-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SsNZ+GYT1mnF7q/qhuNWyTDBjMv1rCdY45SHQmXjpAfdxExBAVhKhsTqPMzVtP+t kWsqVqRpVj8Xwvr/YxgQxQ== 0000944543-97-000058.txt : 19971015 0000944543-97-000058.hdr.sgml : 19971015 ACCESSION NUMBER: 0000944543-97-000058 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19971014 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOUNTAIN POWERBOAT INDUSTRIES INC CENTRAL INDEX KEY: 0000764858 STANDARD INDUSTRIAL CLASSIFICATION: SHIP & BOAT BUILDING & REPAIRING [3730] IRS NUMBER: 880160250 STATE OF INCORPORATION: NV FISCAL YEAR END: 0701 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-14712 FILM NUMBER: 97695452 BUSINESS ADDRESS: STREET 1: P O DRAWER 457 STREET 2: WHICHARDS BEACH RD CITY: WASHINGTON STATE: NC ZIP: 27889 BUSINESS PHONE: 9199752000 MAIL ADDRESS: STREET 1: P O BOX 457 STREET 2: WHICHARDS BEACH RD CITY: WASHINGTON STATE: NC ZIP: 27889 FORMER COMPANY: FORMER CONFORMED NAME: TOV VENTURES LTD DATE OF NAME CHANGE: 19860902 10-K 1 FOUNTAIN POWERBOAT INDUSTRIES, INC. FORM 10-K ANNUAL REPORT FOR THE YEAR ENDED JUNE 30, 1997 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (D)OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For fiscal year ended June 30, 1997 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] __________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 88-0160250 (State or other jurisdiction (IRS Employer of incorporation) Identification No.) Post Office Drawer 457, Whichard's Beach Road., Washington, NC 27889 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (919) 975-2000 Securities registered pursuant to Section 12 (g) of the Act: Common Stock, par value $ .01 per share 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 requirement for the past 90 day. [ X ]Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X ]Yes [ ]No -2- The aggregate market value of the voting stock held by non-affiliates of the registrant was $ 30,981,540 at October 7, 1997 based upon a closing price of $15.00 per share on such date for the Company's Common Stock. As of October 7, 1997 there were 4,725,108 shares of the Company's Common Stock issued of which 15,000 shares are owned by the Company's subsidiary Fountain Powerboats, Inc. and are regarded as treasury shares. Documents incorporated by reference: None. Part I Item 1. Business. Background Fountain Powerboat Industries, Inc. (the "Company"), through its wholly-owned subsidiary, Fountain Powerboats, Inc. (the "Subsidiary"), designs, manufactures, and sells offshore sport boats, sport cruisers, and sport fishing boats intended for that segment of the recreational power boat market where speed, performance, and quality are the main criteria for purchase. The Company's strategy in concentrating on that segment of the market is to maximize its use of the reputation of its Chairman and President, Reginald M. Fountain, Jr., as an internationally recognized power boat racer and designer. The Company also has made specialized high performance boats for the United States Government. The Company's products are sold through a network of authorized dealers worldwide. The Company has targeted that segment of the market in which purchase decisions are generally predicated to a relatively greater degree on the product's image, style, speed, performance, quality, and safety and to a lesser degree on the product's price or other economic considerations. Products. Each of the Company's products is based upon a deep V- shaped fiberglass hull with a V-shaped pad and a notched transom. This design enables the boat to move along the water at high speed on its pad and achieve performance and stability standards which the Company believes are greater than those offered by its competitors. As a result, the Company maintains that its boats are among the fastest, best- handling, and safest boats of their kind. In Fiscal 1994, the Company developed a new, high performance hull design for its boats. These new "positive- lift" designs increase speed significantly and gives a softer ride by incorporating radically different keel lines with steps in the hull bottoms. Handling and fuel economy are also substantially improved with the new designs. The Company is seeking patent protection for these new hull designs. -3- All of the Company's sport boats, ranging from 25' to 51' are of inboard/outdrive or surface drive design. They are propelled by single, twin, or triple gasoline (or diesel) engines ranging from 415 HP to more than 1,000 HP each. Fountain also builds custom racing boats designed specifically for competition. The Company also produces outboard powered center consoles and outboard or stern drive cabin model offshore sport fishing boats ranging from 25' through 32'. Furthermore, the Company builds 29', 32', 38' and 47' sport cruisers. By February, 1998, the company will introduce a Super Cruiser, 65 foot in length with a 16' beam. Introduced early in Fiscal 1992, the 47' Sport Cruiser is the flagship of the Fountain fleet. Its hull design is based upon that of the Company's 47' Super boat and 42' manufacturer's Super-Vee boats which won 8 out of 10 races in a recent twelve month period. The model features a walk- in cabin, enclosed head with shower, complete galley with refrigerator and microwave among it's very extensive list of standard equipment. With most of the amenities of a traditional cruising yacht, the Fountain 47' Sport Cruiser is capable of speeds in excess of 70 mph with standard triple MerCruiser 502 EFI engines. A high performance diesel engine version is available for international use. This boat was named "The Outstanding Offshore Performance Boat" for 1992 and 1993 by Powerboat Magazine and "Best of the Best" for 1992 by Boating Magazine. Depending primarily upon the customer's choice of engines, the retail price of this boat is from $348,000 to $603,000. The Company's new 47' Lightning Sport Boat is available with a wide range of engine options and amenities which make it suitable for long range cruising at high speeds in relatively rough offshore waters. Its sleek styling makes it particularly attractive. Depending primarily upon the type of engines selected, this boat retails at prices ranging from $364,000 to $618,000. As of August, 1997, the 42' Lightning Sport Boat has been redesigned and restyled and operates at maximum speeds of 75 to 100 mph and is very stable even in relatively rough offshore waters. This boat's standard features include an integrated swim platform, flush deck hatches, and an attractively appointed cockpit and cabin. This boat was cited by Powerboat Magazine as "The Outstanding Offshore Performance Boat" for 1988 and 1990. It retails at prices ranging form $222,000 to $386,000, depending primarily upon the type of engines selected. Equipped with special racing engines, this model set a new world speed record for V- hulled boats in February, 1996 at 131.941 mph. Introduced in Fiscal 1991, the 38' Sport Cruiser offers a scaled down version of the many amenities found on the 47' Sport Cruiser. This model has successfully incorporated the performance type sport boat's features without compromising the comforts found in a cruiser. Depending primarily upon the customer's choice of engines, the retail price of the boat is from $221,000 to $375,000. -4- The 38' Fever Sport Boat operates at maximum speeds of between 70 and 100 mph. Its retail price ranges from $201,000 to $354,000, depending primarily upon the type of engines selected. This model was cited by Powerboat Magazine as "Offshore Performance Boat of the Year" for 1989 and, again, for 1991. It also captured an award from The Hot Boat Magazine for "Boat of the Year" for 1991. The 35' Lightning Sport Boat is similar in design to the 38' Fever, but operates at maximum speeds between 70 and 100 mph. Because of its smaller size and lighter weight, this model can achieve greater speeds than a 38' Fever when equipped with the same size engines. The 25' Lightning was named by Powerboat Magazine "Offshore Boat of the Year" for 1981 and 1995. It has also captured that magazine's title "Outstanding Offshore Performance Boat" for 1980,1981,1982,1983,1984, and 1987. This boat retails at prices ranging from $163,000 to $202,000, depending primarily upon the type of engines selected. Fountain's 32' Fever Sport Boat was introduced during Fiscal 1991 to satisfy the market's demand for a mid-size sport boat between the 29' Fever and the 35' Lightning. This model combines many of the advantages of both the 29' model the 35' model. Depending primarily upon the customer's choice of engines, the retail price of this boat is from $132,000 to $163,000. The 29' Fever single engine is one of the most popular boats in our line. It operates at a maximum speed of 54 to 73 mph and retails between $85,000 and $106,000 depending on engine size. It has great balance and speed for a single engine and for its size really handles the big waters. Fountain's 27' Fever sport boat has a single engine. It was added to the line in order to enable the first time offshore performance boat buyer to acquire a Fountain power boat at a very affordable price. This model won an award from Powerboat Magazine for "The Full Size Boat of the Year" for 1991 and 1992. It also captured that magazine's award for "Outstanding full-size Workmanship" for 1995. Depending primarily upon the type of engine selected the retail price of this boat is from $73,000 to $94,000. In 1990, the Company's sole offshore sport fishing boat was a 31' model which featured a center console design and incorporated the same high performance, styling, and structural integrity as its sport boat models. It has a deck configuration engineered for the knowledgeable, experienced sport fisherman. This boat has won the Southern Kingfish Association's World Championship for five of the last seven years and has won more than 50% of the top ten positions over the same period. In Fiscal 1992, Fountain added substantially to its sport fishing boat line. An all new 29' twin engine center console model and an all new 25' single engine center console model were introduced to extend the product line. The design, construction, and performance of these new models, together with the proven features of the 31' center console model, make a line which in management's view will appeal to many experienced sport fishermen. -5- To further enhance its sport fishing boat line, the Company introduced a new 31' walk around cabin model based upon the proven 31' center console hull design. This model features a deck design which incorporates a walk-in cabin, enclosed head with shower, and a full galley. With twin outboard engine power, this model is produced either as a fishing boat for the serious angler or as a purely recreational sport boat type cruiser. During Fiscal 1993, the Company introduced both 25' and 29' walk around cabin fishing boats with outboard engine power and a new 32' walk around cabin model fishing boat with inboard power. Other new product introductions for Fiscal 1994 are 25' and 29' walk around cabin model fishing boats with inboard power. For Fiscal 1998, the Company plans to introduce two all new surface drive sport boats, the 46' and 51' Lightning. These boats will come with the Company's new second generation positive lift hulls. The 42' Lightning is also new for 1998. This will have the new style deck with full wrap around windshield and canvas top. These boats also have an all new positive lift hull which will increase speed, stability and ride comfort. Fountain will also launch into the yacht market with the introduction of the all new 65' Supercruiser. This performance yacht will be much faster than the competition, while still providing all the comforts of a luxury yacht through the use of Fountain's all new super ventilated positive lift hull equipped with Fountain's all new Surface Drive System. During the last quarter of Fiscal 1997, the Company introduced the Fountain Drive System. Fountain developed this state of the art drive system which will revolutionize performance boating. This new technology matches Fountain's Super Ventilated Positive Lift Hull with a highly efficient surface drive system. Born from the Fountain's racing heritage, this revolutionary system offers increased speed and efficiency, better rough water handling, stainless steel components to minimize corrosion, greater horsepower capacity, less component parts and gears and better transfer of horsepower to the water. Fountain continues to strive to offer the latest in performance technology in each and every boat we build. Never before has a production boat company offered such technology to its customers. Following is a table showing the number of boats completed and shipped in each of the last three fiscal years by product line: Fiscal Fiscal Fiscal 1997 1996 1995 Sport boats ....... 336 295 293 Sport cruisers .... 14 20 15 Sport fishing boats 128 109 93 ------ ------ ----- Total 478 424 401 ==== ==== ==== -6- The Company conducts research and development projects for the design of its plugs and molds for hull, deck, and small parts production. The design, engineering, and tooling departments currently employ approximately 29 full- time employees. Amounts spent on design research and development and to build new plugs and molds in recent years were: Design Construction Research & of New Plugs Development and Molds Fiscal 1997 $635,652 $1,684,274 Fiscal 1996 234,425 878,513 Fiscal 1995 134,828 767,102 For Fiscal 1998, planned design research and development expenses are $ 750,000 and plug and mold construction expenditures are approximately $ 3,000,000. These expenditures will be primarily to complete the tooling needed to produce three luxury high performance sport yachts, a 51' model, a 58' model and a 65' model. Also, work will be started on a 35' wide beam surface drive cabin sport fishing boat. Tooling expenditures will also be made for other modifications to existing models. Manufacturing capacity is sufficient to accommodate approximately 40 to 50 boats in various stages of construction at any one time. The Company shipped 478 boats in Fiscal 1997, 424 boats in Fiscal 1996 and 401 boats in Fiscal 1995. Construction of a boat currently made, depending on size, takes approximately three to five weeks. Construction of the all new wide beam Super Cruisers should be as follows: A 51' by December, 1997, the 65' by February, 1998 and the 58' by April, 1998. The Company currently has the ability to manufacture approximately 600 boats per year with additional personnel. The Company can further expand its manufacturing capacity by adding additional personnel, plant, equipment, and tooling. The manufacturing process for the hulls and decks consists primarily of the "laying-up" by hand of vinylester resins and high quality stitched, bi-directional and quad- directional fiberglass over a foam core in the molds designed and constructed by the Company's engineering and tooling department. This creates a composite structure with strong outer and inner skins with a thicker, light core in between. The "laying-up" of fiberglass by hand rather than using chopped fiberglass and mechanical blowers, results in superior strength and appearance. The resin used to bind the composite structure together is vinylester which is stronger, better bonding, and more flexible than the polyester used by most other fiberglass boat manufacturers. Decks are bonded to the hulls using bonding agents, rivets, screw, and fiberglass to achieve a strong, unitized construction. -7- As one of the most highly integrated manufacturers in the marine industry, the Company manufactures many metal, plexiglass, plastic, and small parts (such as gas tanks, seat frames, steering systems, instrument panels, bow rails, brackets, T-tops, and windscreens) to assure that its quality standards are met. In addition, the company also manufacturers all of its upholstery to its own custom specifications and benefits from lower cost, receives parts just in time for assembly and achieves savings of several million dollars. All other component parts and materials used in the manufacture of the Company's boats are readily available from a variety of suppliers at comparable prices exclusive of discounts. However, where practicable, the Company purchases certain supplies and materials from a limited number of suppliers in order to obtain the benefit of volume discount. Certain materials used in boat manufacturing, including the resins used to make the decks and hulls, are toxic, flammable, corrosive, or reactive and are classified by the federal and state governments as "hazardous materials." Control of these substances is regulated by the Environmental Protection Agency and state pollution control agencies which require reports and inspect facilities to monitor compliance with their regulations. The Company's cost of compliance with environmental regulations has not been material. The Company's manufacturing facilities are regularly inspected by the Occupational Safety and Health Administration and by state and local inspection agencies and departments. The Company believes that its facilities comply with substantially all regulations. The Company, however, has been informed that it may incur or may have incurred liability for remediation of ground water contamination at two hazardous waste disposal sites resulting from the disposal of a hazardous substance at those sites by a third-party contractor of the Subsidiary. (See item 3. Legal Proceedings.) Recreational power boats must be certified by the manufacturer to meet U.S. Coast Guard specifications. In addition, their safety is subject to federal regulation under the Boat Safety Act of 1971, as amended, pursuant to which boat manufacturers may be required to recall products for replacement of parts or components that have demonstrated defects affection safety. The Company has never had to conduct a product recall. Sales and Marketing. Sales are made through approximately 50 dealers throughout the United States. The Company also has 14 additional dealers throughout the world. These dealers are not exclusive to the Company and carry the boats of other companies including some which may be competitive with the Company's products. The territories served by any dealer are not exclusive to the dealer. However, the Company uses discretion in locating new dealers in an effort to protect the interests of the existing dealers. -8- Following is a table of sales by geographic area for the last three fiscal years: Fiscal`97 Fiscal '96 Fiscal `95 United States .. $48,346,485 $40,545,235 $38,220,232 Canada, Mexico, Central and South America ....$1,047,913 $658,738 $ -0- Europe and the Middle East .... $752,801 $394,078 $309,165 Asia ............... $ 367,126 $ -0- $ 197,932 -------- -------- -------- Total ........ $50,514,325 $41,598,051 $38,727,329 ======== ======== ======= The Company has a growing international advertising program and is seeking additional distribution for its products in foreign markets through its own sales representative who is establishing new dealers at a rapid pace. In general, the Company requires payment in full or an irrevocable letter of credit from a domestic bank before it will ship a boat overseas. Consequently, there is no credit risk associated with its foreign sales nor risk related to foreign currency fluctuation. The Company believes that within several years, foreign sales could account for up to 25% of its total sales. For Fiscal 1997 one dealer accounted for 6.6% of sales and two other dealers each accounted for more than 5% of sales. For Fiscal 1996 one dealer accounted for 10.2% of sales and three other dealers each accounted for more than 5% of sales. For Fiscal 1995 one dealer accounted for 9.8% of sales and four other dealers each accounted for more than 5% of sales. The Company believes that the loss of any particular dealer would not have a materially adverse effect on sales. As sales continue to grow through more dealers, it is reasonable to assume the Company will grow less dependent on any one dealer. Field sales representatives call upon existing dealers and develop new dealers. The field sales force is headed by the Fountain's National Director of Sales who is responsible for developing a full dealer organization for sport boats, sport cruisers, sport fishing boats and now yachts. The Company is seeking to establish separate sport boat and fishing boat dealers in most marketing areas due to the specialization of each type of boat and the different sales programs required. -9- Although a sales order can be cancelled at any time, most boats are pre-sold to a dealer before entering the production line. The Company generally has been able to sell to another dealer any boat for which the order has been cancelled. To date, cancellations have not had any material effect on the Company. The Company normally does not manufacture boats for inventory. The Company ships boats to its dealers on a cash on delivery basis. However, approximately one-half of the Company's shipments are made pursuant to commercial dealer "floor plan financing" programs in which the Company participates on behalf of its dealers. Under these arrangements, a dealer establishes lines of credit with one or more third-party lenders for the purchase of showroom inventory. When a dealer purchases a boat pursuant to a floor plan arrangement, it draws against its line of credit and the lender pays the invoice cost of the boat, net of shipping charges, directly to the Company. Generally, payment is made to the Company within seven business days. When the dealer in turn sells the boat to a retail customer, the dealer repays the lender, thereby restoring its available credit line. For the 1998 model year (which commenced July 1, 1997), the Company had made arrangements to pay all interest charged to dealers by certain floor plan lenders for as long as six months. This and other incentives to the dealers have resulted in relatively level month to month production and sales. After six months, the free interest program ends and interest will be charged to the dealer at the rates set by the lender. The dealers will make curtailment payments (principal payments) in the boats as required by their particular commercial lenders. Similar sales promotion programs were in effect during Fiscal 1997, 1996, and 1995. Each dealer's floor plan credit facilities are secured by the dealer's inventory, letters of credit, and perhaps, other personal and real property. In connection with the dealer's floor plan arrangements, the Company (together with substantially all other major manufacturers) has agreed to repurchase any of its boats which a lender repossesses from a dealer and returns to the Company. In the event that a dealer defaults under a credit line, the lender may then invoke the manufacturers' repurchase agreements with respect to that dealer. In that event, all repurchase agreements of all manufacturers supplying a defaulting dealer are generally invoked regardless of the boat or boats with respect to which the dealer has defaulted (See also Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations). The Company participates in floor plan arrangements with several major third-party lenders on behalf of its dealers, most of whom have financing arrangements with more than one lender. Except as described above or where it has a direct repurchase agreement with a dealer, the Company is under no material obligation to repurchase boats from its dealers. From time to time the Company will voluntarily repurchase a boat for the convenience of the dealer or for another dealer who needs a particular model not readily available from the factory. -10- The marketing of boats to retail customers is primarily the responsibility of the dealer, whose efforts are supplemented by the Company through advertising in boating magazines and participation in regional, national, and international boat shows. Additionally, in order to further promote its products, the Company developed a racing program. This entailed the construction of specially designed race boats which have been entered in major national offshore boat races. Fountain race boats won many major races. Additionally, Fountain single, twin and triple engine racing boats currently own world speed records. The result of this record of victories and speed records by a major manufacturer is that the Company's products won a reputation for very fast and safe hull design, durable construction, and mechanical reliability. The Company believes that the favorable publicity generated by its record setting and winning race boats has contributed significantly to its sales volume. Although the Company curtailed its racing program for Fiscal 1992 and sold all of its race boats, the fact that its racing program was so successful in Fiscal 1990 and Fiscal 1991 has, the Company believes, significantly benefited its sales volume in subsequent years. From fiscal 1992 through fiscal 1996, the Company had limited its participation in racing to partial support of customer owned and driven Fountain race boats. Also, the Company Founder and C.E.O., Reggie Fountain, has raced a limited schedule since 1992, and won numerous races in both factory and customer boats; he has also set numerous speed records in both factory and customer boats. These Fountain race boats were, in general, very successful in the various racing circuits in which they competed. The Company commenced construction of two race boats during Fiscal 1997 and intends to again implement a racing program during Fiscal 1998. As part of the marketing program for its new line of sport fishing boats, the Company sponsored several outstanding sport fishermen in the Southern Kingfish Association's King Mackerel Tournaments. This competitive circuit is held throughout the Southeast. In Fiscal 1992, the Company's boats and sponsored fishermen dominated the tournaments by winning four of the top five spots. One Fountain fisherman, Clayton Kirby, was named "Angler of the Year" and finished in first place. Again, in Fiscal 1993, first place was taken by a Fountain fisherman. Fountain fishermen also won second place and 11 of the top 15 spots in Fiscal 1993. Since Fiscal 1993, the Fountain fishing team has continued to place high in the final standings winning five of the last seven S.K.A. world championships. The Southern Kingfish Association's tournaments are held weekly and attract from one hundred to one thousand entrants with prizes ranging up to $350,000. The winning participation by Fountain sport fishing boats has given them favorable exposure to serious sport fishermen, in particular with respect to the superior performance of Fountain's fishing boat line. -11- Sales Order Backlog. The sales order backlog as of the end of September 1997 was for approximately 200 boats having an estimated sales value of $20,000,000. This compares to an equivalent backlog at this time in September, 1996 and September, 1995. During the last two years the Company's lower priced fishing boat lines have led sales increases holding down the average unit price. Later this year, with the formal introduction of the new 46', 51' and 65' models which have not been included in backlog numbers, the Company believes that its average unit price and margins will increase significantly. The Company's Fall Dealer Allocation Program is designed to promote early replenishment of the stock in Dealer inventories depleted throughout the spring and summer. Product Warranty. The Company warrants the deck and hull of its boats against defects in material and workmanship for a period of three years. Engines included in the boats are warrantied by the engine manufacturer. Warranty expenses of $707,202 were incurred in Fiscal 1997 and were charged-off against net income. A reserve for warranty expenses estimated to be incurred in future years had been recorded and amounted to $500,000 at June 30, 1997. For 1996, warranty costs were only six-tenths of one (1) percent. Warranty cost as a percentage of sales are among the lowest in the marine industry thereby reflecting the Company's superior construction of its boats. Competition. Competition within the power boat manufacturing industry is intense. While the high performance sports boat market comprises only a small segment of all boats manufactured, the higher prices commanded by these boats make it a significant market in terms of total dollars spent. The manufacturers that compete directly with the Company in its market segment include: Wellcraft Division of Genmar Industries, Inc. Formula, a Division of Thunderbird Products Corporation Cigarette Racing Team, Inc. Baja Boats, Inc. The Company believes that in its market segment, speed, performance, quality, image, and safety are the main competitive factors, with styling and price being somewhat lesser considerations. Their market for fishing boats is much larger than the one for sport boats, but there are many more fishing boat manufacturers than there are sport boat manufacturers. With its winning image, Fountain will always sell its projected budget. -12- For High Performance Surface Drive Super Ventilated Positive Lift wide beam cruisers, we believe there is a ready market waiting for our products. It is our belief that there are no competitors that can match us in this highly profitable area. Employees. As of September 30, 1997 the Company had 331 employees, of whom seven were executive and management personnel. Sixteen were engaged primarily in administrative positions including accounting, personnel, marketing and sales activities. Twenty-nine were employed in engineering, tooling, and design. About one dozen are employed to expand and maintain our facilities. The balance were engaged in manufacturing operation. None of the Company's employees are party to a collective bargaining agreement. The Company considers its employee relations to be satisfactory. The Company is an affirmative action, equal opportunity employer. Item 2. Properties. The Company's executive offices and manufacturing facilities are located on 62 acres along the Pamlico River in Beaufort County, North Carolina. All of the land, buildings and improvements are owned by the Company and are held as collateral on notes and mortgages payable having a balance of $8,273,378 at June 30, 1997 The operating facility contains seven buildings totaling 167,250 square feet located on fifteen acres. The buildings consist of the following: Approximate Square Footage Principal Use Building 1 .......... 13,200 Executive offices, shipping and receiving, and paint shop. Building 2 .......... 7,200 Final prep shop. Building 3 .......... 63,800 Lamination, woodworking, upholstery, final assembly, inventory, and cafeteria. Building 4 .......... 14,250 Metal fabrication shop. Building 5 .......... 26,300 Lamination, Assembly & Engineering Offices. Building 6 .......... 18,500 Mold storage. Building 7 .......... 12,000 Tooling, Racing, service, and warranty. Building 8 .......... 8,750 Lamination extension area. Building 9 4,500 Mold Storage Building 10 25,200 Mold Storage, Mold Prep and Service Building 11 10,500 Manufacturing and Tooling ====== Total ................. 204,200 -13- Site improvements include a boat ramp and docking facilities along a 600 foot canal leading to the Pamlico River. In addition, approximately 200,000 square feet of concrete paving surrounds the buildings and provides for employee parking. Thirty-five unimproved acres are owned and available for future expansion. Item 3. Legal Proceedings. The Company has been notified by the United States Environmental Protection Agency (the "EPA") and the North Carolina Department of Environment, Health and Natural Resources ("NCSEHNR") that it has been identified as a potentially responsible party (a "PRP") and may incur, or may have incurred, liability for the remediation of ground water contamination at the Spectron/Galaxy Waste Disposal Site located in Elkton, Maryland (notice from the EPA dated June 7, 1989) and the Seaboard Disposal Site, located in High Point, North Carolina, also referred to as the Jamestown, North Carolina site (notice form the EPA dated July 10, 1991), resulting from the disposal of hazardous substance at those sites by a third-party contractor of the Company. The Company has been informed that the EPA and NCDEHNR ultimately may identify a total of between 1,000 and 2,000, or more PRP's with respect to each site. The amounts of the hazardous substances generated by the Company, which are disposed of at both sites, are believed to be minimal in relation to the total amount of hazardous substances disposed of by all PRP's at the sites. At present, the environmental conditions at the sites, to the Company's knowledge, have not been fully determined by the EPA and NCDEHNR, respectively, and the Company is not able to determine at this time the amount of any potential liability it may have in connection with remediation at either site. Without any acknowledgment of liability, approximately $3,279 has been paid by the Company to date as a non-performing cash-out participant in an EPA- supervised response and removal program at the Elkton, Maryland site, and in a NCSEHNR-supervised removal and preliminary assessment program at the Jamestown, North Carolina site. A cash-out proposal for the next phase of the project is expected to be forthcoming from the PRP Group for the Elkton, Maryland site within the near future. According to the PRP Group, The Company's full cash-out amount is estimated to be approximately $10,000 for the Elkton, Maryland site based upon an estimated 3,304 gallons of waste disposed of at that site by the Company's third party contractor. A cash-out proposal in the approximate amount of $66,000 based upon an estimated 19,245 gallons of water is anticipated from the PRP Group for the Jamestown, North Carolina site following completion of a remedial investigation and feasibility study in early 1998, according to the PRP Group administrator. Any such cash-out agreement will be subject to approval by EPA and NCDEHNR, respectively. The Company has accrued the estimated $76,000 liability related to these matters in the accompanying financial statements. -14- The Company received a demand letter dated February 22, 1996, from the representative and agent for a famous professional basketball player, for damages in connection with an advertisement for the Company which used the basketball player's name. The monetary demand was for $1,000,000 if the claim was resolved prior to the institution of a lawsuit, which also has been threatened. The Company put its primary and umbrella liability insurance carriers on notice after receiving the demand. On January 2, 1997, the Company filed suit in U.S. District Court for the Eastern District of North Carolina against the basketball player, his affiliates and Spencer Communications (a company owned by a director of the Company) claiming it did not know of or approve of the ad using the basketball player's name. The Company withdrew the ad after being contacted by the basketball player's attorney. The Company further contends that it did not state that the player was endorsing the product and that the player has no legal claim to the usage of a certain word within the advertisment. The Company further claims that the player's counsel used coercion by threatening suit and that the Company should be awarded the costs of suit. On May 8, 1997, the player and his company filed a response with counterclaim and crossclaim claiming trademark infringement and unfair competition seeking damages for $10,000,000. The Company filed a reply and seeks dismissal. Shortly after the Company filed suit in North Carolina, the player and an affiliated company filed suit in the Northern District of Illinois. This matter was later transferred to North Carolina and the Company has moved to dismiss this suit with prejudice because it is repetitious of the counterclaims in the Company's declaratory judgment suit. (See Note 10) There were seven product liability lawsuits brought against the Company at June 30, 1997. In the Company's opinion, these lawsuits are without merit. Therefore, these lawsuits are being defended vigorously. The Company carries sufficient product liability insurance to cover attorney's fees and any losses which may occur from these lawsuits over and above the insurance deductibles. The Company was audited during Fiscal 1997 by the State of North Carolina under the Escheat and Unclaimed Property Statute. The State Treasurer's audit report was received and a small amount of escheated funds were paid. However, the Company disputed approximately $65,000 of remaining escheated property by appealing to the Administrative office of the State of North Carolina. The dispute has been resolved by the Company's payment of $3,090 to the State. -15- The Company filed suit on July 21, 1997 against Marcia K. Garbrecht, Gary D. Garbrecht, Mach, Inc., and Mach performance, Inc. Gary D. Garbrecht is a former director of the Company and together with his wife owned Mach, Inc. and Mach Performance, Inc. The Company acquired Mach Performance, Inc. which manufactured propellers in order to effectuate the Company's goals of vertical integration and because the directors were convinced by Gary Garbrecht that Mach Performance, Inc.'s propeller sales would grow significantly. As a director of the Company, Gary Garbrecht represented that Mach Performance, Inc.'s sales would exceed $3(three)million per year. He and his wife also made representations directly to the Company and to independent auditors and appraisers hired to determine the value of Mach Performance, Inc. Among those representations were representations that Mach Performance did not have agreements to repurchase assets previously sold, That inventory was currently valued according to GAAP, that warranty claims were not significant enough to require accounting contingencies, and that the product manufactured by mach Performance, Inc. was of high quality. After the acquisition and the move of production to Washington, N.C. during the spring of 1997, the Company learned that Mach Performance, Inc. did have repurchase agreements, that its warranty claims were significant, and that the propellers manufactured by its equipment and processes were not of high quality. Gary Garbrecht resigned as an employee of the Company in April and resigned as a director in May. After investigating the warranty claims and the quality of the propellers built through Mach Performance, Inc.'s equipment and processes, the Company notified the Garbrechts that the contracts involved in and resulting from the acquisition were rescinded. Because the Garbrechts refused to recognize the rescission and to return the consideration they received, the Company filed suit.This suit seeks rescission of an Agreement and Plan of Reorganization entered into with the Garbrechts in 1996 for the Company's acquisition of Mach Performance, Inc. The Company seeks rescission of the acquisition and merger agreement and voidance of the resulting transaction on grounds of fraud and material breach of contract. Federal securities fraud claims are based on the Garbrechts' alleged deceptive acts in violation of Section 10(b) of the Securities Exchange Act of 1934, arising from the sale of Mach Performance, Inc. capital stock to the Company in exchange for the Company's issuance to them of 127,500 new restricted shares of its common stock valued at $1,041,250. Other claims include breach of fiduciary duty, based on North Carolina law, arising from Mr. Garbrecht's alleged material misrepresentations and omissions while serving as a director of the Company during the time when the acquisition and merger agreement was reached. The Company is seeking a preliminary and permanent injunction against the sale or transfer of its 127,500 new restricted common shares acquired by the Garbrechts in the transaction, and is seeking monetary damages, including trebled and punitive damages in an unspecified amount, for the claims stated above, as well as for a number of alleged actions by Mr. Garbrecht after the acquisition, including usurpation of corporate opportunities and conversion. The Garbrechts and Mach, Inc. have filed counterclaims alleging breach of Gary D. Garbrecht's employment contract, breach of the merger contract, and requesting a declaratory judgment regarding the parties' rights and responsibilities under all the contracts involved in this transaction. The company intends to vigorously pursue its claims against the Garbrechts and their co-defendants in this suit, and to defend vigorously against the counterclaims brought by the Garbrechts and their affiliates. -16- On September 3, 1997, the company filed suit against P.R.O.P. Tour, Inc., an affiliate of Gary Gary Garbrecht. P.R.O.P. tour Inc. runs a Formula One racing tour of which the Company is the major sponsor. This sponsorship had two components, a sponsorship of a Formula One race held in Washington, N.C. and a separate sponsorship of the entire series of races which made the Company's subsidiary, Fountain Powerboats, Inc., the title sponsor of the series. The suit results from P.R.O.P. Tour Inc.'s repeated claims that it was damaged by alleged breaches of the sponsorship agreement for the Washington, N.C. race by Fountain Powerboats, Inc. The Company decided to seek a declaratory judgment regarding its obligations under the Washington, N.C. race contract. The suit also includes claims by the Company involving the series sponsorship agreement based on P.R.O.P. Tour, Inc.'s repudiation of its obligations to provide the Company primary media exposure according to the terms of that agreement. Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to the Shareholders for a vote during the last quarter of Fiscal 1997. Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The Company's common stock, $.01 per value, was listed and began trading on the NASDAQ National Market System (under the symbol "FPWR") on August 28,1996. Prior to that time the Company's common stock was traded on the American Stock Exchange (under the symbol "FPI"). The following table contains certain historical high and low price information relation to the common stock for the past quarter indicated. Amounts shown reflect high and low sales prices of the common stock on the Nasdaq National Market System since August 28, 1996 and the American Stock Exchange prior to such date: Quarter Ended High Low September 30, 1994 ... $2.92 $1.50 December 31, 1994 .. 4.42 1.83 March 31, 1995 4.83 3.50 June 30, 1995 ... 4.17 3.00 September 30, 1995 ... 5.50 3.59 December 31, 1995 ... 4.09 3.50 March 31, 1996 . 4.00 3.50 June 30, 1996 .... 7.92 3.79 September 30, 1996 ........ 8.08 5.69 December 31, 1996 . ...12.33 7.75 March 31, 1997 .. 16.08 10.65 June 30, 1997 ... 13.16 9.50 -17- The Company has not declared or paid any cash dividends since its inception. Any decision as to the future payment of dividends will depend on the Company's earning, financial position, and such other factors as the Board of Directors deems relevant. The number of shareholders of record for the Company's common stock as of September 30, 1997 was approximately 1500. -18- Item 6. Selected Financial Data Fountain Powerboat Industries, Inc. and Subsidiary Selected Financial Data Fiscal Years 1993 through 1997 Year Ended June 30, Operations Statement Data: ------------------------------------------ - ---------------------- (Period Ended) 1997 1996 1995 1994 1993 - ----------------- ------ ----- ------ ------ ------ Sales $50,514,325 $41,598,051 $38,727,329 $22,240,212 $27,232,360 Income from continuing operations $4,069,832 $3,680,034 $2,047,876 $ (2,993,344) $ 146,433 Loss from discontinued operations $2,829,951 - - - - Net Income (loss) $ 1,239,951 $ 3,680,034 $ 2,047,876 $(2,993,344) $ 146,433 Income (loss) per share $.25 $ .81 $ .45 $( .67) $.03 Weight average shares outstanding .. 4,995,154 4,528,608 4,528,608 4,452,856 4,398,750 Fully diluted earnings (loss) per share ... $ N/A $ .77 $ .45 $ N/A $N/A Fully diluted weighted average shares outstanding N/A 4,800,238 4,539,694 N/A N/A Balance Sheet Data (At Period End) - ----------------------------------- Current assets.. $10,997,133 $8,378,341 $6,185,727 $5,365,619 $5,011,591 Total Assets . $23,713,896 $18,498,104 $16,334,757 $16,266,787 $16,211,026 Current Liabilities $6,305,212 $6,180,476 $6,081,298 $14,976,570 $5,920,743 Long-term debt.. $8,047,039 $5,433,184 $7,049,049 $133,683 $6,440,403 Stockholders' equity (1) .. $ 9,361,645 $6,884,444 $3,204,410 $1,156,534 $3,849,880 - ------------------- (1) The Company has not paid any dividends since its inception. -19- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. As described more fully below at "Business Environment", approximately half of the Company's shipments to dealers were financed through so-called "100% floor plan arrangements" with third-party lenders pursuant to which the Company may be required to repurchase boats repossessed by the lenders if the dealers defaults under his credit arrangement. The other half of shipments were C.O.D. or payment prior to shipment. Generally, the Company recognizes a sale when a boat is shipped to a customer, legal title and all other incidents of ownership have passed from the Company to the customer, and payment is received from the customers' third-party commercial lender or from the customer. This is the method of sales recognition believed to be 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 customer, that title and all other incidents of ownership have passed to the customer, and that there is no direct commitment to repurchase the boat or to pay floor plan interest beyond the normal sales program terms. At June 30, 1995, the Company estimated the balances in deferred sales to be $197,541 and in deferred cost of sales to be $183,393. At June 30, 1994, the Company estimated the balances in deferred sales to be $1,100,000 and in deferred cost of sales to be $850,000. The differences between the estimates for deferred sales and deferred cost of sales at June 30, 1994 and June 30, 1995 had the effect of increasing the gross margin on sales and net income after taxes for the year by $235,852 ($.05 per share). At June 30, 1997 and 1996, there were no commitments to dealers to pay the interest on floor plan financed boats in excess of the time period specified in the Company's written sales program and there were no direct repurchase agreements. This was because of much improved market conditions and strong ongoing consumer demand for boats. Therefore, there were no deferred sales or cost of sales estimated at June 30, 1997, and 1996. The differences between the estimates for deferred sales and deferred cost of sales at June 30, 1995 and June 30, 1996 had the effect of increasing the gross margin on sales and net income after taxes for the year by $14,148. There was no such effect on Fiscal 1997. The Company has a contingent liability to repurchase boats where it participates in the floor plan financing made available to its dealers by third-party finance companies. Sales to participating dealers are approved by the respective finance companies. If a participating dealer does not satisfy its obligation to the lender and the boat is subsequently repossessed by the lender, then the Company can be required to repurchase the boat. The Company had a contingent liability of approximately $8,600,000 at June 30, 1997, $7,200,000 at June 30, 1996 and $7,700,000 at June 30, 1995 for the shipment of boats which remained uncollected by the finance companies at those dates. The lesser contingent liability at June 30, 1996 is due to fewer boats being floor planned by dealers with finance companies. Additionally, at June 30, 1997 and June 30, 1996 the Company had recorded a $200,000, and $207,359 reserve for losses which may be reasonably expected to be incurred on boat repurchases in future years. -20- Business Environment. The company's Sales have continued to increase each year. Sales for 1997 were $50,514,325, a 21% increase from Sales for Fiscal 1996. Improved sales volume for Fiscal 1997 was in line with a general improvements is the overall recreational boating industry and the result of additional production capacity. Also, the Company continued its highly effective advertising and marketing programs throughout Fiscal 1997. Sales for Fiscal 1996 were $41,598,051, a 7% increase from sales for Fiscal 1995. Sales for Fiscal 1995 were $38,727,329. In Fiscal 1997, the Company continued to advertise and market aggressively. Management believes that the Company's advertising, marketing, racing, and tournament fishing programs, as well as, its reputation as the builder of the highest quality, best performing, and safest high performance boats in the industry, all contributed in increased sales for Fiscal 1997. Typically, each dealer's floor plan credit facilities are secured by the dealer's inventory, and, perhaps, the dealers letter of credit or other personal and real property. In connection with the dealers' floor plan arrangements, the Company (as well as substantially all other major manufacturers) has agreed in most instances to repurchases, under certain circumstances, any of its boats which a lender repossesses from a dealer and returns to the Company. In the event that a dealer defaults under credit line, the lender may invoke the manufacturers' repurchase agreements with respect to that dealer. In that event, all repurchase agreements of all manufacturers supplying a defaulting dealer are generally invoked regardless of the boat or boats with respect to which the dealer has defaulted. Except where there is a direct repurchase agreement with the customer, the Company is under no obligation to repurchase boats from its dealers, although it will on occasion voluntarily assist a dealer in selling a boat or repurchase a boat for the convenience of a dealer. No boats were repurchased in Fiscal 1997, 1996 and Fiscal 1994 in connection with floor plan arrangements. Five boats were repurchased during Fiscal 1995 in connection with floor plan arrangements. At June 30, 1997 and 1996, the Company had recorded a $200,000, and $207,359 reserve for losses which may be reasonably expected to be incurred on boat repurchases in future years. Results of Operations. Net income for Fiscal 1997 was $1,239,951 or $.25 per share outstanding. This compares to net income for Fiscal 1996 of $3,680,034, or $.81 per share. The change in net income was due to a discontinued operations loss and write- down of assets of a Subsidiary, Fountain Power, Inc. for $2,829,881.(See Note #10 and Note #15). -21- Income from continuing operations (before the loss and writedown due to Fountain Power, Inc,) increased in Fiscal 1997 to $4,069,832 or 10% over fiscal 1996. Income from continuing operations for Fiscal 1996 was $3,680,034. The improvement in income from continuing operations for Fiscal 1997 was the result of greater sales volume, price increases, production efficiencies, and a favorable sales mix. The mix of sales continued to be weighted with sales of the Company's larger, higher margin sport boats. Net income for Fiscal 1996 was up due to an improvement in sales volume, production efficiencies and a favorable sales mix. Also, income was bolstered by inclusion of a non- recurring $800,000 discount earned for the early retirement of indebtedness to a vendor. Sales were $41,598,051 for Fiscal 1996, or up by 7% from the previous year. Net income for Fiscal 1995 was up primarily because of substantially improved sales volume. Sales were $38, 727,329, or up by 74% from the previous year. Sales for Fiscal 1994 were $22,240,212. The sales mix for Fiscal 1994 was unfavorable and overall sales volume through February, 1994 was less than anticipated. Fewer boats were sold and they were generally smaller and less profitable resulting in a loss for the year. In Fiscal 1994, at the Miami boat show in mid-February, the new "positive-lift" hull design was introduced. This new hull design significantly increases speed, improves handling, and results in much better fuel economy. Subsequent to the introduction of this new design, the Company received many orders for large, profitable sport boats having the new "positive-lift" hull. As the Company's sales order volume improved, it began to greatly increase its level of purchases of high performance engines and other critical components. Unfortunately, the high performance engines and certain other critical components were not available on a timely basis. This caused serious and prolonged delays in the Company's boat production. Many costly inefficiencies were incurred in its manufacturing operations as a consequence of not having the necessary high performance engines and components on a timely basis. By July, 1994 most of these supply problems had been resolved. Most of the sales orders that were not completed in the fourth quarter of Fiscal 1994 because of delayed deliveries of critical components were completed in the first quarter of Fiscal 1995. The Company's gross profit margin as a percentage of sales increased to 26.8% in Fiscal 1997 from 22.3% in Fiscal 1996 and 20.1% in Fiscal 1995. The increase in the gross margin percentage was due to price increases and the sales mix of larger, higher margin sport boats. Greater sales volume, more integrated manufacturing operations and production efficiencies also contributed to an improved gross margin for Fiscal 1997. Depreciation expense was $1,642,969 for Fiscal 1997, $1,536,479 for Fiscal 1996, and $1,628,867 for Fiscal 1995. Depreciation expense by asset category was as follows: -22- Fiscal Fiscal Fiscal 1997 1996 1995 Land improvements $ 22,468 $20,595 $18,849 Buildings $ 231,546 $260,580 $269,460 Molds & plugs $1,041,211 $980,104 $1,076,746 Machinery & Equipment $295,829 $ 225,654 $216,089 Furniture & fixtures $24,572 $11,114 $12,094 Transportation equipment $27,343 $ 38,432 $35,629 ------- ------- ------- Total $1,642,969 $1,536,479 $ 1,628,867 ======== ======== ======== The $ 92,388 decrease in depreciation expense for Fiscal 1996 from Fiscal 1995 is due to an excess of molds becoming fully depreciated over new molds commencing to be depreciated during the year. Those particular molds which are now fully depreciated are still in active service. Following is a schedule of the net fixed asset additions during Fiscal 1997 and Fiscal 1996. Fiscal 1997 Fiscal 1996 Buildings ........ $ 360,231 $ 225,781 Land and Improvements...$ 315,605 - Molds and plugs ...... $ 1,684,274 $ 878,513 Construction in Progress...$ 809,506 - Machinery & equipment ..$ 649,895 $ 376,241 Furniture & fixtures .. $ 18,767 $ 6,270 Transportation equipment .$ 41,718 $ (33,925) ----------- ---------- Total $ 3,879,996 $1,482,880 ========= ========= -23- Selling expenses were $6,463,875 for Fiscal 1997, $4,285,923 for Fiscal 1996, and $3,897,086 for Fiscal 1995. The Company continued to promote its products primarily by magazine advertising in Fiscal 1997. Advertising expense was $1,267,822 for Fiscal 1997, $849,627 for Fiscal 1996, and $977,787 for Fiscal 1995. These advertising expenditures increased the Company's visibility in the recreational marine industry and promoted its boat sales. Management believes that advertising is necessary in order to maintain the Company's sales volume and dealer base. Additionally, in an effort to further promote its products, the Company continued its offshore racing and tournament fishing programs. These programs cost $1,256,631 in Fiscal 1997, $867,743 in Fiscal 1996 and $576,741 in Fiscal 1995. As previously noted, the Company curtailed its offshore racing program in Fiscal 1992 and sold its last remaining race boat, but continued a limited racing program and its tournament fishing program through Fiscal 1997. The Company commenced construction of two race boats during late Fiscal 1997 and intends to again implement a racing program during Fiscal 1998. Selling expenses compared for the past three fiscal years were as follows: Fiscal 1997 Fiscal 1996 Fiscal 1995 Offshore racing and tournament fishing ..$1,256,631 $867,743 $576,741 Advertising $1,267,822 $849,627 $977,787 Salaries & commissions $1,029,810 $ 578,170 $752,206 Boat Shows ... . $452,859 $285,321 $388,710 Dealer incentives $1,286,649 $ 954,234 $938,563 Other selling expenses $1,170,104 $ 750,828 $263,079 ----------- ---------- --------- Total $ 6,463,875 $4,285,923 $3,897,006 ======= ========= ========= General and administrative expenses include the finance, accounting, legal, personnel, data processing, and administrative operating expenses of the Company. These expenses were $2,553,870 for Fiscal 1997, $1,904,988 for Fiscal 1996, and $1,415,637 for Fiscal 1995. Most of the increase for Fiscal 1997 over Fiscal 1996 was in executive compensation, travel expense, and attorneys' fees. Interest expense was $557,768 for Fiscal 1997, $747,337 for Fiscal 1996, and $989,359 for Fiscal 1995. The decrease in interest expense for Fiscal 1997 is primarily from lower interest rates on long term debt. -24- No fixed assets were sold in Fiscal 1997. During Fiscal 1996 some trucks were sold yielding a gain of $22,906. During Fiscal 1995 some miscellaneous fixed assets were sold yielding a loss amounting to $23,015. Included in other income for Fiscal 1997 are consulting fees earned by the use of Mr. Fountain amounting to $260,000, and these have been assigned to the company. Included in other income for Fiscal 1996 is a non-recurring $800,000 discount earned for the early retirement of indebtedness to a vendor. Included in other income for Fiscal 1995 is the non-recurring gain on the settlement of a state sales and use tax assessment amounting to $169,552. Also included in other income for Fiscal 1996 are $610,420 of technical consulting fees earned by the Company by the use of Mr. Fountain. These consulting fees amounted to $452,911 for Fiscal 1995. Under the terms of the current consulting contract, the consulting fees ended entirely after Fiscal 1997. Liquidity and Financial Resources. Operations in Fiscal 1997 provided $5,474,162 in cash. Net income plus depreciation expense provided cash amounting to $2,882,920. However, relatively large amounts were needed to finance investment activities in purchasing property, plant, equipment and molds. The loss from operations of the discontinued subsidiaries, Fountain Power, Inc. and Mach Performance, Inc. also contributed to the use of cash (See Note 15). The ending cash balance was $3,690,658. Operations for the prior fiscal year 1996, provided $3,935,379 in cash. Net income plus depreciation expense provided cash amounting to $5,216,513. However, relatively large amounts were needed to finance increases in accounts receivable and inventories. The ending cash balance was $1,360,619. During Fiscal year 1995 operations consumed $1,133,240 in cash. Net income plus depreciation expense provided cash amounting to $3,676,743. However, relatively large amounts were needed to finance an increase in accounts receivable, a decrease in accounts payable and a reduction in customer deposits. The ending cash balance was $490,807. Investing activities for Fiscal 1997 required $4,936,129, including expenditures for additional molds and plugs amounting to $1,684,274 and for property, plant and equipment for $2,249,670. Also, increases in other assets required $306,030. Investing activities for Fiscal 1996 required $1,484,306 including expenditures for additional molds and plugs amounting to $878,513 and for other property, plant and equipment amounting to $604,367. Investing activities for Fiscal 1995 required $1,169,744, including expenditures for additional molds and plugs amounting to $767,102 and for other property, plant, and equipment amounting to $431,137. -25- Financing activities for Fiscal 1997 provided $1,095,851. Included in this amount are proceeds from issuance of notes payable and long term debt to G. E. Capital Corporation for $8,500,000 and the retirement of all previous long term debt of $6,427,060. Financing activities for Fiscal 1996 used $1,581,261. Included in this amount is $2,192,528 of indebtedness to a vendor which was retired entirely during the year. Debt repayments to MetLife Capital Corporation and others amounted to $627,637. Financing activities for Fiscal 1995 provided $2,118,080. Included in this amount is $2,600,000 of indebtedness to a vendor which was converted from a short- term trade payable to a long-term note payable. Debt repayments to MetLife Capital Corporation and other amounted to $928,632. The net increase in cash for Fiscal 1997 was $2,330,039. For Fiscal 1998, the Company anticipates that the $3,690,658 beginning cash balance and the amounts expected to be provided from 1997 operations will be sufficient to meet most of the Company's liquidity needs of the year. However, planned capital expenditures for Fiscal 1998 are substantially greater than for Fiscal 1997. The Company intends to increase its production capacity, principally for new products, in Fiscal 1998. Therefore, the Company is reviewing various financing alternatives to provide for its increased growth. Effective December 31, 1996, the Company repaid its indebtedness to MetLife Capital Corporation, Deutsche Financial Services, and others with a new $10,000,000 long term loan agreement with General Electric Capital Corporation, of which $7,500,000 was initially disbursed. A second disbursement was made during the year for $1,000,000 bringing the total outstanding as of June 30, 1997 to $8,500,000 less scheduled monthly principal reductions. Effective December 31, 1993, the Company refinanced its indebtedness to Metlife Capital Corporation. A $2,000,000 revolving loan was incorporated into the long-term debt and the total amount was amortized over ten years with a call at the end of the fifth year. The interest rate on the debt was fixed at 8 1/2%. The new monthly payment amounts very closely approximate what the principal and interest payment amounts were prior to the refinancing. The indebtedness is secured by a first lien to the Company's assets, except engines manufactured by Mercury Marine. An additional $76,194 was borrowed in the transaction. The total amount of the debt to MetLife as December 31, 1993 was $6,683,200 after the refinancing. The indebtedness to MetLife was $6,003,799 at June 30, 1995 and $5,500,467 at June 30, 1996. The Loan agreement with MetLife was amended January 1, 1995, to revise certain financial ratio requirements that the Company had previously not attained. After the revision of the financial ratio requirements and at June 30, 1995 and 1996, the Company was in compliance with all of the MetLife financial ratio requirements. In June of 1994, the ompany arranged for a line of credit from Deutsche Financial Services for engine purchases. At June 30, 1994 the amount owed to Deutsche was $152,287, at June 30, 1995 the amount owed was $534,185 and at June 30, 1996 the amount owed was $1,173,089. The maximum amount of the line of credit from Deutsche is $1,200,000. The debt is secured by a first lien on all engine inventory and by a $200,000 irrevocable letter of credit. -26- In December, 1995 the Company borrowed $600,000 from G. E. Capital Corporation for the purpose of retiring its indebtedness to a vendor. This debt to G. E. Capital Corporation is scheduled for repayment over forty months at 9.00% interest. It is secured by various boat molds and product tooling and by an irrevocable bank letter of credit for $200,000. The unpaid balance at June 30, 1996 was $538,044. Effects of Inflation. The Company has not been materially affected by the moderate inflation of recent years. Since most of the Company's plant and its equipment are relatively new, expenditures for replacements are not expected to be a factor in the near-term future. When raw material costs increase because of inflation, the Company attempts to minimize the effect of these increases by using alternative, less costly materials, or by finding less costly sources for the materials it uses. When the foregoing measures are not possible, its selling prices are increased to recover the cost increases. The Company's products are targeted at the segment of the power boat market where retail purchasers are generally less significantly affected by price or other economic conditions. Consequently, management believes that the impact of inflation on sales and the results of operations will not be material. 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. -27- 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 dealers, any of which could have a material impact upon the Company; labor relations at the Company and at its customers and suppliers; and the Company's single-source supply and just-in-time inventory strategies for some critical boat components, including high performance engines, which could adversely affect production if a single-source supplier is unable for any reason to meet the Company's requirements on a timely basis. Item 8. Financial Statements and Supplementary Data. The financial statements are set forth immediately following the signature page. Item 9. Changes in and There were no changes in or disagreements with the independent auditors on accounting and financial disclosure matters. Part III Item 10. Directors and Executive Officers Registrant. The Current directors of Registrant and its Subsidiary are as Follows: REGINALD M. FOUNTAIN, JR., age 57, founded the Company's Subsidiary during 1979 and has served as its Chief Executive Officer from its organization. He became a director and President of the Company upon its acquisition of the Subsidiary in August, 1986. Mr. Fountain presently serves as Chairman, President, Chief Executive Officer, and Chief Operating Officer of the Company and its Subsidiary. From 1971 to 1979, Mr. Fountain was a world class race boat driver, and was the Unlimited Class World Champion in 1976 and 1978. REGGIE FOUNTAIN - A BIOGRAPHY Whether it's racing, building the world's premier high-performance sport boats, investing in real estate or selling life insurance, Reggie Fountain has always been a winner at everything he does. One only needs to spend a few minutes with Reggie Fountain to sense the excitement of an American success story come true. The man loves his work. Whether it's beating a star-studded fleet of world-class offshore racers, personally researching, developing and manufacturing his renowned high-performance pleasure boats, earning a business and law degree at the University of North Carolina, joining the Million Dollar Round Table of Life Insurance Salesmen or completing a real estate deal in his native North Carolina, Fountain always finds a way to win. WORLD CHAMPION TUNNEL BOAT RACER Reggie entered his first boat race in 1954 at the age of 14, moving quickly into professional competition in 1970. A year later, while driving for Glastron Boats, he was named the Houston Gulf Coast Marathon Association Champion and the Outstanding New Driver at the lake Havasu World Championships. Relying on a keen sense for speed, a superstar racing career was under way. The following year, operating as an independent, Fountain made boat racing history by setting two world records earning three national closed-course championships all in one day at the Marine Stadium in Miami. Fountain's dominance as an independent eventually earned him a place on the vaunted Mercury Factory Team where he teamed with Bill Seebold and Earl Bentz to become the most dominant trio in tunnel outboard history. Sporting the Mercury corporate colors, Fountain won an amazing 20 of 31 races entered in 1973. In 1975, he followed up by winning 10 of 19 events, but it was the bicentennial year of 1976 that will be remembered as the pinnacle of Fountain's tunnel racing career. He finished first in 15 of 23 races entered, capped by a well deserved title at the St. Louis OZ World Championships. Fountain won the prestigious St. Louis race again in 1978, then retired from active competition the following year to pursue an extensive R&D testing program commissioned by Mercury Marine while continuing to manage his growing real estate interests. FOUNTAIN POWERBOATS - THE BEST ON THE WATER Before Reggie could begin MerCruiser's testing program, he needed a boat. After evaluating the market, he contracted with Bill Farmer of Excalibur Boats in Sarasota, Florida to use one of his 31' V-bottoms. As the testing program progressed, Fountain couldn't resist the temptation to tinker with the boat. A little sandpaper on the running surface netted a speed increase. Hand-crafted putty strakes improved handling and further modifications on the stern drive height improved acceleration. Before long, Reggie had made so many changes the boat no longer resembled the original. Encouraged by the noteworthy performance gains, Fountain next attacked the deck and hull design. As the development process continued, Fountain noticed a growing market for the high customized test boats. A short time later, Fountain Powerboats was born in an abandoned used car dealership just outside Reggie's residence in Washington, North Carolina near the Pamlico River. FOUNTAIN POWERBOATS - ALWAYS ON THE GO Growth has come rapidly at Fountain Powerboats. What started in 1979 as a 10,000-square foot manufacturing facility with eight employees and annual sales of $515,000 has swelled to 200,000 square feet, more than 300 employees and projected sales for the 1995-96 model year in excess of $45,000,000. Likewise, Fountain's model line has kept pace with the company's phenomenal growth. Seventeen years after he started, Fountain's Lightning Series includes 35', 42' and 47' offerings, while the award-winning Fever Series features 27', 29', 32' and 38' models. For cruising enthusiasts that want more performance, Fountain's 32', 38' and 47' Sports Cruisers are considered the best on the water. And for those interested in getting started in high-performance boating, Fountain offers an award-winning 24' Competition Series. In addition to his world-renowned sport boats, fisherman can likewise enjoy Fountain's patented brand of performance. Fountain entered the bluewater fishing market at full strength in 1990. Today, the company's fishing fleet included a diverse mix of boats from 25' to 32' with either stern drive or outboard power in center console, cuddy cabin and open bow configurations. THE BEST ON THE WATER From the outset, Fountain has insisted on ultimate quality. A pioneer of space-age laminates in the boating industry, Fountain was among the first to use bi- and tri-directional glass along with lightweight coring material. Underneath, Fountain was one of the first to successfully utilize a notch transom, pad keel running surface for improved handling and performance. With Reggie at the helm, Fountain Powerboats has gained an international reputation as the world's premier high-performance boat company. Fountain is the only builder ever to earn Boat of the Year honors from three different boating publications, including Powerboat, Hot Boat and Boating. For 15 consecutive years, Fountain has been recognized in Powerboat magazine's annual Awards of Product Excellence program, including five Offshore Boat of the Year awards - the most recent in 1996. Furthermore, fishing boats designed and built by Fountain have thoroughly dominated competition on the Southern Kingfish Association (SKA) tour like no other builder in history. Anglers in Fountain fishing boats have earned firstplace overall honors four of the five years, including Dave Workman's back-to-back wins in 94'-955'. Further, Team Fountain has never failed to place at least five boats in the top ten spots in the 2,000-member SKA. A RETURN TO RACING Certainly, a trophy case full of awards and accolades have helped propel Fountain to the forefront of the boating world but it's been the achievement in offshore racing that has truly separated Fountain from the rest of the pack. After nearly a decade of retirement from active competition, Reggie Fountain returned to racing in 1990 to campaign nationwide on the offshore circuit. Not since the late Don Aronow has a man designed, built, throttled and driven a boat of his own make to such dominance on the demanding offshore tour. Fountain Powerboats is the only V-bottom builder in the decade of the 90's to score a first-place overall finish at a nationally sanctioned offshore race. We've done it more than a dozen times. Wellcraft, Cigarette, Formula, Baja and Hustler have a combined tally of zero. Further, in a two-year stretch, Reggie Fountain went undefeated in major offshore competition. In addition to his complete dominance on the racecourse, Fountain has clearly established several times that he builds the world's fastest, safest, smoothest and best handling V-bottoms on the water. In the last six years, the most hotly contested prize on the offshore circuit has been the kilo record. Fountain started this seesaw battle in 1991 with a 114.585-mph clocking in the triple-engine 47-foot Superboat Team Fountain. The Wellcraft got into the act with a triple-engine 116.751-mph blast of its own. Hell bent on returning bragging rights to North Carolina, Fountain upped the mark to 123.91 mph six month later with the wrinkle that he did the trick in a smaller, less powerful 42-foot twin-engine boat. And then there's the latest episode that Fountain will always remember as icing on the cake literally. Fountain's back to back 5/8th mile kilo passes of 133.788 and 130.092 mph became all the more noteworthy when you consider they were recorded in a freezing sub-zero snow flurry. The new 131.94-mph speed marks the second time that Reggie has used a twin-engine boat to break a record held by a triple. Perhaps Fountain's biggest milestone achievement in offshore racing came in New Orleans, LA, in 1990. Racing against a star-studded fleet that included actors Chuck Norris, Don Johnson, and Kurt Russell, Fountain overcame amazing odds and beat the entire field of hybrid racing catamarans with his V-bottom. The win was particularly sweet for Fountain because heretofore V-bottoms reputedly were no match for the catamarans in slick water. To the amazement of the "experts" Fountain aced a fleet of the world's fastest offshore cats in water conditions on lake Ponchartrain that would've been ideal for a barefoot ski tournament. Two years later in 1992, Reggie, throttling john Rebhan's Fountain 42' Lightning, Ohio Steel, accomplished the near impossible by capturing the OPT World and National Championships in Open V-bottom. Fountain also won the APBA World Championship in Manufacturer's Super Vee. REGGIE FOUNTAIN - MR. FULL THROTTLE Although the title on his business card says, "Reggie Fountain, Chief Executive Officer, Chairman of the Board and President," it scarcely touches upon the extent of his actual involvement. Unlike any other CEO in the performance boating industry, Reggie Fountain is hands-on every step of the way. Drawing on over 37 years of experience in all aspects of racing and pleasure boating, Fountain personally masterminds all engineering and new product Research and Development. Considered among the most innovative minds in the boating world, Fountain revolutionized the way we go fast on the water in the late 70's when he introduced his amazing notch-transom, pad-keel running surface. Then in 1992, he took the state of the art one giant step further when he introduced Positive Lift a breakthrough that added more than a 10 percent performance increase to Fountain's already superior top-end performance while also improving handling and cornering agility. Once a mold is created, Fountain performs all initial on-the-water testing and then collaborates with his staff on interior design and graphic styling. To this day, Fountain still logs approximately 1,000 hours a year on the water. Time permitting, Reggie continues to offer personal instruction in the finer points of operating a high-performance boat to many of the customers that visit his North Carolina facility. Furthermore, he personally tests many of his boats prior to shipment to a dealer network that expands to all corners of the United States. GARY E. MAZZA,III, age 59, became a director of the Company on December 28. 1993. Mr. Mazza is a practicing attorney in the business, tax and international areas of the law in Annapolis, Maryland. He also practices law in New York and Virginia. He is the Chairman of Triangle Tractor & Trailer, Inc., a Director of the American Red Cross of Maryland, and an Adjunct Professor at the University of Maryland. He is the founder, Executive Vice President, and General Counsel for Aerovias Quisqueana, C. por A., Santo Domingo, Dominican Republic. Prior to entering private practice, Mr. Mazza was the Director of the Legal Education Institute at the U.S. Department of Justice from 1977 to 1981. Prior to 1977, he served as the Director of Legal Training for the U.S. Civil Service Commission and as Senior Legal Advisor for the State Attorney General's Achievement Award. Mr. Mazza is a highly decorated retired United States Army Colonel. -28- FEDERICO PIGNATELLI, age 44, became a director of the Company on April 8, 1992. Mr. Pignatelli is the U.S. Representative of Eurocapital Partners, Ltd., and investment banking firm. From 1989 to April, 1992, he was a Managing Director at Gruntal & Company, an investment banking firm. From 1988 to 1989, he was General Manager of Euromobiliar Ltd., a subsidiary of Euromobiliare, SpA, a publicly held investment and merchant bank in Italy and Senior Vice President of New York and Foreign Securities Corporation, an institutional brokerage firm in New York. From 1986 to 1988, he was Managing Director at Ladenburg, Thalmann & Co., an investment banking firm. From 1980 to 1986, he was Assistant Vice President of E. F. Jutton International. Prior to 1980, he was a financial journalist. Mr. Pignatelli was elected as a director of the Company pursuant to the right of Eurocapital Partners, Ltd. to designate one member of the Board of Directors in connection with a private placement of the Company's Common Stock. Mr. Pignatelli also serves as chairman of BioLase Technology, Inc., a company which produces medical and dental lasers and endodontic products. Formerly, he served as a director of MTC Electronic Technologies Co., Ltd., a NASDAQ/NMS company, and of CST Entertainment Imaging, Inc., and American Stock Exchange Company engaged in colonizing black and white film. MARK SPENCER, age 42, became a director on February 26, 1992. He founded Spencer Communications, and advertising public relations firm specializing in the marine industry, in 1987. Previously, Mr. Spencer began his journalism career at Powerboat Magazine in 1976. He was named Executive Editor of Powerboat Magazine in 1981 and served in that capacity until 1987. During the last seven years Mr. Spencer has served as on camera expert commentator for ESPN covering the boating industry. In addition to Mr. Fountain, who is listed above as a director, other executive officers of the Company are as follows: JOSEPH F. SCHEMENAUER, age 52, was appointed Vice President - Finance and Chief Financial Officer in September, 1997. Mr. Schemenauer has had twenty years experience as Chief Financial Officer and or Controller in the boating industry, primarily with Chris Craft Corporation (and its successors, Murray Chris Craft Sportboats, Inc. and Murray Chris Craft Cruisers, Inc.), Donzi Marine Corporation, Wellcraft and Triumph Yachts Divisions of Genmar Industries, Inc. and Luhrs Corporation. His predecessor, Alan Krehbiel, served in that capacity until August, 1997. BLANCHE C. WILLIAMS, age 63, has been Corporate Secretary and Treasurer of the Company since August, 1986, and has held the same positions with the Company's Subsidiary since it was formed during 1979. Mrs. Williams also served as Executive Assistant to the President from 1979 to 1988 and is currently serving in that capacity. -29- Item 11. Executive Compensation. The following table sets forth the compensation awarded, paid to or earned by the Company's Chief Executive Officer, who was the only executive officer of the Company whose compensation exceeded $100,000 in Fiscal 1997, 1996, and 1995. Name and Principal Fiscal Annual Compensation Long-term Stock Position Year Salary(1) Bonus(2) Compensation Options - --------------- ----- ----- ------- ---------- ------ Reginald M. Fountain Jr. 1997 $350,000 $151,717 $ -0- -0- Chairman, President,Chief 1996 $232,154 $199,984 $ -0- -0- Executive Officer, and 1995 $221,650 $106,438 $ -0- 450,000 Chief Operating Officer (4) (1) The Board of Directors increased Mr. Fountain's annual base salary to $285,000 for the period March 30, 1995 to March 30, 1996 and to $350,000 for Fiscal 1997. The amounts shown do not include the value of certain personal benefits received in addition to cash compensation. The aggregate value of such personal benefits received was less than ten percent (10%) of the total cash compensation paid. (2) The bonuses paid to Mr. Fountain for Fiscal 1995,1996 and 1997 were authorized by the Board on May 1, 1994. His bonus represents 5% of net income after the profit sharing distribution, if any, but before income taxes limited to a maximum of $250,000. (3) Mr. Fountain does not participate in the Company's 401 (k) Plan and has no other long- term compensation, other than stock options. The Following table contains information concerning the grant of stock options to the named executive officer in Fiscal 1995: Name ................... Reginald M. Fountain, Jr. Number of securities underlying options/SARS granted .......... 450,000 Per cent of total options/SARS granted to employees in the fiscal year ................. 100% Exercise price .................. $4.667 Expiration date .............. 8/04/05 -30- Potential realizable value of assured stock-appreciation for option term based on a per share market price of the common stock on the last trading day prior to the day of grant of $4.667: Five percent ... $ 1,320,678 Ten percent .... $ 3,346,859 The following table contains information concerning the exercise of stock options and employment related options and information concerning unexercised stock options held as of June 30, 1997 by the named executive officer: Name ....................... Reginald M. Fountain, Jr. Shares acquired on exercise ...... -0- Market value at time of exercise less exercise price, or value realized............... -0- Number of unexercised options & warrants: Exercisable options ......... 480,000 Non-Exercisable ............ -0- Value of unexercised in-the-money options at June 30, 1997, Exercisable ............. $ 2,479,680 (1) (1) The closing sale price of the Common stock on Monday, June 30, 1997 was $9.833. Value equals the difference between market value and exercise price. In October, 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock Based Compensation". SFAS No. 123 permits a company to choose either a new fair value based method of accounting for its stock based compensation arrangements or to comply with the current APB Opinion 25 intrinsic value based method adding pro forma disclosure of net income and earnings per share computed as if the fair value based method had been applied in the financial statements. SFAS No. 123 is effective for fiscal years beginning after December 15, 1995. The Company will adopt SFAS No. 123 in 1997 using pro forma disclosures of net income and earnings per share. The impact of stock options on the Company's pro forma disclosures of net income and earnings per share calculations is not know as the Company has not yet implemented the provision of the SFAS. -31- Directors' Compensation. Directors of the Company currently do not receive any fees or other compensation for their services as directors, but they are reimbursed for travel and other out-of-pocket expenses in connection with their attendance at meetings of the Board of Directors. In Fiscal 1995, each non-employee director (Messrs. Pignatelli, Mazza, Garbrecht, and Spencer) was granted non- qualified stock options to purchase 30,000 common shares at $3.5833 per share. These non-qualified stock options awarded to the outside directors were not under any of the Company's existing stock option plans. Mr. Pignatelli exercised a portion of his options to purchase 24,000 shares during Fiscal 1997 and Mr. Mazza exercised all of his options during July 1997. Mr. Garbrecht resigned as a director in April 1997. The Company takes the position that Mr. Garbrecht's options terminated upon his resignation. These options are disputed in the lawsuit. (See "Legal Proceedings" and "Stock Option Plans") Employment Agreement. Reginald M. Fountain, Jr. serves as the Company's President, Chief Executive Officer, and Chief Operating Officer pursuant to an employment agreement entered into during 1989. The agreement provides for automatic extensions of one-year periods until terminated. Under the agreement, Mr. Fountain receives a base salary approved by the Board of Directors and an annual cash bonus based upon the Company's net profits before taxes. On May 1, 1994, the Board of Directors authorized an increase in the annual bonus payment to Mr. Fountain to 5% of net income after the profit sharing distribution but before income taxes limited to a maximum of $250,000. Bonuses of $151,717 for Fiscal 1997, $199,984 for Fiscal 1996 and $106,438 for Fiscal 1995 were paid to Mr. Fountain. The agreement terminates upon death or permanent disability. The current agreement replaced a similar agreement with Mr. Fountain that had been in effect from December, 1986 to 1989. Profit Sharing Plan. No Profit Sharing Plan was authorized for Fiscal 1997 or Fiscal 1996. On May 1, 1994, the Board of Directors authorized a Profit Sharing Plan applicable to all eligible employees for Fiscal 1995. The profit sharing calculations were based upon the consolidated audited net income for the full fiscal year before income taxes. The actual profit sharing distribution for Fiscal 1995 was $376,614 and was paid in full to the eligible employees on August 12, 1995. -32- Stock Option Plans. During 1987, shareholders of the Company approved the 1986 Incentive Stock Option Plan. The Plan is administered by the Board of Directors which may, in its discretion, from time to time, grant to officers and key employees options to purchase share of the Company's common stock. Directors who are not officers or employees of the Company or its Subsidiary are not eligible to be granted options under the 1986 plan. The 1986 Plan provides that the purchase price per share of common stock provided for in options granted shall not be less than 100% of the fair market value of the stock at the time the option is granted. However, in the case of an optionee who possesses more than 10% of the total combined voting power of all classes of the Company's stock, the purchase price shall not be less than 110% of the fair market value of the stock on the date of the grant. No consideration is payable to the Company by an optionee at the time an option is granted. Upon exercise of an option, payment of the purchase price of the common stock being purchased shall be made to the Company in cash, or at the discretion of the Board of Directors, by surrender of a promissory not from the optionee, or by surrender of shares of common stock already held by the optionee which shall be valued at their fair market value on the date the option is exercised, or by any combination of the foregoing. Also, payment may be in installments, and upon such other terms and conditions as the Board of Directors, in its discretion, shall approve. Under the 1986 Plan, the aggregate fair market value of shares with respect to which options are exercisable for the first time by an employee in any calendar year generally may not exceed $100,000. The term of each option granted under the Plan is determined by the Board of Directors, but may in no event be more than ten years from the date such option is granted. However, in the case of an option granted to a person who, at the time the option is granted, owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company, the term of the option may not be for a period of more than five years from the date of grant. Unless the Board of Directors determines otherwise, no option may be exercised for one year after the date of grant. Thereafter, an option may be exercised either in whole or in installments as shall be determined by the Board of Directors at the time of the grant for each option granted. All rights to purchase stock pursuant to an option, unless sooner terminated or expired, shall expire ten years from the date option was granted. Upon the termination of optionee's employment with the Company, his option shall be limited to the number of shares for which the option is exercisable by him on the date of his termination of employment, and shall terminate as to any remaining shares. However, if the employment of an optionee is terminated for "cause" (as defined in the Plan), the optionee's rights under any then outstanding option immediately terminate at the time of his termination of employment. No option shall be transferable by an optionee otherwise than by will or the laws of descent and distribution. As part of the employment arrangement of Gary Garbrecht which was part of the acquisition of Mach Performance, Inc., Mr. Garbrecht's contract provided for 30,000 shares of stock options. -33- Under the 1986 Plan, a maximum of 300,000 shares of the Company's common stock have been reserved for issuance. In the event of a stock dividend paid in shares of the common stock, or a recapitalization, reclassification, split-up or combination of shares of such stock, the Board of Directors shall have the authority to make appropriate adjustments in the members of shares subject to outstanding options and the option prices relating thereto, and in the total number of shares reserved for the future granting of options under the Plan. During 1989 the Board of Directors amended the Plan to delete a provision requiring that options granted to any one employee be exercised only in the sequential order in which they were granted. That provision at one time was, but is no longer, required by the Internal Revenue Code, as amended, to be contained in incentive stock option plans. During Fiscal 1995 options to purchase 30,000 shares were awarded to Mr. Fountain at $3.9417 ($3.5833 X 110%) per share and options to purchase 30,000 share were awarded to the Chief Financial Officer at $3.667 per share. Of the options granted in previous years, all had expired by June 30, 1996. During Fiscal 1997 options to purchase 30,000 shares were exercised by the Chief Financial Officer. The 1986 Plan terminated on December 5, 1996. On June 21, 1995, a Special Meeting of the shareholders was held to vote upon the adoption of the 1995 Stock Option Plan. The new Plan as adopted by the Shareholders allowed for up to 450,000 common stock options to be granted by the Board of Directors to employees or directors of the Company on either a qualified or non-qualified basis. Subsequently, on August 4, 1995, the Board unanimously voted to grant the entire 450,000 stock options authorized under the 1995 Stock Option Plan to Mr. Reginald M. Fountain, Jr. at $4.667 per share on a non-qualified basis. None of the options granted to Mr. Fountain under the 1995 Plan have been exercised. The expiration date of the options granted to Mr. Fountain is August 4, 2005. During Fiscal 1995, each of the four non-employee directors was granted non-qualified stock options to purchase 30,000 common shares at $3.5833 per share. These non-qualified stock options awarded to the outside directors were not under any of the Company's existing stock option plans. (See Directors' Compensation for status) An October 11, 1996 employment agreement with former director Gary Garbrecht provided him with 30,000 option shares, pursuant to the 1986 stock option plan, on Industries common stock exercisable at 12.25 per share to be granted in blocks of 5,000 option shares each year for the four year term of the employment contract starting October 11, 1998. Gary Garbrecht resigned employment with the Company April 29, 1997. The Company takes the position that the options were not yet granted to Gary Garbrecht when he resigned and, that, in any event, options which are not yet exercisable when employment terminates are void under the 1986 stock option plan. This position is disputed by Gary Garbrecht and the options are involved in a lawsuit between the Company and Gary Garbrecht which is discussed above in the section titled "Legal Proceedings." -34- 401 (k) Payroll Savings Plan. During Fiscal 1991, the Company initiated a 401 (k) Payroll Savings Plan (the "401 (k) Plan") for all employees. Eligible employees may elect to defer up to fifteen percent of their salaries. The amounts deferred by the employees are fully vested at all times. The Company matches twenty- five percent of the employee's deferred salary amounts limited to a maximum of five percent of their salaried amounts, or a maximum of one and one-fourth percent of their salaries. Amounts contributed by the Company vest at a rate of twenty percent per year of service. Mr. Fountain, by his own election, does not participate in the 401 (k) Plan. There are no postretirement benefit plans in effect. Performance Table. The following table was prepared by Standard & Poor's Compustant Services, Inc. It compares the Company's cumulative total shareholder return with a stock market performance indicator (S. & P. 500 Index) and an industry index (S. & P. Leisure Time). The table assumes a base point of June 30, 1992 to be equal to $100.00 Accumulated returns are noted through June 30, 1997. Each time period covered by the table gives the dollar value of the investment assuming monthly reinvestment of dividends. The Company has never paid any cash dividends. Total Shareholder Returns - Dividends Reinvested Annual Return Percentage Years Ending Company/Index Jun93 Jun94 Jun95 Jun96 Jun97 Fountain Powerboats Inds. Inc. -14.01 -55.82 142.14 100.03 28.25 S&P 500 Index 13.63 1.41 26.07 26.00 34.70 Leisure Time (Products) -500 19.55 .87 -21.45 33.63 25.61 Base Indexed Returns Period Years Ending Company/Index Jun92 Jun93 Jun94 Jun95 Jun96 Jun97 Fountain Powerboats Inds. Inc. 100 85.99 37.99 91.98 183.99 235.97 S&P 500 Index 100 113.33 115.23 145.27 183.04 246.55 Leisure Time (Products)-500 100 119.55 120.60 146.47 191.32 240.33 As can be seen from the table, the total return to shareholders of the Company's common stock over the past five years compares favorably or is greater than the S. & P. 500 stocks and the S. & P. Leisure Time stocks. -35- Board Report on Executive Compensation. The entire Board of Directors, including its Chairman, Mr. Reginald M. Fountain, Jr., who also serves as the Company's President, Chief Executive Office, and Chief Operating Officer has prescribed unanimously the compensation amounts for the Company's executive officers. These compensation amounts are deemed adequate by the Board based upon its judgment as to the qualifications, experience, and performance of the individual executive officers, as well as, the Company's size, complexity, growth, and financial performance. During Fiscal 1995, recognizing the Company's much improved financial performance under his leadership, the Board increased Mr. Fountain's salary to $285,000 for the period March 30, 1995 through March 30, 1996, and to $350,000 thereafter. The entire Board has also approved Mr. Fountain's employment agreement with the Company, more fully described above (Item 11), under "Employment Agreements", which provides for a minimum base salary and annual cash bonus equal to five percent of the Company's net profits after profit sharing distribution but before income taxes limited to a maximum of $250,000. Bonuses paid to Mr. Fountain for Fiscal 1997 were $151,717, for Fiscal 1996 amounted to $199,984 and for Fiscal 1995 amounted to $106,438. Compliance with Section 16. Not applicable. Item 12. Security Ownership of Certain Beneficial Owners and Management. Principal Shareholders. The following table sets forth the beneficial ownership of the Company's Common Stock as of September 15, 1997, by each person known to the Company to beneficially own more than five percent (5%) of the Company's Common Stock. This table had been prepared based upon information provided to the Company by each Shareholder: Name and Amount of Beneficial Percent of Address Ownership Class (3) Reginald M. Fountain, Jr. P.O. Drawer 457 Whichard's Beach Road Washington, N.C. 27889 2,569,372 (1) 54.38% Triglova Finanz, A.G. P.O. Box 1824 52nd Street Urbanization Obarrio Torre Banco Sur, 10th Floor Panama City, Republic of Panama 408,750 (2) 8.65% (1) Mr. Fountain has sole voting and investment power with respect to all share shown as beneficially owned. Includes options to acquire 480,000 shares of common stock. -36- (2) The Company is informed that the shares shown as beneficially owned by Triglova Finanz, A.G. are owned directly by it, and it claims shared voting and investment power with respect to all such shares held by Mr. Filippo Dollfus De Vockersberg, C/O Fider Service, 1 Via Degli Amadio 6900, Lugano, Switzerland. Mr. Dollfus had been authorized to act as attorney-in-fact for Triglova Finanz, A.G., and, therefore, claims shared voting and investment power with respect to such shares. (3) The percentage for each person is calculated on the basis of the Company's total outstanding shares less the 15,000 shares owned by the Company's Subsidiary. Directors and Officers. The following table sets forth the beneficial ownership of the Company's common stock as of September 15, 1997, for each of the Company's current directors, and for all directors and officers of the Company as a group. Name Amount of Percent and Beneficial of Address Ownership Class (3) Reginald M. Fountain, Jr. (1) 2,569,372 (2) 54.38% Mark L. Spencer (1) 33,400 (2) (3) Federico Pignatelli (1) 30,000 (2) (3) Gary E. Mazza III (1) 34,500 (3) Blanche C. Williams (1) 300 (3) Joseph F. Schemenauer (1) -0- (3) All directors and officers as a group (6 persons) 2,667,572 (2) 56.46% (1) The address of each person is P.O. Drawer 457, Whichard's Beach Road, Washington, North Carolina 27889. Except as otherwise indicated, to the best knowledge of management of the Company, each of the persons listed or included in the group has sole voting and investment power over all shares shown as beneficially owned. Percentages for each person listed and for the group are calculated on the basis of the Company's total outstanding shares less the 15,000 shares owned by the Company's Subsidiary. -37- (2) For Mr. Fountain, includes options to purchase 480,000 shares of common stock held. For Messrs. Spencer and Pignatelli includes options to purchase 30,000 and 6,000 common shares respectively. Mr. Pignatelli has already exercised 24,000 options shares. (3) Less than 1% Item 13. Certain Relationships and Related-Party Transactions. During the fourth quarter of Fiscal 1996, the Company borrowed $170,000 from Mr. Fountain to supplement its working capital. This loan was unsecured with interest at 12%. The Company paid Mr. Fountain $2,710 in interest. The loan was entirely repaid by June 30, 1996. Mr. Fountain loaned the Company $300,000 in November, 1992 to supplement the Company's working capital. The loan was unsecured and bore interest at the rate of 12% per annum. Effective January 31, 1994, the Company's Board of Directors authorized the issuance of 129,858 additional common stock shares in consideration for the cancellation of this $300,000 debt to Mr. Fountain. The additional shares were issued at a price of $2.333 per share to Mr. Fountain and to Triangle Finance Ltd., a client of Eurocapital, Ltd. Mr. Federico Pignatelli is the U.S. representative of Eurocapital, Ltd. and is also a director of the Company. Mr. Fountain cancelled two thirds of the total amount of the debt ($202,000, including $200,000 of principal and $2,000 of accrued interest) for 86,572 common shares. Triangle Finance Ltd. repaid on-third of the total amount of the debt ($101,000, including $100,000 of principal and $1,000 of accrued interest) for 43,286 common shares. The Board of Directors determined that the price of $2.333 per share was fair to the Company after consideration of such factors as the common stock's book value, its then current market price, and recent private placements. No interest was paid to Mr. Fountain in Fiscal 1997, or 1995. The Company also paid rentals at what it believes to be their fair market values during the last three fiscal years to Mr. Fountain or to entities owned by him as follows: Fiscal Fiscal Fiscal 1997 1996 1995 Apartment Rentals..... $17,260 $ 15,380 $ 13,995 R. M. Fountain, Jr. - airplane rentals ..$ 296,498 $ 155,499 $104,469 -------- -------- --------- $ 313,758 $170,879 $118,464 ======= ======= ====== (See Note 12) -38- The rentals paid to Eastbrook Apartments and Village Green Apartments are primarily for temporary lodging for relocating and transient Company personnel and visitors. The rentals paid for the airplane are based upon the actual hours that the airplane was used for Company business plus a monthly stand-by charge for the exclusive use of the airplane. During Fiscal 1993, Mr. Fountain purchased the airplane from the Company together with a parcel of real estate located at Morehead City, North Carolina. The Company recorded a profit on these transactions with Mr. Fountain amounting to $117,126. During the first quarter of Fiscal 1998 the Company purchased an airplane from Mr. Fountain for $1,375,000. Principal financing for the airplane is through General Electric Capital Corporation. Mr. Gary D. Garbrecht was a director of the Company through April 1997 and the President and sole shareholder of Mach Performance, Inc. which supplies the Company's subsidiary with some of its requirements for propellers and other accessory items. The Company paid Mach Performance, Inc. $254,623 in Fiscal 1997, $191,709 in Fiscal 1996, $254,696 in Fiscal 1995. The Company acquired Mach Performance, Inc. for 127,500 shares of common stock during Fiscal 1997. Mr. Gary E. Mazza, III, a distinguished attorney, businessman, educator, and retired United States Army Colonel was elected to the Board of Directors on December 28, 1993. He is Mr. Fountain's father-in-law. The Company paid Mr. Mazza $1,709 in Fiscal 1997, $11,079 in Fiscal 1996 and $1, 743 in Fiscal 1995. Mr. Federico Pignatelli was elected to the Board of Directors as the designee of Eurocapital, Ltd., the Company's investment banking firm in connection with a private placement of the Company's Stock. No amounts were paid to Mr. Pignatelli or to Eurocapital, Ltd., or to any of their affiliates, in Fiscal 1997, 1996 or 1995. Mr. Mark L. Spencer is a director of the Company and the President and sole shareholder of Spencer Communications, Inc. which furnishes advertising and public relations services the Company. The Company paid Spencer Communications, Inc. $547,436 in Fiscal 1997, $265,985 in Fiscal 1996 and $138,116 in Fiscal 1995. The Company believes that all of the above transactions were on terms which were not more favorable than would have been obtained from non-affiliated parties. -39- Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8 and Form 8-K. (a) The following documents are filed as part of this Report: (1) Financial Statements. The Following consolidated financial statements of the Company and its Subsidiary are included in Part II, Item 8, herein: Page No. Independent Auditors'Report.................. Consolidated Balance Sheets June 30, 1997 and 1996 ........ Consolidated Statements of Operations Years Ended June 30, 1997, 1996, 1995 ............. Consolidated Statements of Stockholders' Equity Years Ended June 30, 1997, 1996, 1995 ............ Consolidated Statements of Cash Flows Years Ended June 30, 1997, 1996, 1995 ................... Notes to Consolidated Financial Statements ............. (2) Exhibits. The following exhibits are filed with this report or incorporated by reference to a previous filing: 3.01 Certificate of Incorporation of the Company (Incorporated by reference to the Company's Registration Statement filed on Previously October 2, 1986) ......................................................... Filed 3.2 Amendments to Certificate of Incorporation of the Company (Incorporated by reference to Amendment No. 1 to the Company's Registration Statement field on December 2,1986) .................... Previously Filed 3.3 Amendment to Certificate of Incorporation of the Company (Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1991) ..................... Previously Filed 3.4 By-laws of the Company (Incorporated by reference to Amendment No. 1 to the Company's Registration Statement filed on December 2, 1986) ........................... Previously Filed 3.5 Certificate of Amendment to the Articles of Incorporation, Consent Action in Writing of the Majority Stockholders, and Resolutions Adopted by Unanimous Written Consent of the Board of Directors for the one-for-two reverse stock split of February 4, 1994 ........................................... Previously Filed 4.1 Form of Warrant Agreement (Incorporated by reference to Amendment No. 2 to the Company's Registration Statement filed on December 10, 1986) .......................... Previously Filed 4.2 Form of Stock Certificate (Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10K for the fiscal year ended October 1, 1989)........ Previously Filed 10.1 1986 Incentive Stock Option Plan (Incorporated by reference to Amendment No. 1 to the Company's Registration Statement filed on December 2, 1986) ...................... Previously Filed 10.2 Employment Agreement dated May 31, 1989 between Reginald M. Fountain, Jr. and the Company's Subsidiary (Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10K for the fiscal year ended October 1, 1989) ..................... Previously Filed 10.3 First Modification of Revolving Loan and Security Agreement dated August 29, 1990 by and between Fountain Powerboats Inc. and MetLife Financial Acceptance Corporation (Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10K for the fiscal year ended March 22, 1994) ....................... Previously Filed 10.4 Loan and Security Agreement with MetLife Capital Corporation dated December 31, 1993 ......... Previously Filed 10.5 Consulting and Marketing Agreement with the Mercury Marine division of the Brunswick Corporation dated July 11, 1994 ................ Previously Filed 10.6 Loan Extension and Amendment Agreement with the Mercury Marine division of the Brunswick Corporation dated July 11, 1994 ........... Previously Filed 10.7 Amendment to Consulting and Marketing Agreement with the Mercury marine division of the Brunswick Corporation dated July 11, 1994 .................. Previously Filed 10.8 Standstill Agreement with the Mercury Marine division of the Brunswick Corporation dated July 11, 1994 ....................................... Previously Filed 10.9 Amendment No. One dated September 24, 1994 to Loan and Security Agreement of December 31, 1993 with MetLife Capital Corporation ......... Previously Filed 10.10 Consent to Loan Restructure dated January 1, 1995 from MetLife Capital Corporation ............ Previously Filed 10.11 Amendment No. Two dated January 1, 1995 to Loan and Security Agreement dated of December 31, 1993 with MetLife Capital Corporation ........... Previously Filed 10.12 Second Loan Extension, Consolidation and Amendment Agreement dated February 24, 1995 with Brunswick Corporation, Mercury Marine Division ....... Previously Filed 10.13 Modification of Deeds and Trust and Assignment of Rents, Issues and Profits dated February 24, 1995 with Brunswick Corporation, Mercury Marine Division ........ Previously Filed 10.14 Consulting and Marketing Agreement dated February 24, 1995 with Brunswick Corporation, Mercury Marine Division ...................... Previously Filed 10.15 Supply agreement dated February 24, 1995 with Brunswick ...............................Previously Filed 10.16 Master Security Agreement dated December 21, 1995 with G.E. Capital Corporation ........................... Previously Filed 10.17 Promissory Note dated December 21, 1995 with G.E. Capital Corporation .................... Previously Filed 10.18 Collateral Schedule No. 001 dated December 21, 1995 with G.E. Capital Corporation ........................... Previously Filed 10.19 Letter of Credit Agreements dated December 21, 1995 with G.E. Capital Corporation........ Previously Filed 10.20 Agreement and Plan of Reorganization with Mach Performance, Inc...................Filed Herewith 10.21 Loan Agreement dated December 31, 1996 with General Electric Capital Corporation........Filed Herewith 21 List of Subsidiaries ........... (b) No Amendments on Form 8 or Current Reports on Form 8-K were filed by the Registrant during the fiscal year ended June 30, 1996. -42- Signatures Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report t be signed on its behalf by the undersigned, thereunto duly authorized. FOUNTAIN POWERBOATS INDUSTRIES, INC. /s/ Reginald M. Fountain, Jr. By: __________________________________________ Reginald M. Fountain, Jr. Chairman, President, and Chief Executive Officer Date: October 14, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Reginald M. Fountain, Jr. ____________________________________ October 14, 1997 Reginald M. Fountain, Jr. Chairman, President, and Chief Executive Officer (Principal Executive Officer) /s/ Gary E. Mazza III ____________________________________ October 14, 1997 Gary E. Mazza III Director /s/ Federico Pignatelli ____________________________________ October 14, 1997 Federico Pignatelli Director /s/ Mark L. Spencer ________________________________________ October 14, 1997 Mark L. Spencer Director /s/ Joseph Schemenauer ____________________________________ October 14, 1997 Joseph Schemenauer Chief Financial Officer (Principal Accounting and Financial Officer) -43- FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 AND 1996 PRITCHETT, SILER & HARDY, P.C. CERTIFIED PUBLIC ACCOUNTANTS FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY CONTENTS PAGE _ Independent Auditors' Report 1 _ Consolidated Balance Sheets, as of June 30, 1997 and 1996 2 _ Consolidated Statements of Operations, for the years ended June 30, 1997, 1996 and 1995. 3 - 4 _ Consolidated Statement of Stockholders Equity, for the years ended June 30, 1997, 1996 and 1995. 5 _ Consolidated Statements of Cash Flows, for the years ended June 30, 1997, 1996 and 1995. 6 - 7 _ Notes to the Consolidated Financial Statements 8 - 24 INDEPENDENT AUDITORS' REPORT To the Board of Directors FOUNTAIN POWERBOAT INDUSTRIES, INC. Washington, North Carolina We have audited the accompanying consolidated balance sheets of Fountain Powerboat Industries, Inc. and Subsidiary as of June 30, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended June 30, 1997, 1996 and 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements audited by us present fairly, in all material respects, the financial position of Fountain Powerboat Industries, Inc. and Subsidiary as of June 30, 1997 and 1996, and the results of their operations and their cash flows for the years ended June 30, 1997, 1996 and 1995 in conformity with generally accepted accounting principles. /s/ PRITCHETT, SILER & HARDY, P.C. PRITCHETT, SILER & HARDY, P.C. July 31, 1997 SALT LAKE CITY, UTAH 84111 FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS ASSETS June 30, _____________________ 1997 1996 ______________________ CURRENT ASSETS: Cash & cash equivalents $2,994,503 $1,360,619 Certificates of deposit - held to maturity 696,155 - Accounts receivable, less allowance for doubtful accounts of $30,000 for 1997 and $27,000 for 1996 1,867,747 2,853,684 Inventories 3,937,757 4,009,195 Prepaid expenses 1,131,703 154,843 Current tax assets 369,268 - ___________ _________ Total Current Assets 10,997,133 8,378,341 PROPERTY, PLANT AND EQUIPMENT, net 12,219,156 9,928,186 OTHER ASSETS 497,607 191,577 __________ ___________ $23,713,896 $18,498,104 __________ ___________ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable $ - $1,173,089 Current maturities of long-term debt 595,607 767,254 Accounts payable 1,987,508 1,713,760 Accrued expenses 860,786 914,732 Dealer territory service accrual 1,637,572 765,674 Customer deposits 310,042 228,608 Allowance for boat repurchases 200,000 207,359 Warranty reserve 500,000 410,000 Net liabilities of discontinued operations 213,697 - ____________ _________ Total Current Liabilities 6,305,212 6,180,476 ____________ _________ LONG-TERM DEBT, less current maturities 7,677,771 5,433,184 DEFERRED TAX LIABILITY 369,268 - COMMITMENTS AND CONTINGENCIES (See Note 10) - - STOCKHOLDERS' EQUITY [Restated] Common stock, par value $.01 per share, authorized 200,000,000 shares; issued 4,725,108 and 4,543,608 shares 47,251 45,436 Additional paid-in capital 10,517,740 9,282,305 Accumulated deficit (1,092,598) (2,332,549) ____________ __________ 9,472,393 6,995,192 Less: Treasury Stock, at cost 15,000 shares (110,748) (110,748) ____________ __________ 9,361,645 6,884,444 ____________ __________ $23,713,896 $18,498,104 ____________ __________ The accompanying notes are an integral part of these financial statements. -2- FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended June 30, _____________________________________ 1997 1996 1995 _____________ __________ ___________ NET SALES $ 50,514,325 $41,598,051 $38,727,329 COST OF SALES 36,976,247 32,326,371 30,953,992 _____________ __________ ___________ Gross Profit 13,538,078 9,271,680 7,773,337 _____________ __________ ___________ EXPENSES: Selling expense 6,463,375 4,285,923 3,897,086 Selling expense - related party 500 - - General and administrative 2,240,112 1,729,399 1,297,173 General and administrative - related parties 313,758 175,589 118,464 _____________ ___________ __________ Total expenses 9,017,745 6,190,911 5,312,723 _____________ ___________ __________ OPERATING INCOME 4,520,333 3,080,769 2,460,614 NON-OPERATING INCOME (EXPENSE): Other income 437,694 1,404,500 642,277 Interest expense (557,768) (744,627) (989,359) Interest expense - related parties - (2,710) - Gain (loss) on disposal of assets - 22,906 (23,015) ______________ ___________ _________ (120,074) 680,069 (370,097) INCOME BEFORE INCOME TAXES 4,400,259 3,760,838 2,090,517 CURRENT TAX EXPENSE 330,427 80,804 42,641 DEFERRED TAX EXPENSE - - - _____________ ___________ __________ INCOME FROM CONTINUING OPERATIONS 4,069,832 3,680,034 2,047,876 DISCONTINUED OPERATIONS(See Note 14): Loss from Operations of Fountain Power, Inc. and Mach Performance, Inc.(Net of no income tax effect) 2,389,480 - - Estimated losses on disposal of the operations of Fountain Power, Inc. and Mach Performance, Inc. (Net of no income tax effect) 440,401 - - ____________ ____________ ___________ LOSS FROM DISCONTINUED OPERATIONS (2,829,881) - - ______________ ___________ __________ NET INCOME $1,239,951 $3,680,034 $2,047,876 ______________ ___________ __________ [Continued] -3- FOUNTAIN POWERBOAT, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS [CONTINUED] Year Ended June 30, ______________________________________ 1997 1996 1995 ____________ ___________ ___________ PRIMARY EARNINGS PER SHARE: Continuing Operations $ .82 $ .81 $ .45 Loss from Operations of Discontinued Segments (.48) - - Estimated Loss on Disposal of Discontinued Segments (.09) - - ______________ __________ ___________ PRIMARY EARNINGS PER SHARE $ .25 $ .81 $ .45 ______________ ___________ __________ WEIGHTED AVERAGE SHARES OUTSTANDING 4,995,154 4,528,608 4,528,608 _____________ ____________ __________ FULLY DILUTED EARNINGS PER SHARE: Continuing Operations $ N/A $ .77 $ .45 Loss from Operations of Discontinued Segments N/A - - Estimated Loss on Disposal of Discontinued Segments N/A - - _____________ ___________ ___________ FULLY DILUTED EARNINGS PER SHARE: $ N/A $ .77 $ .45 _____________ ___________ ___________ FULLY DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING N/A 4,800,238 4,539,694 _____________ ___________ ___________ The accompanying notes are an integral part of these financial statements. -4- FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FROM JUNE 30, 1994 THROUGH JUNE 30, 1997 [RESTATED] Total Common Stock Additional Accum- Treasury Stock Stock- __________________ Paid-in ulated _______________ holders' Shares Amount Capital Deficit Shares Amount Equity _________ ______ _________ ______ _______ ______ ________ BALANCE, June 30, 1994 4,543,608 $45,436 $9,282,305 $(8,060,459) 15,000 $110,748 $1,156,534 Net profit for the year ended June 30, 1995 - - - 2,047,876 - - 2,047,876 __________ _______ _________ _________ _____ _______ ________ BALANCE, June 30, 1995 4,543,608 45,436 9,282,305 (6,012,583) 15,000 110,748 3,204,410 Net profit for the year ended June 30, 1996 - - - 3,680,034 - - 3,680,034 ________ _______ _________ ________ ______ _______ _________ BALANCE, June 30, 1996 4,543,608 45,436 9,282,305 (2,332,549) 15,000 110,748 6,884,444 Common stock issued for acquisition of Mach Performance, October 1996, at $8.17 per share 127,500 1,275 1,039,975 - - - 1,041,250 Additional common stock shares issued for options exercised during Fiscal 1997, at $3.58 to $3.67 per share 54,000 540 195,460 - - - 196,000 Net profit for the year ended June 30, 1997 - - - 1,239,951 - - 1,239,951 __________ ______ ______ _________ ______ _____ ________ BALANCE, June 30, 1997 4,725,108 $47,251 $10,517,740 $(1,092,598)15,000 $110,748 $9,361,645 _______ _____ __________ __________ ______ ______ _________ The accompanying notes are an integral part of these financial statements. -5- FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended June 30, ______________________________________ 1997 1996 1995 _____________ ___________ ___________ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $1,239,951 $3,680,034 $2,047,876 Adjustments to reconcile net income(loss) to net cash provided by operating activities: Depreciation expense 1,642,974 1,536,479 1,628,867 (Gain) loss on disposal of property,plant, and equipment - (22,906) 23,015 Net effect of Acquired Subsidiary 1,041,250 - - Change in assets and liabilities: Accounts receivable 985,937 (954,830) (1,486,475) Inventories 71,438 (601,469) 89,224 Prepaid expenses (976,860) 50,104 (4,369) Accounts payable 273,748 (86,832) (3,129,557) Accounts payable -related parties - (4,769) (8,031) Accrued expenses (53,946) (237,757) 346,719 Dealer territory service accrual 871,898 765,674 - Customer deposits 81,434 (184,201) (447,016) Allowance for boat returns (7,359) - (42,641) Warranty reserve 90,000 10,000 85,000 Deferred sale net of deferred cost of sales - (14,148) (235,852) Net liabilities of discontinued operations 213,697 - - ______________ ___________ __________ Net Cash Provided by (Used in) Operating Activities $5,474,162 $3,935,379 $(1,133,240) _______________________________________ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of certificates of deposits, net 696,155 - - Proceeds from sale of property, plant and equipment - 31,203 34,000 Investment in additional molds and related plugs (1,684,274) (878,513) (767,102) Purchase of other property, plant and equipment (2,249,670) (604,367) (431,137) Increase in other assets (306,030) (32,629) (5,505) _____________ ___________ ___________ Net Cash (Used in) Investing Activities $(4,936,129) $(1,484,306) $(1,169,744) ____________ ____________ ___________ [Continued] -6- FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS [CONTINUED] Year Ended June 30, ______________________________________ 1997 1996 1995 _____________ __________ ___________ CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) on engine floor plan agreement $(1,173,089) $638,904 $ 390,136 Proceeds from issuance of common stock 196,000 - - Proceeds from issuance of notes payable and long-term debt 8,500,000 600,000 2,656,576 Repayment of long-term debt (6,427,060) (2,820,165) (928,632) ______________ ___________ _________ Net Cash Provided by (Used in) Financing Activities $1,095,851 $(1,581,261) $2,118,080 ______________ ___________ _________ Net increase (decrease) in cash & cash equivalents $ 1,633,884 $869,812 $(184,904) Beginning cash & cash equivalents balance 1,360,619 490,807 675,711 _______________ __________ __________ Ending cash & cash equivalents balance $ 2,994,503 $1,360,619 $490,807 _____________ ___________ __________ Supplemental Disclosures of Cash Flow information: Cash paid during the period for: Interest: Unrelated parties $ 557,768 $744,627 $ 989,359 Related parties - 2,710 - ______________ __________ ____________ $ 557,768 $747,337 $ 989,359 ______________ ___________ ___________ Income taxes $ 395,796 $ 42,641 $ - _______________ __________ ___________ Supplemental schedule of Non-cash Investing and Financing Activities: For the year ended June 30, 1997: The Company issued 127,500 shares of common stock in the acquisition of Mach Performance. Valued at $1,041,250 or $8.17 per share (See Notes 7, 10 and 14). For the year ended June 30, 1996: None For the year ended June 30, 1995: None] The accompanying notes are an integral part of these financial statements. -7- FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Nature of the Business and Significant Accounting Policies. Nature of the Business: The Company manufactures high- performance deep water sport boats, sport cruisers, sport fishing boats, custom offshore racing boats and is developing a super cruiser yacht. These boats are sold to its worldwide network of approximately sixty dealers. Its offices and manufacturing facilities are located in Washington, North Carolina and it has been in business since 1979. The Company employs approximately 326 people and is an equal opportunity, affirmative action employer. Principles of consolidation: The consolidated financial statements include the accounts of the Company and its wholly- owned subsidiary, Fountain Powerboats, Inc. together with its six subsidiaries, Fountain Aviation, Inc., Fountain Sportswear, Inc., Fountain Power, Inc., Fountain Trucking, Inc., Fountain Unlimited, Inc. and Mach Performance, Inc. All significant inter-company accounts and transactions have been eliminated in consolidation. Fountain Aviation, Inc. and Fountain Unlimited, Inc. were not active during Fiscal 1997 and were subsequently dissolved effective October 1, 1997. Also effective October 1, 1997, Fountain Trucking, Inc. and Fountain Sportswear, Inc. were subsequently dissolved and the operations transferred to Fountain Powerboats, Inc. The operations of Fountain Power, Inc. and Mach Performance, Inc. were discontinued effective June 30, 1997(see Note 14). Fiscal year: The Company's fiscal year-end is June 30th, which is its natural business year-end. Accounting Estimates: The preparation of financial statements in conformity with generally accepted accounting principles 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 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 June 30, 1997 and 1996, the Company had $3,590,658 and $1,260,619, respectively, in excess of federally insured amounts held in cash and certificates of deposit. Certificates of Deposit: The Company accounts for investments in debt and equity securities in accordance with Statement of Financial Accounting Standard (SFAS) 115, "Accounting for certain Investments in Debt and Equity Securities,". Under SFAS 115 the Company's certificates of deposit (debt securities) have been classified as held-to-maturity and are recorded at amortized cost. Held-to-maturity securities represent those securities that the Company has both the positive intent and ability to hold until maturity (See Note 2). Inventories: Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method (See Note 3). Property, Plant, and Equipment and Depreciation: Property, plant, and equipment is carried at cost. Depreciation on property, plant, and equipment is calculated using the straight-line method and is based upon the estimated useful lives of the assets (See Note 4). -8- FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Nature of the Business and Significant Accounting Policies. [Continued] Fair Value of Financial Instruments: Management estimates the carrying value of financial instruments on the consolidated financial statements approximates their fair values. Dealer territory service accrual: The Company has established a program to pay a service award to dealers for boat deliveries into their market territory for which they will perform service. The service award is a percentage of the purchase price of the boat ranging from 0% to 7% based on the dealers service performance rating. The Company has accrued estimated dealer territory service awards at June 30, 1997 and 1996 of $1,637,572 and 765,674, respectively. Allowance for Boat Repurchases: The Company provides an allowance for boats financed by dealers under floor plan finance arrangements that may be repurchased from finance companies under certain circumstances where the Company has a repurchase agreement with the lender. The amount of the allowance is based upon probable future events which can be reasonably estimated (See Note 10). Warranties: The Company warrants the entire deck and hull, including its supporting bulkhead and stringer system, against defects in materials and workmanship for a period of three years. The Company has accrued a reserve for these anticipated future warranty costs. 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 (See Note 10). 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. -9- FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Nature of the Business and Significant Accounting Policies. [Continued] Income Taxes: The Company accounts for income taxes in accordance with FASB Statement No. 109, "Accounting for Income Taxes (see Note 8). Advertising Cost: Costs incurred in connection with advertising and promotion of the Company's products are expensed as incurred. Such costs amounted to $1,267,822, $849,627 and $977,787 for the years ended 1997, 1996 and 1995. Earnings Per Share: The computations of primary and fully 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. Restatement: The financial statements have been restated for all periods presented to reflect a three-for-two forward stock split effected August 14, 1997 (see Note 7 and 15). Reclassifications: The financial statements for years prior to June 30, 1997 have been reclassified to conform with the headings and classifications used in the June 30, 1997 financial statements. Note 2. Certificates of Deposit. Certificates of deposit are carried at amortized cost and consisted of the following investments at June 30, 1997: Purchase Amortized Maturity Date AcquiredMaturity Date Value Cost Value ___________ ____________ ________ __________ __________ 12/18/96 12/18/97 $50,086 $50,486 $52,641 5/4/97 5/4/98 210,373 216,187 221,312 3/28/97 3/28/98 209,275 212,077 220,157 3/28/97 3/28/98 214,533 217,405 225,688 ____________ ___________ _________ $684,267 $696,155 $719,798 ___________ ___________ _________ Note 3. Inventories. Inventories consist of the following: June 30, ______________________ 1997 1996 ___________ __________ Parts and supplies $2,820,414 $3,095,379 Work-in-process 882,323 715,133 Trailers - 38,414 Finished goods 335,020 260,269 ____________ __________ 4,037,757 4,109,195 Reserve for obsolescence (100,000) (100,000) ____________ __________ $3,937,757 $4,009,195 ____________ __________ -10- FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4. Property, Plant, and Equipment. Property, plant, and equipment consists of the following: Estimated Useful June 30, Lives ________________________ in Years 1997 1996 _______ ___________ ____________ Land and related improvements 10-30 $1,301,721 $ 986,116 Buildings and related improvements 10-30 6,559,930 6,199,699 Construction-in-progress N/A 815,793 6,287 Production molds and related plugs 8 11,658,760 9,974,486 Machinery and equipment 3-5 3,493,375 2,843,480 Furniture and fixtures 5 483,699 464,932 Transportation equipment 5 241,044 199,326 ___________ ________ $24,554,322 $20,674,326 Accumulated depreciation (12,335,166) (10,746,140) ____________ ___________ $12,219,156 $9,928,186 ____________ ___________ Depreciation expense amounted to $1,642,975, $1,536,479, and $1,628,867 for the year ended June 30, 1997, 1996 and 1995, respectively. Construction costs of production molds for new and existing product lines are capitalized and depreciated over an estimated useful life of eight years. Depreciation starts when the production mold is placed in service to manufacture the product. The costs include the direct materials, direct labor, and an overhead allocation based on a percentage of direct labor. Production molds under construction amounted to $219,227 and $0 at June 30, 1997 and 1996. During Fiscal 1997, the Company did not realize any gain or loss from the sale or disposition of any of its fixed assets. The Company sold fixed assets and realized gains amounting to $22,906 for Fiscal 1996. For Fiscal 1995, the Company incurred losses on fixed assets sold amounting to $23,015. On June 30, 1997, the Company determined to discontinue the operations of its Fountain Power, Inc. and Mach Performance, Inc. subsidiaries. An allowance for estimated future losses expected to be incurred upon disposal of certain fixed assets has been accrued in the amount of $440,401 against $539,457 in fixed assets. These assets have been reclassified to net liabilities of discontinued operations (See Note 14). Note 5. Notes Payable. The Company had no outstanding short-term notes payable at June 30, 1997. During Fiscal 1996, the Company retired its interest bearing indebtedness to Mercury Marine. Most of the amount owing to Mercury Marine was repaid from the Company's operating funds, but, additionally, $600,000 was borrowed from G.E. Capital Corporation on a long-term basis to repay Mercury. This indebtedness to G.E. Capital Corporation was retired during Fiscal 1997 (See Note 6) as part of refinancing under a new credit agreement. -11- FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 5. Notes Payable [Continued] The Company also retired the short-term debt to Deutsche Financial Services during Fiscal 1997 (see Note 6). At June 30, 1996, the balance of the note amounted to $1,173,089 payable to Deutsche Financial Services for engine purchases financed by Deutsche. Note 6. Long-term Debt and Pledged Assets. On December 31, 1996, the Company concluded a $10,000,000 credit agreement with General Electric Capital Corporation. Under the terms of the new credit agreement, the Company refinanced substantially all of its interest bearing debts and will have additional funds made available to it for expansion. Initially, the Company borrowed $7,500,000 from GE Capital Services primarily to refinance existing debts. All of the Company's prior interest bearing debts to MetLife Capital Corporation, Deutsche Financial Services, GE Capital Corporation, Branch Bank & Trust Leasing Corp., and other smaller creditors were paid off entirely. The Company borrowed another $1,000,000 to fund plant and equipment additions. An additional $1,500,000 is available to the Company for further expansion until December 31, 1997. The interest rate on the indebtedness to GE Capital Services is variable and ranged from 8.08% to 8.29% during the period with a rate of 8.29% on June 30, 1997. There is a ten-year amortization of the debt with a five-year call. The loan is 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. The current portion of the debt is $595,607 at June 30, 1997. At June 30, 1996, long-term debt consisted of $5,500,467 owing to MetLife and 538,044 owing to GE Capital Corporation. Other long term contracts primarily various capital leases obligations amounted to $161,927. The current portion of these obligations amounted to $767,254 The estimated aggregate maturities required on long-term debt at June 30, 1997 are as follows: 1998 $ 595,607 1999 645,585 2000 699,757 2001 758,476 2002 5,573,953 Thereafter - ____________ $8,273,378 _____________ -12- FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 7. Common Stock, Options, and Treasury Stock. Common Stock: The Company issued 127,500 new restricted common shares at $8.17 per share to acquire Mach Performance, Inc. in October, 1996 from a director of the Company. During June 1997, the Company discontinued the operations and has filed a lawsuit asking for the rescission of the acquisition agreement from Mach Performance, Inc. to recover the 127,500 restricted common shares. (See Note 10 and 14). Subsequent to the year ended June 30, 1997, and reflected in the accompanying financial statements, the Company announced a three for two forward stock split. The shareholder record date was set at August 1, 1997, with fractional shares to be paid in cash on the payable date, August 14, 1997. Stock Options: Under the terms of the Company's qualified 1986 employee incentive stock option plan, which expired on December 5, 1996, options were authorized to purchase up to 300,000 shares of the Company's common stock at a price of no less than 100% of the fair market value on the date of grant as determined by the Board of Directors. Options can be exercised for a ten-year period from the date of grant. During Fiscal 1995, 30,000 options each were granted to the Chief Executive Officer and to the Chief Financial Officer at $3.94 and $3.67 per share respectively. During 1997, the Chief Financial Officer exercised his 30,000 options for $110,000. During October 1996, in connection with the acquisition of Mach Performance, Inc. the Company entered into an employment agreement with the director to continue to operate Mach Performance, Inc. and to head up the operations of Fountain Power, Inc.. The employment agreement provided that the Company issue a total of 30,000 options under the Company's qualified 1986 employee incentive stock option plan exercisable over a four year period (7,500 options exercisable each year on the anniversary date of the agreement). The director resigned his position as an employee during April 1997 and as a director during May 1997. The Company has filed a lawsuit seeking the return and cancelation of the options (See Note 10). On June 21, 1995, a special meeting of the shareholders was held to vote upon the adoption of the 1995 stock option plan. The new plan as adopted by the shareholders allowed up to 450,000 common stock options to be granted by the Board of Directors to employees or directors of the Company on either a qualified or non-qualified basis. Subsequently, on August 4, 1995, the Board unanimously voted to grant the entire 450,000 stock options authorized under the 1995 stock option plan to Mr. Reginald M. Fountain, Jr. at $4.67 per share on a non- qualified basis. None of the options granted to Mr. Fountain under the 1995 stock option plan have been exercised. Effective March 23, 1995, the Board of Directors authorized the issuance of stock options to purchase 30,000 shares of common stock to each of the Company's four outside directors at $3.58 per share on a non-qualified basis. During Fiscal 1997, one of the directors exercised his options for 24,000 shares for $86,000 and assigned, with the specific consent of the Company's Board of Directors, his remaining 6,000 options to another party. Subsequent to June 30, 1997, another director exercised his 30,000 stock options for $110,000. -13- FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 7. Common Stock, Options, and Treasury Stock. [Continued] A summary of the status of the options granted under the Company's stock option plans and other agreements at June 30, 1997, 1996 and 1995, and changes during the periods then ended is presented in the table below: 1997 1996 1995 __________________ _______________ _______________ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price _______ _______ _______ ______ ________ ______ Outstanding at beginning of period 630,000 $6.54 198,750 $4.01 24,375 $7.44 Granted 30,000 8.17 450,000 4.67 180,000 3.66 Exercised (54,000) 3.63 - - - - Forfeited - - - - - - Canceled - - (18,750) 7.44 (5,625) 7.44 __________ ______ ________ _____ ________ ______ Outstanding at end of Period 606,000 $4.63 630,000 $4.38 198,750 $4.01 __________ ______ ________ _____ ________ ______ Exercisable at end of period 576,000 $4.45 630,000 $4.38 198,750 $4.01 __________ ______ ________ _____ _________ _____ Weighted average fair value of options granted 30,000 $.28 450,000 $.22 180,000 $ .09 ________________ ______ ________ _____ _________ ______ The fair value of each option granted is estimated on the date of granted using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants during the year and period ended June 30, 1997, 1996 and 1995, respectively: risk-free interest rates of 6.6%, 6.3% and 6.3%, expected dividend yields of zero for all periods, expected lives of 4, 2 and 7 years, and expected volatility of 83%, 85% and 85%. A summary of the status of the options outstanding under the Company's stock option plans and other agreements at June 30, 1997 is presented below: Options Outstanding Options Exercisable _____________________________ _________________ Weighted Weighted Weighted Average Average Average Range of Number Remaining Exercise Number Exercise Exercise Outstanding Contractual Price Exercisable Price Prices Life __________ ________ __________ ______ ________ ______ $3.58 - $3.94 126,000 7.9 years $3.67 126,000 $3.67 $4.67 450,000 8.1 years $4.67 450,000 $4.67 $8.17 30,000 9.2 years $8.17 - - Included in the options outstanding at June 30, 1997 and 1996 are 60,000 and 30,000 options issued to a former director of the Company. The Company has filed a lawsuit seeking to have the options returned and canceled. (See Note 10). -14- FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 7. Common Stock, Options, and Treasury Stock. [Continued] The Company accounts for these plans and other option agreements under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. Accordingly, since all options granted were granted with exercise prices at market value or above, no compensation cost has been recognized in the accompanying financial statements. Had compensation cost for these options been determined based on the fair value at the grant dates for awards under these plans and other option agreements consistent with the method prescribed by Statement of Financial Accounting Standards No. 123, "Accounting for Stock- Based Compensation:, the Company's net income and earnings per common share would have been the proforma amounts as indicated below: Year Ended June 30, _________________________________ 1997 1996 1995 __________ _________ _________ Net Income As reported $1,239,951 $3,680,034 $2,047,876 Proforma $1,234,605 $3,617,601 $2,037,360 Earnings per share As reported $ .25 $ .81 $ .45 Proforma $ .25 $ .80 $ .45 Treasury Stock: The Company is holding 15,000 shares of its own common stock. This common stock is accounted for as treasury stock at its acquisition cost of $110,748 ($7.38 per share) in the accompanying financial statements. Note 8. Income Taxes. The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109. FASB 109 requires the Company to provide a net deferred tax asset or liability equal to the expected future tax benefit or expense of temporary reporting differences between book and tax accounting and any available operating loss or tax credit carryforwards. At June 30, 1997 and 1996, the totals of all deferred tax assets were $1,462,432 and $1,917,494. The totals of all deferred tax liabilities were $1,037,362 and $893,349. The amount of and ultimate realization of the benefits from the deferred tax assets for income tax purposes is dependent, in part, upon the tax laws in effect, the Company's future earnings, and other future events, the effects of which cannot be determined. Because of the uncertainty surrounding the realization of the deferred tax assets, the Company has established valuation allowances of $425,070 and $1,024,145 as of June 30, 1997 and 1996, respectively, which have been offset against the deferred tax assets. The net decrease in the valuation allowance during the year ended June 30, 1997, was $599,075. The Company has available at June 30, 1997 unused operating loss carryforwards of approximately $601,119, which may be applied against future taxable income and which expire in various years through 2010. -15- FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8. Income Taxes. [Continued] The Company incurred current tax expense amounting to $258,371 for Fiscal 1997 and $80,804 for Fiscal 1996 as a result of the federal alternative minimum income tax. The components of federal income tax expense from continuing operations consist of the following: Year Ended June 30, _____________________________________ 1997 1996 1995 ______________ _________ ___________ Current income tax expense: Federal $ 258,371 $ 80,804 $ 41,431 State 72,056 - 1,210 ______________ _________ ___________ Net current tax expense $ 330,427 $ 80,804 $ 42,641 ______________ __________ ___________ Deferred tax expense (benefit) resulted from: Excess of tax over financial accounting depreciation. $144,013 $(18,130) $67,663 Warranty reserves (42,300) (4,200) (35,700) Accrued vacations (8,107) (3,765) (5,137) Dealer incentive reserves (37,500) 42,000 7,258 Bad debt reserves (28,686) 1,260 1,260 Deferred sales and cost, net - 5,942 99,058 Excess contributions carryforwards - - 1,298 Inventory adjustment -Sec.263A (6,366) (12,304) (16,648) Decrease in NOL carryforwards 1,014,168 1,646,237 805,215 Decrease in valuation allowance (599,075) (1,573,833) (797,651) Allowance for obsolete inventory 3,000 (4,200) (16,800) Alternative minimum tax credits (256,982) (79,007) (41,431) Reserve for loss on disposition (171,756) - - Investment tax credits - - (86,294) Allowance for boat repurchases (10,409) - 17,909 ______________ ________ ___________ Net deferred tax expense $ - $ - $ - ______________ _________ ___________ Deferred income tax expense results primarily from the reversal of temporary timing differences between tax and financial statement income. -16- FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8. Income Taxes. [Continued] 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: Year Ended June 30, _____________________________________________ 1997 1996 1995 _______________________________________ Computed tax at the expected federal statutory rate. 34.00% 34.00% 34.00% Excess of tax over financial accounting depreciation - .43 (3.16) Warranty reserves - .10 1.67 State income taxes, net of federal benefit 5.00 5.28 5.28 Deferred sales and cost, net. - (.14) (4.62) Compensation from stock options (3.85) - - (Increase) decrease in NOL carryforwards (14.48) (38.82) (37.59) Officer's life insurance .78 - - Valuation allowance (16.08) - - Net effect of alternative minimum taxes .03 1.86 1.93 Investment tax credits - - 4.03 Other 2.11 (.56) .50 _______________________________________ Effective income tax rates 7.51% 2.15% 2.04% _______________________________________ The temporary differences gave rise to the following deferred tax asset (liability): June 30, ___________________________ 1997 1996 ________________________ Excess of tax over financial accounting depreciation $(1,037,362) $(893,349) Warranty reserve 214,500 72,200 Obsolete inventory reserve 39,000 42,000 Accrued vacations 48,063 9,957 Allowance for boat repurchases 97,500 7,091 Dealer incentive reserves 58,500 21,000 Bad debt reserve 40,026 1,340 Reserve for loss on disposition 171,756 - Inventory adjustments - Sec. 253A 124,992 118,626 NOL carryforwards 204,380 1,218,548 Alternative minimum tax credits 377,421 120,438 Investment tax credits.. 86,294 86,294 -17- FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 9. Research and Development. The Company expenses the costs of researching and developing new products and components as the costs are incurred. Research and development costs are included in the cost of sales and amounted to $635,652 for Fiscal 1997, $234,425 for Fiscal 1996, and $134,828 for Fiscal 1995. Note 10. Commitments and Contingencies. Employment Agreement: The Company entered into a one-year employment agreement in 1989 with its Chairman, Mr. Reginald M. Fountain, Jr. The agreement provides for automatic one- year renewals at the end of each year subject to Mr. Fountain's continued employment. 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 $1,009,285 for Fiscal 1997, $704,736 for Fiscal 1996, and $708,655 for Fiscal 1995. They are included in the accompanying consolidated statements of operations as part of selling expense. At June 30, 1997 and 1996 the estimated unpaid dealer incentive interest included in accrued expenses amounted to $150,000 and $50,000, respectively. 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 June 30, 1997, the Company had a contingent liability to repurchase boats in the event of dealer defaults and if repossessed by the commercial lenders amounting to approximately $8,600,000. The Company has reserved for the future losses it might incur upon the repossession and repurchase of boats from commercial lenders. The amount of the reserve is based upon probable future events which can be reasonably estimated. At June 30, 1997, the allowance for boat repurchases was $200,000. Also, in connection with one of its floor plan agreements with a lender, the Company has provided an irrevocable standby letter of credit in the amount of $250,000 as security for the lender. Utility Agreement: During 1997, the Company entered into a development agreement with Beaufort County, North Carolina. Under the agreement, the County will provide $522,802 towards the extension of community sewer and water service to the Company's plant site. The Company agreed to: 1). expand it's plant and purchase additional production equipment; 2) employ an additional fifty people by April 30, 1999, sixty percent whose household incomes are under low or moderate income limits. If the number of low or moderate income newly employed individuals falls below fifty one percent, then the entire $522,802 amount will become due and payable by the Company to the County. If the Company fails to create and maintain fifty new jobs specified prior to April 30, 1999, then the Company will reimburse the County $10,456 for each low to moderate income job not created up to a maximum of $522,802. -18- FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 10. Commitments and Contingencies. [Continued] Environmental: The Company has been notified by the United States Environmental Protection Agency (the "EPA") and the North Carolina Department of Environment, Health and Natural Resources ("NCDEHNR") that it has been identified as a potentially responsible party (a "PRP") and may incur, or may have incurred, liability for the remediation of ground water contamination at the Spectron/Galaxy Waste Disposal Site located in Elkton, Maryland and the Seaboard Disposal Site, located in High Point, North Carolina, also referred to as the Jamestown, North Carolina site, resulting from the disposal of hazardous substances at those sites by a third party contractor of the Company. The Company has been informed that the EPA and NCDEHNR ultimately may identify a total of between 1,000 and 2,000, or more, PRP's with respect to each site. The amounts of hazardous substances generated by the Company, which were disposed of at both sites, are believed to be minimal in relation to the total amount of hazardous substances disposed of by all PRP's at the sites. At present, the environmental conditions at the sites, to the Company's knowledge, have not been fully determined by the EPA and NCDEHNR, respectively, and the Company is not able to determine at this time the amount of any potential liability it may have in connection with remediation at either site. Without any acknowledgment or admission of liability, the Company has made payments of approximately $3,279 to date as a non-performing cash-out participant in an EPA-supervised response and removal program at the Elkton, Maryland site, and in a NCDEHNR-supervised removal and preliminary assessment program at the Jamestown, North Carolina site. A cash-out proposal for the next phase of the project is expected to be forthcoming from the PRP Group for the Elkton, Maryland site within the near future. According to the PRP Group, the Company's full cash-out amount is estimated to be approximately $10,000 for the Elkton, Maryland site, based upon an estimated 3,304 gallons of waste disposed of at that site by the Company. A cash-out proposal in the approximate amount of $66,000 based on an estimated 19,245 gallons of waste is anticipated from the PRP Group for the Jamestown, North Carolina site following completion of a remedial investigation and feasibility study in early 1998, according to the PRP Group administrator. Any such cash-out agreement will be subject to approval by EPA and NCDEHNR, respectively. The Company has accrued the estimated $76,000 liability related to these matters in the accompanying financial statements. Litigation: The Company was audited during Fiscal 1997 by the State of North Carolina under the Escheat and Unclaimed Property Statute. The State Treasurer's audit report was received and the Company paid a small amount of the escheated funds. However, the Company filed a dispute as to the remaining escheats property, amounting to approximately $65,000. The matter was appealed to the Administrative Office of the State of North Carolina. The dispute was subsequently resolved by the Company's payment of $3,090 to the state. -19- FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 10. Commitments and Contingencies. [Continued] Litigation: The Company received a demand letter, dated February 22, 1996, from a representative of a famous basketball player (Player), claiming damages in connection with an advertisement for the Company. The letter demanded payment of $1,000,000 unless the claim was resolved prior to filing suit. The Company put its primary and umbrella insurance carriers on notice after receiving the demand. On January 2, 1997, the Company filed suit in U.S. District Court for the Eastern District of North Carolina against the Player and his affiliated company and the advertising agency (an agency owned by a director of the Company) that produced the advertisement. The Company asserted that it had neither previewed nor authorized an advertisement using the Player's name and that the advertising agency had designed and run the advertisement without the Company's prior review and consent. The Company contends that it withdrew the advertisement after being contacted by the Player's counsel and that Player was not damaged by the advertisement. The Company further contends that it did not state that the Player was endorsing the product and that the Player has no legal claim to the usage of a certain word within the advertisement. Further, the Company claims that Player's counsel used coercion by threatening suit and that the Company should be awarded the costs of suit. On May 8, 1997, the Player and his affiliated company filed an answer, counterclaim, and crossclaim, alleging trademark infringement, unfair competition and trademark dilution, and seeking damages of $10,000,000, trebled, plus punitive and exemplary damages. On June 4, 1997, the Company filed a reply to the Counterclaim, denying the Player's allegations and seeking dismissal of the Counterclaims against it. A discovery plan was agreed to by all parties and filed on July 14, 1997. Discovery is scheduled to be completed by April, 1998, and is set for trail on October 13, 1998. Shortly after the Company filed suit in North Carolina, the Player and affiliated company filed suit against the Company and advertising agency on February 24, 1997, in U.S. District Court for the Northern District of Illinois. The Complaint alleges trademark infringement, unfair competition and trademark dilution, and seeks damages of $10,000,000, trebled, plus punitive and exemplary damages. By Order dated April 30, 1997, this matter was transferred to North Carolina. The Company has moved to dismiss the suit with prejudice because the claims are repetitions of the counterclaims in the Company's declaratory judgment suit. The Player has responded by requesting that his suit be dismissed without prejudice or consolidated with the Company's declaratory judgment action. The Company intends to vigorously defend its interests in these matters unless a reasonable and equitable settlement can be reached. -20- FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 10. Commitments and Contingencies. [Continued] Litigation: The Company filed suit on July 21, 1997, against a former officer and director and his wife, Mach, Inc., and Mach Performance, Inc. This suit was filed in U.S. District Court for the Eastern District of North Carolina, seeking rescission of an Agreement and Plan of Reorganization entered into in 1996 for the Company's acquisition of Mach Performance, Inc. in a merger transaction. The Company seeks rescission of the acquisition and merger agreement and voidance of the resulting transaction on grounds of fraud and material breach of contract. The federal securities fraud claims are based on the alleged deceptive acts in violation of Section 10(b) of the Securities Exchange Act of 1934, arising from the sale of Mach Performance, Inc. capital stock to the Company in exchange for the Company's issuance to them of 127,500 new restricted shares of its common stock valued at $1,041,250. Other claims include breach of fiduciary duty, based on North Carolina law, arising from the former director's alleged material misrepresentations and omissions as a director of the Company during the time when the acquisition and merger agreement was negotiated. The Company is seeking a preliminary and permanent injunction against the sale or transfer of its 127,500 new restricted common shares issued in the transaction, and is seeking monetary damages, including trebled and punitive damages in an unspecified amount, for the claims stated above, as well as for alleged actions by the former director and officer after the acquisition. The former director and his wife have filed counterclaims alleging breach of contract regarding the failure to merge the Company and regarding options issued to the former employee and director. The Company intends to vigorously pursue its claims in this suit, and to defend vigorously against any counterclaims or suits brought by against the Company. The Company is also seeking the return and cancelation of options to purchase 60,000 shares of common stock. Product Liability and Other Litigation: There were seven product liability lawsuits brought against the Company at June 30, 1997. The Company intends to vigorously defend its interests in these matters. The Company carries sufficient product liability insurance to cover attorney's fees and any losses which may occur from these lawsuits over and above the insurance deductibles. The Company is involved from time to time in other litigation through the normal course of its business. Management believes there are no such undisclosed claims which would have a material effect on the financial position of the Company. Note 11. Export Sales. The Company had export sales of $2,167,840 for Fiscal 1997, $1,052,816 for Fiscal 1996, and $507,097 for Fiscal 1995. Export sales were to customers in the following geographic areas: Year Ended June 30, ______________________________________________ 1997 1996 1995 ______________________________________ Americas $1,047,913 $658,738 $ - Asia 367,126 - 197,932 Middle East and Europe. 752,801 394,078 309,165 _______________________________________ $2,167,840 $1,052,816 $ 507,097 _______________________________________ -21- FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 12. Transactions with Related Parties. The Company paid or accrued the following amounts for services rendered or for interest on indebtedness to Mr. Reginald M. Fountain, Jr., the Company's Chairman, President, Chief Executive Officer, and Chief Operating Officer, or to entities owned or controlled by him: Year Ended June 30, ______________________________________________ 1997 1996 1995 _______________________________________ R.M. Fountain, Jr. -Apartments rentals $ 17,260 $ 15,380 $ 13,995 R.M. Fountain, Jr. - airplane rentals 296,498 155,499 104,469 R.M. Fountain, Jr. - interest on loans - 2,710 - R.M. Fountain, Jr. - other misc. 500 2,000 - _______________________________________ $ 314,258 $175,589 $ 118,464 _______________________________________ As of June 30, 1997 the Company had receivables and advances from employees of the Company amounting to $165,936 which includes $147,081 from Mr. Fountain. During March 1997, the Company purchase 4.84 acres of land, from Mr. Fountain for $123,000. The land is adjacent to the land owned by the Company for anticipated future expansion During the fourth quarter of Fiscal 1996, the Company borrowed $170,000 from Mr. Fountain to supplement its working capital. This loan was unsecured with interest at 12%. The loan was entirely repaid to Mr. Fountain by June 30, 1996. The Company paid $517,278, $265,985 and $138,116 for the year ended June 30, 1997, 1996 and 1995 for advertising and public relations services from a entity owned by a director of the Company. The Company acquired a subsidiary, Mach Performance, Inc., from a director of the Company for 127,500 shares of Common Stock in a stock for stock purchase (See Note 15). Prior to June 30, 1997, the Company received consulting fees pursuant to a consulting agreement with a vendor of the Company. Mr. Fountain has assigned these consulting fees to the Company. Included in other non-operating income are consulting fees earned by the Company amounting to $260,000 for Fiscal 1997, $610,420 for Fiscal 1996, and $452,911 for Fiscal 1995. The consulting agreement expired on June 30, 1997 and has not been re-negotiated. Note 13. Concentration of Credit Risk Concentration of credit risk arise due to the Company operating in the marine industry, particularly in the United States. For Fiscal 1997 one dealer accounted for 6.6% of sales and two other dealers each accounted for more than 5% of sales. For Fiscal 1996 one dealer accounted for 10.2% of sales and three other dealers each accounted for more than 5% of sales. For fiscal 1995 one dealer accounted for 9.8% of sales and four other dealers each accounted for more than 5% of sales. -22- FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 14. Acquisition and Discontinued Operations. The Company formed Fountain Power, Inc., a subsidiary of Fountain Powerboats, Inc. late in Fiscal 1996 to acquire Mach Performance, Inc., a propeller manufacturer, and to engage in the manufacturing of propellers and development of engines and propulsion systems. Mach Performance, Inc. was acquired on October 11, 1996, using the purchase method of accounting, in a stock for stock exchange (from a director of the Company) through the issuance of 127,500 restricted common shares valued at $8.167 per share or $1,041,250, which exceeded the fair market value of the net assets of Mach Performance, Inc. by $411,401. The excess was recorded as goodwill and was being amortized over 20 years. The operations were subsequently moved from Lake Hamilton, Florida to the Company's plant site near Washington, North Carolina in December, 1996. The operations never became profitable and during June, 1997, the Company adopted a plan to discontinue the operations of Mach Performance Inc. and Fountain Power, Inc. The accompanying financial statements have been reclassified to segregate the discontinued operations from continuing operations. Included in the operating losses from the discontinued operations is the write down of $395,761 of remaining goodwill and $461,422 of propeller inventory which management believes is not saleable. The Company also accrued an allowance for estimated losses expected to be incurred in the disposition of $440,401. During July, 1997, the Company filed suit against a former officer and director and his wife seeking rescission of the acquisition and merger agreement with Mach Performance, Inc. and voidance of the resulting transaction on grounds of fraud and material breach of contract. The Company is further asking that the 127,500 shares of common stock issued in the transaction be returned to the Company and that certain stock purchase options issued pursuant to an employment agreement also be rescinded and canceled. Net sales related to Mach Performance, Inc. for fiscal 1997 were $125,429. The following is a condensed proforma statement of operations that reflects what the presentation would have been for the year ended June 30, 1997 without the reclassifications required by "discontinued operations" accounting principles: 1997 _____________ Net Sales $50,954,753 Cost of goods sold (39,132,978) Other operating expenses (10,127,760) Other income (expense) (123,637) Provision for taxes (330,427) _____________ Net income $1,239,951 _____________ Earnings per share $ .25 _____________ -23- FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 14. Acquisition and Discontinued Operations. [Continued] Net (liabilities) of discontinued operations at June 30,1997 consisted of the following: 1997 ____________ Accounts receivables $ 4,174 Prepaid expenses 14,371 Equipment, net 539,457 Accounts payable (226,332) Warranty & returns reserve (100,000) Customer deposits (4,966) Estimated loss on disposal (440,401) ____________ $213,697 ____________ Note 15. Subsequent Events. During July 1997, the Company approved a three-for-two forward stock split of all its previously issued and outstanding common stock including options to purchase common stock (effectively a three share for two share stock dividend). The split was accomplished during August. The effect of the common stock split has been reflected in these financial statements (See Note 1 and 7). During July 1997, a director of the Company exercised stock options held by him to acquire 30,000 shares of the Company's common stock for $110,000 (See Note 7). Prior to fiscal 1993, the Company owned and operated an aircraft. During fiscal 1993, the aircraft was sold to officer and director of the Company. The Company has been leasing airplane services from the officer and director since that time. During September 1997, the board of directors determined to acquire an airplane for the Company and approved the acquisition of an airplane from Mr. Fountain for $1,375,000. The Company will issue a note payable to Mr. Fountain for approximately $420,000 and will also assume the remaining underlying indebtedness on the airplane. Effective October 1, 1997, Fountain Trucking, Inc., Fountain Sportswear, Inc., Fountain Aviation, Inc. and Fountain Unlimited, Inc. were dissolved. In connection with the dissolution of the subsidiaries the operations of Fountain Trucking, Inc., and Fountain Sportswear, Inc. were transferred to Fountain Powerboats, Inc. (See Note 1). -24- EX-27 2
5 1,000 YEAR JUN-30-1997 JUN-30-1997 2,995 696 1,897 30 3,938 10,997 24,554 12,335 23,714 6,305 0 0 0 47 9,315 23,714 50,514 50,514 36,976 36,976 9,018 0 558 4,400 330 4,070 (2,830) 0 0 1,240 .25 0
EX-10 3 AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and entered into as of October 11, 1996, and is by and between Fountain Powerboat Industries, Inc. ("Industries"), a Nevada corporation, Fountain Powerboats, Inc. ("Powerboats", a North Carolina corporation and a wholly owned subsidiary of Industries, Fountain Power, Inc. ("Power"), a North Carolina corporation and a wholly owned subsidiary of Powerboats, and Mach Performance, Inc. ("Mach"), a Florida corporation. R E C I T A L S WHEREAS, the Boards of Directors of Industries, Powerboats, Power and Mach deem it advisable and in the best interests of Industries, Powerboats, Power and Mach and their respective shareholders that Power and Mach combine; and WHEREAS, Industries is a public company; and WHEREAS, Industries is the owner of all the outstanding shares Powerboats, which, in turn, is the owner of all of the outstanding shares of Power; and WHEREAS, the Boards of Directors of Industries, Powerboats, Power and Mach deem it advisable that the acquisition by Industries of Mach be effected through the merger of Power and Mach (the "Merger") pursuant to this Agreement and an Agreement of Merger; and WHEREAS, Industries desires to acquire all of the outstanding Mach shares for Eighty-five Thousand (85,000) shares of voting Common Stock of Industries, which common shares shall be restricted from sale, transfer, or hypothecation, as follows: Twenty-eight Thousand Three Hundred and Thirty-three (28,333) shares shall be restricted until October 11, 1998, and Twenty-eight Thousand Three Hundred and Thirty-three (28,333) shares shall be restricted until October 11, 1999, and Twenty-eight Thousand Three Hundred and Thirty-four (28,334) shares shall be restricted until October 11, 2000. The foregoing shares shall bear appropriate legends on the share certificates restricting that shares from sale, transfer, or hypothecation, in a transaction that qualifies under Section 368(a)(2)(D) of Internal Revenue Code of 1986, as amended (the "Code"); and In the event of any merger, consolidation, reorganization or liquidation of Industries with one or more corporations in which Industries is not the surviving corporation, or the transfer of substantially all of Industries assets, or the transfer of more than fifty percent (50%) of the then outstanding shares of Common Stock of Industries to any person, persons, or corporations ("change of control"), then in that event Industries Board of Directors shall authorize the termination of the foregoing common stock restrictions, and WHEREAS, the Board of Directors of Industries, Powerboats, Power and Mach intend that the Merger constitute a "reorganization" under Sections 268 (a)(2)(D) and 368 (a)(2)(E) of the Internal Revenue Code of 1986, as amended (the "Code"), and the rules and regulations of the Internal Revenue Service (the "IRS") promulgated thereunder, have approved and adopted this Agreement as a "plan of reorganization" within the meaning of Section 368 of the Code, and the rules and regulations of the IRS promulgated thereunder, and intend that the Merger be treated as a tax free merger under the Code and the rules and regulations of the IRS promulgated thereunder. NOW, THEREFORE, in consideration of the mutual agreements hereinafter set forth, the parties hereto, intending to be legally bound, hereby agree as follows: I. MERGER 1.01 Merger. Power and Mach shall merger pursuant to the North Carolina General Corporation Law (the "Merger") and in accordance with the Agreement of merger among Industries, Powerboats, Power and Mach (the "Agreement of Merger"), a copy of which is attached hereto as Exhibit 1.01. The Merger shall be effective on the date on which the Agreement of Merger, or a conformed copy thereof, in substantially the form annexed hereto as Exhibit 1.01, is filed with the Secretary of the State of North Carolina, which filing shall take place upon Closing. 1.02 Closing. The Closing of the transaction contemplated by this Agreement (the "Closing") shall take place as soon as practicable, but is expected to take place prior to December 31, 1996. At Closing, and pursuant to the Agreement of Merger, all outstanding shares of Common Stock of Mach shall be cancelled and in lieu thereof shareholders of Mach common stock shall receive an aggregate of Eighty-five Thousand (85,000) shares of Industries Common Stock, which stock will be restricted from sale, transfer, or hypothecation as provided above. At Closing, Industries, Powerboats, Power and Mach shall deliver the following documents: 1.02(a). Each of Industries, Powerboats, Power and Mach shall deliver an officer's certificate signed by its president or chief financial officer, certifying that the representations and warranties given by Industries, Powerboats, Power and Mach, respectively, are true and correct as of the Closing. - 2 - 1.02(b). Mach shall deliver to Industries certified copies of resolutions of the Company's Board of Directors, electing the following persons as members of Mach's Board of Directors and the following persons as directors and officers of Mach: Reginald M Fountain, Jr. - Chairman of the Board Gary D. Garbrecht - Director Gary E. Mazza, III - Director Federico Pignatelli - Director Mark L. Spencer - Director Reginald M. Fountain, Jr. - Chief Executive Officer Gary D. Garbrecht - President Allan L. Krehbiel - Vice President and Chief Financial Officer Blanche C. Williams - Secretary & Treasurer Carol J. Price - Assistant Secretary 1.02(c). Industries, Powerboats, and Power shall deliver to Mach certified resolutions of their respective Boards of Directors authorizing the Merger and the transactions contemplated by this Agreement. 1.02(d). Mach shall deliver to Industries, Powerboats, and Power certified resolutions of its board of Directors and shareholders authorizing the Merger and the transactions contemplated by this Agreement. 1.02(e). Industries' subsidiary, Powerboats, and Gary D. Garbrecht shall enter into an Employment Agreement in the form attached hereto as Exhibit 1.02. II. REPRESENTATIONS AND WARRANTIES OF MACH Mach represents and warrants to Industries, Powerboats, and Power as follows, as of the date of this Agreement and as of the Closing: 2.01. Organization. 2.01(a). Mach is a corporation duly organized, validly existing and in good standing under the laws of the State of Florida; Mach has the corporate poser and authority to carry on its business as presently conducted; and Mach is qualified to do business in all jurisdictions where the failure to be so qualified would have a material adverse effect on its business. 2.01(b). The copies of the Articles of Incorporation and all amendments thereto of Mach as certified by the Secretary of State of Florida, and the copy of the Bylaws as certified by the Secretary of Mach, which have heretofore been delivered to Industries, are complete and correct copies of such Articles of - 3 - Incorporation as amended and in effect on the date hereof. All minutes and actions in writing without a meeting of the Board of Directors and shareholders of Mach are contained in the minute book of Mach heretofore delivered to Industries for examination, and no minutes or actions in writing have been included in such minute book since delivery to Industries that have not also been delivered to Industries. 2.02. Capitalization. 2.02(a). The authorized capital stock and the issued and outstanding shares of Mach are as set forth on Exhibit 2.02(a). All of the issued and outstanding shares of Mach are duly authorized, validly issued, fully paid and nonassessable. 2.02(b). Except as set forth in Exhibit 2.02(b) there are no outstanding options, warrants, or rights to purchase any securities of Mach. 2.03. Subsidiaries and Investments. Mach does not own any capital stock or have any interest in any corporation, partnership or other form of business organization, except as described in Exhibit 2.03 hereto. 2.04. Financial Statements. The unaudited financial statements of Mach as of June 30, 1996 and for the two years ended December 31, 1995 and 1994, including unaudited balance sheets and the related unaudited statements of operations, retained earnings, and cash flows for the periods then ended and the audited financial statements of Mach as of August 31, 1996 and for the eight months ended August 31, 1996 (the "Financial Statements") present fairly the financial positions and results of operations of Mach, on a consistent basis. 2.05. No Undisclosed Liabilities. Other than as described in Exhibit 2.05 hereto, Mach is not subject to any material liability or obligation of any nature, whether absolute, accrued, contingent, or otherwise and whether due or to become due, which is not reflected or reserved against in the Financial Statements, except those incurred in the normal course of business. 2.06. Absence of Material Changes. Since June 30, 1996, except as described in any Exhibit hereto or as required or permitted under this Agreement, there has not been: 2.06(a). any material change in the condition (financial or otherwise) of the properties, assets, liabilities or business of Mach, except changes in the ordinary course of business which, individually and in the aggregate, have not been materially adverse: - 4 - 2.06(b). any redemption, purchase or other acquisition of any shares of the capital stock of Mach, or any issuance of any shares of capital stock or the granting, issuance or exercise of any rights, warrants, options or commitments by Mach relating to their authorized or issued capital stock; or 2.06(c). any change or amendment to the Articles of Incorporation of Mach. 2.07. Litigation. Except as set forth in Exhibit 2.07 attached hereto, there is no litigation, proceeding or investigation pending or threatened against Mach affecting any of its properties or assets against any officer, director, or stockholder of Mach that might result, either in any case or in the aggregate, in any material adverse change in the business, operations, affairs or condition of Mach or its properties or assets, or that might call into question the validity of this Agreement, or any action taken or to be taken pursuant hereto. 2.08. Title To Assets. Mach has good and marketable title to all of its assets and properties now carried on its books including those reflected in the balance sheets contained in the Financial Statements, free and clear f all liens, claims, charges, security interests or other encumbrances, except as described in Exhibit 2.08 attached hereto or any other Exhibit. 2.09. Real Estate. There is set forth on Exhibit 2.09 attached hereto a brief description of all real estate (including building and improvements) owned and held by Mach, together with a legal description of such real estate. Mach has good and marketable title to such real estate in fee simple and clear of any encumbrances whatsoever except as shown on Exhibit 2.09 hereto. 2.10. Contracts and Undertakings. Mach is not in material default, or alleged to be in material default, under any contact, agreement, lease, license commitment, instrument or obligation and no other party to any contract, agreement, lease, license, commitment, instrument or obligation to which Mach is a party is in default thereunder nor does there exist any condition or event which, after notice or lapse of time or both, would constitute a default by any party to any such contract, agreement, lease, license, commitment, instrument or obligation. These contracts and undertakings shall be delivered at Closing. 2.11. Underlying Documents. Copies of all documents described in any exhibit attached hereto (or a summary of any such contract, agreement or commitment, if oral) have been made available to Industries and are complete and correct and include al amendments, supplements or modifications thereto. - 5 - 2.12. Transactions with Affiliates, Directors and Shareholders. Except as set forth in Exhibit 2.12 hereto, there are and have been no contracts, agreements, arrangements or other transactions between Mach on the one hand, and any officer, director, or shareholder of Mach, or any corporation or other entity controlled by them. 2.13. No Conflict. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby will not conflict with or result in a breach of any term or provision of, or constitute a default under, the Articles of Incorporation or Bylaws of Mach, or any agreement, contract or instrument to which Mach is a party or by which it or any of its assets are bound. 2.14. Ownership of Intellectual Property Rights. Mach owns or has valid right or license to sue on all patents, patent rights, trade secrets, trademarks, trademark rights, trade names, trade name rights, copyrights and other intellectual property rights (collectively referred to as "Intellectual property Rights") which are necessary to operate its business as now proposed to be operated. Mach does not have any obligation to compensate any person, firm, corporation, or other entity for the use of any such Intellectual Property Rights, nor has Mach granted to any person, firm, corporation or other entity any license or other rights to use in any manner, or waived its rights with respect to any Intellectual Property Rights of Mach. 2.15. Disclosure. To the actual knowledge of Mach, neither this Agreement, the Financial Statements nor any other agreement, document, certificate or written or oral statement furnished to Industries by or on behalf of Mach in connection with the transactions contemplated hereby, contains any untrue statement of a material fact which when taken as a whole omits to state a material fact necessary in order to make the statements contained herein or therein not misleading. 2.16. Authority. Mach has full Power and authority to enter into this Agreement and to carry out the transactions contemplated herein. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, have been duly authorized and approved by the Board of Directors of Mach and no other corporate proceedings on the part of Mach are necessary to authorize this Agreement and the transactions contemplated hereby. III. REPRESENTATIONS AND WARRANTIES OF INDUSTRIES, POWERBOATS, AND POWER Each of Industries, Powerboats and Power hereby represents and warrants to Mach as follows, as of the date of this Agreement and as of the Closing: - 6 - 3.01. Organization. 3.01(a). Each of Industries, Powerboats, and Power is a corporation duly organized, validly existing, and in good standing under the laws of its state of incorporation; has the corporate Power and authority to carry on its business as presently conducted; and is qualified to do business in all jurisdictions were the failure to be so qualified would have a material adverse effect on the business of Industries, Powerboats, or Power. 3.01(b). The copies of the charter documents, of Industries, Powerboats, and Power, as certified by the Secretary of Industries, Powerboats, and Power are complete and correct copies of such documents as amended and in effect on the date hereof. All minutes of meetings and actions in writing without a meeting of the Boards of Directors and shareholders of Industries, Powerboats and Power are contained in their respective minute books and no minutes or actions in writing without a meeting have been included in such minute book since such delivery to Mach that have not also been delivered to Mach. 3.02. Capitalization. The authorized capital stock of Industries consists of 200,000 000 shares of common stock, par value $.01 per share, of which 3,044,072 shares are outstanding including 10,000 shares owned by Fountain Powerboats, Inc. the outstanding capital stock of Power consists of 10,000 shares of common stock, par value of $1.00, all of which are outstanding. All outstanding shares are duly authorized, validly issued, fully paid and non-assessable. 3.03. Reporting Documents. Industries has delivered to Mach copies of its Annual Report on Form 10-K for the year ended June 30, 1996 (the "10-K") and its quarterly report on Form 10-Q for the quarter ended September 30, 1996 (the "10-Q"). The 10-K and 10-Q comply in all material respects with the requirements of the Securities Exchange Act of 1934 (the "Exchange Act'). 3.04. Authority. Each of Industries, Powerboats, and Power has full power and authority to enter into this Agreement and to carry out the transactions contemplated herein. The execution and delivery of this Agreement and the Agreement of merger and the consummation of the transactions contemplated hereby, have been duly authorized and approved by the respective Boards of Directors of Industries, Powerboats, and Power. 3.05. No Conflict. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby will not conflict with or result in a breach of any term or provision of, or constitute a default under, the charter documents or Bylaws of Industries, Powerboats, or Power, or any agreement, contract or instrument to which Industries, Powerboats, or Power is a party or by which it or any of its assets are bound. - 7 - 3.06. Disclosure. To the actual knowledge of Industries, Powerboats, or Power, neither this Agreement, the 10-K or the 10- Q nor any other agreement, document, certificate or written or oral statement furnished to Mach by or on behalf of Industries, Powerboats, or Power in connection with the transactions contemplated hereby, contains any untrue statement of a material fact or when taken as a whole omits to state a material fact necessary in order to make the statements contained herein or therein not misleading. 3.07. Absence of Material Changes. Since September 30, 1996, except as described in any Exhibit hereto or as required or permitted under this Agreement, there has not been: 3.07(a) any material change in the condition (financial or otherwise) of the properties, assets, liabilities or business of Industries, Powerboats, or Power, except changes in the ordinary course of business which, individually and in the aggregate, have not been materially adverse. 3.07(b) any redemption, purchase or other acquisition of any shares of the capital stock of Industries, Powerboats, or Power, or any issuance of any shares of capital stock or the granting, issuance or exercise of any rights, warrants, options or commitments by Industries, Powerboats, or Power relating to their authorized or issued capital stock. 3.07(c) any amendment to the Certificate of Incorporation of Industries or Articles of Incorporation of Powerboats or power. IV. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS 4.01. All representations, warranties and covenants of Industries, Powerboats, Power and Mach contained herein shall survive the consummation of the transactions contemplated herein and remain in full force and effect. V. CERTAIN UNDERSTANDINGS AND AGREEMENTS 5.01 Audit and Appraisal. Upon execution of this Agreement, Mach shall cooperate fully with the accounting firm of Pritchett, Siler & Hardy to perform an audit of Mach's financial statements as of and for the period ending August 31, 1996 (the "Audit"). Mach shall also cooperate fully with an appraiser to be selected by industries for the purpose of appraising Mach's assets as of August 31, 1996 (the "Appraisal"). the cost of the Audit and the Appraisal shall be borne by Industries. - 8 - VI. CONDITIONS TO CLOSING 6.01 Conditions to Obligations of Mach. The obligations of Mach under this Agreement shall be subject to each of the following conditions: 6.01(a) Representations and Warranties of Industries, Powerboats, and Power to be True. The representations and warranties of Industries, Powerboats, and Power herein contained shall be true in all material respects at the Closing with the same effect as though made at such time. Industries, Powerboats and Power shall have performed in all material respects all obligations and complied in all material respects, to their actual knowledge, with all covenants and conditions required by this Agreement to be performed or complied with by them at or prior to the Closing. 6.01(b) No legal Proceedings. No injunction or restraining order shall be in effect, and no action or proceeding shall have been instituted and, at what would otherwise have been the Closing, remain pending before a court to restrain or prohibit the transactions contemplated by this Agreement. 6.01(c) Statutory Requirements. All statutory requirements for the valid consummation by Industries, Powerboats, and Power of the transactions contemplated by this Agreement shall have been fulfilled. All authorizations, consents and approvals of all governments and other persons required to be obtained in order to permit consummation by Industries, Powerboats, and Power of the transactions contemplated by this Agreement and to continue unimpaired in all material respects immediately following the Closing shall have been obtained. 6.01(d) Closing Documents. Industries, Powerboats, and Power shall have executed and delivered all documents required to be executed and delivered by Industries, Powerboats, and Power pursuant to this Agreement. 6.02 Conditions to Obligations of Industries, Powerboats, and Power. The obligations of Industries, Powerboats, and Power under this Agreement shall be subject to the following conditions: 6.02(a) Representations and Warranties of Mach to be True. The representations and warranties of Mach herein contained shall be true in all material respects as of the Closing, and shall have the same effect as though made at the Closing; Mach shall have performed in all material respects all obligations and complied in all material respects, to its actual knowledge, with all covenants and conditions required by this Agreement to be performed or complied with by it prior to the Closing. - 9 - 6.02(b) No Legal Proceedings. No injunction or restraining order shall be in effect prohibiting this Agreement, and no action or proceeding shall have been instituted and, at what would otherwise have been the Closing, remain pending before a court to restrain or prohibit the transactions contemplated by this Agreement. 6.02(c) Statutory and Other Requirements. All statutory requirements for the valid consummation by Mach of the transactions contemplated by this Agreement shall have been fulfilled; all authorizations, consents and approvals of all Governmental agencies and authorities to be obtained in order to permit consummation by Mach of the transactions contemplated by this Agreement shall have been obtained. 6.02(d) The audited Balance Sheet of Mach as of August 31, 1996 shall reflect net worth (total assets less total liabilities) of Mach to be no less than Six Hundred Thirty- Thousand and Forty Dollars ($630,040) after adjustment for the appraised value of the machinery and equipment and after the reclassification of Ninety-four Thousand and Ninety-four Dollars ($94,094) and Three Hundred and Thirty-one Thousand Seven Hundred and Sixty-three Dollars ($331,763) from debt owing to Mach shareholders to equity of Mach shareholders. It is expressly understood that Industries, Powerboats, and Power shall not assume the aforementioned indebtednesses to Mach shareholders, but rather, that these indebtednesses will be treated as part of the equity of Mach in this transaction. VII. TERMINATION OF OBLIGATIONS AND WAIVERS OF CONDITIONS; PAYMENT OF EXPENSES 7.01 Termination of Agreement. Anything herein to the contrary notwithstanding, this Agreement may be terminated at any time before the Closing as follows and in no other manner; 7.01(a) Mutual Consent. By mutual consent of Industries, Powerboats, Power and Mach. 7.01(b) Expiration Date. By either Industries, Powerboats, Power and Mach if the Closing shall not have taken place by December 31, 1996, which date may be extended by mutual agreement of Industries, Powerboats, Power and Mach. 7.02. Payment of Expenses; Waiver of Conditions. In the event that this Agreement shall be terminated pursuant to Section 7.01 all obligations of the parties under this Agreement shall terminate and there shall be no liability of any party to the other. Each party hereto will pay all costs and expenses incident to its negotiation and preparation of this Agreement and performance of and compliance with all agreements and conditions contained herein or therein on its part to be performed or complied with, including the fees, expenses and disbursements of counsel. - 10 - If any of the conditions specified in Section 6.01 hereof has not been satisfied, Mach may nevertheless a the election of Mach proceed with the transactions contemplated hereby and if any of the conditions specified in Section 6.02 hereof has not been satisfied, Industries, Powerboats, and Power may nevertheless at their joint election proceed with the transactions contemplated hereby. In the event that the Closing shall be consummated, each party hereto will pay all of its costs and expenses in connection therewith. XIII. MISCELLANEOUS 8.01 Finder's Fees, Investment Banking Fees. Neither Industries, Powerboats, Power nor Mach have retained or used the services of any person, firm or corporation in such manner as to require the payment of any compensation as a finder or a broker in connection with the transactions contemplated herein. 8.02 Tax Treatment. The transaction contemplated hereby is intended to qualify as a so-called "tax-free" reorganization under the provisions of Section 368 of the Internal Revenue Code. Industries, Powerboats, Power and Mach acknowledge, however, that they each have been represented by their own tax advisors in connection with this transaction; that they have not made any representations or warranties to the others with respect to the tax treatment of such transaction or the effect thereof under applicable tax laws, regulations, or interpretations; and that no attorney's opinion or private revenue ruling has been obtained with respect to the effects thereof under the Internal Revenue Code of 1986, as amended. 8.03 Further Assurances. From time to time, at the other party's request and without further consideration, each of the parties will execute and deliver to the others such documents and take such action as the other party may reasonably request in order to consummate more effectively the transactions contemplated hereby. 8.04 Parties in Interest. Except as otherwise expressly provided herein, all the terms and provisions of this Agreement shall be binding upon, shall inure to the benefit of and shall be enforceable by the respective heirs, beneficiaries, personal and legal representatives, successors and assigns of the parties hereto. 8.05 Entire Agreement; Amendments. This Agreement, including the schedules, Exhibits and other documents and writings referred to herein or delivered pursuant hereto, which form a part hereof, contains the entire understanding of the parties with respect to this subject matter. There are no restrictions, agreements, promises, warranties, covenants or undertakings other than those - 11 - expressly set forth herein or therein. This Agreement supersedes all prior agreements and understandings between the parties with respect to this subject matter. This Agreement may be amended only by a written instrument duly executed by the parties or their respective successors or assigns. 8.06 Headings, Etc. The section and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretations of this Agreement. 8.07 Pronouns. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine or neuter, singular or plural, as the identity of the person, persons, entity or entities may require. 8.08 Counterparts. this Agreement may be executed in several counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 8.09 Governing Law. This Agreement shall be governed by the laws of the State of North Carolina applicable to contracts to be performed in the State of North Carolina. IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the parties hereto as the date first above written. FOUNTAIN POWERBOAT MACH PERFORMANCE, INC. INDUSTRIES, INC. FOUNTAIN POWERBOATS, INC. /S/REGINALD M. FOUNTAIN, JR. /S/GARY D. GARBRECHT Reginald M. Fountain, Jr. Gary D. Garbrecht Chairman, President Chairman, President, and Chief Executive officer, Chief Executive Officer and Chief Operating Officer FOUNTAIN POWER, INC. /S/GARY D. GARBRECHT Gary D. Garbrecht President and Chief Operating Officer - 12 - I HEREBY CERTIFY that I am the duly elected and qualified secretary of MACH PERFORMANCE, INC., a Florida corporation and the keeper of the records and corporate seal of said corporation; that the following is a resolution duly adopted at a meeting of the Board of Directors thereof held in accordance with its by- laws at its offices at Lake Hamilton, Florida on the _____ day of ________, 1996, and that the same are now in full force. Resolution "BE IT RESOLVED, That the President and Vice President/Secretary/Treasurer of this corporation, as well as Gary Garbrecht, individually and Marcia Garbrecht, individually the owners of all the shares of the corporation, hereby agree to the merger of this corporation with Fountain Powerboat Industries, Inc. I HEREBY CERTIFY that the following named persons have been duly elected to the offices set opposite their respective names, that they continue to hold these offices at the present time, and that the signatures appearing hereon are the genuine, original signatures of each respectively: GARY GARBRECHT President/ /S/GARY D. GARBRECHT Shareholder (signature) MARCIA GARBRECHT Vice President Secretary/Treasurer/ /S/MARCIA GARBRECHT Shareholder (signature) IN WITNESS WHEREOF, I have hereunto affixed by name as secretary and have caused the corporate seal of said corporation to be hereto affixed this 19th day of March, 1997. /S/MARCIA GARBRECHT MARCIA GARBRECHT Secretary fountain\cooperative.cr CORPORATE RESOLUTION I HEREBY CERTIFY that I am the duly elected and qualified secretary of MACH PERFORMANCE, INC., A Florida corporation and the keeper of the records and corporate seal of said corporation; that the following is a resolution duly adopted at a meeting of the Board of Directors thereof held in accordance with its by- laws at its offices at Lake Hamilton, Florida on the ____ day of _____, 1996, and that the same are now in full force. Resolution "BE IT RESOLVED, That the Board of Directors of Mach Performance, Inc. and its shareholders have duly elected as members of Mach Performance, Inc.'s Board of Directors the following person as directors and officers: Reginald M Fountain, Jr. - Chairman of the Board Gary D. Garbrecht - Director Gary E. Mazza, III - Director Federico Pignatelli - Director Mark L. Spencer - Director Reginald M. Fountain, Jr. - Chief Executive Officer Gary D. Garbrecht - President Allan L. Krehbiel - Vice President and Chief Financial Officer Blanche C. Williams - Secretary & Treasurer Carol J. Price - Assistant Secretary I HEREBY CERTIFY that the following named persons have been duly elected to the offices set opposite their respective names, that they continue to hold these offices at the present time, and that the signatures appearing hereon are the genuine original signatures of each respectively: GARY GARBRECHT President /S/GARY GARBRECHT (signature) MARCIA GARBRECHT Vice President Secretary/Treasurer /S/MARCIA GARBRECHT (signature) IN WITNESS WHEREOF, I have hereunto affixed by name as secretary and have caused the corporate seal of said corporation to be hereto affixed this 19th day of March, 1997. /S/MARCIA GARBRECHT MARCIA GARBRECHT Secretary fountain\cooperative.cr2 EXHIBIT 1.01 ARTICLES OF MERGER THESE ARTICLES OF MERGER, dated as of October 11, 1996, are entered into by and between Mach Performance, Inc. ("Mach"), a Florida corporation, Fountain Power, Inc. ("Power"), a North Carolina corporation, Fountain Powerboats, Inc. ("Powerboats"), a North Carolina corporation, and Fountain Powerboat Industries, Inc. ("Industries"), a Nevada Corporation, such corporations being hereinafter collectively referred to as the "Constituent Corporations." Power is sometimes hereinafter referred to as the "Surviving Corporation." These Articles of Merger set forth the Plan of Merger described in Section 55-11-01 of the North Carolina Business Corporation act. RECITALS A. Industries is a Nevada corporation authorized to issue 200,000,000 shares of common stock $.01 par value (the "Industries Common Stock"), of which 3,044,072 shares are issued and outstanding at the date hereof. B. Mach is a Florida corporation authorized to issue 10,000 shares of common stock, $1.00 par value (the "Mach Common Stock"), of which 5,465 shares are issued and outstanding as of the date hereof. C. Industries owns all of the capital stock of Powerboats, which, in turn, owns all of the capital stock of Power. D. The respective Boards of Directors of each of the Constituent Corporation deem it advisable and in the best interests of the respective corporations and their respective shareholders that Mach be merged with and into Power on the terms and conditions hereinafter set forth in accordance with the provisions of Sections 55-11-01 and 55-11-03 to 55-11-05 inclusive of the North Carolina Business Corporation Act. E. On October 11, 1996, the Board of Directors of Power adopted the following resolution, which resolution has not been amended or revoked and is in full force and effect as of the date hereof, and which resolution constitutes all approval required for the merger of Mach with and into Power under Sections 55-11- 01 and 55-11-03 to 55-11-05 inclusive of the North Carolina Business Corporation Act: RESOLVED, That Power merge with and into Mach with Power being the surviving corporation, pursuant to Articles of Merger to be executed and acknowledged by Power. F. The merger of Mach into Power was approved by Industries and Powerboats, and Powerboats holds all of the 10,000 outstanding shares of Power common stock, which is the only class of stock outstanding, acting by consent action in accordance with Section 55-7-04 of the North Carolina Business Corporation Act. - 13 - G. By execution these Articles of merger, then merger of Mach with and into Power has been approved, in accordance with Section 55-11-03(b0(2) of the North Carolina Business Corporation Act. H. On October 11, 1996, the Board of Directors of Mach adopted the following resolution, which resolution has not been amended or revoked and is in full force and effect as of the date hereof. RESOLVED, that Mach merge with and into Power, with Power being the surviving corporation, pursuant to Articles of Merger to be executed and acknowledged by Mach. I. The merger of Mach into Power was approved by shareholders holding all of the outstanding shares of Mach common stock, which is the only class of stock outstanding, acting by consent action in accordance with Section 55-7-04 of the North Carolina business Corporation Act. J. By execution and acknowledgment of these Articles of Merger, the merger of Mach with and into Power has been approved in accordance with the North Carolina Business Corporation Act. NOW, THEREFORE, in order to prescribe (a) the terms and conditions of the Merger; (b) to method of carrying the same into effect; (c) the manner and basis of converting and exchanging the shares of Mach's Common Stock into shares of Common Stock of Industries; and (d) such other details and provisions as are deemed necessary or desirable; and in consideration of the foregoing recitals and the agreements, provisions and covenants herein contained, Industries, Powerboats, Power and Mach hereby agree as follows: 1. Effective Date. The Merger shall become effective upon the filing of a copy of these Articles of Merger with the Secretary of State of North Carolina, as required by Section 55- 11-05 of the North Carolina Business Corporation Act. The date and time on which the Merger becomes effective is hereinafter referred to as the "Effective Date." 2. Merger. At the Effective Date, Mach shall merger with and into Power with Power being the Surviving Corporation and the separate corporate existence of Mach shall cease. The corporate identity, existence, purposes, franchises, powers, rights and immunities of Mach at the Effective Date shall be merged into Power which shall be fully vested therewith. Power shall be subject to all of the debts and liabilities of Mach as if power had itself incurred them and all rights of creditors and all liens upon the property of each of Mach and Power shall e preserved unimpaired, provided that such liens, if any, upon the property of Power shall be limited to the property affected thereby immediately prior to the Effective Date. - 14 - 3. Articles of Incorporation. At the Effective Date, the Articles of Incorporation of Power shall be the Articles of Incorporation of the Surviving Corporation. 4. Effect of Merger on Outstanding Shares. (a) Surviving Corporation. Each share of Power Common Stock issued and outstanding immediately prior to the Effective Date of the Merger shall continue to be outstanding. (b) Disappearing Corporation. At the Effective Date, each issued and outstanding share of Mach Common Stock shall be cancelled. 5. Surrender of Share Certificates. After the Effective Date, each holder of an outstanding certificate which prior to the Effective Date evidenced Mach Common Stock shall surrender the same, duly endorsed as Power may require, to Industries or its designated agent for cancellation. Thereupon the shareholders of Mach shall receive in exchange therefor 85,000 restricted common shares of Industries as provided in the Agreement and Plan of Reorganization of October 11, 1996. 6. Status of Power Common Stock After the Effective Date. (a) After the Effective Date, until surrendered in accordance with Section 5 hereof, each outstanding certificate which prior to the Effective Date represented shares of Mach Common Stock, shall be deemed for all corporate purposes (subject to the further provision of this Section 6(a) to evidence Power Common Stock in accordance with the terms of this Agreement of merger. After the Effective Date, there shall be no further registry of transfers on the records of Mach common Stock outstanding immediately prior to the Effective Date, and, if certificates representing such shares are presented to Power or Industries, as the successor of Mach, they shall be cancelled, and the holder thereof shall be entitled to receive Industries Common Stock in accordance with the terms of the Agreement and plan of Reorganization of October 11, 1996. No dividends or distributions will be paid to persons entitled to receive certificates for shares of Industries Common Stock until such persons shall have surrendered their Mach Common Stock certificates in accordance with Section 5 hereof; provided, however, that when such certificates shall have been so surrendered in exchange for shares of Industries Common Stock, there shall be paid to the holders thereof, but without interest thereon all dividends and other distributions payable subsequent to and in respect of a record date after the Effective Date on the shares of Industries Common Stock for which such certificates shall have been so exchanged. Holders of certificates for shares of Mach Common Stock shall not be entitled, as such, to receive any dividends unless and until they have exchanged those certificates representing shares of Industries Common Stock as provided herein. - 15 - (b) If any certificates of Industries Common Stock is to be issued in a name other than that in which the certificate for the Mach Common Stock surrendered in exchange is registered, it shall be a condition of such exchange that the certificate so surrendered shall be properly endorsed and otherwise in proper form for transfer and that the person requesting such exchange shall (i) pay any transfer or other taxes required by reason of the issuance of such Industries Common Stock in any name other than that of the registered holder of the certificate surrendered or (ii) establish to the satisfaction of Power or Industries that such tax has been paid or is not applicable. 7. Other Provisions. (a) Governing Law; Entire Agreement. These Articles of Merger shall be governed by and construed in accordance with the laws of the State of North Carolina. These Articles of Merger contain the entire agreement of the parties hereto, and supersede any prior written or oral agreements between them concerning the subject matter contained herein. (b) Counterparts. These Articles of merger may be executed in any number of counter parts and each such counterpart shall be deemed to be an original instrument, but all of such counterparts together shall constitute but one agreement. (c) Further Assurances. Each Constituent Corporation shall from time to time upon the request of the other Constituent Corporation, execute and deliver and file and record all such documents and instruments and take all such other actions as such corporation may request in order to vest or evidence the vesting in Power of title to and possession of all rights, properties, assets and business of Power to the extent provided herein, or otherwise to carry out the full intent and purpose of these Articles of Merger. IN WITNESS WHEREOF, the parties hereto have caused these Articles of merger to be executed on behalf of the Constituent Corporations as of the date and year first above written. MACH PERFORMANCE, INC. FOUNTAIN POWER, INC. /S/GARY D. GARBRECHT /S/GARY D. GARBRECHT Gary D. Garbrecht Gary D. Garbrecht President President FOUNTAIN POWERBOAT INDUSTRIES, INC. FOUNTAIN POWERBOATS, INC. /S/REGINALD M. FOUNTAIN, JR. Reginald M. Fountain, Jr. President - 16 - Exhibit 1.02 EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is entered into as of October 11, 1996, between Fountain Powerboats, Inc., a North Carolina corporation ("Company") and Gary D. Garbrecht ("Employee"). W I T N E S S E T H: WHEREAS, Employee possess unique talents of unusual value to Company; and WHEREAS, concurrently with the execution of this Agreement, Fountain Powerboat Industries, Inc., Company's parent, is acquiring all of the capital stock of Mach Performance, Inc. ("Mach") by merger of Mach into Company's subsidiary, Fountain Power, Inc.; and WHEREAS, Company recognizes that Employee's services are peculiarly valuable to Company and therefore is willing to provide Employee with the rights, benefits and compensation provided for herein so as to secure the services of Employee for the duration of this Agreement on the terms provided herein; NOW THEREFORE, the parties hereto agree as follows: 1. Employment. Company hereby hires Employee to perform the duties and render the services hereinafter set forth for a period of four (4) years from the date of this Agreement, subject to earlier termination as herein provided, and Employee hereby accepts such employment and agrees faithfully to perform such services during the term of this Agreement. 2. Duties. Employee agrees as President and Chief Operating Officer of Company's subsidiary, Fountain Power, Inc., and to perform such duties as may be reasonably required of him in such capacity with Company. 3. Exclusive Service. Employee agrees that he will devote all of his time and efforts to this employment and apply all of his skill and experience to the performance of his duties, and that during the term of this Agreement, except with the written approval of Company, Employee will not engage in, or be employed in, any other business except as a passive investor, and Employee will otherwise do nothing inconsistent with his duties hereunder. 4. Compensation. In consideration of the foregoing and for all the services to be rendered by Employee pursuant thereto, Employee shall receive a salary of Ten Thousand Dollars ($10,000) per month, payable weekly in accordance with the payroll practices - 17 - of Company which may be in effect from time to time, and subject to such withholding as is required by law. In addition, Company shall reimburse Employee for all reasonable and documented business expenses. As an employee of Company, Employee will be entitled to participate in all benefit plans as they may be offered from time to time by company to its other executive employees. Employee shall be entitled to all other compensation increases, perquisites, and benefits as may be determined from time to time by the Board of Directors. Employee shall receive an annual bonus equal to one percent (1%) of the consolidated pretax net income of Fountain Powerboats, Inc. payable within ninety days after the fiscal year-end. Employee shall also receive a Seven Hundred Dollars ($700) per month automobile allowance after the auto lease assumed in the Mach acquisition expires. A monthly housing allowance incident to Employee's relocation to North Carolina will be paid for up to one year from the date of this Agreement or until the Employee's Florida residence is sold, whichever come sooner, equivalent to the Employee's current monthly home mortgage payment amount, or $4,030.72. Employee shall also be granted the following stock options under the Employee Incentive Stock Option Plan of 1986: October 11, 1997 - 5,000 shares at $12.25 per share, and October 11, 1998 - 5,000 shares at $12.25 per share, and October 11, 1999 - 5,000 shares at $12.25 per share, and October 11, 2000 - 5,000 shares at $12.25 per share, The foregoing options shall be exercisable in whole or in part for a period of ten years from the date of grant and be immediately vested to the Employee and exercisable b him whether or not he is an employee at the time of the exercise of the option. 5. Termination. This Agreement shall terminate immediately upon termination for cause or the death or disability of Employee. For purpose of this Agreement, the term "disability" shall mean the inability of Employee, due to mental or physical illness or injury, to perform his duty as an employee of Company, and the term "termination for cause" shall mean termination of Employee by the Board of Directors on account of his refusal to perform duties assigned to him, or breach by Employee of the covenant contained in Section 6 hereof. This Agreement shall also terminate immediately upon any voluntary resignation of Employee. 6. Non-Competition. During the term of this Agreement, and for one year after termination of this Agreement, Employee shall not, either directly or indirectly, either as an employee, employer, consultant, agent, principal, partner, stockholder, officer or director, engage or participate in any business in competition with that of Company. - 18 - 7. Disclosure of Information. Employee agrees not at any time (during or after the term of this Agreement) to disclose or use, except in pursuit of the business of Company or of any affiliate of Company, an Proprietary Information of Company, or of any affiliate of Company, acquired during the term of this Agreement. For purposes of this Agreement the phrase (Proprietary Information: means all information which is known or intended to be known only to Employee or employees of Company, except in pursuit of the business of Company any document, record or other information of company, or others in a confidential relationship with Company, and relates to specific business matters such as patents, patent applications, trade secrets, secret processes, proprietary know-how, information relating the Company's business, and identity of suppliers or customers or accounting procedures of Company, or relates to other business of Company, Employee agrees not to remove from the premises of Company, except in pursuit of the business of company, or of any affiliate of Company, any document, record or other information of Company. Employee recognizes that all such documents, records or other information, whether developed by Employee or by someone else for company, are the exclusive property of company. 8. Proprietary Information of Others. Employee acknowledges that from time to time Company may do business with suppliers or customers who will supply Company with information of a confidential nature, and that Company may have a contractual obligation to preserve the confidential nature of any such information. Employee agrees to treat any information received from suppliers or customers as confidential, and as if it were the Proprietary Information of Company, unless advised otherwise by the Chief Executive Officer of Company. 9. Remedies. In addition to any other remedies which Company may have by virtue of this Agreement, Employee agrees that in the event a breach of the obligations of confidence under this Agreement are threatened, Company shall be entitled to obtain a temporary restraining order and preliminary injunction against Employee to restrain any breach of confidence or covenant not to compete under this Agreement. 10. Term; Renewal. This Agreement shall automatically be renewed for successive terms of one (1) year at the expiration of the term set forth in Section 1 hereof, unless either the Board of Directors or Employee shall give written notice to the other of its or his intention not to renew this Agreement at least ninety (90) days prior to the expiration of such term or renewed term. 11. Assignment. This Agreement shall inure to the benefit of and shall be binding upon the successors and the assigns of Company. since this Agreement is based upon the unique abilities and personal confidence in Employee, he shall have no right to assign this Agreement or any of the rights hereunder. - 19 - 12. Prior Contracts. Any prior contract or agreement between Company and Employee regarding employment is hereby cancelled and shall be of no further force and effect. 13. Severability. If any provision of this Agreement shall be found invalid by any court of competent jurisdiction, such findings shall not affect the validity of the other provisions hereof and the invalid provisions shall be deemed to have been severed herefrom. 14. Waiver of Breach. The waiver by company or Employee of the breach of any provision of this Agreement by the other party or the failure to exercise by company or Employee of any right granted hereunder shall not operate or be construed as the waiver of any subsequent breach by the other party not the waiver of the right to exercise any such right. 15. Entire Agreement. This instrument contains the entire agreement of the parties, and may be amended only by an agreement in writing signed by the parties. 16. Notice. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if sent by certified mail to his residence, in the case of the Employee, or to its principal office, in the case of the Company. 17. Governing Law. This Agreement is entered into and executed in the State of North Carolina and shall be governed by the laws of such state. In the event of any proceeding brought to enforce the provisions of this Agreement, the prevailing party shall be entitled to costs of suit and attorneys' fees, in addition to other remedies available. IN WITNESS WHEREOF, the parties hereto have hereunto set their hands as of the day and year first above written. FOUNTAIN POWERBOATS, INC. EMPLOYEE /S/R.M. FOUNTAIN, JR. /S/GARY D. GARBRECHT R.M. Fountain, Jr. Gary D. Garbrecht Chairman, President, Chief Executive Officer, and Chief Operating Officer - 20 - Mach Exhibit 2.03 Subsidiaries and Investments None - 21 - Mach Exhibit 2.02(a) Capitalization Class Authorized Outstanding Common 10,000 shares 5,465 shares - 22 - Mach Exhibit 2.02(b) Options and Warrants None - 23 - Mach Exhibit 2.05 Undisclosed Liabilities None - 24 - Mach Exhibit 2.07 Litigation None - 25 - Mach Exhibit 2.08 Title to Assets None - 26 - Mach Exhibit 2.09 Real Estate None - 27 - Mach Exhibit 2.12 Interested Transactions None - 28 - EX-10 4 LOAN AGREEMENT THIS LOAN AGREEMENT (hereinafter referred to as the "Agreement") is made this 31st day of December, 1996, by and between GENERAL ELECTRIC CAPITAL CORPORATION, a corporation organized and existing under the laws of New York (hereinafter referred to as "Lender"), FOUNTAIN POWERBOATS, INC., a corporation duly organized and existing under the laws of the State of North Carolina (hereinafter referred to as "Borrower"), FOUNTAIN POWERBOAT INDUSTRIES, INC., a Nevada corporation (the "Parent Corporation"), and FOUNTAIN TRUCKING, INC., a North Carolina corporation ("Trucking"), FOUNTAIN AVIATION, INC., a North Carolina corporation ("Aviation"), FOUNTAIN UNLIMITED, INC., a North Carolina corporation ("Unlimited"), FOUNTAIN SPORTSWEAR, INC., a North Carolina corporation ("Sportswear"), and FOUNTAIN POWER, INC. a North Carolina corporation ("Power"). (Trucking, Aviation, Unlimited, Sportswear and Power are collectively referred to as the "Present Subsidiaries." The Parent Corporation, the Present Subsidiaries, any other present future "Consolidated Subsidiaries" (hereinafter defined) of the Parent Corporation, and the Borrower are hereinafter referred to as the "Fountain Corporations"). RECITALS The Borrower has applied to the Lender for, and the Lender has agreed to make, subject to the terms of this Agreement, a loan in the principal amount of up to $10,000,000.00 ("the Loan"), to be evidenced by the Borrower's Promissory Note dated December 31, 1996. The Loan shall be secured by a first and only lien on the Property (hereinafter defined) as well as other security hereinafter described. AGREEMENT Section 1. Loan Purpose; Conditions Precedent (a) Loan Purpose; Disbursement of Proceeds. The proceeds of the Loan may be used only for the following purposes: (i) To satisfy existing indebtedness of the Borrower as described in Schedule 1(a) attached hereto. (ii) To acquire tangible personal property (including, but not limited to, equipment, engines and molds) in the name of the Borrower. (iii) To finance the construction and equipping of additional buildings and facilities to be located on the real property owned by the Borrower and located in Beaufort County, North Carolina and described in Exhibit A attached hereto and incorporated herein by reference (the "Property") on which the Borrower's existing boat manufacturing facility is located. By the Deed of Trust, the Borrower has encumbered the Property as additional security for repayment of the Loan. R#0202662.05 Of the $10,000,000 available for disbursement under the Loan, $7,500,000 is being disbursed in connection with Loan closing to satisfy existing indebtedness of the Borrower. Upon the Lender's receipt of the Borrower's written request for disbursement (but only once a month and for no less than $500,000), provided there has occurred no Event of Default hereunder and provided there has been no materially adverse change in the financial condition of the Borrower, the Parent Corporation and its Consolidated Subsidiaries, the remaining loan proceeds of $2,500,000 (the "Remaining Proceeds") shall be available for any one or more of the purposes hereinabove described until and including January 2, 1998 (the "Funding Deadline Date"). The Borrower shall not be entitled to borrow any portion of the Remaining Proceeds, and the Lender shall have no obligation to lend such Remaining Proceeds, at any time after the Funding Deadline Date. Upon the request of the Borrower, and with the prior written consent of the Lender, the Remaining Proceeds may be used to acquire tangible personal property in the name of a Subsidiary of the Borrower, provided such Subsidiary grants to the Lender a security interest in such assets pursuant to documentation acceptable to the Lender. (b) Conditions Precedent to Initial and Future Advances. The Lender shall not be obligated to make any disbursement until receipt by the Lender of the following items, all in form and substance satisfactory to the Lender and the Lender's counsel in their sole discretion: 1.01 Promissory Note. The Promissory Note ("Note") dated of even date with this Agreement, evidencing the Loan and duly executed by the Borrower. 1.02 Deed of Trust, Assignment of Rents and Security Agreement. The recorded Deed of Trust, Assignment of Rents and Security Agreement ("Deed of Trust") in which the Borrower shall grant to a trustee for the benefit of the Lender a deed of trust on the Property and a security interest in fixtures and other personalty located on the property, all securing the Note. 1.03 Assignment of Rents and Leases. The assignment of Rents and Leases in which the Borrower shall assign to Lender all existing and thereafter arising leases on the Property and the rents and profits therefrom. 1.04 Title Insurance. A standard ALTA non-expiring mortgagee policy from a company or companies approved by the Lender, providing coverage for the full principal amount of the Note which is secured by the Deed of Trust and containing no title exceptions unless approved by the Lender and the Lender's counsel. 1.05 Survey. A certified copy of a recent survey of the Property prepared by a registered land surveyor or civil engineer, in form an substance satisfactory to the Lender. 1.06 Flood Hazard Certification. Evidence satisfactory to the Lender and Lender's counsel as to whether the Property is located within a 100-year flood zone or flood insurance satisfactory to the Lender. 1.07 Environmental Audit Report. A favorable "Phase 1" unedited environmental audit covering the Property from an independent environmental engineering firm satisfactory to the - 2 - R#0202662.05 Lender which reflects that no hazardous waste, toxic substance, or other pollutants have contaminated the Property or, if the Property has been so contaminated, that it has been satisfactorily cleaned up in accordance with all Environmental Laws. The Lender shall be fully authorized to discuss all aspects of the audit with the engineering firm. 1.08 Master Security Agreement. A Master Security Agreement (the "Security Agreement") in which the Borrower shall grant to the Lender a first lien and security interest in the Borrower's personal property described therein (the "Collateral") securing the Note. A favorable opinion is required from legal counsel acceptable to the Lender regarding the priority of the Lender's lien position. 1.09 UCC Financing Statements. Acknowledged copies of UCC Financing Statement (UCC-1) duly filed in all jurisdictions necessary, or in the opinion of the Lender desirable, to perfect the security interests granted in the Security Agreement, and certified copies of Requests For Information (UCC-11) identifying all previous financing statements on record for the Borrower and any predecessors in title for the five-year period predating the date of this Loan Agreement from all jurisdictions indicating that no security interest has previously been granted in any of the collateral described in the Security Agreement unless prior approval has been given by the Lender. 1.10 Corporate Resolution. A Corporate Resolution from the Board of Directors of each of the Fountain Corporations authorizing the execution, delivery, and performance of the Loan Documents to which it is a party. 1.11 Certificate of Good Standing; Charter Documents. A certification of the Secretary of State of the State of North Carolina as to the good standing of the Borrower and the Parent Corporation. 1.12 By-Laws. A copy of the By-Laws of the Borrower, certified by the Secretary of the Borrower or the Parent Corporation (as the case may be) as to their completeness and accuracy. 1.13 Certificate of Incumbency. A certificate of the Secretary of each of the Fountain Corporations certifying the names and true signatures of the officers of each of the Fountain Corporations authorized to sign the Loan Documents. 1.14 Opinion of Counsel. A favorable opinion of counsel for the Borrower satisfactory to the Lender and Lender's counsel. 1.15 Assignment of Life Insurance Policy. An Assignment of Life Insurance Policy on the life of Reginald M. Fountain, Jr. in the amount of $1,000,000.00 in form and substance satisfactory to the Lender. 1.16 Appraisal(s). Two (2) copies of an appraisal of the estimated market value of the Property and the Collateral. The appraisal must be addressed to the Lender and must conform to the Uniform Standards of Professional Appraisal Practice ("USPAP") adopted by the Appraisal Standards Board of the Appraisal Foundation. Any deviation from the USPAP must be explained in the appraisal. - 3 - R#0202662.05 1.17 Insurance. Evidence that the following insurance is in place: (a) business income coverage in amounts and from an insurer as described in the Deed of Trust. (b) commercial general liability insurance in amounts and as described in the Deed of Trust. 1.18 Guaranty. A Corporate Guaranty executed by the Parent Corporation and the Present Subsidiaries (the "Guaranty"). 1.19 Additional Documents. Receipt by the Lender of other approvals, opinions, or documents as the Lender may reasonably request. Section 2. Representations and Warranties. In order to induce the Lender to enter into this Agreement and to make the Loan, each of the Fountain Corporations represents and warrants to the Lender (which representations and warranties shall survive the delivery of the documents mentioned herein and the making of the Loan contemplated hereby and shall be deemed to have been made at any time hereafter that Loan proceeds are disbursed) as follows: 2.01 Financial Statements. The balance sheet of the Parent Corporation and its Consolidated Subsidiaries (as defined in Section 9 hereof) and the related Statements of Income and Retained Earnings of the Parent Corporation and its Consolidated Subsidiaries, the accompanying footnotes together with the accountant's opinion thereon, and all other financial information previously furnished to the Lender, are true and correct and fairly reflect the financial condition of the Parent Corporation and its Consolidated Subsidiaries as of the dates thereof, including all contingent liability of every type, and the financial condition of the Parent Corporation and its Consolidated Subsidiaries as stated therein has not changed materially and adversely since the dates thereof. 2.02 Capacity and Standing. Each Fountain Corporation is duly organized and validly existing under the laws of the state in which it is incorporated, is duly qualified and in good standing in every other state in which the nature of its business shall require such qualification and where the failure to qualify would have a material adverse effect, and it is duly authorized by its board of directors to make and perform its respective obligations under the Loan Documents. 2.03 No Violation of Other Agreements. The execution by each Fountain Corporation of any of the Loan Documents, and other performance by each Fountain Corporation thereunder will not violate any provision of its certificate of incorporation or bylaws (as amended), or of any law, other agreement, indenture, note, or other instrument binding upon such Fountain Corporation, or create any lien, charge or encumbrances on the Property or the Collateral (except for the lien created by the Deed of Trust and the Security Agreement), or give cause for the acceleration of any of the obligations of the such Fountain Corporation. - 4 - R#0202662.05 2.04 Authority. All authority from and approval by any governmental body, commission, or agency, whether federal, state, or local necessary to the making, validity, or enforceability of this Agreement or the other Loan Documents has been obtained. 2.05 Asset Ownership. The Fountain Corporations have good and marketable title to all of the properties and assets reflected on the balance sheets and financial statements of the Parent Corporation and its Consolidated Subsidiaries supplied to the Lender, and all such properties and assets are free and clear of mortgages, deeds of trust, pledges, liens, and all other encumbrances except as otherwise disclosed by such financial statements. The only asset held by the Parent Corporation is the stock of the Borrower. The only Subsidiaries of the Parent Corporation are the Present Subsidiaries. None of the Present Subsidiaries owns Receivables (as defined in the Security Agreement), Inventory (as defined in the Security Agreement) or Tangible Personal Property (as defined in the Security Agreement) in its own name except as disclosed in Schedule 2.05 attached hereto. All of the Receivables and Inventory disclosed in the Parent Corporation's financial statements are owned by the Borrower except for those described in Schedule 2.05. 2.06 Discharge of Liens and Taxes. Each Fountain Corporation has filed, paid and or discharged all taxes or other claims which may become a lien on its properties or assets, excepting to the extent that such items are being appropriately contested in good faith and for which an adequate reserve for the payment thereof is being maintained. 2.07 Regulation U. None of the proceeds of the Loan made pursuant to this Agreement shall be used directly or indirectly for the purpose of purchasing or carrying any stock in violation of any of the provisions of Regulation U of the Board of Governors of the Federal Reserve System. 2.08 ERISA. Each employee benefit plan, as defined by the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), maintained by any Fountain Corporation meets, as of the date hereof, the minimum funding standards of ERISA, all applicable requirements of ERISA and of the Internal Revenue Code of 1986, as amended, and no "Reportable Event" nor "Prohibited Transaction" (as defined by ERISA) has occurred with respect to any such plan. 2.09 Litigation. Except as disclosed in Schedule 2.09 attached hereto, there is no pending or threatened action or proceeding against or affecting the Fountain Corporations before any court, commission, governmental agency, whether state or federal, or arbitration which may materially adversely affect such party's financial condition, operations, properties, or business or the ability of such party to perform its obligations under the Loan Documents. 2.10 Binding and Enforceable. Each of the Loan documents, when executed, shall constitute valid and binding obligations of the Fountain Corporations being a party thereto and are enforceable in accordance with its terms, except as may be limited by bankruptcy, insolvency, moratorium, or similar laws affecting creditors' rights generally. 2.11 Insolvency. After giving effect to the execution and delivery of the Loan Documents and the making of the Loan under this Agreement, none of the Fountain Corporations will be "insolvent," as defined in 101 of Title 11 of the United States Code or Section 2 of the - 5 - R#0202662.05 Uniform Fraudulent Transfer Act, or any other applicable state law pertaining to fraudulent transfers, as each may be amended from time to time, or be unable to pay its debts generally as such debts become due, or have an unreasonably small capital to engage in any business or transaction, whether current or contemplated. Section 3. Affirmative Covenants Each of the Fountain Corporations covenants and agrees that from the date hereof and until payment in full of the Loan and performance of all obligations under the Loan Documents, it will: 3.01 Maintain Existence. Preserve and maintain its existence and good standing in its state of organization, and qualify and remain qualified as a foreign corporation, in each jurisdiction in which such qualification is required and where the failure to qualify would have a material adverse effect on such Fountain Corporation. The foregoing covenant shall not preclude mergers permitted under Section 5.03 hereof and shall not preclude the dissolution of a corporation owning no assets or whose assets would vest, as a result of such dissolution, in the Borrower. 3.02 Maintain Records. Keep adequate records and books of account, in which complete entries will be made in accordance with GAAP, consistently applied , reflecting all financial transactions of Fountain Corporations. 3.03 Maintain Properties. Maintain, keep and preserve all of its properties (tangible and intangible) necessary or useful in the conduct of its business in good working order and condition, ordinary wear and tear excepted. 3.04 Conduct of Business. Continue to engage in an efficient, prudent, and economical manner in a business of the same general type as now conducted. 3.05 Maintain Insurance. Maintain insurance with financially sound and reputable insurance companies or associations in such amounts and covering such risks as are usually carried by companies engaged in the same or a similar business, which insurance may provide for a reasonable deductible. The Lender shall be named as loss payee on all policies which apply to the Lender's collateral and additional insured on all such insurance, and the Borrower shall deliver certificates of insurance at closing evidencing such insurance. All such insurance policies shall provide, and the certificate shall state, that no policy will be terminated without 30 days prior written notice to Lender. 3.06 Comply with Laws. Comply in all material respects with all applicable laws, rules, regulations, and orders including, without limitation, all Environmental Laws and pay before any delinquency all taxes, assessments, and governmental charges imposed upon the Borrower or upon its property. Provide to the Lender a copy of any written notice of a governmental authority received by such Fountain Corporation which indicates that such Fountain Corporation has violated a law, rule, regulation and order, including without limitation any Environmental Law. - 6 - R#0202662.05 3.07 Right of Inspection. Permit the officers and authorized agents of the Lender, at any reasonable time, to examine and make copies of the records and books of account of such Fountain Corporation, and visit the properties of such Fountain Corporation, and to discuss such matters with any officers, directors and independent accountants of such Fountain Corporation as the Lender deems necessary. 3.08 Financial Reports and Other Data. (a) As soon as practicable and in any event within ninety (90) days after the end of each fiscal year, deliver, or cause to be delivered to the Lender an audited consolidated balance sheet of the Parent Corporation and its Consolidated Subsidiaries and related statements of income and retained earnings and cash flow for such fiscal year, setting forth in each case in comparative form corresponding figures for the preceding annual period, all satisfactory to the Lender. All annual financial statements will be consolidated, will be prepared in conformity with generally accepted accounting principles and will be in a form satisfactory to the Lender. In connection with the examination, the independent certified public accountant will issue a letter stating any and all of the terms of this Agreement that are being violated or that there are no violations. (b) Deliver to the Lender as soon as practicable and in any event within forty-five (45) days following the end of each fiscal quarter except for the last fiscal quarter of the Parent Corporation's fiscal year an unaudited consolidated balance sheet for the Parent Corporation and its Consolidated Subsidiaries and related statements of income and retained earnings and cash flow, in each case for the period from the beginning of the then current fiscal year to the end of such quarter, all in reasonable detail and certified by the chief financial officer of the Parent Corporation to provide a fair presentation of the financial condition of the Parent Corporation and its consolidated subsidiaries, subject to normal year end audit adjustments. (c) As soon as available each year, copies of all state and federal tax returns filed by each of the Fountain Corporations. (d) With reasonable promptness, deliver such additional financial or other data as the Lender may reasonably request regarding each Fountain Corporation's operations, business affairs and financial condition. The Lender is hereby authorized by each Fountain Corporation to deliver a copy of such information made available by such corporation to any regulatory authority having jurisdiction over the Lender. (e) Deliver to the Lender, on a quarterly basis, at the time quarterly financial statements are tendered, a Certificate of Compliance prepared by the Parent Corporation's Chief Financial Officer and certified as to accuracy by such officer of the Parent Corporation and the Borrower (the "Certificate of Compliance"). The Certificate of Compliance shall set forth the Fountain Corporations' status with respect to their compliance with the covenants and other default provisions contained in the Loan Documents hereinafter delivered. Any default shall be identified with particularity, and the Borrower shall also identify proposed action to be taken by the Borrower or such other Fountain Corporation with respect thereto. - 7 - R#0202662.05 (f) Deliver to Lender at least once each calendar month an itemized list of the Borrower's "Inventory" (as defined in the Security Agreement) and "Receivables" (as defined in the Security Agreement) (the "Monthly Assets Report"). The Monthly Assets Report shall identify the names and addresses of all dealers to whom Inventory is in transit. This Monthly Assets Report shall also describe with particularity additional equipment, molds and other Tangible Personal Property (as defined in the Security Agreement) acquired by the Borrower within the prior calendar month and identify any Tangible Personal Property disposed of within the prior calendar month and shall identify and federal trademark registration applications and patent applications filed during the preceding calendar month. The Borrower shall provide serial numbers for any Tangible Personal Property having a value of $50,000 individually and, if requested by the Lender, shall identify the Lender's security interest in such property by tagging such property with a written disclosure of such security interest. The Borrower shall at all times maintain an aggregate value of Inventory (as defined in the Security Agreement) and Receivables (as defined in the Security Agreement) of at least Five Million Five Hundred Thousand Dollars ($5,500,000). Compliance with this covenant shall be established once each month through the Monthly Assets Report and more frequently, upon request of the Lender. 3.09 Knowledge of Certain Events. Upon an officer of any of the Fountain Corporations obtaining knowledge of the occurrence of any Event of Default hereunder, cause to be delivered to the Lender, within fifteen (15) business days of such officer obtaining such knowledge, an officer's certificate specifying the nature thereof, the period of existence thereof and what action is proposed to be taken with respect thereto. 3.10 Other Notices. Notify the Lender in writing within thirty (30) business days of the occurrence of any of the following with respect to such Fountain Corporation: (a) the services upon such Fountain Corporation of any action, suit or proceeding at law or in equity making a claim in excess of $100,000; (b) any event or condition which shall constitute an event of default under any other agreement for borrowed money or any known or potential material change in this or any other contractual agreement; (c) the loss of any patents, licenses, franchises, trademarks, trademark rights, trade names, trade name rights and copyrights material to its business; (d) any event or condition which shall cause any agreements, reports, schedules, certificates or instruments heretofore or simultaneously with execution of this Agreement delivered to the Lender by or on behalf of the Fountain Corporations to become false or misleading in any material respect with respect to this transaction; (e) a Fountain Corporation or any other Person causes or permits Hazardous Materials to be placed, held, located or disposed of on, under or at real property owned, leased or otherwise used by a Fountain Corporation or any part thereof in violation of Environmental Laws (specifically including real property that is not encumbered by the Deed of Trust). - 8 - R#0202662.05 3.11 Further Assurances. Upon request of the Lender, duly execute and deliver or cause to be duly executed and delivered to the Lender such further instruments and do and cause to be done such further acts that may be reasonably necessary or proper in the opinion of the Lender to carry out more effectively the provisions and purposes of the Loan Documents. 3.12 ERISA. Comply with all requirements of ERISA applicable to it (including the payment of all obligations and liabilities arising under ERISA) and furnish to the Lender as soon as possible and in any event within 30 days after it or any duly appointed administrator of any employee pension benefit plan (as defined in ERISA) knows or has reason to know that a Reportable Event (as defined in ERISA) with respect to any such plan has occurred which is likely to result in a penalty being imposed on the plan, a statement of the chief financial officer of the Parent Corporation describing in reasonable detail such Reportable Event and any action proposed to be taken with respect thereto, together with a copy of the notice of such Reportable Event given to the Pension Benefit Guaranty Corporation or a statement that such notice will be filed with annual report to the United States Department of Labor with respect to such plan if such filing has been authorized. 3.13 Payment of Obligations. Pay when due (including any applicable grace period) all of its obligations for indebtedness for money borrowed, except where the same may be contested in good faith and appropriate reserves for the accrual of the same are maintained in amounts in accordance with GAAP. 3.14 Subsidiaries. In the event that any corporation or other entity becomes a Subsidiary (directly or indirectly) of the Parent Corporation, the Parent Corporation shall cause such Subsidiary to guarantee repayment of the Note pursuant to a guaranty in form and substance identical to the Guaranty and to sign documentation, in form and substance satisfactory to the Lender, agreeing to abide by the covenants and terms of the Loan Agreement. 3.15 Assets. Each Monthly Assets Report shall disclose all assets held in the name of the Parent Corporation and its Consolidated Subsidiaries other than the Borrower. The value of Tangible Personal Property, Inventory, or Receivables for any Fountain Corporation other than the Borrower shall not exceed at any one time $2,000,000. If requested by the Lender, each of the Fountain Corporations shall execute such documentation as the Lender deems necessary so as to grant a first-priority security interest in any asset held by such Fountain Corporation. Section 4. Financial Covenants. Unless otherwise specified herein, all terms of an accounting character used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with GAAP, applied on a basis consistent (except for changes concurred in by the Parent Corporation's independent public accounts or otherwise required by a change in GAAP) with the most recent audited consolidated financial statements of the Parent Corporation delivered to the Lender, unless with respect to any such change concurred in by the Parent Corporation's independent public accountants or required by GAAP, in determining compliance with any of the provisions of this Agreement or - 9 - R#0202662.05 any of the other Loan Documents: (i) the Borrower shall have objected to determining such compliance on such basis at the time of delivery of such financial statements, or (ii) the Lender shall so object in writing within 30 days after the delivery of such financial statements, in either of which events such calculations shall be made on a basis consistent with those used in the preparation of the latest financial statements as to which such objection shall not have been made. Each of the Fountain Corporations covenants and agrees that from the date hereof until payment in full of all indebtedness and the performance of all obligations under the Loan Documents, the Parent Corporation and its Consolidated Subsidiaries shall at all times maintain the following financial position and ratios. 4.01 Current Ratio. A ratio of Consolidated Current Assets to Consolidated Current Liabilities of not less than 1.0 to 1.0. 4.02 Tangible Net Worth. A minimum Consolidated Tangible Net Worth of not less than $3,000,000.00 at all times. 4.03 Debt to Worth. A ratio of Consolidated Liabilities to Consolidated Tangible Net Worth of not greater than 1.8 to 1. 4.04 Cash Flow Margin. The ratio of (I) Net Income after taxes plus depreciation plus amortization to (ii) all long-term debt payments (excluding interest) due within the next twelve (12) months must exceed 2.0 to 1.0 annually. Compliance with this ratio will be calculated on a rolling four quarter basis, determined at the end of each fiscal quarter of the Parent Corporation. 4.05 Capital Expenditures Limitation. Expenditures for fixed assets in any fiscal year shall not exceed in the aggregate for all Fountain Corporations the sum of $500,000 unless such assets are subject to Lender's first lien position. Section 5. Negative Covenants. Each of the Fountain Corporations covenants and agrees that from the date hereof and until payment in full of the Loan and performance of all obligations under the Loan Documents, it shall not, without the prior written consent of the Lender: 5.01 Liens. Create, incur, assume, or suffer to exist any Lien (as defined in Section 9 hereof) upon or with respect to any of its properties, except: (a) Liens in favor of the Lender; (b) Liens for taxes not yet due and payable or otherwise being contested in good faith an for which appropriate reserves are maintained; (c) Other Liens imposed by law not yet due and payable, or otherwise being contested in good faith and for which appropriate reserves are maintained; (d) Purchase money Liens on any property hereafter acquired (expressly excluding, however, Liens with respect to any property acquired in replacement of or - 10 - R#0202662.05 substitution for property on which the Lender has a security interest), provided that such purchase- money Lien shall attach only to the property so acquired. 5.02 Debt. Create, incur, assume, or suffer to exist any Debt (as defined in Section 9 hereof), except: (a) Debt to the Lender; (b) Debt presently outstanding and shown on the most recent financial statements of the Borrower submitted to the Lender; (c) Accounts payable to trade creditors incurred in the ordinary course of business; (d) Debt secured by purchase money Liens as outlined above in Section 5.01(d); (e) Additional Debt (including, but not limited to, Debt owed to any Related Party) not to exceed $500,000.00 in the aggregate. 5.03 Mergers. Enter into a merger or consolidate with or sell, assign, lease, or otherwise dispose of all or substantially all of its assets to any person or entity except for the merger of a Consolidated Subsidiary into the Borrower where the Borrower is the surviving corporation or a dissolution of a corporation owing no assets or whose assets would vest, as a result of such dissolution, in the Borrower. 5.04 Leases. Create, incur, assume, or suffer to exist any leases, except: (a) Leases presently outstanding and showing on the most recent financial statement submitted to the Lender; (b) Operating Leases for machinery and equipment which do not in the aggregate require payments in excess of $100,000 in any fiscal year of the Parent Corporation. 5.05 Dividends. Declare or pay any Dividends in excess of Net Income plus depreciation less current maturities of indebtedness in any fiscal year of the Parent Corporation. 5.06 Guaranties. Execute any Guarantee (as defined in Section 9 hereof) or assume, Guarantee (as defined in Section 9 hereof), endorse, or otherwise be or become directly or contingently liable for obligations of any person, or agree to repurchase any Inventory sold to a third party except (i) Guarantees by endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business, (ii) Guarantees of repayment of interest accruing under floor-plan-financed boats constituting Inventory; and (iii) repurchase obligations arising under direct repurchase agreements pursuant to which the Borrower agrees to repurchase boats constituting Inventory from floor plan lenders. The aggregate amount of all such Guarantees specified under (i), (ii) and (iii), however, shall not exceed 200% of the net sales of the Parent Corporation and its Consolidated Subsidiaries for the preceding fiscal quarter. 5.07 Sale of Assets. Sell, lease, or otherwise dispose of any of its assets or properties (exclusive of Inventory permitted to be sold pursuant to the terms of the Security Agreement) in excess of $200,000 in the aggregate for all Fountain Corporations in any fiscal year of the Parent Corporation without the prior written consent of the Lender. - 11 - R#0202662.05 5.08 Transfer of Ownership. Transfer or sell more than 10% of the total number of shares of stock in any Fountain Corporation (other than the Parent Corporation) prior to the repayment in full of the Note. 5.09 Related Party Contracts. No Fountain Corporation shall enter into any contract (specifically including any lease or contract for services) with any Related Party (as hereinafter defined) without the Lender's prior review and approval of such contract, not to be unreasonably withheld or delayed. Section 6. Hazardous Materials and Environmental Compliance. 6.01 Investigation. Each Fountain Corporation hereby certifies that it has exercised due diligence to ascertain whether its real property, including without limitation the Property, is or has been affected by the presence of asbestos, oil or oil products, urea formaldehyde, PCBs, hazardous or nuclear waste, toxic chemicals and substances, or other Hazardous Materials. Each Fountain Corporation represents and warrants that except as disclosed in the audited financial statements for the period ending June 30, 1996, or as disclosed in Schedule 6.01 attached hereto, there are no such materials contaminating its real property, nor have any such materials been improperly stored or improperly disposed of on the Property. Each Fountain Corporation hereby agrees that it shall not permit any such contamination as long as any indebtedness or obligations to the Lender under the Loan Documents remain unpaid or unfulfilled. In addition, no Fountain Corporation has or uses any underground storage tanks on its real property which are not registered with appropriate federal and/or state agencies and which are not properly equipped and maintained in accordance with all Environmental Laws. If requested by the Lender, each Fountain Corporation shall provide the Lender with all necessary and reasonable assistance required for purposes of determining the existence of Hazardous Materials on real property owned by it, including the Property, including allowing the Lender access to such property, and access to such corporation's employees having knowledge of, and to files and records within such corporation's control relating to the existence, storage or discharge of Hazardous Materials on such real property. 6.02 Compliance. Each Fountain Corporation agrees to comply with all applicable Environmental Laws, including, without limitation, all those relating to Hazardous Materials. Each Fountain Corporation further agrees to provide the Lender, and all appropriate federal and state authorities, with immediate notice in writing of any hazardous or toxic materials released on any property owned by it, including the Property, and to pursue diligently to completion all appropriate and/or required remedial action in the event of such release. 6.03 Remedial Action. The Lender shall have the right, but not the obligation, to undertake all or any part of such remedial action in the event of a release of hazardous or toxic materials on the Property and to add any expenditures so made to the principal indebtedness secured by the Deed of Trust. The Borrower agrees to indemnify and hold the Lender harmless from any and all loss or liability arising out of any violation of the representations, covenants and obligations contained in this Section 6, or resulting from the recording of the Deed of Trust. - 12 - R#0202662.05 Section 7. Events Default. Each of the following shall be Events of Default hereunder: 7.01 The failure to make payment of any installment of principal or interest on the Note when due or payable after the passage of any applicable cure period set out in the Note. 7.02 Any representation or warranty made in the Loan Documents shall prove to be false or misleading in any material respect. 7.03 Any report, certificate, financial statement or other document furnished prior to the execution of or pursuant to the terms of this Agreement shall prove to be false or misleading in any material respect. 7.04 Any Fountain Corporation shall default in the payment of any other obligation for money borrowed when due or in the performance of any obligation incurred in connection with such money borrowed. Notwithstanding the foregoing, it shall not constitute an Event of Default hereunder if such default is with respect to indebtedness of less than $25,000 individually and $50,000 in the aggregate for all indebtedness of all Fountain Corporations. 7.05 The breach of any covenant, condition, or agreement made by any Fountain Corporation under any Loan Document after the passage of any applicable cure period set out in such Loan Document. 7.06 Except as expressly permitted herein, liquidation or dissolution of any Fountain Corporation, or suspension of the business of any Fountain Corporation or filing by any Fountain Corporation of a voluntary petition in bankruptcy or a voluntary petition or an answer seeking reorganization, arrangement, readjustment of its debts or for any other relief under the United States Bankruptcy Code, as amended, or under any other insolvency act of law, state or federal, now or hereafter existing, or any other action of any Fountain Corporation indicating its consent to, approval of, or acquiescence in any petition or proceedings; the application by any Fountain Corporation for, or the appointment by consent or acquiescence of, a receiver, a trustee or a custodian of such Fountain Corporation, or an assignment for the benefit of creditors, the inability of such Fountain Corporation or the admission by such Fountain Corporation in writing of its inability to pay its debts as they mature. 7.07 Filing of an involuntary petition against any Fountain Corporation in bankruptcy or seeking reorganization, arrangement, readjustment of its debts or for any other relief under the United States Bankruptcy Code, as amended, or under any other insolvency act or law, state or federal, now or hereafter existing; or the involuntary appointment of a receiver, a trustee or a custodian of any Fountain Corporation or for all or a substantial part of its property; the issuance of a warrant of attachment, execution or similar process against any substantial part of the property of any Fountain Corporation and the continuance of any of the events referred to in this Section 7.07 for thirty (30) days undismissed or undischarged. 7.08 Final judgment for the payment of money shall be rendered against the Borrower or any Fountain Corporation which is in excess of $10,000 individually and which shall remain - 13 - R#0202662.05 undischarged for a period of 30 days unless such judgment or execution thereon be effectively stayed under the laws of the jurisdiction in which such judgment was rendered. 7.09 The occurrence of an Event of Default under the Guaranty or any guaranty hereafter delivered. 7.10 Should any lien or security interest granted to the Lender to secure payment of the Note terminate, fail for any reason to have the priority believed by the Lender on the date granted, or become unperfected for any reason. Section 8. Remedies Upon Default. Upon the occurrence of any Event of Default, the Lender may at any time thereafter, at its option, take any or all of the following actions at the same or at different times: 8.01 Declare the balance of the Note to be immediately due an payable, both as to principal and interest, without presentment, demand, protest, or notice of any kind, all of which are hereby expressly waived by each of the Fountain Corporations, and such balance shall accrue interest at the Default Rate (as specified in the Note). 8.02 Take immediate possession of and foreclosure upon any or all collateral including real and personal property which may be granted to the Lender as security for the Loan and obligations of the Borrower under the Loan Documents. 8.03 Exercise such other rights and remedies as the Lender may be provided in the Loan Documents, as a secured party under the North Carolina Uniform Commercial Code, or as otherwise provided by law. 8.04 Any obligation of the Lender to advance funds under the Note(s) and all other obligations (if any) of the Lender shall immediately cease and terminate unless and until Lender shall reinstate such obligation in writing. 8.05 Institute any action against the Borrower to collect on sums due under the Note and institute any action against any one or more of the Fountain Corporations that have executed the Guaranty or any subsequent guaranty. 8.06 Take any other action permitted to be taken as specified in the Loan Documents upon the occurrence of an Event of Default and take any other action permitted to be taken and available at law or in equity. Section 9. Miscellaneous Provisions. 9.01 Definitions. (a) "Consolidated Current Assets" and "Consolidated Current Liabilities" mean, at any time, all assets or liabilities, respectively, of the parent Corporation and its - 14 - R#0202662.05 Consolidated Subsidiaries that, in accordance with GAAP, should be classified as current assets or current liabilities, respectively, on a consolidated balance sheet of the Parent Corporation. (b) "Consolidated Liabilities" means the sum of (i) all liabilities that, in accordance with GAAP, should be classified as liabilities on a consolidated balance sheet of Parent Corporation, and (ii) to the extent not included in clause (i) of this definition, all redeemable preferred stock. (c) "Consolidated Tangible Net Worth" means, at any time, stockholders' equity, less the sum of the value, as set forth or reflected on the most recent consolidated balance sheet of the Parent Corporation, prepared in accordance with GAAP, of (A) Any surplus resulting from any write-up of assets subsequent to June 30, 1996; (B) All assets which would be treated as intangible assets for balance sheet presentation purposes under GAAP, including without limitation goodwill (whether representing the excess of cost over book value of assets acquired, or otherwise), trademarks, tradenames, copyrights, patents and technologies, and unamortized debt discount and expenses. (C) To the extent not included in (B) of this definition, any, amount at which shares of capital stock of the Parent Corporation appear as an asset on the consolidated balance sheet of the Parent Corporation; (D) Loans or advances to stockholders, directors, officers or employees; and (E) To the extent not included in (B) of this definition, deferred expenses. (d) "Consolidated Subsidiary" means at any date any Subsidiary or any other entity the accounts of which, in accordance with GAAP, would be consolidated with those of the Parent Corporation in its consolidated financial statements as of such date. "Subsidiary" means any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by the Parent Corporation. (e) "Debt" of any Person means at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable - 15 - R#0202662.05 arising in the ordinary course of business, (iv) all obligations of such Person as lessee under capital leases, (v) all obligations of such Person to reimburse any bank or other Person in respect of amounts payable under a banker's acceptance, (vi) all redeemable preferred stock of such Person (in the event such Person is a corporation), (vii) all obligations (absolute or contingent) of such Person to reimburse any bank or other Person in respect of amounts paid under a letter of credit or similar instrument, (viii) all Debt of others secured by a Lien on any asset of such Person, whether or not such Debt is assumed by such Person, and (ix) all Debt of others Guaranteed by such Person. (f) "Default Rate" shall have the meaning given such term in the Note. (g) "Dividends" means for any period the sum of all dividends paid or declared during such period in respect to any capital stock and redeemable preferred stock (other than dividends paid or payable in the form of additional capital stock). (h) "Environmental Laws" shall mean all federal and state laws, rules and regulations which affect or may affect any real property, including Property, including without limitation the Comprehensive Environmental Response Compensation and Liability Act (42 U.S.C. Section 9601 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.), the Federal Water Pollution Control Act (33 U.S.C. Section 1251 et seq.), the Clean Air Act (42 U.S.C. Section 7401 et seq.), the Toxic Substances Control Act (15 U.S.C. Section 2601 et seq.), the Sedimentation Pollution Control Act (N.C.G.S. Section 113A-5 et seq.), the Hazardous Chemicals Right to Know Act (N.C.G.S. Section 95-173 et seq.), the Oil Pollution and Hazardous Substances Control Act (N.C.G.S. Section 143-215.75 et seq.), the North Carolina Solid Waste Management Act (N.C.G.S. Section 130A- 290 et seq.), and the Coastal Area Management Act (N.C.G.S. Section 113A-100 et seq.), as such laws, rules or regulations have been amended or may be amended. (i) "GAAP" shall mean generally accepted accounting principles, applied on a consistent basis. (j) "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to secure, purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to provide collateral security , to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Debt or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part), provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. - 16 - R#0202662.05 (k) "Hazardous Materials" means and includes any hazardous, toxic or dangerous waste, substance or material (including without limitation any materials containing asbestos) defined as such in (or for purposes of) any Environmental Laws. (l) "Lien" means, with respect to any asset, any mortgage, deed to secure debt, deed of trust, lien, pledge, charge, security interest, security title, preferential arrangement which has the practical effect of constituting a security interest or encumbrance, servitude or encumbrance of any kind in respect of such asset to secure or assure payment of a Debt or a Guarantee, whether by consensual agreement or by operation of statute or other law, or by any agreement, contingent or otherwise, to provide any of the foregoing. For the purposes of this Agreement, the Parent Corporation or any Subsidiary shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. (m) "Loan Documents" shall mean this Agreement, the Note, the Deed of Trust, the Security Agreement, all UCC-1 Financing Statements, the Guaranty, the Assignment of Rents, the Assignment of Life Insurance Agreement, any additional guaranty agreements hereafter executed, and all other documents, certificates and instruments executed in connection therewith, and all renewals, extensions, modifications, substitutions, and replacements thereto and therefor. (n) "Net Income" means, as applied to any Person for any period, the aggregate amount of net income of such Person, after taxes, for such period, as determined in accordance with GAAP. (o) "Person" shall mean an individual, partnership, corporation, limited liability company, trust, incorporated organization, association, joint venture, or a government agency or political subdivision thereof. (p) "Related Party" has the meaning given to such term in the Internal Revenue Code. 9.02 Non-Impairment. If any one or more provisions contained in the Loan Documents shall be held invalid, illegal, or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained therein shall not in any way be affected or impaired thereby and shall otherwise remain in full force and effect. 9.03 Applicable Law. This Agreement shall be construed in accordance with and governed by the laws of the State of North Carolina. 9.04 Waiver. Neither the failure or any delay on the part of the Lender in exercising any right, power or privilege granted in the Loan Documents shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise of any other right, power or privilege which may be provided in any Loan Document or provided by law. - 17 - R#0202662.05 9.05 Modification. No modification, amendment or waiver of any provisions of any of the Loan Documents shall be effective unless in writing and signed by the parties thereto. 9.06 Renewal/Modification. If the Lender elects to modify/renew this Agreement, the Note or other Loan Documents, the Lender reserves the right to assess a fee in consideration for such modification/renewal. 9.07 Stamps and Fees. The Borrower shall pay all federal or state stamps, taxes, or other fees, or changes, if any are payable or are determined to be payable by reason of the execution, delivery or issuance of the Loan Documents or any security granted to the Lender (but specifically excluding any tax on income owed by the Lender as a result of income generated by the loan evidenced by this Agreement); and the Borrower agrees to indemnify and hold harmless the Lender against any and all liability in respect thereof. 9.08 Attorneys' Fees. In the event the Borrower shall default in any of its obligations to Lender and the Lender believes it necessary to employ an attorney to assist in the enforcement or collection of the indebtedness of the Borrower to the Lender, to enforce the terms and provisions of the Loan Documents or in the event the Lender voluntarily or otherwise should become a party to any suit or legal proceeding relating to its obligations hereunder (including a proceeding conducted under the United States Bankruptcy Code), the Borrower agrees to pay the reasonable attorneys' fees of the Lender and all related costs that may be reasonably incurred by the Lender. The Borrower shall be liable for such attorneys' fees and costs whether or not any suit or proceeding commences. Any attorneys' fees, however, shall be calculated on the basis of such attorneys' standard hourly billing rate for time in fact incurred, without regard to any statutory presumption. 9.09 Lender Making Required Payments. In the event any Fountain Corporation shall fail to maintain insurance, pay taxes or assessments, costs and expenses which such Fountain Corporation is, under any of the terms hereof or of any Loan Document, required to pay, or shall fail to keep any of the properties and assets constituting collateral free from new security interests, liens, or encumbrances, except as permitted herein, the Lender may at its election make expenditures for any or all such purposes and the amounts expended together with interest thereon at the Default Rate, shall become immediately due and payable to the Lender, and shall have the benefit of and be secured by the Collateral to the extent permitted by law. The Lender shall be under no duty or obligation whatever with respect to any of the foregoing expenditures. 9.10 Loan Agreement Controls. In the event of any inconsistency between the terms of the Loan Documents (other than this Agreement) and this Agreement, the terms of this Agreement shall control, except in the case of the Note (which shall be controlling in the event of a conflict with this Agreement). 9.11 Notices. All notices, requests or other communications provided for or permitted to be given pursuant to the Loan Agreement, the Deed of Trust, the Note or any other Loan Document (herein called a "notice") must be in writing (which includes by telephonic facsimile transmission) and shall be served by personal delivery or by depositing in the United States of America mail, postage prepaid, registered or certified, return receipt requested, and addressed to the addresses set forth below. All notices shall be effective upon personal delivery or on the third (3rd) day after being deposited in the - 18 - R#0202662.05 United States mail. Personal delivery may be accomplished through the use of a reputable commercial courier or air freight service or through the use of a telephone facsimile transmitter (telecopier). Rejection or other refusal to accept or the inability to deliver because of changed address of which no notice was given shall be deemed to be receipt of the notice sent. A notice shall not be ineffective solely because a non- party to be copied on a notice, as indicated below, did not receive such copy. By giving at least fifteen (15) days' written notice thereof, any party hereto shall have the right to specify as its address any other address in the United States of America. Each notice given by telecopy shall be deemed given on the date shown on the sender's copy thereof bearing the proper "answer back code" for the telecopy number to which the notice is sent, provided such telecopy number is the correct number of the receiving party at the time such notice is sent. The Borrower: Fountain Powerboats, Inc. Whichards Beach Road P.O. Drawer 457 Washington, North Carolina 27889 Attn: Reginald M. Fountain, Jr. Telecopy: (919) 975-6793 The Lender: General Electric Capital Corporation 6100 Fairview Road Suite 1450 Charlotte, North Carolina 28210 Attention: Waller Blackwell Telecopy: (704) 554-0726 9.12 Consent to Jurisdiction. Each Fountain Corporation hereby irrevocably agrees that any legal action or proceeding arising out of or relating to this Agreement or the other Loan Documents may be instituted in the Superior Court in Mecklenburg County, North Carolina, or the United States District Court for the Western District of North Carolina or in such other appropriate court and venue as the Lender may choose at its sole discretion Each Fountain Corporation consents to the jurisdiction of such courts and waives any objection relating to the basis for personal or in rem jurisdiction or to venue which such Fountain Corporation may now or hereafter have in any such legal action or proceedings. 9.13 Arbitration. Any controversy or claim arising out of or relating to this Loan Agreement shall be determined by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The number of arbitrators shall be three. One arbitrator shall be appointed by each of the parties and the third arbitrator, who shall serve as chairman of the tribunal, shall be appointed by the American Arbitration Association. The place of arbitration shall be Charlotte, North Carolina. Any arbitral award arising from any arbitration pursuant to this paragraph shall be final and binding upon all parties hereto. - 19 - R#0202662.05 9.14 Counterparts. This Agreement may be executed by one or more parties on any number of separate counterparts and all of such counterparts taken together shall be deemed to constitute one and the same instrument. 9.15 Entire Agreement. The Loan Documents embody the entire agreement among the parties hereto with respect to the Loan, and there are no oral or parol agreements existing between the Lender and the Fountain Corporations with respect to the Loan which is not expressly set forth in the Loan Documents. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed all as of the date first above written. BORROWER: ATTEST: FOUNTAIN POWERBOATS, INC., a North Carolina corporation /s/Blanche C. Williams By: /s/Reginanld M. Fountain, Jr. _______ Secretary ________ President [CORPORATE SEAL] LENDER: ATTEST: GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation /s/Kerry S. Thomas By: /s/Waller T. Blackwell _______ Secretary ________ Region Credit Analyst [CORPORATE SEAL] PARENT CORPORATION: ATTEST: FOUNTAIN POWERBOAT INDUSTRIES, INC. a Nevada corporation /s/Blanche C. Williams By: Reginald M. Fountain, Jr. _______ Secretary ________ President [CORPORATE SEAL] - 20 - R#0202662.05 PRESENT SUBSIDIARIES: ATTEST: FOUNTAIN TRUCKING, INC. a North Carolina corporation /s/Blanche C. Williams By: /s/Reginald M. Fountain,Jr. _______ Secretary ________ President [CORPORATE SEAL] ATTEST: FOUNTAIN AVIATION, INC. a North Carolina corporation /s/Blanche C. Williams By: /s/Reginald M. Fountain, Jr. _______ Secretary ________ President [CORPORATE SEAL] ATTEST: FOUNTAIN UNLIMITED, INC. a North Carolina corporation /s/Blanche C. Williams By: /s/Reginald M. Fountain, Jr. _______ Secretary ________ President [CORPORATE SEAL] ATTEST: FOUNTAIN POWER, INC. a North Carolina corporation /s/Blanche C. Williams By: /s/Reginald M. Fountain, Jr. _______ Secretary ________ President [CORPORATE SEAL] - 21 - R#0202622.05 ATTEST: FOUNTAIN SPORTSWEAR, INC. a North Carolina corporation /s/Blanche C. Williams By: /s/Reginald M. Fountain, Jr. _______ Secretary ________ President [CORPORATE SEAL] - 22 - R#0202662.05 SCHEDULE 1(a) FOUNTAIN POWERBOATS, INC. SCHEDULE OF DEBTS TO BE PAID OFF FROM PROCEEDS AS OF DECEMBER 31, 1996 1. MetLife Capital Corporation Bellevue, Washington Reference: Fountain Powerboats, Inc. Loan number 2046493-001 Pay-off Amount: $5,316,563.15 2. Deutsche Financial Services Troy Michigan Reference: Fountain Powerboats, Inc. Loan number 90475 Pay-off Amount: $1,234,702.96 3. General Electric Capital Corporation Charlotte, NC Reference: Fountain Powerboats, Inc. Loan number 4060713-001 Pay-off Amounts: $ 4. Branch Bank & Trust Leasing Corporation Charlotte, NC Reference: Fountain Powerboats, Inc. Loan number 3423449-001 Pay-off Amount: $54,287.30 Loan number 3423449-002 Pay-off Amount: $4,114.40 Loan number 3423449-003 Pay-off Amount: $60,342.53 5. Waster Industries, Inc. Raleigh, NC Reference: Fountain Powerboats, Inc. Loan number 019-259565 Pay-off Amount: $9,860.00 6. Toyota Acceptance Corporation Atlanta, GA Reference: Fountain Powerboats Loan number 01023303300600064319 Pay-off Amount: $4,657.18 Schedule 2.05 Receivables, Inventory or Tangible Personal Property Owned by Subsidiaries As of November 30, 1996 A. Fountain Aviation, Inc. - Asset Value $ 0 B. Fountain Sportswear, Inc. - Asset Value $ 181,129.00 C. Fountain Trucking, Inc. - Asset Value $ 67,287.00 D. Fountain Unlimited, Inc. - Asset Value $ 0 E. Fountain Power, Inc. - Asset Value $ 1,709,967.32 Schedule 2.09 Litigation 1. Environmental Matters - Fountain was notified by the United State Environmental Protection Agency ("EPA") and the North Carolina Department of Environment, Health and Natural Resources ("NCDEHNR") that it has been identified as a potentially responsible party ("PRP") and may incur, or may have incurred, liability for the remediation of contamination at the Spectron/Galaxy Waste Disposal Site located in Elkton, Maryland, and the Seaboard Disposal Site, located in High Point, North Carolina, also referred to as the Jamestown, North Carolina site, respectively, resulting from the disposal of hazardous substances at those sites by a third party contractor. Fountain has been informed that the EPA and NCDEHNR ultimately may identify a total of 1,000 to 2,000, or more, PRP's with respect to each site. Fountain believes that the amounts of hazardous substances generated by Fountain, which were disposed of at both sites, are minimal in relation to the total amount of hazardous substances disposed of by all PRP's at the sites. At present, the environmental conditions at the sites and the cost of remediation, to the best of Fountain's knowledge, have not been determined fully by the EPA and NCDEHNR, respectively, and Fountain is not able to determine at this time the amount of any potential liability it may ultimately have in connection with remediation at either site. Without any acknowledgment or admission of liability, Fountain has made payments as a nonperforming cash-out participant in an EPA-supervised response and removal program at the Spectron/Galaxy Site, and in a NCDEHNR-supervised removal and preliminary assessment program at the Seaboard Disposal Site. A cash-out proposal for the next phase of the project is expected to be forthcoming from the PRP Group for the Spectron/Galaxy Site. According to the PRP Group, Fountain's full cash-out amount is estimated too be approximately $10,000 for the Spectron/Galaxy Site in Elkton, Maryland, based on an estimated 3,304 gallons of waste disposed of at that site by Fountain. A cash-out proposal in the approximate amount of $66,000 based on an estimated 19,245 gallons of waste is anticipated from the PRP Group for the Seaboard Disposal Site in North Carolina following completion of a Remedial Investigation and Feasibility Study in early 1998, according to the PRP Group administrator. Any cash-out agreement will be subject to approval by EPA and NCDEHNR, respectively. 2. Anglo American Insurance Company, Ltd. on behalf of Richard Kall v. Fountain Powerboats, Inc. and Adventure Marine and Outdoors, Inc. - This matter involves one federal lawsuit and two state lawsuits, described below, all currently pending in Louisiana. Local counsel for Fountain's defense for all three suits is Christopher J. Fransen of Fransen and Hardin, New Orleans, Louisiana. The federal suit was filed in the Eastern District of Louisiana on September 28, 1995. The plaintiff alleges negligence on the part of Fountain and its dealer co-defendant due to damages caused by the eruption of a fire on a boat while being trailered on the Louisiana Interstate. The plaintiff paid $75,460.00 to Richard D. Kall, the insured boat owner, on his claim, and the insurance carrier now is seeking to recover that amount from Fountain and its co-defendant. Richard D. Kall v. Fountain Powerboats, Inc. and Adventure Marine and Outdoors, Inc. - The two state court suits involve Petitions for damages filed on October 2, 1995 in the District Courts of both Jefferson Parish, and Orleans Parish, Louisiana. Mr. Kall claims that the value of the boat at the time of the fire was $90,000.00, plus additional equipment and gear in the boat of $1,500.00 He claims negligence on the part of Fountain and its co-defendant, and asserts claims for mental anguish and distress as a result of the fire and loss of his boat. The petition seeks sums "as are just and reasonable under the premises, including attorneys' fees and all coast in bringing these proceedings plus interest from date of judicial demand until paid." 3. Michael Jordan/Air Jordan Trademark Claim - Fountain received a demand letter, dated February 22, 1996, from David Falk, representative and agent for Michael Jordan, for damages in connection with an advertisement for Fountain which used Michael Jordan's name and the phrase "Air Reggie." The initial monetary demand was for $1 million if the claim was resolved prior to institution of a lawsuit, which also has been threatened. Fountain put its primary and umbrella insurance carriers on notice. 4. M & G Electronics Corp. v. Fountain Powerboats, Inc. - This is a collection suit filed August 16, 1995 in Wake County, and later moved to Beaufort County. The plaintiff alleges that it sold and delivered certain goods to Fountain, for which $10,960.41 remains due. The suit seeks to recover this amount, plus costs and interest. Fountain's Answer and Counterclaims were filed on November 15, 1995. Fountain denies owing the plaintiff any money and asserts that the plaintiff supplied defective and/or faulty materials, and additionally did not provide some of the materials ordered by Fountain. 5. Allstate Insurance Company, as subrogee of Michael Centanzo v. Fountain Powerboats, Inc. - This suit was filed on September 25, 1995 in the Superior Court of Camden County, New Jersey. The plaintiff alleges that the boat Centanzo bought from Fountain began to take on a considerable amount of water while it was in use. The plaintiff further alleges that the problem was due to a defective water pressure fitting installed by Fountain. Plaintiff paid Centanzo $19,234.96 on his claim for the water damage, and plaintiff is seeking to recover this sum, plus court costs and attorney fees. The case is being handled by New Jersey counsel. The New Jersey counsel reports directly to Fountain. 6. Manoocher Fateh, M.D. v. Fountain Powerboats, Inc. - This suit was filed on September 12, 1994, in the Superior Court of Essex County, New Jersey. The plaintiff alleges that he contracted in December 1993 with Fountain's dealer, Trenton Marine, to purchase a new Fountain 47' Sport Cruiser for $230,000, but that when the boat was delivered to him by Trenton Marine on May 13, 1994, its cabin area filled with water due to an alleged structural defect, extensively damaging the interior. The plaintiff seeks trebled damages in an unspecified amount, pursuant to the New Jersey Consumer Fraud Act, and rescission of his contract to purchase the boat. Fountain's Answer, filed on October 25, 1994, denied liability in the matter and asserted various affirmative defenses. The case is being handled by New Jersey counsel. 7. North Carolina Escheat Audit - Fountain has been audited by the State of North Carolina under the Escheat and Unclaimed Property Statute. The State Treasurer's audit report, dated November 1, 1996, sets forth a total of $14,015.48 and 4,535 shares in property deemed escheatable. A response to the audit was submitted on December 6, 1996, wherein Fountain agrees to an amount of $480.44 and 25 shares in escheatable property. Fountain maintains that the remaining funds and shares are not escheatable for various reasons. WSMAIN/205824. Schedule 6.01 Environmental 1. Fountain was notified by the United States Environmental Protection Agency ("EPA") and the North Carolina Department of Environment, Health and Natural Resources ("NCDEHNR") that it has been identified as a potentially responsible party ("PRP") and may incur, or may have incurred, liability for the remediation of contamination at the Spectron/Galaxy Waste Disposal Site located in Elkton, Maryland, and the Seaboard Disposal Site, located in High Point, North Carolina, also referred to as the Jamestown, North Carolina site, respectively, resulting from the disposal of hazardous substances at those sites by a third party contractor. Fountain has been informed that the EPA and NCDEHNR ultimately may identify a total of 1,000 to 2,000, or more, PRP's with respect to each site. Fountain believes that the amounts of hazardous substances generated by Fountain, which were disposed of at both sites, are minimal in relation to the total amount of hazardous substances disposed of by all PRP's at the sites. At present, the environmental conditions at the sites and the cost of remediation, to the best of Fountain's knowledge, have not been determined fully by the EPA and NCDEHNR, respectively, and Fountain is not able to determine at this time the amount of any potential liability it may ultimately have in connection with remediation at either site. Without any acknowledgment or admission of liability, Fountain has made payments as a nonperforming cash-out participant in an EPA-supervised response and removal program at the Spectron/Galaxy Site, and in a NCDEHNR-supervised removal and preliminary assessment program at the Seaboard Disposal Site. A cash- out proposal for the next phase of the project is expected to be forthcoming from the PRP Group for the Spectron/Galaxy Site. According to the PRP Group, Fountain's full cash-out amount is estimated to be approximately $10,000 for the Spectron/Galaxy Site in Elkton, Maryland, based on an estimated 3,304 gallons of waste disposed of at that site by Fountain. A cash-out proposal in the approximate amount of $66,000 based on an estimated 19,245 gallons of waste is anticipated from the PRP Group for the Seaboard Disposal Site in North Carolina following completion of a Remedial Investigation and Feasibility Study in early 1988, according to the PRP Group administrator. Any cash-out agreement will be subject to approval by EPA and NCDEHNR, respectively. 2. Fountain sustained a fire at its plant in 1989, and the fire caused a discharge of environmental contaminants on the Property. A clean-up operation was conducted and based on information from the State and the engineers, it is believed that all necessary clean-up activities were performed and completed in accordance with the requirements. A copy of the related correspondence is attached hereto. State of North Carolina Department of Natural Resources and Community Development Northeastern Region 1424 Carolina Avenue, Washington, North Carolina 27889 James G. Martin, Governor Lorraine G. Shinn William W. Cobey, Jr., Secretary Regional Manager DIVISION OF ENVIRONMENTAL MANAGEMENT May 30, 1989 Mr. Thomas W. Harwell Carolina Benchmark, Inc. 10 Oakmont Drive P.O. Box 2687 Greenville, NC 27836 SUBJECT: Fountain Power Boats, Inc. Remedial Action Beaufort County Dear Mr. Harwell This office of the Division of Environmental Management has reviewed the analytical laboratory reports submitted to us May 9, 1989. It has been determined that your proposal to mitigate the site, pond #1 area, is acceptable. You should be made aware, though, that if the evaporation rate of the air exchangers is such that a discharge of treated water will result, an NPDES permit will be required. Please notify this office of the proposed schedule of activity and completion date of this project . If you have any questions or comments, please call this office at 946-6481. Sincerely /s/Jim Mulligan Jim Mulligan Regional Supervisor P.O. Box 1507, Washington, North Carolina 27889-1507 Telephone 919-946-6481 An Equal Opportunity Affirmative Action Employer CB CAROLINA BENCHMARK ENGINEERS-SURVEYORS-PLANNERS INCORPORATED June 5, 1989 Mr. John Ward Ward & Smith P.O. Box 867 New Bern, NC 28560 RE: Fountain Powerboats, Inc. Remedial Action Beaufort County Dear Sir: Herein enclosed is the latest letter from the State on the cleanup. This basically is their approval. Very truly your, /s/Thomas W. Harwell Thomas W. Harwell Chairman TWH/nwd Enclosure Copy to: Fountain Power Boats CAROLINA BENCHMARK 102 OAKMONT DRIVE P.O. BOX 2687 (ECU STATION) GREENVILLE, N.C. 27836 TELEPHONE (919) 756-8440 CB CAROLINA BENCHMARK ENGINEERS-SURVEYORS-PLANNERS INCORPORATED July 13, 1989 Mr. Ken Bornstein Fountain Powerboats, Inc. P.O. Drawer 457 Washington, NC 27889 RE: Fountain Powerboats, Inc. Beaufort County Dear Sir: This is a report of the status of the environmental concern involving the canal system at the Fountain Powerboats, Inc. site. These concerns were raised by the Northeastern Regional Office of the Division of Environmental Management, NC Department of Natural Resources and Community Development. Reference the attached correspondence: a. Carolina Benchmark ltr dated January 31, 1989 b. NC Division of Environmental Management ltr dated March 15, 1989 c. Carolina Benchmark ltr dated March 28, 1989 d. Carolina Benchmark ltr dated May 1, 1989 e. NC Division of Environmental Management lrt dated May 30, 1989 f. Results of Pond #1 Acetone and 2-Butanone testing dated May 25, 1989 In essence, as shown, the above referenced correspondence concludes that the State (NC Division of Environmental Management) has agreed with the proposal to mitigate the site, Pond #1 area. The test of May 25, 1989 shows that Acetone and 2-Butanone levels are below the quantitation limit as is 1,1,1- Trichlorethane in Pond #2. A retesting to confirm this mitigation is scheduled this week. If the anticipated results of this confirmation testing are the same as the May 25, 1989 results, a request will be made to the State (NC Division of Environmental Management) to declare cleanup and mitigation successfully conducted and allow final filling of Pond #1 for which a permit has already been issued (See attached Permit #32- 87, issued May 23, 1989). Very truly yours, /s/Thomas W. Harwell Thomas W. Harwell Chairman CAROLINA BENCHMARK 102 OAKMONT DRIVE P.O. BOX 2687 (ECU STATION) GREENVILLE, N.C. 27836 TELEPHONE (919) 756-8440 CB CAROLINA BENCHMARK ENGINEERS-SURVEYORS-PLANNERS INCORPORATED August 13, 1990 Mr. David L. Ward, Jr. Ward & Smith, PA P.O. Box 867 New Bern, NC 28563 RE: Fountain Powerboats, Inc. Beaufort County, NC Plant Dear Sir: In accordance with Mr. Leon Smith's request of this date I am enclosing copies of our letters of last year (July 13, 1989 & August 14, 1989) concerning the status of environmental concern involving the canal systems after the fire at the subject facility. A plan of mitigation was approved from the state. Reports of the sampling indicated results below the quantitation limits after mitigation that was conducted in accordance with the approved plan. A permit (Addenda to permit 32-87) was received authorizing the canal fill. To the best of my knowledge the mitigation of the chemicals entering the canal as a direct result of the fire (ie. Acetone and 2-Butanone) was completed. The sampling and testing program ended and the remedial action plan was concluded. We did not direct the cleanup operations or supervise the endeavors. We did prepare the mitigation plan and monitored the results. Very truly yours, /s/Thomas W. Harwell Thomas W. Harwell, PE Copy to: Fountain Powerboats CAROLINA BENCHMARK 102 OAKMONT DRIVE P.O. BOX 2687 (ECU STATION) GREENVILLE, N.C. 27836 TELEPHONE (919) 756-8440 CB CAROLINA BENCHMARK ENGINEERS-SURVEYORS-PLANNERS INCORPORATED August 14, 1989 Mr. Alton R. Hodge, Environmental Engineer Division of Environmental Management Water Quality Section P.O. Box 1507 Washington, NC 27889 RE: Site Investigation/Remedial Action Plan Fountain Powerboats, Inc. References: a. Carolina Benchmark ltr dated January 31, 1989 b. NC Division of Environmental Management ltr dated March 15, 1989 c. Carolina Benchmark ltr dated March 28, 1989 d. Carolina Benchmark ltr dated May 1, 1989 e. NC division of Environmental Management ltr dated May 30, 1989 f. Carolina Benchmark ltr dated June 5, 1989 Enclosed is the result of test of Pond #1 Acetone and 2- Butanone dated May 25, 1989 and rechecked on July 18, 1989 (Recheck analyzed July 28, 1989 and reported August 8, 1989). The test of May 25, 1989 shows that Acetone and 2-Butanone levels in Pond #1 area was below the quantitation limit as was 1,1,1-Trichlorethane in Pond #2. Retesting to confirm that result was done on July 18, 1989 and the results reported August 8, 1989. This report showed Acetone at less than 25 ug/1 and 2- Butanone at less than 25 ug/1 also. Sampling was made by Brian E. Gray, Geologist of our office with testing by IEA of Research Triangle Park NC. In light of the above test results, it is requested that the final filling of Pond #1 be authorized. Very truly yours, /s/Thomas W. Harwell Thomas W. Harwell Chairman TWH/nwd CAROLINA BENCHMARK 102 OAKMONT DRIVE P.O. BOX 2687 (ECU STATION) GREENVILLE, N.C. 27836 TELEPHONE (919) 756-8440 State of North Carolina Department of Environment, Health and Natural Resources Northeastern Region 1424 Carolina Avenue, Washington, North Carolina 27889 James G. Martin, Governor Lorraine G. Shinn William W. Cobey, Jr. Secretary Regional Manager DIVISION OF ENVIRONMENTAL MANAGEMENT August 27, 1990 Mr. Reggie Fountain Fountain Powerboats, Inc. P.O. Box 457 Washington, NC 27889 SUBJECT: Status of Site Beaufort County Dear Mr. Fountain: At your request, this letter is written to inform the company of the status of the site following the fire. Fountain Powerboats, Inc. cooperated with this Division during every phase of the emergency, fire, and cleanup. The containment, monitoring, and cleanup efforts were evaluated as satisfactory by staff members of this Division. If you have any questions or we can be of any further help, please call. Sincerely, /s/Jim Mulligan Jim Mulligan Regional Supervisor cc: Lorraine Shinn Ted Dennis Tom Harwell P.O. Box 1507, Washington, North Carolina 27889-1507 Telephone 919-946-6481 An Equal Opportunity Affirmative Action Employer CB CAROLINA BENCHMARK ENGINEERS-SURVEYORS-PLANNERS INCORPORATED September 6, 1990 Mr. John L. Ward, Jr. Attorney-at-Law Ward & Smith, P.A. P.O. Box 867 New Bern, NC 28560 RE: Fountain Power Boats, Inc. Dear Sir: I have forwarded to you a copy of the August 27, 1990 letter from the NC Division of Environmental Management concerning the Status of Site following the fire. In response to an inquiry by Sandra of your office on September 5, 1990, we faxed a copy of our August 14, 1989 and July 13, 1989 letters. For the record, I am enclosing herein: a. Carolina Benchmark letter of July 113, 1989 b. NC Division of Environment letter of May 30, 1989 c. Carolina Benchmark letter of August 14, 1989 d. Carolina Benchmark letter of June 5, 1989 e. Carolina Benchmark letter of August 13, 1990 f. NC division of Environmental letter of August 27, 1990 On August 27, 1990, the NC Division of Environmental Management by letter stated "The containment, monitoring, and cleanup efforts were evaluated as satisfactory by staff members of this Division". Regards, /s/Thomas W. Harwell Thomas W. Harwell Chairman TWH/nwd Enclosures CAROLINA BENCHMARK 102 OAKMONT DRIVE P.O. BOX 2687 (ECU STATION) GREENVILLE, N.C. 27836 TELEPHONE (919) 756-8440 MASTER SECURITY AGREEMENT THIS MASTER SECURITY AGREEMENT, made as of December 31, 1996 ("Agreement"), by and between GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation with an address at 6100 Fairview Road, Suite 1450, Charlotte, North Carolina ("Secured Party"), and FOUNTAIN POWERBOATS, INC., a corporation organized and existing under the laws of the State of North Carolina, with its chief executive offices located at Whichard's Beach Road, Washington, North Carolina 27889 ("Debtor"). This Security Agreement is given simultaneously with that certain Loan Agreement between the Debtor, the Secured Party, and certain other parties, dated of even date herewith (the "Loan Agreement"). In addition, to further secure the Note (hereinafter defined), the Debtor has executed that certain Deed of Trust, Assignment of Rents and Security Agreement, dated of even date herewith, with respect to certain real property now owned by the Debtor and located in Beaufort County, North Carolina and described in Exhibit B attached hereto and incorporated herein by reference (the "Real Property") (such deed of trust being referred to as the "Deed of Trust") and has also executed certain other loan documents in connection with the Indebtedness. In consideration of the promises herein contained and certain other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Debtor and Secured Party hereby agree as follows: 1. CREATION OF SECURITY INTEREST Debtor hereby gives, grants and assigns to Secured Party, its successors and assigns forever, a security interest in and against any and all of the following property: (a) Tangible Personal Property. All furniture, furnishings, machinery, apparatus, equipment [specifically including but not limited to that attached to any collateral schedule (the "Collateral Schedule") now or hereafter attached hereto as an Exhibit A], fittings, fixtures and other articles of tangible personal property now owned or leased or hereafter acquired by the Debtor, wherever located [but specifically including any such property now or hereafter located on the Real Property and any additional real property now or hereafter owned by the Debtor (the "Additional Property") (the Real Property and the Additional Property hereinafter referred to as the "Property"), including but not limited to, goods, machinery, tools, equipment (including fire, sprinkler and alarm systems; air conditioning, heating, refrigerating, electronic monitoring, entertainment, and recreational equipment; window or structural cleaning rigs; maintenance equipment; equipment relating exclusion of vermin or insects, removal of dust, refuse or garbage; and all other equipment of every kind), elevators, indoor and outdoor furniture (including tables, chairs, planters, desks, sofas, shelves, lockers and cabinets), wall beds wall safes, furniture, furnishings, appliances (including ice boxes, refrigerators, fans, heaters, stoves, water heaters and incinerators), rugs, carpets and other floor coverings, draperies and drapery rods and brackets, awnings, window shades, venetian blinds, curtains, lamps, chandeliers, and other lighting fixtures and office maintenance and R#0202392.04 other supplies and the proceeds and products of all of the foregoing and all replacements and renewals thereof (the foregoing being hereafter referred to as the "Tangible Personal Property"). (b) Inventory. All of the Debtor's inventory now owned or hereafter acquired, including but not limited to (i) goods intended for sale, use or lease by the Debtor or to be furnished by the Debtor under contracts of service, (ii) all raw materials, goods in process, finished goods, materials and supplies of every nature used or usable in connection with the manufacture, packing, shopping, advertising, selling, leasing or furnishing of such goods (specifically including, but not limited to, all molds, metals, plastics, upholstery, windscreens, fiberglass, and other components in boat manufacture), and any and all items including machinery and equipment used or consumed in the operation of the business of the Debtor or which contribute to the finished product or to the sale, promotion, and shipment thereof, in which the Debtor now or at any time hereafter may have an interest, whether or not such inventory is listed on any reports furnished to the Secured Party from time to time; (iii) all inventory whether or not the same is in transit or in the constructive, actual, or exclusive occupancy or possession of the Debtor or is held by the Debtor or by others for the Receivables (as hereafter defined), including, without limitation, all goods covered by purchase orders, and contracts with suppliers and all goods billed and held by suppliers; (iv) all inventory which may be located on premises of the Debtor or of any carrier, forwarding agents, truckers, warehousemen, vendors, selling agents, or third parties; (v) all general intangibles relating to or arising out of inventory; (vi) all documents evidencing or representing the same, all documents of title, all negotiable and non-negotiable warehouse receipts representing the same; and (vii) all products and proceeds of the foregoing (including cash, accounts receivable, non-cash trade ins, and non-cash-proceeds), wherein the foregoing may be located (referred to herein collectively as "Inventory"). (c) Insurance Policies. All rights in and to all pertinent present and future fire and/or hazard insurance policies (including, but not limited to, insurance proceeds) covering the Property, and improvements thereon (the "Improvements") or the property described in (a) and (b) above. (d) Awards. All awards made by any public body or decreed by any court of competent jurisdiction for a taking or for degradation of value of the Property, the Improvements or the property described in (a) above in any eminent domain proceeding and all payments made in respect of a conveyance made in lieu of any such taking. (e) Lease Rights and Security Deposits. All of the Debtor's rights and interests in and to all present and future leases of the Property and Improvements or any part thereof and/or all rental income and/or security deposits, whether payable pursuant to any present or future lease or otherwise growing out of any occupancy or use of the Property and the Improvements. (f) Accounts Receivable and General Intangibles Relating to Debtor. (i) All obligations and indebtedness of every kind at any time owing to the Debtor from whatever source arising, and including (without limitation) all accounts, accounts receivable, tax refunds, refunds, payments or proceeds under any insurance policies, instruments, contract rights, chattel paper, general intangibles and documents, whether secured or unsecured, now existing or hereafter created; (ii) any and all sums and property recovered by the Debtor or any trustee, receiver or fiduciary acting on the 2 R#0202392.04 Debtor's behalf as a result of or arising from a fraudulent or preferential transfer or payment (as determined under present or future federal or state law or regulations relating to bankruptcy, insolvency or other relief or debtors) made by the Debtor or on the Debtor's behalf; (ii) all of the Debtor's rights as an unpaid seller, including stoppage in transit, replevin, detinue and reclamation; (iv) all customer lists and other documents containing names, addresses and other information regarding the Debtor's customers, subscribers and those to whom the Debtor provides any services, and all supplier lists of the Debtor; (v) all books, records, files, computer tapes, programs, software, discs and other material or documents relating to the recording, billing or analyzing of any of the above; (vi) all now or hereafter existing balances, credits, deposits (general or special, time or demand, provisional of final), accounts and all other sums credited by, maintained with or due from the Debtor the Debtor or any of the Debtor's affiliates to the Debtor or subject to withdrawal by the Debtor, together with all goods, inventory, and merchandise returned by or reclaimed by or repossessed from customers wherever such goods, inventory and merchandise are located, and all proceeds thereto; and (vii) all products and proceeds of any of the foregoing in any form, including cash, insurance proceeds, negotiable instruments and other evidences of indebtedness, chattel paper, security agreements and other documents (all of the foregoing being herein referred to as "Receivables"). All trade names (specifically including without limitation, the name "Fountain Powerboats"), symbols, logos, copyrights, patents, patent applications, federal trademark registrations, any trademark applications now or hereafter filed with respect thereto and any federal trademark registrations issued or issuing with respect thereto, and all goodwill associated with the trademarks and patents. All goodwill and all other general intangibles of every kind and description now or hereafter owned by the Debtor. Together with all items listed in Exhibit C. (g) Motor Vehicles. All motor vehicles and trailers now or hereafter owned by the Debtor. (h) Proceeds. All proceeds or sums payable in lieu of or as compensation for the loss or damage to any property described in (a) through (g) above. (i) Additions, Accessions, Substitutes. Any and all additions, attachments, accessories and accessions thereto, any and all substitutions, replacements or exchanges therefor, and any and all insurance and/or other proceeds thereof. All of the foregoing personal property is hereinafter individually and collectively referred to as the "Collateral". The foregoing security interest is given to secure the payment and performance of any and all debts, obligations and liabilities of any kind, nature or description whatsoever (whether primary, secondary, direct, contingent, sole, joint or several, or otherwise and whether due or to become due) of Debtor to Secured Party, now existing or hereafter arising, including but not limited to the payment and performance of a certain Promissory Note from the Debtor to the Secured Party in the 3 R#0202392.04 principal amount of $10,000,000, dated of even date herewith (hereinafter referred to as the Note"), and any renewals, extensions and modifications of such Note and any other debts, obligations and liabilities of the Debtor to the Secured Party (all of the foregoing being hereinafter referred to as the "Indebtedness"). Notwithstanding the foregoing, and notwithstanding anything to the contrary contained elsewhere in this Agreement, to the extent that Secured party asserts a purchase money security interest in any items of the Tangible Personal Property constituting a portion of the Collateral ("PMSI Collateral"): (i) the PMSI Collateral shall secure only that portion of the Indebtedness which has been advanced by Secured Party to enable Debtor to purchase, or acquire rights in or the use of such PMSI Collateral (the " PMSI Indebtedness"), and (ii) no other Collateral shall secure the PMSI Indebtedness. 2. REPRESENTATIONS, WARRANTIES, AND COVENANTS OF DEBTOR. Debtor hereby represents, warrants and covenants as of the date hereof and as of the date of execution of each Collateral Schedule hereto that: (a) Debtor is, and will remain, duly organized, existing and in good standing under the laws of the State set forth in the first paragraph of this Agreement, has its chief executive offices at the location set forth in such paragraph, and is, and will remain, duly qualified and licensed in every jurisdiction wherever necessary to carry on its business and operations; (b) Debtor has adequate power and capacity to enter into, and to perform its obligations, under this Agreement, the Note and any other documents evidencing, or given in connection with, any of the Indebtedness (all of the foregoing being hereinafter referred to as the "Debt Documents"); (c) This Agreement and the other Debt Documents have been duly authorized, executed and delivered by Debt and constitute legal, valid and binding agreements enforceable under all applicable laws n accordance with their terms, except to the extent that the enforcement of remedies may be limited under applicable bankruptcy and insolvency laws; (d) No approval, consent or withholding of objections is required from any governmental authority or instrumentality with respect to the entry into, or performance by, Debtor of any of the Debt Documents, except such as may have already been obtained; (e) The entry into, and performance by, Debtor of the Debt Documents will not (i) violate any of the organizational documents of Debtor or any judgment, order, law or regulation applicable to Debtor, or (ii) result in any breach of, constitute a default under, or result in the creation of any lien, claim or encumbrance on any of Debtor's property (except for liens in favor of Secured Party) pursuant to, any indenture, mortgage, deed of trust, bank loan, credit agreement, or other agreement or instrument to which Debtor is a party; (f) There are no suits or proceedings pending or threatened in court or before any commission, board or other administrative agency against or affecting Debtor which could, in the aggregate, have a material adverse effect on Debtor, its business or operations, or its ability to 4 R#0202392.04 perform its obligations under the Debt Documents, except those disclosed in Schedules to the Loan Agreement; (g) All financial statements delivered to Secured Party in connection with the Indebtedness have been prepared in accordance with generally accepted accounting principles, and since the date of the most recent financial statement, there has been no material adverse change; (h) The Collateral is not, and will not be, used by Debtor for personal, family or household purposes; (i) The Collateral constituting Tangible Personal Property and Inventory is, and will remain, in good condition and repair and Debtor will not be negligent in the care and use thereof; (j) Debtor is, and will remain, the sole and lawful owner, and in possession of the Collateral (except for Inventory in transit to dealers for sale and except for Inventory sold in the ordinary course of business), and has the sole right and lawful authority to grant the security interest described in this Agreement; and (k) The Collateral is, and will remain, free and clear of all liens, claims and encumbrances of every kind, nature and description, except for (i) liens in favor of Secured party, (ii) liens for taxes not yet due or for taxes being contested in good faith and which do not involve, in the reasonable judgment of Secured Party, any risk for the sale, forfeiture or loss of any of the Collateral, and (iii) inchoate materialmen's mechanic's, repairmen's and similar liens arising by operation of law in the normal course of business for amounts which are not delinquent (all of such permitted liens being hereinafter referred to as "Permitted Liens"). 3. COLLATERAL. (a) Until the declaration of any default hereunder, Debtor shall remain in possession of the Collateral; provided, however, that Secured Party shall have the right to possess (i) any chattel paper or instrument that constitutes a part of the Collateral, and (ii) any other Collateral which because of its nature may require that Secured Party's security interest therein be perfected by possession. Secured Party, its successors and assigns, and their respective agents, shall have the right to examine and inspect any of the Collateral at any time during normal business hours. Upon any request from Secured Party, Debtor shall provide Secured Party with notice of the then current locations of the Collateral, specifically including the names and addresses of dealers to whom Inventory is sent from time to time. (b) Debtor shall (i) use the Collateral only in its trade or business, (ii) maintain all of the Collateral in good condition and working order, (iii) use and maintain the Collateral only in compliance with all applicable laws, and (iv) keep all of the Collateral free and clear of all liens, claims and encumbrances (except for Permitted Liens). 5 R#0202392.04 (c) Debtor shall not, without the prior written consent of Secured Party, (i) part with possession of any of the Collateral (except to dealers for sale of Inventory, to Secured Party, or for maintenance and repair), (ii) remove any of the Collateral from the continental United States, or (iii) sell, rent, lease, mortgage, grant a security interest in or otherwise transfer or encumber (except for Permitted Liens) any of the Collateral. Notwithstanding the foregoing, the Debtor may ship Inventory to dealers outside the continental United States for sale, provided payment is made in full prior to shipment or is secured by an irrevocable letter of credit from a domestic bank. (d) Debtor shall pay promptly when due all taxes, license fees, assessments and public and private charges levied or assessed on any of the Collateral, on the use thereof, or on this Agreement or any of the other Debt Documents. At its option, Secured Party may discharge taxes, liens, security interests or other encumbrances at any time levied or placed on the Collateral and may pay for the maintenance, insurance and preservation of the Collateral or to effect compliance with the terms of this Agreement or any of the other Debt Documents. Debtor shall reimburse Secured Party, on demand, for any and all costs and expenses incurred by Secured Party in connection therewith and agrees that such reimbursement obligation shall be secured hereby. (e) Debtor shall, at all times, keep accurate and complete records of the Collateral, and Secured Party, its successors ad assigns, and their respective agents, shall have the right to examine, inspect, and make extracts from all of Debtor's books and records relating to the Collateral at any time during normal business hours. Such reports shall be in such detail, form and scope as the Secured Party shall require. The Secured Party and the Secured Party's agents and representatives may at all times have access to, examine and inspect the Inventory, the Tangible Personal Property, and all records pertaining thereto. The Debtor now keeps and shall continue to keep correct and accurate records itemizing and describing the kind, type, quality and quantity of Inventory, the Debtor's cost therefor and the selling price thereof, the daily withdrawals therefrom and the additions thereto. Any equipment and molding designated by the Secured Party shall be tagged so as to disclose the security interest of the Secured Party in such personalty. (f) If agreed by the parties, Secured Party may, but shall in no event be obligated to, accept substitutions and exchanges of property for property, and additions to the property, constituting all or any part of the Collateral. Such substitutions, exchanges and additions may be accomplished at any time and from time to time, by the substitution of a revised Collateral Schedule for the Collateral Schedule now or hereafter annexed. Any property which may be substituted, exchanged or added as aforesaid shall constitute a portion of the Collateral and shall be subject to the security interest granted herein. Additions to, reductions or exchanges of, or substitutions for, the Collateral, payments on account of any obligation or liability secured hereby, increases in the obligations and liabilities secured hereby, or the creation of addition obligations and liabilities secured hereby, may from time to time be made or occur without affecting the provisions of this Agreement or the provisions of any obligation or liability which this Agreement secures. (g) Any third person at any time and from time to time holding all or any portion of the Collateral shall be deemed to, and shall, hold the Collateral as the agent, and as pledge holder for, Secured Party. At any time and from time to time, Secured party may give notice to any third 6 R#0202392.04 person holding all or any portion of the Collateral that such third person is holding the Collateral as the agent of, and as pledge holder for, the Secured Party. 4. INSURANCE. The Collateral shall at all times be held at Debtor's risk, and Debtor shall keep it insured against loss or damage by fire and extended coverage perils, theft, burglary, and for any or all Collateral which are vehicles, for risk of loss by collision, and where requested by Secured Party, against other risks as required thereby, for the full replacement value thereof, with companies in amounts and under policies acceptable to Secured Party. Debtor shall, if Secured Party so requires, deliver to Secured Party policies of certificates of insurance evidencing such coverage. Each policy shall name Secured Party as loss payee thereunder, shall provide for coverage to Secured Party regardless of the breach by Debtor of any warranty or representation made therein, shall not be subject to co- insurance, and shall provide for thirty (30) days written notice to Secured Party of the cancellation or material modification thereof (unless such insurance coverage is not obtainable). Debtor hereby appoints Secured Party as its attorney in fact to make proof of loss, claim for insurance and adjustments with insurers, and to execute or endorse all documents, checks or drafts in connection with payment made as a result of any such insurance policies. Proceeds of insurance shall be applied, at the option of Secured Party, to repair or replace the Collateral or to reduce any of the Indebtedness secured hereby. 5. REPORTS. (a) Debtor shall promptly notify Secured Party in the event of (i) any change in the name of Debtor, (ii) any relocation of its chief executive offices, (iii) any relocation of any of the Collateral, (iv) any of the Collateral being lost, stolen, missing, destroyed, materially damaged or worn out, or (v) any lien, claim or encumbrance attaching or being made against any of the Collateral other than Permitted Liens. (b) Debtor agrees to furnish its annual financial statements and such interim statements as Secured Party may require in form satisfactory to Secured Party and as required in the Loan Agreement. Any and all financial statements submitted and to be submitted to Secured Party have and will have been prepared on a basis of generally accepted accounting principles, and are and will be complete and correct and fairly present Debtor's financial condition as at the date thereof. Secured Party may at any reasonable time examine the books and records of Debtor and make copies thereof. 6. FURTHER ASSURANCES. (a) Debtor shall, upon request of Secured Party, furnish to Secured Party such further information, execute and deliver to Secured Party such documents and instruments (including, without limitation, Uniform Commercial Code financing statements) and do such other acts and things, as Secured Party may at any time reasonably request relating to the perfection or protection of the security interest created by this Agreement or for the purpose of carrying out the intent of this 7 R#0202392.04 Agreement. Without limiting the foregoing, Debtor shall cooperate and do all acts deemed necessary or advisable by Secured Party to continue in Secured Party a perfected first security interest in the Collateral, and shall obtain and furnish to Secured Party any subordinations, releases, landlord, lessor, or mortgagee waivers, and similar documents as may be from time to time requested by, and which are in form and substance satisfactory to, Secured Party. The Debtor shall provide to the Secured Party a schedule of all Receivables, Tangible Personal Property, and Inventory at least once every fiscal quarter, as described in the Loan Agreement. The Debtor shall also notify the Secured Party of any patent and trademark applications filed each fiscal quarter and take such measures as the Secured Party may require to confirm the assignment and to perfect the security interests granted hereby. If any Inventory is in the possession or control of any of the Debtor's agents or processors, the Debtor shall notify them of the Secured Party's security interest therein, and upon the Secured Party's request, instruct them to hold all such Inventory for the Secured Party's account and subject them to the Secured Party's instructions. If at any time the Secured Party determines that the Secured Party's security interest in any boat constituting a portion of Inventory is required to be perfected by the filing of a marine vessel mortgage, the Debtor agrees to execute such a vessel mortgage (in form and substance satisfactory to the Secured Party) and cause such mortgage to be filed in appropriate governmental offices so as to perfect the Secured Party's security interests in such vessel. (b) Debtor hereby grants to Secured Party the power to sign Debtor's name and generally to act on behalf of Debtor to execute and file applications for title, transfers of title, financing statements, notices of lien and other documents pertaining to any or all of the Collateral. Debtor shall, if any certificate of title be required or permitted by law for any of the Collateral, obtain such certificate showing the lien hereof with respect to the Collateral and promptly deliver same to Secured Party. (c) Debtor shall indemnify and defend the Secured Party, its successors and assigns, and their respective directors, officers and employees, from and against any and all claims, actions and suits (including, without limitation, related attorneys' fees) of any kind, nature or description whatsoever arising, directly or indirectly, in connection with any of the Collateral. (d) The Secured Party shall have no duty or care with respect to the Collateral, except that the Secured Party shall exercise reasonable care with respect to Collateral in its custody, but shall be deemed to have exercised reasonable care if such property is accorded treatment substantially equal to that which it accords its own property, or if it takes such action with respect to the Collateral as the Debtor shall request in writing. No failure to comply with any such request nor any omission to do any such act requested by the Debtor shall be deemed a failure to exercise reasonable care, nor shall the Secured Party's failure to take steps to preserve rights against any parties or property be deemed a failure to have exercised reasonable care with respect to Collateral in its custody. 8 R#0202392.04 7. EVENTS OF DEFAULT Debtor shall be in default under this Agreement and each of the other Debt Documents upon the occurrence of any of the following "Event(s) of Default": (a) Debtor fails to pay any installment or other amount due or coming due under any of the Debt Documents within ten (10) days after its due date; (b) Any attempt by Debtor, without the prior written consent of Secured Party, to sell, rent, lease, mortgage, grant a security interest in, or otherwise transfer or encumber (except for Permitted Liens and except as elsewhere permitted herein) any of the Collateral; (c) Debtor fails to procure, or maintain in effect at all times, any of the insurance on the Collateral in accordance with Section 4 of this Agreement; (d) Debtor breaches any of its other obligations under any of the Debt Documents and fails to cure the same within thirty (30) days after written notice thereof; (e) Any warranty, representation or statement made by Debtor in any of the Debt Documents or otherwise in connection with any of the Indebtedness shall be false or misleading in any material respect; (f) Any of the Collateral being subjected to, or being threatened with, attachment, execution, levy, seizure or confiscation in any legal proceeding or otherwise; (g) The occurrence of an "Event of Default" under the Deed of Trust or the Loan Agreement; or any default by Debtor under any other agreement between Debtor and Secured Party after the passage of any applicable cure period set out in such agreement; (h) Any dissolution, termination of existence, merger, consolidation, change in controlling ownership, insolvency, or business failure of Debtor or any guarantor or other obligor for any of the Indebtedness (collectively "Guarantor"), except as permitted in the Loan Agreement, or if Debtor or any Guarantor is a natural person, any death or incompetency of Debtor or such Guarantor; (i) The appointment of a receiver for all or any part of the property of Debtor or any Guarantor, or any assignment for the benefit of creditors by Debtor or any Guarantor; or (j) The filing of a petition by Debtor or any Guarantor under any bankruptcy, insolvency or similar law, or the filing of any such petition against Debtor or any Guarantor if the same is not dismissed within thirty (30) days of such filing. 9 R#0202392.04 8. REMEDIES ON DEFAULT. (a) Upon the occurrence of an Event of Default under this Agreement, the Secured Party, at its option, may declare any or all of the Indebtedness, including without limitation the Note, to be immediately due and payable, without demand or notice to Debtor or any Guarantor. The obligations and liabilities accelerated thereby shall bear interest (both before and after any judgment) until paid in full at the lower of eighteen percent (18%) per annum or the maximum rate not prohibited by applicable law. (b) Upon such declaration of default, Secured Party shall have all of the rights and remedies of a Secured Party under the Uniform Commercial Code, and under any other applicable law. Without limiting the foregoing, Secured Party shall have the right to (i) notify any account debtor of Debtor or any obligor on any instrument which constitutes part of the Collateral to make payment to the Secured party, (ii) with or without legal process, enter any premises, where the Collateral may be and take possession and/or remove said Collateral from said premises, (iii) sell the Collateral at public or private sale, in whole or in part, and have the right to bid and purchase at said sale, (iv) lease or otherwise dispose of all or part of the Collateral, applying proceeds therefrom to the obligations then in default, and/or (v) use, without charge or liability to the Secured Party, any of the Debtor's labels, trade names, trademarks, patents, patent applications, licenses, certificates of authority, advertising materials, or any of the Debtor's other properties or interests in properties of similar nature in advertising for sale, selling or otherwise realizing upon any of the Collateral. If requested by Secured Party, Debtor shall promptly assemble the Collateral and make it available to Secured Party at a place to be designated by Secured Party which is reasonably convenient to both parties. Secured Party may also render any or all of the Collateral unusable at the Debtor's premises and may dispose of such Collateral on such premises without liability for rent or costs. Any notice which Secured Party is required to give to Debtor under the Uniform Commercial Code of the time and place of any public sale or the time after which any private sale or other intended disposition of the collateral is to be made shall be deemed to constitute reasonable notice if such notice is given to the last known address of Debtor at least five (5) days prior to such action. (c) Proceeds from any sale or lease or other disposition shall be applied: first, to all costs of repossession, storage, and disposition including without limitation attorneys', appraisers', and auctioneers' fees; second, to discharge the obligations then in default; third, to discharge any other Indebtedness of Debtor to Secured Party, whether as obligor, endorser, guarantor, surety or indemnitor; fourth, to expenses incurred in paying or settling liens and claims against the Collateral; and lastly, to Debtor, if there exists any surplus. Debtor shall remain fully liable for any deficiency. (d) In the event this Agreement, any Note or any other Debt Documents are placed in the hands of an attorney for collection of money due or to become due or to obtain performance of any provision thereof, Debtor agrees to pay all reasonable attorneys' fees incurred by Secured Party at such attorneys' standard hourly rates for time in fact incurred (without regard to any statutory presumption), and further agrees that payment of such fees is secured hereunder. Debtor and Secured Party agree that such fees to the extent not in excess of fifteen percent (15%) of subject amount owing after default (if permitted by law, or such lesser sum as may otherwise be permitted by law) shall be deemed reasonable. 10 R#0202392.04 (e) Secured Party's rights and remedies hereunder or otherwise are cumulative and may be exercised singularly or concurrently. Neither the failure nor any delay on the part of the Secured Party to exercise any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege preclude any other or further exercise thereof or the exercise of any other right power or privilege. Secured Party shall not be deemed to have waived any of its rights hereunder or under any other agreement, instrument or paper signed by Debtor unless such waiver be in writing and signed by Secured Party. A waiver on any one occasion shall not be construed as a bar to or waiver of any right or remedy on any future occasion. (f) Any controversy or claim arising out of or relating to this Master Security Agreement shall be determined by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The number of arbitrators shall be three. One Arbitrator shall be appointed by each of the parties and the third arbitrator, who shall serve as chairman of the tribunal, shall be appointed by the American Arbitration Association. The place of arbitration shall be Charlotte, North Carolina. Any arbitral award arising from any arbitration pursuant to this paragraph shall be final and binding upon all parties hereto. 9. INVENTORY AND RECEIVABLES COVENANTS. The following are covenants applicable to Inventory and Receivables generally: (a) The Secured Party's security interest in the Inventory will continue through all stages of manufacturing and will, without further act, attach to raw materials, to goods in process, to finished goods, to all products of the foregoing, to the Receivables (as defined in the Agreement) and all other proceeds resulting from the sale or other disposition thereof and to all such Inventory that may be rejected, returned, reclaimed, repossessed or stopped in transit. (b) Inventory shall be kept only at the address identified on the first page of this Security Agreement, and shall not be removed therefrom except for purposes of sale and promotion in the regular course of the Debtor's business. (c) No Inventory has been or shall be consigned without the Secured Party's prior written consent; no Inventory is or shall ever be stored with a bailee, warehouseman or similar party without the Secured Party's prior written consent, and in such event the Debtor will, concurrently with delivery to such party, cause any such party to issue and deliver to the Secured Party, in form acceptable to the Secured Party, warehouse receipts in the Secured Party's name evidencing the storage of such Inventory. (d) Until the occurrence of an Event of Default, the Debtor may, subject to the provisions of this Agreement, sell finished Inventory, but only in the ordinary course of the Debtor's business; however, in no event shall the Debtor make any sale of Inventory which would cause a breach of the Debtor's warranties, representations and covenants under this Agreement. A sale of Inventory in the ordinary course of the Debtor's business does not include a transfer in partial or total satisfaction of a debt owing by the Debtor. The Debtor agrees to report the receipt or creation of all sales or other dispositions of Inventory to the Secured Party. The Debtor hereby agrees to execute 11 R#0202392.04 and deliver to the Secured Party, in form satisfactory to the Secured Party, a formal assignment or schedule of accounts receivable or other proceeds resulting from the sale or other disposition of Inventory but in the absence of such assignment or schedule this Agreement shall constitute such assignment or schedule and the grant of a security interest therein. (e) The Secured Party shall not, under any circumstance, be liable for any error or omission or delay of any kind occurring in the settlement, collection or payment of any Receivables or any instrument received in payment thereof or for any damage resulting therefrom. The Secured Party shall not be liable for or prejudiced by any loss, depreciation or other damage to Receivables or other Collateral unless caused by the Secured Party's willful and malicious act, and the Secured Party shall have no duty to take any action to preserve or collect any Receivable or other Collateral. (f) The Secured Party may notify customers at any time that Receivables have been assigned to the Secured Party and collect them directly in the Secured Party's own name but, unless and until the Secured party does so or gives the Debtor other instructions, the Debtor shall, at its cost and expense, collect and otherwise hold for the Secured party as trustee of an express trust for the Secured party's benefit all amounts of unpaid Receivables, and, if so requested by the Secured Party, shall not commingle such collections with the Debtor's own funds or use the same for any purpose. (g) As to any Receivable forming part of the Collateral, unless the Secured Party otherwise consents in writing: (i) all Receivables are and will be bona fide existing obligations of the customer named therein, for a fixed sum as set forth in the invoice relating thereto, created by the sale and actual delivery of goods or other property or the rendition of services or the furnishing of other good and sufficient consideration to the customer in the regular course of business; (ii) all unpaid balances appearing on the Debtor's books and records and any invoice or statement delivered or to be delivered to the Secured Party relating to any Receivable are and shall be true and correct in all respects; (iii) all shipping or delivery receipts and other documents furnished or to be furnished to the Secured Party in connection therewith are all and will be genuine, complete, correct, valid and enforceable in accordance with the Debtor's terms; and (vi) no Receivable has arisen or shall arise out of a contract or purchase order containing provisions prohibiting assignment thereof or the creation of a security interest therein and the Debtor has not received and shall not accept any note, or other instrument with respect to any Receivable or in payment thereof which is not assigned and delivered to the Secured Party immediately. (h) To facilitate the maintenance of the Secured party's records, the Debtor shall: (I) hold in trust for the Secured party's benefit all items constituting proof of shipment or delivery of all goods sold and services rendered together with copies of all of the Debtor's invoices to customers; and (ii) furnish the Secured party promptly with copies of such information as the Secured Party may reasonable require. The Debtor's billing of customers on such invoices or otherwise shall by conclusive evidence of the assignment to the Secured Party of the Receivables represented thereby whether or not the Debtor executes any other document. The items to be provided under this paragraph are to be in form satisfactory to the Secured Party and are executed and delivered to the Secured Party from time to time solely for the Secured Party convenience in maintaining records of the Collateral; the Debtor's failure to give any of such items to the Secured Party shall not affect, terminate, modify or otherwise limit the Secured party's lien or security interest in the Collateral. 12 R#0202392.04 10. MISCELLANEOUS (a) This Agreement, the Note and/or any of the other Debt Documents may be assigned, in whole or in part, by Secured Party without notice to Debtor, and Debtor hereby waives any defense, counterclaim or cross-complaint by Debtor against any assignee, agreeing that Secured Party shall be solely responsible therefor. (b) All notices to be given in connection with this Agreement shall be in writing, shall be addressed to the parties at their respective addresses set forth hereinabove (unless and until a different address may be specified in a written notice to the other party), and shall be deemed given when given in the manner prescribed by the Deed of Trust. (c) Secured Party may correct patent errors herein and fill in all blanks herein or in any Collateral Schedule consistent with agreement of the parties. (d) Time is of the essence hereof. This Agreement shall be binding, jointly and severally, upon all parties described as the "Debtor" and their respective heirs, executors, representatives, successors and assigns, and shall inure to the benefit of Secured Party, its successors and assigns. (e) This Agreement and its Collateral Schedules, the Note and the other loan documents executed on the date hereof constitute the entire agreement between the parties with respect to the subject matter hereof and supersede all prior understandings (whether written, verbal, or implied) with respect thereto. This Agreement and its Collateral Schedules shall not be changed or terminated orally or by course of conduct, but only by a writing signed by both parties hereto. Section headings contained in this Agreement have been included for convenience only, and shall not affect the construction or interpretation hereof. (f) This Agreement shall continue in full force and effect until all of the Indebtedness has been indefeasibly paid in full to Secured Party. The surrender, upon payment or otherwise, of the Note or any of the other documents evidencing any of the Indebtedness shall not affect the right of Secured Party to retain the Collateral for such other Indebtedness as may then exist or (with the consent of the Borrower) as it may be reasonably contemplated will exist in the future. This Agreement shall automatically be reinstated in the event that Secured Party is ever required to return or restore the payment of all or any portion of the Indebtedness (all as though such payment had never been made). 13 R#0202392.04 IN WITNESS WHEREOF, Debtor and Secured Party, intending to be legally bound hereby, have duly executed this Agreement in one or more counterparts, each of which shall be deemed to be an original, as of the day and year first aforesaid. DEBTOR: FOUNTAIN POWERBOATS, INC., a North Carolina corporation ATTEST: /s/Blanche C. Williams________________ By: /s/Reginald M. Fountain, Jr. ____________ Secretary ___________ President SECURED PARTY: GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation By: /s/Waller T. Blackwell Region Credit Analyst 14 R#0202392.04 EXHIBIT A Description Year/Model Serial Number Location Fountain Asset # 27' Fever Sport Boat: Washington, NC 721 27' II Fixture Molds 845 27' Vent Mold 857 27' Proto Dev 1088 27' SB Dash Mold 1096 27' SB Dash Mold/Plug 1106 27' Hull Mold 1237 MLD.MA. 27' SB Hull 2 1283 27' SB Deck Splash 1322 27' SB Deck Splash 1397 Pos. Lift 27' SB 32' Fever Sport Boat 1093 Mold Maint/32SB Hull 1100 27'/32' Dash Mld/Plg 1142 29'/32' SB Eng. Vent 1178 Mold Maint/32' SB DK 1390 Mold Maint/32' SB 1401 Pos. Lift 32' SB 35' Lightning Sport Boat 722 33' Radar Arch Mold 730 27 II Footbox Mold 736 27 SB Deck & Hull 740 33LB Dec & Hull 741 33SB Deck & Hull 1077 35' Fuel Fill Mold 1099 35' Eng. Hatch Plug 1162 Mold Maint/35' Deck 1203 35' L Deck & Mold 1380 Mold Maint. 35' S.B. 1391 Mold Maint. 35' S.B. 1392 Mold Maint. 35' S.B. 1402 Pos. Lift 35' S.B. 38' Sport Boat and Sport Cruiser: 742 36 Radar Arch 743 36 Windscreen Brkt 744 36 Deck Mold 745 36SB Deck & Hull 746 36SB Mold Foot Boxes 754 36 Radar Arch Modifi 837 38C Deck Splashes 841 33SC Deck Prep 876 38' Radar Arch Tool 877 38' S.C. Patterns 891 38' S.C. Deck Mold 893 38' S.B. Venturi Mold 1008 38' S.C. Side Store 1104 38' SB Eng. Hatch Mld. 1164 Mold Maint/38' SC HL 1179 Mold Maint/38' SC HL 1236 MLD.MA 38' Deck #2 1240 MLD.MA 38' SC Deck 1246 38' SC Windshld Mold 1268 38' SC Eng. Vent 1300 38' SC Step Insert 1371 38' SC Step Insert 1393 Mold Maint. 38' S.B. 1394 Mold Maint. 38' S.B. 1403 Pos. Lift 38' S.B. 1404 38' S.C. Deck & Liner 1455 38' S.C. Tooling 1479 38' Lightning Deck 31' Fishboats (All Models) 725 31' Liner Plug 739 31SF Deck & Hull 838 31SF Hull 840 31SF LNR Strge Bx 846 31SF Seat Box Doors 847 31SF Lnr Strge Bx Mo 875 31' Cuddy Splash Plug 902 31' Cuddy Splash Plug 931 31' Cuddy Int. Pattrn 933 31' Cuddy Liner Mold 934 31' Cuddy Liner Plug 947 31' 32' S.F. Liner/Deck/Pl 948 31' S.F. Cab. Deck Mold 949 31' S.F. Cab. Deck Plug 951 31' S.F. Cab. Linr Plug 964 31' S.F. Cab. Design RT 975 31' S.F. Cuddy Design 976 31' S.F. Cuddy Molds 998 31' S.F. Cuddy Design 1009 31' S.F. Cuddy Parts 1010 31' S.F. Cuddy Store 1024 31' S.F. Cuddy Deck Mold 1025 31' S.F. Cuddy I/B Dk Mld 1140 31' S.F. Cuddy I/B Dk Plg 1141 31' I/B Liner Plug 1152 32' Deck & Liner Mld. 1195 32' Cuddy I/B Dk. Mld 1196 31' I/B Liner Mold 1199 31' SF Fuel Tank Lid 1202 Modify 32' Liner MLD 1238 MLD.MA 31' SF Liner 1239 MLD.MA. 31' SF Deck 1244 31' SF Eng. Box Mld 1247 31' SF Liverwell Mold 1265 32" I/O S.F.C. Plug 1269 31' S.F. Livewell 1271 35' S.B. Deck Splash 1284 31' SF Livewell 1299 31' SF Livewell Mold 1325 31' SF Livewell Mold 1326 31' SF Eng. Box Lid 1346 Mold Maint. 31' S.F. 1351 31' C.C. Open Bow Mold EXHIBIT B TRACT I: All that certain tract or parcel of land lying and being situate in Chocowinity Township, Beaufort County, North Carolina, and being more particularly described as follows: Beginning at a point in the southern right-of-way line of NCSR 1166 (Whichards Beach Road); said point being located the following courses and distances from a concrete monument located at the southeasterly corner of the subdivision known as Harbor Estates, as shown on a plat thereof recorded in Plat Cabinet A, Slide 113A in the office of the Register of Deeds of Beaufort County, North Carolina (said concrete monument also being the southwesterly corner of Tract II described below): South 35- 52' 54" East 62.93 feet; South 36- 20' 33" West 30.61 feet; and South 64- 01' 09" East 16.66 feet to a point. THENCE FROM SAID POINT OF BEGINNING BEING SO LOCATED, along and with the southern right-of-way line of Whichards Beach Road South 64- 01' 03" East 132.39 feet to a point; thence South 64- 00' 52" East 49.07 feet to a point; thence South 64- 01' 18" East 50.66 feet to a point; thence South 64- 01' 12" East 220.27 feet to a point; thence South 64- 01' 09" East 45.61 feet to a point; thence continuing along and with the southern right-of-way line of NCSR 1166 with a curve to the right in a southeastwardly direction which has a chord bearing and distance of South 57- 55' 13" East 341.99 feet to a point; thence South 51- 52' 17" East 22.40 feet to a point; thence continuing South 51- 52' 17" East 300.00 feet to a point in the southern right-of-way line of NCSR 1166 (all previous calls being along and with the southern right-of-way line of NCSR 1166); thence leaving NCSR 1166 South 38- 00' 08" West 140.26 feet to a point; thence South 51- 52' 37" East 31.00 feet to a point; thence South 51- 52' 19" East 131.00 feet to a point; thence South 38- 00' 08" West 50.00 feet to a point; thence North 51- 59' 55" West 21.00 feet to a point; thence South 37- 59' 26" West 137.56 feet to a point; thence South 52- 57' 27" East 107.66 feet to a point; thence South 35- 48' 31" West 49.16 feet to a point; thence South 37- 39' 39" West 149.73 feet to a point; thence continuing South 37- 39' 39" West 18.38 feet to a point in a ditch; thence along and with said ditch the following courses: North 56- 10' 32" West 114.97 feet to a point; North 57- 56' 27" West 120.08 feet to a point; thence North 59- 09' 12" West 105.20 feet to a point; thence North 57- 02' 11" West 105.33 feet to a point; thence North 64- 27' 40" West 506.54 feet to a point; thence North 56- 33' 24" West 99.24 feet to a point; thence North 48- 59' 54" West 220.23 feet to a point; thence North 47- 02' 51" West 145.55 feet to a point; thence North 36- 19' 37" East 158.65 feet to a point; thence North 36- 20' 38" East 20.00 feet to a point; thence North 36- 19' 33" East 51.10 feet to a point; thence North 36- 20' 24" East 24.66 feet to a point; thence North 36- 20' 20" East 100.34 feet to a point; thence North 36- 20' 41" East 166.95 feet to a point; thence with a curve to the right (which curve has radius of 20 feet, a chord bearing and distance of North 76- 08' 47" East 25.60 feet, and an arc distance of 27.78 feet) to the point of beginning. Together with a perpetual non-exclusive easement for ingress, egress and regress across a 60-foot wide private right-of-way running southwardly from NCSR 1166 at point (C) in the Ottis M. Crisp line as shown on the plat entitled "Plan of Land surveyed for Jennis M. Crisp" recorded in Plat Cabinet A, Slide 42A, in the Beaufort County Registry. TRACT II: All that certain tract or parcel of land lying and being situate in Chocowinity Township, Beaufort County, North Carolina, and being more particularly described as follows: Beginning at an existing concrete monument in the northern right- of-way line of NCSR 1166 (Whichards Beach Road), said concrete monument being also the southeasterly corner of the subdivision known as Harbor Estates, as shown on a plat thereof recorded in Plat Cabinet A, Slide 113A in the office of the Register of Deeds of Beaufort County, North Carolina. THENCE FROM SAID POINT OF BEGINNING BEING SO LOCATED, North 30- 36' 00" East 375.64 feet to a point; thence North 30- 36' 00" East 17.0 feet to a point in a canal; thence continuing with the canal North 48- 42' 00" East 23.43 feet to a point; thence continuing with the canal North 30- 26' 00" East 476.44 feet to a point; thence North 31- 42' 00" East 427.85 feet to a point in the mean high water line of the Pamlico River; thence along and with the mean high water line of the Pamlico River the following courses and distances; North 71- 11' 00" East 88.88 feet to a point; thence North 78- 57' 00" East 77.78 feet to a point; thence North 51- 09' 00" East 53.88 feet to a point; thence South 21- 39' 00" East 42.48 feet to a point; thence South 55" 23' 00" East 82.19 feet to a point; thence North 65- 06' 00" East 38.64 feet to a point; thence South 45- 07' 00" East 146.64 feet to a point; thence South 59- 32' 00" East 106.73 feet to a point; thence South 65- 55' 46" East 91.98 feet to a point; thence South 87- 44' 21" East 82.14 feet to a point; thence South 83- 21' 00" East 96.80 feet to a point; thence North 78- 56' 00" East 251.10 feet to a point; thence South 63- 13' 00" East 91.37 feet to a point; thence South 63- 13' 00" East 182.56 feet to a point; thence South 63- 13' 00" East 107.00 feet to a point; thence leaving said river South 38- 18' 41 " West 21.94 feet to a concrete monument; thence continuing South 38- 18' 41" West 701.64 feet to a concrete monument; thence continuing South 38- 18' 41" West 64.72 feet to a concrete monument; thence continuing South 38- 18' 41" West 108.03 feet to a concrete monument; thence South 38- 18' 41" West 106.26 feet to a concrete monument; thence continuing South 38- 18' 41" West 104.29 feet to a concrete monument; thence continuing South 38- 18' 41" West 102.43 feet to a concrete monument; thence South 38- 18' 41" West 127.21 feet to a concrete monument; thence South 38- 18' 41" West 35.74 feet to a concrete monument; thence South 38- 18' 41" West 63.98 feet to a concrete monument; thence continuing South 38- 18' 41" West 99.54 feet to a concrete monument; thence continuing South 38- 18' 41" West 99.16 feet to a concrete monument; thence conitinuing South 38- 18' 41' West 106.40 feet to a concrete monument in the northern right-of- way line of NCSR 1166; thence continuing along and with the northern right-of-way line of NCSR 1166 along a curve to the left in a northwestwardly direction to a point (which curve has a chord bearing and distance of North 51- 41' 19" West 100.00 feet); thence continuing along and with the northern right-of-way line of NCSR 1166 along a curve to the left in a northwestwardly direction to a point (which curve has a chord bearing and distance of North 55- 31' 51" West 396.18 feet); thence continuing along and with the northern right-of-way line of NCSR 1166 North 62- 36' 41" West 58.52 feet to a point; thence continuing along and with the northern right-of-way line of NCSR 1166 North 63- 28' 00" West 100.00 feet to a point; ;thence continuing along and with the northern right-of-way line of NCSR 1166 North 64- 04' 00" West 470.44 feet to the point or place of beginning. Together with all property lying between the northern property line of the above-described property, the eastern and western property line of the above-described property extended in a northeasterly direction to the mean high water line of the Pamlico River and the mean high water line of the southern shore of the Pamlico River. 81-0242 (DV) 12/28/96 CDR/DCR WSMAIN/205631 EXHIBIT C Northwestern Mutual Life Insurance Policy #12-839-890 on the life of Reginald M. Fountain, Jr. and all claims, options, privileges, rights, title, and interest therein and thereunder. The aircraft hangar (60 feet x 80 feet) and all personal property owned by Fountain Powerboats, Inc. which is located in or about the aircraft hangar which is located on the Washington Airport in Beaufort County, North Carolina on an area of land 200 feet x 200 feet being immediately adjacent to and south of the Hackney Hangar Site, said site leased to Fountain Powerboats, Inc. by lease recorded in Book 922, Page 236 in the office of the Register of Deeds of Beaufort County, North Carolina. The record owner of the real property on which the aircraft hangar is located is Warren Field Airport Commission of Beaufort County, North Carolina. The real property upon which the aircraft hangar is located on or used in connection with or otherwise pertaining to is described in Exhibit D attached hereto and incorporated herein by reference. EXHIBIT D Being an area 200 feet by 200 feet being immediately adjacent to and to the South of the Hackney Hangar Site and being more particularly described according to the general airport plan as follows: Beginning at the easternmost corner of that parcel of land leased to J. A. Hackney & Sons Inc. from Warren Field Airport Commission by lease dated 8-1-71, recorded in Book G72, Page 416, Beaufort County Registry; running, thence S. 70- 30' W. 200 feet; thence S. 19- 30' E. 200 feet; thence N. 70--30' E. 200 feet; thence N. 19--30' W. 200 feet to the point of beginning. PROMISSORY NOTE December 31, 1996 Beaufort County Washington, North Carolina FOR VALUE RECEIVED, FOUNTAIN POWERBOATS, INC., a North Carolina corporation ("Maker"), promises, jointly and severally if more then one, to pay to the order of GENERAL ELECTRIC CAPITAL CORPORATION or any subsequent holder hereof (each, a "Payee") at its office located at 6100 Fairview Road, Suite 1450, Charlotte, NC 28210 or at such other place as Payee of the holder hereof may designate, the principal sum of TEN MILLION AND NO/100 DOLLARS ($10,000,000.00), or so much thereof as shall have been disbursed from time to time and remains unpaid, with interest hereon in arrears, from the date hereof through and including dates of payment, at a floating per annum simple interest rate ("Contract Rate") as hereinafter calculated. Until the Option to Convert (as defined below) is exercised, the Contract Rate for a given period (the "Effective Period") shall be equal to the sum of (i) two and 68/100 percent (2.68%) per annum plus (ii) a variable per annum interest rate ("Current CPR") which shall be equal to the rate listed for "1-Month" Commercial Paper under the column indicating an average rate for the second calendar month preceding the month in which the Effective Period ends, as stated in the Federal Reserve Statistical Release H.15 (519) published in the calendar month preceding the month in which the Effective Period ends. The first Effective Period shall begin on the date hereof, an shall continue through the earlier of (w) the date the first Periodic Installment (or part thereof) is received by Payee or (x) the date on which the first Periodic Installment is due. Each subsequent Effective Period shall begin on the day after the last day of the previous Effective Period and shall continue through the earlier of (y) the date the earliest due and unpaid Periodic Installment (or part thereof) is received by Payee of (z) the date on which the next Periodic Installment is due after the beginning of the current Effective Period. If, for any reason whatsoever, the Federal Reserve Statistical Release H.15 (519) is no longer published, the Current CPR shall be equal to the latest Commercial Paper Rate for high grade unsecured notes of 30 days maturity sold through dealers by major corporations in multiples of $1,000, as indicated in the "Money Rates" column of the Wall Street Journal, Eastern Edition, published on the first Business Day of the calendar month in which the Effective Period ends. As used herein, the term "Business Day" shall mean and include any calendar day other than a day on which all commercial banks in the City of New York, New York, are required or authorized to be closed. So long as no default exists hereunder and all of the terms and conditions of this Note are fulfilled, Maker may elect to convert (the "Option to Convert") the Contract Rate to a fixed per annum simple interest rate (which, determined as hereinafter set out, is referred to as the `Fixed Contract Rate") as of any date on which a Periodic Installment is due upon at least 30 but no more than 60 days prior R#0202454.04 written notice (the "Notice Date") to Payee accompanied by a Conversion Fee of $500.00 (which notice shall be irrevocable and shall be sent to the attention of Payee's Business Center Manager, 44 Old Ridgebury Road, Danbury, CT 06810-5105). Such notice shall state the due date of a Periodic Installment on which Maker elects the Fixed Contract Rate to apply (the "Fixed Contract Rate Effective Date"). Upon receipt of notice of such Option to Convert, and the accompanying sums due, the Payee shall calculate the amount of the Periodic Installments thereafter due commencing on the Fixed Contract Rate Effective Date using the following: (i) the outstanding principal balance of this Note on the date the Periodic Installment is recalculated, (ii) the Fixed Contract Rate (determined as hereinafter set out), and (iii) the balance of the original Amortization Period (hereinafter defined). In addition, Maker shall pay to Payee, if necessary, prior to the Fixed Contract Rate Effective Date, an additional sum sufficient to amortize the then-unpaid principal over the balance of the Amortization Period at the Contract Rate applicable for the first Periodic Installment. If the Option to Convert is elected prior to the date on which additional loan proceeds can no longer be advanced under the Loan Agreement, the Periodic Installment shall be recalculated by the Lender on each occasion that additional principal is advanced, but using the Fixed Contract Rate determined initially. If Maker elects to exercise this Option to Convert, the Fixed Contract Rate shall be equal to the sum of (i) Two and 93/100 percent (2.93%) per annum plus (ii) the applicable Current Rate (as defined below): (a) If there are eighteen (18) months or less than eighteen (18) months remaining before the Final Installment of this Note is due, the "Current Rate" shall be the per annum interest rate listed for "1-Year" Treasury, constant maturity, under the column indicating an average rate as stated in the Federal Reserve Statistical Release H.15 (519) for the second calendar month preceding the calendar month in which the Fixed Contract Rate will be effective. If, for any reason whatsoever the Federal Reserve Statistical Release H.15 (519) is no longer published, the Current Rate shall be equal to the latest annualized interest rate for "one year" U.S. Treasury Bills as reported by the Federal Reserve Board on a weekly-average basis, adjusted for constant maturity as indicated in the "Money Rates" column of the Wall Street Journal, Eastern Edition, published on the first Business Day of the calendar month preceding the month in which the fixed Contract Rate will be effective. (b) If there are more than eighteen (18) months but either (42) forty-two months or less than forty-two (42) months remaining before the Final Installment of this Note is due, the "Current Rate" shall be determined in the same manner as noted in subparagraph (a) above except it shall be based upon the rate listed for "2-Year" Treasury bills. 2 R#0202454.04 (c) If there are forty-three (43) months or more than forty- three (43) months remaining before the Final Installment of this Note is due, the "Current Rate" shall be determined in the same manner as noted in subparagraph (a) above except it shall be based upon the rate listed for "3-Year" Treasury bills. Subject to the other provisions hereof, the principal and interest on this Note is payable in lawful money of the United States in fifty-nine (59) consecutive monthly installments of Ninety-One Thousand Two Hundred Seventy-Three and 30/100 Dollars ($91,273.30) (each, whether or not increased as described below, a "Periodic Installment") and a final installment ("Final Installment") in the amount of the total outstanding unpaid principal and accrued but unpaid interest. THIS IS A BALLOON NOTE, AND ON THE MATURITY DATE A SUBSTANTIAL PORTION OF THE PRINCIPAL AMOUNT OF THIS NOTE WILL REMAIN UNPAID BY THE MONTHLY PAYMENTS HEREIN REQUIRED. The first Periodic Installment shall be due and payable on February 1, 1997, and the following Periodic Installments shall be due and payable on the same day of each succeeding month (each, a "Payment Date"). All payments shall be applied first to interest and then to principal The acceptance by Payee of any payment which is less than payment in full of all amounts due and owing at such time shall not constitute a waiver of Payee's right to receive payment in full at such time or at any prior or subsequent time. Interest shall be calculated on the basis of a 365 day year ( 366 day leap year) and will be charged at the Contract Rate for principal outstanding hereunder for each calendar day on which any principal is outstanding. The amount of the foregoing Periodic Installment is based upon (i) the outstanding principal balance of this Note on the date hereof ($7,500,000), (ii) a per annum interest rate of eight and 07/100 percent (the "Payment Rate"), and (iii) a ten year amortization period (the "Amortization Period"). The amount of each future Periodic Installment shall be recalculated from time to time as and if additional principal is advanced under this Note, using the Payment Rate, the remaining term of the Amortization period, and the then-outstanding principal balance of the Note in such computations. In the absence of any additional principal being advanced under this Note or the Borrower's election of the Option to Convert, the amount of the Periodic Installments will not change. The amount and number of the Periodic Installments, moreover, will not change with fluctuations in the Contract Rate. Any increase in the Contract Rate shall be reflected by a corresponding decrease in the portion of the Periodic Installment credited to the remaining unpaid principal balance. Any decrease in the Contract Rate shall be reflected as a corresponding increase in the portion of the Periodic Installment credited to the remaining unpaid principal balance. Notwithstanding the foregoing, at the end of each three (3) month period commencing with the first Payment Date hereof, Maker agrees to pay to Payee forthwith an additional sum ("Quarterly Payment") sufficient to amortize the then-unpaid principal over the balance of the original Amortization Period hereof at the Contract Rate applicable for the first Periodic Installment. If, and for so long as, the amount of interest due exceeds the amount of the Periodic Installment, Maker agrees to pay forthwith, in addition to (i) any Periodic Installment then due and (ii) any Quarterly Payment, the amount by which said interest exceeds the Periodic Installment. In the event 3 R#0202454.04 interest only is required to be paid during any period, the interest for such period shall be due and payable monthly as it accrues in arrears and the amount of such "interest only" installment shall be calculated on the unpaid principal balance existing at the commencement of such period but the amount of such installment in excess of interest due at the Contract Rate o the principal balance during such period shall be applied to repayment of principal. This Note is secured by a deed of trust, by an assignment of rents and by a security agreement, chattel mortgage, or like instrument and certain other loan documents (each of which is hereinafter called a "Security Agreement"). Time is of the essence hereof. If any installment or any other sum due under this Note or any Security Agreement is not received within fifteen (15) days after its due date, the Maker agrees to pay, in addition to the amount of each such installment or other sum, a late payment charge of four percent (4%) of said installment or other sum in order to compensate the Payee for extra costs and expenses caused by such late payment. If (i) Maker fails to make payment of any amount due hereunder within ten (10) days after the same becomes due and payable; or (ii) maker is in default, or fails to perform after the passage of any applicable cure period, under any term or condition contained in any Security Agreement or in any Loan Agreement between the Maker and the Payee, then the entire principal sum remaining unpaid, together with all interest thereon and any other sum payable under this Note or the Security Agreement, at the election of payee, shall immediately become due and payable, with interest thereon at the lesser of 18% per annum or the highest rate not prohibited by applicable law from the date of such accelerated maturity until paid (both before and after an judgment). The Maker may prepay in full, but not in part, its entire indebtedness hereunder upon payment of an additional sum as a premium equal to the following percentages of the original principal balance for the indicated period: Prior to the first annual anniversary date of this Note: two percent (2%) Thereafter and prior to the second annual anniversary date of this Note: two percent (2%) Thereafter and prior to the third annual anniversary date of this Note: one percent (1%) and zero percent (0%) thereafter, plus all other sums due hereunder or under any Security Agreement. It is the intention of the parties hereto to comply with the applicable usury laws; accordingly, it is agreed that, notwithstanding any provision to the contrary in this Note or any Security Agreement, in no event shall this Note or any Security Agreement require the payment or permit the collection of interest in excess of the maximum amount permitted by applicable law. If any such excess interest is contracted for, charged or received under this Note or any Security Agreement, or if all of the principal balance shall be prepaid, so that under any of such circumstances the amount of interest contracted for, charged or received under this Note or the Security Agreement on the principal balance shall exceed the maximum amount of interest permitted by applicable law, then in such event (a) the provisions of this paragraph shall govern and control, (b) neither Maker nor any 4 R#0202454.04 other person or entity now or hereafter liable for the payment hereof shall be obligated to pay the amount of such interest to the extent that it is in excess of the maximum amount of interest permitted by applicable law, (c) any such excess which may have been collected shall be either applied as a credit against the then unpaid principal balance or refunded to maker, at the option of the Payee, and (d) the effective rate of interest shall be automatically reduced to the maximum lawful contract rate allowed under applicable law as now or hereafter construed by the courts having jurisdiction thereof. It is further agreed that without limitation of the foregoing, all calculations of the rate of interest contracted for, charged or received under this Note or the Security Agreement which are made for the purpose of determining whether such rate exceeds the maximum lawful contract rate, shall be made, to the extent permitted by applicable law, by amortizing, prorating, allocating and spreading in equal parts during the period of the full stated term of the indebtedness evidenced hereby, all interest at any time contracted for, charged or received from Maker or otherwise by Payee in connection with such indebtedness; provided, however, that if any applicable state law is amended or the law of the United States of America preempts any applicable state law, so that it becomes lawful for the Payee to receive a greater interest per annum rate than is presently allowed, the Maker agrees that, on the effective date of such amendment or preemption, as the case may be, the lawful maximum hereunder shall be increased to the maximum interest per annum rate allowed by the amended state law or the law of the United States of America. The Maker and all sureties, endorsers, guarantors or any others (each such person, other than the Maker, an "Obligor") who may at any time become liable for the payment hereof jointly and severally consent hereby to any and all extensions of time, renewals, waivers or modifications of, and all substitutions or release of, security or of any party primarily or secondarily liable on this Note or any Security Agreement or any term and provision of either, which may be made, granted or consented to by Payee and agree that suit may be brought and maintained against any one or more of them, at the election of Payee without joinder of any other as a party thereto, and that Payee shall not be required first to foreclose, proceed against, or exhaust any security hereof in order to enforce payment of this Note. The Maker and each Obligor hereby waive presentment demand for payment, notice of nonpayment, protest, notice of protest, notice of dishonor, and all other notices in connection herewith, as well as filing of suit (if permitted by law) and diligence in collecting this Note or enforcing any of the security hereof, and agree to pay (if permitted by law) all expenses incurred in collection, including Payee's actual attorneys' fees for time in fact incurred at such attorneys' standard hourly billing rates, without regard to any statutory presumption. Any controversy or claim arising out of or relating to this Note shall be determined by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The number of arbitrators shall be three. On arbitrator shall be appointed by each of the parties and the third arbitrator, who shall serve as chairman of the tribunal, shall be appointed by the American Arbitration Association. The place of arbitration shall be Charlotte, North Carolina. Any arbitral award arising from any arbitration pursuant to this paragraph shall be final and binding upon all parties hereto. This Note and any Security Agreement constitute the entire agreement of the Maker and Payee with respect to the subject matter hereof and supersedes all prior understandings, agreements and representations, express or implied. 5 R#0202454.04 THIS NOTE SHALL BE GOVERNED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NORTH CAROLINA. No variation or modification of this Note, or any waiver of any of its provisions or conditions, shall be valid unless in writing and signed by an authorized representative of Maker and payee. Any such waiver, consent, modification or change shall be effective only in the specific instance and for the specific purpose given. Any provisions in this Note or any Security Agreement which is in conflict with an statute, law or applicable rule shall be deemed omitted, modified or altered to conform thereto. IN WITNESS WHEREOF, this Note has been executed, UNDER SEAL, the day and year first above written. FOUNTAIN POWERBOATS, INC. ATTEST: By: /s/Reginald M. Fountain, Jr. _______________ President /s/Blanche C. Williams _____________Secretary [CORPORATE SEAL] 6 R#0202454.04 BK 1063 PG 337 This document prepared by (and return to): William C. Matthews, Jr. Womble Carlyle Sandridge & Rice, P.L.L.C. P.O. Box 831 Raleigh, North Carolina 27602 STATE OF NORTH CAROLINA ) ) DEED OF TRUST, ASSIGNMENT COUNTY OF BEAUFORT ) OF RENTS AND SECURITY AGREEMENT COLLATERAL INCLUDES FIXTURES THIS DEED OF TRUST, ASSIGNMENT OF RENTS AND SECURITY AGREEMENT (hereinafter referred to as this "Deed of Trust"), made this 31st day of December, 1996, by and among FOUNTAIN POWERBOATS, INC., a North Carolina corporation, whose address is Whichard's Beach Road, Washington, North Carolina 27889 (hereinafter referred to as the "Grantor"), WILLIAM C. MATTHEWS, JR., the Trustee, a resident of Wake County, North Carolina, whose address is Womble Carlyle Sandridge & Rice, P.L.L.C., 2100 First Union Capitol Center, Raleigh, North Carolina 27601 (hereinafter referred to as the "Trustee"), and GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation whose address is 6100 Fairview Road, Suite 1450, Charlotte, North Carolina 28210 (hereinafter referred to as the "Beneficiary"); W I T N E S S E T H Grantor has requested the Beneficiary make available to the Grantor credit, and the Beneficiary has agreed to extend to the Grantor, subject to the terms and provisions of that certain Loan Agreement between the Grantor, the Beneficiary, and certain other parties, dated of even date herewith (the "Loan Agreement"), and any modifications, extensions or replacements thereof, credit of up to the sum of TEN MILLION AND NO/100 DOLLARS ($10,000,000.00); The Grantor therefore is indebted to the Beneficiary in the principal amount of up to TEN MILLION AND NO/100 DOLLARS ($10,000,000.00), or so much thereof as shall be advanced from time to time and remain outstanding, as evidenced by its promissory note, in such principal amount, of even date herewith (which, together with any amendments, renewals, and extensions hereof, is hereinafter referred to as the "Note"), reference to which is hereby made and which is payable in installments and with interest as set out therein; This Deed of Trust is given to secure all present and future obligations of Grantor to Beneficiary. The period in which future obligations may be incurred and secured by this Deed of Trust is the period between the date hereof and that date which is fifteen (15) years from the date hereof. The amount of present obligations secured by this Deed of Trust is SEVEN MILLION FIVE HUNDRED THOUSAND DOLLARS ($7,500,000.00). and the maximum principal amount, including present and future obligations, which may be secured by this Deed of Trust at any one time is TEN MILLION AND R#0202455.04 BK 1063 PG 338 NO/100 DOLLARS ($10,000,000.00). Grantor need not sign any instrument or notation evidencing or stipulating that future advances are secured by this Deed of Trust. The Grantor desires to secure the payment of the Note with interest and any renewals or extensions thereof, in whole or in part, and of the additional payments hereinafter agreed to be made, by a conveyance of the lands and a grant of the security interests hereinafter described; NOW, THEREFORE, to secure the repayment of the indebtedness evidenced by the Note and any extensions or renewals thereof, the performance of such other obligations of the Grantor as are set forth herein and the payment of all other sums herein covenanted to be paid, the Grantor hereby irrevocably grants, transfers, conveys and assigns to the Trustee, successors and assigns IN TRUST, WITH POWER OF SALE, for the benefit and security of the Beneficiary, under and subject to the terms and conditions herein after set forth, the real property located in the County of Beaufort, State of North Carolina, described in EXHIBIT A attached hereto and by this reference incorporated herein (the "Property"); TOGETHER WITH all rents, issues, profits, royalties, income and other benefits derived from the Property (collectively the "Rents"), subject to the right, power and authority hereinafter given to the Grantor to collect and apply such Rents. The Rents have also been assigned to the Beneficiary pursuant to a separate Assignment of Rents and Leases of even date herewith (the "Assignment of Rents"); TOGETHER WITH all leasehold estate, right, title and interest of the Grantor in and to all leases or subleases covering the Property or any portion thereof now or hereafter existing or entered into, and all right, title and interest of the Grantor thereunder, including, without limitation, all cash or security deposits, advance rentals and deposits or payments of similar nature; TOGETHER WITH all right, title and interest of the Grantor in and to all options to purchase or lease the Property or any portion thereof or interest therein, and any greater estate in the Property owned or hereafter acquired; TOGETHER WITH all interests, estates or other claims, both in law and in equity, which the Grantor now has or may hereafter acquire in the Property; TOGETHER WITH all easements, rights-of-way and rights used in connection therewith or as a means of access thereto and all tenements, hereditaments and appurtenances thereof and thereto; TOGETHER WITH all right, title and interest of the Grantor, now owned or hereafter acquired, in and to any land lying within the right-of-way of any street, open or proposed, adjoining the Property, and any and all sidewalks, alleys and strips and gores of land adjacent to or used in connection with the Property; TOGETHER WITH any and all buildings and improvements now or hereafter erected thereon, including, but not limited to, all the Grantor's right, title and interest in and to the fixtures, attachments, appliances, equipment, machinery, and other articles attached to the buildings and other improvements on the Property (hereinafter called the "Improvements"); 2 R#0202455.04 BK 1063 PG 339 EXHIBIT A TRACT I: All that certain tract or parcel of land lying and being situate in Chocowinity Township, Beaufort County, North Carolina, and being more particularly described as follows: Beginning at a point in the southern right-of-way line of NCSR 1166 (Whichards Beach Road); said point being located the following courses and distances from a concrete monument located at the southeasternly corner of the subdivision known as Harbor Estates, as shown on a plat thereof recorded in Plat Cabinet A, Slide 113A in the office of the Register of Deeds of Beaufort County, North Carolina (said concrete monument also being the southwesterly corner of Tract II described below): South 35- 52' 54" East 62.93 feet; South 36- 20' 33" West 30.61 feet; and South 64- 01' 09" East 16.66 feet to a point. THENCE FROM SAID POINT OF BEGINNING BEING SO LOCATED, along and with the southern right-of-way line of Whichards Beach Road South 64- 01' 03" East 132.39 feet to a point; thence South 64- 00' 52" East 49.07 feet to a point; thence South 64- 01' 18" East 50.66 feet to a point; thence South 64- 01' 12" East 220.27 feet to a point; thence South 64- 01' 09" East 45.61 feet to a point; thence continuing along and with the southern right-of-way line of NCSR 1166 with a curve to the right in a southeastwardly direction which has a chord bearing and distance of South 57- 55' 13" East 341.99 feet to a point; thence South 51- 52' 17" East 22.40 feet to a point; thence continuing South 51- 52' 17" East 300.00 feet to a point in the southern right-of-way line of NCSR 1166 (all previous calls being along and with the southern right-of-way line of NCSR 1166); thence leaving NCSR 1166 South 38- 00' 08" West 140.26 feet to a point; thence South 51- 52' 37" East 31.00 feet to a point; thence South 51- 52' 19" East 131.00 feet to a point; thence South 38- 00' 08" West 50.00 feet to a point; thence North 51- 59' 55" West 21.00 feet to a point; thence South 37- 59' 26" West 137.56 feet to a point; thence South 52- 57' 27" East 107.66 feet to a point; thence South 35- 48' 31" West 49.16 feet to a point; thence South 37- 39' 39" West 149.73 feet to a point; thence continuing South 37- 39' 39" West 18.38 feet to a point in a ditch; thence along and with said ditch the following courses: North 56- 10' 32" West 114.97 feet to a point; North 57- 56' 27" West 120.08 feet to a point; thence North 59- 09' 12" West 105.20 feet to a point; thence North 57- 02' 11" West 105.33 feet to a point; thence North 64- 27' 40" West 506.54 feet to a point; thence North 56- 33' 24" West 99.24 feet to a point; thence North 48- 59' 54" West 220.23 feet to a point; thence North 47- 02' 51" West 145.55 feet to a point; thence North 36- 19' 37" East 158.65 feet to a point; thence North 36- 19' 33" East 51.10 feet to a point; thence North 36- 20' 24" East 24.66 feet to a point; thence North 36- 20' 24" East 24.66 feet to a point; thence North 36- 20' 20" East 100.34 feet to a point; thence North 36- 20' 41" East 166.95 feet to a point; thence with a curve to the right (which curve has radius of 20 feet, a chord bearing BK 1063 PG 340 and distance of North 76- 08' 47" East 25.60 feet, and an arc distance of 27.78 feet) to the point of beginning. Together with a perpetual non-exclusive easement for ingress, egress and regress across a 60-foot wide private right-of-way running southwardly from NCSR 1166 at point (C) in the Ottis M. Crisp line as shown on the plat entitled "Plan of Land surveyed for Jennis M. Crisp" recorded in Plat Cabinet A, Slide 42A, in the Beaufort County Registry. TRACT II: All that certain tract or parcel of land lying and being situate in Chocowinity Township, Beaufort County, North Carolina, and being more particularly described as follows: Beginning at an existing concrete monument in the northern right- of-way line of NCSR 1166 (Whichards Beach Road), said concrete monument being also the southeasterly corner of the subdivision known as Harbor Estates, as shown on a plat thereof recorded in Plat Cabinet A, Slide 113A in the office of the Register of Deeds of Beaufort County, North Carolina. THENCE FROM SAID POINT OF BEGINNING BEING SO LOCATED, North 30- 36' 00" East 375.64 feet to a point; thence North 30- 36' 00" East 17.0 feet to a point in a canal; thence continuing with the canal North 48- 42' 00" East 23.43 feet to a point; thence continuing with the canal North 30- 26' 00" East 476.44 feet to a point; thence North 31- 42' 00" East 427.85 feet to a point in the mean high water line of the Pamlico River; thence along and with the mean high water line of the Pamlico River the following courses and distances; North 71- 11' 00" East 88.88 feet to a point; thence North 78- 57' 00" East 77.78 feet to a point; thence North 51- 09' 00" East 53.88 feet to a point; thence South 21- 39' 00" East 42.48 feet to a point; thence South 55" 23' 00" East 82.19 feet to a point; thence North 65- 06' 00" East 38.64 feet to a point; thence South 45- 07' 00" East 146.64 feet to a point; thence South 59- 32' 00" East 106.73 feet to a point; thence South 65- 55' 46" East 91.98 feet to a point; thence South 87- 44' 21" East 82.14 feet to a point; thence South 83- 21' 00" East 96.80 feet to a point; thence North 78- 56' 00" East 251.10 feet to a point; thence South 63- 13' 00" East 91.37 feet to a point; thence South 63- 13' 00" East 182.56 feet to a point; thence South 63- 13' 00" East 107.00 feet to a point; thence leaving said river South 38- 18' 41 " West 21.94 feet to a concrete monument; thence continuing South 38- 18' 41" West 701.64 feet to a concrete monument; thence continuing South 38- 18' 41" West 64.72 feet to a concrete monument; thence continuing South 38- 18' 41" West 108.03 feet to a concrete monument; thence South 38- 18' 41" West 106.26 feet to a concrete monument; thence continuing South 38- 18' 41" West 104.29 feet to a concrete monument; thence continuing South 38- 18' 41" West 102.43 feet to a concrete monument; thence South 38- 18' 41" West 127.21 feet to a concrete monument; thence South 38- 18' 41" West 35.74 feet to a concrete BK 1063 PG 341 monument; thence South 38- 18' 41" West 63.98 feet to a concrete monument; thence continuing South 38- 18' 41" West 99.54 feet to a concrete monument; thence continuing South 38- 18' 41" West 99.16 feet to a concrete monument in the northern right-of-way line of NCSR 1166; thence continuing South 38- 18' 41" West 106.40 feet to a concrete monument along and with the northern right-of-way line of NCSR 1166 along a curve to the left in a northwestwardly direction to a point (which curve has a chord bearing and distance of North 51- 41' 19" West 100.00 feet); thence continuing along and with the northern right-of-way line of NCSR 1166 along a curve to the left in a northwestwardly direction to a point (which curve has a chord bearing and distance of North 55- 31' 51" West 396.18 feet); thence continuing along and with the northern right-of-way line of NCSR 1166 North 62- 36' 41" West 58.52 feet to a point; thence continuing along and with the northern right-of-way line of NCSR 1166 North 63- 28' 00" West 100.00 feet to a point; ;thence continuing along and with the northern right-of-way line of NCSR 1166 North 64- 04' 00" West 470.44 feet to the point or place of beginning. Together with all property lying between the northern property line of the above-described property, the eastern and western property line of the above-described property extended in a northeasterly direction to the mean high water line of the Pamlico River and the mean high water line of the southern shore of the Pamlico River. 81-0242 (DV) 12/28/96 CDR/DCR WSMAIN/205631 BK 1063 PG 342 TOGETHER WITH all right, title and interest of the Grantor in and to all tangible and intangible personal property now or hereafter owned or leased by the Grantor relating to or associated with the property, including, without limitation, all the Grantor's right, title and interest in, to and under (a) all furniture, furnishings, machinery, apparatus, equipment, fittings, fixtures and other articles of tangible personal property now owned or leased or hereafter acquired by the Grantor and now or at any time hereafter located on or at the Property and the Improvements now or hereafter erected thereon or used in connection with the Property and/or the Improvements, and the operation and maintenance thereof; (b) all proceeds or sums payable in lieu of or as compensation for the loss or damage to any property described in (a) above or to the Property or the Improvements; (c) all rights in and to all pertinent present and future fire and/or hazard insurance policies (including, but not limited to, insurance proceeds) covering the Property, the Improvements or the property described in (a) above; (d) all awards made by any public body or decreed by any court of competent jurisdiction for a taking or for degradation of value of the Property, the Improvements or the property described in (a) above in any eminent domain proceeding and all payments made in respect of a conveyance made in lieu of any such taking; (e) all proceeds of every kind and description of the property described in clauses (a) through (d) above (all of the foregoing is referred to herein collectively as the "Personal Property"); TOGETHER WITH all other interest of every kind and character which the Grantor now has or at any time hereafter acquires, in and to the real and personal property described herein, and all property which is used or useful in connection therewith, including rights of ingress and egress and all reversionary rights or interests of the Grantor with respect to such property; and any proceeds thereof (including insurance proceeds), any additions and accessions thereto, and any replacements or renewals of all of the foregoing; TOGETHER WITH all the estate, interest, right, title, other claim or demand, including claims or demands with respect to the proceeds (including premium refunds) of insurance in effect with respect to the Trust Estate, as herein defined, which the Grantor now has or may hereafter acquire in the Property and Improvements, and any and all awards made for the taking by eminent domain, or by any proceeding or purchase in lieu thereof, of the whole or any part of the Trust Estate (as hereinafter defined), including without limitation, any awards resulting from a change of grade of streets and awards for severance damages; TOGETHER WITH all (to the full extent legally assignable) licenses, permits and authorizations (issued in the name of the Grantor) necessary for the operation of the Property and Improvements as a boat manufacturing facility; The entire estate, property and interest hereby conveyed to the Trustee may be hereinafter referred to as the "Trust Estate". TO HAVE AND TO HOLD the Property and Improvements, with all rights, privileges and appurtenances thereunto belonging or appertaining, as hereinabove described, to the Trustee, his heirs, successors and assigns in fee simple forever, upon the trusts and for the uses and purposes hereinafter set forth; AND THE GRANTOR COVENANTS WITH THE TRUSTEE that it is seized of the Property and Improvements in fee simple and has the right to convey the same; that it will warrant and - 3 - R#0202455.04 BK 1063 PG 343 defend the title to the Trust Estate against the lawful claims of all persons whomsoever and that the Property and Improvements are free and clear of all liens and encumbrances, except those set forth in EXHIBIT B attached hereto and incorporated herein by reference. THIS CONVEYANCE IS MADE IN TRUST FOR THE PURPOSES OF SECURING a. Payment of the indebtedness in the maximum principal amount of $10,000,000.00, with interest thereon, evidenced by the Note executed by the Grantor, which has been delivered to and is payable to the order of the Beneficiary, and which by this reference is hereby made a part hereof, and any and all modifications, extensions and renewals thereof. This Deed of Trust also secures all attorney's fees, court costs and expenses of whatever kind incident to the collection of the indebtedness and the enforcement or protection of the Beneficiary's interest under this Deed of Trust; b. Payment of all sums advanced by the Beneficiary to protect the Trust Estate, with interest thereon at the Default Rate, as defined in the Note; c. Performance of the Grantor's obligations and agreements contained in this Deed of Trust, the Note, the Assignment of Rents, that certain Master Security Agreement of even date herewith between the Grantor and the beneficiary (the "Security Agreement"), the Loan Agreement and any other instrument or modifications or amendments thereof given to evidence or further secure the payment and performance of any obligation secured hereby. This Deed of Trust, the Note, the Assignment of Rents, the Security Agreement, the Loan Agreement, and any other instrument given to evidence or further secure the payment and performance of any obligation secured hereby may hereafter be referred to herein as the "Loan Instruments." PROVIDED, HOWEVER, if the Grantor shall pay the Note secured hereby in accordance with its terms, together with interest thereon, and any renewals or extensions thereof, and any advances made by the Beneficiary for the protection of the Trust Estate, and shall comply with all of the Grantor's covenants, terms and conditions contained in this Deed of Trust, then this conveyance shall be null and void and shall be canceled of record by the Beneficiary at the request and at the cost of the Grantor. TO PROTECT THE SECURITY OF THIS DEED OF TRUST, THE GRANTOR HEREBY COVENANTS AND AGREES AS FOLLOWS: - 4 - R#0202455.04 BK 1063 PG 344 EXHIBIT B Permitted Exceptions Permitted Exceptions consist of the exceptions set forth in Schedule B - Section 2 (Exceptions) in the title insurance commitment issued by Fidelity National Title Insurance Company of Pennsylvania for this loan. WSMAIN/205912 BK 1063 PG 345 ARTICLE I COVENANTS AND AGREEMENTS OF THE GRANTOR 1.01 Payment of Secured Obligations. The Grantor covenants and agrees to pay when due the principal of, and the interest on, the indebtedness evidenced by the Note, charges, fees and all other sums as provided in the Loan Instruments, and the principal of, and interest on, any advances made by the Beneficiary to protect the Property or the Improvements, the repayment of which is secured by this Deed of Trust. 1.02 Maintenance, Repair, Alterations. The Grantor covenants and agrees to keep the Trust Estate in good conditions and repair; not to remove, demolish or substantially alter (except such alterations as may be required by laws, ordinances or regulations or as may not materially adversely affect the value of the Improvements and except such non-structural demolition and renovation of tenant space as may be deemed necessary or appropriate by the Grantor in connection with preparing such space for leasing) any of the Improvements; to complete promptly and in a good and workmanlike manner any Improvements and to promptly restore in like manner any of the Improvements which may be damaged or destroyed and to pay when due all claims for labor performed and materials furnished therefor; to comply with all laws, ordinances, regulations, covenants, conditions and restrictions now or hereafter affecting the Trust Estate or any part thereof or requiring any alterations or improvements; not to commit or permit any waste or deterioration of the Trust Estate; to keep and maintain grounds, sidewalks, and landscape areas located on the Property in good and neat order and repair; to comply with the provisions of any lease, if this Deed of trust is on a leasehold; not to commit, suffer or permit any act to be done in or upon the Trust Estate in violation of any law, ordinance or regulation or provision of any lease the violation of which could result in a termination of such leasehold. Notwithstanding the foregoing, the Grantor's obligation to repair and restore the Improvements following any casualty damage or any Condemnation (as defined in Section 1.14 below) shall be subject to the terms and provisions in Sections 1.05 and 1.14 below. 1.03 Required Insurance. The Grantor covenants and agrees at all times to provide, maintain and keep in force (or to cause to be provided, maintained, and kept in force) the following policies of insurance: (a) Insurance against loss or damage to the Improvements by fire and any of the risks covered by insurance of the type now known as "special cause of loss," in an amount not less than (1) the original principal amount of the Note or (2) the full insurable value of the Improvements, including cost of the debris removal (exclusive of the cost of excavations, foundations, and footings below the lowest basement floor), whichever is greater, with not more than a $50,000 deductible from the loss payable for any casualty. The policies of insurance carried in accordance with this subparagraph (a) shall contain the "Replacement Cost Endorsement"; (b) Commercial general liability insurance (including coverage for elevators and escalators, if any, on the Trust Estate) on an "occurrence basis" against claims for "personal injury," including, without limitation, bodily injury, death or property damage occurring on, in or about the Trust Estate and the adjoining streets, sidewalks and passageways, such insurance to afford immediate minimum protection to a limit of not less than $3 million for personal injury or death to any one or more - 5 - R#0202455.04 BK 1063 PG 346 persons or damage to property with respect to any one or more occurrences and $4 million for all such occurrences in the aggregate; (c) During the course of any construction or repair of Improvements on the Property, workers' compensation insurance (including employer's liability insurance, if requested by the Beneficiary) for all employees of the Grantor engaged on or with respect to the Trust Estate in such amount as is reasonably satisfactory to the Beneficiary, or, if such limits are established by law, in such amounts; (d) During the course of any construction or repair of Improvements on the Property, builder's completed value insurance against those risks of loss covered by the "special cause of Loss" form, including collapse and transit coverage, during construction of such Improvements, with deductibles not to exceed $50,000, in nonreporting form, covering the total insurable value of work performed and equipment, supplies and materials furnished, with the policy of insurance to contain the "permission to occupy upon completion of work or occupancy" endorsement; (e) Boiler and machinery insurance covering pressure vessels, air tanks, boilers, machinery, pressure piping, heating, air conditioning and elevator equipment and escalator equipment, provided the improvements contain equipment of such nature, and insurance against loss of occupancy or use arising from any breakdown of any of the items referred to in this subparagraph (e), in such amounts as are reasonably satisfactory to the Beneficiary; (f) Insurance against loss or damage to the Personal Property by fire and other risks covered by insurance of the type now known as "special cause of loss," (g) Business income insurance and/or loss of "rental value" insurance in such amounts as are reasonably acceptable to the Beneficiary; and (h) Such other insurance and in such amounts as may from time to time be maintained by similar businesses using prudent, commercially reasonable judgment. All policies of insurance required by the terms of this Deed of Trust shall contain an endorsement or agreement by the insurer, if such an endorsement is generally obtainable from insurance companies, that any loss shall be payable in accordance with the terms of such policy notwithstanding any act or negligence of the Grantor which might otherwise result in forfeiture of such insurance and the further agreement of the insurer waiving all rights of setoff, counterclaim or deductions against the Grantor. 1.04 Delivery of Policies, Payment of Premiums. All policies of insurance shall be issued by companies and in amounts in each company satisfactory to the Beneficiary in its sole discretion. All policies of insurance [except for that required in Section 1.03(b)] shall have attached thereto a lender's loss payable endorsement for the benefit of the Beneficiary in a form satisfactory to the Beneficiary. The grantor shall provide to the Beneficiary certificates of insurance with respect to the policies required hereunder. If requested by the Beneficiary, the Grantor shall furnish the Beneficiary with an original policy of all policies of required insurance or certified copies of such policies. If the Beneficiary consents to the Grantor providing any of the required insurance through blanket policies - 6 - R#0202455.04 BK 1063 PG 347 carried by the Grantor and covering more than one location, then the Grantor shall furnish the Beneficiary with a certificate of insurance for each such policy setting forth the coverage, the limits of liability as to the Trust Estate, the name of the carrier, the policy number, and the expiration date. At least fifteen (15) days prior to the expiration of each such policy, the Grantor shall furnish the Beneficiary with evidence satisfactory to the Beneficiary of the reissuance of continuation of a policy continuing insurance in force as required by this Deed of Trust. The Grantor shall pay al insurance premiums promptly as billed by the issuing insurance companies, and in any event prior to delinquency; and the Grantor shall furnish the Beneficiary with evidence satisfactory to the Beneficiary of the timely payment of such insurance premiums. To the extent such endorsements can be generally obtained from insurance companies, all such policies shall contain a provision that such policies will not be canceled including any reduction in the scope or limits of coverage) without at least thirty (30) days prior written notice to the Beneficiary. In the event the Grantor fails to provide, maintain, keep in force or deliver and furnish to the Beneficiary the polices of insurance required by this Deed of Trust, the Beneficiary may procure such insurance or single- interest insurance for such risks covering the Beneficiary's interest. The Grantor will pay all premiums thereon promptly upon demand by the Beneficiary. Until the Grantor makes such payment, the amount of all such premiums, together with interest thereon at the Default Rate, shall be secured by this Deed of Trust. Upon written request by the Beneficiary, the Grantor shall deposit with an escrow agent selected by the Beneficiary (such party being hereinafter referred to as the "Escrow Agent") in monthly installments an amount equal to one-twelfth (1/12) of the estimated aggregate annual insurance premiums on all policies of insurance required by this Deed of Trust in order to accumulate sufficient funds to pay such premiums 30 days prior to their due date. In such case, should the Grantor fail to deposit sums sufficient to fully pay such insurance premiums at least thirty (30) days before delinquency thereof, the Beneficiary may, at the Beneficiary's election (but shall not be obligated to), advance any amounts required to make up the deficiency. Such advances, if any, shall be secured hereby and, together with interest thereon, shall be repayable to the Beneficiary in like manner as herein elsewhere provided for the repayment on sums advanced by the Beneficiary to pay insurance premiums. At the option of the Beneficiary, if the Grantor has failed to deposit sufficient funds to fully pay such insurance, the Beneficiary instead may, without making any advance whatever, apply any sums held by the Escrow Agent upon any obligation of the Grantor secured hereby following the occurrence of an Event of Default. Should any Event of Default (as hereinafter defined) occur or exist on the part of the Grantor in the payment or performance of any of the Grantor's obligations under the terms of the Loan Instruments, the Beneficiary may apply any sums or amounts in its hands received as rents or income of the Trust Estate, or otherwise, upon any indebtedness or obligation of the Grantor secured hereby in such manner and order as the Beneficiary may elect. The receipt, use or application of any such sums paid by the Grantor to the Escrow Agent hereunder shall not be construed to affect the maturity of any indebtedness secured by this Deed of Trust or any of the rights or powers of the Beneficiary or the Trustee under the terms of the Loan Instruments or any of the obligations of the Grantor. The Grantor further agrees, upon the Beneficiary's request, to cause originals or true and complete copies of all bills, statements and other documents relating to the foregoing insurance premiums to be sent or mailed directly to the Beneficiary. Upon receipt of such bills, statements or other documents, and provided the Grantor has deposited sufficient funds pursuant to this Section 1.04, the Escrow Agent, upon instructions from the Beneficiary, shall pay such amounts as may be due thereunder out of the funds so deposited. If at any time and for any reason such funds are or will be insufficient to - 7 - R#0202455.04 BK 1063 PG 348 pay such amounts as may then or subsequently be due, the Beneficiary shall so notify the Grantor, and the Grantor shall immediately deposit an amount equal to such deficiency with the Escrow Agent. Notwithstanding the foregoing, nothing contained herein shall cause the Beneficiary or the Escrow Agent to be obligated to pay any amounts in excess of the amount of funds deposited with the Escrow Agent pursuant to this Section 1.04. The Escrow Agent may commingle the reserve with its own funds, and the Grantor shall be entitled to no interest thereon. 1.05 Insurance Proceeds. After the happening of any casualty to the Trust Estate or any part thereof, the Grantor shall give prompt written notice thereof to the Beneficiary and shall, whether or not any insurance proceeds are available or adequate for such purpose and regardless of the dollar amount of such damage or loss, with reasonable diligence, at the Grantor's own sole cost and expense, repair, restore or reconstruct the Improvements or the portion thereof so damaged. (a) In the event of any damage or destruction of the Improvements, the Beneficiary shall have the option in its sole discretion of applying all or part of the insurance proceeds (i) to any indebtedness secured hereby and in such order as the Beneficiary may determine, or (ii) to the restoration of the Improvements, or (iii) to the Grantor. (b) In the event of such loss or damage, all proceeds of insurance shall be payable to the Beneficiary. The Grantor hereby authorizes and directs any affected insurance company to make payment of such proceeds directly to the Beneficiary. The Grantor hereby authorizes and empowers the Beneficiary to settle, adjust or compromise any claims for loss, damage or destruction under any policy or policies of insurance. (c) The Grantor's obligation under this Deed of Trust to repair and restore the Trust Estate following any casualty damage shall be limited to the extent that, pursuant to Section 1.05(a) above or any other Loan Instrument, the Beneficiary elects not to make the insurance proceeds available to the Grantor to fund such repair and restoration. Except to the extent that insurance proceeds are received by the Beneficiary and applied to the indebtedness secured hereby, nothing herein contained shall be deemed to excuse the Grantor from repairing or maintaining the Trust Estate as provided in Section 1.02 hereof or restoring all damage or destruction to the Trust Estate, regardless of the availability or sufficiency of insurance proceeds. (d) The application or release by the Beneficiary of any insurance proceeds pursuant to this Deed of Trust shall not cure or waive any default or notice of default under this Deed of Trust or invalidate any act done pursuant to such notice. 1.06 Assignment of Policies upon Foreclosure. In the event of foreclosure of this Deed of Trust or other transfer of title or assignment of the Trust Estate in extinguishment, in whole or in part, of the debt secured hereby, all right, title and interest of the Grantor in and to all policies of insurance required by this Deed of Trust, including refunds of premiums thereon, (unless insurance is provided by a so-called "blanket" policy covering multiple property locations) shall inure to the benefit of and pass to the successor in interest to the Grantor or the purchaser or grantee of the Trust Estate. To the extent that the policies will not permit such rights and benefits to pass automatically, the Grantor shall execute such documentation (and forward such refunds of premiums for such policies) to effectuate the intent of this Section. - 8 - R#0202455.04 BK 1063 PG 349 1.07 Indemnification; Subrogation; Waiver of Offset. (a) If the Beneficiary is made a party defendant to any proceeding or litigation concerning this Deed of Trust or the Trust Estate or any part thereof or interest therein, or the occupancy thereof by the Grantor, then the Grantor shall indemnify, defend and hold the Beneficiary and the Trustee harmless from all liability by reason of such proceeding or litigation, including attorneys' fees and expenses incurred by the Beneficiary or the Trustee in any such proceeding or litigation, whether or not any such proceeding or litigation is prosecuted to judgment. If the Beneficiary or the Trustee commences an action against the Grantor to enforce any of the terms hereof or because of the breach by the Grantor of any of the terms hereof, or for the recovery of any sum secured hereby, the Grantor shall pay to the Beneficiary or the Trustee, as the case may be, attorneys' fees and expenses. The right to such attorneys' fees and expenses shall be deemed to have accrued on the commencement of such action and shall be enforceable whether or not such action is prosecuted to judgment or otherwise completed. If the Grantor breaches any term of this Deed of Trust, the Beneficiary or the Trustee may employ an attorney or attorneys to protect its rights hereunder. In the event of such employment following any breach by the Grantor, the Grantor shall pay the Beneficiary or the Trustee, as the case may be, attorneys' fees and expenses incurred by such party, whether or not an action is actually commenced against the Grantor by reason of such breach. (b) The Grantor waives any and all right to claim or recover against the Trust and the Beneficiary, its officers, employees, agents and representatives, for loss of or damage to the Grantor, the Trust Estate, the Grantor's property or the property of others under the Grantors control from any cause insured against or required to be insured against by the provisions of this Deed of Trust. (c) All sums payable by the Grantor hereunder shall be paid without notice, demand, counterclaim, setoff, deduction or defense and without abatement, suspension, deferment, diminution or reduction. The obligations and liabilities of the Grantor hereunder shall in no way be released, discharged or otherwise affected (except as expressly provided herein) by reason of: (i) any damage to or destruction of or any condemnation or similar taking of the Trust Estate or any part thereof; (ii) any restriction or prevention of or interference with any use of the Trust Estate or any part thereof; (iii) any title defect or encumbrance or any eviction from the Property or the Improvements or any part thereof by title paramount or otherwise; (iv) any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation, or other like proceeding relating to the Beneficiary or the Grantor, or any action taken with respect to this Deed of Trust by any trustee or receiver of the Beneficiary or the Grantor, or by any court, in any such proceeding; (v) any claim which the Grantor has, or might have, against the Beneficiary; (vi) any default or failure on the part of the Beneficiary to perform or comply with any of the terms hereof or of any other agreement with the Grantor; or (vii) any other occurrence whatsoever, whether similar or dissimilar to the foregoing, whether or not the Grantor shall have notice or knowledge of any of the foregoing. Except as expressly provided herein and to the extent waivable by the Grantor, the Grantor waives all rights now or hereafter conferred by statute or otherwise to any abatement, suspension, deferment, diminution, or reduction of any sum secured hereby and payable by the Grantor. - 9 - R#0202455.04 BK 1063 PG 350 1.08 Taxes and Impositions. (a) Subject to its obligations under Section 1.08(e) below, the Grantor agrees to pay, at least ten days prior to delinquency, all applicable real property and personal property taxes and assessments, general and special; all applicable payments in lieu of taxes; and all other applicable taxes, fees and assessments of any kind or nature whatsoever (including, without limitation, nongovernmental review or assessments such as maintenance charges; owner association dues, charges or fees; levies or charges resulting from covenants, conditions and restrictions affecting the Trust Estate) which are assessed or imposed upon the Trust Estate, or become due and payable, and which create, may create or appear to create a lien upon the Trust Estate, or any part thereof, or upon any Personal Property, equipment or other facility used in the operation or maintenance thereof (all of which taxes, assessments and other governmental and nongovernmental charges of like nature are hereinafter referred to as "Impositions"). If, by law, any such Imposition is payable, of may, at the option of the taxpayer, be paid in installments, the Grantor may pay the same, together with any accrued interest on the unpaid balance of such Impositions, in installments as the same become due and before any fine, penalty, interest or cost may be added thereto for the nonpayment of any such installment and interest. (b) If at any time after the date hereof there shall be assessed or imposed (i) a tax or assessment on the Trust Estate in lieu of or in addition to the Imposition payable by the Grantor pursuant to subparagraph (a) hereof, or (ii) a license, fee, tax or assessment imposed on the Beneficiary and measured by or based in whole or in part upon the amount of the outstanding obligations secured hereby, then all such taxes, assessments or fees shall be deemed to be included within the term "Impositions" as defined in subparagraph (a) hereof. The Grantor shall pay and discharge such Impositions as herein provided with respect to the payment of other Impositions. Anything to the contrary herein not withstanding, the Grantor shall have no obligation to pay any franchise, estate, inheritance, income, excess profits or similar tax levied on the Beneficiary or on the obligations secured hereby. (c) Subject to the provisions of Section 1.08(d) below, the Grantor covenants to furnish the Beneficiary, within thirty (30) days after the date upon which any such Imposition must be paid by the Grantor in order to avoid a delinquency, official receipts of the appropriate taxing authority, or other proof satisfactory to the Beneficiary, evidencing the payments thereof. (d) The Grantor shall have the right before any delinquency occurs to contest or object to the amount or validity of any such Imposition by appropriate legal proceedings. This right shall not be deemed or construed in any way as relieving, modifying or extending the Grantor's covenant to pay any such Imposition at the time and in the manner provided in this Section 1.08, (1) unless the Grantor gives prior written notice to the Beneficiary of the Grantor's contest of any Imposition within three (3) days of filing such contest, and (2) unless, at the Beneficiary's sole option, (i) the Grantor demonstrates to the Beneficiary's sole satisfaction that the legal proceedings shall conclusively operate to prevent the sale of the Trust Estate or any part thereof to satisfy such Imposition prior to final determination of such proceedings; or (ii) the Grantor shall furnish a good and sufficient bond or surety as requested by and satisfactory to the Beneficiary; or (iii) the Grantor shall have provided a good and sufficient undertaking as may be required or permitted by law to accomplish a stay of such proceedings. (e) The Grantor shall pay to the Escrow Agent on the day monthly installments of principal and interest are payable under the Note, until the Note is paid in full, an amount equal to one- - 10 - R#0202455.04 BK 1063 PG 351 twelfth of the annual Impositions reasonably estimated by the Beneficiary to pay at least thirty (30) days prior to their delinquency the installment of taxes (or payment due in lieu of taxes) next due on the Trust Estate. The Grantor further agrees to cause originals or true and complete copies of all bills, statements, and other documents relating to Impositions to be sent or mailed directly to the Beneficiary. Upon receipt of such bills, statements and other documents, and provided the Grantor has deposited sufficient funds with the Escrow Agent pursuant to this Section 1.08, the Escrow Agent, upon instructions from the Beneficiary, shall pay such amounts as may be due thereunder out of the funds so deposited. If at any time and for any reason such funds deposited are or will be insufficient to pay such amounts as may then or subsequently be due, the Beneficiary shall so notify the Grantor and the Grantor shall immediately deposit an amount equal to such deficiency with the Escrow Agent. Notwithstanding the foregoing, nothing contained herein shall cause the Beneficiary or the Escrow Agent to be obligated to pay any amounts in excess of the amount of funds so deposited pursuant to this Section 1.08. The Escrow Agent may commingle the reserve with its own funds and shall not be obligated to pay or allow any interest on any sums so held pending disbursement or application hereunder. Should the Grantor fail to deposit with the Escrow Agent sums sufficient to fully pay such Impositions at least thirty (30) days before delinquency thereof, the Beneficiary may, at the Beneficiary's election (but shall not be obligated to), advance any amounts required to make up the deficiency. Such advances, if any, shall be secured hereby and, together with interest thereon, shall be repayable to the Beneficiary in like manner as herein elsewhere provided for the repayment on sums advanced by the Beneficiary to pay insurance premiums. At the option of the Beneficiary, if the Grantor has failed to deposit such funds sufficient to fully satisfy the Impositions, the Beneficiary instead may, without making any advance whatever, apply any sums held by the Escrow Agent upon any obligation of the Grantor secured hereby following the occurrence of an Event of Default. Should any Event of Default occur or exist on the part of the Grantor in the payment or performance of any of the Grantor's obligations under the terms of the Loan Instruments, the Beneficiary may apply any sums or amounts in its hands received as rents or income of the Trust Estate, or otherwise, upon an indebtedness or obligation of the Grantor secured hereby in such manner and order as the Beneficiary may elect. The receipt, use or application of any sums paid by the Grantor to the Escrow Agent hereunder shall not be construed to affect the maturity of any indebtedness secured by this Deed of Trust or any of the rights or powers of the Beneficiary or the Trustee under the terms of the Loan Instruments or any of the obligations of the Grantor under any of the Loan Instruments. (f) The Grantor covenants and agrees not to suffer, permit or initiate the joint assessment of the real and personal property herein described as the Trust Estate with any other real and personal property of the Grantor or any other procedure whereby the lien of the real property and personal property taxes shall be assessed, levied or charged to the Trust Estate and other real and personal property of the Grantor as a single lien. The Grantor agrees to furnish to the Beneficiary documentation establishing to the Beneficiary's satisfaction that the Trust Estate is not taxed together with other real or personal property. 1.09 Utilities. The Grantor covenants and agrees to pay when due all utility charges which are incurred by the Grantor for the benefit of the Trust Estate or which may become a charge or lien against the Trust Estate for gas, electricity, water or sewer services furnished to the Trust Estate and all other assessments or charges of a similar nature, whether public or private, affecting the Trust Estate or any portion thereof, whether or not such taxes, assessments or charges are liens thereon. - 11 - R#0202455.04 BK 1063 PG 352 1.10 Licenses, Permits and Authorizations. The Grantor covenants and agrees to apply for, obtain and continue in full force all licenses, authorizations and permits necessary for the operation of the Property and Improvements as a boat manufacturing facility. 1.11 Actions Affecting Trust Estate. The Grantor covenants and agrees to appear in and contest any action or proceeding purporting to affect the security hereof or the rights or powers of the Beneficiary or the Trustee, and to pay all costs and expenses (including cost of evidence of title and attorneys' fees) in any such action or proceeding in which the Beneficiary or the Trustee may appear. 1.12 Actions By the Trustee and/or the Beneficiary to Preserve Trust Estate. Should the Grantor fail to make any payment or to do any act as and in the manner provided in any of the Loan Instruments, the Beneficiary and/or the Trustee, each in its own discretion, without notice to or demand upon the Grantor (except as may be otherwise provided herein) and without releasing the Grantor from any obligation, may (but shall not be obligated to) make or do the same in such manner and to such extent as either may deem necessary to protect to security hereof. In connection therewith (without limiting their general powers), the Beneficiary and/or the Trustee shall have, and are hereby given, the right, but not the obligation, upon the occurrence of such a failure as hereinabove described, (i) to enter upon and take possession of the Trust Estate (ii) to make additions, alterations, repairs and improvements to the Trust Estate which they or either of them may consider necessary or proper to keep the Trust Estate in good condition and repair; (iii) to appear and participate in any action or proceeding affecting or which may affect the security hereof or the rights or powers of the Beneficiary or the Trustee; (iv) to pay, purchase, contest, or compromise any encumbrance, claim, charge, lien or debt which in the sole judgment of either affects the security of this Deed of Trust or is prior or superior hereto (excluding easements, encroachments, leases and subleases existing as of the date of this Deed of Trust which have been disclosed to the Beneficiary); and (v) in exercising such powers, to pay necessary expenses, including employment of counsel or other necessary or desirable consultants. the Grantor shall, immediately upon demand therefor by the Beneficiary or the Trustee, as the case may be, pay all costs and expenses incurred by such party in connection with the exercise by such party of the foregoing rights, including without limitation, costs of evidence of title, court costs, appraisals, surveys and attorneys' fees. 1.13 Further Assurances. At any time, and from time to time, upon request by the Beneficiary, and provided the request does not increase the Grantor's obligations under the Loan Instruments, the Grantor will execute and deliver to the Beneficiary and, where appropriate, cause to be recorded and/or filed and from time to time thereafter to be re-recorded and or refiled at such time and in such offices and places as shall be reasonably required by the Beneficiary, any and all such other and further deeds of trust, security agreements, financing statements, continuation statements, instruments of further assurance, certificates and other documents as may, in the reasonable opinion of the Beneficiary, be necessary or desirable in order to effectuate, complete or perfect , or to continue and preserve (i) the obligation of the Grantor under the Note and under this Deed of Trust and (ii) the security interest created by this Deed of Trust as a first and prior security interest upon security title in and to all of the Trust Estate, whether now owned or hereafter acquired by the Grantor. Upon any failure by the Grantor so to do, the Beneficiary may execute, record, file, re-record and/or refile any and all such deeds of trust, security agreements, financing statements, continuation statements, instruments, certificates and documents for and in the name of - 12 - R#0202455.04 BK 1063 PG 353 the Grantor, and the Grantor hereby irrevocable appoints the Beneficiary the agent and attorney-in-fact of the Grantor so to do. 1.14 Eminent Domain. Should the Trust Estate, or any part thereof or interest therein, be taken or damaged by reason of any public improvement or condemnation proceeding, or in any other manner ("Condemnation"), or should the Grantor receive any notice or other information regarding such proceeding, the Grantor shall give prompt written notice thereof to the Beneficiary. (a) The Beneficiary shall be entitled to all compensation, awards and other payments or relief for Condemnation to the extent of the outstanding indebtedness and unpaid interest thereon and all other sums secured by this Deed of Trust. The Beneficiary shall be entitled, at its option, to commence, appear in and prosecute in its own name any action or proceedings (and shall also be entitled to make any compromise or settlement) in connection with such taking or damage. All such compensation, awards, damages, rights of action and proceeds awarded to the Grantor (the "Proceeds") are hereby assigned to the Beneficiary. The Grantor covenants and agrees to execute such further assignments of the Proceeds as the Beneficiary or the Trustee may require. (b) In the event any portion of the Trust Estate is so taken or damaged, the Beneficiary shall have the option, in its sole and absolute discretion (with or without causing the entire indebtedness evidenced by the Note to be accelerated) to apply all such Proceeds, after deducting therefrom all costs and expenses (regardless of the particular nature thereof and whether incurred with or without suit), including attorneys' fees, incurred by it in connection with such Proceeds, upon any indebtedness secured hereby and in such order as the Beneficiary may determine, or (without accelerating the indebtedness) to apply all such Proceeds after such deductions, to the restoration of the Trust Estate upon such conditions as the Beneficiary may determine. (c) If less than the entire Trust Estate is taken in the Condemnation and if the Trust Estate remaining after the Condemnation is capable of being repaired and restored to an architectural, functional and economic whole, the Grantor shall, at the Grantor's cost and expense, so repair and restore the remaining portion of the Trust Estate with reasonable diligence; provided, however, the Grantor's obligation under this Deed of Trust to repair and restore the remaining portion of the Trust Estate following any Condemnation shall be limited to the extent that, pursuant to Section 1.14(b) above or any other Loan Instrument, the Beneficiary elects not to make the proceeds available to the Grantor to fund such repair and restoration. (d) The application or release by the Beneficiary of any Condemnation Proceeds pursuant to this Deed of Trust shall not cure or waive any default or notice of default under this Deed of Trust or invalidate any act done pursuant to such notice. 1.15 Additional Security. In the event the Beneficiary at any time holds additional security for any of the obligations secured hereby, it may enforce the sale thereof or otherwise realize upon the same, at its option, either before, concurrently with or after a sale made hereunder. 1.16 Appointment of Successor Trustee. The Beneficiary shall at any time have the irrevocable right to remove the Trustee herein named without notice or cause and to appoint his - 13 - R#0202455.04 BK 1063 PG 354 successor by an instrument in writing, duly acknowledged, in such form as to entitle such written instrument to be recorded in the State of North Carolina. In the event of the death or resignation of the Trustee herein named, the Beneficiary shall have the right to appoint his successor by such written instrument. Any Trustee so appointed shall be vested with the title to the Trust Estate and shall possess all the powers, duties and obligations herein conferred on the Trustee in the same manner and to the same extent as though he were named herein as the Trustee. 1.17 Inspections. The Beneficiary, or its agents, representatives or workers are authorized to enter at any reasonable time upon or in any part of the Trust Estate for the purpose of inspecting the Trust Estate and performing any of the acts it is authorized to perform under the terms of any of the Loan Instruments. The Beneficiary and its agents, however, shall conduct such inspections in such a manner that does not interfere unreasonably with any tenant's operations and in accordance with the terms of all leases affecting or encumbering the Trust Estate. 1.18 Liens. The Grantor covenants and agrees to pay and promptly discharge, a t the Grantor's cost and expense, all liens, encumbrances and charges upon the Trust Estate, or any part thereof or interest therein. The existence of any mechanic's laborer's, materialman's, supplier's or vendor's lien or right thereto shall not constitute a violation of this Section if payment is not yet due under the contract which is the foundation thereof and if such contract does not postpone payment for more than sixty (60) days after the performance thereof. The Grantor shall have the right to contest in good faith the validity of any such lien, encumbrance or charge, provided the Grantor shall first deposit with the Beneficiary a bond or other security satisfactory to the Beneficiary in such amounts as the Beneficiary shall reasonably require (but not more than one and one-half (1-1/2) times the amount of the claim) and provided further that the Grantor shall thereafter diligently proceed to cause such lien, encumbrance or charge to be removed and discharged. If the Grantor shall fail to discharge any such lien, encumbrance or charge or provide such reasonable security, then, in addition to any other right or remedy of the Beneficiary, the Beneficiary may (but shall not be obligated to) discharge the same, either by paying the amount claimed to be due, or by procuring the discharge of such lien by depositing in court a bond for the amount claimed or otherwise giving security for such claim, or in such manner as is or may be prescribed by law. The Beneficiary shall be entitled to recover from the Grantor all expenses it incurs in discharging such a lien (including, but not limited to, its attorneys' fees), in addition to the amount paid by the Beneficiary for such discharge. 1.19 Trustee's Powers. At any time, or from time to time, without liability therefor and without notice, upon written request of the Beneficiary and presentation of this Deed of Trust and the Note secured hereby for endorsement, and without affecting the personal liability of any remainder of the Trust Estate, the Trustee may (i) release or reconvey any part of the Trust Estate, (ii) consent in writing to the recording of any map or plat thereof, (iii) join in granting any easement with respect to the Trust Estate, (iv) or join in any extension agreement or any agreement subordinating the lien or charge hereof. 1.20 Beneficiary's Powers. Without affecting the liability of any other person liable for the payment of any obligation herein mentioned, if any, and without affecting the lien or charge of this Deed of Trust upon any portion of the Trust Estate not then or theretofore released as security - 14 - R#0202455.04 BK 1063 PG 355 for the full amount of all unpaid obligations, the Beneficiary may, from time to time and without notice, (i) release any person so liable, (ii) extend the maturity or alter any of the terms of any such obligation, (iii) grant other indulgences, (iv) release or reconvey (or cause to be released or reconveyed at any time at the Beneficiary's option) any parcel, portion or all of the Trust Estate, (v) take or release any other or additional security for any obligation herein mentioned, (vi) make compositions or other arrangements with debtors in relation thereto or (vii), as provided herein, advance additional funds to protect the security hereof or pay discharge the obligations of the Grantor hereunder, or under the Loan Instruments, and all amounts so advanced, with interest thereon, at the Default Rate, shall be secured hereby. The Grantor consents that the provisions of N.C. Gen. Stat. 45- 45.1 or any similar statute hereafter enacted in replacement or in substitution thereof shall be inapplicable to this Deed of Trust. 1.21 Operating Statements; Financial Statements. The Grantor will cause to be delivered to the Beneficiary financial information and reports required by the Loan Agreement. 1.22 Filings and Recordings. The Grantor covenants and agrees to promptly cause this Deed of Trust and the Assignment of Rents and any supplements, amendments, or modifications thereto and financing statements and continuation statements under the Uniform Commercial Code and other instruments with respect thereto to be filed, registered and recorded (and when and if necessary to be refiled, re-registered or re-recorded) in such place or places as may be required by any law in order to create, perfect or protect the lien of (and security interest created by) this Deed of Trust, the Security Agreement and Assignment of Rents; to protect the validity thereof to publish notice thereof and to protect and maintain the estate, right, interest, claim and demand of the Beneficiary in, to and under the Trust Estate, the Rents and Leases described in the Assignment of Rents and the Collateral described in the Security Agreement. 1.23 Trade Names. At the request of the Beneficiary, the Grantor shall execute a certificate in form satisfactory to the Beneficiary listing the trade names under which the Grantor intends to operate the Trust Estate, and representing and warranting that the Grantor does business under no other trade names with respect to the Trust Estate. The Grantor shall promptly notify the Beneficiary in writing of any change in these trade names, and will, upon request of the Beneficiary, execute any additional financing statements and other certificates revised to reflect the change in trade name. 1.24 Leases. The Grantor shall not lease the Trust Estate to any third party without the Beneficiary's prior written consent. 1.25 Hazardous Materials. (a) The Grantor warrants and covenants (1) that the Property does not contain and that the Grantor will not cause or permit the property to contain (i) asbestos in any form; (ii) urea formaldehyde foam insulation (iii) transformers or other equipment which contain dielectric fluid containing levels of polychlorinated biphenyls in excess of 50 parts per million; or (iv) except as disclosed in any schedule to the Loan Agreement, any other chemical, material, or substance which is regulated as toxic or hazardous or exposure to which is prohibited, limited, or regulated by any federal, state, county, regional, local, or other governmental authority (except for chemicals, - 15 - R#0202455.04 BK 1063 PG 356 materials or substances used, stored and disposed of in a manner required by applicable laws and regulations) or which, even if not so regulated, may or could pose a hazard to the health and safety of the occupants of the Property or the owners of property adjacent to the Property (such substances described in (i), (ii), (iii) and (iv) above are referred to collectively herein as "Hazardous Materials"); (2) that the Property is not now being used nor has ever been used for any activities involving, directly or indirectly, the use, generation, treatment, storage, transportation, or disposal of any Hazardous Materials; (3) that neither the Property nor the Grantor is subject to any existing, pending, or threatened investigation or inquiry by any governmental authority, or any remedial obligations under any applicable laws, rules, or regulations pertaining to health or the environment. The Grantor shall not install, store, use, treat, transport or dispose (or permit or acquiesce in the installation, storage, use, treatment, transportation or disposal by the Grantor, its agents, employees, independent contractors or tenants) on the Property of any Hazardous Materials. In the event of any such installation, storage, use, treatment, presence, transportation or disposal, whether prior to or during the term of the loan secured by this Deed of Trust, and whether by the Grantor or any predecessor in title, the Grantor promptly shall remove any such Hazardous Materials if the presence of such Hazardous Materials is violative of applicable law, or otherwise comply with the regulations or orders of such authority, all at the expense of the Grantor. If the Grantor shall fail to proceed with such removal or otherwise comply with such regulations or orders promptly, the Beneficiary may declare the indebtedness secured hereby to be in default or the Beneficiary (without regard to any applicable cure period provided for herein) may (but shall not be obligated to) do whatever is necessary to eliminate such Hazardous Materials from the Property or otherwise cure any violation of the applicable regulation or order, and the cost thereof shall constitute additional indebtedness secured hereby and shall become immediately due and payable without notice, and with interest thereon at the Default Rate. The Grantor shall give to the Beneficiary and its agents and employees access to the Property for such purposes and hereby specifically grants to the Beneficiary a license to remove the Hazardous Materials or otherwise cure any such violation. The Grantor and its general partners (if the Grantor is a partnership) shall indemnify the Beneficiary and hold the Beneficiary harmless from and against all loss, damage, and expense (including, without limitation, attorneys' fees and costs incurred in the investigation, defense, and settlement of claims) that the Beneficiary may incur as a result of or in connection with the assertion against the Beneficiary of any claims, actions or violations relating directly or indirectly, in whole or in part, to the presence or removal of any Hazardous Materials on the Property, or relating to any activity on or off the Property, whether prior to or during the term of the loan secured by this Deed of Trust, and whether such activity was carried on by the Grantor or any predecessor in title or any employees, agents, contractors or third parties, if such activity involved Hazardous Materials, in whole or in part, directly or indirectly, or was in violation of any federal, state, or local laws, rules regulations or orders relating thereto. (b) The representations, warranties and covenants of the Grantor in Section 1.25(a) above specifically exclude Hazardous Materials in the form of normal and customary janitorial cleaning supplies and fluids stored and used in the Improvements in connection with the maintenance and cleaning of the Improvements, normal and customary office supplies and equipment stored and used in the Improvements in connection with the operation of tenant businesses therein and heating oil stored and used in the Improvements. - 16 - R#0202455.04 BK 1063 PG 357 (c) The Grantor shall promptly notify the Beneficiary in writing of any order or pending or threatened action by any regulatory agency or other governmental body, or any claims made by any third party, relating to Hazardous Materials on, or emanating from, the Property, and shall promptly furnish the Beneficiary with copies of any correspondence or legal pleadings in connection therewith. In addition, the Beneficiary shall have the right (but shall not be obligated) to notify any state, federal or local governmental authority of information which may come to its attention with respect to Hazardous Materials on or emanating from the Property. The Grantor irrevocably releases the Beneficiary from any claims of loss, damage, liability, expense or injury relating to or arising from, directly or indirectly any such disclosure. (d) The liability of the Grantor and its general partners (if the Grantor is a partnership) to the Beneficiary under the covenants of this Section is not limited by any exculpatory provision in the Note, this Deed of Trust or in any other of the Loan Instruments and shall survive any foreclosure of this Deed of Trust or any transfer of the property by deed in lieu of foreclosure. (e) At any time during the term of this Deed of Trust, but no more than once in any calendar year (unless the Beneficiary has reasonable cause for suspecting the presence of Hazardous Materials on the Trust Estate or unless an Event of Default has occurred and is continuing), the Beneficiary may require the Grantor to cause to be performed, at the expense of the Grantor, an inspection or audit of the Property by a qualified consultant approved by the Beneficiary, to furnish to the Beneficiary a written report thereon by the consultant opining as to the presence or absence of Hazardous Materials, or to permit the Beneficiary to so inspect or audit the Property at the Grantor's expense. The Grantor hereby grants the Beneficiary, its employees, agents and independent contractors, the right to enter upon the Property upon reasonable notice for the purpose of conducting tests and soil borings, installing monitoring wells, and conducting such other tests as the Beneficiary deems necessary or desirable. (f) If the Property or any of the Improvements now or hereafter contains any material or product containing more than 0.1 percent asbestos by weight, the Grantor shall prepare, implement, and comply with, on an ongoing basis, a written asbestos operations and maintenance program prepared by a qualified environmental consultant. Such program shall be designed to assure that (i) all persons are protected from any release of asbestos fibers, and (ii) asbestos fibers are not distributed or released on the Property during maintenance, repairs, alterations or improvements. ARTICLE II ASSIGNMENT OF RENTS, ISSUES AND PROFITS 2.01 Assignment of Rents. The Grantor hereby assigns and transfers to the Beneficiary all the Rents, as hereinbefore defined, of the Trust Estate, and hereby gives to and confers upon the Beneficiary the right, power an authority to collect such Rents. The Grantor irrevocably appoints the Beneficiary its true and lawful attorney-in-fact, at the option of the Beneficiary at any time and from time to time following an Event of Default, to demand, receive and enforce payment, to give receipts, releases and satisfactions, and to sue, in the name of the Grantor or the Beneficiary, for all such Rents and apply the same to the indebtedness secured hereby. The - 17 - R#0202455.04 BK 1063 PG 358 Grantor shall have the right to collect such Rents (but not more than one month in advance) prior to or at any time there is not an Event of Default under any of the Loan Instruments. The assignment of the Rents of the Trust Estate in this Article II is intended to be an absolute, present assignment from the Grantor to the Beneficiary and not merely the passing of a security interest. The Grantor hereby assigns absolutely the Rents to the Beneficiary contingent only upon the occurrence of an Event of Default under any of the Loan Instruments. 2.02 Assignment of Leases. The Grantor agrees to (and hereby does) assign and transfer to the Beneficiary as additional security for the payment of the indebtedness secured hereby, all present and future leases upon all or any part of the Trust Estate and to execute and deliver, at the request of the Beneficiary, all such further assurances and assignments in the Trust Estate as the Beneficiary shall from time to time reasonably require. In the event the Grantor, as additional security has sold, transferred and assigned, or may hereafter sell, transfer and assign, to the Beneficiary, its successors and assigns, any interest of the Grantor as lessor in any lease or leases, the Grantor expressly covenants and agrees that the Grantor, as lessor under such lease or leases so assigned, shall perform and fulfill all terms, covenants, conditions and provisions in such lease or leases, or any of them, on the Grantor's part to be performed or fulfilled, at the times and in the manner in such lease or leases provided. In the event of an explicit conflict between the provisions hereof and the provisions of the Assignment of Rents, the Deed of Trust shall control. 2.03 Assignment of Security Deposits. The Grantor hereby assigns to the Beneficiary all security deposits, if any, received by the Grantor or any agent of the Grantor relative to the Trust Estate. Prior to an Event of Default hereunder and demand by the Beneficiary for delivery of such security deposits to it or its designee, the Grantor shall maintain the security deposits in a separate, identifiable account with a bank acceptable to the Beneficiary. Upon delivery of such security deposits to the Beneficiary, the Beneficiary shall hold such deposits pursuant to the terms of the leases in respect of which such deposits were obtained by the Grantor. In no event shall the Beneficiary be liable to any lessee of any part of the Trust Estate for the return of any security deposit in any amount in excess of the amount delivered to the Beneficiary by the Grantor. Any security deposits held by the Beneficiary shall not bear interest. 2.04 Collection Upon Default. Upon any Event of Default under any of the Loan Instruments, the Beneficiary may, at any time without notice, either in person, by agent or by a receiver appointed by a court and without regard to the adequacy of any security for the indebtedness hereby secured, (1) enter upon and take possession of the Trust Estate, or any part thereof, (2) in its own name sue for or otherwise collect the Rents, including those past due and unpaid, and apply the same, less costs and expenses of operation and collection, including attorneys' fees, upon any indebtedness secured hereby, and in such order as the Beneficiary may determine. The collection of the Rents or the entering upon and taking possession of the Trust Estate, or the application thereof as aforesaid, shall not cure or waive any default or notice of default hereunder or invalidate any act done in response to such default or pursuant to such notice of default. 2.05 Beneficiary's Right of Possession in Case of Default. Upon the occurrence of an Event of Default, whether before or after the whole principal sum secured hereby is declared to be immediately due, or whether before or after the institution of legal proceedings to foreclose the lien hereof or before or after the sale thereunder, forthwith, upon demand of the Beneficiary, the - 18 - R#0202455.04 BK 1063 PG 359 Grantor shall surrender to the Beneficiary and the Beneficiary shall be entitled to take actual possession of the Trust Estate or any part thereof personally, or by its agent or attorneys, as for condition broken. In such event the Beneficiary in its discretion may, with or without force and with or without process of law, enter upon and take and maintain possession of all or any part of the Trust Estate, together with all documents, books, records, papers and accounts of the Grantor or the then owner of the Trust Estate relating thereto, and may exclude the Grantor, its agents or servants, wholly therefrom and may as attorney in fact or agent of the Grantor, or in its own name as the Beneficiary and under the powers herein granted , hold, operate, manage and control the Trust Estate and conduct the business, if any, thereof, either personally or by its agents, and with full power to use such measures, legal or equitable, as in its discretion or in the discretion of its successors or assigns, may be deemed proper or necessary to enforce the payment or the security of Rents of the Trust Estate, including actions for the recovery of rent, actions in forcible detainer and actions in distress for rent, and with full power: (a) to cancel or terminate any lease or sublease for any cause or on any ground which would entitle the Grantor to cancel the same; (b) to elect to disaffirm any lease of sublease which is then subordinate to the lien hereof; (c) to extend or modify any then existing leases and to make new leases, which extensions, modifications and new leases may provide for terms to expire, or for options to lessees to extend or renew terms to expire, beyond the maturity date of the indebtedness hereunder and beyond the date of the issuance of a deed or deeds to a purchaser or purchasers at a foreclosure sale, it being understood and agreed that any such leases, and the options or other such provisions to be contained therein, shall be binding upon the Grantor and all persons whose interests in the Trust Estate are subject to the lien hereof and upon the purchaser or purchasers at any foreclosure sale, notwithstanding any redemption from sale, discharge of the mortgage indebtedness, satisfaction of any foreclosure decree, or issuance of any deed to any purchaser; (d) to make all necessary or proper repairs, decorating, renewals replacements, alterations, additions, betterments and improvements to the Trust Estate as it may deem judicious; (e) to insure and reinsure the same and all risks incidental to the Beneficiary's possession, operation and management thereof; and (f) to receive all of such Rents. The Grantor hereby grants full power and authority to exercise each and every of the rights, privileges and powers herein granted at any and all times hereafter, without notice to the Grantor (except as otherwise provided herein). The Beneficiary shall not be obligated to perform or discharge (nor does it hereby undertake to perform or discharge) any obligation, duty or liability under any leases. The Grantor shall and does hereby agree to indemnify and hold the Beneficiary harmless of and from any and all liability, loss or damage which it may or might incur under such leases or under or by reason of the - 19 - R#0202455.04 BK 1063 PG 360 assignment thereof and of and from any and all claims and demands whatsoever which may be asserted against it by reason of any alleged obligations or undertakings on its part to perform or discharge any of the terms, covenants or agreements contained in such leases. Should the Beneficiary incur any such liability, loss or damage, under such leases or under or by reason of assignment thereof, or in the defense of any claims or demands, the amount thereof, including cots, expenses and reasonable attorney's fees, shall be secured hereby, and the Grantor shall reimburse the Beneficiary therefor promptly upon demand. 2.06 Application of Income Received by the Beneficiary. The Beneficiary, in the exercise of the rights and powers hereinabove conferred upon it by Sections 2.01, 2.04 and 2.05 hereof, shall have full power to use and apply the Rents of the Trust Estate to the payment of or on account of the following, in such order as the Beneficiary may determine: (a) to the payment of the operating expenses of the Trust Estate, including cost of management and leasing thereof (which shall include reasonable compensation to the Beneficiary and its agent or agents, if management be delegated to an agent or agents, and shall also include reasonable and customary lease commissions and other reasonable and customary compensation and expenses of seeking and procuring tenants and entering into leases), established claims for damages, if any, subsequent claims for damages which arise (if any), and premiums on insurance hereinabove authorized; (b) to the payment of taxes and special assessments now due or which may hereafter become due on the Trust Estate; (c) to the payment of all repairs, decorating, renewals, replacements, alterations, additions, betterments, and improvements of the Trust Estate, and of placing the Trust Estate in such condition as will, in the reasonable judgment of the Beneficiary, make it readily rentable; (d) to the payment of any indebtedness secured hereby, in such order as the Beneficiary shall determine in its sole discretion. ARTICLE III SECURITY AGREEMENT 3.01 Creation of Security Interest. The Grantor hereby grants to the Beneficiary a security interest in the Personal Property, as hereinbefore defined, including without limitation, any and all property of similar type or kind, and any replacements or renewals thereof, for the purpose of securing all obligations of the Grantor contained in any of the Loan Instruments. This Deed of Trust constitutes a Security agreement as that term is used in the Uniform Commercial Code of North Carolina (the "Uniform Commercial Code"). In the event of an explicit conflict between the provisions hereof and the provisions of any separate security agreement with respect to the personal property described herein, this Deed of Trust shall control. 3.02 Warranties, Representations and Covenants of the Grantor Respecting the Personal Property. The Grantor hereby warrants, represents and covenants as follows: - 20 - R#0202455.04 BK 1063 PG 361 (a) Except for the security interest granted hereby, the Grantor is, and as to portions of the Personal Property to be acquired after the date hereof will be, the sole owner (or lessee in the case of Personal Property leased by the Grantor) of the Personal Property, free from any adverse lien, security interest, encumbrance or adverse claim thereon of any kind whatsoever. The Grantor will notify the Beneficiary of, and will defend the Personal Property against, all claims and demands of all persons at any time claiming the same or any interest therein. (b) The Grantor will not lease, sell, convey or in any manner transfer the Personal Property without the prior written consent of the Beneficiary, except as permitted under Section 3.02(d) below and except as permitted in the Security Agreement. (c) The Personal Property is not used or bought for personal, family or household purposes. (d) The Personal Property will be kept on or at the Property. The Grantor will not remove the Personal Property from the Property without the prior written consent of the Beneficiary, except such portions or items of Personal Property which are consumed or worn out in ordinary usage, all of which shall be promptly replaced by the Grantor with new items of equal or greater quality. (e) The Grantor has its principal place of business in the State of North Carolina, and the Grantor will immediately notify the Beneficiary in writing of any change in its principal place of business as set forth in the beginning of this Deed of Trust. (f) At the request of the Beneficiary, the Grantor will execute one or more financing statements and renewals and amendments thereof pursuant to the Uniform Commercial Code in form satisfactory to the Beneficiary, and will pay the cost of filing the same in all public offices wherever filing is deemed by the Beneficiary to be necessary. (g) All covenants and obligations of the Grantor contained herein relating to the Trust Estate shall be deemed to apply to the Personal Property whether or not expressly referred to herein. ARTICLE IV REMEDIES UPON DEFAULT 4.01 Events of Default. Any of the following events shall be deemed an Event of Default hereunder. (a) Default in the payment of any installment of principal and/or interest on the Note or any other sum secured hereby when due, provided, however, the failure to make such payment when due shall not constitute an Event of Default hereunder until after the passage of ten (10) calendar days from the date on which such payment is due; (b) The Grantor, or any general partner of the Grantor, (1) shall file a voluntary petition in bankruptcy or shall benefit from or be subject to any order for relief entered by any court of insolvency, or shall file any petition or answer seeking or acquiescing in any reorganization, - 21 - R#0202455.04 BK 1063 PG 362 arrangement, composition, readjustment, liquidation, dissolution or similar relief for itself under any present or future federal, state or other statute, law or regulation relating to bankruptcy, insolvency or other relief for debtors; (2) shall seek or consent to or acquiesce in the appointment of any trustee, receiver, or liquidator of the Grantor, or any general partner of the Grantor, or of all or any part of the Trust Estate, or of any or all of the Rents thereof; of (3) shall make any general assignment for the benefit of creditors or shall admit in writing its inability to pay its debts generally as they become due; (c) A court competent jurisdiction shall enter an order, judgment, or decree approving a petition filed against the Grantor, or any general partner of the Grantor, seeking any reorganization, dissolution or similar relief under any present or future federal, state, or other statute, law or regulation relating to bankruptcy, insolvency or other relied for debtors, and such order, judgment or decree shall remain unvacated and unstayed for an aggregate of sixty (60) days (whether or not consecutive) from the first date of entry thereof; or any trustee, receiver or liquidator of the Grantor, or any general partner of the Grantor, or of all or any part of the Trust Estate, or of any or all of the Rents thereof, shall be appointed without the consent or acquiescence of the Grantor, or any general partner of the Grantor, an such appointment shall remain unvacated and unstayed for an aggregate of sixty (60) days (whether or not consecutive); (d) A writ of execution or attachment or any similar process shall be issued or levied against all or any part of or interest in the Trust Estate, or any judgment involving monetary damages shall be entered against the Grantor, or any general partner of the Grantor, which shall become a lien on the Trust Estate or any portion thereof or interest therein and such execution, attachment or similar process or judgment is not released, bonded satisfied, vacated or stayed within sixty (60) days after its entry or levy; (e) Except as otherwise provided below, the Grantor shall voluntarily or involuntarily, directly or indirectly, without the prior written consent of the Beneficiary, (i) sell, transfer or convey (including, without limitation, by way of mortgage or deed of trust) the Trust Estate or any portion thereof or interest therein, (ii) change, or permit or suffer any change in, the ownership (legal or beneficial), composition or form of business association of the legal entity constituting the Grantor, except for transfers of any limited partnership interest therein, (iii) execute a contract of sale or record a condominium declaration affecting the Trust Estate or any portion thereof or interest therein (legal or beneficial), (iv) permit any other financing to be secured by the Trust Estate or any portion thereof or interest therein (legal or beneficial), (v) change the nature of the use of the Trust Estate. The Grantor acknowledges and agrees that the Beneficiary may require, as a condition to granting its consent to any of the foregoing, the payment of a transfer fee and/or that the Loan Instruments be modified so as to increase the Interest Rate on the Note, alter the maturity of the Note, or both. (f) Failure to maintain hazard insurance with respect to the Trust Estate as required in this Deed of Trust. (g) There has occurred a breach of or default under any other term, covenant, agreement, condition, provision, representation or warranty in this Deed of Trust or under any term, - 22 - R#0202455.04 BK 1063 PG 363 covenant, agreement, condition, provision, representation or warranty contained in any of the other Loan Instruments or any part thereof, whether or not referred to in this Section 4.01 and such default has continued for a period of thirty (30) days after the Beneficiary's written notice of default to the Grantor. (h) The furnishing by the Grantor to the Beneficiary of any document or statement (including a financial or operating statement) which contains any untrue and materially adverse statement of a material fact, or which omits a material fact, necessary to make the statements made, in light of the circumstances in which they were made, not misleading. 4.02 Acceleration upon Default, Additional Remedies. In the event of any Event of Default, the Beneficiary may declare all indebtedness secured hereby to be due and payable and the same shall thereupon become due and payable without any presentment, demand, protest or notice of any kind. Thereafter, the beneficiary may: (a) Either in person or by agent, with or without bringing any action or proceeding, or by a receiver appointed by a court and without regard to the adequacy of its security, (i) enter upon and take possession of the Trust Estate, or any part thereof, in its own name or in the name of the Trustee, and do any acts which it deems necessary or desirable to preserve the value, marketability or rentability of the Trust Estate, or part thereof or interest therein, increase the income therefrom or protect the security hereof, and (ii) with or without taking possession of the Trust Estate, sue for or otherwise collect the Rents thereof, including those Rents past due and unpaid and apply the same, less costs and expenses of operation and collection (including attorneys' fees), upon any indebtedness secured hereby, all in such order as the Beneficiary may determine. The entering upon and taking possession of the Trust Estate, the collection of the Rents and the application thereof as aforesaid shall not cure or waive any default or notice of default hereunder or invalidate any act done in response to such default or pursuant to such notice of default. Notwithstanding the continuance in possession of the Trust Estate or the collection, receipt and application of the Rents, the Trustee or the Beneficiary shall be entitled to exercise every right provided for in any of the Loan Instruments or by law upon occurrence of any Event of Default, including the right to exercise the power of sale, as authorized by law; (b) Commence an action to foreclose this Deed of Trust (or cause the Trustee to foreclose this Deed of Trust by power of sale), appoint a receiver, or specifically enforce any of the covenants hereof; (c) Exercise any or all of the remedies available to a secured party under the Uniform Commercial Code, including, but not limited to: (1) Either personally or by means of a court-appointed receiver, take possession of all or any of the Personal Property and exclude therefrom the Grantor and all others claiming under the Grantor, and thereafter hold, store, use, operate, manage, maintain and control, make repairs, replacements, alterations, additions and improvements to and exercise all rights and powers of the Grantor in respect to the Personal Property or any part thereof. In the event the Beneficiary demands or attempts to take possession of the Personal Property in the exercise of any rights under any of the Loan Instruments, the Grantor promises and agrees to promptly turn over and deliver complete possession thereof to the Beneficiary; - 23 - R#0202455.04 BK 1063 PG 364 (2) Without notice to or demand upon the Grantor, make such payments and do such acts as the Beneficiary may deem necessary to protect its security interest in the Personal Property, including without limitation, paying, purchasing, contesting or compromising any encumbrance, charge or lien which is prior to or superior to the security interest granted hereunder and in exercising any such powers or authority to pay all expenses incurred in connection therewith; (3) Require the Grantor to assemble the Personal Property or any portion thereof, at a place designated by the Beneficiary, and promptly to deliver such Personal Property to the Beneficiary or to an agent or representative designated by it. The Beneficiary and its agents and representatives shall have the right to enter upon any or all of the Grantor's premises and property to exercise the Beneficiary's rights hereunder; (4) Sell, lease or otherwise dispose of the Personal Property at public sale, with or without having the Personal Property at the place of sale, and upon such terms and in such manner as the Beneficiary may determine. The Beneficiary may be a purchaser at any such sale; (5) Unless the Personal Property is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, the Beneficiary shall give the Grantor at least ten (10) days prior written notice at the address specified in or pursuant to this Deed of Trust of the time and place of any public sale of the Personal Property or other intended disposition thereof. Such notice shall be mailed to the Grantor in the manner set out in Section 5.06 of this Deed of Trust. (d) Upon the acceleration of the maturity of the indebtedness as herein provided, a tender of payment of the amount necessary to satisfy the entire indebtedness secured hereby made at any time prior to foreclosure sale (including sale under the power of sale) by the Trustee, shall constitute an evasion of the prepayment terms of the Note and be deemed to be a voluntary prepayment thereunder. Any such payment, to the extent permitted by applicable law, will therefore include the additional payment (if any) required under the prepayment privilege contained in the Note. In no event shall the amount due pursuant to this paragraph exceed the maximum non-usurious amount permitted by applicable law. 4.03 Foreclosure by Power of Sale. Should the Beneficiary elect to foreclosure by exercise of the power of sale herein contained, the Beneficiary shall notify the Trustee and shall deposit with the Trustee this Deed of Trust and the Note and such receipts and evidence of expenditures made and secured hereby as the Trustee may require. Upon application of the Beneficiary, it shall be lawful for and the duty of the Trustee, and he is hereby authorized and empowered, to expose to sale and to sell the Property and the Improvements (either in whole or in separate parcels and in such order as the Trustee may determine), and the Personal Property at public auction for cash. After having first compiled with all applicable requirements of North Carolina law with respect to the exercise of powers of sale contained in deeds of trust and upon such sale, the Trustee shall convey title to the purchaser in fee simple. After retaining from the proceeds of such sale just compensation for his services and all - 24 - R#0202455.04 BK 1063 PG 365 expenses incurred by him, including a trustee's commission not exceeding three percent (3%) of the bid, the Trustee shall apply the residue of the proceeds first to the payment of all sums expended by the Beneficiary under the terms of this Deed of Trust; second, to the payment of the Note and interest thereon secured hereby; and third, the balance, if any, to the parties entitled to such proceeds. The Grantor agrees that in the event of sale hereunder, the Beneficiary shall have the right to bid thereat. The Trustee may require the successful bidder at any sale to deposit immediately with the Trustee cash or certified check in the amount not to exceed ten (10%) of the bid, provided notice of such requirement is contained in the advertisement of the sale. The bid may be rejected if the deposit is not immediately made, and thereupon the next highest bidder may be declared to be the purchaser. Such deposit shall be refunded in case a resale is had; otherwise, it shall be applied to the purchase price. If the Personal Property is sold hereunder, it need not be at the place of sale. The published notice, however, shall state the time and place where such property may be inspected prior to sale. If a foreclosure proceeding is commenced by the Trustee but not completed, the Trustee's fee shall be one percent (1%) of the then-outstanding principal balance of the Note if the termination occurs prior to the first public auction sale and two percent (2%) of the then-outstanding principal balance of the Note if the termination occurs after the first public auction sale. Before taking any action hereunder, the Trustee may require that satisfactory indemnity be furnished for the reimbursement of all costs and expenses to which he may be put and to protect him against all liability, except liability which is adjudicated to have resulted from his negligence or willful default by reason of such action. The Trustee shall not be required to see that this Deed of Trust is recorded nor be liable for its validity or its priority as a first-priority Deed of Trust or otherwise, nor shall the Trustee be answerable for the default or misconduct or any agent or attorney appointed by him in good faith in pursuance hereof. The Trustee may act upon any instrument believed by him in good faith to be genuine and to be signed by the proper party or parties and shall not be liable for any action taken or suffered by him in reliance thereon. The Trustee shall be entitled to reasonable compensation for all services rendered in the execution of the trust hereby created. The Grantor agrees to pay all reasonable costs, expenses and liability for which the Trustee is indemnified hereunder or pursuant hereto, and until the payment thereof, the Trust Estate is hereby charged with the payment of the same in full as an obligation secured hereby. The Trustee, at any time, may consult counsel for the purposes of this trust and shall be protected in any action taken or suffered by him in accordance with the opinion of such counsel. The Beneficiary, at its option, is authorized to foreclose this Deed of Trust subject to the rights of any tenants of the Trust Estate. The notice of sale published by the Trustee shall specify the tenants to which the sale of the Trust Estate is subject. The failure to make any such tenants parties to any such foreclosure proceedings and to foreclose their rights will not be, nor be asserted by the Grantor as, a defense to any proceedings instituted by the Beneficiary for repayment of the Note. 4.04 Appointment of Receiver. If an Event of Default shall have occurred and be continuing, the Beneficiary as a matter of right and without notice to the Grantor or to anyone claiming under the Grantor, and without regard to the value of the Trust Estate at such time or the interest of the Grantor therein, shall have the right to apply to any court having jurisdiction to appoint a receiver or receivers of the Trust Estate. The Grantor hereby irrevocably consents to such appointment and waives notice of any application thereof. Any such receiver or receivers shall have - 25 - R#0202455.04 BK 1063 PG 366 all the usual powers and duties of receivers in like or similar cases and all the powers and duties of the Beneficiary in case of entry as provided in Section 4.02(a) and shall continue as such and exercise all such powers until the date of confirmation of sale of the Trust Estate unless such receivership is sooner terminated. 4.05 Remedies Not Exclusive. The Trustee and the Beneficiary, and each of them, shall be entitled to enforce payment and performance of any indebtedness or obligations secured hereby and to exercise all rights and powers under this Deed of Trust or under any other Loan Instrument or other agreement or any laws now or hereafter in force, notwithstanding some or all of the indebtedness and obligations secured hereby may now or hereafter be otherwise secured, whether by mortgage, deed of trust, pledge, lien, assignment or otherwise. Neither the acceptance of this Deed of Trust nor its enforcement, whether by court action or pursuant to the power of sale or other powers herein contained, shall prejudice or in any manner affect the Trustee's or the Beneficiary's right to realize upon or enforce any other security now or hereafter held by the Trustee or the Beneficiary. The Trustee and the Beneficiary, and each of them, shall be entitled to enforce this Deed of Trust and any other security now or hereafter held by the Beneficiary or the Trustee in such order and manner as they or either of them may in their absolute discretion determine. No remedy herein conferred upon or reserved to the Trustee or the Beneficiary is intended to be exclusive of any other remedy herein or by law provided or preclusive of any other remedy herein or by law provided or permitted but each shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute. Every power or remedy given by any of the Loan Instruments to the Trustee or the Beneficiary (or to which either of them may be otherwise entitled) may be exercised, concurrently or independently, from time to time and as often as may be deemed expedient by the Trustee or the Beneficiary and either of them may pursue inconsistent remedies. ARTICLE V MISCELLANEOUS 5.01 Governing Law. This Deed of Trust shall be governed by the laws of the State of North Carolina. In the event that any provision or clause of any of the Loan Instruments conflicts with applicable laws, such conflicts shall not affect other provisions of such Loan Instruments which can be given effect without the conflicting provision. To this end, the provisions of the Loan Instruments are declared to be severable. This instrument cannot be waived, changed, discharged or terminated orally, but only by an instrument in writing signed by the party against whom enforcement of any waiver, change, discharge or termination is sought. 5.02 Successors and Assigns. This Deed of Trust applies to, inures to the benefit of and binds all parties hereto, their heirs, legatees, devisees, administrators, executors, successors and assigns. The term "Beneficiary" shall mean the owner and holder of the Note, whether or not named as the Beneficiary herein. 5.03 Grantor's Waiver of Rights. The Grantor waives, to the extent allowed by applicable law, the benefit of all laws now existing or that hereafter may be enacted providing for (i) any appraisement before sale of any portion of the Trust Estate and (ii) any extension of the time for the enforcement of the collection of the Note or the debt evidenced thereby or the creation or - 26 - R#0202455.04 BK 1063 PG 367 extension of a period of redemption from any sale made in collecting the debt. To the full extent the Grantor may do so, the Grantor agrees that the Grantor will not at any time insist upon, plead, claim or take the benefit or advantage of any law now or hereafter in force providing for any appraisement, valuation, stay, extension or redemption. The Grantor, the Grantor's heirs, devisees, representatives, successors and assigns, and for any and all persons ever claiming any interest in the Trust Estate, to the extent permitted by law, hereby waive and release all rights of redemption, valuation, appraisement, stay or execution, notice of election to mature or declare due the whole of the secured indebtedness and marshalling in the event of foreclosure of the liens hereby created. If any law referred to in this Section and now in force, of which the Grantor, the Grantor's heirs, devisees, representatives, successors and assigns or other persons might take advantage despite this Section, shall hereafter be repealed or cease to be in force, such law shall not thereafter be deemed to preclude the application of this Section. To the extent permitted by applicable law, the Grantor expressly waives and relinquishes any and all rights and remedies which the Grantor may have or be able to assert by reason of the laws of the State of North Carolina pertaining to the rights and remedies of sureties. 5.04 Limitation of Interest. It is the intent of the Grantor and the Beneficiary in the execution of this Deed of Trust and the Note and all other instruments securing the Note to contract in strict compilance with usury laws of the State of North Carolina governing the loan evidenced by the Note. In furtherance thereof, the Beneficiary and the Grantor stipulate and agree that none of the terms and provisions contained in the Loan Instruments shall ever be construed to create a contract for the use, forbearance or detention of money requiring payment of interest at a rate in excess of the maximum interest rate permitted to be charged by the laws of the State of North Carolina governing the loan evidenced by the Note. The Grantor or any guarantor, endorser or other party now or hereafter becoming liable for the payment of the Note, if any, shall never be liable for unearned interest on the Note and shall never be required to pay interest on the Note at a rate in excess of the maximum interest that may be lawfully charged under the laws of the State of North Carolina. The provisions of the Section shall control over all other provisions of the Note and any other instrument executed in connection herewith which may be in apparent conflict herewith. In the event any holder of the Note shall collect monies which are deemed to constitute interest which would otherwise increase the effective interest rate on the Note to a rate in excess of that permitted to be charged by the laws of the State of North Carolina, all such sums deemed to constitute interest in excess of the maximum permissible rate shall be applied forthwith to the reduction of the principal balance of the Note. 5.05 Statements by Grantor. The Grantor, within ten (10) days after being given notice by mail, will furnish to the Beneficiary a written statement stating the unpaid principal of the Note and any other amounts secured by this Deed of Trust and stating whether any offset or defense exists against such principal and interest. 5.06 Notices. All notices, requests or other communications provided for or permitted to be given pursuant to this Deed of Trust, the Note or the Loan Instruments (herein called a "notice") must be in writing (which includes by telephonic facsimile transmission) and shall be served by personal delivery or by depositing in the United States of America mail, postage prepaid registered, return receipt requested, and addressed to the addresses set forth below. All notices shall be effective upon personal delivery or on the third (3rd) day after being deposited in the United - 27 - R#0202455.04 BK 1063 PG 368 States mail. Personal delivery may be accomplished through the use of a reputable commercial courier or air freight service or through use of a telephonic facsimile transmitter (telecopier); provided, however, notices sent by telecopy shall also be sent on the same day by one of the other methods of giving notices provided for herein. Rejection or other refusal to accept or the inability to deliver because of changed address of which no notice was given shall be deemed to be receipt of the notice sent. By giving at least fifteen (15) days' written notice thereof, any party hereto shall have the right, from time to time, to change their respective addresses and each shall have the right to specify as its address any other address in the Untied States of America. Each notice given by telecopy shall be deemed given on the date shown on the sender's copy thereof bearing the proper "answer back code" for the telecopy number to which the notice is sent, provided such telecopy number is the correct number of the receiving party at the time such notice is sent. Grantor: Fountain Powerboats, Inc. Whichard's Beach Road Washington, North Carolina 27889 Telecopy: (919) 975-6793 Attention: Reginald M. Fountain, Jr. Beneficiary: General Electric Capital Corporation 6100 Fairview Road, Suite 1450 Charlotte, North Carolina 28210 Telecopy: (704) 554-0726 Trustee: William C. Matthews, Jr. Womble Carlyle Sandridge & Rice, PLLC 2100 First Union Capitol Center 150 Fayetteville Street Mall Raleigh, North Carolina 27601 Telecopy (919) 755-2150 5.07 Acceptance by Trustee. The Trustee accepts this trust when this Deed of Trust duly executed and acknowledged is made a public record as provided by law. 5.08 Captions. The captions or headings at the beginning of each Section hereof are for the convenience of the parties and are not a part of this Deed of Trust. 5.09 Invalidity of Certain Provisions. If this Deed of Trust is invalid or unenforceable as to any part of the Trust Estate or any part of the debt, the unsecured or partially secured portion of the debt shall be completely paid prior to the payment of the remaining and secured or partially secured portion of the debt. All payments made on the debt, whether voluntary or under foreclosure or other enforcement action or procedure, shall be considered to have been first paid on and applied to the full payment of that portion of the debt which is not secured or fully secured by this Deed of Trust. - 28 - R#0202455.04 BK 1063 PG 369 5.10 Subrogation. To the extent that proceeds of the Note or advances under this Deed of Trust are used to pay any outstanding mortgage, deed of trust, lien, charge or prior encumbrance against the Trust Estate, such proceeds or advances have been or will be advanced by the Beneficiary at the Grantor's request, and the Beneficiary shall be suborgated to any and all rights and liens held or owned by an owner or holder of such outstanding liens, charges and prior encumbrances irrespective of whether these liens, charges or encumbrances are released. 5.11 No Merger. If both the lessor's and lessee's estates under any lease or any portion thereof which constitutes a part of the Trust Estate shall at any time become vested in one owner, this Deed of Trust and the lien created hereby shall not be destroyed or terminated by application of the doctrine of merger. In such event, the Beneficiary shall continue to have and enjoy all of the rights and privileges of the Beneficiary as to the separate estates. In addition, upon the foreclosure of this Deed of Trust pursuant to the provisions hereof, any leases or subleases then existing and created by the Grantor shall not be destroyed or terminated by application of the law of merger or as matter of law or as a result of such foreclosure unless the Beneficiary or any purchaser at any such foreclosure sale shall so elect. No act by or on behalf of the Beneficiary or any such purchaser shall constitute a termination of any lease or sublease unless the Beneficiary or such purchaser shall give written notice thereof of such tenant or subtenant. 5.12 Non-Waiver. The acceptance by the Beneficiary of any sum after the same is due shall not constitute a waiver of the right either to require prompt payment, when due, of all other sums hereby secured or to declare a default as herein provided. The acceptance by the Beneficiary of any sum in an amount less than the sum then due shall be deemed an acceptance on account only and upon condition that it shall not constitute a waiver of the obligation of the Grantor to pay the entire sum then due. The Grantor's failure to pay the entire sum then due shall be and continue to be a default notwithstanding such acceptance of such amount on account, as aforesaid. At all times thereafter and without regard to whether the entire sum then due shall have been paid (and notwithstanding the acceptance by Beneficiary thereof of further sums on account, or otherwise), the Beneficiary and the Trustee shall be entitled to exercise all rights in this instrument conferred upon them, or either of them, upon the occurrence of a default. The right to proceed with a sale under any notice of default, and election to sell, or the right to exercise any other rights or remedies hereunder, shall in no way be impaired, whether any of such amounts are received prior or subsequent to such proceeding, election or exercise. Consent by the Beneficiary to any transaction or action of the Grantor which is subject to consent or approval of the Beneficiary hereunder shall not be deemed a waiver of the right to require such consent or approval to future or successive transaction or actions. 5.13 Attorneys' Fees. Notwithstanding anything herein to the contrary, where this Deed of Trust requires the Grantor to pay for attorneys' fees incurred by the Beneficiary, such fees shall be calculated at such attorneys' standard hourly rates for time in fact spent, rather than on the basis of any statutory presumption. - 29 - R#0202455.04 BK 1063 PG 370 IN WITNESS WHEREOF, the Grantor has executed this Deed of Trust under seal as of the day and year first above written. FOUNTAIN POWERBOATS, INC., a North Carolina corporation By: /s/ Reginald M. Fountain, Jr. _____________ President /s/ Blanche C. Williams ______________ Secretary [CORPORATE SEAL] - 30 - R#0202455.04 BK 1063 PG 371 NORTH CAROLINA CRAVEN COUNTY I, Stephanie C. Crosby, a Notary Public of Craven County, North Carolina, do hereby certify that Blanche C. Williams personally came before me this day and acknowledged that [s] he is the - Secretary of Fountain Powerboats, Inc., a North Carolina corporation, and that by authority duly given and as the act of the corporation, the foregoing instrument was signed in its name by its - President, sealed with its corporate seal and attested by himself/herself as its - Secretary. WITNESS my hand and notarial seal, this 31st day of December, 1996. /s/ Stephanie C. Crosby Notary Public [NOTARY SEAL] My commission expires: 11-30-99 North Carolina Beaufort County The foregoing Certificate of Stephanie C. Crosby Notary Public/Notaries Public is/are certified to be correct This 31st day of December, 1996 at 3:16 o'clock P.M. By /s/Judy Till Register of Deeds Ass't/Deputy Register of Deeds - 31 - R#0202455.04 BK 1063 PG 372 This document prepared by: William C. Matthews, Jr. Womble Carlyle Sandridge & Rice, PLLC Post Office Box 831 Raleigh, North Carolina 27602 After recording please return to the draftsman. STATE OF NORTH CAROLINA ) ) ASSIGNMENT OF RENTS AND LEASES COUNTY OF BEAUFORT ) THIS AGREEMENT OF RENTS AND LEASES (this "Assignment") made this 31st day of December, 1996, by and between FOUNTAIN POWERBOATS, INC., a North Carolina corporation (hereinafter referred to as the "Assignor"), and GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation (the "Assignee"); WITNESSETH: THAT, the Assignor, in consideration of credit extended by the Assignee, hereby conveys, transfers and assigns unto the Assignee, its successors and assigns, all the rights, interests and privileges that the Assignor as lessor has and may have in the leases now existing or hereafter made and affecting the Trust Estate (as defined and described below) or any part thereof (the "Leases") as the Leases may have been or may from time to time be hereafter modified, extended or renewed, with all rents, income and profits due and becoming due therefrom (the "Rents"). The Assignor will, on request of the Assignee, execute assignments of any future leases affecting any part of certain real property situated in Beaufort County, North Carolina and described in EXHIBIT A attached hereto and incorporated by reference (such real property, together with all improvements located thereon, hereinafter referred to as the "Trust Estate"). Notwithstanding any provision herein to the contrary, this Assignment is intended to be an absolute present assignment from the Assignor to the Assignee and not merely the passing of a security interest. The Rents and Leases are hereby assigned absolutely by the Assignor to the Assignee contingently only upon the occurrence of an Event of Default (as defined in the Deed of Trust, as defined and described below). This Assignment is made as additional security for the payment of a certain promissory note in the maximum principal sum of $10,000,000.00 with interest, made by the Assignor to the Assignee, dated of even date herewith (the "Note), and performance by the Assignor of its obligations and agreements contained in that certain Deed of Trust, Assignment of Rents and Security Agreement dated of even date herewith (the "Deed of Trust"), and all extensions or modifications thereof, made by the Assignor to the trustee therein named for the benefit of the Assignee, covering the Trust Estate. The acceptance of this Assignment and the collection of Rents or the payments under the Leases hereby assigned shall not constitute a waiver of any rights of the Assignee under the terms of the Note and the Deed of Trust. Before an Event of Default occurs under the terms of the Note and the Deed of Trust, the Assignor shall have the right to collect the Rents from the Leases and to retain, use and enjoy the Rents. Even before an Event of Default occurs, however, no Rent more than one month in advance shall be collected or accepted without the prior written consent of the Assignee. Anything to the contrary notwithstanding, the Assignor hereby assigns to the Assignee (1) any award made hereafter R#0202465.02 BK 1063 PG 373 EXHIBIT A TRACT I: All that certain tract or parcel of land lying and being situate in Chocowinity Township, Beaufort County, North Carolina, and being more particularly described as follows: Beginning at a point in the southern right-of-way line of NCSR 1166 (Whichards Beach Road); said point being located the following courses and distances from a concrete monument located at the southeasternly corner of the subdivision known as Harbor Estates, as shown on a plat thereof recorded in Plat Cabinet A, Slide 113A in the office of the Register of Deeds of Beaufort County, North Carolina (said concrete monument also being the southwesterly corner of Tract II described below): South 35- 52' 54" East 62.93 feet; South 36- 20' 33" West 30.61 feet; and South 64- 01' 09" East 16.66 feet to a point. THENCE FROM SAID POINT OF BEGINNING BEING SO LOCATED, along and with the southern right-of-way line of Whichards Beach Road South 64- 01' 03" East 132.39 feet to a point; thence South 64- 00' 52" East 49.07 feet to a point; thence South 64- 01' 18" East 50.66 feet to a point; thence South 64- 01' 12" East 220.27 feet to a point; thence South 64- 01' 09" East 45.61 feet to a point; thence continuing along and with the southern right-of-way line of NCSR 1166 with a curve to the right in a southeastwardly direction which has a chord bearing and distance of South 57- 55' 13" East 341.99 feet to a point; thence South 51- 52' 17" East 22.40 feet to a point; thence continuing South 51- 52' 17" East 300.00 feet to a point in the southern right-of-way line of NCSR 1166 (all previous calls being along and with the southern right-of-way line of NCSR 1166); thence leaving NCSR 1166 South 38- 00' 08" West 140.26 feet to a point; thence South 51- 52' 37" East 31.00 feet to a point; thence South 51- 52' 19" East 131.00 feet to a point; thence South 38- 00' 08" West 50.00 feet to a point; thence North 51- 59' 55" West 21.00 feet to a point; thence South 37- 59' 26" West 137.56 feet to a point; thence South 52- 57' 27" East 107.66 feet to a point; thence South 35- 48' 31" West 49.16 feet to a point; thence South 37- 39' 39" West 149.73 feet to a point; thence continuing South 37- 39' 39" West 18.38 feet to a point in a ditch; thence along and with said ditch the following courses: North 56- 10' 32" West 114.97 feet to a point; North 57- 56' 27" West 120.08 feet to a point; thence North 59- 09' 12" West 105.20 feet to a point; thence North 57- 02' 11" West 105.33 feet to a point; thence North 64- 27' 40" West 506.54 feet to a point; thence North 56- 33' 24" West 99.24 feet to a point; thence North 48- 59' 54" West 220.23 feet to a point; thence North 47- 02' 51" West 145.55 feet to a point; thence North 36- 19' 37" East 158.65 feet to a point; thence North 36- 19' 33" East 51.10 feet to a point; thence North 36- 20' 24" East 24.66 feet to a point; thence North 36- 20' 24" East 24.66 feet to a point; thence North 36- 20' 20" East 100.34 feet to a point; thence North 36- 20' 41" East 166.95 feet to a point; thence with a curve to the right (which curve has radius of 20 feet, a chord bearing BK 1063 PG 374 and distance of North 76- 08' 47" East 25.60 feet, and an arc distance of 27.78 feet) to the point of beginning. Together with a perpetual non-exclusive easement for ingress, egress and regress across a 60-foot wide private right-of-way running southwardly from NCSR 1166 at point (C) in the Ottis M. Crisp line as shown on the plat entitled "Plan of Land surveyed for Jennis M. Crisp" recorded in Plat Cabinet A, Slide 42A, in the Beaufort County Registry. TRACT II: All that certain tract or parcel of land lying and being situate in Chocowinity Township, Beaufort County, North Carolina, and being more particularly described as follows: Beginning at an existing concrete monument in the northern right- of-way line of NCSR 1166 (Whichards Beach Road), said concrete monument being also the southeasterly corner of the subdivision known as Harbor Estates, as shown on a plat thereof recorded in Plat Cabinet A, Slide 113A in the office of the Register of Deeds of Beaufort County, North Carolina. THENCE FROM SAID POINT OF BEGINNING BEING SO LOCATED, North 30- 36' 00" East 375.64 feet to a point; thence North 30- 36' 00" East 17.0 feet to a point in a canal; thence continuing with the canal North 48- 42' 00" East 23.43 feet to a point; thence continuing with the canal North 30- 26' 00" East 476.44 feet to a point; thence North 31- 42' 00" East 427.85 feet to a point in the mean high water line of the Pamlico River; thence along and with the mean high water line of the Pamlico River the following courses and distances; North 71- 11' 00" East 88.88 feet to a point; thence North 78- 57' 00" East 77.78 feet to a point; thence North 51- 09' 00" East 53.88 feet to a point; thence South 21- 39' 00" East 42.48 feet to a point; thence South 55" 23' 00" East 82.19 feet to a point; thence North 65- 06' 00" East 38.64 feet to a point; thence South 45- 07' 00" East 146.64 feet to a point; thence South 59- 32' 00" East 106.73 feet to a point; thence South 65- 55' 46" East 91.98 feet to a point; thence South 87- 44' 21" East 82.14 feet to a point; thence South 83- 21' 00" East 96.80 feet to a point; thence North 78- 56' 00" East 251.10 feet to a point; thence South 63- 13' 00" East 91.37 feet to a point; thence South 63- 13' 00" East 182.56 feet to a point; thence South 63- 13' 00" East 107.00 feet to a point; thence leaving said river South 38- 18' 41 " West 21.94 feet to a concrete monument; thence continuing South 38- 18' 41" West 701.64 feet to a concrete monument; thence continuing South 38- 18' 41" West 64.72 feet to a concrete monument; thence continuing South 38- 18' 41" West 108.03 feet to a concrete monument; thence South 38- 18' 41" West 106.26 feet to a concrete monument; thence continuing South 38- 18' 41" West 104.29 feet to a concrete monument; thence continuing South 38- 18' 41" West 102.43 feet to a concrete monument; thence South 38- 18' 41" West 127.21 feet to a concrete monument; thence South 38- 18' 41" West 35.74 feet to a concrete BK 1063 PG 375 monument; thence South 38- 18' 41" West 63.98 feet to a concrete monument; thence continuing South 38- 18' 41" West 99.54 feet to a concrete monument; thence continuing South 38- 18' 41" West 99.16 feet to a concrete monument in the northern right-of-way line of NCSR 1166; thence continuing South 38- 18' 41" West 106.40 feet to a concrete monument along and with the northern right-of-way line of NCSR 1166 along a curve to the left in a northwestwardly direction to a point (which curve has a chord bearing and distance of North 51- 41' 19" West 100.00 feet); thence continuing along and with the northern right-of-way line of NCSR 1166 along a curve to the left in a northwestwardly direction to a point (which curve has a chord bearing and distance of North 55- 31' 51" West 396.18 feet); thence continuing along and with the northern right-of-way line of NCSR 1166 North 62- 36' 41" West 58.52 feet to a point; thence continuing along and with the northern right-of-way line of NCSR 1166 North 63- 28' 00" West 100.00 feet to a point; ;thence continuing along and with the northern right-of-way line of NCSR 1166 North 64- 04' 00" West 470.44 feet to the point or place of beginning. Together with all property lying between the northern property line of the above-described property, the eastern and western property line of the above-described property extended in a northeasterly direction to the mean high water line of the Pamlico River and the mean high water line of the southern shore of the Pamlico River. 81-0242 (DV) 12/28/96 CDR/DCR WSMAIN/205631 BK 1063 PG 376 to it in any court procedure involving any of the lessees under the Leases in any bankruptcy, insolvency, or reorganization proceedings in any state or federal court and (2) any and all payments made by lessees in lieu of Rent. The Assignor hereby appoints the Assignee as its irrevocable attorney-in-fact to appear in action and/or to collect any such award or payment following an Event of Default. The Assignor hereby assigns to the Assignee all security deposits received by the Assignor or any agent of the Assignor in respect of any Leases. Prior to an Event of Default and demand by the Assignee for delivery of such security deposits to it or its designee, the Assignor shall maintain the security deposits as required by the Deed f Trust. After an Event of Default and upon demand by the Assignee, the Assignor shall deliver such deposits to the Assignee or its designee. Upon delivery of such security deposits to the Assignee, the Assignee shall hold such deposits pursuant to the terms of the Leases in respect of which such deposits were obtained by the Assignor. In no event, however, shall the Assignee be liable under any Lease of any part of the Trust Estate for the return of any security deposit in any amount in excess of the amount delivered to the Assignee by the Assignor. Any security deposits delivered to and held by the Assignee shall not bear interest. The Assignor, upon the occurrence of an Event of Default, hereby authorizes the Assignee, at its option, to enter and take possession of the Trust Estate; to manage and operate the Trust Estate; to collect all or any Rents accruing therefrom and from the Leases; to let the Trust Estate or any part thereof; to cancel the Leases pursuant to the terms of the Leases and to enter into any modification of any lease with tenant of such Lease; to evict tenants in accordance with the terms of the applicable Leases; to bring or defend any suits in connection with the possession of the Trust Estate in its own name or the Assignor's name; to make repairs as the Assignee deems appropriate; and to perform such other acts in connection with management and operation of the Trust Estate as the Assignee, in its discretion, may deem proper. The receipt by the Assignee of any Rents pursuant to this instrument after the institution of foreclosure proceedings under the Deed of Trust shall neither cure such default nor affect such proceedings or any sale pursuant thereto. The Assignee shall not be obligated to perform or discharge any obligation or duty to be performed or discharged by the Assignor under any of the Leases. The Assignor hereby agrees to indemnify the Assignee for, and to save it harmless from, any and all liability arising from any of the Leases or from this Assignment, except for gross negligence or willful misconduct of the Assignee during any period in which the Assignee is in possession of the Trust Estate. This Assignment shall not place responsibility for the control, care management or repair of the Trust Estate upon the Assignee, or make the Assignee responsible or liable for any negligence in the management, operation, upkeep, repair or control of the Trust Estate resulting in loss or injury or death to any lessee, licensee, employee or stranger prior to the Assignee's assuming actual operation or management of the Trust Estate following an Event of Default. The Assignor covenants and represents: that the Assignor has full right and title to assign the Leases and the Rents due or to become due thereunder; that the terms of the Leases have not been changed from the terms in the copies of the Leases submitted to the Assignee for approval; that no other assignment of any interest therein has been made; that, to Assignor's actual knowledge, there are no existing defaults under the provisions thereof; and that the Assignor will not hereafter cancel, surrender or terminate any of the Leases, exercise any option which might lead to such termination, or change, alter or modify them or consent to the release of any party liable thereunder or to the assignment of the lessees' interest in them without the prior written consent of the Assignee. - 2 - R#0202465.02 BK 1063 PG 377 The Assignor hereby authorizes the Assignee upon the occurrence of an Event of Default, to give notice in writing of this Assignment at any time to any lessee under any of the Leases. The Assignor authorizes and directs each and every tenant under the leases, upon receipt of written notice from the Assignee that an Event of Default has occurred, to pay Rents to the Assignee upon written demand for payment by the Assignee, without any liability to the Assignor to inquire further as to the existence of any Event of Default hereunder or under any of the other Loan Instruments (as defined in the Deed of Trust) by the Assignor. Violation of any of the covenants, representations and provisions contained herein by the Assignor is default under the terms of the Note and the Deed of Trust. A material default (one on the basis of which the tenant is entitled to terminate its lease, to withhold rent, or to expend funds and deduct the amount of such expenditure from rent) by the Assignor under any of the terms of the Leases assigned herein shall be deemed a default hereunder. Any expenditures made by the Assignee in curing such a default on the Assignor's behalf (including, without limitation, reasonable attorneys' fees for services in fact provided, whether or not suit is commenced), with interest thereon at the per annum rate of 18% or the highest contract rate permitted by applicable law, whichever is less, shall become part of the debt secured by this Assignment. If the Assignor is liable for attorneys' fees incurred by the Assignee pursuant to any provision in this Assignment, such attorneys' fees for which the Assignor is liable shall be the actual attorneys' fees incurred and shall be based on the normal hourly rate of the attorneys and paralegals performing the work, without regard to any statutory presumption. Any controversy or claim arising our of or relating to this Assignment of Rents and Leases shall be determined by arbitration in accordance with Commercial Arbitration Rules of the American Arbitration Association. The number of arbitrators shall be three. One arbitrator shall be appointed by each of the parties and the third arbitrator, who shall serve as chairman of the tribunal, shall be appointed by the American Arbitration Association. The place of arbitration shall be Charlotte, North Carolina. Any arbitral award arising from any arbitration pursuant to this paragraph shall be final and binding upon all parties hereto. All communications and notices provided for hereunder shall be in writing and shall be given in the manner (and shall be deemed effective at the time) prescribed by the Deed of Trust. The full performance of the Deed of Trust and the duly entered release or cancellation of the Deed of Trust of record render this Assignment void. Neither the existence of this Assignment nor the exercise of its privilege to collect the Rents shall be construed as a waiver by the Assignee, or its successors and assigns, of the right to enforce payment of the debt hereinabove mentioned, in strict accordance with terms and provisions of the Note and the Deed of Trust for which this Assignment is given as additional security. This Assignment applies to and binds the parties hereto and their respective heirs, administrators, executors, successors and assigns, as well as any subsequent owner of the Trust Estate and any assignee of the Deed of Trust referred to herein. - 3 - R#0202465.02 BK 1063 PG 378 IN WITNESS WHEREOF, the Assignor has signed and sealed this instrument the date first above set out. FOUNTAIN POWERBOATS, INC., a North Carolina corporation By: /s/ Reginald M. Fountain, Jr. _____________ President ATTEST: /s/ Blanche C. Williams ______________ Secretary [CORPORATE SEAL] - 4 - R#0202465.02 BK 1063 PG 379 NORTH CAROLINA CRAVEN COUNTY I, Stephanie C. Crosby, a Notary Public of Craven County, North Carolina, do hereby certify that Blanche C. Williams personally came before me this day and acknowledged that [s] he is the ___-____ Secretary of Fountain Powerboats, Inc., a North Carolina corporation, and that by authority duly given and as the act of the corporation, the foregoing instrument was signed in its name by its __-_____ President, sealed with its corporate seal and attested by himself/herself as its ________-______ Secretary. WITNESS my hand and notarial seal, this 31st day of December, 1996. /s/ Stephanie C. Crosby Notary Public [NOTARY SEAL] My commission expires: 11-30-99 North Carolina Beaufort County The foregoing Certificate of Stephanie C. Crosby Notary Public/Notaries Public is/are certified to be correct This 31st day of December, 1996 at 3:16 o'clock P.M. By /s/Judy Till Register of Deeds Ass't/Deputy Register of Deeds - 5 - R#0202465.02 CORPORATE GUARANTY Date: December 31, 1996 General Electric Capital Corporation 6100 Fairview Road, Suite 1450 Charlotte, North Carolina 28210 To induce you to enter into, purchase or otherwise acquire, now or at any time hereafter, any promissory notes, security agreements, chattel mortgages, pledge agreements, conditional sale contracts, lease agreements, and/or any other documents or instruments evidencing, or relating to, any lease, loan, extension of credit or other financial accommodation, specifically including, but not limited to, credit extended pursuant to that certain promissory note dated December 31, 1996, executed by the Customer (hereinafter defined) and payable to you, in the amount of $10,000,000 (collectively "Account Documents" and each an "Account Document") to FOUNTAIN POWERBOATS, INC., a corporation organized and existing under the laws of the State of North Carolina ("Customer"), but without in any way binding you to do so, the undersigned for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, does hereby guarantee to you, your successors and assigns, the due regular and punctual payment of any sum or sums of money which the Customer may owe to you now or at any time hereafter, whether evidenced by an Account Document, on open account or otherwise, and whether it represents principal, interest, rent, late charges, indemnities, an original balance, an accelerated balance, liquidated damages, a balance reduced by partial payment, a deficiency after sale or other disposition of any leased equipment, collateral or security, or any other type of sum of any kind whatsoever that the Customer may owe to you now or at any time hereafter, and does hereby further guarantee to you, your successors and assigns, the due, regular and punctual performance of any other duty or obligation of any kind or character whatsoever that the Customer may owe to you now or at any time hereafter (all such payment and performance obligations being collectively referred to as "Obligations"). Undersigned does hereby further guarantee to pay upon demand all losses, costs, attorneys' fees and expenses which may be suffered by you by reason of Customer's default or default of the undersigned. One of the undersigned, FOUNTAIN POWERBOAT INDUSTRIES, INC., a Nevada corporation (the "Parent Corporation"), owns all of the stock of the Customer and therefore receives a direct financial benefit as a result of the credit extended by you to the Customer. The remaining undersigned guarantors are wholly owned subsidiaries of the Customer and likewise shall be directly benefited as a result of the credit extended by you to the Customer. The undersigned acknowledge that they are familiar with the financial condition of the Customer and acknowledge that you have no obligation to provide the undersigned with information regarding the present or future financial condition of the Customer. R#0202886.03 The Guaranty is a guaranty of prompt payment and performance (and not merely a guaranty of collection). Nothing herein shall require you to first seek or exhaust any remedy against the Customer, its successors and assigns, or any other person obligated with respect to the Obligations, or to first foreclose, exhaust or otherwise proceed against any leased equipment, collateral or security which may be given in connection with the Obligations. The undersigned hereby waives any and all rights under N.C.G.S. 26-7 et seq. and any similar subsequent law pursuant to which the undersigned might otherwise be entitled to require that you pursue collection against collateral and/or primary obligors. It is agreed that you may, upon any breach or default of the Customer, or at any time thereafter, make demand upon the undersigned and receive payment and performance of the Obligations, with or without notice or demand for payment or performance by the Customer, its successors or assigns, or any other person. Suit may be brought and maintained against the undersigned, at your election, without joinder of the Customer or any other person as parties thereto. The obligations of each signatory to this Guaranty shall be joint and several. The undersigned agrees that its obligations under this Guaranty shall be primary, absolute, continuing and unconditional, irrespective of and unaffected by any of the following actions or circumstances (regardless of any notice to or consent of the undersigned): (a) the genuineness, validity, regularity and enforceability of the Account Documents or any other document; (b) any extension, renewal, amendment, change, waiver or other modification of the Account Documents or any other document; (c) the absence of, or delay in, any action to enforce the Account Documents, this Guaranty or any other document; (d) your failure or delay in obtaining any other guaranty of the Obligations (including, without limitation, your failure to obtain the signature of any other guarantor hereunder); (e) the release of, extension of time for payment or performance by, or any other indulgence granted to the Customer or any other person with respect to the Obligations by operation of law or otherwise; (f) the existence, value, condition, loss, subordination or release (with or without substitution) of , or failure to have title to or perfect and maintain a security interest in, or the time, place and manner of any sale or other disposition of any leased equipment, collateral or security given in connection with the Obligations, or any other impairment (whether intentional or negligent, by operation of law or otherwise) of the rights of the undersigned: (g) the Customers voluntary or involuntary bankruptcy, assignment for the benefit of creditors, reorganization, or similar proceedings affecting the Customer or any of its assets; or (h) any other action or circumstances which might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor. This Guaranty may be terminated upon delivery to you (at your address shown above) of a written termination notice from the undersigned. However, as to all Obligations (whether matured, unmatured, absolute, contingent or otherwise) incurred by the Customer prior to your receipt of such written termination notice (and regardless of any subsequent amendment, extension or other modification which may be made with respect to such Obligations), this Guaranty shall nevertheless continue and remain undischarged until all such Obligations are indefeasibly paid and performed in full. - 2 - R#0202886.03 The undersigned agrees that this Guaranty shall remain in full force and effect or be reinstated (as the case may be) if at any time payment or performance of any of the Obligations (or any part thereof) is rescinded, reduced or must otherwise be restored or returned by you, all as though such payment or performance had not been made. If, by reason of any bankruptcy, insolvency or similar laws affecting the rights of creditors, you shall be prohibited from exercising any of your rights or remedies against the Customer or any other person or against any property, then, as between you and the undersigned, such prohibition shall be of no force and effect, and you shall have the right to make demand upon, and receive payment from, the undersigned of all amounts and other sums that would be due to you upon a default with respect to the Obligations. Notice of acceptance of this Guaranty and of any default by the Customer or any other person is hereby waived. Presentment, protest demand, and notice of protest, demand and dishonor of any of the Obligations, and the exercise of possessory, collection or other remedies for the Obligations, are hereby waived. The undersigned warrants that it has adequate means to obtain from the Customer of a continuing basis financial data and other information regarding the Customer and is not relying upon you to provide any such data or other information. Without limiting the foregoing, notice of adverse change in the Customer's financial condition or of any other fact which might materially increase the risk of the undersigned is also waived. All settlements, compromises, accounts stated and agreed balances made in good faith between the Customer, its successors or assigns, and you shall be binding upon and shall not affect the liability of the undersigned. Payment of all amounts now or hereafter owed to the undersigned by the Customer or any other obligor for any of the Obligations is hereby subordinated in right of payment to the indefeasible payment in full to you of all Obligations and is hereby assigned to you as a security therefor. The undersigned hereby irrevocably and unconditionally waives and relinquishes all statutory, contractual, common law,, equitable and all other claims against the Customer, any other obligor for any of the Obligations, any collateral therefor, or any other assets of the Customer or any such other obligor, for subrogation, reimbursement, exoneration, contribution, indemnification, setoff or other recourse in respect of sums paid or payable to you by the undersigned hereunder, and the undersigned hereby further irrevocably and unconditionally waives and relinquishes any and all other benefits which it might otherwise directly or indirectly receive or be entitled to receive by reason of any amounts paid by, or collected or due from, it, the Customer or any other obligor for any of the Obligations, or realized from any of their respective assets. Any controversy or claim arising out of or relating to this Corporate Guaranty shall be determined by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The number of arbitrators shall be three. One arbitrator shall be appointed by each of the parties and the third arbitrator, who shall serve as chairman of the tribunal, shall be appointed by the American Arbitration Association. The place of arbitration shall be Charlotte, North Carolina. Any arbitral award arising form any arbitration pursuant to this paragraph shall be final and binding upon all parties hereto. - 3 - R#0202886.03 As used in this Guaranty, the word "person" shall include any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization, or any government or any political subdivision thereof. This Guaranty is intended by the parties as a final expression of the guaranty of the undersigned and is also intended as a complete and exclusive statement of the terms thereof. No course of dealing, course of performance or trade usage, nor any paid evidence of any kind, shall be used to supplement or modify any of the terms hereof. Nor are there any conditions to the full effectiveness of this Guaranty. This Guaranty and each of its provisions may only be waived, modified, varied, released, terminated or surrendered, in whole or in part, by a duly authorized written instrument signed by you. No failure by you to exercise your rights hereunder shall give rise to any estoppel against you, or excuse the undersigned from performing hereunder. Your waiver of any right to demand performance hereunder shall not be a waiver of any subsequent or other right to demand performance hereunder. This Guaranty shall bind the undersigned's successors and assigns and the benefits thereof shall extend to and include your successors and assigns. In the event of default hereunder, you may at any time inspect undersigned's records, or at your option undersigned shall furnish you with a current independent audit report. If any provisions of this Guaranty are in conflict with any applicable statute, rule or law, then such provisions shall be deemed null and void to the extent that they may conflict therewith, but without invalidating any other provisions hereof. Each signatory on behalf of a corporation guarantor warrants that he had authority to sign on behalf of such corporation and by so signing, to bind said guarantor corporation hereunder. IN WITNESS WHEREOF, this Guaranty is executed the day and year above written. FOUNTAIN AVIATION, INC. ATTEST: By: /s/ Reginald M. Fountain, Jr. _________________ President /s/ Blanche C. Williams ______________ Secretary [CORPORATE SEAL] - 4 - R#0202886.03 FOUNTAIN SPORTSWEAR, INC. ATTEST: By: /s/ Reginald M. Fountain, Jr. _________________ President /s/ Blanche C. Williams ______________ Secretary [CORPORATE SEAL] FOUNTAIN TRUCKING, INC. ATTEST: By: /s/ Reginald M. Fountain, Jr. _________________ President /s/ Blanche C. Williams ______________ Secretary [CORPORATE SEAL] FOUNTAIN UNLIMITED, INC. ATTEST: By: /s/ Reginald M. Fountain, Jr. _________________ President /s/ Blanche C. Williams ______________ Secretary [CORPORATE SEAL] FOUNTAIN POWER, INC. ATTEST: By: /s/ Reginald M. Fountain, Jr. _________________ President /s/ Blanche C. Williams ______________ Secretary [CORPORATE SEAL] - 5 - R#0202866.03 FOUNTAIN POWERBOAT INDUSTRIES, INC. ATTEST: By: /s/ Reginald M. Fountain, Jr. _________________ President /s/ Blanche C. Williams ______________ Secretary [CORPORATE SEAL] - 6 - R#0202886.03 SUBORDINATION AGREEMENT THIS SUBORDINATION AGREEMENT (this "Agreement") is made as of this 31st day of December, 1996, in favor of GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation (the "Lender"), by REGINALD M. FOUNTAIN, JR. (the foregoing individual hereinafter referred to as the "Unsecured Creditor"); Recitals: 1. FOUNTAIN POWERBOATS, INC., a North Carolina corporation (the "Borrower"), has applied to the Lender for a loan in the principal amount of $10,000,000 (such loan being referred to as the "Financial Accommodations") pursuant to the provisions of a Loan Agreement of even date herewith, by and between the Lender, the Borrower and certain other parties (the "Loan Agreement"). The Financial Accommodations are to be evidenced by, and repaid with interest in accordance with the provisions of, a promissory note dated of even date herewith in the amount of $10,000,000, executed by the Borrower and payable to the Lender (the "Note"). 2. The Unsecured Creditor has requested the Lender to enter into the Loan Agreement with the Borrower and to make the Financial Accommodations to the Borrower pursuant thereto. The Unsecured Creditor has a substantial interest in the Borrower and shall derive direct financial benefit as a result of credit extended to the Borrower. 3. The Lender has required, as a condition to the making of the Financial Accommodations, the execution of this Agreement by the Unsecured Creditor. NOW, THEREFORE, in consideration of the recitals and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Unsecured Creditor hereby agrees with the Lender as follows: 1. Amount of Subordinated Indebtedness and Recitals. the Unsecured Creditor represents and warrants that (a) as of the date hereof the Subordinated Indebtedness is in the amount of __- 0-__ and No/100 Dollars ($__-0-_______) and after the date hereof, the Subordinated Indebtedness shall not at any time exceed $500,000; (b) the above Recitals are true, accurate, and correct and are incorporated in this Agreement by reference; (c) the Unsecured Creditor is the lawful owner of the Subordinated Indebtedness, free and clear of all liens, assignments, security interests and other encumbrances; and (d) the Unsecured Creditor has not previously subordinated the subordinated Indebtedness. 2. Subordination to Lender's Obligations. The Unsecured Creditor hereby subordinates and postpones the payment and the time of payment of the Subordinated R#0202895.03 Indebtedness to and in favor of the payment and the time of payment of the Lender's Obligations. Except as hereinafter provided, so long as all or any part of the Lender's Obligations remain unpaid, the Unsecured Creditor shall not, without the prior written consent of the Lender, ask, demand, sue for, set off, accept, or receive any payment of all or any part of the Subordinated Indebtedness from the Borrower; provided, that until the occurrence of an event of default under any of the Loan Documents, the Unsecured Creditor may receive scheduled payments of interest only and scheduled principal payments due in accordance with the Subordinated Indebtedness. The Unsecured Creditor agrees not to subordinate, grant a security interest or lien on, assign, or transfer all or any part of the Subordinated Indebtedness to any other person without the prior written consent of the Lender. The Unsecured Creditor will not, without the prior written consent of Lender: (a) commence, or join with any other creditor in commencing, any bankruptcy, reorganization, insolvency or similar proceedings with respect to Borrower; or (b) extend, modify or renew any of the Borrower's obligations under the Subordinated Indebtedness or the documents evidencing or executed or delivered in connection with the Subordinated Indebtedness, or release any surety or security for such obligations or obtain additional collateral security or exercise any other right under the Subordinated Indebtedness, or the documents evidencing or executed or delivered in connection with the Subordinated Indebtedness. the Unsecured Creditor shall take no action, either within an Insolvency Proceeding or otherwise, that would affect, contest or hinder the Lender's entitlement to priority over the Subordinated Indebtedness. The Borrower agrees that it will not give any security agreement with respect to, convey, assign, or pledge any property of the Borrower as security for or to be applied to the payment of the Subordinated Indebtedness while this agreement is in effect. 3. Distributions, etc. In the event of any distribution, division, or application, partial or complete, voluntary or involuntary, by operation of law or otherwise , of all or any part of the assets of the Borrower or the proceeds thereof to creditors of the Borrower or to any indebtedness, liabilities, and obligations of the Borrower by reason of the liquidation, dissolution, or other winding up of the Borrower or Borrower's business or in the event of any sale, receivership, insolvency, or bankruptcy proceeding, or assignment for the benefit of creditors, or any proceeding by or against the Borrower for any relief under the Bankruptcy Code or any insolvency law or other laws relating to the relief of debtors, readjustment of indebtedness, reorganizations, compositions, or extensions (an "Insolvency Proceeding"), then and in any such event, any payment or distribution of any kind or character, whether in cash, securities, or with respect to all or any part of the Subordinated Indebtedness, shall be paid or delivered directly to the Lender for application to the Lender's Obligations (whether due or not due and in such order and manner as the Lender may elect). The Unsecured Creditor hereby irrevocably authorizes and empowers the Lender to demand, sue for, collect, and receive every such payment or distribution and to give acquittance therefor and to file claims, vote, and take such other proceedings in the Lender's own name or in the name of the Unsecured Creditor or otherwise as the Lender may deem necessary or advisable to carry out the provisions of this Agreement. The Unsecured Creditor hereby agrees to execute and deliver to the Lender such powers of attorney, assignments, endorsements, or other instruments as may be required by the Lender in order to enable the Lender to enforce any and all claims upon or with respect to the Subordinated Indebtedness and - 2 - R#0202895.03 to collect and receive any and all payments or distributions which may be payable or deliverable at any time upon or with respect to the Subordinated Indebtedness. 4. Receipt of Payments by Unsecured Creditor. Should any payment or distribution not permitted by the provisions of this Agreement be received by the Unsecured Creditor upon or with respect to all or any part of the Subordinated Indebtedness, the Unsecured Creditor will deliver the same to the Lender in precisely the form received (except for the endorsement or assignment of the Unsecured Creditor where necessary) for application to the Lender's Obligations (whether due or not due and in such order and manner as the Lender may elect) and, until so delivered, the same shall be held in trust by the Unsecured Creditor as property of the Lender. In the event of the failure of the Unsecured Creditor to make any such endorsement or assignment, the Lender, or any of its officers or employers on behalf of the Lender, is hereby irrevocably authorized to make the same. 5. Consents, Waivers, ect. The Unsecured Creditor hereby consents that at any time and from time to time and with or without consideration, the Lender may, without further consent of or notice to the Unsecured Creditor and without in any manner affecting, impairing, lessening, or releasing any of the provisions of this Agreement, renew, extend, change the manner, time, place, and terms of payment of, sell, exchange, release, substitute, surrender, realize upon, modify, waive, grant indulgences with respect to, and otherwise deal with in any manner: (a) all or any part of the Lender's Obligations; (b) all or any of the Loan Documents; (c) all or any part of any property at any time securing all or any part of the Lender's Obligations; and (d) any person at any time primarily or secondarily liable for all or any part of the Lender's Obligations and/or any collateral and security therefor. The Unsecured Creditor hereby waives demand, presentment for payment, protest, notice of dishonor and of protest with respect to the Subordinated Indebtedness, notice of acceptance of this Agreement by the Lender, notice of the making of any of the Lender's Obligations, and notice of the occurrence of an event of default under any of the Loan Documents. 6. Notices and Communications. All notices and other combinations hereunder shall be in writing and shall be effective when sent by certified mail, return receipt requested: (a) if to the Unsecured Creditor, addressed to Reginald M. Fountain, Jr., at Whichard's Beach Road, Washington, North Carolina 27889 or at such other address as the Unsecured Creditor shall have furnished in writing to the Lender, or (b) if to the Lender, addressed to it at 6100 Fairview Road, Suite 1450, Charlotte, North Carolina 28210, or at such other address as the Lender shall have furnished in writing to the Unsecured Creditor. 7. Transfer or Assignment of Obligations. If any of the Lender's Obligations should be transferred or assigned by the Lender, this Agreement will inure to the benefit of the Lender's transferee or assignee to the extent of such transfer or assignment, provided that the Lender shall continue to have the unimpaired right to enforce this Agreement as to any of the Lender's Obligations not so transferred or assigned. - 3 - R#0202895.03 8. Acceleration of Lender's Obligations. In the event that any of the agreements hereinabove set out shall not be compiled with or shall be violated, the Lender may, at its option, in any such event, terminate any credit agreement or commitment for loans theretofore made to the Borrower and (notwithstanding any of the provisions of any note or other instrument evidencing the debts of the Borrower to the Lender) immediately declare all or any part of such debt, with interest, due and payable, and may without presentment for payment, demand, protest, or any other notice or demand whatsoever proceed to collect such debt. 9. Definitions. The following terms have the following meanings: "Lender Obligations" means all past, present, and future indebtedness, liabilities, and obligations of any nature whatsoever of the Borrower to the Lender in connection with the Financial Accommodations including, without limitation, the Note (as such Note may be amended, renewed, extended, provided the principal amount of such Financial Accommodations may not be increased above the principal amount of the Financial Accommodations referenced herein or increased whatsoever upon repayment of the principal evidenced by the Note, whether by prepayment or through scheduled payments), and which are direct, indirect, contingent, primary, secondary, alone, jointly with others, due, to become due, unsecured, secured, future advances, now existing, hereafter created, principal, interest, expense payments, liquidation costs, and attorneys' fees and expenses. "Loan Documents" means collectively any security agreement, mortgage, deed of trust, indemnify deed of trust, collateral pledge agreement, loan agreement, letter of credit application, assignment, reimbursement agreement, promissory note, guaranty, indemnity agreement, or any other instrument or agreement previously, simultaneously, or hereafter executed and delivered by the Borrower, or any other person as evidence of, security for, guarantee of, or in connection with, the Financial Accommodations, including, without limitation, the Loan Agreement and the Note. "Subordinated Indebtedness" means all past and present indebtedness, liabilities, and obligations of any nature whatsoever of the Borrower to the Unsecured Creditor (including any renewals or extensions of present indebtedness), which are direct, indirect, contingent, primary, secondary, alone, jointly with others, due, to become due, unsecured, secured, future advances, now existing, hereafter created, principal, interest, expense payments, liquidation costs, and attorneys' fees and expenses. 10. Arbitration. any controversy or claim arising out of or relating to this Subordination Agreement shall be determined by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The number of arbitrators shall be three. One arbitrator shall be appointed by each of the parties and the third arbitrator, who shall serve as chairman of the tribunal, shall be appointed by the American Arbitration Association. The place of - 4 - R#0202895.03 arbitration shall be Charlotte, North Carolina. Any arbitral award arising from any arbitration pursuant to this paragraph shall be final and binding upon all parties hereto. 11. Miscellaneous. The Lender may, at its option, by written instrument, waive any of its rights hereunder without in any manner impairing or affecting any of its other rights hereunder. This Agreement shall not be affected, impaired, or released b the delay or failure of the Lender to exercise any of its rights and remedies against the Borrower or under any of the Loan Documents or against any collateral or security for the Lender's Obligations. No delay or failure on the part of the Lender to exercise any of its rights or remedies hereunder or now or hereafter existing at law or in equity or by statute or otherwise, or any partial or single exercise thereof, shall constitute a waiver thereof. All such rights remedies are cumulative and may be exercised singly or concurrently and the exercise of any one or more of them will not be a waiver of any other. No waiver of any of its rights and remedies hereunder and no modification or amendment of this Agreement shall be deemed to be made by the Lender unless the same shall be in writing, duly signed on behalf of the Lender, and each such waiver, if any shall apply only with respect to the specific instance involved and shall in no way impair the rights and remedies of the Lender hereunder in any other respect at any other time. The Lender shall have the right to grant participation in the Lender's Obligations to others at any time and from time to time, and the Lender may divulge to any such participant or potential participant all information, reports, financial statements, and documents obtained in connection with this Agreement, any of the Loan Documents, or otherwise. If any term of this Agreement or any obligation thereunder shall be held to be invalid, illegal, or unenforceable, the remainder of this Agreement and any other application of such term shall not be affected thereby. This Agreement may be executed in duplicate originals or in several counterparts, each of which shall be deemed an original but all of which together shall constitute one instrument, and it shall not be necessary in making proof hereof to produce or account for more than one such duplicate, original, or counterpart. This Agreement shall be binding upon the heirs, personal representatives, successors, and assigns of the Unsecured Creditor and shall inure to the benefit of the successors and assigns of the Lender. As used herein, the singular number shall include the plural, the plural the singular, and the use of the masculine, feminine, or neuter gender shall include all genders, as the context may require, and the term "person" shall include an individual, a corporation, an association, a partnership, a trust, and an organization. The paragraph headings of this Agreement are for convenience only and shall not limit or otherwise affect any of the terms hereof. This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina and shall be deemed to be executed, delivered and accepted in the State of North Carolina. - 5 - R#0202895.03 IN WITNESS WHEREOF, the Unsecured Creditor has caused this Agreement to be signed, sealed, and delivered on the day and year first written above. By: /s/ Reginald M. Fountain, Jr. (SEAL) _____________ President The Borrower join in the execution of this Agreement so as to signify their acceptance of and agreement and consent to the provisions of this Agreement. FOUNTAIN POWERBOATS, INC., a North Carolina corporation By: /s/ Reginald M. Fountain, Jr. _____________ President Attest: /s/ Blanche C. Williams ______________ Secretary [CORPORATE SEAL] - 6 - R#0202895.03 COLLATERAL ASSIGNMENT OF SECURITY INTEREST IN PATENTS, TRADEMARKS AND RELATED APPLICATIONS WHEREAS, Fountain Powerboats, inc., a North Carolina corporation ("Assignor"), and General Electric Capital Corporation, a New York corporation ("Assignee"), executed and entered into that certain Loan Agreement, dated as of December 31, 196 (the "Loan Agreement"); and WHEREAS, the Loan Agreement requires Assignor to submit to Assignee, on a quarterly basis, a document confirming the Security Interest of Assignee in any patent or trademark with respect to which Assignor or any of its subsidiaries has filed an application or an assignment during the preceding calendar month; and WHEREAS, Assignor has filed federal trademark registration applications and/or received trademark applications or registrations by assignment with respect to the trademarks listed on Schedule A (collectively, the "Trademarks"); and WHEREAS, the parties hereto desire to confirm and perfect the security interest (the "Security Interest") granted to Assignee in the Trademarks, in accordance with the Loan Agreements; NOW, THEREFORE, subject in the terms, conditions and limitations set forth in the Loan Agreement, and in consideration of the mutual covenants, warranties and promises set forth in the Loan Agreement, and other good and valuable consideration, the full receipt and sufficiency of which are hereby acknowledged. Assignor hereby grants and conveys unto Assignee a first lien Security Interest in and to the Trademarks, any trademark applications filed with respect thereto and any federal trademark registrations issued or issuing with respect thereto and all goodwill associated with the Trademarks, such grant being hereby effected for the purposes and subject to the terms, conditions and limitations set forth in the Loan Agreement. Assignor hereby appoints General Electric Capital Corporation, with full power of substitution, to file and record this Collateral Assignment of Security Interest in Patents, Trademarks and Related Applications, to transact all business in the United States Patent and Trademark Office in connection therewith, to receive any confirmatory documents relating thereto, and to take any and all action before the Patent and Trademark Office to give effect to this collateral Assignment of Security Interest in Patents, Trademarks and Related Applications and to the Loan Agreement referred to herein. IN WITNESS WHEREOF, Assignor has duly executed this Collateral Assignment of Security Interest in Patents, Trademarks and Related Applications as of the 31st day of December, 1996. FOUNTAIN POWERBOATS, INC., By: /s/ Reginald M. Fountain, Jr. President R#0202980.01 STATE OF NORTH CAROLINA ) ) COUNTY OF BEAUFORT ) On this 31st day of December, 1996, personally appeared before me Reginald M. Fountain, Jr., President of Fountain Powerboats, Inc., a North Carolina corporation, and, being by me first duly sworn, signed the foregoing instrument and acknowledged that he executed the same in the capacity and for the purposes stated therein. /s/ Stephanie C. Crosby Notary Public Stephanie C. Crosby Printed Name of Notary Public My commission expires: 11-30-99 [SEAL] R#0202980.01 THE UNITED STATES OF AMERICA 1604523 CERTIFICATE OF REGISTRATION This is to certify that the records of the Patent and Trademark Office show that an application was filed in said Office for registration of the Mark shown herein, a copy of said Mark and pertinent data from the Application being annexed hereto and made a part hereof, And there having been due compilance with the requirements of the law and with the regulations prescribed by the Commissioner of Patents and Trademarks, Upon examination, it appeared that the applicant was entitled to have said Mark registered under the Trademark Act of 1946, as amended, and the said Mark has been duly registered this day in the Patent and Trademark Office on the PRINCIPAL REGISTER to the registrant named herein. This registration shall remain in force for TEN years unless sooner terminated as provided by law. In Testimony Whereof I have hereunto set my hand and caused the seal of the Patent and Trademark Office to be affixed this third day of July 1990. /s/ Harry F. Manbeck, Jr. Commissioner of Patents and Trademarks Int. Cl.: 12 Prior U.S. Cl.: 19 Reg. No. 1,604,523 United States Patent and Trademark Office Registered July 3, 1990 TRADEMARK PRINCIPAL REGISTER FOUNTAIN FOUNTAIN POWERBOATS, INC. (NORTH FIRST USE 11-25-1981: CAROLINA CORPORATION) IN COMMERCE 11-25-1981. P.O. DRAWER 457 WASHINGTON, NC 27889 SER. NO. 74-006.862, FILED 12- 1-1989. FOR BOATS, IN CLASS 12 (U.S. Cl. 19) R.G. COLE. EXAMINING ATTORNEY THE UNITED STATES OF AMERICA 1606329 CERTIFICATE OF REGISTRATION This is to certify that the records of the Patent and Trademark Office show that an application was filed in said Office for registration of the Mark shown herein, a copy of said Mark and pertinent data from the Application being annexed hereto and made a part hereof, And there having been due compliance with the requirements of the law and with the regulations prescribed by the Commissioner of Patents and Trademarks, Upon examination, it appeared that the applicant was entitled to have said Mark registered under the Trademark Act of 1946, as amended, and the said Mark has been duly registered this day in the patent and Trademark Office on the PRINCIPAL REGISTER to the registrant named herein. This registration shall remain in force for TEN years unless sooner terminated as provided by law. In Testimony Whereof I have hereunto set my hand and caused the seal of the patent and Trademark Office to be affixed this third day of July 1990. /s/ Harry F. Manbeck, Jr. Commissioner of Patents and Trademarks Int. Cl.: 12 Prior U.S. Cl.: 19 Reg. No. 1,606,329 United States Patent and Trademark Office Registered July 17, 1990 TRADEMARK PRINCIPAL REGISTER FOUNTAIN POWERBOATS, INC. (NORTH FIRST USE 11-25-1981: CAROLINA CORPORATION) IN COMMERCE 11-25-1981. P.O. DRAWER 457 WASHINGTON, NC 27889 SER. NO. 74-007.625 FILED 12-1- 1989. FOR BOATS, IN CLASS 12 (U.S. Cl. 19) ELLEN A. RUBEL EXAMINING ATTORNEY This FINANCING STATEMENT is presented to a Filing Officer for No. of Additional filing pursuant to the Uniform Commercial Code. Sheets Presented: 10 (1) Debtor(s) (Last Name First) and Address(s): (2) Secured Party(ies) (Names and Address(es) (Please TYPE) Fountain Powerboats, Inc. General Electric Captial Corporation P.O. Drawer 457, 6100 Fairview Rd., Suite 1450 Whichards Beach Rd. Charlotte, NC 28210 961214 96 DEC 31 PM 3:17 Washington, NC 27889 (3)(a) x Collateral is or includes fixtures. (b) 1 . Timber, Minerals or Accounts Subject to G.S: 25-9-103(5) are covered (c) 1. Crops Are Growing Or To Be Grown For On Real Property Described In Section (5). Filing If either block 3(a) or block 3(b) applies described real Officer estate, including record owner(s) in section (5). (4) Assignee(s) of Secured Party, Address(es): (5) This financing Statement Covers the Following types [or items] of property. See Attached Exhibit A. 1. Products of the Colleteral Are Also Covered. TERMINATION STATEMENT: This Statement of Termination of Financing is presented to a filing Officer pursuant to the Uniform commercial Code. The Secured party certifies that the Secured Party no longer claims a security interest under the financing statement bearing the file number shown above. (A termination statement signed by a person other than the secured party of record must include or be accompanied by the assignment r a statement by the secured party of record that he has assigned the security interest to the signer of the Termination Statement.) Date _______________________, 19_______________________ By _______________________________ (Signature of Secured Party or Assignee) President (3) Filing Officer Copy Acknowledgment. Filing Officer is requested to note file Number and hour of filing on this copy and return to the person filing as an acknowledgment. UCC-1 WARD AND SMITH, P.A. ATTORNEYS AT LAW 1001 COLLEGE COURT 120 WEST FIRE TOWER ROAD POST OFFICE BOX 867 POST OFFICE BOX 8088 NEW BERN, N.C. 28563-0867 GREENVILLE, N.C. 27835-8088 ___________ TELEPHONE (919) 355-3030 TELEPHONE (919) 633-1000 FACSIMILE (919) 756-3689 FACSIMILE (901) 636-2121 SUITE 2400 TWO HANNOVER SQUARE FAYETTEVILLE STREET MALL POST OFFICE BOX 2091 RALEIGH, N.C. 27602-2091 TELEPHONE (919) 836-1800 FACSIMILE (919) 836-1507 UNIVERSITY CORPORATE CENTER 127 RACINE DRIVE POST OFFICE BOX 7068 WILMINGTON, N.C. 28406-7068 TELEPHONE (910) 392-5100 FACSIMILE (910) 392-2333 December 31, 1996 General Electric Capital Corporation 6100 Fairview Road, Suite 1450 Charlotte, North Carolina 28210 Ladies and Gentlemen: We have acted as counsel to Fountain Powerboats, Inc., a North Carolina corporation ("Borrower"), Fountain Powerboat Industries, Inc., a Nevada corporation, Fountain Aviation, Inc., a North Carolina corporation, Fountain Sportswear, Inc., a North Carolina corporation, Fountain Trucking, Inc., a North Carolina corporation, Fountain Unlimited, Inc., a North Carolina corporation, and Fountain Power, Inc., a North Carolina corporation (collectively, "Guarantors"), in connection with that certain $10,000,000.00 loan (the "Loan") from General Electric Capital Corporation, a New York corporation ("Lender") to Borrower. For purposes of rendering this opinion, we have examined the following documents, all dated of even date herewith, unless otherwise noted below: 1. Loan Agreement ("Loan Agreement") among Borrower, Guarantors, and Lender; 2. Promissory Note ("Note") in the original principal amount of $10,000,000.00 executed by Borrower and payable to the order of Lender; 3. Deed of Trust, Assignment of Rents and Security Agreement ("Deed of Trust") executed by Borrower to William c. Matthews, Jr., as trustee for Lender, encumbering certain real property ("Real Property") located in Beaufort County, North Carolina, as more particularly described therein, as security for the Loan; 4. Assignment of Rents and Leases ("Assignment of Leases") executed by Borrower to the benefit of Lender with respect to the Real Property; WARD AND SMITH, P.A. General Electric Capital Corporation December 31, 1996 Page 2 5. Master Security Agreement ("Security Agreement") executed by Borrower and Lender granting Lender a security interest in certain personal property described therein ("Personal Property") as security for the Loan (the Real Property and the Personal Property being hereinafter collectively called the "Property"); 6. Collateral Assignment of Security Interest in Patents, Trademarks and Related Applications ("Collateral Assignment") executed by Borrower granting Lender a security interest in certain personal property described therein as security for the Loan; 7. One updated UCC-1 Financing Statement to be filed in the office of the Register of Deeds of Beaufort County naming Borrower as Debtor and Lender as Secured Party; 8. One undated UCC-1 Financing Statement to be filed in the office of the Secretary of State of North Carolina naming Borrower as Debtor and Lender as Secured Party (the two financing statements collectively being referred to as the "Financing Statements"); 9. Corporate Guaranty ("Guaranty") executed by Guarantors to the benefit of Lender; 10. Subordination Agreement ("Subordination Agreement") executed by Reginald M. Fountain, Jr. and Borrower to the benefit of Lender; and, 11. Assignment of Life Insurance Policy as Collateral ("Life Insurance Assignment") executed by Borrower granting Lender a security interest in a specific life insurance policy on the life of Reginald M. Fountain, Jr. as security for the Loan. For purposes of this opinion, the Loan Agreement, the Note, the Deed of Trust, the Assignment of Leases, the Security Agreement, the Collateral Assignment, the Financing Statements, and the Life Insurance Assignment collectively hereinafter are called the "Loan Documents". In connection with this opinion, we have requested Borrower and Guarantors to provide us with specific documents and any and all other documents which might be applicable to this transaction, and we have examined all documents they have provided to us. Our review of the documents provided to us by Borrower and Guarantors did not notify us of any additional documents which directly bear WARD AND SMITH, P.A. General Electric Capital Corporation December 31, 1996 Page 3 on this transaction. The documents provided to us by Borrower and Guarantors consisted of the articles of incorporation (including amendments) and the bylaws (including amendments) of Borrower and Guarantors. In rendering this opinion, we have assumed, with your express permission and without independent verification or investigation, each of the following: 1. Each of the respective parties thereto (other than Borrower and Guarantors) has the full right, power and authority to execute, deliver and perform all of its obligations under the Loan Documents, the Guaranty, and all other documents required or permitted to be executed, delivered and performed thereunder and has taken all necessary action to enter into, and has duly executed and delivered, each such document; 2. All natural persons executing the Loan Documents and the Guaranty are legally competent to do so; all signatures on all documents submitted to us (other than signatures of Borrower and Guarantors) are genuine; all documents submitted to us as originals are authentic; and all documents submitted to us as copies conform to the original documents, which themselves are authentic; 3. To the extent that any Loan Document or the Guaranty imposes any obligations upon Lender, the Loan documents and the Guaranty are valid and binding obligations of Lender, enforceable against Lender in accordance with their respective terms; 4. In connection with our opinion, we have assumed that Fountain has good title to all non-real property as described in the Loan Documents; 5. We have assumed that all necessary and proper actions shall be taken by or on behalf of Lender to file continuation financing statements or other documents required to continue the perfection of its security interests, and that Lender will enforce its rights under the loan documents in circumstances and in a manner which is commercially reasonable; and, 6. We have assumed that the Financing Statement for the office of the Secretary of State of North Carolina has been filed properly in the office of the Secretary of State of North Carolina, and that, except for the filing of that WARD AND SMITH, P.A. General Electric Capital Corporation December 31, 1996 Page 4 Financing Statement, no additional financing statements which named Borrower as the debtor were filed in the office of the Secretary of State of North Carolina after 5:00 P.M. on December 22, 1996, the effective date and time of the UCC report of Jack B. Styles. Based upon the foregoing assumptions and subject to the qualifications, limitations and exceptions set forth herein, we are of the opinion that: A. Borrower is a corporation duly organized and validly existing under the laws of the State of North Carolina with full corporate power to borrow money and to undertake the other obligations as contemplated by the Loan Documents, to execute and to deliver the Loan Documents, to encumber the Property as security and to perform Borrower's obligations under the Loan Documents. The execution and delivery of the Loan Documents have been duly authorized by all necessary corporate action on the part of Borrower. B. Fountain Powerboat Industries, Inc. is a corporation duly organized and validly existing under the laws of the State of Nevada with full corporate power to undertake the obligations as contemplated by the Loan Agreement and the Guaranty which it has executed, to execute and to deliver the Loan Agreement and the Guaranty and to perform its obligations under the Loan Agreement and the Guaranty. The execution and delivery of the Loan Agreement and the Guaranty have been duly authorized by all necessary corporate action on the part of Fountain Powerboat Industries, Inc. C. Fountain Aviation, Inc. is a corporation duly organized and validly existing under the laws of the State of North Carolina with full corporate power to undertake the obligations as contemplated by the Loan Agreement and the Guaranty which it has executed, to execute and to deliver the Loan Agreement and the Guaranty and to perform its obligations under the Loan Agreement and the Guaranty. The execution and delivery of the Loan Agreement and the Guaranty have been duly authorized by all necessary corporate action on the part of Fountain Aviation, Inc. D. Fountain Sportswear, Inc. is a corporation duly organized and validly existing under the laws of the State of North Carolina with full corporate power to undertake the obligations as contemplated by the Loan Agreement and the Guaranty which it has executed, to execute and to deliver the Loan Agreement and the Guaranty and to perform its obligations under the Loan Agreement and the Guaranty. The execution and delivery of the Loan Agreement WARD AND SMITH, P.A. General Electric Capital Corporation December 31, 1996 Page 5 and the Guaranty have been duly authorized by all necessary corporate action on the part of Fountain Sportswear, Inc. E. Fountain Trucking, Inc. is a corporation duly organized and validly existing under the laws of the State of North Carolina with full corporate power to undertake the obligations as contemplated by the Loan Agreement and the Guaranty which it has executed, to execute and to deliver the Loan Agreement and the Guaranty and to perform its obligations under the Loan Agreement and the Guaranty. The execution and delivery of the Loan Agreement and the Guaranty have been duly authorized by all necessary corporate action on the part of Fountain Trucking, Inc. F. Fountain Unlimited, Inc. is a corporation duly organized and validly existing under the laws of the State of North Carolina with full corporate power to undertake the obligations as contemplated by the Loan Agreement and the Guaranty which it has executed, to execute and to deliver the Loan Agreement and the Guaranty and to perform its obligations under the Loan Agreement and the Guaranty. The execution and delivery of the Loan Agreement and the Guaranty have been duly authorized by all necessary corporate action on the part of Fountain Unlimited, Inc. G. Fountain Power, Inc. is a corporation duly organized and validly existing under the laws of the State of North Carolina with full corporate power to undertake the obligations as contemplated by the Loan Agreement and the Guaranty which it has executed, to execute and to deliver the Loan Agreement and the Guaranty and to perform its obligations under the Loan Agreement and the Guaranty. The execution and delivery of the Loan Agreement and the Guaranty have been duly authorized by all necessary corporate action on the part of Fountain Power, Inc. H. Each of the Loan Documents has been duly executed and delivered by Borrower and is a valid and binding obligation of Borrower, enforcement against Borrower in accordance with its terms. I. The Loan Agreement and Guaranty have been duly executed and delivered by Guarantors and are valid and binding obligations of Guarantors, enforceable against Guarantors in accordance with their terms. J. The Loan Documents and the performance by Borrower of its obligations thereunder do not conflict with, or result in a violation of the Articles of Incorporation and By-Laws of Borrower. To the best of our knowledge, the execution, delivery and performance of the Loan Documents by Borrower (a) do not and will WARD AND SMITH, P.A. General Electric Capital Corporation December 31, 1996 Page 6 not violate or conflict with any order, writ, injunction or decree of any court, administrative agency or any other governmental authority applicable to Borrower or the Property or any agreement by which Borrower is bound and (b) will not result in the creation or imposition of any lien, charge or encumbrance upon any assets of Borrower, except as contemplated by the terms of the Loan Documents. K. The Loan Agreement and Guaranty and the performance by Guarantors of their obligations thereunder do not conflict with, or result in a violation of the Articles of Incorporation and By- Laws of the Guarantors. To the best of our knowledge, the execution, delivery and performance by Guarantors of their obligations under the Loan Agreement and Guaranty does not and will not violate or conflict with any order, writ, injunction or decree of any court, administrative agency or any other governmental authority applicable to any Guarantor or any agreement by which any Guarantor is bound. L. To the best of our knowledge, there is no action, suit or proceeding at law or in equity, or by or before any governmental instrumentality or agency or arbitral body now pending, or overtly threatened against Borrower, any Guarantor or the Property, except as set forth in Schedule 2.09 to the Loan Agreement. M. The Loan, as reflected in the Loan Documents, does not violate any existing laws of the State of North Carolina relating to interest or usury and will not violate any such law by virtue of any fluctuations in any base, prime, index or equivalent rate or rates in which interest charges may be based under the Loan Documents. N. The Deed of Trust and the Assignment of Leases have been filed in the office of the Register of Deeds of Beaufort County. The Deed of Trust creates for the Benefit of Lender a valid lien on the Real Property described in Exhibit A to the Deed of Trust. O. The Security Agreement creates for the benefit of lender a valid security interest in that portion of the Personal Property owned by Borrower which consists of types or items of personal property to which Article 9 the Uniform Commercial Code of the State of North Carolina ("UCC") is applicable and in which a security interest may be created thereunder. The financing Statements are in proper form for filing in the office of the Register of Deeds of Beaufort County and in the office of the Secretary of State of North Carolina, the only offices in North Carolina in which they are required to be filed to perfect under the UCC the security interest granted to Lender under the Loan WARD AND SMITH, P.A. General Electric Capital Corporation December 31, 1996 Page 7 Documents in the Personal Property. The Financing Statement for the office of the Register of Deeds of Beaufort County has been filed properly in the office of the Register of Deeds of Beaufort County, and any and all filing fees therefor and stamp or documentary taxes in connection therewith have been paid. The filing of the Financing Statements in such offices will perfect the security interest in that portion of the Personal Property owned by Borrower and described in the Financing Statements and Security Agreement which consist of types or items of personal property to which Article 9 of the Uniform Commercial Code of the State of North Carolina is applicable and in which a security interest may be perfected by filing of financing statements in the State of North Carolina. Our examination of the Uniform Commercial Code Financing Statements records in the office of the Register of Deeds of Beaufort County, North Carolina under the names of the Borrower and Guarantors disclosed the following financing statements as being effective as of December 31, 1996 at 3;17 p.m.: a. 89-2003 to ITT Commercial Finance Corp., which has been continued by 94-0707; b. 92-1204 to Mercury Marine, a division of Brunswick Corporation; c. 94-0404 to Southern National Leasing Corp.; d. 94-0426 to MetLife Capital Corporation; e. 94-0628 to ITT Commercial Finance Corp., which has been amended to Deutsche Financial Services Corporation; f. 94-0829 to Southern National Leasing Corp.; g. 94-0880 to Southern National Leasing Corp.; h. 94-1030 to Sunox, Inc.; i. 96-0014 to General Electric Capital Corporation; and, j. 96-0787 to Executive Leasing. The opinions set forth herein are subject to the following qualifications: 1. Enforceability of the Loan Documents and the Guaranty may be limited by (i) applicable bankruptcy, insolvency, reorganization, arrangement, moratorium, fraudulent conveyance and other similar state or federal debtor relief laws from time to time in effect and which affect the enforcement of creditors' rights or the collection of debtors' obligations in general, (ii) general principles of equity, the application of which may deny Lender certain of the rights and remedies granted to Lender under the Loan Documents, including rights to specific performance, injunctive relief and appointment of a receiver, and (iii) WARD AND SMITH, P.A. General Electric Capital Corporation December 31, 1996 Page 8 general principles of commercial reasonableness and good faith to the extent required of lender by applicable law; 2. Certain remedies, waivers and other provisions of the Loan Documents or the Guaranty may not be enforceable, but such unenforceability will not render the Loan Documents or the Guaranty invalid as a whole or preclude (i) the judicial enforcement of the obligation of Borrower or the Guarantor to repay the principal, together with interest thereon, as provided in the Note (to the extent not deemed a penalty), and (ii) the foreclosure of the Deed of Trust. Provisions that may be unenforceable due to public policy concerns may include, but are not limited to, issues related to the waiver of procedural, substantive or constitutional rights or other legal or equitable rights, including, without limitation, the waiver of the right to a jury trial and the right of statutory or equitable redemption; the confession or consent to any judgment; the consent by Borrower or the Guarantors to the jurisdiction of any court; disclaimers or limitations of liabilities; discharges of defenses; the exercise of self-help or other remedies without judicial process; and the waiver of accountings for rent or sale proceeds; 3. We express no opinion as to the enforceability of any provisions of any of the Loan documents or the Guaranty which impose liquidated damages, penalties, forfeitures, or an increase in interest rate upon default; or that appoint Lender or others as the agent or attorney-in-fact for Borrower or any Guarantor. We are not aware of any North Carolina statute or case clearly addressing the enforceability of a default rate of interest; 4. Pursuant to N.C.G.S. Section 40A-68, Lender may share in the amount of condemnation compensation awarded for a partial taking of the Real Property only to the extent determined necessary to prevent a impairment of Lender's security, and without imposition of any prepayment penalty, and pursuant to N.C.G.S. Section 40A-31, a court may allocate the proceeds of a private condemnation to the parties entitled thereto, notwithstanding any agreement to the contrary; 5. We express no opinion as to the effectiveness of any security contemplated by the Loan Documents in real property not described specifically in Exhibit A in the Deed of Trust or in real property acquired by Borrower after the date of recordation of the Deed of Trust; WARD AND SMITH, P.A. General Electric Capital Corporation December 31, 1996 Page 9 6. We express no opinion with respect to the description, title or location of any of the Property or the priority of any lien of security interest intended to be granted therein pursuant to one or more of the Loan Documents; however, the foregoing limitation does not detract from out opinion as to our UCC searches in the office of the Register of Deeds of Beaufort County under the names of the Borrower and the Guarantors; 7. We express no opinion as to the effectiveness of any provisions of the Loan Documents that provide for the assignment of transfer of any permits, licenses or similar rights of Borrower or any Guarantor; 8. N.C.G.S. Section 6-21.2 sets forth the procedures and limitations applicable to the collection of attorneys' fees pursuant to the Loan Documents and the Guaranty, and North Carolina caselaw requires that attorneys' fees charged to borrowers by lenders be reasonable in amount. Accordingly, any provisions in the Loan Documents and the Guaranty relating to the ability of either the Lender or its trustee under the Deed of Trust to collect attorneys' fees are subject to those limitations; 9. In connection with the opinion set forth in paragraph O above, we call your attention to the following: (i) The perfected security interest of Lender in the Personal Property requires the filing of continuation statements duly executed by Lender within the period of six (6) months prior to the expiration of five (5) years from the date of filing of the Financing Statements; (ii) Under certain circumstances described in N.C.G.S. Section 25-9-306, the rights of a secured party to enforce a perfected security interest in proceeds of collateral may be limited: (iii) Under certain circumstances described in N.C.G.S. Section 25-9-307 and 25-9-308, purchasers of collateral may take the same free and clear of a perfected security interest; (iv) Pursuant to N.C.G.S. Section 25-9-402(7), perfection of the security interest of Lender in the Personal Property will be terminated as to any property acquired by Borrower more than four (4) months after the date Borrower changes its name or identity so as to make WARD AND SMITH, P.A. General Electric Capital Corporation December 31, 1996 Page 10 the filed Financing Statements seriously misleading unless new appropriate financing statements indicating the new name or identity of Borrower are properly filed before the expiration of such four (4) month period; (v) Certain provisions of the Uniform Commercial Code do not govern the perfection of security interests in certain types of personal property and the terms used in the Loan Documents may include collateral in which the security interest is not capable of being perfected by recordation of financing statements, such as cash, investments, depository accounts, patents, leases or rents, articles with certificates of title or other matters. Except for the filing of the Financing Statements, we will take no other steps to perfect any security interests; (vi) Certain super-priority security interests (such as purchase money interests) and possessory liens may not be defeated by the filing of UCC statements and accordingly, Lender's security interests would be subject to any such super-priority or possessory security interests now existing or any super-priority security interests arising in the future; and, (vii) This opinion is subject to the sale of goods in the ordinary course of business and the loss of security interest in the collateral subject to such sales notwithstanding the filing of appropriate UCC statements. 10. In rendering the opinions set forth in paragraph J, K, and L above bases on our knowledge, we have, with your permission advised you only as to such knowledge as we have obtained from (a) affidavits from Reginald M. Fountain, Jr., President of Borrower, and Allan L. Krehbiel, Chief Financial Officer of Borrower, and interviews with lawyers presently in our firm whom we have determined are likely, in the ordinary course of their respective duties, to have knowledge of the transactions contemplated by the Loan Documents, the Guaranty and the matters covered by this opinion. In addition, with respect to the opinions contained in paragraph 7 above, we have examined the public records in the office of the Clerk of Superior Court of Beaufort County, North Carolina, on December 31, 1996. Except to the extent otherwise set forth above, for purposes of this opinion, we have not made an independent review of any agreements, instruments, writs, orders, judgments, rules or other regulations or decrees which may have been executed by or which may now be binding upon WARD AND SMITH, P.A. General Electric Capital Corporation December 31, 1996 Page 11 Borrower or Guarantors or which may affect the Property, nor have we undertaken to review our internal files or any files of Borrower or Guarantors, relating to transactions to which Borrower or Guarantors may be a party, or to discuss their transactions or business with any other lawyers in our firm or with any other officers, partners or any employees of Borrower. 11. To the extent that the Loan Documents have a "due on sale clause" and also contain restrictions on secondary financing or transfers of equity ownership interests, then the provisions may be unenforceable. To the extent that the Loan Documents provide for simultaneous enforcement of due on sale clauses and prepayment penalties, and to the extent that Federal law does not preempt the field, such simultaneous enforcement may not be permitted under North Carolina law due to Crockett v. Savings and Loan Association, 224 S.E.2d 580 (1976), although the court did not state which of the provisions would stand and which would fall. 12. No opinion is rendered as to whether any hazardous or toxic materials are legally or illegally present or contained in, under or upon the subject property or its waters or if any hazardous or toxic materials have contaminated such property or its waters in any way whatsoever. Further, no opinion is rendered as to any violation of any environmental laws or regulations, either Federal or state, in connection with this opinion. For the purposes of this opinion, "hazardous or toxic material" means and includes all types of petroleum products, any flammable explosives, radioactive materials, asbestos or any material containing asbestos, and/or any hazardous, toxic or dangerous waste, substance or material defined as such in (or for the purpose of) the environmental laws. For the purposes of this opinion, "environmental laws" includes the Comprehensive Environmental Response, Compensation and Liability Act, the Hazardous Materials Transportation and Liability Act, the Hazardous Materials Transportation Act, the Resource Conversation and Recovery Act, the Clean Water Act, the Clear Air Act, the Toxic Substances Control Act, the Coastal Area Management Act, any "Superfund" or "Superlien" law, the Oil Pollution and Hazardous Substances Control Act or any other federal, state or local law, regulation, rule, order, ordinance or decree regulating, relating to or imposing liability, responsibility or standards of conduct applicable to human health, safety, environmental conditions and/or releases (or potential releases) of hazardous or toxic materials in, on, at or affecting the premises, as such may now or at any time hereafter be defined or in effect. WARD AND SMITH, P.A. General Electric Capital Corporation December 31, 1996 Page 12 13. No opinion is expressed as to whether Fountain is in compliance with the provisions or requirements imposed on it under the Loan Documents or any other agreements with Lender. We are admitted to practice only in the State of North Carolina and we express no opinion as to matters under or involving the laws of any jurisdiction other than the United States of America and the State of North Carolina and its political subdivisions. This opinion is rendered solely to Lender in connection with the Loan and may not be relied upon by any other party (except counsel to Lender) or for any other purpose other than the purposes herein stated without our prior written consent. Yours very truly, Ward and Smith, P.A. 81-0242 (DV)\WSMAIN/206466. MASTER SECURITY AGREEMENT THIS MASTER SECURITY AGREEMENT, made this 31st day of January, 1997 ("Agreement"), by and between GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation with an address at 6100 Fairview Road, Suite 1450, Charlotte, North Carolina ("Secured Party"), and FOUNTAIN POWER, INC., a corporation organized and existing under the laws of the State of North Carolina, with its chief executive offices located at Whichard's Beach Road, Washington, North Carolina 27889 ("Debtor"). This Security Agreement is given in connection with the loan evidenced by the certain Loan Agreement between the Fountain Powerboats, Inc., a North Carolina corporation (the "Borrower"), the Secured Party, the Debtor and certain other parties, dated December 31, 1996 (the "Loan Agreement"). The Borrower has previously executed that certain Master Security Agreement, dated December 31, 1996 (the "Borrower's Security Agreement"). WITNESSETH: WHEREAS, the Borrower is indebted to the Secured Party in the principal amount of up to TEN MILLION AND NO/100 DOLLARS ($10,000,000), as evidenced by that certain Promissory Note in such principal amount, dated December 31, 1996, executed by Borrower, and payable to the order of the Secured Party (the `Note"); and WHEREAS, the Note is secured by a Deed of Trust, Assignment of Rents and Security Agreement, dated December 31, 1996, from the Borrower to a trustee designated therein for the benefit of the Secured Party, encumbering certain real property located in Beaufort County, North Carolina and described in Exhibit B attached hereto and incorporated herein by reference (the "Real Property"); and WHEREAS, as a condition to the Secured Party's making of the loan evidenced by the Note, the Secured party required and the Debtor agreed to grant to the Secured Party the security interests hereinafter set forth. The Debtor is a wholly-owned subsidiary of the Borrower and shall derive direct financial benefit from credit extended by the Secured Party to the Borrower. NOW, THEREFORE, in consideration of the promises herein contained and of certain other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Debtor and Secured Party hereby agree as follows: 1. CREATION OF SECURITY INTEREST. Debtor hereby gives, grants and assigns to Secured Party, its successors and assigns forever, a security interest in and against any and all of the following property: R#0204908.03 (a) Tangible Personal Property. All furniture, furnishings, machinery, apparatus, equipment [specifically including but not limited to that attached to any collateral schedule (the "Collateral Schedule") now or hereafter attached hereto as an Exhibit A], fittings, fixtures and other articles of tangible personal property now owned or leased or hereafter acquired by the Debtor, wherever located [but specifically including any such property now or hereafter located on the Real Property and any additional real property now or hereafter owned by the Debtor (the "Additional Property") (the Real Property and the Additional Property hereinafter referred to as the "Property"), including but not limited to, goods, machinery, tools, equipment (including fire, sprinkler and alarm systems; air conditioning, heating, refrigerating, electronic monitoring, entertainment, and recreational equipment; window or structural cleaning rigs; maintenance equipment; equipment relating to exclusion of vermin or insects, removal of dust, refuse or garbage; and all other equipment of every kind), elevators, indoor and outdoor furniture (including tables, chairs, planters, desks, sofas, shelves, lockers and cabinets), wall beds wall safes, furniture, furnishings, appliances (including ice boxes, refrigerators, fans, heaters, stoves water heaters and incinerators), rugs, carpets and other floor coverings, draperies and drapery rods and brackets, awnings, window shades, venetian blinds, curtains, lamps, chandeliers, and other lighting fixtures and office maintenance and other supplies and the proceeds and products of all of the foregoing and all replacements and renewals thereof being hereafter referred to as the ("Tangible Personal Property"). (b) Inventory. All of the Debtor's inventory now owned or hereafter acquired, including but not limited to (I) goods intended for sale, use or lease by the Debtor or to be furnished by the Debtor under contracts of service, (ii) all raw materials, goods in process, finished goods, materials and supplies of every nature used or usable in connection with the manufacture, packing, shopping, advertising, selling, leasing or furnishing of such goods (specifically including, but not limited to, all molds, metals, plastics, upholstery, windscreens, fiberglass, and other components in boat manufacture), and any and all items including machinery and equipment used or consumed in the operation of the business of the Debtor or which contribute to the finished product or to the sale, promotion, and shipment thereof, in which the Debtor now or at any time hereafter may have an interest, whether or not such inventory is listed on any reports furnished to the Secured Party from time to time; (iii) all inventory whether or not the same is in transit or in the constructive, actual, or exclusive occupancy or possession of the Debtor or is held by the Debtor or by others for the Receivables (as hereafter defined), including, without limitation, all goods covered by purchase orders, and contracts with suppliers and all goods billed and held by suppliers; (iv) all inventory which may be located on premises of the Debtor or of any carrier, forwarding agents, truckers, warehousemen, vendors, selling agents, or third parties; (v) all general intangibles relating to or arising out of inventory; (vi) all documents evidencing or representing the same, all documents of title, all negotiable and non-negotiable warehouse receipts representing the same; and (vii) all products and proceeds of the foregoing (including cash, accounts receivable, non-cash trade ins, and non-cash-proceeds), wherein the foregoing may be located (referred to herein collectively as "Inventory"). (c) Insurance Policies. All rights in and to all pertinent present and future fire and/or hazard insurance policies (including, but not limited to, insurance proceeds) covering the Property, and improvements thereon (the "Improvements") or the property described in (a) and (b) above. 2 R#0204908.03 (d) Awards. All awards made by any public body or decreed by any court of competent jurisdiction for a taking or for degradation of value of the Property, the Improvements or the property described in (a) above in any eminent domain proceeding and all payments made in respect of a conveyance made in lieu of any such taking. (e) Lease Rights and Security Deposits. All of the Debtor's rights and interests in and to all present and future leases of the Property and Improvements or any part thereof and/or all rental income and/or security deposits, whether payable pursuant to any present or future lease of otherwise growing out of any occupancy or use of the Property and the Improvements. (f) Accounts Receivable and General intangibles Relating to Debtor. (i) All obligations and indebtedness of every kind at any time owing to the Debtor from whatever source arising, and including (without limitation) all accounts, accounts receivable, tax refunds, refunds, payments or proceeds under any insurance policies, instruments, contract rights, chattel paper, general intangibles and documents, whether secured or unsecured, now existing or hereafter created; (ii) any and all sums and property recovered by the Debtor or any trustee, receiver or fiduciary acting on the Debtor's behalf as a result of or arising from a fraudulent or preferential transfer or payment (as determined under present or future federal or state law or regulations relating to bankruptcy, insolvency or other relief or debtors) made by the Debtor or on the Debtor's behalf; (ii) all of the Debtor's rights as an unpaid seller, including stoppage in transit, replevin, detinue and reclamation; (iv) all customer lists and other documents containing names, addresses and other information regarding the Debtor's customers, subscribers and those to whom the Debtor provides any services, and all supplier lists of the Debtor; (v) all books, records, files, computer tapes, programs, software, discs and other material or documents relating to the recording, billing or analyzing of any of the above; (vi) all now or hereafter existing balances, credits deposits (general or special, time or demand, provisional of final), accounts and all other sums credited by, maintained with or due from the Debtor the Debtor or any of the Debtor's affiliates to the Debtor or subject to withdrawal by the Debtor, together with all goods, inventory, and merchandise returned by or reclaimed by or repossessed from customers wherever such goods, inventory and merchandise are located, and all proceeds thereto; and (vii) all products and proceeds of any of the foregoing in any form, including cash, insurance proceeds, negotiable instruments and other evidences of indebtedness, chattel paper, security agreements and other documents (all of the foregoing being herein referred to as "Receivables"). All trade names, symbols, logos, copyrights, patents, patent applications, federal trademark registrations, any trademark applications now or hereafter filed with respect thereto and any federal trademark registrations issued or issuing with respect thereto, and all goodwill associated with the trademarks and patents. All goodwill and all other general intangibles of every kind and description now or hereafter owned by the Debtor. (g) Motor Vehicles. All motor vehicles and trailers now or hereafter owned by the Debtor. 3 R#0204908.03 (h) Proceeds. All proceeds or sums payable in lieu of or as compensation for the loss or damage to any property described in (a) through (g) above. (i) Additions, Accessions, Substitutes. Any and all additions, attachments, accessories and accessions thereto, any and all substitutions, replacements or exchanges therefor, and any and all insurance and/or other proceeds thereof. All of the foregoing personal property is hereinafter individually and collectively referred to as the "Collateral". The foregoing security interest is given to secure the payment and performance of any and all debts, obligations and liabilities of any kind, nature or description whatsoever (whether primary, secondary, direct contingent, sole, joint or several, or otherwise and whether due or to become due) of Debtor and the Borrower to Secured Party, now existing or hereafter arising, including but not limited to the payment and performance of the Note, and any renewals, extensions and modifications of such Note and any other debts, obligations and liabilities of the Borrower and the Debtor to the Secured Party (all of the foregoing being hereinafter referred to as the "Indebtedness"). Notwithstanding the foregoing, and notwithstanding anything to the contrary contained elsewhere in this Agreement, to the extent that Secured Party asserts a purchase money security interest in any items of the Tangible Personal Property constituting a portion of the Collateral ("PMSI Collateral"): (i) the PMSI Collateral shall secure only that portion of the Indebtedness which has been advanced by Secured Party to enable Debtor to purchase, or acquire rights in or the use of such PMSI Collateral (the " PMSI Indebtedness"), and (ii) no other Collateral shall secure the PMSI Indebtedness. 2. REPRESENTATIONS, WARRANTIES, AND COVENANTS OF DEBTOR. Debtor hereby represents, warrants and covenants as of the date hereof and as of the date of execution of each Collateral Schedule hereto that: (a) Debtor is, and will remain, duly organized, existing and in good standing under the laws of the State set forth in the first paragraph of this Agreement, has its chief executive offices at the location set forth in such paragraph, and is, and will remain, duly qualified and licensed in every jurisdiction wherever necessary to carry on its business and operations; (b) Debtor has adequate power and capacity to enter into, and to perform its obligations, under this Agreement and any other documents evidencing, or given in connection with, any of the Indebtedness (all of the foregoing being hereinafter referred to as the "Debt Documents"); (c) This Agreement and the other Debt Documents have been duly authorized, executed and delivered by Debt and constitute legal, valid and binding agreements enforceable under all applicable laws in accordance with their terms, except to the extend that the enforcement of remedies may be limited under applicable bankruptcy and insolvency laws; 4 R#0204908.03 (d) No approval, consent or withholding of objections is required from any governmental authority or instrumentality with respect to the entry into, or performance by, Debtor of any of the Debt Documents, except such as may have already been obtained; (e) The entry into, and performance by, Debtor of the Debt Documents will not (I) violate any of the organizational documents of Debtor or any judgment, order, law or regulation applicable to Debtor, or (ii) result in any breach of, constitute a default under, or result in the creation of any lien, claim or encumbrance on any of Debtor's property (except for liens in favor of Secured Party) pursuant to, any indenture, mortgage, deed of trust, bank loan, credit agreement, or other agreement or instrument to which Debtor is a party; (f) There are no suits or proceedings pending or threatened in court or before any commission, board or other administrative agency against or affecting Debtor which could, in the aggregate, have a material adverse effect on Debtor, its business or operations, or its ability to perform its obligations under the Debt Documents, except those disclosed in Schedules to the Loan Agreement; (g) All financial statements delivered to Secured Party in connection with the Indebtedness have been prepared in accordance with generally accepted accounting principles, and since the date of the most recent financial statement, there has been no material adverse change; (h) The Collateral is not, and will not be, used by Debtor for personal, family or household purposes; (i) The Collateral constituting Tangible Personal Property and Inventory is, and will remain, in good condition and repair and Debtor will not be negligent in the care and use thereof; (j) Debtor is, and will remain, the sole and lawful owner, and in possession of the Collateral (except for Inventory in transit to dealers for sale and except for Inventory sold in the ordinary course of business), and has the sole right and lawful authority to grant the security interest described in this Agreement; and (k) The Collateral is, and will remain, free and clear of all liens, claims and encumbrances of every kind, nature and description, except for (i) liens in favor of Secured Party, (ii) liens for taxes not yet due or for taxes being contested in good faith and which do not involve, in the reasonable judgment of Secured Party, any risk for the sale, forfeiture or loss of any of the Collateral, and (iii) inchoate materialmen's mechanic's, repairmen's and similar liens arising by operation of law in the normal course of business for amounts which are not delinquent (all of such permitted liens being hereinafter referred to as "Permitted Liens"). 3. COLLATERAL. (a) Until the declaration of any default hereunder, Debtor shall remain in possession of the Collateral; provided, however, that Secured Party shall have the right to possess (i) any chattel 5 R#0204908.03 paper or instrument that constitutes a part of the Collateral, and (ii) any other Collateral which because of its nature may require that Secured Party's security interest therein be perfected by possession. Secured Party, its successors and assigns, and their respective agents, shall have the right to examine and inspect any of the Collateral at any time during normal business hours. Upon any request from Secured party, Debtor shall provide Secured Party with notice of the then current locations of the Collateral, specifically including the names and addresses of dealers to whom Inventory is sent from time to time. (b) Debtor shall (i) use the Collateral only in its trade or business, (ii) maintain all of the Collateral in good condition and working order, (iii) use and maintain the Collateral only in compliance with all applicable laws, and (iv) keep all of the Collateral free and clear of all liens, claims and encumbrances (except for Permitted Liens). (c) Debtor shall not, without the prior written consent of Secured party, (i) part with possession of any of the Collateral (except to dealers for sale of Inventory, to Secured Party, or for maintenance and repair), (ii) remove any of the Collateral from the continental United States, or (iii) sell, rent, lease, mortgage, grant a security interest in or otherwise transfer or encumber (except for Permitted Liens) any of the Collateral. Notwithstanding the foregoing, the Debtor may ship Inventory to dealers outside the continental United States for sale, provided payment is made in full prior to shipment or is secured by an irrevocable letter of credit from a domestic bank. (d) Debtor shall pay promptly when due all taxes, license fees, assessments and public and private charges levied or assessed on any of the Collateral, on the use thereof, or on this Agreement or any of the other Debt Documents. At its option, Secured Party may discharge taxes, liens, security interests or other encumbrances at any time levied or placed on the Collateral and may pay for the maintenance, insurance and preservation of the Collateral or to effect compliance with the terms of this Agreement or any of the other Debt Documents. Debtor shall reimburse Secured Party, on demand, for any and all costs and expenses incurred by Secured Party in connection therewith and agrees that such reimbursement obligation shall be secured hereby. (e) Debtor shall, at all times, keep accurate and complete records of the Collateral, and Secured Party, its successors and assigns, and their respective agents, shall have the right to examine, inspect, and make extracts from all of Debtors books and records relating to the Collateral at any time during normal business hours. Such reports shall be in such detail, form and scope as the Secured Party shall require. The Secured Party and the Secured Party's agents and representatives may at all times have access to, examine and inspect the Inventory, the Tangible Personal Property, and all records pertaining thereto. The Debtor now keeps and shall continue to keep correct and accurate records itemizing and describing the kind, type, quality and quantity of Inventory, the Debtor's cost therefor and the selling price thereof, the daily withdrawals therefrom and the additions thereto. Any equipment and molding designated by the Secured Party shall be tagged so as to disclose the security interest of the Secured Party in such personalty. (f) If agreed by the parties, Secured Party may, but shall in no event be obligated to, accept substitutions and exchanges of property for property, and additions to the property, 6 R#0204908.03 constituting all or any part of the Collateral. Such substitutions, exchanges and additions may be accomplished at any time and from time to time, by the substitution of a revised Collateral Schedule for the Collateral Schedule now or hereafter annexed. Any property which may be substituted, exchanged or added as aforesaid shall constitute a portion of the Collateral and shall be subject to the security interest granted herein. Additions to, reductions or exchanges of, or substitutions for, the Collateral, payments on account of any obligation or liability secured hereby, increases in the obligations and liabilities secured hereby, or the creation of addition obligations and liabilities secured hereby, may from time to time be made or occur without affecting the provisions of this Agreement or the provisions of any obligation or liability which this Agreement secures. (g) Any third person at any time and from time to time holding all or any portion of the Collateral shall be deemed to, and shall hold the Collateral as the agent, and as pledge holder for, Secured Party. At any time and from time to time, Secured Party may give notice to any third person holding all or any portion of the Collateral that such third person is holding the Collateral as the agent of, and as pledge holder for, the Secured Party. 4. INSURANCE. The Collateral shall at all times be held at Debtor's risk, and Debtor shall keep it insured against loss or damage by fire and extended coverage perils, theft, burglary, and for any or all Collateral which are vehicles, for risk of loss by collision, and where requested by Secured Party, against other risks as required thereby, for the full replacement value thereof, with companies in amounts and under policies acceptable to Secured Party. Debtor shall, if Secured Party so requires, deliver to Secured Party policies of certificates of insurance evidencing such coverage. Each policy shall name Secured Party as loss payee thereunder, shall provide for coverage to Secured Party regardless of the breach by Debtor of any warranty or representation made therein, shall not be subject to co- insurance, and shall provide for thirty (30) days written notice to Secured Party of the cancellation or material modification thereof (unless such insurance coverage is not obtainable). Debtor hereby appoints Secured Party as its attorney in fact to make proof of loss, claim for insurance and adjustments with insurers, and to execute or endorse all documents, checks or drafts in connection with payment made as a result of any such insurance policies. Proceeds of insurance shall be applied, at the option of Secured Party, to repair or replace the Collateral or to reduce any of the Indebtedness secured hereby. 5. REPORTS. (a) Debtor shall promptly notify Secured Party in the event of (i) any change in the name of Debtor, (ii) any relocation of its chief executive offices, (iii) any relocation of any of the Collateral, (iv) any of the Collateral being lost, stolen, missing, destroyed, materially damaged or worn out, or (v) any lien, claim or encumbrance attaching or being made against any of the Collateral other than Permitted Liens. (b) Debtor agrees to furnish its annual financial statements and such interim statements as Secured Party may require in form satisfactory to Secured Party and as required in the Loan 7 R#0204908.03 Agreement. Any and all financial statements submitted and to be submitted to Secured Party have and will have been prepared on a basis of generally accepted accounting principles, and are and will be complete and correct and fairly present Debtor's financial condition as at the date thereof. Secured Party may at any reasonable time examine the books and records of Debtor and make copies thereof. 6. FURTHER ASSURANCES. (a) Debtor shall, upon request of Secured Party, furnish to Secured Party such further information, execute and deliver to Secured Party such documents and instruments (including, without limitation, Uniform Commercial Code financing statements) and do such other acts and things, as Secured Party may at any time reasonably request relating to the perfection or protection of the security interest created by this Agreement or for the purpose of carrying out the intent of this Agreement. Without limiting the foregoing, Debtor shall cooperate and do all acts deemed necessary or advisable by Secured Party to continue in Secured Party a perfected first security interest in the Collateral, and shall obtain and furnish to Secured Party any subordinations, releases, landlord, lessor, or mortgagee waivers, and similar documents as may be from time to time requested by, and which are in form and substance satisfactory to, Secured Party. The Debtor shall provide to the Secured Party a schedule of all Receivables, Tangible Personal Property, and Inventory at least once every fiscal quarter, as described in the Loan Agreement. The Debtor shall also notify the Secured Party of any patent and trademark applications filed each fiscal quarter and take such measures as the Secured Party may require to confirm the assignment and to perfect the security interests granted hereby. If any Inventory is in the possession or control of any of the Debtor's agents or processors, the Debtor shall notify them of the Secured Party's security interest therein, and upon the Secured Party's request, instruct them to hold all such Inventory for the Secured Party's account and subject them to the Secured Party's instructions. If at any time the Secured Party determines that the Secured Party's security interest in any boat constituting a portion of Inventory is required to be perfected by the filing of a marine vessel mortgage, the Debtor agrees to execute such a vessel mortgage (in form and substance satisfactory to the Secured Party) and cause such mortgage to be filed in appropriate governmental offices so as to perfect the Secured Party's security interests in such vessel. (b) Debtor hereby grants to Secured Party the power to sign Debtor's name and generally to act on behalf of Debtor to execute and file applications for title, transfers of title, financing statements, notices of lien and other documents pertaining to any or all of the Collateral. Debtor shall, if any certificate to title be required or permitted by law for any of the Collateral, obtain such certificate showing the lien hereof with respect to the Collateral and promptly deliver same to Secured Party. 8 R#0204908.03 (c) Debtor shall indemnify and defend the Secured Party, its successors and assigns, and their respective directors, officers and employees, from and against any and all claims, actions and suits (including, without limitation, related attorneys' fees) of any kind, nature or description whatsoever arising, directly or indirectly, in connection with any of the Collateral. (d) The Secured Party shall have no duty or care with respect to the Collateral, except that the Secured Party shall exercise reasonable care with respect to Collateral in its custody, but shall be deemed to have exercised reasonable care if such property is accorded treatment substantially equal to that which it accords its own property, or if it takes such action with respect to the Collateral as the Debtor shall request in writing. No failure to comply with any such request nor any omission to do any such act requested by the Debtor shall be deemed a failure to exercise reasonable care, nor shall the Secured Party's failure to take steps to preserve rights against any parties or property be deemed a failure to have exercised reasonable care with respect to Collateral in its custody. 7. EVENTS OF DEFAULT Debtor shall de in default under this Agreement and each of the other Debt Documents upon the occurrence of any of the following "Event(s) of Default": (a) Either the Borrower or the Debtor fails to pay any installment or other amount due or coming due under any of the Debt Documents within ten (10) days after its due date; (b) Any attempt by Debtor, without the prior written consent of Secured Party, to sell, rent, lease, mortgage, grant a security interest in, or otherwise transfer or encumber (except for Permitted Liens and except as elsewhere permitted herein) any of the Collateral; (c) Debtor fails to procure, or maintain in effect at all times, any of the insurance on the Collateral in accordance with Section 4 of this Agreement. (d) Debtor or the Borrower breaches any of its other obligations under any of the Debt Documents and fails to cure the same within thirty (30) days after written notice thereof; (e) Any warranty, representation or statement made by Debtor or the Borrower in any of the Debt Documents or otherwise in connection with any of the Indebtedness shall be false or misleading in any material respect; (f) Any of the Collateral being subjected to, or being threatened with, attachment, execution, levy, seizure or confiscation in any legal proceeding or otherwise; (g) The occurrence of an "Event of Default" under the Deed of Trust or the Loan Agreement; or any default by Debtor or the Borrower under any other agreement between Debtor 9 R#0204908.03 or the Borrower and Secured Party, specifically including (but not limited to) the Borrower's Security Agreement, after the passage of any applicable cure period set out in such agreement; (h) Any dissolution, termination of existence, merger, consolidation, change in controlling ownership, insolvency, or business failure of Debtor, the Borrower or any guarantor or other obligor for any of the Indebtedness (collectively "Guarantor"), except as permitted in the Loan Agreement, or if Debtor or any Guarantor is a natural person, any death or incompetence of Debtor or such Guarantor; (i) The appointment of a receiver for all or any part of the property of Debtor, the Borrower or any Guarantor, or any assignment for the benefit of creditors by Debtor, the Borrower or any Guarantor; or (j) The filing of a petition by Debtor, the Borrower or any Guarantor under any bankruptcy, insolvency or similar law, or the filing of any such petition against Debtor, the Borrower or any Guarantor if the same is not dismissed within thirty (30) days of such filing. 8. REMEDIES ON DEFAULT. (a) Upon the occurrence of an Event of Default under this Agreement, the Secured Party, at its option, may declare any or all of the Indebtedness, including without limitation the Note, to be immediately due and payable, without demand or notice to Debtor or any Guarantor. The obligations and liabilities accelerated thereby shall bear interest (both before and after any judgment) until paid in full at the lower eighteen percent (18%) per annum or the maximum rate not prohibited by applicable law. (b) Upon such declaration of default, Secured Party shall have all of the rights and remedies of a Secured Party under the Uniform Commercial Code, and under any other applicable law. Without limiting the foregoing, Secured Party shall have the right to (i) notify any account debtor of Debtor or any obligor on any instrument which constitutes part of the Collateral to make payment to the Secured Party, (ii) with or without legal process, enter any premises where the Collateral may be and take possession and/or remove said Collateral from said premises, (iii) sell the Collateral at public or private sale, in whole or in part, and have the right to bid and purchase at said sale, (iv) lease or otherwise dispose of all or part of the Collateral, applying proceeds therefrom to the obligations then in default, and/or (v) use, without charge or liability to the Secured Party, any of the Debtor's labels, trade names, trademarks, patents, patent applications, licenses, certificates of authority, advertising materials, or any of the Debtor's other properties or interests in properties of similar nature in advertising for sale, selling or otherwise realizing upon any of the Collateral. If requested by Secured Party, Debtor shall promptly assemble the Collateral and make it available to Secured party at a place to be designated by Secured Party which is reasonably convenient to both parties. Secured Party may also render any or all of the Collateral unusable at the Debtor's premises and may dispose of such Collateral on such premises without liability for rent or costs. Any notice which Secured Party is required to give to Debtor under the Uniform Commercial Code of the time and place of any public sale or the time after which any private sale or other intended disposition of the Collateral is to be made shall be deemed to constitute reasonable 10 R#0204908.03 notice if such notice is given to the last known address of Debtor at least five (5) days prior to such action. (c) Proceeds from any sale or lease or other disposition shall be applied: first, to all costs of repossession, storage, and disposition including without limitation attorneys', appraisers', and auctioneers' fees; second, to discharge the obligations then in default; third, to discharge any other Indebtedness of Borrower or Debtor to Secured Party, whether as obligor, endorser, guarantor, surety or indemnitor; fourth, to expenses incurred in paying or settling liens and claims against the Collateral; and lastly, to Debtor, if there exists any surplus. Debtor and the Borrower (as the case may be) shall remain fully liable for any deficiency. (d) In the event this Agreement, any Note or any other Debt Documents to which the Debtor is a party are placed in the hands of an attorney for collection of money due or to become due or to obtain performance of any provision thereof, Debtor agrees to pay all reasonable attorneys' fees incurred by Secured Party at such attorneys' standard hourly rates for time in fact incurred (without regard to any statutory presumption), and further agrees that payment of such fees is secured hereunder. Debtor and Secured Party agree that such fees to the extent not in excess of fifteen percent (15%) of subject amount owing after default (if permitted by law, or such lesser sum as may otherwise be permitted by law) shall be deemed reasonable. (e) Secured Party's rights and remedies hereunder or otherwise are cumulative and may be exercised singularly or concurrently. Neither the failure nor any delay on the part of the Secured Party to exercise any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege preclude any other or further exercise thereof or the exercise of any other right power or privilege. Secured Party shall not be deemed to have waived any of its rights hereunder or under any other agreement, instrument or paper signed by Debtor unless such waiver be in writing and signed by Secured Party. A waiver on any one occasion shall not be construed as a bar to or waiver of any right or remedy on any future occasion. (f) Any controversy or claim arising out of or relating to this Master Security Agreement shall be determined by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The number of arbitrators shall be three. One Arbitrator shall be appointed by each of the parties and the third arbitrator, who shall serve as chairman of the tribunal, shall be appointed by the American Arbitration Association. The place of arbitration shall be Charlotte, North Carolina. Any arbitral award arising from any arbitration pursuant to this paragraph shall be final and binding upon all parties hereto. 9. INVENTORY AND RECEIVABLES COVENANTS. The following are covenants applicable to Inventory and Receivables generally: (a) The Secured Party's security interest in the Inventory will continue through all stages of manufacture and will, without further act, attach to raw materials, to goods in process, to finished goods, to all products of the foregoing, to the Receivables (as defined in the Agreement) and all 11 R#0204908.03 other proceeds resulting from the sale or other disposition thereof and to all such Inventory that may be rejected, returned, reclaimed, repossessed or stopped in transit. (b) Inventory shall be kept only at the address identified on the first page of this Security Agreement, and shall not be removed therefrom except for purposes of sale and promotion in the regular course of the Debtor's business. (c) No Inventory has been or shall be consigned without the Secured Party's prior written consent; no Inventory is or shall ever be stored with a bailee, warehouseman or similar party without the Secured Party's prior written consent, and in such event the Debtor will, concurrently with delivery to such party, cause any such party to issue and deliver to the Secured Party, in form acceptable to the Secured Party, warehouse receipts in the Secured Party's name evidencing the storage of such Inventory. (d) Until the occurrence of an Event of Default, the Debtor may, subject to the provisions of this Agreement, sell finished Inventory, but only in the ordinary course of the Debtor's business; however, in no event shall the Debtor make any sale of Inventory which would cause a breach of the Debtor's warranties, representations and covenants under this Agreement. A sale of Inventory in the ordinary course of the Debtor's business does not include a transfer in partial or total satisfaction of a debt owing by the Debtor. The Debtor agrees to report the receipt or creation of all sales or other dispositions of Inventory to the Secured Party. The Debtor hereby agrees to execute and deliver to the Secured Party, in form satisfactory to the Secured Party, a formal assignment or schedule of accounts receivable or other proceeds resulting from the sale or other disposition of Inventory but in the absence of such assignment or schedule this Agreement shall constitute such assignment or schedule and the grant of a security interest therein. (e) The Secured Party shall not, under any circumstance, be liable for any error or omission or delay of any kind occurring in the settlement, collection or payment of any Receivables or any instrument received in payment thereof or for any damage resulting therefrom. The Secured Party shall not be liable for or prejudiced by any loss, depreciation or other damage to Receivables or other Collateral unless caused by the Secured Party's willful and malicious act, and the Secured Party shall have no duty to take any action to preserve or collect any Receivable or other Collateral. (f) The Secured Party may notify customers at any time that Receivables have been assigned to the Secured Party and collect them directly in the Secured Party's own name but, unless and until the Secured Party does so or gives the Debtor other instructions, the Debtor shall, at its cost and expense, collect and otherwise hold for the Secured Party as trustee of an express trust for the Secured Party's benefit all amounts of unpaid Receivables, and, if so requested by the Secured Party, shall not commingle such collections with the Debtor's own funds or use the same for any purpose. (g) As to any Receivable forming part of the Collateral, unless the Secured Party otherwise consents in writing: (i) all Receivables are and will be bona fide existing obligations of the customer named therein, for a fixed sum as set forth in the invoice relating thereto, created by the sale and actual delivery of goods or other property or the rendition of services or the furnishing of other good and sufficient consideration to the customer in the regular course of business; (ii) all unpaid balances appearing on the Debtor's books and records and any invoice or statement delivered 12 R#0204908.03 or to be delivered to the Secured Party relating to any Receivable are and shall be true and correct in all respects; (iii) all shipping or delivery receipts and other documents furnished or to be furnished to the Secured Party in connection therewith are all and will be genuine, complete, correct, valid and enforceable in accordance with the Debtor's terms; and (vi) no Receivable has arisen or shall arise out of a contract or purchase order containing provisions prohibiting assignment thereof or the creation of a security interest therein and the Debtor has not received and shall not accept any note, or other instrument with respect to any Receivable or in payment thereof which is not assigned and delivered to the Secured Party immediately. (h) To facilitate the maintenance of the Secured Party's records, the Debtor shall: (I) hold in trust for the Secured Party's benefit all items constituting proof of shipment or delivery of all goods sold and services rendered together with copies of all of the Debtor's invoices to customers; and (ii) furnish the Secured Party promptly with copies of such information as the Secured Party may reasonable require. The Debtor's billing of customers on such invoices or otherwise shall be conclusive evidence of the assignment to the Secured Party of the Receivables represented thereby whether or not the Debtor executes any other document. The items to be provided under this paragraph are to be in form satisfactory to the Secured Party and are executed and delivered to the Secured Party from time to time solely for the Secured Party's convenience in maintaining records of the Collateral; the Debtor's failure to give any of such items to the Secured Party shall not affect, terminate, modify or otherwise limit the Secured Party's lien or security interest in the Collateral. 10. MISCELLANEOUS (a) This Agreement, the Note and/or any of the other Debt Documents may be assigned, in whole or in part, by Secured Party without notice to Debtor, and Debtor hereby waives any defense, counterclaim or cross-complaint by Debtor against any assignee, agreeing that Secured Party shall be solely responsible therefor. (b) All notices to be given in connection with this Agreement shall be in writing, shall be addressed to the parties at their respective addresses set forth hereinabove (unless and until a different address may be specified in a written notice to the other party), and shall be deemed given when given in the manner prescribed by the Deed of Trust. (c) Secured party may correct patent errors herein and fill in all blanks herein or in any Collateral Schedule consistent with agreement of the parties. (d) Time is of the essence hereof. This Agreement shall be binding, jointly and severally, upon all parties described as the "Debtor" and their respective heirs, executors, representatives, successors and assigns, and shall inure to the benefit of Secured Party, its successors and assigns. (e) This Agreement and its Collateral Schedules, the Note and the other loan documents executed on December 31, 1996 and the date hereof constitute the entire agreement between the parties with respect to the subject matter hereof and supersede all prior understandings (whether written, verbal, or implied) with respect thereto. This Agreement and its Collateral Schedules shall not be changed or terminated orally or by course of conduct, but only by a writing signed by both 13 R#0204908.03 parties hereto. Section headings contained in this Agreement have been included for convenience only, and shall not affect the construction or interpretation hereof. (f) This Agreement shall continue in full force and effect until all of the Indebtedness has been indefeasible paid in full to Secured Party. The surrender, upon payment or otherwise, of the Note or any of the other documents evidencing any of the Indebtedness shall not affect the right of Secured party to retain the Collateral for such other Indebtedness as may then exist or (with the consent of the Borrower) as it may be reasonable contemplated will exist in the future. This Agreement shall automatically be reinstated in the event that Secured Party is ever required to return or restore the payment of all or any portion of the Indebtedness (all as though such payment had never been made). 14 R#0204908.03 IN WITNESS WHEREOF, Debtor and Secured Party, intending to be legally bound hereby, have duly executed this Agreement in one or more counterparts, each of which shall be deemed to be an original, as of the day and year first aforesaid. DEBTOR: FOUNTAIN POWERBOATS, INC., a North Carolina corporation ATTEST: /s/Carol J. Price By:/s/ R.M. Fountain, Jr. Assistant Secretary ___________ President [CORPORATE SEAL] SECURED PARTY: GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation By: __________________________ Vice President 15 R#0204908.03 -----END PRIVACY-ENHANCED MESSAGE-----