<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10962
CALLAWAY GOLF COMPANY
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3797580
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2285 RUTHERFORD ROAD, CARLSBAD, CA 92008-8815
(760) 931-1771
(Address, including zip code and telephone number, including area code, of
principal executive offices)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
The number of shares outstanding of the issuer's of Common Stock, $.01
par value, as of April 30, 1997 was 72,661,132
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CALLAWAY GOLF COMPANY
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheet at March 31, 1997 3
and December 31, 1996
Consolidated Condensed Statement of Income for the three 4
months ended March 31, 1997 and 1996
Consolidated Condensed Statement of Cash Flows for the three 5
months ended March 31, 1997 and 1996
Consolidated Condensed Statement of Shareholders' Equity for 6
the three months ended March 31, 1997
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition 9
and Results of Operations
Part II. Other Information 14
</TABLE>
2
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED BALANCE SHEET
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
----------- ------------
(Unaudited)
ASSETS
- ------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 113,623 $ 108,457
Accounts receivable, net 97,309 74,477
Inventories, net 96,191 98,333
Deferred taxes 26,058 25,948
Other current assets 9,187 4,298
---------- ----------
Total current assets 342,368 311,513
Property and equipment, net 99,360 91,346
Other assets 24,502 25,569
---------- ----------
$ 466,230 $ 428,428
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 39,682 $ 14,996
Accrued employee compensation and benefits 13,112 16,195
Accrued warranty expense 27,280 27,303
Income taxes payable 9,134 2,558
---------- ----------
Total current liabilities 89,208 61,052
Long-term liabilities 5,749 5,109
Commitments and Contingencies (Note 6)
Shareholders' equity:
Preferred Stock, $.01 par value, 3,000,000 shares authorized, none issued
and outstanding at March 31, 1997 and December 31, 1996, respectively
Common Stock, $.01 par value, 240,000,000 shares authorized, 72,842,675 and
72,855,222 issued and outstanding at March 31, 1997 and December 31, 1996,
respectively 728 729
Paid-in capital 293,156 278,669
Unearned compensation (3,309) (3,105)
Retained earnings 232,411 238,349
Less: Grantor Stock Trust (5,300,000 shares) at market (151,713) (152,375)
---------- ----------
Total shareholders' equity 371,273 362,267
---------- ----------
$ 466,230 $ 428,428
========== ==========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
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CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED STATEMENT OF INCOME (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
--------------------------------------------
March 31, March 31,
1997 1996
---- ----
<S> <C> <C> <C> <C>
Net sales $169,073 100% $135,138 100%
Cost of goods sold 82,071 49% 66,506 49%
--------- ---------
Gross profit 87,002 51% 68,632 51%
Selling expenses 26,579 16% 18,145 13%
General and administrative expenses 16,254 10% 17,191 13%
Research and development costs 5,953 4% 3,162 2%
--------- ---------
Income from operations 38,216 23% 30,134 22%
Other income, net 1,383 863
--------- ---------
Income before income taxes 39,599 23% 30,997 23%
Provision for income taxes 15,133 11,542
--------- ---------
Net income $ 24,466 14% $ 19,455 14%
========= =========
Earnings per common share $.34 $.28
==== ====
Common equivalent shares 71,763 69,595
====== ======
Dividends paid per share $.07 $.06
==== ====
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
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CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Three months ended
-----------------------------------------
March 31, March 31,
1997 1996
---------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $24,466 $19,455
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 3,460 2,939
Loss on disposal of fixed assets 0 11
Non-cash compensation 4,309 1,778
Increase (decrease) in cash resulting from changes in:
Accounts receivable, net (23,174) (11,017)
Inventories, net 1,489 (15,794)
Deferred taxes (380) (924)
Other assets (3,945) (1,627)
Accounts payable and accrued expenses 22,720 (1,339)
Accrued employee compensation and benefits (351) 1,147
Accrued warranty expense (23) 1,350
Income taxes payable 6,635 8,003
Other liabilities 640 221
---------- ---------
Net cash provided by operating activities 35,846 4,203
---------- ---------
Cash flows used in investing activities:
Capital expenditures (11,503) (6,104)
----------- ----------
Net cash used in investing activities (11,503) (6,104)
----------- ----------
Cash flows used in financing activities:
Issuance of Common Stock 4,359 5,942
Tax benefit from exercise of stock options 6,285 4,184
Dividends paid, net (4,773) (3,964)
Retirement of Common Stock (25,091) 0
----------- ---------
Net cash (used in) provided by financing activities (19,220) 6,162
----------- ---------
Effect of exchange rate changes on cash 43 (22)
---------- ----------
Net increase in cash and cash equivalents 5,166 4,239
Cash and cash equivalents at beginning of period 108,457 59,157
---------- ---------
Cash and cash equivalents at end of period $ 113,623 $63,396
========== =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
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CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Common Stock Paid-in Unearned Retained
Shares Amount Capital Compensation Earnings GST Total
------ ------ ------- ------------ -------- --- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 72,855 $729 $278,669 ($3,105) $238,349 ($152,375) $362,267
Exercise of stock options 603 6 4,353 4,359
Tax benefit from exercise of
stock options 6,285 6,285
Compensatory stock options 822 (204) 618
Employee stock purchase plan 233 2 3,689 3,691
Stock retirement (848) (9) (25,082) (25,091)
Cash dividends (5,144) (5,144)
Dividends on shares held by
GST 371 371
Equity adjustment from
foreign currency translation (549) (549)
Adjustment of GST shares to
market value (662) 662
Net income 24,466 24,466
------ ------- ---------- -------- ----------- ---------- ----------
Balance, March 31, 1997 72,843 $728 $293,156 ($3,309) $232,411 ($151,713) $371,273
====== ==== ========= ======== =========== ========= ==========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
6
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CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
---------------------
The accompanying consolidated condensed balance sheet as of March 31, 1997 and
the consolidated condensed statements of income, cash flows and shareholders'
equity for the three month periods ended March 31, 1997 and 1996 have been
prepared by Callaway Golf Company (the Company) and have not been audited. These
financial statements, in the opinion of management, include all adjustments
(consisting only of normal recurring accruals) necessary for a fair presentation
of the financial position, results of operations and cash flows for all periods
presented.
Certain information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Company's Annual Report on Form 10-K filed for the year ended
December 31, 1996. Interim operating results are not necessarily indicative of
operating results for the full year.
2. INVENTORIES
-----------
Inventories at March 31, 1997 and December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
----------- ------------
(Unaudited)
<S> <C> <C>
Inventories, net:
Raw materials $ 47,638 $ 50,012
Work-in-process 1,491 1,651
Finished goods 52,266 51,954
--------- ---------
101,395 103,617
Less reserve for obsolescence (5,204) (5,284)
--------- ---------
Net inventories $ 96,191 $ 98,333
========= =========
</TABLE>
3. FOREIGN CURRENCY EXCHANGE CONTRACTS
-----------------------------------
During the three months ended March 31, 1997, the Company entered into forward
foreign currency exchange rate contracts to hedge payments due on intercompany
transactions from a wholly owned foreign subsidiary. The effect of this practice
is to minimize variability in the Company's operating results arising from
foreign exchange rate movements. The Company does not engage in foreign currency
speculation. These foreign exchange contracts do not subject the Company to risk
due to exchange rate movements because gains and losses on these contracts
offset losses and gains on the intercompany transactions being hedged, and the
Company does not engage in hedging contracts which exceed the amount of the
intercompany transactions. At March 31, 1997, the Company had approximately
$3,843,000 of foreign exchange contracts outstanding. The contracts mature
between April and July of 1997. Realized and unrealized losses on these
contracts are recorded in net income. The net realized and unrealized gains from
foreign exchange contracts for the three months ended March 31, 1997 totaled
approximately $250,000.
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4. CASH AND CASH EQUIVALENTS
-------------------------
At March 31, 1997, the Company held investments in U.S. Treasury bills with
maturities of three months or less in the aggregate amount of $99.5 million.
Management determines the appropriate classification of its U.S. Government and
other debt securities at the time of purchase and reevaluates such designation
as of each balance sheet date. The Company has included these securities, net of
amortization, in cash and cash equivalents and has designated them as
"held-to-maturity."
5. EARNINGS PER SHARE
------------------
Earnings per share are based upon the weighted average number of shares
outstanding during the period increased by the effect of dilutive stock options,
when applicable, using the treasury stock method. Earnings per common and common
equivalent share as presented on the face of the consolidated condensed
statement of income represent primary earnings per share. Dual presentation of
primary and fully diluted earnings per share has not been made because the
differences are insignificant.
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 128, "Earnings Per Share". SFAS No. 128
will be adopted by the Company as required in the fourth quarter of 1997. Upon
adoption of SFAS No. 128, the Company will present basic earnings per share and
diluted earnings per share. Basic earnings per share will be computed based on
the weighted average number of shares outstanding during the period. Diluted
earnings per share will be computed based on the weighted average number of
shares outstanding during the period increased by the effect of dilutive stock
options using the treasury stock method. Pro forma basic earnings per share for
the three months ended March 31, 1997 and 1996 are $.36 and $.29, respectively.
Pro forma diluted earnings per share for the three months ended March 31, 1997
and 1996 are $.34 and $.28, respectively.
6. COMMITMENTS AND CONTINGENCIES
-----------------------------
In the normal course of business, the Company enters into certain long term
purchase commitments with various vendors. The Company has agreements with one
of its suppliers which require the Company to purchase, under certain
conditions, a minimum of 25% of all graphite shafts required in the manufacture
of its golf clubs through May 1998.
The Company has committed to purchase titanium golf club heads costing
approximately $40,880,000 from one of its vendors. These heads are to be shipped
to the Company in accord with a production schedule that runs through the middle
of 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. Pursuant to the joint venture
agreement, the Company has a 50% equity interest in the new foundry and has
contributed $7,000,000 in capital contributions for developing, designing and
equipping the new facility, which has not commenced operations. The Company
accounts for its investment in the joint venture pursuant to the equity method.
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, 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 "Schmidt Litigation"). 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
8
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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 alleged oral
contract and related claims; damages of approximately $10,000,000 for the
wrongful termination; and unspecified punitive damages and costs. Formal
discovery has commenced in preparation for trial. The trial is currently
scheduled to commence on October 20, 1997. Following the Company's tender of the
Schmidt Litigation to its insurers, the carriers denied coverage. On April 11,
1997, the Company initiated litigation against these carriers seeking a judicial
declaration that such coverage is afforded under the applicable insurance
policies (the "Insurance Litigation"). The Company believes there are
meritorious defenses to the Schmidt Litigation, and thus no provision for
liability has been made in the Company's financial statements. The Company also
believes it is entitled to coverage by its insurers for all or some of the costs
and claims asserted in the Schmidt Litigation. The ultimate resolution of the
Schmidt Litigation and the Insurance Litigation, however, could result in a
material liability and income statement charge.
The Company has certain additional contingent liabilities resulting from
litigation and claims incident to the ordinary course of business. Except as
noted above, with respect to litigation outside the scope of applicable
insurance coverage and to the extent insured claims may exceed liability limits,
it is the opinion of the management of the Company that the probable result of
these matters individually and in the aggregate will not have a material adverse
effect upon the Company's financial position, results of operations or cash
flows.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
When used in this discussion, 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 describe certain
factors which affect the Company's business, including the disclosures made
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Certain Factors Affecting Callaway Golf Company"
below, as well as the Company's other periodic reports on Forms 10-K, 10-Q and
8-K filed with the Securities and Exchange Commission.
CERTAIN FACTORS AFFECTING CALLAWAY GOLF COMPANY
The Company believes that the growth rate in the golf equipment industry in the
United States has been modest for the past several years, and this trend is
likely to continue through 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
declining during 1996, but recent trends indicate the market may be stabilizing.
Although demand for the Company's products has been generally strong during the
quarter ended March 31, 1997, 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 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.
9
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The market in which the Company does business is highly competitive, and is
served by a number of well-established and well-financed companies with
recognized brand names. New product introductions by competitors continue to
generate increased market competition. For example, in 1997 Taylor Made
introduced two new products, the "Ti Bubble 2" Metal Wood Driver and the "Ti
Bubble 2" Irons, and other competitors have increased their marketing activities
with respect to existing products. 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.
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 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.
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.
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.
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
10
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infringers of its patents, trademarks, and trade dress. However, there is no
assurance that these efforts will reduce the level of acceptance obtained by
these infringers. Additionally, there can be no assurance that other golf club
manufacturers will not be able to produce successful golf clubs which imitate
the Company's designs without infringing any of the Company's patents,
trademarks, or trade dress.
An increasing number of the Company's competitors have, like the Company itself,
sought to obtain patent, trademark or other protection of their proprietary
rights and designs. From time to time others have or may contact the Company to
claim that they have proprietary rights which have been infringed by the Company
and/or its products. The Company evaluates any such claims and, where
appropriate, has obtained or sought to obtain licenses or other business
arrangements. To date, there have been no interruptions in the Company's
business as the result of any claims of infringement. No assurance can be given,
however, that the Company will not be adversely affected in the future by the
assertion of intellectual property rights belonging to others. This effect could
include alteration of existing products, withdrawal of existing products and
delayed introduction of new products.
Various patents have been issued to the Company's competitors in the golf ball
industry. As Callaway Golf Ball Company develops a new golf ball product, it
must avoid infringing on these patent or other intellectual property rights, or
it must obtain licenses to use them lawfully. If any new golf ball product was
found to infringe on protected technology, the Company could incur substantial
costs to redesign its golf ball product or to defend legal action taken against
it. Despite its efforts to avoid such infringements, there can be no assurance
that Callaway Golf Ball Company will not infringe on the patents and other
intellectual property rights of third parties in its development efforts, or
that it will be able to obtain licenses to use any such rights, if necessary.
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.
The Company also establishes relationships with professional golfers in order to
promote the Callaway Golf brand among both professional and amateur golfers. The
Company has entered into endorsement arrangements with members of the Senior
Professional Golf Association's Tour, the Professional Golf Association's Tour,
the Ladies Professional Golf Association's Tour, the European Professional Golf
Association's Tour and the Nike Tour. While most professional golfers fulfill
their contractual obligations, some have been known to stop using a sponsor's
products despite contractual commitments. If one or more of Callaway Golf's pro
endorsers were to stop using Callaway Golf's products contrary to their
endorsement agreements, the Company's business could be adversely affected in a
material way by the negative publicity.
During 1995, the Company began to evaluate growth 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 be
successful, and it is possible that the attempt to do so will adversely affect
the Company's business.
11
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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.
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, intellectual property rights of others, 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. 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.
RESULTS OF OPERATIONS
THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND 1996:
Net sales increased 25% to $169.1 million for the three months ended March 31,
1997 compared to $135.1 million for the same period in the prior year. The
increase was primarily attributable to the introduction of the Biggest Big
Bertha(TM) Titanium Driver and increased sales of the Great Big Bertha(R)
Titanium Metal Woods, Big Bertha Gold(TM) Irons and Big Bertha(R) Tour Series
Wedges. These sales increases were offset by a decrease in net sales of Big
Bertha War Bird(R) Metal Woods.
For the three months ended March 31, 1997, gross profit increased to $87.0
million from $68.6 million for the same period in the prior year and gross
margin remained constant at 51%.
Selling expenses increased to $26.6 million in the first quarter of 1997
compared to $18.1 million in the first quarter of 1996. As a percentage of net
sales, selling expenses in the first quarter of 1997 increased to 16% from 13%
for the same period in 1996. The $8.5 million increase was primarily a result of
increased profit sharing and bonus accruals, increased salaries, higher
promotional expenses associated with demonstrating new products at a trade show,
additional pro tour expenses with our staff players and increased print
advertising of the Company's new products.
General and administrative expenses for the three months ended March 31, 1997
decreased to $16.3 million from the $17.2 million incurred during the first
quarter of 1996. The $900,000 decrease in general and administrative expenses
was primarily attributable to decreased charitable contributions, lower computer
support expenses and decreased consulting fees in the first quarter of 1997.
12
<PAGE>
Research and development expenses were $6.0 million for the three months
ended March 31, 1997 as compared to $3.2 million for the same period in the
prior year. The $2.8 million increase in research and development costs was
attributable to increased product engineering and testing of molds and shafts
with a continued focus on developing core products, increased spending on
developing potential new business opportunities and additional staffing and
overhead.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, cash and cash equivalents increased to $113.6 million from
$108.5 million at December 31, 1996 due to $35.8 million provided by operating
activities. This increase was offset by $19.2 million used in financing
activities associated primarily with retirement of the Company's Common Stock
and dividends paid. Also, the Company spent approximately $11.5 million in
capital expenditures. The Company has available a $50.0 million line of credit
and anticipates that its existing capital resources and cash flow generated from
future operations will enable it to maintain its current level of operations,
including capital expenditures and its planned operations for the foreseeable
future.
The Company's net accounts receivable increased to $97.3 million at March 31,
1997 from $74.5 million at December 31, 1996 and $84.9 million at March 31,
1996, primarily as a result of the increase in net sales. Net inventory was
$96.2 million at March 31, 1997 compared to $98.3 million at December 31, 1996
and $67.3 million at March 31, 1996. The inventory levels at March 31, 1997 are
consistent with historical seasonality trends.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
The Company, incident to its business activities, is the plaintiff in several
legal proceedings, both domestically and abroad, in various stages of
development. In conjunction with the Company's program of enforcing its
proprietary rights, the Company has initiated a number of actions against
alleged infringers under the Lanham Act, 15 USCA Sections 1051-1127, the U.S.
Patent Act, 35 USCA Sections 1-376, and other pertinent laws. Some defendants in
these actions have, among other things, contested the validity and/or the
enforceability of some of the Company's patents and/or trademarks. Others have
asserted counterclaims against the Company. The Company believes that the
outcome of these matters individually and in the aggregate will not have a
material adverse effect upon the financial position or results of operations of
the Company. It is possible, however, that in the future one or more defenses or
claims asserted by defendants in those actions may succeed, resulting in the
loss of all or part of the rights under one or more patents, loss of a
trademark, a monetary award against the Company, or some other loss to the
Company. One or more of these results could adversely affect the Company's
overall ability to protect its product designs and ultimately limit its future
success in the market place.
In addition, the Company from time to time receives information claiming that
products sold by the Company infringe or may infringe patent or other
intellectual property rights of third parties. To date, the Company has not
experienced any material expense or disruption associated with any such
potential infringement matters. It is possible, however, that in the future one
or more claims of potential infringement could lead to litigation, the need to
obtain additional licenses, the need to alter a product to avoid infringement,
or some other action or loss by the Company.
On May 30, 1996, a lawsuit was filed against Callaway Golf Company and two of
its officers by a former officer of the Company, captioned Glenn Schmidt v.
----------------
Callaway Golf Company, et al., Case No. N 71548, in the Superior Court for the
- ----------------------------
State of California, County of San Diego (the "Schmidt Litigation"). 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 alleged oral contract and
related claims; damages of approximately $10,000,000 for the wrongful
termination; and unspecified punitive damages and costs. Formal discovery has
commenced in preparation for trial. The trial is currently scheduled to commence
on October 20, 1997. Following the Company's tender of the Schmidt Litigation to
its insurers, the carriers denied coverage. On April 11, 1997, the Company
initiated litigation against these carriers seeking a judicial declaration that
such coverage is afforded under the applicable insurance policies (the
"Insurance Litigation"). The Company believes there are meritorious defenses to
the Schmidt Litigation, and thus no provision for liability has been made in the
Company's financial statements. The Company also believes it is entitled to
coverage by its insurers for all or some of the costs and claims asserted in the
Schmidt Litigation. The ultimate resolution of the Schmidt Litigation and the
Insurance Litigation, however, could result in a material liability and income
statement charge.
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. Except as noted
above, 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.
14
<PAGE>
<TABLE>
<C> <S>
ITEM 2. CHANGES IN SECURITIES:
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES:
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
a. Exhibits:
10.1 Callaway Golf Company 1996 Stock Option Plan (as amended and restated through
April 17, 1997)
10.2 Callaway Golf Company Executive Deferred Compensation Plan (as amended
and restated through February 6, 1997)
10.3 Callaway Golf Company 1998 Executive Non-Discretionary Bonus Plan
11.1 Statement re: Computation of Earnings Per Share
27.1 Financial Data Schedule
b. Reports on Form 8-K:
None
</TABLE>
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CALLAWAY GOLF COMPANY
Date: May 13, 1997 /s/ Donald H. Dye
-------------------------------------
DONALD H. DYE
President and
Chief Executive Officer
/s/ David A. Rane
-------------------------------------
DAVID A. RANE
Executive Vice President, Golf Venues
and Chief Financial Officer
16
<PAGE>
EXHIBIT 10.1
------------
CALLAWAY GOLF COMPANY
1996 STOCK OPTION PLAN
(AS AMENDED AND RESTATED APRIL 17, 1997)
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(6), 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
<PAGE>
deems relevant, in its sole and absolute discretion, to making such decisions,
determinations and interpretations, including, without limitation, the
recommendations or advice of any 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
-----------
3,000,000. 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
2
<PAGE>
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" 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 3,000,000. 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
3
<PAGE>
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.
-----------
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.
4
<PAGE>
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.
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,
5
<PAGE>
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 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. Unless the Committee shall otherwise
----------------
determine on a case by case basis, 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. Unless
the Committee shall otherwise determine on a case by case basis, 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
6
<PAGE>
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 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
7
<PAGE>
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 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
8
<PAGE>
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 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.
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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.
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.
10
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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.
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EXHIBIT 10.2
------------
CALLAWAY GOLF COMPANY
EXECUTIVE DEFERRED COMPENSATION PLAN
(AS AMENDED AND RESTATED FEBRUARY 6, 1997)
This Executive Deferred Compensation Plan ("Plan") has been adopted
by the Board of Directors of Callaway Golf Company, a California corporation
("Company"), effective August 1, 1994, as amended and restated February 6, 1997.
1. PURPOSE
-------
The primary purpose of the Plan is to provide deferred compensation
to a select group of management or highly compensated employees through an
unfunded "top hat" arrangement exempt from the fiduciary, funding, vesting, and
plan termination insurance provisions of Title I and Title IV of the Employee
Retirement Income Security Act ("ERISA"). More specifically, the Company has
adopted this Plan to provide Employees with the opportunity to defer part or all
of that portion of their Compensation including amounts they are unable to
defer, receive or take into account under any tax qualified deferred
compensation (i.e., 401(k), pension, profit sharing or stock bonus) plan which
the Company may now or hereafter maintain, as a result of the limits imposed by
Sections 401(a)(4), 401(a)(17), 401(k)(3), 401(m), 402(g) and 415 of the
Internal Revenue Code ("Code") on plans to which those sections of the Code
apply. To the extent that a separable part of the Plan is maintained for the
purpose of providing benefits in excess of those permitted by Section 415 of the
Code, that part of the Plan may be treated as an excess benefit plan within the
meaning of Section 3(36) of ERISA.
2. DEFINITIONS AND CAPITALIZED TERMS
---------------------------------
When used in this Plan document, the capitalized terms set forth in
alphabetical order herein have the definitions specified below unless the
context in which the term appears clearly requires a different meaning.
a. "ACCOUNT" refers to the bookkeeping entries established and
maintained by the Company or the Committee for the purpose of recording (i) the
amounts of Compensation deferred by an Employee under this Plan, (ii) any
hypothetical investment earnings, losses, interest accruals or administrative
expenses with respect to those amounts, and (iii) any distributions to an
Employee or Beneficiary.
b. "BENEFICIARY" refers to the person or entity selected to receive
any portion of an Employee's Account that has not been distributed from the Plan
at the time of the Employee's death. Such designation shall be on a form
provided or approved by the Plan Administrator. If an Employee fails to
designate a Beneficiary or no designated Beneficiary survives the Employee, the
Plan Administrator may direct payment of benefits to the following person or
persons in the order given below: the Employee's
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(i) spouse,
(ii) descendants, per stirpes,
(iii) parents,
(iv) brothers and sisters, or
(v) estate of the Participant.
c. "BOARD" or "BOARD OF DIRECTORS" refers to the Board of Directors
of the Company.
d. "CODE" refers to the Internal Revenue Code of 1986, as amended
from time to time.
e. "COMMITTEE" or "ADMINISTRATIVE COMMITTEE" refers to the officers
of the Company who act on behalf of the Company in discharging the Company's
duties as the Plan Administrator. Notwithstanding any other provision of the
Plan document, any member of the Committee or any other officer or employee of
the Company who exercises discretion or authority on behalf of the Company shall
not be a fiduciary of the Plan merely by virtue of his or her exercise of such
discretion or authority. The Board shall identify the Company officers who shall
serve as members of the Committee. Because this Plan is a "top hat" arrangement,
neither the Company nor the Committee shall be subject to the duties imposed by
the provisions of Part 4 of Title I of ERISA.
f. "COMPANY," "CORPORATION" or "EMPLOYER" refers to Callaway Golf
Company, a California corporation.
g. "COMPANY 401(K) PLAN" refers to the Callaway Golf Company defined
contribution plan intended to satisfy the requirements of Sections 401(a),
401(k), 401(m) and 414(i) of the Code. References to the Company 401(k) Plan or
to the Company Matching Contributions, below, are for purposes of measurement
only. Nothing in this Plan contemplates a transfer of contributions or assets
from the Company 401(k) Plan to this Plan or conditions participation in this
Plan upon an Employee's participation or nonparticipation in the Company 401(k)
Plan.
h. "COMPANY MATCHING CONTRIBUTIONS" refers to contributions, if any,
made by the Company or any Subsidiary pursuant to Section 5.6 of this Plan.
Said contributions may be measured with reference to matching contributions
under the Company 401(k) Plan.
i. "COMPENSATION" refers to an Employee's gross salary, including any
commissions, bonuses or awards, payable by the Company or any Subsidiary after
an Employee first becomes eligible to participate in this Plan and during the
period through which such participation continues. For the 1994 Plan Year, the
Compensation an Employee may defer under the Plan is limited to bonuses earned
in 1994 and determined after July 31, 1994.
j. "DISABLED" or "DISABILITY" refers to a physical or mental
condition of an Employee which (i) occurs after an Employee first defers
Compensation under this Plan, (ii) results from an injury, disease or disorder,
and (iii)
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renders the Employee totally and permanently incapable of continuing in his or
her customary employment with the Company or any Subsidiary. In determining
whether an Employee is disabled, the Committee may rely upon the conclusions of
any insurance carrier that has issued a policy of insurance covering the
Employee or upon the conclusions of any physician acceptable to the Committee.
An Employee will automatically satisfy the requirements under this Plan, with
respect to submission of evidence of disability, throughout the period that he
or she remains qualified for Social Security disability benefits. Any Employee
who believes that he or she is entitled to any advantage, benefit or other
consideration under the Plan as a result of being Disabled shall apply to the
Committee for such consideration and shall provide any evidence of Disability
which the Committee in its discretion may request in a manner consistent with
the Americans with Disabilities Act of 1990 and other relevant laws.
k. "EFFECTIVE DATE" refers to August 1, 1994 (with respect to
Compensation first earned, determined or payable after that date) contingent
upon approval of the Plan by the Board of Directors of the Company.
l. "EMPLOYEE" refers to any employee, within the meaning of Section
3121(d) of the Code, who is highly compensated or is a member of management
selected by the Board to participate in this Plan or in any other executive
deferred compensation arrangement maintained by the Company or any Subsidiary.
In determining whether an employee is described in the preceding sentence, an
employee shall be considered to be highly compensated if the employee's annual
Compensation exceeds $150,000 or such greater amount permitted to be considered
under Section 401(a)(17) of the Code. Where the Plan Administrator considers
appropriate in applying the provisions of this Plan, the term Employee shall
include only persons who are Participants or Inactive Participants under the
Plan. If the Board amends the Plan to allow participation by outside directors
or other independent contractors, the term Employee shall refer to such outside
director or independent contractor.
m. "ERISA" refers to the Employee Retirement Income Security Act of
1974, as amended from time to time.
n. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
o. "HARDSHIP" refers to an Employee's immediate and heavy financial
need caused by an unforeseeable emergency, as described in Treasury Regulations
Section 1.457-2(h)(4) and (5). In general, but without limitation, the Plan
Administrator shall approve a Hardship withdrawal from an Employee's Account if
the reduction does not exceed the amount needed to pay for the following
unreimbursed expenses: (i) medial expenses defined in Code Section 213(d) and
incurred (or to be incurred) during the calendar year by the Employee, or his or
her spouse or dependents (as described in Code Section 152) as a result of a
sudden or unexpected illness or accident; (ii) loss of a participant's property
as a result of a casualty or other extraordinary, unforeseeable circumstances
attributable to forces beyond the participant's control; and (iii) other costs
recognized by the
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<PAGE>
Plan Administrator to pose an immediate and heavy financial need on the Employee
as a result of an unforeseeable emergency.
p. "INACTIVE PARTICIPANT" refers to an Employee who deferred
Compensation under the Plan during a previous Plan Year but who does not defer
any Compensation payable during the current Plan Year.
q. "INSOLVENCY" shall exist if Callaway Golf Company is (a) unable to
pay its debts as they come due or (b) subject to a pending proceeding as a
debtor under the United States Bankruptcy Code.
r. "PARTICIPANT" refers to an eligible Employee who elects to defer
under the Plan part or all of his or her Compensation payable during the
current Plan Year.
s. "PLAN" shall mean this Callaway Golf Company Executive Deferred
Compensation Plan, as amended from time to time.
t. "PLAN ADMINISTRATOR" refers to the Company.
u. "PLAN YEAR" refers to the calendar year; however, the first Plan
Year shall be the period beginning August 1, 1994 and ending December 31, 1994.
v. "TERMINATION OF EMPLOYMENT" refers to an Employee's (i) separation
from service with the Company or any Subsidiary, (ii) refusal or failure to
return to work within five working days after the date requested by the Company
or any Subsidiary or (iii) failure to return to work at the conclusion of a
leave of absence. If the Board amends the Plan to allow participation by outside
directors or other independent contractors, the phrase Termination of Employment
shall refer to the cessation of all services rendered to the Company or any
Subsidiary by the outside director or independent contractor.
w. "TRUST" shall mean any trust or other vehicle established by the
Company to meet its obligations under the Plan.
x. "SUBSIDIARY" refers to any corporation, partnership, limited
liability company or other entity, domestic or foreign, in which the Company
directly or indirectly owns 50% or more of the total combined power to cast
votes in the election of directors, managing partners, managers or similar
officials, and which has been included within the coverage of the Plan by the
Board of Directors, in its sole discretion.
3. ELIGIBILITY
-----------
The Board or the Committee, in its sole discretion, may designate
from time to time those Employees of the Company or any Subsidiary who are
eligible to participate in the Plan for one or more Plan Years and the date upon
which each such Employee's participation may commence. All designated Employees
shall be notified by the Board or the Committee of their eligibility to
4
<PAGE>
participate. An Employee shall cease to be eligible when the Employee ceases
both (i) to be a member of a select group of management and (ii) to be highly
compensated as described in Section 2(k) above. Additionally, at the discretion
of the Board or Committee, an Employee shall not be eligible to participate in
the Plan (a) while the Employee has an unpaid loan from any tax-qualified
deferred compensation plan maintained by the Company or any Subsidiary or (b)
during the Plan Year immediately following the Plan Year in which the Employee
takes a Hardship withdrawal from the Plan. The Effective Date of any such
ineligibility shall be the first day of the Plan Year coinciding with or next
following the date on which the Board or Committee provides the Employee with
notice of revocation of eligibility. An Employee's eligibility to participate in
the Plan does not confer upon the Employee any right to any award, bonus or
remuneration of any kind.
4. DEFERRAL OF COMPENSATION
------------------------
4.1 ELECTION TO DEFER
-----------------
An Employee who is eligible to participate in the Plan may elect to
defer the receipt of Compensation by completing a deferral election form
provided or approved by the Company or Committee. Pursuant to the deferral
election form, an eligible Employee may elect to defer any whole percentage or
fixed dollar amount of his or her Compensation. An Employee who elects to
participate in the Plan must defer at least $2,000 in Compensation for each Plan
Year in which he or she remains eligible to participate.
4.2 DATE OF DEFERRAL
----------------
An eligible Employee must submit his or her deferral election form to
the Committee no later than the last day of the deferral election period. The
last day of the deferral election period shall be (a) the last day preceding the
calendar year in which the eligible Employee will render the services for which
he or she will receive any part of the Compensation (including bonus) payable to
the Employee during that year or (b) with respect to the deferral of
Compensation earned during 1994 Plan Year, not later than 30 days after the
Effective Date. At the time of the deferral election, the Employee must specify
the form in which distributions shall occur under the Plan.
4.3 MULTIPLE ELECTIONS
------------------
An election to defer Compensation shall be effective on the date an
eligible Employee delivers a completed deferral election to the Committee;
provided, however, that, if the eligible Employee delivers another properly
completed deferral election form to the Committee prior to the close of the
deferral election period described in Section 4.2, the deferral election on the
form bearing the latest date shall control. After the last day of the election
period, the controlling election made prior to the close of the period shall be
irrevocable.
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<PAGE>
4.4 ANNUAL ELECTIONS
----------------
In order to defer any portion of Compensation earned in any calendar
year after the 1994 calendar year, an eligible Employee must submit at least one
completed deferral election form during the 3-month period immediately preceding
the start of that calendar year.
4.5 NO DEFERRAL ADJUSTMENTS
-----------------------
After an annual election has taken effect for any Plan Year, a
Participant may not increase or decrease the percentage or amount of
Compensation to be deferred during that Plan Year; except that a Participant
must cease deferrals under the Plan to the extent that such cessation may
relieve the Participant of one or more Hardships without any withdrawals under
this Plan.
5. DEFERRED COMPENSATION ACCOUNTS
------------------------------
5.1 MAINTENANCE OF ACCOUNTS
-----------------------
The Plan Administrator shall maintain one or more bookkeeping
Accounts with respect to any Compensation deferred by an eligible Employee under
Section 4 above. The Plan Administrator shall credit the Account with the full
amount of Compensation deferred in any payroll period. If the Compensation
deferred is subject to federal or state employment taxes (e.g. taxes under the
Federal Insurance Contributions Act or Federal Unemployment Tax Act), said taxes
shall be withheld and deducted from a portion of the Employee's Compensation not
deferred under this Plan. A Participant or Inactive Participant shall be fully
vested at all times in amounts deferred under Section 4 above, as adjusted for
any earnings, losses, interest accruals, administrative expenses or
distributions as described below.
5.2 INVESTMENT ELECTIONS
--------------------
In accordance with rules, procedures and options established by the
Committee, a Participant shall have the right to express preferences with
respect to the investment of his or her Account, except for any period of time
during which the Company limits Account earnings to interest accruals under
Section 5.4 below. Although the Company shall have the hypothetical obligation
to follow the Participant's investment preferences, the Company, in its sole
discretion, may satisfy its hypothetical obligation from time to time in one or
both of the following ways. First, the Company may invest assets hypothetically
allocable to the Participant's Accounts in the specific investments, in the
specific amounts and for the specific periods requested by the Participant; and
the Company must credit or charge the Participant's Accounts with the earnings,
gains or losses resulting from such investments. Second, the Company may invest
assets hypothetically allocable to the Participant's Accounts in any manner, in
any amount and for any period of time which the Company in its sole discretion
may select; but the Company must credit or charge the Participant's Accounts
with the same earnings, gains or losses that the Participant would have incurred
if the Company had invested the assets
6
<PAGE>
hypothetically allocable to the Participant's Accounts in the specific
investments, in the specific amounts and for the specific periods requested by
the Participant. In accordance with procedures established by the Plan
Administrator, a Participant may change his or her investment preferences twice
each Plan Year. Such changes may be made, if at all, during the three-week
period immediately following the quarterly distribution of individual account
statements. If this Plan is determined to be subject to the fiduciary provisions
of Part 4 of Title I of ERISA, this Plan shall be treated as a Plan described in
Section 404(c) of ERISA and Title 29 of the Code of Federal Regulations Section
2550.404c-1, in which Plan fiduciaries may be relieved of liability for any
losses which are the direct and necessary result of investment instructions
given by a Participant or Beneficiary.
5.3 INVESTMENT EARNINGS OR LOSSES
-----------------------------
Except for any period of time during which the Company limits
bookkeeping Account earnings to hypothetical interest accruals under Section 5.4
below, any amounts credited to the bookkeeping Account of a Participant or
Inactive Participant as a result of the deferral of all or part of his or her
Compensation may increase or decrease as a result of the Company's investment of
such amounts during the Plan Year, as described in Section 5.2 above. A ratable
share of the Plan's hypothetical investment earnings or losses under this
Section 5.3 shall be credited to the bookkeeping Account of a Participant or
Inactive Participant, as determined in good faith by the Committee. At the sole
discretion of the Committee, for any Plan Year, the Committee may allocate to
the Participant's bookkeeping Account either (i) the full amount of the
Participant's share of the Plan's hypothetical investment earnings or losses or
(ii) the full amount of such share adjusted for any federal, state or local
income or employment tax consequences attributable to such hypothetical earnings
or losses. If the full amount of such hypothetical investment earnings or losses
are allocated to a Participant's Account, any federal, state or local income or
employment tax consequences attributable to such earnings or losses under this
Section 5.3 shall be borne by or inure to the benefit of the Company. The
Participant and his or her Beneficiary understand and agree that they assume all
risk in connection with any decrease in the value of the Compensation deferred
under the Plan and invested in accordance with these Sections 5.2 and 5.3.
5.4 INTEREST ACCRUALS
-----------------
During each Plan Year in which the Company does not invest an
Employee's deferred Compensation as described in Sections 5.2 and 5.3 above, any
amounts credited to the bookkeeping Account of a Participant or Inactive
Participant as a result of the deferral of all or part of his or her
Compensation shall accrue hypothetical interest compounded annually, as
consideration for the use or forbearance of money. The hypothetical accrual of
interest begins and the compounding of interest occurs on January 1 of each Plan
Year or, if later, the date on which an eligible Employee first defers
Compensation under the Plan. The rate at which interest accrues shall equal the
prime rate, plus one percent, offered to borrowers by a commercial bank in San
Diego, California on December 31st of the Plan Year during which the accrual
occurs. The Committee shall select the
7
<PAGE>
commercial bank before December 1 of the Plan Year during which the accrual
occurs. At the sole discretion of the Company, for any Plan Year (i) the full
amount of such hypothetical accrued interest may be allocated to a Participant's
Account or (ii) adjusted for any federal, state or local income or employment
tax consequences attributable to such interest, prior to allocating such
hypothetical interest to a Participant's Account. If the full amount of such
interest accruals are allocated to a Participant's Account, any federal, state
or local income or employment tax consequences attributable to interest accruals
under this Section 5.4 shall be borne by or inure to the benefit of the Company.
5.5 INVESTMENT OF UNPAID BALANCES
-----------------------------
The unpaid balance of all Accounts payable under the Plan shall
continue to be credited with the hypothetical investment earnings or losses
described in Sections 5.2 and 5.3 above or hypothetical accruals of interest as
described in Section 5.4 above.
5.6 COMPANY MATCHING CONTRIBUTIONS
------------------------------
a. At the end of any Plan Year for which an eligible Employee has
deferred Compensation under this Plan, the Committee may add to his or her
Accounts no more than the lesser of (1) $25,000 or (2) an amount equal to the
Company Matching Contribution which the Employee would have received if (i) the
Employee had contributed, to the Company 401(k) Plan, the amounts deferred under
this Plan and (ii) the limitations described in Section 1 above did not apply to
the Company 401(k) Plan. Nothing in the preceding sentence shall require the
Company to make Matching Contributions to the Account of any Participant in any
Plan Year or create a presumption that Matching Contributions allocated under
this Plan shall be determined with reference to Matching Contributions under the
Company 401(k) Plan. Once credited to an Employee's Accounts under this Plan,
the amounts described in the preceding sentence shall accrue the hypothetical
investment return described in Sections 5.2, 5.3, 5.4 and 5.5 above, and shall
be payable in accordance with Section 7 below.
b. Subject to the provisions of Section 5.6(c) below, an Employee
shall be fully vested in amounts allocated to his or her Account as described in
Section 5.6(a).
c. Without regard to the number of years of service an Employee has
completed with the Company or any Subsidiary and without regard to an Employee's
Disability, if an Employee separates from service with the Company or any
Subsidiary as a result of the Employee's gross misconduct, within the meaning of
Part 6 of Title I of ERISA, regarding group health continuation coverage, or if
the Employee engages in unlawful business competition with the Company or any of
its subsidiaries, the Employee shall forfeit all amounts allocated to his or her
bookkeeping Accounts under Section 5.6(a) above and all hypothetical earnings
thereon. Such forfeitures will be used to reduce the Company's obligation, if
any, to make Matching Contributions to other Participants or to defray the
expenses of administering the Plan.
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d. References to the Company 401(k) Plan or to Company Matching
Contributions are for purposes of measurement only. Nothing in this Plan
contemplates a transfer of contributions or assets from the Company 401(k) Plan
to this Plan or conditions participation in this Plan upon an Employee's
participation or nonparticipation in the Company 401(k) Plan.
5.7 COMPANY'S GENERAL ASSETS
------------------------
Participant understands and agrees that all Compensation deferred
under the Plan and all amounts credited to a Participant's Account under the
Plan (a) are the general assets of the Company, (b) may be used in the operation
of the Company's business or in any other manner permitted by law, and (c)
remain subject to the claims of the Company's creditors. Participant agrees, on
behalf of Participant and his or her Beneficiary, that (i) title to any amounts
deferred under the Plan or credited to a Participant's Account remains in the
Company and (ii) neither Participant nor his or her Beneficiary has any property
interests whatsoever in said amounts, except as general creditors of the
Company.
6. EFFECT ON EMPLOYEE BENEFITS
---------------------------
Amounts deferred under this Plan or distributed pursuant to the terms
of this Plan are not taken into account in the calculation of an Employee's
benefits under any employee pension or welfare benefit program or under any
other compensation practice maintained by the Company or any Subsidiary, except
to the extent provided in such program or practice.
7. PAYMENT OF DEFERRED COMPENSATION ACCOUNTS
-----------------------------------------
7.1 INCOME TAX OBLIGATIONS
----------------------
The Plan Administrator may make payments before they would otherwise
be due if, based on a change in the federal tax or revenue laws, a published
ruling or similar announcement issued by the Internal Revenue Service, a
regulation issued by the Secretary of the Treasury, a decision by a court of
competent jurisdiction involving a Participant, Inactive Participant or
Beneficiary or a closing agreement made under Section 7121 of the Internal
Revenue Code that is approved by the Internal Revenue Service and involves a
Participant, Inactive Participant or Beneficiary, the Plan Administrator
determines that the Participant, Inactive Participant or Beneficiary has or will
recognize income for federal income tax purposes with respect to amounts that
are or will be payable under the Plan before they are to be paid. If an Employee
is assessed federal, state or local income taxes by reason of, and computed on
the basis of, his or her undistributed deferred Compensation or undistributed
interest accruals, earnings or gains on his or her Account, the Employee shall
notify the Company in writing of such assessment and there shall be distributed,
within thirty (30) days following such notice, from the Employee's bookkeeping
Account deferred Compensation, accrued interest, earnings or gains in an amount
equal to such tax assessment, together with any interest due and penalties
assessed thereupon; provided however, that if the Company
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<PAGE>
determines that such assessment is improper, it may request that the Employee
contest the assessment, at the expense of the Company (which expense shall
include all costs of appeal and litigation, including legal and accounting fees,
and any additional interest assessed on the deficiency from and after the date
of the Employee's notice to the Company); and during the period such contest is
pending, the sums otherwise distributable pursuant to this Section 7.1 shall not
be distributed.
7.2 IN-SERVICE WITHDRAWALS
----------------------
A. WITHDRAWALS TO MEET HARDSHIPS
-----------------------------
If at any time following the first anniversary of participation in
the Plan, an Employee incurs a Hardship, described in Section 2(o), the Employee
may, by written notice to the Committee, request that all or any specified part
of his or her Account, but not less than $1,000 per withdrawal, be paid to the
Employee; and such distribution, if approved by the Company, shall be made in a
lump sum within thirty (30) days following the Company's receipt of such notice.
The Company shall have exclusive authority to determine whether to make a
Hardship distribution from an Employee's Account but shall not unreasonably deny
a request for such a distribution. The Company's decision shall be final and
binding on all parties. Any Hardship withdrawals from an Account shall reduce
the amount available for subsequent distributions from the Account, as the
Company in good faith may determine.
B. OTHER WITHDRAWALS
-----------------
Prior to the termination of his or her employment, a Participant may
not withdraw any funds from his or her Account, except as provided in Section
7.2.a. above. Notwithstanding the foregoing, the Plan Administrator may make
in-service distributions upon the termination of the Plan.
7.3 TERMINATION OF EMPLOYMENT
-------------------------
Upon termination of the employment of a Participant or Inactive
Participant, the Company shall distribute his or her Account under the Plan, as
elected by the Participant or Inactive Participant, in a lump sum or in five,
ten or fifteen substantially equal annual installments. The payment from the
Account shall occur or commence within 30 days after the first day of the
calendar year immediately following the calendar year in which the termination
of employment occurs.
7.4 DISABILITY
----------
Upon the Disability of a Participant or Inactive Participant prior to
termination of employment, the Company shall distribute his or her Account under
the Plan, as elected by the Participant or Inactive Participant, in a lump sum
or in five or more (but not more than 15) substantially equal annual
installments. The payment from the Account shall occur or commence within 30
days after the first
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day of the calendar year immediately following the calendar year in which the
Disability results in the Employee's termination of employment. Prior to the
death of the Participant or Inactive Participant, during any period in which a
Participant or Inactive Participant remains Disabled, he or she (or his or her
legal representative) may request Hardship withdrawals from any undistributed
portion of his or her Account. Any such Hardship withdrawals shall reduce the
amount available for subsequent distributions from the Account, as the Company
in good faith may determine.
7.5 DEATH PRIOR TO COMMENCEMENT OF DISTRIBUTIONS
--------------------------------------------
Upon the death of a Participant or Inactive Participant prior to the
commencement of any distribution under Sections 7.3. or 7.4 above, the Account
of such Participant or Inactive Participant shall be distributed to his or her
Beneficiary, in a lump sum or in five or more (but not more than 15)
substantially equal annual installments, as elected at the time of the deferral
of Compensation under the Plan. The payment from the Account shall occur or
commence within 30 days after the first day of the calendar year immediately
following the calendar year in which the death of the Participant or Inactive
Participant occurs. During the period between the death of the Participant or
Inactive Participant and the commencement of distributions to the Beneficiary,
the Beneficiary may request Hardship withdrawals from any undistributed portion
of his or her Account. Any such Hardship withdrawals shall reduce the amount
available for subsequent distributions from the Plan, as the Company in good
faith may determine.
7.6 DEATH AFTER COMMENCEMENT OF DISTRIBUTIONS
-----------------------------------------
Upon the death of a Participant or Inactive Participant after the
commencement of any distribution in accordance with Sections 7.3 or 7.4 above,
the balance remaining in the Account of such Participant or Inactive Participant
shall be distributed to his or her Beneficiary in accordance with the terms
elected by the Participant or Inactive Participant under Sections 7.3 or 7.4.
7.7 DEFAULT DISTRIBUTION
--------------------
The Company or any Subsidiary shall accelerate the payment of
Accounts under the Plan as a lump sum payment (i) if an Employee terminates
employment with the Company or any Subsidiary at a time when the value of his or
her Account is less than $10,000 or (ii) if an Employee who has elected
installment distributions, terminates employment with the Company or any of its
subsidiaries and works for a competitor of the Company. Additionally, if a
Participant or Inactive Participant fails to make an election offered under
Section 7.3 or 7.4 above, the Committee shall distribute the Account in a lump
sum within 30 days after the Account first becomes payable under the Plan.
7.8 WITHHOLDING AND OTHER TAX CONSEQUENCES
--------------------------------------
From any payments made under this Plan, the Company shall withhold
any taxes or other amounts which federal, state or local law requires the
Company
11
<PAGE>
to deduct, withhold and deposit. The Company's determination of the type and
amount of taxes to be withheld from any payment shall be final and binding on
all persons having or claiming to have an interest in this Plan or in any
Account under this Plan. Any adverse consequences incurred by a Participant or
Inactive Participant with respect to his or her participation in the Plan or in
connection with a distribution from or vesting under the Plan shall be the sole
responsibility of the Participant or Inactive Participant.
8. UNFUNDED STATUS OF PLAN
-----------------------
All amounts deferred under this Plan remain or become general assets
of the Company. All payments under this Plan shall come from the general assets
of the Company. The amounts credited to an Employee's Account are not secured by
any specific assets of the Company or any Subsidiary. This Plan shall not be
construed to require the Company or any Subsidiary to fund any of the benefits
provided hereunder or to establish a trust or purchase an insurance or other
product for such purpose. The Company or any Subsidiary may make such
arrangements as it desires to provide for the payment of benefits. Neither an
Employee, Participant or Inactive Participant nor his or her Beneficiary or
estate shall have any rights against the Company with respect to any portion of
any Account under the Plan except as general unsecured creditors nor against any
Subsidiary. No Employee, Participant, Inactive Participant, Beneficiary or
estate has an interest in any Account under this Plan until the Employee,
Participant, Inactive Participant, Beneficiary or estate has a right to receive
payment from the Account.
9. SUSPENSION OF PAYMENTS IN THE EVENT OF COMPANY'S INSOLVENCY
-----------------------------------------------------------
At all times during the continuance of any trust established in
connection with this Plan ("Trust"), if the Plan Administrator determines that
the Company's financial condition is likely to result in the suspension of
benefit payments from the Trust, the Plan Administrator shall advise
Participants, Inactive Participants and Beneficiaries that payments from the
Trust shall be suspended during the Company's insolvency. If the Trustee
subsequently resumes such payments, the Administrator shall advise Participants,
Inactive Participants and Beneficiaries that, if Trust assets are sufficient,
the first payment following such discontinuance shall include the aggregate
amount of all payments due to Participants, Inactive Participants and
Beneficiaries under the terms of the Plan for the period of such discontinuance,
less the aggregate amount of any payments made directly by the Company during
any period of discontinuance. At not time shall any insufficiency of Trust
assets relieve the Company of its obligation to make payments when due under the
Plan.
10. NON-ALIENATION OF BENEFITS
--------------------------
The interest of any Employee, Participant, Inactive Participant or
Beneficiary shall not be subject to sale, assignment, transfer, conveyance,
hypothecation, encumbrance, garnishment, attachment, anticipation, pledge,
alienation or other disposition prior to actual distribution from the Plan; and
any
12
<PAGE>
attempt to effect such disposition shall be void. No portion of any Account
shall, prior to receipt thereof, be subject to the debts, contracts,
liabilities, or engagements of any Employee, Participant, Inactive Participant,
or Beneficiary. Nothing in the preceding sentence shall prohibit the Company
from recovering from an Employee, Participant, Inactive Participant or
Beneficiary any payments to which he or she was not entitled under the Plan.
11. LIMITATION OF RIGHTS
--------------------
Nothing in this Plan document or in any related instrument shall
cause this Plan to be treated as a contract of employment within the meaning of
the Federal Arbitration Act, 9 U.S.C. 1 et seq., or otherwise shall be construed
as evidence of any agreement or understanding, express or implied, that the
Company or any Subsidiary (a) will employ any person in any particular position
or level of Compensation, (b) will offer any person initial or continued
participation or awards in any commission, bonus or other compensation program,
or (c) will continue any person's employment with the Company or any Subsidiary.
12. NOTICE UNDER WARN
-----------------
Any amounts paid (i) to any Employee under the Worker Adjustment and
Retraining Notification Act of 1988 ("WARN") or under any other laws regarding
termination of employment, or (ii) to any third party for the benefit of said
Employee or for the benefit of his or her dependents shall not be offset or
reduced by any amounts paid or determined to be payable by the Company to said
Employee or to his or her dependents under this Plan.
13. AMENDMENT OR TERMINATION OF PLAN
--------------------------------
a. The Board of Directors may modify, suspend or terminate the Plan
in any manner at any time. Such modification, suspension or termination may not
reduce any accrued vested benefits allocated to a Participant's Account under
this Plan, but may modify, suspend or terminate future accruals or allocations
under the Plan and may alter any other aspects of the Plan.
b. In modifying, suspending or terminating the Plan, or in taking
any other action with respect to the implementation, operation, maintenance or
administration of the Plan, the Board of Directors may act by a resolution of
the Board.
c. This Plan shall terminate immediately if an impartial arbitrator
or court of competent jurisdiction determines that this Plan is not exempt from
the fiduciary provisions of Part 4 of Title I of ERISA. The Plan shall terminate
as of the date it ceased to be exempt.
d. Upon termination of the Plan, the Plan Administrator shall
distribute all Accounts, as determined by the Plan Administrator (i) in a lump
sum to all Participants or (ii) in accordance with the method designated by
Participants at the time of their deferrals.
13
<PAGE>
14. ADMINISTRATIVE PROCEDURES AND DISPUTE RESOLUTION
------------------------------------------------
14.1 PLAN ADMINISTRATOR
------------------
The Plan Administrator shall be the Company. The Board of Directors
may establish an Administrative Committee composed of any persons, including
officers or employees of the Company, who act on behalf of the Company in
discharging the duties of the Company in administering the Plan. No
Administrative Committee member who is a full-time officer or employee of the
Company shall receive compensation with respect to his or her service on the
Administrative Committee. Any member of the Administrative Committee may resign
by delivering his or her written resignation to the Board of Directors of the
Company. The Board may remove any Committee member by providing him or her with
written notice of the removal.
14.2 COMMITTEE ORGANIZATION AND PROCEDURES
-------------------------------------
a. The President or the Secretary of the Company may designate a
chairperson from the members of the Administrative Committee. The Administrative
Committee may appoint its own secretary, who may or may not be a member of the
Administrative Committee and may or may not be a person distinct from the
Secretary of the Company. The Committee secretary shall have the primary
responsibility for keeping a record of all meetings and acts of the
Administrative Committee and shall have custody of all documents, the
preservation of which shall be necessary or convenient to the efficient
functioning of the Administrative Committee. All reports required by law may be
signed by the Chairperson or another member of the Administrative Committee, as
designated by the Chairperson, on behalf of the Company.
b. The Administrative Committee shall act by a majority of its
members in office and may adopt such rules and regulations as it deems desirable
for the conduct of its affairs. If the Company, the Plan, any Participant or
Inactive Participant is or becomes subject to the Exchange Act, the Securities
and Exchange Commission or any national or regional securities exchange, the
Company and the members of the Administrative Committee shall take any actions
which are necessary or desirable for the maintenance, modification or operation
of the Plan in accordance with applicable rules thereunder.
14.3 ADMINISTRATIVE AUTHORITY
------------------------
The Company and the Committee have discretionary authority to perform
all functions necessary or appropriate to the operation of the Plan, including
without limitation authority to (a) construe and interpret the provisions of the
Plan document and any related instrument and determine any question arising
under the Plan document or related instrument, or in connection with the
administration or operation thereof; (b) determine in its sole discretion all
facts and relevant considerations affecting the eligibility of any Employee to
be or become a
14
<PAGE>
Participant; (c) decide eligibility for, and the amount of, benefits for any
Participant, Inactive Participant or Beneficiary; (d) authorize and direct all
investments and disbursements under the Plan; and (e) employ and engage such
persons, counsel and agents and to obtain such administrative, clerical,
medical, legal, audit and actuarial services as it may deem necessary in
carrying out the provisions of the Plan. The Company shall be the
"administrator" as defined in Section 3(16)(A) of ERISA for purposes of the
reporting and disclosure requirements of ERISA and the Code. The President of
the Company, or in his or her absence, the Secretary of the Company shall be the
agent for service of process on the Plan.
14.4 EXPENSES
--------
Reasonable expenses which are necessary to operate and administer the
Plan, including but not limited to expenses incurred in connection with the
provisions of Section 14.3 shall be paid directly by the Company. Such expenses
may not be charged against Participant Accounts or reduce the amount of
Compensation, investment earnings or interest accruals allocated to Participant
Accounts under the Plan. All reasonable costs incurred by a Committee member in
the discharge of the Company's or his or her duties under the Plan shall be paid
or reimbursed by the Company. Such costs shall include fees or expenses arising
from the Committee's retention, with the consent of the Company, of any
attorneys, accountants, actuaries, consultants or recordkeepers required by the
Committee to discharge its duties under the Plan. Nothing in the preceding two
sentences or in any other provisions of the Plan shall require the Company to
pay or reimburse any Committee member or any other person for any cost,
liability, loss, fee or expense incurred by the Committee member or other person
in any dispute with the Company; nor may any Committee member or other person
reimburse himself, herself or itself, for any such cost, liability, loss, fee or
expense, from any Plan contributions or from the principal or income of any
investment or other vehicle established by the Company to assist it in meeting
its obligations under the Plan.
14.5 INSURANCE
---------
The Company may, but need not, obtain liability insurance to protect
its directors, officers, employees or representatives against liability in the
operation of the Plan. An Employee, Participant or Inactive Participant may use
his or her own funds to obtain any policy of insurance with respect to the
Company's payment of any amounts under the Plan.
14.6 CLAIMS PROCEDURE
----------------
a. A claim for benefits shall be considered filed only when
actually received by the Plan Administrator.
b. Any time a claim for benefits is wholly or partially denied, the
Participant, Inactive Participant or Beneficiary (hereinafter "Claimant") shall
be given written notice of such denial within 90 days after the claim is filed,
unless special circumstances require an extension of time for processing the
claim. If there is an extension, the Claimant shall be notified of the extension
and the reason for the
15
<PAGE>
extension within the initial 90 day period. The extension shall expire within
180 days after the claim is filed. Such notice will indicate the reason for
denial, the pertinent provisions of the Plan on which the denial is based, an
explanation of the claims appeal procedure set forth herein, and a description
of any additional material or information necessary to perfect the claim and an
explanation of why such material or information is necessary.
14.7 APPEAL PROCEDURES
-----------------
a. Any person who has had a claim for benefits denied by the Plan
Administrator, or is otherwise adversely affected by the action or inaction of
the Plan Administrator, shall have the right to request review by the Plan
Administrator. Such request must be in writing, and must be received by the Plan
Administrator within 60 days after such person receives notice of the Plan
Administrator's action. If written request for review is not made within such
60-day period, the Claimant shall forfeit his or her right to review. The
Claimant or a duly authorized representative of the Claimant may review all
pertinent documents and submit issues and comments in writing.
b. The Plan Administrator shall then review the claim. The Plan
Administrator may issue a written decision reaffirming, modifying or setting
aside its former action within 60 days after receipt of the written request for
review, or 120 days if special circumstances require an extension. The Claimant
shall be notified in writing of any such extension within 60 days following the
request for review. An original or copy of the decision shall be furnished to
the Claimant. The decision shall set forth the reasons and pertinent plan
provisions or relevant laws on which the decision rests. The decision shall be
final and binding upon the Claimant and the Plan Administrator and all other
persons having or claiming to have an interest in the Plan or in any Account
established under the Plan.
14.8 ARBITRATION
-----------
a. Any Participant's, Inactive Participant's or Beneficiary's claim
remaining unresolved after exhaustion of the procedures in Sections 14.6 and
14.7 (and to the extent permitted by law any dispute concerning any breach or
claimed breach of duty regarding the Plan) shall be settled solely by binding
arbitration at the Employer's principal place of business at the time of the
arbitration, in accordance with the Employment Claims Rules of the American
Arbitration Association. Judgment on any award rendered by the arbitrator may be
entered in any court having jurisdiction thereof. Each party to any dispute
regarding the Plan shall pay the fees and costs of presenting his, her or its
case in arbitration. All other costs of arbitration, including the costs of any
transcript of the proceedings, administrative fees, and the arbitrator's fees
shall be borne equally by the parties.
b. Except as otherwise specifically provided in this Plan, the
provisions of this Section 14.8 shall be absolutely exclusive for any and all
purposes and fully applicable to each and every dispute regarding the Plan
including any claim which, if pursued through any state or federal court or
administrative proceeding, would arise at law, in equity or pursuant to
statutory, regulatory or common law
16
<PAGE>
rules, regardless of whether such claim would arise in contract, tort or under
any other legal or equitable theory or basis. The arbitrator who hears or
decides any claim under the Plan shall have jurisdiction and authority to award
only compensatory damages to make whole a person or entity suffering foreseeable
economic damages; and apart from such foreseeable economic damages, the
arbitrator shall not have any authority or jurisdiction to make any award of any
kind including, without limitation, punitive damages, unforeseeable economic
damages, damages for pain and suffering or emotional distress, adverse tax
consequences or any other kind or form of damages. The remedy, if any, awarded
by such arbitrator shall be the sole and exclusive remedy for each and every
claim which is subject to arbitration pursuant to this Section 14.8. Any
limitations on the relief that can be awarded by the arbitrator are in no way
intended (i) to create rights or claims that can be asserted outside arbitration
or (ii) in any other way to reduce the exclusivity of arbitration as the sole
dispute resolution mechanism with respect to this Plan.
c. The Plan and the Company will be the necessary parties to any
action or proceeding involving the Plan. No person employed by the Company, no
Participant, Inactive Participant or Beneficiary or any other person having or
claiming to have an interest in the Plan will be entitled to any notice or
process, unless such person is a named party to the action or proceeding. In any
arbitration proceeding all relevant statutes of limitation shall apply. Any
final judgment or decision that may be entered in any such action or proceeding
will be binding and conclusive on all persons having or claiming to have any
interest in the Plan.
14.9 NOTICES
-------
Any notice from the Company or the Committee to an Employee,
Participant, Inactive Participant or Beneficiary regarding this Plan may be
addressed to the last known residence of said person as indicated in the records
of the Company. Any notice to, or any service of process upon, the Company or
the Committee with respect to this Plan may be addressed as follows:
Chief Financial Officer
Callaway Golf Company
2285 Rutherford Road
Carlsbad, California 92008
14.10 INDEMNIFICATION
---------------
To the extent permitted by law, the Company shall, and hereby does,
indemnify and hold harmless any director, officer or employee of the Company or
any Subsidiary who is or may be deemed to be responsible for the operation of
the Plan, from and against any and all losses, claims, damages or liabilities
(including attorneys' fees and amounts paid, with the approval of the Board, in
settlement of any claim) arising out of or resulting from a duty, act, omission
or decision with respect to the Plan, so long as such duty, act, omission or
decision does not involve gross negligence or willful misconduct on the part of
such director, officer or employee. Any individual so indemnified, shall, within
10 days after receipt of notice of any action, suit or proceeding, notify the
President of the Company (or in
17
<PAGE>
the President's absence, the Chief Financial Officer of the Company) and offer
in writing to the President (or Chief Financial Officer) the opportunity, at the
Company's expense, to handle and defend such action, suit or proceeding, and the
Company shall have the right, but not the obligation, to conduct the defense in
any such action, suit or proceeding. An individual's failure to give the
President (or Chief Financial Officer) such notice and opportunity shall relieve
the Company of any liability to said individual under this Section 14.10. The
Company may satisfy its obligations under this provision (in whole or in part)
by the purchase of insurance. Any payment by an insurance carrier to or on
behalf of such individual shall, to the extent of such payment, discharge any
obligation of the Company to the individual under this indemnification.
15. MISCELLANEOUS
-------------
15.1 ALTERNATIVE ACTS AND TIMES
--------------------------
If it becomes impossible or burdensome for the Company or the
Committee to perform a specific act at a specific time required by this Plan,
the Company or Committee may perform such alternative act which most nearly
carries out the intent and purpose of this Plan and may perform such required or
alternative act at a time as close as administratively feasible to the time
specified in this Plan for such performance. Without limiting the foregoing,
neither the Company nor the Committee shall accelerate or delay distributions,
except as expressly permitted herein, such as upon termination of the Plan.
15.2 MASCULINE AND FEMININE, SINGULAR AND PLURAL
-------------------------------------------
Whenever used herein, pronouns shall include both genders, and the
singular shall include the plural, and the plural shall include the singular,
whenever the context shall plainly so require.
15.3 GOVERNING LAW AND SEVERABILITY
------------------------------
This Plan shall be construed in accordance with the laws of the State
of California (exclusive of its provisions regarding conflicts of law) to the
extent that such laws are not preempted by ERISA or other federal laws. If any
provision of this Plan shall be held illegal or invalid for any reason, such
determination shall not affect the remaining provisions of this Plan which shall
be construed as if said illegal or invalid provision had never been included.
15.4 FACILITY OF PAYMENT
-------------------
If the Plan Administrator, in its sole discretion, determines that
any Employee, Participant, Inactive Participant or Beneficiary by reason of
infirmity, minority or other disability, is physically, mentally or legally
incapable of giving a valid receipt for any payment due him or her or is
incapable of handling his or her own affairs and if the Plan Administrator is
not aware of any legal representative appointed on his or her behalf, then the
Plan Administrator, in its sole discretion, may direct (a) payment to or for the
benefit of the Employee, Participant, Inactive
18
<PAGE>
Participant or Beneficiary; (b) payment to any person or institution maintaining
custody of the Employee, Participant, Inactive Participant or Beneficiary; or
(c) payment to any other person selected by the Plan Administrator to receive,
manage and disburse such payment for the benefit of the Employee, Participant,
Inactive Participant or Beneficiary. The receipt by any such person of any such
payment shall be a complete acquittance therefor; and any such payment, to the
extent thereof, shall discharge the liability of the Company, the Committee, and
the Plan for any amounts owed to the Employee, Participant, Inactive Participant
or Beneficiary hereunder. In the event of any controversy or uncertainty
regarding who should receive or whom the Plan Administrator should select to
receive any payment under this Plan, the Plan Administrator may seek instruction
from a court of proper jurisdiction or may place the payment (or entire Account)
into such court with final distribution to be determined by such court.
15.5 CORRECTION OF ERRORS
--------------------
Any crediting of Compensation or interest accruals to the Account of
any Employee, Participant, Inactive Participant or Beneficiary under a mistake
of fact or law shall be returned to the Company. If an Employee, Participant,
Inactive Participant or Beneficiary in an application for a benefit or in
response to any request by the Company or the Plan Administrator for
information, makes any erroneous statement, omits any material fact, or fails to
correct any information previously furnished incorrectly to the Company or the
Plan Administrator, or if the Plan Administrator makes an error in determining
the amount payable to an Employee, Participant, Inactive Participant or
Beneficiary, the Company or the Plan Administrator may correct is error and
adjust any payment on the basis of correct facts. The amount of any overpayment
or underpayment may be deducted from or added to the next succeeding payments,
as directed by the Plan Administrator. The Plan Administrator and the Company
reserve the right to maintain any action, suit or proceeding to recover any
amounts improperly or incorrectly paid to any person under the Plan or in
settlement of a claim or satisfaction of a judgment involving the Plan.
15.6 MISSING PERSONS
---------------
In the event a distribution of part or all of an Account is required
to be made from the Plan to an Employee, Participant, Inactive Participant or
Beneficiary, and such person cannot be located, the relevant portion of the
Account shall escheat in accordance with the laws of the State of California. If
the affected Employee, Participant, Inactive Participant or Beneficiary later
contacts the Company, his or her portion of the Account shall be reinstated and
distributed as soon as administratively feasible. The Company shall reinstate
the amount forfeited by reclaiming such amount from the State of California, and
allocating it to the Account of the affected Employee, Participant, Inactive
Participant or Beneficiary. Prior to forfeiting any Account, the Company shall
attempt to contact the Employee, Participant, Inactive Participant or
Beneficiary by return receipt mail (or other carrier) at his or her last known
address according to the Company's records, and, where practical, by
letter-forwarding services offered through the Internal Revenue Service,
19
<PAGE>
or the Social Security Administration, or such other means as the Plan
Administrator deems appropriate.
15.7 EMPLOYEE ACKNOWLEDGMENT
-----------------------
By executing this Plan document or related enrollment or election
form, the undersigned Employee hereby acknowledges that Employee has read and
understood this Plan document. Employee also acknowledges that Employee
knowingly and voluntarily agrees to be bound by the provisions of the Plan, as
amended from time to time, including those Plan provisions which require the
resolution of disputes by binding out-of-court arbitration. Employee further
acknowledges that Employee has had the opportunity to consult with counsel of
Employee's own choosing with respect to all of the financial, tax and legal
consequences of participating in this Plan, including in particular the effects
of participation on any community property or other interest which the Employee
and his or her spouse, if any, may have in the Compensation deferred and any
amounts allocated to the Employee's Account under the Plan.
IN WITNESS WHEREOF, each of the undersigned has executed this
document on the date set forth adjacent to his or her signature below.
CALLAWAY GOLF COMPANY
A California Corporation
Dated:__________ By______________________________
David Rane
Chief Financial Officer
EMPLOYEE
Dated: __________ ________________________________
Employee's Signature
________________________________
Employee's Printed Name
20
<PAGE>
EXHIBIT 10.3
------------
CALLAWAY GOLF COMPANY
1998 EXECUTIVE NON-DISCRETIONARY BONUS PLAN
(EFFECTIVE JANUARY 1, 1998)
1. PURPOSE
The 1998 Executive Non-Discretionary Plan (the "Non-Discretionary
Plan") is designed to promote the interests of Callaway Golf Company (the
"Company") and its shareholders by providing incentive to participating officers
of the Company and its subsidiaries to make significant contributions to the
performance of the Company and its subsidiaries and to reward outstanding
performance on the part of those individuals whose decisions and actions most
significantly affect the growth, profitability and efficient operation of the
Company and its subsidiaries. The Non-Discretionary Plan is intended to satisfy
the requirements of Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code").
2. ADMINISTRATION
The Non-Discretionary Plan shall be administered by a special
subcommittee of the Executive and Compensation Committee of the Board of
Directors (the "Executive Non-Discretionary Bonus Plan Subcommittee"), which
will at all times be constituted to meet the "outside director" requirements of
Section 162(m) of the Code. The Executive Non-Discretionary Bonus Plan
Subcommittee shall have the power to make rules and regulations for the
administration of the Non-Discretionary Plan. In making any determination under
the Non-Discretionary Plan, the Executive Non-Discretionary Bonus Plan
Subcommittee shall be entitled to rely on reports, opinions or statements of
officers or employees of the Company and its affiliates as well as those of
counsel, public accountants and other professional or expert persons. The
interpretations and decisions of the Executive Non-Discretionary Bonus Plan
Subcommittee with regard to the Non-Discretionary Plan shall be final and
conclusive. No member of the Executive Non-Discretionary Bonus Plan Subcommittee
shall be liable for any action or determination made in good faith with respect
to the Non-Discretionary Plan.
3. ELIGIBILITY
The Executive Non-Discretionary Bonus Plan Subcommittee will
initially designate 24 officers of the Company and its subsidiaries
("Participants") as eligible to participate in the Non-Discretionary Plan for
1998. Additional persons may be added as Participants in the discretion of the
Executive Non-Discretionary Bonus Plan Subcommittee.
<PAGE>
4. DETERMINATION
The Executive Non-Discretionary Bonus Plan Subcommittee will
designate performance targets under the Non-Discretionary Plan within the time
period required by the Department of Treasury Regulations adopted to implement
Section 162(m) of the Code ("Regulations") for each year. The performance
targets will be based on achievement of specified levels of pre-tax earnings.
The performance targets will be set by the Executive Non-Discretionary Bonus
Plan Subcommittee based on the prior year's performance and other relevant
factors. The performance targets designated by the Executive Non-Discretionary
Bonus Plan Subcommittee may differ for each Participant in the Non-Discretionary
Plan. The maximum bonus amount payable under the Non-Discretionary Plan to any
Participant shall not exceed $2,000,000 for any year. The Executive
Non-Discretionary Bonus Plan Subcommittee may, in its sole discretion, establish
maximum bonus amounts payable to individual Participants under the
Non-Discretionary Plan of less than $2,000,000 for any year.
5. CERTIFICATION OF ACHIEVEMENT OF PERFORMANCE TARGETS
Provided that the Code and/or Regulations so require, the
Executive Non-Discretionary Bonus Plan Subcommittee shall, prior to any payment
under the Non-Discretionary Plan, certify in writing the extent, if any, of
achievement of performance targets for each Participant. For purposes of this
provision, and for so long as the Code and/or Regulations permit, the approved
minutes of the Executive Non-Discretionary Bonus Plan Subcommittee meeting in
which the certification is made may be treated as a written certification.
6. WITHHOLDING TAXES
The Company shall have the right to deduct from all awards granted
under the Non-Discretionary Plan any federal, state, local or foreign taxes
required by law to be withheld with respect to such awards.
7. OTHER BENEFITS
In addition to awards granted to Participants under the
Non-Discretionary Plan, discretionary bonuses may be awarded by the Executive
and Compensation Committee under the discretionary portion of the Company's
Executive Bonus Pool, pursuant to contract, or as otherwise determined by the
Executive and Compensation Committee. Awards granted to Participants under the
Non-Discretionary Plan shall not be considered as part of a Participant's salary
or used for the calculation of any other pay, allowance, pension or other
benefit unless otherwise permitted by the other benefit plans provided by the
Company or any of its subsidiaries, or as required by law or by contractual
obligations of the Company or any of its subsidiaries.
2
<PAGE>
8. AMENDMENT OR TERMINATION
The Executive Non-Discretionary Bonus Plan Subcommittee may from
time to time amend the Non-Discretionary Plan in any respect or terminate or
suspend the Non-Discretionary Plan at any time in whole or in part, provided
that, if shareholder approval of an amendment is required for continued
compliance with the requirements of Section 162(m) of the Code, such amendment
shall be subject to obtaining the required shareholder approval.
9. NO ASSIGNMENT
Except as expressly authorized by the Executive Non-Discretionary
Bonus Plan Subcommittee, the rights under the Non-Discretionary Plan, including
without limitation the rights to receive any payment, shall not be sold,
assigned, transferred, encumbered or hypothecated by a Participant (except by
testamentary disposition or intestate succession), and during the lifetime of
any Participant, any payment shall be payable only to such Participant.
10. NO RIGHT TO CONTINUED EMPLOYMENT
Nothing in the Non-Discretionary Plan shall confer upon any
Participant any right to continue in the employ of the Company or any of its
subsidiaries or shall interfere with or restrict in any way the right of the
Company or any of its subsidiaries to discharge a Participant at any time for
any reason whatsoever, with or without cause. If any Participant ceases to be
employed by the Company or any of its subsidiaries, any unpaid bonuses shall be
paid in accordance with the Participant's termination agreement, if any, and as
otherwise determined by the Executive Non-Discretionary Bonus Plan Subcommittee.
11. COSTS AND EXPENSES
The costs and expenses of administering the Non-Discretionary Plan
shall be borne by the Company and not charged to any award nor to any
Participant receiving an award under the Non-Discretionary Plan.
12. FUNDING
The Non-Discretionary Plan shall be unfunded. Neither the Company
nor any of its subsidiaries shall be required to establish any special or
separate fund or to make any other segregation of assets to assure the payment
of any award under the Non-Discretionary Plan.
13. SEPARABILITY
If any of the terms or provisions of the Non-Discretionary Plan
conflict with
3
<PAGE>
the requirements of Section 162(m) of the Code, the Regulations or applicable
law, then such terms or provisions shall be deemed inoperative to the extent
necessary to avoid the conflict with the requirements of Section 162(m) of the
Code, the Regulations or applicable law without invalidating the remaining
provisions hereof. With respect to Section 162(m) of the Code, if the Non-
Discretionary Plan does not contain any provision required to be included herein
under Section 162(m) of the Code or the Regulations, such provisions shall be
deemed to be incorporated herein with the same force and effect as if such
provision had been set out at length herein.
14. TERM
The Non-Discretionary Plan shall be effective as of the first day
of the Company's 1998 fiscal year, subject to shareholder approval, and shall
continue for a period until the first shareholder meeting that occurs in the
fifth year following the year in which the shareholders of the Company
previously approved this Non-Discretionary Plan, unless amended or terminated by
the Company (see Amendment or Termination above), subject to any future
shareholder re-approval requirements of the Code and the Regulations.
15. GOVERNING LAW
The validity, construction and effect of the Non-Discretionary
Plan and any action taken or relating to the Non-Discretionary Plan shall be
determined in accordance with the laws of the State of California and applicable
federal law.
4
<PAGE>
EXHIBIT 11.1
CALLAWAY GOLF COMPANY
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three months ended March 31,
-------------------------------------
1997 1996
---- ----
(in thousands, except per share data)
<S> <C> <C>
Primary earnings per share computation:
- ---------------------------------------
Net Income $24,466 $19,455
======= =======
Weighted average shares outstanding 68,016 66,082
Dilutive Options 3,747 3,513
------- -------
Common equivalent shares 71,763 69,595
======= =======
Primary earnings per share:
Net Income $.34 $.28
==== ====
Fully diluted earnings per share computation:
- ---------------------------------------------
Net Income $24,466 $19,455
======= =======
Weighted average shares outstanding 68,016 66,082
Dilutive options 3,745 3,953
--------- ---------
Common equivalent shares 71,761 70,035
======== ========
Fully diluted earnings per share:
Net Income $.34 $.28
==== ====
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 113,623
<SECURITIES> 0
<RECEIVABLES> 103,669
<ALLOWANCES> 6,360
<INVENTORY> 101,395
<CURRENT-ASSETS> 342,368
<PP&E> 136,637
<DEPRECIATION> 37,277
<TOTAL-ASSETS> 466,230
<CURRENT-LIABILITIES> 89,208
<BONDS> 0
0
0
<COMMON> 728
<OTHER-SE> 370,545
<TOTAL-LIABILITY-AND-EQUITY> 466,230
<SALES> 169,073
<TOTAL-REVENUES> 169,073
<CGS> 82,071
<TOTAL-COSTS> 82,071
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> 39,599
<INCOME-TAX> 15,133
<INCOME-CONTINUING> 24,466
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,466
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.34
</TABLE>
