previous year is primarily attributable to higher racing,
fish team and magazine advertising expenses incurred during the
first three months of the Company's fiscal year.
Page 16
General and Administrative Expenses - The increase in general and
administrative expenses of $88,112 and $186,958 for the three and
six months ended December 31, 2003, respectively, over the
comparable periods in the previous year is primarily attributable
to increases in accounting department expenditures relating to
compliance with certain provisions of the Sarbanes - Oxley Act
and increased travel costs consistent with the acquisition of
additional dealers during the period.
Interest Expense - The interest expense during the three months
ended December 31, 2003 of $216,032 was $1,557 greater than the
interest expense during the comparable quarter in the previous
year and represents normal debt service for the Company. The
$165,514 increase in interest expense during the six months ended
December 31, 2003 over the comparable period in the previous year
is primarily attributable to the write-off of the unamortized
closing costs of a loan with G. E. Capital that was paid with a
partial amount of the proceeds of the Bank of America loan during
the quarter ended September 30, 3003.
Net Income - The decrease in net income of $227,741 and $741,995
during the three and six months ended December 31, 2003,
respectively, as compared to the comparable periods during the
previous year, is primarily attributable to the mix of units sold
in the first and second quarters of this year and the increased
selling and general and administrative expenses experienced in
the first three months of the Company's fiscal year.
Liquidity and Capital Resources
The following table sets forth certain items relating to the
measurement of liquidity and capital resources from the Company's
condensed consolidated financial statements for the dates
indicated:
Balances as of
December 31, June 30, Increase
2003 2002 (Decrease)
Cash and cash equivalents 3,995,211 1,224,935 2,770,276
Working capital 5,881,425 (3,493,945) 9,375,370
Current Ratio 2.02 to 1.00 .070 to 1.00
Quick Ratio 1.14 to 1.00 0.11 to 1.00
Cash increased by $2,770,276 to $3,995,211 during the six months
ended December 31, 2003 from $1,224,935 at June 30, 2003. The
increase in cash can generally be attributed to financing
activities which arose from the Bank of America loan of
$18,000,000, less $8,980,049 which was used to reduce existing
long-term debt, $6,065,742 which was used to reduce trade
payables and $592,126 which was used to construct additional
molds for the new 38' express fish boat and other miscellaneous
tooling projects.
Cash used by operations for the six months ended December 31,
2003 was $5,436,421 and was primarily attributable to the use of
loan proceeds to reduce trade payables as outlined in the
immediately preceding paragraph and to finance the increase in
trade receivables and inventories consistent with the improvement
in the Company's sales.
In the six months following the borrowings from Bank of America
the Company has internally generated $1,462,381 of cash from
operations. The Company believes that it will continue to improve
upon the three and six months ended December 31, 2003 and upon
its prior years operating results. With a favorable sales climate
induced by the improving trends in the U.S. economy and the
Company's operation's generated cash flows, Management believes
that it will have sufficient resources to meet its current and
future liquidity demands.
Page 17
As described in Note 4 of the notes to the condensed consolidated
financial statements, the Company is required to maintain certain
covenants with its senior lender, Bank of America. On February
10, 2004 the Company renegotiated certain of these covenants as
described in Exhibit 10 of this quarterly report. As of December
31, 2003 the Company was in compliance with all covenants
required by its loan agreement with Bank of America.
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.
ITEM 3: Quantitative and Qualitative Disclosures about Market
Risk.
Interest Rate Risk - At December 31, 2003, the Company owed
$17,667,394 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 December 31, 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 December 31, 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.
PART II. OTHER INFORMATION.
ITEM 1: Legal Proceedings.
There were no legal proceedings of a material nature during the
quarter ending December 31, 2003
ITEM 2: Change in Securities.
There was no change in securities during the quarter ending
December 31, 2003.
Page 18
Item 3: Defaults Upon Senior Securities.
There were no defaults upon senior securities during the quarter
ending December 31, 2003.
ITEM 4: Submission of Matters to a vote of Security Holders.
The Company's Annual Meeting of Shareholders was held on November
18, 2003. Each person who was then serving as a member of the
Board of Directors was re-elected for another one year term. The
votes for each nominee were cast as follows:
Shares Voting
For Against Withheld
Reginald M. Fountain, Jr. 3,972,730 - 535
A. Myles Cartrette 3,972,730 - 535
George L. Deichmann, III 3,972,730 - 535
Guy L. Hecker, Jr. 3,972,730 - 535
David C. Miller 3,972,730 - 535
Mark L. Spencer 3,972,730 - 535
Robert L. Stallings, III 3,972,730 - 535
David L. Woods 3,972,730 - 535
The shareholders ratified the Board of Directors' appointment of
Pritchett, Siler & Hardy, PA as independent certified public
accountants for the Company. The appointment was ratified by a
vote of 3,973,099 shares for and 0 shares against or withheld,
with 166 abstentions or broker nonvotes.
ITEM 5: Other Information.
None.
ITEM 6: Exhibits and Reports on Form 8 and Form 8-K.
(1). Exhibits:
(a). Exhibit 10, Agreement dated February 10, 2004 between Fountain
Powerboat Industries, Inc. and Bank of America amending the
covenant ratios contained in the original loan agreement between
the parties executed on July 17. 2003
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 quarter for which this report was filed.
Page 19
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: February 13, 2003
Irving L. Smith
Chief Financial Officer
Page 20