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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITUES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
Common Stock New York Stock Exchange
Preferred Share Purchase Rights
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
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
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 26, 1997, the aggregate market value of the Registrant's
Common Stock held by nonaffiliates of the Registrant was $2,121,298,000 based on
the closing sales price of the Registrant's Common Stock as reported in the
consolidated transactions reporting system.
As of March 26, 1997, the number of shares of the Registrant's Common
Stock outstanding was 73,690,775, and there were no shares of the Registrant's
Preferred Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Parts I, II and IV incorporate certain information by reference from
Registrant's Annual Report to shareholders for the fiscal year ended December
31, 1996.
Part III incorporates certain information by reference from the
Registrant's definitive proxy statement for the annual meeting of shareholders
to be held on April 17, 1997 which proxy statement was filed on March 10, 1997.
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Note: When used in this Annual Report on Form 10-K and the information
incorporated herein by reference, the words "expect(s)," "feel(s)," "believe(s),
"will," "may," "anticipate(s)," 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.
Callaway Golf Company undertakes no obligation to republish revised forward-
looking statements to reflect events or circumstances after the date hereof or
to reflect the occurrence of unanticipated events. Readers are also urged to
carefully review and consider the various disclosures made by the Company which
describe certain factors which affect the Company's business, including the
factors set forth in Item 1 of this Report and the discussion incorporated by
reference in Part II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" under the caption "Certain Factors
Affecting the Golf Club Industry and Callaway Golf," as well as the Company's
periodic reports on Forms 10-Q and 8-K filed with the Securities and Exchange
Commission.
PART I
ITEM 1. BUSINESS.
Callaway Golf Company (the "Company" or "Callaway Golf") designs,
develops, manufactures and markets high quality, innovative golf clubs. The
Company's golf clubs are sold at premium prices to both average and skilled
golfers on the basis of performance, ease of use and appearance. Callaway
Golf's primary products, all of which incorporate the Company's S2H2(R) design
concept, currently include the Biggest Big Bertha(TM) Titanium Driver, Great Big
Bertha(R) Titanium Driver and Fairway Woods, Big Bertha(R) Metal Woods, Great
Big Bertha(R) Tungsten.Titanium(TM) Irons, Big Bertha(R) Irons, Big Bertha
Gold(TM) Irons, Big Bertha(R) Tour Series Wedges and various putters, including
the Bobby Jones(R) Series Putters.
PRODUCTS
The following table sets forth the contribution to net sales
attributable to the product groups and for the periods indicated (dollars in
thousands).
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1996 1995 1994
-------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Metal Woods $479,127 71% $382,740 69% $325,797 73%
Irons 168,576 25% 140,620 25% 98,913 22%
Putters, accessories
and other 30,809 4% 29,927 6% 24,019 5%
-------------------------------------------------
Net Sales $678,512 100% $553,287 100% $448,729 100%
=================================================
</TABLE>
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 1997. 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 year ended December 31, 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.
METAL WOODS
Biggest Big Bertha(TM) Titanium Driver. In January 1997, the Company
introduced the Biggest Big Bertha(TM) Titanium Driver. The Biggest Big
Bertha(TM) Driver has a titanium clubhead which is approximately 15% larger than
the Great Big Bertha(R) Driver clubhead described below, and has a 46"
ultralight graphite shaft which is one inch longer than the Great Big Bertha(R)
Driver's shaft. Although larger and longer, the Biggest Big Bertha(TM) Driver is
lighter in overall weight than the Great Big Bertha(R) Driver. The Biggest Big
Bertha(TM) Driver incorporates the S2H2(R) design
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concept, the War Bird(R) soleplate (which features a deep dish on either side of
the central facet running from clubface to trailing edge) and an advanced
internal weighting system which increases the degree of perimeter weighting of
the titanium clubhead. The Company offers the Biggest Big Bertha(TM) Driver in
lofts ranging from 7 to 12 degrees. It is expected that this product line will
be offered as a driver only. Deliveries of significant quantities of this new
product commenced in January 1997.
Great Big Bertha(R) Titanium Metal Woods. The Company offers the Great
Big Bertha(R) Titanium Driver, which has a titanium clubhead and a lightweight
graphite shaft, in lofts ranging from 6.5 to 12 degrees. The head is 25% larger
and the overall weight is 10% lighter than the Big Bertha(R) War Bird(R) Driver.
The driver incorporates the S2H2(R) concept as well as the War Bird(R)
soleplate. Deliveries of significant quantities of this product commenced in
March 1995. In January 1996, the Company introduced Great Big Bertha(R) Fairway
Woods (numbers 2, 3, 4, 5, 7 and 9). These fairway woods have titanium clubheads
and also incorporate the S2H2(R) concept, the War Bird(R) soleplate and
lightweight graphite shafts. Deliveries of significant quantities of these new
products commenced in May 1996.
Big Bertha(R) Metal Woods with the War Bird(R) Soleplate. The Company
offers Big Bertha(R) War Bird(R) Drivers in lofts ranging from 8 to 12 degrees
with graphite, steel or titanium shafts. The Company also offers Big Bertha(R)
War Bird(R) Fairway Woods (numbers 2, 3, strong 3, 4, strong 4, 5,
HeavenWood(R), Divine Nine(R) and Ely Would(R)). The Company introduced the
Heaven Wood(R), Divine Nine(R) and Ely Would(R) metal woods in 1992, 1993 and
1995, respectively. All of these clubs incorporate the War Bird(R) soleplate. In
January 1996, the Company introduced new RCH series 96(TM) graphite shafts for
its Big Bertha(R) War Bird(R) Metal Woods. The new shafts are lighter and more
responsive. Delivery of this product commenced in February 1996.
IRONS
Big Bertha(R) Irons, Big Bertha Gold(TM) Irons, Big Bertha(R) Tour
Series Wedges and Big Bertha Gold(TM) Tour Series Wedges. The Company offers Big
Bertha(R) Irons 1 through 9, and pitching, approach, sand, and lob wedges, with
either graphite, steel or titanium shafts. In January 1996, the Company
introduced new and improved Big Bertha(R) Irons. These new Irons provide
improved weight distribution and have a lighter, more responsive graphite shaft
than the original Big Bertha(R) Irons. Delivery of this new product commenced in
February 1996. In September 1996, the Company introduced Big Bertha Gold(TM)
Irons, cast of aluminum bronze and including all of the design features of Big
Bertha(R) Irons. Designed to have a softer feel and richer look than Big
Bertha(R) Irons, deliveries of significant quantities of Big Bertha Gold(TM)
Irons commenced in October 1996. In September 1996, the Company also introduced
Big Bertha(R) Tour Series Wedges (pitching, approach, sand and lob wedges) with
several new features geared toward enhancing playability for middle-to low-
handicap amateurs as well as tour professionals. Deliveries of significant
quantities of these new products commenced in September 1996. In January 1997,
the Company also introduced Big Bertha Gold(TM) Tour Series Wedges. These
wedges, which are cast of aluminum bronze, are expected to be available in May
1997.
Great Big Bertha(R) Tungsten.Titanium(TM) Irons. In January 1997, the
Company introduced Great Big Bertha(R) Tungsten.Titanium(TM) Irons. The new
Great Big Bertha(R) Tungsten.Titanium(TM) Irons incorporate the same core design
features as Big Bertha(R) Irons, but have a slightly larger titanium clubhead
with a specially designed tungsten inset to concentrate weight low and deep in
the clubhead. These design features are intended to give these irons a lower and
deeper sweet-spot compared to other titanium irons. The Company offers Great Big
Bertha(R) Tungsten.Titanium(TM) Irons 1 through 9, and pitching, approach, sand
and lob wedges, with either graphite, steel or titanium shafts. Deliveries of
limited quantities of this new product are expected to commence in May 1997.
PUTTERS, ACCESSORIES AND OTHER
Putters. The Company has a line of steel and graphite shafted putters,
some of which incorporate the S2H2(R) concept, including the Tuttle(R) and the
Tuttle(R) II putters, the Big Bertha(R) War Bird(R) putter, and the steel
shafted Big Bertha(R) Blade putter. In September 1996, the Company introduced
and commenced deliveries of the new Bobby Jones(R) line of putters, consisting
of three styles of precision-machined putters with a double-radius bend, offset
shaft.
Accessories and Other. In addition to its golf clubs, Callaway Golf
offers golf-related equipment and supplies manufactured by other companies
bearing the Callaway(R) logo, including golf bags, travel bags, head covers,
hats, umbrellas and other accessories.
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LICENSING
Through a licensing arrangement with Jonesheirs, Inc., Callaway Golf
obtained the exclusive, worldwide rights to the use of the Bobby Jones(R) name
for golf clubs and golf-related accessories through 2010. The Company receives a
royalty from the Hickey-Freeman Company on sales of Bobby Jones(R) Sportswear
and certain other products.
Callaway Golf also has an exclusive licensing agreement with Nordstrom,
Inc., under which Nordstrom, Inc. designs, produces and sells apparel at its own
expense under the "Callaway Golf Apparel by Nordstrom" label. The line includes
men's and women's golf apparel and footwear and is sold at Nordstrom stores
throughout the United States.
PRODUCT DESIGN AND DEVELOPMENT
Product design at Callaway Golf is a result of the integrated efforts of
its product development, manufacturing and sales departments, all of which work
together to generate new ideas for golf equipment. The Company has not limited
itself in its research efforts by trying to duplicate designs that are
traditional or conventional and believes it has created an environment in which
new ideas are valued and explored. The Company's research and development
expenses were $16.2 million, $8.6 million and $6.4 million during 1996, 1995,
and 1994, respectively. The Company intends to continue to invest substantial
amounts in its research and development activities in 1997 and beyond. In
addition to development of new golf equipment, these investments are expected to
include, among others, significant expenditures in support of Callaway Golf Ball
Company's efforts to develop and market a new golf ball product, as well as the
continued enhancement of, and the development of additional applications for,
the Company's Sir Isaac Performance System(TM), a high-tech evaluation system
which permits golfers to compare the performance of different golf clubs and
balls.
In January 1997, the Company announced agreements to establish the
"Callaway Golf Experience" centers at the Walt Disney World Resort in Buena
Vista, Florida and the Pebble Beach Resorts in Pebble Beach, California. The
Callaway Golf Experience Centers feature the Sir Isaac Performance System(TM), a
high-tech evaluation system which permits golfers to compare the performance of
different golf clubs and balls. In connection with these arrangements, the
Company also received certain exclusive promotional rights at these popular
resorts.
Callaway Golf has the ability to build and modify clubhead designs by
using computer aided design/computer aided manufacturing ("CAD/CAM") software
and complete numerical control ("CNC") milling equipment. CAD/CAM software
enables designers to develop computer models of new club designs. CNC milling
equipment converts the digital output from CAD/CAM computer models into physical
metal models produced by an electronically-controlled milling machine. Callaway
Golf uses this software and equipment to facilitate the rapid design and
production of physical models of clubheads, as well as casting tools for
producing prototype clubheads for testing. In 1996, the Company purchased two
induction furnaces (for casting ferrous and non-ferrous alloys) and one
cold-walled furnace (for casting titanium, nickel and cobalt alloys). The
Company is installing these furnaces in a state-of-the-art research facility at
the Company's headquarters in Carlsbad, California, which should enable it to
cast its own prototype clubheads on-site, as well as study new production
processes and techniques. The Company expects that this new development
facility will be operational in August 1997. The Company believes that this
on-site casting capability will further facilitate the rapid design and
development of prototype clubheads.
The Company believes that the introduction of new, innovative golf
equipment will be important to its future success. As a result, the Company
faces certain risks associated with such a strategy. For example, new models
and basic design changes in golf equipment are frequently met with consumer
rejection. In addition, prior successful designs may be rendered obsolete
within a relatively short period of time as new products are introduced into the
marketplace. New designs must satisfy the standards established by the United
States Golf Association ("USGA") and the Royal and Ancient Golf Club of St.
Andrews ("R&A") because these standards are generally followed by golfers
within their respective jurisdictions. There is no assurance that new designs
will receive USGA and/or R&A approval, or that existing USGA and/or R&A
standards will not be altered in ways that adversely affect the sales of the
Company's products. Moreover, the Company's new products have tended to
incorporate significant innovations in design and manufacture, which have
resulted in increasingly higher prices for the Company's products relative to
products already in the marketplace. There can be no assurance that a
significant percentage of the public will always be willing to pay such prices
for golf equipment. Thus, although the Company has achieved certain successes
in the
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introduction of its golf clubs in the past, no assurances can be given that the
Company will be able to continue to design and manufacture golf clubs that
achieve market acceptance in the future.
In June 1996, the Company formed Callaway Golf Ball Company, a
wholly-owned subsidiary of the Company, for the purpose of designing,
manufacturing and selling golf balls. The Company has previously licensed the
manufacture and distribution of a golf ball product in Japan and Korea. The
Company also distributed a golf ball under the trademark "Bobby Jones". These
golf ball ventures were not commercially successful. At this time, it has not
been finally determined whether Callaway Golf Ball Company will enter the golf
ball business by developing a new product in a new plant to be constructed just
for this purpose; 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 the early stages of development. It is
expected, however, that it will have a negative impact on the Company's future
cash flow and income from operations for several years. The Company believes
that many of the same factors which affect the golf equipment industry,
including growth rate in the golf equipment industry, seasonality and new
product introduction, 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.
SALES AND MARKETING
Sales for Distribution in the United States
Approximately 68%, 66% and 74% of the Company's net sales were derived
from sales for distribution within the United States in 1996, 1995 and 1994,
respectively. The Company targets those golf retailers (both on-course and off-
course) who sell "pro-line" clubs (professional quality golf clubs) and provide
a level of customer service appropriate for the sale of premium golf clubs. No
one customer that distributes golf clubs in the United States accounted for more
than 5% of the Company's revenues in 1996, 1995, and 1994. The Company
distributes its products in Hawaii through an exclusive distributor.
The Company employs 56 full-time regional field representatives, 16
in-house telephone salespersons and 19 customer service representatives. Each
geographic region is covered by both a field representative and a telephone
salesperson who work together to initiate and maintain relationships with
customers through frequent telephone calls and in-person visits. The Company
believes that this tandem approach of utilizing field representatives and
telephone salespersons provides the Company a competitive advantage over other
golf club manufacturers that distribute their golf clubs solely through
independent sales representatives rather than employees. Notwithstanding the
foregoing, Callaway Golf recognizes that other companies have marketing programs
which may be equally or more effective than its own strategy.
While the Company seeks to control the distribution of its products to
the extent permitted by law, it is still the case that quantities of the
Company's products find their way to unapproved outlets or distribution
channels. This "gray market" in the Company's products can undermine approved
retailers and distributors who promote and support the Company's products, and
can injure the Company's image in the minds of its customers and consumers. On
the other hand, stopping such commerce could result in an increase in sales
returns over historical levels, and/or a potential decrease in sales to those
customers who are selling Callaway Golf products to unauthorized distributors.
While the Company has taken some lawful steps to limit commerce in its products
in the "gray market" in both domestic and international markets, it has not been
successful in stopping such commerce to date.
Sales for Distribution Outside of the United States
Approximately 32%, 34% and 26% of the Company's net sales were derived
from sales for distribution outside of the United States in 1996, 1995 and 1994,
respectively. The majority of the Company's international sales are made
through distributors specializing in the sale and promotion of golf clubs in
specific countries or regions around the world. The Company currently has 21
distribution arrangements covering sales of the Company's products in over 40
foreign countries, including Japan, Canada, Singapore, Korea, Hong Kong,
Australia, France, Spain, Argentina and South Africa. Prices of golf clubs for
sales outside of the United States receive an export pricing discount to
compensate international distributors for selling, advertising and distribution
costs. A change in the Company's relationship with significant distributors
could negatively impact the volume of the Company's international sales.
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The Company directly markets its products in the United Kingdom and
Sweden through its wholly-owned British subsidiary, Callaway Golf (UK) Limited.
In July 1996, the Company acquired a majority interest in its distributor in
Germany, Golf Trading GmbH, which sells and promotes the Company's products in
Germany, Austria, the Netherlands and Switzerland.
The Company, through a distribution agreement, appointed Sumitomo Rubber
Industries, Ltd. ("Sumitomo") as the sole distributor of the Company's golf
clubs in Japan. The distribution agreement requires Sumitomo to purchase
specified minimum quantities. The current distribution agreement began in
February 1993 and has an initial term of seven years. The Company has been
engaged in discussions regarding a possible restructuring of the Company's
distribution arrangements with Sumitomo, which is intended to streamline the
distribution of the Company's products in Japan. There can be no assurance,
however, that such a restructuring will occur, or if consummated, that the
proposed restructuring will achieve its intended goals. It is possible that the
attempt to restructure the Company's distribution arrangements in Japan, or the
failure to succeed in that attempt, will adversely affect the Company's
business in Japan. Sales to Sumitomo represented approximately $58.2 million
(9%), $61.0 million (11%) and $45.9 million (10%) of the Company's net sales in
1996, 1995 and 1994, respectively. See Note 9 of Notes to Consolidated
Financial Statements in the Company's Annual Report to shareholders for the
fiscal year ended December 31, 1996 ("1996 Annual Report to Shareholders").
During 1995, the Company began to evaluate growth opportunities in and
outside of the golf equipment industry. One of the opportunities identified by
the Company relates to the Company's acquisition of selected foreign
distributors. The Company's management believes that controlling the
distribution of its products throughout the world will be a key element in the
future growth and success of the Company. Executing a business strategy to
achieve this has and will result in additional investments in inventory,
accounts receivable, corporate infrastructure and facilities. It could also
result in disruptions in the distribution of the Company's products in some
areas. There can be no assurance that the acquisition of the Company's foreign
distributors will be successful, and it is possible that the attempt to do so
will adversely affect the Company's business.
As noted above, the Company continues to experience unauthorized
distribution of its products in international markets. For a discussion of the
Company's efforts in this area, see "Sales for Distribution in the United
States" set forth above.
Advertising and Promotion
Within the United States, the Company has focused its advertising
efforts mainly on a combination of television commercials and printed
advertisements in national magazines, such as Golf Digest, Golf Magazine, Golf
Week, Golf World and Sports Illustrated's Golf Edition, and in trade
publications, such as Golf Pro and Golf Shop Operations. Advertising of the
Company's golf clubs outside of the United States is typically handled by
distributors and resellers of the products in a particular country.
The Company also establishes relationships with professional golfers in
order to promote the Callaway Golf brand among both professional and amateur
golfers. The Company has entered into endorsement arrangements with members of
the Senior Professional Golf Association's Tour ("SPGA"), the Professional Golf
Association's Tour ("PGA"), the Ladies Professional Golf Association's Tour
("LPGA"), the European Professional Golf Association's Tour and the Nike Tour.
While most professional golfers fulfill their contractual obligations, some have
been known to stop using a sponsor's products despite contractual commitments.
If one or more of Callaway Golf's pro endorsers were to stop using Callaway
Golf's products contrary to their endorsement agreements, the Company's business
could be adversely affected in a material way by the negative publicity.
During 1996, Callaway Golf continued its Big Bertha(R) Players' Pool
("Pool") for the PGA, SPGA, LPGA and Nike Tours. Those professional players
participating in the Pool received cash for using Callaway Golf metal woods
in professional tournaments. A select few of the Pool players also received
compensation for wearing the Company's logos during tournament play. The
Company has established the 1997 Big Bertha(R) Players' Pool similar to the 1996
Pool, in which professional players participating in the Pool will receive cash
for using certain Callaway Golf products in professional tournaments. The
Company believes that its staff professional program and its Pool contributed to
its success on the professional tours in 1996. There is no guarantee, however,
that the Company will be able to sustain this level of success.
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To support the promotion of its products at the retail level, the
Company offers various promotional programs to its customers. Golf clubs may be
purchased at a discount for personal use by golf shop professionals,
demonstration, test, loan and rental use.
The Company spent approximately $45.0 million, $37.7 million and $33.9
million on advertising, promotional and endorsement related expenditures,
including compensation to professional golfers, in 1996, 1995 and 1994,
respectively. The Company expects these expenditures to increase during 1997.
MANUFACTURING
The manufacturing of the Company's golf clubs involves a number of
specialized processes required by the unique design of the products. The
Company's metal woods and irons are produced by the Company's manufacturing
personnel at its Carlsbad, California facilities using clubheads, shafts and
grips supplied by independent vendors.
The Company works with a few select casting houses to produce its
clubheads. The clubheads used in the production of Big Bertha(R) Metal Woods
with the War Bird(R) soleplate are manufactured to Callaway Golf's
specifications by Cast Alloys, Inc. and Coastcast Corporation ("Coastcast").
Sturm, Ruger and Company ("Sturm, Ruger"), Coastcast and Cast Alloys, Inc. cast
Great Big Bertha(R) Titanium Metal Wood clubheads. Biggest Big Bertha(TM)
Titanium Driver clubheads are provided by Cast Alloys Inc. and Sturm, Ruger. Big
Bertha(R) Iron clubheads are provided by Hitchiner Manufacturing Co. and
Coastcast. Great Big Bertha(R) Tungsten.Titanium(TM) Irons are provided by
Coastcast, and Big Bertha Gold(TM) Irons are provided by Hitchener Manufacturing
Co. The Company works closely with its casting houses, which enables the Company
to monitor the quality and reliability of clubhead production. All of these
casting houses are currently manufacturing, or are entitled to manufacture,
clubheads for competitors of the Company. The Company also works closely with
Aldila, True Temper, HST, Graphite Design, Inc., Fujikura, Suntech-Sunwoo Co,
Ltd. and Unifiber, its principal suppliers of shafts, to develop specialized
shafts suited to the S2H2(R) design and the other unique features of the
Company's products.
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. In the event of
a significant delay or disruption, the Company believes that suitable heads and
shafts could be obtained from other manufacturers, although the transition to
another supplier, particularly with respect to the Biggest Big Bertha(TM)
Titanium Driver and Great Big Bertha(R) Tungsten.Titanium(TM) Irons, could
result in significant production delays and would likely have an adverse impact
on results of operations during the transition.
Callaway Golf's own production processes entail rigorous and continual
quality control inspection and require the application of significant resources
to the manufacturing process. The Company's executive offices and its product
development, manufacturing and distribution facilities are housed in facilities
leased and owned by the Company in Carlsbad, California.
In the ordinary course of its manufacturing process, the Company uses
paints and chemical solvents which are stored on-site. The waste created by use
of these materials is transported off-site on a regular basis by registered
waste haulers. To date, the Company has not experienced any material
environmental compliance problems, although there can be no assurance that such
problems will not arise in the future. Additionally, in the manufacturing
process, the Company has used 1,1,1 trichloroethane ("trichloroethane") which is
considered ozone depleting by the Environmental Protection Agency. Effective
January 1996, the Company began using alternative products for trichloroethane
in its manufacturing processes.
The Company's size has made it a large consumer of certain materials,
including titanium and carbon fiber. Callaway Golf does not make these
materials itself, and must rely on its ability to obtain adequate supplies in
the world marketplace in competition with other users of such materials. While
the Company has been successful in obtaining its requirements for such materials
thus far, there can be no assurance that it will always be able to do so. An
interruption in the supply of such materials or a significant change in costs
could have a material adverse effect on the Company.
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COMPETITION
The market in which the Company does business is highly competitive, and
is served by a number of well-established and well-financed companies with
recognized brand names. 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 successful marketing activities by competitors
will not negatively impact the Company's future sales.
Additionally, the golf club industry, in general, has been characterized
by widespread imitation of popular club designs. A manufacturer's ability to
compete is in part dependent upon its ability to satisfy the various subjective
requirements of golfers, including the golf club's look and "feel," and the
level of acceptance that the golf club has among professional and other golfers.
The subjective preferences of golf club purchasers may also be subject to rapid
and unanticipated changes. There can be no assurance as to how long the
Company's golf clubs will maintain market acceptance.
As noted elsewhere in this Report, the Company has formed Callaway Golf
Ball Company for the purpose of designing, manufacturing and selling golf balls.
The golf ball business is highly competitive with a number of well-established
and well-financed competitors, including Titleist, Spalding, Sumitomo Rubber
Industries, Bridgestone and others. These competitors have established market
share in the golf ball business which will need to be penetrated in order for
the Company's golf ball business to be successful.
INTELLECTUAL PROPERTY
The Company seeks to protect its intellectual property rights, such as
product designs, manufacturing processes, new product research and concepts, and
trademarks. These rights are protected through the acquisition of utility and
design patents and trademark registrations, the maintenance of trade secrets,
the development of trade dress, and, when necessary and appropriate, litigation
against those who are, in the Company's opinion, unfairly competing. In the
United States, the Company has applied for or been granted patents for certain
features of its golf clubs. Additionally, it has been granted trademark
registrations for Callaway(R), Big Bertha(R), War Bird(R) and S2H2(R), and
several other product names and descriptions. There is no assurance that, prior
to a court of competent jurisdiction validating them, any of these patents or
trademarks are enforceable, although the Company believes them to be
enforceable.
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 it rights against infringers of
its patents, trademarks, and trade dress. However, there is no assurance that
these efforts will reduce the level of acceptance obtained by these infringers.
Additionally, there can be no assurance that other golf club manufacturers will
not be able to produce successful golf clubs which imitate the Company's designs
without infringing any of the Company's patents, trademarks, or trade dress.
The Company has stringent procedures to maintain the secrecy of its
confidential business information. These procedures include criteria for
dissemination of information and written confidentiality agreements with
employees and vendors. Suppliers, when engaged in joint research projects, are
required to enter into additional confidentiality agreements. There can be no
assurance that these measures will prove adequate in all instances to protect
the Company's confidential information.
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. (See also Item 3, "Legal Proceedings"). To date, there have been
no interruptions in the Company's business as the result of any claims of
infringement. No assurance can be given, however, that the Company will not be
adversely affected in the future by the assertion of intellectual property
rights belonging to others. This effect could include alteration of existing
products, withdrawal of existing products and delayed introduction of new
products.
7
<PAGE>
Various patents have been issued to the Company's competitors in the golf ball
industry. As Callaway Golf Ball Company develops a new golf ball product, it
must avoid infringing on these patent rights, or it must obtain licenses to use
them lawfully. If any new golf ball product was found to infringe on protected
technology, the Company could incur substantial costs to redesign its golf ball
product or to defend legal action taken against it. Despite its efforts to avoid
such infringements, there can be no assurance that Callaway Golf Ball Company
will not infringe on the patents and other intellectual property rights of third
parties in its development efforts, or that it will be able to obtain licenses
to use any such rights, if necessary.
SEASONALITY
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 Company's increasing sales volume in
many years has tended to mitigate the impact of seasonality on the Company's
operating results. However, in recent years, the Company's operating results
have been more significantly affected by seasonal buying trends, and the Company
expects this trend to continue.
PRODUCT WARRANTIES
The Company supports all of its golf clubs with a two year written
warranty. Since the Company does not rely upon traditional designs in the
development of its golf clubs, its products may be more likely to develop
unanticipated problems than those of many of its competitors which use
traditional designs. For example, clubs have been returned with cracked
clubheads, broken graphite shafts and loose medallions. While any breakage or
warranty problems are deemed significant to the Company, the incidence of clubs
returned as a result of cracked clubheads, broken graphite shafts, loose
medallions and other product problems has not to date been material in relation
to the volume of Callaway Golf clubs which have been sold. The Company monitors
closely the level and nature of any product breakage and, where appropriate,
incorporates design and production changes to assure its customers of the
highest quality available in the market. If Callaway Golf clubs were to
experience a significant increase in the incidence of breakage or other product
problems, the Company's sales and image with golfers would be materially
adversely affected. At December 31, 1996, 1995 and 1994, the Company's reserves
for warranty claims were approximately $27.3 million, $23.8 million and $18.2
million, respectively. The increase in this reserve was primarily attributable
to increased sales volume and change in product mix. The Company believes that
it has sufficient reserves for warranty claims; however, there can be no
assurance that these reserves will be sufficient if the Company were to
experience an unusually high incidence of breakage or other product problems.
EMPLOYEES
As of December 31, 1996, the Company and its subsidiaries had 2,152
full-time employees, including 201 employed in sales and marketing, 145 employed
in research and development and product engineering and 1,432 employed in
production. The remaining full-time employees are administrative and support
staff.
The Company considers its employee relations to be good. None of the
Company's employees are represented by unions. The Company's commitment to the
development of new products and the seasonal nature of its business may result
in fluctuations in production levels. The Company attempts to manage these
fluctuations to maintain employee morale and avoid disruption. However, it is
possible that such fluctuations could strain employee relations in the future.
8
<PAGE>
ITEM 2. PROPERTIES.
Operations of the Company and its subsidiaries are conducted in both
owned and leased properties. The following table describes the general
character of the important existing facilities:
<TABLE>
<CAPTION>
Location Interest Size (sq.ft.)
-------- -------- -------------
<S> <C> <C>
United States
Corporate Headquarters, Manufacturing and
Research & Development Facilities:
2285 Rutherford Road, Carlsbad, California Owned 128,000
5960 Pascal Court, Carlsbad, California Owned 73,000
5957 Landau Court, Carlsbad, California Owned 46,000
5928 Pascal Court, Carlsbad, California Owned 38,000
1911 Palomar Oaks Way, Carlsbad, California Owned 22,000
5860 Dryden Place, Carlsbad, California Owned 10,000
5858 Dryden Place, Carlsbad, California Leased 63,000
5931 Priestly Drive, Carlsbad, California Leased 46,000
2261 Rutherford Road, Carlsbad, California Leased 20,000
5925 Priestly Drive, Carlsbad, California Leased 15,000
5940 Priestly Drive, Carlsbad, California Leased 11,000
5927 Priestly Drive, Carlsbad, California Leased 11,000
2260 Rutherford Road, Carlsbad, California Leased 6,000
Additional Manufacturing/Warehouse Facilities:
2835 La Mirada Drive, Vista, California Leased 32,000
985 Poinsettia Avenue, Vista, California Leased 31,000
2105 Rutherford Road, Carlsbad, California Leased 8,000
-------
560,000
=======
United Kingdom
Headquarters, Sales Office and Warehouse:
Barwell Business Park, Chessington, Surrey, England Leased 16,000
=======
Germany
Headquarters, Sales Office and Warehouse:
Golf Trading GmbH
Luruper Chaussee 125 Leased 13,000
Haus 6, 22761 Hamburg, Germany =======
</TABLE>
The Company believes that its facilities are adequate to meet its
current requirements. The Company has experienced rapid growth in its business
for the last several years, however, and in order to accommodate this growth,
the Company has regularly acquired or leased new facilities for manufacturing,
research and development, office and storage. Although there can be no assurance
that the Company will achieve similar growth in its business in the future, the
Company expects that its practice of regularly acquiring or leasing additional
properties near its headquarters in Carlsbad, California is likely to continue
in the near term, including the possible acquisition or leasing of facilities
for Callaway Golf Ball Company.
ITEM 3. 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.
9
<PAGE>
In addition, the Company from time to time receives information claiming
that products sold by the Company infringe or may infringe patent or other
intellectual property rights of third parties. To date, the Company has not
experienced any material expense or disruption associated with any such
potential infringement matters. It is possible, however, that in the future
one or more claims of potential infringement could lead to litigation, the need
to obtain additional licenses, the need to alter a product to avoid
infringement, or some other action or loss by the Company.
On May 30, 1996, a lawsuit was filed against the Company and two of its
officers by a former officer of the Company, captioned Glenn Schmidt v. Callaway
-------------------------
Golf Company, et al., Case No. N 71548, in the Superior Court for the State of
- ---------------------
California, County of San Diego. 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. The plaintiff has
also recently filed a first amended complaint asserting claims for wrongful
termination and termination in violation of public policy. The first amended
complaint seeks damages of $290,000,000, a royalty of $27,000,000, or
compensatory damages for breach of the oral contract and related claims; damages
of approximately $10,000,000 for the wrongful termination; and unspecified
punitive damages and costs. The Company believes there are meritorious defenses
to all of plaintiff's claims, and thus no provision for liability has been made
in the Company's financial statements. Formal discovery has commenced in
preparation for trial. The trial is currently scheduled to commence on October
20, 1997.
The Company and its subsidiaries, incident to their business activities,
from time to time are parties to a number of legal proceedings in various stages
of development, including but not limited to those described above. The Company
believes that the majority of these proceedings involve matters as to which
liability, if any, will be adequately covered by insurance. With respect to
litigation outside the scope of applicable insurance coverage and to the extent
insured claims may exceed liability limits, it is the opinion of the management
of the Company that the probable result of these matters individually and in the
aggregate will not have a material adverse effect upon the Company's financial
position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
None.
10
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
Biographical information concerning certain of the Company's officers is
set forth below.
<TABLE>
<CAPTION>
Name Age Position(s) Held
---- --- ----------------
<S> <C> <C>
Ely Callaway 77 Founder and Chairman of the Board
Donald H. Dye 54 President and Chief Executive Officer
Bruce Parker 41 Senior Executive Vice President, Chief Merchant
John P. Duffy 56 Senior Executive Vice President, Chief of
Manufacturing
Richard C. Helmstetter 55 Senior Executive Vice President, Chief of New
Products
Steven C. McCracken 46 Executive Vice President, Secretary and General
Counsel
Frederick R. Port 55 Executive Vice President, International Sales,
Licensing and Business Development
David A. Rane 42 Executive Vice President, Chief Financial
Officer
Charles J. Yash 48 President and Chief Executive Officer, Callaway
Golf Ball Company
</TABLE>
Ely Callaway, Founder, has served as Chairman of the Board since the
Company's formation in 1982, and is the Chairman of the Executive and
Compensation Committee of the Company's Board of Directors. He served as Chief
Executive Officer from 1982 to May 1996. From 1974 to 1981, Mr. Callaway
founded and operated Callaway Vineyard and Winery in Temecula, California, until
it was sold. From 1946 to 1973, Mr. Callaway worked in the textile industry,
where he served as a Divisional President of several major divisions of
Burlington Industries, Inc., and in 1968 was elected Corporate President and
Director of Burlington, which at the time was the world's largest textile
company. Prior to 1945, Mr. Callaway served a five-year tour of duty in the
U.S. Army Quartermaster Corps.
Donald H. Dye serves as President and Chief Executive Officer of the
Company. He has served as Chief Executive Officer since May 1996, as President
since 1993, and as a Director of the Company since its formation in 1982. He
served as Chief Operating Officer from October 1991 until May 1996. From 1973
to 1991, Mr. Dye was in the private practice of law in Riverside, California.
During that period, he provided legal services to Callaway Vineyard & Winery,
Mr. Callaway and the Company. Prior to 1973, Mr. Dye served five years in the
U.S. Air Force as a member of the Judge Advocates General Corps.
Bruce Parker has served as Senior Executive Vice President since 1993,
Chief Merchant since 1991 and as a Director of the Company since July 1996. Mr.
Parker also served the Company in various vice presidential positions since 1984
and became Executive Vice President, Chief Merchant in October 1991. Prior to
1984, Mr. Parker worked as a sales manager for various golf club manufacturers
in California.
John P. Duffy has served the Company in various vice presidential
positions since 1989 and became Executive Vice President, Chief of Manufacturing
in March 1990 and Senior Executive Vice President in April 1993. From 1988 to
1989, Mr. Duffy served as Vice President--Product Line Management of Taylor Made
Golf Company. From 1984 to 1988, Mr. Duffy served as Vice President-
Manufacturing of Taylor Made. From 1982 to 1984, Mr. Duffy served as General
Manager--Western Division of Taylor Made. Prior to 1982, Mr. Duffy owned and
operated golf retail outlets in Florida and California under the name "House of
Golf."
11
<PAGE>
Richard C. Helmstetter has served the Company as Senior Executive Vice
President, Chief of New Products since April 1993. Mr. Helmstetter served as
President from 1990 to 1993 and as Executive Vice President from 1986 to 1990.
From 1967 to 1986, Mr. Helmstetter served as President of Adam Ltd., a pool cue
manufacturing and merchandising company which he founded and operated in Japan.
During 1982 and 1983, Mr. Helmstetter also consulted extensively for several
Japanese, European and American companies, including Bridgestone Corporation's
strategic planning group.
Steven C. McCracken has served the Company as Executive Vice President
since April 1996 and as Secretary and General Counsel since April 1994. He
served as Vice President from April 1994 to April 1996. Prior to April 1994,
Mr. McCracken was a partner at Gibson, Dunn & Crutcher for 11 years, and had
been in the private practice of law for over 18 years. During part of that
period, he provided legal services to the Company.
Frederick R. Port has served as Executive Vice President, International
Sales, Licensing and Business Development since April 1996 and as a Director of
the Company since October 1995. He served as Executive Vice President, Business
Development of the Company from September 1995 to April 1996. From 1993 to
1995, Mr. Port was the Managing Director of Korn/Ferry International for the
Southern California region (an executive recruiting and strategic consulting
firm). From 1987 to 1992, he was the President and a Director of the Owl
Companies (a company providing military base services management, construction
materials production and sale, industrial and commercial real estate development
and power development).
David A. Rane has served the Company as Executive Vice President since
April 1996 and as Chief Financial Officer since January 1994. He served as
Vice President from January 1994 to April 1996. Mr. Rane served as Director of
Investor Relations from June 1993 to January 1994. Prior to 1993, Mr. Rane was
a senior manager for the accounting firm of Price Waterhouse LLP, and served a
total of 14 years in public accounting.
Charles J. Yash has served as President and Chief Executive Officer of
Callaway Golf Ball Company, a wholly-owned subsidiary of the Company, since June
1996 and as a Director of the Company since July 1996. From 1992 to June 1996,
Mr. Yash was President and Chief Executive Officer and a Director of Taylor Made
Golf Company. From 1979 to 1992, Mr. Yash was employed in various marketing
positions with the golf products division of Spalding Sports Worldwide,
including Corporate Vice President and General Manager-Golf Products, from 1988
to 1992.
The Company has employment agreements with Messrs. Callaway, Dye and
Helmstetter for terms commencing January 1, 1995 and ending December 31, 1997.
The Company is currently in negotiations with Messrs. Dye and Helmstetter with
respect to new, long-term employment agreements. The Company has new employment
agreements with Messrs. Parker, Duffy, McCracken, Port and Rane for terms
commencing January 1, 1997 and ending on December 31, 1999. The Company also
has an employment agreement with Mr. Yash which commenced May 15, 1996 and ends
on May 14, 2001.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Information in response to Item 5 is contained on page 35 of the
Company's 1996 Annual Report to Shareholders, which information is incorporated
herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
Information in response to Item 6 is contained on page 19 of the
Company's 1996 Annual Report to Shareholders, which information is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
Information in response to Item 7 is contained on pages 20, 21 and 22 of
the Company's 1996 Annual Report to Shareholders, which information is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Information in response to Item 8 is contained on pages 23 through 36 of
the Company's 1996 Annual Report to Shareholders, which information is
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Certain information concerning the Company's executive officers is
included under the caption "Executive Officers of the Registrant" following Part
I, Item 4. Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers, directors and greater than 10% shareholders to
file initial reports of ownership (on Form 3) and periodic changes in ownership
(on Forms 4 and 5) of Company securities with the Securities and Exchange
Commission and the New York Stock Exchange. Based solely on its review of copies
of such forms and such written representations regarding compliance with such
filing requirements as were received from its executive officers, directors and
greater than 10% shareholders, the Company believes that all such Section 16(a)
filing requirements were complied with during 1996.
Other information required by Item 10 has been included in the Company's
definitive proxy statement under the caption "Election of Directors," as filed
with the Securities and Exchange Commission (the "Commission") on March 10, 1997
pursuant to Regulation 14A, which information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
The Company maintains employee benefit plans and programs in which its
executive officers are participants. Copies of certain of these plans and
programs are set forth or incorporated by reference as Exhibits 10.1.1 to
10.19.2 to this Report. Information required by Item 11 has been included in the
Company's definitive proxy statement under the captions "Compensation of
Executive Officers," "Report of the Executive and Compensation Committee of the
Board of Directors on Executive Compensation," "Performance Graph" and "Election
of Directors," as filed with the Commission on March 10, 1997 pursuant to
Regulation 14A, which information is incorporated herein by reference.
13
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 has been included in the Company's
definitive proxy statement under the caption "Beneficial Ownership of the
Company's Securities," as filed with the Commission on March 10, 1997 pursuant
to Regulation 14A, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 has been included in the Company's
definitive proxy statement under the caption "Certain Transactions," as filed
with the Commission on March 10, 1997 pursuant to Regulation 14A, which
information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
1. Financial Statements. The following consolidated
financial statements of Callaway Golf Company and its
subsidiaries included in Part II, Item 8, are
incorporated by reference from pages 23 through 35 of
the 1996 Annual Report to Shareholders:
Consolidated Balance Sheet at December 31, 1996 and
1995
Consolidated Statement of Income for the three years
ended December 31, 1996
Consolidated Statement of Cash Flows for the three
years ended December 31, 1996
Consolidated Statement of Shareholders' Equity for
the three years ended December 31, 1996
Notes to Consolidated Financial Statements
Report of Independent Accountants
2. Financial Statement Schedule.
Report of Independent Accountants on Financial
Statement Schedule
II Consolidated Valuation and Qualifying Accounts
All other schedules are omitted because they are
not applicable or the required information is shown
in the consolidated financial statements or notes
thereto.
3. Exhibits.
3.1.1 Restated Articles of Incorporation of the
Company.(1)
3.1.2 Certificate of Amendment of Articles of
Incorporation, effective February 10, 1995.(2)
3.2 Certificate of Determination of Rights,
Preferences, Privileges and Restrictions of
Series A Junior Participating Preferred Stock.
(3)
3.3 Bylaws of the Company (as amended through May
10, 1996).(4)
4.1 Dividend Reinvestment and Stock Purchase Plan.
(5)
4.2 Rights Agreement by and between the Company and
Chemical Mellon Shareholder Services as Rights
Agent dated as of June 21, 1995.(3)
14
<PAGE>
Executive Compensation Contracts/Plans
10.1.1 Officer Employment Agreement by and between the
Company and Ely Callaway dated January 1, 1995.
(6)
10.1.2 Amendment No. 1 to Officer Employment Agreement
by and between the Company and Ely Callaway
dated July 19, 1995.(3)
10.2.1 Officer Employment Agreement by and between the
Company and Donald H. Dye dated January 1,
1995.(6)
10.2.2 Amendment No. 1 to Officer Employment Agreement
by and between the Company and Donald H. Dye
dated July 19, 1995.(3)
10.3 Executive Officer Employment Agreement by and
between the Company and Bruce Parker dated as
of January 1, 1997.
10.4.1 Officer Employment Agreement by and between the
Company and Richard Helmstetter dated January
1, 1995.(6)
10.4.2 Amendment No. 1 to Officer Employment Agreement
by and between the Company and Richard
Helmstetter dated July 19, 1995.(3)
10.5 Executive Officer Employment Agreement by and
between the Company and John Duffy dated
January 1, 1997.
10.6 Executive Officer Employment Agreement by and
between the Company and Steven C. McCracken
dated January 1, 1997.
10.7.1 Executive Officer Employment Agreement by and
between the Company and Frederick R. Port dated
January 1, 1997.
10.7.2 Stock Option Agreement by and between the
Company and Frederick R. Port dated as of
September 1, 1995.(7)
10.8 Executive Officer Employment Agreement by and
between the Company and David Rane dated
January 1, 1997.
10.9.1 Officer Employment Agreement by and between the
Company and Charles J. Yash dated May 10, 1996.
(8)
10.9.2 Stock Option Agreement by and between the
Company and Charles J. Yash.(9)
10.10 Employment Agreement by and between the Company
and Elmer Ward dated July 1, 1996.(10)
10.11.1 Form of Tax Indemnification Agreement.(3)
10.11.2 Form of Amendment No. 1 to Tax Indemnification
Agreement.(10)
10.12 Executive Deferred Compensation Plan (amended
and restated July 1995).(3)
10.13 Callaway Golf Company Executive Non-
Discretionary Bonus Plan.(6)
10.14 Executive Bonus Pool.(11)
10.15 1991 Stock Incentive Plan (as amended and
restated April 1994).(2)
10.16 Amended and Restated Stock Option Plan effective
April 2, 1991.(12)
10.17 1996 Stock Option Plan.
10.18 Callaway Golf Company Non-Employee Directors
Stock Option Plan (as Amended and Restated
April 17, 1996).(9)
10.19.1 Form of Indemnification Agreement by and between
the Company and the following directors:
William Baker, Richard Rosenfield, William
Schreyer and Michael Sherwin, all dated January
25, 1995.(2)
10.19.2 Indemnification Agreement by and between the
Company and Ms. Aulana L. Peters, Director,
dated July 18, 1996.(11)
Other Contracts
10.20.1 Loan Agreement by and between the Company and
First Interstate Bank of California dated
December 1, 1994.(2)
10.20.2 Amended and Restated Revolving Credit Note made
by the Company in the principal amount of
$50,000,000 and payable to First Interstate
Bank of California, dated December 1, 1995 and
First Amendment to Loan Agreement by and
between the Company and First Interstate Bank
of California dated December 1, 1995.(8)
10.21 Trust Agreement between Callaway Golf Company
and Sanwa Bank California as Trustee, for the
benefit of participating employees, dated July
14, 1995.(13)
10.22.1 Industrial lease by and between Dwight and Donna
Johnson and the Company, dated July 16, 1993,
for 2261 Rutherford Road, Carlsbad, California
("Johnson Lease").(14)
15
<PAGE>
10.22.2 Amendment No. 1 to Johnson Lease dated October
24, 1994.(8)
10.23.1 Industrial Real Estate Lease by and between Mark
IV Properties, Inc. ("Mark IV") and the
Company, dated March 14, 1994, for 5931
Priestly Drive, Carlsbad, California.(2)
10.23.2 Assignment and Assumption dated December 15,
1995 by Seltzer Chemicals, Inc. ("Seltzer") to
the Company of Interest in Lease Agreement
between Seltzer and Mark IV, as amended through
January 20, 1993, for additional space at 5931
Priestly Drive.(8)
10.24.1 Standard Net Industrial Lease by and between
National Life Insurance Company and Callaway
Golf Company dated March 13, 1996 for 5858
Dryden Place, Carlsbad, California.(15)
10.24.2 Lease Amendment made as of October 4, 1996
between National Life Insurance Company and
Callaway Golf Company.
11.1 Computation of earnings per share.
13.1 Portions of the Company's 1996 Annual Report to
Shareholders (with the exception of the
information incorporated by reference
specifically in this Report on Form 10-K, the
1996 Annual Report to Shareholders is not
deemed to be filed as a part of this Report on
Form 10-K).
21.1 List of Subsidiaries.
23.1 Consent of Price Waterhouse LLP.
27.1 Financial Data Schedule.
/(1)/ Included as an exhibit to the Company's
Registration Statement on Form S-8 (No. 33-85692), as
filed with the Securities and Exchange Commission on
October 28, 1994, and incorporated herein by reference.
/(2)/ Included as an exhibit to the Company's 1994
Annual Report on Form 10-K, as filed with the Securities
and Exchange Commission on March 31, 1995, and
incorporated herein by reference.
/(3)/ Included as an exhibit to the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 1995,
as filed with the Securities and Exchange Commission on
August 12, 1995, and incorporated herein by reference.
/(4)/ Included as an exhibit to the Company's
Registration Statement on Form S-8 (No. 333-5719), as
filed with the Securities and Exchange Commission on
June 11, 1996, and incorporated herein by reference.
/(5)/ Included as the Prospectus in the Company's
Registration Statement on Form S-3 (No. 33-77024), as
filed with the Securities and Exchange Commission on
March 29, 1994, and incorporated herein by reference.
/(6)/ Included as an exhibit to the Company's Quarterly
Report on Form 10-Q for the period ended March 31, 1995,
as filed with the Securities and Exchange Commission on
May 10, 1995, and incorporated herein by reference.
/(7)/ Included as an exhibit to the Company's
Registration Statement on Form S-8 (No. 33-98750), as
filed with the Securities and Exchange Commission on
October 30, 1995, and incorporated herein by reference.
/(8)/ Included as an exhibit to the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 1996,
as filed with the Securities and Exchange Commission on
August 14, 1996, and incorporated herein by reference.
16
<PAGE>
/(9)/ Included as an exhibit to the Company's
Registration Statement on Form S-8 (No. 333-5721), as
filed with the Securities and Exchange Commission on
June 11, 1996, and incorporated herein by reference.
/(10)/ Included as an exhibit to the Company's Quarterly
Report on Form 10-Q for the period ended September 30,
1996, as filed with the Securities and Exchange
Commission on November 13, 1996, and incorporated herein
by reference.
/(11)/ Included as an exhibit to the Company's
Registration Statement on Form S-1 (No. 33-44556), as
declared effective by the Securities and Exchange
Commission on February 27, 1992, and incorporated herein
by reference.
/(12)/ Included as an exhibit to the Company's 1995
Annual Report on Form 10-K, as filed with the Securities
and Exchange Commission on April 1, 1996, and
incorporated herein by reference.
/(13)/ Included as an exhibit to the Company's Quarterly
Report on Form 10-Q for the period ended September 30,
1995, as filed with the Securities and Exchange
Commission on November 14, 1995, and incorporated herein
by reference.
/(14)/ Included as an exhibit to the Company's 1993
Annual Report on Form 10-K, as filed with the Securities
and Exchange Commission on March 25, 1994, and
incorporated herein by reference.
/(15)/ Included as an exhibit to the Company's Quarterly
Report on Form 10-Q for the period ended March 31, 1996,
as filed with the Securities and Exchange Commission on
May 15, 1996, and incorporated herein by reference.
(b) Reports on Form 8-K:
No Reports on Form 8-K were filed by the Company during the
quarter ended December 31, 1996.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
CALLAWAY GOLF COMPANY
Date: March 26, 1997 /s/ ELY CALLAWAY
------------- ---------------------------
Ely Callaway
Chairman of the Board
/s/ DONALD H. DYE
---------------------------
Donald H. Dye
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICERS AND DIRECTORS:
/s/ ELY CALLAWAY Chairman of the Board March 26, 1997
--------------------- --------------
Ely Callaway
/s/ DONALD H. DYE President and Chief Executive Officer March 26, 1997
--------------------- --------------
Donald H. Dye
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
/s/ DAVID A. RANE Executive Vice President, March 26, 1997
--------------------- --------------
David A. Rane Chief Financial Officer
OTHER DIRECTORS:
/s/ WILLIAM C. BAKER Director March 26, 1997
--------------------- --------------
William C. Baker
/s/ BRUCE PARKER Director March 26, 1997
--------------------- --------------
Bruce Parker
/s/ AULANA L. PETERS Director March 26 , 1997
--------------------- --------------
Aulana L. Peters
/s/ FREDERICK R. PORT Director March 26, 1997
--------------------- --------------
Frederick R. Port
/s/ RICHARD ROSENFIELD Director March 26, 1997
--------------------- --------------
Richard Rosenfield
/s/ WILLIAM SCHREYER Director March 26, 1997
--------------------- --------------
William Schreyer
/s/ MICHAEL SHERWIN Director March 26, 1997
--------------------- --------------
Michael Sherwin
/s/ ELMER WARD Director March 26, 1997
--------------------- --------------
Elmer Ward
/s/ CHARLES J. YASH Director March 26, 1997
--------------------- --------------
Charles J. Yash
</TABLE>
18
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders
of Callaway Golf Company
Our audits of the consolidated financial statements referred to in our report
dated January 20, 1997 appearing on page 35 of the 1996 Annual Report to
Shareholders of Callaway Golf Company (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the Financial Statement Schedule listed in Item 14(a)
of this Form 10-K. In our opinion, this Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
San Diego, California
January 20, 1997
19
<PAGE>
SCHEDULE II
CALLAWAY GOLF COMPANY
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEAR PERIOD ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Allowance Allowance Allowance
for Doubtful for Obsolete for Warranty
Date Accounts Inventory Costs
- ----------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Balance, December 31, 1993 $3,035 $5,155 $ 9,730
Provision 3,479 13,302
Write-off (108) (215) (4,850)
Recovery 6 19
------------------------------------------------
Balance, December 31, 1994 6,412 4,959 18,182
Provision 101 12,002
Write-off (103) (163) (6,415)
Recovery
------------------------------------------------
Balance, December 31, 1995 6,410 4,796 23,769
Provision 231 800 10,735
Write-Off (304) (312) (7,201)
Recovery
------------------------------------------------
Balance, December 31, 1996 $6,337 $5,284 $27,303
================================================
</TABLE>
20
<PAGE>
EXHIBIT 10.3
------------
EXECUTIVE OFFICER EMPLOYMENT AGREEMENT
This Executive Officer Employment Agreement ("Agreement") is
entered into as of January 1, 1997, by and between Callaway Golf Company, a
California corporation (the "Company"), and Bruce Parker ("Employee").
1. TERM. The Company hereby employs Employee and Employee
----
hereby accepts employment pursuant to the terms and provisions of this Agreement
for the term commencing January 1, 1997 and terminating December 31, 1999 unless
this Agreement is earlier terminated as hereinafter provided. Unless such
employment is earlier terminated, upon the expiration of the term of this
Agreement, Employee's status shall be one of at will employment.
2. SERVICES.
--------
(a) Employee shall serve as Senior Executive Vice President,
Chief Merchant of the Company. Employee's duties shall be the usual and
customary duties of the offices in which he or she serves. Employee shall
report to the President and Chief Executive Officer of the Company, or to such
other person as the Chief Executive Officer shall designate. Employee's title,
position and/or duties may be changed by the Board of Directors and/or the Chief
Executive Officer of the Company.
(b) Employee shall be required to comply with all policies
and procedures of the Company, as such shall be adopted, modified or otherwise
established by the Company from time to time.
3. SERVICES TO BE EXCLUSIVE. During the term hereof,
------------------------
Employee agrees to devote his or her full productive time and best efforts to
the performance of Employee's duties hereunder pursuant to the supervision and
direction of the Company's Board of Directors and its Chief Executive Officer.
Employee further agrees, as a condition to the performance by the Company of
each and all of its obligations hereunder, that so long as Employee is employed
by the Company, Employee will not directly or indirectly render services of any
nature to, otherwise become employed by, or otherwise participate or engage in
any other business without the Company's prior written consent. Employee
further agrees to execute such secrecy, non-disclosure, patent, trademark,
copyright and other proprietary rights agreements, if any, as the Company may
from time to time reasonably require. Nothing herein contained shall be deemed
to preclude Employee from having outside personal investments and involvement
with appropriate community activities, and from devoting a reasonable amount of
time to such matters, provided that this shall in no manner interfere with or
derogate from Employee's work for the Company.
4. COMPENSATION. The Company agrees to pay Employee:
------------
(a) a base salary at the rate of $600,000.00 per year; and
<PAGE>
(b) an opportunity to earn an annual bonus based upon
participation in the Company's Executive Bonus Plan as it may exist from time to
time.
5. EXPENSES AND BENEFITS.
---------------------
(a) Reasonable and Necessary Expenses. In addition to the
---------------------------------
compensation provided for in Section 4 hereof, the Company shall reimburse
Employee for all reasonable, customary, and necessary expenses incurred in the
performance of Employee's duties hereunder. Employee shall first account for
such expenses by submitting a signed statement itemizing such expenses prepared
in accordance with the policy set by the Company for reimbursement of such
expenses. The amount, nature, and extent of such expenses shall always be
subject to the control, supervision, and direction of the Company and its Chief
Executive Officer.
(b) Vacation. Employee shall receive four (4) weeks paid
--------
vacation for each twelve (12) month period of employment with the Company. The
vacation may be taken any time during the year subject to prior approval by the
Company, such approval not to be unreasonably withheld. Any unused time will
accrue from year to year. The maximum vacation time Employee may accrue shall
be three times Employee's annual vacation benefit. The Company reserves the
right to pay Employee for unused, accrued vacation benefits in lieu of providing
time off.
(c) Benefits. During Employee's employment with the Company
--------
pursuant to this Agreement, the Company shall provide for Employee to:
(i) participate in the Company's health insurance
and disability insurance plans as the same may be modified from time to time;
(ii) receive, if Employee is insurable under usual
underwriting standards, term life insurance coverage on Employee's life, payable
to whomever the Employee directs, in the face amount of $1,000,000.00, provided
that Employee's physical condition does not prevent Employee from reasonably
qualifying for such insurance coverage;
(iii) participate in the Company's 401(k) pension plan
pursuant to the terms of the plan, as the same may be modified from time to
time;
(iv) participate in the Company's Executive Deferred
Compensation Plan, as the same may be modified from time to time: and
(v) participate in any other benefit plans the
Company provides from time to time to executive officers.
(d) Club Membership. The Company shall pay the reasonable
---------------
cost
2
<PAGE>
of initiation associated with Employee gaining privileges at a mutually agreed
upon country club. Employee shall be responsible for all other expenses and
costs associated with such club use, including monthly member dues and charges.
The club membership itself shall belong to and be the property of the Company,
not Employee.
(e) Estate Planning and Other Perquisites. To the extent
-------------------------------------
the Company provides estate planning and related services, or any other
perquisites and personal benefits to other executive officers from time to time,
such services and perquisites shall be made available to Employee on the same
terms and conditions.
6. DISABILITY. If on account of any physical or mental
----------
disability Employee shall fail or be unable to perform all or substantially all
of Employee's duties under this Agreement for a continuous period of up to six
(6) months during any twelve month period during the term of this Agreement,
Employee shall be entitled to his or her full compensation and benefits as set
forth in this Agreement. If Employee's disability continues after such six (6)
month period, this Agreement is subject to termination pursuant to the
provisions of Section 8(e) hereof.
7. NONCOMPETITION.
--------------
(a) Other Business. To the fullest extent permitted by law
--------------
Employee agrees that, while employed by the Company, Employee will not, directly
or indirectly (whether as agent, consultant, holder of a beneficial interest,
creditor, or in any other capacity), engage in any business or venture which
engages directly or indirectly in competition with the business of the Company,
or have any interest in any person, firm, corporation, or venture which engages
directly or indirectly in competition with the business of the Company. For
purposes of this section, the ownership of interests in a broadly based mutual
fund shall not constitute ownership of the stocks held by the fund.
(b) Other Employees. Except as may be required in the
---------------
performance of his or her 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. While employed by the Company, and for one
---------
(1) year thereafter, Employee shall not cause or induce, or attempt to cause or
induce, any person or firm supplying goods, services or credit to the Company to
diminish or cease furnishing such goods, services or credit.
(d) Conflict of Interest. While employed by the Company,
--------------------
Employee shall not engage in any conduct or enterprise that shall constitute an
actual or apparent conflict of interest with respect to Employee's duties and
obligations to the
3
<PAGE>
Company.
8. TERMINATION.
-----------
(a) Termination at the Company's Convenience. Employee's
-----------------------------------------
employment under this Agreement may be terminated by the Company at its
convenience at any time upon giving 90 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 in effect at the time of termination for a period of time
equal to the greater of the remainder of the term of this Agreement or two
years; (iii) the payment of nondiscretionary bonuses pursuant to the Company's
Executive Bonus Plan, as it existed on the date of termination, for a period of
time equal to the greater of the remainder of the term of this Agreement or two
years; (iv) the immediate vesting of all unvested stock options held by Employee
as of such termination date; (v) the continuation of all benefits and
perquisites provided by Sections 5(c)(i) and (ii) hereof for a period of time
equal to the greater of the remainder of the term of this Agreement or two
years; and (vi) no other severance. At Employee's option, Employee may elect in
writing up to 60 days prior to termination to receive such payments and benefits
as provided by subsection (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
or her 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; (ii) severance pay equal to the
nondiscretionary cash bonus Employee would have earned under the then existing
Executive Bonus Plan in the fiscal year in which Employee's employment is
terminated, prorated in accordance with the number of days in such fiscal year
that elapsed prior to Employee's termination and payable at the same time and
under the same terms and conditions as any other nondiscretionary bonuses paid
to officers in that fiscal year; and (iii) 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; (ii) severance
pay equal to the nondiscretionary cash bonus Employee would have earned under
the then existing Executive Bonus Plan in the fiscal year in which Employee's
employment is terminated, prorated in accordance with the number of days in such
fiscal year that elapsed prior to Employee's termination and payable at the same
time and under the
4
<PAGE>
same terms and conditions as any other nondiscretionary bonuses paid to officers
in that fiscal year; and (iii) no other severance. "Substantial cause" shall
mean for purposes of this subsection failure by Employee to substantially
perform his her duties, 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 in
effect at the time of termination for a period of time equal to the greater of
the remainder of the term of this Agreement or two years; (iii) the payment of
nondiscretionary bonuses pursuant to the Company's Executive Bonus Plan, as it
existed on the date of termination, for a period of time equal to the greater of
the remainder of the term of this Agreement or two years; (iv) the immediate
vesting of all unvested stock options held by Employee as of such termination
date; (v) the continuation of all benefits and perquisites provided by Sections
5(c)(i) and (ii) hereof for a period of time equal to the greater of the
remainder of the term of this Agreement or two years; and (vi) no other
severance. At Employee's option, Employee may elect in writing up to 60 days
prior to termination to receive such payments and benefits as provided by
subsection (ii) of this subsection in a lump sum payment representing all future
payments due, discounted to their then present value at the prevailing major
bank prime rate as of the date of termination. "Substantial cause" shall mean
for purposes of this subsection a material breach of this Agreement by the
Company.
(e) Termination Due to Permanent Disability. Subject to all
----------------------------------------
applicable laws, Employee's employment under this Agreement may be terminated
immediately by the Company in the event Employee becomes permanently disabled.
In the event of a termination by the Company due to Employee's permanent
disability, Employee shall be entitled to (i) any compensation accrued and
unpaid as of the date of termination; (ii) the continued payment of base salary
at the same rate and on the same schedule as in effect at the time of
termination for a period of time equal to the greater of the remainder of the
term of this Agreement or two years; (iii) severance pay equal to the
nondiscretionary cash bonus Employee would have earned under the then existing
Executive Bonus Plan in the fiscal year in which Employee's employment is
terminated, prorated in accordance with the number of days in such fiscal year
that elapsed prior to Employee's termination and payable at the same time and
under the same terms and conditions as any other nondiscretionary bonuses paid
to officers in that fiscal year; (iv) 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; (v) the continuation of all benefits
and perquisites provided by Section 5(c)(i) and (ii) hereof for a period of time
equal to the greater of the remainder of the
5
<PAGE>
term of this Agreement or two years; and (vi) 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 or her time during normal
business hours to the daily performance of Employee's duties as required under
this Agreement for a continuous period of six (6) months. At Employee's option,
Employee may elect in writing up to 60 days prior to termination to receive such
payments and benefits as provided by subsection (ii) of this section in a lump
sum payment representing all future payments due, discounted to their then
present value at the prevailing major bank prime rate as of the date of
termination.
(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 the greater of the remainder of the
term of this Agreement or six months; (iii) severance pay equal to the
nondiscretionary cash bonus Employee would have earned under the then existing
Executive Bonus Plan in the fiscal year in which Employee's employment is
terminated, prorated in accordance with the number of days in such fiscal year
that elapsed prior to Employee's termination and payable at the same time and
under the same terms and conditions as any other nondiscretionary bonuses paid
to officers in that fiscal year; (iv) 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 (v) no other severance. At
Employee's option, Employee may elect in writing at least 60 days prior to
termination to receive such payments and benefits as provided by subsection (ii)
of this section in a lump sum payment representing all future payments due,
discounted to their then present value at the prevailing major bank prime rate
as of the date of termination.
(g) Unless otherwise provided, any severance payments or
other amounts due pursuant to this Section 8 shall be paid in cash within thirty
(30) days of termination. Any severance payments shall be subject to usual and
customary employee payroll practices and all applicable withholding
requirements. Except for such severance pay and other amounts specifically
provided pursuant to this Section 8, Employee shall not be entitled to any
further compensation, bonus, damages, restitution, relocation benefits, or other
severance benefits upon termination of employment during the term of this
Agreement. The amounts payable to Employee pursuant to this Section 8 shall not
be treated as damages, but as severance compensation to which Employee is
entitled by reason of termination of employment under the applicable
circumstances. The Company shall not be entitled to set off against the amounts
payable to Employee hereunder any amounts earned by Employee
6
<PAGE>
in other employment after termination of his or her employment with the Company
pursuant to this Agreement, or any amounts which might have been earned by
Employee in other employment had Employee sought such other employment. The
provisions of this Section 8 shall not limit Employee's rights under or pursuant
to any other agreement or understanding with the Company or with Employee's
participation in, or terminating distributions and vested rights under, any
pension, profit sharing, insurance or other employee benefit plan of the Company
to which Employee is entitled pursuant to the terms of such plan.
(h) Termination By Mutual Agreement of the Parties.
----------------------------------------------
Employee's employment pursuant to this Agreement may be terminated at any time
upon the mutual agreement in writing of the parties. Any such termination of
employment shall have the consequences specified in such agreement.
(i) Pre-Termination Rights. The Company shall have the
----------------------
right, at its option, to require Employee to vacate his or her 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.
9. RIGHTS UPON A CHANGE IN CONTROL.
-------------------------------
(a) If a Change in Control (as defined in Exhibit A hereto)
occurs before the termination of Employee's employment hereunder, then this
Agreement shall be extended (the "Extended Employment Agreement") in the same
form and substance as in effect immediately prior to the Change in Control,
except that the termination date shall be that date which would permit the
Extended Employment Agreement to continue in effect for an additional period of
time equal to the full term of this Agreement.
(b) Notwithstanding anything in this Agreement to the
contrary, if upon or at any time within one year following any Change in Control
that occurs during the term of this Agreement there is a Termination Event (as
defined below), Employee shall be treated as if he or she had been terminated
for the convenience of the Company and Employee shall be entitled to receive the
same compensation and other benefits and entitlements as are described in
Section 8(a) of this Agreement. Furthermore, the termination events and
consequences described in Section 8 shall continue to apply during the term of
the Extended Employment Agreement except that, in the event of a conflict
between Section 8 and the rights of Employee described in this Section 9, the
provisions of this Section 9 shall govern.
(c) A "Termination Event" shall mean the occurrence of any
one or more of the following, and in the absence of the Employee's permanent
disability (defined in Sections 6 and 8(e)), Employee's death, and any of the
factors enumerated in Section 8(c) as providing to the Company "substantial
cause" for terminating Employee's employment:
7
<PAGE>
(i) the termination or material breach of this Agreement by
the Company;
(ii) a failure by the Company to obtain the assumption of
this Agreement by any successor to the Company or any assignee of all or
substantially all of the Company's assets;
(iii) any material diminishment in the title, position,
duties, responsibilities or status that Employee had with the Company, as a
publicly traded entity, immediately prior to the Change in Control;
(iv) any reduction, limitation or failure to pay or provide
any of the compensation, reimbursable expenses, stock options, incentive
programs, or other benefits or perquisites provided to Employee under the terms
of this Agreement or any other agreement or understanding between the Company
and Employee, or pursuant to the Company's policies and past practices as of the
date immediately prior to the Change in Control; or
(v) any requirement that Employee relocate or any assignment
to Employee of duties that would make it unreasonably difficult for Employee to
maintain the principal residence he or she had immediately prior to the Change
in Control.
10. SURRENDER OF BOOKS AND RECORDS. Employee agrees
------------------------------
that upon termination of employment in any manner, Employee will immediately
surrender to the Company all lists, books and records of or connected with the
business of the Company, and all other properties belonging to the Company, it
being distinctly understood that all such lists, books, records and other
documents are the property of the Company.
11. GENERAL RELATIONSHIP. Employee shall be considered an
--------------------
employee of the Company within the meaning of all federal, state and local laws
and regulations, including, but not limited to, laws and regulations governing
unemployment insurance, workers' compensation, industrial accident, labor and
taxes.
12. PROPRIETARY INFORMATION.
-----------------------
(a) Employee agrees that any trade secret or proprietary
information of the Company to which Employee has become privy or may become
privy to as a result of his or her employment with the Company shall not be
divulged or disclosed to any other party (including, without limit, any person
or entity with whom or in whom Employee has a business interest) without the
express written consent of the Company, except as otherwise required by law. In
addition, Employee agrees to use such information only during the term of this
Agreement and only in a manner which is consistent with the purposes of this
Agreement. In the event Employee believes that he
8
<PAGE>
or she 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 or her possession to the Company.
(c) As used in this Agreement, "trade secret and proprietary
information" means information, whether written or oral, not generally available
to the public; it includes the concepts and ideas involved in the Company's
products whether patentable or not; and includes, but is not limited to, the
processes, formulae, and techniques disclosed by the Company to Employee or
observed by Employee. It does not include:
(i) Information, which at the time of disclosure,
had been previously published;
(ii) Information which is published after disclosure,
unless such publication is a breach of this Agreement or is otherwise a
violation of the contractual, legal or fiduciary duties owed to the Company,
which violation is known to Employee; or
(iii) Information which, subsequent to disclosure, is
obtained by Employee from a third person who is lawfully in possession of such
information (which information is not acquired in violation of any contractual,
legal, or fiduciary obligation owed to the Company with respect to such
information, and is known by Employee) and does not require Employee to refrain
from disclosing such information to others.
(d) The provisions of this Section 12 shall survive the
termination or expiration of this Agreement, and shall be binding upon Employee
in perpetuity.
13. INVENTIONS AND INNOVATIONS.
--------------------------
(a) As used in this Agreement, inventions and innovations
mean new ideas and improvements, whether or not patentable, relating to the
design,
9
<PAGE>
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 or she develops, either alone or with anyone else, during the term of
Employee's employment with the Company, as well as any invention or innovation
based on proprietary information of the Company which Employee develops, whether
alone or with anyone else, within twelve (12) months after the termination of
Employee's employment with the Company.
(c) Employee agrees to assign any invention or innovation to
the Company:
(i) which is developed totally or partially while
Employee is employed by the Company;
(ii) for which Employee used any of the Company's
equipment, supplies, facilities or proprietary information, even if any or all
of such items are relatively minor, and have little or no monetary value; or
(iii) which results in any way from Employee's work
for the Company or relates in any way to the Company's business or the Company's
current or anticipated research and development.
(d) Employee understands and agrees that the existence of
any condition set forth in either (c)(i), (ii) or (iii) above is sufficient to
require Employee to assign his or her inventions or innovations to the Company.
(e) All provisions of this Agreement relating to the
assignment by Employee of any invention or innovation are subject to the
provisions of California Labor Code Sections 2870, 2871 and 2872.
(f) Employee agrees that any invention or innovation which
is required under the provisions of this Agreement to be assigned to the Company
shall be the sole and exclusive property of the Company. Upon the Company's
request, at no expense to Employee, Employee shall execute any and all proper
applications for patents, assignments to the Company, and all other applicable
documents, and will give testimony when and where requested to perfect the title
and/or patents (both within and without the United States) in all inventions or
innovations belonging to the Company.
(g) Employee shall disclose all inventions and innovations
to the Company, even if Employee does not believe that he or she is required
under this
10
<PAGE>
Agreement, or pursuant to California Labor Code Section 2870, to assign his or
her 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.
14. ASSIGNMENT. This Agreement shall be binding upon and
----------
shall inure to the benefit of the parties hereto and the successors and assigns
of the Company. Employee shall have no right to assign his rights, benefits,
duties, obligations or other interests in this Agreement, it being understood
that this Agreement is personal to Employee.
15. ATTORNEYS' FEES AND COSTS. If any arbitration or other
-------------------------
proceeding is brought for the enforcement of this Agreement, or because of an
aleged 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. The prevailing party in any such proceeding shall be entitled to
recover from the other party the reasonable costs and expenses of any such
proceeding (not including attorneys' fees).
16. ENTIRE UNDERSTANDING. This Agreement sets forth the
--------------------
entire understanding of the parties hereto with respect to the subject matter
hereof, and no other representations, warranties or agreements whatsoever as to
that subject matter have been made by Employee or the Company not herein
contained. This Agreement shall not be modified, amended or terminated except
by another instrument in writing executed by the parties hereto. This Agreement
replaces and supersedes any and all prior understandings or agreements between
Employee and the Company regarding employment.
17. NOTICES. Any notice, request, demand, or other
-------
communication required or permitted hereunder, shall be deemed properly given
when actually received or within five (5) days of mailing by certified or
registered mail, postage prepaid, to:
Employee: Bruce Parker
2455 El Amigo Road
Del Mar, CA 92014
Company: Callaway Golf Company
2285 Rutherford Road
Carlsbad, California 92008-8815
Attn: Donald H. Dye
11
<PAGE>
or to such other address as Employee or the Company may from time to time
furnish, in writing, to the other.
18. ARBITRATION. Any dispute, controversy or claim arising
-----------
hereunder or in any way related to this Agreement, its interpretation,
enforceability, or applicability, or relating to Employee's employment, or the
termination thereof, that cannot be resolved by mutual agreement of the parties
shall be submitted to arbitration. The arbitration shall be conducted by a
retired judge from the Judicial Arbitration and Mediation Service/Endispute
("JAMS") office located in Orange County, California, who shall have the powers
to hear motions, control discovery, conduct hearings and otherwise do all that
is necessary to resolve the matter. The arbitration award shall be final and
binding, and judgment on the award may be entered in any court having
jurisdiction thereof. It is expressly understood that the parties have chosen
arbitration to avoid the burdens, costs and publicity of a court proceeding, and
the arbitrator is expected to handle all aspects of the matter, including
discovery and any hearings, in such a way as to minimize the expense, time,
burden and publicity of the process, while assuring a fair and just result. In
particular, the parties expect that the arbitrator will limit discovery by
controlling the amount of discovery that may be taken (e.g., the number of
depositions or interrogatories) and by restricting the scope of discovery to
only those matters clearly relevant to the dispute.
19. MISCELLANEOUS.
-------------
(a) Headings. The headings of the several sections and
--------
paragraphs of this Agreement are inserted solely for the convenience of
reference and are not a part of and are not intended to govern, limit or aid in
the construction of any term or provision hereof.
(b) Waiver. Failure of either party at any time to require
------
performance by the other of any provision of this Agreement shall in no way
affect that party's rights thereafter to enforce the same, nor shall the waiver
by either party of any breach of any provision hereof be held to be a waiver of
any succeeding breach of any provision or a waiver of the provision itself.
(c) Applicable Law. This Agreement shall constitute a
--------------
contract under the internal laws of the State of California and shall be
governed and construed in accordance with the laws of said state as to both
interpretation and performance.
(d) Severability. In the event any provision or provisions
------------
of this Agreement is or are held invalid, the remaining provisions of this
Agreement shall not be affected thereby.
20. SUPERSEDES OLD OFFICER EMPLOYMENT CONTRACT.
-------------------------------------------
Employee and the Company recognize that prior to the effective date of this
Agreement they were parties to a certain Officer Employment Agreement effective
January 1, 1995
12
<PAGE>
(the "Old Officer Employment Agreement"). It is the intent of the parties that
as of the effective date of this Agreement, this Agreement shall replace and
supersede the Old Officer Employment Agreement entirely, that the Old Officer
Employment Agreement shall no longer be of any force or effect except as to
Sections 7, 12, 13, 15 and 18 thereof, and that to the extent there is any
conflict between the Old Officer Employment Agreement and this Agreement, this
Agreement shall control and both agreements shall be construed so as to give the
maximum force and effect to the provisions of this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed effective the date first written above.
EMPLOYEE: COMPANY:
CALLAWAY GOLF COMPANY,
a California corporation
/s/ BRUCE PARKER By: /s/ DONALD H. DYE
- ------------------------- -------------------------
Bruce Parker Donald H. Dye, President & CEO
13
<PAGE>
EXHIBIT A
A "Change in Control" means the following and shall be deemed to occur
if any of the following events occurs:
(a) Any person, entity or group, within the meaning of Section 13(d)
or 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") but
excluding the Company and its subsidiaries and any employee benefit or stock
ownership plan of the Company or its subsidiaries and also excluding an
underwriter or underwriting syndicate that has acquired the Company's securities
solely in connection with a public offering thereof (such person, entity or
group being referred to herein as a "Person") becomes the beneficial owner
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or
more of either the then outstanding shares of Common Stock or the combined
voting power of the Company's then outstanding securities entitled to vote
generally in the election of directors; or
(b) Individuals who, as of the effective date hereof, constitute the
Board of Directors of the Company (the "Incumbent Board") cease for any reason
to constitute at least a majority of the Board of Directors of the Company,
provided that any individual who becomes a director after the effective date
hereof whose election, or nomination for election by the Company's shareholders,
is approved by a vote of at least a majority of the directors then comprising
the Incumbent Board shall be considered to be a member of the Incumbent Board
unless that individual was nominated or elected by any Person having the power
to exercise, through beneficial ownership, voting agreement and/or proxy, 20% or
more of either the outstanding shares of Common Stock or the combined voting
power of the Company's then outstanding voting securities entitled to vote
generally in the election of directors, in which case that individual shall not
be considered to be a member of the Incumbent Board unless such individual's
election or nomination for election by the Company's shareholders is approved by
a vote of at least two-thirds of the directors then comprising the Incumbent
Board; or
(c) Consummation by the Company of the sale or other disposition by
the Company of all or substantially all of the Company's assets or a
reorganization or merger or consolidation of the Company with any other person,
entity or corporation, other than
(i) a reorganization or merger or consolidation that would
result in the voting securities of the Company outstanding immediately prior
thereto (or, in the case of a reorganization or merger or consolidation that is
preceded or accomplished by an acquisition or series of related acquisitions by
any Person, by tender or exchange offer or otherwise, of voting securities
representing 5% or more of the combined voting power of all securities of the
Company, immediately prior to such acquisition or the first acquisition in such
series of acquisitions) continuing to represent, either by remaining outstanding
or by being converted into voting securities of another entity,
14
<PAGE>
more than 50% of the combined voting power of the voting securities of the
Company or such other entity outstanding immediately after such reorganization
or merger or consolidation (or series of related transactions involving such a
reorganization or merger or consolidation), or
(ii) a reorganization or merger or consolidation effected to
implement a recapitalization or reincorporation of the Company (or similar
transaction) that does not result in a material change in beneficial ownership
of the voting securities of the Company or its successor; or
(d) Approval by the shareholders of the Company or an order by a
court of competent jurisdiction of a plan of liquidation of the Company.
15
<PAGE>
EXHIBIT 10.5
------------
EXECUTIVE OFFICER EMPLOYMENT AGREEMENT
This Executive Officer Employment Agreement ("Agreement") is
entered into as of January 1, 1997, by and between Callaway Golf Company, a
California corporation (the "Company"), and John Duffy ("Employee").
1. TERM. The Company hereby employs Employee and Employee
----
hereby accepts employment pursuant to the terms and provisions of this Agreement
for the term commencing January 1, 1997 and terminating December 31, 1999 unless
this Agreement is earlier terminated as hereinafter provided. Unless such
employment is earlier terminated, upon the expiration of the term of this
Agreement, Employee's status shall be one of at will employment.
2. SERVICES.
--------
(a) Employee shall serve as Senior Executive Vice President
and Chief of Manufacturing of the Company. Employee's duties shall be the usual
and customary duties of the offices in which he or she serves. Employee shall
report to the President and Chief Executive Officer of the Company, or to such
other person as the Chief Executive Officer shall designate. Employee's title,
position and/or duties may be changed by the Board of Directors and/or the Chief
Executive Officer of the Company.
(b) Employee shall be required to comply with all policies
and procedures of the Company, as such shall be adopted, modified or otherwise
established by the Company from time to time.
3. SERVICES TO BE EXCLUSIVE. During the term hereof,
------------------------
Employee agrees to devote his or her full productive time and best efforts to
the performance of Employee's duties hereunder pursuant to the supervision and
direction of the Company's Board of Directors and its Chief Executive Officer.
Employee further agrees, as a condition to the performance by the Company of
each and all of its obligations hereunder, that so long as Employee is employed
by the Company, Employee will not directly or indirectly render services of any
nature to, otherwise become employed by, or otherwise participate or engage in
any other business without the Company's prior written consent. Employee
further agrees to execute such secrecy, non-disclosure, patent, trademark,
copyright and other proprietary rights agreements, if any, as the Company may
from time to time reasonably require. Nothing herein contained shall be deemed
to preclude Employee from having outside personal investments and involvement
with appropriate community activities, and from devoting a reasonable amount of
time to such matters, provided that this shall in no manner interfere with or
derogate from Employee's work for the Company.
<PAGE>
4. COMPENSATION. The Company agrees to pay Employee:
------------
(a) a base salary at the rate of $400,000.00 per year; and
(b) an opportunity to earn an annual bonus based upon
participation in the Company's Executive Bonus Plan as it may exist from time to
time.
5. EXPENSES AND BENEFITS.
---------------------
(a) Reasonable and Necessary Expenses. In addition to the
---------------------------------
compensation provided for in Section 4 hereof, the Company shall reimburse
Employee for all reasonable, customary, and necessary expenses incurred in the
performance of Employee's duties hereunder. Employee shall first account for
such expenses by submitting a signed statement itemizing such expenses prepared
in accordance with the policy set by the Company for reimbursement of such
expenses. The amount, nature, and extent of such expenses shall always be
subject to the control, supervision, and direction of the Company and its Chief
Executive Officer.
(b) Vacation. Employee shall receive paid vacation in the
--------
following amounts for each of the twelve (12) month periods of employment with
the Company indicated: for 1997, four (4) weeks; for 1998, six (6) weeks; and
for 1999, eight (8) weeks. The vacation may be taken any time during the year
subject to prior approval by the Company, such approval not to be unreasonably
withheld. Any unused time will accrue from year to year. The maximum vacation
time Employee may accrue shall be three times Employee's annual vacation
benefit.The Company reserves the right to pay Employee for unused, accrued
vacation benefits in lieu of providing time off.
(c) Benefits. During Employee's employment with the Company
--------
pursuant to this Agreement, the Company shall provide for Employee to:
(i) participate in the Company's health insurance
and disability insurance plans as the same may be modified from time to time;
(ii) receive, if Employee is insurable under usual
underwriting standards, term life insurance coverage on Employee's life, payable
to whomever the Employee directs, in the face amount of $1,000,000.00, provided
that Employee's physical condition does not prevent Employee from reasonably
qualifying for such insurance coverage;
(iii) participate in the Company's 401(k) pension plan
pursuant to the terms of the plan, as the same may be modified from time to
time;
(iv) participate in the Company's Executive Deferred
Compensation Plan, as the same may be modified from time to time: and
2
<PAGE>
(v) participate in any other benefit plans the
Company provides from time to time to executive officers.
(d) Club Membership. The Company shall pay the reasonable
----------------
cost of initiation associated with Employee gaining privileges at a mutually
agreed upon country club. Employee shall be responsible for all other expenses
and costs associated with such club use, including monthly member dues and
charges. The club membership itself shall belong to and be the property of the
Company, not Employee.
(e) Estate Planning and Other Perquisites. To the extent
--------------------------------------
the Company provides estate planning and related services, or any other
perquisites and personal benefits to other executive officers from time to time,
such services and perquisites shall be made available to Employee on the same
terms and conditions.
6. DISABILITY. If on account of any physical or mental
----------
disability Employee shall fail or be unable to perform all or substantially all
of Employee's duties under this Agreement for a continuous period of up to six
(6) months during any twelve month period during the term of this Agreement,
Employee shall be entitled to his or her full compensation and benefits as set
forth in this Agreement. If Employee's disability continues after such six (6)
month period, this Agreement is subject to termination pursuant to the
provisions of Section 8(e) hereof.
7. NONCOMPETITION.
--------------
(a) Other Business. To the fullest extent permitted by
--------------
law, Employee agrees that, while employed by the Company, Employee will not,
directly or indirectly (whether as agent, consultant, holder of a beneficial
interest, creditor, or in any other capacity), engage in any business or venture
which engages directly or indirectly in competition with the business of the
Company, or have any interest in any person, firm, corporation, or venture which
engages directly or indirectly in competition with the business of the Company.
For purposes of this section, the ownership of interests in a broadly based
mutual fund shall not constitute ownership of the stocks held by the fund.
(b) Other Employees. Except as may be required in the
---------------
performance of his or her 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. While employed by the Company, and for one
---------
(1) year thereafter, Employee shall not cause or induce, or attempt to cause or
induce, any person or firm supplying goods, services or credit to the Company
to diminish or cease
3
<PAGE>
furnishing such goods, services or credit.
(d) Conflict of Interest. While employed by the Company,
--------------------
Employee shall not engage in any conduct or enterprise that shall constitute an
actual or apparent conflict of interest with respect to Employee's duties and
obligations to the Company.
8. TERMINATION.
-----------
(a) Termination at the Company's Convenience. Employee's
----------------------------------------
employment under this Agreement may be terminated by the Company at its
convenience at any time upon giving 90 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 in effect at the time of termination for a period of time
equal to the greater of the remainder of the term of this Agreement or two
years; (iii) the payment of nondiscretionary bonuses pursuant to the Company's
Executive Bonus Plan, as it existed on the date of termination, for a period of
time equal to the greater of the remainder of the term of this Agreement or two
years; (iv) the immediate vesting of all unvested stock options held by Employee
as of such termination date; (v) the continuation of all benefits and
perquisites provided by Sections 5(c)(i) and (ii) hereof for a period of time
equal to the greater of the remainder of the term of this Agreement or two
years; and (vi) no other severance. At Employee's option, Employee may elect in
writing up to 60 days prior to termination to receive such payments and benefits
as provided by subsection (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
or her 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; (ii) severance pay equal to the
nondiscretionary cash bonus Employee would have earned under the then existing
Executive Bonus Plan in the fiscal year in which Employee's employment is
terminated, prorated in accordance with the number of days in such fiscal year
that elapsed prior to Employee's termination and payable at the same time and
under the same terms and conditions as any other nondiscretionary bonuses paid
to officers in that fiscal year; and (iii) 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
4
<PAGE>
and unpaid as of the date of termination; (ii) severance pay equal to the
nondiscretionary cash bonus Employee would have earned under the then existing
Executive Bonus Plan in the fiscal year in which Employee's employment is
terminated, prorated in accordance with the number of days in such fiscal year
that elapsed prior to Employee's termination and payable at the same time and
under the same terms and conditions as any other nondiscretionary bonuses paid
to officers in that fiscal year; and (iii) no other severance. "Substantial
cause" shall mean for purposes of this subsection failure by Employee to
substantially perform his her duties, 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 in
effect at the time of termination for a period of time equal to the greater of
the remainder of the term of this Agreement or two years; (iii) the payment of
nondiscretionary bonuses pursuant to the Company's Executive Bonus Plan, as it
existed on the date of termination, for a period of time equal to the greater
of the remainder of the term of this Agreement or two years; (iv) the immediate
vesting of all unvested stock options held by Employee as of such termination
date; (v) the continuation of all benefits and perquisites provided by Sections
5(c)(i) and (ii) hereof for a period of time equal to the greater of the
remainder of the term of this Agreement or two years; and (vi) no other
severance. At Employee's option, Employee may elect in writing up to 60 days
prior to termination to receive such payments and benefits as provided by
subsection (ii) of this subsection in a lump sum payment representing all
future payments due, discounted to their then present value at the prevailing
major bank prime rate as of the date of termination. "Substantial cause" shall
mean for purposes of this subsection a material breach of this Agreement by the
Company.
(e) Termination Due to Permanent Disability. Subjct to all
----------------------------------------
applicable laws, Employee's employment under this Agreement may be terminated
immediately by the Company in the event Employee becomes permanently disabled.
In the event of a termination by the Company due to Employee's permanent
disability, Employee shall be entitled to (i) any compensation accrued and
unpaid as of the date of termination; (ii) the continued payment of base salary
at the same rate and on the same schedule as in effect at the time of
termination for a period of time equal to the greater of the remainder of the
term of this Agreement or two years; (iii) severance pay equal to the
nondiscretionary cash bonus Employee would have earned under the then existing
Executive Bonus Plan in the fiscal year in which Employee's employment is
terminated, prorated in accordance with the number of days in such fiscal year
that elapsed prior to Employee's termination and payable at the same time and
under the same terms and conditions as any other nondiscretionary bonuses paid
to officers in
5
<PAGE>
that fiscal year; (iv) 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; (v) the continuation of all benefits and perquisites
provided by Section 5(c)(i) and (ii) hereof for a period of time equal to the
greater of the remainder of the term of this Agreement or two years; and (vi) 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 or her time during normal business hours to the daily performance of
Employee's duties as required under this Agreement for a continuous period of
six (6) months. At Employee's option, Employee may elect in writing up to 60
days prior to termination to receive such payments and benefits as provided by
subsection (ii) of this section in a lump sum payment representing all future
payments due, discounted to their then present value at the prevailing major
bank prime rate as of the date of termination.
(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 the greater of the remainder of the
term of this Agreement or six months; (iii) severance pay equal to the
nondiscretionary cash bonus Employee would have earned under the then existing
Executive Bonus Plan in the fiscal year in which Employee's employment is
terminated, prorated in accordance with the number of days in such fiscal year
that elapsed prior to Employee's termination and payable at the same time and
under the same terms and conditions as any other nondiscretionary bonuses paid
to officers in that fiscal year; (iv) 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 (v) no other severance. At
Employee's option, Employee may elect in writing at least 60 days prior to
termination to receive such payments and benefits as provided by subsection (ii)
of this section in a lump sum payment representing all future payments due,
discounted to their then present value at the prevailing major bank prime rate
as of the date of termination.
(g) Unless otherwise provided, any severance payments or
other amounts due pursuant to this Section 8 shall be paid in cash within thirty
(30) days of termination. Any severance payments shall be subject to usual and
customary employee payroll practices and all applicable withholding
requirements. Except for such severance pay and other amounts specifically
provided pursuant to this Section 8, Employee shall not be entitled to any
further compensation, bonus, damages, restitution, relocation benefits, or
other severance benefits upon termination of
6
<PAGE>
employment during the term of this Agreement. The amounts payable to Employee
pursuant to this Section 8 shall not be treated as damages, but as severance
compensation to which Employee is entitled by reason of termination of
employment under the applicable circumstances. The Company shall not be entitled
to set off against the amounts payable to Employee hereunder any amounts earned
by Employee in other employment after termination of his or her employment with
the Company pursuant to this Agreement, or any amounts which might have been
earned by Employee in other employment had Employee sought such other
employment. The provisions of this Section 8 shall not limit Employee's rights
under or pursuant to any other agreement or understanding with the Company or
with Employee's participation in, or terminating distributions and vested rights
under, any pension, profit sharing, insurance or other employee benefit plan of
the Company to which Employee is entitled pursuant to the terms of such plan.
(h) Termination By Mutual Agreement of the Parties.
----------------------------------------------
Employee's employment pursuant to this Agreement may be terminated at any time
upon the mutual agreement in writing of the parties. Any such termination of
employment shall have the consequences specified in such agreement.
(i) Pre-Termination Rights. The Company shall have the
----------------------
right, at its option, to require Employee to vacate his or her 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.
9. RIGHTS UPON A CHANGE IN CONTROL.
-------------------------------
(a) If a Change in Control (as defined in Exhibit A hereto)
occurs before the termination of Employee's employment hereunder, then this
Agreement shall be extended (the "Extended Employment Agreement") in the same
form and substance as in effect immediately prior to the Change in Control,
except that the termination date shall be that date which would permit the
Extended Employment Agreement to continue in effect for an additional period of
time equal to the full term of this Agreement.
(b) Notwithstanding anything in this Agreement to the
contrary, if upon or at any time within one year following any Change in
Control that occurs during the term of this Agreement there is a Termination
Event (as defined below), Employee shall be treated as if he or she had been
terminated for the convenience of the Company and Employee shall be entitled to
receive the same compensation and other benefits and entitlements as are
described in Section 8(a) of this Agreement. Furthermore, the termination
events and consequences described in Section 8 shall continue to apply during
the term of the Extended Employment Agreement except that, in the event of a
conflict between Section 8 and the rights of Employee described in this Section
9, the provisions of this Section 9 shall govern.
7
<PAGE>
(c) A "Termination Event" shall mean the occurrence of any
one or more of the following, and in the absence of the Employee's permanent
disability (defined in Sections 6 and 8(e)), Employee's death, and any of the
factors enumerated in Section 8(c) as providing to the Company "substantial
cause" for terminating Employee's employment:
(i) the termination or material breach of this Agreement by
the Company;
(ii) a failure by the Company to obtain the assumption of
this Agreement by any successor to the Company or any assignee of all or
substantially all of the Company's assets;
(iii) any material diminishment in the title, position,
duties, responsibilities or status that Employee had with the Company, as a
publicly traded entity, immediately prior to the Change in Control;
(iv) any reduction, limitation or failure to pay or provide
any of the compensation, reimbursable expenses, stock options, incentive
programs, or other benefits or perquisites provided to Employee under the terms
of this Agreement or any other agreement or understanding between the Company
and Employee, or pursuant to the Company's policies and past practices as of the
date immediately prior to the Change in Control; or
(v) any requirement that Employee relocate or any assignment
to Employee of duties that would make it unreasonably difficult for Employee to
maintain the principal residence he or she had immediately prior to the Change
in Control.
10. SURRENDER OF BOOKS AND RECORDS. Employee agrees
------------------------------
that upon termination of employment in any manner, Employee will immediately
surrender to the Company all lists, books and records of or connected with the
business of the Company, and all other properties belonging to the Company, it
being distinctly understood that all such lists, books, records and other
documents are the property of the Company.
11. GENERAL RELATIONSHIP. Employee shall be considered an
--------------------
employee of the Company within the meaning of all federal, state and local laws
and regulations, including, but not limited to, laws and regulations governing
unemployment insurance, workers' compensation, industrial accident, labor and
taxes.
12. PROPRIETARY INFORMATION.
-----------------------
(a) Employee agrees that any trade secret or proprietary
information of the Company to which Employee has become privy or may become
privy to as a result of his or her employment with the Company shall not be
divulged or disclosed to
8
<PAGE>
any other party (including, without limit, any person or entity with whom or in
whom Employee has a business interest) without the express written consent of
the Company, except as otherwise required by law. In addition, Employee agrees
to use such information only during the term of this Agreement and only in a
manner which is consistent with the purposes of this Agreement. In the event
Employee believes that he or she 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 or her possession to the Company.
(c) As used in this Agreement, "trade secret and proprietary
information" means information, whether written or oral, not generally available
to the public; it includes the concepts and ideas involved in the Company's
products whether patentable or not; and includes, but is not limited to, the
processes, formulae, and techniques disclosed by the Company to Employee or
observed by Employee. It does not include:
(i) Information, which at the time of disclosure,
had been previously published;
(ii) Information which is published after disclosure,
unless such publication is a breach of this Agreement or is otherwise a
violation of the contractual, legal or fiduciary duties owed to the Company,
which violation is known to Employee; or
(iii) Information which, subsequent to disclosure, is
obtained by Employee from a third person who is lawfully in possession of such
information (which information is not acquired in violation of any contractual,
legal, or fiduciary obligation owed to the Company with respect to such
information, and is known by Employee) and does not require Employee to refrain
from disclosing such information to others.
(d) The provisions of this Section 12 shall survive the
termination or expiration of this Agreement, and shall be binding upon Employee
in perpetuity.
9
<PAGE>
13. INVENTIONS AND INNOVATIONS.
--------------------------
(a) As used in this Agreement, inventions and innovations
mean new ideas and improvements, whether or not patentable, relating to the
design, manufacture, use or marketing of golf equipment or other products of
the Company. This includes, but is not 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 or she develops, either alone or with anyone else, during the term of
Employee's employment with the Company, as well as any invention or innovation
based on proprietary information of the Company which Employee develops, whether
alone or with anyone else, within twelve (12) months after the termination of
Employee's employment with the Company.
(c) Employee agrees to assign any invention or innovation
to the Company:
(i) which is developed totally or partially while
Employee is employed by the Company;
(ii) for which Employee used any of the Company's
equipment, supplies, facilities or proprietary information, even if any or all
of such items are relatively minor, and have little or no monetary value; or
(iii) which results in any way from Employee's work
for the Company or relates in any way to the Company's business or the Company's
current or anticipated research and development.
(d) Employee understands and agrees that the existence of
any condition set forth in either (c)(i), (ii) or (iii) above is sufficient to
require Employee to assign his or her inventions or innovations to the Company.
(e) All provisions of this Agreement relating to the
assignment by Employee of any invention or innovation are subject to the
provisions of California Labor Code Sections 2870, 2871 and 2872.
(f) Employee agrees that any invention or innovation which
is required under the provisions of this Agreement to be assigned to the Company
shall be the sole and exclusive property of the Company. Upon the Company's
request, at no expense to Employee, Employee shall execute any and all proper
applications for patents, assignments to the Company, and all other applicable
documents, and will give
10
<PAGE>
testimony when and where requested to perfect the title and/or patents (both
within and without the United States) in all inventions or innovations belonging
to the Company.
(g) Employee shall disclose all inventions and innovations
to the Company, even if Employee does not believe that he or she is required
under this Agreement, or pursuant to California Labor Code Section 2870, to
assign his or her 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.
14. ASSIGNMENT. This Agreement shall be binding upon and
----------
shall inure to the benefit of the parties hereto and the successors and assigns
of the Company. Employee shall have no right to assign his rights, benefits,
duties, obligations or other interests in this Agreement, it being understood
that this Agreement is personal to Employee.
15. ATTORNEYS' FEES AND COSTS. If any arbitration or other
-------------------------
proceeding is brought for the enforcement of this Agreement, or because of an
alleged dispute or default in connection with any of its provisions, the
successful or prevailing party shall be entitled to recover reasonable
attorneys' fees 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. The prevailing party in any such proceeding shall be entitled to
recover from the other party the reasonable costs and expenses of any such
proceeding (not including attorneys' fees).
16. ENTIRE UNDERSTANDING. This Agreement sets forth the
--------------------
entire understanding of the parties hereto with respect to the subject matter
hereof, and no other representations, warranties or agreements whatsoever as to
that subject matter have been made by Employee or the Company not herein
contained. This Agreement shall not be modified, amended or terminated except
by another instrument in writing executed by the parties hereto. This
Agreement replaces and supersedes any and all prior understandings or agreements
between Employee and the Company regarding employment.
17. NOTICES. Any notice, request, demand, or other
-------
communication required or permitted hereunder, shall be deemed properly given
when actually received or within five (5) days of mailing by certified or
registered mail, postage prepaid, to:
Employee: John Duffy
2212 Plaza Bonita
Carlsbad, CA 92009
11
<PAGE>
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, in writing, to the other.
18. ARBITRATION. Any dispute, controversy or claim arising
-----------
hereunder or in any way related to this Agreement, its interpretation,
enforceability, or applicability, or relating to Employee's employment, or the
termination thereof, that cannot be resolved by mutual agreement of the parties
shall be submitted to arbitration. The arbitration shall be conducted by a
retired judge from the Judicial Arbitration and Mediation Service/Endispute
("JAMS") office located in Orange County, California, who shall have the powers
to hear motions, control discovery, conduct hearings and otherwise do all that
is necessary to resolve the matter. The arbitration award shall be final and
binding, and judgment on the award may be entered in any court having
jurisdiction thereof. It is expressly understood that the parties have chosen
arbitration to avoid the burdens, costs and publicity of a court proceeding,
and the arbitrator is expected to handle all aspects of the matter, including
discovery and any hearings, in such a way as to minimize the expense, time,
burden and publicity of the process, while assuring a fair and just result.
In particular, the parties expect that the arbitrator will limit discovery by
controlling the amount of discovery that may be taken (e.g., the number of
depositions or interrogatories) and by restricting the scope of discovery to
only those matters clearly relevant to the dispute.
19. MISCELLANEOUS.
-------------
(a) Headings. The headings of the several sections and
--------
paragraphs of this Agreement are inserted solely for the convenience of
reference and are not a part of and are not intended to govern, limit or aid
in the construction of any term or provision hereof.
(b) Waiver. Failure of either party at any time to require
------
performance by the other of any provision of this Agreement shall in no way
affect that party's rights thereafter to enforce the same, nor shall the
waiver by either party of any breach of any provision hereof be held to be a
waiver of any succeeding breach of any provision or a waiver of the provision
itself.
(c) Applicable Law. This Agreement shall constitute a
--------------
contract under the internal laws of the State of California and shall be
governed and construed in accordance with the laws of said state as to both
interpretation and performance.
(d) Severability. In the event any provision or provisions
------------
of this Agreement is or are held invalid, the remaining provisions of this
Agreement shall not
12
<PAGE>
be affected thereby.
20. SUPERSEDES OLD OFFICER EMPLOYMENT CONTRACT.
-------------------------------------------
Employee and the Company recognize that prior to the effective date of this
Agreement they were parties to a certain Officer Employment Agreement effective
January 1, 1995 (the "Old Officer Employment Agreement"). It is the intent of
the parties that as of the effective date of this Agreement, this Agreement
shall replace and supersede the Old Officer Employment Agreement entirely, that
the Old Officer Employment Agreement shall no longer be of any force or effect
except as to Sections 7, 12, 13, 15 and 18 thereof, and that to the extent
there is any conflict between the Old Officer Employment Agreement and this
Agreement, this Agreement shall control and both agreements shall be construed
as to give the maximum force and effect to the provisions of this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed effective the date first written above.
EMPLOYEE: COMPANY:
CALLAWAY GOLF COMPANY,
a California corporation
/s/ JOHN DUFFY By: /s/ DONALD H. DYE
- --------------------------- -----------------------------
John Duffy Donald H. Dye, President & CEO
13
<PAGE>
EXHIBIT A
A "Change in Control" means the following and shall be deemed to occur
if any of the following events occurs:
(a) Any person, entity or group, within the meaning of Section 13(d)
or 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") but
excluding the Company and its subsidiaries and any employee benefit or stock
ownership plan of the Company or its subsidiaries and also excluding an
underwriter or underwriting syndicate that has acquired the Company's
securities solely in connection with a public offering thereof (such person,
entity or group being referred to herein as a "Person") becomes the beneficial
owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of
30% or more of either the then outstanding shares of Common Stock or the
combined voting power of the Company's then outstanding securities entitled to
vote generally in the election of directors; or
(b) Individuals who, as of the effective date hereof, constitute
the Board of Directors of the Company (the "Incumbent Board") cease for any
reason to constitute at least a majority of the Board of Directors of the
Company, provided that any individual who becomes a director after the
effective date hereof whose election, or nomination for election by the
Company's shareholders, is approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered to be a
member of the Incumbent Board unless that individual was nominated or elected
by any Person having the power to exercise, through beneficial ownership,
voting agreement and/or proxy, 20% or more of either the outstanding shares of
Common Stock or the combined voting power of the Company's then outstanding
voting securities entitled to vote generally in the election of directors, in
which case that individual shall not be considered to be a member of the
Incumbent Board unless such individual's election or nomination for election
by the Company's shareholders is approved by a vote of at least two-thirds of
the directors then comprising the Incumbent Board; or
(c) Consummation by the Company of the sale or other disposition by
the Company of all or substantially all of the Company's assets or a
reorganization or merger or consolidation of the Company with any other person,
entity or corporation, other than
(i) a reorganization or merger or consolidation that would
result in the voting securities of the Company outstanding immediately prior
thereto (or, in the case of a reorganization or merger or consolidation that is
preceded or accomplished by an acquisition or series of related acquisitions by
any Person, by tender or exchange offer or otherwise, of voting securities
representing 5% or more of the combined voting power of all securities of the
Company, immediately prior to such acquisition or the first acquisition in such
series of acquisitions) continuing to represent, either by remaining
outstanding or by being converted into voting securities of another entity,
14
<PAGE>
more than 50% of the combined voting power of the voting securities of the
Company or such other entity outstanding immediately after such reorganization
or merger or consolidation (or series of related transactions involving such a
reorganization or merger or consolidation), or
(ii) a reorganization or merger or consolidation effected to
implement a recapitalization or reincorporation of the Company (or similar
transaction) that does not result in a material change in beneficial ownership
of the voting securities of the Company or its successor; or
(d) Approval by the shareholders of the Company or an order by a
court of competent jurisdiction of a plan of liquidation of the Company.
15
<PAGE>
EXHIBIT 10.6
------------
EXECUTIVE OFFICER EMPLOYMENT AGREEMENT
This Executive Officer Employment Agreement ("Agreement") is
entered into as of January 1, 1997, by and between Callaway Golf Company, a
California corporation (the "Company"), and Steven C. McCracken ("Employee").
1. TERM. The Company hereby employs Employee and Employee
----
hereby accepts employment pursuant to the terms and provisions of this Agreement
for the term commencing January 1, 1997 and terminating December 31, 1999 unless
this Agreement is earlier terminated as hereinafter provided. Unless such
employment is earlier terminated, upon the expiration of the term of this
Agreement, Employee's status shall be one of at will employment.
2. SERVICES.
--------
(a) Employee shall serve as Executive Vice President,
General Counsel and Secretary of the Company. Employee's duties shall be the
usual and customary duties of the offices in which he or she serves. Employee
shall report to the President and Chief Executive Officer of the Company, or to
such other person as the Chief Executive Officer shall designate. Employee's
title, position and/or duties may be changed by the Board of Directors and/or
the Chief Executive Officer of the Company.
(b) Employee shall be required to comply with all policies
and procedures of the Company, as such shall be adopted, modified or otherwise
established by the Company from time to time.
3. SERVICES TO BE EXCLUSIVE. During the term hereof,
------------------------
Employee agrees to devote his or her full productive time and best efforts to
the performance of Employee's duties hereunder pursuant to the supervision and
direction of the Company's Board of Directors and its Chief Executive Officer.
Employee further agrees, as a condition to the performance by the Company of
each and all of its obligations hereunder, that so long as Employee is employed
by the Company, Employee will not directly or indirectly render services of any
nature to, otherwise become employed by, or otherwise participate or engage in
any other business without the Company's prior written consent. Employee
further agrees to execute such secrecy, non-disclosure, patent, trademark,
copyright and other proprietary rights agreements, if any, as the Company may
from time to time reasonably require. Nothing herein contained shall be deemed
to preclude Employee from having outside personal investments and involvement
with appropriate community activities, and from devoting a reasonable amount of
time to such matters, provided that this shall in no manner interfere with or
derogate from Employee's work for the Company.
<PAGE>
4. COMPENSATION. The Company agrees to pay Employee:
------------
(a) a base salary at the rate of $350,000.00 per year; and
(b) an opportunity to earn an annual bonus based upon
participation in the Company's Executive Bonus Plan as it may exist from time to
time.
5. EXPENSES AND BENEFITS.
---------------------
(a) Reasonable and Necessary Expenses. In addition to the
---------------------------------
compensation provided for in Section 4 hereof, the Company shall reimburse
Employee for all reasonable, customary, and necessary expenses incurred in the
performance of Employee's duties hereunder. Employee shall first account for
such expenses by submitting a signed statement itemizing such expenses prepared
in accordance with the policy set by the Company for reimbursement of such
expenses. The amount, nature, and extent of such expenses shall always be
subject to the control, supervision, and direction of the Company and its Chief
Executive Officer.
(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. Any unused time will
accrue from year to year. The maximum vacation time Employee may accrue shall
be three times Employee's annual vacation benefit. The Company reserves the
right to pay Employee for unused, accrued vacation benefits in lieu of providing
time off.
(c) Benefits. During Employee's employment with the Company
--------
pursuant to this Agreement, the Company shall provide for Employee to:
(i) participate in the Company's health insurance
and disability insurance plans as the same may be modified from time to time;
(ii) receive, if Employee is insurable under usual
underwriting standards, term life insurance coverage on Employee's life, payable
to whomever the Employee directs, in the face amount of $1,000,000.00, provided
that Employee's physical condition does not prevent Employee from reasonably
qualifying for such insurance coverage;
(iii) participate in the Company's 401(k) pension plan
pursuant to the terms of the plan, as the same may be modified from time to
time;
(iv) participate in the Company's Executive Deferred
Compensation Plan, as the same may be modified from time to time: and
(v) participate in any other benefit plans the
Company
2
<PAGE>
provides from time to time to executive officers.
(d) Club Membership. The Company shall pay the reasonable
---------------
cost of initiation associated with Employee gaining privileges at a mutually
agreed upon country club. Employee shall be responsible for all other expenses
and costs associated with such club use, including monthly member dues and
charges. The club membership itself shall belong to and be the property of the
Company, not Employee.
(e) Estate Planning and Other Perquisites. To the extent
-------------------------------------
the Company provides estate planning and related services, or any other
perquisites and personal benefits to other executive officers from time to time,
such services and perquisites shall be made available to Employee on the same
terms and conditions.
6. DISABILITY. If on account of any physical or mental
----------
disability Employee shall fail or be unable to perform all or substantially all
of Employee's duties under this Agreement for a continuous period of up to six
(6) months during any twelve month period during the term of this Agreement,
Employee shall be entitled to his or her full compensation and benefits as set
forth in this Agreement. If Employee's disability continues after such six (6)
month period, this Agreement is subject to termination pursuant to the
provisions of Section 8(e) hereof.
7. NONCOMPETITION.
--------------
(a) Other Business. To the fullest extent permitted by law,
--------------
Employee agrees that, while employed by the Company, Employee will not, directly
or indirectly (whether as agent, consultant, holder of a beneficial interest,
creditor, or in any other capacity), engage in any business or venture which
engages directly or indirectly in competition with the business of the Company,
or have any interest in any person, firm, corporation, or venture which engages
directly or indirectly in competition with the business of the Company. For
purposes of this section, the ownership of interests in a broadly based mutual
fund shall not constitute ownership of the stocks held by the fund.
(b) Other Employees. Except as may be required in the
---------------
performance of his or her 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. While employed by the Company, and for one
---------
(1) year thereafter, Employee shall not cause or induce, or attempt to cause or
induce, any person or firm supplying goods, services or credit to the Company to
diminish or cease furnishing such goods, services or credit.
3
<PAGE>
(d) Conflict of Interest. While employed by the Company,
--------------------
Employee shall not engage in any conduct or enterprise that shall constitute an
actual or apparent conflict of interest with respect to Employee's duties and
obligations to the Company.
8. TERMINATION.
-----------
(a) Termination at the Company's Convenience. Employee's
----------------------------------------
employment under this Agreement may be terminated by the Company at its
convenience at any time upon giving 90 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 in effect at the time of termination for a period of time
equal to the greater of the remainder of the term of this Agreement or two
years; (iii) the payment of nondiscretionary bonuses pursuant to the Company's
Executive Bonus Plan, as it existed on the date of termination, for a period of
time equal to the greater of the remainder of the term of this Agreement or two
years; (iv) the immediate vesting of all unvested stock options held by
Employee as of such termination date; (v) the continuation of all benefits and
perquisites provided by Sections 5(c)(i) and (ii) hereof for a period of time
equal to the greater of the remainder of the term of this Agreement or two
years; and (vi) no other severance. At Employee's option, Employee may elect
in writing up to 60 days prior to termination to receive such payments and
benefits as provided by subsection (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
or her 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; (ii) severance pay equal to the
nondiscretionary cash bonus Employee would have earned under the then existing
Executive Bonus Plan in the fiscal year in which Employee's employment is
terminated, prorated in accordance with the number of days in such fiscal year
that elapsed prior to Employee's termination and payable at the same time
and under the same terms and conditions as any other nondiscretionary bonuses
paid to officers in that fiscal year; and (iii) 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; (ii) severance
pay equal to the nondiscretionary cash bonus Employee would have earned under
the then existing
4
<PAGE>
Executive Bonus Plan in the fiscal year in which Employee's employment is
terminated, prorated in accordance with the number of days in such fiscal year
that elapsed prior to Employee's termination and payable at the same time and
under the same terms and conditions as any other nondiscretionary bonuses paid
to officers in that fiscal year; and (iii) no other severance. "Substantial
cause" shall mean for purposes of this subsection failure by Employee to
substantially perform his her duties, 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
in effect at the time of termination for a period of time equal to the
greater of the remainder of the term of this Agreement or two years; (iii)
the payment of nondiscretionary bonuses pursuant to the Company's Executive
Bonus Plan, as it existed on the date of termination, for a period of time equal
to the greater of the remainder of the term of this Agreement or two years; (iv)
the immediate vesting of all unvested stock options held by Employee as of such
termination date; (v) the continuation of all benefits and perquisites provided
by Sections 5(c)(i) and (ii) hereof for a period of time equal to the greater of
the remainder of the term of this Agreement or two years; and (vi) no other
severance. At Employee's option, Employee may elect in writing up to 60 days
prior to termination to receive such payments and benefits as provided by
subsection (ii) of this subsection in a lump sum payment representing all future
payments due, discounted to their then present value at the prevailing major
bank prime rate as of the date of termination. "Substantial cause" shall mean
for purposes of this subsection a material breach of this Agreement by the
Company.
(e) Termination Due to Permanent Disability. Subject to all
---------------------------------------
applicable laws, Employee's employment under this Agreement may be terminated
immediately by the Company in the event Employee becomes permanently disabled.
In the event of a termination by the Company due to Employee's permanent
disability, Employee shall be entitled to (i) any compensation accrued and
unpaid as of the date of termination; (ii) the continued payment of base salary
at the same rate and on the same schedule as in effect at the time of
termination for a period of time equal to the greater of the remainder of the
term of this Agreement or two years; (iii) severance pay equal to the
nondiscretionary cash bonus Employee would have earned under the then existing
Executive Bonus Plan in the fiscal year in which Employee's employment is
terminated, prorated in accordance with the number of days in such fiscal year
that elapsed prior to Employee's termination and payable at the same time and
under the same terms and conditions as any other nondiscretionary bonuses paid
to officers in that fiscal year; (iv) the immediate vesting of outstanding but
unvested stock options held by Employee as of such termination date in a
prorated amount based upon the
5
<PAGE>
number of days in the option vesting period that elapsed prior to Employee's
termination; (v) the continuation of all benefits and perquisites provided by
Section 5(c)(i) and (ii) hereof for a period of time equal to the greater of the
remainder of the term of this Agreement or two years; and (vi) 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 or her time
during normal business hours to the daily performance of Employee's duties as
required under this Agreement for a continuous period of six (6) months. At
Employee's option, Employee may elect in writing up to 60 days prior to
termination to receive such payments and benefits as provided by subsection (ii)
of this section in a lump sum payment representing all future payments due,
discounted to their then present value at the prevailing major bank prime rate
as of the date of termination.
(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 the greater of the remainder of the
term of this Agreement or six months; (iii) severance pay equal to the
nondiscretionary cash bonus Employee would have earned under the then existing
Executive Bonus Plan in the fiscal year in which Employee's employment is
terminated, prorated in accordance with the number of days in such fiscal year
that elapsed prior to Employee's termination and payable at the same time and
under the same terms and conditions as any other nondiscretionary bonuses paid
to officers in that fiscal year; (iv) 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 (v) no other severance.
At Employee's option, Employee may elect in writing at least 60 days prior to
termination to receive such payments and benefits as provided by subsection
(ii) of this section in a lump sum payment representing all future payments due,
discounted to their then present value at the prevailing major bank prime rate
as of the date of termination.
(g) Unless otherwise provided, any severance payments or
other amounts due pursuant to this Section 8 shall be paid in cash within thirty
(30) days of termination. Any severance payments shall be subject to usual and
customary employee payroll practices and all applicable withholding
requirements. Except for such severance pay and other amounts specifically
provided pursuant to this Section 8, Employee shall not be entitled to any
further compensation, bonus, damages, restitution, relocation benefits, or
other severance benefits upon termination of employment during the term of this
Agreement. The amounts payable to Employee pursuant to this Section 8 shall not
be treated as damages, but as severance
6
<PAGE>
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 or her employment with
the Company pursuant to this Agreement, or any amounts which might have been
earned by Employee in other employment had Employee sought such other
employment. The provisions of this Section 8 shall not limit Employee's rights
under or pursuant to any other agreement or understanding with the Company or
with Employee's participation in, or terminating distributions and vested rights
under, any pension, profit sharing, insurance or other employee benefit plan of
the Company to which Employee is entitled pursuant to the terms of such plan.
(h) Termination By Mutual Agreement of the Parties.
----------------------------------------------
Employee's employment pursuant to this Agreement may be terminated at any time
upon the mutual agreement in writing of the parties. Any such termination of
employment shall have the consequences specified in such agreement.
(i) Pre-Termination Rights. The Company shall have the
----------------------
right, at its option, to require Employee to vacate his or her 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.
9. RIGHTS UPON A CHANGE IN CONTROL.
-------------------------------
(a) If a Change in Control (as defined in Exhibit A hereto)
occurs before the termination of Employee's employment hereunder, then this
Agreement shall be extended (the "Extended Employment Agreement") in the same
form and substance as in effect immediately prior to the Change in Control,
except that the termination date shall be that date which would permit the
Extended Employment Agreement to continue in effect for an additional period of
time equal to the full term of this Agreement.
(b) Notwithstanding anything in this Agreement to the
contrary, if upon or at any time within one year following any Change in Control
that occurs during the term of this Agreement there is a Termination Event (as
defined below), Employee shall be treated as if he or she had been terminated
for the convenience of the Company and Employee shall be entitled to receive the
same compensation and other benefits and entitlements as are described in
Section 8(a) of this Agreement. Furthermore, the termination events and
consequences described in Section 8 shall continue to apply during the term of
the Extended Employment Agreement except that, in the event of a conflict
between Section 8 and the rights of Employee described in this Section 9, the
provisions of this Section 9 shall govern.
(c) A "Termination Event" shall mean the occurrence of any
one or more of the following, and in the absence of the Employee's permanent
disability
7
<PAGE>
(defined in Sections 6 and 8(e)), Employee's death, and any of the factors
enumerated in Section 8(c) as providing to the Company "substantial cause" for
terminating Employee's employment:
(i) the termination or material breach of this Agreement by
the Company;
(ii) a failure by the Company to obtain the assumption of
this Agreement by any successor to the Company or any assignee of all or
substantially all of the Company's assets;
(iii) any material diminishment in the title, position,
duties, responsibilities or status that Employee had with the Company, as a
publicly traded entity, immediately prior to the Change in Control;
(iv) any reduction, limitation or failure to pay or provide
any of the compensation, reimbursable expenses, stock options, incentive
programs, or other benefits or perquisites provided to Employee under the terms
of this Agreement or any other agreement or understanding between the Company
and Employee, or pursuant to the Company's policies and past practices as of the
date immediately prior to the Change in Control; or
(v) any requirement that Employee relocate or any assignment
to Employee of duties that would make it unreasonably difficult for Employee to
maintain the principal residence he or she had immediately prior to the Change
in Control.
10. SURRENDER OF BOOKS AND RECORDS. Employee agrees
------------------------------
that upon termination of employment in any manner, Employee will immediately
surrender to the Company all lists, books and records of or connected with the
business of the Company, and all other properties belonging to the Company, it
being distinctly understood that all such lists, books, records and other
documents are the property of the Company.
11. GENERAL RELATIONSHIP. Employee shall be considered an
--------------------
employee of the Company within the meaning of all federal, state and local laws
and regulations, including, but not limited to, laws and regulations governing
unemployment insurance, workers' compensation, industrial accident, labor and
taxes.
12. PROPRIETARY INFORMATION.
-----------------------
(a) Employee agrees that any trade secret or proprietary
information of the Company to which Employee has become privy or may become
privy to as a result of his or her 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,
8
<PAGE>
except as otherwise required by law. In addition, Employee agrees to use such
information only during the term of this Agreement and only in a manner which is
consistent with the purposes of this Agreement. In the event Employee believes
that he or she 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 or her possession to the Company.
(c) As used in this Agreement, "trade secret and proprietary
information" means information, whether written or oral, not generally available
to the public; it includes the concepts and ideas involved in the Company's
products whether patentable or not; and includes, but is not limited to, the
processes, formulae, and techniques disclosed by the Company to Employee or
observed by Employee. It does not include:
(i) Information, which at the time of disclosure,
had been previously published;
(ii) Information which is published after disclosure,
unless such publication is a breach of this Agreement or is otherwise a
violation of the contractual, legal or fiduciary duties owed to the Company,
which violation is known to Employee; or
(iii) Information which, subsequent to disclosure, is
obtained by Employee from a third person who is lawfully in possession of such
information (which information is not acquired in violation of any contractual,
legal, or fiduciary obligation owed to the Company with respect to such
information, and is known by Employee) and does not require Employee to refrain
from disclosing such information to others.
(d) The provisions of this Section 12 shall survive the
termination or expiration of this Agreement, and shall be binding upon Employee
in perpetuity.
9
<PAGE>
13. INVENTIONS AND INNOVATIONS.
--------------------------
(a) As used in this Agreement, inventions and innovations
mean new ideas and improvements, whether or not patentable, relating to the
design, manufacture, use or marketing of golf equipment or other products of the
Company. This includes, but is not 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 or she develops, either alone or with anyone else, during the term of
Employee's employment with the Company, as well as any invention or innovation
based on proprietary information of the Company which Employee develops, whether
alone or with anyone else, within twelve (12) months after the termination of
Employee's employment with the Company.
(c) Employee agrees to assign any invention or innovation to
the Company:
(i) which is developed totally or partially while
Employee is employed by the Company;
(ii) for which Employee used any of the Company's
equipment, supplies, facilities or proprietary information, even if any or all
of such items are relatively minor, and have little or no monetary value; or
(iii) which results in any way from Employee's work
for the Company or relates in any way to the Company's business or the Company's
current or anticipated research and development.
(d) Employee understands and agrees that the existence of
any condition set forth in either (c)(i), (ii) or (iii) above is sufficient to
require Employee to assign his or her inventions or innovations to the Company.
(e) All provisions of this Agreement relating to the
assignment by Employee of any invention or innovation are subject to the
provisions of California Labor Code Sections 2870, 2871 and 2872.
(f) Employee agrees that any invention or innovation which
is required under the provisions of this Agreement to be assigned to the Company
shall be the sole and exclusive property of the Company. Upon the Company's
request, at no expense to Employee, Employee shall execute any and all proper
applications for patents, assignments to the Company, and all other applicable
documents, and will give testimony when and where requested to perfect the title
and/or patents (both within and
10
<PAGE>
without the United States) in all inventions or innovations belonging to the
Company.
(g) Employee shall disclose all inventions and innovations
to the Company, even if Employee does not believe that he or she is required
under this Agreement, or pursuant to California Labor Code Section 2870, to
assign his or her 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.
14. ASSIGNMENT. This Agreement shall be binding upon and
----------
shall inure to the benefit of the parties hereto and the successors and assigns
of the Company. Employee shall have no right to assign his rights, benefits,
duties, obligations or other interests in this Agreement, it being understood
that this Agreement is personal to Employee.
15. ATTORNEYS' FEES AND COSTS. If any arbitration or other
-------------------------
proceeding is brought for the enforcement of this Agreement, or because of an
alleged dispute or default in connection with any of its provisions, the
successful or prevailing party shall be entitled to recover reasonable
attorneys' fees 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. The prevailing party in any such proceeding shall be entitled to
recover from the other party the reasonable costs and expenses of any such
proceeding (not including attorneys' fees).
16. ENTIRE UNDERSTANDING. This Agreement sets forth the
--------------------
entire understanding of the parties hereto with respect to the subject matter
hereof, and no other representations, warranties or agreements whatsoever as to
that subject matter have been made by Employee or the Company not herein
contained. This Agreement shall not be modified, amended or terminated except
by another instrument in writing executed by the parties hereto. This Agreement
replaces and supersedes any and all prior understandings or agreements between
Employee and the Company regarding employment.
17. NOTICES. Any notice, request, demand, or other
-------
communication required or permitted hereunder, shall be deemed properly given
when actually received or within five (5) days of mailing by certified or
registered mail, postage prepaid, to:
Employee: Steven C. McCracken
5186 Chelterham Terrace
San Diego, CA 92130
11
<PAGE>
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, in writing, to the other.
18. ARBITRATION. Any dispute, controversy or claim arising
-----------
hereunder or in any way related to this Agreement, its interpretation,
enforceability, or applicability, or relating to Employee's employment, or the
termination thereof, that cannot be resolved by mutual agreement of the parties
shall be submitted to arbitration. The arbitration shall be conducted by a
retired judge from the Judicial Arbitration and Mediation Service/Endispute
("JAMS") office located in Orange County, California, who shall have the powers
to hear motions, control discovery, conduct hearings and otherwise do all that
is necessary to resolve the matter. The arbitration award shall be final and
binding, and judgment on the award may be entered in any court having
jurisdiction thereof. It is expressly understood that the parties have chosen
arbitration to avoid the burdens, costs and publicity of a court proceeding, and
the arbitrator is expected to handle all aspects of the matter, including
discovery and any hearings, in such a way as to minimize the expense, time,
burden and publicity of the process, while assuring a fair and just result.
In particular, the parties expect that the arbitrator will limit discovery by
controlling the amount of discovery that may be taken (e.g., the number of
depositions or interrogatories) and by restricting the scope of discovery to
only those matters clearly relevant to the dispute.
19. MISCELLANEOUS.
-------------
(a) Headings. The headings of the several sections and
--------
paragraphs of this Agreement are inserted solely for the convenience of
reference and are not a part of and are not intended to govern, limit or aid in
the construction of any term or provision hereof.
(b) Waiver. Failure of either party at any time to require
------
performance by the other of any provision of this Agreement shall in no way
affect that party's rights thereafter to enforce the same, nor shall the waiver
by either party of any breach of any provision hereof be held to be a waiver of
any succeeding breach of any provision or a waiver of the provision itself.
(c) Applicable Law. This Agreement shall constitute a
--------------
contract under the internal laws of the State of California and shall be
governed and construed in accordance with the laws of said state as to both
interpretation and performance.
(d) Severability. In the event any provision or provisions
------------
of this Agreement is or are held invalid, the remaining provisions of this
Agreement shall not
12
<PAGE>
be affected thereby.
20. SUPERSEDES OLD OFFICER EMPLOYMENT CONTRACT.
------------------------------------------
Employee and the Company recognize that prior to the effective date of this
Agreement they were parties to a certain Officer Employment Agreement effective
January 1, 1996 (the "Old Officer Employment Agreement"). It is the intent of
the parties that as of the effective date of this Agreement, this Agreement
shall replace and supersede the Old Officer Employment Agreement entirely, that
the Old Officer Employment Agreement shall no longer be of any force or effect
except as to Sections 7, 12, 13, 15 and 18 thereof, and that to the extent there
is any conflict between the Old Officer Employment Agreement and this Agreement,
this Agreement shall control and both agreements shall be construed so as to
give the maximum force and effect to the provisions of this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed effective the date first written above.
EMPLOYEE: COMPANY:
CALLAWAY GOLF COMPANY,
a California corporation
/s/ STEVEN C. McCRACKEN By: /s/ DONALD H. DYE
- -------------------------- -------------------------------
Steven C. McCracken Donald H. Dye, President & CEO
13
<PAGE>
EXHIBIT A
A "Change in Control" means the following and shall be deemed to occur
if any of the following events occurs:
(a) Any person, entity or group, within the meaning of Section 13(d)
or 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") but
excluding the Company and its subsidiaries and any employee benefit or stock
ownership plan of the Company or its subsidiaries and also excluding an
underwriter or underwriting syndicate that has acquired the Company's securities
solely in connection with a public offering thereof (such person,
entity or group being referred to herein as a "Person") becomes the beneficial
owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of
30% or more of either the then outstanding shares of Common Stock or the
combined voting power of the Company's then outstanding securities entitled to
vote generally in the election of directors; or
(b) Individuals who, as of the effective date hereof, constitute the
Board of Directors of the Company (the "Incumbent Board") cease for any reason
to constitute at least a majority of the Board of Directors of the Company,
provided that any individual who becomes a director after the effective date
hereof whose election, or nomination for election by the Company's shareholders,
is approved by a vote of at least a majority of the directors then comprising
the Incumbent Board shall be considered to be a member of the Incumbent Board
unless that individual was nominated or elected by any Person having the power
to exercise, through beneficial ownership, voting agreement and/or proxy, 20% or
more of either the outstanding shares of Common Stock or the combined voting
power of the Company's then outstanding voting securities entitled to vote
generally in the election of directors, in which case that individual shall not
be considered to be a member of the Incumbent Board unless such individual's
election or nomination for election by the Company's shareholders is approved by
a vote of at least two-thirds of the directors then comprising the Incumbent
Board; or
(c) Consummation by the Company of the sale or other disposition by
the Company of all or substantially all of the Company's assets or a
reorganization or merger or consolidation of the Company with any other person,
entity or corporation, other than
(i) a reorganization or merger or consolidation that would
result in the voting securities of the Company outstanding immediately prior
thereto (or, in the case of a reorganization or merger or consolidation that is
preceded or accomplished by an acquisition or series of related acquisitions by
any Person, by tender or exchange offer or otherwise, of voting securities
representing 5% or more of the combined voting power of all securities of the
Company, immediately prior to such acquisition or the first acquisition in such
series of acquisitions) continuing to represent, either by remaining outstanding
or by being converted into voting securities of another entity,
14
<PAGE>
more than 50% of the combined voting power of the voting securities of the
Company or such other entity outstanding immediately after such reorganization
or merger or consolidation (or series of related transactions involving such a
reorganization or merger or consolidation), or
(ii) a reorganization or merger or consolidation effected to
implement a recapitalization or reincorporation of the Company (or similar
transaction) that does not result in a material change in beneficial ownership
of the voting securities of the Company or its successor; or
(d) Approval by the shareholders of the Company or an order by a
court of competent jurisdiction of a plan of liquidation of the Company.
15
<PAGE>
EXHIBIT 10.7.1
--------------
EXECUTIVE OFFICER EMPLOYMENT AGREEMENT
This Executive Officer Employment Agreement ("Agreement") is
entered into as of January 1, 1997, by and between Callaway Golf Company, a
California corporation (the "Company"), and Frederick R. Port ("Employee").
1. TERM. The Company hereby employs Employee and Employee
----
hereby accepts employment pursuant to the terms and provisions of this
Agreement for the term commencing January 1, 1997 and terminating December 31,
1999 unless this Agreement is earlier terminated as hereinafter provided.
Unless such employment is earlier terminated, upon the expiration of the term
of this Agreement, Employee's status shall be one of at will employment.
2. SERVICES.
---------
(a) Employee shall serve as Executive Vice President,
International Sales, Licensing and Business Development of the Company, and
President of Callaway Golf International, a Division of the Company.
Employee's duties shall be the usual and customary duties of the offices in
which he or she serves. Employee shall report to the President and Chief
Executive Officer of the Company, or to such other person as the Chief
Executive Officer shall designate. Employee's title, position and/or duties
may be changed by the Board of Directors and/or the Chief Executive Officer of
the Company.
(b) Employee shall be required to comply with all policies
and procedures of the Company, as such shall be adopted, modified or otherwise
established by the Company from time to time.
3. SERVICES TO BE EXCLUSIVE. During the term hereof,
------------------------
Employee agrees to devote his or her full productive time and best efforts to
the performance of Employee's duties hereunder pursuant to the supervision and
direction of the Company's Board of Directors and its Chief Executive Officer.
Employee further agrees, as a condition to the performance by the Company of
each and all of its obligations hereunder, that so long as Employee is employed
by the Company, Employee will not directly or indirectly render services of any
nature to, otherwise become employed by, or otherwise participate or engage in
any other business without the Company's prior written consent. Employee
further agrees to execute such secrecy, non-disclosure, patent, trademark,
copyright and other proprietary rights agreements, if any, as the Company may
from time to time reasonably require. Nothing herein contained shall be
deemed to preclude Employee from having outside personal investments and
involvement with appropriate community activities, and from devoting a
reasonable amount of time to such matters, provided that this shall in no
manner interfere with or derogate from Employee's work for the Company.
4. COMPENSATION. The Company agrees to pay Employee:
------------
<PAGE>
(a) a base salary at the rate of $550,000.00 per year, with
the opportunity to receive increases (but not decreases) in such base salary
in accord with the Company's plans and policies as they may exist from time
to time for its senior executive officers; and
(b) an opportunity to earn an annual bonus based upon
participation in the Company's Executive Bonus Plan as it may exist from time
to time.
5. EXPENSES AND BENEFITS.
----------------------
(a) Reasonable and Necessary Expenses. In addition to the
---------------------------------
compensation provided for in Section 4 hereof, the Company shall reimburse
Employee for all reasonable, customary, and necessary expenses incurred in the
performance of Employee's duties hereunder. Employee shall first account for
such expenses by submitting a signed statement itemizing such expenses prepared
in accordance with the policy set by the Company for reimbursement of such
expenses. The amount, nature, and extent of such expenses shall always be
subject to the control, supervision, and direction of the Company and its Chief
Executive Officer. Notwithstanding the foregoing, Employee shall also receive
a Special Expense Allowance of $20,000.00 per year to be used to cover the
actual costs of reasonable, customary and necessary expenses incurred in the
performance of Employee's duties hereunder, for which Employee shall not be
required to submit supporting documentation as might otherwise be required by
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. Any unused time will
accrue from year to year. The maximum vacation time Employee may accrue shall
be three times Employee's annual vacation benefit. The Company reserves the
right to pay Employee for unused, accrued vacation benefits in lieu of
providing time off.
(c) Benefits. During Employee's employment with the
--------
Company pursuant to this Agreement, the Company shall provide for Employee to:
(i) participate in the Company's health insurance
and disability insurance plans as the same may be modified from time to time;
(ii) receive, if Employee is insurable under usual
underwriting standards, term life insurance coverage on Employee's life,
payable to whomever the Employee directs, in the face amount of $3,000,000.00,
provided that Employee's physical condition does not prevent Employee from
reasonably qualifying for such insurance coverage;
2
<PAGE>
(iii) participate in the Company's 401(k) pension
plan pursuant to the terms of the plan, as the same may be modified from time
to time;
(iv) participate in the Company's Executive Deferred
Compensation Plan, as the same may be modified from time to time: and
(v) participate in any other benefit plans the
Company provides from time to time to senior executive officers.
(d) Club Membership. The Company shall pay the reasonable
---------------
cost of initiation associated with Employee gaining privileges at a mutually
agreed upon country club. Employee shall be responsible for all other
expenses and costs associated with such club use, including monthly member
dues and charges. The club membership itself shall belong to and be the
property of the Company, not Employee.
(e) Estate Planning and Other Perquisites. To the extent
-------------------------------------
the Company provides estate planning and related services, or any other
perquisites and personal benefits to other senior executive officers from time
to time, such services and perquisites shall be made available to Employee on
the same terms and conditions.
(f) Office Support. At its expense, the Company shall
--------------
provide Employee, for Company business purposes, with a secretary, an office and
a mobile telephone. At its expense, the Company shall provide Employee, for
Company business purposes, with computers, facsimile machines and business
telephones for use at Employee's office and at two homes.
6. DISABILITY. If on account of any physical or mental
----------
disability Employee shall fail or be unable to perform all or substantially
all of Employee's duties under this Agreement for a continuous period of up to
six (6) months during any twelve month period during the term of this
Agreement, Employee shall be entitled to his or her full compensation and
benefits as set forth in this Agreement. If Employee's disability continues
after such six (6) month period, this Agreement is subject to termination
pursuant to the provisions of Section 8(e) hereof.
7. NONCOMPETITION.
--------------
(a) Other Business. To the fullest extent permitted by
--------------
law, Employee agrees that, while employed by the Company, Employee will not,
directly or indirectly (whether as agent, consultant, holder of a beneficial
interest, creditor, or in any other capacity), engage in any business or
venture which engages directly or indirectly in competition with the business
of the Company, or have any interest in any person, firm, corporation, or
venture which engages directly or indirectly in competition with the business
of the Company. For purposes of this section, the ownership of interests in a
broadly based mutual fund shall not constitute ownership of the stocks held by
the fund.
3
<PAGE>
(b) Other Employees. Except as may be required in the
---------------
performance of his or her 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. While employed by the Company, and for one
---------
(1) year thereafter, Employee shall not cause or induce, or attempt to cause or
induce, any person or firm supplying goods, services or credit to the Company
to diminish or cease furnishing such goods, services or credit.
(d) Conflict of Interest. While employed by the Company,
--------------------
Employee shall not engage in any conduct or enterprise that shall constitute an
actual or apparent conflict of interest with respect to Employee's duties and
obligations to the Company.
8. TERMINATION.
------------
(a) Termination at the Company's Convenience. Employee's
----------------------------------------
employment under this Agreement may be terminated by the Company at its
convenience at any time upon giving 90 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 in effect at the time of termination for a period of time
equal to the greater of the remainder of the term of this Agreement or two
years; (iii) the payment of nondiscretionary bonuses pursuant to the Company's
Executive Bonus Plan, as it existed on the date of termination, for a period of
time equal to the greater of the remainder of the term of this Agreement or two
years; (iv) the immediate vesting of all unvested stock options held by
Employee as of such termination date; (v) the continuation of all benefits and
perquisites provided by Sections 5(c)(i) and (ii) hereof for a period of time
equal to the greater of the remainder of the term of this Agreement or two
years; and (vi) no other severance. At Employee's option, Employee may elect
in writing up to 60 days prior to termination to receive such payments and
benefits as provided by subsection (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 or her 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; (ii) severance
pay equal to the nondiscretionary
4
<PAGE>
cash bonus Employee would have earned under the then existing Executive Bonus
Plan in the fiscal year in which Employee's employment is terminated, prorated
in accordance with the number of days in such fiscal year that elapsed prior to
Employee's termination and payable at the same time and under the same terms and
conditions as any other nondiscretionary bonuses paid to officers in that fiscal
year; and (iii) 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;
(ii) severance pay equal to the nondiscretionary cash bonus Employee would have
earned under the then existing Executive Bonus Plan in the fiscal year in which
Employee's employment is terminated, prorated in accordance with the number of
days in such fiscal year that elapsed prior to Employee's termination and
payable at the same time and under the same terms and conditions as any other
nondiscretionary bonuses paid to officers in that fiscal year; and (iii) no
other severance. "Substantial cause" shall mean for purposes of this
subsection failure by Employee to substantially perform his her duties, 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
in effect at the time of termination for a period of time equal to the greater
of the remainder of the term of this Agreement or two years; (iii) the payment
of nondiscretionary bonuses pursuant to the Company's Executive Bonus Plan, as
it existed on the date of termination, for a period of time equal to the
greater of the remainder of the term of this Agreement or two years; (iv) the
immediate vesting of all unvested stock options held by Employee as of such
termination date; (v) the continuation of all benefits and perquisites
provided by Sections 5(c)(i) and (ii) hereof for a period of time equal to the
greater of the remainder of the term of this Agreement or two years; and (vi)
no other severance. At Employee's option, Employee may elect in writing up to
60 days prior to termination to receive such payments and benefits as provided
by subsection (ii) of this subsection in a lump sum payment representing all
future payments due, discounted to their then present value at the prevailing
major bank prime rate as of the date of termination. "Substantial cause" shall
mean for purposes of this subsection the elimination of Employee's position, a
reduction in Employee's base salary, a material reduction in Employee's
authority or responsibilities (including, but not limited to, any failure to
include Employee as a nominee for the Board of Directors at any election of
Directors during the term of this
5
<PAGE>
Agreement), or 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 continued payment of
base salary at the same rate and on the same schedule as in effect at the time
of termination for a period of time equal to the greater of the remainder of
the term of this Agreement or two years; (iii) severance pay equal to the
nondiscretionary cash bonus Employee would have earned under the then existing
Executive Bonus Plan in the fiscal year in which Employee's employment is
terminated, prorated in accordance with the number of days in such fiscal year
that elapsed prior to Employee's termination and payable at the same time and
under the same terms and conditions as any other nondiscretionary bonuses paid
to officers in that fiscal year; (iv) 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; (v) the continuation of all benefits
and perquisites provided by Section 5(c)(i) and (ii) hereof for a period of
time equal to the greater of the remainder of the term of this Agreement or two
years; and (vi) 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 or her time during normal business hours to the daily
performance of Employee's duties as required under this Agreement for a
continuous period of six (6) months. At Employee's option, Employee may elect
in writing up to 60 days prior to termination to receive such payments and
benefits as provided by subsection (ii) of this section in a lump sum payment
representing all future payments due, discounted to their then present value
at the prevailing major bank prime rate as of the date of termination.
(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 the greater of the remainder of
the term of this Agreement or six months; (iii) severance pay equal to the
nondiscretionary cash bonus Employee would have earned under the then existing
Executive Bonus Plan in the fiscal year in which Employee's employment is
terminated, prorated in accordance with the number of days in such fiscal year
that elapsed prior to Employee's termination and payable at the same time and
under the same terms and conditions as any other nondiscretionary bonuses paid
to officers in that fiscal year; (iv) the immediate vesting of outstanding but
unvested stock
6
<PAGE>
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 (v) no other severance. At Employee's option,
Employee may elect in writing at least 60 days prior to termination to receive
such payments and benefits as provided by subsection (ii) of this section in a
lump sum payment representing all future payments due, discounted to their then
present value at the prevailing major bank prime rate as of the date of
termination.
(g) Unless otherwise provided, any severance payments or
other amounts due pursuant to this Section 8 shall be paid in cash within thirty
(30) days of termination. Any severance payments shall be subject to usual and
customary employee payroll practices and all applicable withholding
requirements. Except for such severance pay and other amounts specifically
provided pursuant to this Section 8, Employee shall not be entitled to any
further compensation, bonus, damages, restitution, relocation benefits, or other
severance benefits upon termination of employment during the term of this
Agreement. The amounts payable to Employee pursuant to this Section 8 shall not
be treated as damages, but as severance compensation to which Employee is
entitled by reason of termination of employment under the applicable
circumstances. The Company shall not be entitled to set off against the amounts
payable to Employee hereunder any amounts earned by Employee in other employment
after termination of his or her employment with the Company pursuant to this
Agreement, or any amounts which might have been earned by Employee in other
employment had Employee sought such other employment. The provisions of this
Section 8 shall not limit Employee's rights under or pursuant to any other
agreement or understanding with the Company or with Employee's participation in,
or terminating distributions and vested rights under, any pension, profit
sharing, insurance or other employee benefit plan of the Company to which
Employee is entitled pursuant to the terms of such plan.
(h) Termination By Mutual Agreement of the Parties.
----------------------------------------------
Employee's employment pursuant to this Agreement may be terminated at any time
upon the mutual agreement in writing of the parties. Any such termination of
employment shall have the consequences specified in such agreement.
(i) Pre-Termination Rights. The Company shall have the
----------------------
right, at its option, to require Employee to vacate his or her 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.
9. RIGHTS UPON A CHANGE IN CONTROL.
-------------------------------
(a) If a Change in Control (as defined in Exhibit A hereto)
occurs before the termination of Employee's employment hereunder, then this
Agreement shall be extended (the "Extended Employment Agreement") in the same
form and substance as in effect immediately prior to the Change in Control,
except that the termination date
7
<PAGE>
shall be that date which would permit the Extended Employment Agreement to
continue in effect for an additional period of time equal to the full term of
this Agreement.
(b) Notwithstanding anything in this Agreement to the
contrary, if upon or at any time within one year following any Change in
Control that occurs during the term of this Agreement there is a Termination
Event (as defined below), Employee shall be treated as if he or she had been
terminated for the convenience of the Company and Employee shall be entitled to
receive the same compensation and other benefits and entitlements as are
described in Section 8(a) of this Agreement. Furthermore, the termination
events and consequences described in Section 8 shall continue to apply during
the term of the Extended Employment Agreement except that, in the event of a
conflict between Section 8 and the rights of Employee described in this Section
9, the provisions of this Section 9 shall govern.
(c) A "Termination Event" shall mean the occurrence of any
one or more of the following, and in the absence of the Employee's permanent
disability (defined in Sections 6 and 8(e)), Employee's death, and any of the
factors enumerated in Section 8(c) as providing to the Company "substantial
cause" for terminating Employee's employment:
(i) the termination or material breach of this Agreement by
the Company;
(ii) a failure by the Company to obtain the assumption of
this Agreement by any successor to the Company or any assignee of all or
substantially all of the Company's assets;
(iii) any material diminishment in the title, position,
duties, responsibilities or status that Employee had with the Company, as a
publicly traded entity, immediately prior to the Change in Control;
(iv) any reduction, limitation or failure to pay or provide
any of the compensation, reimbursable expenses, stock options, incentive
programs, or other benefits or perquisites provided to Employee under the terms
of this Agreement or any other agreement or understanding between the Company
and Employee, or pursuant to the Company's policies and past practices as of the
date immediately prior to the Change in Control; or
(v) any requirement that Employee relocate or any assignment
to Employee of duties that would make it unreasonably difficult for Employee to
maintain the principal residence he or she had immediately prior to the Change
in Control.
10. SURRENDER OF BOOKS AND RECORDS. Employee agrees that
------------------------------
upon termination of employment in any manner, Employee will immediately
8
<PAGE>
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.
11. GENERAL RELATIONSHIP. Employee shall be considered an
--------------------
employee of the Company within the meaning of all federal, state and local laws
and regulations, including, but not limited to, laws and regulations governing
unemployment insurance, workers' compensation, industrial accident, labor and
taxes.
12. PROPRIETARY INFORMATION.
-----------------------
(a) Employee agrees that any trade secret or proprietary
information of the Company to which Employee has become privy or may become
privy to as a result of his or her employment with the Company shall not be
divulged or disclosed to any other party (including, without limit, any person
or entity with whom or in whom Employee has a business interest) without the
express written consent of the Company, except as otherwise required by law.
In addition, Employee agrees to use such information only during the term of
this Agreement and only in a manner which is consistent with the purposes of
this Agreement. In the event Employee believes that he or she 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 or her 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;
9
<PAGE>
(ii) Information which is published after disclosure,
unless such publication is a breach of this Agreement or is otherwise a
violation of the contractual, legal or fiduciary duties owed to the Company,
which violation is known to Employee; or
(iii) Information which, subsequent to disclosure, is
obtained by Employee from a third person who is lawfully in possession of such
information (which information is not acquired in violation of any contractual,
legal, or fiduciary obligation owed to the Company with respect to such
information, and is known by Employee) and does not require Employee to refrain
from disclosing such information to others.
(d) The provisions of this Section 12 shall survive the
termination or expiration of this Agreement, and shall be binding upon Employee
in perpetuity.
13. INVENTIONS AND INNOVATIONS.
--------------------------
(a) As used in this Agreement, inventions and innovations
mean new ideas and improvements, whether or not patentable, relating to the
design, manufacture, use or marketing of golf equipment or other products of the
Company. This includes, but is not 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 or she develops, either alone or with anyone else, during the term of
Employee's employment with the Company, as well as any invention or innovation
based on proprietary information of the Company which Employee develops, whether
alone or with anyone else, within twelve (12) months after the termination of
Employee's employment with the Company.
(c) Employee agrees to assign any invention or innovation to
the Company:
(i) which is developed totally or partially while
Employee is employed by the Company;
(ii) for which Employee used any of the Company's
equipment, supplies, facilities or proprietary information, even if any or all
of such items are relatively minor, and have little or no monetary value; or
(iii) which results in any way from Employee's work
for the Company or relates in any way to the Company's business or the
Company's current or
10
<PAGE>
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 or her inventions or innovations to the Company.
(e) All provisions of this Agreement relating to the
assignment by Employee of any invention or innovation are subject to the
provisions of California Labor Code Sections 2870, 2871 and 2872.
(f) Employee agrees that any invention or innovation which
is required under the provisions of this Agreement to be assigned to the Company
shall be the sole and exclusive property of the Company. Upon the Company's
request, at no expense to Employee, Employee shall execute any and all proper
applications for patents, assignments to the Company, and all other applicable
documents, and will give testimony when and where requested to perfect the title
and/or patents (both within and without the United States) in all inventions or
innovations belonging to the Company.
(g) Employee shall disclose all inventions and innovations
to the Company, even if Employee does not believe that he or she is required
under this Agreement, or pursuant to California Labor Code Section 2870, to
assign his or her 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.
14. ASSIGNMENT. This Agreement shall be binding upon and
----------
shall inure to the benefit of the parties hereto and the successors and assigns
of the Company. Employee shall have no right to assign his rights, benefits,
duties, obligations or other interests in this Agreement, it being understood
that this Agreement is personal to Employee.
15. ATTORNEYS' FEES AND COSTS. If any arbitration or other
-------------------------
proceeding is brought for the enforcement of this Agreement, or because of an
alleged dispute or default in connection with any of its provisions, the
successful or prevailing party shall be entitled to recover reasonable
attorneys' fees 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. The prevailing party in any such proceeding shall be entitled to
recover from the other party the reasonable costs and expenses of any such
proceeding (not including attorneys' fees).
16. ENTIRE UNDERSTANDING. This Agreement sets forth the
--------------------
entire understanding of the parties hereto with respect to the subject matter
hereof, and no other representations, warranties or agreements whatsoever as to
that subject matter
11
<PAGE>
have been made by Employee or the Company not herein contained. This Agreement
shall not be modified, amended or terminated except by another instrument in
writing executed by the parties hereto. This Agreement replaces and supersedes
any and all prior understandings or agreements between Employee and the Company
regarding employment.
17. NOTICES. Any notice, request, demand, or other
-------
communication required or permitted hereunder, shall be deemed properly given
when actually received or within five (5) days of mailing by certified or
registered mail, postage prepaid, to:
Employee: Frederick R. Port
c/o Callaway Golf Company
2285 Rutherford Road
Carlsbad, California 92008-8815
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, in writing, to the other.
18. ARBITRATION. Any dispute, controversy or claim arising
-----------
hereunder or in any way related to this Agreement, its interpretation,
enforceability, or applicability, or relating to Employee's employment, or the
termination thereof, that cannot be resolved by mutual agreement of the parties
shall be submitted to arbitration. The arbitration shall be conducted by a
retired judge from the Judicial Arbitration and Mediation Service/Endispute
("JAMS") office located in Orange County, California, who shall have the powers
to hear motions, control discovery, conduct hearings and otherwise do all that
is necessary to resolve the matter. The arbitration award shall be final and
binding, and judgment on the award may be entered in any court having
jurisdiction thereof. It is expressly understood that the parties have chosen
arbitration to avoid the burdens, costs and publicity of a court proceeding, and
the arbitrator is expected to handle all aspects of the matter, including
discovery and any hearings, in such a way as to minimize the expense, time,
burden and publicity of the process, while assuring a fair and just result. In
particular, the parties expect that the arbitrator will limit discovery by
controlling the amount of discovery that may be taken (e.g., the number of
depositions or interrogatories) and by restricting the scope of discovery to
only those matters clearly relevant to the dispute.
19. MISCELLANEOUS.
-------------
(a) Headings. The headings of the several sections and
--------
paragraphs
12
<PAGE>
of this Agreement are inserted solely for the convenience of reference and are
not a part of and are not intended to govern, limit or aid in the construction
of any term or provision hereof.
(b) Waiver. Failure of either party at any time to
------
require performance by the other of any provision of this Agreement shall in no
way affect that party's rights thereafter to enforce the same, nor shall the
waiver by either party of any breach of any provision hereof be held to be a
waiver of any succeeding breach of any provision or a waiver of the provision
itself.
(c) Applicable Law. This Agreement shall constitute a
--------------
contract under the internal laws of the State of California and shall be
governed and construed in accordance with the laws of said state as to both
interpretation and performance.
(d) Severability. In the event any provision or provisions
------------
of this Agreement is or are held invalid, the remaining provisions of this
Agreement shall not be affected thereby.
20. SUPERSEDES OLD OFFICER EMPLOYMENT CONTRACT.
------------------------------------------
Employee and the Company recognize that prior to the effective date of this
Agreement they were parties to a certain Officer Employment Agreement effective
July 20, 1995 (the "Old Officer Employment Agreement"). It is the intent of the
parties that as of the effective date of this Agreement, this Agreement shall
replace and supersede the Old Officer Employment Agreement entirely, that the
Old Officer Employment Agreement shall no longer be of any force or effect
except as to Sections 7, 12, 13, 15 and 18 thereof, and that to the extent there
is any conflict between the Old Officer Employment Agreement and this Agreement,
this Agreement shall control and both agreements shall be construed so as to
give the maximum force and effect to the provisions of this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed effective the date first written above.
EMPLOYEE: COMPANY:
CALLAWAY GOLF COMPANY,
a California corporation
/s/ FREDERICK R. PORT By: /s/ DONALD H. DYE
- ------------------------ ---------------------------------
Frederick R. Port Donald H. Dye, President & CEO
13
<PAGE>
EXHIBIT A
A "Change in Control" means the following and shall be deemed to occur
if any of the following events occurs:
(a) Any person, entity or group, within the meaning of Section 13(d)
or 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") but
excluding the Company and its subsidiaries and any employee benefit or stock
ownership plan of the Company or its subsidiaries and also excluding an
underwriter or underwriting syndicate that has acquired the Company's securities
solely in connection with a public offering thereof (such person, entity or
group being referred to herein as a "Person") becomes the beneficial owner
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or
more of either the then outstanding shares of Common Stock or the combined
voting power of the Company's then outstanding securities entitled to vote
generally in the election of directors; or
(b) Individuals who, as of the effective date hereof, constitute the
Board of Directors of the Company (the "Incumbent Board") cease for any reason
to constitute at least a majority of the Board of Directors of the Company,
provided that any individual who becomes a director after the effective date
hereof whose election, or nomination for election by the Company's shareholders,
is approved by a vote of at least a majority of the directors then comprising
the Incumbent Board shall be considered to be a member of the Incumbent Board
unless that individual was nominated or elected by any Person having the power
to exercise, through beneficial ownership, voting agreement and/or proxy, 20% or
more of either the outstanding shares of Common Stock or the combined voting
power of the Company's then outstanding voting securities entitled to vote
generally in the election of directors, in which case that individual shall not
be considered to be a member of the Incumbent Board unless such individual's
election or nomination for election by the Company's shareholders is approved by
a vote of at least two-thirds of the directors then comprising the Incumbent
Board; or
(c) Consummation by the Company of the sale or other disposition by
the Company of all or substantially all of the Company's assets or a
reorganization or merger or consolidation of the Company with any other person,
entity or corporation, other than
(i) a reorganization or merger or consolidation that would
result in the voting securities of the Company outstanding immediately prior
thereto (or, in the case of a reorganization or merger or consolidation that is
preceded or accomplished by an acquisition or series of related acquisitions by
any Person, by tender or exchange offer or otherwise, of voting securities
representing 5% or more of the combined voting power of all securities of the
Company, immediately prior to such acquisition or the first acquisition in such
series of acquisitions) continuing to represent, either by remaining outstanding
or by being converted into voting securities of another entity,
14
<PAGE>
more than 50% of the combined voting power of the voting securities of the
Company or such other entity outstanding immediately after such reorganization
or merger or consolidation (or series of related transactions involving such a
reorganization or merger or consolidation), or
(ii) a reorganization or merger or consolidation effected to
implement a recapitalization or reincorporation of the Company (or similar
transaction) that does not result in a material change in beneficial ownership
of the voting securities of the Company or its successor; or
(d) Approval by the shareholders of the Company or an order by a
court of competent jurisdiction of a plan of liquidation of the Company.
15
<PAGE>
EXECUTIVE OFFICER EMPLOYMENT AGREEMENT
This Executive Officer Employment Agreement ("Agreement") is
entered into as of January 1, 1997, by and between Callaway Golf Company, a
California corporation (the "Company"), and David Rane ("Employee").
1. TERM. The Company hereby employs Employee and Employee
----
hereby accepts employment pursuant to the terms and provisions of this Agreement
for the term commencing January 1, 1997 and terminating December 31, 1999
unless this Agreement is earlier terminated as hereinafter provided. Unless
such employment is earlier terminated, upon the expiration of the term of this
Agreement, Employee's status shall be one of at will employment.
2. SERVICES.
--------
(a) Employee shall serve as Executive Vice President, Chief
Financial Officer of the Company. Employee's duties shall be the usual and
customary duties of the offices in which he or she serves. Employee shall
report to the President and Chief Executive Officer of the Company, or to such
other person as the Chief Executive Officer shall designate. Employee's title,
position and/or duties may be changed by the Board of Directors and/or the
Chief Executive Officer of the Company.
(b) Employee shall be required to comply with all policies
and procedures of the Company, as such shall be adopted, modified or otherwise
established by the Company from time to time.
3. SERVICES TO BE EXCLUSIVE. During the term hereof,
------------------------
Employee agrees to devote his or her full productive time and best efforts to
the performance of Employee's duties hereunder pursuant to the supervision and
direction of the Company's Board of Directors and its Chief Executive Officer.
Employee further agrees, as a condition to the performance by the Company of
each and all of its obligations hereunder, that so long as Employee is employed
by the Company, Employee will not directly or indirectly render services of any
nature to, otherwise become employed by, or otherwise participate or engage in
any other business without the Company's prior written consent. Employee
further agrees to execute such secrecy, non-disclosure, patent, trademark,
copyright and other proprietary rights agreements, if any, as the Company may
from time to time reasonably require. Nothing herein contained shall be deemed
to preclude Employee from having outside personal investments and involvement
with appropriate community activities, and from devoting a reasonable amount of
time to such matters, provided that this shall in no manner interfere with or
derogate from Employee's work for the Company.
4. COMPENSATION. The Company agrees to pay Employee:
------------
(a) a base salary at the rate of $325,000.00 per year; and
<PAGE>
(b) an opportunity to earn an annual bonus based upon
participation in the Company's Executive Bonus Plan as it may exist from time
to time.
5. EXPENSES AND BENEFITS.
---------------------
(a) Reasonable and Necessary Expenses. In addition to the
---------------------------------
compensation provided for in Section 4 hereof, the Company shall reimburse
Employee for all reasonable, customary, and necessary expenses incurred in the
performance of Employee's duties hereunder. Employee shall first account for
such expenses by submitting a signed statement itemizing such expenses prepared
in accordance with the policy set by the Company for reimbursement of such
expenses. The amount, nature, and extent of such expenses shall always be
subject to the control, supervision, and direction of the Company and its Chief
Executive Officer.
(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. Any unused time will
accrue from year to year. The maximum vacation time Employee may accrue shall
be three times Employee's annual vacation benefit. The Company reserves the
right to pay Employee for unused, accrued vacation benefits in lieu of
providing time off.
(c) Benefits. During Employee's employment with the
--------
Company pursuant to this Agreement, the Company shall provide for Employee to:
(i) participate in the Company's health insurance
and disability insurance plans as the same may be modified from time to time;
(ii) receive, if Employee is insurable under usual
underwriting standards, term life insurance coverage on Employee's life,
payable to whomever the Employee directs, in the face amount of $1,000,000.00,
provided that Employee's physical condition does not prevent Employee from
reasonably qualifying for such insurance coverage;
(iii) participate in the Company's 401(k) pension
plan pursuant to the terms of the plan, as the same may be modified from time
to time;
(iv) participate in the Company's Executive Deferred
Compensation Plan, as the same may be modified from time to time: and
(v) participate in any other benefit plans the
Company provides from time to time to executive officers.
(d) Club Membership. The Company shall pay the reasonable
---------------
cost
2
<PAGE>
of initiation associated with Employee gaining privileges at a mutually agreed
upon country club. Employee shall be responsible for all other expenses and
costs associated with such club use, including monthly member dues and charges.
The club membership itself shall belong to and be the property of the Company,
not Employee.
(e) Estate Planning and Other Perquisites. To the extent
-------------------------------------
the Company provides estate planning and related services, or any other
perquisites and personal benefits to other executive officers from time to
time, such services and perquisites shall be made available to Employee on the
same terms and conditions.
6. DISABILITY. If on account of any physical or mental
----------
disability Employee shall fail or be unable to perform all or substantially all
of Employee's duties under this Agreement for a continuous period of up to six
(6) months during any twelve month period during the term of this Agreement,
Employee shall be entitled to his or her full compensation and benefits as set
forth in this Agreement. If Employee's disability continues after such six (6)
month period, this Agreement is subject to termination pursuant to the
provisions of Section 8(e) hereof.
7. NONCOMPETITION.
--------------
(a) Other Business. To the fullest extent permitted by
--------------
law, Employee agrees that, while employed by the Company, Employee will not,
directly or indirectly (whether as agent, consultant, holder of a beneficial
interest, creditor, or in any other capacity), engage in any business or
venture which engages directly or indirectly in competition with the business
of the Company, or have any interest in any person, firm, corporation, or
venture which engages directly or indirectly in competition with the business
of the Company. For purposes of this section, the ownership of interests in a
broadly based mutual fund shall not constitute ownership of the stocks held by
the fund.
(b) Other Employees. Except as may be required in the
---------------
performance of his or her 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. While employed by the Company, and for one
---------
(1) year thereafter, Employee shall not cause or induce, or attempt to cause or
induce, any person or firm supplying goods, services or credit to the Company
to diminish or cease furnishing such goods, services or credit.
(d) Conflict of Interest. While employed by the Company,
--------------------
Employee shall not engage in any conduct or enterprise that shall constitute
an actual or apparent conflict of interest with respect to Employee's duties
and obligations to the
3
<PAGE>
Company.
8. TERMINATION.
-----------
(a) Termination at the Company's Convenience. Employee's
-----------------------------------------
employment under this Agreement may be terminated by the Company at its
convenience at any time upon giving 90 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 in effect at the time of termination for a period
of time equal to the greater of the remainder of the term of this Agreement or
two years; (iii) the payment of nondiscretionary bonuses pursuant to the
Company's Executive Bonus Plan, as it existed on the date of termination, for a
period of time equal to the greater of the remainder of the term of this
Agreement or two years; (iv) the immediate vesting of all unvested stock options
held by Employee as of such termination date; (v) the continuation of all
benefits and perquisites provided by Sections 5(c)(i) and (ii) hereof for a
period of time equal to the greater of the remainder of the term of this
Agreement or two years; and (vi) no other severance. At Employee's option,
Employee may elect in writing up to 60 days prior to termination to receive such
payments and benefits as provided by subsection (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 or her 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; (ii) severance
pay equal to the nondiscretionary cash bonus Employee would have earned under
the then existing Executive Bonus Plan in the fiscal year in which Employee's
employment is terminated, prorated in accordance with the number of days in
such fiscal year that elapsed prior to Employee's termination and payable at
the same time and under the same terms and conditions as any other
nondiscretionary bonuses paid to officers in that fiscal year; and (iii) 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; (ii)
severance pay equal to the nondiscretionary cash bonus Employee would have
earned under the then existing Executive Bonus Plan in the fiscal year in which
Employee's employment is terminated, prorated in accordance with the number of
days in such fiscal year that elapsed prior to Employee's termination and
payable at the same time and under the
4
<PAGE>
same terms and conditions as any other nondiscretionary bonuses paid to officers
in that fiscal year; and (iii) no other severance. "Substantial cause" shall
mean for purposes of this subsection failure by Employee to substantially
perform his her duties, 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
in effect at the time of termination for a period of time equal to the greater
of the remainder of the term of this Agreement or two years; (iii) the payment
of nondiscretionary bonuses pursuant to the Company's Executive Bonus Plan, as
it existed on the date of termination, for a period of time equal to the
greater of the remainder of the term of this Agreement or two years; (iv) the
immediate vesting of all unvested stock options held by Employee as of such
termination date; (v) the continuation of all benefits and perquisites provided
by Sections 5(c)(i) and (ii) hereof for a period of time equal to the greater
of the remainder of the term of this Agreement or two years; and (vi) no other
severance. At Employee's option, Employee may elect in writing up to 60 days
prior to termination to receive such payments and benefits as provided by
subsection (ii) of this subsection in a lump sum payment representing all
future payments due, discounted to their then present value at the prevailing
major bank prime rate as of the date of termination. "Substantial cause" shall
mean for purposes of this subsection a material breach of this Agreement by the
Company.
(e) Termination Due to Permanent Disability. Subject to
----------------------------------------
all applicable laws, Employee's employment under this Agreement may be
terminated immediately by the Company in the event Employee becomes
permanently disabled. In the event of a termination by the Company due to
Employee's permanent disability, Employee shall be entitled to (i) any
compensation accrued and unpaid as of the date of termination; (ii) the
continued payment of base salary at the same rate and on the same schedule as
in effect at the time of termination for a period of time equal to the greater
of the remainder of the term of this Agreement or two years; (iii) severance
pay equal to the nondiscretionary cash bonus Employee would have earned under
the then existing Executive Bonus Plan in the fiscal year in which Employee's
employment is terminated, prorated in accordance with the number of days in
such fiscal year that elapsed prior to Employee's termination and payable at
the same time and under the same terms and conditions as any other
nondiscretionary bonuses paid to officers in that fiscal year; (iv) 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; (v) the
continuation of all benefits and perquisites provided by Section 5(c)(i) and
(ii) hereof for a period of time equal to the greater of the remainder of the
5
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term of this Agreement or two years; and (vi) 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 or her time during normal
business hours to the daily performance of Employee's duties as required under
this Agreement for a continuous period of six (6) months. At Employee's
option, Employee may elect in writing up to 60 days prior to termination to
receive such payments and benefits as provided by subsection (ii) of this
section in a lump sum payment representing all future payments due, discounted
to their then present value at the prevailing major bank prime rate as of the
date of termination.
(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 the greater of the remainder of
the term of this Agreement or six months; (iii) severance pay equal to the
nondiscretionary cash bonus Employee would have earned under the then existing
Executive Bonus Plan in the fiscal year in which Employee's employment is
terminated, prorated in accordance with the number of days in such fiscal year
that elapsed prior to Employee's termination and payable at the same time and
under the same terms and conditions as any other nondiscretionary bonuses paid
to officers in that fiscal year; (iv) 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 (v) no other severance. At
Employee's option, Employee may elect in writing at least 60 days prior to
termination to receive such payments and benefits as provided by subsection
(ii) of this section in a lump sum payment representing all future payments
due, discounted to their then present value at the prevailing major bank prime
rate as of the date of termination.
(g) Unless otherwise provided, any severance payments or
other amounts due pursuant to this Section 8 shall be paid in cash within
thirty (30) days of termination. Any severance payments shall be subject to
usual and customary employee payroll practices and all applicable withholding
requirements. Except for such severance pay and other amounts specifically
provided pursuant to this Section 8, Employee shall not be entitled to any
further compensation, bonus, damages, restitution, relocation benefits, or
other severance benefits upon termination of employment during the term of this
Agreement. The amounts payable to Employee pursuant to this Section 8 shall
not be treated as damages, but as severance compensation to which Employee is
entitled by reason of termination of employment under the applicable
circumstances. The Company shall not be entitled to set off against the
amounts payable to Employee hereunder any amounts earned by Employee
6
<PAGE>
in other employment after termination of his or her employment with the Company
pursuant to this Agreement, or any amounts which might have been earned by
Employee in other employment had Employee sought such other employment. The
provisions of this Section 8 shall not limit Employee's rights under or pursuant
to any other agreement or understanding with the Company or with Employee's
participation in, or terminating distributions and vested rights under, any
pension, profit sharing, insurance or other employee benefit plan of the Company
to which Employee is entitled pursuant to the terms of such plan.
(h) Termination By Mutual Agreement of the Parties.
-----------------------------------------------
Employee's employment pursuant to this Agreement may be terminated at any time
upon the mutual agreement in writing of the parties. Any such termination of
employment shall have the consequences specified in such agreement.
(i) Pre-Termination Rights. The Company shall have the
-----------------------
right, at its option, to require Employee to vacate his or her 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.
9. RIGHTS UPON A CHANGE IN CONTROL.
-------------------------------
(a) If a Change in Control (as defined in Exhibit A hereto)
occurs before the termination of Employee's employment hereunder, then this
Agreement shall be extended (the "Extended Employment Agreement") in the same
form and substance as in effect immediately prior to the Change in Control,
except that the termination date shall be that date which would permit the
Extended Employment Agreement to continue in effect for an additional period of
time equal to the full term of this Agreement.
(b) Notwithstanding anything in this Agreement to the
contrary, if upon or at any time within one year following any Change in Control
that occurs during the term of this Agreement there is a Termination Event (as
defined below), Employee shall be treated as if he or she had been terminated
for the convenience of the Company and Employee shall be entitled to receive
the same compensation and other benefits and entitlements as are described in
Section 8(a) of this Agreement. Furthermore, the termination events and
consequences described in Section 8 shall continue to apply during the term of
the Extended Employment Agreement except that, in the event of a conflict
between Section 8 and the rights of Employee described in this Section 9, the
provisions of this Section 9 shall govern.
(c) A "Termination Event" shall mean the occurrence of any
one or more of the following, and in the absence of the Employee's permanent
disability (defined in Sections 6 and 8(e)), Employee's death, and any of the
factors enumerated in Section 8(c) as providing to the Company "substantial
cause" for terminating Employee's employment:
7
<PAGE>
(i) the termination or material breach of this Agreement by
the Company;
(ii) a failure by the Company to obtain the assumption of
this Agreement by any successor to the Company or any assignee of all or
substantially all of the Company's assets;
(iii) any material diminishment in the title, position,
duties, responsibilities or status that Employee had with the Company, as a
publicly traded entity, immediately prior to the Change in Control;
(iv) any reduction, limitation or failure to pay or provide
any of the compensation, reimbursable expenses, stock options, incentive
programs, or other benefits or perquisites provided to Employee under the terms
of this Agreement or any other agreement or understanding between the Company
and Employee, or pursuant to the Company's policies and past practices as of
the date immediately prior to the Change in Control; or
(v) any requirement that Employee relocate or any
assignment to Employee of duties that would make it unreasonably difficult for
Employee to maintain the principal residence he or she had immediately prior to
the Change in Control.
10. SURRENDER OF BOOKS AND RECORDS. Employee agrees that
------------------------------
upon termination of employment in any manner, Employee will immediately
surrender to the Company all lists, books and records of or connected with the
business of the Company, and all other properties belonging to the Company, it
being distinctly understood that all such lists, books, records and other
documents are the property of the Company.
11. GENERAL RELATIONSHIP. Employee shall be considered an
--------------------
employee of the Company within the meaning of all federal, state and local laws
and regulations, including, but not limited to, laws and regulations governing
unemployment insurance, workers' compensation, industrial accident, labor and
taxes.
12. PROPRIETARY INFORMATION.
-----------------------
(a) Employee agrees that any trade secret or proprietary
information of the Company to which Employee has become privy or may become
privy to as a result of his or her 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
exeress written consent of the Company, except as otherwise required by law.
In addition, Employee agrees to use such information only during the term of
this Agreement and only in a manner which is consistent with the purposes of
this Agreement. In the event Employee believes that he
8
<PAGE>
or she 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 or her possession to the Company.
(c) As used in this Agreement, "trade secret and proprietary
information" means information, whether written or oral, not generally available
to the public; it includes the concepts and ideas involved in the Company's
products whether patentable or not; and includes, but is not limited to, the
processes, formulae, and techniques disclosed by the Company to Employee or
observed by Employee. It does not include:
(i) Information, which at the time of disclosure,
had been previously published;
(ii) Information which is published after disclosure,
unless such publication is a breach of this Agreement or is otherwise a
violation of the contractual, legal or fiduciary duties owed to the Company,
which violation is known to Employee; or
(iii) Information which, subsequent to disclosure, is
obtained by Employee from a third person who is lawfully in possession of such
information (which information is not acquired in violation of any contractual,
legal, or fiduciary obligation owed to the Company with respect to such
information, and is known by Employee) and does not require Employee to refrain
from disclosing such information to others.
(d) The provisions of this Section 12 shall survive the
termination or expiration of this Agreement, and shall be binding upon Employee
in perpetuity.
13. INVENTIONS AND INNOVATIONS.
--------------------------
(a) As used in this Agreement, inventions and innovations
mean new ideas and improvements, whether or not patentable, relating to the
design,
9
<PAGE>
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 or she develops, either alone or with anyone else, during the term of
Employee's employment with the Company, as well as any invention or innovation
based on proprietary information of the Company which Employee develops, whether
alone or with anyone else, within twelve (12) months after the termination of
Employee's employment with the Company.
(c) Employee agrees to assign any invention or innovation
to the Company:
(i) which is developed totally or partially while
Employee is employed by the Company;
(ii) for which Employee used any of the Company's
equipment, supplies, facilities or proprietary information, even if any or all
of such items are relatively minor, and have little or no monetary value; or
(iii) which results in any way from Employee's work
for the Company or relates in any way to the Company's business or the Company's
current or anticipated research and development.
(d) Employee understands and agrees that the existence of
any condition set forth in either (c)(i), (ii) or (iii) above is sufficient to
require Employee to assign his or her inventions or innovations to the Company.
(e) All provisions of this Agreement relating to the
assignment by Employee of any invention or innovation are subject to the
provisions of California Labor Code Sections 2870, 2871 and 2872.
(f) Employee agrees that any invention or innovation which
is required under the provisions of this Agreement to be assigned to the Company
shall be the sole and exclusive property of the Company. Upon the Company's
request, at no expense to Employee, Employee shall execute any and all proper
applications for patents, assignments to the Company, and all other applicable
documents, and will give testimony when and where requested to perfect the
title and/or patents (both within and without the United States) in all
inventions or innovations belonging to the Company.
(g) Employee shall disclose all inventions and innovations
to the Company, even if Employee does not believe that he or she is required
under this
10
<PAGE>
Agreement, or pursuant to California Labor Code Section 2870, to assign his or
her 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.
14. ASSIGNMENT. This Agreement shall be binding upon and
----------
shall inure to the benefit of the parties hereto and the successors and assigns
of the Company. Employee shall have no right to assign his rights, benefits,
duties, obligations or other interests in this Agreement, it being understood
that this Agreement is personal to Employee.
15. ATTORNEYS' FEES AND COSTS. If any arbitration or other
-------------------------
proceeding is brought for the enforcement of this Agreement, or because of an
alleged dispute or default in connection with any of its provisions, the
successful or prevailing party shall be entitled to recover reasonable
attorneys' fees 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. The prevailing party in any such proceeding shall
be entitled to recover from the other party the reasonable costs and expenses
of any such proceeding (not including attorneys' fees).
16. ENTIRE UNDERSTANDING. This Agreement sets forth the
--------------------
entire understanding of the parties hereto with respect to the subject matter
hereof, and no other representations, warranties or agreements whatsoever as
to that subject matter have been made by Employee or the Company not herein
contained. This Agreement shall not be modified, amended or terminated except
by another instrument in writing executed by the parties hereto. This Agreement
replaces and supersedes any and all prior understandings or agreements between
Employee and the Company regarding employment.
17. NOTICES. Any notice, request, demand, or other
-------
communication required or permitted hereunder, shall be deemed properly given
when actually received or within five (5) days of mailing by certified or
registered mail, postage prepaid, to:
Employee: David Rane
2402 Calle San Clemente
Encinitas, CA 92024
Company: Callaway Golf Company
2285 Rutherford Road
Carlsbad, California 92008-8815
Attn: Donald H. Dye
11
<PAGE>
or to such other address as Employee or the Company may from time to time
furnish, in writing, to the other.
18. ARBITRATION. Any dispute, controversy or claim arising
------------
hereunder or in any way related to this Agreement, its interpretation,
enforceability, or applicability, or relating to Employee's employment, or the
termination thereof, that cannot be resolved by mutual agreement of the parties
shall be submitted to arbitration. The arbitration shall be conducted by a
retired judge from the Judicial Arbitration and Mediation Service/Endispute
("JAMS") office located in Orange County, California, who shall have the powers
to hear motions, control discovery, conduct hearings and otherwise do all that
is necessary to resolve the matter. The arbitration award shall be final and
binding, and judgment on the award may be entered in any court having
jurisdiction thereof. It is expressly understood that the parties have chosen
arbitration to avoid the burdens, costs and publicity of a court proceeding,
and the arbitrator is expected to handle all aspects of the matter, including
discovery and any hearings, in such a way as to minimize the expense, time,
burden and publicity of the process, while assuring a fair and just result.
In particular, the parties expect that the arbitrator will limit discovery by
controlling the amount of discovery that may be taken (e.g., the number of
depositions or interrogatories) and by restricting the scope of discovery to
only those matters clearly relevant to the dispute.
19. MISCELLANEOUS.
-------------
(a) Headings. The headings of the several sections and
--------
paragraphs of this Agreement are inserted solely for the convenience of
reference and are not a part of and are not intended to govern, limit or aid
in the construction of any term or provision hereof.
(b) Waiver. Failure of either party at any time to require
------
performance by the other of any provision of this Agreement shall in no way
affect that party's rights thereafter to enforce the same, nor shall the waiver
by either party of any breach of any provision hereof be held to be a waiver of
any succeeding breach of any provision or a waiver of the provision itself.
(c) Applicable Law. This Agreement shall constitute a
--------------
contract under the internal laws of the State of California and shall be
governed and construed in accordance with the laws of said state as to both
interpretation and performance.
(d) Severability. In the event any provision or provisions
------------
of this Agreement is or are held invalid, the remaining provisions of this
Agreement shall not be affected thereby.
20. SUPERSEDES OLD OFFICER EMPLOYMENT CONTRACT. Employee
-------------------------------------------
and the Company recognize that prior to the effective date of this Agreement
they were parties to a certain Officer Employment Agreement effective January
1, 1996
12
<PAGE>
(the "Old Officer Employment Agreement"). It is the intent of the parties that
as of the effective date of this Agreement, this Agreement shall replace and
supersede the Old Officer Employment Agreement entirely, that the Old Officer
Employment Agreement shall no longer be of any force or effect except as to
Sections 7, 12, 13, 15 and 18 thereof, and that to the extent there is any
conflict between the Old Officer Employment Agreement and this Agreement, this
Agreement shall control and both agreements shall be construed so as to give the
maximum force and effect to the provisions of this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed effective the date first written above.
EMPLOYEE: COMPANY:
CALLAWAY GOLF COMPANY,
a California corporation
/s/ DAVID RANE By: /s/ DONALD H. DYE
- --------------- -----------------------
David Rane Donald H. Dye, President & CEO
13
<PAGE>
EXHIBIT A
A "Change in Control" means the following and shall be deemed to occur
if any of the following events occurs:
(a) Any person, entity or group, within the meaning of Section 13(d)
or 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") but
excluding the Company and its subsidiaries and any employee benefit or stock
ownership plan of the Company or its subsidiaries and also excluding an
underwriter or underwriting syndicate that has acquired the Company's
securities solely in connection with a public offering thereof (such person,
entity or group being referred to herein as a "Person") becomes the beneficial
owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of
30% or more of either the then outstanding shares of Common Stock or the
combined voting power of the Company's then outstanding securities entitled to
vote generally in the election of directors; or
(b) Individuals who, as of the effective date hereof, constitute the
Board of Directors of the Company (the "Incumbent Board") cease for any reason
to constitute at least a majority of the Board of Directors of the Company,
provided that any individual who becomes a director after the effective date
hereof whose election, or nomination for election by the Company's shareholders,
is approved by a vote of at least a majority of the directors then comprising
the Incumbent Board shall be considered to be a member of the Incumbent Board
unless that individual was nominated or elected by any Person having the power
to exercise, through beneficial ownership, voting agreement and/or proxy, 20% or
more of either the outstanding shares of Common Stock or the combined voting
power of the Company's then outstanding voting securities entitled to vote
generally in the election of directors, in which case that individual shall not
be considered to be a member of the Incumbent Board unless such individual's
election or nomination for election by the Company's shareholders is approved
by a vote of at least two-thirds of the directors then comprising the Incumbent
Board; or
(c) Consummation by the Company of the sale or other disposition by
the Company of all or substantially all of the Company's assets or a
reorganization or merger or consolidation of the Company with any other person,
entity or corporation, other than
(i) a reorganization or merger or consolidation that would
result in the voting securities of the Company outstanding immediately prior
thereto (or, in the case of a reorganization or merger or consolidation that is
preceded or accomplished by an acquisition or series of related acquisitions by
any Person, by tender or exchange offer or otherwise, of voting securities
representing 5% or more of the combined voting power of all securities of the
Company, immediately prior to such acquisition or the first acquisition in such
series of acquisitions) continuing to represent, either by remaining outstanding
or by being converted into voting securities of another entity,
14
<PAGE>
more than 50% of the combined voting power of the voting securities of the
Company or such other entity outstanding immediately after such reorganization
or merger or consolidation (or series of related transactions involving such a
reorganization or merger or consolidation), or
(ii) a reorganization or merger or consolidation effected to
implement a recapitalization or reincorporation of the Company (or similar
transaction) that does not result in a material change in beneficial ownership
of the voting securities of the Company or its successor; or
(d) Approval by the shareholders of the Company or an order by a
court of competent jurisdiction of a plan of liquidation of the Company.
15
<PAGE>
EXHIBIT 10.17
CALLAWAY GOLF COMPANY
1996 STOCK OPTION PLAN
SECTION 1. PURPOSE OF THE PLAN
This 1996 Stock Option Plan (the "Plan") of Callaway Golf Company, a
California corporation (the "Company"), is intended as a means whereby the
Company may provide for grants of stock options to employees (including
officers), consultants and advisors of the Company and its subsidiaries and
affiliates, thereby helping to retain and motivate such individuals, and to
encourage the judgment, initiative and efforts of such individuals by further
aligning their interests with those of the shareholders of the Company.
SECTION 2. ADMINISTRATION OF THE PLAN
2.1 Administration. The Plan shall be administered by the Board of
--------------
Directors of the Company (the "Board") or, in the discretion of the Board, a
committee appointed thereby (the "Committee"). All expenses and liabilities
incurred by the Board or the Committee in the administration of the Plan shall
be borne by the Company. The Board or the Committee may employ attorneys,
consultants, accountants, agents, brokers or other persons. If no persons are
designated by the Board to serve on the Committee, the Plan shall be
administered by the Board and all references herein to the Committee shall refer
to the Board. Unless otherwise provided by the Board: (a) with respect to any
Options (as defined in Section 5.1 below) for which the Committee determines
that it is necessary or desirable for the grant thereof to be exempt under Rule
16b-3 of the Securities Exchange Act of 1934 (the "Exchange Act"), membership of
the Committee shall conform to the requirements of that Rule to make grants or
awards that are exempt from the operation of Exchange Act Section 16(a) and (b)
with respect to any Options that are intended to qualify as "performance based
compensation" under Section 162(m) of the Internal Revenue Code (the "Code"),
membership of the Committee shall conform to the requirements of Code Section
162(m) and the Treasury regulations thereunder.
2.2 Determinations. The Committee shall have full and exclusive
--------------
power to construe and interpret the Plan, to determine and designate the class
or classes of Eligible Persons (as defined in Section 4 below) of the Company
---------
and of its subsidiaries or affiliates who are eligible to participate in the
Plan and any other criteria that must be satisfied in order for an Eligible
Person to participate in the Plan, to determine the terms of Options, subject to
the requirements and provisions of the Plan, and generally to determine answers
to any and all questions arising under the Plan. All decisions, determinations
and interpretations by the Committee regarding the Plan shall be final and
binding on all Eligible Persons and Participants (as defined in Section 4
---------
below). The Committee shall consider such factors as it deems relevant, in its
sole and absolute discretion, to making such decisions, determinations and
interpretations, including, without limitation, the recommendations or advice of
any
<PAGE>
officer of the Company or Eligible Person and such attorneys, consultants
and accountants as it may select.
2.3 Powers. Subject to the express provisions of the Plan, the
------
Committee shall be authorized and empowered to do all things necessary or
desirable in connection with the administration of the Plan with respect to the
Options over which the Committee has authority, including, without limitation,
the following:
(a) to prescribe, amend and rescind rules and regulations
relating to the Plan and to define terms not otherwise defined herein;
(b) to determine which persons are Eligible Persons, to which
Eligible Persons, if any, Options shall be granted hereunder and the timing
of any such Options;
(c) to determine the number of Shares (as defined in Section 3.1
-----------
below) that will be subject to any Option and the exercise price of such
Shares;
(d) to prescribe and amend the terms of the Option Agreements (as
defined in Section 5.1 below), which need not be identical;
-----------
(e) to determine whether, and the extent to which, adjustments
are required pursuant to Section 7.2;
-----------
(f) to interpret and construe the Plan, any rules and regulations
under the Plan and the terms and conditions of any Option granted
hereunder, and to make exceptions to any such provisions in good faith and
for the benefit of the Company; and
(g) to make all other determinations deemed necessary or
advisable for the administration of the Plan.
SECTION 3. STOCK SUBJECT TO THE PLAN
3.1 Aggregate Limits. Subject to adjustment as provided in Section
---------------- -------
7.2, at any time, the aggregate number of shares of the Company's Common Stock
- ---
("Shares") issued and issuable pursuant to all Options (including all ISOs (as
defined in Section 5.3 below)) granted under the Plan shall not exceed
-----------
2,000,000. The Shares subject to the Plan may be either Shares reacquired by
the Company (including Shares repurchased in the open market or otherwise) or
authorized but unissued Shares.
3.2 Code Section 162(m) Limit. The maximum number of Shares with
-------------------------
respect to which Options may be granted under the Plan during any calendar year
to a key employee shall not exceed 1,000,000. Notwithstanding anything to the
contrary in the Plan, the foregoing limitation (a) shall not apply if it is not
required in order for the compensation attributable to Options under the Plan to
qualify as "performance based compensation"
2
<PAGE>
described in Code Section 162(m) and the Treasury regulations thereunder, and
(b) shall be subject to adjustment under Section 7.2 only to the extent the
-----------
Committee determines that such adjustment would not affect the status of
compensation attributable to Options hereunder as "performance based
compensation" described in Code Section 162(m) and the Treasury regulations
thereunder.
3.3 ISO Limits. The aggregate number of Shares issued and issuable
----------
pursuant to all ISOs (as defined in Section 5.3) granted under the Plan shall
-----------
not exceed 2,000,000. Such maximum number does not include the number of Shares
subject to the unexercised portion of any ISO granted under the Plan that
expires or is terminated. Notwithstanding anything to the contrary in the Plan,
such aggregate number of Shares shall be subject to adjustment under Section 7.2
-----------
only to the extent that such adjustment will not affect the status of any ISO
granted under the Plan.
3.4 Calculating Plan Limits. For purposes of Section 3.1,
----------------------- -----------
(a) The aggregate number of Shares issued under the Plan at any
time shall equal only the number of Shares actually issued upon exercise or
settlement of an Option and not returned to the Company upon cancellation,
expiration or forfeiture of an Option or in payment or satisfaction of the
purchase price, exercise price or tax withholding obligation of an Option;
and
(b) In the event that any outstanding Option under the Plan
expires by reason of lapse of time or is otherwise terminated without
exercise for any reason, then the Shares subject to any such Option that
have not been issued upon exercise of the Option shall again become
available in the pool of Shares for which Options may be granted under the
Plan; provided, however, that in the event that the Committee determines
that it is appropriate to condition the grant of a new Option to a
Participant upon the surrender by such Participant of a previously issued
unexercised Option having a higher exercise price than the proposed new
Option, then the Shares underlying the old Option shall not again become
available in the pool of Shares for which Options may be granted under the
Plan unless and until such new Option expires by reason of lapse of time or
is otherwise terminated without exercise for any reason other than in
connection with a similar conditional re-grant.
SECTION 4. PERSONS ELIGIBLE UNDER THE PLAN
Any person who is an employee, consultant or advisor of the Company or
any of its subsidiaries or affiliates (an "Eligible Person") may be eligible to
be considered for the grant of Options hereunder, as determined by the Committee
in its discretion; provided, however, that no director of the Company who is not
also an employee of the Company shall be eligible to receive any Option
hereunder. A "Participant" is any Eligible Person to whom an Option has been
granted and any person (including any estate) to whom an Option has been
assigned or transferred pursuant to Section 6.1.
------------
3
<PAGE>
SECTION 5. STOCK OPTION GRANTS
5.1 Authority to Grant Options. An "Option" is a right to purchase a
--------------------------
number of Shares at such exercise price, at such times, and on such other terms
and conditions as are specified in the agreement evidencing the Option (the
"Option Agreement"). The Committee, on behalf of the Company, is authorized
under the Plan to grant an Option or provide for the grant of an Option, either
automatically or in the discretion of the Committee, upon the occurrence of
specified events, including, without limitation, the achievement of Qualifying
Performance Criteria (as defined below) or the satisfaction of an event or
condition within the control of the recipient of the Option or within the
control of others.
For purposes of the Plan, the term "Qualifying Performance Criteria"
shall mean any one or more performance criteria, either individually,
alternatively or in any combination, applied to either the Company as a whole or
to a business unit or subsidiary, either individually, alternatively or in any
combination, and measured either on an absolute basis or relative to a pre-
established target, to previous years' results or to a designated comparison
group, in each case as specified by the Committee in the Option Agreement. For
this purpose, such performance criteria may include (a) cash flow, (b) earnings
per share (including earnings before interest, taxes and amortization), (c)
return on equity, (d) total shareholder return, (e) return on capital, (f)
return on assets or net assets, (g) income or net income, (h) operating income
or net operating income, (i) operating profit or net operating profit, (j)
operating margin, (k) return on operating revenue, (l) market share or
circulation, and (m) any similar performance criteria.
5.2 Option Agreement. Each Option Agreement shall contain provisions
----------------
regarding (a) the number of Shares that may be issued upon exercise of the
Option, (b) the purchase price of the Shares, (c) the term of the Option, (d)
such terms and conditions of exercise as may be determined from time to time by
the Committee, (e) restrictions on the transfer of the Option and forfeiture
provisions, and (f) such further terms and conditions, in each case not
inconsistent with the Plan, as may be determined from time to time by the
Committee.
5.3 ISOs and Nonqualified Options. Options that are intended to
-----------------------------
qualify as Incentive Stock Options ("ISOs") pursuant to Code Section 422 and
Options that are not intended to qualify as ISOs ("Nonqualified Options") may be
granted under this Section 5 as the Committee in its discretion shall determine.
---------
Option Agreements evidencing ISOs shall contain such terms and conditions as may
be necessary to comply with the applicable provisions of Section 422 of the
Code.
5.4 Option Price. The exercise price per Share of each Option
------------
granted under the Plan shall be not less than 85% of the Fair Market Value (as
defined below) on the date the Option is granted.
4
<PAGE>
Unless the Committee shall specify otherwise, for purposes of the
Plan, the "Fair Market Value" of a Share as of a particular date shall be: (a)
if the Shares are of a class listed on an established stock exchange or
exchanges (including, for this purpose, The Nasdaq National Market), the closing
sale price of the Share quoted for such date in the Transactions Index of each
such exchange, as published in The Wall Street Journal, or, if no sale price was
quoted in any such Index for such date, then as of the next preceding date on
which such a sale price was quoted; or (b) if the Shares are of a class not then
listed on an exchange, the average of the closing bid and asked prices per share
for the Share in the over-the-counter market as quoted on the NASDAQ system on
such date; or (c) if the Shares are of a class not then listed on an exchange or
quoted in the over-the-counter market, an amount determined in good faith by the
Committee; provided, however, that when appropriate, the Committee in
determining the Fair Market Value may take into account such other factors as it
may deem appropriate under the circumstances. Notwithstanding the foregoing,
the Fair Market Value for purposes of grants of ISOs shall be determined in
compliance with applicable provisions of the Code.
5.5 Termination of Options. Unless determined otherwise by the
----------------------
Committee in its sole discretion, Options shall expire on the earliest of (a)
one (1) year from the date on which the Participant ceases to be an Eligible
Person of the Company for any reason other than death; (b) one (1) year from the
date of the Participant's death; or (c) with respect to each installment of such
Option, the fifth anniversary of the vesting date of such installment. If a
Participant who is an employee of the Company (or of a subsidiary or affiliated
entity) ceases for any reason to be such an employee, that portion of the Option
that has not yet vested shall terminate, unless the Committee accelerates the
vesting schedule in its sole discretion (in which case, the Committee may impose
whatever conditions it considers appropriate on the accelerated portion).
Options granted to a Participant who is not such an employee may be made subject
to such other termination provisions as determined appropriate by the Committee.
5.6 Option Exercise.
---------------
(a) Partial Exercise. Unless otherwise provided by the
Committee, an exercisable Option may be exercised in whole or in part.
(b) Manner of Exercise. All or a portion of an exercisable
Option shall be deemed exercised upon delivery to the Secretary of the
Company at the Company's principal office all of the following: (i) notice
of exercise specifying the number of Shares to be purchased and signed by
the Participant, (ii) full payment of the exercise price for such number of
Shares, (iii) such representations and documents as the Committee, in its
sole discretion, deems necessary or advisable to effect compliance with all
applicable provisions of the Securities Act of 1933, as amended, and any
other federal, state or foreign securities laws or regulations, (iv) in the
event that the Option shall be exercised pursuant to Section 6.1 by any
-----------
person or persons other than the Eligible Person, appropriate proof of the
right of such person or persons to exercise the Option, and (v) such
representations and documents as the Committee, in its sole discretion,
deems necessary or advisable to provide for the tax withholding
5
<PAGE>
pursuant to Section 9. Shares shall be registered in the name of the
---------
Participant as soon as administratively practicable after exercise of any
Option, subject to reasonable delays and to delays beyond the reasonable
control of the Company such as but not limited to completion of
registration of said Shares with the Securities and Exchange Commission
(the "SEC") or compliance with any federal or state laws, rules or
regulations.
(c) Payment of Exercise Price. The exercise price of an Option
shall be paid in the form of one of more of the following, as the Committee
shall specify, either through the terms of the Option Agreement or at the
time of exercise of an Option: (i) cash, (ii) other property deemed
acceptable by the Committee, (iii) a commitment by a brokerage firm
acceptable to the Company to pay such exercise price from the proceeds of a
sale of Shares issuable upon exercise of the Option, or (iv) any
combination of (i) through (iii). The Company may, in its sole discretion,
assist any person to whom an Option is granted hereunder in the payment of
the purchase price (including, without limitation, by loan or the
acceptance of a promissory note) payable in connection with the receipt or
exercise of that Option.
SECTION 6. OTHER PROVISIONS APPLICABLE TO OPTIONS
6.1 Nonassignability. No Option granted under the Plan shall be
----------------
assignable or transferable except (a) by will or by the laws of descent and
distribution, or (b) subject to the final sentence of this Section, upon
dissolution of marriage pursuant to a qualified domestic relations order or, in
the discretion of the Committee and under circumstances that would not adversely
affect the interests of the Company, pursuant to a nominal transfer that does
not result in a change in beneficial ownership. During the lifetime of a
Participant, an Option granted to him or her shall be exercisable only by the
Participant (or the Participant's permitted transferee) or his or her guardian
or legal representative. Notwithstanding the foregoing, (i) no Option owned by
a Participant subject to Section 16 of the Exchange Act may be assigned or
transferred in any manner inconsistent with Rule 16b-3 thereunder as interpreted
and administered by the Commission and its staff, and (ii) ISOs may not be
assigned or transferred in violation of Section 422(b)(5) of the Code or the
Treasury Regulations thereunder, and nothing herein is intended to allow such
assignment or transfer.
6.2 Dividends. Unless otherwise provided by the Committee, no
---------
adjustment shall be made in Shares issuable under Options on account of cash
dividends that may be paid or other rights that may be issued to the holders of
Shares prior to their issuance under any Option. Unless otherwise provided by
the Committee, no dividends or dividend equivalent amounts shall be paid to any
Participant with respect to the Shares subject to any Option that has not vested
or has not been exercised on the record date for dividends.
6.3 Consideration for Issuance of Shares. Any issuance of Shares may
-------------------------------------
be conditioned upon payment of an amount equal to the minimum amount, if any,
required by applicable law for the issuance of such Shares. The absence of any
such condition shall be deemed to reflect a determination by the Committee that
non-cash consideration in an
6
<PAGE>
amount at least equal to the minimum amount, if any, required by law has been or
will be received prior to the issuance of such Shares.
6.4 Conditions for Issuance of Options. The Committee may, in its
----------------------------------
discretion and on such terms as it may specify, require as a condition to the
grant of any Option that the Eligible Person surrender for cancellation some or
all of any previously granted employee benefit arrangement (including other
Options), or any rights under any such employee benefit arrangement. Any such
Option that is conditioned upon the surrender and cancellation of another
employee benefit arrangement or of rights thereunder may contain such other
terms as the Committee deems appropriate.
6.5 Tandem Stock or Cash Rights. Either at the time an Option is
---------------------------
granted or by subsequent action, the Committee may, but need not, provide that
an Option shall contain as a term thereof, a right, either in tandem with the
other rights under the Option or as an alternative thereto, of the Participant
to receive, without payment to the Company, a number of Shares, cash or a
combination thereof, the amount of which is determined by reference to the value
of the Option.
6.6 No Repricing. The Committee may not decrease the exercise price
------------
of Shares that may be acquired pursuant to Options granted under the Plan unless
such decrease is (a) made subject to approval by the shareholders of the Company
or (b) made pursuant to the adjustment provisions of Section 7.2.
-----------
SECTION 7. CHANGES IN CAPITAL STRUCTURE
7.1 No Preferential Rights. The existence of outstanding Options
----------------------
shall not affect in any way the right or power of the Company or its
shareholders to make or authorize any or all adjustments, recapitalizations,
reorganizations, exchanges, or other changes in the Company's capital structure
or its business, or any merger or consolidation of the Company, or any issuance
of any Shares or other securities or subscription rights thereto, or any
issuance of bonds, debentures, preferred or prior preference stock ahead of or
affecting the Shares or the rights thereof, or the dissolution or liquidation of
the Company, or any sale or transfer of all or any part of its assets or
business, or any other corporate act or proceeding, whether of a similar
character or otherwise.
7.2 Adjustment in Shares. If the outstanding securities of the class
--------------------
then subject to the Plan are increased, decreased or exchanged for or converted
into cash, property or a different number or kind of shares or securities, or if
cash, property or shares or securities are distributed in respect of such
outstanding securities, in either case as a result of a reorganization, merger,
consolidation, recapitalization, restructuring, reclassification, dividend
(other than a regular, quarterly cash dividend) or other distribution, stock
split, reverse stock split, spin-off or the like, or if substantially all of the
property and assets of the Company are sold, then, unless the terms of such
transaction shall provide otherwise, the Committee shall make appropriate and
proportionate adjustments in (a) the number and type of shares or other
securities or cash or other property that may be acquired pursuant to
7
<PAGE>
Options theretofore granted under the Plan and the exercise or settlement price
of such Options, provided, however, that such adjustment shall be made in such a
manner that will not affect the status of any Option intended to qualify as an
ISO under Code Section 422, and (b) the maximum number and type of shares or
other securities that may be issued pursuant to such Options thereafter granted
under the Plan. Any adjustments made by the Committee pursuant to this Section
shall be binding upon the holders of each then outstanding Option, without need
for any consent or amendment signed by such holder, effective at such date as is
fixed by the Committee.
SECTION 8. CHANGE OF CONTROL
The Committee may, through the terms of the Option or otherwise,
provide that a Participant may have the ability to exercise any portion of the
Option not previously exercisable, upon change of control related events or
termination of the Participant's services for the Company following a change of
control related event. The Committee shall have the authority from time to time
to define change of control related events for purposes of this Section 8, which
---------
may include, without limitation, a merger, reorganization, sale of assets,
liquidation, acquisition of a specified percentage of the Company's outstanding
equity securities (which specified percentage may be less than 50%), or a
significant change in composition of the Board.
SECTION 9. TAXES
9.1 Withholding Requirements. The Committee may make such provisions
------------------------
or impose such conditions as it may deem appropriate for the withholding or
payment by the Participant, as appropriate, of any taxes that it determines are
required in connection with any Options granted under the Plan, and a
Participant's rights in any Option are subject to satisfaction of such
conditions.
9.2 Payment of Withholding Taxes. Notwithstanding the terms of
-----------------------------
Section 9.1, the Committee may in its discretion, but need not, provide in the
- -----------
Option Agreement or otherwise that all or any portion of the taxes required to
be withheld by the Company in connection with the exercise of a Nonqualified
Option or the disposition of Shares issued under an ISO shall be paid or, at the
election of the Participant, may be paid by the Company withholding shares of
the Company's capital stock otherwise issuable or subject to such Option having
a fair market value equal to the amount required to be withheld or paid. Any
such elections are subject to such conditions or procedures as may be
established by the Committee and may be subject to disapproval by the Committee.
SECTION 10. AMENDMENT AND TERMINATION
The Committee may, insofar as permitted by law, from time to time
suspend or discontinue the Plan or revise or amend it in any respect whatsoever,
and the Plan as so revised or amended will govern all Options thereunder,
including those granted before such revision or amendment, except that no such
amendment shall alter or impair or diminish in any material
8
<PAGE>
respect any rights or obligations under any Option theretofore granted under the
Plan without the consent of the person to whom such Option was granted. In
addition, if an amendment to the Plan would materially increase the number of
shares subject to the Plan (as adjusted under Section 7.2), materially modify
-----------
the requirements as to eligibility for participation in the Plan, extend the
final date upon which Options may be granted under the Plan, or otherwise
materially increase the benefits accruing to recipients in a manner not
specifically contemplated herein and that affects the Plan's compliance with
Rule 16b-3 under the Exchange Act or applicable provisions of the Code or
requires the approval of the Company's shareholders so that the Options
hereunder continue to qualify as "performance based compensation" described in
Code Section 162(m) and the Treasury regulations thereunder, then the amendment
shall be subject to approval by the Company's shareholders to the extent
required to comply with Rule 16b-3 under the Exchange Act or applicable
provisions of or rules under the Code. Notwithstanding the foregoing, the
Committee may amend the Plan to comply with or take advantage of the rules or
regulations (or interpretations thereof) promulgated under Section 16 of the
Exchange Act or under the Code, subject to the shareholder approval requirement
described above.
SECTION 11. COMPLIANCE WITH LAWS AND REGULATIONS
11.1 Applicability of Laws. The Company shall not be required to
---------------------
issue or deliver any certificates for Shares prior to the completion of any
registration or qualification of such Shares under any federal, state or foreign
law or any ruling or regulation of any government body that the Committee shall,
in its sole discretion, determine to be necessary or advisable.
11.2 Compliance with Securities Laws. The Plan, the grant and
--------------------------------
exercise of Options thereunder, and the obligation of the Company to sell, issue
or deliver Shares under such Options, shall be subject to all applicable
federal, state and foreign laws, rules and regulations and to such approvals by
any governmental or regulatory agency as may be applicable. The exercisability
of any Option and the sale of any Share hereunder is conditioned upon the
registration of the Shares to be offered and sold with the SEC. In no event
shall any Shares be offered or sold hereunder prior to the effective date of
registration with the SEC.
SECTION 12. NO RIGHT TO COMPANY EMPLOYMENT
Neither the Plan nor the terms of any Option shall be construed to
give any Eligible Person the right to be retained in the employ of the Company
or any subsidiary or affiliate. The Company and its subsidiaries and affiliates
each retain the unqualified right to terminate the employment of any Eligible
Person at any time. Any Option Agreement may contain such provisions as the
Committee may approve with reference to the effect of approved leaves of
absence.
9
<PAGE>
SECTION 13. LIABILITY OF THE COMPANY
The Company and any affiliate of the Company that is in existence or
hereafter comes into existence shall not be liable to a Participant, an Eligible
Person or other persons as to the following:
13.1 The Non-Issuance of Shares. The non-issuance or sale of Shares
--------------------------
as to which the Company has been unable to obtain from any regulatory body
having jurisdiction the authority deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder; and
13.2 Tax Consequences. Any tax consequence expected, but not
----------------
realized, by any Eligible Person, Participant or other person due to the
receipt, exercise or settlement of any Option granted hereunder.
SECTION 14. EFFECTIVENESS AND EXPIRATION OF PLAN
The Plan shall be effective as of the date designated by the Board,
and shall continue (unless earlier terminated by the Board) until its expiration
as set forth below; provided that the Plan shall be submitted for the approval
of each class of capital stock eligible to vote on matters submitted to a vote
of the Company's shareholders as soon as reasonably practicable; and provided,
further, that any Options granted prior to such shareholder approval shall be
considered subject to such approval. Unless previously terminated, the
authority to grant Options under the Plan shall expire ten (10) years after the
effective date of the Plan, but such expiration shall not affect any Option
previously made or granted that is then outstanding.
SECTION 15. NON-EXCLUSIVITY OF THE PLAN
The adoption of the Plan by the Board shall not be construed as
creating any limitations on the power of the Company to adopt such other
incentive arrangements as it may deem desirable, including without limitation,
the granting of stock options otherwise than under the Plan, and such
arrangements may be either generally applicable or applicable only in specific
cases.
SECTION 16. GOVERNING LAW
This Plan and any agreements hereunder shall be interpreted and
construed in accordance with the laws of the State of California and applicable
federal law. The Committee may provide that any dispute as to any Option shall
be presented and determined in such forum as the Committee may specify,
including through binding arbitration. Any reference in the Plan or in an
Option Agreement to a provision of law or to a rule or regulation shall be
deemed to include any successor law, rule or regulation of similar effect or
applicability.
10
<PAGE>
EXHIBIT 10.24.2
LEASE AMENDMENT
THIS LEASE AMENDMENT (this "Amendment"), is made as of the 4th day of
October, 1996 between NATIONAL LIFE INSURANCE COMPANY ("Landlord") and CALLAWAY
GOLF COMPANY ("Tenant").
W I T N E S S E T H: That:
-------------------- -----
WHEREAS, Landlord and Tenant have entered into that certain Lease
Agreement (the "Lease"), dated March 16, 1996, whereby Tenant leased from
Landlord certain space (the "Premises") located at 5858 Dryden Place, Carlsbad,
California (the "Lease"):
WHEREAS, Landlord and Tenant desire to amend the Lease in certain
particulars.
NOW, THEREFORE, for and in consideration of the mutual covenants
contained herein, the above premises, the sum of TEN AND NO/100 DOLLARS ($10.00)
and other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the parties hereto, intending to be legally bound, do
hereby agree as follows:
1. Definitions. Terms not otherwise defined herein and which are defined
-----------
in the lease shall have the meanings given them therein.
2. Lease Amendments. Effective as of October 4, 1996 (the "Effective
----------------
Date"), the Lease is hereby amended as follows:
2.1 Extension of Term. The expiration date of the Term of the Lease
-----------------
is hereby extended through October 15, 2002.
2.2 Base Rent. Exhibit E of the Lease is deleted in its entirety
---------
and the following is inserted in lieu thereof:
<TABLE>
<CAPTION>
Annual Base Rent
Per Square Foot
Rental of Agreed Bare Bare
Period Rentable Area Annual Rent Monthly Rent
- ------ ------------- ----------- ------------
<S> <C> <C> <C>
7/1/96 - 12/15/96 $0.00* $0.00 $0.00
12/16/96 - 12/15/97 $5.40 $340,648.20 $28,387.35
12/16/97 - 12/15/98 $5.56 $350,867.64 $29,238.97
12/16/98 - 12/15/99 $5.73 $361,393.68 $30,116.14
12/16/99 - 12/15/00 $5.90 $372,235.44 $31,019.62
12/16/00 - 12/15/01 $6.08 $383,402.52 $31,950.21
12/16/01 - 12/15/02 $6.26 $394,904.64 $32,908.72
</TABLE>
*Tenant shall pay Additional Rent as defined in Section 5.2(a) of the Lease from
July 1, 1996 through December 15, 1996 and thereafter pursuant to the lease.
<PAGE>
2.3 Term of Option. Section 25.2 of the Lease is deleted in its
--------------
entirety and the following is inserted in lieu thereof:
The term of the Option granted herein shall begin on October 16, 1996 and
expire October 15, 1997.
Ratification. Except as expressly amended hereby, the terms and
------------
conditions of the Lease are hereby ratified and the Lease remains in full force
and effect.
Binding Effect. This Amendment shall be binding upon and shall inure to
--------------
the benefit of the parties hereto, their respective heirs, successors, legal
representatives and assigns.
Counterparts. This Amendment may be executed in any number of
------------
counterparts, each of which shall constitute an original and all of which taken
together shall constitute one and the same agreement.
Governing Law. This Amendment shall be construed under and governed by
-------------
the Laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment as of the day and year first above written.
LANDLORD:
--------
NATIONAL LIFE INSURANCE COMPANY
By: Koll Investment Management
Its Authorized Agent
By: /s/
-----------------------------------------------
Senior Vice President
on 11/18/96
------------------------------------------------
TENANT:
------
CALLAWAY GOLF COMPANY
A California Corporation
By: /s/ RICHARD S. MERK
-----------------------------------------------
Title: Vice President of Operations and Planning
------------------------------------------
on 10/25/96
-----------------------------------------------
<PAGE>
EXHIBIT 11.1
CALLAWAY GOLF COMPANY
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
-------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C>
Primary earnings per share computation:
- ---------------------------------------
Net income $122,337 $ 97,736 $ 78,022
======== ======== ========
Weighted average shares outstanding 66,832 66,641 68,435
Dilutive options 3,829 3,214 4,669
-------- -------- --------
Common equivalent shares 70,661 69,855 73,104
======== ======== ========
Primary earnings per share:
Net income $ 1.73 $ 1.40 $ 1.07
======== ======== ========
Fully diluted earnings per share computation:
- ---------------------------------------------
Net income $122,337 $ 97,736 $ 78,022
======== ======== ========
Weighted average shares outstanding 66,832 66,641 68,435
Dilutive options 4,046 3,419 4,675
-------- -------- --------
Common equivalent shares 70,878 70,060 73,110
======== ======== ========
Fully diluted earnings per share:
Net income $ 1.73 $ 1.40 $ 1.07
======== ======== ========
</TABLE>
<PAGE>
EXHIBIT 13.1
------------
Portions of the Callaway Golf Company 1996 Annual Report to Shareholders
<PAGE>
Selected Financial Data
<TABLE>
<CAPTION>
(in thousands, except per share data) Year ended December 31,
- --------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Net sales $678,512 $553,287 $448,729 $254,645 $132,058
Cost of goods sold 317,353 270,125 208,906 115,458 62,970
- --------------------------------------------------------------------------------------------------------------------------------
Gross profit 361,159 283,162 239,823 139,187 69,088
Selling, general and administrative expenses 155,177 120,201 106,913 67,118 34,800
Research and development costs 16,154 8,577 6,380 3,653 1,585
- --------------------------------------------------------------------------------------------------------------------------------
Income from operations 189,828 154,384 126,530 68,416 32,703
Other income, net 5,767 4,017 2,875 1,184 472
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of accounting change 195,595 158,401 129,405 69,600 33,175
Provision for income taxes 73,258 60,665 51,383 28,396 13,895
- --------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 122,337 97,736 78,022 41,204 19,280
Cumulative effect of accounting change 1,658
- --------------------------------------------------------------------------------------------------------------------------------
Net income $122,337 $ 97,736 $ 78,022 $ 42,862 $ 19,280
================================================================================================================================
Earnings per Common Share:
Income before cumulative effect of accounting change $ 1.73 $ 1.40 $ 1.07 $ 0.60 $ 0.32
Cumulative effect of accounting change .02
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 1.73 $ 1.40 $ 1.07 $ 0.62 $ 0.32
================================================================================================================================
Dividends paid per share $ 0.24 $ 0.20 $ 0.10 $ 0.03
<CAPTION>
(in thousands) December 31,
- --------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents $108,457 $ 59,157 $ 54,356 $ 48,996 $ 20,019
Working capital 250,461 146,871 130,792 83,683 39,363
Total assets 428,428 289,975 243,622 144,360 68,937
Long-term liabilities 5,109 2,207 610 3,366
Total shareholders' equity 362,267 224,934 186,414 116,577 49,750
</TABLE>
-19-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
When used in this discussion and the financial statements that follow, the words
"expect(s)", "feel(s)", "believe(s)", "will", "may", "anticipate(s)" 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 discussion under the caption "Certain Factors Affecting
the Golf Club Industry and Callaway Golf" in this report, as well as the
Company's periodic reports on Forms 10-K, 10-Q and 8-K filed with the Securities
and Exchange Commission.
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1996 AND 1995
For the year ended December 31, 1996, net sales increased 23% to $678.5 million
compared to $553.3 million for the prior year. This increase was attributable
primarily to increased sales of Great Big Bertha(R) Drivers, and 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 year ended December 31, 1996, gross profit increased to $361.2 million
from $283.2 million for 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 associated with
increased production volume and improved labor efficiencies.
The Company accrues a provision for warranty expense at the time of sale of
its products. Based on the Company's warranty policies and historical rates of
product returns, the Company believes its accrual for warranty expense to be
adequate.
Selling expenses increased to $80.7 million in 1996 from $64.3 million in
1995. The $16.4 million increase was primarily due to increased tour
endorsement, TV advertising and employee compensation expenses. As a percentage
of net sales, selling expenses remained constant at 12%.
General and administrative expenses increased to $74.5 million in 1996 from
$55.9 million in 1995. The $18.6 million increase was related primarily to
increased employee compensation and benefits, consulting costs associated with
the Company's business development initiatives and increases in computer support
and other general and administrative expenses. As a percentage of net sales,
general and administrative expenses increased to 11% from 10%.
Research and development expenses increased to $16.2 million in 1996 as
compared to $8.6 million in 1995. This increase resulted from increased staffing
and operational expenses consistent with the Company's efforts to pursue
potential new business opportunities and the continued focus on developing core
products.
Net interest income increased to $5.0 million in 1996 compared to $3.5 million
in 1995. The increase in interest income was due to the investment of higher
average cash balances.
YEARS ENDED DECEMBER 31, 1995 AND 1994
For the year ended December 31, 1995, net sales increased 23% to $553.3 million
compared to $448.7 million for the prior year. This increase was attributable to
sales of Great Big Bertha(R) Drivers, which were initially announced at the PGA
International Show in August of 1994, and for which shipments, in significant
quantities, began in March 1995. also contributing to the growth in net sales
were increased sales of Big Bertha(R) Metal Woods with the War Bird(R)
soleplate and Big Bertha(R) Irons.
For the year ended December 31, 1995, gross profit increased to $283.2 million
from $239.8 million for the prior year, and gross margin decreased to 51% from
53%. The decrease in gross margin was related to increased labor and overhead
costs associated with the Company's inventory reduction program, increased sales
discounts related to the Company's improved Big Bertha(R) Iron "demo" sales
program and price concessions offered to customers during the fourth quarter of
1995 in anticipation of the introduction of new products in 1996, and increases
in the sales of irons, which had a lower margin as a percentage of net sales
than metal woods.
The Company accrues a provision for warranty expense at the time of sale of
its products. Based on the Company's warranty policies and historical rates of
product returns, the Company believes its accrual for warranty expense to be
adequate.
Selling expenses increased to $64.3 million in 1995 from $59.1 million in
1994. The $5.2 million increase was due to increased tour endorsement expenses,
TV advertising, and sales salaries and commissions expense. As a percentage of
net sales, selling expenses decreased to 12% from 13%, primarily attributable to
management's efforts to control its operating expenses.
-20-
<PAGE>
General and administrative expenses increased to $55.9 million in 1995 from
$47.8 million in 1994. The $8.1 million increase was primarily related to
increased employee compensation commensurate with the overall growth of the
Company's operations combined with an increase in depreciation expense
associated with the larger depreciable asset base as compared to 1994. These
increases were partially offset by decreases in the accrual for the allowance
for doubtful accounts and in legal expenses. As a percentage of net sales,
general and administrative expenses decreased to 10% from 11%, primarily
attributable to management's efforts to control its operating expenses.
Research and development expenses increased to $8.6 million in 1995 as
compared to $6.4 million in 1994. This increase resulted from personnel and
facilities expansion, including creation of a shaft development department.
Net interest income amounted to $3.5 million in 1995 compared to $2.5 million
in 1994. The increase in interest income was due to the investment of higher
average cash balances along with higher interest rates during 1995.
CERTAIN FACTORS AFFECTING THE GOLF CLUB INDUSTRY AND CALLAWAY GOLF
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 1997. 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 year ended December 31, 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.
However, in recent years, the Company's operating results have been more
significantly affected by seasonal buying trends and we expect this trend to
continue.
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 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.
The Company believes that the introduction of new, innovative golf equipment
will be important to its future success. As a result, the Company faces certain
risks associated with such a strategy. For example, new models and basic design
changes in golf equipment are frequently met with consumer rejection. In
addition, prior successful designs may be rendered obsolete within a relatively
short period of time as new products are introduced into the marketplace. New
designs must satisfy the standards established by the United States Golf
Association ("USGA") and the Royal and Ancient Golf Club of St. Andrews ("R&A")
because these standards are generally followed by golfers within their
respective jurisdictions. There is no assurance that new designs will receive
USGA and/or R&A approval, or that existing USGA and/or R&A standards will not be
altered in ways that adversely affect the sales of the Company's products.
Moreover, the Company's new products have tended to incorporate significant new
innovations in design and manufacture, which have resulted in increasingly
higher prices for the Company's products relative to products already in the
marketplace. There can be no assurance that a significant percentage of the
public will always be willing to pay such prices for golf equipment. Thus,
although the Company has achieved certain successes in the introduction of its
golf clubs in the past, no assurances can be given that the Company will be able
to continue to design and manufacture golf clubs that achieve market acceptance
in the future.
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 its
patents, trademarks, and trade dress. However, there is no assurance that these
efforts will reduce the level of acceptance obtained by these infringers.
Additionally, there can be no assurance that other golf club manufacturers will
not be able to produce successful golf clubs which imitate the Company's designs
without infringing any of the Company's patents, trademarks, or trade dress.
-21-
<PAGE>
The Company continues to experience high levels of unauthorized distribution
of its products (i.e., products sold by the Company to authorized distributors
being ultimately sold at retail by unauthorized distributors). The 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. No assurance can be given,
however, 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 began 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 these activities will be successful.
Two of these opportunities identified by the Company relate to the Company's
acquisition of selected foreign distributors and the golf ball business. The
Company's management believes that controlling the distribution of its products
throughout the world will be a key element in the future growth and success of
the Company. Executing a business strategy to achieve this has and will result
in additional investments in inventory, accounts receivable, corporate
infrastructure and facilities. It could also result in disruptions in the
distribution of the Company's products in some areas. There can be no assurance
that the acquisition of the Company's foreign distributors will achieve these
stated goals, and it is possible that the attempt to do so will adversely affect
the Company's business.
In June 1996, the Company formed Callaway Golf Ball Company, 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". These golf ball
ventures were not commercially successful. At this time, it has not been
determined whether Callaway Golf Ball Company 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 the early stages of development. It is
expected, however, that it will have a negative impact on the Company's future
cash flow and income from operations for several years. The Company believes
that 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, Sumitomo Rubber Industries,
Bridgestone and others. These competitors have established market share in the
golf ball business which will need to be penetrated in order for the Company's
golf ball business to be successful.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, cash and cash equivalents increased to $108.5 million from
$59.2 million at December 31, 1995, due to cash flows from operations of $74.7
million, a tax benefit of $14.2 million related primarily to the exercise of
non-qualified stock options, Common Stock transactions totaling $12.3 million,
offset by $35.9 million of net capital expenditures and $16.0 million related to
dividend payments. The Company has available a $50.0 million line of credit and
it 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 including capital expenditures for the foreseeable
future.
Net capital expenditures for the years ended December 31, 1996 and 1995 were
$35.9 million and $29.5 million, respectively. The increase in capital
expenditures for the year ended December 31, 1996 over 1995 was primarily
attributable to the purchase of computer and manufacturing equipment, various
building and facility improvements and the Company's purchase of land and a
building intended for research and development expansion.
-22-
<PAGE>
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(in thousands, except share and per share data) December 31,
- --------------------------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 108,457 $ 59,157
Accounts receivable, net 74,477 73,906
Inventories, net 98,333 51,584
Deferred taxes 25,948 22,688
Other current assets 4,298 2,370
- --------------------------------------------------------------------------------------------------
Total current assets 311,513 209,705
Property, plant and equipment, net 91,346 69,034
Other assets 25,569 11,236
- --------------------------------------------------------------------------------------------------
$ 428,428 $ 289,975
==================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 14,996 $ 26,894
Accrued employee compensation and benefits 16,195 10,680
Accrued warranty expense 27,303 23,769
Income taxes payable 2,558 1,491
- --------------------------------------------------------------------------------------------------
Total current liabilities 61,052 62,834
Long-term liabilities (Note 6) 5,109 2,207
Commitments (Note 7)
Shareholders' equity:
Preferred Stock, $.01 par value, 3,000,000 shares authorized,
none issued and outstanding at December 31, 1996 and 1995
Common Stock, $.01 par value, 240,000,000 shares authorized,
72,855,222 and 70,912,129 issued and outstanding at
December 31, 1996 and 1995 (Note 4) 729 709
Paid-in capital 278,669 214,846
Unearned compensation (3,105) (2,420)
Retained earnings 238,349 131,712
Less: Grantor stock trust (5,300,000 shares at December 31, 1996 (152,375) (119,913)
and 1995) at market (Note 4)
- --------------------------------------------------------------------------------------------------
Total shareholders' equity 362,267 224,934
- --------------------------------------------------------------------------------------------------
$ 428,428 $ 289,975
===================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
-23-
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
(in thousands, except per share data) Year ended December 31,
- ------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $678,512 100% $553,287 100% $448,729 100%
Cost of goods sold 317,353 47% 270,125 49% 208,906 47%
- ------------------------------------------------------------------------------------------------
Gross profit 361,159 53% 283,162 51% 239,823 53%
Selling expenses 80,701 12% 64,310 12% 59,065 13%
General and administrative expenses 74,476 11% 55,891 10% 47,848 11%
Research and development costs 16,154 2% 8,577 2% 6,380 1%
- ------------------------------------------------------------------------------------------------
Income from operations 189,828 28% 154,384 28% 126,530 28%
Interest and other income, net 5,767 4,017 2,875
- ------------------------------------------------------------------------------------------------
Income before income taxes 195,595 29% 158,401 29% 129,405 29%
Provision for income taxes 73,258 60,665 51,383
- ------------------------------------------------------------------------------------------------
Net income $122,337 18% $ 97,736 18% $ 78,022 17%
=================================================================================================
Earnings per common share $1.73 $1.40 $1.07
Common equivalent shares 70,661 69,855 73,104
</TABLE>
See accompanying notes to consolidated financial statements.
-24-
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(in thousands) Year ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 122,337 $ 97,736 $ 78,022
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 12,691 10,778 6,184
Non-cash compensation 4,194 2,027 2,070
Increase (decrease) in cash resulting from changes in:
Accounts receivable, net 3,510 (43,923) (12,400)
Inventories, net (44,383) 22,516 (45,045)
Deferred taxes (4,420) 4,978 (11,737)
Other assets (12,889) (6,573) (4,531)
Accounts payable and accrued expenses (15,395) 9,227 5,569
Accrued employee compensation and benefits 2,031 1,322 3,247
Accrued warranty expense 3,534 5,587 8,451
Income taxes payable 626 (9,845) 11,372
Other liabilities 2,902 1,597 610
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 74,738 95,427 41,812
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (35,352) (29,510) (26,137)
Sale of fixed assets 72 55
Acquisition of a business, net of cash acquired (610)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (35,890) (29,455) (26,137)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of Common Stock 12,258 7,991 5,050
Retirement of Common Stock (67,022) (14,942)
Tax benefit from exercise of stock options 14,244 11,236 6,410
Dividends paid, net (16,025) (13,350) (6,850)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 10,477 (61,145) (10,332)
- -----------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (25) (26) 17
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 49,300 4,801 5,360
Cash and cash equivalents at beginning of year 59,157 54,356 48,996
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 108,457 $ 59,157 $ 54,356
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
-25-
<PAGE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(in thousands) Common Stock
- -----------------------------------------------------------------------------------------------------------------------------------
Paid-in Unearned Retained
Shares Amount Capital Compensation Earnings GST Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 67,590 $ 677 $ 60,398 $ (2,591) $ 58,093 $116,577
Exercise of stock options 1,410 13 5,045 (8) 5,050
Tax benefit from exercise of stock options 6,410 6,410
Compensatory stock options 3,114 (1,079) 2,035
Compensatory stock 2 35 35
Stock retirement (907) (10) (14,932) (14,942)
Cash dividends (6,850) (6,850)
Equity adjustment from foreign currency 77 77
Net income 78,022 78,022
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 68,095 680 75,002 (3,670) 114,402 186,414
Exercise of stock options 2,329 24 7,971 (4) 7,991
Tax benefit from exercise of stock options 11,236 11,236
Compensatory stock options 759 1,250 2,009
Compensatory stock 1 18 18
Stock retirement (4,813) (48) (66,974) (67,022)
Cash dividends (13,550) (13,550)
Dividends on shares held by GST 200 200
Equity adjustment from foreign currency (98) (98)
Establishment of GST 5,300 53 86,785 $ (86,838)
Adjustment of GST shares to market value 33,075 (33,075)
Net income 97,736 97,736
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 70,912 709 214,846 (2,420) 131,712 (119,913) 224,934
Exercise of stock options 1,775 18 12,240 12,258
Tax benefit from exercise of stock options 14,244 14,244
Compensatory stock options 2,604 (685) 1,919
Employee stock purchase plan 168 2 2,273 2,275
Cash dividends (17,297) (17,297)
Dividends on shares held by GST 1,272 1,272
Equity adjustment from foreign currency 325 325
Adjustment of GST shares to market value 32,462 (32,462)
Net income 122,337 122,337
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 72,855 $ 729 $278,669 $ (3,105) $ 238,349 $(152,375) $ 362,267
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
-26-
<PAGE>
Notes to Consolidated Financial Statements
Note 1
THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Callaway Golf Company ("Callaway" or the "Company") is a California corporation
formed in 1982. The Company designs, develops, manufactures and markets high-
quality, innovative golf clubs. Callaway's primary products during 1996, 1995
and 1994 included Big Bertha(R) Metal Woods, Big Bertha(R) Metal Woods with the
War Bird (R)soleplate, Great Big Bertha(R) Metal Woods, Big Bertha(R) Irons,
S2H2(R) Irons, and various putters. The consolidated financial statements
include the accounts of the Company and its 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.
REVENUE RECOGNITION
Sales are recognized at the time goods are shipped, net of an allowance for
sales returns.
ADVERTISING COSTS
The Company advertises primarily through television and print media. The
Company's policy is to expense advertising costs, including production costs, as
incurred. Advertising expenses for 1996, 1995 and 1994 were $18,321,000,
$12,148,000 and $9,833,000, respectively.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The accounts of the Company's foreign subsidiaries have been translated into
United States dollars at appropriate rates of exchange. Cumulative translation
gains or losses are recorded as a separate component of shareholders' equity.
Gains or losses resulting from foreign currency transactions (transactions
denominated in a currency other than the entity's local currency) are included
in the consolidated statement of income and are not material.
During 1996, 1995 and 1994, the Company entered into forward foreign currency
exchange rate contracts to hedge payments due on inter-company transactions by
its wholly owned foreign subsidiary, Callaway Golf (UK) Limited. Realized and
unrealized gains and losses on these contracts are recorded in income. 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 December 31, 1996,
1995 and 1994, the Company had approximately $5,774,000, $446,000 and
$2,348,000, respectively, of foreign exchange contracts outstanding. The
contracts outstanding at December 31, 1996 mature between January and April of
1997. The Company had net realized and unrealized losses on foreign exchange
contracts of approximately $521,000 in 1996, net realized and unrealized gains
of $106,000 in 1995 and net realized and unrealized losses of $132,000 in 1994.
EARNINGS PER COMMON SHARE
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 in
1996, 1995 and 1994. Shares owned by the Callaway Golf Company Grantor Stock
Trust (Note 4) 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 shares under the Callaway Golf
Shareholder Rights Plan (Note 5) have not been included in weighted average
share amounts as the conditions necessary to cause these rights to be redeemed
were not met.
FINANCIAL STATEMENT PREPARATION
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.
CASH EQUIVALENTS
Cash equivalents are highly liquid investments purchased with maturities of
three months or less. Cash equivalents consist of investments in money market
accounts and U.S. Treasury bills.
At December 31, 1996 and 1995, the Company held investments in U.S. Treasury
bills with maturities of three months or less in the aggregate amount of $96.4
million and $44.7 million, respectively. Management determines the appropriate
classification of its U.S. Government securities at the time of purchase and
reevaluates such designation as of each balance sheet date. The Company has
recorded these securities at amortized costs as it has designated them as "held-
to-maturity."
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method.
-27-
<PAGE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over estimated useful
lives of three to fifteen years. Repairs and maintenance costs are charged to
expense as incurred.
STOCK-BASED COMPENSATION
During the year ended December 31, 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".
See Note 5 for pro forma disclosures of net income and earnings per share as if
the fair value-based method prescribed by SFAS 123 had been applied in measuring
compensation expense.
LONG-LIVED ASSETS
In accordance with 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 Company reviews for the impairment of long-lived assets,
certain identifiable intangibles, and associated goodwill, whenever 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 estimated future
cash flows is less than the carrying amount of the asset. No impairment losses
have been identified by the Company.
INCOME TAXES
Current income tax expense is the amount of income taxes expected to be payable
for the current year. A deferred income tax asset or liability is established
for the expected future consequences resulting from the differences in the
financial reporting and tax basis of assets and liabilities. Deferred income tax
expense (benefit) is the net change during the year in the deferred income tax
asset or liability.
DIVERSIFICATION OF CREDIT RISK
The Company's financial instruments that are subject to concentrations of credit
risk consist primarily of cash equivalents and trade receivables.
The Company invests its excess cash in money market accounts and U.S.
Government securities and has established guidelines relative to diversification
and maturities in an effort to maintain safety and liquidity. These guidelines
are periodically reviewed and modified to take advantage of trends in yields and
interest rates.
The Company operates in the golf equipment industry and primarily sells its
products to golf equipment retailers. The Company performs ongoing credit
evaluations of its customers' financial condition and generally requires no
collateral from its customers. The Company maintains reserves for potential
credit losses.
Note 2
SELECTED FINANCIAL STATEMENT INFORMATION
<TABLE>
<CAPTION>
(in thousands) December 31,
- ----------------------------------------------------------------------------
1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents:
U.S. Treasury bills $ 96,407 $ 44,687
Cash, interest bearing 11,415 3,598
Cash, non-interest bearing 635 10,872
- ----------------------------------------------------------------------------
$108,457 $ 59,157
============================================================================
Accounts receivable, net:
Trade accounts receivable $ 80,814 $ 80,316
Allowance for doubtful accounts (6,337) (6,410)
- ----------------------------------------------------------------------------
$ 74,477 $ 73,906
============================================================================
Inventories, net:
Raw materials $ 50,012 $ 23,980
Work-in-progress 1,651 1,109
Finished goods 51,954 31,291
- ----------------------------------------------------------------------------
103,617 56,380
Reserve for obsolescence (5,284) (4,796)
- ----------------------------------------------------------------------------
$ 98,333 $ 51,584
============================================================================
Property, plant and equipment, net:
Land $ 9,589 $ 7,689
Buildings and improvements 35,076 28,578
Machinery and equipment 29,778 17,359
Furniture, computers and equipment 20,329 15,447
Production molds 9,399 7,908
Construction in progress 21,003 13,338
- ---------------------------------------------------------------------------
125,174 90,319
Accumulated depreciation (33,828) (21,285)
- ---------------------------------------------------------------------------
$ 91,346 $ 69,034
===========================================================================
Accounts payable and accrued expenses:
Accounts payable $ 2,442 $ 9,486
Accrued expenses 12,554 17,408
- ---------------------------------------------------------------------------
$ 14,996 $ 26,894
===========================================================================
Accrued employee compensation and benefits:
Accrued payroll and taxes $ 12,914 $ 7,997
Accrued vacation and sick pay 3,017 2,659
Accrued commissions 264 24
- ---------------------------------------------------------------------------
$ 16,195 $ 10,680
===========================================================================
</TABLE>
Total rent expense was $1,363,000, $1,181,000 and $531,000 in 1996, 1995 and
1994, respectively.
-28-
<PAGE>
Note 3
BANK LINE OF CREDIT
The Company has a $50,000,000 bank line of credit with an interest rate equal to
the bank's prime rate. The interest rate at December 31, 1996 was 8.25%. The
line of credit has been primarily utilized to support the issuance of letters of
credit of which there were $3,921,000 outstanding at December 31, 1996, reducing
the amount available under the Company's line of credit to $46,079,000.
The line of credit is unsecured and is subject to renewal on December 15,
1997. The line requires the Company to maintain certain financial ratios,
including current and debt to equity ratios. The Company is also subject to
other restrictive covenants under the terms of the credit agreement.
Note 4
COMMON AND PREFERRED STOCK
As of December 31, 1996, the Company had 240,000,000 authorized shares of Common
Stock, $.01 par value, of which 72,855,222 were issued and outstanding.
During 1995 and 1994, the Company repurchased and retired 4,813,000 and
908,000 shares of its Common Stock at an average price per share of $13.93 and
$16.45, respectively, for a total purchase price of $67,022,000 in 1995 and
$14,942,000 in 1994.
As of December 31, 1996, the Company was authorized to issue up to 3,000,000
shares of $.01 par value Preferred Stock. No preferred shares have been issued.
In July 1995 the Company established the Callaway Golf Company Grantor Stock
Trust (GST). In conjunction with the formation of the GST, the Company sold
4,000,000 shares of newly issued Common Stock to the GST at a purchase price of
$60,575,000 ($15.14 per share). In December 1995 the Company sold an additional
1,300,000 shares of newly issued Common Stock to the GST at a purchase price of
$26,263,000 ($20.20 per share). The sale of these shares had no net impact on
shareholders' equity. 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.
Note 5
STOCK OPTIONS AND RIGHTS
During 1991, the Company adopted the 1991 Stock Incentive Plan ("the Incentive
Plan") for its officers, directors, key employees and consultants. All
directors, officers, key employees of and consultants to the Company were
eligible for awards under the Incentive Plan except that no director of the
Company who is not also an employee of the Company is eligible to receive any
award under the Incentive Plan. Under the Incentive Plan, options to purchase
Common Stock may be granted with an option price less than the then current
market value of such stock. A total of 10,000,000 shares have been reserved for
issuance under the Incentive Plan. Options to purchase 25,500, 2,281,000 and
220,000 shares of Common Stock at exercise prices of $12.75 to $33.13 per share
were granted in 1996, 1995 and 1994, respectively. At December 31, 1996, 138,100
shares were available for grant under this Plan.
During 1992, the Company adopted the Promotion, Marketing and Endorsement
Stock Incentive Plan ("the Promotion Plan") for golf professionals and other
parties who endorse the Company's products. Under the Promotion Plan, up to
3,560,000 shares of Common Stock may be granted in the form of stock options or
other stock awards at prices which may be less than the then current market
value of the stock. Options to purchase 220,000, 79,000 and 892,000 shares of
Common Stock at exercise prices of $5.25 to $33.88 per share were granted in
1996, 1995 and 1994, respectively. Common Stock grants totalling 1,300 and 2,000
were granted under the Promotion Plan in 1995 and 1994, respectively. At
December 31, 1996, 1,007,700 shares were available for grant under this Plan.
During 1993, the Company adopted the Non-Employee Directors Stock Option Plan.
Under the Plan, options to purchase up to 840,000 shares of Common Stock may be
granted at prices less than the then current market value of the stock to the
non-employee directors based on a non-discretionary formula. Options to purchase
112,000, 10,000 and 256,000 shares of Common Stock at exercise prices of $10.98
to $33.63 per share were issued to non-employee directors in 1996, 1995 and
1994, respectively. At December 31, 1996, 276,000 shares were available under
this Plan.
During 1995, the Company adopted the 1995 Employee Stock Incentive Plan ("1995
Plan") for its employees and consultants. All employees of and consultants to
the Company are eligible for awards under the 1995 Plan, except that no director
or officer of the Company is eligible to receive any award under the 1995 Plan.
Under the 1995 Plan, options to purchase Common Stock may be granted with an
option price less than the then current market value of such stock. A total of
3,000,000 shares have been reserved for issuance under the 1995 Plan. Options to
purchase 1,482,500 and 275,000 shares of Common Stock at exercise prices of
$19.13 to $34.38 per share were granted in 1996 and 1995, respectively. At
December 31, 1996, 1,244,500 shares were available for grant under this Plan.
-29-
<PAGE>
During 1995, the Company granted options to purchase 500,000 shares of Common
Stock at prices of $14.88 and $19.88 per share to a key officer, in conjunction
with the terms of his initial employment.
During 1996, the Company adopted the 1996 Stock Option Plan ("1996 Plan").
This plan is intended primarily for officers, although all employees,
consultants and advisors to the Company are eligible for awards under the 1996
Plan. No director of the Company is eligible to receive any award under the 1996
Plan. Under the 1996 Plan, options to purchase Common Stock may be granted with
an option price up to 15% less than the then current market value of such stock.
A total of 2,000,000 shares have been reserved for issuance under the 1996 Plan.
Options to purchase 320,000 shares of Common Stock at an exercise price of
$31.13 were granted in 1996. At December 31, 1996, 1,680,000 shares were
available for grant under this Plan.
During 1996, the Company granted options to purchase 600,000 shares of Common
Stock at $25.13 per share to a key officer, in conjunction with the terms of his
initial employment.
As of December 31, 1996, 3,939,000 options were exercisable under the Company
Plans. The following summarizes stock option transactions for the years ended
December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
(shares in thousands) Year ended December 31,
- -----------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at
beginning of period 9,842 10,652 10,756
Granted 2,760 3,145 1,368
Exercised (1,775) (2,329) (1,410)
Canceled (27) (1,626) (62)
- -----------------------------------------------------------------------
Outstanding at end of year 10,800 9,842 10,652
- -----------------------------------------------------------------------
Price range of
outstanding options $.44-$34.38 $.19-$19.88 $.19-$18.06
=======================================================================
</TABLE>
The Company has granted officers, consultants and employees rights to receive
an aggregate of 826,880 shares of Common Stock for services or other
consideration. No rights were granted or exercised during 1996, 1995 or 1994.
At December 31, 1996, rights to receive 80,000 shares of Common Stock remained
outstanding.
During August 1995, the Company canceled 634,000 employee stock options,
exclusive of those held by directors, with option prices in excess of the then
current market price of the Company's stock. The Company then reissued an
equivalent number of options at the current market price.
The Company has an Employee Stock Purchase Plan (ESPP) for all eligible
employees to purchase shares of Common Stock at 85% of the lower of the fair
market value on the first day of a two year offering period or last day of each
six month exercise period. Employees may authorize the Company to withhold
compensation during any offering period, subject to certain limitations. At
December 31, 1996, the ESPP had purchased, or was obligated to buy,
approximately 401,000 shares of the Company's Common Stock and 99,000 shares
were reserved for future issuance.
During 1996, 1995, and 1994, the Company recorded $1,919,000, $2,009,000 and
$2,035,000, respectively, in compensation expense as the value of options and
rights to purchase shares of Common Stock granted to employees of and
consultants to the Company. The valuation of the options and rights granted to
employees is based on the difference between the exercise price and the market
value of the stock on the date of the grant. The valuation of the options and
rights granted to non-employees is based on an option pricing model.
Unearned compensation has been charged for the value of options granted to
both employees and non-employees on the date of grant based on the valuation
described above. These amounts are amortized over the vesting period of employee
options and over the contract terms with non-employees. The unamortized portion
of unearned compensation is shown as a reduction of shareholders' equity in the
accompanying consolidated balance sheet.
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.
Under the Company's employee stock option plans, options to purchase Common
Stock may be granted with an option price less than the fair market value of the
shares on the date of grant. Currently outstanding options vest over periods
ranging from zero to five years from the grant date and expire up to ten years
after the date of grant.
The Company adopted Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123) during the year ended December 31, 1996. In
accordance with the provisions of SFAS 123, the Company applies APB Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations in
accounting for its plans and does not recognize compensation expense for its
stock-based compensation plans other than for options granted to non-employees.
If the Company had elected to recognize compensation expense based upon the fair
value at the grant date for awards under these plans consistent with the
methodology prescribed by SFAS 123, the Company's net income and earnings per
share would be reduced to the pro forma amounts indicated on the following page:
-30-
<PAGE>
<TABLE>
<CAPTION>
(thousands, except per share amounts) December 31,
- -------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------
<S> <C> <C>
Net income:
As reported $122,337 $97,736
Pro forma $113,587 $95,510
Earnings per common share:
As reported $ 1.73 $ 1.40
Pro forma $ 1.59 $ 1.36
</TABLE>
These pro forma amounts may not be representative of future disclosures since
the estimated fair value of stock options is amortized to expense over the
vesting period and additional options may be granted in future years. The fair
value for these options was estimated at the date of grant using the Black-
Scholes option pricing model with the following assumptions for the years ended
December 31, 1996 and 1995, respectively; dividend yields of .9 percent,
expected volatility of 31.5 percent, risk free interest rates ranging from 5.32
to 7.66 percent, and expected lives ranging from 2 to 6 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in subjective input
assumptions can materially affect the fair value estimates, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock based compensation plans.
The following table summarizes information about stock based compensation
plans outstanding at December 31, 1996:
OPTIONS OUTSTANDING AND EXERCISABLE BY PRICE RANGE
AS OF DECEMBER 31, 1996
(options outstanding and exercisable in thousands)
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life-Years Price Exercisable Price
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0-$12 4,371 4.4 $ 5.68 2,626 $ 5.09
$ 12-$20 3,779 5.4 $16.49 1,028 $14.55
$ 21-$34 2,650 6.4 $28.82 285 $25.53
- -------------------------------------------------------------------------------------
$ 0-$34 10,800 3,939
=====================================================================================
</TABLE>
During the years ended December 31, 1996 and 1995, the number of shares of
stock granted under the ESPP and the weighted average fair values were 302,000
and $17.47; and 99,000 and $8.80, respectively.
-31-
<PAGE>
Note 6
EMPLOYEE BENEFIT PLANS
The Company has a voluntary deferred compensation plan under Section 401(k) of
the Internal Revenue Code (the "401(k) Plan") for all employees who satisfy the
age and service requirements under the 401(k) Plan. Each participant may elect
to contribute up to the maximum permitted under federal law, and the Company is
obligated to contribute annually an amount equal to 100% of the participant's
contribution up to 6% of that participant's annual compensation. Additionally,
the Company can make discretionary contributions based on the profitability of
the Company. For the years ended December 31, 1996, 1995 and 1994, the Company
recorded compensation expense for discretionary contributions of $6,390,000,
$6,481,000 and $5,000,000, respectively, and employees contributed $3,315,000,
$3,336,000 and $2,271,000, respectively, to the 401(k) Plan. In accordance with
the provisions of the 401(k) Plan, the Company matched employee contributions in
the amount of $1,988,000, $1,458,000 and $1,087,000 during 1996, 1995 and 1994,
respectively.
The Company also has an unfunded, non-qualified deferred compensation plan.
The plan allows officers and certain other employees of the Company to defer all
or part of their compensation, to be paid to the participants or their
designated beneficiaries upon retirement, death or separation from the Company.
For the years ended December 31, 1996, 1995 and 1994, the total participant
deferrals, which is reflected in long-term liabilities, was $2,564,000,
$1,460,000 and $610,000, respectively. The plan expenses for 1996, 1995 and 1994
were approximately $9,000, $5,000 and $18,000, respectively.
Note 7
COMMITMENTS & CONTINGENCIES
In the normal course of business, the Company enters into certain long term
purchase commitments with various vendors. The Company has agreements with one
of its suppliers which require the Company to purchase, under certain
conditions, a minimum of 25% of all graphite shafts required in the manufacture
of its golf clubs through May 1998.
The Company has committed to purchase titanium golf club heads costing
approximately $68,550,000 from one of its vendors. These heads are to be shipped
to the Company in accord with a production schedule that runs through September
1998.
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 agreement, 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 December 31, 1996, the Company had made capital contributions of
$6,460,000 to the joint venture, which had not commenced operations. 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. While the costs of a possible dissolution of the
joint venture are not known at this time, management does not believe that such
costs would have an adverse material impact on the financial position, results
of operations or cash flows of 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. 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. The plaintiff has also recently filed a first amended complaint
asserting claims for wrongful termination and termination in violation of public
policy. The first amended complaint seeks damages of $290,000,000, a royalty of
$27,000,000, or compensatory damages for breach of the oral contract and related
claims; damages of approximately $10,000,000 for the wrongful termination; and
unspecified punitive damages and costs. The Company believes there are
meritorious defenses to all plaintiff's claims and thus no provision for any
liability has been made in the financial statements.
The Company has certain contingent liabilities resulting from litigation and
claims incident to the ordinary course of business. Management believes the
probable resolution of such contingencies will not materially affect the
financial position, results of operations or cash flows of the Company.
-32-
<PAGE>
Note 8
INCOME TAXES
Income before income taxes for the years ended December 31 was taxed under the
following jurisdictions:
<TABLE>
<CAPTION>
(in thousands) Year ended December 31,
1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
Domestic $193,170 $154,054 $126,471
Foreign 2,425 4,347 2,934
- ----------------------------------------------------------------------------------------------------
Total $195,595 $158,401 $129,405
====================================================================================================
The provision for income taxes is as follows:
<CAPTION>
(in thousands) Year ended December 31,
- ----------------------------------------------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax provision:
Federal $ 65,287 $ 48,563 $ 50,069
State 11,154 9,840 13,007
Foreign 1,244 1,626 777
Deferred tax (benefit) expense
Federal (3,911) (317) (10,467)
State (437) 1,053 (2,003)
Foreign (79) (100)
- ----------------------------------------------------------------------------------------------------
Provision for income taxes $ 73,258 $ 60,665 $ 51,383
====================================================================================================
</TABLE>
During 1996, 1995, and 1994, the Company recognized certain tax benefits related
to stock option plans in the amount of $14,244,000, $11,236,000 and $6,410,000,
respectively. Such benefits were recorded as a reduction of income taxes payable
and an increase in additional paid-in capital.
Deferred tax assets are comprised of the following:
<TABLE>
<CAPTION>
(In thousands) Year ended December 31,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Reserves and allowances $15,056 $16,381
Depreciation and amortization 5,585 4,297
Deferred compensation 3,088 2,019
Effect of inventory overhead adjustment 2,057 1,414
Compensatory stock options and rights 1,541 1,346
State taxes, net 697 972
Other 3,437 605
- --------------------------------------------------------------------------------
Net deferred tax asset $31,461 $27,034
================================================================================
</TABLE>
The Company did not require a deferred tax asset valuation allowance at
December 31, 1996 or 1995. A reconciliation of the provision for income taxes to
the amount computed by applying the statutory federal income tax rate to income
before income taxes is as follows:
<TABLE>
<CAPTION>
(in thousands) Year ended December 31,
- ------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Amounts computed at
statutory federal tax rate $ 68,458 $ 55,440 $ 45,292
State income taxes, net of
federal benefit 6,966 7,081 7,153
Other (2,166) (1,856) (1,062)
- -------------------------------------------------------------------------------------------
Provision for income taxes $ 73,258 $ 60,665 $ 51,383
===========================================================================================
</TABLE>
-33-
<PAGE>
Note 9
SALES INFORMATION
The Company is engaged in domestic and international sales within the following
geographic areas:
<TABLE>
<CAPTION>
(In thousands) Year ended December 31,
- --------------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $460,611 $367,359 $331,493
Japan 58,156 60,971 45,944
All others--individually less
than 10% of net sales 159,745 124,957 71,292
- --------------------------------------------------------------------------------------
$678,512 $553,287 $448,729
======================================================================================
</TABLE>
The Company, through a distribution agreement, appointed Sumitomo Rubber
Industries, Ltd. (Sumitomo) as the sole distributor of Callaway Golf clubs in
Japan. The distribution agreement requires Sumitomo to purchase specified
minimum quantities. The current distribution agreement began in February 1993
and has an initial term of seven years. In 1996, 1995 and 1994, sales to
Sumitomo accounted for 9%, 11% and 10%, respectively, of the Company's net
sales.
Note 10
SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION
Cash paid for interest during 1996, 1995 and 1994 was $37,000, $21,000 and
$4,000, respectively.
Income taxes paid in 1996, 1995 and 1994 amounted to $62,938,000, $58,543,000
and $45,776,000, respectively.
Note 11
SUBSEQUENT EVENT
On January 22, 1997, the Company declared a quarterly cash dividend of $.07 per
share payable on February 25, 1997, to shareholders of record on February 4,
1997.
-34-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
[LOGO OF PRICE WATERHOUSE LLP]
To the Board of Directors and Shareholders of Callaway Golf Company
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of cash flows and of shareholders' equity
present fairly, in all material respects, the financial position of Callaway
Golf Company and its subsidiaries at December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICE WATERHOUSE LLP
San Diego, California
January 20, 1997
MARKET FOR COMMON SHARES AND RELATED SHAREHOLDER MATTERS
The Company's Common Shares are traded on the New York Stock Exchange (NYSE).
The Company's symbol for its Common Shares is "ELY." The stock price
information set forth below has been retroactively restated to reflect the two-
for-one stock split effective February 10, 1995.
As of February 20, 1997, the approximate number of holders of record of the
Company's Common Stock was 6,684.
<TABLE>
<CAPTION>
STOCK INFORMATION
FISCAL 1996 FISCAL 1995
- -----------------------------------------------------------------------------------------
PERIOD: HIGH LOW DIVIDEND HIGH LOW DIVIDEND
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FIRST QUARTER $28.13 $18.50 $.06 $18.13 $13.25 $.05
SECOND QUARTER 33.88 24.50 .06 16.88 11.25 .05
THIRD QUARTER 36.63 27.88 .06 17.00 13.38 .05
FOURTH QUARTER 36.63 26.63 .06 22.63 14.38 .05
</TABLE>
-35-
<PAGE>
Summarized Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
(in thousands, except per share data) Fiscal Year 1996 Quarters
- ------------------------------------------------------------------------------------------
1st 2nd 3rd 4th Total
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $135,138 $210,002 $194,545 $138,827 $678,512
Gross profit 68,632 111,083 106,071 75,373 361,159
Net income 19,455 38,937 38,418 25,527 122,337
Earnings per common share $ 0.28 $ 0.55 $ 0.54 $ 0.36 $ 1.73
<CAPTION>
Fiscal Year 1995 Quarters
- ------------------------------------------------------------------------------------------
1st 2nd 3rd 4th Total
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $119,025 $155,699 $155,924 $122,639 $553,287
Gross profit 60,476 79,836 80,794 62,056 283,162
Net income 16,904 27,329 30,178 23,325 97,736
Earnings per common share $ 0.23 $ 0.39 $ 0.44 $ 0.34 $ 1.40
</TABLE>
-36-
<PAGE>
EXHIBIT 21.1
------------
SUBSIDIARIES OF CALLAWAY GOLF COMPANY
-------------------------------------
NAME JURISDICTION OF FORMATION
---- -------------------------
Callaway Golf Sales Company California
Callaway Golf Ball Company California
CGV, Inc. California
Callaway Golf (Germany) GmbH Germany
Callaway Golf Trading GmbH Germany
(owned 80% by Callaway Golf
(Germany) GmbH
Callaway Golf (UK) Limited United Kingdom
ERC International Company Japan
<PAGE>
EXHIBIT 23.1
------------
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 33-77024) and
in the Registration Statements on Form S-8 (No. 33-85692, No. 33-50564, No.
33-56756, No. 33-67160, No. 33-73680, No. 33-98750, No. 33-92302, No. 333-242,
No. 333-5719, and No. 333-5721) of Callaway Golf Company of our report dated
January 20, 1997 appearing on page 35 of the Annual Report to Shareholders which
is incorporated in this Annual Report on Form 10-K. We also consent to the
incorporation by reference of our report on the Financial Statement Schedule,
which appears on page 19 of this Form 10-K.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
San Diego, California
March 27, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 108,457
<SECURITIES> 0
<RECEIVABLES> 80,814
<ALLOWANCES> 6,337
<INVENTORY> 98,333
<CURRENT-ASSETS> 311,513
<PP&E> 125,174
<DEPRECIATION> 33,828
<TOTAL-ASSETS> 428,428
<CURRENT-LIABILITIES> 61,052
<BONDS> 0
0
0
<COMMON> 729
<OTHER-SE> 361,538
<TOTAL-LIABILITY-AND-EQUITY> 428,428
<SALES> 678,512
<TOTAL-REVENUES> 678,512
<CGS> 317,353
<TOTAL-COSTS> 317,353
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21
<INCOME-PRETAX> 195,595
<INCOME-TAX> 73,258
<INCOME-CONTINUING> 122,337
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 122,337
<EPS-PRIMARY> 1.73
<EPS-DILUTED> 1.73
</TABLE>
