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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 March 31, 2004
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 March 31, 2004
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,
March 31, 2004 and June 30, 2003 3 - 4
Unaudited Condensed Consolidated Statements of
Operations, for the three and nine months ended
March 31, 2004 and 2003 5
Unaudited Condensed Consolidated Statements of
Cash Flows, for the three and nine months ended
March 31, 2004 and 2003 6 - 7
Notes to Unaudited Condensed Consolidated
Financial Statements 8 - 16
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial
Condition 17 - 19
Item 3. Quantitative and Qualitative Disclosures
of Market Risk 19
Item 4. Controls and Procedures 19
Part II Other Information
Items 1, 2, 3, 4, 5 & 6 20
Signature 21
Exhibits
Page 2
PART I. FINANCIAL INFORMATION.
ITEM 1: Financial Statements.
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, June 30,
ASSETS 2004 2003
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents 3,584,625 1,224,935
Accounts receivable, net 3,585,857 2,015,371
Inventories 4,637,734 3,460,286
Prepaid Expenses 649,323 644,581
Current tax assets 806,066 807,315
------------ ------------
Total Current Assets 13,263,605 8,152,488
------------ ------------
PROPERTY, PLANT AND EQUIPMENT 42,374,815 41,676,783
Less: Accumulated depreciation (26,863,374) (25,511,099)
------------ ------------
15,511,440 16,165,684
------------ ------------
CASH SURRENDER VALUE LIFE INSURANCE 1,535,284 1,378,626
OTHER ASSETS 671,351 736,288
------------ ------------
TOTAL ASSETS 30,981,680 26,433,086
============ ============
Continued
Page 3
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 2004 2003
------------ ------------
CURRENT LIABILITIES:
Current maturities - long-term debt 1,091,865 1,060,444
Current maturities - capital lease 17,709 20,118
Accounts payable 2,026,651 7,498,762
Accounts payable - related party 14,125 169,043
Accrued expenses 1,045,707 1,317,398
Dealer incentives 1,040,802 190,010
Customer deposits 522,207 290,658
Allowance for boat repurchases 75,000 200,000
Warranty reserve 900,000 900,000
------------ ------------
Total Current Liabilities 6,734,066 11,646,433
LONG-TERM DEBT, less current maturities 17,976,978 8,986,160
CAPITAL LEASE, less current maturities 6,562 24,367
DEFERRED TAX LIABILITY 1,149,066 1,207,958
COMMITMENTS AND CONTINGENCIES (NOTE 5) - -
------------ ------------
Total Liabilities 25,866,672 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) (5,106,605) (5,801,326)
------------ ------------
5,384,811 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 (156,965) -
------------ ------------
Total Stockholders' Equity 5,115,008 4,568,168
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 30,981,680 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 Nine Months Ended
March 31, March 31, March 31, March 31,
2004 2003 2004 2003
------------ ------------ ------------ ------------
NET SALES 15,790,650 12,783,311 42,037,693 37,799,524
COST OF SALES 12,671,582 10,871,979 34,859,344 31,611,866
------------ ------------ ------------ ------------
Gross Profit 3,119,068 1,911,332 7,178,349 6,187,658
------------ ------------ ------------ ------------
EXPENSES:
Selling expense 1,593,717 1,396,465 3,999,981 3,311,758
General and administrative 487,891 330,467 1,573,103 1,228,721
------------ ------------ ------------ ------------
Total Expenses 2,081,608 1,726,932 5,573,084 4,540,479
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) 1,037,460 184,400 1,605,265 1,647,179
------------ ------------ ------------ ------------
NON-OPERATING INCOME (EXPENSE):
Other income (expense) 5,524 (29,799) 6,621 166
Interest expense (288,619) (245,939) (974,809) (766,615)
------------ ------------ ------------ ------------
Total Non-operating Income (Expense) (283,095) (275,738) (968,188) (766,449)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 754,365 (91,338) 637,077 880,730
CURRENT TAX EXPENSE (BENEFIT) - - - -
DEFERRED TAX EXPENSE (BENEFIT) (30,646) 86,064 (57,643) 406,428
------------ ------------ ------------ ------------
NET INCOME (LOSS) 785,011 (177,402) 694,720 474,302
============ ============ ============ ============
BASIC EARNINGS (LOSS) PER SHARE 0.17 (0.04) 0.15 0.10
============ ============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING 4,757,608 4,745,108 4,757,608 4,745,108
============ ============ ============ ============
DILUTED EARNINGS (LOSS) PER SHARE 0.16 N/A 0.15 0.10
============ ============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING ASSUMING DILUTION 4,833,092 N/A 4,825,605 4,811,619
============ ============ ============ ============
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 Nine Months Ended
March 31, March 31,
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES: ------------ ------------
Net income (loss) 694,720 474,302
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation 1,545,395 1,574,814
Net deferred taxes (57,643) 406,428
Loss on sale of fixed asset 11,696 9,890
Amortization of deferred loan cost 266,963 46,350
Non-cash expense 9,085 13,440
Increase in warranty reserve - 30,000
(Decrease) in allowance for boat repurchases (125,000) -
Change in assets and liabilities:
Decrease (increase) in accounts receivable (1,570,486) 438,802
(Increase) in inventories (1,177,448) (113,219)
(Increase) in prepaid expenses (4,742) (400,765)
Increase(decrease) in accounts payable (5,627,029) 7,726
(Decrease) in accrued expenses (271,691) (92,886)
Increase(decrease) in dealer incentives 850,792 (583,936)
Increase(decrease) in customer deposits 231,549 (492,227)
------------ ------------
Net Cash Provided (Used) by Operating Activities (5,223,839) 1,318,719
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (153,463) (512,125)
Investment in molds and related plugs (774,384) (576,302)
Proceeds from sale of fixed assets 25,000 165,945
(Increase) in other assets and liabilities (210,555) (277,026)
------------ ------------
Net Cash Provided (Used) by Investing Activities (1,113,402) (1,199,508)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 18,067,841 343,029
Payments of long-term debt (9,222,781) (756,778)
Payment of deferred loan cost (148,129) -
Proceeds from stock options exercised - 16,800
------------ ------------
Net Cash Provided (Used) by Financing Activities 8,696,931 (396,949)
------------ ------------
Net increase in cash and cash equivalents 2,359,690 (277,738)
Cash and cash equivalents at beginning of year 1,224,935 329,640
------------ ------------
Cash and cash equivalents at end of period 3,584,625 51,902
============ ============
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 Nine Months Ended
March 31, March 31,
2004 2003
------------ ------------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest, net of amounts capitalized 977,171 771,831
Income taxes - -
Supplemental Disclosures of Noncash Investing and Financing
Activities:
For the nine month period ended March 31, 2004:
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 nine month period ended March 31, 2003:
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 March 31, 2004 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 nine
month periods ended March 31, 2004 and 2003 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 March 31, 2004 and June 30, 2003, the Company had $3,484,625
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.
The Company has entered into arrangements that license other
foreign companies to manufacture boats utilizing the Company's
concepts and designs in exchange for royalties received for each
boat manufactured and sold. The Company accounts for these
royalties as sales revenue when payment is received.
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 nine
months ended March 31, 2004 and 2003 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 Nine Months Ended
March 31, March 31, March 31, March 31,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net Income (Loss) as Reported 785,011 (177,401) 694,720 474,302
Add: Stock-based nonemployee compensation
expense included in reported net income - 4,600 1,795 15,446
Deduct: Total stock-based employee
compensation expense determined
under fair value based method (5,193) (24,826) (15,579) (60,944)
------------ ------------ ------------ ------------
Net Income (Loss) Proforma 779,818 (197,627) 680,936 428,804
============ ============ ============ ============
Basic earnings (loss) per share: As reported 0.17 (0.04) 0.15 0.10
Proforma 0.16 (0.04) 0.14 0.09
Diluted earnings (loss) per share: As reported 0.16 N/A 0.14 0.10
Proforma 0.16 N/A 0.14 0.09
NOTE 2 - ACCOUNTS RECEIVABLE
Accounts receivable at March 31, 2004 and June 30, 2003 consisted
of the following:
March 31, June 30,
2004 2003
------------ ------------
Trade accounts receivable 3,668,698 2,043,212
Allowance for doubtful accounts (82,841) (27,841)
------------ ------------
Total 3,585,857 2,015,371
============ ============
The Company reviews its receivables on a regular basis and
adjusts its allowance for doubtful accounts based upon its best
judgment. The Company believes these amounts (net of the
allowance for doubtful accounts) to be fully realizable and has
pledged its receivables as collateral for its promissory note
with Bank of America.
NOTE 3 - INVENTORIES
Inventories at March 31, 2004 and June 30, 2003 consisted of the
following:
March 31, June 30,
2004 2003
------------ ------------
Parts and supplies 1,895,490 1,593,057
Work-in-process 2,636,510 1,702,533
Finished Goods 155,734 214,696
------------ ------------
4,687,734 3,510,286
Obselete inventory reserve (50,000) (50,000)
------------ ------------
Total 4,637,734 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:
March 31, June 30,
2004 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. 21,852 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. 20,276 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. 1,366,491 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). 17,660,224 -
------------ ------------
19,068,843 10,046,604
Less: Current maturities included in current liabilities (1,091,865) (1,060,444)
------------ ------------
17,976,978 8,986,160
============ ============
On July 17, 2003, the Company obtained an $18,000,000 long-term
loan from Bank of America which matures in five years. 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%
(2.50% for seven months as amended on February 10, 2004).
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)
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 which the Company's
tangible net worth may not fall below.
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 which the
Company's ratio may not fall below.
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 which
the Company's ratio may not exceed.
4. Maintenance of a gross margin (gross profit) percentage floor
which the Company's gross margin percentage may not fall below.
These covenants change and generally become more restrictive in
future periods. The following matrix lists the required covenant
levels for the periods then indicated:
March 31, June 30, September 30, December 31, June 30,
2004 2004 2004 2004 2005
------------ ------------ ------------ ------------ ------------
Tangible Net Worth Floor 4.300 Million $4.475 Million $4.500 Million $4.800 Million $5.225 Million
Current Maturity Coverage Ratio 1.25 to 1.00 1.30 to 1.00 1.40 to 1.00 1.50 to 1.00 1.50 to 1.00
Funded Debt to EBITDA 6.25 to 1.00 6.00 to 1.00 5.25 to 1.00 5.00 to 1.00 3.75 to 1.00
Gross Margin Floor % 13.50% 14.50% 14.50% 14.50% 14.50%
The Company is required to renegotiate these covenants prior to
June 30, 2005.
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)
The Company's performance under the loan covenants for the
current quarter ended March 31, 2004 was as follows:
1. The applicable tangible net worth floor required by the
Company's lender for the current quarter ended March 31, 2004 was
a tangible net worth not less than $4.30 million. The Company's
tangible net worth for purposes of determining compliance was
$5.12 million.
2. The current maturity coverage ratio required by the Company's
lender for the current quarter ended March 31, 2004 was a ratio
not less than 1.25 to 1.00. The Company's current maturity
coverage ratio for purposes of determining compliance was 1.79 to
1.00.
3. The funded debt to EBITDA ratio required by the Company's
lender for the current quarter ended March 31, 2004 was a ratio
not more than 6.25 to 1.00. The Company's funded debt to EBITDA
ratio for purposes of determining compliance was 4.53 to 1.00.
4. The gross margin percentage floor required by the Company's
lender for the current quarter ended March 31, 2004 was a gross
margin percentage of not less than 13.5%. The Company's gross
margin percentage for purposes of determining compliance was
19.8%.
As of March 31, 2004 the Company was in compliance with all its
required covenants.
In addition to the covenants listed above, the Company may not
exceed its budgeted annual listing of fixed asset purchases
approved by the loan's guarantor, Brunswick Corporation and any
non-listed fixed asset purchases greater than $50,000 per
instance must have Brunswick Corporation's express approval prior
to acquisition. The Company expects this restriction to have no
material effect upon its ability to maintain and improve its
facilities and compete with other companies in the boating
industry.
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 13
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 nine months ended March 31, 2004, the Company
recorded consulting expense of $0 and $1,795, respectively as
compare to the respective March 31, 2003 amounts of $4,600 and
$15,446.
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 March 31, 2004, 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 $25,637,698. 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 March 31, 2004, the allowance for boat repurchases
was $75,000.
Page 14
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 $278,453 and $652,869,
respectively for the three and nine months ended March 31, 2004
and the estimated unpaid dealer interest included in accrued
dealer incentives at March 31, 2004 amounted to $51,540.
Interest Rate Risk - At March 31, 2004, the Company owed
$17,660,224 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 March 31, 2004, the Company had receivables and advances from
its employees amounting to $9,730.
During the three and nine month period ended March 31, 2004, the
Company paid $55,000 and $178,500 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 nine
month periods ended March 31, 2004 and $0 and $0 respectively,
for the three and nine month periods ended March 31, 2003 for
current income taxes and incurred a tax expense/(benefit) for
deferred income taxes for the three and nine month periods ended
March 31, 2004 of $(30,646) and $(57,643), respectively and for
the three and nine month periods ended March 31, 2003 of $86,064
and $406,428, 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 15
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 nine month periods ended
March 31, 2004 and 2003 for purposes of calculating earnings per
share was as follows:
For the Three Months Ended For the Nine Months Ended
March 31, March 31, March 31, March 31,
2004 2003 2004 2003
------------ ------------ ------------ ------------
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 75,484 N/A 67,997 66,511
------------ ------------ ------------ ------------
Weighted average common shares and potential
dilutive common equivalent shares outstanding
used in dilutive earnings per share 4,833,092 N/A 4,825,605 4,811,619
At March 31, 2004 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
March 31, 2004 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 March 31,
Account Description 2003 Adjustments Reductions 2004
------------ ------------ ------------ ------------
Allowance for doubtful accounts 27,841 55,000 - 82,841
Inventory valuation reserve 50,000 - - 50,000
Deferred tax valuation allowance 2,743,556 - (338,111) 2,405,445
Warranty reserve 900,000 889,833 889,833 2,679,666
Allowance for boat repurchases 200,000 (125,000) - 75,000
Page 16
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
March 31, 2004 March 31, 2003 Prior Period
Net sales 15,790,650 100.0% 12,783,311 100.0% 3,007,339 23.5%
Cost of sales 12,671,582 80.2% 10,871,979 85.0% 1,799,603 16.6%
----------- ----- ----------- ----- ----------- -----
Gross profit 3,119,068 19.8% 1,911,332 15.0% 1,207,736 63.2%
=========== ===== =========== ===== =========== =====
Selling expense 1,593,717 1,396,465 197,252
General and administrative 487,891 330,467 157,424
Interest expense 288,619 245,939 42,680
Net income 785,011 (177,402) 962,413
Boat shipments (Units shipped) 94 93 1
For the Nine Months Ended Change over the
March 31, 2004 March 31, 2003 Prior Period
Net sales 42,037,693 100.0% 37,799,524 100.0% 4,238,169 11.2%
Cost of sales 34,859,344 82.9% 31,611,866 83.6% 3,247,478 10.3%
----------- ----- ----------- ----- ----------- -----
Gross profit 7,178,349 17.1% 6,187,658 16.4% 990,691 16.0%
=========== ===== =========== ===== =========== =====
Selling expense 3,999,981 3,311,758 688,223
General and administrative 1,573,103 1,228,721 344,382
Interest expense 974,809 766,615 208,194
Net income 694,720 474,302 220,418
Boat shipments (Units shipped) 299 281 18
Net Sales - The increase in net sales of $3,007,339 and
$4,238,169 during the three and nine months ended March 31, 2004,
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 increase in gross profit of $1,207,736 and
$990,691 for the three and nine months ended March 31, 2004,
respectively, as compared to the comparable periods in the
previous year is primarily attributable to the increase in the
unit selling price of boats sold as discussed above combined with
a favorable mix of boats sold by the Company. During the current
quarter and nine month period the Company sold larger boats
(which have a higher 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
March 31, 2004 were $197,252 more 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 $688,223 in selling expenses during the
nine months ended March 31, 2004 over the comparable nine 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 17
General and Administrative Expenses - The increase in general and
administrative expenses of $157,424 and $344,382 for the three
and nine months ended March 31, 2004, 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 March 31, 2004 of $288,619 was $42,680 greater than the
interest expense during the comparable quarter in the previous
year and represents normal debt service for the Company. The
$208,194 increase in interest expense during the nine months
ended March 31, 2004 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 increase in net income of $962,413 and $220,418
during the three and nine months ended March 31, 2004,
respectively, as compared to the comparable periods during the
previous year, is primarily attributable to the favorable mix of
units sold in the first, second and third quarters of this year
and the increased selling price per unit currently being enjoyed
by the Company.
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
March 31, June 30, Increase
2004 2003 (Decrease)
------------ ------------ ------------
Cash and cash equivalents 3,584,625 1,224,935 2,359,690
Working capital 6,529,539 (3,493,945) 10,023,484
Current Ratio 1.97 to 1.00 0.71 to 1.00
Quick Ratio 0.87 to 1.00 0.13 to 1.00
Cash increased by $2,359,690 to $3,854,625 during the nine months
ended March 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 nine months ended March 31, 2003
was $5,223,839 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 nine months following the borrowings from Bank of America
the Company has internally generated $1,942,776 of cash from
operations. The Company believes that it will continue to improve
upon the three and nine months ended March 31, 2004 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.
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. The Company
entered into negotiations with its senior lender because it
believed that the covenants as originally conceived were too
restrictive and difficult to achieve and would lead to situations
in which the Company would be required to seek waivers of
covenants on a continual basis for each quarter a violation
occurred and the Company believed that it would not be able to
meet any of its original covenants for the current quarter.
Additionally, while the Company believed the covenants were too
restrictive at the present time, it believed that its financial
conditions and results of operations would continually improve
and that more restrictive covenants could be implemented in the
future. In consideration of the above the Company granted its
lender an additional .25% interest margin for a seven month
period which will have the effect of raising its interest expense
an additional $1,875 per month for the seven month period.
Page 18
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 March 31, 2004, the Company owed
$17,660,224 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 March 31, 2004 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.
Page 19
PART II. OTHER INFORMATION.
ITEM 1: Legal Proceedings.
There were no legal proceedings of a material nature during the
quarter ending March 31, 2004.
ITEM 2: Change in Securities.
There was no change in securities during the quarter ending March
31, 2004.
Item 3: Defaults Upon Senior Securities.
There were no defaults upon senior securities during the quarter
ending March 31, 2004.
ITEM 4: Submission of Matters to a vote of Security Holders.
There were no matters submitted to a vote of the Company's
security holders during the quarter ending March 31, 2004.
ITEM 5: Other Information.
On April 14, 2004 the Board of Directors adopted a new code of
ethics for the Company's executive officers and members of the
Board of Directors. On May 4, 2004 the Company reproduced the
code of ethics on its internet website at www.fountainpowerboats.
com and filed Form 8-K and reproduced the code of ethics as an
exhibit to the report.
Additionally, the Board of Directors in accordance with the
listing requirements of NASDAQ created a Corporate Governance
Committee to perform, among other duties, act as the nominating
committee for the Board of Directors and make recommendations
regarding candidates for the Board of Directors, act as the
compensation committee with regard to recommendations regarding
the compensation of the Company's executive officers, and perform
other such governance tasks as may be required. The Company has
reproduced the charter for the Corporate Governance Committee
ethics on its internet website at www.fountainpowerboats.com.
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). A Current Report on Form 8-K was filed on
May 4, 2004 reproducing the Company's recently
adopted Code of Ethics for Executive Officers
and Directors. The Form 8-K is incorporated
herein by reference.
A Current Report on Form 8-K was filed on
February 19, 2004 reproducing the Company's
news release regarding orders for the
Company's boats at the Miami Boat Show. The
Form 8-K is incorporated herein by reference.
A Current Report on Form 8-K was filed on
April 30, 2004 reporting the Company's earnings
for the three and nine months ending March 31,
2004. The Form 8-K is incorporated herein by
reference.
Page 20
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: May 14, 2004
Irving L. Smith
Chief Financial Officer
Page 21