FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
For Quarter Ended 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 (I.R.S. Identification No.)
of incorporation or
organization)
1653 Whichard's Beach Road
P.O. Drawer 457
Washington, NC 27889
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, 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 the number of shares outstanding of each of the issurer's classes of
common stock as of the latest practicable date.
Class Outstanding at April 30, 1999
Common stock, $.01 par value 4,732,608 shares
-1-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
INDEX
PART I. Financial Information. Page No.
Review Report of Independent Certified
Public Accountants........................... 3
Consolidated Balance Sheets - Assets,
March 31, 1999 and June 30, 1998............ 4
Consolidated Balance Sheets - Liabilities &
Shareholders' Equity, March 31, 1999
and June 30, 1998............................ 5
Consolidated Statements of Operations -
Three and Nine Months Ended March 31, 1999
and March 31, 1998......................... 6-7
Consolidated Statements of Cash Flows -
Nine Months Ended March 31, 1999
and March 31, 1998........................ 8-9
Notes to Consolidated Financial Statements ... 10-15
Management's Discussion and Analysis of
Results of Operations and
Financial Condition.......................... 15-17
PART II. Other Information.
Item 2. Changes in Securities............................. 18
Item 6. Exhibits and Reports on Form 8 and Form 8-K....... 18
Signature........................................ 18
-2-
PRITCHETT, SILER & HARDY, P.C.
430 EAST 400 SOUTH
SALT LAKE CITY, UTAH 84111
To the Board of Directors
FOUNTAIN POWERBOAT INDUSTRIES, INC.
Washington, North Carolina
We have reviewed the accompanying consolidated balance sheet of Fountain
Powerboat Industries, Inc. as of March 31, 1999, and the related consolidated
statements of income and cash flows for the three and nine months then ended.
All information included in these financial statements is the representation of
the management of Fountain Powerboat Industries, Inc.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of Company personnel responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
/s/ PRITCHETT, SILER & HARDY, P.C.
May 10, 1999
Salt Lake City, Utah
-3-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited - See Accountant's Review Report)
March 31, June 30,
1999 1998
____________ ____________
CURRENT ASSETS:
Cash and cash equivalents $ 3,210,514 $ 1,376,984
Accounts receivable, net 924,701 2,715,754
Inventories 5,951,658 7,077,540
Prepaid expenses 898,239 489,290
Deferred tax assets 1,698,726 1,058,967
____________ ____________
Total Current Assets 12,683,838 12,718,535
____________ ____________
PROPERTY, PLANT AND EQUIPMENT 34,271,399 33,411,011
Less: Accumulated depreciation (15,610,403) (14,254,156)
____________ ____________
18,660,996 19,156,855
____________ ____________
OTHER ASSETS 724,972 622,003
____________ ____________
TOTAL ASSETS $ 32,069,806 $ 32,497,393
____________ ____________
-4-
[Continued]
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited - See Accountants' Review Report)
[Continued]
March 31, June 30,
1999 1998
___________ ___________
CURRENT LIABILITIES:
Current portion/long-term debt $ 2,173,487 $ 981,365
Notes payable - related party 157,910 415,821
Accounts payable 2,196,417 3,591,489
Accrued expenses 2,175,425 1,939,791
Dealer territory service accrual 2,392,557 2,046,939
Customer deposits 413,996 510,967
Allowance for boat repurchases 200,000 200,000
Reserve for warranty expense 500,000 500,000
Net liabilities of discontinued operations 10,000 103,612
___________ ___________
Total Current Liabilities 10,219,792 10,289,984
___________ ___________
LONG-TERM DEBT, LESS CURRENT PORTION 10,915,956 9,499,895
DEFERRED TAX LIABILITY 88,978 926,807
COMMITMENTS AND CONTINGENCIES [NOTE 6] - -
___________ ___________
Total Liabilities 21,224,726 20,716,686
___________ ___________
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value,
200,000,000 shares authorized,
4,732,608 and 4,702,608 shares
issued and outstanding, respectively 47,326 47,026
Capital in excess of par value 10,303,640 10,196,540
Retained earnings - accumulated 604,862 1,647,889
___________ ___________
10,955,828 11,891,454
Less: Treasury stock (110,748) (110,748)
___________ ___________
Total Stockholders' Equity 10,845,080 11,780,707
___________ ___________
$32,069,806 $32,497,393
___________ ___________
The accompanying notes are an integral part of these financial statements.
-5-
FOUNTAIN POWERBOAT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - See Accountants' Review Report)
For the Three Months Ended For the Nine Months Ended
March 31, March 31,
__________________________ _________________________
1999 1998 1999 1998
____________ _____________ ____________ ____________
NET SALES $ 14,041,832 $ 12,699,853 $ 39,718,327 $ 37,313,090
____________ _____________ ____________ ____________
COST OF SALES 11,094,281 8,744,319 31,172,114 26,456,149
____________ _____________ ____________ ____________
Gross Profit 2,947,551 3,955,534 8,546,213 10,856,941
EXPENSES:
Selling expense 1,761,294 1,952,340 5,855,679 3,869,103
General and administrative 734,898 592,272 2,053,514 2,089,473
General and administrative
Related parties 4,325 - 8,758 73,853
____________ _____________ ____________ ____________
Total Expenses 2,500,517 2,544,612 7,917,951 6,032,429
____________ _____________ ____________ ____________
OPERATING INCOME BEFORE
STRATEGIC CHARGE 447,034 1,410,922 628,262 4,824,512
STRATEGIC CHARGE - - (2,440,000) -
____________ _____________ ____________ ____________
OPERATING INCOME (LOSS) 447,034 1,410,922 (1,811,738) 4,824,512
NON-OPERATING INCOME
(EXPENSE):
Other income 25,937 21,934 80,933 62,099
Interest expense (249,732) (199,734) (769,363) (480,867)
Interest expense-
related party (6,514) - (20,447) -
____________ _____________ ____________ ____________
INCOME (LOSS) BEFORE TAXES 216,725 1,233,122 (2,520,615) 4,405,744
CURRENT TAX EXPENSE - 312,618 - 1,267,066
DEFERRED TAX (BENEFIT) (120,960) - (1,477,588) -
DEFERRED TAX EXPENSE - 147,574 - 75,756
____________ _____________ ____________ ____________
INCOME (LOSS) FROM
CONTINUING OPERATIONS 337,685 772,930 (1,043,027) 3,062,922
DISCONTINUED OPERATIONS:
Loss on disposal of operations
of Fountain Power, Inc. and
Mach Performance, Inc. - 60,310 - 33,710
____________ _____________ ____________ ____________
LOSS FROM DISCONTINUED
OPERATIONS - (60,310) - (33,710)
____________ _____________ ____________ ____________
NET INCOME (LOSS) $ 337,685 $ 712,620 $(1,043,027) $ 3,029,212
____________ _____________ ____________ ____________
-6-
[Continued]
FOUNTAIN POWERBOAT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - See Accountants' Review Report)
[Continued]
For the Three Months Ended For the Nine Months Ended
March 31, March 31,
__________________________ _________________________
1999 1998 1999 1998
____________ _____________ ____________ ____________
EARNINGS (LOSS) PER SHARE:
Continuing Operations $ .07 $ .16 $ (.22) $ .65
Income from Operations of
Discontinued Segments - - - -
Estimated Loss on Disposal
of Discontinued Segments - (.01) - (.01)
____________ _____________ ____________ ____________
EARNINGS (LOSS) PER SHARE $ .07 $ .15 $ (.22) $ .64
____________ _____________ ____________ ____________
WEIGHTED AVERAGE SHARES
OUTSTANDING 4,702,608 4,740,108 4,705,017 4,738,356
____________ _____________ ____________ ____________
DILUTED EARNINGS PER SHARE:
Continuing Operations $ .07 $ .15 $ N/A $ .61
Loss from Operations of
Discontinued Segments - - N/A -
Estimated Loss on Disposal
of Discontinued Segments - (.01) N/A (.01)
____________ _____________ ____________ ____________
DILUTED EARNINGS PER SHARE $ .07 $ .14 $ N/A $ .60
____________ _____________ ____________ ____________
DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 4,794,363 5,068,713 N/A 5,088,913
____________ _____________ ____________ ____________
The accompanying notes are an integral part of these financial statements.
-7-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - See Accountant's Review Report)
Increase (Decrease) in Cash and Cash Equivalents
For the Nine Months Ended
March 31,
_________________________________
1999 1998
________________ ________________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,043,027) $ 3,029,212
________________ ________________
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation expense 1,741,646 1,418,965
Strategic Charge 2,440,000 -
Change in assets and liabilities:
(Increase) decrease in accounts receivable 1,791,053 (2,436,774)
(Increase) decrease in inventories 197,060 (3,606,629)
(Increase) decrease in prepaid expenses (408,949) 446,220
Increase (decrease) in accounts payable (1,395,072) 716,133
Increase (decrease) in accrued expenses 235,632 229,995
Increase (decrease) in dealer territory
service accrual 345,618 337,497
Increase (decrease) in customer deposits (96,971) 154,028
Net deferred taxes (1,477,588) 623,417
Net liabilities of discontinued operations (93,612) (134,441)
________________ ________________
Net Cash Provided (Used) by
Operating Activities $ 2,235,790 $ 777,623
________________ ________________
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchase) sale of certificates of
deposit, net $ - $ 696,155
Investment in molds, plugs, and other tooling (635,272) (1,060,026)
Purchase of property, plant, and equipment (2,121,691) (5,452,598)
(Increase) in other assets (102,969) (112,712)
________________ ________________
Net Cash Provided (Used) by Investing
Activities $ (2,859,932) $ (5,929,181)
________________ ________________
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt $ 4,000,000 $ 2,875,000
Repayment of long-term debt (1,391,817) (524,680)
Repayment of long-term debt - related party (257,911) -
Proceeds from issuance of common stock 107,400 107,500
________________ ________________
Net Cash Provided (Used) by Financing
Activities $ 2,457,672 $ 2,457,820
________________ ________________
Net increase (decrease) in cash and cash
equivalents $ 1,833,530 $ (2,693,738)
Cash and cash equivalents at beginning of period 1,376,984 2,994,503
________________ ________________
Cash and cash equivalents at end of period $ 3,210,514 $ 300,765
________________ ________________
-8-
[Continued]
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - See Accountant's Review Report)
Increase (Decrease) in Cash and Cash Equivalents
[Continued]
For the Nine Months Ended
March 31,
_________________________________
1999 1998
________________ ________________
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest:
Unrelated parties $ 502,752 $ 570,688
Related parties 16,879 17,672
________________ ________________
$ 519,631 $ 588,360
________________ ________________
Income taxes $ 263,345 $ 8,836
________________ ________________
Supplemental Disclosures of Noncash Investing and Financing Activities:
For the nine month period ended March 31, 1999:
There were no non-cash investing and financing activities.
For the nine month period ended March 31, 1998:
On September 30, 1997 the Company purchased an airplane for $1,375,000
from a related party through the issuance of a $415,821 note payable to
the related party and assuming $959,179 underlying indebtedness on the
plane.
The accompanying notes are an integral part of these financial statements.
-9-
FOUNTAIN POWERBOAT INDUSTRIES, INC.
Notes to Consolidated Financial Statements
(Unaudited - See Accountants' Review Report)
NOTE 1. Basis of Presentation.
Although these statements have been reviewed by our independent auditors,
they are unaudited. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reporting amounts of assets and liabilities,
the disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimated by management. 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,
1999 and for all periods presented have been made.
Certain information and footnote disclosures normally included in the
financial statements prepared in accordance with generally accepted accounting
principles 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,
1998 audited financial statements. The results of operations for the period
ended March 31, 1999 are not necessarily indicative of the operating results for
the full year.
NOTE 2. Accounts Receivable.
As of March 31, 1999, accounts receivable were $924,701 net of the allowance
for bad debts of $30,000. This represents a decrease of $1,791,053 from the
$2,715,754 in net accounts receivable recorded at June 30, 1998. Of the
$924,701 balance at March 31, 1999, $612,996 has subsequently been collected as
of April 30, 1999, and the remaining $311,705 is believed to be fully
collectible.
NOTE 3. Inventories.
Inventories at March 31, 1999 and June 30, 1998 consisted of the following:
March 31, March 31,
1999 1998
________________ ________________
Parts and Supplies.............................$ 3,163,596 $ 4,510,373
Work-in-process................................ 2,175,290 2,235,394
Finished goods................................. 536,102 302,587
Sportswear..................................... 196,670 149,186
Obsolete inventory reserve..................... (120,000) (120,000)
Total..........................................$ 5,951,658 $ 7,077,540
-10-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited - See Accountants' Review Report)
NOTE 4. Revenue Recognition.
The Company 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 to the Government, and an account receivable is
recorded or payment is received from the dealer, from the Government, or from
the dealer's third-party commercial lender. This is the method of sales
recognition 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 all other 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 or to pay floor plan interest for the dealer beyond the normal,
published sales program terms.
The sales incentive floor plan interest expense for each individual boat
sale is accrued for the maximum six month (180 days) interest payment period in
the same fiscal accounting period that the related boat sale is recorded. The
entire six months' interest expense is accrued at the time of the sale because
the Company considers it a selling expense. 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.
Presently, the Company's normal sales program provides for the payment of
floor plan interest on behalf of its dealers for a maximum of six months. The
Company believes that this program is currently competitive with the interest
payment programs offered by other boat manufacturers, but may from time to time
adopt and publish different programs as necessary in order to meet competition.
-11-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited - See Accountants' Review Report)
NOTE 5. Allowance and Qualifying Accounts.
For the nine months ended March 31, 1999, the Company adjusted its
allowance and qualifying accounts as follows:
Balance at Charged to Balance
Beginning Cost and Additions at End
of Period Expense (Deductions) of Period
Allowance for
boat repurchases $ 200,000 $ -0- $ -0- $ 200,000
Allowance for
doubtful accounts 30,000 12,710 12,710 30,000
Allowance for
warranty claims 500,000 612,279 612,279 500,000
Allowance for
inventory values 120,000 -0- -0- 120,000
---------- ---------- ------------ ----------
Total $ 850,000 $ 624,989 $ 624,989 $ 850,000
========== ========== ============ ==========
In management's opinion, the balances of the allowance and qualifying
accounts are adequate to provide for all reasonably anticipated future losses.
NOTE 6. Notes Payable and Line of Credit.
During September 1998 the Company concluded negotiations for a new $4,000,000
promissory note with Transamerica Business Credit Corporation which included
restatement and amendment of certain existing promissory notes with General
Electric Capital Corporation ("GECC"). An Omnibus Agreement was entered into
which provides that all the underlying collateral and encumbered property would
apply ratably to all of the Notes Payable. The $4,000,000 promissory note
provides for thirty-nine monthly principal payments in the amount of $100,000
beginning October 1, 1998 with a final payment of the entire outstanding payment
due on January 2, 2002. Accrued interest will be paid monthly in addition to
the principal payment. Interest will be calculated at 2.7% per annum above the
published LIBOR Rate (London Interbank Offered Rates) and is calculated monthly.
The Company executed a restated and amended Note to GECC in the amount of
$9,007,797, which replaces a previous
-12-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited - See Accountants' Review Report)
note with the same outstanding balance. The note provides for 39 monthly
payments of $123,103, which includes principal and interest. A final payment of
the outstanding balance will be due on January 2, 2002. Interest is calculated
at 2.7% per annum above the published LIBOR Rate. The Company also executed a
restated and amended Note to GECC in the amount of $855,050, which replaces a
previous note with the same outstanding balance. The note provides for seventy
monthly payments of $15,181, which includes principal and interest. A final
payment of the outstanding balance will be due on April 1, 2004. Interest is
calculated at 2.7% per annum above the published LIBOR Rate. All of the notes
provide for prepayment penalties according to a predefined timetable. On
December 1, 1998, the two GECC loans were converted to fixed rates of 7.02% on
the $9,007,797 loan and 7.26% on the $855,050 loan.
NOTE 7. 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, 1999, 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
$32,100,000. The Company has reserved for 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, 1999, the allowance for boat repurchases was $200,000.
Dealer Interest - The Company regularly pays a portion of dealers' interest
charges for floor plan financing for up to six months. These interest charges
amounted to approximately $1,213,400 for the first nine months of Fiscal 1999
and are included in the accompanying consolidated statements of operations as
part of selling expense. At March 31, 1999, the estimated unpaid dealer
incentive interest included in accrued expenses amounted to $404,900.
NOTE 8. Transactions with Related Parties.
The Company paid or accrued the following amounts for services rendered or for
interest on indebtedness to related parties:
-13-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited - See Accountants' Review Report)
March 31, March 31,
1999 1998
___________ ___________
Apartments - Rentals $ 7,808 $ 3,862
R.M. Fountain, Jr. - Interest 20,447 -0-
- Aircraft
Rental -0- 137,219
----------- -----------
$ 28,255 $ 141,081
=========== ===========
At March 31, 1999 the Company had travel advances and other receivables
from employees in the amount of $71,328, of which $58,304 was due from an
officer of the Company. For the nine months ended March 31, 1999 the Company
paid interest expense of $20,447 to an Officer/Director of the Company.
NOTE 9. Income Taxes.
For the nine-month period ended March 31, 1999, the Company provided $-0-
for current income taxes and a benefit of $1,477,588 for deferred income taxes.
NOTE 10. Stock Options.
On January 12, 1999, the board of directors adopted a 1999 Employee Stock
Option Plan for the purpose of encouraging officers and employees of the Company
to expand and improve the profits and prosperity of the Company. Concurrent
with the adoption of this plan, the Company issued an incentive stock option for
30,000 shares of stock to an officer of the Company, at an exercise price of
$5.00 per option share. The 1999 employee stock option plan and the employee
stock option agreement with an officer of the Company were approved by a
majority of the shareholders at the 1998 annual meeting held on March 2, 1999.
At March 31, 1999 there were 546,000 unexercised stock options, of which
540,000 were held by officers and directors of the Company at prices ranging
from $3.58 to $8.167 per share. During this period, a former director of the
Company exercised 30,000 stock option shares at an option price of $3.58 per
share.
NOTE 11. Earnings Per Share.
The computation of earnings (loss) per share and diluted earnings (loss)
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. Diluted earnings
(loss) per share for the nine-month period ended March 31, 1999, was not
presented, as its effect was anti-dilutive.
-14-
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited - See Accountants' Review Report)
For the Three Months Ended For the Nine Months Ended
March 31, March 31,
__________________________ _________________________
1999 1998 1999 1998
Weighted average common
shares outstanding for basic____________ _____________ ____________ ____________
earnings per share 4,702,608 4,740,108 4,705,017 4,738,356
Effect of dilutive securities:
Stock options 92,322 328,605 N/A 350,557
____________ _____________ ____________ ____________
Weighted average common shares
and potential dilutive shares
outstanding for dilutive
earnings per share 4,794,930 5,068,713 N/A 5,088,913
____________ _____________ ____________ ____________
Stock options to purchase
common stock not included
in the computation of diluted
earnings per share as their
effect is anti-dilutive - - 546,000 -
____________ _____________ ____________ ____________
NOTE 12. Strategic Charge.
During December 1998, the Company designed and implemented a restructuring
plan to aggressively improve the Company's cost structure, refocus sales and
marketing expenditures and divest the Company of certain non-realizable assets.
In connection with the restructuring plan the Company reviewed components of its
business for possible improvement of future profitability through reengineering
or restructuring. As part of this plan the Company decided to eliminate its
racing program and write off the balance of excess yacht
tooling cost along with other discontinued unused tooling. The Company expects
to complete the majority of these actions during the third and fourth quarters
of Fiscal 1999. The carrying value of the assets held was reduced to fair value
based on estimated realizable value based on future cash flows from use of the
asset or sale of the related assets. The resulting pretax adjustment of
$2,440,000 was recorded as a strategic charge in the second quarter statement of
operations of the Company.
Management's Discussion and Analysis of Results of Operations
and Financial Condition
Results of Operations.
The operating income for the third quarter ended March 31, 1999 was
$447,034 or $.09 per share versus operating income of $1,410,922 or $.30 per
share for the corresponding period of the previous year. Operating income as a
percent of sales for the third quarter of Fiscal 1999 was 3.2% versus 11.1% for
the same period the previous Fiscal year. Net income for the third quarter of
Fiscal 1999 was $337,685 or $.07 per share. This compares to net income
amounting to $712,620 or $.15 per share for the third quarter of Fiscal 1998.
-15-
Net sales were $14,041,832 for the third quarter of Fiscal 1999 as compared
to $12,699,853 for the third quarter of the prior Fiscal year. Unit sales
volume for the third quarter of Fiscal 1999 was 111 boats as compared to 109
boats for the third quarter of Fiscal 1998. The increase in units this quarter
over the prior Fiscal year is primarily due to an increase in the number of
fishing boats sold.
For the third quarter of Fiscal 1999, the gross margin on sales was
$2,947,551 (21.0%) as compared to $3,955,534 (31.1%) for the third quarter of
Fiscal 1998.
Selling expenses were $1,761,294 for the third quarter of Fiscal 1999 as
compared to $1,952,340 for the third quarter of last Fiscal year. Most of the
decrease was in promotional racing and advertising expense.
General and administrative expenses were $739,223 for the third
quarter of Fiscal 1999 as compared to $592,272 for the same quarter of last
Fiscal year. Most of the increase was due to a one time insurance credit
occurring in the third quarter of last Fiscal year.
Interest expense for the third quarter of Fiscal 1999 was $256,246 as
compared to $199,734 for the third quarter of last Fiscal year. Interest
expense is up due to an overall increase in long-term debt.
Other non-operating income/(expense) for the third quarter of Fiscal 1999
was $25,937 as compared to $21,934 for the third quarter of last Fiscal year.
Financial Condition.
The Company's cash flows for the first nine months of Fiscal 1999 are
summarized as follows:
Net cash provided by operating activities........ $ 2,235,790
" " used by investing activities.............. (2,859,932)
" " provided by financing activities.......... 2,457,672
Net increase in cash..................... $ 1,833,530
===========
This net increase compared to a $(2,693,738) net decrease for the first nine
months of the prior fiscal year.
Cash used in the first nine months of Fiscal 1999 to acquire additional
property, plant, and equipment (investing activity) amounted to $2,756,963 of
which $635,272 was for plugs, molds, and other product tooling.
During the first quarter of Fiscal 1999, the Company borrowed $4,000,000
to supplement and offset the cash used during Fiscal 1998 to increase
property, plant and equipment by $6,937,699 and inventory by $3,139,783.
Refer to Note 6 to the
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Consolidated Financial Statements for complete notes payable details. Both the
General Electric Capital Corporation loan and the Transamerica Business Credit
Corporation loans are secured by all of the Company's real and personal
property and by the Company's assignment of a $1,000,000 key man life
insurance policy.
For the remainder of 1999 and beyond, the Company expects to generate
sufficient cash through operations to meet its needs and obligations.
Management believes that the Company's sales and production volume will
continue to grow with a return to net earnings and positive cash flow. Most
of the Company's cash resources will be used to maintain its plant and
equipment, for new product tooling and for work in process inventory increases
for new product line additions.
The Year 2000.
A current concern, known as the "Year 2000" or "Y2K" Bug is expected to effect
a large number of computer systems and software during or after the year 1999.
The concern is that any computer function that requires a date calculation may
produce errors. The Year 2000 issue affects virtually all companies and
organizations, including the Company. The
Company is taking the steps necessary to prevent these errors from occurring.
With respect to third party providers whose services are critical to the
Company, the Company intends to monitor the efforts of such vendors, as they
become Year 2000 compliant. Management is not presently aware of any Year
2000 issues that have been encountered by any such third party, which could
materially affect the Company's operations. At present, the Company has spent
$312,000 and anticipates $100,000 in additional costs in upgrading some of its
software and hardware in order to avoid any problems resulting from the
Millennium bug. There is no assurance that the Company will not experience
operational difficulties as a result of Year 2000 issues.
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
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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.
PART II. Other Information.
ITEM 2: Change in Securities.
During third quarter of Fiscal 1999, 30,000 stock option shares were exercised
by a former director of the Company at an option price of $3.58 per share.
ITEM 6: Exhibits and Reports on Form 8 and Form 8-K.
(a) No Amendments on Form 8 were filed by the Registrant during the first nine
months of Fiscal 1999.
(b) No Current Reports on Form 8-K were filed by the Registrant
during the first nine months of Fiscal 1999.
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)
/s/ Joseph F. Schemenauer
By: Joseph F. Schemenauer Date: May 14, 1999
Joseph F. Schemenauer
Vice President, Chief Financial
Officer, and Designated Principal
Accounting Officer
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