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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
Item 6. Selected Financial Data
<TABLE>
Fountain Powerboat Industries, Inc. and Subsidiary
Selected Financial Data
Fiscal Years 1995 through 1999
<CAPTION>
Year Ended June 30,
Operations Statement Data: ----------------------------------------------------------------------------
(Period Ended) 1999 1998 1997 1996 1995
- ------------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
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.
</TABLE>
12
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
<TABLE>
FOUNTAIN POWERBOAT INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FROM JUNE 30, 1996 THROUGH JUNE 30, 1999
<CAPTION>
Common Stock Additional Treasury Stock Total
______________________ Paid-in Accumulated ___________________ Stockholders'
Shares Amount Capital Earnings Shares Amount Equity
___________ _________ ____________ ____________ ________ _________ ____________
<S> <C> <C> <C> <C> <C> <C> <C>
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
___________ _________ ____________ ___________ _________ _________ ____________
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,217
<SECURITIES> 0
<RECEIVABLES> 1,607
<ALLOWANCES> 30
<INVENTORY> 7,308
<CURRENT-ASSETS> 14,085
<PP&E> 36,209
<DEPRECIATION> 17,144
<TOTAL-ASSETS> 33,931
<CURRENT-LIABILITIES> 12,184
<BONDS> 0
0
0
<COMMON> 47
<OTHER-SE> 10,585
<TOTAL-LIABILITY-AND-EQUITY> 33,931
<SALES> 53,428
<TOTAL-REVENUES> 53,428
<CGS> 41,548
<TOTAL-COSTS> 41,548
<OTHER-EXPENSES> 13,502
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,024
<INCOME-PRETAX> (2,445)
<INCOME-TAX> (1,189)
<INCOME-CONTINUING> (1,256)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,256)
<EPS-BASIC> (.27)
<EPS-DILUTED> (.27)
</TABLE>
58
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
