Fountain Powerboat Industries 10Q/A 2005 Q3 Quarterly report (amended)

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2005

¨	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

incorporation or organization)

(I.R.S. employer

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 by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange 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, 2005
Common Stock, $.01 par value		4,814,275 shares

FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY

INDEX


		Page No.
	Explanatory Note	3 – 4

Part I	Financial Information

	Item 1. Financial Statements

	Unaudited Condensed Consolidated Balance Sheets, March 31, 2005 and June 30, 2004	5 – 6

	Unaudited Condensed Consolidated Statements of Operations, for the three months and nine months ended March 31, 2005 and 2004	7

	Unaudited Condensed Consolidated Statements of Cash Flows, for the nine months ended March 31, 2005 and 2004	8 – 9

	Notes to Unaudited Condensed Consolidated Financial Statements	10 – 23

	Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition	24 – 26

	Item 3. Quantitative and Qualitative Disclosures of Market Risk	26

	Item 4. Controls and Procedures	26 – 27

Part II	Other Information

	Items 1, 2, 3, 4, 5 & 6	27

	Signature	28

	Exhibits	29 – 32

EXPLANATORY NOTE

RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS

As previously announced, the Audit Committee of the Board of Directors of Fountain Powerboat Industries, Inc. (the “Company”), together with the management of the Company, have concluded that the Company should restate its consolidated financial statements for the year ended June 30, 2004 and the quarters ended September 30, 2004, December 31, 2004 and March 31, 2005. This Form 10-Q/A relates to the restatement for the quarter ended March 31, 2005.

As disclosed in Note 14 to the Company’s restated consolidated financial statements for the year ended June 30, 2004 included in the Company’s amended Annual Report on Form 10-K/A for the fiscal year ended June 30, 2004, filed with the SEC on October 12, 2005, the Company has restated its consolidated financial statements as of and for the year ended June 30, 2004 to correct certain financial statement errors reported in the Form 10-K for such fiscal year as originally filed. Also, as disclosed in the Company’s Quarterly Reports on Forms 10-Q/A for the quarters ended September 30, 2004 and December 31, 2004, each filed with the SEC on October 12, 2005, the Company has restated its consolidated financial statements as of and for the quarters ended June 30, 2004 and December 31, 2004 to correct certain financial statement errors reported in the Forms 10-Q for such quarters as originally filed. The corrections in these restatements (i.e., fiscal year ended June 30, 2004 and quarters ended September 30, 2004 and December 31, 2004) have a carry forward impact on the Company’s consolidated financial statements as of and for the three and nine months ended March 31, 2005. In addition, as previously disclosed, the Company, through an internal review process, has identified certain accounting errors made during the quarter ended March 31, 2005. The Company discovered that there were omissions and errors in the entry and reconciliation of certain items to the general ledger during these periods. These errors are the result of the following:

•

Other payables and accruals were understated by $242,207 at December 31, 2004 and by $191,628 at March 31, 2005. As a result, operating results were understated by $50,579 for the three months and overstated by $191,628 for the nine months ended March 31, 2005.

•

The amount accrued for dealer interest was incorrectly calculated causing the amount to be understated by $226,000 at December 31, 2004 and by $180,000 at March 31, 2005. This resulted in an understatement of operating results of $46,000 for the quarter ended March 31, 2005 and an overstatement of operating results of $180,000 for the nine months ended March 31, 2005.

•

An inventory disposal during the quarter ended September 30, 2004 resulted in a loss of $135,899. This loss was not recorded during that quarter, and remained unrecorded at March 31, 2005. As a result, operating results were overstated by that amount for the nine months ended March 31, 2005.

•

Interest costs incurred during the quarters ended September 30, 2004, December 31, 2004 and March 31, 2005 of $12,298, $27,506 and $38,640, respectively, relating to self constructed fixed asset projects, were not properly capitalized during those quarters. This resulted in an overstatement of interest expense of $38,640 and $78,444, respectively, for the three months and nine months ended March 31, 2005.

•

Prepaid expenses (related to boat show expenses) at December 31, 2004 and March 31, 2005 were understated by $192,403 and $205,064, respectively, resulting in overstatements of expenses of $12,681 and $205,084, respectively, for the three months and nine months ended March 31, 2005.

•

A sales transaction was inadvertently recorded twice in the general ledger during the quarter ended September 30, 2004. This error remained uncorrected at March 31, 2005, which resulted in sales being overstated by $61,600 for the nine months ended March 31, 2005.

•

Certain costs associated with fixed asset additions were erroneously expensed during the quarter ended December 31, 2004. This error was corrected during the three months ended March 31, 2005, resulting in an understatement of expense of $18,000 for nine months ended March 31, 2005.

•

Interest expense for the quarter ended September 30, 2004 was understated by $90,615 as a result of that amount being erroneously credited to interest expense rather than to the accrued interest liability account. This error remained uncorrected at March 31, 2005, resulting in an understatement of interest expense of that amount for the nine months ended March 31, 2005.

As a result of these errors and the carry forward effects of restatements made at June 30, 2004, the Company’s consolidated financial statement as of and for the three months and nine months ended March 31, 2005 were misstated. The consolidated financial statements as of and for the three and nine months ended March 31, 2005 have been restated in this filing to properly reflect the carry forward effects of the June 30, 2004 restatements as well as to correct for the effects of errors that occurred during the three and nine months ended March 31, 2005.

In addition, the Company’s management has determined that the accounting errors referenced above were the result of material weaknesses in the Company’s internal control over financial reporting related to (i) its system of entry of certain types of transactions into the general and subsidiary ledgers and (ii) the reconciliation of general ledger balance sheet accounts to the appropriate underlying subsidiary records. As described in Item 4. Controls and Procedures, the Company has taken steps to remediate the material weaknesses, including:

•

an increase in the number of accounting and financial reporting personnel at the Company, which includes a new accounts receivable associate and a new accounting administrative associate;

•

the removal of the Company’s former controller, who was principally responsible for ledger entries and oversight of all reconciliations, and the hiring of a replacement controller;

•

the hiring of a full-time experienced accounting and financial reporting consultant to assist the accounting and finance staff of the Company in connection with the restatement, the Company’s ongoing financial reporting obligations and the improvement of its internal controls over financial reporting;

•

the implementation of significantly enhanced record-keeping policies and procedures; and

•

the implementation of new controls to verify and reconcile the entry of items to the general ledger, such as (i) the review by our chief financial officer of all journal entries and accrual schedules, (ii) new control processes for balancing accounts, such as revenue accounts, dealer discount accounts, accounts receivable, accounts payable, which will be reconciled every month (instead of at quarter end as the Company had previously done), and (iii) additional review process for accounts receivable and payable accounts by manager level personnel.

The Company believes that these remedial steps have corrected the material weaknesses described above and will help ensure that the previous types of errors to not recur. See “Item 4. Controls and Procedures.”

This Form 10-Q/A further amends the Company’s Quarterly Report on Form 10-Q/A for the quarter ended March 31, 2005 filed with the Securities and Exchange Commission (SEC) on October 12, 2005 (the “First 10-Q/A”). The First 10-Q/A amended the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, initially filed with the SEC on May 9, 2005 (the “Original Filing”) to reflect the restatement of the Company’s consolidated financial statements as of and for the quarter ended March 31, 2005 and the notes related thereto. This Form 10-Q/A provides further detail in note 11 to the consolidated financial statements as to the nature of the errors and the changes that were made from the information previously reported in the Original Filing. See notes 1,2,3,4,8 & 10 to the consolidated financial statements in this Form 10-Q/A for further information. Additional changes were also made in the First 10-Q/A to the Managements’ Discussion and Analysis of the Results of Operations and Financial Condition to further explain the Company’s reasons for these amendments. Except for the amended information, this Form 10-Q/A continues to describe conditions as of the date of the Original Filing and the Company has not modified or updated other disclosures presented in the Original Filing. This Form 10-Q/A does not reflect events occurring after the filing of the Original Filing or modify or update disclosures (including, except as otherwise provided herein, the exhibits to the Original Filing), affected by subsequent events. Accordingly, this Form 10-Q/A should be read in conjunction with the Company’s filings made with the SEC subsequent to the date of the Original Filing. In addition, this Form 10-Q/A includes certifications from the Company’s Chief Executive Officer and Chief Financial Officer at Exhibits 31.1, 31.2 and 32.

PART I. FINANCIAL INFORMATION.

ITEM 1: Financial Statements.

FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS


	March 31, 2005			June 30, 2004
	Restated			Restated
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	2,315,794		$	3,622,258
Accounts receivable, net		3,473,034			3,507,246
Inventories		6,193,610			4,653,402
Prepaid expenses		780,994			429,657
Deferred tax assets		372,925			247,655

Total Current Assets		13,136,357			12,460,218

PROPERTY, PLANT AND EQUIPMENT		45,686,421			43,183,460
Less: Accumulated depreciation		(28,450,117	)		(27,269,666	)

		17,236,304			15,913,794

CASH SURRENDER VALUE LIFE INSURANCE, NET		2,013,094			1,581,316

OTHER ASSETS		584,232			665,815

TOTAL ASSETS	$	32,969,987		$	30,621,143

[Continued]

FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

[Continued]


	March 31, 2005			June 30, 2004
	Restated			Restated
LIABILITIES AND STOCKHOLDER’S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt	$	792,388		$	772,704
Current maturities of capital lease		28,336			17,710
Accounts payable		4,176,640			2,821,866
Accounts payable – Related Party		27,826			21,000
Accrued expenses		1,453,751			1,074,705
Dealer incentives		2,964,103			1,203,522
Customer deposits		884,180			86,077
Allowance for boat repurchases		75,000			75,000
Warranty reserve		710,000			710,000

Total Current Liabilities		11,112,224			6,782,584

LONG-TERM DEBT, less current portion		15,740,508			17,862,521

CAPITAL LEASE, less current maturities		17,265			6,657

DEFERRED TAX LIABILITY		372,925			247,655

COMMITMENTS AND CONTINGENCIES[NOTE 6]		—			—

		27,242,922			24,899,417
SHAREHOLDERS’ EQUITY
Common stock, $.01 par value, 200,000,000 shares authorized, 4,814,275 shares issued and outstanding as of March 31, 2005 and 4,807,608 as of June 30, 2004		48,142			48,076
Additional paid-in capital		10,527,055			10,517,451
Accumulated deficit		(4,667,775	)		(4,791,596	)

		5,907,422			5,773,931

Less: Treasury stock, at cost, 15,000 shares		(110,748	)		(110,748	)
Accumulated other comprehensive Income (loss) from interest rate swap		(69,609	)		58,543

Total Stockholders’ Equity		5,727,065			5,721,726

Total Liabilities and Stockholders’ Equity	$	32,969,987		$	30,621,143

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


	For the Three Months Ended						For the Nine Months Ended
	March 31, 2005			March 31, 2004			March 31, 2005			March 31, 2004
	Restated						Restated
NET SALES	$	16,714,140		$	15,790,650		$	50,712,967		$	42,037,693
COST OF SALES		13,822,547			12,671,582			43,452,323			34,859,344

Gross Profit		2,891,593			3,119,068			7,260,644			7,178,349

EXPENSES:
Selling Expenses		1,459,364			1,593,717			3,994,954			3,999,981
General and Administrative Expenses		824,396			487,891			2,353,472			1,573,103

Total Expenses:		2,283,760			2,081,608			6,348,426			5,573,084

OPERATING INCOME		607,833			1,037,460			912,218			1,605,265

NON-OPERATING INCOME (EXPENSE):
Other income		3,966			5,524			4,758			6,621
Interest expense		(252,308	)		(288,619	)		(793,417	)		(974,809	)

Total Non-operating Expense		(248,342	)		(283,095	)		(788,659	)		(968,188	)

INCOME BEFORE INCOME TAXES		359,491			754,365			123,559			637,077

INCOME TAX (BENEFIT)		(969	)		—			(969	)		—

NET INCOME	$	360,460		$	754,365		$	124,528		$	637,077

BASIC EARNINGS PER SHARE	$	0.07		$	0.16		$	.03		$	0.13

WEIGHTED AVERAGE SHARES OUTSTANDING		4,814,275			4,757,608			4,812,255			4,757,608

DILUTED EARNINGS PER SHARE	$	0.07		$	0.16		$	.03		$	0.13

WEIGHTED AVERAGE SHARES OUTSTANDING ASSUMING DILUTION		4,927,051			4,833,092			4,878,400			4,825,605

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	For the Nine Months Ended
	March 31, 2005			March 31, 2004
	Restated
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	124,528		$	637,077

Adjustments to reconcile net income to net cash provided (used) by operating activities:
Depreciation Expense		1,397,680			1,545,395
(Gain)/Loss on sale of fixed asset		(4,000	)		11,696
Amortization of deferred loan cost		59,949			266,963
Provision for inventory obsolescence		14,907			9,085
Decrease in allowance for boat repurchases		—			(125,000	)
Change in assets and liabilities:
(Increase) decrease in accounts receivable		34,213			(1,570,486	)
(Increase) in inventories		(1,540,208	)		(1,177,448	)
(Increase) in prepaid expenses		(351,337	)		(4,742	)
(Increase) decrease in other assets		21,634			(210,555	)
Increase (decrease) in accounts payable		1,361,600			(5,627,029	)
Increase (decrease) in accrued expenses		378,339			(271,691	)
Increase in dealer incentives		1,760,581			850,792
Increase in customer deposits		798,103			231,549

Net cash flow provided (used) by operating activities		4,055,989			(5,434,394	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment		(1,236,275	)		(153,463	)
Investment in molds and related plugs		(1,483,911	)		(774,384	)
Proceeds from sale of fixed assets		4,000			25,000
Net Increase in Life Insurance – Cash Value		(431,778	)		—

Cash used by investing activities		(3,147,964	)		(902,847	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt		—			18,067,841
Payments of long-term debt		(2,224,158	)		(9,222,781	)
Payment of deferred loan cost		—			(148,129	)
Proceeds from stock options exercised		9,669			—

Cash provided (used) by financing activities		(2,214,489	)		8,696,931

Net increase (decrease) in cash and cash equivalents		(1,306,464	)		2,359,690

Cash and cash equivalents at beginning of period		3,622,258			1,224,935

Cash and cash equivalents at end of period	$	2,315,794		$	3,584,625

FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Continued)


	For the Nine Months Ended
	March 31, 2005		March 31, 2004
	Restated
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest, net of amounts capitalized	$	702,802	$	977,171

Income Taxes	$	—	$	—

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

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 normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at March 31, 2005 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 consolidated financial statements and notes thereto included in the Company’s audited financial statements for the year ended June 30, 2004. The results of operations for the three and nine month periods ended March 31, 2005 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 accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual 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, 2005 and June 30, 2004, the Company had $2,215,794 and $3,522,258, respectively, in excess of federally insured amounts held in cash.

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.

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 except 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 6 month 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

FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION (continued)

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, 2005 and 2004 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:


	For the Three Months Ended					For the Nine Months Ended
	March 31, 2005			March 31, 2004		March 31 2005		March 31, 2004
	Restated					Restated
Net Income as Reported	$	360,460		754,365		124,528		637,077
Add: Stock-based non-employee compensation expense included in reported net income		—		—		—		1,795
Deduct: Total stock-based employee compensation expense determined under fair value based method		(4,221	)	(5,193	)	(12,663	)	(15,579	)

Net Income (loss) Pro forma	$	356,239		749,172		111,865		623,293

Basic earnings (loss) per share:
As reported	$	0.07		0.16		.03		0.13

Pro forma	$	0.07		0.16		.02		0.13

Diluted earnings (loss) per share:
As reported	$	0.07		0.16		.03		0.13

Pro forma	$	0.07		0.16		.02		0.13

NOTE 2 - ACCOUNTS RECEIVABLE

As of March 31, 2005, accounts receivable were $3,473,034 net of the allowance for bad debts of $82,841. Accounts Receivable, as of June 30, 2004, were $3,507,247 net of the allowance for bad debts which amounted to $82,841. 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.

Additionally, certain corrections were made to the beginning balances in accounts receivable for the quarter ended March 31, 2005, as a result of the adjustments previously made in previous quarters.

FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 - INVENTORIES

Inventories at March 31, 2005 and June 30, 2004 consisted of the following:


	March 31, 2005			June 30, 2004
	Restated
Parts and supplies	$	2,684,281		$	1,920,860
Work-in-process		3,523,615			1,999,076
Finished Goods		50,621			783,466

		6,258,517			4,703,402
Obsolete inventory reserve		(64,907	)		(50,000	)

Total Inventory	$	6,193,610		$	4,653,402

The Company has pledged its inventories as collateral for its promissory note with Bank of America.

Additionally, certain corrections were made to the beginning balances in work-in-process for the quarter ended March 31, 2005, as a result of the adjustments previously made in previous quarters.

NOTE 4 - LONG-TERM DEBT AND PLEDGED ASSETS

The following is a summary of long-term debt:


		March 31, 2005			June 30, 2004
		Restated			Restated
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	$	6,775		$	18,216
4.00%	Loan payable to a financial institution for the purchase of a vehicle, monthly payments of $726 through September 2006, secured by the vehicle purchased		12,626			18,522
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		—			1,295,449
	$18,000,000 credit agreement with a financial corporation (See below)		16,513,495			17,303,039

			16,532,896			18,635,226

Less:	Current portions included incurrent liabilities		(792,388	)		(772,704	)

		$	15,740,508		$	17,862,522

On July 17, 2003, the Company obtained $18,000,000 of long-term borrowings, in the form of two $9,000,000 notes, from Bank of America which mature in five years. The 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 interest, taxes, depreciation and amortization (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	%

FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - LONG-TERM DEBT AND PLEDGED ASSETS (Continued)

The applicable margin is currently 2.50%.

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 currently are approximately $137,000.

The Company has agreed to observe certain covenants under the terms of its note agreements as amended, 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:

Maintenance of a tangible net worth floor which the Company’s tangible net worth may not fall below.

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.

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.

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,

2004

June 30,

2004

September 30,
2004

December 31,
2004

March 31,

2005

June 30,

2005

Tangible Net Worth Floor

4.300 Million

4.475 Million

4.500 Million

4.800 Million

4.950 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

Funded Debt To EBITDA

6.25 to 1.00

6.00 to 1.00

5.25 to 1.00

5.00 to 1.00

4.35 to 1.00

3.75 to 1.00

Gross Margin Floor %

13.50

14.50

The Company is required to renegotiate these covenants prior to June 30, 2005.

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, 2005 was as follows:

The applicable tangible net worth floor required by the Company’s lender for the current quarter ended March 31, 2005 was a tangible net worth not less than $4.95 million. The Company’s tangible net worth for purposes of determining compliance was $5.5 million.

The current maturity coverage ratio required by the Company’s lender for the current quarter ended March 31, 2005 was a ratio not less than 1.50 to 1.00. The Company’s current maturity coverage ratio for purposes of determining compliance was 1.58 to 1.00.

The funded debt to EBITDA ratio required by the Company’s lender for the current quarter ended March 31, 2005 was a ratio not more than 4.35 to 1.00. The Company’s funded debt to EBITDA ratio for purposes of determining compliance was 5.74 to 1.00.

The gross margin percentage floor required by the Company’s lender for the current quarter ended March 31, 2005 was a gross margin percentage of not less than 14.5%. The Company’s gross margin percentage for purposes of determining compliance was 17.3%.

As of March 31, 2005 the Company was not in compliance with the funded debt to EBITDA ratio which resulted from the changes made to the financial statements in this Form 10Q-A as well as the previous amended reports for the quarter ended September 30, 2004 and the amended annual report 10K-A for the year ended June 30, 2004.. The Company has obtained a letter from Bank of America waiving compliance with the requirements of Section 4.A., of the Loan Agreement for the reporting period ending March 31, 2005.

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 principal payments, an additional 50% of the excess earnings after debt service within 120 days after the close of the Company’s fiscal year end.

If the Company prepays the balance of the note after one year from 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.

Loan Guarantee – On July 17, 2003 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. On July 17, 2003 the Company issued to Brunswick Corporation 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 Brunswick’s prior approval. Brunswick Corporation’s option to purchase vests upon the earlier of the repayment of $18,000,000 notes payable, or July 1, 2007. Brunswick Corporation’s option expires no earlier than approximately 180 days after vesting.

FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 - COMMON STOCK

During July 2003, the Company issued 273,146 options to purchase common stock to Brunswick Corporation as a condition of guaranteeing 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, 2005, 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 $26,907,087. At March 31, 2005 the allowance for boat repurchases was $75,000.

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 $502,402 and $839,895, respectively for the three and nine months ended March 31, 2005 and the estimated unpaid dealer interest included in accrued dealer incentives at March 31, 2005 amounted to $127,354.

Interest Rate Risk -At March 31, 2005 the Company owed $16,513,495 on an $18,000,000 credit agreement with Bank of America. The credit agreement has $9,000,000 at the one month LIBOR plus 2.50% or 5.35% as of March 31, 2005 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 $41,000 increase in interest expense.

Engine Supply Agreement– The Company entered into an Engine Supply agreement with Brunswick Corporation, as a condition for guaranteeing 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, 2005 the Company had receivables and advances from its employees amounting to $27,826.

During the three and nine month period ended March 31, 2005, the Company paid $54,464 and $151,934 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).

FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 - INCOME TAXES

The Company has provided for deferred income taxes in accordance with SAFS No. 109,Accounting for Income Taxes,whereby deferred income taxes are determined based upon the enacted income tax rates for the years in which these taxes are estimated to be payable or recoverable. Deferred income taxes arise from temporary differences resulting from a difference between the tax basis of an asset or liability and its reported amount in the financial statements.

The components of federal income tax expense from continuing operations consist of the following:


	For the Nine Months Ended
	March 31, 2005				March 31, 2004
	RESTATED
Current income tax expense	$	—			$	—
Federal		—				—
State		(969	)			—
				��
Net current tax (benefit)		(969	)			—

Deferred tax expense (benefit) resulted from:
Excess of tax over financial accounting depreciation		(22,940	)			(58,893	)
Donations		(1,477	)			—
Reserve for Obsolete Inventory		(5,814	)			—
Accrued vacation – current		(4,198	)			—
Accrued dealer incentive interest		(27,783	)			(46,795	)
Accrued profit sharing – executive		20,800				51,620
Accrued dealer service incentive		(274,314	)			11,310
Reserve for boat repurchases		—				48,750
Bad debt reserves		—				(21,450	)
Health insurance reserve		—				(4,680	)
Inventory adjustment – Section 263A		(14,390	)			(37,505	)
Decrease (increase) in NOL carryforward		394,284				338,111
Valuation allowance		(64,168	)			(280,468	)

Net deferred tax expense (benefit)	$	—			$	—

The reconciliation of income tax from continuing operations computed at the U.S. federal statutory tax rate to the Company’s effective rate is as follows:


	For the Nine Months Ended
	March 31, 2005		March 31, 2004
	RESTATED
Computed tax at the expected federal statutory rate	34.00	%	34.00	%
State income taxes, net of federal benefit	5.00	%	5.00	%
Valuation allowance Depreciation provision	(51.53	)%	(44.02	)%
	19.75	%	0.00	%
Compensation from stock options	(1.22	)%	0.11	%
Officer’s life insurance	0.00	%	0.66	%
Other	(5.73	)%	4.25	%

Effective income tax rates	0.27	%	0.00	%

FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 - INCOME TAXES (Continued)

Significant components of the Company’s deferred tax assets and liabilities are as follows:


	March 31, 2005			June 30, 2004
	RESTATED			RESTATED
Deferred tax assets:
Warranty reserve	$	276,900		$	276,900
Obsolete inventory reserve		25,314			19,500
Allowance for boat repurchases		29,250			29,250
Bad debt reserve		32,308			32,308
Accrued dealer incentive interest		52,855			25,072
Inventory adjustments – Section 263A		147,655			133,264
State NOL carryforward		427,579			478,128
Federal NOL carryforward		1,853,630			2,197,365
Alternative minimum tax credits		41,524			41,524
Donations carryforward		6,085			4,608
Health insurance reserve		49,140			49,140
Investment tax credits		86,294			86,294
Accrued vacation current		4,198			—
Accrued profit sharing – executive		32,609			53,410
Accrued dealer service incentive		274,314			—

Total deferred assets		3,339,655			3,426,763
Less: Valuation allowance for deferred tax assets		(2,001,373	)		(2,065,541	)

Net deferred tax assets		1,338,282			1,361,222
Deferred tax liabilities
Excess of financial accounting depreciation over tax		(1,338,282	)		(1,361,222	)

Net deferred tax assets (liabilities)	$	—		$	—

Net deferred tax assets (liabilities) are presented as follows:


	March 31, 2004			June 30 2004
	Restated			Restated
Current deferred tax assets	$	372,925		$	247,655
Deferred tax liabilities		(372,925	)		(247,655	)

Net deferred tax assets (liabilities)	$	—		$	—

NOTE 9 - EARNINGS PER SHARE

The computations of earnings 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.

FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 – EARNINGS PER SHARE (Continued)

The weighted average common shares and common equivalent shares outstanding for the nine month periods ended March 31, 2005 and 2004 for purposes of calculating earnings per share was as follows:


	For the Three Months Ended		For the Nine Months Ended
	March 31, 2005	March 31, 2004	March 31, 2005	March 31, 2004
Weighted average common shares outstanding used in basic earnings per share for the three and nine months ending	4,814,275	4,757,608	4,812,255	4,757,608

Effect of dilutive stock options	112,776	75,484	66,144	67,997

Weighted average common shares and potential dilutive common equivalent shares outstanding used in dilutive earnings per share	4,927,051	4,833,092	4,878,400	4,825,605

NOTE 10 – VALUATION AND QUALIFYING ACCOUNTS

The balance in the following valuation and qualifying accounts at March 31, 2005 and change from the year ended June 30, 2004 are as follows:


Valuation and Qualifying Account Description	June 30, 2004		Expense Adjustment	And Other Reductions		March 31, 2005
	RESTATED			RESTATED		RESTATED
Allowance for doubtful accounts	$	82,841				$	82,841
Inventory valuation reserve		50,000	14,907				64,907
Deferred tax valuation allowance		2,065,540		(64,167	)		2,001,373
Warranty reserve		710,000					710,000
Allowance for boat repurchases		75,000					75,000

NOTE 11 – FINANCIAL STATEMENT RESTATEMENTS

As previously announced, the Audit Committee of the Board of Directors of Fountain Powerboat Industries, Inc. (the “Company”), together with the management of the Company, have concluded that the Company should restate its consolidated financial statements for the year ended June 30, 2004 and the three month periods ended September 30, 2004, December 31, 2004 and March 31, 2005.

As disclosed in Note 14 to the Company’s restated consolidated financial statements for the year ended June 30, 2004 included in the Company’s amended Annual Report on Form 10-K/A for the fiscal year ended June 30, 2004, filed with the SEC on October 12, 2005, the Company has restated its consolidated financial statements as of and for the year ended June 30, 2004 to correct certain financial statement errors reported in the Form 10-K for such fiscal year as originally filed. Also, as disclosed in the Company’s Quarterly Reports on Forms 10-Q/A for the three month periods ended September 30, 2004 and December 31, 2004, each filed with the SEC on October 12, 2005, the Company has restated its consolidated financial statements as of and for the three month periods ended June 30, 2004 and December 31, 2004 to correct certain financial statement errors reported in the Forms 10-Q for such three month periods as originally filed. The corrections in these restatements (i.e., fiscal year ended June 30, 2004 and three month periods ended September 30, 2004 and December 31, 2004) have a carry forward impact on the Company’s consolidated financial statements as of and for the three and nine months ended March 31, 2005. In addition, certain financial reporting errors occurred during the three months ended March 31, 2005 that affected the Company’s consolidated financial statements as of and for the three and nine months ended March 31, 2005. The errors are the result of the following:

•

Other payables and accruals were understated by by $242,207 at December 31, 2004 and by $191,628 at March 31, 2005. As a result, operating results were understated by $50,579 for the three months and overstated by $191,628 for the nine months ended March 31, 2005.

•

FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 – FINANCIAL STATEMENT RESTATEMENTS (Continued)

•

As a result of these errors and the carry forward effects of restatements made at from June 30, 2004, the Company’s consolidated financial statement as of and for the three months and nine months ended March 31, 2005 were misstated. The consolidated financial statements as of and for the three and nine months ended March 31, 2005 have been restated in this filing to properly reflect the carry forward effects of the June 30, 2004 restatements as well as to correct for the effects of errors that occurred during the three and nine months ended March 31, 2005.

A summary of the of the effects of correction of the errors that occurred during the three months and nine months ended March 31, 2005 is as follows:


	Effect of Restatement on Results of Operations
Error Giving Rise to Restatement	Quarter			Year-to-date
Under-accrual of payroll costs	$	—		$	—
Understatement of other accruals		50,579			(191,628	)
Under-accrual of dealer interest		46,000			(180,000	)
Unrecorded loss on disposal of inventory		—			(135,899	)
Undercapitalized interest costs		38,640			78,444
Understatement of prepaid expenses		12,681			205,084
Overstatement of sales from duplicate transaction		—			(61,600	)
Fixed Asset addition recorded as expense		(18,000	)		—
Understatement of interest expense		—			(90,615	)

Effect of Restatement on Results of Operations	$	129,900		$	(376,214	)

FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 – FINANCIAL STATEMENT RESTATEMENTS (Continued)

A summary reconciling the consolidated financial statements as originally reported to the consolidated financial statements restated to reflect the carry forward effects of the prior year restatements and the correction of errors arising during the three months ended March 31, 2005 is as follows:


	March 31, 2005 Restated		Corrections Of Current Period Errors			Effects of Prior Year Restatements			March 31, 2005 Originally Reported
ASSETS

CURRENT ASSETS:
Cash & Cash equivalents	$	2,315,794	$	(1	)	$	(91,531	)	$	2,407,326
Accounts Receivable, Net		3,473,034		(61,598	)		(630,238	)		4,164,870
Inventories		6,193,610		(135,901	)		—			6,329,511
Prepaid expenses		780,994		205,084			—			575,910
Current tax assets		372,925		114,297			(21,248	)		279,876

Total Current Assets		13,136,357		121,881			(743,017	)		13,757,493

Property, Plant & Equip., Net		17,236,304		78,445			—			17,157,859

Cash surrender value life insurance		2,013,094		—			—			2,013,094

Other Assets		584,232		—			—			584,232

TOTAL ASSETS	$	32,969,987	$	200,326		$	(743,017	)	$	33,512,678

FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 – FINANCIAL STATEMENT RESTATEMENTS (Continued)


	March 31, 2005 Restated			Corrections Of Current Period Errors			Effects of Prior Year Restatements			March 31, 2005 Originally Reported
CURRENT LIABILITIES:
Current maturities: long-term debt	$	792,388		$	—		$	—		$	792,388
Current maturities: capital lease		28,336			—			—			28,336
Accounts payable		4,176,640			220,941			—			3,955,699
Accounts payable – related party		27,826			—			—			27,826
Accrued expenses		1,453,751			377,890			(97,505	)		1,173,366
Dealer incentives		2,964,103			(135,881	)		—			3,099,984
Customer Deposits		884,180			—			—			884,180
Allowance for boat repurchases		75,000			—			—			75,000
Warranty reserve		710,000			—			—			710,000

Total Current Liabilities		11,112,224			462,950			(97,505	)		10,746,779

Long-term Debt, less current maturities		15,740,508			1			(7,520	)		15,748,027
Capital Lease, less current maturities		17,265			—			—			17,265
Deferred Tax Liability		372,925			114,297			(21,248	)		279,876

Total Liabilities		27,242,922			577,248			(126,273	)		26,791,947

STOCKHOLDERS’ EQUITY:
Common Stock		48,142			—			—			48,142
Additional paid-in capital		10,527,055			—			—			10,527,055
Retained earnings (deficit)		(4,667,775	)		(376,921	)		(692,056	)		(3,598,798	)

		5,907,422			(376,921	)		(692,056	)		6,976,399

Less: Treasury Stock		(110,748	)		—			—			(110,748	)
Accumulated other comprehensive income from interest rate swap		(69,609	)		(1	)		75,312			(144,920	)

Total Stockholders’ Equity		5,727,065			(376,922	)		(616,744	)		6,720,731
TOTAL LIABILITIES & STOCKHOLDER’S EQUITY	$	32,969,987		$	200,326		$	(743,017	)	$	33,512,678

FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 – FINANCIAL STATEMENT RESTATEMENTS (Continued)


Three Months Ended March 31, 2005	March 31, 2005 Restated			Corrections of Current Period Errors		March 31, 2005 Originally Reported
CONSOLIDATED STATEMENT OF OPERATIONS
NET SALES	$	16,714,140		$	149,864	$	16,564,276
COST OF SALES		13,822,547			18,000		13,804,547

Gross Profit		2,891,593			131,864		2,759,729

EXPENSES:
Selling expense		1,459,364			40,604		1,418,760
General and Administrative		824,396			—		824,396

Total expenses		2,283,760			40,604		2,243,156

OPERATING INCOME (LOSS)		607,833			91,260		516,573
NON-OPERATING INCOME (EXPENSE)
Other income (expense)		3,966			—		3,966
Interest expense		(252,308	)		38,640		(290,948	)
Gain (loss) on disposal of assets		—			—		—

TOTAL NON-OPERATING INCOME (EXPENSE)		(248,342	)		38,640		(286,982	)

INCOME (LOSS) BEFORE INCOME TAXES		359,491			129,900		229,591
CURRENT TAX EXPENSE (BENEFIT)		(969	)		—		(969
DEFERRED TAX EXPENSE (BENEFIT)		—			—		—

NET INCOME (LOSS)	$	360,460		$	129,900	$	230,560

BASIC EARNINGS (LOSS) PER SHARE	$	0.07		$	0.02	$	0.05

WEIGHTED AVERAGE SHARES OUTSTANDING		4,814,275			4,814,275		4,814,275

DILUTED EARNINGS (LOSS) PER SHARE	$	0.07		$	0.02	$	0.05

WEIGHTED AVERAGE SHARES OUTSTANDING ASSUMING DILUTION		4,927,051			4,927,051		4,927,051

FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 – FINANCIAL STATEMENT RESTATEMENTS (Continued)


Nine Months Ended March 31, 2005	March 31, 2005 Restated			Corrections of Current Period Errors			March 31, 2005 Originally Reported
CONSOLIDATED STATEMENT OF OPERATIONS
NET SALES	$	50,712,967		$	(107,211	)	$	50,820,178
COST OF SALES		43,452,323			219,448			43,232,875

Gross Profit		7,260,644			(326,659	)		7,587,303

EXPENSES:
Selling expense		3,994,954			37,384			3,957,570
General and Administrative		2,353,472			(1	)		2,353,473

Total expenses		6,348,426			37,383			6,311,043

OPERATING INCOME (LOSS)		912.218			(364,042	)		1,276,260
NON-OPERATING INCOME (EXPENSE)
Other income (expense)		4,758			—			4,758
Interest expense		(793,417	)		(12,172	)		(781,245	)
Gain (loss) on disposal of assets		—			—			—

TOTAL NON-OPERATING INCOME (EXPENSE)		(788,659	)		(12,172	)		(776,487	)

INCOME (LOSS) BEFORE INCOME TAXES		123,559			(376,214	)		499,733
CURRENT TAX EXPENSE (BENEFIT)		(969	)		—			(969	)
DEFERRED TAX EXPENSE (BENEFIT)		—			—			—

NET INCOME (LOSS)	$	124,528		$	(376,214	)	$	500,742

BASIC EARNINGS (LOSS) PER SHARE	$	0.03		$	(0.07	)	$	0.10

WEIGHTED AVERAGE SHARES OUTSTANDING		4,812,255			4,812,255			4,812,255

DILUTED EARNINGS (LOSS) PER SHARE	$	0.03		$	(0.07	)	$	0.10

WEIGHTED AVERAGE SHARES OUTSTANDING ASSUMING DILUTION		4,878,400			4,878,400			4,878,400

ITEM 2: Management’s Discussion and Analysis of Results of Operations and Financial Condition

Results of Operations.

Net Sales – Net sales for the three months ended March 31, 2005 were $16,714,140, an increase of $923,490 or 5.8%, as compared to net sales of $15,790,650 for the three months ended March 31, 2004. Net sales for the nine months ended March 31, 2005 were $50,712,967, an increase of $8,675,274 or 20.6%, as compared to net sales of $42,037,693 for the nine months ended March 31, 2004. The increase in net sales is primarily attributable to increased unit sales of fish boats and express cruisers.

Gross Profit – Gross profit for the three months ended March 31, 2005 was $2,891,593 as compared to $3,119,068 for the three months ended March 31, 2004. Gross profit for the nine months ended March 31, 2005 was $7,260,644 as compared to $7,178,349 for the nine months ended March 31, 2004. The increase in gross profits is attributable to the increase in the number of units sold.

Our products require the use and/or consumption of petroleum based and metal products. The rise in petroleum prices and metal product prices during the nine months ending March 31, 2005 has negatively impacted our Gross Profit by increasing the Cost of Sales. Prices of our boats have now been adjusted to offset these increases in materials prices. During the nine months ending March 31, 2005 we have undertaken and/or completed capital projects which will ultimately result in improved efficiency of the manufacturing process. During the construction period, however, the disruption of the manufacturing process has adversely affected productivity with a commensurate increase in the Cost of Sales. Construction is now complete and the manufacturing operation is achieving productivity and efficiency improvements as expected.

Selling Expenses – Selling expenses for the three months ended March 31, 2005 were $1,459,364 as compared to $1,593,717 for the three months ended March 31, 2004. Selling expenses for the nine months ended March 31, 2005 were $3,994,954 as compared to $3,999,981 for the nine months ended March 31, 2004.

General and Administrative Expenses – General and administrative expenses for the three months ended March 31, 2005 were $824,396 as compared to $487,891 for the three months ended March 31, 2004. General and administrative expenses for the nine months ended March 31, 2005 were $2,353,472 as compared to $1,573,103 for the nine months ended March 31, 2004. The increase in general and administrative expenses is attributable to augmentation of the executive and finance staffs, increased expenditures for investor relations and professional service fees.

Operating Income – Operating income for the three months ended March 31, 2005 was $607,833 as compared to $1,037,460 for the three months ended March 31, 2004. Operating income for the nine months ended March 31, 2005 was $912,218 as compared to $1,605,265 for the nine months ended March 31, 2004.

Interest Expense – Interest expense for the three months ended March 31, 2005 was $252,308 as compared to $288,619 for the three months ended March 31, 2004. Interest expense for the nine months ended March 31, 2005 was $793,417 as compared to $974,809 for the nine months ended March 31, 2004. The $181,392 reduction in interest expense, for the nine months ended March 31, 2005, is mainly attributable to the write-off of the unamortized closing costs of a loan with G. E. Capital that occurred during the quarter ended September 30, 2003 which was not duplicated in the current period.

Net Income – Net Income for the three months ended March 31, 2005 was $360,460 as compared to $754,365 for the three months ended March 31, 2004. Net income for the nine months ended March 31, 2005 was $124,528 as compared to a net income of $637,077 for the nine months ended March 31, 2004.

Income Tax - Current tax expense is a current income tax benefit of $969 for the three months ended March 31, 2005 and is $0 for the three months ended March 31, 2004. Current tax expense is a current tax benefit for the nine months ended March 31, 2005 and is $0 for the nine months ended March 31, 2004. Deferred tax expense is $0 for the three months ended March 31, 2005 and 2004, and is $0 for the nine months ended March 31, 2005 and 2004, respectively. The Company’s lack of income tax expense is a result of net operating loss carryovers from the year ended June 30, 2002. There remains $5,451,852 for federal and $8,551,582 for state tax purposes of net operating loss carryovers available until the years 2022 and 2023, to offset current tax expenses.

The ultimate realization of the benefits from the deferred tax assets is dependent upon the Company’s future earnings, the future tax laws in effect, and other unknown factors, all of which are uncertain. For these reasons and because the Company has generated operating tax losses in recent years, the Company has elected to provide for a tax asset valuation allowance to fully reserve its net deferred tax asset at March 31, 2005.

Management estimates, based on the Company’s increased backlog of orders, that sales volumes will continue to improve in the near future thus resulting in improved earnings and partial or full absorption of the net operating tax loss carryovers. However, the Company has not reduced the tax asset valuation allowance since, with the exception of order backlog, it is very difficult to predict future sales volumes in an uncertain economy. Management regularly reviews the Company’s need for the valuation allowance and expects that it will not be required in its entirety in the coming years. As operating results and the economy stabilize and future sales volumes increase, management will give increasing consideration to reducing the valuation allowance or eliminating it altogether.

Liquidity and Capital Resources.

Cash decreased by $1,306,464 to $2,315,794 at March 31, 2005 from $3,622,258 at June 30, 2004. The decrease in cash is primarily attributable to paying off the outstanding loan against the life insurance policies.

During the three months ended March 31, 2005, $1,880,350 was transferred from the Bank of America savings account to Northwest Mutual Life Insurance to pay off loans on key man insurance policies and deposit additional funds in the cash value of the policies. This was done in order to earn 8% interest from Northwestern Mutual vs. 1.25% interest earned from the Bank of America savings account. The balance sheet reflects a decrease in Current Assets of $1,880,350 and an increase of the same amount in Other Assets. The cash value of the life insurance policies can be obtained within a few days and is effectively the same as a savings account, however, GAAP rules require that it be reported in other assets.

Cash provided by operations for the nine months ended March 31, 2005 was $4,055,989 and was primarily attributable to the net income of the Company as adjusted by depreciation and an increase in customer deposits.

Cash used in investing activities for the nine months ended March 31, 2005 was $3,147,964 and was primarily attributable to boat mold and tooling expenditures $(1,483,911) to support the Company’s new fish boat designs that are to be introduced in the current fiscal year and improvements to the Company’s manufacturing line and facilities $(1,236,275) intended to increase manufacturing capacity and efficiency. An additional $431,778 was purchased on the key man life insurance policy, in this quarter.

Management is of the opinion that cash flows will be sufficient to satisfy its current and future liquidity demands because of the increase in sales volumes and sales backlogs at the date of this filing. The Company has maintained a record sales backlog through the date of this report and is currently enjoying an increasingly favorable business climate for its products. The backlog of orders for our boats has increased from $31.7 million on March 31, 2004 to $45.6 million as of March 31, 2005.

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.

Recent Accounting Pronouncements:

In December 2004, the FASB issued SFAS No. 123(R),Accounting for Stock-Based Compensation (SFAS No. 123(R)). SFAS No. 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods and services. The Statement focuses primarily on accounting for transactions in which an entity obtains

employee services in share-based payment transactions. SFAS No. 123(R) requires that the fair value of such equity instruments be recognized as an expense in the historical financial statements as services are performed. Prior to SFAS No. 123(R), only certain pro forma disclosures of fair value were required. The provisions of this Statement as amended on August 14, 2005 are effective for the fiscal year that begins after June 15, 2005. Accordingly, we will adopt SFAS No. 123(R) commencing with the quarter ending September 30, 2005. If we had included the cost of employee stock option compensation in our consolidated financial statements, our net income for the three months ended March 31, 2005 and 2004 would have been $278,918 and $749,172, respectively. Our net income for the nine months ended March 31, 2005 and 2004 would have been $(81,047) and $623,293, respectively. The adoption of SFAS No. 123(R) is not expected to have a material effect on our consolidated financial statements.

Certain reclass and corrections to the accounts related to the Results of Operations were made for the quarter ended March 31, 2005. The related corrections and reclass adjustments have been made in the above discussions where appropriate.

ITEM 3: Quantitative and Qualitative Disclosures about Market Risk.

Interest Rate Risk - At March 31, 2005, the Company owed $16,513,495 on a $18,000,000 credit agreement with Bank of America. The credit agreement has $9,000,000 at one month LIBOR plus 2.50% or 5.35% as of March 31, 2005, and $9,000,000 under an interest rate swap to provide a fixed rate of 6.02%. A hypothetical 50 basis point increase in interest rates would result in an approximately $41,000 increase in interest expense, resulting in a negative impact on the Company’s liquidity and results of operations.

ITEM 4. Controls and Procedures

In the Original Filing, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report, our disclosure controls and procedures (as defined in Rules 13a-(e) and 15d-(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) were effective in enabling the Company to record, process, summarize and report in a timely manner the information required to be disclosed in reports it files under the Exchange Act. However, in connection with the additional review done in connection with the restatement and the preparation of this Form 10-Q/A, our management, with the participation of our Chief Executive Officer and Chief Financial Officer carried out another evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, because of material weaknesses in internal controls over financial reporting discussed below, as of the end of the period covered by this report, our disclosure controls and procedures were not effective in ensuring that the information required to be disclosed by us in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Internal Control over Financial Reporting

As described more fully elsewhere in this Form 10-Q/A, the Company, through an internal review process, identified certain accounting errors made during the quarter ended March 31, 2005. The errors related primarily certain account balances and certain income and expense amounts being previously reported in an incorrect quarter. After an extensive investigation, the Company has identified the journal entries and transactions that caused the errors. The Company concluded as part of its review process that these entries needed to be corrected to properly report its financial condition and results of operations. The Company has corrected these errors and other insignificant errors in the restatement. See “Explanatory Note” and Notes 1,2,3,4,8, 10 & 11 to the Consolidated Financial Statements for further information and a detailed description of the corrections of the Company’s financial statements made in the restatement.

Based upon the results of our investigation, our Chief Executive Officer and Chief Financial Officer determined that the accounting errors referenced above were the result of material weaknesses in internal control over financial reporting related to (i) its system of entry of certain types of transactions into the general and subsidiary ledgers and (ii) the timely reconciliation of general ledger balance sheet accounts to the appropriate underlying subsidiary records. The Company has taken steps to remediate the material weaknesses as of the date of this report.

As a result of these material weaknesses, certain account balances and certain income and expense amounts being previously reported in an incorrect quarter. The Company’s reconciliation and review processes, which should had detected these errors, were not adequate to do so, with the result that the Company’s financial statements as of and for the quarter ended March 31, 2005 were materially misstated prior to restatement.

A material weakness in internal control is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements would not be prevented or detected on a timely basis by the company. We have taken steps to remediate the material weaknesses, including:

•

an increase in the number of accounting and financial reporting personnel at the Company, which includes a new accounts receivable associate and a new accounting administrative associate;

•

the removal of the Company’s former controller, who was principally responsible for ledger entries and oversight of all reconciliations, and the hiring of a replacement controller;

•

the implementation of better record-keeping policies and procedures; and

•

The Company believes that these remedial steps have corrected the material weaknesses described above.

In addition to the evaluation discussed above, we will continue to evaluate our internal control over financial reporting on a regular basis. If we identify a problem in our internal control over financial reporting during the course of our evaluations, we will consider what revision, improvement and/or correction to make in order to ensure that our internal control over financial reporting is effective. Accordingly, we intend to continue to refine our internal control over financial reporting on an ongoing basis as we deem appropriate with a view towards making improvements.

PART II. OTHER INFORMATION.

ITEM 1: Legal Proceedings.

Not Applicable

ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds.

Not Applicable

Item 3: Defaults Upon Senior Securities.

Not Applicable

ITEM 4: Submission of Matters to a Vote of Security Holders.

Not Applicable

ITEM 5: Other Information.

On April 13, 2005, the Company’s Board of Directors passed a resolution to transfer the listing of the Company’s common stock from NASDAQ to the American Stock Exchange. The Company’s common stock became listed and began trading on the American Stock Exchange effective April 14, 2005.

ITEM 6: Exhibits.

(a)Exhibits. An index of exhibits that is a part of this Form 10-Q/A appears following the signature page and is incorporated herein by reference.

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.


By:	/s/ Irving L. Smith	Date: November 15, 2005
	Irving L. Smith
	Chief Financial Officer

EXHIBIT INDEX


Exhibit No.		Exhibit Description
31.1		Certification pursuant to Rule 13a-14(a) by the Chief Executive Officer

31.2		Certification pursuant to Rule 13a-14(a) by the Chief Financial Officer

32		Certifications pursuant to 18 U.S.C. Section 1350

Fountain Powerboat Industries (FPWB) Inactive 10-Q/A2005 Q3 Quarterly report (amended)

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