<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10962
CALLAWAY GOLF COMPANY
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3797580
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2285 RUTHERFORD ROAD, CARLSBAD, CA 92008-8815
(619) 931-1771
(Address, including zip code and telephone number, including area code, of
principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_].
The number of shares outstanding of the issuer's of Common Stock, $.01 par
value, as of October 31, 1996 was 72,734,222.
1
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CALLAWAY GOLF COMPANY
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheet at September
30, 1996 and December 31, 1995 3
Consolidated Condensed Statement of Income for
the three months and nine months ended September 30,
1996 and 1995 4
Consolidated Condensed Statement of Cash Flows
for the nine months ended September 30, 1996 and 1995 5
Consolidated Condensed Statement of Shareholders'
Equity for the nine months ended September 30, 1996 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Part II. Other Information 16
</TABLE>
2
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED BALANCE SHEET
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
-------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 140,331 $ 59,157
Accounts receivable, net 84,864 73,906
Inventories, net 82,169 51,584
Deferred taxes 25,623 22,688
Other current assets 7,496 2,370
--------- ---------
Total current assets 340,483 209,705
Property and equipment, net 80,983 69,034
Other assets 23,189 11,236
--------- ---------
$ 444,655 $ 289,975
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable and accrued
expenses $ 30,979 $ 26,894
Accrued employee compensation and
benefits 34,410 10,680
Accrued warranty expense 27,289 23,769
Income taxes payable 12,894 1,491
--------- ---------
Total current liabilities 105,572 62,834
Long-term liabilities 3,144 2,207
Commitments (Note 10)
Shareholders' equity:
Preferred Stock, $.01 par value
3,000,000 shares authorized, none
issued and outstanding at
September 30, 1996 and December
31, 1995, respectively 0 0
Common Stock, $.01 par value
240,000,000 shares authorized,
72,616,022 and 70,912,129 issued
and outstanding at September 30,
1996 and December 31, 1995,
respectively 726 709
Paid-in capital 302,270 214,846
Unearned compensation (2,283) (2,420)
Retained earnings 216,089 131,712
Less: Grantor Stock Trust
(5,300,000 shares) at market
(Note 9) (180,863) (119,913)
--------- ---------
Total shareholders' equity 335,939 224,934
--------- ---------
$ 444,655 $ 289,975
========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
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CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED STATEMENT OF INCOME (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
----------------------------------- ------------------------------------
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
---------------- ---------------- --------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $194,545 100% $155,924 100% $539,685 100% $430,647 100%
Cost of goods sold 88,474 45% 75,130 48% 253,899 47% 209,541 49%
-------- -------- -------- --------
Gross profit 106,071 55% 80,794 52% 285,786 53% 221,106 51%
Selling expenses 21,728 11% 15,247 10% 61,727 11% 51,943 12%
General and administrative expenses 19,326 10% 15,896 10% 61,440 11% 43,790 10%
Research and development costs 5,245 3% 1,936 1% 11,653 2% 6,213 1%
-------- -------- -------- --------
Income from operations 59,772 31% 47,715 31% 150,966 28% 119,160 28%
Other income, net 1,619 1,361 3,952 3,008
-------- -------- -------- --------
Income before income taxes 61,391 32% 49,076 31% 154,918 29% 122,168 28%
Provision for income taxes 22,973 18,898 58,108 47,756
-------- -------- -------- --------
Net income $ 38,418 20% $ 30,178 19% $ 96,810 18% $ 74,412 17%
======== ======== ======== ========
Earnings per common share $ .54 $ .44 $ 1.38 $ 1.06
======== ======== ======== ========
Common equivalent shares 71,065 68,830 70,390 70,414
======== ======== ======== ========
Dividends paid per share $.06 $.05 $.18 $.15
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
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CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Nine months ended
-------------------------------
September 30, September 30,
1996 1995
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 96,810 $ 74,412
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation 9,377 7,721
(Gain) on disposal of fixed assets (11) 0
Non-cash compensation 3,576 1,424
Increase (decrease) in cash
resulting from changes in:
Accounts receivable, net (7,485) (42,301)
Inventories, net (28,794) 33,087
Deferred taxes (4,665) 2,062
Other assets (13,168) (584)
Accounts payable and accrued
expenses (1,524) 6,873
Accrued employee compensation and
benefits 23,162 12,694
Accrued warranty expense 3,520 4,488
Income taxes payable 11,017 3,534
Other liabilities 937 187
-------- --------
Net cash provided by operating
activities 92,752 103,597
-------- --------
Cash flows from investing activities:
Capital expenditures (21,156) (16,831)
Intangible assets (481) 0
Investment in subsidiary (610) 0
-------- --------
Net cash used in investing (22,247) (16,831)
activities -------- --------
Cash flows from financing activities:
Issuance of Common Stock 11,101 3,173
Tax benefit from exercise of stock
options 11,951 5,552
Dividends paid (12,303) (10,115)
Retirement of Common Stock 0 (59,039)
-------- --------
Net cash provided (used in)
financing activities 10,749 (60,429)
-------- --------
Effect of exchange rate changes on
cash (80) 5
-------- --------
Net increase in cash and cash
equivalents 81,174 26,342
Cash and cash equivalents at beginning
of period 59,157 54,356
-------- --------
Cash and cash equivalents at end of $140,331 $ 80,698
period ======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
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CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Common Shares Paid-in Unearned Retained
Stock Amount Capital Compensation Earnings GST Total
------ ------ --------- ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 70,912 $709 $214,846 ($2,420) $131,712 ($119,913) $224,934
Exercise of stock options 1,536 15 11,086 11,101
Tax benefit from exercise of
stock options 11,951 11,951
Compensatory stock options 1,165 137 1,302
Compensatory stock 168 2 2,272 2,274
Cash dividends (12,939) (12,939)
Dividends on shares held by GST 636 636
Equity adjustment from
foreign currency translation (130) (130)
Adjustment of GST shares to
market value 60,950 (60,950)
Net income 96,810 96,810
------ ---- -------- ------- -------- --------- --------
Balance, September 30, 1996 72,616 $726 $302,270 ($2,283) $216,089 ($180,863) $335,939
====== ==== ======== ======= ======== ========= ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
6
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CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Note 1
The accompanying consolidated condensed balance sheet as of September 30, 1996
and the consolidated condensed statements of income, cash flows and
shareholders' equity for the nine month periods ended September 30, 1996 and
1995 have been prepared by Callaway Golf Company (the Company) and have not been
audited. These financial statements, in the opinion of management, include all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation of the financial position, results of operations and cash flows for
all periods presented. These financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K filed for the year ended December 31, 1995. Interim
operating results are not necessarily indicative of operating results for the
full year. The consolidated condensed financial statements include the accounts
of the Company and its wholly owned subsidiaries, Callaway Golf Sales Company,
Callaway Golf Ball Company, Callaway Golf (UK) Limited and Callaway Golf
(Germany) GmbH. All significant intercompany transactions and balances have
been eliminated.
Note 2
The preparation of financial statements, in conformity with generally accepted
accounting principles, requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Note 3
Earnings per common share are calculated by dividing net income by the weighted
average number of common shares outstanding during the period increased by
dilutive common stock equivalents using the treasury stock method. Fully
diluted earnings per share was substantially the same as primary earnings per
share for the periods ended September 30, 1996 and 1995, respectively. Shares
owned by the Callaway Golf Company Grantor Stock Trust are included in the
number of weighted average shares outstanding using the treasury stock method
with assumed proceeds from exercise equal to the aggregate closing price of
those shares at the end of the reporting period. The dilutive effect of rights
to purchase preferred or common shares under the Callaway Golf Shareholder
Rights Plan have not been included in weighted average share amounts as the
conditions necessary to cause these rights to be exercised were not met.
Note 4
Inventories at September 30, 1996 and December 31, 1995 consisted of:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
(Unaudited)
(in thousands)
Inventories:
Raw materials $36,838 $23,980
Work-in-process 1,586 1,109
Finished goods 48,205 31,291
------- -------
86,629 56,380
Less reserve for obsolescence (4,460) (4,796)
------- -------
Net inventories $82,169 $51,584
======= =======
</TABLE>
7
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CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Note 5
The provision for income taxes is as
follows:
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
(Unaudited) (Unaudited)
(in thousands)
Current tax provision:
Federal $52,309 $35,676
State 9,317 8,444
Foreign 1,208 1,574
Deferred tax (benefit) expense:
Federal (4,234) 1,403
State (446) 802
Foreign (46) (143)
------- -------
Provisions for income taxes $58,108 $47,756
======= =======
</TABLE>
Deferred tax assets are comprised of
the following:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- -----------
(Unaudited)
(in thousands)
<S> <C> <C>
Reserves and allowances $18,508 $16,381
Depreciation and amortization 6,086 4,297
Deferred compensation 2,420 2,019
Effect of inventory overhead adjustment 1,629 1,414
Compensatory stock options and rights 1,554 1,346
State taxes, net 877 972
Other 625 605
------- -------
Net deferred tax assets $31,699 $27,034
======= =======
</TABLE>
8
<PAGE>
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Note 6
On August 20, 1996, the Company paid a quarterly dividend of $.06 per share to
shareholders of record on July 30, 1996. Additionally, on October 16, 1996, the
Company declared a quarterly dividend of $.06 per share payable November 19,
1996 to shareholders of record on October 29, 1996.
Note 7
During the nine months ended September 30, 1996, the Company entered into
forward foreign currency exchange rate contracts to hedge payments due on
intercompany transactions from its wholly owned foreign subsidiary. The effect
of this practice is to minimize variability in the Company's operating results
arising from foreign exchange rate movements. The Company does not engage in
foreign currency speculation. These foreign exchange contracts do not subject
the Company to risk due to exchange rate movements because gains and losses on
these contracts offset losses and gains on the intercompany transactions being
hedged, and the Company does not engage in hedging contracts which exceed the
amount of the intercompany transactions. At September 30, 1996, the Company had
approximately $5,219,000 of foreign exchange contracts outstanding. The
contracts mature between October and December of 1996. Realized and unrealized
losses on these contracts are recorded in net income. The net realized and
unrealized losses from foreign exchange contracts for the nine months ended
September 30, 1996 totaled approximately $48,000.
Note 8
At September 30, 1996, the Company held investments in U.S. Treasury bills with
maturities of three months or less in the aggregate amount of $124.2 million.
Management determines the appropriate classification of its U.S. Government and
other debt securities at the time of purchase and reevaluates such designation
as of each balance sheet date. The Company has included these securities, net
of amortization, in cash and cash equivalents and has designated them as "held-
to-maturity."
Note 9
The Company's Grantor Stock Trust (GST) holds 5,300,000 shares of Company stock
at September 30, 1996. During the term of the GST, shares in the GST may be
used to fund the Company's obligations with respect to one or more of the
Company's non-qualified or qualified employee benefit plans. Shares owned by
the GST are accounted for as a reduction to shareholders' equity until used in
connection with employee benefits. Each period the shares owned by the GST are
valued at the closing market price, with corresponding changes in the GST
balance reflected in capital in excess of par value. These shares have no
impact on the net amount of shareholders' equity.
In 1995, the Company implemented a plan to protect shareholders' rights in the
event of a proposed takeover of the Company. Under the plan, each share of the
Company's outstanding Common Stock carries one Right to Purchase Series "A"
Junior Participating Preferred Stock ("the Right"). The Right entitles the
holder, under certain circumstances, to purchase Common Stock of Callaway Golf
Company or of the acquiring company at a substantially discounted price ten days
after a person or group publicly announces it has acquired or has tendered an
offer for 15% or more of the Company's outstanding Common Stock. The Rights are
redeemable by the Company at $.01 per Right and expire in 2005.
9
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CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Note 10
In the normal course of business, the Company enters into certain long term
purchase commitments with various vendors. The Company has agreements with one
of its suppliers which require the Company to purchase, under certain
conditions, a minimum of 2,000,000 graphite shafts, or 25% of all graphite
shafts required in the manufacture of its golf clubs, whichever is greater,
through December 31, 1997, and 25% of all graphite shaft requirements from
January 1998 through May 1998.
In April 1996, the Company entered into a clubhead supply agreement with one of
its suppliers to purchase, under certain conditions, titanium club heads costing
up to a maximum of $97,500,000 for the remainder of 1996 through December 1997.
This agreement is cancelable by the Company at any time by giving six months
notice.
Effective June 1995, the Company agreed to form a joint venture with Sturm,
Ruger & Company, Inc. (Sturm, Ruger), its main supplier of Great Big Bertha(R)
titanium heads, to construct a foundry that would significantly increase Sturm,
Ruger's capacity to produce heads. Under the terms of the joint venture
agreements, the Company shall have a 50% equity interest in the new foundry and
is required to contribute up to $7,000,000 in capital contributions for
developing, designing, equipping and operating the new facility. The Company
accounts for its investment in the joint venture pursuant to the equity method.
As of September 30, 1996, the Company had made capital contributions of
$6,454,000 to the joint venture, which had not commenced operations. It was
contemplated in 1995 that the Company would purchase from Sturm, Ruger and the
joint venture at competitive prices a minimum quantity of 500,000 club heads per
year in 1996, 1997 and 1998. The Company has placed orders that meet or exceed
this minimum for 1996 and 1997. However, delays and cost overruns in the joint
venture project, improved production at Sturm, Ruger and the development of new
alternative sources for quality titanium castings at significantly lower prices
than those originally contemplated for the joint venture have prompted the
parties to enter into discussions about the continuing need for the joint
venture.
Note 11
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 123, "Accounting for Stock-Based Compensation." The Company
will continue to measure compensation expense for its stock-based employee
compensation plans using the intrinsic value method prescribed by APB Opinion
No. 25, "Accounting for Stock Issued to Employees." Adoption of SFAS 123 will
not have a material impact on the Company's financial position or results of
operations for the year ending December 31, 1996.
Note 12
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of." The new standard requires that the
Company investigate potential impairments of long-lived assets, certain
identifiable intangibles, and associated goodwill, on an exception basis, when
events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable. An impairment loss would be recognized when the sum of
the expected future net cash flows is less than the carrying amount of the
asset. Adoption of SFAS 121 did not have a material impact on the Company's
financial position or results of operations.
10
<PAGE>
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Note 13
On May 30, 1996, a lawsuit was filed against Callaway Golf Company and two of
its officers by a former officer of the Company. The lawsuit asserts claims for
breach of oral contract, fraud, negligent misrepresentation, declaratory
judgment, rescission, restitution and accounting, arising out of an alleged oral
promise in connection with the assignment of a patent for certain tooling
designs and alleges facts which may be asserted by the plaintiff as an
additional claim for wrongful termination of employment. The complaint seeks
damages of $290,000,000, a royalty of $27,000,000 or compensatory damages for
breach of alleged oral contract, as well as unspecified punitive damages and
costs. The Company is vigorously defending the suit, and believes based on the
information available to it at this time that it has good and valid defenses to
the claims and that the suit will not have a material adverse effect upon the
Company's financial position, results of operations or cash flows.
Note 14
On July 1, 1996 the Company acquired a majority ownership interest in its German
distributor, Golf Trading GmbH. This acquisition was made through the formation
of Callaway Golf (Germany) GmbH (a wholly owned subsidiary).
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
When used in this discussion, the words "believes," "anticipated" and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. Readers are cautioned
not to place undue reliance on these forward-looking statements which speak only
as of the date hereof. The Company undertakes no obligation to republish
revised forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events. Readers are
also urged to carefully review and consider the various disclosures made by the
Company which attempt to advise interested parties of the factors which affect
the Company's business, including the disclosures made under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Factors Affecting the Golf Club Industry and Callaway
Golf" in this Report, as well as the Company's other periodic reports on Forms
10-K, 10-Q and 8-K filed with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
THREE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995:
Net sales increased 25% to $194.5 million for the three months ended September
30, 1996 compared to $155.9 million for the same period in the prior year. This
increase was primarily attributable to increased sales of Great Big Bertha(R)
Metal Woods, including the Great Big Bertha(R) Fairway Woods which were
introduced in January 1996, combined with increased sales of Big Bertha(R)
Irons. These sales increases were offset by a decrease in net sales of Big
Bertha(R) War Bird(R) Metal Woods.
For the three months ended September 30, 1996, gross profit increased to
$106.1 million from $80.8 million for the same period in the prior year and
gross margin increased to 55% from 52%. The increase in gross profit was
primarily the result of decreases in component costs and manufacturing labor and
overhead costs related to increased production volume and improved labor
efficiencies.
Selling expenses increased to $21.7 million in the third quarter of 1996
compared to $15.2 million in the third quarter of 1995. As a percentage of net
sales, selling expenses in the third quarter increased to 11% from 10% for the
same period in 1995. The $6.5 million increase was primarily a result of
increased sales representatives' salaries and commission expense in the quarter
due to a new compensation package under which such expenses are incurred more
evenly throughout the year, combined with increases in TV advertising and tour
endorsement expenses.
General and administrative expenses for the three months ended September 30,
1996 increased to $19.3 million from the $15.9 million incurred during the third
quarter of 1995. As a percentage of net sales, general and administrative
expenses remained constant at 10% for the third quarter of 1996 and 1995. The
$3.4 million increase in general and administrative expenses was primarily
attributable to increased employee compensation and benefits, costs associated
with the Company's business development initiatives and facility expenses.
These increases were partially offset by a decrease in charitable contributions.
Research and development expenses were $5.2 million for the three months ended
September 30, 1996 as compared to $1.9 million for the same period in the prior
year. The increase in research and development costs was attributable to
increased personnel and operating expenses associated with the Company's golf
club testing facility and shaft and tooling departments.
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995:
For the nine months ended September 30, 1996, net sales increased 25% to
$539.7 million compared to $430.6 million for the same period in the prior year.
This increase was primarily attributable to increased sales of Great Big
Bertha(R) Metal Woods, including the Great Big Bertha(R) Fairway Woods.
12
<PAGE>
For the nine months ended September 30, 1996, gross profit increased to $285.8
million from $221.1 million for the same period in the prior year and gross
margin increased to 53% from 51%. The increase in gross margin was primarily
the result of decreases in component costs and manufacturing labor and overhead
costs related to increased production volume and improved labor efficiencies.
Selling expenses increased to $61.7 million from $51.9 million for the nine
months ended September 30, 1996 compared to the same period in the prior year.
As a percentage of net sales, selling expenses in the first nine months of 1996
decreased to 11% from 12% for the same period in 1995. The decrease as a
percentage of net sales was primarily attributable to costs being spread over a
larger sales volume. The $9.8 million increase was primarily a result of
compensation, tour endorsement and TV advertising expenses.
General and administrative expenses for the nine months ended September 30,
1996 increased to $61.4 million from the $43.8 million incurred during the nine
months ended September 30, 1995. The $17.6 million increase was primarily
attributable to increased employee compensation and benefits, costs associated
with the Company's business development initiatives and increases in computer
support, legal, depreciation and other general and administrative expenses.
Research and development expenses were $11.7 million for the nine months ended
September 30, 1996 as compared to $6.2 million for the same period in the prior
year. The increase in research and development costs is attributable to
increased personnel and operating expenses associated with the Company's golf
club testing facility and shaft and tooling departments.
CERTAIN FACTORS AFFECTING CALLAWAY GOLF COMPANY
The Company believes that the growth rate in the golf equipment industry in
the United States has been modest for the past several years, and this trend is
likely to continue through 1996. Sales of all golf clubs in Japan, the world's
second largest consumer of golf clubs next to the United States, appeared to be
stabilizing during early 1996, but recent trends indicate the market may be
declining. Although demand for the Company's products has been generally strong
during the three and nine months ended September 30, 1996, no assurances can be
given that the demand for the Company's existing products or the introduction of
new products will continue to permit the Company to experience its historical
growth or maintain its historical profit margin. Additionally, given the
Company's current size and market position, it is possible that further market
penetration will prove more difficult.
In the golf equipment industry, sales to retailers are generally seasonal due
to lower demand in the retail market in the cold weather months covered by the
fourth and first quarters. Although the Company's business generally follows
this seasonal trend, the success of the Company over the past several years has
tended to mitigate the impact of seasonality on the Company's operating results.
Beginning in the current year, the Company's operating results have been more
significantly affected by seasonal buying trends.
The market in which the Company does business is highly competitive, and is
served by a number of well established and well financed companies with
recognized brand names. Several companies introduced new products in 1996 (e.g.
Ping "ISI" irons, Taylor Made "Burner Bubble Shaft" irons, Cobra "Ti" titanium
metal woods, "King Cobra II" irons and Armour "Ti 100" irons) that have
generated increased market competition. Others increased their marketing
activities with respect to existing products in 1996. While the Company
believes that its products and its marketing efforts continue to be competitive,
there can be no assurance that these actions by others will not negatively
impact the Company's future sales. Additionally, the golf club industry, in
general, has been characterized by widespread imitation of popular club designs.
A manufacturer's ability to compete is in part dependent upon its ability to
satisfy various subjective requirements of golfers, including the golf club's
look and "feel," and the level of acceptance that the golf club has among
professional and other golfers. The subjective preferences of golf club
purchasers may also be subject to rapid and unanticipated changes. There can be
no assurance as to how long the Company's golf clubs will maintain market
acceptance.
13
<PAGE>
The Company began shipping significant quantities of its Great Big Bertha(R)
Drivers in March 1995, and began shipping Great Big Bertha(R) Fairway Woods in
March of 1996. This product line is an important part of the Company's
business. Great Big Bertha(R) Metal Woods have a titanium club head and are
priced substantially higher than the Company's stainless steel product line.
The Company currently has three sources for its titanium club heads, but is
currently receiving the vast majority of its club heads from two vendors. While
the Company has been successful thus far in acquiring adequate quantities of
high quality titanium castings at acceptable prices, there is no guarantee that
its current suppliers will continue to meet those needs.
The Company believes that the introduction of new, innovative golf equipment
will be important to its future success. New models and basic design changes
are frequently introduced into the golf equipment market but are often met with
consumer rejection. Although the Company has achieved certain successes in the
introduction of its golf clubs, no assurances can be given that the Company will
be able to continue to design and manufacture golf clubs that achieve market
acceptance. In addition, prior successful designs may be rendered obsolete
within a relatively short period of time as new products are introduced into the
market. The design of new golf equipment is also greatly influenced by rules
and interpretations of the United States Golf Association ("USGA") and the Royal
and Ancient Golf Club of St. Andrews ("R&A"). The golf equipment standards
established by the USGA and R&A apply to competitive events sanctioned by each
organization and are generally followed in competitions within their respective
jurisdictions. Accordingly, it has become critical for designers of new clubs to
assure compliance with USGA and R&A standards. While the Company believes that
all of its clubs comply with USGA and R&A standards, no assurance can be given
that any new products will receive USGA and R&A approval or that existing USGA
and R&A standards will not be altered in ways that adversely affect the sales of
the Company's products.
In June 1996, the Company formed Callaway Golf Ball Company ("CGB"), a wholly
owned subsidiary of Callaway Golf Company for the purpose of designing,
manufacturing and selling golf balls. The Company has previously licensed the
manufacture and distribution of a golf ball product in Japan and Korea. The
Company also distributed a golf ball under the trademark "Bobby Jones". Both
previous golf ball ventures were not commercially successful. At this time, it
has not been determined whether CGB will enter the golf ball business by
developing a new product, by acquiring an existing golf ball manufacturer, by
participating in a joint venture with another company, or by a combination of
these factors. This business is in early stages of development, the impact of
this new business on the Company's future cash flow and income from operations
is uncertain. The Company believes that factors affecting the golf equipment
industry described above, including growth rate in the golf equipment industry,
seasonality and new product introduction will also apply to the golf ball
business. There can be no assurance if and when a successful golf ball product
will be developed or that the Company's investment will ultimately be realized.
In addition, the golf ball business is highly competitive with a number of well
established and well financed competitors including Titleist, Spalding, Maxfli,
Bridgestone and others. These competitors have established market share in the
golf ball business which will need to be penetrated in order for the Company's
golf ball business to be successful.
The Company is dependent on a limited number of suppliers for its club heads
and shafts. In addition, some of the Company's products require specifically
developed techniques and processes which make it difficult to identify and
utilize alternative suppliers quickly. Consequently, if any significant delay
or disruption in the supply of these component parts occurs, it may have a
material adverse effect on the Company's business.
The Company has an active program of enforcing its proprietary rights against
companies and individuals who market or manufacture counterfeits and "knock off"
products, and aggressively asserts its rights against infringers of it patents,
trademarks, and trade dress. However, there is no assurance that these efforts
will reduce the level of acceptance obtained by these infringers. Additionally,
there can be no assurance that other golf club manufacturers will not be able to
produce successful golf clubs which imitate the Company's designs without
infringing any of the Company's patents, trademarks, or trade dress.
During 1995, there was an increase in unauthorized distribution of the
Company's products (i.e. product sold by the Company to authorized distributors
being ultimately sold at retail by unauthorized distributors). The
14
<PAGE>
Company is making further efforts to reduce this unauthorized distribution of
its products in both domestic and international markets. While efforts to reduce
unauthorized distribution have had only limited success to date, these efforts
could result in an increase in sales returns over historical levels, and/or a
potential decrease in sales to those customers who are selling Callaway(R)
products to unauthorized distributors.
An increasing number of the Company's competitors have, like the Company
itself, sought to obtain patent, trademark or other protection of their
proprietary rights and designs. From time to time others have or may contact
the Company to claim that they have proprietary rights which have been infringed
by the Company and/or its products. The Company evaluates any such claims and,
where appropriate, has obtained or sought to obtain licenses or other business
arrangements. To date, there have been no interruptions in the Company's
business as the result of any claims of infringement. However, no assurance can
be given that the Company will not be adversely affected by the assertion of
intellectual property rights belonging to others. This effect could include
alteration of existing products, withdrawal of existing products and delayed
introduction of new products. Such effect may have a material adverse impact on
the Company.
During 1995, the Company established a department to evaluate opportunities in
and outside of the golf equipment industry. Such ventures will present new
challenges for the Company and there can be no assurance that this activity will
be successful. One of the opportunities identified by this department relates
to the Company's acquisition of selected foreign distributors. The Company's
management believes that controlling the distribution of its products in these
areas will be a key element in the future growth and success of the Company.
Executing this business strategy has and will result in additional investments
in inventory, accounts receivable, corporate infrastructure and facilities.
There can be no assurance that the acquisition of the Company's foreign
distributors will achieve these stated goals.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, cash and cash equivalents increased to $140.3 million
from $59.2 million at December 31, 1995, due to $92.7 million provided by
operating activities and $10.7 million provided by financing activities. These
increases were offset by $22.2 million used in investing activities associated
primarily with capital expenditures. The Company has available a $50.0 million
line of credit and anticipates that its existing capital resources and cash flow
generated from future operations will enable it to maintain its current level of
operations and its planned operations for the foreseeable future.
The Company's net accounts receivable increased to $84.9 million at September
30, 1996 from $73.9 million at December 31, 1995 and $72.3 million at September
30, 1995, primarily as a result of the increase in net sales. The 1996 third
quarter sales included certain sales with extended payment terms to qualified
customers. These terms are comparable to those traditionally offered by our
competitors. Net inventory was $82.2 million at September 30, 1996 compared to
$51.6 million at December 31, 1995 and $41.1 million at September 30, 1995. The
increase in inventory levels at September 30, 1996 is consistent with historical
seasonality trends. Component costs related to the Great Big Bertha(R) product
line which are higher in relation to other product lines also contributed to the
increase in inventory.
15
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings:
The Company, incident to its business activities, is the plaintiff in
several legal proceedings, both domestically and abroad, in various stages of
development. In conjunction with the Company's program of enforcing its
proprietary rights, the Company has initiated a number of actions against
alleged infringers under the Lanham Act, 15 USCA Sections 1051-1127, the U.S.
Patent Act, 35 USCA Sections 1-376, and other pertinent laws. Some defendants
in these actions have, among other things, contested the validity and/or the
enforceability of some of the Company's patents and/or trademarks. Others have
asserted counterclaims against the Company. The Company believes that the
outcome of these matters individually and in the aggregate will not have a
material adverse effect upon the financial position or results of operations of
the Company. It is possible, however, that in the future one or more defenses
or claims asserted by defendants in those actions may succeed, resulting in the
loss of all or part of the rights under one or more patents, loss of a
trademark, a monetary award against the Company, or some other loss to the
Company. One or more of these results could adversely affect the Company's
overall ability to protect its product designs and ultimately limit its future
success in the market place.
In addition, the Company from time to time receives information
claiming that products sold by the Company infringe or may infringe patent or
other intellectual property rights of third parties. To date, the Company has
not experienced any material expense or disruption associated with any such
potential infringement matters. It is possible, however, that in the future one
or more claims of potential infringement could lead to litigation, the need to
obtain additional licenses, the need to alter a product to avoid infringement,
or some other action or loss by the Company.
On May 30, 1996, a lawsuit was filed against Callaway Golf Company
and two of its officers by a former officer of the Company, captioned Glenn
-----
Schmidt v. Callaway Golf Company, et al., Case No. N 71548, in the Superior
- ----------------------------------------
Court for the State of California, County of San Diego. On July 10, 1996, the
defendants removed the case to the United States District Court for the Southern
District of California, Case No. 961235 B AJB. On September 12, 1996, the
District Court entered an order returning the case to state court, holding that
the plaintiff's claims arose under state law. The lawsuit asserts claims for
breach of oral contract, fraud, negligent misrepresentation, declaratory
judgment, rescission, restitution and accounting, arising out of an alleged oral
promise in connection with the assignment of a patent for certain tooling
designs and alleges facts which may be asserted by the plaintiff as an
additional claim for wrongful termination of employment. The complaint seeks
damages of $290,000,000, a royalty of $27,000,000, or compensatory damages for
breach of the alleged oral contract, as well as unspecified punitive damages and
costs. The Company believes based on the information available to it at this
time that it has good and valid defenses to the claims, is vigorously defending
the suit, and has asserted its own counterclaims for breach of fiduciary duty,
fraud and negligent misrepresentation. Formal discovery has commenced in
preparation for trial.
The Company and its subsidiaries, incident to their business
activities, from time to time are parties to a number of legal proceedings in
various stages of development, including but not limited to those described
above. The Company believes that the majority of these proceedings involve
matters as to which liability, if any, will be adequately covered by insurance.
With respect to litigation outside the scope of applicable insurance coverage
and to the extent insured claims may exceed liability limits, it is the opinion
of the management of the Company that these matters individually and in the
aggregate will not have a material adverse effect upon the Company's financial
position, results of operations or cash flows.
Item 2. Changes in Securities:
None
Item 3. Defaults Upon Senior Securities:
None
16
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders:
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K:
a. Exhibits:
<TABLE>
<C> <S>
10.9.2 Amendment No. 1 to Form of Tax Indemnification
Agreement
10.16.2 Indemnification Agreement by and between the
Company and Aulana L. Peters dated as of July
18, 1996
10.18 Employment agreement by and between the
Company and Elmer L. Ward Jr. dated July 1,
1996
11.1 Statement re: Computation of Earnings Per
Common Share
27 Financial Data Schedule
</TABLE>
b. Reports on Form 8-K:
None
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CALLAWAY GOLF COMPANY
Date: November 13, 1996 /s/ DONALD H. DYE
------------------------
DONALD H. DYE
President
Chief Executive Officer
/s/ DAVID A. RANE
------------------------
DAVID A. RANE
Executive Vice President
Chief Financial Officer
18
<PAGE>
Exhibit 10.9.2
AMENDMENT NO. 1 TO
TAX INDEMNIFICATION AGREEMENTS
This Amendment No. 1 to Tax Indemnification Agreements (this "First
Amendment") is made effective as of January 1, 1996 by and between Callaway Golf
Company, a California corporation (the "Company") and those certain employees of
the Company listed on Schedule A hereto (the "Employees").
WHEREAS the Company and the Employees are signatories and parties to
certain Tax Indemnification Agreements effective as of September 1, 1995 (the
"Tax Agreements"); and
WHEREAS the Company desires to amend the Tax Agreements in a manner
that is fully consistent with the original agreements, and clarifies those
agreements to make clear that the benefits of the Tax Agreements are to be
realized to the fullest extent appropriate; and
WHEREAS such an amendment to the Tax Agreements would not work
contrary to the contractual rights, benefits or obligations of the Employees
under the Tax Agreements, and therefore can be implemented by the Company
unilaterally;
NOW THEREFORE it is agreed as follows:
1. Each and every one of the Tax Agreements is hereby deemed to be
amended, effective January 1, 1996, as follows:
(a) Exhibit A to said Tax Agreements is hereby stricken and deleted,
and otherwise rendered null and void as of the effective date of this First
Amendment; and
(b) A new paragraph 7 to said Tax Agreements is hereby added to each
and every one of the Tax Agreements, and made a part thereof effective as of the
effective date of this First Amendment, the contents of which are as follows:
7. It is intended that this Agreement shall apply in any and all
situations where Recipient might be subject to Sections 280G and/or 4999 of
the Code or similar successor provisions or similar state or local tax
laws, and therefore, for purposes of this Agreement, Change of Control
shall mean a change in the ownership or effective control of the Company,
or in the ownership of a substantial portion of the Company's assets, as
defined under the Code and/or such other tax laws.
<PAGE>
2. Except as set forth in this First Amendment, the Tax Agreements
shall continue as in effect prior to the effectiveness hereof.
3. To the extent this First Amendment is held by a court of law or
any other properly authorized tribunal to be ineffective or invalid, the Tax
Agreements so affected shall be deemed to have not been amended and shall remain
in force and effect as they were prior to the attempted amendment.
IN WITNESS WHEREOF, the Company has caused this First Amendment to be
executed unilaterally on behalf of the Company effective as of the date set
forth above.
COMPANY
Callaway Golf Company,
a California corporation
By: /s/DONALD H. DYE
---------------------
Name: Donald H. Dye
---------------------
Title: President and COO
---------------------
<PAGE>
SCHEDULE A
AMENDMENT NO. 1 TO TAX INDEMNIFICATION AGREEMENT
Ely Callaway
Donald H. Dye
Bruce Parker
John Duffy
Richard C. Helmstetter
Kim D. Carpenter
Ann Barthelmess
David Biddle
Victor Dennis
Dean Ellis
Michael Galeski
Joel Hamilton
Chris Holiday
Marv Hosenfeld
Scott Howard
Bret Larsen
Steven McCracken
Richard Merk
Elizabeth O'Mea
Stuart Orr
David Rane
Kenneth Wolf
<PAGE>
Exhibit 10.16.2
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT is made as of this 18th day of July,
1996, by and between Callaway Golf Company, a California corporation (the
"Company"), and Aulana L. Peters ("Indemnitee"), a director of the Company.
WHEREAS, the Company and Indemnitee recognize the increasing
difficulty in obtaining liability insurance covering directors, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance;
WHEREAS, although the Company currently has directors' liability
insurance, the coverage of such insurance is such that many claims which may be
brought against Indemnitee may not be covered, or may not be fully covered, and
the Company may be unable to maintain such insurance;
WHEREAS, the Company and the Indemnitee further recognize the
substantial increase in corporate litigation subjecting directors to expensive
litigation risks at the same time that liability insurance has been severely
limited;
WHEREAS, the current protection available may not be adequate given
the present circumstances, and Indemnitee may not be willing to serve as a
director without adequate protection;
WHEREAS, the Company desires to attract and retain the services of
highly qualified individuals, such as Indemnitee, to serve as directors of the
Company and to indemnify its directors so as to provide them with the maximum
protection permitted by law;
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. DEFINITIONS. The following terms, as used herein, have the following
-----------
meaning:
1.1 Affiliate. "Affiliate" means, (i) with respect to any
---------
corporation, any officer, director or 10% or more shareholder of such
corporation, or (ii) with respect to any individual, any partner or immediate
family member of such individual or the estate of such individual, or (iii) with
respect to any partnership, trust or joint venture, any partner, co-venturer or
trustee of such partnership, trust of joint venture, or any beneficiary or owner
having 10% or more interest in the equity, property or profits of such
partnership, trust or joint venture, or (iv) with respect to any Person, any
other Person which, directly or indirectly, controls, is controlled by, or is
under common control with such Person or any Affiliate of such Person.
1
<PAGE>
1.2 Agreement. "Agreement" shall mean this Indemnification
---------
Agreement, as the same may be amended from time to time hereafter.
1.3 Code. "Code" shall mean the California Corporations Code, as
----
amended.
1.4 Person. "Person" shall mean any individual, partnership,
------
corporation, joint venture, trust, estate, or other entity.
1.5 Subsidiary. "Subsidiary" shall mean any corporation of which the
----------
Company owns, directly or indirectly, through one or more subsidiaries,
securities having more than 50% of the voting power of such corporation.
2. INDEMNIFICATION
---------------
2.1 Third Party Proceedings. The Company shall indemnify Indemnitee
-----------------------
if Indemnitee is or was a party or witness or other participant in, or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than action by or in the right of the Company) by reason of the fact that
Indemnitee is or was a director of the Company or any subsidiary of the Company,
by reason of any action or inaction on the part of Indemnitee while a director
of the Company or any Subsidiary, and/or by reason of the fact that Indemnitee
is or was serving at the request of the Company as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against all expense, liability and loss (including attorneys' fees),
judgments, fines and amounts paid in settlement (if such settlement is approved
in advance by the Company, which approval shall not be unreasonably withheld)
actually and reasonably incurred by Indemnitee in connection with such action,
suit or proceeding if Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in the best interests of the Company, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
Indemnitee's conduct was unlawful and provided, further, that the Company has
determined that such indemnification is otherwise permitted by applicable law.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent
shall not, of itself, create a presumption that Indemnitee did not act in good
faith and in a manner which Indemnitee reasonably believed to be in the best
interests of the Company or that Indemnitee had reasonable cause to believe that
Indemnitee's conduct was unlawful.
2.2 Proceedings by or in the Right of the Company. The Company shall
---------------------------------------------
indemnify Indemnitee if Indemnitee was or is a party or a witness or other
participant in or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Company or any Subsidiary to
procure a judgment in its favor by reason of the fact that Indemnitee is or was
a director of the Company or any Subsidiary, by reason of any action or inaction
on the part of Indemnitee while a director of the Company or a Subsidiary or by
reason
2
<PAGE>
of the fact that Indemnitee is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against all expense, liability and loss
(including attorneys' fees) and amounts paid in settlement (if such settlement
is court-approved) actually and reasonably incurred by Indemnitee in connection
with the defense or settlement of such action or suit if Indemnitee acted in
good faith and in a manner Indemnitee reasonably believed to be in the best
interests of the Company and its shareholders and provided, further, that the
Company has determined that such indemnification is otherwise permitted by
applicable law. No indemnification shall be made in respect of any claim, issue
or matter as to which Indemnitee shall have been adjudged to be liable to the
Company in the performance of Indemnitee's duties to the Company and its
shareholders, unless and only to the extent that the court in which such
proceeding is or was pending shall determine upon application that, in view of
all the circumstances of the case, Indemnitee is fairly and reasonably entitled
to indemnity for expenses and then only to the extent that the court shall
determine.
2.3 Mandatory Payment of Expenses. To the extent that Indemnitee has
-----------------------------
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Section 2.1 or 2.2 or the defense of any claim, issue
or matter therein, Indemnitee shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by Indemnitee in connection
therewith.
2.4 Enforcing the Agreement. If Indemnitee properly makes a claim
-----------------------
for indemnification or an advance of expenses which is payable pursuant to the
terms of this Agreement, and that claim is not paid by the Company, or on its
behalf, within ninety days after a written claim has been received by the
Company, the Indemnitee may at any time thereafter bring suit against the
Company to recover the unpaid amount of the claim and if successful in whole or
in part, the Indemnitee shall be entitled to be paid also all expenses actually
and reasonably incurred in connection with prosecuting such claim.
2.5 Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of the Indemnitee, who shall execute all papers required and shall
do everything that may be necessary to secure such rights, including the
execution of such documents necessary to enable the Company effectively to bring
suit to enforce such rights.
3. EXPENSES; INDEMNIFICATION PROCEDURE
-----------------------------------
3.1 Advancement of Expenses. The Company shall advance all expenses
-----------------------
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action, suit or proceeding referenced in
Section 2.1 or 2.2 hereof. Indemnitee hereby undertakes to repay such amounts
advanced only if, and to the extent that, it shall ultimately be determined that
Indemnitee is not entitled to be indemnified by the Company as authorized hereby
or that such indemnification is not otherwise permitted by applicable law. The
3
<PAGE>
advances to be made hereunder shall be paid by the Company to Indemnitee within
thirty (30) days following delivery of a written request therefor or by
Indemnitee to the Company.
3.2 Determination of Conduct. Any indemnification (unless ordered by
------------------------
a court) shall be made by the Company only as authorized in the specified case
upon a determination that indemnification of Indemnitee is proper under the
circumstances because Indemnitee has met the applicable standard of conduct set
forth in Sections 2.1 or 2.2 of this Agreement. Such determination shall be
made by any of the following: (1) the Board of Directors (or by an executive
committee thereof) by a majority vote of a quorum consisting of directors who
were not parties to such action, suit or proceeding, (2) if such a quorum is not
obtainable, or, even if obtainable, if a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, (3) by the
shareholders, with the shares owned by Indemnitee not being entitled to vote
thereon, or (4) the court in which such proceeding is or was pending upon
application made by the Company or Indemnitee or the attorney or other person
rendering services in connection with the defense, whether or not such
application by Indemnitee, the attorney or the other person is opposed by the
Company.
3.3 Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to Indemnitee's right to be indemnified under this
Agreement, give the Company notice in writing as soon as practicable of any
claim made against Indemnitee for which indemnification will or could be sought
under this Agreement. Notice to the Company shall be given in the manner set
forth in Section 10.3 hereof and to the address stated therein, or such other
address as the Company shall designate in writing to Indemnitee. In addition,
Indemnitee shall give the Company such information and cooperation as it may
reasonably require and as shall be within Indemnitee's power.
3.4 Notice to Insurers. If, at the time of the receipt of a notice
------------------
of a claim pursuant to Section 3.3 hereof, the Company has director liability
insurance in effect, the Company shall give prompt notice of the commencement of
such proceeding to the insurers in accordance with the procedures set forth in
the respective policies. The Company shall thereafter take all necessary or
desirable actions to cause such insurers to pay, on behalf of the Indemnitee,
all amounts payable as a result of such proceeding in accordance with the terms
of such policies.
3.5 Selection of Counsel. In the event the Company shall be
--------------------
obligated under Section 3.1 hereof to pay the expenses of any proceeding against
Indemnitee, the Company shall be entitled to assume the defense of such
proceeding, with counsel approved by Indemnitee, upon the delivery to Indemnitee
of written notice of its election so to do. After delivery of such notice,
approval of such counsel by Indemnitee and the retention of such counsel by the
Company, the Company will not be liable to Indemnitee under this Agreement for
any fees of counsel subsequently incurred by Indemnitee with respect to the same
proceeding, provided that (a) Indemnitee shall have the right to employ separate
counsel in any such proceeding at Indemnitee's expense; and (b) if (i) the
employment of counsel by Indemnitee has been previously authorized by the
Company, (ii) Indemnitee shall have reasonably concluded that
4
<PAGE>
there may be a conflict of interest between the Company and Indemnitee in the
conduct of any such defense, or (iii) the Company shall not, in fact, have
employed counsel to assume the defense of such proceeding, then the fees and
expenses of Indemnitee's counsel shall be at the expense of the Company (subject
to the provisions of this Agreement).
4. ADDITIONAL INDEMNIFICATION RIGHTS; NON-EXCLUSIVITY
--------------------------------------------------
4.1 Application. The provisions of this Agreement shall be deemed
-----------
applicable to all actual or alleged actions or omissions by Indemnitee during
any and all periods of time that Indemnitee was, is, or shall be serving as a
director of the Company or a Subsidiary.
4.2 Scope. The Company hereby agrees to indemnify Indemnitee to the
-----
fullest extent permitted by law (except as set forth in Section 8 hereof),
notwithstanding that such indemnification is not specifically authorized by the
other provisions of this Agreement, the Company's Articles of Incorporation, the
Company's Bylaws or by statute. In the event of any changes, after the date of
this Agreement, in any applicable law, statute, or rule which expands the right
of a California corporation to indemnify a member of its board of directors,
such changes shall be, ipso facto, within the purview of Indemnitee's rights and
----------
the Company's obligations under this Agreement. In the event of any change in
any applicable law, statute, or rule which narrows the right of a California
corporation to indemnify a member of its board of directors, such changes, to
the extent not otherwise required by such law, statute or rule to be applied to
this Agreement shall have no effect on this Agreement or the parties' rights and
obligations hereunder.
4.3 Non-Exclusivity. The indemnification provided by this Agreement
---------------
shall not be deemed exclusive of any rights to which an Indemnitee may be
entitled under the Company's Articles of Incorporation, its Bylaws, any
agreement, any vote of shareholders or disinterested directors, the Code, or
otherwise, both as to action in Indemnitee's official capacity and as to action
in another capacity while holding such office. The indemnification provided
under this Agreement shall continue as to Indemnitee for an action taken or not
taken while serving in an indemnified capacity even though he may have ceased to
serve in such capacity at the time of any action, suit or other covered
proceeding.
5. PARTIAL INDEMNIFICATION
-----------------------
5.1 Partial Indemnity. If Indemnitee is entitled under any provision
-----------------
of this Agreement to indemnification by the Company for some or a portion of the
expenses, judgments, fines or penalties actually or reasonably incurred by
Indemnitee in the investigation, defense, appeal or settlement of any civil or
criminal action, suit or proceedings but not, however, for the total amount
thereof, the Company shall nevertheless indemnify Indemnitee for that portion to
which Indemnitee is entitled.
5
<PAGE>
6. MUTUAL ACKNOWLEDGMENT
---------------------
6.1 Acknowledgment. Both the Company and Indemnitee acknowledge that
--------------
in certain instances, federal law or public policy may override applicable state
law and prohibit the Company from indemnifying its directors under this
Agreement or otherwise. For example, the Company and Indemnitee acknowledge
that the Securities and Exchange Commission (the "SEC") has taken the position
that indemnification is not permissible for liabilities arising under certain
federal securities laws, and federal legislation prohibits indemnification for
certain ERISA violations. Indemnitee understands and acknowledges that the
Company has undertaken or may be required in the future to undertake with the
SEC to submit the question of indemnification to a court in certain
circumstances for a determination of the Company's right under public policy to
indemnify Indemnitee.
7. LIABILITY INSURANCE
-------------------
7.1 Obtaining Insurance. The Company shall, from time to time, make
-------------------
the good faith determination whether or not it is practicable for the Company to
obtain and maintain a policy or policies of insurance with reputable, insurance
companies providing the directors with coverage for losses from wrongful acts,
or to ensure the Company's performance of its indemnification obligations under
this Agreement. Among other considerations, the Company will weigh the costs of
obtaining such insurance coverage against the protection afforded by such
coverage. In all such policies of liability insurance, Indemnitee shall be
named as an insured in such a manner as to provide Indemnitee the same rights
and benefits as are accorded to the most favorably insured of the Company's
directors. Notwithstanding the foregoing, the Company shall have no obligation,
to obtain or maintain such insurance if the Company determines in good faith
that such insurance is not reasonably available, if the premium costs for such
insurance are disproportionate to the amount of coverage provided, if the
coverage provided by such insurance is limited by exclusions so as to provide an
insufficient benefit, or if Indemnitee is covered by similar insurance
maintained by a parent or Subsidiary of the Company.
8. SEVERABILITY
------------
8.1 Severability. Nothing in this Agreement is intended to require
------------
or shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 8.1. If this Agreement or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, the Company
shall nevertheless indemnify Indemnitee to the full extent permitted by any
applicable portion of this Agreement that shall not have been invalidated, and
the balance of this Agreement not so invalidated shall be enforceable in
accordance with its terms.
6
<PAGE>
9. EXCEPTIONS
----------
9.1 Exceptions to Company's Obligations. Any other provision to the
-----------------------------------
contrary notwithstanding, the Company shall not be obligated pursuant to the
terms of this Agreement for the following:
(a) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, unless said proceedings or
claims were authorized by the board of directors of the Company.
(b) Improper Personal Benefit. To indemnify Indemnitee against
-------------------------
liability for any transactions from which Indemnitee, or any Affiliate of
Indemnitee, derived an improper personal benefit, including, but not limited to,
self-dealing or usurpation of a corporate opportunity.
(c) Dishonesty. To indemnify Indemnitee if a judgment or other final
----------
adjudication adverse to Indemnitee established that Indemnitee committed acts of
active and deliberate dishonesty, with actual dishonest purpose and intent,
which acts were material to the cause of action so adjudicated.
(d) Insured Claims; Paid Claims. To indemnify Indemnitee for expenses
---------------------------
or liabilities of any type whatsoever (including but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) which
have been paid directly to Indemnitee (i) by an insurance carrier under a policy
of liability insurance maintained by the Company, or (ii) otherwise by any other
means.
(e) Claims Under Section 16(b). To indemnify Indemnitee for an
--------------------------
accounting of profits in fact realized from the purchase and sale of securities
within the meaning of Section 16(b) of the Securities Exchange Act of 1934, as
amended, or any similar successor statute.
10. MISCELLANEOUS
-------------
10.1 Construction of Certain Phrases.
-------------------------------
(a) For purposes of this Agreement, references to the "Company" shall
include any resulting or surviving corporation in any merger or consolidation in
which the Company (as then constituted) is not the resulting or surviving
corporation so that Indemnitee will continue to have the full benefits of this
Agreement.
(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of
7
<PAGE>
the Company" shall include any service as a director, officer, employee or agent
of the Company which impose duties on, or involves services by, such director,
officer, employee or agent with respect to an employee benefit plan, its
participants, or beneficiaries; and if Indemnitee acted in good faith and in a
manner Indemnitee reasonably believed to be in the best interests of the
participants and beneficiaries of an employee benefit plan, Indemnitee shall be
deemed to have acted in a manner "reasonably believed to be in the best
interests of the Company and its shareholders" as referred to in this Agreement.
10.2 Successors and Assigns. This Agreement shall be binding upon
----------------------
the Company and its successors and assigns, and shall inure to the benefit of
Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns.
Notwithstanding the foregoing, the Indemnitee shall have no right or power to
voluntarily assign or transfer any rights granted to Indemnitee, or obligations
imposed upon the Company, by or pursuant to this Agreement. Further, the rights
of the Indemnitee hereunder shall in no event accrue to the benefit of, or be
enforceable by, any judgment creditor or other involuntary transferee of the
Indemnitee.
10.3 Notice. All notices, requests, demands and other communications
------
under this Agreement shall be in writing and shall be deemed duly given (i) if
mailed by domestic certified or registered mail with postage prepaid, properly
addressed to the parties at the addresses set forth below, or to such other
address as may be furnished to Indemnitee by the Company or to the Company by
Indemnitee, as the case may be, on the third business day after the date
postmarked, or (ii) otherwise notice shall be deemed received when such notice
is actually received by the party to whom it is directed.
If to Indemnitee: To the address set forth below the signature
line of Indemnitee on the signature page
hereof.
If to Company: Callaway Golf Company
2285 Rutherford Road
Carlsbad, CA 92008
Attention: General Counsel
10.4 Consent to Jurisdiction. The Company and Indemnitee each hereby
-----------------------
irrevocably consent to the jurisdiction of the courts of the State of California
for all purposes in connection with any action or proceeding which arises out of
or related to this Agreement and agree that any action instituted under this
Agreement shall be brought only in the state courts of the State of California.
10.5 Choice of Law. This Agreement shall be governed by and its
-------------
provisions construed in accordance with the laws of the State of California, as
applied to contracts between California residents entered into and to be
performed entirely within California.
8
<PAGE>
10.6 Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall constitute an original and all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereby have executed this Agreement as
of the date first above written.
<TABLE>
<CAPTION>
<S> <C> <C>
"Company" Callaway Golf Company, a California corporation
By: /s/ DONALD H. DYE
-------------------------------------
(Signature)
Donald H. Dye
-------------------------------------
(Name)
President and CEO
-------------------------------------
(Title)
"Indemnitee" Aulana L. Peters
-------------------------------------
(Name)
/s/ AULANA L. PETERS
-------------------------------------
(Signature)
Address:
Gibson, Dunn & Crutcher
-------------------------------------
333 South Grand Avenue, 47th Floor
-------------------------------------
Los Angeles, CA 90071
-------------------------------------
</TABLE>
9
<PAGE>
Exhibit 10.18
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into as of July 1,
1996, by and between Callaway Golf Company, a California corporation (the
"Company"), and Elmer L. Ward, Jr. ("Employee").
1. TERM. The Company hereby employs Employee and Employee hereby
----
accepts employment pursuant to the terms and provisions of this Agreement for
the term commencing July 1, 1996, and terminating June 30, 1999 unless this
Agreement is earlier terminated as hereinafter provided. Neither the Company
nor Employee have any expectation, obligation, commitment or other agreement
with respect to further employment of Employee by the Company following the
termination of this Agreement, it being understood that Employee intends to
retire as of that time.
2. SERVICES.
--------
(a) Employee shall have the title Manager, Special Licenses, or such
other title as shall be given to him from time to time by the Chief Executive
Officer. Employee's duties shall be those assigned to him from time to time by
the Chief Executive Officer. It is expected that Employee shall initially
report directly to the Executive Vice President, International Sales, Licensing
and Business Development, or to such other persons as shall be specified from
time to time by the Chief Executive Officer.
(b) Employee shall be required to comply with all policies and
procedures of the Company, as such shall be adopted, modified or otherwise
established by the Company from time to time.
3. SERVICES TO BE EXCLUSIVE. During the term hereof, Employee
------------------------
agrees to devote his full productive time and best efforts to the performance of
Employee's duties hereunder. Employee further agrees, as a condition to the
performance by the Company of each and all of its obligations hereunder, that so
long as Employee is employed by the Company, Employee will not directly or
indirectly render services of any nature to, otherwise become employed by, or
otherwise participate or engage in any other business without the Company's
prior written consent. Employee further agrees to execute such secrecy, non-
disclosure, patent, trademark, copyright and other proprietary rights
agreements, if any, as the Company may from time to time reasonably require.
Nothing herein contained shall be deemed to preclude Employee from having
outside personal investments and involvement with appropriate community
activities, or from devoting a reasonable amount of time to such matters,
provided that they shall in no manner interfere with or derogate from Employee's
work for the Company.
4. COMPENSATION. The Company agrees to pay Employee:
------------
1
<PAGE>
(a) a base salary paid at the rate of $250,000.00 per year; and
(b) an opportunity to earn and receive, in the Company's sole
discretion, an annual discretionary bonus, payable in accordance with the
Company's general policies and practices regarding employee bonuses.
5. EXPENSES AND BENEFITS.
---------------------
(a) Reasonable and Necessary Business Expenses. In addition to the
------------------------------------------
compensation provided for in Section 4 hereof, the Company shall reimburse
Employee for all reasonable, customary, and necessary expenses incurred in the
performance of Employee's duties hereunder. Employee shall first account for
such expenses by submitting a signed statement itemizing such expenses prepared
in accordance with the policy set by the Company for reimbursement of such
expenses. The amount, nature, and extent of such expenses shall always be
subject to the control, supervision, and direction of the Company.
(b) Vacation. Employee shall receive three (3) weeks paid vacation
--------
for each twelve (12) month period of employment with the Company. The vacation
may be taken any time during the year subject to prior approval by the Company,
such approval not to be unreasonably withheld. Vacation benefits, including the
accumulation of unused vacation time, shall be subject to the Company's general
policies and practices, as they may exist from time to time.
(c) Benefits. During Employee's employment with the Company pursuant
--------
to this Agreement, the Company shall provide for Employee to:
(i) participate in the Company's standard health insurance, life
insurance and disability insurance plans as the same may be modified from time
to time; and
(ii) participate in the Company's 401(k) pension plan pursuant
to the terms of the plan, as the same may be modified from time to time.
(d) Stock Options. Pursuant to a separate stock option agreement, the
--------------
Company shall provide to Employee options to purchase up to 25,000 shares of the
Common Stock of the Company in accord with the following pricing and vesting
schedule:
2
<PAGE>
<TABLE>
<CAPTION>
SHARES VESTING DATE PRICE
----- --------------- -------------------------------------
<C> <C> <S>
10,000 January 1, 1997 Base Price (the closing price on
the NYSE on August 30, 1996, as
reported in the Wall Street Journal
10,000 January 1, 1998 Base Price
5,000 January 1, 1999 Base Price
</TABLE>
All shares of stock that are issuable upon the exercise of such options granted
to Employee shall be registered as promptly as possible with the Securities and
Exchange Commission, and shall be approved for listing on the New York Stock
Exchange upon notice of issuance. It is expressly understood that the vesting
of such options shall be dependent upon Employee's continued employment by the
Company on the specified vesting dates, as provided in the separate stock option
agreement.
6. NONCOMPETITION.
--------------
(a) Other Business. To the fullest extent permitted by law, Employee
--------------
agrees that during the term of this Agreement he will not, directly or
indirectly (whether as agent, consultant, holder of a beneficial interest,
creditor, or in any other capacity), engage in any business or venture which
engages directly or indirectly in competition with the business of the Company,
or have any interest in any person, firm, corporation, or venture which engages
directly or indirectly in competition with the business of the Company. For
purposes of this section, the ownership of interests in a broadly based mutual
fund shall not constitute ownership of the stocks held by the fund.
(b) Other Employees. Except as may be required in the performance of
---------------
his duties hereunder, Employee shall not cause or induce, or attempt to cause or
induce, any person now or hereafter employed by the Company, or any subsidiary,
to terminate such employment, nor shall Employee directly or indirectly employ
any person who is now or hereafter employed by the Company for a period of one
(1) year from the date such person ceases to be employed by the Company.
(c) Suppliers. During the term of this Agreement, and for one (1)
---------
year thereafter, Employee shall not cause or induce, or attempt to cause or
induce, any person or firm supplying goods, services or credit to the Company to
diminish or cease furnishing such goods, services or credit.
(d) Conflict of Interest. During the term of this Agreement, Employee
--------------------
shall not engage in any conduct or enterprise that shall constitute an actual or
apparent conflict of interest with respect to Employee's duties and obligations
to the Company.
3
<PAGE>
7. TERMINATION.
-----------
(a) Termination at the Company's Convenience. Employee's employment
-----------------------------------------
under this Agreement may be terminated by the Company at its convenience at any
time upon giving 30 days or longer notice to Employee. In the event of a
termination at the Company's convenience, Employee shall be entitled to receive
(i) any compensation accrued and unpaid as of the date of termination; (ii) the
continued payment of base salary at the same rate and on the same schedule as
specified in this Agreement for a period of time equal to the greater of the
remainder of the term of this Agreement or six months; (iii) the payment of the
minimum discretionary bonuses specified in this Agreement; (iv) the immediate
vesting of those outstanding but unvested stock options held by Employee as of
such termination date that would have vested had Employee remained in the employ
of the Company for a period of time equal to the greater of the remainder of the
term of this Agreement plus one day or six months; (v) the continuation of the
benefits provided by Sections 5(c)(i) and (ii) for a period of time equal to the
greater of the remainder of the term of this Agreement or six months; and (vi)
no other severance. At his option, Employee may elect in writing up to 60 days
prior to termination to receive such payments and benefits as provided by
subsection (ii) of this section in a lump sum payment representing all future
payments due, discounted to their then present value at the prevailing major
bank prime rate as of the date of termination.
(b) Termination at Employee's Convenience. Employee's employment
--------------------------------------
under this Agreement may be terminated immediately by Employee at his
convenience at any time. In the event of a termination at the Employee's
convenience, Employee shall be entitled to receive (i) any compensation accrued
and unpaid as of the date of termination; and (ii) no other severance.
(c) Termination by the Company for Substantial Cause. Employee's
-------------------------------------------------
employment under this Agreement may be terminated immediately by the Company for
substantial cause at any time. In the event of a termination by the Company for
substantial cause, Employee shall be entitled to receive (i) any compensation
accrued and unpaid as of the date of termination; and (ii) no other severance.
"Substantial cause" shall mean for purposes of this subsection a material breach
of this Agreement, or misconduct, including but not limited to, dishonesty,
theft, use or possession of drugs or alcohol during work, disloyalty and/or
felony criminal conduct.
(d) Termination by Employee for Substantial Cause. Employee's
----------------------------------------------
employment under this Agreement may be terminated immediately by Employee for
substantial cause at any time. In the event of a termination by Employee for
substantial cause, Employee shall be entitled to receive (i) any compensation
accrued and unpaid as of the date of termination; (ii) the continued payment of
base salary at the same rate and on the same schedule as specified in this
Agreement for a period of time equal to the greater of the remainder of the term
of this Agreement or six months; (iii) the immediate vesting of those
outstanding but unvested stock options held by Employee as of such termination
date that would have vested had Employee remained in the employ
4
<PAGE>
of the Company for a period of time equal to the greater of the remainder of the
term of this Agreement plus one day or six months; (iv) the continuation of the
benefits provided by Sections 5(c)(i) and (ii) for a period of time equal to the
greater of the remainder of the term of this Agreement or six months; and (v) no
other severance. At his option, Employee may elect in writing up to 60 days
prior to termination to receive such payments and benefits as provided by
subsection (ii) of this section in a lump sum payment representing all future
payments due, discounted to their then present value at the prevailing major
bank prime rate as of the date of termination. "Substantial cause" shall mean
for purposes of this subsection a material breach of this Agreement by the
Company.
(e) Termination Due to Permanent Disability. Subject to all
----------------------------------------
applicable laws, Employee's employment under this Agreement may be terminated
immediately by the Company in the event Employee becomes permanently disabled.
In the event of a termination by the Company due to Employee's permanent
disability, Employee shall be entitled to (i) any compensation accrued and
unpaid as of the date of termination; (ii) the immediate vesting of outstanding
but unvested stock options held by Employee as of such termination date in a
prorated amount based upon the number of days in the option vesting period that
elapsed prior to Employee's termination; (iii) the continuation of the benefits
provided by Sections 5(c)(i) and (ii) for a period of time equal to the greater
of the remainder of the term of this Agreement or six months; and (v) no other
severance. Termination under this subsection shall be effective immediately
upon the date the Board of Directors of the Company formally resolves that
Employee is permanently disabled. Subject to all applicable laws, "permanent
disability" shall mean the inability of Employee, by reason of any ailment or
illness, or physical or mental condition, to devote substantially all of his
time during normal business hours to the daily performance of Employee's duties
as required under this Agreement for a continuous period of six (6) months.
(f) Termination Due to Death. Employee's employment under this
-------------------------
Agreement may be terminated immediately by the Company in the event of
Employee's death. In the event of a termination by the Company due to
Employee's death, Employee's estate shall be entitled to (i) any compensation
accrued and unpaid as of the date of termination; (ii) the continued payment of
base salary at the same rate and on the same schedule as in effect at the time
of termination for a period of time equal to six months; (iii) the immediate
vesting of outstanding but unvested stock options held by Employee as of such
termination date in a prorated amount based upon the number of days in the
option vesting period that elapsed prior to Employee's termination; and (iv) no
other severance.
(g) Unless otherwise provided, any severance payments or other amounts
due pursuant to this Section 7 shall be paid in cash within thirty (30) days of
termination. Any severance payments shall be subject to usual and customary
employee payroll practices and all applicable withholding requirements. Except
for such severance pay and other amounts specifically provided pursuant to this
Section 7,
5
<PAGE>
Employee shall not be entitled to any further compensation, bonus, damages,
restitution, or other severance benefits upon termination of employment during
the term of this Agreement. The amounts payable to Employee pursuant to this
Section 7 shall not be treated as damages, but as severance compensation to
which Employee is entitled by reason of termination of employment under the
applicable circumstances. The Company shall not be entitled to set off against
the amounts payable to Employee hereunder any amounts earned by Employee in
other employment after termination of his employment with the Company, or any
amounts which might have been earned by Employee in other employment had he
sought such other employment. The provisions of this Section 7 shall not limit
Employee's rights under or pursuant to any other agreement or understanding with
the Company or with Employee's participation in, or terminating distributions
and vested rights under, any pension, profit sharing, insurance or other
employee benefit plan of the Company to which Employee is entitled pursuant to
the terms of such plan.
(h) Termination By Mutual Agreement of the Parties. Employee's
----------------------------------------------
employment pursuant to this Agreement may be terminated at any time upon the
mutual agreement in writing of the parties. Any such termination of employment
shall have the consequences specified in such agreement.
(i) Pre-Termination Rights. The Company shall have the right, at its
----------------------
option, to require Employee to vacate his office or otherwise remain off the
Company's premises prior to the effective date of termination as determined
above, and to cease any and all activities on the Company's behalf.
8. SURRENDER OF BOOKS AND RECORDS. Employee agrees that upon
------------------------------
termination of employment in any manner, Employee will immediately surrender to
the Company all lists, books and records of or connected with the business of
the Company, and all other properties belonging to the Company, it being
distinctly understood that all such lists, books, records and other documents
are the property of the Company.
9. GENERAL RELATIONSHIP. Employee shall be considered an employee
--------------------
of the Company within the meaning of all federal, state and local laws and
regulations, including, but not limited to, laws and regulations governing
unemployment insurance, workers' compensation, industrial accident, labor and
taxes.
10. PROPRIETARY INFORMATION.
-----------------------
(a) Employee agrees that any trade secret or proprietary information
of the Company to which Employee has become privy or may become privy to as a
result of his employment with the Company shall not be divulged or disclosed to
any other party (including, without limit, any person or entity with whom or in
whom Employee has a business interest) without the express written consent of
the Company, except as otherwise required by law. In addition, Employee agrees
to use such
6
<PAGE>
information only during the term of this Agreement and only in a manner which is
consistent with the purposes of this Agreement. In the event Employee believes
that he is legally required to disclose any trade secret or proprietary
information of the Company, Employee shall give reasonable notice to the Company
prior to disclosing such information and shall take such legally permissible
steps as are reasonably necessary to protect such Company trade secrets or
proprietary information, including but not limited to, seeking orders from a
court of competent jurisdiction preventing disclosure or limiting disclosure of
such information beyond that which is legally required. The Company shall
reimburse Employee for reasonable legal expenses incurred in seeking said
orders.
(b) Except as otherwise required by law, Employee shall hold in
confidence all trade secret and proprietary information received from the
Company until such information is available to the public generally or to the
Company's competitors through no unauthorized act or fault of Employee. Upon
termination of this Agreement, Employee shall promptly return any written
proprietary information in his possession to the Company.
(c) As used in this Agreement, "trade secret and proprietary
information" means information, whether written or oral, not generally available
to the public; it includes the concepts and ideas involved in the Company's
products whether patentable or not; and includes, but is not limited to, the
processes, formulae, and techniques disclosed by the Company to Employee or
observed by Employee. It does not include:
(i) Information, which at the time of disclosure, had been
previously published.
(ii) Information which is published after disclosure, unless such
publication is a breach of this Agreement or is otherwise a violation of the
contractual, legal or fiduciary duties owed to the Company, which violation is
known to Employee; or
(iii) Information which, subsequent to disclosure, is obtained by
Employee from a third person who is lawfully in possession of such information
(which information is not acquired in violation of any contractual, legal, or
fiduciary obligation owed to the Company with respect to such information) and
does not require Employee to refrain from disclosing such information to others.
(d) The provisions of this Section 10 shall survive the termination or
expiration of this Agreement, and shall be binding upon Employee in perpetuity.
11. INVENTIONS AND INNOVATIONS.
--------------------------
(a) As used in this Agreement, inventions and innovations mean new ideas
7
<PAGE>
and improvements, whether or not patentable, relating to the design,
manufacture, use or marketing of golf equipment or other products of the
Company. This includes, but is not limited to, products, processes, methods of
manufacture, distribution and management, sources of and uses for materials,
apparatus, plans, systems and computer programs.
(b) Employee agrees to disclose to the Chief Executive Officer and the
Board of Directors of the Company any invention or innovation which he develops,
either alone or with anyone else, during the term of his employment with the
Company, as well as any invention or innovation based on proprietary information
of the Company which Employee develops, whether alone or with anyone else,
within twelve (12) months after the termination of Employee's employment with
the Company.
(c) Employee agrees to assign any invention or innovation to the
Company:
(i) which is developed totally or partially while Employee is
employed by the Company;
(ii) for which Employee used any of the Company's equipment,
supplies, facilities or proprietary information, even if any or all of such
items are relatively minor, and have little or no monetary value; or
(iii) which results in any way from Employee's work for the
Company or relates in any way to the Company's business or the Company's current
or anticipated research and development.
(d) Employee understands and agrees that the existence of any
condition set forth in either (c)(i), (ii) or (iii) above is sufficient to
require Employee to assign his invention or innovation to the Company.
(e) All provisions of this Agreement relating to the assignment by
Employee of any invention or innovation are subject to the provisions of
California Labor Code Sections 2870, 2871 and 2872.
(f) Employee agrees that any invention or innovation which is required
under the provisions of this Agreement to be assigned to the Company shall be
the sole and exclusive property of the Company. Upon the Company's request, at
no expense to Employee, Employee shall execute any and all proper applications
for patents, assignments to the Company, and all other applicable documents, and
will give testimony when and where requested to perfect the title and/or patents
(both within and without the United States) in all inventions or innovations
belonging to the Company.
(g) Employee shall disclose all inventions and innovations to the
8
<PAGE>
Company, even if Employee does not believe that he is required under this
Agreement, or pursuant to California Labor Code Section 2870, to assign his
interest in such invention or innovation to the Company. If the Company and
Employee disagree as to whether or not an invention or innovation is included
within the terms of this Agreement, it will be the responsibility of Employee to
prove that it is not included.
12. ASSIGNMENT. This Agreement shall be binding upon and shall inure
----------
to the benefit of the parties hereto and the successors and assigns of the
Company. Employee shall have no right to assign his rights, benefits, duties,
obligations or other interests in this Agreement, it being understood that this
Agreement is personal to Employee.
13. ATTORNEYS' FEES AND COSTS. If any arbitration or other
-------------------------
proceeding is brought for the enforcement of this Agreement, or because of an
alleged dispute or default in connection with any of its provisions, the
successful or prevailing party shall be entitled to recover reasonable
attorneys' fees incurred in such action or proceeding, in addition to any relief
to which such party may be deemed entitled, if, and only if, the arbitrator
finds that the non-prevailing party's position, taken as a whole, was frivolous
or baseless.
14. ENTIRE UNDERSTANDING. This Agreement, together with all
--------------------
applicable stock option plans and agreements and other employee benefit plans
and agreements to which Employee is a beneficiary, sets forth the entire
understanding of the parties hereto with respect to the subject matter hereof,
and no other representations, warranties or agreements whatsoever have been made
by Employee or the Company not herein contained. This Agreement shall not be
modified, amended or terminated except by another instrument in writing executed
by the parties hereto. This Agreement replaces and supersedes any and all prior
understandings or agreements between Employee and the Company regarding
employment.
15. NOTICES. Any notice, request, demand, or other communication
-------
required or permitted hereunder, shall be deemed properly given when actually
received or within five (5) days of mailing by certified or registered mail,
postage prepaid, to:
Employee: Elmer L. Ward, Jr.
P.O. Box 1447
Rancho Santa Fe, California 92067
Company: Callaway Golf Company
2285 Rutherford Road
Carlsbad, California 92008-8815
Attn: Donald H. Dye
or to such other address as Employee or the Company may from time to time
furnish,
9
<PAGE>
in writing, to the other.
16. ARBITRATION. Any dispute, controversy or claim arising hereunder
-----------
or in any way related to this Agreement, its interpretation, enforceability, or
applicability, or relating to Employee's employment, or the termination thereof,
that cannot be resolved by mutual agreement of the parties shall be submitted to
arbitration. The arbitration shall be conducted by a retired judge from the
Judicial Arbitration and Mediation Service ("JAMS") office located in Orange
County, California, who shall have the powers to hear motions, control
discovery, conduct hearings and otherwise do all that is necessary to resolve
the matter. The arbitration award shall be final and binding, and judgment on
the award may be entered in any court having jurisdiction thereof. It is
expressly understood that the parties have chosen arbitration to avoid the
burdens, costs and publicity of a court proceeding, and the arbitrator is
expected to handle all aspects of the matter, including discovery and any
hearings, in such a way as to minimize the expense, time, burden and publicity
of the process, while assuring a fair and just result. In particular, the
parties expect that the arbitrator will limit discovery by controlling the
amount of discovery that may be taken (e.g., the number of depositions or
interrogatories) and by restricting the scope of discovery to only those matters
clearly relevant to the dispute.
17. MISCELLANEOUS.
-------------
(a) Headings. The headings of the several sections and paragraphs of
--------
this Agreement are inserted solely for the convenience of reference and are not
a part of and are not intended to govern, limit or aid in the construction of
any term or provision hereof.
(b) Waiver. Failure of either party at any time to require
------
performance by the other of any provision of this Agreement shall in no way
affect that party's rights thereafter to enforce the same, nor shall the waiver
by either party of any breach of any provision hereof be held to be a waiver of
any succeeding breach of any provision or a waiver of the provision itself.
(c) Applicable Law. This Agreement shall constitute a contract under
--------------
the internal laws of the State of California and shall be governed and construed
in accordance with the laws of said state as to both interpretation and
performance.
(d) Severability. In the event any provision or provisions of this
------------
Agreement is or are held invalid, the remaining provisions of this Agreement
shall not be affected thereby.
18. SUPERSEDES OLD CONSULTING AGREEMENT. Employee and the Company
------------------------------------
recognize that prior to the effective date of this Agreement they were parties
to a certain Consulting Agreement effective March 1, 1993, as amended, (the "Old
Consulting Agreement"). It is the intent of the parties that as of the
effective date
10
<PAGE>
of this Agreement, this Agreement shall replace and supersede the Old Consulting
Agreement entirely and that the Old Consulting Agreement shall no longer be of
any force or effect, except as to Section 7 thereof, and that to the extent
there is any conflict between the Old Consulting Agreement and this Agreement,
this Agreement shall control and both agreements shall be construed so as to
give the maximum force and effect to the provisions of this Agreement.
19. DIRECTOR COMPENSATION. It is recognized that at the time
----------------------
Employee commences his employment with the Company pursuant to this Agreement,
Employee will have been serving as an elected Director on the Board of Directors
of the Company. Employee and the Company both acknowledge that immediately upon
the effective date of this Agreement, and throughout the term of this Agreement
should Employee remain a Director of the Company, Employee shall not be entitled
to any form of compensation offered solely to non-employee Directors, including
participation in the Company's Non-Employee Director Stock Option Plan, and that
options previously granted to Employee under such Plan, but not yet vested,
shall not vest and shall be lost. In lieu of any such compensation as a non-
employee Director, including the loss of any unvested stock options previously
granted to Employee pursuant to the Non-Employee Director Stock Option Plan, and
as further consideration for the promises and obligations contained in this
Agreement, the Company shall pay to Employee a one time signing bonus of
$60,000.00 upon execution of this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed effective the date first written above.
<TABLE>
<CAPTION>
<S> <C>
EMPLOYEE: COMPANY:
CALLAWAY GOLF COMPANY,
a California corporation
/s/ ELMER L. WARD JR. By: /s/ DONALD H. DYE
- --------------------- ---------------------------------
Elmer L. Ward, Jr. Donald H. Dye, President & CEO
</TABLE>
11
<PAGE>
EXHIBIT 11.1
CALLAWAY GOLF COMPANY
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Primary earnings per share computation:
- ------------------------------------------------
Net income $38,418 $30,178 $96,810 $74,412
======= ======= ======= =======
Weighted average shares outstanding 67,128 65,858 66,624 67,240
Dilutive options 3,937 2,972 3,766 3,174
------- ------- ------- -------
Common equivalent shares 71,065 68,830 70,390 70,414
======= ======= ======= =======
Primary earnings per share:
Net income $ .54 $ .44 $ 1.38 $ 1.06
======= ======= ======= =======
Fully diluted earnings per share computation:
- ------------------------------------------------
Net income $38,418 $30,178 $96,810 $74,412
======= ======= ======= =======
Weighted average shares outstanding 67,128 65,858 66,624 67,240
Dilutive options 4,052 3,026 4,051 3,257
------- ------- ------- -------
Common equivalent shares 71,180 68,884 70,675 70,497
======= ======= ======= =======
Fully diluted earnings per share:
Net income $ .54 $ .44 $ 1.37 $ 1.06
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 140,331
<SECURITIES> 0
<RECEIVABLES> 91,301
<ALLOWANCES> 6,437
<INVENTORY> 86,629
<CURRENT-ASSETS> 340,483
<PP&E> 111,635
<DEPRECIATION> 30,652
<TOTAL-ASSETS> 444,655
<CURRENT-LIABILITIES> 105,572
<BONDS> 0
0
0
<COMMON> 726
<OTHER-SE> 335,213
<TOTAL-LIABILITY-AND-EQUITY> 444,655
<SALES> 539,685
<TOTAL-REVENUES> 539,685
<CGS> 253,899
<TOTAL-COSTS> 253,899
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14
<INCOME-PRETAX> 154,918
<INCOME-TAX> 58,108
<INCOME-CONTINUING> 96,810
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 96,810
<EPS-PRIMARY> 1.38
<EPS-DILUTED> 1.37
</TABLE>
