Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Jupiter Marine International Holdings, Inc. (JMIH), a Florida
corporation, was incorporated on May 19, 1998. On May 26, 1998, JMIH acquired
all of the outstanding shares of common stock of Jupiter Marine International,
Inc. (JMI), a boat manufacturing company, which was incorporated under the laws
of the State of Florida on November 7, 1997. JMIH and JMI will sometimes be
collectively referred to as the "Company". The Company's principal offices and
manufacturing facilities are located in Palmetto, Florida. The Company's Web
site address is www.jupitermarine.com.
The Company designs, manufactures and markets a diverse mix of high
quality sportfishing boats under the Jupiter brand name. The outboard powered
product line currently consists of seven models:
38' Forward Seating Center Console
38' Open Center Console
34' Forward Seating Center Console
31' Cuddy Cabin
31' Forward Seating Center Console
31' Open Center Console
29' Forward Seating Center Console
The Jupiter 34' Forward Seating Center Console was introduced at the
October 2007 Ft. Lauderdale Boat Show. The 34' is a new design and fills the gap
between the 31' Forward Seating Center Console and the 38' Forward Seating
Center Console. It was specifically engineered to accommodate the new Yamaha
350HP V-8 four stroke outboard engines. Deliveries of the 34' will commence
during the later part of the quarter ending January 26, 2008.
Management's discussion and analysis contains various "forward-looking
statements" within the meaning of the Securities and Exchange Act of 1934. Such
statements consist of any statement other than a recitation of historical fact
and can be identified by the use of forward-looking terminology such as "may,"
"expect," "anticipate," "estimate" or "continue" or use of negative or other
variations or comparable terminology.
The Company cautions that these statements are further qualified by
important factors that could cause actual results to differ materially from
those contained in the forward-looking statements, that these forward-looking
statements are necessarily speculative, and there are certain risks and
uncertainties that could cause actual events or results to differ materially
from those referred to in such forward-looking statements.
The Company plans to grow the business by the addition of new features
on present models, the introduction of new models and expansion of its Palmetto
facility. The Company would consider an acquisition candidate if their products
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would complement those offered by the Company and the result would enhance the
service level provided by the Company. There are no discussions with any
potential candidates at this time, nor has the Company identified any
acquisition candidates.
Management of the Company believes that economic pressures such as
higher fuel prices, higher interest rates, a weak housing market's effect on the
buying public, concerns with the credit markets, and increases in costs of other
essential items have negatively effected our business. These factors have
already contributed to an overall slow down in the marine industry. Based on
published reports the marine industry has experienced double digit sales
declines. Some retail boat sales outlets have announced that due to high
inventory levels they plan on increasing promotions to move product. These
retail outlets have also expressed concern over their high inventory levels and
have indicated that they will be reducing purchases in the future. In addition,
as a public company we are constantly faced with increasing costs and expenses
to comply with SEC reporting obligations. We believe we will be required in
fiscal 2008 to comply with the annual internal control certification pursuant to
Section 404 of the Sarbanes-Oxley Act of 2002 and the related SEC rules. We
expect that these and other compliance costs of a public company will increase
significantly. In addition, our stock has historically been, and continues to
be, relatively thinly traded, providing little liquidity for our shareholders.
As a result of the foregoing, we have, from time-to-time considered, and expect
from time-to-time to continue to consider strategic alternatives to maximize
shareholder value. See "Other Events" below.
Net Sales
The Company's net sales were $3,857,821, for the quarter ended October
27, 2007 an increase of $34,403 as compared to $3,892,224 for the quarter ended
October 28, 2006. We have been able to maintain our sales levels at a rate
consistent with last year primarily due to enlisting new dealers who contributed
approximately $1.6 million or 42% to our first quarter sales. There is no
assurance that additional new dealers can absorb any potential sales decline in
the future as we have filled most of the open sales territories.
Promotional sales discounts, given to stimulate retail sales, increased
to $86,069 or 2.2% of sales for the quarter ended October 27, 2007 as compared
to $27,650 or 0.7% of sales for the quarter ended October 28, 2006.
Dealer inventory at October 27, 2007 increased to approximately four
and one-half months supply compared to an approximate two and one-half months
supply at the same time last year. Order backlog remained at approximately one
month at October 27, 2007 compared to the same time last year. We continually
monitor activity at our dealerships and will, if necessary, adjust production to
consumer demand.
Cost of Sales and Gross Profit
Cost of sales for the quarter ended October 27, 2007 was $2,990,472
resulting in $867,349 of gross profit or 22.5% of net sales. For the quarter
ended October 28, 2006 cost of sales was $3,098,918 and gross profit was
$793,306 or 20.4% of net sales.
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During the quarter ended October 28, 2006 the Company was operating two
manufacturing facilities, both operating below capacity, the cost of which
adversely affected gross margins.
The benefits of merging the Company's manufacturing operations into one
facility have started to pay off in the way of reduced operation cost and
improved efficiencies. The full benefit of this consolidation will not be
realized until additional improvements are made to the Palmetto facility. The
timing of completing these improvements is dependent on improved cash flow.
The improvement in gross margin percentage was also the result of a
sales mix shift to the larger higher gross margin 38' Forward Seating model.
Higher promotional discounts, as mentioned previously, reduced gross margins by
approximately 1.5%. The increase in selling price at the start of fiscal year
2008 (August 1, 2007) helped offset increases in raw material, labor and other
operating expenses. Management is very concerned about the consumers' acceptance
of rising selling prices now and in the future.
Selling, General and Administrative Expenses
Selling and marketing expenses were $166,088, or 4.3% of net sales, for
the quarter ended October 27, 2007 as compared to $143,332 or 3.7% of net sales
for the same quarter of last year. This increase is primarily attributable to an
increase in salaries for certain sales personnel.
General and administrative expenses for the quarter ended October 27,
2007 remained about the same at $480,643 or 12.5% of net sales for the quarter
ended October 27, 2007 compared to $488,165 or 12.5% of net sales for the same
quarter of last year.
Depreciation and amortization expense increased by $12,696 to $122,905
for the quarter ended October 27, 2007 resulting from addition of boat molds and
equipment.
Interest expense for the quarter ended October 27, 2007 of $28,258 was
$14,342 less than the same quarter of last year due to lower average borrowings
on the line of credit.
Liquidity and Capital Resources
At October 27, 2007 the Company had cash and cash equivalents of
$341,031 and working capital deficit of $876,416. At October 28, 2006, the
Company had cash and cash equivalents of $100,542 and working capital of
$1,425,693.
The Company anticipates that cash generated from operations and the
availability under the Company's credit line should be sufficient to satisfy the
Company's contemplated cash requirements for its current operations, other than
for capital expenditures and the repayment of the Note Payable to shareholders,
as discussed below, for at least the next twelve months.
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The Note Payable to Shareholders in the amount of $350,000 plus accrued
interest in the amount of $155,496 is due on February 14, 2008. The Company does
not currently have available funds to satisfy the note. If the Company is unable
to repay the note, the note may be converted into common stock. Conversion of
the note would result in substantial dilution to current shareholders.
Property and equipment purchases during the quarter ended October 27,
2007 were $489,091 consisting primarily of new boat molds. Its is estimated that
between $750,000 and $1,000,000 will be needed to complete the initial Palmetto
build-out that will allow us to more efficiently meet the current production
schedule. Additionally, it is estimated that $400,000 will be required to
complete the new boat development project schedule. The actual timing of these
expenditures and, consequently, the products completion date is predicated on
the Company's ability to generate cash or secure alternative financing.
Net cash provided by operating activities was $956,022 for the three
months ended October 27, 2007 compared to $310,313 used by operating activities
for the three months ended October 28, 2006.
Inventories at October 27, 2007 increased by $206,846 compared to July
28, 2007 due to increased work in process.
Accounts payable at October 27, 2007 increased by $672,308 due to the
increase in inventory and delaying vendor payments.
The number and level of employees at October 27, 2007 should be
adequate to fulfill the production schedule.
Other Events
As discussed above, we believe that the economy and other factors have
had a negative effect on the Company's operations and stock quotation price. In
July 2007, in an attempt to maximize shareholder value, the Company entered into
a merger agreement with Diamond Information Institute, Inc., a jewelry designer
and manufacturer company. Under the merger the Company will issue an aggregate
of 7,400,000 shares of common stock and 1,025,000 shares of Series A Voting
Convertible Preferred Stock to the shareholders of Diamond Information
Institute, Inc. in exchange for a wholly owned interest in Diamond Information
Institute, Inc. Simultaneously with the merger, the Company will dispose of all
of its boat manufacturing business assets and liabilities, which will be
purchased by Carl Herndon, Lawrence Tierney and certain other shareholders of
the Company in consideration for the return of 9,987,833 shares of the Company
common stock. These affiliates and others will own 100% of the boat
manufacturing business following the completion of the reverse merger. Diamond
Information Institute, Inc. will be the accounting survivor and surviving
business operations; however, the Company is the surviving legal entity. Diamond
Information Institute, Inc. is a New Jersey corporation organized in 1988 that
has been engaged in the design and manufacture of upscale jewelry since 1995.
Diamond Information Institute, Inc. sells its jewelry to approximately 150
independent jewelry stores across the United States. The completion of these
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transactions is subject to several conditions, including but not limited to SEC
review and delivery of an information statement to the Company's shareholders.
As of the date of this report the Company cannot provide any assurances that the
transactions will be completed.
