-----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, TQbzXXw5psSC/GAu8wxehiP53zuq7gCjbxbBtZq8CweC+Yl+E4zQ8kNlprcwiJao HMPCGdXrF14X9t8Cwwu7zw== 0000944543-99-000034.txt : 19990917 0000944543-99-000034.hdr.sgml : 19990917 ACCESSION NUMBER: 0000944543-99-000034 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990916 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: 99712750 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, 1999 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: (252) 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 $ 9,496,906 at September 9, 1999 based upon a closing price of $3.625 per share on such date for the Company's Common Stock. As of September 9, 1999 there were 4,732,608 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. 1 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, sport fishing boats and sport yachts intended for that segment of the recreational power boat market where speed, performance, and quality are the main criteria for purchase. In addition, the Company produces various military support craft for domestic and international government agencies, (including the United States Customs Service, the United States Navy and the United States Coast Guard). The Company's strategy in concentrating on these segments of the market is to maximize its use of the reputation of its Chairman and President, Reginald M. Fountain, Jr., as an internationally recognized designer and builder of high speed power boats. 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 recreational 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. The Company's sport boats, ranging from 27' to 51' are of inboard/outboard 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 introduced the first of the new Super Cruiser Line, a 65 foot long by 16' wide high speed cruising yacht. This is the first of a family of Super Cruisers to be introduced during the next several years. In addition to the Sportboats, Fishing boats and Supercruising Yachts, Fountain is producing an ever increasing line of military/governmental boats of various configurations. These boats are based on the racing boat technology that's incorporated into the large sportboats; along with new models including the new rigid inflatables (RIB) in 38' and 46' design along with additional new designs in process to meet specific governmental needs. 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 10 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 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 also available. This boat was named "The Outstanding Offshore Performance Boat" by Powerboat Magazine and "Best of the Best" by Boating Magazine. Depending primarily upon the customer's choice of engines, the retail price of this boat is from $373,000 to $416,000. 2 The Company's 47' Lightning Sport Boat has been newly redesigned and restyled and operates at 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 $403,000 to $750,000. This boat's standard features include an integrated swim platform, flush deck hatches, and an attractively appointed cockpit and cabin. This boat has been cited by Powerboat Magazine as "The Outstanding Offshore Performance Boat". Equipped with special racing engines, this model set a new world speed record for V-hulled boats in February, 1996 at 131.941 mph. The 38' Sport Cruiser offers most of the 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 $236,000 to $270,000. The 38' Sport Boat operates at speeds of between 70 and 100 mph. The retail price ranges from $220,000 to $263,000, depending primarily upon the type of engines selected. This model was cited by Powerboat Magazine as "Offshore Performance Boat of the Year". It also captured an award from The Hot Boat Magazine for "Boat of the Year". The 35' Lightning Sport Boat is being totally redesigned this year to go with a higher freeboard, new 2-step design, new deck and interior. It will operate at speeds between 70 and 100 mph. The current 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 $178,000 to $217,000, 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 twin engine sport boat between the single engine 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 $146,000 to $179,000. The 29' Fever is one of the most popular boats in our line. It operates at speeds of 55 to 75 mph and retails between $95,000 and $111,000 depending on engine size. It has great balance and speed for a single engine and offshore sea conditions with superior safety and handling. Fountain's 27' Fever and 27' Fever II Sport Boats are also equipped with single engines. These boats represent the most affordable access tot he Fountain line of safe, smooth, high performance boats. The 27' Fever 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 $79,000 to $100,000. The Company also builds and markets a sport fishing line. The 31' sport fish model features a center console with T-Top 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 eight years and has won more than 50% of the top ten positions over the same period. The additional models include the 29' twin engine center console model and 25' single engine center console model. The design, construction, and performance of these 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 added a 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. 3 The Company also produces both, a 25' and 29' walk around cabin fishing boats with outboard engine power and a 32' walk around cabin model fishing boat with twin inboard power. Inboard power has been introduced to the 29' walk-around cabin model as well. In Fiscal 1999, the Company introduced a redesigned 27' with a new deck, glass windshield, anchor locker and swim ladder. A new 38' Lightning sport boat was introduced at mid-year, sporting a new glass windshield, standard bimini top, new style engine vents along with other features standard in the 42' Lightning. Another introduction for the year was the all new 38' Rigid Inflatable Boat (RIB), the first in a series of special purpose boats with a rigid fiberglass hull surrounded with an inflatable collar, surface drive technology and diesel engine power. This type of boat will primarily be sold to Government Agencies such as the U. S. Coast Guard beginning in the first quarter of Fiscal year 2000. For Fiscal 1998, the Company introduced an all-new 42' Lightning. This boat comes with the Company's new second-generation positive lift hull. It comes with a new style deck with full wrap around windshield, canvas top and the all-new positive lift hull, which increases speed, stability and ride comfort. This model set a new world speed record for V-hulled boats in August, 1999 at 140.120 mph. Also in 1998, Fountain launched into the yacht market with the introduction of the all-new 65' Supercruiser. This performance yacht is 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. Performance at wide-open throttle can exceed 60 mph. 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 1999 1998 1997 Sport boats 316 324 336 Sport cruisers 1 9 14 Yachts 1 - - Sport fishing boats 130 116 128 ------ ------ ------ Total 448 449 478 ====== ====== ====== 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 38 full- time employees. Amounts spent on design research and development and to build new plugs and molds in recent years were: 4 Design Construction Research & of New Plugs Development and Molds Fiscal 1999 $876,965 $1,275,182 Fiscal 1998 575,918 2,010,634 Fiscal 1997 635,652 1,684,274 Fiscal 1996 234,425 878,274 For Fiscal 2000, planned design research and development expenses are estimated to be $ 800,000 and plug and mold construction expenditures are estimated to be $ 1,500,000. These expenditures will be primarily to complete the tooling for the all-new 35' sport boat plus tooling of the first in the new mid-size cruiser line. Manufacturing capacity is sufficient to accommodate approximately 30 to 40 boats in various stages of construction at any one time. Construction of a current model boat, depending on size, takes approximately three to five weeks. The Company, with additional personnel, currently has the capacity to manufacture approximately 500 sport and fishing boats and 12 yachts per year. The manufacturing process for the hulls and decks consists primarily of the hand "lay-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 "lay-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, Plexiglas, 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. 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.) 5 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. In addition, boats manufactured for sale in the European Community must meet CE Certification Standards. Sales and Marketing. Sales are made through approximately 39 dealers throughout the United States. The Company also has 5 international dealers. Most of 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 `99 Fiscal `98 Fiscal `97 United States $49,711,114 $46,068,495 $48,346,485 Canada, Mexico, Central and South America $ 2,495,048 $ 2,639,523 $ 1,047,913 Europe and the Middle East $ 1,222,325 $ 1,834,524 $ 752,801 Asia $ - $ 109,495 $ 367,126 ----------- ----------- ----------- Total $53,428,487 $50,652,037 $50,514,325 =========== =========== =========== The Company targets a portion of its advertising program into a number of foreign countries through various advertising media. It continues to seek new dealers in many areas throughout Europe, South America, the Fareast and the Mideast. 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% of its total sales. For Fiscal 1999 one dealer accounted for 6.83% of sales, one for 6.77% of sales and one for 6.71% of 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. 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 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. 6 Beginning in Fiscal 1999, sales to Government and Defense Agencies, both domestic and foreign are headed up by a newly hired Director of Defense Operations, who is responsible for establishing contractual relationships with key Armed Services and Congressional Leaders. The Company is seeking new growth in this market. 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 has been able to resell 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 some dealers on a cash-on-delivery basis. However, most 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 five 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 1999 model year (which commenced July 1, 1998), 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 cost reverts 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 1998, 1997, and 1996. 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 over the years, the Company has developed racing programs to participate in the major classes of offshore powerboat races, many of which are regularly televised on networks such as ESPN, TNN and Speed Vision. Additionally, Fountain single, twin and triple engine racing boats continue to 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 these performance programs contribute to its sales volume. The Company Founder and C.E.O., Reggie Fountain, has 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 was 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. During the second quarter of Fiscal 1999, the Company announced its withdrawal from active racing and proceeded to sell its owned racing boats. Beginning with the 1999 racing season, the Company stopped racing its owned boats and changed its focus to a lower cost sponsorship basis where the Company is only involved in participating on a limited cost basis as sponsor for selective Fountain race boat owners. 7 As part of the marketing program for its line of sport fishing boats, the Company sponsors several outstanding sport fishermen in the Southern Kingfish Association Circuit. This competitive circuit sanctions King Mackerel Tournaments throughout the Atlantic and Gulf Coast from North Carolina to Texas. In Fiscal 1991, the Company's boats and sponsored fishermen dominated this circuit by winning 4 of the top 5 spots. One Fountain fisherman, Clayton Kirby was named `Angler of the Year' and finished in first place. Since Fiscal 1992, the Fountain Fishing Team has continued to dominate the S.K.A. circuit winning no less than 5 of the top 10 spots annually. Fountain Fishermen have won the coveted `Angler of the Year' title 5 of the last 8 years. Kirby's son, Brandon has won the coveted Jr. Angler title 4 of the last 5 years. The S.K.A. Tournaments are held weekly and attract from 100 - 1000 entrants with prize money in excess of $500,000. The Fountain fishing teams winning record have given our sport fishing boats 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 typically builds to approximately 200 boats during the August-October Dealer allocation period having an estimated sales value of $20,000,000. All of the backlog is generally shipped within 6 months. During the last year, the Company's performance boats increased in sales value to a greater degree than fishing boats, which increased the overall average unit boat price. In addition, the sale of the first 65' SuperCruiser contributed to a substantial per boat increase. 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 $856,694 or 1.6% of sales were incurred in Fiscal 1999 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 $590,000 at June 30, 1999. For 1998, warranty costs were $531,062 or 1.0 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 Baja Boats, a Division of Brunswick Corporation Cigarette Racing Team, 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 of 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. 8 Employees. As of September 1, 1999 the Company had 370 employees, of whom twelve were executive and management personnel. Twenty 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 $11,409,551 at June 30, 1999. 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 ========== 9 Over the last two years there has been heavy expenditures in property, plant and equipment, which include additions to the plant, plus 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 surrounding the buildings and providing employee parking has been completed this year. 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 disposed of approximately 3,300 gallons of hazardous waste at the Spectron/Galaxy waste disposal site, according to PRP Group records. The Group Administrator/Counsel for that site estimates that the Company's proportionate share of the total assessment and cleanup costs of $40-45 million will be approximately $10,000. The EPA is expected to circulate a draft De Minimis (i.e., small volume contributor) Settlement Agreement to all de minimis PRPs sometime this summer or fall. The Group Administrator indicated that the likely "buy out" offer in the proposed settlement agreement is anticipated to be approximately $3 per gallon. Accordingly, the Company's proportionate share is calculated to be $9,900. If the Company accepts EPA's buyout offer and a Consent Decree is entered in Court in a timely manner, this matter likely will be concluded for the Company and all other de minimis PRPs by the end of 1999, even though completion of site cleanup may take several more years. The Company's subsidiary also disposed of approximately 19,245 gallons of hazardous waste at the Seaboard disposal site, according to PRP Group records. The total of estimated gallons for this site is approximately 14.3 million. Accordingly, the Company's share is .132% of the total estimated assessment and cleanup cost of $23 million, or approximately $30,000. The Group Administrator confirmed that this is a revised estimate and that, under the worst case conditions, the Company's potential liability at this site is now expected to be no more than $30,000, and could be considerably less if the Company's subsidiary is eligible for a De Minimis Settlement Agreement likely to be proposed by the EPA sometime next year. A remedial investigation of the site and a feasibility study of cleanup options has been completed, which proposes natural attenuation as the preferred remediation approach. If approved by the State and EPA, the Company's share could be as low as $18,000 according to the Group Administrator. Completion of site cleanup could take several years, depending on the cleanup option selected. The Group Administrator noted that the Company already has paid amounts previously assessed for its proportionate share of the costs. 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. As of June 30, 1999, the Company's chief operating subsidiary was a defendant in two product liability suits and four alleged breach-of-warranty 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 liability and product liability insurance to cover attorney's fees and any losses that may occur from such suits, over and above applicable insurance deductibles. Item 4. Submission of Matters to a Vote of Security Holders. The only matters submitted to the Shareholders for a vote during Fiscal 1999 were at the annual meeting with the election of directors, approval of 10 the 1999 Employee Stock Option Plan, and appointment 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 related 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, 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 September 30, 1998 11.13 4.38 December 31, 1998 6.72 3.88 March 31,1999 7.00 4.50 June 30, 1999 5.00 3.97 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 1, 1999 was approximately 1906. 11 Item 6. Selected Financial Data Fountain Powerboat Industries, Inc. and Subsidiary Selected Financial Data Fiscal Years 1995 through 1999
Year Ended June 30, Operations Statement Data: ---------------------------------------------------------------------------- (Period Ended) 1999 1998 1997 1996 1995 - ------------------------- ------------ ------------ ------------ ------------ ------------ Sales ................... $ 53,428,487 $ 50,652,037 $ 50,514,325 $ 41,598,051 $ 38,727,329 Net Income (loss) ....... $ (1,255,791) $ 2,740,487 $ 1,239,951 $ 3,680,034 $ 2,047,876 Income (loss) per share . $ (.27) $ .58 $ .27 $ .81 $ .45 Weighted average shares outstanding ............ 4,702,608 4,751,779 4,664,251 4,528,608 4,528,608 Diluted earnings (loss) per share .............. $ N/A $ .54 $ .24 $ .77 $ .45 Diluted weighted average shares outstanding ..... N/A 5,110,090 5,093,289 4,573,153 4,539,694 Balance Sheet Data (At Period End) - ------------------------- Current assets .......... $ 14,084,888 $ 12,718,535 $ 10,997,133 $ 8,378,341 $ 6,185,727 Total Assets ............ $ 33,930,960 $ 32,497,393 $ 23,713,896 $ 18,498,104 $ 16,334,757 Current Liabilities ..... $ 12,183,630 $ 10,289,985 $ 6,305,212 $ 6,180,476 $ 6,081,298 Long-term debt .......... $ 10,215,334 $ 9,499,895 $ 8,047,039 $ 5,433,184 $ 7,049,049 Stockholders' equity (1) $ 10,632,316 $ 11,780,707 $ 9,361,645 $ 6,884,444 $ 3,204,410 - ------------------------- (1) The Company has not paid any cash dividends since its inception.
12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. As described more fully below at "Business Environment", more than 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 balance 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, 1999, 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 improved market conditions and strong ongoing consumer demand for boats. Therefore, there were no deferred sales or cost of sales estimated at June 30, 1999, 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 1999, 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 $23,350,000 at June 30, 1999 and 1998 for the shipment of boats, which remained uncollected by the finance companies at those dates. Additionally, at June 30, 1999 and 1998, the Company had recorded reserves of $200,000 and $200,000, 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 1999 were $53,428,487 up 5.5% from Fiscal 1998. The sales volume increase for Fiscal 1999 was in line with the overall recreational boating industry. Plant utilization stands at about 80% until full production of the new 65' yacht is achieved. 13 Sales for Fiscal 1998 were $50,652,037, up less than 1% from sales for Fiscal 1997. Sales for Fiscal 1997 were $50,514,325. In Fiscal 1999, 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 repurchase, 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 its 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 1999, 1998 and Fiscal 1997 in connection with floor plan arrangements. At June 30, 1999, 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. During the second quarter of Fiscal 1999, the Company designed and implemented a restructuring plan to aggressively improve the Company's cost structure, refocus sales and marketing expenditures and divest the Company of certain non-realizable assets. In connection with the restructuring plan the Company reviewed components of its business for possible improvement of future profitability through reengineering or restructuring. As part of this plan the Company decided to eliminate its direct racing program and reduce the yacht tooling cost (carrying value), along with other discontinued unused tooling. The carrying value of the assets held was reduced to fair value based on estimated realizable value based on future cash flows from use of the asset or sale of the related assets. The resulting pretax adjustment of $2,440,000 was recorded as a strategic charge in the statement of operations of the Company. During Fiscal 1999, the Company had a net loss of $(1,255,791) or $(.27) per share. This compares to net income for Fiscal 1998 of $2,740,487, or $.58 per share. The change to a net loss from the previous year's net income is primarily due to the restructuring charge, increased selling expenses and a drop in margins due to the sales mix of fish boats in relation to overall boats. Operating income before strategic charge decreased to $819,059 in Fiscal 1999 from $4,084,388 in Fiscal 1998 and $4,520,333 in Fiscal 1997. This was primarily due to a substantial increase in selling expenses and a drop in margins due to a higher number of fishing boats in relation to total boats sold. 14 The Company's gross profit margin as a percentage of sales decreased to 22.2% in Fiscal 1999 from 24.8% in Fiscal 1998 and 26.8% in Fiscal 1997. The change in the gross margin percentage was due to the overall sales mix of boats. Depreciation expense was $2,280,871 for Fiscal 1999, $1,953,207 for Fiscal 1998 and $1,642,975 for Fiscal 1997. Depreciation expense by asset category was as follows: Fiscal Fiscal Fiscal 1999 1998 1997 Land Improvements ........... $ 57,065 $ 29,504 $ 22,468 Buildings ................... $ 256,205 $ 239,187 $ 231,546 Molds & Plugs ............... $1,236,027 $1,112,705 $1,041,217 Machinery & Equipment ........ $ 387,732 $ 353,102 $ 295,829 Furniture & Fixtures ........ $ 30,842 $ 15,238 $ 24,572 Transportation Equipment ..... $ 194,627 $ 129,722 $ 27,343 Racing Equipment ............. $ 118,373 $ 73,749 - ---------- ---------- ---------- Total $2,280,871 $1,953,207 $1,642,975 ========== ========== =========== Following is a schedule of the net fixed asset additions during Fiscal 1999 and Fiscal 1998. Fiscal 1999 Fiscal 1998 Buildings ............... $ 555,475 $ 240,003 Land and Improvements ... $ 804,226 $ 35,537 Molds and Plugs ......... $ 312,045 $2,050,745 Construction in Progress $ 760,052 $1,139,725 Machinery & Equipment ... $ 597,610 $ 512,933 Furniture & Fixtures .... $ 217,123 $ 24,495 Transportation Equipment $ 506,172 $1,458,079 Racing equipment ....... $ - $1,335,163 ---------- ---------- Total $3,752,703 $8,796,680 ========== ========== 15 Selling expenses were $7,934,683 for Fiscal 1999, $5,687,097 for Fiscal 1998 and $6,463,875 for Fiscal 1997. The Company continued to promote its products primarily by magazine advertising in Fiscal 1999. Advertising expense was $1,411,883 in Fiscal 1999, $1,166,633 for Fiscal 1998 and $1,267,822 for Fiscal 1997. 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 $2,503,699 in Fiscal 1999, $953,928 in Fiscal 1998 and $1,256,631 in Fiscal 1997. The Company reentered active racing with construction of two race boats during late Fiscal 1997 added a third one and began a racing program during Fiscal 1998. During the second quarter of Fiscal 1999 the Company announced its withdrawal from active racing, placed its owned race boats for sale and changed its focus to a lower cost sponsorship basis where the Company is only involved in participating on a limited cost basis as sponsor for selective Fountain race boat owners. Selling expenses compared for the past three fiscal years were as follows: Fiscal 1999 Fiscal 1998 Fiscal 1997 Offshore racing and tournament fishing ......... $2,503,699 $ 953,928 $1,256,631 Advertising ............... $1,411,883 $1,166,633 $1,267,822 Salaries & commissions ...... $1,054,467 $ 939,541 $1,029,810 Boat Shows .................. $ 494,832 $ 446,706 $ 452,859 Dealer incentives .......... $1,612,415 $1,031,611 $1,286,649 Other selling expenses ...... $ 857,387 $1,148,678 $1,170,104 ----------- ----------- ---------- Total $7,934,683 $5,687,097 $6,463,875 =========== =========== ========== General and administrative expenses include the finance, accounting, legal, personnel, data processing, and administrative operating expenses of the Company. These expenses were $3,127,029 for Fiscal 1999, $2,796,518 for Fiscal 1998 and $2,553,870 for Fiscal 1997. Most of the increase for Fiscal 1999 over Fiscal 1998 was due to expenses incurred for ISO 9001 Certification. 16 Interest expense was $1,023,727 for Fiscal 1999, $833,932 for Fiscal 1998 and $557,768 for Fiscal 1997. The increase in interest expense for Fiscal 1999 was primarily due to an overall increase in loan debt during the first quarter of Fiscal 1999. For Fiscal 1999 the Company received $130,118 in other income, primarily from vendor discounts and a gain of $69,100 on the disposal of certain assets. For Fiscal 1998, the Company recorded $500,000 in racing participation fees, which reduced our overall program cost for that year. Included in other income for Fiscal 1997 are consulting fees earned by the use of Mr. Fountain amounting to $260,000, and these were assigned to the company. Liquidity and Financial Resources. Net cash provided by operations in Fiscal 1999 amounted to $2,738,206. Net loss plus adjustment to reconcile net loss to net cash provided by activities including $2,280,874 in depreciation, $2,440,000 in strategic charges, and net of other of $20,900 provided net cash of $3,485,980 before changes in assets and liabilities accounts. However, relatively large amounts were needed to complete investment activities in purchasing property, plant, equipment, inventory and molds. The ending cash balance was $2,217,301. 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 $2,882,925. 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. Investing activities for Fiscal 1999 required $3,710,206, including $2,477,520 for property, plant and equipment and $1,275,183 for additional molds and plugs. Increases in other assets required $131,696. 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. Financing activities for Fiscal 1999 provided $1,812,317. Included in this amount are proceeds from issuance of notes payable and long-term debt to Transamerica Business Credit Corporation and General Electric Capital Corporation for $4,000,000 along with total debt repayment of $2,547,637. 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. 17 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. The net increase in cash for Fiscal 1999 was $840,317, primarily due from 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. The net decrease in cash for Fiscal 1998 was $1,617,519, 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. At June 30, 1997, the total outstanding amount was $8,500,000 less scheduled monthly principal reductions. For Fiscal 2000, the Company anticipates that the $2,217,301 beginning cash balance along with the net projected increase in cash provided from operations will be sufficient to meet most of the Company's liquidity needs of the year. The Company intends to concentrate on reducing capital expenditures and building its cash reserves during Fiscal 2000. 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 is taking the steps necessary to prevent these errors from occurring. With respect to third party providers whose services are critical to the Company, the Company intends to monitor the efforts of such vendors, as they become Year 2000 compliant. Management is not presently aware of any Year 2000 issues that have been encountered by any such third party, which could materially affect the Company's operations. At present, the Company has spent $370,000 and anticipates $100,000 in additional costs in upgrading some of its software and hardware in order to avoid any problems resulting from the Millennium bug. There is no assurance that the Company will not experience operational difficulties as a result of Year 2000 issues. 18 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. 19 Item 8. Financial Statements and Supplementary Data. CONTENTS PAGE - Independent Auditors' Report 21 - Consolidated Balance Sheets, as of June 30, 1999 and 1998 22 - Consolidated Statements of Operations, for the years ended June 30, 1999, 1998 and 1997. 23 - 24 - Consolidated Statement of Stockholders' Equity, for the years ended June 30, 1999, 1998 and 1997. 25 - Consolidated Statements of Cash Flows, for the years ended June 30, 1999, 1998 and 1997. 26 -27 - Notes to the Consolidated Financial Statements 28 - 44 20 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, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended June 30, 1999, 1998 and 1997. 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, 1999 and 1998, and the consolidated results of their operations and their cash flows for the years ended June 30, 1999, 1998 and 1997 in conformity with generally accepted accounting principles. /s/ Pritchett, Siler & Hardy, P.C. Pritchett, Sier & Hardy, P.C. July 27, 1999 Salt Lake City, Utah 21 FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS ASSETS June 30, ______________________________ 1999 1998 ____________ ____________ CURRENT ASSETS: Cash & cash equivalents $ 2,217,301 $ 1,376,984 Accounts receivable, less allowance for doubtful accounts of $30,000 for 1999 and 1998 1,576,712 2,715,754 Inventories 7,307,890 7,077,540 Prepaid expenses 761,486 489,290 Current tax assets 2,221,499 1,058,967 ____________ ____________ Total Current Assets 14,084,888 12,718,535 PROPERTY, PLANT AND EQUIPMENT, net 19,065,270 19,156,855 OTHER ASSETS 780,802 622,003 ____________ ____________ $33,930,960 $32,497,393 ____________ ____________ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable - related party $ - $ 415,821 Current maturities of long-term debt 2,464,535 981,365 Current maturities of capital lease 11,788 - Accounts payable 3,961,516 3,591,489 Accrued expenses 2,231,061 1,939,791 Dealer territory service accrual 2,037,170 2,046,939 Customer deposits 687,560 510,967 Allowance for boat repurchases 200,000 200,000 Warranty reserve 590,000 500,000 Net liabilities of discontinued operations - 103,612 ____________ ____________ Total Current Liabilities 12,183,630 10,289,984 LONG-TERM DEBT, less current maturities 10,138,395 9,499,895 CAPITAL LEASE, less current maturities 76,939 - DEFERRED TAX LIABILITY 899,680 926,807 COMMITMENTS AND CONTINGENCIES (See Note 9) - - ____________ ____________ Total Liabilities 23,298,644 20,716,686 ____________ ____________ STOCKHOLDERS' EQUITY Common stock, par value $.01 per share, authorized 200,000,000 shares; issued $4,732,608 and 4,702,608 shares 47,326 47,026 Additional paid-in capital 10,303,640 10,196,540 Accumulated earnings 392,098 1,647,889 ____________ ____________ 10,743,064 11,891,455 Less: Treasury Stock, at cost 15,000 shares (110,748) (110,748) ____________ ____________ 10,632,316 11,780,707 ____________ ____________ $33,930,960 $32,497,393 ____________ ____________ The accompanying notes are an integral part of these financial statements. 22 FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended June 30, ___________________________________________ 1999 1998 1997 _____________ _____________ _____________ NET SALES $53,428,487 $50,652,037 $50,514,325 COST OF SALES 41,547,716 38,084,034 36,976,247 _____________ _____________ _____________ Gross Profit 11,880,771 12,568,003 13,538,078 _____________ _____________ _____________ EXPENSES: Selling expense 7,934,683 5,687,097 6,463,375 Selling expense - related party - - 500 General and administrative 2,628,722 2,722,665 2,240,112 General and administrative - related parties 498,307 73,853 313,758 _____________ _____________ _____________ Total expenses 11,061,712 8,483,615 9,017,745 _____________ _____________ _____________ OPERATING INCOME (LOSS) BEFORE STRATEGIC CHARGE 819,059 4,084,388 4,520,333 STRATEGIC CHARGE 2,440,000 - - _____________ _____________ _____________ OPERATING INCOME (LOSS) (1,620,941) 4,084,388 4,520,333 _____________ _____________ _____________ NON-OPERATING INCOME (EXPENSE): Other income 130,118 252,967 437,694 Interest expense (1,003,280) (807,423) (557,768) Interest expense - related parties (20,447) (26,509) - Gain on disposal of assets 69,100 4,637 - _____________ _____________ _____________ (824,509) (576,328) (120,074) INCOME (LOSS) BEFORE INCOME TAXES (2,445,450) 3,508,060 4,400,259 CURRENT TAX EXPENSE - 1,057,640 330,427 DEFERRED TAX EXPENSE(BENEFIT) (1,189,659) 10,864 - _____________ _____________ _____________ INCOME (LOSS) FROM CONTINUING OPERATIONS (1,255,791) 2,439,556 4,069,832 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 (LOSS) $(1,255,791) $ 2,740,487 $ 1,239,951 _____________ _____________ _____________ [Continued] 23 FOUNTAIN POWERBOAT, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS [CONTINUED] Year Ended June 30, ___________________________________________ 1999 1998 1997 _____________ _____________ _____________ BASIC EARNINGS (LOSS) PER SHARE: Continuing operations $ (.27) $ .51 $ .87 Loss from operations of discontinued segments - - (.51) Estimated income (loss) on disposal of discontinued segments - .07 (.09) _____________ _____________ _____________ BASIC EARNINGS PER SHARE $ (.27) $ .58 $ .27 _____________ _____________ _____________ WEIGHTED AVERAGE SHARES OUTSTANDING 4,711,896 4,751,779 4,664,251 _____________ _____________ _____________ DILUTED EARNINGS PER SHARE: Continuing operations $ N/A $ .48 $ .80 Loss from operations of discontinued segments N/A - (.47) Estimated income (loss) on disposal of discontinued segments N/A .06 (.09) _____________ _____________ _____________ DILUTED EARNINGS PER SHARE $ N/A $ .54 $ .24 _____________ _____________ _____________ DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING N/A 5,110,090 5,093,289 _____________ _____________ _____________ The accompanying notes are an integral part of these financial statements. 24 FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FROM JUNE 30, 1996 THROUGH JUNE 30, 1999
Common Stock Additional Treasury Stock Total ______________________ Paid-in Accumulated ___________________ Stockholders' Shares Amount Capital Earnings Shares Amount Equity ___________ _________ ____________ ____________ ________ _________ ____________ 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 Issuance of common stock upon exercise of options at approximately $3.58 per share by a director of the Company 30,000 300 107,100 - - - 107,400 Net loss for the year ended June 30, 1999 - - - (1,255,791) - - (1,255,791) ___________ _________ ____________ ___________ _________ _________ ____________ BALANCE, June 30, 1999 4,732,608 $ 47,326 $10,303,640 $ 392,098 15,000 $110,748 $10,632,316 ___________ _________ ____________ ___________ _________ _________ ____________
The accompanying notes are an integral part of these financial statements. 25 FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended June 30, ________________________________________ 1999 1998 1997 ____________ ____________ ____________ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(1,255,791) $ 2,740,487 $ 1,239,951 Adjustments to reconcile net income (loss)to net cash provided by operating activities: Strategic charge 2,440,000 - - Depreciation expense 2,280,871 1,953,207 1,642,974 Gain on disposal of property, plant, and equipment (69,100) (4,637) - Warranty reserve 90,000 - 90,000 Net effect of acquired Subsidiary - (525,095) 1,041,250 Change in assets and liabilities: (Increase) decrease in accounts receivable 1,148,745 (848,007) 985,937 (Increase) decrease in inventories (959,172) (3,139,783) 71,438 (Increase) decrease in prepaid expenses (281,492) 642,413 (976,860) (Increase)in net tax asset (1,293,271) (132,160) - Increase in accounts payable 370,027 1,603,982 273,748 Increase (decrease) in accrued expenses 292,316 1,079,005 (53,946) Increase (decrease) in Dealer territory service accrual (1,520) 409,367 871,898 Increase (decrease) in customer deposits (23,407) 200,925 81,434 Decrease in allowance for boat returns - - (7,359) Increase (decrease) in net liabilities of discontinued operations - (110,085) 213,697 ____________ ____________ ____________ Net Cash Provided by Operating Activities $2,738,206 $3,869,619 $5,474,162 ____________ ____________ ____________ CASH FLOWS FROM INVESTING ACTIVITIES: Increase in notes receivable - related party (36,807) - - (Purchase) sale of certificates of deposits, net - 696,155 (696,155) Proceeds from sale of property, plant and equipment 211,000 6,581 - Investment in additional molds and related plugs (1,275,183) (2,050,745) (1,684,274) Purchase of other property, plant and equipment (2,477,520) (6,745,936) (2,249,670) Increase in other assets (131,696) (124,396) (306,030) ____________ ____________ ____________ Net Cash (Used) by investing activities $(3,710,206) $(8,218,341) $(4,936,129) ____________ ____________ ____________ [Continued] 26 FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS [CONTINUED] Year Ended June 30, ________________________________________ 1999 1998 1997 ____________ ____________ ____________ CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) on engine floor plan agreement $ - $ - $(1,173,089) Proceeds from issuance of common stock 107,400 107,500 196,000 Proceeds from issuance of notes payable and long-term debt 4,279,554 3,362,137 8,500,000 Payments on capital lease (931) - - Payments on related party payable (415,821) - - Repayment of long-term debt (2,157,885) (738,434) (6,427,060) ____________ ____________ ____________ Net Cash Provided by Financing Activities $ 1,812,317 $ 2,731,203 $ 1,095,851 ____________ ____________ ____________ Net increase (decrease) in cash & cash equivalents $ 840,317 $(1,617,519) $ 1,633,884 Beginning cash & cash equivalents balance 1,376,984 2,994,503 1,360,619 ____________ ____________ ____________ Ending cash & cash equivalents balance $ 2,217,301 $ 1,376,984 $ 2,994,503 ____________ ____________ ____________ Supplemental Disclosures of Cash Flow Information: Cash paid during the period for: Interest: Unrelated parties $ 996,640 $ 767,867 $ 557,768 Related parties 20,447 26,509 - ____________ ____________ ____________ $ 1,017,087 $ 794,376 $ 557,768 ____________ ____________ ____________ Income taxes $ 263,345 $ 825,570 $ 395,796 ____________ ____________ ____________ Supplemental Schedule of Non-cash Investing and Financing Activities: For the year ended June 30, 1999: None 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 3). 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 6 and 13). 27 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: Fountain Powerboat Industries, Inc. and Subsidiary (the Company) manufactures high-performance deep water sport boats, sport cruisers, sport fishing boats, custom offshore racing boats and super cruiser yachts. 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. All significant inter-company accounts and transactions have been eliminated in consolidation. Fountain Power, Inc. was not active during Fiscal 1999 and was dissolved effective June 30, 1999. Also effective October 1, 1997, Fountain Trucking, Inc. and Fountain Sportswear, Inc. were 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 13). 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, 1999 and 1998, the Company had $2,117,301 and $1,276,984, respectively, in excess of federally insured amounts held in cash. Inventories: Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method (See Note 2). 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 3). Fair Value of Financial Instruments: Management estimates the carrying value of financial instruments on the consolidated financial statements approximates their fair values. 28 FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Nature of the Business and Significant Accounting Policies. [Continued] 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, 1999 and 1998 of $2,037,170 and $2,046,939, 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 9). 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 9). 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. Income Taxes: The Company accounts for income taxes in accordance with issued Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes" (see Note 7). 29 FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Nature of the Business and Significant Accounting Policies. [Continued] Advertising Cost: Costs incurred in connection with advertising and promotion of the Company's products are expensed as incurred. Such costs amounted to $1,411,883, $1,166,633 and $1,267,822 for the years ended 1999, 1998 and 1997. Earnings Per Share: The Company accounts for earnings per share in accordance with the Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share," which requires the Company to present basic and diluted earnings 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 14) Stock Based Compensation: The Company accounts for its stock based compensation in accordance with Statement of Financial Accounting Standards (SFAS) No. 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. Reclassifications: The financial statements for years prior to June 30, 1999 have been reclassified to conform with the headings and classifications used in the June 30, 1999 financial statements. Note 2. Inventories. Inventories consist of the following: June 30, __________________________ 1999 1998 ____________ ____________ Parts and supplies $3,296,244 $4,510,373 Work-in-process 3,208,982 2,235,394 Finished goods 922,664 451,773 ____________ ____________ 7,427,890 7,197,540 Reserve for obsolescence (120,000) (120,000) ____________ ____________ $7,307,890 $7,077,540 ____________ ____________ 30 FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 3. Property, Plant, and Equipment. Property, plant, and equipment consists of the following: Estimated Useful June 30, Lives __________________________ in Years 1999 1998 ________ ____________ ____________ Land and related improvements 10-30 $ 1,416,429 $ 1,416,429 Buildings and related improvements 10-30 11,092,771 6,720,762 Construction-in-progress N/A 760,052 3,955,544 Production molds and related plugs 8 14,527,208 13,669,394 Machinery and equipment 3-5 4,562,734 4,063,671 Furniture and fixtures 5 754,497 538,516 Transportation equipment 5 2,305,033 1,711,526 Racing boats N/A 790,860 1,335,163 ____________ ____________ $36,209,584 $33,411,011 Accumulated depreciation (17,144,314) (14,254,156) ____________ ____________ $19,065,270 $19,156,855 ____________ ____________ Depreciation expense amounted to $2,280,871, $1,953,207 and $1,642,975 for the years ended June 30, 1999, 1998 and 1997, respectively. During December 1998, as part of a strategic restructuring the Company wrote off assets totaling $2,440,000 (See Note 15). 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 Credit Corporation, and issuing a note to the Company's CEO. The balance owing to GE Capital Credit Corporation on June 30, 1999 and 1998 was $754,014 and $872,881, respectively. The balance owing to the Company's CEO on June 30, 1999 and 1998, was -0- 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 $80,123 and $219,227 at June 30, 1999 and 1998. During Fiscal 1999 and 1998, the Company sold fixed assets and realized gains amounting to $69,100 and $4,637, respectively. Note 4. 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 was due in a balloon payment on March 31, 1999 and was paid in full. 31 FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 5. Long-term Debt and Pledged Assets. The following is a summary of long-term debt at: June 30, __________________________ 1999 1998 ____________ ____________ 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 fixed interest rate of 7.26%. Monthly payments of $15,181. Matures August 1, 2004. $ 754,014 $ 872,881 6.30% loan payable to Wachovia Bank for the purchase of a vehicle, monthly payment of $771 through December 2002, secured by the vehicle purchased. 28,989 - 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. 37,475 47,079 6.30% loan payable to Wachovia Bank for the purchase of a vehicle, president of the Company pays the monthly payments of $979 through December 2002, secured by the vehicle purchased [See Note 11] 36,807 - Amounts borrowed against the cash surrender value of keyman life insurance policies during June 1998, fixed interest rate of 8% on $274,060 and variable interest rate of 7.39% at June 30, 1999 on the remaining $62,033, monthly payments of $10,000. 336,093 431,678 $14,000,000 credit agreement with General Electric Capital Corporation. (See Below). 11,409,552 9,129,622 ____________ ____________ 12,602,930 10,481,260 Less: Current maturities included in current liabilities: (2,464,535) (981,365) ____________ ____________ $10,138,395 $ 9,499,895 ____________ ____________ 32 FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 5. Long-term Debt and Pledged Assets. [Continued] 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 fixed interest 7.02%. 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 amended and restated during 1999 to include an additional $4,000,000 credit loan, with a fixed interest rate of 7.02%, maturing January 2, 2002, monthly payments of $100,000, and a prepayment penalty of $80,000 if paid prior to September 1, 2000 or $40,000 if paid prior to September 1, 2001. The estimated aggregate maturities required on long-term debt at June 30, 1999 are as follows: 2000 $ 2,464,535 2001 2,460,416 2002 7,318,362 2003 185,677 2004 173,940 Thereafter - ____________ $12,602,930 ____________ Note 6. 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 13). Stock Options: During March 1999, the shareholders voted to adopt the 1999 Employee Stock Option Plan (the Plan), which expires January 11, 2009. Under the Plan, the board is empowered to grant up to 120,000 stock options to employees, officers, directors and consultants of the Company. Additionally, the Board will determine at the time of granting the vesting provisions and whether the options will qualify as Incentive Stock Options under Section 422 of the Internal Revenue Code (Section 422 provides certain tax advantages to the employee recipients). The Plan was approved by the shareholders of the Company during January 1999. During January 1999, the Company granted an officer of the Company 30,000 options under the Plan. The options are exercisable at $5 per share and 5000 options vest quarterly beginning June 30, 1999. The Options expire on January 11, 2004. As of June 30, 1999 none of the options have been exercised. 33 FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 6. Common Stock, Options, and Treasury Stock. [Continued] 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 former Chief Executive Officer and to the Chief Financial Officer at $3.94 and $3.67 per share, respectively. During fiscal 1997 the former Chief Financial Officer exercised his 30,000 options. During June 1998, 30,000 options, issued to a former officer of the Company in the acquisition of Mach Performance, Inc., were cancelled in connection with the settlement agreement (See Note 13). 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, 1999, 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 1999, a former director exercised 30,000 stock options for $107,400. During the year ended 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, 1999, 1998 and 1997, and changes during the periods then ended is presented in the table below: 1999 1998 1997 __________________ __________________ __________________ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price _________ ________ _________ ________ _________ ________ Outstanding at beginning of period 546,000 $4.50 606,000 $4.63 630,000 $6.54 Granted 30,000 5.00 - - 30,000 8.17 Exercised (30,000) 3.58 (30,000) 3.58 (54,000) 3.58 Forfeited - - - - - - Canceled - - (30,000) 8.17 - - _________ ________ _________ _________ ________ ________ Outstanding at end of period 546,000 $4.57 546,000 $4.50 606,000 $4.63 _________ ________ _________ _________ ________ ________ Exercisable at end of period 522,000 $4.55 546,000 $4.50 576,000 $4.45 _________ ________ _________ _________ ________ ________ Weighted average fair value of options granted 30,000 $ .14 - $ - 30,000 $ .28 _________ ________ _________ __________ _______ ________ 34 FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 6. Common Stock, Options, and Treasury Stock. [Continued] 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, 1999 and 1997, respectively: risk-free interest rates of 4.5% and 6.6%, respectively, expected dividend yields of zero for all periods, expected lives of 5 and 4 years, respectively, and expected volatility of 60% and 83%, respectively. No options were granted during the year ended June 30, 1998. A summary of the status of the options outstanding under the Company's stock option plans and other agreements at June 30, 1999 is presented below: Options Outstanding Options Exercisable ____________________________________ ______________________ Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price ___________ ___________ ___________ ____________ ___________ __________ $3.58-$3.94 66,000 5.9 years 3.67 66,000 3.67 $4.67 450,000 6.1 years 4.67 450,000 4.67 $5.00 30,000 4.6 years 5.00 6,000 5.00 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, ______________________________________ 1999 1998 1997 ____________ ___________ ___________ Net Income(loss) As reported $(1,225,791) $ 2,740,487 $ 1,239,951 Proforma $(1,256,233) $ 2,740,487 $ 1,234,605 Earnings per share As reported $ (.27) $ .58 $ .25 Proforma $ (.27) $ .58 $ .25 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. 35 FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 7. Income Taxes. The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109. SFAS 109 requires the Company to provide a net deferred tax asset or liability equal to the expected future tax benefit or expense of temporary reporting differences between book and tax accounting and any available operating loss or tax credit carryforwards. At June 30, 1999 and 1998, the totals of all deferred tax assets were $2,388,559 and $1,328,619, respectively. The totals of all deferred tax liabilities were $1,066,740 and $1,196,459. 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. The net decrease in the valuation allowance during the years ended June 30, 1999 and 1998, were $0 and $425,070, respectively. The Company has an unused operating loss carryforwards at June 30, 1999 of approximately $2,080,000, which expires in 2019. As a result of the federal alternative minimum income tax, the Company incurred current tax expense amounting to $258,371 for Fiscal 1997. The components of federal income tax expense from continuing operations consist of the following: Year Ended June 30, _____________________________________ 1999 1998 1997 ___________ ___________ ___________ Current income tax expense: Federal $ - $ 783,508 $ 258,371 State - 274,132 72,056 ___________ ___________ ___________ Net current tax expense $ - $1,057,640 $ 330,427 ___________ ___________ ___________ Deferred tax expense (benefit) resulted from: Excess of tax over financial accounting depreciation $ (129,720) $ 303,782 $ 144,013 Warranty reserves (15,600) - (42,300) Accrued vacations (2,317) (3,850) (8,107) Dealer incentive reserves (13,537) (293,662) (37,500) Bad debt reserves 12,491 - (28,686) Accrued Dealer incentive interest (99,190) - - Excess contributions carryforwards (1,059) - - Inventory adjustment-Sec.263A (13,170) (131,941) (6,366) Decrease in NOL carryforwards (805,261) 204,380 1,014,168 Decrease in valuation allowance - (316,948) (599,075) Allowance for obsolete inventory - (7,800) 3,000 Alternative minimum tax credits 102,592 186,947 (256,982) Reserve for loss on disposition - - (171,756) Investment tax credits - 86,294 - Allowance for boat repurchases 18,972 - (10,409) Accrued executive compensation (8,472) (16,338) - Accrued dealer incentives (235,388) - - ____________ ___________ ___________ Net deferred tax expense $(1,189,659) $ 10,864 $ - ____________ ___________ ___________ 36 FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 7. Income Taxes. [Continued] Deferred income tax expense results primarily from the reversal of temporary timing differences between tax and financial statement income. 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, _________________________________ 1999 1998 1997 ________ ________ ________ 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 5.00 Compensation from stock options .87 (2.77) (3.85) (Increase) decrease in NOL carryforwards - 4.86 (14.48) Officer's life insurance (.38) .36 .78 Valuation allowance - (9.03) (16.08) Net effect of alternative minimum taxes (4.23) (.34) .03 Other 13.84 (1.62) 2.11 ________ _________ ________ Effective income tax rates 49.10% 30.46% 7.51% ________ _________ ________ The temporary differences gave rise to the following deferred tax asset (liability): June 30, _________________________ 1999 1998 ____________ ____________ Excess of tax over financial accounting depreciation $(1,066,740) $(1,196,460) Warranty reserve 230,100 214,500 Obsolete inventory reserve 46,800 46,800 Accrued vacations 54,230 51,914 Allowance for boat repurchases 78,000 96,972 Dealer incentive reserves 365,699 352,162 Bad debt reserve 10,858 23,349 Accrued Dealer incentive interest 99,190 - Inventory adjustments - Sec. 253A 270,103 256,932 NOL carryforwards 805,262 - Alternative minimum tax credits 167,060 269,652 Accrued executive compensation 24,810 16,338 Donations Carryforwards 1,059 - Accrued dealer service incentives 235,388 - 37 FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8. Research and Development. The Company expenses the costs of research and development for new products and components as the costs are incurred. Research and development costs are included in the cost of sales and amounted to $876,965 for Fiscal 1999, $575,918 for Fiscal 1998, and $635,652 for Fiscal 1997. Note 9. 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. During 1999, the Company entered into a three year employment agreement with the Company's new Chief Operating Officer and Executive Vice President. 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 $1,353,848 for Fiscal 1999, $1,031,611 for Fiscal 1998, and $1,009,285 for Fiscal 1997. They are included in the accompanying consolidated statements of operations as part of selling expense. At June 30, 1999 and 1998 the estimated unpaid dealer incentive interest included in accrued expenses amounted to $327,643 and $160,000, 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, 1999 and 1998, 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 $23,350,000 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, 1999 and 1998, the allowance for boat repurchases was $200,000. Utility Agreement: As of June 30, 1999, the Company fulfilled its commitments in 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 and 2) employ an additional fifty people by April 30, 1999, sixty percent whose household incomes are under low or moderate income limits. 38 FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 9. Commitments and Contingencies. [Continued] 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. 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 $30,000 based on an estimated 19,245 gallons of waste is anticipated from the PRP Group for the Jamestown, North Carolina site, 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 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. The Company obtained a favorable judgement in the North Carolina action. The plaintiff then dismissed its lawsuit in Texas but retained the right to re-file the suit within one year from the dismissal. In the event the suit is re- filed, the Company intends to vigorously defend its interests in this matter. 39 FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 9. 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. Product Liability and Other Litigation: There were various product liability lawsuits brought against the Company at June 30, 1999. 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. 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 currently matches fifty percent of the employee's deferred salary amounts limited to a maximum of six percent of their salaried amounts, or a maximum of three 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. 40 FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 10. Export Sales. The Company had export sales of $3,717,373 for Fiscal 1999, $4,583,542 for Fiscal 1998 and $2,167,840 for Fiscal 1997. Export sales were to customers in the following geographic areas: Year Ended June 30, __________________________________ 1999 1998 1997 __________ __________ __________ Americas $2,495,048 $2,639,523 $1,047,913 Asia - 1,834,524 367,126 Middle East and Europe. 1,222,325 109,495 752,801 __________ __________ __________ $3,717,373 $4,583,542 $2,167,840 __________ __________ __________ Note 11. 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, __________________________________ 1999 1998 1997 __________ __________ __________ Apartments rentals $ 19,731 $ 6,717 $ 17,260 R.M. Fountain, Jr. - airplane rentals - 107,312 296,498 R.M. Fountain, Jr. - interest on loans 20,447 26,509 - __________ __________ __________ $ 40,178 $ 140,538 $ 313,758 __________ __________ __________ 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 5) and issuing a note to Mr. Fountain in the amount of $415,821 (See Note 5). As of June 30,1999 and 1998 the Company had receivables and advances from employees of the Company amounting to $39,658 and $77,574, respectively which includes $36,808 and $48,624, respectively from Mr. Fountain. The Company paid $478,576, $288,915 and $547,436 for the year ended June 30, 1999, 1998 and 1997 for advertising and public relations services from an entity owned by a director of the Company. 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 $498,307 for Fiscal 1998 and $260,000 for Fiscal 1997. The consulting agreement expired on June 30, 1997 and has not been re-negotiated. 41 FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 11. Transactions with Related Parties. [Continued] During 1998, the Company's President purchased a vehicle in the name of the Company. All payments on the vehicle are being paid by the President. The transaction has been recorded in the accompanying financial statements as a receivable from the president equal to the remaining amount owed on the vehicle (See Note 5). Note 12. 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 1999 one dealer who accounted for 6.8% of sales and two dealers who each accounted for 6.7% of sales. 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. Note 13. 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. 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. 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. 42 FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 13. Acquisition and Discontinued Operations. [Continued] 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, 1999 and 1998 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 _____________ _____________ Note 14. - Earnings Per Share. The following data show 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, 1999, 1998 and 1997: For the years ended June 30, ________________________________________ 1999 1998 1997 ____________ ____________ ____________ Income from continuing operations available to common stockholders $(1,255,791) $ 2,439,556 $ 4,069,832 ____________ ____________ ____________ Weighted average number of common shares outstanding used in basic earnings per share 4,711,896 4,751,779 4,664,251 Effect of dilutive securities: Stock options - 358,311 429,038 Weighted number of common shares and potential dilutive common shares outstanding used in dilutive earning per share 4,711,896 5,110,090 5,093,289 ____________ ____________ ____________ The Company had at June 30, 1999 options to purchase 546,000 shares of common stock at prices ranging from $3.58 to $5.00 per share that were not in the computation of earnings per share because their effect was anti-dilutive. 43 FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 15. Strategic Charge. During December 1998, The Company designed and implemented a restructuring plan to aggressively improve the Company's Cost Structure, refocus sales and marketing expenditures and divest the Company of certain non-realizable assets. In connection with the restructuring plan the Company reviewed components of its business for possible improvement of future profitability through reengineering or restructuring. The Company decided in the plan to eliminate its racing program, to write-off excess yacht tooling costs along with other discontinued unused tooling. The Company completed these actions during the third and fourth quarters of Fiscal 1999. The carrying value of the assets held was reduced to their estimated realizable fair value based on future cash flows from use of the assets or sale of the related assets. The resulting adjustment of $2,440,000 was recorded as a strategic charge in the statement of operations of the Company. Note 16. Capital Lease. The Company is the lessee of equipment under a capital lease expiring in May 2004. The assets and liabilities under the capital leases were recorded at the lower of the present value of the minimum lease payments or the fair value of the assets at the time of purchase. Equipment at June 30, 1999 under capital lease obligations is as follows: 1999 ___________ Equipment $ 89,659 Less: accumulated amortization (-) __________ $ 89,659 __________ Total future minimum lease payments, executory costs and current portion of capital lease obligations are as follows: Future minimum lease payments for the years ended June 30,: Year ending June 30, Lease Payments 2000 39,552 2001 39,552 2002 39,552 2003 39,552 2004 54,140 ______________ Total future minimum lease payments $212,348 Less: amounts representing maintainance and usage fee, interest and executory costs (123,621) ______________ Present value of the future minimum lease payments 88,727 Less: Lease current portion (11,788) ______________ Capital lease obligations - long term $ 76,939 ______________ 44 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. 45 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 59, 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 and Chief Executive 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. ANTHONY J. ROMERSA, age 54, Executive Vice President and Chief Operating Officer, became a director of the Company on March 2, 1999. Mr. Romersa joins the Company following a 28 year business career in a number of senior management positions with the Brunswick Corporation and its Mercury Marine Consumer and Vapor Divisions. As the corporate director of Brunswick's Marine Operations Planning since 1986, he was actively involved in Brunswick's acquisition of Bayliner and Sea Ray and was responsible to the Vice President of Corporate Planning and Development for the strategic performance of global marine operations. DARRYL M. DIAMOND, M. D., age 62, is a retired physician. From 1984 to 1986, Dr. Diamond served as a director of the Company's subsidiary. GEORGE L. DEICHMANN, III, age 55, is the President and owner of Trent Olds/Cadillac/Buick/GMC, an automobile dealership located in New Bern, North Carolina. CRAIG F. GOESS, age 45, is the President and General Manager of Greenville Toyota, an automobile dealership located in Greenville, North Carolina. FEDERICO PIGNATELLI, age 46, 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 43, 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. 46 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 over 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 65, 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 and Chief Operating Officer, the only executive officers of the Company whose compensation exceeded $100,000 in Fiscal 1999, 1998, and 1997. Name and Principal Fiscal Annual Compensation Long-term Stock Position Year Salary(1) Bonus(2) Compensation Options Reginald M. Fountain Jr. 1999 $350,000 $ -0- $ -0- -0- Chairman, President and 1998 $350,000 $218,017 $ -0- -0- Chief Executive Officer 1997 $350,000 $ 78,519 $ -0- -0- Anthony J. Romersa 1999 $134,808 $ -0- $ -0- 30,000 Executive Vice President, Chief Operating Officer (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 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: 47 Name .......................................... Reginald M. Fountain, Jr. Number of securities underlying options/SARS granted ....................................... 450,000 Percent of total options/SARS granted to employees in the fiscal year .................. 100% Exercise price ................................. $4.667 Expiration date ................................ 8/04/05 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, 1999, Exercisable ............................. $1,584(1) (1) The closing sale price of the Common stock on Tuesday, June 30, 1999 was $4.625. 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. 47 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. Outside 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. Mr. Mazza exercised all of his options during July 1997. Mr. Garbrecht exercised his options during Fiscal 1999. Mr. Spencer retains his issued stock options of 30,000 shares. Mr. Garbrecht resigned as a director in April 1997 and Mr. Mazza was not re- elected as a director at the Fiscal year 1998 annual meeting. 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. No bonus was paid in Fiscal 1999. 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. Anthony J. Romersa joined the Company during the first quarter of Fiscal 1999 and serves as Executive Vice President and Chief Operating Officer pursuant to an employment agreement entered into at that time. Under the agreement, Mr. Romersa receives a base salary set by the Board of Directors at a rate of $160,000 annually and an annual bonus payment equal to 1% of pretax earnings. This agreement runs for a period of three years. 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 48 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. 49 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) During January 1999, the Board of Directors adopted the 1999 employee Stock Option Plan (the plan), which expires January 11, 2009. Under the plan, the Board is empowered to grant up to 120,000 options to employees, officers, directors and consultants of the Company. The plan was approved by the shareholders of the Company during March 1999. 401 (k) Payroll Savings Plan. The Company currently has 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 fifty percent of the employee's deferred salary amounts limited to a maximum of six percent of their salaried amounts, or a maximum of three 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 Research Data Group, 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, 1994 to be equal to $100.00 Accumulated returns are noted through June 30, 1999. 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. 50 COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* AMONG FOUNTAIN POWERBOAT INDUSTRIES, INC., THE S&P 500 INDEX AND THE S&P LEISURE TIME (PRODUCTS) INDEX * $100 INVESTED ON 6/30/94 IN STOCK OR INDEX INCLUDING REINVESTMENT OF DIVIDENDS. FISCAL YEAR ENDING JUNE 30. As can be seen from the table, the total return to shareholders of the Company's common stock over the past five years compares to the S & P 500 stocks and the S & P Leisure Time stocks through 1998 and the S & P Leisure Time stocks through 1999. 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. 51 During Fiscal 1995, recognizing the Company's much improved financial performance under his leadership, the Board increased Mr. Fountain's salary from $285,000 to $350,000 beginning March 30, 1996 and 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 1999 were -0-, for Fiscal 1998 were $218,017 and for Fiscal 1997 amounted to $78,519. 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 1, 1999, 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) 48.68% 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) 5.05% (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, 52 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 1, 1999, for each of the Company's current directors, and for all directors and officers of the Company as a group. Name Amount of Percent and Beneficial of Address Ownership Class (3) Reginald M. Fountain, Jr.(1) 2,569,372(2) 48.68% Anthony J. Romersa(1) 30,000(2) (3) Mark L. Spencer(1) 33,400(2) (3) Federico Pignatelli(1) 26,000(2) (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) 2,659,572(2) 50.38% (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. Romersa, Spencer and Pignatelli includes options to purchase 30,000, 30,000 and 6,000 common shares respectively. Mr. Pignatelli has already exercised 24,000 options shares. (3) Less than 1% 53 Item 13. Certain Relationships and Related-Party Transactions. The following is a schedule of related party transactions for Fiscal 1999, 1998 and 1997. No interest was paid to Mr. Fountain in Fiscal 1997. The Company has 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 1999 1998 1997 Apartment Rentals............ $ 19,731 $ 6,717 $ 17,260 R. M. Fountain, Jr. - airplane rentals ..... $ -0- $107,312 $296,498 - interest ............. $ 20,447 $ 26,509 $ -0- -------- -------- -------- $ 40,178 $140,538 $313,758 ======== ======== ======== 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 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. A second note payable to Mr. Fountain for $415,821 was paid off during Fiscal year 1999. Mr. Gary D. Garbrecht was a director of the Company through April 1997 and the President and sole shareholder of Mach Performance, Inc. which supplied 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. 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 13 - 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. $478,576 in Fiscal 1999, $288,915 in Fiscal 1998 and $547,436 in Fiscal 1997. 54 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8 and Form 8-K. (1) Exhibits. The following exhibits are filied with this report: Page No. 10.1 - 1999 Employee Stock Option Plan 59 10.2 - Stock Option Agreement dated January 1999 74 10.3 - Employment Agreement dated August 24, 1998 with 81 Anthony J. Romersa and the Company's Subsidiary 27 - Financial Data Schedule 58 (2) No Amendments on Form 8 or Current Reports on Form 8-k were filed by the Registrant during the quarter ended June 30, 1999. 55 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 to be signed on its behalf by the undersigned, thereunto duly authorized. FOUNTAIN POWERBOATS INDUSTRIES, INC. By: /s/ Reginald M. Fountain, Jr. September 15, 1999 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 15, 1999 Chairman, President, and Chief Executive Officer (Principal Executive Officer) /s/ Anthony J. Romersa September 15, 1999 Executive Vice President, and Chief Operating Officer /s/ Darryl M. Diamond, M. D. September 15, 1999 Director /s/ George L. Deichmann, III September 15, 1999 Director /s/ Craig F. Goess September 15, 1999 Director /s/ Federico Pignatelli September 15, 1999 Director /s/ Mark L Spencer September 15, 1999 Director /s/ Joseph F. Schemenauer September 15, 1999 Chief Financial Officer (Principal Accounting and Financial Officer) 56 EX-27 2
5 This schedule contains summary financial information extracted from financial statements for the year ended June 30, 1999, and is qualified in its entirety by reference to such financial statements. 1,000 YEAR JUN-30-1999 JUN-30-1999 2,217 0 1,607 30 7,308 14,085 36,209 17,144 33,931 12,184 0 0 0 47 10,585 33,931 53,428 53,428 41,548 41,548 13,502 0 1,024 (2,445) (1,189) (1,256) 0 0 0 (1,256) (.27) (.27)
EX-10 3 58 FOUNTAIN POWERBOAT INDUSTRIES, INC. 1999 EMPLOYEE STOCK OPTION PLAN FOUNTAIN POWERBOAT INDUSTRIES, INC. (the "Company") hereby adopts this 1999 EMPLOYEE STOCK OPTION PLAN (the "Plan") as further described herein. ARTICLE I PURPOSE AND SCOPE OF PLAN 1.1 Purpose. The purpose of the Plan is to encourage the continued service of officers and employees of the Company or any company which is a subsidiary of the Company (a "Subsidiary"), and to provide an additional incentive for such officers and employees to expand and improve the profits and prosperity of the Company and its Subsidiaries, by granting them options to purchase shares of the Company's common stock. The Plan also will assist the Company and its subsidiaries in recruiting and retaining persons to serve as officers and employees of the Company and its Subsidiaries. 1.2 Stock Subject to Plan. Pursuant to and in accordance with the terms of the Plan, options ("Options") may be granted from time to time to purchase shares of the Company's common stock, $.01 par value per share ("Common Stock"). The aggregate number of shares of Common Stock which may be sold upon the exercise of Options granted under the Plan is 120,000 shares, which maximum number is subject to adjustment as provided in Paragraph 6.1 hereof. Shares of Common Stock sold by the Company upon the exercise of Options granted hereunder, at the sole discretion of the Company, may be issued from the Company's authorized but unissued shares, or be issued and outstanding shares purchased by the Company on the open market or in private transactions. In the event an Option granted under the Plan shall expire or terminate for any reason without having been exercised in full, then, to the extent the Plan shall remain in effect, the shares covered by the unexercised portion of such Option shall again be available for the grant of Options under the Plan. 1.3 Effective Date. The Plan shall become effective as of January 12, 1999 (the "Effective Date," which is the date of adoption of the Plan by the Company's Board of Directors); provided, however, that notwithstanding anything contained herein to the contrary, the Plan shall be subject to approval of the Company's shareholders by a vote of the holders of at least a majority of the shares of the Company's Common Stock present and voted at a meeting of the Company's shareholders held in accordance with Nevada law. Options may be granted pursuant to the Plan prior to receipt of such approvals, but any such Options granted shall be subject to, and may not become exercisable until, receipt of such approvals. 1.4 Termination Date. Unless sooner terminated as provided herein, the Plan shall terminate at 5:00 P.M. on January 11, 2009 (the "Termination Date"). Following the Termination Date, no further Options may be granted under the Plan, but such termination shall not effect any Option granted prior to the Termination Date. 59 ARTICLE II DEFINITIONS 2.1 Company. "Company" refers to Fountain Powerboat Industries, Inc. and to any successor to the Company which shall have assumed or become liable for the Company's obligations pursuant to any Option granted or Option Agreement entered into pursuant to the Plan. 2.2 Board. "Board" refers to the Company's Board of Directors. 2.3 Committee. "Committee" refers to the committee of and appointed or designated by the Board to administer the Plan as described in Article III below. 2.4 Common Stock. "Common Stock" refers to the common stock of the Company, par value $.01 per share. 2.5 Date of Grant. The "Date of Grant" of an Option refers to the effective date of action by the Committee granting such Option. 2.6 Employee. "Employee" refers to any person who is a full-time employee of the Company or of any of the Company's Subsidiaries. 2.7 Exercise Price. "Exercise Price" refers to the price per share to be paid by an Optionee for the purchase of Option Stock upon the exercise of an Option. 2.8 Expiration Date. "Expiration Date" refers to the date set by the Committee at which time any unexercised portion of an Option automatically will terminate and be of no further force or effect. 2.9 Modification, Extension or Renewal. "Modification" refers to any change in an Option which alters or modifies the original terms, conditions or benefits of the Option granted to the Optionee. "Extension" refers to the granting to the Optionee of an additional period of time within which to exercise the Option beyond the Expiration Date originally prescribed in the Option Agreement. "Renewal" refers to the granting of an Option to the Optionee with the same rights and privileges and on the same terms and conditions as contained in an original Option after expiration or termination of the original Option. 2.10 Non-Employee Director. "Non-Employee Director" refers to a member of the Board who satisfies the definition of that term contained in Rule 16b-3(b)(3) under the Securities Exchange Act of 1934, as such rule may be amended from time to time. 2.11 Option. "Option" refers to a right granted to an Employee by the Company pursuant to the Plan to purchase shares of Common Stock at the Exercise Price set by the Committee for such Option and on the terms and conditions set forth herein and in the Option Agreement relating to such Option. 2.12 Option Agreement. "Option Agreement" refers to a formal written agreement executed between the Company and an Optionee setting forth the terms and conditions of an Option. 2.13 Option Stock. "Option Stock" refers to the shares of Common Stock covered by an Option and which may be purchased by the Optionee upon the exercise, in whole or in part, of such Option. 2.14 Optionee. "Optionee" refers to an Employee to whom an Option is granted pursuant to the Plan. 60 ARTICLE III PLAN ADMINISTRATION 3.1 General. The Plan shall be administered by the Committee which shall be composed solely of two or more Non-Employee Directors. Members of the Committee shall serve at the pleasure of the Board, and the Board, from time to time and at its discretion, may remove members from (with or without cause) or add members to the Committee or fill any vacancies on the Committee, however created. Alternatively, the Board may, by resolution, elect that the Plan be administered by the full Board rather than a Committee. During any such time as the Board shall administer the Plan, all references herein to the "Committee" shall be deemed to refer to the Board and all actions taken by the Board in the administration of the Plan shall be taken in the form of resolutions approved by the Board. 3.2 Duties. In its administration of the Plan, the Committee shall have the authority, power and duty: (a) to make any and all determinations regarding persons who are eligible to receive Options under the Plan; (b) to construe and interpret the terms and provisions of the Plan and any and all Option Agreements entered into pursuant to the Plan; (c) to make, adopt, amend, rescind, and interpret such rules and regulations not inconsistent with the Plan or law as it from time to time deems reasonable and necessary for the interpretation and administration of the Plan; (d) to prescribe the form or forms of the Option Agreements and other instruments evidencing or relating to any Options granted under the Plan and of any other instruments required under the Plan and to change such forms from time to time; (e) to determine: (i) the Employees to whom Options shall be granted pursuant to the Plan and the timing of such grant or grants, and to cause Options to be granted to Employees it selects; (ii) the number of shares of Option Stock to be covered by each Option granted; (iii) the Exercise Price to be paid for Option Stock upon exercise of the Option as set forth in the Option Agreement and as determined in accordance with Paragraph 4.3 hereof; (iv) the Expiration Date of each Option granted, and the period within which any such Option may be exercised; (v) any other term and/or condition of each Option (which need not be identical from Option to Option) so long as not inconsistent with the Plan; and, 61 (f) to make all other determinations and take all other actions provided for herein or deemed by it, in its discretion, to be necessary or advisable to administer the Plan in a proper and effective manner. 3.3 Meetings and Voting. The Committee shall select one of its members as Chairman and shall hold meetings at such times and places as it shall deem necessary or desirable. A majority of the members of the Committee shall constitute a quorum for all matters with respect to administration of the Plan, and acts of a majority of the members of the Committee present at meetings at which a quorum is present, or acts reduced to and approved in writing by all of the members of the Committee without a meeting, shall be valid acts of the Committee. 3.4 Choice of Form of Option. The Committee shall have the discretion to cause any Option granted pursuant to the Plan to be granted with the intent that it qualify for treatment as an "Incentive Stock Option" (an "ISO") as defined in 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or with the intent that it be treated as a "Nonqualified Stock Option" (an "NSO"). ISOs and NSOs shall collectively be referred to herein as "Options" unless reference is specifically made only to one or the other, and, in the case of any such reference only to one, such reference shall be deemed to be made to the exclusion of the other. 3.5 Effect of Committee Action. All actions, decisions and determinations of the Committee in connection with the grant of Options or the administration, interpretation or construction of, or questions or other matters concerning, the Plan or any Option granted, shall (i) be made consistent and in accordance with the terms of the Plan and, with respect to an ISO, shall be designed to cause the Plan and each such ISO to continue to comply with applicable provisions of the Code, and (ii) shall be final, conclusive and binding on all persons, including the Company, its shareholders, Optionees and any other person claiming any interest in any Option; provided, however, that any action, decision, interpretation or determination, other than those respecting the actual grant of Options, shall be subject to review by the Board of Directors either on its own initiative, at the request of the Committee or on application of any aggrieved party. In such a case, the determination of the Board of Directors on such review shall be final and binding on all affected parties. 3.6 Indemnification. To the extent permitted by applicable law, and in addition to such other rights of indemnification that members of the Committee may have as Directors of the Company, the members of the Committee shall be indemnified by the Company against the reasonable expenses, including attorneys' fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal thereof, to which they or any of them may be made a party by reason of any action taken or omitted in good faith under or in connection with administration of the Plan or any Option granted hereunder and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that any such Committee member is liable for gross negligence or misconduct in the performance of his duties; provided, however, that within thirty (30) days after institution of any such action, suit or proceeding, such Committee member(s) shall in writing offer the Company the opportunity, at its own expense, to handle and defend same. 62 ARTICLE IV GRANT AND TERMS OF OPTIONS 4.1 Authorization to Grant Options. Pursuant to the Plan, from time to time prior to the Termination Date the Company may grant Options to Employees to purchase shares of Common Stock. Options may only be granted by action of the Committee, and no person shall have any rights under the Plan or with respect to any Option except pursuant to such action of the Committee. 4.2 Number of Shares. The number of shares of Option Stock covered by each Option shall be set by the Committee at the time such Option is granted and shall be specified in the Option Agreement evidencing such Option; provided, however, that the number of shares of Option Stock covered by Options granted from time to time to any one Employee under the Plan may not exceed 40% of the aggregate number of shares of Common Stock originally available for the grant of Options under the Plan from time to time. The number of shares of Option Stock covered by each Option shall be subject to adjustment in the manner described in Paragraph 6.1 below. 4.3 Exercise Price. At the time an Option is granted, the Committee shall set the Exercise Price applicable to such Option. The Exercise Price shall be determined by the Committee in the manner described below and shall be specified in the Option Agreement evidencing the Option. The Exercise Price applicable to each Option shall be subject to adjustment in the manner described in Paragraph 6.1 below. The Exercise Price for each share of Option Stock covered by an Option shall not be less than one hundred percent (100%) of the fair market value of one share of the Common Stock on the Date of Grant of such Option (the "Fair Market Value"). The Fair Market Value on any particular date shall be, (i) if the Common Stock is not then listed on the Nasdaq Stock Market, the fair market value of a share of the Common Stock as determined by the Committee in its sole discretion in such manner as it shall deem to be reasonable and appropriate, or, (ii) if the Common Stock is listed on the Nasdaq Stock Market, the closing sale price of the Common Stock as quoted by Nasdaq on such date. 4.4 Option Agreements. Each Option granted under the Plan shall be evidenced by an Option Agreement which shall be executed and delivered by the Optionee and by or on behalf of the Company and which shall (i) specify whether such Option is intended to be an ISO or an NSO, (ii) contain such other information as is provided or permitted herein to be contained in the Option Agreement, and (iii) not contain any provisions inconsistent with the Plan. Following the execution of an Option Agreement evidencing an Option, such Option shall be effective as of the Date of Grant of such Option. 4.5 Limits on Grant of ISOs. Notwithstanding anything contained herein to the contrary: 63 (a) in the case of an ISO granted to an Employee who owns, immediately before the ISO is granted, more than ten percent (10%) of the total combined voting power of all classes of Common Stock of the Company, the Exercise Price per share with respect to such ISO, as determined by the Committee and stated in the Option Agreement, shall not be less than one hundred ten percent (110%) of the Fair Market Value as of the Date of Grant of the ISO; and, (b) the aggregate Fair Market Value (determined as of the Date of Grant of the Option) of the Option Stock for which an Optionee may be granted ISOs exercisable for the first time in any calendar year (including ISOs granted under all option plans of the Company or any of its Subsidiaries) shall not exceed $100,000. This $100,000 limitation shall not apply to the grant of NSOs. ARTICLE V EXERCISE OF OPTIONS 5.1 Waiting Period. In connection with the grant of an Option, the Committee may, at its option, specify a "Waiting Period" in connection with the exercise of such Option. In such event, the Option may not be exercised unless and until the Optionee shall have completed a period of continuous, full time service in the employment of the Company or any of its Subsidiaries following the Date of Grant of the Option equal to the Waiting Period set by the Committee and specified in the Option Agreement evidencing that Option, but thereafter, subject to earlier termination as described herein, may be exercised as provided herein and in the Option Agreement evidencing such Option. No such Waiting Period shall not operate to extend the Expiration Date or other date of termination of an Option set forth or provided for herein or in the Option Agreement evidencing such Option. 5.2 Term; Conditions on Exercise; Expiration or Termination. The Expiration Date of each Option shall be set by the Committee at the time the Option is granted and shall be specified in the Option Agreement evidencing the Option, but in no event shall be more than ten years following the Date of Grant of the Option. However, notwithstanding any thing contained herein to the contrary, in the case of an ISO granted to an Employee who owns, immediately before the ISO is granted, more than ten percent (10%) of the total combined voting power of all classes of Common Stock of the Company, the Expiration Date shall not be more than 5 years following the Date of Grant of the ISO. Subject to the other terms and conditions contained in the Plan, each Option may be exercised by the Optionee at such times or intervals and on such other terms and conditions (if any) as are determined by the Committee and specified in the Option Agreement evidencing the Option. Notwithstanding anything contained herein or in any Option Agreement to the contrary, to the extent that an Option shall not previously have been exercised in the manner required by the Plan, it shall expire and terminate at 5:00 P.M. on its Expiration Date. In addition to the termination provisions set forth above, Options granted pursuant to the Plan shall terminate or may be terminated as provided in Paragraphs 5.7 and 6.1 below. Upon the expiration or termination of all or any portion of an Option, such Option or portion thereof shall, without any further act by the Company, expire and no longer be exercisable or confer any rights to any person to purchase shares of Common Stock under the Plan. 64 5.3 Notice of Exercise. To exercise an Option in whole or in part, the Optionee or other person then entitled to exercise the Option or portion thereof shall notify the Company by delivering written notice of such exercise (a "Notice of Exercise") to the President or the Secretary of the Company. Such written notice shall be substantially in the form attached hereto as Exhibit A and shall specify the number of shares of Option Stock to be purchased. A Notice of Exercise shall not be effective (and the Company shall have no obligation to sell any Option Stock to the Optionee pursuant to such Notice) unless it satisfies the terms and conditions set forth herein and actually is received by the Company as provided above prior to the Expiration Date or other termination of the Option to be exercised. In the event an Option or portion thereof is being exercised by a person other than the Optionee (as provided in Paragraph 5.7(c) below), the Notice of Exercise shall be accompanied by appropriate proof of the right of such person(s) to exercise the Option. 5.4 Payment Upon Exercise. The Exercise Price of Option Stock being purchased upon the exercise of an Option (in part or in whole) shall be paid by the Optionee in full at the time of such exercise. Such payment may be made (i) in cash, (ii) by official bank check, bank money order or other certified funds, or (iii) in the discretion of the Committee, by a combination thereof. No Option Stock shall be issued or delivered until full payment of the Exercise Price therefor has been made. 5.5 Restrictions. At the time an Option is granted, the Committee shall have the authority, in its sole discretion, to impose restrictions of any nature on the exercise of such Option (including restrictions in the form of a schedule by which an Option becomes exercisable in increments over a period of time) and on the Option Stock acquired by the Optionee upon such exercise. Without limiting the generality of the foregoing, the Committee may impose conditions restricting absolutely the transferability of Option Stock acquired through exercise of any Option for such periods as the Committee may determine. Any such restrictions imposed by the Committee shall be specified in the Option Agreement. 5.6 Nontransferability. Options granted hereunder shall not be assignable or transferable except by will or by the laws of descent and distribution, and, during the lifetime of the Optionee, may be exercised only by him. More particularly, but without limiting the generality of the foregoing, an Option may not be sold, assigned, transferred (except as noted herein), pledged or hypothecated in any way and shall not be subject to execution, attachment or similar process. 5.7 Termination of Employment. (a) Voluntary and Involuntary Terminations. In the event an Optionee's employment with the Company or any Subsidiary shall terminate or be terminated prior to the Expiration Date of his or her Option for any reason other than his or her death or "Disability" (as defined below), then the status of the Optionee's Option shall be as specified below. Authorized leaves of absence and transfers of employment by an Optionee between the Company and a Subsidiary, or between two Subsidiaries, without a break in service, shall not constitute terminations of 65 employment for purposes of the Plan. The Committee shall determine whether any other absence for military or government service or for any other reasons shall constitute a termination of employment for purposes of the Plan, and the Committee's determination shall be final. (i) If, prior to the Expiration Date of his or her Option, an Optionee voluntarily terminates his or her employment with the Company or any of its Subsidiaries other than as a result of "Retirement" (as defined below), then, to the extent it shall not previously have been exercised in the manner required by the Plan, the Option immediately shall terminate and be of no further force or effect on the effective date of such termination of employment. (ii) If, prior to the Expiration Date of his or her Option, an Optionee voluntarily terminates his or her employment with the Company or any of its Subsidiaries as a result of "Retirement" (as defined below), the Option shall remain in effect and, to the extent it shall not previously have been exercised, the Optionee shall have the right to exercise the Option at any time before but not later than 5:00 P.M. on the 90th day following the effective date of such Retirement (but not later than the Expiration Date of the Option) in accordance with the terms of the Plan and, to the extent not so exercised, at that time the Option shall terminate and be of no further force or effect. The termination of an Optionee's employment with the Company or any of its Subsidiaries which is treated as a "retirement" under the terms of any qualified retirement plan maintained by the Company from time to time, or the termination of an Optionee's employment at such earlier time or under such other circumstances as the Committee shall agree in writing to treat as "Retirement" for purposes of the Plan, shall be deemed to be a "Retirement" for purposes of the Plan. (iii) If, prior to the Expiration Date of his or her Option, an Optionee's employment is terminated by the Company or any of its Subsidiaries other than for "Cause" (as defined below), the Option shall remain in effect and, to the extent it shall not previously have been exercised, the Optionee shall have the right to exercise the Option at any time before but not later than 5:00 P.M. on the 90th day following the date of such termination (but not later than the Expiration Date of the Option) in accordance with the terms of the Plan and, to the extent not so exercised, at that time the Option shall terminate and be of no further force or effect. (iv) If, prior to the Expiration Date of his or her Option, an Optionee's employment is terminated by the Company or any of its Subsidiaries for Cause, then, to the extent it shall not previously have been exercised in the manner required by the Plan, the Option immediately shall terminate and be of no further force or effect on the earlier of the date such termination of employment is effective or the date on which the determination is made to terminate the Optionee's employment for Cause. For purposes of this Paragraph 5.7(a), the Company or its Subsidiary shall have "Cause" to terminate an Optionee's employment upon a determination by the Company or its Subsidiary, in good faith, that the Optionee (1) has failed in any material respect to perform or discharge his duties or responsibilities of employment in a reasonably competent manner, (2) is engaging or has engaged in willful misconduct, 66 insubordination, or other conduct, which is detrimental to the business of the Company or its Subsidiary or which has had or likely will have a material adverse effect on the Company's or its Subsidiary's business or reputation; or (3) has violated or failed to comply with any of the Company's or its Subsidiary's policies or procedures (including any employee codes of conduct) that are applicable to him or her. For purposes of this Plan, the determination of whether any termination of an Optionee's employee was for Cause shall be within the sole discretion of the Committee. (b) Disability of Optionee: If, prior to the Expiration Date of his or her Option, an Optionee becomes "Disabled" (as defined below) and, as a result, his or her employment with the Company or any of its Subsidiaries is terminated, the Option shall remain in effect and, to the extent it shall not previously have been exercised, the Optionee's Option shall remain in effect and the Optionee shall have the right to exercise the Option at any time before but not later than the 90th day following the effective date of such termination (but not later than the Expiration Date of the Option) in accordance with the terms of the Plan and, to the extent not so exercised, at that time the Option shall terminate and be of no further force or effect. For purposes of this Paragraph 5.7(b), an Optionee shall be considered "Disabled" at such time as he or she is determined to be permanently disabled such as would qualify the Optionee for benefits under the Company's long term disability insurance plan which is applicable to the Optionee. (c) Death of Optionee: If, prior to the Expiration Date of his or her Option, an Optionee shall die while employed by the Company or a Subsidiary, then, following the date of the Optionee's death, the Option shall remain in effect and, to the extent it shall not previously have been exercised, the Optionee's designated beneficiary (determined either by will or other writing delivered to the Committee in advance), or if no designated beneficiary, the personal representative of his estate, shall have the right to exercise the Option at any time before but not later than 5:00 P.M. on the Expiration Date of the Option in accordance with the terms of the Plan and, to the extent not so exercised, at that time the Option shall terminate and be of no further force or effect. Any references herein to an Optionee shall be deemed to include any person entitled to exercise an Option after the death of such Optionee under the terms of this Plan. 5.8 Modification, Extension and Renewal of Options. Subject to the provisions of Paragraph 6.1 below, any Option may be Modified, Extended or Renewed (as those terms are defined in Article II) only upon the agreement of the Committee and the Optionee. Any such agreement shall be in the form of a written amendment to the Option Agreement evidencing the Option being Modified, Extended or Renewed and which shall set forth the terms of any such Modification, Extension or Renewal. 5.9 Other Provisions. In addition to the items required to be in the Option Agreement evidencing an Option, such Option Agreement may contain such other terms, conditions and provisions applicable to such Option or the exercise thereof (including any and all limitations or restrictions as shall be necessary to comply with any applicable federal and state securities laws and regulations) as the Committee shall, at its sole discretion, deem 68 necessary or desirable; provided, however, that the Committee may not impose any such terms, conditions or provisions that are inconsistent with any provisions of the Plan. 5.10 Issuance of Option Stock. A stock certificate representing the number of shares of Option Stock purchased by the Optionee upon the proper exercise of an Option shall be issued and delivered by the Company as soon as practicable after receipt of a valid and effective Notice of Exercise and full payment of the Exercise Price relating to those shares. Such certificate shall be delivered to or on the written order of the person exercising the Option. ARTICLE VI GENERAL PROVISIONS 6.1 Adjustment of Options. (a) Changes in Capitalization; Stock Splits and Dividends. In the event of (i) any dividend payable by the Company in shares of Common Stock, or (ii) any recapitalization, reclassification, split-up, consolidation or combination of, or other change in or offering of rights to the holders of, Common Stock, or (iii) an exchange of the outstanding shares of Common Stock for a different number or class of shares of stock or other securities of the Company in connection with a merger, consolidation or other reorganization of or involving the Company (provided the Company shall be the surviving or resulting corporation in any such merger or consolidation), then the Committee shall, in such a manner as it shall determine in its sole discretion, appropriately adjust the number and class or kind of shares which may be issued under the Plan and of the securities which shall be subject to outstanding Options and/or the Exercise Price applicable to any outstanding Option, all computed on a basis prior to the event described in such event. However, in no event shall any such adjustment change the aggregate Exercise Price for Option Stock to be purchased upon the exercise of any Option. Subject to review by the Board of Directors of the Company, any such adjustments made by the Committee shall be consistent with changes in the Company's outstanding Common Stock resulting from the above events and, when made, shall be final, conclusive and binding on all persons, including, without limitation, the Company, its shareholders and each Optionee or other person having any interest in any Option so adjusted. Any fractional shares resulting from any such adjustment shall be eliminated. However, notwithstanding anything contained herein to the contrary, no Option which is intended to be an ISO shall be adjusted in a manner that causes the Option to fail to continue to qualify as an ISO. (b) Dissolution; Merger or Consolidation; Sale of Assets. In the event of a dissolution or liquidation of the Company, the sale of substantially all the Company's assets, or a merger or consolidation of the Company with or into any other corporation or entity (or any other such reorganization or similar transaction) in which the Company is not the surviving or resulting corporation, and if a provision is not made in such transaction for the continuance of this Plan or the assumption of Options by any successor to the Company or for the substitution for Options of new options covering shares of any successor corporation or a parent or subsidiary thereof, then, in such event, and to the extent such Options have not previously been exercised, all rights of Optionees pursuant to all outstanding Options shall terminate and be of no further effect immediately prior to the effective time of such dissolution, liquidation, sale, merger, consolidation or other reorganization (or at such other time and pursuant to such rules and regulations as the Committee shall determine and promulgate to the Optionees). However, to the extent such 69 Options shall not previously have been exercised, and notwithstanding any provisions of the Plan or any Option Agreement to the contrary, each such Option shall become exercisable, and may be exercised, in full immediately prior to the effective time of any such event. The Committee shall give each Optionee at least ninety (90) days prior written notice of the effective time of an event which gives rise to an immediate purchase right under this Paragraph 6.1. (c) Miscellaneous. The grant of an Option shall not affect in any way the right or power of the Company to (i) enter into or effect any adjustment, recapitalization, reclassification, reorganization or any other change in the Company's capital or business structure or its business, (ii) to merge or consolidate, or to dissolve, liquidate, sell or transfer all or any part of its business or assets, or (iii) to issue bonds, debentures, preferred or other preference stock ahead of or affecting Common Stock or the rights thereof. 6.2 Rights as a Shareholder. Neither an Optionee nor any other person shall have any rights as a stockholder with respect to any shares of Option Stock covered by an Option until such Option shall have been validly exercised in the manner described herein and in the Option Agreement relating to such Option, full payment of the Exercise Price has been made for such shares, and a stock certificate representing the Option Stock purchased upon such exercise shall have been registered on the Company's stock records in the name of and delivered to such person. Except to the extent of adjustments made pursuant to Paragraph 6.1 above, no adjustment on behalf of the Optionee shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property), distributions or other rights for which the record date for determining the shareholders entitled to receive the same is prior to the date of registration and delivery of the stock certificate(s) representing the Option Stock. 6.3 No Right to Employment. Neither the Plan nor the grant of an Option, nor any Option Agreement evidencing any such Option, is intended or shall be deemed or interpreted to constitute an employment agreement or to confer upon an Optionee any right of employment with the Company or any of its Subsidiaries, including without limitation any right to continue in the employ of the Company or any of its Subsidiaries, or to interfere with, restrict or otherwise limit in any way the right of the Company or any Subsidiary to discharge or terminate the employment of any Optionee at any time for any reason whatsoever, with or without Cause. 6.4 Legal Restrictions. If in the opinion of legal counsel for the Company the issuance or sale of any shares of Option Stock by the Company pursuant to the exercise of an Option would not be lawful without registration under the Securities Act of 1933 (the "1933 Act") or without some other action being taken, or for any other reason, or would require the Company to obtain approval from any governmental authority or regulatory body having jurisdiction deemed by such counsel to be necessary to such issuance or sale, then the Company shall not be obligated to issue or sell any Option Stock pursuant to the exercise of any Option to any Optionee or to any other authorized person unless a registration statement that complies with the provisions of the 1933 Act in respect of such shares is in effect at the time thereof and all other required or appropriate action has been taken under and pursuant to the terms and provisions of the 1933 Act or other applicable law, or the Company receives evidence satisfactory to such counsel that the issuance and sale of such shares, in the absence of an effective registration statement or other action, would not constitute a 70 violation of the 1933 Act or other applicable law, or unless any such required approval shall have been obtained. The Company is in no event obligated to register any such shares, to comply with any exemption from registration requirements or to take any other action which may be required in order to permit, or to remedy or remove any prohibition or limitation on, the issuance or sale of Option Stock to any Optionee or other authorized person. The Committee, as a condition of the grant of an Option and/or the exercise thereof, may require that the Optionee execute one or more undertakings in such form as the Committee shall prescribe to the effect that such shares are being acquired for investment purposes only and not with a view to the distribution or resale thereof. 6.5 No Obligation to Purchase Shares. The granting of an Option pursuant to the Plan shall impose no obligation on the Optionee to purchase any shares covered by such Option. 6.6 Payment of Taxes. Each Optionee shall be responsible for all federal, state, local or other taxes of any nature as shall be imposed pursuant to any law or governmental regulation or ruling on any Option or the exercise thereof or on any income which an Optionee is deemed to recognize in connection with an Option. If the Committee shall determine to its reasonable satisfaction that the Company or any of its Subsidiaries is required to pay or withhold the whole or any part of any estate, inheritance, income, or other tax with respect to or in connection with any Option or the exercise thereof, then the Company or such Subsidiary shall have the full power and authority to withhold and pay such tax out of any shares of Common Stock being purchased by the Optionee or from the Optionee's salary or any other funds otherwise payable to the Optionee, or, prior to and as a condition of exercising such Option, the Company may require that the Optionee pay to it in cash the amount of any such tax which the Company, in good faith, deems itself required to withhold. 6.7 Choice of Law. The validity, interpretation and administration of the Plan, any Option Agreement, and of any rules, regulations, determinations or decisions made thereunder, and the rights of any and all persons having or claiming to have any interest therein or thereunder, shall be determined exclusively in accordance with the laws of the State of Nevada. Without limiting the generality of the foregoing, the period within which any action in connection with the Plan must be commenced shall be governed by the laws of the State of Nevada, without regard to the place where the act or omission complained of took place, the residence of any party to such action, or the place where the action may be brought or maintained. 71 6.8 Modification of Plan. The Board, upon recommendation of the Committee, may, from time to time, amend, modify, suspend, terminate or discontinue the Plan at any time without notice, provided, however, that no such action by the Board shall adversely affect any Optionee's rights under any then outstanding Options without such Optionee's prior written consent; and, provided further that, except as shall be required to comport with changes in the Code, any modification or amendment of the Plan that (i) increases the aggregate number of shares of Common Stock which may be issued upon the exercise of Options (other than as provided in Paragraph 6.1 above), (ii) changes the formula by which the Exercise Price is determined, (iii) changes the provisions of the Plan with respect to the determination of Employees to whom Options may be granted or, (iv) otherwise materially increases the benefits accruing to Optionees under the Plan, shall be subject to the approval of the Company's shareholders. In the event the Board shall terminate or discontinue the Plan, such action shall not operate to deprive any Optionee of any rights theretofore acquired by him or her under the Plan, and any Options outstanding as of the date of any such termination shall remain in full force and effect according to their terms as though the Plan had not been terminated. 6.9 Application of Funds. The proceeds received by the Company from the sale of Common Stock pursuant to Options granted under the Plan will be used for general corporate purposes. 6.10 Notices. Except as otherwise provided herein, any notice which the Company or an Optionee may be required or permitted to give to the other under this Plan shall be in writing and shall be deemed duly given when delivered personally or deposited in the United States mail, first class postage prepaid, and properly addressed. Notice, if to the Company, shall be sent to its President at the address of the Company's then current corporate office. Any notice sent by mail by the Company to an Optionee shall be sent to the most current address of the Optionee as reflected on the records of the Company or its Subsidiaries as of the time said notice is required. In the case of a deceased Optionee, any notice shall be given to the Optionee's personal representative if such representative has delivered to the Company evidence satisfactory to the Company of such representative's status as such and has informed the Company of the address of such representative by notice pursuant to this Paragraph 6.10. 6.11 Conformity With Applicable Laws and Regulations. With respect to persons who are subject to Section 16 of the 1934 Act, the Plan and each Option granted and transaction under it are intended to, and shall be interpreted so as to, be consistent with the requirements, and satisfy applicable conditions, of Rule 16b-3 of the Securities and Exchange Commission (as such Rule may be modified, amended or superseded from time to time). To the extent any provision of the Plan or any Option Agreement, or any action by the Committee or the Board, shall fail to so comply, then, to the extent permitted by law and deemed advisable by the Committee, such provision or action shall be deemed null and void. 6.12 Successors and Assigns. Subject to Paragraph 5.6 above, this Plan shall bind and inure to the benefit of the Company, any Optionee, and their respective successors, assigns, personal or legal representatives and heirs. 72 6.13 Severability. It is intended that each provision of this Plan shall be viewed as separate and divisible, and in the event that any provision hereof shall be held to be invalid or unenforceable, the remaining provisions shall continue to be in full force and effect. 6.14 Titles. Titles of Articles and Paragraphs are provided herein for convenience only, do not modify or affect the meaning of any provision herein, and shall not serve as a basis for interpretation or construction of this Plan. 6.15 Gender and Number. As used herein, the masculine gender shall include the feminine and neuter, the singular number the plural, and vice versa, whenever such meanings are appropriate. IN WITNESS WHEREOF, the Company has caused this Plan to be executed in its corporate name by its President, attested by its Secretary and its corporate seal to be hereto affixed, all by authority duly given by the Board. As of this the 12th day of January, 1999. FOUNTAIN POWERBOAT INDUSTRIES, INC. By: President ATTEST: Secretary 73 EX-10 4 STATE OF NORTH CAROLINA COUNTY OF BEAUFORT EMPLOYEE STOCK OPTION AGREEMENT (Incentive Stock Option) THIS EMPLOYEE STOCK OPTION AGREEMENT (the "Agreement") is made as of this 12th day of January, 1999 (the "Date of Grant"), by and between FOUNTAIN POWERBOAT INDUSTRIES, INC., a Nevada corporation (the "Company"), and ANTHONY J. ROMERSA, a resident of Beaufort County, North Carolina (the "Optionee"). WHEREAS, on January 12, 1999, the Company's Board of Directors adopted the 1999 EMPLOYEE STOCK OPTION PLAN (the "Plan"), subject to the approval of the Company's shareholders; and WHEREAS, the Plan provides that the Stock Option Committee (the "Committee") of the Company's Board of Directors (the "Board"), or the Board itself, from time to time may grant to officers and employees of the Company and its subsidiaries the right or option to purchase shares of the Company's $.01 par value common stock ("Common Stock") on the terms and conditions set forth in the Plan; and WHEREAS, the Optionee currently is a full-time employee of the Company and its subsidiary, Fountain Powerboats, Inc., and the Board has selected the Optionee as an employee to whom it will grant an option to purchase Common Stock under the Plan; NOW, THEREFORE, in consideration of the premises and the agreements of the parties set forth herein, the Company and the Optionee hereby agree as follow: 1. Grant of Option. Pursuant to and subject to the terms and conditions contained in the Plan and this Agreement, the Company hereby grants to the Optionee the right and option (the "Option") to purchase from the Company all or any number of an aggregate of THIRTY THOUSAND (30,000) shares of Common Stock (the "Option Stock") which may be authorized but unissued shares or shares acquired by the Company on the open market or in private transactions. The Option is intended to be an Incentive Stock Option (an "ISO") as that term is defined in the Plan. The Option is granted under and pursuant to the Plan, a copy of which is attached hereto and the terms and conditions of which are incorporated herein by reference. Capitalized terms used in this Agreement which are defined in the Plan shall have the same meanings herein as are assigned to them in the Plan. In the event any provision of this Agreement conflicts or is inconsistent with a term or condition of the Plan, then the Plan provision shall be controlling and shall supersede the provision of this Agreement. 2. Approval by Shareholders. This Agreement and the Option described herein are expressly made subject to approval of the Plan by the Company's shareholders at the Company's next annual meeting of shareholders following the date hereof. Notwithstanding anything contained herein to the contrary, the Option may not be exercised prior to receipt of such approval, and, in the event such approval is not obtained, then this Agreement and the Option shall, without any action by the Company or the Optionee, become void and unenforceable and of no further force or effect. 74 3. Date of Grant of Option. For purposes of the Plan and this Agreement, the Date of Grant of the Option shall be the date of this Agreement. 4. Exercise Price. The Exercise Price to be paid by the Optionee for the purchase of the Option Stock upon exercise of the Option shall be FIVE AND NO/100s DOLLARS ($5.00) per share. 5. Exercise Schedule. Subject to any further restrictions contained in the Plan or this Agreement, the Option will become exercisable on the following dates as to the indicated number of shares of the Option Stock: Option Stock Date Available For Exercise June 30, 1999 5,000 shares September 30, 1999 5,000 shares December 31, 1999 5,000 shares March 31, 2000 5,000 shares June 30, 2000 5,000 shares September 30, 2000 5,000 shares Notwithstanding anything contained herein to the contrary, the Option may not be exercised at any time as to a fractional share. 6. Method of Exercise. To exercise the Option in whole or in part, the Optionee must deliver written notice of such exercise (a "Notice of Exercise") to the President or Secretary of the Company. Such written notice shall be substantially in the form attached hereto as Exhibit A and shall specify the number of shares of Option Stock to be purchased. A Notice of Exercise shall not be effective (and the Company shall have no obligation to sell any Option Stock to the Optionee pursuant to such Notice) unless it satisfies the terms and conditions contained in the Plan and this Agreement and actually is received by the Company prior to the Expiration Date or any earlier termination of the Option. Notwithstanding anything contained herein to the contrary, the Optionee may not exercise the Option to purchase less than one hundred (100) shares, unless the Committee otherwise approves or unless the partial exercise is for all remaining shares of Option Stock available under the Option. Following receipt from the Optionee of a valid and effective Notice of Exercise and full payment of the Exercise Price relating to a number of the shares of Option Stock being purchased, a stock certificate representing that number of shares shall be issued and delivered by the Company to the Optionee as soon as practicable; provided however that, the Company shall have the right and discretion to hold any shares purchased upon exercise of the Option in escrow for a period ending on the later of (i) two years from the Date of Grant of the Option, or (ii) one year after issuance of the stock upon exercise of the Option, for the sole purpose of informing the Company of a disqualifying disposition within the meaning of Section 422 of the Internal Revenue Code of 1986. During any such escrow period, the Optionee shall have all rights of a shareholder with respect to the Option Stock purchased, including but not limited to the right to vote, receive dividends on and to sell such stock. 75 7. Payment. The Exercise Price of Option Stock being purchased upon an exercise of the Option (in part or in whole) shall be paid by the Optionee in full at the time of such exercise. Such payment shall be made in the manner described in the Plan and shall accompany the Notice of Exercise. The Option shall not be considered to have been properly exercised as to any Option Stock, and no Option Stock shall be issued or delivered, until full payment of the Exercise Price therefor has been made. 8. Expiration or Termination. (a) Expiration Date. Notwithstanding anything contained herein to the contrary, to the extent the Option shall not previously have been exercised in the manner required by or otherwise terminated as provided in the Plan or this Agreement, it shall expire and terminate at 5:00 P.M. on the "Expiration Date" which, for purposes of this Agreement, shall be January 11, 2004. (b) Other Termination. The Option otherwise shall terminate prior to the Expiration Date in the events and upon the occurrences described in the Plan. (c) Effect of Termination or Expiration of Option. Upon the expiration or termination of all or any portion of the Option, it shall, without any further act by the Company or the Optionee, no longer be exercisable or of any force or effect and shall no longer confer any rights to any person to purchase shares of Common Stock under the Plan or this Agreement. 9. Effect of Agreement on Employment Status of Optionee. Neither the Plan, this Agreement nor the grant of the Option is intended or shall be deemed or interpreted to constitute an employment agreement or to confer upon the Optionee any right of employment with the Company, including without limitation any right to continue in the employ of the Company, or to interfere with, restrict or otherwise limit in any way the right of the Company to discharge or terminate the employment of the Optionee at any time for any reason whatsoever, with or without Cause. 10. Rights as a Shareholder. Neither the Optionee nor any other person shall have any rights as a stockholder with respect to any shares of Option Stock until the Option has been validly exercised in the manner described in the Plan and this Agreement, full payment of the Exercise Price has been made for such shares, and a stock certificate representing the Option Stock purchased upon such exercise has been registered on the Company's stock records in the name of and delivered to the Optionee or other person entitled thereto. Except to the extent of adjustments made as described in the Plan, no adjustment on behalf of the Optionee shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property), distributions or other rights for which the record date for determining the shareholders entitled to receive the same is prior to the date of registration and delivery of the stock certificate(s) representing the Option Stock. 11. Listing and Registration of Option Shares. If in the opinion of legal counsel for the Company the issuance or sale of any shares of Option Stock upon the exercise of the Option would not be lawful without registration under the Securities Act of 1933 (the "1933 Act") or without some other action being taken or for any other reason, or would require the Company to obtain approval from any governmental authority or regulatory body having jurisdiction deemed by such counsel to be necessary to such issuance or sale, then the Company shall not be obligated to issue or sell any Option Stock to the Optionee or any other authorized person unless a registration statement that complies with the provisions of the 1933 Act in respect of such shares is 76 in effect at the time thereof, or all other required or appropriate action has been taken under and pursuant to the terms and provisions of the 1933 Act or other applicable law, or the Company receives evidence satisfactory to such counsel that the issuance and sale of such shares, in the absence of an effective registration statement or other action, would not constitute a violation of the 1933 Act or other applicable law, or unless any such required approval shall have been obtained. The Company is in no event obligated to register any such shares, to comply with any exemption from registration requirements or to take any other action which may be required in order to permit, or to remedy or remove any prohibition or limitation on, the issuance or sale of such shares to the Optionee or other authorized person. As a condition of the exercise of the Option, the Company may require that the Optionee execute one or more undertakings in such form as it shall prescribe to the effect that such shares are being acquired for investment purposes only and not with a view to the distribution or resale thereof. 12. Payment of Taxes. The Optionee shall be responsible for all federal, state, local or other taxes of any nature as shall be imposed pursuant to any law or governmental regulation or ruling on the Option or the exercise thereof or on any income which the Optionee is deemed to recognize in connection with the Option. If the Company shall determine to its reasonable satisfaction that the Company is required to pay or withhold the whole or any part of any estate, inheritance, income, or other tax with respect to or in connection with the Option or the exercise thereof, or on the Optionee's resale of any shares of Option Stock, then the Company shall have the full power and authority to withhold and pay such tax out of any shares of Option Stock being purchased by the Optionee or from the Optionee's salary or any other funds otherwise payable to the Optionee, or, prior to and as a condition of exercising such Option, the Company may require that the Optionee pay to it in cash the amount of any such tax which it, in good faith, deems itself required to withhold. 13. Limit on Grant of ISOs. Notwithstanding anything contained in this Agreement to the contrary (including the number of shares of Option Stock provided for herein), the aggregate Fair Market Value (determined as of the Date of Grant) of the Option Stock for which the Option may be exercised for the first time in any calendar year (including ISOs granted under all option plans of the Company) shall not exceed $100,000; and, if this Agreement covers a number of shares of Option Stock that would result in the Option exceeding that limitation, then the Committee shall have the right and discretion to reduce the number of Option Shares, and/or to modify the Exercise Schedule, provided above such that the Option qualifies as an ISO. 14. Nontransferability. The Option shall not be assignable or transferable except by will or by the laws of descent and distribution, and, during the lifetime of the Optionee, may be exercised only by him or her. More particularly, but without limiting the generality of the foregoing, the Option may not be sold, assigned, transferred (except as noted herein), pledged or hypothecated in any way and shall not be subject to execution, attachment or similar process. 15. Notices. Except as otherwise provided herein, any notice which the Company or the Optionee may be required or permitted to give to the other under the Plan or this Agreement shall be in writing and shall be deemed duly given when delivered personally or deposited in the United States mail, first class postage prepaid, and properly addressed. Notice, if to the Company, shall be sent to its President at the address of the Company's then current corporate office. Any notice sent by mail by the Company to the Optionee shall be sent to the most current address of the Optionee as reflected on the 77 records of the Company or its Subsidiaries as of the time said notice is required. If the Optionee has died, any such notice shall be given to the Optionee's personal representative if such representative has delivered to the Company evidence satisfactory to the Company of such representative's status as such and has informed the Company of the address of such representative by notice pursuant to this Paragraph 15. Notwithstanding anything contained herein to the contrary, a Notice of Exercise shall be effective only upon actual receipt thereof by the Company as provided in Paragraph 6 above. 16. References to Committee. Optionee acknowledges that, pursuant to its terms, the Plan may be administered from time to time by the Board or by the Committee and that, during such time as the Plan is administered by the Board, then all references in this Agreement to the Committee shall be deemed to refer to the Board. 17. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such a manner as to be valid and enforceable under applicable law, but, in the event that any provision hereof shall be held to be invalid or unenforceable, the remaining provisions shall continue to be in full force and effect and this Agreement shall continue to be binding on the parties hereto as if such invalid or unenforceable provision or part hereof had not been included herein. 18. Modification of Agreement; Waiver. Except as otherwise provided herein, this Agreement may be modified, amended, suspended, or terminated, and any terms or conditions may be waived, but only by written instrument signed by each of the parties hereto. No waiver hereunder shall constitute a waiver with respect to any subsequent occurrence or other transaction hereunder or of any other provision hereof. 19. Captions and Headings; Gender and Number. Captions and paragraph headings used herein are for convenience only, do not modify or affect the meaning of any provision herein, are not a part hereof, and shall not serve as a basis for interpretation or in construction of this Agreement. As used herein, the masculine gender shall include the feminine and neuter, the singular number the plural, and vice versa, whenever such meanings are appropriate. 20. Governing Law; Venue and Jurisdiction. The validity, interpretation and administration of this Agreement, and the rights of any and all persons having or claiming to have any interest hereunder, shall be determined exclusively in accordance with the laws of the State of Nevada. Without limiting the generality of the foregoing, the period within which any action in connection with this Agreement must be commenced shall be governed by the laws of the State of Nevada, without regard to the place where the act or omission complained of took place, the residence of any party to such action, or the place where the action may be brought or maintained. The parties hereto agree that any suit or action relating to this Agreement shall be instituted and prosecuted in the courts of Beaufort County, North Carolina, and each party hereby does waive any right or defense relating to such jurisdiction and venue. 21. Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of the Company, its successors and assigns, and shall be binding upon and inure to the benefit of the Optionee, his heirs, legatees, personal representatives, executors, and administrators. 22. Entire Agreement. This Agreement (which incorporates the terms and conditions of the Plan) constitutes and embodies the entire understanding 78 and agreement of the parties hereto with respect to the Option and satisfies the provisions of Paragraph 3(c) of the Employment Agreement dated August 24, 1998, between Optionee, the Company and Fountain Powerboats, Inc. Except as otherwise provided hereunder, there are no other agreements or understandings, written or oral, in effect between the parties hereto relating to the matters addressed herein. 23. Counterparts. This Agreement may be executed in any number of counterparts, each of which when executed and delivered shall be deemed an original, but all of which taken together shall constitute one and the same instrument. IN WITNESS WHEREOF, the Company has caused this instrument to be executed in its corporate name by its President, or one of its Vice Presidents, and attested by its Secretary or one of its Assistant Secretaries, and its corporate seal to be hereto affixed, all by authority of its Board of Directors first duly given, and the Optionee has hereunto set his or her hand and adopted as his or her seal the typewritten word "SEAL" appearing beside his or her name, all done this the day and year first above written. FOUNTAIN POWERBOAT INDUSTRIES, INC. [CORPORATE SEAL] By: President and Chief Executive Officer ATTEST: Secretary OPTIONEE: (SEAL) Anthony J. Romersa 79 EXHIBIT A NOTICE OF EXERCISE OF EMPLOYEE STOCK OPTION To: The Board of Directors of Fountain Powerboat Industries, Inc. The undersigned hereby elects to purchase shares of Common Stock of Fountain Powerboat Industries, Inc. (the "Company") pursuant to the Option granted to the undersigned pursuant to the Company's 1999 Employee Stock Option Plan (the "Plan") and that certain Stock Option Agreement between the Company and the undersigned dated . The undersigned elects to purchase whole shares of Common Stock having an aggregate Exercise Price of $ which is tendered herewith: [ ] in cash in the amount of $ ; [ ] by bank check or money order in the amount of $ ; [ ] . This the day of , . Optionee 80 EX-10 5 STATE OF NORTH CAROLINA COUNTY OF BEAUFORT EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of August 24, 1998 (the "Effective Date"), by and among FOUNTAIN POWERBOATS, INC., a North Carolina business corporation with its corporate headquarters in Washington, North Carolina ("Fountain"); FOUNTAIN POWERBOAT INDUSTRIES, INC., a Nevada business corporation, which is the holding company of Fountain, with its corporate headquarters in Washington, North Carolina ("FPBI"); and ANTHONY J. ROMERSA ("Employee"). W I T N E S S E T H: WHEREAS, Fountain is engaged worldwide in the business of designing, developing, manufacturing, marketing and selling high performance sport and fishing boats and high performance sport cruisers and yachts, including specialized instrumentation and related equipment and products (some of which may be or become patented) for and to various customers and is engaged in various related business activities (collectively "Fountain's Business"); and, WHEREAS, Employee has been involved for many years in various aspects of the maritime and boating industry, with over 20 years of senior level management experience in global consumer and industrial manufacturing environments and extensive experience in finance, strategic planning, business development, marketing, and general management, having previously served as the Corporate Director of Planning Marine Operations for Brunswick Corporation; and, WHEREAS, Employee's experience and knowledge of such matters and his expertise in the boat manufacturing industry would benefit Fountain in the operation and development of Fountain's Business; and, WHEREAS, Fountain desires to employ Employee as Chief Operating Officer and Executive Vice President of Fountain, effective as of the Effective Date, and Employee desires to accept employment with Fountain; and, 81 WHEREAS, Fountain and Employee have agreed and desire to enter into this Agreement to set forth the terms and conditions of Employee's employment with Fountain. NOW, THEREFORE, in consideration of the premises and mutual promises, covenants and conditions hereinafter set forth, and for other good and valuable considerations, the receipt and sufficiency of which hereby are acknowledged, Fountain and Employee hereby agree as follows: 1. Relationship and Duties. (a) Employment. Fountain agrees to employ Employee, and Employee accepts employment with Fountain, upon the terms and conditions stated herein, subject to the Condition Precedent set forth in Paragraph 18 below. As an employee of Fountain, Employee will (i) serve as Fountain's and FPBI's Chief Operating Officer and Executive Vice President and, in such position, shall report directly to, and shall be subject to the direction of, Fountain's Chairman, President and Chief Executive Officer; (ii) perform such duties and exercise such authority as is customary for persons holding such office, including but not limited to directing, supervising, and managing the construction, marketing, sale, and servicing of high performance sport and fishing boats and sport cruisers and yachts; (iii) supervise the development of Fountain's Business, and promote Fountain and engage in Business development activities on Fountain's behalf in its market areas; and (iv) have such other duties and responsibilities consistent with the position of Chief Operating Officer as shall be assigned to him from time to time by the Chairman, President and Chief Executive Officer. In connection with the performance of his duties hereunder, Employee's office and principal employment location shall be at the principal executive offices of Fountain near Washington, North Carolina, or at such other place or places as the Board of Directors shall designate. (b) Standards of Performance and Conduct. During the Term of Employment, Employee shall (i) faithfully and diligently discharge his duties and responsibilities under this Agreement; (ii) perform in a reasonably competent manner the duties associated with his position with Fountain or assigned to him by the Chairman, President and Chief Executive Officer; (iii) 82 use his best efforts to implement the policies and procedures of Fountain currently in effect or as established from time to time by Fountain's Board of Directors; and (iv) devote his full working time, attention, and efforts to the diligent performance of his duties herein specified and not accept employment with any other individual, corporation, or other entity, or engage as a corporate officer or employee in any other venture for profit, which Fountain's Board of Directors considers to be in conflict with Fountain's best interests or to be in competition with Fountain's Business, or which may interfere in any way with Employee's performance of his duties hereunder. Employee, in the execution of his duties under this Agreement, at all times and in all material respects, shall comply with any code of conduct or other personnel policies and procedures adopted by Fountain, as the same are in effect and as amended or supplemented from time to time, and with all applicable federal and state statutes and all rules, regulations, administrative orders, statements of policy and other pronouncements or standards promulgated thereunder. 2. Term of Employment. Unless sooner terminated as provided in this Agreement, and subject to the right of either Employee or Fountain to terminate Employee's employment at any time as provided herein, the initial term of Employee's employment with Fountain under this Agreement (the "Term of Employment") shall be for a period of three (3) years commencing on the Effective Date and ending three years following the Effective Date on August 23, 2001(the "Expiration Date"). At any time during the six (6) months period prior to the Expiration Date, either Fountain or Employee may give notice to the other party of a desire to negotiate an extension to the Term of Employment or to otherwise modify the terms and conditions of this Agreement. 83 3. Compensation. (a) Base Salary. For all services rendered by Employee under this Agreement as an officer of FPBI and Fountain, and as an employee of Fountain, Fountain shall pay to Employee a base salary ("Base Salary") at an annual rate of One Hundred Sixty Thousand Dollars ($160,000) during the Term of Employment. Base Salary paid under this Agreement shall be payable not less frequently than monthly in accordance with Fountain's payroll policies and procedures. (b) Bonus. Fountain shall pay to Employee an annual bonus equal to one percent (1%) of Fountain's pre-tax profits from continuing operations before other bonuses, and computed on the same standard as R. M. Fountain, Jr.'s bonus, which shall be payable within thirty (30) days following the completion of (i) the annual fiscal year-end audit of Fountain's financial statements and (ii) Fountain's annual filing on Form 10-K with the Securities and Exchange Commission for the applicable fiscal year. Such bonus shall be forfeited if Employee voluntarily resigns pursuant to Paragraph 11(a) below or is terminated with "Cause" pursuant to Paragraph 11(c) below; in the case of termination without "Cause" as defined in Paragraph 11 below, the bonus shall be prorated on a calendar day basis (365 days) for the portion of the then current fiscal year during which Employee was employed by Fountain. (c) Incentive Stock Options. Subject to approval by the shareholders of FPBI within one (1) year of the Effective Date of this Agreement, FPBI shall grant to Employee incentive stock options to acquire thirty thousand (30,000) shares of FPBI's common stock at the closing market price for such stock as quoted on NASDAQ on the Effective Date of this Agreement ($ ), which options shall vest and become exercisable over a five (5) year period at the rate of six thousand (6,000) optioned shares per year, with the first increment of options becoming vested and exercisable on June 30, 1999, and subsequent increments of options to become vested and exercisable on June 30 of each successive year. An appropriate adjustment shall be made by FPBI as to the amount of such incentive stock options simultaneously with the effectiveness of any stock split, stock dividend, or other change affecting the number of shares of FPBI's common stock. The vesting of such options shall be contingent upon Employee's continued employment, subject to the provisions of Paragraph 11 of this Agreement. 84 Options shall become immediately exercisable when vested and must be exercised within 10 years from the date of grant or shall be forfeited, null and void. Options granted shall not be assignable or transferable except by will or by the laws of descent and distribution and, during the lifetime of Employee, may be exercised only by him. In the event Employee's employment is terminated pursuant to Paragraph 11 below, such options shall vest and become exercisable according to the provisions of Paragraph 11. The grant of stock options to Employee pursuant to this Agreement shall be in addition to any other stock- based compensation plans of Fountain, if any, in which Employee becomes eligible to participate. FPBI, by and through its Chairman and Chief Executive Officer and the concurrence of its Directors, agrees to present for shareholder consideration and approval an incentive stock option plan authorizing the grant of such incentive stock options to Employee, and R. M. Fountain, Jr., FPBI's Chairman, President and Chief Executive Officer, agrees to vote his shares of FPBI in favor of said plan. (d) Annual Performance and Financial Review. Within thirty (30) days following the completion of (i) the annual fiscal year-end audit of Fountain's financial statements and (ii) Fountain's annual filing on Form 10-K with the Securities and Exchange Commission for the applicable fiscal year, Fountain shall conduct a review of Employee's performance during the past fiscal year and his financial compensation and benefits, and Fountain shall make, in its discretion, any such adjustments to such compensation and benefits as it may deem reasonable and appropriate. (e) Taxes; Withholdings. All cash compensation payable under this Agreement shall be subject to applicable withholding taxes and such other employment taxes as are required by law. (f) Moving Expenses. Fountain shall reimburse Employee for moving expenses involved in the relocation of Employee and his family from their current residence to a location in or near Washington, North Carolina; provided, however, that such reimbursement of Employee's moving expenses shall be limited to the actual cost to Employee of packing fees, transportation 85 costs, and out-of-pocket expenses, not to exceed an aggregate reimbursement of Fifteen Thousand Dollars ($15,000); provided, however, that such amount shall not include reimbursement of the transportation costs to relocate Employee's currently-owned 32' boat to the Washington, North Carolina area, and Fountain shall provide additional reimbursement to Employee for such boat relocation expense. Employee shall provide to Fountain reasonable documentation, in a form acceptable to Fountain, for all such moving and relocation expenses in order to obtain reimbursement from Fountain. (g) Participation in Boat Testing Program. Employee shall be entitled during the Term of Employment to the reasonable use of a Fountain boat and to participate in Fountain's Boat Testing Program, subject to Fountain's normal policies, guidelines and safety procedures for the Program. 4. Leave and Other Benefits. Employee shall be eligible for such leave and other benefits as are generally available to and which cover Fountain's executive officers at Employee's job level or classification, subject to the rules applicable to such plans or programs prevailing from time to time. Except as otherwise specifically provided herein, Employee's participation in such plans and programs shall be subject to and in accordance with the terms and conditions (including eligibility requirements) of such plans and programs, resolutions of Fountain's Board of Directors establishing such programs and plans, and Fountain's normal practices and established policies regarding such plans and programs. 5. Adjustment to Compensation or Benefits. No adjustment to compensation, nor any addition to or modification or termination of the leave or other benefits provided to Employee under this Agreement, shall affect the other provisions of this Agreement. 6. Expenses. Upon presentation to Fountain of expense reports in sufficiently detailed form to comply with standards for deductibility of business expenses established from time to time by the Internal Revenue Service, Fountain will reimburse Employee for all reasonable business expenses incurred by Employee in connection with performance of his duties hereunder. 86 Such expenses will be submitted for reimbursement and paid in accordance with Fountain's standard policies and procedures for reimbursement of business expenses. 7. Facilities and Services. Fountain shall furnish Employee with such facilities and services as are suitable to Employee's position and necessary for the performance of Employee's duties hereunder. All files, records, and documents generated, produced, or maintained by Fountain, by Employee, or by any other employee of Fountain during Employee's employment hereunder shall be and remain the sole and exclusive property of Fountain. 8. Ownership of Inventions, Etc. Employee promptly and fully shall disclose and shall assign and transfer to Fountain, its successors and assigns, the entire right, title, and interest in and to any invention, product, process, apparatus, improvement, or design, patentable or unpatentable, invented, discovered, conceived, developed, or originated by Employee, individually or jointly, during the term of Employee's employment with Fountain and (i) relating to Fountain's Business or any actual or anticipated research or development of Fountain (including, without limitation, the production of any product manufactured, distributed, marketed, sold, used, or in the process of being developed by Fountain or by any parent or affiliate of Fountain, or which may be manufactured, distributed, marketed, sold, or used in competition with any such product) or (ii) resulting from any work performed by Employee for Fountain (including, without limitation, any invention, product, process, apparatus, improvement, or design invented, discovered, conceived, developed, or originated by Employee (A) during Employee's work time with Fountain or (B) with Fountain's equipment, supplies, facilities, or trade secret information) (collectively, the "Inventions"). All such Inventions shall be and remain the sole property of Fountain. Such assignment shall include the right to obtain letters patent or design patents, in the name of Employee or otherwise, on such Inventions in the United States or in any foreign countries. Employee agrees to execute all documents and to make all oaths and declarations necessary for the filing and/or prosecution of any applications for such letters patent or design patents, or any divisions, continuations, continuations in part, renewals, or reissues thereof, and to 87 execute on request all documents necessary to assign such Inventions to Fountain. The requirement of disclosure shall apply to all inventions, products, processes, apparatuses, improvements, and designs, including those asserted by Employee to be nonassignable hereunder, for the purpose of determining the rights of Employee and Fountain therein. This paragraph shall apply only to the extent not prohibited or limited by state or federal law. 9. Noncompetition; Confidentiality. Fountain and Employee acknowledge that during the course of Employee's employment with Fountain, Employee shall be given access to and shall develop names, contacts at, and addresses of, the dealers, customers, and prospective customers for the purposes of furthering Fountain's Business, and that Employee will be responsible for and will participate in the development of Fountain's Business (whether through the conception, invention, or development of any Inventions; through planning, marketing, customer and prospective customer relations, construction, distribution, sales, servicing, or management; or otherwise). Fountain and Employee also acknowledge that Fountain will spend considerable amounts of time, effort, and corporate resources in providing Employee with knowledge relating to Fountain's Business, including but not limited to patents, proposed patents, copyrights, trade secrets, inventions, proprietary information, designs, specifications, blueprints, project notes, finances, dealers, customers, customer lists, customer information (including, without limitation, requirements and preferences) prospective customers, plans, concepts, ideas, methods, analyses, marketing investigations, strategies, proposals, surveys, and research, in whatever form, (collectively, the "Information"), which Information Fountain has a right to regard as confidential and to protect from disclosure. To protect Fountain from Employee's use or exploitation of such Information, and to provide reasonable assurance to Fountain that it safely may provide Employee with information relating to the dealers, customers, and prospective customers and with other information relating to Fountain's Business, Employee covenants and agrees as follows: 88 (a) Covenant of Nonsolicitation and Noncompetition. During the term of his employment with Fountain and for a period of one (1) year following the termination of such employment for any reason ("Restriction Period"), Employee shall not directly or indirectly, either for himself or for any other person or entity, other than on behalf of Fountain, without the prior written consent of Fountain (which consent may be withheld in Fountain's sole discretion): (i) solicit or accept any business related or similar to Fountain's Business from any person or entity who or which was or is a dealer or customer during Employee's employment with Fountain, or, if Employee's employment with Fountain has terminated, during the twenty-four (24) months immediately preceding the termination of Employee's employment with Fountain (a "Serviced Customer"); (ii) solicit or accept any business related or similar to Fountain's Business from any person or entity who or which was or is a prospective dealer or customer (a "Prospective Customer") and (A) in whom or which Fountain or any of the principals, shareholders, directors, officers, or employees of Fountain, had or has invested a reasonable amount of time or company resources in an effort to secure such Prospective Customer's business, and (B) with whom or which Employee had or has had contact by virtue of his employment with Fountain, during Employee's employment with Fountain or, if Employee's employment with Fountain has terminated, during the twenty-four (24) months immediately preceding the termination of Employee's employment with Fountain; (iii) divert or attempt to divert any dealer, customer, or prospective customer or, if Employee's employment with Fountain has terminated, divert or attempt to divert any Serviced Customer or Prospective Customer, to any person or entity competitive with Fountain; (iv) engage as an owner, partner, shareholder, member, director, manager, employee, agent, consultant, or otherwise, or assist any person or entity in any way, in any activity performed in his capacity as an Employee of Fountain, in any business related or similar to Fountain's Business; or, 89 (v) employ, or seek to employ, any employee of Fountain or induce any such person to leave Fountain's employment; in any of the following areas ("Market Area"): (A) Beaufort County, North Carolina; (B) Any county of North Carolina contiguous to Beaufort County in which Fountain engages in Fountain's Business or in which Fountain has contacted, solicited, or accepted business from a dealer, customer, or prospective customer; (C) Any county in North Carolina in which Fountain engages in Fountain's Business or in which Fountain has contacted, solicited, or accepted business from a dealer, customer, or prospective customer; (D) Within a fifty (50)-mile radius of a dealer of Fountain boats in any other state in the United States or in which Fountain engages in Fountain's Business or in which Fountain has contacted, solicited, or accepted business from a dealer, customer or prospective customer; (E) Within a fifty (50)-mile radius of a dealer of Fountain boats in any other country or territory or in which Fountain engages in Fountain's Business or in which Fountain has contacted, solicited, or accepted business from a dealer, customer, or prospective customer. By listing the specific geographic areas described above, it is the intent of the parties to list areas in which Fountain is or is expected to be engaging in Fountain's Business on its own behalf or through its dealers. (b) Covenant of Nondisclosure. Employee shall not at any time, either during the term of his employment with Fountain or at any time following the termination of his employment with Fountain for any reason: (i) divulge, disclose, or communicate to any person or entity the names of, contacts at, or addresses of any Serviced Customers or Prospective Customers; or, (ii) divulge, disclose, or communicate to any person or entity any confidential information of any kind, nature, or description concerning 90 any matters affecting or relating to Fountain's Business, including but not limited to the Information; provided, however, that during the term of his employment, Employee may disclose such information to dealers, customers, prospective customers, or fellow employees, for the limited purpose of performing his job duties, to the extent authorized by Fountain; or, (iii) use the Information to the detriment of Fountain or Fountain's Business, or the principals, shareholders, officers, directors, or employees thereof, particularly in any manner competitive with Fountain or Fountain's Business, in any unlawful manner, or to interfere with or attempt to terminate or otherwise adversely affect any business relationship of Fountain with any Serviced Customer or Prospective Customer. Employee acknowledges that all books, records, files, forms, lists, reports, accounts, and any other documentation relating in any manner to the Serviced Customers and the Prospective Customers, or Fountain's Business, whether prepared by Employee or anyone else and in whatever form, are the exclusive property of Fountain and shall be returned immediately to Fountain upon the termination of Employee's employment for any reason or upon Fountain's request at any time. (c) Reasonableness of Restrictions. If any of the restrictions set forth in this Paragraph 9 shall be declared invalid for any reason whatsoever by a court of competent jurisdiction, the validity and enforceability of the remainder of such restrictions shall not thereby be adversely affected. Employee acknowledges that Fountain has a legitimate economic interest in those geographic areas which this Paragraph 9 specifically is intended to protect, and that the Market Area and Restriction Period are limited in scope to the geographic territory and period of time reasonably necessary to protect Fountain's economic interest and otherwise are reasonable and proper. In the event the Restriction Period or any other such time limitation is deemed to be unreasonable by a court of competent jurisdiction, Employee hereby agrees to submit to such reduction of the Restriction Period as the court shall deem reasonable. In the event the Market Area is deemed by a court of competent jurisdiction to be unreasonable, Employee hereby agrees that the Market Area 91 shall be reduced by excluding any separately identifiable and geographically severable area necessary to make the remaining geographic restriction reasonable, but this Paragraph 9 shall be enforced as to all other areas included in the Market Area which are not so excluded. (d) Remedies for Breach. Employee understands and acknowledges that a breach or violation by him of any of the covenants contained in Paragraph 9 shall be deemed a material breach of this Agreement and will cause substantial, immediate, and irreparable injury to Fountain, and that Fountain will have no adequate remedy at law for such breach or violation. In the event of Employee's actual or threatened breach or violation of the covenants contained in Paragraph 9, Fountain shall be entitled to bring a civil action seeking, and shall be entitled to, an injunction restraining Employee from violating or continuing to violate such covenant or from any threatened violation thereof, or for any other legal or equitable relief relating to the breach or violation of such covenant. Employee agrees that, if Fountain institutes any action or proceeding against Employee seeking to enforce any of such covenants or to recover other relief relating to an actual or threatened breach or violation of any of such covenants, Employee shall be deemed to have waived the claim or defense that Fountain has an adequate remedy at law and shall not urge in any such action or proceeding the claim or defense that such a remedy at law exists. However, the exercise by Fountain of any such right, remedy, power, or privilege shall not preclude Fountain or its successors or assigns from pursuing any other remedy or exercising any other right, power, or privilege available to it for any such breach or violation, whether at law or in equity, including the recovery of damages, all of which shall be cumulative and in addition to all other rights, remedies, powers, or privileges of Fountain. 92 Notwithstanding anything contained herein to the contrary, Employee agrees that the provisions of Paragraphs 9(b) and 9(c) above and the remedies provided in this Paragraph 9(d) for a breach by Employee shall be in addition to, and shall not be deemed to supersede or to otherwise restrict, limit or impair the rights of Fountain under any state or federal law or regulation dealing with or providing a remedy for the wrongful disclosure, misuse or misappropriation of trade secrets or other proprietary or confidential information. (e) Survival of Covenants. Employee's covenants and agreements and Fountain's rights and remedies as provided in this Paragraph 9 shall survive and remain fully in effect following expiration of the Term of Employment or any actual termination of Employee's employment with Fountain during the Term of Employment. 10. Change in Control. (a) In the event of a termination of Employee's employment in connection with, or within twenty-four (24) months after, a "Change in Control" (as defined in Subparagraph (d) below) of Fountain or FPBI, other than for "Cause" (as defined in Paragraph 11 below), retirement, death or disability, Employee shall be entitled to receive compensation as set forth in Paragraph 10(c) below. Said sum shall be payable as provided in Paragraph 10(e) below. (b) In addition to any rights Employee might have to terminate this Agreement as contained in Paragraph 11, Employee shall have the right to terminate this Agreement upon the occurrence of any of the following events (the "Termination Events") within twenty-four (24) months following a Change in Control of Fountain or FPBI: (i) Employee is assigned any duties and/or responsibilities that are inconsistent with his position, duties, responsibilities or status at the time of the Change in Control; or, (ii) Employee is not paid an annual Base Salary rate at or above the rate established by the terms of Paragraph 3 of this Agreement; or, (iii) Employee's life insurance, medical or hospitalization insurance, disability insurance, stock options, stock purchase plans, deferred 93 compensation plans, management retention plans, retirement plans, or similar plans or benefits, if any, being provided by Fountain or FPBI to Employee as of the effective date of the Change in Control are reduced in their level, scope, or coverage, or any such insurance, plans, or benefits are eliminated, unless such reduction or elimination applies proportionately to all salaried employees of Fountain or FPBI who participated in such benefits prior to such Change in Control; or, (iv) Employee is transferred to a geographic location which is an unreasonable distance from his current (at the time of the Change of Control) principal work location, without Employee's express written consent. A Termination Event shall be deemed to have occurred on the date such action or event is implemented or takes effect. (c) In the event that Employee terminates this Agreement pursuant to this Paragraph 10, Fountain will be obligated to pay or cause to be paid to Employee an amount equal to the compensation that Employee would have been entitled to receive hereunder and which remains unpaid at the date of such termination not to exceed two (2) years of Base Salary at the time of the Change of Control. (d) For the purposes of this Agreement, the term "Change in Control" shall mean any of the following events: (i) After the Effective Date of this Agreement, any "person" (as such term is defined in Paragraphs 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as amended), directly or indirectly, acquires beneficial ownership of voting stock, or acquires irrevocable proxies or any combination of voting stock and irrevocable proxies, representing forty-five percent (45%) or more of any class of voting securities of either Fountain or FPBI, or acquires control in any manner of the election of a majority of the directors of either Fountain or FPBI, provided, however, that the provisions of this subparagraph shall not apply to R. M. Fountain, Jr., his estate, his heirs, members of his family, his testamentary beneficiaries, or any trusts or other entities created for the benefit of the family of R. M. Fountain, Jr.; or, 94 (ii) Either Fountain or FPBI consolidates or merges with or into another corporation, association, or entity, or is otherwise reorganized, where neither Fountain nor FPBI nor an entity controlled by R. M. Fountain, Jr. having more than forty-five percent (45%) of the vote for directors is the surviving corporation in such transaction; or, (iii) All or substantially all of the assets of either Fountain or FPBI are sold or otherwise transferred to or are acquired by any other corporation, association, or other person, entity, or group except an entity controlled by R. M. Fountain, Jr. having more than forty-five percent (45%) of the vote for directors. Notwithstanding the other provisions of this Paragraph 10, a transaction or event shall not be considered a Change in Control if, prior to the consummation or occurrence of such transaction or event, Employee, FPBI, and Fountain agree in writing that the same shall not be treated as a Change in Control for purposes of this Agreement. (e) Such amounts payable pursuant to this Paragraph 10 shall be paid, at the sole option of Employee, either in one lump sum, discounted at an appropriate rate of interest, or in equal monthly payments over the remaining term of the Agreement. (f) Following a Termination Event which gives rise to Employee's rights hereunder, Employee shall have one (1) month from the date of occurrence of the Termination Event to terminate this Agreement pursuant to this Paragraph 10. Any such termination shall be deemed to have occurred only upon delivery to Fountain (or to any successor corporation) of written notice of termination which describes the Change in Control and Termination Event. If Employee does not so terminate this Agreement within such one month period, he shall thereafter have no further rights hereunder with respect to that Termination Event, but shall retain rights hereunder, if any, with respect to any other Termination Event as to which such period has not expired. (g) It is the intent of the parties hereto that all payments made pursuant to this Agreement be deductible by Fountain for federal income tax purposes and not result in the imposition of an excise tax on Employee. Notwithstanding anything contained in this Agreement to the contrary, any 95 payments to be made to or for the benefit of Employee which are deemed to be "parachute payments" as that term is defined in Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), shall be modified or reduced to the extent deemed to be necessary by Fountain (or of its successor in interest) to avoid the imposition of excise taxes on Employee under Section 4999 of the Code and the disallowance of a deduction to Fountain (or of its successor in interest) under Section 280G of the Code. 11. Termination and Termination Pay. (a) By Employee. Employee's employment under this Agreement may be terminated at any time by Employee upon sixty (60) days written notice to Fountain. Upon such termination, Employee shall be entitled to receive his normal Base Salary compensation through the effective date of such termination. Any outstanding vested, unexercised options granted to Employee pursuant to Paragraph 3 must be exercised by Employee prior to the applicable expiration date of such options, at which time any remaining unexercised options shall be forfeited, expired, null and void; and Employee's right to receive any further options that have not vested as of the termination date shall immediately be terminated, null, void, and of no further force or effect. (b) Death or Retirement. Employee's employment under this Agreement shall be terminated upon his death during the Term of Employment or upon the effective date of Employee's retirement with Fountain's consent or under the terms of Fountain's retirement plan. Upon any such termination, Employee (or, in the case of Employee's death, his estate) shall be entitled to receive any compensation Employee shall have earned prior to and through the month of the date of termination and shall be entitled, through the applicable expiration date of such options, to exercise any options granted pursuant to Paragraph 3 that have become fully vested, plus any options Employee would have received for that year, all as of the termination date. (c) By Fountain for Cause. Fountain may terminate Employee's employment at any time during the Term of Employment for "Cause" (as defined below). Upon any such termination by Fountain under this Paragraph 11(c), 96 Employee shall have no further rights under this Agreement (including any right to receive compensation or other benefits for any period after such termination) and shall be entitled only to his Base Salary through the effective date of termination. Any vested, unexercised stock options granted to Employee pursuant to Paragraph 3 which remain outstanding and in effect and all unvested stock options shall immediately terminate and be of no further force or effect as of the effective date of such termination of employment for Cause. Notwithstanding anything contained herein to the contrary, before Fountain may terminate Employee's employment for a Cause described in Paragraph 11(c)(i) below, Fountain first shall give Employee seven (7) calendar days written notice of the facts or circumstances constituting such Cause for termination and if, during such period, Employee shall cure such Cause to the reasonable satisfaction of Fountain, then Employee's employment may continue in the discretion of Fountain; provided, however, that, in the event of any reoccurrence or further occurrence of the same Cause, Fountain shall have no obligation to give Employee any further or additional notice or opportunity to cure such Cause prior to the termination of Employee's employment. Except as specifically provided above, no such notice or opportunity to cure shall be required in the case of termination of Employee's employment for any Cause. For purposes of this Paragraph 11(c), Fountain shall have "Cause" to terminate Employee's employment upon: (i) A determination by Fountain, in good faith, that Employee (A) has breached in any material respect any of the terms or conditions of this Agreement, any Fountain policy, discriminated against any employee, customer, or other person covered by any anti-discrimination laws, regulations, or policies; (B) has failed in any material respect to perform or discharge his duties or responsibilities of employment in the manner provided herein; or (c) is engaging or has engaged in conduct involving moral turpitude, willful misconduct, or conduct which is detrimental in any material respect to the business prospects of Fountain or which has had or likely will have a material adverse effect on Fountain's Business or reputation; 97 (ii) The commission in the course of Employee's employment with Fountain of an act of fraud, embezzlement, theft, or personal dishonesty (whether or not such act or charge results in criminal indictment, charges, prosecution, or conviction); (iii) The unauthorized use of alcohol by Employee during working hours or any use of alcohol by Employee during nonworking hours that adversely affects his job performance, his ability to fulfill the responsibilities of his position, or the safety of himself or others at the workplace; or, (iv) Employee's use of any controlled substance, as defined at 21 U.S.C. 802 and listed on Schedules I through V of 21 U.S.C. 812, as revised from time to time, or as defined by any other federal or state law or regulation. (d) By Fountain without Cause. Fountain and Employee agree that notwithstanding anything contained herein to the contrary, Employee is an "at will" employee, and Fountain may terminate Employee's employment at will and without "Cause" at any time during the Term of Employment. Upon any such termination by Fountain under this Paragraph 11(d), Employee's rights under this Agreement (including his right to receive compensation or other benefits for any period after such termination) shall be limited to the right to receive nine (9) months of Base Salary only, without any incentive compensation (except stock options granted in Paragraph 3 above, which shall become vested and exercisable as set forth below) and with such bonus as may be calculated and prorated pursuant to Paragraph 3(b) above on a calendar day basis for the portion of the then current fiscal year during which Employee was employed by Fountain. Fountain also shall provide outplacement services to Employee, not to exceed Five Thousand and No/100 Dollars ($5,000.00) during the twelve (12) months immediately following such termination without Cause, and such employee benefits, if any, as required by applicable law. If Employee's employment is terminated without Cause pursuant to this Paragraph 11(d), Employee shall be entitled to exercise, through the applicable expiration date of such options, all of his then outstanding vested, unexercised stock options granted pursuant to Paragraph 3 above, plus 98 a prorated portion of the options due to vest at the end of the current fiscal year, prorated on a calendar day basis of 365 days, for the fiscal year in which Employee's employment was terminated without "Cause" by Fountain, which prorated options shall vest and become exercisable immediately and shall remain exercisable through the applicable expiration date of such options, after which all of such options shall be forfeited, terminated, null, void and of no effect. (e) Except as otherwise provided herein, upon the earlier of the Expiration Date of the Term of Employment or the effective date of any actual termination of Employee's employment with Fountain under this Agreement for any reason, the provisions of this Agreement likewise shall terminate and be of no further force or effect; provided, however, that Employee's covenants contained in Paragraph 9 above, and Fountain's obligations for payment of cash compensation under Paragraphs 11(a), 11(b), 11(c) and 11(d) above, shall survive and remain in effect in accordance with their terms following the Expiration Date or any actual termination of Employee's employment. 12. Successors and Assigns. (a) This Agreement shall inure to the benefit of and be binding upon any corporate or other successor of Fountain which shall acquire, directly or indirectly, by conversion, merger, consolidation, purchase, or otherwise, all or substantially all of the assets of Fountain. (b) Fountain is contracting for the unique and personal skills of Employee. Therefore, Employee shall be precluded from assigning or delegating his rights or duties hereunder without first obtaining the written consent of Fountain. 99 13. Modification; Waiver; Amendments. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the parties hereto. No waiver by either party hereto, at any time, of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties, except as herein otherwise provided. 14. Applicable Law. The parties hereto agree that without regard to principles of conflicts of laws, the internal laws of the State of North Carolina shall govern and control the validity, interpretation, performance, and enforcement of this Agreement and that any suit or action relating to this Agreement shall be instituted and prosecuted in the Courts of Beaufort County, North Carolina, and each party hereto hereby does waive any right or defense relating to such jurisdiction and venue, except to the extent that federal law shall be deemed to apply. 15. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 16. Headings. The section and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 17. Notices. Except as otherwise may be provided herein, all notices, claims, certificates, requests, demands, and other communications hereunder shall be in writing and shall be deemed to have been duly given when hand delivered or sent by facsimile transmission by one party to the other, or when deposited by one party with the United States Postal Service, postage prepaid, and addressed to the other party as follows: If to Fountain: If to Employee: Fountain Powerboats, Inc. Anthony J. Romersa Post Office Drawer 457 __________________ Washington, NC 27889 __________________ Attention: R. M. Fountain, Jr. (to be determined) 100 Such notice shall be deemed to be received upon receipt or refusal, if delivered by hand, or upon receipt or refusal as evidenced by the return receipt therefor, if delivered by registered or certified mail. 18. Condition Precedent. This Agreement is subject to the condition precedent that Employee must obtain from his current or former employer(s) and deliver to Fountain an appropriate written release or written consent, in a form satisfactory to Fountain and its attorneys, as to all covenants not to compete and/or not to solicit that are, or may be, applicable to Employee and that will, or may be, violated by Employee's employment with Fountain. 19. Entire Agreement. This Agreement contains the entire understanding and agreement of the parties, and there are no agreements, promises, warranties, covenants, or undertakings other than those expressly set forth or referred to herein. IN WITNESS WHEREOF, Fountain and FPBI each has caused this Agreement to be executed by its respective duly authorized officer within the authority duly given by its respective Board of Directors, and Employee has hereunto set his hand and adopted as his seal the typewritten word "SEAL" appearing beside his name, all as of the day and year first above written. FOUNTAIN POWERBOATS, INC. By:_______________________________ Title:____________________________ FOUNTAIN POWERBOAT INDUSTRIES, INC. By:_______________________________ Title:____________________________ EMPLOYEE: Anthony J. Romersa (SEAL) 101 -----END PRIVACY-ENHANCED MESSAGE-----