-----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, FPouuYLIxCnI5lkwDjF/iQm7CqB2dM4jZq6UslGdVG+7AaV08wS7fImMyfonB0V1 4EAju0d6HpLp9H21eL89aQ== 0000944543-98-000033.txt : 19980929 0000944543-98-000033.hdr.sgml : 19980929 ACCESSION NUMBER: 0000944543-98-000033 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980928 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: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-14712 FILM NUMBER: 98716300 BUSINESS ADDRESS: STREET 1: 1653 WICHARDS BEACH ROAD 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 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 {NO FEE REQUIRED] For fiscal year ended June 30, 1998 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 The aggregate market value of the voting stock held by non-affiliates of the registrant was $ 15,313,752 at September 9, 1998 based upon a closing price of $6.00 per share on such date for the Company's Common Stock. As of September 9, 1998 there were 4,702,608 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 achieve performance and stability standards, which the Company believes are greater than those offered by any of its competitors, worldwide. 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 give 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. 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 310 HP to more than 900 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. During the first half of Fiscal 1999, the company will introduce a Super Cruiser, 65 foot in length with a 16' beam. This is the first of a family of Super Cruisers to be introduced during the next several years. 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 $328,000 to $394,000. The Company's 47' Lightning Sport Boat has been newly redesigned and restyled and operates at maximum speeds of 75 to 100 mph and is very stable and suited for long range cruising in offshore waters. Its sleek styling makes it particularly attractive. Depending primarily upon the type of engines and options selected, this boat retails at prices ranging from $343,000 to $648,000. 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. 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 $208,000 to $248,000. The 38' Fever Sport Boat operates at maximum speeds of between 70 and 100 mph. Its retail price ranges from $189,000 to $229,000, 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 35' 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 $150,000 to $192,000, 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 $118,000 to $150,000. 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 $79,000 and $100,000 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 powerboat 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 $65,000 to $81,000. In 1990, the Company began its offshore sport fishing program with a 31' sport fishing model which features a center console design and incorporates 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. 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 were the 25' and 29' walk around cabin model fishing boats with inboard power. For Fiscal 1998, the Company introduced an all-new surface drive sport boat, the 51' Lightning. This boat comes with the Company's new second- generation positive lift hull. The 42' Lightning was also new for 1998. It comes with the new style deck with full wrap around windshield, canvas top and the 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 during the first half of Fiscal 1999. 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 and less component parts and gears for 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 1998 1997 1996 Sport boats . 324 336 295 Sport cruisers . 9 14 20 Sport fishing boats . 116 128 109 ------ ------ ------ Total 449 478 424 ==== ==== ==== 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 62 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 1998 ..... $575,918 $2,010,634 Fiscal 1997 ..... 635,652 1,684,274 Fiscal 1996 ..... 234,425 878,274 For Fiscal 1999, planned design research and development expenses are $700,000 and plug and mold construction expenditures are approximately $1,500,000. These expenditures will be primarily to complete the tooling for new sport boat decks and interiors plus initiation of the first in the new mid- line cruiser line along with the second model in the new Supercruiser line. Details are not yet complete and will be released in the near future. Manufacturing capacity is sufficient to accommodate approximately 30 to 40 boats in various stages of construction at any one time. Construction of a boat currently made, depending on size, takes approximately three to five weeks. Construction of the all new wide beam Super Cruisers is expected as follows: A 40' in six weeks, a 50' in ten weeks and a 65' in twelve weeks. The Company, with additional personnel, currently has the ability to manufacture approximately 500 sport and fishing boats and 15-20 yachts per year. 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 hand "laying-up" 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 resins used by most other fiberglass boat manufacturers. Decks are bonded to the hulls using bonding agents, rivets, screws and fiberglass to achieve a strong, unitized construction. 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 costs as it receives parts just in time for assembly and achieves considerable savings. 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 discounts. 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 re-mediation 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 powerboats 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 international dealers. 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. Following is a table of sales by geographic area for the last three fiscal years: Fiscal `98 Fiscal `97 Fiscal `96 United States ........$46,068,495 $48,346,485 $40,545,235 Canada, Mexico, Central and South America .....$2,639,523 $ 1,047,913 $ 658,738 Europe and the Middle East ...... $1,834,524 $ 752,801 $ 394,078 Asia .................. $ 109,495 $ 367,126 $ -0- ------------- ------------- ---------- Total ...........$50,652,037 $50,514,325 $ 41,598,051 ======== ======== ======= The Company has a growing international advertising program and is seeking additional distribution for its products in foreign markets through its own sales representative. 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 10-20% of its total sales. For Fiscal 1998 one dealer accounted for 6.7% of sales, one for 6.3% and one other dealer accounted for more than 5% of 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. 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 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. 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 up to 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 who 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. 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 to participate in the major classes of offshore powerboat races, many of which are regularly televised on programs such as ESPN. Additionally, Fountain single, twin and triple engine racing boats currently hold their respective world speed records. The result of these racing victories and world speed records has established the Company's products as the highest performing and safest designed offshore boats. The Company believes that the favorable publicity generated by its performance programs contribute to its sales volume. 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 constructed two race boats during Fiscal 1997 and implemented a racing program during Fiscal 1998, of which a major engine manufacturer is a sponsor. In Fiscal 1998, the company completed the structure of its racing program with a third boat and captured several world speed records through the summer of calendar 1998 with the 100th victory completed by Reggie Fountain in New York City in September. As part of the marketing program for its new line of sport fishing boats, the Company sponsors 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, a Fountain fisherman took first place. 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. Sales Order Backlog. The sales order backlog as of mid September 1998 was for approximately 200 boats having an estimated sales value of $20,000,000. All of the backlog is generally shipped within 6 months. This compares to an equivalent backlog at this time in September 1997 and 1996. During the last year, the Company's performance boats' increase in sales value to a greater degree than fishing boats has increased the overall average unit price. Later this year, with the formal introduction of the new 65' yacht, which has 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 prime spring and summer selling seasons. Product Warranty. The Company warrants its boats against defects in material and workmanship for a period of three years. The engine manufacturer warrants engines included in the boats. Warranty expenses of $531,062 were incurred in Fiscal 1998 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, 1998. For 1997, warranty costs were $707,202 or 1.4 percent of sales. 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 powerboat 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. The 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. The Company believes that its current owners, many whom have purchased multiple and increasingly larger boats from the Company regenerate a ready waiting market for its expansion into the cruiser and yacht market. Employees. As of September 1, 1998 the Company had 376 employees, of whom ten were executive and management personnel. Twenty-three were engaged primarily in administrative positions including accounting, personnel, marketing and sales activities. 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 66 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 $9,129,622 at June 30, 1998 The operating facility contains buildings totaling 229,280 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 .......... 75,800 Lamination, upholstery, final, assembly, inventory, and cafeteria. Building 4 .......... 14,250 Woodworking. Building 5 .......... 26,800 Mating, small parts lamination. Building 6 .......... 23,800 Metal fabrication. Building 7 .......... 15,720 Racing, service, and warranty. Building 8 .......... 8,750 Lamination extension area. Building 9... 4,800 Mold Storage. Building 10.... 26,960 Fabrication, sportswear sales. Building 11.... 12,000 Yacht manufacturing. ---------- Total ............. 229,280 ====== The results of the heavy expenditures in property, plant and equipment also include additions of a travellift bay, 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. The present site can accommodate an addition of up to 300,000 square feet of manufacturing space. Item 3. Legal Proceedings. The Company's subsidiary 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 remediation of contamination at the Spectron/Galaxy Waste Disposal Site in Elkton, Maryland, and the Seaboard Disposal Site, 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 of the Company, which has been informed the EPA and NCDEHNR ultimately may identify a total of 1,000 to 2,000, or more, PRP's with respect to each site. The amounts of hazardous substances generated by the Company and disposed of at these sites are believed to be minimal in relation to the total amount of hazardous substances disposed of by all PRP's at such sites. At present, the environmental conditions at the sites and the cost of remediation, to the best of the Company's knowledge, have not been determined fully 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 ultimately have in connection with remediation at either site. Without any acknowledgement or admission of liability, the Company has made payments as a non-performing cash-out participant in an EPA-supervised response and removal program at the Spectron/Galaxy Site, and in 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, the Company'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 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 Seaboard Disposal Site in North Carolina following completion of a Remedial Investigation and Feasibility Study in late 1998, according to the PRP Group administrator. Any cash-out agreement will be subject to approval by EPA and NCDEHNR, respectively. As of June 30, 1998, the Company's chief operating subsidiary was a defendant in six product liability suits. In the Company's opinion, these lawsuits are without merit and, therefore, the Company is vigorously defending its interests in such suits. The Company carries sufficient product liability insurance to cover attorney's fees and any losses that may occur from such suits, over and above applicable insurance deductibles. On June 9, 1998, and Order was entered in U. S. District Court for the Eastern District of North Carolina, regarding a settlement among the parties in a trademark infringement suit involving the Company's chief operating subsidiary, Fountain Powerboats, Inc., Mark Spencer, Spencer Communications, and Michael Jordan, a professional basketball player. A description of the litigation is contained in the Company's Annual Report on Form 10-K for June 30, 1997, filed with the Commission on October 14, 1997, which description is incorporated by reference herein. On June 16, 1998, a court-mediated settlement was reached among the Company and Gary D. Garbrecht, Marcia K. Garbrecht, and Mach Performance, Inc., of a lawsuit filed by the Company and its subsidiary in U. S. District Court for the Eastern District of North Carolina; the settlement also concludes another suit filed by the Company in Beaufort County Superior Court, Washington, North Carolina, against an affiliate of the Garbrechts, P.R.O.P. Tour, Inc. A description is incorporated by reference herein. The Company is involved in litigation in Texas and North Carolina with one of its dealers in Austin, Texas, concerning termination of the dealer agreement. The Company's position is that the dealer agreement is non- exclusive, allowing the Company to have other dealers in the Austin, Texas area. The Company is seeking a declaratory judgment that the dealer terminated the agreement or, alternatively, that the dealer is bound by the agreement and should fulfill its inventory-stocking obligation. The Company intends to vigorously defend its interests in this matter. Item 4. Submission of Matters to a Vote of Security Holders. The only matter submitted to the Shareholders for a vote during the last quarter of Fiscal 1998 was the notice of annual meeting with revocable proxy for election of Director Nominees and ratification of the Board's selection of Pritchett, Siler & Hardy, P.C., Certified Public Accountants, as the Company's independent public accountants. 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, 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 September 30, 1997 ... 14.88 9.00 December 31, 1997 ... 15.38 8.88 March 31, 1998 ... 12.75 8.50 June 30, 1998 ... 13.00 8.93 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 9, 1998 was approximately 1500. Item 6. Selected Financial Data Fountain Powerboat Industries, Inc. and Subsidiary Selected Financial Data Fiscal Years 1994 through 1998
Year Ended June 30, Operations Statement Data: ------------------------------------------------------------------- (Period Ended) 1998 1997 1996 1995 1994 - ----------------------- -------------- ----------- -------- ------- ---------- Sales ........................ $50,652,037 $50,514,325 $41,598,051 $38,727,329 $22,240,212 Net Income (loss) ........... $ 2,740,487 $ 1,239,951 $ 3,680,034 $ 2,047,876 $(2,993,344) Income (loss) per share .. $ .58 $ .27 $ .81 $ .45 $ (.67) Weight average shares outstanding .......... 4,751,779 4,664,251 4,528,608 4,528,608 4,452,856 Fully diluted earnings (loss) per share .............. $ .54 $ .24 $ .77 $ .45 N/A Fully diluted weighted average shares outstanding ... 5,110,090 5,093,289 4,573,153 4,539,694 N/A Balance Sheet Data (At Period End) - ----------------------------------- Current assets ............... $12,718,535 $10,997,133 $ 8,378,341 $ 6,185,727 $ 5,365,619 Total Assets ................. $32,497,393 $23,713,896 $18,498,104 $16,334,757 $16,266,787 Current Liabilities .......... $10,289,985 $ 6,305,212 $ 6,180,476 $ 6,081,298 $14,976,570 Long-term debt ............... $ 9,499,895 $ 8,047,039 $ 5,433,184 $ 7,049,049 $ 133,683 Stockholders' equity (1) .... $11,780,706 $ 9,361,645 $ 6,884,444 $ 3,204,410 $ 1,156,534 - -----------------(1) The Company has not paid any cash dividends since its inception.
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 was 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, 1998, 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, 1998, 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 1998 and 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 may be required to repurchase the boat. The Company had a contingent liability of approximately $8,600,000 at June 30, 1998, $8,600,000 at June 30, 1997 and $7,200,000 at June 30, 1996 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, 1998, 1997 and 1996, the Company had recorded reserves of $200,000, $200,000 and $207,359, which represent losses which may be reasonably expected to be incurred on boat repurchases in future years. Business Environment. The Company's Sales have continued to increase each year. Sales for 1998 were $50,652,037. The sales volume for Fiscal 1998 was in line with the stable environment in the overall recreational boating industry. Plant utilization stands at about 80% until full production of the new 65' yacht is achieved. Sales for Fiscal 1997 were $50,514,325, a 21% increase from sales for Fiscal 1996. Sales for Fiscal 1996 were $41,598,051. In Fiscal 1998, 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 maintaining our performance market share. Typically, each dealer's floor plan credit facilities are secured by the dealer's inventory, and, perhaps, 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 1998, 1997 and Fiscal 1996 in connection with floor plan arrangements. Five boats were repurchased during Fiscal 1995 in connection with floor plan arrangements. At June 30, 1998 and 1997, the Company had recorded a $200,000 reserve for losses which may be reasonably expected to be incurred on boat repurchases in future years. Results of Operations. Net income for Fiscal 1998 was $2,740,487 or $.58 per share outstanding. This compares to net income for Fiscal 1997 of $1,239,951, or $.27 per share. The change in net income was primarily due to a discontinued operations loss and write-down of assets of a Subsidiary, Fountain Power, Inc. for $2,829,881 in Fiscal 1997. (See Note #14). Operating income decreased slightly from $4,520,333 in Fiscal 1997 to $4,084,388 in Fiscal 1998. Income from continuing operations (before the loss and write-down due to Fountain Power, Inc.) decreased (primarily due the Company's current tax liability) in Fiscal 1998 to $2,439,556 from $4,069,832 in Fiscal 1997. 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. The Company's gross profit margin as a percentage of sales changed slightly to 24.8% in Fiscal 1998 from 26.8% in Fiscal 1997 and 22.3% in Fiscal 1996. The change in the gross margin percentage was due to the overall sales mix of boats and production efficiencies. Depreciation expense was $1,953,207 for Fiscal 1998, $1,642,975 for Fiscal 1997, and $1,536,479 for Fiscal 1996. Depreciation expense by asset category was as follows: Fiscal Fiscal Fiscal 1998 1997 1996 Land improvements ........ $ 29,504 $ 22,468 $ 20,595 Buildings ................ $ 239,187 $ 231,546 $ 260,580 Molds & plugs ........ $1,112,705 $ 1,041,217 $ 980,104 Machinery & Equipment ... $ 353,102 $ 295,829 $ 225,654 Furniture & fixtures ....$ 15,238 $ 24,572 $ 11,114 Transportation equipment ..$ 129,722 $ 27,343 $ 38,432 Racing Equipment..... $ 73,749 ---------- ----------- --------- Total $1,953,207 $ 1,642,975 $1,536,479 ======== ======== ======== Following is a schedule of the net fixed asset additions during Fiscal 1998 and Fiscal 1997. Fiscal 1998 Fiscal 1997 Buildings ............. $ 240,003 $ 360,231 Land and Improvements.... $ 35,537 $ 315,605 Molds and plugs ...... $2,050,745 $1,684,274 Construction in Progress.. $3,139,725 $ 809,506 Machinery & equipment .....$ 512,933 $ 649,895 Furniture & fixtures .....$ 24,495 $ 18,767 Transportation equipment ...$1,458,079 $ 41,718 Racing equipment...... $1,335,163 $ -0- ----------- ----------- Total $ 8,796,680 $ 3,879,996 ========= ========= Selling expenses were $5,687,097 for Fiscal 1998, $6,463,875 for Fiscal 1997, and $4,285,923 for Fiscal 1996. The Company continued to promote its products primarily by magazine advertising in Fiscal 1998. Advertising expense was $1,166,633 for Fiscal 1998, $1,267,822 for Fiscal 1997, and $849,627 for Fiscal 1996. These advertising expenditures continue to promote the Company's visibility in the recreational marine industry and 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 $953,928 in Fiscal 1998, $1,256,631 in Fiscal 1997 and $867,743 in Fiscal 1996. As previously noted, the Company curtailed its offshore racing program in Fiscal 1992 and sold its last remaining race boat, but continued a limited racing program and its tournament fishing program through Fiscal 1997. The Company commenced construction of two race boats during late Fiscal 1997 and began a racing program during Fiscal 1998. Selling expenses compared for the past three fiscal years were as follows: Fiscal 1998 Fiscal 1997 Fiscal 1996 Offshore racing and tournament fishing ..$ 953,928 $ 1,256,631 $ 867,743 Advertising ...........$ 1,166,633 $ 1,267,822 $ 849,627 Salaries & commissions ..$ 939,541 $ 1,029,810 $ 578,170 Boat Shows ............$ 446,706 $ 452,859 $ 285,321 Dealer incentives ......$ 1,031,611 $ 1,286,649 $ 285,321 Other selling expenses ..$ 1,148,678 $ 1,170,104 $ 750,828 ----------- ----------- ---------- Total $ 5,687,097 $ 6,463,875 $4,285,923 ========= ========= ========= General and administrative expenses include the finance, accounting, legal, personnel, data processing, and administrative operating expenses of the Company. These expenses were $2,725,146 for Fiscal 1998, $2,553,870 for Fiscal 1997, and $1,904,988 for Fiscal 1996. Most of the increase for Fiscal 1998 over Fiscal 1997 was in attorneys' fees. (See Item 3-Legal Proceedings) Interest expense was $833,932 for Fiscal 1998, $557,768 for Fiscal 1997, and $747,337 for Fiscal 1996. The increase in interest expense for Fiscal 1998 was primarily due to an overall increase in loan debt from the Fiscal 1997 consolidation loan from General Electric Capital Corporation. For Fiscal 1998, the Company recorded $500,000 in racing participation fees, which reduced our overall program cost for the year. 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. 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. Under the terms of the consulting contract, the consulting fees ended entirely after Fiscal 1997. Liquidity and Financial Resources. Operations in Fiscal 1998 provided $3,869,619 in cash. Net income plus depreciation expense provided cash amounting to $4,693,694. However, relatively large amounts were needed to finance investment activities in purchasing property, plant, equipment, inventory and molds. In addition, the new yacht construction with associated development costs added to the heavy use of cash. The ending cash balance was $1,376,984. Operations for the prior fiscal year 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. The ending cash balance was $2,994,503. Operations for the 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. Investing activities for Fiscal 1998 required $8,218,341, including expenditures for additional molds and plugs amounting to $2,050,745 and for property, plant and equipment for $6,745,936. Also, increases in other assets required $124,396. 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. Financing activities for Fiscal 1998 provided $2,731,203. Included in this amount are proceeds from issuance of notes payable and long term-debt to G. E. Capital Corporation for $3,362,137 and the retirement of previous long- term debt of $738,434. 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. The net decrease in cash for Fiscal 1998 was $1,633,884, primarily due to the investment in facilities, equipment and molds. During Fiscal 1998, the Company borrowed the remaining $1,500,000 against the initial General Electric Capital Corporation loan, bringing the balance to $10,000,000, less the scheduled monthly principal reductions. During the first quarter of Fiscal 1999, the Company concluded negotiations for a new $4,000,000 promissory note with Transamerica Business Credit Corporation, which included restatement and amendment of certain existing promissory notes with General Electric Capital Corporation. For Fiscal 1999, the Company anticipates that the $1,376,984 beginning cash balance along with the proceeds of the additional financing and net income from Fiscal 1999 operations will be sufficient to meet most of the Company's liquidity needs of the year. The Company intends to concentrate on developing the new yacht assembly line in Fiscal 1999. Effective December 31, 1996, the Company concluded a new $10,000,000 term loan agreement with General Electric Capital Corporation repaying previous indebtedness to MetLife Capital Corporation, Deutsche Financial Services and others. At June 30, 1997, the total outstanding amount was $8,500,000 less scheduled monthly principal reductions. 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 powerboat 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. The Year 2000. A current concern, known as the "Year 2000" or "Y2K" Bug is expected to effect a large number of computer systems and software during or after the year 1999. The concern is that any computer function that requires a date calculation may produce errors. The Year 2000 issue affects virtually all companies and organizations, including the Company. The Company plans on taking all steps necessary to prevent these errors from occurring. With respect to third party providers whose services are critical to the Company, the Company intends to monitor the efforts of such vendors, as they become Year 2000 compliant. Management is not presently aware of any Year 2000 issues that have been encountered by any such third party, which could materially affect the Company's operations. At present, the Company anticipates the costs of upgrading some of its software and hardware in order to avoid any problems resulting from the Millennium bug will cost approximately $300,000. There is no assurance that the Company will not experience operational difficulties as a result of Year 2000 issues. Cautionary Statement for Purposes of "Safe Harbor" Under the Private Securities Reform Act of 1995. The Company may from time to time make forward-looking statements, including statements projecting, forecasting, or estimating the Company's performance and industry trends. The achievement of the projections, forecasts, or estimates contained in these statements is subject to certain risks and uncertainties, and actual results and events may differ materially from those projected, forecast, or estimated. The applicable risks and uncertainties include general economic and industry conditions that affect all businesses, as well as matters that are specific to the Company and the markets it serves. For example, the achievement of projections, forecasts, or estimates contained in the Company's forward-looking statements may be impacted by national and international economic conditions; compliance with governmental laws and regulations; accidents and acts of God; and all of the general risks associated with doing business. Risks that are specific to the Company and its markets include but are not limited to compliance with increasingly stringent environmental laws and regulations; the cyclical nature of the industry; competition in pricing and new product development from larger companies with substantial resources; the concentration of a substantial percentage of the Company's sales with a few major customers, the loss of, or change in demand from 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. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 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 of Registrant. The Current directors of Registrant and its Subsidiary are as Follows: REGINALD M. FOUNTAIN, JR., age 58, 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. DARRYL M. DIAMOND, M. D., age 61, is a retired physician. From 1984 to 1986, Dr. Diamond served as a director of the Company's subsidiary. GEORGE L. DEICHMANN, III, age 54, is the President and owner of Trent Olds/Cadillac/Buick/GMC, an automobile dealership located in New Bern, North Carolina. CRAIG F. GOESS, age 44, is the President and General Manager of Greenville Toyota, an automobile dealership located in Greenville, North Carolina. GARY E. MAZZA, III, age 60, 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. FEDERICO PIGNATELLI, age 45, 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, an 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 53, 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. BLANCHE C. WILLIAMS, age 64, 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. 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 1998, 1997, and 1996. Name and Principal Fiscal Annual Compensation Long-term Stock --------------------- --------------------- Position Year Salary(1) Bonus(2) Compensation Options - --------------------- ----- -------- -------- --------- ------ Reginald M. Fountain Jr. 1998 $350,000 $218,017 $ -0- -0- Chairman, President,Chief 1997 $350,000 $ 78,519 $ -0- -0- Executive Officer,and 1996 $232,154 $199,984 $ -0- -0- 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 forward. 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 1996,1997 and 1998 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 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, 1998 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, 1998, Exercisable......................................$ 3,121,599 (1) (1) The closing sale price of the Common stock on Tuesday, June 30, 1998 was $11.125. 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 adopted 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 disclosed in the "Notes To Consolidated Financial Statements" contained within this report. 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 and Mr. Spencer retain their issued stock options of 30,000 shares each. Mr. Garbrecht resigned as a director in April 1997. 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 $218,017 for Fiscal 1998, $78,519 for Fiscal 1997 and $199,984 for Fiscal 1996 were earned by 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 1998 or Fiscal 1997. 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. 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 should 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. 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. On June 16, 1998, an order was entered in U. S. District Court for the Eastern District of North Carolina, whereas the above options were cancelled as part of an overall settlement agreement. 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 post-retirement 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, 1993 to be equal to $100.00 Accumulated returns are noted through June 30, 1998. 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 Return To Shareholder's - Dividends Reinvested ANNUAL PERCENTAGE RETURN YEARS ENDING Company / Index Jun94 Jun95 Jun96 Jun97 Jun98 FOUNTAIN POWERBOAT INDS -55.82 142.14 100.03 28.25 13.14 INC S&P 500 INDEX 1.41 26.07 26.00 34.70 30.16 LEISURE TIME (PRODUCTS)- 0.87 21.45 30.63 25.61 20.51 500 INDEXED RETURNS Base Years Ending Period Company / Index Jun93 Jun94 Jun95 Jun96 Jun97 Jun98 FOUNTAIN POWERBOAT INDS 100 44.18 106.98 213.98 274.43 310.49 INC S&P 500 INDEX 100 101.41 127.84 161.08 216.98 282.42 LEISURE TIME (PRODUCTS)- 100 100.87 122.51 160.03 201.02 242.26 500 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. 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 earned by Mr. Fountain for Fiscal 1998 were $218,017, for Fiscal 1997 amounted to $78,519 and for Fiscal 1996 amounted to $199,984. 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) 54.81% Triglova Finanz, A.G. P.O. Box 1824 52nd Street Urbanization Obarrio Torre Banco Sur, 10th Floor Panama City, Republic of Panama 266,500(2) 5.69% (1) Mr. Fountain has sole voting and investment power with respect to all shares shown as beneficially owned. Includes options to acquire 480,000 shares of common stock. (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, 1998, for each of the Company's current directors, and for all directors and officers of the Company as a group. Name and Address Amount of Percent Beneficial of Ownership Class (3) Reginald M. Fountain, Jr.(1) 2,569,372(2) 54.81% Mark L. Spencer (1) 33,400(2) (3) Federico Pignatelli (1) 10,000(2) (3) Gary E. Mazza III (1) 46,744 (3) Blanche C. Williams (1) 800 (3) Darryl M. Diamond, M.D.(1) -0- (3) George L. Deichmann, III(1) -0- (3) Craig F. Goess (1) -0- (3) Joseph F. Schemenauer (1) -0- (3) All directors and officers as a group (6 persons) 2,660,316 (2) 56.75% (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. (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 one-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 $2.333 per share was fair to the Company after consideration of such factors as the common stock's book value, its then current market price, and recent private placements. No interest was paid to Mr. Fountain in Fiscal 1997, or 1995. The Company also paid rentals at what it believes to be their fair market values during the last three fiscal years to Mr. Fountain or to entities owned by him as follows: Fiscal Fiscal Fiscal 1998 1997 1996 Apartment Rentals...........$ 6,717 $ 17,260 $ 15,380 R. M. Fountain, Jr. - airplane rentals ....$ 107,312 $296,498 $ 155,499 - interest ........ $ 26,509 -0- -0- --------- ------- --------- $ 140,583 $313,758 $170,879 ======= ======= ====== (See Note 12) 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. The airplane rentals ended in September 1997. 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 with a second note payable to Mr. Fountain for $415,821. 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. At the end of Fiscal 1997, the Company ceased operations of Fountain Power, Inc., the operating Company into which Mach Performance was contained and filed suit during Fiscal 1998 seeking rescission of the acquisition and merger agreement. On June 10, 1998, a Court mediated legal settlement was reached between the parties. Refer to note 14 - Acquisition and Discontinued Operations in the Consolidated Financial Statements contained herein. 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. $288,915 in Fiscal 1998, $547,436 in Fiscal 1997 and $265,985 in Fiscal 1996. 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. 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 Previously Company's Registration Statement field on December 2,1986) .........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 Previously ended June 30, 1991)................................................Filed 3.4 By-laws of the Company (Incorporated by reference to Amendment No. 1 to the Company's Registration Statement filed on Previously December 2, 1986)...................................................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 Previously for the one-for-two reverse stock split of February 4, 1994.... Filed 4.1 Form of Warrant Agreement (Incorporated by reference to Amendment No. 2 to the Company's Registration Statement filed on Previously December 10, 1986).................................................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 Previously fiscal year ended October 1, 1989)............................ Filed 10.1 1986 Incentive Stock Option Plan (Incorporated by reference to Amendment No. 1 to the Company's Registration Statement filed on Previously December 2, 1986)...........................................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 Previously on Form 10K for the fiscal year ended October 1, 1989).......... 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 Previously on Form 10K for the fiscal year ended March 22, 1994)............. Filed 10.4 Loan and Security Agreement with MetLife Capital Corporation Previously dated December 31, 1993............................................ Filed 10.5 Consulting and Marketing Agreement with the Mercury Marine Previously Division of the Brunswick Corporation dated July 11, 1994.... Filed 10.6 Loan Extension and Amendment Agreement with the Mercury Marine division of the Brunswick Corporation dated Previously July 11, 1994.................................................. Filed 10.7 Amendment to Consulting and Marketing Agreement with the Mercury marine division of the Brunswick Corporation dated Previously July 11, 1994.................................................. Filed 10.8 Standstill Agreement with the Mercury Marine division of the Previously Brunswick Corporation dated July 11, 1994....................... Filed 10.9 Amendment No. One dated September 24, 1994 to Loan and Security Agreement of December 31, 1993 with MetLife Previously Capital Corporation...............................................Filed 10.10 Consent to Loan Restructure dated January 1, 1995 from MetLifePreviously Capital Corporation........................................Filed 10.11 Amendment No. Two dated January 1, 1995 to Loan and Security Agreement dated of December 31, 1993 with MetLife Previously Capital Corporation............................................Filed 10.12 Second Loan Extension, Consolidation and Amendment Agreement dated February 24, 1995 with Brunswick Corporation, Previously Mercury Marine Division...........................................Filed 10.13 Modification of Deeds and Trust and Assignment of Rents, Issues and Profits dated February 24, 1995 with Brunswick Corporation, Previously Mercury Marine Division .................................................................... Filed 10.14 Consulting and Marketing Agreement dated February 24, 1995 Previously with Brunswick Corporation, Mercury Marine Division............. Filed 10.15 Supply agreement dated February 24, 1995 with BrunswickPreviously Filed 10.16 Master Security Agreement dated December 21, 1995 Previously with G.E. Capital Corporation...................... 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....... Previously Filed 10.21 Loan Agreement dated December 31, 1996 with General Electric Capital Corporation............ Previously Filed 10.22 Omnibus Loan Agreement dated September 2, 1998 with General Electric Capital Corporation and Transamerica Business Credit Corporation................ Filed Within (b) Form 8K was filed on June 3, 1998: On June 9, 1998, an Order was entered in the United States District Court for the Eastern District of North Carolina concerning a settlement among the parties in a lawsuit involving the Registrant's chief operating subsidiary, Fountain Powerboats, Inc., Mark Spencer, Spencer Communications, and Michael Jordan. A description of this litigation is contained in the Registrant's Annual Report on Form 10-K, filed with the Commission on October 14, 1997, which is incorporated by reference herein. On June 16, 1998, a court-mediated settlement was reached among the Registrant and Gary D. Garbrecht, Marcia K. Garbrecht, and Mach Performance, Inc. of a lawsuit filed by the Registrant in the United States District Court for the Eastern District of North Carolina; the settlement also will conclude another suit filed by the Registrant in Beaufort County Superior Court, Washington, North Carolina, against an affiliate of the Garbrechts, P.R.O.P. Tour, Inc. A description of the litigation is contained in the Registrant's Annual Report on Form 10-K filed with the Commission on October 14, 1997, which is incorporated by reference herein. On June 15, 1998, Registrant engaged CIBC Oppenheimer Corp. (Oppenheimer) to assist the Registrant in evaluating its strategic alternatives to maximize shareholder value, pursuant to an agreement between the two parties for such services. On June 25, 1998, the Registrant issued a press release concerning its engagement of Oppenheimer, a copy of which is included as an exhibit to this Report and is incorporated by reference herein. The Registrant's Board of Directors has approved a change in the Registrant's stock transfer agent and registrar to Firstar Trust Company, Milwaukee, Wisconsin (Firstar). Firstar will replace the Registrant's current stock transfer agent and registrar, Registrar and Transfer Company, New York, New York. The Registrant currently is in the process of effecting such change, which is projected to be effective on June 30, 1998. The Board of Directors of the Registrant on June 3, 1998, elected officers of the Registrant and its operating subsidiary, Fountain Powerboats, Inc., and elected four of its outside directors as the members of Registrant's Audit Committee, as follows: Officers: Reginald M. Fountain, Jr. - Chairman, President and Chief Executive Officer Donald J. Abel - Vice President, Chief Operating Officer and General Manager Gary G. Baltz, Jr. - Vice President/Sales Joseph F. Schemenauer - Vice President/Finance and Chief Financial Officer Blanche C. Williams - Secretary/Treasurer Carol J. Price - Assistant Secretary Audit Committee: Darryl M. Diamond, M.D., George L. Deichmann, III, Craig F. Goess, Federico Pignatelli 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. By: /s/ Reginald M. Fountain, Jr. September 23, 1998 Chairman, President, and Chief Executive Officer 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. September 23, 1998 Chairman, President, and Chief Executive Officer (Principal Executive Officer) /s/ Darryl M. Diamond, M. D. September 25, 1998 Director /s/ George L. Deichmann, III September 21, 1998 Director /s/ Craig F. Goess September 21, 1998 Director /s/ Gary E. Mazza, III September 21, 1998 Director /s/ Federico Pignatelli September 21, 1998 Director /s/ Mark L Spencer September 21, 1998 Director /s/ Joseph F. Schemenauer September 21, 1998 Chief Financial Officer (Principal Accounting and Financial Officer) FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 AND 1997 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, 1998 and 1997 2 - Consolidated Statements of Operations, for the years ended June 30, 1998, 1997 and 1996. 3 - 4 - Consolidated Statement of Stockholders' Equity, for the years ended June 30, 1998, 1997 and 1996. 5 - Consolidated Statements of Cash Flows, for the years ended June 30, 1998, 1997 and 1996. 6 - 7 - Notes to the Consolidated Financial Statements 8 - 26 INDEPENDENT AUDITORS' REPORT To the Board of Directors FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY Washington, North Carolina We have audited the accompanying consolidated balance sheets of Fountain Powerboat Industries, Inc. and Subsidiary as of June 30, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended June 30, 1998, 1997 and 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial position of Fountain Powerboat Industries, Inc. and Subsidiary as of June 30, 1998 and 1997, and the consolidated results of their operations and their cash flows for the years ended June 30, 1998, 1997 and 1996 in conformity with generally accepted accounting principles. /s/ Pritchett, Siler & Hardy, P.C. PRITCHETT, SILER & HARDY, P.C. Salt Lake City, Utah July 31, 1998 FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS ASSETS June 30, __________________________ 1998 1997 ____________ ____________ CURRENT ASSETS: Cash & cash equivalents $1,376,984 $2,994,503 Certificates of deposit - held to maturity - 696,155 Accounts receivable, less allowance for doubtful accounts of $30,000 for 1998 and 1997 2,715,754 1,867,747 Inventories 7,077,540 3,937,757 Prepaid expenses 489,290 1,131,703 Current tax assets 1,058,967 369,268 ____________ ____________ Total Current Assets 12,718,535 10,997,133 PROPERTY, PLANT AND EQUIPMENT, net 19,156,855 12,219,156 OTHER ASSETS 622,003 497,607 ____________ ____________ $32,497,393 $23,713,896 ____________ ____________ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable - related party $ 415,821 $ - Current maturities of long-term debt 981,365 595,607 Accounts payable 3,591,489 1,987,508 Accrued expenses 1,939,791 860,786 Dealer territory service accrual 2,046,939 1,637,572 Customer deposits 510,967 310,042 Allowance for boat repurchases 200,000 200,000 Warranty reserve 500,000 500,000 Net liabilities of discontinued operations 103,612 213,697 ____________ ____________ Total Current Liabilities 10,289,984 6,305,212 LONG-TERM DEBT, less current maturities 9,499,895 7,677,771 DEFERRED TAX LIABILITY 926,807 369,268 COMMITMENTS AND CONTINGENCIES (See Note 10) - - ____________ ____________ Total Liabilities 20,716,686 14,352,251 ____________ ____________ STOCKHOLDERS' EQUITY [Restated] Common stock, par value $.01 per share, authorized 200,000,000 shares; issued 4,702,608 and 4,725,108 shares 47,026 47,251 Additional paid-in capital 10,196,540 10,517,740 Accumulated earnings (deficit) 1,647,889 (1,092,598) ____________ ____________ 11,891,454 9,472,393 Less: Treasury Stock, at cost 15,000 shares (110,748) (110,748) ____________ ____________ 11,780,707 9,361,645 ____________ ____________ $ 32,497,393 $ 23,713,896 ____________ ____________ 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, ________________________________________ 1998 1997 1996 ____________ ____________ ____________ NET SALES $ 50,652,037 $ 50,514,325 $ 41,598,051 COST OF SALES 38,084,034 36,976,247 32,326,371 ____________ ____________ ____________ Gross Profit 12,568,003 13,538,078 9,271,680 ____________ ____________ ____________ EXPENSES: Selling expense 5,687,097 6,463,375 4,285,923 Selling expense - related party - 500 - General and administrative 2,722,665 2,240,112 1,729,399 General and administrative - related parties 73,853 313,758 175,589 ____________ ____________ ____________ Total expenses 8,483,615 9,017,745 6,190,911 ____________ ____________ ____________ OPERATING INCOME 4,084,388 4,520,333 3,080,769 NON-OPERATING INCOME (EXPENSE): Other income 252,967 437,694 1,404,500 Interest expense (807,423) (557,768) (744,627) Interest expense - related parties (26,509) - (2,710) Gain on disposal of assets 4,637 - 22,906 ____________ ____________ ____________ (576,328) (120,074) 680,069 INCOME BEFORE INCOME TAXES 3,508,060 4,400,259 3,760,838 CURRENT TAX EXPENSE 1,057,640 330,427 80,804 DEFERRED TAX EXPENSE 10,864 - - ____________ ____________ ____________ INCOME FROM CONTINUING OPERATIONS 2,439,556 4,069,832 3,680,034 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 income (loss) on disposal of the operations of Fountain Power, Inc. and Mach Performance, Inc. (Net of $282,512 income tax benefit) 300,931 (440,401) - ____________ ____________ ____________ INCOME (LOSS) FROM DISCONTINUED OPERATIONS 300,931 (2,829,881) - ____________ ____________ ____________ NET INCOME $ 2,740,487 $ 1,239,951 $ 3,680,034 ____________ ____________ ____________ [Continued] -3- FOUNTAIN POWERBOAT, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS [CONTINUED] Year Ended June 30, ________________________________________ 1998 1997 1996 ____________ ____________ ____________ BASIC EARNINGS PER SHARE: Continuing operations $ .51 $ .87 $ .81 Loss from operations of discontinued segments - (.51) - Estimated income (loss) on disposal of discontinued segments .07 (.09) - ____________ ____________ ____________ BASIC EARNINGS PER SHARE $ .58 $ .27 $ .81 ____________ ____________ ____________ WEIGHTED AVERAGE SHARES OUTSTANDING 4,751,779 4,664,251 4,528,608 ____________ ____________ ____________ DILUTED EARNINGS PER SHARE: Continuing operations $ .48 $ .80 $ .77 Loss from operations of discontinued segments - (.47) - Estimated income (loss) on disposal of discontinued segments .06 (.09) - ____________ ____________ ____________ DILUTED EARNINGS PER SHARE: $ .54 $ .24 $ .77 ____________ ____________ ____________ DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 5,110,090 5,093,289 4,573,153 ____________ ____________ ____________ 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, 1995 THROUGH JUNE 30, 1998 [RESTATED]
Common Stock Additional Treasury Stock Total ___________________ Paid-in Accumulated ________________ Stockholders' Shares Amount Capital Earnings Shares Amount Equity _________ ________ ___________ ___________ ______ ________ __________ BALANCE, June 30, 1995 4,543,608 $45,436 $ 9,282,305 $(6,012,583) 15,000 $110,748 $ 3,204,410 Net income 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 income 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 Cancellation of common stock previously issued in acquisition of Mach Performance during June 1998 at $8.17 per share (52,500) (525) (428,400) - - - (428,925) Issuance of common stock upon exercise of options at $3.58 per share by a director of the Company during July 1997. 30,000 300 107,200 - - - 107,500 Net income for the year ended June 30, 1998 - - - 2,740,487 - - 2,740,487 ____________ _______ ___________ _________ _______ _______ _________ BALANCE, June 30, 1998 4,702,608 $47,026 $10,196,540 $1,647,889 15,000 $110,748 $11,780,707 ____________ _______ ___________ _________ _______ _______ ___________
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, ______________________________________ 1998 1997 1996 __________ __________ __________ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $2,740,487 $1,239,951 $3,680,034 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense 1,953,207 1,642,974 1,536,479 Gain on disposal of property, plant, and equipment (4,637) - (22,906) Net effect of Acquired Subsidiary (525,095) 1,041,250 - Change in assets and liabilities: Accounts receivable (848,007) 985,937 (954,830) Inventories (3,139,783) 71,438 (601,469) Prepaid expenses 642,413 (976,860) 50,104 Net tax asset (132,160) - - Accounts payable 1,603,982 273,748 (86,832) Accounts payable-related parties - - (4,769) Accrued expenses 1,079,005 (53,946) (237,757) Dealer territory service accrual 409,367 871,898 765,674 Customer deposits 200,925 81,434 (184,201) Allowance for boat returns - (7,359) - Warranty reserve - 90,000 10,000 Deferred sale net of deferred cost of sales - - (14,148) Net liabilities of discontinued operations (110,085) 213,697 - __________ __________ __________ Net Cash Provided by Operating Activities $3,869,619 $5,474,162 $3,935,379 __________ __________ __________ CASH FLOWS FROM INVESTING ACTIVITIES: (Purchase) sale of certificates of deposits, net 696,155 (696,155) - Proceeds from sale of property, plant and equipment 6,581 - 31,203 Investment in additional molds and related plugs 2,050,745) (1,684,274) (878,513) Purchase of other property, plant and equipment (6,745,936) (2,249,670) (604,367) Increase in other assets (124,396) (306,030) (32,629) ____________ ____________ ____________ Net Cash (Used in) Investing Activities $(8,218,341) $(4,936,129) $(1,484,306) ____________ ____________ ____________ [Continued] -6- FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS [CONTINUED] Year Ended June 30, ________________________________________ 1998 1997 1996 ____________ ____________ ____________ CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) on engine floor plan agreement $ - $(1,173,089) $ 638,904 Proceeds from issuance of common stock 107,500 196,000 - Proceeds from issuance of notes payable and long-term debt 3,362,137 8,500,000 600,000 Repayment of long-term debt (738,434) (6,427,060) (2,820,165) ____________ ____________ ____________ Net Cash Provided by (Used in) Financing Activities $ 2,731,203 $ 1,095,851 $(1,581,261) ____________ ____________ ____________ Net increase (decrease) in cash & cash equivalents $(1,617,519) $ 1,633,884 $ 869,812 Beginning cash & cash equivalents balance 2,994,503 1,360,619 490,807 ____________ ____________ ____________ Ending cash & cash equivalents balance $ 1,376,984 $ 2,994,503 $ 1,360,619 ____________ ____________ ____________ Supplemental Disclosures of Cash Flow information: Cash paid during the period for: Interest: Unrelated parties $ 767,867 $ 557,768 $ 744,627 Related parties 26,509 - 2,710 ____________ ____________ ____________ $ 794,376 $ 557,768 $ 747,337 ____________ ____________ ____________ Income taxes $ 825,570 $ 395,796 $ 42,641 ____________ ____________ ____________ Supplemental schedule of Non-cash Investing and Financing Activities: For the year ended June 30, 1998: The Company entered into an agreement whereby 52,500 shares of stock previously issued in the acquisition of Mach Performance at $8.17 per share were returned for cancellation. The Company purchased an airplane for $1,375,000 by assuming a $959,179 loan and issuing a $415,821 note payable (See Note 4). The Company borrowed $47,079 for the purchase of a vehicle. 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 and 14). For the year ended June 30, 1996: 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 the Company's worldwide network of approximately sixty dealers. The Company's offices and manufacturing facilities are located in Washington, North Carolina and the Company has been in business since 1979. The Company employs approximately 370 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 subsidiary, Fountain Power, 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 1998 and 1997 and were 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 as of 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, 1998 and 1997, the Company had $905,115 and $3,590,658, 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 dealer's service performance rating. The Company has accrued estimated dealer territory service awards at June 30, 1998 and 1997 of $2,046,939 and $1,637,572, 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 generally sells boats only to authorized dealers and to the U.S. Government. A sale is recorded when a boat is shipped to a dealer or to the Government, legal title and all other incidents of ownership have passed from the Company to the dealer or 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 $1,166,633, $1,267,822 and $849,627 for the years ended 1998, 1997 and 1996. Earnings Per Share: In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share," which requires the Company to present basic and diluted earnings per share, instead of the primary and fully diluted earning per share. The computation of basic earning per share is based on the weighted average number of shares outstanding during the periods presented. The computation of diluted earnings per shares is based on the weighted average number of outstanding common shares during the year plus, when their effect is dilutive, additional shares assuming the exercise of certain vested and non-vested stock options and warrants, reduced by the number of shares which could be purchased from the proceeds. Prior period earnings per share and weighted average shares have been restated to reflect the adoption of SFAS No. 128. (See Note 15) Stock Based Compensation: The Company accounts for its stock based compensation in accordance with Statement of Financial Accounting Standards 123 "Accounting for Stock-Based Compensation". This statement establishes an accounting method based on the fair value of equity instruments awarded to employees as compensation. However, companies are permitted to continue applying previous accounting standards in the determination of net income with disclosure in the notes to the financial statements of the differences between previous accounting measurements and those formulated by the new accounting standard. The Company has adopted the disclosure only provisions of SFAS No. 123; accordingly, the Company has elected to determine net income using previous accounting standards. 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). Reclassifications: The financial statements for years prior to June 30, 1998 have been reclassified to conform with the headings and classifications used in the June 30, 1998 financial statements. Recently Enacted Accounting Standards: In June 1997, SFAS Nos. 130, "Reporting Comprehensive Income" and 131, "Disclosures about Segments of an Enterprise and Related Information" were issued. SFAS No. 130 requires that all items that are required to be recognized as comprehensive income be reported in a financial statement that is displayed with the same prominence as the other financial statements. SFAS No. 131 sets standards for reporting information about operating segments in the financial statements. SFAS No. 131 also sets standards for the disclosure about products, major customers, and geographical areas. SFAS No. 132 provides for disclosures about pensions and other post-retirement benefits. Although such statements are not effective until fiscal years beginning after December 15, 1997, had such statements been adopted for the periods presented, their effect on the financial statements would not have been significant. -10- FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 2. Certificates of Deposit. During the year ended June 30, 1998, the Company included in interest income $4,940 from the sale of certificate of deposits with an amortized cost of $701,095 on the date of the sale and an amortized cost of $696,155 as of June 30, 1997. The proceeds from the sale of the certificates of deposit were used to provide additional working capital to the Company. Note 3. Inventories. Inventories consist of the following: June 30, __________________________ 1998 1997 ____________ ____________ Parts and supplies $ 4,510,373 $ 2,820,414 Work-in-process 2,235,394 882,323 Finished goods 451,773 335,020 ____________ ____________ 7,197,540 4,037,757 Reserve for obsolescence (120,000) (100,000) ____________ ____________ $ 7,077,540 $ 3,937,757 ____________ ____________ Note 4. Property, Plant, and Equipment. Property, plant, and equipment consists of the following: Estimated Useful June 30, Lives __________________________ in Years 1998 1997 _______ ____________ ____________ Land and related improvements 10-30 $ 1,416,429 $ 1,301,721 Buildings and related improvements 10-30 6,720,762 6,559,930 Construction-in-progress N/A 3,955,544 815,793 Production molds and related plugs 8 13,669,394 11,658,760 Machinery and equipment 3-5 4,063,677 3,493,375 Furniture and fixtures 5 538,516 483,699 Transportation equipment 5 1,711,526 241,044 Racing boats 5 1,335,163 - ____________ ____________ $ 33,411,011 $ 24,554,322 Accumulated depreciation (14,254,156) (12,335,166) ____________ ____________ $ 19,156,855 $ 12,219,156 ____________ ____________ Depreciation expense amounted to $1,953,207, $1,642,975 and $1,536,479 for the years ended June 30, 1998, 1997 and 1996, respectively. -11- FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4. Property, Plant, and Equipment. [Continued] During fiscal 1998, the Company purchased an airplane from its executive officer for $1,375,000 by assuming the loan on the airplane from GE Capital Services, and issuing a note to the Company's CEO. The balance owing to GE Capital Services and to the Company's CEO on June 30, 1998, was $959,199 and $415,821, 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 $914,886 and 219,227 at June 30, 1998 and 1997. During Fiscal 1998 and 1996, the Company sold fixed assets and realized gains amounting to $4,637 and $22,900, respectively. During Fiscal 1997, the Company did not realize any gain or loss from the sale or disposition of any of its fixed assets. Note 5. Notes Payable - Related Party. The Company issued a $415,821 note payable to an officer and director of the Company, in connection with the purchase of an airplane. The note accrues interest at a fixed rate of 8.5%, which is payable monthly. The principle amount is due in a balloon payment on March 31, 1999. -12- FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 6. Long-term Debt and Pledged Assets. The following is a summary of long-term debt at: June 30, _____________________ 1998 1997 __________ ________ Loan payable to General Electric Capital Corporation assumed on an airplane purchased by the Company from an officer and director during September, 1997 with a carrying value of $959,179 on that date. The loan has a variable interest rate with the rate being 8.35% on June 30, 1998. Monthly payments of $15,181. Matures August 1, 2004. The Loan was subsequently amended and restated. (See Note 16) $872,881 $ - 7.15% loan payable to 1st Citizens Bank for the purchase of a vehicle, monthly payments of $1,055 through October, 2002, secured by the vehicle purchased. 47,079 - Amounts borrowed against the cash surrender value of key- man life insurance policies during June 1998, fixed interest rate of 8% on $356,476 and variable interest rate of 7.39% at June 30, 1998 on the remaining $75,202, monthly payments of $10,000. 431,678 - $10,000,000 credit agreement with General Electric Capital Corporation. (See Below). 9,129,622 8,273,378 __________ __________ 10,481,260 8,273,378 Less:Current maturities included in current liabilities:(981,365) (595,607) __________ _________ $9,499,895 $7,677,771 __________ _________ 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 had additional funds made available to it for expansion. Initially, the Company borrowed $7,500,000 to primarily 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. During 1998 and 1997 the Company borrowed the additional $1,500,000 and $1,000,000, respectively, to fund plant and equipment additions. The credit agreement has a variable interest rate with the rate ranging from 8.06% to 8.29% during 1998, with a rate of 8.29% on June 30, 1998. The agreement calls for monthly payments of $123,103 and has a ten- year amortization with a five-year call. The credit agreement 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 credit agreement was subsequently amended and restated (See Note 16). -13- FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 6. Long-term Debt and Pledged Assets. [Continued] The estimated aggregate maturities required on long-term debt at June 30, 1998 are as follows: 1999 $ 981,365 2000 1,063,643 2001 1,152,824 2002 6,892,694 2003 192,870 Thereafter 197,864 ____________ $10,481,260 ____________ 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 subsequently filed a lawsuit asking for the rescission of the acquisition agreement from Mach Performance, Inc. to recover the 127,500 restricted common shares. During July, 1998 the parties entered into a settlement agreement resulting in the recovery and cancellation of 52,500 shares of common stock. (See Note 14). Restatement: During the year ended June 30, 1998, and reflected in the accompanying financial statements, the Company effected 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 issued 30,000 options to a former officer of Fountain Power, Inc. and a former director of the Company under the Company's qualified 1986 employee incentive stock option plan. During June 1998, the options were cancelled in connection with the settlement agreement (See Note 14). -14- FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 7. Common Stock, Options, and Treasury Stock. [Continued] On June 21, 1995, the shareholders voted to adopt the 1995 stock option plan. The plan allowed up to 450,000 common stock options to be granted by the Board of Directors to employees or directors of the Company. On August 4, 1995, the Board of Directors voted to grant the 450,000 stock options to Mr. Reginald M. Fountain, Jr. at $4.67 per share, exercisable for 10 years from the date granted, on a non-qualified basis. As of June 30, 1998, none of these options have been exercised. Effective March 23, 1995, the Board of Directors authorized the issuance of 30,000 stock options to each of the Company's four outside directors at $3.58 per share on a non-qualified basis. During the year ended to June 30, 1998, a director exercised 30,000 stock options for $110,000. During Fiscal 1997, a director exercised his options for 24,000 shares for $86,000 and assigned, with the specific consent of the Company's Board of Directors, the remaining 6,000 options to another party. A summary of the status of the options granted under the Company's stock option plans and other agreements at June 30, 1998, 1997 and 1996, and changes during the periods then ended is presented in the table below: 1998 1997 1996 ____________________ _______________ ________________ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price _________ _______ _____ ______ _______ _______ Outstanding at beginning of period 606,000 4.63 630,000 $6.54 198,750 $4.01 Granted - - 30,000 8.17 450,000 4.67 Exercised (30,000) 3.58 (54,000) 3.63 - - Forfeited - - - - - - Canceled (30,000) 8.17 - - (18,750) 7.44 _______________________________________________________ Outstanding at end of Period 546,000 4.50 606,000 $4.63 630,000 $4.38 ______________________________________________________ Exercisable at end of period 546,000 4.50 576,000 $4.45 630,000 $4.38 _______________________________________________________ Weighted average fair value of options granted - - 30,000 $ .28 450,000 $ .22 _______________________________________________________ The fair value of each option granted is estimated on the date granted using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants during the years ended June 30, 1997 and 1996, respectively: risk-free interest rates of 6.6% and 6.3%, expected dividend yields of zero for all periods, expected lives of 4 and 2 years, and expected volatility of 83% and 85%. No options were granted during the year ended June 30, 1998. -15- 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 outstanding under the Company's stock option plans and other agreements at June 30, 1998 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 96,000 6.9 years 3.67 96,000 3.67 $4.67 450,000 7.1 years 4.67 450,000 4.67 The Company accounts for its option 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, ________________________________ 1998 1997 1996 __________ _________ _________ Net Income As reported $2,740,487 $1,239,951 $3,680,034 Proforma $2,740,487 $1,234,605 $3,617,601 Earnings per share As reported $.58 $ .25 $ .81 Proforma $.58 $ .25 $ .80 Treasury Stock: The Company holds 15,000 shares of its 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. -16- FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8. Income Taxes. [Continued] At June 30, 1998 and 1997, the totals of all deferred tax assets were $1,328,619 and $1,462,432. The totals of all deferred tax liabilities were $1,196,459 and $1,037,362. 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 $0 and $425,070 as of June 30, 1998 and 1997, respectively, which have been offset against the deferred tax assets. The net decrease in the valuation allowance during the years ended June 30, 1998 and 1997, were $425,070 and $599,075. The Company has no unused operating loss carryforwards at June 30, 1998. As a result of the federal alternative minimum income tax, the Company incurred current tax expense amounting to $258,371 for Fiscal 1997 and $80,804 for Fiscal 1996. The components of federal income tax expense from continuing operations consist of the following: Year Ended June 30, ___________________________________ 1998 1997 1996 ____________________________________ Current income tax expense: Federal $ 783,508 $258,371 $ 80,804 State 274,132 72,056 - ____________________________________ Net current tax expense $1,057,640 $330,427 $ 80,804 ____________________________________ Deferred tax expense (benefit) resulted from: Excess of tax over financial accounting depreciation. $303,782 $144,013 $ (18,130) Warranty reserves - (42,300) (4,200) Accrued vacations (3,850) (8,107) (3,765) Dealer incentive reserves (293,662) (37,500) 42,000 Bad debt reserves - (28,686) 1,260 Deferred sales and cost, net - - 5,942 Excess contributions carryforwards - - - Inventory adjustment-Sec.263A (131,941) (6,366) (12,304) Decrease in NOL carryforwards 204,380 1,014,168 1,646,237 Decrease in valuation allowance (316,948) (599,075) (1,573,833) Allowance for obsolete inventory (7,800) 3,000 (4,200) Alternative minimum tax credits 186,947 (256,982) (79,007) Reserve for loss on disposition - (171,756) - Investment tax credits 86,294 - - Allowance for boat repurchases - (10,409) - Accrued executive compensation (16,338) - - _______________________________________ Net deferred tax expense $ 10,864 $ - $ - _____________________________________ Deferred income tax expense results primarily from the reversal of temporary timing differences between tax and financial statement income. -17- 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, _____________________________________________ 1998 1997 1996 ______________________________________ Computed tax at the expected federal statutory rate. 34.00% 34.00% 34.00% State income taxes, net of federal benefit 5.00 5.00 5.28 Compensation from stock options (2.77) (3.85) - (Increase) decrease in NOL carryforwards 4.86 (14.48) (38.82) Officer's life insurance .36 .78 - Valuation allowance (9.03) (16.08) - Net effect of alternative minimum taxes (.34) .03 1.86 Other (1.62) 2.11 (.17) _______________________________________ Effective income tax rates 30.46% 7.51% 2.15% _______________________________________ The temporary differences gave rise to the following deferred tax asset (liability): June 30, ___________________________ 1998 1997 ________________________ Excess of tax over financial accounting depreciation $(1,196,460) $(1,037,362) Warranty reserve 214,500 214,500 Obsolete inventory reserve 46,800 39,000 Accrued vacations 51,914 48,063 Allowance for boat repurchases 96,972 97,500 Dealer incentive reserves 352,162 58,500 Bad debt reserve 23,349 40,026 Reserve for loss on disposition - 171,756 Inventory adjustments - Sec. 253A 269,652 124,992 NOL carryforwards - 204,380 Alternative minimum tax credits 259,233 377,421 Investment tax credits - 86,294 Accrued executive compensation 16,338 - Note 9. Research and Development. The Company expenses the costs of research and develop for new products and components as the costs are incurred. Research and development costs are included in the cost of sales and amounted to $575,918 for fiscal 1998, $635,652 for Fiscal 1997 and $234,425 for Fiscal 1996. -18- FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 $1,031,611 for fiscal 1998, $1,009,285 for Fiscal 1997 and $704,736 for Fiscal 1996. They are included in the accompanying consolidated statements of operations as part of selling expense. At June 30, 1998 and 1997 the estimated unpaid dealer incentive interest included in accrued expenses amounted to $160,000 and $150,000, 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, 1998 and 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 at each year end. 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, 1998 and 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. Litigation: A suit was filed against the Company on May 1, 1998 in the Circuit Court for Lake County, Illinois. The plaintiff seeks to collect fees of $6,641 for advertising services allegedly earned from employment with the Company. A motion to dismiss the suit has been filed on the Company's behalf, due to incorrect designation of the defendant in this matter. The Company intends to vigorously defend its interests in this matter. -19- 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 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. 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 late 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: A suit was filed against the Company in District Court, Travis County, Austin, Texas on February 5, 1998, alleging that the Company wrongfully attempted to terminate its dealer agreement with one of its dealers ("Dealer") in Texas, or breached the agreement by attempting to change to a different dealer in the Austin, Texas area. In an Answer filed on March 10, 1998, the Company asserted that on February 24, 1998, it had filed a related declaratory judgement action in Beaufort County Superior Court, Washington, North Carolina, and that the dealer agreement by its terms was governed by North Carolina law. The company asked the Texas Court to abate the Texas suit pending the outcome of the North Carolina declaratory judgement action. On May 6, 1998, the Texas District Court ordered the Texas case abated pending the results of the North Carolina action, but allowed discovery to proceed in the Texas case. In the North Carolina action, the Company's position is that the dealer agreement is non- exclusive, allowing the Company to have other dealers in the Austin, Texas area, and the company is seeking a declaration judgement that the Dealer terminated the agreement or, alternatively, that it is bound by the agreement and should fulfill its inventory-stocking obligation. A court-mediated settlement conference has been scheduled for August 11, 1998. The client intends to vigorously defend its interests in this matter, unless an 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 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. Shortly after the Company filed suit in North Carolina, the Player and affiliated company filed suit against the Company and its 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 without prejudice. The North Carolina suit then proceeded through the discovery stage and, as a result of a court mediated settlement conference held during June 1998, the parties reached a confidential settlement of the matter, which was approved by the Court. A formal settlement agreement has been drafted and currently is being circulated to counsel for the various parties for their comments. The final settlement is to be concluded during September, 1998. Product Liability and Other Litigation: There were various product liability lawsuits brought against the Company at June 30, 1998. 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 also 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. 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. -21- FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 10. Commitments and Contingencies. [Continued] 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 post-retirement benefits plans in effect. Note 11. Export Sales. The Company had export sales of $4,583,542 for Fiscal 1998, $2,167,840 for Fiscal 1997 and $1,052,816 for Fiscal 1996. Export sales were to customers in the following geographic areas: Year Ended June 30, ______________________________________ 1998 1997 1996 _______________________________________ Americas $2,639,523 $1,047,913 $ 658,738 Asia 1,834,524 367,126 - Middle East and Europe. 109,495 752,801 394,078 _______________________________________ $4,583,542 $2,167,840 $1,052,816 _______________________________________ 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, ____________________________ 1998 1997 1996 ____________________________ Apartments rentals $ 6,717 $ 17,260 $ 15,380 R.M. Fountain, Jr.- airplane rentals 107,312 296,498 155,499 R.M. Fountain, Jr. - interest on loans 26,509 - 2,710 R.M. Fountain, Jr. - other misc. - 500 2,000 _____________________________ $ 140,538 $314,258 $175,589 _____________________________ During the year ended June 30, 1998 the Company purchased an airplane from Mr. Fountain for $1,375,000 by assuming the loan on the airplane from GE Capital Services for $959,179, (See Note 6) and issuing a note to Mr. Fountain in the amount of $415,821 (See Note 5). As of June 30,1998 and 1997 the Company had receivables and advances from employees of the Company amounting to $77,574 and $165,936 which includes $48,624 and $147,081 from Mr. Fountain. -22- FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 12. Transactions with Related Parties. [Continued] 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 $288,915, $547,436 and $265,985 for the years ended June 30, 1998, 1997 and 1996 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 14). During the years ended 1997 and 1996 the Company paid $1,709 and $11,079 in legal fees to a firm associated with a director of the Company. There were no such payments during 1998. 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 and $610,420 for Fiscal 1996. The consulting agreement expired on June 30, 1997 and has not been re- negotiated. Note 13. Concentration of Credit Risk. Concentration of credit risk arises due to the Company operating in the marine industry, particularly in the United States. For Fiscal 1998 one dealer accounted for 6.7% of sales, another for 6.3%, and one other dealer for 5% of 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. Note 14. Acquisition and Discontinued Operations. On October 11, 1996 Fountain Power, Inc acquired Mach Performance, Inc. 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 of the Company 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 moved from Lake Hamilton, Florida to the Company's plant site near Washington, North Carolina in December, 1996. -23- FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 14. Acquisition and Discontinued Operations. [Continued] 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 for June 30, 1997 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 reclassified $539,457 in fixed assets to net liabilities of discontinued operations and accrued a $440,401 for estimated future losses expected to be incurred in the disposition. The Company filed suit on July 21, 1997, against the former officer and director, his wife, Mach, Inc., and Mach Performance, Inc. seeking a rescission of the Mach Performance, Inc acquisition and merger agreement and voidance of the resulting transaction on grounds of fraud and material breach of contract. The former director and his wife filed counterclaims alleging breach of contract regarding the failure to merge the Company and regarding options issued to the former employee and director. In a related action, a corporate affiliate of the former director was sued by the Company in a declaratory judgement action filed on September 3, 1997, regarding a racing sponsorship contract. The parties involved reached a confidential settlement of both lawsuits during June 1998, and settlement documents are currently being circulated for execution. As a result of the settlement agreement, 52,500 shares of common stock valued at $428,925 have been returned and cancelled by the Company and the 30,000 options issued in connection with the former officer's employment were cancelled. During the year ended June 30, 1998, the Company adjusted it estimates for loss on disposal resulting in a gain on the disposal of discontinued operations of $290,512 (net of a tax benefit of $272,093). The gain was a result of the return of 52,500 shares of common stock valued at $428,925, less associated legal fees of approximately $486,399 plus adjustments to the estimated loss on disposal of approximately $75,893. The following is a condensed proforma statement of operations that reflects what the presentation would have been for the years ended June 30, 1998 and 1997 without the reclassifications required by "discontinued operations" accounting principles: 1998 1997 _________________________ Net Sales $50,652,037 $ 50,954,753 Cost of goods sold (38,084,034) (39,132,978) Other operating expenses (8,894,121) (10,127,760) Other income (expense) (147,403) (123,637) Provision for taxes (785,992) (330,427) _________________________ Net income $2,740,487 $1,239,951 _________________________ Earnings per share $ .58 $ .25 _________________________ -24- 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, 1998 and 1997 consisted of the following: 1998 1997 ________________________ Accounts receivables $ - $ 4,174 Prepaid expenses - 14,371 Equipment, net - 539,457 Accounts payable - (226,332) Warranty & returns reserve(98,646) (100,000) Customer deposits (4,966) (4,966) Estimated loss on disposal - (440,401) __________ _________ $(103,612) $(213,697) __________ _________ Note 15 - Earnings Per Share. The following data shows the amounts used in computing earnings per share and the effect on income and the weighted average number of shares of potential dilutive common stock for the years ended June 30, 1998, 1997 and 1996: For the years ended June 30, _____________________________________ 1998 1997 1996 _____________ __________ __________ Income from continuing operations available to common stockholders $2,439,556 $4,069,832 $3,680,034 _____________ __________ __________ Weighted average number of common shares outstanding used in basic earnings per share 4,751,779 4,664,251 4,543,608 Effect of dilutive securities: Stock options 358,311 429,038 209,545 Weighted number of common shares and potential dilutive common shares outstanding used in dilutive earning per share 5,110,090 5,093,289 4,573,153 _____________ __________ __________ -25- FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 16. Subsequent Events. During September, 1998 the Company concluded negotiations for a new $4,000,000 promissory note with Transamerica Business Credit Corporation which included restatement and amendment of certain existing promissory notes with General Electric Capital Corporation ("GECC"). An omnibus Agreement was entered into which provides that all the underlying collateral and encumbered property would apply ratably to all of the Notes Payable. The $4,000,000 promissory note provides for thirty-nine monthly principal payments in the amount of $100,000 beginning October 1, 1998 with a final payment of the entire outstanding payment due on January 2, 2002. Accrued interest will be paid monthly in addition to the principal payment. Interest will be calculated at 2.7% per annum above the published LIBOR Rate (London Interbank Offered Rates) and is calculated monthly. The Company executed a restated and amended Note to GECC in the amount of $9,007,797, which replaces a previous note with the same outstanding balance. The note provides for thirty-nine monthly payments of $123,103 which includes principal and interest. A final payment of the outstanding balance will be due on January 2, 2002. Interest is calculated at 2.7% per annum above the published LIBOR Rate. The Company also executed a restated and amended Note to GECC in the amount of $855,050, which replaces a previous note with the same outstanding balance. The note provides for seventy monthly payments of $15,181 which includes principal and interest. A final payment of the outstanding balance will be due on August 1, 2004. Interest is calculated at 2.7% per annum above the published LIBOR Rate. All of the notes provide for prepayment penalties according to a predefined time table. -26- EX-27 2
5 1,000 YEAR JUN-30-1998 JUN-30-1998 1,377 0 2,746 30 7,078 12,719 33,411 14,254 32,497 10,290 0 0 0 47 11,733 32,497 50,652 50,652 38,084 38,084 8,484 0 834 3,508 1,068 2,439 300 0 0 2,740 .58 .54
EX-10.22 3 R#261058.5 [Execution Copy] OMNIBUS AGREEMENT dated September 2, 1998 by and among FOUNTAIN POWERBOATS, INC. FOUNTAIN POWERBOAT INDUSTRIES, INC. FOUNTAIN POWER,INC. THE LENDERS FROM TIME TO TIME PARTY HERETO and GENERAL ELECTRIC CAPITAL CORPORATION, AS AGENT TABLE OF CONTENTS (Not a part of the Agreement) ARTICLE 1. DEFINITIONS AND USAGE 2 1.01. Definitions 2 1.02. Use of Defined Terms 8 1.03. Terminology 8 1.04. Accounting Terms 8 1.05. Headings 8 1.06. References 8 ARTICLE 2. THE LOANS 9 2.01. The GECC Loan 9 2.02. The Aircraft Loan 9 2.03. The Transamerica Loan 9 2.04. Prepayments 9 ARTICLE 3. CONDITIONS 10 3.01. Transamerica Loan; Amendment of GECC Loan and Aircraft Loan 10 3.02. General Conditions 13 ARTICLE 4. REPRESENTATIONS AND WARRANTIES 14 4.01. Financial Statements 14 4.02. Capacity and Standing 14 4.03. No Violation of Other Agreements 14 4.04. Authority 14 4.05. Asset Ownership 14 4.06. Discharge of Liens and Taxes 15 4.07. Regulation U 15 4.08. ERISA 15 4.09. Litigation 15 4.10. Binding and Enforceable 15 4.11. Insolvency 15 4.12. Boat Titles, Etc 15 ARTICLE 5. COVENANTS 16 5.01. Affirmative Covenants. 16 (a) Maintain Existence 16 (b) Maintain Records 16 (c) Maintain Properties 16 (d) Conduct of Business 16 (e) Maintain Insurance 16 (f) Comply with Laws 16 (g) Governmental Notices 16 (h) Right of Inspection 16 (i) Financial Reports and Other Data 17 (j) Knowledge of Certain Events 18 (k) Other Notices 18 (l) Further Assurances 19 (m) ERISA 19 (n) Payment of Obligations 19 (o) Subsidiaries 19 (p) Assets 19 (q) Encumbrance of Assets 19 5.02. Financial Covenants. 20 (a) Current Ratio 20 (b) Tangible Net Worth 20 (c) Debt to Worth 20 (d) Cash Flow Margin 20 (e) Capital Expenditures Limitation 20 5.03. Negative Covenants. 20 (a) Liens 20 (b) Debt 20 (c) Mergers 21 (d) Leases 21 (e) Dividends 21 (f) Guaranties 21 (g) Sale of Assets 22 (h) Transfer of Ownership 22 (i) Related Party Contracts 22 (j) Boat Titles, Etc 22 ARTICLE 6. HAZARDOUS MATERIALS AND ENVIRONMENTAL COMPLIANCE 22 6.01. Investigation 22 6.02. Compliance 23 6.03. Remedial Action 23 ARTICLE 7. COLLATERAL; INTERCREDITOR PROVISIONS 23 7.01. Collateral. 23 7.02. Transfer of Secured Party's Interest 23 7.03. Sharing of Collateral. 23 7.04. Collateral Held for Benefit of Lenders. 24 7.05. Sharing of Recoveries. 24 7.06. Consents 24 7.07. Modifications to Existing Security Agreements 25 ARTICLE 8. DEFAULT 26 8.01. Events of Default 26 8.02. Remedies 28 8.03. Notice of Default 29 8.04. Realization on Collateral 29 ARTICLE 9. THE AGENT 29 9.01. Appointment, Powers and Immunities 29 9.02. Reliance by Agent 30 9.03. Defaults 30 9.04. Rights of Agent as a Lender 30 9.05. Indemnification 31 9.06. CONSEQUENTIAL DAMAGES 31 9.07. Payee of Note Treated as Owner 31 9.08. Non-Reliance on Agent and Other Lenders 32 9.09. Failure to Act 32 9.10. Resignation or Removal of Agent 32 ARTICLE 10. MISCELLANEOUS 33 10.01. Notices 33 10.02. No Waivers 33 10.03. Expenses; Documentary Taxes; Indemnification 33 10.04. Amendments and Waivers 34 10.05. Successors and Assigns 35 10.06. Obligations Several 36 10.07. Making Required Payments 37 10.08. Existing Guaranty 37 10.09. Omnibus Agreement Controls 37 10.10. No Novation 37 10.11. North Carolina Law 38 10.12. Severability 38 10.13. Interpretation 38 10.14. Consent to Jurisdiction 38 10.15. Arbitration 39 10.16. Proceedings Against Collateral 39 10.17. No Setoff 39 10.18. Reproduction of Documents 40 10.19. Inconsistency of Covenants 40 10.20. Counterparts 40 SCHEDULES AND EXHIBITS SCHEDULE 4.05 Assets of Present Subsidiary SCHEDULE 4.09 Litigation SCHEDULE 6.01 Hazardous Materials SCHEDULE 7.07 Existing Security Agreement Terms EXHIBIT A Amended GECC Note EXHIBIT B Amended Aircraft Note EXHIBIT C Transamerica Note EXHIBIT D Deed of Trust Amendment EXHIBIT E Assignment of Rents Amendment EXHIBIT F Aircraft Mortgage Amendment EXHIBIT G Assignment of Existing Collateral Assignment EXHIBIT H New Collateral Assignment EXHIBIT I Corporate Guaranty EXHIBIT J Parent Security Agreement EXHIBIT K Life Insurance Assignment EXHIBIT L Subordination Agreement EXHIBIT M Parent Collateral Assignment EXHIBIT N Power Collateral Assignment EXHIBIT O Form of Legal Opinion OMNIBUS AGREEMENT THIS OMNIBUS AGREEMENT (this "Agreement") is made as of September 2, 1998, by and among: 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 POWER, INC., a North Carolina corporation ("Power" or the "Present Subsidiary"; the Parent Corporation, the Present Subsidiary, any other present or future "Consolidated Subsidiaries" {as such term is hereinafter defined} of the Parent Corporation, and the Borrower are sometimes hereinafter referred to collectively as the "Fountain Corporations" and each as a "Fountain Corporation"); GENERAL ELECTRIC CAPITAL CORPORATION, a corporation organized and existing under the laws of New York (hereinafter referred to as "GECC"); TRANSAMERICA BUSINESS CREDIT CORPORATION, a corporation organized and existing under the laws of Delaware (hereinafter referred to as "Transamerica"; Transamerica and GECC are referred to herein collectively as the "Lenders" and individually as a "Lender"); and GENERAL ELECTRIC CAPITAL CORPORATION, a corporation organized and existing under the laws of New York, not individually but in its capacity as agent (in such capacity, the "Agent") for itself and the other Lenders. BACKGROUND: A. The Borrower, the Parent Corporation, Power, certain formerly existing subsidiaries of the Borrower and GECC have heretofore entered into a Loan Agreement, dated December 31, 1996, pursuant to which GECC loaned to the Borrower the principal sum of $10,000,000 (the "GECC Loan") as evidenced by the Borrower's promissory note in said principal amount payable to the order of GECC and dated December 31, 1996 (the "Existing GECC Note"). B. The Borrower, the Parent Corporation and Power have requested that GECC make an additional $4,000,000 loan to the Borrower. GECC has declined to do so. However, Transamerica has agreed to make a loan in such amount to the Borrower (the "Transamerica Loan"), subject to the terms and conditions of this Agreement. C. The parties desire to provide that the collateral currently securing the GECC Loan and the Aircraft Loan (as hereinafter defined) shall ratably secure the GECC Loan, the Aircraft Loan and the Transamerica Loan (collectively, the "Loans") and that GECC shall hold all such collateral not solely for its own account but, acting as Agent, for the account of the Lenders. The parties also wish to provide that the Loans shall be subject to and governed by the terms of this Agreement. Finally, the parties wish to (1) make certain amendments to the certain instruments and agreements heretofore executed in connection with the Aircraft Loan and the GECC Loan and (2), make certain amendments to the various instruments and agreements now securing the GECC Loan and the Aircraft Loan, in order to provide for the sharing of collateral by the Lenders through the Agent and to provide for certain additional collateral to secure the Loans. D. In addition to the foregoing, the Borrower and GECC wish to provide for certain changes to the Existing GECC Note and the Existing Aircraft Note (as hereinafter defined). NOW, THEREFORE, in consideration of the premises and for other valuable consideration the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties agree as follows: 1. ARTICLE DEFINITIONS AND USAGE 1.1. Definitions . In addition to the terms heretofore defined, the terms as defined in this Section 1.01 shall, for all purposes of this Agreement and any amendment hereto (except as herein otherwise expressly provided or unless the context otherwise requires), have the meanings set forth herein (terms used in the singular to have the corresponding meanings when used in the plural, and vice versa): "Affiliate" means any entity which directly or indirectly controls, is controlled by, or is under common control with, the Parent Corporation or any of its subsidiaries. For purposes of this definition, "control" shall mean the possession, directly or indirectly, of the power to (i) vote ten percent (10%) or more of the securities having ordinary voting power for the election of directors of such Person, or (ii) direct or cause the direction of management and policies of a business, whether through the ownership of voting securities, by contract or otherwise and either alone or in conjunction with others or any group. "Aircraft Loan Assumption Agreement" means that Transfer and Assumption Agreement, dated October 1, 1997, by and among RMF, the Borrower and GECC. "Aircraft Loan" means the loan in the principal amount of $1,067,810.66 made by GECC to RMF on July 11, 1996, as evidenced by the Existing Aircraft Note, the liability for which loan the Borrower assumed (and from which liability RMF was released) pursuant to the Aircraft Loan Assumption Agreement. "Aircraft Mortgage" means that Aircraft Chattel Mortgage, dated as of July 11, 1996, by and between GECC as mortgagee and RMF, as mortgagor, as the same has been amended on the date hereof by the Aircraft Mortgage Amendment and as the same may be further amended, supplemented, restated, extended, renewed, replaced or otherwise modified and in effect from time to time. Said Aircraft Chattel Mortgage, the aircraft and other property encumbered thereby and the indebtedness secured thereby were transferred by said RMF to the Borrower pursuant to the Aircraft Loan Assumption Agreement. "Aircraft Mortgage Amendment" has the meaning assigned to such term in Section 3.01.(g). "Amended Aircraft Note" means the promissory note of the Borrower provided for by Section 2.02 to evidence the Aircraft Loan, and all promissory notes delivered in substitution or exchange therefor, in each case as the same may be modified, amended, supplemented, restated, extended, consolidated, renewed or replaced and in effect from time to time. "Amended GECC Note" means the promissory note of the Borrower provided for by Section 2.01 to evidence the GECC Loan, and all promissory notes delivered in substitution or exchange therefor, in each case as the same may be modified, amended, supplemented, restated, extended, consolidated, renewed or replaced and in effect from time to time. "Assignment of Existing Collateral Assignment" has the meaning assigned to such term in Section 3.01(h). "Assignment of Rents" means the Assignment of Rents and Leases, dated December 31, 1996, between the Borrower and GECC, recorded in the Registry in Book 1063, Page 372, as amended on the date hereof pursuant to the Assignment of Rents Amendment and as the same may be further amended, supplemented, restated, extended, renewed, replaced or otherwise modified and in effect from time to time. "Assignment of Rents Amendment" has the meaning assigned to such term in Section 3.01(f). "Borrower Security Agreement" means that Master Security Agreement, dated December 31, 1996, between the Borrower and GECC, as modified by this Agreement and as the same may be further amended, supplemented, restated, extended, renewed, replaced or otherwise modified and in effect from time to time. "Business Day" means and includes any calendar day other than a Saturday, a Sunday or a day on which all commercial banks in the City of New York, New York, are required or authorized to be closed. "Collateral" means any and all assets of the respective Fountain Corporations now or at any time hereafter encumbered by the lien of any Security Document. "Consolidated Current Assets" and "Consolidated Current Liabilities" mean, at any time, all assets or liabilities, respectively, of the Parent Corporation and its 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. "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. "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. "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 expense. (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. "Corporate Guaranty" means the guaranty agreement provided for by Section 3.01(j), executed by the Parent Corporation and the Present Subsidiary to and in favor of the Agent and the Lenders, as the same may be amended, supplemented, restated, extended, renewed, replaced or otherwise modified and in effect from time to time. "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 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. "Deed of Trust" means that Deed of Trust, Assignment of Rents and Security Agreement, dated December 31, 1996, by and among the Borrower, William C. Matthews as trustee and GECC as Beneficiary, recorded in the Registry at Book 1063, Page 337, as amended on the date hereof pursuant to the Deed of Trust Amendment and as the same may be further amended, supplemented, restated, extended, renewed, replaced or otherwise modified and in effect from time to time. "Deed of Trust Amendment" has the meaning assigned to such term in Section 3.01(e). "Default" means any act, event, condition, occurrence or circumstance that constitutes an Event of Default or that, with the giving of notice or lapse of time or both, would become an Event of Default unless cured or waived in writing. "Default Rate" means, at any time, the lesser of 18% per annum or the highest rate not prohibited by applicable law. "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). "Environmental Laws" means all federal and state laws, rules and regulations which affect or may affect any real 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 North Carolina Sedimentation Pollution Control Act (N.C.G.S. Section 113A-5 et seq.), the North Carolina Hazardous Chemicals Right to Know Act (N.C.G.S. Section 95-173 et seq.), the North Carolina 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 North Carolina 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. "ERISA" has the meaning set forth in Section 4.08. "Event of Default" has the meaning set forth in Section 8.01. "Existing Aircraft Note" means the promissory note, dated July 11, 1996, executed by RMF and made payable to the order of GECC in the original principal amount of $1,067,810.66 (the liability for and indebtedness under which were assumed by the Borrower, and from which liability and indebtedness said RMF was released, pursuant to the Aircraft Loan Assumption Agreement). "Existing Collateral Assignment" means the Collateral Assignment of Security Interest in Patents, Trademarks and Related Applications, dated December 31, 1996, between the Borrower and GECC, as assigned and amended on the date hereof pursuant to Assignment of Existing Collateral Assignment and as the same may be further amended, supplemented, restated, extended, renewed, replaced or otherwise modified and in effect from time to time. "Existing Guaranty" means that Corporate Guaranty, dated December 31, 1996, by and from the Parent Corporation, the Present Subsidiary, Fountain Aviation, Inc., Fountain Sportswear, Inc., Fountain Trucking, Inc., and Fountain Unlimited, Inc. to and in favor of GECC. "Existing Security Agreements" means the Borrower Security Agreement and the Power Security Agreement. "GAAP" means generally accepted accounting principles, applied on a consistent basis. "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. "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. "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. "Life Insurance Assignment" has the meaning set forth in Section 3.01(l). "Loan Documents" means this Agreement, the Notes, the Corporate Guaranty, the Existing Guaranty, the Subordination Agreement, the Security Documents and any and all other instruments at any time evidencing, securing, guarantying or governing the terms of the Loans, or any of them, all as the same may be amended, supplemented, restated, extended, renewed, replaced or otherwise modified and in effect from time to time. "Monthly Assets Report" has the meaning set forth in Section 5.01(i)(vi). "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. "New Collateral Assignment" has the meaning assigned to such term in Section 3.01(i). "Notes" means the Amended GECC Note, the Amended Aircraft Note and the Transamerica Note. "Obligations" means all indebtedness, obligations and liabilities of the Borrower or any other Fountain Corporation to any or all of the Lenders and/or the Agent evidenced by the Notes or otherwise arising under this Agreement or any other Loan Document, whether any such indebtedness, obligations and liabilities (a) exist on the date of this Agreement or arise thereafter, (b) is direct or indirect, joint or several, absolute or contingent, matured or unmatured, liquidated or unliquidated, secured or unsecured (and including, without limitation, including interest accruing after the filing of any bankruptcy or similar petition), or (c) arise by contract, operation of law or otherwise. "Parent Security Agreement" has the meaning assigned to such term in Section 3.01(k). "Parent Collateral Assignment" has the meaning assigned to such term in Section 3.01(n). "Person" means an individual, a corporation, a partnership (including without limitation, a joint venture), a limited liability company, an unincorporated association, a trust or any other entity or organization, including, but not limited to, a government or political subdivision or an agency or instrumentality thereof. "Power Collateral Assignment" has the meaning assigned to such term in Section 3.01(o). "Power Security Agreement" means that Master Security Agreement, dated January 31, 1997, between Power and GECC, as modified by this Agreement and as the same may be further amended, supplemented, restated, extended, renewed, replaced or otherwise modified and in effect from time to time. "Registry" means the Office of the Register of Deeds of Beaufort County, North Carolina. "Related Party" has the meaning given to such term in the Internal Revenue Code of 1986, as amended. "Required Lenders" means at any time Lenders holding at least 66 2/3% of the aggregate outstanding principal amount of the Notes. "RMF" means Reginald M. Fountain, Jr., a resident of Beaufort County, North Carolina. "Security Documents" means this Agreement, the Existing Security Agreements, the Parent Security Agreement, the Aircraft Mortgage, the Deed of Trust, the Assignment of Rents, the Life Insurance Assignment, the Existing Collateral Assignment, the New Collateral Assignment, the Parent Collateral Assignment, the Power Collateral Assignment, and any and all other instruments and agreements now or at any time hereafter securing any or all of the Loans, all as the same may be amended, supplemented, restated, extended, renewed, replaced or otherwise modified and in effect from time to time. "Subordination Agreement" means the subordination agreement provided for by Section 3.01(m), executed by RMF, the Borrower, the Parent Corporation and the Present Subsidiary to and in favor of the Lenders, as the same may be amended, supplemented, restated, extended, renewed, replaced or otherwise modified and in effect from time to time. "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. "Transamerica Note" means the promissory note of the Borrower provided for by Section 2.03 and all promissory notes delivered in substitution or exchange therefor, in each case as the same may be modified, amended, supplemented, restated, extended, consolidated, renewed or replaced and in effect from time to time. 1.2. Use of Defined Terms . All terms defined in this Agreement shall have the same meanings when used in any of the other Loan Documents, unless otherwise defined therein or unless the context shall otherwise require. 1.3. 1.4. Terminology . Except as otherwise expressly provided in this Agreement: all personal pronouns used in this Agreement, whether used in the masculine, feminine or neuter gender, shall include all other genders; the singular shall include the plural and the plural shall include the singular; the words "herein," "hereof," "hereunder" and other words of similar import refer to this Agreement as a whole, including the Schedules hereto, if any, that are a part hereof, and not to any particular Section, Article, paragraph or other subdivision; "or" is not exclusive; and the words "include," "includes" and "including" are not limiting. 1.5. 1.6. Accounting Terms . 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 accountants 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 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 Required Lenders 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. 1.7. 1.8. Headings . Article, Section and other headings in this Agreement are included for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. 1.9. 1.10. References . Except as otherwise expressly provided in this Agreement: 1.11. (a) a reference to an Article, Section, paragraph or other subdivision, or to a Schedule or an Exhibit, is a reference to an Article, Section, paragraph or other subdivision of, or to a Schedule or an Exhibit to, this Agreement; (a) a reference to any agreement or other contract includes past and future permitted supplements, amendments, modifications and restatements thereto or thereof; (a) a reference to any law includes any amendment or modification to such law, any replacement or successor law or laws and any rules and regulations promulgated under such law or any replacement or successor law or laws; (a) a reference to a particular provision of any law, rule or regulation includes any successor provision or provisions; (a) a reference to the time of day is to the time of day in the city in which the Agent's office is located; (b) a reference to a Person includes its permitted successors and assigns; (a) any right may be exercised at any time and from time to time; and (a) except as otherwise expressly provided therein, all obligations under any agreement or other contract are continuing obligations throughout the term of such agreement or contract. 1. ARTICLE THE LOANS 1.1. The GECC Loan . Subject to the terms and conditions set forth herein, henceforth the GECC Loan shall be evidenced by a single separate promissory note of the Borrower, payable to the order of GECC in a principal amount equal to the current outstanding principal balance of the GECC Loan. Such note shall be dated the date hereof and shall be substantially in the form attached as Exhibit A and otherwise duly completed. Such note shall evidence the same indebtedness as heretofore evidenced by the Existing GECC Note and shall be secured, ratably with the Amended Aircraft Note and the Transamerica Note, by all of the Collateral (including, without limitation, the collateral securing the Existing GECC Note and the Existing Aircraft Note). The GECC Loan shall be repaid as set forth in such note and shall bear interest as set forth therein, payable as set forth therein. 1.1. The Aircraft Loan . Subject to the terms and conditions set forth herein, henceforth the Aircraft Loan shall be evidenced by a single separate promissory note of the Borrower, payable to the order of GECC in a principal amount equal to the current outstanding principal balance of the Aircraft Loan. Such note shall be dated the date hereof and shall be substantially in the form attached as Exhibit B and otherwise duly completed. Such note shall evidence the same indebtedness as heretofore evidenced by the Existing Aircraft Note and shall be secured, ratably with the Amended GECC Note and the Transamerica Note, by all of the Collateral (including, without limitation, the collateral securing the Existing GECC Note and the Existing Aircraft Note). The Aircraft Loan shall be repaid as set forth in such note and shall bear interest as set forth therein, payable as set forth therein. 1.2. 1.3. The Transamerica Loan . Transamerica agrees, on the terms and conditions set forth herein, to make the Transamerica Loan to the Borrower in the principal amount of $4,000,000. The Transamerica Loan shall be evidenced by a single separate promissory note of the Borrower, payable to the order of Transamerica in the principal amount of $4,000,000. Such note shall be dated the date hereof and shall be substantially in the form attached as Exhibit C and otherwise duly completed. Such note shall be secured, ratably with the Amended GECC Note and the Amended Aircraft Note, by all of the Collateral (including, without limitation, the collateral securing the Existing GECC Note and the Existing Aircraft Note). The Transamerica Loan shall be repaid as set forth in such note and shall bear interest as set forth therein, payable as set forth therein. 1.4. 1.5. Prepayments . 1.6. 1.7. (a) Partial prepayment of the Notes, or any of them is hereby expressly prohibited. No prepayment in full of any Note may be made except as hereinafter provided in this Section and further provided in the Notes. 1.8. 1.9. (b) Subject to paragraph (c) of this Section, the Borrower shall have the right, on the first Business Day of any month, to prepay the outstanding principal of all (but not less than all) of the Notes in full by paying with such prepayment to each Lender with respect to each of its Notes a lump sum prepayment charge or premium, if any, expressly required by the terms of such Note. 1.10. 1.11. (c) Notwithstanding anything to the contrary in this Section 2.04, no prepayment may be made except after not more than sixty (60), nor less than thirty (30), days' prior written notice, delivered to the Agent and each of the Lenders, specifying the prepayment date and that such prepayment is being made pursuant to Section 2.04(b) of this Agreement. Any such notice shall be irrevocable. The Borrower shall pay with such prepayment all accrued and unpaid interest on the principal of the Notes to the date of such prepayment and any and all other Obligations, including, without limitation, if and to the extent expressly required by the terms of any Note, the applicable prepayment premium due in connection with such prepayment. Notwithstanding anything to the contrary set forth in any Note or any other Loan Document, on the date for prepayment specified in such notice of prepayment, the entire principal of, premium, if any, and interest on each of the Notes, and any and all other Obligations then outstanding, shall be and become due and payable in full. 1.12. 1.13. 2. ARTICLE CONDITIONS 1.1. Transamerica Loan; Amendment of GECC Loan and Aircraft Loan . The obligation of Transamerica to make and fund the Transamerica Loan and of GECC to amend the terms of the GECC Loan and the Aircraft Loan is subject to the satisfaction of the conditions set forth in Section 3.02 and the condition that the Agent shall have received each of the following items in form and substance satisfactory to the Lenders and their counsel: (a) a duly executed counterpart of this Agreement signed by the Borrower; (a) the Amended GECC Note duly executed by the Borrower, dated the date hereof and complying with the provisions of Section 2.01; (a) the Amended Aircraft Note, duly executed by the Borrower, dated the date hereof and complying with the provisions of Section 2.02; (a) the Transamerica Note, duly executed by the Borrower, dated the date hereof and complying with the provisions of Section 2.03; (a) a First Amendment to Deed of Trust in the form attached hereto as Exhibit D, dated the date hereof and duly executed and acknowledged by the Borrower and duly recorded in the Registry (the"Deed of Trust Amendment"); (a) a First Amendment to Assignment of Rents and Leases in the form attached hereto as Exhibit E, dated the date hereof and duly executed and acknowledged by the Borrower and duly recorded in the Registry (the "Assignment of Rents Amendment"); (a) a First Amendment to Aircraft Chattel Mortgage in the form attached hereto as Exhibit F, duly executed by the Borrower and the Agent and duly filed with the Federal Aviation Administration (the "Aircraft Mortgage Amendment"); (a) an Assignment of Collateral Assignment of Security Interest in Patents, Trademarks and Related Applications in the form attached hereto as Exhibit G, duly executed by the Borrower and the Agent and duly filed in the United States Patent and Trademark Office (the "Assignment of Existing Collateral Assignment"); (a) a Collateral Assignment of Security Interest in Patents, Trademarks and Related Applications in the form attached hereto as Exhibit H, duly executed by the Borrower and duly filed in the United States Patent and Trademark Office (the "New Collateral Assignment"); (a) a guaranty agreement in the form attached hereto as Exhibit I, duly executed by the Parent and the Present Subsidiary (the "Corporate Guaranty"); (a) a security agreement in the form attached hereto as Exhibit J, duly executed by the Parent Corporation (the "Parent Security Agreement"); (a) an Assignment of Life Insurance Policy on the life of RMF in the amount of $1,000,000.00, which instrument shall be substantially in the form attached hereto as Exhibit K (the "Life Insurance Assignment"); (a) a subordination agreement substantially in the form attached hereto as Exhibit L, duly executed by RMF, the Borrower, the Parent Corporation and the Present Subsidiary (the "Subordination Agreement"); (a) a Collateral Assignment of Security Interest in Patents, Trademarks and Related Applications in the form attached hereto as Exhibit M, duly executed by the Parent Corporation and duly filed in the United States Patent and Trademark Office (the "Parent Collateral Assignment"); (a) a Collateral Assignment of Security Interest in Patents, Trademarks and Related Applications in the form attached hereto as Exhibit N, duly executed by the Present Subsidiary and duly filed in the United States Patent and Trademark Office (the "Power Collateral Assignment"); (a) the legal opinion of Ward and Smith, P.A., counsel for the Borrower, dated the date hereof, substantially in the form of Exhibit O hereto and covering such additional matters relating to the transactions contemplated hereby as the Lenders may reasonably request; (a) an endorsement to the mortgagee title insurance policy no. 96J31510-M, issued by Fidelity National Title Insurance Company of Pennsylvania to GECC in connection with the initial recordation of the Deed of Trust (the "Title Policy"), which shall: (i) increase the amount of coverage thereunder to $14,153,525.52, (ii) insure the lien of the Deed of Trust, as amended by the Deed of Trust Amendment, as a first priority lien with respect to all of the real property (including fixtures) covered thereby, including, without limitation, the additional real property made subject to the lien of the Deed of Trust by the Deed of Trust Amendment (the "New Real Property"), (iii) insure that the lien of the Deed of Trust, as so amended, is in favor of the Agent for the ratable benefit of the Lenders, to secure up to $14,153,525.52 in respect of the aggregate principal amount of, and the maximum aggregate prepayment premium on, all of the Notes, and (iv) bring the effective date of coverage of the Title Policy forward to the date the Deed of Trust Amendment is recorded and contain no exceptions to coverage except those satisfactory to the Lenders; (a) either (i) evidence satisfactory to the Lenders and their counsel that the New Real Property is not located within a 100-year flood zone or (ii) flood insurance satisfactory to the Agent; (a) UCC Financing Statements (UCC-1) duly filed in all jurisdictions necessary, or in the opinion of the Agent desirable, to perfect the security interests granted in the Security Documents, results of searches for all previously filed financing statements, currently effective and on record as of the date for which filing information is most recently available, for the Borrower and Power and any predecessors in title for the five-year period predating the date of this Agreement from all relevant jurisdictions indicating that no security interest has previously been granted in any of the Collateral described in the Security Documents unless prior approval has been given by the Required Lenders; (a) to the extent required by the Lenders, statements of termination with respect to UCC Financing Statements of record filed in favor Persons other than GECC or the Agent; (a) evidence satisfactory to the Lenders that all insurance coverage required by any Security Document is in full force and satisfies all of the requirements of such Security Document; (a) a copy of the Articles of Incorporation of the Borrower, the Parent Corporation and Power, each certified by the Secretary of State of the state of such Fountain Corporation's incorporation each dated not more than sixty (60) days prior to the date hereof; (a) a certificate as to the existence in good standing of the Borrower, the Parent Corporation and Power, each dated not more than sixty (60) days prior to the date hereof and issued by the Secretary of State of the state of each such Fountain Corporation's incorporation; (a) the following items with respect to each of the Borrower, the Parent Corporation and Power, each certified by the Secretary or an Assistant Secretary of such Fountain Corporation on the date hereof: (i) a copy of its Bylaws, (ii) a copy of the action taken by its Board of Directors authorizing its execution, delivery and performance of this Agreement and the other Loan Documents to which it is a party, and the consummation of the other transactions contemplated hereby and thereby, and (iii) true signatures of its officer or officers authorized to execute and deliver this Agreement and the other Loan Documents to which it is a party; (a) the unpaid balance, if any, of those fees due to GECC under the terms of that letter agreement between GECC and the Borrower dated April 24, 1998; and (a) such other requirements, agreements, certificates, instruments, opinions and other documents and materials as the Lenders may reasonably request. 1.1. General Conditions . The obligation of GECC to modify the terms of the GECC Loan and the Aircraft Loan and of Transamerica to make the Transamerica Loan is subject to the satisfaction of the additional following conditions: 1.2. (a) the fact that no Default shall have occurred and be continuing or, after giving effect to any such transaction, will result therefrom; (b) the fact that the representations and warranties of the Borrower, the Parent Corporation and the Present Subsidiary contained in Article 4 shall be true and correct on the date hereof; and (c) that on the date hereof, the Lenders shall have received a certificate of a principal financial officer of each Fountain Corporation, dated on each such date, to the effect that (i) the representations and warranties made by the Borrower, the Parent Corporation and the Present Subsidiary in Article 4 are true and complete on and as of each such date, (ii) no Default or Event of Default exists such date, and no act, event, condition or circumstance has occurred or exists which would result in the occurrence or existence of a Default or an Event of Default, (iii) except to the extent such performance or compliance has been expressly waived by the Lenders in writing, the Borrower, the Parent Corporation and the Present Subsidiary have performed and complied with all the terms and conditions of this Agreement required to be performed or complied with by them prior to such date as a condition to the funding of the Loan to be made on such date, and (iv) there has not occurred any material adverse change in the consolidated financial condition of the Parent Corporation and its Consolidated Subsidiaries from the consolidated financial condition of the Parent Corporation and its Consolidated Subsidiaries as shown by the financial statements most recently delivered to the Lenders, nor has there occurred, since the date of any Lender's written commitment on the basis of which the parties have entered into or become a party to this Agreement, (A) any material adverse change in the business, results of operations or prospects of the Parent Corporation and its Consolidated Subsidiaries, considered as a whole, or in the condition of the principal industry in which the Parent Corporation and its Consolidated Subsidiaries are engaged, or (B) a material change in the Borrower's management personnel. 1. ARTICLE REPRESENTATIONS AND WARRANTIES In order to induce the Lenders to enter into this Agreement and to make or ( in the case of GECC) modify the terms of its Loans, each of the Fountain Corporations represents and warrants to the Lenders (which representations and warranties shall survive the delivery of this Agreement and the other Loan Documents and the funding of the Loans) as follows: 1.1. Financial Statements . The balance sheet of the Parent Corporation and its Consolidated Subsidiaries 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 Lenders, 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. 1.2. 1.3. 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 this Agreement and each of the other Loan Documents to which it is a party. 1.4. 1.5. 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 any of the Collateral (except for the liens arising under the Security Documents), or give cause for the acceleration of any of the obligations of any Fountain Corporation. 1.6. 1.7. 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 and each of the other Loan Documents has been obtained. 1.8. 1.9. 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 Lenders, 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 Borrower and the Present Subsidiary. The Present Subsidiary owns no Receivables (as defined in the Existing Security Agreements), Inventory (as defined in the Existing Security Agreements) or Tangible Personal Property (as defined in the Existing Security Agreements) in its own name except as disclosed in Schedule 4.05 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 4.05. 1.10. 1.11. 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. 1.12. 1.13. Regulation U . None of the proceeds of any of the Loans has been or 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. 1.14. 1.15. 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. 1.16. 1.17. Litigation . Except as disclosed in Schedule 4.09 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. 1.18. 1.19. Binding and Enforceable . Each of the Loan Documents, when executed, shall constitute a valid, legal and binding obligation of each Fountain Corporation party thereto, enforceable against each such Fountain Corporation in accordance with its terms, except as may be limited by bankruptcy, insolvency, moratorium, or similar laws affecting creditors' rights generally. 1.20. 1.21. Insolvency . After giving effect to the execution and delivery of the Loan Documents and the making of the Loans 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 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. 1.22. 1.23. Boat Titles, Etc . No boat or vessel owned by any Fountain Corporation, including without limitation any boat used for racing, demonstration, advertising or promotional purposes, has been documented as a flag vessel of the United States or any other jurisdiction, nor has any application been filed to so document any such boat or vessel. No title or certificate of title has been issued, nor has application been made for the issuance of any title or certificate of title, for any such boat or vessel pursuant to the North Carolina Watercraft Titling Act, N.C.G.S. 75A-32 et seq., or any similar law of any jurisdiction. 1.24. 2. ARTICLE COVENANTS 1.1. Affirmative Covenants. Each of the Fountain Corporations covenants and agrees that from the date hereof until payment in full and performance of all of the Obligations, it will: 1.2. (a) 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(c) 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. (b) 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. (c) 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. (d) Conduct of Business . Continue to engage in an efficient, prudent, and economical manner in a business of the same general type as now conducted. (e) 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 Agent shall be named as loss payee on all policies which apply to the 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 Agent and, provided that the issuers of such policies will agree to provide the such notice, to each Lender that is not the Agent. (f) 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. (g) Governmental Notices . Promptly upon receipt thereof, provide to the Lenders a copy of any written notice of any 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. (h) Right of Inspection . Permit the officers and authorized agents of the Agent and the Lenders, 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 Agent or any such Lender deems necessary. (i) Financial Reports and Other Data . Deliver or cause to be delivered to the Agent and the Lenders: (i) As soon as practicable and in any event within ninety (90) days after the end of each fiscal year, 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 Lenders. All annual financial statements will be consolidated, will be prepared in conformity with GAAP consistently applied and will be in a form satisfactory to the Lenders. 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. (ii) 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. (iii) As soon as available for each year, copies of all state and federal tax returns filed by each of the Fountain Corporations. (iv) With reasonable promptness, such additional financial or other data as any Lender may reasonably request regarding each Fountain Corporation's operations, business affairs and financial condition. Each Lender and the Agent 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 such Lender or the Agent. (v) 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 herein or in any other Loan Document. Any default shall be identified with particularity, and the Parent Corporation shall also identify proposed action to be taken by it, the Borrower or such other Fountain Corporation with respect thereto. (vi) If requested by the Required Lenders in writing, an itemized list, to be delivered no more often than once a month, of the Borrower's "Inventory" (as defined in the Borrower Security Agreement), including without limitation work-in- process Inventory, and "Receivables" (as defined in the Borrower Security Agreement) (the "Monthly Assets Report"). The Monthly Assets Report shall describe with particularity additional equipment, molds, and other Tangible Personal Property (as defined in the Borrower 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 at all times maintain an aggregate value of Inventory (as defined in the Borrower Security Agreement) and Receivables (as defined in the Borrower 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 Required Lenders. (vii) At least once each calendar month, provide the Lenders with a schedule of its Receivables (as defined in the Borrower Security Agreement) and a schedule of its Inventory (as so defined) consisting of boats the manufacture of which has been completed for more than 30 days. (j) Knowledge of Certain Events . Upon an officer of any of the Fountain Corporations obtaining knowledge of the occurrence of any Default or Event of Default hereunder, cause to be delivered to the Lender, within ten (10) 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. (k) Other Notices . Notify the Lenders in writing within ten (10) Business Days of the occurrence of any of the following with respect to such Fountain Corporation: (i) the service upon such Fountain Corporation of any action, suit or proceeding at law or in equity making a claim in excess of $100,000; (ii) the occurrence or existence of 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; (iii) the loss of any patents, licenses, franchises, trademarks, trademark rights, trade names, trade name rights and copyrights material to its business; (iv) the occurrence or existence of any event or condition which shall cause any Loan Document or any agreements, reports, schedules, certificates or instruments in connection with or pursuant to this Agreement or any other Loan Document to become false or misleading in any material respect; and (v) 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 (whether or not any of such real property is encumbered by the Deed of Trust). (l) Further Assurances . Upon request of the Agent or the Required Lenders, duly execute and deliver or cause to be duly executed and delivered to the Lenders 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 Agent or the Required Lenders (as the case may be) to carry out more effectively the provisions and purposes of the Loan Documents. (m) 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 Lenders 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 the annual report to the United States Department of Labor with respect to such plan if such filing has been authorized. (n) Payment of Obligations . Pay when due (including any applicable grace period) all its obligations for indebtedness for money borrowed, except where the same (other than indebtedness evidenced by the Notes or in respect of any other Obligations) may be contested in good faith and appropriate reserves for the accrual of the same are maintained in amounts in accordance with GAAP. (o) 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 Obligations pursuant to a guaranty in form and substance identical to the Corporate Guaranty and to sign documentation, in form and substance satisfactory to the Required Lenders, agreeing to abide by the covenants and terms of this Agreement. (p) 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 $1,000,000. (q) Encumbrance of Assets . If requested by any Lender, each of the Fountain Corporations shall execute such documentation as the Required Lenders deem necessary so as to grant a first-priority security interest in any asset held by such Fountain Corporation to the Agent for the benefit of the Lenders. 1.1. Financial Covenants. Each of the Fountain Corporations covenants and agrees that from the date hereof until payment in full and performance of all of the Obligations, the Parent Corporation and its Consolidated Subsidiaries shall at all times maintain the following financial position and ratios: 1.2. (a) Current Ratio . A ratio of Consolidated Current Assets to Consolidated Current Liabilities of not less than 1.0 to 1.0. (b) Tangible Net Worth . A minimum Consolidated Tangible Net Worth of not less than $10,500,000.00 at all times. (c) Debt to Worth . A ratio of Consolidated Liabilities to Consolidated Tangible Net Worth of not greater than 1.8 to 1. (d) Cash Flow Margin . The ratio of (i) Net Income after taxes plus depreciation plus amortization less extraordinary items to (ii) all long- term debt payments (excluding interest) due during the previous 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. (e) 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 without the prior written consent of the Required Lenders. 1.1. 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 Required Lenders: 1.2. (a) Liens . Create, incur, assume, or suffer to exist any Lien upon or with respect to any of its properties, except: (i) Liens in favor of the Agent securing the Obligations; (ii) Liens for taxes not yet due and payable or otherwise being contested in good faith and for which appropriate reserves are maintained; (iii) Other Liens imposed by law not yet due and payable, or otherwise being contested in good faith and for which appropriate reserves are maintained; and (iv) Purchase money Liens on any property hereafter acquired (expressly excluding, however, Liens with respect to any property acquired in replacement of or 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. (b) Debt . Create, incur, assume, or suffer to exist any Debt except: (i) Debt consisting of the Obligations; (ii) Debt presently outstanding and shown on the most recent financial statements of the Borrower submitted to the Lenders; (iii) accounts payable to trade creditors incurred in the ordinary course of business; (iv) Debt secured by purchase money Liens as outlined above in Section 5.03(a)(iv), provided that the aggregate cost of all assets acquired in any year that have been financed by or with the proceeds of such Debt shall not result in a violation of the capital expenditure limitation set forth in Section 5.02(e); (v) additional Debt (including, but not limited to, Debt owed to any Related Party) not to exceed $500,000.00 in the aggregate. (c) 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 except for the merger of a Consolidated Subsidiary into the Borrower where the Borrower is the surviving corporation or a dissolution of a corporation owning no assets or whose assets would vest, as a result of such dissolution, in the Borrower. (d) Leases . Create, incur, assume, or suffer to exist any leases, except: (i) Leases presently outstanding and showing on the most recent financial statement submitted to the Lender; and (i) 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. (e) Dividends . Declare or pay any Dividends in excess of Net Income plus depreciation less current maturities of indebtedness and less extraordinary items in any fiscal year of the Parent Corporation. (f) Guaranties . Execute any Guarantee or assume, Guarantee 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 (as such term is defined in the Borrower Security Agreement); (iii) repurchase obligations arising under direct repurchase agreements pursuant to which the Borrower agrees to repurchase boats constituting Inventory (as so defined) from floor plan lenders; (iv) the Existing Guaranty; and (v) any Guarantee required by the terms of this Agreement, including without limitation the Corporate Guaranty. 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. (g) 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 Borrower 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 Required Lenders. (h) 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 Obligations. (i) Related Party Contracts . No Fountain Corporation shall enter into any contract (specifically including any lease or contract for services) with any Related Party without the Required Lenders' prior review and approval of such contract, not to be unreasonably withheld or delayed; provided that, notwithstanding the foregoing, (i) the Fountain Corporations continue to pay annual compensation to RMF under an employment contract of up to $600,000 in any year, (ii) the Fountain Corporations may enter into other contracts with RMF, so long as the aggregate amount of all payments to him under all such other contracts shall not exceed $50,000 in any year, and (ii) the Borrower may contract for advertising services with Spencer Advertising so long as the aggregate amount of all payments to Spencer Advertising under all such contracts shall not exceed in any year the sum of (x) $300,000 in respect of advertising consulting fees and (y) out-of-pocket costs actually incurred and independent third party pass-through costs. (j) Boat Titles, Etc . No Fountain Corporation shall (i) suffer or permit any boat or vessel owned by it, including without limitation any boat or vessel used for racing, demonstration, advertising or promotional purposes, to be documented as a flag vessel of the United States or any other jurisdiction, (ii) make application for such documentation, (iii) suffer or permit any title or certificate of title to be issued for any such boat or vessel pursuant to the North Carolina Watercraft Titling Act, N.C.G.S. 75A-32 et seq., or any similar law of any jurisdiction, or (iv) suffer or permit application to be made for any such title or certificate of title. 1. ARTICLE HAZARDOUS MATERIALS AND ENVIRONMENTAL COMPLIANCE 1.1. Investigation . Each Fountain Corporation hereby certifies that it has exercised due diligence to ascertain whether any real property owned, leased, occupied or operated by it (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, 1997, or as disclosed in Schedule 6.01 attached hereto, there are no such materials contaminating any Property, nor have any such materials been improperly stored or improperly disposed of on any Property. Each Fountain Corporation hereby agrees that it shall not permit any such contamination as long as any Obligations remain unpaid or unfulfilled. In addition, no Fountain Corporation has or uses any underground storage tanks on any Property which are not registered with the appropriate federal and/or state agencies and which are not properly equipped and maintained in accordance with all Environmental Laws. If requested by any Lender, each Fountain Corporation shall provide the Lenders with all necessary and reasonable assistance required for purposes of determining the existence of Hazardous Materials on any Property (including without limitation the Property encumbered by the Deed of Trust), including allowing the Lenders 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 Property. 1.2. 1.3. 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 Lenders, and all appropriate federal and state authorities, with immediate notice in writing of any Hazardous Materials released on any Property and to pursue diligently to completion all appropriate and/or required remedial action in the event of such release. 1.4. 1.5. Remedial Action . The Lenders 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 Materials on any Property and to add any expenditures so made to the principal indebtedness secured by the Deed of Trust. Each Fountain Corporation jointly and severally agrees to indemnify and hold the Agent and the Lenders harmless from any and all loss or liability arising out of any violation of the representations, covenants and obligations contained in this Article 6, or resulting from the recording of the Deed of Trust. 1.6. 1.7. 2. ARTICLE COLLATERAL; INTERCREDITOR PROVISIONS 1.1. Collateral. The Notes and all other Obligations owing from time to time to the Agent or any Lender shall be secured by the Collateral (including, without limitation, all Collateral encumbered by any Security Document executed prior to the date hereof in favor of GECC as secured party, beneficiary, mortgagee, assignee or otherwise) and, to the extent they have not heretofore done so, each Fountain Corporation which now or at anytime hereafter has any rights in or to any and all of the Collateral (whether now or hereafter owned or existing) hereby grants to the Agent, and hereby transfers, conveys and assigns to the Agent, for the ratable benefit of the Lenders, all of such Collateral as security for the payment when due and performance of the Obligations. 1.1. Transfer of Secured Party's Interest . GECC, as beneficiary first named under the Deed of Trust, as assignee first named under the Assignment of Rents and the Existing Collateral Assignment, as mortgagee first named under the Aircraft Mortgage, and as secured party first named under the Borrower Security Agreement and the Power Security Agreement, hereby transfers, conveys and assigns to the Agent all of its rights in, to and under each such Security Document, all of the Liens arising or created thereunder, and all of the property conveyed, transferred, assigned, mortgaged or otherwise encumbered thereby or thereunder, to be held by the Agent for the ratable benefit of the Lenders to secure the repayment of the principal of, premium, if any, and interest on the Loans and the Notes and any and all other Obligations. The Agent hereby accepts the aforesaid transfer, conveyance and assignment. 1.2. 1.3. Sharing of Collateral. The Agent and the Lenders agree that the net proceeds of any and all Collateral received by the Agent or any Lender (after payment of the Agent's or such Lender's costs and expenses incurred in realizing upon any Collateral, including without limitation attorneys fees incurred by the Agent or such Lender) shall be applied first to all sums then due and owing to the Agent (in its capacity as Agent, and not in its individual capacity as a Lender) hereunder or under any other Loan Document and the balance shall be shared ratably among the Lenders based on the outstanding amount of Obligations owing to the respective Lenders. 1.4. 1.5. Collateral Held for Benefit of Lenders. The Agent shall hold all Collateral and the proceeds thereof for the account of itself and the Lenders in accordance with the provisions hereof. The Borrower, the Lenders and the Agent agree that, to the extent that GECC now or hereafter holds any Collateral for its individual account in respect of the Existing GECC Note or the Existing Aircraft Note, all such Collateral shall henceforth be held by GECC in its capacity as Agent for the ratable benefit of all of the Lenders to secure the payment when due of all of the principal, premium, if any, and interest on the Notes and the payment when due and performance of any and all other Obligations. 1.6. 1.7. Sharing of Recoveries. Each Lender agrees that if it shall, by exercising any right1.8. of set-off or counterclaim, by recovery under the Existing Guaranty or the Corporate Guaranty, or otherwise, receive payment of principal, premium and/or interest or other amounts in excess of the ratable portion due to such Lender in accordance with this Agreement ("Excess Payment"), then such Lender ("Distributing Lender") shall distribute to the other Lenders ("Receiving Lender(s)") the applicable amounts necessary to give each Lender its proportionate share (for purposes of this paragraph, "Pro Rata Share") of such Excess Payment. To the extent necessary under applicable law so as not to extinguish any unpaid Obligations, to maintain perfection in the Collateral, or otherwise protect any rights of the Lenders herein, the Distributing Lender shall be subrogated to any and all rights and interests of the Receiving Lender receiving the Excess Payment but only to the extent of the applicable Pro Rata Share of the Excess Payment. Should the Receiving Lender ever receive monies or funds for which the Distributing Lender would be entitled due to the Excess Payment distributed by the Distributing Lender to the Receiving Lender ("Recoupment Payments"), such funds shall be paid to the Distributing Lender to the extent necessary so as to maintain the appropriate Pro Rata Share among the Lenders. To the extent any interest, premiums, or other amounts are received by any of the Lenders in connection with either Excess Payments or Recoupment Payments, the same shall be distributed on an equitable basis based on each Lender's Pro Rata Share as evaluated over the applicable time period. Should any Lender be required to return funds, in an amount disporportionate to that required to be returned by the other Lenders, to a bankruptcy trustee, the Borrower or otherwise due to a bankruptcy filing or other legal process, then such other Lenders shall make appropriate payment adjustments with such Lender so that each Lender has received it Pro Rata Share. To the extent any Lender has the right of set-off or counterclaim arising from indebtedness other than the Obligations and which is either unsecured or secured by collateral other than the Collateral, it may exercise the right of set-off or counterclaim against any monies it may hold which were not paid in connection with the Obligations or otherwise received in connection with the Collateral. 1.9. 1.10. Consents . At any time during which an Event of Default has occurred and is continuing, if GECC shall make a written request, delivered to Transamerica in accordance with the notice provisions of Section 10.01 (a "Request"), for Transamerica's consent to or approval of any action to be taken or not taken by the Agent hereunder or under any other Loan Document or Transamerica's consent to any other matter as to which such consent is required hereunder or under any Loan Document, and GECC shall not receive a written denial thereof from Transamerica within thirty (30) days after Transamerica's receipt of such Request, then Transamerica shall be deemed to have denied such consent or approval upon the expiration of such period. In the event Transamerica shall deny or shall be so deemed to have denied any such Request and in the event that an Event of Default has occurred and is continuing, then GECC may, but shall be under no obligation to, purchase from Transamerica the Transamerica Note and all of Transamerica's right, title and interest in, to and under this Agreement and each of the other Loan Documents for a purchase price, payable by wire transfer within thirty (30) days after GECC's receipt of such denial (or, if applicable, within thirty (30) days after the date of such deemed denial), equal to the entire outstanding principal of and all accrued and unpaid interest on the Transamerica Loan. Upon payment of such purchase price, Transamerica shall endorse the Transamerica Note to the order of GECC and deliver it, together with an instrument of assignment, reasonably satisfactory to GECC and Transamerica and executed by Transamerica, assigning to GECC all of Transamerica's right, title and interest in, to and under this Agreement and the other Loan Documents. 1.11. 1.12. Modifications to Existing Security Agreements . In order to implement the provisions of this Agreement, the Existing Security Agreements are hereby amended as follows: 1.13. 1.14. (a) Notwithstanding anything to the contrary in any Existing Security Agreement, the Collateral described in each of the respective Existing Security Agreements shall henceforth secure the payment when due and performance of the Obligations, and the Borrower and Power each hereby grant to the Agent, for the ratable benefit of the Lenders, a security interest in such Collateral to which it has rights in order to secure the payment when due and performance of the Obligations. 1.15. 1.16. (b) The last sentence of Section 1 of the Existing Security Agreements (which begins with the phrase "Notwithstanding the foregoing") is hereby deleted. 1.17. 1.18. (c) Except as otherwise provided in this Section, the terms set forth in the table appearing in Schedule 7.07 attached hereto, as used in the respective Existing Security Agreements, shall be deemed to refer to the terms defined in this Agreement as set forth opposite such terms. 1.19. 1.20. (d) Notwithstanding the provisions of paragraph (c) of this Section with respect to the term "Secured Party" as used in the Existing Security Agreements, the following specific references to the "Secured Party" as used therein shall be construed as follows: 1.21. (i) The following such references shall be construed to refer to the Lenders: (A) those contained in the final paragraph of Section 1 of the Existing Security Agreements; (B) that contained in Section 2(g) of the Existing Security Agreements; (C) that contained in the second sentence of Section 3(a) of the Existing Security Agreements; (D) all those contained in Section 3(d) of the Existing Security Agreements; (E) that contained in Section 3(f) of the Existing Security Agreements; (F) all those contained in Section 5(b) of the Existing Security Agreements; (G) that contained in the first sentence of the second paragraph of Section 6(a) of the Existing Security Agreements; (H) that contained in Section 8(c) of the Existing Security Agreements; (I) those contained in Section 10(a) of the Existing Security Agreements; and (J) those contained in Section 10(f) of the Existing Security Agreements. (ii) The following such references shall be construed to refer to the Required Lenders: (A) that contained in the last sentence of Section 4 of the Existing Security Agreements; (B) that contained in Section 7(b) of the Existing Security Agreements; (C) that contained in Section 8(a) of the Existing Security Agreements; (D) the second such reference contained in the third sentence of Section 8(e) of the Existing Security Agreements; (E) those contained in the first sentence of Section 9(c) of the Existing Security Agreements; and (F) the first such reference contained in Section 9(g) of the Existing Security Agreements. (iii) Such reference set forth in Section 6(c) of the Existing Security Agreements shall be construed to refer to the Agent and the Lenders. (iv) Such references set forth in Section 7(g), and in the first sentence of Section 8(d), of the Existing Security Agreements shall be construed to refer to the Agent or any Lender. 1. ARTICLE DEFAULT 1.1. Events of Default . The occurrence of any one or more of the following events shall constitute an "Event of Default" under this Agreement, whatever the reason for such event and whether it shall be voluntary or involuntary, within or without the control of the Borrower or any other Fountain Corporation, or be effected by operation of law or pursuant to any judgment or order of any court or any order, rule or regulation of any governmental authority or non-governmental body: (a) Either (i) the failure to make payment of any installment of principal or interest (or of principal and interest) on any Note within ten (10) days after the same becomes due and payable or (ii) the failure to pay the entire outstanding principal of, premium, if any, and interest on any Note when the same shall become due (at maturity, by acceleration, by notice of prepayment or otherwise); (b) Any representation or warranty made in the Loan Documents shall prove to be false or misleading in any material respect when made or repeated or deemed made or repeated. (c) Any report, certificate, financial statement or other document furnished prior to the execution of or pursuant to the terms of this Agreement (or pursuant to any terms of any other agreement incorporated herein by reference) shall prove to be false or misleading in any material respect. (d) 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. (e) The breach of any covenant, condition, or agreement made by any Fountain Corporation in (i) paragraph (a), (e), (h) or (j) of Section 5.01, (ii) Section 5.02, (iii) Section 5.03, or (iv) Article 6. (f) The breach of any other covenant, condition, or agreement made by any Fountain Corporation, or incorporated by reference, in or pursuant to this Agreement (other than those identified in paragraphs (a) or (e) above), which breach is not fully cured within thirty (30) days after the earlier of (i) the first day on which an officer of any Fountain Corporation has knowledge of such failure or (ii) written notice thereof has been given to the Borrower by the Agent at the request of any Lender. (g) The occurrence of an "Event of Default" under (and as defined in) any other Loan Document, or 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. (h) 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 or 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. (i) 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 paragraph for thirty (30) days undismissed or undischarged. (j) Final judgment, settlement or arbitration award 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 judgment shall remain 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. (k) The occurrence of any default under the Existing Guaranty, Corporate Guaranty, or any other guaranty of all or any of the Obligations hereafter delivered. (l) Should any lien or security interest granted to the Agent or any Lender to secure payment and/or performance of the Obligations terminate, fail for any reason to have the priority believed by the Lenders on the date granted, or become unperfected for any reason. 1.1. Remedies . If an Event of Default shall have occurred, then (a) any obligation of the Lenders, or any of them, to advance funds under any Note and all other obligations (if any) of the Agent or Lenders to the Borrower or any other Fountain Corporation hereunder or under any other Loan Document shall immediately cease and terminate unless and until the Lenders shall reinstate such obligation in writing, and (b) at any time thereafter the Agent shall, if requested by the Required Lenders, by notice to the Borrower declare the Notes (together with accrued interest and premium, if any, thereon) and all other amounts payable hereunder and under the other Loan Documents to be, and the Notes (together will all accrued interest and premium, if any, thereon) and all other amounts payable hereunder and under the other Loan Documents shall thereupon become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower and the other Fountain Corporations; provided that, if any Event of Default specified in clause (h) or (i) of Section 8.01 shall occur, then without any notice to the Borrower or any other act by the Agent or the Lenders, the Notes (together with accrued interest and premium, if any, thereon) and all other amounts payable hereunder and under the other Loan Documents shall automatically become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower and each of the other Fountain Corporations. Notwithstanding the foregoing, the Agent and the Lenders shall have all other remedies available to it or them under the other Loan Documents or otherwise available to it or them at law or in equity, and the Agent shall exercise any one or all of such remedies available to it at the request of the Required Lenders. Without limiting the foregoing, the Lenders or the Agent may, and the Agent at the request of the Required Lenders shall, 1.2. (a) take immediate possession of and foreclose upon any or all Collateral including real and personal property which may be granted to the Agent or any Lender as security for the Obligations; (b) exercise such other rights and remedies as the Agent or any 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; (c) institute any action against the Borrower to collect on sums due under the Notes, and institute any action against any one or more of the Fountain Corporations that have executed the Existing Guaranty, the Corporate Guaranty, any subsequent guaranty of all or any of the Obligations or any other Loan Document; and/or (d) 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. 1.1. Notice of Default . The Agent shall give notice to the Borrower of any Default under Section 8.01(f) promptly upon being requested to do so by any Lender and shall thereupon notify all the Lenders thereof. 1.2. 1.3. Realization on Collateral . Notwithstanding anything to the contrary contained in this Agreement or any other Loan Document, no Person other than the Agent shall exercise any right or remedy against, or liquidate, foreclose or otherwise realize upon, any of the Collateral except for the exercise by any Lender of rights of set-off (it being understood that the exercise of any such rights shall be subject to the provisions of Section 7.05). 1.4. 1.5. 2. ARTICLE THE AGENT 1.1. Appointment, Powers and Immunities . Each Lender hereby irrevocably appoints and authorizes the Agent to act as its agent hereunder and under the other Loan Documents with such powers as are specifically delegated to the Agent by the terms hereof and thereof, together with such other powers as are reasonably incidental thereto. The Agent: (a) shall have no duties or responsibilities except as expressly set forth in this Agreement and the other Loan Documents, and shall not by reason of this Agreement or any other Loan Document be a trustee for any Lender; (b) shall not be responsible to the Lenders for any recitals, statements, representations or warranties made by any Fountain Corporation contained in this Agreement or any other Loan Document, or in any certificate or other document referred to or provided for in, or received by any Lender under, this Agreement or any other Loan Document, or for the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document or any other document referred to or provided for herein or therein by any Fountain Corporation or for any failure by any Fountain Corporation to perform any of its obligations hereunder or thereunder; (c) subject to Section 9.03, shall not be required to initiate or conduct any litigation or collection proceedings under any Loan Document except to the extent requested by the Required Lenders, and then only on terms and conditions reasonably satisfactory to the Agent after consulting with the Lenders, and (d) shall not be responsible for any action taken or omitted to be taken by it hereunder or under any other Loan Document or any other document or instrument referred to or provided for herein or therein or in connection herewith or therewith, except for its own negligence or willful misconduct. The Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys- in-fact selected by it with reasonable care. The provisions of this Article 9 are solely for the benefit of the Agent and the Lenders, and neither the Borrower nor any other Fountain Corporation shall have any rights as a third party beneficiary of any of the provisions hereof. In performing its functions and duties under this Agreement and under the other Loan Documents, the Agent shall act solely as agent of the Lenders and does not assume and shall not be deemed to have assumed any obligation towards or relationship of agency or trust with or for the Borrower or any other Fountain Corporation. The duties of the Agent shall be ministerial and administrative in nature, and the Agent shall not have by reason of this Agreement or any other Loan Document a fiduciary relationship in respect of any Lender. 1.1. Reliance by Agent . The Agent shall be entitled to rely upon any certification, notice or other communication (including any thereof by telephone, telefax, telegram or cable) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants or other experts selected by the Agent. As to any matters not expressly provided for by this Agreement or any other Loan Document, the Agent, subject to the provisions of Section 9.03, shall in all cases be fully protected in acting, or in refraining from acting, hereunder and thereunder in accordance with instructions signed by the Required Lenders (given after compliance with the requirements of Section 9.03 hereof), and such instructions of the Required Lenders in any action taken or failure to act pursuant thereto shall be binding on all of the Lenders. Notwithstanding the foregoing or otherwise, the Agent shall carry out and act in good faith to satisfy the directions of the Required Lenders. 1.2. 1.3. Defaults . If the Agent or any Lender shall have actual knowledge of a Default or an Event of Default, then the Agent shall promptly notify the Lenders, or such Lender shall promptly notify the Agent and the other Lenders, of such Default or Event of Default. As used in this Section, "actual knowledge" means the actual knowledge of the President, any Senior Vice President or any Vice President of a party. Thereupon, the Lenders and the Agent shall consult in good faith as to the action to be taken as a consequence of such Default or Event of Default. Subject to the foregoing, the Required Lenders shall determine in good faith the action or actions to be taken as it shall reasonably determine to be advisable and in the best interest of the Lenders and the Agent shall take such actions with respect thereto as the Required Lenders shall direct in writing. However, if the Agent shall have actual knowledge of a Default or an Event of Default, and unless and until the Agent shall have received directions from the Required Lenders (or, in the case a Default described in Section 8.01(f), any Lender), the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Lenders. The selection by the Agent of counsel to represent it and the Lenders in connection with proceedings to collect the Obligations and enforce the Loan Documents shall be subject to the approval of each Lender, provided that such approval shall not be unreasonably withheld or delayed. 1.4. 1.5. Rights of Agent as a Lender . With respect to the Loans made by GECC or any Person succeeding it as Agent hereunder, GECC or such Person in its capacity as a Lender hereunder shall have the same rights and powers hereunder as any other Lender and may exercise the same as though it were not acting as the Agent, and the term "Lender" or "Lenders" shall, unless the context otherwise indicates, include GECC or such Person succeeding it as Agent hereunder, as the case may be, in its individual capacity. The Agent may (without having to account therefor to any Lender) lend money to and generally engage in any kind of business with the Borrower (and any of its Affiliates) as if it were not acting as the Agent; provided that such lending of money to or engaging in business with the Borrower (or any of its Affiliates) does not adversely affect any other Lender's ratable interest in and to the Collateral nor is secured by any Lien on any of the Collateral. Notwithstanding anything herein to the contrary, however, the Agent may retain for its own account the fee referenced in Section 3.01(y). 1.6. 1.7. Indemnification . Each Lender severally agrees to indemnify the Agent, to the extent the Agent shall not have been reimbursed by the Borrower, ratably in accordance with the outstanding principal amount of its Note, for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses (including, without limitation, counsel fees and disbursements) or disbursements (but not including any fees or other considerations paid to the Agent by the Borrower or its Affiliates pursuant to or described in Section 9.04) of any kind and nature whatsoever that may be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of this Agreement or any other Loan Document or any other documents contemplated hereby or thereby or referred to herein or therein or the transactions contemplated hereby or thereby (excluding, unless an Event of Default has occurred and is continuing, the normal administrative costs and expenses incident to the performance of its agency duties hereunder) or the enforcement of any of the terms hereof or thereof or any such other documents; provided that no Lender shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the Agent. If following receipt of an indemnity payment from the Lenders the Agent shall recover from any Fountain Corporation or any other party (other than a Lender) any sum in respect of which such indemnity payment was required to be made, then the Agent shall pay such sum over to each Lender to the extent of the indemnity payment made by such Lender (except if such sum is insufficient to cover all such indemnity payments, such sum shall be allocated among the Lenders ratably in accordance with their respective indemnity payments). Except to the extent that the Agent shall recover from any Fountain Corporation or any other party (other than a Lender) and distribute to the indemnifying Lenders any sum in respect of which an indemnity payment was made hereunder, any indemnity payment made by the Lenders shall be a debt of the Borrower to the respective Lenders and shall be added to and form a part of the Obligations. 1.8. 1.9. CONSEQUENTIAL DAMAGES . THE AGENT SHALL NOT BE RESPONSIBLE OR LIABLE TO ANY LENDER, THE BORROWER, ANY OTHER FOUNTAIN CORPORATION OR ANY OTHER PERSON OR ENTITY FOR ANY PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES THAT MAY BE ALLEGED AS A RESULT OF THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. 1.10. 1.11. Payee of Note Treated as Owner . The Agent may deem and treat the named payee of any Note as the owner thereof for all purposes hereof unless and until a written notice of the assignment or transfer thereof shall have been filed with the Agent and the provisions of Section 10.05(c) have been satisfied. Any requests, authority or consent of any Person who at the time of making such request or giving such authority or consent is the holder of any Note shall be conclusive and binding on any subsequent holder, transferee or assignee of that Note or of any Note or Notes issued in exchange therefor or replacement thereof. 1.12. 1.13. Non-Reliance on Agent and Other Lenders . Each Lender agrees that it has, independently and without reliance on the Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Borrower and the other Fountain Corporations and its own decision to enter into this Agreement and that it will, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement or any of the other Loan Documents. The Agent shall not be required to keep itself (or any Lender) informed as to the performance or observance by the Borrower or any other Person of this Agreement or any of the other Loan Documents or any other document referred to or provided for herein or therein or to inspect the properties or books of the Borrower or any other Person. Except for notices, reports and other documents and information expressly required to be furnished to the Lenders by the Agent hereunder or under the other Loan Documents, the Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the affairs, financial condition or business of the Borrower or any other Person (or any of their Affiliates) that may come into the possession of the Agent. 1.14. 1.15. Failure to Act . Except for action expressly required of the Agent hereunder or under the other Loan Documents, the Agent shall in all cases be fully justified in failing or refusing to act hereunder and thereunder unless it shall receive further reasonable assurances to its reasonable satisfaction by the Lenders of their indemnification obligations under Section 9.05 against any and all liability and expense that may be incurred by the Agent by reason of taking, continuing to take, or failing to take any such action. 1.16. 1.17. Resignation or Removal of Agent . Subject to the appointment and acceptance of a successor Agent as provided below, the Agent may resign at any time by giving notice thereof to the Lenders and the Borrower and the Agent may be removed at any time with or without cause by the Required Lenders. Upon any such resignation or removal, the Required Lenders shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Required Lenders and shall have accepted such appointment within 60 days after the retiring Agent's notice of resignation or the Required Lenders' removal of the retiring Agent, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent. Any successor Agent shall be either a Lender or a financial institution that has a total capitalization of not less than $500,000,000 (or, in the case of a bank, that has a combined capital and surplus of at least $500,000,000). Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Article 9 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Agent hereunder. The resigning or removed Agent shall execute and deliver to the successor Agent all such instruments as the successor Agent may reasonably require in order to publish record notice that the successor Agent has succeeded to all of the right, title and interest of the removed or resigning Agent in, to and under the Security Documents and the Collateral. 1.18. 2. ARTICLE MISCELLANEOUS 1.1. Notices . All notices, requests and other communications to any party hereunder shall be in writing (including facsimile transmission or similar writing) and shall be given to such party at its address or telecopy number set forth on the signature pages hereof or such other address or telecopy number as such party may hereafter specify for the purpose by notice to each other party. Each such notice, request or other communication shall be effective (i) if given by telecopier, when such telecopy is transmitted to the telecopy number referred to in or specified pursuant to this Section and the telecopy machine used by the sender provides a written confirmation that such telecopy has been so transmitted or receipt of such telecopy transmission is otherwise confirmed, (ii) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid, or (iii) if given by any other means, when delivered at the address referred to in or specified pursuant to this Section; provided that notices to the Agent under Article 9 shall not be effective until received. 1.1. No Waivers . No failure or delay by the Agent or any Lender in exercising any right, power or privilege hereunder or under any Note or other Loan Document shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. 1.2. (a) Expenses; Documentary Taxes; Indemnification . The Borrower shall pay (i) all out-of-pocket expenses of the Lenders and the Agent, including fees and disbursements of the Agent's and each Lender's counsel, in connection with the preparation of this Agreement and the other Loan Documents, any waiver or consent hereunder or thereunder or any amendment hereof or thereof or any Default or alleged Default hereunder or thereunder and (ii) if a Default occurs, all out-of-pocket expenses incurred by the Agent or any Lender, including fees and disbursements of counsel, in connection with such Default and collection and other enforcement proceedings resulting therefrom, including out-of-pocket expenses incurred in enforcing this Agreement and the other Loan Documents. (b) (c) The Borrower shall indemnify the Agent and each Lender against any and all documentary stamp taxes, transfer taxes or interest equalization taxes or similar excise taxes, assessments or charges which may at any time be determined to be payable by the Agent or such Lender by reason of the execution and delivery of this Agreement or any other Loan Document or the issuance by the Borrower of any of the Notes. (d) (e) The Borrower agrees to indemnify each of the Agent, the Lenders, each affiliate of the Agent or any Lender and all of their respective directors, officers, employees and agents (each an "Indemnified Party") from, and hold each Indemnified Party harmless from and against, any and all losses, costs, charges, expenses (including, without limitation, reasonable attorney's fees and expenses of preparing for litigation or preparation therefor, whether or not such Indemnified Party is a party thereto), claims, demands, suits, damages, penalties, taxes (other than taxes on the income), fines, levies and assessments that may be asserted or imposed against, or suffered or incurred by, such Indemnified Party as a direct or indirect result of: (f) (i) this Agreement, the Notes, the other Loan Documents, the Obligations, the transactions contemplated by the Loan Documents, the making of any Loans or the direct or indirect use or application, or proposed use or application, of the proceeds of any Loans, (i) any violation of any Environmental Laws, the past, present or future operations of any Fountain Corporation or its predecessors in interest, or the past, present or future environmental, health or safety condition of any property or any actual or threatened release of any Hazardous Material. (i) any representation or warranty of any Fountain Corporation in this Agreement or any other Loan Document being untrue or inaccurate in any respect, and/or (i) the failure by any Fountain Corporation to observe, perform or comply with any of its covenants, undertakings or obligations set forth in this Agreement or any other Loan Document; provided that the Borrower shall have no obligation to indemnify an Indemnified Party hereunder in respect of the foregoing to the extent the same shall arise directly from the gross negligence or willful misconduct of such Indemnified Party. The obligations of the Borrower under this Section shall survive the repayment of the Loans and other Obligations. 1.1. Amendments and Waivers . (a) Any provision of this Agreement, the Notes or any other Loan Documents may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by each such Fountain Corporation party hereto and the Required Lenders (and, if the rights or duties of the Agent are affected thereby, by the Agent); provided that no such amendment or waiver shall, unless signed by all the Lenders, (i) increase the amount any Lender has agreed to lend to the Borrower or subject any Lender to any additional obligation, (ii) change the principal of or rate of interest on any Loan or any fees hereunder, (iii) change the date fixed for any payment of principal of or interest on any Loan or any fees hereunder, (iv) change the amount of principal, interest or fees due on any date fixed for the payment thereof, (v) change the percentage of the aggregate unpaid principal amount of the Notes, or the percentage of Lenders, that shall be required for the Lenders or any of them to take any action under this Section or any other provision of this Agreement, (vi) change the manner of application of any payments made under this Agreement or the Notes, (vii) release, subordinate or substitute any of the Collateral (except in accordance with the limitations set forth in the Loan Documents, (viii) release any guaranty given to support payment of the Loans, (ix) change or waive insurance requirements, or (vii) modify or waive in any respect any provision of Article 2, Section 5.02, Section 5.03, Article 7 (excluding, however, Section 7.07), Article 8, Article 9 or this Section 10.04. To the extent any Event of Default described in paragraph (a), (d), (e), (l) of Section 8.01 or (as it relates to a payment default under the Parent Guaranty) in paragraph (k) of Section 8.01 shall occur and GECC, in its capacity as Agent, shall have failed to initiate remedial action with respect to such Event of Default within forty-five (45) days after its receipt from Transamerica of a written request that it take remedial action with respect to such Event of Default, then if such Event of Default is continuing such situation shall be deemed an "Implied Waiver" unless the commencement of remedial action in the then-present circumstance would not be consistent with the practice of a reasonably prudent lender. Upon the occurrence of an Implied Waiver, the Agent must receive the consent of Transamerica to the continuance of the Implied Waiver, which consent shall not be unreasonably withheld. To the extent the Agent fails to obtain consent to an Implied Waiver and Transamerica gives written notice of such failure to the Agent, the Agent shall within thirty (30) days after it's receipt of such notice discuss with and obtain Transamerica's consent to the Implied Waiver, which consent shall not be unreasonably withheld. If the Agent fails to obtain such consent as contemplated by the foregoing sentence, then so long as such Event of Default is continuing, GECC shall, at Transamerica's written request, purchase from Transamerica the Transamerica Note and all of Transamerica's right, title and interest in, to and under this Agreement and each of the other Loan Documents for a purchase price, payable by wire transfer within thirty (30) days after GECC's receipt of such request for purchase, equal to the entire outstanding principal of and all accrued and unpaid interest on the Transamerica Loan. Upon payment of such purchase price, Transamerica shall endorse the Transamerica Note to the order of GECC and deliver it, together with an instrument of assignment, reasonably satisfactory to GECC and Transamerica and executed by Transamerica, assigning to GECC all of Transamerica's right, title and interest in, to and under this Agreement and the other Loan Documents. The definition of Implied Waiver, as used herein, only relates to the rights as between the Lenders and in no way shall the definition or procedures set forth in this Section 10.04(a) constitute a waiver as to, or for the benefit of, Borrower or any Fountain Corporation, or give any rights or defenses to any such party. 1.2. 1.3. (b) No Fountain Corporation will solicit, request or negotiate for or with respect to any proposed waiver or amendment of any of the provisions of this Agreement or any other Loan Document unless each Lender shall be informed thereof by such Fountain Corporation and shall be afforded an opportunity of considering the same and shall be supplied by such Fountain Corporation with sufficient information to enable it to make an informed decision with respect thereto. Executed or true and correct copies of any waiver or consent effected pursuant to the provisions of this Agreement shall be delivered by the Borrower to each Lender forthwith following the date on which the same shall have been executed and delivered by the Lenders. No such Fountain Corporation will, directly or indirectly, pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, to any Lender (in its capacity as such) as consideration for or as an inducement to the entering into by such Lender of any waiver or amendment of any of the terms and provisions of this Agreement unless such remuneration is concurrently paid, on the same terms, ratably to all the Lenders; provided that no Lender other than GECC shall be entitled to receive any fee or other compensation in connection with (i) the Borrower's exercise of its options, under the Amended GECC Note and/or the Amended Aircraft Note, to convert the interest rate thereunder from a floating rate to a fixed rate or (ii) any fee paid pursuant to Section 3.01(y). 1.4. 1.5. (c) The Lenders reserve the right to charge a fee in connection with any amendment, extension, renewal or other modification of this Agreement or any other Loan Document; provided that except for fees that are to be apportioned ratably among the Lenders based on the outstanding principal balance of the Obligations owed to the respective Lenders, the fees paid to each Lender on the occasion of each such amendment, extension, renewal or modification shall be equal to those paid to all other Lenders. 1.6. 1.7. Successors and Assigns . (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided that no Fountain Corporation may assign or otherwise transfer any of its rights under this Agreement. 1.8. 1.9. (b) Any Lender may at any time sell to one or more Persons (each a "Participant") participating interests in any Loan owing to such Lender, any Note held by such Lender or any other interest of such Lender hereunder. In the event of any such sale by a Lender of a participating interest to a Participant, such Lender's obligations under this Agreement shall remain unchanged, such Lender shall remain solely responsible for the performance thereof, such Lender shall remain the holder of any such Note for all purposes under this Agreement, and Fountain Corporations and the Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. In no event shall a Lender that sells a participation be obligated to the Participant to take or refrain from taking any action hereunder except that such Lender may agree that it will not (except as provided below), without the consent of the Participant, agree to (i) the change of any date fixed for the payment of principal of or interest on the related Loan or Loans, (ii) the change of the amount of any principal, interest or fees due on any date fixed for the payment thereof with respect to the related Loan or Loans (except for those changes required by the terms of any Note, including those options set forth in the Amended Aircraft Note and the Amended GECC Note to change the interest rate to a fixed rate of interest), (iii) the change of the principal of the related Loan or Loans, (iv) any change in the rate at which either interest is payable thereon or (if the Participant is entitled to any part thereof) commitment fee is payable hereunder from the rate at which the Participant is entitled to receive interest or commitment fee (as the case may be) in respect of such participation, (v) the release or substitution of all or any substantial part of the Collateral, or (vi) the release of any guaranty given to support payment of the Loans. Each Lender selling a participating interest in any Loan, Note or other interest under this Agreement shall, within 10 Business Days of such sale, provide the Borrower and the Agent with written notification stating that such sale has occurred and identifying the Participant and the interest purchased by such Participant. 1.10. 1.11. (c) Any Lender may at any time assign to one or more banks or financial institutions (each an "Assignee") all, or a proportionate part of all, of its rights and obligations under this Agreement, the Notes and the other Loan Documents, and such Assignee shall assume all such rights and obligations, pursuant to an instrument of assignment and assumption (an "Assignment") reasonably satisfactory to the Agent and the other Lenders, executed by such Assignee, such transferring Lender and the Agent. All costs relating to any such assignment, including without limitation reasonable outside, third party costs incurred by and administrative charges of the Agent, shall be paid by the Lender making such assignment. Upon the consummation of any transfer to an Assignee pursuant to this paragraph (c), the transferor Lender, the Agent and the Borrower shall make appropriate arrangements so that, if required, a new Note is issued to each of such Assignee and such transferor Lender. 1.12. 1.13. (d) Each such Fountain Corporation authorizes each Lender to disclose to any Participant, Assignee or other transferee (each a "Transferee") and any prospective Transferee any and all financial and other information in such Lender's possession concerning the Fountain Corporations that has been delivered to such Lender pursuant to this Agreement or that has been delivered to such Lender in connection with such Lender's credit evaluation prior to entering into this Agreement. 1.14. 1.15. Obligations Several . The obligations of each Lender hereunder are several, and no Lender shall be responsible for the obligations or commitment of any other Lender hereunder. Nothing contained in this Agreement nor any action taken by the Lenders pursuant hereto shall be deemed to constitute the Lenders to be a partnership, an association, a joint venture or any other kind of entity. The amounts payable at any time hereunder to each Lender shall be a separate and independent debt, and each Lender shall be entitled to protect and enforce its rights arising out of this Agreement or any other Loan Document and it shall not be necessary for any other Lender to be joined as an additional party in any proceeding for such purpose. 1.16. 1.17. 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 Lenders may, at the election of the Required Lenders, 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 Lenders, shall constitute part of the Obligations and shall have the benefit of and be secured by the Collateral to the extent permitted by law. The Lenders shall be under no duty or obligation whatever with respect to any of the foregoing expenditures. 1.18. 1.19. Existing Guaranty . Each Fountain Corporation that is a party to the Existing Guaranty hereby acknowledges and consents to the amendments to the Existing GECC Note, the Existing Aircraft Note and all of the Security Documents executed and delivered in connection with the loans evidenced by the Existing GECC Note and the Existing Aircraft Note, whether effected hereby or by any instrument, agreement or amendment to be delivered pursuant to Article 3 and agrees that (a) each reference in the Existing Guaranty to the Loan Agreement shall be deemed to refer to this Agreement as amended from time to time, (b) each reference, if any, in the Existing Guaranty to the Existing Aircraft Note or the Existing GECC Note shall be deemed to refer to the Amended Aircraft Note and the Amended GECC Note, respectively, (c) the liabilities, indebtedness and obligations the payment and performance of which has been guaranteed pursuant to the Existing Guaranty shall be and hereby is expanded to include any and all of the Obligations, whether the same shall be due or owing to GECC, Transamerica, any other Lender or the Agent, (d) the Existing Guaranty and each such Fountain Corporation's liabilities and obligations thereunder are and shall remain in full force and effect in accordance with the terms and provisions of the Existing Guaranty as modified, supplemented and/or amended by the provisions of this Section, and (e) nothing in this Agreement or in any instrument, agreement or amendment delivered pursuant to Article 3 shall alter, limit, diminish or impair such Fountain Corporation's obligations under the Existing Guaranty except to the extent that the indebtedness and obligations of the Borrower, the payment of which such Fountain Corporation has guaranteed pursuant to the Existing Guaranty, have been altered by the provisions of this Agreement or any instrument, agreement or amendment delivered pursuant to Article 3. 1.20. 1.21. Omnibus 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 Notes (which shall be controlling in the event of a conflict with this Agreement). 1.22. 1.23. No Novation . Except as expressly modified and amended by or pursuant to this Agreement, the Amended Aircraft Note, the Amended GECC Note or any other amendment of any existing Loan Document made pursuant to the provisions of this Agreement, all of the agreements and instruments so modified and amended by or pursuant thereto shall be and continue in full force and effect. None of the parties hereto intends that anything in this Agreement, the Amended Aircraft Note, the Amended GECC Note or any such other amendment shall be construed as a novation, and none of such instruments and agreements shall effect a novation. The Borrower hereby ratifies and confirms its indebtedness under the Existing Aircraft Note and the Existing GECC Note, as modified, amended and restated by the Amended Aircraft Note and the Amended GECC Note, respectively. Each of the Fountain Corporations that is a party to any existing Loan Document hereby further ratifies and confirms the conveyances and assignments provided in, the security provided by, and its duties, obligations and responsibilities under, each such existing Loan Document, as the same heretofore may have been and, pursuant to this Agreement or any such amendment, hereby is modified and amended, and acknowledges that each such Loan Document, as so modified, supplemented and amended, is fully enforceable against such Fountain Corporation and its assets, if any, encumbered thereby. The Existing Aircraft Note, all prior amendments and supplements thereto and modifications thereof, if any, and the Amended Aircraft Note shall be construed together as a single instrument. The Existing GECC Note, all prior amendments and supplements thereto and modifications thereof, if any, and the Amended GECC Note shall be construed together as a single instrument. Each of the other existing Loan Documents that has been amended as aforesaid, all prior amendments and supplements thereto and modifications thereof, if any, and the instrument or agreement amending the same (or, in the case of the Existing Security Agreements, the provisions of Article 7 hereof, to the extent that the Existing Security Agreements have been amended pursuant thereto) shall be construed together as a single instrument. 1.24. 1.25. North Carolina Law . This Agreement and each Note shall be construed in accordance with and governed by, and any dispute arising out of or related to the relationship established among the parties from time to time party hereto in connection with this Agreement and the other Loan Documents (and whether arising in contract, tort, equity, or otherwise) shall be resolved in accordance with, the internal laws and not the conflicts of law provisions of the State of North Carolina. This Agreement and the Notes are intended to be effective as instruments executed under seal. 1.26. 1.27. Severability . This Agreement, the Notes and the other Loan Documents are intended to be performed in accordance with, and only to the extent permitted by, all applicable requirements of law. If any provision of this Agreement, any Note or any other Loan Document or the application thereof to any Person or circumstances shall, for any reason and to any extent, be invalid or unenforceable, neither the remainder of this Agreement, such Note or such other Loan Document in which such provision is contained nor the application of such provision to other Persons or circumstances or other Loan Documents or other instruments referred to hereinabove shall be affected thereby, but rather, the same shall be enforced to the greatest extent permitted by law. 1.28. 1.29. Interpretation . No provision of this Agreement or any of the other Loan Documents shall be construed against or interpreted to the disadvantage of any party hereto by any court or other governmental authority by reason of such party having or being deemed to have structured or dictated such provision. 1.30. 1.31. 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 AGENT OR ANY 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. EACH FOUNTAIN CORPORATION AGREES THAT SERVICE OF PROCESS MAY BE MADE UPON IT IN THE MANNER PRESCRIBED IN SECTION 9.01 FOR THE GIVING OF NOTICE TO IT. NOTHING HEREIN CONTAINED, HOWEVER, SHALL PREVENT THE AGENT OR ANY LENDER FROM BRINGING ANY ACTION OR EXERCISING ANY RIGHTS AGAINST ANY SECURITY AND AGAINST ANY FOUNTAIN CORPORATION PERSONALLY, AND AGAINST ANY ASSETS OF ANY FOUNTAIN CORPORATION, WITHIN ANY OTHER STATE OR JURISDICTION. 1.32. 1.33. Arbitration . SUBJECT TO SECTION 10.16, ANY CONTROVERSY OR CLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT 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 THE LENDERS, ONE ARBITRATOR SHALL BE APPOINTED BY THE BORROWER, 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. 1.34. 1.35. Proceedings Against Collateral . Notwithstanding the provisions of Section 10.15 or any similar provision contained in any other Loan Document, neither the commencement or pendency of, or demand by any party for, any arbitration proceedings to determine any controversy or claim arising out of or relating to this Agreement or any other Loan Document shall preclude the Lenders or the Agent, if an Event of Default shall have occurred, from causing the maturity of the Obligations or the Notes to be accelerated or enforcing any rights or remedies (including, without limitation, foreclosure, sale, liquidation or other rights or remedies) with respect to any Collateral, all of which rights and remedies (including, without limitation, the right to cause the maturity of the Obligations or the Notes to be accelerated) may be exercised if an Event of Default shall have occurred, notwithstanding the commencement or pendency of or demand for any such proceedings. 1.36. 1.37. No Setoff . Except as otherwise expressly provided in this Agreement, no act of commission or omission of any kind or at any time upon the part of the Agent or any Lender in respect of any matter whatsoever shall in any way affect or impair the rights of the Agent, such Lender or any other Lender to enforce any right, power or benefit of the Agent, such Lender or any other Lender under this Agreement or any other Loan Document, and no set-off, claim, reduction or diminution of any obligation or any defense of any kind or nature that either any Fountain Corporation has or may have against the Agent or any Lender shall be available to any such Fountain Corporation or asserted against the Agent, such Lender or any other Lender in any suit or action brought by Agent or any Lender to enforce or collect any Obligation or to exercise any right, power or benefit under this Agreement or any other Loan Document. Nothing in this Agreement shall be construed as a waiver by any Fountain Corporation of any rights or claims it may have against the Agent or any Lender under this Agreement or otherwise, but any recovery upon such rights and claims shall be had from the Agent or such Lender separately, the intent of this Agreement being that each Fountain Corporation party to any Loan Document shall be unconditionally and absolutely obligated to perform fully all of its obligations, agreements and covenants thereunder for the benefit of the Agent and the Lenders. 1.38. 1.39. Reproduction of Documents . This Agreement, the other Loan Documents and all documents relating hereto and thereto, including without limitation (a) consents, waivers and modifications that may hereafter be executed, (b) documents received by the Agent or any Lender at the closing (except the Notes), and (c) financial statements, certificates and other information previously or hereafter furnished to the Agent or any Lender may be reproduced by the Agent or such Lender by a photographic, photostatic, microfilm, micro-card, miniature photographic or other similar process and the Agent and such Lender may destroy any original document so reproduced. Each Fountain Corporation from time to time party to any Loan Document agrees and stipulates that, to the extent permitted by applicable law, any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence) and that any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. The purpose of this Section is to constitute a waiver of the "best evidence" rule with respect to this Agreement, the Loan Documents and the other documents referred to herein and therein and this Section shall not constitute a waiver of any other objection to the admissibility of such document in any judicial or administrative proceeding. 1.40. 1.41. Inconsistency of Covenants . All of covenants hereunder of the Borrower, the Parent Corporation or any Consolidated Subsidiary from time to time party hereto shall be given independent effect, so that if a particular action or condition is not permitted by any such covenant, the fact that it would be permitted by, or be otherwise within the limitations of, another covenant shall not avoid the occurrence of a Default if such action is taken or such condition occurs. 1.42. 1.43. Counterparts . This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 1.44. 1.45. 1.46. 1.47. 1.48. 1.49. 1.50. 1.51. 1.52. 1.53. [Signatures follow on separate pages] IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers duly authorized to do so, as of the day and year first above written. THE BORROWER: ATTEST: FOUNTAIN POWERBOATS, INC. By: Secretary Name: Reginald M. Fountain, Jr. Title: President [CORPORATE SEAL] THE PARENT CORPORATION: ATTEST: FOUNTAIN POWERBOAT INDUSTRIES, INC. By: Secretary Name: Reginald M. Fountain, Jr. Title: President [CORPORATE SEAL] THE PRESENT SUBSIDIARY: ATTEST: FOUNTAIN POWER, INC. By: Secretary Name: Reginald M. Fountain, Jr. Title: President [CORPORATE SEAL] Notice Address (for all Fountain Corporations): Fountain Powerboats, Inc. 1653 Whichard's Beach Road P.O. Drawer 457 Washington, North Carolina 27889 Attention: Reginald M. Fountain, Jr. Telecopy number: 252-975- 4565 Telephone number: 252-975- 2000 [This is a signature page to the Omnibus Agreement, signed by the parties named above] [This page intentionally left blank] [Signatures continued from preceding page] GECC AND THE AGENT: GENERAL ELECTRIC CAPITAL CORPORATION, individually and as Agent By: Name: Title: Notice Address: General Electric Capital Corporation Suite 500 4 North Park Drive Hunt Valley, Maryland 21030 Attention: Operations Manager Telecopy number: 410-527- 9393 Telephone number: 410-527- 9300 [This is a signature page to the Omnibus Agreement, signed by the party named above] [Signatures continued from preceding page] TRANSAMERICA: TRANSAMERICA BUSINESS CREDIT CORPORATION By: Name: Title: Notice Address: Transamerica Business Credit Corporation Equipment and Lease Division Intermediary Funding Group 5080 Spectrum Drive, Suite 1100 West Dallas, Texas 75248 Telecopy number: 972-458-5959 Telephone number: 972-458-5999 [This is a signature page to the Omnibus Agreement, signed by the party named above] SCHEDULE 4.05 Assets of Present Subsidiary SCHEDULE 4.09 Litigation SCHEDULE 6.01 Hazardous Materials SCHEDULE 7.07 Existing Security Agreement Terms Except as otherwise provided in Section 7.06, the terms set forth in the following table, as used in the respective Existing Security Agreements, shall be deemed to refer to the terms defined in this Agreement as set forth opposite such terms: The following term used in the Existing Security AgreementsShall be deemed to refer to "Debt Documents" the Loan Documents "Deed of Trust" the Deed of Trust, as amended by the Deed of Trust Amendment "Indebtedness" the Obligations "Loan Agreement" this Omnibus Agreement "loan documents" the Loan Documents "Note" the Notes "Real Property" the property encumbered by the Deed of Trust, as amended "Secured Party" the Agent, acting in its capacity as such for the ratable benefit of the Lenders from time to time party to this Omnibus Agreement EXHIBIT A AMENDED GECC NOTE [Intentionally Omitted] EXHIBIT B AMENDED AIRCRAFT NOTE [Intentionally Omitted] EXHIBIT C TRANSAMERICA NOTE [Intentionally Omitted] EXHIBIT D DEED OF TRUST AMENDMENT [Intentionally Omitted] EXHIBIT E ASSIGNMENT OF RENTS AMENDMENT [Intentionally Omitted] EXHIBIT F AIRCRAFT MORTGAGE AMENDMENT [Intentionally Omitted] EXHIBIT G ASSIGNMENT OF COLLATERAL ASSIGNMENT [Intentionally Omitted] EXHIBIT H NEW COLLATERAL ASSIGNMENT [Intentionally Omitted] EXHIBIT I CORPORATE GUARANTY [Intentionally Omitted] EXHIBIT J PARENT SECURITY AGREEMENT [Intentionally Omitted] EXHIBIT K LIFE INSURANCE ASSIGNMENT [Intentionally Omitted] EXHIBIT L SUBORDINATION AGREEMENT [Intentionally Omitted] EXHIBIT M PARENT COLLATERAL ASSIGNMENT [Intentionally Omitted] EXHIBIT N POWER COLLATERAL ASSIGNMENT [Intentionally Omitted] EXHIBIT O FORM OF LEGAL OPINION [Intentionally Omitted] 5 R#260921.4 [Execution Copy] PROMISSORY NOTE September 2, 1998 Beaufort County Washington, North Carolina FOR VALUE RECEIVED, FOUNTAIN POWERBOATS, INC., a North Carolina corporation ("Maker"), promises, jointly and severally if more than one, to pay to the order of TRANSAMERICA BUSINESS CREDIT CORPORATION, a Delaware corporation, or any subsequent holder hereof (each, a "Payee") at its office located at 5080 Spectrum Drive, Suite 1100 West Dallas, Texas 75248 (Attention: Equipment and Lease Division, Intermediary Funding Group), or at such other place as Payee or the holder hereof may designate, the principal sum of FOUR MILLION AND NO/100 DOLLARS ($4,000,000.00), or so much thereof as shall have been disbursed from time to time and remains unpaid, with interest thereon 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. The principal of and interest on this Note shall be payable as hereinafter provided. As used in this Note, unless otherwise defined herein terms defined in the Omnibus Agreement (as hereinafter defined) are used herein as therein defined and, in addition, the following terms shall have the following meanings (terms defined in the singular to have the corresponding meaning when used in the plural, and vice versa): "Default Rate" means, at any time, the lesser of 18% per annum or the highest rate not prohibited by applicable law. "LIBOR Rate" means, with respect to any Effective Period (as herein defined) occurring during the term of this Note, an interest rate per annum equal the rate published under the heading "London Interbank Offered Rates (LIBOR)" for dollar deposits in the London market for a one month maturity, as published in the "Money Rates" column of the Eastern Edition of the Wall Street Journal on the first Business Day of the calendar month in which such Effective Period commences. "Maturity Date" means January 2, 2002. "Omnibus Agreement" means that Omnibus Agreement, dated as of September 2, 1998, by and among the Maker, Fountain Powerboat Industries, Inc., Fountain Power, Inc., Transamerica Business Credit Corporation, and General Electric Capital Corporation, in its individual capacity and in its capacity as agent for itself and the other Lenders (as such term is defined in the Omnibus Agreement), as the same may be amended, supplemented, restated, extended, renewed, replaced or otherwise modified and in effect from time to time. "Payment Date" means the first day of each month, commencing October 1, 1998 and continuing thereafter until and including the Maturity Date. The Contract Rate for a given period (the "Effective Period") shall be equal to the sum of (i) two and 70/100 percent (2.70%) per annum plus (ii) the LIBOR Rate for such Effective Period. The first Effective Period shall begin on the date hereof, and shall continue to (but shall not include) the first Payment Date. Each subsequent Effective Period shall begin on the day immediately after the last day of the previous Effective Period and shall continue to (but shall not include) the next Payment Date. Interest shall be payable in arrears on each Payment Date, commencing October 1, 1998. Subject to the other provisions hereof, the principal of and interest on this Note shall be paid in monthly installments (each a "Periodic Installment") commencing on October 1, 1998 and on each Payment Date thereafter until and including January 2, 2002, as follows: (i) thirty-nine (39) consecutive monthly installments of principal each in the amount of One Hundred Thousand and 00/100 Dollars ($100,000.00), (ii) the interest accrued on the outstanding principal of this Note shall be paid with, and in addition to, each of the foregoing principal installments, and (iii) on the fortieth (40th) and final Payment Date (i.e., January 2, 2002, the Maturity Date) the entire outstanding principal balance of this Note, together with all accrued and unpaid interest thereon, shall be due and payable. All Periodic Installments hereunder 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. All interest due and payable hereunder shall be calculated on the basis of a 360 day year for the number of days actually elapsed and will be charged at the Contract Rate (or if an Event of Default or from and after the Maturity Date, at the Default Rate) on the outstanding principal balance of this Note for each calendar day on which any principal is outstanding. Except as expressly set forth in Section 2.05 of the Omnibus Agreement, prepayment of this Note is prohibited. If and to the extent that the Maker shall give notice of its intention to prepay this Note pursuant to Section 2.05 of the Omnibus Agreement, then on the date for prepayment specified in such notice there shall be due and payable in full the entire outstanding principal of and interest on this Note and, in addition thereto, a prepayment premium equal to the amount determined in accordance with the following table: If Prepayment is Made The Prepayment Premium is Prior to September 1, 2000 $ 80,000.00 Thereafter and prior to September 1, 2001 $ 40,000.00 September 1, 2001 and thereafter $ 0.00 The acceptance by Payee of any payment of principal or interest 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. This Note is one of the Notes issued pursuant to, and is one of the Notes identified in, the Omnibus Agreement. This Note and the Payee are entitled to all of the rights, benefits and security of the Omnibus Agreement and of the other Loan Documents. This Note is secured by the Security Documents identified in the Omnibus Agreement, including without limitation the Deed of Trust. Time is of the essence hereof. If the full amount of any payment (whether of principal, interest or any other amount) due hereunder or any other Loan Document is not received within fifteen (15) days after its due date, the Maker agrees to pay, in addition to the amount of each payment, a late payment charge of four percent (4%) of the amount not so paid when due in order to compensate the Payee for extra costs and expenses caused by such late payment. If an Event of Default shall occur, then (subject to the provisions of the Omnibus Agreement) at any time thereafter the entire principal sum remaining unpaid, together with all interest thereon and any other sum payable under this Note or any Loan Document at the election of Payee, shall immediately become due and payable, with interest thereon at the Default Rate from the date of such accelerated maturity until paid (both before and after any judgment). 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 other Loan Document, in no event shall this Note or any other Loan Document 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 other Loan Document, 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 any other Loan Document 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 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 any Loan Document 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 Loan Document 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. This Note and the other Loan Documents 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. 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 provision in this Note or any Loan Document which is in conflict with any 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. ATTEST: FOUNTAIN POWERBOATS, INC. By: Secretary Name: Reginald M. Fountain Title: President [CORPORATE SEAL] 7 R#261221.4 [Execution Copy] AMENDED AND RESTATED PROMISSORY NOTE September 2, 1998 Beaufort County Washington, North Carolina FOR VALUE RECEIVED, FOUNTAIN POWERBOATS, INC., a North Carolina corporation ("Maker"), promises, jointly and severally if more than 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 or the holder hereof may designate, the principal sum of NINE MILLION SEVEN THOUSAND SEVEN HUNDRED NINETY-SEVEN AND 00/100 DOLLARS ($9,007,797.00), with interest thereon 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. This Note amends and restates, and evidences the current principal balance outstanding under, that promissory note, dated December 31, 1996, issued by the Borrower in the principal amount of $10,000,000 and made payable to the order of the Payee first named above (the "Original Note"). This Note does not extinguish the indebtedness in respect of accrued and unpaid interest on the Original Note, which shall be repaid as hereinafter provided. Unless otherwise defined herein, terms defined in the Omnibus Agreement (as hereinafter defined) are used herein as therein defined and, in addition, the following terms shall have the following meanings (terms defined in the singular to have the corresponding meaning when used in the plural, and vice versa): "Amortization Period" means the ten year period ending on the January 1, 2007. "Default Rate" means, at any time, the lesser of 18% per annum or the highest rate not prohibited by applicable law. "LIBOR Rate" means, with respect to any Effective Period (as herein defined) occurring during the term of this Note, an interest rate per annum equal the rate published under the heading "London Interbank Offered Rates (LIBOR)" for dollar deposits in the London market for a one month maturity, as published in the "Money Rates" column of the Eastern Edition of the Wall Street Journal on the first Business Day of the calendar month in which such Effective Period commences. "Maturity Date" means January 2, 2002. "Omnibus Agreement" means that Omnibus Agreement, dated as of September 2, 1998, by and among the Maker, Fountain Powerboat Industries, Inc., Fountain Power, Inc., Transamerica Business Credit Corporation, and General Electric Capital Corporation, in its individual capacity and in its capacity as agent for itself and the other Lenders (as such term is defined in the Omnibus Agreement), as the same may be amended, supplemented, restated, extended, renewed, replaced or otherwise modified and in effect from time to time. "Payment Date" means the first day of each month, commencing October 1, 1998 and continuing thereafter until and including the Maturity Date. 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 70/100 percent (2.70%) per annum plus (ii) the LIBOR Rate for such Effective Period. The first Effective Period shall begin on the date hereof, and shall continue to (but shall not include) the first Payment Date. Each subsequent Effective Period shall begin on the day immediately after the last day of the previous Effective Period to (but shall not include) the next Payment Date. So long as no Default or Event of Default exists and all of the terms and conditions of this Note and the other Loan Documents 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") effective on any Payment Date upon at least 30 but no more than 60 days prior 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 Payment Date 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 Fixed Contract Rate Effective Date, (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 that was due under the Original Note. If Maker elects to exercise this Option to Convert, the Fixed Contract Rate shall be equal to the sum of (a) Two and 93/100 percent (2.93%) per annum plus (b) the applicable Current Rate (as defined below): (I) If there are eighteen (18) months or less than eighteen (18) months remaining before the Maturity Date, 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. (ii) If there are more than eighteen (18) months remaining before the Maturity Date, 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. Subject to the other provisions hereof, the principal and interest on this Note is payable in lawful money of the United States in thirty- nine (39) consecutive monthly installments, due as hereinafter provided, each in the amount of One Hundred Twenty-Three Thousand One Hundred Three and 07/100 Dollars ($123,103.07) (each, whether or not increased as described below, a "Periodic Installment") and a fortieth (40th) and final installment ("Final Installment"), due and payable on the Maturity Date, 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 October 1, 1998, and the following Periodic Installments shall be due and payable on each Payment Date thereafter. All payments shall be applied first to interest and then to principal; provided that the payment received in respect of the first Periodic Installment shall be applied first to the aggregate amount of interest accrued on (a) the Original Note from and including September 1, 1998 to but excluding the date of this Note and (b) this Note from and including the date hereof to but excluding October 1, 1998, and any remaining balance of such first Periodic Installment shall be applied to the principal hereof. 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. All interest calculated by reference to the LIBOR Rate shall be calculated on the basis of a 360 day year for the number of days actually elapsed and will be charged at the Contract Rate (or if an Event of Default or from and after the Maturity Date, at the Default Rate) on the outstanding principal balance of this Note for each calendar day on which any principal is outstanding. All interest calculated by reference to the Fixed Contract Rate shall be calculated on the basis of a 365 day year (366 day leap year) for the number of days actually elapsed and will be charged at the Contract Rate (or if an Event of Default or from and after the Maturity Date, at the Default Rate) on the outstanding principal balance of this Note for each calendar day on which any principal is outstanding. In the absence of the Borrower's election of the Option to Convert, the amount and number of the Periodic Installments 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"), if any, 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 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 on the principal balance during such period shall be applied to repayment of principal. This Note is one of the Notes issued pursuant to, and is one of the Notes identified in, the Omnibus Agreement. This Note and the Payee are entitled to all of the rights, benefits and security of the Omnibus Agreement and of the other Loan Documents. This Note is secured by the Security Documents identified in the Omnibus Agreement, including without limitation the Deed of Trust. Time is of the essence hereof. If any installment or any other sum due under this Note or any Loan Document 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 an Event of Default shall occur, then (subject to the provisions of the Omnibus Agreement) at any time thereafter the entire principal sum remaining unpaid, together with all interest thereon and any other sum payable under this Note or any Loan Document at the election of Payee, shall immediately become due and payable, with interest thereon at the Default Rate from the date of such accelerated maturity until paid (both before and after any judgment). Except as expressly set forth in Section 2.05 of the Omnibus Agreement, prepayment of this Note is prohibited. If and to the extent that the Maker shall give notice of its intention to prepay this Note pursuant to Section 2.05 of the Omnibus Agreement, then on the date for prepayment specified in such notice there shall be due and payable in full the entire outstanding principal of and interest on this Note and, in addition thereto, a prepayment premium equal to the amount determined in accordance with the following table: If Prepayment is Made The Prepayment Premium is Prior to January 1, 1999 $ 200,000.00 Thereafter and prior to January 1, 2000 $ 100,000.00 January 1, 2000 and thereafter $ 0.00 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 Loan Document, in no event shall this Note or any Loan Document 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 Loan Document, 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 any Loan Document 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 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 any Loan Document 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 Loan Document 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. This Note and the other Loan Documents 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. 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 provision in this Note or any Loan Document which is in conflict with any 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. ATTEST: FOUNTAIN POWERBOATS, INC. By: Secretary Name: Reginald M. Fountain, Jr. Title: President [CORPORATE SEAL] Payee hereby consents to the amendment and restatement of the Original Note pursuant to the foregoing Amended and Restated Promissory Note. GENERAL ELECTRIC CAPITAL CORPORATION By: Name: Title: 7 R#261578.4 [Execution Copy] AMENDED AND RESTATED PROMISSORY NOTE September 2, 1998 Beaufort County Washington, North Carolina FOR VALUE RECEIVED, FOUNTAIN POWERBOATS, INC., a North Carolina corporation ("Maker"), promises, jointly and severally if more than 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 or the holder hereof may designate, the principal sum of EIGHT HUNDRED FIFTY-FIVE THOUSAND FIFTY AND 41/100 DOLLARS ($855,050.41), with interest thereon 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. This Note amends and restates, and evidences the current principal balance outstanding under, that promissory note, dated July 11, 1996, issued by Reginald M. Fountain, Jr., in the principal amount of $1,067,810.66, and made payable to the order of the Payee first named above (the "Original Note"), the liability for which was assumed by the Maker under and pursuant to the Aircraft Loan Assumption Agreement (as such term is defined in the Omnibus Agreement referred to below). This Note does not extinguish the indebtedness in respect of accrued and unpaid interest on the Original Note, which shall be repaid as hereinafter provided. Unless otherwise defined herein, terms defined in the Omnibus Agreement (as hereinafter defined) are used herein as therein defined and, in addition, the following terms shall have the following meanings (terms defined in the singular to have the corresponding meaning when used in the plural, and vice versa): "Default Rate" means, at any time, the lesser of 18% per annum or the highest rate not prohibited by applicable law. "LIBOR Rate" means, with respect to any Effective Period (as herein defined) occurring during the term of this Note, an interest rate per annum equal the rate published under the heading "London Interbank Offered Rates (LIBOR)" for dollar deposits in the London market for a one month maturity, as published in the "Money Rates" column of the Eastern Edition of the Wall Street Journal on the first Business Day of the calendar month in which such Effective Period commences. "Maturity Date" means August 1, 2004. "Omnibus Agreement" means that Omnibus Agreement, dated as of September 2, 1998, by and among the Maker, Fountain Powerboat Industries, Inc., Fountain Power, Inc., Transamerica Business Credit Corporation, and General Electric Capital Corporation, in its individual capacity and in its capacity as agent for itself and the other Lenders (as such term is defined in the Omnibus Agreement), as the same may be amended, supplemented, restated, extended, renewed, replaced or otherwise modified and in effect from time to time. "Payment Date" means the first day of each month, commencing October 1, 1998 and continuing thereafter until and including the Maturity Date. 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 70/100 percent (2.70%) per annum plus (ii) the LIBOR Rate for such Effective Period. The first Effective Period shall begin on the date hereof, and shall continue to (but shall not include) the first Payment Date. Each subsequent Effective Period shall begin on the day immediately after the last day of the previous Effective Period to (but shall not include) the next Payment Date. So long as no Default or Event of Default exists and all of the terms and conditions of this Note and the other Loan Documents 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") effective on any Payment Date upon at least 30 but no more than 60 days prior 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 Payment Date 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 Fixed Contract Rate Effective Date, (ii) the Fixed Contract Rate (determined as hereinafter set out), and (iii) the balance of the original term hereof. 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 original term hereof at the Contract Rate applicable for the first Periodic Installment that was due under the Original Note. If Maker elects to exercise this Option to Convert, the Fixed Contract Rate shall be equal to the sum of (a) Three and 17/100 percent (3.17%) per annum plus (b) the applicable Current Rate (as defined below): (i) If there are eighteen (18) months or less than eighteen (18) months remaining before the Maturity Date, 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. (ii) If there are more than eighteen (18) but less than forty-two (42) months remaining before the Maturity Date, the "Current Rate" shall be determined in the same manner as noted in subparagraph (i) above except it shall be based upon the rate listed for "2-Year" Treasury bills. (iii) If there are more than forty-two (42) but less than sixty (60) months remaining before the Maturity Date, the "Current Rate" shall be determined in the same manner as noted in subparagraph (i) above except it shall be based upon the rate listed for "3-Year" Treasury bills. (iv) If there are more than sixty (60) but less than eighty-four (84) months remaining before the Maturity Date, the "Current Rate" shall be determined in the same manner as noted in subparagraph (i) above except it shall be based upon the rate listed for "4-Year" Treasury bills. (v) If there are more than eighty-four (84) but less than one hundred twenty (120) months remaining before the Maturity Date, the "Current Rate" shall be determined in the same manner as noted in subparagraph (i) above except it shall be based upon the rate listed for "5- 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 seventy (70) consecutive monthly installments, due as hereinafter provided, each in the amount of Fifteen Thousand One Hundred Eighty and 55/100 Dollars ($15,180.55 ) (each, whether or not increased as described below, a "Periodic Installment") and an seventy-first (71st) and final installment ("Final Installment"), due and payable on the Maturity Date, in the amount of the total outstanding unpaid principal and accrued but unpaid interest. The first Periodic Installment shall be due and payable on October 1, 1998, and the following Periodic Installments shall be due and payable on each Payment Date thereafter. All payments shall be applied first to interest and then to principal; provided that the payment received in respect of the first Periodic Installment shall be applied first to the aggregate amount of interest accrued on (a) the Original Note from and including September 1, 1998 to but excluding the date of this Note and (b) this Note from and including the date hereof to but excluding October 1, 1998, and any remaining balance of such first Periodic Installment shall be applied to the principal hereof. 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. All interest calculated by reference to the LIBOR Rate shall be calculated on the basis of a 360 day year for the number of days actually elapsed and will be charged at the Contract Rate (or if an Event of Default or from and after the Maturity Date, at the Default Rate) on the outstanding principal balance of this Note for each calendar day on which any principal is outstanding. All interest calculated by reference to the Fixed Contract Rate shall be calculated on the basis of a 365 day year (366 day leap year) for the number of days actually elapsed and will be charged at the Contract Rate (or if an Event of Default or from and after the Maturity Date, at the Default Rate) on the outstanding principal balance of this Note for each calendar day on which any principal is outstanding. In the absence of the Borrower's election of the Option to Convert, 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"), if any, sufficient to amortize the then-unpaid principal over the balance of the original term 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 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 on the principal balance during such period shall be applied to repayment of principal. This Note is one of the Notes issued pursuant to, and is one of the Notes identified in, the Omnibus Agreement. This Note and the Payee are entitled to all of the rights, benefits and security of the Omnibus Agreement and of the other Loan Documents. This Note is secured by the Security Documents identified in the Omnibus Agreement, including without limitation the Deed of Trust. Time is of the essence hereof. If any installment or any other sum due under this Note or any Loan Document 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 an Event of Default shall occur, then (subject to the provisions of the Omnibus Agreement) at any time thereafter the entire principal sum remaining unpaid, together with all interest thereon and any other sum payable under this Note or any Loan Document at the election of Payee, shall immediately become due and payable, with interest thereon at the Default Rate from the date of such accelerated maturity until paid (both before and after any judgment). Except as expressly set forth in Section 2.05 of the Omnibus Agreement, prepayment of this Note is prohibited. If and to the extent that the Maker shall give notice of its intention to prepay this Note pursuant to Section 2.05 of the Omnibus Agreement, then on the date for prepayment specified in such notice there shall be due and payable in full the entire outstanding principal of and interest on this Note and, in addition thereto, a prepayment premium equal to the amount determined in accordance with the following table: If Prepayment is Made The Prepayment Premium is Prior to August 1, 1999 $ 10,678.11 August 1, 1999 and thereafter $ 0.00 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 Loan Document, in no event shall this Note or any Loan Document 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 Loan Document, 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 any Loan Document 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 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 any Loan Document 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 Loan Document 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. This Note and the other Loan Documents 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. 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 provision in this Note or any Loan Document which is in conflict with any statute, law or applicable rule shall be deemed omitted, modified or altered to conform thereto. [Signature follows on separate page] IN WITNESS WHEREOF, this Note has been executed, UNDER SEAL, the day and year first above written. ATTEST: FOUNTAIN POWERBOATS, INC. By: Secretary Name: Reginald M. Fountain, Jr. Title: President [CORPORATE SEAL] Payee hereby consents to the amendment and restatement of the Original Note pursuant to the foregoing Amended and Restated Promissory Note. GENERAL ELECTRIC CAPITAL CORPORATION By: Name: Title: 19 R#261782.5 Drawn by and return to: Stephen Yeagy, Esquire Womble Carlyle Sandridge & Rice, PLLC P. O. Box 831 Raleigh, Carolina 27602-0831 [Execution Copy] NORTH CAROLINA ) ) BEAUFORT COUNTY ) FIRST AMENDMENT TO DEED OF TRUST COLLATERAL INCLUDES FIXTURES THIS FIRST AMENDMENT TO DEED OF TRUST (this "Amendment"), is made as of the 2nd day of September, 1998, by and among FOUNTAIN POWERBOATS, INC., a North Carolina corporation, whose address is 1653 Whichard's Beach Road, Washington, North Carolina 27889 (hereinafter referred to as the "Grantor"), STEPHEN A. YEAGY, the substitute Trustee under the Existing Deed of Trust referred to below and a resident of Wake County, North Carolina, whose address is Womble Carlyle Sandridge & Rice, PLLC, 2100 First Union Capitol Center, 150 Fayetteville Street Mall, 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, acting in (i) its individual corporate capacity ("GECC"), (ii) in its capacity as the "Beneficiary under the Existing Deed of Trust referred to below (in such capacity, the "Original Beneficiary") and (iii) its capacity as the agent for the ratable benefit of the lenders now or from time to time hereafter party to the Omnibus Agreement referred to below (in such capacity, the "Agent" or, in the Agent's capacity as the beneficiary hereunder and under the Deed of Trust as defined below, the "Beneficiary"); and amends, modifies and supplements the following instrument (said instrument, together with all prior amendments, supplements and modifications thereto and thereof, if any, is referred to herein as the "Existing Deed of Trust"): Deed of Trust, Assignment of Rents and Security Agreement, dated December 31, 1996, by and among the Grantor, William C. Matthews, Jr., as Trustee, and GECC, which Deed of Trust is recorded at Book 1063, Page 337, in the Office of the Register of Deeds , beaufort County, North Carolina. RECITALS: A. The Existing Deed of Trust was first given as a part of the security for the promissory note referred to therein (the "Original Note") evidencing a loan made by GECC to the Grantor in the original principal amount of $10,000,000 (the "GECC Loan"), and encumbers certain real property as more particularly described therein (the "Original Property"). B. Pursuant to the Omnibus Agreement referred to below, the Original Note has been amended and restated by an Amended and Restated Promissory Note, dated the date hereof, executed by the Grantor and GECC and made payable to the order of GECC in the principal amount of $9,007,797.00 (the Original Note, as the same has been so amended and restated by said Amended and Restated Promissory Note, and together with all promissory notes delivered in substitution or exchange therefor, in each case as the same may be modified, amended, supplemented, restated, extended, consolidated, renewed or replaced and in effect from time to time, is referred to herein as the "Amended GECC Note"). C. The Grantor, GECC and the Agent, together with Fountain Powerboat Industries, Inc., Fountain Power, Inc. and Transamerica Business Credit Corporation ("Transamerica" and, together with GECC, the "Lenders") have entered into an Omnibus Agreement, dated the date hereof (as the same may be amended, supplemented, restated, extended, renewed, replaced or otherwise modified and in effect from time to time, the "Omnibus Agreement"). Pursuant to and subject to the terms of the Omnibus Agreement, (1) GECC and the Grantor have agreed to amend and restate the terms of another note evidencing a loan made by GECC to Reginald M. Fountain, Jr. on July 11, 1996 in the original principal amount of $1,067,810.66 (the "Aircraft Loan"), the liability for which was subsequently assumed by the Grantor pursuant to the Aircraft Loan Assumption Agreement (as defined in the Omnibus Agreement), said amendment and restatement being set forth in, and the outstanding principal balance of said loan being evidenced by, that Amended and Restated Promissory Note, dated the date hereof, executed by the Borrower in the principal amount of $855,050.41 and payable to the order of GECC (the "Amended Aircraft Note"), and (2) Transamerica has agreed to make a loan of $4,000,000 to the Grantor (the "Transamerica Loan"; the GECC Loan, the Aircraft Loan and the Transamerica Loan are sometimes referred to herein collectively as the "Loans" and individually as a "Loan"), which loan is evidenced by that Promissory Note, dated the date hereof, executed by the Borrower in the principal amount of $4,000,000.00 and payable to the order of Transamerica (the "Transamerica Note"). D. Pursuant to the Omnibus Agreement, in addition to all of the other collateral described therein or in the other Security Documents, the Grantor has agreed that all of the property encumbered by the Deed of Trust (as hereinafter defined) shall secure not only the GECC Loan but all of the Loans on a ratable basis, and that the Agent, for the ratable benefit of the lenders now or from time to time hereafter party to the Omnibus Agreement (the "Lenders"), shall succeed to all of GECC's right, title and interest in, to and under the Deed of Trust (as hereinafter defined) as beneficiary and hold the beneficial interest thereunder as security for the payment of the principal of, premium, if any, and interest on the Loans and all of the other Obligations (as hereinafter defined). In addition, the parties wish to provide that the Trustee shall hold the property encumbered by the Existing Deed of Trust, together with the additional property encumbered pursuant to this Amendment, for the account of the Beneficiary for the ratable benefit of the Lenders, as security for the payment of the principal of, premium, if any, and interest on the Loans and all of the other Obligations. E. The Grantor has acquired certain additional real property (the "Additional Property"), which property is adjacent to the Original Property and which, together with the Original Property, is more particularly described in Exhibit A attached hereto and incorporated herein by reference (the Original Property and the Additional Property are collectively referred to as the "Property"). As a condition of the undertakings of the Lenders under the Omnibus Agreement, the Grantor is required, and the Grantor has agreed, to convey to the Trustee the Additional Property under and subject to, and as a part of, the property encumbered by the lien of the Deed of Trust. By a conveyance of, and a grant of the security interest in, all of the Property, the Grantor desires to secure the payment of the principal of, premium, if any, and interest on the Loans and the Notes (as hereinafter defined), together with any renewals or extensions thereof, in whole or in part, and all of the other Obligations, including without limitation the additional payments agreed to be made pursuant to the Deed of Trust. F. The parties also desire to make certain other modifications and amendments to the Existing Deed of Trust. NOW, THEREFORE, the Grantor, the Trustee, the Original Beneficiary and the Beneficiary hereby agree as follows: 1. Definitions. (a) Except as otherwise provided herein, terms defined in the Existing Deed of Trust are used herein as therein defined. 2. 3. (b) The following terms defined in the Omnibus Agreement are used herein as therein defined: "Assignment of Rents", "Default Rate", "Loan Documents", "Security Documents" and "Required Lenders". 4. 5. (c) In addition to the terms defined above in the first paragraph of and in the Recitals to this Amendment, the terms as defined below, for all purposes of this Amendment (except as herein otherwise expressly provided or unless the context otherwise requires), shall have the meanings set forth herein: 6. "Deed of Trust" means the Existing Deed of Trust, as amended pursuant to this Amendment and as the same may be amended, supplemented, restated, extended, renewed, replaced or otherwise modified and in effect from time to time. "Improvements" shall have the meaning assigned to such term in Section 4 hereof. "Notes" means the Amended GECC Note, the Amended Aircraft Note and the Transamerica Note, in each case together with all promissory notes delivered in substitution or exchange therefor, in each case as the same may be modified, amended, supplemented, restated, extended, consolidated, renewed or replaced and in effect from time to time. "Obligations" shall have the meaning assigned to such term in Section 3 hereof. "Personal Property" shall have the meaning assigned to such term in Section 4 hereof. "Rents" shall have the meaning assigned to such term in Section 4 hereof. "Trust Estate" shall have the meaning assigned to such term in Section 4 hereof. (d) Any term defined in the singular (whether herein, in the Existing Deed of Trust or in the Omnibus Agreement) shall have the corresponding meaning when used in the plural, and vice versa. (e) Any terms that are defined in this Amendment which are used without express definition in the text of any of the modifications to the Existing Deed of Trust made hereunder shall, as part of the Deed of Trust, have the meanings so assigned to them in this Amendment. Any terms that are defined in the Omnibus Agreement, and identified in paragraph (b) of this Section, which terms are used without express definition in the text of any of the modifications to the Existing Deed of Trust made hereunder shall, as part of the Deed of Trust, have the meanings so assigned to them in the Omnibus Agreement. 1. Transfer of Original Beneficiary's Interest. The Original Beneficiary hereby transfers, conveys and assigns to the Beneficiary all of its right, title and interest in, to and under the Existing Deed of Trust and the original "Trust Estate" thereunder, to be held by the Beneficiary for the ratable benefit of the Lenders to secure the repayment of the principal of, premium, if any, and interest on the Loans and the Notes and any and all other Obligations. The Beneficiary hereby accepts the aforesaid transfer, conveyance and assignment. 2. 3. Security for Obligations. The Grantor agrees that, from and after the date of this Amendment, the Deed of Trust shall secure the Loans, the Notes, and any and all liabilities and obligations of the Grantor thereunder or under the Omnibus Agreement, the Security Documents or the other Loan Documents (i) for the payment of the principal of the Loans and the Notes in the aggregate principal amount of $13,862,847.41, together with all premium, if any, and interest thereon; (ii) for the payment of the principal of and interest, if any, on any and all other "Obligations" (as such term is defined in the Omnibus Agreement); (iii) for the payment of all reasonable attorney's fees, court costs and expenses of whatever nature incurred in collection of such indebtedness and the enforcement or protection of the interest of the Beneficiary and the Lenders under the Deed of Trust, (iv) for the payment of all sums advanced by the Beneficiary of the Lenders to protect the Trust Estate, with interest thereon at the Default Rate; (v) for the performance of the Grantor's obligations and agreements contained in the Deed of Trust, the Notes, the Omnibus Agreement, the Security Documents, the other Loan Documents, and any other instrument or modifications or amendments thereof given to evidence or further secure the payment and performance of any obligation or indebtedness secured hereby (all of the foregoing, including the "Obligations" as defined in the Omnibus Agreement, are collectively referred to herein as the "Obligations"). 4. 5. Conveyance. As security for the repayment and performance of all of the Obligations, the Grantor hereby irrevocably grants, transfers, conveys and assigns to the Trustee, IN TRUST, WITH POWER OF SALE, for the benefit and security of the Beneficiary held for the ratable benefit of the Lenders, under and subject to the terms and conditions of the Deed of Trust, the Property located in the County of Beaufort, State of North Carolina, described in Exhibit A attached to this Amendment and by this reference incorporated herein; 6. 7. 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); 8. 9. 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; 10. 11. 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; 12. 13. TOGETHER WITH all interests, estate or other claims (but none of the obligations), both in law and in equity, which the Grantor now has or may hereafter acquire in the Property; 14. 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; 15. 16. 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 of land adjacent to or used in connection with the Property; 17. 18. TOGETHER WITH any and all buildings and improvements now or hereafter erected thereon, including, but not limited to, the fixtures, attachments, appliances, equipment, machinery, and other articles attached to the buildings and other improvements on the Property (hereinafter called the "Improvements"); 19. 20. 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"); 21. 22. 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; 23. 24. 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; 25. 26. 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; 27. 28. The entire estate, property and interest conveyed by this Amendment to the Trustee may hereinafter be referred to as the "Trust Estate". 29. 30. TO HAVE AND TO HOLD the Property, the Improvements and the Trust Estate, 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; 31. 32. AND THE GRANTOR COVENANTS WITH THE TRUSTEE that it is seized of the Property and Improvements in fee simple and good and marketable title to the remainder of the Trust Estate, and has the right to convey the same; that it will warrant and defend the same 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, if any, set forth in Exhibit B attached to this Amendment and incorporated herein by reference. 33. THIS CONVEYANCE IS MADE IN TRUST FOR THE PURPOSE OF SECURING a. Payment of the indebtedness in the aggregate principal amount of $13,862,847.41, with interest and premium (if any) thereon, evidenced by the Notes from time to time executed by the Grantor, which have been or may hereafter be delivered to and made payable to the order of the respective Lenders, and which by this reference are hereby made a part hereof, and any and all modifications, extensions and renewals thereof. The 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 the Deed of Trust, and any and all other Obligations; b. Payment of all sums advanced by the Beneficiary or any Lender to protect the Trust Estate, with interest thereon at the Default Rate; and c. Performance of the Grantor's obligations and agreements contained in the Deed of Trust, the Notes, the Omnibus Agreement, the Security Documents and all of the other Loan Documents. 1. Covenants, Etc. Applicable. All covenants, obligations and undertakings of the Grantor, and all other terms, conditions, defaults and other provisions, contained in the Existing Deed of Trust relating in any manner to the "Trust Estate" (as defined in the Existing Deed of Trust) or any part thereof shall be deemed to apply to the Trust Estate (as defined herein) and each part thereof, whether or not expressly referred to herein. 2. (a) Security Interest. The Grantor hereby grants to the Beneficiary for the ratable benefit of the Lenders a security interest in the Personal Property located on or at the Property, including without limitation, any and all property of similar type or kind, and any replacements or renewals thereof, hereafter located on or at the Property, for the purpose of securing all of the Obligations. This Amendment constitutes a Security Agreement as that term is used in the Uniform Commercial Code of North Carolina (the "UCC"). (b) (c) The Grantor hereby warrants, represents and covenants as follows: (d) (i) 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 Trust Estate, 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 Trust Estate against, all claims and demands of all persons at any time claiming the same or any interest therein. (i) Except for inventory of the Grantor sold in the ordinary course of its business, the Grantor will not lease, sell, convey or in any manner transfer the Personal Property without the prior written consent of the Beneficiary. (i) The Personal Property is not used or bought for personal, family or household purposes. (i) Except for inventory of the Grantor sold in the ordinary course of its business, 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. (i) The Grantor maintains a place of business in the State of North Carolina, and the Grantor will immediately notify the Beneficiary in writing of any change in its place of business as set forth in the Deed of Trust. (i) 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 of North Carolina 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 or desirable. (a) All covenants, obligations and undertakings of the Grantor, and all other terms, conditions, defaults and other provisions, contained in the Deed of Trust relating in any manner to the "Personal Property" (as defined in the Existing Deed of Trust) shall be deemed to apply to the Personal Property whether or not expressly referred to herein. (b) 2. Construction of Terms. (a) The terms set forth in the table appearing in Schedule A attached hereto and incorporated herein by reference, as used in the Existing Deed of Trust, henceforth shall be deemed to refer to the terms defined in this Amendment or (if so indicated) in the Omnibus Agreement as set forth opposite such terms. 3. 4. (b) In addition, each of the following words or phrases used in the Existing Deed of Trust, henceforth shall be construed to refer to the Grantor's indebtedness in respect of the principal of, premium, if any, and interest on the Loans and the Notes and in respect of all other Obligations: "indebtedness secured hereby", "indebtedness evidenced by the Note" or any phrase like or similar thereto or words of similar intent. 5. 6. References to Beneficiary. (a) The following references in the Existing Deed of Trust to the term "Beneficiary" henceforth shall be construed to refer to the Lenders: 7. (i) those set forth in paragraph (a) of Section 1.05 of the Existing Deed of Trust; (ii) that set forth in the first sentence of paragraph (c) of Section 1.05 of the Existing Deed of Trust; (iii) those set forth in paragraphs (b) and (c) of Section 1.14 of the Existing Deed of Trust; (iv) that set forth in Section 1.24 of the Existing Deed of Trust; (v) those set forth in the fourth sentence of paragraph (a) of Section 1.25 of the Existing Deed of Trust; (vi) those set forth in paragraph (e) of Section 4.01 of the Existing Deed of Trust; (vii) that set forth in the first sentence of Section 4.02 of the Existing Deed of Trust; and (vii) the first such reference set forth in Section 5.10 of the Existing Deed of Trust. (b) The following references in the Existing Deed of Trust to the term "Beneficiary" henceforth shall be construed to refer to the Agent or any Lender or to the Agent and the Lenders, as the context may require: (i) those set forth in the first sentence of paragraph (a) of Section 1.07 of the Existing Deed of Trust; (ii) that those set forth in paragraph (b) of Section 1.07 of the Existing Deed of Trust; (iii) those set forth in paragraph (c) of Section 1.07 of the Existing Deed of Trust; (iv) those set forth in paragraph (b) of Section 1.08 of the Existing Deed of Trust; (v) those set forth in Section 1.12 of the Existing Deed of Trust; (vi) those set forth in Section 1.17 of the Existing Deed of Trust; (vii) that set forth in Section 1.21 of the Existing Deed of Trust; (viii) those set forth in the last sentence of paragraph (a) of Section 1.25 of the Existing Deed of Trust; (ix) those set forth in the second paragraph of paragraph (c) of Section 1.25 of the Existing Deed of Trust; (x) that set forth in paragraph (d) of Section 1.25 of the Existing Deed of Trust; (xi) that set forth in paragraph (h) of Section 4.01 of the Existing Deed of Trust; (xii) that set forth in the last sentence of subparagraph (c)(4) of Section 4.02 of the Existing Deed of Trust; (xiii) that set forth in the last sentence of the last paragraph of Section 4.02 of the Existing Deed of Trust; and (xiv) those set forth in Section 5.11 of the Existing Deed of Trust. 1. Additional Specific Amendments. 2. (a) Section 1.20 of the Existing Deed of Trust is hereby amended and restated in its entirety as follows: (b) "1.20 Powers. Without affecting the liability of any other person liable for the payment of the Obligations, 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 for the full amount of all Obligations, all (but not less than all) of the Lenders may, or the Beneficiary (at the direction of all of the Lenders) 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 Lenders' option) any parcel, portion or all of the Trust Estate, (v) take or release any other or additional security for any of the Obligations, (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 or discharge the obligations of the Grantor hereunder, or under the Loan Documents or the Security Documents, 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. (a) Paragraph (g) of Section 4.01 of the Existing Deed of Trust is hereby amended and restated in its entirety as follows: (b) "(g) Either (i) there has occurred a breach of or default under any other term, covenant, agreement, condition, provision, representation or warranty in this Deed of Trust and such breach or default is not fully cured within the stated cure period therefore, within the stated cure period for a similar breach or default under the Omnibus Agreement or the Security Documents or, in the absence of any such stated cure period, within thirty (30) days (but in no event shall this provision be construed to add to, increase or duplicate any stated cure period) after the earlier of (A) the first day on which a responsible officer of the Grantor has knowledge thereof or (B) written notice thereof has been given to the Grantor by the Beneficiary or any Lender, or (ii) any "Event of Default" (as defined in any other Loan Document or Security Document) shall occur." (a) The second paragraph of Section 4.03 of the Existing Deed of Trust is hereby amended and restated in its entirety as follows: (b) "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 complied 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 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 in accordance with the provisions of Section 45-21.31 of the North Carolina General Statutes. The Grantor agrees that in the event of sale hereunder, the Beneficiary or any Lender 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 an amount not to exceed ten percent (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 Notes if the termination occurs prior to the first public auction sale and two percent (2%) of the then-outstanding principal balance of the Notes if the termination occurs after the first public auction sale." (a) The Section 4.05 of the Existing Deed of Trust is hereby amended and restated in its entirety as follows: (b) "4.05 Remedies Not Exclusive. The Trustee, the Beneficiary and the respective Lenders, and each of them, shall be entitled to enforce payment and performance of the Obligations and to exercise all rights and powers under this Deed of Trust or under any other Loan Document 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, the Beneficiary's or any Lender's right to realize upon or enforce any other security now or hereafter held by the Trustee, the Beneficiary or such Lender. The Trustee, the Beneficiary and the Lenders, and each of them, shall be entitled to enforce this Deed of Trust and any other security now or hereafter held by the Beneficiary, the Trustee or any Lender in such order and manner as the Trustee, the Beneficiary or the Required Lenders, as applicable, may in their absolute discretion determine. No remedy herein conferred upon or reserved to the Trustee, the Beneficiary or the Lenders 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 Documents to the Trustee, the Beneficiary or any Lender (or to which any 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, the Beneficiary or such Lender and any of them may pursue inconsistent remedies." (a) The Section 5.02 of the Existing Deed of Trust is hereby amended and restated in its entirety as follows: (b) "5.02 Successors and Assigns. This Deed of Trust applies to, inures to the benefit of and binds all parties hereto (including the Lenders), their heirs, legatees, devisees, administrators, executors, successors and assigns. The term "Beneficiary" shall mean the Agent under the Omnibus Agreement and any person or entity that shall be a successor Agent thereunder. The term "Lender" shall mean an owner and holder of a Note, whether or not named as a Lender herein." (a) The Section 5.12 of the Existing Deed of Trust is hereby amended and restated in its entirety as follows: (b) "5.12 Non-Waiver. The acceptance by the Beneficiary or any Lender 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 or any Lender 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 or any Lender thereof of further sums on account, or otherwise), the Beneficiary, the Lenders and the Trustee shall be entitled to exercise all rights in this instrument conferred upon them, or any 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 or the Lenders (or any of them) to any transaction or action of the Grantor which is subject to consent or approval of the Beneficiary or the Lenders (or any of them) hereunder or under the Omnibus Agreement shall not be deemed a waiver of the right to require such consent or approval to future or successive transactions or actions." 1. Execution by Trustee. The Trustee joins in the execution of this Amendment for the sole purpose of acknowledging his receipt of notice of the terms and provisions hereof, his acceptance of the conveyances made herein for the purposes herein described, and his agreement to be bound thereby. 2. 3. Ratification, Etc. Except as herein expressly modified and amended, the Existing Deed of Trust shall be and continue in full force and effect. None of the parties hereto intends that anything in this Amendment shall be construed as a novation, and this Amendment does not effect a novation. The Grantor hereby ratifies and confirms the conveyances and assignments provided in, and the security provided by and its duties, obligations and responsibilities under, the Existing Deed of Trust, as the same heretofore may have been and by this Amendment hereby is modified and amended, and acknowledges that the Existing Deed of Trust, as so modified, supplemented and amended, is fully enforceable against the property therein described. The Existing Deed of Trust, all prior amendments and supplements thereto and modifications thereof, if any, and this Amendment shall be construed together as a single instrument. 4. 5. North Carolina Law . This Amendment shall be construed in accordance with and governed by, and any dispute arising out of or related to the relationship established among the parties from time to time party hereto in connection with this Amendment (and whether arising in contract, tort, equity, or otherwise) shall be resolved in accordance with, the internal laws and not the conflicts of law provisions of the State of North Carolina. This Amendment is intended to be effective as an instrument executed under seal. 6. 7. Counterparts. This Amendment may be executed in one or more counterparts, each of which shall be an original and all of which, together, shall constitute but one instrument. Any duplicate original of this instrument may be recorded with the Register of Deeds of any county in which the Property, or any portion thereof, is located. 8. 9. 10. [Signatures follow on separate pages] IN WITNESS WHEREOF, the Grantor, the Trustee, the Original Beneficiary and the Beneficiary have executed this Amendment under seal as of the day and year first above written. GRANTOR: ATTEST: FOUNTAIN POWERBOATS, INC., a North Carolina corporation By: Secretary Name: Reginald M. Fountain, Jr. Title: President [CORPORATE SEAL] NORTH CAROLINA _______________ COUNTY I, _______________________________, a Notary Public of ___________ County, North Carolina, do hereby certify that ______________________________ 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 _____ day of August, 1998. __________________________ Notary Public [NOTARY SEAL] My commission expires: ______________________ [This is a signature page to the First Amendment to Deed of Trust, signed by the party named above] [Signatures continued from preceding page] TRUSTEE: (SEAL) Stephen A. Yeagy, as Trustee NORTH CAROLINA WAKE COUNTY I, _______________________________, a Notary Public of ___________ County, North Carolina, do hereby certify that Stephen A. Yeagy, Trustee, personally came before me this day and acknowledged the foregoing instrument in his capacity as Trustee. WITNESS my hand and notarial seal, this _____ day of August, 1998. __________________________ Notary Public [NOTARY SEAL] My commission expires: ______________________ [This is a signature page to the First Amendment to Deed of Trust, signed by the party named above] [Signatures continued from preceding page] ORIGINAL BENEFICIARY AND BENEFICIARY: ATTEST: GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation, individually and as Agent By: Secretary Name: Title: [CORPORATE SEAL] STATE OF ______________ _______________ COUNTY I, _______________________________, a Notary Public of ___________ County, State of ____________________, do hereby certify that ______________________________ personally came before me this day and acknowledged that [s]he is the _________ Secretary of General Electric Capital Corporation, a New York 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 _____ day of August, 1998. __________________________ Notary Public [NOTARY SEAL] My commission expires: ______________________ [This is a signature page to the First Amendment to Deed of Trust, signed by the parties named above] SCHEDULE A TO FIRST AMENDMENT TO DEED OF TRUST The terms set forth in the following table, as used in the Existing Deed of Trust, henceforth shall be deemed to refer to the terms defined in this Amendment or (if so indicated) in the Omnibus Agreement as set forth opposite such terms. The following term used in the Existing Deed of Trust Shall be deemed to refer to "Assignment of Rents" the Assignment of Rents (as defined in the Omnibus Agreement) "Beneficiary" the Agent, acting in its capacity as such for the ratable benefit of the Lenders from time to time party to the Omnibus Agreement "this Deed of Trust" the Deed of Trust "Default Rate" the Default Rate (as defined in the Omnibus Agreement) "Improvements" the Improvements "loan" or "loans" the Loans "Loan Agreement" the Omnibus Agreement "Loan Instruments" the Loan Documents(as defined in the Omnibus Agreement) "Note" the Notes "Personal Property" the Personal Property "Property" the Property "Rents" the Rents "Security Agreement" the Borrower Security Agreement (as defined in the Omnibus Agreement) "Trust Estate" the Trust Estate EXHIBIT A Legal Description of the Property EXHIBIT B Permitted Liens and Encumbrances TRACT I: 1. The lien of all taxes for the year 1998 and thereafter, which are not yet delinquent. 2. Right of way to State Highway Commission, recorded in Book 529, page 278, Beaufort County Registry. 3. Permit to Carolina Telephone & Telegraph Company recorded in Book 474, Page 275, Beaufort County Registry. 4. Rights of way to Carolina Power & Light Company recorded in Book 541, Page 76; Book 602, Page 207; Book 614, Page 258; Book 702, Page 415; Book 782, Page 15; Book 886, Page 73; and, Book 886, Page 72, Beaufort County Registry. 5. Rights of others in and to the use of the perpetual non- exclusive sixty (60) foot access easement for ingress, egress, and regress which is located adjacent to and on the West side of subject property. 6. Rights of adjoining property owners in and to ditches affecting subject property. 7. UCC to the benefit of General Electric Capital Corporation in UCC File #96- 1214, Beaufort County Registry. 8. Deed of Trust to William C. Matthews, Jr., Trustee(s) for General Electric Capital Corporation, dated December 31, 1996, in the amount of $10,000,000.00 recorded in Book 1063, Page 337, Beaufort County Registry. (To be modified). 9. Assignment of Rents recorded in Book 1063, Page 372, Beaufort County Registry. (To be modified). 10. Survey entitled, "Survey for Fountain Powerboats, Inc.", dated October 12, 1987 and revised August 28 and 29, 1990; September 5, 1990, by Thomas W. Harwell, Registered Land Surveyor reveals the following: a) power poles and electrical lines situated on and crossing over subject property; b) easement ten (10) feet in width for telephone, power and cable television along the Northeasterly lot line; c) ten (10) foot by seventy (70) foot sight easement in the Northernmost corner of subject property; d) ditch running along the Southwesterly lot line and a portion running through the subject property; and e) existing pump house belonging to the property adjoining to the Southeast encroaches onto subject property. TRACT II: 1. The lien of all taxes for the year 1998 and thereafter, which are not yet delinquent. 2. Easements to Carolina Power & Light Company recorded in Book 468, Page 43; Book 474, Page 275; Book 540, Page 571; Book 541, Page 76; Book 803, Page 936; Book 803, Page 937; Book 813, Page 154; and, Book 878, Page 95, Beaufort County Registry. 3. Riparian rights or title to that portion of subject property lying below the highwater mark of Pamlico River and the canal. 4. Rights of others in and to the use of the Pamlico River and the canal. 5. Rights of adjoining property owners in and to ditches affecting subject property. 6. UCC to the benefit of General Electric Capital Corporation in UCC File #96- 1214, Beaufort County Registry. 7. Deed of Trust to William C. Matthews, Jr., Trustee(s) for General Electric Capital Corporation, dated December 31, 1996, in the amount of $10,000,000.00 recorded in Book 1063, Page 337, Beaufort County Registry. (To be modified). 8. Assignment of Rents recorded in Book 1063, Page 372, Beaufort County Registry. (To be modified). 9. Survey entitled, "Site Plan for Fountain Powerboats, Inc.", dated June 27, 1990 and revised August 29 and 31, 1990; and September 5, 1990, by Thomas W. Harwell, Registered Land Surveyor reveals the following: a) power poles, power lines, fire hydrants, indicator posts, control panel, electrical transformers, catch basins, bulkheads and water pump affecting subject property; b) Pamlico River along the Northerly lot line; and c) swale and canal affecting subject property. TRACT III: 1. The lien of all taxes for the year 1998 and thereafter, which are not yet delinquent. 2. Easements to Carolina Power & Light Company recorded in Book 468, Page 43; Book 474, Page 275; Book 540, Page 571; Book 541, Page 76; Book 803, Page 936; and, Book 803, Page 937 Beaufort County Registry. 3. Riparian rights or title to that portion of subject property lying below the highwater mark of Pamlico River and the canal. 4. Rights of others in and to the use of the Pamlico River and the canal. 5. Rights of adjoining property owners in and to ditches affecting subject property. 6. UCC to the benefit of General Electric Capital Corporation in UCC File #96- 1214, Beaufort County Registry. 7. Deed of Trust to William C. Matthews, Jr., Trustee(s) for General Electric Capital Corporation, dated December 31, 1996, in the amount of $10,000,000.00 recorded in Book 1063, Page 337, Beaufort County Registry. (To be modified). 8. Assignment of Rents recorded in Book 1063, Page 372, Beaufort County Registry. (To be modified). 9. Any encroachments, overlaps, boundary line disputes, easements, measurements, variations in area or content, party walls or other facts which a correct survey and inspection of the premises would show subsequent to October 16, 1996. 12 R#2611783.3 [Execution Copy] FIRST AMENDMENT TO AIRCRAFT CHATTEL MORTGAGE THIS FIRST AMENDMENT TO AIRCRAFT CHATTEL MORTGAGE (this "Amendment") is made this 2nd day of September, 1998, by and among REGINALD M. FOUNTAIN, JR., an individual with a place of business at 1653 Whichard's Beach Road, P.O. Drawer 457, Washington, North Carolina 27889 ("RMF"); FOUNTAIN POWERBOATS, INC., a North Carolina corporation with its principal place of business at 1653 Whichard's Beach Road, P.O. Drawer 457, Washington, North Carolina 27889 (the "Borrower"); and GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation having an office at 6100 Fairview Road, Suite 1450, Charlotte, North Carolina 28210, both individually (in its individual corporate capacity, "GECC") and in its capacity as the agent for the lenders from time to time to the Omnibus Agreement referred to below (in such capacity, the "Agent"). BACKGROUND: A. RMF and GECC heretofore entered into that Aircraft Chattel Mortgage, dated as of July 11, 1996, recorded by the Federal Aviation Administration on September 17, 1996 at its office in Oklahoma City, Oklahoma under document number DD011087 (the "Mortgage"), pursuant to which RMF encumbered the Aircraft (as described and defined in the Mortgage) as security for the promissory note referred to therein (the "Original Note") evidencing a loan made by GECC to RMF in the original principal amount of $1,067,810.66 (the "Aircraft Loan"). B. Pursuant to a Transfer and Assumption Agreement, dated October 1, 1997, recorded by the Federal Aviation Administration on December 4, 1997 at its office in Oklahoma City, Oklahoma under document number FF23142 (the "Transfer and Assumption Agreement"), RMF transferred and conveyed the Aircraft to the Borrower, subject to the Mortgage, and the Borrower assumed liability for the repayment of the principal of, premium, if any, and interest on the Original Note. C. Pursuant to the Omnibus Agreement referred to below, the Original Note has been amended and restated by an Amended and Restated Promissory Note, dated the date hereof, executed by the Borrower and made payable to the order of GECC in the principal amount of $9,007,797.00 (the Original Note, as the same has been so amended and restated by said Amended and Restated Promissory Note, and together with all promissory notes delivered in substitution or exchange therefor, in each case as the same may be modified, amended, supplemented, restated, extended, consolidated, renewed or replaced and in effect from time to time, is referred to herein as the "Amended Aircraft Note"). D. The Borrower, GECC and the Agent, together with Fountain Powerboat Industries, Inc., Fountain Power, Inc. and Transamerica Business Credit Corporation ("Transamerica" and, together with GECC, the "Lenders") have entered into an Omnibus Agreement, dated the date hereof (as the same may be amended, supplemented, restated, extended, renewed, replaced or otherwise modified and in effect from time to time, the "Omnibus Agreement"), pursuant to which, among other things, (1) GECC and the Borrower have agreed to amend and restate the terms of another note evidencing a loan made by GECC to Reginald M. Fountain, Jr. on July 11, 1996 in the original principal amount of $1,067,810.66 (the "Aircraft Loan"), the liability for which was subsequently assumed by the Borrower pursuant to the Aircraft Loan Assumption Agreement (as defined in the Omnibus Agreement), said amendment and restatement being set forth in, and the outstanding principal balance of said loan being evidenced by, that Amended and Restated Promissory Note, dated the date hereof, executed by the Borrower in the principal amount of $855,050.41 and payable to the order of GECC (the "Amended Aircraft Note"), and (2) Transamerica has agreed to make a loan of $4,000,000 to the Borrower (the "Transamerica Loan"; the GECC Loan, the Aircraft Loan and the Transamerica Loan are sometimes referred to herein collectively as the "Loans" and individually as a "Loan"), which loan is evidenced by that Promissory Note, dated the date hereof, executed by the Borrower in the principal amount of $4,000,000.00 and payable to the order of Transamerica (the "Transamerica Note"). E. Pursuant to the Omnibus Agreement, the Borrower has agreed that the Aircraft and all other property encumbered by the Mortgage shall secure not only the Aircraft Loan but all of the Loans on a ratable basis, and that the Agent, for the ratable benefit of the Lenders now or from time to time hereafter party to the Omnibus Agreement, shall succeed to all of GECC's right, title and interest in, to and under the Mortgage and hold the Aircraft and other assets encumbered thereby, for the ratable benefit of the Lenders, as security for the payment of the principal of, premium, if any, and interest on the Loans and the payment and performance of the other Obligations (as such term is defined in the Omnibus Agreement). NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows: 1. Definitions. (a) Unless otherwise defined herein, terms defined in the Omnibus Agreement are used herein as therein defined. (b) The terms as defined below, for all purposes of this Amendment (except as herein otherwise expressly provided or unless the context otherwise requires), shall have the meanings set forth herein: "Collateral" means the Aircraft and any and all other assets now or hereafter conveyed or encumbered by the Mortgage. "Notes" means the Amended GECC Note, the Amended Aircraft Note and the Transamerica Note, in each case together with all promissory notes delivered in substitution or exchange therefor, in each case as the same may be modified, amended, supplemented, restated, extended, consolidated, renewed or replaced and in effect from time to time. "RMF Security Agreement" means that Security Agreement, dated September 30, 1997, by and between the Borrower and RMF pursuant to which the Borrower granted to RMF a security interest in the Collateral in order to secure the Borrower's indebtedness to RMF evidenced by the Borrower's promissory note, dated September 30, 1997, in the principal amount of $415,820.57 payable to the order of RMF. (c) Any term defined in the singular (whether herein or in the Omnibus Agreement) shall have the corresponding meaning when used in the plural, and vice versa. 2. Transfer to the Agent. GECC hereby transfers, conveys and assigns to the Agent all of its rights in, to and under the Mortgage, the Collateral and the Transfer and Assumption Agreement, to be held by the Agent for the ratable benefit of the Lenders to secure the repayment of the principal of, premium, if any, and interest on the Loans and the Notes and the payment and performance of any and all other Obligations. The Agent hereby accepts the aforesaid transfer, conveyance and assignment. 3. Security for Obligations. RMF and the Borrower hereby agree that henceforth the Collateral shall secure the payment when due of the principal, premium, if any, and interest on the Loans and the Notes, and the payment when due and performance of any and all other Obligations. In confirmation of the foregoing, the Borrower hereby conveys, pledges and mortgages to the Agent, for the ratable benefit of the Lenders, the Aircraft, including without limitation the equipment described in the Mortgage and/or in the schedules attached thereto, to have and to hold the same unto the Agent until all the entire principal of, premium, if any, and interest on the Loans and the Notes, and all of the other Obligations, are paid in full. 4. Construction of Mortgage Terms. The terms set forth in the following table, as used in the Mortgage, shall be deemed to refer to the terms defined in this Agreement (or in the Omnibus Agreement, as the case may be) as set forth opposite such terms: The following term used in the Mortgage Shall be deemed to refer to "loan" or "loans" the Loans "Note" the Notes "Mortgagee" the Agent, acting in its capacity as such for the ratable benefit of the Lenders from time to time party to the Omnibus Agreement "Mortgagor" the Borrower In addition, the phrase "indebtedness secured hereby" and the phrase "indebtedness of Mortgagor to Mortgagee" shall be construed to refer to the Borrower's indebtedness in respect of the principal of, premium, if any, and interest on the Loans and Notes and in respect of all other Obligations. 5. Representations. The Borrower hereby represents and warrants to the Agent that: (a) each of the representations and warranties set forth in the Mortgage is true and correct on the date hereof (it being understood that, for purposes of this paragraph, each reference therein to the "Mortgagor" shall be construed to refer to the Borrower and each reference therein to the "Note" shall be construed to refer to the Loans, the Notes and the other Obligations); (b) the Borrower has the corporate power and authority to enter into this Amendment and to do all acts and things as are required or contemplated hereunder and under the Mortgage, as modified and amended hereby (as so modified and amended, the "Amended Mortgage"), to be done, observed and performed by it; (c) this Amendment has been duly authorized, validly executed and delivered by one or more authorized officers of the Borrower and this Amendment and the Amended Mortgage each constitutes the legal, valid and binding obligation of the Borrower enforceable against it in accordance with its terms; (d) the execution and delivery of this Amendment and Borrower's performance hereunder and under the Amended Mortgage do not and will not require the consent or approval of any court, regulatory authority or governmental authority or agency having jurisdiction over the Borrower; (e) none of the execution and delivery by the Borrower of this Amendment, the consummation of the transactions herein contemplated or compliance with the provisions hereof or of the Amended Mortgage does or will (i) violate, conflict with, result in the breach of, or constitute a default under (A) any applicable laws, (B) the Articles of Incorporation, Bylaws or board resolutions of any Fountain Corporation, (C) any instrument, agreement or contract to which any Fountain Corporation is a party, or by or to which any Fountain Corporation or any properties of any Fountain Corporation may be affected, bound or subject, or (D) any order, writ, injunction or decree of any court, arbitrator or governmental or regulatory authority, or (ii) result in the creation or imposition of any lien, charge or encumbrance upon any assets of any Fountain Corporation (except those created hereunder). 6. Subordination. RMF hereby agrees that the RMF Security Agreement and the security interest in the Collateral created thereunder shall be and is hereby made unconditionally junior, subordinate and in all respects subject to the Amended Mortgage, as the same may be further amended, supplemented, restated, extended, renewed, replaced or otherwise modified and in effect from time to time, and to all of the liens and encumbrances on and against the Collateral created by or pursuant thereto. RMF further agrees that unless and until all of the Loans, the Notes and all other Obligations are finally and indefeasibly paid and satisfied in full, he shall take no action to foreclose or otherwise enforce the RMF Mortgage or to liquidate, sell or realize upon the Collateral or any thereof. The terms of RMF's subordination are more fully set forth in a Subordination Agreement, dated the date hereof, by and from RMF to and in favor of the Agent and the Lenders, a copy of which is attached hereto as Exhibit A. 7. Counterparts. This Amendment may be executed in multiple counterparts, each of which shall be deemed to be an original and all of which, taken together, shall constitute one and the same agreement. 8. Law of Contract. This Amendment shall be deemed to be made pursuant to the laws of the State of North Carolina with respect to agreements made and to be performed wholly in the State of North Carolina and shall be construed, interpreted, performed and enforced in accordance therewith. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers duly authorized to do so, as of the day and year first above written. THE BORROWER: ATTEST: FOUNTAIN POWERBOATS, INC. By: Secretary Name: Reginald M. Fountain, Jr. Title: President [CORPORATE SEAL] NORTH CAROLINA _______________ COUNTY I, _______________________________, a Notary Public of ___________ County, North Carolina, do hereby certify that ______________________________ 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 _____ day of ______________, 1998. Notary Public [NOTARY SEAL] My commission expires: ______________________ [This is a signature page to the First Amendment to Aircraft Mortgage, signed by the party named above] [Signatures continued from preceding page] RMF: (SEAL) Reginald M. Fountain, Jr. NORTH CAROLINA _______________ COUNTY I, _______________________________, a Notary Public of ___________ County, North Carolina, do hereby certify that Reginald M. Fountain, Jr. personally came before me this day and acknowledged the execution of the foregoing instrument. WITNESS my hand and notarial seal, this _____ day of August, 1998. Notary Public [NOTARY SEAL] My commission expires: ______________________ 0This is a signature page to the First Amendment to Aircraft Mortgage, signed by the parties named above] [Signatures continued from preceding page] GECC AND THE AGENT: ATTEST: GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation, individually and as Agent By: Secretary Name: Title: [CORPORATE SEAL] STATE OF ______________ _______________ COUNTY I, _______________________________, a Notary Public of ___________ County, State of ____________________, do hereby certify that ______________________________ personally came before me this day and acknowledged that [s]he is the _________ Secretary of General Electric Capital Corporation, a New York 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 _____ day of August, 1998. Notary Public [NOTARY SEAL] My commission expires: ______________________ [This is a signature page to the First Amendment to Aircraft Mortgage, signed by the party named above] 11 R#261950.3 Drawn by and return to: Stephen Yeagy, Esquire Womble Carlyle Sandridge & Rice, PLLC P. O. Box 831 Raleigh, Carolina 27602-0831 [Execution Copy] NORTH CAROLINA ) ) BEAUFORT COUNTY ) FIRST AMENDMENT TO ASSIGNMENT OF RENTS AND LEASES THIS FIRST AMENDMENT TO ASSIGNMENT OF RENTS AND LEASES (this "Amendment"), is made as of the 2nd day of September, 1998, by and between FOUNTAIN POWERBOATS, INC., a North Carolina corporation, whose address is 1653 Whichard's Beach Road, Washington, North Carolina 27889 (hereinafter referred to as the "Assignor"), and GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation, whose address is 6100 Fairview Road, Suite 1450, Charlotte, North Carolina 28210, acting both in its capacity as "Assignee" under the Existing Assignment, as hereinafter defined ("GECC" or, in such capacity, the "Original Assignee") and in its capacity as the agent for the ratable benefit of the lenders now or from time to time hereafter party to the Omnibus Agreement referred to below (in such capacity, the "Agent" or, as the assignee hereunder and under the Assignment, as hereinafter defined, the "Assignee"); and amends, modifies and supplements the following instrument (said instrument, together with all prior amendments, supplements and modifications thereto and thereof, if any, is referred to herein as the "Existing Assignment"): Assignment of Rents and Leases, dated December 31, 1996, by and between the Assignor and GECC, which Assignment of Rents and Leases is recorded at Book 1063, Page 372, in the Office of the Register of Deeds , beaufort County, North Carolina. RECITALS: A. The Existing Assignment was first given as security for the promissory note referred to therein (the "Original Note") evidencing a loan made by GECC to the Assignor in the original principal amount of $10,000,000 (the "GECC Loan"), and encumbers certain rents, leases and other assets arising from or relating to the real property (and the improvements thereon) as more particularly described therein (the "Original Trust Estate"). B. Pursuant to the Omnibus Agreement referred to below, the Original Note has been amended and restated by an Amended and Restated Promissory Note, dated the date hereof, executed by the Assignor and GECC and made payable to the order of GECC in the principal amount of $9,007,797.00 (the Original Note, as the same has been so amended and restated by said Amended and Restated Promissory Note, and together with all promissory notes delivered in substitution or exchange therefor, in each case as the same may be modified, amended, supplemented, restated, extended, consolidated, renewed or replaced and in effect from time to time, is referred to herein as the "Amended GECC Note"). C. The Assignor, GECC and the Agent, together with Fountain Powerboat Industries, Inc., Fountain Power, Inc. and Transamerica Business Credit Corporation ("Transamerica" and, together with GECC, the "Lenders") have entered into an Omnibus Agreement, dated the date hereof (as the same may be amended, supplemented, restated, extended, renewed, replaced or otherwise modified and in effect from time to time, the "Omnibus Agreement"). Pursuant to and subject to the terms of the Omnibus Agreement, (1) GECC and the Assignor have agreed to amend and restate the terms of another note evidencing a loan made by GECC to Reginald M. Fountain, Jr. on July 11, 1996 in the original principal amount of $1,067,810.66 (the "Aircraft Loan"), the liability for which was subsequently assumed by the Assignor pursuant to the Aircraft Loan Assumption Agreement (as defined in the Omnibus Agreement), said amendment and restatement being set forth in, and the outstanding principal balance of said loan being evidenced by, that Amended and Restated Promissory Note, dated the date hereof, executed by the Borrower in the principal amount of $855,050.41 and payable to the order of GECC (the "Amended Aircraft Note"), and (2) Transamerica has agreed to make a loan of $4,000,000 to the Assignor (the "Transamerica Loan"; the GECC Loan, the Aircraft Loan and the Transamerica Loan are sometimes referred to herein collectively as the "Loans" and individually as a "Loan"), which loan is evidenced by that Promissory Note, dated the date hereof, executed by the Borrower in the principal amount of $4,000,000.00 and payable to the order of Transamerica (the "Transamerica Note"). D. Pursuant to the Omnibus Agreement, the Assignor has agreed that all of the assets and property assigned pursuant to or otherwise encumbered by the Existing Assignment, together with the additional assets and property assigned to the Agent under this Amendment, shall secure not only the GECC Loan but all of the Loans on a ratable basis and that the Agent, for the ratable benefit of the lenders now or from time to time hereafter party to the Omnibus Agreement (the "Lenders"), shall succeed to all of GECC's right, title and interest in, to and under the Assignment (as hereinafter defined) as the assignee thereunder and hold the assignee's interest thereunder and in and to all such assets and property as security for the payment of the principal of, premium, if any, and interest on the Loans and the payment and performance of the other "Obligations" (as such term is defined in the Omnibus Agreement). E. The Assignor has acquired certain additional real property (which, together with the improvements thereon, is referred to herein as the "Additional Trust Estate"), which property is adjacent to the Original Trust Estate and which, together with the Original Trust Estate. is more particularly described in Exhibit A attached hereto and incorporated herein by reference (the Original Trust Estate and the Additional Trust Estate are collectively referred to as the "Trust Estate"). As a condition of the undertakings of the Lenders under the Omnibus Agreement, the Assignor is required, and the Assignor has agreed, to assign, convey and transfer to the Agent, for the ratable benefit of the Lenders, the rents and leases affecting any part of the Additional Trust Estate under and subject to, and as a part of, the property encumbered by the lien of the Assignment. By an assignment of all of the rents and leases at any time affecting any or all of the Trust Estate, the Assignor desires to secure the payment and performance of the Loans, the Notes with interest and premium, if any, and any renewals or extensions thereof, in whole or in part, and the payment and performance of all of the other Obligations" (as such term is hereinafter defined), including without limitation the additional payments hereinafter agreed to be made. F. The Assignor and the Assignee desire to make certain other modifications and amendments to the Existing Assignment. NOW, THEREFORE, the Assignor, the Assignee and GECC hereby agree as follows: 1. Definitions. (a) Except as otherwise provided herein, terms defined in the Existing Assignment are used herein as therein defined. 2. 3. (b) The following terms defined in the Omnibus Agreement are used herein as therein defined: "Deed of Trust", "Event of Default", "Loan Documents" and "Security Documents". 4. 5. (c) In addition to the terms defined above in the first paragraph of and in the Recitals to this Amendment, the terms as defined below, for all purposes of this Amendment (except as herein otherwise expressly provided or unless the context otherwise requires), shall have the meanings set forth herein: 6. "Assignment" means the Existing Assignment, as amended pursuant to this Amendment and as the same may be amended, supplemented, restated, extended, renewed, replaced or otherwise modified and in effect from time to time. "Leases" shall have the meaning assigned to such term in Section 4 hereof. "Notes" means the Amended GECC Note, the Amended Aircraft Note and the Transamerica Note, in each case together with all promissory notes delivered in substitution or exchange therefor, in each case as the same may be modified, amended, supplemented, restated, extended, consolidated, renewed or replaced and in effect from time to time. "Obligations" shall have the meaning assigned to such term in Section 3 hereof. "Rents" shall have the meaning assigned to such term in Section 4 hereof. (d) Any term defined in the singular (whether herein, in the Existing Assignment or in the Omnibus Agreement) shall have the corresponding meaning when used in the plural, and vice versa. (e) Any terms that are defined in this Amendment, and any term defined in the Omnibus Agreement and identified in paragraph (b) of this Section, which are used without express definition in the text of any of the modifications to the Existing Assignment made hereunder shall, as part of the Assignment, have the meanings so assigned to them in this Amendment or the Omnibus Agreement, as the case may be. 1. Transfer of Assignee's Interest. GECC, as assignee under the Existing Assignment, hereby transfers, conveys and assigns to the Agent all of its rights in, to and under the Assignment and "Rents" and "Leases" referred to therein and all of the assets and property conveyed, assigned or otherwise encumbered thereby or pursuant thereto, to be held by the Agent for the ratable benefit of the Lenders to secure the repayment of the principal of, premium, if any, and interest on the Loans and the Notes and the payment and performance of any and all other Obligations. The Agent hereby accepts the aforesaid transfer, conveyance and assignment. 2. 3. Security for Obligations. The Assignor agrees that, from and after the date of this Amendment, the Assignment shall secure the Loans, the Notes, and any and all liabilities and obligations of the Assignor thereunder or under the Omnibus Agreement, the Security Documents or the other Loan Documents (i) for the payment of the principal of the Loans and the Notes in the aggregate principal amount of $13,862,847.41, together with all premium, if any, and interest thereon; (ii) for the payment of the principal of and interest, if any, on any and all other "Obligations" (as such term is defined in the Omnibus Agreement); (iii) for the payment of all reasonable attorney's fees, court costs and expenses of whatever nature incurred in collection of such indebtedness and the enforcement or protection of the interest of the Assignee and the Lenders under the Assignment, (iv) for the payment of all sums advanced by the Assignee of the Lenders to protect the Trust Estate, with interest thereon at the Default Rate; (v) for the performance of the Assignor's obligations and agreements contained in the Assignment, the Notes, the Omnibus Agreement, the Security Documents, the other Loan Documents, and any other instrument or modifications or amendments thereof given to evidence or further secure the payment and performance of any obligation or indebtedness secured hereby (all of the foregoing, including the "Obligations" as defined in the Omnibus Agreement, are collectively referred to herein as the "Obligations"). 4. 5. Assignment and Conveyance. As security for the repayment and performance of all of the Obligations, the Assignor 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 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 the Trust Estate. Notwithstanding any provision herein to the contrary, the Assignment, and the assignments made herein, are 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 for the ratable benefit of the Lenders, contingent only upon the occurrence of an Event of Default (as defined in the Omnibus Agreement). 6. 7. Covenants, Etc. Applicable. All covenants, obligations and undertakings of the Assignor, and all other terms, conditions, defaults and other provisions, contained in the Existing Assignment relating in any manner to the "Leases", the "Rents" and/or "Trust Estate" (each as defined in the Existing Assignment) or any part thereof shall be deemed to apply to the Rents, Leases and Trust Estate (each as defined herein), whether or not expressly referred to herein. 8. 9. Construction of Terms. (a) The terms set forth in the table appearing in Schedule A attached hereto and incorporated herein by reference, as used in the Existing Assignment, henceforth shall be deemed to refer to the terms defined in this Amendment or (if so indicated) in the Omnibus Agreement as set forth opposite such terms. 10. 11. (b) In addition, (i) each reference in the Existing Assignment to the debt secured thereby shall be construed to refer to the debt evidenced by the Notes and the other Obligations and (ii) each reference in the Existing Assignment to an "Event of Default" (including any "Event of Default" under or as defined in the "Note" or the "Deed of Trust") shall be deemed to refer to an Event of Default under, and as defined in, the Omnibus Agreement. 12. 13. Additional Specific Amendments. 14. (a) The first sentence of the fourth paragraph of the Existing Assignment is hereby amended and restated in its entirety as follows: (b) "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 or any Lender under the terms of the Notes or any other Loan Documents." (a) The penultimate sentence of the fifth paragraph of the Existing Assignment (being the first full paragraph on page 2 of the Existing Assignment) is hereby amended and restated in its entirety as follows: (b) "In no event, however, shall the Assignee or any Lender 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 or such Lender, as the case may be, by the Assignor." (a) The eighth paragraph of the Existing Assignment (being the fourth full paragraph on page 2 of the Existing Assignment) is hereby amended and restated in its entirety as follows: (b) "Neither the Assignee nor any Lender shall 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 and the Lenders for, and to save them 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 or such Lender, as the case may be, 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 any Lender, or make the Assignee or any Lender 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." (a) The penultimate paragraph of the Existing Assignment (being the penultimate paragraph on page 3 of the Existing Assignment) is hereby amended and restated in its entirety as follows: (b) "Neither the existence of this Assignment nor the exercise of the privilege to collect the Rents shall be construed as a waiver by the Assignee or any Lender, or any of their respective successors and assigns, of the right to enforce payment and performance of the Obligations, in strict accordance with the terms and provisions of the Notes and the other Loan Documents." 1. Ratification, Etc. Except as herein expressly modified and amended, the Assignment shall be and continue in full force and effect. Neither the Assignor nor the Assignee intends that anything in this Amendment shall be construed as a novation, and this Amendment does not effect a novation. The Assignor hereby ratifies and confirms the conveyances and assignments provided in, and the security provided by and its duties, obligations and responsibilities under, the Existing Assignment, as the same heretofore may have been and by this Amendment hereby is modified and amended, and acknowledges that the Existing Assignment, as so modified, supplemented and amended, is fully enforceable against the Rents, Leases and other assets and property therein described. The Existing Assignment, all prior amendments and supplements thereto and modifications thereof, if any, and this Amendment shall be construed together as a single instrument. 2. 3. North Carolina Law . This Amendment shall be construed in accordance with and governed by, and any dispute arising out of or related to the relationship established among the parties from time to time party hereto in connection with this Amendment (and whether arising in contract, tort, equity, or otherwise) shall be resolved in accordance with, the internal laws and not the conflicts of law provisions of the State of North Carolina. This Amendment is intended to be effective an instrument executed under seal. 4. 5. Counterparts. This Amendment may be executed in two or more counterparts, each of which shall be an original and all of which, together, shall constitute but one instrument. Any duplicate original of this instrument may be recorded with the Register of Deeds of any county in which the Land, or any portion thereof, is located. 6. 7. 8. 9. 10. 11. 12. [Signatures follow on separate pages] IN WITNESS WHEREOF, the Assignor, GECC and the Agent have executed this Amendment under seal as of the day and year first above written. ASSIGNOR: ATTEST: FOUNTAIN POWERBOATS, INC., a North Carolina corporation By: Secretary Name: Reginald M. Fountain, Jr. Title: President [CORPORATE SEAL] NORTH CAROLINA _______________ COUNTY I, _______________________________, a Notary Public of ___________ County, North Carolina, do hereby certify that ______________________________ 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 _____ day of August, 1998. __________________________ Notary Public [NOTARY SEAL] My commission expires: ______________________ [This is a signature page to the First Amendment to Assignment of Rents, signed by the party named above] [Signatures continued from preceding page] GECC AND AGENT: ATTEST: GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation, individually and as Agent By: Secretary Name: Title: [CORPORATE SEAL] STATE OF ______________ _______________ COUNTY I, _______________________________, a Notary Public of ___________ County, State of ____________________, do hereby certify that ______________________________ personally came before me this day and acknowledged that [s]he is the _________ Secretary of General Electric Capital Corporation, a New York 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 _____ day of August, 1998. __________________________ Notary Public [NOTARY SEAL] My commission expires: ______________________ [This is a signature page to the First Amendment to Assignment of Rents, signed by the parties named above] SCHEDULE A TO FIRST AMENDMENT TO ASSIGNMENT OF RENTS The terms set forth in the following table, as used in the Existing Assignment, henceforth shall be deemed to refer to the terms defined in this Amendment or (if so indicated) in the Omnibus Agreement as set forth opposite such terms. The following term used in the Mortgage Shall be deemed to refer to this "Assignment" the Assignment "Assignee" the Agent, acting in its capacity as such for the ratable benefit of the Lenders from time to time party to the Omnibus Agreement "Deed of Trust" the Deed of Trust (as defined in the Omnibus Agreement) "Event of Default" an Event of Default (as defined in the Omnibus Agreement) "Leases" the Leases "Loan Instruments" the Loan Documents (as defined in the Omnibus Agreement) "Note" the Notes "Rents" the Rents "Trust Estate" the Trust Estate EXHIBIT A Legal Description of Trust Estate 5 R#262003.3 [Execution Copy] CORPORATE GUARANTY Date: September 2, 1998 TO: The Agent and each of the Lenders from time to time party to the Omnibus Agreement referred to below c/o General Electric Capital Corporation 6100 Fairview Road, Suite 1450 Charlotte, North Carolina 28210 This Guaranty is issued pursuant to that Omnibus Agreement, dated the date hereof (as the same may be amended, supplemented, restated, extended, renewed, replaced or otherwise modified and in effect from time to time, the "Omnibus Agreement"), by and among the FOUNTAIN POWERBOATS, INC., a North Carolina corporation (the "Customer"), the undersigned, Transamerica Business Credit Corporation, a Delaware corporation, and General Electric Capital Corporation, a New York corporation acting both in its individual corporate capacity and in its capacity as agent for the lenders from time to time party to the Omnibus Agreement (the "Lenders"). Unless otherwise defined herein, terms defined in the Omnibus Agreement are used herein as therein defined. To induce you to make and/or modify the Loans as contemplated by the Omnibus Agreement, 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, do hereby jointly and severally guarantee to you, your successors and assigns, the due regular and punctual payment when due of the principal of, premium, if any, and interest on the Notes and of any and all of the other Obligations (whether consisting of principal, interest, premium, 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 do hereby further jointly and severally guarantee to you, your successors and assigns, the due, regular and punctual performance of any and all non-payment Obligations. The undersigned do hereby further jointly and severally 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, 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 guarantor is a wholly owned subsidiary of the Customer and likewise shall be directly benefitted 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. This 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 Collateral given in connection with the Obligations. Each of the undersigned hereby waives any and all rights under Sections 26-7 et seq. of the North Carolina General Statutes 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, and the obligations of the undersigned shall be joint and several with any other Person who shall guaranty the payment or performance of all or any part of the Obligations. Each of 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 or enforceability of the Omnibus Agreement, any Note, any other Loan Document or any other instrument, agreement or document; (b) any extension, renewal, amendment, change, waiver or other modification of any Loan Document or any other instrument, agreement or document; (c) the absence of, or delay in, any action to enforce any Loan Document, this Guaranty or any other instrument, agreement or document; (d) failure or delay by any of you 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, any 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 Customer's 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 each of you (at your address for notice provided in or pursuant to the Omnibus Agreement) 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 (together with interest and premium , if any, thereon accruing or due either before or after your receipt of such written termination notice, with respect to all of which this Guaranty shall continue in full force and effect notwithstanding any such termination) are indefeasibly paid and performed in full. Each of 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. Each of the undersigned warrants that it has adequate means to obtain from the Customer on 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 final and indefeasible payment in full to you of all Obligations and is hereby assigned to you as a security therefor. Each of 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 each of 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 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 the Lenders, one by the undersigned 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. Notwithstanding the provisions of preceding paragraph or any similar provision contained in any other Loan Document, neither the commencement or pendency of, or demand by any party for, any arbitration proceedings to determine any controversy or claim arising out of or relating to this Guaranty shall preclude the Lenders or the Agent, if an Event of Default shall have occurred, from causing the maturity of the Obligations or the Notes to be accelerated or enforcing any rights or remedies (including, without limitation, foreclosure, sale, liquidation or other rights or remedies) with respect to any Collateral, all of which rights and remedies (including, without limitation, the right to cause the maturity of the Obligations or the Notes to be accelerated) may be exercised if an Event of Default shall have occurred, notwithstanding the commencement or pendency of or demand for any such proceedings. 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 other 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 the Lenders. 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 and their respective successors and assigns and the benefits thereof shall extend to and include the Agent, the Lenders and their respective successors and assigns. In the event of default hereunder, you may at any time inspect the records of the undersigned or, at your option, each of the 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 corporate guarantor warrants that he had authority to sign on behalf of such corporation and by so signing, to bind said guarantor corporation hereunder. [Signatures follow on separate pages] IN WITNESS WHEREOF, this Guaranty is executed the day and year first above written. ATTEST: FOUNTAIN POWERBOAT INDUSTRIES, INC. By: Secretary Name: Reginald M. Fountain, Jr. Title: President [CORPORATE SEAL] ATTEST: FOUNTAIN POWER, INC. By: Secretary Name: Reginald M. Fountain, Jr. Title: President [CORPORATE SEAL] R#266438.2 [Execution Copy] MASTER SECURITY AGREEMENT THIS MASTER SECURITY AGREEMENT, made this 2nd day of September, 1998, ("Agreement"), by and between GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation with an address at 6100 Fairview Road, Suite 1450, Charlotte, North Carolina, acting not in its individual capacity but in its capacity for the ratable benefit of the Lenders (as hereinafter defined) from time to time party to the Omnibus Agreement referred to below (in such capacity, the "Agent"), and FOUNTAIN POWERBOAT INDUSTRIES, INC., a corporation organized and existing under the laws of the State of Nevada, with its chief executive offices and principal place of business located at 1653 Whichard's Beach Road, Washington, North Carolina 27889 (the "Debtor"). This Agreement is given in connection with the loans referenced in and governed by that Omnibus Agreement, dated the date hereof (as the same may be amended, supplemented, restated, extended, renewed, replaced or otherwise modified and in effect from time to time, the "Omnibus Agreement"), among Fountain Powerboats, Inc., a North Carolina corporation (the "Borrower"), Fountain Power, Inc., a North Carolina corporation, the Debtor, General Electric Capital Corporation, a New York corporation acting in its individual corporate capacity (in such capacity, "GECC"), Transamerica Business Credit Corporation, a Delaware corporation ("Transamerica" and, together with GECC and any other lender from time to time party to the Omnibus Agreement, the "Lenders"). WITNESSETH: WHEREAS, the Borrower is indebted to the respective Lenders in the aggregate principal amount of $13,862,847.71, as evidenced by the Notes (as such term is defined, and used hereinafter as so defined, in the Omnibus Agreement); and WHEREAS, the Notes are secured by the Deed of Trust (as such term is defined, and used hereinafter as so defined, in the Omnibus Agreement) which encumbers certain real property located in Beaufort County, North Carolina and described in Exhibit A attached hereto and incorporated herein by reference (the "Real Property"); and WHEREAS, as a condition to GECC's modification of the terms of the GECC Loan and the Aircraft Loan (as such terms are defined, and used hereinafter as so defined, in the Omnibus Agreement) pursuant to the Omnibus Agreement and Transamerica's making of the Transamerica Loan (as such term is defined, and used hereinafter as so defined, in the Omnibus Agreement) pursuant to the Omnibus Agreement, the Lenders have required and the Debtor agreed to grant to the Agent the security interests hereinafter set forth. The Debtor owns all of the issued and outstanding capital stock of the Borrower and shall derive direct financial benefit from the transactions contemplated by the Omnibus Agreement. 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, The Debtor and the Agent hereby agree as follows: 1. DEFINITIONS. Unless otherwise defined in this Agreement, terms defined in the Omnibus Agreement are used herein as therein defined. 2. CREATION OF SECURITY INTEREST. The Debtor hereby gives, grants and assigns to the Agent, its successors and assigns forever, for the ratable benefit of the Lenders, a security interest in and against any and all of the following property: (a) Tangible Personal Property. All furniture, furnishings, machinery, apparatus, equipment 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 (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 Agent 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), wherever 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, any 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 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; (iii) 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 or final), accounts and all other sums credited by, maintained with or due from 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. (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 when due of the principal of, premium, if any, and interest on the Notes and the payment and performance of any and all of the other Obligations. 3. REPRESENTATIONS, WARRANTIES, AND COVENANTS OF DEBTOR. The 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 Omnibus Agreement and each of the other Loan Documents to which the Debtor is a party; (c) This Agreement and the other Loan Documents have been duly authorized, executed and delivered by Debtor and constitute legal, valid and binding agreements enforceable under all applicable laws in 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 Loan Documents, except such as may have already been obtained; (e) The entry into, and performance by, Debtor of the Loan 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 the Agent) 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 Loan Documents, except those disclosed in Schedules to the Omnibus Agreement; (g) All financial statements delivered to the Lenders in connection with the Omnibus Agreement 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 the Agent, (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 the Agent, any risk of 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"). 4. COLLATERAL. (a) Until the declaration of any default hereunder, Debtor shall remain in possession of the Collateral; provided, however, that the Agent 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 the Agent's security interest therein be perfected by possession. The Lenders, their respective 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 the Agent, Debtor shall provide the Agent 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 the Agent, (i) part with possession of any of the Collateral (except to dealers for sale of Inventory, to the Agent, 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 Loan Documents. At its option, the Lenders 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 Loan Documents. Debtor shall reimburse the Lenders, on demand, for any and all costs and expenses incurred by the Agent 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 the Agent, its successors and 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 Agent shall require. The Agent and the Agent'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 Agent shall be tagged so as to disclose the security interest of the Agent in such personalty. (f) If agreed by the parties, the Lenders 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. 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 additional 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 of, and as pledge holder for, the Agent. At any time and from time to time, the Agent 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 Agent. 5. 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 the Agent against other risks as required thereby, for the full replacement value thereof, with companies, in amounts and under policies acceptable to Agent. Debtor shall, if the Agent so requires, deliver to the Agent policies of certificates of insurance evidencing such coverage. Each policy shall name the Agent as loss payee thereunder, shall provide for coverage to the Agent 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 the Agent of the cancellation or material modification thereof (unless such insurance coverage is not obtainable). Debtor hereby appoints the Agent 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 payments made as a result of any such insurance policies. Proceeds of insurance shall be applied, at the option of the Required Lenders, to repair or replace the Collateral or to reduce any of the Obligations. 6. REPORTS. (a) Debtor shall promptly notify the Agent 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 the Lenders may require in form satisfactory to the Lenders and as required in the Omnibus Agreement. Any and all financial statements submitted and to be submitted to the Lenders 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. The Lenders may at any reasonable time examine the books and records of Debtor and make copies thereof. 7. FURTHER ASSURANCES. (a) Debtor shall, upon request of the Agent, furnish to the Agent such further information, execute and deliver to the Agent such documents and instruments (including, without limitation, Uniform Commercial Code financing statements) and do such other acts and things, as the Agent 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 the Agent to continue in the Agent a perfected first security interest in the Collateral, and shall obtain and furnish to the Agent 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, the Agent. The Debtor shall provide to the Lenders, a schedule of all Receivables, Tangible Personal Property, and Inventory to the extent required by the Omnibus Agreement. The Debtor shall also notify the Agent of any patent and trademark applications filed each fiscal quarter and take such measures as the Agent 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 Agent's security interest therein, and upon the Agent's request, instruct them to hold all such Inventory for the Agent's account and subject them to the Agent's instructions. If at any time the Agent determines that the Agent'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 Agent) and cause such mortgage to be filed in appropriate governmental offices so as to perfect the Agent's security interests in such vessel. (b) Debtor hereby grants to the Agent 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 the Agent. (c) Debtor shall indemnify and defend the Agent and the Lenders, and their respective 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 Agent shall have no duty or care with respect to the Collateral, except that the Agent 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 Agent'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. EVENTS OF DEFAULT. Debtor shall be in default under this Agreement and each of the other Loan 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 Loan Documents to which it is a party within ten (10) days after its due date; (b) Any attempt by Debtor, without the prior written consent of the Required Lenders, 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 5 of this Agreement; (d) Debtor or the Borrower breaches any of its other obligations under any of the Loan Documents and fails to cure the same within thirty (30) days after written notice thereof from the Agent or any Lender; (e) Any warranty, representation or statement made by Debtor or the Borrower in any of the Loan Documents or otherwise in connection with any of the Obligations 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 Omnibus Agreement or any other Loan Document; or any default by Debtor or the Borrower under any other agreement between Debtor or the Borrower and any Lender 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 Obligations (collectively "Guarantor"), except as permitted in the Omnibus 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, 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. 9. REMEDIES ON DEFAULT. (a) Upon the occurrence of an Event of Default under this Agreement, the Required Lenders, at their option, may declare any or all of the Obligations, including without limitation the Notes, to be immediately due and payable, without demand or notice to Debtor, the Borrower, 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, the Agent 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, the Agent 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 Agent, (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 Agent, 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 the Agent, Debtor shall promptly assemble the Collateral and make it available to the Agent at a place to be designated by the Agent which is reasonably convenient to both parties. The Agent 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 the Agent 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; 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 Loan 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 the Agent or any Lender 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 the Agent 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) The Agent's rights and remedies hereunder or otherwise arising are cumulative and may be exercised singularly or concurrently. Neither the failure nor any delay on the part of the Agent 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. The Agent 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 the Required Lenders. 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 form any arbitration pursuant to this paragraph shall be final and binding upon all parties hereto. Notwithstanding the foregoing or any similar provision contained in any other Loan Document, neither the commencement or pendency of, or demand by any party for, any arbitration proceedings to determine any controversy or claim arising out of or relating to this Agreement or any other Loan Document shall preclude the Lenders or the Agent, if an Event of Default shall have occurred, from causing the maturity of the Obligations or the Notes to be accelerated or enforcing any rights or remedies (including, without limitation, foreclosure, sale, liquidation or other rights or remedies) with respect to any Collateral, all of which rights and remedies (including, without limitation, the right to cause the maturity of the Obligations or the Notes to be accelerated) may be exercised if an Event of Default shall have occurred, notwithstanding the commencement or pendency of or demand for any such proceedings. 10. INVENTORY AND RECEIVABLES COVENANTS. The following are covenants applicable to Inventory and Receivables generally: (a) The Agent'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 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 Required Lenders' prior written consent; no Inventory is or shall ever be stored with a bailee, warehouseman or similar party without the Required Lenders' 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 Agent, in form acceptable to the Required Lenders, warehouse receipts in the Agent'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 Agent. The Debtor hereby agrees to execute and deliver to the Agent, in form satisfactory to the Agent, 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 Agent shall not, under any circumstances, 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 Agent shall not be liable for or prejudiced by any loss, depreciation or other damage to Receivables or other Collateral unless caused by the Agent's willful and malicious act, and the Agent shall have no duty to take any action to preserve or collect any Receivable or other Collateral. (f) The Agent may notify customers at any time that Receivables have been assigned to the Agent and collect them directly in the Agent's own name but, unless and until the Agent does so or gives the Debtor other instructions, the Debtor shall, at its cost and expense, collect and otherwise hold for the Agent as trustee of an express trust for the Agent's benefit all amounts of unpaid Receivables, and, if so requested by the Agent, 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 Required Lenders otherwise consent 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 Agent 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 Agent 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 Agent immediately. (h) To facilitate the maintenance of the Agent's records, the Debtor shall: (i) hold in trust for the Agent'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 Agent promptly with copies of such information as the Agent may reasonable require. The Debtor's billing of customers on such invoices or otherwise shall be conclusive evidence of the assignment to the Agent 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 Agent and are executed and delivered to the Agent from time to time solely for the Agent's convenience in maintaining records of the Collateral; the Debtor's failure to give any of such items to the Agent shall not affect, terminate, modify or otherwise limit the Agent's lien or security interest in the Collateral. 11. MISCELLANEOUS. (a) This Agreement, the Notes and/or any of the other Loan Documents may be assigned, in whole or in part, by the Lenders without notice to Debtor, and Debtor hereby waives any defense, counterclaim or cross-complaint by Debtor against any assignee, agreeing that the Lenders 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) The Agent may correct patent errors herein and fill in all blanks herein or in any Collateral Schedule consistent with the 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 the Agent, its successors and assigns. (e) This Agreement and the other Loan Documents 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 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) In the event of any inconsistency between this Agreement and the Omnibus Agreement, the Omnibus Agreement shall be controlling. (g) This Agreement shall continue in full force and effect until all of the Obligations have been indefeasibly paid in full to the Lenders. This Agreement shall automatically be reinstated in the event that any Lender is ever required to return or restore the payment of all or any portion of the Obligations (all as though such payment had never been made). [Signatures follow on separate pages] IN WITNESS WHEREOF, Debtor and the Agent, 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. THE DEBTOR: ATTEST: FOUNTAIN POWERBOAT INDUSTRIES, INC. By: Secretary Name: Reginald M. Fountain, Jr. Title: President [CORPORATE SEAL] [This is a signature page to the Security Agreement, signed by the party named above] [This page intentionally left blank] [Signatures continued from preceding page] THE AGENT: GENERAL ELECTRIC CAPITAL CORPORATION, as Agent By: Name: Title: [This is a signature page to the Security Agreement, signed by the party named above] EXHIBIT A Legal Description 3 R#262023.5 [Execution Copy] COLLATERAL ASSIGNMENT OF SECURITY INTEREST IN PATENTS, TRADEMARKS AND RELATED APPLICATIONS THIS COLLATERAL ASSIGNMENT OF SECURITY INTEREST IN PATENTS, TRADEMARKS AND RELATED APPLICATIONS (this "Assignment") is made this 2nd day of September, 1998, by and from : FOUNTAIN POWERBOATS, INC., a North Carolina corporation (the "Assignor"), to: GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation, acting in its capacity as agent (in such capacity, the "Agent") for the ratable benefit of the lenders from time to time party to that certain Omnibus Agreement, dated September 2, 1998 (as the same may be amended, supplemented, restated, extended, renewed, replaced or otherwise modified and in effect from time to time, the "Omnibus Agreement"), by and among the Assignor, Fountain Powerboat Industries, Inc., a Nevada corporation, Fountain Power, Inc., a North Carolina corporation, General Electric Capital Corporation, a New York corporation acting in its individual corporate capacity, Transamerica Business Credit Corporation, a Delaware corporation, and the Agent. WHEREAS, the Omnibus Agreement requires Assignor to submit to Agent, on a quarterly basis, a document confirming the Security Interest of Agent, FOR THE RATABLE BENEFIT OF THE LENDERS, in all patents and trademarks with respect to which Assignor has filed an application or an assignment subsequent to the date of the last such document so submitted to the Agent; 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 Agent for the ratable benefit of the Lenders in the Trademarks and all patents and other trademarks of the Assignor, in accordance with the Omnibus Agreement; NOW, THEREFORE, subject to the terms, conditions and limitations set forth in the Omnibus Agreement, and in consideration of the mutual covenants, warranties and promises set forth in the Omnibus Agreement, and other good and valuable consideration, the full receipt and sufficiency of which are hereby acknowledged, Assignor hereby grants and conveys unto Agent, for the ratable benefit of the Lenders, a first lien Security Interest in and to: (i) all trademarks, service marks, copyrights, patents and other intellectual property now owned or hereafter acquired by the Assignor, including, without limitation, the Trademarks (collectively, the "Intellectual Property"); (ii) any federal, state or foreign applications filed with respect to the Intellectual Property; (iii) any federal, state or foreign registrations issued or issuing with respect to the Intellectual Property; (iv) all proceeds of the Intellectual Property, including, but not limited to, any and all royalties and any claims and demands arising out of any infringement of the Intellectual Property, including the right to settle disputes concerning such claims and demands; and (v) all goodwill associated with the Intellectual Property, such grant being hereby effected for the purposes and subject to the terms, conditions and limitations set forth in the Omnibus Agreement. Assignor hereby appoints the Agent, 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 Omnibus Agreement referred to herein, all for the ratable benefit of the Lenders. [Signature follows on a separate page] IN WITNESS WHEREOF, Assignor has duly executed this Collateral Assignment of Security Interest in Patents, Trademarks and Related Applications as of the day and year first above written. ATTEST: FOUNTAIN POWERBOATS, INC., a North Carolina corporation By: Secretary Name: Reginald M. Fountain Title: President [CORPORATE SEAL] NORTH CAROLINA _______________ COUNTY I, _______________________________, a Notary Public of ___________ County, North Carolina, do hereby certify that ______________________________ 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 _____ day of August, 1998. __________________________ Notary Public [NOTARY SEAL] My commission expires: ______________________ SCHEDULE A Assigned Trademarks Registration No. Mark 1,604,523 FOUNTAIN 1,606,329 Miscellaneous Design 1 R#262076.3 [Execution Copy] ASSIGNMENT OF COLLATERAL ASSIGNMENT OF SECURITY INTEREST IN PATENTS, TRADEMARKS AND RELATED APPLICATIONS THIS ASSIGNMENT (this "Assignment") is made this 2nd day of September, 1998, by and from : GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation, acting in its individual corporate capacity (in such capacity, "GECC") to: GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation, acting in its capacity as agent (in such capacity, the "Agent") for the ratable benefit of the lenders from time to time party to that certain Omnibus Agreement, dated September 2, 1998 (as the same may be amended, supplemented, restated, extended, renewed, replaced or otherwise modified and in effect from time to time, the "Omnibus Agreement"), by and among Fountain Powerboats, Inc., a North Carolina corporation ("Fountain"), Fountain Powerboat Industries, Inc., a Nevada corporation, Fountain Power, Inc., a North Carolina corporation, Transamerica Business Credit Corporation, a Delaware corporation, GECC and the Agent. WHEREAS, Fountain has heretofore executed and delivered to GECC a Collateral Assignment of Security Interest in Patents, Trademarks and Related Applications, dated December 31, 1996 which has been filed with the United States Patent and Trademark Office at Reel 1541, Page 374 (the "Collateral Assignment"); and WHEREAS, pursuant to the Omnibus Agreement, GECC has agreed to assign to the Agent all of its right, title and interest in and to the Collateral Assignment and in and to the Security Interest (as such term is defined in the Collateral Assignment), to be held by the Agent, for the ratable benefit of the Lenders, as security for the Obligations (as such term is defined, and used herein as so defined, in the Omnibus Agreement) from time to time owing to the lenders from time to time party to the Omnibus Agreement (the "Lenders"); and WHEREAS, Fountain has agreed that all of the assignee's right, title and interest in and to the Collateral Assignment and the Security Interest shall be so held by the Agent, for the ratable benefit of the Lenders, as security for the Obligations, and Fountain joins in this Assignment to confirm such agreement. NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, GECC hereby assigns, transfers and conveys to the Agent all of GECC's right, title and interest in, to and under the Collateral Assignment and the Security Interest, which the Agent shall and hereby agrees to hold for the ratable benefit of the Lenders as security for the Obligations. Fountain hereby agrees that the Collateral Assignment and the Security Interest shall secure any and all of the Obligations from time to time owing to the Lenders. To confirm the same, Fountain hereby further agrees that, subject to the terms, conditions and limitations set forth in the Omnibus Agreement and the other Loan Documents (as defined in the Omnibus Agreement), and in consideration of the mutual covenants, warranties and promises set forth in the Omnibus Agreement, and other good and valuable consideration, the full receipt and sufficiency of which are hereby acknowledged, Fountain hereby grants and conveys unto Agent, for the ratable benefit of the Lenders, a first lien security interest in and to the trademarks identified in the Collateral Assignment (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 Omnibus Agreement. GECC and Fountain hereby appoint General Electric Capital Corporation, in its capacity as Agent, for the ratable benefit of the Lenders, with full power of substitution, to file and record this Assignment, to transact all business in the United States Patent and Trademark Office in connection with this Assignment and the Collateral Assignment, 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 Assignment, to the Collateral Assignment and to the Omnibus Agreement. [Signatures follow on separate pages] IN WITNESS WHEREOF, the parties have duly executed this Assignment as of the day of and year first above written. GECC AND THE AGENT: ATTEST: GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation, individually and as Agent By: Secretary Name: Title: [CORPORATE SEAL] STATE OF ______________ _______________ COUNTY I, _______________________________, a Notary Public of ___________ County, State of ____________________, do hereby certify that ______________________________ personally came before me this day and acknowledged that [s]he is the _________ Secretary of General Electric Capital Corporation, a New York 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 _____ day of August, 1998. __________________________ Notary Public [NOTARY SEAL] My commission expires: ______________________ [This is a signature page to the Assignment of Collateral Assignment of Security Interest in Patents, Trademarks and Related Applications, signed by the parties named above] [Signatures continued from preceding page] FOUNTAIN: ATTEST: FOUNTAIN POWERBOATS, INC., a North Carolina corporation By: Secretary Name: Reginald M. Fountain, Jr. Title: President [CORPORATE SEAL] NORTH CAROLINA _______________ COUNTY I, _______________________________, a Notary Public of ___________ County, North Carolina, do hereby certify that ______________________________ 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 _____ day of August, 1998. __________________________ Notary Public [NOTARY SEAL] My commission expires: ______________________ [This is a signature page to the Assignment of Collateral Assignment of Security Interest in Patents, Trademarks and Related Applications, signed by the parties named above] 3 R#266433.2 [Execution Copy] COLLATERAL ASSIGNMENT OF SECURITY INTEREST IN PATENTS, TRADEMARKS AND RELATED APPLICATIONS THIS COLLATERAL ASSIGNMENT OF SECURITY INTEREST IN PATENTS, TRADEMARKS AND RELATED APPLICATIONS (this "Assignment") is made this 2nd day of September, 1998, by and from : FOUNTAIN POWERBOAT INDUSTRIES, INC., a Nevada corporation (the "Assignor"), to: GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation, acting in its capacity as agent (in such capacity, the "Agent") for the ratable benefit of the lenders from time to time party to that certain Omnibus Agreement, dated September 2, 1998 (as the same may be amended, supplemented, restated, extended, renewed, replaced or otherwise modified and in effect from time to time, the "Omnibus Agreement"), by and among the Assignor, Fountain Powerboats, Inc., a North Carolina corporation, Fountain Power, Inc., a North Carolina corporation, General Electric Capital Corporation, a New York corporation acting in its individual corporate capacity, Transamerica Business Credit Corporation, a Delaware corporation, and the Agent. WHEREAS, the Omnibus Agreement requires Assignor to submit to Agent, on a quarterly basis, a document confirming the Security Interest of Agent, FOR THE RATABLE BENEFIT OF THE LENDERS, in all patents and trademarks with respect to which Assignor has filed an application or an assignment subsequent to the date of the last such document so submitted to the Agent; 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 Agent for the ratable benefit of the Lenders in the Trademarks and all patents and other trademarks of the Assignor, in accordance with the Omnibus Agreement; NOW, THEREFORE, subject to the terms, conditions and limitations set forth in the Omnibus Agreement, and in consideration of the mutual covenants, warranties and promises set forth in the Omnibus Agreement, and other good and valuable consideration, the full receipt and sufficiency of which are hereby acknowledged, Assignor hereby grants and conveys unto Agent, for the ratable benefit of the Lenders, a first lien Security Interest in and to: (i) all trademarks, service marks, copyrights, patents and other intellectual property now owned or hereafter acquired by the Assignor, including, without limitation, the Trademarks (collectively, the "Intellectual Property"); (ii) any federal, state or foreign applications filed with respect to the Intellectual Property; (iii) any federal, state or foreign registrations issued or issuing with respect to the Intellectual Property; (iv) all proceeds of the Intellectual Property, including, but not limited to, any and all royalties and any claims and demands arising out of any infringement of the Intellectual Property, including the right to settle disputes concerning such claims and demands; and (v) all goodwill associated with the Intellectual Property, such grant being hereby effected for the purposes and subject to the terms, conditions and limitations set forth in the Omnibus Agreement. Assignor hereby appoints the Agent, 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 Omnibus Agreement referred to herein, all for the ratable benefit of the Lenders. [Signature follows on a separate page] IN WITNESS WHEREOF, Assignor has duly executed this Collateral Assignment of Security Interest in Patents, Trademarks and Related Applications as of the day and year first above written. ATTEST: FOUNTAIN POWERBOAT INDUSTRIES, INC., a Nevada corporation By: Secretary Name: Reginald M. Fountain Title: President [CORPORATE SEAL] NORTH CAROLINA _______________ COUNTY I, _______________________________, a Notary Public of ___________ County, North Carolina, do hereby certify that ______________________________ personally came before me this day and acknowledged that [s]he is the _________ Secretary of Fountain Powerboat Industries, Inc., a Nevada 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 _____ day of August, 1998. __________________________ Notary Public [NOTARY SEAL] My commission expires: ______________________ SCHEDULE A Assigned Trademarks None 3 R#266436.2 [Execution Copy] COLLATERAL ASSIGNMENT OF SECURITY INTEREST IN PATENTS, TRADEMARKS AND RELATED APPLICATIONS THIS COLLATERAL ASSIGNMENT OF SECURITY INTEREST IN PATENTS, TRADEMARKS AND RELATED APPLICATIONS (this "Assignment") is made this 2nd day of September, 1998, by and from : FOUNTAIN POWER, INC., a North Carolina corporation (the "Assignor"), to: GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation, acting in its capacity as agent (in such capacity, the "Agent") for the ratable benefit of the lenders from time to time party to that certain Omnibus Agreement, dated September 2, 1998 (as the same may be amended, supplemented, restated, extended, renewed, replaced or otherwise modified and in effect from time to time, the "Omnibus Agreement"), by and among the Assignor, Fountain Powerboats, Inc., a North Carolina corporation, Fountain Powerboat Industries, Inc., a Nevada corporation, General Electric Capital Corporation, a New York corporation acting in its individual corporate capacity, Transamerica Business Credit Corporation, a Delaware corporation, and the Agent. WHEREAS, the Omnibus Agreement requires Assignor to submit to Agent, on a quarterly basis, a document confirming the Security Interest of Agent, FOR THE RATABLE BENEFIT OF THE LENDERS, in all patents and trademarks with respect to which Assignor has filed an application or an assignment subsequent to the date of the last such document so submitted to the Agent; 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 Agent for the ratable benefit of the Lenders in the Trademarks and all patents and other trademarks of the Assignor, in accordance with the Omnibus Agreement; NOW, THEREFORE, subject to the terms, conditions and limitations set forth in the Omnibus Agreement, and in consideration of the mutual covenants, warranties and promises set forth in the Omnibus Agreement, and other good and valuable consideration, the full receipt and sufficiency of which are hereby acknowledged, Assignor hereby grants and conveys unto Agent, for the ratable benefit of the Lenders, a first lien Security Interest in and to: (i) all trademarks, service marks, copyrights, patents and other intellectual property now owned or hereafter acquired by the Assignor, including, without limitation, the Trademarks (collectively, the "Intellectual Property"); (ii) any federal, state or foreign applications filed with respect to the Intellectual Property; (iii) any federal, state or foreign registrations issued or issuing with respect to the Intellectual Property; (iv) all proceeds of the Intellectual Property, including, but not limited to, any and all royalties and any claims and demands arising out of any infringement of the Intellectual Property, including the right to settle disputes concerning such claims and demands; and (v) all goodwill associated with the Intellectual Property, such grant being hereby effected for the purposes and subject to the terms, conditions and limitations set forth in the Omnibus Agreement. Assignor hereby appoints the Agent, 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 Omnibus Agreement referred to herein, all for the ratable benefit of the Lenders. [Signature follows on a separate page] IN WITNESS WHEREOF, Assignor has duly executed this Collateral Assignment of Security Interest in Patents, Trademarks and Related Applications as of the day and year first above written. ATTEST: FOUNTAIN POWER, INC., a North Carolina corporation By: Secretary Name: Reginald M. Fountain Title: President [CORPORATE SEAL] NORTH CAROLINA _______________ COUNTY I, _______________________________, a Notary Public of ___________ County, North Carolina, do hereby certify that ______________________________ personally came before me this day and acknowledged that [s]he is the _________ Secretary of Fountain Power, 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 _____ day of August, 1998. __________________________ Notary Public [NOTARY SEAL] My commission expires: ______________________ SCHEDULE A Assigned Trademarks None 5 R#263885.3 [Execution Copy] ASSIGNMENT OF LIFE INSURANCE POLICY AS COLLATERAL A. For Value Received the undersigned hereby assign, transfer and set over to GENERAL ELECTRIC CAPITAL CORPORATION, in its capacity as agent for the Lenders from time to time party to the Omnibus Agreement referenced below To the attention of Operations Manager Address Suite 500, 4 North Park Drive, Hunt Valley, Maryland 21030 And its successors (herein called the "Assignee") Policy No. 12-839-890 issued by THE NORTH WESTERN MUTUAL LIFE INSURANCE COMPANY MILWAUKEE, WISCONSIN (herein called the "Insurer") and any supplementary contracts issued in connection therewith (said policy and contracts being herein called the "Policy"), upon the life of Reginald M. Fountain, Jr. of Beaufort County, North Carolina and all claims, options, privileges, rights, title and interest therein and thereunder (except as provided in Paragraph C hereof), subject to all the terms and conditions of the Policy and to all superior liens, if any, acceptance of this assignment agrees to the conditions and provisions herein set forth. A. It is expressly agreed that, without detracting from the generality of the foregoing, the following specific rights are included in this assignment and pass by virtue hereof: 1. The sole right to collect form the Insurer the net proceeds of the Policy when it becomes a claim by death or maturity; 2. The sole right to surrender the Policy and receive the surrender value thereof at any time provided by the terms of the Policy and at such other times as the Insurer may allow; 3. The sole right to obtain one or more loans or advances on the Policy, either from other persons, and to pledge or assign the Policy as security for such loans or advances; 4. The sole right to collect and receive all distributions or shares of surplus, dividend deposits or additions to the Policy now or hereafter made or apportioned thereto, and to exercise any and all options contained in the Policy with respect thereto; provided, that unless and until the Assignee shall notify the Insurer in writing to the contrary, the distributions or shares of surplus, dividend deposits and additions shall continue on the plan in force at the time of this assignment; and 5. The sole right to exercise all nonforfeiture rights permitted by the terms of the Policy or allowed by the Insurer and to receive all benefits and advantages derived therefrom. A. It is expressly agreed that the following specific rights, so long as the Policy has not been surrendered, are reserved and excluded from this assignment and do not pass by virtue hereof: 1. The right to collect from the Insurer any disability benefit payable in cash that does not reduce the amount of insurance; 2. The right to designate and change the beneficiary; 3. The right to elect any optional mode of settlement permitted by the Policy or allowed by the Insurer; but the reservation of these rights shall in no way limit the right of the Assignee to surrender the Policy complete with all its incidents or impair any other right of the Assignee hereunder, and any designation or change of beneficiary or election of a mode of settlement shall be made subject to this assignment and to the rights of the Assignee hereunder. A. This assignment is made and the Policy is to be held as collateral security for any and all liabilities of the undersigned (either now existing or that may hereafter arise) to the Lenders and/or the Assignee that shall now or at any time hereafter be evidenced by any note or notes now or hereafter issued pursuant to, or that shall exist or shall hereafter arise under, that Omnibus Agreement, dated September 2, 1998 (as the same may be amended, supplemented, restated, extended, renewed, replaced or otherwise modified and in effect from time to time, the "Omnibus Agreement"), by and among the undersigned, Fountain Power Industries, Inc., Fountain Power, Inc., General Electric Capital Corporation (in its individual corporate capacity), Transamerica Business Credit Corporation and the Assignee in its capacity as agent for the Lenders (all such liabilities under the Omnibus Agreement or any such note or notes and that are secured or to be secured hereby are referred to herein as the "Liabilities"). B. The Assignee covenants and agrees with the undersigned as follows: 1. That any balance of sums received hereunder from the Insurer remaining after payment of the then existing Liabilities, matured or unmatured, shall be paid by the Assignee to the persons entitled thereto under the terms of the Policy had this assignment not been executed; 2. That the Assignee will not exercise either the right to surrender the Policy or (except for the purpose of paying premiums) the right to obtain policy loans from the Insurer, until there has been default in any of the Liabilities or a failure to pay any premium when due, nor until twenty days after the Assignee shall have mailed, by first- class mail, to the undersigned at the addresses last supplied in writing to the Assignee specifically, referring to this assignment, notice of intention to exercise such right; and 3. That the Assignee will upon request forward without reasonable delay to the Insurer the Policy for endorsement of any designation or change of beneficiary or any election of an optional mode of settlement. A. The Insurer is hereby authorized to recognize the Assignee's claims to rights hereunder without investigating the reason for any action taken by the Assignee, or the validity or the amount of the Liabilities or the existence of any default therein, or the giving of any notice under Paragraph E(2) above or otherwise, or the application to be made by the Assignee of any amounts to be paid to the Assignee. The sole signature of the Assignee shall be sufficient for the exercise of any rights under the Policy assigned hereby and the sole receipt of the Assignee for any sums received shall be a full discharge and release therefor to the Insurer. Checks for all or any part of the sums payable under the Policy and assigned herein, shall be drawn to the exclusive order of the Assignee if, when, and in such amounts as may be, requested by the Assignee. B. Neither the Assignee or any Lender shall be under any obligation to pay any premium, or the principal of or interest on any loans or advances on the Policy whether or not obtained by the Assignee or the Lenders, or any other charges on the Policy, but any such amounts so paid by the Assignee or the Lenders from its or their own funds shall become a part of the Liabilities hereby secured, shall be due immediately, and shall draw interest at a rate fixed by the Lenders from time to time not exceeding 18% per annum. C. The exercise of any right, opinion, privilege or power given herein to the Assignee shall be at the option of the Assignee, but (except as restricted by Paragraph E(2) above) the Assignee may exercise any such right, option, privilege or power without notice to, or assent by, or affecting the liability of, or releasing any interest hereby assigned by the undersigned, or any of them. D. All (but not less than all) of the Lenders, or the Assignee at the direction of all (but not less than all) of the Lenders, may take or release other security, may release any party primarily or secondarily liable for any of the Liabilities, may grant extensions, renewals or indulgences with respect to the Liabilities, or may apply to the Liabilities in such order as the Lenders shall determine, the proceeds of the Policy hereby assigned or any other amount received on account of the Policy by the exercise of any right permitted under this assignment, without resorting or regard to other security. E. In the event of any conflict between the provisions of this assignment and provisions of the note or other evidence of any Liability, with respect to the Policy or rights of collateral security therein, the provisions of this assignment shall prevail. F. Each of the undersigned declares that no proceedings in bankruptcy are pending against him and that his property is not subject to any assignment for the benefit of creditors. Signed and Sealed this ______ day of August, 1998. FOUNTAIN POWERBOATS, INC., Owner By: (L.S.) Witness Reginald M. Fountain, President Attest: Secretary [CORPORATE SEAL] SEAL] Address: 1653 Whichard's Beach Road P.O. Drawer 457 Washington, North Carolina 27889 CORPORATE ACKNOWLEDGMENT STATE OF NORTH CAROLINA }ss: COUNTY OF ___________________ On the ____ day of August, 1998, before me personally came Reginald M. Fountain, Jr., who being duly sworn, did depose and say that he resides in Beaufort County, North Carolina, that he is the President of Fountain Powerboats, Inc., the corporation described in and which executed the foregoing assignment; that he knows the seal of said corporation; that the seal affixed to said assignment is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation, and that he signed his name thereto by like order. Notary Public My commission expires: ____________________________ ************ Assignment recorded and filed at the Home Office of The Northwestern Mutual Life Insurance Company (the "Company"). The Company assumes no responsibility as to the validity or effect of any assignment. This _____ day of August, 1998. THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY By: Name: Position: -----END PRIVACY-ENHANCED MESSAGE-----