<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 10, 1998
REGISTRATION NO. 333-51715
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
--------------------------
ADAMS GOLF, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3949 75-2320087
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification Number)
organization) Code Number)
</TABLE>
300 DELAWARE AVENUE, SUITE 548
WILMINGTON, DELAWARE 19801
(302) 427-5892
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
B.H. (BARNEY) ADAMS
CHIEF EXECUTIVE OFFICER
300 DELAWARE AVENUE, SUITE 548
WILMINGTON, DELAWARE 19801
(302) 427-5892
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
JOSEPH A. HOFFMAN KENNETH L. GUERNSEY
J. DAVID WASHBURN KARYN R. SMITH
Arter & Hadden LLP Cooley Godward LLP
1717 Main Street, Suite 4100 One Maritime Plaza, 20th Floor
Dallas, Texas 75201 San Francisco, California 94111
(214) 761-2100 (415) 693-2000
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
--------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective Registration Statement for the same offering. / /
- ---------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
- ---------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
- ---------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
Subject to Completion, dated June 10, 1998
PROSPECTUS
5,750,000 SHARES
[LOGO]
COMMON STOCK
----------------
Of the 5,750,000 shares of common stock, par value $.001 per share (the
"Common Stock"), being offered hereby 3,750,000 are being offered by Adams Golf,
Inc. (the "Company") and 2,000,000 are being offered by certain stockholders of
the Company (the "Selling Stockholders"). The Company will not receive any of
the proceeds from the sale of shares by the Selling Stockholders. See "Principal
and Selling Stockholders."
Prior to the offering made hereby (the "Offering"), there has been no public
market for the Common Stock of the Company. It is currently estimated that the
initial public offering price of the Common Stock will be between $14.00 and
$16.00 per share. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price of the Common Stock.
The Common Stock has been approved for listing on the Nasdaq National Market
under the symbol "ADGO."
---------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO PROCEEDS TO SELLING
PUBLIC AND COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
<S> <C> <C> <C> <C>
Per Share................ $ $ $ $
Total(3)................. $ $ $ $
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of the Offering payable by the Company
of $ .
(3) The Selling Stockholders have granted the Underwriters a 30-day option to
purchase up to an aggregate of 862,500 additional shares of Common Stock on
the same terms and conditions as set forth above, solely to cover over-
allotments, if any. If such option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions and Proceeds to Selling
Stockholders will be $ , $ and $ , respectively. See
"Underwriting."
---------------------
The shares of Common Stock offered by this Prospectus are offered severally
by the Underwriters, subject to prior sale, to withdrawal, cancellation or
modification of the offer without notice, to delivery to and acceptance by the
Underwriters and to certain further conditions. It is expected that delivery of
the certificates for the shares of Common Stock will be made at the offices of
Lehman Brothers Inc., New York, New York, on or about July , 1998.
---------------------
LEHMAN BROTHERS
NATIONSBANC MONTGOMERY SECURITIES LLC
FERRIS, BAKER WATTS
INCORPORATED
July , 1998
<PAGE>
[ON THIS PAGE APPEAR SEVERAL PHOTOGRAPHS OF THE COMPANY'S PRODUCTS AND CERTAIN
PERSONS AFFILIATED WITH THE COMPANY INCLUDING B. H. (BARNEY) ADAMS, NICK FALDO
AND HANK HANEY. CERTAIN OF THE PHOTOGRAPHS CONTAIN CAPTIONS INDICATING THE
CONTENTS THEREOF.]
------------------------
The Company intends to furnish to its stockholders annual reports containing
audited consolidated financial statements and quarterly reports containing
unaudited consolidated financial information for each of the first three
quarters of each fiscal year.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON STOCK FOLLOWING THE
PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON STOCK
OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
The Company has registered the trademarks Adams-Registered Trademark- (with
triangle design), Tight Lies-Registered Trademark- and Assault-Registered
Trademark-, and currently has pending trademark applications for registration of
a configuration of the heel portion of a golf club head, and an overall
configuration of a golf club head. This Prospectus also includes trademarks of
companies other than the Company.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY INFORMATION IS QUALIFIED IN ITS ENTIRETY BY AND SHOULD
BE READ IN CONJUNCTION WITH THE MORE DETAILED INFORMATION AND THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL SHARE AMOUNTS, PER
SHARE AMOUNTS AND OTHER INFORMATION IN THIS PROSPECTUS HAVE BEEN ADJUSTED TO
GIVE RETROACTIVE EFFECT TO A 2-FOR-1 STOCK SPLIT OF THE COMMON STOCK AND ASSUME
NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. REFERENCES IN THIS
PROSPECTUS TO THE "COMPANY" OR "ADAMS" ARE, UNLESS THE CONTEXT OTHERWISE
REQUIRES, TO ADAMS GOLF, INC., A DELAWARE CORPORATION, AND ITS SUBSIDIARIES.
THE COMPANY
Adams designs, manufactures and markets premium quality, technologically
innovative golf clubs. The Company's design objective is to produce golf clubs
that deliver meaningful performance benefits and inspire player confidence. The
Company believes that its most successful product line to date, the Tight Lies
fairway woods, meets this objective by providing golfers with the ability to hit
the ball from virtually any lie while maximizing distance. The patented Tight
Lies fairway woods feature an upright trapezoidal head, a shallow face and a
lower center of gravity as compared to conventional fairway woods. The complete
Tight Lies line of products includes the original, Strong 3, Strong 5, Strong 7
and Strong 9 fairway woods. According to the Golf Market Research Institute, the
Tight Lies fairway woods were the top-selling single fairway woods in the U.S.
on a unit volume basis during the three months ended March 31, 1998. During this
period, the Company achieved a 27% market share of the single fairway woods
category.
Adams has developed a marketing model that integrates direct response and
traditional image-based advertising to generate brand awareness and drive retail
sales. The Company's advertising includes a 30-minute informative television
commercial ("infomercial") and print advertising in publications such as GOLF
DIGEST, USA TODAY and THE WALL STREET JOURNAL. For the three months ended March
31, 1998, approximately 79% of the Company's sales occurred at the retail level.
To preserve the integrity of its image and reputation, the Company currently
limits its distribution to retailers that market premium quality golf equipment
and provide a high level of customer service and technical expertise. The
Company currently sells its products to on- and off-course golf shops and
selected sporting goods retailers. The Company believes its selective retail
distribution helps its retailers to maintain profitable margins and maximize
sales of Adams' products.
Another important element of the Company's success to date has been its
sales and customer service infrastructure. Rather than relying on independent
sales representatives, as do many other golf equipment companies, Adams
maintains an inside sales department that currently consists of 25 employees who
are in regular telephone contact with the Company's over 7,000 retailers. These
sales representatives are supported by 13 field-based Regional Account
Coordinators who maintain personal contact with the Company's retailers
nationwide. The Company believes that using and carefully managing its own sales
force enables it to significantly reduce selling expenses. Adams also has a
separate 30-seat customer call center that provides customer service to
retailers and consumers. The majority of the Company's sales and customer
service personnel are experienced golfers. The Company believes interaction with
its knowledgeable representatives promotes customer satisfaction and helps to
strengthen the Adams brand.
In 1997, wholesale sales of golf equipment in the U.S. reached an estimated
$2.4 billion. Wholesale sales of golf clubs increased at an estimated compound
annual growth rate of approximately 13% over the 5-year period from 1992 to
1997. The Company believes that a number of trends are likely to further
increase the demand for Adams' products. These trends include: (i) significant
growth in the number of golf courses; (ii) increasing interest in golf from
women, junior and minority golfers; (iii) the large numbers of golfers entering
their 40s and 50s, the age when most golfers begin to play more often and
increase their spending on the sport; (iv) the correspondingly large population
of "Echo Boomers," who are beginning to
3
<PAGE>
enter their 20s, the age when golfers generally take up the sport; and (v) the
rapid evolution of golf club designs and materials.
The Company recently established a relationship with internationally
recognized, professional golfer Nicholas A. Faldo, who currently uses the Tight
Lies fairway woods. Mr. Faldo was inducted into the World Golf Hall of Fame in
May 1998 and has won more major championships in the 1990s than any other
golfer. Pursuant to the terms of the agreement, Mr. Faldo has agreed to, among
other things, (i) exclusively endorse the Company's golf clubs and undertake
certain other promotional activities on behalf of the Company and (ii) assist in
the design and field testing of a new line of golf clubs. In exchange for his
services, Mr. Faldo was granted 900,000 shares of Common Stock and is entitled
to receive certain minimum royalties. Absent an early termination event, the
agreement with Mr. Faldo continues throughout his lifetime. The Company believes
that Mr. Faldo's comprehensive knowledge of the game of golf and reputation for
technical excellence complement the Company's capabilities and strong brand
identity. See "Certain Transactions."
The Company intends to develop proprietary new technologies and product
designs that provide golfers with meaningful performance benefits. Capitalizing
on the technical knowledge and expertise gained through the Tight Lies fairway
woods, the Company is currently testing prototypes of a potential new driver.
This new product is expected to combine the distance of a driver with the
playability of a fairway wood. The Company currently expects the new driver to
be introduced after the end of fiscal year 1998. The Company is working with Mr.
Faldo to design and test this new driver as well as other potential new
products.
The Company's goal is to establish itself as a leading developer of
technologically innovative, performance-oriented golf clubs. To achieve this
goal the Company intends to (i) build its share of the premium fairway woods
market; (ii) leverage the success, performance and reputation of the Tight Lies
fairway woods; (iii) expand international sales; and (iv) develop new
technologies and product designs.
The address of the Company's principal executive office is 300 Delaware
Avenue, Suite 548, Wilmington, Delaware 19801. The Company's telephone number at
this address is (302) 427-5892. Adams' principal manufacturing and management
headquarters are located at 2801 East Plano Parkway, Plano, Texas 75074 and its
telephone number at this location is (972) 673-9000. The Company's World Wide
Web site is located at www.adamsgolf.com. The contents of the Company's Web site
shall not be deemed to be part of this Prospectus.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by:
The Company.......................................... 3,750,000 shares
The Selling Stockholders............................. 2,000,000 shares
Total Common Stock Offered......................... 5,750,000 shares
Common Stock to be outstanding after the Offering(1)... 22,849,282 shares
Use of net proceeds to the Company..................... Working capital and general
corporate purposes
Nasdaq National Market Symbol.......................... ADGO
</TABLE>
- ------------------------
(1) Excludes 423,666 shares of Common Stock issuable upon the exercise of
outstanding stock options.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth summary consolidated financial data of the
Company and should be read in conjunction with the Consolidated Financial
Statements and related Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA(1):
Net sales................................................. $ 1,125 $ 3,522 $ 36,690 $ 1,475 $ 24,511
Gross profit.............................................. 369 1,932 26,699 888 18,649
Operating expenses (excluding stock compensation and bonus
award).................................................. 613 1,709 15,826 823 9,777
Stock compensation and bonus award(2)..................... -- 214 14,842 -- --
--------- --------- --------- --------- ---------
Operating income (loss)................................... (244) 9 (3,969) 65 8,872
Net income (loss)......................................... $ (243) $ 13 $ (4,654) $ 45 $ 5,642
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income (loss) per common share(3):
Basic................................................... $ (0.05) $ -- $ (0.37) $ -- $ 0.32
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted................................................. $ (0.05) $ -- $ (0.37) $ -- $ 0.31
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average common shares(3):
Basic................................................... 4,423 11,238 12,519 11,873 17,662
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted................................................. 4,423 11,238 12,519 11,873 18,374
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1998
-------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED(4)
--------- --------------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................................................ $ 602 $ 51,915
Working capital...................................................................... 12,299 63,612
Total assets......................................................................... 25,793 77,106
Total debt (including current maturities)............................................ 1,135 1,135
Stockholders' equity................................................................. 14,667 65,980
</TABLE>
- ------------------------
(1) This table excludes summary financial information for the fiscal years ended
December 31, 1993 and 1994 because operations in those years were not
comparable in size or scope to current operations.
(2) Consists primarily of a stock award to the Company's founder, Chief
Executive Officer and President. See "Certain Transactions" and Note 9 of
Notes to Consolidated Financial Statements.
(3) See Note 1 of Notes to Consolidated Financial Statements for information
concerning the calculation of income (loss) per common share and weighted
average common shares outstanding.
(4) Gives effect to the sale of 3,750,000 shares of Common Stock offered by the
Company hereby and the application of the estimated net proceeds therefrom
(based on an assumed initial public offering price of $15 per share). See
"Use of Proceeds" and "Capitalization."
5
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. PROSPECTIVE PURCHASERS OF COMMON STOCK OFFERED HEREBY SHOULD CONSIDER
CAREFULLY THE FOLLOWING FACTORS IN ADDITION TO OTHER INFORMATION IN THIS
PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE
RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS AND THE TIMING OF CERTAIN
EVENTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED BY SUCH FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN FACTORS DISCUSSED IN THIS PROSPECTUS,
INCLUDING THE FACTORS SET FORTH BELOW AND IN "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS." SEE
"DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS."
DEPENDENCE ON NEW PRODUCT INTRODUCTIONS; UNCERTAIN CONSUMER ACCEPTANCE
During the years ended December 31, 1996 and 1997 and the three months ended
March 31, 1998, approximately 47.2%, 94.3% and 97.3%, respectively, of the
Company's net sales were derived from the sale of Tight Lies fairway woods.
Sales of this product line are expected to account for a substantial portion of
the Company's net sales for some time. A decline in demand for, or average
selling prices of, the Tight Lies line of products would have a material adverse
effect on the Company's business, operating results and financial condition.
Accordingly, the Company's continued growth and success depend, in large part,
on its ability to successfully develop and introduce new products accepted in
the marketplace. Historically, a large portion of new golf club technologies and
product designs have been met with consumer rejection. No assurance can be given
that the new driver currently under development will meet with market acceptance
or that the Company will be able to continue to design, manufacture and
introduce new products that will meet with market acceptance. Failure by the
Company to identify and develop innovative new products that achieve widespread
market acceptance would adversely affect the Company's future growth and
profitability. Additionally, successful technologies, designs and product
concepts are likely to be copied by competitors. Accordingly, the Company's
operating results could fluctuate as a result of the amount, timing and market
acceptance of new product introductions by the Company or its competitors. The
design of new golf clubs is also greatly influenced by the rules and
interpretations of the U.S. Golf Association ("USGA"). Although the golf
equipment standards established by the USGA generally apply only to competitive
events sanctioned by that organization, the Company believes that it is critical
for its future success that new clubs introduced by the Company comply with USGA
standards. No assurance can be given that any new products will receive USGA
approval or that existing USGA standards will not be altered in ways that
adversely affect the sales of the Company's products. See "--Historical
Dependence on Television Advertising."
LIMITED HISTORY OF PROFITABILITY
The Company has a limited history of profitability. Although the Company
generated net income during the year ended December 31, 1996 and the three
months ended March 31, 1998, it has historically experienced net losses from
operations. There can be no assurance that the Company will be able to sustain
profitability on a quarterly or annual basis in the future. The Company's
prospects must be considered in light of the significant risks, challenges and
difficulties frequently encountered by companies experiencing rapid growth. To
address these risks, the Company must, among other things, successfully increase
the scope of its operations, respond to competitive and technological
developments, continue to attract, retain and motivate qualified personnel and
continue to develop and obtain market acceptance of its products. There can be
no assurance that the Company will be successful in addressing these risks and
challenges. See "--Dependence on New Product Introductions; Uncertain Consumer
Acceptance,"
"--Ability to Manage Growth," "--Highly Competitive Industry," and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY
The Company's ability to compete effectively in the golf club market will
depend, in large part, on its ability to maintain the proprietary nature of its
technologies and products. The Company currently holds
6
<PAGE>
six U.S. patents relating to certain of its products and proprietary
technologies and has two patent applications pending. Assuming timely payment of
maintenance fees, if any, the Company expects that the six currently issued
patents will expire on various dates between 2009 and 2013. There can be no
assurance, however, as to the degree of protection afforded by these patents or
as to the likelihood that patents will be issued from the pending patent
applications. Moreover, these patents may have limited commercial value or may
lack sufficient breadth to adequately protect the aspects of the Company's
products to which the patents relate. The Company does not hold any foreign
patents and no foreign patent applications are pending. The U.S. patents held by
the Company do not preclude competitors from developing or marketing products
similar to the Company's products in international markets.
There can be no assurance that competitors, many of which have substantially
greater resources than the Company and have made substantial investments in
competing products, will not apply for and obtain patents that will prevent,
limit or interfere with the Company's ability to make and sell its products. The
Company is aware of numerous patents held by third parties that relate to
products competitive to the Company's, including products competitive with the
Tight Lies fairway woods. There is no assurance that these patents would not be
used as a basis to challenge the validity of one or more of the Company's patent
rights, to limit the scope of the Company's patent rights or to limit the
Company's ability to obtain additional or broader patent rights. A successful
challenge to the validity of the Company's patents may adversely affect the
Company's competitive position. Moreover, there can be no assurance that such
patent holders or other third parties will not claim infringement by the Company
with respect to current and future products. Because U.S. patent applications
are held and examined in secrecy, it is also possible that presently pending
U.S. applications will eventually issue with claims that will be infringed by
the Company's products or technologies. The defense and prosecution of patent
suits is costly and time-consuming, even if the outcome is favorable. This is
particularly true in foreign countries where the expenses associated with such
proceedings can be prohibitive. An adverse outcome in the defense of a patent
suit could subject the Company to significant liabilities to third parties,
require the Company to cease selling products or require disputed rights to be
licensed from third parties. Such licenses may not be available on satisfactory
terms, or at all. The Company also relies on unpatented proprietary technology.
Third parties could develop the same or similar technology or otherwise obtain
access to the Company's proprietary technology.
Despite the Company's efforts to protect its patent and other intellectual
property rights, unauthorized parties have attempted and are expected to
continue to attempt to copy all, or certain aspects of, the Company's products.
Policing unauthorized use of the Company's intellectual property rights can be
difficult and expensive, and while the Company takes appropriate action whenever
it discovers any of its products or designs have been copied, knock-offs and
counterfeit products are a persistent problem in the performance-oriented golf
club industry. There can be no assurance that the Company's means of protecting
its patent and other intellectual property rights will be adequate. See
"Business--Patents."
ABILITY TO MANAGE GROWTH
The Company has recently experienced a period of rapid growth that has
resulted in new and increased responsibilities for existing management
personnel. Further, the Company has recently employed a number of additional
senior management personnel and, accordingly, numerous members of the management
team have worked together for only a short time. The Company's growth has
placed, and is expected to continue to place, a significant strain on the
Company's management and operating and financial systems. To accommodate this
recent growth and to compete effectively and manage future growth, if any, the
Company will be required to continue to implement and improve its operational,
financial and management information systems, procedures and controls on a
timely basis and to expand, train, motivate and manage its workforce. The
Company's growth has required increasing amounts of working capital that, to
date, have been funded from current operations and available borrowing sources.
There can be no assurance that the Company's personnel, systems, procedures,
controls and working capital will be adequate to support its existing or future
operations. Any failure to implement and improve
7
<PAGE>
the Company's operational, financial and management systems, to expand, train,
motivate or manage employees or to maintain adequate working capital could have
a material adverse effect on the Company's business, operating results or
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources,"
"Business--Information Systems" and "Management."
DEPENDENCE ON KEY PERSONNEL AND ENDORSEMENTS
The Company's success depends to a significant extent upon the performance
of its senior management team, particularly the Company's founder, Chief
Executive Officer and President, B. H. (Barney) Adams. In addition to his
direction and supervision of the day-to-day affairs of the Company, Mr. Adams
spearheads the Company's product development efforts. The loss or unavailability
of Mr. Adams would adversely affect the Company's business and prospects. None
of the Company's officers or employees, including Mr. Adams, is bound by an
employment agreement and the relationships of such officers and employees are,
therefore, at will. The Company has a $2.0 million key man life insurance policy
on the life of Mr. Adams; however, there can be no assurance that the proceeds
of such policy could adequately compensate the Company for the loss of his
services. In addition, there is strong competition for qualified personnel in
the golf club industry, and the inability to continue to attract, retain and
motivate other key personnel could adversely affect the Company's business,
operating results or financial condition.
The Company has recently entered into an agreement with Nick Faldo, an
internationally recognized professional golfer and winner of numerous U.S. and
international championships. The agreement provides that Mr. Faldo will provide
a variety of services to the Company including endorse certain of the Company's
products. This agreement requires the Company to make certain significant
payments to Mr. Faldo, whether or not his endorsement results in increased sales
of the Company's products. Specifically, Mr. Faldo is entitled to receive a
royalty of 5% of the net sales price of all Adams golf clubs (other than certain
specialty items for which the royalty equals 10% of the net sales price) sold
outside the U.S. throughout the term of the agreement. The agreement provides
for a minimum royalty of $1.5 million in 1999 escalating to $4.0 million for the
years 2004 through 2008. From 2009 through 2014, the minimum royalty is $1.5
million, as adjusted for changes in the consumer price index. After 2014, the
agreement does not provide for a minimum royalty. Commencing with 2009, however,
the agreement provides for a maximum royalty of $4.0 million, as adjusted for
changes in the consumer price index. Absent an early termination event, the
agreement with Mr. Faldo continues throughout his lifetime. The Company believes
that the future success of its marketing strategy may be affected by the
continued professional success of Mr. Faldo. The inability of the Company to
maintain its relationship with Mr. Faldo or the inability of Mr. Faldo to
maintain an acceptable level of professional success, could have a material
adverse effect on the Company's business, operating results or financial
condition. See "Business--Business Strengths," "-- Growth Strategy,"
"--Marketing" and "Certain Transactions."
HIGHLY COMPETITIVE INDUSTRY
The market for golf clubs is highly competitive. The Company's competitors
include a number of established companies, many of which have greater financial
and other resources than the Company. The purchasing decisions of many golfers
are often the result of highly subjective preferences, which can be influenced
by many factors, including, among others, advertising, media, promotions and
product endorsements. The Company could therefore face substantial competition
from existing or new competitors that introduce and successfully promote golf
clubs that achieve market acceptance. Such competition could result in
significant price erosion or increased promotional expenditures, either of which
could have a material adverse effect on the Company's business, operating
results and financial condition. There can be no assurance that Adams will be
able to compete successfully against current and future sources of competition
or that its business, operating results or financial condition will not be
adversely affected by increased competition in the markets in which it operates.
See "Business--Competition."
8
<PAGE>
HISTORICAL DEPENDENCE ON TELEVISION ADVERTISING
In April 1997 the Company debuted a 30-minute infomercial concerning the
original Tight Lies fairway wood, and, immediately thereafter, sales of this
product grew significantly. Although, consistent with the Company's marketing
model, the Company has subsequently increased its use of traditional image-based
advertising, sales of the Company's products at both the retail and direct
response levels have been, and may continue to be, highly dependent on the
success of the Company's infomercial. The Company believes that its current
television advertising strategy, like other advertising campaigns, will reach a
point of diminishing return and will therefore need to be replaced or abandoned.
No assurance can be given that an alternative infomercial or other equally
effective advertising strategy can be timely developed or that, if developed,
such infomercial or alternative strategy will achieve the same level of success
as that previously enjoyed by the Company's original infomercial. Further,
certain companies have attempted to emulate the Company's marketing strategy. To
the extent the Company believes that these additional infomercials may have the
effect of diluting the Company's message, the Company may be forced to adopt a
new marketing strategy. A decline in effectiveness of the Company's marketing
strategy could have a material adverse effect on the Company's business,
operating results or financial condition.
SOURCES OF SUPPLY
The Company relies on a limited number of suppliers for a significant
portion of the component parts used in the manufacture of its golf clubs,
including the manufacture of its Tight Lies line of fairway woods. The Company
could in the future experience shortages of components or periods of increased
price pressures, which could have a material adverse effect on the Company's
business, operating results or financial condition. In addition, failure to
obtain adequate supplies or fulfill customer orders on a timely basis could have
a material adverse effect on the Company's business, operating results or
financial condition. See "Business--Manufacturing and Assembly."
UNSPECIFIED USE OF PROCEEDS
Although the Company intends to use the net proceeds of this Offering for
working capital and general corporate purposes, including capital expenditures,
expansion of the Company's product development efforts, additional advertising
and expansion of the Company's international sales efforts, the Company
currently has no definite plan for the use of the net proceeds. In addition, the
Company may use all or a portion of the net proceeds derived from the Offering
for possible acquisitions. Accordingly, management will have broad discretion
with respect to the expenditure of such proceeds. Purchasers of shares of Common
Stock in the Offering will be entrusting their funds to the Company's
management, upon whose judgment they must depend, with limited information
concerning the specific purposes to which the funds will ultimately be applied.
See "--Risks Associated with Acquisitions" and "Use of Proceeds."
RISKS ASSOCIATED WITH ACQUISITIONS
While the Company has no current agreements or negotiations underway with
respect to any acquisition, the Company may make acquisitions of complementary
services, technologies, product designs or businesses in the future. There can
be no assurance that any future acquisition will be completed or that, if
completed, any such acquisition will be effectively assimilated into the
Company's business. Acquisitions involve numerous risks, including, among
others, loss of key personnel of the acquired company, the difficulty associated
with assimilating the personnel and operations of the acquired company, the
potential disruption of the Company's ongoing business, the maintenance of
uniform standards, controls, procedures and policies, and the impairment of the
Company's reputation and relationships with employees and customers. In
addition, any future acquisitions could result in the issuance of dilutive
equity securities, the incurrence of debt or contingent liabilities, and
amortization expenses related to goodwill and other intangible assets, any of
which could have a material adverse effect on the Company's business, operating
results or financial condition.
9
<PAGE>
SEASONALITY AND QUARTERLY FLUCTUATIONS; DISCRETIONARY CONSUMER SPENDING
Golf generally is regarded as a warm weather sport and sales of golf
equipment historically have been strongest during the second and third quarters,
with the weakest sales occurring during the fourth quarter. In addition, sales
of golf clubs are dependent on discretionary consumer spending, which may be
affected by general economic conditions. A decrease in consumer spending
generally could result in decreased spending on golf equipment, which could have
a material adverse effect on the Company's business, operating results and
financial condition. In addition, the Company's future results of operations
could be affected by a number of other factors, such as unseasonal weather
patterns; demand for and market acceptance of the Company's existing and future
products; new product introductions by the Company's competitors; competitive
pressures resulting in lower than expected average selling prices; and the
volume of orders that are received and that can be fulfilled in a quarter. Any
one or more of these factors could result in the Company failing to achieve its
expectations as to future sales or net income.
Because most operating expenses are relatively fixed in the short term, the
Company may be unable to adjust spending sufficiently in a timely manner to
compensate for any unexpected sales shortfall, which could materially adversely
affect quarterly results of operations. If technological advances by competitors
or other competitive factors require the Company to invest significantly greater
resources than anticipated in research and development or sales and marketing
efforts, the Company's business, operating results or financial condition could
be materially adversely affected. Accordingly, the Company believes that period-
to-period comparisons of its results of operations should not be relied upon as
an indication of future performance. In addition, the results of any quarter are
not indicative of results to be expected for a full fiscal year. As a result of
fluctuating operating results or other factors discussed above and below, in
certain future quarters the Company's results of operations may be below the
expectations of public market analysts or investors. In such event, the market
price of the Company's Common Stock would be materially adversely affected. See
"--Absence of Public Market for Common Stock and Volatility" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
CERTAIN RISKS OF CONDUCTING BUSINESS ABROAD
The Company imports a significant portion of its component parts, including
heads, shafts, headcovers and grips, from companies in Taiwan, China and Mexico.
In addition, the Company is rapidly increasing its international sales efforts.
The Company's international business is currently centered in Canada, Japan and
the United Kingdom. The Company intends to focus its international expansion
efforts in Japan and the United Kingdom and, to a lesser extent, in South Africa
and Australia. The Company's business is subject to the risks generally
associated with doing business abroad, such as foreign government regulations,
foreign consumer preferences, import and export control, political unrest,
disruptions or delays in shipments and changes in economic conditions and
exchange rates in countries in which the Company purchases components or sells
its products.
CONTROL BY PRINCIPAL STOCKHOLDERS
Following the closing of the Offering, the Company's existing stockholders,
certain of whom are directors, officers or employees of the Company, will own
approximately 75% of the outstanding Common Stock without giving effect to any
purchases of Common Stock in the Offering by such persons. As a result, the
existing stockholders will be in a position to exercise control of matters
submitted to the Company's stockholders, including the election of directors. In
addition, the Company's founder, Chief Executive Officer and President, B.H.
(Barney) Adams, and Royal Holding Company, Inc. ("Royal"), the Company's largest
single stockholder, will own approximately 15.6% and 30.4%, respectively of the
outstanding Common Stock immediately following the Offering and through their
respective stock ownership and positions or representations on the Board of
Directors may be able to exercise a controlling influence over the Company. See
"Management," "Certain Transactions" and "Principal and Selling Stockholders."
10
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE; ISSUANCE OF ADDITIONAL SHARES
Future sales of shares of Common Stock by the Company and its stockholders
could adversely affect the prevailing market price of the Common Stock. The
Company's directors, officers and certain stockholders, including the Selling
Stockholders, holding an aggregate of 18,025,835 shares of Common Stock as of
the date of this Prospectus have agreed not to sell, offer, contract to sell,
grant any option or right for the sale of or otherwise dispose of any Common
Stock or any securities convertible, exercisable or exchangeable into shares of
Common Stock, nor any options or right to acquire any shares of Common Stock,
including any sale pursuant to Rule 144 or Rule 144A promulgated under the
Securities Act of 1933, as amended (the "Securities Act"), for a period of 180
days after the date of this Prospectus without the prior written consent of
Lehman Brothers Inc. (the "Lock-up Agreement"). After such time, based upon
stock ownership at the date of this Prospectus, approximately 16,199,282 shares
of Common Stock will be eligible for sale pursuant to Rule 144 promulgated under
the Securities Act.
In addition, the Company has granted registration rights that will be
effective after the Offering to stockholders holding as of the date of this
Prospectus an aggregate of 17,797,087 shares of Common Stock. These stockholders
have the right, subject to certain conditions, to demand that their stock be
registered under the Securities Act on any three occasions commencing generally
one year after the date of this Prospectus. The stockholders also have certain
additional piggyback registration rights, and subject to certain conditions, may
participate in future registrations by the Company of shares of Common Stock
under the Securities Act.
Pursuant to its Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation"), the Company has the authority to issue
additional shares of Common Stock. The issuance of such shares could result in
the dilution of the voting power of Common Stock purchased in the Offering.
Sales of substantial amounts of Common Stock in the public market, or the
perception that such sales may occur, could have a material adverse effect on
the market price of the Common Stock. See "Shares Eligible for Future Sale,"
"Underwriting" and "Description of Capital Stock."
ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation and Amended and Restated Bylaws
(the "Bylaws") contain, among other things, provisions establishing a classified
Board of Directors, authorizing shares of preferred stock with respect to which
the Board of Directors of the Company has the power to fix the rights,
preferences, privileges and restrictions without any further vote or action by
the stockholders, requiring that all stockholder action be taken at a
stockholders' meeting and establishing certain advance notice requirements in
order for stockholder proposals or director nominations to be considered at such
meetings. In addition, the Company is subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law (the "DGCL"). In general,
this statute prohibits a publicly-held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
Such provisions could delay, deter or prevent a merger, consolidation, tender
offer, or other business combination or change of control involving the Company
that some or a majority of the Company's stockholders might consider to be in
its best interest, including offers or attempted takeovers that might otherwise
result in such stockholders receiving a premium over the market price for the
Common Stock. The potential issuance of preferred stock may have the effect of
delaying, deferring or preventing a change of control of the Company, may
discourage bids for the Common Stock at a premium over the market price of the
Common Stock and may adversely affect the market price of and the voting and
other rights of the holders of the Common Stock. The Company has not issued, and
currently has no plans to issue, shares of preferred stock. See "Description of
Capital Stock--Preferred Stock" and "--Delaware Law and Certain Charter and
Bylaw Provisions."
11
<PAGE>
ABSENCE OF PUBLIC MARKET FOR COMMON STOCK AND VOLATILITY
Prior to the Offering there has been no public market for the Common Stock,
and there can be no assurance that an active trading market will develop or be
sustained after the Offering. The initial public offering price of the Common
Stock offered hereby will be determined through negotiations among the Company,
the Selling Stockholders and the Underwriters, and may not be indicative of the
market price for the Common Stock after the Offering. The market price for
shares of the Common Stock may be volatile depending on a number of factors,
including business performance, industry dynamics, news announcements or changes
in general market conditions. See "Underwriting."
DILUTION
The initial public offering price is substantially higher than the book
value per share of Common Stock. Investors purchasing shares of Common Stock in
the Offering will therefore incur immediate and substantial dilution in net
tangible book value per share of $11.99. To the extent outstanding options to
purchase the Company's Common Stock are exercised, there will be further
dilution. See "Dilution."
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" including statements
containing the words "believes," "anticipates," "expects" and words of similar
import. All statements other than statements of historical fact included in this
Prospectus, including without limitation, such statements under "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" and located elsewhere
herein, regarding the Company or any of the transactions described herein,
including the timing, financing, strategies and effects of such transactions,
are forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to have been correct.
Important factors that could cause actual results to differ materially from
expectations are disclosed in this Prospectus, including, without limitation, in
conjunction with the forward-looking statements in this Prospectus and/or under
"Risk Factors." The Company does not intend to update these forward-looking
statements.
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,750,000 shares of
Common Stock offered by the Company hereby, after deducting estimated Offering
expenses payable by the Company and the underwriting discounts and commissions,
are estimated to be approximately $51.3 million. The principal purposes of the
Offering are to provide working capital to fund the Company's long-term growth
strategy, to facilitate future access by the Company to the public equity
markets, to enhance the Company's ability to use the Common Stock as a means of
attracting, retaining and motivating senior managers and professionals and to
provide liquidity to its stockholders. The Company intends to use the net
proceeds for working capital and general corporate purposes, including capital
expenditures, expansion of the Company's product development efforts, additional
advertising and expansion of the Company's international sales efforts. In
addition, the Company may use all or a portion of the net proceeds from the
Offering for possible acquisitions. The Company has no current agreements or
specific plans with respect to any acquisition, but will consider acquisition
opportunities as they arise. Company management will have broad discretion with
respect to the proceeds of this Offering. Pending such uses, the Company intends
to invest the net proceeds of this Offering in short-term, interest-bearing,
investment-grade securities. The Company will not receive any of the proceeds
from the sale of Common Stock by the Selling Stockholders. See "Risk
Factors--Unspecified Use of Proceeds," "--Risks Associated with Acquisitions"
and "Principal and Selling Stockholders."
DIVIDEND POLICY
The Company has not paid cash dividends in the past and has no present
intention of declaring or paying any dividends in the foreseeable future. The
Company anticipates that any earnings will be retained for the foreseeable
future for use in the operations of the business. Any future determinations as
to the payment of dividends will be at the discretion of the Company's Board of
Directors and will depend on the Company's results of operations, financial
condition, contractual restrictions and other factors deemed relevant by the
Board of Directors. The Company's ability to pay dividends is restricted by
certain covenants set forth in its Revolving Credit Agreement with NationsBank
of Texas, N.A. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
13
<PAGE>
DILUTION
At March 31, 1998, the Company's net tangible book value was $14,654,000 or
$0.81 per share. Net tangible book value per share represents the amount of the
Company's total tangible assets less the Company's total liabilities, divided by
the number of shares of Common Stock outstanding. Without taking into account
any other changes in such net tangible book value after March 31, 1998, other
than to give effect to the sale of 3,750,000 shares of Common Stock offered by
the Company hereby (after deduction of expenses payable by the Company and
estimated underwriting discounts and commissions), the net tangible book value
of the Company on March 31, 1998 would have been $65,967,000 or $3.01 per share.
This represents an immediate increase in net tangible book value of
approximately $2.20 per share to the Company's existing stockholders and an
immediate dilution in net tangible book value of $11.99 per share to new
investors in the Offering. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share...................................... $ 15.00
Net tangible book value per share before the Offering...................... $ 0.81
Increase in net tangible book value per share attributable to new
investors................................................................ 2.20
---------
Net tangible book value per share after the Offering......................... 3.01
---------
Dilution per share to new investors.......................................... $ 11.99
---------
---------
</TABLE>
The following table sets forth, at May 31, 1998, the difference between
existing stockholders and the new investors in the Offering with respect to the
number of shares purchased from the Company, the total consideration paid and
the average price per share paid.
<TABLE>
<CAPTION>
SHARES PURCHASED
FROM THE COMPANY TOTAL CONSIDERATION AVERAGE
------------------------- --------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------------ ----------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders................................ 19,099,282 83.6% $ 4,838,636 7.9% $ 0.25
New investors........................................ 3,750,000 16.4 56,250,000 92.1 $ 15.00
------------ ----- -------------- -----
Total.............................................. 22,849,282 100.0% 61,088,636 100.0%
------------ ----- -------------- -----
------------ ----- -------------- -----
</TABLE>
The above computations exclude 423,666 shares of Common Stock issuable upon
exercise of outstanding stock options outstanding at May 31, 1998. At May 31,
1998, an additional 518,000 shares of Common Stock are reserved for issuance
under the Company's 1998 Stock Incentive Plan (the "Incentive Plan"). To the
extent that any outstanding options are exercised, or additional options are
issued, there will be further dilution to new investors in the Offering. See
"Management--Benefit Plans," "Description of Capital Stock," "Shares Eligible
for Future Sale" and "Underwriting."
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1998 and as adjusted as of that date to give effect to the sale of 3,750,000
shares of Common Stock by the Company in the Offering and the application of the
estimated net proceeds therefrom. See "Use of Proceeds." This table should be
read in conjunction with the Company's Consolidated Financial Statements and
Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT MARCH 31, 1998
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................................................. $ 602 $ 51,914
--------- -----------
--------- -----------
Note payable--current..................................................................... $ 913 $ 913
--------- -----------
Note payable--non-current................................................................. 222 222
--------- -----------
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized; none outstanding.......... -- --
Common stock, $.001 par value, 50,000,000 shares authorized; 18,199,282 shares (actual)
and 21,949,282 shares (as adjusted) issued(1)......................................... 18 22
Additional paid-in capital.............................................................. 16,032 67,341
Common stock subscription............................................................... (231) (231)
Deferred compensation................................................................... (981) (981)
Accumulated deficit..................................................................... (171) (171)
--------- -----------
Total stockholders' equity............................................................ 14,667 65,980
--------- -----------
Total capitalization................................................................ $ 14,889 $ 66,202
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) Excludes 313,666 shares subject to outstanding options at March 31, 1998.
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following selected financial data at and for the fiscal years ended
December 31, 1995, 1996 and 1997 are derived from the Consolidated Financial
Statements of the Company, which have been audited by KPMG Peat Marwick LLP,
independent certified public accountants. The selected financial information for
the three months ended March 31, 1997 and 1998 are derived from unaudited
Consolidated Financial Statements of the Company. In the opinion of management,
all adjustments consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position and results of operations, have been
included in such unaudited Consolidated Financial Statements. Results for the
three months ended March 31, 1998 may not be indicative of the results expected
for the year ended December 31, 1998. The Consolidated Financial Statements at
December 31, 1996 and 1997 and for each of the years in the three-year period
ended December 31, 1997, and the independent auditors' report are included
elsewhere in this Prospectus. The selected financial data should be read in
conjunction with the Consolidated Financial Statements, the related Notes
thereto, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the other financial information included elsewhere
herein.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA(1):
Net sales................................................. $ 1,125 $ 3,522 $ 36,690 $ 1,475 $ 24,511
Cost of goods sold........................................ 756 1,590 9,991 587 5,862
Gross profit.............................................. 369 1,932 26,699 888 18,649
Operating expenses (excluding stock compensation and bonus
award).................................................. 613 1,709 15,826 823 9,777
Stock compensation and bonus award(2)..................... -- 214 14,842 -- --
--------- --------- --------- --------- ---------
Operating income (loss)................................... (244) 9 (3,969) 65 8,872
Income (loss) before taxes................................ (243) 13 (4,071) 61 8,773
Net income (loss)......................................... $ (243) $ 13 $ (4,654) $ 45 $ 5,642
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income (loss) per common share(3):
Basic................................................... $ (.05) $ -- $ (.37) $ -- $ .32
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted................................................. $ (.05) $ -- $ (.37) $ -- $ .31
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average common shares(3):
Basic................................................... 4,423 11,238 12,519 11,873 17,662
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted................................................. 4,423 11,238 12,519 11,873 18,374
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
<CAPTION>
AT DECEMBER 31, AT MARCH 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 243 $ 855 $ 1,956 $ 760 $ 602
Working capital........................................... 575 1,475 6,915 1,558 12,299
Total assets.............................................. 658 2,559 17,360 3,116 25,793
Total debt (including current maturities)................. -- 230 -- 479 1,135
Stockholders' equity...................................... 615 1,978 8,325 2,024 14,667
</TABLE>
- ------------------------
(1) This table excludes financial information for the fiscal years ended
December 31, 1993 and 1994 because operations in those years were not
comparable in size or scope to current operations.
(2) Consists primarily of a stock award to the Company's founder, Chief
Executive Officer and President. See "Certain Transactions" and Note 9 of
Notes to Consolidated Financial Statements.
(3) See Note 1 of Notes to Consolidated Financial Statements for information
concerning the calculation of income (loss) per common share and weighted
average common shares outstanding.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management's discussion and analysis of financial condition
and results of operations addresses the performance of the Company for the three
months ended March 31, 1997 and 1998, and the years ended December 31, 1995,
1996 and 1997, and should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
OVERVIEW
Adams designs, manufactures and markets premium quality, technologically
innovative golf clubs. Founded in 1987, the Company operated initially as a
components supplier and contract manufacturer. Thereafter, the Company
established its custom fitting operation which currently services a network of
over 100 certified custom fitting accounts. In the fall of 1995, the Company
introduced the original Tight Lies fairway wood and, in December 1996, the
Company extended the Tight Lies line to include the Tight Lies Strong 3, Strong
5 and Strong 7, with the Tight Lies Strong 9 being introduced in January 1998.
Sales of the Tight Lies line of products increased significantly subsequent to
the second quarter of 1997 when the Company launched an infomercial relating to
the original Tight Lies fairway wood.
The Company's net sales are primarily derived from sales to on- and
off-course golf shops and selected sporting goods retailers and, to a much
lesser extent, direct sales to consumers, international distributors and the
Company's custom fitting accounts. The Company defines net sales as gross sales
less returns. The Company recognizes sales and an allowance for returns is
estimated at the time products are shipped. The Company's net sales increased to
$36.7 million for 1997 from $1.1 million for 1995 and to $24.5 million for the
three months ended March 31, 1998 from $1.5 million for the three months ended
March 31, 1997. The Company's net sales are based on orders for immediate
delivery and backlog is not, therefore, necessarily indicative of future net
sales.
The Company does not currently manufacture the components required to
assemble its golf clubs, relying instead on component suppliers. Costs of the
Company's Tight Lies fairway woods consist primarily of component parts,
including the head, shaft and grip. To a lesser extent, the Company's cost of
goods sold includes labor and occupancy costs in connection with the inspection,
testing and assembly of component parts at its facility in Plano, Texas.
Operating expenses are composed primarily of selling and royalty expenses,
general and administrative expenses, and to a lesser extent, research and
development expenses. Selling and royalty expenses include advertising and
marketing expenses, salaries and commissions, royalties related to the Company's
infomercial and independent consulting fees. During the year ended December 31,
1997 and the first three months of 1998, royalties were approximately 6% of net
sales of the Company's original Tight Lies fairway wood, excluding international
and custom fitting sales. The Company expects royalties to increase as a
percentage of net sales as a result of the agreement reached with Nick Faldo.
The Company's royalty expenses were $0 and $944,451 for 1996 and 1997,
respectively. Beginning May 1, 1998, Mr. Faldo is entitled to receive a royalty
equal to 5% of the Company's net sales of golf clubs (other than certain
specialty items for which the royalty is 10%) sold outside the U.S. Although,
there is no minimum royalty for 1998, Mr. Faldo will be entitled to a minimum
royalty in subsequent years. See "Certain Transactions." General and
administrative expense includes salaries and benefits for corporate management,
accounting, administrative support staff, bad debts, independent consulting and
professional services, and office rent and utilities. Expenses associated with
research and development efforts include salaries and independent consulting
fees.
The Company was incorporated in Texas in 1987 and reincorporated in Delaware
in 1990. The Company completed an internal reorganization in 1997 and now
conducts its operations through several direct and indirect wholly-owned
subsidiaries, including (i) Adams Golf Holding Corp., a Delaware corporation,
which holds limited partnership interests of certain indirect subsidiaries of
the Company; (ii) Adams Golf GP Corp., a Delaware corporation, which holds
capital stock or limited partnership
17
<PAGE>
interests, as applicable, of certain indirect subsidiaries of the Company; (iii)
Adams Golf Direct Response, Ltd., a Texas limited partnership, which operates
the call-center and advertising activities; (iv) Adams Golf, Ltd., a Texas
limited partnership, which operates the golf club design, assembly and sales
business; (v) Adams Golf IP, L.P., a Delaware limited partnership, which holds
the intellectual property rights of the Company; and (vi) Adams Golf Management
Corp., a Delaware corporation, which provide management and consulting services
to certain of the Company's indirect subsidiaries.
RESULTS OF OPERATIONS
The following table sets forth operating results expressed as a percentage
of net sales for the periods indicated. Results for any one or more periods are
not necessarily indicative of annual results or continuing trends. See
"--Quarterly Results and Seasonality," below.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------- --------------------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA 1995 1996 1997 1997 1998
- ----------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales.................................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold......................................... 67.2 45.1 27.2 39.8 23.9
--------- --------- --------- --------- ---------
Gross profit............................................. 32.8 54.9 72.8 60.2 76.1
Operating expenses......................................... 54.5 54.6 83.6 55.8 39.9
--------- --------- --------- --------- ---------
Operating income (loss).................................. (21.7) 0.3 (10.8) 4.4 36.2
Interest expense........................................... -- -- 0.2 0.9 --
Other income (expense)..................................... 0.1 0.1 (0.1) 0.6 (0.4)
--------- --------- --------- --------- ---------
Income (loss) before income taxes........................ (21.6) 0.4 (11.1) 4.1 35.8
--------- --------- --------- --------- ---------
Income tax expense......................................... -- -- 1.6 1.0 12.8
Net income (loss).......................................... (21.6)% 0.4% (12.7)% 3.0% 23.0%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Net sales increased to $24.5 million for the three months ended March 31,
1998 from $1.5 million for the comparable period of 1997, primarily due to the
continued market acceptance of the Company's Tight Lies line of fairway woods,
and, to a lesser extent, a price increase effective January 1, 1998. Net sales
of the Tight Lies line of fairway woods increased to $23.8 million from $1.1
million for the comparable period of 1997, and increased as a percentage of net
sales to 97.3% from 75.8%, respectively. Sales of the Tight Lies fairway woods
increased subsequent to the Company's introduction of an infomercial marketing
its original Tight Lies fairway wood in the second quarter of 1997. Net sales of
other product lines for the three months ended March 31, 1998 increased to $0.7
million from $0.4 million for the comparable period of 1997, but decreased as a
percentage of net sales to 2.7% from 24.2%, respectively. Net sales of the
Company's products outside the U.S. increased to $1.4 million for the three
months ended March 31, 1998 from $0.2 million for the three months ended March
31, 1997, but decreased as a percentage of net sales to 5.7% from 11.0%,
respectively. The increase in international sales in absolute dollars was due to
increased market acceptance of the Tight Lies fairway woods and expanded
international marketing efforts in the last half of 1997.
Gross profit increased to $18.6 million for the three months ended March 31,
1998 from $0.9 million for the comparable period of 1997, and increased as a
percentage of net sales to 76.1% from 60.2%, respectively. Gross profit for the
three months ended March 31, 1998 was favorably affected by an increased
percentage of sales attributable to the higher margin Tight Lies fairway woods
and the inherent cost savings associated with buying components in large volumes
and assembling them on a substantially increased scale.
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<PAGE>
Operating income increased to $8.9 million for the three months ended March
31, 1998 from $65,000 for the comparable period of 1997 due to increased sales.
Total operating expenses increased to $9.8 million for the three months ended
March 31, 1998 from $0.8 million for the comparable period of 1997, principally
as a result of increased selling and advertising costs related to the promotion
of the Tight Lies fairway woods and increased administrative costs resulting
primarily from the hiring of additional employees and slightly higher occupancy
costs. As a percentage of net sales, operating expenses decreased for the three
months ended March 31, 1998 to 39.9% from 55.8% for the comparable period of
1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net sales increased to $36.7 million for 1997 from $3.5 million for 1996,
primarily due to increased market acceptance of the Company's Tight Lies fairway
woods. Net sales of the Tight Lies fairway woods increased to $34.5 million for
1997, from $1.7 million for 1996, and increased as a percentage of net sales to
94.3% from 47.2%, respectively. Net sales of other product lines increased to
$2.1 million for 1997 compared to $1.8 million for 1996, but decreased as a
percentage of net sales to 5.7% for 1997 from 52.8% for 1996.
Gross profit increased to $26.7 million for 1997 from $1.9 million for 1996,
and increased as a percentage of net sales to 72.8% from 54.9%, respectively.
Gross profit for 1997 was favorably affected by an increased percentage of sales
attributable to the higher margin Tight Lies fairway woods and the inherent cost
savings associated with buying components in large volumes and assembling them
on a substantially increased scale.
The Company experienced an operating loss of $4.0 million for 1997 as
compared to an operating income of $9,000 for 1996. Total operating expenses
increased to $30.7 million for 1997 from $1.9 million for 1996. Of the $30.7
million of operating expenses for 1997, $14.8 million, or 48.4%, of expenses
related to stock compensation and bonus awards to the Company's founder, Chief
Executive Officer and President. See "Certain Transactions" and Note 9 of Notes
to Consolidated Financial Statements. The expense recognized in 1996 in
conjunction with these awards was $0.2 million, or 11.1% of operating expenses.
In 1997, the Company also incurred higher expenses for selling and royalties and
provision for bad debts, in each case due principally to increased sales of the
Tight Lies fairway woods. General and administrative expenses also increased in
1997 due to the hiring of additional employees, and research and development
expenses.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net sales increased to $3.5 million for 1996 from $1.1 million for 1995,
primarily due to the introduction of the original Tight Lies fairway wood in the
fall of 1995. Net sales of the original Tight Lies fairway wood increased to
$1.7 million for 1996 from $0.1 million for 1995, and increased as a percentage
of net sales to 47.2% from 9.6%, respectively. Net sales of other products
increased to $1.8 million for 1996 from $1.0 million for 1995, but decreased as
a percentage of net sales to 52.8% from 90.4%, respectively. The increase in
sales of other products in absolute dollars was due to increased sales of custom
fitted golf clubs resulting from increased number of teaching professionals who
became certified Adams Golf club fitters during 1996.
Gross profit increased to $1.9 million for 1996 from $0.4 million for 1995,
and increased as a percentage of net sales to 54.9% from 32.8%, respectively.
The increase in gross profit was due to higher sales of the Company's products
in 1996, specifically the higher margin original Tight Lies fairway wood.
Operating income was $9,000 for 1996 compared to an operating loss of $0.2
million for 1995. Total operating expenses increased to $1.9 million for 1996
from $0.6 million for 1995 and remained relatively flat as a percentage of net
sales. Of the $1.9 million of operating expenses in 1996, $0.2 million, or
11.1%, of expenses were related to a bonus award to the Company's founder, Chief
Executive Officer and President. The Company also incurred additional selling
and general and administrative expenses in 1996 as a result of increased sales
and hiring additional employees.
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QUARTERLY RESULTS AND SEASONALITY
The following table sets forth certain unaudited quarterly financial
operational data for the five most recent quarters.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------
SEPT. 30, DEC. 31,
MARCH 31, 1997 JUNE 30, 1997 1997 1997 MARCH 31, 1998
--------------- ------------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Net sales........................... $ 1,475 $ 3,974 $ 14,236 $ 17,005 $ 24,511
Gross profit........................ 888 2,418 10,633 12,759 18,649
Operating income (loss)............. 65 4 4,212 (8,250) 8,872
Net income (loss)................... 45 (4) 3,144 (7,839) 5,642
</TABLE>
Golf generally is regarded as a warm weather sport and sales of golf
equipment historically have been strongest during the second and third quarters,
with the weakest sales occurring during the fourth quarter. Although the
Company's rapid growth has offset this trend in recent periods, no assurances
can be given that the Company's growth will continue to offset the impact of
seasonality, and therefore results for any one or more quarters are not
necessarily indicative of annual results or continuing trends. In addition,
sales of golf clubs are dependent on discretionary consumer spending, which may
be affected by general economic conditions. A decrease in consumer spending
generally could result in decreased spending on golf equipment, which could have
a material adverse effect on the Company's business, operating results and
financial condition. In addition, the Company's future results of operations
could be affected by a number of other factors, such as unseasonal weather
patterns; demand for and market acceptance of the Company's existing and future
products; new product introductions by the Company's competitors; competitive
pressures resulting in lower than expected average selling prices; and the
volume of orders that are received and that can be fulfilled in a quarter. Any
one or more of these factors could result in the Company failing to achieve its
expectations as to future sales or net income.
Because most operating expenses are relatively fixed in the short term, the
Company may be unable to adjust spending sufficiently in a timely manner to
compensate for any unexpected sales shortfall, which could materially adversely
affect quarterly results of operations. If technological advances by competitors
or other competitive factors require the Company to invest significantly greater
resources than anticipated in research and development or sales and marketing
efforts, the Company's business, operating results or financial condition could
be materially adversely affected. Accordingly, the Company believes that period-
to-period comparisons of its results of operations should not be relied upon as
an indication of future performance. In addition, the results of any quarter are
not indicative of results to be expected for a full fiscal year. As a result of
fluctuating operating results or other factors discussed above and below, in
certain future quarters the Company's results of operations may be below the
expectations of public market analysts or investors. In such event, the market
price of the Company's Common Stock would be materially adversely affected.
STOCK-BASED COMPENSATION
In December 1997, the Board of Directors of the Company approved a stock
compensation award of 2,000,000 shares of Common Stock to the Company's founder,
Chief Executive Officer and President. The Company agreed to pay all income
taxes due by the officer relating to such stock award and related tax bonus. As
a result, compensation expense of approximately $12.5 million was charged to
operations in 1997. In addition, this officer notified the Company of his intent
to exercise stock options and an additional compensation expense of
approximately $2.3 million was recorded in 1997. With respect to certain stock
options granted to employees, the Company recorded deferred compensation of
$981,000 and $788,000, respectively, in the first and second quarters of 1998.
The Company will begin amortizing deferred compensation in the second quarter of
1998 over the vesting period, generally four years. In addition, in connection
with its stock grant to Nick Faldo, the Company recorded deferred compensation
of $10.1 million in the second quarter of 1998. This amount will be amortized to
expense ratably over 10 years beginning in the second quarter of 1998. See
"Certain Transactions" and Note 9 of Notes to Consolidated Financial Statements.
20
<PAGE>
YEAR 2000 COMPLIANCE
Many existing computer systems and applications and other control devices
use only two digits to identify a year in the date field, without considering
the impact of the upcoming change in the century. As a result, as year 2000
approaches, computer systems and applications used by many companies may need to
be upgraded to comply with "Year 2000" requirements. The Company relies on its
systems in operating and monitoring many significant aspects of its business,
including financial systems (such as general ledger, accounts payable, accounts
receivable, inventory and order management), customer services, infrastructure
and network and telecommunications equipment. The Company also relies directly
and indirectly on the systems of external business enterprises such as
customers, suppliers, creditors, financial organizations and domestic and
international governments. The Company currently estimates that its costs
associated with Year 2000 compliance, including any costs associated with the
consequences of incomplete or untimely resolution of Year 2000 compliance
issues, will not have a material adverse effect on the Company's business,
financial condition or results of operations. However, the Company has not
exhaustively investigated and does not believe it has fully identified the
impact of Year 2000 compliance and has not concluded that it can resolve any
issues that may arise in complying with Year 2000 without disruption of its
business or without incurring significant expense. In addition, even if the
Company's internal systems are not materially affected by Year 2000 compliance
issues, the Company could be affected through disruption in the operation of the
enterprises with which the Company interacts.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has financed its operations principally through
internally generated funds and funds from the private placement of equity
securities. Such funds have been supplemented from time to time with short-term
borrowings under the Company borrowing facilities. Primarily as a result of tax
payments made by the Company in the first quarter of 1998, for the three months
ended March 31, 1998 net cash used in operating activities was $1.5 million. Net
cash provided by operating activities was $1.1 million for the year ended
December 31, 1997.
Working capital totaled $12.3 million at March 31, 1998 compared to $6.9
million at December 31, 1997. Net trade accounts receivable amounted to $14.7
million at March 31, 1998 compared to $7.7 million at December 31, 1997. The
increase was primarily due to increased net sales in the first three months of
1998. Inventory totaled $5.6 million at March 31, 1998 and $4.5 million at
December 31, 1997.
The Company has a $10.0 million revolving credit facility, which expires on
December 31, 1998. At May 31, 1998, the Company had no outstanding borrowings
under this facility. Borrowings under the Company's revolving credit facility
agreement are at interest rates based on the lending bank's general refinance
rate of interest or certain LIBOR rates of interest. Obligations under the
revolving credit facility loan agreement are collateralized by substantially all
of the accounts receivable, inventory and equipment of the Company. See Note 7
of Notes to Consolidated Financial Statements. During the first quarter of 1998,
the Company borrowed approximately $1.1 million in the form of a note payable to
the Company's founder, Chief Executive Officer and President to be used for
working capital purposes. The remaining principal amount of the note ($534,899
at April 30, 1998) is payable in two installments on December 15, 1998 and April
14, 1999 at an interest rate of 5.39%.
The Company's capital expenditures amounted to $1.7 million, $0.8 million
and $0.1 million for the three months ended March 31, 1998 and the years ended
December 31, 1997 and 1996, respectively. The Company anticipates making capital
expenditures in the ordinary course of business and is currently implementing a
customer management information system at an estimated cost of $1.9 million for
the year ending December 31, 1998.
The Company believes that the cash flow from operations, the net proceeds of
the Offering and the Company's $10.0 million credit facility will be sufficient
to meet operating needs and capital expenditures for at least the next 12
months.
21
<PAGE>
BUSINESS
GENERAL
Adams designs, manufactures and markets premium quality, technologically
innovative golf clubs. The Company's design objective is to produce golf clubs
that deliver meaningful performance benefits and inspire player confidence. The
Company believes that its most successful product line to date, the Tight Lies
fairway woods, meets this objective by providing golfers with the ability to hit
the ball from virtually any lie while maximizing distance. The patented Tight
Lies fairway woods feature an upright trapezoidal head, a shallow face and a
lower center of gravity as compared to conventional fairway woods. Adams has
developed a marketing model that integrates direct response and traditional
image-based advertising to generate brand awareness and drive retail sales. The
complete Tight Lies line of products includes the original, Strong 3, Strong 5,
Strong 7 and Strong 9 fairway woods. According to the Golf Market Research
Institute, the Tight Lies fairway woods were the top-selling single fairway
woods in the U.S. on a unit volume basis during the three months ended March 31,
1998. During this period, the Company achieved a 27% market share of the single
fairway woods category.
The Company's growth strategy is to continue to increase its share of the
fairway woods market, leverage consumer acceptance of the Tight Lies brand,
expand international sales and develop new technologies and product designs.
GOLF INDUSTRY OVERVIEW
According to the National Golf Foundation ("NGF"), there are approximately
49 million golfers worldwide, including approximately 25 million in the U.S. In
1997, golfers in the U.S. played an estimated 547 million rounds of golf and,
according to the National Sporting Goods Association, are estimated to have
spent $5.8 billion on golf equipment, apparel and accessories. Of the 25 million
U.S. golfers, about 5.2 million, characterized by the NGF as "avid golfers,"
play over 25 rounds of golf per year. The Company believes that avid golfers are
the first to seek out performance-oriented golf equipment and generally drive
golf club product trends.
In 1997, wholesale sales of golf equipment in the U.S. reached an estimated
$2.4 billion. Wholesale sales of golf clubs increased at a compound annual
growth rate of approximately 13% over the 5-year period from 1992 to 1997. The
Company believes that sales of golf clubs will continue to grow in the future
due to a number of factors including:
INCREASING AVAILABILITY OF GOLF FACILITIES. According to the NGF,
approximately 900 new golf courses, the vast majority of which will be available
to the public, are expected to open in the U.S. by the year 2000. The Company
believes that these additional facilities will make golf more accessible and
convenient, leading to a further increase in golf participation rates.
INCREASING INTEREST FROM NON-TRADITIONAL GOLFERS. The game of golf has
become increasingly attractive to segments of the population that have not
historically been well-represented among golfers. Most notably, Tiger Woods has
made golf more appealing to junior and minority golfers. According to the NGF,
the total number of beginning and junior golfers increased by over 40% in 1997
compared to the previous year. In addition, the success of the Ladies
Professional Golf Association (the "LPGA") Tour and such female golfers as
Annika Sorenstam of Sweden have increased the appeal of the sport to women.
FAVORABLE POPULATION TRENDS. The Company believes that two population
trends are likely to benefit the golf industry over the next several years: (i)
the aging of Baby Boomers (those born between 1946 and 1964) and (ii) the
emergence of the Echo Boom generation (those born between 1977 and 1995). As
golfers age, they tend to play golf more often and spend more money on the
sport, particularly in the over-50 age group. Accordingly, because a majority of
Baby Boomers are entering their 40s and 50s, the Company expects interest in and
spending on golf to increase. Further, because Echo Boomers are
22
<PAGE>
beginning to enter their 20s, the age most golfers begin to play the sport, the
Company believes they will further increase their participation in and spending
on golf.
NEW PRODUCT INNOVATIONS. In recent years, the golf equipment industry has
made significant advances in product designs and technologies to enhance
golfers' performance and overall enjoyment of the game. The Company believes
that this rapid evolution of golf clubs accelerates the rate at which golfers
purchase new or additional clubs.
GROWTH IN FAIRWAY WOODS. The Company believes that sales of fairway woods
are growing for a number of reasons. Fairway woods have proven to be more
versatile and dependable than long irons (specifically, the 1-4 irons), which
many golfers find inherently difficult to hit. In addition, an increasing number
of professional golfers on each of the Professional Golf Association ("PGA"),
LPGA, Senior PGA and Nike Tours are carrying multiple fairway woods in
competition, thereby validating the use of fairway woods as an accepted
substitute for long irons. Finally, changes in course architectures and turf
maintenance techniques are placing a premium on shots that fly higher and land
softer (I.E., the types of shots typically produced by fairway woods).
COMPANY HISTORY
Barney Adams founded the Company in 1987. After an initial period of
supplying components and performing contract manufacturing, the Company
established a custom fitting operation at the Hank Haney Golf Ranch in McKinney,
Texas, a well-known teaching and practice facility. As a result of the knowledge
and experience gained through custom fitting, Mr. Adams concluded that the
greatest difference in skill between a professional golfer and an amateur golfer
is the ability to successfully hit the long second shot to the green. Similarly,
Alastair Cochran and John Stobbs previously concluded in their book "THE SEARCH
FOR THE PERFECT SWING" that the long approach shot affects a player's score more
than any other. After a period of further research, development and testing, the
Company introduced a patented club head design to assist golfers with this shot.
The resulting product, the original Tight Lies fairway wood, incorporates an
upright trapezoidal head, a shallow face, a low center of gravity and 16 DEG. of
loft to assist the golfer in getting the ball airborne quickly and efficiently
from a variety of lies while maximizing distance. In late 1996, Adams extended
the Tight Lies line of fairway woods to include the Strong 3, Strong 5 and
Strong 7 and, one year later, the Strong 9.
In an effort to generate maximum exposure and retail sell-through of the
original Tight Lies fairway wood, the Company debuted its professionally
produced infomercial in April 1997. This 30-minute informational commercial is
hosted by veteran golf announcer Jack Whitaker and features former PGA Teacher
of the Year Hank Haney, former British Open Champion Bill Rogers and LPGA Hall
of Famer Carol Mann. Demand for the Tight Lies fairway woods increased
significantly after the introduction of the infomercial. To meet this demand,
the Company increased its distribution capacity by expanding its network of on-
and off-course golf shops and selected sporting goods retailers.
The International Network of Golf, an 800-member organization of leading
media and golf industry executives, named the original Tight Lies fairway wood
the "Breakthrough Product of the Year" in 1996. In addition, the Tight Lies
fairway wood received the 1997/98 Certificate of Excellence from the Golf
Industry Association. Since the introduction of the original Tight Lies fairway
wood in late 1995, more than 50 professionals on the PGA, LPGA and Senior PGA
Tours have carried one or more Tight Lies fairway woods in competition, none of
whom were then under contract with or paid by the Company.
23
<PAGE>
BUSINESS STRENGTHS
The Company has developed the following business strengths that it believes
provide it with a competitive advantage over many other golf club manufacturers:
STRENGTH OF THE TIGHT LIES BRAND. The Company believes that it has
established a significant presence in the fairway woods market category.
According to the Golf Market Research Institute, the Tight Lies fairway woods
were the top selling single fairway woods in the U.S. on a unit volume basis
during the three months ended March 31, 1998. During this period, the Company
achieved a 27% market share of the single fairway woods category. The Company
believes that the strength of its brand is further demonstrated by the rapid
acceptance of the expanded line of Tight Lies fairway woods. Although at the
time the Company only advertised the original Tight Lies fairway wood, sales of
the expanded line represented 48.8% of net sales for the three months ended
March 31, 1998.
INNOVATIVE MARKETING MODEL AND STRONG RETAIL DISTRIBUTION. Adams has
developed a marketing model that integrates direct response and traditional
image-based advertising to generate brand awareness and drive retail sales. For
the three months ended March 31, 1998, approximately 79% of the Company's sales
occurred at the retail level. To preserve the integrity of its image and
reputation, the Company currently limits its distribution to retailers that
market premium quality golf equipment and provide a high level of customer
service and technical expertise. The Company currently sells its products to on-
and off-course golf shops and selected sporting goods retailers. The Company
does not sell its products through price sensitive general discount warehouses,
department stores or membership clubs. The Company believes its selective retail
distribution helps its retailers to maintain profitable margins and maximize
sales of Adams products. The Company further believes it is well-positioned to
utilize its marketing model and retail distribution for future products.
RELATIONSHIP WITH NICK FALDO. The Company has recently entered into a
relationship with Nick Faldo. Mr. Faldo was inducted into the World Golf Hall of
Fame in May 1998 and has won more major championships in the 1990s than any
other golfer. In addition to numerous other domestic and international
championships, Mr. Faldo has won the Masters three times (1989, 1990 and 1996)
and the British Open three times (1987, 1990 and 1992). Mr. Faldo uses the Tight
Lies fairway woods in competition and has agreed to work closely with the
Company to assist in the design and testing of future golf clubs and other
equipment. The Company believes that Mr. Faldo's comprehensive knowledge of the
game of golf and reputation for technical excellence complements the Company's
capabilities and strong brand identity.
SALES AND CUSTOMER SERVICE INFRASTRUCTURE. Adams has committed significant
resources to developing its sales and customer service infrastructure. Rather
than relying on independent sales representatives, as do many other golf
equipment companies, Adams maintains an inside sales department that currently
consists of 25 employees who are in regular telephone contact with the Company's
over 7,000 retailers. These sales representatives are supported by 13
field-based Regional Account Coordinators who maintain personal contact with the
Company's retailers nationwide. The Company believes that using and carefully
managing its own sales force enables it to significantly reduce selling
expenses. Adams also has a separate 30-seat customer call center that provides
customer service to retailers and consumers. The majority of the Company's sales
and customer service personnel are experienced golfers. The Company believes
interaction with its knowledgeable representatives promotes customer
satisfaction and helps to strengthen the Adams brand.
EMPHASIS ON QUALITY. Due in large part to its heritage in custom club
fitting, Adams emphasizes quality control and precise adherence to design
specifications. The Company has redundant sources of supply for each of the
component parts used in the manufacture of its golf clubs and has established a
quality assurance program at those manufacturing facilities located in Taiwan
and China that are collectively responsible for producing substantially all of
the Company's performance club heads. Upon arrival at the Company's
manufacturing facilities in Plano, Texas, each component used in the Company's
clubs is
24
<PAGE>
again checked to ensure consistency with strict design specifications.
Components are then sorted to identify variations in characteristics, such as
head weight and shaft flexibility, that, although within the specified
manufacturing tolerances, may affect club performance. The Company uses its
patented variable moment of inertia ("VMI") formula to combine compatible
components to produce a consistent swing feel across an entire set of clubs.
GROWTH STRATEGY
The Company's goal is to establish itself as a leading developer of
technologically innovative, performance-oriented golf clubs. The Company's
strategy to achieve this goal includes the following elements:
BUILDING MARKET SHARE IN FAIRWAY WOODS. The Company's first priority is to
build its share of the premium fairway woods market. The Company believes it can
increase its market share by (i) continuing to build demand using the Company's
marketing model; (ii) assisting existing retailers to increase their sales of
the Tight Lies fairway woods by maintaining the relatively high margins
currently enjoyed by such retailers; and (iii) increasing the number of on- and
off-course golf shops and selected sporting goods retailers that distribute the
Tight Lies fairway woods.
LEVERAGING CONSUMER ACCEPTANCE OF TIGHT LIES BRAND. The Company intends to
leverage acceptance of the Tight Lies brand to develop and sell additional
products, a strategy that has proven effective in marketing the Company's
expanded line of Tight Lies fairway woods. For the three months ended March 31,
1998, sales of the expanded line of Tight Lies fairway woods exceeded sales of
the original club. The Company believes that the success and performance of its
Tight Lies fairway woods have earned Adams a reputation as a manufacturer of
technologically innovative, performance-oriented golf clubs among its customers
and avid golfers. The Company further believes that it will be able to
efficiently introduce new products to this customer base through its recent
investments in infrastructure, thereby generating sales and receiving valuable
product feedback.
EXPANDING INTERNATIONAL SALES. Until recently, the Company has focused on
developing sales domestically. For the year ended December 31, 1997 and the
three months ended March 31, 1998, approximately 2% and 6%, respectively, of the
Company's net sales were derived from international sales. Accordingly, the
Company's sales to date have been achieved without significant contribution from
international markets. Beginning in late 1997, the Company began leveraging its
domestic strength to attract qualified international distributors. The Company
currently has a network of 33 distributors located in 39 countries including
Canada, Japan and the United Kingdom and expects to continue to build its
international distribution. Toward this end, the Company has recently hired a
Director of International Sales who has significant international golf equipment
sales experience. Additionally, the Company believes that Nick Faldo's worldwide
reputation will help drive international demand for the Company's products.
DEVELOPING NEW TECHNOLOGIES AND PRODUCT DESIGNS. The Company engages
continuously in the process of developing new technologies and product designs
that, when incorporated into golf clubs, are expected to provide golfers with
meaningful performance benefits. Capitalizing on the technical knowledge and
expertise gained through the Tight Lies fairway woods, the Company is currently
testing prototypes of a potential new driver. This new product is expected to
combine the distance of a driver with the playability of a fairway wood. The
Company currently expects the new driver to be introduced after the end of
fiscal year 1998. The Company is working with Mr. Faldo to design and test this
new driver as well as other potential new products. To the extent that any new
technology or product design can be developed to the point of commercial
viability, the Company intends to introduce such technology or design into a
single product and, if the product is well received by consumers, develop a
broader product line around the core club category. The Company believes that
the affiliation, endorsement and support of Nick Faldo will provide important
credibility in the development and marketing of new technologies and product
designs.
25
<PAGE>
The Company's continued growth and success depend, in large part, on its
ability to successfully develop and introduce new products that achieve
widespread market acceptance. Failure by the Company to identify and develop
innovative new technologies and product designs could adversely affect the
Company's future growth and profitability. See "Risk Factors--Dependence on New
Product Introductions; Uncertain Consumer Acceptance."
PRODUCTS
The Company currently offers the following products:
ORIGINAL TIGHT LIES FAIRWAY WOOD. The original Tight Lies fairway wood has
an innovative upright trapezoidal or "upside down" head shape that incorporates
a distinctive shallow face, a low center of gravity and 16 DEG. of loft. The
Company believes that this club is ideal for getting the ball airborne quickly
and efficiently with optimum spin to maximize distance from the critical scoring
area of 185 to 225 yards from the green. The Company further believes that the
Tight Lies fairway woods are particularly effective from virtually any lie on
the course including the rough, hard pan, fairway bunkers and divots.
EXPANDED LINE OF TIGHT LIES FAIRWAY WOODS. In late 1996, based on initial
consumer acceptance of the original Tight Lies fairway wood, the Company
expanded its line to include the Tight Lies Strong 3 (13 DEG. loft), the Tight
Lies Strong 5 (19 DEG. loft) and the Tight Lies Strong 7 (24 DEG. loft). In
January 1998, the Company expanded the line again to include the Tight Lies
Strong 9 (28 DEG. loft). The expanded line of Tight Lies fairway woods
incorporates the same design innovations as the original club while providing
golfers with increased flexibility to play these clubs from different distances
on the course. For the three months ended March 31, 1998, sales of the expanded
line of Tight Lies fairway woods exceeded sales of the original club.
OTHER CLUB LINES. The Company's other clubs include the Air Assault Driver
and the Assault-VMI irons. The Air Assault Driver was the Company's first
product to incorporate the patented upright trapezoidal head. The Company's
Assault-VMI irons are perimeter-weighted, cavity-backed, slightly offset irons
which incorporate the Company's patented VMI design formula producing consistent
swing feel across an entire set of clubs. The Company markets the Assault-VMI
irons to professional and avid golfers exclusively through its network of over
100 certified custom fitting accounts. The Company believes that its custom
fitting activities provide Adams with an in-depth understanding of golf club
design and credibility in the golf industry.
Each golf club manufactured by the Company is available in a variety of
shaft lengths and flexes to accommodate both men and women golfers of all ages
and ability levels. In addition, once a club has received a certain degree of
market acceptance, the Company has historically introduced a left-handed model.
Currently, the Company offers each of its golf clubs in a left-handed model,
with the exception of the recently introduced Tight Lies Strong 9.
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<PAGE>
The following table indicates the percentage of net sales in each major
product group for the years ended December 31, 1996 and 1997 and the three
months ended March 31, 1998. Historical percentages may not be indicative of the
Company's future product mix.
PERCENTAGE OF NET SALES BY PRODUCT GROUP
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
------------------------------------ ENDED MARCH 31,
PRODUCT GROUP 1996 1997 1998
- ------------------------------------------------------ ----------------- ----------------- -----------------
<S> <C> <C> <C>
Original Tight Lies................................... 45.6% 55.9% 48.5%
3, 5, 7 and 9 Tight Lies.............................. 1.6 38.4 48.8
Other Club Lines...................................... 52.8 5.7 2.7
----- ----- -----
Total............................................... 100.0% 100.0% 100.0%
----- ----- -----
----- ----- -----
</TABLE>
The Company supports each of its products with a two-year warranty. The
warranty provides for repair or replacement of the golf club, except in the case
of abuse. The Company has not experienced material amounts of breakage with
respect to its golf clubs.
DESIGN AND DEVELOPMENT
The Company's design and development team is responsible for developing,
testing and introducing new technologies and product designs. This team is
currently spearheaded by Barney Adams, the founder of the Company and inventor
of the Tight Lies fairway wood; Richard H. Murtland, Vice President-- Research
and Development; Mr. Nick Faldo and, independent consultants, Robert R. Bush and
Dr. Michael M. Carroll. Mr. Bush has over 30 years of experience in golf club
development, most notably, as Director of Technical Services for True Temper
Sports, a leading shaft manufacturer, where from 1966 to 1993, he was
responsible for testing all golf club shafts. Mr. Bush was instrumental in the
development of "Iron Byron," the industry standard for the mechanical testing of
golf clubs and balls. Mr. Bush is currently a member of the Technical Advisory
Panel for GOLF DIGEST. Dr. Michael M. Carroll is Dean of the George R. Brown
School of Engineering at Rice University in Houston, Texas. Dr. Carroll holds
doctorate degrees in both physics and mathematics and is an avid golfer. Dr.
Carroll has worked with the Adams design and development team since April 1,
1998 and is responsible for the scientific analysis of each new product under
development by the Company.
The design and development team engages in a five-step process to create new
products.
CONCEPT DEVELOPMENT. During concept development, Adams' design and
development team identifies specific desirable ball flight objectives. In
addition, the Company considers new ideas from professional golfers, inventors,
distributors and others. The Company expects that Nick Faldo will play a
significant role in future concept development.
DESIGN SPECIFICATIONS. The Company's product design and development team
determines design specifications for the club, including shaft length, flex and
weight, head design, loft and overall club weight. Throughout the design
specifications process, the Company refers to and incorporates the golf
equipment standards developed by the USGA. Although the standards set by the
USGA only apply to competitive events sanctioned by that organization, the
Company believes it is critical for new clubs to comply with these standards. At
this time, the product design and development team also determines the optimal
materials to use in the club. The Company will not use higher cost materials,
such as titanium or other alloys, unless such expensive materials provide
meaningful performance benefits. This stage of product development typically
takes 6 to 8 weeks after a concept has been clearly identified.
PATENT REVIEW. The Company considers patent protection for its technologies
and product designs to be an important part of its development strategy. The
Company and its patent attorneys conduct a search
27
<PAGE>
of prior art and existing products to determine whether a new product idea may
be covered by an existing patent. Patent review, depending upon the complexity
and novelty of the design involved, generally requires between 3 to 18 months to
complete.
PRODUCT DESIGN AND ENGINEERING REVIEW. If a product concept continues past
the patent review stage, the Company translates design parameters into working
designs. When appropriate, these designs are modeled and developed using
computer aided design technologies and subjected to rigorous engineering review
to validate the effectiveness of the technology or design. Dr. Carroll is
expected to play a key role in this stage of product development. The Company
estimates that it will take between 4 to 6 months to successfully complete
product design and engineering review.
TESTING. Once a specific design has been decided upon, the Company creates
and tests one or more prototypes. The Company has a testing facility at the Hank
Haney Golf Ranch in McKinney, Texas. As part of the testing process, the Company
records, analyzes and interprets data associated with each prototype including
ball flight, distance, spin and accuracy. Using feedback from these tests, the
Company modifies its designs to achieve its performance objective. Additionally,
the Company applies for official USGA approval of the resulting club at this
time. Upon approval of a new product from the USGA, it becomes considered for
commercial release. The Company believes that in order to properly field test a
new product, it must expect between 4 to 6 months of additional development
time.
The Company's research and development expenses were $18,516, $51,101 and
$557,513 during 1995, 1996 and 1997, respectively.
MARKETING
The goals of the Company's marketing efforts are to build its brand identity
and drive sales through its retail distribution channel. To accomplish these
goals, Adams utilizes direct response and traditional image-based advertising,
engages in promotional activities and capitalizes on its relationship with Nick
Faldo and other well known golf figures.
ADVERTISING. The Company uses a combination of direct response and
traditional image-based advertising.
- DIRECT RESPONSE ADVERTISING. The Company intends to continue to build
brand awareness and stimulate product demand through its direct response
advertising, which includes a variety of mediums including television,
radio, print and direct mail. Direct response advertising, in which
consumers may order products directly from the Company by calling a
toll-free telephone number, provides a cost-effective vehicle enabling
Adams to communicate a compelling product story and build brand
recognition. The Company's direct response advertising serves to introduce
the Company's products to consumers, many of whom will subsequently
purchase Adams clubs directly from the Company's retailers. In April 1997,
Adams debuted a 30-minute Tight Lies infomercial, which has contributed
significantly to the Company's recent growth. This infomercial received
the award for "Best Infomercial Demonstration Show" from the National
Infomercial Marketing Association in September 1997. The Tight Lies
infomercial routinely runs on The Golf Channel, regional sports stations,
national networks and local, market-specific broadcast stations. In
addition, the Company utilizes 30- and 60-second direct response
television commercials as well as radio advertising. The Company
advertises regularly in major golf and industry publications, general
consumer magazines and local newspapers nationwide. These include GOLF
DIGEST, GOLF MAGAZINE, SPORTS ILLUSTRATED, THE WALL STREET JOURNAL and USA
TODAY. Finally, the Company engages in regularly scheduled direct mail
advertising campaigns.
- TRADITIONAL IMAGE-BASED ADVERTISING. The Company's direct response sales
revenue has enabled Adams to broaden its advertising efforts to include
traditional image-based advertising. This advertising includes a series of
30-second commercials which run during major golf tournaments
28
<PAGE>
and golf related programs; newspaper, magazine and radio ad campaigns;
sponsorship of selected golf tournaments; exclusive sponsorship of The
Golf Channel's weekly instructional program, "LIVING ROOM LESSONS" and a
recently updated and professionally redesigned web site located at
www.adamsgolf.com.
The Company has received extensive editorial coverage in golf, consumer and
trade publications as well as general consumer magazines and newspapers
worldwide.
PROMOTIONAL ACTIVITIES. The Company engages in a variety of promotional
activities to sell and market its products. Such activities include (i) consumer
sweepstakes like the Company's "Ramble in the Bramble," where the winner will
receive an all expense paid, luxury tour for two of Scotland's most legendary
golf courses; (ii) promotional giveaways with certain purchases, including items
such as instructional videos and audio tapes; and (iii) promotional campaigns
like the "90-Day Challenge," in which the Company advertises its 90-day return
policy.
RELATIONSHIP WITH NICK FALDO AND OTHERS. The Company has recently formed a
lifetime relationship with Nick Faldo, an internationally recognized
professional golfer and winner of numerous U.S. and international championships,
including three Masters (1989, 1990 and 1996) and three British Opens (1987,
1990 and 1992). Mr. Faldo led the Official World Golf Ranking for 81 weeks
during 1993 and 1994. Mr. Faldo also has made the most Ryder Cup appearances in
the history of golf. Adams expects Nick Faldo to be actively and directly
involved in the design, testing and development of new technologies and
products. Mr. Faldo is noted for his precise play as a golfer and his reputation
as a perfectionist. The Company believes that by aligning itself with Mr. Faldo,
it can further promote the Adams brand, while at the same time demonstrating the
Company's ability to deliver golf clubs that satisfy the specific and demanding
requirements of tour professionals.
The Company has also obtained endorsements from Hank Haney, Bill Rogers and
Carol Mann. Mr. Haney was named the 1993 PGA Teacher of the Year and is a
five-time recipient of the Northern Texas Section PGA Teacher of the Year Award.
Mr. Haney has instructed over 100 touring professionals from the PGA, LPGA,
European, Japanese and Asian Tours along with several top rated junior golfers.
Mr. Haney is a member of the advisory staff for GOLF DIGEST. Mr. Rogers won the
British Open championship in 1981 and was the 1981 PGA Player of the Year. Ms.
Mann is a member of the LPGA Hall of Fame.
SALES AND CUSTOMER SUPPORT
The Company sells its products through on- and off-course golf shops and
selected sporting goods retailers, direct sales to consumers, international
distributors and the Company's custom fitting accounts.
SALES TO RETAILERS. The Company sells a significant majority of its
products to selected retailers. To maintain its high quality reputation and
generate retailer loyalty, the Company does not sell its products through price
sensitive general discount warehouses, department stores or membership clubs.
The Company believes its selective retail distribution strategy helps its
retailers to maintain profitable margins and maximize sales of Adams products.
In the three months ended March 31, 1998, sales to retailers accounted for
approximately 79% of the Company's total sales.
Adams maintains an inside sales department that currently consists of 25
employees who are in regular contact with the Company's over 7,000 retailers.
These sales representatives are supported by 13 field-based Regional Account
Coordinators who maintain personal contact with the Company's retailers
nationwide. The Company generally has been successful in delivering product to
its retailers within one week of a placed order. The Company believes its prompt
delivery of products enables its retail accounts to maintain smaller quantities
of inventory than may be required with other golf equipment manufacturers.
29
<PAGE>
CUSTOMER SUPPORT AND DIRECT SALES. Adams believes that superior customer
service can significantly enhance its marketing efforts. Accordingly, the
Company maintains an in-house customer call center whose representatives provide
technical assistance to Adams' customers and field calls resulting from the
Company's direct response advertising. The Company also outsources a portion of
its call center activities. The Company provides its staff with computerized
access to its retailer database enabling call center representatives to guide
consumers to their nearest Adams retailer.
INTERNATIONAL SALES. International sales are made in 39 countries
(including Japan, Canada and the United Kingdom) through approximately 33
independent distributors. The international distributors sell to retailers for
end sale to the consumer. International sales have increased from $0.6 million
for 1996 to $0.9 million for 1997 and $0.2 million for the first three months of
1997 to $1.4 million for the first three months of 1998. The Company recently
expanded its international sales staff to include a Director of International
Sales to identify, develop, engage and support the Company's worldwide
distributor base.
CUSTOM FITTING SALES. The Company employs six sales representatives who
manage the Company's custom fitting sales and support division and administer
Adams' custom fitting training program for golf professionals. Adams' custom
fitting training program has received PGA certification and provides continuing
education credits for PGA Member Professionals. Since 1992, the Company has
certified in excess of 300 golf professionals to custom fit its Assault-VMI
irons, which are sold exclusively through its over 100 custom fitting accounts.
Custom fitters measure data relating to swing and ball flight characteristics.
Based on the interpretation of the data, a set of clubs is manufactured that is
specifically tailored to that golfer.
The majority of the Company's sales and customer service personnel are
experienced golfers, including a number of former collegiate and professional
golfers. Further, each of the Company's new employees attends an 8-hour,
in-house seminar which provides training on club specifications, performance,
design and manufacturing. Adams believes interaction with its knowledgeable
representatives promotes customer satisfaction and helps to strengthen the Adams
brand image.
MANUFACTURING AND ASSEMBLY
The Company manages all stages of manufacturing, from sourcing to assembly,
in order to maintain a high level of product quality and consistency. The
Company establishes product specifications, selects the materials used to
produce the components and tests the specifications of all components received
by the Company. In addition, the Company has redundant sources of supply for
each of the component parts used in the manufacture of its golf clubs and has
established a quality assurance program at those manufacturing facilities
located in Taiwan and China that are collectively responsible for producing
substantially all of the Company's performance club heads. Upon arrival at the
Company's manufacturing facilities in Plano, Texas, each component used in the
Company's clubs is again checked to ensure consistency with strict design
specifications. Components are then sorted to identify variations in
characteristics, such as head weight and shaft flexibility, that, although
within the specified range, may affect club performance. Golf clubs are then
built by the Company's manufacturing personnel using the appropriate component
parts and the Company's patented VMI technology. See "Risk Factors--Sources of
Supply."
PATENTS
The Company's ability to compete effectively in the golf club market will
depend, in large part, on the ability of the Company to maintain the proprietary
nature of its technologies and products. The Company currently holds six U.S.
patents relating to certain of its products and proprietary technologies and has
two patent applications pending. Assuming timely payment of maintenance fees, if
any, the Company expects that the six currently issued patents will expire on
various dates between 2009 and 2013. The Company has been awarded patents with
respect to the design of the Tight Lies fairway wood and the VMI design formula.
There can be no assurance, however, as to the degree of protection afforded by
these or any other
30
<PAGE>
patents held by the Company or as to the likelihood that patents will be issued
from the pending patent applications. Moreover, these patents may have limited
commercial value or may lack sufficient breadth to adequately protect the
aspects of the Company's products to which the patents relate. The Company does
not hold any foreign patents and no foreign patent applications are pending. The
U.S. patents held by the Company do not preclude competitors from developing or
marketing products similar to the Company's products in international markets.
There can be no assurance that competitors, many of which have substantially
greater resources than the Company and have made substantial investments in
competing products, will not apply for and obtain patents that will prevent,
limit or interfere with the Company's ability to make and sell its products. The
Company is aware of numerous patents held by third parties that relate to
products competitive to the Company's, including products competitive with the
Tight Lies fairway woods. There is no assurance that these patents would not be
used as a basis to challenge the validity of the Company's patent rights, to
limit the scope of the Company's patent rights or to limit the Company's ability
to obtain additional or broader patent rights. A successful challenge to the
validity of the Company's patents may adversely affect the Company's competitive
position. Moreover, there can be no assurance that such patent holders or other
third parties will not claim infringement by the Company with respect to current
and future products. Because U.S. patent applications are held and examined in
secrecy, it is also possible that presently pending U.S. applications will
eventually issue with claims that will be infringed by the Company's products or
technologies. The defense and prosecution of patent suits is costly and
time-consuming, even if the outcome is favorable. This is particularly true in
foreign countries where the expenses associated with such proceedings can be
prohibitive. An adverse outcome in the defense of a patent suit could subject
the Company to significant liabilities to third parties, require the Company and
others to cease selling products or require disputed rights to be licensed from
third parties. Such licenses may not be available on satisfactory terms, or at
all.
Despite the Company's efforts to protect its patent and other intellectual
property rights, unauthorized parties have attempted and are expected to
continue to attempt to copy all, or certain aspects of, the Company's products.
Policing unauthorized use of the Company's intellectual property rights can be
difficult and expensive, and while the Company takes appropriate action whenever
it discovers any of its products or designs have been copied, knock-offs and
counterfeit products are a persistent problem in the performance-oriented golf
club industry. There can be no assurance that the Company's means of protecting
its patent and other intellectual property rights will be adequate.
INFORMATION SYSTEMS
The Company believes that a comprehensive and integrated infrastructure of
information technology, systems and services is a significant factor in
maintaining and improving its competitive position. Systems in place, including
order fulfillment and distribution, financial and decision support and
operational planning, have supported the growth of the Company to date. The
Company is aggressively enhancing its current capabilities to meet the demands
of the Company's growth. Special emphasis is being placed on systems for
customer management, supply chain management and business analysis and planning.
The Company believes that its current and enhanced computer systems, along with
normal upgrades and extensions, will be sufficient to accommodate the Company's
anticipated growth of sales and planned expansion for the foreseeable future.
There can be no assurance that any upgrades of its information systems will be
completed in a timely manner, that any such upgrades will be adequate to meet
the needs of the Company or that these upgrades will not strain the Company's
financial resources.
COMPETITION
The Company competes with a number of established golf club manufacturers,
many of which have greater financial and other resources than the Company.
Adams' competitors include Callaway Golf Company, adidas-Salomon AG (Taylor
Made) and Fortune Brands, Inc. (Titleist and Cobra). The
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<PAGE>
Company competes primarily on the basis of performance, brand name recognition,
quality and price. The Company believes that its ability to market its products
through multiple distribution channels, including on- and off-course golf shops,
selected sporting goods retailers and through direct response advertising, is
important to its ability to compete.
The golf club industry is generally characterized by rapid and widespread
imitation of popular technologies, designs and product concepts. Due to the
success of the Tight Lies fairway woods, the Company expects that one or more
competitors may introduce products similar to the Tight Lies fairway woods. The
buying decisions of many purchasers of golf clubs are often the result of highly
subjective preferences which can be influenced by many factors, including, among
others, advertising media, promotions and product endorsements. The Company may
face competition from manufacturers introducing other new or innovative products
or successfully promoting golf clubs that achieve market acceptance. The failure
to compete successfully in the future could result in a material deterioration
of customer loyalty and the Company's image and could have a material adverse
effect on the Company's business, operating results or financial condition. See
"Risk Factors--Dependence on New Product Introductions; Uncertain Consumer
Acceptance" "--Highly Competitive Industry" and "Historical Dependence on
Television Advertising."
EMPLOYEES
At May 31, 1998, the Company had 264 full-time employees, including 113
engaged in manufacturing and assembly, 26 in research and development and
quality control, 86 in sales support and 39 in management and administration.
Adams' employees are not unionized. Management believes its relations with its
employees are good.
PROPERTIES
The Company's administrative offices and manufacturing facilities currently
occupy approximately 65,000 square feet of space in Plano, Texas. This facility
is leased by the Company pursuant to a lease agreement expiring in 2004 and may
be extended for an additional five years. The Company maintains the right to
terminate the lease if it moves to a larger facility owned by the current
lessor. The Company has also leased an additional 33,000 square feet of space
and expects to take possession of the additional space before July 31, 1998
pursuant to the terms of a lease also expiring in 2004. The Company believes
that these facilities will be sufficient through at least the end of 1999.
LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings.
32
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors and executive officers of the Company, as of May 31, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) HELD
- ----------------------------- --- ----------------------------------------------------------------
<S> <C> <C>
B. H. (Barney) Adams......... 59 Chairman of the Board, Chief Executive Officer and President
Darl P. Hatfield............. 51 Senior Vice President--Finance and Administration and Chief
Financial Officer
Richard H. Murtland.......... 57 Vice President--Research and Development, Secretary, Treasurer
and Director
James E. Farrell............. 39 Vice President--Finance
Mark D. Gonsalves............ 38 Vice President--Sales and Marketing, Retail
Steven P. Sanazaro........... 50 Vice President--Information Technology
Paul F. Brown, Jr............ 51 Director
Roland E. Casati............. 67 Director
Finis F. Conner.............. 54 Director
Mark R. Mulvoy............... 56 Director
Stephen R. Patchin........... 39 Director
</TABLE>
The Company's Certificate of Incorporation was amended and restated
effective May 1, 1998 to provide, among other things, that the Board of
Directors be divided into three classes, each of whose members serve for
staggered three-year terms. Commencing with the 1999 Annual Meeting of
Stockholders, one class of directors will be elected each year for a three-year
term. Messrs. Conner and Patchin are members of Class I, the term of which
expires at the 1999 Annual Meeting of Stockholders, Messrs. Murtland and Casati
are members of Class II, the term of which expires at the 2000 Annual Meeting of
Stockholders and Messrs. Adams, Brown and Mulvoy are members of Class III, the
term of which expires at the 2001 Annual Meeting of Stockholders. See
"Description of Capital Stock--Delaware Law and Certain Charter and Bylaw
Provisions."
The number of members of the Board of Directors of the Company is currently
fixed at nine and, as a result, the Board presently has two vacancies. The
Company intends to fill these vacancies as soon as practicable after the
completion of the Offering. Under the terms of the agreement between the Company
and Nick Faldo, the Company has agreed that, for so long as royalties remain
payable to Mr. Faldo, it will use commercially reasonable efforts to cause a
designee of Mr. Faldo to be nominated for, and elected to, the Board. As of the
date of this Prospectus, Mr. Faldo has not notified the Company of his designee
to the Board.
Certain additional information concerning the directors and executive
officers is set forth below.
B. H. (BARNEY) ADAMS. Mr. Adams founded the Company in 1987 and has served
as Chairman of the Board, Chief Executive Officer and President since that time.
Mr. Adams is the inventor of the Tight Lies fairway wood. Prior to founding the
Company, Mr. Adams served as President of Intertest, Inc. (a manufacturer of
semiconductor testing equipment), Senior Vice President of Margaux Controls,
Inc. (a manufacturer of energy control systems) and Executive Vice President of
Maytex Manufacturing Co., Inc. (a manufacturer of store fixtures). Mr. Adams has
authored several magazine articles concerning the technical aspects of golf
equipment and is a frequent PGA section speaker.
DARL P. HATFIELD. Mr. Hatfield joined the Company as Senior Vice
President--Finance and Administration and Chief Financial Officer in May 1998.
Prior to joining the Company, Mr. Hatfield was a partner
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<PAGE>
with KPMG Peat Marwick LLP ("KPMG") from July 1977 to April 1998. Mr. Hatfield
has 30 years of experience in accounting and auditing and is a Certified Public
Accountant.
RICHARD H. MURTLAND. Mr. Murtland joined the Company in 1994 as Vice
President--Operations and has been a director of the Company since August 1995.
He became Vice President--Research and Development in April 1998. Mr. Murtland
has approximately 30 years of experience in operations and engineering, most
recently serving as Project Manager with ARCO International Oil and Gas Company
(an international oil exploration and production company) from June 1976 to
March 1994.
JAMES E. FARRELL. Mr. Farrell joined the Company as Vice President--Finance
in September 1997. From June 1995 to September 1997, Mr. Farrell served as a
Manager for The Pittson Company (a diversified holding company), where he was
responsible for financial review and re-engineering in the security services and
air freight divisions. From May 1994 to June 1995, Mr. Farrell was employed by
ADT Security Systems, Inc. as a Manager of Planning and Marketing. Prior
thereto, he served as Director of Accounting for Brinks Home Security, Inc. from
September 1986 to December 1993. Mr. Farrell has over 15 years of business
experience and is a Certified Public Accountant.
MARK D. GONSALVES. Mr. Gonsalves joined the Company in July 1995 as Vice
President--Sales and Marketing and now serves as Vice President--Sales and
Marketing, Retail. Prior to joining the Company, Mr. Gonsalves was President and
Chief Executive Officer of In-Sync Sport International, Inc. (a sports
psychology company founded by Mr. Gonsalves) from January 1992 to July 1995. He
was a professional golfer from 1990 to 1992. Mr. Gonsalves has 16 years of sales
and marketing experience.
STEVEN P. SANAZARO. Mr. Sanazaro joined the Company as Vice
President--Information Technology in January 1998. Prior to joining Adams, Mr.
Sanazaro served as Director, Information Technology for Sprint Corporation from
June 1987 to November 1992, as Vice President, Information Technology for
Pepsico, Inc. from May 1996 to January 1998 and as Vice President, Research and
Development and Chief Technology Officer for Harbinger Corporation (a supplier
of electronic commerce software and network services) from August 1993 to May
1996. Mr. Sanazaro has approximately 30 years of business technology experience.
PAUL F. BROWN, JR. Mr. Brown became a director of the Company in August
1995. Mr. Brown has been Vice President--Finance and Chief Financial Officer of
Royal (a holding company with diversified interests) since 1990. Mr. Brown has
29 years of experience in accounting, auditing, and finance and is a Certified
Public Accountant.
ROLAND E. CASATI. Mr. Casati became a director of the Company in November
1995. Mr. Casati has been Chairman of the Board of Continental Offices, Ltd. for
over five years. Continental Offices, Ltd. is engaged in the development of
residential and commercial real estate and diversified personal investments. Mr.
Casati is a director of Zeigler Coal Holding Co. (one of the largest coal
producers in the U.S.) and Virtual Visits, Inc. (a company engaged in the design
of Internet web sites for the promotion of golf products).
FINIS F. CONNER. Mr. Conner became a director of the Company in October
1996. From 1985 to February 1996, Mr. Conner was Chairman of the Board and Chief
Executive Officer of Conner Peripherals, Inc. (a manufacturer of disk drives for
personal computers founded by Mr. Conner in 1986) which, in February 1996,
merged with Seagate Technology, Inc. ("Seagate") (a publicly traded manufacturer
of computer components co-founded by Mr. Conner in 1979). Mr. Conner served as
Vice-Chairman of Seagate from 1979 to 1985. Since February 1996, Mr. Conner has
been a principal of the Conner Group, an independent consulting organization,
and Chairman of the Board of Virtual Visits, Inc. Mr. Conner is also a director
of Box Hill Systems Corp., a manufacturer of high performance data storage
systems.
MARK R. MULVOY. Mr. Mulvoy became a director of the Company in April 1998.
Mr. Mulvoy is a retired executive of Sports Illustrated magazine, where he was
employed from 1965 to 1998. Mr. Mulvoy was Managing Editor of Sports Illustrated
from 1984 through 1996 and Publisher from 1990 to 1992.
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<PAGE>
Mr. Mulvoy has written 12 books including "GOLF - THE PASSION AND THE
CHALLENGE." He is also a director of Tosco Corporation (the largest independent
refiner and marketer of petroleum products in the U.S.).
STEPHEN R. PATCHIN. Mr. Patchin became a director in October 1993. He has
been President and Chief Executive Officer of Royal Oil and Gas Corp., an oil
and gas exploration and production company and wholly owned subsidiary of Royal,
since June 1985 and President and Chief Executive Officer of Royal since
February 1990.
Executive officers of the Company are elected by and serve at the discretion
of the Board of Directors.
KEY MANAGEMENT EMPLOYEES
The following table sets forth certain information with respect to certain
additional key management employees of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) HELD
- ------------------------------- --- --------------------------------------------------------------
<S> <C> <C>
Walter G. DeVault.............. 47 Director of Customer Service and Consumer Sales
Cindy A. Herington............. 36 Director of Advertising and Direct Response Marketing
Christopher K. Beebe IV........ 41 Director of International Sales
</TABLE>
Certain additional information concerning these individuals is set forth
below.
WALTER G. DEVAULT. Mr. DeVault joined the Company as Director of Customer
Service and Consumer Sales in February 1998. He has worked in the home security
industry for the last eight years. Mr. DeVault served as Director of Sales for
X-Truder, Inc. (a home security company) from February 1992 to July 1994 and as
National Sales Director for Brink's Home Security, Inc. from August 1994 to
February 1998. Mr. DeVault has over 25 years of sales and sales management
experience.
CINDY A. HERINGTON. Ms. Herington joined the Company as Director of Special
Projects in May 1997. Ms. Herington became Director of Advertising and Direct
Response Marketing in April 1998. Prior to joining the Company, Ms. Herington
had been employed from August 1987 to May 1997 by The Neiman Marcus Group, Inc.
in a variety of sales management positions. Ms. Herington is the daughter of Mr.
Adams, the Company's Chairman of the Board, Chief Executive Officer and
President.
CHRISTOPHER K. BEEBE IV. Mr. Beebe joined the Company as Director of
International Sales in March 1998. He has been involved with international sales
for the past 10 years. From June 1989 through July 1994, Mr. Beebe held various
international sales positions with Ram Golf Corporation (a golf equipment
manufacturer), and from August 1994 through April 1997 he was Vice
President--Asia/Pacific with Lynx Golf, Inc. (a golf equipment manufacturer).
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors currently has two standing committees: the
Compensation/Plan Committee and the Audit Committee. The Compensation/Plan
Committee is responsible for the recommendation to the Board of Directors of
annual salaries for senior management as well as the administration and grant of
awards under the Company's Incentive Plan and the Company's Bonus Plan (the
"Bonus Plan"). The Compensation/Plan Committee is comprised of Messrs. Casati,
Mulvoy and Patchin.
The Audit Committee is responsible for meeting periodically with
representatives of the Company's independent public accountants to review the
general scope of audit coverage, including consideration of the Company's
accounting practices and procedures and system of internal accounting controls,
and to report to the Board of Directors with respect thereto. The Audit
Committee also makes recommendations to the Board of Directors with respect to
appointment of the Committee's independent auditors. The Audit Committee is
comprised of Messrs. Brown and Conner.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth all compensation received by the Company's
Chief Executive Officer and the executive officers whose total annual salary and
bonus exceeded $100,000 during the fiscal year ended December 31, 1997
(collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION
- ------------------------------------------------ --------- ---------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
B. H. Adams
Chairman of the Board, Chief Executive Officer
and President................................. 1997 $ 162,940 $ 10,015,000(1) $ 2,541,688(2) $ 4,185(3)
Richard H. Murtland
Vice President-Research and Development,
Secretary and Treasurer....................... 1997 72,548 40,000 -- --
Mark D. Gonsalves
Vice President--Sales and Marketing, Retail... 1997 62,400 352,144(4) -- --
</TABLE>
- ------------------------
(1) Represents (a) $15,000 cash bonus and (b) value of 2,000,000 shares of
Common Stock granted on December 31, 1997 having a fair market value, as
determined by the Board of Directors, of $5.00 per share on the date of
grant. See "Certain Transactions."
(2) Represents reimbursement of federal income taxes and Medicare tax liability
associated with the grant of certain restricted shares of Common Stock. See
"Certain Transactions."
(3) Comprised of premiums for a life insurance policy for which members of Mr.
Adams' family are the beneficiaries.
(4) Represents bonus earned in 1997 pursuant to the terms of a sales commission
agreement which expired by its terms on December 31, 1997.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS MONEY OPTIONS AT
AT FISCAL YEAR-END(#) FISCAL YEAR END($)(1)
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------------ ------------- ------------- ------------- -------------
B. H. Adams........................................... 1,520,766 0 $ 7,033,552 --
Richard H. Murtland................................... 222,214 0 1,027,739 --
Mark D. Gonsalves..................................... 333,320 0 1,541,605 --
</TABLE>
- ------------------------
(1) Calculated by determining the difference between the fair market value of
the Common Stock underlying the options at December 31, 1997 ($5.00 per
share), as determined by the Board of Directors, and the exercise price of
such options. See "Certain Transactions." Each of the options referred to
herein was exercised by the respective option holder during January 1998.
BENEFIT PLANS
1998 STOCK INCENTIVE PLAN. In February 1998, the Company adopted the 1998
Stock Incentive Plan. The purpose of the Incentive Plan is to provide incentives
and rewards for participating employees and consultants of the Company (i) to
support the execution of the Company's business strategies and the achievement
of its goals and (ii) to associate the interests of such persons with those of
the Company's stockholders. In furtherance of this purpose, the Incentive Plan
authorizes the granting of stock options, including incentive stock options
(within the meaning of Section 422 of the Internal Revenue Code of
36
<PAGE>
1986, as amended) (the "Code"), stock appreciation rights, restricted and
performance shares, restricted and performance share units, performance stock
awards, dividend or equivalent rights, or other awards that are valued in whole
or in part by reference to, or otherwise based on, the Common Stock of the
Company (each, an "Award"). A total of 1,800,000 shares of Common Stock have
been reserved for issuance upon the exercise of Awards granted under the
Incentive Plan, subject to adjustment in accordance with the terms of the
Incentive Plan.
Upon consummation of the Offering, the Incentive Plan will be administered
by the Compensation/ Plan Committee comprised of Messrs. Casati, Mulvoy and
Patchin. The Compensation/Plan Committee has discretion to select the persons to
whom Awards will be granted (each, a "Participant"), to determine the type, size
and terms and conditions applicable to each Award and the authority to
interpret, construe and implement the provisions of the Incentive Plan. Each
Award under the Incentive Plan shall be evidenced by an Award Agreement.
Under the Incentive Plan, the Company may grant, in addition to other
Awards, incentive or nonqualified stock options. The exercise price of any
option granted under the Incentive Plan must be at least equal to the fair
market value of the Common Stock on the date of the grant, and in the case of a
grant of an incentive stock option to any Participant who owns stock
representing more than 10% of the Common Stock, the exercise price shall at
least equal 110% of the fair market value of the shares at the time the
incentive stock option is granted. In addition, no incentive stock option is
exercisable more than 10 years from the date of grant (5 years if such option is
granted to a Participant who owns in excess of 10% of the Common Stock) and the
aggregate fair market value, determined on the date of grant, of the Common
Stock as to which such incentive stock options are exercisable for the first
time by any Participant in the Incentive Plan shall be limited to $100,000 per
calendar year. The Incentive Plan also permits the grant of stock appreciation
rights (rights to receive the excess of the fair market value of a share of
Common Stock on the date the Award is exercised over the fair market value of a
share of Common Stock on the date of grant for such period as the
Compensation/Plan Committee may determine); restricted and performance shares (a
transfer of shares of Common Stock to a Participant, subject to such
restrictions on transfer or other incidents of ownership, or subject to
specified performance standards as the Compensation/Plan Committee may
determine); restricted or performance share units (fixed or variable share or
dollar-denominated units subject to conditions of vesting, performance and time
of payment as the Compensation/Plan Committee may determine, which may be paid
in shares of Common Stock, cash or a combination of both); dividend or
equivalent rights (rights to receive dividends or their equivalent in value in
shares of Common Stock, cash or in a combination of both with respect to any new
or previously existing Award); performance stock awards (rights to receive
restricted shares that will not be issued until after the end of the applicable
performance period, subject to the satisfaction of specified performance goals);
and other Common Stock-based Awards, in each case, as set forth in the Incentive
Plan.
At May 31, 1998, the Company had granted Awards under the Incentive Plan
consisting of (i) options to purchase an aggregate of 382,000 shares of Common
Stock, none of which were exercisable at such date and (ii) 900,000 shares of
restricted Common Stock. It is anticipated that all of the Company's employees
will be considered for participation in the Incentive Plan.
If a Participant terminates his or her service for reasons other than
retirement, permanent and total disability or death, the Participant may
exercise, no later than the date of termination, only those stock options vested
as of the date of termination. Upon retirement, a Participant's options
immediately vest and such Participant may exercise nonqualified stock options
within one year of retirement and incentive stock options within three months of
such retirement. In order to retire under the Incentive Plan, a Participant must
have attained the age of 62 and have had 10 years of continuous employment with
the Company. In the case of termination as a result of permanent and total
disability, a Participant's options will immediately vest and such Participant
will have one year from termination to exercise any outstanding options. If a
Participant who was granted stock options dies while employed by the Company, or
during the period which options may be exercised following termination of
employment due to retirement or permanent and
37
<PAGE>
total disability, all stock options granted under the Incentive Plan immediately
vest and must be exercised by the Participant's estate no later than the
termination date of such option. Except to the extent permitted by the Code and
the rules and regulations promulgated under Section 16 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), (i) no Award under the
Incentive Plan is assignable or transferable except by will, by the laws of
descent and distribution or pursuant to a qualified domestic relations order and
(ii) during the lifetime of a Participant, the Award will be exercisable only by
such Participant or such Participant's guardian, legal representative or
assignee pursuant to a qualified domestic relations order.
The Incentive Plan provides that, in the event of a "change of control" (as
defined below), the following may, in the sole discretion of the
Compensation/Plan Committee, occur with respect to any and all Awards
outstanding as of such change of control:
(i) automatic maximization of performance standards, lapse of all
restrictions and acceleration of any time periods relating to the exercise,
realization or vesting of such Awards so that such Awards may be immediately
exercised, realized or vested in full on or before the relevant date fixed
in the applicable Award Agreement;
(ii) performance shares or performance units shall be paid entirely in
cash;
(iii) upon the exercise of a stock option during the 60-day period from
and after the date of the change of control, the Participant exercising the
option may in lieu of the receipt of Common Stock upon exercise, elect by
written notice to the Company to receive an amount in cash equal to the
excess of the aggregate Value (as hereinafter defined) of the shares of
Common Stock covered by the option or portion thereof surrendered,
determined on the date the option is exercised, over the aggregate exercise
price of the option (the "Aggregate Spread"). However, if the end of such 60
day period is within six months of the date of grant of the option held by a
Participant subject to the reporting requirements of Section 16 of the
Exchange Act, such option shall be canceled in exchange for a cash payment
to the participant equal to the Aggregate Spread on the day which is six
months and one day after the date of grant of such option. "Value," as more
fully defined in the Incentive Plan, means the higher of (i) the highest
fair market value during the 60-day period after the date of a change of
control and (ii) if the change of control is the result of a transaction
described in paragraphs (i) or (iii) under the definition of a change of
control, the highest price per share of the Common Stock paid in such
transaction.
(iv) if a Participant's employment or engagement terminates for any
reason other than retirement or death following a change of control, any
options held by such Participant may be exercised by such Participant until
the earlier of three months after the termination of employment or
engagement or the expiration date of such options; and
(v) all Awards become non-cancellable.
For purposes of the Incentive Plan, "change of control" is defined, in
general, to mean the occurrence of any of the following events: (i) the
acquisition, other than from the Company, by an individual, entity or group
(other than Royal or B. H. Adams) of beneficial ownership of thirty percent
(30%) or more of either the then outstanding shares of Common Stock or the
combined voting power of the then outstanding voting securities of the Company
entitled to vote generally in election of directors, (ii) the ceasing, for any
reason, of individuals who, as of January 1, 1998, constitute the Board of
Directors to constitute at least a majority of the Board, provided that any
individual becoming a director subsequent to such date whose election, or
nomination for election by the Company's stockholders, was approved by a vote of
at least a majority of the directors then comprising the incumbent Board shall
be considered as though such individual were a member of the incumbent Board,
but excluding, for this purpose, any such individual whose initial assumption of
office is in connection with an actual or threatened election contest relating
to the election of the directors of the Company; (iii) approval by the
stockholders of the Company of a
38
<PAGE>
reorganization, merger or consolidation of the Company, in each case, whereby
the individuals who were the respective beneficial owners of the Common Stock
and voting securities of the Company immediately prior to such reorganization,
merger or consolidation do not, following such reorganization, merger or
consolidation, beneficially own, directly or indirectly, more than sixty percent
(60%) of the then outstanding shares of Common Stock and the combined voting
power of the then outstanding voting securities entitled to vote generally in
election of directors, as the case may be, of the corporation resulting from
such reorganization, merger or consolidation, or complete liquidation or
dissolution of the Company or the sale or other disposition of all or
substantially all of the assets of the Company. The Incentive Plan terminates on
February 25, 2008.
1996 STOCK OPTION PLAN. In April 1996, the Company adopted a stock option
plan (the "1996 Plan") providing for the issuance to certain officers,
directors, employees and advisors of the Company of incentive stock options
within the meaning of Section 422 of the Code and stock options that are
nonqualified for federal income tax purposes. A total of 800,000 shares of
Common Stock have been reserved for issuance upon the exercise of options
granted under the 1996 Plan, subject to adjustment in accordance with such plan.
At May 31, 1998, options to purchase an aggregate of 659,694 shares of Common
Stock had been granted under the 1996 Plan, of which 618,030 had been exercised.
All such stock options were granted at an exercise price that was, at the time
of grant, equal to the fair market value of a share of Common Stock, as
determined by the Board of Directors. The Company currently does not anticipate
making additional grants under the 1996 Plan.
401(K) PLAN. In February 1998, the Company adopted its 401(k) Retirement
Plan (the "Retirement Plan"). Generally, all employees who are 18 years of age
and who have completed a three-month consecutive period of service are eligible
for participation in the Retirement Plan.
The Retirement Plan is a defined contribution plan intended to qualify under
Section 401 of the Code, such that participants generally may elect to
contribute to the Retirement Plan, on a pretax basis, up to 15% of their
compensation per pay period in the form of voluntary payroll deductions (for
which the statutorily prescribed annual limit in 1998 is $10,000 per
participant) ("Voluntary Contributions"). The Company makes matching
contributions equal to 50% of the first 6% of a participant's compensation
contributed to the Retirement Plan during such pay period ("Mandatory Matching
Contributions"). From time to time, the Company may make additional
discretionary contributions to the Retirement Plan ("Discretionary
Contributions," and together with Mandatory Matching Contributions, "Company
Contributions").
Participants who were employed by the Company at May 1, 1998 are immediately
vested in all Company Contributions. Participants who were not employed by the
Company on May 1, 1998 are gradually vested in all Company Contributions over a
period of three years of credited service, vesting 33 1/3% a year for each full
year of service beginning with the participant's first anniversary, and becoming
fully vested after three years of service or upon death, total and permanent
disability, retirement under the Retirement Plan or Retirement Plan termination.
Participants are always fully vested in their Voluntary Contributions.
COMPANY BONUS PLAN. In February 1998, the Company adopted the Bonus Plan to
become effective for the fiscal quarter commencing January 1, 1998. The Bonus
Plan is administered by the Compensation/ Plan Committee. Participation is based
upon individual selection by the Compensation/Plan Committee from among key
employees who, in the judgment of the Compensation/Plan Committee, make
significant contributions to the performance of the Company and whose decisions
and actions most significantly affect the growth, profitability and efficient
operations of the Company. It is anticipated that approximately 22 individuals
will initially participate in the Bonus Plan. The aggregate amount of any awards
paid with respect to calendar year 1998 to any participant under the Bonus Plan
shall not exceed 8% of the Company's net pre-tax operating profits.
39
<PAGE>
Awards are based upon the extent to which the Company's financial
performance (measured in terms of financial goals or objectives as may be
determined by the Compensation/Plan Committee) during the appropriate
measurement period for each award (e.g., the calendar year, calendar quarter,
etc.) has met or exceeded certain performance goals specified by the
Compensation/Plan Committee. Some performance goals applicable to participants
in the Bonus Plan may include elements which specify individual achievement
objectives directly related to such individual's area of responsibility. The
Compensation/Plan Committee may, in its discretion, decrease, but not increase,
the amount of any award granted under the Bonus Plan. Additionally, the
Compensation/Plan Committee may alternatively grant discretionary bonuses.
Because the performance goals under the Bonus Plan are determined by the
Compensation/Plan Committee in its discretion, it is not possible to determine
the benefits and amounts that will be received by any individual participant or
group of participants in the future. The Board of Directors may terminate,
modify or suspend the Bonus Plan, in whole or in part, at any time; provided
that no such termination or modification may impair any rights which may have
accrued under such Bonus Plan.
COMPENSATION OF DIRECTORS
Prior to the Offering, directors did not receive compensation to serve as
directors of the Company but did receive reimbursement for expenses traveling to
and from meetings of the Board of Directors. The Company intends to continue to
reimburse directors for their reasonable expenses associated with attending
meetings. The Company is also considering the adoption of a Director Plan to
further incentivize the directors and align their interests with those of the
stockholders.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. Delaware provides that a
corporation's certificate of incorporation may contain a provision eliminating
or limiting the personal liability of directors for monetary damages for breach
of their fiduciary duties as directors, except for liability (i) for any breach
of their duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for unlawful payments of dividends or unlawful
stock repurchases or redemptions as provided in Section 174 of the DGCL or (iv)
for any transaction from which a director derives an improper personal benefit.
The Company's Certificate of Incorporation and Bylaws provide that the
Company will indemnify, to the fullest extent permitted by applicable law as
from time to time may be in effect, any person against all liability and expense
(including attorneys' fees and settlement costs) incurred by reason of the fact
that he is or was a director or officer of the Company. Expenses (including
reasonable attorneys' fees) incurred in defending any proceeding or prosecution
will be paid by the Company in advance of the final disposition of such
proceeding or suit upon receipt of a written affirmation by the director or
officer of his or her good faith belief that he or she has met the standard of
conduct necessary for indemnification and a written undertaking by such person
to repay such amount if it is ultimately determined that he or she is not
entitled to indemnification. The Company may purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee, or agent of
the Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against any liability asserted against and incurred
by such person in any such capacity or arising out of such person's position,
whether or not the Company would have the power to indemnify against such
liability under the provisions of the Certificate of Incorporation or Bylaws of
the Company.
40
<PAGE>
The indemnification provided by the Certificate of Incorporation is not
deemed to be exclusive of any other rights to which those indemnified may be
entitled under any Bylaw, agreement or vote of stockholders or disinterested
directors, or otherwise, and inures to the benefit of their heirs, executors and
administrators. Further, such indemnification shall continue as to a person who
has ceased to be a director or officer. The provisions of the Bylaws
specifically permit the Company to indemnify other persons from similar or other
expenses and liabilities as the Board of Directors may determine. Insofar as
indemnification for liabilities under the Securities Act may be permitted to
directors, officers or persons controlling the Company pursuant to the foregoing
provisions, the Company has been informed that, in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
The Company is not aware of any pending litigation or proceeding involving
any director, officer, employee or agent of the Company where indemnification
will be required or permitted, nor any threatened litigation or proceeding that
might result in a claim for such indemnification.
The foregoing description of certain provisions of the Company's Certificate
of Incorporation and Bylaws is qualified in its entirety by the actual
Certificate of Incorporation and Bylaws filed as exhibits to the Registration
Statement of which this Prospectus is a part.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to April 29, 1998, the Company did not have a Compensation Committee
or other committee of the Board of Directors performing similar functions.
Decisions concerning compensation of executive officers have generally been made
by Mr. Adams in consultation with the other members of the Board of Directors.
None of the executive officers of the Company currently serves on the
Compensation Committee of another entity or on any other committee of the Board
of Directors of another entity performing similar functions.
41
<PAGE>
CERTAIN TRANSACTIONS
In September 1995, the Company effected a reorganization (the
"Reorganization") pursuant to which it (i) distributed to its stockholders the
shares of common stock of Supershafts, Inc., a Texas corporation
("Supershafts"), held by the Company and constituting a minority interest in
Supershafts, (ii) issued four shares of Common Stock in exchange for each share
of Supershafts common stock then outstanding and (iii) reclassified, on a 1 for
1 basis, all of the outstanding Series A Preferred Stock and Series B Preferred
Stock of the Company as Common Stock. As a result of the Reorganization, the
Company issued an aggregate of 5,827,406 shares of Common Stock, Supershafts
became a wholly-owned subsidiary of the Company and the Common Stock became the
only class of capital stock of the Company outstanding. Mr. Adams and Royal
Holding Company, Inc. received 820,000 and 3,706,382 shares of Common Stock,
respectively, in the Reorganization.
In 1996 and 1997, the Company borrowed an aggregate of $450,000 from Royal
of which $250,000 was advanced in 1997, to finance the production of the
Company's infomercial. Such advances bore interest at the prime rate. In
September 1997, the Company paid accrued interest of $29,233 on this debt and
issued 900,000 shares of Common Stock (at a rate of $.50 of principal
indebtedness per share) to Royal in cancellation of the principal amount.
In December 1997, the Board of Directors of the Company granted to Mr.
Adams, the Company's Chairman of the Board, Chief Executive Officer and
President, 2,000,000 shares of Common Stock. The Board of Directors also
provided Mr. Adams with a cash payment of $2,541,688, an amount equal to the
federal income tax and Medicare tax liability associated with such grant and
bonus. In the first quarter of 1998, Mr. Adams loaned $1.1 million of such funds
back to the Company pursuant to an unsecured promissory note at an interest rate
of 5.39% per annum. The Company repaid $600,142 of the note on April 14, 1998
and the remaining principal amount of the note ($534,899) is payable in
installments of $312,500 and $222,399 on December 15, 1998 and April 14, 1999,
respectively. In determining that the stock grant and bonus to Mr. Adams were
appropriate and in the best interests of the Company and its stockholders, the
Board of Directors considered, among other factors, the Company's revenue and
operating income growth and improved competitive position under Mr. Adams'
leadership, Mr. Adams' historical cash compensation and the Board of Directors'
desire to increase Mr. Adams' equity interest in the Company to a level
commensurate with his contributions to and role with the Company. The Board of
Directors determined that the value of Mr. Adams' services to the Company
exceeded the fair market value of the stock ($10,000,000) and bonus. The Company
does not consider these payments to be indicative of future levels of
compensation to Mr. Adams or other executives of the Company.
The agreement between the Company and Nick Faldo (the "Faldo Agreement")
became effective May 1, 1998 and provides that Mr. Faldo will exclusively
endorse the Company's clubs and undertake certain other promotional activities
on behalf of the Company. Pursuant to the Faldo Agreement, the Company and Mr.
Faldo will design a line of clubs to be used by Mr. Faldo in tournaments and
other events, provided such clubs are suitable for Mr. Faldo's use. Under the
Faldo Agreement, the Company has licensed the worldwide rights to the Nick Faldo
trademark for use in connection with the distribution of its golf clubs, head
covers, golf bags, travel covers, golf towels and umbrellas which it designs or
manufactures.
As compensation for the licensing and endorsement arrangement set forth in
the Faldo Agreement, the Company has granted 900,000 shares of Common Stock to
Mr. Faldo. Subject to certain exceptions including transfers to Mr. Faldo's
agent, Mr. Faldo may not transfer, dispose of or otherwise assign any rights in
more than 100,000 shares of Common Stock in any calendar year prior to 2002. In
addition, Mr. Faldo is entitled to receive a royalty of 5% of the net sales
price of all Adams golf clubs (other than certain specialty items for which the
royalty equals 10% of the net sales price) sold outside the U.S. throughout the
term of the Faldo Agreement. The Faldo Agreement provides for a minimum royalty
of $1.5 million in 1999 escalating to $4.0 million for years 2004 through 2008.
From 2009 through 2014, the minimum royalty is $1.5 million, as adjusted for
changes in the consumer price index. After 2014, the Faldo
42
<PAGE>
Agreement does not provide for a minimum royalty. Commencing with 2009, however,
the Faldo Agreement provides for a maximum royalty of $4.0 million, as adjusted
for changes in the consumer price index. In the event Mr. Faldo does not compete
in a minimum number of worldwide golf events each year, such royalty payments
shall be reduced on a pro-rata basis, unless such events are missed as a result
of illness or injury. The Company has also agreed that through the year 2008, it
will support the "Faldo Junior Series" in the United Kingdom by making an annual
contribution to the sponsoring organization of not less than $45,000 for each
year the tournament is played under that name. The Faldo Agreement further
provides that, so long as royalties remain payable thereunder, the Company will
use commercially reasonable efforts to cause a designee of Mr. Faldo to be
nominated for, and elected to, the Board of Directors of the Company. As of the
date of this Prospectus, Mr. Faldo has not notified the Company of his
designation to the Board.
The Faldo Agreement extends through Mr. Faldo's lifetime; however, the
Company has the right to terminate the Faldo Agreement earlier if Mr. Faldo (a)
is unable to perform the duties required by the Faldo Agreement for a period of
12 consecutive months, (b) retires or becomes officially ineligible to compete
on the PGA and/or Senior PGA tour, or (c) has engaged in illegal or immoral
conduct resulting in a felony conviction, or has otherwise conducted himself in
a manner not in keeping with the standards of professional conduct set forth in
the Faldo Agreement. In the event of the death of Mr. Faldo prior to May 1,
2030, the Company may, at its option, continue the terms of the Faldo Agreement
until May 1, 2030, in which case, Mr. Faldo's heirs or estate shall be entitled
to any royalties due.
KPMG, a public accounting firm in which Mr. Hatfield was a partner until
April 30, 1998, has provided accounting and auditing services to the Company
during 1997 and 1998. The amounts paid to KPMG for services rendered during 1997
and 1998 were $112,887 and $403,520, respectively. Mr. Hatfield is currently
Senior Vice President--Finance and Administration and Chief Financial Officer of
the Company. The Company has an agreement with Mr. Hatfield providing that, upon
Mr. Hatfield's termination without cause following certain change of control
events, Mr. Hatfield's stock options will become fully vested and Mr. Hatfield
will be paid an amount equal to one year of his base salary.
From January 1, 1998 through May 31, 1998, the Company paid Virtual Visits,
Inc. ("Virtual Visits"), a company engaged in the design of Internet Web sites
for the promotion of golf products, approximately $56,000. The Company expects
to pay at least an additional $10,000 to Virtual Visits during 1998. Mr. Conner
and Mr. Casati, directors of the Company, are also directors and significant
stockholders of Virtual Visits.
In January 1998, the Company made loans of $83,330 and $125,000 to Mr.
Murtland and Mr. Gonsalves, respectively, to finance the aggregate exercise
price of stock options then exercised by such individuals. The loans bore
interest at the rate of 5% per annum and were due January 14, 2001. The loan to
Mr. Murtland was repaid in April 1998. Messrs. Murtland and Gonsalves are each
executive officers of the Company.
The Company has granted options to purchase the Company's Common Stock to
certain of its officers and directors. See "Management--Benefit Plans" and
"Principal and Selling Stockholders."
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions between the Company and its
officers, directors, principal stockholders and their affiliates will be
approved by a majority of the Board of Directors, including a majority of the
independent and disinterested outside directors.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table and the notes thereto set forth certain information
regarding the beneficial ownership of the Common Stock as of May 31, 1998, by
(i) each person known by the Company to own beneficially more than 5% of the
outstanding shares of the Common Stock, (ii) each director of the Company, (iii)
each Named Executive Officer, (iv) all directors and executive officers of the
Company as a group, and (v) each Selling Stockholder. Unless otherwise noted in
the notes to the table, the Company believes the executive officers and
directors can be contacted at the principal offices of the Company.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
OF COMMON STOCK NUMBER OF SHARES OF COMMON STOCK
PRIOR TO THE OF COMMON STOCK AFTER THE
OFFERING(1) TO BE SOLD(2) OFFERING(1)(2)
------------------------ ----------------- ------------------------
NAME OF BENEFICIAL OWNERS NUMBER PERCENT NUMBER NUMBER PERCENT
- -------------------------------------------------- ----------- ----------- ----------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
DIRECTORS AND NAMED EXECUTIVE OFFICERS
B. H. Adams..................................... 4,482,321 23.5% 928,000 3,554,321 15.6%
Richard H. Murtland............................. 333,952 1.7 66,750 267,202 1.2
Mark D. Gonsalves............................... 333,320 1.7 0 333,320 1.5
Paul F. Brown, Jr.(3)(4)........................ 7,405,438 38.8 454,745(5) 6,950,693 30.4
Roland E. Casati................................ 1,838,600 9.6 0 1,838,600 8.0
Finis F. Conner................................. 1,942,776 10.2 388,555 1,554,221 6.8
Mark R. Mulvoy.................................. 0 0.0 0 0 0.0
Stephen R. Patchin(3)(4)........................ 7,405,438 38.8 454,745(5) 6,950,963 30.4
ALL EXECUTIVE OFFICERS AND DIRECTORS AS A GROUP
(11 PERSONS)(4)(6).............................. 16,381,407 85.6 1,838,050 14,543,537 63.5
BENEFICIAL OWNERS OF 5% OR MORE OF THE COMPANY'S
COMMON STOCK
Royal Holding Company, Inc.(3)(4)............... 7,405,438 38.8 454,745 6,950,693 30.4
OTHER SELLING STOCKHOLDERS
Lincoln Trust Company
Custodian f/b/o Richard Urdahl................ 116,592 * 77,000 39,592 *
Richard Urdahl(7)............................... 119,392 * 79,800(8) 39,592 *
Faris McMullin.................................. 111,738 * 73,750 37,988 *
Peter Cassady................................... 8,400 * 8,400 0 0.0
</TABLE>
- --------------------------
* Less than one percent.
(1) Applicable percentage of ownership is based on 19,099,282 shares of Common
Stock outstanding on May 31, 1998, and 22,849,282 shares of Common Stock to
be outstanding upon completion of the Offering. Common Stock is the only
class of equity securities outstanding. Beneficial ownership is determined
in accordance with the rules of the Commission and generally includes voting
or investment power with respect to securities. Shares of Common Stock
subject to options that are presently exercisable or exercisable within 60
days of May 31, 1998 are deemed to be beneficially owned by the person
holding such options for the purpose of computing the beneficial ownership
of such person, but are not treated as outstanding for the purpose of
computing the beneficial ownership of any other person.
(2) Does not give effect to the exercise of the Underwriters' over-allotment
option or to purchases in the Offering, if any. If the Underwriters
over-allotment option is exercised in full, Messrs. Adams, Murtland,
Gonsalves, Conner, Urdahl, McMullin and Cassady would beneficially own
3,362,321 (14.7%), 250,464 (1.1%), 303,320 (1.3%), 1,554,221 (6.8%), 30,000
(less than 1%) (representing 30,000 shares held of record by Lincoln Trust
Company as custodian for Mr. Urdahl), -0- and -0- shares of Common Stock,
respectively, and Royal Holding Company, Inc. and Lincoln Trust Company
would own 6,374,511 (27.9%) and 30,000 (less than 1%) shares, respectively,
after the Offering. See "Underwriting."
(3) The address for Messrs. Patchin and Brown and for Royal is c/o Royal Holding
Company, Inc., 300 Delaware Avenue, Suite 306, Wilmington, Delaware 19801.
(4) Includes 7,405,438 shares of Common Stock owned directly by Royal. Messrs.
Patchin and Brown, directors of the Company, are the (i) Chief Executive
Officer and President and (ii) Chief Financial Officer and Vice President--
Finance, respectively, of Royal and, by virtue of their positions with
Royal, may be deemed to share the power to vote or direct the vote of, and
to share the power to dispose or direct the disposition of, these shares of
Common Stock. Each of Messrs. Patchin and Brown disclaim beneficial
ownership of the shares of Common Stock held by Royal.
(5) Represents shares sold for the account of Royal Holding Company, Inc.
(6) Includes 45,000 shares of Common Stock subject to options exercisable by
Darl P. Hatfield, an executive officer of the Company, within 60 days of May
31, 1998.
(7) Includes 116,592 shares of Common Stock held of record by Lincoln Trust
Company as custodian for Mr. Urdahl and 2,800 shares of Common Stock held of
record by Mr. Urdahl.
(8) Represents 77,000 shares sold for the account of Lincoln Trust Company as
custodian for Mr. Urdahl and 2,800 shares sold for the account of Mr.
Urdahl.
44
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, $.001 par value per share, and 5,000,000 shares of Preferred
Stock, $.01 par value per share (the "Preferred Stock"). The following
description of certain characteristics of the capital stock of the Company does
not purport to be complete and is subject to, and qualified in its entirety by,
the provisions of the Certificate of Incorporation, Bylaws and the Registration
Rights Agreement, as defined below, each of which is included as an exhibit to
the Registration Statement of which this Prospectus is a part, and by the
provisions of applicable law.
COMMON STOCK
As of May 31, 1998, there were 19,099,282 shares of Common Stock outstanding
held of record by 101 stockholders. The holders of Common Stock are entitled to
share pro rata in dividends and distributions, if any, with respect to the
Common Stock when, as and if declared by the Board of Directors, from funds
legally available therefor. See "Dividend Policy". Holders of Common Stock are
entitled to one vote per share, are not entitled to cumulative voting in the
election of directors and have no preemptive, subscription, redemption or
conversion rights. Upon the liquidation, dissolution or winding up of the
Company, the assets of the Company remaining after payment of or provision for
liabilities and payment to the holders of Preferred Stock of such preferential
amounts that they are entitled to receive will be distributed pro rata on a
share-for-share basis among the holders of Common Stock. All outstanding shares
of Common Stock are, and the shares to be issued and sold in the Offering will
be, duly authorized, validly issued, fully paid and non-assessable. The rights,
preferences and privileges of holders of Common Stock are subject to any series
of Preferred Stock that the Company may issue in the future.
The Company effected a two-for-one stock split on May 1, 1998 in
contemplation of this Offering. The Company had 9,549,641 shares of Common Stock
issued and outstanding immediately prior to the stock split.
PREFERRED STOCK
The Company's Board of Directors is authorized, without further action by
the stockholders, to divide the Preferred Stock into series and, with respect to
each series, to determine the preferences and rights, and the qualifications,
limitations or restrictions thereof, including the dividend rights, conversion
rights, voting rights, redemption rights and terms, liquidation preferences,
sinking fund provisions, the number of shares constituting the series and the
designation of such series. The Board of Directors could, without stockholder
approval, issue Preferred Stock with voting and other rights that could
adversely affect the voting power of the holders of Common Stock and could have
certain anti-takeover effects. The Company has no present plans to issue any
shares of Preferred Stock.
The authority possessed by the Board of Directors to issue Preferred Stock
could potentially be used to discourage attempts by others to obtain control of
the Company through merger, tender offer, proxy contest or otherwise by making
such attempts more costly or difficult to achieve.
REGISTRATION RIGHTS
Pursuant to the terms of that Registration Rights Agreement dated April 30,
1998 (the "Registration Rights Agreement") by and among the Company and certain
stockholders of the Company holding an aggregate of 17,797,087 shares of Common
Stock as of May 31, 1998, the Company has granted certain registration rights to
such stockholders. Specifically, under the terms of the Registration Rights
Agreement, the stockholders holding in excess of 40% of the Common Stock covered
by such agreement have a right commencing at any time not earlier than the
latter of (i) the expiration of any of the "lock-up" period prescribed by the
Lock-up Agreement and (ii) the date on which the Company shall become eligible
to use the Form S-3 Registration Statement (or any successor to such form) for
the purpose of registering outstanding securities for the account of any person
other than the Company, to demand that the shares of
45
<PAGE>
the Common Stock held by them be registered under the Securities Act. However,
if the Board of Directors determines, in its good faith, that such registration
would be detrimental to the Company and, as a result, that it is necessary to
defer the filing of such registration statement at such time, the Company may
defer such registration for a period not to exceed 180 days. The Company has
agreed to pay all costs and expenses necessary to effect the registration of the
shares of Common Stock to be sold by the stockholders in this first registration
statement (other than underwriting and brokerage commissions, if any, and legal
fees incurred by the selling holders). If, after the Company has effected the
first such registration statement, it shall receive a request for registration
from the stockholders holding a majority of the shares of Common Stock subject
to the Registration Rights Agreement not previously registered, the Company
shall file a second or third registration statement for the purpose of
registering such shares under the Securities Act; however, the Company and such
stockholders have agreed to defer the filing of such registration statements in
the same manner and on the same basis as the first registration. The
stockholders having shares registered in such subsequent registration statements
have agreed to pay all costs and expenses related thereto including the
Company's fees and expenses relating to counsel, accountants and filing under
the Securities Act.
The Registration Rights Agreement also grants certain piggy-back
registration rights to the stockholders. Accordingly, whenever the Company
proposes to register any shares of Common Stock under the Securities Act (other
than registrations on Form S-4 or S-8), certain of the stockholders have the
right to include the shares of Common Stock held by them in any such
registration. However, if the managing underwriter of such registration advises
the Company in writing that, in its opinion, the total number or dollar amounts
of securities requested to be included in such registration exceeds the number
or dollar amount of shares of Common Stock that can be sold in such offering,
the Company may exclude certain shares from the offering. In such a case, the
order of priority in which shares are to be included in the proposed offering
will be as follows: first, all shares of Common Stock that the Company proposes
to sell; and second, up to the full number or dollar amount of shares of Common
Stock requested by the stockholders to be included in such registration in
excess of the number or dollar amount of shares of the Common Stock the Company
proposes to sell which, in the opinion of such underwriter, can be sold,
allocated pro rata among the participating stockholders on the basis of the
number of shares of Common Stock requested to be included therein by each. The
Company generally is obligated to bear the expenses, other than underwriting
discounts and sales commissions, of the registration of such shares. Any
exercise by the holders of such incidental registration rights may hinder
efforts by the Company to arrange future financings and may have an adverse
impact on the market price of the Common Stock.
DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
Following the consummation of the Offering, the Company will be subject to
Section 203 of the DGCL, the "business combinations" statute. In general, such
statute prohibits a publicly held Delaware corporation from engaging in various
"business combinations" with any "interested stockholder" for a period of three
years after the time that such stockholder became an "interested stockholder,"
unless (i) the business combination or the transaction by which such stockholder
became an "interested stockholder" was approved by the Board of Directors prior
to such time, (ii) upon consummation of the transaction which resulted in the
stockholder becoming an "interested stockholder," the "interested stockholder"
owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced (excluding for purposes of determining the number
of shares outstanding those shares owned by (a) persons who are directors and
also officers and (b) certain employee stock ownership plans) or (iii) on or
subsequent to such time the "business combination" is approved by the Board of
Directors and authorized at an annual or special meeting of stockholders by the
affirmative vote of at least 66 2/3% of the outstanding voting stock which is
not owned by the "interested stockholder." A "business combination" includes
mergers, asset sales and other transactions resulting in financial benefit to a
stockholder. In general, an "interested stockholder" is a person who, together
with affiliates and associates, owns (or within three years, did own) 15% or
more of a corporation's outstanding voting stock. The
46
<PAGE>
statute could prohibit or delay mergers or other takeover or change in control
attempts with respect to the Company and, accordingly, may discourage attempts
to acquire the Company.
In addition, certain provisions of the Company's Certificate of
Incorporation and Bylaws summarized in the following paragraphs may be deemed to
have an anti-takeover effect and may delay, defer or prevent an attempt to
obtain control of the Company by means of a proxy contest, tender offer, merger
or other transaction that a stockholder might consider in its best interest,
including those attempts that might result in a premium over the market price
for the shares held by stockholders.
CLASSIFIED BOARD OF DIRECTORS. The Company's Certificate of Incorporation
provides for the Board of Directors to be divided into three classes of
directors serving staggered three-year terms. As a result, approximately
one-third of the Board of Directors will be elected each year. Moreover, under
the DGCL, in the case of a corporation having a classified board, stockholders
may remove a director only for cause. This provision, when coupled with the
provision of the Bylaws authorizing the Board of Directors to fill vacant
directorships, may preclude a stockholder from removing incumbent directors
without cause and simultaneously gaining control of the Board of Directors by
filling the vacancies created by such removal with its own nominees.
SPECIAL MEETING OF STOCKHOLDERS. The Company's Bylaws provide that special
meetings of stockholders of the Company may be called only by the Board of
Directors, or the Executive Committee of the Board of Directors, if any, or the
President. This provision will make it more difficult for stockholders to take
actions opposed by the Board of Directors.
STOCKHOLDER ACTION BY WRITTEN CONSENT. The Company's Certificate of
Incorporation provides that no action required or permitted to be taken at any
annual or special meeting of the stockholders of the Company may be taken
without a meeting, and the power of stockholders of the Company's to consent in
writing, without a meeting, for the taking of any action is specifically denied.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. The Bylaws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for election
as directors at an annual or special meeting of stockholders, must provide
timely notice thereof in writing. In order to be timely, a stockholder's notice
must be delivered to or mailed and received at the principal executive offices
of the Company no later than 90 days prior to the meeting; provided, however,
that in the event that less than 100 days notice or prior public disclosure of
the date of the meeting is given and made to stockholders, notice by the
stockholder must be received no later than the close of business on the tenth
day following the earlier of the day on which such notice of the date of the
meeting was mailed or such public disclosure was made in order to be timely. The
Bylaws specify certain requirements for a stockholder's notice to be in proper
form. These provisions may preclude some stockholders from bringing matters
before the stockholders at an annual or special meeting or from making
nominations for directors at an annual or special meeting.
The Company believes the foregoing provisions are necessary to attract and
retain qualified persons as directors and officers.
MARKET INFORMATION
Prior to the Offering, there has been no established public trading market
for the Common Stock. The Common Stock has been approved for listing on the
Nasdaq National Market under the symbol "ADGO."
TRANSFER AGENT AND REGISTRAR
The Company has appointed The Bank of New York as the transfer agent and
registrar for the Common Stock.
47
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of the Offering, the Company will have 22,849,282 shares of
Common Stock outstanding. Of these shares, the 3,750,000 shares sold by the
Company and the 2,000,000 shares sold by the Selling Stockholders in the
Offering will be freely tradeable without restriction or further registration
under the Securities Act unless held by an "affiliate" of the Company (as that
term is defined below). Any such affiliate will be subject to the resale
limitations of Rule 144 adopted under the Securities Act. The remaining
17,099,282 shares of Common Stock currently outstanding are "restricted
securities" for purposes of Rule 144 ("Restricted Shares"). Restricted Shares
may be sold in the public market only if registered or if they qualify for an
exemption from registration under Rule 144 or Rule 701 promulgated under the
Securities Act. As a result of contractual restrictions and the provisions of
Rule 144 and Rule 701, additional shares will be available for sale in the
public market as follows: (i) 15,000 Restricted Shares will be eligible for
immediate sale on the date of this Prospectus; (ii) no additional Restricted
Shares will be eligible for sale 90 days after the date of this Prospectus; and
(iii) an additional 16,184,282 Restricted Shares will be eligible for sale upon
expiration of the Lock-up Agreements, 180 days after the date of this
Prospectus.
After the expiration of the Lock-up Agreements, the Company may file a
Registration Statement on Form S-8 under the Securities Act to register the
shares of Common Stock reserved for issuance to its employees, officers,
directors and consultants under its employee benefit plans. Upon the effective
date of such Registration Statement, shares of Common Stock issued upon exercise
of options granted under the plans generally will be available for sale in the
open market. As of the date of this Prospectus, the Company has granted
outstanding options to purchase up to 423,666 shares of Common Stock to certain
employees, officers, directors and consultants under the 1996 Plan and the
Incentive Plan, none of which were then exercisable.
In general under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated), including a person who may be deemed to be an
"affiliate" of the Company as that term is defined under the Securities Act, is
entitled to sell within any three-month period a number of shares beneficially
owned for at least one year that does not exceed the greater of (i) 1% of the
then outstanding shares of Common Stock (approximately 228,492 shares
immediately after the Offering) or (ii) the average weekly trading volume of the
outstanding shares of Common Stock during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain requirements as to the
manner of sale, notice and the availability of current public information about
the Company. A person (or persons whose shares are aggregated) who is not an
"affiliate" of the Company during the 90 days immediately preceding a proposed
sale by such person and who has beneficially owned "restricted securities" for
at least two years is entitled to sell such shares under Rule 144(k) without
regard to the volume, manner of sale, public information or notice requirements.
As defined in Rule 144, an "affiliate" of an issuer is a person that directly or
indirectly controls, or is controlled by, or is under common control with such
issuer. In general, under Rule 701 under the Securities Act as currently in
effect, any employee, consultant or advisor of the Company who purchases shares
from the Company in connection with a compensatory stock or option plan or other
written agreement related to compensation is eligible to resell such shares 90
days after the effective date of the offering in reliance on Rule 144, but
without compliance with certain restrictions contained in Rule 144.
Prior to this Offering, there has been no public market for the Common Stock
of the Company and no predictions can be made of the effect, if any, that future
sales of shares of Common Stock, and options to acquire shares of Common Stock,
or the availability of shares for future sale, will have on the market price
prevailing from time to time. Sales of substantial amounts of Common Stock in
the public market, or the perception that such sales could occur, could
adversely affect prevailing market prices of the Common Stock.
48
<PAGE>
UNDERWRITING
Subject to certain terms and conditions contained in the Underwriting
Agreement, Lehman Brothers Inc., NationsBanc Montgomery Securities LLC and
Ferris, Baker Watts, Incorporated (the "Underwriters") have severally agreed to
purchase from the Company and the Selling Stockholders, and the Company and the
Selling Stockholders have agreed to sell to each of the Underwriters, the number
of shares of Common Stock set forth opposite their respective names below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- -------------------------------------------------------------------------------- ------------
<S> <C>
Lehman Brothers Inc. ...........................................................
NationsBanc Montgomery Securities LLC...........................................
Ferris, Baker Watts, Incorporated...............................................
------------
Total....................................................................... 5,750,000
------------
------------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
thereunder are subject to various conditions. The nature of the Underwriters'
obligations are such that they are committed to take and pay for all of the
shares offered hereby if any are purchased.
The Company and the Selling Stockholders have been advised by the
Underwriters that they propose to offer the shares of Common Stock to the public
at the public offering price set forth on the cover page hereof and to certain
selected dealers (who may include the Underwriters) at such price less a
concession not in excess of $ per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per share to
certain other dealers. After the initial offering, the public offering price,
the concession to selected dealers and the reallowance to other dealers may be
changed by the Underwriters.
The Selling Stockholders have granted to the Underwriters an option to
purchase up to an additional 862,500 shares of Common Stock, at the public
offering price less the underwriting discounts and commissions shown on the
cover page of this Prospectus, solely to cover over-allotments, if any. Such
option may be exercised at any time up to 30 days after the date of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will be committed, subject to certain conditions, to purchase a
number of additional shares that is proportional to such Underwriter's initial
commitment.
The Company's directors, officers and certain stockholders of the Company
including the Selling Stockholders have agreed that they will not, without the
prior written consent of Lehman Brothers, Inc., during the 180 days following
the date of this Prospectus, directly or indirectly, (1) offer for sale, sell,
pledge or otherwise dispose of (or enter into any transaction or device which is
designed to, or could be expected to, result in the disposition by any person at
any time in the future of) any shares of Common Stock (including, without
limitation, in the case of Selling Stockholders, shares of Common Stock that may
be deemed to be beneficially owned in accordance with the rules and regulations
of the Securities and Exchange Commission and shares of Common Stock that may be
issued upon exercise of any option or warrant) or securities convertible into or
exchangeable for Common Stock (other than the shares of Common Stock to be sold
in the Offering), or (2) enter into any swap or other derivatives transaction
that transfers to another, in whole or in part, any of the economic benefits or
risks of ownership of such shares
49
<PAGE>
of Common Stock, whether any such transaction described in clause (1) or (2)
above is to be settled by delivery of Common Stock or other securities, in cash
or otherwise (other than, in the case of the Company, the grant of options
pursuant to option plans existing on the date hereof).
Until the distribution of the shares of Common Stock is completed, rules of
the Commission may limit the ability of the Underwriters and certain selling
group members to bid for and purchase shares of Common Stock. As an exception to
these rules, the Underwriters are permitted to engage in certain transactions
that stabilize the price of the Common Stock. Such transactions may consist of
bids or purchases for the purpose of pegging, fixing or maintaining the price of
the Common Stock.
In addition, if the Underwriters over-allot (I.E., if they sell more shares
of Common Stock than are set forth on the cover page of this Prospectus), and
thereby create a short position in the Common Stock in connection with the
Offering, the Underwriters may reduce that short position by purchasing Common
Stock in the open market. The Underwriters also may elect to reduce any short
position by exercising all or part of the over-allotment option described
herein.
The Underwriters also may impose a penalty bid on certain dealers and
certain selling group members. This means that if the Underwriters purchase
shares of Common Stock in the open market to reduce the Underwriter short
position to stabilize the price of the Common Stock, they may reclaim the amount
of selling concession from such dealers and the selling group who sold shares as
part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security, to
the extent that it were to discourage resales of the security by purchasers in
the Offering.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
The Company and each of the Selling Stockholders have agreed to indemnify
the Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof.
Prior to the sale of shares in the Offering, there has been no active public
market for the Common Stock of the Company. The initial public offering price of
the shares of Common Stock will be determined by negotiation among the Company,
the Selling Stockholders and the Underwriters. Among the factors that will be
considered in determining the initial public offering price will be the
prospects of the Company and its industry in general, the Company's past and
present operations, the Company's position in the industry, an assessment of the
Company's management, the general condition of securities markets at the time of
the Offering and the demand for similar securities.
At the request of the Company, the Underwriters have reserved up to 575,000
shares of Common Stock offered hereby for sale to certain officers, directors,
employees, business associates and related parties of the Company at the initial
public offering price set forth on the cover page of this Prospectus. Such
persons must commit to purchase no later than the close of business on the day
following the date hereof. The number of shares available for sale to the
general public will be reduced to the extent such persons purchase such reserved
shares.
50
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Arter & Hadden LLP, Dallas, Texas. Certain legal matters
in connection with the Offering will be passed upon for the Underwriters by
Cooley Godward LLP, San Francisco, California.
EXPERTS
The consolidated financial statements and financial statement schedule of
the Company as of December 31, 1996 and 1997, and for each of the years in the
three-year period ended December 31, 1997, have been included herein and
elsewhere in the Registration Statement in reliance upon the report of KPMG Peat
Marwick LLP, independent certified public accountants, appearing elsewhere
herein and in the Registration Statement, and upon the authority of such firm as
experts in accounting and auditing.
The statements in this Prospectus set forth under "Risk Factors--Patents and
Protection of Proprietary Technology," "Business--Design and Development--Patent
Review" and "Business--Patents," together with the last paragraph of the inside
front cover of this Prospectus, have been reviewed and approved by Aquilino &
Welsh, Arlington, Virginia, as experts in patent and trademark law, and are
included herein in reliance upon that review and approval. A partner in Aquilino
& Welsh owns 59,106 shares of Common Stock of the Company. Purchasers of the
securities offered hereby should not rely on Aquilino & Welsh with respect to
any matters other than as set forth above.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus constitutes a part of the Registration Statement and does not
contain all of the information set forth therein and in the exhibits thereto,
certain portions of which have been omitted as permitted by the rules and
regulations of the Commission. For further information with respect to the
Company and the Common Stock offered hereby, reference is hereby made to such
Registration Statement and exhibits. Statements contained in this Prospectus as
to the contents of any document are not necessarily complete and in each
instance are qualified in their entirety by reference to the copy of the
appropriate document filed with the Commission. The Registration Statement,
including the exhibits thereto, may be examined without charge at the
Commission's public reference facility at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following regional offices of
the Commission: 7 World Trade Center, New York, NY 10048, and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, IL 60601. Copies of
such material may be obtained from the Public Reference Section of the
Commission at its principal office at 450 Fifth Street, N.W., Washington, D.C.
20549, upon payment of the fees prescribed by the Commission. Copies of such
material are also available through the Commission's website located at http://
www.sec.gov.
51
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report......................................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 and March 31, 1998
(unaudited)........................................................................ F-3
Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and
1997 and the three months ended March 31, 1997 and 1998 (unaudited)................ F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1995, 1996 and 1997 and the three months ended March 31, 1998 (unaudited).......... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and
1997 and the three months ended March 31, 1997 and 1998 (unaudited)................ F-6
Notes to Consolidated Financial Statements........................................... F-7
Financial Statement Schedule:
II--Valuation and Qualifying Accounts for the years ended December 31, 1995, 1996
and 1997 and the three months ended March 31, 1998 (unaudited)................... F-16
</TABLE>
All other schedules are omitted since the required information is not present or
is not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the consolidated financial
statements and notes thereto.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Adams Golf, Inc. and subsidiaries:
We have audited the consolidated financial statements of Adams Golf, Inc.
and subsidiaries as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we have also audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule 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 referred to above
present fairly, in all material respects, the financial position of Adams Golf,
Inc. and subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG PEAT MARWICK LLP
Dallas, Texas
January 16, 1998, except for note 9(f)
which is as of April 29, 1998
F-2
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- MARCH 31,
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Current assets:
Cash and cash equivalents......................................... $ 854,543 $ 1,955,563 $ 602,290
Trade receivables net of allowance for doubtful accounts of
$26,199, $698,341 and $1,126,831 (unaudited) in 1996, 1997 and
1998, respectively (note 7)..................................... 497,787 7,670,960 14,708,636
State income taxes refundable..................................... -- 221,637 221,637
Inventories (notes 2 and 7)....................................... 674,737 4,486,563 5,559,699
Prepaid expenses.................................................. 28,007 509,350 1,106,635
Deferred income tax assets (note 8)............................... -- 390,164 650,626
Other current assets.............................................. -- 715,670 352,795
------------- ------------- -------------
Total current assets............................................ 2,055,074 15,949,907 23,202,318
Property and equipment, net (note 3)................................ 123,950 603,823 2,094,794
Deferred income tax assets (note 8)................................. -- 182,621 209,942
Other assets, net (note 4).......................................... 379,697 623,728 285,705
------------- ------------- -------------
Total assets.................................................... $ 2,558,721 $ 17,360,079 $ 25,792,759
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable..................................................... $ 230,406 $ -- $ --
Note payable to shareholder (note 7).............................. -- -- 912,642
Accounts payable.................................................. 17,526 377,622 2,732,215
Federal income taxes payable...................................... -- 1,020,980 2,940,390
Accrued expenses (note 5)......................................... 332,423 7,636,157 4,317,926
------------- ------------- -------------
Total current liabilities....................................... 580,355 9,034,759 10,903,173
------------- ------------- -------------
Notes payable to shareholder, less current portion (note 7)......... -- -- 222,399
------------- ------------- -------------
Total liabilities............................................... 580,355 9,034,759 11,125,572
------------- ------------- -------------
Stockholders' equity (note 9):
Common stock, $.001 par value. Authorized 50,000,000 shares;
11,873,234, 15,719,338 and 18,199,282 (unaudited) shares issued
and outstanding at December 31, 1996 and 1997 and March 31,
1998, respectively.............................................. 11,873 15,719 18,199
Additional paid-in capital........................................ 3,126,073 14,123,398 16,031,896
Common stock subscription......................................... -- -- (230,459)
Deferred compensation............................................. -- -- (981,000)
Accumulated deficit............................................... (1,159,580) (5,813,797) (171,449)
------------- ------------- -------------
Total stockholders' equity...................................... 1,978,366 8,325,320 14,667,187
Commitments (note 6)................................................
------------- ------------- -------------
$ 2,558,721 $ 17,360,079 $ 25,792,759
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEARS ENDED DECEMBER 31, 31,
-------------------------------------- -------------------------
1995 1996 1997 1997 1998
----------- ----------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales................................... $ 1,125,115 $ 3,521,788 $ 36,690,090 $ 1,474,940 $ 24,510,808
Cost of goods sold.......................... 756,400 1,589,696 9,991,132 586,538 5,862,255
----------- ----------- ------------ ----------- ------------
Gross profit.......................... 368,715 1,932,092 26,698,958 888,402 18,648,553
----------- ----------- ------------ ----------- ------------
Operating expenses:
Research and development expenses......... 18,516 51,101 557,513 -- 196,997
Selling and royalty expenses.............. 312,785 625,897 13,093,174 418,737 6,248,196
General and administrative expenses:
Stock compensation and bonus award (note
9).................................... -- 213,760 14,841,711 -- --
Provision for bad debts................. 12,791 51,306 738,805 75,768 466,213
Other................................... 268,518 981,219 1,436,995 328,727 2,865,198
----------- ----------- ------------ ----------- ------------
Total operating expenses.............. 612,610 1,923,283 30,668,198 823,232 9,776,604
----------- ----------- ------------ ----------- ------------
Operating income (loss)............... (243,895) 8,809 (3,969,240) 65,170 8,871,949
Other income (expense):
Interest income........................... 1,226 3,938 15,325 4,451 10,550
Interest expense.......................... -- -- (69,731) (13,090) (9,362)
Other..................................... -- -- (47,808) 4,350 (100,621)
----------- ----------- ------------ ----------- ------------
Income (loss) before income taxes..... (242,669) 12,747 (4,071,454) 60,881 8,772,516
Income tax expense (note 8)................. -- -- 582,763 15,586 3,130,168
----------- ----------- ------------ ----------- ------------
Net income (loss)..................... $ (242,669) $ 12,747 $ (4,654,217) $ 45,295 $ 5,642,348
----------- ----------- ------------ ----------- ------------
----------- ----------- ------------ ----------- ------------
Income (loss) per common share:
Basic..................................... $ (.05) $ .00 $ (.37) $ .00 $ .32
----------- ----------- ------------ ----------- ------------
----------- ----------- ------------ ----------- ------------
Diluted................................... $ (.05) $ .00 $ (.37) $ .00 $ .31
----------- ----------- ------------ ----------- ------------
----------- ----------- ------------ ----------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES OF SHARES OF ADDITIONAL
PREFERRED PREFERRED COMMON COMMON PAID-IN COMMON STOCK DEFERRED
STOCK STOCK STOCK STOCK CAPITAL SUBSCRIPTION COMPENSATION
----------- ----------- ----------- ----------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994
(unaudited).............. 772,551 $ 773 1,066,514 $ 1,067 $ 1,327,799 $ -- $ --
Conversion of preferred
stock to
common stock (note 9).... (772,551) (773) 1,545,102 1,545 (772) -- --
Sale of stock.............. -- -- 4,168,988 4,169 453,507 -- --
Stock distribution (note
9)....................... -- -- 4,282,304 4,282 (4,282) -- --
Net loss................... -- -- -- -- -- -- --
----------- ----- ----------- ----------- ------------ ------------- --------------
Balance, December 31,
1995..................... -- $ -- 11,062,908 11,063 1,776,252 -- --
----------- -----
----------- -----
Sale of stock.............. 1,581,126 1,581 1,594,362 -- --
Common stock repurchased
and retired (note 9)..... (770,800) (771) (244,541) -- --
Net income................. -- -- -- -- --
----------- ----------- ------------ ------------- --------------
Balance, December 31,
1996..................... 11,873,234 11,873 3,126,073 -- --
Stock compensation award
(note 9)................. 2,000,000 2,000 9,998,000 -- --
Exercise of stock options.. 946,104 946 550,225 -- --
Exchange of debt for common
stock
(note 9)................. 900,000 900 449,100 -- --
Net loss................... -- -- -- -- --
----------- ----------- ------------ ------------- --------------
Balance, December 31,
1997..................... 15,719,338 15,719 14,123,398 -- --
Issuance of stock options.. -- -- 981,000 -- (981,000)
Exercise of stock options.. 2,479,944 2,480 927,498 (230,459) --
Net income................. -- -- -- -- --
----------- ----------- ------------ ------------- --------------
Balance, March 31, 1998
(unaudited).............. 18,199,282 $ 18,199 $ 16,031,896 $ (230,459) $ (981,000)
----------- ----------- ------------ ------------- --------------
----------- ----------- ------------ ------------- --------------
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------- --------------
<S> <C> <C>
Balance, December 31, 1994
(unaudited).............. $ (929,658) $ 399,981
Conversion of preferred
stock to
common stock (note 9).... -- --
Sale of stock.............. -- 457,676
Stock distribution (note
9)....................... -- --
Net loss................... (242,669) (242,669)
------------- --------------
Balance, December 31,
1995..................... (1,172,327) 614,988
Sale of stock.............. -- 1,595,943
Common stock repurchased
and retired (note 9)..... -- (245,312)
Net income................. 12,747 12,747
------------- --------------
Balance, December 31,
1996..................... (1,159,580) 1,978,366
Stock compensation award
(note 9)................. -- 10,000,000
Exercise of stock options.. -- 551,171
Exchange of debt for common
stock
(note 9)................. -- 450,000
Net loss................... (4,654,217) (4,654,217)
------------- --------------
Balance, December 31,
1997..................... (5,813,797) 8,325,320
Issuance of stock options.. -- --
Exercise of stock options.. -- 699,519
Net income................. 5,642,348 5,642,348
------------- --------------
Balance, March 31, 1998
(unaudited).............. $ (171,449) $ 14,667,187
------------- --------------
------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------- -----------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Net income (loss)............................. $ (242,669) $ 12,747 $(4,654,217) $ 45,295 $ 5,642,348
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization............... 8,291 19,278 302,589 16,374 218,959
Loss on retirement of fixed assets.......... -- -- 134,009 -- 100,617
Stock compensation and bonus award.......... -- -- 10,000,000 -- --
Deferred income taxes....................... -- -- (572,785) -- (137,657)
Allowance for doubtful accounts............. -- 26,199 672,142 71,207 1,126,831
Changes in assets and liabilities:
Trade and other receivables............... (93,649) (374,228) (8,066,952) (399,963) (8,164,507)
Inventories............................... (81,470) (476,467) (3,811,826) (103,962) (1,073,136)
Prepaid assets............................ (27,589) (418) (481,343) 406 (597,285)
Other current assets...................... 2,860 -- (715,670) (257,186) 362,875
Other assets.............................. (4,873) (361,916) (390,442) 67,478 248,822
Accounts payable.......................... 40,252 (22,726) 360,096 60,688 991,832
Accrued expenses.......................... 2,728 329,302 7,303,734 187,607 (2,105,596)
Federal income taxes payable.............. -- -- 1,020,980 15,586 1,919,410
----------- ----------- ----------- ---------- -----------
Net cash provided by (used in) operating
activities............................ (396,119) (848,229) 1,100,315 (296,470) (1,466,487)
----------- ----------- ----------- ---------- -----------
Cash flow from investing activities--purchase of
equipment..................................... (9,287) (121,444) (770,060) (46,277) (1,721,347)
----------- ----------- ----------- ---------- -----------
Cash flows from financing activities:
Proceeds from notes payable and line of
credit...................................... -- 230,406 1,050,000 250,000 4,635,041
Repayment of line of credit borrowings........ -- -- (800,000) -- (3,500,000)
Repayment of notes payable.................... -- -- (30,406) (1,494) --
Issuance of common stock...................... 457,676 1,350,631 551,171 -- 699,520
----------- ----------- ----------- ---------- -----------
Net cash provided by financing
activities............................ 457,676 1,581,037 770,765 248,506 1,834,561
----------- ----------- ----------- ---------- -----------
Net increase (decrease) in cash and cash
equivalents................................... 52,270 611,364 1,101,020 (94,241) (1,353,273)
Cash and cash equivalents at beginning of
period........................................ 190,909 243,179 854,543 854,543 1,955,563
----------- ----------- ----------- ---------- -----------
Cash and cash equivalents at end of period...... $ 243,179 $ 854,543 $ 1,955,563 $ 760,302 $ 602,290
----------- ----------- ----------- ---------- -----------
----------- ----------- ----------- ---------- -----------
Supplemental disclosure of cash flow
information:
Interest paid................................. $ -- $ -- $ 69,731 $ 13,090 $ 9,362
----------- ----------- ----------- ---------- -----------
----------- ----------- ----------- ---------- -----------
Income taxes paid............................. $ -- $ -- $ 356,204 $ -- $ 1,293,820
----------- ----------- ----------- ---------- -----------
----------- ----------- ----------- ---------- -----------
Supplemental disclosure of financing activity--
exchange of debt for common stock............. $ -- $ -- $ 450,000 $ -- $ --
----------- ----------- ----------- ---------- -----------
----------- ----------- ----------- ---------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997 AND MARCH 31, 1998 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) GENERAL
Adams Golf, Inc. (the "Company") was founded in 1987. The Company designs,
manufactures, markets and distributes golf clubs and provides custom golf club
fitting technology. The Company's primary products are fairway woods that are
marketed under the trademark "Tight Lies."
The Company has both domestic and international sales. International sales
were $647,325, $878,666, and $1,387,325 for the years ended December 31, 1996
and 1997 and the three months ended March 31, 1998, respectively. There were no
international sales in 1995.
The consolidated financial statements include the accounts of Adams Golf,
Inc. and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
The consolidated financial statements of the Company as of March 31, 1998
and for the three months ended March 31, 1997 and 1998 are unaudited, but in the
opinion of management reflect all adjustments (consisting only of normal
recurring accruals) which are necessary for a fair statement of the results of
the interim periods presented. Results for interim periods are not necessarily
indicative of the results to be expected for a full year due in part to the
Company's growth.
(b) INVENTORIES
Inventories are valued at the lower of cost or market and primarily consists
of completed golf clubs and component parts. Cost is determined using the
first-in, first-out method.
(c) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the respective
assets, which range from three to seven years.
(d) REVENUE RECOGNITION
The Company records revenue as earned, which occurs when the product is
shipped.
(e) OTHER ASSETS AND RELATED AMORTIZATION EXPENSE
Other assets consist primarily of the cost of obtaining patents, development
costs of an infomercial and various deposits. Patent amortization is computed on
the straight-line method over the estimated useful lives of the assets, which
range from 5 to 15 years.
(f) RESEARCH AND DEVELOPMENT
Research and development costs consist of all costs incurred in planning,
designing and testing of golf equipment, including salary costs related to
research and development, and are expensed as incurred.
(g) ADVERTISING COSTS
Advertising media costs, other than infomercial costs, are expensed as
incurred. Production costs are charged to expense ratably in relation to sales
over the year in which incurred. Advertising costs other than infomercials were
$35,300, $33,503 and $8,651,420 for the years ended December 31, 1995, 1996 and
1997, respectively, and $59,049 (unaudited) and $2,333,406 (unaudited) for the
three months ended March 31, 1997 and 1998, respectively.
F-7
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997 AND MARCH 31, 1998 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Infomercial costs are amortized based on revenues generated compared to
total estimated revenues expected to result from the airing of such infomercial
generally over an 18 month period. Amortization expense for the years ended
December 31, 1995, 1996 and 1997 was $3,161, $3,738 and $146,411, respectively,
and $89,200 (unaudited) for the three months ended March 31, 1998.
(h) PRODUCT WARRANTY AND SALES RETURNS
The Company's golf equipment is sold under warranty against defects in
material and workmanship for a period of two years. In addition, the Company has
a 90 day "no questions asked" return policy. An allowance for estimated future
warranty and sales return costs is recorded in the period products are sold.
Such estimates have approximated actual costs incurred.
(i) INCOME TAXES
The Company accounts for income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss carryforwards. Deferred tax assets and liabilities are
measured using enacted rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(j) INCOME (LOSS) PER SHARE
The weighted average common shares used for determining basic net income
(loss) per common share was 4,423,146, 11,237,794 and 12,519,392, for the years
ended December 31, 1995, 1996 and 1997, respectively, and 11,873,234 (unaudited)
and 17,662,189 (unaudited) for the three months ended March 31, 1997 and 1998,
respectively. The effect of dilutive stock options added 678,263 (unaudited)
shares for the three months ended March 31, 1998 for the computation of diluted
income (loss) per common share. Stock options outstanding for the years ended
December 31, 1995, 1996 and 1997 and the three months ended March 31, 1997 were
not considered in the computation of net income (loss) per common share since
their effect is immaterial or antidilutive.
(k) USE OF ESTIMATES
The preparation of consolidated 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 and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(l) FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable, and accrued expenses and note payable to stockholder
approximates fair value due to the short maturity of these instruments.
F-8
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997 AND MARCH 31, 1998 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(m) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND
FOR LONG-LIVED ASSETS TO BE DISPOSED OF, on January 1, 1996. This Statement
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. Adoption of this Statement did not
impact the Company's financial position, results of operations, or liquidity.
(n) STATEMENTS OF CASH FLOWS
The Company considers all short-term highly liquid instruments, with an
original maturity of three months or less, to be cash equivalents.
(o) NEWLY ADOPTED ACCOUNTING PRONOUNCEMENTS
The Company adopted the reporting and disclosure requirements of SFAS No.
130, REPORTING COMPREHENSIVE INCOME, on January 1, 1998. This Statement requires
the display of comprehensive income and its components in a financial statement
that is displayed in equal prominence with other financial statements. As the
Company has not had any comprehensive income components, the reporting and
disclosure requirements of this statement have not altered the consolidated
financial statements presented herein.
Effective January 1, 1998, the Company adopted Statement of Position (SOP)
98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR
INTERNAL USE, which was issued in March 1998. The SOP requires that certain
costs related to the development or purchase of internal-use software be
capitalized and amortized over the estimated useful life of the software. The
SOP also requires that costs related to the preliminary project stage and the
post-implementation/operations stage of an internal-use computer software
development project be expensed as incurred.
(2) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1996 1997
---------- ------------ MARCH 31,
1998
------------
(UNAUDITED)
<S> <C> <C> <C>
Finished goods.................................................. $ 41,323 $ 2,063,803 $ 2,526,767
Component parts................................................. 633,414 2,422,760 3,032,932
---------- ------------ ------------
$ 674,737 $ 4,486,563 $ 5,559,699
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
F-9
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997 AND MARCH 31, 1998 (UNAUDITED)
(3) PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
---------- ----------- MARCH 31,
1998
------------
(UNAUDITED)
<S> <C> <C> <C>
Manufacturing equipment.......................................... $ 70,728 $ 142,137 $ 151,979
Office and computer equipment.................................... 100,368 660,145 2,237,891
Accumulated depreciation......................................... (47,146) (198,459) (295,076)
---------- ----------- ------------
$ 123,950 $ 603,823 $ 2,094,794
---------- ----------- ------------
---------- ----------- ------------
</TABLE>
(4) OTHER ASSETS, NET
Other assets, net, consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
Deposits, including amounts for fixed assets purchased.......................... $ 97,498 $ 380,836
Infomercial costs............................................................... 267,677 233,365
Patents......................................................................... 14,522 9,527
---------- ----------
$ 379,697 $ 623,728
---------- ----------
---------- ----------
</TABLE>
(5) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
---------- ------------ MARCH 31,
1998
------------
(UNAUDITED)
<S> <C> <C> <C>
Payroll, bonuses and commissions (see note 9)................... $ 277,810 $ 5,576,134 $ 1,115,699
Sales, property and state income taxes.......................... 4,604 271,225 204,501
Royalties....................................................... -- 392,541 477,163
Advertising..................................................... -- 470,500 795,260
Product warranty and sales returns.............................. -- 449,200 732,100
Professional services........................................... 9,807 340,389 220,491
Other........................................................... 40,202 136,168 772,712
---------- ------------ ------------
$ 332,423 $ 7,636,157 $ 4,317,926
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
F-10
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997 AND MARCH 31, 1998 (UNAUDITED)
(6) COMMITMENTS
The Company is obligated under certain noncancelable leases for office
space. A summary of the minimum rental commitments under noncancellable leases
is as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
- ------------------------------------------------------------------------
<S> <C>
1998.................................................................. $ 368,700
1999.................................................................. 456,000
2000.................................................................. 480,400
2001.................................................................. 488,500
2002.................................................................. 512,900
Thereafter............................................................ 651,400
</TABLE>
Rent expense was $32,540, $45,603, $104,480 $26,694 (unaudited) and $64,075
(unaudited) for the years ended December 31, 1995, 1996 and 1997, and the three
months ended March 31, 1997 and 1998, respectively.
The Company had outstanding commitments (denominated in U.S. dollars ) on
letters of credit of $459,167 at December 31, 1997, and $989,419 (unaudited) at
March 31, 1998 for the purchase of inventory from foreign vendors.
(7) DEBT
The Company entered into a $1,500,000 revolving line of credit agreement
with a bank on May 30, 1997. The line of credit is secured by trade receivables
and inventories, matures on May 15, 1998 and bears interest, payable quarterly,
at the bank's prime rate (8.5% at December 31, 1997). At December 31, 1997,
there was no balance outstanding on this line of credit. The Company pays an
annual commitment fee of 0.5% on the unused portion of the line of credit.
On February 27, 1998, the Company entered into a new $10,000,000 revolving
credit facility with a bank which replaced the existing $1,500,000 line of
credit. The facility is secured by eligible trade receivables, inventories and
equipment, matures on December 31, 1998 and bears interest, payable monthly, at
the bank's prime rate of interest minus 25 basis points (8.25% at March 31,
1998) or LIBOR rates plus 1.75% interest. At March 31, 1998, there was no
balance outstanding on this credit facility. The Company pays an annual
commitment fee of 0.25% on the unused portion of the credit facility.
During the first quarter of 1998, the Company borrowed $1,135,041 in the
form of an unsecured note payable to the Chief Executive Officer. The principal
balance is payable in three installments, matures on April 14, 1999, and bears
interest at 5.39%.
F-11
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997 AND MARCH 31, 1998 (UNAUDITED)
(8) INCOME TAXES
Income tax expense (benefit) for the year ended December 31, 1997 consists
of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------
CURRENT DEFERRED TOTAL
------------ ----------- ----------
<S> <C> <C> <C>
Federal................................................ $ 1,020,980 $ (572,785) $ 448,195
State.................................................. 134,568 -- 134,568
------------ ----------- ----------
$ 1,155,548 $ (572,785) $ 582,763
------------ ----------- ----------
------------ ----------- ----------
</TABLE>
Actual income tax expense differs from the "expected" income tax expense
(benefit) (computed by applying the U.S. federal corporate tax rate of 34% to
income (loss) before income taxes) for the years ended December 31, 1995, 1996
and 1997 as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
---------- --------- ---------------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit)...................... $ (82,507) $ 4,334 $ (1,384,294)
State income taxes, net of federal tax benefit................. -- -- 88,815
Stock compensation and bonus award............................. -- -- 2,159,000
Change in valuation allowance for deferred tax assets.......... 81,352 (4,334) (337,558)
Other.......................................................... 1,155 -- 56,800
---------- --------- ---------------
$ -- $ -- $ 582,763
---------- --------- ---------------
---------- --------- ---------------
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
----------- ---------- MARCH 31,
1998
-----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Allowance for bad debts........................................ $ 8,908 $ 237,436 $ 394,391
Research and development costs................................. 7,563 974 --
Bonus compensation............................................. 72,678 -- --
Product warranty and sales returns............................. -- 152,728 256,235
Net operating tax loss carryforwards........................... 389,528 311,100 320,250
----------- ---------- -----------
Total gross deferred tax assets.............................. 478,677 702,238 970,876
Less valuation allowance....................................... (387,667) (50,109) (59,259)
----------- ---------- -----------
Net deferred tax assets...................................... 91,010 652,129 911,617
Deferred tax liabilities--infomercial costs...................... (91,010) (79,344) (51,049)
----------- ---------- -----------
Net.......................................................... $ -- $ 572,785 $ 860,568
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
In assessing the realizability of deferred income tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred income tax assets will not be realized. The ultimate realization of
deferred income tax assets is dependent upon the generation of future taxable
income during
F-12
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997 AND MARCH 31, 1998 (UNAUDITED)
(8) INCOME TAXES (CONTINUED)
the periods in which those temporary differences become deductible. Based upon
projections for future taxable income over the periods which the deferred tax
assets are deductible, management believes it is more likely than not that the
Company will realize the benefits of these deductible differences, net of the
existing valuation allowance at December 31, 1997.
The valuation allowance for deferred tax assets at December 31, 1996 and
1997 was $387,667 and $50,109, respectively. The net change in the total
valuation allowance for the years ended December 31, 1996 and 1997 were
decreases of $4,334 and $337,558, respectively.
At December 31, 1997, the Company has net operating tax loss carryforwards
for federal income tax purposes of approximately $915,000 which are available to
offset future federal taxable income through 2010. The availability of the net
operating loss carryforwards to reduce future taxable income is subject to
certain limitations. As a result of a change in ownership, the Company believes
utilization of its net operating tax loss carryforwards is limited to
approximately $62,000 per year for the remaining life of the net operating
losses.
(9) STOCKHOLDERS' EQUITY
(a) STOCK OPTION PLANS
In April 1996, the Company adopted the 1996 Stock Option Incentive Plan
("the Stock Option Plan"), pursuant to which stock options covering an aggregate
of 800,000 shares of the Company's common stock may be granted. Options awarded
under the Stock Option Plan (i) are generally granted at prices that equate to
or are above fair market value on the date of the grant; (ii) generally become
exercisable over a period of one to four years; and (iii) generally expire five
years subsequent to award.
At December 31, 1997 and March 31, 1998, there were 140,310 shares available
for grant under the Plan. The per share weighted-average fair value of stock
options granted during 1995 and 1996 was $0.25 and $0.06, respectively, on the
date of grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: Risk-free interest rate, 6%; expected life,
two-five years and expected dividend yield, 0%.
In connection with an employment agreement entered into in September 1995
with the Company's chief executive officer and founder, the Company granted the
chief executive officer options to acquire 1,520,766 shares of common stock at
$.375 per share, the market price at date of grant. Vesting of the stock options
was conditioned upon meeting certain revenue and earnings requirements, which
were met during 1996 and 1997. Also, the agreement provided for a bonus to be
paid to the officer in an amount equal to the exercise price of the options plus
any related income tax due by the officer upon exercise of the options. The
officer notified the Company of his intent to exercise the options in December
1997 and the shares were issued in January 1998. Compensation expense of
$213,760 and $2,300,023 was charged to operations in 1996 and 1997,
respectively, to recognize the bonus due to the officer.
In conjunction with a 1996 stock purchase agreement, the Company granted
options to a shareholder to acquire an aggregate of 942,632 shares of common
stock at option exercise prices ranging from $0.375, the market price at date of
grant, to $0.625 per share. During 1997, the shareholder exercised the options
for an aggregate exercise price of $549,869.
F-13
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997 AND MARCH 31, 1998 (UNAUDITED)
(9) STOCKHOLDERS' EQUITY (CONTINUED)
In February 1998, the Company adopted the 1998 Stock Incentive Plan ("the
1998 Stock Option Plan"), pursuant to which stock options covering an aggregate
of 1,800,000 shares of the Company's common stock may be granted. The Company
granted 218,000 options to employees on February 26, 1998 at $2.50 per share.
For financial statement reporting purposes, the grant was deemed to have a fair
market value of $7.00 per share at the date of grant. Accordingly, the Company
has recorded deferred compensation of $981,000 at March 31, 1998.
The Company applies Accounting Principles Board Opinion 25 in accounting for
its stock plans and, accordingly, no compensation cost has been recognized for
its stock options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net income (loss) would have been
adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------
1995 1996 1997
----------- ---------- -------------
<S> <C> <C> <C>
Net income (loss):
As reported................................................... $ (242,669) $ 12,747 $ (4,654,217)
Pro forma..................................................... (242,669) (13,361) (4,743,744)
Diluted income (loss) per common share:
As reported................................................... $ (0.05) $ 0.00 $ (0.37)
Pro forma..................................................... (0.05) (0.00) (0.38)
</TABLE>
Pro forma net loss reflects only options granted in 1995, 1996 and 1997.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net loss amounts presented
above because compensation cost is reflected over the respective options vesting
periods of up to four years.
A summary of stock option activity follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
----------- -------------
<S> <C> <C>
Options outstanding at December 31, 1994......................... -- $ --
Options granted.................................................. 1,520,766 0.375
Options outstanding at December 31, 1995......................... 1,520,766 0.375
Options granted.................................................. 1,946,948 0.50
Options outstanding at December 31, 1996......................... 3,467,714 0.44
Options exercised................................................ (946,104) 0.583
Options outstanding at December 31, 1997......................... 2,521,610 0.375
Options granted.................................................. 272,000 2.50
Options exercised................................................ (2,479,944) 0.375
----------- ------
Options outstanding at March 31, 1998 (unaudited)................ 313,666 $ 2.22
----------- ------
----------- ------
</TABLE>
At December 31, 1997, the exercise price and weighted-average remaining
contractual life of outstanding options was $0.375 and 3.5 years, respectively.
At December 31, 1996 and 1997, the number of options exercisable was 467,970
and 2,114,492, respectively, and the weighted-average exercise price of those
options was $0.375.
F-14
<PAGE>
ADAMS GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997 AND MARCH 31, 1998 (UNAUDITED)
(9) STOCKHOLDERS' EQUITY (CONTINUED)
(b) STOCK DISTRIBUTION
In connection with the acquisition of a related entity, the Company
distributed 4,282,304 shares of common stock to its shareholders during the year
ended December 31, 1995. As a result of the common control existing between the
Company and the related entity, the transaction was accounted for in a manner
similar to a pooling of interests. Accordingly, the transaction resulted in no
increase to stockholders' equity since the recorded net asset value of the
related entity was not material. The resulting subsidiary has been inactive
during the three years ended December 31, 1997 and has no assets or liabilities.
(c) STOCK COMPENSATION AWARD
In December 1997, the Board of Directors of the Company approved a stock
compensation award of 2,000,000 shares of common stock to its chief executive
officer and founder of the Company. In addition, the Company agreed to pay all
income taxes payable by the officer relating to such stock award and related tax
bonus. Aggregate compensation of $12,541,688 (including $2,541,688 for estimated
taxes) was recorded by the Company during the year ended December 31, 1997 based
on the fair market value of the stock.
(d) NOTE WITH STOCKHOLDER CONVERTED TO STOCK
The Company borrowed $200,000 from a stockholder in October 1996 and an
additional $250,000 from the same stockholder in 1997. The aggregate notes
payable balance of $450,000 was converted into 900,000 shares of the Company's
stock in September 1997.
(e) STOCK CONVERSION
During 1995, the Company amended its Certificate of Incorporation to provide
the authority to issue up to 25,000,000 shares of $.001 per share par value
stock. All such shares were to be designated as common stock and, accordingly,
all stockholders of preferred stock surrendered such shares for an equivalent
number of shares of common stock.
(f) STOCK SPLIT AND AUTHORIZED CLASSES OF STOCK
Effective April 29, 1998, the stockholders of the Company authorized a
two-for-one stock split for holders of record on May 1, 1998. The stock split
has been reflected in the accompanying consolidated financial statements and,
accordingly, all applicable dollar, share and per share amounts have been
restated to reflect the stock split. In addition, the stockholders of the
Company also approved an increase in the number of authorized shares of Common
Stock to 50,000,000 and established a class of preferred stock with a par value
of $.01 per share and authorized shares of 5,000,000.
(10) SUBSEQUENT EVENTS (UNAUDITED)
Effective May 1, 1998, the Company entered into an agreement with Nicholas
A. Faldo, a professional golfer (the "Agreement"). The Agreement with Faldo,
provides the Company with Faldo's endorsement and use of Adams products, as well
as the design, development and testing of new technologies and products. As
consideration for such services, Faldo will receive 900,000 shares of the
Company's common stock which will be recorded and amortized over the estimated
period benefited. In addition, Mr. Faldo will receive royalty payments
representing 5% of net sales outside the U.S., with a minimum annual amount of
$1,500,000 beginning in 1999 and increasing ratably to $4,000,000 in 2004. Under
certain conditions, including the failure by the Company to effect an initial
public offering by December 31, 1998, Faldo has the right to require the Company
to repurchase the shares for $5,000,000 at which point the Company would have
the right to terminate the agreement.
F-15
<PAGE>
SCHEDULE II
ADAMS GOLF, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1995, 1996
AND 1997 AND THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS CHARGED TO:
BALANCE AT -------------------------- BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES OTHER DEDUCTIONS(1) PERIOD
- -------------------------------------------- ---------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1995.............. $ -- $ 12,791 $ -- $ 12,791 $ --
---------- ------------ ------------ ------------- ------------
---------- ------------ ------------ ------------- ------------
Year ended December 31, 1996.............. $ -- $ 51,306 $ -- $ 25,107 $ 26,199
---------- ------------ ------------ ------------- ------------
---------- ------------ ------------ ------------- ------------
Year ended December 31, 1997.............. $ 26,199 $ 738,805 $ -- $ 66,663 $ 698,341
---------- ------------ ------------ ------------- ------------
---------- ------------ ------------ ------------- ------------
Three months ended March 31, 1998
(unaudited)............................. $ 698,341 $ 466,213 $ -- $ 37,723 $ 1,126,831
---------- ------------ ------------ ------------- ------------
---------- ------------ ------------ ------------- ------------
Product Warranty and Sales Returns:
Year ended December 31, 1995.............. $ -- $ -- $ -- $ -- $ --
---------- ------------ ------------ ------------- ------------
---------- ------------ ------------ ------------- ------------
Year ended December 31, 1996.............. $ -- $ 1,733 $ -- $ 1,733 $ --
---------- ------------ ------------ ------------- ------------
---------- ------------ ------------ ------------- ------------
Year ended December 31, 1997.............. $ -- $ 1,808,154 $ -- $ 1,358,954 $ 449,200
---------- ------------ ------------ ------------- ------------
---------- ------------ ------------ ------------- ------------
Three months ended March 31, 1998
(unaudited)............................. $ 449,200 $ 1,078,407 $ -- $ 795,507 $ 732,100
---------- ------------ ------------ ------------- ------------
---------- ------------ ------------ ------------- ------------
</TABLE>
- ------------------------
(1) Represents uncollectible accounts charged against the allowance for doubtful
accounts and actual costs incurred for warranty repairs and sales returns.
F-16
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED ON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES IN ANY STATE
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
STATE. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
Disclosure Regarding Forward-Looking
Statements................................... 12
Use of Proceeds................................ 13
Dividend Policy................................ 13
Dilution....................................... 14
Capitalization................................. 15
Selected Consolidated Financial Information.... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 17
Business....................................... 22
Management..................................... 33
Certain Transactions........................... 42
Principal and Selling Stockholders............. 44
Description of Capital Stock................... 45
Shares Eligible for Future Sale................ 48
Underwriting................................... 49
Legal Matters.................................. 51
Experts........................................ 51
Additional Information......................... 51
Index to Financial Statements.................. F-1
</TABLE>
---------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
5,750,000 SHARES
[LOGO]
COMMON STOCK
-------------------
PROSPECTUS
July , 1998
---------------------
LEHMAN BROTHERS
NATIONSBANC MONTGOMERY SECURITIES LLC
FERRIS, BAKER WATTS
INCORPORATED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below are the expenses in connection with the issuance and
distribution of the securities being registered hereby other than the
underwriting discounts and commissions. All amounts are estimated except the
Securities and Exchange Commission, Nasdaq National Market and NASD fees.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee........................ $ 32,450
Nasdaq National Market listing and application fee......................... 95,000
NASD filing fee............................................................ 11,500
Legal fees and expenses (other than Blue Sky fees and expenses)............ *
Blue Sky fees and expenses................................................. 5,000
Printing and engraving expenses............................................ *
Accounting fees and expenses............................................... *
Transfer Agent and Registrar fees and expenses............................. 10,000
Miscellaneous.............................................................. *
---------
Total.................................................................... *
---------
---------
</TABLE>
- ------------------------
* To be filed by amendment.
The Company will bear all of the foregoing fees and expenses.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article VII of the Registrant's Certificate of Incorporation provides that
the Company shall indemnify its directors and officers to the fullest extent
permitted by the DGCL.
Section 145 of the DGCL permits a corporation, under specified
circumstances, to indemnify its directors, officers, employees or agents against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlements actually and reasonably incurred by them in connection with any
action, suit or proceeding brought by third parties by reason of the fact that
they were or are directors, officers, employees or agents of the corporation, if
such directors, officers, employees or agents acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. In a derivative action
(I.E., one by or in the right of the corporation), indemnification may be made
only for expenses actually and reasonably incurred by directors, officers,
employees or agents in connection with the defense or settlement of an action or
suit, and only with respect to a matter as to which they shall have acted in
good faith and in a manner they reasonably believed to be in or not opposed to
the best interests of the corporation, except that no indemnification shall be
made if such persons shall have been adjudged liable to the corporation, unless
and only to the extent that the court in which the action or suit was brought
shall determine upon application that the defendant directors, officers,
employees or agents are fairly and reasonably entitled to indemnity for such
expenses, despite such adjudication of liability.
Section 102(b)(7) of the DGCL permits a corporation organized under Delaware
law to eliminate or limit the personal liability of a director to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director subject to certain limitations. Article IX of the Certificate
of Incorporation includes the following provision:
A director of this corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach
II-1
<PAGE>
of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
DGCL or (iv) for any transaction from which the director derived an improper
personal benefit. If the DGCL is hereafter amended to authorize corporate
action further eliminating or limiting the personal liability of directors,
then the liability of a director of the corporation shall be eliminated or
limited to the fullest extent permitted by the DGCL, as so amended. Any
repeal or modification of the foregoing provisions of this Article IX by the
stockholders of the corporation shall not adversely affect any right or
protection of a director of the corporation existing at the time of such
repeal or modification.
The Company may purchase and maintain insurance on behalf of any person who
is or was a director, officer, employee, fiduciary, or agent of the Company
against any liability asserted against and incurred by such person in any such
capacity or arising out of such person's position, whether or not the Company
would have the power to indemnify against such liability under the provisions of
the Certificate of Incorporation or Bylaws of the Company.
The Underwriting Agreement, the proposed form of which is filed herewith,
contains provisions by which the Underwriters agree to indemnify the Registrant,
each person who controls the Registrant within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, each director of the
Registrant, and each officer of the Registrant who signs this Registration
Statement which respect to information relating to such Underwriter furnished in
writing by such Underwriter for use in the Registration Statement.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since January 1, 1995, the Registrant has sold or issued the following
securities:
1. From March 1995 through December 1995, the Registrant issued an
aggregate of 266,478 shares of Common Stock to Faris McMullin, Richard Murtland
and Hank Haney for services to the Company. The Board of Directors of the
Company concluded that the value of such services to the Company exceeded the
fair value of the shares, which was determined by the Board of Directors to be
equal to approximately $.375 per share of Common Stock.
2. In September 1995, in connection with the Reorganization the Registrant
issued an aggregate of 4,282,304 shares of Common Stock to the shareholders of
Supershafts, Inc. ("Supershafts") in exchange for all of the then issued and
outstanding shares of common stock of Supershafts. The Board of Directors of the
Company concluded that the value of the consideration to the Company exceeded
the fair value of the shares, which was determined by the Board of Directors to
be equal to approximately $.375 per share of Common Stock.
3. In September 1995, in connection with the Reorganization the Registrant
issued an aggregate of 1,545,102 shares of Common Stock to the holders of the
Company's then outstanding Series A and Series B Preferred Stock in exchange
therefor. The Board of Directors concluded that the value of the consideration
to the Company exceeded the fair value of the shares, which was determined by
the Board of Directors to be equal to approximately $.375 per share.
4. In September 1995, the Registrant sold an aggregate of 40,000 shares of
Common Stock to Steve Adams for an aggregate purchase price of $15,000.
5. In September and October 1995, the Registrant sold an aggregate of
2,000,000 shares of Common Stock to Royal for an aggregate purchase price of
$750,000.
6. In December 1995, the Registrant sold 2,000,000 shares of Common Stock
to Roland Casati for $750,000.
II-2
<PAGE>
7. In June, 1996, the Registrant sold an aggregate of 770,000 shares of
Common Stock to Royal, Roland Casati and Clyde and Peggy Smith for an aggregate
purchase price of $246,400.
8. In October, 1996, the Registrant sold 699,526 shares of Common Stock to
Finis Conner for an aggregate purchase price of $349,763.
9. In September 1997, the Registrant issued 900,000 shares of Common Stock
to Royal in cancellation of certain indebtedness of the Registrant to Royal in
the aggregate principal amount of $450,000.
10. In September, 1997, the Registrant issued 942,632 shares of Common Stock
to Finis Conner upon exercise of stock options for an aggregate exercise price
of $549,869 and subsequently, the Registrant issued an additional 344,618 shares
of Common Stock to Mr. Conner upon exercise of stock options for an aggregate
exercise price of $129,232.
11. In December 1997, the Registrant issued 2,000,000 shares to Barney Adams
for his services to the Company. The Board of Directors of the Company concluded
that the value of such services to the Company exceeded the fair value of the
shares, which was determined by the Board of Directors to be $10,000,000.
12. From April 1996 to the date of this Registration Statement, the
Registrant has issued 2,138,798 shares of Common Stock to employees who
exercised options for an aggregate exercise price of $802,049.
13. As of the date of this Registration Statement, the Company has granted
options to purchase up to 423,666 shares of Common Stock at a weighted average
exercise price of $2.70 that have not been exercised.
14. Pursuant to an agreement between the Registrant and Nick Faldo dated
April 22, 1998, the Registrant issued 900,000 shares to Nick Faldo in
consideration for, among other things, Mr. Faldo's endorsement of certain
products of the Registrant and his license of certain intellectual property
rights to the Registrant. The Board of Directors of the Company concluded that
the value of the consideration to be received by the Company under the agreement
with Mr. Faldo exceeded the fair value of the shares, which was determined by
the Board of Directors to be $10,125,000.
All transactions described above were effected in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act, as transactions by
an issuer not involving any public offering. The recipients of securities in
each such transaction represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates issued in such transactions. All recipients had adequate access,
through their relationships with the Registrant, to information about the
Registrant.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement*
3.1 Amended and Restated Certificate of Incorporation of the Registrant**
3.2 Amended and Restated Bylaws of the Registrant**
4.1 1998 Stock Incentive Plan of the Registrant dated February 26, 1998**
4.2 1996 Stock Option Plan dated April 10, 1996**
4.3 Registration Rights Agreement dated April 30, 1998, among the Registrant and certain
stockholders of the Registrant**
4.4 Adams Golf, Ltd. 401(k) Retirement Plan
5.1 Opinion of Arter & Hadden LLP as to legality of securities being offered*
10.1 Agreement between the Registrant and Nick Faldo, dated April 22, 1998
10.2 Revolving Credit Agreement dated February 27, 1998, between Adams Golf Direct
Response, Ltd., Adams Golf, Ltd. and NationsBank of Texas, N.A.**
10.3 Commercial Lease Agreement dated December 5, 1997, between Jackson-Shaw Technology
Center II, Ltd. and the Registrant
10.4 Commercial Lease Agreement dated April 6, 1998 between Jackson-Shaw Technology Center
II, Ltd. and the Registrant
10.5 Letter Agreement dated April 13, 1998, between the Registrant and Darl P. Hatfield
11.1 Computation of Income (Loss) Per Share
21.1 Subsidiaries of the Registrant**
23.1 Consent of Arter & Hadden LLP (included in their opinion filed as Exhibit 5.1)*
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of Aquilino & Welsh
24.1 Power of Attorney (previously included on Page II-6)**
27.1 Financial Data Schedule**
</TABLE>
- ------------------------
* To be filed by Amendment.
** Previously filed.
(b) Financial Statement Schedules
Set forth below is a list of the financial statements included as part of
this Registration Statement:
Schedule II--Valuation and Qualifying Accounts
All other schedules have been intentionally omitted because they are either
not required or the information has been included in the Notes to the
Consolidated Financial Statements included as part of this Registration
Statement.
ITEM 17. UNDERTAKINGS.
(F) EQUITY OFFERINGS OF NONREPORTING REGISTRANTS. The undersigned
registrant hereby undertakes to provide to the underwriters at the closing
specified in the underwriting agreement certificates in such
II-4
<PAGE>
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
(H) REQUEST FOR ACCELERATION OF EFFECTIVE DATE. Insofar as indemnification
for liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(I) RULE 430A. The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as a part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Plano, State of Texas, on June 9, 1998.
<TABLE>
<S> <C> <C>
ADAMS GOLF, INC.
By: /s/ DARL P. HATFIELD
-----------------------------------------
Darl P. Hatfield
SENIOR VICE PRESIDENT--FINANCE AND
ADMINISTRATION AND CHIEF FINANCIAL OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed on the 9th day of June, 1998, below by or
on behalf of the following persons in the capacities indicated.
SIGNATURE TITLE
- ------------------------------ --------------------------
Chairman of the Board,
/s/ B.H. (BARNEY) ADAMS* Chief Executive Officer,
- ------------------------------ and President (PRINCIPAL
B.H. (Barney) Adams EXECUTIVE OFFICER)
Senior Vice
President--Finance and
/s/ DARL P. HATFIELD Administration and Chief
- ------------------------------ Financial Officer
Darl P. Hatfield (PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
Vice President--Research
/s/ RICHARD H. MURTLAND* and Development,
- ------------------------------ Secretary, Treasurer and
Richard H. Murtland Director
/s/ PAUL F. BROWN, JR.*
- ------------------------------ Director
Paul F. Brown, Jr.
/s/ ROLAND E. CASATI*
- ------------------------------ Director
Roland E. Casati
/s/ FINIS F. CONNER*
- ------------------------------ Director
Finis F. Conner
- ------------------------------ Director
Mark R. Mulvoy
/s/ STEPHEN R. PATCHIN*
- ------------------------------ Director
Stephen R. Patchin
*By: /s/ DARL P. HATFIELD
-------------------------
Darl P. Hatfield
ATTORNEY-IN-FACT
II-6
<PAGE>
T. ROWE PRICE TRUST COMPANY
SIMPLIFIED 401(K) PROTOTYPE PLAN
BASIC DOCUMENT #07
<PAGE>
ARTICLE 1. GENERAL
1.1 PURPOSE. The Employer hereby establishes this Plan to provide
retirement, death and disability benefits for eligible Employees and
their Beneficiaries. This Plan is a prototype defined contribution
profit sharing plan. The provisions herein and the selections made by
the Employer by execution of the Adoption Agreement shall constitute the
Plan. It is intended that the Plan and Trust qualify under sections 401
and 501 of the Internal Revenue Code of 1986, as amended, and that it
comply with the provisions of the Employee Retirement Income Security
Act of 1974, as amended.
1.2 TRUST. The Employer has simultaneously adopted a Trust to receive,
invest and distribute funds in accordance with the Plan.
ARTICLE 2. DEFINITIONS
2.1 ACCOUNT. The aggregate of the individual bookkeeping subaccounts
established for each Participant, as provided in Section 6.1.
2.2 ADOPTION AGREEMENT. The written agreement of the Employer and the
Trustee by which the Employer establishes this Plan and adopts the
Trust Agreement forming a part hereof, as the same may be amended
from time to time. The Adoption Agreement contains all the options
that may be selected by the Employer. The information set forth in
the Adoption Agreement executed by the Employer shall be deemed to be
a part of this Plan as if set forth in full herein.
2.3 AFFILIATED EMPLOYERS. The Employer and any corporation which is a
member of a controlled group of corporations (as defined in section
414(b) of the Code) which includes the Employer, any trade or
business (whether or not incorporated) which is under common
control (as defined in section 414(c) of the Code) with the Employer, or
any service organization (whether or not incorporated) which is a
member of an affiliated service group (as defined in section 414(m)
or (o) of the Code) which includes the Employer or any other entity
(whether or not incorporated) which is aggregated with the Employer
under section 414(o) of the Code.
2.4 BENEFICIARY The person or persons (natural orotherwise) designated by a
Participant in accordance with Section 11.2(c) to receive any
undistributed vested amounts credited to the Participant's Account under
the Plan at the time of the Participant's death.
2.5 BREAK IN SERVICE. A Plan Year in which an Employee fails to complete more
than 500 Hours of Service.
2.6 CODE. The Internal Revenue Code of 1986, as amended from time to time, or
any successor statute.
2.7 COMPENSATION. Except for such amounts as the Employer may elect to exclude
in the Adoption Agreement, Compensation shall be defined as follows:
(a) Compensation will mean the information required to be reported under
sections 6041 and 6051 of the Code. (Wages, Tips and Other
Compensation Box on Form W-2.) Compensation is defined as wages
within the meaning of section 3401(a) of the Code and all other
payments of compensation to an Employee by the Employer (in the
course of the Employer's trade or business) for which the Employer
is required to furnish the Employee a written statement under
sections 6041(d) and 6051(a)(3) of the Code. Compensation must be
determined without regard to any rules under section 3401(a) of the
Code that limit the remuneration included in wages based on the
nature or location of the employment or the services performed (such
as the exception for agricultural labor in section 3401(a)(2) of the
Code). Compensation shall include any amount which is contributed
to a plan by the Employer pursuant to a salary reduction agreement
and which is not includible in the gross income of the Employee
under section 125, 402(a)(8), 402(h) or 403(b) of the Code.
(b) For any Self-Employed Individual covered under the Plan, Compensation
will mean Earned Income.
(c) For Plan Years beginning after December 31, 1988, the annual
compensation of each Participant taken into account for determining
all benefits provided under the Plan for any year shall not exceed
$200,000, as adjusted by the Secretary at the same time and in the
same manner as under section 415(d) of the Code. If, during the
first Plan Year or the last Plan Year, the Plan Year is less than 12
months, the $200,000 limit, as adjusted, shall be equal to such
limit for such Plan Year multiplied by a fraction the numerator of
which is the number of full months in such Plan Year and the
denominator of which is 12. In determining the Compensation of a
Participant for purposes of this limitation, the rules of section
414(q)(6) of the Code shall apply; except in applying such rules,
the term "family" shall include only the spouse of the Participant
and any lineal descendants of the Participant who have not attained
age 19 before the close of the year. If, as a result of the
application of such rules, the adjusted $200,000 limitation is
exceeded, then the limitation shall be prorated among the affected
individuals in proportion to each such individual's Compensation as
determined under this Section prior to the application of this
limitation. This subsection shall be effective in Plan Years
beginning on or after January 1, 1989.
(d) In addition to other applicable limitations set forth in the Plan,
and notwithstanding any other provision of the Plan to the contrary,
for Plan Years beginning on or after January 1, 1994, the annual
compensation of each Employee taken into account under the Plan
shall not exceed the OBRA '93 annual compensation limit. The OBRA
'93 annual compensation limit is $150,000 as adjusted by the
Commissioner for increases in the cost of living in accordance with
section 401(a)(17)(B) of the Internal Revenue Code. The
cost-of-living adjustment in effect for a calendar year applies to
any period, not exceeding 12 months, over which Compensation is
determined (determination period) beginning in such calendar year.
If a determination period consists of fewer that 12 months, the OBRA
'93 annual compensation limit will be multiplied by a fraction, the
numerator of which is the number of months in the determination
period, and the denominator of which is 12.
For Plan Years beginning on or after January 1, 1994, any reference
in this Plan to the limitation under section 401(a)(17) of the Code
shall mean the OBRA '93 annual compensation limit set forth in this
provision.
If Compensation for any prior determination period id taken into
account in determining an Employee's benefits accruing in the
current Plan Year, the Compensation for that prior determination
period is subject to the OBRA '93 annual compensation limit in
effect for that prior determination period. For this purpose, for
determination periods beginning before the first day of the first
Plan Year beginning on or after January 1, 1994, the OBRA '93 annual
compensation limit is $150,000.
<PAGE>
2.8 EARNED INCOME. The net earnings from self-employment in the trade or
business with respect to which the Plan is established, for which
personal services of the individual are a material income-producing
factor. Net earnings will be determined without regard to items not
included in gross income and the deductions allocable to such items. Net
earnings are reduced by contributions to a qualified plan to the extent
deductible under section 404 of the Code. Net earnings shall be
determined with regard to the deduction allowed to the Employer by
section 164(f) of the Code for taxable years beginning after December
31, 1989.
2.9 EFFECTIVE DATE. The day on which the Plan is effective as specified in
the Adoption Agreement. If the Employer is adopting this Plan as an
amendment and restatement of an existing plan, the provisions of the
existing plan shall apply prior to the Effective Date unless an earlier
date is specified herein.
2.10 ELECTIVE DEFERRALS. Any employer contributions made to the Plan at the
election of the Participant, in lieu of cash Compensation, pursuant to a
salary reduction agreement or other deferral mechanism. With respect to
any taxable year, a Participant's Elective Deferral is the sum of all
such employer contributions made on behalf of such Participant pursuant
to an election to defer under any qualified cash or deferred arrangement
as described in section 401(k) of the Code, any simplified employee
pension cash or deferred arrangement as described in section
402(h)(1)(B) of the Code, any eligible deferred compensation plan under
section 457 of the Code, any plan as described in section 501(c)(18) of
the Code and any employer contributions made on behalf of a Participant
pursuant to a salary reduction agreement for the purchase of an annuity
contract under section 403(b) of the Code. Elective Deferrals shall not
include any deferrals properly distributed as excess Annual Additions as
described in Section 7.1.
2.11 EMPLOYEE. Any person, including a Self-Employed Individual, who is
employed by the Employer maintaining the Plan or any other employer
required to be aggregated with such Employer under section 414(b), (c),
(m) or (o) of the Code. The term "Employee" shall also include any
Leased Employee.
2.12 EMPLOYEE AFTER-TAX CONTRIBUTIONS. Any contribution made to the Plan by
or on behalf of a Participant before the Plan Year in which the Employer
adopted this Plan that was included in the Participant's gross income in
the year in which made and that is maintained under a separate
subaccount to which earnings and losses are allocated. Employee
After-Tax Contributions shall not be allowed in or after the Plan Year
in which this Plan is adopted by the Employer.
2.13 EMPLOYER. The corporation, proprietorship, partnership or other
organization that adopts the Plan by execution of an Adoption
Agreement.
2.14 EMPLOYER DISCRETIONARY CONTRIBUTIONS. The contributions of the Employer
to the Plan and Trust as set forth in Section 5.3(b) and the Adoption
Agreement.
2.15 ENTRY DATES. The Entry Dates shall be the dates specified in the Adoption
Agreement.
2.16 ERISA. The Employee Retirement Income Security Act of 1974,
as amended.
2.17 FAMILY MEMBERS. The spouse, lineal ascendants and descendants of a Highly
Compensated Employee and the spouses of such lineal ascendants and
descendants.
2.18 FIVE PERCENT OWNER. Any person who owns (or is considered to own within
the meaning of section 318 of the Code) more than 5% of the interests in
the Employer.
2.19 HIGHLY COMPENSATED EMPLOYEE.
(a) The term "Highly Compensated Employee" shall include highly-
compensated active Employees and highly-compensated former Employees.
(b) A highly-compensated active Employee includes any Employee who
performs service for the Employer during the determination year and
who, during the look-back year:
(i) received Compensation from the Employer in excess of $75,000 (as
adjusted pursuant to section 415(d) of the Code);
(ii) received Compensation from the Employer in excess of $50,000 (as
adjusted pursuant to section 415(d) of the Code) and was a
member of the top-paid group for such year; or
(iii) was an officer of the Employer and received Compensation
during such year that is greater than 50% of the dollar
limitation in effect under section 415(b)(1)(A) of the Code.
(c) The term "Highly Compensated Employee" also includes:
(i) Employees who are both described in the preceding subsection
if the term "determination year" is substituted for the term
"look-back year" and the Employee is one of the 100 Employees
who received the most Compensation from the Employer during
the determination year; and
(ii) Employees who are Five Percent Owners at any time during the
look-back year or determination year.
(d) (i) If no officer has satisfied the Compensation requirement of
subsection (b)(iii) above during either a determination year
or look-back year, the highest paid officer for such year
shall be treated as a Highly Compensated Employee.
(ii) For this purpose, the determination year shall be the Plan
Year. The look-back year shall be the twelve month period
immediately preceding the determination year.
(e) A highly-compensated former Employee includes any Employee who
separated from service (or was deemed to have separated from
service) prior to the determination year, performs no service for
the Employer during the determination year, and was a
highly-compensated active Employee for either the separation year
or any determination year ending on or after the Employee's 55th
birthday.
(f) If an Employee is, during a determination year or look-back year,
a Family Member of either a Five Percent Owner who is an active or
former Employee or a Highly Compensated Employee who is one of the
ten most Highly Compensated Employees ranked on the basis of
Compensation paid by the Employer during such year, then the
Family Member and Five Percent Owner or top ten Highly Compensated
Employee shall be aggregated. In such case, the Family Member and
Five Percent Owner or top ten Highly Compensated Employee shall be
treated as a single Employee receiving Compensation and Plan
contributions or benefits equal to the sum of such Compensation
and contributions or benefits of the Family Member and Five
Percent Owner or top ten Highly Compensated Employee.
(g) For purposes of this Section, "compensation" shall include Section
415 Compensation plus any amount which is contributed to a plan by
the Employer pursuant to a salary reduction agreement and which is
not includible in the gross income of
<PAGE>
the Employee under section 125, 402(a)(8), 402(h) or 403(b) of the
Code.
(h) The determination of who is a Highly Compensated Employee,
including the determinations of the number and identity of
Employees in the top-paid group, the top 100 Employees, the number
of Employees treated as officers and the Compensation that is
considered, will be made in accordance with section 414(q) of the
Code and the regulations thereunder.
2.20 HOUR OF SERVICE.
(a) Each hour for which an Employee is paid, or entitled to payment,
for the performance of duties for the Employer. These hours shall
be credited to the Employee only for the computation period or
periods in which the duties are performed.
(b) Each hour for which an Employee is paid, or entitled to payment,
by the Employer on account of a period of time during which no
duties are performed (irrespective of whether the employment
relationship has terminated) due to vacation, holiday, illness,
incapacity (including disability), layoff, jury duty, military
duty or leave of absence. No more than 501 Hours of Service shall
be credited under this paragraph to an Employee on account of any
single, continuous period during which the Employee performs no
duties (whether or not such period occurs in a single computation
period). Hours under this paragraph will be calculated and
credited pursuant to section 2530.200b-2 of the Department of
Labor regulations which are incorporated herein by this reference.
(c) Each hour for which back pay, irrespective of mitigation of
damages, is either awarded or agreed to by the Employer. The same
Hours of Service shall not be credited both under paragraph (a) or
paragraph (b), as the case may be, and under this paragraph (c).
These hours shall be credited to the Employee for the computation
period or periods to which the award or agreement pertains rather
than the computation period in which the award, agreement, or
payment is made.
(d) Solely for purposes of determining whether an Employee has a Break
in Service, Hours of Service shall also include an uncompensated
authorized leave of absence not in excess of two years, or
military leave while the Employee's reemployment rights are
protected by law or such additional or other periods as granted by
the Employer as military leave (credited on the basis of 40 Hours
of Service per week or eight Hours of Service per working day),
provided the Employee returns to employment at the end of his
leave of absence or within 90 days of the end of his military
leave, whichever is applicable.
(e) Hours of Service will be credited for employment with other
members of an affiliated service group (under section 414(m) of
the Code), a controlled group of corporations (under section
414(b) of the Code), or a group of trades or businesses under
common control (under section 414(c) of the Code) of which the
adopting Employer is a member, and any other entity required to be
aggregated with the Employer pursuant to section 414(o) of the
Code and the regulations thereunder. Hours of Service will also
be credited for any individual considered an Employee for purposes
of this Plan under section 414(n) or (o) of the Code and the
regulations thereunder.
(f) Solely for purposes of determining whether an Employee has a Break
in Service, Hours of Service shall also include absence from work
for maternity or paternity reasons, if the absence begins on or
after the first day of the first Plan Year beginning after 1984.
During this absence, the Employee shall be credited with the Hours
of Service which would have been credited but for the absence, or,
if such hours cannot be determined, with eight (8) hours per day.
An absence from work for maternity or paternity reasons means an
absence:
(i) by reason of the pregnancy of an Employee;
(ii) by reason of the birth of a child of the Employee;
(iii) by reason of the placement of a child with the Employee in
connection with adoption; or
(iv) for purposes of caring for such a child for a period immediately
following such birth or placement.
These Hours of Service shall be credited in the computation period
following the computation period in which the absence begins, except
as necessary to prevent a Break in Service in the computation period
in which the absence begins. However, no more than 501 Hours of
Service will be credited for purposes of any such maternity or
paternity absence from work.
(g) Hours of Service will be determined on the actual hours for which
an Employee is paid or entitled payment.
(h) If the Employer amends the method of crediting service from the
elapsed time method described in section 1.410(a)-7 of the
Treasury Regulations to the Hours of Service computation method by
the adoption of this Plan, or an Employee transfers from a plan
under which service is determined on the basis of elapsed time,
the following rules shall apply for purposes of determining the
Employee's service under this Plan up to the time of amendment or
transfer:
(i) The Employee shall receive credit, as of the date of amendment or
transfer, for a number of Years of Eligibility Service and Years
of Vesting Service equal to the number of one year periods of
eligibility service and vesting service, respectively, credited
to the Employee as of the date of the amendment or transfer; and
(ii) The Employee shall receive credit in the applicable computation
period which includes the date of amendment or transfer for a
number of Hours of Service determined in accordance with
paragraph (g).
2.21 LEASED EMPLOYEE.
(a) Any person (other than an Employee of any of the Affiliated
Employers) who, pursuant to an agreement between any of the
Affiliated Employers and any other person ("leasing
organization"), has performed service for any of the Affiliated
Employers (or for any of the Affiliated Employers and related
persons determined in accordance with section 414(n)(6) of the
Code) on a substantially full-time basis for a period of at least
one year and such services are of a type historically performed by
employees in the Affiliated Employer's business field.
Contributions or benefits provided a Leased Employee by the
leasing organization which are attributable to services performed
for the Affiliated Employer shall be treated as provided by the
Affiliated Employer.
(b) A Leased Employee shall not be considered an Employee of an
Affiliated Employer if:
(i) such Employee is covered by a money purchase pension plan
providing:
(A) a nonintegrated employer contribution rate of at least 10%
of Section 415 Compensation but including amounts
contributed pursuant to a salary reduction agreement which
are excludable from the
<PAGE>
Employee's gross income under section 125, 402(a)(8), 402(h)
or 403(b) of the Code;
(B) immediate participation; and
(C) full and immediate vesting.
and
(ii) Leased Employees do not constitute more than 20% of the
Affiliated Employer's non-highly compensated workforce.
(c) The determination of whether a person is a Leased Employee will be
made pursuant to section 414(n) of the Code and the regulations
thereunder.
2.22 MATCHING CONTRIBUTIONS. A contribution by the Employer made to this
or any other defined contribution plan on behalf of a Participant on
account of a Participant's Elective Deferral or on account of a
Participant's voluntary contributions under a plan maintained by the
Employer. Matching Contributions to this Plan shall be made as set
forth in Section 5.3(a) and the Adoption Agreement.
2.23 NON-HIGHLY COMPENSATED EMPLOYEE. An Employer who is neither a Highly
Compensated Employee nor a Family Member of a Highly Compensated
Employee.
2.24 NORMAL RETIREMENT AGE. Unless otherwise specified in the Adoption
Agreement, Normal Retirement Age shall be age 65.
2.25 OWNER-EMPLOYEE. An individual who is a sole proprietor or who is a
partner owning more than 10% of either the capital or profits interest
of a partnership.
If this Plan provides contributions or benefits for one or more
Owner-Employees who control both the business for which this Plan is
established and one or more other trades or businesses, this Plan and
the plan established for the other trades or businesses must, when
looked at as a single Plan, satisfy section 401(a) and (d) of the Code
for the Employees of this and all such other trades or businesses. If
the Plan provides contributions or benefits for one or more
Owner-Employees who control one or more other trades or businesses,
the employees of the other trades or businesses must be included in a
plan which satisfies section 401(a) and (d) of the Code and which
provides contributions and benefits not less favorable than provided
for Owner-Employees under this Plan. If an individual is covered as
an Owner-Employee under the plans of two or more trades or businesses
which are not controlled and the individual controls a trade or
business, then the contributions or benefits of the employees under
the plan of the trades or businesses which are controlled must be as
favorable as those provided for him under the most favorable plan of
the trade or business which is not controlled.
For purposes of the preceding paragraphs, an Owner-Employee, or two or
more Owner-Employees, will be considered to control a trade or
business if the Owner-Employee, or two or more Owner-Employees
together:
(a) own the entire interest in an unincorporated trade or business, or
(b) in the case of a partnership, own more than 50% of either the capital
interest or the profits interest in the partnership.
For purposes of the preceding sentence, an Owner-Employee, or two
or more Owner-Employees shall be treated as owning any interest in
a partnership which is owned, directly or indirectly, by a
partnership which such Owner-Employee, or such two or more
Owner-Employees, are considered to control within the meaning of
the preceding sentence.
2.26 PARTICIPANT. A person who has met the eligibility requirements of
Section 3.1 and whose Account hereunder has been neither completely
forfeited nor completely distributed.
2.27 PLAN. This 401(k) prototype plan, as amended from time to time,
and the Adoption Agreement executed by the Employer and Trustee.
2.28 PLAN ADMINISTRATOR. The Employer.
2.29 PLAN YEAR. Unless otherwise specified in the Adoption Agreement,
the Plan Year shall be the calendar year.
2.30 SECTION 415 COMPENSATION. A Participant's Earned Income, wages,
salaries and fees for professional services and other amounts received
(without regard to whether an amount is paid in cash) or made
available for personal services actually rendered in the course of
employment with the Employer maintaining the Plan (including, but not
limited to, commissions paid salesmen, compensation for services on
the basis of a percentage of profits, commissions on insurance
premiums, tips, bonuses and reimbursements or other expense allowances
under a nonaccountable plan (as described in Code Regulation
1.62-2(c)), but excluding the following:
(a) Employer contributions to a plan of deferred compensation which
are not includible in the Employee's gross income for the taxable
year in which contributed, or Employer contributions under a
simplified employee pension plan to the extent such contributions
are excluded from the Employee's gross income, or any
distributions from a plan of deferred compensation;
(b) Amounts realized from the exercise of a nonqualified stock option,
or when restricted stock (or property) held by the Employee either
becomes freely transferable or is no longer subject to a
substantial risk of forfeiture;
(c) Amounts realized from the sale, exchange or other disposition of
stock acquired under a qualified stock option; and
(d) Other amounts which received special tax benefits, or
contributions made by the Employer (whether or not under a salary
reduction agreement) towards the purchase of an annuity contract
described in section 403(b) of the Code (whether or not the
contributions are actually excludable from the gross income of the
Employee).
For Plan Years beginning after December 31, 1988, Section 415
Compensation for any Plan Year shall be limited as provided in
Section 2.7(c).
2.31 SELF-EMPLOYED INDIVIDUAL. An individual who has Earned Income for the
taxable year from the trade or business for which the Plan is
established, or an individual who would have had Earned Income for the
taxable year but for the fact that the trade or business had no net
profits for the taxable year.
2.32 SHARES. Shares of stock in any regulated investment company
registered under the Investment Company Act of 1940 the investment
advisor of which is T. Rowe Price Associates, Inc., or units in any
common trust fund or collective investment fund of the Sponsor
qualified under sections 401 and 501 of the Code, that are made
available by the Sponsor for investment purposes as an investment
option under this Plan.
2.33 SPONSOR. T. Rowe Price Trust Company.
2.34 TOTAL COMPENSATION. Compensation plus any amounts the Employer
elected to exclude from the definition of Compensation in the Adoption
Agreement
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2.35 TOTAL AND PERMANENT DISABILITY. The inability of the Participant to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment, which condition, in the
opinion of a physician chosen by the Plan Administrator, can be
expected to result in death or which has lasted or can be expected to
last for a continuous period of not less than twelve months; provided,
however, that Total and Permanent Disability shall not include an
illness or injury caused by or connected with a Participant's service
in the armed forces of any country, or his alcoholism or addiction to
narcotics or other drugs, or his engaging in a criminal act, or
resulting from his effort to bring about the illness, injury or death
of himself or any other person.
2.36 TRUST. The fund maintained by the Trustee for the investment of Plan
assets in accordance with the terms and conditions of the Trust
Agreement.
2.37 TRUST AGREEMENT. The agreement between the Employer and the Trustee
under which the assets of the Plan are held, administered and managed.
The provisions of the Trust Agreement shall be considered an integral
part of this Plan as if set forth fully herein.
2.38 TRUSTEE. The individual or corporate Trustee or Trustees under the
Trust Agreement as they may be named from time to time in the Adoption
Agreement.
2.39 VALUATION DATE. Each day of the Plan Year.
2.40 YEAR OF ELIGIBILITY SERVICE. Except as provided below, a Year of
Eligibility Service is an eligibility computation period during which
an Employee completes at least 1,000 Hours of Service. For this
purpose, the initial eligibility computation period shall be the twelve
consecutive month period beginning with the day the Employee first
performs an Hour of Service for the Employer. Successive eligibility
computation periods shall commence on the first day of each Plan Year
beginning after the date on which the Employee first completes an Hour
of Service for the Employer. AN EMPLOYEE WHO IS CREDITED WITH 1,000
HOURS OF SERVICE IN BOTH THE INITIAL ELIGIBILITY COMPUTATION PERIOD AND
THE PLAN YEAR BEGINNING IMMEDIATELY AFTER THE DATE ON WHICH THE
EMPLOYEE FIRST COMPLETES AN HOUR OF SERVICE FOR THE EMPLOYER WILL BE
CREDITED WITH TWO YEARS OF ELIGIBILITY SERVICE.
Notwithstanding the foregoing, if the Employer selects a Year of
Service in the Adoption Agreement that is a fraction of a Year of
Service, an Employee shall not be required to complete any specified
number of Hours of Service to receive credit for such fractional year.
2.41 YEAR OF VESTING SERVICE. A Plan Year during which an Employee
completes at least 1,000 Hours of Service.
- --------------------------------------------------------------------------------
ARTICLE 3. ELIGIBILITY AND YEARS OF SERVICE
3.1 ELIGIBILITY REQUIREMENTS.
(a) GENERAL RULE. Subject to subsection (b) below and any contrary
designation made by the Employer in the Adoption Agreement, each
Employee of the Affiliated Employers shall become a Participant in
the Plan as of the first Entry Date after the date on which the
Employee has satisfied the minimum age and service requirements, if
any, specified in the Adoption Agreement. Notwithstanding the
foregoing, nonresident aliens (within the meaning of section
7701(b)(1)(B) of the Code) who receive no Earned Income (within the
meaning of section 911(d)(2) of the Code) from the Employer which
constitutes income from sources within the United States (within
the meaning of section 861(a)(3) of the Code) shall not be eligible
to participate in the Plan.
(b) EXCLUDABLE EMPLOYEES. The Employer may elect in the Adoption
Agreement to exclude from participation Employees included in a
unit of employees covered by a collective bargaining agreement
between the Employer and employee representatives, if retirement
benefits were the subject of good faith bargaining. For this
purpose, the term "employee representatives" does not include any
organization more than half of whose members are employees who are
owners, officers or executives of the Employer.
(c) CHANGE IN STATUS. In the event an Employee who is not a member of
an eligible class of Employees becomes a member of an eligible
class, such Employee will participate immediately if such Employee
has satisfied the minimum age and service requirements specified in
the Adoption Agreement and otherwise would have previously become a
Participant. In the event a Participant is no longer a member of
an eligible class of Employees and becomes ineligible to
participate, such Employee will participate immediately upon
returning to an eligible class of Employees.
3.2 PARTICIPATION AND SERVICE UPON REEMPLOYMENT. Upon the reemployment of any
Employee, the following rules shall determine his eligibility to
participate in the Plan and his credit for prior service.
(a) PARTICIPATION. If the reemployed Employee was a Participant in the
Plan during his prior period of employment, he shall be eligible
upon reemployment to resume participation in the Plan if he is in a
class of eligible Employees. If he is not a member of an eligible
class upon reemployment, such Employee will participate immediately
upon returning to a class of eligible Employees. If the reemployed
Employee was not a Participant in the Plan, he shall be considered
a new Employee and required to meet the requirements of Section 3.1
in order to be eligible to participate in the Plan.
(b) CREDIT FOR PRIOR SERVICE. In the case of any Employee who is
reemployed before or after incurring a Break in Service, any Hour
of Service and Year of Eligibility Service credited to the Employee
at the end of his prior period of employment shall be reinstated as
of the date of his reemployment.
3.3 PREDECESSOR EMPLOYERS. Except as provided in the Adoption Agreement, no
credit will be given for service with a predecessor employer, except that
if this Plan is a continuation of a predecessor plan, service under the
predecessor plan must be counted.
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ARTICLE 4. TRUST FUND
4.1 RECEIPT OF CONTRIBUTIONS BY TRUSTEE. All contributions to the Trust
that are received by the Trustee, together with any earnings thereon,
shall be held, managed and administered by the Trustee in accordance
with the terms and conditions of the Trust Agreement and the Plan. The
Trustee shall be subject to the proper directions of the Employer made
in accordance with the terms of the Plan and ERISA.
4.2 INVESTMENT RESPONSIBILITY.
(a) INVESTMENT CHOICES. The selection of the investments in which
assets of the Trust may be invested shall be the responsibility of
the Employer.
(b) PARTICIPANT DIRECTION. Subject to such reasonable restrictions as
may be imposed by the Employer, each Participant or Beneficiary
shall be permitted to select the investments in his Account. The
Employer must complete and forward to the Trustee a schedule of
Participant designations. No person, including the Trustee and the
Plan Administrator, shall be liable for any loss or for any breach
of fiduciary duty which results from a Participant's or
Beneficiary's exercise of control. All investment related
expenses, including administrative fees charged by brokerage
houses, will be charged against the Accounts of the Participants.
(c) CHANGE IN INVESTMENT CHOICES. The Employer may at any time change
the selection of investments in which the assets of the Trust may
be invested, or subject to such reasonable restrictions as may be
imposed by the Sponsor for administrative convenience, may submit
an amended schedule of Participant designations to the Trustee.
Such amended documents may provide for a variance in the
percentages of contributions to any particular investment or a
request that Shares in the Trust be reinvested in whole or in part
in other Shares.
4.3 INVESTMENT LIMITATIONS. All Trust assets must be invested in Shares.
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ARTICLE 5. CONTRIBUTIONS
5.1 PAYMENT. All contributions, including rollover contributions, to the Plan
must be made in U.S. currency, by check, wire transfer or ACH credit. All
Employer contributions to the Trust for any Plan Year shall be made either
in one lump sum or in installments within the time prescribed by law,
including extensions granted by the Internal Revenue Service, for filing
the Employer's federal income tax return for the taxable year with or
within which such Plan Year ends.
5.2 EMPLOYEE CONTRIBUTIONS.
(a) AFTER-TAX CONTRIBUTIONS. Beginning with the Plan Year in which
this Plan is adopted by the Employer, no Participant shall be
permitted to make Employee After-Tax Contributions to the Plan.
(b) EMPLOYEE ELECTIVE DEFERRALS.
(i) If the Adoption Agreement so provides and the Employer
elects, a Participant may make Elective Deferrals to the
Trust in amounts not to exceed the limitations specified in
the Adoption Agreement or any other limitations specified in
this Plan. A Participant's Elective Deferrals shall be made
by direct reduction of Compensation, with such reduction to
be accomplished through regular payroll reduction.
(ii) The Elective Deferrals of a Participant shall be limited in
accordance with the provisions of this subsection, Sections
5.7(a), 5.8(a), 7.1 and 10.2(c) and any other applicable
provisions of the Plan. No Participant shall be permitted to
have Elective Deferrals made under this Plan, or any other
qualified plan maintained by the Employer, during any taxable
year, in excess of the dollar limitation contained in section
402(g) of the Code in effect at the beginning of such taxable
year.
(iii) Participants may elect to commence Elective Deferrals at
least once each Plan Year during a period established by the
Employer. Such election may not be made retroactively and
the election must remain in effect until modified or
terminated. Participants may terminate the election or
change the amounts designated to be deducted at any time and
such changes will become effective on the next payroll period
following by at least ten days the submission of such change
of designation to the Plan Administrator, unless a shorter
period is agreed to by the Plan Administrator.
(iv) No contributions or benefits (other than Matching
Contributions or Qualified Matching Contributions) may be
conditioned upon an Employee's Elective Deferrals.
(c) ROLLOVERS. Subject to the approval of the Plan Administrator, a
Participant, or an Employee who would otherwise be eligible to
participate in the Plan but for the failure to satisfy any service
condition for eligibility to participate, who has participated in
any other qualified plan described in section 401(a) of the Code or
in a qualified annuity plan described in section 403(a) of the Code
shall be permitted to make a rollover (or direct rollover)
contribution to the Trustee of all or part of an amount received by
such individual that is attributable to participation in such other
plan (reduced by any nondeductible voluntary contributions he made
to the plan), provided that the rollover contribution complies with
all requirements of section 402(a)(5), 403(a)(4) or
408(d)(3)(A)(ii) of the Code, whichever is applicable. Before
approving such a rollover, the Plan Administrator may request from
the individual or the sponsor of such other plan any documents that
the Plan Administrator, in its discretion, deems necessary to
determine that such rollover meets the preceding requirements.
(d) PLAN-TO-PLAN TRANSFERS. Beginning with the Plan Year in which this
Plan is adopted by the Employer, no Participant shall be permitted
to make a direct plan-to-plan transfer of all or part of his
benefits in any other plan.
5.3 EMPLOYER CONTRIBUTIONS.
(a) MATCHING CONTRIBUTIONS. If the Employer elects in the Adoption
Agreement to make Matching Contributions, for each Plan Year the
Employer shall contribute to the Trust an amount as shall be
determined by the Employer in accordance with the matching
contribution formula specified in the Adoption
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Agreement. Subject to the minimum top-heavy allocation rules of
Section 6.3 and the exclusions specified in this Section, Matching
Contributions shall be made on behalf of those Participants
specified by the Employer in the Adoption Agreement.
(b) DISCRETIONARY CONTRIBUTIONS. If the Employer elects in the
Adoption Agreement to make Discretionary Contributions, the
Employer may contribute to the Trust an amount as may be determined
by the Employer for each Plan Year. Subject to the minimum
top-heavy allocation rules of Section 6.3 and the exclusions
specified in this Section, and except as provided in the Adoption
Agreement, each Participant (i) who completes at least 500 Hours of
Service during the Plan Year, (ii) who is employed by the Employer
on the last day of the Plan Year (REGARDLESS OF HIS HOURS OF
SERVICE), or (iii) whose employment with the Employer terminates
during the Plan Year by reason of death, retirement on or after
Normal Retirement Age or Total and Permanent Disability (regardless
of his Hours of Service) shall be eligible to share in the Employer
Discretionary Contribution for such Plan Year.
(c) CONTRIBUTION LIMITATION. In no event shall any Employer
contribution (plus any Elective Deferrals) exceed the maximum
amount deductible from the Employer's income under section 404 of
the Code or the maximum limitations under section 415 of the Code
provided in Article 7.
5.4 EXCESS ELECTIVE DEFERRALS.
(a) GENERAL. A Participant may assign to this Plan any Excess Elective
Deferrals made during a taxable year of the Participant by
notifying the Plan Administrator on or before March 1 following the
close of the Participant's taxable year of the Excess Elective
Deferrals to be assigned to the Plan. (A Participant is deemed to
notify the Plan Administrator of any Excess Elective Deferrals that
arise by taking into account only those Elective Deferrals made to
this Plan and any other plans of this Employer.) Notwithstanding
any other provision of the Plan, Excess Elective Deferrals, plus
any income and minus any loss allocable thereto, shall be
distributed after the preceding taxable year and no later than
April 15 following the close of the preceding taxable year to any
Participant to whose Account Excess Elective Deferrals were
assigned for the preceding year and who claims Excess Elective
Deferrals for such taxable year.
(b) CALCULATION OF INCOME OR LOSS. The income or loss allocable to
Excess Elective Deferrals is equal to the amount of income or loss
allocable to the Participant's Elective Deferral subaccount for the
taxable year multiplied by a fraction, the numerator of which is
such Participant's Excess Elective Deferrals for the year and the
denominator of which is the Participant's account balance
attributable to Elective Deferrals without regard to any income or
loss occurring during such taxable year.
(c) TAX TREATMENT. Excess Elective Deferrals that are distributed
after April 15 are includible in the Participant's gross income in
both the taxable year in which deferred and the taxable year in
which distributed.
(d) FORFEITURE OF CERTAIN MATCHING CONTRIBUTIONS. All Matching
Contributions (whether or not vested) that were made on account of
an Excess Elective Deferral that has been distributed in accordance
with this Section 5.4 shall be forfeited before the last day of the
twelve-month period immediately following the close of the taxable
year in which such Excess Elective Deferrals were made.
5.5 ACTUAL DEFERRAL PERCENTAGE TEST.
(a) GENERAL TEST. The Actual Deferral Percentage (hereinafter "ADP")
for Participants who are Highly Compensated Employees for each Plan
Year and the ADP for Participants who are Non-Highly Compensated
Employees for the same Plan Year must satisfy one of the following
tests:
(i) The ADP for Participants who are Highly Compensated Employees
for the Plan Year shall not exceed 125% of the ADP for
Participants who are Non-Highly Compensated Employees for the
same Plan Year; or
(ii) The ADP for Participants who are Highly Compensated Employees
for the Plan Year shall not exceed 200% of the ADP for
Participants who are Non-Highly Compensated Employees for the
same Plan Year, provided that the ADP for Participants who are
Highly Compensated Employees does not exceed the ADP for
Participants who are Non-Highly Compensated Employees by more
than two percentage points.
(b) SPECIAL RULES.
(i) The ADP for any Participant who is a Highly Compensated
Employee for the Plan Year, and who is eligible to have
Elective Deferrals (and Qualified Nonelective Contributions
or Qualified Matching Contributions, or both, if treated as
Elective Deferrals for purposes of the ADP test) allocated
to his Accounts under two or more cash or deferred
arrangements described in section 401(k) of the Code that
are maintained by the Employer, shall be determined as if
such Elective Deferrals (and, if applicable, such Qualified
Nonelective Contributions or Qualified Matching
Contributions, or both) were made under a single
arrangement. If a Highly Compensated Employee participates
in two or more cash or deferred arrangements that have
different plan years, all cash or deferred arrangements
ending with or within the same calendar year shall be
treated as a single arrangement. Notwithstanding the
foregoing, certain plans shall be treated as separate if
mandatorily disaggregated under regulations under section
401(k) of the Code.
(ii) In the event that this Plan satisfies the requirements of
section 401(k), 401(a)(4) or 410(b) of the Code only if
aggregated with one or more other plans, or if one or more
other plans satisfy the requirements of such sections of the
Code only if aggregated with this Plan, then this Section
shall be applied by determining the ADP of Employees as if
all such plans were a single plan. Plans may be aggregated
in order to satisfy section 401(k) of the Code only if they
have the same plan year.
(iii) For purposes of determining the ADP of a Participant who is
a Five Percent Owner or one of the ten most highly-paid
Highly Compensated Employees, the Elective Deferrals (and
Qualified Nonelective Contributions or Qualified Matching
Contributions, or both, if treated as Elective Deferrals for
purposes of the ADP test) and Total Compensation of such
Participant shall include the Elective Deferrals (and, if
applicable, Qualified Nonelective Contributions and
Qualified Matching Contributions) and Total Compensation for
the Plan Year of Family Members. Family Members, with
respect to such Highly Compensated Employees, shall be
disregarded as separate Employees in determining the ADP
both for Participants who are Non-Highly Compensated
Employees and for Participants who are Highly Compensated
Employees.
(iv) For purposes of applying the ADP test, Elective Deferrals,
Qualified Nonelective Contributions and Qualified Matching
Contributions must be made before the last day of the
twelve-month period immediately following the Plan Year to
which contributions relate.
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(v) The Employer shall maintain records sufficient to
demonstrate satisfaction of the ADP test and the amount of
Qualified Nonelective Contributions or Qualified Matching
Contributions, or both, used in such test.
(vi) The determination and treatment of the ADP amounts of any
Participant shall satisfy such other requirements as may be
prescribed by the Secretary of the Treasury.
5.6 AVERAGE CONTRIBUTION PERCENTAGE TEST.
(a) GENERAL TEST. The Average Contribution Percentage (hereinafter "ACP")
for Participants who are Highly Compensated Employees for each Plan
Year and the ACP for Participants who are Non-Highly Compensated
Employees for the same Plan Year must satisfy one of the following
tests:
(i) The ACP for Participants who are Highly Compensated
Employees for the Plan Year shall not exceed the ACP for
Participants who are Non-Highly Compensated Employees for
the same Plan Year multiplied by 1.25; or
(ii) The ACP for Participants who are Highly Compensated
Employees for the Plan Year shall not exceed 200% of the ACP
for Participants who are Non-Highly Compensated Employees
for the same Plan Year, provided that the ACP for
Participants who are Highly Compensated Employees does not
exceed the ACP for Participants who are Non-Highly
Compensated Employees by more than two percentage points.
(b) SPECIAL RULES.
(i) The Contribution Percentage for any Participant who is a
Highly Compensated Employee and who is eligible to have
Contribution Percentage Amounts allocated to his or her
Account under two or more plans described in section 401(a)
of the Code, or cash or deferred arrangements described in
section 401(k) of the Code, that are maintained by the
Employer shall be determined as if the total of such
Contribution Percentage Amounts was made under each plan.
If a Highly Compensated Employee participates in two or more
cash or deferred arrangements that have different plan
years, all cash or deferred arrangements ending with or
within the same calendar year shall be treated as a single
arrangement. Notwithstanding the foregoing, certain plans
shall be treated as separate if mandatorily disaggregated
under regulations under section 401(m) of the Code.
(ii) In the event that this Plan satisfies the requirements of
section 401(m), 401(a)(4) or 410(b) of the Code only if
aggregated with one or more other plans, or if one or more
other plans satisfy the requirements of such sections of the
Code only if aggregated with this Plan, then this Section
shall be applied by determining the Contribution Percentage
of Employees as if all such plans were a single plan. Plans
may be aggregated in order to satisfy section 401(m) of the
Code only if they have the same plan year.
(iii) For purposes of determining the Contribution Percentage of a
Participant who is a Five Percent Owner or one of the ten
most highly-paid Highly Compensated Employees, the
Contribution Percentage Amounts and Total Compensation of
such Participant shall include the Contribution Percentage
Amounts and Total Compensation for the Plan Year of Family
Members. Family Members, with respect to Highly Compensated
Employees, shall be disregarded as separate Employees in
determining the Contribution Percentage both for
Participants who are Non-Highly Compensated Employees and
for Participants who are Highly Compensated Employees.
(iv) For purposes of applying the ACP test, Matching
Contributions and Qualified Nonelective Contributions will
be considered made for a Plan Year if made no later than the
end of the twelve-month period beginning on the day after
the close of the Plan Year.
(v) If one or more Highly Compensated Employees participate in
both a cash or deferred arrangement and a plan subject to
the ACP test maintained by the Employer and the sum of the
ADP and ACP of those Highly Compensated Employees subject to
either or both tests exceeds the Aggregate Limit, then the
ACP of those Highly Compensated Employees who also
participate in a cash or deferred arrangement will be
reduced (beginning with such Highly Compensated Employee
whose ACP is the highest) so that the limit is not exceeded.
The amount by which each Highly Compensated Employee's
Contribution Percentage Amounts is reduced shall be treated
as an Excess Aggregate Contribution. The ADP and ACP of the
Highly Compensated Employees are determined after any
corrections required to meet the ADP and ACP tests.
Impermissible multiple use does not occur if either the ADP
or ACP of the Highly Compensated Employees does not exceed
1.25 multiplied by the ADP and ACP of the Non-Highly
Compensated Employees.
(vi) The Employer shall maintain records sufficient to
demonstrate satisfaction of the ACP test and the amount of
Elective Deferrals, Qualified Nonelective Contributions or
Qualified Matching Contributions used in such test.
(vii) The determination and treatment of the Contribution
Percentage of any Participant shall satisfy such other
requirements as may be prescribed by the Secretary of the
Treasury.
5.7 PREVENTION OR CURE OF ADP TEST FAILURES. The Plan Administrator may, in
its sole discretion, use any one or a combination of the following
methods to prevent or cure any ADP test failure in accordance with
section 401(k) of the Code and the regulations thereunder:
(a) The Plan Administrator may refuse to accept any or all prospective
Elective Deferrals to be contributed by a Highly Compensated
Employee.
(b) The Plan Administrator may distribute any or all Excess
Contributions in accordance with the provisions of Section 5.9.
(c) The Employer may, in its sole discretion, elect to contribute a
Qualified Nonelective Contribution in accordance with the
provisions of Section 5.10.
(d) Subject to the requirements of Section 5.11, the Employer may, in
its sole discretion, elect to treat Qualified Matching
Contributions as if they were Elective Deferrals for purposes of
the ADP test.
5.8 PREVENTION OR CURE OF ACP TEST FAILURES. The Plan Administrator may, in
its sole discretion, use any one or a combination of the following
methods to prevent or cure any ACP test failure in accordance with
section 401(m) of the Code and the regulations thereunder:
(a) The Plan Administrator may refuse to accept any or all prospective
Elective Deferrals to be contributed by a Highly Compensated
Employee.
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(b) The Plan Administrator may elect to contribute a Qualified Matching
Contribution in accordance with the provisions of Section 5.11.
(c) The Plan Administrator may forfeit, if forfeitable, or distribute,
if not forfeitable, Excess Aggregate Contributions in accordance
with Section 5.12.
(d) The Plan Administrator may elect to treat Qualified Nonelective
Contributions or Elective Deferrals, or both, as if they were
Matching Contributions for purposes of the ACP test, subject to the
requirements of Section 5.13(e).
5.9 DISTRIBUTION OF EXCESS CONTRIBUTIONS TO CURE ADP TEST FAILURE.
(a) GENERAL RULE. Notwithstanding any other provision of this Plan,
Excess Contributions for a Plan Year, plus any income and minus any
loss allocable thereto, shall be distributed after the close of
such Plan Year and no later than twelve months after the close of
such Plan Year to Participants to whose Accounts such Excess
Contributions were allocated. (If such excess amounts are
distributed more than 22 months after the last day of the Plan Year
in which such excess amounts arose, a 10% excise tax on such
amounts will be imposed on the Employer.) Such distributions shall
be made to Highly Compensated Employees on the basis of the
respective portions of the Excess Contributions attributable to
each of such Employees. Excess Contributions of Participants who
are subject to the Family Member aggregation rules shall be
allocated among the Family Members in proportion to the Elective
Deferrals (and amounts treated as Elective Deferrals) of each
Family Member that is combined to determine the combined ADP.
(b) CALCULATION OF INCOME OR LOSS. The income or loss allocable to
Excess Contributions is equal to the amount of income or loss
allocable to the Participant's Elective Deferral subaccount (and,
if applicable, the Qualified Nonelective Contribution subaccount or
the Qualified Matching Contribution subaccount, or both) for the
Plan Year multiplied by a fraction, the numerator of which is such
Participant's Excess Contributions for the Plan Year and the
denominator of which is the Participant's account balance
attributable to Elective Deferrals (and Qualified Nonelective
Contributions or Qualified Matching Contributions, or both, if any
of such contributions are included in the ADP test) without regard
to any income or loss occurring during such Plan Year.
(c) METHOD OF DISTRIBUTION. Excess Contributions shall be distributed
from the Participant's Elective Deferral subaccount and Qualified
Matching Contribution subaccount (if applicable) in proportion to
the Participant's Elective Deferrals and Qualified Matching
Contributions (to the extent used in the ADP test) for the Plan
Year. Excess Contributions shall be distributed from the
Participant's Qualified Nonelective Contribution subaccount only to
the extent that such Excess Contributions exceed the balance in the
Participant's Elective Deferral subaccount and Qualified Matching
Contribution subaccount.
(d) FORFEITURE OF CERTAIN MATCHING CONTRIBUTIONS. Any Matching
Contribution (whether or not vested) that was made on account of an
Excess Contribution that has been distributed in accordance with
this Section 5.9 shall be forfeited no later than twelve months
after the close of the Plan Year in which such Excess Contribution
occurred.
5.10 QUALIFIED NONELECTIVE CONTRIBUTIONS TO CURE ADP AND/OR ACP TEST FAILURE.
The Employer may, in its sole discretion, elect to contribute a Qualified
Nonelective Contribution in an amount necessary to cure any ADP and/or ACP
test failure for a Plan Year within twelve months after the close of such
Plan Year. Qualified Nonelective Contributions for a Plan Year shall be
allocated to the Accounts of Participants who are not Highly Compensated
Employees and who would be eligible for an allocation of Employer
Discretionary Contributions in accordance with Section 5.3(b) in the ratio
in which each such Participant's Compensation for such Plan Year bears to
the Total Compensation of all such Participants for such Plan Year.
5.11 QUALIFIED MATCHING CONTRIBUTION TO CURE ADP AND/OR ACP TEST FAILURE.
The Employer may, in its sole discretion, elect to contribute a
Qualified Matching Contribution in an amount necessary to cure any ADP
and/or ACP test failure for a Plan Year within twelve months after the
close of such Plan Year. Qualified Matching Contributions for a Plan
Year shall be allocated to the Accounts of Participants who are not
Highly Compensated Employees and who would be eligible for an
allocation of Matching Contributions in accordance with Section 5.3(a)
in the ratio in which each such Participant's Elective Deferrals for
such Plan Year bear to the total Elective Deferrals of all such
Participants for such Plan Year.
5.12 FORFEITURE AND/OR DISTRIBUTION OF EXCESS AGGREGATE CONTRIBUTIONS.
Notwithstanding any other provision of this Plan, Excess Aggregate
Contributions for a Plan Year, plus any income and minus any loss
allocable thereto, may be forfeited, if forfeitable, or distributed, if
not forfeitable, no later than twelve months after the close of such
Plan Year to Participants to whose Accounts such Excess Aggregate
Contributions were allocated for such Plan Year. Excess Aggregate
Contributions of Participants who are subject to the Family Member
aggregation rules shall be allocated among the Family Members in
proportion to the Matching Contributions (or amounts treated as
Matching Contributions) of each Family Member that is combined to
determine the combined ACP. Excess Aggregate Contributions shall be
forfeited, if forfeitable, or distributed on a pro rata basis from the
Participant's Matching Contribution subaccount and Qualified Matching
Contribution subaccount (and, if applicable, the Participant's
Qualified Nonelective Contribution subaccount or Elective Deferral
subaccount, or both).
The income or loss allocable to Excess Aggregate Contributions
distributed or forfeited is equal to the amount of income or loss
allocable to the Participant's Matching Contribution subaccount,
Qualified Matching Contribution subaccount (if any, and if all amounts
therein are not used in the ADP test) and, if applicable, Qualified
Nonelective Contribution subaccount and Elective Deferral subaccount
for the Plan Year multiplied by a fraction, the numerator of which is
such Participant's Excess Aggregate Contributions for the year and the
denominator of which is the Participant's account balance(s)
attributable to Contribution Percentage Amounts without regard to
income or loss occurring during such Plan Year.
Any Matching Contribution (whether or not vested) that was made on
account of an Excess Aggregate Contribution that has been distributed
in accordance with this Section 5.12 shall be forfeited no later than
twelve months after the close of the Plan Year in which such Excess
Aggregate Contribution occurred.
5.13 DEFINITIONS.
(a) ACTUAL DEFERRAL PERCENTAGE. For a specified group of Participants for
a Plan Year, the average of the ratios (calculated separately for each
Participant in such group) of (i) the amount of Employer deferral
contributions actually paid over to the Plan on behalf of such
Participant for the Plan Year to (ii) the Participant's Total
Compensation for such Plan Year. Employer deferral contributions on
behalf of any Participant shall include: (i) any Elective Deferrals
made pursuant to the Participant's deferral elective (including Excess
Elective Deferrals of Highly
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Compensated Employees), but excluding (A) Excess Elective Deferrals of
Non-Highly Compensated Employees that arise solely from Elective
Deferrals made under the Plan or plans of this Employer, and (B)
Elective Deferrals that are taken into account in the ADP test (provided
the ADP test is satisfied both with and without exclusion of these
Elective Deferrals); and (ii) at the election of the Employer, Qualified
Nonelective Contributions and Qualified Matching Contributions. For
purposes of computing Actual Deferral Percentages, an Employee who would
be a Participant but for the failure to make Elective Deferrals shall be
treated as a Participant on whose behalf no Elective Deferrals are made.
(b) AGGREGATED LIMIT. The sum of (i) 125% of the greater of the ADP of the
Non-Highly Compensated Employees for the Plan Year or the ACP of
Non-Highly Compensated Employees under the Plan subject to section
401(m) of the Code for the Plan Year beginning with or within the Plan
Year of the cash or deferred arrangement, and (ii) the lesser of 200% or
two plus the lesser of such ADP or ACP. "Lesser" is substituted for
"greater" in "(i)", above, and "greater" is substituted for "lesser"
after "two plus the" in "(ii)" if it would result in a larger Aggregate
Limit.
(c) AVERAGE CONTRIBUTION PERCENTAGE. The average of the Contribution
Percentages of the eligible Participants in a group.
(d) CONTRIBUTION PERCENTAGE. The ratio (expressed as a percentage) of an
eligible Participant's Contribution Percentage Amounts to such eligible
Participant's Total Compensation for the Plan Year.
(e) CONTRIBUTION PERCENTAGE AMOUNTS. The sum of the Matching Contributions
and Qualified Matching Contributions (to the extent not taken into
account for purposes of the ADP test) made under the Plan on behalf of
the Participant for the Plan Year. Such Contribution Percentage Amounts
shall not include Matching Contributions that are forfeited either to
correct Excess Aggregate Contributions or because the contributions to
which they relate are Excess Elective Deferrals, Excess Contributions or
Excess Aggregate Contributions. The Plan Administrator may include
Qualified Nonelective Contributions in the Contribution Percentage
Amounts. The Plan Administrator also may elect to use Elective
Deferrals in the Contribution Percentage Amounts so long as the ADP test
is met before the Elective Deferrals are used in the ACP test and
continues to be met following the exclusion of those Elective Deferrals
that are used to meet the ACP test.
(f) EXCESS AGGREGATE CONTRIBUTIONS. With respect to any Plan Year, the
excess of the aggregate Contribution Percentage Amounts taken into
account in computing the numerator of the Contribution Percentage
actually made on behalf of Highly Compensated Employees for such Plan
Year, over the maximum Contribution Percentage Amounts permitted by the
ACP test (determined by reducing contributions made on behalf of Highly
Compensated Employees in order of their Contribution Percentages
beginning with the highest of such percentages). Such determination
shall be made after first determining Excess Elective Deferrals pursuant
to Section 5.13(h) and then determining Excess Contributions pursuant to
Section 5.13(g).
(g) EXCESS CONTRIBUTION. With respect to a Plan Year, the excess of the
Elective Deferrals (including any Qualified Nonelective Contributions
and Qualified Matching Contributions that are treated as Elective
Deferrals under section 401(k)(2) and 401(k)(3) of the Code) on behalf
of eligible Highly Compensated Employees for the Plan Year over the
maximum amount of such contributions permitted under section 401(k)(2)
and 401(k)(3) of the Code.
The amount of Excess Contributions for a Highly Compensated Employee for
a Plan Year is to be determined by the following leveling method under
which the Actual Deferral Percentage of the Highly Compensated Employee
with the highest Actual Deferral Percentage is reduced to the extent
required to:
(i) Enable the Plan to satisfy Section 5.5; or
(ii) Cause such Highly Compensated Employee's Actual Deferral
Percentage to equal the Actual Deferral Percentage of the Highly
Compensated Employee with the next highest Actual Deferral
Percentage. This process is repeated until the Plan satisfies
Section 5.5. For each Highly Compensated Employee, the amount of
Excess Contributions is equal to the total Elective Deferrals
(plus Qualified Nonelective Contributions and Qualified Matching
Contributions treated as Elective Deferrals) on behalf of the
Participant (determined prior to the application of this
paragraph) minus the amount determined by multiplying the
Participant's Actual Deferral Percentage (determined after
application of this paragraph) by his Total Compensation used in
determining such Actual Deferral Percentage.
(h) EXCESS ELECTIVE DEFERRALS. Those Elective Deferrals that are includible
in a Participant's gross income under section 402(g) of the Code to the
extent such Participant's Elective Deferrals for a taxable year exceed
the dollar limitation under such Code section.
(i) QUALIFIED MATCHING CONTRIBUTIONS. Matching Contributions that are made
to this Plan or another arrangement described in section 401(k) of the
Code that is maintained by the Employer that are subject to the
distribution and nonforfeitability requirements of section 401(k) of the
Code when made.
(j) QUALIFIED NONELECTIVE CONTRIBUTIONS. Contributions (other than Matching
Contributions or Qualified Matching Contributions) made by the Employer
and allocated to Participants' Accounts that the Participants may not
elect to receive in cash until distributed from the Plan; that are
nonforfeitable when made; that are distributable only in accordance with
distribution provisions that are applicable to Elective Deferrals.
<PAGE>
ARTICLE 6. ALLOCATIONS
6.1 INDIVIDUAL ACCOUNTS. The Plan Administrator shall establish and
maintain an Account in the name of each Participant. Each Participant's
Account shall contain the following subaccounts:
(a) ELECTIVE DEFERRALS. An Elective Deferral subaccount to which shall
be credited (or debited, as the case may be) (i) such Participant's
Elective Deferrals made under Section 5.2(b); (ii) the net earnings
or net losses on the investment of the assets of the subaccount;
and (iii) distributions from such subaccount.
(b) ROLLOVERS. A rollover subaccount to which shall be credited (or
debited, as the case may be) (i) rollover contributions made by
such Participant to the Trust under Section 5.2(c); (ii) the net
earnings or net losses on the investment of the assets of such
subaccount; and (iii) distributions from such subaccount.
(c) AFTER-TAX CONTRIBUTIONS. A nondeductible voluntary contribution
subaccount to which shall be credited (or debited, as the case may
be) (i) Employee After-Tax Contributions made by the Participant
before the Plan Year in which this Plan was adopted by the
Employer; (ii) the net earnings or net losses on the investment of
the assets of such subaccount; and (iii) distributions from such
subaccount.
(d) MATCHING CONTRIBUTIONS. A Matching Contribution subaccount to
which shall be credited (or debited, as the case may be) (i) such
Participant's Matching Contributions made under Section 5.3(a);
(ii) the net earnings or net losses on the investment of the assets
of such subaccount; and (iii) distributions from such subaccount.
(e) DISCRETIONARY CONTRIBUTIONS. An Employer Discretionary
Contribution subaccount to which shall be credited (or debited, as
the case may be) (i) the Participant's share of Employer
Discretionary Contributions under Section 5.3(b); (ii) the net
earnings or net losses on the investment of the assets of such
subaccount; and (iii) distributions from such subaccount.
(f) QUALIFIED NONELECTIVE CONTRIBUTIONS. A Qualified Nonelective
Contribution subaccount to which shall be credited (or debited, as
the case may be) (i) such Participant's Qualified Nonelective
Contributions made under Section 5.10; (ii) the net earnings or net
losses on the investment of the assets of the subaccount; and (iii)
distributions from such subaccount.
(g) QUALIFIED MATCHING CONTRIBUTIONS. A Qualified Matching Contribution
subaccount to which shall be credited (or debited, as the case may
be) (i) the Participant's Qualified Matching Contributions made
under Section 5.11; (ii) the net earnings or net losses on the
investment of assets in such subaccount; and (iii) distributions
from such subaccount.
6.2 ALLOCATION OF CONTRIBUTIONS.
(a) ELECTIVE DEFERRALS, MATCHING CONTRIBUTIONS AND ROLLOVER
CONTRIBUTIONS. All Elective Deferrals, Matching Contributions and
rollover contributions shall be allocated to the Account of the
Participant on whose behalf such contributions were made.
(b) QUALIFIED NONELECTIVE AND QUALIFIED MATCHING CONTRIBUTIONS. All
Qualified Nonelective Contributions and Qualified Matching
Contributions shall be allocated as provided in Sections 5.10 and
5.11, respectively.
(c) EMPLOYER DISCRETIONARY CONTRIBUTIONS. All Employer Discretionary
Contributions shall be allocated to the Account of each Participant
eligible for such an allocation, as provided in Section 5.3(b), in
the ratio that such Participant's Compensation bears to the
Compensation of all such Participants. However, if the Employer
Discretionary Contribution formula selected in the Adoption
Agreement is allocated under the permitted disparity rules,
Employer Discretionary Contributions for the Plan Year shall be
allocated to the Accounts of Participants eligible for such an
allocation as follows:
If the Plan is Top-Heavy (as defined below) for the Plan Year,
begin at Step One; if the Plan is not Top-Heavy for the Plan Year,
begin at Step Three.
(i) STEP ONE. Contributions will be allocated to each
Participant's Account in the ratio that each Participant's
Compensation bears to all such Participants' Compensation, but
not in excess of 3% of each Participant's Compensation.
(ii) STEP TWO. Any contributions remaining after the allocation in
Step One will be allocated to each Participant's Account in
the ratio that each Participant's Compensation for the Plan
Year in excess of the Integration Level (hereinafter "Excess
Compensation") bears to the Excess Compensation of all
Participants, but not in excess of 3% of Compensation.
(iii) STEP THREE. Any contributions (remaining after the allocation
in Step Two if the Plan is Top-Heavy) will be allocated to
each Participant's Account in the ratio that the sum of each
Participant's Compensation and Excess Compensation bears to
the sum of all Participants' Compensation and Excess
Compensation, but not in excess of the Maximum Profit Sharing
Disparity Rate.
(iv) STEP FOUR. Any remaining contributions will be allocated to
each Participant's Account in the ratio that each
Participant's Compensation for the Plan Year bears to the
total of all Participants' Compensation for that year.
If the Employer maintains any other plan that provides for
permitted disparity, and if any Participant in this Plan is
eligible to participate in such other plan, this Plan may not
provide for permitted disparity.
6.3 MINIMUM TOP-HEAVY ALLOCATION.
(a) GENERAL RULE. Notwithstanding any other provision of this Plan to
the contrary, during any Plan Year that this Plan is Top-Heavy, the
Matching Contributions, Employer Discretionary Contributions and
forfeitures allocated on behalf of any Participant who is not a Key
Employee and who has not separated from service with the Employer
before the end of such Plan Year shall not be less than the lesser
of 3% of such Participant's Section 415 Compensation or, in the
case where the Employer has no defined benefit plan which
designates this Plan to satisfy section 401 of the Code, the
largest percentage of Employer contributions and forfeitures, as a
percentage of the first $200,000 of the Key Employee's Section 415
Compensation, allocated on behalf of any Key Employee for that
year. The minimum allocation is determined without regard to any
Social Security contribution. For purposes of this subsection, all
defined contribution plans required to be included in an
aggregation group under section 416(g)(2)(A)(i) of the Code shall
be treated as a single plan.
(b) SPECIAL RULE IF OTHER PLANS SATISFY TOP-HEAVY MINIMUM. The
provision in subsection (a) above shall not apply to any
Participant to the extent the Participant is covered under any
23
<PAGE>
other plan or plans of the Employer and any other plan or plans of
the Employer provide that the minimum allocation or benefit
requirement applicable to Top-Heavy plans will be met in the other
plan or plans.
6.4 ALLOCATION OF FORFEITURES. Any forfeitures arising under the Plan,
including forfeitures of Excess Aggregate Contributions, shall be
allocated in the following order of priority in the Plan Year in which
forfeitures occur:
(a) First, forfeitures shall be used to the extent necessary to restore
a returning Participant's Account as provided in Section 8.5(a) and
to restore a formerly unlocatable Participant's Account as provided
in Section 8.6;
(b) Next, forfeitures shall be treated as an Employer contribution,
shall be used to reduce the Employer Matching Contribution as
required by Section 5.3(a) and shall be allocated to the Matching
Contribution subaccounts of the Participants on whose behalf such
contributions are to be made;
(c) Next, forfeitures shall be treated as Employer contributions and
shall be allocated to Participants' Accounts to the extent
necessary to satisfy the minimum allocation provisions of Section
6.3;
(d) Next, to the extent elected by the Plan Administrator, forfeitures
shall be treated as a Qualified Nonelective Contribution or a
Qualified Matching Contribution and shall be allocated as provided
in Sections 5.10 and 5.11;
(e) Next, to the extent elected by the Plan Administrator, forfeitures
shall be used to pay reasonable costs of administering the Plan;
(f) Any remaining forfeitures shall be treated as Employer
contributions and allocated as follows:
(i) If the Employer has elected in the Adoption Agreement that it
may make Employer Discretionary Contributions to the Plan,
such forfeitures shall be treated as Employer Discretionary
Contributions and allocated in accordance with the provisions
of Section 6.2(c);
(ii) If the Employer has not elected in the Adoption Agreement that
it may make Employer Discretionary Contributions to the Plan,
such forfeitures shall be allocated to each Participant's
Matching Contribution subaccount in the ratio that each
Participant's Elective Deferrals for the Plan Year bear to the
total of all Participants' Elective Deferrals for the Plan
Year.
6.5 WITHDRAWALS AND DISTRIBUTIONS. Any distribution to a Participant or his
Beneficiary, any amount directly rolled over from a Participant's
Account directly to the trustee of any other qualified plan described in
section 401(a) of the Code, to a qualified annuity plan described in
section 403(a) of the Code, to an individual retirement account
described in section 408(a) of the Code or to an individual retirement
annuity described in section 408(b) of the Code, or any withdrawal by a
Participant shall be charged to the appropriate subaccount(s) of the
Participant as of the date of the distribution or the withdrawal.
6.6 DETERMINATION OF VALUE OF TRUST FUND AND OF NET EARNINGS OR LOSSES. As
of each Valuation Date, the Trustee shall determine for the period then
ended the sum of the net earnings or losses of the Trust which shall
reflect accrued but unpaid interest, dividends, gains, or losses
realized from the sale, exchange or collection of assets, other income
received, appreciation in the fair market value of assets, depreciation
in the fair market value of assets, administration expenses, and taxes
and other expenses paid. Gains or losses realized and adjustments for
appreciation or depreciation in fair market value shall be computed with
respect to the difference between such value as of the preceding
Valuation Date or date of purchase, whichever is applicable, and the
value as of the date of disposition or the current Valuation Date,
whichever is applicable.
6.7 ALLOCATION OF NET EARNINGS OR LOSSES.
(a) SPECIFIC PARTICIPANT ACCOUNT ALLOCATIONS. To the extent that
Shares and other assets are specifically allocated to a specific
Participant's Account or subaccount, earnings, dividends, capital
gain distributions, appreciation, depreciation, losses and accrued
but unpaid interest and any other earnings or losses from Shares
and any other assets in such Account or subaccount shall be
allocated to such Account or subaccount.
(b) COMMON ACCOUNT ALLOCATIONS. As of each Valuation Date, the net
earnings or losses of the Trust (excluding gains or losses on
assets specifically allocated to a specific Participant's Account
or subaccount, all of which shall be allocated to such Account or
subaccount) for the valuation period then ending shall be allocated
to the Accounts of all Participants (or Beneficiaries) (excluding
the Accounts to which are allocated assets of specific
Participants) having assets in the Trust both on such date and on
the immediately preceding Valuation Date. Such allocation shall be
made by the application of a fraction, the numerator of which is
the value of the Account of a specific Participant (or Beneficiary)
as of the immediately preceding Valuation Date, reduced by any
distributions therefrom since such preceding Valuation Date, and
the denominator of which is the total value of all such Accounts as
of that preceding Valuation Date, reduced by any distributions
therefrom since such preceding Valuation Date.
6.8 RESPONSIBILITIES OF THE PLAN ADMINISTRATOR. The Plan Administrator
shall maintain accurate records with respect to the contributions made
by or on behalf of Participants under the Plan and shall furnish the
Trustee with written instructions directing the Trustee to allocate all
Plan contributions to the Trust among the separate Accounts and
subaccounts of Participants in accordance with Section 6.1 above. In
making any such allocation, the Trustee shall be fully entitled to rely
on the instructions furnished by the Plan Administrator and shall be
under no duty to make any inquiry or investigation with respect thereto.
6.9 DEFINITIONS.
(a) DETERMINATION DATE. For the first Plan Year of the Plan, the last
day of that Plan Year. With respect to any Plan Year subsequent to
the first Plan Year, the last day of the preceding Plan Year.
(b) INTEGRATION LEVEL. The Taxable Wage Base or such lesser amount (or
percentage of Taxable Wage Base) elected by the Employer in the
Adoption Agreement.
(c) KEY EMPLOYEE.
(i) Any Employee or former Employee (and the Beneficiaries of such
Employee) who at any time during the determination period was
an officer of the Employer if such individual's annual
compensation exceeds 50% of the dollar limitation under
section 415(b)(1)(A) of the Code; an owner (or considered an
owner under section 318 of the Code) of one of the ten largest
interests in the Employer if such individual's Compensation
exceeds 100% of the dollar limitation under section
415(c)(1)(A) of the Code; a Five Percent Owner of the
Employer; or a 1% owner of the Employer who has annual
compensation of more than $150,000.
<PAGE>
(ii) For purposes of this Section, annual compensation means
Section 415 Compensation, but including amounts contributed by
the Employer pursuant to a salary reduction agreement which
are excludable from the Employee's gross income under section
125, 402(a)(8), 402(h) or 403(b) of the Code.
(iii) For purposes of this Section, the determination period is the
Plan Year containing the Determination Date and the four
preceding Plan Years.
(d) MAXIMUM PROFIT SHARING DISPARITY RATE. The lesser of:
(i) 2.7% (5.7% if the Plan is not Top-Heavy);
(ii) The applicable percentage determined in accordance with the
table below:
If the Integration Level is
<TABLE>
<CAPTION>
The Applicable
More Than But Not More Than Percentage Is:
- --------- ----------------- --------------
Top-Heavy Not Top-Heavy
--------- -------------
<S> <C> <C> <C>
$0 X 2.7% 5.7%
X */ of TWB 80% of TWB 1.3% 4.3%
-
80% of TWB Y **/ 2.4% 5.4%
--
</TABLE>
*X = the greater of $10,000 or 20% of TWB.
**Y = any amount more than 80% of the TWB but less than 100% of TWB.
If the Integration Level is equal to TWB, the applicable percentage is
2.7% (5.7% if the Plan is not Top-Heavy).
(e) NON-KEY EMPLOYEE. Any Employee or former Employee who is not a Key
Employee. In addition, any Beneficiary of a Non-Key Employee shall
be treated as a Non-Key Employee.
(f) PERMISSIVE AGGREGATION GROUP. The Required Aggregation Group of
plans plus any other plan or plans of the Employer which, when
considered as a group with the Required Aggregation Group, would
continue to satisfy the requirements of sections 401(a)(4) and 410
of the Code.
(g) PRESENT VALUE. Present Value shall be based only on the interest
and mortality rates specified in the Adoption Agreement.
(h) REQUIRED AGGREGATION GROUP. (A) Each qualified plan of the
Employer in which at least one Key Employee participates or
participated at any time during the determination period
(regardless of whether the plan has terminated), and (B) any other
qualified plan of the Employer which enables a plan described in
(A) to meet the requirements of section 401(a)(4) or 410 of the
Code.
(i) TOP-HEAVY. For any Plan Year beginning after December 31, 1983,
this Plan is Top-Heavy if any of the following conditions exists:
(i) If the Top-Heavy Ratio for this Plan exceeds 60% and this Plan
is not part of any Required Aggregation Group or Permissive
Aggregation Group of plans.
(ii) If this Plan is a part of a Required Aggregation Group of
plans but not part of a Permissive Aggregation Group and the
Top-Heavy Ratio for the group of plans exceeds 60%.
(iii) If this Plan is a part of a Required Aggregation Group and
part of a Permissive Aggregation Group of plans and the
Top-Heavy Ratio for the Permissive Aggregation Group exceeds
60%.
(j) TOP-HEAVY RATIO.
(i) If the Employer maintains one or more defined contribution
plans (including any Simplified Employee Pension Plan) and the
Employer has not maintained any defined benefit plan which
during the 5-year period ending on the Determination Date(s)
has or has had accrued benefits, the Top-Heavy Ratio for this
Plan alone or for the Required or Permissive Aggregation
Group, as appropriate, is a fraction, the numerator of which
is the sum of the account balances of all Key Employees as of
the Determination Date(s) (including any part of any account
balance distributed in the 5-year period ending on the
Determination Date(s)), and the denominator of which is the
sum of all account balances (including any part of any account
balance distributed in the 5-year period ending on the
Determination Date(s)), both computed in accordance with
section 416 of the Code and the regulations thereunder. Both
the numerator and denominator of the Top-Heavy Ratio are
increased to reflect any contribution not actually made as of
the Determination Date but which is required to be taken into
account on that date under section 416 of the Code and the
regulations thereunder.
(ii) If the Employer maintains one or more defined contribution
plans (including any Simplified Employee Pension Plan) and the
Employer maintains or has maintained one or more defined
benefit plans which during the 5-year period ending on the
Determination Date(s) has or has had any accrued benefits, the
Top-Heavy Ratio for any Required or Permissive Aggregation
Group, as appropriate, is a fraction, the numerator of which
is the sum of account balances under the aggregated defined
contribution plan or plans for all Key Employees, determined
in accordance with (i) above, and the Present Value of accrued
benefits under the aggregated defined benefit plan or plans
for all Key Employees as of the Determination Date(s), and the
denominator of which is the sum of the account balances under
the aggregated defined contribution plan or plans for all
Participants, determined in accordance with (i) above, and the
Present Value of accrued benefits under the defined benefit
plan or plans for all Participants as of the Determination
Date(s), all determined in accordance with section 416 of the
Code and the regulations thereunder. The accrued benefits
under a defined benefit plan in both the numerator and
denominator of the Top-Heavy Ratio are increased for any
distribution of an accrued benefit made in the 5-year period
ending on the Determination Date.
(iii) For purposes of (i) and (ii) above, the value of account
balances and the Present Value of accrued benefits will be
determined as of the most recent Valuation Date that falls
within or ends with the 12-month period ending on the
Determination Date, except as provided in section 416 of the
Code and the regulations thereunder for the first and second
plan years of a defined benefit plan. The account balances
and accrued benefits of a Participant (A) who is not a Key
Employee but who was a Key Employee in a prior year, or (B)
who has not been credited with at least one Hour of Service
with any employer maintaining the Plan at any time during the
5-year period ending on the Determination Date will be
disregarded. The calculation of the Top-Heavy Ratio, and the
extent to which distributions, rollovers and transfers are
taken into account will be made in accordance with section 416
of the Code and the regulations thereunder. Deductible
employee contributions will not be taken into account for
purposes of computing the Top-Heavy Ratio. When aggregating
25
<PAGE>
plans, the value of account balances and accrued benefits will
be calculated with reference to the Determination Dates that
fall within the same calendar year.
The accrued benefit of a Participant other than a Key Employee
shall be determined under (A) the method, if any, that
uniformly applies for accrual purposes under all defined
benefit plans maintained by the Employer, or (B) if there is
no such method, as if such benefit accrued not more rapidly
than the slowest accrual rate permitted under the fractional
rule of section 411(b)(1)(C) of the Code.
(k) TAXABLE WAGE BASE (OR "TWB"). The contribution and benefit base in
effect under section 230 of the Social Security Act on the first
day of the Plan Year.
ARTICLE 7. LIMITATIONS ON ALLOCATIONS
7.1 LIMITATIONS ON ANNUAL ADDITIONS TO QUALIFIED DEFINED CONTRIBUTION PLANS.
Notwithstanding any other provision of this Plan to the contrary, the
amount of Annual Additions that may be credited to the Participant's
Account for any Limitation Year may not exceed the Maximum Permissible
Amount reduced by the sum of the Annual Additions to his Account under
all other defined contribution plans now or hereafter maintained by the
Employer or Affiliated Employers, except that in determining whether any
entity is part of the controlled group of corporations or trades or
businesses including the Employer, "more than 50%" shall be substituted
for "at least 80%" in the tests under section 414(b) and (c) of the
Code. If the Employer contribution that would otherwise be contributed
or allocated to the Participant's Account would cause the Annual
Additions for the Limitation Year to exceed the preceding limitation,
the amount contributed or allocated under this Plan will be reduced so
that the Annual Additions for the Limitation Year to all defined
contribution plans maintained by the Employer will equal the Maximum
Permissible Amount. If, as a result of the allocation of forfeitures, a
reasonable error in determining a Participant's Compensation or other
limited facts and circumstances, there is an Excess Amount, the Excess
Amount will be deemed to consist of the Annual Additions last allocated,
except that Annual Additions attributable to a Simplified Employee
Pension Plan will be deemed allocated first followed by Annual Additions
to a welfare benefit fund or individual medical account regardless of
the actual allocation date. If an Excess Amount was allocated to a
Participant on an allocation date of this Plan which coincides with an
allocation date of another plan, the Excess Amount attributed to this
Plan will be the product of:
(a) the total Excess Amount allocated as of such date, times
(b) the ratio of (i) the Annual Additions allocated to the Participant
for the Limitation Year as of such date under this Plan to (ii) the
total Annual Additions allocated to the Participant for the
Limitation Year as of such date under this and all the other
qualified master or prototype defined contribution plans.
Any Excess Amount allocated to this Plan will be disposed of as follows:
(a) Any Elective Deferrals, and any income attributable thereto, to the
extent they would reduce the Excess Amount, will be returned to the
Participant;
(b) If, after the application of subsection (a), an Excess Amount still
exists, and the Participant is covered by the Plan at the end of
the Limitation Year, the Excess Amount in the Participant's Account
will be used to reduce Employer contributions (including any
allocation of forfeitures) for such Participant in the next
Limitation Year, and each succeeding Limitation Year if necessary;
(c) If, after the application of subsection (a), an Excess Amount still
exists, and the Participant is not covered by the Plan at the end
of the Limitation Year, the Excess Amount will be held unallocated
in a suspense account. The suspense account will be applied to
reduce future Employer contributions (including allocation of any
forfeitures) for all remaining Participants in the next Limitation
Year, and each succeeding Limitation Year if necessary;
(d) If a suspense account is in existence at any time during the
Limitation Year, it will not participate in the allocation of the
Trust's investment gains and losses. If a suspense account is in
existence at any time during a particular Limitation Year, all
amounts in the suspense account must be allocated and reallocated
to Participants' Accounts before any Employer or any Employee
contributions may be made to the Plan for that Limitation Year.
Excess Amounts may not be distributed to Participants or former
participants.
7.2 EMPLOYERS WHO, IN ADDITION TO THIS PLAN, MAINTAIN A QUALIFIED DEFINED
BENEFIT PLAN. If the Employer or Affiliated Employers maintain, or at
any time maintained, a qualified defined benefit plan covering any
Participant in this Plan, the sum of the Participant's Defined Benefit
Fraction and Defined Contribution Fraction will not exceed 1.0 in any
Limitation Year. The Annual Additions which may be credited to such a
Participant's Account under this Plan for any Limitation Year will be
limited in accordance with the terms of the Adoption Agreement.
7.3 DEFINITIONS.
(a) ANNUAL ADDITIONS. Effective on the first day of the Plan Year
beginning after December 31, 1986, the sum of the following amounts
credited to a Participant's Account for the Limitation Year:
(i) Employer contributions (including Excess Elective Deferrals
(as defined in Section 5.13) not distributed to the
Participant on or before the April 15 following the close of
the taxable year of such Excess Elective Deferrals, Excess
Contributions and Excess Aggregate Contributions, both as
defined in Section 5.13);
(ii) for Plan Years beginning on and after January 1, 1987,
Employee After-Tax Contributions;
(iii) forfeitures;
(iv) amounts allocated after March 31, 1984 to an individual
medical account as defined in section 415(l)(2) of the Code,
that is part of a pension or annuity plan maintained by the
Employer, are treated as Annual Additions to a defined
contribution plan. Also, amounts derived from contributions
paid or accrued after December 31, 1985, in taxable years
ending after such date that are attributable to
post-retirement medical benefits allocated to the separate
account of a Key Employee, as defined in section
<PAGE>
419A(d)(3) of the Code, under a welfare benefit fund, as defined in
section 419(e) of the Code maintained by the Employer, are treated
as Annual Additions to a defined contribution plan; and
(v) allocations under a Simplified Employee Pension Plan.
For this purpose, any Excess Amount applied in the Limitation Year to reduce
Employer contributions will be considered Annual Additions for such Limitation
Year.
(b) DEFINED BENEFIT FRACTION. A fraction, the numerator of which is the sum
of the Participant's Projected Annual Benefits under all defined benefit
plans (whether or not terminated) maintained by the Employer, and the
denominator of which is the lesser of 100% of the dollar limitation
determined for the Limitation Year under section 415(b) and (d) of the
Code or 140% of his average Section 415 Compensation for the three
consecutive calendar years that produces the highest average, including
any adjustments under section 415(b) of the Code.
Notwithstanding the above, if the Participant was a Participant as of
the first day of the first Limitation Year beginning after December 31,
1986, in one or more defined benefit plans maintained by the Employer
which were in existence on May 6, 1986, the denominator of this fraction
will not be less than 125% of the sum of the annual benefits under such
plans which the Participant had accrued as of the close of the last
Limitation Year beginning before January 1, 1987, disregarding any
changes in the terms and conditions of the plan after May 5, 1986. The
preceding sentence applies only if the defined benefit plans
individually and in the aggregate satisfied the requirements of section
415 of the Code for all Limitation Years beginning before January 1,
1987.
(c) DEFINED CONTRIBUTION FRACTION. A fraction, the numerator of which is
the sum of the Annual Additions to the Participant's Accounts under all
the defined contribution plans (whether or not terminated) maintained by
the Employer for the current and all prior Limitation Years (including
the Annual Additions attributable to the Participant's voluntary
nondeductible contributions to all defined benefit plans, whether or not
terminated, maintained by the Employer, and the Annual Additions
attributable to all welfare benefit funds as defined in section 419(e)
of the Code and individual medical accounts as defined in section
415(l)(2) of the Code, and simplified employee pensions maintained by
the Employer), and the denominator of which is the sum of the maximum
aggregate amounts for the current and all prior Limitation Years of
service with the Employer (regardless of whether a defined contribution
plan was maintained by the Employer). The maximum aggregate amount in
any Limitation Year is the lesser of 100% of the dollar limitation in
effect under section 415(c)(1)(A) of the Code or 35% of the
Participant's Compensation for such year.
If the Participant was a Participant as of the end of the first day of
the first Limitation Year beginning after December 31, 1986, in one or
more defined contribution plans maintained by the Employer which were in
existence on May 6, 1986, the numerator of this fraction will be
adjusted if the sum of this fraction and the Defined Benefit Fraction
would otherwise exceed 1.0 under the terms of this Plan. Under the
adjustment, an amount equal to the product of (1) the excess of the sum
of the fractions over 1.0, and (2) the denominator of this fraction,
will be permanently subtracted from the numerator of this fraction. The
adjustment is calculated using the fractions as they would be computed
as of the end of the last Limitation Year beginning before January 1,
1987, and disregarding any changes in the terms and conditions of the
plan made after May 5, 1986, but using the section 415 of the Code
limitation applicable to the first Limitation Year beginning on or after
January 1, 1987. The Annual Addition for any Limitation Year beginning
before January 1, 1987, shall not be recomputed to treat all Employee
contributions as Annual Additions.
(d) EXCESS AMOUNT. The excess of the Participant's Annual Addition for the
Limitation Year over the Maximum Permissible Amount.
(e) LIMITATION YEAR. The Plan Year.
(f) MAXIMUM PERMISSIBLE AMOUNT. The maximum Annual Addition that may be
contributed or allocated to a Participant's Account under the Plan for
any Limitation Year shall not exceed the lesser of:
(i) $30,000 or, if greater, 25% of the section 415(b)(1) of the Code
limitation for such year; or
(ii) 25% of the Participant's Section 415 Compensation actually paid or
includible in gross income during the Limitation Year.
The limitation referred to in (ii) shall not apply to any contribution
for medical benefits (within the meaning of section 401(h) or 419A(f)(2)
of the Code) which is otherwise treated as an Annual Addition under
section 415(l)(1) or 419A(d)(2) of the Code.
If a Limitation Year less than 12 consecutive months is created because
of an amendment changing the Plan Year, the Maximum Permissible Amount
shall be equal to the limit for such Limitation Year under paragraph (i)
multiplied by a fraction, the numerator of which is the number of months
in such short Limitation Year and the denominator of which is 12.
(g) PROJECTED ANNUAL BENEFIT. The annual retirement benefit (adjusted to an
actuarially equivalent straight life annuity if such benefit is
expressed in a form other than a straight life annuity or Qualified
Joint and Survivor Annuity) to which the Participant would be entitled
under the terms of all defined benefit plans assuming:
(i) the Participant will continue employment until Normal Retirement Age
under the Plan (or current age, if later), and
(ii) the Participant's Section 415 Compensation for the current Limitation
Year and all other relevant factors used to determine benefits under
the Plan will remain constant for all future Limitation Years.
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<PAGE>
ARTICLE 8 VESTING
8.1 EMPLOYEE AFTER-TAX CONTRIBUTIONS, ELECTIVE DEFERRAL CONTRIBUTIONS,
ROLLOVER CONTRIBUTIONS, QUALIFIED NONELECTIVE CONTRIBUTIONS AND
QUALIFIED MATCHING CONTRIBUTIONS. A Participant's Employee After-Tax
Contribution subaccount, Elective Deferral subaccount, rollover
subaccount, Qualified Nonelective Contribution subaccount and Qualified
Matching Contribution subaccount shall be fully vested and
nonforfeitable at all times.
8.2 EMPLOYER DISCRETIONARY CONTRIBUTIONS AND MATCHING CONTRIBUTIONS.
(a) GENERAL. Notwithstanding the vesting schedule selected by the
Employer in the Adoption Agreement, the Participant's Employer
Discretionary Contribution subaccount and Matching Contribution
subaccount shall be fully vested and nonforfeitable upon the
Participant's death, Total and Permanent Disability or attainment
of Normal Retirement Age while employed by the Employer. In the
absence of any of the preceding events, and subject to the
provisions of Sections 5.4(d), 5.9(d) and 5.12, the Participant's
Employer Discretionary Contribution subaccount and Matching
Contribution subaccount shall be vested in accordance with the
vesting schedule specified in the Adoption Agreement. The schedule
must be at least as favorable to Participants as either schedule
(i) or (ii) below.
(i) Graduated vesting according to the following schedule:
<TABLE>
<CAPTION>
YEARS OF VESTING SERVICE PERCENT VESTED
------------------------ --------------
<S> <C>
Less than 2 0%
2 but less than 3 20%
3 but less than 4 40%
4 but less than 5 60%
5 but less than 6 80%
6 or more 100%
</TABLE>
(ii) Full 100% vesting after three Years of Vesting Service.
(b) IN-SERVICE DISTRIBUTIONS WHEN NOT FULLY VESTED. If a distribution
is made from a Participant's Employer Discretionary Contribution
subaccount or Matching Contribution subaccount at a time when the
Participant is not 100% vested in such subaccount and the
Participant's employment with the Employer has not terminated, then
(i) A separate remainder subaccount will be established for the
Participant's interest in such Employer Discretionary
Contribution subaccount or Matching Contribution subaccount at
the time of the distribution, and
(ii) At any subsequent time, the Participant's vested portion of
such separate subaccount will be equal to an amount "x"
determined under the formula:
X = P(AB + (RxD)) - (RxD)
where
P = the Participant's vested percentage determined under
subsection (a) at the relevant time.
AB = the amount in such separate subaccount at the relevant time.
R = the ratio of AB to the amount in the subaccount prior to the
distribution.
D = the amount of the distribution.
8.3 AMENDMENTS TO VESTING SCHEDULE.
(a) PARTICIPANTS' ELECTION RIGHTS. If the Plan's vesting schedule is
amended, or the Plan is amended in any way that directly or
indirectly affects the computation of the Participant's
nonforfeitable percentage, each Participant with at least three
years of service with the Employer may elect, within a reasonable
period after the adoption of the amendment or change, to have the
nonforfeitable percentage computed under the Plan without regard to
such amendment or change. For any Participants who do not have at
least one Hour of Service in any Plan Year beginning after December
31, 1988, the preceding sentence shall be applied by substituting
"five years of service" for "three years of service" where such
language appears.
(b) ELECTION PERIOD. The period during which the election may be made
shall commence with the date the amendment is adopted or deemed to
be made and shall end on the latest of:
(i) 60 days after the amendment is adopted;
(ii) 60 days after the amendment becomes effective; or
(iii) 60 days after the Participant is issued written notice of the
amendment by the Employer or Plan Administrator.
(c) PROHIBITION AGAINST REDUCING ACCRUED BENEFITS. No amendment to the
Plan shall be effective to the extent that it has the effect of
decreasing a Participant's accrued benefit. Notwithstanding the
preceding sentence, a Participant's account balance may be reduced
to the extent permitted under section 412(c)(8) of the Code. For
purposes of this subsection, a Plan amendment which has the effect
of decreasing a Participant's account balance or eliminating an
optional form of benefit, with respect to benefits attributable to
service before the amendment shall be treated as reducing an
accrued benefit. Furthermore, if the vesting schedule of a Plan is
amended, in the case of an Employee who is a Participant as of the
later of the date such amendment is adopted or the date it becomes
effective, the nonforfeitable percentage (determined as of such
date) of such Employee's right to his Employer-derived accrued
benefit will not be less than his percentage computed under the
Plan without regard to such amendment.
8.4 DETERMINATION OF YEARS OF VESTING SERVICE. For purposes of determining
the vested and nonforfeitable percentage of the Participant's Employer
Discretionary Contribution and Matching Contribution subaccounts, all of
the Participant's Years of Vesting Service with the Employer or an
Affiliated Employer shall be taken into account. If Employer maintains
the plan of a predecessor employer, Years of Vesting Service with such
employer will be treated as service with the Employer.
8.5 FORFEITURE OF NONVESTED AMOUNTS. For Plan Years beginning before 1985,
any portion of a Participant's Account that is not vested shall be
forfeited by him as of the last day of the Plan Year in which he incurs
a Break in Service. For Plan Years beginning after 1984, any portion of
a Participant's Account that is not vested shall be forfeited in
accordance with the following rules:
(a) DISTRIBUTION IN FULL. If a Participant's service with the Employer
terminates and if the entire vested portion of the Participant's
Account is distributed to him at any time before the end of the
second Plan Year following the Plan Year in which his employment
terminated, the remaining portion of the Participant's Account
shall be forfeited as of the end of the Plan Year in which such
distribution occurs, as long as the Participant
28
<PAGE>
has not resumed employment with the Employer by such date.
However, if the Participant has no vested interest in his Account
at the time of his termination of employment, the Plan
Administrator nonetheless shall treat the Participant as if he had
received a distribution on the date his employment terminated and
shall forfeit the Participant's entire Account on the date his
employment terminated. If the Participant returns as an Employee
before the end of five consecutive Breaks in Service measured from
the day immediately after the date of his distribution (or measured
from the date his employment terminated in the case of a
Participant who had no vested interest in his Account), and if he
repays to the Trustee the full amount of the distribution (if any)
paid to him by reason of his termination of employment no later
than the fifth anniversary of the date of his reemployment, then
his Account (determined as of the date of the distribution of his
vested interest, unadjusted by subsequent gains and losses) shall
be fully restored to him as of the end of the Plan Year in which
such repayment occurs (or in the case of a Participant who had no
vested interest in his Account, such Account shall be restored as
of the end of the Plan Year in which he is reemployed). In such
case, the Participant's Account shall be restored first out of such
Participant's repayment (if any is required), next out of the
forfeitures for such Plan Year and, if such forfeitures are
insufficient to restore such Account, the Employer shall make a
special contribution to the Trustee to the extent necessary so that
the Participant's ccount is fully restored.
(b) PARTIAL DISTRIBUTIONS. If a Participant's service with the
Employer terminates and if his entire vested interest in his
Account is not distributed to him before the end of the second Plan
Year following the Plan Year in which his employment terminated, a
separate remainder subaccount shall be established for that portion
of the Participant's Account that is not vested and such separate
subaccount shall be forfeited at the end of the Plan Year in which
the Participant incurs five consecutive Breaks in Service. If all
or any portion of such a Participant's vested benefits are
distributed before a forfeiture is permitted and if the Participant
returns to work as an Employee after the distribution and before he
incurs five consecutive Breaks in Service, his vested interest in
such separate subaccount at any time shall be determined by
applying the formula in Section 8.2(b)(ii).
8.6 REINSTATEMENT OF BENEFIT. If a vested benefit is forfeited because the
Participant or Beneficiary cannot be found, such benefit will be
reinstated if a claim is made by the Participant or Beneficiary.
ARTICLE 9. LOANS
9.1 GENERAL PROVISIONS.
(a) ELIGIBILITY FOR LOANS. If the Employer so elects in the Adoption
Agreement, loans shall be made available to any Participant or
Beneficiary who is a party-in-interest (as defined in section 3(14)
of ERISA) on a reasonably equivalent basis. Loans will not be made
to any shareholder-employee, Owner-Employee or Participant or
Beneficiary who is not a party-in-interest (as defined in section
3(14) of ERISA). For purposes of this requirement, a
shareholder-employee means an Employee or officer of an electing
small business (subchapter S) corporation who owns (or is
considered as owning within the meaning of section 318(a)(1) of the
Code), on any day during the taxable year of such corporation, more
than 5% of the outstanding stock of the corporation.
(b) SPOUSAL CONSENT RULES.
(i) If Section 11.9 is applicable to a Participant, the
Participant must obtain the consent of his or her spouse, if
any, to use his or her account balance as security for the
loan. Spousal consent shall be obtained no earlier than the
beginning of the 90 day period that ends on the date on which
the loan is to be so secured. The consent must be in writing,
must acknowledge the effect of the loan, and must be witnessed
by a Plan representative or notary public. Such consent shall
thereafter be binding with respect to the consenting spouse or
any subsequent spouse with respect to that loan. A new
consent shall be required if the vested account balance is
used for renegotiation, extension, renewal or other revision
of the loan.
(ii) If Section 11.9 is applicable to a Participant and a valid
spousal consent has been obtained in accordance with
subsection (b)(i), then, notwithstanding any other provision
of this Plan, the portion of the Participant's vested Account
used as a security interest held by the Plan by reason of a
loan outstanding to the Participant shall be taken into
account for purposes of determining the amount of the Account
payable at the time of death or distribution, but only if the
reduction is used as repayment of the loan. If less than 100%
of the Participant's vested Account (determined without regard
to the preceding sentence) is payable to the Participant's
surviving spouse, then the vested Account shall be adjusted by
first reducing the vested Account by the amount of the
security used as repayment of the loan, and then determining
the benefit payable to the surviving spouse.
9.2 AMOUNT OF LOAN. Loans shall not be made available to Highly Compensated
Employees in an amount greater than the amount made available to other
Employees. Loans to any Participant or Beneficiary will not be made to
the extent that such loan, when added to the outstanding balance of all
other loans to the Participant or Beneficiary, would exceed the lesser
of:
(a) $50,000 reduced by the excess (if any) of the highest outstanding
balance of loans during the one year period ending on the day
before the loan is made, over the outstanding balance of loans from
the Plan on the date the loan is made; or
(b) one-half the present value of the vested Account of the Participant.
For the purpose of the above limitation, all loans from all plans of the
Employer and other members of a group of employers described in section
414(b), 414(c) and 414(m) of the Code are aggregated.
9.3 MANNER OF MAKING LOANS. The Plan's loan program will be administered by
the Plan Administrator. A request by a Participant for a loan shall be
made in writing to the Plan Administrator and shall specify the amount
of the loan, and the subaccount(s) or investments of the Participant
from which the loan should be made. The terms and conditions on which
the Plan Administrator shall approve loans under the Plan shall be
applied on a uniform and nondiscriminatory basis with respect to all
Participants. If a Participant's request for a loan is approved by the
Plan Administrator, the Plan Administrator shall furnish the Trustee
with written instructions directing the Trustee to make the loan in a
lump-sum payment of cash to the Participant. In making any loan
29
<PAGE>
payment under this Article, the Trustee shall be fully entitled to rely
on the instructions furnished by the Plan Administrator and shall be
under no duty to make any inquiry or investigation with respect thereto.
9.4 TERMS OF LOAN. Loans shall be made on such terms and subject to such
limitations as the Plan Administrator may prescribe. Furthermore, any
loan shall, by its terms, require that repayment (principal and
interest) be amortized in level payments, not less frequently than
quarterly, over a period not extending beyond five years from the date
of the loan, unless such loan is used to acquire a dwelling unit which,
within a reasonable time (determined at the time the loan is made), will
be used as the principal residence of the Participant. The rate of
interest to be charged shall be determined by the Plan Administrator in
accordance with the rates quoted by representative financial
institutions in the local area for similar loans.
9.5 SECURITY FOR LOAN. Any loan to a Participant under the Plan shall be
secured by the pledge of no more than 50% of the Participant's vested
interest in his Account. Such pledge shall be evidenced by the
execution of a promissory note by the Participant which shall provide
that, in the event of any default by the Participant on a loan
repayment, the Plan Administrator shall be authorized (to the extent
permitted by law) to take any and all other actions necessary and
appropriate to enforce collection of the unpaid loan. An assignment or
pledge of any portion of the Participant's interest in the Plan will be
treated as a loan under this Article.
9.6 SEGREGATED INVESTMENT. Loans shall be considered a Participant directed
investment and, for the purposes of allocating earnings and losses
pursuant to Article 6, shall not be considered a part of the common fund
under the Trust.
9.7 REPAYMENT OF LOAN. The Plan Administrator shall have the sole
responsibility for ensuring that a Participant timely makes all loan
repayments and for notifying the Trustee in the event of any default by
the Participant on the loan. Each loan repayment shall be paid to the
Trustee and shall be accompanied by written instructions from the Plan
Administrator that identify the Participant on whose behalf the loan
repayment is being made.
9.8 DEFAULT ON LOAN. In the event of a termination of the Participant's
employment with the Affiliated Employers or a default by a Participant
on a loan repayment, all remaining payments on the loan shall be
immediately due and payable. The Plan Administrator shall take any and
all actions necessary and appropriate to enforce collection of the
unpaid loan. However, attachment of the Participant's Account pledged as
security will not occur until a distributable event occurs under the
Plan.
ARTICLE 10. WITHDRAWALS
10.1 WITHDRAWAL OF EMPLOYEE AFTER-TAX CONTRIBUTIONS. Subject to the
requirements of Sections 10.3 and 11.9, any Participant who has made
Employee After-Tax Contributions may, upon 30 days notice in writing
filed with the Plan Administrator, have paid to him all or any portion
of the value of his Employee After-Tax Contribution subaccount.
10.2 HARDSHIP WITHDRAWALS.
(a) GENERAL RULE. Subject to Sections 10.3 and 11.9 and if the
Employer so elects in the Adoption Agreement, distribution of
Elective Deferrals (and earnings thereon accrued as of December 31,
1988) may be made to a Participant in the event of hardship. For
the purposes of this Section, hardship is defined as an immediate
and heavy financial need of the Participant where such Participant
lacks other available resources.
(b) NEEDS CONSIDERED IMMEDIATE AND HEAVY. The only financial needs
considered immediate and heavy are the following:
(i) deductible medical expenses (within the meaning of section
213(d) of the Code) of the Employee, the Employee's spouse,
children or dependents;
(ii) the purchase (excluding mortgage payments) of a principal
residence for the Employee;
(iii) payment of tuition and related educational fees for the next
twelve months of post-secondary education for the Employee,
the Employee's spouse, children or dependents; or
(iv) the need to prevent the eviction of the Employee from, or a
foreclosure on the mortgage of, the Employee's principal
residence.
(c) NECESSARY TO SATISFY NEED. A distribution will be considered as
necessary to satisfy an immediate and heavy financial need of the
Employee only if:
(i) the Employee has obtained all distributions, other than
hardship distributions, and all nontaxable loans under all
plans maintained by the Employer;
(ii) all plans maintained by the Employer provide that the
Employee's Elective Deferrals (and Employee contributions)
will be suspended for twelve months after the receipt of the
hardship distribution;
(iii) the distribution is not in excess of the amount of an
immediate and heavy financial need (including amounts
necessary to pay any federal, state or local income taxes or
penalties reasonably anticipated to result from the
distribution); and
(iv) all plans maintained by the Employer provide that the Employee
may not make Elective Deferrals for the Employee's taxable
year immediately following the taxable year of the hardship
distribution in excess of the applicable limit under section
402(g) of the Code for such taxable year less the amount of
such Employee's Elective Deferrals for the taxable year of the
hardship distribution.
10.3 MANNER OF MAKING WITHDRAWALS. Any withdrawal by a Participant under the
Plan shall be made only after the Participant files a written request
with the Plan Administrator specifying the nature of the withdrawal (and
the reasons therefor, if a hardship withdrawal) and the amount of funds
requested to be withdrawn and, if applicable, including the spousal
consent required under Section 11.9. Upon approving any withdrawal, the
Plan Administrator shall furnish the Trustee with written instructions
30
<PAGE>
directing the Trustee to make the withdrawal in a lump-sum payment of
cash to the Participant. In making any withdrawal payment, the Trustee
shall be fully entitled to rely on the instructions furnished by the
Plan Administrator, and shall be under no duty to make any inquiry or
investigation with respect thereto.
10.4 LIMITATIONS ON WITHDRAWALS. The Plan Administrator may prescribe
uniform and nondiscriminatory rules and procedures limiting the number
of times a Participant may make a withdrawal under the Plan during any
Plan Year, and the minimum amount a Participant may withdraw on any
single occasion.
10.5 SPECIAL CIRCUMSTANCES. Elective Deferral, Qualified Nonelective
Contribution and Qualified Matching Contribution subaccounts may be
distributed upon:
(a) PLAN TERMINATION. Termination of the Plan without the
establishment of another defined contribution plan, other than an
employee stock ownership plan (as defined in section 4975(e) or 409
of the Code) or a Simplified Employee Pension Plan as defined in
section 408(k) of the Code.
(b) DISPOSITION OF ASSETS. The disposition by a corporation to an
unrelated corporation of substantially all of the assets (within
the meaning of section 409(d)(2) of the Code) used in a trade of
business of such corporation if such corporation continues to
maintain this plan after the disposition, but only with respect to
Employees who continue employment with the corporation acquiring
such assets.
(c) DISPOSITION OF SUBSIDIARY. The disposition by a corporation to an
unrelated entity of such corporation's interest in a subsidiary
(within the meaning of section 409(d)(3) of the Code) if such
corporation continues to maintain this Plan, but only with respect
to Employees who continue employment with such subsidiary.
All distributions that may be made pursuant to one or more of the
foregoing distributable events are subject to the spousal and
participant consent requirements (if applicable) contained in sections
411(a)(11) and 417 of the Code. In addition, distributions after March
31, 1988, that are triggered by any of the foregoing events must be made
in a lump sum.
ARTICLE 11. DISTRIBUTION PROVISIONS
11.1 RETIREMENT DISTRIBUTIONS. If a Participant's Normal Retirement Age
should occur prior to the termination of his employment with the
Employer, all amounts then credited to such Participant's Account shall
become 100% vested regardless of the number of the Participant's Years
of Vesting Service. If a Participant's employment is terminated on or
after his Normal Retirement Age, such termination shall be deemed
"Retirement," and the Plan Administrator shall direct the Trustee to
take such action as may be necessary to distribute to such Participant,
in one of the methods provided in Section 11.7, the value of his Account.
(a) DEFERRED RETIREMENT. If a Participant's employment continues after
his Normal Retirement Age, his participation in the Plan shall
continue and, subject to Section 11.8, the distribution of his
benefits shall be postponed until the earlier of (i) the date on
which his Retirement becomes effective, which shall be his Deferred
Retirement Date, or (ii) the date the Participant elects to receive
his benefits.
(b) PARTICIPANT STATUS AFTER RETIREMENT. Upon a Participant's
Retirement, his participation as an active Participant hereunder
shall cease, subject to his right to share in contributions made
with respect to the Plan Year of his Retirement if he otherwise
qualifies for such contributions in such Plan Year.
11.2 DEATH BENEFITS. Upon the death of a Participant before Retirement or
before other termination of employment with the Employer, all amounts
then credited to his Account shall become 100% vested, regardless of the
number of his Years of Vesting Service. The Plan Administrator shall
direct the Trustee to distribute the value of the Participant's Account,
in one of the methods provided in Section 11.7, and at the time provided
in Section 11.6, to any surviving Beneficiary designated by the
Participant in accordance with the provisions of subsection (c) below.
(a) DEATH OF FORMER EMPLOYEE. Upon the death of a former Employee
before distribution of his vested interest in his Account has
begun, the Trustee, in accordance with the instructions of the Plan
Administrator and in accordance with the provisions of this
Article, shall take such action as may be necessary to distribute
his vested interest in his Account, in one of the methods provided
in Section 11.7 hereof and commencing at such time provided in
Section 11.6, to any surviving Beneficiary designated in accordance
with the provisions of subsection (c) below. Upon the death of a
former Participant after distribution of his benefits has begun and
before the entire vested interest in his Account has been
distributed to him, the Plan Administrator shall direct the Trustee
to distribute the remaining portion of such interest to any
surviving Beneficiary designated in accordance with the provisions
of subsection (c) below at least as rapidly as under the method of
distribution being used as of the date of his death.
(b) PROOF OF DEATH. The Plan Administrator may require such proper
proof of death and such evidence of the right of any person to
receive payment of the vested interest of a deceased Participant or
former Participant as it may deem desirable. The Plan
Administrator's determination of death and of the right of any
person to receive payment shall be conclusive.
(c) BENEFICIARY DESIGNATION. Each Participant may designate one or
more primary Beneficiaries and one or more secondary Beneficiaries
by filing written notice with the Plan Administrator on a form
acceptable to the Plan Administrator. However, in the case of a
married Participant, the Participant shall be deemed to have
designated his surviving spouse as his sole primary Beneficiary,
notwithstanding any contrary written notice, unless such spouse
filed a written voluntary consent with the Plan Administrator
irrevocably consenting to the Participant's designation of a
non-spouse Beneficiary, which consent shall be notarized or
witnessed by the Plan Administrator, and shall acknowledge the
effect of the Participant's designation of Beneficiary. A married
Participant may not subsequently change the designated non-spouse
Beneficiary unless his spouse's voluntary consent acknowledges that
the spouse has a right to consent to a specific beneficiary and
expressly permits designations by the Participant without further
spousal consent or his spouse has filed a written consent with the
Plan Administrator, irrevocably consenting to such change, which
consent shall be notarized or witnessed by the Plan Administrator,
and shall acknowledge the effect of the change. Subject to the two
preceding sentences, a Participant may change any designated
Beneficiary by filing written notice of the change with the Plan
Administrator. If any Participant
31
<PAGE>
fails to designate a Beneficiary, or if his designated Beneficiary
or Beneficiaries do not survive the Participant, the Plan
Administrator shall designate a Beneficiary or Beneficiaries on his
behalf, in the following order:
(i) The Participant's spouse, if living at the time of the
Participant's death.
(ii) The Participant's issue, per stirpes.
(iii) The Participant's brothers and sisters, per stirpes.
(iv) The Participant's parents.
(v) The estate of the Participant.
11.3 PERMANENT DISABILITY BENEFITS. If, prior to his Retirement or other
termination of employment with the Employer, a Participant incurs a
Total and Permanent Disability, he shall be deemed to have retired by
reason of Permanent Disability, and his Account shall become 100%
vested, regardless of the number of his Years of Vesting Service. The
Plan Administrator shall determine the date as of which such
Retirement shall become effective. The Trustee, in accordance with
the instructions of the Plan Administrator and in accordance with the
provisions of this Article, shall take such action as may be necessary
to distribute the value of the Participant's Account(s) to the
Participant commencing at such time, and in one of the methods,
provided in Sections 11.5 through 11.7 hereof.
11.4 TERMINATION OF EMPLOYMENT PRIOR TO RETIREMENT, DEATH OR TOTAL AND
PERMANENT DISABILITY. If a Participant's employment with the Employer
terminates for any reason other than Retirement, Total and Permanent
Disability or death, the Plan Administrator shall direct the Trustee
to take such action as may be needed to distribute to such Participant
the vested portion of his Account, as determined in accordance with
Article 8. Such distribution shall be made commencing at such time,
and in one of the methods, provided in Sections 11.5 through 11.7
hereof.
11.5 COMMENCEMENT OF LIFETIME DISTRIBUTIONS.
(a) UPON RETIREMENT. The distribution of benefits payable to a
Participant who retires by reason of Retirement or Total and
Permanent Disability shall commence as soon as is
administratively feasible after a date on or after the
Participant's Retirement as he elects, but in no event later than
his required beginning date. Notwithstanding the foregoing
provisions of this subsection (a), if such a Participant's total
vested benefits do not exceed $3,500, his vested benefits shall
be distributed to him in a lump-sum payment as soon as
administratively feasible after his Retirement.
(b) UPON TERMINATION OF EMPLOYMENT OTHER THAN RETIREMENT. The
distribution of the vested interest of a Participant whose
employment terminated for any reason other than Retirement, Total
and Permanent Disability or death shall commence as soon as is
administratively feasible after a date elected by the Participant
that follows the date his employment terminated. Notwithstanding
the foregoing provisions of this subsection (b),
(i) If a Participant's total vested benefits do not exceed (or
at the time of any prior distribution did not exceed)
$3,500, his vested benefits shall be distributed to him in
a lump-sum payment as soon as is administratively feasible
after the date on which his employment terminated, as long
as he has not returned as an Employee on the date of such
distribution, and
(ii) Distributions shall begin no later than the Participant's
required beginning date.
(c) STATUTORY REQUIREMENTS. If a Participant does not elect to defer
payment of his benefits in accordance with subsections (a) or (b)
above, distribution of his benefits shall commence during the
sixty day period immediately following the Plan Year in which
occurs the latest of:
(i) the Participant's Normal Retirement Age,
(ii) the 10-year anniversary of the date on which the
Participant commenced participation in the Plan, and
(iii) the date the Participant's employment with the Employer
terminated.
(d) IN-SERVICE DISTRIBUTIONS. The distribution of a Participant's
vested benefits shall not commence prior to the time his
employment with the Employer terminates, except in the following
circumstances:
(i) Withdrawals made in accordance with the provisions of
Article 10,
(ii) Payments to an alternate payee pursuant to qualified
domestic relations order as described in section 414(p) of
the Code may be made at any time,
(iii) Minimum required distributions made on and after his
required beginning date, or
(iv) Distributions made in accordance with the provisions of
Section 11.1(a).
(e) REQUIRED BEGINNING DATE. The required beginning date of a
Participant is the first day of April of the calendar year
following the calendar year in which the Participant attains age
70 1/2. Notwithstanding the foregoing:
(i) The required beginning date of a Participant who attains
age 70 1/2 before January 1, 1988, shall be determined in
accordance with (A) or (B) below:
(A) The required beginning date of a Participant who is
not a Five Percent Owner is the first day of April of
the calendar year following the calendar year in
which the later of Retirement or attainment of age 70
1/2 occurs. (A Participant is treated as a Five
Percent Owner for purpose of this subsection if such
Participant is a Five Percent Owner at any time
during the Plan Year ending with or within the
calendar year in which such owner attains age 66 1/2
or any subsequent Plan Year.)
(B) The required beginning date of a Participant who is a
Five Percent Owner during any year beginning after
December 31, 1979, is the first day of April
following the later of:
(1) the calendar year in which the Participant
attains age 70 1/2, or
(2) the earlier of the calendar year with or within
which ends the Plan Year in which the
Participant becomes a Five Percent Owner, or the
calendar year in which the Participant retires.
(ii) The required beginning date of a Participant who is not a
Five Percent Owner who attains age 70 1/2 during 1988 and
who has not retired as of January 1, 1989, is April 1,
1990.
<PAGE>
11.6 COMMENCEMENT OF DEATH BENEFITS. Subject to Section 11.9, if a
Participant dies before his benefit payments have commenced, his death
benefits, if any, shall be payable beginning at such reasonable time
after the Participant's death as his Beneficiary elects, subject to
and in accordance with the following provisions:
(a) NON-SPOUSE BENEFICIARY. In the case of a Beneficiary other than
the Participant's surviving spouse, benefits must commence no
later than the December 31 that coincides with or immediately
follows the fifth anniversary of the Participant's death. If the
beginning date of such benefits is after the December 31 that
coincides with or immediately follows the first anniversary of
the Participant's death, the Beneficiary's entire interest in the
Participant's death benefits must be distributed no later than
the December 31 that coincides with or immediately follows the
fifth anniversary of the Participant's death.
(b) SPOUSE BENEFICIARY. If the Participant's Beneficiary is the
Participant's surviving spouse, the surviving spouse may elect to
defer the commencement of benefits to the December 31 that
coincides with or immediately follows the later of (i) the first
anniversary of the Participant's death, or (ii) the date on which
the Participant would have attained age 70 1/2. If the
Participant's Beneficiary is his surviving spouse, and if his
surviving spouse dies after the Participant dies but prior to the
time the Participant's death benefits have commenced, the
provisions of this Article 11 shall apply as if the surviving
spouse were the Participant, except that the surviving spouse of
the deceased Participant's surviving spouse shall not qualify as
a surviving spouse.
(c) ELECTION PERIOD. Any election made by a Beneficiary under this
Section must be made no later than the December 31 that coincides
with or immediately follows the first anniversary of the
Participant's death and must be irrevocable as of such date,
except that if the Participant's Beneficiary is the Participant's
surviving spouse, the surviving spouse may defer making such
election to the earlier of (i) the December 31 that coincides
with or immediately follows the fifth anniversary of the
Participant's death, or (ii) the last date on which the surviving
spouse could defer the commencement of benefits under subsection
(b). If a Beneficiary fails to make a proper election hereunder,
the Beneficiary's interest in the Participant's death benefits
shall be distributed in full no later than the December 31 that
coincides with or immediately follows the fifth anniversary of
the Participant's death.
11.7 METHODS OF DISTRIBUTION.
(a) GENERAL RULE. Subject to Section 11.9, all benefits shall be
distributed in accordance with one of the following methods as
the Participant or Beneficiary, as the case may be, may elect in
writing during the 90-day period before the date benefits
commence:
(i) In equal monthly, quarterly or annual installments over a
period certain not to exceed the life expectancy of the
Participant (or Beneficiary in the case of a Participant
who dies prior to the time his benefits commenced) or the
joint and last survivor life expectancy of the Participant
and his Beneficiary so that the amount distributed in each
Plan Year equals the amount determined by dividing the
Participant's vested account balance on the last day of
the immediately preceding Plan Year by the period certain
determined in accordance with this paragraph (i) which
shall be reduced by one for each Plan Year after the Plan
Year in which the Participant's benefits commence.
(ii) Payment to the Participant or Beneficiary of all or part
of such benefits in one lump sum.
(b) DIRECT ROLLOVER. Notwithstanding any provision of the Plan to
the contrary that would otherwise limit a distributee's election
under this Article 11, for all distributions made on or after
January 1, 1993, a distributee may elect, at the time and in the
manner prescribed by the Plan Administrator, to have any portion
of an eligible rollover distribution paid directly to an eligible
retirement plan specified by the distributee in a direct
rollover. For purposes of this subsection, the following
definitions shall apply:
(i) An "eligible rollover distribution" is any distribution of
all or a portion of the balance to the credit of the
distributee, except that an eligible rollover distribution
does not include: any distribution that is one of a
series of substantially equal periodic payments (not less
frequently than annually) made for the life (or life
expectancy) of the distributee or the joint lives (or
joint life expectancies) of the distributee and the
distributee's designated Beneficiary, or for a specified
period of ten years or more; any distribution to the
extent such distribution is required under section
401(a)(9) of the Code; and the portion of any distribution
that is not includible in gross income (determined without
regard to the exclusion for net unrealized appreciation
with respect to employer securities).
(ii) An "eligible retirement plan" in an individual retirement
account described in section 408(a) of the Code, an
individual retirement annuity described in section 408(b)
of the Code, an annuity plan described in section 403(a)
of the Code, or a qualified trust described in section
401(a) of the Code, that accepts the distributee's
eligible rollover distribution. However, in the case of
an eligible rollover distribution to the surviving spouse,
an eligible retirement plan is an individual retirement
account or individual retirement annuity.
(iii) A "distributee" includes an Employee or former Employee.
In addition, the Employee's or former Employee's surviving
spouse and the Employee's or former Employee's spouse or
former spouse who is the alternate payee under a qualified
domestic retirement order, as described the section 414(p)
of the Code, are distributees with regard to the interest
of the spouse or former spouse.
(iv) A "direct rollover" is a payment by the Plan to the
eligible retirement plan specified by the distributee.
11.8 MINIMUM REQUIRED DISTRIBUTIONS. If the Participant's interest is to
be distributed in other than a single sum, the following minimum
distribution rules shall apply on or after the required beginning date:
(a) INDIVIDUAL ACCOUNT.
(i) If a Participant's benefit is to be distributed over (A) a
period not extending beyond the life expectancy of the
Participant or the joint life and last survivor expectancy
of the Participant and the Participant's designated
Beneficiary or (B) a period not extending beyond the life
expectancy of the designated Beneficiary, the amount
required to be distributed for each calendar year,
beginning with distributions for the first distribution
calendar year, must at least equal the quotient obtained
by dividing the Participant's benefit by the applicable
life expectancy.
(ii) For calendar years beginning before January 1, 1989, if
the Participant's spouse is not the designated
Beneficiary, the method of distribution selected must
assure that at least 50% of the present value of the
amount available for
<PAGE>
distribution is paid within the life expectancy of the
Participant.
(iii) For calendar years beginning after December 31, 1988, the
amount to be distributed each year, beginning with
distributions for the first distribution calendar year
shall not be less than the quotient obtained by dividing
the Participant's benefit by the lesser of (A) the
applicable life expectancy or (B) if the Participant's
spouse is not the designated Beneficiary, the applicable
divisor determined from the table set forth in Q&A-4 of
section 1.401(a)(9)-2 of the proposed regulations.
Distributions after the death of the Participant shall be
distributed using the applicable life expectancy in
paragraph (i) above as the relevant divisor without regard
to Proposed Regulations section 1.401(a)(9)B2.
(iv) The minimum distribution required for the Participant's
first distribution calendar year must be made on or before
the Participant's required beginning date. The minimum
distribution for other calendar years, including the
minimum distribution for the distribution calendar year in
which the Employee's required beginning date occurs, must
be made on or before December 31 of the distribution
calendar year.
(b) OTHER FORMS. If the Participant's benefit is distributed in the
form of an annuity purchased from an insurance company,
distributions thereunder shall be made in accordance with the
requirements of section 401(a)(9) of the Code and the proposed
regulations thereunder.
For purposes of this Section 11.8, any amount paid to a child of
the Participant will be treated as if it had been paid to the
surviving spouse if the amount becomes payable to the surviving
spouse when the child reaches the age of majority.
For the purposes of this Section 11.8, distribution of a
Participant's interest is considered to begin on the
Participant's required beginning date (or, if Section 11.6 is
applicable, the date distribution is required to begin to the
surviving spouse pursuant to section 11.6(b)). If distribution
in the form of an annuity irrevocably commences to the
Participant before the required beginning date, the date
distribution is considered to begin is the date distribution
actually commences.
(c) DEFINITIONS.
(i) Applicable life expectancy. The life expectancy (or joint
and last survivor expectancy) calculated using the
attained age of the Participant (or designated
Beneficiary) as of the Participant's (or designated
Beneficiary's) birthday in the applicable calendar year
reduced by one for each calendar year which has elapsed
since the date life expectancy was first calculated. If
life expectancy is being recalculated, the applicable life
expectancy shall be the life expectancy as so
recalculated. The applicable calendar year shall be the
first distribution calendar year, and if life expectancy
is being recalculated, such succeeding calendar year. If
annuity payments commence before the required beginning
date, the applicable calendar year is the year such
payments commence. If distribution is in the form of an
immediate annuity purchased after the Participant's death
with the Participant's remaining interest, the applicable
calendar year is the year of purchase.
(ii) Designated Beneficiary. The individual who is designated
as the Beneficiary under the Plan in accordance with
section 401(a)(9) and the proposed regulations thereunder.
(iii) Distribution calendar year. A calendar year for which a
minimum distribution is required. For distributions
beginning before the Participant's death, the first
distribution calendar year is the calendar year
immediately preceding the calendar year which contains the
Participant's required beginning date. For distributions
beginning after the Participant's death, the first
distribution calendar year is the calendar year in which
distributions are required to begin pursuant to Section
11.6 above.
(iv) Life expectancy. Life expectancy and joint and last
survivor expectancy are computed by use of the expected
return multiples in Table V and VI of section 1.72-9 of
the Income Tax Regulations. Unless otherwise elected by
the Participant (or spouse, in the case of distributions
described in Section 11.6(b)) by the time distributions
are required to begin, life expectancies shall not be
recalculated. Such election shall be irrevocable as to
the Participant (or spouse) and shall apply to all
subsequent years. The life expectancy of a non-spouse
Beneficiary may not be recalculated.
(d) PARTICIPANT'S BENEFIT. The account balance as of the last
Valuation Date in the calendar year immediately preceding the
distribution calendar year (valuation calendar year) increased by
the amount of any contributions or forfeitures allocated to the
account balance as of dates in the valuation calendar year after
the Valuation Date and decreased by distributions made in the
valuation calendar year after the Valuation Date. Notwithstanding
the foregoing, if any portion of the minimum distribution for the
first distribution calendar year is made in the second
distribution calendar year on or before the required beginning
date, the amount of the minimum distribution made in the second
distribution calendar year shall be treated as if it had been
made in the immediately preceding distribution calendar year.
11.9 JOINT AND SURVIVOR ANNUITY REQUIREMENTS. Notwithstanding the
foregoing provisions of this Article 11, if the Plan is a direct or
indirect transferee of a Participant's interest in a defined benefit
plan, money purchase plan, a target benefit plan, stock bonus, or
profit-sharing plan which is subject to the survivor annuity
requirements of sections 401(a)(11) and 417 of the Code, then the
following provisions shall apply to distributions to such Participant:
(a) QUALIFIED JOINT AND SURVIVOR ANNUITY. All benefit distributions
to such a Participant in the Plan shall be in the form of a
"Qualified Joint and Survivor Annuity," subject to the following
rules:
(i) For the purposes of this subsection (a) and of subsection
(b), (A) in the case of a Participant who is married on
the date his benefit payments commence, the term
"Qualified Joint and Survivor Annuity" shall mean an
immediate nontransferable annuity policy which complies
with the provisions of this Plan, purchased with the
Participant's total vested interest in his Account,
payable to the Participant for life with a survivor
annuity payable to his spouse at the time of the purchase
of the policy, for the life of that spouse, which is equal
to 50% of the amount of the annuity payable during the
joint lives of the Participant and his spouse, (B) in the
case of a Participant who is not married on the date his
benefit payments commence, the term "Qualified Joint and
Survivor Annuity" shall mean an annuity policy, purchased
with the Participant's total vested interest in his
Account, payable to the Participant for his life, and (C)
the term "Annuity Starting Date" shall mean the first day
of the first period for which an amount is to be paid to
the Participant or Beneficiary as an annuity,
<PAGE>
or, in the case of a benefit not payable in the form of an
annuity, the first day on which all events have occurred
which entitle the Participant or Beneficiary to such
benefit.
(ii) Written notice explaining the Qualified Joint and Survivor
Annuity and optional forms of benefit, the right of the
Participant to elect to waive the Qualified Joint and
Survivor Annuity, the right of the spouse to consent to
such waiver, the effect of a waiver and the effect of a
consent to a waiver, the right of the Participant to
revoke an election to waive, and the inability of the
spouse to revoke his or her consent shall be given to the
Participant no less than 30 days and no more than 90 days
prior to his Annuity Starting Date.
If a distribution is one to which sections 401(a)(11) and
417 of the Code do not apply, such distribution may
commence less than 30 days after the notice required under
section 1.411(a)-11(c) of the Income Tax Regulations is
given, provided that (a) the Plan Administrator clearly
informs the Participant that the Participant has a right
to a period of at least 30 days after receiving the notice
to consider the decision of whether or not to elect a
distribution (and, if applicable, a particular
distribution option), and (b) the Participant, after
receiving the notice, affirmatively elects a distribution.
(iii) A Qualified Joint and Survivor Annuity shall not be paid
to a Participant if, during the 90-day period ending on
the Annuity Starting Date, (A) the Participant has filed a
written election with the Plan Administrator waiving the
Qualified Joint and Survivor Annuity, and (B) in the case
of a married Participant, his spouse has filed a written
consent with the Plan Administrator irrevocably consenting
to such waiver, which consent shall be notarized or
witnessed by the Plan Administrator, and shall acknowledge
the effect of the waiver. The written election waiving
the Qualified Joint and Survivor Annuity shall state the
specific non-spouse Beneficiary and/or the alternative
form of benefit. A married Participant may not
subsequently change the non-spouse Beneficiary and/or
alternative form of benefit elected unless his spouse's
consent expressly permits designations by the Participant
without any further spousal consent or his spouse has
filed a written consent with the Plan Administrator
irrevocably consenting to such change, which consent shall
be notarized or witnessed by the Plan Administrator, and
shall acknowledge the effect of the change. Notwithstanding
the preceding sentence, a married Participant may revoke
his election waiving the Qualified Joint and Survivor
Annuity at any time and any number of times on or before
the Annuity Starting Date without the consent of his
spouse.
(iv) Even if a Participant does not waive the Qualified Joint
and Survivor Annuity in accordance with paragraph (iii)
above, the Plan Administrator will not be required to
direct the Trustee to distribute a Participant's or former
Participant's benefits in the form of a Qualified Joint
and Survivor Annuity if the value of the Participant's
vested Account on the Annuity Starting Date does not
exceed $3,500 and if such Account is distributed to the
Participant in a single lump-sum payment of cash, provided
that no such distribution shall be made after the Annuity
Starting Date without the written consent of the
Participant and his spouse.
(b) QUALIFIED PRE-RETIREMENT SURVIVOR ANNUITY. In the case of a
Participant with a vested interest under this Plan who dies prior
to his Annuity Starting Date, and who is married on the date of
his death, all death benefits under the money purchase pension
plan shall be distributed to his surviving spouse in the form of
a "Qualified Pre-Retirement Survivor Annuity," in accordance with
the following rules:
(i) For the purposes hereof, the term "Qualified
Pre-Retirement Survivor Annuity" shall mean a
nontransferable annuity which complies with the provisions
of this Plan for the life of the Participant's surviving
spouse, in such amount as may be purchased with an amount
equal to 100% of the value the Participant's total vested
interest in his Account.
(ii) Written notice explaining the Qualified Pre-Retirement
Survivor Annuity, the right of the Participant to elect to
waive the Qualified Pre-Retirement Survivor Annuity, the
right of the spouse to consent to such waiver, the effect
of a waiver and the effect of a consent to a waiver, the
right of the Participant to revoke an election to waive,
and the inability of the spouse to revoke his or her
consent shall the given to the Participant during the
two-year period ending on (A) the first anniversary of the
date he became a Participant, and (B) the first
anniversary of the date his employment terminates. If, in
accordance with clause (A) of the preceding sentence,
written notice is given to the Participant prior to the
last day of the Plan Year in which he attains age 31, a
second notice, similar to the initial notice, shall be
given to the Participant within whichever of the following
periods ends first: (A) the one-year period after his
employment with the Employer terminates, or (B) the period
beginning with the first day of the Plan Year in which he
attains age 32 and ending with the last day of Plan Year
in which he attains age 34.
(iii) A Qualified Pre-Retirement Survivor Annuity shall not be
paid to the surviving spouse of a deceased Participant if,
during the period beginning on the day on which the
Participant first became a Participant in the Plan and
ending on the date of his death, (A) the Participant has
filed a written election with the Plan Administrator
waiving such Qualified Pre-Retirement Survivor Annuity,
and (B) his spouse has filed a written consent with the
Plan Administrator, irrevocably consenting to such waiver,
which consent shall be notarized or witnessed by the Plan
Administrator, and shall acknowledge the effect of the
waiver. The written election waiving the Qualified
Pre-Retirement Survivor Annuity shall state the specific
non-spouse Beneficiary. A Participant may not
subsequently change the designated non-spouse Beneficiary
unless his spouse's voluntary consent acknowledges that
the spouse has the right to limit consent to a specific
beneficiary, and a specific form of benefit where
applicable, and expressly permits designations by the
Participant without further spousal consent or his spouse
has filed a written consent with the Plan Administrator,
irrevocably consenting to such change, which consent shall
be notarized or witnessed by the Plan Administrator, and
shall acknowledge the effect of the change.
Notwithstanding the preceding sentence, a Participant may
revoke his election waiving the Qualified Pre-Retirement
Survivor Annuity at any time and any number of times
without the consent of his spouse.
(iv) Notwithstanding the first sentence of paragraph (iii), if
the Participant waives the Qualified Pre-Retirement
Survivor Annuity prior to the first day of the Plan Year
in which he attains age 35, such waiver shall be invalid
upon the beginning of the Plan Year in which he attains
age 35 until the Participant, during the period beginning
on the earlier of the first day of the Plan Year in which
he attains age 35 or the date on which his employment with
the Employer terminates and ending on the date of his
death, again waives the Qualified Pre-Retirement Survivor
Annuity in accordance with the preceding sentence.
<PAGE>
Qualified preretirement survivor annuity coverage
automatically will be reinstated as of the first day of
the Plan Year in which the Participant attains age 35.
Provided, however, that a Participant who (A) terminates
his employment with the Employer prior to the first day of
the Plan Year in which he attains age 35, and (B) on or
after that date waives the Qualified Pre-Retirement
Survivor Annuity, need not again waive the Qualified
Pre-Retirement Survivor Annuity.
(v) Even if a Participant does not waive the Qualified
Pre-Retirement Survivor Annuity in accordance with
paragraphs (iii) or (iv) above, the Plan Administrator
will not be required to direct the Trustee to distribute a
Participant's total vested interest in all of his Accounts
in the form of a Qualified Pre-Retirement Survivor Annuity
if (A) the Participant's surviving spouse files a written
consent with the Plan Administrator consenting to the
distribution of such vested benefits in one of the methods
described in Section 11.7 hereof, or (B) the value of the
Participant's total vested interest in his Account does
not exceed $3,500 and such Account is distributed to the
surviving spouse in a single lump-sum payment of cash;
provided that no such distribution shall be made after the
Annuity Starting Date without the written consent of the
Participant's or former Participant's surviving spouse.
(c) SPECIAL RULES. For purposes of this Section 11.9:
(i) A former spouse of a Participant will be treated as the
Participant's spouse or surviving spouse to the extent
provided under a qualified domestic relations order as
described in section 414(p) of the Code.
(ii) If the Plan Administrator determines that a Participant
has no spouse or the Participant's spouse cannot be
located, no spousal consent shall be necessary,
(iii) A spouse's consent (or determination that the consent of a
spouse cannot be obtained) hereunder shall be effective
only with respect to such spouse.
11.10 REEMPLOYMENT. If a former Employee who has begun to receive benefit
payments hereunder should be reemployed by the Employer prior to his
Normal Retirement Age, his benefit payments shall cease.
11.11 VALUATION OF BENEFITS. All distributions made in the form of a lump
sum shall be based upon the value of the Participant's Account(s)
determined as of the Valuation Date which coincides with or
immediately precedes the date on which the distribution is being made,
reduced by withdrawals and distributions made from such Account(s)
after such Valuation Date and increased by all allocations to the
Participant's Accounts made after such Valuation Date.
ARTICLE 12. ADMINISTRATION
12.1 DUTIES AND RESPONSIBILITIES OF FIDUCIARIES; ALLOCATION OF FIDUCIARY
RESPONSIBILITY. A fiduciary of the Plan shall have only those
specific powers, duties, responsibilities and obligations as are
explicitly given him under the Plan and Trust Agreement. In general,
the Employer shall have the sole responsibility for making
contributions to the Plan required under Article 5, appointing the
Trustee, and determining the funds available for investment under the
Plan. The Plan Administrator shall have the sole responsibility for
the administration of the Plan, as more fully described in Section
12.2. It is intended that each fiduciary shall be responsible only
for the proper exercise of his own powers, duties, responsibilities
and obligations under the Plan and Trust Agreement and shall not be
responsible for any act or failure to act of another fiduciary. A
fiduciary may serve in more than one fiduciary capacity with respect
to the Plan.
12.2 POWERS AND RESPONSIBILITIES OF THE PLAN ADMINISTRATOR.
(a) ADMINISTRATION OF THE PLAN. The Plan Administrator shall be
charged with the full power and the responsibility for
administering the Plan in all its details. The Plan
Administrator shall have all powers necessary to administer the
Plan, including the power to construe and interpret the Plan
documents; to decide all questions relating to an individual's
eligibility to participate in the Plan; to determine the amount,
manner and timing of any distribution of benefits or withdrawal
under the Plan; to approve and ensure the repayment of any loan
to a Participant under the Plan; to resolve any claim for
benefits in accordance with Section 12.6; and to appoint or
employ advisors, including legal counsel, to render advice with
respect to any of the Plan Administrator's responsibilities under
the Plan. Any construction, interpretation or application of the
Plan by the Plan Administrator shall be final, conclusive and
binding. All actions by the Plan Administrator shall be taken
pursuant to uniform standards applied to all persons similarly
situated. The Plan Administrator shall have no power to add to,
subtract from or modify any of the terms of the Plan, or to
change or add to any benefits provided by the Plan, or to waive
or fail to apply any requirements of eligibility for a benefit
under the Plan.
(b) RECORDS AND REPORTS. The Plan Administrator shall be responsible
for maintaining sufficient records to reflect the periods in
which an Employee is credited with one or more Years of
Eligibility Service or Years of Vesting Service for purposes of
determining his eligibility to participate and his vesting,
respectively, in the Plan, and the Compensation of each
Participant for purposes of determining the amount of
contributions that may be made by or on behalf of the Participant
under the Plan. The Plan Administrator shall be responsible for
submitting all required reports and notifications relating to the
Plan to Participants or their Beneficiaries, the Internal Revenue
Service and the Department of Labor.
(c) FURNISHING TRUSTEE WITH INSTRUCTIONS. The Plan Administrator
shall be responsible for furnishing the Trustee with written
instructions regarding all contributions to the Trust, all
distributions to Participants in accordance with Article 11, all
withdrawals by Participants in accordance with Article 10 and all
loans to Participants in accordance with Article 9. In addition,
the Plan Administrator shall be responsible for furnishing the
Trustee with any further information regarding the Plan which the
Trustee may request for the performance of its duties or for the
purpose of making any returns to the Internal Revenue Service or
Department of Labor as may be required of the Trustee.
(d) RULES AND DECISIONS. The Plan Administrator may adopt such rules
as it deems necessary, desirable or appropriate in the
administration of the Plan. All rules and decisions of the Plan
Administrator shall be applied uniformly and consistently to
<PAGE>
all Participants in similar circumstances. When making a
determination or calculation, the Plan Administrator shall be
entitled to rely upon information furnished by a Participant or
Beneficiary, the Employer, the legal counsel of the Employer or
the Trustee.
(e) APPLICATION AND FORMS FOR BENEFITS. The Plan Administrator may
require a Participant or Beneficiary to complete and file with
it an application for a benefit and to furnish all pertinent
information requested by it. The Plan Administrator may rely
upon all such information so furnished to it, including the
Participant's or Beneficiary's current mailing address.
(f) FACILITY OF PAYMENT. Whenever, in the Plan Administrator's opinion,
a person entitled to receive a payment of a benefit or
installment thereof is under a legal disability or is
incapacitated in any way so as to be unable to manage his
financial affairs, as determined by a court of competent
jurisdiction, it may direct the Trustee to make payments to
such person or to the legal representative or to a relative or
friend of such person for that person's benefit, or it may
direct the Trustee to apply the payment for the benefit of such
person in such manner as it considers advisable.
12.3 ALLOCATION OF DUTIES AND RESPONSIBILITIES. The Plan Administrator may,
by written instrument, allocate among its Employees any of its duties
and responsibilities not already allocated under the Plan or may
designate persons other than Employees to carry out any of the Plan
Administrator's duties and responsibilities under the Plan. Any such
duties or responsibilities thus allocated must be described in the
written instrument. If a person other than an Employee of the Employer
is so designated, such person must acknowledge in writing his
acceptance of the duties and responsibilities allocated to him.
12.4 EXPENSES. The Employer shall pay all expenses authorized and incurred
by the Plan Administrator in the administration of the Plan except to
the extent such expenses are paid from the Trust.
12.5 LIABILITIES. The Plan Administrator and each person to whom duties and
responsibilities have been allocated pursuant to Section 12.3 may be
indemnified and held harmless by the Employer with respect to any
alleged breach of responsibilities performed or to be performed
hereunder. The Employer and each Affiliated Employer shall indemnify
and hold harmless the Sponsor against all claims, liabilities, fines,
penalties and all expenses reasonably incurred by or imposed upon it
(including, but not limited to, reasonable attorney's fees) which arise
as a result of actions or failure to act in connection with the
operation and administration of the Plan.
12.6 CLAIMS PROCEDURE.
(a) FILING A CLAIM. Any Participant or Beneficiary under the Plan may
file a written claim for a Plan benefit with the Plan Administrator
or with a person named by the Plan Administrator to receive claims
under the Plan.
(b) NOTICE OF DENIAL OF CLAIM. In the event of a denial or limitation
of any benefit or payment due to or requested by any Participant
or Beneficiary under the Plan ("claimant"), claimant shall be
given a written notification containing specific reasons for the
denial or limitation of his benefit. The written notification
shall contain specific reference to the pertinent Plan provisions
on which the denial or limitation of his benefit is based. In
addition, it shall contain a description of any other material or
information necessary for the claimant to perfect a claim, and an
explanation of why such material or information is necessary. The
notification shall further provide appropriate information as to
the steps to be taken if the claimant wishes to submit his claim
for review. This written notification shall be given to a
claimant within 90 days after receipt of his claim by the Plan
Administrator unless special circumstances require an extension of
time for processing the claim. If such an extension of time for
processing is required, written notice of the extension shall be
furnished to the claimant prior to the termination of said 90 day
period, and such notice shall indicate the special circumstances
which make the postponement appropriate.
(c) RIGHT OF REVIEW. In the event of a denial or limitation of his
benefit, the claimant or his duly authorized representative shall
be permitted to review pertinent documents and to submit to the
Plan Administrator issues and comments in writing. In addition,
the claimant or his duly authorized representative may make a
written request for a full and fair review of his claim and its
denial by the Plan Administrator; provided, however, that such
written request must be received by the Plan Administrator (or its
delegate to receive such requests) within 60 days after receipt by
the claimant of written notification of the denial or limitation
of the claim. The 60 day requirement may be waived by the Plan
Administrator (or its delegate) in appropriate cases.
(d) DECISION ON REVIEW. A decision shall be rendered by the Plan
Administrator within 60 days after it receives the request for
review, provided that where special circumstances require an
extension of time for processing the decision, it may be postponed
on written notice to the claimant (prior to the expiration of the
initial 60 day period) for an additional 60 days, but in no event
shall the decision be rendered more than 120 days after the
receipt of such request for review. Any decision by the Plan
Administrator shall be furnished to the claimant in writing and
shall set forth the specific reasons for the decision and the
specific Plan provisions on which the decision is based.
(e) COURT ACTION. No Participant or Beneficiary shall have the right
to seek judicial review of a denial of benefits, or to bring any
action in any court to enforce a claim for benefits prior to
filing a claim for benefits or exhausting his rights to review
under this Section.
<PAGE>
ARTICLE 13. AMENDMENT, TERMINATION AND MERGER
13.1 SPONSOR'S POWER TO AMEND. The Sponsor may amend any part of the Plan.
If the Sponsor amends or terminates the Plan, it shall give notice of
such amendment or termination to each adopting Employer which has
notified the Sponsor it has adopted, but not yet ceased to use, this
prototype Plan and which has all Plan assets invested in Shares at the
time of such amendment or termination.
13.2 AMENDMENT BY ADOPTING EMPLOYER. The Employer may:
(a) change the choice of options in the Adoption Agreement;
(b) add overriding language in the Adoption Agreement when such
language is necessary to (i) satisfy section 415 or 416 of the
Code because of the required aggregation of multiple plans, or
(ii) preserve benefits protected under section 411(d)(6) of the
Code; and
(c) add certain model amendments published by the Internal Revenue
Service which specifically provide that their adoption will not
cause the Plan to be treated as individually designed.
An Employer that amends the Plan for any other reason, including a waiver
of the minimum funding requirement under section 412(d) of the Code, will
no longer participate in this prototype plan and will be considered to
have an individually designed plan.
13.3 TERMINATION. The Employer is not and shall not be under any obligation
to continue its contributions to, or to maintain, the Plan for any
length of time. The Employer may, in its sole discretion, completely
discontinue its contributions to or terminate the Plan and Trust in
accordance with the provisions of the Plan in effect at the time of
discontinuance of contributions or termination. In the event of the
termination or partial termination of the Plan, the account balance of
each affected Participant will be nonforfeitable.
13.4 VESTING UPON COMPLETE DISCONTINUANCE OF CONTRIBUTIONS. In the event of
a complete discontinuance of contributions under the Plan, the account
balance of each affected Participant will be nonforfeitable.
13.5 MAINTENANCE OF BENEFITS UPON MERGER. In the event of a merger or
consolidation with, or transfer of assets to any other plan, each
Participant will receive a benefit immediately after such merger,
consolidation or transfer (if the Plan then terminated) which is at
least equal to the benefit the Participant was entitled to immediately
before such merger, consolidation or transfer (if the Plan had been
terminated).
ARTICLE 14. MISCELLANEOUS
14.1 EXCLUSIVE BENEFIT OF PARTICIPANTS AND BENEFICIARIES.
(a) GENERAL RULE. All assets of the Trust shall be retained for the
exclusive benefit of Participants and their Beneficiaries, and
shall be used only to pay benefits to such persons or to pay the
fees and expenses of the Trust. The assets of the Trust shall not
revert to the benefit of the Employer, except as otherwise
specifically provided in subsection (b) below.
(b) SPECIAL RULES. To the extent permitted or required by ERISA and
the Code, contributions to the Trust under this Plan are subject
to the following conditions:
(i) If a contribution or any part thereof is made to the Trust
by the Employer under a mistake of fact, such contribution
or part thereof shall be returned to the Employer within
one year after the date the contribution is made.
(ii) In the event the Plan is determined not to meet the initial
qualification requirements of section 401 of the Code,
contributions made in respect of any period for which such
requirements are not met shall be returned to the Employer
within one year after the Plan is determined not to meet
such requirements, but only if the application for the
qualification is made by the time prescribed by law for
filing the Employer's return for the taxable year in which
the Plan is adopted or such later date as the Secretary of
the Treasury may prescribe.
(iii) Contributions to the Trust are specifically conditioned on
their deductibility under the Code and, to the extent a
deduction is disallowed for any such contribution, such
amount shall be returned to the Employer within one year
after the date of the disallowance of the deduction.
14.2 NONGUARANTEE OF EMPLOYMENT. Nothing contained in this Plan shall be
construed as a contract of employment between the Employer and any
Employee or as a right of any Employee to be continued in the
employment of the Employer or as a limitation of the right of the
Employer to discharge any of its Employees, with or without cause.
14.3 RIGHTS TO TRUST ASSETS. No Employee, Participant or Beneficiary shall
have any right to, or interest in, any assets of the Trust upon
termination of employment or otherwise, except as provided under the
Plan. All payments of benefits under the Plan shall be made solely out
of the assets of the Trust.
14.4 NONALIENATION OF BENEFITS. No benefit or interest available hereunder
will be subject to assignment or alienation, either voluntarily or
involuntarily. The preceding sentence shall also apply to the
creation, assignment or recognition of a right to any benefit payable
with respect to a Participant pursuant to a domestic relations order,
unless such order is determined to be a qualified domestic relations
order, as defined in section 414(p) of the Code, or any domestic
relations order entered before January 1, 1985.
14.5 FAILURE OF QUALIFICATION. If the Employer's plan fails to attain or
retain qualification, such plan will no longer participate in this
prototype plan and will be considered an individually designed plan.
14.6 APPLICABLE LAW. Except to the extent otherwise required by ERISA, as
amended, this Plan shall be construed and enforced in accordance with
the laws of the state in which the Employer's principal place of
business is located, as specified in the Adoption Agreement.
<PAGE>
14.7 REFERENCE TO FEDERAL LAW. All references in this Plan to sections of
the Internal Revenue Code or ERISA and any regulations or ruling
thereunder shall be deemed to refer to such sections (and any
regulation or ruling thereunder) as they subsequently may be modified,
amended, replaced or amplified by any successor federal statute,
regulation or ruling of similar application and import.
14.8 CONSTRUCTION. Whenever used in this Plan, unless the context indicates
otherwise, the singular shall include the plural, the plural shall
include the singular and the male gender shall include the female
gender.
14.9 HEADINGS. Headings in this Plan are inserted solely for convenience of
reference and shall neither constitute a part of this Plan nor affect
its meaning, construction or intent.
14.10 PRIORITY OF ADOPTION AGREEMENT. The Adoption Agreement has the
function of amending the terms of this document where necessary or
appropriate. If there is any conflict between the terms of this
document and the terms of the Adoption Agreement, the terms of the
Adoption Agreement shall prevail.
<PAGE>
SIMPLIFIED 401(k) PROTOTYPE
Trust Agreement
Unless the context of this Trust Agreement clearly indicates otherwise, the
terms defined in Article 2 of the Plan entered into by the Employer of which
this Trust Agreement forms a part shall, when used herein, have the same
meaning as in the Plan.
ARTICLE I - TRUST FUND
1.1 TRUST.
The Employer hereby establishes with the Trustee a trust account or
accounts ("Accounts") consisting of such sums of U.S. currency and such
other property acceptable to the Trustee as shall from time to time be
contributed, paid or delivered to the Trustee pursuant to this Trust
Agreement at the address specified by the Trustee. All such money and
property, all investments and reinvestments made therewith and proceeds
thereof, less any payments or distributions made by the Trustee pursuant
to the terms of this Trust Agreement, are referred to herein as the
"Trust". The Trust shall be held by the Trustee in accordance with the
express provisions of this instrument and the requirements of law.
1.2 DELEGATION OF AUTHORITY.
The Trustee may delegate to a custodian or other agent the custodianship
of all or part of the assets of the Trust. The Trustee and the Employer
may, by mutual agreement, arrange for the delegation by the Trustee to
the Plan Administrator or any agent of the Employer of any powers or
functions of the Trustee hereunder other than the custody of the Trust
assets. The Trustees shall not be responsible for any act or omission of
such person or persons arising from any such delegation, except to the
extent provided in Section 4.8.
1.3 LIMITATIONS OF TRUSTEE'S DUTIES.
With respect to its duties hereunder, the Trustee is a non-discretionary
trustee and shall have no duty to: (a) determine or enforce payment of
any contribution due under the Plan; (b) inquire into the accuracy of
any contribution; (c) determine the adequacy of the funding policy
adopted by the Employer to meet its obligations under the Plan; (d) look
into the property of any investment or distribution made under the Plan;
or (e) ensure the qualification of the Plan under the Code. The Trustee
shall not be deemed to be the administrator, the Plan sponsor or a
"named fiduciary" of the Plan as defined in sections 3(16)(A), 3(16)(B)
and 402(a)(2), respectively, of ERISA.
ARTICLE II - ACCOUNTS
2.1 ESTABLISHING ACCOUNTS. The Trustee shall open and maintain a Trust
Account for the Plan. Upon receipt of written instructions from the
Employer, the Trustee also shall open and maintain such Participant
Accounts and subaccounts as the Employer may direct. The Trustee shall
also open and maintain such other subaccounts as may be appropriate or
desirable to aid in the administration of the Plan. The Employer shall
give written instructions to the Trustee specifying the Participants'
Accounts and subaccounts to which contributions and forfeitures are to
be credited, and the amounts of such contributions and forfeitures which
are to be credited to such Accounts and subaccounts.
2.2 CHARGES AGAINST ACCOUNTS. Upon receipt of written instructions from the
Employer, the Trustee shall charge the appropriate Account or subaccount
of a Participant for any withdrawals or distributions made under the
Plan, for any forfeiture which may be required under the Plan of
unvested interests attributable to Employer contributions and for any
fees which may be charged against the Trust assets.
ARTICLE III - INVESTMENT OF TRUST ASSETS
3.1 INVESTMENT OF TRUST ASSETS.
The Trustee shall not have any discretion, and is specifically
prohibited from having or exercising any discretion, with respect to the
investment of Trust assets. Except as provided in Section 3.3
(Participant Directed Investments) hereof, the Employer shall be solely
responsible for giving the Trustee directions as to the investment and
disposition of the Trust assets. Assets of the Trust may be invested in
shares of stock in any regulated investment company registered under the
Investment Company Act of 1940, the investment advisor of which is T.
Rowe Price Associates, Inc. or any of its affiliates. Trust assets may
also be invested in units in any common, collective or group trust fund
sponsored by T. Rowe Price Trust Company and qualified under sections
401 and 501 of the Code, that is made available for investment purposes
as an investment option under the T. Rowe Price Simplified 401(k)
Prototype Plan (the instrument of trust creating any such qualified
common, collective or group trust fund being adopted hereby).
<PAGE>
3.2 WRITTEN INSTRUCTION.
Any action of the Employer pursuant to any provisions of this Trust
Agreement shall be in writing from the Employer, and the Trustee shall
be fully protected in relying upon such written notification as actions
of the Employer. The term "EMPLOYER," as used throughout this Trust
Agreement, includes any duly authorized designee of the Employer, such
as a Plan Administrator, or any individual having apparent authority as
such. If written instructions are not received by the Trustee, or if
such instructions are received but are deemed by the Trustee to be
unclear, upon notice to the Employer, the Trustee may elect to hold all
or part of any such contribution in cash, without liability for rising
security prices or distributions made, pending receipt by it from the
Employer of written instructions or other clarification. If any
contributions received by the Trustee from the Employer are less than
any minimum which a directed investment requires, the Trustee may hold
the specified portion of such contributions in cash, without interest,
until such time as the proper amount has been contributed so that the
directed investment may be made. The Trustee shall receive all
directions or instructions in writing provided that the Trustee may
accept oral directions for purchase or sales from the Employer or
participant with subsequent written confirmation.
3.3 PARTICIPANT DIRECTED INVESTMENTS.
When so instructed by the Employer, the Trustee shall invest all or any
portion of the individual Accounts of any Participant as directed by said
participant. Such directed investments shall be accounted for separately
for each participant. The Employer shall have the duty to select and
monitor all investment options made available to Participants under the
Plan. The Employer shall ensure that all Participants who are entitled to
direct the investment of assets in their Accounts previously received or
receive a copy of all material describing such investment options that
is required by law. Delivery of investment directions by the Employer in
accordance with the instructions of a Participant or by the Participant
directly to the Trustee shall entitle the Trustee to assume that the
Participant has received all such descriptive material. Each participant
who directs the investment of his Accounts shall be solely and
absolutely responsible for the investment or reinvestment of any such
directed Plan investment held on his behalf in the Trust, and, except as
otherwise provided herein, the Trustee shall not question any such
direction, review any securities or other such assets, or make
suggestions with respect to the investment, reinvestment, retention or
disposition of any such assets. The Trustee shall not have any liability
or responsibility for diversification of such assets or for any loss to
or depreciation of such assets because of the purchase, retention or
sale of assets in accordance with a Participant's direction. The
Participant shall have sole responsibility for the overall
diversification, liquidity and prudence of the investments of his
Accounts. If a Participant fails to direct the investments of his
Accounts, the Trustee shall invest his Accounts in accordance with the
written directions of the Employer.
3.4 EMPLOYER DIRECTED INVESTMENTS.
The Employer, by written direction to the Trustee, is authorized to
designate all or a portion of the Trust assets of which the Employer
will direct investments, and the Trustee may segregate such assets into
one or more separate accounts or administer the Trust as one account. In
the event the Employer shall employ or appoint an investment advisor to
direct the Trustee with respect to a portion of the Trust, the Employer
will notify the Trustee in writing of the appointment of the investment
advisor, including his name and address. Whether or not the Trust is
segregated into separate accounts, the Trustee shall invest such portion
of the Trust as directed by the Employer or its duly appointed
investment advisor only to the extent that such instruction is
consistent with ERISA and any other applicable legal authority. The
Trustee shall have no duty to question any action or direction of the
Employer or investment advisor or any failure of the Employer or
investment advisor give directions, or to review the securities or other
investments which are held pursuant to the Employer's or investment
advisor's directions, or to make suggestions to the Employer or
investment advisor as to the investment, reinvestment, retention or
disposition of any such assets. The Trustee shall not have any liability
or responsibility for diversification of such assets, or for any loss to
or depreciation of such assets because of the purchase, retention or
sale of assets in accordance with the Employer's or investment advisor's
direction. The Employer shall have responsibility for the overall
diversification of the Trust.
3.5 TRUSTEE'S LIABILITY WITH RESPECT TO EMPLOYER OR PARTICIPANT DIRECTED
ACCOUNTS.
The Trustee shall not be liable for, and the Employer will indemnify and
hold harmless the Trustee (including its employees, affiliates,
representatives and agents) from and against, any liability or expense
(including counsel fees) because of: (a) any investment action taken or
omitted by the Trustee in accordance with any direction of the Employer
or a Participant, or (b) any investment inaction in the absence of
investment directions from the Employer or a Participant.
3.6 LIMITATIONS ON INVESTMENTS.
Notwithstanding any other provision of this Trust Agreement to the
contrary:
(a) The Trustee may establish such reasonable rules and regulations,
applied on a uniform basis to all Participants, with respect to the
requirements for, and the form and manner of, effecting a
transaction with respect to Participant directed investments the
Trustee shall determine to be consistent with the purposes of the
Plan. Any such rules and regulations shall be binding upon all
persons interested in the Trust.
(b) In no event shall the Trustee engage in any transactions that would
be prohibited under ERISA.
3.7 "KNOWLEDGE" OF TRUSTEE.
It is understood that although, when the Trustee is subject to the
direction of the Employer or a Participant, the Trustee will perform certain
ministerial duties ("MINISTERIAL DUTIES") with respect to the portion of the
Trust subject to such direction, such duties do not involve the exercise of
any discretionary authority to manage or control Trust assets. Such
Ministerial Duties will be performed in the normal course of business by
employees of the Trustee, its affiliates or agents who may be unfamiliar with
investment management. It is agreed that the Trustee is not undertaking any
duty or obligation, express or implied, to review, and will not be deemed to
have any knowledge of or responsibility with respect to, any transaction
involving the investment of the Trust as a result of the performance of these
Ministerial Duties. Therefore, in the event that "knowledge" of the Trustee
shall be a prerequisite to imposing a duty upon or determining liability of
the Trustee under the Plan, this Trust Agreement or any law regulating the
conduct of directed trustees with respect to the investment of trust assets,
as a result of any act or omission of the Employer or any Participant, or as
the result of any transaction engaged in by any of them, then the receipt and
processing of investment orders and other documents relating to Trust assets
by an employee of the Trustee or its affiliates or agents engaged in the
performance of purely Ministerial Duties shall not constitute "knowledge" of
the Trustee.
<PAGE>
ARTICLE IV - DUTIES OF THE TRUSTEE
4.1 DUTIES OF THE TRUSTEE.
The Trustee is authorized and empowered with respect to the Trust:
(a) To make, execute, acknowledge and deliver any and all documents of
transfer and conveyance and any and all other instruments that may be
necessary or appropriate to carry out the powers herein granted.
(b) To register any investment held in the Trust in the name of the
Trustee or in the name of a nominee, and to hold any investment in
bearer form, but the books and records of the Trustee shall at all
times show that all such investments are part of the Trust.
(c) To employ suitable agents and counsel (who may also be agents
and/or counsel for the Employer) and to pay their reasonable
expenses and compensation.
(d) To borrow or raise monies for the purpose of the Trust from any
source and, for any sum borrowed, to issue its promissory note as
Trustee and to secure the repayment thereof by pledging all or any
part of the Trust, but nothing contained herein shall obligate the
Trustee to render itself liable individually for the amount of any
such borrowing; and no person loaning money to the Trustee shall be
bound to see to the application of money loaned or to inquire into
the validity or propriety of any such borrowing.
Each and all of the foregoing powers may be exercised without a court
order or approval. No one dealing with the Trustee need inquire
concerning the validity or propriety of anything that is done by the
Trustee or need to see the application of any money paid or property
transferred to or upon the order of the Trustee.
4.2 GENERAL POWERS.
The Trustee shall have all of the powers necessary or desirable to do
all acts and exercise all such rights and privileges, whether or not
expressly authorized herein, which it may deem necessary or proper for
the protection of the Trust and to accomplish any action provided for in
this Trust Agreement.
4.3 VALUATION OF TRUST.
The Trustee, as of the valuation date, and at such other time or times
as is necessary, shall determine the net worth of the assets of the
Trust. The Trustee may adopt such methods of valuation as it deems
advisable.
4.4 TRUST RECORDS.
The Trustee shall keep accurate and detailed records of all receipts,
investments, disbursements and other transactions required to be
performed hereunder with respect to the Trust. The Trustee agrees to
treat as confidential all records and other information relative to the
Trust. The Trustee shall not disclose such records and other information
to parties, other than the Employer, except to the extent required by
law or as requested in writing by the Employer.
4.5 DISTRIBUTIONS.
At the direction of the Employer, the Trustee shall mail distributions
from the Trust to the Employer for the benefit of the Participants and,
to the extent agreed to by the Trustee, shall make distributions
directly to the Participants. The Trustee shall not be liable or
responsible for any errors made by the Employer with respect to
distributions. The Trustee shall be entitled to rely conclusively upon
the Employer's directions. Notwithstanding any other provision of the
Trust Agreement, the Trustee may condition its delivery, transfer or
distribution of any Trust assets upon the Trustee's receiving
satisfactory assurances that the approval of appropriate governmental
agencies or other authorities has been secured and that all notice and
other procedures required by applicable law have been satisfied.
4.6 TRUSTEE'S FEES.
The Trustee's fees for performing its duties hereunder shall be such
reasonable amounts as shall be established by it from time to time. The
Trustee shall furnish to the Employer its current schedule of fees and
give written notice to the Employer whenever its fees are changed or
revised. Such fees, any taxes of any kind whatsoever which may be
levied or assessed upon the Trust, and any expenses incurred by the
Trustee in the performance of its duties, including fees for legal
services rendered to the Trustee, shall, unless paid by the Employer, be
paid from the Trust.
4.7 DUTIES NOT ASSIGNED.
The duties of the Trustee with respect to the Trust are limited to those
assumed by the Trustee under the terms of this Trust Agreement. The
Trustee shall not be responsible for filing reports, returns or
disclosures with any government agency except as may otherwise be
required by its duties as Trustee under applicable law.
4.8 STANDARDS FOR THE TRUSTEE'S POWERS.
Notwithstanding any other provision of this Trust Agreement, the
Trustee shall discharge its duties hereunder solely in the interest of
the Participants and for the exclusive purpose of providing benefits to
the Participants and defraying reasonable expenses of administering the
Trust, with the skill, care, prudence and diligence under the
circumstances then prevailing that a prudent man acting in a like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims. The Trustee shall
perform its duties in accordance with this Trust Agreement insofar as
this Trust Agreement is consistent with the provisions of ERISA. To the
extent not prohibited by ERISA, the Trustee shall not be responsible in
any way for any action or omission of the Employer with respect to the
performance of its duties and obligations set forth in this Trust
Agreement and in the Plan. The Trustee may rely upon such information,
direction, action or inaction of the Employer as being proper under the
Plan or the Trust Agreement and is not required to inquire into the
propriety of any such information, direction, action or inaction. To the
extent not prohibit by ERISA, the Trustee shall not be responsible for
any action or omission of any of its agents or with respect to reliance
upon advice of its counsel (whether or not such counsel is also counsel
to the Employer), provided that such agents or counsel were prudently
chosen by the Trustee and that the Trustee relied in good faith upon the
action of such agent or the advice of such counsel.
ARTICLE V - DUTIES OF THE EMPLOYER
5.1 DUTIES OF THE EMPLOYER.
It is understood that the Employer shall be responsible for the
performance of the following functions with respect to the Trust:
(a) Transmitting all Trust contributions made by or on behalf of each
Participant in accordance with the instructions of each Participant to
the Trustee at such times and in such manner as is mutually agreed
between the Employer and the Trustee.
(b) Providing to the Trustee, on a timely basis, a copy of the Plan
document including all amendments and restatements.
41
<PAGE>
(c) Determining that the contributions made by or on the behalf of
each Participant are in accordance with any applicable Federal
and state laws and regulations.
(d) Assuring that the Plan maintains qualified status under
applicable provisions of the Code.
(e) If applicable, assuring that the Plan complies with section
404(c) of ERISA and any regulations issued thereunder.
5.2 BONDING.
The Employer agrees to obtain and maintain a fiduciary bond and
to include as those covered by such bond the Employees of the
Employer, the Plan Administrator and the Trustee, including any
of the Trustee's employees, officers and agents required by law to
be so covered. The cost of any such bond shall be paid by the
Employer.
5.3 INFORMATION AND DATA TO BE FURNISHED TO THE TRUSTEE.
The Employer shall furnish the Trustee with such information and
data relevant to the Plan as is necessary for the Trustee to properly
perform its duties assumed hereunder, including but not limited
to, a copy of the Plan's qualification letter from the Internal Revenue
Service.
5.4 LIMITATION OF DUTIES.
Neither the Trustee nor any of its officers, directors, partners or
agents shall have any duties or obligations with respect to this Trust
Agreement, except those expressly set forth herein, in the Plan and
in ERISA.
ARTICLE VI--TERMINATION OF TRUST
6.1 RESIGNATION OR REMOVAL OF TRUSTEE.
The Trustee may resign at any time upon thirty days' prior written
notice to the Employer and may be removed by the Employer at any
time upon thirty days' prior written notice to the Trustee. Upon
resignation or removal of the Trustee, the Employer shall appoint
a successor trustee. Upon receipt by the Trustee of written acceptance
of such appointment by the successor trustee, the Trustee shall
transfer and pay over to the successor the assets of the Trust and all
records (or copies) pertaining thereto. The Trustee is authorized,
however, to reserve such sum of money or property as it may deem
advisable for payment of all fees, compensation, costs and expenses,
or for payment of any liabilities constituting a charge on or against
the assets of the Trust or on or against the Trustee, with any balance
of such reserve remaining after payment of all such items to be paid
over to the successor trustee. Upon the assignment, transfer and
payment over of the assets of the Trust, and obtaining a receipt
thereof from the successor trustee, the Trustee shall be released and
discharged from any and all claims, demands, duties and obligations
arising out of the Trust and its management thereof, excepting
claims based only upon the Trustee's willful misconduct or gross
negligence. The successor trustee shall hold the assets paid over to
it under the terms similar to those of this Trust Agreement under a
trust that will qualify under section 401(a) of the code. If on the date
upon which the Trustee's resignation or removal is effective, the
Employer has not appointed a successor trustee which has accepted
such appointment, the Trustee shall, unless it elects to terminate the
Trust pursuant to Section 6.3 hereof, appoint such successor itself.
6.2 TERMINATION OF THE TRUST.
Subject to the right of the Trustee to terminate the Trust in
accordance with Section 6.3 hereof, this Trust shall continue as to
the Employer so long as the Plan is in full force and effect. If the Plan
ceases to be in full force and effect, this Trust shall thereupon
terminate unless expressly extended by the Employer.
6.3 TERMINATION OF THE TRUST BY THE TRUSTEE.
The Trustee may elect to terminate the Trust if on the date upon
which the Trustee's resignation or removal is effective, the Employer
has not appointed a successor trustee which has accepted such
appointment. Termination of the Trust shall be effected by
distribution of all assets thereof to the Participants or other persons
entitled thereto pursuant to the directions of the Employer (or, in
the absence of such direction, as determined by the Trustee),
subject to the Trustee's right to reserve funds as provided in Section
6.1 hereof. Upon the completion of such distribution, the Trustee
shall be relieved from all further liability with respect to all amounts
so paid, other than any liability arising out of the Trustee's willful
misconduct or gross negligence.
ARTICLE VII--MISCELLANEOUS
7.1 PURPOSE.
This Trust has been established for the exclusive benefit of the
Plan's Participants. Except as provided herein, it shall be impossible
at any time prior to the satisfaction of all liabilities to the
Participants for any part of the principal or income of the Trust, other
than such part as is required to pay taxes, administrative expenses or
refund contributions as provided herein, to be paid or diverted to the
Employer or to be used for any purpose whatsoever other than for the
exclusive benefit of the Participants.
7.2 INDEMNIFICATION.
The Employer shall indemnify and hold harmless the Trustee
(including its affiliates, employees, representatives and agents
from and against any liability, cost or other expense, including, but
not limited to, the payment of attorney's fees which the Trustee
may incur in connection with the Trust or the Plan unless such
liability, cost or expense arises from the Trustee's own willful
misconduct or gross negligence. The Trustee shall not be obligated
or expected to commence or defend any legal action or proceeding
in connection with the Trust unless agreed upon in writing by the
Trustee and Employer and unless the Trustee is fully indemnified
for doing so it its satisfaction.
7.3 CONSTRUCTION.
Whenever used in this Trust Agreement, unless the context indicates
otherwise, the singular shall include the plural, the plural shall
include the singular, and the male gender shall include the female
gender.
7.4 HEADINGS.
Headings in this Trust Agreement are inserted solely for convenience
of reference and shall neither constitute a part of this Trust
Agreement, nor affect its meaning, construction or intent.
7.5 SEVERABILITY.
If any provision of this Trust Agreement is held invalid or
unenforceable, such invalidity or unenforceability shall not affect
any other provision, and this Trust Agreement shall be construed
and enforced as if such provision had not been included.
7.6 RETURN OF CONTRIBUTIONS.
Contributions are conditioned on initial qualification of the Plan
under section 401(a) of the Code, and if the Plan and Trust do not
42
<PAGE>
qualify, the Trustee may return such contributions to the Employer
upon the Employer's written direction. The Trustee may also
return amounts to the Employer upon the Employer's written
direction due to a "mistake of fact" as described in section 403(c) of
ERISA. Contributions made by the Employer by "mistake of fact"
may revert and be paid to the Employer within one year after the
payment of such mistaken contributions. In making such a return
of assets to the Employer, the Trustee may accept the Employer's
written direction as its warranty that such payment is provided for
in the Plan and complies with such plan provision and section
403(c) of ERISA, and the Trustee need make no further investigation.
7.7 VOTING.
The Employer shall direct the Trustee how to vote any Trust assets
for which the Trust has voting rights. The Employer may not appoint the
Trustee as its designee for purposes of this Section unless the Trustee
agrees to such a designation in writing.
7.8 NONALIENATION OF BENEFITS.
No rights or claims to any of the monies or other assets of the Trust
shall be assignable, nor shall such rights or claims be subject to
garnishment, attachment, execution or levy of any kind; and any
attempt to transfer, assign or pledge the same, except as specifically
permitted by law, shall not be recognized by the Trustee.
7.9 AMENDMENTS.
The Employer and the Trustee may amend this Agreement at any
time by a written agreement between them; provided, however, that
no such amendment shall make it possible for any part of the
corpus or income of the Trust to be used or diverted to purposes
other than the exclusive benefit of Participants and defraying
reasonable expenses of administering the Plan and Trust.
7.10 INSPECTION OF PLAN RECORDS BY EMPLOYER.
The Trustee agrees to permit the Employer to inspect the records of the
Trust maintained by the Trustee during regular business hours
and to permit the Employer to audit the same upon the giving of
reasonable notice to the Trustee. The Trustee further agrees that it
will provide the Employer with information and records that the
Employer may reasonably require in order to perform audits of
said records.
7.11 LAW GOVERNING.
This Agreement shall be administered, construed and enforced
according to the laws of the state of the principal place of business
of the Trustee and applicable Federal law.
7.12 MERGER, CONSOLIDATION OR TRANSFER.
In the event of the merger, consolidation or transfer of any portion
of the Trust to a trust fund held under any other plan, the Trustee
shall dispose of all or part, as the case may be, of the Trust, in
accordance with the written directions of the Employer, subject to
the right of the Trustee to reserve funds as provided in Section 6.1
hereof.
7.13 TRUSTEE AS SUCCESSOR TRUSTEE.
If the Trustee is acting as a successor trustee with respect to the
Trust, the Employer shall indemnify the Trustee against all liabilities
with respect to the Trust arising prior to the appointment of the
Trustee and its acceptance thereof.
7.14 SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon the successor and assigns of
the parties hereto.
7.15 NOTICES.
Any notice from the Trustee to the Employer or from the Employer
to the Trustee provided for in the Plan or in this Trust Agreement
shall be effective if sent by first class mail to their respective last
addresses of record.
7.16 EFFECTIVE DATE.
The effective date of this Trust shall be the date on which the
Trustee has executed the Adoption Agreement unless specified
otherwise in that agreement.
43
<PAGE>
SIMPLIFIED 401(k) PROTOTYPE PLAN
ADOPTION AGREEMENT #001
This is the Adoption Agreement for defined contribution plan #001 of
basic plan document #07, which is a combined prototype Section 401(k)/profit
sharing defined contribution plan. This Adoption Agreement may be used only
in conjunction with basic plan document #07.
NOTE: Before executing this Adoption Agreement, the Employer should
consult with a tax adviser or attorney. Failure to properly complete this
Adoption Agreement may result in Plan disqualification.
The Employer hereby establishes a Section 401(k) plan and a trust for
such plan upon the respective terms and conditions contained in the Section
401(k) prototype plan (the "Plan"), and the Trust Agreement to the Plan and
appoints as Trustee of such trust the person(s) who has (have) executed this
Adoption Agreement evidencing his/her/its (their) acceptance of such
appointment. The Plan and the Trust Agreement shall be supplemented and
modified by the terms and conditions contained in this Adoption Agreement and
shall be effective on the Effective Date, as specified herein.
After the Employer has notified T. Rowe Price Trust Company in writing
that it has adopted the Plan, T. Rowe Price Trust Company shall inform the
Employer of any amendments made to the prototype plan or the discontinuance
or abandonment of the prototype plan after T. Rowe Price Trust Company
receives such notice and until the Employer notifies T. Rowe Price Trust
Company it has ceased to use this prototype plan or the Employer no longer
meets the requirements of the prototype (e.g., plan assets are not invested
solely in Shares).
I. SPONSOR DATA
T. Rowe Price Trust Company
4555 Painters Mill Road
Owings Mills, MD 21117-4903
1-800-492-7670
II. EMPLOYER DATA
A. Name: ADAMS GOLF, LTD.
-------------------------------------------------------------
B. Tax Identification Number (TIN): 75-2740283
----------------------------------
C. Address: 2801 EAST PLANO PARKWAY
--------------------------------------------------------
PLANO, TX 75074
--------------------------------------------------------
--------------------------------------------------------
D. Telephone Number: (972) 673-9299
-------------------------------------------------
E. Employer's Taxable Year End: DECEMBER 31
--------------------------------------
<PAGE>
F. Employer is: /x/ a corporate entity
/ / a non-corporate entity
/ / a corporate entity electing Subchapter S
treatment.
III. PLAN DATA (Complete A or B)
A. New Plan.
1. Name of Plan and Trust:
---------------------------------------
2. Effective Date of Plan and Trust: ____________________ (Usually
the first day of the Plan Year in which the Plan is adopted)
3. Plan Year End:
------------------------------------------------
B. Amended and Restated Plan.
1. Name of Plan and Trust: ADAMS GOLF, LTD.
---------------------------------------
401(k) RETIREMENT PLAN
--------------------------------------------------------
2. Initial Effective Date: MAY 1, 1998
---------------------------------------
3. Effective Date of Amended Plan MAY 2, 1998
------------------------------
(Usually the first day of a Plan Year)
4. Plan Year End: DECEMBER 31
----------------------------------------------
IV. ELIGIBILITY
A. All Employees shall be eligible to participate in this Plan in
accordance with the provisions of Article III of the Plan,
EXCEPT the following:
/x/ Employees who have not attained age 18 cannot exceed 21);
/x/ Employees who have not completed 0.25 (cannot exceed one)
Year of Eligibility Service. (If the year of
eligibility service selected is a fractional year, an
Employee will not be required to complete any
specified number of hours of service to receive credit
for such fractional year.)
/ / Employees included in a unit of Employees covered by a
collective bargaining agreement, if retirement
benefits were the subject of good faith bargaining
between the Employer and Employee representatives.
Employee representatives do not include any
organization more than half of whose members are
Employees who are owners, officers or executives of
the Employer;
<PAGE>
/x/ Any eligible Employee who is employed by the Employer on the
Effective Date of the Plan shall be eligible to
participate on the Effective Date regardless of his or
her age or Years of Eligibility Service.
B. The Entry Dates shall be the Effective Date of the Plan and
thereafter (Complete 1 or 2)
1. / / The first day of each Plan Year and the first day of
the seventh month in each Plan Year;
2. /x/ The first day of each Plan Year and the first day of
each quarter in the Plan Year.
V. CONTRIBUTIONS
A. Elective Deferrals.
A Participant may elect to defer an amount not in excess of
15% of his or her compensation per pay period in accordance
with a salary reduction agreement signed by the Participant.
B. Employer Matching Contributions.
1. Matching Employer Contributions
a. /x/ shall be made to the Plan.
b. / / shall not be made to the Plan. (If this
subsection b is elected, do not complete the
following section 2.)
2. For a Plan Year, the Employer shall contribute and allocate
to the Matching Contributions Account of each
Participant who made Elective Deferrals during the
Plan Year an amount equal to 50% of the
Participant's Elective Deferrals for each pay period
in the Plan Year; provided that for purposes of
calculating such Matching Contributions, the
Participant's Elective Deferrals shall be treated as
not exceeding 6% of the Participant's Compensation
for each such pay period.
Notwithstanding the foregoing, the Employer Matching
Contribution made on behalf of an eligible
Participant for the Plan Year shall not exceed $ NA.
(If this section is not completed, only the
percentage limit will apply to Employer Matching
Contributions.)
C. Discretionary Employer Contributions
1. /x/ may be made to the Plan each year as determined by
the Employer.
2. / / shall not be made to the Plan.
<PAGE>
VI. VESTING
If a Participant terminates employment for reasons other than
retirement, death or total and permanent disability, the vested
portion of his or her Accounts (other than his or her Salary
Deferral and Rollover Contribution Accounts, which are always 100%
vested) shall be determined in accordance with the following
schedule (Choose A, B or C):
A. /X/ YEARS OF SERVICE VESTED PERCENTAGE
---------------- -----------------
1 year 33.33%
-----
2 years 66.7%
-----
3 or more years 100%
B. / / YEARS OF SERVICE VESTED PERCENTAGE
---------------- -----------------
1 year %
------
2 years % (at least 20%)
------
3 years % (at least 40%)
------
4 years % (at least 60%)
------
5 years % (at least 80%)
------
6 or more years 100 %
C. / / 100% full and immediate.
VII. OPTIONAL FEATURES
A. Loans to Participants (Choose 1 or 2):
1. / / will not be permitted.
2. /X/ will be permitted not exceeding _____% (not more than
50%) of the present value of the Participant's vested
accrued benefit.
B. Hardship withdrawals (Choose 1 or 2):
1. / / will not be permitted.
2. /x/ will be permitted.
VIII. TOP-HEAVY PROVISIONS
If the Employer maintains or has ever maintained a defined
benefit plan, then for purposes of determining the present value
of defined benefit plans' accrued benefits required to be
aggregated with this Plan to compute the top-heavy ratio, any
benefit shall be discounted only for mortality and interest based
on the following:
Interest rate: Mortality table:
--------------- -----------------
<PAGE>
IX. ALLOCATION LIMITATION
If any Participant in this Plan is or has ever been a participant
in a defined benefit plan maintained by the Employer, give an
explanation below of the method under which the plan involved will
satisfy the 1.0 limitation of section 415(e) of the Code in a
manner that precludes Employer discretion:
--------------------------------------------------------------------
X. THE TRUSTEE(S)
The Employer hereby appoints the following to serve as Trustee(s):
Name: JAMES E. FARRELL
-----------------------------------------------------------------
Address: 2801 EAST PLANO PARKWAY
--------------------------------------------------------------
PLANO, TX 75074
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Witness [Signature of] Trustee
Dated:
----------------------------------
Name: DARL HATFIELD
-----------------------------------------------------------------
Address: 2801 EAST PLANO PARKWAY
--------------------------------------------------------------
PLANO, TX 75074
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Witness [Signature of] Trustee
Dated:
----------------------------------
Name:
-----------------------------------------------------------------
Address:
--------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Witness [Signature of] Trustee
Dated:
----------------------------------
<PAGE>
XI. SUPPLEMENTS
If additional space is required to specify an elective feature or
to amend the Plan in accordance with Section 13.2 of the Plan,
please attach additional pages as needed. Each additional page
must reference the Section of the Adoption Agreement or the Plan to which the
addition applies and must be signed (or initialed) by the Employer and the
Trustee(s). In addition, each supplementary page should be numbered, and the
total number of pages in the Adoption Agreement and additional pages indicated
in the following Section.
XII. EMPLOYER SIGNATURE
The Employer acknowledges receipt of the current prospectus of
each of the investment options designated by the Employer for its
initial choice of investments available under the Plan and
represents that it has delivered a copy thereof to each
Participant in the Plan, and that it will deliver to each
Participant making contributions and each new Participant, a copy
of the then current prospectus of such investment options. The
Employer further represents that the information in this Adoption
Agreement shall become effective only when approved and
countersigned by the Trustee(s). The right to reject this
Adoption Agreement for any reason is reserved.
Note: An Employer who has ever maintained or who later adopts any
plan (including a welfare benefit fund, as defined in Code
section 419(e), which provides post-retirement medical
benefits allocated to separate accounts for Key Employees, as
described in Code section 419A(d)(3), or an individual
medical account as defined in Code section 415(1)(2)), in
addition to this Plan may not rely on the opinion letter
issued by the National Office of the Internal Revenue Service
as evidence that this Plan is qualified under Code section
401(a). If the Employer who adopts or maintains multiple
plans wishes to obtain reliance that the plans are qualified,
application for a determination letter should be made to the
appropriate Key District Director of Internal Revenue.
The Employer may not rely on the opinion letter issued by the
National Office of the Internal Revenue Service as evidence
that this Plan is qualified under Code section 401 unless the
terms of the Plan, as herein adopted or amended, that pertain
to the requirements of Code sections 401(a)(4), 401(a)(17),
401(l), 401(a)(5), 410 (b) and 414(s), as amended by the Tax
reform Act of 1986, or later laws, (a) are made effective
retroactively to the first day of the first Plan Year
beginning after December 31, 1988 (or such later date on
which these requirements first become effective with respect
to this Plan); or (b) are made effective no later than the
first day on which the Employer is no longer entitled, under
regulations, to rely on a reasonable, good faith
interpretation of these requirements, and the prior
provisions of the plan constitute such an interpretation.
This Adoption Agreement consists of 6 pages.
-----
IN WITNESS WHEREOF, the Employer has caused this Adoption Agreement to
be executed by its duly authorized officers this ______ day of
_______________, ____.
<PAGE>
ADAMS GOLF, LTD
-------------------------------------------
[Name of] Employer
By:
-------------------------------------------
Name and Title:
-------------------------------------------
(please print)
<PAGE>
SIMPLIFIED 401(k) PROTOTYPE PLAN
ADOPTION AGREEMENT #001
This is the Adoption Agreement for defined contribution plan #001 of
basic plan document #07, which is a combined prototype Section 401(k)/profit
sharing defined contribution plan. This Adoption Agreement may be used only
in conjunction with basic plan document #07.
NOTE: Before executing this Adoption Agreement, the Employer should
consult with a tax adviser or attorney. Failure to properly complete this
Adoption Agreement may result in Plan disqualification.
The Employer hereby establishes a Section 401(k) plan and a trust for
such plan upon the respective terms and conditions contained in the Section
401(k) prototype plan (the "Plan"), and the Trust Agreement to the Plan and
appoints as Trustee of such trust the person(s) who has (have) executed this
Adoption Agreement evidencing his/her/its (their) acceptance of such
appointment. The Plan and the Trust Agreement shall be supplemented and
modified by the terms and conditions contained in this Adoption Agreement and
shall be effective on the Effective Date, as specified herein.
After the Employer has notified T. Rowe Price Trust Company in writing
that it has adopted the Plan, T. Rowe Price Trust Company shall inform the
Employer of any amendments made to the prototype plan or the discontinuance
or abandonment of the prototype plan after T. Rowe Price Trust Company
receives such notice and until the Employer notifies T. Rowe Price Trust
Company it has ceased to use this prototype plan or the Employer no longer
meets the requirements of the prototype (e.g., plan assets are not invested
solely in Shares).
I. SPONSOR DATA
T. Rowe Price Trust Company
4555 Painters Mill Road
Owings Mills, MD 21117-4903
1-800-492-7670
II. EMPLOYER DATA
A. Name: ADAMS GOLF, LTD.
-----------------------------------------------------------
B. Tax Identification Number (TIN): 75-2740283
--------------------------------
C. Address: 2801 EAST PLANO PARKWAY
-------------------------------------------------------
PLANO, TX 75074
-------------------------------------------------------
-------------------------------------------------------
D. Telephone Number: (972) 673-9299
-----------------------------------------------
E. Employer's Taxable Year End: DECEMBER 31
------------------------------------
F. Employer is: /X/ a corporate entity
<PAGE>
/ / a non-corporate entity
/ / a corporate entity electing Subchapter S
treatment.
III. PLAN DATA (Complete A or B)
A. New Plan.
1. Name of Plan and Trust: ADAMS GOLF, LTD.
------------------------------------
401(k) RETIREMENT PLAN
-------------------------------------------------------------
2. Effective Date of Plan and Trust: MAY 1, 1998
---------------------------
(Usually the first day of the Plan Year
in which the Plan is adopted)
3. Plan Year End: DECEMBER 31
----------------------------------------------
B. Amended and Restated Plan.
1. Name of Plan and Trust:
--------------------------------------
-------------------------------------------------------------
2. Initial Effective Date:
--------------------------------------
3. Effective Date of Amended Plan
-------------------------------
(Usually the first day of a Plan Year)
4. Plan Year End:
-----------------------------------------------
IV. ELIGIBILITY
A. All Employees shall be eligible to participate in this Plan in
accordance with the provisions of Article III of the Plan, EXCEPT
the following:
/x/ Employees who have not attained (age 18 cannot exceed 21);
/x/ Employees who have not completed 0.25 (cannot exceed one) Year
of Eligibility Service. (If the year of eligibility service
selected is a fractional year, an Employee will not be
required to complete any specified number of hours of service
to receive credit for such fractional year.)
/ / Employees included in a unit of Employees covered by a
collective bargaining agreement, if retirement benefits were
the subject of good faith bargaining between the Employer and
Employee representatives. Employee representatives do not
include any organization more than half of whose members are
Employees who are owners, officers or executives of the
Employer;
/x/ Any eligible Employee who is employed by the Employer on the
Effective Date of the Plan shall be eligible to participate on
the Effective Date regardless of his or her age or Years of
Eligibility Service.
-2-
<PAGE>
B. The Entry Dates shall be the Effective Date of the Plan and
thereafter (Complete 1 or 2)
1. / / The first day of each Plan Year and the first day of the
seventh month in each Plan Year;
2. /X/ The first day of each Plan Year and the first day of
each quarter in the Plan Year.
V. CONTRIBUTIONS
A. Elective Deferrals.
A Participant may elect to defer an amount not in excess of 15% of
his or her compensation per pay period in accordance with a salary
reduction agreement signed by the Participant.
B. Employer Matching Contributions.
1. Matching Employer Contributions
a. /X/ shall be made to the Plan.
b. / / shall not be made to the Plan. (If this
subsection b is elected, do not complete the
following section 2.)
2. For a Plan Year, the Employer shall contribute and allocate to
the Matching Contributions Account of each Participant who
made Elective Deferrals during the Plan Year an amount equal
to 50 % of the Participant's Elective Deferrals for each
---------
pay period in the Plan Year; provided that for purposes of
calculating such Matching Contributions, the Participant's
Elective Deferrals shall be treated as not exceeding 6 % of
---
the Participant's Compensation for each such pay period.
Notwithstanding the foregoing, the Employer Matching
Contribution made on behalf of an eligible Participant for the
Plan Year shall not exceed $ N/A . (If this section is not
--------
completed, only the percentage limit will apply to Employer
Matching Contributions.)
C. Discretionary Employer Contributions
1. /X/ may be made to the Plan each year as determined by the
Employer.
2. / / shall not be made to the Plan.
VI. VESTING
If a Participant terminates employment for reasons other than retirement,
death or total and permanent disability, the vested portion of his or her
Accounts (other than his or her Salary
-3-
<PAGE>
Deferral and Rollover Contribution Accounts, which are always 100% vested)
shall be determined in accordance with the following schedule
(Choose A, B or C):
A. / / YEARS OF SERVICE VESTED PERCENTAGE
---------------- -----------------
1 year
-------
2 years
-------
3 or more years
-------
B. / / YEARS OF SERVICE VESTED PERCENTAGE
---------------- -----------------
1 year
-------%
2 years
-------% (at least 20%)
3 years
-------% (at least 40%)
4 years
-------% (at least 60%)
5 years
-------% (at least 80%)
6 or more years 100 %
C. /X/ 100% full and immediate.
VII. OPTIONAL FEATURES
A. Loans to Participants (Choose 1 or 2):
1. / / will not be permitted.
2. /X/ will be permitted not exceeding 50% (not more than
---
50%) of the present value of the Participant's vested
accrued benefit.
B. Hardship withdrawals (Choose 1 or 2):
1. / / will not be permitted.
2. /X/ will be permitted.
VIII. TOP-HEAVY PROVISIONS
If the Employer maintains or has ever maintained a defined benefit plan,
then for purposes of determining the present value of defined benefit
plans' accrued benefits required to be aggregated with this Plan to
compute the top-heavy ratio, any benefit shall be discounted only for
mortality and interest based on the following:
Interest rate: Mortality table:
----------------- ----------------------
IX. ALLOCATION LIMITATION
If any Participant in this Plan is or has ever been a participant in a
defined benefit plan maintained by the Employer, give an explanation
below of the method under which the plan
-4-
<PAGE>
involved will satisfy the 1.0 limitation of section 415(e) of the Code
in a manner that precludes Employer discretion:
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
X. THE TRUSTEE(S)
The Employer hereby appoints the following to serve as Trustee(s):
Name: JAMES E. FARRELL
------------------------------------------------------------------
Address: 2801 EAST PLANO PARKWAY
---------------------------------------------------------------
PLANO, TX 75074
------------------------------------------------------------------------
------------------------------- --------------------------------------
Witness [Signature of] Trustee
Dated:
-------------------------
Name: DARL HATFIELD
-----------------------------------------------------------------
Address: 2801 EAST PLANO PARKWAY
--------------------------------------------------------------
PLANO, TX 75074
------------------------------------------------------------------------
------------------------------- --------------------------------------
Witness [Signature of] Trustee
Dated:
-------------------------
Name:
-----------------------------------------------------------------
Address:
--------------------------------------------------------------
------------------------------------------------------------------------
------------------------------- --------------------------------------
Witness [Signature of] Trustee
Dated:
-------------------------
XI. SUPPLEMENTS
If additional space is required to specify an elective feature or to
amend the Plan in accordance with Section 13.2 of the Plan, please attach
additional pages as needed. Each additional page
-5-
<PAGE>
must reference the Section of the Adoption Agreement or the Plan to which the
addition applies and must be signed (or initialed) by the Employer and the
Trustee(s). In addition, each supplementary page should be numbered, and the
total number of pages in the Adoption Agreement and additional pages
indicated in the following Section.
XII. EMPLOYER SIGNATURE
The Employer acknowledges receipt of the current prospectus of each of
the investment options designated by the Employer for its initial choice
of investments available under the Plan and represents that it has
delivered a copy thereof to each Participant in the Plan, and that it
will deliver to each Participant making contributions and each new
Participant, a copy of the then current prospectus of such investment
options. The Employer further represents that the information in this
Adoption Agreement shall become effective only when approved and
countersigned by the Trustee(s). The right to reject this Adoption
Agreement for any reason is reserved.
Note: An Employer who has ever maintained or who later adopts any
plan (including a welfare benefit fund, as defined in Code
section 419(e), which provides post-retirement medical
benefits allocated to separate accounts for Key Employees, as
described in Code section 419A(d)(3), or an individual medical
account as defined in Code section 415(1)(2)), in addition to
this Plan may not rely on the opinion letter issued by the
National Office of the Internal Revenue Service as evidence
that this Plan is qualified under Code section 401(a). If the
Employer who adopts or maintains multiple plans wishes to
obtain reliance that the plans are qualified, application for
a determination letter should be made to the appropriate Key
District Director of Internal Revenue.
The Employer may not rely on the opinion letter issued by the
National Office of the Internal Revenue Service as evidence that
this Plan is qualified under Code section 401 unless the terms of
the Plan, as herein adopted or amended, that pertain to the
requirements of Code sections 401(a)(4), 401(a)(17), 401(l),
401(a)(5), 410 (b) and 414(s), as amended by the Tax reform Act of
1986, or later laws, (a) are made effective retroactively to the
first day of the first Plan Year beginning after December 31, 1988
(or such later date on which these requirements first become
effective with respect to this Plan); or (b) are made effective no
later than the first day on which the Employer is no longer
entitled, under regulations, to rely on a reasonable, good faith
interpretation of these requirements, and the prior provisions of
the plan constitute such an interpretation.
This Adoption Agreement consists of 6 pages.
IN WITNESS WHEREOF, the Employer has caused this Adoption Agreement to be
executed by its duly authorized officers this _____ day of ______________
_______________ , _____ .
ADAMS GOLF, LTD
----------------------------------------
[Name of] Employer
By:
----------------------------------------
Name and Title:
--------------------------------------
(please print)
-6-
<PAGE>
EXHIBIT A
ATTACHMENT TO
SIMPLIFIED 401(K) PROTOTYPE PLAN
ADOPTION AGREEMENT #001 FOR
ADAMS GOLF, LTD.
ADDITION TO SECTION II-EMPLOYER DATA
CONTROLLED GROUPS:
Participating Name Adams Golf Direct Response, Ltd.
-----------------------------------------
Employer I.D. 75-2740281 Taxable Year 12/31
--------------- --------
By Title Date
------------------ ------------------- ----------
Participating Name Adams Golf, Inc.
-----------------------------------------
Employer I.D. 75-2320087 Taxable Year 12/31
--------------- --------
By Title Date
------------------ ------------------- ----------
Participating Name Adams Golf Holding Corp.
-----------------------------------------
Employer I.D. 75-2070978 Taxable Year 12/31
--------------- --------
By Title Date
------------------ ------------------- ----------
Participating Name Adams Golf GP Corp.
-----------------------------------------
Employer I.D. 75-2070974 Taxable Year 12/31
--------------- --------
By Title Date
------------------ ------------------- ----------
Participating Name Adams Golf Management Corp.
-----------------------------------------
Employer I.D. 75-2075773 Taxable Year 12/31
--------------- --------
By Title Date
------------------ ------------------- ----------
Participating Name Adams Golf IP, L.P.
-----------------------------------------
Employer I.D. 75-2073297 Taxable Year 12/31
--------------- --------
By Title Date
------------------ ------------------- ----------
<PAGE>
AGREEMENT
BETWEEN
ADAMS GOLF, LTD.
AND
NICHOLAS A. FALDO
This Agreement, dated April 22, 1998 (this "Agreement"), is between
Nicholas A. Faldo, a professional golfer (the "Professional"), and Adams
Golf, Ltd., a Texas limited partnership ("Adams Golf").
WHEREAS, the Professional is recognized and widely known as a highly
skilled professional golfer whose endorsement is of commercial value; and
WHEREAS, Adams Golf and its affiliates are engaged in the design,
manufacture, distribution, advertisement, promotion and sale of golf clubs
and golf-related equipment, and desire to obtain the right to use the name,
likeness, endorsement and consultation services of the Professional in
connection with the advertisement, promotion and sale of the Endorsed
Products;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, the parties hereto agree as follows:
ARTICLE I. SUMMARY OF TERMS AND DEFINITIONS
SECTION 1. CONTRACT PERIOD. The "Contract Period" shall commence
on May 1, 1998 and continue until the later to occur of (i) the death of the
Professional or (ii) May 1, 2030.
SECTION 2. CONTRACT TERRITORY. The "Contract Territory" is the
entire world.
SECTION 3. PROFESSIONAL'S ENDORSEMENT. The "Professional's
Endorsement" means all publicity rights belonging to the Professional, and
any words or symbols, photographic, graphic or video representations, or
combinations thereof, which identify the Professional such as, for example,
the Professional's name, initials, voice, likeness, biographical data,
character, image and signature (and all variations of the foregoing).
SECTION 4. ENDORSED PRODUCTS. The "Endorsed Products" means the
following products promoted by Adams Golf or its affiliates using the
Professional's Endorsement: all golf clubs, head covers, golf bags, travel
covers, golf towels, and umbrellas designed, manufactured, promoted or sold
by or for Adams Golf or any subsidiary or affiliate thereof.
SECTION 5. SPECIALLY ENDORSED PRODUCTS. The "Specially Endorsed
Products" means the Tight Lies-Registered Trademark- fairway woods
distributed by Adams Golf with such
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specifications that are acceptable to the Professional (to the extent
Professional determines to carry fairway woods in his golf bag), an Adams
Golf golf club bag, and Adams Golf head covers which shall be placed on all
Adams Golf golf clubs. It is understood that Adams Golf will design with the
Professional a full line of additional golf clubs in the future (including
drivers, fairway woods, irons, wedges and putters) which, when acceptable to
Professional, will be carried by the Professional in his golf bag and shall
be "Specially Endorsed Products" for purposes hereof. Each of the
Professional and Adams Golf will use their respective commercially reasonable
best efforts to cause such line of golf clubs to be acceptable to the
Professional.
SECTION 6. REQUIRED TOURNAMENTS. The "Required Tournaments" in
which the Professional shall compete during each calendar year during the
Contract Period, as required by ARTICLE III, SECTION 4a, means at least
eighteen (18) premium worldwide golf events, provided that if during the
Contract Period Professional should commence play on the Senior PGA Tour the
parties will mutually determine a lesser number of Required Tournaments as
appropriate. The Professional shall use his reasonable best efforts to
compete in at least the Required Tournaments. The Professional acknowledges
and agrees that the presumption that the Professional will receive exposure
proportionate to the number of designated tournaments is a material
inducement to Adams Golf to enter into this Agreement. In the event
Professional does not compete in the anticipated number of tournaments other
than as a result of illness or injury, the royalty (including any minimum
royalty) payable to Professional pursuant to ARTICLE II, SECTION 5 shall be
reduced on a prorata basis. In order to facilitate monitoring the number of
Required Tournaments in which the Professional competes, the Professional
shall provide to Adams Golf at the beginning of each tournament season a
tentative schedule of tournaments in which the Professional intends to
compete and shall review with Adams Golf on a quarterly basis the number of
Required Tournaments in which the Professional competed during the previous
calendar quarter.
SECTION 7. PROMOTION ACTIVITIES. The items which the Professional
is required to wear and/or use, as required under ARTICLE III, SECTION 4b,
are visor/headgear with the Adams Golf logo when the Professional wears a
visor or head gear and an Adams Golf umbrella with the Adams Golf logo.
Adams Golf and its affiliates shall have the right to change their respective
trademark(s) or logo(s) from time to time.
SECTION 8. PERMITTED OTHER ENDORSEMENTS. The term "Permitted Other
Endorsements" means all products not competitive with the Endorsed Products.
Permitted Other Endorsements include the following endorsements in effect on
the date hereof: Polygram Video International Limited, Chapman Publishers,
Florsheim Group, Inc., Ford Motor Company, Marriott Ownership Resorts, Inc.
(subject to ARTICLE III, SECTION 12 hereof), Audemars Piguet, Pringle of
Scotland Limited and Bridgestone Sports Co., Limited.
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SECTION 9. PERSONAL APPEARANCES. The Professional shall make such
personal appearances each calendar year during the Contract Period as may be
mutually agreed upon by the Professional and Adams Golf.
ARTICLE II. COMPENSATION TO PROFESSIONAL
SECTION 1. STOCK. In consideration for entering into the licensing
arrangement described herein, Adams Golf shall cause Adams Golf, Inc. to
issue to the Professional 450,000 shares of Adams Golf, Inc. common stock,
par value $.001 per share ("Adams Stock"). Adams Golf represents and
warrants to Professional that, as of the date hereof, but immediately prior
to the issuance contemplated hereby, there are 9,120,422 shares of Adams
Stock issued and outstanding.
SECTION 2. RESTRICTED SECURITIES; RISKS OF INVESTMENT. Professional
acknowledges and agrees that any investment in Adams Golf, Inc. common stock
involves substantial risks and that Professional or his representative has
had the opportunity to review fully the books, records and financial
statements of Adams Golf, Inc., Adams Golf, and their respective affiliates,
and to ask questions of Adams Golf's management and executive employees.
Professional further acknowledges and agrees that the shares of common stock
to be acquired hereunder are restricted securities which may not be sold,
transferred or hypothecated unless such transfer is pursuant to an effective
registration statement or an exemption from such registration as verified by
an opinion of counsel acceptable to Adams Golf. Without limiting the
foregoing, Professional agrees that in no event shall he sell, transfer or
dispose of (except as set forth below) more than 50,000 shares of common
stock in any calendar year prior to 2002 without the prior written consent of
Adams Golf other than transfers to the Professional's agent or manager in
payment of commissions, transfers to entities controlled by Professional or
gifts or transfers to immediate family members, provided that any such
transfers shall be subject to the provisions of this ARTICLE II, SECTION 2,
and, in connection therewith, the aggregate sales, transfers, dispositions or
hypothecations by such persons and Professional will not exceed 50,000 shares
in any calendar year without Adams Golf's prior written consent. Adams Golf
may request a written agreement from any transferee as a precondition to such
transfer regarding the restrictions set forth in this ARTICLE II, SECTION 2.
Professional may hypothecate any or all such shares to a third party lender
(which is not then or thereafter competitive to Adams Golf or its affiliates
in any respect) in a bona fide loan transaction provided that such third
party lender agrees that in the event there is any foreclosure, sale or
similar action by such third party to realize upon the value thereof, Adams
Golf or its affiliates shall have a right of first refusal to acquire such
shares from such lender at the price such shares are to be sold or the value
otherwise attributed to the same.
SECTION 3. TAXES ON STOCK GRANT. Adams Golf agrees that it will use
commercially reasonable efforts to arrange financing for Professional for the
purpose of providing Professional with funds equivalent to the U.S. federal
income and U.K. income tax liability, if any, attributable to Professional by
virtue of the grant of stock hereunder.
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Professional acknowledges and agrees that in connection therewith he will
execute and deliver such loan documents as may be reasonably requested by
Adams Golf, any of its affiliates or any third party lender and pledge such
number of the shares acquired by him hereunder as may be reasonably required
as collateral security for such loan. Such loan shall be for a reasonable
term to be negotiated between the parties and shall bear interest at a
variable rate equal to the lowest applicable federal rate (the "AFR") to
avoid imputed interest under the provisions of the Internal Revenue Code of
1986, as amended.
SECTION 4. PUBLIC OFFERING. Adams Golf acknowledges that Adams Golf
intends to use commercially reasonable efforts to effect an initial public
offering of Adams Golf, Inc.'s common stock as soon as it is believed
commercially advisable and practical. In the event that on or prior to
December 31, 1998 Adams Golf, Inc. has either (i) not effected such an
initial public offering or (ii) not entered into a definitive agreement to be
acquired (including, without limitation, an acquisition of substantially all
of its assets) for any combination of cash and registered securities,
Professional will have the right, exercisable on January 1, 1999 and for
ninety (90) days thereafter, to cause Adams Golf effective March 31, 1999 to
repurchase all of the shares of common stock acquired by Professional
hereunder for $5,000,000. Such sum may, at the option of Adams Golf, be paid
in equal quarterly installments over a period of three (3) years with
interest thereon at the AFR. In the event such "put right" is exercised by
Professional, Adams Golf may, in its discretion, terminate this Agreement.
SECTION 5. ROYALTIES AND TRADEMARKS. The Professional hereby grants
to Adams Golf, its affiliates and its duly authorized distributors and
representatives, subject to the terms and conditions of this Agreement, the
unlimited, sole and exclusive right, privilege and license, throughout the
Contract Territory, to use the Marks, for the endorsement of Adams Golf and
its affiliates, and for the manufacture, endorsement, promotion, sale and
distribution of the Endorsed Products. Without limiting the generality of
the foregoing, Adams Golf and its affiliates shall be permitted to use the
Marks in all advertising and promotional activities and media relating to
Adams Golf or its affiliates, or the Endorsed Products, even if certain items
which are not Endorsed Products are shown or included in such advertising and
promotional activities and media. For purposes of this Agreement, "Marks"
shall mean "Nick Faldo," "Faldo," "N. Faldo," "Nick Faldo Line" and any
variations or derivations thereof, any related designs or logos, and all
copyrights, trade names, trademarks and service marks, and other proprietary
rights in or associated with any of the foregoing, anywhere in the world.
The Professional agrees, at his own expense, to promptly apply for and obtain
registration of such Marks as shall be mutually agreed, for use on and in
connection with the Endorsed Products, including at least the "Nick Faldo"
and "Faldo" Marks, in the United States of America and all such other
countries where Adams Golf or its affiliates now or hereafter apply for or
obtain registration of any of Adams Golf's or its affiliates' marks. The
Professional shall diligently and timely prosecute all such applications for
registration of the Marks, and shall upon request deliver or cause to be
delivered to Adams Golf a report on the status of all such applications and
registrations of the Marks, together with copies thereof. The Professional
shall diligently and timely record Adams Golf or its affiliates
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as licensees or registered users of the Marks where necessary or desirable
under applicable law. Further, the Professional agrees, at his own expense,
to take all such actions as may be necessary or desirable to record, enforce,
defend or otherwise preserve the validity of, or the Professional's title to,
any of the Marks, including without limitation, the timely filing,
prosecution or defense of oppositions or similar proceedings, prompt action
against infringers or third parties which may cause dilution of any of the
Marks, and timely defense of any claims that use any of the Marks by the
Professional, Adams Golf or its affiliates infringes or dilutes the rights of
third parties. The Professional shall deliver or cause to be delivered to
Adams Golf timely status reports on all such oppositions, proceedings,
actions or claims involving or relating to any of the Marks, including
without limitation, as much advance notice as shall be feasible prior to the
dismissal, cancellation, abandonment, withdrawal, refusal, or other adverse
judgment or decision involving or relating to any of the Marks, applications
therefor or registrations thereof. The Professional shall be responsible for
maintenance of all registrations of the Marks, including the timely filing of
declarations of continued use and incontestability, annuities, renewals,
continuations, and all related fees and expenses. In the event that Adams
Golf shall determine that registrations would be desirable in more countries,
on more of the Marks, or for more goods or services than the Professional
obtains or is required to obtain hereunder, the Professional agrees to apply
for and obtain such additional registrations and Adams Golf agrees to
reimburse the Professional for the reasonable direct costs thereof. Subject
to the provisions hereof, during the Contract Period, Professional shall be
entitled to receive a royalty equal to 5% of the Net Sales Price of all Adams
Golf golf clubs (other than Specialty Items as defined below) sold by Adams
Golf or its affiliates outside the United States of America, its territories
and possessions. For purposes hereof, the Net Sales Price shall mean the
sums actually received by Adams Golf or its affiliates with respect to golf
clubs sold outside the United States of America, its territories and
possessions, less amounts for returns, price allowances, rebates, refunds,
shipping and taxes and shall exclude sales to or among affiliates of Adams
Golf. The royalty shall be payable forty-five (45) days after the end of
each calendar quarter with respect to the prior quarter's net sales, provided
that in the event any such royalty payment, when taken together with all
other royalty payments (including, without limitation, any pro rata minimum
royalty payments as described below) made with respect to such year, is less
than the pro rata portion of the minimum royalty for such year (as set forth
below), Adams Golf shall also remit the difference between the aggregate
amounts and the pro rata portion of the minimum royalty allocable to such
partial year. Any royalty payment may provide for such deductions that are
appropriate with respect to overpayment of royalties of any such prior
period. Any such deductions shall be allocated to such prior period and
minimum or maximum royalty amounts (as described herein) shall be
recalculated for such prior period. Further adjustments may be made to the
extent such allocation results in an overpayment for any period. Any such
adjustment shall also be allocated to the appropriate period for purposes of
determining minimum or maximum royalties Each royalty payment shall be
accompanied by such sales data that Professional may reasonably request.
With respect to sales made during 1999 and each of the following years during
the Contract Period, Professional shall receive a minimum royalty of the
following amount:
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<TABLE>
YEAR MINIMUM ROYALTY
---- ---------------
<S> <C>
1999 $1,500,000.00
2000 1,875,000.00
2001 2,343,750.00
2002 2,929,687.50
2003 3,662,109.38
2004 4,000,000.00
2005 4,000,000.00
2006 4,000,000.00
2007 4,000,000.00
2008 4,000,000.00
2009 - 2014 as set forth below
</TABLE>
With respect to the years 2009 to 2014 the Professional shall receive a
minimum royalty, adjusted as of December 31 of each such year, to be as
follows:
$1,500,000 X CPI 1/CPI 2 = adjusted minimum royalty amount.
The terms CPI 1 and CPI 2 shall have the meanings set forth below.
In all events, minimum royalty amounts shall be adjusted to be the prorata
portion of the amount for any year which is less than a full year. Within
forty-five (45) days after the end of each such calendar year, Adams Golf
shall pay to Professional the difference, if any, between the applicable
minimum royalty and the royalties received by Professional (including,
without limitation, pro rata minimum royalty payments) with respect to such
calendar year. After December 31, 2013 through the termination date or
expiration hereof, there shall be no minimum royalty. After December 31,
2008 and through the Termination date or Expiration hereof, the maximum
royalty payable to Professional with respect to sales in any of such years
shall not exceed $4,000,000, adjusted as set forth below (or the pro rata
portion of such amount for any year which is less than a full year). During
the Contract Period, such maximum amount shall be adjusted as of December 31
of every year commencing 2009 to be as follows:
$4,000,000 X CPI 1/CPI 2 = adjusted maximum royalty amount, where:
a. CPI means the monthly National Consumer Price Index for All
Urban Consumers, U.S. City Average (All Items; 1982-84 equals 100) issued
by the U.S. Department of Labor, Bureau of Labor Statistics, or its
successor agency, or if such index is no longer in effect, the successor
index thereto;
b. "CPI 1" shall mean the monthly CPI for the month of December of
such year (initially, December 2009); and
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c. "CPI 2" shall mean CPI for the month of December 2008.
In no event shall any delay in paying a royalty due to computation of the
formula set forth above result in a default hereunder.
For all purposes, sales of specialty golf clubs and limited edition golf
clubs, including, without limitation, "Audemars Piguet"-TM- and Jaguar (all of
the foregoing specialty and limited edition golf clubs being referred to
herein when designated as such by Adams Golf as "Specialty Items"), will not
be included in determining the above minimum royalty amounts. From the date
this Agreement is executed through the termination date of this Agreement.
Professional shall be entitled to receive a royalty equal to ten percent
(10%) of the Net Sales Price of all Adams Golf Specialty Item golf clubs sold
outside of the United States of America, its territories and possessions.
Within thirty (30) days after the last royalty payment for any calendar year,
Professional may request that he inspect the books and records of Adams Golf
relating to the computation of royalties payable hereunder. Upon execution
of a confidentiality agreement containing standard terms and conditions,
Adams Golf shall permit Professional or his representative to conduct such
inspection at such times to be agreed to by the parties. Professional
acknowledges and agrees that the royalty payments to be made herein are in
consideration of all provisions of this Agreement.
SECTION 6. FALDO JUNIOR SERIES. Adams Golf agrees that through the
year 2008 it will support the "Faldo Junior Series" in the United Kingdom by
making an annual contribution to the sponsoring organization of not less than
$45,000 for each year the tournament is played under such name. In return
for such support, Professional will ensure that Adams Golf is accorded
sponsorship recognition of the highest category with respect to the "Faldo
Junior Series" and shall receive all other benefits accorded to the greatest
sponsors thereof (including, without limitation, advertising and tickets to
events).
SECTION 7. ACTOR'S GUILD. Payments made to the Professional as
gross wages for work pursuant to a contract governed by agreements with the
Screen Actor's Guild ("SAG") in connection with the Professional's appearance
in television commercials or other promotional activities under this
Agreement shall be deducted from the compensation (including royalties)
payable to the Professional pursuant to this Agreement.
ARTICLE III. DUTIES, GRANTS, SERVICES, COVENANTS
AND AGREEMENTS
SECTION 1. CONTRACT TERMS. The parties hereby confirm that the
recitals of this Agreement and the provisions of ARTICLE I are integral parts
of this Agreement.
SECTION 2. GRANT OF ENDORSEMENT RIGHTS. The Professional hereby
grants to Adams Golf and its affiliates and its duly authorized distributors
and representatives,
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subject to all terms and conditions of this Agreement, the unlimited, sole
and exclusive right, privilege and license, within the Contract Territory and
during the Contract Period, to use the Professional's Endorsement to endorse
Adams Golf and its affiliates, and on and in connection with the
advertisement, promotion, endorsement and sale of the Endorsed Products in
any manner or media whatsoever, whether now existing or hereafter created,
anywhere in the world. The Professional agrees that he will not grant, nor
cause any affiliated entity to grant, to anyone other than Adams Golf or its
affiliates the right to use the Marks or the Professional's Endorsement,
except in the case of the Permitted Other Endorsements identified in ARTICLE
I, SECTION 8. Neither Adams Golf nor any of its affiliates shall have any
obligation hereunder to use the Professional's Endorsement or the Marks in
connection with the advertisement, endorsement, promotion or sale of any of
the Endorsed Products.
The Professional represents and warrants that he is the owner, free and
clear, of each of the rights granted, assigned or licensed to Adams Golf and
its affiliates in this Agreement and he has the legal capacity, power and
authority to grant the rights and licenses contained in this Agreement. In
addition, the Professional expressly represents and warrants that he has
neither assigned nor previously granted any license or any endorsement right
in conflict with the rights and licenses granted to Adams Golf and its
affiliates hereunder. Adams Golf recognizes the validity of the
Professional's property interest in the Professional's Endorsement and agrees
not to challenge the validity of said interest during the Contract Period.
SECTION 3. USE OF SPECIALLY ENDORSED PRODUCTS. During the Contract
Period, the Professional shall use exclusively the Specially Endorsed
Products, defined in ARTICLE I, SECTION 5, within the Contract Territory
while playing golf and during all professional tournaments, golf events,
personal appearances, exhibitions, advertisements, fund raisers, corporate
outings and similar promotional events in which he takes part.
SECTION 4. ADDITIONAL OBLIGATIONS.
a. REQUIRED TOURNAMENT PLAY. The Professional agrees to use his
best efforts to compete in at least the Required Tournaments, as defined
in ARTICLE I, SECTION 6.
b. PROMOTION. The Professional agrees that during the Contract
Period and within the Contract Territory, while playing golf and during
all professional tournaments, golf events, personal appearances,
exhibitions, advertisements, fund raisers, corporate outings and similar
promotional events in which he takes part, he will wear and/or use the
items described in ARTICLE I, SECTION 7, unless prohibited by the rules of
the event.
c. PROFESSIONAL CONDUCT. During the term of this Agreement, the
Professional will conduct himself at all times with due regard to public
morals and conventions. Notwithstanding anything to the contrary set forth
in the prior
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sentence or the immediately succeeding sentence, in no event shall a
matter which is public knowledge as of the date hereof be deemed a
violation by Professional of this ARTICLE III, SECTION 4. If, in Adams
Golf's reasonable opinion, the Professional shall have committed or shall
commit any act or do anything that is or shall be offensive or involve
moral turpitude under violations of U.S., federal, State of Texas or other
applicable or local laws, or which brings him into public disrepute,
contempt, scandal or ridicule, or which insults or offends the community,
which injures or may tend to injure the success of Adams Golf or its
affiliates or any of their respective products, distributors, services or
customers; or if, in Adams Golf's reasonable opinion, the Professional
shall make any statements in derogation in any material respect of Adams
Golf or any of its affiliates or any of their respective products or
services and such statement is made to the general public or becomes a
matter of public knowledge; then at any time after the occurrence of such
act, thing or statement, Adams Golf shall have the right, in addition to
its other legal and equitable remedies, to immediately terminate this
Agreement, by giving written notice to the Professional. In the event the
Professional receives written notice from Adams Golf terminating this
Agreement for cause as set forth in this Section, the Professional shall
have twenty (20) days from the date of delivery of the notice to request,
by written notice to Adams Golf, that the matter be submitted to
arbitration. If the Professional requests arbitration, Adams Golf and the
Professional agree that such matter shall be settled by arbitration in
accordance with the Commercial Arbitration Rules of the American
Arbitration Association. Unless required otherwise by state law, the
parties hereto agree to arbitrate their differences in Dallas, Texas.
The parties agree further that (i) an arbitrator may render an interim
ruling, including injunctive relief, and (ii) all claims of any type
alleged in connection with such matter (but only such matter) by either
party, including defenses, are included in the jurisdiction of the
arbitrator.
In connection with such dispute, either party may send written notice to
the other party and the Regional Office of American Arbitration
Association invoking the binding arbitration provisions of this Section.
Each party has ten (10) days from the date of mailing by the American
Arbitration Association of a written list of proposed arbitrators within
which to return the written list of proposed arbitrators with their
choices of arbitrators, to the American Arbitration Association. The
arbitrator selected by the Professional and the arbitrator selected by
Adams Golf shall both select a third arbitrator. The parties further
consent to the jurisdiction of any appropriate court to enforce the
provisions of this Section and/or to confirm any award rendered by the
panel of arbitrators.
Any costs or other expenses, including attorney fees and costs
incurred by the successful party, arising out of or occurring because of
the arbitration proceedings, shall be assessed against the unsuccessful
party.
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SECTION 5. PRODUCTS FOR PROFESSIONAL'S USE. During the Contract
Period, Adams Golf will provide the Professional, at no cost or expense to the
Professional, with such quantities of Endorsed Products and clothing bearing
Adams Golf's authorized logos as he may reasonably request in connection with
performing his obligations under this Agreement.
SECTION 6. OTHER ENDORSEMENTS. During the Contract Period, the
Professional agrees not to endorse, wear or exhibit the logo, trademark or
sticker of, or otherwise advertise or promote, any other company, firm,
organization or person, or their products or services, except as permitted in
ARTICLE I, SECTION 8, without the express written consent of Adams Golf, which
consent Adams Golf may withhold in its sole discretion.
SECTION 7. SERVICES OF THE PROFESSIONAL.
a. The Professional and Adams Golf shall mutually agree on the
personal appearances to be made by Professional. The personal
appearances which may be made by the Professional under this Agreement
may be for any one or more of the following purposes: attendance at
sales "demo" days; in-store appearances, autograph sessions, customer or
distributor outings or dinners and other promotional appearances on
behalf of Adams Golf or its affiliates; modeling in connection with
photographs, drawings or other advertising relating to the Endorsed
Products, which shall be subject to Professional's approval, which such
approval shall not be unreasonably withheld; production of television and
radio commercials or promotional videos and/or other multi-media
advertising (including materials for use on the Internet), which shall be
subject to Professional's approval, which such approval shall not be
unreasonably withheld; and developing, testing, evaluating and consulting
regarding prototypes and new products, including but not limited to golf
clubs. The Professional agrees to keep confidential the nature of this
Agreement, the terms hereof and all non-public information which may be
disclosed or made available to him by or on behalf of Adams Golf or its
affiliates in the course of rendering such services, including, without
limitation, the existence of any prototypes or new products and all
design aspects and any financial information or data which are not
available to the public. With respect to the services of the
Professional in developing, testing and evaluating prototypes and new
products, including the "Nick Faldo Line" described in ARTICLE III,
SECTION 9, the Professional agrees, if requested, to execute an agreement
in form and substance reasonably satisfactory to Adams Golf, whereby the
Professional agrees to maintain the confidentiality of Adams Golf's or
its affiliates' proprietary business and technical information and data,
and assigns to Adams Golf or its affiliates all rights in and to any
inventions, designs, trade secrets, know how, patents, patent
applications, copyrights, and similar rights, applications therefor and
registrations thereof, throughout the world (collectively, the
"Intellectual Property Rights").
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b. Adams Golf agrees that it will reimburse the Professional for
reasonable travel, lodging and meal expenses (including first class air
travel) incurred by him and his traveling associate in connection with
rendering the services set forth in this Article III, Section 7.
c. The Professional acknowledges that Adams Golf and its
affiliates may use the Professional's Endorsement and the Marks in its
promotional activities, including television commercials, print and/or
Internet advertisements, and he agrees to cooperate with Adams Golf's and
its affiliates promotional efforts in that regard. The Professional
shall use his best efforts to demonstrate and promote the characteristics
and quality of the Endorsed Products. The Professional shall participate
in the production of television and radio commercials and in such press
interviews, radio and television appearances and other appearances as may
be arranged for him by Adams Golf. It is understood and agreed by the
Professional that Adams Golf and its affiliates shall have the right to
exhibit commercials and otherwise make use of all such promotional
materials on a worldwide basis and that Adams Golf and its affiliates
shall be the sole owner of all commercials, promotional materials and
other items produced or created hereunder and all related rights
worldwide, including, without limitation, copyright, trademark and
intellectual property rights. The Professional agrees to enter into a
SAG contract with Adams Golf and/or its advertising agency if reasonably
necessary to accomplish the purposes of this Section. If required under
a SAG contract, the Professional shall be paid as gross wages for the
making, use, reuse, broadcast, publication or other display of any
television commercials produced under this Agreement utilizing the
Professional's Endorsement at the minimum fee as provided in the then
current applicable SAG union code agreement, which sum(s) shall be
deducted from the compensation payable to the Professional under this
Agreement, as set forth in ARTICLE II, SECTION 7. All other costs and
expenses associated with work performed by the Professional under a SAG
contract shall be paid by Adams Golf. It is further understood and agreed
by the Professional that Adams Golf and its affiliates shall have the
right to translate and "dub" the Professional's voice in television
commercials produced for Adams Golf or its affiliates in order to
facilitate foreign exhibition of the commercials.
SECTION 8. APPROVAL OF ADVERTISING. Adams Golf agrees that no use of
the Professional's Endorsement nor advertising materials will be made hereunder
unless and until the same has been approved by the Professional. The
Professional agrees that any material, advertising or otherwise, submitted for
approval as provided herein may be deemed by Adams Golf to have been approved
hereunder if the same is not disapproved by the Professional in writing within
fourteen (14) days after the Professional's receipt thereof. The Professional
agrees that any material submitted hereunder will not be unreasonably
disapproved and, if it is disapproved, that Adams Golf will be advised in
writing of the specific grounds therefor at the time of disapproval. Adams
Golf agrees to protect, indemnify and save harmless the Professional from and
against any and all expenses, damages, claims, suits, actions, judgments and
costs whatsoever, arising out of,
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or in any way connected with, any advertising material furnished by, or
prepared on behalf of, Adams Golf or its affiliates.
SECTION 9. NICK FALDO LINE. Adams Golf and Professional agree that
Adams Golf will develop a "Nick Faldo Line" of Adams Golf golf clubs. Adams
Golf and Professional agree that Professional will be actively involved in the
research, development, testing and advertising of such new line of clubs.
Professional acknowledges and agrees that all of his rights in any inventions,
designs, patents, copyrights and other intellectual property or rights created
in connection with such new line of clubs shall be the sole property of Adams
Golf and/or its affiliates. Professional further acknowledges and agrees that
any such intellectual property and rights shall have been made for the sole and
exclusive benefit of and owned by Adams Golf and/or its affiliates.
SECTION 10. BOARD OF ADAMS GOLF. Adams Golf covenants that until the
date that royalties are no longer to be paid to Professional under ARTICLE II,
SECTION 5 HEREOF, it will use its commercially reasonable efforts to cause a
designee of Professional to be nominated and elected to the Board of Directors
of Adams Golf, Inc.
SECTION 11. EXCLUSIVE DISTRIBUTOR AGREEMENT. The parties acknowledge
that it is the intent of Adams Golf to execute an exclusive distributorship
agreement containing standard terms and conditions for the sale and
distribution of Adams Golf products in the United Kingdom with Dimensions in
Sports on terms to be negotiated.
SECTION 12. MARRIOTT AGREEMENT. If a suitable agreement can be reached
between Adams Golf or its affiliates and Marriott Corporation or its affiliates
("Marriott") for the operation of golf learning, research and custom fitting
centers at various Marriott facilities, the Professional agrees, for no
additional compensation, to enter into and perform under an agreement relating
thereto with Adams Golf or its affiliates and Marriott. The existing "Nick
Faldo Learning Centers" or "Nick Faldo Golf Institutes" at various Marriott
facilities and any future such facilities will be named "Nick Faldo Learning
and Adams Golf Custom Fitting and Research Centers" or such other name as may
be mutually agreed.
ARTICLE IV. MISCELLANEOUS
SECTION 1. INTELLECTUAL PROPERTY RIGHTS. Adams Golf and its
affiliates shall have the right anywhere in the world, during the Contract
Period or thereafter, at its own expense, to apply for, file, renew, assign,
obtain registrations or patents, or record its ownership, as the case may be,
of any of the Intellectual Property Rights or other rights granted or licensed
to Adams Golf or its affiliates hereunder. The Professional agrees, without
additional compensation, to render such reasonable assistance, including the
taking of such actions and execution of such documents, as may be necessary or
desirable to enable Adams Golf or its affiliates to accomplish these items, and
to enforce, defend or
AGREEMENT - PAGE 12
<PAGE>
otherwise preserve the validity of the Intellectual Property Rights or other
rights granted or licensed to Adams Golf or its affiliates hereunder. The
Professional agrees not to directly or indirectly challenge the validity,
registration, enforceability of Adams Golf's or its affiliates' ownership of
such Intellectual Property Rights or other rights, and shall not, directly or
indirectly, apply for, file or obtain any patents or registrations on any of
the Intellectual Property Rights or any variations or derivations thereof.
SECTION 2. ASSIGNMENT. This Agreement shall bind and inure to the
benefit of the Professional, and the heirs and permitted assigns of the
Professional. The Professional may not transfer or assign any of his rights
hereunder without the prior written consent of Adams Golf. The rights granted
Adams Golf hereunder shall run and inure to the benefit of Adams Golf and each
of its subsidiaries and affiliates and their respective successors, including
successors by merger or consolidation. Except as provided herein, Adams Golf
shall not, without the prior written consent of the Professional, transfer or
assign the rights under this Agreement to any other person or entity; provided,
however, that Adams Golf may assign this Agreement and its rights hereunder
without Professional's consent to a third party which acquires substantially
all of the assets of Adams Golf or which relate to the Endorsed Products.
SECTION 3. DEFAULT. If either party at any time during the Contract
Period shall (a) fail to timely make any payment of any sum of money herein
specified to be made, or (b) fail to timely observe or perform any of the
covenants, agreements, or obligations hereunder (other than the payment of
money), the non-defaulting party may terminate this Agreement as follows: as
to (a), above, if such payment is not made within thirty (30) days after the
aggrieved party shall have delivered to the other party written notice of such
failure to make payment; or as to (b), above, if such default is not cured
completely as soon as reasonably possible and in no event later than sixty (60)
days after the aggrieved party shall have delivered to the other party written
notice specifying such default; provided, however, that failure to terminate
this Agreement pursuant to this Section shall not effect or constitute a waiver
of any rights or remedies the non-defaulting party would have been entitled to
demand in the absence of this Section, whether by way of damages, termination
or otherwise.
SECTION 4. TERMINATION. Except as set forth herein, including,
without limitation, termination for uncorrected default as set forth in ARTICLE
IV, SECTION 3, hereof, this Agreement shall terminate upon the expiration of
the Contract Period. In addition, and without limiting the foregoing, Adams
Golf shall have the right to terminate this Agreement upon any of the following
events:
a. The inability of the Professional, by reason of any ailment or
illness, physical or mental, to perform the duties required hereunder for
a consecutive period of twelve (12) months, unless Adams Golf has
provided, and the Professional has elected to participate in, group
disability insurance coverage through a third party insurer, in which
case this Agreement will continue in effect, but the compensation payable
hereunder to the Professional shall then be reduced
AGREEMENT - PAGE 13
<PAGE>
and limited to the amounts payable by the insurer under the group
disability insurance policy; or
b. The Professional shall retire or become officially ineligible
to compete on the Official PGA Tour and/or the Senior PGA Tour (or
similar premium successor tours, should one or more be formed) at any
time during the Contract Period; or
c. The Professional has engaged in illegal or immoral conduct
resulting in a felony conviction, or has otherwise conducted himself in a
manner not in keeping with the standards of professional conduct as
required under ARTICLE III, SECTION 4c; or
d. The Professional shall have exercised the put right provided
for in ARTICLE II, SECTION 4, provided that such termination shall have
no effect on the Professional's right to exercise such put right; or
e. The death of the Professional.
Adams Golf and Professional shall each have the right, on January 1, 2008
and for a period of 90 days thereafter, to terminate this Agreement in the
event that (a) Adams Golf is in default of its obligation to make royalty
payments hereunder or the Nick Faldo Line (or similar line) of golf clubs is
not being actively marketed by Adams Golf or its affiliates (other than as a
result of action or inaction by Professional) and (b) B.H. (Barney) Adams is
not then affiliated with Adams Golf, Inc. in a senior executive capacity and
(c) Adams Golf, Inc. did not effect an initial public offering of its common
stock or become a reporting company under the Securities Exchange Act of 1934,
as amended, or any successor statute thereto, and there has been a sale or
other disposition by Adams Golf, Inc. of all or substantially all of its assets
or a reorganization, stock sale, exchange, merger or consolidation of Adams
Golf, Inc. which at such time results in a change of 50% or more of the then
beneficial ownership of the then outstanding common stock of Adams Golf, Inc.
or any successor entity.
In the event of the death of the Professional prior to May 1, 2030, Adams
Golf's exclusive rights to the use of the Professional's Endorsement shall
continue, at the option of Adams Golf, for any periods until May 1, 2030, and
the Professional's heirs or estate shall be entitled to any royalties due under
ARTICLE III, SECTION 4 hereof during the periods therein provided. The
Professional's heirs or estate shall cooperate with Adams Golf and its
affiliates in the recording or registration of Adams Golf's rights in this
regard under applicable law.
Upon termination or expiration of this Agreement for any reason other than
the default of Adams Golf, Adams Golf shall have the right for one (1) year to
market and sell all remaining inventory of Endorsed Products (including
Specially Endorsed Products and the Specialty Items) and other items bearing
the Professional's Endorsement and the Professional shall be entitled to the
royalty contemplated by ARTICLE II, SECTION 5 hereof
AGREEMENT - PAGE 14
<PAGE>
with respect to such sale, provided that the minimum royalty will no longer be
applicable. Termination of this Agreement shall be in addition to, and not in
lieu of, any other rights and remedies of Adams Golf.
SECTION 5. INDEMNITY.
a. Adams Golf agrees to protect, indemnify and save harmless the
Professional and the Professional's authorized agent, or either of them,
from and against any and all expenses, damages, claims, suits, actions,
liabilities, judgments and costs whatsoever, including reasonable
attorneys' fees, in each case arising out of, or in any way connected
with, actions or omissions of Adams Golf or any claim or action for
personal injury, death or other cause of action involving alleged defects
in Adams Golf's products, provided that Adams Golf shall be given prompt
notice of any such action or claim and the Professional and the
Professional's agent shall render all reasonable assistance to Adams Golf
and its counsel in the investigation, defense, settlement or resolution of
such action or claim. During the Contract Period, Adams Golf agrees to
provide and maintain, at its own expense, product liability insurance with
limits of not less than $2,000,000.
b. Professional agrees to protect, indemnify and save harmless
Adams Golf and each of its subsidiaries and affiliates from and against
any and all expenses, damages, claims, suits, actions, liabilities,
judgments and costs, whatsoever, including reasonable attorneys' fees,
arising out of, or in any way connected with, (i) federal, state, local
and other taxes or contributions imposed or required under unemployment
insurance, social security and income tax laws worldwide, with respect to
the Professional's performance of this Agreement or his receipt of
compensation hereunder, or (ii) use of any of the Marks in accordance
with ARTICLE III, SECTION 5 hereof.
SECTION 6. NOTICE. Any notice, request, demand or other communication
required or permitted hereunder shall be in writing and shall be deemed
properly given when actually received or within fourteen (14) days of mailing
by certified or registered mail, return receipt requested, postage prepaid,
whichever first occurs, to the Professional at:
Nicholas Faldo
XXX XXXX
XXX XX XXX
XXX XXXXXX
XXXXX, XXXX, XXXX
England
AGREEMENT - PAGE 15
<PAGE>
with a copy to: Adam Chinn Esq.
Wachtel, Lipton, Rosen & Katz
51 West 52nd Street, 33rd Floor
New York, NY 10019-6618
and to Adams Golf at: 2108 Plano Parkway
Plano, Texas 75076
Attn: B. H. (Barney) Adams
with a copy to: Joseph A. Hoffman, Esq.
Arter & Hadden LLP
1717 Main Street, Suite 4100
Dallas, Texas 75201
Either party may change its address for the purpose of this Agreement by giving
notice to the other party in accordance herewith.
SECTION 7. WAIVER. The failure of any party hereto at any time or
times to demand strict performance by the other of any of the terms, covenants
or conditions set forth herein shall not be construed as a continuing waiver or
relinquishment thereof and each may at any time demand strict and complete
performance by the other of said terms, covenants and conditions.
SECTION 8. SIGNIFICANCE OF HEADINGS. Section headings contained
herein are solely for the purpose of aiding in speedy location of subject
matter and are not in any sense to be given weight in the construction of this
Agreement. Accordingly, in case of any question with respect to the
construction of this Agreement, it is to be construed as though such Section
headings had been omitted.
SECTION 9. ENTIRE AGREEMENT; AMENDMENTS. This writing constitutes the
entire agreement between the parties hereto and may not be changed or modified
except by a writing signed by the party or parties to be charged thereby.
SECTION 10. GOVERNING LAW. This Agreement shall be governed by and
interpreted in accordance with the internal laws of the State of Texas, without
reference to its choice of law principles. Any legal action to interpret or
enforce this Agreement, or any provision hereof, shall be brought exclusively
in the courts in the State of Texas, and the parties hereby consent to the
jurisdiction of said courts and waive any objection to venue in this state or
proceeding in such state on the basis of FORUM NON CONVENIENS.
SECTION 11. RESERVATION OF RIGHTS. All rights not herein specifically
granted to Adams Golf shall remain the property of the Professional to be used
in any manner the Professional deems appropriate.
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<PAGE>
SECTION 12. U.S. DOLLARS. For purposes of this Agreement, the term
"dollars" or "$" means U.S. dollars. All amounts recited herein shall be in U.
S. dollars.
SECTION 13. INDEPENDENT CONTRACTOR. The services performed by the
Professional under this Agreement are in the capacity as an independent
contractor. This Agreement does not constitute and shall not be construed as
establishing an employee-employer relationship, or constituting a partnership
or joint venture, between the Professional and Adams Golf. Except as set forth
herein, no party hereto shall have any right to obligate or bind another party
in any manner, and nothing herein contained shall give, or is intended to give,
any rights of any kind to any third person.
SECTION 14. SEVERABILITY. In the event that any one or more provisions
of this Agreement shall be deemed unenforceable or invalid by a court of
competent jurisdiction, such determination shall in no way affect the validity
or enforceability of any other provision herein.
SECTION 15. COUNTERPARTS. This Agreement may be executed in any number
of counterparts, and each of such counterpart hereof shall be deemed to be an
original instrument, but all such counterparts together shall constitute but
one Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the dates set forth below.
ADAMS GOLF, LTD.
By: ADAMS GOLF GP, INC.
Date: April 22, 1998 By: /s/ B.H. Adams
-------------- ------------------------------
Name: B. H. (Barney) Adams
Title: President
PROFESSIONAL
Date: April 22, 1998 /s/ Nicholas A. Faldo
-------------- ---------------------------------
Nicholas A. Faldo
AGREEMENT - PAGE 17
<PAGE>
Accepted and Agreed to this
22nd day of April, 1998
ADAMS GOLF, INC.
By: /s/ B.H. Adams
------------------------------
Name: B. H. (Barney) Adams
Title: President
AGREEMENT - PAGE 18
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(LEASE 2)
COMMERCIAL LEASE AGREEMENT
JACKSON-SHAW TECHNOLOGY CENTER II, LTD.,
Landlord
to
ADAMS GOLF, INC.,
Tenant
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. LANDLORD 4
2. TENANT 4
3. LEASED PREMISES 4
4. TERM 5
5. BASE RENT AND SECURITY DEPOSIT 6
6. ADDITIONAL RENTAL 7
7. TENANT REPAIRS AND MAINTENANCE 9
8. LANDLORD'S REPAIRS 11
9. UTILITY SERVICE 11
10. SIGNS 11
11. USAGE 12
12. INSURANCE 12
13. (INTENTIONALLY DELETED) 13
14. COMPLIANCE WITH LAWS, RULES AND REGULATIONS 13
15. ASSIGNMENT AND SUBLETTING 13
16. ALTERATIONS AND IMPROVEMENTS 14
17. CONDEMNATION 15
COMMERCIAL LEASE AGREEMENT - PAGE 2
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18. FIRE AND CASUALTY 16
19. CASUALTY INSURANCE 17
20. WAIVER OF SUBROGATION 17
21. HOLD HARMLESS 17
22. QUIET ENJOYMENT 18
23. LANDLORD'S RIGHT OF ENTRY 18
24. ASSIGNMENT OF LANDLORD'S INTEREST IN LEASE 18
25. LANDLORD'S LIEN 18
26. DEFAULT BY TENANT 19
27. REMEDIES FOR TENANT'S DEFAULT 19
28. TERMINATION OF OPTIONS 21
29. WAIVER OF DEFAULT OR REMEDY 21
30. CHOICE OF LAW; VENUE; ATTORNEY'S FEES 21
31. HOLDING OVER 22
32. RIGHTS OF MORTGAGEE 22
33. ESTOPPEL CERTIFICATES 23
34. SUCCESSORS 23
35. REAL ESTATE COMMISSION 23
COMMERCIAL LEASE AGREEMENT - PAGE 3
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36. DEFAULT BY LANDLORD 23
37. MECHANIC'S LIENS 24
38. HAZARDOUS WASTE 24
39. ENTIRE AGREEMENT AND LIMITATION OF WARRANTIES 25
40. FINANCIAL STATEMENTS 25
41. FORCE MAJEURE 25
42. MISCELLANEOUS 26
43. NOTICE 27
44. LIMITATION ON TENANT'S DAMAGES 28
</TABLE>
COMMERCIAL LEASE AGREEMENT
THIS LEASE AGREEMENT is entered into by and between:
1. LANDLORD: JACKSON-SHAW TECHNOLOGY CENTER II, LTD., a Texas Limited
Partnership ("Landlord"), and
2. TENANT: ADAMS GOLF, INC., a Texas Corporation ("Tenant").
3. LEASED PREMISES: In consideration of the rents, terms and covenants of
this Commercial Lease Agreement (this "Lease"), Landlord hereby leases to
Tenant certain premises (the "Leased Premises") consisting of approximately
65,135 square feet within the 65,135 square foot building (the "Building")
located at 2801 E. Plano Parkway, Suite ____, Plano, Texas together with the
non-exclusive right to use, in common with other tenants, the common areas of
the Project, which are all areas neither exclusively leased to another tenant
nor expressly reserved to or by Landlord. The land upon which the Building
is located is described in the attached Exhibit A and, together with the
Building, landscaping, parking and driveway areas, sidewalks, and other
improvements thereon, shall be referred to in this Lease as the "Project."
COMMERCIAL LEASE AGREEMENT - PAGE 4
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<PAGE>
4. TERM:
(a) The term of this Lease shall be Six (6) years commencing on
February 1, 1998, the "Commencement Date" and terminating on the last day of
the same calendar month in the Sixth (6th) year following the Commencement
Date (the "Termination Date"). This Commencement Date may be subject to
change, however, pursuant to Paragraphs 4(b) and (c) below.
(b) Tenant acknowledges that it accepts the Leased Premises as suitable
for Tenant's purposes subject only to Paragraph 4(c) below, if applicable.
If this Lease is executed before the Leased Premises become available for
occupancy, or if Landlord cannot acquire possession of the Leased Premises
prior to the Commencement Date stated above, Tenant agrees to accept
possession of the Leased Premises at such time as Landlord is able to tender
the same, which date shall then be the Commencement Date of the Lease term.
(c) Landlord agrees to install at its cost and expense the
improvements, if any, described in the plans and specifications described in
Exhibit B. If such improvements are not completed and the Leased Premises
are not ready for occupancy on the Commencement Date stated above, other than
as a result of the omission, delay or default by Tenant or anyone acting
under or on behalf of Tenant, the rent under this Lease shall not commence
until substantial completion of the work described in said plans and
specifications, and the Commencement Date of the Lease term shall be the date
of such substantial completion. Landlord shall notify Tenant in writing as
soon as such improvements are substantially completed and ready for
occupancy. If Tenant believes that such improvements have not been
substantially completed as aforesaid, Tenant shall notify Landlord in
writing of its objections within three (3) days after receipt of the
completion notice from Landlord. Landlord shall have a reasonable time after
receipt of such notice (but in no event more than 10 days) in which to
commence such corrective action as may be necessary and shall notify Tenant
in writing as soon as it deems such corrective action has been completed so
that the Leased Premises are completed and ready for occupancy. In the event
of any dispute as to substantial completion or work performed or required to
be performed by Landlord, the certificate of a registered architect shall be
conclusive and binding on all parties.
(d) Tenant acknowledges that no representations or promises regarding
construction, repairs, alterations, remodeling, or improvements to the Leased
Premises have been made by Landlord, its agents, employees, or other
representatives, unless such are expressly set forth in this Lease or any
Exhibit hereto. Tenant is solely responsible for applying for and obtaining
a Certificate of Occupancy for the Leased Premises and will satisfy itself as
to the business park restrictions and all zoning and similar restrictions and
regulations prior to commencement of any construction. Failure of Tenant to
provide written notice of such objections prior to commencement of
construction shall be deemed acceptance by Tenant. Tenant agrees that if its
occupancy of the Leased Premises is delayed under the circumstances described
in Paragraphs 4(b) and (c) above, this Lease shall nonetheless continue in
full force and effect. Adjustment of the rent commencement date as above
provided shall constitute full settlement of all claims by Tenant against
Landlord by reason of any such delay in possession of the Leased Premises.
Tenant's taking possession of the Leased Premises shall conclusively
establish that the improvements, if any, to be
COMMERCIAL LEASE AGREEMENT - PAGE 5
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<PAGE>
made by Landlord under the terms of this Lease have been completed in
accordance with the plans and specifications therefor and that the Leased
Premises are in good and satisfactory condition as of the date of Tenant's
possession, unless Tenant notifies Landlord in writing specifying any bona
fide deficiencies after taking possession (i) within 270 days, for the
heating and air conditioning systems, and (ii) within ninety (90) days, for
all other matters, after the Commencement Date. Landlord shall use
reasonable diligence to repair promptly such items but Tenant shall have no
claim for damages or rebate or abatement of rent by reason thereof. In
conjunction with, or at any time after, the Commencement Date, Tenant shall,
upon demand, execute and deliver to Landlord an Estoppel letter (as referred
to in paragraph 33 herein) to acknowledge the Commencement Date.
5. BASE RENT AND SECURITY DEPOSIT:
(a) Tenant agrees to pay to Landlord the following rental amounts
(sometimes referred to in this Lease as the "Base Rent" or "Base Rental"):
MONTHS 1 THROUGH 24, $455,952.00 PER YEAR PAYABLE IN MONTHLY INSTALLMENTS OF
$37,996.00 EACH; AND MONTHS 25 THROUGH 48, $488,520.00 PER YEAR PAYABLE IN
MONTHLY INSTALLMENTS OF $40,710.00 EACH; MONTHS 49 - 72, $521,088.00 PER
YEAR PAYABLE IN MONTHLY INSTALLMENTS OF $43,424.00. Payment of rent is
subject to proration for partial months and to adjustment for early or
delayed occupancy under the terms hereof, and, if the area of the Leased
Premises is, on the Commencement Date, different than the area stated in
Paragraph 3 above, then Base Rent shall be adjusted to reflect $7.00 per
gross square foot. Base Rent shall be payable to Landlord monthly, in
advance, without demand, deduction or offset, in lawful money of the United
States of America at the address stated below. The first month's Base Rent
payment of $37,996.00 shall be due upon the date Tenant executes the Lease
Agreement, and all other installments of Base Rent shall be due and payable
on or before the first (1st) day of each month during the Lease term.
(b) Upon the date Tenant executes the Lease Agreement, there shall be
due and payable by Tenant a Security Deposit in the amount of $37,996.00.
Such deposit shall be held by Landlord (without any obligation to pay
interest thereon or segregate such money from Landlord's general funds except
as may be required by applicable law) as security for the performance of
Tenant's obligations under this Lease. Tenant agrees to increase such
Security Deposit from time to time so that it is at all times equal to one
monthly Base Rental installment plus the average monthly additional rentals
arising pursuant to Paragraph 6 below. Tenant shall deposit cash with
Landlord in an amount sufficient so to increase the Security Deposit to such
amount within five (5) days after written demand by Landlord. It is
expressly understood that the Security Deposit is not an advance payment of
rental or a measure of Landlord's damages in the event of Tenant's default
under this Lease. Upon the occurrence of any event of default by Tenant
under this Lease, Landlord may, from time to time, without prejudice to any
other remedy provided herein or provided by law, use, apply, or retain all or
part of the Security Deposit for the payment of (i) any Base Rent, (ii)
additional rentals arising under Paragraph 6 below, and (iii) other sums due
hereunder, including without limitation any amount which Landlord may spend
or become obligated to spend by reason of Tenant's default or to compensate
Landlord for any damage, injury, expense or liability caused to Landlord by
such default or breach (all of which items (i), (ii) and (iii) are sometimes
referred to in
COMMERCIAL LEASE AGREEMENT - PAGE 6
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<PAGE>
the aggregate as "Rent"). If any portion of the Security Deposit is so used
or applied, Tenant shall, within five (5) days after written demand thereof,
deposit cash with Landlord in an amount sufficient to restore the Security
Deposit to the amount required by this Paragraph. Tenant's failure to do so
shall be an event of default under this Lease. The balance of the Security
Deposit shall be returned by Landlord to Tenant at such time after
termination of this Lease that all of Tenant's obligations have been
fulfilled.
(c) Other remedies for nonpayment of Rent notwithstanding, if the
monthly Base Rental payment is not received by Landlord on or before the
tenth (10th) day of the month for which such rent is due, or if any other
Rent payment due Landlord by Tenant hereunder is not received by Landlord
within ten (10) days of the due date three (3) times during any one (1) year
period, a service charge of two hundred ($200.00) dollars shall be
additionally due and payable by Tenant as an administrative charge for the
excess efforts necessitated by such tardiness in payment. Such service
charge shall be cumulative of any other remedies Landlord may have for
nonpayment of Rent and other sums payable under this Lease.
(d) If three (3) consecutive monthly Base Rental payments or any ten
(10) [in total, cumulative from the beginning of the Lease term] monthly Base
Rental payments during the Lease term (or any renewal or extension thereof)
are not received by Landlord within ten (10) days of the due date, the Base
Rent hereunder shall automatically become due and payable by Tenant in
advance in quarterly installments equal to three (3) months' Base Rent each.
The first of such quarterly Base Rent payments shall be due and payable on
the first day of the next succeeding month and on the first day of every
third (3rd) month thereafter. This remedy shall be cumulative of any other
remedies of Landlord under this Lease for nonpayment of Rent.
6. ADDITIONAL RENTAL:
(a) TAXES AND INSURANCE:
(1) "Tax and Insurance Costs" shall mean all of the following paid
or payable by Landlord with respect to the Project or any portion thereof:
(i) all federal, state and local sales, use, ad valorem, rental, value added,
and other taxes (other than Landlord's income or franchise taxes) and special
assessments and other governmental charges; and (ii) all insurance premiums,
including, without limitation, public liability, casualty, rental and
property damage insurance.
(2) Landlord shall pay all Tax and Insurance Costs; however,
Landlord may in its discretion defer such payment to the extent permitted by
applicable laws so long as contested by Landlord in good faith and so long as
Tenant's occupancy of the Premises is not lawfully disturbed.
(3) For each calendar year of the term of this Lease, Tenant shall
pay to Landlord as additional Rent hereunder its "pro rata portion" of the
Tax and Insurance Costs computed by multiplying the Tax and Insurance Costs
by a fraction, the numerator of which is the number of rentable square feet
in the Leased Premises, and the denominator of which is the number of
rentable square feet in the Building.
COMMERCIAL LEASE AGREEMENT - PAGE 7
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<PAGE>
(4) Tenant shall pay one-twelfth of its pro rata portion of
estimated Tax and Insurance Costs as estimated by Landlord, along with the
monthly Base Rental payment each month, during the term of this Lease. As
soon as available after the expiration of each calendar year during the term
of this Lease, Landlord shall submit a reconciliation statement to Tenant
setting forth (1) Tenant's pro rata portion of the Tax and Insurance Costs
due from Tenant for the preceding calendar year, (ii) the amount of Tax and
Insurance Costs paid by Tenant during such calendar year, and (iii) the
amount, if any, either overpaid or remaining due from Tenant to Landlord.
Within (10) days after receipt of such statement, Tenant shall remit to
Landlord the amount said statement shows to be due from Tenant or, if Tenant
has overpaid, Landlord shall credit the amount overpaid to Tenant's pro rata
portion of Tax and Insurance Costs next due. If Tenant is not in default and
this Lease terminated at the end of such prior year, Landlord shall refund
such overpayment to Tenant.
(5) For the calendar years in which this Lease commences and
terminates, Tenant's liability for its pro rata portion of the Tax and
Insurance Costs for such partial calendar years shall be subject to pro rata
adjustment based upon the number of days of the term elapsing during such
partial year. Where the applicable charges are not available prior to the
end of the term hereof, then the aforesaid adjustment shall be made between
Landlord and Tenant after Landlord shall have received the charges for such
period, it being specifically agreed that Landlord's and Tenant's obligations
under this Paragraph shall survive the expiration of the term of this Lease.
(6) The failure of Landlord to exercise its rights hereunder to
estimate Tax and Insurance Costs and require payment of same as additional
Rent shall not constitute a waiver of such rights which rights may be
exercised from time to time at Landlord's discretion.
(b) COMMON AREA MAINTENANCE:
(1) "Common Area Maintenance Expenses" shall mean any and all
expenses (other than the Tax and Insurance Costs described above) arising
from the maintenance, repair, replacement and operation of, and modifications
and improvements to comply with governmental mandate to, the Project's common
areas and any portions of the Project for which Landlord is responsible
hereunder (excluding only expenses associated with structural integrity of
the roof, foundation, and exterior walls) including, but not limited to,
management fees, utility expenses (if furnished by Landlord), wages and
fringe benefits payable to employees of Landlord whose duties are connected
with the operation and maintenance of the Project, amounts paid to
contractors or subcontractors for work or services performed in connection
with the operation and maintenance of the Project, including without
limitation common areas and parking areas and roof, exterior wall and
foundation work that is not related to structural integrity. Any capitalized
expenditures included within the foregoing (together with reasonable finance
charges) will be amortized for purposes of this Paragraph over a three (3)
year period.
(2) The term "Common Area Maintenance Expenses" shall not include
repair, restoration or other work occasioned by fire, windstorm or other
casualty with respect to which
COMMERCIAL LEASE AGREEMENT - PAGE 8
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<PAGE>
Landlord actually receives insurance proceeds, income and franchise taxes of
Landlord, expenses incurred in leasing to or procuring of tenants, leasing
commissions, advertising expenses, expenses for the renovating of space for
new tenants, interest or principal payments or any mortgage or other
indebtedness of Landlord, compensation paid to any employee of Landlord above
the grade of building superintendent, or depreciation allowance or expense.
(3) Tenant agrees to pay as additional Rent its pro rata portion
(as defined in Paragraph 6(a)(3) above) of the Common Area Maintenance
Expenses. Tenant shall pay one-twelfth of its pro rata portion of estimated
Common Area Maintenance Expenses as estimated by Landlord, along with the
monthly Base Rental payment each month during the term of this Lease. As
soon as available after the expiration of each calendar year during the term
of this Lease, Landlord shall submit a statement to Tenant setting forth (i)
Tenant's pro rata portion of the Common Area Maintenance Expenses due from
Tenant for the preceding calendar year, (ii) the amount of Common Area
Expenses paid by Tenant during such calendar year, and (iii) the amount, if
any, either overpaid or remaining due from Tenant to Landlord. Within ten
(10) days after receipt of such statement, Tenant shall remit to Landlord the
amount said statement shows to be due from Tenant or, if Tenant has overpaid,
Landlord shall credit the amount overpaid to Tenant's pro rata portion of
Common Area Maintenance Expenses next due. If Tenant is not in default and
this Lease terminated at the end of such prior year, Landlord shall refund
such overpayment to Tenant.
(4) For the calendar years in which this Lease commences and
terminates, Tenant's liability for its pro rata portion of the Common Area
Maintenance Expenses for such partial calendar years shall be subject to pro
rata adjustment based upon the number of days of the term elapsing during
such partial year. Where the applicable expenses are not available prior to
the end of the term hereof, then the aforesaid adjustment shall be made
between Landlord and Tenant after Landlord shall have received all of the
expenses for such period, it being specifically agreed that Landlord's and
Tenant's obligations under this Paragraph shall survive the expiration of the
term of this Lease.
(5) The failure of Landlord to exercise its rights hereunder to
estimate expenses and require payment of same as additional Rent shall not
constitute a waiver of such rights which rights may be exercised from time to
time at Landlord's discretion.
(c) In any event, Tenant shall be responsible for insuring and paying
all taxes upon Tenant's furniture, machinery, goods, supplies, fixtures,
Alterations (below defined) or other improvements, and other property on the
Project.
7. TENANT REPAIRS AND MAINTENANCE:
(a) Tenant shall maintain all parts of the Leased Premises and their
appurtenances (except those for which Landlord is expressly responsible under
this Lease) in good, clean and sanitary condition, at its own expense.
Tenant shall promptly make all necessary repairs and replacements to the
Leased Premises, including but not limited to electric light lamps or tubes,
windows, glass and plate glass, interior and exterior doors, any special
office entry, interior walls and finish work,
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floors and floor coverings, downspouts, gutters, heating and air conditioning
systems, dock boards, truck doors, dock bumpers, and plumbing work and
fixtures. Replacement and repair parts, materials and equipment shall be of
quality equivalent to those initially installed within the Leased Premises,
and repair and maintenance work shall be done in a good and workmanlike
manner and in accordance with existing laws, rules, regulations and
ordinances.
(b) Tenant shall not damage or disturb the integrity, structural
integrity, or support of any wall, roof, or foundation of the Building. Any
damage to these areas caused by Tenant or Tenant's Representatives (defined
in Paragraph 7(g)) shall be promptly repaired by Tenant at its sole cost and
expense.
(c) Landlord shall have the right to coordinate any repairs,
maintenance and replacement of any rail tracks serving or to serve the
Project, and if Tenant uses such rail tracks, Tenant shall reimburse Landlord
from time to time upon demand for a share of the cost of such repairs,
maintenance and replacement and any other sums specified in any agreement to
which Landlord is a party respecting such tracks. Tenant's share of such
costs shall be additional Rent and shall reflect a proration based on the
ratio that Tenant's use, in number of cars, bears to the total rail use, in
number of cars, by all rail users in the Project.
(d) Tenant shall, at its own cost and expense, enter into a regularly
scheduled preventive maintenance service contract with a maintenance
contractor for servicing all heating, ventilation and air conditioning
systems and equipment within, and any other equipment or machinery installed
by Landlord in, or to serve, the Leased Premises. The maintenance contractor
and the contract are subject to Landlord approval which shall not be
unreasonably withheld. The service contract must include all services
suggested by the equipment manufacturer within the operation/maintenance
manual and must become effective (and a copy delivered to Landlord) within
thirty (30) days of the date Tenant takes possession of the Leased Premises.
If Tenant fails to enter into such service contract as required, Landlord
shall have the right to do so on Tenant's behalf, and Tenant agrees to pay
Landlord the cost and expense of same upon demand, and such amount shall be
considered additional Rent.
(e) Tenant shall at its own expense keep the Leased Premises pest-free
and pay all charges for pest control and extermination within the Leased
Premises.
(f) At the termination of this Lease, Tenant shall deliver the Leased
Premises "broom clean" to Landlord in the same good order, configuration, and
condition as existed at the Commencement Date of this Lease, ordinary wear,
natural deterioration beyond the control of Tenant, and damage by fire,
tornado or other casualty excepted. Tenant shall give written notice to
Landlord at least thirty (30) days prior to vacating the Leased Premises and
shall arrange to meet with Landlord for a joint inspection of the Leased
Premises prior to vacating. In the event of Tenant's failure to give such
notice or arrange such joint inspection, Landlord's inspection at or after
Tenant's vacating the Leased Premises shall be conclusively deemed correct
for purposes of determining Tenant's responsibility for repairs and
restoration.
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(g) Not in limitation on the foregoing, it is expressly understood that
Tenant shall repair and pay for all damage caused by the negligence of Tenant,
Tenant's employees, officers, directors, partners, agents, invitees, licensees,
contractors, representatives, or others for whom Tenant is legally responsible
(all such persons and entities being herein collectively referred to as
"Tenant's Representatives") or caused by Tenant's default hereunder.
(h) If Landlord shall give Tenant written notice of defects or need for
repairs for which Tenant is responsible under this Lease, and if Tenant shall
fail to make or fails to commence to make repairs within 30 days of Landlord's
notification or such shorter time as is reasonable if expedited repair is
needed to avoid injury or damage, Landlord shall have the option to cure said
defect or repair, and Tenant shall pay to Landlord all costs and expenses
incurred on demand.
8. LANDLORD'S REPAIRS:
(a) Landlord shall be responsible, at its expense, for, but only for, the
structural integrity of the roof, foundation and exterior walls of the
Building. In further limitation on Landlord's responsibilities hereunder, (i)
the foregoing does not include maintenance and repair that are a result of
deterioration due to wear and tear or the passing of time; (ii) any repair to
the roof, foundation or exterior walls occasioned by the act of omission of
Tenant or Tenant's Representatives shall be the responsibility of Tenant; (iii)
the term "walls" as used in this Paragraph 8 shall not include windows, glass
or plate glass, interior doors, special store fronts, office entries or
exterior doors; and (iv) Landlord's liability with respect to any defects,
repairs or maintenance for which Landlord is responsible at its expense under
this Lease shall be limited to the cost of such repairs or maintenance or the
curing of such defect. Tenant shall promptly give Landlord written notice of
defects or need for repairs, after which Landlord shall have 30 days to
commence to repair or cure such defect.
(b) Landlord shall perform the work which gives rise to Common Area
Maintenance Expenses, subject to payment therefor by Tenant pursuant to the
provisions of Paragraph 6(b) above. If the need for any such work shall come
to the attention of Tenant, Tenant will promptly so notify Landlord in writing.
9. UTILITY SERVICE: Tenant shall pay the cost of all utility services
including, but not limited to, initial connection charges and deposits and all
charges for gas, water, trash disposal, sewer, telephone or other
telecommunications, and electricity used on the Leased Premises. Tenant shall
pay all costs caused by Tenant introducing excessive pollutants into the
sanitary or storm sewer system, including permits, fees, assessments, and
charges levied by any governmental subdivision for any pollutants or solids
other than ordinary human waste.
10. SIGNS: No sign, door plaques, advertisement, or notice shall be
displayed, painted or affixed by Tenant on any part of the Project, Building,
parking facilities, or Leased Premises without prior written consent of
Landlord. The color, size, character, style, material, placement and location
and method of attachment to the Building shall be subject to Landlord's
approval, and to any applicable governmental laws, ordinances, regulations,
project specifications, and other requirements.
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Landlord's notice of approval or disapproval shall be delivered to Tenant
within ten (10) days of Tenant's written request for same. Signs, if
approved by Landlord, shall be placed by a contractor approved by Landlord
and paid for by Tenant. Tenant shall remove all such signs at the
termination of this Lease. Such installations and removals shall be made in
such manner as to avoid injury or defacement of the Project and other
improvements, and Tenant, at its sole expense, shall repair any injury or
defacement, including, without limitation, any discoloration caused by such
installation and/or removal. Landlord may erect a sign or signs on the
Leased Premises indicating that the Leased Premises are for lease during the
six (6) month period prior to the expiration of this Lease.
11. USAGE: Tenant warrants and represents to Landlord that the Leased
Premises shall be used and occupied only for the purpose of: General office,
manufacturing and distribution of custom golf clubs and related activities.
Any change in the stated usage purposes shall be subject to the prior written
approval of Landlord. Tenant shall occupy the Leased Premises, conduct its
business, and control Tenant's Representatives in a lawful and reputable way
and as not to create any nuisance. Tenant shall not commit, or allow to be
committed, any waste on the Leased Premises or the Project. Tenant may not use
the Leased Premises for the use, storage, or distribution of hazardous or
environmentally offensive substances, for underground storage, or for any
unlawful purposes.
12. INSURANCE:
(a) Tenant shall not permit the Leased Premises to be used in any way
which would be hazardous or which would in any way increase the cost of or
render void any insurance on the improvements, and Tenant shall immediately, on
demand, cease any use which violates the foregoing or to which Landlord's
insurer or any governmental or regulatory authority objects. If at any time
during the term of this Lease Tenant's use or vacancy shall cause an increase
in premiums, and in particular, but without limitation, if the State Board of
Insurance or other insurance authority disallows any of Landlord's sprinkler
credits or imposes an additional penalty or surcharge in Landlord's insurance
premiums because of Tenant's original or subsequent placement or use of storage
racks or bins or method of storage or because of the nature of Tenant's
inventory or any other act of Tenant, Tenant agrees to pay as additional Rent
the increase in Landlord's insurance premiums.
(b) Tenant, at its sole cost and expense, shall procure and maintain
throughout the term of this Lease a policy or policies of insurance insuring
Landlord, Landlord's management company and lender, and Tenant against all
claims for property damages, personal injury or death of others occurring on or
in connection with: (i) the Leased Premises; (ii) the condition of the Leased
Premises; (iii) Tenant's operations in and maintenance and use of the Leased
Premises; (iv) Tenant's and Tenant's Representatives' use of the common areas
of the Project, and (v) Tenant's liability assumed under this Lease. The
limits of such policy or policies shall be not less than $ 2,000,000.00
combined single limit coverage per occurrence for injury to persons (including
death) and/or property damage or destruction, including loss of use.
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(c) All such policies shall be procured by Tenant from insurance
companies satisfactory to Landlord naming the following as co-insureds: (i)
Landlord; (ii) Landlord's management company, JACKSON-SHAW COMPANY; and, (iii)
Landlord's mortgage holder, if any. Certified copies of such policies together
with receipt for payment of premiums, shall be delivered to Landlord prior to
the Commencement Date of this Lease. Not less than fifteen (15) days prior to
the expiration date of any such policies, certified copies of renewal policies
and evidence of the payment of renewal premiums shall be delivered to Landlord.
All such original and renewal policies shall provide for at least thirty (30)
days written notice to Landlord before such policy may be canceled or changed
to reduce insurance coverage provided thereby. Upon request of Landlord,
Tenant further agrees to complete and return to Landlord an insurance
questionnaire (such form to be provided by Landlord) regarding Tenant's
insurance coverage and intended use of the Leased Premises. Tenant warrants
and represents that all information contained in such questionnaire shall be
true and correct as of the date thereof and shall be updated by Tenant from
time to time upon Landlord's request.
13. (INTENTIONALLY DELETED)
14. COMPLIANCE WITH LAWS, RULES AND REGULATIONS: Tenant shall comply with all
applicable laws, ordinances, orders, rules and regulations of state, federal,
municipal, or other agencies or bodies relating to the use, condition and
occupancy of and business conducted on the Leased Premises, including without
limitation, the Americans with Disabilities Act, the Resource Conservation and
Recovery Act, the Comprehensive Environmental Response Act, and the rules,
regulations and directives of the U.S. Environmental Protection Agency.
15. ASSIGNMENT AND SUBLETTING: The Tenant agrees not to assign, transfer, or
mortgage this Lease or any right or interest therein or sublet the Leased
Premises or any part thereof, without the prior written consent of Landlord,
such consent not to be unreasonably withheld. No assignment or subletting
shall relieve Tenant of its obligations hereunder, and Tenant shall continue to
be liable as a principal (and not as a guarantor or surety) to the same extent
as though no assignment or subletting had been made. Consent by Landlord to
any one assignment or subletting shall not be construed to be consent to any
additional assignment or subletting. Each such successive act shall require
similar consent of Landlord. Landlord shall be reimbursed by Tenant for any
costs or expenses incurred as a result of Tenant's request for consent to any
such assignment or subletting, including legal costs. In the event Tenant
subleases the Leased Premises, or any portion thereof, or assigns this Lease
with the consent of the Landlord at an annual Base Rental exceeding that stated
herein, such excess shall be paid by Tenant to Landlord as additional Rent
hereunder within ten (10) days after receipt by Tenant. Upon the occurrence of
an "event of default" as defined below, if all or any part of the Leased
Premises is then assigned or sublet, Landlord may, in addition to any other
remedies provided by this Lease or provided by law, collect directly from the
assignee or subtenant all rents due to Tenant. Landlord shall have a security
interest in all property on the Leased Premises to secure payment of such sums.
Any collection directly by Landlord from the assignee or subtenant shall not be
construed, however, to constitute a novation or a release of Tenant from the
further performance of its obligations under this Lease. Notwithstanding the
foregoing, it is expressly agreed that if this Lease is assigned to any person
or
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entity pursuant to the provisions of the Bankruptcy Code, 11 U.S.C. Sec. 101
et seq, as amended (the "Bankruptcy Code"), any and all monies or other
considerations payable or otherwise to be delivered in connection with such
assignment shall be paid or delivered to Lessor, shall be and remain the
exclusive property of Landlord and shall not constitute property of Tenant or
of the estate of Tenant within the meaning of the Bankruptcy Code. Any and all
monies or other considerations constituting Landlord's property under the
preceding sentence not paid or delivered to Landlord shall be held in trust for
the benefit of Landlord and be promptly paid or delivered to Landlord. Any
person or entity to which this Lease is assigned pursuant to the provisions of
the Bankruptcy Code shall be deemed without further act or deed to have assumed
all of the obligations arising under this Lease on and after the date of such
assignment. Any such assignee shall upon demand execute and deliver to
Landlord an instrument confirming such assumption.
*Should Tenant be acquired by a Corporation whose net worth is greater than
Tenant's, and whose use of the space is the same as Tenant's, then Landlord
will automatically approve an assignment of Tenant's interest in the Lease.
16. ALTERATIONS AND IMPROVEMENTS:
(a) Tenant shall not make or perform, or permit the making or performance
of, any initial or subsequent tenant finish work or any alterations,
installations, decorations, improvements, additions or other physical changes
in or about the Leased Premises (referred to collectively as "Alterations")
without Landlord's prior consent. Landlord shall be under no obligation to
allow Alterations of any kind and may withhold its consent without cause.
Notwithstanding the foregoing provisions or Landlord's consent to any
Alterations, all Alterations shall be made and performed in conformity with and
subject to the following provisions: All Alterations shall be made and
performed at Tenant's sole cost and expense in a good and workmanlike manner.
Alterations shall be made only by contractors or mechanics approved by
Landlord, such approval not to be unreasonably withheld. Tenant shall submit
to Landlord detailed plans and specifications (including architectural layout,
mechanical and structural drawings) for each proposed Alteration and shall not
commence any such Alteration without first obtaining Landlord's written
approval of such plans and specifications. Prior to the commencement of each
proposed Alteration, Tenant shall furnish to Landlord a certificate evidencing
worker's compensation insurance coverage for all persons to be employed in
connection with such Alterations, including those to be employed by all
contractors and subcontractors, and of comprehensive public liability insurance
(including property damage coverage) in which Landlord, its agents, and any
lessor under any ground or underlying lease, and any mortgagee of the Building
shall be named as parties insured, which policies shall be issued by companies
and shall be in form and amounts satisfactory to Landlord and shall be
maintained by Tenant until the completion of such Alteration. Tenant shall
cause its contractor and each subcontractor to provide Landlord with a
Certificate of Completion of the Alterations and a Bills Paid Affidavit and
full Lien Waiver. Tenant shall, if required by Landlord at the time of
Landlord's consent to the Alterations, agree to restore the Leased Premises at
the termination of this Lease to their condition prior to making such
Alterations. All permits, approvals and certificates required by all
governmental authorities shall be timely obtained by Tenant and submitted to
Landlord. Notwithstanding Landlord's approval of plans and specifications for
any Alterations, all Alterations shall be made and performed in full compliance
with all applicable laws, orders, rules,
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standards and regulations of Federal, State, County, and Municipal
authorities, including, without limitation, all directions, pursuant to law,
of all public officers, and with all applicable rules, orders, regulations
and requirements of the local Board of Fire Underwriters or any similar body
("Applicable Laws"). Landlord's approval shall not in any way be considered
an indication that the plans and specifications comply with Applicable Laws.
All materials and equipment to be incorporated in the Leased Premises as a
result of all Alterations shall be new and first quality. No such materials
or equipment shall be subject to any lien, encumbrance, chattel mortgage or
title retention or security agreement. Whether such Alterations are being
performed by Tenant in connection with Tenant's initial occupancy of the
Leased Premises or subsequently, Tenant agrees to make proper application
for, and obtain, a Building Permit and a Certificate of Occupancy from the
city in which the Leased Premises are located. Tenant shall furnish copies
of such permit and certificate to Landlord promptly after issuance of same.
(b) All appurtenances, fixtures, improvements, and other property
attached to or installed in the Leased Premises, whether by Landlord or Tenant
or others, and whether at Landlord's expense or Tenant's expense, or the joint
expense of Landlord and Tenant, shall be and remain the property of Landlord,
except that any such fixtures, improvements, additions, and other property
which have been installed at the sole expense of Tenant and which are removable
without material damage to the Leased Premises shall be and remain the property
of Tenant. If no event of default has occurred, Tenant may, and if Landlord so
elects Tenant shall, remove any property belonging to Tenant at the end of the
term hereof, and Tenant shall repair or, at Landlord's option, shall pay to
Landlord the cost of repairing any damage arising from such removal. Any
replacements of any property of Landlord, whether made at Tenant's expense or
otherwise, shall be and remain the property of Landlord.
17. CONDEMNATION:
(a) If, during the term (or extension or renewal) of this Lease, all or a
substantial part of the Leased Premises are taken for any public or quasi-
public use under any governmental law, ordinance or regulation, or by right of
eminent domain or by private purchase in lieu thereof, and the taking would
prevent or materially interfere with the then current use of the Leased
Premises, this Lease shall terminate and the Rent shall be prorated during the
unexpired portion of this Lease effective on the date physical possession is
taken by the condemning authority.
(b) If a portion of the Leased Premises is taken and this Lease is not
terminated as provided in Paragraph 17(a) above, if condemnation proceeds are
sufficient and if restoration is feasible, Landlord may, at its option restore
the Project (other than Alterations) in order to make it reasonably tenantable
and suitable for Tenant's approved use. During such restoration, Rent shall be
reduced by the amount of business or rent interruption insurance proceeds
actually received by Landlord, or Rent shall be paid based on the portion of
the Leased Premises Tenant can occupy. Upon completion of such restoration,
the Rent payable under this Lease during the unexpired portion of the term
shall be adjusted to such an extent as may be fair and reasonable under the
circumstances.
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(c) In the event of such taking or private purchase in lieu thereof,
Tenant may seek a separate award for any loss of improvements made or paid for
by Tenant, its personal property, and its moving expenses (so long as no such
claim diminishes Landlord's claim or award), but all other claims of any nature
shall belong to Landlord. In the event Tenant does not receive such a separate
award, Landlord shall be entitled to receive any and all sums awarded for the
taking.
(d) Notwithstanding anything herein to the contrary, if the holder of any
indebtedness secured by a mortgage or deed of trust covering the Building
and/or Project requires that the condemnation proceeds be applied to such
indebtedness, then Landlord shall have the right to terminate this Lease by
delivering written notice of termination to Tenant within fifteen (15) days
after such requirement is imposed. All rights and obligations under this Lease
shall then cease. If Landlord does not receive condemnation proceeds sufficient
for restoration (such as when its mortgagee does not allow the proceeds to be
used for such purposes) and if restoration is economically reasonably feasible,
Tenant will have the option of supplementing available proceeds to allow
restoration, and Tenant's actual costs will be reimbursed through a monthly
prorata credit against rent beginning after Landlord's mortgage has been paid
in full.
18. FIRE AND CASUALTY:
(a) If the Building should be damaged or destroyed by fire, tornado, or
other casualty, Tenant shall give immediate verbal and written notice thereof
to Landlord.
(b) If the Building should be totally destroyed by fire, tornado, or
other casualty, or if it should be so damaged thereby that rebuilding or
repairs cannot reasonably be completed within one hundred eighty (180) days
after the date on which Landlord is notified by Tenant of such damage, at the
option of either Landlord or Tenant, this Lease shall terminate, and the Rent
shall be abated during the unexpired portion of this Lease effective upon the
date of occurrence of such damage.
(c) If the Building should be damaged by any peril that will be wholly
compensated (subject to deductibles) by the insurance maintained by Landlord or
if Landlord, in its sole discretion, so chooses notwithstanding a deficiency in
such proceeds, and if rebuilding or repairs can reasonably be completed within
one hundred eighty (180) days after the date on which Landlord is notified by
Tenant of such damage, this Lease shall not terminate, and Landlord shall then
proceed with reasonable diligence to rebuild and repair the Building to
substantially the same condition in which it existed prior to such damage.
Landlord shall not be required, however, to rebuild, repair, or replace
Tenant's furniture, fixtures, Alterations, inventory or other personal
property. If the Leased Premises are untenantable in whole or in part during
restoration, the Rent payable hereunder during the period in which they are
untenantable shall be reduced by the amount of business or rent interruption
insurance proceeds actually received by Landlord. If Landlord should fail to
complete such repairs and rebuilding within one hundred eighty (180) days after
the date on which Landlord is notified by Tenant of such damage, Tenant may
terminate this Lease by delivering written notice of termination to Landlord.
Such termination shall be Tenant's exclusive remedy and all rights and
obligations of the parties under the Lease shall then cease. Notwithstanding
the foregoing provisions of this Paragraph 18(c), Tenant agrees that if the
Leased
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Premises, the Building and/or Project are damaged by fire or other casualty
caused by the fault or negligence of Tenant or Tenant's Representatives,
Tenant shall have no option to terminate this Lease even if the damage cannot
be repaired within one hundred eighty (180) days, and the Rent shall not be
abated or reduced before or during the repair period.
(d) Notwithstanding anything herein to the contrary, if the holder of any
indebtedness secured by a mortgage or deed of trust covering the Building
and/or Project requires that the insurance proceeds be applied to such
indebtedness, then Landlord shall have the right to terminate this Lease by
delivering written notice of termination to Tenant within fifteen (15) days
after such requirement is imposed. All rights and obligations under this Lease
shall then cease. If Landlord does not receive insurance proceeds sufficient
for restoration (such as when its mortgagee does not allow the proceeds to be
used for such purposes) and if restoration is economically reasonably feasible,
Tenant will have the option of supplementing available proceeds to allow
restoration, and Tenant's actual costs will be reimbursed through a monthly
prorata credit against rent beginning after Landlord's mortgage has been paid
in full.
19. CASUALTY INSURANCE: Landlord shall at all times during the term of this
Lease maintain a policy or policies of business or rental interruption
insurance and a policy or policies of insurance insuring the Building against
eighty percent (80%) of full replacement cost for loss or damage by fire,
explosion, and other customary hazards. Such policies will not insure any
personal property (including, but not limited to any furniture, machinery,
goods, or supplies) of Tenant or which Tenant may have in the Leased Premises
or any fixtures installed by or paid for by Tenant upon or within the Leased
Premises or any Alterations or other improvements which Tenant may construct or
install on the Leased Premises or any signs identifying Tenant's business
located on the exterior of the Building, insurance for all of which shall be
Tenant's responsibility.
20. WAIVER OF SUBROGATION: To the extent that Landlord or Tenant receives
casualty insurance proceeds, such recipient hereby waives and releases any and
all rights, claims, demands and causes of action such recipient may have
against the other on account of any loss or damage occasioned to such recipient
or its businesses, real and personal properties, the Leased Premises, the
Building, the Project, or its contents, arising from any risk or peril covered
by any insurance policy carried by either party and for which such proceeds are
actually received. Inasmuch as the above mutual waivers will preclude the
assignment of any such claim by way of subrogation (or otherwise) to an
insurance company (or any other person), each party hereto agrees immediately
to give to its respective insurance companies written notice of the terms of
such mutual waivers and to have their respective insurance policies properly
endorsed, if necessary, to prevent the invalidation of such insurance coverages
by reason of such waivers. This provision shall be cumulative of Paragraph 21
below.
21. HOLD HARMLESS: Landlord shall not be liable to Tenant, Tenant's
Representatives, or any other person for any injury to person or damage to
property on or about the Leased Premises or the Project caused by the
negligence or misconduct of Tenant, or Tenant's Representatives, entering upon
the Leased Premises or the Project. Tenant agrees to indemnify and hold
Landlord harmless from any and all loss, attorney's fees, expenses, or claims
arising out of any such damage, loss or
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injury. Tenant shall not be liable to Landlord, Landlord's employees,
agents, invitees, licensees or visitors for any injury to person or damage to
property on or about the Leased Premises or the Project caused by the
negligence or misconduct of Landlord, its agents, employees, agents,
invitees, licensees or visitors. Landlord agrees to indemnify and hold
Tenant harmless from any and all loss, attorney's fees, expenses, or claims
arising out of any such damage, loss or injury.
22. QUIET ENJOYMENT: Landlord warrants that it has full right to execute and
to perform this Lease and to grant the estate demised herein and that Tenant,
upon payment of the required Rent and performance of the covenants and
agreements contained in this Lease, shall peaceably and quietly have, hold, and
enjoy the Leased Premises during the full term of this Lease, including any
extensions or renewals thereof.
23. LANDLORD'S RIGHT OF ENTRY: Landlord shall have the right to enter the
Leased Premises for the following reasons: inspection, cleaning or making
repairs, making such alterations or additions as Landlord may deem necessary or
desirable; installation of utility lines servicing the Leased Premises or any
other space in the Building; determining Tenant's use of the Leased Premises,
or for determining if any event of default under this Lease has occurred.
Landlord shall attempt to give twenty-four (24) hours verbal notice to Tenant
prior to such entry during business hours, except in cases of emergency or when
an event of default has occurred in which cases Landlord may enter the Leased
Premises at any time and without prior notice. During the period that is six
(6) months prior to the end of the Lease term, Landlord and Landlord's agents
and representatives shall have the right to enter the Leased Premises at any
reasonable time during business hours, without notice, for the purpose of
showing the Leased Premises and shall have the right to erect on the Leased
Premises a suitable sign indicating the Leased Premises are available for
lease.
24. ASSIGNMENT OF LANDLORD'S INTEREST IN LEASE: Landlord shall have the right
to transfer and assign, in whole or in part, its rights and obligations with
respect to the Project, the Leased Premises, and this Lease, including Tenant's
Security Deposit. Upon and after such transfer, Landlord shall be released
from any further obligation under this Lease and Tenant agrees to look solely
to Landlord's successor for the performance of such obligations.
25. LANDLORD'S LIEN: In addition to any statutory lien for Rent in Landlord's
favor, Landlord shall have, and Tenant hereby grants to Landlord, a continuing
security interest for all Rent and other sums of money becoming due under this
Lease from Tenant upon all goods, wares, equipment, fixtures, furniture,
inventory, accounts, contract rights, and other personal property of Tenant
situated on or arising from the Leased Premises. Such property shall not be
removed without the consent of Landlord which consent may be withheld by
Landlord until all of Tenant's duties and obligations have been performed in
full. In the event of a default under this Lease, Landlord shall have, in
addition to any other remedies provided in this Lease or by law, all rights and
remedies under the Texas Uniform Commercial Code, including without limitation
the right to sell the property described in this Paragraph at public or private
sale upon five (5) days notice to Tenant. Tenant hereby agrees to execute such
financing statements and other instruments necessary or desirable in Landlord's
discretion to perfect the security interest hereby created.
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*Upon written request, Landlord will subordinate its lien created herein to any
lender of Tenant.
26. DEFAULT BY TENANT: The following shall be events of default by Tenant
under this Lease:
(a) Tenant's failure to pay any installment of Rent or other payment
required pursuant to this Lease and the failure is not cured within ten (10)
days after it is due and after written notice to Tenant;
(b) Tenant's abandonment or vacation of any part of the Leased Premises,
whether or not Tenant is in default of the Rent payments due under this Lease;
(c) Tenant's failure to comply with any term, provision or covenant of
this Lease, other than the defaults listed in the other subparagraphs of this
Paragraph 26, and the failure is not cured within ten (10) days after written
notice thereof to Tenant;
(d) Tenant's filing of a petition or adjudication as a debtor or bankrupt
insolvent under the Bankruptcy Code or any similar law or statute of the United
States or any state; or appointment of a receiver or trustee for all or
substantially all of the assets of Tenant; or Tenant's transfer in fraud of
creditors or assignment for the benefit of creditors of all or substantially
all of Tenant's assets;
(e) Tenant doing or permitting to be done any act which results in a lien
being filed against the Leased Premises and the same is not removed within
sixty (60) days after Landlord's notice thereof to Tenant.
27. REMEDIES FOR TENANT'S DEFAULT: Upon the occurrence of any event of
default, Landlord shall have the option to pursue any one or more of the
following remedies without any prior notice or demand:
(a) Landlord may terminate this Lease, in which event Tenant shall
immediately surrender the Leased Premises to Landlord, and if Tenant fails to
do so, Landlord may, without prejudice to any other remedy which it may have,
enter upon and take possession of the Leased Premises, and expel or remove
Tenant and any other person who may be occupying all or any part of the Leased
Premises. Landlord shall not be liable for prosecution or any claim for
damages as a result of such actions. Tenant agrees to pay on demand the amount
of all losses, costs, expenses, deficiencies, and damages, including, without
limitation, reasonable reconfiguration expenses, rental concessions and other
inducements to new tenants, advertising expenses and broker's commissions,
which Landlord may incur or suffer by reason of Tenant's default or the
termination of this Lease under this subparagraph, whether through inability to
rent the Leased Premises on satisfactory terms or otherwise. Tenant
acknowledges that its obligation to pay Base Rent and all additional Rent
hereunder is not only compensation for use of the Leased Premises but also
compensation for sums already expended and/or being expended by Landlord with
respect to its obligations hereunder and with respect to the Leased Premises,
and Tenant acknowledges that Tenant's default in timely payment of all sums due
hereunder shall constitute significant financial loss to Landlord. Tenant
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further acknowledges that any failure to pay any sum due hereunder shall
evidence Tenant's inability to meet its debts as they become due. In such
event, in addition to Landlord's other remedies hereunder, Landlord shall be
entitled to accelerate all Base Rental remaining unpaid hereunder, the entirety
of which shall at the option of Landlord be immediately due and payable to the
extent allowed by law.
(b) Without termination of this Lease, Landlord may enter upon and take
possession of the Leased Premises and expel or remove Tenant and any other
person who may be occupying all or any part of the Leased Premises (without
being liable for prosecution or any claim for damages therefor) and relet the
Leased Premises on behalf of Tenant and receive directly the rent from the
reletting. Tenant agrees to pay Landlord on demand any deficiency that may
arise by reason of any reletting of the Leased Premises and to reimburse
Landlord on demand for any losses, costs, and expenses, including without
limitation, reconfiguration expenses*, rental concessions and other inducements
to new tenants, advertising costs or broker's commissions, which Landlord may
incur or suffer as a result of Tenant's default or in reletting the Leased
Premises.
*Reconfiguration expenses shall not exceed the unpaid amortized portion of
Tenant's original tenant improvement costs.
(c) Without terminating this Lease, Landlord may enter upon the Leased
Premises (without being liable for prosecution or any claim for damages
therefor) and do whatever Tenant is obligated to do under the terms of this
Lease. Tenant agrees to reimburse Landlord on demand for any losses, costs and
expenses which Landlord may incur in effecting compliance with Tenant's
obligations under this Lease. Tenant further agrees that Landlord shall not be
liable for any damages resulting to Tenant from effecting compliance with
Tenant's obligations under this subparagraph.
(d) With respect to Landlord's entry upon the Leased Premises under the
provisions of subparagraphs (a), (b), and (c) above, no restriction of, or
obligation imposed upon Landlord by, Texas Property Code Section 93.002 shall
apply, such Section being superseded hereby. In particular, but without
limitation, Landlord will have no duty or responsibility to Tenant to tender a
key in the event of a change of locks, and Tenant will have no further right of
possession except as otherwise expressly agreed by Landlord in writing. If
Landlord changes the locks, Tenant shall be allowed to retrieve its business
records from the Leased Premises.
(e) Landlord may pursue any remedy provided at law or in equity.
(f) Landlord shall have no duty to relet the Premises, and the failure of
Landlord to do so shall not release or affect Tenant's liability for Rent and
other charges due hereunder or for damages.
(g) No re-entry or reletting of the Premises or any filing or service of
an unlawful detainer action or similar action shall be construed as an election
by Landlord to terminate this Lease unless a written notice of such intention
is given by Landlord to Tenant. Notwithstanding any such reletting without
termination, Landlord may at any time thereafter elect to terminate this Lease
and Tenant's right to possession hereunder.
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(h) To the extent allowed by law, Tenant hereby waives the protections
and rights provided by Texas Property Code Section 93.002.
28. TERMINATION OF OPTIONS: If there exist any options or special rights
which Landlord may have granted Tenant under this Lease including, but not
limited to, options or rights regarding extensions of the term, expansion of
the Leased Premises, or acquisition of any other interest in the Leased
Premises, the Building, or the Project, then all such options and rights are
independent of the leasehold estate hereby granted to Tenant by Landlord.
Landlord and Tenant agree and acknowledge that the negotiated consideration for
any such options or special rights is Tenant's entry into this Lease and that
no portion of any sums due and payable by Tenant to Landlord hereunder is
attributable thereto. In addition to, and not in lieu of, the above remedies
of Landlord for Tenant's default, any and all such options or special rights
shall be automatically terminated upon the occurrence of the following events:
(a) Tenant shall have failed to pay when due any installment of Rent or
other sums payable under this Lease for any three (3) consecutive months during
the Lease term or any renewal or extension thereof, or for any ten (10) months
during the Lease term or any renewal or extension thereof, whether or not said
defaults are cured by Tenant; or
(b) Tenant shall have received two (2) or more notices of default under
Paragraph 26(c) within any one calendar year with respect to any other covenant
of this Lease, whether or not such default(s) is/are cured; or
(c) Tenant shall have committed or suffered to exist any other event of
default described under Paragraph 26 above, whether or not such default is
cured by Tenant.
29. WAIVER OF DEFAULT OR REMEDY: Failure of Landlord to declare a default
immediately upon its occurrence, or delay in taking any action in connection
with an event of default, shall not be a waiver of the default. Landlord shall
have the right to declare the default at any time and take such action as its
lawful or authorized under this Lease. Pursuit of any one or more of the
remedies set forth in Paragraphs 27 or 28 above shall not preclude pursuit of
any one or more of the other remedies provided therein or elsewhere in this
Lease or as provided by law, nor shall pursuit of any remedy be a forfeiture or
waiver of any Rent or damages accruing to Landlord by reason of the violation
of any of the terms of this Lease. Failure by Landlord to enforce one or more
of its remedies upon an event of default shall not be construed as a waiver of
the default or of any other violation or breach of any of the terms contained
in this Lease.
30. CHOICE OF LAW; VENUE; ATTORNEY'S FEES: It is specifically stipulated that
this Lease shall be interpreted and construed according to the laws of the
State in which the Leased Premises are located, and any suit brought on this
Lease shall be maintained in the county in which the Leased Premises are
located. Further, the prevailing party in any such litigation between the
parties shall be entitled to recover, as a part of its judgment, reasonable
attorney's fees and costs and expenses incurred therein.
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31. HOLDING OVER: Tenant will, at the termination of this Lease by lapse of
time or otherwise, surrender immediate possession to Landlord. If Landlord
agrees in writing that Tenant may hold over after the expiration or termination
of this Lease and if the parties do not otherwise agree, the hold over tenancy
shall be subject to termination by Landlord at any time upon not less than
thirty (30) days advance written notice, or by Tenant at any time upon not less
than thirty (30) days advance written notice. Further, all of the terms and
provisions of this Lease shall be applicable during the hold over period,
except that Tenant shall pay Landlord from time to time upon demand, as Base
Rent for the period of any hold over, an amount equal to one and one-half times
(1-1/2) the Base Rent in effect on the date of termination, computed on a daily
basis for each day of the hold over period, plus all additional Rent and other
sums due hereunder. If Tenant shall fail immediately to surrender possession
of the Leased Premises to Landlord upon termination of this Lease, by lapse of
time or otherwise, and Landlord has not agreed to such continued possession, as
above provided, then, until Landlord can dispossess Tenant under the terms
hereof or otherwise, Tenant shall pay Landlord from time to time upon demand,
as Base Rent for the period of any such hold over, an amount equal to twice the
Base Rent in effect on the date of termination, computed on a daily basis for
each day of the hold over period, plus all additional Rent and other sums due
hereunder. No holding over by Tenant, whether with or without consent of
Landlord, shall operate to extend this Lease except as otherwise expressly
agreed by the parties. The preceding provisions of this Paragraph shall not be
construed as Landlord's consent for Tenant to hold over.
32. RIGHTS OF MORTGAGEE: Tenant accepts this Lease subject and subordinate to
any recorded mortgage, deed of trust or other lien (a "Mortgage") presently
existing or hereafter to exist with respect to the Leased Premises. Further,
but without limiting the preceding sentence, Landlord is hereby irrevocably
vested with full power and authority to subordinate and/or to evidence such
subordination of Tenant's interest under this Lease to any Mortgage hereafter
placed on the Leased Premises, and Tenant agrees upon demand to execute such
additional instruments subordinating this Lease, and further defining the terms
of such subordination, as well as the attornment discussed below, as Landlord
or the holder of any such Mortgage, may require. Tenant agrees to provide to
the holder of any such Mortgage, whose name and address have been provided to
Tenant (a "Mortgagee"), a copy of each notice to Landlord which alleges any
act, omission, or condition that might constitute a default by Landlord
hereunder and Mortgagee, in its sole discretion, shall have all rights of
Landlord hereunder to cure any such default. If the interests of Landlord
under this Lease shall be transferred by reason of foreclosure or other
proceedings for enforcement of any Mortgage on the Leased Premises, at the
election of the transferee (sometimes called the "Purchaser") Tenant shall be
bound to the Purchaser under the terms and conditions of this Lease for the
balance of the remaining Lease term, including any extensions or renewals, with
the same force and effect as if the Purchaser were Landlord under this Lease;
provided, however, that such Purchaser shall not be liable or bound to Tenant
(i) for any act or omission of any prior landlord, (ii) for any offsets or
defenses which Tenant might have against any prior landlord, (iii) for or by
any Rent which Tenant might have paid for more than the current month, (iv) by
any amendment or modification of, or consensual termination agreement with
respect to, the Lease made without the Mortgagee's consent, (v) for any
Security Deposit given by Tenant to a prior landlord unless such
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deposit is actually received by such Purchaser, (vi) for any repairs or
replacements required by this Lease arising prior to the date Purchaser takes
possession of the Leased Premises, or (vii) for any moving, relocation or
refurbishment allowance or any construction of or payment or allowance for
tenant improvements to the Leased Premises or any part thereof for the
benefit of Tenant except as set forth in this Lease. Tenant further agrees
at the election of the Purchaser to attorn to the Purchaser, including the
Mortgagee if it be the Purchaser, as its Landlord. Such attornment shall be
effective without the execution of any further instruments upon the
Purchaser's succeeding to the interest of Landlord under this Lease. The
respective rights and obligations of Tenant and the Purchaser upon the
attornment, to the extent of the then remaining balance of the term of this
Lease and any extensions and renewals, shall be and are the same as those set
forth in this Lease, but Tenant agrees upon demand to execute such additional
instruments defining the terms of such attornment as Landlord or the
Purchaser may require. Each such Mortgagee and each such Purchaser shall be
a third-party beneficiary of the provisions of this Paragraph.
*Upon written request by Tenant and provided Tenant is not in default of any
terms, conditions, or provisions of the Lease, Landlord agrees to use best
efforts to obtain a non-disturbance agreement from any lender or purchaser.
33. ESTOPPEL CERTIFICATES: Tenant agrees to furnish on the Commencement Date
of this Lease and from time to time within ten (10) days of request by Landlord
or Landlord's mortgagee, a statement certifying that the Tenant is in
possession of the Leased Premises; the Leased Premises are acceptable; this
Lease is in full force and effect; this Lease is unmodified; Tenant claims no
present charge, lien, or claim of offset against Rent; the Rent is paid for the
current month but is not paid and will not be paid for more than one month in
advance (except estimated additional Rent under Paragraph 6); there is no
existing default under this Lease; and such other matters as may be reasonably
required by Landlord or Landlord's mortgagee.
34. SUCCESSORS: This Lease shall be binding upon and inure to the benefit of
Landlord and Tenant and their respective heirs, personal representatives,
successors and assigns. It is hereby covenanted and agreed that should
Landlord's interest in the Leased Premises cease to exist for any reason during
the term of the Lease, then notwithstanding the happening of such event, at the
election of Landlord's successor herein, this Lease shall nevertheless remain
unimpaired and in full force and effect and Tenant hereunder agrees to attorn
to the then owner of the Leased Premises.
35. REAL ESTATE COMMISSION: Tenant represents and warrants that is has dealt
with no broker, agent, or other person other than Bradford Realty Services of
Dallas, Inc., Mark Aston, in connection with this transaction, and that no
other broker, agent, or other person brought about this transaction. Landlord
and Tenant each agree to indemnify and hold the other harmless from and against
any claims by any broker, agent, or other person claiming a commission or other
form of compensation by virtue of having dealt with Tenant or Landlord
respectively with regard to this transaction. The provisions of this Paragraph
shall survive the termination of this Lease.
36. DEFAULT BY LANDLORD: Landlord shall not be in default, and Tenant shall
have no right to any remedy at law or in equity, unless the act, omission, or
condition allegedly giving rise to such default shall have continued uncured or
unabated for a period of thirty (30) days following
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written notice to Landlord (with a copy to any Mortgagee as provided in
Paragraph 32 above) or, if such cure or abatement cannot be accomplished
within said 30-day period, then, so long as Landlord or Mortgagee has
commenced such cure or abatement within such 30-day period and diligently
pursues same, such period shall be extended a reasonable time to allow
completion of the cure or abatement.
37. MECHANIC'S LIENS: Tenant shall have no authority, express or implied, to
create or place any lien or encumbrance of any kind or nature whatsoever upon,
or in any manner to bind, the interest of Landlord in the Leased Premises or
the Project or to charge the Rent payable hereunder for any claim in favor of
any person dealing with Tenant, including those who may furnish materials or
perform labor for any construction or repairs. Each such claim shall affect,
and each such lien shall attach to, if at all, only the leasehold interest
granted to Tenant by this Lease. Tenant covenants and agrees that it will pay
or cause to be paid all sums legally due and payable by it on account of any
labor performed or materials furnished in connection with any work performed on
the Leased Premises on which any lien is or can be validly and legally asserted
against its leasehold interest in the Leased Premises or the improvements
thereon. Tenant further agrees to save and hold Landlord harmless from any and
all loss, cost, or expense based on or arising out of claims or liens asserted
by parties by virtue of their dealings with Tenant and encumbering the
leasehold estate or the right, title and interest of the Landlord in the Leased
Premises or the Project. Under no circumstances shall Tenant be or hold itself
out to be the agent or representative of Landlord with respect to any
Alterations of the Leased Premises whether or not consented to or approved by
Landlord hereunder.
38. HAZARDOUS WASTE: The term "Hazardous Substances," as used in this Lease
shall mean petroleum and petroleum products and by-products, crude oil,
pollutants, contaminants, toxic or hazardous wastes, or any other substances,
the use of which is regulated, restricted, prohibited or penalized, or the
removal or disposal of which is required, by any "Environmental Laws," which
term shall mean any and all federal, state or local law, ordinance or other
statute of a governmental or quasi-governmental authority relating to the
pollution or protection of the environment. Tenant hereby agrees that (i) no
activity will be conducted on the Leased Premises that will produce any
Hazardous Substances; (ii) the Leased Premises will not be used in any manner
not in compliance with local and federal laws for the storage of any Hazardous
Substances; (iii) no portion of the Leased Premises will be used as a landfill
or a dump; (iv) Tenant will not install any underground tanks of any type; (v)
Tenant will not allow any surface or subsurface conditions to exist or come
into existence that constitute, or with the passage of time may constitute, a
public or private nuisance; and (vi) Tenant will not permit any Hazardous
Substances to be brought onto the Leased Premises, and if so brought thereon,
then the same shall be stored and used in compliance with all local and federal
laws regarding same. Landlord or Landlord's representative shall have the
right but not the obligation to enter the Leased Premises for the purpose of
ensuring compliance with all Environmental Laws. If Tenant in any manner
contaminates the Leased Premises, then Tenant shall promptly and diligently
institute proper and thorough clean-up procedures at Tenant's sole cost.
Landlord hereby agrees to defend, indemnify and hold Tenant, its employees,
partners, agents, contractors, officers and directors and their heirs,
successors, and assigns harmless from any and all costs (including costs of
litigation), reasonable attorneys' fees, expenses, liabilities, claims,
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damages or judgements arising or alleged to occur, and that result, or are
alleged to result from the actual, or threatened discharge, dispersal,
disposal, release or escape of Hazardous Substances or other wastes or
pollutants (including, but not limited to asbestos, solid, liquid, gaseous or
thermal irritants or contaminants, smoke, vapor, soot, fumes, acids, alkalis,
chemicals, and water materials to be recycled, reconditioned or reclaimed),
but only as the same are a direct result of any act or omission of Landlord
or its agents, employees, contractors or subcontractors. Tenant hereby
agrees to defend, indemnify and hold Landlord, its employees, agents,
partners, contractors, officers and directors and their heirs, successors,
and assigns harmless from any and all costs (including costs of litigation),
reasonable attorneys' fees, expenses, liabilities, claims, damages or
judgements arising or alleged to occur, and that result, or are alleged to
result from the actual, or threatened discharge, dispersal, disposal, release
or escape of Hazardous Substances or other wastes or pollutants (including,
but not limited to asbestos, solid, liquid, gaseous or thermal irritants or
contaminants, smoke, vapor, soot, fumes, acids, alkalis, chemicals, and water
materials to be recycled, reconditioned or reclaimed), but only as the same
are a direct result of any act or omission of Tenant or Tenant's
Representatives.
39. ENTIRE AGREEMENT AND LIMITATION OF WARRANTIES: It is expressly agreed by
Tenant, as a material consideration for the execution of this Lease, that this
Lease is the entire agreement of the parties and that there are and were no
verbal representations, warranties, understandings, stipulations, agreements,
or promises pertaining to this Lease not incorporated in this Lease. Tenant
expressly agrees that there are and shall be no implied warranties of
merchantability, fitness, habitability, or of any other kind and that Tenant's
acceptance of the Leased Premises shall be "as is". It is likewise agreed that
this Lease may not be altered, waived, amended, or extended except by an
instrument in writing signed by both Landlord and Tenant. Not in limitation
upon the foregoing, Landlord agrees that to the extent assignable, all
warranties, if any shall exist, from contractors or suppliers with respect to
the improvements to the Leased Premises hereunder are hereby partially assigned
to Tenant to the extent necessary to avail Tenant of the benefits thereof with
respect to its leasehold estate and property located at the Leased Premises.
40. FINANCIAL STATEMENTS: From time to time Landlord may need to obtain
financing or renew financing on the Project, or perform calculations for
various reasons regarding the value of the Project. Tenant hereby agrees to
provide to Landlord financial statements on its business when requested, but
not more than once annually, indicating the most current year end and quarterly
financial status of the business. Landlord will not deliver such financial
statement to any third party except in confidence and only as required by
Landlord's lenders or in conjunction with appraisals of the Project.
41. FORCE MAJEURE:
(a) Landlord shall not be required to perform any covenant or obligation
of this Lease or be liable in damages to Tenant for that time period during
which the performance or non-performance of the covenant or obligation is
delayed, caused by, or prevented by Tenant or Tenant's Representatives or by an
act of God or force majeure.
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(b) Except with respect to the payment of Rent or any other sum due
hereunder, Tenant shall not be required to perform any covenant or obligation
of this Lease or be liable in damages to Landlord for that time period during
which the performance or non-performance of the covenant or obligation is
delayed, caused by, or prevented by Landlord or Landlord's Representatives or
by an act of God or force majeure.
(c) An "act of God" or "force majeure" is defined for purposes of this
Lease as strikes, lockouts, sit-downs, material or labor restrictions by any
governmental authority, riots, floods, washouts, explosions, earthquakes, fire,
storms, acts of the public enemy, wars, insurrections and any other similar
cause not reasonably within the control of Landlord and which by the exercise
of due diligence Landlord is unable, wholly or in part, to prevent or overcome.
42. MISCELLANEOUS:
(a) Words of any gender used in this Lease shall be held and construed to
include any other gender; and words in the singular number shall be held to
include the plural, unless the context otherwise requires.
(b) Each party agrees to furnish to the other, promptly upon demand, a
corporate resolution, proof of due authorization by partners, or other
appropriate documentation evidencing the due authorization and power of such
party to enter into this Lease and the empowerment and authority of the
individual signing below to bind his or her principal.
(c) The captions inserted in this Lease are for convenience only and in
no way define, limit, or otherwise describe the scope or intent of this Lease
or any provision hereof, or in any way affect the interpretation of this Lease.
(d) If any clause or provision of this Lease is illegal, invalid, or
unenforceable under present or future laws effective during the term of this
Lease, then and in that event, it is the intention of the parties hereto that
the remainder of this Lease shall not be affected thereby; and it is also the
intention of the parties to this Lease that in lieu of each clause or provision
of this Lease that is illegal, invalid, or unenforceable there be added as a
part of this Lease a clause as similar in terms to such illegal, invalid, or
unenforceable clause or provision as may be possible and be legal, valid, and
enforceable.
(e) Intentionally deleted
(f) All references in this Lease to "the date hereof" or similar
references shall be deemed to refer to the last date, in point of time, on
which all parties hereto have executed this Lease.
(g) In the event that Tenant shall fail to perform any duty or obligation
hereunder, whether maintenance, repair or replacement of the Leased Premises,
maintenance of insurance, or otherwise, then Landlord may, but shall in no
event be obligated to, without notice of any kind, take such actions as
Landlord deems necessary or appropriate to remedy such Tenant failure, and any
sums
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expended by Landlord together with fair and just compensation for the time
and effort of Landlord in such efforts shall be deemed additional Rent
hereunder due and payable by Tenant on demand.
(h) If Tenant shall fail to pay, when the same is due and payable, any
Rent or any other sum due hereunder, such unpaid amount shall bear interest
from the tenth (10th) day after the due date thereof to the date of remittance
at the rate of the lesser of 18% per annum and the maximum rate allowed by law.
(i) Landlord does not in any way or for any purpose become a partner with
Tenant in the conduct of its business or otherwise, nor a member of a joint
venture with Tenant.
(j) Tenant shall not record this Lease without the prior written consent
of Landlord. However, upon the request of either party hereto, the other party
shall join in the execution of a memorandum or so-called "short form" of this
Lease for the purposes of recordation.
(k) Time is of the essence in the performance of all the covenants,
conditions, and agreements contained in this Lease.
(l) Any duty, obligation, or debt and any right or remedy arising
hereunder and not otherwise consummated and/or extinguished by the express
terms hereof at or as of the time of termination of this Lease, whether at the
end of the term hereof or otherwise, shall survive such termination as
continuing duties, obligations, and debts of the obligated party to the other
or continuing rights and remedies of the benefited party against the other.
(m) This Agreement may be executed in one or more counterparts, each of
which counterpart shall for all purposes be deemed to be an original; but all
such counterparts together shall constitute but one instrument.
(n) Attached hereto, marked Exhibit "A" through Exhibit "__", are certain
exhibits to this Lease all of which are hereby incorporated herein by
reference.
43. NOTICE:
(a) All Rent and other payments required to be made by Tenant to Landlord
shall be payable to Landlord at the address set forth below or any other
address that Landlord may specify from time to time by written notice delivered
to Tenant.
(b) All payments, if any, required to be made by Landlord to Tenant shall
be payable to Tenant at the address set forth below or at any other address
that Tenant may specify from time to time by written notice delivered to
Landlord.
(c) Any notice or document required or permitted to be delivered by this
Lease shall be deemed to be delivered (whether or not actually received) when
deposited in the United States Mail, postage prepaid, certified mail return
receipt requested, addressed to the parties at the
COMMERCIAL LEASE AGREEMENT - PAGE 27
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respective addresses set forth below or such other address as hereinafter
specified by notice given in accordance with this paragraph.
44. LIMITATION ON TENANT'S DAMAGES: Tenant agrees that any liability of
Landlord under this Lease shall be limited solely to Landlord's interest in the
Project, and no other assets of Landlord shall be subject to levy or execution.
Executed by Landlord and Tenant as of the below dates.
LANDLORD TENANT
JACKSON-SHAW TECHNOLOGY ADAMS GOLF, INC., A TEXAS CORPORATION
CENTER II, LTD.
3860 W. Northwest Highway 2801 E. Plano Parkway
Suite 350 Suite
Dallas, Texas 75220 ----------------------
Plano, Texas 75074
By: Jackson-Shaw/Texas, Inc., By: B.H. Adams
-------------------------- -----------------------
General Partner Its: CEO
By: J. Michael Berg ----------------------
-----------------------
Its: Vice President
----------------------
Date: December 5, 1997 Date: December 5, 1997
--------------------- ----------------------
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EXHIBIT "A"
LEGAL DESCRIPTION
COMMERCIAL LEASE AGREEMENT - PAGE 29
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EXHIBIT "B"
TENANT IMPROVEMENTS
Landlord agrees, at Landlord's expense, to install the tenant improvements per
the attached plans and specifications provided such plans and specifications
have been approved by Landlord and Tenant. Landlord's estimate of the cost of
these improvements is $911,890.00 ($14.00 per square foot). Should the actual
construction costs exceed $911,890.00, Tenant shall pay such excess to
Landlord prior to the commencement of the construction. This construction
allowance is based on the cost to duplicate Tenant's finishes and space
allocation in its current Leased Premises.
COMMERCIAL LEASE AGREEMENT - PAGE 30
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ADDENDUM
This Addendum is entered into this ______day of November, 1997, between JACKSON-
SHAW TECHNOLOGY CENTER II, LTD., as Landlord, and ADAMS GOLF, INC., as Tenant.
This Addendum is an integral part of that certain Commercial Lease Agreement
dated as of the date hereof between Landlord and Tenant to which it is attached
(the "Lease"). If the terms and provisions of this Addendum conflict with those
of the Lease, those of this Addendum shall prevail.
1) RENEWAL OPTION: Tenant is granted the option to extend the term of this
Lease for one (1) extended term of five (5) years, provided no event of default
exists at the time of exercise of the option and no condition exists which with
the giving of notice or the passage of time or both would constitute an event
of default, and Tenant gives written notice of its exercise of the option at
least one hundred eighty (180) days prior to the expiration of the original
term. The extension term shall be upon the same terms and conditions as set
forth herein, except Tenant shall have no further right of renewal after the
extension term prescribed above, and the Base Rental will be equal to the then
prevailing rate for comparable space for a comparable term.
2) PARKING: Tenant shall be entitled to the non-exclusive use of the 217
parking spaces directly adjacent to the Leased Premises as shown on the
attached site plan.
3) EXPANSION: If during the term of this Lease agreement, Landlord leases to
or sells to Tenant a space or building of a size larger than the present Leased
Premises in any development owned by Landlord, Tenant's then remaining
obligations due under this Lease agreement shall be terminated upon the
commencement date of the new lease or purchase agreement. Not withstanding the
above-stated, Tenant shall remain obligated to pay for any Rents or other sums
due Landlord as a result of Tenant's tenancy hereunder, and such obligation
shall survive the termination of this Lease pursuant to this Paragraph 3.
4) SIGNAGE: Landlord shall pay for the cost of one (1) tenant identification
sign for the Leased Premises. Such sign shall be in accordance to the sign
criteria established for the Building.
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5) EARLY OCCUPANCY: Tenant shall be granted occupancy to the Leased Premises
upon the substantial completion of the tenant improvements. The first two (2)
weeks of Tenant's occupancy shall be considered to be Early Occupancy with
all terms and conditions of the Lease in full force and effect except the
base rent due for this two week early occupancy period shall be abated.
COMMERCIAL LEASE AGREEMENT - PAGE 32
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(LEASE 3)
COMMERCIAL LEASE AGREEMENT
JACKSON-SHAW TECHNOLOGY CENTER II, LTD.,
Landlord
to
ADAMS GOLF, INC.,
Tenant
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1. LANDLORD 4
2. TENANT 4
3. LEASED PREMISES 4
4. TERM 5
5. BASE RENT AND SECURITY DEPOSIT 6
6. ADDITIONAL RENTAL 7
7. TENANT REPAIRS AND MAINTENANCE 10
8. LANDLORD'S REPAIRS 11
9. UTILITY SERVICE 12
10. SIGNS 12
11. USAGE 12
12. INSURANCE 12
13. (INTENTIONALLY DELETED) 13
14. COMPLIANCE WITH LAWS, RULES AND REGULATIONS 13
15. ASSIGNMENT AND SUBLETTING 13
16. ALTERATIONS AND IMPROVEMENTS 14
17. CONDEMNATION 15
COMMERCIAL LEASE AGREEMENT - PAGE 2
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18. FIRE AND CASUALTY 16
19. CASUALTY INSURANCE 17
20. WAIVER OF SUBROGATION 17
21. HOLD HARMLESS 18
22. QUIET ENJOYMENT 18
23. LANDLORD'S RIGHT OF ENTRY 18
24. ASSIGNMENT OF LANDLORD'S INTEREST IN LEASE 18
25. LANDLORD'S LIEN 19
26. DEFAULT BY TENANT 19
27. REMEDIES FOR TENANT'S DEFAULT 19
28. TERMINATION OF OPTIONS 21
29. WAIVER OF DEFAULT OR REMEDY 21
30. CHOICE OF LAW; VENUE; ATTORNEY'S FEES 22
31. HOLDING OVER 22
32. RIGHTS OF MORTGAGEE 22
33. ESTOPPEL CERTIFICATES 23
34. SUCCESSORS 23
35. REAL ESTATE COMMISSION 24
COMMERCIAL LEASE AGREEMENT - PAGE 3
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36. DEFAULT BY LANDLORD 24
37. MECHANIC'S LIENS 24
38. HAZARDOUS WASTE 24
39. ENTIRE AGREEMENT AND LIMITATION OF WARRANTIES 25
40. FINANCIAL STATEMENTS 25
41. FORCE MAJEURE 26
42. MISCELLANEOUS 26
43. NOTICE 27
44. LIMITATION ON TENANT'S DAMAGES 28
</TABLE>
COMMERCIAL LEASE AGREEMENT
THIS LEASE AGREEMENT is entered into by and between:
1. LANDLORD: JACKSON-SHAW TECHNOLOGY CENTER II, LTD., a Texas Limited
Partnership ("Landlord"), and
2. TENANT: ADAMS GOLF, INC., a Texas Corporation ("Tenant").
3. LEASED PREMISES: In consideration of the rents, terms and covenants of
this Commercial Lease Agreement (this "Lease"), Landlord hereby leases to
Tenant certain premises (the "Leased Premises") consisting of approximately
32,996 square feet within the 67,372 square foot building (the "Building")
located at 2805 E. Plano Parkway, Suite ____, Plano, Texas together with the
non-exclusive right to use, in common with other tenants, the common areas of
the Project, which are all areas neither exclusively leased to another tenant
nor expressly reserved to or by Landlord. The land upon which the Building
is located is described in the attached Exhibit A and, together with the
Building, landscaping, parking and driveway areas, sidewalks, and other
improvements thereon, shall be referred to in this Lease as the "Project."
COMMERCIAL LEASE AGREEMENT - PAGE 4
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4. TERM:
(a) The term of this Lease shall be seventy (70) months commencing on
June 15, 1998, the "Commencement Date" and terminating on the 14th day of June
in the seventieth (70th) month following the Commencement Date (the
"Termination Date"). This Commencement Date may be subject to change, however,
pursuant to Paragraphs 4(b) and (c) below.
(b) Tenant acknowledges that it accepts the Leased Premises as suitable
for Tenant's purposes subject only to Paragraph 4(c) below, if applicable. If
this Lease is executed before the Leased Premises become available for
occupancy, or if Landlord cannot acquire possession of the Leased Premises
prior to the Commencement Date stated above, Tenant agrees to accept possession
of the Leased Premises at such time as Landlord is able to tender the same,
which date shall then be the Commencement Date of the Lease term.
(c) Landlord agrees to install at its cost and expense the improvements,
if any, described in the plans and specifications described in Exhibit B. If
such improvements are not completed and the Leased Premises are not ready for
occupancy on the Commencement Date stated above, other than as a result of the
omission, delay or default by Tenant or anyone acting under or on behalf of
Tenant, the rent under this Lease shall not commence until substantial
completion of the work described in said plans and specifications, and the
Commencement Date of the Lease term shall be the date of such substantial
completion. Landlord shall notify Tenant in writing as soon as such
improvements are substantially completed and ready for occupancy. If Tenant
believes that such improvements have not been substantially completed as
aforesaid, Tenant shall notify Landlord in writing of its objections within
three (3) days after receipt of the completion notice from Landlord. Landlord
shall have a reasonable time after receipt of such notice (but in no event more
than 10 days) in which to commence such corrective action as may be necessary
and shall notify Tenant in writing as soon as it deems such corrective action
has been completed so that the Leased Premises are completed and ready for
occupancy. In the event of any dispute as to substantial completion or work
performed or required to be performed by Landlord, the certificate of a
registered architect shall be conclusive and binding on all parties.
(d) Tenant acknowledges that no representations or promises regarding
construction, repairs, alterations, remodeling, or improvements to the Leased
Premises have been made by Landlord, its agents, employees, or other
representatives, unless such are expressly set forth in this Lease or any
Exhibit hereto. Tenant is solely responsible for applying for and obtaining a
Certificate of Occupancy for the Leased Premises and will satisfy itself as to
the business park restrictions and all zoning and similar restrictions and
regulations prior to commencement of any construction. Failure of Tenant to
provide written notice of such objections prior to commencement of construction
shall be deemed acceptance by Tenant. Tenant agrees that if its occupancy of
the Leased Premises is delayed under the circumstances described in Paragraphs
4(b) and (c) above, this Lease shall nonetheless continue in full force and
effect. Adjustment of the rent commencement date as above provided shall
constitute full settlement of all claims by Tenant against Landlord by reason
of any such delay in possession of the Leased Premises. Tenant's taking
possession of the Leased Premises shall conclusively establish that the
improvements, if any, to be
COMMERCIAL LEASE AGREEMENT - PAGE 5
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made by Landlord under the terms of this Lease have been completed in
accordance with the plans and specifications therefor and that the Leased
Premises are in good and satisfactory condition as of the date of Tenant's
possession, unless Tenant notifies Landlord in writing specifying any bona
fide deficiencies after taking possession (i) within 270 days, for the
heating and air conditioning systems, and (ii) within ninety (90) days, for
all other matters, after the Commencement Date. Landlord shall use
reasonable diligence to repair promptly such items but Tenant shall have no
claim for damages or rebate or abatement of rent by reason thereof. In
conjunction with, or at any time after, the Commencement Date, Tenant shall,
upon demand, execute and deliver to Landlord an Estoppel letter (as referred
to in paragraph 33 herein) to acknowledge the Commencement Date.
5. BASE RENT AND SECURITY DEPOSIT:
(a) Tenant agrees to pay to Landlord the following rental amounts
(sometimes referred to in this Lease as the "Base Rent" or "Base Rental"):
MONTHS 1 THROUGH 22, $230,976.00 PER YEAR PAYABLE IN MONTHLY INSTALLMENTS OF
$19,248.00 EACH; AND MONTHS 23 THROUGH 46, $247,476.00 PER YEAR PAYABLE IN
MONTHLY INSTALLMENTS OF $20,263.00 EACH; MONTHS 47 - 70, $263,976.00 PER YEAR
PAYABLE IN MONTHLY INSTALLMENTS OF $21,998.00. Payment of rent is subject to
proration for partial months and to adjustment for early or delayed occupancy
under the terms hereof, and, if the area of the Leased Premises is, on the
Commencement Date, different than the area stated in Paragraph 3 above, then
Base Rent shall be adjusted to reflect $7.00 per gross square foot. Base Rent
shall be payable to Landlord monthly, in advance, without demand, deduction or
offset, in lawful money of the United States of America at the address stated
below. The first month's Base Rent payment of $19,248.00 shall be due upon the
date Tenant executes the Lease Agreement, and all other installments of Base
Rent shall be due and payable on or before the first (1st) day of each month
during the Lease term.
(b) Upon the date Tenant executes the Lease Agreement, there shall be due
and payable by Tenant a Security Deposit in the amount of $19,248.00. Such
deposit shall be held by Landlord (without any obligation to pay interest
thereon or segregate such money from Landlord's general funds except as may be
required by applicable law) as security for the performance of Tenant's
obligations under this Lease. Tenant agrees to increase such Security Deposit
from time to time so that it is at all times equal to one monthly Base Rental
installment plus the average monthly additional rentals arising pursuant to
Paragraph 6 below. Tenant shall deposit cash with Landlord in an amount
sufficient so to increase the Security Deposit to such amount within five (5)
days after written demand by Landlord. It is expressly understood that the
Security Deposit is not an advance payment of rental or a measure of Landlord's
damages in the event of Tenant's default under this Lease. Upon the occurrence
of any event of default by Tenant under this Lease, Landlord may, from time to
time, without prejudice to any other remedy provided herein or provided by law,
use, apply, or retain all or part of the Security Deposit for the payment of
(i) any Base Rent, (ii) additional rentals arising under Paragraph 6 below, and
(iii) other sums due hereunder, including without limitation any amount which
Landlord may spend or become obligated to spend by reason of Tenant's default
or to compensate Landlord for any damage, injury, expense or liability caused
to Landlord by such default or breach (all of which items (i), (ii) and (iii)
are sometimes referred to in
COMMERCIAL LEASE AGREEMENT - PAGE 6
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the aggregate as "Rent"). If any portion of the Security Deposit is so used
or applied, Tenant shall, within five (5) days after written demand thereof,
deposit cash with Landlord in an amount sufficient to restore the Security
Deposit to the amount required by this Paragraph. Tenant's failure to do so
shall be an event of default under this Lease. The balance of the Security
Deposit shall be returned by Landlord to Tenant at such time after
termination of this Lease that all of Tenant's obligations have been
fulfilled.
(c) Other remedies for nonpayment of Rent notwithstanding, if the monthly
Base Rental payment is not received by Landlord on or before the tenth (10th)
day of the month for which such rent is due, or if any other Rent payment due
Landlord by Tenant hereunder is not received by Landlord within ten (10) days
of the due date three (3) times during any one (1) year period, a service
charge of two hundred ($200.00) dollars shall be additionally due and payable
by Tenant as an administrative charge for the excess efforts necessitated by
such tardiness in payment. Such service charge shall be cumulative of any
other remedies Landlord may have for nonpayment of Rent and other sums payable
under this Lease.
(d) If three (3) consecutive monthly Base Rental payments or any ten (10)
[in total, cumulative from the beginning of the Lease term] monthly Base Rental
payments during the Lease term (or any renewal or extension thereof) are not
received by Landlord within ten (10) days of the due date, the Base Rent
hereunder shall automatically become due and payable by Tenant in advance in
quarterly installments equal to three (3) months' Base Rent each. The first of
such quarterly Base Rent payments shall be due and payable on the first day of
the next succeeding month and on the first day of every third (3rd) month
thereafter. This remedy shall be cumulative of any other remedies of Landlord
under this Lease for nonpayment of Rent.
6. ADDITIONAL RENTAL:
(a) TAXES AND INSURANCE:
(1) "Tax and Insurance Costs" shall mean all of the following paid
or payable by Landlord with respect to the Project or any portion thereof: (i)
all federal, state and local sales, use, ad valorem, rental, value added, and
other taxes (other than Landlord's income or franchise taxes) and special
assessments and other governmental charges; and (ii) all insurance premiums,
including, without limitation, public liability, casualty, rental and property
damage insurance.
(2) Landlord shall pay all Tax and Insurance Costs; however,
Landlord may in its discretion defer such payment to the extent permitted by
applicable laws so long as contested by Landlord in good faith and so long as
Tenant's occupancy of the Premises is not lawfully disturbed.
(3) For each calendar year of the term of this Lease, Tenant shall
pay to Landlord as additional Rent hereunder its "pro rata portion" of the Tax
and Insurance Costs computed by multiplying the Tax and Insurance Costs by a
fraction, the numerator of which is the number of rentable square feet in the
Leased Premises, and the denominator of which is the number of rentable square
feet in the Building.
COMMERCIAL LEASE AGREEMENT - PAGE 7
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(4) Tenant shall pay one-twelfth of its pro rata portion of
estimated Tax and Insurance Costs as estimated by Landlord, along with the
monthly Base Rental payment each month, during the term of this Lease. As soon
as available after the expiration of each calendar year during the term of this
Lease, Landlord shall submit a reconciliation statement to Tenant setting forth
(1) Tenant's pro rata portion of the Tax and Insurance Costs due from Tenant
for the preceding calendar year, (ii) the amount of Tax and Insurance Costs
paid by Tenant during such calendar year, and (iii) the amount, if any, either
overpaid or remaining due from Tenant to Landlord. Within (10) days after
receipt of such statement, Tenant shall remit to Landlord the amount said
statement shows to be due from Tenant or, if Tenant has overpaid, Landlord
shall credit the amount overpaid to Tenant's pro rata portion of Tax and
Insurance Costs next due. If Tenant is not in default and this Lease
terminated at the end of such prior year, Landlord shall refund such
overpayment to Tenant.
(5) For the calendar years in which this Lease commences and
terminates, Tenant's liability for its pro rata portion of the Tax and
Insurance Costs for such partial calendar years shall be subject to pro rata
adjustment based upon the number of days of the term elapsing during such
partial year. Where the applicable charges are not available prior to the end
of the term hereof, then the aforesaid adjustment shall be made between
Landlord and Tenant after Landlord shall have received the charges for such
period, it being specifically agreed that Landlord's and Tenant's obligations
under this Paragraph shall survive the expiration of the term of this Lease.
(6) The failure of Landlord to exercise its rights hereunder to
estimate Tax and Insurance Costs and require payment of same as additional Rent
shall not constitute a waiver of such rights which rights may be exercised from
time to time at Landlord's discretion.
(b) COMMON AREA MAINTENANCE:
(1) "Common Area Maintenance Expenses" shall mean any and all
expenses (other than the Tax and Insurance Costs described above) arising from
the maintenance, repair, replacement and operation of, and modifications and
improvements to comply with governmental mandate to, the Project's common areas
and any portions of the Project for which Landlord is responsible hereunder
(excluding only expenses associated with structural integrity of the roof,
foundation, and exterior walls) including, but not limited to, management fees,
utility expenses (if furnished by Landlord), wages and fringe benefits payable
to employees of Landlord whose duties are connected with the operation and
maintenance of the Project, amounts paid to contractors or subcontractors for
work or services performed in connection with the operation and maintenance of
the Project, including without limitation common areas and parking areas and
roof, exterior wall and foundation work that is not related to structural
integrity. Any capitalized expenditures included within the foregoing
(together with reasonable finance charges) will be amortized for purposes of
this Paragraph over a three (3) year period.
(2) The term "Common Area Maintenance Expenses" shall not include
repair, restoration or other work occasioned by fire, windstorm or other
casualty with respect to which
COMMERCIAL LEASE AGREEMENT - PAGE 8
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Landlord actually receives insurance proceeds, income and franchise taxes of
Landlord, expenses incurred in leasing to or procuring of tenants, leasing
commissions, advertising expenses, expenses for the renovating of space for
new tenants, interest or principal payments or any mortgage or other
indebtedness of Landlord, compensation paid to any employee of Landlord above
the grade of building superintendent, or depreciation allowance or expense.
(3) Tenant agrees to pay as additional Rent its pro rata portion (as
defined in Paragraph 6(a)(3) above) of the Common Area Maintenance Expenses.
Tenant shall pay one-twelfth of its pro rata portion of estimated Common Area
Maintenance Expenses as estimated by Landlord, along with the monthly Base
Rental payment each month during the term of this Lease. As soon as available
after the expiration of each calendar year during the term of this Lease,
Landlord shall submit a statement to Tenant setting forth (i) Tenant's pro rata
portion of the Common Area Maintenance Expenses due from Tenant for the
preceding calendar year, (ii) the amount of Common Area Expenses paid by Tenant
during such calendar year, and (iii) the amount, if any, either overpaid or
remaining due from Tenant to Landlord. Within ten (10) days after receipt of
such statement, Tenant shall remit to Landlord the amount said statement shows
to be due from Tenant or, if Tenant has overpaid, Landlord shall credit the
amount overpaid to Tenant's pro rata portion of Common Area Maintenance
Expenses next due. If Tenant is not in default and this Lease terminated at
the end of such prior year, Landlord shall refund such overpayment to Tenant.
(4) For the calendar years in which this Lease commences and
terminates, Tenant's liability for its pro rata portion of the Common Area
Maintenance Expenses for such partial calendar years shall be subject to pro
rata adjustment based upon the number of days of the term elapsing during such
partial year. Where the applicable expenses are not available prior to the end
of the term hereof, then the aforesaid adjustment shall be made between
Landlord and Tenant after Landlord shall have received all of the expenses for
such period, it being specifically agreed that Landlord's and Tenant's
obligations under this Paragraph shall survive the expiration of the term of
this Lease.
(5) The failure of Landlord to exercise its rights hereunder to
estimate expenses and require payment of same as additional Rent shall not
constitute a waiver of such rights which rights may be exercised from time to
time at Landlord's discretion.
(6) Notwithstanding anything contained in this Lease to the
contrary, Tenant shall have the right, at its own expense and within a
reasonable time, to audit Landlord's books relevant to the additional rent due
under this Lease. Tenant's right to audit the books and records of Landlord
shall be limited to one time per calendar year. If any such audit reveals an
overpayment of Common Area Maintenance Expenses and/or Tax and Insurance Costs
for the period covered by such annual statement, the amount of such overpayment
shall be credited against the next installment of base rent and all other sums
due from Tenant. If Landlord is found to have been in error by a factor which
would be in excess of ten percent (10%) of the actual Common Area Maintenance
Expenses and/or Tax and Insurance Costs, then Landlord shall pay for the cost
of the audit which cost shall not exceed $1,000.00. If such audit reveals an
underpayment by Tenant, then Tenant shall pay the same with its next monthly
base rent payment.
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(c) In any event, Tenant shall be responsible for insuring and paying all
taxes upon Tenant's furniture, machinery, goods, supplies, fixtures,
Alterations (below defined) or other improvements, and other property on the
Project.
7. TENANT REPAIRS AND MAINTENANCE:
(a) Tenant shall maintain all parts of the Leased Premises and their
appurtenances (except those for which Landlord is expressly responsible under
this Lease) in good, clean and sanitary condition, at its own expense. Tenant
shall promptly make all necessary repairs and replacements to the Leased
Premises, including but not limited to electric light lamps or tubes, windows,
glass and plate glass, interior and exterior doors, any special office entry,
interior walls and finish work, floors and floor coverings, downspouts,
gutters, heating and air conditioning systems, dock boards, truck doors, dock
bumpers, and plumbing work and fixtures. Replacement and repair parts,
materials and equipment shall be of quality equivalent to those initially
installed within the Leased Premises, and repair and maintenance work shall be
done in a good and workmanlike manner and in accordance with existing laws,
rules, regulations and ordinances.
(b) Tenant shall not damage or disturb the integrity, structural
integrity, or support of any wall, roof, or foundation of the Building. Any
damage to these areas caused by Tenant or Tenant's Representatives (defined in
Paragraph 7(g)) shall be promptly repaired by Tenant at its sole cost and
expense.
(c) Landlord shall have the right to coordinate any repairs, maintenance
and replacement of any rail tracks serving or to serve the Project, and if
Tenant uses such rail tracks, Tenant shall reimburse Landlord from time to time
upon demand for a share of the cost of such repairs, maintenance and
replacement and any other sums specified in any agreement to which Landlord is
a party respecting such tracks. Tenant's share of such costs shall be
additional Rent and shall reflect a proration based on the ratio that Tenant's
use, in number of cars, bears to the total rail use, in number of cars, by all
rail users in the Project.
(d) Tenant shall, at its own cost and expense, enter into a regularly
scheduled preventive maintenance service contract with a maintenance contractor
for servicing all heating, ventilation and air conditioning systems and
equipment within, and any other equipment or machinery installed by Landlord
in, or to serve, the Leased Premises. The maintenance contractor and the
contract are subject to Landlord approval which shall not be unreasonably
withheld. The service contract must include all services suggested by the
equipment manufacturer within the operation/maintenance manual and must become
effective (and a copy delivered to Landlord) within thirty (30) days of the
date Tenant takes possession of the Leased Premises. If Tenant fails to enter
into such service contract as required, Landlord shall have the right to do so
on Tenant's behalf, and Tenant agrees to pay Landlord the cost and expense of
same upon demand, and such amount shall be considered additional Rent.
(e) Tenant shall at its own expense keep the Leased Premises pest-free
and pay all charges for pest control and extermination within the Leased
Premises.
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(f) At the termination of this Lease, Tenant shall deliver the Leased
Premises "broom clean" to Landlord in the same good order, configuration, and
condition as existed at the Commencement Date of this Lease, ordinary wear,
natural deterioration beyond the control of Tenant, and damage by fire,
tornado or other casualty excepted. Tenant shall give written notice to
Landlord at least thirty (30) days prior to vacating the Leased Premises and
shall arrange to meet with Landlord for a joint inspection of the Leased
Premises prior to vacating. In the event of Tenant's failure to give such
notice or arrange such joint inspection, Landlord's inspection at or after
Tenant's vacating the Leased Premises shall be conclusively deemed correct
for purposes of determining Tenant's responsibility for repairs and
restoration.
(g) Not in limitation on the foregoing, it is expressly understood that
Tenant shall repair and pay for all damage caused by the negligence of
Tenant, Tenant's employees, officers, directors, partners, agents, invitees,
licensees, contractors, representatives, or others for whom Tenant is legally
responsible (all such persons and entities being herein collectively referred
to as "Tenant's Representatives") or caused by Tenant's default hereunder.
(h) If Landlord shall give Tenant written notice of defects or need for
repairs for which Tenant is responsible under this Lease, and if Tenant shall
fail to make or fails to commence to make repairs within 30 days of
Landlord's notification or such shorter time as is reasonable if expedited
repair is needed to avoid injury or damage, Landlord shall have the option to
cure said defect or repair, and Tenant shall pay to Landlord all costs and
expenses incurred on demand.
8. LANDLORD'S REPAIRS:
(a) Landlord shall be responsible, at its expense, for, but only for,
the structural integrity of the roof, foundation and exterior walls of the
Building. In further limitation on Landlord's responsibilities hereunder,
(i) the foregoing does not include maintenance and repair that are a result
of deterioration due to wear and tear or the passing of time; (ii) any repair
to the roof, foundation or exterior walls occasioned by the act of omission
of Tenant or Tenant's Representatives shall be the responsibility of Tenant;
(iii) the term "walls" as used in this Paragraph 8 shall not include windows,
glass or plate glass, interior doors, special store fronts, office entries or
exterior doors; and (iv) Landlord's liability with respect to any defects,
repairs or maintenance for which Landlord is responsible at its expense under
this Lease shall be limited to the cost of such repairs or maintenance or the
curing of such defect. Tenant shall promptly give Landlord written notice of
defects or need for repairs, after which Landlord shall have 30 days to
commence to repair or cure such defect.
(b) Landlord shall perform the work which gives rise to Common Area
Maintenance Expenses, subject to payment therefor by Tenant pursuant to the
provisions of Paragraph 6(b) above. If the need for any such work shall come
to the attention of Tenant, Tenant will promptly so notify Landlord in
writing.
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9. UTILITY SERVICE: Tenant shall pay the cost of all utility services
including, but not limited to, initial connection charges and deposits and
all charges for gas, water, trash disposal, sewer, telephone or other
telecommunications, and electricity used on the Leased Premises. Tenant
shall pay all costs caused by Tenant introducing excessive pollutants into
the sanitary or storm sewer system, including permits, fees, assessments, and
charges levied by any governmental subdivision for any pollutants or solids
other than ordinary human waste.
10. SIGNS: No sign, door plaques, advertisement, or notice shall be
displayed, painted or affixed by Tenant on any part of the Project, Building,
parking facilities, or Leased Premises without prior written consent of
Landlord. The color, size, character, style, material, placement and
location and method of attachment to the Building shall be subject to
Landlord's approval, and to any applicable governmental laws, ordinances,
regulations, project specifications, and other requirements. Landlord's
notice of approval or disapproval shall be delivered to Tenant within ten
(10) days of Tenant's written request for same. Signs, if approved by
Landlord, shall be placed by a contractor approved by Landlord and paid for
by Tenant. Tenant shall remove all such signs at the termination of this
Lease. Such installations and removals shall be made in such manner as to
avoid injury or defacement of the Project and other improvements, and Tenant,
at its sole expense, shall repair any injury or defacement, including,
without limitation, any discoloration caused by such installation and/or
removal. Landlord may erect a sign or signs on the Leased Premises
indicating that the Leased Premises are for lease during the six (6) month
period prior to the expiration of this Lease.
11. USAGE: Tenant warrants and represents to Landlord that the Leased
Premises shall be used and occupied only for the purpose of: General office,
manufacturing and distribution of custom golf clubs and related activities.
Any change in the stated usage purposes shall be subject to the prior written
approval of Landlord. Tenant shall occupy the Leased Premises, conduct its
business, and control Tenant's Representatives in a lawful and reputable way
and as not to create any nuisance. Tenant shall not commit, or allow to be
committed, any waste on the Leased Premises or the Project. Tenant may not
use the Leased Premises for the use, storage, or distribution of hazardous or
environmentally offensive substances, for underground storage, or for any
unlawful purposes.
12. INSURANCE:
(a) Tenant shall not permit the Leased Premises to be used in any way
which would be hazardous or which would in any way increase the cost of or
render void any insurance on the improvements, and Tenant shall immediately,
on demand, cease any use which violates the foregoing or to which Landlord's
insurer or any governmental or regulatory authority objects. If at any time
during the term of this Lease Tenant's use or vacancy shall cause an increase
in premiums, and in particular, but without limitation, if the State Board of
Insurance or other insurance authority disallows any of Landlord's sprinkler
credits or imposes an additional penalty or surcharge in Landlord's insurance
premiums because of Tenant's original or subsequent placement or use of
storage racks or bins or method of storage or because of the nature of
Tenant's inventory or any other act of Tenant, Tenant agrees to pay as
additional Rent the increase in Landlord's insurance premiums.
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(b) Tenant, at its sole cost and expense, shall procure and maintain
throughout the term of this Lease a policy or policies of insurance insuring
Landlord, Landlord's management company and lender, and Tenant against all
claims for property damages, personal injury or death of others occurring on
or in connection with: (i) the Leased Premises; (ii) the condition of the
Leased Premises; (iii) Tenant's operations in and maintenance and use of the
Leased Premises; (iv) Tenant's and Tenant's Representatives' use of the
common areas of the Project, and (v) Tenant's liability assumed under this
Lease. The limits of such policy or policies shall be not less than
$2,000,000.00 combined single limit coverage per occurrence for injury to
persons (including death) and/or property damage or destruction, including
loss of use.
(c) All such policies shall be procured by Tenant from insurance
companies satisfactory to Landlord naming the following as co-insureds: (i)
Landlord; (ii) Landlord's management company, JACKSON-SHAW COMPANY; and,
(iii) Landlord's mortgage holder, if any. Certified copies of such policies
together with receipt for payment of premiums, shall be delivered to Landlord
prior to the Commencement Date of this Lease. Not less than fifteen (15)
days prior to the expiration date of any such policies, certified copies of
renewal policies and evidence of the payment of renewal premiums shall be
delivered to Landlord. All such original and renewal policies shall provide
for at least thirty (30) days written notice to Landlord before such policy
may be canceled or changed to reduce insurance coverage provided thereby.
Upon request of Landlord, Tenant further agrees to complete and return to
Landlord an insurance questionnaire (such form to be provided by Landlord)
regarding Tenant's insurance coverage and intended use of the Leased
Premises. Tenant warrants and represents that all information contained in
such questionnaire shall be true and correct as of the date thereof and shall
be updated by Tenant from time to time upon Landlord's request.
13. (INTENTIONALLY DELETED)
14. COMPLIANCE WITH LAWS, RULES AND REGULATIONS: Tenant shall comply with
all applicable laws, ordinances, orders, rules and regulations of state,
federal, municipal, or other agencies or bodies relating to the use,
condition and occupancy of and business conducted on the Leased Premises,
including without limitation, the Americans with Disabilities Act, the
Resource Conservation and Recovery Act, the Comprehensive Environmental
Response Act, and the rules, regulations and directives of the U.S.
Environmental Protection Agency.
15. ASSIGNMENT AND SUBLETTING: The Tenant agrees not to assign, transfer,
or mortgage this Lease or any right or interest therein or sublet the Leased
Premises or any part thereof, without the prior written consent of Landlord,
such consent not to be unreasonably withheld. No assignment or subletting
shall relieve Tenant of its obligations hereunder, and Tenant shall continue
to be liable as a principal (and not as a guarantor or surety) to the same
extent as though no assignment or subletting had been made. Consent by
Landlord to any one assignment or subletting shall not be construed to be
consent to any additional assignment or subletting. Each such successive act
shall require similar consent of Landlord. Landlord shall be reimbursed by
Tenant for any costs or expenses incurred as a result of Tenant's request for
consent to any such
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assignment or subletting, including legal costs. In the event Tenant
subleases the Leased Premises, or any portion thereof, or assigns this Lease
with the consent of the Landlord at an annual Base Rental exceeding that
stated herein, such excess shall be paid by Tenant to Landlord as additional
Rent hereunder within ten (10) days after receipt by Tenant. Upon the
occurrence of an "event of default" as defined below, if all or any part of
the Leased Premises is then assigned or sublet, Landlord may, in addition to
any other remedies provided by this Lease or provided by law, collect
directly from the assignee or subtenant all rents due to Tenant. Landlord
shall have a security interest in all property on the Leased Premises to
secure payment of such sums. Any collection directly by Landlord from the
assignee or subtenant shall not be construed, however, to constitute a
novation or a release of Tenant from the further performance of its
obligations under this Lease. Notwithstanding the foregoing, it is expressly
agreed that if this Lease is assigned to any person or entity pursuant to the
provisions of the Bankruptcy Code, 11 U.S.C. Sec. 101 et seq, as amended (the
"Bankruptcy Code"), any and all monies or other considerations payable or
otherwise to be delivered in connection with such assignment shall be paid or
delivered to Lessor, shall be and remain the exclusive property of Landlord
and shall not constitute property of Tenant or of the estate of Tenant within
the meaning of the Bankruptcy Code. Any and all monies or other
considerations constituting Landlord's property under the preceding sentence
not paid or delivered to Landlord shall be held in trust for the benefit of
Landlord and be promptly paid or delivered to Landlord. Any person or entity
to which this Lease is assigned pursuant to the provisions of the Bankruptcy
Code shall be deemed without further act or deed to have assumed all of the
obligations arising under this Lease on and after the date of such
assignment. Any such assignee shall upon demand execute and deliver to
Landlord an instrument confirming such assumption.
*Should Tenant be acquired by a Corporation whose net worth is greater than
Tenant's, and whose use of the space is the same as Tenant's, then Landlord
will automatically approve an assignment of Tenant's interest in the Lease.
16. ALTERATIONS AND IMPROVEMENTS:
(a) Tenant shall not make or perform, or permit the making or
performance of, any initial or subsequent tenant finish work or any
alterations, installations, decorations, improvements, additions or other
physical changes in or about the Leased Premises (referred to collectively as
"Alterations") without Landlord's prior consent. Landlord shall be under no
obligation to allow Alterations of any kind and may withhold its consent
without cause. Notwithstanding the foregoing provisions or Landlord's consent
to any Alterations, all Alterations shall be made and performed in conformity
with and subject to the following provisions: All Alterations shall be made
and performed at Tenant's sole cost and expense in a good and workmanlike
manner. Alterations shall be made only by contractors or mechanics approved
by Landlord, such approval not to be unreasonably withheld. Tenant shall
submit to Landlord detailed plans and specifications (including architectural
layout, mechanical and structural drawings) for each proposed Alteration and
shall not commence any such Alteration without first obtaining Landlord's
written approval of such plans and specifications. Prior to the commencement
of each proposed Alteration, Tenant shall furnish to Landlord a certificate
evidencing worker's compensation insurance coverage for all persons to be
employed in connection with such Alterations, including those to be employed
by all contractors and subcontractors, and of comprehensive public liability
insurance (including property
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damage coverage) in which Landlord, its agents, and any lessor under any
ground or underlying lease, and any mortgagee of the Building shall be named
as parties insured, which policies shall be issued by companies and shall be
in form and amounts satisfactory to Landlord and shall be maintained by
Tenant until the completion of such Alteration. Tenant shall cause its
contractor and each subcontractor to provide Landlord with a Certificate of
Completion of the Alterations and a Bills Paid Affidavit and full Lien
Waiver. Tenant shall, if required by Landlord at the time of Landlord's
consent to the Alterations, agree to restore the Leased Premises at the
termination of this Lease to their condition prior to making such
Alterations. All permits, approvals and certificates required by all
governmental authorities shall be timely obtained by Tenant and submitted to
Landlord. Notwithstanding Landlord's approval of plans and specifications
for any Alterations, all Alterations shall be made and performed in full
compliance with all applicable laws, orders, rules, standards and regulations
of Federal, State, County, and Municipal authorities, including, without
limitation, all directions, pursuant to law, of all public officers, and with
all applicable rules, orders, regulations and requirements of the local Board
of Fire Underwriters or any similar body ("Applicable Laws"). Landlord's
approval shall not in any way be considered an indication that the plans and
specifications comply with Applicable Laws. All materials and equipment to
be incorporated in the Leased Premises as a result of all Alterations shall
be new and first quality. No such materials or equipment shall be subject to
any lien, encumbrance, chattel mortgage or title retention or security
agreement. Whether such Alterations are being performed by Tenant in
connection with Tenant's initial occupancy of the Leased Premises or
subsequently, Tenant agrees to make proper application for, and obtain, a
Building Permit and a Certificate of Occupancy from the city in which the
Leased Premises are located. Tenant shall furnish copies of such permit and
certificate to Landlord promptly after issuance of same.
(b) All appurtenances, fixtures, improvements, and other property
attached to or installed in the Leased Premises, whether by Landlord or
Tenant or others, and whether at Landlord's expense or Tenant's expense, or
the joint expense of Landlord and Tenant, shall be and remain the property of
Landlord, except that any such fixtures, improvements, additions, and other
property which have been installed at the sole expense of Tenant and which
are removable without material damage to the Leased Premises shall be and
remain the property of Tenant. If no event of default has occurred, Tenant
may, and if Landlord so elects Tenant shall, remove any property belonging to
Tenant at the end of the term hereof, and Tenant shall repair or, at
Landlord's option, shall pay to Landlord the cost of repairing any damage
arising from such removal. Any replacements of any property of Landlord,
whether made at Tenant's expense or otherwise, shall be and remain the
property of Landlord.
17. CONDEMNATION:
(a) If, during the term (or extension or renewal) of this Lease, all or
a substantial part of the Leased Premises are taken for any public or
quasi-public use under any governmental law, ordinance or regulation, or by
right of eminent domain or by private purchase in lieu thereof, and the
taking would prevent or materially interfere with the then current use of the
Leased Premises, this Lease shall terminate and the Rent shall be prorated
during the unexpired portion of this Lease effective on the date physical
possession is taken by the condemning authority.
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(b) If a portion of the Leased Premises is taken and this Lease is not
terminated as provided in Paragraph 17(a) above, if condemnation proceeds are
sufficient and if restoration is feasible, Landlord may, at its option
restore the Project (other than Alterations) in order to make it reasonably
tenantable and suitable for Tenant's approved use. During such restoration,
Rent shall be reduced by the amount of business or rent interruption
insurance proceeds actually received by Landlord, or Rent shall be paid based
on the portion of the Leased Premises Tenant can occupy. Upon completion of
such restoration, the Rent payable under this Lease during the unexpired
portion of the term shall be adjusted to such an extent as may be fair and
reasonable under the circumstances.
(c) In the event of such taking or private purchase in lieu thereof,
Tenant may seek a separate award for any loss of improvements made or paid
for by Tenant, its personal property, and its moving expenses (so long as no
such claim diminishes Landlord's claim or award), but all other claims of any
nature shall belong to Landlord. In the event Tenant does not receive such a
separate award, Landlord shall be entitled to receive any and all sums
awarded for the taking.
(d) Notwithstanding anything herein to the contrary, if the holder of
any indebtedness secured by a mortgage or deed of trust covering the Building
and/or Project requires that the condemnation proceeds be applied to such
indebtedness, then Landlord shall have the right to terminate this Lease by
delivering written notice of termination to Tenant within fifteen (15) days
after such requirement is imposed. All rights and obligations under this
Lease shall then cease. If Landlord does not receive condemnation proceeds
sufficient for restoration (such as when its mortgagee does not allow the
proceeds to be used for such purposes) and if restoration is economically
reasonably feasible, Tenant will have the option of supplementing available
proceeds to allow restoration, and Tenant's actual costs will be reimbursed
through a monthly prorata credit against rent beginning after Landlord's
mortgage has been paid in full.
18. FIRE AND CASUALTY:
(a) If the Building should be damaged or destroyed by fire, tornado, or
other casualty, Tenant shall give immediate verbal and written notice thereof
to Landlord.
(b) If the Building should be totally destroyed by fire, tornado, or
other casualty, or if it should be so damaged thereby that rebuilding or
repairs cannot reasonably be completed within one hundred eighty (180) days
after the date on which Landlord is notified by Tenant of such damage, at the
option of either Landlord or Tenant, this Lease shall terminate, and the Rent
shall be abated during the unexpired portion of this Lease effective upon the
date of occurrence of such damage.
(c) If the Building should be damaged by any peril that will be wholly
compensated (subject to deductibles) by the insurance maintained by Landlord
or if Landlord, in its sole discretion, so chooses notwithstanding a
deficiency in such proceeds, and if rebuilding or repairs can reasonably be
completed within one hundred eighty (180) days after the date on which
Landlord is notified by Tenant of such damage, this Lease shall not
terminate, and Landlord shall
COMMERCIAL LEASE AGREEMENT - PAGE 16
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then proceed with reasonable diligence to rebuild and repair the Building to
substantially the same condition in which it existed prior to such damage.
Landlord shall not be required, however, to rebuild, repair, or replace
Tenant's furniture, fixtures, Alterations, inventory or other personal
property. If the Leased Premises are untenantable in whole or in part during
restoration, the Rent payable hereunder during the period in which they are
untenantable shall be reduced by the amount of business or rent interruption
insurance proceeds actually received by Landlord. If Landlord should fail to
complete such repairs and rebuilding within one hundred eighty (180) days
after the date on which Landlord is notified by Tenant of such damage, Tenant
may terminate this Lease by delivering written notice of termination to
Landlord. Such termination shall be Tenant's exclusive remedy and all rights
and obligations of the parties under the Lease shall then cease.
Notwithstanding the foregoing provisions of this Paragraph 18(c), Tenant
agrees that if the Leased Premises, the Building and/or Project are damaged
by fire or other casualty caused by the fault or negligence of Tenant or
Tenant's Representatives, Tenant shall have no option to terminate this Lease
even if the damage cannot be repaired within one hundred eighty (180) days,
and the Rent shall not be abated or reduced before or during the repair
period.
(d) Notwithstanding anything herein to the contrary, if the holder of
any indebtedness secured by a mortgage or deed of trust covering the Building
and/or Project requires that the insurance proceeds be applied to such
indebtedness, then Landlord shall have the right to terminate this Lease by
delivering written notice of termination to Tenant within fifteen (15) days
after such requirement is imposed. All rights and obligations under this
Lease shall then cease. If Landlord does not receive insurance proceeds
sufficient for restoration (such as when its mortgagee does not allow the
proceeds to be used for such purposes) and if restoration is economically
reasonably feasible, Tenant will have the option of supplementing available
proceeds to allow restoration, and Tenant's actual costs will be reimbursed
through a monthly prorata credit against rent beginning after Landlord's
mortgage has been paid in full.
19. CASUALTY INSURANCE: Landlord shall at all times during the term of this
Lease maintain a policy or policies of business or rental interruption
insurance and a policy or policies of insurance insuring the Building against
eighty percent (80%) of full replacement cost for loss or damage by fire,
explosion, and other customary hazards. Such policies will not insure any
personal property (including, but not limited to any furniture, machinery,
goods, or supplies) of Tenant or which Tenant may have in the Leased Premises
or any fixtures installed by or paid for by Tenant upon or within the Leased
Premises or any Alterations or other improvements which Tenant may construct
or install on the Leased Premises or any signs identifying Tenant's business
located on the exterior of the Building, insurance for all of which shall be
Tenant's responsibility.
20. WAIVER OF SUBROGATION: To the extent that Landlord or Tenant receives
casualty insurance proceeds, such recipient hereby waives and releases any
and all rights, claims, demands and causes of action such recipient may have
against the other on account of any loss or damage occasioned to such
recipient or its businesses, real and personal properties, the Leased
Premises, the Building, the Project, or its contents, arising from any risk
or peril covered by any insurance policy carried by either party and for
which such proceeds are actually received. Inasmuch as the above mutual
waivers will preclude the assignment of any such claim by way of subrogation
(or
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otherwise) to an insurance company (or any other person), each party hereto
agrees immediately to give to its respective insurance companies written
notice of the terms of such mutual waivers and to have their respective
insurance policies properly endorsed, if necessary, to prevent the
invalidation of such insurance coverages by reason of such waivers. This
provision shall be cumulative of Paragraph 21 below.
21. HOLD HARMLESS: Landlord shall not be liable to Tenant, Tenant's
Representatives, or any other person for any injury to person or damage to
property on or about the Leased Premises or the Project caused by the
negligence or misconduct of Tenant, or Tenant's Representatives, entering
upon the Leased Premises or the Project. Tenant agrees to indemnify and hold
Landlord harmless from any and all loss, attorney's fees, expenses, or claims
arising out of any such damage, loss or injury. Tenant shall not be liable
to Landlord, Landlord's employees, agents, invitees, licensees or visitors
for any injury to person or damage to property on or about the Leased
Premises or the Project caused by the negligence or misconduct of Landlord,
its agents, employees, agents, invitees, licensees or visitors. Landlord
agrees to indemnify and hold Tenant harmless from any and all loss,
attorney's fees, expenses, or claims arising out of any such damage, loss or
injury.
22. QUIET ENJOYMENT: Landlord warrants that it has full right to execute
and to perform this Lease and to grant the estate demised herein and that
Tenant, upon payment of the required Rent and performance of the covenants
and agreements contained in this Lease, shall peaceably and quietly have,
hold, and enjoy the Leased Premises during the full term of this Lease,
including any extensions or renewals thereof.
23. LANDLORD'S RIGHT OF ENTRY: Landlord shall have the right to enter the
Leased Premises for the following reasons: inspection, cleaning or making
repairs, making such alterations or additions as Landlord may deem necessary
or desirable; installation of utility lines servicing the Leased Premises or
any other space in the Building; determining Tenant's use of the Leased
Premises, or for determining if any event of default under this Lease has
occurred. Landlord shall attempt to give twenty-four (24) hours verbal notice
to Tenant prior to such entry during business hours, except in cases of
emergency or when an event of default has occurred in which cases Landlord
may enter the Leased Premises at any time and without prior notice. During
the period that is six (6) months prior to the end of the Lease term,
Landlord and Landlord's agents and representatives shall have the right to
enter the Leased Premises at any reasonable time during business hours,
without notice, for the purpose of showing the Leased Premises and shall have
the right to erect on the Leased Premises a suitable sign indicating the
Leased Premises are available for lease.
24. ASSIGNMENT OF LANDLORD'S INTEREST IN LEASE: Landlord shall have the
right to transfer and assign, in whole or in part, its rights and obligations
with respect to the Project, the Leased Premises, and this Lease, including
Tenant's Security Deposit. Upon and after such transfer, Landlord shall be
released from any further obligation under this Lease and Tenant agrees to
look solely to Landlord's successor for the performance of such obligations.
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25. LANDLORD'S LIEN: In addition to any statutory lien for Rent in
Landlord's favor, Landlord shall have, and Tenant hereby grants to Landlord,
a continuing security interest for all Rent and other sums of money becoming
due under this Lease from Tenant upon all goods, wares, equipment, fixtures,
furniture, inventory, accounts, contract rights, and other personal property
of Tenant situated on or arising from the Leased Premises. Such property
shall not be removed without the consent of Landlord which consent may be
withheld by Landlord until all of Tenant's duties and obligations have been
performed in full. In the event of a default under this Lease, Landlord
shall have, in addition to any other remedies provided in this Lease or by
law, all rights and remedies under the Texas Uniform Commercial Code,
including without limitation the right to sell the property described in this
Paragraph at public or private sale upon five (5) days notice to Tenant.
Tenant hereby agrees to execute such financing statements and other
instruments necessary or desirable in Landlord's discretion to perfect the
security interest hereby created.
*Upon written request, Landlord will subordinate its lien created herein to
any lender of Tenant.
26. DEFAULT BY TENANT: The following shall be events of default by Tenant
under this Lease:
(a) Tenant's failure to pay any installment of Rent or other payment
required pursuant to this Lease and the failure is not cured within ten (10)
days after it is due and after written notice to Tenant;
(b) Tenant's abandonment or vacation of any part of the Leased
Premises, whether or not Tenant is in default of the Rent payments due under
this Lease;
(c) Tenant's failure to comply with any term, provision or covenant of
this Lease, other than the defaults listed in the other subparagraphs of this
Paragraph 26, and the failure is not cured within ten (10) days after written
notice thereof to Tenant;
(d) Tenant's filing of a petition or adjudication as a debtor or
bankrupt insolvent under the Bankruptcy Code or any similar law or statute of
the United States or any state; or appointment of a receiver or trustee for
all or substantially all of the assets of Tenant; or Tenant's transfer in
fraud of creditors or assignment for the benefit of creditors of all or
substantially all of Tenant's assets;
(e) Tenant doing or permitting to be done any act which results in a
lien being filed against the Leased Premises and the same is not removed
within sixty (60) days after Landlord's notice thereof to Tenant.
27. REMEDIES FOR TENANT'S DEFAULT: Upon the occurrence of any event of
default, Landlord shall have the option to pursue any one or more of the
following remedies without any prior notice or demand:
(a) Landlord may terminate this Lease, in which event Tenant shall
immediately surrender the Leased Premises to Landlord, and if Tenant fails to
do so, Landlord may, without prejudice to any other remedy which it may have,
enter upon and take possession of the Leased Premises, and
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expel or remove Tenant and any other person who may be occupying all or any
part of the Leased Premises. Landlord shall not be liable for prosecution or
any claim for damages as a result of such actions. Tenant agrees to pay on
demand the amount of all losses, costs, expenses, deficiencies, and damages,
including, without limitation, reasonable reconfiguration expenses, rental
concessions and other inducements to new tenants, advertising expenses and
broker's commissions, which Landlord may incur or suffer by reason of
Tenant's default or the termination of this Lease under this subparagraph,
whether through inability to rent the Leased Premises on satisfactory terms
or otherwise. Tenant acknowledges that its obligation to pay Base Rent and
all additional Rent hereunder is not only compensation for use of the Leased
Premises but also compensation for sums already expended and/or being
expended by Landlord with respect to its obligations hereunder and with
respect to the Leased Premises, and Tenant acknowledges that Tenant's default
in timely payment of all sums due hereunder shall constitute significant
financial loss to Landlord. Tenant further acknowledges that any failure to
pay any sum due hereunder shall evidence Tenant's inability to meet its debts
as they become due. In such event, in addition to Landlord's other remedies
hereunder, Landlord shall be entitled to accelerate all Base Rental remaining
unpaid hereunder, the entirety of which shall at the option of Landlord be
immediately due and payable to the extent allowed by law.
(b) Without termination of this Lease, Landlord may enter upon and take
possession of the Leased Premises and expel or remove Tenant and any other
person who may be occupying all or any part of the Leased Premises (without
being liable for prosecution or any claim for damages therefor) and relet the
Leased Premises on behalf of Tenant and receive directly the rent from the
reletting. Tenant agrees to pay Landlord on demand any deficiency that may
arise by reason of any reletting of the Leased Premises and to reimburse
Landlord on demand for any losses, costs, and expenses, including without
limitation, reconfiguration expenses*, rental concessions and other
inducements to new tenants, advertising costs or broker's commissions, which
Landlord may incur or suffer as a result of Tenant's default or in reletting
the Leased Premises.
*Reconfiguration expenses shall not exceed the unpaid amortized portion of
Tenant's original tenant improvement costs.
(c) Without terminating this Lease, Landlord may enter upon the Leased
Premises (without being liable for prosecution or any claim for damages
therefor) and do whatever Tenant is obligated to do under the terms of this
Lease. Tenant agrees to reimburse Landlord on demand for any losses, costs
and expenses which Landlord may incur in effecting compliance with Tenant's
obligations under this Lease. Tenant further agrees that Landlord shall not
be liable for any damages resulting to Tenant from effecting compliance with
Tenant's obligations under this subparagraph.
(d) With respect to Landlord's entry upon the Leased Premises under the
provisions of subparagraphs (a), (b), and (c) above, no restriction of, or
obligation imposed upon Landlord by, Texas Property Code Section 93.002 shall
apply, such Section being superseded hereby. In particular, but without
limitation, Landlord will have no duty or responsibility to Tenant to tender
a key in the event of a change of locks, and Tenant will have no further
right of possession except as otherwise expressly agreed by Landlord in
writing. If Landlord changes the locks, Tenant shall be allowed to retrieve
its business records from the Leased Premises.
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(e) Landlord may pursue any remedy provided at law or in equity.
(f) Landlord shall have no duty to relet the Premises, and the failure
of Landlord to do so shall not release or affect Tenant's liability for Rent
and other charges due hereunder or for damages.
(g) No re-entry or reletting of the Premises or any filing or service
of an unlawful detainer action or similar action shall be construed as an
election by Landlord to terminate this Lease unless a written notice of such
intention is given by Landlord to Tenant. Notwithstanding any such reletting
without termination, Landlord may at any time thereafter elect to terminate
this Lease and Tenant's right to possession hereunder.
(h) To the extent allowed by law, Tenant hereby waives the protections
and rights provided by Texas Property Code Section 93.002.
28. TERMINATION OF OPTIONS: If there exist any options or special rights
which Landlord may have granted Tenant under this Lease including, but not
limited to, options or rights regarding extensions of the term, expansion of
the Leased Premises, or acquisition of any other interest in the Leased
Premises, the Building, or the Project, then all such options and rights are
independent of the leasehold estate hereby granted to Tenant by Landlord.
Landlord and Tenant agree and acknowledge that the negotiated consideration
for any such options or special rights is Tenant's entry into this Lease and
that no portion of any sums due and payable by Tenant to Landlord hereunder
is attributable thereto. In addition to, and not in lieu of, the above
remedies of Landlord for Tenant's default, any and all such options or
special rights shall be automatically terminated upon the occurrence of the
following events:
(a) Tenant shall have failed to pay when due any installment of Rent or
other sums payable under this Lease for any three (3) consecutive months
during the Lease term or any renewal or extension thereof, or for any ten
(10) months during the Lease term or any renewal or extension thereof,
whether or not said defaults are cured by Tenant; or
(b) Tenant shall have received two (2) or more notices of default under
Paragraph 26(c) within any one calendar year with respect to any other
covenant of this Lease, whether or not such default(s) is/are cured; or
(c) Tenant shall have committed or suffered to exist any other event of
default described under Paragraph 26 above, whether or not such default is
cured by Tenant.
29. WAIVER OF DEFAULT OR REMEDY: Failure of Landlord to declare a default
immediately upon its occurrence, or delay in taking any action in connection
with an event of default, shall not be a waiver of the default. Landlord
shall have the right to declare the default at any time and take such action
as its lawful or authorized under this Lease. Pursuit of any one or more of
the remedies set forth in Paragraphs 27 or 28 above shall not preclude
pursuit of any one or
COMMERCIAL LEASE AGREEMENT - PAGE 21
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more of the other remedies provided therein or elsewhere in this Lease or as
provided by law, nor shall pursuit of any remedy be a forfeiture or waiver of
any Rent or damages accruing to Landlord by reason of the violation of any of
the terms of this Lease. Failure by Landlord to enforce one or more of its
remedies upon an event of default shall not be construed as a waiver of the
default or of any other violation or breach of any of the terms contained in
this Lease.
30. CHOICE OF LAW; VENUE; ATTORNEY'S FEES: It is specifically stipulated
that this Lease shall be interpreted and construed according to the laws of
the State in which the Leased Premises are located, and any suit brought on
this Lease shall be maintained in the county in which the Leased Premises are
located. Further, the prevailing party in any such litigation between the
parties shall be entitled to recover, as a part of its judgment, reasonable
attorney's fees and costs and expenses incurred therein.
31. HOLDING OVER: Tenant will, at the termination of this Lease by lapse of
time or otherwise, surrender immediate possession to Landlord. If Landlord
agrees in writing that Tenant may hold over after the expiration or
termination of this Lease and if the parties do not otherwise agree, the hold
over tenancy shall be subject to termination by Landlord at any time upon not
less than thirty (30) days advance written notice, or by Tenant at any time
upon not less than thirty (30) days advance written notice. Further, all of
the terms and provisions of this Lease shall be applicable during the hold
over period, except that Tenant shall pay Landlord from time to time upon
demand, as Base Rent for the period of any hold over, an amount equal to one
and one-half times (1-1/2) the Base Rent in effect on the date of
termination, computed on a daily basis for each day of the hold over period,
plus all additional Rent and other sums due hereunder. If Tenant shall fail
immediately to surrender possession of the Leased Premises to Landlord upon
termination of this Lease, by lapse of time or otherwise, and Landlord has
not agreed to such continued possession, as above provided, then, until
Landlord can dispossess Tenant under the terms hereof or otherwise, Tenant
shall pay Landlord from time to time upon demand, as Base Rent for the period
of any such hold over, an amount equal to twice the Base Rent in effect on
the date of termination, computed on a daily basis for each day of the hold
over period, plus all additional Rent and other sums due hereunder. No
holding over by Tenant, whether with or without consent of Landlord, shall
operate to extend this Lease except as otherwise expressly agreed by the
parties. The preceding provisions of this Paragraph shall not be construed
as Landlord's consent for Tenant to hold over.
32. RIGHTS OF MORTGAGEE: Tenant accepts this Lease subject and subordinate
to any recorded mortgage, deed of trust or other lien (a "Mortgage")
presently existing or hereafter to exist with respect to the Leased Premises.
Further, but without limiting the preceding sentence, Landlord is hereby
irrevocably vested with full power and authority to subordinate and/or to
evidence such subordination of Tenant's interest under this Lease to any
Mortgage hereafter placed on the Leased Premises, and Tenant agrees upon
demand to execute such additional instruments subordinating this Lease, and
further defining the terms of such subordination, as well as the attornment
discussed below, as Landlord or the holder of any such Mortgage, may require.
Tenant agrees to provide to the holder of any such Mortgage, whose name and
address have been provided to Tenant (a "Mortgagee"), a copy of each notice
to Landlord which alleges any act, omission, or condition that
COMMERCIAL LEASE AGREEMENT - PAGE 22
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might constitute a default by Landlord hereunder and Mortgagee, in its sole
discretion, shall have all rights of Landlord hereunder to cure any such
default. If the interests of Landlord under this Lease shall be transferred
by reason of foreclosure or other proceedings for enforcement of any Mortgage
on the Leased Premises, at the election of the transferee (sometimes called
the "Purchaser") Tenant shall be bound to the Purchaser under the terms and
conditions of this Lease for the balance of the remaining Lease term,
including any extensions or renewals, with the same force and effect as if
the Purchaser were Landlord under this Lease; provided, however, that such
Purchaser shall not be liable or bound to Tenant (i) for any act or omission
of any prior landlord, (ii) for any offsets or defenses which Tenant might
have against any prior landlord, (iii) for or by any Rent which Tenant might
have paid for more than the current month, (iv) by any amendment or
modification of, or consensual termination agreement with respect to, the
Lease made without the Mortgagee's consent, (v) for any Security Deposit
given by Tenant to a prior landlord unless such deposit is actually received
by such Purchaser, (vi) for any repairs or replacements required by this
Lease arising prior to the date Purchaser takes possession of the Leased
Premises, or (vii) for any moving, relocation or refurbishment allowance or
any construction of or payment or allowance for tenant improvements to the
Leased Premises or any part thereof for the benefit of Tenant except as set
forth in this Lease. Tenant further agrees at the election of the Purchaser
to attorn to the Purchaser, including the Mortgagee if it be the Purchaser,
as its Landlord. Such attornment shall be effective without the execution of
any further instruments upon the Purchaser's succeeding to the interest of
Landlord under this Lease. The respective rights and obligations of Tenant
and the Purchaser upon the attornment, to the extent of the then remaining
balance of the term of this Lease and any extensions and renewals, shall be
and are the same as those set forth in this Lease, but Tenant agrees upon
demand to execute such additional instruments defining the terms of such
attornment as Landlord or the Purchaser may require. Each such Mortgagee and
each such Purchaser shall be a third-party beneficiary of the provisions of
this Paragraph.
*Upon written request by Tenant and provided Tenant is not in default of any
terms, conditions, or provisions of the Lease, Landlord agrees to use best
efforts to obtain a non-disturbance agreement from any lender or purchaser.
33. ESTOPPEL CERTIFICATES: Tenant agrees to furnish on the Commencement
Date of this Lease and from time to time within ten (10) days of request by
Landlord or Landlord's mortgagee, a statement certifying that the Tenant is
in possession of the Leased Premises; the Leased Premises are acceptable;
this Lease is in full force and effect; this Lease is unmodified; Tenant
claims no present charge, lien, or claim of offset against Rent; the Rent is
paid for the current month but is not paid and will not be paid for more than
one month in advance (except estimated additional Rent under Paragraph 6);
there is no existing default under this Lease; and such other matters as may
be reasonably required by Landlord or Landlord's mortgagee.
34. SUCCESSORS: This Lease shall be binding upon and inure to the benefit
of Landlord and Tenant and their respective heirs, personal representatives,
successors and assigns. It is hereby covenanted and agreed that should
Landlord's interest in the Leased Premises cease to exist for any reason
during the term of the Lease, then notwithstanding the happening of such
event, at the election of Landlord's successor herein, this Lease shall
nevertheless remain unimpaired and in full force and effect and Tenant
hereunder agrees to attorn to the then owner of the Leased Premises.
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35. REAL ESTATE COMMISSION: Tenant represents and warrants that is has dealt
with no broker, agent, or other person other than Bradford Realty Services of
Dallas, Inc., Mark Aston, in connection with this transaction, and that no
other broker, agent, or other person brought about this transaction. Landlord
and Tenant each agree to indemnify and hold the other harmless from and against
any claims by any broker, agent, or other person claiming a commission or other
form of compensation by virtue of having dealt with Tenant or Landlord
respectively with regard to this transaction. The provisions of this Paragraph
shall survive the termination of this Lease.
36. DEFAULT BY LANDLORD: Landlord shall not be in default, and Tenant shall
have no right to any remedy at law or in equity, unless the act, omission, or
condition allegedly giving rise to such default shall have continued uncured or
unabated for a period of thirty (30) days following written notice to Landlord
(with a copy to any Mortgagee as provided in Paragraph 32 above) or, if such
cure or abatement cannot be accomplished within said 30-day period, then, so
long as Landlord or Mortgagee has commenced such cure or abatement within such
30-day period and diligently pursues same, such period shall be extended a
reasonable time to allow completion of the cure or abatement.
37. MECHANIC'S LIENS: Tenant shall have no authority, express or implied, to
create or place any lien or encumbrance of any kind or nature whatsoever upon,
or in any manner to bind, the interest of Landlord in the Leased Premises or
the Project or to charge the Rent payable hereunder for any claim in favor of
any person dealing with Tenant, including those who may furnish materials or
perform labor for any construction or repairs. Each such claim shall affect,
and each such lien shall attach to, if at all, only the leasehold interest
granted to Tenant by this Lease. Tenant covenants and agrees that it will pay
or cause to be paid all sums legally due and payable by it on account of any
labor performed or materials furnished in connection with any work performed on
the Leased Premises on which any lien is or can be validly and legally asserted
against its leasehold interest in the Leased Premises or the improvements
thereon. Tenant further agrees to save and hold Landlord harmless from any and
all loss, cost, or expense based on or arising out of claims or liens asserted
by parties by virtue of their dealings with Tenant and encumbering the
leasehold estate or the right, title and interest of the Landlord in the Leased
Premises or the Project. Under no circumstances shall Tenant be or hold itself
out to be the agent or representative of Landlord with respect to any
Alterations of the Leased Premises whether or not consented to or approved by
Landlord hereunder.
38. HAZARDOUS WASTE: The term "Hazardous Substances," as used in this Lease
shall mean petroleum and petroleum products and by-products, crude oil,
pollutants, contaminants, toxic or hazardous wastes, or any other substances,
the use of which is regulated, restricted, prohibited or penalized, or the
removal or disposal of which is required, by any "Environmental Laws," which
term shall mean any and all federal, state or local law, ordinance or other
statute of a governmental or quasi-governmental authority relating to the
pollution or protection of the environment. Tenant hereby agrees that (i) no
activity will be conducted on the Leased Premises that will produce any
Hazardous Substances; (ii) the Leased Premises will not be used in any manner
not in compliance with local and federal laws for the storage of any Hazardous
Substances; (iii) no portion of the
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Leased Premises will be used as a landfill or a dump; (iv) Tenant will not
install any underground tanks of any type; (v) Tenant will not allow any
surface or subsurface conditions to exist or come into existence that
constitute, or with the passage of time may constitute, a public or private
nuisance; and (vi) Tenant will not permit any Hazardous Substances to be
brought onto the Leased Premises, and if so brought thereon, then the same
shall be stored and used in compliance with all local and federal laws
regarding same. Landlord or Landlord's representative shall have the right
but not the obligation to enter the Leased Premises for the purpose of
ensuring compliance with all Environmental Laws. If Tenant in any manner
contaminates the Leased Premises, then Tenant shall promptly and diligently
institute proper and thorough clean-up procedures at Tenant's sole cost.
Landlord hereby agrees to defend, indemnify and hold Tenant, its employees,
partners, agents, contractors, officers and directors and their heirs,
successors, and assigns harmless from any and all costs (including costs of
litigation), reasonable attorneys' fees, expenses, liabilities, claims,
damages or judgements arising or alleged to occur, and that result, or are
alleged to result from the actual, or threatened discharge, dispersal,
disposal, release or escape of Hazardous Substances or other wastes or
pollutants (including, but not limited to asbestos, solid, liquid, gaseous or
thermal irritants or contaminants, smoke, vapor, soot, fumes, acids, alkalis,
chemicals, and water materials to be recycled, reconditioned or reclaimed),
but only as the same are a direct result of any act or omission of Landlord
or its agents, employees, contractors or subcontractors. Tenant hereby
agrees to defend, indemnify and hold Landlord, its employees, agents,
partners, contractors, officers and directors and their heirs, successors,
and assigns harmless from any and all costs (including costs of litigation),
reasonable attorneys' fees, expenses, liabilities, claims, damages or
judgements arising or alleged to occur, and that result, or are alleged to
result from the actual, or threatened discharge, dispersal, disposal, release
or escape of Hazardous Substances or other wastes or pollutants (including,
but not limited to asbestos, solid, liquid, gaseous or thermal irritants or
contaminants, smoke, vapor, soot, fumes, acids, alkalis, chemicals, and water
materials to be recycled, reconditioned or reclaimed), but only as the same
are a direct result of any act or omission of Tenant or Tenant's
Representatives.
39. ENTIRE AGREEMENT AND LIMITATION OF WARRANTIES: It is expressly agreed by
Tenant, as a material consideration for the execution of this Lease, that this
Lease is the entire agreement of the parties and that there are and were no
verbal representations, warranties, understandings, stipulations, agreements,
or promises pertaining to this Lease not incorporated in this Lease. Tenant
expressly agrees that there are and shall be no implied warranties of
merchantability, fitness, habitability, or of any other kind and that Tenant's
acceptance of the Leased Premises shall be "as is". It is likewise agreed that
this Lease may not be altered, waived, amended, or extended except by an
instrument in writing signed by both Landlord and Tenant. Not in limitation
upon the foregoing, Landlord agrees that to the extent assignable, all
warranties, if any shall exist, from contractors or suppliers with respect to
the improvements to the Leased Premises hereunder are hereby partially assigned
to Tenant to the extent necessary to avail Tenant of the benefits thereof with
respect to its leasehold estate and property located at the Leased Premises.
40. FINANCIAL STATEMENTS: From time to time Landlord may need to obtain
financing or renew financing on the Project, or perform calculations for
various reasons regarding the value of the Project. Tenant hereby agrees to
provide to Landlord financial statements on its business when
COMMERCIAL LEASE AGREEMENT - PAGE 25
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<PAGE>
requested, but not more than once annually, indicating the most current year
end and quarterly financial status of the business. Landlord will not
deliver such financial statement to any third party except in confidence and
only as required by Landlord's lenders or in conjunction with appraisals of
the Project.
41. FORCE MAJEURE:
(a) Landlord shall not be required to perform any covenant or obligation
of this Lease or be liable in damages to Tenant for that time period during
which the performance or non-performance of the covenant or obligation is
delayed, caused by, or prevented by Tenant or Tenant's Representatives or by an
act of God or force majeure.
(b) Except with respect to the payment of Rent or any other sum due
hereunder, Tenant shall not be required to perform any covenant or obligation
of this Lease or be liable in damages to Landlord for that time period during
which the performance or non-performance of the covenant or obligation is
delayed, caused by, or prevented by Landlord or Landlord's Representatives or
by an act of God or force majeure.
(c) An "act of God" or "force majeure" is defined for purposes of this
Lease as strikes, lockouts, sit-downs, material or labor restrictions by any
governmental authority, riots, floods, washouts, explosions, earthquakes, fire,
storms, acts of the public enemy, wars, insurrections and any other similar
cause not reasonably within the control of Landlord and which by the exercise
of due diligence Landlord is unable, wholly or in part, to prevent or overcome.
42. MISCELLANEOUS:
(a) Words of any gender used in this Lease shall be held and construed to
include any other gender; and words in the singular number shall be held to
include the plural, unless the context otherwise requires.
(b) Each party agrees to furnish to the other, promptly upon demand, a
corporate resolution, proof of due authorization by partners, or other
appropriate documentation evidencing the due authorization and power of such
party to enter into this Lease and the empowerment and authority of the
individual signing below to bind his or her principal.
(c) The captions inserted in this Lease are for convenience only and in
no way define, limit, or otherwise describe the scope or intent of this Lease
or any provision hereof, or in any way affect the interpretation of this Lease.
(d) If any clause or provision of this Lease is illegal, invalid, or
unenforceable under present or future laws effective during the term of this
Lease, then and in that event, it is the intention of the parties hereto that
the remainder of this Lease shall not be affected thereby; and it is also the
intention of the parties to this Lease that in lieu of each clause or provision
of this Lease that is illegal, invalid, or unenforceable there be added as a
part of this Lease a clause as similar in
COMMERCIAL LEASE AGREEMENT - PAGE 26
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terms to such illegal, invalid, or unenforceable clause or provision as may
be possible and be legal, valid, and enforceable.
(e) Intentionally deleted
(f) All references in this Lease to "the date hereof" or similar
references shall be deemed to refer to the last date, in point of time, on
which all parties hereto have executed this Lease.
(g) In the event that Tenant shall fail to perform any duty or obligation
hereunder, whether maintenance, repair or replacement of the Leased Premises,
maintenance of insurance, or otherwise, then Landlord may, but shall in no
event be obligated to, without notice of any kind, take such actions as
Landlord deems necessary or appropriate to remedy such Tenant failure, and any
sums expended by Landlord together with fair and just compensation for the time
and effort of Landlord in such efforts shall be deemed additional Rent
hereunder due and payable by Tenant on demand.
(h) If Tenant shall fail to pay, when the same is due and payable, any
Rent or any other sum due hereunder, such unpaid amount shall bear interest
from the tenth (10th) day after the due date thereof to the date of remittance
at the rate of the lesser of 18% per annum and the maximum rate allowed by law.
(i) Landlord does not in any way or for any purpose become a partner with
Tenant in the conduct of its business or otherwise, nor a member of a joint
venture with Tenant.
(j) Tenant shall not record this Lease without the prior written consent
of Landlord. However, upon the request of either party hereto, the other party
shall join in the execution of a memorandum or so-called "short form" of this
Lease for the purposes of recordation.
(k) Time is of the essence in the performance of all the covenants,
conditions, and agreements contained in this Lease.
(l) Any duty, obligation, or debt and any right or remedy arising
hereunder and not otherwise consummated and/or extinguished by the express
terms hereof at or as of the time of termination of this Lease, whether at the
end of the term hereof or otherwise, shall survive such termination as
continuing duties, obligations, and debts of the obligated party to the other
or continuing rights and remedies of the benefited party against the other.
(m) This Agreement may be executed in one or more counterparts, each of
which counterpart shall for all purposes be deemed to be an original; but all
such counterparts together shall constitute but one instrument.
(n) Attached hereto, marked Exhibit "A" through Exhibit "__", are certain
exhibits to this Lease all of which are hereby incorporated herein by
reference.
43. NOTICE:
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(a) All Rent and other payments required to be made by Tenant to Landlord
shall be payable to Landlord at the address set forth below or any other
address that Landlord may specify from time to time by written notice delivered
to Tenant.
(b) All payments, if any, required to be made by Landlord to Tenant shall
be payable to Tenant at the address set forth below or at any other address
that Tenant may specify from time to time by written notice delivered to
Landlord.
(c) Any notice or document required or permitted to be delivered by this
Lease shall be deemed to be delivered (whether or not actually received) when
deposited in the United States Mail, postage prepaid, certified mail return
receipt requested, addressed to the parties at the respective addresses set
forth below or such other address as hereinafter specified by notice given in
accordance with this paragraph.
44. LIMITATION ON TENANT'S DAMAGES: Tenant agrees that any liability of
Landlord under this Lease shall be limited solely to Landlord's interest in the
Project, and no other assets of Landlord shall be subject to levy or execution.
Executed by Landlord and Tenant as of the below dates.
LANDLORD TENANT
JACKSON-SHAW TECHNOLOGY ADAMS GOLF, INC., A TEXAS CORPORATION
CENTER II, LTD.
4890 Alpha Road 2801 E. Plano Parkway
Suite 100 Suite
Dallas, Texas 75244 Plano, Texas 75074
By:Jackson-Shaw/Texas, Inc., By: Richard Murtland
General Partner ----------------------------
By : J. Michael Berg Its: V.P. Operations
------------------ ----------------------
Its: Vice President
------------------
Date: April 6, 1998 Date: April 3, 1998
-------------------- ----------------------
EXHIBIT "A"
LEGAL DESCRIPTION
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EXHIBIT "B"
TENANT IMPROVEMENTS
Landlord agrees, at Landlord's expense, to install the tenant improvements per
the attached plans and specifications provided such plans and specifications
have been approved by Landlord and Tenant. Landlord's estimate of the cost of
these improvements is $461,944.00 ($14.00 per square foot). Should the actual
construction costs exceed $461,944.00, Tenant shall pay such excess to
Landlord prior to the commencement of the construction. This construction
allowance is based on the cost to duplicate Tenant's finishes and space
allocation in its current Leased Premises.
COMMERCIAL LEASE AGREEMENT - PAGE 29
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ADDENDUM
This Addendum is entered into this ______day of March, 1998, between JACKSON-
SHAW TECHNOLOGY CENTER II, LTD., as Landlord, and ADAMS GOLF, INC., as Tenant.
This Addendum is an integral part of that certain Commercial Lease Agreement
dated as of the date hereof between Landlord and Tenant to which it is attached
(the "Lease"). If the terms and provisions of this Addendum conflict with those
of the Lease, those of this Addendum shall prevail.
1) RENEWAL OPTION: Tenant is granted the option to extend the term of this
Lease for one (1) extended term of five (5) years, provided no event of default
exists at the time of exercise of the option and no condition exists which with
the giving of notice or the passage of time or both would constitute an event
of default, and Tenant gives written notice of its exercise of the option at
least one hundred eighty (180) days prior to the expiration of the original
term. The extension term shall be upon the same terms and conditions as set
forth herein, except Tenant shall have no further right of renewal after the
extension term prescribed above, and the Base Rental will be equal to the then
prevailing rate for comparable space for a comparable term.
2) PARKING: Tenant shall be entitled to the non-exclusive use of the 115
parking spaces directly adjacent to the Leased Premises as shown on the
attached site plan.
3) EXPANSION: If during the term of this Lease agreement, Landlord leases to
or sells to Tenant a space or building of a size larger than the present Leased
Premises in any development owned by Landlord or any affiliate of Landlord,
Tenant's then remaining obligations due under this Lease agreement shall be
terminated upon the commencement date of the new lease or purchase agreement.
Not withstanding the above-stated, Tenant shall remain obligated to pay for any
Rents or other sums due Landlord as a result of Tenant's tenancy hereunder, and
such obligation shall survive the termination of this Lease pursuant to this
Paragraph 3.
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EXHIBIT 10.5
[ADAMS GOLF LETTERHEAD]
April 13, 1998
Darl P. Hatfield
601 Liechty Court
Heath, Texas 75087
Dear Darl:
I enjoyed the opportunity to visit with you concerning our current
search of a senior financial executive. Your past experience with KPMG Peat
Markwich LLP has provided you with a strong compliment of financial and
administrative skills which match very well with our current needs.
Based on your educational background, interpersonal skills, professional
experience and overall executive presence, I am pleased to offer you the
position of Senior Vice President, Finance and Administration with Adams Golf.
As the Sr. VP, Finance and Administration, you will report directly to
me, the Chief Executive Officer, and will interact across all of our
organizational levels. You will be responsible for the establishment and
sustained maintenance of financial policies, procedures and practices as well
as the financial objectives for Adams, which is experiencing rapid growth and
profitability.
Additionally, you have the responsibility for the development of
financial plans, analysis, mergers and acquisition analysis and accounting
for the Company. You will be responsible for establishing weekly meetings
with the senior executive staff to ensure both financial and operational
objectives are being achieved. As the Sr. VP, Finance and Administration you
will be responsible for maintaining and enhancing the financial liquidity of
the Company and negotiating substantial annual capital funding requirements.
These responsibilities include all cash management, credit and collections,
banking relationships and negotiations and presentations to the investment
community.
You will be an employee of Adams Golf Management Corporation, and your
compensation will be as follows:
<PAGE>
Darl P. Hatfield
April 13, 1998
Page 2
Base Monthly Salary: $12,500--paid by-monthly ($150,000 annual
salary)
Performance Bonus All bonus awards will be made pursuant to
the Company's Bonus Plan.
(Two tier bonus)
First Tier: Up to 50% of your annual base salary, based
on achieving corporate revenue goals--paid
quarterly.
Second Tier: Up to an annual 30% of your annual base
salary, based on achieving department
goals--paid quarterly.
Equity Participation: 45,000 stock options (pre-split), 50%
(22,500 shares) to be vested the sooner of
one (1) year or upon the successful
completion of a public offering, with the
remaining 50% (22,500 shares) vested
equally (7,500 shares per year) over the
subsequent three year period. Such options
will have a strike price of $5 per share.
Change of Control: Should Adams Golf be acquired, merged or
experience any change of corporate
leadership that would lead to your
termination without cause, your Adams Golf
Stock Options will become fully vested.
Additionally, you will receive one year (12
months) of base salary compensation.
However, should you be terminated for cause
there will be no continuation of salary or
any other benefits. In the event of your
termination for cause, all non-vested
options will expire.
Employee Benefits: You will participate in Adams Golf's group
health and other benefits (i.e., vacation,
etc.) in accordance with our group benefit
programs.
Reimbursement of Cost of It is our understanding that due to
Rabbi Trust: independence requirements imposed by the
SEC that if the Company completes a public
offering that KPMG will be required to fund
certain pension payments into a "Rabbi"
trust. In conection with this requirement,
if KPMG charges you an interest rate
differential,
<PAGE>
Darl P. Hatfield
April 13, 1998
Page 3
Adams Golf will pay such cost up to a
maximum of $50,000 for your estimated
remaining lifetime.
Darl, we are very excited about you joining our team at Adams Golf
effective May 1, 1998, and believe your skills and abilities will be key
ingredients in our continued success. Please sign this letter below and
return on of the enclosed originals to me.
I look forward to working with you and achieving the potential we have
together.
Best Regards,
/s/ B. H. Adams
B. H. (Barney) Adams
Chief Executive Officer
Accepted by: /s/ Darl P. Hatfield Date: April 13, 1998
------------------------------ -------------------
Darl P. Hatfield
<PAGE>
ADAMS GOLF EXHIBIT 11-1
COMPUTATION OF INCOME (Loss) PER SHARE
<TABLE>
Years Ended December 31, Three Months Ended March 31,
---------------------------------------- ----------------------------
1995 1996 1997 1997 1998
---------------------------------------- ----------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
BASIC INCOME (Loss) PER SHARE:
Net Income (Loss) $ (242,669) $ 12,747 $(4,654,217) $ 45,295 $ 5,642,348
---------------------------------------- ----------------------------
---------------------------------------- ----------------------------
Weighted Average Shares Outstanding 4,423,146 11,234,794 12,519,392 11,873,234 17,662,189
---------------------------------------- ----------------------------
---------------------------------------- ----------------------------
Income (Loss) Per Share $ (0.05) 0.00 $ (0.37) $ 0.00 $ 0.32
---------------------------------------- ----------------------------
---------------------------------------- ----------------------------
DILUTED INCOME (Loss) PER SHARE:
Net Income (Loss) $ (242,669) $ 12,747 $(4,654,217) $ 45,295 $ 5,642,348
---------------------------------------- ----------------------------
---------------------------------------- ----------------------------
Weighted Average Shares Outstanding 4,423,146 11,234,794 12,519,392 11,873,234 17,662,189
Effect of Dilutive Shares-Stock Options* -- -- -- -- 678,263
---------------------------------------- ----------------------------
Total Weighted Average Dilutive Shares 4,423,146 11,234,794 12,519,392 11,873,234 18,340,452
---------------------------------------- ----------------------------
Income (Loss) Per Share $ (0.05) $ 0.00 $ (0.37) $ 0.00 $ 0.31
---------------------------------------- ----------------------------
---------------------------------------- ----------------------------
</TABLE>
* Stock options outstanding for the years ended December 31, 1995, 1996 and
1997 and the three months ended March 31, 1997 were not considered in the
computation of net income (loss) per common share since their effect is
immaterial or antidilutive.
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Adams Golf, Inc. and subsidiaries:
We consent to the use of our report included herein and to the reference to
our firm under the headings "Selected Consolidated Financial Information" and
"Experts" in the prospectus.
KPMG PEAT MARWICK LLP
Dallas, Texas
June 10, 1998
<PAGE>
EXHIBIT 23.3
CONSENT
We hereby consent to the use of our name under the caption "Experts" in
the Prospectus forming a part of the Registration Statement and do hereby
confirm the statements therein made.
/s/ Nicholas J. Aquilino
Aquilino & Welsh
Arlington, Virginia
June 9, 1998
