Wednesday, October 10, 2007

Wintry Ocean Conditions at Fountain Powerboat Industries

At last the anchor was up, the sails were set, and off we glided. It was a sharp, cold Christmas; and as the short northern day merged into night, we found ourselves almost broad upon the wintry ocean, whose freezing spray cased us in ice, as in polished armor.

Fountain Powerboat Industries, Inc. (FPB-$1.90), a manufacturer of high performance sport boats, express cruisers and fish boats, reported net sales for fiscal 2007 ended June 30 of $68.83 million, a decrease of 13 percent when compared to net sales of $79,226,224 for fiscal 2006.

The 13% decrease in sales for the year was due to an overall softening of the marine industry, according to management.

The number of boats completed and shipped during the last two fiscal years was 329 and 400 (for fiscal 2007 and 2006), respectively.

Net loss for fiscal 2007 was $(5.05) million, or a net loss of $(1.05) per share, versus net income of $2.40 million, or net earnings of $0.49 per share in the prior year.

Year-over year, total stockholder equity fell from $1.88 per share to $0.75 per share.

Though amid all the smoking horror and diabolism of a sea-fight, sharks will be seen longingly gazing up to the ship's decks, like hungry dogs round a table where red meat is being carved, ready to bolt down every killed man that is tossed to them . . .

Ironically, during fiscal 2007, the base salary of Reginald M. Fountain, Chairman & CEO of Fountain Powerboat increased 40.5%, or $170,000, to $520,000 from 2006.

"Come, Ahab’s compliments to ye; come and see if ye can swerve me. Swerve me? ye cannot swerve me, else ye swerve yourselves! man has ye there. Swerve me? The path to my fixed purpose is laid with iron rails, whereon my soul is grooved to run.”

The 10Q Detective notes that the stated base salary benchmarks at Fountain Powerboat have more to do with reviewing ‘other executive’ salaries at similar companies than with assessing executive performance within the context of the Company’s overall operating results!

“Some ships sail from their ports, and ever afterwards are missing…”

Chairman & CEO Reginald M. Fountain, however, did not receive an incentive cash bonus in fiscal 2007, for his performance pay related to the Company's consolidated net profits—of which there were none.

''There she blows!- there she blows! A hump like a snow-hill! It is Moby-Dick!''

Curiously, Fountain Powerboat does not offer an equity-based component to long-term compensation for its Named Executive Officers. Albeit the Company is cognizant that the stock ownership of its executives better aligns its officers with shareholder interests, the Compensation Committee does not believe it is appropriate to include a stock ownership element into the compensation program for its Named Executive Officers.

Hearing the tremendous rush of the sea-crashing boat, the whale wheeled round to present his blank forehead at bay; but in that evolution, catching sight of the nearing black hull of the ship; seemingly seeing in it the source of all his persecutions; bethinking it—it may be—a larger and nobler foe; of a sudden, he bore down upon its advancing prow, smiting his jaws amid fiery showers of foam.

Common stockholders, mindful that rough seas have swamped Fountain Powerboat, abandoned the sinking ship, sending the share price of Fountain Powerboat down more than 54 percent in value.

“The whale! The ship!” cried the cringing oarsmen.

Like some shareholders still clinging to flotsam, Mr. Fountain, too, is choking on some seawater; he holds 450,000 stock options (from an erstwhile plan that expired in 2005) at an exercise price of $4.67 that expire in 2008.

But as the oarsmen violently forced their boat through the sledge-hammering seas, the before whale-smitten bow-ends of two planks burst through, and in an instant almost, the temporarily disabled boat lay nearly level with the waves; its half-wading, splashing crew, trying hard to stop the gap and bale out the pouring water.

2008 Outlook

Boat purchasing decisions are influenced by consumer confidence, which is affected by economic conditions—such as interest rates (financing of boat purchases) and fuel prices. At this time, industry analysts are forecasting that boat sales will continue to be down through the first half of calendar 2008, and do predict a turn around for the 2008 season.

Fountain Powerboats expects sales for fiscal 2008 to be at approximately the same level as 2007, approximately $68 million.

Selling expenses as a percentage of sales rose 315 basis points year-over-year to 11.68% for fiscal year 2007, primarily due to an increase in advertising expenses, including an expanded international advertising program, increased salaries and commissions and increased expenses for the Company’s support of offshore racing and fishing tournament programs.

The Company spent an aggregate $2.3 million on fishing/racing promotional expenses last year and only $691,633 on boat show advertising expenses. Cost reduction programs are currently underway to boost the bottom-line in fiscal 2008. In our view, management should focus promotional cuts on R. Fountain's hobbies--offshore racing expenses-- than on boat show advertising dollars.

In our view, overall attendance of 2008 season boat shows will portend forward quarter sales successes. The Company has increased its participation with its dealers at regional and national boat shows, with some success. At the Miami International Boat Show in February 2007 the Company recorded approximately $20 million in orders for new boats and boats from dealers’ inventory, the highest in the history of the Company.

In September, management said that while dealer inventories were at a four-year low, the results of late summer boat shows have been encouraging, with the Company maintaining market share in the sport boat segment and experienced improvement in the express cruiser segment.

The Miami International Boat Show 2008 is scheduled for February 14 – 18.

“Towards thee I roll, thou all-destroying but unconquering whale; to the last I grapple with thee; from hell's heart I stab at thee; for hate's sake, I spit my last breath at thee. Sink all coffins and hearses to one common pool! and since neither can be mine, let me then tow to pieces, while still chasing thee, though tied to thee, thou damned whale! Thus, I give up the spear!” ~ Herman Melville, Moby-Dick (1819-1891)

Related Person Transactions During 2007

Before we award a Gold Star in Corporate Governance matters to Fountain & Company, the 10Q Detective wanted to point out that Reginald Fountain—by regal right of 51.5% beneficial ownership—will profitable ride out the heavy sea swells predicted in coming quarters:

  • Messer. Fountain owns a company that leases an airplane to Fountain for business purposes. During Fiscal 2007, Fountain paid that company $297,785 in rentals.
  • Fountain also rents apartments from a company owned by Mr. Fountain as temporary housing for consultants and new employees. During 2007, Fountain paid that company $3,576 in apartment rental fees.
  • In addition, during Fiscal 2007, Fountain expensed $20,000 related to a race boat owned by Mr. Fountain as compensation for Fountain's use of the boat over the course of five years for promotion and demonstration purposes.
  • Wyatt M. Fountain, who is Mr. Fountain's son, is employed as Regional Sales Manager for Fountain's Southeast Region. For Fiscal 2007 his aggregate compensation was $214,875 (consisting of sales commissions).

Do not expect Reggie Fountain to cede his spear--to any damned whale!

Editor David J. Phillips does not hold a financial interest in Fountain Powerboat Industries. The 10Q Detective has a Full Disclosure Policy.

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