<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10962
CALLAWAY GOLF COMPANY
(Exact name of registrant as specified in its charter)
California 95-3797580
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2285 Rutherford Road, Carlsbad, CA 92008-8815
(760) 931-1771
(Address, including zip code and telephone number, including area code, of
principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
The number of shares outstanding of the Registrant's Common Stock, $.01
par value, as of October 31, 1997 was 74,730,267.
<PAGE>
CALLAWAY GOLF COMPANY
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheet at September 30, 1997
and December 31, 1996 3
Consolidated Condensed Statement of Income for the three
and nine months ended September 30, 1997 and 1996 4
Consolidated Condensed Statement of Cash Flows for the nine
months ended September 30, 1997 and 1996 5
Consolidated Condensed Statement of Shareholders' Equity for
the nine months ended September 30, 1997 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Part II. Other Information 17
</TABLE>
2
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED BALANCE SHEET
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
- - ------
Current assets:
Cash and cash equivalents $ 41,493 $ 108,457
Accounts receivable, net 161,872 74,477
Inventories, net 67,369 98,333
Deferred taxes 26,483 25,948
Other current assets 11,084 4,298
--------- ---------
Total current assets 308,301 311,513
Property, plant and equipment, net 126,545 91,346
Other assets 136,276 25,569
--------- ---------
$ 571,122 $ 428,428
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- - ------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 20,473 $ 14,996
Accrued employee compensation and
benefits 38,114 16,195
Accrued warranty expense 28,049 27,303
Income taxes payable 2,701 2,558
--------- ---------
Total current liabilities 89,337 61,052
Long-term liabilities 6,762 5,109
Commitments and contingencies (Note 7)
Shareholders' equity:
Preferred Stock, $.01 par value,
3,000,000 shares authorized, none
issued and outstanding at September
30, 1997 and December 31, 1996,
respectively
Common Stock, $.01 par value,
240,000,000 shares authorized,
74,597,967 and 72,855,222 issued
and outstanding at September 30,
1997 and December 31, 1996,
respectively 746 729
Paid-in capital 364,424 278,669
Unearned compensation (3,862) (3,105)
Retained earnings 298,553 238,349
Less: Grantor Stock Trust
(5,300,000 shares) at market (184,838) (152,375)
--------- ---------
Total shareholders' equity 475,023 362,267
--------- ---------
$ 571,122 $ 428,428
========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED STATEMENT OF INCOME (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
---------------------------------- ----------------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $257,435 100% $194,545 100% $679,540 100% $539,685 100%
Cost of goods sold 118,666 46% 88,474 45% 319,026 47% 253,899 47%
-------- -------- -------- --------
Gross profit 138,769 54% 106,071 55% 360,514 53% 285,786 53%
Selling expenses 32,643 13% 21,728 11% 95,238 14% 61,727 11%
General and administrative
expenses 24,716 10% 19,326 10% 57,045 8% 61,440 11%
Research and development
costs 10,640 4% 5,245 3% 24,682 4% 11,653 2%
Litigation settlement (Note 8) 12,000 5% 12,000 2%
-------- -------- -------- --------
Income from operations 58,770 23% 59,772 31% 171,549 25% 150,966 28%
Other income, net 1,146 1,619 3,561 3,952
-------- -------- -------- --------
Income before income taxes 59,916 23% 61,391 32% 175,110 26% 154,918 29%
Provision for income taxes 22,867 22,973 66,773 58,108
-------- -------- -------- --------
Net income $ 37,049 14% $ 38,418 20% $108,337 16% $ 96,810 18%
======== ======== ======== ========
Earnings per common share $ .52 $ .54 $ 1.52 $ 1.38
======== ======== ======== ========
Common equivalent shares 71,648 71,065 71,382 70,390
======== ======== ======== ========
Dividends paid per share $ .07 $ .06 $ .21 $ .18
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
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CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Nine months ended
--------------------------------
September 30, September 30,
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 108,337 $ 96,810
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 12,797 9,377
Non-cash compensation 7,515 3,576
Increase (decrease) in cash resulting
from changes in:
Accounts receivable, net (73,431) (7,485)
Inventories, net 35,989 (28,794)
Deferred taxes (2,379) (4,665)
Other assets (6,351) (14,270)
Accounts payable and accrued
expenses 1,511 (1,524)
Accrued employee compensation and
benefits 24,259 23,162
Accrued warranty expense 746 3,520
Income taxes payable 240 11,017
Other liabilities 1,653 937
--------- --------
Net cash provided by operating 110,886 91,661
activities --------- --------
Cash flows from investing activities:
Acquisition of a business (129,256)
Capital expenditures (46,292) (21,156)
--------- --------
Net cash used in investing activities (175,548) (21,156)
--------- --------
Cash flows from financing activities:
Issuance of Common Stock 19,103 11,101
Tax benefit from exercise of stock
options 25,946 11,951
Dividends paid (14,264) (12,303)
Retirement of Common Stock (33,010)
--------- --------
Net cash (used in) provided by
financing activities (2,225) 10,749
-------- --------
Effect of exchange rate changes on cash (77) (80)
-------- --------
Net (decrease) increase in cash and
cash equivalents (66,964) 81,174
Cash and cash equivalents at beginning
of period 108,457 59,157
-------- --------
Cash and cash equivalents at end of
period $ 41,493 $140,331
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE>
CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Common Stock Paid-in Unearned Retained
Shares Amount Capital Compensation Earnings GST Total
------ ------ --------- ------------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 72,855 $729 $278,669 $(3,105) $238,349 $(152,375) $362,267
Exercise of stock options 2,502 25 19,078 19,103
Tax benefit from exercise of
stock options 25,946 25,946
Compensatory stock options 2,300 (757) 1,543
Employee stock purchase plan 372 4 5,968 5,972
Stock retirement (1,131) (12) (32,998) (33,010)
Cash dividends (15,377) (15,377)
Dividends on shares held by GST 1,113 1,113
Equity adjustment from foreign
currency translation (871) (871)
Adjustment of GST shares to market
value 32,463 (32,463)
Net income 108,337 108,337
------ ---- -------- ------- -------- --------- --------
Balance, September 30, 1997 74,598 $746 $364,424 $(3,862) $298,553 $(184,838) $475,023
====== ==== ======== ======= ======== ========= ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
6
<PAGE>
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of presentation
---------------------
The accompanying financial information for the three and nine months ended
September 30, 1997 and 1996 have been prepared by Callaway Golf Company (the
"Company") and have not been audited. These financial statements, in the opinion
of management, include all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the financial position, results
of operations and cash flows for all periods presented.
Certain information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K filed for the year ended December 31, 1996
and the Company's Current Report on Form 8-K dated August 8, 1997, as amended.
Interim operating results are not necessarily indicative of operating results
for the full year.
Certain prior period amounts have been reclassified to conform with the current
period presentation.
2. Inventories
-----------
Inventories at September 30, 1997 and December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
--------------- --------------
<S> <C> <C>
(Unaudited)
Inventories, net:
Raw materials $36,244 $ 50,012
Work-in-process 2,270 1,651
Finished goods 34,502 51,954
------- --------
73,016 103,617
Less reserve for obsolescence (5,647) (5,284)
------- --------
Net inventories $67,369 $ 98,333
======= ========
</TABLE>
3. Foreign currency exchange contracts
-----------------------------------
During the nine months ended September 30, 1997, the Company entered into
forward foreign currency exchange rate contracts to hedge payments due on
intercompany transactions from a wholly-owned foreign subsidiary. The effect of
this practice is to minimize variability in the Company's operating results
arising from foreign exchange rate movements. The Company does not engage in
foreign currency speculation. These foreign exchange contracts do not subject
the Company to risk due to exchange rate movements because gains and losses on
these contracts offset losses and gains on the intercompany transactions being
hedged, and the Company does not engage in hedging contracts which exceed the
amount of the intercompany transactions. At September 30, 1997, the Company had
approximately $5.2 million of foreign exchange contracts outstanding. The
contracts mature between October and December 1997. Gains and losses on these
contracts are recorded in net income. The net realized and unrealized gains from
foreign exchange contracts for the nine months ended September 30, 1997 totaled
approximately $357,000.
7
<PAGE>
4. Cash and cash equivalents
-------------------------
At September 30, 1997, the Company held investments in U.S. Treasury bills with
maturities of three months or less in the aggregate amount of $34.9 million.
Management determines the appropriate classification of its U.S. Government and
other debt securities at the time of purchase and reevaluates such designation
as of each balance sheet date. The Company has included these securities, net of
amortization, in cash and cash equivalents and has designated them as "held-to-
maturity."
The acquisition of substantially all of the assets and certain liabilities of
Odyssey Sports, Inc. ("Odyssey") (Note 6) necessitated the sale of certain held-
to-maturity debt securities from two weeks to two months prior to their
respective stated maturity dates and as a result are considered to be sold at
maturity under the provisions of Statement of Financial Accounting Standard
(SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." These debt securities were purchased at a discount and had an
amortized cost of $115.4 million when sold. No realized or unrealized gain or
loss resulted from the sale of these securities.
5. Earnings per share
------------------
Earnings per share are based upon the weighted average number of shares
outstanding during the period increased by the effect of dilutive stock options,
when applicable, using the treasury stock method. Earnings per common share and
common equivalent shares as presented on the face of the consolidated condensed
statement of income represent primary earnings per share. Dual presentation of
primary and fully diluted earnings per share has not been made because the
differences are insignificant.
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 128, "Earnings Per Share." SFAS No. 128
will be adopted by the Company as required in the fourth quarter of 1997. Upon
adoption of SFAS No. 128, the Company will present basic earnings per share and
diluted earnings per share. Basic earnings per share will be computed based on
the weighted average number of shares outstanding during the period. Diluted
earnings per share will be computed based on the weighted average number of
shares outstanding during the period increased by the effect of dilutive stock
options using the treasury stock method. Pro forma basic and diluted earnings
per share for the three and nine months ended September 30, 1997 and 1996 are
presented below:
<TABLE>
<CAPTION>
Three months ended Nine months ended
----------------------------- -----------------------------
September 30, September 30, September 30, September 30,
Pro forma: 1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Basic $.54 $.57 $1.59 $1.45
Diluted $.52 $.54 $1.52 $1.38
</TABLE>
6. Acquisition
-----------
On August 8, 1997, Callaway Acquisition, a wholly-owned subsidiary of the
Company, consummated its acquisition of substantially all of the assets and
certain liabilities of Odyssey, subject to certain adjustments as of the time of
closing. Odyssey manufactured and marketed the Odyssey(R) line of putters and
wedges with Stronomic(R) face inserts.
The cost to acquire substantially all of the assets and certain liabilities of
Odyssey, including professional fees directly related to the acquisition, was
approximately $129.3 million and has been accounted for using the purchase
method of accounting. The allocations of the acquisition cost amounts to assets
acquired and liabilities assumed are presented in the table that follows. The
amounts therein are estimates and are subject to revision once appraisals and
other studies of fair value are completed. Amounts allocated to trade name,
trademark, trade dress and goodwill are being amortized over 40 years. The
amount allocated to the process patent is being amortized over 16 years and the
covenant not to compete is being amortized over 3 years.
8
<PAGE>
<TABLE>
<CAPTION>
Assets acquired/liabilities assumed August 8, 1997
- - ----------------------------------- --------------
(in thousands)
<S> <C>
Accounts receivable $ 14,643
Inventories 6,000
--------
Total current assets 20,643
Property and equipment 1,360
Other assets 410
Trade name 69,629
Trademark and trade dress 29,841
Goodwill 2,036
Process patent 6,763
Covenant not to compete 1,641
--------
Total assets acquired 132,323
--------
Accounts payable and accrued liabilities (2,602)
Accrued compensation and related
benefits (465)
--------
Total liabilities assumed (3,067)
--------
Net assets acquired $129,256
========
</TABLE>
The following unaudited pro forma net sales, net income and earnings per share
data for the nine months ended September 30, 1997 and 1996 are based on the
respective historical financial statements of the Company and Odyssey. The pro
forma data presented for the nine months ended September 30, 1997 combines the
results of operations of the Company for the nine months ended September 30,
1997 with the results of operations of Odyssey for the nine months ended June
30, 1997 and assumes that the acquisition of substantially all of the assets and
certain liabilities of Odyssey had occurred on January 1, 1997. The pro forma
data presented for the nine months ended September 30, 1996 combines the results
of operations of the Company for the nine months ended September 30, 1996 with
the results of operations of Odyssey for the nine months ended June 30, 1996 and
assumes that the acquisition of substantially all the assets and certain
liabilities of Odyssey had occurred on January 1, 1996.
The pro forma financial data presented are not necessarily indicative of the
Company's results of operations that might have occurred had the transaction
been completed at the beginning of the periods specified, and do not purport to
represent what the Company's consolidated results of operations might be for any
future period.
<TABLE>
<CAPTION>
Nine months ended
-----------------------------
September 30, September 30,
1997 1996
------------- -------------
<S> <C> <C>
Net sales (in thousands) $723,586 $559,681
======== ========
Net income (in thousands) $110,169 $ 93,791
======== ========
Earnings per common share $ 1.54 $ 1.33
======== ========
</TABLE>
7. Commitments and contingencies
-----------------------------
In the normal course of business, the Company enters into certain long-term
purchase commitments with various vendors. The Company has agreements with one
of its suppliers which require the Company to purchase, under certain
conditions, a minimum of 25% of all graphite shafts required in the manufacture
of its golf clubs through May 1998.
9
<PAGE>
The Company has committed to purchase titanium golf clubheads costing
approximately $53.2 million from one of its vendors. These clubheads are to be
shipped to the Company in accord with a production schedule that extends into
1999.
During June 1997, the Company entered into an agreement with Saint Andrews Golf
Corporation to form All-American Golf LLC ("All-American") whereby the Company
is a 20% equity owner in All-American, which operates a nine-hole golf course,
performance center, training facility and driving range (the "Center") located
in Las Vegas, Nevada. As of September 30, 1997, the Company had made capital
contributions to All-American of $750,000. Additionally, the Company has agreed
to loan All-American up to $5.3 million, pursuant to a secured promissory note,
for purposes of construction and various other start-up costs. The note, which
is secured by certain assets of All-American, bears interest of 10% per annum
and is payable in monthly installments. Commencing on the fifth anniversary of
the Center's opening, the principal shall be repaid in 60 equal monthly
installments. As of September 30, 1997 the Company has advanced All-American
approximately $3.9 million under the secured promissory note. The balance of the
note will be advanced upon the completion of the final milestone.
The Company and its subsidiaries, incident to their business activities, from
time to time are parties to a number of legal proceedings in various stages of
development. The Company believes that the majority of these proceedings involve
matters as to which liability, if any, will be adequately covered by insurance.
Management believes that the probable result of these matters individually and
in the aggregate will not have a material adverse effect upon the Company's
financial position, results of operations or cash flows.
8. Litigation settlement
---------------------
On September 23, 1997, the Company settled a lawsuit brought against it and
certain officers of the Company by a former officer of the Company. Pursuant to
the settlement, the Company agreed to a six year employment agreement with the
officer, the payment of $12.0 million and the issuance of 600,000 stock options
at the market price on the date of grant. The Company is seeking coverage for
the costs of defending and settling this lawsuit with certain of its insurance
carriers and an insurance agent; however, no assurance can be given that any of
the costs will be recovered.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Statements used in this discussion that relate to future plans, events,
financial results or performance are forward-looking statements as defined under
the Private Securities Litigation Reform Act of 1995. Such statements are
subject to certain risks and uncertainties which could cause actual results to
differ materially from those anticipated. Readers are cautioned not to place
undue reliance on these forward-looking statements which speak only as of the
date hereof. The Company undertakes no obligation to republish revised forward-
looking statements to reflect events or circumstances after the date hereof or
to reflect the occurrence of unanticipated events. Readers are also urged to
carefully review and consider the various disclosures made by the Company which
describe certain factors which affect the Company's business, including the
disclosures made under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Certain Factors Affecting
Callaway Golf Company" below, as well as the Company's other periodic reports on
Forms 10-K and 10-Q and Current Reports on Form 8-K filed with the Securities
and Exchange Commission.
Certain Factors Affecting Callaway Golf Company
Growth in sales; seasonality
The Company believes that the growth rate in the world-wide golf equipment
market has been modest for the past several years, and this trend is likely to
continue. In addition, recent turmoil in the Southeast Asian financial markets
and its potential effect on Korea, Japan and the rest of Asia, combined with any
economic disruptions resulting from such turmoil, may have an adverse effect on
the Company's sales and results of operations. Although demand for the Company's
products has been generally strong during the quarter ended September 30, 1997,
no assurances can be given that the demand for the Company's
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existing products or the introduction of new products will continue to permit
the Company to experience its historical growth or maintain its historical
profit margin. Additionally, given the Company's current size and market
position, it is possible that further market penetration will prove more
difficult.
In the golf equipment industry, sales to retailers are generally seasonal due to
lower demand in the retail market in the cold weather months covered by the
fourth and first quarters. The Company's business generally follows this
seasonal trend and the Company expects this to continue.
Competition
The market in which the Company does business is highly competitive, and is
served by a number of well-established and well-financed companies with
recognized brand names. New product introductions by competitors continue to
generate increased market competition. While the Company believes that its
products and its marketing efforts continue to be competitive, there can be no
assurance that successful marketing activities by competitors will not
negatively impact the Company's future sales.
Additionally, the golf club industry, in general, has been characterized by
widespread imitation of popular club designs. A manufacturer's ability to
compete is in part dependent upon its ability to satisfy the various subjective
requirements of golfers, including the golf club's look and "feel," and the
level of acceptance that the golf club has among professional and other golfers.
The subjective preferences of golf club purchasers may also be subject to rapid
and unanticipated changes. There can be no assurance as to how long the
Company's golf clubs will maintain market acceptance.
New product introduction
The Company believes that the introduction of new, innovative golf equipment
will be important to its future success. As a result, the Company faces certain
risks associated with such a strategy. For example, new models and basic design
changes in golf equipment are frequently met with consumer rejection. In
addition, prior successful designs may be rendered obsolete within a relatively
short period of time as new products are introduced into the marketplace. New
designs must satisfy the standards established by the United States Golf
Association ("USGA") and the Royal and Ancient Golf Club of St. Andrews ("R&A")
because these standards are generally followed by golfers within their
respective jurisdictions. There is no assurance that new designs will receive
USGA and/or R&A approval, or that existing USGA and/or R&A standards will not be
altered in ways that adversely affect the sales of the Company's products.
Moreover, the Company's new products have tended to incorporate significant
innovations in design and manufacture, which have resulted in increasingly
higher prices for the Company's products relative to products already in the
marketplace. There can be no assurance that a significant percentage of the
public will always be willing to pay such prices for golf equipment. In
addition, the materials and unique clubhead designs incorporated in the
Company's Great Big Bertha(R) Tungsten.Titanium Irons require more sophisticated
and lengthy manufacturing processes than the Company's existing products. To
date, the Company has been unable to supply the Great Big Bertha(R)
Tungsten.Titanium Irons in sufficient quantities to meet fully the demand for
this new product. Thus, although the Company has achieved certain successes in
the introduction of its golf clubs in the past, no assurances can be given that
the Company will be able to continue to design and manufacture golf clubs that
achieve market acceptance in the future.
Product breakage
Since the Company does not rely upon traditional designs in the development of
its golf clubs, its products may be more likely to develop unanticipated
problems than those of many of its competitors which use traditional designs.
For example, clubs have been returned with cracked clubheads, broken graphite
shafts and loose medallions. While any breakage or warranty problems are deemed
significant to the Company, the incidence of clubs returned as a result of
cracked clubheads, broken graphite shafts, loose medallions and other product
problems to date has not been material in relation to the volume of Callaway
Golf clubs which have been sold. The Company monitors closely the level and
nature of any product breakage and, where appropriate, seeks to incorporate
design and
11
<PAGE>
production changes to assure its customers of the highest quality available in
the market. The Company's recently introduced Biggest Big Bertha(TM) Drivers,
because of their large clubhead size and extra long graphite shafts, have
experienced breakage at a rate higher than generally experienced with the
Company's other metal woods. Significant increases in the incidence of breakage
or other product problems may adversely affect the Company's sales and image
with golfers.
Dependence on certain vendors
The Company is dependent on a limited number of suppliers for its clubheads and
shafts. In addition, some of the Company's products require specifically
developed techniques and processes which make it difficult to identify and
utilize alternative suppliers quickly. Consequently, if any significant delay or
disruption in the supply of these component parts occurs, it may have a material
adverse effect on the Company's business. In the event of a significant delay or
disruption, the Company believes that suitable clubheads and shafts could be
obtained from other manufacturers, although the transition to other suppliers,
particularly with respect to the Great Big Bertha(R) Tungsten.Titanium(TM)
Irons, could result in significant production delays and an adverse impact on
results of operations during the transition.
The Company uses United Parcel Service ("UPS") for substantially all ground
shipments of products to its domestic customers. While the Company is seeking to
arrange alternative methods of ground shipping to reduce its reliance on UPS,
there can be no assurance that the Company will be successful in doing so.
Intellectual property and proprietary rights
The Company has an active program of enforcing its proprietary rights against
companies and individuals who market or manufacture counterfeits and "knock off"
products, and aggressively asserts its rights against infringers of its patents,
trademarks, and trade dress. However, there is no assurance that these efforts
will reduce the level of acceptance obtained by these infringers. Additionally,
there can be no assurance that other golf club manufacturers will not be able to
produce successful golf clubs which imitate the Company's designs without
infringing any of the Company's patents, trademarks, or trade dress.
An increasing number of the Company's competitors have, like the Company itself,
sought to obtain patent, trademark or other protection of their proprietary
rights and designs. From time to time others have or may contact the Company to
claim that they have proprietary rights which have been infringed by the Company
and/or its products. The Company evaluates any such claims and, where
appropriate, has obtained or sought to obtain licenses or other business
arrangements. To date, there have been no interruptions in the Company's
business as the result of any claims of infringement. No assurance can be given,
however, that the Company will not be adversely affected in the future by the
assertion of intellectual property rights belonging to others. This effect could
include alteration of existing products, withdrawal of existing products and
delayed introduction of new products.
Various patents have been issued to the Company's competitors in the golf ball
industry. As Callaway Golf Ball Company develops a new golf ball product, it
must avoid infringing on these patent or other intellectual property rights, or
it must obtain licenses to use them lawfully. If any new golf ball product was
found to infringe on protected technology, the Company could incur substantial
costs to redesign its golf ball product or to defend legal action taken against
it. Despite its efforts to avoid such infringements, there can be no assurance
that Callaway Golf Ball Company will not infringe on the patents and other
intellectual property rights of third parties in its development efforts, or
that it will be able to obtain licenses to use any such rights, if necessary.
"Gray market" distribution
While the Company seeks to control the distribution of its products to the
extent permitted by law, it is still the case that quantities of the Company's
products find their way to unapproved outlets or distribution channels. This
"gray market" in the Company's products can undermine approved retailers and
distributors who promote and support the Company's products, and can injure the
Company's image in the minds of its customers and consumers. On the
12
<PAGE>
other hand, stopping such commerce could result in an increase in sales returns
over historical levels, and/or a potential decrease in sales to those customers
who are selling Callaway Golf products to unauthorized distributors. While the
Company has taken some lawful steps to limit commerce in its products in the
"gray market" in both domestic and international markets, it has not been
successful in stopping such commerce to date.
Professional endorsements
The Company also establishes relationships with professional golfers in order to
promote the Callaway Golf brand among both professional and amateur golfers. The
Company has entered into endorsement arrangements with members of the Senior
Professional Golf Association's Tour, the Professional Golf Association's Tour,
the Ladies Professional Golf Association's Tour, the European Professional Golf
Association's Tour and the Nike Tour. While most professional golfers fulfill
their contractual obligations, some have been known to stop using a sponsor's
products despite contractual commitments. If one or more of Callaway Golf's pro
endorsers were to stop using Callaway Golf's products contrary to their
endorsement agreements, the Company's business could be adversely affected in a
material way by the negative publicity.
New business ventures
Beginning in 1995, the Company began to evaluate and pursue new business
ventures which it believes constitute potential growth opportunities in and
outside of the golf equipment industry. The Company has invested, and expects to
continue to invest, significant capital resources in these new ventures in the
form of research and development, capital expenditures and the hiring of
additional personnel. There can be no assurance that new ventures will lead to
new product offerings or otherwise increase the revenues and profits of the
Company. Like all new businesses, these ventures require significant management
time, involve a high degree of risk and will present many new challenges for the
Company. There can be no assurance that these activities will be successful, or
that the Company will realize appropriate returns on its investments in these
new ventures.
International distribution
The Company's management believes that controlling the distribution of its
products throughout the world will be an element in the future growth and
success of the Company. Executing a business strategy to achieve this has and
will result in additional investments in inventory, accounts receivable,
corporate infrastructure and facilities. It could also result in disruptions in
the distribution of the Company's products in some areas. There can be no
assurance that the acquisition of some or all of the Company's foreign
distributors will be successful, and it is possible that an attempt to do so
will adversely affect the Company's business.
The Company, through a distribution agreement, appointed Sumitomo Rubber
Industries, Ltd. ("Sumitomo") as the sole distributor of the Company's golf
clubs in Japan. The current distribution agreement began in February 1993 and
runs through December 31, 1999. The Company has been engaged in discussions
regarding a possible restructuring of the Company's distribution arrangements
with Sumitomo, which is intended to streamline the distribution of the Company's
products in Japan. There can be no assurance, however, that such a restructuring
will occur, or if consummated, that the proposed restructuring will achieve its
intended goals. It is possible that the attempt to restructure the Company's
distribution arrangements in Japan, or the failure to succeed in that attempt,
will adversely affect the Company's business in Japan.
Golf ball development
In June 1996, the Company formed Callaway Golf Ball Company, a wholly-owned
subsidiary of the Company, for the purpose of designing, manufacturing and
selling golf balls. The Company has previously licensed the manufacture and
distribution of a golf ball product in Japan and Korea. The Company also
distributed a golf ball under the trademark "Bobby Jones." These golf ball
ventures were not commercially successful.
The Company has determined that Callaway Golf Ball Company will enter the golf
ball business by developing a new product in a new plant to be constructed just
for this purpose. The successful implementation of the
13
<PAGE>
Company's strategy could be adversely affected by various risks, including,
among others, delays in product development, construction delays and
unanticipated costs. There can be no assurance if and when a successful golf
ball product will be developed or that the Company's investments will ultimately
be realized.
The Company's golf ball business is in the early stages of development. It is
expected, however, that it will have a negative impact on the Company's future
cash flow and income from operations for several years. The Company believes
that many of the same factors which affect the golf equipment industry,
including growth rate in the golf equipment industry, intellectual property
rights of others, seasonality and new product introduction, also apply to the
golf ball business. In addition, the golf ball business is highly competitive
with a number of well-established and well-financed competitors, including
Titleist, Spalding, Sumitomo Rubber Industries, Bridgestone and others. These
competitors have established market share in the golf ball business which will
need to be penetrated in order for the Company's golf ball business to be
successful.
Acquisition of Odyssey
On August 8, 1997, the Company consummated its acquisition of substantially all
of the assets and certain liabilities of Odyssey Sports, Inc., a leading
manufacturer of premium putters. The integration of Odyssey's operations into
Odyssey Golf, a wholly-owned subsidiary of the Company, will require the
dedication of management resources which may temporarily detract from attention
to the day-to-day business of the Company. There can be no assurance that the
Company's integration of Odyssey's operations will not result in a loss of key
personnel, a decrease in revenues and profitability, or other material adverse
effects on the financial performance and business operations of Odyssey Golf
and/or the Company.
Odyssey(R) products previously were manufactured and shipped on behalf of
Odyssey by Tommy Armour Golf Company. In October 1997, Odyssey Golf began
manufacturing and shipping Odyssey(R) products at its own plant in Carlsbad,
California. There can be no assurance that the Company's ability to deliver
Odyssey(R) products to the marketplace in sufficient quantities and quality will
not be adversely affected by this manufacturing transition. Odyssey Golf is in
the process of restructuring its international distribution in certain
countries. There can be no assurance that this restructuring will not adversely
affect Odyssey Golf's international business.
Year 2000 Compliance
Historically, certain computer programs have been written using two digits
rather than four to define the applicable year, which could result in the
computer recognizing a date using "00" as the year 1900 rather than the year
2000. This, in turn, could result in major system failures or miscalculations,
and is generally referred to as the "Year 2000" problem.
In October 1997, the Company began implementing a new computer system which runs
substantially all of the Company's principal data processing and financial
reporting software applications. The application software used on this new
system is Year 2000 compliant. The information systems of certain of the
Company's subsidiaries, however, have not been converted to the new system, but
the Company expects that such conversion will be complete well in advance of the
Year 2000. Pursuant to the Company's Year 2000 Plan, the Company is currently
evaluating its computerized production equipment to assure that the transition
to the Year 2000 will not disrupt the Company's manufacturing capabilities. The
Company also intends to evaluate the systems of its key component suppliers,
distributors and other vendors. Presently, the Company does not believe that
Year 2000 compliance will result in material investments by the Company, nor
does the Company anticipate that the Year 2000 problem will have material
adverse effects on the business operations or financial performance of the
Company. There can be no assurance, however, that the Year 2000 problem will not
adversely affect the Company and its business.
14
<PAGE>
Results of Operations
Three-month periods ended September 30, 1997 and 1996:
Net sales increased 32% to $257.4 million for the three months ended September
30, 1997 compared to $194.5 million for the comparable period in the prior year.
The increase was primarily attributable to sales generated by Biggest Big
Bertha(TM) Titanium Drivers and Great Big Bertha(R) Tungsten.Titanium(TM) Irons
as well as sales of the Odyssey(R) line of putters and wedges. Also contributing
to the increase were increased sales of Big Bertha Gold(TM) Irons and Big
Bertha(R) Tour Series Wedges. The increase was partially offset by a decrease in
sales of Great Big Bertha(R) Titanium Drivers, Big Bertha(R) War Bird(R) Metal
Woods and Big Bertha(R) Irons.
For the three months ended September 30, 1997, gross profit increased 31% to
$138.8 million from $106.1 million for the comparable period in the prior year.
As a percentage of net sales, gross profit decreased to 54% from 55%, primarily
as a result of slightly higher cost of sales associated with the product mix and
region sales during the quarter ended September 30, 1997 as compared to that
sold in the comparable quarter of the prior year.
Selling expenses increased to $32.6 million in the third quarter of 1997
compared to $21.7 million in the third quarter of 1996. As a percentage of net
sales, selling expenses increased to 13% from 11% during the third quarter of
1997 over the third quarter of 1996. The $10.9 million increase was primarily
the result of increased pro tour, promotional and compensation expenses.
General and administrative expenses increased to $24.7 million for the three
months ended September 30, 1997 from $19.3 million for the comparable period in
the prior year. As a percentage of net sales, general and administrative
expenses in the third quarter of 1997 remained constant at 10%. The $5.4 million
increase was primarily attributable to increases in legal fees, compensation
expenses and building construction costs.
Research and development expenses increased to $10.6 million in the third
quarter of 1997 compared to $5.2 million in the comparable period of the prior
year. As a percentage of net sales, research and development expenses in the
third quarter of 1997 increased to 4% from 3% in the third quarter of 1996. The
$5.4 million increase was primarily the result of increased product engineering
costs, the Company's interactive golf efforts and costs associated with golf
ball development.
Nine-month periods ended September 30, 1997 and 1996:
For the nine months ended September 30, 1997, net sales increased 26% to $679.5
million compared to $539.7 million for the comparable period of the prior year.
The increase was primarily attributable to sales generated by the introduction
of Biggest Big Bertha(TM) Titanium Drivers and Great Big Bertha(R)
Tungsten.Titanium(TM) Irons as well as sales of the Odyssey(R) line of putters
and wedges. Also contributing to the increase were increased sales of Big Bertha
Gold(TM) Irons and Big Bertha(R) Tour Series Wedges. This increase was partially
offset by a decrease in sales of Great Big Bertha(R) Titanium Drivers, Big
Bertha(R) War Bird(R) Metal Woods and Big Bertha(R) Irons.
For the nine months ended September 30, 1997, gross profit increased 26% to
$360.5 million from $285.8 million for the comparable period in the prior year,
while gross profit, as a percentage of net sales, remained constant at 53%.
Selling expenses increased to $95.2 million for the nine months ended September
30, 1997 from $61.7 million for the comparable period in the prior year. As a
percentage of net sales, selling expenses in the first nine months of 1997
increased to 14% from 11% for the comparable period in 1996. The $33.5 million
increase was primarily the result of increased compensation, pro tour,
promotional and advertising expenses.
General and administrative expenses decreased to $57.0 million for the nine
months ended September 30, 1997 from $61.4 million for the comparable period in
the prior year. As a percentage of net sales, general and
15
<PAGE>
administrative expenses in the first nine months of 1997 decreased to 8% from
11% in the first nine months of 1996. The $4.4 million decrease resulted
primarily from a decrease in compensation expenses, charitable contributions,
consulting fees and computer support expenses. These decreases were partially
offset by increases in legal fees and costs associated with the Company's
business development initiatives.
Research and development expenses increased to $24.7 million for the nine months
ended September 30, 1997 from $11.7 million for the comparable period in the
prior year. As a percentage of net sales, research and development expenses for
the first nine months of 1997 increased to 4% from 2% in the first nine months
of 1996. The $13.0 million increase was primarily attributable to increased
product engineering and design costs, the Company's interactive golf efforts and
costs associated with golf ball development.
Liquidity and Capital Resources
At September 30, 1997, cash and cash equivalents decreased to $41.5 million from
$108.5 million at December 31, 1996 primarily due to investing activities, which
included the acquisition of substantially all of the assets and certain
liabilities of Odyssey (Note 6), and increases in capital expenditures, which
totaled $46.3 million and included building and building improvements, computer
equipment and software, and research and development machinery and equipment.
These increases were partially offset by cash provided by operating activities
of $110.9 million.
The increase in cash flows from operations was primarily a result of net income
of $108.3 million, depreciation and amortization of $12.8 million, a decrease in
inventories of $36.0 million and an increase in accrued employee compensation
and benefits of $24.3 million, partially offset by increases in accounts
receivable of $73.4 million and other assets of $6.4 million.
The Company had available a $50.0 million line of credit at September 30, 1997.
At this time, the Company anticipates that it will be able to maintain its
current level of operations, including capital expenditures and planned
operations for the foreseeable future, through cash flow generated from future
operations and the existing line of credit.
16
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company, incident to its business activities, is the plaintiff in several
legal proceedings, both domestically and abroad, in various stages of
development. In conjunction with the Company's program of enforcing its
proprietary rights, the Company has initiated a number of actions against
alleged infringers under the Lanham Act, 15 USCA Sections 1051-1127, the U.S.
Patent Act, 35 USCA Sections 1-376, and other pertinent laws. Some defendants in
these actions have, among other things, contested the validity and/or the
enforceability of some of the Company's patents and/or trademarks. Others have
asserted counterclaims against the Company. The Company believes that the
outcome of these matters individually and in the aggregate will not have a
material adverse effect upon the financial position or results of operations of
the Company. It is possible, however, that in the future one or more defenses or
claims asserted by defendants in those actions may succeed, resulting in the
loss of all or part of the rights under one or more patents, loss of a
trademark, a monetary award against the Company, or some other loss to the
Company. One or more of these results could adversely affect the Company's
overall ability to protect its product designs and ultimately limit its future
success in the marketplace.
In addition, the Company from time to time receives information claiming that
products sold by the Company infringe or may infringe patent or other
intellectual property rights of third parties. To date, the Company has not
experienced any material expense or disruption associated with any such
potential infringement matters. It is possible, however, that in the future one
or more claims of potential infringement could lead to litigation, the need to
obtain additional licenses, the need to alter a product to avoid infringement,
or some other action or loss by the Company.
On May 30, 1996, a lawsuit was filed against the Company and two of its officers
by a former officer of the Company, captioned Glenn Schmidt v. Callaway Golf
------------------------------
Company, et al., case no. N71548, in the Superior Court for the State of
- - ---------------
California, County of San Diego (the "Schmidt Litigation"). On September 23,
1997, the Schmidt Litigation was dismissed pursuant to a settlement between
Schmidt, the Company and the other named defendants. The Company paid Mr.
Schmidt $12.0 million, obtained Mr. Schmidt's services for a six year term, and
issued options to Mr. Schmidt to purchase 600,000 shares of the Company's Common
Stock at the market price on the day of the option grant. After the Schmidt
Litigation was filed, the Company tendered the claim to its insurers. Certain
insurers denied coverage. On April 11, 1997, the Company initiated litigation
against certain of its carriers and an insurance agent, captioned Callaway Golf
-------------
v. National Union Fire Insurance Company of Pittsburgh, Federal Insurance
- - -------------------------------------------------------------------------
Company, and MDM Associates, Inc., case no. 709645, in the Superior Court for
- - ---------------------------------
the State of California, County of San Diego (the "Insurance Litigation"). In
the Insurance Litigation the Company is seeking a judicial declaration that
coverage is afforded for the Schmidt Litigation under the applicable insurance
policies. The Company believes it is entitled to coverage by its insurers for
all or some of the costs of defending and settling the claims asserted in the
Schmidt Litigation.
The Company and its subsidiaries, incident to their business activities, from
time to time are parties to a number of legal proceedings in various stages of
development, including but not limited to those described above. The Company
believes that the majority of these proceedings involve matters as to which
liability, if any, will be adequately covered by insurance. With respect to
litigation outside the scope of applicable insurance coverage and to the extent
insured claims may exceed liability limits, it is the opinion of the management
of the Company that the probable result of these matters individually and in the
aggregate will not have a material adverse effect upon the Company's financial
position, results of operations or cash flows.
Item 2. Changes in Securities:
None
Item 3. Defaults Upon Senior Securities:
None
17
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders:
None
Item 5. Other Information:
None
Item 6. Exhibits and Reports on Form 8-K:
<TABLE>
<CAPTION>
a. Exhibits:
--------
<C> <S>
10.1 Chief Executive Officer Employment Agreement by and
between Callaway Golf Company and Donald H. Dye entered
into as of January 1, 1997.
10.2 Asset Purchase Agreement dated July 20, 1997 by and
among Callaway Golf Company, Odyssey Sports, Inc. and
U.S. Industries, Inc. (filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K dated August 8,
1997, as filed with the Securities and Exchange
Commission on August 22, 1997 and incorporated herein
by this reference).
10.3 Transitional Assembly Services Agreement dated as of
August 8, 1997 by and between Callaway Acquisition and
Tommy Armour Golf Company (filed as Exhibit 10.2 to the
Company's Current Report on Form 8-K dated August 8,
1997, as filed with the Securities and Exchange
Commission on August 22, 1997 and incorporated herein
by this reference).
10.4.1 Standard Industrial/Commercial Single-Tenant Lease
dated September 20, 1996 by and between Techplex, L.P.
and Putter Properties, Inc.
10.4.2 Assignment made as of August 8, 1997 by Putter
Properties, Inc. to Callaway Acquisition.
10.4.3 Guaranty of Lease entered into as of August 8, 1997 by
the Company in favor of Techplex, L.P.
10.5 Indemnification Agreement by and between the Company
and Vernon E. Jordan, Jr., dated July 16, 1997.
11.1 Statement re: Computation of Earnings Per Share.
27.1 Financial Data Schedule.
</TABLE>
b. Reports on Form 8-K:
-------------------
The Company filed the following Current Reports on Form 8-K during
the three months ended September 30, 1997:
(1) Current Report on Form 8-K dated July 20, 1997, regarding
agreement to acquire substantially all of the assets of
Odyssey Sports, Inc., reported under Item 5.
(2) Current Report on Form 8-K dated August 8, 1997, regarding the
consummation of the acquisition of substantially all of the
assets of Odyssey Sports, Inc., reported under Item 2.
(3) Amendment No. 1 to Current Report on Form 8-K/A dated August
8, 1997, regarding the consummation of the acquisition of
substantially all of the assets of Odyssey Sports, Inc.,
reported under Items 2 and 7. The following financial
statements were filed under Item 7 with that Report:
(a) Financial Statements of Business Acquired.
Audited financial statements as of September 30, 1996 and
for the year then ended, as follows:
- Report of Independent Accountants;
- Balance Sheet as of September 30, 1996;
18
<PAGE>
- Statement of Income for the year ended September 30,
1996;
- Statement of Changes in Invested Capital of Parent
for the year ended September 30, 1996;
- Statement of Cash Flows for the year ended September
30, 1996; and
- Notes to financial statements.
Unaudited financial statements as of June 30, 1997 and for
the nine months ended June 30, 1997 and 1996, as follows:
- Unaudited Balance Sheet as of June 30, 1997;
- Unaudited Statements of Income for the nine months
ended June 30, 1997 and 1996; and
- Unaudited Statements of Cash Flows for the nine
months ended June 30, 1997 and 1996.
(b) Pro Forma Financial Information.
- Unaudited Pro Forma Consolidated Condensed Balance
Sheet as of June 30, 1997;
- Unaudited Pro Forma Consolidated Condensed
Statements of Income for the six months ended June
30, 1997 and the year ended December 31, 1996; and
- Notes to Unaudited Pro Forma Consolidated Condensed
financial statements.
(4) Current Report on Form 8-K dated September 12, 1997, regarding
the Company's settlement of litigation with a former officer,
Mr. Glenn Schmidt, on behalf of the Company and the other
defendants, reported under Item 5.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CALLAWAY GOLF COMPANY
Date: November 13, 1997 /s/ DONALD H. DYE
-------------
Donald H. Dye
President and
Chief Executive Officer
/s/ DAVID A. RANE
-------------
David A. Rane
Executive Vice President, Planning and
Administration and Chief Financial Officer
20
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Number Description
- - -------------- -----------
10.1 Chief Executive Officer Employment Agreement by and between
Callaway Golf Company and Donald H. Dye entered into as of
January 1, 1997.
10.2* Asset Purchase Agreement dated July 20, 1997 by and among
Callaway Golf Company, Odyssey Sports, Inc. and U.S.
Industries, Inc.
10.3* Transitional Assembly Services Agreement dated as of August 8,
1997 by and between Callaway Acquisition and Tommy Armour Golf
Company.
10.4.1 Standard Industrial/Commercial Single-Tenant Lease dated
September 20, 1996 by and between Techplex, L.P. and Putter
Properties, Inc.
10.4.2 Assignment made as of August 8, 1997 by Putter Properties,
Inc. to Callaway Acquisition.
10.4.3 Guaranty of Lease entered into as of August 8, 1997 by the
Company in favor of Techplex, L.P.
10.5 Indemnification Agreement by and between the Company and
Vernon E. Jordan, Jr., dated July 16, 1997.
11.1 Statement re: Computation of Earnings Per Share.
27.1 Financial Data Schedule.
_______________
*Previously filed with the Registrant's Current Report on Form 8-K dated August
8, 1997 as filed with the Securities and Exchange Commission on August 22, 1997.
21
<PAGE>
Exhibit 10.1
------------
CHIEF EXECUTIVE OFFICER EMPLOYMENT AGREEMENT
This Chief Executive Officer Employment Agreement ("Agreement") is entered
into as of January 1, 1997, by and between Callaway Golf Company, a California
corporation (the "Company"), and Donald H. Dye ("Employee").
1. TERM. The Company hereby employs Employee and Employee hereby accepts
----
employment pursuant to the terms and provisions of this Agreement for the term
commencing January 1, 1997 and terminating December 31, 2001 unless this
Agreement is earlier terminated as hereinafter provided. Unless such employment
is earlier terminated, upon the expiration of the term of this Agreement,
Employee's status shall be one of at will employment.
2. SERVICES.
--------
(a) Employee shall serve as President and Chief Executive Officer of the
Company. Employee's duties shall be the usual and customary duties of the
offices in which he serves. Employee shall report to the Board of Directors of
the Company.
(b) Employee shall be required to comply with all policies and procedures
of the Company, as such shall be adopted, modified or otherwise established by
the Company from time to time.
3. SERVICES TO BE EXCLUSIVE. During the term hereof, Employee agrees to
------------------------
devote his full productive time and best efforts to the performance of
Employee's duties hereunder pursuant to the supervision and direction of the
Company's Board of Directors. Employee further agrees, as a condition to the
performance by the Company of each and all of its obligations hereunder, that so
long as Employee is employed by the Company, Employee will not directly or
indirectly render services of any nature to, otherwise become employed by, or
otherwise participate or engage in any other business without the Company's
prior written consent. Employee further agrees to execute such secrecy, non-
disclosure, patent, trademark, copyright and other proprietary rights
agreements, if any, as the Company may from time to time reasonably require.
Nothing herein contained shall be deemed to preclude Employee from having
outside personal investments and involvement with appropriate community
activities, and from devoting a reasonable amount of time to such matters,
provided that this shall in no manner interfere with or derogate from Employee's
work for the Company.
4. COMPENSATION.
------------
(a) The Company agrees to pay Employee during the term of this Agreement a
base salary at the rate of $750,000.00 per year;
<PAGE>
(b) The Company further agrees to pay Employee during the term of this
Agreement an annual Bonus, consisting of a Qualified Bonus and a Non-Qualified
Bonus. If Employee elects to defer all or any part of his annual Bonus (the
"Deferred Bonus"), such Deferred Bonus shall be taken first from any Non-
Qualified Bonus earned by Employee and then, to the extent necessary and only to
such extent, from any Qualified Bonus earned by Employee. Notwithstanding
whatever amounts Employee might defer, any annual Bonus amounts that are not
deductible by the Company as a result of the application of Section 162(m) of
the Internal Revenue Code shall be deferred pursuant to the Company's Executive
Deferred Compensation Plan.
(c) The Qualified and Non-Qualified Bonuses shall be calculated as follows:
(i) The annual Qualified Bonus shall be determined pursuant to the
applicable shareholder-approved nondiscretionary bonus plan for the year in
which the bonus is earned (i.e., the Executive Non-Discretionary Bonus Plan for
1997 and the 1998 Executive Non-Discretionary Bonus Plan for subsequent contract
years). Subject to any restrictions in the applicable Plan or otherwise imposed
by law, the Company may elect to pay all, some or none of Employee's Bonus as
Qualified Bonus, provided however that the total Qualified Bonus payable in any
year shall not be greater than the maximum potential Non-Qualified Bonus
(without taking into account any offset for payment of a Qualified Bonus), as
defined in subsection 4(c)(ii) below.
(ii) Subject to the last sentence of this subsection, the annual Non-
Qualified Bonus shall be an amount equal to $75,000.00 for each full one percent
of growth in the Company's pre-tax profit over the pre-tax profit in the prior
year (e.g., if pre-tax profit grows 10% in 1999 as compared with 1998, then
Employee's Non-Qualified Bonus for 1999 shall be $750,000.00; if pre-tax profit
grows 25% in 2000 as compared with 1999, then Employee's Non-Qualified Bonus for
2000 shall be $1,875,000.00). Notwithstanding anything else to the contrary,
the amount of any Non-Qualified Bonus earned in any year shall be reduced,
dollar for dollar, by the amount of any Qualified Bonus earned in that same
year.
5. EXPENSES AND BENEFITS.
---------------------
(a) Reasonable and Necessary Expenses. In addition to the compensation
---------------------------------
provided for in Section 4 hereof, the Company shall reimburse Employee for all
reasonable, customary, and necessary expenses incurred in the performance of
Employee's duties hereunder. Employee shall first account for such expenses by
submitting a signed statement itemizing such expenses prepared in accordance
with the policy set by the Company for reimbursement of such expenses. The
amount, nature, and extent of such expenses shall always be subject to the
control, supervision, and direction of the Company. While the Company shall not
reimburse Employee for all incremental travel and entertainment expenses
directly attributable to Employee's spouse, it is recognized that Employee's
spouse will generally accompany Employee on business
2
<PAGE>
trips, and that such accompaniment by Employee's spouse is a benefit to the
Company in that it assists Employee in the efficient and effective performance
of his duties.
(b) Vacation. Employee shall receive four (4) weeks paid vacation for each
--------
twelve (12) month period of employment with the Company. The vacation may be
taken any time during the year subject to prior approval by the Company, such
approval not to be unreasonably withheld. Any unused time will accrue from year
to year. The maximum vacation time Employee may accrue shall be three times
Employee's annual vacation benefit. The Company reserves the right to pay
Employee for unused, accrued vacation benefits in lieu of providing time off.
(c) Benefits. During Employee's employment with the Company pursuant to
--------
this Agreement, the Company shall provide for Employee to:
(i) participate in the Company's health insurance and disability
insurance plans as the same may be modified from time to time;
(ii) receive, if Employee is insurable under usual underwriting
standards and Employee's physical condition does not prevent Employee from
reasonably qualifying for such insurance coverage, term life insurance coverage
on Employee's life, payable to whomever the Employee directs, in the face amount
of $2,000,000.00, such policies to be transferable to Employee upon the
termination of employment without evidence of insurability;
(iii) participate in the Company's 401(k) pension plan pursuant to the
terms of the plan, as the same may be modified from time to time;
(iv) participate in the Company's Executive Deferred Compensation
Plan, as the same may be modified from time to time; and
(v) participate in any other benefit plans the Company provides from
time to time to executive officers.
(d) Club Membership. The Company shall continue to make available to
----------------
Employee the benefits of at least one corporate membership at a mutually agreed
upon country club. While the Company has paid the costs of initiation, Employee
shall be responsible for all other expenses and costs associated with such club
use, including monthly member dues and charges. The club membership itself
shall belong to and be the property of the Company, not Employee. Upon the
termination of Employee's employment with the Company, Employee shall have the
option for ninety (90) days to purchase such club membership from the Company,
if it is otherwise transferable, at a price equal to the actual cost to the
Company of the membership at the time it was acquired.
3
<PAGE>
(e) Estate Planning and Other Perquisites. To the extent the Company
--------------------------------------
provides estate planning and related services, or any other perquisites and
personal benefits to other executive officers from time to time, such services
and perquisites shall be made available to Employee on the same terms and
conditions.
(f) Stock Options.
--------------
(i) Pursuant to a separate stock option agreement, the Company shall
provide to Employee options to purchase up to 1,000,000 shares of the Common
Stock of the Company at $40.00 per share (these stock options granted pursuant
to this subsection hereinafter referred to as "Incentive Options"). Such
Incentive Options shall vest on July 15, 2003. Notwithstanding anything else to
the contrary, Employee's stock options granted pursuant to this subsection
5(f)(i) shall be subject to accelerated vesting as provided in subsection
5(f)(ii).
(ii) Employee's stock options granted pursuant to subsection 5(f)(i)
shall be subject to accelerated vesting in accord with the following terms and
conditions:
<TABLE>
<CAPTION>
SHARES VESTING DATE AND CONDITIONS
- - ------ ---------------------------
<C> <S>
100,000 On the date upon which the average closing price for the Common Stock
of the Company on the New York Stock Exchange for the trailing sixty
(60) days is equal to or greater than $40.00 per share, if such date
occurs prior to July 15, 2002;
100,000 On the date upon which the average closing price for the Common Stock
of the Company on the New York Stock Exchange for the trailing sixty
(60) days is equal to or greater than $45.00 per share, if such date
occurs prior to July 15, 2002;
100,000 On the date upon which the average closing price for the Common Stock
of the Company on the New York Stock Exchange for the trailing sixty
(60) days is equal to or greater than $50.00 per share, if such date
occurs prior to July 15, 2002;
100,000 On the date upon which the average closing price for the Common Stock
of the Company on the New York Stock Exchange for the trailing sixty
(60) days is equal to or greater than $55.00 per share, if such date
occurs prior to July 15, 2002;
100,000 On the date upon which the average closing price for the Common Stock
of the Company on the New York Stock Exchange for the trailing sixty
(60) days is equal to or greater than $60.00 per share, if such date
occurs prior to July 15, 2002; and
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
500,000 On the date upon which the average closing price for the Common Stock
of the Company on the New York Stock Exchange for the trailing sixty
(60) days is equal to or greater than $65.00 per share, if such date
occurs prior to July 15, 2002.
</TABLE>
(iii) All shares of stock that are issuable upon the exercise of such
options granted to Employee pursuant to this subsection shall be registered as
promptly as possible with the Securities and Exchange Commission, and shall be
approved for listing on the New York Stock Exchange upon notice of issuance.
Except as otherwise provided herein, in the separate stock option agreements, or
in any other written agreement between the Company and Employee, vesting of
these stock options shall be conditioned upon Employee's continued employment
with the Company as of the vesting date. Such options shall expire four (4)
years following vesting if not exercised prior thereto, and shall be
transferable to the full extent permitted by the law and the Company's stock
option plan from which they are issued. At the discretion of the Board of
Directors or its designee, such options may be granted as incentive stock
options ("ISOs").
(g) Tax Indemnification. Employee and the Company recognize the
--------------------
existence of the Tax Indemnification Agreement effective July 20, 1995 between
Employee and the Company, as amended effective January 1, 1996. It is
specifically agreed that the Company shall do nothing to reduce the benefits or
protections available to Employee pursuant to that agreement during the term of
this Agreement.
6. DISABILITY. If on account of any physical or mental disability
----------
Employee shall fail or be unable to perform all or substantially all of
Employee's duties under this Agreement for a continuous period of up to six (6)
months during any twelve month period during the term of this Agreement,
Employee shall be entitled to his full compensation and benefits as set forth in
this Agreement. If Employee's disability continues after such six (6) month
period, this Agreement is subject to termination pursuant to the provisions of
Section 8(e) hereof.
7. NONCOMPETITION.
--------------
(a) Other Business. To the fullest extent permitted by law,
--------------
Employee agrees that, while employed by the Company, Employee will not, directly
or indirectly (whether as agent, consultant, holder of a beneficial interest,
creditor, or in any other capacity), engage in any business or venture which
engages directly or indirectly in competition with the business of the Company,
or have any interest in any person, firm, corporation, or venture which engages
directly or indirectly in competition with the business of the Company. For
purposes of this section, the ownership of interests in a broadly based mutual
fund shall not constitute ownership of the stocks held by the fund.
(b) Other Employees. Except as may be required in the performance
---------------
of his duties hereunder, Employee shall not cause or induce, or attempt to cause
or
5
<PAGE>
induce, any person now or hereafter employed by the Company, or any subsidiary,
to terminate such employment, nor shall Employee directly or indirectly employ
any person who is now or hereafter employed by the Company for a period of one
(1) year from the date Employee ceases to be employed by the Company.
(c) Suppliers. While employed by the Company, and for one (1) year
---------
thereafter, Employee shall not cause or induce, or attempt to cause or induce,
any person or firm supplying goods, services or credit to the Company to
diminish or cease furnishing such goods, services or credit.
(d) Conflict of Interest. While employed by the Company, Employee shall
--------------------
not engage in any conduct or enterprise that shall constitute an actual or
apparent conflict of interest with respect to Employee's duties and obligations
to the Company.
8. TERMINATION.
-----------
(a) Termination at the Company's Convenience. Employee's employment under
-----------------------------------------
this Agreement may be terminated by the Company at its convenience at any time
upon the majority vote of the group consisting of Ely Callaway, if Ely Callaway
is a member of the Company's Board of Directors at the time, and the non-
employee members of the Company's Board of Directors, or the majority vote of
the entire Board of Directors. In the event of a termination at the Company's
convenience, Employee shall be entitled to receive (i) any compensation accrued
and unpaid as of the date of termination; (ii) the continued payment of base
salary at the same rate and on the same schedule as in effect at the time of
termination for a period of time equal to the remainder of the term of this
Agreement; (iii) the immediate vesting of unvested stock options as provided in
Exhibit B to this Agreement; (iv) the continuation of all benefits and
perquisites provided by Sections 5(c)(i) and (ii) hereof for a period of time
equal to the remainder of the term of this Agreement; and (v) no other
severance. At Employee's option, Employee may elect in writing up to 60 days
prior to termination to receive such payments and benefits as provided by
subsection (iii) of this section in a lump sum payment representing all future
payments due, discounted to their then present value at the prevailing major
bank prime rate as of the date of termination.
(b) Termination at Employee's Convenience. Employee's employment under
--------------------------------------
this Agreement may be terminated immediately by Employee at his convenience at
any time. In the event of a termination at Employee's convenience, Employee
shall be entitled to receive (i) any compensation accrued and unpaid as of the
date of termination; and (ii) no other severance.
(c) Termination by the Company for Substantial Cause. Employee's
-------------------------------------------------
employment under this Agreement may be terminated immediately by the Company for
substantial cause at any time. In the event of a termination by the Company for
substantial cause, Employee shall be entitled to receive (i) any compensation
accrued and unpaid as of the date of termination; and (ii) no other severance.
"Substantial cause" shall
6
<PAGE>
mean for purposes of this subsection breach of this Agreement, or misconduct,
including but not limited to, dishonesty, theft, disloyalty and/or felony
criminal conduct.
(d) Termination by Employee for Substantial Cause. Employee's employment
----------------------------------------------
under this Agreement may be terminated immediately by Employee for substantial
cause at any time. In the event of a termination by Employee for substantial
cause, Employee shall be entitled to receive (i) any compensation accrued and
unpaid as of the date of termination; (ii) the continued payment of base salary
at the same rate and on the same schedule as in effect at the time of
termination for a period of time equal to the remainder of the term of this
Agreement; (iii) the immediate vesting of unvested stock options as provided in
Exhibit B to this Agreement; (iv) the continuation of all benefits and
perquisites provided by Sections 5(c)(i) and (ii) hereof for a period of time
equal to the remainder of the term of this Agreement; and (v) no other
severance. At Employee's option, Employee may elect in writing up to 60 days
prior to termination to receive such payments and benefits as provided by
subsection (iii) of this subsection in a lump sum payment representing all
future payments due, discounted to their then present value at the prevailing
major bank prime rate as of the date of termination. "Substantial cause" shall
mean for purposes of this subsection a diminution in Employee's title or duties
or any material breach of this Agreement by the Company.
(e) Termination Due to Permanent Disability. Subject to all applicable
----------------------------------------
laws, Employee's employment under this Agreement may be terminated immediately
by the Company in the event Employee becomes permanently disabled. In the event
of a termination by the Company due to Employee's permanent disability, Employee
shall be entitled to (i) any compensation accrued and unpaid as of the date of
termination; (ii) the continued payment of base salary at the same rate and on
the same schedule as in effect at the time of termination for a period of time
equal to the remainder of the term of this Agreement (net of any disability
insurance proceeds); (iii) the immediate vesting of outstanding but unvested
stock options (including Incentive Options) held by Employee as of such
termination date in a prorated amount based upon the number of days in the
contract period that elapsed prior to Employee's termination; (iv) the
continuation of all benefits and perquisites provided by Section 5(c)(i) and
(ii) hereof for a period of time equal to the remainder of the term of this
Agreement; and (v) no other severance. Termination under this subsection shall
be effective immediately upon the date the Board of Directors of the Company
formally resolves that Employee is permanently disabled. Subject to all
applicable laws, "permanent disability" shall mean the inability of Employee, by
reason of any ailment or illness, or physical or mental condition, to devote
substantially all of his time during normal business hours to the daily
performance of Employee's duties as required under this Agreement for a
continuous period of six (6) months. At Employee's option, Employee may elect
in writing up to 60 days prior to termination to receive such payments and
benefits as provided by subsection (ii) of this section in a lump sum payment
representing all future payments due, discounted to their then present value at
the prevailing major bank prime rate as of the date of termination.
7
<PAGE>
(f) Termination Due to Death. Employee's employment under this Agreement
-------------------------
may be terminated immediately by the Company in the event of Employee's death.
In the event of a termination by the Company due to Employee's death, Employee's
estate shall be entitled to (i) any compensation accrued and unpaid as of the
date of termination; (ii) the immediate vesting of outstanding but unvested
stock options (including Incentive Options) held by Employee as of such
termination date in a prorated amount based upon the number of days in the
contract period that elapsed prior to Employee's termination; and (iii) no other
severance. At Employee's option, Employee may elect in writing at least 60 days
prior to termination to receive such payments and benefits as provided by
subsection (ii) of this section in a lump sum payment representing all future
payments due, discounted to their then present value at the prevailing major
bank prime rate as of the date of termination.
(g) Unless otherwise provided, any severance payments or other amounts due
pursuant to this Section 8 shall be paid in cash within thirty (30) days of
termination. Any severance payments shall be subject to usual and customary
employee payroll practices and all applicable withholding requirements. Except
for such severance pay and other amounts specifically provided pursuant to this
Section 8, Employee shall not be entitled to any further compensation, bonus,
damages, restitution, relocation benefits, or other severance benefits upon
termination of employment during the term of this Agreement. The amounts
payable to Employee pursuant to this Section 8 shall not be treated as damages,
but as severance compensation to which Employee is entitled by reason of
termination of employment under the applicable circumstances. The Company shall
not be entitled to set off against the amounts payable to Employee hereunder any
amounts earned by Employee in other employment after termination of his
employment with the Company pursuant to this Agreement, or any amounts which
might have been earned by Employee in other employment had Employee sought such
other employment. The provisions of this Section 8 shall not limit Employee's
rights under or pursuant to any other agreement or understanding with the
Company or with Employee's participation in, or terminating distributions and
vested rights under, any pension, profit sharing, insurance or other employee
benefit plan of the Company to which Employee is entitled pursuant to the terms
of such plan.
(h) Termination By Mutual Agreement of the Parties. Employee's employment
----------------------------------------------
pursuant to this Agreement may be terminated at any time upon the mutual
agreement in writing of the parties. Any such termination of employment shall
have the consequences specified in such agreement.
(i) Pre-Termination Rights. The Company shall have the right, at its
----------------------
option, to require Employee to vacate his office or otherwise remain off the
Company's premises prior to the effective date of termination as determined
above, and to cease any and all activities on the Company's behalf.
8
<PAGE>
9. RIGHTS UPON A CHANGE IN CONTROL.
-------------------------------
(a) If a Change in Control (as defined in Exhibit A hereto) occurs before
the termination of Employee's employment hereunder, then this Agreement shall be
extended (the "Extended Employment Agreement") in the same form and substance as
in effect immediately prior to the Change in Control, except that the
termination date shall be that date which would permit the Extended Employment
Agreement to continue in effect for an additional period of time equal to the
full term of this Agreement.
(b) Employee may elect at any time within ninety (90) days following a
Change in Control to terminate this Agreement at Employee's convenience. If
Employee so elects, Employee shall be entitled to receive (i) any compensation
accrued and unpaid as of the date of termination; (ii) the continued payment of
base salary at the same rate and on the same schedule as in effect at the time
of termination for a period of time equal to the remainder of the term of this
Agreement (without giving effect to the extension provisions of Section 9(a)
above); (iii) the immediate vesting of all outstanding but unvested stock
options (including Incentive Options) held by Employee as of such termination
date; (iv) the continuation of all benefits and perquisites provided by Sections
5(c)(i) and (ii) hereof for a period of time equal to the remainder of the term
of this Agreement; and (v) no other severance. Moreover, the provisions of
Section 8(g) shall be applicable to any severance paid pursuant hereto.
(c) Notwithstanding anything in this Agreement to the contrary, if upon or
at any time within one year following any Change in Control that occurs during
the term of this Agreement there is a Termination Event (as defined below),
Employee shall be entitled to receive, in lieu of any other severance provided
for in Section 8 of this Agreement, (i) any compensation accrued and unpaid as
of the date of termination; (ii) an amount equal to 2.99 times Employee's
average total compensation (base salary and bonus) in the preceding three (3)
years; (iii) the immediate vesting of all unvested stock options (including
Incentive Options) held by Employee as of such termination date; (iv) the
continuation of all benefits and perquisites provided by Sections 5(c)(i) and
(ii) hereof for a period of time equal to the remainder of the term of this
Agreement; and (v) no other severance. Furthermore, except as specifically
provided herein, the termination events and consequences described in Section 8
shall continue to apply during the term of the Extended Employment Agreement
except that, in the event of a conflict between Section 8 and the rights of
Employee described in this Section 9, the provisions of this Section 9 shall
govern.
(d) A "Termination Event" shall mean the occurrence of any one or more of
the following (in the absence of any basis for termination pursuant to Sections
8(c), 8(e) or 8(f)):
(i) the termination or material breach of this Agreement by the
Company;
9
<PAGE>
(ii) a failure by the Company to obtain the assumption of this
Agreement by any successor to the Company or any assignee of all or
substantially all of the Company's assets;
(iii) any change in the title, position, duties, responsibilities or
status that Employee had with the Company, as a publicly traded entity,
immediately prior to the Change in Control;
(iv) any reduction, limitation or failure to pay or provide any of the
compensation, reimbursable expenses, stock options, incentive programs, or other
benefits or perquisites provided to Employee under the terms of this Agreement
or any other agreement or understanding between the Company and Employee, or
pursuant to the Company's policies and past practices as of the date immediately
prior to the Change in Control; or
(v) any requirement that Employee relocate or any assignment to
Employee of duties that would make it unreasonably difficult for Employee to
maintain the principal residence he had immediately prior to the Change in
Control.
10. SURRENDER OF BOOKS AND RECORDS. Employee agrees that upon termination
------------------------------
of employment in any manner, Employee will immediately surrender to the Company
all lists, books and records of or connected with the business of the Company,
and all other properties belonging to the Company, it being distinctly
understood that all such lists, books, records and other documents are the
property of the Company. However, notwithstanding the foregoing, Employee may
keep, subject to the provisions of Section 12 of this Agreement and any and all
other confidentiality agreements between Employee and the Company, copies of
those records maintained by Employee as attorney for the Company or otherwise
relating to Employee's association with the Company ("Retained Copies"). The
Company shall have the right to inspect and review all Retained Copies during
normal business hours upon reasonable request.
11. GENERAL RELATIONSHIP. Employee shall be considered an employee of the
--------------------
Company within the meaning of all federal, state and local laws and regulations,
including, but not limited to, laws and regulations governing unemployment
insurance, workers' compensation, industrial accident, labor and taxes.
12. PROPRIETARY INFORMATION.
-----------------------
(a) Employee agrees that any trade secret or proprietary information of the
Company to which Employee has become privy or may become privy to as a result of
his employment with the Company shall not be divulged or disclosed to any other
party (including, without limit, any person or entity with whom or in whom
Employee has a business interest) without the express written consent of the
Company, except as otherwise required by law. In addition, Employee agrees to
use such information only during the term of this Agreement and only in a manner
which is consistent with the
10
<PAGE>
purposes of this Agreement. In the event Employee believes that he is legally
required to disclose any trade secret or proprietary information of the Company,
Employee shall give reasonable notice to the Company prior to disclosing such
information and shall take such legally permissible steps as are reasonably
necessary to protect such Company trade secrets or proprietary information,
including but not limited to, seeking orders from a court of competent
jurisdiction preventing disclosure or limiting disclosure of such information
beyond that which is legally required. The Company shall reimburse Employee for
reasonable legal expenses incurred in seeking said orders.
(b) Except as otherwise required by law, Employee shall hold in confidence
all trade secret and proprietary information received from the Company until
such information is available to the public generally or to the Company's
competitors through no unauthorized act or fault of Employee. Upon termination
of this Agreement, Employee shall promptly return any written proprietary
information in his possession to the Company.
(c) As used in this Agreement, "trade secret and proprietary information"
means information, whether written or oral, not generally available to the
public; it includes the concepts and ideas involved in the Company's products
whether patentable or not; and includes, but is not limited to, the processes,
formulae, and techniques disclosed by the Company to Employee or observed by
Employee. It does not include:
(i) Information, which at the time of disclosure, had been previously
published;
(ii) Information which is published after disclosure, unless such
publication is a breach of this Agreement or is otherwise a violation of the
contractual, legal or fiduciary duties owed to the Company, which violation is
known to Employee; or
(iii) Information which, subsequent to disclosure, is obtained by
Employee from a third person who is lawfully in possession of such information
(which information is not acquired in violation of any contractual, legal, or
fiduciary obligation owed to the Company with respect to such information, and
is known by Employee) and does not require Employee to refrain from disclosing
such information to others.
(d) The provisions of this Section 12 shall survive the termination or
expiration of this Agreement, and shall be binding upon Employee in perpetuity.
13. INVENTIONS AND INNOVATIONS.
--------------------------
(a) As used in this Agreement, inventions and innovations mean ideas and
improvements, whether or not patentable, relating to the design, manufacture,
use or marketing of golf equipment or other products of the Company. This
includes, but is not
11
<PAGE>
limited to, products, processes, methods of manufacture, distribution and
management, sources of and uses for materials, apparatus, plans, systems and
computer programs.
(b) Employee agrees to disclose to the General Counsel and the Board of
Directors of the Company any invention or innovation which he develops, either
alone or with anyone else, during the term of Employee's employment with the
Company, as well as any invention or innovation based on proprietary information
of the Company which Employee develops, whether alone or with anyone else,
within twelve (12) months after the termination of Employee's employment with
the Company.
(c) Employee agrees to assign any invention or innovation to the Company:
(i) which is developed totally or partially while Employee is
employed by the Company;
(ii) for which Employee used any of the Company's equipment, supplies,
facilities or proprietary information, even if any or all of such items are
relatively minor, and have little or no monetary value; or
(iii) which results in any way from Employee's work for the Company or
relates in any way to the Company's business or the Company's current or
anticipated research and development.
(d) Employee understands and agrees that the existence of any condition set
forth in either (c)(i), (ii) or (iii) above is sufficient to require Employee to
assign his inventions or innovations to the Company.
(e) All provisions of this Agreement relating to the assignment by Employee
of any invention or innovation are subject to the provisions of California Labor
Code Sections 2870, 2871 and 2872.
(f) Employee agrees that any invention or innovation which is required
under the provisions of this Agreement to be assigned to the Company shall be
the sole and exclusive property of the Company. Upon the Company's request, at
no expense to Employee, Employee shall execute any and all proper applications
for patents, assignments to the Company, and all other applicable documents, and
will give testimony when and where requested to perfect the title and/or patents
(both within and without the United States) in all inventions or innovations
belonging to the Company.
(g) Employee shall disclose all inventions and innovations to the Company,
even if Employee does not believe that he is required under this Agreement, or
pursuant to California Labor Code Section 2870, to assign his interest in such
invention or innovation to the Company. If the Company and Employee disagree as
to whether or
12
<PAGE>
not an invention or innovation is included within the terms of this Agreement,
it will be the responsibility of Employee to prove that it is not included.
14. ASSIGNMENT. This Agreement shall be binding upon and shall inure to
----------
the benefit of the parties hereto and the successors and assigns of the Company.
Except as otherwise specifically provided in writing, Employee shall have no
right to assign his rights, benefits, duties, obligations or other interests in
this Agreement, it being understood that this Agreement is personal to Employee.
15. ATTORNEYS' FEES AND COSTS. If any arbitration or other proceeding is
-------------------------
brought for the enforcement of this Agreement, or because of an alleged dispute
or default in connection with any of its provisions, the successful or
prevailing party shall be entitled to recover reasonable attorneys' fees and
costs incurred in such action or proceeding, in addition to any relief to which
such party may be deemed entitled.
16. ENTIRE UNDERSTANDING. This Agreement sets forth the entire
--------------------
understanding of the parties hereto with respect to the subject matter hereof,
and no other representations, warranties or agreements whatsoever as to that
subject matter have been made by Employee or the Company not herein contained.
This Agreement shall not be modified, amended or terminated except by another
instrument in writing executed by the parties hereto. This Agreement replaces
and supersedes any and all prior understandings or agreements between Employee
and the Company regarding employment.
17. NOTICES. Any notice, request, demand, or other communication required
-------
or permitted hereunder, shall be deemed properly given when actually received or
within five (5) days of mailing by certified or registered mail, postage
prepaid, to:
Employee: Donald H. Dye
P.O. Box 675870
Rancho Santa Fe, California 92061-6375
Company: Callaway Golf Company
2285 Rutherford Road
Carlsbad, California 92008-8815
Attn: Ely Callaway
or to such other address as Employee or the Company may from time to time
furnish, in writing, to the other.
18. ARBITRATION. Any dispute, controversy or claim arising hereunder or
-----------
in any way related to this Agreement, its interpretation, enforceability, or
applicability, or relating to Employee's employment, or the termination thereof,
that cannot be resolved by mutual agreement of the parties shall be submitted to
arbitration.
13
<PAGE>
The arbitration shall be conducted by a retired judge from the Judicial
Arbitration and Mediation Service/Endispute ("JAMS") office located in Orange
County, California, who shall have the powers to hear motions, control
discovery, conduct hearings and otherwise do all that is necessary to resolve
the matter. The arbitration award shall be final and binding, and judgment on
the award may be entered in any court having jurisdiction thereof. It is
expressly understood that the parties have chosen arbitration to avoid the
burdens, costs and publicity of a court proceeding, and the arbitrator is
expected to handle all aspects of the matter, including discovery and any
hearings, in such a way as to minimize the expense, time, burden and publicity
of the process, while assuring a fair and just result. In particular, the
parties expect that the arbitrator will limit discovery by controlling the
amount of discovery that may be taken (e.g., the number of depositions or
interrogatories) and by restricting the scope of discovery to only those matters
clearly relevant to the dispute.
19. MISCELLANEOUS.
-------------
(a) Headings. The headings of the several sections and paragraphs of this
--------
Agreement are inserted solely for the convenience of reference and are not a
part of and are not intended to govern, limit or aid in the construction of any
term or provision hereof.
(b) Waiver. Failure of either party at any time to require performance by
------
the other of any provision of this Agreement shall in no way affect that party's
rights thereafter to enforce the same, nor shall the waiver by either party of
any breach of any provision hereof be held to be a waiver of any succeeding
breach of any provision or a waiver of the provision itself.
(c) Applicable Law. This Agreement shall constitute a contract under the
--------------
internal laws of the State of California and shall be governed and construed in
accordance with the laws of said state as to both interpretation and
performance.
(d) Severability. In the event any provision or provisions of this
------------
Agreement is or are held invalid, the remaining provisions of this Agreement
shall not be affected thereby.
20. SUPERSEDES OLD OFFICER EMPLOYMENT CONTRACT. Employee and the Company
-------------------------------------------
recognize that prior to the effective date of this Agreement they were parties
to a certain Officer Employment Agreement effective January 1, 1995 (the "Old
Officer Employment Agreement"). It is the intent of the parties that as of the
effective date of this Agreement, this Agreement shall replace and supersede the
Old Officer Employment Agreement entirely, that the Old Officer Employment
Agreement shall no longer be of any force or effect except as to Sections 7, 12,
13, 15 and 18 thereof, and that to the extent there is any conflict between the
Old Officer Employment Agreement and this Agreement, this Agreement shall
control and both agreements shall
14
<PAGE>
be construed so as to give the maximum force and effect to the provisions of
this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
effective the date first written above.
EMPLOYEE: COMPANY:
CALLAWAY GOLF COMPANY,
a California corporation
/s/ DONALD H. DYE By: /s/ ELY CALLAWAY
- - ----------------------------- ----------------------------
Donald H. Dye Ely Callaway, Chairman
15
<PAGE>
EXHIBIT A
A "Change in Control" means the following and shall be deemed to occur if
any of the following events occurs:
(a) Any person, entity or group, within the meaning of Section 13(d) or
14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") but excluding
the Company and its subsidiaries and any employee benefit or stock ownership
plan of the Company or its subsidiaries and also excluding an underwriter or
underwriting syndicate that has acquired the Company's securities solely in
connection with a public offering thereof (such person, entity or group being
referred to herein as a "Person") becomes the beneficial owner (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of
either the then outstanding shares of Common Stock or the combined voting power
of the Company's then outstanding securities entitled to vote generally in the
election of directors; or
(b) Individuals who, as of the effective date hereof, constitute the Board
of Directors of the Company (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board of Directors of the Company,
provided that any individual who becomes a director after the effective date
hereof whose election, or nomination for election by the Company's shareholders,
is approved by a vote of at least a majority of the directors then comprising
the Incumbent Board shall be considered to be a member of the Incumbent Board
unless that individual was nominated or elected by any Person having the power
to exercise, through beneficial ownership, voting agreement and/or proxy, 20% or
more of either the outstanding shares of Common Stock or the combined voting
power of the Company's then outstanding voting securities entitled to vote
generally in the election of directors, in which case that individual shall not
be considered to be a member of the Incumbent Board unless such individual's
election or nomination for election by the Company's shareholders is approved by
a vote of at least two-thirds of the directors then comprising the Incumbent
Board; or
(c) Consummation by the Company of the sale or other disposition by the
Company of all or substantially all of the Company's assets or a reorganization
or merger or consolidation of the Company with any other person, entity or
corporation, other than
(i) a reorganization or merger or consolidation that would result in
the voting securities of the Company outstanding immediately prior thereto (or,
in the case of a reorganization or merger or consolidation that is preceded or
accomplished by an acquisition or series of related acquisitions by any Person,
by tender or exchange offer or otherwise, of voting securities representing 5%
or more of the combined voting power of all securities of the Company,
immediately prior to such acquisition or the first acquisition in such series of
acquisitions) continuing to represent, either by remaining outstanding or by
being converted into voting securities of another entity, more than 50% of the
combined voting power of the voting securities of the Company or such other
16
<PAGE>
entity outstanding immediately after such reorganization or merger or
consolidation (or series of related transactions involving such a reorganization
or merger or consolidation), or
(ii) a reorganization or merger or consolidation effected to implement
a recapitalization or reincorporation of the Company (or similar transaction)
that does not result in a material change in beneficial ownership of the voting
securities of the Company or its successor; or
(d) Approval by the shareholders of the Company or an order by a court of
competent jurisdiction of a plan of liquidation of the Company.
17
<PAGE>
EXHIBIT B
Pursuant to Sections 8(a)(iii) and 8(d)(iii) of the Agreement, Employee
shall be entitled to the immediate vesting of unvested options as follows:
(a) Incentive Options. If the termination occurs in the first, second or
------------------
third year of this Agreement (1997, 1998 or 1999), then 300,000 of Employee's
unvested Incentive Options granted pursuant to Section 5(f)(i) shall immediately
vest; if the termination occurs in the fourth year of this Agreement (2000),
then 400,000 of Employee's unvested Incentive Options granted pursuant to
Section 5(f)(i) shall immediately vest; and if the termination occurs in the
fifth year of this Agreement (2001), then 500,000 of Employee's unvested
Incentive Options granted pursuant to Section 5(f)(i) shall immediately vest.
If, due to prior vestings of Incentive Options, Employee's unvested Incentive
Options are less than the number that would vest pursuant to this provision,
then the lesser number shall vest.
(b) Options Other Than Incentive Options. Notwithstanding what Incentive
-------------------------------------
Options may vest, all other outstanding but unvested options held by Employee as
of the termination date shall immediately vest upon termination.
18
<PAGE>
Exhibit 10.4.1
--------------
2.2 Building Lease
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-NET
(Do not use this form for Multi-Tenant Property)
1. Basic Provisions ("Basic Provisions")
1.1 Parties: This Lease ("Lease"), dated for reference purposes only,
December 20, 1996, is made by and between Techplex, L.P., A California Limited
Partnership ("Lessor") and Putter Properties, Inc., a Delaware Corporation
("Lessee"), (collectively the "Parties," or individually a "Party").
1.2 Premises: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known by the street address of 1969 Kellogg Avenue located in the County of San
Diego, State of California and generally described as (describe briefly the
nature of the property) the land and an industrial building totaling
approximately 32,975 square feet located in the Carlsbad Airport Centre,
Carlsbad, California 92008, as depicted on EXHIBIT "1" annexed to the Addendum,
see Addendum, (S)1, ("Premises"). (See Paragraph 2 for further provisions.)
1.3 Term: Ten (10) years and Zero (0) months ("Original Term") commencing
February 1, 1997 ("Commencement Date") and ending one hundred twenty (120)
months thereafter ("Expiration Date"). (See Paragraph 3 for further
provisions.)
1.4 Early Possession: See Addendum, (S)6 ("Early Possession Date"). (See
Paragraphs 3.2 and 3.3 for further provisions.)
1.5 Base Rent: $14,038.00 per month ("Base Rent"), payable on the first
(1st) day of each month commencing February 1, 1997, subject to adjustment. See
Addendum, (S)3. (See Paragraph 4 for further provisions.)
[X] If this box is checked, there are provisions in this Lease for the Base Rent
to be adjusted. See Addendum, (S)3.
1.6 Base Rent Paid Upon Execution: $14,038.00 (Fourteen Thousand Thirty-
Eight and no/100ths Dollars) as Base Rent for the period of February 1, 1997
through February 28, 1997.
1.7 Security Deposit: $25,617.00. See Addendum, (S)4, ("Security
Deposit"). (See Paragraph 5 for further provisions.)
1.8 Permitted Use: General office, research, development and
manufacturing and any other legally permitted use. (See Paragraph 6 for further
provisions.)
1.9 Insuring Party: Lessor is the "Insuring Party" unless otherwise
stated herein. (See Paragraph 8 for further provisions.)
1.10 Real Estate Brokers: The following real estate brokers
(collectively, the "Brokers") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes): CB
Commercial Real Estate Group, Inc. represents [_] Lessor exclusively ("Lessor's
Broker"); [X] both Lessor and Lessee, and CB Commercial Real Estate Group, Inc.
represents [_] Lessee exclusively ("Lessee's Broker"); [X] both Lessee and
Lessor. (See Paragraph 15 for further provisions.) See Addendum, (S)5.
1.11 Guarantor. The obligations of the Lessee under this Lease are to be
guaranteed by Tommy Armour Golf Company and Odyssey Sports, Inc. ("Guarantor").
(See Paragraph 37 for further provisions.)
1.12 Addenda. Attached hereto is an Addendum or Addenda consisting of
pages 1 through 12 and Exhibits 1 through 6 of the Addendum all of which
constitute a part of this Lease.
<PAGE>
2. Premises. See Addendum, (S)7.
2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of square footage set forth in this Lease, or
that may have been used in calculating rental, is an approximation which Lessor
and Lessee agree is reasonable and the rental based thereon is not subject to
revision whether or not the actual square footage is more or less.
2.2 Condition. Lessor shall deliver the Premises to Lessee clean and free
of debris on the Scheduled Completion Date and warrants to Lessee that the
existing plumbing, fire sprinkler system, lighting, air conditioning, heating
and loading doors, if any, in the Premises, other than those constructed by
Lessee, shall be in good operating condition as of that date. If a non-
compliance with said warranty exists on the Scheduled Completion Date, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee setting forth with specificity the nature and extent
of such non-compliance, rectify same at Lessor's expense. If Lessee does not
give Lessor written notice of a non-compliance with this warranty as provided in
the Addendum, (S)7, correction of that non-compliance shall be the obligation of
Lessee at Lessee's sole cost and expense.
2.3 Compliance with Covenants, Restrictions and Building Code. Lessor
warrants to Lessee that the improvements on the Premises comply with all
applicable covenants or restrictions of record and applicable building codes,
regulations and ordinances in effect on the Substantial Completion Date. Said
warranty does not apply to the use to which Lessee will put the Premises or to
any Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made
or to be made by Lessee. If the Premises do not comply with said warranty,
Lessor shall, except as otherwise provided in this Lease, promptly after receipt
of written notice from Lessee setting forth with specificity the nature and
extent of such non-compliance, rectify the same at Lessor's expense. If Lessee
does not give Lessor written notice of a non-compliance with this warranty as
provided in the Addendum, (S)8, correction of that non-compliance shall be the
obligation of Lessee at Lessee's sole cost and expense.
2.4 Acceptance of Premises. Lessee hereby acknowledges that neither
Lessor, nor any of Lessor's agents, has made any oral or written representations
or warranties with respect to the said matters other than as set forth in this
Lease.
3. Term.
3.1 Term. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.
3.2 Early Possession. See Addendum, (S)9.
3.3 Delay in Possession. See Addendum, (S)(S) 6 and 9.
4. Rent.
4.1 Base Rent. Lessee shall cause payment of Base Rent and other rent or
charges, as the same may be adjusted from time to time, to be received by Lessor
in lawful money of the United States, without offset or deduction, on or before
the day on which it is due under the terms of this Lease. Base Rent and all
other rent and charges for any period during the term hereof which is for less
than one (1) full calendar month shall be prorated based upon the actual number
of days of the calendar month involved. Payment of Base Rent and other charges
shall be made to Lessor at its address stated herein or to such other persons or
at such other addresses as Lessor may from time to time designate in writing to
Lessee.
5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof
the Security Deposit set forth in Paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee fails
to pay Base Rent or other rent or charges due hereunder, or otherwise Breaches
under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain
all or any portion of said Security Deposit for the payment of any amount due
Lessor or to reimburse or compensate Lessor for any liability, cost, expense,
loss or damage (including attorneys' fees) which Lessor may suffer or incur by
reason thereof. If Lessor uses or applies all or any portion of said Security
Deposit, Lessee shall within ten (10) days after written request therefor
deposit moneys with Lessor sufficient to restore said Security Deposit to the
full amount required by this Lease. Lessor shall not be required to keep all or
any part of the Security Deposit separate from its general accounts. Lessor,
shall, at the expiration or earlier termination of the term hereof and after
Lessee has vacated the Premises, return to Lessee (or, at Lessor's
<PAGE>
option, to the last assignee, if any, of Lessee's interest herein), that portion
of the Security Deposit not used or applied by Lessor. Unless otherwise
expressly agreed in writing by Lessor, no part of the Security Deposit shall be
considered to be held in trust, to bear interest or other increment for its use,
or to be prepayment for any moneys to be paid by Lessee under this Lease. See
Addendum, (S)4.
6. Use. See Addendum, (S)10.
6.1 Use. Lessee shall use and occupy the Premises only for the purposes
set forth in Paragraph 1.8, or any other use which is comparable thereto and for
no other purpose. Lessee shall not use or permit the use of the Premises in a
manner that creates waste or a nuisance, or that disturbs owners and/or
occupants of, or causes damage to, neighboring premises or properties. Lessor
hereby agrees to not unreasonably withhold or delay its consent to any written
request by Lessee. Lessees assignees or subtenants, and by prospective
assignees and subtenants of the Lessee, its assignees and subtenants, for a
modification of said permitted purpose for which the premises may be used or
occupied, so long as the same will not impair the structural integrity of the
improvements on the Premises, the mechanical or electrical systems therein, is
not significantly more burdensome to the Premises and the improvements thereon,
and is otherwise permissible pursuant to this Paragraph 6. If Lessor elects to
withhold such consent, Lessor shall within five (5) business days give a written
notification of same, which notice shall include an explanation of Lessor's
reasonable objections to the change in use.
6.2 Hazardous Substances.
(a) Reportable Uses Require Consent. The term "Hazardous Substance" as
used in this Lease shall mean any product, substance, chemical material or waste
whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment or the premises, (ii) regulated or monitored by any governmental
authority, or (iii) a basis for liability of Lessor to any governmental agency
or third party under any applicable statute or common law theory. Hazardous
Substance shall include, but not be limited to, hydrocarbons, petroleum,
gasoline, crude oil or any products, by-products or fractions thereof. Lessee
shall not engage in any activity in, on or about the Premises which constitute a
Reportable Use (as hereinafter defined) of Hazardous Substances without the
express prior written consent of Lessor and compliance in a timely manner (at
Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph
6.3). "Reportable Use" shall mean (i) the installation or use of an above or
below ground storage tank, (ii) the generation, possession, storage, use,
transportation, or disposal of a Hazardous Substance that requires permit from,
or with respect to which a report, notice, registration or business plan is
required to be filled with, any governmental authority. Reportable Use shall
also include Lessee's being responsible for the presence in, on or about the
Premises of a Hazardous Substance with respect to which any Applicable Law
requires that a notice be given to persons entering or occupying the Premises or
neighboring properties. Notwithstanding the foregoing, Lessee may without
Lessor's prior consent, but in compliance with all Applicable Law, use any
ordinary and customary materials reasonably required to be used by Lessee in the
normal course of Lessee's business permitted on the Premises, so long as such
use is not a Reportable Use and does not expose the Premise or neighboring
properties to any meaningful risk of contamination or damage or expose Lessor to
any liability therefor. In addition, Lessor may (but without any obligation to
do so) condition its consent to the use or presence of any Hazardous Substance,
activity or storage tank by Lessee upon Lessee's giving Lessor such additional
assurances as Lessor, in its reasonable discretion, deems necessary to protect
itself, the public, the Premises and the environment against damage,
contamination or injury and/or liability therefrom or therefor, including, but
not limited to, the installation (and removal on or before Lease expiration or
earlier termination) of reasonably necessary protective modifications to the
Premises (such as concrete encasements).
(b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to
believe, that a Hazardous Substance, or a condition involving or resulting from
same, has come to be located in, on, under or about the Premises, other than as
previously consented to by Lessor, Lessee shall immediately give written notice
of such fact to Lessor. Lessee shall also immediately give Lessor a copy of any
statement, report, notice, registration, application, permit, business plan,
license, claim, action or proceeding given to, or received from, any
governmental authority or private party, or persons entering or occupying the
Premises, concerning the presence, spill, release, discharge of, or exposure to,
any Hazardous Substance or contamination in, on, or about the Premises,
including but not limited to all such documents as may be involved in any
Reportable Uses involving the Premises.
(c) Indemnification. Lessee shall indemnify, protect, defend and hold
Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all loss of rents and/or damages,
liabilities, judgments, costs, claims, liens, expenses, penalties, permits and
attorney's and
<PAGE>
consultant's fees arising out of or involving any Hazardous Substance or storage
tank brought onto the Premises by or for Lessee or under Lessee's control.
Lessee's obligations under this Paragraph 6 shall include, but not be limited
to, the effects of any contamination or injury to persons, property or the
environment created or permitted by Lessee, and the cost of investigation
(including consultant's and attorney's fees and testing), removal, remediation,
restoration and/or abatement thereof, or of any contamination therein involved,
and shall survive the expiration or earlier termination of the Lease. No
termination, cancellation or release agreement entered into by Lessor and Lessee
shall release Lessee from its obligations under this Lease with respect to
Hazardous Substances or storage tanks, unless specifically so agreed by Lessor
in writing at the time of such agreement.
6.3 Lessee's Compliance with Law. Except as otherwise provided in this
Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and
in a timely manner, comply with all "Applicable Law," which term is used in this
Lease to include all laws, rules, regulations, ordinances, directives,
covenants, easements and restrictions of record, permits, the requirements of
any applicable fire insurance underwriter or rating bureau, and the
recommendations of Lessor's engineers and/or consultants, relating in any manner
to the Premises (including but not limited to matters pertaining to (i)
industrial hygiene, (ii) environmental conditions on, in, under or about the
Premises, including soil and groundwater conditions, and (iii) the use,
generation, manufacture, production, installation, maintenance, removal,
transportation, storage, spill or release of any Hazardous Substance or storage
tank), now in effect or which may hereafter come into effect, and whether or not
reflecting a change in policy from any previously existing policy. Lessee
shall, within five (5) days after receipt of Lessor's written request, provide
Lessor with copies of all documents and information, including, but not limited
to, permits, registrations, manifests, applications, reports and certificates,
evidencing Lessee's compliance with any Applicable Law specified by Lessor, and
shall immediately upon receipt, notify Lessor in writing (with copies of any
documents involved) of any threatened or actual claim, notice, citation,
warning, complaint or report pertaining to or involving failure by Lessee or the
Premises to comply with any Applicable Law. See Addendum, (S)8.
6.4 Inspection; Compliance. Lessor and Lessor's Lender(s) (as defined in
Paragraph 8.3(a)) shall have the right to enter the Premises at any time in the
case of an emergency, and otherwise at reasonable times after reasonable notice,
for the purpose of inspecting the condition of the Premises and for verifying
compliance by Lessee with this Lease and all Applicable Laws (as defined in
Paragraph 6.3), and to employ experts and/or consultants in connection therewith
and to advise Lessor with respect to Lessee's activities, including but not
limited to the installation, operation, use, monitoring, maintenance, or removal
of a Hazardous Substance or storage tank on or from the Premises. The costs and
expenses of any such inspections shall be paid by the party requesting same,
unless a Breach of this Lease, violation of Applicable Law, or a contamination,
caused or materially contributed to by Lessee is found to exist or be imminent,
or unless the inspection is requested or ordered by a governmental authority as
the result of any such existing or imminent violation or contamination. In any
such case, Lessee shall upon request reimburse Lessor or Lessor's Lender, as the
case may be, for the costs and expenses of such inspections.
7. Maintenance; Repairs; Utility Installations; Trade Fixtures and Alterations.
7.1 Lessee's Obligations.
(a) Subject to Lessor's obligations under Addendum, (S)(S) 2 and 11, and
subject to the provisions of Paragraphs 2.2 (Lessor's warranty as to condition),
2.3 (Lessor's warranty as to compliance with covenants, etc.), 7.2 (Lessor's
obligations to repair), 9 (damage and destruction), and 14 (condemnation),
Lessee shall, at Lessee's sole cost and expense and at all such times, keep the
Premises and every part thereof in good order, condition and repair, structural
and non-structural (whether or not such portion of the Premises requiring
repairs, or the means of repairing the same, are reasonably or readily
accessible to Lessee, and whether or not the need for such repairs occurs as a
result of Lessee's use, any prior use, the elements or the age of such portion
of the Premises), including, without limiting the generality of the foregoing,
all equipment or facilities serving the Premises, such as plumbing, heating, air
conditioning, ventilating, electrical, lighting facilities, boilers, fired or
unfired pressure vessels, fire sprinkler and/or standpipe and hose or other
automatic fire extinguishing system, including fire alarm and/or smoke detection
systems and equipment, fire hydrants, fixtures, walls (interior and exterior),
foundations, ceilings, roofs, floors, windows, doors, plate glass, skylights,
landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks
and parkways located in, on, about, or adjacent to the Premises. Lessee shall
not cause or permit any Hazardous Substance to be spilled or released in, on,
under or about the Premises (including through the plumbing or sanitary sewer
system) and shall promptly, at Lessee's expense, take all investigatory and/or
remedial action reasonably recommended, whether or not formally ordered or
required, for the cleanup of any contamination of, and for the maintenance,
security and/or monitoring of the Premises, the elements surrounding same, or
neighboring properties, that was caused or materially contributed to by Lessee,
or pertaining to or involving any Hazardous Substance and/or storage tank
brought onto the Premises by or for Lessee or under its control. Lessee,
<PAGE>
in keeping the Premises in good order, condition and repair, shall exercise and
perform good maintenance practices. Lessee's obligations shall include
restorations, replacements or renewals when necessary to keep the Premises and
all improvements thereon or a part thereof in good order, condition and state of
repair. If Lessee occupies the Premises for seven (7) years or more, Lessor may
require Lessee to repaint the exterior of the buildings on the Premises as
reasonably required, but not more frequently than once every seven (7) years.
(b) Lessee shall pay as a part of "Operating Expenses," as defined in
Addendum, (S)2, the cost of contracts, in customary form and substance for, and
with contractors specializing and experienced in, the inspection, maintenance
and service of the following equipment and improvements, if any, located on the
Premises: (i) heating, air conditioning and ventilation equipment, (ii) boiler,
fired or unfired pressure vessels, (iii) fire sprinkler and/or standpipe and
hose or other automatic fire extinguishing systems, including fire alarm and/or
smoke detection, (iv) landscaping and irrigation systems, (v) roof covering and
drain maintenance and (vi) asphalt and parking lot maintenance.
7.2 Lessor's Obligations. Except for the warranties and agreements of
Lessor contained in Paragraphs 2.2 (relating to condition of the Premises), 2.3
(relating to compliance with covenants, restrictions and building code), 9
(relating to destruction of the Premises) and 14 (relating to condemnation of
the Premises), and as otherwise provided in this Lease (see Addendum, (S)11), it
is intended by the Parties hereto that Lessor have no obligation, in any manner
whatsoever, to repair and maintain the Premises, the improvements located
thereon, or the equipment therein, whether structural or non structural, all of
which obligations are intended to be that of the Lessee under Paragraph 7.1
hereof. It is the intention of the Parties that the terms of this Lease govern
the respective obligations of the Parties as to maintenance and repair of the
Premises. Lessee and Lessor expressly waive the benefit of any statute now or
hereafter in effect to the extent it is inconsistent with the terms of this
Lease with respect to, or which affords Lessee the right to make repairs at the
expense of Lessor or to terminate this Lease by reason of any needed repairs.
7.3 Utility Installations; Trade Fixtures; Alterations.
(a) Definitions; Consent Required. The term "Utility Installations" is
used in this Lease to refer to all carpeting, window coverings, air lines, power
panels, electrical distribution, security, fire protection systems,
communication systems, lighting fixtures, heating, ventilating, and air
conditioning equipment, plumbing, and fencing in, on or about the Premises. The
term "Trade Fixtures" shall mean Lessee's machinery and equipment that can be
removed without doing material damage to the Premises. The term "Alterations"
shall mean any modification of the improvements on the Premises from that which
are provided by Lessor under the terms of this Lease, other than Utility
Installations or Trade Fixtures, whether by addition or deletion. "Lessee Owned
Alterations and/or Utility Installations" are defined as Alterations and/or
Utility Installations made by Lessee that are not yet owned by Lessor as defined
in Paragraph 7.4(a). Lessee shall not make any Alterations or Utility
Installations in, on, under or about the Premises without Lessor's prior written
consent. Lessee may, however, make non-structural Utility Installations to the
interior of the Premises (excluding the roof), as long as they are not visible
from the outside, do not involve puncturing, relocating or removing the roof or
any existing walls, and the cumulative cost thereof during the term of this
Lease as extended does not exceed $50,000.
(b) Consent. Any Alterations or Utility Installations that Lessee shall
desire to make and which require the consent of the Lessor shall be presented to
Lessor in written form with proposed detailed plans. All consents given by
Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent,
shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits
required by governmental authorities, (ii) the furnishing of copies of such
permits together with a copy of the plans and specifications for the Alteration
or Utility Installation to Lessor prior to commencement of the work thereon, and
(iii) the compliance by Lessee with all conditions of said permits in a prompt
and expeditious manner. Any Alterations or Utility Installations by Lessee
during the term of this Lease shall be done in a good and workmanlike manner,
with good and sufficient materials, and in compliance with all Applicable Law.
Lessee shall promptly upon completion thereof furnish Lessor with as-built plans
and specifications therefor. Lessor may (but without obligation to do so)
condition its consent to any requested Alteration or Utility Installation that
costs $10,000 or more upon Lessee's providing Lessor with a lien and completion
bond in an amount equal to the estimated cost of such Alteration or Utility
Installation.
(c) Indemnification. Lessee shall pay, when due, all claims for labor or
materials furnished or alleged to have been furnished to or for Lessee at or for
use on the Premises, which claims are or may be secured by any mechanics' or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of any
work in, on or about the Premises, and Lessor shall have the right to post
notices of non-responsibility in or on the Premises as provided by law. If
Lessee shall,
<PAGE>
in good faith, contest the validity of any such lien, claim or demand, then
Lessee shall, at its sole expense defend and protect itself, Lessor and the
Premises against the same and shall pay and satisfy any such adverse judgment
that may be rendered thereon before the enforcement thereof against the Lessor
or the Premises. If Lessor shall require, Lessee shall furnish to Lessor a
surety bond satisfactory to Lessor in an amount equal to one and one-half times
the amount of such contested lien claim or demand, indemnifying Lessor against
liability for the same, as required by law for the holding of the Premises free
from the effect of such lien or claim.
7.4 Ownership; Removal; Surrender; and Restoration.
(a) Ownership. Subject to Lessor's right to require their removal or
become the owner thereof as hereinafter provided in this Paragraph 7.4, all
Alterations and Utility Additions made to the Premises by Lessee shall be the
property of and owned by Lessee, but considered a part of the Premises. Lessor
may, at any time and at its option, elect in writing to Lessee to be the owner
of all or any specified part of the Lessee Owned Alterations and Utility
Installations. Unless otherwise instructed per subparagraph 7.4(b) hereof, all
Lessee Owned Alterations and Utility Installations shall, at the expiration or
earlier termination of this Lease, become the property of Lessor and remain upon
and be surrendered by Lessee with the Premises. See Addendum, (S)13.
(b) Removal. Unless otherwise agreed in writing, Lessor may require
that any or all Lessee Owned Alterations or Utility Installations be removed by
the expiration or earlier termination of this Lease, notwithstanding their
installation may have been consented to by Lessor. Lessor may require the
removal at any time of all or any part of any Lessee Owned Alterations or
Utility Installations made without the required consent of Lessor.
(c) Surrender/Restoration. Lessee shall surrender the Premises by the
end of the last day of the Lease term or any earlier termination date, with all
of the improvements, parts and surfaces thereof clean and free of debris and in
good operating order, condition and state of repair, ordinary wear and tear
excepted. "Ordinary wear and tear" shall not include any damage or deterioration
that would have been prevented by good maintenance practice or by Lessee
performing all of its obligations under this Lease. Except as otherwise agreed
or specified in writing by Lessor, the Premises, as surrendered shall include
the Utility Installations. The obligation of Lessee shall include the repair of
any damage occasioned by the installation, maintenance or removal of Lessee's
Trade Fixtures, furnishings, equipment, and Alterations and/or Utility
Installations, as well as the removal of any storage tank installed by or for
Lessee, and the removal, replacement, or remediation of any soil, material or
ground water contaminated by Lessee, all as may then be required by Applicable
Law and/or good service practice. Lessee's Trade Fixtures shall remain the
property of Lessee and shall be removed by Lessee subject to its obligation to
repair and restore the Premises per this Lease.
8. Insurance; Indemnity.
8.1 Payment For Insurance. Regardless of whether the Lessor or Lessee is
the Insuring Party, Lessee shall pay for all insurance as a part of operating
expenses payable under Addendum, (S)2, required under this Paragraph 8 except to
the extent of the cost attributable to liability insurance carried by Lessor in
excess of $1,000,000 per occurrence. Premiums for policy periods commencing
prior to or extending beyond the Lease term shall be prorated to correspond to
the Lease term.
8.2 Liability Insurance.
(a) Carried by Lessee. Lessee shall obtain and keep in force during
the term of this Lease a Commercial General Liability policy of insurance
protecting Lessee and Lessor (as an additional insured) against claims for
bodily injury, personal injury and property damage based upon, involving or
arising out of the ownership, use, occupancy or maintenance of the Premises and
all areas appurtenant thereto. Such insurance shall be on an occurrence basis
providing single limit coverage in an amount not less than $1,000,000 per
occurrence with an "Additional Insured-Managers or Lessors of Premises
Endorsement and contain the "Amendment of the Pollution Exclusion" for damage
caused by heat, smoke or fumes from a hostile fire. The policy shall not contain
any intra-insured exclusions as between insured persons or organizations, but
shall include coverage for liability assumed under this Lease as an "insured
contract" for the performance of Lessee's indemnity obligations under this
Lease. The limits of said insurance required by this Lease or as carried by
Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of
any obligation hereunder. All insurance to be carried by Lessee shall be primary
to and not contributory with any similar insurance carried by Lessor, whose
insurance shall be considered excess insurance only.
<PAGE>
(b) Carried by Lessor. In the event Lessor is the Insuring Party,
Lessor shall also maintain liability insurance described in Paragraph 8.2(a),
above, in addition to, and not in lieu of, the insurance required to be
maintained by Lessee. Lessee shall not be named as an additional insured
therein.
8.3 Property Insurance - Building, Improvements and Rental Value. See
Addendum, (S)14.
(a) Building and Improvements. The Insuring Party shall obtain and
keep in force during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and to the holders of any mortgages, deeds
of trust or ground leases on the Premises ("Lender(s)"), insuring loss or damage
to the Premises. The amount of such insurance shall be equal to the full
replacement cost of the Premises, as the same shall exist from time to time, or
the amount required by Lenders. If Lessor is the Insuring Party, however, Lessee
Owned Alterations and Utility Installations shall be insured by Lessee under
Paragraph 8.4 rather than by Lessor. If the coverage is available and
commercially appropriate, such policy or policies shall insure against all risks
of direct physical loss or damage (except the perils of flood and/or earthquake
unless required by a Lender), including coverage for any additional costs
resulting from debris removal and reasonable amounts of coverage for the
enforcement of any ordinance or law regulating the reconstruction or replacement
of any undamaged sections of the Premises required to be demolished or removed
by reason of the enforcement of any building, zoning, safety or land use laws as
the result of a covered cause of loss. Said policy or policies shall also
contain an agreed valuation provision in lieu of any coinsurance clause, waiver
of subrogation, and inflation guard protection causing an increase in the annual
property insurance coverage amount by a factor of not less than the adjusted
U.S. Department of Labor Consumer Price Index for All Urban Consumers for the
city nearest to where the Premises are located. If such insurance coverage has a
deductible clause, the deductible amount shall not exceed $1,000 per occurrence,
and Lessee shall be liable for such deductible amount in the event of an Insured
Loss, as defined in Paragraph 9.1(c).
(b) Rental Value. The Insuring Party shall, in addition, obtain and
keep in force during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and Lender(s), insuring the loss of the full
rental and other charges payable by Lessee to Lessor under this Lease for one
(1) year (including all real estate taxes, insurance costs, and any scheduled
rental increases). Said insurance shall provide that in the event the Lease is
terminated by reason of an insured loss, the period of indemnity for such
coverage shall be extended beyond the date of the completion of repairs or
replacement of the Premises, to provide for one full year's loss of rental
revenues from the date of any such loss. Said insurance shall contain an agreed
valuation provision in lieu of any coinsurance clause, and the amount of
coverage shall be adjusted annually to reflect the projected rental income,
property taxes, insurance premium costs and other expenses, if any, otherwise
payable by Lessee, for the next twelve (12) month period. Lessee shall be liable
for any deductible amount in the event of such loss.
(c) Adjacent Premises. If the Premises are part of a larger building,
or if the Premises are part of a group of buildings owned by Lessor which are
adjacent to the Premises, the Lessee shall pay for any increase in the premiums
for the property insurance of such building or buildings if said increase is
caused by Lessee's acts, omissions, use or occupancy of the Premises.
(d) Tenant's Improvements. If the Lessor is the Insuring Party, the
Lessor shall not be required to insure Lessee Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease. If Lessee is the Insuring Party, the policy
carried by Lessee under this Paragraph 8.3 shall insure Lessee Owned Alterations
and Utility Installations.
8.4 Lessee's Property Insurance. Subject to the requirements of Paragraph
8.5, Lessee at its cost shall either by separate policy or, at Lessor's option,
by endorsement to a policy already carried, maintain insurance coverage on all
of Lessee's personal property, Lessee Owned Alterations and Utility
Installations in, on, or about the Premises similar in coverage to that carried
by the Insuring Party under Paragraph 8.3. Such insurance shall be full
replacement cost coverage with a deductible of not to exceed $1,000 per
occurrence. The proceeds from any such insurance shall be used by Lessee for
the replacement of personal property or the restoration of Lessee Owned
Alterations and Utility Installations. Lessee shall be the Insuring Party with
respect to the insurance required by this Paragraph 8.4 and shall provide Lessor
with written evidence that such insurance is in force.
8.5 Insurance Policies. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises are
located, and maintaining during the policy term a "General Policyholders Rating"
of at least B+, V, or such other rating as may be reasonably required by a
Lender having a lien on the Premises, as set forth in the most current issue of
"Best's Insurance Guide." Lessee shall not do or permit to be done anything
which shall invalidate the insurance policies referred to in this Paragraph 8.
If Lessee is the Insuring Party, Lessee shall cause to be delivered to Lessor
certified copies of policies of such insurance or
<PAGE>
certificates evidencing the existence and amounts of such insurance with the
insureds and loss payable clause as required by this Lease. No such policy shall
be cancellable or subject to modification except after thirty (30) days prior
written notice to Lessor. Lessee shall at least thirty (30) days prior to the
expiration of such policies, furnish Lessor with evidence of renewals or
"insurance binders" evidencing renewal thereof. If the Insuring Party shall fail
to procure and maintain the insurance required to be carried by the Insuring
Party under this Paragraph 8, the other Party may, but shall not be required to,
procure and maintain the same, but at Lessee's expense.
8.6 Waiver of Subrogation. Without affecting any other rights or
remedies, Lessee and Lessor ("Waiving Party") each hereby release and relieve
the other, and waive their entire right to recover damages (whether in contract
or in tort) against the other, for loss of or damage to the Waiving Party's
property arising out of or incident to the perils required to be insured against
under Paragraph 8. The effect of such releases and waivers of the right to
recover damages shall not be limited by the amount of insurance carried or
required, or by any deductibles applicable thereto.
8.7 Indemnity. Except for Lessor's negligence and/or breach of express
warranties, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
costs, liens, judgments, penalties, permits, attorney's and consultant's fees,
expenses and/or liabilities arising out of, involving, or in dealing with the
occupancy of the Premises by Lessee, the conduct of Lessee's business, any act,
omission or neglect of Lessee, its agents, contractors, employees or invitees,
and out of any Default or Breach by Lessee in the performance in a timely manner
of any obligation on Lessee's part to be performed under this Lease. The
foregoing shall include, but not be limited to, the defense or pursuit of any
claim or any action or proceeding involved therein, and whether or not (in the
case of claims made against Lessor) litigated and/or reduced to judgment, and
whether well founded or not. In case any action or proceeding be brought
against Lessor by reason of any of the foregoing matters, Lessee upon notice
from Lessor shall defend the same at Lessee's expense by counsel reasonably
satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense.
Lessor need not have first paid any such claim in order to be so indemnified.
8.8 Exemption of Lessor from Liability. Except for Lessor's gross
negligence or Breach of this Lease, Lessor shall not be liable for injury or
damage to the person or goods, wares, merchandise or other property of Lessee,
Lessee's employees, contractors, invitees, customers, or any other person in or
about the Premises, whether such damage or injury is caused by or results from
fire, steam, electricity, gas, water or rain, or from the breakage, leakage,
obstruction or other defects of pipes, fire sprinklers, wire appliances,
plumbing, air conditioning or lighting fixtures, or from any other cause,
whether the said injury or damage results from conditions arising upon the
Premises or upon other portions of the building of which the Premises are a
part, or from other sources or places, and regardless of whether the cause of
such damage or injury or the means of repairing the same is accessible or not.
Lessor shall not be liable for any damages arising from any act of neglect of
any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of
this Lease, Lessor shall under no circumstances be liable for injury to Lessee's
business or for any loss of income or profit therefrom. See Addendum, (S)12.
9. Damage or Destruction. See Addendum, (S)15.
9.1 Definitions.
(a) "Premises Partial Damage" shall mean damage or destruction to the
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations, the repair and cost of which damage or destruction is less than
50% of the then Replacement Cost of the Premises immediately prior to such
damage or destruction, excluding from such calculation the value of the land and
Lessee Owned Alterations and Utility Installations.
(b) "Premises Total Destruction" shall mean damage or destruction to
the Premises, other than Lessee Owned Alterations and Utility Installations, the
repair cost of which damage or destruction is 50% or more of the then
Replacement Cost of the Premises immediately prior to such damage or
destruction, excluding from such calculation the value of the land and Lessee
Owned Alterations and Utility Installations.
(c) "Insured Loss" shall mean damage or destruction to improvements on
the Premises, other than Lessee Owned Alterations and Utility Installations,
which was caused by an event required to be covered by the insurance described
in Paragraph 8.3(a), irrespective of any deductible amounts coverage limits
involved.
(d) "Replacement Cost" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto, including demolition,
<PAGE>
debris removal and upgrading required by the operation of applicable building
codes, ordinances or laws, and without deduction for depreciation.
(e) "Hazardous Substance Condition" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 Partial Damage - Insured Loss. If a Premises Partial Damage that is
an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such
damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect; provided, however, that Lessee shall, at Lessor's
election, make the repair of any damage or destruction the total cost to repair
of which is $10,000 or less, and, in such event, Lessor shall make the insurance
proceeds available to Lessee on a reasonable basis for this purpose.
Notwithstanding the foregoing, if the required insurance was not in force or the
insurance proceeds are not sufficient to effect such repair, the Insuring Party
shall promptly contribute the shortage in proceeds (except as to the deductible
which is Lessee's responsibility) as and when required to complete said repairs.
In the event, however, the shortage in proceeds was due to the fact that, by
reason of the unique nature of the improvements, replacement cost insurance
coverage was not commercially reasonable and available, Lessor shall have no
obligation to pay for the shortage in insurance proceeds or to fully restore the
unique aspects of the Premises unless Lessee provides Lessor with the funds to
cover same, or adequate assurance thereof, within ten (10) days following
receipt of written notice of such shortage and request therefor. If Lessor
receives said funds or adequate assurance thereof within said ten (10) day
period, the party responsible for making the repairs shall complete them as soon
as reasonably possible and this Lease shall remain in full force and effect. If
Lessor does not receive such funds or assurance within said period, Lessor may
nevertheless elect by written notice to Lessee within ten (10) days thereafter
to make such restoration and repair as is commercially reasonable with Lessor
paying any shortage in proceeds in which case this Lease shall remain in full
force and effect. If in such case Lessor does not so elect, then this Lease
shall terminate sixty (60) days following the occurrence of the damage or
destruction. Unless otherwise agreed, Lessee shall in no event have any right to
reimbursement from Lessor any funds contributed by Lessee to repair any such
damage or destruction. Premises Partial Damage due to flood or earthquake shall
be subject to Paragraph 9.3 rather than Paragraph 9.2., notwithstanding that
there may be some insurance coverage, but the net proceeds of any such insurance
shall be made available for the repairs if made by either Party.
9.3 Partial Damage - Uninsured Loss. If a Premises Partial Damage that is
not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13), Lessor may at Lessor's option, either: (i) repair
such damage as soon as reasonably possible at Lessor's expense, in which event
this Lease shall continue in full force and effect, or (ii) give written notice
to Lessee within thirty (30) days after receipt by Lessor of knowledge of the
occurrence of such damage of Lessor's desire to terminate this Lease as of the
date sixty (60) days following the giving of such notice. In the event Lessor
elects to give such notice of Lessor's intention to terminate this Lease, Lessee
shall have the right within ten (10) days after the receipt of such notice to
give written notice to Lessor of Lessee's commitment to pay for the repair of
such damage totally at Lessee's expense and without reimbursement from Lessor.
Lessee shall provide Lessor with the required funds or satisfactory assurance
thereof within thirty (30) days following Lessee's said commitment. In such
event this Lease shall continue in full force and effect, and Lessor shall
proceed to make such repairs as soon as reasonably possible and the required
funds are available. If Lessee does not give such notice and provide the funds
or assurance thereof within the times specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination. See
Addendum, (S)15.1.
9.4 Total Destruction. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an Insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 8.6.
9.5 Damage Near End of Term. If at any time during the last six (6)
months of the term of this Lease there is damage for which the cost to repair
exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may,
at Lessor's option, terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, if Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by, within twenty (20) days following the
<PAGE>
occurrence of the damage, or before the expiration of the time provided in such
option for its exercise, whichever is earlier ("Exercise Period"), (i)
exercising such option and (ii) providing Lessor with any shortage in insurance
proceeds (or adequate assurance thereof) needed to make the repairs. If Lessee
duly exercises such option during said Exercise Period and provides Lessor with
funds (or adequate assurance thereof) to cover any shortage in insurance
proceeds, Lessor shall, at Lessor's expense repair such damage as soon as
reasonably possible and this Lease shall continue in full force and effect. If
Lessee fails to exercise such option and provide such funds or assurance during
said Exercise Period, then Lessor may at Lessor's option terminate this Lease as
of the expiration of said sixty (60) day period following the occurrence of such
damage by giving written notice to Lessee of Lessor's election to do so within
ten (10) days after the expiration of the Exercise Period, notwithstanding any
term or provision in the grant of option to the contrary. See Addendum, (S)15.2.
9.6 Abatement of Rent; Lessee's Remedies. See Addendum, (S)15.3.
(a) In the event of damage described in Paragraph 9.2 (Partial Damage
- - -Insured), whether or not Lessor or Lessee repairs or restores the Premises, the
Base Rent, Real Property Taxes, insurance premiums, and other charges, if any,
payable by Lessee hereunder for the period during which such damage, its repair
or the restoration continues (not to exceed the period for which rental value
insurance is required under Paragraph 8.3(b)), shall be abated in proportion to
the degree to which Lessee's use of the Premises is impaired. Except for
abatement of Base Rent, Real Property Taxes, insurance premiums, and other
charges, if any, as aforesaid, all other obligations of Lessee hereunder shall
be performed by Lessee, and Lessee shall have no claim against Lessor for any
damage suffered by reason of any such repair or restoration, except for Lessor's
gross negligence or willful misconduct.
(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises within
ninety (90) days after such obligation shall accrue, Lessee may, at any time
prior to the commencement of such repair or restoration, give written notice to
Lessor and to any Lenders of which Lessee has actual notice of Lessee's election
to terminate this Lease on a date not less than sixty days following the giving
of such notice. If Lessee gives such notice to Lessor and such Lenders and such
repair or restoration is not commenced within thirty (30) days after receipt of
such notice, this Lease shall terminate as of the date specified in said notice.
If Lessor or a Lender commences the repair or restoration of the Premises within
thirty (30) days after receipt of such notice, this Lease shall continue in full
force and effect. "Commence" as used in this Paragraph shall mean either the
unconditional authorization of the preparation of the required plans, or the
beginning of the actual work on the Premises, whichever first occurs.
9.7 Hazardous Substance Conditions. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable Law
and this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13), Lessor may at Lessor's option either (i) investigate
and remediate such Hazardous Substance Condition, if required, as soon as
reasonably possible at Lessor's expense, in which event this Lease shall
continue in full force and effect, or (ii) if the estimated cost to investigate
and remediate such condition exceeds twelve (12) times the then monthly Base
Rent or $100,000, whichever is greater, give written notice to Lessee within
thirty (30) days after receipt by Lessor of knowledge of the occurrence of such
Hazardous Substance Condition of Lessor's desire to terminate this Lease as of
the date sixty (60) days following the giving of such notice. In the event
Lessor elects to give such notice of Lessor's intention to terminate this Lease,
Lessee shall have the right within ten (10) days after the receipt of such
notice to give written notice to Lessor of Lessee's commitment to pay for the
investigation and remediation of such Hazardous Substance Condition totally at
Lessee's expense and without reimbursement from Lessor except to the extent of
an amount equal to twelve (12) times the then monthly Base Rent or $100,000,
whichever is greater. Lessee shall provide Lessor with the funds required of
Lessee or satisfactory assurance thereof within thirty (30) days following
Lessee's said commitment. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such investigation and remediation
as soon as reasonably possible and the required funds are available. If Lessee
does not give such notice and provide the required funds or assurance thereof
within the times specified above, this Lease shall terminate as of the date
specified in Lessor's notice of termination. If a Hazardous Substance Condition
occurs for which Lessee is not legally responsible, there shall be abatement of
Lessee's obligations under this Lease to the same extent as provided in
Paragraph 9.6(a) for a period of not to exceed twelve (12) months.
9.8 Termination - Advance Payments. Upon termination of this Lease
pursuant to this Paragraph 9, an equitable adjustment shall be made concerning
advance Base Rent and any other advance payments made by Lessee to Lessor.
Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit
as has not been, or is not then required to be, used by Lessor under the terms
of this Lease. See Addendum, (S)15.4.
<PAGE>
9.9 Waive Statutes. Lessor and Lessee agree that the terms of this Lease
shall govern the effect of any damage to or destruction of the Premises with
respect to the termination of this Lease and hereby waive the provisions of any
present or future statute to the extent inconsistent herewith.
10. Real Property Taxes.
10.1 Payment of Taxes. Lessee shall pay the Real Property Taxes, as
defined in Paragraph 10.2, applicable to the Premises during the term of this
Lease as a part of the Operating Expenses payable under Addendum, (S)2. If any
such taxes to be paid by Lessee shall cover any period of time prior to or after
the expiration or earlier termination of the term hereof, Lessee's share of such
taxes shall be equitably prorated to cover only the period of time within the
tax fiscal year this Lease is in effect, and Lessor shall reimburse Lessee for
any overpayment after such proration.
10.2 Definition of "Real Property Taxes." As used herein, the term "Real
Property Taxes" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed upon the Premises by any authority
having the direct or indirect power to tax, including any city, state or federal
government, or any school, agricultural, sanitary, fire, street, drainage or
other improvement district thereof, levied against any legal or equitable
interest of Lessor in the Premises or in the real property of which the Premises
are a part, Lessor's right to rent or other income therefrom, and/or Lessor's
business of leasing the Premises. The term "Real Property Taxes" shall also
include any tax, fee, levy, assessment or charge, or any increase therein
imposed by reason of events occurring, or changes in applicable law taking
effect, during the term of this Lease, including but not limited to a change in
the ownership of the Premises or in the improvements thereon, the execution of
this Lease, or any modification, amendment or transfer thereof, and whether or
not contemplated by the Parties.
10.3 Joint Assessment. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property Taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be determined by Lessor from the respective valuations
assigned in the assessor's work sheets or such other information as may be
reasonably available. Lessor's reasonable determination thereof, in good faith,
shall be conclusive.
10.4 Personal Property Taxes. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or elsewhere. When possible, Lessee shall
cause its Trade Fixtures, furnishings, equipment and all other personal property
to be assessed and billed separately from the real property of Lessor. If any
of Lessee's said personal property shall be assessed with Lessor's real
property, Lessee shall pay Lessor the taxes attributable to Lessee within ten
(10) days after receipt of a written statement setting forth the taxes
applicable to Lessee's property or, at Lessor's option, as provided in Paragraph
10.1(b).
11. Utilities. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered with other premises.
12. Assignment and Subletting. See Addendum, (S)16.
12.1 Lessor's Consent Required.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively,
"assignment") sublet all or any part of Lessee's interest in this Lease or in
the Premises without Lessor's prior written consent given under and subject to
the terms of Paragraph 36.
(b) See Addendum, (S)16.
(c) See Addendum, (S)16.
(d) An assignment or subletting of Lessee's interest in this Lease
without Lessor's specific prior written consent shall, at Lessor's option, be
Default curable after notice per Paragraph 13.1(c). Lessor shall have the right
to upon thirty (30) days written notice ("Lessor's Notice"), increase the
monthly Base Rent to fair market
<PAGE>
rental value or one hundred ten percent (110%) of the Base Rent then in effect,
whichever is greater. Pending determination of the new fair market rental value,
if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice,
with any overpayment credited against the next installment(s) of Base Rent
coming due, and any underpayment for the period retroactively to the effective
date of the adjustment being due and payable immediately upon the determination
thereof. Further, in the event such Breach and market value adjustment, (i) any
index-oriented rental or price adjustment formulas contained in this Lease shall
be adjusted to require that the base index is determined with reference to the
index applicable to the time of such adjustment, and (ii) any fixed rental
adjustments scheduled during the remainder of the Lease term shall be increased
in the same ratio as the new market rental bears to the Base Rent in effect
immediately prior to the market value adjustment.
12.2 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessor's consent, any assignment shall not: (i) be
effective without the express written assumption by such assignee of the
obligations of Lessee under this Lease, (ii) release Lessee of any obligations
hereunder, or (iii) alter the primary liability of Lessee of the payment of Base
Rent and other sums due Lessor hereunder or for the performance of any other
obligations to be performed by Lessee under the Lease.
(b) Lessor may accept any rent or performance of Lessee's obligations
from any person other than Lessee pending approval or disapproval of assignment.
Neither a delay in the approval or disapproval of such assignment nor the
acceptance of any rent or performance shall constitute a waiver or estoppel of
Lessor's right to exercise its remedies for the Default or Breach by Lessee of
any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessor or to
any subsequent or successive assignment or subletting by the sublessee.
However, Lessor may consent to subsequent sublettings and assignments of the
sublease or any amendments or modifications thereto without notifying Lessee or
anyone else liable on the Lease or sublease and without obtaining their consent,
and such action shall not relieve such persons from liability under this Lease
or sublease.
(d) In the event of any Breach of Lessee's obligations under this
Lease, Lessor may proceed directly against Lessee, any Guarantor or any one else
responsible for the performance of the Lessee's obligations under this Lease,
including the sublessee, without first exhausting Lessor's remedies against any
other person or entity responsible therefor to Lessor, or any security held by
Lessor or Lessee.
(e) Each request for consent to an assignment or subletting shall be
in writing, accompanied by information relevant to Lessor's determination to the
financial and operational responsibility and appropriateness of the proposed
assignee or sublessee, including but not limited to the intended and/or required
modification of the Premises, if any, together with a non-refundable deposit of
$1,000 as reasonable consideration for Lessor's considering and processing the
request for consent. Lessee agrees to provide Lessor with such other or
additional information and/or documentation as may be reasonably requested by
Lessor.
(f) Any assignee of this Lease shall, by reason of accepting such
assignment, be deemed for the benefit of Lessor, to have assumed and agreed to
conform and comply with each and every term, covenant, condition and obligation
herein to be observed or performed by Lessee during the term of said assignment
or sublease, other than such obligations as are contrary to or inconsistent with
provisions of an assignment to which Lessor has specifically consented in
writing.
12.3 Additional Terms and Conditions Applicable to Subletting. The
following terms and conditions shall apply to any subletting by Lessee of any
part of the Premises and shall be deemed included in all subleases under this
Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a portion
of the Premises heretofore or hereafter made by Lessee, and Lessor may collect
such rent and income and apply same toward Lessee's obligations under this
Lease; provided, however, that until a Breach (as defined in Paragraph 13.1)
shall occur in the performance of Lessee's obligations under this Lease, Lessee
may, except as otherwise provided in this Lease, receive, collect and enjoy the
rents accruing under such sublease. Lessor shall not, by reason of this or any
other assignment of such sublease to Lessor, nor by reason of the collection of
the rents from a sublessee, be deemed liable to the sublessee for any failure of
Lessee to perform and comply with any of Lessee's obligations to such sublessee
under such sublease. Lessee hereby irrevocably authorizes and directs any such
sublessee, upon receipt of a written notice from Lessor stating that a Breach
exists in the performance of Lessee's obligations under this Lease, to pay to
Lessor the rents
<PAGE>
and other charges due and to become due under the sublease. Sublessee shall rely
upon such statement and request from Lessor and shall pay such rents and other
charges to Lessor without any obligation or right to inquire as to why such
Breach exists and notwithstanding any notice from or claim from Lessee to the
contrary. Lessee shall have no right or claim against said sublessee or, until
the Breach has been cured, against Lessor, for any such rents and other charges
so paid by said sublessee to Lessor.
(d) No sublessee shall further assign or sublet all or any part of
the Premises without Lessor's prior written consent.
13. Default; Breach; Remedies. See Addendum, (S)17.
13.1 Default; Breach. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as herein
defined), $350.00 is a reasonable minimum sum per such occurrence for legal
services and costs in the preparation and service of a notice of Default and
that Lessor may include the cost of such services and costs in said notice as
rent due and payable to cure said Default. A "Default" is defined as a failure
by the Lessee to observe, comply with or perform any of the terms, covenants,
conditions or rules applicable to Lessee under this Lease. A "Breach" is
defined as the occurrence of any one or more of the following Defaults, and,
where a grace period for cure after notice is specified herein, the failure by
Lessee to cure such Default prior to the expiration of the applicable grace
period, shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2
and/or 13.3:
(a) The abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the failure
by Lessee to make any payment of Base Rent or any other monetary payment
required to be made by Lessee hereunder, whether to Lessor or to a third party,
as and when due, where such failure continues for a period of three (3) days
following written notice thereof by or on behalf of Lessor to Lessee.
(c) See Addendum, (S)17.2.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
that are to be observed, complied with or performed by Lessee, other than those
described in subparagraphs (a), (b), or (c), above, where such Default continues
for a period of thirty (30) days after written notice thereof by or on behalf of
Lessor to Lessee; provided, however, that if the nature of Lessee's Default is
such that more than thirty (30) days are reasonably required for its cure, then
it shall not be deemed to be a Breach of this Lease by Lessee if Lessee
commences such cure within said thirty (30) day period and thereafter diligently
prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) The making by
Lessee of any general arrangement or assignment for the benefit of creditors;
(ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. (S)101 or any
successor statute thereto (unless, in the case of a petition filed against
Lessee, the same is dismissed within sixty (60) days; (iii) the appointment of a
trustee or receiver to take possession of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where possession
is not restored to Lessee within thirty (30) days; or (iv) the attachment,
execution or other judicial seizure of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where such
seizure is not discharged within thirty (30) days; provided, however, in the
event that any provision of this subparagraph (e) is contrary to any applicable
law, such provision shall be of no force or effect, and not affect the validity
of the remaining provisions.
(f) The discovery by Lessor that any financial statement given to
Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was
materially false.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a guarantor; (ii) the termination of a guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty; (iii) a guarantor's becoming insolvent or the subject of a
bankruptcy filing, which is not dismissed within 60 days; (iv) a guarantor's
refusal to honor the guaranty; or (v) a guarantor's breach of its guaranty
obligation on an anticipatory breach basis, and Lessee's failure, within sixty
(60) days following written notice by or on behalf of Lessor to Lessee of any
such event, to provide Lessor with written alternative assurance or security,
which, when coupled with the then existing resources of Lessee, equals or
exceeds the combined financial resources of Lessee and the guarantors that
existed at the time of execution of this Lease.
<PAGE>
13.2 Remedies. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written notice
to Lessee (or in case of an emergency, without notice), Lessor may at its option
(but without obligation to do so), perform such duty or obligation on Lessee's
behalf with respect to the obtaining of reasonably required bonds, insurance
policies, or governmental licenses, permits or approvals. The costs and
expenses of any such performance by Lessor shall be due and payable by Lessee to
Lessor upon invoice therefor. If any check given to Lessor by Lessee shall not
be honored by the bank upon which it is drawn, Lessor, at its option, may
require all future payments to be made under this Lease by Lessee to be made
only by cashier's check. In the event of a Breach of this Lease by Lessee, as
defined in Paragraph 13.1, with or without further notice or demand, and without
limiting Lessor in the exercise of any right or remedy which Lessor may have by
reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor. In such
event Lessor shall be entitled to recover from Lessee: (i) the worth at the time
of the award of the unpaid rent which had been earned at the time of
termination; (ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves could have
been reasonably avoided; (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of the leasing commission paid by Lessor applicable to the unexpired
term of this Lease. The worth at the time of award of the amount referred to in
provision (iii) of the prior sentence shall be computed by discounting such
amount at the discount rate of the Federal Reserve Bank of San Francisco at the
time of award plus one percent (1%). Efforts by Lessor to mitigate damages
caused by Lessee's Default or Breach of this Lease shall not waive Lessor's
right to recover damages under this Paragraph. If termination of this Lease is
obtained through the provisional remedy of unlawful detainer, Lessor shall have
the right to recover in such proceeding the unpaid rent and damages as are
recoverable therein, or Lessor may reserve therein the right to recover all or
any part thereof in a separate suit for such rent and/or damages. If a notice
and grace period required under subparagraphs 13.1(b), (c) or (d) was not
previously given, a notice to pay rent or quit, or to perform or quit, as the
case may be, given to Lessee under any statute authorizing the forfeiture of
leases for unlawful detainer shall also constitute the applicable notice for
grace period purposes required by subparagraphs 13.1(b), (c) or (d). In such
case, the applicable grace period under subparagraphs 13.1 (b), (c) or (d) and
under the unlawful detainer statute shall run concurrently after the one such
statutory notice, and the failure of Lessee to cure the Default within the
greater of the two such grace periods shall constitute both an unlawful detainer
and a Breach of this Lease entitling Lessor to the remedies provided for in this
Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession in effect (in
California under California Civil Code Section 1951.4) after Lessee's Breach and
abandonment and recover the rent as it becomes due, provided Lessee has the
right to sublet or assign, subject only to reasonable limitations. See
Paragraphs 12 and 36 for the limitations on assignment and subletting which
limitations Lessee and Lessor agree are reasonable. Acts of maintenance or
preservation, efforts to relet the Premises, or the appointment of a receiver to
protect the Lessor's interest under the Lease, shall not constitute a
termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located.
(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters occurring
or accruing during the term hereof or by reason of Lessee's occupancy of the
Premises.
13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee
to Lessor of rent and other sums due hereunder will cause Lessor to incur costs
not contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed upon Lessor by the
terms of any ground lease, mortgage or trust deed covering the Premises.
Accordingly, if any installment of rent or any other sum due from Lessee shall
not be received by Lessor or Lessor's designee within five (5) days after such
amount shall be due, then, without any requirement for notice to Lessee, Lessee
shall pay to Lessor a late charge equal to six percent (6%) of such overdue
amount. The parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor
<PAGE>
will incur by reason of late payment by Lessee. Acceptance of such late charge
by Lessor shall in no event constitute a waiver of Lessee's Default or Breach
with respect to such overdue amount, nor prevent Lessor from exercising any of
the other rights and remedies granted hereunder. In the event that a late charge
is payable hereunder, whether or not collected, for three (3) consecutive
installments of Base Rent, then notwithstanding Paragraph 4.1 or any other
provision of this Lease to the contrary, Base Rent shall, at Lessor's option,
become due and payable quarterly in advance. See Addendum, (S)17.
13.5 Breach by Lessor. Lessor shall not be deemed in breach of this Lease
unless Lessor fails within a reasonable time to perform an obligation required
to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable
time shall in no event be less than thirty (30) days after receipt by Lessor,
and by the holders of any ground lease, mortgage or deed of trust covering the
Premises whose name and address shall have been furnished Lessee in writing for
such purpose, of written notice specifying wherein such obligation of Lessor has
not been performed; provided, however, that if the nature of Lessor's obligation
is such that more than thirty (30) days after such notice are reasonably
required for its performance, then Lessor shall not be in breach of this Lease
if performance is commenced within such thirty (30) day period and thereafter
diligently pursued to completion.
14. Condemnation. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than ten percent (10%) of the floor
area of the Premises, or more than twenty-five percent (25%) of the land area
not occupied by any building, is taken by condemnation, Lessee may, at Lessee's
option, to be exercised in writing within thirty (30) days after Lessor shall
have given Lessee written notice of such taking (or in the absence of such
notice, within thirty (30) days after the condemning authority shall have taken
possession) terminate this Lease as of the date the condemning authority takes
such possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the Base Rent shall be reduced in the same
proportion as the rentable floor area of the Premises taken bears to the total
rentable floor area of the building located on the Premises. No reduction of
Base Rent shall occur if the only portion of the Premises taken is land on which
there is no building. Any award for the taking of all or any part of the
Premises under the power of eminent domain or any payment made under threat of
the exercise of such power shall be the property of Lessor, whether such award
shall be made as compensation for diminution in value of the leasehold or for
the taking of the fee, or as severance damages; provided, however, that Lessee
shall be entitled to any compensation separately awarded to Lessee for Lessee's
relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that
this Lease is not terminated by reason of such condemnation, Lessor shall to the
extent of its net severance damages received, over and above the legal and other
expenses incurred by Lessor in the condemnation matter, repair any damage to the
Premises caused by such condemnation, except to the extent that Lessee has been
reimbursed therefor by the condemning authority. Lessee shall be responsible
for the payment of any amount in excess of such net severance damages required
to complete such repair. See Addendum, (S)18.
15. Broker's Fee.
15.1 The Brokers named in Paragraph 1.10 are the procuring causes of this
Lease.
15.2 Upon execution of this Lease by both Parties, Lessor shall pay to
said Broker's jointly, or in such separate shares as they may mutually designate
in writing, a fee as set forth in a separate written agreement between Lessor
and said Brokers (or in the event there is no separate written agreement between
Lessor and said Brokers, the sum of $ as per agreement) for brokerage services
----------------
rendered by said Brokers to Lessor in this transaction.
15.3 Unless Lessor and Brokers have otherwise agreed in writing, Lessor
further agrees that: (a) if Lessee exercises any Option (as defined in
Paragraph 39.1) or any Option subsequently granted which is substantially
similar to an Option granted to Lessee in this Lease, or (b) if Lessee acquires
any rights to the Premises or other premises described in this Lease which are
substantially similar to what Lessee would have acquired had an Option herein
granted to Lessee been exercised, or (c) if Lessee remains in possession of the
Premises, with the consent of Lessor, after the expiration of the term of this
Lease after having failed to exercise an Option, or (d) if said Brokers are the
procuring cause of any other lease or sale entered into between the Parties
pertaining to the Premises and/or any adjacent property in which Lessor has an
interest, or (e) if Base Rent is increased, whether by agreement or operation of
an escalation clause herein, then as to any of said transactions, Lessor shall
pay said Brokers a fee in accordance with the schedule of said Brokers in effect
at the time of the execution of this Lease.
<PAGE>
15.4 Any buyer or transferee of Lessor's interest in this Lease, whether
such transfer is by agreement or by operation of law, shall be deemed to have
assumed Lessor's obligation under this Paragraph 15. Each Broker shall be a
third party beneficiary of the provisions of this Paragraph 15 to the extent its
interest in any commission arising from this Lease and may enforce that right
directly against Lessor and its successors.
15.5 Lessee and Lessor each represent and warrant to the other that it has
had no dealings with any person, firm, broker or finder (other than the Brokers,
if any named in Paragraph 1.10) in connection with the negotiation of this Lease
and/or the consummation of the transaction contemplated herein and that no
broker or other person, firm or entity other than said named Brokers is entitled
to any commission or finder's fee in connection with such transaction. Lessee
and Lessor do each hereby agree to indemnify, protect, defend and hold the other
harmless from and against liability for compensation or charges which may be
claimed by any such unnamed broker, finder or other similar party by reason of
any dealings or actions of the indemnifying Party, including any costs,
expenses, attorneys' fees reasonably incurred with respect thereto.
15.6 Lessor and Lessee hereby consent to and approve all agency
relationships, including any dual agencies, indicated in Paragraph 1.10.
16. Tenancy Statement.
16.1 Each Party (as "Responding Party") shall within ten (10) days after
written notice from the other Party (the "Requesting Party") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the then most current "Tenancy Statement" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.
16.2 If Lessor desires to finance, refinance, or sell the Premises, any
part thereof, or the building of which the Premises are a part, Lessee and the
Guarantors of Lessee's performance hereunder shall deliver to any potential
lender or purchaser designated by Lessor financial statements of Lessee and such
Guarantors in such form as customarily prepared by Lessee and Guarantor, as
applicable (including any additional statements for the last three years), as
may be reasonably required by such lender or purchaser, including but not
limited to Lessee's financial statements for the past three (3) years. All such
financial statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
17. Lessor's Liability. The term "Lessor" as used herein shall mean the owner
or owners at the time in question of the fee title to the Premises, or, if it is
a sublease, of the Lessee's interest in the prior lease. In the event of a
transfer of Lessor's title or interest in the Premises or in this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor at the time of such transfer or assignment.
Except as provided in Paragraph 15, upon such transfer or assignment and
delivery of the Security Deposit, as aforesaid, the prior Lessor shall be
relieved of liability with respect to the obligations and/or covenants under
this Lease thereafter to be performed by the Lessor. Subject to the foregoing,
the obligations and/or covenants in this Lease to be performed by the Lessor
shall be binding only upon the Lessor as hereinabove defined. See Addendum,
(S)19.
18. Severability. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. Interest on Past-Due Obligations. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within thirty (30)
days following the date on which it was due, shall bear interest from the
thirty-first (31st) day after it was due at the rate of 12% per annum, but not
exceed the maximum rate allowed by law, in addition to the late charge provided
for in Paragraph 13.4. See Addendum, (S)20.
20. Time of Essence. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
21. Rent Defined. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be rent.
22. No Prior or Other Agreements; Broker Disclaimer. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein and
no other prior agreement or understanding shall be effective.
<PAGE>
23. Notices.
23.1 All notices required or permitted by this Lease shall be in writing
and may be delivered in person (by hand or by messenger or courier service or
may be sent by regular, certified or registered mail or U.S. Postal Service
Express Mail, with postage prepaid, or by facsimile transmission, and shall be
deemed sufficiently given if served in a manner specified in this Paragraph 23.
The addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notice purposes. Either Party may by
written notice to the other specify a different address for notice purposes. A
copy of all notices required or permitted to be given to Lessor or Lessee
hereunder shall be concurrently transmitted to such persons or parties at such
addresses as Lessor or Lessee may from time to time hereafter designate by
written notice to the other.
23.2 Any notice sent by registered or certified mail, return receipt
requested, shall be deemed given on the date of delivery shown on the receipt or
if no delivery date is shown, the postmark thereon. If sent by regular mail the
notice shall be deemed given forty-eight (48) hours after the same is addressed
as required herein and mailed with postage prepaid. Notices delivered by United
States Express Mail or overnight courier that guarantees next day delivery shall
be deemed given twenty-four (24) hours after delivery of the same to the United
States Postal Service or courier. If any notice is transmitted by facsimile
transmission or similar means, the same shall be deemed served or delivered upon
telephone confirmation of receipt of the transmission thereof, provided a copy
is also delivered via delivery or mail. If notice is received on a Saturday,
Sunday or legal holiday, it shall be deemed received on the next business day.
24. Waivers. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or of any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any act shall not be deemed to render unnecessary
the obtaining of Lessor's consent to, or approval of, any subsequent or similar
act by Lessee, or be construed as the basis of an estoppel to enforce the
provision or provisions of this Lease requiring such consent. Regardless of
Lessor's knowledge of a Default or Breach at the time of accepting rent, the
acceptance of rent by Lessor shall not be a waiver of any preceding Default or
Breach by Lessee of any provision hereof, other than the failure of Lessee to
pay the particular rent so accepted. Any payment given Lessor by Lessee may be
accepted by Lessor on account of moneys or damages due Lessor, notwithstanding
any qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment. See Addendum, (S)21.
25. Recording. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. No Right to Holdover. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of the
Lease.
27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
29. Binding Effect; Choice of Law. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
30. Subordination; Attornment; Non-Disturbance.
30.1 Subordination. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security Device"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor under this
Lease, but that in the event of Lessor's default with respect to any such
obligation, Lessee will give any Lender whose name and address have been
furnished Lessee in writing for such purpose notice of Lessor's default and
allow such Lender thirty (30) days following receipt of such notice for the cure
of said default before invoking any remedies Lessee may have by reason thereof.
If any Lender shall elect to have this Lease and/or any Option granted hereby
superior to the lien of its Security Device and shall give
<PAGE>
written notice thereof to Lessee, this Lease and such Options shall be deemed
prior to such Security Device, notwithstanding the relative dates of the
documentation or recordation thereof.
30.2 Attornment. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership, (ii) be subject to any offsets or defenses
which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one (1) month's rent.
30.3 Non-Disturbance. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving assurance (a "non-disturbance agreement") from the
Lender that Lessee's possession and this Lease, including any options to extend
the term hereof, will not be disturbed so long as Lessee is not in Breach hereof
and attorns to the record owner of the Premises.
30.4 Self-Executing. The agreements contained in this Paragraph 30 shall
be effective without the execution of any further documents; provided, however,
that, upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of the Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any such
subordination or non-subordination, attornment and/or non-disturbance agreement
as is provided for herein.
31. Attorney's Fees. If any Party or Broker brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Party (as
hereafter defined) or Broker in any such proceeding, action, or appeal thereon,
shall be entitled to reasonable attorney's fees. Such fees may be awarded in
the same suit or recovered in a separate suit, whether or not such action or
proceeding is pursued to decision or judgment. The term "Prevailing Party"
shall include, without limitation, a Party or Broker who substantially obtains
or defeats the relief sought, as the case may be, whether by compromise,
settlement, judgment, or the abandonment by the other Party or Broker of its
claim or defense. The attorney's fees award shall not be computed in accordance
with any court fee schedule, but shall be such as to fully reimburse all
attorney's fees reasonably incurred.
32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times after reasonable notice for the
purpose of showing the same to prospective purchasers, lenders, or lessees, and
making such alterations, repairs, improvements or additions to the Premises or
to the building of which they are a part, as Lessor may reasonably deem
necessary. Lessor may at any time during the last one hundred twenty (120) days
of the term hereof place on or about the Premises any ordinary "For Lease"
signs. All such activities of Lessor shall be without abatement of rent or
liability to Lessee.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. Signs. Lessee may, with Lessor's prior written consent, install (but not
on the roof) such signs as are reasonably required to advertise Lessee's own
business. The installation of any sign on the Premises by or for Lessee shall
be subject to the provisions of Paragraph 7 (Maintenance, Repairs, Utility
Installations, Trade Fixtures and Alterations).
35. Termination; Merger. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest, shall constitute Lessor's election to have such
event constitute the termination of such interest.
36. Consents.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided
herein, wherever in this Lease the consent of a Party is required to an act by
or for the other Party, such consent shall not be unreasonably
<PAGE>
withheld or delayed. Lessor's actual reasonable costs and expenses (including
but not limited to architects', attorneys', engineers' or other consultants'
fees) incurred in the consideration of, or response to, a request by Lessee for
any Lessor consent pertaining to the presence or use of a Hazardous Substance,
practice or storage tank, shall be paid by Lessee to Lessor upon receipt of an
invoice and supporting documentation therefor. Lessor may, as a condition to
considering any such request by Lessee, require that Lessee deposit with Lessor
an amount of money (in addition to the Security Deposit held under Paragraph 5)
reasonably calculated by Lessor to represent the cost Lessor will incur in
considering and responding to Lessee's request. Except as otherwise provided,
any unused portion of said deposit shall be refunded to Lessee without interest.
Lessor's consent to any act, assignment of this Lease or subletting of the
Premises by Lessee shall not constitute an acknowledgment that no Default or
Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver
of any then existing Default or Breach, except as may be otherwise specifically
stated in writing by Lessor at the time of such consent.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the imposition by
Lessor at the time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is being
given.
37. Guarantor.
37.1 The form of the guaranty to be executed by each such Guarantor shall
be in the form approved by Lessor and Guarantor, and each said Guarantor shall
have the obligations as provided in the Guaranty, and the obligation to provide
the Tenancy Statement and information called for by Paragraph 16.
37.2 It shall constitute a Default of the Lessee under this Lease if any
such Guarantor fails or refuses, upon reasonable request by Lessor to give (a)
evidence of the due execution of the guaranty called for by this Lease,
including the authority of the Guarantor (and of the party signing on
Guarantor's behalf) to obligate such Guarantor on said guaranty, and including
in the case of a corporate Guarantor, a certified copy of a resolution of its
board of directors authorizing the making of such guaranty, together with a
certificate of incumbency showing the signature of the persons authorized to
sign on its behalf or (d) written confirmation that the guaranty is still in
effect.
38. Quiet Possession. Upon payment by Lessee of the rent for the Premises and
the observance and performance of all of the covenants, conditions and
provisions on Lessee's part to be observed and performed under this Lease,
Lessee shall have quiet possession of the Premises for the entire term hereof
subject to all of the provisions of this Lease.
39. Options. See Addendum, (S)22.
39.1 Definition. As used in this Paragraph 39 the word "Option" has the
following meaning: (a) the right to extend the term of this Lease or to renew
this Lease or to extend or renew any lease that Lessee has on other property of
Lessor; (b) the right of first refusal to lease the Premises or the right of
first offer to lease the Premises or the right of first refusal to lease other
property of Lessor or the right of first offer to lease other property of
Lessor; (c) the right to purchase the Premises, or the right of first refusal to
purchase the Premises, or the right of first offer to purchase the Premises, or
the right to purchase other property of Lessor, or the right of first refusal to
purchase other property of Lessor, or the right of first offer to purchase other
property of Lessor.
39.2 Options Personal To Original Lessee. Each Option granted to Lessee
in this Lease is personal to the original Lessee named in Paragraph 1 hereof,
and cannot be voluntarily or involuntarily assigned or exercised by any person
or entity other than said original Lessee while the original Lessee is in full
and actual possession of the Premises and without the intention of thereafter
assigning or subletting. The Options, if any, herein granted to Lessee are not
assignable, either as a part of an assignment of this Lease or separately or
apart therefrom, and no Option may be separated from this Lease in any manner,
by reservation or otherwise. See Addendum, (S)22.
39.3 Multiple Options. In the event that Lessee has any Multiple Options
to extend or renew this Lease, a later Option cannot be exercised unless the
prior Options to extend or renew this Lease have been validly exercised.
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option, notwithstanding
any provision in the grant of Option to the contrary: (i) during the period
commencing with the giving of any notice of Default under
<PAGE>
Paragraph 13.1 and continuing until the noticed Default is cured, or (ii) during
the period of time any monetary obligation due Lessor from Lessee is unpaid, or
(iii) during the time Lessee is in Breach of this Lease, or (iv) in the event
that Lessor has given to Lessee three (3) or more notices of Default under
Paragraph 13.1, whether or not the Defaults are cured, during the twelve (12)
month period immediately preceding the exercise of the Option, if such Default
has, in fact, occurred.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of thirty (30) days after such obligation becomes due or (ii)
Lessor gives to Lessee three (3) or more notices of Default under Paragraph 13.1
during any twelve (12) month period if such Defaults, in fact, occurred, whether
or not the Defaults are cured, or (iii) Lessee commits a Breach of this Lease.
40. Multiple Buildings. If the Premises are part of a group of buildings
controlled by Lessor, Lessee agrees that it will abide by, keep and observe
reasonable rules and regulations which Lessor may make from time to time for the
management, safety, care, and cleanliness of the grounds, the parking and
unloading of vehicles and the preservation of good order, as well as for the
convenience of other occupants or tenants of such other buildings, and their
invitees.
41. Security Measures. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. Reservations. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights, and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee or increase Lessee's monetary obligation. Lessee agrees to sign any
documents reasonably requested by Lessor to effectuate any such easement rights,
dedication, map or restrictions.
43. Performance Under Protest. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under any provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay under the provisions of this
Lease.
44. Authority. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. Conflict. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the typewritten
or handwritten provisions.
46. Offer. Preparation of this Lease by Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer to lease to Lessee.
This Lease is not intended to be binding until executed by all Parties hereto.
47. Amendments. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. The parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease.
48. Multiple Parties. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee the
obligations of such Multiple Parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
<PAGE>
See Addendum for additional provisions.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY EXECUTION OF THIS LEASE SHOW THEIR INFORMED
AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS
LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND
EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO
YOUR ATTORNEY FOR HIS APPROVAL. FURTHER EXPERTS SHOULD BE CONSULTED TO
EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF
ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR
RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS TO THE
LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE
TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE
ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS
LEASE. IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN
CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD
BE CONSULTED.
The parties hereto have executed this Lease at the place on the dates specified
above to their respective signatures.
<TABLE>
<CAPTION>
<S> <C>
Executed at El Cajon Executed at Iselin, NJ
on 12/26/96 on 12/23/96
by LESSOR: by LESSEE:
Techplex, L.P., A California Limited Putter Properties, Inc., a Delaware
Partnership corporation
Its General Partner, Hamann Consolidated,
Inc., A California Corporation
By /s/ JEFFREY C. HAMANN By /s/ RICHARD A. BUCCARELLI
---------------------------------------- ---------------------------------
Name Printed: Jeffrey C. Hamann Name Printed: Richard A. Buccarelli
Title: President Title: Vice President
</TABLE>
By /s/ JEFFREY C. HAMANN
----------------------------------------
Name Printed: Gregg Hamann
Title: Secretary
Address: 475 West Bradley Avenue
El Cajon, California 92020
Tel. No. (619) 440-7424 Fax No. (619) 440-8914
NET Jeffrey C. Hamann has Attorney In Fact for Gregg Hamann.
NOTICE: These forms are often modified to meet changing requirements of law and
industry needs. Always write or call to make sure you are utilizing the most
current form: American Industrial Real Estate Association, 345 South Figueroa
Street, Suite M-1, Los Angeles, California 90071.
<PAGE>
ADDENDUM TO LEASE
BETWEEN
TECHPLEX, L.P.,
A California Limited Partnership
AND
PUTTER PROPERTIES, INC.,
a Delaware corporation
Dated December 20, 1996
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Section Page
- - ------- ----
<S> <C>
1. Premises Description.................................................... 1
2. Base Rent Adjustment/Operating Expenses................................. 1
2.1 Method of Payment.................................................. 1
2.2 LESSOR's Administrative Services................................... 2
2.3 Monetary Limitation................................................ 2
3. Base Rent............................................................... 2
4. Security Deposit........................................................ 2
5. Broker Representation/Licensee Disclosure............................... 2
6. Building Shell and Tenant Improvements.................................. 2
6.1 Tenant Improvements............................................... 3
6.1.1 Design of Tenant Improvements............................ 3
6.1.2 Approval of Contractor................................... 4
6.1.3 "Substantial Completion" Defined......................... 4
6.1.4 Time for Substantial Completion.......................... 4
6.1.5 Payment of Tenant Improvement Costs...................... 5
6.1.6 "Tenant Improvement Costs" Defined....................... 5
6.1.7 Change Orders............................................ 5
6.1.8 Reports and Final Reconciliation......................... 6
6.1.9 Dispute Resolution....................................... 6
7. LESSOR's Warranty Concerning the Condition of the Premises.............. 6
7.1 Hazardous Materials............................................... 6
8. LESSOR's Warranty of Compliance with Building Code and Restrictions..... 7
9. Delivery of Possession.................................................. 7
10. Use Warranty............................................................ 7
11. LESSOR's Maintenance Obligations........................................ 8
11.1 Limitations on LESSOR's Responsibility............................ 8
11.2 Exclusions........................................................ 8
12. Indemnification......................................................... 9
13. Additional Provisions Regarding Alteration Removal...................... 9
14. Property Insurance/Earthquake........................................... 9
15. Additional Provision Concerning Damage or Destruction................... 9
15.1 Partial Damage-Uninsured Loss..................................... 9
15.2 Damage Near End of Term........................................... 10
15.3 Abatement of Rent................................................. 10
15.4 Termination-Advance Payments...................................... 10
16. Additional Provision Concerning Assignment and Subletting............... 10
16.1 LESSOR's Consent/Affiliate Transaction............................ 10
16.2 Exception to Consent For Certain Subletting....................... 10
16.3 Assignee's Assumption............................................. 10
16.4 Rent Adjustment Upon Assignment or Sublease....................... 11
16.5 Presumption of Reasonableness..................................... 11
</TABLE>
<PAGE>
<TABLE>
<S> <C>
16.6 Time For Consent.................................................. 11
17. Additional Provision Concerning Default/Breach/Remedies................. 11
17.1 Limited Waiver of Costs........................................... 12
17.2 Documentation Requirements........................................ 12
17.3 Limited Late Charge Waiver........................................ 12
17.4 Limitation........................................................ 12
18. Additional Provision Regarding Condemnation............................. 12
19. Additional Provision Regarding LESSOR's Liability....................... 12
20. Additional Provision Regarding Interest................................. 12
21. Waiver.................................................................. 13
22. Additional Option Provisions............................................ 13
22.1 Adjustment to Base Rent........................................... 13
22.2 Refurbishment Allowance........................................... 14
22.3 "Index" Defined................................................... 14
23. Arbitration Procedure................................................... 14
24. Subordination/Non-Disturbance........................................... 15
25. Hazardous Materials Questionnaire....................................... 15
26. Additional Notice Provisions............................................ 15
</TABLE>
EXHIBITS
Exhibit "1" Description of Premises
Exhibit "2" 1997 Estimated Operating Budget
Exhibit "3" Tenant Improvement Plans
Exhibit "4" Specifications
Exhibit "5" Subordination, Estoppel, Nondisturbance and Attornment Agreement
Exhibit "6" Hazardous Materials Questionnaire
<PAGE>
ADDENDUM TO LEASE
-----------------
This ADDENDUM TO LEASE ("Addendum") is made by and between Techplex, L.P.,
a California limited partnership ("LESSOR"), and Putter Properties, Inc., a
Delaware corporation ("LESSEE"), and is intended to supplement that certain
Standard Industrial/Commercial Single-Tenant Lease Net between LESSOR and LESSEE
dated December 20, 1996 ("Lease") to which this Addendum is annexed. If there is
any inconsistency between this Addendum and the Lease, the terms of this
Addendum shall supersede and control, provided that except as otherwise stated,
references to the "Lease" mean and refer to the above referenced standard Lease
as modified by this Addendum. LESSOR and LESSEE agree as follows:
1. Premises Description. The Premises presently consist of the land and
--------------------
all improvements located on the land depicted on Exhibit "1" annexed to this
Addendum, including the "Building Shell" as described in section 6 of this
Addendum, and, following LESSOR's completion of the "Tenant Improvements" as
described in section 6 of this Addendum, the Tenant Improvements.
2. Base Rent Adjustment/Operating Expenses. The Base Rent for each
---------------------------------------
subsequent year of the Lease during the Original Term following the initial year
of the Lease shall be adjusted as provided in section 3 of this Addendum. In
addition to payment of the Base Rent, LESSEE shall, from and after February 1,
1997, be responsible for payment of all "Operating Expenses" (as defined below),
subject to the limitation provided in subsection 2.3 of this Addendum. The term
"Operating Expenses" means the following expenses and costs of the ownership and
operation of the Premises: (a) amounts payable for maintenance contracts
required to be procured pursuant to Paragraph 7.1(b) of the Lease (but not the
cost of repairs or replacements payable by LESSEE), (b) insurance required to be
maintained by LESSOR or LESSEE under the Lease (exclusive of the insurance
maintained by LESSEE under Paragraph 8.4 of the Lease), (c) Real Property Taxes,
(d) a reasonable reserve for replacement of the roof, (e) assessments and dues
payable to any association or other governing body established pursuant to any
covenants, conditions or restrictions affecting the Premises as of the date of
the Lease, (f) reimbursement to LESSOR of Carlsbad Community Facilities District
costs, (g) a fire sprinkler monitoring contract if payable separate from the
fire sprinkler maintenance contract described in Paragraph 7.1(b) of the Lease,
(h) the Administrative Fee described in subsection 2.2 of this Addendum, and (i)
the reasonable amount of other ordinary and necessary expenses and costs of
operation of the Premises, which are customarily incurred in the operation of
similarly situated real estate projects; provided, however, the term "Operating
Expenses" does not include (i) any indebtedness secured by a mortgage, deed of
trust or similar security interest granted by LESSOR and encumbering the
Premises, or (ii) any other items of expense or cost which the terms of the
Lease expressly require be paid or incurred by LESSEE, including all utility
charges payable by LESSEE under Paragraph 11 of the Lease.
2.1 Method of Payment. From and after February 1, 1997, LESSEE shall pay
-----------------
to LESSOR monthly, as additional rent, an amount equal to 1/12 of the projected
annual Operating Expenses. Such amount shall be due and payable concurrently
with the payment of the applicable Base Rent. Prior to the beginning of each
lease year, LESSOR will provide LESSEE an annual estimated Operating Budget
("Estimated Operating Budget"). Subject to LESSEE's payment of Operating
Expenses as provided in this Addendum, LESSOR shall make prompt payment of the
Operating Expenses. Any excess or deficit from the estimates shown in the
Estimated Operating Budget will be credited or billed to LESSEE at the end of
the applicable year and LESSOR shall concurrently furnish LESSEE with a detailed
statement showing actual Operating Expenses. Any deficit will be payable as
additional rent within ten (10) days of receipt of a final Operating Budget
setting forth the actual expenditures for the applicable lease year and the
deficit. Any excess shall be credited against the next payments of Operating
Expenses due from LESSEE. A copy of the 1997 Estimated Operating Budget is
attached to this Addendum as Exhibit 2; amounts of expense may vary in future
years as the Premises ages. Promptly following request, LESSOR shall furnish
LESSEE with such additional information as LESSEE may reasonably request with
respect to such Operating Expenses.
<PAGE>
2.2 LESSOR's Administrative Services. LESSOR agrees to provide certain
--------------------------------
administrative services to assist LESSEE in the performance of LESSEE's
obligations under Paragraphs 7, 8.2, 8.3 and 10 of the Lease in consideration
for LESSEE's monthly payment of an administrative fee to LESSOR of two percent
(2%) of the Base Rent ("Administrative Fee"). Such Administrative Fee shall be
payable as a part of the Operating Expenses payable by LESSEE. LESSOR's
administrative services shall consist of the following: LESSOR shall procure, on
behalf of LESSEE, maintenance contracts required to be procured by LESSEE under
Paragraph 7.1(b) of the Lease, and shall otherwise procure bids and contract
proposals from contractors when necessary for LESSEE's performance of its
general repair obligations under Paragraph 7.1(a) of the Lease. Except with the
prior written consent of LESSEE, major items of expense exceeding $10,000.00
shall be competitively bid and LESSOR shall not submit any contracts or
proposals for any of such services to be performed by LESSOR or any affiliate of
LESSOR, except to the extent such affiliation is disclosed to LESSEE and such
contract is competitively priced. LESSOR shall not be liable for any acts or
omissions of any such contractors, nor for LESSEE's default in failing to
perform any obligation under the Lease, except to the extent of LESSOR's failure
to pay any Operating Expense from funds previously provided by LESSEE for the
payment of such Operating Expense, LESSOR's failure to perform its obligations
under the Lease, or LESSOR's gross negligence or willful misconduct.
2.3 Monetary Limitation. Notwithstanding the preceding provisions, LESSOR
-------------------
agrees that during the Original Term, the maximum amount payable by LESSEE for
Operating Expenses shall not exceed an amount equal to $4,946.25 monthly.
3. Base Rent. The Base Rent stated in Paragraph 1.5 of the Lease for the
---------
first year of the Lease as shown below, shall be adjusted at the beginning of
the second year of the Lease and at the beginning of each year thereafter during
the Original Term in accordance with the following schedule of Base Rent:
<TABLE>
<CAPTION>
Year Base Rent
---- ---------
<S> <C>
1 $14,038.00
2 $17,761.00
3 $20,677.00
4 $20,841.00
5 $21,571.00
6 $22,326.00
7 $23,107.00
8 $23,915.00
9 $24,752.00
10 $25,617.00
</TABLE>
4. Security Deposit. Notwithstanding any contrary provision in Paragraph 5
----------------
of the Lease, any unexpended portion of the Security Deposit shall be applied to
the last month's Base Rent for the Original Term, or if LESSEE exercises any
option to extend the term of the Lease, for the last month of the last extension
period.
5. Broker Representation/Licensee Disclosure. LESSOR and LESSEE each
-----------------------------------------
warrant that: (a) they have dealt with no other real estate brokers in
connection with this transaction except: CB Commercial Real Estate Group, Inc.,
who represents LESSOR and LESSEE; (b) that they were timely advised of such
dual representation and have consented to such dual representation by Brokers;
and (c) they have not and do not expect the Brokers to disclose to one party the
confidential information of the other party. In addition, LESSEE acknowledges
that it is aware that one or more principals or members of LESSOR may be
licensed real estate brokers or other licensees, including David Onosko, and
that such licensees are participating in this transaction as affiliates of
LESSOR and have not undertaken to represent the interests of LESSOR.
6. Building Shell and Tenant Improvements. LESSOR, at its expense, has
--------------------------------------
caused the completion of the construction of the Building Shell. The phrase
"Building Shell" means the building improvements and related site improvements
as shown on those certain plans and specifications prepared by Progressive
Images, dated December 5, 1995 and consisting of 38
<PAGE>
pages ("Building Shell Plans"), including (a) roofing, fascia, exterior walls,
doors and windows, (b) footings and concrete floors, (c) "shell" fire sprinkler
system in accordance with minimum code requirements, (d) conduits and pipes for
telephone, electricity, water, fire sprinklers and sewage brought to "stub out"
termination points in or above a perimeter wall of the Premises, (e) a main
electrical termination panel for the Building, (f) paving and finish of parking
areas, entrance areas and walkways, (g) landscaping as reasonably determined by
LESSOR, and (h) site improvements consisting of street, gutters, sidewalks,
curbs, storm drains and erosion control (construction period and permanent) as
required to comply with governmental requirements; provided, however, the term
"Building Shell" does not include completion of the mezzanine light weight
concrete floor or the railings, walls or stairways for the mezzanine other than
as required for governmental approval of LESSEE's occupancy of other areas of
the Building Shell, provided LESSOR acknowledges that completion of such
mezzanine improvements may be performed by LESSEE at a later date. LESSEE
acknowledges that the "Building Shell" improvements have been completed and are
approved by LESSEE; provided, however, the preceding approval is not intended to
waive any warranties or other obligations of LESSOR.
6.1 Tenant Improvements. Subject to all requirements in this section 6,
-------------------
LESSOR shall diligently commence and pursue to completion the construction of
the Tenant Improvements to the Premises in connection with LESSEE's initial
occupancy of the Premises as provided in this section. The phrase "Tenant
Improvements" means all improvements which are not a part of the Building Shell,
as shown in the Tenant Improvement Plans (described below), including (a)
partitions, walls, and doors, (b) all surface finishes, including wall
coverings, paint, floor coverings, suspended ceilings and other similar items,
(c) duct work, heat pumps, vents, diffusers, terminal boxes and accessories for
completion of heating, ventilation and air conditioning systems within the
Premises, (d) electrical distribution systems (including panels, subpanels,
wires and outlets), lighting fixtures, outlets, switches and other electrical
work to be installed in the Premises, but excluding any additional or special
electrical requirements for the equipment room/machine shop (e) plumbing lines,
fixtures and accessories, (f) all fire and life safety control systems such as
fire walls and fire alarms (including piping, wiring and accessories) to be
located in the Premises, and fire sprinklers and lines attributable to the
Tenant Improvements and/or LESSEE's fixtures, furnishing or equipment, (g)
improvements required for compliance with Title 24, and (h) such other
improvements shown on the "Tenant Improvement Plans" (as defined below);
provided, however LESSEE's trade fixtures, equipment and personal property
(including telephone systems and cabling, computer systems and network cabling,
chairs, tables, furniture and other equipment used in LESSEE's business) shall
not be considered part of the Tenant Improvements regardless of whether shown on
the Tenant Improvement Plans. The construction of the Tenant Improvements shall
be carried out without Material Deviation (as defined below) from the Tenant
Improvement Plans, in a good and workmanlike manner using materials as described
in the Specifications (as described below), and in accordance with Applicable
Law. LESSEE will cause the Architect to submit the Tenant Improvement Plans for
government plan checking and for issuance of a building permit (the "Building
Permit") promptly following the execution of this Lease. LESSOR shall cause the
Contractor to cause the Substantial Completion (as defined below) of the Tenant
Improvements on or before the "Scheduled Completion Date" as provided in
subsection 6.1.4 below. Notwithstanding the Substantial Completion of the Tenant
Improvements, LESSOR shall remain responsible for causing the completion of any
corrective work or "punch list" required to fully complete the Tenant
Improvements in a good and professional workmanlike manner.
6.1.1 Design of Tenant Improvements. LESSOR has approved the plans
-----------------------------
prepared by Smith Consulting Architects ("Architect"), a list of which is
annexed to this Addendum as Exhibit "3" ("Tenant Improvement Plans"), which
Tenant Improvement Plans also include specifications describing the quality or
category of materials to be utilized in the construction of the Tenant
Improvements ("Specifications"); a copy of the Specifications is annexed to this
Addendum as Exhibit "4." LESSEE will have the Architect submit the Tenant
Improvement Plans for government plan checking and for issuance of a building
permit (the "Building Permit"). The Tenant Improvement Plans and Specifications
shall be subject to any changes required by governmental authorities; provided,
however, LESSOR and LESSEE shall have the right to approve any changes to the
Tenant Improvement Plans or Specifications requested by such governmental
authorities, whether during such plan check or during the course of construction
("Government Change"), and LESSOR and LESSEE agree not to unreasonably
<PAGE>
withhold such approval. LESSOR shall cause the Contractor to complete the Tenant
Improvements in accordance with the Tenant Improvement Plans and Specifications,
without Material Deviation. The term "Material Deviation" means a change,
modification or deviation other than (a) any change, modification or deviation
constituting a Government Change or change requested by LESSEE, (b) minor
deviations in the location or dimensions of walls, windows doors, electrical
outlets and similar improvements, or (c) any other change, modification or
deviation approved by LESSEE, which approval will not be unreasonably withheld.
6.1.2 Approval of Contractor. LESSOR and LESSEE hereby approve CSI General
----------------------
Contractors as the contractor ("Contractor") for construction of the Tenant
Improvements. LESSOR shall not permit or otherwise cause any other person or
entity to act as the general contractor for construction of the Tenant
Improvements, except in the event of a termination of the general contract with
Contractor on account of the default of Contractor. In the event of any such
termination, LESSOR shall have the right to reasonably select an alternate
licensed, general contractor to complete the construction so long as such
replacement contractor is experienced in the construction of commercial tenant
improvements and is not affiliated with LESSOR.
6.1.3 "Substantial Completion" Defined. The term "Substantial Completion"
--------------------------------
means the date upon which LESSOR satisfies all of the following requirements:
(a) the construction of the Tenant Improvements is substantially completed in
accordance with the Tenant Improvement Plans and Specifications as modified only
by any changes requested by LESSEE or Government Changes, subject only to minor
corrective work which does not affect or limit LESSEE's use of the Premises; (b)
LESSOR has procured a certificate of occupancy (whether temporary or permanent)
or other applicable permit permitting LESSEE's immediate occupancy of the
Premises and the use of the Premises for the conduct of LESSEE's business; and
(c) LESSOR has given LESSEE written notice stating that such Substantial
Completion has occurred and that the Premises are available for LESSEE's
immediate possession and occupancy ("Notice of Possession").
6.1.4 Time for Substantial Completion. LESSOR shall cause Contractor to
-------------------------------
diligently pursue the construction and cause the Substantial Completion of the
Tenant Improvements on or before a date which is no later than forty-five (45)
days following the date of LESSEE's delivery of the Building Permit to LESSOR
("Scheduled Completion Date"); provided, however, the Scheduled Completion Date
shall be extended if Substantial Completion is delayed on account of (a) changes
to the approved Tenant Improvement Plans requested by LESSEE, including time
expended in obtaining fixed, price quotations for any changed work as required
under subsection 6.1.7 of this Addendum or delays in obtaining LESSEE's approval
of any Government Changes as provided in subsection 6.1.1 of this Addendum, (b)
Government Changes, (c) delays of LESSEE in paying the amount of any Tenant
Improvement Costs payable by LESSEE, or (d) fire, earthquake or other
causalities, inclement weather conditions, delays encountered in processing
governmental approvals or inspections or other governmental action which
prevents or impedes the orderly progress of construction, delays encountered as
a result of the discovery of any unknown or concealed conditions affecting the
Premises, delays caused by general area wide labor or material shortages or
labor disputes (such as strikes or lock-outs), or any other causes beyond the
reasonable control of LESSOR or Contractor. If such delays are encountered, the
Scheduled Completion Date shall be extended but only for the number of days the
delaying event exists and prevents Contractor from proceeding with the work. The
extension of the Scheduled Completion Date pursuant to this subsection shall not
change or delay the date for LESSEE to commence payment of the Base Rent,
Operating Expenses or other charges payable by LESSEE. Except for excused delays
described in the preceding provisions, if Substantial Completion is delayed
beyond the Scheduled Completion Date, the following provisions shall apply: (i)
if the delay does not exceed thirty (30) days, LESSEE shall be credited with two
(2) free days of Base Rent for each one (1) day Substantial Completion is so
delayed, with such credits to be applied to the Base Rent next becoming due; and
(ii) if the delay exceeds thirty (30) days, then LESSEE at its option, shall
have the right to either (aa) continue to accumulate the two (2) days free Base
Rent credit for each one (1) day of additional delay and apply such credit to
Base Rent next becoming due, or (bb) terminate the Lease by giving written
notice of such election to LESSOR, which notice shall effectively terminate the
Lease upon the
<PAGE>
expiration of ten (10) days following delivery of the notice, unless LESSOR has
caused the Substantial Completion prior to the expiration of such ten (10) day
period, in which event the termination notice shall not become effective and
this Lease shall continue in full force and effect, provided that LESSEE shall
be entitled to the accumulation and application of the free Base Rent credit
until such Substantial Completion and LESSEE shall not be required to pay
Operating Expenses during any period of Base Rent credit accumulation. If the
Lease is terminated by LESSEE pursuant to the preceding provision, LESSOR agrees
to reimburse LESSEE for LESSEE's contributions to the Tenant Improvement Costs
described in subsections 6.1.5 and 6.1.7 of this Addendum, the Security Deposit
and any rentals previously paid by LESSEE within thirty (30) days of such
termination; provided, however, LESSOR shall have no other liability whatsoever
to LESSEE on account of the failure to timely deliver the Premises.
6.1.5 Payment of Tenant Improvement Costs. The "Tenant Improvement Costs"
-----------------------------------
(as defined below) shall be allocated between LESSOR and LESSEE in the manner
hereinafter set forth. Except as otherwise provided, LESSOR shall be
responsible for payment of the amount of $225,000 towards the Tenant Improvement
Costs and LESSEE shall be responsible for payment of the amount of $184,000
("LESSEE's Initial Contribution") towards the Tenant Improvement Costs;
provided, however, LESSEE shall also be solely responsible for payment of all
fees and costs payable to any design professionals, such as architects and
engineers, in connection with the preparation of or processing for permit of the
Tenant Improvement Plans and Specifications and/or any other services concerning
or relating to the design of the Tenant Improvements. Within five (5) days from
the execution of this Lease, LESSEE shall pay LESSEE's Initial Contribution to a
fund control account maintained at Bank of Commerce ("Lender"), and the proceeds
of LESSEE's Initial Contribution shall be disbursed from such account along with
the proceeds of LESSOR's loan from Lender as the construction of the Tenant
Improvements progresses. LESSOR and LESSEE shall each be responsible for payment
of fifty percent (50%) of any Tenant Improvement Costs in excess of $409,000 up
to a maximum of $434,000. LESSEE agrees to pay to the Lender's fund control any
additional amount due from LESSEE under the preceding provision within ten (10)
days following notice from LESSOR requesting such additional funds together with
Contractor's invoices and other documentation reasonably requested by LESSEE to
evidence such costs. In the event the Tenant Improvement Costs exceed $434,000,
LESSOR shall be solely responsible for such excess, except as provided in
subsection 6.1.7 below. If, following completion of the Tenant Improvements, the
Tenant Improvement Costs are less than $409,000, LESSOR shall reimburse LESSEE
in the amount of 50% of the savings within forty-five (45) days after
Substantial Completion.
6.1.6 "Tenant Improvement Costs" Defined. The phrase "Tenant Improvement
----------------------------------
Costs" means all direct and indirect costs of furnishing, constructing and
installing the Tenant Improvements, including, without limitation, (a) any
reasonable out-of-pocket costs for design and/or architectural services incurred
by LESSOR in reviewing any changes to the Tenant Improvement Plans and/or in
connection with government inspections of the construction, but not any costs or
expenses incurred by LESSEE for such design and/or architectural services, (b)
government permit costs applicable to the Tenant Improvements, (c) amounts
payable to the contractor for overhead/profit, job site supervision, cleanup,
trash and janitorial services, (d) the actual 'hard costs" of construction of
the Tenant Improvements, and (e) any and all other expenses and costs of
whatever kind or nature incurred by LESSOR in connection with the Tenant
Improvements; provided, however, the term "Tenant Improvement Costs" shall not
include any fees of LESSOR or any affiliated entity in connection with
construction of the Tenant Improvements.
6.1.7 Change Orders. LESSEE shall have the right to issue change orders to
-------------
change or eliminate any item or detail contained in the Tenant Improvement Plans
and/or Specifications and/or to substitute and/or add other items or details not
shown on the Tenant Improvement Plans and/or Specifications, subject to
obtaining LESSOR's approval, which approval shall not be unreasonably withheld.
LESSEE will be responsible for payment of any excess Tenant Improvement Costs
resulting from any changes to the Work requested by LESSEE or necessitated by
government requirements, following LESSOR's approval of the Tenant Improvement
Plans. The cost of any such change order which results in the Tenant Improvement
Costs exceeding $409,000 shall be borne by LESSEE to the extent of the amount
<PAGE>
so in excess. LESSOR shall have no right to issue change orders. Any such
changes shall be subject to LESSOR's approval. LESSOR shall obtain from the
Contractor a fixed price quotation for completion of the change and provide such
quotation to LESSEE. LESSEE shall deposit funds with LESSOR to pay such costs
within ten (10) days following notice from LESSOR of the Contractor's quotation
of the added cost for any change. LESSOR shall make a refund to LESSEE for any
excess payment for changes to the extent that the total Tenant Improvement Costs
are less than $409,000.
6.1.8 Reports and Final Reconciliation. During the course of construction
--------------------------------
of the Tenant Improvements, LESSEE, upon reasonable request and during LESSOR's
regular business hours, shall be entitled to inspect, review and copy invoices,
reports or other documentation received by LESSOR from Contractor regarding the
progress of Construction and the amount of Tenant Improvement Costs being
incurred. Following completion of the construction of the Tenant Improvements,
LESSOR shall deliver to LESSEE a final reconciliation report showing the total
of the Tenant Improvement Costs.
6.1.9 Dispute Resolution. In the event that LESSEE reasonably determines
------------------
that any portion of the Tenant Improvement Costs has not been properly accounted
for, LESSEE shall give LESSOR written notice of such determination, which notice
shall include a detailed explanation of the reason(s) for such determination,
within thirty (30) days following the receipt of LESSOR's final accounting. In
the event that LESSEE does not give such a written notice within such thirty
(30) day period, LESSEE shall be deemed to have conclusively approved LESSOR's
final accounting. Any dispute concerning the Tenant Improvement Costs shall be
subject to Arbitration as provided in section 23 of this Addendum. Pending the
resolution of any such dispute, LESSEE shall pay the amount invoiced by LESSOR,
and in the event LESSEE prevails in the Arbitration, LESSEE shall be entitled to
a credit against the payment of Base Rent next becoming due in an amount
determined in the Arbitration. Any Arbitration must be commenced by LESSEE
within ninety (90) days from the delivery of LESSOR's final accounting and, if
LESSEE fails to timely commence such Arbitration, LESSEE shall be deemed to have
conclusively approved LESSOR's final accounting.
7. LESSOR's Warranty Concerning the Condition of the Premises.
----------------------------------------------------------
Notwithstanding the provisions of Paragraph 2.2 of the Lease, LESSOR's warranty
in Paragraph 2.2 of the Lease applies only to the improvements included in the
Building Shell, and LESSOR is not making any warranty concerning the physical
condition of the Tenant Improvements nor the suitability of such Tenant
Improvements for use by LESSEE. Except as provided in this section and in
sections 8, 10 and 11 of this Addendum, LESSEE is accepting the Premises in an
"AS IS, WHERE IS" condition without representation or warranty by LESSOR. If
LESSEE does not give LESSOR written notice of a non-compliance with the warranty
provided in Paragraph 2.2 of the Lease within one (1) year after the Scheduled
Completion Date, correction of any non-compliance shall be the obligation of
LESSEE, at LESSEE's sole cost and expense.
7.1 Hazardous Materials. Except as described in the reports identified in
-------------------
this section, LESSOR warrants to LESSEE that LESSOR has no knowledge of the
existence of Hazardous Substances in, on or about the Premises in violation of
any Applicable Laws. LESSEE acknowledges and agrees that LESSOR has disclosed to
LESSEE that the sole basis of LESSOR's knowledge concerning such Hazardous
Substances is that certain "Environment Site Assessment Carlsbad Airport Centre
Phase II Expansion Property, Carlsbad, California" report prepared by Woodward-
Clyde, dated April, 1993, that certain "Groundwater Monitoring Well Abandonment"
report by Woodward-Clyde, dated October 7, 1994, and that certain "Site
Assessment and Subsurface Investigation Report" prepared by Woodward-Clyde
Consultants, dated September 26, 1991; copies of such reports have been
furnished to LESSEE. LESSOR shall be under no obligation to conduct any
additional investigation or further inquiry concerning Hazardous Substances in
connection with entering into this Lease and making the warranty provided in
this section. LESSOR further acknowledges and agrees that LESSEE shall not be
liable to LESSOR for the costs to remedy or cleanup any Hazardous Substances
migrating or flowing on to the Premises from outside of the Premises, including,
without limitation, any off-Premises releases affecting ground water beneath the
Premises so long as such off-Premises release or discharge was not caused by
LESSEE or its agents, contractors or invitees. Subject to the limitations
described below, LESSOR shall indemnify, defend and hold harmless LESSEE
<PAGE>
from and against any out-of-pocket loss, liability, claim, expense (including
reasonable attorneys' fees and court costs) or damage resulting from any Third
Party Claim (as defined below) which is based on the existence of any Hazardous
Substance contamination in, under or about the Premises (including groundwater)
as of the Commencement Date of the Lease or any Hazardous Substance
contamination thereafter migrating in, under or about the Premises (including
groundwater) as a result of its proximity to the former landfill described in
the reports identified in this section, but only to the extent any such loss,
liability, claim and/or expense first exceeds in aggregate the sum of
$25,000.00. The phrase "Third Party Claim" means any lawsuit, administrative
action or other proceeding commenced and maintained by any governmental agency
or other third person or entity who is not a partner, principal, agent, employee
or affiliate of LESSEE. LESSEE shall promptly give LESSOR notice of any such
Third Party Claim. LESSOR's obligation of indemnification includes the
obligation to defend the Third Party Claims through qualified legal counsel
reasonably satisfactory to LESSEE, after LESSEE has first paid losses,
liabilities, costs and/or expenses in excess of $25,000.00 on account of such
Third Party Claim, provided LESSEE need not have first paid any such Third Party
Claim in order to be so indemnified. LESSEE shall cooperate with LESSOR in such
defense.
8. LESSOR's Warranty of Compliance with Building Code and Restrictions.
-------------------------------------------------------------------
Notwithstanding the provisions of Paragraph 2.3 of the Lease, LESSOR's warranty
applies only to the improvements included in the Building Shell, and LESSOR is
not making any warranty concerning the compliance of the Tenant Improvements
with such codes, regulations, ordinances and restrictions. LESSOR's warranty
includes compliance of the Building Shell with the Americans With Disabilities
Act ("ADA"). In the event that future changes in the ADA having general
application require any modifications or improvements to the Building Shell,
LESSOR shall be responsible, at its expense, for completing such modifications
or improvements; provided, however, LESSEE, not LESSOR, shall be responsible for
any modifications or improvements: (a) affecting the Tenant Improvements or
other alterations made by LESSEE; or (b) resulting from special ADA requirements
resulting from any unusual use or employment practices of LESSEE which are not
ordinary and customary to the use or practices of tenants generally in similarly
situated real estate projects. Except with respect to LESSOR's responsibility
for future compliance of the Building Shell with future ADA requirements, if
LESSEE does not give LESSOR written notice of a non-compliance with the
warranty provided in Paragraph 2.3 of the Lease within three (3) years after the
Scheduled Completion Date, correction of any non-compliance shall be the
obligation of LESSEE, at LESSEE's sole cost and expense.
9. Delivery of Possession. LESSOR shall deliver possession of the
----------------------
Premises to LESSEE on the date of Substantial Completion. LESSEE shall accept
possession of the Premises upon the Substantial Completion of the Tenant
Improvements. During the last fourteen (14) days immediately preceding the
expected date for Substantial Completion, LESSEE shall have the right to enter
the Premises prior to completion of the Tenant Improvements in order for LESSEE
to perform work required by LESSEE to make the Premises ready for its use and
occupancy; provided, however, (a) LESSEE requests in writing, no later than ten
(10) days prior to the requested date of entry, that LESSOR procure the
liability insurance coverage required under Paragraph 8.2 of the Lease and
LESSEE pays for the cost of such insurance; and (b) any such work shall be
carried out in a manner and method which does not interfere with or delay the
construction of the Tenant Improvements, LESSOR shall give LESSEE notice of the
expected date of Substantial Completion no later than twenty (20) days prior to
the expected date of Substantial Completion.
10. Use Warranty. Notwithstanding any other provision of this Lease to the
------------
contrary, LESSOR hereby warrants to LESSEE that as of the Substantial Completion
of the Premises, applicable zoning and land use laws will generally permit use
of the Premises for office, research, development and manufacture of golf clubs,
provided that LESSEE's specific method of use of the Premises is in accordance
with all other Applicable Laws and such warranty shall not be deemed to be a
warranty that LESSEE is permitted to use the Premises exclusively for only one
of the activities described, such as office use. Any action or claim of LESSEE
for breach of the preceding warranty must be commenced within one (1) year from
the Substantial Completion Date or it shall be deemed waived.
<PAGE>
11. LESSOR's Maintenance Obligations. Notwithstanding the provisions of
--------------------------------
Paragraphs 2.2, 2.3, 7.1 and 7.2 of the Lease, provisions of the Lease to the
contrary and except as provided in subsections 11.1 and 11.2 of this Addendum,
LESSOR, not LESSEE, shall be responsible for the maintenance and repair of
certain LESSOR Maintained Improvements. The phrase "LESSOR Maintained
Improvements" refers to and is limited to: (a) the structural elements of the
Building Shell, being the structural portion of the exterior Building Shell
walls, foundations and structural roof; (b) the non-structural roof membrane
(exclusive of roof drainage system, including gutters and downspouts, which
shall be maintained by LESSEE); and (c) Building Shell electrical, sewer and
water utilities; provided, however, and notwithstanding any other provision,
LESSOR's obligation to maintain the non-structural roof membrane shall only
apply during the Original Term.
11.1 Limitations on LESSOR's Responsibility. LESSOR's obligation for
--------------------------------------
repair and maintenance of the LESSOR Maintained Improvements is limited to
maintaining the LESSOR Maintained Improvements in a commercially reasonable
order, condition and repair and sound structural condition, and LESSEE, not
LESSOR, shall be responsible for any painting or other resurfacing of the
exterior surfaces of exterior or interior walls of LESSOR Maintained
Improvements in order to maintain such improvements in a neat and attractive
appearance. LESSOR shall not be in default of its repair and maintenance
obligation if LESSOR performs the required repairs or maintenance within thirty
(30) days after written notice from LESSEE of the need for such repairs or
maintenance. If, due to the nature of a particular repair or maintenance
obligation, more than thirty (30) days is reasonably required to complete such
repairs or maintenance, LESSOR shall not be in default so long as LESSOR
commences work within such thirty (30) day period and diligently prosecutes the
work to completion. No abatement of rent and no liability of LESSOR shall result
for any injury to or interference with LESSEE's business from the making of or
failure to make any repairs or replacements except for LESSOR's gross negligence
or willful misconduct. Except as otherwise provided herein, LESSEE waives and
releases its rights, if any, to make repair at LESSOR's expense, under
California Civil Code Sections 1941-42 or any similar law, statute or ordinance
in effect now or in the future. Notwithstanding the foregoing, if any such
repair and or maintenance obligation of LESSOR constitutes an emergency
situation involving property damage or personal injury, LESSOR shall make such
repair immediately following notice from LESSEE. If LESSOR cannot perform such
repair or maintenance obligation in time to mitigate any such property damage or
personal injury, LESSEE shall have the right to perform same and LESSOR shall
reimburse LESSEE for the reasonable, out-of-pocket cost thereof within thirty
(30) days from the receipt of an invoice from LESSEE, which invoice shall
include backup information substantiating the expenses. In the case of such
emergency situations, the notice given to LESSOR may be made by telephonic
communication so long as LESSEE continues with its best efforts to contact a
responsible employee or agent of LESSOR or LESSOR's designated manager until
successful and LESSEE simultaneously sends a facsimile transmission to LESSOR
notifying LESSOR of the emergency.
11.2 Exclusions. The provisions of Paragraph 9 (damage and destruction)
----------
and Paragraph 14 (condemnation) of the Lease, and not this section 11 of this
Addendum, shall control in the event of any damage, destruction or condemnation
of any of the LESSOR Maintained Improvements. In addition, LESSOR shall have no
responsibility to maintain or repair such LESSOR Maintained Improvements in the
following circumstances:
(a) repairs or replacements are necessitated by LESSEE's failure to
promptly perform its repair and maintenance obligations of other improvements;
(b) repairs or replacements are necessitated by any intentional or
negligent act or omission of LESSEE, its employees, agents or contractors,
including misuse or abuse of the LESSOR Maintained Improvements, and LESSEE
acknowledges that the entry upon or placing objects on any portion of the roof
shall constitute misuse;
(c) to the extent that LESSEE makes any modification or alteration
of any of the LESSOR Maintained Improvements, with or without the consent of
LESSOR, including, without limitation, penetrations of the roof or structural
elements, and LESSEE shall be deemed to have assumed full responsibility for the
repair and maintenance of any
<PAGE>
improvements so modified, altered or added, but only to the extent any such
repair or maintenance results from LESSEE's modification or alteration;
(d) repairs or replacements are necessitated by LESSEE exceeding the
designed load bearing capacities of the walls, foundations, floor slab or other
structural elements;
(e) repairs only to remove blockages of the Building Shell plumbing
and sewer lines resulting from the misuse or from ordinary and customary and
usual blockages and not from any defect or deficiency in such improvements; or
(f) repairs or replacement to the Building Shell electrical system
resulting from any unusual or intensive power demand requirements of LESSEE, or
on account of any power fluctuation or other malfunction attributable to
equipment or other electrical system improvements to be maintained by
LESSEE.
12. Indemnification. Except for LESSEE's negligence, LESSOR shall
---------------
indemnify, protect, defend and hold harmless LESSEE and its agents from and
against any and all claims, damages, costs, liens, judgments, penalties,
attorneys' fees, expenses and/or liabilities attributable to personal injury or
property damage and/or arising out of or resulting from any act, omission or
neglect of LESSOR, its agents, contractors or employees while present on the
Premises in connection with LESSOR's exercise of any of its rights to access to
the Premises granted in this Lease. The foregoing shall include, but not be
limited to, the defense or pursuit of any claim or any action or proceeding
involved therein, and whether or not (in the case of claims made against LESSOR)
litigated and/or reduced to judgment, and whether well founded or not. In case
any action or proceeding be brought against LESSEE by reason of any of the
foregoing matters, LESSOR upon notice from LESSEE shall defend the same at
LESSOR's expense by counsel reasonably satisfactory to LESSEE and LESSEE shall
cooperate with LESSOR in such defense. LESSEE need not have first paid any such
claim in order to be so indemnified.
13. Additional Provisions Regarding Alteration Removal. Notwithstanding
--------------------------------------------------
any contrary provision in Paragraph 7.4(b) of the Lease, if LESSOR expressly
consents to any Alteration or Utility Installations constructed or installed by
LESSEE, LESSOR shall notify LESSEE at the time of giving such consent whether or
not LESSOR will require the removal of the Alteration or Utility Installation
upon expiration of the Lease, and LESSOR's failure to so notify LESSEE shall
constitute a waiver of LESSOR's right to require LESSEE to remove such
Alteration or Utility Installation upon expiration of the Lease. In addition,
and notwithstanding any contrary provisions, LESSEE shall not remove and LESSOR
shall be entitled to retain any computer network, telephone or security system
cabling or conduits placed within the walls, ceilings or floors of the Premises.
14. Property Insurance/Earthquake. Notwithstanding the provision in
-----------------------------
Paragraph 8.3(a) of the Lease requiring earthquake coverage if requested by
LESSOR's lender, LESSOR agrees that LESSEE shall not be responsible for the cost
of earthquake insurance coverage to the extent any coverage requested by
LESSOR's lender is not consistent with the prevailing practices of institutional
lenders making loans for similarly situated commercial real estate developments
in the same locale and seismic zone.
15. Additional Provision Concerning Damage or Destruction. This section
-----------------------------------------------------
includes provisions that modify and/or supplement the provisions of Paragraph 9
of the Lease concerning damage or destruction of the Premises. Except as
expressly set forth in subsections 15.1 through 15.4 of this Addendum, the
provisions of Paragraph 9 of the Lease shall be enforced in accordance with
their terms.
15.1 Partial Damage-Uninsured Loss. LESSOR agrees that LESSOR's right to
-----------------------------
terminate the Lease under Paragraph 9.3 of the Lease on account of an uninsured
loss shall not apply unless the aggregate cost and expense of repairing and
restoring the Premises exceeds One Hundred Thousand Dollars ($100,000.00), and
LESSOR shall cause such repair and restoration to be completed to the extent
required in Paragraph 9.3 of the Lease. If LESSOR elects to exercise such right
of termination and LESSEE elects to exercise its right under Paragraph 9.3 of
<PAGE>
the Lease to complete such repairs at its expense, LESSEE shall only be
responsible for the repair or replacement costs in excess of One Hundred
Thousand Dollars ($100,000.00), and LESSOR shall be responsible for payment of
such costs up to a maximum of One Hundred Thousand Dollars ($100,000.00).
15.2 Damage Near End of Term. LESSOR agrees that LESSEE shall have the
-----------------------
same right to terminate the Lease during the last six (6) months of the term of
the Lease as provided to LESSOR under Paragraph 9.5 of the Lease, except in the
event such damage was caused by LESSEE, in which event LESSEE shall not have the
right to terminate the Lease.
15.3 Abatement of Rent. The requirement in Paragraph 9.6(a) of the Lease
-----------------
for LESSEE to continue to perform its obligations under the Lease other than
those monetary obligations subject to abatement under Paragraph 9.6(a) of the
Lease, shall not apply to the extent that LESSEE's ability to perform any such
other obligations is impaired by the damage or destruction of the Premises;
provided, however, the preceding exception shall not apply to any monetary
obligations. In addition, the waiver of LESSEE of any claim against LESSOR for
any damage suffered by reason of such repair or restoration shall not apply to
the extent such damage is solely caused by the gross negligence or willful
misconduct of LESSOR, or its agents, contractors or employees.
15.4 Termination-Advance Payments. In addition to any entitlement of
----------------------------
LESSEE to receive any advance payment under Paragraph 9.8 of the Lease, in the
event of the termination of the Lease pursuant to Paragraph 9 of the Lease
during the first five (5) years of the Original Term, LESSEE shall be entitled
to receive a portion of insurance proceeds actually received by LESSOR on
account of the unamortized cost of the Tenant Improvements, with such portion
equaling a percentage determined by (a) dividing the aggregate amount of the
Tenant Improvement Costs paid by LESSEE, (b) by the total Tenant Improvement
Costs paid by both LESSOR and LESSEE.
16. Additional Provision Concerning Assignment and Subletting. This
---------------------------------------------------------
section includes provisions that modify and/or supplement the provisions of
Paragraph 12 of the Lease concerning the assignment and subletting of the
Premises. Except as expressly set forth in subsections 16.1 through 16.4 of this
Addendum, the provisions of Paragraph 16 of the Lease shall be enforced in
accordance with their terms.
16.1 LESSOR's Consent/Affiliate Transaction. Subject to compliance with
--------------------------------------
Paragraph 12.2 of the Lease, LESSOR's consent shall not be required with respect
to an Affiliate Transaction and the provisions of Paragraph 12.1(d) of the Lease
shall not apply to an Affiliate Transaction. The term "Affiliate Transaction'
means (i) any assignment resulting from a bona fide consolidation, merger or
purchase of substantially all of LESSEE's assets, or (ii) any assignment or
sublease to an entity controlling, controlled by or under common control with
LESSEE, or an entity which acquires, is acquired by, or merges with, LESSEE;
provided, however, any such assignment shall not release or otherwise affect
LESSEE's liability for its obligations under the Lease. LESSOR agrees that
LESSEE's failure to use or occupy all or any portion of the Premises shall not
constitute a default. Further and notwithstanding anything to the contrary
contained herein, LESSOR acknowledges and agrees that the Premises may be
occupied by one or both Guarantors, companies affiliated with LESSEE, and LESSOR
consents to such occupancy. For purposes of determining whether a transaction is
an "Affiliate Transaction," references to "LESSEE" in this section shall also be
deemed to include each Guarantor.
16.2 Exception to Consent For Certain Subletting. Notwithstanding any
-------------------------------------------
other provision in Paragraph 12 of the Lease, LESSOR's consent to a sublease
shall not be required and LESSOR shall not have the right to adjust the rental
under Paragraph 12.1(d) of the Lease so long as all of the following conditions
are and remain satisfied: (a) the sublease is for a portion of the Premises
constituting less than fifty percent (50%) of the total rentable square feet of
the Premises; (b) LESSEE continues to occupy the remaining portions of the
Premises; and (c) LESSEE is not otherwise in Breach of this Lease.
16.3 Assignee's Assumption. With respect to the obligation under Paragraph
---------------------
12.2(a) for any assignee to assume the obligations of LESSEE under the Lease,
such obligation is
<PAGE>
clarified to provide that such assumption only applies to any accrued or
unperformed obligations existing as of the date of the assignment and any future
obligations accruing on and after the date of the assignment.
16.4 Rent Adjustment Upon Assignment or Sublease. Subject to all other
-------------------------------------------
provisions of Paragraph 12 of the Lease and except in the case of an Affiliate
Transaction, if LESSEE subleases or assigns the Premises (regardless of whether
such sublease or assignment is consented to by LESSOR), LESSEE shall pay to
LESSOR, as additional rental due under this Lease, at LESSOR's option, the
following amounts: (a) in the case of an assignment, LESSOR shall be entitled to
receive an amount equal to fifty percent (50%) of the total value of the
consideration received by LESSEE on account of such assignment, less an amount
equal to any real estate commissions payable by LESSEE on account of the
assignment of this Lease, which amount shall be payable within five (5) days
from the date(s) as and when LESSEE receives such consideration; and (b) in the
case of a sublease, an amount equal to fifty percent (50%) of the Excess Rental
payable by any subtenant on account of such sublease less the costs of any real
estate commissions payable by LESSEE. The term "Excess Rental" means the rent or
other consideration received by LESSEE from the subtenant in excess of the
amount of Base Rent, additional rent and other charges payable by LESSEE under
this Lease. In no event shall this provision be construed or applied to reduce
the Base Rent or other charges payable by LESSEE under this Lease, nor modify,
waive or otherwise affect LESSOR's entitlement to increase the rentals payable
under this Lease pursuant to Paragraph 12.1(d) of the Lease in the event of an
assignment or subletting without the consent of LESSOR.
16.5 Presumption of Reasonableness. To the extent that the Lease provides
-----------------------------
for LESSOR's reasonable consent to an assignment of the Lease, LESSEE
acknowledges and agrees that LESSOR shall be conclusively deemed to have
reasonably withheld such consent if (a) the Net Worth of the proposed assignee
does not exceed One Million Dollars ($1,000,000.00) as evidenced by financial
statements conforming to the requirements of section 16.6 of the Lease, or (b)
the assignee's use of the Premises would increase the risk of contamination of
any Hazardous Substance from the risk presented by LESSEE's use of the Premises
as determined by Dames & Moore, or such other qualified environmental consultant
as LESSOR and LESSEE may reasonably approve if Dames & Moore decline to make
such determination. LESSEE shall be responsible for the fees of such consultant.
Nothing in this section shall be construed or applied to restrict LESSOR from
withholding its consent for other reasonable grounds, and this provision is
included solely to provide LESSOR the benefit of the conclusive presumption with
respect to one or both of the above described conditions.
16.6 Time For Consent. LESSOR shall give LESSEE written notice of its
----------------
consent or refusal to consent to a proposed assignment no later than thirty (30)
days following receipt from LESSEE of the last of the Transfer Documentation and
LESSEE's payment under Paragraph 12.2(e) of the Lease ("LESSOR's Notice"). The
term "Transfer Documentation" means and includes the following documentation,
which shall be certified in writing as true, correct and complete by the
assignee: (a) the name, address, telephone number and responsible representative
of the assignee; (b) financial statements, prepared by a certified public
accountant or equivalent, for the last three (3) years of assignee's operation,
including balance sheet, income statements and any other statements prepared in
the ordinary course of assignee's operations; (c) written reports, government
filings and other relevant documentation, if any, describing the extent of the
use of Hazardous Substances in assignee's general business operations, and, if
different, the use of the Premises proposed by assignee; and (d) all written
contracts and agreements, including lease assignments, signed between LESSEE (or
any of its affiliates) and the assignee relating to or in any way concerning the
assignment or any contemporaneous transaction, which contracts and agreements
must evidence that the assignment is subject only to the condition or
contingency of LESSOR's consent. If LESSOR does not timely give LESSOR's Notice,
LESSOR shall be deemed to have given its consent to the assignment as disclosed
in the Transfer Documentation.
17. Additional Provision Concerning Default/Breach/Remedies. This section
-------------------------------------------------------
includes provisions that modify and/or supplement the provisions of Paragraph 13
of the Lease concerning a Default and Breach and remedies. Except as expressly
set forth in subsections 17.1
<PAGE>
through 17.3 of this Addendum, the provisions of Paragraph 13 of the Lease shall
be enforced in accordance with their terms.
17.1 Limited Waiver of Costs. LESSOR agrees to waive the charges for
-----------------------
preparation of a notice of Default in the following circumstances: (a) it is
determined that a Default, in fact, did not occur; or (b) the first Default
occurring during any rolling twelve (12) month period other than a Default
arising on account of the failure to pay Base Rent or any other monetary charge.
17.2 Documentation Requirements. Except as expressly otherwise provided in
--------------------------
this Lease, the failure by LESSEE to provide LESSOR with reasonable written
evidence (in duly executed original form, if applicable) of (i) a Tenancy
Statement required pursuant to Paragraphs 16 or 37 of the Lease, (ii) the
execution of any document requested under Paragraph 42 (easements) of the Lease,
or (iii) the subordination or non-subordination of this Lease as provided in
Paragraph 30 of the Lease, where such failure continues for a period of ten (10)
days following written notice by or on behalf of LESSOR to LESSEE, shall
constitute a Breach. Except as expressly otherwise provided in this Lease, the
failure by LESSEE to provide LESSOR with reasonable written evidence (in duly
executed original form, if applicable) of (aa) compliance with Applicable Law as
required under Paragraph 6.3 of the Lease, (bb) the rescission of an
unauthorized assignment or subletting of the Premises under Paragraph 12.1(b) of
the Lease, or (cc) any other documentation or information which LESSOR may
reasonably require of LESSEE under the terms of this Lease, where such failure
continues for a period of thirty (30) days following written notice by or on
behalf of LESSOR to LESSEE, shall constitute a Breach.
17.3 Limited Late Charge Waiver. Notwithstanding the provisions of
--------------------------
Paragraph 13.4 of the Lease, LESSOR agrees to waive any late charges so long as
LESSEE is not late in payment of the Base Rent or additional rent on more than
one (1) occasion during any twelve (12) month period and LESSEE otherwise pays
the late rent within three (3) business days from LESSOR's delivery of written
notice of such nonpayment.
17.4 Limitation. Notwithstanding the provisions of Paragraph 13.2 of the
----------
Lease, LESSOR agrees to refrain from undertaking direct action so long as
LESSEE, within ten (10) days following receipt of LESSOR's notice, provides
satisfactory evidence that LESSEE has commenced the required performance and
that LESSEE's performance will be completed within the time period allowed for
LESSEE to cure a Default with respect to the item to be performed.
18. Additional Provision Regarding Condemnation. Notwithstanding any
-------------------------------------------
contrary provision in Paragraph 14 of the Lease, in addition to any other
compensation to which LESSEE may be entitled to pursuant to Paragraph 14 of the
Lease, if a taking occurs during the first five (5) years of the Original Term,
LESSEE shall be entitled to receive a portion of any condemnation proceeds
actually received by LESSOR attributable to the unamortized cost of the Tenant
Improvements, with such portion equaling a percentage determined by (a) dividing
the aggregate amount of the Tenant Improvement Costs paid by LESSEE, (b) by the
total Tenant Improvement Costs paid by both LESSOR and LESSEE.
19. Additional Provision Regarding LESSOR's Liability. Notwithstanding the
-------------------------------------------------
provisions of Paragraph 17 of the Lease, the provision providing for LESSOR, or
its successors, to be relieved from liability upon transfer or assignment of the
Lease shall only apply so long as such transferee or assignee expressly assumes
in writing the obligations of the LESSOR under this Lease arising from and after
the date of such assignment or transfer.
20. Additional Provision Regarding Interest. Notwithstanding the
---------------------------------------
provisions of Paragraph 19 of the Lease, to the extent that LESSOR becomes
entitled to collect more than one late charge for the same Default, LESSOR
agrees to waive interest charges to the extent that the amount actually
collected by LESSOR on account of any cumulative late charges (not including the
initial late charge attributable to the particular Default), if taken together
with the interest on the same sums, would exceed the amount of interest on the
undue amount provided in Paragraph 19 of the Lease.
<PAGE>
21. Waiver. No waiver by LESSEE of any breach of any term, covenant or
------
condition hereof by LESSOR shall be deemed a waiver of any other term, covenant
or condition hereof, or of any subsequent breach by LESSOR of the same or of any
other term, covenant or condition hereof.
22. Additional Option Provisions. Notwithstanding the provisions of
----------------------------
Paragraph 39.2 of the Lease providing that the options are personal to LESSEE,
LESSEE shall have the right to assign the options as a part of the assignment of
the Lease in the following circumstances: (a) in an Affiliate Transaction; or
(b) in an assignment to which LESSOR is obligated to provide its consent in
accordance with Paragraph 12 of the Lease and section 16 of this Addendum;
provided, however, in the case of preceding clause (b), LESSOR shall have the
right to elect to terminate this Lease rather than permit the assignment of the
options, by giving LESSEE notice of such termination in LESSOR's Notice under
subsection 16.6, and such termination shall be effective upon the later to occur
of (i) the expiration of thirty (30) days following the delivery of such
LESSOR's Notice, or (ii) the date of the proposed assignment. In addition,
subject to Paragraph 39 of the Lease, LESSOR is granting to LESSEE two (2)
successive options to extend the Lease term for successive five (5) year
periods, with the first option period beginning upon the expiration of the
Original Term and the second option period beginning on the expiration of the
first option period. Each option shall be exercised only by written notice
delivered to LESSOR no earlier than 365 days and no later than 180 days before
the expiration of the Lease, or previous option period, whichever is applicable.
Regardless of cause, if LESSEE fails to timely give notice of the exercise of an
option, all option rights will automatically lapse and terminate and be of no
further force or effect without any requirement of notice or demand by LESSOR.
The Base Rent for each option period shall be adjusted in accordance with
subsection 22.1 of this Addendum at the beginning of each option period. The
other terms and conditions of the Lease shall remain in effect during each
option period, except: (a) except as provided in subsection 22.2 of this
Addendum, no tenant improvements or allowances shall be provided by LESSOR, and
LESSEE shall be deemed to have extended the term of the Lease and accepted the
Premises "AS IS" in their then existing condition and without representation or
warranty from LESSOR; (b) upon the exercise of the first option, LESSEE shall
have only one remaining option to extend the Lease for an additional five (5)
year period, and upon the exercise of the second option, LESSEE shall have no
further right to extend the term of the Lease; (c) the limitation on Operating
Expenses under section 2 of this Addendum shall not apply; and (d) as provided
in section 11 of this Addendum, LESSOR shall have no further responsibility for
the maintenance and repair of the non-structural roof membrane.
22.1 Adjustment to Base Rent. Except as otherwise provided in this
-----------------------
section, the Base Rent shall be adjusted at the beginning of each option period
to 95% of the "fair rental value" of the Premises as determined in the following
manner:
(a) Within thirty (30) days from LESSEE's notice, LESSOR and
LESSEE shall meet in an effort to negotiate, in good faith, the fair rental
value of the Premises as of the beginning of the applicable option period. If
LESSOR and LESSEE have not agreed upon the fair rental value of the Premises at
least ninety (90) days prior to the beginning of the applicable option period,
the fair rental value shall be determined by appraisal, by one or more
appraisers ("Appraiser(s)"). The Appraisers shall have at least five (5) years
experience in the appraisal of commercial/industrial real property in the area
in which the Premises is located and shall be members of professional
organizations such as M.A.I. or equivalent.
(b) If LESSOR and LESSEE are not able to agree upon the fair
rental value of the Premises within the prescribed time period, then LESSOR and
LESSEE shall attempt to agree in good faith upon a single Appraiser not later
than seventy-five (75) days prior to the beginning of the applicable option
period. If LESSOR and LESSEE are unable to agree upon a single Appraiser within
such time period, then LESSOR and LESSEE shall each appoint one Appraiser not
later than sixty-five (65) days prior to the beginning of the applicable option
period. Within ten (10) days thereafter, the two (2) appointed Appraisers shall
appoint a third Appraiser. If either LESSOR or LESSEE fails to appoint its
Appraiser within the prescribed time period, the single Appraiser appointed
shall determined the fair rental value of the Premises. If both parties fail to
appoint Appraisers within the prescribed time periods, then the first Appraiser
thereafter selected by a party shall determine the fair rental value of the
Premises. Each party
<PAGE>
shall bear the cost of its own Appraiser and the parties shall share equally the
cost of the single or third Appraiser, if applicable.
(c) For the purposes of such appraisal, the term "fair rental
value" shall mean the price that a ready and willing tenant would pay, as of the
beginning of the applicable option period, as monthly rent to a ready and
willing landlord of property comparable to the Premises if such property were
exposed for lease on the open market for a reasonable period of time and taking
into account all of the purposes for which such property may be used. Fair
rental value shall take into consideration all monetary concessions being
granted in connection with such comparable property, including without
limitation, rent abatement concessions and tenant improvements or allowances
(after deduction for the refurbishment allowance afforded LESSEE under
subsection 22.2 of this Addendum) provided therefor. If a single Appraiser is
chosen, then such Appraiser shall determine the fair rental value of the
Premises. Otherwise, the fair rental value of the Premises shall be the
arithmetic average of the two (2) of the three (3) appraisals which are closest
in amount, and the third appraisal shall be disregarded. LESSOR and LESSEE shall
instruct the Appraiser(s) to complete the determination of the fair rental value
not later than thirty (30) days prior to the beginning of the applicable option
period. If the fair rental value is not determined prior to the beginning of the
applicable option period, then LESSEE shall continue to pay to LESSOR the Base
Rent applicable to the Premises immediately prior to such extension, until the
fair rental value is determined. When the fair rental value of the Premises is
determined, LESSOR shall deliver notice thereof to LESSEE, and if the fair
rental value is higher, LESSEE shall pay to LESSOR, within ten (10) days after
receipt of such notice, the difference between the Base Rent actually paid by
LESSEE to LESSOR and the new Base Rent determined hereunder.
(d) Notwithstanding any other provision of this Lease, in no
event shall the Base Rent in effect for the last year of the Original Term, or
the last year of the immediately preceding option period ("Prior Base Rent"), be
decreased on account of the operation of this section. If the fair rental value
of the Premises determined under this section is less than the Prior Base Rent,
then the Base Rent for the applicable option period shall equal the Prior Base
Rent.
(e) The provision providing for an adjustment to 95% of the fair
market rental shall not apply if LESSOR becomes obligated to pay any real estate
brokerage commission pursuant to any agreements or other acts or omissions of
LESSEE on account of LESSEE's extension of the term of the Lease. If any such
commissions are payable, the rent shall be 100% of the fair market rental,
subject to the provisions of preceding clause (d).
22.2 Refurbishment Allowance. In the case of each option period,
-----------------------
LESSOR shall reimburse LESSEE for certain "Refurbishment Expenses" (as defined
below) up to a maximum amount not to exceed the "Refurbishment Allowance" (as
defined below). The term "Refurbishment Expense(s)" means out-of-pocket expenses
paid by LESSEE, no earlier than 180 days prior to the beginning of each option
period, to replace carpet, repaint interior walls and replace damaged or soiled
ceiling tiles with comparable quality materials to the items being replaced or
refurbished. The term "Refurbishment Allowance" means an amount, calculated as
of the beginning of each option period, equal to the lesser of (i) $41,450.00
increased by increases in the "Index" (as defined below) from the Commencement
Date, or (ii) a maximum amount of $62,175.00.
22.3 "Index" Defined. The term "Index" means the Consumer Price Index
--------------
for Urban Wage Earners and Clerical Workers, in the Los Angeles-Anaheim-
Riverside metropolitan area, All Items (1982-84 equals 100), published by the
Bureau of Labor Statistics of the United States Department of Labor. If the
Bureau of Labor Statistics revises the Index, the parties agree that the Bureau
of Labor Statistics will be the sole judge of the comparability of successive
indexes, but if that agency fails to supply indexes that it deems comparable, or
if no succeeding index is published, then the parties shall negotiate in good
faith to reasonably determine an appropriate alternative published price index.
23. Arbitration Procedure. Whenever in this Lease another provision
---------------------
expressly provides for the resolution of a dispute through Arbitration, the
arbitration procedures provided
<PAGE>
in this section shall apply ("Arbitration"). Any Arbitration permitted pursuant
to this section shall be commenced and conducted in accordance with the
California Code of Civil Procedure, Section 1281, et. seq., and the discovery
procedures permitted by Section 1283.05 of the Code shall apply. The Arbitration
award rendered shall be final and binding and judgment may be entered upon it in
accordance with applicable laws and any court having jurisdiction thereof.
Except on account of claims, disputes and other matters in question required to
be submitted to Arbitration in accordance with another section of this Lease,
all other claims, disputes and actions arising from or relating to this Lease
shall be commenced and maintained in the appropriate court having jurisdiction.
Notwithstanding any other provision, the jurisdiction of any arbitrators
appointed pursuant to this provision shall not extend to the award of any
exemplary or punitive damages, or other substantially equivalent damages.
24. Subordination/Non-Disturbance. LESSEE shall execute and deliver to
-----------------------------
LESSOR, in favor of LESSOR's lender, a Subordination, Estoppel, Nondisturbance
and Attornment Agreement in the form as shown in Exhibit "5" annexed to this
Lease upon request, and LESSOR shall cause LESSOR's lender to execute such
agreement in favor of LESSEE. If the Premises are presently encumbered by a
mortgage, deed of trust or similar security interest in favor of LESSOR's
lender, within thirty (30) days from LESSOR's execution of the Lease, LESSOR
shall cause such lender to enter into a nondisturbance acknowledging LESSEE's
right to continued occupancy under the Lease so long as LESSEE is not in Breach
of the Lease and notwithstanding LESSOR's default under the mortgage, deed of
trust or other security device. If such lender requests, such nondisturbance
agreement shall also include provisions regarding the subordination of the Lease
and certain estoppel certification and LESSEE agrees to execute a Subordination,
Estoppel, Nondisturbance and Attornment Agreement in the form as shown in
Exhibit "5" annexed to this Addendum.
25. Hazardous Materials Questionnaire. Without limiting LESSEE's
---------------------------------
obligations under Paragraph 6.2 of the Lease regarding compliance with
Applicable Laws concerning Hazardous Substances, LESSEE shall, within ten (10)
days from the execution, complete and deliver to LESSOR for its filing with
applicable government authorities a Hazardous Materials Questionnaire in the
form as set forth in Exhibit "6" annexed to this Addendum.
26. Additional Notice Provisions. LESSEE may, by giving written notice to
----------------------------
LESSOR, change the address for notices under Paragraph 23 of the Lease from the
address of the Premises to any other address designated by LESSEE. In addition,
LESSOR shall also give copies of any notice of Default or Breach as follows:
U.S. Industries, Inc., 101 Wood Avenue South, Iselin, New Jersey, 08830,
Attention: Rich Buccarelli.
[SIGNATURE PAGE FOLLOWS]
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Addendum as of the date
set forth above.
"LESSOR"
TECHPLEX, L.P., a California limited partnership
By Its General Partner
HAMANN CONSOLIDATED, INC.,
a California corporation
By: /s/ JEFFREY C. HAMANN
----------------------------------
Jeffrey C. Hamann, President
By: /s/ JEFFREY C. HAMANN
----------------------------------
Gregg Hamann, Secretary
Jeffrey C. Hamann has Attorney In
Fact for Gregg Hamann
"LESSEE"
PUTTER PROPERTIES, INC., a Delaware corporation
By: /s/ RICHARD A. BUCCARELLI
-----------------------------------------
Richard A. Buccarelli, Vice President
By:
-----------------------------------------
[Signature]
-----------------------------------------
Print Name and Title of Signatory
<PAGE>
Exhibit 10.4.2
--------------
ASSIGNMENT
(Real Property Lease)
THIS ASSIGNMENT, made as of August 8, 1997, by Putter Properties, Inc., a
Delaware corporation ("Putter") and Callaway Acquisition, a California
corporation ("Buyer") provides:
RECITALS
Odyssey Sports, Inc., a California corporation ("Seller"), among others,
has entered into an Asset Purchase Agreement dated July 20, 1997 (the "Purchase
Agreement") pursuant to which Seller has agreed to sell certain assets to
Callaway Golf Company, a California corporation ("Callaway Golf"), and Callaway
Golf has agreed to purchase from Seller such assets. Pursuant to subsection
10.10 of the Purchase Agreement, Callaway Golf has assigned the Purchase
Agreement to Buyer, its wholly owned subsidiary. Putter and Techplex, L.P., a
California limited partnership ("Lessor") entered into that certain Standard
Industrial/Commercial Single-Tenant Lease-Net dated December 20, 1996, including
an Addendum to Lease attached thereto, whereby Lessor leased to Putter certain
real property, including all buildings and permanent improvements thereon (the
"Premises"), commonly known as 1969 Kellogg Avenue, Carlsbad, California, for
general office, research, development, manufacturing and any other legally
permitted use (the "Lease"). Putter now desires to assign the Lease to Buyer
and Buyer desires to accept the assignment of the Lease.
NOW THEREFORE, in consideration of the above premises and for other good
and valuable consideration the receipt and sufficiency of which are hereby
acknowledged Putter assigns and transfers to Buyer all of Putter's right, title,
and interest in and to the Lease, a copy of which (including all amendments
thereto) is attached to the assignment as Exhibit A, and Buyer agrees to and
does accept the assignment. Buyer expressly assumes and agrees to keep,
perform, and fulfill by Putter as Lessee under the Lease, including the making
of all payments due to Lessor under the Lease when due and payable.
Putter and Buyer agree to execute and deliver, or cause to be executed and
delivered, and to do or make or cause to be done or made, any and all
instruments, papers, acts or things, supplemental, confirmatory or otherwise, as
reasonably may be required by the other party for the purposes of perfecting and
completing the transfer and conveyance to Buyer of the Lease.
<PAGE>
IN WITNESS WHEREOF, Putter and Buyer have each caused this Assignment to be
executed and delivered in a manner sufficient to bind it, as of the day and year
first above written.
PUTTER PROPERTIES, INC., CALLAWAY ACQUISITION,
a Delaware corporation a California corporation
By: /s/ GEORGE H. MACLEAN By: /s/ DONALD H. DYE
----------------------------- -------------------------------
Name: George H. MacLean Name: Donald H. Dye
Title: Vice President Title: President and CEO
<PAGE>
Exhibit 10.4.3
--------------
GUARANTY OF LEASE
THIS GUARANTY OF LEASE ("Guaranty") is entered into as of August 8, 1997,
by Callaway Golf Company, a California corporation ("GUARANTOR"), in favor of
Techplex, L.P., a California limited partnership ("LANDLORD"), and is with
reference to the following facts, which are a material part of this Guaranty:
A. LANDLORD and Putter Properties, Inc., a Delaware corporation,
("TENANT") previously entered into that certain Standard Industrial/Commercial
Single-Tenant Lease-Net, dated December 20, 1996 ("Lease").
B. Tommy Armour Golf Company, a Delaware corporation, and Odyssey Sports,
Inc., a California corporation ("Odyssey") entered into a Guaranty of Lease,
dated December 20, 1996, to guaranty TENANT's obligations under the Lease.
C. Callaway Acquisition, a California corporation ("Callaway") and an
affiliate of GUARANTOR, is acquiring all of the assets of Odyssey and is
succeeding to the liabilities of TENANT under the Lease.
D. Any words or phrases constituting defined terms in the Lease shall have
the same meaning and effect when used in this Guaranty.
NOW THEREFORE, for other good and valuable consideration, the receipt and
sufficiency of which is acknowledged, GUARANTOR agrees as follows:
1. Guaranteed Obligations. GUARANTOR hereby unconditionally and
----------------------
irrevocably guarantees to LANDLORD the payment of, and promises to pay to
LANDLORD, or order, upon demand after any Breach under the Lease, all
indebtedness and obligations, of any nature whatsoever, of TENANT under the
Lease and any and all extensions, renewals, substitutions, replacements and
modifications thereof, and additionally promises to timely perform all other
obligations as set forth in the Lease. For purposes of reference in this
Guaranty, all of the obligations described in this section being guaranteed by
GUARANTOR are referred to as the "Guaranteed Obligations."
2. Independent Obligations. This Guaranty is a guaranty of payment and
-----------------------
not of collection. The GUARANTOR's obligations under this Guaranty are
independent of those of the TENANT and of the obligations of any other
guarantor, and are not conditioned or contingent upon the validity, regularity,
or enforceability of the Guaranteed Obligations or of the obligations of any
other guarantor. LANDLORD may bring a separate action against the GUARANTOR
without first proceeding against the TENANT, any other guarantor, or any other
person or entity. LANDLORD's rights under this Guaranty in respect of the
Guaranteed Obligations shall not be exhausted by any
<PAGE>
action of the LANDLORD until all of the Guaranteed Obligations have been fully
and indefeasibly paid.
3. Waiver of Defenses. The GUARANTOR waives and agrees not to assert or
------------------
take advantage of:
(a) any right to require the LANDLORD to proceed against the TENANT,
any other guarantor, or any other person or entity, or to pursue any other
remedy whatsoever, including, without limitation, any such right or any other
right set forth in or arising out of any of Sections 2845, 2848, 2849, 2850 and
2855 of the California Civil Code;
(b) any defense based upon any legal disability of the TENANT or of any
other guarantor or any discharge or limitation of the liability of the TENANT or
of any other guarantor to the LANDLORD, or any restraint or stay applicable to
actions against the TENANT or against any other guarantor, whether such
disability, discharge, limitation, restraint, or stay is consensual, arises by
order of a court or other governmental authority, or arises by operation of law
or any liquidation, reorganization, receivership, bankruptcy, insolvency or
debtor relief proceeding, or from any other cause, including, without
limitation, any defense to the payment of interest, attorneys' fees and costs,
and other charges that otherwise would accrue or become payable in respect of
the Guaranteed Obligations after the commencement of any such proceeding:
(c) setoffs or counterclaims (except as otherwise available to TENANT),
presentment, demand, protest, notice of protest, notice of non-payment, or other
notice of any kind;
(d) any defense based upon the modification, renewal, extension, or
other alteration of the Guaranteed Obligations;
(e) any defense based upon a statute of limitations (to the fullest
extent permitted by law), and any defense based upon the LANDLORD's delay in
enforcing this Guaranty;
(f) any defense based upon the death, incapacity, lack of authority, or
termination of existence of, or revocation of this Guaranty by, any person or
entity or persons or entities, or the substitution of any party to this
Guaranty;
(g) any defense based upon or related to the GUARANTOR's lack of
knowledge as to the TENANT's financial condition;
(h) any defense based upon Section 2809 of the California Civil Code;
(i) any defense based upon the impairment of any subrogation or
reimbursement rights that the GUARANTOR might have; and
<PAGE>
(j) any right to direct the application of any payment or collateral.
4. TENANT's Financial Condition. The GUARANTOR acknowledges that the
----------------------------
GUARANTOR is relying upon the GUARANTOR's own knowledge and is fully informed
with respect to the TENANT's financial condition. The GUARANTOR assumes full
responsibility for keeping fully informed of the financial condition of the
TENANT and all other circumstances affecting the TENANT's ability to perform its
obligations to the LANDLORD, and agrees that the LANDLORD will have no duty to
report to the GUARANTOR any information that the LANDLORD receives about the
TENANT's financial condition or any circumstances bearing on the TENANT's
ability to perform all or any portion of the Guaranteed Obligations, regardless
of whether the LANDLORD has reason to believe that any such facts materially
increase the risk beyond that which the GUARANTOR intends to assume or has
reason to believe that such facts are unknown to the GUARANTOR or has a
reasonable opportunity to communicate such facts to the GUARANTOR.
5. Subrogation and Additional Waiver. Until all the covenants and
---------------------------------
conditions in the Lease on TENANT's part to be performed and observed, are fully
performed and observed, GUARANTOR (a) shall have no right of subrogation against
TENANT by reason of any payments or acts of performance by GUARANTOR hereunder;
and (b) subordinates any liability or indebtedness of TENANT now or hereafter
held by GUARANTOR in the obligations of TENANT to LANDLORD under the Lease.
GUARANTOR waives all rights and defenses arising out of an election of remedies
by LANDLORD, even though that election of remedies has destroyed or diminished
GUARANTOR's rights of subrogation and reimbursement against TENANT.
6. Liability of GUARANTOR. The liability of GUARANTOR under this Guaranty
----------------------
shall in no way be affected by (a) the release or discharge of TENANT in any
creditor's receivership, bankruptcy or similar proceeding; (b) the impairment,
limitation or bankruptcy, or of any remedy for the enforcement of TENANT's
liability under the Lease resulting from the operation of any present or future
provision of the bankruptcy code or similar statute or similar decision in any
court; (c) the rejection or disaffirmance of the Lease in any such proceedings;
(d) the assignment or transfer of the Lease by TENANT; (e) any disability of
TENANT; (f) the exercise by LANDLORD of any of its rights or remedies reserved
under the Lease or by law; or (g) any termination of the Lease.
7. Financial Statements. If LANDLORD desires to sell, finance or
--------------------
refinance the property which compromises in whole or in part the Premises which
are the subject of the Lease, GUARANTOR agrees to deliver to any lender or buyer
designated by LANDLORD financial statements of GUARANTOR (in such form as
customarily prepared by or for GUARANTOR, including all audited statements
prepared, if any) as may be reasonably required by such lender or buyer. Such
statements shall include the past three (3) years' financial statements of
GUARANTOR. Any such financial
<PAGE>
statements shall be received by LANDLORD in confidence and shall be used only
for the foregoing purposes.
8. Attorneys' Fees. In the event of any litigation between GUARANTOR and
---------------
LANDLORD to enforce or interpret this Guaranty or in connection with the Lease,
the unsuccessful party to such litigation agrees to pay to the successful party
all fees, costs and expenses, including reasonable attorney's fees, expert
witness fees and expenses.
9. Binding Effect/Assignment. This Guaranty shall be binding upon the
-------------------------
GUARANTOR and the GUARANTOR's heirs, executors, personal representatives,
successors, and assigns, and shall inure to the benefit of, and be enforceable
by, the LANDLORD and the LANDLORD's successors and assigns. The benefit of this
Guaranty shall be assignable by LANDLORD to LANDLORD's lenders and successors
and enforceable by them, and the term "Landlord" as used in this Guaranty
includes such successors and assigns. Any assignment of the Lease shall be
deemed to include the assignment of this Guaranty notwithstanding that this
Guaranty is not separately described in the instrument of assignment.
10. Notices. All notices and other communications shall be in writing and
-------
provided to LANDLORD at the address set forth in the Lease and to GUARANTOR, or
at the address set forth under GUARANTOR's signature, unless either party gives
the other written notice of a different address for notices and communications.
11. Severability. If any provision of this Guaranty shall be deemed or
------------
held to be invalid or unenforceable for any reason, such provision shall be
adjusted, if possible, rather than voided, so as to achieve the intent of the
parties to the fullest extent possible. In any event such provision shall be
severable from, and shall not be construed to have any effect on, the remaining
provisions of this Guaranty, which shall continue in full force and effect.
12. Multiple Obligors. If "GUARANTOR" refers to more than one person or
-----------------
entity, then (i) the obligations of each such person or entity shall be joint
and several; (ii) all references to the "GUARANTOR" shall, unless the context
otherwise requires, refer to all such parties jointly and severally; and (iii)
each such person or entity named as GUARANTOR waives any and all defenses based
upon suretyship or guaranty or impairment of collateral. If the GUARANTOR is a
partnership, the partnership and all general partners therein shall be jointly
and severally liable under this Guaranty. Where the "TENANT" is more than one
person or entity, the word "TENANT" shall mean all and any one or more of them.
13. Governing Law; Jurisdiction. This Guaranty shall be governed by and
---------------------------
construed in accordance with the laws of the State of California applicable to
contracts to be wholly performed within the State of California. The GUARANTOR,
by execution of this Guaranty, irrevocably consents to the jurisdiction of the
Courts of the State of
<PAGE>
California and of any Federal Court located in such State in connection with any
action or proceeding arising out of or relating to this Guaranty.
14. Rights Cumulative; No Waiver. The LANDLORD's options, powers, rights,
----------------------------
privileges, and immunities specified herein or arising hereunder are in addition
to, and not exclusive of, those otherwise created or existing now or at any
time, whether by contract, by statute, or by rule of law. The LANDLORD shall
not, by any act, delay, omission or otherwise, be deemed to have modified,
discharged, or waived any of the LANDLORD's options, powers or rights in respect
of this Guaranty, and no modification, discharge, or waiver of any such option,
power or right shall be valid unless set forth in writing signed by the LANDLORD
or the LANDLORD's authorized agent, and then only to the extent therein set
forth. A waiver by the LANDLORD of any right or remedy hereunder on any one
occasion shall be effective only in the specific instance and for the specific
purpose for which given, and shall not be construed as a bar to any right or
remedy that the LANDLORD would otherwise have on any other occasion.
15. Entire Agreement. This Guaranty contains the entire agreement between
----------------
the GUARANTOR and the LANDLORD with respect to its subject matter, and
supersedes all prior communications relating thereto, including, without
limitation, all oral statements or representations. No supplement to or
modification of this Guaranty shall be binding unless executed in writing by the
GUARANTOR and the LANDLORD.
16. No Execution by Landlord. LANDLORD, by acceptance of the delivery of
------------------------
this Guaranty from GUARANTOR shall be deemed to have accepted the terms and
conditions of this Guaranty. This Guaranty does not require the LANDLORD to
execute the GUARANTY as a condition to its effectiveness.
IN WITNESS WHEREOF, GUARANTOR has executed this Guaranty to be effective as
of the date first set forth above.
"GUARANTOR"
Callaway Golf Company,
a California corporation
By: /s/ DONALD H. DYE
--------------------------------
Donald H. Dye, President and CEO
2285 Rutherford Road
Carlsbad, California 92008-8815
<PAGE>
EXHIBIT 10.5
------------
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT is made as of this 16th day of July,
1997, by and between Callaway Golf Company, a California corporation (the
"Company"), and Vernon E. Jordan, Jr. ("Indemnitee"), a director of the Company.
WHEREAS, the Company and Indemnitee recognize the increasing
difficulty in obtaining liability insurance covering directors, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance;
WHEREAS, although the Company currently has directors' liability
insurance, the coverage of such insurance is such that many claims which may be
brought against Indemnitee may not be covered, or may not be fully covered, and
the Company may be unable to maintain such insurance;
WHEREAS, the Company and the Indemnitee further recognize the
substantial increase in corporate litigation subjecting directors to expensive
litigation risks at the same time that liability insurance has been severely
limited;
WHEREAS, the current protection available may not be adequate given
the present circumstances, and Indemnitee may not be willing to serve as a
director without adequate protection;
WHEREAS, the Company desires to attract and retain the services of
highly qualified individuals, such as Indemnitee, to serve as directors of the
Company and to indemnify its directors so as to provide them with the maximum
protection permitted by law;
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. DEFINITIONS. The following terms, as used herein, have the following
-----------
meaning:
1.1 Affiliate. "Affiliate" means, (i) with respect to any
---------
corporation, any officer, director or 10% or more shareholder of such
corporation, or (ii) with respect to any individual, any partner or immediate
family member of such individual or the estate of such individual, or (iii) with
respect to any partnership, trust or joint venture, any partner, co-venturer or
trustee of such partnership, trust of joint venture, or any beneficiary or owner
having 10% or more interest in the equity, property or profits of such
partnership, trust or joint venture, or (iv) with respect to any Person, any
other Person which, directly or indirectly, controls, is controlled by, or is
under common control with such Person or any Affiliate of such Person.
1
<PAGE>
1.2 Agreement. "Agreement" shall mean this Indemnification
---------
Agreement, as the same may be amended from time to time hereafter.
1.3 Code. "Code" shall mean the California Corporations Code, as
----
amended.
1.4 Person. "Person" shall mean any individual, partnership,
------
corporation, joint venture, trust, estate, or other entity.
1.5 Subsidiary. "Subsidiary" shall mean any corporation of which the
----------
Company owns, directly or indirectly, through one or more subsidiaries,
securities having more than 50% of the voting power of such corporation.
2. INDEMNIFICATION
---------------
2.1 Third Party Proceedings. The Company shall indemnify Indemnitee
-----------------------
if Indemnitee is or was a party or witness or other participant in, or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than action by or in the right of the Company) by reason of the fact that
Indemnitee is or was a director of the Company or any subsidiary of the Company,
by reason of any action or inaction on the part of Indemnitee while a director
of the Company or any Subsidiary, and/or by reason of the fact that Indemnitee
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 all expense, liability and loss (including attorneys' fees),
judgments, fines and amounts paid in settlement (if such settlement is approved
in advance by the Company, which approval shall not be unreasonably withheld)
actually and reasonably incurred by Indemnitee in connection with such action,
suit or proceeding if Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in the best interests of the Company, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
Indemnitee's conduct was unlawful and provided, further, that the Company has
determined that such indemnification is otherwise permitted by applicable law.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent
shall not, of itself, create a presumption that Indemnitee did not act in good
faith and in a manner which Indemnitee reasonably believed to be in the best
interests of the Company or that Indemnitee had reasonable cause to believe that
Indemnitee's conduct was unlawful.
2.2 Proceedings by or in the Right of the Company. The Company shall
---------------------------------------------
indemnify Indemnitee if Indemnitee was or is a party or a witness or other
participant in or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Company or any Subsidiary to
procure a judgment in its favor by reason of the fact that Indemnitee is or was
a director of the Company or any Subsidiary, by reason of any action or inaction
on the part of Indemnitee while a director of the Company or a Subsidiary or by
reason of the fact that Indemnitee 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
2
<PAGE>
enterprise, against all expense, liability and loss (including attorneys' fees)
and amounts paid in settlement (if such settlement is court-approved) actually
and reasonably incurred by Indemnitee in connection with the defense or
settlement of such action or suit if Indemnitee acted in good faith and in a
manner Indemnitee reasonably believed to be in the best interests of the Company
and its shareholders and provided, further, that the Company has determined that
such indemnification is otherwise permitted by applicable law. No
indemnification shall be made in respect of any claim, issue or matter as to
which Indemnitee shall have been adjudged to be liable to the Company in the
performance of Indemnitee's duties to the Company and its shareholders, unless
and only to the extent that the court in which such proceeding is or was pending
shall determine upon application that, in view of all the circumstances of the
case, Indemnitee is fairly and reasonably entitled to indemnity for expenses and
then only to the extent that the court shall determine.
2.3 Mandatory Payment of Expenses. To the extent that Indemnitee has
-----------------------------
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Section 2.1 or 2.2 or the defense of any claim, issue
or matter therein, Indemnitee shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by Indemnitee in connection
therewith.
2.4 Enforcing the Agreement. If Indemnitee properly makes a claim
-----------------------
for indemnification or an advance of expenses which is payable pursuant to the
terms of this Agreement, and that claim is not paid by the Company, or on its
behalf, within ninety days after a written claim has been received by the
Company, the Indemnitee may at any time thereafter bring suit against the
Company to recover the unpaid amount of the claim and if successful in whole or
in part, the Indemnitee shall be entitled to be paid also all expenses actually
and reasonably incurred in connection with prosecuting such claim.
2.5 Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of the Indemnitee, who shall execute all papers required and shall
do everything that may be necessary to secure such rights, including the
execution of such documents necessary to enable the Company effectively to bring
suit to enforce such rights.
3. EXPENSES; INDEMNIFICATION PROCEDURE
-----------------------------------
3.1 Advancement of Expenses. The Company shall advance all expenses
-----------------------
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action, suit or proceeding referenced in
Section 2.1 or 2.2 hereof. Indemnitee hereby undertakes to repay such amounts
advanced only if, and to the extent that, it shall ultimately be determined that
Indemnitee is not entitled to be indemnified by the Company as authorized hereby
or that such indemnification is not otherwise permitted by applicable law. The
advances to be made hereunder shall be paid by the Company to Indemnitee within
thirty (30) days following delivery of a written request therefor or by
Indemnitee to the Company.
3
<PAGE>
3.2 Determination of Conduct. Any indemnification (unless ordered by
------------------------
a court) shall be made by the Company only as authorized in the specified case
upon a determination that indemnification of Indemnitee is proper under the
circumstances because Indemnitee has met the applicable standard of conduct set
forth in Sections 2.1 or 2.2 of this Agreement. Such determination shall be made
by any of the following: (1) the Board of Directors (or by an executive
committee thereof) by a majority vote of a quorum consisting of directors who
were not parties to such action, suit or proceeding, (2) if such a quorum is not
obtainable, or, even if obtainable, if a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, (3) by the
shareholders, with the shares owned by Indemnitee not being entitled to vote
thereon, or (4) the court in which such proceeding is or was pending upon
application made by the Company or Indemnitee or the attorney or other person
rendering services in connection with the defense, whether or not such
application by Indemnitee, the attorney or the other person is opposed by the
Company.
3.3 Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to Indemnitee's right to be indemnified under this
Agreement, give the Company notice in writing as soon as practicable of any
claim made against Indemnitee for which indemnification will or could be sought
under this Agreement. Notice to the Company shall be given in the manner set
forth in Section 10.3 hereof and to the address stated therein, or such other
address as the Company shall designate in writing to Indemnitee. In addition,
Indemnitee shall give the Company such information and cooperation as it may
reasonably require and as shall be within Indemnitee's power.
3.4 Notice to Insurers. If, at the time of the receipt of a notice
------------------
of a claim pursuant to Section 3.3 hereof, the Company has director liability
insurance in effect, the Company shall give prompt notice of the commencement of
such proceeding to the insurers in accordance with the procedures set forth in
the respective policies. The Company shall thereafter take all necessary or
desirable actions to cause such insurers to pay, on behalf of the Indemnitee,
all amounts payable as a result of such proceeding in accordance with the terms
of such policies.
3.5 Selection of Counsel. In the event the Company shall be
--------------------
obligated under Section 3.1 hereof to pay the expenses of any proceeding against
Indemnitee, the Company shall be entitled to assume the defense of such
proceeding, with counsel approved by Indemnitee, upon the delivery to Indemnitee
of written notice of its election so to do. After delivery of such notice,
approval of such counsel by Indemnitee and the retention of such counsel by the
Company, the Company will not be liable to Indemnitee under this Agreement for
any fees of counsel subsequently incurred by Indemnitee with respect to the same
proceeding, provided that (a) Indemnitee shall have the right to employ separate
counsel in any such proceeding at Indemnitee's expense; and (b) if (i) the
employment of counsel by Indemnitee has been previously authorized by the
Company, (ii) Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company and Indemnitee in the conduct of any
such defense, or (iii) the Company shall not, in fact, have employed counsel to
assume the
4
<PAGE>
defense of such proceeding, then the fees and expenses of Indemnitee's counsel
shall be at the expense of the Company (subject to the provisions of this
Agreement).
4. ADDITIONAL INDEMNIFICATION RIGHTS; NON-EXCLUSIVITY
--------------------------------------------------
4.1 Application. The provisions of this Agreement shall be deemed
-----------
applicable to all actual or alleged actions or omissions by Indemnitee during
any and all periods of time that Indemnitee was, is, or shall be serving as a
director of the Company or a Subsidiary.
4.2 Scope. The Company hereby agrees to indemnify Indemnitee to the
-----
fullest extent permitted by law (except as set forth in Section 8 hereof),
notwithstanding that such indemnification is not specifically authorized by the
other provisions of this Agreement, the Company's Articles of Incorporation, the
Company's Bylaws or by statute. In the event of any changes, after the date of
this Agreement, in any applicable law, statute, or rule which expands the right
of a California corporation to indemnify a member of its board of directors,
such changes shall be, ipso facto, within the purview of Indemnitee's rights and
---- -----
the Company's obligations under this Agreement. In the event of any change in
any applicable law, statute, or rule which narrows the right of a California
corporation to indemnify a member of its board of directors, such changes, to
the extent not otherwise required by such law, statute or rule to be applied to
this Agreement shall have no effect on this Agreement or the parties' rights and
obligations hereunder.
4.3 Non-Exclusivity. The indemnification provided by this Agreement
---------------
shall not be deemed exclusive of any rights to which an Indemnitee may be
entitled under the Company's Articles of Incorporation, its Bylaws, any
agreement, any vote of shareholders or disinterested directors, the Code, or
otherwise, both as to action in Indemnitee's official capacity and as to action
in another capacity while holding such office. The indemnification provided
under this Agreement shall continue as to Indemnitee for an action taken or not
taken while serving in an indemnified capacity even though he may have ceased to
serve in such capacity at the time of any action, suit or other covered
proceeding.
5. PARTIAL INDEMNIFICATION
-----------------------
5.1 Partial Indemnity. If Indemnitee is entitled under any provision
-----------------
of this Agreement to indemnification by the Company for some or a portion of the
expenses, judgments, fines or penalties actually or reasonably incurred by
Indemnitee in the investigation, defense, appeal or settlement of any civil or
criminal action, suit or proceedings but not, however, for the total amount
thereof, the Company shall nevertheless indemnify Indemnitee for that portion to
which Indemnitee is entitled.
6. MUTUAL ACKNOWLEDGMENT
---------------------
5
<PAGE>
6.1 Acknowledgment. Both the Company and Indemnitee acknowledge that
--------------
in certain instances, federal law or public policy may override applicable state
law and prohibit the Company from indemnifying its directors under this
Agreement or otherwise. For example, the Company and Indemnitee acknowledge that
the Securities and Exchange Commission (the "SEC") has taken the position that
indemnification is not permissible for liabilities arising under certain federal
securities laws, and federal legislation prohibits indemnification for certain
ERISA violations. Indemnitee understands and acknowledges that the Company has
undertaken or may be required in the future to undertake with the SEC to submit
the question of indemnification to a court in certain circumstances for a
determination of the Company's right under public policy to indemnify
Indemnitee.
7. LIABILITY INSURANCE
-------------------
7.1 Obtaining Insurance. The Company shall, from time to time, make
-------------------
the good faith determination whether or not it is practicable for the Company to
obtain and maintain a policy or policies of insurance with reputable, insurance
companies providing the directors with coverage for losses from wrongful acts,
or to ensure the Company's performance of its indemnification obligations under
this Agreement. Among other considerations, the Company will weigh the costs of
obtaining such insurance coverage against the protection afforded by such
coverage. In all such policies of liability insurance, Indemnitee shall be named
as an insured in such a manner as to provide Indemnitee the same rights and
benefits as are accorded to the most favorably insured of the Company's
directors. Notwithstanding the foregoing, the Company shall have no obligation,
to obtain or maintain such insurance if the Company determines in good faith
that such insurance is not reasonably available, if the premium costs for such
insurance are disproportionate to the amount of coverage provided, if the
coverage provided by such insurance is limited by exclusions so as to provide an
insufficient benefit, or if Indemnitee is covered by similar insurance
maintained by a parent or Subsidiary of the Company.
8. SEVERABILITY
------------
8.1 Severability. Nothing in this Agreement is intended to require
------------
or shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 8.1. If this Agreement or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, the Company
shall nevertheless indemnify Indemnitee to the full extent permitted by any
applicable portion of this Agreement that shall not have been invalidated, and
the balance of this Agreement not so invalidated shall be enforceable in
accordance with its terms.
9. EXCEPTIONS
----------
6
<PAGE>
9.1 Exceptions to Company's Obligations. Any other provision to the
-----------------------------------
contrary notwithstanding, the Company shall not be obligated pursuant to the
terms of this Agreement for the following:
(a) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, unless said proceedings or
claims were authorized by the board of directors of the Company.
(b) Improper Personal Benefit. To indemnify Indemnitee against
-------------------------
liability for any transactions from which Indemnitee, or any Affiliate of
Indemnitee, derived an improper personal benefit, including, but not limited to,
self-dealing or usurpation of a corporate opportunity.
(c) Dishonesty. To indemnify Indemnitee if a judgment or other final
----------
adjudication adverse to Indemnitee established that Indemnitee committed acts of
active and deliberate dishonesty, with actual dishonest purpose and intent,
which acts were material to the cause of action so adjudicated.
(d) Insured Claims; Paid Claims. To indemnify Indemnitee for expenses
---------------------------
or liabilities of any type whatsoever (including but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) which
have been paid directly to Indemnitee (i) by an insurance carrier under a policy
of liability insurance maintained by the Company, or (ii) otherwise by any other
means.
(e) Claims Under Section 16(b). To indemnify Indemnitee for an
--------------------------
accounting of profits in fact realized from the purchase and sale of securities
within the meaning of Section 16(b) of the Securities Exchange Act of 1934, as
amended, or any similar successor statute.
10. MISCELLANEOUS
-------------
10.1 Construction of Certain Phrases.
-------------------------------
(a) For purposes of this Agreement, references to the "Company" shall
include any resulting or surviving corporation in any merger or consolidation in
which the Company (as then constituted) is not the resulting or surviving
corporation so that Indemnitee will continue to have the full benefits of this
Agreement.
(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
service as a director, officer, employee or agent of the Company which impose
duties on, or involves services by, such director, officer, employee or agent
with respect to an employee benefit plan, its participants, or beneficiaries;
and if Indemnitee acted in
7
<PAGE>
good faith and in a manner Indemnitee reasonably believed to be in the best
interests of the participants and beneficiaries of an employee benefit plan,
Indemnitee shall be deemed to have acted in a manner "reasonably believed to be
in the best interests of the Company and its shareholders" as referred to in
this Agreement.
10.2 Successors and Assigns. This Agreement shall be binding upon
----------------------
the Company and its successors and assigns, and shall inure to the benefit of
Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns.
Notwithstanding the foregoing, the Indemnitee shall have no right or power to
voluntarily assign or transfer any rights granted to Indemnitee, or obligations
imposed upon the Company, by or pursuant to this Agreement. Further, the rights
of the Indemnitee hereunder shall in no event accrue to the benefit of, or be
enforceable by, any judgment creditor or other involuntary transferee of the
Indemnitee.
10.3 Notice. All notices, requests, demands and other communications
------
under this Agreement shall be in writing and shall be deemed duly given (i) if
mailed by domestic certified or registered mail with postage prepaid, properly
addressed to the parties at the addresses set forth below, or to such other
address as may be furnished to Indemnitee by the Company or to the Company by
Indemnitee, as the case may be, on the third business day after the date
postmarked, or (ii) otherwise notice shall be deemed received when such notice
is actually received by the party to whom it is directed.
If to Indemnitee: To the address set forth below the signature
line of Indemnitee on the signature page
hereof.
If to Company: Callaway Golf Company
2285 Rutherford Road
Carlsbad, CA 92008
Attention: General Counsel
10.4 Consent to Jurisdiction. The Company and Indemnitee each hereby
-----------------------
irrevocably consent to the jurisdiction of the courts of the State of California
for all purposes in connection with any action or proceeding which arises out of
or related to this Agreement and agree that any action instituted under this
Agreement shall be brought only in the state courts of the State of California.
10.5 Choice of Law. This Agreement shall be governed by and its
-------------
provisions construed in accordance with the laws of the State of California, as
applied to contracts between California residents entered into and to be
performed entirely within California.
10.6 Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall constitute an original and all of which together shall
constitute one and the same instrument.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereby have executed this Agreement as
of the date first above written.
"Company" Callaway Golf Company, a California corporation
By: /s/ Donald H. Dye
------------------------------------------
(Signature)
Donald H. Dye
------------------------------------------
(Name)
President and CEO
------------------------------------------
(Title)
"Indemnitee"
Vernon E. Jordan, Jr.
------------------------------------------
(Name)
/s/ Vernon E. Jordan, Jr.
------------------------------------------
(Signature)
Address:
Akin, Gump, Strauss, Hauer & Feld LLP
--------------------------------------------
1333 New Hampshire Ave., N.W. Suite 400
--------------------------------------------
Washington, D.C. 20036
--------------------------------------------
9
<PAGE>
EXHIBIT 11.1
CALLAWAY GOLF COMPANY
COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------------------ -----------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Primary earnings per share computation:
- - ---------------------------------------
Net income $37,049 $38,418 $108,337 $96,810
======= ======= ======== =======
Weighted average shares outstanding 68,704 67,128 68,085 66,624
Dilutive options 2,944 3,937 3,297 3,766
------- ------- -------- -------
Common equivalent shares 71,648 71,065 71,382 70,390
======= ======= ======== =======
Primary earnings per share:
Net income $.52 $.54 $1.52 $1.38
==== ==== ===== =====
Fully diluted earnings per share computation:
- - ---------------------------------------------
Net income $37,049 $38,418 $108,337 $96,810
======= ======= ======== =======
Weighted average shares outstanding 68,704 67,128 68,085 66,624
Dilutive options 2,946 4,052 3,383 4,051
------- ------- -------- -------
Common equivalent shares 71,650 71,180 71,468 70,675
======= ======= ======== =======
Fully diluted earnings per share:
Net income $.52 $.54 $1.52 $1.37
==== ==== ===== =====
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The Schedule contains summary financial information extracted from the Callaway
Golf Company Consolidated Condensed Balance Sheet (unaudited) and Consolidated
Condensed Statement of Income (unaudited) at September 30, 1997 and for the nine
months then ended and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 41,493
<SECURITIES> 0
<RECEIVABLES> 169,208
<ALLOWANCES> 7,336
<INVENTORY> 73,016
<CURRENT-ASSETS> 308,301
<PP&E> 173,029
<DEPRECIATION> 46,484
<TOTAL-ASSETS> 571,122
<CURRENT-LIABILITIES> 89,337
<BONDS> 0
0
0
<COMMON> 746
<OTHER-SE> 474,277
<TOTAL-LIABILITY-AND-EQUITY> 571,122
<SALES> 679,540
<TOTAL-REVENUES> 679,540
<CGS> 319,026
<TOTAL-COSTS> 319,026
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,098
<INTEREST-EXPENSE> 10
<INCOME-PRETAX> 175,110
<INCOME-TAX> 66,773
<INCOME-CONTINUING> 108,337
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 108,337
<EPS-PRIMARY> 1.52
<EPS-DILUTED> 1.52
</TABLE>
