-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UPB8PygKi/PJ3axiY5vU0zlTLn6vub2Uq0uL9MpDc1BmfnJj7tb76v3sD4U0I2gz cqpP5dhF3ZFlrCmVFZ+5pQ== 0001047469-98-023682.txt : 19980611 0001047469-98-023682.hdr.sgml : 19980611 ACCESSION NUMBER: 0001047469-98-023682 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19980610 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADAMS GOLF INC CENTRAL INDEX KEY: 0001059763 STANDARD INDUSTRIAL CLASSIFICATION: [3949] IRS NUMBER: 752320087 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-51715 FILM NUMBER: 98645984 BUSINESS ADDRESS: STREET 1: 2801 EAST PLANO PARKWAY CITY: PLANO STATE: TX ZIP: 75074 BUSINESS PHONE: 9726739000 MAIL ADDRESS: STREET 1: 2801 EAST PLANO PARKWAY CITY: PLANO STATE: TX ZIP: 75074 S-1/A 1 FORM S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 10, 1998 REGISTRATION NO. 333-51715 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- ADAMS GOLF, INC. (Exact name of registrant as specified in its charter) DELAWARE 3949 75-2320087 (State or other jurisdiction (Primary Standard (I.R.S. Employer of incorporation or Industrial Classification Identification Number) organization) Code Number)
300 DELAWARE AVENUE, SUITE 548 WILMINGTON, DELAWARE 19801 (302) 427-5892 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) B.H. (BARNEY) ADAMS CHIEF EXECUTIVE OFFICER 300 DELAWARE AVENUE, SUITE 548 WILMINGTON, DELAWARE 19801 (302) 427-5892 (Name, address, including zip code, and telephone number, including area code, of agent for service) -------------------------- COPIES TO: JOSEPH A. HOFFMAN KENNETH L. GUERNSEY J. DAVID WASHBURN KARYN R. SMITH Arter & Hadden LLP Cooley Godward LLP 1717 Main Street, Suite 4100 One Maritime Plaza, 20th Floor Dallas, Texas 75201 San Francisco, California 94111 (214) 761-2100 (415) 693-2000
-------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT. -------------------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box: / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective Registration Statement for the same offering. / / - --------------------- If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / - --------------------- If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / - --------------------- If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / -------------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. Subject to Completion, dated June 10, 1998 PROSPECTUS 5,750,000 SHARES [LOGO] COMMON STOCK ---------------- Of the 5,750,000 shares of common stock, par value $.001 per share (the "Common Stock"), being offered hereby 3,750,000 are being offered by Adams Golf, Inc. (the "Company") and 2,000,000 are being offered by certain stockholders of the Company (the "Selling Stockholders"). The Company will not receive any of the proceeds from the sale of shares by the Selling Stockholders. See "Principal and Selling Stockholders." Prior to the offering made hereby (the "Offering"), there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price of the Common Stock will be between $14.00 and $16.00 per share. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price of the Common Stock. The Common Stock has been approved for listing on the Nasdaq National Market under the symbol "ADGO." --------------------- THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6. ------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO PROCEEDS TO SELLING PUBLIC AND COMMISSIONS(1) COMPANY(2) STOCKHOLDERS Per Share................ $ $ $ $ Total(3)................. $ $ $ $
(1) The Company and the Selling Stockholders have agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting estimated expenses of the Offering payable by the Company of $ . (3) The Selling Stockholders have granted the Underwriters a 30-day option to purchase up to an aggregate of 862,500 additional shares of Common Stock on the same terms and conditions as set forth above, solely to cover over- allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Selling Stockholders will be $ , $ and $ , respectively. See "Underwriting." --------------------- The shares of Common Stock offered by this Prospectus are offered severally by the Underwriters, subject to prior sale, to withdrawal, cancellation or modification of the offer without notice, to delivery to and acceptance by the Underwriters and to certain further conditions. It is expected that delivery of the certificates for the shares of Common Stock will be made at the offices of Lehman Brothers Inc., New York, New York, on or about July , 1998. --------------------- LEHMAN BROTHERS NATIONSBANC MONTGOMERY SECURITIES LLC FERRIS, BAKER WATTS INCORPORATED July , 1998 [ON THIS PAGE APPEAR SEVERAL PHOTOGRAPHS OF THE COMPANY'S PRODUCTS AND CERTAIN PERSONS AFFILIATED WITH THE COMPANY INCLUDING B. H. (BARNEY) ADAMS, NICK FALDO AND HANK HANEY. CERTAIN OF THE PHOTOGRAPHS CONTAIN CAPTIONS INDICATING THE CONTENTS THEREOF.] ------------------------ The Company intends to furnish to its stockholders annual reports containing audited consolidated financial statements and quarterly reports containing unaudited consolidated financial information for each of the first three quarters of each fiscal year. CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON STOCK FOLLOWING THE PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON STOCK OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." The Company has registered the trademarks Adams-Registered Trademark- (with triangle design), Tight Lies-Registered Trademark- and Assault-Registered Trademark-, and currently has pending trademark applications for registration of a configuration of the heel portion of a golf club head, and an overall configuration of a golf club head. This Prospectus also includes trademarks of companies other than the Company. PROSPECTUS SUMMARY THE FOLLOWING SUMMARY INFORMATION IS QUALIFIED IN ITS ENTIRETY BY AND SHOULD BE READ IN CONJUNCTION WITH THE MORE DETAILED INFORMATION AND THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL SHARE AMOUNTS, PER SHARE AMOUNTS AND OTHER INFORMATION IN THIS PROSPECTUS HAVE BEEN ADJUSTED TO GIVE RETROACTIVE EFFECT TO A 2-FOR-1 STOCK SPLIT OF THE COMMON STOCK AND ASSUME NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. REFERENCES IN THIS PROSPECTUS TO THE "COMPANY" OR "ADAMS" ARE, UNLESS THE CONTEXT OTHERWISE REQUIRES, TO ADAMS GOLF, INC., A DELAWARE CORPORATION, AND ITS SUBSIDIARIES. THE COMPANY Adams designs, manufactures and markets premium quality, technologically innovative golf clubs. The Company's design objective is to produce golf clubs that deliver meaningful performance benefits and inspire player confidence. The Company believes that its most successful product line to date, the Tight Lies fairway woods, meets this objective by providing golfers with the ability to hit the ball from virtually any lie while maximizing distance. The patented Tight Lies fairway woods feature an upright trapezoidal head, a shallow face and a lower center of gravity as compared to conventional fairway woods. The complete Tight Lies line of products includes the original, Strong 3, Strong 5, Strong 7 and Strong 9 fairway woods. According to the Golf Market Research Institute, the Tight Lies fairway woods were the top-selling single fairway woods in the U.S. on a unit volume basis during the three months ended March 31, 1998. During this period, the Company achieved a 27% market share of the single fairway woods category. Adams has developed a marketing model that integrates direct response and traditional image-based advertising to generate brand awareness and drive retail sales. The Company's advertising includes a 30-minute informative television commercial ("infomercial") and print advertising in publications such as GOLF DIGEST, USA TODAY and THE WALL STREET JOURNAL. For the three months ended March 31, 1998, approximately 79% of the Company's sales occurred at the retail level. To preserve the integrity of its image and reputation, the Company currently limits its distribution to retailers that market premium quality golf equipment and provide a high level of customer service and technical expertise. The Company currently sells its products to on- and off-course golf shops and selected sporting goods retailers. The Company believes its selective retail distribution helps its retailers to maintain profitable margins and maximize sales of Adams' products. Another important element of the Company's success to date has been its sales and customer service infrastructure. Rather than relying on independent sales representatives, as do many other golf equipment companies, Adams maintains an inside sales department that currently consists of 25 employees who are in regular telephone contact with the Company's over 7,000 retailers. These sales representatives are supported by 13 field-based Regional Account Coordinators who maintain personal contact with the Company's retailers nationwide. The Company believes that using and carefully managing its own sales force enables it to significantly reduce selling expenses. Adams also has a separate 30-seat customer call center that provides customer service to retailers and consumers. The majority of the Company's sales and customer service personnel are experienced golfers. The Company believes interaction with its knowledgeable representatives promotes customer satisfaction and helps to strengthen the Adams brand. In 1997, wholesale sales of golf equipment in the U.S. reached an estimated $2.4 billion. Wholesale sales of golf clubs increased at an estimated compound annual growth rate of approximately 13% over the 5-year period from 1992 to 1997. The Company believes that a number of trends are likely to further increase the demand for Adams' products. These trends include: (i) significant growth in the number of golf courses; (ii) increasing interest in golf from women, junior and minority golfers; (iii) the large numbers of golfers entering their 40s and 50s, the age when most golfers begin to play more often and increase their spending on the sport; (iv) the correspondingly large population of "Echo Boomers," who are beginning to 3 enter their 20s, the age when golfers generally take up the sport; and (v) the rapid evolution of golf club designs and materials. The Company recently established a relationship with internationally recognized, professional golfer Nicholas A. Faldo, who currently uses the Tight Lies fairway woods. Mr. Faldo was inducted into the World Golf Hall of Fame in May 1998 and has won more major championships in the 1990s than any other golfer. Pursuant to the terms of the agreement, Mr. Faldo has agreed to, among other things, (i) exclusively endorse the Company's golf clubs and undertake certain other promotional activities on behalf of the Company and (ii) assist in the design and field testing of a new line of golf clubs. In exchange for his services, Mr. Faldo was granted 900,000 shares of Common Stock and is entitled to receive certain minimum royalties. Absent an early termination event, the agreement with Mr. Faldo continues throughout his lifetime. The Company believes that Mr. Faldo's comprehensive knowledge of the game of golf and reputation for technical excellence complement the Company's capabilities and strong brand identity. See "Certain Transactions." The Company intends to develop proprietary new technologies and product designs that provide golfers with meaningful performance benefits. Capitalizing on the technical knowledge and expertise gained through the Tight Lies fairway woods, the Company is currently testing prototypes of a potential new driver. This new product is expected to combine the distance of a driver with the playability of a fairway wood. The Company currently expects the new driver to be introduced after the end of fiscal year 1998. The Company is working with Mr. Faldo to design and test this new driver as well as other potential new products. The Company's goal is to establish itself as a leading developer of technologically innovative, performance-oriented golf clubs. To achieve this goal the Company intends to (i) build its share of the premium fairway woods market; (ii) leverage the success, performance and reputation of the Tight Lies fairway woods; (iii) expand international sales; and (iv) develop new technologies and product designs. The address of the Company's principal executive office is 300 Delaware Avenue, Suite 548, Wilmington, Delaware 19801. The Company's telephone number at this address is (302) 427-5892. Adams' principal manufacturing and management headquarters are located at 2801 East Plano Parkway, Plano, Texas 75074 and its telephone number at this location is (972) 673-9000. The Company's World Wide Web site is located at www.adamsgolf.com. The contents of the Company's Web site shall not be deemed to be part of this Prospectus. THE OFFERING Common Stock offered by: The Company.......................................... 3,750,000 shares The Selling Stockholders............................. 2,000,000 shares Total Common Stock Offered......................... 5,750,000 shares Common Stock to be outstanding after the Offering(1)... 22,849,282 shares Use of net proceeds to the Company..................... Working capital and general corporate purposes Nasdaq National Market Symbol.......................... ADGO
- ------------------------ (1) Excludes 423,666 shares of Common Stock issuable upon the exercise of outstanding stock options. 4 SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) The following table sets forth summary consolidated financial data of the Company and should be read in conjunction with the Consolidated Financial Statements and related Notes thereto included elsewhere in this Prospectus.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------- -------------------- 1995 1996 1997 1997 1998 --------- --------- --------- --------- --------- CONSOLIDATED STATEMENTS OF OPERATIONS DATA(1): Net sales................................................. $ 1,125 $ 3,522 $ 36,690 $ 1,475 $ 24,511 Gross profit.............................................. 369 1,932 26,699 888 18,649 Operating expenses (excluding stock compensation and bonus award).................................................. 613 1,709 15,826 823 9,777 Stock compensation and bonus award(2)..................... -- 214 14,842 -- -- --------- --------- --------- --------- --------- Operating income (loss)................................... (244) 9 (3,969) 65 8,872 Net income (loss)......................................... $ (243) $ 13 $ (4,654) $ 45 $ 5,642 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Income (loss) per common share(3): Basic................................................... $ (0.05) $ -- $ (0.37) $ -- $ 0.32 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Diluted................................................. $ (0.05) $ -- $ (0.37) $ -- $ 0.31 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Weighted average common shares(3): Basic................................................... 4,423 11,238 12,519 11,873 17,662 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Diluted................................................. 4,423 11,238 12,519 11,873 18,374 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
AT MARCH 31, 1998 ------------------------- ACTUAL AS ADJUSTED(4) --------- -------------- CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents............................................................ $ 602 $ 51,915 Working capital...................................................................... 12,299 63,612 Total assets......................................................................... 25,793 77,106 Total debt (including current maturities)............................................ 1,135 1,135 Stockholders' equity................................................................. 14,667 65,980
- ------------------------ (1) This table excludes summary financial information for the fiscal years ended December 31, 1993 and 1994 because operations in those years were not comparable in size or scope to current operations. (2) Consists primarily of a stock award to the Company's founder, Chief Executive Officer and President. See "Certain Transactions" and Note 9 of Notes to Consolidated Financial Statements. (3) See Note 1 of Notes to Consolidated Financial Statements for information concerning the calculation of income (loss) per common share and weighted average common shares outstanding. (4) Gives effect to the sale of 3,750,000 shares of Common Stock offered by the Company hereby and the application of the estimated net proceeds therefrom (based on an assumed initial public offering price of $15 per share). See "Use of Proceeds" and "Capitalization." 5 RISK FACTORS AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. PROSPECTIVE PURCHASERS OF COMMON STOCK OFFERED HEREBY SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS IN ADDITION TO OTHER INFORMATION IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED BY SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS DISCUSSED IN THIS PROSPECTUS, INCLUDING THE FACTORS SET FORTH BELOW AND IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS." SEE "DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS." DEPENDENCE ON NEW PRODUCT INTRODUCTIONS; UNCERTAIN CONSUMER ACCEPTANCE During the years ended December 31, 1996 and 1997 and the three months ended March 31, 1998, approximately 47.2%, 94.3% and 97.3%, respectively, of the Company's net sales were derived from the sale of Tight Lies fairway woods. Sales of this product line are expected to account for a substantial portion of the Company's net sales for some time. A decline in demand for, or average selling prices of, the Tight Lies line of products would have a material adverse effect on the Company's business, operating results and financial condition. Accordingly, the Company's continued growth and success depend, in large part, on its ability to successfully develop and introduce new products accepted in the marketplace. Historically, a large portion of new golf club technologies and product designs have been met with consumer rejection. No assurance can be given that the new driver currently under development will meet with market acceptance or that the Company will be able to continue to design, manufacture and introduce new products that will meet with market acceptance. Failure by the Company to identify and develop innovative new products that achieve widespread market acceptance would adversely affect the Company's future growth and profitability. Additionally, successful technologies, designs and product concepts are likely to be copied by competitors. Accordingly, the Company's operating results could fluctuate as a result of the amount, timing and market acceptance of new product introductions by the Company or its competitors. The design of new golf clubs is also greatly influenced by the rules and interpretations of the U.S. Golf Association ("USGA"). Although the golf equipment standards established by the USGA generally apply only to competitive events sanctioned by that organization, the Company believes that it is critical for its future success that new clubs introduced by the Company comply with USGA standards. No assurance can be given that any new products will receive USGA approval or that existing USGA standards will not be altered in ways that adversely affect the sales of the Company's products. See "--Historical Dependence on Television Advertising." LIMITED HISTORY OF PROFITABILITY The Company has a limited history of profitability. Although the Company generated net income during the year ended December 31, 1996 and the three months ended March 31, 1998, it has historically experienced net losses from operations. There can be no assurance that the Company will be able to sustain profitability on a quarterly or annual basis in the future. The Company's prospects must be considered in light of the significant risks, challenges and difficulties frequently encountered by companies experiencing rapid growth. To address these risks, the Company must, among other things, successfully increase the scope of its operations, respond to competitive and technological developments, continue to attract, retain and motivate qualified personnel and continue to develop and obtain market acceptance of its products. There can be no assurance that the Company will be successful in addressing these risks and challenges. See "--Dependence on New Product Introductions; Uncertain Consumer Acceptance," "--Ability to Manage Growth," "--Highly Competitive Industry," and "Management's Discussion and Analysis of Financial Condition and Results of Operations." PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY The Company's ability to compete effectively in the golf club market will depend, in large part, on its ability to maintain the proprietary nature of its technologies and products. The Company currently holds 6 six U.S. patents relating to certain of its products and proprietary technologies and has two patent applications pending. Assuming timely payment of maintenance fees, if any, the Company expects that the six currently issued patents will expire on various dates between 2009 and 2013. There can be no assurance, however, as to the degree of protection afforded by these patents or as to the likelihood that patents will be issued from the pending patent applications. Moreover, these patents may have limited commercial value or may lack sufficient breadth to adequately protect the aspects of the Company's products to which the patents relate. The Company does not hold any foreign patents and no foreign patent applications are pending. The U.S. patents held by the Company do not preclude competitors from developing or marketing products similar to the Company's products in international markets. There can be no assurance that competitors, many of which have substantially greater resources than the Company and have made substantial investments in competing products, will not apply for and obtain patents that will prevent, limit or interfere with the Company's ability to make and sell its products. The Company is aware of numerous patents held by third parties that relate to products competitive to the Company's, including products competitive with the Tight Lies fairway woods. There is no assurance that these patents would not be used as a basis to challenge the validity of one or more of the Company's patent rights, to limit the scope of the Company's patent rights or to limit the Company's ability to obtain additional or broader patent rights. A successful challenge to the validity of the Company's patents may adversely affect the Company's competitive position. Moreover, there can be no assurance that such patent holders or other third parties will not claim infringement by the Company with respect to current and future products. Because U.S. patent applications are held and examined in secrecy, it is also possible that presently pending U.S. applications will eventually issue with claims that will be infringed by the Company's products or technologies. The defense and prosecution of patent suits is costly and time-consuming, even if the outcome is favorable. This is particularly true in foreign countries where the expenses associated with such proceedings can be prohibitive. An adverse outcome in the defense of a patent suit could subject the Company to significant liabilities to third parties, require the Company to cease selling products or require disputed rights to be licensed from third parties. Such licenses may not be available on satisfactory terms, or at all. The Company also relies on unpatented proprietary technology. Third parties could develop the same or similar technology or otherwise obtain access to the Company's proprietary technology. Despite the Company's efforts to protect its patent and other intellectual property rights, unauthorized parties have attempted and are expected to continue to attempt to copy all, or certain aspects of, the Company's products. Policing unauthorized use of the Company's intellectual property rights can be difficult and expensive, and while the Company takes appropriate action whenever it discovers any of its products or designs have been copied, knock-offs and counterfeit products are a persistent problem in the performance-oriented golf club industry. There can be no assurance that the Company's means of protecting its patent and other intellectual property rights will be adequate. See "Business--Patents." ABILITY TO MANAGE GROWTH The Company has recently experienced a period of rapid growth that has resulted in new and increased responsibilities for existing management personnel. Further, the Company has recently employed a number of additional senior management personnel and, accordingly, numerous members of the management team have worked together for only a short time. The Company's growth has placed, and is expected to continue to place, a significant strain on the Company's management and operating and financial systems. To accommodate this recent growth and to compete effectively and manage future growth, if any, the Company will be required to continue to implement and improve its operational, financial and management information systems, procedures and controls on a timely basis and to expand, train, motivate and manage its workforce. The Company's growth has required increasing amounts of working capital that, to date, have been funded from current operations and available borrowing sources. There can be no assurance that the Company's personnel, systems, procedures, controls and working capital will be adequate to support its existing or future operations. Any failure to implement and improve 7 the Company's operational, financial and management systems, to expand, train, motivate or manage employees or to maintain adequate working capital could have a material adverse effect on the Company's business, operating results or financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources," "Business--Information Systems" and "Management." DEPENDENCE ON KEY PERSONNEL AND ENDORSEMENTS The Company's success depends to a significant extent upon the performance of its senior management team, particularly the Company's founder, Chief Executive Officer and President, B. H. (Barney) Adams. In addition to his direction and supervision of the day-to-day affairs of the Company, Mr. Adams spearheads the Company's product development efforts. The loss or unavailability of Mr. Adams would adversely affect the Company's business and prospects. None of the Company's officers or employees, including Mr. Adams, is bound by an employment agreement and the relationships of such officers and employees are, therefore, at will. The Company has a $2.0 million key man life insurance policy on the life of Mr. Adams; however, there can be no assurance that the proceeds of such policy could adequately compensate the Company for the loss of his services. In addition, there is strong competition for qualified personnel in the golf club industry, and the inability to continue to attract, retain and motivate other key personnel could adversely affect the Company's business, operating results or financial condition. The Company has recently entered into an agreement with Nick Faldo, an internationally recognized professional golfer and winner of numerous U.S. and international championships. The agreement provides that Mr. Faldo will provide a variety of services to the Company including endorse certain of the Company's products. This agreement requires the Company to make certain significant payments to Mr. Faldo, whether or not his endorsement results in increased sales of the Company's products. Specifically, Mr. Faldo is entitled to receive a royalty of 5% of the net sales price of all Adams golf clubs (other than certain specialty items for which the royalty equals 10% of the net sales price) sold outside the U.S. throughout the term of the agreement. The agreement provides for a minimum royalty of $1.5 million in 1999 escalating to $4.0 million for the years 2004 through 2008. From 2009 through 2014, the minimum royalty is $1.5 million, as adjusted for changes in the consumer price index. After 2014, the agreement does not provide for a minimum royalty. Commencing with 2009, however, the agreement provides for a maximum royalty of $4.0 million, as adjusted for changes in the consumer price index. Absent an early termination event, the agreement with Mr. Faldo continues throughout his lifetime. The Company believes that the future success of its marketing strategy may be affected by the continued professional success of Mr. Faldo. The inability of the Company to maintain its relationship with Mr. Faldo or the inability of Mr. Faldo to maintain an acceptable level of professional success, could have a material adverse effect on the Company's business, operating results or financial condition. See "Business--Business Strengths," "-- Growth Strategy," "--Marketing" and "Certain Transactions." HIGHLY COMPETITIVE INDUSTRY The market for golf clubs is highly competitive. The Company's competitors include a number of established companies, many of which have greater financial and other resources than the Company. The purchasing decisions of many golfers are often the result of highly subjective preferences, which can be influenced by many factors, including, among others, advertising, media, promotions and product endorsements. The Company could therefore face substantial competition from existing or new competitors that introduce and successfully promote golf clubs that achieve market acceptance. Such competition could result in significant price erosion or increased promotional expenditures, either of which could have a material adverse effect on the Company's business, operating results and financial condition. There can be no assurance that Adams will be able to compete successfully against current and future sources of competition or that its business, operating results or financial condition will not be adversely affected by increased competition in the markets in which it operates. See "Business--Competition." 8 HISTORICAL DEPENDENCE ON TELEVISION ADVERTISING In April 1997 the Company debuted a 30-minute infomercial concerning the original Tight Lies fairway wood, and, immediately thereafter, sales of this product grew significantly. Although, consistent with the Company's marketing model, the Company has subsequently increased its use of traditional image-based advertising, sales of the Company's products at both the retail and direct response levels have been, and may continue to be, highly dependent on the success of the Company's infomercial. The Company believes that its current television advertising strategy, like other advertising campaigns, will reach a point of diminishing return and will therefore need to be replaced or abandoned. No assurance can be given that an alternative infomercial or other equally effective advertising strategy can be timely developed or that, if developed, such infomercial or alternative strategy will achieve the same level of success as that previously enjoyed by the Company's original infomercial. Further, certain companies have attempted to emulate the Company's marketing strategy. To the extent the Company believes that these additional infomercials may have the effect of diluting the Company's message, the Company may be forced to adopt a new marketing strategy. A decline in effectiveness of the Company's marketing strategy could have a material adverse effect on the Company's business, operating results or financial condition. SOURCES OF SUPPLY The Company relies on a limited number of suppliers for a significant portion of the component parts used in the manufacture of its golf clubs, including the manufacture of its Tight Lies line of fairway woods. The Company could in the future experience shortages of components or periods of increased price pressures, which could have a material adverse effect on the Company's business, operating results or financial condition. In addition, failure to obtain adequate supplies or fulfill customer orders on a timely basis could have a material adverse effect on the Company's business, operating results or financial condition. See "Business--Manufacturing and Assembly." UNSPECIFIED USE OF PROCEEDS Although the Company intends to use the net proceeds of this Offering for working capital and general corporate purposes, including capital expenditures, expansion of the Company's product development efforts, additional advertising and expansion of the Company's international sales efforts, the Company currently has no definite plan for the use of the net proceeds. In addition, the Company may use all or a portion of the net proceeds derived from the Offering for possible acquisitions. Accordingly, management will have broad discretion with respect to the expenditure of such proceeds. Purchasers of shares of Common Stock in the Offering will be entrusting their funds to the Company's management, upon whose judgment they must depend, with limited information concerning the specific purposes to which the funds will ultimately be applied. See "--Risks Associated with Acquisitions" and "Use of Proceeds." RISKS ASSOCIATED WITH ACQUISITIONS While the Company has no current agreements or negotiations underway with respect to any acquisition, the Company may make acquisitions of complementary services, technologies, product designs or businesses in the future. There can be no assurance that any future acquisition will be completed or that, if completed, any such acquisition will be effectively assimilated into the Company's business. Acquisitions involve numerous risks, including, among others, loss of key personnel of the acquired company, the difficulty associated with assimilating the personnel and operations of the acquired company, the potential disruption of the Company's ongoing business, the maintenance of uniform standards, controls, procedures and policies, and the impairment of the Company's reputation and relationships with employees and customers. In addition, any future acquisitions could result in the issuance of dilutive equity securities, the incurrence of debt or contingent liabilities, and amortization expenses related to goodwill and other intangible assets, any of which could have a material adverse effect on the Company's business, operating results or financial condition. 9 SEASONALITY AND QUARTERLY FLUCTUATIONS; DISCRETIONARY CONSUMER SPENDING Golf generally is regarded as a warm weather sport and sales of golf equipment historically have been strongest during the second and third quarters, with the weakest sales occurring during the fourth quarter. In addition, sales of golf clubs are dependent on discretionary consumer spending, which may be affected by general economic conditions. A decrease in consumer spending generally could result in decreased spending on golf equipment, which could have a material adverse effect on the Company's business, operating results and financial condition. In addition, the Company's future results of operations could be affected by a number of other factors, such as unseasonal weather patterns; demand for and market acceptance of the Company's existing and future products; new product introductions by the Company's competitors; competitive pressures resulting in lower than expected average selling prices; and the volume of orders that are received and that can be fulfilled in a quarter. Any one or more of these factors could result in the Company failing to achieve its expectations as to future sales or net income. Because most operating expenses are relatively fixed in the short term, the Company may be unable to adjust spending sufficiently in a timely manner to compensate for any unexpected sales shortfall, which could materially adversely affect quarterly results of operations. If technological advances by competitors or other competitive factors require the Company to invest significantly greater resources than anticipated in research and development or sales and marketing efforts, the Company's business, operating results or financial condition could be materially adversely affected. Accordingly, the Company believes that period- to-period comparisons of its results of operations should not be relied upon as an indication of future performance. In addition, the results of any quarter are not indicative of results to be expected for a full fiscal year. As a result of fluctuating operating results or other factors discussed above and below, in certain future quarters the Company's results of operations may be below the expectations of public market analysts or investors. In such event, the market price of the Company's Common Stock would be materially adversely affected. See "--Absence of Public Market for Common Stock and Volatility" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." CERTAIN RISKS OF CONDUCTING BUSINESS ABROAD The Company imports a significant portion of its component parts, including heads, shafts, headcovers and grips, from companies in Taiwan, China and Mexico. In addition, the Company is rapidly increasing its international sales efforts. The Company's international business is currently centered in Canada, Japan and the United Kingdom. The Company intends to focus its international expansion efforts in Japan and the United Kingdom and, to a lesser extent, in South Africa and Australia. The Company's business is subject to the risks generally associated with doing business abroad, such as foreign government regulations, foreign consumer preferences, import and export control, political unrest, disruptions or delays in shipments and changes in economic conditions and exchange rates in countries in which the Company purchases components or sells its products. CONTROL BY PRINCIPAL STOCKHOLDERS Following the closing of the Offering, the Company's existing stockholders, certain of whom are directors, officers or employees of the Company, will own approximately 75% of the outstanding Common Stock without giving effect to any purchases of Common Stock in the Offering by such persons. As a result, the existing stockholders will be in a position to exercise control of matters submitted to the Company's stockholders, including the election of directors. In addition, the Company's founder, Chief Executive Officer and President, B.H. (Barney) Adams, and Royal Holding Company, Inc. ("Royal"), the Company's largest single stockholder, will own approximately 15.6% and 30.4%, respectively of the outstanding Common Stock immediately following the Offering and through their respective stock ownership and positions or representations on the Board of Directors may be able to exercise a controlling influence over the Company. See "Management," "Certain Transactions" and "Principal and Selling Stockholders." 10 SHARES ELIGIBLE FOR FUTURE SALE; ISSUANCE OF ADDITIONAL SHARES Future sales of shares of Common Stock by the Company and its stockholders could adversely affect the prevailing market price of the Common Stock. The Company's directors, officers and certain stockholders, including the Selling Stockholders, holding an aggregate of 18,025,835 shares of Common Stock as of the date of this Prospectus have agreed not to sell, offer, contract to sell, grant any option or right for the sale of or otherwise dispose of any Common Stock or any securities convertible, exercisable or exchangeable into shares of Common Stock, nor any options or right to acquire any shares of Common Stock, including any sale pursuant to Rule 144 or Rule 144A promulgated under the Securities Act of 1933, as amended (the "Securities Act"), for a period of 180 days after the date of this Prospectus without the prior written consent of Lehman Brothers Inc. (the "Lock-up Agreement"). After such time, based upon stock ownership at the date of this Prospectus, approximately 16,199,282 shares of Common Stock will be eligible for sale pursuant to Rule 144 promulgated under the Securities Act. In addition, the Company has granted registration rights that will be effective after the Offering to stockholders holding as of the date of this Prospectus an aggregate of 17,797,087 shares of Common Stock. These stockholders have the right, subject to certain conditions, to demand that their stock be registered under the Securities Act on any three occasions commencing generally one year after the date of this Prospectus. The stockholders also have certain additional piggyback registration rights, and subject to certain conditions, may participate in future registrations by the Company of shares of Common Stock under the Securities Act. Pursuant to its Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation"), the Company has the authority to issue additional shares of Common Stock. The issuance of such shares could result in the dilution of the voting power of Common Stock purchased in the Offering. Sales of substantial amounts of Common Stock in the public market, or the perception that such sales may occur, could have a material adverse effect on the market price of the Common Stock. See "Shares Eligible for Future Sale," "Underwriting" and "Description of Capital Stock." ANTI-TAKEOVER PROVISIONS The Company's Certificate of Incorporation and Amended and Restated Bylaws (the "Bylaws") contain, among other things, provisions establishing a classified Board of Directors, authorizing shares of preferred stock with respect to which the Board of Directors of the Company has the power to fix the rights, preferences, privileges and restrictions without any further vote or action by the stockholders, requiring that all stockholder action be taken at a stockholders' meeting and establishing certain advance notice requirements in order for stockholder proposals or director nominations to be considered at such meetings. In addition, the Company is subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law (the "DGCL"). In general, this statute prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Such provisions could delay, deter or prevent a merger, consolidation, tender offer, or other business combination or change of control involving the Company that some or a majority of the Company's stockholders might consider to be in its best interest, including offers or attempted takeovers that might otherwise result in such stockholders receiving a premium over the market price for the Common Stock. The potential issuance of preferred stock may have the effect of delaying, deferring or preventing a change of control of the Company, may discourage bids for the Common Stock at a premium over the market price of the Common Stock and may adversely affect the market price of and the voting and other rights of the holders of the Common Stock. The Company has not issued, and currently has no plans to issue, shares of preferred stock. See "Description of Capital Stock--Preferred Stock" and "--Delaware Law and Certain Charter and Bylaw Provisions." 11 ABSENCE OF PUBLIC MARKET FOR COMMON STOCK AND VOLATILITY Prior to the Offering there has been no public market for the Common Stock, and there can be no assurance that an active trading market will develop or be sustained after the Offering. The initial public offering price of the Common Stock offered hereby will be determined through negotiations among the Company, the Selling Stockholders and the Underwriters, and may not be indicative of the market price for the Common Stock after the Offering. The market price for shares of the Common Stock may be volatile depending on a number of factors, including business performance, industry dynamics, news announcements or changes in general market conditions. See "Underwriting." DILUTION The initial public offering price is substantially higher than the book value per share of Common Stock. Investors purchasing shares of Common Stock in the Offering will therefore incur immediate and substantial dilution in net tangible book value per share of $11.99. To the extent outstanding options to purchase the Company's Common Stock are exercised, there will be further dilution. See "Dilution." DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This Prospectus includes "forward-looking statements" including statements containing the words "believes," "anticipates," "expects" and words of similar import. All statements other than statements of historical fact included in this Prospectus, including without limitation, such statements under "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" and located elsewhere herein, regarding the Company or any of the transactions described herein, including the timing, financing, strategies and effects of such transactions, are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from expectations are disclosed in this Prospectus, including, without limitation, in conjunction with the forward-looking statements in this Prospectus and/or under "Risk Factors." The Company does not intend to update these forward-looking statements. 12 USE OF PROCEEDS The net proceeds to the Company from the sale of the 3,750,000 shares of Common Stock offered by the Company hereby, after deducting estimated Offering expenses payable by the Company and the underwriting discounts and commissions, are estimated to be approximately $51.3 million. The principal purposes of the Offering are to provide working capital to fund the Company's long-term growth strategy, to facilitate future access by the Company to the public equity markets, to enhance the Company's ability to use the Common Stock as a means of attracting, retaining and motivating senior managers and professionals and to provide liquidity to its stockholders. The Company intends to use the net proceeds for working capital and general corporate purposes, including capital expenditures, expansion of the Company's product development efforts, additional advertising and expansion of the Company's international sales efforts. In addition, the Company may use all or a portion of the net proceeds from the Offering for possible acquisitions. The Company has no current agreements or specific plans with respect to any acquisition, but will consider acquisition opportunities as they arise. Company management will have broad discretion with respect to the proceeds of this Offering. Pending such uses, the Company intends to invest the net proceeds of this Offering in short-term, interest-bearing, investment-grade securities. The Company will not receive any of the proceeds from the sale of Common Stock by the Selling Stockholders. See "Risk Factors--Unspecified Use of Proceeds," "--Risks Associated with Acquisitions" and "Principal and Selling Stockholders." DIVIDEND POLICY The Company has not paid cash dividends in the past and has no present intention of declaring or paying any dividends in the foreseeable future. The Company anticipates that any earnings will be retained for the foreseeable future for use in the operations of the business. Any future determinations as to the payment of dividends will be at the discretion of the Company's Board of Directors and will depend on the Company's results of operations, financial condition, contractual restrictions and other factors deemed relevant by the Board of Directors. The Company's ability to pay dividends is restricted by certain covenants set forth in its Revolving Credit Agreement with NationsBank of Texas, N.A. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 13 DILUTION At March 31, 1998, the Company's net tangible book value was $14,654,000 or $0.81 per share. Net tangible book value per share represents the amount of the Company's total tangible assets less the Company's total liabilities, divided by the number of shares of Common Stock outstanding. Without taking into account any other changes in such net tangible book value after March 31, 1998, other than to give effect to the sale of 3,750,000 shares of Common Stock offered by the Company hereby (after deduction of expenses payable by the Company and estimated underwriting discounts and commissions), the net tangible book value of the Company on March 31, 1998 would have been $65,967,000 or $3.01 per share. This represents an immediate increase in net tangible book value of approximately $2.20 per share to the Company's existing stockholders and an immediate dilution in net tangible book value of $11.99 per share to new investors in the Offering. The following table illustrates this per share dilution: Assumed public offering price per share...................................... $ 15.00 Net tangible book value per share before the Offering...................... $ 0.81 Increase in net tangible book value per share attributable to new investors................................................................ 2.20 --------- Net tangible book value per share after the Offering......................... 3.01 --------- Dilution per share to new investors.......................................... $ 11.99 --------- ---------
The following table sets forth, at May 31, 1998, the difference between existing stockholders and the new investors in the Offering with respect to the number of shares purchased from the Company, the total consideration paid and the average price per share paid.
SHARES PURCHASED FROM THE COMPANY TOTAL CONSIDERATION AVERAGE ------------------------- --------------------------- PRICE PER NUMBER PERCENT AMOUNT PERCENT SHARE ------------ ----------- -------------- ----------- --------- Existing stockholders................................ 19,099,282 83.6% $ 4,838,636 7.9% $ 0.25 New investors........................................ 3,750,000 16.4 56,250,000 92.1 $ 15.00 ------------ ----- -------------- ----- Total.............................................. 22,849,282 100.0% 61,088,636 100.0% ------------ ----- -------------- ----- ------------ ----- -------------- -----
The above computations exclude 423,666 shares of Common Stock issuable upon exercise of outstanding stock options outstanding at May 31, 1998. At May 31, 1998, an additional 518,000 shares of Common Stock are reserved for issuance under the Company's 1998 Stock Incentive Plan (the "Incentive Plan"). To the extent that any outstanding options are exercised, or additional options are issued, there will be further dilution to new investors in the Offering. See "Management--Benefit Plans," "Description of Capital Stock," "Shares Eligible for Future Sale" and "Underwriting." 14 CAPITALIZATION The following table sets forth the capitalization of the Company at March 31, 1998 and as adjusted as of that date to give effect to the sale of 3,750,000 shares of Common Stock by the Company in the Offering and the application of the estimated net proceeds therefrom. See "Use of Proceeds." This table should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
AT MARCH 31, 1998 ---------------------- ACTUAL AS ADJUSTED --------- ----------- (IN THOUSANDS) Cash and cash equivalents................................................................. $ 602 $ 51,914 --------- ----------- --------- ----------- Note payable--current..................................................................... $ 913 $ 913 --------- ----------- Note payable--non-current................................................................. 222 222 --------- ----------- Stockholders' equity: Preferred stock, $.01 par value, 5,000,000 shares authorized; none outstanding.......... -- -- Common stock, $.001 par value, 50,000,000 shares authorized; 18,199,282 shares (actual) and 21,949,282 shares (as adjusted) issued(1)......................................... 18 22 Additional paid-in capital.............................................................. 16,032 67,341 Common stock subscription............................................................... (231) (231) Deferred compensation................................................................... (981) (981) Accumulated deficit..................................................................... (171) (171) --------- ----------- Total stockholders' equity............................................................ 14,667 65,980 --------- ----------- Total capitalization................................................................ $ 14,889 $ 66,202 --------- ----------- --------- -----------
- ------------------------ (1) Excludes 313,666 shares subject to outstanding options at March 31, 1998. 15 SELECTED CONSOLIDATED FINANCIAL INFORMATION The following selected financial data at and for the fiscal years ended December 31, 1995, 1996 and 1997 are derived from the Consolidated Financial Statements of the Company, which have been audited by KPMG Peat Marwick LLP, independent certified public accountants. The selected financial information for the three months ended March 31, 1997 and 1998 are derived from unaudited Consolidated Financial Statements of the Company. In the opinion of management, all adjustments consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations, have been included in such unaudited Consolidated Financial Statements. Results for the three months ended March 31, 1998 may not be indicative of the results expected for the year ended December 31, 1998. The Consolidated Financial Statements at December 31, 1996 and 1997 and for each of the years in the three-year period ended December 31, 1997, and the independent auditors' report are included elsewhere in this Prospectus. The selected financial data should be read in conjunction with the Consolidated Financial Statements, the related Notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the other financial information included elsewhere herein.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------- -------------------- 1995 1996 1997 1997 1998 --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENTS OF OPERATIONS DATA(1): Net sales................................................. $ 1,125 $ 3,522 $ 36,690 $ 1,475 $ 24,511 Cost of goods sold........................................ 756 1,590 9,991 587 5,862 Gross profit.............................................. 369 1,932 26,699 888 18,649 Operating expenses (excluding stock compensation and bonus award).................................................. 613 1,709 15,826 823 9,777 Stock compensation and bonus award(2)..................... -- 214 14,842 -- -- --------- --------- --------- --------- --------- Operating income (loss)................................... (244) 9 (3,969) 65 8,872 Income (loss) before taxes................................ (243) 13 (4,071) 61 8,773 Net income (loss)......................................... $ (243) $ 13 $ (4,654) $ 45 $ 5,642 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Income (loss) per common share(3): Basic................................................... $ (.05) $ -- $ (.37) $ -- $ .32 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Diluted................................................. $ (.05) $ -- $ (.37) $ -- $ .31 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Weighted average common shares(3): Basic................................................... 4,423 11,238 12,519 11,873 17,662 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Diluted................................................. 4,423 11,238 12,519 11,873 18,374 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- AT DECEMBER 31, AT MARCH 31, ------------------------------- -------------------- 1995 1996 1997 1997 1998 --------- --------- --------- --------- --------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................. $ 243 $ 855 $ 1,956 $ 760 $ 602 Working capital........................................... 575 1,475 6,915 1,558 12,299 Total assets.............................................. 658 2,559 17,360 3,116 25,793 Total debt (including current maturities)................. -- 230 -- 479 1,135 Stockholders' equity...................................... 615 1,978 8,325 2,024 14,667
- ------------------------ (1) This table excludes financial information for the fiscal years ended December 31, 1993 and 1994 because operations in those years were not comparable in size or scope to current operations. (2) Consists primarily of a stock award to the Company's founder, Chief Executive Officer and President. See "Certain Transactions" and Note 9 of Notes to Consolidated Financial Statements. (3) See Note 1 of Notes to Consolidated Financial Statements for information concerning the calculation of income (loss) per common share and weighted average common shares outstanding. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following management's discussion and analysis of financial condition and results of operations addresses the performance of the Company for the three months ended March 31, 1997 and 1998, and the years ended December 31, 1995, 1996 and 1997, and should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. OVERVIEW Adams designs, manufactures and markets premium quality, technologically innovative golf clubs. Founded in 1987, the Company operated initially as a components supplier and contract manufacturer. Thereafter, the Company established its custom fitting operation which currently services a network of over 100 certified custom fitting accounts. In the fall of 1995, the Company introduced the original Tight Lies fairway wood and, in December 1996, the Company extended the Tight Lies line to include the Tight Lies Strong 3, Strong 5 and Strong 7, with the Tight Lies Strong 9 being introduced in January 1998. Sales of the Tight Lies line of products increased significantly subsequent to the second quarter of 1997 when the Company launched an infomercial relating to the original Tight Lies fairway wood. The Company's net sales are primarily derived from sales to on- and off-course golf shops and selected sporting goods retailers and, to a much lesser extent, direct sales to consumers, international distributors and the Company's custom fitting accounts. The Company defines net sales as gross sales less returns. The Company recognizes sales and an allowance for returns is estimated at the time products are shipped. The Company's net sales increased to $36.7 million for 1997 from $1.1 million for 1995 and to $24.5 million for the three months ended March 31, 1998 from $1.5 million for the three months ended March 31, 1997. The Company's net sales are based on orders for immediate delivery and backlog is not, therefore, necessarily indicative of future net sales. The Company does not currently manufacture the components required to assemble its golf clubs, relying instead on component suppliers. Costs of the Company's Tight Lies fairway woods consist primarily of component parts, including the head, shaft and grip. To a lesser extent, the Company's cost of goods sold includes labor and occupancy costs in connection with the inspection, testing and assembly of component parts at its facility in Plano, Texas. Operating expenses are composed primarily of selling and royalty expenses, general and administrative expenses, and to a lesser extent, research and development expenses. Selling and royalty expenses include advertising and marketing expenses, salaries and commissions, royalties related to the Company's infomercial and independent consulting fees. During the year ended December 31, 1997 and the first three months of 1998, royalties were approximately 6% of net sales of the Company's original Tight Lies fairway wood, excluding international and custom fitting sales. The Company expects royalties to increase as a percentage of net sales as a result of the agreement reached with Nick Faldo. The Company's royalty expenses were $0 and $944,451 for 1996 and 1997, respectively. Beginning May 1, 1998, Mr. Faldo is entitled to receive a royalty equal to 5% of the Company's net sales of golf clubs (other than certain specialty items for which the royalty is 10%) sold outside the U.S. Although, there is no minimum royalty for 1998, Mr. Faldo will be entitled to a minimum royalty in subsequent years. See "Certain Transactions." General and administrative expense includes salaries and benefits for corporate management, accounting, administrative support staff, bad debts, independent consulting and professional services, and office rent and utilities. Expenses associated with research and development efforts include salaries and independent consulting fees. The Company was incorporated in Texas in 1987 and reincorporated in Delaware in 1990. The Company completed an internal reorganization in 1997 and now conducts its operations through several direct and indirect wholly-owned subsidiaries, including (i) Adams Golf Holding Corp., a Delaware corporation, which holds limited partnership interests of certain indirect subsidiaries of the Company; (ii) Adams Golf GP Corp., a Delaware corporation, which holds capital stock or limited partnership 17 interests, as applicable, of certain indirect subsidiaries of the Company; (iii) Adams Golf Direct Response, Ltd., a Texas limited partnership, which operates the call-center and advertising activities; (iv) Adams Golf, Ltd., a Texas limited partnership, which operates the golf club design, assembly and sales business; (v) Adams Golf IP, L.P., a Delaware limited partnership, which holds the intellectual property rights of the Company; and (vi) Adams Golf Management Corp., a Delaware corporation, which provide management and consulting services to certain of the Company's indirect subsidiaries. RESULTS OF OPERATIONS The following table sets forth operating results expressed as a percentage of net sales for the periods indicated. Results for any one or more periods are not necessarily indicative of annual results or continuing trends. See "--Quarterly Results and Seasonality," below.
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ------------------------------- -------------------- CONSOLIDATED STATEMENTS OF OPERATIONS DATA 1995 1996 1997 1997 1998 - ----------------------------------------------------------- --------- --------- --------- --------- --------- Net sales.................................................. 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold......................................... 67.2 45.1 27.2 39.8 23.9 --------- --------- --------- --------- --------- Gross profit............................................. 32.8 54.9 72.8 60.2 76.1 Operating expenses......................................... 54.5 54.6 83.6 55.8 39.9 --------- --------- --------- --------- --------- Operating income (loss).................................. (21.7) 0.3 (10.8) 4.4 36.2 Interest expense........................................... -- -- 0.2 0.9 -- Other income (expense)..................................... 0.1 0.1 (0.1) 0.6 (0.4) --------- --------- --------- --------- --------- Income (loss) before income taxes........................ (21.6) 0.4 (11.1) 4.1 35.8 --------- --------- --------- --------- --------- Income tax expense......................................... -- -- 1.6 1.0 12.8 Net income (loss).......................................... (21.6)% 0.4% (12.7)% 3.0% 23.0% --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998 Net sales increased to $24.5 million for the three months ended March 31, 1998 from $1.5 million for the comparable period of 1997, primarily due to the continued market acceptance of the Company's Tight Lies line of fairway woods, and, to a lesser extent, a price increase effective January 1, 1998. Net sales of the Tight Lies line of fairway woods increased to $23.8 million from $1.1 million for the comparable period of 1997, and increased as a percentage of net sales to 97.3% from 75.8%, respectively. Sales of the Tight Lies fairway woods increased subsequent to the Company's introduction of an infomercial marketing its original Tight Lies fairway wood in the second quarter of 1997. Net sales of other product lines for the three months ended March 31, 1998 increased to $0.7 million from $0.4 million for the comparable period of 1997, but decreased as a percentage of net sales to 2.7% from 24.2%, respectively. Net sales of the Company's products outside the U.S. increased to $1.4 million for the three months ended March 31, 1998 from $0.2 million for the three months ended March 31, 1997, but decreased as a percentage of net sales to 5.7% from 11.0%, respectively. The increase in international sales in absolute dollars was due to increased market acceptance of the Tight Lies fairway woods and expanded international marketing efforts in the last half of 1997. Gross profit increased to $18.6 million for the three months ended March 31, 1998 from $0.9 million for the comparable period of 1997, and increased as a percentage of net sales to 76.1% from 60.2%, respectively. Gross profit for the three months ended March 31, 1998 was favorably affected by an increased percentage of sales attributable to the higher margin Tight Lies fairway woods and the inherent cost savings associated with buying components in large volumes and assembling them on a substantially increased scale. 18 Operating income increased to $8.9 million for the three months ended March 31, 1998 from $65,000 for the comparable period of 1997 due to increased sales. Total operating expenses increased to $9.8 million for the three months ended March 31, 1998 from $0.8 million for the comparable period of 1997, principally as a result of increased selling and advertising costs related to the promotion of the Tight Lies fairway woods and increased administrative costs resulting primarily from the hiring of additional employees and slightly higher occupancy costs. As a percentage of net sales, operating expenses decreased for the three months ended March 31, 1998 to 39.9% from 55.8% for the comparable period of 1997. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1997 Net sales increased to $36.7 million for 1997 from $3.5 million for 1996, primarily due to increased market acceptance of the Company's Tight Lies fairway woods. Net sales of the Tight Lies fairway woods increased to $34.5 million for 1997, from $1.7 million for 1996, and increased as a percentage of net sales to 94.3% from 47.2%, respectively. Net sales of other product lines increased to $2.1 million for 1997 compared to $1.8 million for 1996, but decreased as a percentage of net sales to 5.7% for 1997 from 52.8% for 1996. Gross profit increased to $26.7 million for 1997 from $1.9 million for 1996, and increased as a percentage of net sales to 72.8% from 54.9%, respectively. Gross profit for 1997 was favorably affected by an increased percentage of sales attributable to the higher margin Tight Lies fairway woods and the inherent cost savings associated with buying components in large volumes and assembling them on a substantially increased scale. The Company experienced an operating loss of $4.0 million for 1997 as compared to an operating income of $9,000 for 1996. Total operating expenses increased to $30.7 million for 1997 from $1.9 million for 1996. Of the $30.7 million of operating expenses for 1997, $14.8 million, or 48.4%, of expenses related to stock compensation and bonus awards to the Company's founder, Chief Executive Officer and President. See "Certain Transactions" and Note 9 of Notes to Consolidated Financial Statements. The expense recognized in 1996 in conjunction with these awards was $0.2 million, or 11.1% of operating expenses. In 1997, the Company also incurred higher expenses for selling and royalties and provision for bad debts, in each case due principally to increased sales of the Tight Lies fairway woods. General and administrative expenses also increased in 1997 due to the hiring of additional employees, and research and development expenses. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Net sales increased to $3.5 million for 1996 from $1.1 million for 1995, primarily due to the introduction of the original Tight Lies fairway wood in the fall of 1995. Net sales of the original Tight Lies fairway wood increased to $1.7 million for 1996 from $0.1 million for 1995, and increased as a percentage of net sales to 47.2% from 9.6%, respectively. Net sales of other products increased to $1.8 million for 1996 from $1.0 million for 1995, but decreased as a percentage of net sales to 52.8% from 90.4%, respectively. The increase in sales of other products in absolute dollars was due to increased sales of custom fitted golf clubs resulting from increased number of teaching professionals who became certified Adams Golf club fitters during 1996. Gross profit increased to $1.9 million for 1996 from $0.4 million for 1995, and increased as a percentage of net sales to 54.9% from 32.8%, respectively. The increase in gross profit was due to higher sales of the Company's products in 1996, specifically the higher margin original Tight Lies fairway wood. Operating income was $9,000 for 1996 compared to an operating loss of $0.2 million for 1995. Total operating expenses increased to $1.9 million for 1996 from $0.6 million for 1995 and remained relatively flat as a percentage of net sales. Of the $1.9 million of operating expenses in 1996, $0.2 million, or 11.1%, of expenses were related to a bonus award to the Company's founder, Chief Executive Officer and President. The Company also incurred additional selling and general and administrative expenses in 1996 as a result of increased sales and hiring additional employees. 19 QUARTERLY RESULTS AND SEASONALITY The following table sets forth certain unaudited quarterly financial operational data for the five most recent quarters.
QUARTER ENDED --------------------------------------------------------------------------- SEPT. 30, DEC. 31, MARCH 31, 1997 JUNE 30, 1997 1997 1997 MARCH 31, 1998 --------------- ------------- ------------- ------------ -------------- Net sales........................... $ 1,475 $ 3,974 $ 14,236 $ 17,005 $ 24,511 Gross profit........................ 888 2,418 10,633 12,759 18,649 Operating income (loss)............. 65 4 4,212 (8,250) 8,872 Net income (loss)................... 45 (4) 3,144 (7,839) 5,642
Golf generally is regarded as a warm weather sport and sales of golf equipment historically have been strongest during the second and third quarters, with the weakest sales occurring during the fourth quarter. Although the Company's rapid growth has offset this trend in recent periods, no assurances can be given that the Company's growth will continue to offset the impact of seasonality, and therefore results for any one or more quarters are not necessarily indicative of annual results or continuing trends. In addition, sales of golf clubs are dependent on discretionary consumer spending, which may be affected by general economic conditions. A decrease in consumer spending generally could result in decreased spending on golf equipment, which could have a material adverse effect on the Company's business, operating results and financial condition. In addition, the Company's future results of operations could be affected by a number of other factors, such as unseasonal weather patterns; demand for and market acceptance of the Company's existing and future products; new product introductions by the Company's competitors; competitive pressures resulting in lower than expected average selling prices; and the volume of orders that are received and that can be fulfilled in a quarter. Any one or more of these factors could result in the Company failing to achieve its expectations as to future sales or net income. Because most operating expenses are relatively fixed in the short term, the Company may be unable to adjust spending sufficiently in a timely manner to compensate for any unexpected sales shortfall, which could materially adversely affect quarterly results of operations. If technological advances by competitors or other competitive factors require the Company to invest significantly greater resources than anticipated in research and development or sales and marketing efforts, the Company's business, operating results or financial condition could be materially adversely affected. Accordingly, the Company believes that period- to-period comparisons of its results of operations should not be relied upon as an indication of future performance. In addition, the results of any quarter are not indicative of results to be expected for a full fiscal year. As a result of fluctuating operating results or other factors discussed above and below, in certain future quarters the Company's results of operations may be below the expectations of public market analysts or investors. In such event, the market price of the Company's Common Stock would be materially adversely affected. STOCK-BASED COMPENSATION In December 1997, the Board of Directors of the Company approved a stock compensation award of 2,000,000 shares of Common Stock to the Company's founder, Chief Executive Officer and President. The Company agreed to pay all income taxes due by the officer relating to such stock award and related tax bonus. As a result, compensation expense of approximately $12.5 million was charged to operations in 1997. In addition, this officer notified the Company of his intent to exercise stock options and an additional compensation expense of approximately $2.3 million was recorded in 1997. With respect to certain stock options granted to employees, the Company recorded deferred compensation of $981,000 and $788,000, respectively, in the first and second quarters of 1998. The Company will begin amortizing deferred compensation in the second quarter of 1998 over the vesting period, generally four years. In addition, in connection with its stock grant to Nick Faldo, the Company recorded deferred compensation of $10.1 million in the second quarter of 1998. This amount will be amortized to expense ratably over 10 years beginning in the second quarter of 1998. See "Certain Transactions" and Note 9 of Notes to Consolidated Financial Statements. 20 YEAR 2000 COMPLIANCE Many existing computer systems and applications and other control devices use only two digits to identify a year in the date field, without considering the impact of the upcoming change in the century. As a result, as year 2000 approaches, computer systems and applications used by many companies may need to be upgraded to comply with "Year 2000" requirements. The Company relies on its systems in operating and monitoring many significant aspects of its business, including financial systems (such as general ledger, accounts payable, accounts receivable, inventory and order management), customer services, infrastructure and network and telecommunications equipment. The Company also relies directly and indirectly on the systems of external business enterprises such as customers, suppliers, creditors, financial organizations and domestic and international governments. The Company currently estimates that its costs associated with Year 2000 compliance, including any costs associated with the consequences of incomplete or untimely resolution of Year 2000 compliance issues, will not have a material adverse effect on the Company's business, financial condition or results of operations. However, the Company has not exhaustively investigated and does not believe it has fully identified the impact of Year 2000 compliance and has not concluded that it can resolve any issues that may arise in complying with Year 2000 without disruption of its business or without incurring significant expense. In addition, even if the Company's internal systems are not materially affected by Year 2000 compliance issues, the Company could be affected through disruption in the operation of the enterprises with which the Company interacts. LIQUIDITY AND CAPITAL RESOURCES The Company historically has financed its operations principally through internally generated funds and funds from the private placement of equity securities. Such funds have been supplemented from time to time with short-term borrowings under the Company borrowing facilities. Primarily as a result of tax payments made by the Company in the first quarter of 1998, for the three months ended March 31, 1998 net cash used in operating activities was $1.5 million. Net cash provided by operating activities was $1.1 million for the year ended December 31, 1997. Working capital totaled $12.3 million at March 31, 1998 compared to $6.9 million at December 31, 1997. Net trade accounts receivable amounted to $14.7 million at March 31, 1998 compared to $7.7 million at December 31, 1997. The increase was primarily due to increased net sales in the first three months of 1998. Inventory totaled $5.6 million at March 31, 1998 and $4.5 million at December 31, 1997. The Company has a $10.0 million revolving credit facility, which expires on December 31, 1998. At May 31, 1998, the Company had no outstanding borrowings under this facility. Borrowings under the Company's revolving credit facility agreement are at interest rates based on the lending bank's general refinance rate of interest or certain LIBOR rates of interest. Obligations under the revolving credit facility loan agreement are collateralized by substantially all of the accounts receivable, inventory and equipment of the Company. See Note 7 of Notes to Consolidated Financial Statements. During the first quarter of 1998, the Company borrowed approximately $1.1 million in the form of a note payable to the Company's founder, Chief Executive Officer and President to be used for working capital purposes. The remaining principal amount of the note ($534,899 at April 30, 1998) is payable in two installments on December 15, 1998 and April 14, 1999 at an interest rate of 5.39%. The Company's capital expenditures amounted to $1.7 million, $0.8 million and $0.1 million for the three months ended March 31, 1998 and the years ended December 31, 1997 and 1996, respectively. The Company anticipates making capital expenditures in the ordinary course of business and is currently implementing a customer management information system at an estimated cost of $1.9 million for the year ending December 31, 1998. The Company believes that the cash flow from operations, the net proceeds of the Offering and the Company's $10.0 million credit facility will be sufficient to meet operating needs and capital expenditures for at least the next 12 months. 21 BUSINESS GENERAL Adams designs, manufactures and markets premium quality, technologically innovative golf clubs. The Company's design objective is to produce golf clubs that deliver meaningful performance benefits and inspire player confidence. The Company believes that its most successful product line to date, the Tight Lies fairway woods, meets this objective by providing golfers with the ability to hit the ball from virtually any lie while maximizing distance. The patented Tight Lies fairway woods feature an upright trapezoidal head, a shallow face and a lower center of gravity as compared to conventional fairway woods. Adams has developed a marketing model that integrates direct response and traditional image-based advertising to generate brand awareness and drive retail sales. The complete Tight Lies line of products includes the original, Strong 3, Strong 5, Strong 7 and Strong 9 fairway woods. According to the Golf Market Research Institute, the Tight Lies fairway woods were the top-selling single fairway woods in the U.S. on a unit volume basis during the three months ended March 31, 1998. During this period, the Company achieved a 27% market share of the single fairway woods category. The Company's growth strategy is to continue to increase its share of the fairway woods market, leverage consumer acceptance of the Tight Lies brand, expand international sales and develop new technologies and product designs. GOLF INDUSTRY OVERVIEW According to the National Golf Foundation ("NGF"), there are approximately 49 million golfers worldwide, including approximately 25 million in the U.S. In 1997, golfers in the U.S. played an estimated 547 million rounds of golf and, according to the National Sporting Goods Association, are estimated to have spent $5.8 billion on golf equipment, apparel and accessories. Of the 25 million U.S. golfers, about 5.2 million, characterized by the NGF as "avid golfers," play over 25 rounds of golf per year. The Company believes that avid golfers are the first to seek out performance-oriented golf equipment and generally drive golf club product trends. In 1997, wholesale sales of golf equipment in the U.S. reached an estimated $2.4 billion. Wholesale sales of golf clubs increased at a compound annual growth rate of approximately 13% over the 5-year period from 1992 to 1997. The Company believes that sales of golf clubs will continue to grow in the future due to a number of factors including: INCREASING AVAILABILITY OF GOLF FACILITIES. According to the NGF, approximately 900 new golf courses, the vast majority of which will be available to the public, are expected to open in the U.S. by the year 2000. The Company believes that these additional facilities will make golf more accessible and convenient, leading to a further increase in golf participation rates. INCREASING INTEREST FROM NON-TRADITIONAL GOLFERS. The game of golf has become increasingly attractive to segments of the population that have not historically been well-represented among golfers. Most notably, Tiger Woods has made golf more appealing to junior and minority golfers. According to the NGF, the total number of beginning and junior golfers increased by over 40% in 1997 compared to the previous year. In addition, the success of the Ladies Professional Golf Association (the "LPGA") Tour and such female golfers as Annika Sorenstam of Sweden have increased the appeal of the sport to women. FAVORABLE POPULATION TRENDS. The Company believes that two population trends are likely to benefit the golf industry over the next several years: (i) the aging of Baby Boomers (those born between 1946 and 1964) and (ii) the emergence of the Echo Boom generation (those born between 1977 and 1995). As golfers age, they tend to play golf more often and spend more money on the sport, particularly in the over-50 age group. Accordingly, because a majority of Baby Boomers are entering their 40s and 50s, the Company expects interest in and spending on golf to increase. Further, because Echo Boomers are 22 beginning to enter their 20s, the age most golfers begin to play the sport, the Company believes they will further increase their participation in and spending on golf. NEW PRODUCT INNOVATIONS. In recent years, the golf equipment industry has made significant advances in product designs and technologies to enhance golfers' performance and overall enjoyment of the game. The Company believes that this rapid evolution of golf clubs accelerates the rate at which golfers purchase new or additional clubs. GROWTH IN FAIRWAY WOODS. The Company believes that sales of fairway woods are growing for a number of reasons. Fairway woods have proven to be more versatile and dependable than long irons (specifically, the 1-4 irons), which many golfers find inherently difficult to hit. In addition, an increasing number of professional golfers on each of the Professional Golf Association ("PGA"), LPGA, Senior PGA and Nike Tours are carrying multiple fairway woods in competition, thereby validating the use of fairway woods as an accepted substitute for long irons. Finally, changes in course architectures and turf maintenance techniques are placing a premium on shots that fly higher and land softer (I.E., the types of shots typically produced by fairway woods). COMPANY HISTORY Barney Adams founded the Company in 1987. After an initial period of supplying components and performing contract manufacturing, the Company established a custom fitting operation at the Hank Haney Golf Ranch in McKinney, Texas, a well-known teaching and practice facility. As a result of the knowledge and experience gained through custom fitting, Mr. Adams concluded that the greatest difference in skill between a professional golfer and an amateur golfer is the ability to successfully hit the long second shot to the green. Similarly, Alastair Cochran and John Stobbs previously concluded in their book "THE SEARCH FOR THE PERFECT SWING" that the long approach shot affects a player's score more than any other. After a period of further research, development and testing, the Company introduced a patented club head design to assist golfers with this shot. The resulting product, the original Tight Lies fairway wood, incorporates an upright trapezoidal head, a shallow face, a low center of gravity and 16 DEG. of loft to assist the golfer in getting the ball airborne quickly and efficiently from a variety of lies while maximizing distance. In late 1996, Adams extended the Tight Lies line of fairway woods to include the Strong 3, Strong 5 and Strong 7 and, one year later, the Strong 9. In an effort to generate maximum exposure and retail sell-through of the original Tight Lies fairway wood, the Company debuted its professionally produced infomercial in April 1997. This 30-minute informational commercial is hosted by veteran golf announcer Jack Whitaker and features former PGA Teacher of the Year Hank Haney, former British Open Champion Bill Rogers and LPGA Hall of Famer Carol Mann. Demand for the Tight Lies fairway woods increased significantly after the introduction of the infomercial. To meet this demand, the Company increased its distribution capacity by expanding its network of on- and off-course golf shops and selected sporting goods retailers. The International Network of Golf, an 800-member organization of leading media and golf industry executives, named the original Tight Lies fairway wood the "Breakthrough Product of the Year" in 1996. In addition, the Tight Lies fairway wood received the 1997/98 Certificate of Excellence from the Golf Industry Association. Since the introduction of the original Tight Lies fairway wood in late 1995, more than 50 professionals on the PGA, LPGA and Senior PGA Tours have carried one or more Tight Lies fairway woods in competition, none of whom were then under contract with or paid by the Company. 23 BUSINESS STRENGTHS The Company has developed the following business strengths that it believes provide it with a competitive advantage over many other golf club manufacturers: STRENGTH OF THE TIGHT LIES BRAND. The Company believes that it has established a significant presence in the fairway woods market category. According to the Golf Market Research Institute, the Tight Lies fairway woods were the top selling single fairway woods in the U.S. on a unit volume basis during the three months ended March 31, 1998. During this period, the Company achieved a 27% market share of the single fairway woods category. The Company believes that the strength of its brand is further demonstrated by the rapid acceptance of the expanded line of Tight Lies fairway woods. Although at the time the Company only advertised the original Tight Lies fairway wood, sales of the expanded line represented 48.8% of net sales for the three months ended March 31, 1998. INNOVATIVE MARKETING MODEL AND STRONG RETAIL DISTRIBUTION. Adams has developed a marketing model that integrates direct response and traditional image-based advertising to generate brand awareness and drive retail sales. For the three months ended March 31, 1998, approximately 79% of the Company's sales occurred at the retail level. To preserve the integrity of its image and reputation, the Company currently limits its distribution to retailers that market premium quality golf equipment and provide a high level of customer service and technical expertise. The Company currently sells its products to on- and off-course golf shops and selected sporting goods retailers. The Company does not sell its products through price sensitive general discount warehouses, department stores or membership clubs. The Company believes its selective retail distribution helps its retailers to maintain profitable margins and maximize sales of Adams products. The Company further believes it is well-positioned to utilize its marketing model and retail distribution for future products. RELATIONSHIP WITH NICK FALDO. The Company has recently entered into a relationship with Nick Faldo. Mr. Faldo was inducted into the World Golf Hall of Fame in May 1998 and has won more major championships in the 1990s than any other golfer. In addition to numerous other domestic and international championships, Mr. Faldo has won the Masters three times (1989, 1990 and 1996) and the British Open three times (1987, 1990 and 1992). Mr. Faldo uses the Tight Lies fairway woods in competition and has agreed to work closely with the Company to assist in the design and testing of future golf clubs and other equipment. The Company believes that Mr. Faldo's comprehensive knowledge of the game of golf and reputation for technical excellence complements the Company's capabilities and strong brand identity. SALES AND CUSTOMER SERVICE INFRASTRUCTURE. Adams has committed significant resources to developing its sales and customer service infrastructure. Rather than relying on independent sales representatives, as do many other golf equipment companies, Adams maintains an inside sales department that currently consists of 25 employees who are in regular telephone contact with the Company's over 7,000 retailers. These sales representatives are supported by 13 field-based Regional Account Coordinators who maintain personal contact with the Company's retailers nationwide. The Company believes that using and carefully managing its own sales force enables it to significantly reduce selling expenses. Adams also has a separate 30-seat customer call center that provides customer service to retailers and consumers. The majority of the Company's sales and customer service personnel are experienced golfers. The Company believes interaction with its knowledgeable representatives promotes customer satisfaction and helps to strengthen the Adams brand. EMPHASIS ON QUALITY. Due in large part to its heritage in custom club fitting, Adams emphasizes quality control and precise adherence to design specifications. The Company has redundant sources of supply for each of the component parts used in the manufacture of its golf clubs and has established a quality assurance program at those manufacturing facilities located in Taiwan and China that are collectively responsible for producing substantially all of the Company's performance club heads. Upon arrival at the Company's manufacturing facilities in Plano, Texas, each component used in the Company's clubs is 24 again checked to ensure consistency with strict design specifications. Components are then sorted to identify variations in characteristics, such as head weight and shaft flexibility, that, although within the specified manufacturing tolerances, may affect club performance. The Company uses its patented variable moment of inertia ("VMI") formula to combine compatible components to produce a consistent swing feel across an entire set of clubs. GROWTH STRATEGY The Company's goal is to establish itself as a leading developer of technologically innovative, performance-oriented golf clubs. The Company's strategy to achieve this goal includes the following elements: BUILDING MARKET SHARE IN FAIRWAY WOODS. The Company's first priority is to build its share of the premium fairway woods market. The Company believes it can increase its market share by (i) continuing to build demand using the Company's marketing model; (ii) assisting existing retailers to increase their sales of the Tight Lies fairway woods by maintaining the relatively high margins currently enjoyed by such retailers; and (iii) increasing the number of on- and off-course golf shops and selected sporting goods retailers that distribute the Tight Lies fairway woods. LEVERAGING CONSUMER ACCEPTANCE OF TIGHT LIES BRAND. The Company intends to leverage acceptance of the Tight Lies brand to develop and sell additional products, a strategy that has proven effective in marketing the Company's expanded line of Tight Lies fairway woods. For the three months ended March 31, 1998, sales of the expanded line of Tight Lies fairway woods exceeded sales of the original club. The Company believes that the success and performance of its Tight Lies fairway woods have earned Adams a reputation as a manufacturer of technologically innovative, performance-oriented golf clubs among its customers and avid golfers. The Company further believes that it will be able to efficiently introduce new products to this customer base through its recent investments in infrastructure, thereby generating sales and receiving valuable product feedback. EXPANDING INTERNATIONAL SALES. Until recently, the Company has focused on developing sales domestically. For the year ended December 31, 1997 and the three months ended March 31, 1998, approximately 2% and 6%, respectively, of the Company's net sales were derived from international sales. Accordingly, the Company's sales to date have been achieved without significant contribution from international markets. Beginning in late 1997, the Company began leveraging its domestic strength to attract qualified international distributors. The Company currently has a network of 33 distributors located in 39 countries including Canada, Japan and the United Kingdom and expects to continue to build its international distribution. Toward this end, the Company has recently hired a Director of International Sales who has significant international golf equipment sales experience. Additionally, the Company believes that Nick Faldo's worldwide reputation will help drive international demand for the Company's products. DEVELOPING NEW TECHNOLOGIES AND PRODUCT DESIGNS. The Company engages continuously in the process of developing new technologies and product designs that, when incorporated into golf clubs, are expected to provide golfers with meaningful performance benefits. Capitalizing on the technical knowledge and expertise gained through the Tight Lies fairway woods, the Company is currently testing prototypes of a potential new driver. This new product is expected to combine the distance of a driver with the playability of a fairway wood. The Company currently expects the new driver to be introduced after the end of fiscal year 1998. The Company is working with Mr. Faldo to design and test this new driver as well as other potential new products. To the extent that any new technology or product design can be developed to the point of commercial viability, the Company intends to introduce such technology or design into a single product and, if the product is well received by consumers, develop a broader product line around the core club category. The Company believes that the affiliation, endorsement and support of Nick Faldo will provide important credibility in the development and marketing of new technologies and product designs. 25 The Company's continued growth and success depend, in large part, on its ability to successfully develop and introduce new products that achieve widespread market acceptance. Failure by the Company to identify and develop innovative new technologies and product designs could adversely affect the Company's future growth and profitability. See "Risk Factors--Dependence on New Product Introductions; Uncertain Consumer Acceptance." PRODUCTS The Company currently offers the following products: ORIGINAL TIGHT LIES FAIRWAY WOOD. The original Tight Lies fairway wood has an innovative upright trapezoidal or "upside down" head shape that incorporates a distinctive shallow face, a low center of gravity and 16 DEG. of loft. The Company believes that this club is ideal for getting the ball airborne quickly and efficiently with optimum spin to maximize distance from the critical scoring area of 185 to 225 yards from the green. The Company further believes that the Tight Lies fairway woods are particularly effective from virtually any lie on the course including the rough, hard pan, fairway bunkers and divots. EXPANDED LINE OF TIGHT LIES FAIRWAY WOODS. In late 1996, based on initial consumer acceptance of the original Tight Lies fairway wood, the Company expanded its line to include the Tight Lies Strong 3 (13 DEG. loft), the Tight Lies Strong 5 (19 DEG. loft) and the Tight Lies Strong 7 (24 DEG. loft). In January 1998, the Company expanded the line again to include the Tight Lies Strong 9 (28 DEG. loft). The expanded line of Tight Lies fairway woods incorporates the same design innovations as the original club while providing golfers with increased flexibility to play these clubs from different distances on the course. For the three months ended March 31, 1998, sales of the expanded line of Tight Lies fairway woods exceeded sales of the original club. OTHER CLUB LINES. The Company's other clubs include the Air Assault Driver and the Assault-VMI irons. The Air Assault Driver was the Company's first product to incorporate the patented upright trapezoidal head. The Company's Assault-VMI irons are perimeter-weighted, cavity-backed, slightly offset irons which incorporate the Company's patented VMI design formula producing consistent swing feel across an entire set of clubs. The Company markets the Assault-VMI irons to professional and avid golfers exclusively through its network of over 100 certified custom fitting accounts. The Company believes that its custom fitting activities provide Adams with an in-depth understanding of golf club design and credibility in the golf industry. Each golf club manufactured by the Company is available in a variety of shaft lengths and flexes to accommodate both men and women golfers of all ages and ability levels. In addition, once a club has received a certain degree of market acceptance, the Company has historically introduced a left-handed model. Currently, the Company offers each of its golf clubs in a left-handed model, with the exception of the recently introduced Tight Lies Strong 9. 26 The following table indicates the percentage of net sales in each major product group for the years ended December 31, 1996 and 1997 and the three months ended March 31, 1998. Historical percentages may not be indicative of the Company's future product mix. PERCENTAGE OF NET SALES BY PRODUCT GROUP
YEAR ENDED DECEMBER 31, THREE MONTHS ------------------------------------ ENDED MARCH 31, PRODUCT GROUP 1996 1997 1998 - ------------------------------------------------------ ----------------- ----------------- ----------------- Original Tight Lies................................... 45.6% 55.9% 48.5% 3, 5, 7 and 9 Tight Lies.............................. 1.6 38.4 48.8 Other Club Lines...................................... 52.8 5.7 2.7 ----- ----- ----- Total............................................... 100.0% 100.0% 100.0% ----- ----- ----- ----- ----- -----
The Company supports each of its products with a two-year warranty. The warranty provides for repair or replacement of the golf club, except in the case of abuse. The Company has not experienced material amounts of breakage with respect to its golf clubs. DESIGN AND DEVELOPMENT The Company's design and development team is responsible for developing, testing and introducing new technologies and product designs. This team is currently spearheaded by Barney Adams, the founder of the Company and inventor of the Tight Lies fairway wood; Richard H. Murtland, Vice President-- Research and Development; Mr. Nick Faldo and, independent consultants, Robert R. Bush and Dr. Michael M. Carroll. Mr. Bush has over 30 years of experience in golf club development, most notably, as Director of Technical Services for True Temper Sports, a leading shaft manufacturer, where from 1966 to 1993, he was responsible for testing all golf club shafts. Mr. Bush was instrumental in the development of "Iron Byron," the industry standard for the mechanical testing of golf clubs and balls. Mr. Bush is currently a member of the Technical Advisory Panel for GOLF DIGEST. Dr. Michael M. Carroll is Dean of the George R. Brown School of Engineering at Rice University in Houston, Texas. Dr. Carroll holds doctorate degrees in both physics and mathematics and is an avid golfer. Dr. Carroll has worked with the Adams design and development team since April 1, 1998 and is responsible for the scientific analysis of each new product under development by the Company. The design and development team engages in a five-step process to create new products. CONCEPT DEVELOPMENT. During concept development, Adams' design and development team identifies specific desirable ball flight objectives. In addition, the Company considers new ideas from professional golfers, inventors, distributors and others. The Company expects that Nick Faldo will play a significant role in future concept development. DESIGN SPECIFICATIONS. The Company's product design and development team determines design specifications for the club, including shaft length, flex and weight, head design, loft and overall club weight. Throughout the design specifications process, the Company refers to and incorporates the golf equipment standards developed by the USGA. Although the standards set by the USGA only apply to competitive events sanctioned by that organization, the Company believes it is critical for new clubs to comply with these standards. At this time, the product design and development team also determines the optimal materials to use in the club. The Company will not use higher cost materials, such as titanium or other alloys, unless such expensive materials provide meaningful performance benefits. This stage of product development typically takes 6 to 8 weeks after a concept has been clearly identified. PATENT REVIEW. The Company considers patent protection for its technologies and product designs to be an important part of its development strategy. The Company and its patent attorneys conduct a search 27 of prior art and existing products to determine whether a new product idea may be covered by an existing patent. Patent review, depending upon the complexity and novelty of the design involved, generally requires between 3 to 18 months to complete. PRODUCT DESIGN AND ENGINEERING REVIEW. If a product concept continues past the patent review stage, the Company translates design parameters into working designs. When appropriate, these designs are modeled and developed using computer aided design technologies and subjected to rigorous engineering review to validate the effectiveness of the technology or design. Dr. Carroll is expected to play a key role in this stage of product development. The Company estimates that it will take between 4 to 6 months to successfully complete product design and engineering review. TESTING. Once a specific design has been decided upon, the Company creates and tests one or more prototypes. The Company has a testing facility at the Hank Haney Golf Ranch in McKinney, Texas. As part of the testing process, the Company records, analyzes and interprets data associated with each prototype including ball flight, distance, spin and accuracy. Using feedback from these tests, the Company modifies its designs to achieve its performance objective. Additionally, the Company applies for official USGA approval of the resulting club at this time. Upon approval of a new product from the USGA, it becomes considered for commercial release. The Company believes that in order to properly field test a new product, it must expect between 4 to 6 months of additional development time. The Company's research and development expenses were $18,516, $51,101 and $557,513 during 1995, 1996 and 1997, respectively. MARKETING The goals of the Company's marketing efforts are to build its brand identity and drive sales through its retail distribution channel. To accomplish these goals, Adams utilizes direct response and traditional image-based advertising, engages in promotional activities and capitalizes on its relationship with Nick Faldo and other well known golf figures. ADVERTISING. The Company uses a combination of direct response and traditional image-based advertising. - DIRECT RESPONSE ADVERTISING. The Company intends to continue to build brand awareness and stimulate product demand through its direct response advertising, which includes a variety of mediums including television, radio, print and direct mail. Direct response advertising, in which consumers may order products directly from the Company by calling a toll-free telephone number, provides a cost-effective vehicle enabling Adams to communicate a compelling product story and build brand recognition. The Company's direct response advertising serves to introduce the Company's products to consumers, many of whom will subsequently purchase Adams clubs directly from the Company's retailers. In April 1997, Adams debuted a 30-minute Tight Lies infomercial, which has contributed significantly to the Company's recent growth. This infomercial received the award for "Best Infomercial Demonstration Show" from the National Infomercial Marketing Association in September 1997. The Tight Lies infomercial routinely runs on The Golf Channel, regional sports stations, national networks and local, market-specific broadcast stations. In addition, the Company utilizes 30- and 60-second direct response television commercials as well as radio advertising. The Company advertises regularly in major golf and industry publications, general consumer magazines and local newspapers nationwide. These include GOLF DIGEST, GOLF MAGAZINE, SPORTS ILLUSTRATED, THE WALL STREET JOURNAL and USA TODAY. Finally, the Company engages in regularly scheduled direct mail advertising campaigns. - TRADITIONAL IMAGE-BASED ADVERTISING. The Company's direct response sales revenue has enabled Adams to broaden its advertising efforts to include traditional image-based advertising. This advertising includes a series of 30-second commercials which run during major golf tournaments 28 and golf related programs; newspaper, magazine and radio ad campaigns; sponsorship of selected golf tournaments; exclusive sponsorship of The Golf Channel's weekly instructional program, "LIVING ROOM LESSONS" and a recently updated and professionally redesigned web site located at www.adamsgolf.com. The Company has received extensive editorial coverage in golf, consumer and trade publications as well as general consumer magazines and newspapers worldwide. PROMOTIONAL ACTIVITIES. The Company engages in a variety of promotional activities to sell and market its products. Such activities include (i) consumer sweepstakes like the Company's "Ramble in the Bramble," where the winner will receive an all expense paid, luxury tour for two of Scotland's most legendary golf courses; (ii) promotional giveaways with certain purchases, including items such as instructional videos and audio tapes; and (iii) promotional campaigns like the "90-Day Challenge," in which the Company advertises its 90-day return policy. RELATIONSHIP WITH NICK FALDO AND OTHERS. The Company has recently formed a lifetime relationship with Nick Faldo, an internationally recognized professional golfer and winner of numerous U.S. and international championships, including three Masters (1989, 1990 and 1996) and three British Opens (1987, 1990 and 1992). Mr. Faldo led the Official World Golf Ranking for 81 weeks during 1993 and 1994. Mr. Faldo also has made the most Ryder Cup appearances in the history of golf. Adams expects Nick Faldo to be actively and directly involved in the design, testing and development of new technologies and products. Mr. Faldo is noted for his precise play as a golfer and his reputation as a perfectionist. The Company believes that by aligning itself with Mr. Faldo, it can further promote the Adams brand, while at the same time demonstrating the Company's ability to deliver golf clubs that satisfy the specific and demanding requirements of tour professionals. The Company has also obtained endorsements from Hank Haney, Bill Rogers and Carol Mann. Mr. Haney was named the 1993 PGA Teacher of the Year and is a five-time recipient of the Northern Texas Section PGA Teacher of the Year Award. Mr. Haney has instructed over 100 touring professionals from the PGA, LPGA, European, Japanese and Asian Tours along with several top rated junior golfers. Mr. Haney is a member of the advisory staff for GOLF DIGEST. Mr. Rogers won the British Open championship in 1981 and was the 1981 PGA Player of the Year. Ms. Mann is a member of the LPGA Hall of Fame. SALES AND CUSTOMER SUPPORT The Company sells its products through on- and off-course golf shops and selected sporting goods retailers, direct sales to consumers, international distributors and the Company's custom fitting accounts. SALES TO RETAILERS. The Company sells a significant majority of its products to selected retailers. To maintain its high quality reputation and generate retailer loyalty, the Company does not sell its products through price sensitive general discount warehouses, department stores or membership clubs. The Company believes its selective retail distribution strategy helps its retailers to maintain profitable margins and maximize sales of Adams products. In the three months ended March 31, 1998, sales to retailers accounted for approximately 79% of the Company's total sales. Adams maintains an inside sales department that currently consists of 25 employees who are in regular contact with the Company's over 7,000 retailers. These sales representatives are supported by 13 field-based Regional Account Coordinators who maintain personal contact with the Company's retailers nationwide. The Company generally has been successful in delivering product to its retailers within one week of a placed order. The Company believes its prompt delivery of products enables its retail accounts to maintain smaller quantities of inventory than may be required with other golf equipment manufacturers. 29 CUSTOMER SUPPORT AND DIRECT SALES. Adams believes that superior customer service can significantly enhance its marketing efforts. Accordingly, the Company maintains an in-house customer call center whose representatives provide technical assistance to Adams' customers and field calls resulting from the Company's direct response advertising. The Company also outsources a portion of its call center activities. The Company provides its staff with computerized access to its retailer database enabling call center representatives to guide consumers to their nearest Adams retailer. INTERNATIONAL SALES. International sales are made in 39 countries (including Japan, Canada and the United Kingdom) through approximately 33 independent distributors. The international distributors sell to retailers for end sale to the consumer. International sales have increased from $0.6 million for 1996 to $0.9 million for 1997 and $0.2 million for the first three months of 1997 to $1.4 million for the first three months of 1998. The Company recently expanded its international sales staff to include a Director of International Sales to identify, develop, engage and support the Company's worldwide distributor base. CUSTOM FITTING SALES. The Company employs six sales representatives who manage the Company's custom fitting sales and support division and administer Adams' custom fitting training program for golf professionals. Adams' custom fitting training program has received PGA certification and provides continuing education credits for PGA Member Professionals. Since 1992, the Company has certified in excess of 300 golf professionals to custom fit its Assault-VMI irons, which are sold exclusively through its over 100 custom fitting accounts. Custom fitters measure data relating to swing and ball flight characteristics. Based on the interpretation of the data, a set of clubs is manufactured that is specifically tailored to that golfer. The majority of the Company's sales and customer service personnel are experienced golfers, including a number of former collegiate and professional golfers. Further, each of the Company's new employees attends an 8-hour, in-house seminar which provides training on club specifications, performance, design and manufacturing. Adams believes interaction with its knowledgeable representatives promotes customer satisfaction and helps to strengthen the Adams brand image. MANUFACTURING AND ASSEMBLY The Company manages all stages of manufacturing, from sourcing to assembly, in order to maintain a high level of product quality and consistency. The Company establishes product specifications, selects the materials used to produce the components and tests the specifications of all components received by the Company. In addition, the Company has redundant sources of supply for each of the component parts used in the manufacture of its golf clubs and has established a quality assurance program at those manufacturing facilities located in Taiwan and China that are collectively responsible for producing substantially all of the Company's performance club heads. Upon arrival at the Company's manufacturing facilities in Plano, Texas, each component used in the Company's clubs is again checked to ensure consistency with strict design specifications. Components are then sorted to identify variations in characteristics, such as head weight and shaft flexibility, that, although within the specified range, may affect club performance. Golf clubs are then built by the Company's manufacturing personnel using the appropriate component parts and the Company's patented VMI technology. See "Risk Factors--Sources of Supply." PATENTS The Company's ability to compete effectively in the golf club market will depend, in large part, on the ability of the Company to maintain the proprietary nature of its technologies and products. The Company currently holds six U.S. patents relating to certain of its products and proprietary technologies and has two patent applications pending. Assuming timely payment of maintenance fees, if any, the Company expects that the six currently issued patents will expire on various dates between 2009 and 2013. The Company has been awarded patents with respect to the design of the Tight Lies fairway wood and the VMI design formula. There can be no assurance, however, as to the degree of protection afforded by these or any other 30 patents held by the Company or as to the likelihood that patents will be issued from the pending patent applications. Moreover, these patents may have limited commercial value or may lack sufficient breadth to adequately protect the aspects of the Company's products to which the patents relate. The Company does not hold any foreign patents and no foreign patent applications are pending. The U.S. patents held by the Company do not preclude competitors from developing or marketing products similar to the Company's products in international markets. There can be no assurance that competitors, many of which have substantially greater resources than the Company and have made substantial investments in competing products, will not apply for and obtain patents that will prevent, limit or interfere with the Company's ability to make and sell its products. The Company is aware of numerous patents held by third parties that relate to products competitive to the Company's, including products competitive with the Tight Lies fairway woods. There is no assurance that these patents would not be used as a basis to challenge the validity of the Company's patent rights, to limit the scope of the Company's patent rights or to limit the Company's ability to obtain additional or broader patent rights. A successful challenge to the validity of the Company's patents may adversely affect the Company's competitive position. Moreover, there can be no assurance that such patent holders or other third parties will not claim infringement by the Company with respect to current and future products. Because U.S. patent applications are held and examined in secrecy, it is also possible that presently pending U.S. applications will eventually issue with claims that will be infringed by the Company's products or technologies. The defense and prosecution of patent suits is costly and time-consuming, even if the outcome is favorable. This is particularly true in foreign countries where the expenses associated with such proceedings can be prohibitive. An adverse outcome in the defense of a patent suit could subject the Company to significant liabilities to third parties, require the Company and others to cease selling products or require disputed rights to be licensed from third parties. Such licenses may not be available on satisfactory terms, or at all. Despite the Company's efforts to protect its patent and other intellectual property rights, unauthorized parties have attempted and are expected to continue to attempt to copy all, or certain aspects of, the Company's products. Policing unauthorized use of the Company's intellectual property rights can be difficult and expensive, and while the Company takes appropriate action whenever it discovers any of its products or designs have been copied, knock-offs and counterfeit products are a persistent problem in the performance-oriented golf club industry. There can be no assurance that the Company's means of protecting its patent and other intellectual property rights will be adequate. INFORMATION SYSTEMS The Company believes that a comprehensive and integrated infrastructure of information technology, systems and services is a significant factor in maintaining and improving its competitive position. Systems in place, including order fulfillment and distribution, financial and decision support and operational planning, have supported the growth of the Company to date. The Company is aggressively enhancing its current capabilities to meet the demands of the Company's growth. Special emphasis is being placed on systems for customer management, supply chain management and business analysis and planning. The Company believes that its current and enhanced computer systems, along with normal upgrades and extensions, will be sufficient to accommodate the Company's anticipated growth of sales and planned expansion for the foreseeable future. There can be no assurance that any upgrades of its information systems will be completed in a timely manner, that any such upgrades will be adequate to meet the needs of the Company or that these upgrades will not strain the Company's financial resources. COMPETITION The Company competes with a number of established golf club manufacturers, many of which have greater financial and other resources than the Company. Adams' competitors include Callaway Golf Company, adidas-Salomon AG (Taylor Made) and Fortune Brands, Inc. (Titleist and Cobra). The 31 Company competes primarily on the basis of performance, brand name recognition, quality and price. The Company believes that its ability to market its products through multiple distribution channels, including on- and off-course golf shops, selected sporting goods retailers and through direct response advertising, is important to its ability to compete. The golf club industry is generally characterized by rapid and widespread imitation of popular technologies, designs and product concepts. Due to the success of the Tight Lies fairway woods, the Company expects that one or more competitors may introduce products similar to the Tight Lies fairway woods. The buying decisions of many purchasers of golf clubs are often the result of highly subjective preferences which can be influenced by many factors, including, among others, advertising media, promotions and product endorsements. The Company may face competition from manufacturers introducing other new or innovative products or successfully promoting golf clubs that achieve market acceptance. The failure to compete successfully in the future could result in a material deterioration of customer loyalty and the Company's image and could have a material adverse effect on the Company's business, operating results or financial condition. See "Risk Factors--Dependence on New Product Introductions; Uncertain Consumer Acceptance" "--Highly Competitive Industry" and "Historical Dependence on Television Advertising." EMPLOYEES At May 31, 1998, the Company had 264 full-time employees, including 113 engaged in manufacturing and assembly, 26 in research and development and quality control, 86 in sales support and 39 in management and administration. Adams' employees are not unionized. Management believes its relations with its employees are good. PROPERTIES The Company's administrative offices and manufacturing facilities currently occupy approximately 65,000 square feet of space in Plano, Texas. This facility is leased by the Company pursuant to a lease agreement expiring in 2004 and may be extended for an additional five years. The Company maintains the right to terminate the lease if it moves to a larger facility owned by the current lessor. The Company has also leased an additional 33,000 square feet of space and expects to take possession of the additional space before July 31, 1998 pursuant to the terms of a lease also expiring in 2004. The Company believes that these facilities will be sufficient through at least the end of 1999. LEGAL PROCEEDINGS The Company is not involved in any material legal proceedings. 32 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information with respect to the directors and executive officers of the Company, as of May 31, 1998:
NAME AGE POSITION(S) HELD - ----------------------------- --- ---------------------------------------------------------------- B. H. (Barney) Adams......... 59 Chairman of the Board, Chief Executive Officer and President Darl P. Hatfield............. 51 Senior Vice President--Finance and Administration and Chief Financial Officer Richard H. Murtland.......... 57 Vice President--Research and Development, Secretary, Treasurer and Director James E. Farrell............. 39 Vice President--Finance Mark D. Gonsalves............ 38 Vice President--Sales and Marketing, Retail Steven P. Sanazaro........... 50 Vice President--Information Technology Paul F. Brown, Jr............ 51 Director Roland E. Casati............. 67 Director Finis F. Conner.............. 54 Director Mark R. Mulvoy............... 56 Director Stephen R. Patchin........... 39 Director
The Company's Certificate of Incorporation was amended and restated effective May 1, 1998 to provide, among other things, that the Board of Directors be divided into three classes, each of whose members serve for staggered three-year terms. Commencing with the 1999 Annual Meeting of Stockholders, one class of directors will be elected each year for a three-year term. Messrs. Conner and Patchin are members of Class I, the term of which expires at the 1999 Annual Meeting of Stockholders, Messrs. Murtland and Casati are members of Class II, the term of which expires at the 2000 Annual Meeting of Stockholders and Messrs. Adams, Brown and Mulvoy are members of Class III, the term of which expires at the 2001 Annual Meeting of Stockholders. See "Description of Capital Stock--Delaware Law and Certain Charter and Bylaw Provisions." The number of members of the Board of Directors of the Company is currently fixed at nine and, as a result, the Board presently has two vacancies. The Company intends to fill these vacancies as soon as practicable after the completion of the Offering. Under the terms of the agreement between the Company and Nick Faldo, the Company has agreed that, for so long as royalties remain payable to Mr. Faldo, it will use commercially reasonable efforts to cause a designee of Mr. Faldo to be nominated for, and elected to, the Board. As of the date of this Prospectus, Mr. Faldo has not notified the Company of his designee to the Board. Certain additional information concerning the directors and executive officers is set forth below. B. H. (BARNEY) ADAMS. Mr. Adams founded the Company in 1987 and has served as Chairman of the Board, Chief Executive Officer and President since that time. Mr. Adams is the inventor of the Tight Lies fairway wood. Prior to founding the Company, Mr. Adams served as President of Intertest, Inc. (a manufacturer of semiconductor testing equipment), Senior Vice President of Margaux Controls, Inc. (a manufacturer of energy control systems) and Executive Vice President of Maytex Manufacturing Co., Inc. (a manufacturer of store fixtures). Mr. Adams has authored several magazine articles concerning the technical aspects of golf equipment and is a frequent PGA section speaker. DARL P. HATFIELD. Mr. Hatfield joined the Company as Senior Vice President--Finance and Administration and Chief Financial Officer in May 1998. Prior to joining the Company, Mr. Hatfield was a partner 33 with KPMG Peat Marwick LLP ("KPMG") from July 1977 to April 1998. Mr. Hatfield has 30 years of experience in accounting and auditing and is a Certified Public Accountant. RICHARD H. MURTLAND. Mr. Murtland joined the Company in 1994 as Vice President--Operations and has been a director of the Company since August 1995. He became Vice President--Research and Development in April 1998. Mr. Murtland has approximately 30 years of experience in operations and engineering, most recently serving as Project Manager with ARCO International Oil and Gas Company (an international oil exploration and production company) from June 1976 to March 1994. JAMES E. FARRELL. Mr. Farrell joined the Company as Vice President--Finance in September 1997. From June 1995 to September 1997, Mr. Farrell served as a Manager for The Pittson Company (a diversified holding company), where he was responsible for financial review and re-engineering in the security services and air freight divisions. From May 1994 to June 1995, Mr. Farrell was employed by ADT Security Systems, Inc. as a Manager of Planning and Marketing. Prior thereto, he served as Director of Accounting for Brinks Home Security, Inc. from September 1986 to December 1993. Mr. Farrell has over 15 years of business experience and is a Certified Public Accountant. MARK D. GONSALVES. Mr. Gonsalves joined the Company in July 1995 as Vice President--Sales and Marketing and now serves as Vice President--Sales and Marketing, Retail. Prior to joining the Company, Mr. Gonsalves was President and Chief Executive Officer of In-Sync Sport International, Inc. (a sports psychology company founded by Mr. Gonsalves) from January 1992 to July 1995. He was a professional golfer from 1990 to 1992. Mr. Gonsalves has 16 years of sales and marketing experience. STEVEN P. SANAZARO. Mr. Sanazaro joined the Company as Vice President--Information Technology in January 1998. Prior to joining Adams, Mr. Sanazaro served as Director, Information Technology for Sprint Corporation from June 1987 to November 1992, as Vice President, Information Technology for Pepsico, Inc. from May 1996 to January 1998 and as Vice President, Research and Development and Chief Technology Officer for Harbinger Corporation (a supplier of electronic commerce software and network services) from August 1993 to May 1996. Mr. Sanazaro has approximately 30 years of business technology experience. PAUL F. BROWN, JR. Mr. Brown became a director of the Company in August 1995. Mr. Brown has been Vice President--Finance and Chief Financial Officer of Royal (a holding company with diversified interests) since 1990. Mr. Brown has 29 years of experience in accounting, auditing, and finance and is a Certified Public Accountant. ROLAND E. CASATI. Mr. Casati became a director of the Company in November 1995. Mr. Casati has been Chairman of the Board of Continental Offices, Ltd. for over five years. Continental Offices, Ltd. is engaged in the development of residential and commercial real estate and diversified personal investments. Mr. Casati is a director of Zeigler Coal Holding Co. (one of the largest coal producers in the U.S.) and Virtual Visits, Inc. (a company engaged in the design of Internet web sites for the promotion of golf products). FINIS F. CONNER. Mr. Conner became a director of the Company in October 1996. From 1985 to February 1996, Mr. Conner was Chairman of the Board and Chief Executive Officer of Conner Peripherals, Inc. (a manufacturer of disk drives for personal computers founded by Mr. Conner in 1986) which, in February 1996, merged with Seagate Technology, Inc. ("Seagate") (a publicly traded manufacturer of computer components co-founded by Mr. Conner in 1979). Mr. Conner served as Vice-Chairman of Seagate from 1979 to 1985. Since February 1996, Mr. Conner has been a principal of the Conner Group, an independent consulting organization, and Chairman of the Board of Virtual Visits, Inc. Mr. Conner is also a director of Box Hill Systems Corp., a manufacturer of high performance data storage systems. MARK R. MULVOY. Mr. Mulvoy became a director of the Company in April 1998. Mr. Mulvoy is a retired executive of Sports Illustrated magazine, where he was employed from 1965 to 1998. Mr. Mulvoy was Managing Editor of Sports Illustrated from 1984 through 1996 and Publisher from 1990 to 1992. 34 Mr. Mulvoy has written 12 books including "GOLF - THE PASSION AND THE CHALLENGE." He is also a director of Tosco Corporation (the largest independent refiner and marketer of petroleum products in the U.S.). STEPHEN R. PATCHIN. Mr. Patchin became a director in October 1993. He has been President and Chief Executive Officer of Royal Oil and Gas Corp., an oil and gas exploration and production company and wholly owned subsidiary of Royal, since June 1985 and President and Chief Executive Officer of Royal since February 1990. Executive officers of the Company are elected by and serve at the discretion of the Board of Directors. KEY MANAGEMENT EMPLOYEES The following table sets forth certain information with respect to certain additional key management employees of the Company.
NAME AGE POSITION(S) HELD - ------------------------------- --- -------------------------------------------------------------- Walter G. DeVault.............. 47 Director of Customer Service and Consumer Sales Cindy A. Herington............. 36 Director of Advertising and Direct Response Marketing Christopher K. Beebe IV........ 41 Director of International Sales
Certain additional information concerning these individuals is set forth below. WALTER G. DEVAULT. Mr. DeVault joined the Company as Director of Customer Service and Consumer Sales in February 1998. He has worked in the home security industry for the last eight years. Mr. DeVault served as Director of Sales for X-Truder, Inc. (a home security company) from February 1992 to July 1994 and as National Sales Director for Brink's Home Security, Inc. from August 1994 to February 1998. Mr. DeVault has over 25 years of sales and sales management experience. CINDY A. HERINGTON. Ms. Herington joined the Company as Director of Special Projects in May 1997. Ms. Herington became Director of Advertising and Direct Response Marketing in April 1998. Prior to joining the Company, Ms. Herington had been employed from August 1987 to May 1997 by The Neiman Marcus Group, Inc. in a variety of sales management positions. Ms. Herington is the daughter of Mr. Adams, the Company's Chairman of the Board, Chief Executive Officer and President. CHRISTOPHER K. BEEBE IV. Mr. Beebe joined the Company as Director of International Sales in March 1998. He has been involved with international sales for the past 10 years. From June 1989 through July 1994, Mr. Beebe held various international sales positions with Ram Golf Corporation (a golf equipment manufacturer), and from August 1994 through April 1997 he was Vice President--Asia/Pacific with Lynx Golf, Inc. (a golf equipment manufacturer). COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors currently has two standing committees: the Compensation/Plan Committee and the Audit Committee. The Compensation/Plan Committee is responsible for the recommendation to the Board of Directors of annual salaries for senior management as well as the administration and grant of awards under the Company's Incentive Plan and the Company's Bonus Plan (the "Bonus Plan"). The Compensation/Plan Committee is comprised of Messrs. Casati, Mulvoy and Patchin. The Audit Committee is responsible for meeting periodically with representatives of the Company's independent public accountants to review the general scope of audit coverage, including consideration of the Company's accounting practices and procedures and system of internal accounting controls, and to report to the Board of Directors with respect thereto. The Audit Committee also makes recommendations to the Board of Directors with respect to appointment of the Committee's independent auditors. The Audit Committee is comprised of Messrs. Brown and Conner. 35 EXECUTIVE COMPENSATION The following table sets forth all compensation received by the Company's Chief Executive Officer and the executive officers whose total annual salary and bonus exceeded $100,000 during the fiscal year ended December 31, 1997 (collectively, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ---------------------------------------- OTHER ANNUAL ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION - ------------------------------------------------ --------- ---------- ------------- ------------- ------------- B. H. Adams Chairman of the Board, Chief Executive Officer and President................................. 1997 $ 162,940 $ 10,015,000(1) $ 2,541,688(2) $ 4,185(3) Richard H. Murtland Vice President-Research and Development, Secretary and Treasurer....................... 1997 72,548 40,000 -- -- Mark D. Gonsalves Vice President--Sales and Marketing, Retail... 1997 62,400 352,144(4) -- --
- ------------------------ (1) Represents (a) $15,000 cash bonus and (b) value of 2,000,000 shares of Common Stock granted on December 31, 1997 having a fair market value, as determined by the Board of Directors, of $5.00 per share on the date of grant. See "Certain Transactions." (2) Represents reimbursement of federal income taxes and Medicare tax liability associated with the grant of certain restricted shares of Common Stock. See "Certain Transactions." (3) Comprised of premiums for a life insurance policy for which members of Mr. Adams' family are the beneficiaries. (4) Represents bonus earned in 1997 pursuant to the terms of a sales commission agreement which expired by its terms on December 31, 1997. FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE- OPTIONS MONEY OPTIONS AT AT FISCAL YEAR-END(#) FISCAL YEAR END($)(1) ---------------------------- ---------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------------------------------------------ ------------- ------------- ------------- ------------- B. H. Adams........................................... 1,520,766 0 $ 7,033,552 -- Richard H. Murtland................................... 222,214 0 1,027,739 -- Mark D. Gonsalves..................................... 333,320 0 1,541,605 --
- ------------------------ (1) Calculated by determining the difference between the fair market value of the Common Stock underlying the options at December 31, 1997 ($5.00 per share), as determined by the Board of Directors, and the exercise price of such options. See "Certain Transactions." Each of the options referred to herein was exercised by the respective option holder during January 1998. BENEFIT PLANS 1998 STOCK INCENTIVE PLAN. In February 1998, the Company adopted the 1998 Stock Incentive Plan. The purpose of the Incentive Plan is to provide incentives and rewards for participating employees and consultants of the Company (i) to support the execution of the Company's business strategies and the achievement of its goals and (ii) to associate the interests of such persons with those of the Company's stockholders. In furtherance of this purpose, the Incentive Plan authorizes the granting of stock options, including incentive stock options (within the meaning of Section 422 of the Internal Revenue Code of 36 1986, as amended) (the "Code"), stock appreciation rights, restricted and performance shares, restricted and performance share units, performance stock awards, dividend or equivalent rights, or other awards that are valued in whole or in part by reference to, or otherwise based on, the Common Stock of the Company (each, an "Award"). A total of 1,800,000 shares of Common Stock have been reserved for issuance upon the exercise of Awards granted under the Incentive Plan, subject to adjustment in accordance with the terms of the Incentive Plan. Upon consummation of the Offering, the Incentive Plan will be administered by the Compensation/ Plan Committee comprised of Messrs. Casati, Mulvoy and Patchin. The Compensation/Plan Committee has discretion to select the persons to whom Awards will be granted (each, a "Participant"), to determine the type, size and terms and conditions applicable to each Award and the authority to interpret, construe and implement the provisions of the Incentive Plan. Each Award under the Incentive Plan shall be evidenced by an Award Agreement. Under the Incentive Plan, the Company may grant, in addition to other Awards, incentive or nonqualified stock options. The exercise price of any option granted under the Incentive Plan must be at least equal to the fair market value of the Common Stock on the date of the grant, and in the case of a grant of an incentive stock option to any Participant who owns stock representing more than 10% of the Common Stock, the exercise price shall at least equal 110% of the fair market value of the shares at the time the incentive stock option is granted. In addition, no incentive stock option is exercisable more than 10 years from the date of grant (5 years if such option is granted to a Participant who owns in excess of 10% of the Common Stock) and the aggregate fair market value, determined on the date of grant, of the Common Stock as to which such incentive stock options are exercisable for the first time by any Participant in the Incentive Plan shall be limited to $100,000 per calendar year. The Incentive Plan also permits the grant of stock appreciation rights (rights to receive the excess of the fair market value of a share of Common Stock on the date the Award is exercised over the fair market value of a share of Common Stock on the date of grant for such period as the Compensation/Plan Committee may determine); restricted and performance shares (a transfer of shares of Common Stock to a Participant, subject to such restrictions on transfer or other incidents of ownership, or subject to specified performance standards as the Compensation/Plan Committee may determine); restricted or performance share units (fixed or variable share or dollar-denominated units subject to conditions of vesting, performance and time of payment as the Compensation/Plan Committee may determine, which may be paid in shares of Common Stock, cash or a combination of both); dividend or equivalent rights (rights to receive dividends or their equivalent in value in shares of Common Stock, cash or in a combination of both with respect to any new or previously existing Award); performance stock awards (rights to receive restricted shares that will not be issued until after the end of the applicable performance period, subject to the satisfaction of specified performance goals); and other Common Stock-based Awards, in each case, as set forth in the Incentive Plan. At May 31, 1998, the Company had granted Awards under the Incentive Plan consisting of (i) options to purchase an aggregate of 382,000 shares of Common Stock, none of which were exercisable at such date and (ii) 900,000 shares of restricted Common Stock. It is anticipated that all of the Company's employees will be considered for participation in the Incentive Plan. If a Participant terminates his or her service for reasons other than retirement, permanent and total disability or death, the Participant may exercise, no later than the date of termination, only those stock options vested as of the date of termination. Upon retirement, a Participant's options immediately vest and such Participant may exercise nonqualified stock options within one year of retirement and incentive stock options within three months of such retirement. In order to retire under the Incentive Plan, a Participant must have attained the age of 62 and have had 10 years of continuous employment with the Company. In the case of termination as a result of permanent and total disability, a Participant's options will immediately vest and such Participant will have one year from termination to exercise any outstanding options. If a Participant who was granted stock options dies while employed by the Company, or during the period which options may be exercised following termination of employment due to retirement or permanent and 37 total disability, all stock options granted under the Incentive Plan immediately vest and must be exercised by the Participant's estate no later than the termination date of such option. Except to the extent permitted by the Code and the rules and regulations promulgated under Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (i) no Award under the Incentive Plan is assignable or transferable except by will, by the laws of descent and distribution or pursuant to a qualified domestic relations order and (ii) during the lifetime of a Participant, the Award will be exercisable only by such Participant or such Participant's guardian, legal representative or assignee pursuant to a qualified domestic relations order. The Incentive Plan provides that, in the event of a "change of control" (as defined below), the following may, in the sole discretion of the Compensation/Plan Committee, occur with respect to any and all Awards outstanding as of such change of control: (i) automatic maximization of performance standards, lapse of all restrictions and acceleration of any time periods relating to the exercise, realization or vesting of such Awards so that such Awards may be immediately exercised, realized or vested in full on or before the relevant date fixed in the applicable Award Agreement; (ii) performance shares or performance units shall be paid entirely in cash; (iii) upon the exercise of a stock option during the 60-day period from and after the date of the change of control, the Participant exercising the option may in lieu of the receipt of Common Stock upon exercise, elect by written notice to the Company to receive an amount in cash equal to the excess of the aggregate Value (as hereinafter defined) of the shares of Common Stock covered by the option or portion thereof surrendered, determined on the date the option is exercised, over the aggregate exercise price of the option (the "Aggregate Spread"). However, if the end of such 60 day period is within six months of the date of grant of the option held by a Participant subject to the reporting requirements of Section 16 of the Exchange Act, such option shall be canceled in exchange for a cash payment to the participant equal to the Aggregate Spread on the day which is six months and one day after the date of grant of such option. "Value," as more fully defined in the Incentive Plan, means the higher of (i) the highest fair market value during the 60-day period after the date of a change of control and (ii) if the change of control is the result of a transaction described in paragraphs (i) or (iii) under the definition of a change of control, the highest price per share of the Common Stock paid in such transaction. (iv) if a Participant's employment or engagement terminates for any reason other than retirement or death following a change of control, any options held by such Participant may be exercised by such Participant until the earlier of three months after the termination of employment or engagement or the expiration date of such options; and (v) all Awards become non-cancellable. For purposes of the Incentive Plan, "change of control" is defined, in general, to mean the occurrence of any of the following events: (i) the acquisition, other than from the Company, by an individual, entity or group (other than Royal or B. H. Adams) of beneficial ownership of thirty percent (30%) or more of either the then outstanding shares of Common Stock or the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in election of directors, (ii) the ceasing, for any reason, of individuals who, as of January 1, 1998, constitute the Board of Directors to constitute at least a majority of the Board, provided that any individual becoming a director subsequent to such date whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the incumbent Board shall be considered as though such individual were a member of the incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Company; (iii) approval by the stockholders of the Company of a 38 reorganization, merger or consolidation of the Company, in each case, whereby the individuals who were the respective beneficial owners of the Common Stock and voting securities of the Company immediately prior to such reorganization, merger or consolidation do not, following such reorganization, merger or consolidation, beneficially own, directly or indirectly, more than sixty percent (60%) of the then outstanding shares of Common Stock and the combined voting power of the then outstanding voting securities entitled to vote generally in election of directors, as the case may be, of the corporation resulting from such reorganization, merger or consolidation, or complete liquidation or dissolution of the Company or the sale or other disposition of all or substantially all of the assets of the Company. The Incentive Plan terminates on February 25, 2008. 1996 STOCK OPTION PLAN. In April 1996, the Company adopted a stock option plan (the "1996 Plan") providing for the issuance to certain officers, directors, employees and advisors of the Company of incentive stock options within the meaning of Section 422 of the Code and stock options that are nonqualified for federal income tax purposes. A total of 800,000 shares of Common Stock have been reserved for issuance upon the exercise of options granted under the 1996 Plan, subject to adjustment in accordance with such plan. At May 31, 1998, options to purchase an aggregate of 659,694 shares of Common Stock had been granted under the 1996 Plan, of which 618,030 had been exercised. All such stock options were granted at an exercise price that was, at the time of grant, equal to the fair market value of a share of Common Stock, as determined by the Board of Directors. The Company currently does not anticipate making additional grants under the 1996 Plan. 401(K) PLAN. In February 1998, the Company adopted its 401(k) Retirement Plan (the "Retirement Plan"). Generally, all employees who are 18 years of age and who have completed a three-month consecutive period of service are eligible for participation in the Retirement Plan. The Retirement Plan is a defined contribution plan intended to qualify under Section 401 of the Code, such that participants generally may elect to contribute to the Retirement Plan, on a pretax basis, up to 15% of their compensation per pay period in the form of voluntary payroll deductions (for which the statutorily prescribed annual limit in 1998 is $10,000 per participant) ("Voluntary Contributions"). The Company makes matching contributions equal to 50% of the first 6% of a participant's compensation contributed to the Retirement Plan during such pay period ("Mandatory Matching Contributions"). From time to time, the Company may make additional discretionary contributions to the Retirement Plan ("Discretionary Contributions," and together with Mandatory Matching Contributions, "Company Contributions"). Participants who were employed by the Company at May 1, 1998 are immediately vested in all Company Contributions. Participants who were not employed by the Company on May 1, 1998 are gradually vested in all Company Contributions over a period of three years of credited service, vesting 33 1/3% a year for each full year of service beginning with the participant's first anniversary, and becoming fully vested after three years of service or upon death, total and permanent disability, retirement under the Retirement Plan or Retirement Plan termination. Participants are always fully vested in their Voluntary Contributions. COMPANY BONUS PLAN. In February 1998, the Company adopted the Bonus Plan to become effective for the fiscal quarter commencing January 1, 1998. The Bonus Plan is administered by the Compensation/ Plan Committee. Participation is based upon individual selection by the Compensation/Plan Committee from among key employees who, in the judgment of the Compensation/Plan Committee, make significant contributions to the performance of the Company and whose decisions and actions most significantly affect the growth, profitability and efficient operations of the Company. It is anticipated that approximately 22 individuals will initially participate in the Bonus Plan. The aggregate amount of any awards paid with respect to calendar year 1998 to any participant under the Bonus Plan shall not exceed 8% of the Company's net pre-tax operating profits. 39 Awards are based upon the extent to which the Company's financial performance (measured in terms of financial goals or objectives as may be determined by the Compensation/Plan Committee) during the appropriate measurement period for each award (e.g., the calendar year, calendar quarter, etc.) has met or exceeded certain performance goals specified by the Compensation/Plan Committee. Some performance goals applicable to participants in the Bonus Plan may include elements which specify individual achievement objectives directly related to such individual's area of responsibility. The Compensation/Plan Committee may, in its discretion, decrease, but not increase, the amount of any award granted under the Bonus Plan. Additionally, the Compensation/Plan Committee may alternatively grant discretionary bonuses. Because the performance goals under the Bonus Plan are determined by the Compensation/Plan Committee in its discretion, it is not possible to determine the benefits and amounts that will be received by any individual participant or group of participants in the future. The Board of Directors may terminate, modify or suspend the Bonus Plan, in whole or in part, at any time; provided that no such termination or modification may impair any rights which may have accrued under such Bonus Plan. COMPENSATION OF DIRECTORS Prior to the Offering, directors did not receive compensation to serve as directors of the Company but did receive reimbursement for expenses traveling to and from meetings of the Board of Directors. The Company intends to continue to reimburse directors for their reasonable expenses associated with attending meetings. The Company is also considering the adoption of a Director Plan to further incentivize the directors and align their interests with those of the stockholders. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS The Company's Certificate of Incorporation limits the liability of directors to the maximum extent permitted by Delaware law. Delaware provides that a corporation's certificate of incorporation may contain a provision eliminating or limiting the personal liability of directors for monetary damages for breach of their fiduciary duties as directors, except for liability (i) for any breach of their duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the DGCL or (iv) for any transaction from which a director derives an improper personal benefit. The Company's Certificate of Incorporation and Bylaws provide that the Company will indemnify, to the fullest extent permitted by applicable law as from time to time may be in effect, any person against all liability and expense (including attorneys' fees and settlement costs) incurred by reason of the fact that he is or was a director or officer of the Company. Expenses (including reasonable attorneys' fees) incurred in defending any proceeding or prosecution will be paid by the Company in advance of the final disposition of such proceeding or suit upon receipt of a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification and a written undertaking by such person to repay such amount if it is ultimately determined that he or she is not entitled to indemnification. The Company may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against and incurred by such person in any such capacity or arising out of such person's position, whether or not the Company would have the power to indemnify against such liability under the provisions of the Certificate of Incorporation or Bylaws of the Company. 40 The indemnification provided by the Certificate of Incorporation is not deemed to be exclusive of any other rights to which those indemnified may be entitled under any Bylaw, agreement or vote of stockholders or disinterested directors, or otherwise, and inures to the benefit of their heirs, executors and administrators. Further, such indemnification shall continue as to a person who has ceased to be a director or officer. The provisions of the Bylaws specifically permit the Company to indemnify other persons from similar or other expenses and liabilities as the Board of Directors may determine. Insofar as indemnification for liabilities under the Securities Act may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that, in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. The Company is not aware of any pending litigation or proceeding involving any director, officer, employee or agent of the Company where indemnification will be required or permitted, nor any threatened litigation or proceeding that might result in a claim for such indemnification. The foregoing description of certain provisions of the Company's Certificate of Incorporation and Bylaws is qualified in its entirety by the actual Certificate of Incorporation and Bylaws filed as exhibits to the Registration Statement of which this Prospectus is a part. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Prior to April 29, 1998, the Company did not have a Compensation Committee or other committee of the Board of Directors performing similar functions. Decisions concerning compensation of executive officers have generally been made by Mr. Adams in consultation with the other members of the Board of Directors. None of the executive officers of the Company currently serves on the Compensation Committee of another entity or on any other committee of the Board of Directors of another entity performing similar functions. 41 CERTAIN TRANSACTIONS In September 1995, the Company effected a reorganization (the "Reorganization") pursuant to which it (i) distributed to its stockholders the shares of common stock of Supershafts, Inc., a Texas corporation ("Supershafts"), held by the Company and constituting a minority interest in Supershafts, (ii) issued four shares of Common Stock in exchange for each share of Supershafts common stock then outstanding and (iii) reclassified, on a 1 for 1 basis, all of the outstanding Series A Preferred Stock and Series B Preferred Stock of the Company as Common Stock. As a result of the Reorganization, the Company issued an aggregate of 5,827,406 shares of Common Stock, Supershafts became a wholly-owned subsidiary of the Company and the Common Stock became the only class of capital stock of the Company outstanding. Mr. Adams and Royal Holding Company, Inc. received 820,000 and 3,706,382 shares of Common Stock, respectively, in the Reorganization. In 1996 and 1997, the Company borrowed an aggregate of $450,000 from Royal of which $250,000 was advanced in 1997, to finance the production of the Company's infomercial. Such advances bore interest at the prime rate. In September 1997, the Company paid accrued interest of $29,233 on this debt and issued 900,000 shares of Common Stock (at a rate of $.50 of principal indebtedness per share) to Royal in cancellation of the principal amount. In December 1997, the Board of Directors of the Company granted to Mr. Adams, the Company's Chairman of the Board, Chief Executive Officer and President, 2,000,000 shares of Common Stock. The Board of Directors also provided Mr. Adams with a cash payment of $2,541,688, an amount equal to the federal income tax and Medicare tax liability associated with such grant and bonus. In the first quarter of 1998, Mr. Adams loaned $1.1 million of such funds back to the Company pursuant to an unsecured promissory note at an interest rate of 5.39% per annum. The Company repaid $600,142 of the note on April 14, 1998 and the remaining principal amount of the note ($534,899) is payable in installments of $312,500 and $222,399 on December 15, 1998 and April 14, 1999, respectively. In determining that the stock grant and bonus to Mr. Adams were appropriate and in the best interests of the Company and its stockholders, the Board of Directors considered, among other factors, the Company's revenue and operating income growth and improved competitive position under Mr. Adams' leadership, Mr. Adams' historical cash compensation and the Board of Directors' desire to increase Mr. Adams' equity interest in the Company to a level commensurate with his contributions to and role with the Company. The Board of Directors determined that the value of Mr. Adams' services to the Company exceeded the fair market value of the stock ($10,000,000) and bonus. The Company does not consider these payments to be indicative of future levels of compensation to Mr. Adams or other executives of the Company. The agreement between the Company and Nick Faldo (the "Faldo Agreement") became effective May 1, 1998 and provides that Mr. Faldo will exclusively endorse the Company's clubs and undertake certain other promotional activities on behalf of the Company. Pursuant to the Faldo Agreement, the Company and Mr. Faldo will design a line of clubs to be used by Mr. Faldo in tournaments and other events, provided such clubs are suitable for Mr. Faldo's use. Under the Faldo Agreement, the Company has licensed the worldwide rights to the Nick Faldo trademark for use in connection with the distribution of its golf clubs, head covers, golf bags, travel covers, golf towels and umbrellas which it designs or manufactures. As compensation for the licensing and endorsement arrangement set forth in the Faldo Agreement, the Company has granted 900,000 shares of Common Stock to Mr. Faldo. Subject to certain exceptions including transfers to Mr. Faldo's agent, Mr. Faldo may not transfer, dispose of or otherwise assign any rights in more than 100,000 shares of Common Stock in any calendar year prior to 2002. In addition, Mr. Faldo is entitled to receive a royalty of 5% of the net sales price of all Adams golf clubs (other than certain specialty items for which the royalty equals 10% of the net sales price) sold outside the U.S. throughout the term of the Faldo Agreement. The Faldo Agreement provides for a minimum royalty of $1.5 million in 1999 escalating to $4.0 million for years 2004 through 2008. From 2009 through 2014, the minimum royalty is $1.5 million, as adjusted for changes in the consumer price index. After 2014, the Faldo 42 Agreement does not provide for a minimum royalty. Commencing with 2009, however, the Faldo Agreement provides for a maximum royalty of $4.0 million, as adjusted for changes in the consumer price index. In the event Mr. Faldo does not compete in a minimum number of worldwide golf events each year, such royalty payments shall be reduced on a pro-rata basis, unless such events are missed as a result of illness or injury. The Company has also agreed that through the year 2008, it will support the "Faldo Junior Series" in the United Kingdom by making an annual contribution to the sponsoring organization of not less than $45,000 for each year the tournament is played under that name. The Faldo Agreement further provides that, so long as royalties remain payable thereunder, the Company will use commercially reasonable efforts to cause a designee of Mr. Faldo to be nominated for, and elected to, the Board of Directors of the Company. As of the date of this Prospectus, Mr. Faldo has not notified the Company of his designation to the Board. The Faldo Agreement extends through Mr. Faldo's lifetime; however, the Company has the right to terminate the Faldo Agreement earlier if Mr. Faldo (a) is unable to perform the duties required by the Faldo Agreement for a period of 12 consecutive months, (b) retires or becomes officially ineligible to compete on the PGA and/or Senior PGA tour, or (c) has engaged in illegal or immoral conduct resulting in a felony conviction, or has otherwise conducted himself in a manner not in keeping with the standards of professional conduct set forth in the Faldo Agreement. In the event of the death of Mr. Faldo prior to May 1, 2030, the Company may, at its option, continue the terms of the Faldo Agreement until May 1, 2030, in which case, Mr. Faldo's heirs or estate shall be entitled to any royalties due. KPMG, a public accounting firm in which Mr. Hatfield was a partner until April 30, 1998, has provided accounting and auditing services to the Company during 1997 and 1998. The amounts paid to KPMG for services rendered during 1997 and 1998 were $112,887 and $403,520, respectively. Mr. Hatfield is currently Senior Vice President--Finance and Administration and Chief Financial Officer of the Company. The Company has an agreement with Mr. Hatfield providing that, upon Mr. Hatfield's termination without cause following certain change of control events, Mr. Hatfield's stock options will become fully vested and Mr. Hatfield will be paid an amount equal to one year of his base salary. From January 1, 1998 through May 31, 1998, the Company paid Virtual Visits, Inc. ("Virtual Visits"), a company engaged in the design of Internet Web sites for the promotion of golf products, approximately $56,000. The Company expects to pay at least an additional $10,000 to Virtual Visits during 1998. Mr. Conner and Mr. Casati, directors of the Company, are also directors and significant stockholders of Virtual Visits. In January 1998, the Company made loans of $83,330 and $125,000 to Mr. Murtland and Mr. Gonsalves, respectively, to finance the aggregate exercise price of stock options then exercised by such individuals. The loans bore interest at the rate of 5% per annum and were due January 14, 2001. The loan to Mr. Murtland was repaid in April 1998. Messrs. Murtland and Gonsalves are each executive officers of the Company. The Company has granted options to purchase the Company's Common Stock to certain of its officers and directors. See "Management--Benefit Plans" and "Principal and Selling Stockholders." The Company believes that all of the transactions set forth above were made on terms no less favorable to the Company than could have been obtained from unaffiliated third parties. All future transactions between the Company and its officers, directors, principal stockholders and their affiliates will be approved by a majority of the Board of Directors, including a majority of the independent and disinterested outside directors. 43 PRINCIPAL AND SELLING STOCKHOLDERS The following table and the notes thereto set forth certain information regarding the beneficial ownership of the Common Stock as of May 31, 1998, by (i) each person known by the Company to own beneficially more than 5% of the outstanding shares of the Common Stock, (ii) each director of the Company, (iii) each Named Executive Officer, (iv) all directors and executive officers of the Company as a group, and (v) each Selling Stockholder. Unless otherwise noted in the notes to the table, the Company believes the executive officers and directors can be contacted at the principal offices of the Company.
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP OF COMMON STOCK NUMBER OF SHARES OF COMMON STOCK PRIOR TO THE OF COMMON STOCK AFTER THE OFFERING(1) TO BE SOLD(2) OFFERING(1)(2) ------------------------ ----------------- ------------------------ NAME OF BENEFICIAL OWNERS NUMBER PERCENT NUMBER NUMBER PERCENT - -------------------------------------------------- ----------- ----------- ----------------- ----------- ----------- DIRECTORS AND NAMED EXECUTIVE OFFICERS B. H. Adams..................................... 4,482,321 23.5% 928,000 3,554,321 15.6% Richard H. Murtland............................. 333,952 1.7 66,750 267,202 1.2 Mark D. Gonsalves............................... 333,320 1.7 0 333,320 1.5 Paul F. Brown, Jr.(3)(4)........................ 7,405,438 38.8 454,745(5) 6,950,693 30.4 Roland E. Casati................................ 1,838,600 9.6 0 1,838,600 8.0 Finis F. Conner................................. 1,942,776 10.2 388,555 1,554,221 6.8 Mark R. Mulvoy.................................. 0 0.0 0 0 0.0 Stephen R. Patchin(3)(4)........................ 7,405,438 38.8 454,745(5) 6,950,963 30.4 ALL EXECUTIVE OFFICERS AND DIRECTORS AS A GROUP (11 PERSONS)(4)(6).............................. 16,381,407 85.6 1,838,050 14,543,537 63.5 BENEFICIAL OWNERS OF 5% OR MORE OF THE COMPANY'S COMMON STOCK Royal Holding Company, Inc.(3)(4)............... 7,405,438 38.8 454,745 6,950,693 30.4 OTHER SELLING STOCKHOLDERS Lincoln Trust Company Custodian f/b/o Richard Urdahl................ 116,592 * 77,000 39,592 * Richard Urdahl(7)............................... 119,392 * 79,800(8) 39,592 * Faris McMullin.................................. 111,738 * 73,750 37,988 * Peter Cassady................................... 8,400 * 8,400 0 0.0
- -------------------------- * Less than one percent. (1) Applicable percentage of ownership is based on 19,099,282 shares of Common Stock outstanding on May 31, 1998, and 22,849,282 shares of Common Stock to be outstanding upon completion of the Offering. Common Stock is the only class of equity securities outstanding. Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to securities. Shares of Common Stock subject to options that are presently exercisable or exercisable within 60 days of May 31, 1998 are deemed to be beneficially owned by the person holding such options for the purpose of computing the beneficial ownership of such person, but are not treated as outstanding for the purpose of computing the beneficial ownership of any other person. (2) Does not give effect to the exercise of the Underwriters' over-allotment option or to purchases in the Offering, if any. If the Underwriters over-allotment option is exercised in full, Messrs. Adams, Murtland, Gonsalves, Conner, Urdahl, McMullin and Cassady would beneficially own 3,362,321 (14.7%), 250,464 (1.1%), 303,320 (1.3%), 1,554,221 (6.8%), 30,000 (less than 1%) (representing 30,000 shares held of record by Lincoln Trust Company as custodian for Mr. Urdahl), -0- and -0- shares of Common Stock, respectively, and Royal Holding Company, Inc. and Lincoln Trust Company would own 6,374,511 (27.9%) and 30,000 (less than 1%) shares, respectively, after the Offering. See "Underwriting." (3) The address for Messrs. Patchin and Brown and for Royal is c/o Royal Holding Company, Inc., 300 Delaware Avenue, Suite 306, Wilmington, Delaware 19801. (4) Includes 7,405,438 shares of Common Stock owned directly by Royal. Messrs. Patchin and Brown, directors of the Company, are the (i) Chief Executive Officer and President and (ii) Chief Financial Officer and Vice President-- Finance, respectively, of Royal and, by virtue of their positions with Royal, may be deemed to share the power to vote or direct the vote of, and to share the power to dispose or direct the disposition of, these shares of Common Stock. Each of Messrs. Patchin and Brown disclaim beneficial ownership of the shares of Common Stock held by Royal. (5) Represents shares sold for the account of Royal Holding Company, Inc. (6) Includes 45,000 shares of Common Stock subject to options exercisable by Darl P. Hatfield, an executive officer of the Company, within 60 days of May 31, 1998. (7) Includes 116,592 shares of Common Stock held of record by Lincoln Trust Company as custodian for Mr. Urdahl and 2,800 shares of Common Stock held of record by Mr. Urdahl. (8) Represents 77,000 shares sold for the account of Lincoln Trust Company as custodian for Mr. Urdahl and 2,800 shares sold for the account of Mr. Urdahl. 44 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 50,000,000 shares of Common Stock, $.001 par value per share, and 5,000,000 shares of Preferred Stock, $.01 par value per share (the "Preferred Stock"). The following description of certain characteristics of the capital stock of the Company does not purport to be complete and is subject to, and qualified in its entirety by, the provisions of the Certificate of Incorporation, Bylaws and the Registration Rights Agreement, as defined below, each of which is included as an exhibit to the Registration Statement of which this Prospectus is a part, and by the provisions of applicable law. COMMON STOCK As of May 31, 1998, there were 19,099,282 shares of Common Stock outstanding held of record by 101 stockholders. The holders of Common Stock are entitled to share pro rata in dividends and distributions, if any, with respect to the Common Stock when, as and if declared by the Board of Directors, from funds legally available therefor. See "Dividend Policy". Holders of Common Stock are entitled to one vote per share, are not entitled to cumulative voting in the election of directors and have no preemptive, subscription, redemption or conversion rights. Upon the liquidation, dissolution or winding up of the Company, the assets of the Company remaining after payment of or provision for liabilities and payment to the holders of Preferred Stock of such preferential amounts that they are entitled to receive will be distributed pro rata on a share-for-share basis among the holders of Common Stock. All outstanding shares of Common Stock are, and the shares to be issued and sold in the Offering will be, duly authorized, validly issued, fully paid and non-assessable. The rights, preferences and privileges of holders of Common Stock are subject to any series of Preferred Stock that the Company may issue in the future. The Company effected a two-for-one stock split on May 1, 1998 in contemplation of this Offering. The Company had 9,549,641 shares of Common Stock issued and outstanding immediately prior to the stock split. PREFERRED STOCK The Company's Board of Directors is authorized, without further action by the stockholders, to divide the Preferred Stock into series and, with respect to each series, to determine the preferences and rights, and the qualifications, limitations or restrictions thereof, including the dividend rights, conversion rights, voting rights, redemption rights and terms, liquidation preferences, sinking fund provisions, the number of shares constituting the series and the designation of such series. The Board of Directors could, without stockholder approval, issue Preferred Stock with voting and other rights that could adversely affect the voting power of the holders of Common Stock and could have certain anti-takeover effects. The Company has no present plans to issue any shares of Preferred Stock. The authority possessed by the Board of Directors to issue Preferred Stock could potentially be used to discourage attempts by others to obtain control of the Company through merger, tender offer, proxy contest or otherwise by making such attempts more costly or difficult to achieve. REGISTRATION RIGHTS Pursuant to the terms of that Registration Rights Agreement dated April 30, 1998 (the "Registration Rights Agreement") by and among the Company and certain stockholders of the Company holding an aggregate of 17,797,087 shares of Common Stock as of May 31, 1998, the Company has granted certain registration rights to such stockholders. Specifically, under the terms of the Registration Rights Agreement, the stockholders holding in excess of 40% of the Common Stock covered by such agreement have a right commencing at any time not earlier than the latter of (i) the expiration of any of the "lock-up" period prescribed by the Lock-up Agreement and (ii) the date on which the Company shall become eligible to use the Form S-3 Registration Statement (or any successor to such form) for the purpose of registering outstanding securities for the account of any person other than the Company, to demand that the shares of 45 the Common Stock held by them be registered under the Securities Act. However, if the Board of Directors determines, in its good faith, that such registration would be detrimental to the Company and, as a result, that it is necessary to defer the filing of such registration statement at such time, the Company may defer such registration for a period not to exceed 180 days. The Company has agreed to pay all costs and expenses necessary to effect the registration of the shares of Common Stock to be sold by the stockholders in this first registration statement (other than underwriting and brokerage commissions, if any, and legal fees incurred by the selling holders). If, after the Company has effected the first such registration statement, it shall receive a request for registration from the stockholders holding a majority of the shares of Common Stock subject to the Registration Rights Agreement not previously registered, the Company shall file a second or third registration statement for the purpose of registering such shares under the Securities Act; however, the Company and such stockholders have agreed to defer the filing of such registration statements in the same manner and on the same basis as the first registration. The stockholders having shares registered in such subsequent registration statements have agreed to pay all costs and expenses related thereto including the Company's fees and expenses relating to counsel, accountants and filing under the Securities Act. The Registration Rights Agreement also grants certain piggy-back registration rights to the stockholders. Accordingly, whenever the Company proposes to register any shares of Common Stock under the Securities Act (other than registrations on Form S-4 or S-8), certain of the stockholders have the right to include the shares of Common Stock held by them in any such registration. However, if the managing underwriter of such registration advises the Company in writing that, in its opinion, the total number or dollar amounts of securities requested to be included in such registration exceeds the number or dollar amount of shares of Common Stock that can be sold in such offering, the Company may exclude certain shares from the offering. In such a case, the order of priority in which shares are to be included in the proposed offering will be as follows: first, all shares of Common Stock that the Company proposes to sell; and second, up to the full number or dollar amount of shares of Common Stock requested by the stockholders to be included in such registration in excess of the number or dollar amount of shares of the Common Stock the Company proposes to sell which, in the opinion of such underwriter, can be sold, allocated pro rata among the participating stockholders on the basis of the number of shares of Common Stock requested to be included therein by each. The Company generally is obligated to bear the expenses, other than underwriting discounts and sales commissions, of the registration of such shares. Any exercise by the holders of such incidental registration rights may hinder efforts by the Company to arrange future financings and may have an adverse impact on the market price of the Common Stock. DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS Following the consummation of the Offering, the Company will be subject to Section 203 of the DGCL, the "business combinations" statute. In general, such statute prohibits a publicly held Delaware corporation from engaging in various "business combinations" with any "interested stockholder" for a period of three years after the time that such stockholder became an "interested stockholder," unless (i) the business combination or the transaction by which such stockholder became an "interested stockholder" was approved by the Board of Directors prior to such time, (ii) upon consummation of the transaction which resulted in the stockholder becoming an "interested stockholder," the "interested stockholder" owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced (excluding for purposes of determining the number of shares outstanding those shares owned by (a) persons who are directors and also officers and (b) certain employee stock ownership plans) or (iii) on or subsequent to such time the "business combination" is approved by the Board of Directors and authorized at an annual or special meeting of stockholders by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the "interested stockholder." A "business combination" includes mergers, asset sales and other transactions resulting in financial benefit to a stockholder. In general, an "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years, did own) 15% or more of a corporation's outstanding voting stock. The 46 statute could prohibit or delay mergers or other takeover or change in control attempts with respect to the Company and, accordingly, may discourage attempts to acquire the Company. In addition, certain provisions of the Company's Certificate of Incorporation and Bylaws summarized in the following paragraphs may be deemed to have an anti-takeover effect and may delay, defer or prevent an attempt to obtain control of the Company by means of a proxy contest, tender offer, merger or other transaction that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by stockholders. CLASSIFIED BOARD OF DIRECTORS. The Company's Certificate of Incorporation provides for the Board of Directors to be divided into three classes of directors serving staggered three-year terms. As a result, approximately one-third of the Board of Directors will be elected each year. Moreover, under the DGCL, in the case of a corporation having a classified board, stockholders may remove a director only for cause. This provision, when coupled with the provision of the Bylaws authorizing the Board of Directors to fill vacant directorships, may preclude a stockholder from removing incumbent directors without cause and simultaneously gaining control of the Board of Directors by filling the vacancies created by such removal with its own nominees. SPECIAL MEETING OF STOCKHOLDERS. The Company's Bylaws provide that special meetings of stockholders of the Company may be called only by the Board of Directors, or the Executive Committee of the Board of Directors, if any, or the President. This provision will make it more difficult for stockholders to take actions opposed by the Board of Directors. STOCKHOLDER ACTION BY WRITTEN CONSENT. The Company's Certificate of Incorporation provides that no action required or permitted to be taken at any annual or special meeting of the stockholders of the Company may be taken without a meeting, and the power of stockholders of the Company's to consent in writing, without a meeting, for the taking of any action is specifically denied. ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR NOMINATIONS. The Bylaws provide that stockholders seeking to bring business before an annual meeting of stockholders, or to nominate candidates for election as directors at an annual or special meeting of stockholders, must provide timely notice thereof in writing. In order to be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Company no later than 90 days prior to the meeting; provided, however, that in the event that less than 100 days notice or prior public disclosure of the date of the meeting is given and made to stockholders, notice by the stockholder must be received no later than the close of business on the tenth day following the earlier of the day on which such notice of the date of the meeting was mailed or such public disclosure was made in order to be timely. The Bylaws specify certain requirements for a stockholder's notice to be in proper form. These provisions may preclude some stockholders from bringing matters before the stockholders at an annual or special meeting or from making nominations for directors at an annual or special meeting. The Company believes the foregoing provisions are necessary to attract and retain qualified persons as directors and officers. MARKET INFORMATION Prior to the Offering, there has been no established public trading market for the Common Stock. The Common Stock has been approved for listing on the Nasdaq National Market under the symbol "ADGO." TRANSFER AGENT AND REGISTRAR The Company has appointed The Bank of New York as the transfer agent and registrar for the Common Stock. 47 SHARES ELIGIBLE FOR FUTURE SALE Upon the closing of the Offering, the Company will have 22,849,282 shares of Common Stock outstanding. Of these shares, the 3,750,000 shares sold by the Company and the 2,000,000 shares sold by the Selling Stockholders in the Offering will be freely tradeable without restriction or further registration under the Securities Act unless held by an "affiliate" of the Company (as that term is defined below). Any such affiliate will be subject to the resale limitations of Rule 144 adopted under the Securities Act. The remaining 17,099,282 shares of Common Stock currently outstanding are "restricted securities" for purposes of Rule 144 ("Restricted Shares"). Restricted Shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 or Rule 701 promulgated under the Securities Act. As a result of contractual restrictions and the provisions of Rule 144 and Rule 701, additional shares will be available for sale in the public market as follows: (i) 15,000 Restricted Shares will be eligible for immediate sale on the date of this Prospectus; (ii) no additional Restricted Shares will be eligible for sale 90 days after the date of this Prospectus; and (iii) an additional 16,184,282 Restricted Shares will be eligible for sale upon expiration of the Lock-up Agreements, 180 days after the date of this Prospectus. After the expiration of the Lock-up Agreements, the Company may file a Registration Statement on Form S-8 under the Securities Act to register the shares of Common Stock reserved for issuance to its employees, officers, directors and consultants under its employee benefit plans. Upon the effective date of such Registration Statement, shares of Common Stock issued upon exercise of options granted under the plans generally will be available for sale in the open market. As of the date of this Prospectus, the Company has granted outstanding options to purchase up to 423,666 shares of Common Stock to certain employees, officers, directors and consultants under the 1996 Plan and the Incentive Plan, none of which were then exercisable. In general under Rule 144 as currently in effect, a person (or persons whose shares are aggregated), including a person who may be deemed to be an "affiliate" of the Company as that term is defined under the Securities Act, is entitled to sell within any three-month period a number of shares beneficially owned for at least one year that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock (approximately 228,492 shares immediately after the Offering) or (ii) the average weekly trading volume of the outstanding shares of Common Stock during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain requirements as to the manner of sale, notice and the availability of current public information about the Company. A person (or persons whose shares are aggregated) who is not an "affiliate" of the Company during the 90 days immediately preceding a proposed sale by such person and who has beneficially owned "restricted securities" for at least two years is entitled to sell such shares under Rule 144(k) without regard to the volume, manner of sale, public information or notice requirements. As defined in Rule 144, an "affiliate" of an issuer is a person that directly or indirectly controls, or is controlled by, or is under common control with such issuer. In general, under Rule 701 under the Securities Act as currently in effect, any employee, consultant or advisor of the Company who purchases shares from the Company in connection with a compensatory stock or option plan or other written agreement related to compensation is eligible to resell such shares 90 days after the effective date of the offering in reliance on Rule 144, but without compliance with certain restrictions contained in Rule 144. Prior to this Offering, there has been no public market for the Common Stock of the Company and no predictions can be made of the effect, if any, that future sales of shares of Common Stock, and options to acquire shares of Common Stock, or the availability of shares for future sale, will have on the market price prevailing from time to time. Sales of substantial amounts of Common Stock in the public market, or the perception that such sales could occur, could adversely affect prevailing market prices of the Common Stock. 48 UNDERWRITING Subject to certain terms and conditions contained in the Underwriting Agreement, Lehman Brothers Inc., NationsBanc Montgomery Securities LLC and Ferris, Baker Watts, Incorporated (the "Underwriters") have severally agreed to purchase from the Company and the Selling Stockholders, and the Company and the Selling Stockholders have agreed to sell to each of the Underwriters, the number of shares of Common Stock set forth opposite their respective names below:
NUMBER OF UNDERWRITER SHARES - -------------------------------------------------------------------------------- ------------ Lehman Brothers Inc. ........................................................... NationsBanc Montgomery Securities LLC........................................... Ferris, Baker Watts, Incorporated............................................... ------------ Total....................................................................... 5,750,000 ------------ ------------
The Underwriting Agreement provides that the obligations of the Underwriters thereunder are subject to various conditions. The nature of the Underwriters' obligations are such that they are committed to take and pay for all of the shares offered hereby if any are purchased. The Company and the Selling Stockholders have been advised by the Underwriters that they propose to offer the shares of Common Stock to the public at the public offering price set forth on the cover page hereof and to certain selected dealers (who may include the Underwriters) at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the initial offering, the public offering price, the concession to selected dealers and the reallowance to other dealers may be changed by the Underwriters. The Selling Stockholders have granted to the Underwriters an option to purchase up to an additional 862,500 shares of Common Stock, at the public offering price less the underwriting discounts and commissions shown on the cover page of this Prospectus, solely to cover over-allotments, if any. Such option may be exercised at any time up to 30 days after the date of this Prospectus. To the extent that the Underwriters exercise such option, each of the Underwriters will be committed, subject to certain conditions, to purchase a number of additional shares that is proportional to such Underwriter's initial commitment. The Company's directors, officers and certain stockholders of the Company including the Selling Stockholders have agreed that they will not, without the prior written consent of Lehman Brothers, Inc., during the 180 days following the date of this Prospectus, directly or indirectly, (1) offer for sale, sell, pledge or otherwise dispose of (or enter into any transaction or device which is designed to, or could be expected to, result in the disposition by any person at any time in the future of) any shares of Common Stock (including, without limitation, in the case of Selling Stockholders, shares of Common Stock that may be deemed to be beneficially owned in accordance with the rules and regulations of the Securities and Exchange Commission and shares of Common Stock that may be issued upon exercise of any option or warrant) or securities convertible into or exchangeable for Common Stock (other than the shares of Common Stock to be sold in the Offering), or (2) enter into any swap or other derivatives transaction that transfers to another, in whole or in part, any of the economic benefits or risks of ownership of such shares 49 of Common Stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Stock or other securities, in cash or otherwise (other than, in the case of the Company, the grant of options pursuant to option plans existing on the date hereof). Until the distribution of the shares of Common Stock is completed, rules of the Commission may limit the ability of the Underwriters and certain selling group members to bid for and purchase shares of Common Stock. As an exception to these rules, the Underwriters are permitted to engage in certain transactions that stabilize the price of the Common Stock. Such transactions may consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Common Stock. In addition, if the Underwriters over-allot (I.E., if they sell more shares of Common Stock than are set forth on the cover page of this Prospectus), and thereby create a short position in the Common Stock in connection with the Offering, the Underwriters may reduce that short position by purchasing Common Stock in the open market. The Underwriters also may elect to reduce any short position by exercising all or part of the over-allotment option described herein. The Underwriters also may impose a penalty bid on certain dealers and certain selling group members. This means that if the Underwriters purchase shares of Common Stock in the open market to reduce the Underwriter short position to stabilize the price of the Common Stock, they may reclaim the amount of selling concession from such dealers and the selling group who sold shares as part of the Offering. In general, purchases of a security for the purpose of stabilization or to reduce a syndicate short position could cause the price of the security to be higher than it might otherwise be in the absence of such purchases. The imposition of a penalty bid might have an effect on the price of a security, to the extent that it were to discourage resales of the security by purchasers in the Offering. Neither the Company nor any of the Underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Common Stock. In addition, neither the Company nor any of the Underwriters makes any representation that the Underwriters will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. The Company and each of the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments the Underwriters may be required to make in respect thereof. Prior to the sale of shares in the Offering, there has been no active public market for the Common Stock of the Company. The initial public offering price of the shares of Common Stock will be determined by negotiation among the Company, the Selling Stockholders and the Underwriters. Among the factors that will be considered in determining the initial public offering price will be the prospects of the Company and its industry in general, the Company's past and present operations, the Company's position in the industry, an assessment of the Company's management, the general condition of securities markets at the time of the Offering and the demand for similar securities. At the request of the Company, the Underwriters have reserved up to 575,000 shares of Common Stock offered hereby for sale to certain officers, directors, employees, business associates and related parties of the Company at the initial public offering price set forth on the cover page of this Prospectus. Such persons must commit to purchase no later than the close of business on the day following the date hereof. The number of shares available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. 50 LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company by Arter & Hadden LLP, Dallas, Texas. Certain legal matters in connection with the Offering will be passed upon for the Underwriters by Cooley Godward LLP, San Francisco, California. EXPERTS The consolidated financial statements and financial statement schedule of the Company as of December 31, 1996 and 1997, and for each of the years in the three-year period ended December 31, 1997, have been included herein and elsewhere in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein and in the Registration Statement, and upon the authority of such firm as experts in accounting and auditing. The statements in this Prospectus set forth under "Risk Factors--Patents and Protection of Proprietary Technology," "Business--Design and Development--Patent Review" and "Business--Patents," together with the last paragraph of the inside front cover of this Prospectus, have been reviewed and approved by Aquilino & Welsh, Arlington, Virginia, as experts in patent and trademark law, and are included herein in reliance upon that review and approval. A partner in Aquilino & Welsh owns 59,106 shares of Common Stock of the Company. Purchasers of the securities offered hereby should not rely on Aquilino & Welsh with respect to any matters other than as set forth above. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement on Form S-1 under the Securities Act with respect to the Common Stock offered hereby. This Prospectus constitutes a part of the Registration Statement and does not contain all of the information set forth therein and in the exhibits thereto, certain portions of which have been omitted as permitted by the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock offered hereby, reference is hereby made to such Registration Statement and exhibits. Statements contained in this Prospectus as to the contents of any document are not necessarily complete and in each instance are qualified in their entirety by reference to the copy of the appropriate document filed with the Commission. The Registration Statement, including the exhibits thereto, may be examined without charge at the Commission's public reference facility at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following regional offices of the Commission: 7 World Trade Center, New York, NY 10048, and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, IL 60601. Copies of such material may be obtained from the Public Reference Section of the Commission at its principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of the fees prescribed by the Commission. Copies of such material are also available through the Commission's website located at http:// www.sec.gov. 51 INDEX TO FINANCIAL STATEMENTS Independent Auditors' Report......................................................... F-2 Consolidated Balance Sheets as of December 31, 1996 and 1997 and March 31, 1998 (unaudited)........................................................................ F-3 Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997 and the three months ended March 31, 1997 and 1998 (unaudited)................ F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1996 and 1997 and the three months ended March 31, 1998 (unaudited).......... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997 and the three months ended March 31, 1997 and 1998 (unaudited)................ F-6 Notes to Consolidated Financial Statements........................................... F-7 Financial Statement Schedule: II--Valuation and Qualifying Accounts for the years ended December 31, 1995, 1996 and 1997 and the three months ended March 31, 1998 (unaudited)................... F-16
All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto. F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Adams Golf, Inc. and subsidiaries: We have audited the consolidated financial statements of Adams Golf, Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Adams Golf, Inc. and subsidiaries as of December 31, 1996 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG PEAT MARWICK LLP Dallas, Texas January 16, 1998, except for note 9(f) which is as of April 29, 1998 F-2 ADAMS GOLF, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31, ---------------------------- MARCH 31, 1996 1997 1998 ------------- ------------- ------------- (UNAUDITED) Current assets: Cash and cash equivalents......................................... $ 854,543 $ 1,955,563 $ 602,290 Trade receivables net of allowance for doubtful accounts of $26,199, $698,341 and $1,126,831 (unaudited) in 1996, 1997 and 1998, respectively (note 7)..................................... 497,787 7,670,960 14,708,636 State income taxes refundable..................................... -- 221,637 221,637 Inventories (notes 2 and 7)....................................... 674,737 4,486,563 5,559,699 Prepaid expenses.................................................. 28,007 509,350 1,106,635 Deferred income tax assets (note 8)............................... -- 390,164 650,626 Other current assets.............................................. -- 715,670 352,795 ------------- ------------- ------------- Total current assets............................................ 2,055,074 15,949,907 23,202,318 Property and equipment, net (note 3)................................ 123,950 603,823 2,094,794 Deferred income tax assets (note 8)................................. -- 182,621 209,942 Other assets, net (note 4).......................................... 379,697 623,728 285,705 ------------- ------------- ------------- Total assets.................................................... $ 2,558,721 $ 17,360,079 $ 25,792,759 ------------- ------------- ------------- ------------- ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable..................................................... $ 230,406 $ -- $ -- Note payable to shareholder (note 7).............................. -- -- 912,642 Accounts payable.................................................. 17,526 377,622 2,732,215 Federal income taxes payable...................................... -- 1,020,980 2,940,390 Accrued expenses (note 5)......................................... 332,423 7,636,157 4,317,926 ------------- ------------- ------------- Total current liabilities....................................... 580,355 9,034,759 10,903,173 ------------- ------------- ------------- Notes payable to shareholder, less current portion (note 7)......... -- -- 222,399 ------------- ------------- ------------- Total liabilities............................................... 580,355 9,034,759 11,125,572 ------------- ------------- ------------- Stockholders' equity (note 9): Common stock, $.001 par value. Authorized 50,000,000 shares; 11,873,234, 15,719,338 and 18,199,282 (unaudited) shares issued and outstanding at December 31, 1996 and 1997 and March 31, 1998, respectively.............................................. 11,873 15,719 18,199 Additional paid-in capital........................................ 3,126,073 14,123,398 16,031,896 Common stock subscription......................................... -- -- (230,459) Deferred compensation............................................. -- -- (981,000) Accumulated deficit............................................... (1,159,580) (5,813,797) (171,449) ------------- ------------- ------------- Total stockholders' equity...................................... 1,978,366 8,325,320 14,667,187 Commitments (note 6)................................................ ------------- ------------- ------------- $ 2,558,721 $ 17,360,079 $ 25,792,759 ------------- ------------- ------------- ------------- ------------- -------------
See accompanying notes to consolidated financial statements. F-3 ADAMS GOLF, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH YEARS ENDED DECEMBER 31, 31, -------------------------------------- ------------------------- 1995 1996 1997 1997 1998 ----------- ----------- ------------ ----------- ------------ (UNAUDITED) Net sales................................... $ 1,125,115 $ 3,521,788 $ 36,690,090 $ 1,474,940 $ 24,510,808 Cost of goods sold.......................... 756,400 1,589,696 9,991,132 586,538 5,862,255 ----------- ----------- ------------ ----------- ------------ Gross profit.......................... 368,715 1,932,092 26,698,958 888,402 18,648,553 ----------- ----------- ------------ ----------- ------------ Operating expenses: Research and development expenses......... 18,516 51,101 557,513 -- 196,997 Selling and royalty expenses.............. 312,785 625,897 13,093,174 418,737 6,248,196 General and administrative expenses: Stock compensation and bonus award (note 9).................................... -- 213,760 14,841,711 -- -- Provision for bad debts................. 12,791 51,306 738,805 75,768 466,213 Other................................... 268,518 981,219 1,436,995 328,727 2,865,198 ----------- ----------- ------------ ----------- ------------ Total operating expenses.............. 612,610 1,923,283 30,668,198 823,232 9,776,604 ----------- ----------- ------------ ----------- ------------ Operating income (loss)............... (243,895) 8,809 (3,969,240) 65,170 8,871,949 Other income (expense): Interest income........................... 1,226 3,938 15,325 4,451 10,550 Interest expense.......................... -- -- (69,731) (13,090) (9,362) Other..................................... -- -- (47,808) 4,350 (100,621) ----------- ----------- ------------ ----------- ------------ Income (loss) before income taxes..... (242,669) 12,747 (4,071,454) 60,881 8,772,516 Income tax expense (note 8)................. -- -- 582,763 15,586 3,130,168 ----------- ----------- ------------ ----------- ------------ Net income (loss)..................... $ (242,669) $ 12,747 $ (4,654,217) $ 45,295 $ 5,642,348 ----------- ----------- ------------ ----------- ------------ ----------- ----------- ------------ ----------- ------------ Income (loss) per common share: Basic..................................... $ (.05) $ .00 $ (.37) $ .00 $ .32 ----------- ----------- ------------ ----------- ------------ ----------- ----------- ------------ ----------- ------------ Diluted................................... $ (.05) $ .00 $ (.37) $ .00 $ .31 ----------- ----------- ------------ ----------- ------------ ----------- ----------- ------------ ----------- ------------
See accompanying notes to consolidated financial statements. F-4 ADAMS GOLF, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
SHARES OF SHARES OF ADDITIONAL PREFERRED PREFERRED COMMON COMMON PAID-IN COMMON STOCK DEFERRED STOCK STOCK STOCK STOCK CAPITAL SUBSCRIPTION COMPENSATION ----------- ----------- ----------- ----------- ------------ ------------- -------------- Balance, December 31, 1994 (unaudited).............. 772,551 $ 773 1,066,514 $ 1,067 $ 1,327,799 $ -- $ -- Conversion of preferred stock to common stock (note 9).... (772,551) (773) 1,545,102 1,545 (772) -- -- Sale of stock.............. -- -- 4,168,988 4,169 453,507 -- -- Stock distribution (note 9)....................... -- -- 4,282,304 4,282 (4,282) -- -- Net loss................... -- -- -- -- -- -- -- ----------- ----- ----------- ----------- ------------ ------------- -------------- Balance, December 31, 1995..................... -- $ -- 11,062,908 11,063 1,776,252 -- -- ----------- ----- ----------- ----- Sale of stock.............. 1,581,126 1,581 1,594,362 -- -- Common stock repurchased and retired (note 9)..... (770,800) (771) (244,541) -- -- Net income................. -- -- -- -- -- ----------- ----------- ------------ ------------- -------------- Balance, December 31, 1996..................... 11,873,234 11,873 3,126,073 -- -- Stock compensation award (note 9)................. 2,000,000 2,000 9,998,000 -- -- Exercise of stock options.. 946,104 946 550,225 -- -- Exchange of debt for common stock (note 9)................. 900,000 900 449,100 -- -- Net loss................... -- -- -- -- -- ----------- ----------- ------------ ------------- -------------- Balance, December 31, 1997..................... 15,719,338 15,719 14,123,398 -- -- Issuance of stock options.. -- -- 981,000 -- (981,000) Exercise of stock options.. 2,479,944 2,480 927,498 (230,459) -- Net income................. -- -- -- -- -- ----------- ----------- ------------ ------------- -------------- Balance, March 31, 1998 (unaudited).............. 18,199,282 $ 18,199 $ 16,031,896 $ (230,459) $ (981,000) ----------- ----------- ------------ ------------- -------------- ----------- ----------- ------------ ------------- -------------- TOTAL ACCUMULATED STOCKHOLDERS' DEFICIT EQUITY ------------- -------------- Balance, December 31, 1994 (unaudited).............. $ (929,658) $ 399,981 Conversion of preferred stock to common stock (note 9).... -- -- Sale of stock.............. -- 457,676 Stock distribution (note 9)....................... -- -- Net loss................... (242,669) (242,669) ------------- -------------- Balance, December 31, 1995..................... (1,172,327) 614,988 Sale of stock.............. -- 1,595,943 Common stock repurchased and retired (note 9)..... -- (245,312) Net income................. 12,747 12,747 ------------- -------------- Balance, December 31, 1996..................... (1,159,580) 1,978,366 Stock compensation award (note 9)................. -- 10,000,000 Exercise of stock options.. -- 551,171 Exchange of debt for common stock (note 9)................. -- 450,000 Net loss................... (4,654,217) (4,654,217) ------------- -------------- Balance, December 31, 1997..................... (5,813,797) 8,325,320 Issuance of stock options.. -- -- Exercise of stock options.. -- 699,519 Net income................. 5,642,348 5,642,348 ------------- -------------- Balance, March 31, 1998 (unaudited).............. $ (171,449) $ 14,667,187 ------------- -------------- ------------- --------------
See accompanying notes to consolidated financial statements. F-5 ADAMS GOLF, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS YEARS ENDED DECEMBER 31, ENDED MARCH 31, ------------------------------------- ----------------------- 1995 1996 1997 1997 1998 ----------- ----------- ----------- ---------- ----------- (UNAUDITED) Cash flows from operating activities: Net income (loss)............................. $ (242,669) $ 12,747 $(4,654,217) $ 45,295 $ 5,642,348 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization............... 8,291 19,278 302,589 16,374 218,959 Loss on retirement of fixed assets.......... -- -- 134,009 -- 100,617 Stock compensation and bonus award.......... -- -- 10,000,000 -- -- Deferred income taxes....................... -- -- (572,785) -- (137,657) Allowance for doubtful accounts............. -- 26,199 672,142 71,207 1,126,831 Changes in assets and liabilities: Trade and other receivables............... (93,649) (374,228) (8,066,952) (399,963) (8,164,507) Inventories............................... (81,470) (476,467) (3,811,826) (103,962) (1,073,136) Prepaid assets............................ (27,589) (418) (481,343) 406 (597,285) Other current assets...................... 2,860 -- (715,670) (257,186) 362,875 Other assets.............................. (4,873) (361,916) (390,442) 67,478 248,822 Accounts payable.......................... 40,252 (22,726) 360,096 60,688 991,832 Accrued expenses.......................... 2,728 329,302 7,303,734 187,607 (2,105,596) Federal income taxes payable.............. -- -- 1,020,980 15,586 1,919,410 ----------- ----------- ----------- ---------- ----------- Net cash provided by (used in) operating activities............................ (396,119) (848,229) 1,100,315 (296,470) (1,466,487) ----------- ----------- ----------- ---------- ----------- Cash flow from investing activities--purchase of equipment..................................... (9,287) (121,444) (770,060) (46,277) (1,721,347) ----------- ----------- ----------- ---------- ----------- Cash flows from financing activities: Proceeds from notes payable and line of credit...................................... -- 230,406 1,050,000 250,000 4,635,041 Repayment of line of credit borrowings........ -- -- (800,000) -- (3,500,000) Repayment of notes payable.................... -- -- (30,406) (1,494) -- Issuance of common stock...................... 457,676 1,350,631 551,171 -- 699,520 ----------- ----------- ----------- ---------- ----------- Net cash provided by financing activities............................ 457,676 1,581,037 770,765 248,506 1,834,561 ----------- ----------- ----------- ---------- ----------- Net increase (decrease) in cash and cash equivalents................................... 52,270 611,364 1,101,020 (94,241) (1,353,273) Cash and cash equivalents at beginning of period........................................ 190,909 243,179 854,543 854,543 1,955,563 ----------- ----------- ----------- ---------- ----------- Cash and cash equivalents at end of period...... $ 243,179 $ 854,543 $ 1,955,563 $ 760,302 $ 602,290 ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- ---------- ----------- Supplemental disclosure of cash flow information: Interest paid................................. $ -- $ -- $ 69,731 $ 13,090 $ 9,362 ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- ---------- ----------- Income taxes paid............................. $ -- $ -- $ 356,204 $ -- $ 1,293,820 ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- ---------- ----------- Supplemental disclosure of financing activity-- exchange of debt for common stock............. $ -- $ -- $ 450,000 $ -- $ -- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- ---------- -----------
See accompanying notes to consolidated financial statements. F-6 ADAMS GOLF, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1997 AND MARCH 31, 1998 (UNAUDITED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) GENERAL Adams Golf, Inc. (the "Company") was founded in 1987. The Company designs, manufactures, markets and distributes golf clubs and provides custom golf club fitting technology. The Company's primary products are fairway woods that are marketed under the trademark "Tight Lies." The Company has both domestic and international sales. International sales were $647,325, $878,666, and $1,387,325 for the years ended December 31, 1996 and 1997 and the three months ended March 31, 1998, respectively. There were no international sales in 1995. The consolidated financial statements include the accounts of Adams Golf, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements of the Company as of March 31, 1998 and for the three months ended March 31, 1997 and 1998 are unaudited, but in the opinion of management reflect all adjustments (consisting only of normal recurring accruals) which are necessary for a fair statement of the results of the interim periods presented. Results for interim periods are not necessarily indicative of the results to be expected for a full year due in part to the Company's growth. (b) INVENTORIES Inventories are valued at the lower of cost or market and primarily consists of completed golf clubs and component parts. Cost is determined using the first-in, first-out method. (c) PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets, which range from three to seven years. (d) REVENUE RECOGNITION The Company records revenue as earned, which occurs when the product is shipped. (e) OTHER ASSETS AND RELATED AMORTIZATION EXPENSE Other assets consist primarily of the cost of obtaining patents, development costs of an infomercial and various deposits. Patent amortization is computed on the straight-line method over the estimated useful lives of the assets, which range from 5 to 15 years. (f) RESEARCH AND DEVELOPMENT Research and development costs consist of all costs incurred in planning, designing and testing of golf equipment, including salary costs related to research and development, and are expensed as incurred. (g) ADVERTISING COSTS Advertising media costs, other than infomercial costs, are expensed as incurred. Production costs are charged to expense ratably in relation to sales over the year in which incurred. Advertising costs other than infomercials were $35,300, $33,503 and $8,651,420 for the years ended December 31, 1995, 1996 and 1997, respectively, and $59,049 (unaudited) and $2,333,406 (unaudited) for the three months ended March 31, 1997 and 1998, respectively. F-7 ADAMS GOLF, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1997 AND MARCH 31, 1998 (UNAUDITED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Infomercial costs are amortized based on revenues generated compared to total estimated revenues expected to result from the airing of such infomercial generally over an 18 month period. Amortization expense for the years ended December 31, 1995, 1996 and 1997 was $3,161, $3,738 and $146,411, respectively, and $89,200 (unaudited) for the three months ended March 31, 1998. (h) PRODUCT WARRANTY AND SALES RETURNS The Company's golf equipment is sold under warranty against defects in material and workmanship for a period of two years. In addition, the Company has a 90 day "no questions asked" return policy. An allowance for estimated future warranty and sales return costs is recorded in the period products are sold. Such estimates have approximated actual costs incurred. (i) INCOME TAXES The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (j) INCOME (LOSS) PER SHARE The weighted average common shares used for determining basic net income (loss) per common share was 4,423,146, 11,237,794 and 12,519,392, for the years ended December 31, 1995, 1996 and 1997, respectively, and 11,873,234 (unaudited) and 17,662,189 (unaudited) for the three months ended March 31, 1997 and 1998, respectively. The effect of dilutive stock options added 678,263 (unaudited) shares for the three months ended March 31, 1998 for the computation of diluted income (loss) per common share. Stock options outstanding for the years ended December 31, 1995, 1996 and 1997 and the three months ended March 31, 1997 were not considered in the computation of net income (loss) per common share since their effect is immaterial or antidilutive. (k) USE OF ESTIMATES The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (l) FINANCIAL INSTRUMENTS The carrying amount of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses and note payable to stockholder approximates fair value due to the short maturity of these instruments. F-8 ADAMS GOLF, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1997 AND MARCH 31, 1998 (UNAUDITED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (m) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, on January 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of this Statement did not impact the Company's financial position, results of operations, or liquidity. (n) STATEMENTS OF CASH FLOWS The Company considers all short-term highly liquid instruments, with an original maturity of three months or less, to be cash equivalents. (o) NEWLY ADOPTED ACCOUNTING PRONOUNCEMENTS The Company adopted the reporting and disclosure requirements of SFAS No. 130, REPORTING COMPREHENSIVE INCOME, on January 1, 1998. This Statement requires the display of comprehensive income and its components in a financial statement that is displayed in equal prominence with other financial statements. As the Company has not had any comprehensive income components, the reporting and disclosure requirements of this statement have not altered the consolidated financial statements presented herein. Effective January 1, 1998, the Company adopted Statement of Position (SOP) 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE, which was issued in March 1998. The SOP requires that certain costs related to the development or purchase of internal-use software be capitalized and amortized over the estimated useful life of the software. The SOP also requires that costs related to the preliminary project stage and the post-implementation/operations stage of an internal-use computer software development project be expensed as incurred. (2) INVENTORIES Inventories consist of the following:
DECEMBER 31 ------------------------ 1996 1997 ---------- ------------ MARCH 31, 1998 ------------ (UNAUDITED) Finished goods.................................................. $ 41,323 $ 2,063,803 $ 2,526,767 Component parts................................................. 633,414 2,422,760 3,032,932 ---------- ------------ ------------ $ 674,737 $ 4,486,563 $ 5,559,699 ---------- ------------ ------------ ---------- ------------ ------------
F-9 ADAMS GOLF, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1997 AND MARCH 31, 1998 (UNAUDITED) (3) PROPERTY AND EQUIPMENT, NET Property and equipment consists of the following:
DECEMBER 31, ----------------------- 1996 1997 ---------- ----------- MARCH 31, 1998 ------------ (UNAUDITED) Manufacturing equipment.......................................... $ 70,728 $ 142,137 $ 151,979 Office and computer equipment.................................... 100,368 660,145 2,237,891 Accumulated depreciation......................................... (47,146) (198,459) (295,076) ---------- ----------- ------------ $ 123,950 $ 603,823 $ 2,094,794 ---------- ----------- ------------ ---------- ----------- ------------
(4) OTHER ASSETS, NET Other assets, net, consist of the following:
DECEMBER 31, ---------------------- 1996 1997 ---------- ---------- Deposits, including amounts for fixed assets purchased.......................... $ 97,498 $ 380,836 Infomercial costs............................................................... 267,677 233,365 Patents......................................................................... 14,522 9,527 ---------- ---------- $ 379,697 $ 623,728 ---------- ---------- ---------- ----------
(5) ACCRUED EXPENSES Accrued expenses consist of the following:
DECEMBER 31, ------------------------ 1996 1997 ---------- ------------ MARCH 31, 1998 ------------ (UNAUDITED) Payroll, bonuses and commissions (see note 9)................... $ 277,810 $ 5,576,134 $ 1,115,699 Sales, property and state income taxes.......................... 4,604 271,225 204,501 Royalties....................................................... -- 392,541 477,163 Advertising..................................................... -- 470,500 795,260 Product warranty and sales returns.............................. -- 449,200 732,100 Professional services........................................... 9,807 340,389 220,491 Other........................................................... 40,202 136,168 772,712 ---------- ------------ ------------ $ 332,423 $ 7,636,157 $ 4,317,926 ---------- ------------ ------------ ---------- ------------ ------------
F-10 ADAMS GOLF, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1997 AND MARCH 31, 1998 (UNAUDITED) (6) COMMITMENTS The Company is obligated under certain noncancelable leases for office space. A summary of the minimum rental commitments under noncancellable leases is as follows:
YEARS ENDING DECEMBER 31, - ------------------------------------------------------------------------ 1998.................................................................. $ 368,700 1999.................................................................. 456,000 2000.................................................................. 480,400 2001.................................................................. 488,500 2002.................................................................. 512,900 Thereafter............................................................ 651,400
Rent expense was $32,540, $45,603, $104,480 $26,694 (unaudited) and $64,075 (unaudited) for the years ended December 31, 1995, 1996 and 1997, and the three months ended March 31, 1997 and 1998, respectively. The Company had outstanding commitments (denominated in U.S. dollars ) on letters of credit of $459,167 at December 31, 1997, and $989,419 (unaudited) at March 31, 1998 for the purchase of inventory from foreign vendors. (7) DEBT The Company entered into a $1,500,000 revolving line of credit agreement with a bank on May 30, 1997. The line of credit is secured by trade receivables and inventories, matures on May 15, 1998 and bears interest, payable quarterly, at the bank's prime rate (8.5% at December 31, 1997). At December 31, 1997, there was no balance outstanding on this line of credit. The Company pays an annual commitment fee of 0.5% on the unused portion of the line of credit. On February 27, 1998, the Company entered into a new $10,000,000 revolving credit facility with a bank which replaced the existing $1,500,000 line of credit. The facility is secured by eligible trade receivables, inventories and equipment, matures on December 31, 1998 and bears interest, payable monthly, at the bank's prime rate of interest minus 25 basis points (8.25% at March 31, 1998) or LIBOR rates plus 1.75% interest. At March 31, 1998, there was no balance outstanding on this credit facility. The Company pays an annual commitment fee of 0.25% on the unused portion of the credit facility. During the first quarter of 1998, the Company borrowed $1,135,041 in the form of an unsecured note payable to the Chief Executive Officer. The principal balance is payable in three installments, matures on April 14, 1999, and bears interest at 5.39%. F-11 ADAMS GOLF, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1997 AND MARCH 31, 1998 (UNAUDITED) (8) INCOME TAXES Income tax expense (benefit) for the year ended December 31, 1997 consists of the following:
YEAR ENDED DECEMBER 31, 1997 ------------------------------------- CURRENT DEFERRED TOTAL ------------ ----------- ---------- Federal................................................ $ 1,020,980 $ (572,785) $ 448,195 State.................................................. 134,568 -- 134,568 ------------ ----------- ---------- $ 1,155,548 $ (572,785) $ 582,763 ------------ ----------- ---------- ------------ ----------- ----------
Actual income tax expense differs from the "expected" income tax expense (benefit) (computed by applying the U.S. federal corporate tax rate of 34% to income (loss) before income taxes) for the years ended December 31, 1995, 1996 and 1997 as follows:
YEARS ENDED DECEMBER 31, -------------------------------------- 1995 1996 1997 ---------- --------- --------------- Computed "expected" tax expense (benefit)...................... $ (82,507) $ 4,334 $ (1,384,294) State income taxes, net of federal tax benefit................. -- -- 88,815 Stock compensation and bonus award............................. -- -- 2,159,000 Change in valuation allowance for deferred tax assets.......... 81,352 (4,334) (337,558) Other.......................................................... 1,155 -- 56,800 ---------- --------- --------------- $ -- $ -- $ 582,763 ---------- --------- --------------- ---------- --------- ---------------
The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities are presented below:
DECEMBER 31, ----------------------- 1996 1997 ----------- ---------- MARCH 31, 1998 ----------- (UNAUDITED) Deferred tax assets: Allowance for bad debts........................................ $ 8,908 $ 237,436 $ 394,391 Research and development costs................................. 7,563 974 -- Bonus compensation............................................. 72,678 -- -- Product warranty and sales returns............................. -- 152,728 256,235 Net operating tax loss carryforwards........................... 389,528 311,100 320,250 ----------- ---------- ----------- Total gross deferred tax assets.............................. 478,677 702,238 970,876 Less valuation allowance....................................... (387,667) (50,109) (59,259) ----------- ---------- ----------- Net deferred tax assets...................................... 91,010 652,129 911,617 Deferred tax liabilities--infomercial costs...................... (91,010) (79,344) (51,049) ----------- ---------- ----------- Net.......................................................... $ -- $ 572,785 $ 860,568 ----------- ---------- ----------- ----------- ---------- -----------
In assessing the realizability of deferred income tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during F-12 ADAMS GOLF, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1997 AND MARCH 31, 1998 (UNAUDITED) (8) INCOME TAXES (CONTINUED) the periods in which those temporary differences become deductible. Based upon projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowance at December 31, 1997. The valuation allowance for deferred tax assets at December 31, 1996 and 1997 was $387,667 and $50,109, respectively. The net change in the total valuation allowance for the years ended December 31, 1996 and 1997 were decreases of $4,334 and $337,558, respectively. At December 31, 1997, the Company has net operating tax loss carryforwards for federal income tax purposes of approximately $915,000 which are available to offset future federal taxable income through 2010. The availability of the net operating loss carryforwards to reduce future taxable income is subject to certain limitations. As a result of a change in ownership, the Company believes utilization of its net operating tax loss carryforwards is limited to approximately $62,000 per year for the remaining life of the net operating losses. (9) STOCKHOLDERS' EQUITY (a) STOCK OPTION PLANS In April 1996, the Company adopted the 1996 Stock Option Incentive Plan ("the Stock Option Plan"), pursuant to which stock options covering an aggregate of 800,000 shares of the Company's common stock may be granted. Options awarded under the Stock Option Plan (i) are generally granted at prices that equate to or are above fair market value on the date of the grant; (ii) generally become exercisable over a period of one to four years; and (iii) generally expire five years subsequent to award. At December 31, 1997 and March 31, 1998, there were 140,310 shares available for grant under the Plan. The per share weighted-average fair value of stock options granted during 1995 and 1996 was $0.25 and $0.06, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: Risk-free interest rate, 6%; expected life, two-five years and expected dividend yield, 0%. In connection with an employment agreement entered into in September 1995 with the Company's chief executive officer and founder, the Company granted the chief executive officer options to acquire 1,520,766 shares of common stock at $.375 per share, the market price at date of grant. Vesting of the stock options was conditioned upon meeting certain revenue and earnings requirements, which were met during 1996 and 1997. Also, the agreement provided for a bonus to be paid to the officer in an amount equal to the exercise price of the options plus any related income tax due by the officer upon exercise of the options. The officer notified the Company of his intent to exercise the options in December 1997 and the shares were issued in January 1998. Compensation expense of $213,760 and $2,300,023 was charged to operations in 1996 and 1997, respectively, to recognize the bonus due to the officer. In conjunction with a 1996 stock purchase agreement, the Company granted options to a shareholder to acquire an aggregate of 942,632 shares of common stock at option exercise prices ranging from $0.375, the market price at date of grant, to $0.625 per share. During 1997, the shareholder exercised the options for an aggregate exercise price of $549,869. F-13 ADAMS GOLF, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1997 AND MARCH 31, 1998 (UNAUDITED) (9) STOCKHOLDERS' EQUITY (CONTINUED) In February 1998, the Company adopted the 1998 Stock Incentive Plan ("the 1998 Stock Option Plan"), pursuant to which stock options covering an aggregate of 1,800,000 shares of the Company's common stock may be granted. The Company granted 218,000 options to employees on February 26, 1998 at $2.50 per share. For financial statement reporting purposes, the grant was deemed to have a fair market value of $7.00 per share at the date of grant. Accordingly, the Company has recorded deferred compensation of $981,000 at March 31, 1998. The Company applies Accounting Principles Board Opinion 25 in accounting for its stock plans and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income (loss) would have been adjusted to the pro forma amounts indicated below:
YEARS ENDED DECEMBER 31 -------------------------------------- 1995 1996 1997 ----------- ---------- ------------- Net income (loss): As reported................................................... $ (242,669) $ 12,747 $ (4,654,217) Pro forma..................................................... (242,669) (13,361) (4,743,744) Diluted income (loss) per common share: As reported................................................... $ (0.05) $ 0.00 $ (0.37) Pro forma..................................................... (0.05) (0.00) (0.38)
Pro forma net loss reflects only options granted in 1995, 1996 and 1997. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net loss amounts presented above because compensation cost is reflected over the respective options vesting periods of up to four years. A summary of stock option activity follows:
WEIGHTED AVERAGE NUMBER OF EXERCISE SHARES PRICE ----------- ------------- Options outstanding at December 31, 1994......................... -- $ -- Options granted.................................................. 1,520,766 0.375 Options outstanding at December 31, 1995......................... 1,520,766 0.375 Options granted.................................................. 1,946,948 0.50 Options outstanding at December 31, 1996......................... 3,467,714 0.44 Options exercised................................................ (946,104) 0.583 Options outstanding at December 31, 1997......................... 2,521,610 0.375 Options granted.................................................. 272,000 2.50 Options exercised................................................ (2,479,944) 0.375 ----------- ------ Options outstanding at March 31, 1998 (unaudited)................ 313,666 $ 2.22 ----------- ------ ----------- ------
At December 31, 1997, the exercise price and weighted-average remaining contractual life of outstanding options was $0.375 and 3.5 years, respectively. At December 31, 1996 and 1997, the number of options exercisable was 467,970 and 2,114,492, respectively, and the weighted-average exercise price of those options was $0.375. F-14 ADAMS GOLF, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1997 AND MARCH 31, 1998 (UNAUDITED) (9) STOCKHOLDERS' EQUITY (CONTINUED) (b) STOCK DISTRIBUTION In connection with the acquisition of a related entity, the Company distributed 4,282,304 shares of common stock to its shareholders during the year ended December 31, 1995. As a result of the common control existing between the Company and the related entity, the transaction was accounted for in a manner similar to a pooling of interests. Accordingly, the transaction resulted in no increase to stockholders' equity since the recorded net asset value of the related entity was not material. The resulting subsidiary has been inactive during the three years ended December 31, 1997 and has no assets or liabilities. (c) STOCK COMPENSATION AWARD In December 1997, the Board of Directors of the Company approved a stock compensation award of 2,000,000 shares of common stock to its chief executive officer and founder of the Company. In addition, the Company agreed to pay all income taxes payable by the officer relating to such stock award and related tax bonus. Aggregate compensation of $12,541,688 (including $2,541,688 for estimated taxes) was recorded by the Company during the year ended December 31, 1997 based on the fair market value of the stock. (d) NOTE WITH STOCKHOLDER CONVERTED TO STOCK The Company borrowed $200,000 from a stockholder in October 1996 and an additional $250,000 from the same stockholder in 1997. The aggregate notes payable balance of $450,000 was converted into 900,000 shares of the Company's stock in September 1997. (e) STOCK CONVERSION During 1995, the Company amended its Certificate of Incorporation to provide the authority to issue up to 25,000,000 shares of $.001 per share par value stock. All such shares were to be designated as common stock and, accordingly, all stockholders of preferred stock surrendered such shares for an equivalent number of shares of common stock. (f) STOCK SPLIT AND AUTHORIZED CLASSES OF STOCK Effective April 29, 1998, the stockholders of the Company authorized a two-for-one stock split for holders of record on May 1, 1998. The stock split has been reflected in the accompanying consolidated financial statements and, accordingly, all applicable dollar, share and per share amounts have been restated to reflect the stock split. In addition, the stockholders of the Company also approved an increase in the number of authorized shares of Common Stock to 50,000,000 and established a class of preferred stock with a par value of $.01 per share and authorized shares of 5,000,000. (10) SUBSEQUENT EVENTS (UNAUDITED) Effective May 1, 1998, the Company entered into an agreement with Nicholas A. Faldo, a professional golfer (the "Agreement"). The Agreement with Faldo, provides the Company with Faldo's endorsement and use of Adams products, as well as the design, development and testing of new technologies and products. As consideration for such services, Faldo will receive 900,000 shares of the Company's common stock which will be recorded and amortized over the estimated period benefited. In addition, Mr. Faldo will receive royalty payments representing 5% of net sales outside the U.S., with a minimum annual amount of $1,500,000 beginning in 1999 and increasing ratably to $4,000,000 in 2004. Under certain conditions, including the failure by the Company to effect an initial public offering by December 31, 1998, Faldo has the right to require the Company to repurchase the shares for $5,000,000 at which point the Company would have the right to terminate the agreement. F-15 SCHEDULE II ADAMS GOLF, INC. AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS CHARGED TO: BALANCE AT -------------------------- BALANCE AT BEGINNING COSTS AND END OF DESCRIPTION OF PERIOD EXPENSES OTHER DEDUCTIONS(1) PERIOD - -------------------------------------------- ---------- ------------ ------------ ------------- ------------ Allowance for doubtful accounts: Year ended December 31, 1995.............. $ -- $ 12,791 $ -- $ 12,791 $ -- ---------- ------------ ------------ ------------- ------------ ---------- ------------ ------------ ------------- ------------ Year ended December 31, 1996.............. $ -- $ 51,306 $ -- $ 25,107 $ 26,199 ---------- ------------ ------------ ------------- ------------ ---------- ------------ ------------ ------------- ------------ Year ended December 31, 1997.............. $ 26,199 $ 738,805 $ -- $ 66,663 $ 698,341 ---------- ------------ ------------ ------------- ------------ ---------- ------------ ------------ ------------- ------------ Three months ended March 31, 1998 (unaudited)............................. $ 698,341 $ 466,213 $ -- $ 37,723 $ 1,126,831 ---------- ------------ ------------ ------------- ------------ ---------- ------------ ------------ ------------- ------------ Product Warranty and Sales Returns: Year ended December 31, 1995.............. $ -- $ -- $ -- $ -- $ -- ---------- ------------ ------------ ------------- ------------ ---------- ------------ ------------ ------------- ------------ Year ended December 31, 1996.............. $ -- $ 1,733 $ -- $ 1,733 $ -- ---------- ------------ ------------ ------------- ------------ ---------- ------------ ------------ ------------- ------------ Year ended December 31, 1997.............. $ -- $ 1,808,154 $ -- $ 1,358,954 $ 449,200 ---------- ------------ ------------ ------------- ------------ ---------- ------------ ------------ ------------- ------------ Three months ended March 31, 1998 (unaudited)............................. $ 449,200 $ 1,078,407 $ -- $ 795,507 $ 732,100 ---------- ------------ ------------ ------------- ------------ ---------- ------------ ------------ ------------- ------------
- ------------------------ (1) Represents uncollectible accounts charged against the allowance for doubtful accounts and actual costs incurred for warranty repairs and sales returns. F-16 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED ON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH STATE. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ------------------------ TABLE OF CONTENTS
Page ----- Prospectus Summary............................. 3 Risk Factors................................... 6 Disclosure Regarding Forward-Looking Statements................................... 12 Use of Proceeds................................ 13 Dividend Policy................................ 13 Dilution....................................... 14 Capitalization................................. 15 Selected Consolidated Financial Information.... 16 Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 17 Business....................................... 22 Management..................................... 33 Certain Transactions........................... 42 Principal and Selling Stockholders............. 44 Description of Capital Stock................... 45 Shares Eligible for Future Sale................ 48 Underwriting................................... 49 Legal Matters.................................. 51 Experts........................................ 51 Additional Information......................... 51 Index to Financial Statements.................. F-1
--------------------- UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 5,750,000 SHARES [LOGO] COMMON STOCK ------------------- PROSPECTUS July , 1998 --------------------- LEHMAN BROTHERS NATIONSBANC MONTGOMERY SECURITIES LLC FERRIS, BAKER WATTS INCORPORATED - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. Set forth below are the expenses in connection with the issuance and distribution of the securities being registered hereby other than the underwriting discounts and commissions. All amounts are estimated except the Securities and Exchange Commission, Nasdaq National Market and NASD fees. Securities and Exchange Commission registration fee........................ $ 32,450 Nasdaq National Market listing and application fee......................... 95,000 NASD filing fee............................................................ 11,500 Legal fees and expenses (other than Blue Sky fees and expenses)............ * Blue Sky fees and expenses................................................. 5,000 Printing and engraving expenses............................................ * Accounting fees and expenses............................................... * Transfer Agent and Registrar fees and expenses............................. 10,000 Miscellaneous.............................................................. * --------- Total.................................................................... * --------- ---------
- ------------------------ * To be filed by amendment. The Company will bear all of the foregoing fees and expenses. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Article VII of the Registrant's Certificate of Incorporation provides that the Company shall indemnify its directors and officers to the fullest extent permitted by the DGCL. Section 145 of the DGCL permits a corporation, under specified circumstances, to indemnify its directors, officers, employees or agents against expenses (including attorneys' fees), judgments, fines and amounts paid in settlements actually and reasonably incurred by them in connection with any action, suit or proceeding brought by third parties by reason of the fact that they were or are directors, officers, employees or agents of the corporation, if such directors, officers, employees or agents acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful. In a derivative action (I.E., one by or in the right of the corporation), indemnification may be made only for expenses actually and reasonably incurred by directors, officers, employees or agents in connection with the defense or settlement of an action or suit, and only with respect to a matter as to which they shall have acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made if such persons shall have been adjudged liable to the corporation, unless and only to the extent that the court in which the action or suit was brought shall determine upon application that the defendant directors, officers, employees or agents are fairly and reasonably entitled to indemnity for such expenses, despite such adjudication of liability. Section 102(b)(7) of the DGCL permits a corporation organized under Delaware law to eliminate or limit the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director subject to certain limitations. Article IX of the Certificate of Incorporation includes the following provision: A director of this corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach II-1 of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL or (iv) for any transaction from which the director derived an improper personal benefit. If the DGCL is hereafter amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the DGCL, as so amended. Any repeal or modification of the foregoing provisions of this Article IX by the stockholders of the corporation shall not adversely affect any right or protection of a director of the corporation existing at the time of such repeal or modification. The Company may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, fiduciary, or agent of the Company against any liability asserted against and incurred by such person in any such capacity or arising out of such person's position, whether or not the Company would have the power to indemnify against such liability under the provisions of the Certificate of Incorporation or Bylaws of the Company. The Underwriting Agreement, the proposed form of which is filed herewith, contains provisions by which the Underwriters agree to indemnify the Registrant, each person who controls the Registrant within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, each director of the Registrant, and each officer of the Registrant who signs this Registration Statement which respect to information relating to such Underwriter furnished in writing by such Underwriter for use in the Registration Statement. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Since January 1, 1995, the Registrant has sold or issued the following securities: 1. From March 1995 through December 1995, the Registrant issued an aggregate of 266,478 shares of Common Stock to Faris McMullin, Richard Murtland and Hank Haney for services to the Company. The Board of Directors of the Company concluded that the value of such services to the Company exceeded the fair value of the shares, which was determined by the Board of Directors to be equal to approximately $.375 per share of Common Stock. 2. In September 1995, in connection with the Reorganization the Registrant issued an aggregate of 4,282,304 shares of Common Stock to the shareholders of Supershafts, Inc. ("Supershafts") in exchange for all of the then issued and outstanding shares of common stock of Supershafts. The Board of Directors of the Company concluded that the value of the consideration to the Company exceeded the fair value of the shares, which was determined by the Board of Directors to be equal to approximately $.375 per share of Common Stock. 3. In September 1995, in connection with the Reorganization the Registrant issued an aggregate of 1,545,102 shares of Common Stock to the holders of the Company's then outstanding Series A and Series B Preferred Stock in exchange therefor. The Board of Directors concluded that the value of the consideration to the Company exceeded the fair value of the shares, which was determined by the Board of Directors to be equal to approximately $.375 per share. 4. In September 1995, the Registrant sold an aggregate of 40,000 shares of Common Stock to Steve Adams for an aggregate purchase price of $15,000. 5. In September and October 1995, the Registrant sold an aggregate of 2,000,000 shares of Common Stock to Royal for an aggregate purchase price of $750,000. 6. In December 1995, the Registrant sold 2,000,000 shares of Common Stock to Roland Casati for $750,000. II-2 7. In June, 1996, the Registrant sold an aggregate of 770,000 shares of Common Stock to Royal, Roland Casati and Clyde and Peggy Smith for an aggregate purchase price of $246,400. 8. In October, 1996, the Registrant sold 699,526 shares of Common Stock to Finis Conner for an aggregate purchase price of $349,763. 9. In September 1997, the Registrant issued 900,000 shares of Common Stock to Royal in cancellation of certain indebtedness of the Registrant to Royal in the aggregate principal amount of $450,000. 10. In September, 1997, the Registrant issued 942,632 shares of Common Stock to Finis Conner upon exercise of stock options for an aggregate exercise price of $549,869 and subsequently, the Registrant issued an additional 344,618 shares of Common Stock to Mr. Conner upon exercise of stock options for an aggregate exercise price of $129,232. 11. In December 1997, the Registrant issued 2,000,000 shares to Barney Adams for his services to the Company. The Board of Directors of the Company concluded that the value of such services to the Company exceeded the fair value of the shares, which was determined by the Board of Directors to be $10,000,000. 12. From April 1996 to the date of this Registration Statement, the Registrant has issued 2,138,798 shares of Common Stock to employees who exercised options for an aggregate exercise price of $802,049. 13. As of the date of this Registration Statement, the Company has granted options to purchase up to 423,666 shares of Common Stock at a weighted average exercise price of $2.70 that have not been exercised. 14. Pursuant to an agreement between the Registrant and Nick Faldo dated April 22, 1998, the Registrant issued 900,000 shares to Nick Faldo in consideration for, among other things, Mr. Faldo's endorsement of certain products of the Registrant and his license of certain intellectual property rights to the Registrant. The Board of Directors of the Company concluded that the value of the consideration to be received by the Company under the agreement with Mr. Faldo exceeded the fair value of the shares, which was determined by the Board of Directors to be $10,125,000. All transactions described above were effected in reliance on the exemption from registration provided by Section 4(2) of the Securities Act, as transactions by an issuer not involving any public offering. The recipients of securities in each such transaction represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates issued in such transactions. All recipients had adequate access, through their relationships with the Registrant, to information about the Registrant. II-3 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits 1.1 Form of Underwriting Agreement* 3.1 Amended and Restated Certificate of Incorporation of the Registrant** 3.2 Amended and Restated Bylaws of the Registrant** 4.1 1998 Stock Incentive Plan of the Registrant dated February 26, 1998** 4.2 1996 Stock Option Plan dated April 10, 1996** 4.3 Registration Rights Agreement dated April 30, 1998, among the Registrant and certain stockholders of the Registrant** 4.4 Adams Golf, Ltd. 401(k) Retirement Plan 5.1 Opinion of Arter & Hadden LLP as to legality of securities being offered* 10.1 Agreement between the Registrant and Nick Faldo, dated April 22, 1998 10.2 Revolving Credit Agreement dated February 27, 1998, between Adams Golf Direct Response, Ltd., Adams Golf, Ltd. and NationsBank of Texas, N.A.** 10.3 Commercial Lease Agreement dated December 5, 1997, between Jackson-Shaw Technology Center II, Ltd. and the Registrant 10.4 Commercial Lease Agreement dated April 6, 1998 between Jackson-Shaw Technology Center II, Ltd. and the Registrant 10.5 Letter Agreement dated April 13, 1998, between the Registrant and Darl P. Hatfield 11.1 Computation of Income (Loss) Per Share 21.1 Subsidiaries of the Registrant** 23.1 Consent of Arter & Hadden LLP (included in their opinion filed as Exhibit 5.1)* 23.2 Consent of KPMG Peat Marwick LLP 23.3 Consent of Aquilino & Welsh 24.1 Power of Attorney (previously included on Page II-6)** 27.1 Financial Data Schedule**
- ------------------------ * To be filed by Amendment. ** Previously filed. (b) Financial Statement Schedules Set forth below is a list of the financial statements included as part of this Registration Statement: Schedule II--Valuation and Qualifying Accounts All other schedules have been intentionally omitted because they are either not required or the information has been included in the Notes to the Consolidated Financial Statements included as part of this Registration Statement. ITEM 17. UNDERTAKINGS. (F) EQUITY OFFERINGS OF NONREPORTING REGISTRANTS. The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such II-4 denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. (H) REQUEST FOR ACCELERATION OF EFFECTIVE DATE. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (I) RULE 430A. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as a part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For purposes of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Amendment No. 1 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Plano, State of Texas, on June 9, 1998. ADAMS GOLF, INC. By: /s/ DARL P. HATFIELD ----------------------------------------- Darl P. Hatfield SENIOR VICE PRESIDENT--FINANCE AND ADMINISTRATION AND CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed on the 9th day of June, 1998, below by or on behalf of the following persons in the capacities indicated. SIGNATURE TITLE - ------------------------------ -------------------------- Chairman of the Board, /s/ B.H. (BARNEY) ADAMS* Chief Executive Officer, - ------------------------------ and President (PRINCIPAL B.H. (Barney) Adams EXECUTIVE OFFICER) Senior Vice President--Finance and /s/ DARL P. HATFIELD Administration and Chief - ------------------------------ Financial Officer Darl P. Hatfield (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) Vice President--Research /s/ RICHARD H. MURTLAND* and Development, - ------------------------------ Secretary, Treasurer and Richard H. Murtland Director /s/ PAUL F. BROWN, JR.* - ------------------------------ Director Paul F. Brown, Jr. /s/ ROLAND E. CASATI* - ------------------------------ Director Roland E. Casati /s/ FINIS F. CONNER* - ------------------------------ Director Finis F. Conner - ------------------------------ Director Mark R. Mulvoy /s/ STEPHEN R. PATCHIN* - ------------------------------ Director Stephen R. Patchin *By: /s/ DARL P. HATFIELD ------------------------- Darl P. Hatfield ATTORNEY-IN-FACT II-6 EX-4.4 2 EXHIBIT 4.4 T. ROWE PRICE TRUST COMPANY SIMPLIFIED 401(K) PROTOTYPE PLAN BASIC DOCUMENT #07 ARTICLE 1. GENERAL 1.1 PURPOSE. The Employer hereby establishes this Plan to provide retirement, death and disability benefits for eligible Employees and their Beneficiaries. This Plan is a prototype defined contribution profit sharing plan. The provisions herein and the selections made by the Employer by execution of the Adoption Agreement shall constitute the Plan. It is intended that the Plan and Trust qualify under sections 401 and 501 of the Internal Revenue Code of 1986, as amended, and that it comply with the provisions of the Employee Retirement Income Security Act of 1974, as amended. 1.2 TRUST. The Employer has simultaneously adopted a Trust to receive, invest and distribute funds in accordance with the Plan. ARTICLE 2. DEFINITIONS 2.1 ACCOUNT. The aggregate of the individual bookkeeping subaccounts established for each Participant, as provided in Section 6.1. 2.2 ADOPTION AGREEMENT. The written agreement of the Employer and the Trustee by which the Employer establishes this Plan and adopts the Trust Agreement forming a part hereof, as the same may be amended from time to time. The Adoption Agreement contains all the options that may be selected by the Employer. The information set forth in the Adoption Agreement executed by the Employer shall be deemed to be a part of this Plan as if set forth in full herein. 2.3 AFFILIATED EMPLOYERS. The Employer and any corporation which is a member of a controlled group of corporations (as defined in section 414(b) of the Code) which includes the Employer, any trade or business (whether or not incorporated) which is under common control (as defined in section 414(c) of the Code) with the Employer, or any service organization (whether or not incorporated) which is a member of an affiliated service group (as defined in section 414(m) or (o) of the Code) which includes the Employer or any other entity (whether or not incorporated) which is aggregated with the Employer under section 414(o) of the Code. 2.4 BENEFICIARY The person or persons (natural orotherwise) designated by a Participant in accordance with Section 11.2(c) to receive any undistributed vested amounts credited to the Participant's Account under the Plan at the time of the Participant's death. 2.5 BREAK IN SERVICE. A Plan Year in which an Employee fails to complete more than 500 Hours of Service. 2.6 CODE. The Internal Revenue Code of 1986, as amended from time to time, or any successor statute. 2.7 COMPENSATION. Except for such amounts as the Employer may elect to exclude in the Adoption Agreement, Compensation shall be defined as follows: (a) Compensation will mean the information required to be reported under sections 6041 and 6051 of the Code. (Wages, Tips and Other Compensation Box on Form W-2.) Compensation is defined as wages within the meaning of section 3401(a) of the Code and all other payments of compensation to an Employee by the Employer (in the course of the Employer's trade or business) for which the Employer is required to furnish the Employee a written statement under sections 6041(d) and 6051(a)(3) of the Code. Compensation must be determined without regard to any rules under section 3401(a) of the Code that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in section 3401(a)(2) of the Code). Compensation shall include any amount which is contributed to a plan by the Employer pursuant to a salary reduction agreement and which is not includible in the gross income of the Employee under section 125, 402(a)(8), 402(h) or 403(b) of the Code. (b) For any Self-Employed Individual covered under the Plan, Compensation will mean Earned Income. (c) For Plan Years beginning after December 31, 1988, the annual compensation of each Participant taken into account for determining all benefits provided under the Plan for any year shall not exceed $200,000, as adjusted by the Secretary at the same time and in the same manner as under section 415(d) of the Code. If, during the first Plan Year or the last Plan Year, the Plan Year is less than 12 months, the $200,000 limit, as adjusted, shall be equal to such limit for such Plan Year multiplied by a fraction the numerator of which is the number of full months in such Plan Year and the denominator of which is 12. In determining the Compensation of a Participant for purposes of this limitation, the rules of section 414(q)(6) of the Code shall apply; except in applying such rules, the term "family" shall include only the spouse of the Participant and any lineal descendants of the Participant who have not attained age 19 before the close of the year. If, as a result of the application of such rules, the adjusted $200,000 limitation is exceeded, then the limitation shall be prorated among the affected individuals in proportion to each such individual's Compensation as determined under this Section prior to the application of this limitation. This subsection shall be effective in Plan Years beginning on or after January 1, 1989. (d) In addition to other applicable limitations set forth in the Plan, and notwithstanding any other provision of the Plan to the contrary, for Plan Years beginning on or after January 1, 1994, the annual compensation of each Employee taken into account under the Plan shall not exceed the OBRA '93 annual compensation limit. The OBRA '93 annual compensation limit is $150,000 as adjusted by the Commissioner for increases in the cost of living in accordance with section 401(a)(17)(B) of the Internal Revenue Code. The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which Compensation is determined (determination period) beginning in such calendar year. If a determination period consists of fewer that 12 months, the OBRA '93 annual compensation limit will be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is 12. For Plan Years beginning on or after January 1, 1994, any reference in this Plan to the limitation under section 401(a)(17) of the Code shall mean the OBRA '93 annual compensation limit set forth in this provision. If Compensation for any prior determination period id taken into account in determining an Employee's benefits accruing in the current Plan Year, the Compensation for that prior determination period is subject to the OBRA '93 annual compensation limit in effect for that prior determination period. For this purpose, for determination periods beginning before the first day of the first Plan Year beginning on or after January 1, 1994, the OBRA '93 annual compensation limit is $150,000. 2.8 EARNED INCOME. The net earnings from self-employment in the trade or business with respect to which the Plan is established, for which personal services of the individual are a material income-producing factor. Net earnings will be determined without regard to items not included in gross income and the deductions allocable to such items. Net earnings are reduced by contributions to a qualified plan to the extent deductible under section 404 of the Code. Net earnings shall be determined with regard to the deduction allowed to the Employer by section 164(f) of the Code for taxable years beginning after December 31, 1989. 2.9 EFFECTIVE DATE. The day on which the Plan is effective as specified in the Adoption Agreement. If the Employer is adopting this Plan as an amendment and restatement of an existing plan, the provisions of the existing plan shall apply prior to the Effective Date unless an earlier date is specified herein. 2.10 ELECTIVE DEFERRALS. Any employer contributions made to the Plan at the election of the Participant, in lieu of cash Compensation, pursuant to a salary reduction agreement or other deferral mechanism. With respect to any taxable year, a Participant's Elective Deferral is the sum of all such employer contributions made on behalf of such Participant pursuant to an election to defer under any qualified cash or deferred arrangement as described in section 401(k) of the Code, any simplified employee pension cash or deferred arrangement as described in section 402(h)(1)(B) of the Code, any eligible deferred compensation plan under section 457 of the Code, any plan as described in section 501(c)(18) of the Code and any employer contributions made on behalf of a Participant pursuant to a salary reduction agreement for the purchase of an annuity contract under section 403(b) of the Code. Elective Deferrals shall not include any deferrals properly distributed as excess Annual Additions as described in Section 7.1. 2.11 EMPLOYEE. Any person, including a Self-Employed Individual, who is employed by the Employer maintaining the Plan or any other employer required to be aggregated with such Employer under section 414(b), (c), (m) or (o) of the Code. The term "Employee" shall also include any Leased Employee. 2.12 EMPLOYEE AFTER-TAX CONTRIBUTIONS. Any contribution made to the Plan by or on behalf of a Participant before the Plan Year in which the Employer adopted this Plan that was included in the Participant's gross income in the year in which made and that is maintained under a separate subaccount to which earnings and losses are allocated. Employee After-Tax Contributions shall not be allowed in or after the Plan Year in which this Plan is adopted by the Employer. 2.13 EMPLOYER. The corporation, proprietorship, partnership or other organization that adopts the Plan by execution of an Adoption Agreement. 2.14 EMPLOYER DISCRETIONARY CONTRIBUTIONS. The contributions of the Employer to the Plan and Trust as set forth in Section 5.3(b) and the Adoption Agreement. 2.15 ENTRY DATES. The Entry Dates shall be the dates specified in the Adoption Agreement. 2.16 ERISA. The Employee Retirement Income Security Act of 1974, as amended. 2.17 FAMILY MEMBERS. The spouse, lineal ascendants and descendants of a Highly Compensated Employee and the spouses of such lineal ascendants and descendants. 2.18 FIVE PERCENT OWNER. Any person who owns (or is considered to own within the meaning of section 318 of the Code) more than 5% of the interests in the Employer. 2.19 HIGHLY COMPENSATED EMPLOYEE. (a) The term "Highly Compensated Employee" shall include highly- compensated active Employees and highly-compensated former Employees. (b) A highly-compensated active Employee includes any Employee who performs service for the Employer during the determination year and who, during the look-back year: (i) received Compensation from the Employer in excess of $75,000 (as adjusted pursuant to section 415(d) of the Code); (ii) received Compensation from the Employer in excess of $50,000 (as adjusted pursuant to section 415(d) of the Code) and was a member of the top-paid group for such year; or (iii) was an officer of the Employer and received Compensation during such year that is greater than 50% of the dollar limitation in effect under section 415(b)(1)(A) of the Code. (c) The term "Highly Compensated Employee" also includes: (i) Employees who are both described in the preceding subsection if the term "determination year" is substituted for the term "look-back year" and the Employee is one of the 100 Employees who received the most Compensation from the Employer during the determination year; and (ii) Employees who are Five Percent Owners at any time during the look-back year or determination year. (d) (i) If no officer has satisfied the Compensation requirement of subsection (b)(iii) above during either a determination year or look-back year, the highest paid officer for such year shall be treated as a Highly Compensated Employee. (ii) For this purpose, the determination year shall be the Plan Year. The look-back year shall be the twelve month period immediately preceding the determination year. (e) A highly-compensated former Employee includes any Employee who separated from service (or was deemed to have separated from service) prior to the determination year, performs no service for the Employer during the determination year, and was a highly-compensated active Employee for either the separation year or any determination year ending on or after the Employee's 55th birthday. (f) If an Employee is, during a determination year or look-back year, a Family Member of either a Five Percent Owner who is an active or former Employee or a Highly Compensated Employee who is one of the ten most Highly Compensated Employees ranked on the basis of Compensation paid by the Employer during such year, then the Family Member and Five Percent Owner or top ten Highly Compensated Employee shall be aggregated. In such case, the Family Member and Five Percent Owner or top ten Highly Compensated Employee shall be treated as a single Employee receiving Compensation and Plan contributions or benefits equal to the sum of such Compensation and contributions or benefits of the Family Member and Five Percent Owner or top ten Highly Compensated Employee. (g) For purposes of this Section, "compensation" shall include Section 415 Compensation plus any amount which is contributed to a plan by the Employer pursuant to a salary reduction agreement and which is not includible in the gross income of the Employee under section 125, 402(a)(8), 402(h) or 403(b) of the Code. (h) The determination of who is a Highly Compensated Employee, including the determinations of the number and identity of Employees in the top-paid group, the top 100 Employees, the number of Employees treated as officers and the Compensation that is considered, will be made in accordance with section 414(q) of the Code and the regulations thereunder. 2.20 HOUR OF SERVICE. (a) Each hour for which an Employee is paid, or entitled to payment, for the performance of duties for the Employer. These hours shall be credited to the Employee only for the computation period or periods in which the duties are performed. (b) Each hour for which an Employee is paid, or entitled to payment, by the Employer on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. No more than 501 Hours of Service shall be credited under this paragraph to an Employee on account of any single, continuous period during which the Employee performs no duties (whether or not such period occurs in a single computation period). Hours under this paragraph will be calculated and credited pursuant to section 2530.200b-2 of the Department of Labor regulations which are incorporated herein by this reference. (c) Each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Employer. The same Hours of Service shall not be credited both under paragraph (a) or paragraph (b), as the case may be, and under this paragraph (c). These hours shall be credited to the Employee for the computation period or periods to which the award or agreement pertains rather than the computation period in which the award, agreement, or payment is made. (d) Solely for purposes of determining whether an Employee has a Break in Service, Hours of Service shall also include an uncompensated authorized leave of absence not in excess of two years, or military leave while the Employee's reemployment rights are protected by law or such additional or other periods as granted by the Employer as military leave (credited on the basis of 40 Hours of Service per week or eight Hours of Service per working day), provided the Employee returns to employment at the end of his leave of absence or within 90 days of the end of his military leave, whichever is applicable. (e) Hours of Service will be credited for employment with other members of an affiliated service group (under section 414(m) of the Code), a controlled group of corporations (under section 414(b) of the Code), or a group of trades or businesses under common control (under section 414(c) of the Code) of which the adopting Employer is a member, and any other entity required to be aggregated with the Employer pursuant to section 414(o) of the Code and the regulations thereunder. Hours of Service will also be credited for any individual considered an Employee for purposes of this Plan under section 414(n) or (o) of the Code and the regulations thereunder. (f) Solely for purposes of determining whether an Employee has a Break in Service, Hours of Service shall also include absence from work for maternity or paternity reasons, if the absence begins on or after the first day of the first Plan Year beginning after 1984. During this absence, the Employee shall be credited with the Hours of Service which would have been credited but for the absence, or, if such hours cannot be determined, with eight (8) hours per day. An absence from work for maternity or paternity reasons means an absence: (i) by reason of the pregnancy of an Employee; (ii) by reason of the birth of a child of the Employee; (iii) by reason of the placement of a child with the Employee in connection with adoption; or (iv) for purposes of caring for such a child for a period immediately following such birth or placement. These Hours of Service shall be credited in the computation period following the computation period in which the absence begins, except as necessary to prevent a Break in Service in the computation period in which the absence begins. However, no more than 501 Hours of Service will be credited for purposes of any such maternity or paternity absence from work. (g) Hours of Service will be determined on the actual hours for which an Employee is paid or entitled payment. (h) If the Employer amends the method of crediting service from the elapsed time method described in section 1.410(a)-7 of the Treasury Regulations to the Hours of Service computation method by the adoption of this Plan, or an Employee transfers from a plan under which service is determined on the basis of elapsed time, the following rules shall apply for purposes of determining the Employee's service under this Plan up to the time of amendment or transfer: (i) The Employee shall receive credit, as of the date of amendment or transfer, for a number of Years of Eligibility Service and Years of Vesting Service equal to the number of one year periods of eligibility service and vesting service, respectively, credited to the Employee as of the date of the amendment or transfer; and (ii) The Employee shall receive credit in the applicable computation period which includes the date of amendment or transfer for a number of Hours of Service determined in accordance with paragraph (g). 2.21 LEASED EMPLOYEE. (a) Any person (other than an Employee of any of the Affiliated Employers) who, pursuant to an agreement between any of the Affiliated Employers and any other person ("leasing organization"), has performed service for any of the Affiliated Employers (or for any of the Affiliated Employers and related persons determined in accordance with section 414(n)(6) of the Code) on a substantially full-time basis for a period of at least one year and such services are of a type historically performed by employees in the Affiliated Employer's business field. Contributions or benefits provided a Leased Employee by the leasing organization which are attributable to services performed for the Affiliated Employer shall be treated as provided by the Affiliated Employer. (b) A Leased Employee shall not be considered an Employee of an Affiliated Employer if: (i) such Employee is covered by a money purchase pension plan providing: (A) a nonintegrated employer contribution rate of at least 10% of Section 415 Compensation but including amounts contributed pursuant to a salary reduction agreement which are excludable from the Employee's gross income under section 125, 402(a)(8), 402(h) or 403(b) of the Code; (B) immediate participation; and (C) full and immediate vesting. and (ii) Leased Employees do not constitute more than 20% of the Affiliated Employer's non-highly compensated workforce. (c) The determination of whether a person is a Leased Employee will be made pursuant to section 414(n) of the Code and the regulations thereunder. 2.22 MATCHING CONTRIBUTIONS. A contribution by the Employer made to this or any other defined contribution plan on behalf of a Participant on account of a Participant's Elective Deferral or on account of a Participant's voluntary contributions under a plan maintained by the Employer. Matching Contributions to this Plan shall be made as set forth in Section 5.3(a) and the Adoption Agreement. 2.23 NON-HIGHLY COMPENSATED EMPLOYEE. An Employer who is neither a Highly Compensated Employee nor a Family Member of a Highly Compensated Employee. 2.24 NORMAL RETIREMENT AGE. Unless otherwise specified in the Adoption Agreement, Normal Retirement Age shall be age 65. 2.25 OWNER-EMPLOYEE. An individual who is a sole proprietor or who is a partner owning more than 10% of either the capital or profits interest of a partnership. If this Plan provides contributions or benefits for one or more Owner-Employees who control both the business for which this Plan is established and one or more other trades or businesses, this Plan and the plan established for the other trades or businesses must, when looked at as a single Plan, satisfy section 401(a) and (d) of the Code for the Employees of this and all such other trades or businesses. If the Plan provides contributions or benefits for one or more Owner-Employees who control one or more other trades or businesses, the employees of the other trades or businesses must be included in a plan which satisfies section 401(a) and (d) of the Code and which provides contributions and benefits not less favorable than provided for Owner-Employees under this Plan. If an individual is covered as an Owner-Employee under the plans of two or more trades or businesses which are not controlled and the individual controls a trade or business, then the contributions or benefits of the employees under the plan of the trades or businesses which are controlled must be as favorable as those provided for him under the most favorable plan of the trade or business which is not controlled. For purposes of the preceding paragraphs, an Owner-Employee, or two or more Owner-Employees, will be considered to control a trade or business if the Owner-Employee, or two or more Owner-Employees together: (a) own the entire interest in an unincorporated trade or business, or (b) in the case of a partnership, own more than 50% of either the capital interest or the profits interest in the partnership. For purposes of the preceding sentence, an Owner-Employee, or two or more Owner-Employees shall be treated as owning any interest in a partnership which is owned, directly or indirectly, by a partnership which such Owner-Employee, or such two or more Owner-Employees, are considered to control within the meaning of the preceding sentence. 2.26 PARTICIPANT. A person who has met the eligibility requirements of Section 3.1 and whose Account hereunder has been neither completely forfeited nor completely distributed. 2.27 PLAN. This 401(k) prototype plan, as amended from time to time, and the Adoption Agreement executed by the Employer and Trustee. 2.28 PLAN ADMINISTRATOR. The Employer. 2.29 PLAN YEAR. Unless otherwise specified in the Adoption Agreement, the Plan Year shall be the calendar year. 2.30 SECTION 415 COMPENSATION. A Participant's Earned Income, wages, salaries and fees for professional services and other amounts received (without regard to whether an amount is paid in cash) or made available for personal services actually rendered in the course of employment with the Employer maintaining the Plan (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses and reimbursements or other expense allowances under a nonaccountable plan (as described in Code Regulation 1.62-2(c)), but excluding the following: (a) Employer contributions to a plan of deferred compensation which are not includible in the Employee's gross income for the taxable year in which contributed, or Employer contributions under a simplified employee pension plan to the extent such contributions are excluded from the Employee's gross income, or any distributions from a plan of deferred compensation; (b) Amounts realized from the exercise of a nonqualified stock option, or when restricted stock (or property) held by the Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (c) Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and (d) Other amounts which received special tax benefits, or contributions made by the Employer (whether or not under a salary reduction agreement) towards the purchase of an annuity contract described in section 403(b) of the Code (whether or not the contributions are actually excludable from the gross income of the Employee). For Plan Years beginning after December 31, 1988, Section 415 Compensation for any Plan Year shall be limited as provided in Section 2.7(c). 2.31 SELF-EMPLOYED INDIVIDUAL. An individual who has Earned Income for the taxable year from the trade or business for which the Plan is established, or an individual who would have had Earned Income for the taxable year but for the fact that the trade or business had no net profits for the taxable year. 2.32 SHARES. Shares of stock in any regulated investment company registered under the Investment Company Act of 1940 the investment advisor of which is T. Rowe Price Associates, Inc., or units in any common trust fund or collective investment fund of the Sponsor qualified under sections 401 and 501 of the Code, that are made available by the Sponsor for investment purposes as an investment option under this Plan. 2.33 SPONSOR. T. Rowe Price Trust Company. 2.34 TOTAL COMPENSATION. Compensation plus any amounts the Employer elected to exclude from the definition of Compensation in the Adoption Agreement - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2.35 TOTAL AND PERMANENT DISABILITY. The inability of the Participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment, which condition, in the opinion of a physician chosen by the Plan Administrator, can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve months; provided, however, that Total and Permanent Disability shall not include an illness or injury caused by or connected with a Participant's service in the armed forces of any country, or his alcoholism or addiction to narcotics or other drugs, or his engaging in a criminal act, or resulting from his effort to bring about the illness, injury or death of himself or any other person. 2.36 TRUST. The fund maintained by the Trustee for the investment of Plan assets in accordance with the terms and conditions of the Trust Agreement. 2.37 TRUST AGREEMENT. The agreement between the Employer and the Trustee under which the assets of the Plan are held, administered and managed. The provisions of the Trust Agreement shall be considered an integral part of this Plan as if set forth fully herein. 2.38 TRUSTEE. The individual or corporate Trustee or Trustees under the Trust Agreement as they may be named from time to time in the Adoption Agreement. 2.39 VALUATION DATE. Each day of the Plan Year. 2.40 YEAR OF ELIGIBILITY SERVICE. Except as provided below, a Year of Eligibility Service is an eligibility computation period during which an Employee completes at least 1,000 Hours of Service. For this purpose, the initial eligibility computation period shall be the twelve consecutive month period beginning with the day the Employee first performs an Hour of Service for the Employer. Successive eligibility computation periods shall commence on the first day of each Plan Year beginning after the date on which the Employee first completes an Hour of Service for the Employer. AN EMPLOYEE WHO IS CREDITED WITH 1,000 HOURS OF SERVICE IN BOTH THE INITIAL ELIGIBILITY COMPUTATION PERIOD AND THE PLAN YEAR BEGINNING IMMEDIATELY AFTER THE DATE ON WHICH THE EMPLOYEE FIRST COMPLETES AN HOUR OF SERVICE FOR THE EMPLOYER WILL BE CREDITED WITH TWO YEARS OF ELIGIBILITY SERVICE. Notwithstanding the foregoing, if the Employer selects a Year of Service in the Adoption Agreement that is a fraction of a Year of Service, an Employee shall not be required to complete any specified number of Hours of Service to receive credit for such fractional year. 2.41 YEAR OF VESTING SERVICE. A Plan Year during which an Employee completes at least 1,000 Hours of Service. - -------------------------------------------------------------------------------- ARTICLE 3. ELIGIBILITY AND YEARS OF SERVICE 3.1 ELIGIBILITY REQUIREMENTS. (a) GENERAL RULE. Subject to subsection (b) below and any contrary designation made by the Employer in the Adoption Agreement, each Employee of the Affiliated Employers shall become a Participant in the Plan as of the first Entry Date after the date on which the Employee has satisfied the minimum age and service requirements, if any, specified in the Adoption Agreement. Notwithstanding the foregoing, nonresident aliens (within the meaning of section 7701(b)(1)(B) of the Code) who receive no Earned Income (within the meaning of section 911(d)(2) of the Code) from the Employer which constitutes income from sources within the United States (within the meaning of section 861(a)(3) of the Code) shall not be eligible to participate in the Plan. (b) EXCLUDABLE EMPLOYEES. The Employer may elect in the Adoption Agreement to exclude from participation Employees included in a unit of employees covered by a collective bargaining agreement between the Employer and employee representatives, if retirement benefits were the subject of good faith bargaining. For this purpose, the term "employee representatives" does not include any organization more than half of whose members are employees who are owners, officers or executives of the Employer. (c) CHANGE IN STATUS. In the event an Employee who is not a member of an eligible class of Employees becomes a member of an eligible class, such Employee will participate immediately if such Employee has satisfied the minimum age and service requirements specified in the Adoption Agreement and otherwise would have previously become a Participant. In the event a Participant is no longer a member of an eligible class of Employees and becomes ineligible to participate, such Employee will participate immediately upon returning to an eligible class of Employees. 3.2 PARTICIPATION AND SERVICE UPON REEMPLOYMENT. Upon the reemployment of any Employee, the following rules shall determine his eligibility to participate in the Plan and his credit for prior service. (a) PARTICIPATION. If the reemployed Employee was a Participant in the Plan during his prior period of employment, he shall be eligible upon reemployment to resume participation in the Plan if he is in a class of eligible Employees. If he is not a member of an eligible class upon reemployment, such Employee will participate immediately upon returning to a class of eligible Employees. If the reemployed Employee was not a Participant in the Plan, he shall be considered a new Employee and required to meet the requirements of Section 3.1 in order to be eligible to participate in the Plan. (b) CREDIT FOR PRIOR SERVICE. In the case of any Employee who is reemployed before or after incurring a Break in Service, any Hour of Service and Year of Eligibility Service credited to the Employee at the end of his prior period of employment shall be reinstated as of the date of his reemployment. 3.3 PREDECESSOR EMPLOYERS. Except as provided in the Adoption Agreement, no credit will be given for service with a predecessor employer, except that if this Plan is a continuation of a predecessor plan, service under the predecessor plan must be counted. - -------------------------------------------------------------------------------- 17 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ARTICLE 4. TRUST FUND 4.1 RECEIPT OF CONTRIBUTIONS BY TRUSTEE. All contributions to the Trust that are received by the Trustee, together with any earnings thereon, shall be held, managed and administered by the Trustee in accordance with the terms and conditions of the Trust Agreement and the Plan. The Trustee shall be subject to the proper directions of the Employer made in accordance with the terms of the Plan and ERISA. 4.2 INVESTMENT RESPONSIBILITY. (a) INVESTMENT CHOICES. The selection of the investments in which assets of the Trust may be invested shall be the responsibility of the Employer. (b) PARTICIPANT DIRECTION. Subject to such reasonable restrictions as may be imposed by the Employer, each Participant or Beneficiary shall be permitted to select the investments in his Account. The Employer must complete and forward to the Trustee a schedule of Participant designations. No person, including the Trustee and the Plan Administrator, shall be liable for any loss or for any breach of fiduciary duty which results from a Participant's or Beneficiary's exercise of control. All investment related expenses, including administrative fees charged by brokerage houses, will be charged against the Accounts of the Participants. (c) CHANGE IN INVESTMENT CHOICES. The Employer may at any time change the selection of investments in which the assets of the Trust may be invested, or subject to such reasonable restrictions as may be imposed by the Sponsor for administrative convenience, may submit an amended schedule of Participant designations to the Trustee. Such amended documents may provide for a variance in the percentages of contributions to any particular investment or a request that Shares in the Trust be reinvested in whole or in part in other Shares. 4.3 INVESTMENT LIMITATIONS. All Trust assets must be invested in Shares. - -------------------------------------------------------------------------------- ARTICLE 5. CONTRIBUTIONS 5.1 PAYMENT. All contributions, including rollover contributions, to the Plan must be made in U.S. currency, by check, wire transfer or ACH credit. All Employer contributions to the Trust for any Plan Year shall be made either in one lump sum or in installments within the time prescribed by law, including extensions granted by the Internal Revenue Service, for filing the Employer's federal income tax return for the taxable year with or within which such Plan Year ends. 5.2 EMPLOYEE CONTRIBUTIONS. (a) AFTER-TAX CONTRIBUTIONS. Beginning with the Plan Year in which this Plan is adopted by the Employer, no Participant shall be permitted to make Employee After-Tax Contributions to the Plan. (b) EMPLOYEE ELECTIVE DEFERRALS. (i) If the Adoption Agreement so provides and the Employer elects, a Participant may make Elective Deferrals to the Trust in amounts not to exceed the limitations specified in the Adoption Agreement or any other limitations specified in this Plan. A Participant's Elective Deferrals shall be made by direct reduction of Compensation, with such reduction to be accomplished through regular payroll reduction. (ii) The Elective Deferrals of a Participant shall be limited in accordance with the provisions of this subsection, Sections 5.7(a), 5.8(a), 7.1 and 10.2(c) and any other applicable provisions of the Plan. No Participant shall be permitted to have Elective Deferrals made under this Plan, or any other qualified plan maintained by the Employer, during any taxable year, in excess of the dollar limitation contained in section 402(g) of the Code in effect at the beginning of such taxable year. (iii) Participants may elect to commence Elective Deferrals at least once each Plan Year during a period established by the Employer. Such election may not be made retroactively and the election must remain in effect until modified or terminated. Participants may terminate the election or change the amounts designated to be deducted at any time and such changes will become effective on the next payroll period following by at least ten days the submission of such change of designation to the Plan Administrator, unless a shorter period is agreed to by the Plan Administrator. (iv) No contributions or benefits (other than Matching Contributions or Qualified Matching Contributions) may be conditioned upon an Employee's Elective Deferrals. (c) ROLLOVERS. Subject to the approval of the Plan Administrator, a Participant, or an Employee who would otherwise be eligible to participate in the Plan but for the failure to satisfy any service condition for eligibility to participate, who has participated in any other qualified plan described in section 401(a) of the Code or in a qualified annuity plan described in section 403(a) of the Code shall be permitted to make a rollover (or direct rollover) contribution to the Trustee of all or part of an amount received by such individual that is attributable to participation in such other plan (reduced by any nondeductible voluntary contributions he made to the plan), provided that the rollover contribution complies with all requirements of section 402(a)(5), 403(a)(4) or 408(d)(3)(A)(ii) of the Code, whichever is applicable. Before approving such a rollover, the Plan Administrator may request from the individual or the sponsor of such other plan any documents that the Plan Administrator, in its discretion, deems necessary to determine that such rollover meets the preceding requirements. (d) PLAN-TO-PLAN TRANSFERS. Beginning with the Plan Year in which this Plan is adopted by the Employer, no Participant shall be permitted to make a direct plan-to-plan transfer of all or part of his benefits in any other plan. 5.3 EMPLOYER CONTRIBUTIONS. (a) MATCHING CONTRIBUTIONS. If the Employer elects in the Adoption Agreement to make Matching Contributions, for each Plan Year the Employer shall contribute to the Trust an amount as shall be determined by the Employer in accordance with the matching contribution formula specified in the Adoption - -------------------------------------------------------------------------------- 18 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Agreement. Subject to the minimum top-heavy allocation rules of Section 6.3 and the exclusions specified in this Section, Matching Contributions shall be made on behalf of those Participants specified by the Employer in the Adoption Agreement. (b) DISCRETIONARY CONTRIBUTIONS. If the Employer elects in the Adoption Agreement to make Discretionary Contributions, the Employer may contribute to the Trust an amount as may be determined by the Employer for each Plan Year. Subject to the minimum top-heavy allocation rules of Section 6.3 and the exclusions specified in this Section, and except as provided in the Adoption Agreement, each Participant (i) who completes at least 500 Hours of Service during the Plan Year, (ii) who is employed by the Employer on the last day of the Plan Year (REGARDLESS OF HIS HOURS OF SERVICE), or (iii) whose employment with the Employer terminates during the Plan Year by reason of death, retirement on or after Normal Retirement Age or Total and Permanent Disability (regardless of his Hours of Service) shall be eligible to share in the Employer Discretionary Contribution for such Plan Year. (c) CONTRIBUTION LIMITATION. In no event shall any Employer contribution (plus any Elective Deferrals) exceed the maximum amount deductible from the Employer's income under section 404 of the Code or the maximum limitations under section 415 of the Code provided in Article 7. 5.4 EXCESS ELECTIVE DEFERRALS. (a) GENERAL. A Participant may assign to this Plan any Excess Elective Deferrals made during a taxable year of the Participant by notifying the Plan Administrator on or before March 1 following the close of the Participant's taxable year of the Excess Elective Deferrals to be assigned to the Plan. (A Participant is deemed to notify the Plan Administrator of any Excess Elective Deferrals that arise by taking into account only those Elective Deferrals made to this Plan and any other plans of this Employer.) Notwithstanding any other provision of the Plan, Excess Elective Deferrals, plus any income and minus any loss allocable thereto, shall be distributed after the preceding taxable year and no later than April 15 following the close of the preceding taxable year to any Participant to whose Account Excess Elective Deferrals were assigned for the preceding year and who claims Excess Elective Deferrals for such taxable year. (b) CALCULATION OF INCOME OR LOSS. The income or loss allocable to Excess Elective Deferrals is equal to the amount of income or loss allocable to the Participant's Elective Deferral subaccount for the taxable year multiplied by a fraction, the numerator of which is such Participant's Excess Elective Deferrals for the year and the denominator of which is the Participant's account balance attributable to Elective Deferrals without regard to any income or loss occurring during such taxable year. (c) TAX TREATMENT. Excess Elective Deferrals that are distributed after April 15 are includible in the Participant's gross income in both the taxable year in which deferred and the taxable year in which distributed. (d) FORFEITURE OF CERTAIN MATCHING CONTRIBUTIONS. All Matching Contributions (whether or not vested) that were made on account of an Excess Elective Deferral that has been distributed in accordance with this Section 5.4 shall be forfeited before the last day of the twelve-month period immediately following the close of the taxable year in which such Excess Elective Deferrals were made. 5.5 ACTUAL DEFERRAL PERCENTAGE TEST. (a) GENERAL TEST. The Actual Deferral Percentage (hereinafter "ADP") for Participants who are Highly Compensated Employees for each Plan Year and the ADP for Participants who are Non-Highly Compensated Employees for the same Plan Year must satisfy one of the following tests: (i) The ADP for Participants who are Highly Compensated Employees for the Plan Year shall not exceed 125% of the ADP for Participants who are Non-Highly Compensated Employees for the same Plan Year; or (ii) The ADP for Participants who are Highly Compensated Employees for the Plan Year shall not exceed 200% of the ADP for Participants who are Non-Highly Compensated Employees for the same Plan Year, provided that the ADP for Participants who are Highly Compensated Employees does not exceed the ADP for Participants who are Non-Highly Compensated Employees by more than two percentage points. (b) SPECIAL RULES. (i) The ADP for any Participant who is a Highly Compensated Employee for the Plan Year, and who is eligible to have Elective Deferrals (and Qualified Nonelective Contributions or Qualified Matching Contributions, or both, if treated as Elective Deferrals for purposes of the ADP test) allocated to his Accounts under two or more cash or deferred arrangements described in section 401(k) of the Code that are maintained by the Employer, shall be determined as if such Elective Deferrals (and, if applicable, such Qualified Nonelective Contributions or Qualified Matching Contributions, or both) were made under a single arrangement. If a Highly Compensated Employee participates in two or more cash or deferred arrangements that have different plan years, all cash or deferred arrangements ending with or within the same calendar year shall be treated as a single arrangement. Notwithstanding the foregoing, certain plans shall be treated as separate if mandatorily disaggregated under regulations under section 401(k) of the Code. (ii) In the event that this Plan satisfies the requirements of section 401(k), 401(a)(4) or 410(b) of the Code only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such sections of the Code only if aggregated with this Plan, then this Section shall be applied by determining the ADP of Employees as if all such plans were a single plan. Plans may be aggregated in order to satisfy section 401(k) of the Code only if they have the same plan year. (iii) For purposes of determining the ADP of a Participant who is a Five Percent Owner or one of the ten most highly-paid Highly Compensated Employees, the Elective Deferrals (and Qualified Nonelective Contributions or Qualified Matching Contributions, or both, if treated as Elective Deferrals for purposes of the ADP test) and Total Compensation of such Participant shall include the Elective Deferrals (and, if applicable, Qualified Nonelective Contributions and Qualified Matching Contributions) and Total Compensation for the Plan Year of Family Members. Family Members, with respect to such Highly Compensated Employees, shall be disregarded as separate Employees in determining the ADP both for Participants who are Non-Highly Compensated Employees and for Participants who are Highly Compensated Employees. (iv) For purposes of applying the ADP test, Elective Deferrals, Qualified Nonelective Contributions and Qualified Matching Contributions must be made before the last day of the twelve-month period immediately following the Plan Year to which contributions relate. - -------------------------------------------------------------------------------- 19 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (v) The Employer shall maintain records sufficient to demonstrate satisfaction of the ADP test and the amount of Qualified Nonelective Contributions or Qualified Matching Contributions, or both, used in such test. (vi) The determination and treatment of the ADP amounts of any Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. 5.6 AVERAGE CONTRIBUTION PERCENTAGE TEST. (a) GENERAL TEST. The Average Contribution Percentage (hereinafter "ACP") for Participants who are Highly Compensated Employees for each Plan Year and the ACP for Participants who are Non-Highly Compensated Employees for the same Plan Year must satisfy one of the following tests: (i) The ACP for Participants who are Highly Compensated Employees for the Plan Year shall not exceed the ACP for Participants who are Non-Highly Compensated Employees for the same Plan Year multiplied by 1.25; or (ii) The ACP for Participants who are Highly Compensated Employees for the Plan Year shall not exceed 200% of the ACP for Participants who are Non-Highly Compensated Employees for the same Plan Year, provided that the ACP for Participants who are Highly Compensated Employees does not exceed the ACP for Participants who are Non-Highly Compensated Employees by more than two percentage points. (b) SPECIAL RULES. (i) The Contribution Percentage for any Participant who is a Highly Compensated Employee and who is eligible to have Contribution Percentage Amounts allocated to his or her Account under two or more plans described in section 401(a) of the Code, or cash or deferred arrangements described in section 401(k) of the Code, that are maintained by the Employer shall be determined as if the total of such Contribution Percentage Amounts was made under each plan. If a Highly Compensated Employee participates in two or more cash or deferred arrangements that have different plan years, all cash or deferred arrangements ending with or within the same calendar year shall be treated as a single arrangement. Notwithstanding the foregoing, certain plans shall be treated as separate if mandatorily disaggregated under regulations under section 401(m) of the Code. (ii) In the event that this Plan satisfies the requirements of section 401(m), 401(a)(4) or 410(b) of the Code only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such sections of the Code only if aggregated with this Plan, then this Section shall be applied by determining the Contribution Percentage of Employees as if all such plans were a single plan. Plans may be aggregated in order to satisfy section 401(m) of the Code only if they have the same plan year. (iii) For purposes of determining the Contribution Percentage of a Participant who is a Five Percent Owner or one of the ten most highly-paid Highly Compensated Employees, the Contribution Percentage Amounts and Total Compensation of such Participant shall include the Contribution Percentage Amounts and Total Compensation for the Plan Year of Family Members. Family Members, with respect to Highly Compensated Employees, shall be disregarded as separate Employees in determining the Contribution Percentage both for Participants who are Non-Highly Compensated Employees and for Participants who are Highly Compensated Employees. (iv) For purposes of applying the ACP test, Matching Contributions and Qualified Nonelective Contributions will be considered made for a Plan Year if made no later than the end of the twelve-month period beginning on the day after the close of the Plan Year. (v) If one or more Highly Compensated Employees participate in both a cash or deferred arrangement and a plan subject to the ACP test maintained by the Employer and the sum of the ADP and ACP of those Highly Compensated Employees subject to either or both tests exceeds the Aggregate Limit, then the ACP of those Highly Compensated Employees who also participate in a cash or deferred arrangement will be reduced (beginning with such Highly Compensated Employee whose ACP is the highest) so that the limit is not exceeded. The amount by which each Highly Compensated Employee's Contribution Percentage Amounts is reduced shall be treated as an Excess Aggregate Contribution. The ADP and ACP of the Highly Compensated Employees are determined after any corrections required to meet the ADP and ACP tests. Impermissible multiple use does not occur if either the ADP or ACP of the Highly Compensated Employees does not exceed 1.25 multiplied by the ADP and ACP of the Non-Highly Compensated Employees. (vi) The Employer shall maintain records sufficient to demonstrate satisfaction of the ACP test and the amount of Elective Deferrals, Qualified Nonelective Contributions or Qualified Matching Contributions used in such test. (vii) The determination and treatment of the Contribution Percentage of any Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. 5.7 PREVENTION OR CURE OF ADP TEST FAILURES. The Plan Administrator may, in its sole discretion, use any one or a combination of the following methods to prevent or cure any ADP test failure in accordance with section 401(k) of the Code and the regulations thereunder: (a) The Plan Administrator may refuse to accept any or all prospective Elective Deferrals to be contributed by a Highly Compensated Employee. (b) The Plan Administrator may distribute any or all Excess Contributions in accordance with the provisions of Section 5.9. (c) The Employer may, in its sole discretion, elect to contribute a Qualified Nonelective Contribution in accordance with the provisions of Section 5.10. (d) Subject to the requirements of Section 5.11, the Employer may, in its sole discretion, elect to treat Qualified Matching Contributions as if they were Elective Deferrals for purposes of the ADP test. 5.8 PREVENTION OR CURE OF ACP TEST FAILURES. The Plan Administrator may, in its sole discretion, use any one or a combination of the following methods to prevent or cure any ACP test failure in accordance with section 401(m) of the Code and the regulations thereunder: (a) The Plan Administrator may refuse to accept any or all prospective Elective Deferrals to be contributed by a Highly Compensated Employee. - -------------------------------------------------------------------------------- 20 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (b) The Plan Administrator may elect to contribute a Qualified Matching Contribution in accordance with the provisions of Section 5.11. (c) The Plan Administrator may forfeit, if forfeitable, or distribute, if not forfeitable, Excess Aggregate Contributions in accordance with Section 5.12. (d) The Plan Administrator may elect to treat Qualified Nonelective Contributions or Elective Deferrals, or both, as if they were Matching Contributions for purposes of the ACP test, subject to the requirements of Section 5.13(e). 5.9 DISTRIBUTION OF EXCESS CONTRIBUTIONS TO CURE ADP TEST FAILURE. (a) GENERAL RULE. Notwithstanding any other provision of this Plan, Excess Contributions for a Plan Year, plus any income and minus any loss allocable thereto, shall be distributed after the close of such Plan Year and no later than twelve months after the close of such Plan Year to Participants to whose Accounts such Excess Contributions were allocated. (If such excess amounts are distributed more than 22 months after the last day of the Plan Year in which such excess amounts arose, a 10% excise tax on such amounts will be imposed on the Employer.) Such distributions shall be made to Highly Compensated Employees on the basis of the respective portions of the Excess Contributions attributable to each of such Employees. Excess Contributions of Participants who are subject to the Family Member aggregation rules shall be allocated among the Family Members in proportion to the Elective Deferrals (and amounts treated as Elective Deferrals) of each Family Member that is combined to determine the combined ADP. (b) CALCULATION OF INCOME OR LOSS. The income or loss allocable to Excess Contributions is equal to the amount of income or loss allocable to the Participant's Elective Deferral subaccount (and, if applicable, the Qualified Nonelective Contribution subaccount or the Qualified Matching Contribution subaccount, or both) for the Plan Year multiplied by a fraction, the numerator of which is such Participant's Excess Contributions for the Plan Year and the denominator of which is the Participant's account balance attributable to Elective Deferrals (and Qualified Nonelective Contributions or Qualified Matching Contributions, or both, if any of such contributions are included in the ADP test) without regard to any income or loss occurring during such Plan Year. (c) METHOD OF DISTRIBUTION. Excess Contributions shall be distributed from the Participant's Elective Deferral subaccount and Qualified Matching Contribution subaccount (if applicable) in proportion to the Participant's Elective Deferrals and Qualified Matching Contributions (to the extent used in the ADP test) for the Plan Year. Excess Contributions shall be distributed from the Participant's Qualified Nonelective Contribution subaccount only to the extent that such Excess Contributions exceed the balance in the Participant's Elective Deferral subaccount and Qualified Matching Contribution subaccount. (d) FORFEITURE OF CERTAIN MATCHING CONTRIBUTIONS. Any Matching Contribution (whether or not vested) that was made on account of an Excess Contribution that has been distributed in accordance with this Section 5.9 shall be forfeited no later than twelve months after the close of the Plan Year in which such Excess Contribution occurred. 5.10 QUALIFIED NONELECTIVE CONTRIBUTIONS TO CURE ADP AND/OR ACP TEST FAILURE. The Employer may, in its sole discretion, elect to contribute a Qualified Nonelective Contribution in an amount necessary to cure any ADP and/or ACP test failure for a Plan Year within twelve months after the close of such Plan Year. Qualified Nonelective Contributions for a Plan Year shall be allocated to the Accounts of Participants who are not Highly Compensated Employees and who would be eligible for an allocation of Employer Discretionary Contributions in accordance with Section 5.3(b) in the ratio in which each such Participant's Compensation for such Plan Year bears to the Total Compensation of all such Participants for such Plan Year. 5.11 QUALIFIED MATCHING CONTRIBUTION TO CURE ADP AND/OR ACP TEST FAILURE. The Employer may, in its sole discretion, elect to contribute a Qualified Matching Contribution in an amount necessary to cure any ADP and/or ACP test failure for a Plan Year within twelve months after the close of such Plan Year. Qualified Matching Contributions for a Plan Year shall be allocated to the Accounts of Participants who are not Highly Compensated Employees and who would be eligible for an allocation of Matching Contributions in accordance with Section 5.3(a) in the ratio in which each such Participant's Elective Deferrals for such Plan Year bear to the total Elective Deferrals of all such Participants for such Plan Year. 5.12 FORFEITURE AND/OR DISTRIBUTION OF EXCESS AGGREGATE CONTRIBUTIONS. Notwithstanding any other provision of this Plan, Excess Aggregate Contributions for a Plan Year, plus any income and minus any loss allocable thereto, may be forfeited, if forfeitable, or distributed, if not forfeitable, no later than twelve months after the close of such Plan Year to Participants to whose Accounts such Excess Aggregate Contributions were allocated for such Plan Year. Excess Aggregate Contributions of Participants who are subject to the Family Member aggregation rules shall be allocated among the Family Members in proportion to the Matching Contributions (or amounts treated as Matching Contributions) of each Family Member that is combined to determine the combined ACP. Excess Aggregate Contributions shall be forfeited, if forfeitable, or distributed on a pro rata basis from the Participant's Matching Contribution subaccount and Qualified Matching Contribution subaccount (and, if applicable, the Participant's Qualified Nonelective Contribution subaccount or Elective Deferral subaccount, or both). The income or loss allocable to Excess Aggregate Contributions distributed or forfeited is equal to the amount of income or loss allocable to the Participant's Matching Contribution subaccount, Qualified Matching Contribution subaccount (if any, and if all amounts therein are not used in the ADP test) and, if applicable, Qualified Nonelective Contribution subaccount and Elective Deferral subaccount for the Plan Year multiplied by a fraction, the numerator of which is such Participant's Excess Aggregate Contributions for the year and the denominator of which is the Participant's account balance(s) attributable to Contribution Percentage Amounts without regard to income or loss occurring during such Plan Year. Any Matching Contribution (whether or not vested) that was made on account of an Excess Aggregate Contribution that has been distributed in accordance with this Section 5.12 shall be forfeited no later than twelve months after the close of the Plan Year in which such Excess Aggregate Contribution occurred. 5.13 DEFINITIONS. (a) ACTUAL DEFERRAL PERCENTAGE. For a specified group of Participants for a Plan Year, the average of the ratios (calculated separately for each Participant in such group) of (i) the amount of Employer deferral contributions actually paid over to the Plan on behalf of such Participant for the Plan Year to (ii) the Participant's Total Compensation for such Plan Year. Employer deferral contributions on behalf of any Participant shall include: (i) any Elective Deferrals made pursuant to the Participant's deferral elective (including Excess Elective Deferrals of Highly - -------------------------------------------------------------------------------- 21 Compensated Employees), but excluding (A) Excess Elective Deferrals of Non-Highly Compensated Employees that arise solely from Elective Deferrals made under the Plan or plans of this Employer, and (B) Elective Deferrals that are taken into account in the ADP test (provided the ADP test is satisfied both with and without exclusion of these Elective Deferrals); and (ii) at the election of the Employer, Qualified Nonelective Contributions and Qualified Matching Contributions. For purposes of computing Actual Deferral Percentages, an Employee who would be a Participant but for the failure to make Elective Deferrals shall be treated as a Participant on whose behalf no Elective Deferrals are made. (b) AGGREGATED LIMIT. The sum of (i) 125% of the greater of the ADP of the Non-Highly Compensated Employees for the Plan Year or the ACP of Non-Highly Compensated Employees under the Plan subject to section 401(m) of the Code for the Plan Year beginning with or within the Plan Year of the cash or deferred arrangement, and (ii) the lesser of 200% or two plus the lesser of such ADP or ACP. "Lesser" is substituted for "greater" in "(i)", above, and "greater" is substituted for "lesser" after "two plus the" in "(ii)" if it would result in a larger Aggregate Limit. (c) AVERAGE CONTRIBUTION PERCENTAGE. The average of the Contribution Percentages of the eligible Participants in a group. (d) CONTRIBUTION PERCENTAGE. The ratio (expressed as a percentage) of an eligible Participant's Contribution Percentage Amounts to such eligible Participant's Total Compensation for the Plan Year. (e) CONTRIBUTION PERCENTAGE AMOUNTS. The sum of the Matching Contributions and Qualified Matching Contributions (to the extent not taken into account for purposes of the ADP test) made under the Plan on behalf of the Participant for the Plan Year. Such Contribution Percentage Amounts shall not include Matching Contributions that are forfeited either to correct Excess Aggregate Contributions or because the contributions to which they relate are Excess Elective Deferrals, Excess Contributions or Excess Aggregate Contributions. The Plan Administrator may include Qualified Nonelective Contributions in the Contribution Percentage Amounts. The Plan Administrator also may elect to use Elective Deferrals in the Contribution Percentage Amounts so long as the ADP test is met before the Elective Deferrals are used in the ACP test and continues to be met following the exclusion of those Elective Deferrals that are used to meet the ACP test. (f) EXCESS AGGREGATE CONTRIBUTIONS. With respect to any Plan Year, the excess of the aggregate Contribution Percentage Amounts taken into account in computing the numerator of the Contribution Percentage actually made on behalf of Highly Compensated Employees for such Plan Year, over the maximum Contribution Percentage Amounts permitted by the ACP test (determined by reducing contributions made on behalf of Highly Compensated Employees in order of their Contribution Percentages beginning with the highest of such percentages). Such determination shall be made after first determining Excess Elective Deferrals pursuant to Section 5.13(h) and then determining Excess Contributions pursuant to Section 5.13(g). (g) EXCESS CONTRIBUTION. With respect to a Plan Year, the excess of the Elective Deferrals (including any Qualified Nonelective Contributions and Qualified Matching Contributions that are treated as Elective Deferrals under section 401(k)(2) and 401(k)(3) of the Code) on behalf of eligible Highly Compensated Employees for the Plan Year over the maximum amount of such contributions permitted under section 401(k)(2) and 401(k)(3) of the Code. The amount of Excess Contributions for a Highly Compensated Employee for a Plan Year is to be determined by the following leveling method under which the Actual Deferral Percentage of the Highly Compensated Employee with the highest Actual Deferral Percentage is reduced to the extent required to: (i) Enable the Plan to satisfy Section 5.5; or (ii) Cause such Highly Compensated Employee's Actual Deferral Percentage to equal the Actual Deferral Percentage of the Highly Compensated Employee with the next highest Actual Deferral Percentage. This process is repeated until the Plan satisfies Section 5.5. For each Highly Compensated Employee, the amount of Excess Contributions is equal to the total Elective Deferrals (plus Qualified Nonelective Contributions and Qualified Matching Contributions treated as Elective Deferrals) on behalf of the Participant (determined prior to the application of this paragraph) minus the amount determined by multiplying the Participant's Actual Deferral Percentage (determined after application of this paragraph) by his Total Compensation used in determining such Actual Deferral Percentage. (h) EXCESS ELECTIVE DEFERRALS. Those Elective Deferrals that are includible in a Participant's gross income under section 402(g) of the Code to the extent such Participant's Elective Deferrals for a taxable year exceed the dollar limitation under such Code section. (i) QUALIFIED MATCHING CONTRIBUTIONS. Matching Contributions that are made to this Plan or another arrangement described in section 401(k) of the Code that is maintained by the Employer that are subject to the distribution and nonforfeitability requirements of section 401(k) of the Code when made. (j) QUALIFIED NONELECTIVE CONTRIBUTIONS. Contributions (other than Matching Contributions or Qualified Matching Contributions) made by the Employer and allocated to Participants' Accounts that the Participants may not elect to receive in cash until distributed from the Plan; that are nonforfeitable when made; that are distributable only in accordance with distribution provisions that are applicable to Elective Deferrals. ARTICLE 6. ALLOCATIONS 6.1 INDIVIDUAL ACCOUNTS. The Plan Administrator shall establish and maintain an Account in the name of each Participant. Each Participant's Account shall contain the following subaccounts: (a) ELECTIVE DEFERRALS. An Elective Deferral subaccount to which shall be credited (or debited, as the case may be) (i) such Participant's Elective Deferrals made under Section 5.2(b); (ii) the net earnings or net losses on the investment of the assets of the subaccount; and (iii) distributions from such subaccount. (b) ROLLOVERS. A rollover subaccount to which shall be credited (or debited, as the case may be) (i) rollover contributions made by such Participant to the Trust under Section 5.2(c); (ii) the net earnings or net losses on the investment of the assets of such subaccount; and (iii) distributions from such subaccount. (c) AFTER-TAX CONTRIBUTIONS. A nondeductible voluntary contribution subaccount to which shall be credited (or debited, as the case may be) (i) Employee After-Tax Contributions made by the Participant before the Plan Year in which this Plan was adopted by the Employer; (ii) the net earnings or net losses on the investment of the assets of such subaccount; and (iii) distributions from such subaccount. (d) MATCHING CONTRIBUTIONS. A Matching Contribution subaccount to which shall be credited (or debited, as the case may be) (i) such Participant's Matching Contributions made under Section 5.3(a); (ii) the net earnings or net losses on the investment of the assets of such subaccount; and (iii) distributions from such subaccount. (e) DISCRETIONARY CONTRIBUTIONS. An Employer Discretionary Contribution subaccount to which shall be credited (or debited, as the case may be) (i) the Participant's share of Employer Discretionary Contributions under Section 5.3(b); (ii) the net earnings or net losses on the investment of the assets of such subaccount; and (iii) distributions from such subaccount. (f) QUALIFIED NONELECTIVE CONTRIBUTIONS. A Qualified Nonelective Contribution subaccount to which shall be credited (or debited, as the case may be) (i) such Participant's Qualified Nonelective Contributions made under Section 5.10; (ii) the net earnings or net losses on the investment of the assets of the subaccount; and (iii) distributions from such subaccount. (g) QUALIFIED MATCHING CONTRIBUTIONS. A Qualified Matching Contribution subaccount to which shall be credited (or debited, as the case may be) (i) the Participant's Qualified Matching Contributions made under Section 5.11; (ii) the net earnings or net losses on the investment of assets in such subaccount; and (iii) distributions from such subaccount. 6.2 ALLOCATION OF CONTRIBUTIONS. (a) ELECTIVE DEFERRALS, MATCHING CONTRIBUTIONS AND ROLLOVER CONTRIBUTIONS. All Elective Deferrals, Matching Contributions and rollover contributions shall be allocated to the Account of the Participant on whose behalf such contributions were made. (b) QUALIFIED NONELECTIVE AND QUALIFIED MATCHING CONTRIBUTIONS. All Qualified Nonelective Contributions and Qualified Matching Contributions shall be allocated as provided in Sections 5.10 and 5.11, respectively. (c) EMPLOYER DISCRETIONARY CONTRIBUTIONS. All Employer Discretionary Contributions shall be allocated to the Account of each Participant eligible for such an allocation, as provided in Section 5.3(b), in the ratio that such Participant's Compensation bears to the Compensation of all such Participants. However, if the Employer Discretionary Contribution formula selected in the Adoption Agreement is allocated under the permitted disparity rules, Employer Discretionary Contributions for the Plan Year shall be allocated to the Accounts of Participants eligible for such an allocation as follows: If the Plan is Top-Heavy (as defined below) for the Plan Year, begin at Step One; if the Plan is not Top-Heavy for the Plan Year, begin at Step Three. (i) STEP ONE. Contributions will be allocated to each Participant's Account in the ratio that each Participant's Compensation bears to all such Participants' Compensation, but not in excess of 3% of each Participant's Compensation. (ii) STEP TWO. Any contributions remaining after the allocation in Step One will be allocated to each Participant's Account in the ratio that each Participant's Compensation for the Plan Year in excess of the Integration Level (hereinafter "Excess Compensation") bears to the Excess Compensation of all Participants, but not in excess of 3% of Compensation. (iii) STEP THREE. Any contributions (remaining after the allocation in Step Two if the Plan is Top-Heavy) will be allocated to each Participant's Account in the ratio that the sum of each Participant's Compensation and Excess Compensation bears to the sum of all Participants' Compensation and Excess Compensation, but not in excess of the Maximum Profit Sharing Disparity Rate. (iv) STEP FOUR. Any remaining contributions will be allocated to each Participant's Account in the ratio that each Participant's Compensation for the Plan Year bears to the total of all Participants' Compensation for that year. If the Employer maintains any other plan that provides for permitted disparity, and if any Participant in this Plan is eligible to participate in such other plan, this Plan may not provide for permitted disparity. 6.3 MINIMUM TOP-HEAVY ALLOCATION. (a) GENERAL RULE. Notwithstanding any other provision of this Plan to the contrary, during any Plan Year that this Plan is Top-Heavy, the Matching Contributions, Employer Discretionary Contributions and forfeitures allocated on behalf of any Participant who is not a Key Employee and who has not separated from service with the Employer before the end of such Plan Year shall not be less than the lesser of 3% of such Participant's Section 415 Compensation or, in the case where the Employer has no defined benefit plan which designates this Plan to satisfy section 401 of the Code, the largest percentage of Employer contributions and forfeitures, as a percentage of the first $200,000 of the Key Employee's Section 415 Compensation, allocated on behalf of any Key Employee for that year. The minimum allocation is determined without regard to any Social Security contribution. For purposes of this subsection, all defined contribution plans required to be included in an aggregation group under section 416(g)(2)(A)(i) of the Code shall be treated as a single plan. (b) SPECIAL RULE IF OTHER PLANS SATISFY TOP-HEAVY MINIMUM. The provision in subsection (a) above shall not apply to any Participant to the extent the Participant is covered under any 23 other plan or plans of the Employer and any other plan or plans of the Employer provide that the minimum allocation or benefit requirement applicable to Top-Heavy plans will be met in the other plan or plans. 6.4 ALLOCATION OF FORFEITURES. Any forfeitures arising under the Plan, including forfeitures of Excess Aggregate Contributions, shall be allocated in the following order of priority in the Plan Year in which forfeitures occur: (a) First, forfeitures shall be used to the extent necessary to restore a returning Participant's Account as provided in Section 8.5(a) and to restore a formerly unlocatable Participant's Account as provided in Section 8.6; (b) Next, forfeitures shall be treated as an Employer contribution, shall be used to reduce the Employer Matching Contribution as required by Section 5.3(a) and shall be allocated to the Matching Contribution subaccounts of the Participants on whose behalf such contributions are to be made; (c) Next, forfeitures shall be treated as Employer contributions and shall be allocated to Participants' Accounts to the extent necessary to satisfy the minimum allocation provisions of Section 6.3; (d) Next, to the extent elected by the Plan Administrator, forfeitures shall be treated as a Qualified Nonelective Contribution or a Qualified Matching Contribution and shall be allocated as provided in Sections 5.10 and 5.11; (e) Next, to the extent elected by the Plan Administrator, forfeitures shall be used to pay reasonable costs of administering the Plan; (f) Any remaining forfeitures shall be treated as Employer contributions and allocated as follows: (i) If the Employer has elected in the Adoption Agreement that it may make Employer Discretionary Contributions to the Plan, such forfeitures shall be treated as Employer Discretionary Contributions and allocated in accordance with the provisions of Section 6.2(c); (ii) If the Employer has not elected in the Adoption Agreement that it may make Employer Discretionary Contributions to the Plan, such forfeitures shall be allocated to each Participant's Matching Contribution subaccount in the ratio that each Participant's Elective Deferrals for the Plan Year bear to the total of all Participants' Elective Deferrals for the Plan Year. 6.5 WITHDRAWALS AND DISTRIBUTIONS. Any distribution to a Participant or his Beneficiary, any amount directly rolled over from a Participant's Account directly to the trustee of any other qualified plan described in section 401(a) of the Code, to a qualified annuity plan described in section 403(a) of the Code, to an individual retirement account described in section 408(a) of the Code or to an individual retirement annuity described in section 408(b) of the Code, or any withdrawal by a Participant shall be charged to the appropriate subaccount(s) of the Participant as of the date of the distribution or the withdrawal. 6.6 DETERMINATION OF VALUE OF TRUST FUND AND OF NET EARNINGS OR LOSSES. As of each Valuation Date, the Trustee shall determine for the period then ended the sum of the net earnings or losses of the Trust which shall reflect accrued but unpaid interest, dividends, gains, or losses realized from the sale, exchange or collection of assets, other income received, appreciation in the fair market value of assets, depreciation in the fair market value of assets, administration expenses, and taxes and other expenses paid. Gains or losses realized and adjustments for appreciation or depreciation in fair market value shall be computed with respect to the difference between such value as of the preceding Valuation Date or date of purchase, whichever is applicable, and the value as of the date of disposition or the current Valuation Date, whichever is applicable. 6.7 ALLOCATION OF NET EARNINGS OR LOSSES. (a) SPECIFIC PARTICIPANT ACCOUNT ALLOCATIONS. To the extent that Shares and other assets are specifically allocated to a specific Participant's Account or subaccount, earnings, dividends, capital gain distributions, appreciation, depreciation, losses and accrued but unpaid interest and any other earnings or losses from Shares and any other assets in such Account or subaccount shall be allocated to such Account or subaccount. (b) COMMON ACCOUNT ALLOCATIONS. As of each Valuation Date, the net earnings or losses of the Trust (excluding gains or losses on assets specifically allocated to a specific Participant's Account or subaccount, all of which shall be allocated to such Account or subaccount) for the valuation period then ending shall be allocated to the Accounts of all Participants (or Beneficiaries) (excluding the Accounts to which are allocated assets of specific Participants) having assets in the Trust both on such date and on the immediately preceding Valuation Date. Such allocation shall be made by the application of a fraction, the numerator of which is the value of the Account of a specific Participant (or Beneficiary) as of the immediately preceding Valuation Date, reduced by any distributions therefrom since such preceding Valuation Date, and the denominator of which is the total value of all such Accounts as of that preceding Valuation Date, reduced by any distributions therefrom since such preceding Valuation Date. 6.8 RESPONSIBILITIES OF THE PLAN ADMINISTRATOR. The Plan Administrator shall maintain accurate records with respect to the contributions made by or on behalf of Participants under the Plan and shall furnish the Trustee with written instructions directing the Trustee to allocate all Plan contributions to the Trust among the separate Accounts and subaccounts of Participants in accordance with Section 6.1 above. In making any such allocation, the Trustee shall be fully entitled to rely on the instructions furnished by the Plan Administrator and shall be under no duty to make any inquiry or investigation with respect thereto. 6.9 DEFINITIONS. (a) DETERMINATION DATE. For the first Plan Year of the Plan, the last day of that Plan Year. With respect to any Plan Year subsequent to the first Plan Year, the last day of the preceding Plan Year. (b) INTEGRATION LEVEL. The Taxable Wage Base or such lesser amount (or percentage of Taxable Wage Base) elected by the Employer in the Adoption Agreement. (c) KEY EMPLOYEE. (i) Any Employee or former Employee (and the Beneficiaries of such Employee) who at any time during the determination period was an officer of the Employer if such individual's annual compensation exceeds 50% of the dollar limitation under section 415(b)(1)(A) of the Code; an owner (or considered an owner under section 318 of the Code) of one of the ten largest interests in the Employer if such individual's Compensation exceeds 100% of the dollar limitation under section 415(c)(1)(A) of the Code; a Five Percent Owner of the Employer; or a 1% owner of the Employer who has annual compensation of more than $150,000. (ii) For purposes of this Section, annual compensation means Section 415 Compensation, but including amounts contributed by the Employer pursuant to a salary reduction agreement which are excludable from the Employee's gross income under section 125, 402(a)(8), 402(h) or 403(b) of the Code. (iii) For purposes of this Section, the determination period is the Plan Year containing the Determination Date and the four preceding Plan Years. (d) MAXIMUM PROFIT SHARING DISPARITY RATE. The lesser of: (i) 2.7% (5.7% if the Plan is not Top-Heavy); (ii) The applicable percentage determined in accordance with the table below: If the Integration Level is
The Applicable More Than But Not More Than Percentage Is: - --------- ----------------- -------------- Top-Heavy Not Top-Heavy --------- ------------- $0 X 2.7% 5.7% X */ of TWB 80% of TWB 1.3% 4.3% - 80% of TWB Y **/ 2.4% 5.4% --
*X = the greater of $10,000 or 20% of TWB. **Y = any amount more than 80% of the TWB but less than 100% of TWB. If the Integration Level is equal to TWB, the applicable percentage is 2.7% (5.7% if the Plan is not Top-Heavy). (e) NON-KEY EMPLOYEE. Any Employee or former Employee who is not a Key Employee. In addition, any Beneficiary of a Non-Key Employee shall be treated as a Non-Key Employee. (f) PERMISSIVE AGGREGATION GROUP. The Required Aggregation Group of plans plus any other plan or plans of the Employer which, when considered as a group with the Required Aggregation Group, would continue to satisfy the requirements of sections 401(a)(4) and 410 of the Code. (g) PRESENT VALUE. Present Value shall be based only on the interest and mortality rates specified in the Adoption Agreement. (h) REQUIRED AGGREGATION GROUP. (A) Each qualified plan of the Employer in which at least one Key Employee participates or participated at any time during the determination period (regardless of whether the plan has terminated), and (B) any other qualified plan of the Employer which enables a plan described in (A) to meet the requirements of section 401(a)(4) or 410 of the Code. (i) TOP-HEAVY. For any Plan Year beginning after December 31, 1983, this Plan is Top-Heavy if any of the following conditions exists: (i) If the Top-Heavy Ratio for this Plan exceeds 60% and this Plan is not part of any Required Aggregation Group or Permissive Aggregation Group of plans. (ii) If this Plan is a part of a Required Aggregation Group of plans but not part of a Permissive Aggregation Group and the Top-Heavy Ratio for the group of plans exceeds 60%. (iii) If this Plan is a part of a Required Aggregation Group and part of a Permissive Aggregation Group of plans and the Top-Heavy Ratio for the Permissive Aggregation Group exceeds 60%. (j) TOP-HEAVY RATIO. (i) If the Employer maintains one or more defined contribution plans (including any Simplified Employee Pension Plan) and the Employer has not maintained any defined benefit plan which during the 5-year period ending on the Determination Date(s) has or has had accrued benefits, the Top-Heavy Ratio for this Plan alone or for the Required or Permissive Aggregation Group, as appropriate, is a fraction, the numerator of which is the sum of the account balances of all Key Employees as of the Determination Date(s) (including any part of any account balance distributed in the 5-year period ending on the Determination Date(s)), and the denominator of which is the sum of all account balances (including any part of any account balance distributed in the 5-year period ending on the Determination Date(s)), both computed in accordance with section 416 of the Code and the regulations thereunder. Both the numerator and denominator of the Top-Heavy Ratio are increased to reflect any contribution not actually made as of the Determination Date but which is required to be taken into account on that date under section 416 of the Code and the regulations thereunder. (ii) If the Employer maintains one or more defined contribution plans (including any Simplified Employee Pension Plan) and the Employer maintains or has maintained one or more defined benefit plans which during the 5-year period ending on the Determination Date(s) has or has had any accrued benefits, the Top-Heavy Ratio for any Required or Permissive Aggregation Group, as appropriate, is a fraction, the numerator of which is the sum of account balances under the aggregated defined contribution plan or plans for all Key Employees, determined in accordance with (i) above, and the Present Value of accrued benefits under the aggregated defined benefit plan or plans for all Key Employees as of the Determination Date(s), and the denominator of which is the sum of the account balances under the aggregated defined contribution plan or plans for all Participants, determined in accordance with (i) above, and the Present Value of accrued benefits under the defined benefit plan or plans for all Participants as of the Determination Date(s), all determined in accordance with section 416 of the Code and the regulations thereunder. The accrued benefits under a defined benefit plan in both the numerator and denominator of the Top-Heavy Ratio are increased for any distribution of an accrued benefit made in the 5-year period ending on the Determination Date. (iii) For purposes of (i) and (ii) above, the value of account balances and the Present Value of accrued benefits will be determined as of the most recent Valuation Date that falls within or ends with the 12-month period ending on the Determination Date, except as provided in section 416 of the Code and the regulations thereunder for the first and second plan years of a defined benefit plan. The account balances and accrued benefits of a Participant (A) who is not a Key Employee but who was a Key Employee in a prior year, or (B) who has not been credited with at least one Hour of Service with any employer maintaining the Plan at any time during the 5-year period ending on the Determination Date will be disregarded. The calculation of the Top-Heavy Ratio, and the extent to which distributions, rollovers and transfers are taken into account will be made in accordance with section 416 of the Code and the regulations thereunder. Deductible employee contributions will not be taken into account for purposes of computing the Top-Heavy Ratio. When aggregating 25 plans, the value of account balances and accrued benefits will be calculated with reference to the Determination Dates that fall within the same calendar year. The accrued benefit of a Participant other than a Key Employee shall be determined under (A) the method, if any, that uniformly applies for accrual purposes under all defined benefit plans maintained by the Employer, or (B) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional rule of section 411(b)(1)(C) of the Code. (k) TAXABLE WAGE BASE (OR "TWB"). The contribution and benefit base in effect under section 230 of the Social Security Act on the first day of the Plan Year. ARTICLE 7. LIMITATIONS ON ALLOCATIONS 7.1 LIMITATIONS ON ANNUAL ADDITIONS TO QUALIFIED DEFINED CONTRIBUTION PLANS. Notwithstanding any other provision of this Plan to the contrary, the amount of Annual Additions that may be credited to the Participant's Account for any Limitation Year may not exceed the Maximum Permissible Amount reduced by the sum of the Annual Additions to his Account under all other defined contribution plans now or hereafter maintained by the Employer or Affiliated Employers, except that in determining whether any entity is part of the controlled group of corporations or trades or businesses including the Employer, "more than 50%" shall be substituted for "at least 80%" in the tests under section 414(b) and (c) of the Code. If the Employer contribution that would otherwise be contributed or allocated to the Participant's Account would cause the Annual Additions for the Limitation Year to exceed the preceding limitation, the amount contributed or allocated under this Plan will be reduced so that the Annual Additions for the Limitation Year to all defined contribution plans maintained by the Employer will equal the Maximum Permissible Amount. If, as a result of the allocation of forfeitures, a reasonable error in determining a Participant's Compensation or other limited facts and circumstances, there is an Excess Amount, the Excess Amount will be deemed to consist of the Annual Additions last allocated, except that Annual Additions attributable to a Simplified Employee Pension Plan will be deemed allocated first followed by Annual Additions to a welfare benefit fund or individual medical account regardless of the actual allocation date. If an Excess Amount was allocated to a Participant on an allocation date of this Plan which coincides with an allocation date of another plan, the Excess Amount attributed to this Plan will be the product of: (a) the total Excess Amount allocated as of such date, times (b) the ratio of (i) the Annual Additions allocated to the Participant for the Limitation Year as of such date under this Plan to (ii) the total Annual Additions allocated to the Participant for the Limitation Year as of such date under this and all the other qualified master or prototype defined contribution plans. Any Excess Amount allocated to this Plan will be disposed of as follows: (a) Any Elective Deferrals, and any income attributable thereto, to the extent they would reduce the Excess Amount, will be returned to the Participant; (b) If, after the application of subsection (a), an Excess Amount still exists, and the Participant is covered by the Plan at the end of the Limitation Year, the Excess Amount in the Participant's Account will be used to reduce Employer contributions (including any allocation of forfeitures) for such Participant in the next Limitation Year, and each succeeding Limitation Year if necessary; (c) If, after the application of subsection (a), an Excess Amount still exists, and the Participant is not covered by the Plan at the end of the Limitation Year, the Excess Amount will be held unallocated in a suspense account. The suspense account will be applied to reduce future Employer contributions (including allocation of any forfeitures) for all remaining Participants in the next Limitation Year, and each succeeding Limitation Year if necessary; (d) If a suspense account is in existence at any time during the Limitation Year, it will not participate in the allocation of the Trust's investment gains and losses. If a suspense account is in existence at any time during a particular Limitation Year, all amounts in the suspense account must be allocated and reallocated to Participants' Accounts before any Employer or any Employee contributions may be made to the Plan for that Limitation Year. Excess Amounts may not be distributed to Participants or former participants. 7.2 EMPLOYERS WHO, IN ADDITION TO THIS PLAN, MAINTAIN A QUALIFIED DEFINED BENEFIT PLAN. If the Employer or Affiliated Employers maintain, or at any time maintained, a qualified defined benefit plan covering any Participant in this Plan, the sum of the Participant's Defined Benefit Fraction and Defined Contribution Fraction will not exceed 1.0 in any Limitation Year. The Annual Additions which may be credited to such a Participant's Account under this Plan for any Limitation Year will be limited in accordance with the terms of the Adoption Agreement. 7.3 DEFINITIONS. (a) ANNUAL ADDITIONS. Effective on the first day of the Plan Year beginning after December 31, 1986, the sum of the following amounts credited to a Participant's Account for the Limitation Year: (i) Employer contributions (including Excess Elective Deferrals (as defined in Section 5.13) not distributed to the Participant on or before the April 15 following the close of the taxable year of such Excess Elective Deferrals, Excess Contributions and Excess Aggregate Contributions, both as defined in Section 5.13); (ii) for Plan Years beginning on and after January 1, 1987, Employee After-Tax Contributions; (iii) forfeitures; (iv) amounts allocated after March 31, 1984 to an individual medical account as defined in section 415(l)(2) of the Code, that is part of a pension or annuity plan maintained by the Employer, are treated as Annual Additions to a defined contribution plan. Also, amounts derived from contributions paid or accrued after December 31, 1985, in taxable years ending after such date that are attributable to post-retirement medical benefits allocated to the separate account of a Key Employee, as defined in section 419A(d)(3) of the Code, under a welfare benefit fund, as defined in section 419(e) of the Code maintained by the Employer, are treated as Annual Additions to a defined contribution plan; and (v) allocations under a Simplified Employee Pension Plan. For this purpose, any Excess Amount applied in the Limitation Year to reduce Employer contributions will be considered Annual Additions for such Limitation Year. (b) DEFINED BENEFIT FRACTION. A fraction, the numerator of which is the sum of the Participant's Projected Annual Benefits under all defined benefit plans (whether or not terminated) maintained by the Employer, and the denominator of which is the lesser of 100% of the dollar limitation determined for the Limitation Year under section 415(b) and (d) of the Code or 140% of his average Section 415 Compensation for the three consecutive calendar years that produces the highest average, including any adjustments under section 415(b) of the Code. Notwithstanding the above, if the Participant was a Participant as of the first day of the first Limitation Year beginning after December 31, 1986, in one or more defined benefit plans maintained by the Employer which were in existence on May 6, 1986, the denominator of this fraction will not be less than 125% of the sum of the annual benefits under such plans which the Participant had accrued as of the close of the last Limitation Year beginning before January 1, 1987, disregarding any changes in the terms and conditions of the plan after May 5, 1986. The preceding sentence applies only if the defined benefit plans individually and in the aggregate satisfied the requirements of section 415 of the Code for all Limitation Years beginning before January 1, 1987. (c) DEFINED CONTRIBUTION FRACTION. A fraction, the numerator of which is the sum of the Annual Additions to the Participant's Accounts under all the defined contribution plans (whether or not terminated) maintained by the Employer for the current and all prior Limitation Years (including the Annual Additions attributable to the Participant's voluntary nondeductible contributions to all defined benefit plans, whether or not terminated, maintained by the Employer, and the Annual Additions attributable to all welfare benefit funds as defined in section 419(e) of the Code and individual medical accounts as defined in section 415(l)(2) of the Code, and simplified employee pensions maintained by the Employer), and the denominator of which is the sum of the maximum aggregate amounts for the current and all prior Limitation Years of service with the Employer (regardless of whether a defined contribution plan was maintained by the Employer). The maximum aggregate amount in any Limitation Year is the lesser of 100% of the dollar limitation in effect under section 415(c)(1)(A) of the Code or 35% of the Participant's Compensation for such year. If the Participant was a Participant as of the end of the first day of the first Limitation Year beginning after December 31, 1986, in one or more defined contribution plans maintained by the Employer which were in existence on May 6, 1986, the numerator of this fraction will be adjusted if the sum of this fraction and the Defined Benefit Fraction would otherwise exceed 1.0 under the terms of this Plan. Under the adjustment, an amount equal to the product of (1) the excess of the sum of the fractions over 1.0, and (2) the denominator of this fraction, will be permanently subtracted from the numerator of this fraction. The adjustment is calculated using the fractions as they would be computed as of the end of the last Limitation Year beginning before January 1, 1987, and disregarding any changes in the terms and conditions of the plan made after May 5, 1986, but using the section 415 of the Code limitation applicable to the first Limitation Year beginning on or after January 1, 1987. The Annual Addition for any Limitation Year beginning before January 1, 1987, shall not be recomputed to treat all Employee contributions as Annual Additions. (d) EXCESS AMOUNT. The excess of the Participant's Annual Addition for the Limitation Year over the Maximum Permissible Amount. (e) LIMITATION YEAR. The Plan Year. (f) MAXIMUM PERMISSIBLE AMOUNT. The maximum Annual Addition that may be contributed or allocated to a Participant's Account under the Plan for any Limitation Year shall not exceed the lesser of: (i) $30,000 or, if greater, 25% of the section 415(b)(1) of the Code limitation for such year; or (ii) 25% of the Participant's Section 415 Compensation actually paid or includible in gross income during the Limitation Year. The limitation referred to in (ii) shall not apply to any contribution for medical benefits (within the meaning of section 401(h) or 419A(f)(2) of the Code) which is otherwise treated as an Annual Addition under section 415(l)(1) or 419A(d)(2) of the Code. If a Limitation Year less than 12 consecutive months is created because of an amendment changing the Plan Year, the Maximum Permissible Amount shall be equal to the limit for such Limitation Year under paragraph (i) multiplied by a fraction, the numerator of which is the number of months in such short Limitation Year and the denominator of which is 12. (g) PROJECTED ANNUAL BENEFIT. The annual retirement benefit (adjusted to an actuarially equivalent straight life annuity if such benefit is expressed in a form other than a straight life annuity or Qualified Joint and Survivor Annuity) to which the Participant would be entitled under the terms of all defined benefit plans assuming: (i) the Participant will continue employment until Normal Retirement Age under the Plan (or current age, if later), and (ii) the Participant's Section 415 Compensation for the current Limitation Year and all other relevant factors used to determine benefits under the Plan will remain constant for all future Limitation Years. 27 ARTICLE 8 VESTING 8.1 EMPLOYEE AFTER-TAX CONTRIBUTIONS, ELECTIVE DEFERRAL CONTRIBUTIONS, ROLLOVER CONTRIBUTIONS, QUALIFIED NONELECTIVE CONTRIBUTIONS AND QUALIFIED MATCHING CONTRIBUTIONS. A Participant's Employee After-Tax Contribution subaccount, Elective Deferral subaccount, rollover subaccount, Qualified Nonelective Contribution subaccount and Qualified Matching Contribution subaccount shall be fully vested and nonforfeitable at all times. 8.2 EMPLOYER DISCRETIONARY CONTRIBUTIONS AND MATCHING CONTRIBUTIONS. (a) GENERAL. Notwithstanding the vesting schedule selected by the Employer in the Adoption Agreement, the Participant's Employer Discretionary Contribution subaccount and Matching Contribution subaccount shall be fully vested and nonforfeitable upon the Participant's death, Total and Permanent Disability or attainment of Normal Retirement Age while employed by the Employer. In the absence of any of the preceding events, and subject to the provisions of Sections 5.4(d), 5.9(d) and 5.12, the Participant's Employer Discretionary Contribution subaccount and Matching Contribution subaccount shall be vested in accordance with the vesting schedule specified in the Adoption Agreement. The schedule must be at least as favorable to Participants as either schedule (i) or (ii) below. (i) Graduated vesting according to the following schedule:
YEARS OF VESTING SERVICE PERCENT VESTED ------------------------ -------------- Less than 2 0% 2 but less than 3 20% 3 but less than 4 40% 4 but less than 5 60% 5 but less than 6 80% 6 or more 100%
(ii) Full 100% vesting after three Years of Vesting Service. (b) IN-SERVICE DISTRIBUTIONS WHEN NOT FULLY VESTED. If a distribution is made from a Participant's Employer Discretionary Contribution subaccount or Matching Contribution subaccount at a time when the Participant is not 100% vested in such subaccount and the Participant's employment with the Employer has not terminated, then (i) A separate remainder subaccount will be established for the Participant's interest in such Employer Discretionary Contribution subaccount or Matching Contribution subaccount at the time of the distribution, and (ii) At any subsequent time, the Participant's vested portion of such separate subaccount will be equal to an amount "x" determined under the formula: X = P(AB + (RxD)) - (RxD) where P = the Participant's vested percentage determined under subsection (a) at the relevant time. AB = the amount in such separate subaccount at the relevant time. R = the ratio of AB to the amount in the subaccount prior to the distribution. D = the amount of the distribution. 8.3 AMENDMENTS TO VESTING SCHEDULE. (a) PARTICIPANTS' ELECTION RIGHTS. If the Plan's vesting schedule is amended, or the Plan is amended in any way that directly or indirectly affects the computation of the Participant's nonforfeitable percentage, each Participant with at least three years of service with the Employer may elect, within a reasonable period after the adoption of the amendment or change, to have the nonforfeitable percentage computed under the Plan without regard to such amendment or change. For any Participants who do not have at least one Hour of Service in any Plan Year beginning after December 31, 1988, the preceding sentence shall be applied by substituting "five years of service" for "three years of service" where such language appears. (b) ELECTION PERIOD. The period during which the election may be made shall commence with the date the amendment is adopted or deemed to be made and shall end on the latest of: (i) 60 days after the amendment is adopted; (ii) 60 days after the amendment becomes effective; or (iii) 60 days after the Participant is issued written notice of the amendment by the Employer or Plan Administrator. (c) PROHIBITION AGAINST REDUCING ACCRUED BENEFITS. No amendment to the Plan shall be effective to the extent that it has the effect of decreasing a Participant's accrued benefit. Notwithstanding the preceding sentence, a Participant's account balance may be reduced to the extent permitted under section 412(c)(8) of the Code. For purposes of this subsection, a Plan amendment which has the effect of decreasing a Participant's account balance or eliminating an optional form of benefit, with respect to benefits attributable to service before the amendment shall be treated as reducing an accrued benefit. Furthermore, if the vesting schedule of a Plan is amended, in the case of an Employee who is a Participant as of the later of the date such amendment is adopted or the date it becomes effective, the nonforfeitable percentage (determined as of such date) of such Employee's right to his Employer-derived accrued benefit will not be less than his percentage computed under the Plan without regard to such amendment. 8.4 DETERMINATION OF YEARS OF VESTING SERVICE. For purposes of determining the vested and nonforfeitable percentage of the Participant's Employer Discretionary Contribution and Matching Contribution subaccounts, all of the Participant's Years of Vesting Service with the Employer or an Affiliated Employer shall be taken into account. If Employer maintains the plan of a predecessor employer, Years of Vesting Service with such employer will be treated as service with the Employer. 8.5 FORFEITURE OF NONVESTED AMOUNTS. For Plan Years beginning before 1985, any portion of a Participant's Account that is not vested shall be forfeited by him as of the last day of the Plan Year in which he incurs a Break in Service. For Plan Years beginning after 1984, any portion of a Participant's Account that is not vested shall be forfeited in accordance with the following rules: (a) DISTRIBUTION IN FULL. If a Participant's service with the Employer terminates and if the entire vested portion of the Participant's Account is distributed to him at any time before the end of the second Plan Year following the Plan Year in which his employment terminated, the remaining portion of the Participant's Account shall be forfeited as of the end of the Plan Year in which such distribution occurs, as long as the Participant 28 has not resumed employment with the Employer by such date. However, if the Participant has no vested interest in his Account at the time of his termination of employment, the Plan Administrator nonetheless shall treat the Participant as if he had received a distribution on the date his employment terminated and shall forfeit the Participant's entire Account on the date his employment terminated. If the Participant returns as an Employee before the end of five consecutive Breaks in Service measured from the day immediately after the date of his distribution (or measured from the date his employment terminated in the case of a Participant who had no vested interest in his Account), and if he repays to the Trustee the full amount of the distribution (if any) paid to him by reason of his termination of employment no later than the fifth anniversary of the date of his reemployment, then his Account (determined as of the date of the distribution of his vested interest, unadjusted by subsequent gains and losses) shall be fully restored to him as of the end of the Plan Year in which such repayment occurs (or in the case of a Participant who had no vested interest in his Account, such Account shall be restored as of the end of the Plan Year in which he is reemployed). In such case, the Participant's Account shall be restored first out of such Participant's repayment (if any is required), next out of the forfeitures for such Plan Year and, if such forfeitures are insufficient to restore such Account, the Employer shall make a special contribution to the Trustee to the extent necessary so that the Participant's ccount is fully restored. (b) PARTIAL DISTRIBUTIONS. If a Participant's service with the Employer terminates and if his entire vested interest in his Account is not distributed to him before the end of the second Plan Year following the Plan Year in which his employment terminated, a separate remainder subaccount shall be established for that portion of the Participant's Account that is not vested and such separate subaccount shall be forfeited at the end of the Plan Year in which the Participant incurs five consecutive Breaks in Service. If all or any portion of such a Participant's vested benefits are distributed before a forfeiture is permitted and if the Participant returns to work as an Employee after the distribution and before he incurs five consecutive Breaks in Service, his vested interest in such separate subaccount at any time shall be determined by applying the formula in Section 8.2(b)(ii). 8.6 REINSTATEMENT OF BENEFIT. If a vested benefit is forfeited because the Participant or Beneficiary cannot be found, such benefit will be reinstated if a claim is made by the Participant or Beneficiary. ARTICLE 9. LOANS 9.1 GENERAL PROVISIONS. (a) ELIGIBILITY FOR LOANS. If the Employer so elects in the Adoption Agreement, loans shall be made available to any Participant or Beneficiary who is a party-in-interest (as defined in section 3(14) of ERISA) on a reasonably equivalent basis. Loans will not be made to any shareholder-employee, Owner-Employee or Participant or Beneficiary who is not a party-in-interest (as defined in section 3(14) of ERISA). For purposes of this requirement, a shareholder-employee means an Employee or officer of an electing small business (subchapter S) corporation who owns (or is considered as owning within the meaning of section 318(a)(1) of the Code), on any day during the taxable year of such corporation, more than 5% of the outstanding stock of the corporation. (b) SPOUSAL CONSENT RULES. (i) If Section 11.9 is applicable to a Participant, the Participant must obtain the consent of his or her spouse, if any, to use his or her account balance as security for the loan. Spousal consent shall be obtained no earlier than the beginning of the 90 day period that ends on the date on which the loan is to be so secured. The consent must be in writing, must acknowledge the effect of the loan, and must be witnessed by a Plan representative or notary public. Such consent shall thereafter be binding with respect to the consenting spouse or any subsequent spouse with respect to that loan. A new consent shall be required if the vested account balance is used for renegotiation, extension, renewal or other revision of the loan. (ii) If Section 11.9 is applicable to a Participant and a valid spousal consent has been obtained in accordance with subsection (b)(i), then, notwithstanding any other provision of this Plan, the portion of the Participant's vested Account used as a security interest held by the Plan by reason of a loan outstanding to the Participant shall be taken into account for purposes of determining the amount of the Account payable at the time of death or distribution, but only if the reduction is used as repayment of the loan. If less than 100% of the Participant's vested Account (determined without regard to the preceding sentence) is payable to the Participant's surviving spouse, then the vested Account shall be adjusted by first reducing the vested Account by the amount of the security used as repayment of the loan, and then determining the benefit payable to the surviving spouse. 9.2 AMOUNT OF LOAN. Loans shall not be made available to Highly Compensated Employees in an amount greater than the amount made available to other Employees. Loans to any Participant or Beneficiary will not be made to the extent that such loan, when added to the outstanding balance of all other loans to the Participant or Beneficiary, would exceed the lesser of: (a) $50,000 reduced by the excess (if any) of the highest outstanding balance of loans during the one year period ending on the day before the loan is made, over the outstanding balance of loans from the Plan on the date the loan is made; or (b) one-half the present value of the vested Account of the Participant. For the purpose of the above limitation, all loans from all plans of the Employer and other members of a group of employers described in section 414(b), 414(c) and 414(m) of the Code are aggregated. 9.3 MANNER OF MAKING LOANS. The Plan's loan program will be administered by the Plan Administrator. A request by a Participant for a loan shall be made in writing to the Plan Administrator and shall specify the amount of the loan, and the subaccount(s) or investments of the Participant from which the loan should be made. The terms and conditions on which the Plan Administrator shall approve loans under the Plan shall be applied on a uniform and nondiscriminatory basis with respect to all Participants. If a Participant's request for a loan is approved by the Plan Administrator, the Plan Administrator shall furnish the Trustee with written instructions directing the Trustee to make the loan in a lump-sum payment of cash to the Participant. In making any loan 29 payment under this Article, the Trustee shall be fully entitled to rely on the instructions furnished by the Plan Administrator and shall be under no duty to make any inquiry or investigation with respect thereto. 9.4 TERMS OF LOAN. Loans shall be made on such terms and subject to such limitations as the Plan Administrator may prescribe. Furthermore, any loan shall, by its terms, require that repayment (principal and interest) be amortized in level payments, not less frequently than quarterly, over a period not extending beyond five years from the date of the loan, unless such loan is used to acquire a dwelling unit which, within a reasonable time (determined at the time the loan is made), will be used as the principal residence of the Participant. The rate of interest to be charged shall be determined by the Plan Administrator in accordance with the rates quoted by representative financial institutions in the local area for similar loans. 9.5 SECURITY FOR LOAN. Any loan to a Participant under the Plan shall be secured by the pledge of no more than 50% of the Participant's vested interest in his Account. Such pledge shall be evidenced by the execution of a promissory note by the Participant which shall provide that, in the event of any default by the Participant on a loan repayment, the Plan Administrator shall be authorized (to the extent permitted by law) to take any and all other actions necessary and appropriate to enforce collection of the unpaid loan. An assignment or pledge of any portion of the Participant's interest in the Plan will be treated as a loan under this Article. 9.6 SEGREGATED INVESTMENT. Loans shall be considered a Participant directed investment and, for the purposes of allocating earnings and losses pursuant to Article 6, shall not be considered a part of the common fund under the Trust. 9.7 REPAYMENT OF LOAN. The Plan Administrator shall have the sole responsibility for ensuring that a Participant timely makes all loan repayments and for notifying the Trustee in the event of any default by the Participant on the loan. Each loan repayment shall be paid to the Trustee and shall be accompanied by written instructions from the Plan Administrator that identify the Participant on whose behalf the loan repayment is being made. 9.8 DEFAULT ON LOAN. In the event of a termination of the Participant's employment with the Affiliated Employers or a default by a Participant on a loan repayment, all remaining payments on the loan shall be immediately due and payable. The Plan Administrator shall take any and all actions necessary and appropriate to enforce collection of the unpaid loan. However, attachment of the Participant's Account pledged as security will not occur until a distributable event occurs under the Plan. ARTICLE 10. WITHDRAWALS 10.1 WITHDRAWAL OF EMPLOYEE AFTER-TAX CONTRIBUTIONS. Subject to the requirements of Sections 10.3 and 11.9, any Participant who has made Employee After-Tax Contributions may, upon 30 days notice in writing filed with the Plan Administrator, have paid to him all or any portion of the value of his Employee After-Tax Contribution subaccount. 10.2 HARDSHIP WITHDRAWALS. (a) GENERAL RULE. Subject to Sections 10.3 and 11.9 and if the Employer so elects in the Adoption Agreement, distribution of Elective Deferrals (and earnings thereon accrued as of December 31, 1988) may be made to a Participant in the event of hardship. For the purposes of this Section, hardship is defined as an immediate and heavy financial need of the Participant where such Participant lacks other available resources. (b) NEEDS CONSIDERED IMMEDIATE AND HEAVY. The only financial needs considered immediate and heavy are the following: (i) deductible medical expenses (within the meaning of section 213(d) of the Code) of the Employee, the Employee's spouse, children or dependents; (ii) the purchase (excluding mortgage payments) of a principal residence for the Employee; (iii) payment of tuition and related educational fees for the next twelve months of post-secondary education for the Employee, the Employee's spouse, children or dependents; or (iv) the need to prevent the eviction of the Employee from, or a foreclosure on the mortgage of, the Employee's principal residence. (c) NECESSARY TO SATISFY NEED. A distribution will be considered as necessary to satisfy an immediate and heavy financial need of the Employee only if: (i) the Employee has obtained all distributions, other than hardship distributions, and all nontaxable loans under all plans maintained by the Employer; (ii) all plans maintained by the Employer provide that the Employee's Elective Deferrals (and Employee contributions) will be suspended for twelve months after the receipt of the hardship distribution; (iii) the distribution is not in excess of the amount of an immediate and heavy financial need (including amounts necessary to pay any federal, state or local income taxes or penalties reasonably anticipated to result from the distribution); and (iv) all plans maintained by the Employer provide that the Employee may not make Elective Deferrals for the Employee's taxable year immediately following the taxable year of the hardship distribution in excess of the applicable limit under section 402(g) of the Code for such taxable year less the amount of such Employee's Elective Deferrals for the taxable year of the hardship distribution. 10.3 MANNER OF MAKING WITHDRAWALS. Any withdrawal by a Participant under the Plan shall be made only after the Participant files a written request with the Plan Administrator specifying the nature of the withdrawal (and the reasons therefor, if a hardship withdrawal) and the amount of funds requested to be withdrawn and, if applicable, including the spousal consent required under Section 11.9. Upon approving any withdrawal, the Plan Administrator shall furnish the Trustee with written instructions 30 directing the Trustee to make the withdrawal in a lump-sum payment of cash to the Participant. In making any withdrawal payment, the Trustee shall be fully entitled to rely on the instructions furnished by the Plan Administrator, and shall be under no duty to make any inquiry or investigation with respect thereto. 10.4 LIMITATIONS ON WITHDRAWALS. The Plan Administrator may prescribe uniform and nondiscriminatory rules and procedures limiting the number of times a Participant may make a withdrawal under the Plan during any Plan Year, and the minimum amount a Participant may withdraw on any single occasion. 10.5 SPECIAL CIRCUMSTANCES. Elective Deferral, Qualified Nonelective Contribution and Qualified Matching Contribution subaccounts may be distributed upon: (a) PLAN TERMINATION. Termination of the Plan without the establishment of another defined contribution plan, other than an employee stock ownership plan (as defined in section 4975(e) or 409 of the Code) or a Simplified Employee Pension Plan as defined in section 408(k) of the Code. (b) DISPOSITION OF ASSETS. The disposition by a corporation to an unrelated corporation of substantially all of the assets (within the meaning of section 409(d)(2) of the Code) used in a trade of business of such corporation if such corporation continues to maintain this plan after the disposition, but only with respect to Employees who continue employment with the corporation acquiring such assets. (c) DISPOSITION OF SUBSIDIARY. The disposition by a corporation to an unrelated entity of such corporation's interest in a subsidiary (within the meaning of section 409(d)(3) of the Code) if such corporation continues to maintain this Plan, but only with respect to Employees who continue employment with such subsidiary. All distributions that may be made pursuant to one or more of the foregoing distributable events are subject to the spousal and participant consent requirements (if applicable) contained in sections 411(a)(11) and 417 of the Code. In addition, distributions after March 31, 1988, that are triggered by any of the foregoing events must be made in a lump sum. ARTICLE 11. DISTRIBUTION PROVISIONS 11.1 RETIREMENT DISTRIBUTIONS. If a Participant's Normal Retirement Age should occur prior to the termination of his employment with the Employer, all amounts then credited to such Participant's Account shall become 100% vested regardless of the number of the Participant's Years of Vesting Service. If a Participant's employment is terminated on or after his Normal Retirement Age, such termination shall be deemed "Retirement," and the Plan Administrator shall direct the Trustee to take such action as may be necessary to distribute to such Participant, in one of the methods provided in Section 11.7, the value of his Account. (a) DEFERRED RETIREMENT. If a Participant's employment continues after his Normal Retirement Age, his participation in the Plan shall continue and, subject to Section 11.8, the distribution of his benefits shall be postponed until the earlier of (i) the date on which his Retirement becomes effective, which shall be his Deferred Retirement Date, or (ii) the date the Participant elects to receive his benefits. (b) PARTICIPANT STATUS AFTER RETIREMENT. Upon a Participant's Retirement, his participation as an active Participant hereunder shall cease, subject to his right to share in contributions made with respect to the Plan Year of his Retirement if he otherwise qualifies for such contributions in such Plan Year. 11.2 DEATH BENEFITS. Upon the death of a Participant before Retirement or before other termination of employment with the Employer, all amounts then credited to his Account shall become 100% vested, regardless of the number of his Years of Vesting Service. The Plan Administrator shall direct the Trustee to distribute the value of the Participant's Account, in one of the methods provided in Section 11.7, and at the time provided in Section 11.6, to any surviving Beneficiary designated by the Participant in accordance with the provisions of subsection (c) below. (a) DEATH OF FORMER EMPLOYEE. Upon the death of a former Employee before distribution of his vested interest in his Account has begun, the Trustee, in accordance with the instructions of the Plan Administrator and in accordance with the provisions of this Article, shall take such action as may be necessary to distribute his vested interest in his Account, in one of the methods provided in Section 11.7 hereof and commencing at such time provided in Section 11.6, to any surviving Beneficiary designated in accordance with the provisions of subsection (c) below. Upon the death of a former Participant after distribution of his benefits has begun and before the entire vested interest in his Account has been distributed to him, the Plan Administrator shall direct the Trustee to distribute the remaining portion of such interest to any surviving Beneficiary designated in accordance with the provisions of subsection (c) below at least as rapidly as under the method of distribution being used as of the date of his death. (b) PROOF OF DEATH. The Plan Administrator may require such proper proof of death and such evidence of the right of any person to receive payment of the vested interest of a deceased Participant or former Participant as it may deem desirable. The Plan Administrator's determination of death and of the right of any person to receive payment shall be conclusive. (c) BENEFICIARY DESIGNATION. Each Participant may designate one or more primary Beneficiaries and one or more secondary Beneficiaries by filing written notice with the Plan Administrator on a form acceptable to the Plan Administrator. However, in the case of a married Participant, the Participant shall be deemed to have designated his surviving spouse as his sole primary Beneficiary, notwithstanding any contrary written notice, unless such spouse filed a written voluntary consent with the Plan Administrator irrevocably consenting to the Participant's designation of a non-spouse Beneficiary, which consent shall be notarized or witnessed by the Plan Administrator, and shall acknowledge the effect of the Participant's designation of Beneficiary. A married Participant may not subsequently change the designated non-spouse Beneficiary unless his spouse's voluntary consent acknowledges that the spouse has a right to consent to a specific beneficiary and expressly permits designations by the Participant without further spousal consent or his spouse has filed a written consent with the Plan Administrator, irrevocably consenting to such change, which consent shall be notarized or witnessed by the Plan Administrator, and shall acknowledge the effect of the change. Subject to the two preceding sentences, a Participant may change any designated Beneficiary by filing written notice of the change with the Plan Administrator. If any Participant 31 fails to designate a Beneficiary, or if his designated Beneficiary or Beneficiaries do not survive the Participant, the Plan Administrator shall designate a Beneficiary or Beneficiaries on his behalf, in the following order: (i) The Participant's spouse, if living at the time of the Participant's death. (ii) The Participant's issue, per stirpes. (iii) The Participant's brothers and sisters, per stirpes. (iv) The Participant's parents. (v) The estate of the Participant. 11.3 PERMANENT DISABILITY BENEFITS. If, prior to his Retirement or other termination of employment with the Employer, a Participant incurs a Total and Permanent Disability, he shall be deemed to have retired by reason of Permanent Disability, and his Account shall become 100% vested, regardless of the number of his Years of Vesting Service. The Plan Administrator shall determine the date as of which such Retirement shall become effective. The Trustee, in accordance with the instructions of the Plan Administrator and in accordance with the provisions of this Article, shall take such action as may be necessary to distribute the value of the Participant's Account(s) to the Participant commencing at such time, and in one of the methods, provided in Sections 11.5 through 11.7 hereof. 11.4 TERMINATION OF EMPLOYMENT PRIOR TO RETIREMENT, DEATH OR TOTAL AND PERMANENT DISABILITY. If a Participant's employment with the Employer terminates for any reason other than Retirement, Total and Permanent Disability or death, the Plan Administrator shall direct the Trustee to take such action as may be needed to distribute to such Participant the vested portion of his Account, as determined in accordance with Article 8. Such distribution shall be made commencing at such time, and in one of the methods, provided in Sections 11.5 through 11.7 hereof. 11.5 COMMENCEMENT OF LIFETIME DISTRIBUTIONS. (a) UPON RETIREMENT. The distribution of benefits payable to a Participant who retires by reason of Retirement or Total and Permanent Disability shall commence as soon as is administratively feasible after a date on or after the Participant's Retirement as he elects, but in no event later than his required beginning date. Notwithstanding the foregoing provisions of this subsection (a), if such a Participant's total vested benefits do not exceed $3,500, his vested benefits shall be distributed to him in a lump-sum payment as soon as administratively feasible after his Retirement. (b) UPON TERMINATION OF EMPLOYMENT OTHER THAN RETIREMENT. The distribution of the vested interest of a Participant whose employment terminated for any reason other than Retirement, Total and Permanent Disability or death shall commence as soon as is administratively feasible after a date elected by the Participant that follows the date his employment terminated. Notwithstanding the foregoing provisions of this subsection (b), (i) If a Participant's total vested benefits do not exceed (or at the time of any prior distribution did not exceed) $3,500, his vested benefits shall be distributed to him in a lump-sum payment as soon as is administratively feasible after the date on which his employment terminated, as long as he has not returned as an Employee on the date of such distribution, and (ii) Distributions shall begin no later than the Participant's required beginning date. (c) STATUTORY REQUIREMENTS. If a Participant does not elect to defer payment of his benefits in accordance with subsections (a) or (b) above, distribution of his benefits shall commence during the sixty day period immediately following the Plan Year in which occurs the latest of: (i) the Participant's Normal Retirement Age, (ii) the 10-year anniversary of the date on which the Participant commenced participation in the Plan, and (iii) the date the Participant's employment with the Employer terminated. (d) IN-SERVICE DISTRIBUTIONS. The distribution of a Participant's vested benefits shall not commence prior to the time his employment with the Employer terminates, except in the following circumstances: (i) Withdrawals made in accordance with the provisions of Article 10, (ii) Payments to an alternate payee pursuant to qualified domestic relations order as described in section 414(p) of the Code may be made at any time, (iii) Minimum required distributions made on and after his required beginning date, or (iv) Distributions made in accordance with the provisions of Section 11.1(a). (e) REQUIRED BEGINNING DATE. The required beginning date of a Participant is the first day of April of the calendar year following the calendar year in which the Participant attains age 70 1/2. Notwithstanding the foregoing: (i) The required beginning date of a Participant who attains age 70 1/2 before January 1, 1988, shall be determined in accordance with (A) or (B) below: (A) The required beginning date of a Participant who is not a Five Percent Owner is the first day of April of the calendar year following the calendar year in which the later of Retirement or attainment of age 70 1/2 occurs. (A Participant is treated as a Five Percent Owner for purpose of this subsection if such Participant is a Five Percent Owner at any time during the Plan Year ending with or within the calendar year in which such owner attains age 66 1/2 or any subsequent Plan Year.) (B) The required beginning date of a Participant who is a Five Percent Owner during any year beginning after December 31, 1979, is the first day of April following the later of: (1) the calendar year in which the Participant attains age 70 1/2, or (2) the earlier of the calendar year with or within which ends the Plan Year in which the Participant becomes a Five Percent Owner, or the calendar year in which the Participant retires. (ii) The required beginning date of a Participant who is not a Five Percent Owner who attains age 70 1/2 during 1988 and who has not retired as of January 1, 1989, is April 1, 1990. 11.6 COMMENCEMENT OF DEATH BENEFITS. Subject to Section 11.9, if a Participant dies before his benefit payments have commenced, his death benefits, if any, shall be payable beginning at such reasonable time after the Participant's death as his Beneficiary elects, subject to and in accordance with the following provisions: (a) NON-SPOUSE BENEFICIARY. In the case of a Beneficiary other than the Participant's surviving spouse, benefits must commence no later than the December 31 that coincides with or immediately follows the fifth anniversary of the Participant's death. If the beginning date of such benefits is after the December 31 that coincides with or immediately follows the first anniversary of the Participant's death, the Beneficiary's entire interest in the Participant's death benefits must be distributed no later than the December 31 that coincides with or immediately follows the fifth anniversary of the Participant's death. (b) SPOUSE BENEFICIARY. If the Participant's Beneficiary is the Participant's surviving spouse, the surviving spouse may elect to defer the commencement of benefits to the December 31 that coincides with or immediately follows the later of (i) the first anniversary of the Participant's death, or (ii) the date on which the Participant would have attained age 70 1/2. If the Participant's Beneficiary is his surviving spouse, and if his surviving spouse dies after the Participant dies but prior to the time the Participant's death benefits have commenced, the provisions of this Article 11 shall apply as if the surviving spouse were the Participant, except that the surviving spouse of the deceased Participant's surviving spouse shall not qualify as a surviving spouse. (c) ELECTION PERIOD. Any election made by a Beneficiary under this Section must be made no later than the December 31 that coincides with or immediately follows the first anniversary of the Participant's death and must be irrevocable as of such date, except that if the Participant's Beneficiary is the Participant's surviving spouse, the surviving spouse may defer making such election to the earlier of (i) the December 31 that coincides with or immediately follows the fifth anniversary of the Participant's death, or (ii) the last date on which the surviving spouse could defer the commencement of benefits under subsection (b). If a Beneficiary fails to make a proper election hereunder, the Beneficiary's interest in the Participant's death benefits shall be distributed in full no later than the December 31 that coincides with or immediately follows the fifth anniversary of the Participant's death. 11.7 METHODS OF DISTRIBUTION. (a) GENERAL RULE. Subject to Section 11.9, all benefits shall be distributed in accordance with one of the following methods as the Participant or Beneficiary, as the case may be, may elect in writing during the 90-day period before the date benefits commence: (i) In equal monthly, quarterly or annual installments over a period certain not to exceed the life expectancy of the Participant (or Beneficiary in the case of a Participant who dies prior to the time his benefits commenced) or the joint and last survivor life expectancy of the Participant and his Beneficiary so that the amount distributed in each Plan Year equals the amount determined by dividing the Participant's vested account balance on the last day of the immediately preceding Plan Year by the period certain determined in accordance with this paragraph (i) which shall be reduced by one for each Plan Year after the Plan Year in which the Participant's benefits commence. (ii) Payment to the Participant or Beneficiary of all or part of such benefits in one lump sum. (b) DIRECT ROLLOVER. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this Article 11, for all distributions made on or after January 1, 1993, a distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. For purposes of this subsection, the following definitions shall apply: (i) An "eligible rollover distribution" is any distribution of all or a portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated Beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under section 401(a)(9) of the Code; and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). (ii) An "eligible retirement plan" in an individual retirement account described in section 408(a) of the Code, an individual retirement annuity described in section 408(b) of the Code, an annuity plan described in section 403(a) of the Code, or a qualified trust described in section 401(a) of the Code, that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. (iii) A "distributee" includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the alternate payee under a qualified domestic retirement order, as described the section 414(p) of the Code, are distributees with regard to the interest of the spouse or former spouse. (iv) A "direct rollover" is a payment by the Plan to the eligible retirement plan specified by the distributee. 11.8 MINIMUM REQUIRED DISTRIBUTIONS. If the Participant's interest is to be distributed in other than a single sum, the following minimum distribution rules shall apply on or after the required beginning date: (a) INDIVIDUAL ACCOUNT. (i) If a Participant's benefit is to be distributed over (A) a period not extending beyond the life expectancy of the Participant or the joint life and last survivor expectancy of the Participant and the Participant's designated Beneficiary or (B) a period not extending beyond the life expectancy of the designated Beneficiary, the amount required to be distributed for each calendar year, beginning with distributions for the first distribution calendar year, must at least equal the quotient obtained by dividing the Participant's benefit by the applicable life expectancy. (ii) For calendar years beginning before January 1, 1989, if the Participant's spouse is not the designated Beneficiary, the method of distribution selected must assure that at least 50% of the present value of the amount available for distribution is paid within the life expectancy of the Participant. (iii) For calendar years beginning after December 31, 1988, the amount to be distributed each year, beginning with distributions for the first distribution calendar year shall not be less than the quotient obtained by dividing the Participant's benefit by the lesser of (A) the applicable life expectancy or (B) if the Participant's spouse is not the designated Beneficiary, the applicable divisor determined from the table set forth in Q&A-4 of section 1.401(a)(9)-2 of the proposed regulations. Distributions after the death of the Participant shall be distributed using the applicable life expectancy in paragraph (i) above as the relevant divisor without regard to Proposed Regulations section 1.401(a)(9)B2. (iv) The minimum distribution required for the Participant's first distribution calendar year must be made on or before the Participant's required beginning date. The minimum distribution for other calendar years, including the minimum distribution for the distribution calendar year in which the Employee's required beginning date occurs, must be made on or before December 31 of the distribution calendar year. (b) OTHER FORMS. If the Participant's benefit is distributed in the form of an annuity purchased from an insurance company, distributions thereunder shall be made in accordance with the requirements of section 401(a)(9) of the Code and the proposed regulations thereunder. For purposes of this Section 11.8, any amount paid to a child of the Participant will be treated as if it had been paid to the surviving spouse if the amount becomes payable to the surviving spouse when the child reaches the age of majority. For the purposes of this Section 11.8, distribution of a Participant's interest is considered to begin on the Participant's required beginning date (or, if Section 11.6 is applicable, the date distribution is required to begin to the surviving spouse pursuant to section 11.6(b)). If distribution in the form of an annuity irrevocably commences to the Participant before the required beginning date, the date distribution is considered to begin is the date distribution actually commences. (c) DEFINITIONS. (i) Applicable life expectancy. The life expectancy (or joint and last survivor expectancy) calculated using the attained age of the Participant (or designated Beneficiary) as of the Participant's (or designated Beneficiary's) birthday in the applicable calendar year reduced by one for each calendar year which has elapsed since the date life expectancy was first calculated. If life expectancy is being recalculated, the applicable life expectancy shall be the life expectancy as so recalculated. The applicable calendar year shall be the first distribution calendar year, and if life expectancy is being recalculated, such succeeding calendar year. If annuity payments commence before the required beginning date, the applicable calendar year is the year such payments commence. If distribution is in the form of an immediate annuity purchased after the Participant's death with the Participant's remaining interest, the applicable calendar year is the year of purchase. (ii) Designated Beneficiary. The individual who is designated as the Beneficiary under the Plan in accordance with section 401(a)(9) and the proposed regulations thereunder. (iii) Distribution calendar year. A calendar year for which a minimum distribution is required. For distributions beginning before the Participant's death, the first distribution calendar year is the calendar year immediately preceding the calendar year which contains the Participant's required beginning date. For distributions beginning after the Participant's death, the first distribution calendar year is the calendar year in which distributions are required to begin pursuant to Section 11.6 above. (iv) Life expectancy. Life expectancy and joint and last survivor expectancy are computed by use of the expected return multiples in Table V and VI of section 1.72-9 of the Income Tax Regulations. Unless otherwise elected by the Participant (or spouse, in the case of distributions described in Section 11.6(b)) by the time distributions are required to begin, life expectancies shall not be recalculated. Such election shall be irrevocable as to the Participant (or spouse) and shall apply to all subsequent years. The life expectancy of a non-spouse Beneficiary may not be recalculated. (d) PARTICIPANT'S BENEFIT. The account balance as of the last Valuation Date in the calendar year immediately preceding the distribution calendar year (valuation calendar year) increased by the amount of any contributions or forfeitures allocated to the account balance as of dates in the valuation calendar year after the Valuation Date and decreased by distributions made in the valuation calendar year after the Valuation Date. Notwithstanding the foregoing, if any portion of the minimum distribution for the first distribution calendar year is made in the second distribution calendar year on or before the required beginning date, the amount of the minimum distribution made in the second distribution calendar year shall be treated as if it had been made in the immediately preceding distribution calendar year. 11.9 JOINT AND SURVIVOR ANNUITY REQUIREMENTS. Notwithstanding the foregoing provisions of this Article 11, if the Plan is a direct or indirect transferee of a Participant's interest in a defined benefit plan, money purchase plan, a target benefit plan, stock bonus, or profit-sharing plan which is subject to the survivor annuity requirements of sections 401(a)(11) and 417 of the Code, then the following provisions shall apply to distributions to such Participant: (a) QUALIFIED JOINT AND SURVIVOR ANNUITY. All benefit distributions to such a Participant in the Plan shall be in the form of a "Qualified Joint and Survivor Annuity," subject to the following rules: (i) For the purposes of this subsection (a) and of subsection (b), (A) in the case of a Participant who is married on the date his benefit payments commence, the term "Qualified Joint and Survivor Annuity" shall mean an immediate nontransferable annuity policy which complies with the provisions of this Plan, purchased with the Participant's total vested interest in his Account, payable to the Participant for life with a survivor annuity payable to his spouse at the time of the purchase of the policy, for the life of that spouse, which is equal to 50% of the amount of the annuity payable during the joint lives of the Participant and his spouse, (B) in the case of a Participant who is not married on the date his benefit payments commence, the term "Qualified Joint and Survivor Annuity" shall mean an annuity policy, purchased with the Participant's total vested interest in his Account, payable to the Participant for his life, and (C) the term "Annuity Starting Date" shall mean the first day of the first period for which an amount is to be paid to the Participant or Beneficiary as an annuity, or, in the case of a benefit not payable in the form of an annuity, the first day on which all events have occurred which entitle the Participant or Beneficiary to such benefit. (ii) Written notice explaining the Qualified Joint and Survivor Annuity and optional forms of benefit, the right of the Participant to elect to waive the Qualified Joint and Survivor Annuity, the right of the spouse to consent to such waiver, the effect of a waiver and the effect of a consent to a waiver, the right of the Participant to revoke an election to waive, and the inability of the spouse to revoke his or her consent shall be given to the Participant no less than 30 days and no more than 90 days prior to his Annuity Starting Date. If a distribution is one to which sections 401(a)(11) and 417 of the Code do not apply, such distribution may commence less than 30 days after the notice required under section 1.411(a)-11(c) of the Income Tax Regulations is given, provided that (a) the Plan Administrator clearly informs the Participant that the Participant has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (b) the Participant, after receiving the notice, affirmatively elects a distribution. (iii) A Qualified Joint and Survivor Annuity shall not be paid to a Participant if, during the 90-day period ending on the Annuity Starting Date, (A) the Participant has filed a written election with the Plan Administrator waiving the Qualified Joint and Survivor Annuity, and (B) in the case of a married Participant, his spouse has filed a written consent with the Plan Administrator irrevocably consenting to such waiver, which consent shall be notarized or witnessed by the Plan Administrator, and shall acknowledge the effect of the waiver. The written election waiving the Qualified Joint and Survivor Annuity shall state the specific non-spouse Beneficiary and/or the alternative form of benefit. A married Participant may not subsequently change the non-spouse Beneficiary and/or alternative form of benefit elected unless his spouse's consent expressly permits designations by the Participant without any further spousal consent or his spouse has filed a written consent with the Plan Administrator irrevocably consenting to such change, which consent shall be notarized or witnessed by the Plan Administrator, and shall acknowledge the effect of the change. Notwithstanding the preceding sentence, a married Participant may revoke his election waiving the Qualified Joint and Survivor Annuity at any time and any number of times on or before the Annuity Starting Date without the consent of his spouse. (iv) Even if a Participant does not waive the Qualified Joint and Survivor Annuity in accordance with paragraph (iii) above, the Plan Administrator will not be required to direct the Trustee to distribute a Participant's or former Participant's benefits in the form of a Qualified Joint and Survivor Annuity if the value of the Participant's vested Account on the Annuity Starting Date does not exceed $3,500 and if such Account is distributed to the Participant in a single lump-sum payment of cash, provided that no such distribution shall be made after the Annuity Starting Date without the written consent of the Participant and his spouse. (b) QUALIFIED PRE-RETIREMENT SURVIVOR ANNUITY. In the case of a Participant with a vested interest under this Plan who dies prior to his Annuity Starting Date, and who is married on the date of his death, all death benefits under the money purchase pension plan shall be distributed to his surviving spouse in the form of a "Qualified Pre-Retirement Survivor Annuity," in accordance with the following rules: (i) For the purposes hereof, the term "Qualified Pre-Retirement Survivor Annuity" shall mean a nontransferable annuity which complies with the provisions of this Plan for the life of the Participant's surviving spouse, in such amount as may be purchased with an amount equal to 100% of the value the Participant's total vested interest in his Account. (ii) Written notice explaining the Qualified Pre-Retirement Survivor Annuity, the right of the Participant to elect to waive the Qualified Pre-Retirement Survivor Annuity, the right of the spouse to consent to such waiver, the effect of a waiver and the effect of a consent to a waiver, the right of the Participant to revoke an election to waive, and the inability of the spouse to revoke his or her consent shall the given to the Participant during the two-year period ending on (A) the first anniversary of the date he became a Participant, and (B) the first anniversary of the date his employment terminates. If, in accordance with clause (A) of the preceding sentence, written notice is given to the Participant prior to the last day of the Plan Year in which he attains age 31, a second notice, similar to the initial notice, shall be given to the Participant within whichever of the following periods ends first: (A) the one-year period after his employment with the Employer terminates, or (B) the period beginning with the first day of the Plan Year in which he attains age 32 and ending with the last day of Plan Year in which he attains age 34. (iii) A Qualified Pre-Retirement Survivor Annuity shall not be paid to the surviving spouse of a deceased Participant if, during the period beginning on the day on which the Participant first became a Participant in the Plan and ending on the date of his death, (A) the Participant has filed a written election with the Plan Administrator waiving such Qualified Pre-Retirement Survivor Annuity, and (B) his spouse has filed a written consent with the Plan Administrator, irrevocably consenting to such waiver, which consent shall be notarized or witnessed by the Plan Administrator, and shall acknowledge the effect of the waiver. The written election waiving the Qualified Pre-Retirement Survivor Annuity shall state the specific non-spouse Beneficiary. A Participant may not subsequently change the designated non-spouse Beneficiary unless his spouse's voluntary consent acknowledges that the spouse has the right to limit consent to a specific beneficiary, and a specific form of benefit where applicable, and expressly permits designations by the Participant without further spousal consent or his spouse has filed a written consent with the Plan Administrator, irrevocably consenting to such change, which consent shall be notarized or witnessed by the Plan Administrator, and shall acknowledge the effect of the change. Notwithstanding the preceding sentence, a Participant may revoke his election waiving the Qualified Pre-Retirement Survivor Annuity at any time and any number of times without the consent of his spouse. (iv) Notwithstanding the first sentence of paragraph (iii), if the Participant waives the Qualified Pre-Retirement Survivor Annuity prior to the first day of the Plan Year in which he attains age 35, such waiver shall be invalid upon the beginning of the Plan Year in which he attains age 35 until the Participant, during the period beginning on the earlier of the first day of the Plan Year in which he attains age 35 or the date on which his employment with the Employer terminates and ending on the date of his death, again waives the Qualified Pre-Retirement Survivor Annuity in accordance with the preceding sentence. Qualified preretirement survivor annuity coverage automatically will be reinstated as of the first day of the Plan Year in which the Participant attains age 35. Provided, however, that a Participant who (A) terminates his employment with the Employer prior to the first day of the Plan Year in which he attains age 35, and (B) on or after that date waives the Qualified Pre-Retirement Survivor Annuity, need not again waive the Qualified Pre-Retirement Survivor Annuity. (v) Even if a Participant does not waive the Qualified Pre-Retirement Survivor Annuity in accordance with paragraphs (iii) or (iv) above, the Plan Administrator will not be required to direct the Trustee to distribute a Participant's total vested interest in all of his Accounts in the form of a Qualified Pre-Retirement Survivor Annuity if (A) the Participant's surviving spouse files a written consent with the Plan Administrator consenting to the distribution of such vested benefits in one of the methods described in Section 11.7 hereof, or (B) the value of the Participant's total vested interest in his Account does not exceed $3,500 and such Account is distributed to the surviving spouse in a single lump-sum payment of cash; provided that no such distribution shall be made after the Annuity Starting Date without the written consent of the Participant's or former Participant's surviving spouse. (c) SPECIAL RULES. For purposes of this Section 11.9: (i) A former spouse of a Participant will be treated as the Participant's spouse or surviving spouse to the extent provided under a qualified domestic relations order as described in section 414(p) of the Code. (ii) If the Plan Administrator determines that a Participant has no spouse or the Participant's spouse cannot be located, no spousal consent shall be necessary, (iii) A spouse's consent (or determination that the consent of a spouse cannot be obtained) hereunder shall be effective only with respect to such spouse. 11.10 REEMPLOYMENT. If a former Employee who has begun to receive benefit payments hereunder should be reemployed by the Employer prior to his Normal Retirement Age, his benefit payments shall cease. 11.11 VALUATION OF BENEFITS. All distributions made in the form of a lump sum shall be based upon the value of the Participant's Account(s) determined as of the Valuation Date which coincides with or immediately precedes the date on which the distribution is being made, reduced by withdrawals and distributions made from such Account(s) after such Valuation Date and increased by all allocations to the Participant's Accounts made after such Valuation Date. ARTICLE 12. ADMINISTRATION 12.1 DUTIES AND RESPONSIBILITIES OF FIDUCIARIES; ALLOCATION OF FIDUCIARY RESPONSIBILITY. A fiduciary of the Plan shall have only those specific powers, duties, responsibilities and obligations as are explicitly given him under the Plan and Trust Agreement. In general, the Employer shall have the sole responsibility for making contributions to the Plan required under Article 5, appointing the Trustee, and determining the funds available for investment under the Plan. The Plan Administrator shall have the sole responsibility for the administration of the Plan, as more fully described in Section 12.2. It is intended that each fiduciary shall be responsible only for the proper exercise of his own powers, duties, responsibilities and obligations under the Plan and Trust Agreement and shall not be responsible for any act or failure to act of another fiduciary. A fiduciary may serve in more than one fiduciary capacity with respect to the Plan. 12.2 POWERS AND RESPONSIBILITIES OF THE PLAN ADMINISTRATOR. (a) ADMINISTRATION OF THE PLAN. The Plan Administrator shall be charged with the full power and the responsibility for administering the Plan in all its details. The Plan Administrator shall have all powers necessary to administer the Plan, including the power to construe and interpret the Plan documents; to decide all questions relating to an individual's eligibility to participate in the Plan; to determine the amount, manner and timing of any distribution of benefits or withdrawal under the Plan; to approve and ensure the repayment of any loan to a Participant under the Plan; to resolve any claim for benefits in accordance with Section 12.6; and to appoint or employ advisors, including legal counsel, to render advice with respect to any of the Plan Administrator's responsibilities under the Plan. Any construction, interpretation or application of the Plan by the Plan Administrator shall be final, conclusive and binding. All actions by the Plan Administrator shall be taken pursuant to uniform standards applied to all persons similarly situated. The Plan Administrator shall have no power to add to, subtract from or modify any of the terms of the Plan, or to change or add to any benefits provided by the Plan, or to waive or fail to apply any requirements of eligibility for a benefit under the Plan. (b) RECORDS AND REPORTS. The Plan Administrator shall be responsible for maintaining sufficient records to reflect the periods in which an Employee is credited with one or more Years of Eligibility Service or Years of Vesting Service for purposes of determining his eligibility to participate and his vesting, respectively, in the Plan, and the Compensation of each Participant for purposes of determining the amount of contributions that may be made by or on behalf of the Participant under the Plan. The Plan Administrator shall be responsible for submitting all required reports and notifications relating to the Plan to Participants or their Beneficiaries, the Internal Revenue Service and the Department of Labor. (c) FURNISHING TRUSTEE WITH INSTRUCTIONS. The Plan Administrator shall be responsible for furnishing the Trustee with written instructions regarding all contributions to the Trust, all distributions to Participants in accordance with Article 11, all withdrawals by Participants in accordance with Article 10 and all loans to Participants in accordance with Article 9. In addition, the Plan Administrator shall be responsible for furnishing the Trustee with any further information regarding the Plan which the Trustee may request for the performance of its duties or for the purpose of making any returns to the Internal Revenue Service or Department of Labor as may be required of the Trustee. (d) RULES AND DECISIONS. The Plan Administrator may adopt such rules as it deems necessary, desirable or appropriate in the administration of the Plan. All rules and decisions of the Plan Administrator shall be applied uniformly and consistently to all Participants in similar circumstances. When making a determination or calculation, the Plan Administrator shall be entitled to rely upon information furnished by a Participant or Beneficiary, the Employer, the legal counsel of the Employer or the Trustee. (e) APPLICATION AND FORMS FOR BENEFITS. The Plan Administrator may require a Participant or Beneficiary to complete and file with it an application for a benefit and to furnish all pertinent information requested by it. The Plan Administrator may rely upon all such information so furnished to it, including the Participant's or Beneficiary's current mailing address. (f) FACILITY OF PAYMENT. Whenever, in the Plan Administrator's opinion, a person entitled to receive a payment of a benefit or installment thereof is under a legal disability or is incapacitated in any way so as to be unable to manage his financial affairs, as determined by a court of competent jurisdiction, it may direct the Trustee to make payments to such person or to the legal representative or to a relative or friend of such person for that person's benefit, or it may direct the Trustee to apply the payment for the benefit of such person in such manner as it considers advisable. 12.3 ALLOCATION OF DUTIES AND RESPONSIBILITIES. The Plan Administrator may, by written instrument, allocate among its Employees any of its duties and responsibilities not already allocated under the Plan or may designate persons other than Employees to carry out any of the Plan Administrator's duties and responsibilities under the Plan. Any such duties or responsibilities thus allocated must be described in the written instrument. If a person other than an Employee of the Employer is so designated, such person must acknowledge in writing his acceptance of the duties and responsibilities allocated to him. 12.4 EXPENSES. The Employer shall pay all expenses authorized and incurred by the Plan Administrator in the administration of the Plan except to the extent such expenses are paid from the Trust. 12.5 LIABILITIES. The Plan Administrator and each person to whom duties and responsibilities have been allocated pursuant to Section 12.3 may be indemnified and held harmless by the Employer with respect to any alleged breach of responsibilities performed or to be performed hereunder. The Employer and each Affiliated Employer shall indemnify and hold harmless the Sponsor against all claims, liabilities, fines, penalties and all expenses reasonably incurred by or imposed upon it (including, but not limited to, reasonable attorney's fees) which arise as a result of actions or failure to act in connection with the operation and administration of the Plan. 12.6 CLAIMS PROCEDURE. (a) FILING A CLAIM. Any Participant or Beneficiary under the Plan may file a written claim for a Plan benefit with the Plan Administrator or with a person named by the Plan Administrator to receive claims under the Plan. (b) NOTICE OF DENIAL OF CLAIM. In the event of a denial or limitation of any benefit or payment due to or requested by any Participant or Beneficiary under the Plan ("claimant"), claimant shall be given a written notification containing specific reasons for the denial or limitation of his benefit. The written notification shall contain specific reference to the pertinent Plan provisions on which the denial or limitation of his benefit is based. In addition, it shall contain a description of any other material or information necessary for the claimant to perfect a claim, and an explanation of why such material or information is necessary. The notification shall further provide appropriate information as to the steps to be taken if the claimant wishes to submit his claim for review. This written notification shall be given to a claimant within 90 days after receipt of his claim by the Plan Administrator unless special circumstances require an extension of time for processing the claim. If such an extension of time for processing is required, written notice of the extension shall be furnished to the claimant prior to the termination of said 90 day period, and such notice shall indicate the special circumstances which make the postponement appropriate. (c) RIGHT OF REVIEW. In the event of a denial or limitation of his benefit, the claimant or his duly authorized representative shall be permitted to review pertinent documents and to submit to the Plan Administrator issues and comments in writing. In addition, the claimant or his duly authorized representative may make a written request for a full and fair review of his claim and its denial by the Plan Administrator; provided, however, that such written request must be received by the Plan Administrator (or its delegate to receive such requests) within 60 days after receipt by the claimant of written notification of the denial or limitation of the claim. The 60 day requirement may be waived by the Plan Administrator (or its delegate) in appropriate cases. (d) DECISION ON REVIEW. A decision shall be rendered by the Plan Administrator within 60 days after it receives the request for review, provided that where special circumstances require an extension of time for processing the decision, it may be postponed on written notice to the claimant (prior to the expiration of the initial 60 day period) for an additional 60 days, but in no event shall the decision be rendered more than 120 days after the receipt of such request for review. Any decision by the Plan Administrator shall be furnished to the claimant in writing and shall set forth the specific reasons for the decision and the specific Plan provisions on which the decision is based. (e) COURT ACTION. No Participant or Beneficiary shall have the right to seek judicial review of a denial of benefits, or to bring any action in any court to enforce a claim for benefits prior to filing a claim for benefits or exhausting his rights to review under this Section. ARTICLE 13. AMENDMENT, TERMINATION AND MERGER 13.1 SPONSOR'S POWER TO AMEND. The Sponsor may amend any part of the Plan. If the Sponsor amends or terminates the Plan, it shall give notice of such amendment or termination to each adopting Employer which has notified the Sponsor it has adopted, but not yet ceased to use, this prototype Plan and which has all Plan assets invested in Shares at the time of such amendment or termination. 13.2 AMENDMENT BY ADOPTING EMPLOYER. The Employer may: (a) change the choice of options in the Adoption Agreement; (b) add overriding language in the Adoption Agreement when such language is necessary to (i) satisfy section 415 or 416 of the Code because of the required aggregation of multiple plans, or (ii) preserve benefits protected under section 411(d)(6) of the Code; and (c) add certain model amendments published by the Internal Revenue Service which specifically provide that their adoption will not cause the Plan to be treated as individually designed. An Employer that amends the Plan for any other reason, including a waiver of the minimum funding requirement under section 412(d) of the Code, will no longer participate in this prototype plan and will be considered to have an individually designed plan. 13.3 TERMINATION. The Employer is not and shall not be under any obligation to continue its contributions to, or to maintain, the Plan for any length of time. The Employer may, in its sole discretion, completely discontinue its contributions to or terminate the Plan and Trust in accordance with the provisions of the Plan in effect at the time of discontinuance of contributions or termination. In the event of the termination or partial termination of the Plan, the account balance of each affected Participant will be nonforfeitable. 13.4 VESTING UPON COMPLETE DISCONTINUANCE OF CONTRIBUTIONS. In the event of a complete discontinuance of contributions under the Plan, the account balance of each affected Participant will be nonforfeitable. 13.5 MAINTENANCE OF BENEFITS UPON MERGER. In the event of a merger or consolidation with, or transfer of assets to any other plan, each Participant will receive a benefit immediately after such merger, consolidation or transfer (if the Plan then terminated) which is at least equal to the benefit the Participant was entitled to immediately before such merger, consolidation or transfer (if the Plan had been terminated). ARTICLE 14. MISCELLANEOUS 14.1 EXCLUSIVE BENEFIT OF PARTICIPANTS AND BENEFICIARIES. (a) GENERAL RULE. All assets of the Trust shall be retained for the exclusive benefit of Participants and their Beneficiaries, and shall be used only to pay benefits to such persons or to pay the fees and expenses of the Trust. The assets of the Trust shall not revert to the benefit of the Employer, except as otherwise specifically provided in subsection (b) below. (b) SPECIAL RULES. To the extent permitted or required by ERISA and the Code, contributions to the Trust under this Plan are subject to the following conditions: (i) If a contribution or any part thereof is made to the Trust by the Employer under a mistake of fact, such contribution or part thereof shall be returned to the Employer within one year after the date the contribution is made. (ii) In the event the Plan is determined not to meet the initial qualification requirements of section 401 of the Code, contributions made in respect of any period for which such requirements are not met shall be returned to the Employer within one year after the Plan is determined not to meet such requirements, but only if the application for the qualification is made by the time prescribed by law for filing the Employer's return for the taxable year in which the Plan is adopted or such later date as the Secretary of the Treasury may prescribe. (iii) Contributions to the Trust are specifically conditioned on their deductibility under the Code and, to the extent a deduction is disallowed for any such contribution, such amount shall be returned to the Employer within one year after the date of the disallowance of the deduction. 14.2 NONGUARANTEE OF EMPLOYMENT. Nothing contained in this Plan shall be construed as a contract of employment between the Employer and any Employee or as a right of any Employee to be continued in the employment of the Employer or as a limitation of the right of the Employer to discharge any of its Employees, with or without cause. 14.3 RIGHTS TO TRUST ASSETS. No Employee, Participant or Beneficiary shall have any right to, or interest in, any assets of the Trust upon termination of employment or otherwise, except as provided under the Plan. All payments of benefits under the Plan shall be made solely out of the assets of the Trust. 14.4 NONALIENATION OF BENEFITS. No benefit or interest available hereunder will be subject to assignment or alienation, either voluntarily or involuntarily. The preceding sentence shall also apply to the creation, assignment or recognition of a right to any benefit payable with respect to a Participant pursuant to a domestic relations order, unless such order is determined to be a qualified domestic relations order, as defined in section 414(p) of the Code, or any domestic relations order entered before January 1, 1985. 14.5 FAILURE OF QUALIFICATION. If the Employer's plan fails to attain or retain qualification, such plan will no longer participate in this prototype plan and will be considered an individually designed plan. 14.6 APPLICABLE LAW. Except to the extent otherwise required by ERISA, as amended, this Plan shall be construed and enforced in accordance with the laws of the state in which the Employer's principal place of business is located, as specified in the Adoption Agreement. 14.7 REFERENCE TO FEDERAL LAW. All references in this Plan to sections of the Internal Revenue Code or ERISA and any regulations or ruling thereunder shall be deemed to refer to such sections (and any regulation or ruling thereunder) as they subsequently may be modified, amended, replaced or amplified by any successor federal statute, regulation or ruling of similar application and import. 14.8 CONSTRUCTION. Whenever used in this Plan, unless the context indicates otherwise, the singular shall include the plural, the plural shall include the singular and the male gender shall include the female gender. 14.9 HEADINGS. Headings in this Plan are inserted solely for convenience of reference and shall neither constitute a part of this Plan nor affect its meaning, construction or intent. 14.10 PRIORITY OF ADOPTION AGREEMENT. The Adoption Agreement has the function of amending the terms of this document where necessary or appropriate. If there is any conflict between the terms of this document and the terms of the Adoption Agreement, the terms of the Adoption Agreement shall prevail. SIMPLIFIED 401(k) PROTOTYPE Trust Agreement Unless the context of this Trust Agreement clearly indicates otherwise, the terms defined in Article 2 of the Plan entered into by the Employer of which this Trust Agreement forms a part shall, when used herein, have the same meaning as in the Plan. ARTICLE I - TRUST FUND 1.1 TRUST. The Employer hereby establishes with the Trustee a trust account or accounts ("Accounts") consisting of such sums of U.S. currency and such other property acceptable to the Trustee as shall from time to time be contributed, paid or delivered to the Trustee pursuant to this Trust Agreement at the address specified by the Trustee. All such money and property, all investments and reinvestments made therewith and proceeds thereof, less any payments or distributions made by the Trustee pursuant to the terms of this Trust Agreement, are referred to herein as the "Trust". The Trust shall be held by the Trustee in accordance with the express provisions of this instrument and the requirements of law. 1.2 DELEGATION OF AUTHORITY. The Trustee may delegate to a custodian or other agent the custodianship of all or part of the assets of the Trust. The Trustee and the Employer may, by mutual agreement, arrange for the delegation by the Trustee to the Plan Administrator or any agent of the Employer of any powers or functions of the Trustee hereunder other than the custody of the Trust assets. The Trustees shall not be responsible for any act or omission of such person or persons arising from any such delegation, except to the extent provided in Section 4.8. 1.3 LIMITATIONS OF TRUSTEE'S DUTIES. With respect to its duties hereunder, the Trustee is a non-discretionary trustee and shall have no duty to: (a) determine or enforce payment of any contribution due under the Plan; (b) inquire into the accuracy of any contribution; (c) determine the adequacy of the funding policy adopted by the Employer to meet its obligations under the Plan; (d) look into the property of any investment or distribution made under the Plan; or (e) ensure the qualification of the Plan under the Code. The Trustee shall not be deemed to be the administrator, the Plan sponsor or a "named fiduciary" of the Plan as defined in sections 3(16)(A), 3(16)(B) and 402(a)(2), respectively, of ERISA. ARTICLE II - ACCOUNTS 2.1 ESTABLISHING ACCOUNTS. The Trustee shall open and maintain a Trust Account for the Plan. Upon receipt of written instructions from the Employer, the Trustee also shall open and maintain such Participant Accounts and subaccounts as the Employer may direct. The Trustee shall also open and maintain such other subaccounts as may be appropriate or desirable to aid in the administration of the Plan. The Employer shall give written instructions to the Trustee specifying the Participants' Accounts and subaccounts to which contributions and forfeitures are to be credited, and the amounts of such contributions and forfeitures which are to be credited to such Accounts and subaccounts. 2.2 CHARGES AGAINST ACCOUNTS. Upon receipt of written instructions from the Employer, the Trustee shall charge the appropriate Account or subaccount of a Participant for any withdrawals or distributions made under the Plan, for any forfeiture which may be required under the Plan of unvested interests attributable to Employer contributions and for any fees which may be charged against the Trust assets. ARTICLE III - INVESTMENT OF TRUST ASSETS 3.1 INVESTMENT OF TRUST ASSETS. The Trustee shall not have any discretion, and is specifically prohibited from having or exercising any discretion, with respect to the investment of Trust assets. Except as provided in Section 3.3 (Participant Directed Investments) hereof, the Employer shall be solely responsible for giving the Trustee directions as to the investment and disposition of the Trust assets. Assets of the Trust may be invested in shares of stock in any regulated investment company registered under the Investment Company Act of 1940, the investment advisor of which is T. Rowe Price Associates, Inc. or any of its affiliates. Trust assets may also be invested in units in any common, collective or group trust fund sponsored by T. Rowe Price Trust Company and qualified under sections 401 and 501 of the Code, that is made available for investment purposes as an investment option under the T. Rowe Price Simplified 401(k) Prototype Plan (the instrument of trust creating any such qualified common, collective or group trust fund being adopted hereby). 3.2 WRITTEN INSTRUCTION. Any action of the Employer pursuant to any provisions of this Trust Agreement shall be in writing from the Employer, and the Trustee shall be fully protected in relying upon such written notification as actions of the Employer. The term "EMPLOYER," as used throughout this Trust Agreement, includes any duly authorized designee of the Employer, such as a Plan Administrator, or any individual having apparent authority as such. If written instructions are not received by the Trustee, or if such instructions are received but are deemed by the Trustee to be unclear, upon notice to the Employer, the Trustee may elect to hold all or part of any such contribution in cash, without liability for rising security prices or distributions made, pending receipt by it from the Employer of written instructions or other clarification. If any contributions received by the Trustee from the Employer are less than any minimum which a directed investment requires, the Trustee may hold the specified portion of such contributions in cash, without interest, until such time as the proper amount has been contributed so that the directed investment may be made. The Trustee shall receive all directions or instructions in writing provided that the Trustee may accept oral directions for purchase or sales from the Employer or participant with subsequent written confirmation. 3.3 PARTICIPANT DIRECTED INVESTMENTS. When so instructed by the Employer, the Trustee shall invest all or any portion of the individual Accounts of any Participant as directed by said participant. Such directed investments shall be accounted for separately for each participant. The Employer shall have the duty to select and monitor all investment options made available to Participants under the Plan. The Employer shall ensure that all Participants who are entitled to direct the investment of assets in their Accounts previously received or receive a copy of all material describing such investment options that is required by law. Delivery of investment directions by the Employer in accordance with the instructions of a Participant or by the Participant directly to the Trustee shall entitle the Trustee to assume that the Participant has received all such descriptive material. Each participant who directs the investment of his Accounts shall be solely and absolutely responsible for the investment or reinvestment of any such directed Plan investment held on his behalf in the Trust, and, except as otherwise provided herein, the Trustee shall not question any such direction, review any securities or other such assets, or make suggestions with respect to the investment, reinvestment, retention or disposition of any such assets. The Trustee shall not have any liability or responsibility for diversification of such assets or for any loss to or depreciation of such assets because of the purchase, retention or sale of assets in accordance with a Participant's direction. The Participant shall have sole responsibility for the overall diversification, liquidity and prudence of the investments of his Accounts. If a Participant fails to direct the investments of his Accounts, the Trustee shall invest his Accounts in accordance with the written directions of the Employer. 3.4 EMPLOYER DIRECTED INVESTMENTS. The Employer, by written direction to the Trustee, is authorized to designate all or a portion of the Trust assets of which the Employer will direct investments, and the Trustee may segregate such assets into one or more separate accounts or administer the Trust as one account. In the event the Employer shall employ or appoint an investment advisor to direct the Trustee with respect to a portion of the Trust, the Employer will notify the Trustee in writing of the appointment of the investment advisor, including his name and address. Whether or not the Trust is segregated into separate accounts, the Trustee shall invest such portion of the Trust as directed by the Employer or its duly appointed investment advisor only to the extent that such instruction is consistent with ERISA and any other applicable legal authority. The Trustee shall have no duty to question any action or direction of the Employer or investment advisor or any failure of the Employer or investment advisor give directions, or to review the securities or other investments which are held pursuant to the Employer's or investment advisor's directions, or to make suggestions to the Employer or investment advisor as to the investment, reinvestment, retention or disposition of any such assets. The Trustee shall not have any liability or responsibility for diversification of such assets, or for any loss to or depreciation of such assets because of the purchase, retention or sale of assets in accordance with the Employer's or investment advisor's direction. The Employer shall have responsibility for the overall diversification of the Trust. 3.5 TRUSTEE'S LIABILITY WITH RESPECT TO EMPLOYER OR PARTICIPANT DIRECTED ACCOUNTS. The Trustee shall not be liable for, and the Employer will indemnify and hold harmless the Trustee (including its employees, affiliates, representatives and agents) from and against, any liability or expense (including counsel fees) because of: (a) any investment action taken or omitted by the Trustee in accordance with any direction of the Employer or a Participant, or (b) any investment inaction in the absence of investment directions from the Employer or a Participant. 3.6 LIMITATIONS ON INVESTMENTS. Notwithstanding any other provision of this Trust Agreement to the contrary: (a) The Trustee may establish such reasonable rules and regulations, applied on a uniform basis to all Participants, with respect to the requirements for, and the form and manner of, effecting a transaction with respect to Participant directed investments the Trustee shall determine to be consistent with the purposes of the Plan. Any such rules and regulations shall be binding upon all persons interested in the Trust. (b) In no event shall the Trustee engage in any transactions that would be prohibited under ERISA. 3.7 "KNOWLEDGE" OF TRUSTEE. It is understood that although, when the Trustee is subject to the direction of the Employer or a Participant, the Trustee will perform certain ministerial duties ("MINISTERIAL DUTIES") with respect to the portion of the Trust subject to such direction, such duties do not involve the exercise of any discretionary authority to manage or control Trust assets. Such Ministerial Duties will be performed in the normal course of business by employees of the Trustee, its affiliates or agents who may be unfamiliar with investment management. It is agreed that the Trustee is not undertaking any duty or obligation, express or implied, to review, and will not be deemed to have any knowledge of or responsibility with respect to, any transaction involving the investment of the Trust as a result of the performance of these Ministerial Duties. Therefore, in the event that "knowledge" of the Trustee shall be a prerequisite to imposing a duty upon or determining liability of the Trustee under the Plan, this Trust Agreement or any law regulating the conduct of directed trustees with respect to the investment of trust assets, as a result of any act or omission of the Employer or any Participant, or as the result of any transaction engaged in by any of them, then the receipt and processing of investment orders and other documents relating to Trust assets by an employee of the Trustee or its affiliates or agents engaged in the performance of purely Ministerial Duties shall not constitute "knowledge" of the Trustee. ARTICLE IV - DUTIES OF THE TRUSTEE 4.1 DUTIES OF THE TRUSTEE. The Trustee is authorized and empowered with respect to the Trust: (a) To make, execute, acknowledge and deliver any and all documents of transfer and conveyance and any and all other instruments that may be necessary or appropriate to carry out the powers herein granted. (b) To register any investment held in the Trust in the name of the Trustee or in the name of a nominee, and to hold any investment in bearer form, but the books and records of the Trustee shall at all times show that all such investments are part of the Trust. (c) To employ suitable agents and counsel (who may also be agents and/or counsel for the Employer) and to pay their reasonable expenses and compensation. (d) To borrow or raise monies for the purpose of the Trust from any source and, for any sum borrowed, to issue its promissory note as Trustee and to secure the repayment thereof by pledging all or any part of the Trust, but nothing contained herein shall obligate the Trustee to render itself liable individually for the amount of any such borrowing; and no person loaning money to the Trustee shall be bound to see to the application of money loaned or to inquire into the validity or propriety of any such borrowing. Each and all of the foregoing powers may be exercised without a court order or approval. No one dealing with the Trustee need inquire concerning the validity or propriety of anything that is done by the Trustee or need to see the application of any money paid or property transferred to or upon the order of the Trustee. 4.2 GENERAL POWERS. The Trustee shall have all of the powers necessary or desirable to do all acts and exercise all such rights and privileges, whether or not expressly authorized herein, which it may deem necessary or proper for the protection of the Trust and to accomplish any action provided for in this Trust Agreement. 4.3 VALUATION OF TRUST. The Trustee, as of the valuation date, and at such other time or times as is necessary, shall determine the net worth of the assets of the Trust. The Trustee may adopt such methods of valuation as it deems advisable. 4.4 TRUST RECORDS. The Trustee shall keep accurate and detailed records of all receipts, investments, disbursements and other transactions required to be performed hereunder with respect to the Trust. The Trustee agrees to treat as confidential all records and other information relative to the Trust. The Trustee shall not disclose such records and other information to parties, other than the Employer, except to the extent required by law or as requested in writing by the Employer. 4.5 DISTRIBUTIONS. At the direction of the Employer, the Trustee shall mail distributions from the Trust to the Employer for the benefit of the Participants and, to the extent agreed to by the Trustee, shall make distributions directly to the Participants. The Trustee shall not be liable or responsible for any errors made by the Employer with respect to distributions. The Trustee shall be entitled to rely conclusively upon the Employer's directions. Notwithstanding any other provision of the Trust Agreement, the Trustee may condition its delivery, transfer or distribution of any Trust assets upon the Trustee's receiving satisfactory assurances that the approval of appropriate governmental agencies or other authorities has been secured and that all notice and other procedures required by applicable law have been satisfied. 4.6 TRUSTEE'S FEES. The Trustee's fees for performing its duties hereunder shall be such reasonable amounts as shall be established by it from time to time. The Trustee shall furnish to the Employer its current schedule of fees and give written notice to the Employer whenever its fees are changed or revised. Such fees, any taxes of any kind whatsoever which may be levied or assessed upon the Trust, and any expenses incurred by the Trustee in the performance of its duties, including fees for legal services rendered to the Trustee, shall, unless paid by the Employer, be paid from the Trust. 4.7 DUTIES NOT ASSIGNED. The duties of the Trustee with respect to the Trust are limited to those assumed by the Trustee under the terms of this Trust Agreement. The Trustee shall not be responsible for filing reports, returns or disclosures with any government agency except as may otherwise be required by its duties as Trustee under applicable law. 4.8 STANDARDS FOR THE TRUSTEE'S POWERS. Notwithstanding any other provision of this Trust Agreement, the Trustee shall discharge its duties hereunder solely in the interest of the Participants and for the exclusive purpose of providing benefits to the Participants and defraying reasonable expenses of administering the Trust, with the skill, care, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. The Trustee shall perform its duties in accordance with this Trust Agreement insofar as this Trust Agreement is consistent with the provisions of ERISA. To the extent not prohibited by ERISA, the Trustee shall not be responsible in any way for any action or omission of the Employer with respect to the performance of its duties and obligations set forth in this Trust Agreement and in the Plan. The Trustee may rely upon such information, direction, action or inaction of the Employer as being proper under the Plan or the Trust Agreement and is not required to inquire into the propriety of any such information, direction, action or inaction. To the extent not prohibit by ERISA, the Trustee shall not be responsible for any action or omission of any of its agents or with respect to reliance upon advice of its counsel (whether or not such counsel is also counsel to the Employer), provided that such agents or counsel were prudently chosen by the Trustee and that the Trustee relied in good faith upon the action of such agent or the advice of such counsel. ARTICLE V - DUTIES OF THE EMPLOYER 5.1 DUTIES OF THE EMPLOYER. It is understood that the Employer shall be responsible for the performance of the following functions with respect to the Trust: (a) Transmitting all Trust contributions made by or on behalf of each Participant in accordance with the instructions of each Participant to the Trustee at such times and in such manner as is mutually agreed between the Employer and the Trustee. (b) Providing to the Trustee, on a timely basis, a copy of the Plan document including all amendments and restatements. 41 (c) Determining that the contributions made by or on the behalf of each Participant are in accordance with any applicable Federal and state laws and regulations. (d) Assuring that the Plan maintains qualified status under applicable provisions of the Code. (e) If applicable, assuring that the Plan complies with section 404(c) of ERISA and any regulations issued thereunder. 5.2 BONDING. The Employer agrees to obtain and maintain a fiduciary bond and to include as those covered by such bond the Employees of the Employer, the Plan Administrator and the Trustee, including any of the Trustee's employees, officers and agents required by law to be so covered. The cost of any such bond shall be paid by the Employer. 5.3 INFORMATION AND DATA TO BE FURNISHED TO THE TRUSTEE. The Employer shall furnish the Trustee with such information and data relevant to the Plan as is necessary for the Trustee to properly perform its duties assumed hereunder, including but not limited to, a copy of the Plan's qualification letter from the Internal Revenue Service. 5.4 LIMITATION OF DUTIES. Neither the Trustee nor any of its officers, directors, partners or agents shall have any duties or obligations with respect to this Trust Agreement, except those expressly set forth herein, in the Plan and in ERISA. ARTICLE VI--TERMINATION OF TRUST 6.1 RESIGNATION OR REMOVAL OF TRUSTEE. The Trustee may resign at any time upon thirty days' prior written notice to the Employer and may be removed by the Employer at any time upon thirty days' prior written notice to the Trustee. Upon resignation or removal of the Trustee, the Employer shall appoint a successor trustee. Upon receipt by the Trustee of written acceptance of such appointment by the successor trustee, the Trustee shall transfer and pay over to the successor the assets of the Trust and all records (or copies) pertaining thereto. The Trustee is authorized, however, to reserve such sum of money or property as it may deem advisable for payment of all fees, compensation, costs and expenses, or for payment of any liabilities constituting a charge on or against the assets of the Trust or on or against the Trustee, with any balance of such reserve remaining after payment of all such items to be paid over to the successor trustee. Upon the assignment, transfer and payment over of the assets of the Trust, and obtaining a receipt thereof from the successor trustee, the Trustee shall be released and discharged from any and all claims, demands, duties and obligations arising out of the Trust and its management thereof, excepting claims based only upon the Trustee's willful misconduct or gross negligence. The successor trustee shall hold the assets paid over to it under the terms similar to those of this Trust Agreement under a trust that will qualify under section 401(a) of the code. If on the date upon which the Trustee's resignation or removal is effective, the Employer has not appointed a successor trustee which has accepted such appointment, the Trustee shall, unless it elects to terminate the Trust pursuant to Section 6.3 hereof, appoint such successor itself. 6.2 TERMINATION OF THE TRUST. Subject to the right of the Trustee to terminate the Trust in accordance with Section 6.3 hereof, this Trust shall continue as to the Employer so long as the Plan is in full force and effect. If the Plan ceases to be in full force and effect, this Trust shall thereupon terminate unless expressly extended by the Employer. 6.3 TERMINATION OF THE TRUST BY THE TRUSTEE. The Trustee may elect to terminate the Trust if on the date upon which the Trustee's resignation or removal is effective, the Employer has not appointed a successor trustee which has accepted such appointment. Termination of the Trust shall be effected by distribution of all assets thereof to the Participants or other persons entitled thereto pursuant to the directions of the Employer (or, in the absence of such direction, as determined by the Trustee), subject to the Trustee's right to reserve funds as provided in Section 6.1 hereof. Upon the completion of such distribution, the Trustee shall be relieved from all further liability with respect to all amounts so paid, other than any liability arising out of the Trustee's willful misconduct or gross negligence. ARTICLE VII--MISCELLANEOUS 7.1 PURPOSE. This Trust has been established for the exclusive benefit of the Plan's Participants. Except as provided herein, it shall be impossible at any time prior to the satisfaction of all liabilities to the Participants for any part of the principal or income of the Trust, other than such part as is required to pay taxes, administrative expenses or refund contributions as provided herein, to be paid or diverted to the Employer or to be used for any purpose whatsoever other than for the exclusive benefit of the Participants. 7.2 INDEMNIFICATION. The Employer shall indemnify and hold harmless the Trustee (including its affiliates, employees, representatives and agents from and against any liability, cost or other expense, including, but not limited to, the payment of attorney's fees which the Trustee may incur in connection with the Trust or the Plan unless such liability, cost or expense arises from the Trustee's own willful misconduct or gross negligence. The Trustee shall not be obligated or expected to commence or defend any legal action or proceeding in connection with the Trust unless agreed upon in writing by the Trustee and Employer and unless the Trustee is fully indemnified for doing so it its satisfaction. 7.3 CONSTRUCTION. Whenever used in this Trust Agreement, unless the context indicates otherwise, the singular shall include the plural, the plural shall include the singular, and the male gender shall include the female gender. 7.4 HEADINGS. Headings in this Trust Agreement are inserted solely for convenience of reference and shall neither constitute a part of this Trust Agreement, nor affect its meaning, construction or intent. 7.5 SEVERABILITY. If any provision of this Trust Agreement is held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision, and this Trust Agreement shall be construed and enforced as if such provision had not been included. 7.6 RETURN OF CONTRIBUTIONS. Contributions are conditioned on initial qualification of the Plan under section 401(a) of the Code, and if the Plan and Trust do not 42 qualify, the Trustee may return such contributions to the Employer upon the Employer's written direction. The Trustee may also return amounts to the Employer upon the Employer's written direction due to a "mistake of fact" as described in section 403(c) of ERISA. Contributions made by the Employer by "mistake of fact" may revert and be paid to the Employer within one year after the payment of such mistaken contributions. In making such a return of assets to the Employer, the Trustee may accept the Employer's written direction as its warranty that such payment is provided for in the Plan and complies with such plan provision and section 403(c) of ERISA, and the Trustee need make no further investigation. 7.7 VOTING. The Employer shall direct the Trustee how to vote any Trust assets for which the Trust has voting rights. The Employer may not appoint the Trustee as its designee for purposes of this Section unless the Trustee agrees to such a designation in writing. 7.8 NONALIENATION OF BENEFITS. No rights or claims to any of the monies or other assets of the Trust shall be assignable, nor shall such rights or claims be subject to garnishment, attachment, execution or levy of any kind; and any attempt to transfer, assign or pledge the same, except as specifically permitted by law, shall not be recognized by the Trustee. 7.9 AMENDMENTS. The Employer and the Trustee may amend this Agreement at any time by a written agreement between them; provided, however, that no such amendment shall make it possible for any part of the corpus or income of the Trust to be used or diverted to purposes other than the exclusive benefit of Participants and defraying reasonable expenses of administering the Plan and Trust. 7.10 INSPECTION OF PLAN RECORDS BY EMPLOYER. The Trustee agrees to permit the Employer to inspect the records of the Trust maintained by the Trustee during regular business hours and to permit the Employer to audit the same upon the giving of reasonable notice to the Trustee. The Trustee further agrees that it will provide the Employer with information and records that the Employer may reasonably require in order to perform audits of said records. 7.11 LAW GOVERNING. This Agreement shall be administered, construed and enforced according to the laws of the state of the principal place of business of the Trustee and applicable Federal law. 7.12 MERGER, CONSOLIDATION OR TRANSFER. In the event of the merger, consolidation or transfer of any portion of the Trust to a trust fund held under any other plan, the Trustee shall dispose of all or part, as the case may be, of the Trust, in accordance with the written directions of the Employer, subject to the right of the Trustee to reserve funds as provided in Section 6.1 hereof. 7.13 TRUSTEE AS SUCCESSOR TRUSTEE. If the Trustee is acting as a successor trustee with respect to the Trust, the Employer shall indemnify the Trustee against all liabilities with respect to the Trust arising prior to the appointment of the Trustee and its acceptance thereof. 7.14 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the successor and assigns of the parties hereto. 7.15 NOTICES. Any notice from the Trustee to the Employer or from the Employer to the Trustee provided for in the Plan or in this Trust Agreement shall be effective if sent by first class mail to their respective last addresses of record. 7.16 EFFECTIVE DATE. The effective date of this Trust shall be the date on which the Trustee has executed the Adoption Agreement unless specified otherwise in that agreement. 43 SIMPLIFIED 401(k) PROTOTYPE PLAN ADOPTION AGREEMENT #001 This is the Adoption Agreement for defined contribution plan #001 of basic plan document #07, which is a combined prototype Section 401(k)/profit sharing defined contribution plan. This Adoption Agreement may be used only in conjunction with basic plan document #07. NOTE: Before executing this Adoption Agreement, the Employer should consult with a tax adviser or attorney. Failure to properly complete this Adoption Agreement may result in Plan disqualification. The Employer hereby establishes a Section 401(k) plan and a trust for such plan upon the respective terms and conditions contained in the Section 401(k) prototype plan (the "Plan"), and the Trust Agreement to the Plan and appoints as Trustee of such trust the person(s) who has (have) executed this Adoption Agreement evidencing his/her/its (their) acceptance of such appointment. The Plan and the Trust Agreement shall be supplemented and modified by the terms and conditions contained in this Adoption Agreement and shall be effective on the Effective Date, as specified herein. After the Employer has notified T. Rowe Price Trust Company in writing that it has adopted the Plan, T. Rowe Price Trust Company shall inform the Employer of any amendments made to the prototype plan or the discontinuance or abandonment of the prototype plan after T. Rowe Price Trust Company receives such notice and until the Employer notifies T. Rowe Price Trust Company it has ceased to use this prototype plan or the Employer no longer meets the requirements of the prototype (e.g., plan assets are not invested solely in Shares). I. SPONSOR DATA T. Rowe Price Trust Company 4555 Painters Mill Road Owings Mills, MD 21117-4903 1-800-492-7670 II. EMPLOYER DATA A. Name: ADAMS GOLF, LTD. ------------------------------------------------------------- B. Tax Identification Number (TIN): 75-2740283 ---------------------------------- C. Address: 2801 EAST PLANO PARKWAY -------------------------------------------------------- PLANO, TX 75074 -------------------------------------------------------- -------------------------------------------------------- D. Telephone Number: (972) 673-9299 ------------------------------------------------- E. Employer's Taxable Year End: DECEMBER 31 -------------------------------------- F. Employer is: /x/ a corporate entity / / a non-corporate entity / / a corporate entity electing Subchapter S treatment. III. PLAN DATA (Complete A or B) A. New Plan. 1. Name of Plan and Trust: --------------------------------------- 2. Effective Date of Plan and Trust: ____________________ (Usually the first day of the Plan Year in which the Plan is adopted) 3. Plan Year End: ------------------------------------------------ B. Amended and Restated Plan. 1. Name of Plan and Trust: ADAMS GOLF, LTD. --------------------------------------- 401(k) RETIREMENT PLAN -------------------------------------------------------- 2. Initial Effective Date: MAY 1, 1998 --------------------------------------- 3. Effective Date of Amended Plan MAY 2, 1998 ------------------------------ (Usually the first day of a Plan Year) 4. Plan Year End: DECEMBER 31 ---------------------------------------------- IV. ELIGIBILITY A. All Employees shall be eligible to participate in this Plan in accordance with the provisions of Article III of the Plan, EXCEPT the following: /x/ Employees who have not attained age 18 cannot exceed 21); /x/ Employees who have not completed 0.25 (cannot exceed one) Year of Eligibility Service. (If the year of eligibility service selected is a fractional year, an Employee will not be required to complete any specified number of hours of service to receive credit for such fractional year.) / / Employees included in a unit of Employees covered by a collective bargaining agreement, if retirement benefits were the subject of good faith bargaining between the Employer and Employee representatives. Employee representatives do not include any organization more than half of whose members are Employees who are owners, officers or executives of the Employer; /x/ Any eligible Employee who is employed by the Employer on the Effective Date of the Plan shall be eligible to participate on the Effective Date regardless of his or her age or Years of Eligibility Service. B. The Entry Dates shall be the Effective Date of the Plan and thereafter (Complete 1 or 2) 1. / / The first day of each Plan Year and the first day of the seventh month in each Plan Year; 2. /x/ The first day of each Plan Year and the first day of each quarter in the Plan Year. V. CONTRIBUTIONS A. Elective Deferrals. A Participant may elect to defer an amount not in excess of 15% of his or her compensation per pay period in accordance with a salary reduction agreement signed by the Participant. B. Employer Matching Contributions. 1. Matching Employer Contributions a. /x/ shall be made to the Plan. b. / / shall not be made to the Plan. (If this subsection b is elected, do not complete the following section 2.) 2. For a Plan Year, the Employer shall contribute and allocate to the Matching Contributions Account of each Participant who made Elective Deferrals during the Plan Year an amount equal to 50% of the Participant's Elective Deferrals for each pay period in the Plan Year; provided that for purposes of calculating such Matching Contributions, the Participant's Elective Deferrals shall be treated as not exceeding 6% of the Participant's Compensation for each such pay period. Notwithstanding the foregoing, the Employer Matching Contribution made on behalf of an eligible Participant for the Plan Year shall not exceed $ NA. (If this section is not completed, only the percentage limit will apply to Employer Matching Contributions.) C. Discretionary Employer Contributions 1. /x/ may be made to the Plan each year as determined by the Employer. 2. / / shall not be made to the Plan. VI. VESTING If a Participant terminates employment for reasons other than retirement, death or total and permanent disability, the vested portion of his or her Accounts (other than his or her Salary Deferral and Rollover Contribution Accounts, which are always 100% vested) shall be determined in accordance with the following schedule (Choose A, B or C): A. /X/ YEARS OF SERVICE VESTED PERCENTAGE ---------------- ----------------- 1 year 33.33% ----- 2 years 66.7% ----- 3 or more years 100% B. / / YEARS OF SERVICE VESTED PERCENTAGE ---------------- ----------------- 1 year % ------ 2 years % (at least 20%) ------ 3 years % (at least 40%) ------ 4 years % (at least 60%) ------ 5 years % (at least 80%) ------ 6 or more years 100 % C. / / 100% full and immediate. VII. OPTIONAL FEATURES A. Loans to Participants (Choose 1 or 2): 1. / / will not be permitted. 2. /X/ will be permitted not exceeding _____% (not more than 50%) of the present value of the Participant's vested accrued benefit. B. Hardship withdrawals (Choose 1 or 2): 1. / / will not be permitted. 2. /x/ will be permitted. VIII. TOP-HEAVY PROVISIONS If the Employer maintains or has ever maintained a defined benefit plan, then for purposes of determining the present value of defined benefit plans' accrued benefits required to be aggregated with this Plan to compute the top-heavy ratio, any benefit shall be discounted only for mortality and interest based on the following: Interest rate: Mortality table: --------------- ----------------- IX. ALLOCATION LIMITATION If any Participant in this Plan is or has ever been a participant in a defined benefit plan maintained by the Employer, give an explanation below of the method under which the plan involved will satisfy the 1.0 limitation of section 415(e) of the Code in a manner that precludes Employer discretion: -------------------------------------------------------------------- X. THE TRUSTEE(S) The Employer hereby appoints the following to serve as Trustee(s): Name: JAMES E. FARRELL ----------------------------------------------------------------- Address: 2801 EAST PLANO PARKWAY -------------------------------------------------------------- PLANO, TX 75074 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Witness [Signature of] Trustee Dated: ---------------------------------- Name: DARL HATFIELD ----------------------------------------------------------------- Address: 2801 EAST PLANO PARKWAY -------------------------------------------------------------- PLANO, TX 75074 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Witness [Signature of] Trustee Dated: ---------------------------------- Name: ----------------------------------------------------------------- Address: -------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Witness [Signature of] Trustee Dated: ---------------------------------- XI. SUPPLEMENTS If additional space is required to specify an elective feature or to amend the Plan in accordance with Section 13.2 of the Plan, please attach additional pages as needed. Each additional page must reference the Section of the Adoption Agreement or the Plan to which the addition applies and must be signed (or initialed) by the Employer and the Trustee(s). In addition, each supplementary page should be numbered, and the total number of pages in the Adoption Agreement and additional pages indicated in the following Section. XII. EMPLOYER SIGNATURE The Employer acknowledges receipt of the current prospectus of each of the investment options designated by the Employer for its initial choice of investments available under the Plan and represents that it has delivered a copy thereof to each Participant in the Plan, and that it will deliver to each Participant making contributions and each new Participant, a copy of the then current prospectus of such investment options. The Employer further represents that the information in this Adoption Agreement shall become effective only when approved and countersigned by the Trustee(s). The right to reject this Adoption Agreement for any reason is reserved. Note: An Employer who has ever maintained or who later adopts any plan (including a welfare benefit fund, as defined in Code section 419(e), which provides post-retirement medical benefits allocated to separate accounts for Key Employees, as described in Code section 419A(d)(3), or an individual medical account as defined in Code section 415(1)(2)), in addition to this Plan may not rely on the opinion letter issued by the National Office of the Internal Revenue Service as evidence that this Plan is qualified under Code section 401(a). If the Employer who adopts or maintains multiple plans wishes to obtain reliance that the plans are qualified, application for a determination letter should be made to the appropriate Key District Director of Internal Revenue. The Employer may not rely on the opinion letter issued by the National Office of the Internal Revenue Service as evidence that this Plan is qualified under Code section 401 unless the terms of the Plan, as herein adopted or amended, that pertain to the requirements of Code sections 401(a)(4), 401(a)(17), 401(l), 401(a)(5), 410 (b) and 414(s), as amended by the Tax reform Act of 1986, or later laws, (a) are made effective retroactively to the first day of the first Plan Year beginning after December 31, 1988 (or such later date on which these requirements first become effective with respect to this Plan); or (b) are made effective no later than the first day on which the Employer is no longer entitled, under regulations, to rely on a reasonable, good faith interpretation of these requirements, and the prior provisions of the plan constitute such an interpretation. This Adoption Agreement consists of 6 pages. ----- IN WITNESS WHEREOF, the Employer has caused this Adoption Agreement to be executed by its duly authorized officers this ______ day of _______________, ____. ADAMS GOLF, LTD ------------------------------------------- [Name of] Employer By: ------------------------------------------- Name and Title: ------------------------------------------- (please print) SIMPLIFIED 401(k) PROTOTYPE PLAN ADOPTION AGREEMENT #001 This is the Adoption Agreement for defined contribution plan #001 of basic plan document #07, which is a combined prototype Section 401(k)/profit sharing defined contribution plan. This Adoption Agreement may be used only in conjunction with basic plan document #07. NOTE: Before executing this Adoption Agreement, the Employer should consult with a tax adviser or attorney. Failure to properly complete this Adoption Agreement may result in Plan disqualification. The Employer hereby establishes a Section 401(k) plan and a trust for such plan upon the respective terms and conditions contained in the Section 401(k) prototype plan (the "Plan"), and the Trust Agreement to the Plan and appoints as Trustee of such trust the person(s) who has (have) executed this Adoption Agreement evidencing his/her/its (their) acceptance of such appointment. The Plan and the Trust Agreement shall be supplemented and modified by the terms and conditions contained in this Adoption Agreement and shall be effective on the Effective Date, as specified herein. After the Employer has notified T. Rowe Price Trust Company in writing that it has adopted the Plan, T. Rowe Price Trust Company shall inform the Employer of any amendments made to the prototype plan or the discontinuance or abandonment of the prototype plan after T. Rowe Price Trust Company receives such notice and until the Employer notifies T. Rowe Price Trust Company it has ceased to use this prototype plan or the Employer no longer meets the requirements of the prototype (e.g., plan assets are not invested solely in Shares). I. SPONSOR DATA T. Rowe Price Trust Company 4555 Painters Mill Road Owings Mills, MD 21117-4903 1-800-492-7670 II. EMPLOYER DATA A. Name: ADAMS GOLF, LTD. ----------------------------------------------------------- B. Tax Identification Number (TIN): 75-2740283 -------------------------------- C. Address: 2801 EAST PLANO PARKWAY ------------------------------------------------------- PLANO, TX 75074 ------------------------------------------------------- ------------------------------------------------------- D. Telephone Number: (972) 673-9299 ----------------------------------------------- E. Employer's Taxable Year End: DECEMBER 31 ------------------------------------ F. Employer is: /X/ a corporate entity / / a non-corporate entity / / a corporate entity electing Subchapter S treatment. III. PLAN DATA (Complete A or B) A. New Plan. 1. Name of Plan and Trust: ADAMS GOLF, LTD. ------------------------------------ 401(k) RETIREMENT PLAN ------------------------------------------------------------- 2. Effective Date of Plan and Trust: MAY 1, 1998 --------------------------- (Usually the first day of the Plan Year in which the Plan is adopted) 3. Plan Year End: DECEMBER 31 ---------------------------------------------- B. Amended and Restated Plan. 1. Name of Plan and Trust: -------------------------------------- ------------------------------------------------------------- 2. Initial Effective Date: -------------------------------------- 3. Effective Date of Amended Plan ------------------------------- (Usually the first day of a Plan Year) 4. Plan Year End: ----------------------------------------------- IV. ELIGIBILITY A. All Employees shall be eligible to participate in this Plan in accordance with the provisions of Article III of the Plan, EXCEPT the following: /x/ Employees who have not attained (age 18 cannot exceed 21); /x/ Employees who have not completed 0.25 (cannot exceed one) Year of Eligibility Service. (If the year of eligibility service selected is a fractional year, an Employee will not be required to complete any specified number of hours of service to receive credit for such fractional year.) / / Employees included in a unit of Employees covered by a collective bargaining agreement, if retirement benefits were the subject of good faith bargaining between the Employer and Employee representatives. Employee representatives do not include any organization more than half of whose members are Employees who are owners, officers or executives of the Employer; /x/ Any eligible Employee who is employed by the Employer on the Effective Date of the Plan shall be eligible to participate on the Effective Date regardless of his or her age or Years of Eligibility Service. -2- B. The Entry Dates shall be the Effective Date of the Plan and thereafter (Complete 1 or 2) 1. / / The first day of each Plan Year and the first day of the seventh month in each Plan Year; 2. /X/ The first day of each Plan Year and the first day of each quarter in the Plan Year. V. CONTRIBUTIONS A. Elective Deferrals. A Participant may elect to defer an amount not in excess of 15% of his or her compensation per pay period in accordance with a salary reduction agreement signed by the Participant. B. Employer Matching Contributions. 1. Matching Employer Contributions a. /X/ shall be made to the Plan. b. / / shall not be made to the Plan. (If this subsection b is elected, do not complete the following section 2.) 2. For a Plan Year, the Employer shall contribute and allocate to the Matching Contributions Account of each Participant who made Elective Deferrals during the Plan Year an amount equal to 50 % of the Participant's Elective Deferrals for each --------- pay period in the Plan Year; provided that for purposes of calculating such Matching Contributions, the Participant's Elective Deferrals shall be treated as not exceeding 6 % of --- the Participant's Compensation for each such pay period. Notwithstanding the foregoing, the Employer Matching Contribution made on behalf of an eligible Participant for the Plan Year shall not exceed $ N/A . (If this section is not -------- completed, only the percentage limit will apply to Employer Matching Contributions.) C. Discretionary Employer Contributions 1. /X/ may be made to the Plan each year as determined by the Employer. 2. / / shall not be made to the Plan. VI. VESTING If a Participant terminates employment for reasons other than retirement, death or total and permanent disability, the vested portion of his or her Accounts (other than his or her Salary -3- Deferral and Rollover Contribution Accounts, which are always 100% vested) shall be determined in accordance with the following schedule (Choose A, B or C): A. / / YEARS OF SERVICE VESTED PERCENTAGE ---------------- ----------------- 1 year ------- 2 years ------- 3 or more years ------- B. / / YEARS OF SERVICE VESTED PERCENTAGE ---------------- ----------------- 1 year -------% 2 years -------% (at least 20%) 3 years -------% (at least 40%) 4 years -------% (at least 60%) 5 years -------% (at least 80%) 6 or more years 100 % C. /X/ 100% full and immediate. VII. OPTIONAL FEATURES A. Loans to Participants (Choose 1 or 2): 1. / / will not be permitted. 2. /X/ will be permitted not exceeding 50% (not more than --- 50%) of the present value of the Participant's vested accrued benefit. B. Hardship withdrawals (Choose 1 or 2): 1. / / will not be permitted. 2. /X/ will be permitted. VIII. TOP-HEAVY PROVISIONS If the Employer maintains or has ever maintained a defined benefit plan, then for purposes of determining the present value of defined benefit plans' accrued benefits required to be aggregated with this Plan to compute the top-heavy ratio, any benefit shall be discounted only for mortality and interest based on the following: Interest rate: Mortality table: ----------------- ---------------------- IX. ALLOCATION LIMITATION If any Participant in this Plan is or has ever been a participant in a defined benefit plan maintained by the Employer, give an explanation below of the method under which the plan -4- involved will satisfy the 1.0 limitation of section 415(e) of the Code in a manner that precludes Employer discretion: ------------------------------------------------------------------------ ------------------------------------------------------------------------ ------------------------------------------------------------------------ X. THE TRUSTEE(S) The Employer hereby appoints the following to serve as Trustee(s): Name: JAMES E. FARRELL ------------------------------------------------------------------ Address: 2801 EAST PLANO PARKWAY --------------------------------------------------------------- PLANO, TX 75074 ------------------------------------------------------------------------ ------------------------------- -------------------------------------- Witness [Signature of] Trustee Dated: ------------------------- Name: DARL HATFIELD ----------------------------------------------------------------- Address: 2801 EAST PLANO PARKWAY -------------------------------------------------------------- PLANO, TX 75074 ------------------------------------------------------------------------ ------------------------------- -------------------------------------- Witness [Signature of] Trustee Dated: ------------------------- Name: ----------------------------------------------------------------- Address: -------------------------------------------------------------- ------------------------------------------------------------------------ ------------------------------- -------------------------------------- Witness [Signature of] Trustee Dated: ------------------------- XI. SUPPLEMENTS If additional space is required to specify an elective feature or to amend the Plan in accordance with Section 13.2 of the Plan, please attach additional pages as needed. Each additional page -5- must reference the Section of the Adoption Agreement or the Plan to which the addition applies and must be signed (or initialed) by the Employer and the Trustee(s). In addition, each supplementary page should be numbered, and the total number of pages in the Adoption Agreement and additional pages indicated in the following Section. XII. EMPLOYER SIGNATURE The Employer acknowledges receipt of the current prospectus of each of the investment options designated by the Employer for its initial choice of investments available under the Plan and represents that it has delivered a copy thereof to each Participant in the Plan, and that it will deliver to each Participant making contributions and each new Participant, a copy of the then current prospectus of such investment options. The Employer further represents that the information in this Adoption Agreement shall become effective only when approved and countersigned by the Trustee(s). The right to reject this Adoption Agreement for any reason is reserved. Note: An Employer who has ever maintained or who later adopts any plan (including a welfare benefit fund, as defined in Code section 419(e), which provides post-retirement medical benefits allocated to separate accounts for Key Employees, as described in Code section 419A(d)(3), or an individual medical account as defined in Code section 415(1)(2)), in addition to this Plan may not rely on the opinion letter issued by the National Office of the Internal Revenue Service as evidence that this Plan is qualified under Code section 401(a). If the Employer who adopts or maintains multiple plans wishes to obtain reliance that the plans are qualified, application for a determination letter should be made to the appropriate Key District Director of Internal Revenue. The Employer may not rely on the opinion letter issued by the National Office of the Internal Revenue Service as evidence that this Plan is qualified under Code section 401 unless the terms of the Plan, as herein adopted or amended, that pertain to the requirements of Code sections 401(a)(4), 401(a)(17), 401(l), 401(a)(5), 410 (b) and 414(s), as amended by the Tax reform Act of 1986, or later laws, (a) are made effective retroactively to the first day of the first Plan Year beginning after December 31, 1988 (or such later date on which these requirements first become effective with respect to this Plan); or (b) are made effective no later than the first day on which the Employer is no longer entitled, under regulations, to rely on a reasonable, good faith interpretation of these requirements, and the prior provisions of the plan constitute such an interpretation. This Adoption Agreement consists of 6 pages. IN WITNESS WHEREOF, the Employer has caused this Adoption Agreement to be executed by its duly authorized officers this _____ day of ______________ _______________ , _____ . ADAMS GOLF, LTD ---------------------------------------- [Name of] Employer By: ---------------------------------------- Name and Title: -------------------------------------- (please print) -6- EXHIBIT A ATTACHMENT TO SIMPLIFIED 401(K) PROTOTYPE PLAN ADOPTION AGREEMENT #001 FOR ADAMS GOLF, LTD. ADDITION TO SECTION II-EMPLOYER DATA CONTROLLED GROUPS: Participating Name Adams Golf Direct Response, Ltd. ----------------------------------------- Employer I.D. 75-2740281 Taxable Year 12/31 --------------- -------- By Title Date ------------------ ------------------- ---------- Participating Name Adams Golf, Inc. ----------------------------------------- Employer I.D. 75-2320087 Taxable Year 12/31 --------------- -------- By Title Date ------------------ ------------------- ---------- Participating Name Adams Golf Holding Corp. ----------------------------------------- Employer I.D. 75-2070978 Taxable Year 12/31 --------------- -------- By Title Date ------------------ ------------------- ---------- Participating Name Adams Golf GP Corp. ----------------------------------------- Employer I.D. 75-2070974 Taxable Year 12/31 --------------- -------- By Title Date ------------------ ------------------- ---------- Participating Name Adams Golf Management Corp. ----------------------------------------- Employer I.D. 75-2075773 Taxable Year 12/31 --------------- -------- By Title Date ------------------ ------------------- ---------- Participating Name Adams Golf IP, L.P. ----------------------------------------- Employer I.D. 75-2073297 Taxable Year 12/31 --------------- -------- By Title Date ------------------ ------------------- ---------- EX-10.1 3 EXHIBIT 10.1 AGREEMENT BETWEEN ADAMS GOLF, LTD. AND NICHOLAS A. FALDO This Agreement, dated April 22, 1998 (this "Agreement"), is between Nicholas A. Faldo, a professional golfer (the "Professional"), and Adams Golf, Ltd., a Texas limited partnership ("Adams Golf"). WHEREAS, the Professional is recognized and widely known as a highly skilled professional golfer whose endorsement is of commercial value; and WHEREAS, Adams Golf and its affiliates are engaged in the design, manufacture, distribution, advertisement, promotion and sale of golf clubs and golf-related equipment, and desire to obtain the right to use the name, likeness, endorsement and consultation services of the Professional in connection with the advertisement, promotion and sale of the Endorsed Products; NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the parties hereto agree as follows: ARTICLE I. SUMMARY OF TERMS AND DEFINITIONS SECTION 1. CONTRACT PERIOD. The "Contract Period" shall commence on May 1, 1998 and continue until the later to occur of (i) the death of the Professional or (ii) May 1, 2030. SECTION 2. CONTRACT TERRITORY. The "Contract Territory" is the entire world. SECTION 3. PROFESSIONAL'S ENDORSEMENT. The "Professional's Endorsement" means all publicity rights belonging to the Professional, and any words or symbols, photographic, graphic or video representations, or combinations thereof, which identify the Professional such as, for example, the Professional's name, initials, voice, likeness, biographical data, character, image and signature (and all variations of the foregoing). SECTION 4. ENDORSED PRODUCTS. The "Endorsed Products" means the following products promoted by Adams Golf or its affiliates using the Professional's Endorsement: all golf clubs, head covers, golf bags, travel covers, golf towels, and umbrellas designed, manufactured, promoted or sold by or for Adams Golf or any subsidiary or affiliate thereof. SECTION 5. SPECIALLY ENDORSED PRODUCTS. The "Specially Endorsed Products" means the Tight Lies-Registered Trademark- fairway woods distributed by Adams Golf with such AGREEMENT - PAGE 1 specifications that are acceptable to the Professional (to the extent Professional determines to carry fairway woods in his golf bag), an Adams Golf golf club bag, and Adams Golf head covers which shall be placed on all Adams Golf golf clubs. It is understood that Adams Golf will design with the Professional a full line of additional golf clubs in the future (including drivers, fairway woods, irons, wedges and putters) which, when acceptable to Professional, will be carried by the Professional in his golf bag and shall be "Specially Endorsed Products" for purposes hereof. Each of the Professional and Adams Golf will use their respective commercially reasonable best efforts to cause such line of golf clubs to be acceptable to the Professional. SECTION 6. REQUIRED TOURNAMENTS. The "Required Tournaments" in which the Professional shall compete during each calendar year during the Contract Period, as required by ARTICLE III, SECTION 4a, means at least eighteen (18) premium worldwide golf events, provided that if during the Contract Period Professional should commence play on the Senior PGA Tour the parties will mutually determine a lesser number of Required Tournaments as appropriate. The Professional shall use his reasonable best efforts to compete in at least the Required Tournaments. The Professional acknowledges and agrees that the presumption that the Professional will receive exposure proportionate to the number of designated tournaments is a material inducement to Adams Golf to enter into this Agreement. In the event Professional does not compete in the anticipated number of tournaments other than as a result of illness or injury, the royalty (including any minimum royalty) payable to Professional pursuant to ARTICLE II, SECTION 5 shall be reduced on a prorata basis. In order to facilitate monitoring the number of Required Tournaments in which the Professional competes, the Professional shall provide to Adams Golf at the beginning of each tournament season a tentative schedule of tournaments in which the Professional intends to compete and shall review with Adams Golf on a quarterly basis the number of Required Tournaments in which the Professional competed during the previous calendar quarter. SECTION 7. PROMOTION ACTIVITIES. The items which the Professional is required to wear and/or use, as required under ARTICLE III, SECTION 4b, are visor/headgear with the Adams Golf logo when the Professional wears a visor or head gear and an Adams Golf umbrella with the Adams Golf logo. Adams Golf and its affiliates shall have the right to change their respective trademark(s) or logo(s) from time to time. SECTION 8. PERMITTED OTHER ENDORSEMENTS. The term "Permitted Other Endorsements" means all products not competitive with the Endorsed Products. Permitted Other Endorsements include the following endorsements in effect on the date hereof: Polygram Video International Limited, Chapman Publishers, Florsheim Group, Inc., Ford Motor Company, Marriott Ownership Resorts, Inc. (subject to ARTICLE III, SECTION 12 hereof), Audemars Piguet, Pringle of Scotland Limited and Bridgestone Sports Co., Limited. AGREEMENT - PAGE 2 SECTION 9. PERSONAL APPEARANCES. The Professional shall make such personal appearances each calendar year during the Contract Period as may be mutually agreed upon by the Professional and Adams Golf. ARTICLE II. COMPENSATION TO PROFESSIONAL SECTION 1. STOCK. In consideration for entering into the licensing arrangement described herein, Adams Golf shall cause Adams Golf, Inc. to issue to the Professional 450,000 shares of Adams Golf, Inc. common stock, par value $.001 per share ("Adams Stock"). Adams Golf represents and warrants to Professional that, as of the date hereof, but immediately prior to the issuance contemplated hereby, there are 9,120,422 shares of Adams Stock issued and outstanding. SECTION 2. RESTRICTED SECURITIES; RISKS OF INVESTMENT. Professional acknowledges and agrees that any investment in Adams Golf, Inc. common stock involves substantial risks and that Professional or his representative has had the opportunity to review fully the books, records and financial statements of Adams Golf, Inc., Adams Golf, and their respective affiliates, and to ask questions of Adams Golf's management and executive employees. Professional further acknowledges and agrees that the shares of common stock to be acquired hereunder are restricted securities which may not be sold, transferred or hypothecated unless such transfer is pursuant to an effective registration statement or an exemption from such registration as verified by an opinion of counsel acceptable to Adams Golf. Without limiting the foregoing, Professional agrees that in no event shall he sell, transfer or dispose of (except as set forth below) more than 50,000 shares of common stock in any calendar year prior to 2002 without the prior written consent of Adams Golf other than transfers to the Professional's agent or manager in payment of commissions, transfers to entities controlled by Professional or gifts or transfers to immediate family members, provided that any such transfers shall be subject to the provisions of this ARTICLE II, SECTION 2, and, in connection therewith, the aggregate sales, transfers, dispositions or hypothecations by such persons and Professional will not exceed 50,000 shares in any calendar year without Adams Golf's prior written consent. Adams Golf may request a written agreement from any transferee as a precondition to such transfer regarding the restrictions set forth in this ARTICLE II, SECTION 2. Professional may hypothecate any or all such shares to a third party lender (which is not then or thereafter competitive to Adams Golf or its affiliates in any respect) in a bona fide loan transaction provided that such third party lender agrees that in the event there is any foreclosure, sale or similar action by such third party to realize upon the value thereof, Adams Golf or its affiliates shall have a right of first refusal to acquire such shares from such lender at the price such shares are to be sold or the value otherwise attributed to the same. SECTION 3. TAXES ON STOCK GRANT. Adams Golf agrees that it will use commercially reasonable efforts to arrange financing for Professional for the purpose of providing Professional with funds equivalent to the U.S. federal income and U.K. income tax liability, if any, attributable to Professional by virtue of the grant of stock hereunder. AGREEMENT - PAGE 3 Professional acknowledges and agrees that in connection therewith he will execute and deliver such loan documents as may be reasonably requested by Adams Golf, any of its affiliates or any third party lender and pledge such number of the shares acquired by him hereunder as may be reasonably required as collateral security for such loan. Such loan shall be for a reasonable term to be negotiated between the parties and shall bear interest at a variable rate equal to the lowest applicable federal rate (the "AFR") to avoid imputed interest under the provisions of the Internal Revenue Code of 1986, as amended. SECTION 4. PUBLIC OFFERING. Adams Golf acknowledges that Adams Golf intends to use commercially reasonable efforts to effect an initial public offering of Adams Golf, Inc.'s common stock as soon as it is believed commercially advisable and practical. In the event that on or prior to December 31, 1998 Adams Golf, Inc. has either (i) not effected such an initial public offering or (ii) not entered into a definitive agreement to be acquired (including, without limitation, an acquisition of substantially all of its assets) for any combination of cash and registered securities, Professional will have the right, exercisable on January 1, 1999 and for ninety (90) days thereafter, to cause Adams Golf effective March 31, 1999 to repurchase all of the shares of common stock acquired by Professional hereunder for $5,000,000. Such sum may, at the option of Adams Golf, be paid in equal quarterly installments over a period of three (3) years with interest thereon at the AFR. In the event such "put right" is exercised by Professional, Adams Golf may, in its discretion, terminate this Agreement. SECTION 5. ROYALTIES AND TRADEMARKS. The Professional hereby grants to Adams Golf, its affiliates and its duly authorized distributors and representatives, subject to the terms and conditions of this Agreement, the unlimited, sole and exclusive right, privilege and license, throughout the Contract Territory, to use the Marks, for the endorsement of Adams Golf and its affiliates, and for the manufacture, endorsement, promotion, sale and distribution of the Endorsed Products. Without limiting the generality of the foregoing, Adams Golf and its affiliates shall be permitted to use the Marks in all advertising and promotional activities and media relating to Adams Golf or its affiliates, or the Endorsed Products, even if certain items which are not Endorsed Products are shown or included in such advertising and promotional activities and media. For purposes of this Agreement, "Marks" shall mean "Nick Faldo," "Faldo," "N. Faldo," "Nick Faldo Line" and any variations or derivations thereof, any related designs or logos, and all copyrights, trade names, trademarks and service marks, and other proprietary rights in or associated with any of the foregoing, anywhere in the world. The Professional agrees, at his own expense, to promptly apply for and obtain registration of such Marks as shall be mutually agreed, for use on and in connection with the Endorsed Products, including at least the "Nick Faldo" and "Faldo" Marks, in the United States of America and all such other countries where Adams Golf or its affiliates now or hereafter apply for or obtain registration of any of Adams Golf's or its affiliates' marks. The Professional shall diligently and timely prosecute all such applications for registration of the Marks, and shall upon request deliver or cause to be delivered to Adams Golf a report on the status of all such applications and registrations of the Marks, together with copies thereof. The Professional shall diligently and timely record Adams Golf or its affiliates AGREEMENT - PAGE 4 as licensees or registered users of the Marks where necessary or desirable under applicable law. Further, the Professional agrees, at his own expense, to take all such actions as may be necessary or desirable to record, enforce, defend or otherwise preserve the validity of, or the Professional's title to, any of the Marks, including without limitation, the timely filing, prosecution or defense of oppositions or similar proceedings, prompt action against infringers or third parties which may cause dilution of any of the Marks, and timely defense of any claims that use any of the Marks by the Professional, Adams Golf or its affiliates infringes or dilutes the rights of third parties. The Professional shall deliver or cause to be delivered to Adams Golf timely status reports on all such oppositions, proceedings, actions or claims involving or relating to any of the Marks, including without limitation, as much advance notice as shall be feasible prior to the dismissal, cancellation, abandonment, withdrawal, refusal, or other adverse judgment or decision involving or relating to any of the Marks, applications therefor or registrations thereof. The Professional shall be responsible for maintenance of all registrations of the Marks, including the timely filing of declarations of continued use and incontestability, annuities, renewals, continuations, and all related fees and expenses. In the event that Adams Golf shall determine that registrations would be desirable in more countries, on more of the Marks, or for more goods or services than the Professional obtains or is required to obtain hereunder, the Professional agrees to apply for and obtain such additional registrations and Adams Golf agrees to reimburse the Professional for the reasonable direct costs thereof. Subject to the provisions hereof, during the Contract Period, Professional shall be entitled to receive a royalty equal to 5% of the Net Sales Price of all Adams Golf golf clubs (other than Specialty Items as defined below) sold by Adams Golf or its affiliates outside the United States of America, its territories and possessions. For purposes hereof, the Net Sales Price shall mean the sums actually received by Adams Golf or its affiliates with respect to golf clubs sold outside the United States of America, its territories and possessions, less amounts for returns, price allowances, rebates, refunds, shipping and taxes and shall exclude sales to or among affiliates of Adams Golf. The royalty shall be payable forty-five (45) days after the end of each calendar quarter with respect to the prior quarter's net sales, provided that in the event any such royalty payment, when taken together with all other royalty payments (including, without limitation, any pro rata minimum royalty payments as described below) made with respect to such year, is less than the pro rata portion of the minimum royalty for such year (as set forth below), Adams Golf shall also remit the difference between the aggregate amounts and the pro rata portion of the minimum royalty allocable to such partial year. Any royalty payment may provide for such deductions that are appropriate with respect to overpayment of royalties of any such prior period. Any such deductions shall be allocated to such prior period and minimum or maximum royalty amounts (as described herein) shall be recalculated for such prior period. Further adjustments may be made to the extent such allocation results in an overpayment for any period. Any such adjustment shall also be allocated to the appropriate period for purposes of determining minimum or maximum royalties Each royalty payment shall be accompanied by such sales data that Professional may reasonably request. With respect to sales made during 1999 and each of the following years during the Contract Period, Professional shall receive a minimum royalty of the following amount: AGREEMENT - PAGE 5 YEAR MINIMUM ROYALTY ---- --------------- 1999 $1,500,000.00 2000 1,875,000.00 2001 2,343,750.00 2002 2,929,687.50 2003 3,662,109.38 2004 4,000,000.00 2005 4,000,000.00 2006 4,000,000.00 2007 4,000,000.00 2008 4,000,000.00 2009 - 2014 as set forth below
With respect to the years 2009 to 2014 the Professional shall receive a minimum royalty, adjusted as of December 31 of each such year, to be as follows: $1,500,000 X CPI 1/CPI 2 = adjusted minimum royalty amount. The terms CPI 1 and CPI 2 shall have the meanings set forth below. In all events, minimum royalty amounts shall be adjusted to be the prorata portion of the amount for any year which is less than a full year. Within forty-five (45) days after the end of each such calendar year, Adams Golf shall pay to Professional the difference, if any, between the applicable minimum royalty and the royalties received by Professional (including, without limitation, pro rata minimum royalty payments) with respect to such calendar year. After December 31, 2013 through the termination date or expiration hereof, there shall be no minimum royalty. After December 31, 2008 and through the Termination date or Expiration hereof, the maximum royalty payable to Professional with respect to sales in any of such years shall not exceed $4,000,000, adjusted as set forth below (or the pro rata portion of such amount for any year which is less than a full year). During the Contract Period, such maximum amount shall be adjusted as of December 31 of every year commencing 2009 to be as follows: $4,000,000 X CPI 1/CPI 2 = adjusted maximum royalty amount, where: a. CPI means the monthly National Consumer Price Index for All Urban Consumers, U.S. City Average (All Items; 1982-84 equals 100) issued by the U.S. Department of Labor, Bureau of Labor Statistics, or its successor agency, or if such index is no longer in effect, the successor index thereto; b. "CPI 1" shall mean the monthly CPI for the month of December of such year (initially, December 2009); and AGREEMENT - PAGE 6 c. "CPI 2" shall mean CPI for the month of December 2008. In no event shall any delay in paying a royalty due to computation of the formula set forth above result in a default hereunder. For all purposes, sales of specialty golf clubs and limited edition golf clubs, including, without limitation, "Audemars Piguet"-TM- and Jaguar (all of the foregoing specialty and limited edition golf clubs being referred to herein when designated as such by Adams Golf as "Specialty Items"), will not be included in determining the above minimum royalty amounts. From the date this Agreement is executed through the termination date of this Agreement. Professional shall be entitled to receive a royalty equal to ten percent (10%) of the Net Sales Price of all Adams Golf Specialty Item golf clubs sold outside of the United States of America, its territories and possessions. Within thirty (30) days after the last royalty payment for any calendar year, Professional may request that he inspect the books and records of Adams Golf relating to the computation of royalties payable hereunder. Upon execution of a confidentiality agreement containing standard terms and conditions, Adams Golf shall permit Professional or his representative to conduct such inspection at such times to be agreed to by the parties. Professional acknowledges and agrees that the royalty payments to be made herein are in consideration of all provisions of this Agreement. SECTION 6. FALDO JUNIOR SERIES. Adams Golf agrees that through the year 2008 it will support the "Faldo Junior Series" in the United Kingdom by making an annual contribution to the sponsoring organization of not less than $45,000 for each year the tournament is played under such name. In return for such support, Professional will ensure that Adams Golf is accorded sponsorship recognition of the highest category with respect to the "Faldo Junior Series" and shall receive all other benefits accorded to the greatest sponsors thereof (including, without limitation, advertising and tickets to events). SECTION 7. ACTOR'S GUILD. Payments made to the Professional as gross wages for work pursuant to a contract governed by agreements with the Screen Actor's Guild ("SAG") in connection with the Professional's appearance in television commercials or other promotional activities under this Agreement shall be deducted from the compensation (including royalties) payable to the Professional pursuant to this Agreement. ARTICLE III. DUTIES, GRANTS, SERVICES, COVENANTS AND AGREEMENTS SECTION 1. CONTRACT TERMS. The parties hereby confirm that the recitals of this Agreement and the provisions of ARTICLE I are integral parts of this Agreement. SECTION 2. GRANT OF ENDORSEMENT RIGHTS. The Professional hereby grants to Adams Golf and its affiliates and its duly authorized distributors and representatives, AGREEMENT - PAGE 7 subject to all terms and conditions of this Agreement, the unlimited, sole and exclusive right, privilege and license, within the Contract Territory and during the Contract Period, to use the Professional's Endorsement to endorse Adams Golf and its affiliates, and on and in connection with the advertisement, promotion, endorsement and sale of the Endorsed Products in any manner or media whatsoever, whether now existing or hereafter created, anywhere in the world. The Professional agrees that he will not grant, nor cause any affiliated entity to grant, to anyone other than Adams Golf or its affiliates the right to use the Marks or the Professional's Endorsement, except in the case of the Permitted Other Endorsements identified in ARTICLE I, SECTION 8. Neither Adams Golf nor any of its affiliates shall have any obligation hereunder to use the Professional's Endorsement or the Marks in connection with the advertisement, endorsement, promotion or sale of any of the Endorsed Products. The Professional represents and warrants that he is the owner, free and clear, of each of the rights granted, assigned or licensed to Adams Golf and its affiliates in this Agreement and he has the legal capacity, power and authority to grant the rights and licenses contained in this Agreement. In addition, the Professional expressly represents and warrants that he has neither assigned nor previously granted any license or any endorsement right in conflict with the rights and licenses granted to Adams Golf and its affiliates hereunder. Adams Golf recognizes the validity of the Professional's property interest in the Professional's Endorsement and agrees not to challenge the validity of said interest during the Contract Period. SECTION 3. USE OF SPECIALLY ENDORSED PRODUCTS. During the Contract Period, the Professional shall use exclusively the Specially Endorsed Products, defined in ARTICLE I, SECTION 5, within the Contract Territory while playing golf and during all professional tournaments, golf events, personal appearances, exhibitions, advertisements, fund raisers, corporate outings and similar promotional events in which he takes part. SECTION 4. ADDITIONAL OBLIGATIONS. a. REQUIRED TOURNAMENT PLAY. The Professional agrees to use his best efforts to compete in at least the Required Tournaments, as defined in ARTICLE I, SECTION 6. b. PROMOTION. The Professional agrees that during the Contract Period and within the Contract Territory, while playing golf and during all professional tournaments, golf events, personal appearances, exhibitions, advertisements, fund raisers, corporate outings and similar promotional events in which he takes part, he will wear and/or use the items described in ARTICLE I, SECTION 7, unless prohibited by the rules of the event. c. PROFESSIONAL CONDUCT. During the term of this Agreement, the Professional will conduct himself at all times with due regard to public morals and conventions. Notwithstanding anything to the contrary set forth in the prior AGREEMENT - PAGE 8 sentence or the immediately succeeding sentence, in no event shall a matter which is public knowledge as of the date hereof be deemed a violation by Professional of this ARTICLE III, SECTION 4. If, in Adams Golf's reasonable opinion, the Professional shall have committed or shall commit any act or do anything that is or shall be offensive or involve moral turpitude under violations of U.S., federal, State of Texas or other applicable or local laws, or which brings him into public disrepute, contempt, scandal or ridicule, or which insults or offends the community, which injures or may tend to injure the success of Adams Golf or its affiliates or any of their respective products, distributors, services or customers; or if, in Adams Golf's reasonable opinion, the Professional shall make any statements in derogation in any material respect of Adams Golf or any of its affiliates or any of their respective products or services and such statement is made to the general public or becomes a matter of public knowledge; then at any time after the occurrence of such act, thing or statement, Adams Golf shall have the right, in addition to its other legal and equitable remedies, to immediately terminate this Agreement, by giving written notice to the Professional. In the event the Professional receives written notice from Adams Golf terminating this Agreement for cause as set forth in this Section, the Professional shall have twenty (20) days from the date of delivery of the notice to request, by written notice to Adams Golf, that the matter be submitted to arbitration. If the Professional requests arbitration, Adams Golf and the Professional agree that such matter shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association. Unless required otherwise by state law, the parties hereto agree to arbitrate their differences in Dallas, Texas. The parties agree further that (i) an arbitrator may render an interim ruling, including injunctive relief, and (ii) all claims of any type alleged in connection with such matter (but only such matter) by either party, including defenses, are included in the jurisdiction of the arbitrator. In connection with such dispute, either party may send written notice to the other party and the Regional Office of American Arbitration Association invoking the binding arbitration provisions of this Section. Each party has ten (10) days from the date of mailing by the American Arbitration Association of a written list of proposed arbitrators within which to return the written list of proposed arbitrators with their choices of arbitrators, to the American Arbitration Association. The arbitrator selected by the Professional and the arbitrator selected by Adams Golf shall both select a third arbitrator. The parties further consent to the jurisdiction of any appropriate court to enforce the provisions of this Section and/or to confirm any award rendered by the panel of arbitrators. Any costs or other expenses, including attorney fees and costs incurred by the successful party, arising out of or occurring because of the arbitration proceedings, shall be assessed against the unsuccessful party. AGREEMENT - PAGE 9 SECTION 5. PRODUCTS FOR PROFESSIONAL'S USE. During the Contract Period, Adams Golf will provide the Professional, at no cost or expense to the Professional, with such quantities of Endorsed Products and clothing bearing Adams Golf's authorized logos as he may reasonably request in connection with performing his obligations under this Agreement. SECTION 6. OTHER ENDORSEMENTS. During the Contract Period, the Professional agrees not to endorse, wear or exhibit the logo, trademark or sticker of, or otherwise advertise or promote, any other company, firm, organization or person, or their products or services, except as permitted in ARTICLE I, SECTION 8, without the express written consent of Adams Golf, which consent Adams Golf may withhold in its sole discretion. SECTION 7. SERVICES OF THE PROFESSIONAL. a. The Professional and Adams Golf shall mutually agree on the personal appearances to be made by Professional. The personal appearances which may be made by the Professional under this Agreement may be for any one or more of the following purposes: attendance at sales "demo" days; in-store appearances, autograph sessions, customer or distributor outings or dinners and other promotional appearances on behalf of Adams Golf or its affiliates; modeling in connection with photographs, drawings or other advertising relating to the Endorsed Products, which shall be subject to Professional's approval, which such approval shall not be unreasonably withheld; production of television and radio commercials or promotional videos and/or other multi-media advertising (including materials for use on the Internet), which shall be subject to Professional's approval, which such approval shall not be unreasonably withheld; and developing, testing, evaluating and consulting regarding prototypes and new products, including but not limited to golf clubs. The Professional agrees to keep confidential the nature of this Agreement, the terms hereof and all non-public information which may be disclosed or made available to him by or on behalf of Adams Golf or its affiliates in the course of rendering such services, including, without limitation, the existence of any prototypes or new products and all design aspects and any financial information or data which are not available to the public. With respect to the services of the Professional in developing, testing and evaluating prototypes and new products, including the "Nick Faldo Line" described in ARTICLE III, SECTION 9, the Professional agrees, if requested, to execute an agreement in form and substance reasonably satisfactory to Adams Golf, whereby the Professional agrees to maintain the confidentiality of Adams Golf's or its affiliates' proprietary business and technical information and data, and assigns to Adams Golf or its affiliates all rights in and to any inventions, designs, trade secrets, know how, patents, patent applications, copyrights, and similar rights, applications therefor and registrations thereof, throughout the world (collectively, the "Intellectual Property Rights"). AGREEMENT - PAGE 10 b. Adams Golf agrees that it will reimburse the Professional for reasonable travel, lodging and meal expenses (including first class air travel) incurred by him and his traveling associate in connection with rendering the services set forth in this Article III, Section 7. c. The Professional acknowledges that Adams Golf and its affiliates may use the Professional's Endorsement and the Marks in its promotional activities, including television commercials, print and/or Internet advertisements, and he agrees to cooperate with Adams Golf's and its affiliates promotional efforts in that regard. The Professional shall use his best efforts to demonstrate and promote the characteristics and quality of the Endorsed Products. The Professional shall participate in the production of television and radio commercials and in such press interviews, radio and television appearances and other appearances as may be arranged for him by Adams Golf. It is understood and agreed by the Professional that Adams Golf and its affiliates shall have the right to exhibit commercials and otherwise make use of all such promotional materials on a worldwide basis and that Adams Golf and its affiliates shall be the sole owner of all commercials, promotional materials and other items produced or created hereunder and all related rights worldwide, including, without limitation, copyright, trademark and intellectual property rights. The Professional agrees to enter into a SAG contract with Adams Golf and/or its advertising agency if reasonably necessary to accomplish the purposes of this Section. If required under a SAG contract, the Professional shall be paid as gross wages for the making, use, reuse, broadcast, publication or other display of any television commercials produced under this Agreement utilizing the Professional's Endorsement at the minimum fee as provided in the then current applicable SAG union code agreement, which sum(s) shall be deducted from the compensation payable to the Professional under this Agreement, as set forth in ARTICLE II, SECTION 7. All other costs and expenses associated with work performed by the Professional under a SAG contract shall be paid by Adams Golf. It is further understood and agreed by the Professional that Adams Golf and its affiliates shall have the right to translate and "dub" the Professional's voice in television commercials produced for Adams Golf or its affiliates in order to facilitate foreign exhibition of the commercials. SECTION 8. APPROVAL OF ADVERTISING. Adams Golf agrees that no use of the Professional's Endorsement nor advertising materials will be made hereunder unless and until the same has been approved by the Professional. The Professional agrees that any material, advertising or otherwise, submitted for approval as provided herein may be deemed by Adams Golf to have been approved hereunder if the same is not disapproved by the Professional in writing within fourteen (14) days after the Professional's receipt thereof. The Professional agrees that any material submitted hereunder will not be unreasonably disapproved and, if it is disapproved, that Adams Golf will be advised in writing of the specific grounds therefor at the time of disapproval. Adams Golf agrees to protect, indemnify and save harmless the Professional from and against any and all expenses, damages, claims, suits, actions, judgments and costs whatsoever, arising out of, AGREEMENT - PAGE 11 or in any way connected with, any advertising material furnished by, or prepared on behalf of, Adams Golf or its affiliates. SECTION 9. NICK FALDO LINE. Adams Golf and Professional agree that Adams Golf will develop a "Nick Faldo Line" of Adams Golf golf clubs. Adams Golf and Professional agree that Professional will be actively involved in the research, development, testing and advertising of such new line of clubs. Professional acknowledges and agrees that all of his rights in any inventions, designs, patents, copyrights and other intellectual property or rights created in connection with such new line of clubs shall be the sole property of Adams Golf and/or its affiliates. Professional further acknowledges and agrees that any such intellectual property and rights shall have been made for the sole and exclusive benefit of and owned by Adams Golf and/or its affiliates. SECTION 10. BOARD OF ADAMS GOLF. Adams Golf covenants that until the date that royalties are no longer to be paid to Professional under ARTICLE II, SECTION 5 HEREOF, it will use its commercially reasonable efforts to cause a designee of Professional to be nominated and elected to the Board of Directors of Adams Golf, Inc. SECTION 11. EXCLUSIVE DISTRIBUTOR AGREEMENT. The parties acknowledge that it is the intent of Adams Golf to execute an exclusive distributorship agreement containing standard terms and conditions for the sale and distribution of Adams Golf products in the United Kingdom with Dimensions in Sports on terms to be negotiated. SECTION 12. MARRIOTT AGREEMENT. If a suitable agreement can be reached between Adams Golf or its affiliates and Marriott Corporation or its affiliates ("Marriott") for the operation of golf learning, research and custom fitting centers at various Marriott facilities, the Professional agrees, for no additional compensation, to enter into and perform under an agreement relating thereto with Adams Golf or its affiliates and Marriott. The existing "Nick Faldo Learning Centers" or "Nick Faldo Golf Institutes" at various Marriott facilities and any future such facilities will be named "Nick Faldo Learning and Adams Golf Custom Fitting and Research Centers" or such other name as may be mutually agreed. ARTICLE IV. MISCELLANEOUS SECTION 1. INTELLECTUAL PROPERTY RIGHTS. Adams Golf and its affiliates shall have the right anywhere in the world, during the Contract Period or thereafter, at its own expense, to apply for, file, renew, assign, obtain registrations or patents, or record its ownership, as the case may be, of any of the Intellectual Property Rights or other rights granted or licensed to Adams Golf or its affiliates hereunder. The Professional agrees, without additional compensation, to render such reasonable assistance, including the taking of such actions and execution of such documents, as may be necessary or desirable to enable Adams Golf or its affiliates to accomplish these items, and to enforce, defend or AGREEMENT - PAGE 12 otherwise preserve the validity of the Intellectual Property Rights or other rights granted or licensed to Adams Golf or its affiliates hereunder. The Professional agrees not to directly or indirectly challenge the validity, registration, enforceability of Adams Golf's or its affiliates' ownership of such Intellectual Property Rights or other rights, and shall not, directly or indirectly, apply for, file or obtain any patents or registrations on any of the Intellectual Property Rights or any variations or derivations thereof. SECTION 2. ASSIGNMENT. This Agreement shall bind and inure to the benefit of the Professional, and the heirs and permitted assigns of the Professional. The Professional may not transfer or assign any of his rights hereunder without the prior written consent of Adams Golf. The rights granted Adams Golf hereunder shall run and inure to the benefit of Adams Golf and each of its subsidiaries and affiliates and their respective successors, including successors by merger or consolidation. Except as provided herein, Adams Golf shall not, without the prior written consent of the Professional, transfer or assign the rights under this Agreement to any other person or entity; provided, however, that Adams Golf may assign this Agreement and its rights hereunder without Professional's consent to a third party which acquires substantially all of the assets of Adams Golf or which relate to the Endorsed Products. SECTION 3. DEFAULT. If either party at any time during the Contract Period shall (a) fail to timely make any payment of any sum of money herein specified to be made, or (b) fail to timely observe or perform any of the covenants, agreements, or obligations hereunder (other than the payment of money), the non-defaulting party may terminate this Agreement as follows: as to (a), above, if such payment is not made within thirty (30) days after the aggrieved party shall have delivered to the other party written notice of such failure to make payment; or as to (b), above, if such default is not cured completely as soon as reasonably possible and in no event later than sixty (60) days after the aggrieved party shall have delivered to the other party written notice specifying such default; provided, however, that failure to terminate this Agreement pursuant to this Section shall not effect or constitute a waiver of any rights or remedies the non-defaulting party would have been entitled to demand in the absence of this Section, whether by way of damages, termination or otherwise. SECTION 4. TERMINATION. Except as set forth herein, including, without limitation, termination for uncorrected default as set forth in ARTICLE IV, SECTION 3, hereof, this Agreement shall terminate upon the expiration of the Contract Period. In addition, and without limiting the foregoing, Adams Golf shall have the right to terminate this Agreement upon any of the following events: a. The inability of the Professional, by reason of any ailment or illness, physical or mental, to perform the duties required hereunder for a consecutive period of twelve (12) months, unless Adams Golf has provided, and the Professional has elected to participate in, group disability insurance coverage through a third party insurer, in which case this Agreement will continue in effect, but the compensation payable hereunder to the Professional shall then be reduced AGREEMENT - PAGE 13 and limited to the amounts payable by the insurer under the group disability insurance policy; or b. The Professional shall retire or become officially ineligible to compete on the Official PGA Tour and/or the Senior PGA Tour (or similar premium successor tours, should one or more be formed) at any time during the Contract Period; or c. The Professional has engaged in illegal or immoral conduct resulting in a felony conviction, or has otherwise conducted himself in a manner not in keeping with the standards of professional conduct as required under ARTICLE III, SECTION 4c; or d. The Professional shall have exercised the put right provided for in ARTICLE II, SECTION 4, provided that such termination shall have no effect on the Professional's right to exercise such put right; or e. The death of the Professional. Adams Golf and Professional shall each have the right, on January 1, 2008 and for a period of 90 days thereafter, to terminate this Agreement in the event that (a) Adams Golf is in default of its obligation to make royalty payments hereunder or the Nick Faldo Line (or similar line) of golf clubs is not being actively marketed by Adams Golf or its affiliates (other than as a result of action or inaction by Professional) and (b) B.H. (Barney) Adams is not then affiliated with Adams Golf, Inc. in a senior executive capacity and (c) Adams Golf, Inc. did not effect an initial public offering of its common stock or become a reporting company under the Securities Exchange Act of 1934, as amended, or any successor statute thereto, and there has been a sale or other disposition by Adams Golf, Inc. of all or substantially all of its assets or a reorganization, stock sale, exchange, merger or consolidation of Adams Golf, Inc. which at such time results in a change of 50% or more of the then beneficial ownership of the then outstanding common stock of Adams Golf, Inc. or any successor entity. In the event of the death of the Professional prior to May 1, 2030, Adams Golf's exclusive rights to the use of the Professional's Endorsement shall continue, at the option of Adams Golf, for any periods until May 1, 2030, and the Professional's heirs or estate shall be entitled to any royalties due under ARTICLE III, SECTION 4 hereof during the periods therein provided. The Professional's heirs or estate shall cooperate with Adams Golf and its affiliates in the recording or registration of Adams Golf's rights in this regard under applicable law. Upon termination or expiration of this Agreement for any reason other than the default of Adams Golf, Adams Golf shall have the right for one (1) year to market and sell all remaining inventory of Endorsed Products (including Specially Endorsed Products and the Specialty Items) and other items bearing the Professional's Endorsement and the Professional shall be entitled to the royalty contemplated by ARTICLE II, SECTION 5 hereof AGREEMENT - PAGE 14 with respect to such sale, provided that the minimum royalty will no longer be applicable. Termination of this Agreement shall be in addition to, and not in lieu of, any other rights and remedies of Adams Golf. SECTION 5. INDEMNITY. a. Adams Golf agrees to protect, indemnify and save harmless the Professional and the Professional's authorized agent, or either of them, from and against any and all expenses, damages, claims, suits, actions, liabilities, judgments and costs whatsoever, including reasonable attorneys' fees, in each case arising out of, or in any way connected with, actions or omissions of Adams Golf or any claim or action for personal injury, death or other cause of action involving alleged defects in Adams Golf's products, provided that Adams Golf shall be given prompt notice of any such action or claim and the Professional and the Professional's agent shall render all reasonable assistance to Adams Golf and its counsel in the investigation, defense, settlement or resolution of such action or claim. During the Contract Period, Adams Golf agrees to provide and maintain, at its own expense, product liability insurance with limits of not less than $2,000,000. b. Professional agrees to protect, indemnify and save harmless Adams Golf and each of its subsidiaries and affiliates from and against any and all expenses, damages, claims, suits, actions, liabilities, judgments and costs, whatsoever, including reasonable attorneys' fees, arising out of, or in any way connected with, (i) federal, state, local and other taxes or contributions imposed or required under unemployment insurance, social security and income tax laws worldwide, with respect to the Professional's performance of this Agreement or his receipt of compensation hereunder, or (ii) use of any of the Marks in accordance with ARTICLE III, SECTION 5 hereof. SECTION 6. NOTICE. Any notice, request, demand or other communication required or permitted hereunder shall be in writing and shall be deemed properly given when actually received or within fourteen (14) days of mailing by certified or registered mail, return receipt requested, postage prepaid, whichever first occurs, to the Professional at: Nicholas Faldo XXX XXXX XXX XX XXX XXX XXXXXX XXXXX, XXXX, XXXX England AGREEMENT - PAGE 15 with a copy to: Adam Chinn Esq. Wachtel, Lipton, Rosen & Katz 51 West 52nd Street, 33rd Floor New York, NY 10019-6618 and to Adams Golf at: 2108 Plano Parkway Plano, Texas 75076 Attn: B. H. (Barney) Adams with a copy to: Joseph A. Hoffman, Esq. Arter & Hadden LLP 1717 Main Street, Suite 4100 Dallas, Texas 75201 Either party may change its address for the purpose of this Agreement by giving notice to the other party in accordance herewith. SECTION 7. WAIVER. The failure of any party hereto at any time or times to demand strict performance by the other of any of the terms, covenants or conditions set forth herein shall not be construed as a continuing waiver or relinquishment thereof and each may at any time demand strict and complete performance by the other of said terms, covenants and conditions. SECTION 8. SIGNIFICANCE OF HEADINGS. Section headings contained herein are solely for the purpose of aiding in speedy location of subject matter and are not in any sense to be given weight in the construction of this Agreement. Accordingly, in case of any question with respect to the construction of this Agreement, it is to be construed as though such Section headings had been omitted. SECTION 9. ENTIRE AGREEMENT; AMENDMENTS. This writing constitutes the entire agreement between the parties hereto and may not be changed or modified except by a writing signed by the party or parties to be charged thereby. SECTION 10. GOVERNING LAW. This Agreement shall be governed by and interpreted in accordance with the internal laws of the State of Texas, without reference to its choice of law principles. Any legal action to interpret or enforce this Agreement, or any provision hereof, shall be brought exclusively in the courts in the State of Texas, and the parties hereby consent to the jurisdiction of said courts and waive any objection to venue in this state or proceeding in such state on the basis of FORUM NON CONVENIENS. SECTION 11. RESERVATION OF RIGHTS. All rights not herein specifically granted to Adams Golf shall remain the property of the Professional to be used in any manner the Professional deems appropriate. AGREEMENT - PAGE 16 SECTION 12. U.S. DOLLARS. For purposes of this Agreement, the term "dollars" or "$" means U.S. dollars. All amounts recited herein shall be in U. S. dollars. SECTION 13. INDEPENDENT CONTRACTOR. The services performed by the Professional under this Agreement are in the capacity as an independent contractor. This Agreement does not constitute and shall not be construed as establishing an employee-employer relationship, or constituting a partnership or joint venture, between the Professional and Adams Golf. Except as set forth herein, no party hereto shall have any right to obligate or bind another party in any manner, and nothing herein contained shall give, or is intended to give, any rights of any kind to any third person. SECTION 14. SEVERABILITY. In the event that any one or more provisions of this Agreement shall be deemed unenforceable or invalid by a court of competent jurisdiction, such determination shall in no way affect the validity or enforceability of any other provision herein. SECTION 15. COUNTERPARTS. This Agreement may be executed in any number of counterparts, and each of such counterpart hereof shall be deemed to be an original instrument, but all such counterparts together shall constitute but one Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the dates set forth below. ADAMS GOLF, LTD. By: ADAMS GOLF GP, INC. Date: April 22, 1998 By: /s/ B.H. Adams -------------- ------------------------------ Name: B. H. (Barney) Adams Title: President PROFESSIONAL Date: April 22, 1998 /s/ Nicholas A. Faldo -------------- --------------------------------- Nicholas A. Faldo AGREEMENT - PAGE 17 Accepted and Agreed to this 22nd day of April, 1998 ADAMS GOLF, INC. By: /s/ B.H. Adams ------------------------------ Name: B. H. (Barney) Adams Title: President AGREEMENT - PAGE 18 EX-10.3 4 EXHIBIT 10.3 (LEASE 2) COMMERCIAL LEASE AGREEMENT JACKSON-SHAW TECHNOLOGY CENTER II, LTD., Landlord to ADAMS GOLF, INC., Tenant TABLE OF CONTENTS 1. LANDLORD 4 2. TENANT 4 3. LEASED PREMISES 4 4. TERM 5 5. BASE RENT AND SECURITY DEPOSIT 6 6. ADDITIONAL RENTAL 7 7. TENANT REPAIRS AND MAINTENANCE 9 8. LANDLORD'S REPAIRS 11 9. UTILITY SERVICE 11 10. SIGNS 11 11. USAGE 12 12. INSURANCE 12 13. (INTENTIONALLY DELETED) 13 14. COMPLIANCE WITH LAWS, RULES AND REGULATIONS 13 15. ASSIGNMENT AND SUBLETTING 13 16. ALTERATIONS AND IMPROVEMENTS 14 17. CONDEMNATION 15 COMMERCIAL LEASE AGREEMENT - PAGE 2 - -------------------------- LEASE 2 18. FIRE AND CASUALTY 16 19. CASUALTY INSURANCE 17 20. WAIVER OF SUBROGATION 17 21. HOLD HARMLESS 17 22. QUIET ENJOYMENT 18 23. LANDLORD'S RIGHT OF ENTRY 18 24. ASSIGNMENT OF LANDLORD'S INTEREST IN LEASE 18 25. LANDLORD'S LIEN 18 26. DEFAULT BY TENANT 19 27. REMEDIES FOR TENANT'S DEFAULT 19 28. TERMINATION OF OPTIONS 21 29. WAIVER OF DEFAULT OR REMEDY 21 30. CHOICE OF LAW; VENUE; ATTORNEY'S FEES 21 31. HOLDING OVER 22 32. RIGHTS OF MORTGAGEE 22 33. ESTOPPEL CERTIFICATES 23 34. SUCCESSORS 23 35. REAL ESTATE COMMISSION 23 COMMERCIAL LEASE AGREEMENT - PAGE 3 - -------------------------- LEASE 2 36. DEFAULT BY LANDLORD 23 37. MECHANIC'S LIENS 24 38. HAZARDOUS WASTE 24 39. ENTIRE AGREEMENT AND LIMITATION OF WARRANTIES 25 40. FINANCIAL STATEMENTS 25 41. FORCE MAJEURE 25 42. MISCELLANEOUS 26 43. NOTICE 27 44. LIMITATION ON TENANT'S DAMAGES 28
COMMERCIAL LEASE AGREEMENT THIS LEASE AGREEMENT is entered into by and between: 1. LANDLORD: JACKSON-SHAW TECHNOLOGY CENTER II, LTD., a Texas Limited Partnership ("Landlord"), and 2. TENANT: ADAMS GOLF, INC., a Texas Corporation ("Tenant"). 3. LEASED PREMISES: In consideration of the rents, terms and covenants of this Commercial Lease Agreement (this "Lease"), Landlord hereby leases to Tenant certain premises (the "Leased Premises") consisting of approximately 65,135 square feet within the 65,135 square foot building (the "Building") located at 2801 E. Plano Parkway, Suite ____, Plano, Texas together with the non-exclusive right to use, in common with other tenants, the common areas of the Project, which are all areas neither exclusively leased to another tenant nor expressly reserved to or by Landlord. The land upon which the Building is located is described in the attached Exhibit A and, together with the Building, landscaping, parking and driveway areas, sidewalks, and other improvements thereon, shall be referred to in this Lease as the "Project." COMMERCIAL LEASE AGREEMENT - PAGE 4 - -------------------------- LEASE 2 4. TERM: (a) The term of this Lease shall be Six (6) years commencing on February 1, 1998, the "Commencement Date" and terminating on the last day of the same calendar month in the Sixth (6th) year following the Commencement Date (the "Termination Date"). This Commencement Date may be subject to change, however, pursuant to Paragraphs 4(b) and (c) below. (b) Tenant acknowledges that it accepts the Leased Premises as suitable for Tenant's purposes subject only to Paragraph 4(c) below, if applicable. If this Lease is executed before the Leased Premises become available for occupancy, or if Landlord cannot acquire possession of the Leased Premises prior to the Commencement Date stated above, Tenant agrees to accept possession of the Leased Premises at such time as Landlord is able to tender the same, which date shall then be the Commencement Date of the Lease term. (c) Landlord agrees to install at its cost and expense the improvements, if any, described in the plans and specifications described in Exhibit B. If such improvements are not completed and the Leased Premises are not ready for occupancy on the Commencement Date stated above, other than as a result of the omission, delay or default by Tenant or anyone acting under or on behalf of Tenant, the rent under this Lease shall not commence until substantial completion of the work described in said plans and specifications, and the Commencement Date of the Lease term shall be the date of such substantial completion. Landlord shall notify Tenant in writing as soon as such improvements are substantially completed and ready for occupancy. If Tenant believes that such improvements have not been substantially completed as aforesaid, Tenant shall notify Landlord in writing of its objections within three (3) days after receipt of the completion notice from Landlord. Landlord shall have a reasonable time after receipt of such notice (but in no event more than 10 days) in which to commence such corrective action as may be necessary and shall notify Tenant in writing as soon as it deems such corrective action has been completed so that the Leased Premises are completed and ready for occupancy. In the event of any dispute as to substantial completion or work performed or required to be performed by Landlord, the certificate of a registered architect shall be conclusive and binding on all parties. (d) Tenant acknowledges that no representations or promises regarding construction, repairs, alterations, remodeling, or improvements to the Leased Premises have been made by Landlord, its agents, employees, or other representatives, unless such are expressly set forth in this Lease or any Exhibit hereto. Tenant is solely responsible for applying for and obtaining a Certificate of Occupancy for the Leased Premises and will satisfy itself as to the business park restrictions and all zoning and similar restrictions and regulations prior to commencement of any construction. Failure of Tenant to provide written notice of such objections prior to commencement of construction shall be deemed acceptance by Tenant. Tenant agrees that if its occupancy of the Leased Premises is delayed under the circumstances described in Paragraphs 4(b) and (c) above, this Lease shall nonetheless continue in full force and effect. Adjustment of the rent commencement date as above provided shall constitute full settlement of all claims by Tenant against Landlord by reason of any such delay in possession of the Leased Premises. Tenant's taking possession of the Leased Premises shall conclusively establish that the improvements, if any, to be COMMERCIAL LEASE AGREEMENT - PAGE 5 - -------------------------- LEASE 2 made by Landlord under the terms of this Lease have been completed in accordance with the plans and specifications therefor and that the Leased Premises are in good and satisfactory condition as of the date of Tenant's possession, unless Tenant notifies Landlord in writing specifying any bona fide deficiencies after taking possession (i) within 270 days, for the heating and air conditioning systems, and (ii) within ninety (90) days, for all other matters, after the Commencement Date. Landlord shall use reasonable diligence to repair promptly such items but Tenant shall have no claim for damages or rebate or abatement of rent by reason thereof. In conjunction with, or at any time after, the Commencement Date, Tenant shall, upon demand, execute and deliver to Landlord an Estoppel letter (as referred to in paragraph 33 herein) to acknowledge the Commencement Date. 5. BASE RENT AND SECURITY DEPOSIT: (a) Tenant agrees to pay to Landlord the following rental amounts (sometimes referred to in this Lease as the "Base Rent" or "Base Rental"): MONTHS 1 THROUGH 24, $455,952.00 PER YEAR PAYABLE IN MONTHLY INSTALLMENTS OF $37,996.00 EACH; AND MONTHS 25 THROUGH 48, $488,520.00 PER YEAR PAYABLE IN MONTHLY INSTALLMENTS OF $40,710.00 EACH; MONTHS 49 - 72, $521,088.00 PER YEAR PAYABLE IN MONTHLY INSTALLMENTS OF $43,424.00. Payment of rent is subject to proration for partial months and to adjustment for early or delayed occupancy under the terms hereof, and, if the area of the Leased Premises is, on the Commencement Date, different than the area stated in Paragraph 3 above, then Base Rent shall be adjusted to reflect $7.00 per gross square foot. Base Rent shall be payable to Landlord monthly, in advance, without demand, deduction or offset, in lawful money of the United States of America at the address stated below. The first month's Base Rent payment of $37,996.00 shall be due upon the date Tenant executes the Lease Agreement, and all other installments of Base Rent shall be due and payable on or before the first (1st) day of each month during the Lease term. (b) Upon the date Tenant executes the Lease Agreement, there shall be due and payable by Tenant a Security Deposit in the amount of $37,996.00. Such deposit shall be held by Landlord (without any obligation to pay interest thereon or segregate such money from Landlord's general funds except as may be required by applicable law) as security for the performance of Tenant's obligations under this Lease. Tenant agrees to increase such Security Deposit from time to time so that it is at all times equal to one monthly Base Rental installment plus the average monthly additional rentals arising pursuant to Paragraph 6 below. Tenant shall deposit cash with Landlord in an amount sufficient so to increase the Security Deposit to such amount within five (5) days after written demand by Landlord. It is expressly understood that the Security Deposit is not an advance payment of rental or a measure of Landlord's damages in the event of Tenant's default under this Lease. Upon the occurrence of any event of default by Tenant under this Lease, Landlord may, from time to time, without prejudice to any other remedy provided herein or provided by law, use, apply, or retain all or part of the Security Deposit for the payment of (i) any Base Rent, (ii) additional rentals arising under Paragraph 6 below, and (iii) other sums due hereunder, including without limitation any amount which Landlord may spend or become obligated to spend by reason of Tenant's default or to compensate Landlord for any damage, injury, expense or liability caused to Landlord by such default or breach (all of which items (i), (ii) and (iii) are sometimes referred to in COMMERCIAL LEASE AGREEMENT - PAGE 6 - -------------------------- LEASE 2 the aggregate as "Rent"). If any portion of the Security Deposit is so used or applied, Tenant shall, within five (5) days after written demand thereof, deposit cash with Landlord in an amount sufficient to restore the Security Deposit to the amount required by this Paragraph. Tenant's failure to do so shall be an event of default under this Lease. The balance of the Security Deposit shall be returned by Landlord to Tenant at such time after termination of this Lease that all of Tenant's obligations have been fulfilled. (c) Other remedies for nonpayment of Rent notwithstanding, if the monthly Base Rental payment is not received by Landlord on or before the tenth (10th) day of the month for which such rent is due, or if any other Rent payment due Landlord by Tenant hereunder is not received by Landlord within ten (10) days of the due date three (3) times during any one (1) year period, a service charge of two hundred ($200.00) dollars shall be additionally due and payable by Tenant as an administrative charge for the excess efforts necessitated by such tardiness in payment. Such service charge shall be cumulative of any other remedies Landlord may have for nonpayment of Rent and other sums payable under this Lease. (d) If three (3) consecutive monthly Base Rental payments or any ten (10) [in total, cumulative from the beginning of the Lease term] monthly Base Rental payments during the Lease term (or any renewal or extension thereof) are not received by Landlord within ten (10) days of the due date, the Base Rent hereunder shall automatically become due and payable by Tenant in advance in quarterly installments equal to three (3) months' Base Rent each. The first of such quarterly Base Rent payments shall be due and payable on the first day of the next succeeding month and on the first day of every third (3rd) month thereafter. This remedy shall be cumulative of any other remedies of Landlord under this Lease for nonpayment of Rent. 6. ADDITIONAL RENTAL: (a) TAXES AND INSURANCE: (1) "Tax and Insurance Costs" shall mean all of the following paid or payable by Landlord with respect to the Project or any portion thereof: (i) all federal, state and local sales, use, ad valorem, rental, value added, and other taxes (other than Landlord's income or franchise taxes) and special assessments and other governmental charges; and (ii) all insurance premiums, including, without limitation, public liability, casualty, rental and property damage insurance. (2) Landlord shall pay all Tax and Insurance Costs; however, Landlord may in its discretion defer such payment to the extent permitted by applicable laws so long as contested by Landlord in good faith and so long as Tenant's occupancy of the Premises is not lawfully disturbed. (3) For each calendar year of the term of this Lease, Tenant shall pay to Landlord as additional Rent hereunder its "pro rata portion" of the Tax and Insurance Costs computed by multiplying the Tax and Insurance Costs by a fraction, the numerator of which is the number of rentable square feet in the Leased Premises, and the denominator of which is the number of rentable square feet in the Building. COMMERCIAL LEASE AGREEMENT - PAGE 7 - -------------------------- LEASE 2 (4) Tenant shall pay one-twelfth of its pro rata portion of estimated Tax and Insurance Costs as estimated by Landlord, along with the monthly Base Rental payment each month, during the term of this Lease. As soon as available after the expiration of each calendar year during the term of this Lease, Landlord shall submit a reconciliation statement to Tenant setting forth (1) Tenant's pro rata portion of the Tax and Insurance Costs due from Tenant for the preceding calendar year, (ii) the amount of Tax and Insurance Costs paid by Tenant during such calendar year, and (iii) the amount, if any, either overpaid or remaining due from Tenant to Landlord. Within (10) days after receipt of such statement, Tenant shall remit to Landlord the amount said statement shows to be due from Tenant or, if Tenant has overpaid, Landlord shall credit the amount overpaid to Tenant's pro rata portion of Tax and Insurance Costs next due. If Tenant is not in default and this Lease terminated at the end of such prior year, Landlord shall refund such overpayment to Tenant. (5) For the calendar years in which this Lease commences and terminates, Tenant's liability for its pro rata portion of the Tax and Insurance Costs for such partial calendar years shall be subject to pro rata adjustment based upon the number of days of the term elapsing during such partial year. Where the applicable charges are not available prior to the end of the term hereof, then the aforesaid adjustment shall be made between Landlord and Tenant after Landlord shall have received the charges for such period, it being specifically agreed that Landlord's and Tenant's obligations under this Paragraph shall survive the expiration of the term of this Lease. (6) The failure of Landlord to exercise its rights hereunder to estimate Tax and Insurance Costs and require payment of same as additional Rent shall not constitute a waiver of such rights which rights may be exercised from time to time at Landlord's discretion. (b) COMMON AREA MAINTENANCE: (1) "Common Area Maintenance Expenses" shall mean any and all expenses (other than the Tax and Insurance Costs described above) arising from the maintenance, repair, replacement and operation of, and modifications and improvements to comply with governmental mandate to, the Project's common areas and any portions of the Project for which Landlord is responsible hereunder (excluding only expenses associated with structural integrity of the roof, foundation, and exterior walls) including, but not limited to, management fees, utility expenses (if furnished by Landlord), wages and fringe benefits payable to employees of Landlord whose duties are connected with the operation and maintenance of the Project, amounts paid to contractors or subcontractors for work or services performed in connection with the operation and maintenance of the Project, including without limitation common areas and parking areas and roof, exterior wall and foundation work that is not related to structural integrity. Any capitalized expenditures included within the foregoing (together with reasonable finance charges) will be amortized for purposes of this Paragraph over a three (3) year period. (2) The term "Common Area Maintenance Expenses" shall not include repair, restoration or other work occasioned by fire, windstorm or other casualty with respect to which COMMERCIAL LEASE AGREEMENT - PAGE 8 - -------------------------- LEASE 2 Landlord actually receives insurance proceeds, income and franchise taxes of Landlord, expenses incurred in leasing to or procuring of tenants, leasing commissions, advertising expenses, expenses for the renovating of space for new tenants, interest or principal payments or any mortgage or other indebtedness of Landlord, compensation paid to any employee of Landlord above the grade of building superintendent, or depreciation allowance or expense. (3) Tenant agrees to pay as additional Rent its pro rata portion (as defined in Paragraph 6(a)(3) above) of the Common Area Maintenance Expenses. Tenant shall pay one-twelfth of its pro rata portion of estimated Common Area Maintenance Expenses as estimated by Landlord, along with the monthly Base Rental payment each month during the term of this Lease. As soon as available after the expiration of each calendar year during the term of this Lease, Landlord shall submit a statement to Tenant setting forth (i) Tenant's pro rata portion of the Common Area Maintenance Expenses due from Tenant for the preceding calendar year, (ii) the amount of Common Area Expenses paid by Tenant during such calendar year, and (iii) the amount, if any, either overpaid or remaining due from Tenant to Landlord. Within ten (10) days after receipt of such statement, Tenant shall remit to Landlord the amount said statement shows to be due from Tenant or, if Tenant has overpaid, Landlord shall credit the amount overpaid to Tenant's pro rata portion of Common Area Maintenance Expenses next due. If Tenant is not in default and this Lease terminated at the end of such prior year, Landlord shall refund such overpayment to Tenant. (4) For the calendar years in which this Lease commences and terminates, Tenant's liability for its pro rata portion of the Common Area Maintenance Expenses for such partial calendar years shall be subject to pro rata adjustment based upon the number of days of the term elapsing during such partial year. Where the applicable expenses are not available prior to the end of the term hereof, then the aforesaid adjustment shall be made between Landlord and Tenant after Landlord shall have received all of the expenses for such period, it being specifically agreed that Landlord's and Tenant's obligations under this Paragraph shall survive the expiration of the term of this Lease. (5) The failure of Landlord to exercise its rights hereunder to estimate expenses and require payment of same as additional Rent shall not constitute a waiver of such rights which rights may be exercised from time to time at Landlord's discretion. (c) In any event, Tenant shall be responsible for insuring and paying all taxes upon Tenant's furniture, machinery, goods, supplies, fixtures, Alterations (below defined) or other improvements, and other property on the Project. 7. TENANT REPAIRS AND MAINTENANCE: (a) Tenant shall maintain all parts of the Leased Premises and their appurtenances (except those for which Landlord is expressly responsible under this Lease) in good, clean and sanitary condition, at its own expense. Tenant shall promptly make all necessary repairs and replacements to the Leased Premises, including but not limited to electric light lamps or tubes, windows, glass and plate glass, interior and exterior doors, any special office entry, interior walls and finish work, COMMERCIAL LEASE AGREEMENT - PAGE 9 - -------------------------- LEASE 2 floors and floor coverings, downspouts, gutters, heating and air conditioning systems, dock boards, truck doors, dock bumpers, and plumbing work and fixtures. Replacement and repair parts, materials and equipment shall be of quality equivalent to those initially installed within the Leased Premises, and repair and maintenance work shall be done in a good and workmanlike manner and in accordance with existing laws, rules, regulations and ordinances. (b) Tenant shall not damage or disturb the integrity, structural integrity, or support of any wall, roof, or foundation of the Building. Any damage to these areas caused by Tenant or Tenant's Representatives (defined in Paragraph 7(g)) shall be promptly repaired by Tenant at its sole cost and expense. (c) Landlord shall have the right to coordinate any repairs, maintenance and replacement of any rail tracks serving or to serve the Project, and if Tenant uses such rail tracks, Tenant shall reimburse Landlord from time to time upon demand for a share of the cost of such repairs, maintenance and replacement and any other sums specified in any agreement to which Landlord is a party respecting such tracks. Tenant's share of such costs shall be additional Rent and shall reflect a proration based on the ratio that Tenant's use, in number of cars, bears to the total rail use, in number of cars, by all rail users in the Project. (d) Tenant shall, at its own cost and expense, enter into a regularly scheduled preventive maintenance service contract with a maintenance contractor for servicing all heating, ventilation and air conditioning systems and equipment within, and any other equipment or machinery installed by Landlord in, or to serve, the Leased Premises. The maintenance contractor and the contract are subject to Landlord approval which shall not be unreasonably withheld. The service contract must include all services suggested by the equipment manufacturer within the operation/maintenance manual and must become effective (and a copy delivered to Landlord) within thirty (30) days of the date Tenant takes possession of the Leased Premises. If Tenant fails to enter into such service contract as required, Landlord shall have the right to do so on Tenant's behalf, and Tenant agrees to pay Landlord the cost and expense of same upon demand, and such amount shall be considered additional Rent. (e) Tenant shall at its own expense keep the Leased Premises pest-free and pay all charges for pest control and extermination within the Leased Premises. (f) At the termination of this Lease, Tenant shall deliver the Leased Premises "broom clean" to Landlord in the same good order, configuration, and condition as existed at the Commencement Date of this Lease, ordinary wear, natural deterioration beyond the control of Tenant, and damage by fire, tornado or other casualty excepted. Tenant shall give written notice to Landlord at least thirty (30) days prior to vacating the Leased Premises and shall arrange to meet with Landlord for a joint inspection of the Leased Premises prior to vacating. In the event of Tenant's failure to give such notice or arrange such joint inspection, Landlord's inspection at or after Tenant's vacating the Leased Premises shall be conclusively deemed correct for purposes of determining Tenant's responsibility for repairs and restoration. COMMERCIAL LEASE AGREEMENT - PAGE 10 - -------------------------- LEASE 2 (g) Not in limitation on the foregoing, it is expressly understood that Tenant shall repair and pay for all damage caused by the negligence of Tenant, Tenant's employees, officers, directors, partners, agents, invitees, licensees, contractors, representatives, or others for whom Tenant is legally responsible (all such persons and entities being herein collectively referred to as "Tenant's Representatives") or caused by Tenant's default hereunder. (h) If Landlord shall give Tenant written notice of defects or need for repairs for which Tenant is responsible under this Lease, and if Tenant shall fail to make or fails to commence to make repairs within 30 days of Landlord's notification or such shorter time as is reasonable if expedited repair is needed to avoid injury or damage, Landlord shall have the option to cure said defect or repair, and Tenant shall pay to Landlord all costs and expenses incurred on demand. 8. LANDLORD'S REPAIRS: (a) Landlord shall be responsible, at its expense, for, but only for, the structural integrity of the roof, foundation and exterior walls of the Building. In further limitation on Landlord's responsibilities hereunder, (i) the foregoing does not include maintenance and repair that are a result of deterioration due to wear and tear or the passing of time; (ii) any repair to the roof, foundation or exterior walls occasioned by the act of omission of Tenant or Tenant's Representatives shall be the responsibility of Tenant; (iii) the term "walls" as used in this Paragraph 8 shall not include windows, glass or plate glass, interior doors, special store fronts, office entries or exterior doors; and (iv) Landlord's liability with respect to any defects, repairs or maintenance for which Landlord is responsible at its expense under this Lease shall be limited to the cost of such repairs or maintenance or the curing of such defect. Tenant shall promptly give Landlord written notice of defects or need for repairs, after which Landlord shall have 30 days to commence to repair or cure such defect. (b) Landlord shall perform the work which gives rise to Common Area Maintenance Expenses, subject to payment therefor by Tenant pursuant to the provisions of Paragraph 6(b) above. If the need for any such work shall come to the attention of Tenant, Tenant will promptly so notify Landlord in writing. 9. UTILITY SERVICE: Tenant shall pay the cost of all utility services including, but not limited to, initial connection charges and deposits and all charges for gas, water, trash disposal, sewer, telephone or other telecommunications, and electricity used on the Leased Premises. Tenant shall pay all costs caused by Tenant introducing excessive pollutants into the sanitary or storm sewer system, including permits, fees, assessments, and charges levied by any governmental subdivision for any pollutants or solids other than ordinary human waste. 10. SIGNS: No sign, door plaques, advertisement, or notice shall be displayed, painted or affixed by Tenant on any part of the Project, Building, parking facilities, or Leased Premises without prior written consent of Landlord. The color, size, character, style, material, placement and location and method of attachment to the Building shall be subject to Landlord's approval, and to any applicable governmental laws, ordinances, regulations, project specifications, and other requirements. COMMERCIAL LEASE AGREEMENT - PAGE 11 - -------------------------- LEASE 2 Landlord's notice of approval or disapproval shall be delivered to Tenant within ten (10) days of Tenant's written request for same. Signs, if approved by Landlord, shall be placed by a contractor approved by Landlord and paid for by Tenant. Tenant shall remove all such signs at the termination of this Lease. Such installations and removals shall be made in such manner as to avoid injury or defacement of the Project and other improvements, and Tenant, at its sole expense, shall repair any injury or defacement, including, without limitation, any discoloration caused by such installation and/or removal. Landlord may erect a sign or signs on the Leased Premises indicating that the Leased Premises are for lease during the six (6) month period prior to the expiration of this Lease. 11. USAGE: Tenant warrants and represents to Landlord that the Leased Premises shall be used and occupied only for the purpose of: General office, manufacturing and distribution of custom golf clubs and related activities. Any change in the stated usage purposes shall be subject to the prior written approval of Landlord. Tenant shall occupy the Leased Premises, conduct its business, and control Tenant's Representatives in a lawful and reputable way and as not to create any nuisance. Tenant shall not commit, or allow to be committed, any waste on the Leased Premises or the Project. Tenant may not use the Leased Premises for the use, storage, or distribution of hazardous or environmentally offensive substances, for underground storage, or for any unlawful purposes. 12. INSURANCE: (a) Tenant shall not permit the Leased Premises to be used in any way which would be hazardous or which would in any way increase the cost of or render void any insurance on the improvements, and Tenant shall immediately, on demand, cease any use which violates the foregoing or to which Landlord's insurer or any governmental or regulatory authority objects. If at any time during the term of this Lease Tenant's use or vacancy shall cause an increase in premiums, and in particular, but without limitation, if the State Board of Insurance or other insurance authority disallows any of Landlord's sprinkler credits or imposes an additional penalty or surcharge in Landlord's insurance premiums because of Tenant's original or subsequent placement or use of storage racks or bins or method of storage or because of the nature of Tenant's inventory or any other act of Tenant, Tenant agrees to pay as additional Rent the increase in Landlord's insurance premiums. (b) Tenant, at its sole cost and expense, shall procure and maintain throughout the term of this Lease a policy or policies of insurance insuring Landlord, Landlord's management company and lender, and Tenant against all claims for property damages, personal injury or death of others occurring on or in connection with: (i) the Leased Premises; (ii) the condition of the Leased Premises; (iii) Tenant's operations in and maintenance and use of the Leased Premises; (iv) Tenant's and Tenant's Representatives' use of the common areas of the Project, and (v) Tenant's liability assumed under this Lease. The limits of such policy or policies shall be not less than $ 2,000,000.00 combined single limit coverage per occurrence for injury to persons (including death) and/or property damage or destruction, including loss of use. COMMERCIAL LEASE AGREEMENT - PAGE 12 - -------------------------- LEASE 2 (c) All such policies shall be procured by Tenant from insurance companies satisfactory to Landlord naming the following as co-insureds: (i) Landlord; (ii) Landlord's management company, JACKSON-SHAW COMPANY; and, (iii) Landlord's mortgage holder, if any. Certified copies of such policies together with receipt for payment of premiums, shall be delivered to Landlord prior to the Commencement Date of this Lease. Not less than fifteen (15) days prior to the expiration date of any such policies, certified copies of renewal policies and evidence of the payment of renewal premiums shall be delivered to Landlord. All such original and renewal policies shall provide for at least thirty (30) days written notice to Landlord before such policy may be canceled or changed to reduce insurance coverage provided thereby. Upon request of Landlord, Tenant further agrees to complete and return to Landlord an insurance questionnaire (such form to be provided by Landlord) regarding Tenant's insurance coverage and intended use of the Leased Premises. Tenant warrants and represents that all information contained in such questionnaire shall be true and correct as of the date thereof and shall be updated by Tenant from time to time upon Landlord's request. 13. (INTENTIONALLY DELETED) 14. COMPLIANCE WITH LAWS, RULES AND REGULATIONS: Tenant shall comply with all applicable laws, ordinances, orders, rules and regulations of state, federal, municipal, or other agencies or bodies relating to the use, condition and occupancy of and business conducted on the Leased Premises, including without limitation, the Americans with Disabilities Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response Act, and the rules, regulations and directives of the U.S. Environmental Protection Agency. 15. ASSIGNMENT AND SUBLETTING: The Tenant agrees not to assign, transfer, or mortgage this Lease or any right or interest therein or sublet the Leased Premises or any part thereof, without the prior written consent of Landlord, such consent not to be unreasonably withheld. No assignment or subletting shall relieve Tenant of its obligations hereunder, and Tenant shall continue to be liable as a principal (and not as a guarantor or surety) to the same extent as though no assignment or subletting had been made. Consent by Landlord to any one assignment or subletting shall not be construed to be consent to any additional assignment or subletting. Each such successive act shall require similar consent of Landlord. Landlord shall be reimbursed by Tenant for any costs or expenses incurred as a result of Tenant's request for consent to any such assignment or subletting, including legal costs. In the event Tenant subleases the Leased Premises, or any portion thereof, or assigns this Lease with the consent of the Landlord at an annual Base Rental exceeding that stated herein, such excess shall be paid by Tenant to Landlord as additional Rent hereunder within ten (10) days after receipt by Tenant. Upon the occurrence of an "event of default" as defined below, if all or any part of the Leased Premises is then assigned or sublet, Landlord may, in addition to any other remedies provided by this Lease or provided by law, collect directly from the assignee or subtenant all rents due to Tenant. Landlord shall have a security interest in all property on the Leased Premises to secure payment of such sums. Any collection directly by Landlord from the assignee or subtenant shall not be construed, however, to constitute a novation or a release of Tenant from the further performance of its obligations under this Lease. Notwithstanding the foregoing, it is expressly agreed that if this Lease is assigned to any person or COMMERCIAL LEASE AGREEMENT - PAGE 13 - -------------------------- LEASE 2 entity pursuant to the provisions of the Bankruptcy Code, 11 U.S.C. Sec. 101 et seq, as amended (the "Bankruptcy Code"), any and all monies or other considerations payable or otherwise to be delivered in connection with such assignment shall be paid or delivered to Lessor, shall be and remain the exclusive property of Landlord and shall not constitute property of Tenant or of the estate of Tenant within the meaning of the Bankruptcy Code. Any and all monies or other considerations constituting Landlord's property under the preceding sentence not paid or delivered to Landlord shall be held in trust for the benefit of Landlord and be promptly paid or delivered to Landlord. Any person or entity to which this Lease is assigned pursuant to the provisions of the Bankruptcy Code shall be deemed without further act or deed to have assumed all of the obligations arising under this Lease on and after the date of such assignment. Any such assignee shall upon demand execute and deliver to Landlord an instrument confirming such assumption. *Should Tenant be acquired by a Corporation whose net worth is greater than Tenant's, and whose use of the space is the same as Tenant's, then Landlord will automatically approve an assignment of Tenant's interest in the Lease. 16. ALTERATIONS AND IMPROVEMENTS: (a) Tenant shall not make or perform, or permit the making or performance of, any initial or subsequent tenant finish work or any alterations, installations, decorations, improvements, additions or other physical changes in or about the Leased Premises (referred to collectively as "Alterations") without Landlord's prior consent. Landlord shall be under no obligation to allow Alterations of any kind and may withhold its consent without cause. Notwithstanding the foregoing provisions or Landlord's consent to any Alterations, all Alterations shall be made and performed in conformity with and subject to the following provisions: All Alterations shall be made and performed at Tenant's sole cost and expense in a good and workmanlike manner. Alterations shall be made only by contractors or mechanics approved by Landlord, such approval not to be unreasonably withheld. Tenant shall submit to Landlord detailed plans and specifications (including architectural layout, mechanical and structural drawings) for each proposed Alteration and shall not commence any such Alteration without first obtaining Landlord's written approval of such plans and specifications. Prior to the commencement of each proposed Alteration, Tenant shall furnish to Landlord a certificate evidencing worker's compensation insurance coverage for all persons to be employed in connection with such Alterations, including those to be employed by all contractors and subcontractors, and of comprehensive public liability insurance (including property damage coverage) in which Landlord, its agents, and any lessor under any ground or underlying lease, and any mortgagee of the Building shall be named as parties insured, which policies shall be issued by companies and shall be in form and amounts satisfactory to Landlord and shall be maintained by Tenant until the completion of such Alteration. Tenant shall cause its contractor and each subcontractor to provide Landlord with a Certificate of Completion of the Alterations and a Bills Paid Affidavit and full Lien Waiver. Tenant shall, if required by Landlord at the time of Landlord's consent to the Alterations, agree to restore the Leased Premises at the termination of this Lease to their condition prior to making such Alterations. All permits, approvals and certificates required by all governmental authorities shall be timely obtained by Tenant and submitted to Landlord. Notwithstanding Landlord's approval of plans and specifications for any Alterations, all Alterations shall be made and performed in full compliance with all applicable laws, orders, rules, COMMERCIAL LEASE AGREEMENT - PAGE 14 - -------------------------- LEASE 2 standards and regulations of Federal, State, County, and Municipal authorities, including, without limitation, all directions, pursuant to law, of all public officers, and with all applicable rules, orders, regulations and requirements of the local Board of Fire Underwriters or any similar body ("Applicable Laws"). Landlord's approval shall not in any way be considered an indication that the plans and specifications comply with Applicable Laws. All materials and equipment to be incorporated in the Leased Premises as a result of all Alterations shall be new and first quality. No such materials or equipment shall be subject to any lien, encumbrance, chattel mortgage or title retention or security agreement. Whether such Alterations are being performed by Tenant in connection with Tenant's initial occupancy of the Leased Premises or subsequently, Tenant agrees to make proper application for, and obtain, a Building Permit and a Certificate of Occupancy from the city in which the Leased Premises are located. Tenant shall furnish copies of such permit and certificate to Landlord promptly after issuance of same. (b) All appurtenances, fixtures, improvements, and other property attached to or installed in the Leased Premises, whether by Landlord or Tenant or others, and whether at Landlord's expense or Tenant's expense, or the joint expense of Landlord and Tenant, shall be and remain the property of Landlord, except that any such fixtures, improvements, additions, and other property which have been installed at the sole expense of Tenant and which are removable without material damage to the Leased Premises shall be and remain the property of Tenant. If no event of default has occurred, Tenant may, and if Landlord so elects Tenant shall, remove any property belonging to Tenant at the end of the term hereof, and Tenant shall repair or, at Landlord's option, shall pay to Landlord the cost of repairing any damage arising from such removal. Any replacements of any property of Landlord, whether made at Tenant's expense or otherwise, shall be and remain the property of Landlord. 17. CONDEMNATION: (a) If, during the term (or extension or renewal) of this Lease, all or a substantial part of the Leased Premises are taken for any public or quasi- public use under any governmental law, ordinance or regulation, or by right of eminent domain or by private purchase in lieu thereof, and the taking would prevent or materially interfere with the then current use of the Leased Premises, this Lease shall terminate and the Rent shall be prorated during the unexpired portion of this Lease effective on the date physical possession is taken by the condemning authority. (b) If a portion of the Leased Premises is taken and this Lease is not terminated as provided in Paragraph 17(a) above, if condemnation proceeds are sufficient and if restoration is feasible, Landlord may, at its option restore the Project (other than Alterations) in order to make it reasonably tenantable and suitable for Tenant's approved use. During such restoration, Rent shall be reduced by the amount of business or rent interruption insurance proceeds actually received by Landlord, or Rent shall be paid based on the portion of the Leased Premises Tenant can occupy. Upon completion of such restoration, the Rent payable under this Lease during the unexpired portion of the term shall be adjusted to such an extent as may be fair and reasonable under the circumstances. COMMERCIAL LEASE AGREEMENT - PAGE 15 - -------------------------- LEASE 2 (c) In the event of such taking or private purchase in lieu thereof, Tenant may seek a separate award for any loss of improvements made or paid for by Tenant, its personal property, and its moving expenses (so long as no such claim diminishes Landlord's claim or award), but all other claims of any nature shall belong to Landlord. In the event Tenant does not receive such a separate award, Landlord shall be entitled to receive any and all sums awarded for the taking. (d) Notwithstanding anything herein to the contrary, if the holder of any indebtedness secured by a mortgage or deed of trust covering the Building and/or Project requires that the condemnation proceeds be applied to such indebtedness, then Landlord shall have the right to terminate this Lease by delivering written notice of termination to Tenant within fifteen (15) days after such requirement is imposed. All rights and obligations under this Lease shall then cease. If Landlord does not receive condemnation proceeds sufficient for restoration (such as when its mortgagee does not allow the proceeds to be used for such purposes) and if restoration is economically reasonably feasible, Tenant will have the option of supplementing available proceeds to allow restoration, and Tenant's actual costs will be reimbursed through a monthly prorata credit against rent beginning after Landlord's mortgage has been paid in full. 18. FIRE AND CASUALTY: (a) If the Building should be damaged or destroyed by fire, tornado, or other casualty, Tenant shall give immediate verbal and written notice thereof to Landlord. (b) If the Building should be totally destroyed by fire, tornado, or other casualty, or if it should be so damaged thereby that rebuilding or repairs cannot reasonably be completed within one hundred eighty (180) days after the date on which Landlord is notified by Tenant of such damage, at the option of either Landlord or Tenant, this Lease shall terminate, and the Rent shall be abated during the unexpired portion of this Lease effective upon the date of occurrence of such damage. (c) If the Building should be damaged by any peril that will be wholly compensated (subject to deductibles) by the insurance maintained by Landlord or if Landlord, in its sole discretion, so chooses notwithstanding a deficiency in such proceeds, and if rebuilding or repairs can reasonably be completed within one hundred eighty (180) days after the date on which Landlord is notified by Tenant of such damage, this Lease shall not terminate, and Landlord shall then proceed with reasonable diligence to rebuild and repair the Building to substantially the same condition in which it existed prior to such damage. Landlord shall not be required, however, to rebuild, repair, or replace Tenant's furniture, fixtures, Alterations, inventory or other personal property. If the Leased Premises are untenantable in whole or in part during restoration, the Rent payable hereunder during the period in which they are untenantable shall be reduced by the amount of business or rent interruption insurance proceeds actually received by Landlord. If Landlord should fail to complete such repairs and rebuilding within one hundred eighty (180) days after the date on which Landlord is notified by Tenant of such damage, Tenant may terminate this Lease by delivering written notice of termination to Landlord. Such termination shall be Tenant's exclusive remedy and all rights and obligations of the parties under the Lease shall then cease. Notwithstanding the foregoing provisions of this Paragraph 18(c), Tenant agrees that if the Leased COMMERCIAL LEASE AGREEMENT - PAGE 16 - -------------------------- LEASE 2 Premises, the Building and/or Project are damaged by fire or other casualty caused by the fault or negligence of Tenant or Tenant's Representatives, Tenant shall have no option to terminate this Lease even if the damage cannot be repaired within one hundred eighty (180) days, and the Rent shall not be abated or reduced before or during the repair period. (d) Notwithstanding anything herein to the contrary, if the holder of any indebtedness secured by a mortgage or deed of trust covering the Building and/or Project requires that the insurance proceeds be applied to such indebtedness, then Landlord shall have the right to terminate this Lease by delivering written notice of termination to Tenant within fifteen (15) days after such requirement is imposed. All rights and obligations under this Lease shall then cease. If Landlord does not receive insurance proceeds sufficient for restoration (such as when its mortgagee does not allow the proceeds to be used for such purposes) and if restoration is economically reasonably feasible, Tenant will have the option of supplementing available proceeds to allow restoration, and Tenant's actual costs will be reimbursed through a monthly prorata credit against rent beginning after Landlord's mortgage has been paid in full. 19. CASUALTY INSURANCE: Landlord shall at all times during the term of this Lease maintain a policy or policies of business or rental interruption insurance and a policy or policies of insurance insuring the Building against eighty percent (80%) of full replacement cost for loss or damage by fire, explosion, and other customary hazards. Such policies will not insure any personal property (including, but not limited to any furniture, machinery, goods, or supplies) of Tenant or which Tenant may have in the Leased Premises or any fixtures installed by or paid for by Tenant upon or within the Leased Premises or any Alterations or other improvements which Tenant may construct or install on the Leased Premises or any signs identifying Tenant's business located on the exterior of the Building, insurance for all of which shall be Tenant's responsibility. 20. WAIVER OF SUBROGATION: To the extent that Landlord or Tenant receives casualty insurance proceeds, such recipient hereby waives and releases any and all rights, claims, demands and causes of action such recipient may have against the other on account of any loss or damage occasioned to such recipient or its businesses, real and personal properties, the Leased Premises, the Building, the Project, or its contents, arising from any risk or peril covered by any insurance policy carried by either party and for which such proceeds are actually received. Inasmuch as the above mutual waivers will preclude the assignment of any such claim by way of subrogation (or otherwise) to an insurance company (or any other person), each party hereto agrees immediately to give to its respective insurance companies written notice of the terms of such mutual waivers and to have their respective insurance policies properly endorsed, if necessary, to prevent the invalidation of such insurance coverages by reason of such waivers. This provision shall be cumulative of Paragraph 21 below. 21. HOLD HARMLESS: Landlord shall not be liable to Tenant, Tenant's Representatives, or any other person for any injury to person or damage to property on or about the Leased Premises or the Project caused by the negligence or misconduct of Tenant, or Tenant's Representatives, entering upon the Leased Premises or the Project. Tenant agrees to indemnify and hold Landlord harmless from any and all loss, attorney's fees, expenses, or claims arising out of any such damage, loss or COMMERCIAL LEASE AGREEMENT - PAGE 17 - -------------------------- LEASE 2 injury. Tenant shall not be liable to Landlord, Landlord's employees, agents, invitees, licensees or visitors for any injury to person or damage to property on or about the Leased Premises or the Project caused by the negligence or misconduct of Landlord, its agents, employees, agents, invitees, licensees or visitors. Landlord agrees to indemnify and hold Tenant harmless from any and all loss, attorney's fees, expenses, or claims arising out of any such damage, loss or injury. 22. QUIET ENJOYMENT: Landlord warrants that it has full right to execute and to perform this Lease and to grant the estate demised herein and that Tenant, upon payment of the required Rent and performance of the covenants and agreements contained in this Lease, shall peaceably and quietly have, hold, and enjoy the Leased Premises during the full term of this Lease, including any extensions or renewals thereof. 23. LANDLORD'S RIGHT OF ENTRY: Landlord shall have the right to enter the Leased Premises for the following reasons: inspection, cleaning or making repairs, making such alterations or additions as Landlord may deem necessary or desirable; installation of utility lines servicing the Leased Premises or any other space in the Building; determining Tenant's use of the Leased Premises, or for determining if any event of default under this Lease has occurred. Landlord shall attempt to give twenty-four (24) hours verbal notice to Tenant prior to such entry during business hours, except in cases of emergency or when an event of default has occurred in which cases Landlord may enter the Leased Premises at any time and without prior notice. During the period that is six (6) months prior to the end of the Lease term, Landlord and Landlord's agents and representatives shall have the right to enter the Leased Premises at any reasonable time during business hours, without notice, for the purpose of showing the Leased Premises and shall have the right to erect on the Leased Premises a suitable sign indicating the Leased Premises are available for lease. 24. ASSIGNMENT OF LANDLORD'S INTEREST IN LEASE: Landlord shall have the right to transfer and assign, in whole or in part, its rights and obligations with respect to the Project, the Leased Premises, and this Lease, including Tenant's Security Deposit. Upon and after such transfer, Landlord shall be released from any further obligation under this Lease and Tenant agrees to look solely to Landlord's successor for the performance of such obligations. 25. LANDLORD'S LIEN: In addition to any statutory lien for Rent in Landlord's favor, Landlord shall have, and Tenant hereby grants to Landlord, a continuing security interest for all Rent and other sums of money becoming due under this Lease from Tenant upon all goods, wares, equipment, fixtures, furniture, inventory, accounts, contract rights, and other personal property of Tenant situated on or arising from the Leased Premises. Such property shall not be removed without the consent of Landlord which consent may be withheld by Landlord until all of Tenant's duties and obligations have been performed in full. In the event of a default under this Lease, Landlord shall have, in addition to any other remedies provided in this Lease or by law, all rights and remedies under the Texas Uniform Commercial Code, including without limitation the right to sell the property described in this Paragraph at public or private sale upon five (5) days notice to Tenant. Tenant hereby agrees to execute such financing statements and other instruments necessary or desirable in Landlord's discretion to perfect the security interest hereby created. COMMERCIAL LEASE AGREEMENT - PAGE 18 - -------------------------- LEASE 2 *Upon written request, Landlord will subordinate its lien created herein to any lender of Tenant. 26. DEFAULT BY TENANT: The following shall be events of default by Tenant under this Lease: (a) Tenant's failure to pay any installment of Rent or other payment required pursuant to this Lease and the failure is not cured within ten (10) days after it is due and after written notice to Tenant; (b) Tenant's abandonment or vacation of any part of the Leased Premises, whether or not Tenant is in default of the Rent payments due under this Lease; (c) Tenant's failure to comply with any term, provision or covenant of this Lease, other than the defaults listed in the other subparagraphs of this Paragraph 26, and the failure is not cured within ten (10) days after written notice thereof to Tenant; (d) Tenant's filing of a petition or adjudication as a debtor or bankrupt insolvent under the Bankruptcy Code or any similar law or statute of the United States or any state; or appointment of a receiver or trustee for all or substantially all of the assets of Tenant; or Tenant's transfer in fraud of creditors or assignment for the benefit of creditors of all or substantially all of Tenant's assets; (e) Tenant doing or permitting to be done any act which results in a lien being filed against the Leased Premises and the same is not removed within sixty (60) days after Landlord's notice thereof to Tenant. 27. REMEDIES FOR TENANT'S DEFAULT: Upon the occurrence of any event of default, Landlord shall have the option to pursue any one or more of the following remedies without any prior notice or demand: (a) Landlord may terminate this Lease, in which event Tenant shall immediately surrender the Leased Premises to Landlord, and if Tenant fails to do so, Landlord may, without prejudice to any other remedy which it may have, enter upon and take possession of the Leased Premises, and expel or remove Tenant and any other person who may be occupying all or any part of the Leased Premises. Landlord shall not be liable for prosecution or any claim for damages as a result of such actions. Tenant agrees to pay on demand the amount of all losses, costs, expenses, deficiencies, and damages, including, without limitation, reasonable reconfiguration expenses, rental concessions and other inducements to new tenants, advertising expenses and broker's commissions, which Landlord may incur or suffer by reason of Tenant's default or the termination of this Lease under this subparagraph, whether through inability to rent the Leased Premises on satisfactory terms or otherwise. Tenant acknowledges that its obligation to pay Base Rent and all additional Rent hereunder is not only compensation for use of the Leased Premises but also compensation for sums already expended and/or being expended by Landlord with respect to its obligations hereunder and with respect to the Leased Premises, and Tenant acknowledges that Tenant's default in timely payment of all sums due hereunder shall constitute significant financial loss to Landlord. Tenant COMMERCIAL LEASE AGREEMENT - PAGE 19 - -------------------------- LEASE 2 further acknowledges that any failure to pay any sum due hereunder shall evidence Tenant's inability to meet its debts as they become due. In such event, in addition to Landlord's other remedies hereunder, Landlord shall be entitled to accelerate all Base Rental remaining unpaid hereunder, the entirety of which shall at the option of Landlord be immediately due and payable to the extent allowed by law. (b) Without termination of this Lease, Landlord may enter upon and take possession of the Leased Premises and expel or remove Tenant and any other person who may be occupying all or any part of the Leased Premises (without being liable for prosecution or any claim for damages therefor) and relet the Leased Premises on behalf of Tenant and receive directly the rent from the reletting. Tenant agrees to pay Landlord on demand any deficiency that may arise by reason of any reletting of the Leased Premises and to reimburse Landlord on demand for any losses, costs, and expenses, including without limitation, reconfiguration expenses*, rental concessions and other inducements to new tenants, advertising costs or broker's commissions, which Landlord may incur or suffer as a result of Tenant's default or in reletting the Leased Premises. *Reconfiguration expenses shall not exceed the unpaid amortized portion of Tenant's original tenant improvement costs. (c) Without terminating this Lease, Landlord may enter upon the Leased Premises (without being liable for prosecution or any claim for damages therefor) and do whatever Tenant is obligated to do under the terms of this Lease. Tenant agrees to reimburse Landlord on demand for any losses, costs and expenses which Landlord may incur in effecting compliance with Tenant's obligations under this Lease. Tenant further agrees that Landlord shall not be liable for any damages resulting to Tenant from effecting compliance with Tenant's obligations under this subparagraph. (d) With respect to Landlord's entry upon the Leased Premises under the provisions of subparagraphs (a), (b), and (c) above, no restriction of, or obligation imposed upon Landlord by, Texas Property Code Section 93.002 shall apply, such Section being superseded hereby. In particular, but without limitation, Landlord will have no duty or responsibility to Tenant to tender a key in the event of a change of locks, and Tenant will have no further right of possession except as otherwise expressly agreed by Landlord in writing. If Landlord changes the locks, Tenant shall be allowed to retrieve its business records from the Leased Premises. (e) Landlord may pursue any remedy provided at law or in equity. (f) Landlord shall have no duty to relet the Premises, and the failure of Landlord to do so shall not release or affect Tenant's liability for Rent and other charges due hereunder or for damages. (g) No re-entry or reletting of the Premises or any filing or service of an unlawful detainer action or similar action shall be construed as an election by Landlord to terminate this Lease unless a written notice of such intention is given by Landlord to Tenant. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect to terminate this Lease and Tenant's right to possession hereunder. COMMERCIAL LEASE AGREEMENT - PAGE 20 - -------------------------- LEASE 2 (h) To the extent allowed by law, Tenant hereby waives the protections and rights provided by Texas Property Code Section 93.002. 28. TERMINATION OF OPTIONS: If there exist any options or special rights which Landlord may have granted Tenant under this Lease including, but not limited to, options or rights regarding extensions of the term, expansion of the Leased Premises, or acquisition of any other interest in the Leased Premises, the Building, or the Project, then all such options and rights are independent of the leasehold estate hereby granted to Tenant by Landlord. Landlord and Tenant agree and acknowledge that the negotiated consideration for any such options or special rights is Tenant's entry into this Lease and that no portion of any sums due and payable by Tenant to Landlord hereunder is attributable thereto. In addition to, and not in lieu of, the above remedies of Landlord for Tenant's default, any and all such options or special rights shall be automatically terminated upon the occurrence of the following events: (a) Tenant shall have failed to pay when due any installment of Rent or other sums payable under this Lease for any three (3) consecutive months during the Lease term or any renewal or extension thereof, or for any ten (10) months during the Lease term or any renewal or extension thereof, whether or not said defaults are cured by Tenant; or (b) Tenant shall have received two (2) or more notices of default under Paragraph 26(c) within any one calendar year with respect to any other covenant of this Lease, whether or not such default(s) is/are cured; or (c) Tenant shall have committed or suffered to exist any other event of default described under Paragraph 26 above, whether or not such default is cured by Tenant. 29. WAIVER OF DEFAULT OR REMEDY: Failure of Landlord to declare a default immediately upon its occurrence, or delay in taking any action in connection with an event of default, shall not be a waiver of the default. Landlord shall have the right to declare the default at any time and take such action as its lawful or authorized under this Lease. Pursuit of any one or more of the remedies set forth in Paragraphs 27 or 28 above shall not preclude pursuit of any one or more of the other remedies provided therein or elsewhere in this Lease or as provided by law, nor shall pursuit of any remedy be a forfeiture or waiver of any Rent or damages accruing to Landlord by reason of the violation of any of the terms of this Lease. Failure by Landlord to enforce one or more of its remedies upon an event of default shall not be construed as a waiver of the default or of any other violation or breach of any of the terms contained in this Lease. 30. CHOICE OF LAW; VENUE; ATTORNEY'S FEES: It is specifically stipulated that this Lease shall be interpreted and construed according to the laws of the State in which the Leased Premises are located, and any suit brought on this Lease shall be maintained in the county in which the Leased Premises are located. Further, the prevailing party in any such litigation between the parties shall be entitled to recover, as a part of its judgment, reasonable attorney's fees and costs and expenses incurred therein. COMMERCIAL LEASE AGREEMENT - PAGE 21 - -------------------------- LEASE 2 31. HOLDING OVER: Tenant will, at the termination of this Lease by lapse of time or otherwise, surrender immediate possession to Landlord. If Landlord agrees in writing that Tenant may hold over after the expiration or termination of this Lease and if the parties do not otherwise agree, the hold over tenancy shall be subject to termination by Landlord at any time upon not less than thirty (30) days advance written notice, or by Tenant at any time upon not less than thirty (30) days advance written notice. Further, all of the terms and provisions of this Lease shall be applicable during the hold over period, except that Tenant shall pay Landlord from time to time upon demand, as Base Rent for the period of any hold over, an amount equal to one and one-half times (1-1/2) the Base Rent in effect on the date of termination, computed on a daily basis for each day of the hold over period, plus all additional Rent and other sums due hereunder. If Tenant shall fail immediately to surrender possession of the Leased Premises to Landlord upon termination of this Lease, by lapse of time or otherwise, and Landlord has not agreed to such continued possession, as above provided, then, until Landlord can dispossess Tenant under the terms hereof or otherwise, Tenant shall pay Landlord from time to time upon demand, as Base Rent for the period of any such hold over, an amount equal to twice the Base Rent in effect on the date of termination, computed on a daily basis for each day of the hold over period, plus all additional Rent and other sums due hereunder. No holding over by Tenant, whether with or without consent of Landlord, shall operate to extend this Lease except as otherwise expressly agreed by the parties. The preceding provisions of this Paragraph shall not be construed as Landlord's consent for Tenant to hold over. 32. RIGHTS OF MORTGAGEE: Tenant accepts this Lease subject and subordinate to any recorded mortgage, deed of trust or other lien (a "Mortgage") presently existing or hereafter to exist with respect to the Leased Premises. Further, but without limiting the preceding sentence, Landlord is hereby irrevocably vested with full power and authority to subordinate and/or to evidence such subordination of Tenant's interest under this Lease to any Mortgage hereafter placed on the Leased Premises, and Tenant agrees upon demand to execute such additional instruments subordinating this Lease, and further defining the terms of such subordination, as well as the attornment discussed below, as Landlord or the holder of any such Mortgage, may require. Tenant agrees to provide to the holder of any such Mortgage, whose name and address have been provided to Tenant (a "Mortgagee"), a copy of each notice to Landlord which alleges any act, omission, or condition that might constitute a default by Landlord hereunder and Mortgagee, in its sole discretion, shall have all rights of Landlord hereunder to cure any such default. If the interests of Landlord under this Lease shall be transferred by reason of foreclosure or other proceedings for enforcement of any Mortgage on the Leased Premises, at the election of the transferee (sometimes called the "Purchaser") Tenant shall be bound to the Purchaser under the terms and conditions of this Lease for the balance of the remaining Lease term, including any extensions or renewals, with the same force and effect as if the Purchaser were Landlord under this Lease; provided, however, that such Purchaser shall not be liable or bound to Tenant (i) for any act or omission of any prior landlord, (ii) for any offsets or defenses which Tenant might have against any prior landlord, (iii) for or by any Rent which Tenant might have paid for more than the current month, (iv) by any amendment or modification of, or consensual termination agreement with respect to, the Lease made without the Mortgagee's consent, (v) for any Security Deposit given by Tenant to a prior landlord unless such COMMERCIAL LEASE AGREEMENT - PAGE 22 - -------------------------- LEASE 2 deposit is actually received by such Purchaser, (vi) for any repairs or replacements required by this Lease arising prior to the date Purchaser takes possession of the Leased Premises, or (vii) for any moving, relocation or refurbishment allowance or any construction of or payment or allowance for tenant improvements to the Leased Premises or any part thereof for the benefit of Tenant except as set forth in this Lease. Tenant further agrees at the election of the Purchaser to attorn to the Purchaser, including the Mortgagee if it be the Purchaser, as its Landlord. Such attornment shall be effective without the execution of any further instruments upon the Purchaser's succeeding to the interest of Landlord under this Lease. The respective rights and obligations of Tenant and the Purchaser upon the attornment, to the extent of the then remaining balance of the term of this Lease and any extensions and renewals, shall be and are the same as those set forth in this Lease, but Tenant agrees upon demand to execute such additional instruments defining the terms of such attornment as Landlord or the Purchaser may require. Each such Mortgagee and each such Purchaser shall be a third-party beneficiary of the provisions of this Paragraph. *Upon written request by Tenant and provided Tenant is not in default of any terms, conditions, or provisions of the Lease, Landlord agrees to use best efforts to obtain a non-disturbance agreement from any lender or purchaser. 33. ESTOPPEL CERTIFICATES: Tenant agrees to furnish on the Commencement Date of this Lease and from time to time within ten (10) days of request by Landlord or Landlord's mortgagee, a statement certifying that the Tenant is in possession of the Leased Premises; the Leased Premises are acceptable; this Lease is in full force and effect; this Lease is unmodified; Tenant claims no present charge, lien, or claim of offset against Rent; the Rent is paid for the current month but is not paid and will not be paid for more than one month in advance (except estimated additional Rent under Paragraph 6); there is no existing default under this Lease; and such other matters as may be reasonably required by Landlord or Landlord's mortgagee. 34. SUCCESSORS: This Lease shall be binding upon and inure to the benefit of Landlord and Tenant and their respective heirs, personal representatives, successors and assigns. It is hereby covenanted and agreed that should Landlord's interest in the Leased Premises cease to exist for any reason during the term of the Lease, then notwithstanding the happening of such event, at the election of Landlord's successor herein, this Lease shall nevertheless remain unimpaired and in full force and effect and Tenant hereunder agrees to attorn to the then owner of the Leased Premises. 35. REAL ESTATE COMMISSION: Tenant represents and warrants that is has dealt with no broker, agent, or other person other than Bradford Realty Services of Dallas, Inc., Mark Aston, in connection with this transaction, and that no other broker, agent, or other person brought about this transaction. Landlord and Tenant each agree to indemnify and hold the other harmless from and against any claims by any broker, agent, or other person claiming a commission or other form of compensation by virtue of having dealt with Tenant or Landlord respectively with regard to this transaction. The provisions of this Paragraph shall survive the termination of this Lease. 36. DEFAULT BY LANDLORD: Landlord shall not be in default, and Tenant shall have no right to any remedy at law or in equity, unless the act, omission, or condition allegedly giving rise to such default shall have continued uncured or unabated for a period of thirty (30) days following COMMERCIAL LEASE AGREEMENT - PAGE 23 - -------------------------- LEASE 2 written notice to Landlord (with a copy to any Mortgagee as provided in Paragraph 32 above) or, if such cure or abatement cannot be accomplished within said 30-day period, then, so long as Landlord or Mortgagee has commenced such cure or abatement within such 30-day period and diligently pursues same, such period shall be extended a reasonable time to allow completion of the cure or abatement. 37. MECHANIC'S LIENS: Tenant shall have no authority, express or implied, to create or place any lien or encumbrance of any kind or nature whatsoever upon, or in any manner to bind, the interest of Landlord in the Leased Premises or the Project or to charge the Rent payable hereunder for any claim in favor of any person dealing with Tenant, including those who may furnish materials or perform labor for any construction or repairs. Each such claim shall affect, and each such lien shall attach to, if at all, only the leasehold interest granted to Tenant by this Lease. Tenant covenants and agrees that it will pay or cause to be paid all sums legally due and payable by it on account of any labor performed or materials furnished in connection with any work performed on the Leased Premises on which any lien is or can be validly and legally asserted against its leasehold interest in the Leased Premises or the improvements thereon. Tenant further agrees to save and hold Landlord harmless from any and all loss, cost, or expense based on or arising out of claims or liens asserted by parties by virtue of their dealings with Tenant and encumbering the leasehold estate or the right, title and interest of the Landlord in the Leased Premises or the Project. Under no circumstances shall Tenant be or hold itself out to be the agent or representative of Landlord with respect to any Alterations of the Leased Premises whether or not consented to or approved by Landlord hereunder. 38. HAZARDOUS WASTE: The term "Hazardous Substances," as used in this Lease shall mean petroleum and petroleum products and by-products, crude oil, pollutants, contaminants, toxic or hazardous wastes, or any other substances, the use of which is regulated, restricted, prohibited or penalized, or the removal or disposal of which is required, by any "Environmental Laws," which term shall mean any and all federal, state or local law, ordinance or other statute of a governmental or quasi-governmental authority relating to the pollution or protection of the environment. Tenant hereby agrees that (i) no activity will be conducted on the Leased Premises that will produce any Hazardous Substances; (ii) the Leased Premises will not be used in any manner not in compliance with local and federal laws for the storage of any Hazardous Substances; (iii) no portion of the Leased Premises will be used as a landfill or a dump; (iv) Tenant will not install any underground tanks of any type; (v) Tenant will not allow any surface or subsurface conditions to exist or come into existence that constitute, or with the passage of time may constitute, a public or private nuisance; and (vi) Tenant will not permit any Hazardous Substances to be brought onto the Leased Premises, and if so brought thereon, then the same shall be stored and used in compliance with all local and federal laws regarding same. Landlord or Landlord's representative shall have the right but not the obligation to enter the Leased Premises for the purpose of ensuring compliance with all Environmental Laws. If Tenant in any manner contaminates the Leased Premises, then Tenant shall promptly and diligently institute proper and thorough clean-up procedures at Tenant's sole cost. Landlord hereby agrees to defend, indemnify and hold Tenant, its employees, partners, agents, contractors, officers and directors and their heirs, successors, and assigns harmless from any and all costs (including costs of litigation), reasonable attorneys' fees, expenses, liabilities, claims, COMMERCIAL LEASE AGREEMENT - PAGE 24 - -------------------------- LEASE 2 damages or judgements arising or alleged to occur, and that result, or are alleged to result from the actual, or threatened discharge, dispersal, disposal, release or escape of Hazardous Substances or other wastes or pollutants (including, but not limited to asbestos, solid, liquid, gaseous or thermal irritants or contaminants, smoke, vapor, soot, fumes, acids, alkalis, chemicals, and water materials to be recycled, reconditioned or reclaimed), but only as the same are a direct result of any act or omission of Landlord or its agents, employees, contractors or subcontractors. Tenant hereby agrees to defend, indemnify and hold Landlord, its employees, agents, partners, contractors, officers and directors and their heirs, successors, and assigns harmless from any and all costs (including costs of litigation), reasonable attorneys' fees, expenses, liabilities, claims, damages or judgements arising or alleged to occur, and that result, or are alleged to result from the actual, or threatened discharge, dispersal, disposal, release or escape of Hazardous Substances or other wastes or pollutants (including, but not limited to asbestos, solid, liquid, gaseous or thermal irritants or contaminants, smoke, vapor, soot, fumes, acids, alkalis, chemicals, and water materials to be recycled, reconditioned or reclaimed), but only as the same are a direct result of any act or omission of Tenant or Tenant's Representatives. 39. ENTIRE AGREEMENT AND LIMITATION OF WARRANTIES: It is expressly agreed by Tenant, as a material consideration for the execution of this Lease, that this Lease is the entire agreement of the parties and that there are and were no verbal representations, warranties, understandings, stipulations, agreements, or promises pertaining to this Lease not incorporated in this Lease. Tenant expressly agrees that there are and shall be no implied warranties of merchantability, fitness, habitability, or of any other kind and that Tenant's acceptance of the Leased Premises shall be "as is". It is likewise agreed that this Lease may not be altered, waived, amended, or extended except by an instrument in writing signed by both Landlord and Tenant. Not in limitation upon the foregoing, Landlord agrees that to the extent assignable, all warranties, if any shall exist, from contractors or suppliers with respect to the improvements to the Leased Premises hereunder are hereby partially assigned to Tenant to the extent necessary to avail Tenant of the benefits thereof with respect to its leasehold estate and property located at the Leased Premises. 40. FINANCIAL STATEMENTS: From time to time Landlord may need to obtain financing or renew financing on the Project, or perform calculations for various reasons regarding the value of the Project. Tenant hereby agrees to provide to Landlord financial statements on its business when requested, but not more than once annually, indicating the most current year end and quarterly financial status of the business. Landlord will not deliver such financial statement to any third party except in confidence and only as required by Landlord's lenders or in conjunction with appraisals of the Project. 41. FORCE MAJEURE: (a) Landlord shall not be required to perform any covenant or obligation of this Lease or be liable in damages to Tenant for that time period during which the performance or non-performance of the covenant or obligation is delayed, caused by, or prevented by Tenant or Tenant's Representatives or by an act of God or force majeure. COMMERCIAL LEASE AGREEMENT - PAGE 25 - -------------------------- LEASE 2 (b) Except with respect to the payment of Rent or any other sum due hereunder, Tenant shall not be required to perform any covenant or obligation of this Lease or be liable in damages to Landlord for that time period during which the performance or non-performance of the covenant or obligation is delayed, caused by, or prevented by Landlord or Landlord's Representatives or by an act of God or force majeure. (c) An "act of God" or "force majeure" is defined for purposes of this Lease as strikes, lockouts, sit-downs, material or labor restrictions by any governmental authority, riots, floods, washouts, explosions, earthquakes, fire, storms, acts of the public enemy, wars, insurrections and any other similar cause not reasonably within the control of Landlord and which by the exercise of due diligence Landlord is unable, wholly or in part, to prevent or overcome. 42. MISCELLANEOUS: (a) Words of any gender used in this Lease shall be held and construed to include any other gender; and words in the singular number shall be held to include the plural, unless the context otherwise requires. (b) Each party agrees to furnish to the other, promptly upon demand, a corporate resolution, proof of due authorization by partners, or other appropriate documentation evidencing the due authorization and power of such party to enter into this Lease and the empowerment and authority of the individual signing below to bind his or her principal. (c) The captions inserted in this Lease are for convenience only and in no way define, limit, or otherwise describe the scope or intent of this Lease or any provision hereof, or in any way affect the interpretation of this Lease. (d) If any clause or provision of this Lease is illegal, invalid, or unenforceable under present or future laws effective during the term of this Lease, then and in that event, it is the intention of the parties hereto that the remainder of this Lease shall not be affected thereby; and it is also the intention of the parties to this Lease that in lieu of each clause or provision of this Lease that is illegal, invalid, or unenforceable there be added as a part of this Lease a clause as similar in terms to such illegal, invalid, or unenforceable clause or provision as may be possible and be legal, valid, and enforceable. (e) Intentionally deleted (f) All references in this Lease to "the date hereof" or similar references shall be deemed to refer to the last date, in point of time, on which all parties hereto have executed this Lease. (g) In the event that Tenant shall fail to perform any duty or obligation hereunder, whether maintenance, repair or replacement of the Leased Premises, maintenance of insurance, or otherwise, then Landlord may, but shall in no event be obligated to, without notice of any kind, take such actions as Landlord deems necessary or appropriate to remedy such Tenant failure, and any sums COMMERCIAL LEASE AGREEMENT - PAGE 26 - -------------------------- LEASE 2 expended by Landlord together with fair and just compensation for the time and effort of Landlord in such efforts shall be deemed additional Rent hereunder due and payable by Tenant on demand. (h) If Tenant shall fail to pay, when the same is due and payable, any Rent or any other sum due hereunder, such unpaid amount shall bear interest from the tenth (10th) day after the due date thereof to the date of remittance at the rate of the lesser of 18% per annum and the maximum rate allowed by law. (i) Landlord does not in any way or for any purpose become a partner with Tenant in the conduct of its business or otherwise, nor a member of a joint venture with Tenant. (j) Tenant shall not record this Lease without the prior written consent of Landlord. However, upon the request of either party hereto, the other party shall join in the execution of a memorandum or so-called "short form" of this Lease for the purposes of recordation. (k) Time is of the essence in the performance of all the covenants, conditions, and agreements contained in this Lease. (l) Any duty, obligation, or debt and any right or remedy arising hereunder and not otherwise consummated and/or extinguished by the express terms hereof at or as of the time of termination of this Lease, whether at the end of the term hereof or otherwise, shall survive such termination as continuing duties, obligations, and debts of the obligated party to the other or continuing rights and remedies of the benefited party against the other. (m) This Agreement may be executed in one or more counterparts, each of which counterpart shall for all purposes be deemed to be an original; but all such counterparts together shall constitute but one instrument. (n) Attached hereto, marked Exhibit "A" through Exhibit "__", are certain exhibits to this Lease all of which are hereby incorporated herein by reference. 43. NOTICE: (a) All Rent and other payments required to be made by Tenant to Landlord shall be payable to Landlord at the address set forth below or any other address that Landlord may specify from time to time by written notice delivered to Tenant. (b) All payments, if any, required to be made by Landlord to Tenant shall be payable to Tenant at the address set forth below or at any other address that Tenant may specify from time to time by written notice delivered to Landlord. (c) Any notice or document required or permitted to be delivered by this Lease shall be deemed to be delivered (whether or not actually received) when deposited in the United States Mail, postage prepaid, certified mail return receipt requested, addressed to the parties at the COMMERCIAL LEASE AGREEMENT - PAGE 27 - -------------------------- LEASE 2 respective addresses set forth below or such other address as hereinafter specified by notice given in accordance with this paragraph. 44. LIMITATION ON TENANT'S DAMAGES: Tenant agrees that any liability of Landlord under this Lease shall be limited solely to Landlord's interest in the Project, and no other assets of Landlord shall be subject to levy or execution. Executed by Landlord and Tenant as of the below dates. LANDLORD TENANT JACKSON-SHAW TECHNOLOGY ADAMS GOLF, INC., A TEXAS CORPORATION CENTER II, LTD. 3860 W. Northwest Highway 2801 E. Plano Parkway Suite 350 Suite Dallas, Texas 75220 ---------------------- Plano, Texas 75074 By: Jackson-Shaw/Texas, Inc., By: B.H. Adams -------------------------- ----------------------- General Partner Its: CEO By: J. Michael Berg ---------------------- ----------------------- Its: Vice President ---------------------- Date: December 5, 1997 Date: December 5, 1997 --------------------- ---------------------- COMMERCIAL LEASE AGREEMENT - PAGE 28 - -------------------------- LEASE 2 EXHIBIT "A" LEGAL DESCRIPTION COMMERCIAL LEASE AGREEMENT - PAGE 29 - -------------------------- LEASE 2 EXHIBIT "B" TENANT IMPROVEMENTS Landlord agrees, at Landlord's expense, to install the tenant improvements per the attached plans and specifications provided such plans and specifications have been approved by Landlord and Tenant. Landlord's estimate of the cost of these improvements is $911,890.00 ($14.00 per square foot). Should the actual construction costs exceed $911,890.00, Tenant shall pay such excess to Landlord prior to the commencement of the construction. This construction allowance is based on the cost to duplicate Tenant's finishes and space allocation in its current Leased Premises. COMMERCIAL LEASE AGREEMENT - PAGE 30 - -------------------------- LEASE 2 ADDENDUM This Addendum is entered into this ______day of November, 1997, between JACKSON- SHAW TECHNOLOGY CENTER II, LTD., as Landlord, and ADAMS GOLF, INC., as Tenant. This Addendum is an integral part of that certain Commercial Lease Agreement dated as of the date hereof between Landlord and Tenant to which it is attached (the "Lease"). If the terms and provisions of this Addendum conflict with those of the Lease, those of this Addendum shall prevail. 1) RENEWAL OPTION: Tenant is granted the option to extend the term of this Lease for one (1) extended term of five (5) years, provided no event of default exists at the time of exercise of the option and no condition exists which with the giving of notice or the passage of time or both would constitute an event of default, and Tenant gives written notice of its exercise of the option at least one hundred eighty (180) days prior to the expiration of the original term. The extension term shall be upon the same terms and conditions as set forth herein, except Tenant shall have no further right of renewal after the extension term prescribed above, and the Base Rental will be equal to the then prevailing rate for comparable space for a comparable term. 2) PARKING: Tenant shall be entitled to the non-exclusive use of the 217 parking spaces directly adjacent to the Leased Premises as shown on the attached site plan. 3) EXPANSION: If during the term of this Lease agreement, Landlord leases to or sells to Tenant a space or building of a size larger than the present Leased Premises in any development owned by Landlord, Tenant's then remaining obligations due under this Lease agreement shall be terminated upon the commencement date of the new lease or purchase agreement. Not withstanding the above-stated, Tenant shall remain obligated to pay for any Rents or other sums due Landlord as a result of Tenant's tenancy hereunder, and such obligation shall survive the termination of this Lease pursuant to this Paragraph 3. 4) SIGNAGE: Landlord shall pay for the cost of one (1) tenant identification sign for the Leased Premises. Such sign shall be in accordance to the sign criteria established for the Building. COMMERCIAL LEASE AGREEMENT - PAGE 31 - -------------------------- LEASE 2 5) EARLY OCCUPANCY: Tenant shall be granted occupancy to the Leased Premises upon the substantial completion of the tenant improvements. The first two (2) weeks of Tenant's occupancy shall be considered to be Early Occupancy with all terms and conditions of the Lease in full force and effect except the base rent due for this two week early occupancy period shall be abated. COMMERCIAL LEASE AGREEMENT - PAGE 32 - -------------------------- LEASE 2 EX-10.4 5 EXHIBIT 10.4 (LEASE 3) COMMERCIAL LEASE AGREEMENT JACKSON-SHAW TECHNOLOGY CENTER II, LTD., Landlord to ADAMS GOLF, INC., Tenant TABLE OF CONTENTS 1. LANDLORD 4 2. TENANT 4 3. LEASED PREMISES 4 4. TERM 5 5. BASE RENT AND SECURITY DEPOSIT 6 6. ADDITIONAL RENTAL 7 7. TENANT REPAIRS AND MAINTENANCE 10 8. LANDLORD'S REPAIRS 11 9. UTILITY SERVICE 12 10. SIGNS 12 11. USAGE 12 12. INSURANCE 12 13. (INTENTIONALLY DELETED) 13 14. COMPLIANCE WITH LAWS, RULES AND REGULATIONS 13 15. ASSIGNMENT AND SUBLETTING 13 16. ALTERATIONS AND IMPROVEMENTS 14 17. CONDEMNATION 15 COMMERCIAL LEASE AGREEMENT - PAGE 2 - -------------------------- LEASE 3 18. FIRE AND CASUALTY 16 19. CASUALTY INSURANCE 17 20. WAIVER OF SUBROGATION 17 21. HOLD HARMLESS 18 22. QUIET ENJOYMENT 18 23. LANDLORD'S RIGHT OF ENTRY 18 24. ASSIGNMENT OF LANDLORD'S INTEREST IN LEASE 18 25. LANDLORD'S LIEN 19 26. DEFAULT BY TENANT 19 27. REMEDIES FOR TENANT'S DEFAULT 19 28. TERMINATION OF OPTIONS 21 29. WAIVER OF DEFAULT OR REMEDY 21 30. CHOICE OF LAW; VENUE; ATTORNEY'S FEES 22 31. HOLDING OVER 22 32. RIGHTS OF MORTGAGEE 22 33. ESTOPPEL CERTIFICATES 23 34. SUCCESSORS 23 35. REAL ESTATE COMMISSION 24 COMMERCIAL LEASE AGREEMENT - PAGE 3 - -------------------------- LEASE 3 36. DEFAULT BY LANDLORD 24 37. MECHANIC'S LIENS 24 38. HAZARDOUS WASTE 24 39. ENTIRE AGREEMENT AND LIMITATION OF WARRANTIES 25 40. FINANCIAL STATEMENTS 25 41. FORCE MAJEURE 26 42. MISCELLANEOUS 26 43. NOTICE 27 44. LIMITATION ON TENANT'S DAMAGES 28
COMMERCIAL LEASE AGREEMENT THIS LEASE AGREEMENT is entered into by and between: 1. LANDLORD: JACKSON-SHAW TECHNOLOGY CENTER II, LTD., a Texas Limited Partnership ("Landlord"), and 2. TENANT: ADAMS GOLF, INC., a Texas Corporation ("Tenant"). 3. LEASED PREMISES: In consideration of the rents, terms and covenants of this Commercial Lease Agreement (this "Lease"), Landlord hereby leases to Tenant certain premises (the "Leased Premises") consisting of approximately 32,996 square feet within the 67,372 square foot building (the "Building") located at 2805 E. Plano Parkway, Suite ____, Plano, Texas together with the non-exclusive right to use, in common with other tenants, the common areas of the Project, which are all areas neither exclusively leased to another tenant nor expressly reserved to or by Landlord. The land upon which the Building is located is described in the attached Exhibit A and, together with the Building, landscaping, parking and driveway areas, sidewalks, and other improvements thereon, shall be referred to in this Lease as the "Project." COMMERCIAL LEASE AGREEMENT - PAGE 4 - -------------------------- LEASE 3 4. TERM: (a) The term of this Lease shall be seventy (70) months commencing on June 15, 1998, the "Commencement Date" and terminating on the 14th day of June in the seventieth (70th) month following the Commencement Date (the "Termination Date"). This Commencement Date may be subject to change, however, pursuant to Paragraphs 4(b) and (c) below. (b) Tenant acknowledges that it accepts the Leased Premises as suitable for Tenant's purposes subject only to Paragraph 4(c) below, if applicable. If this Lease is executed before the Leased Premises become available for occupancy, or if Landlord cannot acquire possession of the Leased Premises prior to the Commencement Date stated above, Tenant agrees to accept possession of the Leased Premises at such time as Landlord is able to tender the same, which date shall then be the Commencement Date of the Lease term. (c) Landlord agrees to install at its cost and expense the improvements, if any, described in the plans and specifications described in Exhibit B. If such improvements are not completed and the Leased Premises are not ready for occupancy on the Commencement Date stated above, other than as a result of the omission, delay or default by Tenant or anyone acting under or on behalf of Tenant, the rent under this Lease shall not commence until substantial completion of the work described in said plans and specifications, and the Commencement Date of the Lease term shall be the date of such substantial completion. Landlord shall notify Tenant in writing as soon as such improvements are substantially completed and ready for occupancy. If Tenant believes that such improvements have not been substantially completed as aforesaid, Tenant shall notify Landlord in writing of its objections within three (3) days after receipt of the completion notice from Landlord. Landlord shall have a reasonable time after receipt of such notice (but in no event more than 10 days) in which to commence such corrective action as may be necessary and shall notify Tenant in writing as soon as it deems such corrective action has been completed so that the Leased Premises are completed and ready for occupancy. In the event of any dispute as to substantial completion or work performed or required to be performed by Landlord, the certificate of a registered architect shall be conclusive and binding on all parties. (d) Tenant acknowledges that no representations or promises regarding construction, repairs, alterations, remodeling, or improvements to the Leased Premises have been made by Landlord, its agents, employees, or other representatives, unless such are expressly set forth in this Lease or any Exhibit hereto. Tenant is solely responsible for applying for and obtaining a Certificate of Occupancy for the Leased Premises and will satisfy itself as to the business park restrictions and all zoning and similar restrictions and regulations prior to commencement of any construction. Failure of Tenant to provide written notice of such objections prior to commencement of construction shall be deemed acceptance by Tenant. Tenant agrees that if its occupancy of the Leased Premises is delayed under the circumstances described in Paragraphs 4(b) and (c) above, this Lease shall nonetheless continue in full force and effect. Adjustment of the rent commencement date as above provided shall constitute full settlement of all claims by Tenant against Landlord by reason of any such delay in possession of the Leased Premises. Tenant's taking possession of the Leased Premises shall conclusively establish that the improvements, if any, to be COMMERCIAL LEASE AGREEMENT - PAGE 5 - -------------------------- LEASE 3 made by Landlord under the terms of this Lease have been completed in accordance with the plans and specifications therefor and that the Leased Premises are in good and satisfactory condition as of the date of Tenant's possession, unless Tenant notifies Landlord in writing specifying any bona fide deficiencies after taking possession (i) within 270 days, for the heating and air conditioning systems, and (ii) within ninety (90) days, for all other matters, after the Commencement Date. Landlord shall use reasonable diligence to repair promptly such items but Tenant shall have no claim for damages or rebate or abatement of rent by reason thereof. In conjunction with, or at any time after, the Commencement Date, Tenant shall, upon demand, execute and deliver to Landlord an Estoppel letter (as referred to in paragraph 33 herein) to acknowledge the Commencement Date. 5. BASE RENT AND SECURITY DEPOSIT: (a) Tenant agrees to pay to Landlord the following rental amounts (sometimes referred to in this Lease as the "Base Rent" or "Base Rental"): MONTHS 1 THROUGH 22, $230,976.00 PER YEAR PAYABLE IN MONTHLY INSTALLMENTS OF $19,248.00 EACH; AND MONTHS 23 THROUGH 46, $247,476.00 PER YEAR PAYABLE IN MONTHLY INSTALLMENTS OF $20,263.00 EACH; MONTHS 47 - 70, $263,976.00 PER YEAR PAYABLE IN MONTHLY INSTALLMENTS OF $21,998.00. Payment of rent is subject to proration for partial months and to adjustment for early or delayed occupancy under the terms hereof, and, if the area of the Leased Premises is, on the Commencement Date, different than the area stated in Paragraph 3 above, then Base Rent shall be adjusted to reflect $7.00 per gross square foot. Base Rent shall be payable to Landlord monthly, in advance, without demand, deduction or offset, in lawful money of the United States of America at the address stated below. The first month's Base Rent payment of $19,248.00 shall be due upon the date Tenant executes the Lease Agreement, and all other installments of Base Rent shall be due and payable on or before the first (1st) day of each month during the Lease term. (b) Upon the date Tenant executes the Lease Agreement, there shall be due and payable by Tenant a Security Deposit in the amount of $19,248.00. Such deposit shall be held by Landlord (without any obligation to pay interest thereon or segregate such money from Landlord's general funds except as may be required by applicable law) as security for the performance of Tenant's obligations under this Lease. Tenant agrees to increase such Security Deposit from time to time so that it is at all times equal to one monthly Base Rental installment plus the average monthly additional rentals arising pursuant to Paragraph 6 below. Tenant shall deposit cash with Landlord in an amount sufficient so to increase the Security Deposit to such amount within five (5) days after written demand by Landlord. It is expressly understood that the Security Deposit is not an advance payment of rental or a measure of Landlord's damages in the event of Tenant's default under this Lease. Upon the occurrence of any event of default by Tenant under this Lease, Landlord may, from time to time, without prejudice to any other remedy provided herein or provided by law, use, apply, or retain all or part of the Security Deposit for the payment of (i) any Base Rent, (ii) additional rentals arising under Paragraph 6 below, and (iii) other sums due hereunder, including without limitation any amount which Landlord may spend or become obligated to spend by reason of Tenant's default or to compensate Landlord for any damage, injury, expense or liability caused to Landlord by such default or breach (all of which items (i), (ii) and (iii) are sometimes referred to in COMMERCIAL LEASE AGREEMENT - PAGE 6 - -------------------------- LEASE 3 the aggregate as "Rent"). If any portion of the Security Deposit is so used or applied, Tenant shall, within five (5) days after written demand thereof, deposit cash with Landlord in an amount sufficient to restore the Security Deposit to the amount required by this Paragraph. Tenant's failure to do so shall be an event of default under this Lease. The balance of the Security Deposit shall be returned by Landlord to Tenant at such time after termination of this Lease that all of Tenant's obligations have been fulfilled. (c) Other remedies for nonpayment of Rent notwithstanding, if the monthly Base Rental payment is not received by Landlord on or before the tenth (10th) day of the month for which such rent is due, or if any other Rent payment due Landlord by Tenant hereunder is not received by Landlord within ten (10) days of the due date three (3) times during any one (1) year period, a service charge of two hundred ($200.00) dollars shall be additionally due and payable by Tenant as an administrative charge for the excess efforts necessitated by such tardiness in payment. Such service charge shall be cumulative of any other remedies Landlord may have for nonpayment of Rent and other sums payable under this Lease. (d) If three (3) consecutive monthly Base Rental payments or any ten (10) [in total, cumulative from the beginning of the Lease term] monthly Base Rental payments during the Lease term (or any renewal or extension thereof) are not received by Landlord within ten (10) days of the due date, the Base Rent hereunder shall automatically become due and payable by Tenant in advance in quarterly installments equal to three (3) months' Base Rent each. The first of such quarterly Base Rent payments shall be due and payable on the first day of the next succeeding month and on the first day of every third (3rd) month thereafter. This remedy shall be cumulative of any other remedies of Landlord under this Lease for nonpayment of Rent. 6. ADDITIONAL RENTAL: (a) TAXES AND INSURANCE: (1) "Tax and Insurance Costs" shall mean all of the following paid or payable by Landlord with respect to the Project or any portion thereof: (i) all federal, state and local sales, use, ad valorem, rental, value added, and other taxes (other than Landlord's income or franchise taxes) and special assessments and other governmental charges; and (ii) all insurance premiums, including, without limitation, public liability, casualty, rental and property damage insurance. (2) Landlord shall pay all Tax and Insurance Costs; however, Landlord may in its discretion defer such payment to the extent permitted by applicable laws so long as contested by Landlord in good faith and so long as Tenant's occupancy of the Premises is not lawfully disturbed. (3) For each calendar year of the term of this Lease, Tenant shall pay to Landlord as additional Rent hereunder its "pro rata portion" of the Tax and Insurance Costs computed by multiplying the Tax and Insurance Costs by a fraction, the numerator of which is the number of rentable square feet in the Leased Premises, and the denominator of which is the number of rentable square feet in the Building. COMMERCIAL LEASE AGREEMENT - PAGE 7 - -------------------------- LEASE 3 (4) Tenant shall pay one-twelfth of its pro rata portion of estimated Tax and Insurance Costs as estimated by Landlord, along with the monthly Base Rental payment each month, during the term of this Lease. As soon as available after the expiration of each calendar year during the term of this Lease, Landlord shall submit a reconciliation statement to Tenant setting forth (1) Tenant's pro rata portion of the Tax and Insurance Costs due from Tenant for the preceding calendar year, (ii) the amount of Tax and Insurance Costs paid by Tenant during such calendar year, and (iii) the amount, if any, either overpaid or remaining due from Tenant to Landlord. Within (10) days after receipt of such statement, Tenant shall remit to Landlord the amount said statement shows to be due from Tenant or, if Tenant has overpaid, Landlord shall credit the amount overpaid to Tenant's pro rata portion of Tax and Insurance Costs next due. If Tenant is not in default and this Lease terminated at the end of such prior year, Landlord shall refund such overpayment to Tenant. (5) For the calendar years in which this Lease commences and terminates, Tenant's liability for its pro rata portion of the Tax and Insurance Costs for such partial calendar years shall be subject to pro rata adjustment based upon the number of days of the term elapsing during such partial year. Where the applicable charges are not available prior to the end of the term hereof, then the aforesaid adjustment shall be made between Landlord and Tenant after Landlord shall have received the charges for such period, it being specifically agreed that Landlord's and Tenant's obligations under this Paragraph shall survive the expiration of the term of this Lease. (6) The failure of Landlord to exercise its rights hereunder to estimate Tax and Insurance Costs and require payment of same as additional Rent shall not constitute a waiver of such rights which rights may be exercised from time to time at Landlord's discretion. (b) COMMON AREA MAINTENANCE: (1) "Common Area Maintenance Expenses" shall mean any and all expenses (other than the Tax and Insurance Costs described above) arising from the maintenance, repair, replacement and operation of, and modifications and improvements to comply with governmental mandate to, the Project's common areas and any portions of the Project for which Landlord is responsible hereunder (excluding only expenses associated with structural integrity of the roof, foundation, and exterior walls) including, but not limited to, management fees, utility expenses (if furnished by Landlord), wages and fringe benefits payable to employees of Landlord whose duties are connected with the operation and maintenance of the Project, amounts paid to contractors or subcontractors for work or services performed in connection with the operation and maintenance of the Project, including without limitation common areas and parking areas and roof, exterior wall and foundation work that is not related to structural integrity. Any capitalized expenditures included within the foregoing (together with reasonable finance charges) will be amortized for purposes of this Paragraph over a three (3) year period. (2) The term "Common Area Maintenance Expenses" shall not include repair, restoration or other work occasioned by fire, windstorm or other casualty with respect to which COMMERCIAL LEASE AGREEMENT - PAGE 8 - -------------------------- LEASE 3 Landlord actually receives insurance proceeds, income and franchise taxes of Landlord, expenses incurred in leasing to or procuring of tenants, leasing commissions, advertising expenses, expenses for the renovating of space for new tenants, interest or principal payments or any mortgage or other indebtedness of Landlord, compensation paid to any employee of Landlord above the grade of building superintendent, or depreciation allowance or expense. (3) Tenant agrees to pay as additional Rent its pro rata portion (as defined in Paragraph 6(a)(3) above) of the Common Area Maintenance Expenses. Tenant shall pay one-twelfth of its pro rata portion of estimated Common Area Maintenance Expenses as estimated by Landlord, along with the monthly Base Rental payment each month during the term of this Lease. As soon as available after the expiration of each calendar year during the term of this Lease, Landlord shall submit a statement to Tenant setting forth (i) Tenant's pro rata portion of the Common Area Maintenance Expenses due from Tenant for the preceding calendar year, (ii) the amount of Common Area Expenses paid by Tenant during such calendar year, and (iii) the amount, if any, either overpaid or remaining due from Tenant to Landlord. Within ten (10) days after receipt of such statement, Tenant shall remit to Landlord the amount said statement shows to be due from Tenant or, if Tenant has overpaid, Landlord shall credit the amount overpaid to Tenant's pro rata portion of Common Area Maintenance Expenses next due. If Tenant is not in default and this Lease terminated at the end of such prior year, Landlord shall refund such overpayment to Tenant. (4) For the calendar years in which this Lease commences and terminates, Tenant's liability for its pro rata portion of the Common Area Maintenance Expenses for such partial calendar years shall be subject to pro rata adjustment based upon the number of days of the term elapsing during such partial year. Where the applicable expenses are not available prior to the end of the term hereof, then the aforesaid adjustment shall be made between Landlord and Tenant after Landlord shall have received all of the expenses for such period, it being specifically agreed that Landlord's and Tenant's obligations under this Paragraph shall survive the expiration of the term of this Lease. (5) The failure of Landlord to exercise its rights hereunder to estimate expenses and require payment of same as additional Rent shall not constitute a waiver of such rights which rights may be exercised from time to time at Landlord's discretion. (6) Notwithstanding anything contained in this Lease to the contrary, Tenant shall have the right, at its own expense and within a reasonable time, to audit Landlord's books relevant to the additional rent due under this Lease. Tenant's right to audit the books and records of Landlord shall be limited to one time per calendar year. If any such audit reveals an overpayment of Common Area Maintenance Expenses and/or Tax and Insurance Costs for the period covered by such annual statement, the amount of such overpayment shall be credited against the next installment of base rent and all other sums due from Tenant. If Landlord is found to have been in error by a factor which would be in excess of ten percent (10%) of the actual Common Area Maintenance Expenses and/or Tax and Insurance Costs, then Landlord shall pay for the cost of the audit which cost shall not exceed $1,000.00. If such audit reveals an underpayment by Tenant, then Tenant shall pay the same with its next monthly base rent payment. COMMERCIAL LEASE AGREEMENT - PAGE 9 - -------------------------- LEASE 3 (c) In any event, Tenant shall be responsible for insuring and paying all taxes upon Tenant's furniture, machinery, goods, supplies, fixtures, Alterations (below defined) or other improvements, and other property on the Project. 7. TENANT REPAIRS AND MAINTENANCE: (a) Tenant shall maintain all parts of the Leased Premises and their appurtenances (except those for which Landlord is expressly responsible under this Lease) in good, clean and sanitary condition, at its own expense. Tenant shall promptly make all necessary repairs and replacements to the Leased Premises, including but not limited to electric light lamps or tubes, windows, glass and plate glass, interior and exterior doors, any special office entry, interior walls and finish work, floors and floor coverings, downspouts, gutters, heating and air conditioning systems, dock boards, truck doors, dock bumpers, and plumbing work and fixtures. Replacement and repair parts, materials and equipment shall be of quality equivalent to those initially installed within the Leased Premises, and repair and maintenance work shall be done in a good and workmanlike manner and in accordance with existing laws, rules, regulations and ordinances. (b) Tenant shall not damage or disturb the integrity, structural integrity, or support of any wall, roof, or foundation of the Building. Any damage to these areas caused by Tenant or Tenant's Representatives (defined in Paragraph 7(g)) shall be promptly repaired by Tenant at its sole cost and expense. (c) Landlord shall have the right to coordinate any repairs, maintenance and replacement of any rail tracks serving or to serve the Project, and if Tenant uses such rail tracks, Tenant shall reimburse Landlord from time to time upon demand for a share of the cost of such repairs, maintenance and replacement and any other sums specified in any agreement to which Landlord is a party respecting such tracks. Tenant's share of such costs shall be additional Rent and shall reflect a proration based on the ratio that Tenant's use, in number of cars, bears to the total rail use, in number of cars, by all rail users in the Project. (d) Tenant shall, at its own cost and expense, enter into a regularly scheduled preventive maintenance service contract with a maintenance contractor for servicing all heating, ventilation and air conditioning systems and equipment within, and any other equipment or machinery installed by Landlord in, or to serve, the Leased Premises. The maintenance contractor and the contract are subject to Landlord approval which shall not be unreasonably withheld. The service contract must include all services suggested by the equipment manufacturer within the operation/maintenance manual and must become effective (and a copy delivered to Landlord) within thirty (30) days of the date Tenant takes possession of the Leased Premises. If Tenant fails to enter into such service contract as required, Landlord shall have the right to do so on Tenant's behalf, and Tenant agrees to pay Landlord the cost and expense of same upon demand, and such amount shall be considered additional Rent. (e) Tenant shall at its own expense keep the Leased Premises pest-free and pay all charges for pest control and extermination within the Leased Premises. COMMERCIAL LEASE AGREEMENT - PAGE 10 - -------------------------- LEASE 3 (f) At the termination of this Lease, Tenant shall deliver the Leased Premises "broom clean" to Landlord in the same good order, configuration, and condition as existed at the Commencement Date of this Lease, ordinary wear, natural deterioration beyond the control of Tenant, and damage by fire, tornado or other casualty excepted. Tenant shall give written notice to Landlord at least thirty (30) days prior to vacating the Leased Premises and shall arrange to meet with Landlord for a joint inspection of the Leased Premises prior to vacating. In the event of Tenant's failure to give such notice or arrange such joint inspection, Landlord's inspection at or after Tenant's vacating the Leased Premises shall be conclusively deemed correct for purposes of determining Tenant's responsibility for repairs and restoration. (g) Not in limitation on the foregoing, it is expressly understood that Tenant shall repair and pay for all damage caused by the negligence of Tenant, Tenant's employees, officers, directors, partners, agents, invitees, licensees, contractors, representatives, or others for whom Tenant is legally responsible (all such persons and entities being herein collectively referred to as "Tenant's Representatives") or caused by Tenant's default hereunder. (h) If Landlord shall give Tenant written notice of defects or need for repairs for which Tenant is responsible under this Lease, and if Tenant shall fail to make or fails to commence to make repairs within 30 days of Landlord's notification or such shorter time as is reasonable if expedited repair is needed to avoid injury or damage, Landlord shall have the option to cure said defect or repair, and Tenant shall pay to Landlord all costs and expenses incurred on demand. 8. LANDLORD'S REPAIRS: (a) Landlord shall be responsible, at its expense, for, but only for, the structural integrity of the roof, foundation and exterior walls of the Building. In further limitation on Landlord's responsibilities hereunder, (i) the foregoing does not include maintenance and repair that are a result of deterioration due to wear and tear or the passing of time; (ii) any repair to the roof, foundation or exterior walls occasioned by the act of omission of Tenant or Tenant's Representatives shall be the responsibility of Tenant; (iii) the term "walls" as used in this Paragraph 8 shall not include windows, glass or plate glass, interior doors, special store fronts, office entries or exterior doors; and (iv) Landlord's liability with respect to any defects, repairs or maintenance for which Landlord is responsible at its expense under this Lease shall be limited to the cost of such repairs or maintenance or the curing of such defect. Tenant shall promptly give Landlord written notice of defects or need for repairs, after which Landlord shall have 30 days to commence to repair or cure such defect. (b) Landlord shall perform the work which gives rise to Common Area Maintenance Expenses, subject to payment therefor by Tenant pursuant to the provisions of Paragraph 6(b) above. If the need for any such work shall come to the attention of Tenant, Tenant will promptly so notify Landlord in writing. COMMERCIAL LEASE AGREEMENT - PAGE 11 LEASE 3 9. UTILITY SERVICE: Tenant shall pay the cost of all utility services including, but not limited to, initial connection charges and deposits and all charges for gas, water, trash disposal, sewer, telephone or other telecommunications, and electricity used on the Leased Premises. Tenant shall pay all costs caused by Tenant introducing excessive pollutants into the sanitary or storm sewer system, including permits, fees, assessments, and charges levied by any governmental subdivision for any pollutants or solids other than ordinary human waste. 10. SIGNS: No sign, door plaques, advertisement, or notice shall be displayed, painted or affixed by Tenant on any part of the Project, Building, parking facilities, or Leased Premises without prior written consent of Landlord. The color, size, character, style, material, placement and location and method of attachment to the Building shall be subject to Landlord's approval, and to any applicable governmental laws, ordinances, regulations, project specifications, and other requirements. Landlord's notice of approval or disapproval shall be delivered to Tenant within ten (10) days of Tenant's written request for same. Signs, if approved by Landlord, shall be placed by a contractor approved by Landlord and paid for by Tenant. Tenant shall remove all such signs at the termination of this Lease. Such installations and removals shall be made in such manner as to avoid injury or defacement of the Project and other improvements, and Tenant, at its sole expense, shall repair any injury or defacement, including, without limitation, any discoloration caused by such installation and/or removal. Landlord may erect a sign or signs on the Leased Premises indicating that the Leased Premises are for lease during the six (6) month period prior to the expiration of this Lease. 11. USAGE: Tenant warrants and represents to Landlord that the Leased Premises shall be used and occupied only for the purpose of: General office, manufacturing and distribution of custom golf clubs and related activities. Any change in the stated usage purposes shall be subject to the prior written approval of Landlord. Tenant shall occupy the Leased Premises, conduct its business, and control Tenant's Representatives in a lawful and reputable way and as not to create any nuisance. Tenant shall not commit, or allow to be committed, any waste on the Leased Premises or the Project. Tenant may not use the Leased Premises for the use, storage, or distribution of hazardous or environmentally offensive substances, for underground storage, or for any unlawful purposes. 12. INSURANCE: (a) Tenant shall not permit the Leased Premises to be used in any way which would be hazardous or which would in any way increase the cost of or render void any insurance on the improvements, and Tenant shall immediately, on demand, cease any use which violates the foregoing or to which Landlord's insurer or any governmental or regulatory authority objects. If at any time during the term of this Lease Tenant's use or vacancy shall cause an increase in premiums, and in particular, but without limitation, if the State Board of Insurance or other insurance authority disallows any of Landlord's sprinkler credits or imposes an additional penalty or surcharge in Landlord's insurance premiums because of Tenant's original or subsequent placement or use of storage racks or bins or method of storage or because of the nature of Tenant's inventory or any other act of Tenant, Tenant agrees to pay as additional Rent the increase in Landlord's insurance premiums. COMMERCIAL LEASE AGREEMENT - PAGE 12 LEASE 3 (b) Tenant, at its sole cost and expense, shall procure and maintain throughout the term of this Lease a policy or policies of insurance insuring Landlord, Landlord's management company and lender, and Tenant against all claims for property damages, personal injury or death of others occurring on or in connection with: (i) the Leased Premises; (ii) the condition of the Leased Premises; (iii) Tenant's operations in and maintenance and use of the Leased Premises; (iv) Tenant's and Tenant's Representatives' use of the common areas of the Project, and (v) Tenant's liability assumed under this Lease. The limits of such policy or policies shall be not less than $2,000,000.00 combined single limit coverage per occurrence for injury to persons (including death) and/or property damage or destruction, including loss of use. (c) All such policies shall be procured by Tenant from insurance companies satisfactory to Landlord naming the following as co-insureds: (i) Landlord; (ii) Landlord's management company, JACKSON-SHAW COMPANY; and, (iii) Landlord's mortgage holder, if any. Certified copies of such policies together with receipt for payment of premiums, shall be delivered to Landlord prior to the Commencement Date of this Lease. Not less than fifteen (15) days prior to the expiration date of any such policies, certified copies of renewal policies and evidence of the payment of renewal premiums shall be delivered to Landlord. All such original and renewal policies shall provide for at least thirty (30) days written notice to Landlord before such policy may be canceled or changed to reduce insurance coverage provided thereby. Upon request of Landlord, Tenant further agrees to complete and return to Landlord an insurance questionnaire (such form to be provided by Landlord) regarding Tenant's insurance coverage and intended use of the Leased Premises. Tenant warrants and represents that all information contained in such questionnaire shall be true and correct as of the date thereof and shall be updated by Tenant from time to time upon Landlord's request. 13. (INTENTIONALLY DELETED) 14. COMPLIANCE WITH LAWS, RULES AND REGULATIONS: Tenant shall comply with all applicable laws, ordinances, orders, rules and regulations of state, federal, municipal, or other agencies or bodies relating to the use, condition and occupancy of and business conducted on the Leased Premises, including without limitation, the Americans with Disabilities Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response Act, and the rules, regulations and directives of the U.S. Environmental Protection Agency. 15. ASSIGNMENT AND SUBLETTING: The Tenant agrees not to assign, transfer, or mortgage this Lease or any right or interest therein or sublet the Leased Premises or any part thereof, without the prior written consent of Landlord, such consent not to be unreasonably withheld. No assignment or subletting shall relieve Tenant of its obligations hereunder, and Tenant shall continue to be liable as a principal (and not as a guarantor or surety) to the same extent as though no assignment or subletting had been made. Consent by Landlord to any one assignment or subletting shall not be construed to be consent to any additional assignment or subletting. Each such successive act shall require similar consent of Landlord. Landlord shall be reimbursed by Tenant for any costs or expenses incurred as a result of Tenant's request for consent to any such COMMERCIAL LEASE AGREEMENT - PAGE 13 LEASE 3 assignment or subletting, including legal costs. In the event Tenant subleases the Leased Premises, or any portion thereof, or assigns this Lease with the consent of the Landlord at an annual Base Rental exceeding that stated herein, such excess shall be paid by Tenant to Landlord as additional Rent hereunder within ten (10) days after receipt by Tenant. Upon the occurrence of an "event of default" as defined below, if all or any part of the Leased Premises is then assigned or sublet, Landlord may, in addition to any other remedies provided by this Lease or provided by law, collect directly from the assignee or subtenant all rents due to Tenant. Landlord shall have a security interest in all property on the Leased Premises to secure payment of such sums. Any collection directly by Landlord from the assignee or subtenant shall not be construed, however, to constitute a novation or a release of Tenant from the further performance of its obligations under this Lease. Notwithstanding the foregoing, it is expressly agreed that if this Lease is assigned to any person or entity pursuant to the provisions of the Bankruptcy Code, 11 U.S.C. Sec. 101 et seq, as amended (the "Bankruptcy Code"), any and all monies or other considerations payable or otherwise to be delivered in connection with such assignment shall be paid or delivered to Lessor, shall be and remain the exclusive property of Landlord and shall not constitute property of Tenant or of the estate of Tenant within the meaning of the Bankruptcy Code. Any and all monies or other considerations constituting Landlord's property under the preceding sentence not paid or delivered to Landlord shall be held in trust for the benefit of Landlord and be promptly paid or delivered to Landlord. Any person or entity to which this Lease is assigned pursuant to the provisions of the Bankruptcy Code shall be deemed without further act or deed to have assumed all of the obligations arising under this Lease on and after the date of such assignment. Any such assignee shall upon demand execute and deliver to Landlord an instrument confirming such assumption. *Should Tenant be acquired by a Corporation whose net worth is greater than Tenant's, and whose use of the space is the same as Tenant's, then Landlord will automatically approve an assignment of Tenant's interest in the Lease. 16. ALTERATIONS AND IMPROVEMENTS: (a) Tenant shall not make or perform, or permit the making or performance of, any initial or subsequent tenant finish work or any alterations, installations, decorations, improvements, additions or other physical changes in or about the Leased Premises (referred to collectively as "Alterations") without Landlord's prior consent. Landlord shall be under no obligation to allow Alterations of any kind and may withhold its consent without cause. Notwithstanding the foregoing provisions or Landlord's consent to any Alterations, all Alterations shall be made and performed in conformity with and subject to the following provisions: All Alterations shall be made and performed at Tenant's sole cost and expense in a good and workmanlike manner. Alterations shall be made only by contractors or mechanics approved by Landlord, such approval not to be unreasonably withheld. Tenant shall submit to Landlord detailed plans and specifications (including architectural layout, mechanical and structural drawings) for each proposed Alteration and shall not commence any such Alteration without first obtaining Landlord's written approval of such plans and specifications. Prior to the commencement of each proposed Alteration, Tenant shall furnish to Landlord a certificate evidencing worker's compensation insurance coverage for all persons to be employed in connection with such Alterations, including those to be employed by all contractors and subcontractors, and of comprehensive public liability insurance (including property COMMERCIAL LEASE AGREEMENT - PAGE 14 LEASE 3 damage coverage) in which Landlord, its agents, and any lessor under any ground or underlying lease, and any mortgagee of the Building shall be named as parties insured, which policies shall be issued by companies and shall be in form and amounts satisfactory to Landlord and shall be maintained by Tenant until the completion of such Alteration. Tenant shall cause its contractor and each subcontractor to provide Landlord with a Certificate of Completion of the Alterations and a Bills Paid Affidavit and full Lien Waiver. Tenant shall, if required by Landlord at the time of Landlord's consent to the Alterations, agree to restore the Leased Premises at the termination of this Lease to their condition prior to making such Alterations. All permits, approvals and certificates required by all governmental authorities shall be timely obtained by Tenant and submitted to Landlord. Notwithstanding Landlord's approval of plans and specifications for any Alterations, all Alterations shall be made and performed in full compliance with all applicable laws, orders, rules, standards and regulations of Federal, State, County, and Municipal authorities, including, without limitation, all directions, pursuant to law, of all public officers, and with all applicable rules, orders, regulations and requirements of the local Board of Fire Underwriters or any similar body ("Applicable Laws"). Landlord's approval shall not in any way be considered an indication that the plans and specifications comply with Applicable Laws. All materials and equipment to be incorporated in the Leased Premises as a result of all Alterations shall be new and first quality. No such materials or equipment shall be subject to any lien, encumbrance, chattel mortgage or title retention or security agreement. Whether such Alterations are being performed by Tenant in connection with Tenant's initial occupancy of the Leased Premises or subsequently, Tenant agrees to make proper application for, and obtain, a Building Permit and a Certificate of Occupancy from the city in which the Leased Premises are located. Tenant shall furnish copies of such permit and certificate to Landlord promptly after issuance of same. (b) All appurtenances, fixtures, improvements, and other property attached to or installed in the Leased Premises, whether by Landlord or Tenant or others, and whether at Landlord's expense or Tenant's expense, or the joint expense of Landlord and Tenant, shall be and remain the property of Landlord, except that any such fixtures, improvements, additions, and other property which have been installed at the sole expense of Tenant and which are removable without material damage to the Leased Premises shall be and remain the property of Tenant. If no event of default has occurred, Tenant may, and if Landlord so elects Tenant shall, remove any property belonging to Tenant at the end of the term hereof, and Tenant shall repair or, at Landlord's option, shall pay to Landlord the cost of repairing any damage arising from such removal. Any replacements of any property of Landlord, whether made at Tenant's expense or otherwise, shall be and remain the property of Landlord. 17. CONDEMNATION: (a) If, during the term (or extension or renewal) of this Lease, all or a substantial part of the Leased Premises are taken for any public or quasi-public use under any governmental law, ordinance or regulation, or by right of eminent domain or by private purchase in lieu thereof, and the taking would prevent or materially interfere with the then current use of the Leased Premises, this Lease shall terminate and the Rent shall be prorated during the unexpired portion of this Lease effective on the date physical possession is taken by the condemning authority. COMMERCIAL LEASE AGREEMENT - PAGE 15 LEASE 3 (b) If a portion of the Leased Premises is taken and this Lease is not terminated as provided in Paragraph 17(a) above, if condemnation proceeds are sufficient and if restoration is feasible, Landlord may, at its option restore the Project (other than Alterations) in order to make it reasonably tenantable and suitable for Tenant's approved use. During such restoration, Rent shall be reduced by the amount of business or rent interruption insurance proceeds actually received by Landlord, or Rent shall be paid based on the portion of the Leased Premises Tenant can occupy. Upon completion of such restoration, the Rent payable under this Lease during the unexpired portion of the term shall be adjusted to such an extent as may be fair and reasonable under the circumstances. (c) In the event of such taking or private purchase in lieu thereof, Tenant may seek a separate award for any loss of improvements made or paid for by Tenant, its personal property, and its moving expenses (so long as no such claim diminishes Landlord's claim or award), but all other claims of any nature shall belong to Landlord. In the event Tenant does not receive such a separate award, Landlord shall be entitled to receive any and all sums awarded for the taking. (d) Notwithstanding anything herein to the contrary, if the holder of any indebtedness secured by a mortgage or deed of trust covering the Building and/or Project requires that the condemnation proceeds be applied to such indebtedness, then Landlord shall have the right to terminate this Lease by delivering written notice of termination to Tenant within fifteen (15) days after such requirement is imposed. All rights and obligations under this Lease shall then cease. If Landlord does not receive condemnation proceeds sufficient for restoration (such as when its mortgagee does not allow the proceeds to be used for such purposes) and if restoration is economically reasonably feasible, Tenant will have the option of supplementing available proceeds to allow restoration, and Tenant's actual costs will be reimbursed through a monthly prorata credit against rent beginning after Landlord's mortgage has been paid in full. 18. FIRE AND CASUALTY: (a) If the Building should be damaged or destroyed by fire, tornado, or other casualty, Tenant shall give immediate verbal and written notice thereof to Landlord. (b) If the Building should be totally destroyed by fire, tornado, or other casualty, or if it should be so damaged thereby that rebuilding or repairs cannot reasonably be completed within one hundred eighty (180) days after the date on which Landlord is notified by Tenant of such damage, at the option of either Landlord or Tenant, this Lease shall terminate, and the Rent shall be abated during the unexpired portion of this Lease effective upon the date of occurrence of such damage. (c) If the Building should be damaged by any peril that will be wholly compensated (subject to deductibles) by the insurance maintained by Landlord or if Landlord, in its sole discretion, so chooses notwithstanding a deficiency in such proceeds, and if rebuilding or repairs can reasonably be completed within one hundred eighty (180) days after the date on which Landlord is notified by Tenant of such damage, this Lease shall not terminate, and Landlord shall COMMERCIAL LEASE AGREEMENT - PAGE 16 LEASE 3 then proceed with reasonable diligence to rebuild and repair the Building to substantially the same condition in which it existed prior to such damage. Landlord shall not be required, however, to rebuild, repair, or replace Tenant's furniture, fixtures, Alterations, inventory or other personal property. If the Leased Premises are untenantable in whole or in part during restoration, the Rent payable hereunder during the period in which they are untenantable shall be reduced by the amount of business or rent interruption insurance proceeds actually received by Landlord. If Landlord should fail to complete such repairs and rebuilding within one hundred eighty (180) days after the date on which Landlord is notified by Tenant of such damage, Tenant may terminate this Lease by delivering written notice of termination to Landlord. Such termination shall be Tenant's exclusive remedy and all rights and obligations of the parties under the Lease shall then cease. Notwithstanding the foregoing provisions of this Paragraph 18(c), Tenant agrees that if the Leased Premises, the Building and/or Project are damaged by fire or other casualty caused by the fault or negligence of Tenant or Tenant's Representatives, Tenant shall have no option to terminate this Lease even if the damage cannot be repaired within one hundred eighty (180) days, and the Rent shall not be abated or reduced before or during the repair period. (d) Notwithstanding anything herein to the contrary, if the holder of any indebtedness secured by a mortgage or deed of trust covering the Building and/or Project requires that the insurance proceeds be applied to such indebtedness, then Landlord shall have the right to terminate this Lease by delivering written notice of termination to Tenant within fifteen (15) days after such requirement is imposed. All rights and obligations under this Lease shall then cease. If Landlord does not receive insurance proceeds sufficient for restoration (such as when its mortgagee does not allow the proceeds to be used for such purposes) and if restoration is economically reasonably feasible, Tenant will have the option of supplementing available proceeds to allow restoration, and Tenant's actual costs will be reimbursed through a monthly prorata credit against rent beginning after Landlord's mortgage has been paid in full. 19. CASUALTY INSURANCE: Landlord shall at all times during the term of this Lease maintain a policy or policies of business or rental interruption insurance and a policy or policies of insurance insuring the Building against eighty percent (80%) of full replacement cost for loss or damage by fire, explosion, and other customary hazards. Such policies will not insure any personal property (including, but not limited to any furniture, machinery, goods, or supplies) of Tenant or which Tenant may have in the Leased Premises or any fixtures installed by or paid for by Tenant upon or within the Leased Premises or any Alterations or other improvements which Tenant may construct or install on the Leased Premises or any signs identifying Tenant's business located on the exterior of the Building, insurance for all of which shall be Tenant's responsibility. 20. WAIVER OF SUBROGATION: To the extent that Landlord or Tenant receives casualty insurance proceeds, such recipient hereby waives and releases any and all rights, claims, demands and causes of action such recipient may have against the other on account of any loss or damage occasioned to such recipient or its businesses, real and personal properties, the Leased Premises, the Building, the Project, or its contents, arising from any risk or peril covered by any insurance policy carried by either party and for which such proceeds are actually received. Inasmuch as the above mutual waivers will preclude the assignment of any such claim by way of subrogation (or COMMERCIAL LEASE AGREEMENT - PAGE 17 LEASE 3 otherwise) to an insurance company (or any other person), each party hereto agrees immediately to give to its respective insurance companies written notice of the terms of such mutual waivers and to have their respective insurance policies properly endorsed, if necessary, to prevent the invalidation of such insurance coverages by reason of such waivers. This provision shall be cumulative of Paragraph 21 below. 21. HOLD HARMLESS: Landlord shall not be liable to Tenant, Tenant's Representatives, or any other person for any injury to person or damage to property on or about the Leased Premises or the Project caused by the negligence or misconduct of Tenant, or Tenant's Representatives, entering upon the Leased Premises or the Project. Tenant agrees to indemnify and hold Landlord harmless from any and all loss, attorney's fees, expenses, or claims arising out of any such damage, loss or injury. Tenant shall not be liable to Landlord, Landlord's employees, agents, invitees, licensees or visitors for any injury to person or damage to property on or about the Leased Premises or the Project caused by the negligence or misconduct of Landlord, its agents, employees, agents, invitees, licensees or visitors. Landlord agrees to indemnify and hold Tenant harmless from any and all loss, attorney's fees, expenses, or claims arising out of any such damage, loss or injury. 22. QUIET ENJOYMENT: Landlord warrants that it has full right to execute and to perform this Lease and to grant the estate demised herein and that Tenant, upon payment of the required Rent and performance of the covenants and agreements contained in this Lease, shall peaceably and quietly have, hold, and enjoy the Leased Premises during the full term of this Lease, including any extensions or renewals thereof. 23. LANDLORD'S RIGHT OF ENTRY: Landlord shall have the right to enter the Leased Premises for the following reasons: inspection, cleaning or making repairs, making such alterations or additions as Landlord may deem necessary or desirable; installation of utility lines servicing the Leased Premises or any other space in the Building; determining Tenant's use of the Leased Premises, or for determining if any event of default under this Lease has occurred. Landlord shall attempt to give twenty-four (24) hours verbal notice to Tenant prior to such entry during business hours, except in cases of emergency or when an event of default has occurred in which cases Landlord may enter the Leased Premises at any time and without prior notice. During the period that is six (6) months prior to the end of the Lease term, Landlord and Landlord's agents and representatives shall have the right to enter the Leased Premises at any reasonable time during business hours, without notice, for the purpose of showing the Leased Premises and shall have the right to erect on the Leased Premises a suitable sign indicating the Leased Premises are available for lease. 24. ASSIGNMENT OF LANDLORD'S INTEREST IN LEASE: Landlord shall have the right to transfer and assign, in whole or in part, its rights and obligations with respect to the Project, the Leased Premises, and this Lease, including Tenant's Security Deposit. Upon and after such transfer, Landlord shall be released from any further obligation under this Lease and Tenant agrees to look solely to Landlord's successor for the performance of such obligations. COMMERCIAL LEASE AGREEMENT - PAGE 18 LEASE 3 25. LANDLORD'S LIEN: In addition to any statutory lien for Rent in Landlord's favor, Landlord shall have, and Tenant hereby grants to Landlord, a continuing security interest for all Rent and other sums of money becoming due under this Lease from Tenant upon all goods, wares, equipment, fixtures, furniture, inventory, accounts, contract rights, and other personal property of Tenant situated on or arising from the Leased Premises. Such property shall not be removed without the consent of Landlord which consent may be withheld by Landlord until all of Tenant's duties and obligations have been performed in full. In the event of a default under this Lease, Landlord shall have, in addition to any other remedies provided in this Lease or by law, all rights and remedies under the Texas Uniform Commercial Code, including without limitation the right to sell the property described in this Paragraph at public or private sale upon five (5) days notice to Tenant. Tenant hereby agrees to execute such financing statements and other instruments necessary or desirable in Landlord's discretion to perfect the security interest hereby created. *Upon written request, Landlord will subordinate its lien created herein to any lender of Tenant. 26. DEFAULT BY TENANT: The following shall be events of default by Tenant under this Lease: (a) Tenant's failure to pay any installment of Rent or other payment required pursuant to this Lease and the failure is not cured within ten (10) days after it is due and after written notice to Tenant; (b) Tenant's abandonment or vacation of any part of the Leased Premises, whether or not Tenant is in default of the Rent payments due under this Lease; (c) Tenant's failure to comply with any term, provision or covenant of this Lease, other than the defaults listed in the other subparagraphs of this Paragraph 26, and the failure is not cured within ten (10) days after written notice thereof to Tenant; (d) Tenant's filing of a petition or adjudication as a debtor or bankrupt insolvent under the Bankruptcy Code or any similar law or statute of the United States or any state; or appointment of a receiver or trustee for all or substantially all of the assets of Tenant; or Tenant's transfer in fraud of creditors or assignment for the benefit of creditors of all or substantially all of Tenant's assets; (e) Tenant doing or permitting to be done any act which results in a lien being filed against the Leased Premises and the same is not removed within sixty (60) days after Landlord's notice thereof to Tenant. 27. REMEDIES FOR TENANT'S DEFAULT: Upon the occurrence of any event of default, Landlord shall have the option to pursue any one or more of the following remedies without any prior notice or demand: (a) Landlord may terminate this Lease, in which event Tenant shall immediately surrender the Leased Premises to Landlord, and if Tenant fails to do so, Landlord may, without prejudice to any other remedy which it may have, enter upon and take possession of the Leased Premises, and COMMERCIAL LEASE AGREEMENT - PAGE 19 LEASE 3 expel or remove Tenant and any other person who may be occupying all or any part of the Leased Premises. Landlord shall not be liable for prosecution or any claim for damages as a result of such actions. Tenant agrees to pay on demand the amount of all losses, costs, expenses, deficiencies, and damages, including, without limitation, reasonable reconfiguration expenses, rental concessions and other inducements to new tenants, advertising expenses and broker's commissions, which Landlord may incur or suffer by reason of Tenant's default or the termination of this Lease under this subparagraph, whether through inability to rent the Leased Premises on satisfactory terms or otherwise. Tenant acknowledges that its obligation to pay Base Rent and all additional Rent hereunder is not only compensation for use of the Leased Premises but also compensation for sums already expended and/or being expended by Landlord with respect to its obligations hereunder and with respect to the Leased Premises, and Tenant acknowledges that Tenant's default in timely payment of all sums due hereunder shall constitute significant financial loss to Landlord. Tenant further acknowledges that any failure to pay any sum due hereunder shall evidence Tenant's inability to meet its debts as they become due. In such event, in addition to Landlord's other remedies hereunder, Landlord shall be entitled to accelerate all Base Rental remaining unpaid hereunder, the entirety of which shall at the option of Landlord be immediately due and payable to the extent allowed by law. (b) Without termination of this Lease, Landlord may enter upon and take possession of the Leased Premises and expel or remove Tenant and any other person who may be occupying all or any part of the Leased Premises (without being liable for prosecution or any claim for damages therefor) and relet the Leased Premises on behalf of Tenant and receive directly the rent from the reletting. Tenant agrees to pay Landlord on demand any deficiency that may arise by reason of any reletting of the Leased Premises and to reimburse Landlord on demand for any losses, costs, and expenses, including without limitation, reconfiguration expenses*, rental concessions and other inducements to new tenants, advertising costs or broker's commissions, which Landlord may incur or suffer as a result of Tenant's default or in reletting the Leased Premises. *Reconfiguration expenses shall not exceed the unpaid amortized portion of Tenant's original tenant improvement costs. (c) Without terminating this Lease, Landlord may enter upon the Leased Premises (without being liable for prosecution or any claim for damages therefor) and do whatever Tenant is obligated to do under the terms of this Lease. Tenant agrees to reimburse Landlord on demand for any losses, costs and expenses which Landlord may incur in effecting compliance with Tenant's obligations under this Lease. Tenant further agrees that Landlord shall not be liable for any damages resulting to Tenant from effecting compliance with Tenant's obligations under this subparagraph. (d) With respect to Landlord's entry upon the Leased Premises under the provisions of subparagraphs (a), (b), and (c) above, no restriction of, or obligation imposed upon Landlord by, Texas Property Code Section 93.002 shall apply, such Section being superseded hereby. In particular, but without limitation, Landlord will have no duty or responsibility to Tenant to tender a key in the event of a change of locks, and Tenant will have no further right of possession except as otherwise expressly agreed by Landlord in writing. If Landlord changes the locks, Tenant shall be allowed to retrieve its business records from the Leased Premises. COMMERCIAL LEASE AGREEMENT - PAGE 20 LEASE 3 (e) Landlord may pursue any remedy provided at law or in equity. (f) Landlord shall have no duty to relet the Premises, and the failure of Landlord to do so shall not release or affect Tenant's liability for Rent and other charges due hereunder or for damages. (g) No re-entry or reletting of the Premises or any filing or service of an unlawful detainer action or similar action shall be construed as an election by Landlord to terminate this Lease unless a written notice of such intention is given by Landlord to Tenant. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect to terminate this Lease and Tenant's right to possession hereunder. (h) To the extent allowed by law, Tenant hereby waives the protections and rights provided by Texas Property Code Section 93.002. 28. TERMINATION OF OPTIONS: If there exist any options or special rights which Landlord may have granted Tenant under this Lease including, but not limited to, options or rights regarding extensions of the term, expansion of the Leased Premises, or acquisition of any other interest in the Leased Premises, the Building, or the Project, then all such options and rights are independent of the leasehold estate hereby granted to Tenant by Landlord. Landlord and Tenant agree and acknowledge that the negotiated consideration for any such options or special rights is Tenant's entry into this Lease and that no portion of any sums due and payable by Tenant to Landlord hereunder is attributable thereto. In addition to, and not in lieu of, the above remedies of Landlord for Tenant's default, any and all such options or special rights shall be automatically terminated upon the occurrence of the following events: (a) Tenant shall have failed to pay when due any installment of Rent or other sums payable under this Lease for any three (3) consecutive months during the Lease term or any renewal or extension thereof, or for any ten (10) months during the Lease term or any renewal or extension thereof, whether or not said defaults are cured by Tenant; or (b) Tenant shall have received two (2) or more notices of default under Paragraph 26(c) within any one calendar year with respect to any other covenant of this Lease, whether or not such default(s) is/are cured; or (c) Tenant shall have committed or suffered to exist any other event of default described under Paragraph 26 above, whether or not such default is cured by Tenant. 29. WAIVER OF DEFAULT OR REMEDY: Failure of Landlord to declare a default immediately upon its occurrence, or delay in taking any action in connection with an event of default, shall not be a waiver of the default. Landlord shall have the right to declare the default at any time and take such action as its lawful or authorized under this Lease. Pursuit of any one or more of the remedies set forth in Paragraphs 27 or 28 above shall not preclude pursuit of any one or COMMERCIAL LEASE AGREEMENT - PAGE 21 LEASE 3 more of the other remedies provided therein or elsewhere in this Lease or as provided by law, nor shall pursuit of any remedy be a forfeiture or waiver of any Rent or damages accruing to Landlord by reason of the violation of any of the terms of this Lease. Failure by Landlord to enforce one or more of its remedies upon an event of default shall not be construed as a waiver of the default or of any other violation or breach of any of the terms contained in this Lease. 30. CHOICE OF LAW; VENUE; ATTORNEY'S FEES: It is specifically stipulated that this Lease shall be interpreted and construed according to the laws of the State in which the Leased Premises are located, and any suit brought on this Lease shall be maintained in the county in which the Leased Premises are located. Further, the prevailing party in any such litigation between the parties shall be entitled to recover, as a part of its judgment, reasonable attorney's fees and costs and expenses incurred therein. 31. HOLDING OVER: Tenant will, at the termination of this Lease by lapse of time or otherwise, surrender immediate possession to Landlord. If Landlord agrees in writing that Tenant may hold over after the expiration or termination of this Lease and if the parties do not otherwise agree, the hold over tenancy shall be subject to termination by Landlord at any time upon not less than thirty (30) days advance written notice, or by Tenant at any time upon not less than thirty (30) days advance written notice. Further, all of the terms and provisions of this Lease shall be applicable during the hold over period, except that Tenant shall pay Landlord from time to time upon demand, as Base Rent for the period of any hold over, an amount equal to one and one-half times (1-1/2) the Base Rent in effect on the date of termination, computed on a daily basis for each day of the hold over period, plus all additional Rent and other sums due hereunder. If Tenant shall fail immediately to surrender possession of the Leased Premises to Landlord upon termination of this Lease, by lapse of time or otherwise, and Landlord has not agreed to such continued possession, as above provided, then, until Landlord can dispossess Tenant under the terms hereof or otherwise, Tenant shall pay Landlord from time to time upon demand, as Base Rent for the period of any such hold over, an amount equal to twice the Base Rent in effect on the date of termination, computed on a daily basis for each day of the hold over period, plus all additional Rent and other sums due hereunder. No holding over by Tenant, whether with or without consent of Landlord, shall operate to extend this Lease except as otherwise expressly agreed by the parties. The preceding provisions of this Paragraph shall not be construed as Landlord's consent for Tenant to hold over. 32. RIGHTS OF MORTGAGEE: Tenant accepts this Lease subject and subordinate to any recorded mortgage, deed of trust or other lien (a "Mortgage") presently existing or hereafter to exist with respect to the Leased Premises. Further, but without limiting the preceding sentence, Landlord is hereby irrevocably vested with full power and authority to subordinate and/or to evidence such subordination of Tenant's interest under this Lease to any Mortgage hereafter placed on the Leased Premises, and Tenant agrees upon demand to execute such additional instruments subordinating this Lease, and further defining the terms of such subordination, as well as the attornment discussed below, as Landlord or the holder of any such Mortgage, may require. Tenant agrees to provide to the holder of any such Mortgage, whose name and address have been provided to Tenant (a "Mortgagee"), a copy of each notice to Landlord which alleges any act, omission, or condition that COMMERCIAL LEASE AGREEMENT - PAGE 22 LEASE 3 might constitute a default by Landlord hereunder and Mortgagee, in its sole discretion, shall have all rights of Landlord hereunder to cure any such default. If the interests of Landlord under this Lease shall be transferred by reason of foreclosure or other proceedings for enforcement of any Mortgage on the Leased Premises, at the election of the transferee (sometimes called the "Purchaser") Tenant shall be bound to the Purchaser under the terms and conditions of this Lease for the balance of the remaining Lease term, including any extensions or renewals, with the same force and effect as if the Purchaser were Landlord under this Lease; provided, however, that such Purchaser shall not be liable or bound to Tenant (i) for any act or omission of any prior landlord, (ii) for any offsets or defenses which Tenant might have against any prior landlord, (iii) for or by any Rent which Tenant might have paid for more than the current month, (iv) by any amendment or modification of, or consensual termination agreement with respect to, the Lease made without the Mortgagee's consent, (v) for any Security Deposit given by Tenant to a prior landlord unless such deposit is actually received by such Purchaser, (vi) for any repairs or replacements required by this Lease arising prior to the date Purchaser takes possession of the Leased Premises, or (vii) for any moving, relocation or refurbishment allowance or any construction of or payment or allowance for tenant improvements to the Leased Premises or any part thereof for the benefit of Tenant except as set forth in this Lease. Tenant further agrees at the election of the Purchaser to attorn to the Purchaser, including the Mortgagee if it be the Purchaser, as its Landlord. Such attornment shall be effective without the execution of any further instruments upon the Purchaser's succeeding to the interest of Landlord under this Lease. The respective rights and obligations of Tenant and the Purchaser upon the attornment, to the extent of the then remaining balance of the term of this Lease and any extensions and renewals, shall be and are the same as those set forth in this Lease, but Tenant agrees upon demand to execute such additional instruments defining the terms of such attornment as Landlord or the Purchaser may require. Each such Mortgagee and each such Purchaser shall be a third-party beneficiary of the provisions of this Paragraph. *Upon written request by Tenant and provided Tenant is not in default of any terms, conditions, or provisions of the Lease, Landlord agrees to use best efforts to obtain a non-disturbance agreement from any lender or purchaser. 33. ESTOPPEL CERTIFICATES: Tenant agrees to furnish on the Commencement Date of this Lease and from time to time within ten (10) days of request by Landlord or Landlord's mortgagee, a statement certifying that the Tenant is in possession of the Leased Premises; the Leased Premises are acceptable; this Lease is in full force and effect; this Lease is unmodified; Tenant claims no present charge, lien, or claim of offset against Rent; the Rent is paid for the current month but is not paid and will not be paid for more than one month in advance (except estimated additional Rent under Paragraph 6); there is no existing default under this Lease; and such other matters as may be reasonably required by Landlord or Landlord's mortgagee. 34. SUCCESSORS: This Lease shall be binding upon and inure to the benefit of Landlord and Tenant and their respective heirs, personal representatives, successors and assigns. It is hereby covenanted and agreed that should Landlord's interest in the Leased Premises cease to exist for any reason during the term of the Lease, then notwithstanding the happening of such event, at the election of Landlord's successor herein, this Lease shall nevertheless remain unimpaired and in full force and effect and Tenant hereunder agrees to attorn to the then owner of the Leased Premises. COMMERCIAL LEASE AGREEMENT - PAGE 23 LEASE 3 35. REAL ESTATE COMMISSION: Tenant represents and warrants that is has dealt with no broker, agent, or other person other than Bradford Realty Services of Dallas, Inc., Mark Aston, in connection with this transaction, and that no other broker, agent, or other person brought about this transaction. Landlord and Tenant each agree to indemnify and hold the other harmless from and against any claims by any broker, agent, or other person claiming a commission or other form of compensation by virtue of having dealt with Tenant or Landlord respectively with regard to this transaction. The provisions of this Paragraph shall survive the termination of this Lease. 36. DEFAULT BY LANDLORD: Landlord shall not be in default, and Tenant shall have no right to any remedy at law or in equity, unless the act, omission, or condition allegedly giving rise to such default shall have continued uncured or unabated for a period of thirty (30) days following written notice to Landlord (with a copy to any Mortgagee as provided in Paragraph 32 above) or, if such cure or abatement cannot be accomplished within said 30-day period, then, so long as Landlord or Mortgagee has commenced such cure or abatement within such 30-day period and diligently pursues same, such period shall be extended a reasonable time to allow completion of the cure or abatement. 37. MECHANIC'S LIENS: Tenant shall have no authority, express or implied, to create or place any lien or encumbrance of any kind or nature whatsoever upon, or in any manner to bind, the interest of Landlord in the Leased Premises or the Project or to charge the Rent payable hereunder for any claim in favor of any person dealing with Tenant, including those who may furnish materials or perform labor for any construction or repairs. Each such claim shall affect, and each such lien shall attach to, if at all, only the leasehold interest granted to Tenant by this Lease. Tenant covenants and agrees that it will pay or cause to be paid all sums legally due and payable by it on account of any labor performed or materials furnished in connection with any work performed on the Leased Premises on which any lien is or can be validly and legally asserted against its leasehold interest in the Leased Premises or the improvements thereon. Tenant further agrees to save and hold Landlord harmless from any and all loss, cost, or expense based on or arising out of claims or liens asserted by parties by virtue of their dealings with Tenant and encumbering the leasehold estate or the right, title and interest of the Landlord in the Leased Premises or the Project. Under no circumstances shall Tenant be or hold itself out to be the agent or representative of Landlord with respect to any Alterations of the Leased Premises whether or not consented to or approved by Landlord hereunder. 38. HAZARDOUS WASTE: The term "Hazardous Substances," as used in this Lease shall mean petroleum and petroleum products and by-products, crude oil, pollutants, contaminants, toxic or hazardous wastes, or any other substances, the use of which is regulated, restricted, prohibited or penalized, or the removal or disposal of which is required, by any "Environmental Laws," which term shall mean any and all federal, state or local law, ordinance or other statute of a governmental or quasi-governmental authority relating to the pollution or protection of the environment. Tenant hereby agrees that (i) no activity will be conducted on the Leased Premises that will produce any Hazardous Substances; (ii) the Leased Premises will not be used in any manner not in compliance with local and federal laws for the storage of any Hazardous Substances; (iii) no portion of the COMMERCIAL LEASE AGREEMENT - PAGE 24 - -------------------------- LEASE 3 Leased Premises will be used as a landfill or a dump; (iv) Tenant will not install any underground tanks of any type; (v) Tenant will not allow any surface or subsurface conditions to exist or come into existence that constitute, or with the passage of time may constitute, a public or private nuisance; and (vi) Tenant will not permit any Hazardous Substances to be brought onto the Leased Premises, and if so brought thereon, then the same shall be stored and used in compliance with all local and federal laws regarding same. Landlord or Landlord's representative shall have the right but not the obligation to enter the Leased Premises for the purpose of ensuring compliance with all Environmental Laws. If Tenant in any manner contaminates the Leased Premises, then Tenant shall promptly and diligently institute proper and thorough clean-up procedures at Tenant's sole cost. Landlord hereby agrees to defend, indemnify and hold Tenant, its employees, partners, agents, contractors, officers and directors and their heirs, successors, and assigns harmless from any and all costs (including costs of litigation), reasonable attorneys' fees, expenses, liabilities, claims, damages or judgements arising or alleged to occur, and that result, or are alleged to result from the actual, or threatened discharge, dispersal, disposal, release or escape of Hazardous Substances or other wastes or pollutants (including, but not limited to asbestos, solid, liquid, gaseous or thermal irritants or contaminants, smoke, vapor, soot, fumes, acids, alkalis, chemicals, and water materials to be recycled, reconditioned or reclaimed), but only as the same are a direct result of any act or omission of Landlord or its agents, employees, contractors or subcontractors. Tenant hereby agrees to defend, indemnify and hold Landlord, its employees, agents, partners, contractors, officers and directors and their heirs, successors, and assigns harmless from any and all costs (including costs of litigation), reasonable attorneys' fees, expenses, liabilities, claims, damages or judgements arising or alleged to occur, and that result, or are alleged to result from the actual, or threatened discharge, dispersal, disposal, release or escape of Hazardous Substances or other wastes or pollutants (including, but not limited to asbestos, solid, liquid, gaseous or thermal irritants or contaminants, smoke, vapor, soot, fumes, acids, alkalis, chemicals, and water materials to be recycled, reconditioned or reclaimed), but only as the same are a direct result of any act or omission of Tenant or Tenant's Representatives. 39. ENTIRE AGREEMENT AND LIMITATION OF WARRANTIES: It is expressly agreed by Tenant, as a material consideration for the execution of this Lease, that this Lease is the entire agreement of the parties and that there are and were no verbal representations, warranties, understandings, stipulations, agreements, or promises pertaining to this Lease not incorporated in this Lease. Tenant expressly agrees that there are and shall be no implied warranties of merchantability, fitness, habitability, or of any other kind and that Tenant's acceptance of the Leased Premises shall be "as is". It is likewise agreed that this Lease may not be altered, waived, amended, or extended except by an instrument in writing signed by both Landlord and Tenant. Not in limitation upon the foregoing, Landlord agrees that to the extent assignable, all warranties, if any shall exist, from contractors or suppliers with respect to the improvements to the Leased Premises hereunder are hereby partially assigned to Tenant to the extent necessary to avail Tenant of the benefits thereof with respect to its leasehold estate and property located at the Leased Premises. 40. FINANCIAL STATEMENTS: From time to time Landlord may need to obtain financing or renew financing on the Project, or perform calculations for various reasons regarding the value of the Project. Tenant hereby agrees to provide to Landlord financial statements on its business when COMMERCIAL LEASE AGREEMENT - PAGE 25 - -------------------------- LEASE 3 requested, but not more than once annually, indicating the most current year end and quarterly financial status of the business. Landlord will not deliver such financial statement to any third party except in confidence and only as required by Landlord's lenders or in conjunction with appraisals of the Project. 41. FORCE MAJEURE: (a) Landlord shall not be required to perform any covenant or obligation of this Lease or be liable in damages to Tenant for that time period during which the performance or non-performance of the covenant or obligation is delayed, caused by, or prevented by Tenant or Tenant's Representatives or by an act of God or force majeure. (b) Except with respect to the payment of Rent or any other sum due hereunder, Tenant shall not be required to perform any covenant or obligation of this Lease or be liable in damages to Landlord for that time period during which the performance or non-performance of the covenant or obligation is delayed, caused by, or prevented by Landlord or Landlord's Representatives or by an act of God or force majeure. (c) An "act of God" or "force majeure" is defined for purposes of this Lease as strikes, lockouts, sit-downs, material or labor restrictions by any governmental authority, riots, floods, washouts, explosions, earthquakes, fire, storms, acts of the public enemy, wars, insurrections and any other similar cause not reasonably within the control of Landlord and which by the exercise of due diligence Landlord is unable, wholly or in part, to prevent or overcome. 42. MISCELLANEOUS: (a) Words of any gender used in this Lease shall be held and construed to include any other gender; and words in the singular number shall be held to include the plural, unless the context otherwise requires. (b) Each party agrees to furnish to the other, promptly upon demand, a corporate resolution, proof of due authorization by partners, or other appropriate documentation evidencing the due authorization and power of such party to enter into this Lease and the empowerment and authority of the individual signing below to bind his or her principal. (c) The captions inserted in this Lease are for convenience only and in no way define, limit, or otherwise describe the scope or intent of this Lease or any provision hereof, or in any way affect the interpretation of this Lease. (d) If any clause or provision of this Lease is illegal, invalid, or unenforceable under present or future laws effective during the term of this Lease, then and in that event, it is the intention of the parties hereto that the remainder of this Lease shall not be affected thereby; and it is also the intention of the parties to this Lease that in lieu of each clause or provision of this Lease that is illegal, invalid, or unenforceable there be added as a part of this Lease a clause as similar in COMMERCIAL LEASE AGREEMENT - PAGE 26 - -------------------------- LEASE 3 terms to such illegal, invalid, or unenforceable clause or provision as may be possible and be legal, valid, and enforceable. (e) Intentionally deleted (f) All references in this Lease to "the date hereof" or similar references shall be deemed to refer to the last date, in point of time, on which all parties hereto have executed this Lease. (g) In the event that Tenant shall fail to perform any duty or obligation hereunder, whether maintenance, repair or replacement of the Leased Premises, maintenance of insurance, or otherwise, then Landlord may, but shall in no event be obligated to, without notice of any kind, take such actions as Landlord deems necessary or appropriate to remedy such Tenant failure, and any sums expended by Landlord together with fair and just compensation for the time and effort of Landlord in such efforts shall be deemed additional Rent hereunder due and payable by Tenant on demand. (h) If Tenant shall fail to pay, when the same is due and payable, any Rent or any other sum due hereunder, such unpaid amount shall bear interest from the tenth (10th) day after the due date thereof to the date of remittance at the rate of the lesser of 18% per annum and the maximum rate allowed by law. (i) Landlord does not in any way or for any purpose become a partner with Tenant in the conduct of its business or otherwise, nor a member of a joint venture with Tenant. (j) Tenant shall not record this Lease without the prior written consent of Landlord. However, upon the request of either party hereto, the other party shall join in the execution of a memorandum or so-called "short form" of this Lease for the purposes of recordation. (k) Time is of the essence in the performance of all the covenants, conditions, and agreements contained in this Lease. (l) Any duty, obligation, or debt and any right or remedy arising hereunder and not otherwise consummated and/or extinguished by the express terms hereof at or as of the time of termination of this Lease, whether at the end of the term hereof or otherwise, shall survive such termination as continuing duties, obligations, and debts of the obligated party to the other or continuing rights and remedies of the benefited party against the other. (m) This Agreement may be executed in one or more counterparts, each of which counterpart shall for all purposes be deemed to be an original; but all such counterparts together shall constitute but one instrument. (n) Attached hereto, marked Exhibit "A" through Exhibit "__", are certain exhibits to this Lease all of which are hereby incorporated herein by reference. 43. NOTICE: COMMERCIAL LEASE AGREEMENT - PAGE 27 - -------------------------- LEASE 3 (a) All Rent and other payments required to be made by Tenant to Landlord shall be payable to Landlord at the address set forth below or any other address that Landlord may specify from time to time by written notice delivered to Tenant. (b) All payments, if any, required to be made by Landlord to Tenant shall be payable to Tenant at the address set forth below or at any other address that Tenant may specify from time to time by written notice delivered to Landlord. (c) Any notice or document required or permitted to be delivered by this Lease shall be deemed to be delivered (whether or not actually received) when deposited in the United States Mail, postage prepaid, certified mail return receipt requested, addressed to the parties at the respective addresses set forth below or such other address as hereinafter specified by notice given in accordance with this paragraph. 44. LIMITATION ON TENANT'S DAMAGES: Tenant agrees that any liability of Landlord under this Lease shall be limited solely to Landlord's interest in the Project, and no other assets of Landlord shall be subject to levy or execution. Executed by Landlord and Tenant as of the below dates. LANDLORD TENANT JACKSON-SHAW TECHNOLOGY ADAMS GOLF, INC., A TEXAS CORPORATION CENTER II, LTD. 4890 Alpha Road 2801 E. Plano Parkway Suite 100 Suite Dallas, Texas 75244 Plano, Texas 75074 By:Jackson-Shaw/Texas, Inc., By: Richard Murtland General Partner ---------------------------- By : J. Michael Berg Its: V.P. Operations ------------------ ---------------------- Its: Vice President ------------------ Date: April 6, 1998 Date: April 3, 1998 -------------------- ---------------------- EXHIBIT "A" LEGAL DESCRIPTION COMMERCIAL LEASE AGREEMENT - PAGE 28 - -------------------------- LEASE 3 EXHIBIT "B" TENANT IMPROVEMENTS Landlord agrees, at Landlord's expense, to install the tenant improvements per the attached plans and specifications provided such plans and specifications have been approved by Landlord and Tenant. Landlord's estimate of the cost of these improvements is $461,944.00 ($14.00 per square foot). Should the actual construction costs exceed $461,944.00, Tenant shall pay such excess to Landlord prior to the commencement of the construction. This construction allowance is based on the cost to duplicate Tenant's finishes and space allocation in its current Leased Premises. COMMERCIAL LEASE AGREEMENT - PAGE 29 - -------------------------- LEASE 3 ADDENDUM This Addendum is entered into this ______day of March, 1998, between JACKSON- SHAW TECHNOLOGY CENTER II, LTD., as Landlord, and ADAMS GOLF, INC., as Tenant. This Addendum is an integral part of that certain Commercial Lease Agreement dated as of the date hereof between Landlord and Tenant to which it is attached (the "Lease"). If the terms and provisions of this Addendum conflict with those of the Lease, those of this Addendum shall prevail. 1) RENEWAL OPTION: Tenant is granted the option to extend the term of this Lease for one (1) extended term of five (5) years, provided no event of default exists at the time of exercise of the option and no condition exists which with the giving of notice or the passage of time or both would constitute an event of default, and Tenant gives written notice of its exercise of the option at least one hundred eighty (180) days prior to the expiration of the original term. The extension term shall be upon the same terms and conditions as set forth herein, except Tenant shall have no further right of renewal after the extension term prescribed above, and the Base Rental will be equal to the then prevailing rate for comparable space for a comparable term. 2) PARKING: Tenant shall be entitled to the non-exclusive use of the 115 parking spaces directly adjacent to the Leased Premises as shown on the attached site plan. 3) EXPANSION: If during the term of this Lease agreement, Landlord leases to or sells to Tenant a space or building of a size larger than the present Leased Premises in any development owned by Landlord or any affiliate of Landlord, Tenant's then remaining obligations due under this Lease agreement shall be terminated upon the commencement date of the new lease or purchase agreement. Not withstanding the above-stated, Tenant shall remain obligated to pay for any Rents or other sums due Landlord as a result of Tenant's tenancy hereunder, and such obligation shall survive the termination of this Lease pursuant to this Paragraph 3. COMMERCIAL LEASE AGREEMENT - PAGE 30 - -------------------------- LEASE 3 EX-10.5 6 EXHIBIT 10.5 EXHIBIT 10.5 [ADAMS GOLF LETTERHEAD] April 13, 1998 Darl P. Hatfield 601 Liechty Court Heath, Texas 75087 Dear Darl: I enjoyed the opportunity to visit with you concerning our current search of a senior financial executive. Your past experience with KPMG Peat Markwich LLP has provided you with a strong compliment of financial and administrative skills which match very well with our current needs. Based on your educational background, interpersonal skills, professional experience and overall executive presence, I am pleased to offer you the position of Senior Vice President, Finance and Administration with Adams Golf. As the Sr. VP, Finance and Administration, you will report directly to me, the Chief Executive Officer, and will interact across all of our organizational levels. You will be responsible for the establishment and sustained maintenance of financial policies, procedures and practices as well as the financial objectives for Adams, which is experiencing rapid growth and profitability. Additionally, you have the responsibility for the development of financial plans, analysis, mergers and acquisition analysis and accounting for the Company. You will be responsible for establishing weekly meetings with the senior executive staff to ensure both financial and operational objectives are being achieved. As the Sr. VP, Finance and Administration you will be responsible for maintaining and enhancing the financial liquidity of the Company and negotiating substantial annual capital funding requirements. These responsibilities include all cash management, credit and collections, banking relationships and negotiations and presentations to the investment community. You will be an employee of Adams Golf Management Corporation, and your compensation will be as follows: Darl P. Hatfield April 13, 1998 Page 2 Base Monthly Salary: $12,500--paid by-monthly ($150,000 annual salary) Performance Bonus All bonus awards will be made pursuant to the Company's Bonus Plan. (Two tier bonus) First Tier: Up to 50% of your annual base salary, based on achieving corporate revenue goals--paid quarterly. Second Tier: Up to an annual 30% of your annual base salary, based on achieving department goals--paid quarterly. Equity Participation: 45,000 stock options (pre-split), 50% (22,500 shares) to be vested the sooner of one (1) year or upon the successful completion of a public offering, with the remaining 50% (22,500 shares) vested equally (7,500 shares per year) over the subsequent three year period. Such options will have a strike price of $5 per share. Change of Control: Should Adams Golf be acquired, merged or experience any change of corporate leadership that would lead to your termination without cause, your Adams Golf Stock Options will become fully vested. Additionally, you will receive one year (12 months) of base salary compensation. However, should you be terminated for cause there will be no continuation of salary or any other benefits. In the event of your termination for cause, all non-vested options will expire. Employee Benefits: You will participate in Adams Golf's group health and other benefits (i.e., vacation, etc.) in accordance with our group benefit programs. Reimbursement of Cost of It is our understanding that due to Rabbi Trust: independence requirements imposed by the SEC that if the Company completes a public offering that KPMG will be required to fund certain pension payments into a "Rabbi" trust. In conection with this requirement, if KPMG charges you an interest rate differential, Darl P. Hatfield April 13, 1998 Page 3 Adams Golf will pay such cost up to a maximum of $50,000 for your estimated remaining lifetime. Darl, we are very excited about you joining our team at Adams Golf effective May 1, 1998, and believe your skills and abilities will be key ingredients in our continued success. Please sign this letter below and return on of the enclosed originals to me. I look forward to working with you and achieving the potential we have together. Best Regards, /s/ B. H. Adams B. H. (Barney) Adams Chief Executive Officer Accepted by: /s/ Darl P. Hatfield Date: April 13, 1998 ------------------------------ ------------------- Darl P. Hatfield EX-11.1 7 EXHIBIT 11.1 ADAMS GOLF EXHIBIT 11-1 COMPUTATION OF INCOME (Loss) PER SHARE Years Ended December 31, Three Months Ended March 31, ---------------------------------------- ---------------------------- 1995 1996 1997 1997 1998 ---------------------------------------- ---------------------------- (Unaudited) BASIC INCOME (Loss) PER SHARE: Net Income (Loss) $ (242,669) $ 12,747 $(4,654,217) $ 45,295 $ 5,642,348 ---------------------------------------- ---------------------------- ---------------------------------------- ---------------------------- Weighted Average Shares Outstanding 4,423,146 11,234,794 12,519,392 11,873,234 17,662,189 ---------------------------------------- ---------------------------- ---------------------------------------- ---------------------------- Income (Loss) Per Share $ (0.05) 0.00 $ (0.37) $ 0.00 $ 0.32 ---------------------------------------- ---------------------------- ---------------------------------------- ---------------------------- DILUTED INCOME (Loss) PER SHARE: Net Income (Loss) $ (242,669) $ 12,747 $(4,654,217) $ 45,295 $ 5,642,348 ---------------------------------------- ---------------------------- ---------------------------------------- ---------------------------- Weighted Average Shares Outstanding 4,423,146 11,234,794 12,519,392 11,873,234 17,662,189 Effect of Dilutive Shares-Stock Options* -- -- -- -- 678,263 ---------------------------------------- ---------------------------- Total Weighted Average Dilutive Shares 4,423,146 11,234,794 12,519,392 11,873,234 18,340,452 ---------------------------------------- ---------------------------- Income (Loss) Per Share $ (0.05) $ 0.00 $ (0.37) $ 0.00 $ 0.31 ---------------------------------------- ---------------------------- ---------------------------------------- ----------------------------
* Stock options outstanding for the years ended December 31, 1995, 1996 and 1997 and the three months ended March 31, 1997 were not considered in the computation of net income (loss) per common share since their effect is immaterial or antidilutive. EX-23.2 8 EXHIBIT 23.2 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT The Board of Directors Adams Golf, Inc. and subsidiaries: We consent to the use of our report included herein and to the reference to our firm under the headings "Selected Consolidated Financial Information" and "Experts" in the prospectus. KPMG PEAT MARWICK LLP Dallas, Texas June 10, 1998 EX-23.3 9 EXHIBIT 23.3 EXHIBIT 23.3 CONSENT We hereby consent to the use of our name under the caption "Experts" in the Prospectus forming a part of the Registration Statement and do hereby confirm the statements therein made. /s/ Nicholas J. Aquilino Aquilino & Welsh Arlington, Virginia June 9, 1998 -----END PRIVACY-ENHANCED MESSAGE-----