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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock New York Stock Exchange
Preferred Share Purchase Rights
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ___
As of February 24, 1998, the aggregate market value of the Registrant's
Common Stock held by nonaffiliates of the Registrant was $2,403,960,000 based on
the closing sales price of the Registrant's Common Stock as reported in the
consolidated transactions reporting system.
As of February 24, 1998, the number of shares of the Registrant's Common
Stock outstanding was 74,680,325, and there were no shares of the Registrant's
Preferred Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Parts I, II and IV incorporate certain information by reference from
Registrant's Annual Report to shareholders for the fiscal year ended December
31, 1997.
Part III incorporates certain information by reference from the
Registrant's definitive proxy statement for the annual meeting of shareholders
to be held on April 23, 1998 which proxy statement was filed on March 16, 1998.
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Note: Statements used in this Annual Report on Form 10-K and the information
incorporated herein by reference that relate to future plans, events, financial
results or performance are forward-looking statements as defined under the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
certain risks and uncertainties which could cause actual results to differ
materially from those anticipated. Readers are cautioned not to place undue
reliance on these forward-looking statements which speak only as of the date
hereof. The Company undertakes no obligation to republish revised forward-
looking statements to reflect events or circumstances after the date hereof or
to reflect the occurrence of unanticipated events. Readers are also urged to
carefully review and consider the various disclosures made by the Company which
describe certain factors which affect the Company's business, including the
disclosures set forth in Item 1 of this Report and the discussion incorporated
by reference in Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" under the caption "Certain
Factors Affecting Callaway Golf," as well as the Company's periodic reports on
Forms 10-Q and 8-K filed with the Securities and Exchange Commission.
PART I
Item 1. Business.
Callaway Golf Company (the "Company" or "Callaway Golf") is a California
corporation formed in 1982 and has the following directly wholly-owned operating
subsidiaries: Callaway Golf Sales Company, Callaway Golf Ball Company, Odyssey
Golf, Inc., CGV, Inc., Callaway Golf Europe Ltd. (formerly Callaway Golf (UK)
Limited), ERC International Company, Callaway Golf Korea, Ltd. and Callaway Golf
(Germany) GmbH. The Company designs, develops, manufactures and markets high
quality, innovative golf clubs. The Company's golf clubs are sold at premium
prices to both average and skilled golfers on the basis of performance, ease of
use and appearance. Callaway Golf's primary products, most of which incorporate
the Company's S2H2(R) design concept, currently include Biggest Big Bertha(TM)
Titanium Drivers, Great Big Bertha(R) Titanium Drivers and Fairway Woods, Big
Bertha(R) Metal Woods with the War Bird(R) soleplate, Great Big Bertha(R)
Tungsten.Titanium(TM) Irons, Big Bertha(R) X-12 Irons, Big Bertha(R) Tour Series
Wedges and various putters, including the Bobby Jones(R) Series Putters.
In August 1997, the Company consummated its acquisition of substantially
all of the assets and certain liabilities of Odyssey Sports, Inc., by one of its
wholly-owned subsidiaries, Odyssey Golf, Inc. ("Odyssey"), subject to certain
adjustments as of the time of closing. Odyssey manufactures and markets the
Odyssey(R) line of putters and wedges with Stronomic(R) and Lyconite(TM) face
inserts.
Products
The following table sets forth the contribution to net sales attributable
to the product groups for the periods indicated (dollars in thousands).
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Metal Woods $544,258 64% $479,127 71% $382,740 69%
Irons 233,977 28% 168,576 25% 140,620 25%
Putters, accessories
and other* 64,692 8% 30,809 4% 29,927 6%
---------------------------------------------------------------------------
Net Sales $842,927 100% $678,512 100% $553,287 100%
===========================================================================
</TABLE>
* 1997 net sales include $20.5 million of Odyssey(R) putters and wedges.
The Company believes that the growth rate, if any, in the world-wide golf
equipment market has been modest for the past several years, and this trend is
likely to continue. In addition, recent economic turmoil in Southeast Asia and
Korea has caused a significant contraction in the retail golf markets in these
countries and had an adverse effect on the Company's sales and results of
operations for the fourth quarter of 1997. The Company expects this situation to
continue until economic stability returns to these areas. Potential economic
disruption from this turmoil in other areas, such as Japan and elsewhere in
Asia, also could adversely impact the Company's future sales and results of
operations. Additionally, although demand for the Company's products was
generally strong during 1997, no
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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 rates in sales.
The Company experienced an increase in its cost of goods sold during the
third and fourth quarters of 1997 compared to historical levels, primarily due
to a general increase in sales of irons, which have lower margins than metal
woods, and an increase in sales to Japan, an area which has the lowest margins
of all the areas in which the Company sells. In addition, the current operations
of Odyssey have lower margins than the Company has experienced historically. If
sales of irons or Odyssey(R) putters as a percentage of the Company's total
sales remain at these levels or continue to rise and margins do not improve, the
recent increase in cost of goods sold over historical levels will continue.
Metal Woods
Biggest Big Bertha(TM) Titanium Driver
In January 1997, the Company introduced Biggest Big Bertha(TM) Titanium
Drivers. Biggest Big Bertha(TM) Drivers have titanium clubheads which are
approximately 15% larger than Great Big Bertha(R) Driver clubheads described
below, and ultralight graphite shafts which are longer than Great Big Bertha(R)
Driver shafts. Although larger and longer, Biggest Big Bertha(TM) Drivers are
lighter in overall weight than Great Big Bertha(R) Drivers. Biggest Big
Bertha(TM) Drivers incorporate the S2H2(R) design concept, the War Bird(R)
soleplate (which features a deep dish on either side of the central facet
running rearward from the clubface) and an advanced internal weighting system
which increases the degree of perimeter weighting of the titanium clubhead. The
Company offers Biggest Big Bertha(TM) Drivers in lofts ranging from 6 to 12
degrees. It is expected that this product line will be offered as a driver only.
Deliveries of significant quantities of this new product commenced in January
1997.
Great Big Bertha(R) Titanium Metal Woods
The Company offers Great Big Bertha(R) Titanium Drivers, which have a
titanium clubhead and a lightweight graphite shaft, in lofts ranging from 6.5 to
12 degrees. The head is 25% larger and the overall weight is 10% lighter than
the Big Bertha(R) War Bird(R) Driver. The drivers incorporate the S2H2(R)
concept as well as the War Bird(R) soleplate. Deliveries of significant
quantities of this product commenced in 1995. In 1996, the Company introduced
and began delivery of Great Big Bertha(R) Fairway Woods (numbers 2, 3, strong 3,
4, 5, 7 and 9). These fairway woods have titanium clubheads and also incorporate
the S2H2(R) concept, the War Bird(R) soleplate and lightweight graphite shafts.
Big Bertha(R) Metal Woods with the War Bird(R) Soleplate
The Company offers Big Bertha(R) War Bird(R) Drivers in lofts ranging from
8 to 12 degrees with graphite, steel or titanium shafts. The Company also offers
Big Bertha(R) War Bird(R) Fairway Woods (numbers 2, 3, strong 3, 4, strong 4, 5,
HeavenWood(R), Divine Nine(R) and Ely Would(R)). The Company introduced the
HeavenWood(R), Divine Nine(R) and Ely Would(R) metal woods in 1992, 1993 and
1995, respectively. All of these clubs incorporate the War Bird(R) soleplate. In
1996, the Company introduced RCH Series 96(TM) graphite shafts for its Big
Bertha(R) War Bird(R) Metal Woods. These shafts are lighter and more responsive.
Irons
Big Bertha(R) X-12 Irons
In January 1998, the Company introduced and began delivery of significant
quantities of Big Bertha(R) X-12 Irons. Big Bertha(R) X-12 Irons incorporate a
low center of gravity which helps get the ball airborne more easily with the
proper trajectory and spin. The varied 360-degree undercut channel creates a
thinner profile and less drag and the narrower sole keeps the center of gravity
low and reduces turf drag. The unique multi-layer design in the cavity allows
for increased forgiveness on off-center hits. These new irons are offered in 1
through 9, and pitching, approach, sand, and lob wedges, with either graphite or
steel shafts.
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Great Big Bertha(R) Tungsten.Titanium(TM) Irons
In January 1997, the Company introduced Great Big Bertha(R)
Tungsten.Titanium(TM) Irons. Great Big Bertha(R) Tungsten.Titanium(TM) Irons
incorporate the same core design features as Big Bertha(R) Irons, but have a
slightly larger titanium clubhead with a specially designed tungsten inset to
concentrate weight low and deep in the clubhead. These design features are
intended to give these irons a lower and deeper sweet-spot compared to other
titanium irons. The Company offers Great Big Bertha(R) Tungsten.Titanium(TM)
Irons 1 through 9, and pitching, approach, sand and lob wedges, with either
graphite or steel shafts. Deliveries of significant quantities of this product
commenced in April 1997.
Big Bertha(R) Irons, Big Bertha Gold(TM) Irons, Big Bertha(R) Tour Series
Wedges and Big Bertha Gold(TM) Tour Series Wedges
During 1997, the Company offered Big Bertha(R) Irons 1 through 9, and
pitching, approach, sand, and lob wedges, with either graphite, steel or
titanium shafts. Also during 1997, the Company offered Big Bertha Gold(TM)
Irons, cast of aluminum bronze and including all of the design features of Big
Bertha(R) Irons. The Company no longer offers as a current product its Big
Bertha(R) Irons and Big Bertha Gold(TM) Irons.
In 1996, the Company introduced and began delivery of Big Bertha(R) Tour
Series Wedges (pitching, approach, sand and lob wedges) with several new
features geared toward enhancing playability for middle-to low-handicap amateurs
as well as tour professionals. In January 1997, the Company also introduced Big
Bertha Gold(TM) Tour Series Wedges.
Putters
The Company has two lines of putters. As mentioned previously, the Company
acquired substantially all of the assets and certain liabilities of Odyssey
Sports, Inc. in August 1997 through its wholly-owned subsidiary, Odyssey.
Odyssey produces putters incorporating a soft, sensitive black trapezoidal
Stronomic(R) insert designed to provide better feel and forgiveness. Odyssey
produces Rossie(TM) mallets and blade style putters in both stainless steel and
bronze. The Company also has a Callaway Golf(R) line of steel and graphite
shafted putters, some of which incorporate the S2H2(R) concept, including the
Tuttle(R) and the Tuttle(R) II putters, the Big Bertha(R) War Bird(R) putter,
and the steel shafted Big Bertha(R) Blade putter. In 1996, the Company
introduced and commenced deliveries of the new Bobby Jones(R) line of putters,
consisting of three styles of precision-machined putters with a double-radius
bend, offset shaft and in 1997, additional styles of the Bobby Jones(R) line of
putters were introduced. The Bobby Jones(R) line is available in stainless steel
and aluminum bronze.
Accessories
In addition to its golf clubs, Callaway Golf offers golf-related equipment
and supplies manufactured by other companies bearing the Callaway(R) logo,
including golf bags, travel bags, head covers, hats, umbrellas and other
accessories.
Licensing
Through a licensing arrangement with Jonesheirs, Inc., Callaway Golf
obtained the exclusive, worldwide rights to the use of the Bobby Jones(R) name
for golf clubs and golf-related accessories through 2010. The Company receives a
royalty from the Hickey-Freeman Company on sales of Bobby Jones(R) Sportswear
and certain other products.
Callaway Golf also has an exclusive licensing agreement with Nordstrom,
Inc., under which Nordstrom, Inc. designs, produces and sells apparel at its own
expense under the "Callaway Golf Apparel by Nordstrom" label. The licensing
agreement was recently extended through 2004. The line includes men's and
women's golf apparel, golf footwear and certain other products and is sold at
Nordstrom stores throughout the United States.
In 1997, Callaway Golf and Bausch & Lomb Incorporated signed a multi-year
agreement to jointly develop and globally market an exclusive line of premium
sunglasses specifically for golf enthusiasts. The sunglasses, to be
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co-branded with the Ray-Ban(R) and Callaway Golf(R) names, will be marketed in
the second half of 1998 or early 1999 at golf pro shops and other retailers of
premium golf equipment, better sporting goods and better department stores,
sunglass specialty shops and optical channels.
Product Design and Development
Product design at Callaway Golf is a result of the integrated efforts of
its product development, manufacturing and sales departments, all of which work
together to generate new ideas for golf equipment. The Company has not limited
itself in its research efforts by trying to duplicate designs that are
traditional or conventional and believes it has created an environment in which
new ideas are valued and explored. The Company's research and development
expenses were $30.3 million, $16.2 million and $8.6 million during 1997, 1996,
and 1995, respectively. The Company intends to continue to invest substantial
amounts in its research and development activities in 1998 and beyond. In
addition to development of new golf equipment, these investments are expected to
include, among others, significant expenditures in support of Callaway Golf Ball
Company's efforts to develop and market a new golf ball product, as well as the
continued enhancement of, and the development of additional applications for,
the Company's Sir Isaac Performance System(TM), a high-tech evaluation system
which permits golfers to compare the performance of different golf clubs and
balls.
In January 1997, the Company opened Callaway Golf Performance Centers which
feature the Sir Isaac Performance System(TM) at Walt Disney World in Orlando,
Florida, and at the Pebble Beach Golf Resort in Carmel, California. In
connection with these arrangements, the Company also received certain exclusive
promotional rights at these popular resorts. A third Callaway Golf Performance
Center opened in October 1997 in Las Vegas, Nevada.
Callaway Golf has the ability to build and modify clubhead designs by using
computer aided design/computer aided manufacturing ("CAD/CAM") software and
complete numerical control ("CNC") milling equipment. CAD/CAM software enables
designers to develop computer models of new club designs. CNC milling equipment
converts the digital output from CAD/CAM computer models into physical metal
models produced by an electronically-controlled milling machine. Callaway Golf
uses this software and equipment to facilitate the rapid design and production
of physical models of clubheads, as well as casting tools for producing
prototype clubheads for testing. In 1996, the Company purchased two induction
furnaces (for casting ferrous and non-ferrous alloys) and one cold-walled
furnace (for casting titanium, nickel and cobalt alloys). The Company has
installed these furnaces in a state-of-the-art research facility at the
Company's headquarters in Carlsbad, California, which enables it to cast its own
prototype clubheads on-site, as well as study new production processes and
techniques. This new development facility became operational in June 1997 for
stainless steel and August 1997 for Titanium. The Company believes that this on-
site casting capability will further facilitate the rapid design and development
of prototype clubheads.
The Company believes that the introduction of new, innovative golf
equipment will be important to its future success. As a result, the Company
faces certain risks associated with such a strategy. For example, new models and
basic design changes in golf equipment are frequently met with consumer
rejection. In addition, prior successful designs may be cannibalized or rendered
obsolete within a relatively short period of time as new products are introduced
into the marketplace. New designs should generally 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.
The rapid introduction of new products by the Company can result in close-
outs of existing inventories, both at the Company and at retailers. So far, the
Company has managed such close-outs so as to avoid any material negative impact
on the Company's operations. There can be no assurance that the Company will
always be able to do so.
As the Company introduces new products, it plans its manufacturing capacity
based upon the forecasted demand for such new products. Actual demand for such
new products may exceed forecasted demand. The Company's
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unique product designs often require sophisticated manufacturing techniques,
which can limit the Company's ability to quickly expand its manufacturing
capacity to meet the full demand for new products. If the Company is unable to
produce sufficient quantities of new products in time to fulfill actual demand,
especially during the Company's traditionally busy second and third quarters, it
could limit the Company's sales and adversely affect its financial performance.
In 1996, the Company formed Callaway Golf Ball Company, a wholly-owned
subsidiary of the Company, for the purpose of designing, manufacturing and
selling golf balls. The Company has previously licensed the manufacture and
distribution of a golf ball product in Japan and Korea. The Company also
distributed a golf ball under the trademark "Bobby Jones." These golf ball
ventures were not commercially successful.
The Company has determined that Callaway Golf Ball Company will enter the
golf ball business by developing a new product in a new plant to be constructed
just for this purpose. The successful implementation of the Company's strategy
could be adversely affected by various risks, including, among others, delays in
product development, construction delays and unanticipated costs. There can be
no assurance if and when a successful golf ball product will be developed or
that the Company's investments will ultimately be realized.
The Company's golf ball business is in the early stages of development. It
is expected, however, that it will have a negative impact on the Company's
future cash flows and results of 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 introductions, also apply to the
golf ball business. In addition, the golf ball business is highly competitive
with a number of well-established and well-financed competitors. 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.
Sales and Marketing
Sales for Distribution in the United States
Approximately 65%, 68% and 66% of the Company's net sales were derived from
sales for distribution within the United States in 1997, 1996 and 1995,
respectively. The Company targets those golf retailers (both on-course and off-
course) who sell "pro-line" clubs (professional quality golf clubs) and provide
a level of customer service appropriate for the sale of premium golf clubs. No
one customer that distributes golf clubs in the United States accounted for more
than 5% of the Company's revenues in 1997, 1996, and 1995. The Company
distributes its products in Hawaii through an exclusive distributor.
The Company, through its subsidiaries Callaway Golf Sales Company and
Odyssey, currently employ full-time regional field representatives, in-house
telephone salespersons and customer service representatives in connection with
golf club and accessory sales. Each geographic region is covered by both a field
representative and a telephone salesperson who work together to initiate and
maintain relationships with customers through frequent telephone calls and in-
person visits. The Company believes that this tandem approach of utilizing field
representatives and telephone salespersons provides the Company a competitive
advantage over other golf club manufacturers that distribute their golf clubs
solely through independent sales representatives rather than employees.
Notwithstanding the foregoing, Callaway Golf recognizes that other companies
have marketing programs which may be equally or more effective than its own
strategy.
Some 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 authorized 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 a potential decrease in sales to those customers who are selling Callaway
Golf products to unauthorized distributors and/or an increase in sales returns
over historical levels. 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 stopped such commerce. The Company's efforts to address gray
market issues could have an adverse impact on the Company's sales and financial
performance.
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Sales for Distribution Outside of the United States
Approximately 35%, 32% and 34% of the Company's net sales were derived from
sales for distribution outside of the United States in 1997, 1996 and 1995,
respectively. The majority of the Company's international sales are made through
distributors specializing in the sale and promotion of golf clubs in specific
countries or regions around the world. The Company currently has distribution
arrangements covering sales of the Company's products in over 40 foreign
countries, including Japan, Canada, Singapore, Spain, Italy, France, Hong Kong,
Australia, Argentina and South Africa. Prices of golf clubs for sales outside of
the United States receive an export pricing discount to compensate international
distributors for selling, advertising and distribution costs. A change in the
Company's relationship with significant distributors could negatively impact the
volume of the Company's international sales.
The Company directly markets its products in the United Kingdom, Belgium,
Finland, Denmark and Sweden through its wholly-owned British subsidiary,
Callaway Golf Europe Ltd. (formerly Callaway Golf (UK) Limited). In 1996, the
Company acquired a majority interest in its distributor in Germany, Golf Trading
GmbH, which sells and promotes the Company's products in Germany, Austria, the
Netherlands and Switzerland. In February 1998, the Company purchased the
distribution rights of its Korean distributor and began directly marketing its
products in that country through its subsidiary, Callaway Golf Korea, Ltd.
The Company, through a distribution agreement, appointed Sumitomo Rubber
Industries, Ltd. ("Sumitomo") as the sole distributor of the Company's golf
clubs in Japan. The current distribution agreement began in February 1993 and
runs through December 31, 1999. The Company does not intend to extend this
agreement. Sales to Sumitomo represented approximately $83.0 million (10%),
$58.2 million (9%), and $61.0 million (11%) of the Company's net sales in 1997,
1996 and 1995, respectively. See Note 12 of Notes to Consolidated Financial
Statements in the Company's Annual Report to shareholders for the year ended
December 31, 1997 ("1997 Annual Report to Shareholders").
The Company has established ERC International Company ("ERC"), a wholly-
owned Japanese corporation, for the purpose of distributing Odyssey(R) products
immediately, golf balls when ready and Callaway Golf clubs beginning January 1,
2000. There will be significant costs and capital expenditures invested in ERC
before there will be sales sufficient to support such costs. Furthermore, there
are significant risks associated with the Company's intention to effectuate
distribution in Japan through ERC, and it is possible that doing so will have a
material adverse effect on the Company's operations and financial performance.
The Company's management believes that controlling the distribution of its
products throughout the world will be an element in the future growth and
success of the Company. The Company is actively pursuing a reorganization of its
international operations, including the acquisition of distribution rights in
certain key countries in Europe and Asia. These efforts have and will result in
additional investments in inventory, accounts receivable, corporate
infrastructure and facilities. The integration of foreign distributors into the
Company's international sales operations will require the dedication of
management resources which may temporarily detract from attention to the day-to-
day business of the Company, and also increase the Company's exposure to
fluctuations in exchange rates for various foreign currencies. International
reorganization also could result in disruptions in the distribution of the
Company's products in some areas. There can be no assurance that the acquisition
of some or all of the Company's foreign distributors will be successful, and it
is possible that an attempt to do so will adversely affect the Company's
business.
As noted above, the Company continues to experience unauthorized
distribution of its products in international markets. For a discussion of the
Company's efforts in this area, see "Sales for Distribution in the United
States" set forth above.
Advertising and Promotion
Within the United States, the Company has focused its advertising efforts
mainly on a combination of television commercials and printed advertisements in
national magazines, such as Golf Digest, Golf Magazine, Golf Week, Golf World
and Sports Illustrated's Golf Edition, and in trade publications, such as Golf
Pro and Golf Shop Operations. Advertising of the Company's golf clubs outside of
the United States is typically handled by distributors and resellers of the
products in a particular country.
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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 agreements with members of the
Professional Golf Association's Tour ("PGA"), the Senior Professional Golf
Association's Tour ("SPGA"), the Ladies Professional Golf Association's Tour
("LPGA"), the European Professional Golf Association's Tour, the Japanese
Professional Golf Association's Tour ("JPGA") 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 professional 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.
Many professional golfers throughout the world use the Company's golf clubs
even though they are not contractually bound to do so. The Company has created
cash "pools" that reward such usage. For the last several years, the Company has
experienced an exceptional level of driver penetration on the world's five major
professional tours, and the Company has heavily advertised that fact. There is
no assurance that the Company will be able to sustain this level of professional
usage. Many other companies are aggressively seeking the patronage of these
professionals, and are offering many inducements, including specially designed
products and significant cash rewards. While it is not clear whether
professional endorsements materially contribute to retail sales, it is possible
that a decline in the level of professional usage could have a material adverse
effect on the Company's business.
During 1997, Callaway Golf continued its Big Bertha(R) Players' Pools
("Pools") for the PGA, SPGA, LPGA and Nike Tours. Those professional players
participating in the Pools received cash for using Callaway Golf products in
professional tournaments. The Company has established the 1998 Big Bertha(R)
Players' Pools similar to the 1997 Pools, in which professional players
participating in the Pools will receive cash for using certain Callaway Golf
products in professional tournaments. The Company believes that its professional
endorsements and its Pools contributed to its success on the professional tours
in 1997. There is no guarantee, however, that the Company will be able to
sustain this level of success.
To support the promotion of its products at the retail level, the Company
offers various promotional programs to its customers. Golf clubs may be
purchased at a discount for personal use by golf shop professionals,
demonstration, test, loan and rental use.
The Company spent approximately $62.4 million, $45.0 million and $37.7
million on advertising, promotional and endorsement related expenditures,
including compensation to professional golfers, in 1997, 1996 and 1995,
respectively.
Manufacturing
The manufacturing of the Company's golf clubs involves a number of
specialized processes required by the unique design of the products. The
Company's metal woods and irons are produced by the Company's manufacturing
personnel at its Carlsbad, California facilities using clubheads, shafts and
grips supplied by independent vendors.
The Company works with a few select casting houses to produce its
clubheads. The clubheads used in the production of Big Bertha(R) Metal Woods
with the War Bird(R) soleplate are manufactured to Callaway Golf's
specifications by Cast Alloys, Inc. and Coastcast Corporation ("Coastcast").
Sturm, Ruger and Company ("Sturm, Ruger"), Coastcast and Cast Alloys, Inc. cast
Great Big Bertha(R) Titanium Metal Wood clubheads. Biggest Big Bertha(TM)
Titanium Driver clubheads are provided by Cast Alloys Inc. and Sturm, Ruger. Big
Bertha(R) Iron clubheads are provided by Hitchiner Manufacturing Co. and
Coastcast. Great Big Bertha(R) Tungsten.Titanium(TM) Irons are provided by
Coastcast and clubheads for the new Big Bertha(R) X-12 Irons are provided by
Hitchiner Manufacturing Co. and Coastcast. The Company works closely with its
casting houses, which enables the Company to monitor the quality and reliability
of clubhead production. All of these casting houses are currently manufacturing,
or are entitled to manufacture, clubheads for competitors of the Company. The
Company also works closely with Aldila, True Temper, HST, Graphite Design, Inc.,
Fujikura, Suntech-Sunwoo Co, Ltd. and Unifiber, its principal suppliers of
shafts, to develop specialized shafts suited to the S2H2(R) design and the other
unique features of the Company's products.
The Company is dependent on a limited number of suppliers for its clubheads
and shafts. In addition, some of the Company's products require specifically
developed manufacturing techniques and processes which make it difficult to
identify and utilize alternative suppliers quickly. Consequently, if a
significant delay or disruption in the
8
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supply of these component parts occurs, it may have a material adverse effect on
the Company's business. In the event of a significant delay or disruption, the
Company believes that suitable clubheads and shafts could be obtained from other
manufacturers, although the transition to other suppliers could result in
significant production delays and an adverse impact on results of operations
during the transition.
The Company uses United Parcel Service ("UPS") for substantially all ground
shipments of products to its domestic customers. The Company is considering
alternative methods of ground shipping to reduce its reliance on UPS, but no
change has been made. Any interruption in UPS services could have a material
adverse effect on the Company's sales and results of operations.
Callaway Golf's own production processes entail rigorous and continual
quality control inspection and require the application of significant resources
to the manufacturing process. The Company's executive offices and its product
development, manufacturing and distribution facilities are housed in facilities
leased and owned by the Company in Carlsbad, California.
In the ordinary course of its manufacturing process, the Company uses
paints and chemical solvents which are stored on-site. The waste created by use
of these materials is transported off-site on a regular basis by registered
waste haulers. As a standard procedure, a comprehensive audit of the treatment,
storage, and disposal facility with which the Company contracts for the disposal
of hazardous waste is performed annually by the Company. To date, the Company
has not experienced any material environmental compliance problems, although
there can be no assurance that such problems will not arise in the future.
The Company's size has made it a large consumer of certain materials,
including titanium and carbon fiber. Callaway Golf does not make these materials
itself, and must rely on its ability to obtain adequate supplies in the world
marketplace in competition with other users of such materials. While the Company
has been successful in obtaining its requirements for such materials thus far,
there can be no assurance that it will always be able to do so. An interruption
in the supply of such materials or a significant change in costs could have a
material adverse effect on the Company.
Competition
The market in which the Company does business is highly competitive, and is
served by a number of well-established and well-financed companies with
recognized brand names. While usage of the Company's drivers was dominant during
1997 on the PGA, SPGA, LPGA, Nike, PGA European and Women's Professional Golf
European Tour ("WPGET") Tours ("six pro tours"), its competitors included Taylor
Made, Cobra, Mizuno, Titleist, Cleveland and Ping. In the six pro tours, the
Company's competition for iron usage in 1997 included Ping, Mizuno, Titleist and
Top Flite. New product introductions by competitors continue to generate
increased market competition. While the Company believes that its products and
its marketing efforts continue to be competitive, there can be no assurance that
successful marketing activities by competitors will not negatively impact the
Company's future sales.
Additionally, the golf club industry, in general, has been characterized by
widespread imitation of popular club designs. A manufacturer's ability to
compete is in part dependent upon its ability to satisfy the various subjective
requirements of golfers, including the golf club's look and "feel," and the
level of acceptance that the golf club has among professional and other golfers.
The subjective preferences of golf club purchasers may also be subject to rapid
and unanticipated changes. There can be no assurance as to how long the
Company's golf clubs will maintain market acceptance.
As noted elsewhere in this Report, the Company has formed Callaway Golf
Ball Company for the purpose of designing, manufacturing and selling golf balls.
The golf ball business is highly competitive with a number of well-established
and well-financed competitors, including Titleist, Spalding, Sumitomo Rubber
Industries, Bridgestone and others. These competitors have established market
share in the golf ball business which will need to be penetrated in order for
the Company's golf ball business to be successful.
Intellectual Property
The Company seeks to protect its intellectual property rights, such as
product designs, manufacturing processes, new product research and concepts, and
trademarks. These rights are protected through the acquisition of utility and
design patents and trademark registrations, the maintenance of trade secrets,
the development of trade dress,
9
<PAGE>
and, when necessary and appropriate, litigation against those who are, in the
Company's opinion, unfairly competing. In the United States, the Company has
applied for or been granted patents for certain features of its golf clubs.
Additionally, it has been granted trademark registrations for Callaway(R), Big
Bertha(R), Great Big Bertha(R), War Bird(R), S2H2(R), Odyssey(R), Stronomic(R)
and several other product names and descriptions. There is no assurance that,
prior to a court of competent jurisdiction validating them, any of these patents
or trademarks are enforceable, although the Company believes them to be
enforceable.
The Company has an active program of enforcing its proprietary rights
against companies and individuals who market or manufacture counterfeits and
"knock off" products, and aggressively asserts its rights against infringers of
its patents, trademarks, and trade dress. However, there is no assurance that
these efforts will reduce the level of acceptance obtained by these infringers.
Additionally, there can be no assurance that other golf club manufacturers will
not be able to produce successful golf clubs which imitate the Company's designs
without infringing any of the Company's patents, trademarks, or trade dress.
An increasing number of the Company's competitors have, like the Company
itself, sought to obtain patent, trademark or other protection of their
proprietary rights and designs. From time to time others have or may contact the
Company to claim that they have proprietary rights which have been infringed by
the Company and/or its products. The Company evaluates any such claims and,
where appropriate, has obtained or sought to obtain licenses or other business
arrangements. (See also Item 3, "Legal Proceedings.") To date, there have been
no interruptions in the Company's business as the result of any claims of
infringement. No assurance can be given, however, that the Company will not be
adversely affected in the future by the assertion of intellectual property
rights belonging to others. This effect could include alteration of existing
products, withdrawal of existing products and delayed introduction of new
products.
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 patents 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 actions.
Despite its efforts to avoid such infringements, there can be no assurance that
Callaway Golf Ball Company will not infringe on the patents or 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.
The Company has stringent procedures to maintain the secrecy of its
confidential business information. These procedures include criteria for
dissemination of information and written confidentiality agreements with
employees and vendors. Suppliers, when engaged in joint research projects, are
required to enter into additional confidentiality agreements. There can be no
assurance that these measures will prove adequate in all instances to protect
the Company's confidential information.
Seasonality
In the golf equipment industry, sales to retailers are generally seasonal
due to lower demand in the retail market in the cold weather months covered by
the fourth and first quarters. The Company's business generally follows this
seasonal trend and the Company expects this to continue. Unusual weather
conditions such as the "El Nino" weather patterns being experienced in the
winter of 1997-1998 will compound these seasonal affects and could have a
negative effect on the Company's sales and results of operations.
Product Warranties
The Company supports all of its golf clubs with a two year written
warranty. Since the Company does not rely upon traditional designs in the
development of its golf clubs, its products may be more likely to develop
unanticipated problems than those of many of its competitors which use
traditional designs. For example, clubs have been returned with cracked
clubheads, broken graphite shafts and loose medallions. While any breakage or
warranty problems are deemed significant to the Company, the incidence of clubs
returned as a result of cracked clubheads, broken graphite shafts, loose
medallions and other product problems to date has not been material in relation
to the volume of Callaway Golf clubs which have been sold. The Company monitors
closely the level and nature of any product breakage and, where appropriate,
seeks to incorporate design and production changes to assure its customers of
the highest quality available in the market. The Company's Biggest Big
Bertha(TM) Drivers, because of their large clubhead size and extra
10
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long, lightweight graphite shafts, have experienced shaft breakage at a rate
higher than generally experienced with the Company's other metal woods.
Significant increases in the incidence of breakage or other product problems may
adversely affect the Company's sales and image with golfers. At December 31,
1997, 1996 and 1995, the Company's reserves for warranty claims were
approximately $28.1 million $27.3 million, and $23.8 million, respectively. The
increase in this reserve over the last several years has been primarily
attributable to increased sales volume and change in product mix. The Company
believes that it has sufficient reserves for warranty claims; however, there can
be no assurance that these reserves will be sufficient if the Company were to
experience an unusually high incidence of shaft breakage or other product
problems.
Employees
As of December 31, 1997, the Company and its subsidiaries had 2,662 full-
time employees, including 393 employed in sales and marketing, 169 employed in
research and development and product engineering and 1,573 employed in
production. The remaining full-time employees are administrative and support
staff.
The Company considers its employee relations to be good. None of the
Company's employees are represented by unions. The Company's commitment to the
development of new products and the seasonal nature of its business may result
in fluctuations in production levels. The Company attempts to manage these
fluctuations to maintain employee morale and avoid disruption. However, it is
possible that such fluctuations could strain employee relations in the future.
Year 2000 Compliance
Historically, certain computer programs have been written using two digits
rather than four to define the applicable year, which could result in the
computer recognizing a date using "00" as the year 1900 rather than the year
2000. This, in turn, could result in major system failures or miscalculations,
and is generally referred to as the "Year 2000" problem.
In October 1997, the Company implemented a new computer system which runs
most of the Company's principal data processing and financial reporting software
applications. The application software used on this new system is Year 2000
compliant. The information systems of certain of the Company's subsidiaries,
however, have not been converted to the new system, but the Company is in the
process of implementing such conversion. Pursuant to the Company's Year 2000
Plan, the Company is currently evaluating its computerized production equipment
to assure that the transition to the Year 2000 will not disrupt the Company's
manufacturing capabilities. The Company is currently assessing the extent of the
Year 2000 impact on its suppliers, distributors, customers and other vendors.
Presently, the Company does not believe that Year 2000 compliance will result in
additional material investments by the Company, nor does the Company anticipate
that the Year 2000 problem will have material adverse effects on the business
operations or financial performance of the Company. There can be no assurance,
however, that the Year 2000 problem will not adversely affect the Company and
its business.
Management Information Systems
As noted above, in October 1997, the Company converted to a new integrated
computer system which runs substantially all of the Company's principal data
processing and financial reporting software applications. As the Company enters
its traditional busy selling season in the second and third quarters, the
demands on the Company's information systems will increase substantially. Any
significant disruptions or delays in the Company's information systems during
this period could negatively impact the Company's ability to process sales
orders and compile other management information, which in turn could have
material adverse effects on the Company's sales and results of operations.
Item 2. Properties.
The Company and its subsidiaries conduct operations in both owned and
leased properties, located primarily near the Company's headquarters in
Carlsbad, California. The 19 buildings utilized in the Company's Carlsbad
operations include corporate offices, manufacturing, research and development,
warehousing and distribution facilities, and comprise approximately 786,000
square feet of space. Eight of these properties, representing approximately
426,000 square feet of space are owned by the Company; an additional 11
properties, representing approximately
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360,000 square feet of space, are leased. The Company also owns 11 acres of
undeveloped land near its headquarters upon which it intends to construct a golf
ball manufacturing plant for its wholly-owned subsidiary, Callaway Golf Ball
Company. In addition, the Company and its subsidiaries conduct certain
international operations outside of the United States, located in the United
Kingdom, Germany, Japan and Korea, in leased facilities comprising approximately
65,000 square feet.
The Company believes that its facilities are adequate to meet its current
requirements. The Company has experienced rapid growth in its business for the
last several years, however, and in order to accommodate this growth, the
Company has regularly acquired or leased new facilities for manufacturing,
research and development, office and storage. Although there can be no assurance
that the Company will achieve similar growth in its business in the future, the
Company expects that its practice of regularly acquiring or leasing additional
properties near its headquarters in Carlsbad, California is likely to continue
in the near term.
Item 3. Legal Proceedings.
The Company, incident to its business activities, is the plaintiff in
several legal proceedings, both domestically and abroad, in various stages of
development. In conjunction with the Company's program of enforcing its
proprietary rights, the Company has initiated a number of actions against
alleged infringers under the Lanham Act, 15 USCA Sections 1051-1127, the U.S.
Patent Act, 35 USCA Sections 1-376, and other pertinent laws. Some defendants in
these actions have, among other things, contested the validity and/or the
enforceability of some of the Company's patents and/or trademarks. Others have
asserted counterclaims against the Company. The Company believes that the
outcome of these matters individually and in the aggregate will not have a
material adverse effect upon the financial position or results of operations of
the Company. It is possible, however, that in the future one or more defenses or
claims asserted by defendants in those actions may succeed, resulting in the
loss of all or part of the rights under one or more patents, loss of a
trademark, a monetary award against the Company, or some other loss to the
Company. One or more of these results could adversely affect the Company's
overall ability to protect its product designs and ultimately limit its future
success in the marketplace.
In addition, the Company from time to time receives information claiming
that products sold by the Company infringe or may infringe patent or other
intellectual property rights of third parties. To date, the Company has not
experienced any material expense or disruption associated with any such
potential infringement matters. It is possible, however, that in the future one
or more claims of potential infringement could lead to litigation, the need to
obtain additional licenses, the need to alter a product to avoid infringement,
or some other action or loss by the Company.
The Company and its subsidiaries, incident to their business activities,
from time to time are parties to a number of legal proceedings in various stages
of development, including but not limited to those described above. The Company
believes that the majority of these proceedings involve matters as to which
liability, if any, will be adequately covered by insurance. With respect to
litigation outside the scope of applicable insurance coverage and to the extent
insured claims may exceed liability limits, it is the opinion of the management
of the Company that the probable result of these matters individually and in the
aggregate will not have a material adverse effect upon the Company's financial
position, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Securities Holders.
None.
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Executive Officers of the Registrant
Biographical information concerning certain of the Company's officers is
set forth below.
Name Age Position(s) Held
---- --- ----------------
Ely Callaway............. 78 Founder, Chairman, and Chief of Advertising,
Press and Public Relations
Donald H. Dye............ 55 President and Chief Executive Officer
Bruce Parker............. 42 Senior Executive Vice President, Domestic Sales
and Chief Merchant
John P. Duffy............ 57 Senior Executive Vice President, Chief of
Manufacturing
Richard C. Helmstetter... 56 Senior Executive Vice President, Chief of New
Golf Club Products
Steven C. McCracken...... 47 Executive Vice President, Licensing, Chief
Legal Officer and Secretary
Frederick R. Port........ 56 Senior Executive Vice President, International
Sales
David A. Rane............ 43 Executive Vice President, Administration and
Planning, and Chief Financial Officer
Charles J. Yash.......... 49 Executive Vice President; President and Chief
Executive Officer, Callaway Golf Ball Company
Ely Callaway, Founder, has served as Chairman of the Board of the Company
since the Company's formation in 1982 and also currently serves as the Company's
Chief of Advertising, Press and Public Relations and Chairman of the Executive
and Compensation Committee of the Company's Board of Directors. He served as
Chief Executive Officer from 1982 to May 1996. From 1974 to 1981, Mr. Callaway
founded and operated Callaway Vineyard and Winery in Temecula, California, until
it was sold. From 1946 to 1973, Mr. Callaway worked in the textile industry,
where he served as a Divisional President of several major divisions of
Burlington Industries, Inc., and in 1968 was elected Corporate President and
Director of Burlington, which at the time was the world's largest textile
company. Prior to 1945, Mr. Callaway served a five-year tour of duty in the
U.S. Army Quartermaster Corps. Mr. Callaway is a 1940 graduate of Emory
University.
Donald H. Dye serves as President and Chief Executive Officer of the
Company. He has served as Chief Executive Officer since May 1996, as President
since 1993, and as a Director of the Company since its formation in 1982. He
served as Chief Operating Officer from 1991 until May 1996, as Secretary from
1982 until 1994, as Vice Chairman of the Board from 1991 to 1993, and as General
Counsel from 1991 until 1994. From 1973 to 1991, Mr. Dye was in the private
practice of law in Riverside, California. During that period, he provided legal
services to Callaway Vineyard & Winery, Mr. Callaway and the Company. Prior to
1973, Mr. Dye served five years in the U.S. Air Force as a member of the Judge
Advocates General Corps. Mr. Dye is a 1967 graduate of UCLA School of Law.
Bruce Parker, has served as a Director of the Company since July 1996,
Senior Executive Vice President since 1993 and Chief Merchant since 1991. In
addition, since April 1996, Mr. Parker has served as President of Callaway Golf
Sales Company, the Company's wholly-owned subsidiary responsible for domestic
sales operations. Mr. Parker also has served the Company in various vice
presidential positions since 1984 and became Executive Vice President, Chief
Merchant in October 1991. Prior to 1984, Mr. Parker worked as a sales manager
for various golf club manufacturers in California.
John P. Duffy has served the Company in various vice presidential positions
since 1989 and became Executive Vice President, Chief of Manufacturing in March
1990 and Senior Executive Vice President in April 1993. From 1988 to 1989, Mr.
Duffy served as Vice President--Product Line Management of Taylor Made Golf
Company. From 1984 to 1988, Mr. Duffy served as Vice President- Manufacturing of
Taylor Made. From 1982 to 1984, Mr.
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<PAGE>
Duffy served as General Manager--Western Division of Taylor Made. Prior to 1982,
Mr. Duffy owned and operated golf retail outlets in Florida and California under
the name "House of Golf."
Richard C. Helmstetter has served the Company as Senior Executive Vice
President, Chief of New Golf Club Products since February 1998 and as Senior
Executive Vice President, Chief of New Products from 1993 to February 1998. Mr.
Helmstetter served as President from 1990 to 1993 and as Executive Vice
President from 1986 to 1990. From 1967 to 1986, Mr. Helmstetter served as
President of Adam Ltd., a pool cue manufacturing and merchandising company which
he founded and operated in Japan. During 1982 and 1983, Mr. Helmstetter also
consulted extensively for several Japanese, European and American companies,
including Bridgestone Corporation's strategic planning group. Mr. Helmstetter is
a 1966 graduate of the University of Wisconsin.
Steven C. McCracken has served the Company as Executive Vice President,
Licensing and Chief Legal Officer since April 1997 and as Secretary since April
1994. He has served as an Executive Vice President since April 1996 and served
as General Counsel from 1994 to April 1997. He served as Vice President from
1994 to April 1996. Prior to joining the Company, Mr. McCracken was a partner at
Gibson, Dunn & Crutcher for 11 years, and had been in the private practice of
law for over 18 years. During part of that period, he provided legal services to
the Company. Mr. McCracken received a B.A., magna cum laude, from the University
of California at Irvine in 1972 and a J.D. from the University of Virginia in
1975.
Frederick R. Port has served as Senior Executive Vice President,
International Sales since April 1997 and as President of the Company's
International division since April 1996. He served as Executive Vice President,
International Sales, Licensing and Business Development of the Company from
April 1996 to April 1997. He served as Executive Vice President, Business
Development, of the Company from 1995 to April 1996. From 1993 to 1995, Mr. Port
was the Managing Director of Korn/Ferry International for the Southern
California region (an executive recruiting and strategic consulting firm). Mr.
Port served as an infantry officer in the United States Army. He is a 1963
graduate of UCLA and received his MBA with honors from UCLA in 1966.
David A. Rane has served the Company as Executive Vice President, Finance
and Administration since October 1997 and as Chief Financial Officer since 1994.
He served as an Executive Vice President since April 1996, and as Vice President
from 1994 to April 1996. Mr. Rane served as Director of Investor Relations from
1993 to 1994. Prior to 1993, Mr. Rane was a senior manager for the accounting
firm of Price Waterhouse LLP, and served a total of 14 years in public
accounting. Mr. Rane is a 1978 graduate of Brigham Young University.
Charles J. Yash has served as an Executive Vice President of the Company
since February 1998, as a Director of the Company since July 1996, and as
President and Chief Executive Officer of Callaway Golf Ball Company, a wholly-
owned subsidiary of the Company, since June 1996. From 1992 to June 1996, Mr.
Yash was President and Chief Executive Officer and a Director of Taylor Made
Golf Company. From 1979 to 1992, Mr. Yash was employed in various marketing
positions with the golf products division of Spalding Sports Worldwide,
including Corporate Vice President and General Manager-Golf Products, from 1988
to 1992. From 1970 to 1975, Mr. Yash served in the United States Navy in
various positions. Mr. Yash completed the Advanced Executive Program at the
University of Massachusetts in 1982, received his M.B.A. in 1977 from Harvard
Business School and graduated with a Bachelor of Science degree from the U.S.
Naval Academy in 1970.
The Company has employment agreements with Messrs. Callaway, Parker, Duffy,
McCracken, Port and Rane for terms commencing January 1, 1997 and ending
December 31, 1999. The term of Mr. Dye's employment agreement also commenced
January 1, 1997 and ends December 31, 2001. The Company also has an employment
agreement with Mr. Yash which commenced May 15, 1996 and ends on May 14, 2001.
The Company has a new three-year employment agreement with Mr. Helmstetter
commencing January 1, 1998 which may be extended by either the Company or Mr.
Helmstetter until as late as December 31, 2012.
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<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Information in response to Item 5 is contained on page 48 of the Company's
1997 Annual Report to Shareholders, which information is incorporated herein by
reference.
Item 6. Selected Financial Data.
Information in response to Item 6 is contained on page 28 of the Company's
1997 Annual Report to Shareholders, which information is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
Information in response to Item 7 is contained on pages 29 through 33 of
the Company's 1997 Annual Report to Shareholders, which information is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
Information in response to Item 8 is contained on pages 34 through 48 of
the Company's 1997 Annual Report to Shareholders, which information is
incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None
PART III
Item 10. Directors and Executive Officers of the Registrant.
Certain information concerning the Company's executive officers is included
under the caption "Executive Officers of the Registrant" following Part I, Item
4. Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers, directors and greater than 10% shareholders to file initial
reports of ownership (on Form 3) and periodic changes in ownership (on Forms 4
and 5) of Company securities with the Securities and Exchange Commission and the
New York Stock Exchange. Based solely on its review of copies of such forms and
such written representations regarding compliance with such filing requirements
as were received from its executive officers, directors and greater than 10%
shareholders, the Company believes that all such Section 16(a) filing
requirements were complied with during 1997 with one exception: the January
1997 Form 4 of Mr. Michael Sherwin, a former Director of the Company, was filed
three days late due to clerical error.
Other information required by Item 10 has been included in the Company's
definitive proxy statement under the caption "Election of Directors," as filed
with the Securities and Exchange Commission (the "Commission") on March 16, 1998
pursuant to Regulation 14A, which information is incorporated herein by
reference.
Item 11. Executive Compensation.
The Company maintains employee benefit plans and programs in which its
executive officers are participants. Copies of certain of these plans and
programs are set forth or incorporated by reference as Exhibits 10.1 to 10.19.3
to this Report. Information required by Item 11 has been included in the
Company's definitive proxy statement under the captions "Compensation of
Executive Officers," "Report of the Executive and Compensation Committee of the
Board of Directors on Executive Compensation," "Performance Graph" and "Election
of Directors," as filed with the Commission on March 16, 1998 pursuant to
Regulation 14A, which information is incorporated herein by reference.
15
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 12 has been included in the Company's
definitive proxy statement under the caption "Beneficial Ownership of the
Company's Securities," as filed with the Commission on March 16, 1998 pursuant
to Regulation 14A, which information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 13 has been included in the Company's
definitive proxy statement under the caption "Certain Transactions," as filed
with the Commission on March 16, 1998 pursuant to Regulation 14A, which
information is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K.
(a) Documents filed as part of this report:
1. Financial Statements. The following consolidated financial
statements of Callaway Golf Company and its subsidiaries included
in Part II, Item 8, are incorporated by reference from pages 34
through 47 of the 1997 Annual Report to Shareholders:
Consolidated Balance Sheet at December 31, 1997 and 1996
Consolidated Statement of Income for the three years ended
December 31, 1997
Consolidated Statement of Cash Flows for the three years ended
December 31, 1997
Consolidated Statement of Shareholders' Equity for the three
years ended December 31, 1997
Notes to Consolidated Financial Statements
Report of Independent Accountants
2. Financial Statement Schedule.
Report of Independent Accountants on Financial Statement
Schedule
Schedule II - Consolidated Valuation and Qualifying Accounts
All other schedules are omitted because they are not
applicable or the required information is shown in the
consolidated financial statements or notes thereto.
3. Exhibits.
3.1.1 Restated Articles of Incorporation of the Company./(2)/
3.1.2 Certificate of Amendment of Articles of Incorporation,
effective February 10, 1995./(3)/
3.2 Certificate of Determination of Rights, Preferences,
Privileges and Restrictions of Series A Junior
Participating Preferred Stock./(5)/
3.3 Bylaws of the Company (as amended through May 10,
1996)./(9)/
4.1 Dividend Reinvestment and Stock Purchase Plan./(1)/
4.2 Rights Agreement by and between the Company and
Chemical Mellon Shareholder Services as Rights Agent
dated as of June 21, 1995./(5)/
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<PAGE>
Executive Compensation Contracts/Plans
10.1 Chairman and Founder Employment Agreement by and between
the Company and Ely Callaway entered into as of January
1, 1997./(15)/
10.2 Chief Executive Officer Employment Agreement by and
between the Company and Donald H. Dye entered into as
of January 1, 1997./(17)/
10.3 Executive Officer Employment Agreement by and between
the Company and Bruce Parker entered into as of as of
January 1, 1997./(13)/
10.4 Executive Officer Employment Agreement by and between
the Company and Richard Helmstetter entered into as of
January 1, 1998.
10.5 Executive Officer Employment Agreement by and between
the Company and John Duffy entered into as of January 1,
1997./(13)/
10.6 Executive Officer Employment Agreement by and between
the Company and Steven C. McCracken entered into as of
January 1, 1997./(13)/
10.7.1 Executive Officer Employment Agreement by and between
the Company and Frederick R. Port entered into as of
January 1, 1997./(13)/
10.7.2 Stock Option Agreement by and between the Company and
Frederick R. Port dated as of September 1, 1995./(6)/
10.8 Executive Officer Employment Agreement by and between
the Company and David Rane entered into as of January 1,
1997./(13)/
10.9.1 Officer Employment Agreement by and between the Company
and Charles Yash entered into as of May 15, 1996./(11)/
10.9.2 Stock Option Agreement by and between the Company and
Charles J. Yash dated as of May 10, 1996./(10)/
10.10 Employment Agreement by and between the Company and
Elmer L. Ward, Jr. entered into as of July 1,
1996./(12)/
10.11.1 Form of Tax Indemnification Agreement./(5)/
10.11.2 Form of Amendment No. 1 to Form of Tax Indemnification
Agreement./(12)/
10.12 Executive Deferred Compensation Plan (as amended and
restated through February 6, 1997)./(14)/
10.13 Callaway Golf Company Executive Non-Discretionary Bonus
Plan./(4)/
10.14 Callaway Golf Company 1998 Executive Non-Discretionary
Bonus Plan./(14)/
10.15 1991 Stock Incentive Plan (as amended and restated April
1994)./(3)/
10.16 Amended and Restated Stock Option Plan effective April
2, 1991./(8)/
10.17 1996 Stock Option Plan (as amended and restated through
April 17, 1997)./(14)/
10.18 Callaway Golf Company Non-Employee Directors Stock
Option Plan (as Amended and Restated April 17,
1996)./(10)/
10.19.1 Form of Indemnification Agreement by and between the
Company and the following directors: William Baker,
Richard Rosenfield, William Schreyer and Michael
Sherwin, all dated January 25, 1995./(3)/
10.19.2 Indemnification Agreement by and between the Company and
Ms. Aulana L. Peters, Director, dated July 18,
1996./(13)/
10.19.3 Indemnification Agreement by and between the Company and
Vernon E. Jordan, Jr. dated July 16, 1997./(18)/
Other Contracts
10.20.1 Loan Agreement by and between the Company and First
Interstate Bank of California dated December 1,
1994./(3)/
10.20.2 Amended and Restated Revolving Credit Note made by the
Company in the principal amount of $50,000,000 and
payable to First Interstate Bank of California, dated
December 1, 1995 and First Amendment to Loan Agreement
by and between the Company and First Interstate Bank of
California dated December 1, 1995./(9)/
10.20.3 Extension of Amended and Restated Revolving Credit Note
dated December 11, 1997.
10.21 Trust Agreement between Callaway Golf Company and Sanwa
Bank California as Trustee, for the benefit of
participating employees, dated July 14, 1995./(7)/
10.22 Asset Purchase Agreement dated July 20, 1997 by and
among Callaway Golf Company, Odyssey Sports, Inc. and
U.S. Industries, Inc./(16)/
17
<PAGE>
13.1 Portions of the Company's 1997 Annual Report to
Shareholders (with the exception of the information
incorporated by reference specifically in this Report on
Form 10-K, the 1997 Annual Report to Shareholders is not
deemed to be filed as a part of this Report on Form
10-K).
21.1 List of Subsidiaries.
23.1 Consent of Independent Accountants.
27.1 Financial Data Schedule for the year ended
December 31, 1997.
27.2 Restated Financial Data Schedule for the year ended
December 31, 1996.
27.3 Restated Financial Data Schedule for the nine months
ended September 30, 1997 and 1996.
27.4 Restated Financial Data Schedule for the six months
ended June 30, 1997 and 1996.
27.5 Restated Financial Data Schedule for the three months
ended March 31, 1997 and 1996.
/(1)/ Included as the Prospectus in the Company's Registration
Statement on Form S-3 (No. 33-77024), as filed with the
Securities and Exchange Commission on March 29, 1994,
and incorporated herein by reference.
/(2)/ Included as an exhibit to the Company's Registration
Statement on Form S-8 (No. 33-85692), as filed with the
Securities and Exchange Commission on October 28, 1994,
and incorporated herein by reference.
/(3)/ Included as an exhibit to the Company's 1994 Annual
Report on Form 10-K, as filed with the Securities and
Exchange Commission on March 31, 1995, and incorporated
herein by reference.
/(4)/ Included as an exhibit to the Company's Quarterly Report
on Form 10-Q for the period ended March 31, 1995, as
filed with the Securities and Exchange Commission on May
10, 1995, and incorporated herein by reference.
/(5)/ Included as an exhibit to the Company's Quarterly Report
on Form 10-Q for the period ended June 30, 1995, as
filed with the Securities and Exchange Commission on
August 12, 1995, and incorporated herein by reference.
/(6)/ Included as an exhibit to the Company's Registration
Statement on Form S-8 (No. 33-98750), as filed with the
Securities and Exchange Commission on October 30, 1995,
and incorporated herein by reference.
/(7)/ Included as an exhibit to the Company's Quarterly Report
on Form 10-Q for the period ended September 30, 1995, as
filed with the Securities and Exchange Commission on
November 14, 1995, and incorporated herein by reference.
/(8)/ Included as an exhibit to the Company's 1995 Annual
Report on Form 10-K, as filed with the Securities and
Exchange Commission on April 1, 1996, and incorporated
herein by reference.
/(9)/ Included as an exhibit to the Company's Registration
Statement on Form S-8 (No. 333-5719), as filed with the
Securities and Exchange Commission on June 11, 1996, and
incorporated herein by reference.
/(10)/ Included as an exhibit to the Company's Registration
Statement on Form S-8 (No. 333-5721), as filed with the
Securities and Exchange Commission on June 11, 1996, and
incorporated herein by reference.
/(11)/ Included as an exhibit to the Company's Quarterly Report
on Form 10-Q for the period ended June 30, 1996, as
filed with the Securities and Exchange Commission on
August 14, 1996, and incorporated herein by reference.
18
<PAGE>
/(12)/ Included as an exhibit to the Company's Quarterly Report
on Form 10-Q for the period ended September 30, 1996, as
filed with the Securities and Exchange Commission on
November 13, 1996, and incorporated herein by reference.
/(13)/ Included as an exhibit to the Company's 1996 Annual
Report on Form 10-K, as filed with the Securities and
Exchange Commission on March 31, 1997, and incorporated
herein by reference.
/(14)/ Included as an exhibit to the Company's Quarterly Report
on Form 10-Q for the period ended March 31, 1997, as
filed with the Securities and Exchange Commission on May
15, 1997, and incorporated herein by reference.
/(15)/ Included as an exhibit to the Company's Quarterly Report
on Form 10-Q for the period ended June 30, 1997, as
filed with the Securities and Exchange Commission on
August 14, 1997, and incorporated herein by reference.
/(16)/ Included as an exhibit to the Company's Current Report
on Form 8-K dated August 8, 1997, as filed with the
Securities and Exchange Commission on August 22, 1997,
and incorporated herein by reference.
/(17)/ Included as an exhibit to the Company's Quarterly Report
on Form 10-Q for the period ended September 30, 1997, as
filed with the Securities and Exchange Commission on
November 14, 1997, and incorporated herein by reference.
(b) Reports on Form 8-K:
On October 22, 1997, the Company filed Amendment No. 1 to Current Report
on Form 8-K/A dated August 8, 1997, regarding the consummation of the
acquisition of substantially all of the assets of Odyssey Sports, Inc.,
reported under Items 2 and 7. The following financial statements were
filed under Item 7 with that Report:
(a) Financial Statements of Business Acquired.
Audited financial statements as of September 30, 1996 and for the year
then ended, as follows:
- Report of Independent Accountants;
- Balance Sheet as of September 30, 1996;
- Statement of Income for the year ended September 30, 1996;
- Statement of Changes in Invested Capital of Parent for the year
ended September 30, 1996;
- Statement of Cash Flows for the year ended September 30, 1996;
and
- Notes to financial statements.
Unaudited financial statements as of June 30, 1997 and for the nine
months ended June 30, 1997 and 1996, as follows:
- Unaudited Balance Sheet as of June 30, 1997;
- Unaudited Statements of Income for the nine months ended June
30, 1997 and 1996; and
- Unaudited Statements of Cash Flows for the nine months ended
June 30, 1997 and 1996.
(b) Pro Forma Financial Information.
- Unaudited Pro Forma Consolidated Condensed Balance Sheet as of
June 30, 1997;
- Unaudited Pro Forma Consolidated Condensed Statements of Income
for the six months ended June 30, 1997 and the year ended
December 31, 1996; and
- Notes to Unaudited Pro Forma Consolidated Condensed financial
statements.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CALLAWAY GOLF COMPANY
Date: March 30, 1998 /s/ ELY CALLAWAY
---------------------------------------
Ely Callaway
Founder, Chairman and Chief of
Advertising, Press and Public Relations
/s/ DONALD H. DYE
---------------------------------------
Donald H. Dye
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Principal Executive Officers And Directors:
/s/ ELY CALLAWAY Founder, Chairman, and Chief March 30, 1998
- ----------------------------------- of Advertising, Press and Public
Ely Callaway Relations
/s/ DONALD H. DYE President and Chief Executive March 30, 1998
- ----------------------------------- Officer
Donald H. Dye
Principal Financial And Accounting Officer:
/s/ DAVID A. RANE Executive Vice President, March 30, 1998
- ----------------------------------- Administration and Planning, and
David A. Rane Chief Financial Officer
Other Directors:
/s/ WILLIAM C. BAKER Director March 30, 1998
- -----------------------------------
William C. Baker
/s/ VERNON E. JORDON, JR. Director March 30, 1998
- -----------------------------------
Vernon E. Jordon, Jr.
/s/ BRUCE PARKER Director March 30, 1998
- -----------------------------------
Bruce Parker
/s/ AULANA L. PETERS Director March 30, 1998
- -----------------------------------
Aulana L. Peters
/s/ FREDERICK R. PORT Director March 30, 1998
- -----------------------------------
Frederick R. Port
/s/ RICHARD ROSENFIELD Director March 30, 1998
- -----------------------------------
Richard Rosenfield
/s/ WILLIAM SCHREYER Director March 30, 1998
- -----------------------------------
William Schreyer
/s/ ELMER WARD Director March 30, 1998
- -----------------------------------
Elmer Ward
/s/ CHARLES J. YASH Director March 30, 1998
- -----------------------------------
Charles J. Yash
</TABLE>
20
<PAGE>
Report of Independent Accountants on Financial Statement Schedule
To the Board of Directors and Shareholders
of Callaway Golf Company
Our audits of the consolidated financial statements referred to in our report
dated January 28, 1998, except as to Note 14, which is as of February 11, 1998,
appearing on page 47 of the 1997 Annual Report to Shareholders of Callaway Golf
Company (which report and consolidated financial statements are incorporated by
reference in this Annual Report on Form 10-K) also included an audit of the
Financial Statement Schedule listed in Item 14(a) of this Form 10-K. In our
opinion, this Financial Statement Schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
/s/ PRICE WATERHOUSE LLP
San Diego, California
January 28, 1998
21
<PAGE>
SCHEDULE II
CALLAWAY GOLF COMPANY
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
For The Three Year Period Ended December 31, 1997
<TABLE>
<CAPTION>
Allowance Allowance Allowance
for Doubtful for Obsolete for Warranty
Date Accounts Inventory Costs
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Balance, December 31, 1994 $6,412 $4,959 $ 18,182
Provision 101 12,002
Write-off (103) (163) (6,415)
Recovery
----------------------------------------------
Balance, December 31, 1995 6,410 4,796 23,769
Provision 231 800 10,735
Write-off (304) (312) (7,201)
Recovery
----------------------------------------------
Balance, December 31, 1996 6,337 5,284 27,303
Provision 1,354 743 13,726
Write-off (645) (353) (12,970)
Recovery
----------------------------------------------
Balance, December 31, 1997 $7,046 $5,674 $ 28,059
==============================================
</TABLE>
22
<PAGE>
EXHIBIT INDEX
SEQ. PAGE
EXHIBITS NUMBER
- -------- ----------
3.1.1 Restated Articles of Incorporation of the Company./(2)/
3.1.2 Certificate of Amendment of Articles of Incorporation,
effective February 10, 1995./(3)/
3.2 Certificate of Determination of Rights, Preferences,
Privileges and Restrictions of Series A Junior
Participating Preferred Stock./(5)/
3.3 Bylaws of the Company (as amended through May 10,
1996)./(9)/
4.1 Dividend Reinvestment and Stock Purchase Plan./(1)/
4.2 Rights Agreement by and between the Company and
Chemical Mellon Shareholder Services as Rights Agent
dated as of June 21, 1995./(5)/
Executive Compensation Contracts/Plans
10.1 Chairman and Founder Employment Agreement by and between
the Company and Ely Callaway entered into as of January
1, 1997./(15)/
10.2 Chief Executive Officer Employment Agreement by and
between the Company and Donald H. Dye entered into as
of January 1, 1997./(17)/
10.3 Executive Officer Employment Agreement by and between
the Company and Bruce Parker entered into as of as of
January 1, 1997./(13)/
10.4 Executive Officer Employment Agreement by and between
the Company and Richard Helmstetter entered into as of
January 1, 1998.
10.5 Executive Officer Employment Agreement by and between
the Company and John Duffy entered into as of January 1,
1997./(13)/
10.6 Executive Officer Employment Agreement by and between
the Company and Steven C. McCracken entered into as of
January 1, 1997./(13)/
10.7.1 Executive Officer Employment Agreement by and between
the Company and Frederick R. Port entered into as of
January 1, 1997./(13)/
10.7.2 Stock Option Agreement by and between the Company and
Frederick R. Port dated as of September 1, 1995./(6)/
10.8 Executive Officer Employment Agreement by and between
the Company and David Rane entered into as of January 1,
1997./(13)/
10.9.1 Officer Employment Agreement by and between the Company
and Charles Yash entered into as of May 15, 1996./(11)/
10.9.2 Stock Option Agreement by and between the Company and
Charles J. Yash dated as of May 10, 1996./(10)/
10.10 Employment Agreement by and between the Company and
Elmer L. Ward, Jr. entered into as of July 1,
1996./(12)/
10.11.1 Form of Tax Indemnification Agreement./(5)/
10.11.2 Form of Amendment No. 1 to Form of Tax Indemnification
Agreement./(12)/
10.12 Executive Deferred Compensation Plan (as amended and
restated through February 6, 1997)./(14)/
10.13 Callaway Golf Company Executive Non-Discretionary Bonus
Plan./(4)/
10.14 Callaway Golf Company 1998 Executive Non-Discretionary
Bonus Plan./(14)/
10.15 1991 Stock Incentive Plan (as amended and restated April
1994)./(3)/
10.16 Amended and Restated Stock Option Plan effective April
2, 1991./(8)/
10.17 1996 Stock Option Plan (as amended and restated through
April 17, 1997)./(14)/
10.18 Callaway Golf Company Non-Employee Directors Stock
Option Plan (as Amended and Restated April 17,
1996)./(10)/
10.19.1 Form of Indemnification Agreement by and between the
Company and the following directors: William Baker,
Richard Rosenfield, William Schreyer and Michael
Sherwin, all dated January 25, 1995./(3)/
10.19.2 Indemnification Agreement by and between the Company and
Ms. Aulana L. Peters, Director, dated July 18,
1996./(13)/
10.19.3 Indemnification Agreement by and between the Company and
Vernon E. Jordan, Jr. dated July 16, 1997./(18)/
Other Contracts
10.20.1 Loan Agreement by and between the Company and First
Interstate Bank of California dated December 1,
1994./(3)/
10.20.2 Amended and Restated Revolving Credit Note made by the
Company in the principal amount of $50,000,000 and
payable to First Interstate Bank of California, dated
December 1, 1995 and First Amendment to Loan Agreement
by and between the Company and First Interstate Bank of
California dated December 1, 1995./(9)/
10.20.3 Extension of Amended and Restated Revolving Credit Note
dated December 11, 1997.
10.21 Trust Agreement between Callaway Golf Company and Sanwa
Bank California as Trustee, for the benefit of
participating employees, dated July 14, 1995./(7)/
10.22 Asset Purchase Agreement dated July 20, 1997 by and
among Callaway Golf Company, Odyssey Sports, Inc. and
U.S. Industries, Inc./(16)/
23
<PAGE>
13.1 Portions of the Company's 1997 Annual Report to
Shareholders (with the exception of the information
incorporated by reference specifically in this Report on
Form 10-K, the 1997 Annual Report to Shareholders is not
deemed to be filed as a part of this Report on Form
10-K).
21.1 List of Subsidiaries.
23.1 Consent of Independent Accountants.
27.1 Financial Data Schedule for the year ended
December 31, 1997.
27.2 Restated Financial Data Schedule for the year ended
December 31, 1996.
27.3 Restated Financial Data Schedule for the nine months
ended September 30, 1997 and 1996.
27.4 Restated Financial Data Schedule for the six months
ended June 30, 1997 and 1996.
27.5 Restated Financial Data Schedule for the three months
ended March 31, 1997 and 1996.
/(1)/ Included as the Prospectus in the Company's Registration
Statement on Form S-3 (No. 33-77024), as filed with the
Securities and Exchange Commission on March 29, 1994,
and incorporated herein by reference.
/(2)/ Included as an exhibit to the Company's Registration
Statement on Form S-8 (No. 33-85692), as filed with the
Securities and Exchange Commission on October 28, 1994,
and incorporated herein by reference.
/(3)/ Included as an exhibit to the Company's 1994 Annual
Report on Form 10-K, as filed with the Securities and
Exchange Commission on March 31, 1995, and incorporated
herein by reference.
/(4)/ Included as an exhibit to the Company's Quarterly Report
on Form 10-Q for the period ended March 31, 1995, as
filed with the Securities and Exchange Commission on May
10, 1995, and incorporated herein by reference.
/(5)/ Included as an exhibit to the Company's Quarterly Report
on Form 10-Q for the period ended June 30, 1995, as
filed with the Securities and Exchange Commission on
August 12, 1995, and incorporated herein by reference.
/(6)/ Included as an exhibit to the Company's Registration
Statement on Form S-8 (No. 33-98750), as filed with the
Securities and Exchange Commission on October 30, 1995,
and incorporated herein by reference.
/(7)/ Included as an exhibit to the Company's Quarterly Report
on Form 10-Q for the period ended September 30, 1995, as
filed with the Securities and Exchange Commission on
November 14, 1995, and incorporated herein by reference.
/(8)/ Included as an exhibit to the Company's 1995 Annual
Report on Form 10-K, as filed with the Securities and
Exchange Commission on April 1, 1996, and incorporated
herein by reference.
/(9)/ Included as an exhibit to the Company's Registration
Statement on Form S-8 (No. 333-5719), as filed with the
Securities and Exchange Commission on June 11, 1996, and
incorporated herein by reference.
/(10)/ Included as an exhibit to the Company's Registration
Statement on Form S-8 (No. 333-5721), as filed with the
Securities and Exchange Commission on June 11, 1996, and
incorporated herein by reference.
/(11)/ Included as an exhibit to the Company's Quarterly Report
on Form 10-Q for the period ended June 30, 1996, as
filed with the Securities and Exchange Commission on
August 14, 1996, and incorporated herein by reference.
/(12)/ Included as an exhibit to the Company's Quarterly Report
on Form 10-Q for the period ended September 30, 1996, as
filed with the Securities and Exchange Commission on
November 13, 1996, and incorporated herein by reference.
/(13)/ Included as an exhibit to the Company's 1996 Annual
Report on Form 10-K, as filed with the Securities and
Exchange Commission on March 31, 1997, and incorporated
herein by reference.
/(14)/ Included as an exhibit to the Company's Quarterly Report
on Form 10-Q for the period ended March 31, 1997, as
filed with the Securities and Exchange Commission on May
15, 1997, and incorporated herein by reference.
/(15)/ Included as an exhibit to the Company's Quarterly Report
on Form 10-Q for the period ended June 30, 1997, as
filed with the Securities and Exchange Commission on
August 14, 1997, and incorporated herein by reference.
/(16)/ Included as an exhibit to the Company's Current Report
on Form 8-K dated August 8, 1997, as filed with the
Securities and Exchange Commission on August 22, 1997,
and incorporated herein by reference.
/(17)/ Included as an exhibit to the Company's Quarterly Report
on Form 10-Q for the period ended September 30, 1997, as
filed with the Securities and Exchange Commission on
November 14, 1997, and incorporated herein by reference.
24
<PAGE>
Exhibit 10.4
------------
EXECUTIVE OFFICER EMPLOYMENT AGREEMENT
This Executive Officer Employment Agreement ("Agreement") is entered into
as of January 1, 1998, by and between Callaway Golf Company, a California
corporation (the "Company"), and Richard C. Helmstetter ("Employee").
1. TERM.
----
(a) The Company hereby employs Employee and Employee hereby accepts
employment pursuant to the terms and provisions of this Agreement for the term
commencing January 1, 1998 (the "Effective Date") and terminating December 31,
2000 (the "Expiration Date") unless this Agreement is earlier terminated as
hereinafter provided.
(b) Notwithstanding the foregoing, upon each anniversary date of the
Effective Date of this Agreement, the Expiration Date of this Agreement shall be
automatically extended one year so long as (a) this Agreement is otherwise still
in full force and effect, (b) Employee is still employed by the Company pursuant
to this Agreement, (c) Employee is not otherwise in breach of this Agreement,
(d) any such extension does not cause this Agreement to continue beyond the year
in which Employee reaches the age of 70; and (e) neither Employee nor the
Company has given notice as provided in Section 1(c). For example, if this
Agreement is still in full force and effect as of January 1, 1999, Employee is
still employed by the Company pursuant to this Agreement and is not otherwise in
breach of this Agreement, and neither party has given notice as provided in
Section 1(c), then on that date the Expiration Date of this Agreement shall be
extended from December 31, 2000 to December 31, 2001. It is expressly
understood that the termination of this Agreement no later than at the end of
the calendar year in which Employee reaches the age of 70 is at Employee's
request, and does not result from any policy or practice of the Company with
respect to the continued employment of individuals based upon age.
(c) At any time prior to the end of a calendar year, either Employee or the
Company may give written notice to the other that the automatic extension of the
Expiration Date of this Agreement pursuant to Section 1(b) shall end with the
next extension, which shall be the final such automatic extension of the
Expiration Date of this Agreement. Thus, if either Employee or the Company
gives written notice on or before December 31, 1998, and all other conditions
for automatic extension of the Expiration Date of this Agreement pursuant to
Section 1(b) exist, then on January 1, 1999 the Expiration Date of this
Agreement shall be extended pursuant to Section 1(b) from December 31, 2000 to
December 31, 2001, with this Agreement expiring on that date (if not previously
terminated pursuant to its terms) without any further automatic extensions.
(d) Unless such employment is earlier terminated or extended as provided in
this Agreement, upon the expiration of this Agreement pursuant to Section 1 or
the termination of this Agreement pursuant to either Sections 8(a), 8(b) or
8(h), Employee's status shall be one of a consultant to the Company, as provided
in paragraph 21.
<PAGE>
2. SERVICES.
--------
(a) Employee shall serve as Senior Executive Vice President, Chief of New
Golf Club Products, of the Company. Employee shall report to the Chief
Executive Officer of the Company. It is expected that Employee shall, as his
primary function, lead the golf club design function for the Company and shall
be a technical spokesperson for the Company with respect to golf clubs, and
shall be provided a budget, subject to the sole discretion of the Chief
Executive Officer, to perform research and development on golf clubs. It is
further expected that Employee shall serve as a member of the Office of the
Chief Executive Officer ("OCEO") and of the Strategic Planning Group, as those
bodies shall be constituted from time to time by the Chief Executive Officer.
(b) Employee shall be required to comply with all policies and procedures
of the Company, as such shall be adopted, modified or otherwise established by
the Company from time to time.
3. SERVICES TO BE EXCLUSIVE. During the term of this Agreement and any
------------------------
extensions thereof, Employee agrees to devote his or her full productive time
and best efforts to the performance of Employee's duties hereunder pursuant to
the supervision and direction of the Company's Board of Directors and its Chief
Executive Officer. Employee further agrees, as a condition to the performance
by the Company of each and all of its obligations hereunder, that so long as
Employee is employed by the Company, Employee will not directly or indirectly
render services of any nature to, otherwise become employed by, or otherwise
participate or engage in any other business without the Company's prior written
consent. Employee further agrees to execute such secrecy, non-disclosure,
patent, trademark, copyright and other proprietary rights agreements, if any, as
the Company may from time to time reasonably require. Nothing herein contained
shall be deemed to preclude Employee from having outside personal investments
and involvement with appropriate community activities, and from devoting a
reasonable amount of time to such matters, provided that this shall in no manner
interfere with or derogate from Employee's work for the Company.
4. COMPENSATION. The Company agrees to pay Employee a base salary at the
------------
rate of $600,000.00 per year. Employee shall also have an opportunity to earn
an annual bonus based upon participation in the Company's Executive Bonus Plan
as it may exist from time to time. Employee's base salary shall be subject to
review by the Company annually, and may be increased, but not decreased, at the
sole discretion of the Company.
5. EXPENSES AND BENEFITS.
---------------------
(a) Reasonable and Necessary Expenses. In addition to the compensation
---------------------------------
provided for in Section 4 hereof, the Company shall reimburse Employee for all
reasonable, customary, and necessary expenses incurred in the performance of
Employee's duties hereunder. Employee shall first account for such expenses by
submitting a signed statement itemizing such expenses prepared in accordance
with the policy set by the Company for reimbursement of such expenses. The
amount, nature, and extent of such expenses shall
2
<PAGE>
always be subject to the control, supervision, and direction of the Company and
its Chief Executive Officer.
(b) Vacation. Employee shall receive eight (8) weeks paid vacation for
--------
each twelve (12) month period of employment with the Company. The vacation may
be taken any time during the year subject to prior approval by the Company, such
approval not to be unreasonably withheld. Any unused time will accrue from year
to year. The maximum vacation time Employee may accrue shall be three times
Employee's annual vacation benefit. The Company reserves the right to pay
Employee for unused, accrued vacation benefits in excess of eight (8) weeks in
lieu of providing time off.
(c) Benefits. During Employee's employment with the Company pursuant to
--------
this Agreement, the Company shall provide for Employee to:
(i) participate in the Company's health insurance and disability
insurance plans as the same may be modified from time to time;
(ii) receive, if Employee is insurable under usual underwriting
standards, term life insurance coverage on Employee's life, payable to whomever
the Employee directs, in the face amount of $1,000,000.00, provided that
Employee's physical condition does not prevent Employee from qualifying for such
insurance coverage;
(iii) participate in the Company's 401(k) pension plan pursuant to the
terms of the plan, as the same may be modified from time to time;
(iv) participate in the Company's Executive Deferred Compensation
Plan, as the same may be modified from time to time;
(v) participate in the Company's Executive Health Program at Scripp's
Hospital; and
(vi) participate in any other benefit plans the Company provides from
time to time to executive officers.
(d) Club Membership. The Company shall pay the reasonable cost of
----------------
initiation associated with Employee gaining privileges at a mutually agreed upon
country club. Employee shall be responsible for all other expenses and costs
associated with such club use, including monthly member dues and charges. The
club membership itself shall belong to and be the property of the Company, not
Employee.
(e) Estate Planning and Other Perquisites. To the extent the Company
--------------------------------------
provides estate planning and related services, or any other perquisites and
personal benefits to other senior executive and/or executive vice presidents
generally from time to time, such services and perquisites shall be made
available to Employee on similar terms and conditions.
3
<PAGE>
(f) Stock Options. Pursuant to a separate stock option agreement, the
-------------
Company shall provide to Employee options to purchase up to 250,000 shares of
the Common Stock of the Company, which options shall vest provided Employee is
then currently employed by the Company or is a consultant to the Company as
provided in Section 21 and not in breach of this Agreement or any other
agreement between Employee and the Company, in accord with the following pricing
and vesting schedule:
<TABLE>
<CAPTION>
Shares Vesting Date Price
- ------ ------------ ----------------------------------------------
<S> <C> <C>
25,000 January 1, 1999 Base Price (the closing price on the NYSE on
February 19, 1998, as reported in the Wall
----
Street Journal)
--------------
50,000 January 1, 2000 Base Price
75,000 January 1, 2001 Base Price
100,000 January 1, 2002 Base Price
</TABLE>
It is contemplated that such stock options shall be granted in the form of
Incentive Stock Options to the maximum extent permitted by law and by the
Company's pertinent stock plans, and that such options shall be transferable by
Employee to the maximum extent permitted by law and by the Company's pertinent
stock plans. Exercise of such options and/or the sale of the underlying Common
Stock may be subject to reasonable restrictions as imposed by the Company.
(g) Other Benefits. At the sole discretion of the Chief Executive Officer,
--------------
Employee may be provided none, some or all of the following additional benefits
and perquisites:
(i) the opportunity to attend and/or participate in certain golf
tournaments, including The Masters Tournament and the AT&T Pebble Beach
Invitational; and/or
(ii) the opportunity to author a technical book on golf.
6. DISABILITY. If on account of any physical or mental disability
----------
Employee shall fail or be unable to perform all or substantially all of
Employee's duties under this Agreement for a continuous period of up to six (6)
months during any twelve month period during the term of this Agreement,
Employee shall be entitled to his or her full compensation and benefits as set
forth in this Agreement. If Employee's disability continues after such six (6)
month period, this Agreement is subject to termination pursuant to the
provisions of Section 8(e) hereof.
7. NONCOMPETITION.
--------------
(a) Other Business. To the fullest extent permitted by law, Employee
--------------
agrees that while employed by the Company, and during the term of the consulting
relationship set forth in paragraph 21 hereof, Employee will not, directly or
indirectly
4
<PAGE>
(whether as agent, consultant, holder of a beneficial interest, creditor, or in
any other capacity), engage in any business or venture which engages directly or
indirectly in competition with the business of the Company or any of its
affiliates, or have any interest in any person, firm, corporation, or venture
which engages directly or indirectly in competition with the business of the
Company or any of its affiliates. For purposes of this section, the ownership of
interests in a broadly based mutual fund shall not constitute ownership of the
stocks held by the fund.
(b) Other Employees. To the fullest extent permitted by law, Employee
---------------
agrees that during the term of this Agreement, any extensions thereof, and
during the term of the consulting relationship set forth in paragraph 21 hereof,
and except as may be required in the performance of his or her duties hereunder,
Employee shall not cause or induce, or attempt to cause or induce, any person
now or hereafter employed by the Company or any of its affiliates to terminate
such employment, nor shall Employee directly or indirectly employ any person who
is now or hereafter employed by the Company or any of its affiliates for a
period of one (1) year from the date Employee ceases to be an employee or
consultant of the Company.
(c) Suppliers. To the fullest extent permitted by law, Employee agrees
---------
that, while employed by the Company, and during the term of the consulting
relationship set forth in paragraph 21 hereof, and for one (1) year thereafter,
Employee shall not cause or induce, or attempt to cause or induce, any person or
firm supplying goods, services or credit to the Company or any of its affiliates
to diminish or cease furnishing such goods, services or credit.
(d) Conflict of Interest. To the fullest extent permitted by law, Employee
--------------------
agrees that while employed by the Company, and during the term of the consulting
relationship set forth in paragraph 21 hereof, Employee shall not engage in any
conduct or enterprise that shall constitute an actual or apparent conflict of
interest with respect to Employee's duties and obligations to the Company.
8. TERMINATION.
-----------
(a) Termination at the Company's Convenience. Employee's employment under
-----------------------------------------
this Agreement may be terminated by the Company at its convenience at any time
upon giving 90 days or longer notice to Employee. In the event of a termination
at the Company's convenience, Employee shall be entitled to receive (i) any
compensation accrued and unpaid as of the date of termination; (ii) the
continued payment of base salary at the same rate and on the same schedule as in
effect at the time of termination for a period of time running from the date of
termination to December 31, 2000; (iii) the payment of nondiscretionary bonuses,
if any, pursuant to the Company's Executive Bonus Plan, as it existed on the
date of termination, for a period of time running from the date of termination
to December 31, 2000; (iv) the immediate vesting of all unvested stock options
held by Employee as of such termination date; (v) the activation of the
consulting agreement provided for in Section 21 hereof; and (vi) no other
severance. At Employee's option, Employee may elect in writing up to 60 days
prior to termination to receive such payments and benefits as provided by
subsection (ii) of this section
5
<PAGE>
in a lump sum payment representing all future payments due, discounted to their
then present value at the prevailing major bank prime rate as of the date of
termination.
(b) Termination at Employee's Convenience. Employee's employment under
--------------------------------------
this Agreement may be terminated immediately by Employee at his or her
convenience at any time. In the event of a termination at the Employee's
convenience, Employee shall be entitled to receive (i) any compensation accrued
and unpaid as of the date of termination; (ii) severance pay equal to the
nondiscretionary cash bonus, if any, Employee would have earned under the then
existing Executive Bonus Plan in the fiscal year in which Employee's employment
is terminated, prorated in accordance with the number of days in such fiscal
year that elapsed prior to Employee's termination and payable at the same time
and under the same terms and conditions as any other nondiscretionary bonuses
paid to officers in that fiscal year; (iii) the activation of the consulting
agreement provided for in Section 21; and (iv) no other severance.
(c) Termination by the Company for Substantial Cause. Employee's
-------------------------------------------------
employment under this Agreement may be terminated immediately by the Company for
substantial cause at any time. In the event of a termination by the Company for
substantial cause, Employee shall be entitled to receive (i) any compensation
accrued and unpaid as of the date of termination; (ii) severance pay equal to
the nondiscretionary cash bonus, if any, Employee would have earned under the
then existing Executive Bonus Plan in the fiscal year in which Employee's
employment is terminated, prorated in accordance with the number of days in such
fiscal year that elapsed prior to Employee's termination and payable at the same
time and under the same terms and conditions as any other nondiscretionary
bonuses paid to officers in that fiscal year; and (iii) no other severance.
"Substantial cause" shall mean for purposes of this subsection willful failure
by Employee to substantially perform his her duties, material breach of this
Agreement, or gross misconduct, including but not limited to, theft, use or
possession of illegal drugs during work, disloyalty and/or conviction of felony
criminal conduct.
(d) Termination by Employee for Substantial Cause. Employee's employment
----------------------------------------------
under this Agreement may be terminated immediately by Employee for substantial
cause at any time. In the event of a termination by Employee for substantial
cause, Employee shall be entitled to receive (i) any compensation accrued and
unpaid as of the date of termination; (ii) the continued payment of base salary
at the same rate and on the same schedule as in effect at the time of
termination for a period of time equal to the remainder of the term of this
Agreement; (iii) the payment of nondiscretionary bonuses, if any, pursuant to
the Company's Executive Bonus Plan, as it existed on the date of termination,
for a period of time equal to the remainder of the term of this Agreement; (iv)
the immediate vesting of all unvested stock options held by Employee as of such
termination date; (v) the continuation of all benefits and perquisites provided
by Sections 5(c)(i) and (ii) hereof for a period of time equal to the remainder
of the term of this Agreement; and (vi) no other severance. At Employee's
option, Employee may elect in writing up to 60 days prior to termination to
receive such payments and benefits as provided by subsection (ii) of this
subsection in a lump sum payment representing all future payments due,
discounted to their then present value at
6
<PAGE>
the prevailing major bank prime rate as of the date of termination. "Substantial
cause" shall mean for purposes of this subsection a material breach of this
Agreement by the Company or any material diminishment in the title, position,
duties, responsibilities or status of Employee as set forth in Section 2(a).
(e) Termination Due to Permanent Disability. Subject to all applicable
----------------------------------------
laws, Employee's employment under this Agreement may be terminated immediately
by the Company in the event Employee becomes permanently disabled. In the event
of a termination by the Company due to Employee's permanent disability, Employee
shall be entitled to (i) any compensation accrued and unpaid as of the date of
termination; (ii) the continued payment of base salary at the same rate and on
the same schedule as in effect at the time of termination for a period of time
equal to the remainder of the term of this Agreement; (iii) severance pay equal
to the nondiscretionary cash bonus, if any, Employee would have earned under the
then existing Executive Bonus Plan in the fiscal year in which Employee's
employment is terminated, prorated in accordance with the number of days in such
fiscal year that elapsed prior to Employee's termination and payable at the same
time and under the same terms and conditions as any other nondiscretionary
bonuses paid to officers in that fiscal year; (iv) the immediate vesting of
outstanding but unvested stock options held by Employee as of such termination
date in a prorated amount based upon the number of days in the option vesting
period that elapsed prior to Employee's termination; (v) the continuation of all
benefits and perquisites provided by Section 5(c)(i) and (ii) hereof for a
period of time equal to the remainder of the term of this Agreement; and (vi) no
other severance. Termination under this subsection shall be effective
immediately upon the date the Board of Directors of the Company formally
resolves that Employee is permanently disabled. Subject to all applicable laws,
"permanent disability" shall mean the inability of Employee, by reason of any
ailment or illness, or physical or mental condition, to devote substantially all
of his or her time during normal business hours to the daily performance of
Employee's duties as required under this Agreement for a continuous period of
six (6) months. At Employee's option, Employee may elect in writing up to 60
days prior to termination to receive such payments and benefits as provided by
subsection (ii) of this section in a lump sum payment representing all future
payments due, discounted to their then present value at the prevailing major
bank prime rate as of the date of termination.
(f) Termination Due to Death. Employee's employment under this Agreement
-------------------------
may be terminated immediately by the Company in the event of Employee's death.
In the event of a termination by the Company due to Employee's death, Employee's
estate shall be entitled to (i) any compensation accrued and unpaid as of the
date of termination; (ii) the continued payment of base salary at the same rate
and on the same schedule as in effect at the time of termination for a period of
time equal to the remainder of the term of this Agreement; (iii) severance pay
equal to the nondiscretionary cash bonus, if any, Employee would have earned
under the then existing Executive Bonus Plan in the fiscal year in which
Employee's employment is terminated, prorated in accordance with the number of
days in such fiscal year that elapsed prior to Employee's termination and
payable at the same time and under the same terms and conditions as any other
nondiscretionary bonuses paid to officers in that fiscal year; (iv) the
immediate vesting of outstanding but unvested stock options held by
7
<PAGE>
Employee as of such termination date in a prorated amount based upon the number
of days in the option vesting period that elapsed prior to Employee's
termination; and (v) no other severance. At Employee's option, Employee may
elect in writing at least 60 days prior to termination to receive such payments
and benefits as provided by subsection (ii) of this section in a lump sum
payment representing all future payments due, discounted to their then present
value at the prevailing major bank prime rate as of the date of termination.
(g) Unless otherwise provided, any severance payments or other amounts due
pursuant to this Section 8 shall be paid in cash within thirty (30) days of
termination. Any severance payments shall be subject to usual and customary
employee payroll practices and all applicable withholding requirements. Except
for such severance pay and other amounts specifically provided pursuant to this
Section 8, Employee shall not be entitled to any further compensation, bonus,
damages, restitution, relocation benefits, or other severance benefits upon
termination of employment during the term of this Agreement. The amounts
payable to Employee pursuant to this Section 8 shall not be treated as damages,
but as severance compensation to which Employee is entitled by reason of
termination of employment under the applicable circumstances. The Company shall
not be entitled to set off against the amounts payable to Employee hereunder any
amounts earned by Employee in other employment after termination of his or her
employment with the Company pursuant to this Agreement, or any amounts which
might have been earned by Employee in other employment had Employee sought such
other employment. The provisions of this Section 8 shall not limit Employee's
rights under or pursuant to any other agreement or understanding with the
Company or with Employee's participation in, or terminating distributions and
vested rights under, any pension, profit sharing, insurance or other employee
benefit plan of the Company to which Employee is entitled pursuant to the terms
of such plan.
(h) Termination By Mutual Agreement of the Parties. Employee's employment
----------------------------------------------
pursuant to this Agreement may be terminated at any time upon the mutual
agreement in writing of the parties. Any such termination of employment shall
have the consequences specified in such agreement. If this Agreement is
terminated by mutual agreement of the parties, and the parties do not otherwise
agree in writing, the consulting agreement provided for in Section 21 shall be
activated upon termination.
(i) Pre-Termination Rights. The Company shall have the right, at its
----------------------
option, to require Employee to vacate his or her office or otherwise remain off
the Company's premises prior to the effective date of termination as determined
above, and to cease any and all activities on the Company's behalf.
9. RIGHTS UPON A CHANGE IN CONTROL.
-------------------------------
(a) If a Change in Control (as defined in Exhibit A hereto) occurs before
the termination of Employee's employment hereunder, then this Agreement shall be
continued in the same form and substance as in effect immediately prior to the
Change in Control.
(b) Notwithstanding anything in this Agreement to the contrary, if upon or
8
<PAGE>
at any time within one year following any Change in Control that occurs during
the term of this Agreement there is a Termination Event (as defined below),
Employee shall be treated as if he or she had been terminated for the
convenience of the Company pursuant to Section 8(a) and Employee shall be
entitled to receive the same compensation and other benefits and entitlements as
are described in Section 8(a) of this Agreement.
(c) A "Termination Event" shall mean the occurrence of any one or more of
the following, and in the absence of the Employee's permanent disability
(defined in Sections 6 and 8(e)), Employee's death, and any of the factors
enumerated in Section 8(c) as providing to the Company "substantial cause" for
terminating Employee's employment:
(i) the termination or material breach of this Agreement by the Company;
(ii) a failure by the Company to obtain the assumption of this Agreement
by any successor to the Company or any assignee of all or substantially all of
the Company's assets;
(iii) any material diminishment in the title, position, duties,
responsibilities or status that Employee had with the Company, as a publicly
traded entity, immediately prior to the Change in Control;
(iv) any reduction, limitation or failure to pay or provide any of the
compensation, reimbursable expenses, stock options, incentive programs, or other
benefits or perquisites provided to Employee under the terms of this Agreement
or any other agreement or understanding between the Company and Employee, or
pursuant to the Company's policies and past practices as of the date immediately
prior to the Change in Control; or
(v) any requirement that Employee relocate or any assignment to Employee
of duties that would make it unreasonably difficult for Employee to maintain the
principal residence he or she had immediately prior to the Change in Control.
10. SURRENDER OF BOOKS AND RECORDS. Employee agrees that upon termination
------------------------------
of his or her employment in any manner, or upon the termination of the
consulting relationship set forth in paragraph 21 hereof, Employee will
immediately surrender to the Company all lists, books and records of or
connected with the business of the Company or any of its affiliates, and all
other properties belonging to the Company or any of its affiliates, it being
distinctly understood that all such lists, books, records and other documents
are the property of the Company.
11. GENERAL RELATIONSHIP. Unless and until Employee becomes a consultant
--------------------
to the Company pursuant to paragraph 21 hereof, Employee shall be considered an
employee of the Company within the meaning of all federal, state and local laws
and regulations, including, but not limited to, laws and regulations governing
unemployment insurance, workers' compensation, industrial accident, labor and
taxes.
9
<PAGE>
12. PROPRIETARY INFORMATION.
-----------------------
(a) Employee agrees that any trade secret or proprietary information of
the Company or any of its affiliates to which Employee has become privy or may
become privy to as a result of his or her employment with the Company shall not
be divulged or disclosed to any other party (including, without limit, any
person or entity with whom or in whom Employee has a business interest) without
the express written consent of the Company, except as otherwise required by law.
In addition, Employee agrees to use such information only during the term of
this Agreement and only in a manner which is consistent with the purposes of
this Agreement. In the event Employee believes that he or she is legally
required to disclose any trade secret or proprietary information of the Company
or any of its affiliates, Employee shall give reasonable notice to the Company
prior to disclosing such information and shall take such legally permissible
steps as are reasonably necessary to protect such trade secrets or proprietary
information, including but not limited to, seeking orders from a court of
competent jurisdiction preventing disclosure or limiting disclosure of such
information beyond that which is legally required. The Company shall reimburse
Employee for reasonable legal expenses incurred in seeking said orders.
(b) Except as otherwise required by law, Employee shall hold in confidence
all trade secret and proprietary information received from the Company or any of
its affiliates until such information is available to the public generally or to
the Company's competitors through no unauthorized act or fault of Employee.
Upon termination of this Agreement, Employee shall promptly return any such
written proprietary information in his or her possession to the Company.
(c) As used in this Agreement, "trade secret and proprietary information"
means information, whether written or oral, not generally available to the
public; it includes the concepts and ideas involved in the products of the
Company or any of its affiliates, whether patentable or not; and includes, but
is not limited to, the processes, formulae, and techniques disclosed by the
Company or any of its affiliates to Employee or observed by Employee. It does
not include:
(i) Information, which at the time of disclosure, had been
previously published;
(ii) Information which is published after disclosure, unless such
publication is a breach of this Agreement or is otherwise a violation of the
contractual, legal or fiduciary duties owed to the Company or any of its
affiliates, which violation is known to Employee; or
(iii) Information which, subsequent to disclosure, is obtained by
Employee from a third person who is lawfully in possession of such information
(which information is not acquired in violation of any contractual, legal, or
fiduciary obligation owed to the Company or any of its affiliates with respect
to such information) and does not require Employee to refrain from disclosing
such information to others.
10
<PAGE>
(d) The provisions of this Section 12 shall survive the termination or
expiration of this Agreement, and shall be binding upon Employee in perpetuity.
13. INVENTIONS AND INNOVATIONS.
--------------------------
(a) As used in this Agreement, inventions and innovations mean new ideas
and improvements, whether or not patentable, relating to the design,
manufacture, use or marketing of golf equipment or other products of the Company
or any of its affiliates. This includes, but is not limited to, products,
processes, methods of manufacture, distribution and management, sources of and
uses for materials, apparatus, plans, systems and computer programs.
(b) Employee agrees to disclose to the Chief Executive Officer and the
Board of Directors of the Company any invention or innovation which he or she
develops, either alone or with anyone else, during the term of Employee's
employment with the Company or the term of Employee's consulting relationship
with the Company pursuant to paragraph 21 hereof, as well as any invention or
innovation based on proprietary information of the Company or any of its
affiliates which Employee develops, whether alone or with anyone else, within
twelve (12) months after the termination of Employee's employment with the
Company or twelve (12) months after the termination of Employee's consulting
relationship with the Company pursuant to paragraph 21, whichever occurs later.
(c) Employee agrees to assign any invention or innovation to the Company:
(i) which is developed totally or partially while Employee is
employed by the Company or is a consultant to the Company pursuant to paragraph
21 hereof;
(ii) for which Employee used any of the equipment, supplies,
facilities or proprietary information of the Company or any of its affiliates,
even if any or all of such items are relatively minor, and have little or no
monetary value; or
(iii) which results in any way from Employee's work for the Company or
relates in any way to the business of the Company or any of its affiliates, or
the current or anticipated research and development of the Company or any of its
affiliates.
(d) Employee understands and agrees that the existence of any condition
set forth in either (c)(i), (ii) or (iii) above is sufficient to require
Employee to assign his or her inventions or innovations to the Company.
(e) All provisions of this Agreement relating to the assignment by
Employee of any invention or innovation are subject to the provisions of
California Labor Code Sections 2870, 2871 and 2872.
(f) Employee agrees that any invention or innovation which is required
11
<PAGE>
under the provisions of this Agreement to be assigned to the Company shall be
the sole and exclusive property of the Company. Upon the Company's request, at
no expense to Employee, Employee shall execute any and all proper applications
for patents, assignments to the Company, and all other applicable documents, and
will give testimony when and where requested to perfect the title and/or patents
(both within and without the United States) in all inventions or innovations
belonging to the Company.
(g) Employee shall disclose all inventions and innovations to the Company,
even if Employee does not believe that he or she is required under this
Agreement, or pursuant to California Labor Code Section 2870, to assign his or
her interest in such invention or innovation to the Company. If the Company and
Employee disagree as to whether or not an invention or innovation is included
within the terms of this Agreement, it will be the responsibility of Employee to
prove that it is not included.
14. ASSIGNMENT. This Agreement shall be binding upon and shall inure to
----------
the benefit of the parties hereto and the successors and assigns of the Company.
Employee shall have no right to assign his rights, benefits, duties, obligations
or other interests in this Agreement, it being understood that this Agreement is
personal to Employee.
15. ATTORNEYS' FEES AND COSTS. If any arbitration or other proceeding is
-------------------------
brought for the enforcement of this Agreement, or because of an alleged dispute
or default in connection with any of its provisions, the successful or
prevailing party shall be entitled to recover reasonable attorneys' fees
incurred in such action or proceeding, in addition to any relief to which such
party may be deemed entitled, if, and only if, the arbitrator finds that the
non-prevailing party's position, taken as a whole, was frivolous or baseless.
The prevailing party in any such proceeding shall be entitled to recover from
the other party the reasonable costs and expenses of any such proceeding (not
including attorneys' fees).
16. ENTIRE UNDERSTANDING. This Agreement sets forth the entire
--------------------
understanding of the parties hereto with respect to the subject matter hereof,
and no other representations, warranties or agreements whatsoever as to that
subject matter have been made by Employee or the Company not herein contained.
This Agreement shall not be modified, amended or terminated except by another
instrument in writing executed by the parties hereto. This Agreement replaces
and supersedes any and all prior understandings or agreements between Employee
and the Company regarding employment.
17. NOTICES. Any notice, request, demand, or other communication required
-------
or permitted hereunder, shall be deemed properly given when actually received or
within five (5) days of mailing by certified or registered mail, postage
prepaid, to:
Employee: Richard C. Helmstetter
P.O. Box 3644
Rancho Santa Fe, California 92067
Company: Callaway Golf Company
12
<PAGE>
2285 Rutherford Road
Carlsbad, California 92008-8815
Attn: Donald H. Dye
or to such other address as Employee or the Company may from time to time
furnish, in writing, to the other.
18. ARBITRATION. Any dispute, controversy or claim arising hereunder or
-----------
in any way related to this Agreement, its interpretation, enforceability, or
applicability, or relating to Employee's employment, or the termination thereof,
that cannot be resolved by mutual agreement of the parties shall be submitted to
arbitration. The arbitration shall be conducted by a retired judge located in
San Diego, California, who shall have the powers to hear motions, control
discovery, conduct hearings and otherwise do all that is necessary to resolve
the matter. The arbitration award shall be final and binding, and judgment on
the award may be entered in any court having jurisdiction thereof. It is
expressly understood that the parties have chosen arbitration to avoid the
burdens, costs and publicity of a court proceeding, and the arbitrator is
expected to handle all aspects of the matter, including discovery and any
hearings, in such a way as to minimize the expense, time, burden and publicity
of the process, while assuring a fair and just result. In particular, the
parties expect that the arbitrator will limit discovery by controlling the
amount of discovery that may be taken (e.g., the number of depositions or
interrogatories) and by restricting the scope of discovery to only those matters
clearly relevant to the dispute.
19. MISCELLANEOUS.
-------------
(a) Headings. The headings of the several sections and paragraphs of this
--------
Agreement are inserted solely for the convenience of reference and are not a
part of and are not intended to govern, limit or aid in the construction of any
term or provision hereof.
(b) Waiver. Failure of either party at any time to require performance by
------
the other of any provision of this Agreement shall in no way affect that party's
rights thereafter to enforce the same, nor shall the waiver by either party of
any breach of any provision hereof be held to be a waiver of any succeeding
breach of any provision or a waiver of the provision itself.
(c) Applicable Law. This Agreement shall constitute a contract under the
--------------
internal laws of the State of California and shall be governed and construed in
accordance with the laws of said state as to both interpretation and
performance.
(d) Severability. In the event any provision or provisions of this
------------
Agreement is or are held invalid, the remaining provisions of this Agreement
shall not be affected thereby.
20. SUPERSEDES OLD OFFICER EMPLOYMENT CONTRACT. Employee and the Company
-------------------------------------------
recognize that prior to the effective date of this Agreement they
13
<PAGE>
were parties to a certain Officer Employment Agreement effective January 1,
1995, as amended (the "Old Officer Employment Agreement"). It is the intent of
the parties that as of the effective date of this Agreement, this Agreement
shall replace and supersede the Old Officer Employment Agreement entirely, that
the Old Officer Employment Agreement shall no longer be of any force or effect
except as to Sections 7, 12, 13, 15 and 18 thereof, and that to the extent there
is any conflict between the Old Officer Employment Agreement and this Agreement,
this Agreement shall control and both agreements shall be construed so as to
give the maximum force and effect to the provisions of this Agreement.
21. CONSULTING SERVICES. Upon the expiration of this Agreement pursuant
-------------------
to Section 1 or the termination of this Agreement pursuant to either Sections
8(a), 8(b) or 8(h), if this Agreement has not been previously terminated as
otherwise provided herein, Employee shall become a consultant to the Company
pursuant to a written consulting agreement in substantially the same form and
substance as set forth in Exhibit B hereto (the "Consulting Agreement").
Pursuant to the Consulting Agreement, Employee shall consult with and advise the
Company regarding the business of the Company, and shall undertake to render an
opinion or advise the Company on any matter requested by the Company. Such
consulting services shall be rendered on an independent contractor basis, and
shall be provided at such time and place as reasonably requested by the Company.
As full compensation for such consulting services, Employee shall be paid at the
rate of one-half of Employee's base salary as in effect in the final year of
this Agreement per year.
22. ASSIGNMENT OF RIGHTS.
---------------------
(a) Employee hereby assigns and transfers to the Company, in perpetuity,
all rights and title to the use of his or her name, likeness, image, character,
identity, and signature for commercial use by the Company in any business or
trade, everywhere, in perpetuity. Employee shall not license, transfer or
otherwise approve the use of his or her name, likeness, image, character,
identity or signature for commercial use by any other person or entity, and any
attempt by Employee to do so shall be null and void.
(b) Employee agrees to fully and reasonably cooperate with the Company to
effectuate the transfer and enforcement of such rights, including reasonable
cooperation in the preparation and execution of any necessary papers, agreements
or filings, and reasonable cooperation in the enforcement of such rights by the
Company in legal proceedings against third parties. In the event a third party
infringes upon the rights transferred to the Company hereunder, the Company
shall have the right, at its sole discretion, to pursue enforcement of its
rights in its own name and/or in the name of and on behalf of Employee. The
Company shall have full control over any legal proceedings instituted by it
against such third parties, although it shall give Employee reasonable notice of
any such proceeding.
(c) If this Agreement terminates or expires prior to December 31 in the
year in which Employee reaches the age of 70 because (i) the Company has given
notice of no further extensions as provided in Section 1(c), (ii) the Company
has terminated the Agreement pursuant to Section 8(a), or (iii) Employee has
terminated this Agreement pursuant to Section
14
<PAGE>
8(d), then Employee shall be entitled to receive as additional consideration for
the grant of rights covered herein an amount of money equal to the difference
between the severance payments otherwise due, if any, pursuant to Section8(a) or
Section 8(d), respectively, and the base salary and nondiscretionary bonuses, if
any, Employee would have received hereunder had this Agreement remained in
effect until such time as it would have expired on December 31 of the year in
which Employee would reach the age of 70. In lieu of paying such additional
consideration, the Company may, at its option, return such rights to Employee.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
effective the date first written above.
EMPLOYEE: COMPANY:
CALLAWAY GOLF COMPANY,
a California corporation
/s/ RICHARD C. HELMSTETTER By: /s/ DONALD H. DYE
____________________________ ______________________________
Richard C. Helmstetter Donald H. Dye
2 March, 1998 President & Chief Executive Officer
March 6, 1998
15
<PAGE>
EXHIBIT A
A "Change in Control" means the following and shall be deemed to occur if
any of the following events occurs:
(a) Any person, entity or group, within the meaning of Section 13(d) or
14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") but excluding
the Company and its affiliates and any employee benefit or stock ownership plan
of the Company or its affiliates and also excluding an underwriter or
underwriting syndicate that has acquired the Company's securities solely in
connection with a public offering thereof (such person, entity or group being
referred to herein as a "Person") becomes the beneficial owner (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of
either the then outstanding shares of Common Stock or the combined voting power
of the Company's then outstanding securities entitled to vote generally in the
election of directors; or
(b) Individuals who, as of the effective date hereof, constitute the Board
of Directors of the Company (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board of Directors of the Company,
provided that any individual who becomes a director after the effective date
hereof whose election, or nomination for election by the Company's shareholders,
is approved by a vote of at least a majority of the directors then comprising
the Incumbent Board shall be considered to be a member of the Incumbent Board
unless that individual was nominated or elected by any Person having the power
to exercise, through beneficial ownership, voting agreement and/or proxy, 20% or
more of either the outstanding shares of Common Stock or the combined voting
power of the Company's then outstanding voting securities entitled to vote
generally in the election of directors, in which case that individual shall not
be considered to be a member of the Incumbent Board unless such individual's
election or nomination for election by the Company's shareholders is approved by
a vote of at least two-thirds of the directors then comprising the Incumbent
Board; or
(c) Consummation by the Company of the sale or other disposition by the
Company of all or substantially all of the Company's assets or a reorganization
or merger or consolidation of the Company with any other person, entity or
corporation, other than
(i) a reorganization or merger or consolidation that would result in
the voting securities of the Company outstanding immediately prior thereto (or,
in the case of a reorganization or merger or consolidation that is preceded or
accomplished by an acquisition or series of related acquisitions by any Person,
by tender or exchange offer or otherwise, of voting securities representing 5%
or more of the combined voting power of all securities of the Company,
immediately prior to such acquisition or the first acquisition in such series of
acquisitions) continuing to represent, either by remaining outstanding or by
being converted into voting securities of another entity, more than 50% of the
combined voting power of the voting securities of the Company or such other
entity outstanding immediately after such reorganization or merger or
consolidation (or series of related transactions involving such a
16
<PAGE>
reorganization or merger or consolidation), or
(ii) a reorganization or merger or consolidation effected to implement
a recapitalization or reincorporation of the Company (or similar transaction)
that does not result in a material change in beneficial ownership of the voting
securities of the Company or its successor; or
(d) Approval by the shareholders of the Company or an order by a court of
competent jurisdiction of a plan of liquidation of the Company.
17
<PAGE>
EXHIBIT B
CONSULTING AGREEMENT
This Consulting Agreement ("Agreement") is entered into as of
______________, ____, between Callaway Golf Company ("Callaway Golf"), a
California corporation, and Richard C. Helmstetter ("Consultant").
Recitals
--------
A. Callaway Golf is in the business of designing, manufacturing and
selling golf clubs and related products using trade secrets, patented procedures
and other proprietary information. Callaway Golf is currently marketing its
products in the United States of America and internationally.
B. Consultant has been a long-time employee of Callaway Golf with
expertise in various areas including the design, testing and development of new
products.
C. Callaway Golf desires to retain access to the services and expertise of
Consultant and believes that the experience and expertise of Consultant will be
of benefit to Callaway Golf; therefore, Callaway Golf desires to enter into this
Agreement with Consultant.
D. Consultant wishes to assist Callaway Golf in its ongoing golf club
research, development and manufacturing efforts; therefore, Consultant desires
to enter into this Agreement with Callaway Golf.
NOW, THEREFORE, in consideration of the mutual promises contained herein,
the parties agree as follows:
1. Engagement. Callaway Golf hereby engages the services of Consultant as
----------
a consultant, and Consultant hereby accepts such engagement, subject to the
terms and conditions of this Agreement.
2. Term/Termination. The term ("Term") of this Agreement shall commence
----------------
on ____________, ____ and shall continue for (10) years until _______________,
____, unless terminated in accordance with Section 17 herein. Consultant
understands and agrees that the provisions of Sections 4, 9, 10, 11, 14 and 21
shall survive termination of the other provisions of this Agreement.
3. Services to be Performed by Consultant. During the Term of this
--------------------------------------
Agreement, Consultant shall provide consulting services on matters related to
the business of Callaway Golf as may be requested by Callaway Golf from time to
time. Consultant shall maintain contact with Callaway Golf through the Chief
Executive Officer, or such person or persons as may be designated by the Chief
Executive Officer from time to time.
18
<PAGE>
Consultant represents that Consultant has the qualifications and ability
to perform the services in a professional manner without the advice, control, or
supervision of Callaway Golf. While the specific methods and manner of providing
the services shall be solely determined by Consultant, Callaway Golf shall have
the right to oversee, direct and give advice to Consultant regarding the general
extent, nature and scope of services to be performed by Consultant under this
Agreement. The services shall be provided by Consultant at such times and in
such locations as Callaway Golf and Consultant mutually agree upon from time to
time.
4. Assignment of Rights.
--------------------
(a) Callaway Golf shall own all deliverables delivered by Consultant
hereunder.
(b) As used in this Agreement, "Inventions," whether or not they have
been patented, trademarked, or copyrighted, means designs, inventions,
technologies, methods, innovations, ideas, improvements, processes, materials,
sources of and uses for materials, apparatus, plans, systems and computer
programs relating to the design, manufacture, use, marketing, distribution and
management of Callaway Golf's and/or its affiliates' products.
(c) All works of authorship produced under this Agreement shall be
"works for hire" produced exclusively for Callaway Golf, and all rights thereto
shall belong to Callaway Golf. As a material part of the terms and
understandings of this Agreement, Consultant hereby assigns to Callaway Golf all
works of authorship and all Inventions relating to the business of Callaway Golf
and/or its affiliates, and all intellectual property rights therein (including
without limitation all patent rights, copyrights, and trade secret rights),
which Consultant creates, develops, conceives and/or reduces to practice, either
alone or with anyone else, during the course of providing the Services under
this Agreement, regardless of whether they are suitable to be patented,
trademarked and/or copyrighted.
(d) Consultant agrees to disclose to the President and Chief Executive
Officer of Callaway Golf any work of authorship and/or Invention relating to the
business of Callaway Golf and/or its affiliates, which Consultant develops,
conceives and/or reduces to practice, either alone or with anyone else, during
the Term of this Agreement. Consultant shall disclose such works of authorship
and/or Inventions to Callaway Golf, even if Consultant does not believe that
Consultant is required under this Agreement to assign Consultant's interest in
such work of authorship and/or Invention to Callaway Golf. If Callaway Golf and
Consultant disagree as to whether or not a work of authorship and/or an
Invention is included within the terms of this Agreement, it will be the
responsibility of Consultant to prove that it is not included and/or that
assignment to Callaway Golf is not required.
(e) The obligation to assign as provided in this Agreement does not
apply to any work of authorship or any Invention to the extent such obligation
would conflict with any applicable state or federal law. All provisions of this
Agreement relating to the assignment by
19
<PAGE>
Consultant of works of authorship and Inventions are subject to the provisions
of California Labor Code Sections 2870, 2871 and 2872.
(f) Upon Callaway Golf's request, at no expense to Consultant,
Consultant shall execute any and all proper applications for patents, copyrights
and/or trademarks, assignments to Callaway Golf, and all other applicable
documents, and will give testimony when and where requested to perfect the
title, copyrights, trademarks and/or patents (both within and without the United
States) in all works of authorship and Inventions assigned to Callaway Golf
hereunder.
(g) Consultant agrees that if in the course of performing the
Services, Consultant incorporates any other Invention owned by Consultant or for
which Consultant has the right to grant the rights granted in this Section 4(g)
("Consultant Inventions"), into any report, presentation, recommendation,
---------------------
process, method, tooling, design, machine, equipment, product or other item
recommended, presented, developed, implemented or specified by Consultant for or
to Callaway Golf under this Agreement, Consultant hereby grants to Callaway Golf
a nonexclusive, transferable, royalty-free, perpetual, irrevocable, worldwide
license under said Consultant Invention to make, have made, import, modify, and
use any product or other item embodying or using said Consultant Invention.
Consultant will provide to Callaway Golf copies of all patents and patent
applications related to all such Consultant Inventions.
(h) Consultant agrees that if in the course of performing the
Services, Consultant recommends the use of any third party Inventions which, to
the knowledge of Consultant, are or may be covered by patents held by third
parties, that Consultant will disclose such information to Callaway Golf.
5. Compensation. Callaway Golf agrees to pay Consultant during the Term,
------------
and Consultant agrees to accept as payment in full for the services rendered by
Consultant to Callaway Golf, pursuant to the terms of this Agreement and the
assignment of rights provided for above, as follows:
(a) Callaway Golf shall pay Consultant for authorized consulting
services at the rate of one-half of Employee's base salary as in effect in the
final year of the Employment Agreement between the Callaway Golf and Consultant
effective January 1, 1998 per year, to be paid in equal installments on a
monthly basis. In the sole discretion of Callaway Golf, Consultant may be paid
a discretionary bonus in none, some or all of the years during the term of this
Agreement.
(b) Callaway Golf shall provide at its expense, to the extent
Consultant's services to the Company pursuant to this Agreement require, office,
secretarial and other support for Consultant.
(c) Callaway Golf shall reimburse Consultant for all reasonable,
customary and necessary expenses for travel and lodging incurred in the
performance of the services to be provided hereunder. Consultant shall account
for such expenses by submitting a signed
20
<PAGE>
statement itemizing such expenses prepared in accordance with the policies set
by Callaway Golf for reimbursement of such expenses. The amount, nature and
extent of such expenses shall always be subject to the control, supervision and
direction of Callaway Golf.
(d) Consultant shall be permitted, if Consultant is insurable under
usual underwriting standards, to the extent reasonably practical, to participate
in medical, dental and disability insurance to be provided by Callaway Golf.
Callaway Golf shall also provide, at its expense, for Consultant to participate
annually in the Executive Health Program at Scripp's Hospital. It is recognized
that all or part of such expense may be treated as taxable compensation to
Consultant, and that Callaway Golf shall not be responsible for any taxes that
may be due as a result.
(e) Callaway Golf shall provide, at Callaway Golf's expense, if
Consultant is insurable under usual underwriting standards, term life insurance
coverage on Consultant's life, payable to whomever Consultant directs, in the
face amount of $1,000,000.00, provided that Consultant's physical condition does
not prevent Consultant from reasonably qualifying for such insurance coverage.
It is recognized that all or part of such expense may be treated as taxable
compensation to Consultant, and that Callaway Golf shall not be responsible for
any taxes that may be due as a result.
6. Relationship of the Parties. Consultant enters into this Agreement as,
---------------------------
and shall continue to be, an independent contractor. Under no circumstances
shall Consultant look to Callaway Golf as Consultant's employer, or as a
partner, agent, or principal. Except as otherwise specifically provided herein,
while Consultant is engaged as a Consultant pursuant to this Agreement, Callaway
Golf will not provide Consultant with benefits accorded to Callaway Golf
employees, regardless of whether Consultant is later re-classified as an
employee of Callaway Golf, including but not limited to:
. Workers' compensation insurance;
. Participation in Employee health and/or disability insurance plans
. Access to any type of employee benefit plan, including but not
limited to Callaway Golf's 401(k) and employee stock purchase plans;
. Vacation leave and/or sick pay.
7. Reserved.
---------
8. Extent of Authority. Consultant shall have no authority or right to
-------------------
commit or bind Callaway Golf and/or its affiliates to any agreement or
arrangement or to obligate Callaway Golf and/or its affiliates in any manner.
9. Exclusive Dealings. During the term of this Agreement, Consultant
------------------
agrees to deal exclusively with Callaway Golf and/or its affiliates regarding
consultation, research and development, and/or experimental work relating to
Callaway Golf's and/or its affiliates products or anticipated products.
Consultant also agrees that during the term of this Agreement, Consultant will
not consult with any other person or entity regarding any business
21
<PAGE>
which engages directly or indirectly in competition with the business of
Callaway Golf and/or its affiliates.
10. Non-Solicitation. For one year following the termination of
----------------
Consultant's engagement as a Consultant with Callaway Golf, Consultant agrees
not to ask or encourage directly or indirectly any employees or consultants of
Callaway Golf, or any of its affiliates, to leave their employment with or
refrain from providing services to Callaway Golf, or any of its affiliates.
Consultant shall make any subsequent employer aware of this non-solicitation
obligation. Consultant agrees that should any consultant or employee of Callaway
Golf or any of its affiliates, join Consultant or Consultant's subsequent
employer during the year following the termination of Consultant's services for
Callaway Golf and/or its affiliates, this will conclusively be deemed a breach
of the nonsolicitation agreement without the necessity of further proof.
11. Suppliers. During the term of this Agreement, and for one year
---------
thereafter, Consultant shall not cause or induce, or attempt to cause or induce,
any person or firm supplying goods, services or credit to Callaway Golf and/or
its affiliates to diminish or cease furnishing such goods, services or credit.
12. Restrictions Do Not Impair Livelihood. Consultant further acknowledges
-------------------------------------
that: (a) in the event this Agreement terminates for any reason, Consultant
will be able to earn a livelihood without violating the foregoing restrictions;
and (b) Consultant's continuing ability to earn a livelihood without violating
these restrictions is a material condition to this Agreement.
13. Conflict of Interest. During the term of this Agreement, Consultant
--------------------
shall not engage in any conduct or enterprise that shall constitute an actual or
apparent conflict of interest with respect to Consultant's duties and
obligations to Callaway Golf and/or its affiliates.
14. Confidential Information and/or Trade Secrets.
----------------------------------------------
(a) Definition. As used in this Agreement, the terms "Confidential
----------
Information and/or Trade Secrets" mean all information, whether written or
oral, not generally available to the public, regardless of whether it is
suitable to be patented, copyrighted and/or trademarked, which is owned by or
in the possession of Callaway Golf and/or its affiliates, including but not
limited to (1) concepts, ideas, plans and strategies involved in Callaway
Golf's and/or its affiliates' products and businesses, (2) the processes,
formulae and techniques disclosed by Callaway Golf and/or its affiliates or
contractors to Consultant or observed by Consultant, (3) the designs,
inventions and innovations and related plans, strategies and applications which
Consultant develops during the Term of this Agreement in connection with the
projects assigned to Consultant by Callaway Golf, and (4) third party
information which Callaway Golf and/or its affiliates has/have promised to keep
confidential. The terms "Confidential Information and/or Trade Secrets" do not
include the following:
22
<PAGE>
(i) Information which, at the time of disclosure or observation, had
been previously published or otherwise publicly disclosed;
(ii) Information which is published (or otherwise publicly disclosed)
after disclosure or observation, unless such publication is a breach of this
Agreement or is otherwise a violation of the contractual, legal or fiduciary
duties owed to Callaway Golf and/or its affiliates; or
(iii) Information which, subsequent to disclosure or observation, is
obtained by Consultant from a third person who is lawfully in possession of such
information (which information is not acquired in violation of any contractual,
legal, or fiduciary obligation owed to Callaway Golf and/or its affiliates with
respect to such information) and who is not required to refrain from disclosing
such information to others.
(b) No Disclosure of Confidential Information and/or Trade Secrets. During
--------------------------------------------------------------
the Term of this Agreement, Consultant will have access to and become familiar
with various Confidential Information and/or Trade Secrets which Consultant
acknowledges are owned and shall continue to be owned solely by Callaway Golf
and/or its affiliates or third party contractors. Consultant agrees that
Consultant will not, at any time, whether during or subsequent to the term of
this Agreement, use any Confidential Information and/or Trade Secrets for any
purpose except in order to: (1) perform Consultant's duties under this
Agreement; (2) disclose Confidential Information and/or Trade Secrets to third
parties for which Callaway Golf has given its written consent; or (3) disclose
Confidential Information and/or Trade Secrets pursuant to a governmental process
in which Consultant is compelled to do so. In the event Consultant believes that
Consultant is legally required to disclose any Confidential Information and/or
Trade Secrets, Consultant shall give reasonable notice to Callaway Golf prior to
disclosing such information and shall assist Callaway Golf in taking such
legally permissible steps as are reasonable and necessary to protect the
Confidential Information and/or Trade Secrets. If Consultant believes that it is
necessary for Consultant to disclose Confidential Information and/or Trade
Secrets, Consultant shall first obtain written consent to do so from Callaway
Golf, and the party to whom the disclosure is to be made shall execute a non-
disclosure agreement in a form acceptable to Callaway Golf before Consultant
shall make such disclosure.
(c) No Removal of Callaway Golf and/or its Affiliates' Documents or
---------------------------------------------------------------
Information. Consultant understands and agrees that all books, records, customer
- -----------
lists and documents connected with the business of Callaway Golf and/or its
affiliates are the property of and belong to Callaway Golf and/or its affiliates
or third-party contractors. Under no circumstances shall Consultant remove from
Callaway Golf's and/or its affiliates' facilities any of Callaway Golf's and/or
its affiliates' books, records, documents, lists or any copies of the same
without Callaway Golf's and/or its affiliates' written permission, nor shall
Consultant make any copies of Callaway Golf's and/or its affiliates' books,
records, documents or lists for use outside Callaway Golf's and/or its
affiliates' office(s) except as specifically authorized by Callaway Golf.
Consultant shall return to Callaway Golf and/or its affiliates all books,
records, documents and customer lists belonging to Callaway Golf and/or its
affiliates upon
23
<PAGE>
termination of this Agreement.
(d) The provisions of Section 14 shall survive the termination or
expiration of this Agreement, and shall be binding upon Consultant in
perpetuity.
15. Surrender of Company Property. Consultant agrees that upon
-----------------------------
termination of this Agreement in any manner, Consultant will immediately
surrender to Callaway Golf and/or its affiliates all property owned by Callaway
Golf and/or its affiliates.
16. Notices. Any notice, request, demand or other communication required
-------
or permitted hereunder shall be deemed properly given when actually received or
within five days of mailing by certified or registered mail, postage prepaid, to
the following addresses, or to such addresses as may be furnished from time to
time, in writing, to the other party:
Callaway Golf: Callaway Golf Company
2285 Rutherford Road
Carlsbad, CA 92008-8815
Attn: Donald H. Dye, President & Chief Executive Officer
Consultant: Richard C. Helmstetter
P.O. Box 3644
Rancho Santa Fe, California 92067
17. Termination. This Agreement may be terminated by Callaway Golf for
-----------
substantial cause upon the occurrence of any of the following events:
a. Death. This Agreement may be terminated upon the death of
-----
consultant. Termination under this sub-section shall be effective on the date
of Consultant's death.
b. Permanent Disability. This Agreement may be terminated upon the
--------------------
permanent disability of Consultant. For purposes of this Agreement, and subject
to all applicable laws with respect to disabilities and the rights of those who
are disabled, "permanent disability" shall mean the inability of Consultant, by
reason of any ailment or illness, or physical or mental condition, to perform
his duties hereunder for a consecutive period of six (6) months.
c. Failure to Substantially Perform Duties or Misconduct. This
-----------------------------------------------------
Agreement may be terminated for the failure of Consultant to substantially
perform his duties, breach of this Agreement, or misconduct associated with the
performance of his duties as a consultant, including, but not limited to,
dishonesty, theft, disloyalty and/or felony criminal conduct. Termination under
this subsection shall be effective immediately, upon the receipt by Consultant
of written notice stating the cause of such termination.
The provisions of Sections 4, 9, 10, 11, 14 and 21 shall survive
termination of the other provisions of this Agreement.
24
<PAGE>
18. Advertising Waiver. Consultant agrees to permit Callaway Golf and/or
------------------
its affiliates, and persons or other organizations authorized by Callaway Golf
and/or its affiliates, to use, publish and distribute advertising or sales
promotional literature concerning the products of Callaway Golf and/or its
affiliates, or the machinery and equipment used in the manufacture thereof, in
which Consultant's name and/or pictures of Consultant taken in the course of
Consultant's provision of services to Callaway Golf and/or its affiliates,
appear. Consultant hereby waives and releases any claim or right Consultant may
otherwise have arising out of such use, publication or distribution.
19. Publicity; Use of Marks. Consultant shall not at any time use
-----------------------
Callaway Golf's or its affiliates' names, trademarks or trade names in any
advertising or publicity without the prior written consent of Callaway Golf.
20. Assignment. Consultant shall not assign this Agreement or any of
----------
Consultant's rights hereunder without the prior written consent of Callaway
Golf. Any attempted assignment by Consultant in violation of this paragraph
shall be void.
21. Irrevocable Arbitration of Disputes.
-----------------------------------
(a) Consultant and Callaway Golf agree that any dispute, controversy
or claim arising hereunder or in any way related to this Agreement, its
interpretation, enforceability, or applicability, or relating to Consultant's
provision of services to Callaway Golf, or the termination thereof, that cannot
be resolved by mutual agreement of the parties shall be submitted to binding
arbitration. This includes, but is not limited to, alleged violations of
federal, state and/or local statutes, claims based on any purported breach of
duty arising in contract or tort, including breach of contract, breach of
covenant of good faith and fair dealing, violation of public policy, and
violation of any statutory, contractual or common law rights. The parties agree
that arbitration is the parties' only recourse for such claims and hereby waive
the right to pursue such claims in any other forum, unless otherwise provided by
law. A proceeding to compel arbitration under this provision shall be governed
by Section 3 of Chapter 1 of the Federal Arbitration Act such that any court
action involving a dispute which is not subject to arbitration shall be stayed
pending arbitration of any arbitrable dispute. The parties further agree that
Section 1281.2 of the California Code of Civil Procedure, which permits a court
to deny arbitration to the parties, shall have no force and effect on this
agreement to arbitrate.
(b) Any demand for arbitration shall be in writing and must be made
to the Chief Legal Officer within one (1) year, or within the time period stated
in the applicable statute of limitations, whichever is shorter, after the
discovery of the alleged claim or cause of action by the aggrieved party.
(c) The arbitration shall be conducted pursuant to the procedural
rules stated in the commercial rules of the American Arbitration Association
("AAA") in San
25
<PAGE>
Diego, California. The arbitration shall be conducted in San
Diego by a former or retired judge or attorney with at least 10 years experience
in commercial disputes, or a non-attorney with like experience in the area of
dispute, who shall have the power to hear motions, control discovery, conduct
hearings and otherwise do all that is necessary to resolve the matter. The
parties must mutually agree on the arbitrator. If the parties cannot agree on
the arbitrator after their best efforts, an arbitrator from the American
Arbitration Association will be selected pursuant to the commercial rules of the
American Arbitration Association in San Diego, California.
(d) The arbitration award shall be final and binding, and may be
entered as a judgment in any court having competent jurisdiction. It is
expressly understood that the parties have chosen arbitration to avoid the
burdens, costs and publicity of a court proceeding, and the arbitrator is
expected to handle all aspects of the matter, including discovery and any
hearings, in such a way as to minimize the expense, time, burden and publicity
of the process, while assuring a fair and just result. In particular, the
parties expect that the arbitrator will limit discovery by controlling the
amount of discovery that may be taken (e.g., the number of depositions or
interrogatories) and by restricting the scope of discovery to only those matters
clearly relevant to the dispute.
(e) The arbitrator has no authority to award punitive damages.
(f) The prevailing party shall be entitled to an award by the
arbitrator of reasonable attorneys' fees and other costs reasonably incurred in
connection with the arbitration, including witness fees and expert witness fees,
unless the arbitrator for good cause determines otherwise.
I have read Section 21 and irrevocably agree to arbitrate any dispute identified
above.
- ------------
(Consultant's initials)
22. Disclosure of Others' Confidential Information. It is the
----------------------------------------------
understanding of both Callaway Golf and Consultant that Consultant shall not
divulge to Callaway Golf, its affiliates or its third party contractors any
confidential information or trade secrets belonging to others, nor shall
Callaway Golf seek to elicit from Consultant any such information. Consistent
with the foregoing, Consultant shall not provide to Callaway Golf, and Callaway
Golf shall not request, any documents or copies of documents containing such
information. Failure to comply with this obligation by Consultant shall be
grounds for immediate termination of this Agreement.
23. Applicable Law. This Agreement shall constitute a contract under the
--------------
internal laws of the State of California and shall be governed in accordance
with the laws of said state as to both interpretation and performance.
24. Entire Agreement/Amendments. This Agreement reflects the only, sole
---------------------------
and
26
<PAGE>
entire agreement between the parties relating in any way to the subject
matter hereof. No statement or promise or different representations have been
made which in any way form a part of or modify this Agreement. No amendment or
modification of the terms or conditions of this Agreement shall be valid unless
in writing and signed by the parties hereto.
25. Separate Terms. Each term, condition, covenant or provision of this
--------------
Agreement shall be viewed as separate and distinct, and in the event that any
such term, covenant or provision shall be held by a court of competent
jurisdiction to be invalid, the remaining provisions shall continue in full
force and effect.
26. Waiver. A waiver by either party of a breach of any provision or
------
provisions of this Agreement shall not constitute a general waiver or prejudice
the other party's right otherwise to demand strict compliance with that
provision or any other provisions in this Agreement.
27. Consequential Damages Waiver. In no event will either party, its
----------------------------
directors, officers, employees, agents or affiliates be liable to the other
party for any direct, incidental, special or consequential damages, including
any lost profits, whether based upon a claim or action of contract, warranty,
negligence, strict liability or other tort, or otherwise, arising out of this
Agreement, regardless of whether such party has been advised of the possibility
of such damages.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on the date(s) set forth below to be effective as of the day and
year first set forth above.
Callaway Golf Consultant
Callaway Golf Company,
a California corporation
By:
-------------------- -------------------------------
Donald H. Dye Richard C. Helmstetter
President & Chief Executive Officer
Dated:________________ Dated:
-------------
27
<PAGE>
EXHIBIT 10.20.3
WELLS FARGO BANK
December 2, 1997
Callaway Golf Company,
a California corporation
2285 Rutherford Road
Carlsbad, CA 92008
Gentlemen:
This letter is to confirm that Wells Fargo Bank, National Association,
successor-by-merger to First Interstate Bank of California ("Bank") has agreed
to extend the maturity date of that certain credit accommodation granted by Bank
to Callaway Golf Company, a California corporation ("Borrower") in the maximum
principal amount of Fifty Million Dollars ($50,000,000.00), as evidenced by that
certain promissory note dated as of December 1, 1995, executed by Borrower and
payable to the order of Bank (the "Note"), a copy of which is attached hereto as
Exhibit A.
- ---------
The maturity date of said credit accommodation is hereby extended until
February 15, 1998. The Note shall be deemed modified as of the date this letter
is acknowledged by Borrower to reflect said new maturity date. All other terms
and conditions of the Note remain in full force and effect, without waiver or
modification.
Borrower acknowledges that Bank has not committed to make any renewal or
further extension of the maturity date of the above-described credit
accommodation beyond the new maturity date specified herein, and that any such
renewal or further extension remains in the sole discretion of Bank. This letter
constitutes the entire agreement between Bank and Borrower with respect to the
maturity date extension for the above-described credit accommodation, and
supersedes all prior negotiations, discussions and correspondence concerning
said extension.
Please acknowledge your acceptance of the terms and conditions contained
herein by dating and signing one copy below and returning it to my attention at
the above address on or before December 19, 1997.
<PAGE>
Very truly yours,
WELLS FARGO BANK,
NATIONAL ASSOCIATION,
SUCCESSOR-BY-MERGER TO
FIRST INTERSTATE BANK OF
CALIFORNIA
By: /s/ DAVID BRUEN
------------------
David Bruen
Vice President
Acknowledged and accepted as of December 11, 1997.
-----------------
CALLAWAY GOLF COMPANY,
a California corporation
By: /s/ DAVID RANE
------------------------------
David Rane
Chief Financial Officer
By: /s/ STEVEN C. MCCRACKEN
------------------------------
Steven C. McCracken
Secretary
<PAGE>
EXHIBIT A
---------
NOTE: Exhibit A is identical to Exhibit 10.20.2, "Amended and Restated
- ----
Revolving Credit Note made by the Company in the principal amount of $50,000,000
and payable to First Interstate Bank of California, dated December 1, 1995 and
First Amendment to Loan Agreement by and between the Company and First
Interstate Bank of California dated December 1, 1995," listed in the Company's
1997 Annual Report on Form 10-K, and is incorporated herein by reference.
<PAGE>
Exhibit 13.1
------------
Portions of the Callaway Golf Company 1997 Annual Report to Shareholders
<PAGE>
------------------
FINANCIAL CONTENTS
------------------
<TABLE>
<S> <C>
Selected Financial Data.............................................................................28
Management's Discussion and Analysis of Financial Condition and Results of Operations...............29
Consolidated Balance Sheet..........................................................................34
Consolidated Statement of Income....................................................................35
Consolidated Statement of Cash Flows................................................................36
Consolidated Statement of Shareholders' Equity......................................................37
Notes to Consolidated Financial Statements..........................................................38
Report of Independent Accountants...................................................................47
Summarized Quarterly Financial Data (unaudited).....................................................48
</TABLE>
27
<PAGE>
-------------------------------
SELECTED FINANCIAL DATA
-------------------------------
<TABLE>
<CAPTION>
(in thousands, except per share data) Year ended December 31,
1997 1996 1995 1994 1993
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Net sales $ 842,927 $ 678,512 $ 553,287 $ 448,729 $ 254,645
Cost of goods sold 400,127 317,353 270,125 208,906 115,458
---------------------------------------------------------------------
Gross profit 442,800 361,159 283,162 239,823 139,187
Selling, general and administrative expenses 191,313 155,177 120,201 106,913 67,118
Research and development costs 30,298 16,154 8,577 6,380 3,653
Litigation settlement 12,000
---------------------------------------------------------------------
Income from operations 209,189 189,828 154,384 126,530 68,416
Other income, net 4,576 5,767 4,017 2,875 1,184
---------------------------------------------------------------------
Income before income taxes and cumulative
effect of accounting change 213,765 195,595 158,401 129,405 69,600
Provision for income taxes 81,061 73,258 60,665 51,383 28,396
---------------------------------------------------------------------
Income before cumulative effect
of accounting change 132,704 122,337 97,736 78,022 41,204
Cumulative effect of accounting change 1,658
---------------------------------------------------------------------
Net income $ 132,704 $122,337 $ 97,736 $ 78,022 $ 42,862
=====================================================================
Earnings per Common Share (Note 1):
Income before cumulative effect
of accounting change
Basic $1.94 $1.83 $1.47 $1.14 $0.65
Diluted $1.85 $1.73 $1.40 $1.07 $0.60
Cumulative effect of accounting change
Basic $0.03
Diluted $0.02
---------------------------------------------------------------------
Net income
Basic $1.94 $1.83 $1.47 $1.14 $0.68
Diluted $1.85 $1.73 $1.40 $1.07 $0.62
=====================================================================
Dividends paid per share $0.28 $0.24 $0.20 $0.10 $0.03
(in thousands) December 31,
1997 1996 1995 1994 1993
---------------------------------------------------------------------
Balance Sheet Data:
Cash and cash equivalents $26,204 $108,457 $59,157 $54,356 $48,996
Working capital $209,402 $250,461 $146,871 $130,792 $83,683
Total assets $561,714 $428,428 $289,975 $243,622 $144,360
Long-term liabilities $7,905 $5,109 $2,207 $610
Total shareholders' equity $481,425 $362,267 $224,934 $186,414 $116,577
=====================================================================
</TABLE>
28
<PAGE>
-----------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-----------------------------------------------------
Results of Operations
Years Ended December 31, 1997 and 1996
For the year ended December 31, 1997, net sales increased 24% to $842.9 million
compared to $678.5 million for the prior year. The growth in sales included
increases in the sales of metal woods, irons, and putters. Metal wood sales
increased $65.1 million primarily due to sales of Biggest Big Bertha(TM)
Titanium Drivers. Iron sales increased $65.4 million primarily due to sales of
Great Big Bertha(R) Tungsten.Titanium(TM) Irons, which generated revenues of
$59.3 million for the year ended December 31, 1997. Also contributing to the
increase in net sales was the acquisition of certain assets and liabilities of
Odyssey Sports, Inc. by the Company's wholly-owned subsidiary, Odyssey Golf,
Inc. ("Odyssey"), which contributed $20.5 million in net sales.
For the year ended December 31, 1997, gross profit increased to $442.8
million from $361.2 million in 1996 and cost of goods sold was relatively
unchanged as a percentage of sales from the prior year.
The Company accrues a provision for warranty expense at the time of sale
of its products. Based on the Company's warranty policies and historical rates
of product returns, the Company believes its accrual for warranty expense to be
adequate.
Selling expenses increased to $120.6 million in 1997 from $80.7 million in
1996. As a percentage of net sales, selling expenses increased to 14% from 12%.
The $39.9 million increase was primarily due to increased promotional and tour
expenses, higher costs related to the Company's performance centers and
additional selling expenses associated with the addition of Odyssey.
General and administrative expenses decreased to $70.7 million in 1997
from $74.5 million in 1996. The $3.8 million decrease was primarily due to
reduced employee bonus and profit sharing expenses, partially offset by
increased start-up costs associated with the Company's golf ball operations and
the addition of Odyssey.
Research and development expenses increased to $30.3 million in 1997 as
compared to $16.2 million in 1996. This $14.1 million increase resulted from
increased expenditures related to casting technologies, golf ball development
and product engineering efforts.
Litigation settlement expense of $12.0 million represents the Company's
third quarter settlement of certain litigation brought against it and certain
officers of the Company by a former officer of the Company.
During the fourth quarter of 1997, the Company reversed an accrual for
bonus compensation of approximately $8.0 million due to the fact that certain
operating targets were not met.
Years Ended December 31, 1996 and 1995
For the year ended December 31, 1996, net sales increased 23% to $678.5 million
compared to $553.3 million for the prior year. This increase was attributable
primarily to increased sales of Great Big Bertha(R) Titanium Drivers, and Great
Big Bertha(R) Fairway Woods which were introduced in January 1996, combined with
increased sales of Big Bertha(R) Irons. These sales increases were offset by a
decrease in net sales of Big Bertha(R) War Bird(R) Metal Woods.
For the year ended December 31, 1996, gross profit increased to $361.2
million from $283.2 million for the prior year and gross margin increased to 53%
from 51%. The increase in gross margin was primarily the result of decreases in
component costs and manufacturing labor and overhead costs associated with
increased production volume and improved labor efficiencies.
The Company accrues a provision for warranty expense at the time of sale
of its products. Based on the Company's warranty policies and historical rates
of product returns, the Company believes its accrual for warranty expense to be
adequate.
Selling expenses increased to $80.7 million in 1996 from $64.3 million in
1995. The $16.4 million increase was primarily due to increased tour
endorsement, TV advertising and employee compensation expenses. As a percentage
of net sales, selling expenses remained constant at 12%.
General and administrative expenses increased to $74.5 million in 1996
from $55.9 million in 1995. The $18.6 million increase was related primarily to
increased employee compensation and benefits, consulting costs associated with
the Company's business development initiatives and increases in computer
support, legal and other general and administrative expenses. As a percentage of
net sales, general and administrative expenses increased to 11% from 10%.
Research and development expenses increased to $16.2 million in 1996 as
compared to $8.6 million in 1995. This increase resulted from increased staffing
and operational expenses consistent with the Company's efforts to pursue
potential new business opportunities and the continued focus on existing core
products.
Net interest income increased to $5.0 million in 1996 compared to $3.5
million in 1995. The increase in interest income was due to the investment of
higher average cash balances.
29
<PAGE>
Liquidity and Capital Resources
At December 31, 1997, cash and cash equivalents decreased to $26.2 million from
$108.5 million at December 31, 1996 primarily due to investing activities, which
included the acquisition of substantially all of the assets and certain
liabilities of Odyssey Sports, Inc. for $129.3 million and increases in capital
expenditures, which totaled $67.9 million and included building and land
improvements, computer equipment and software, and research and development
machinery and equipment. During 1997, the Company also spent $53.0 million to
repurchase and retire Common Stock and paid $19.1 million in dividends.
Offsetting these investing and financing activities were cash flows generated by
operations of $165.5 million and proceeds from Common Stock transactions
totaling $21.6 million.
The Company had available a $50.0 million line of credit at December 31,
1997. This credit facility was replaced with a new five year, $150.0 million
credit facility during February 1998. At this time, the Company anticipates that
it will be able to maintain its current level of operations, including capital
expenditures and planned operations for the foreseeable future, through cash
flow generated from future operations and the new line of credit.
Certain Factors Affecting
Callaway Golf Company
Growth in Sales; Profit Margins; Seasonality
The Company believes that the growth rate, if any, in the world-wide golf
equipment market has been modest for the past several years, and this trend is
likely to continue. In addition, recent economic turmoil in Southeast Asia and
Korea has caused a significant contraction in the retail golf markets in these
countries and had an adverse effect on the Company's sales and results of
operations for the fourth quarter of 1997. The Company expects this situation to
continue until economic stability returns to these areas. Potential economic
disruption from this turmoil in other areas, such as Japan and elsewhere in
Asia, also could adversely impact the Company's future sales and results of
operations. Additionally, although demand for the Company's products has been
generally strong during 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 rates in sales. Given the
Company's current size and market position, it is likely that further market
penetration will prove more difficult.
The Company experienced an increase in its cost of goods sold during the
third and fourth quarters of 1997 compared to historical levels, primarily due
to a general increase in sales of irons, which have lower margins than metal
woods, and an increase in sales to Japan, an area which has the lowest margins
of all the areas in which the Company sells. In addition, the current operations
of Odyssey have lower margins than the Company has experienced historically. If
sales of irons in general, or Great Big Bertha(R) Tungsten.Titanium(TM) Irons in
particular, as a percentage of the Company's total sales remain at these levels
or continue to rise, the recent increases in cost of goods sold over historical
levels will continue. Similarly, if Odyssey's business continues to increase,
and its margins do not improve, the Company's margins could continue to
decrease.
In the golf equipment industry, sales to retailers are generally seasonal
due to lower demand in the retail market in the cold weather months covered by
the fourth and first quarters. The Company's business generally follows this
seasonal trend and the Company expects this to continue. Unusual or severe
weather conditions such as the "El Nino" weather patterns being experienced in
the winter of 1997-1998 will compound these seasonal affects and could have a
negative effect on the Company's sales and results of operations.
Competition
The market in which the Company does business is highly competitive, and is
served by a number of well-established and well-financed companies with
recognized brand names. New product introductions by competitors continue to
generate increased market competition. While the Company believes that its
products and its marketing efforts continue to be competitive, there can be no
assurance that successful marketing activities by competitors will not
negatively impact the Company's future sales.
Additionally, the golf club industry, in general, has been characterized
by widespread imitation of popular club designs. A manufacturer's ability to
compete is in part dependent upon its ability to satisfy the various subjective
requirements of golfers, including the golf club's look and "feel," and the
level of acceptance that the golf club has among professional and other golfers.
The subjective preferences of golf club purchasers may also be subject to rapid
and unanticipated changes. There can be no assurance as to how long the
Company's golf clubs will maintain market acceptance.
New Product Introduction
The Company believes that the introduction of new, innovative golf equipment is
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
30
<PAGE>
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.
The rapid introduction of new products by the Company can result in
close-outs of existing inventories, both at the Company and at retailers. So
far, the Company has managed such close-outs so as to avoid any material
negative impact on the Company's operations. There can be no assurance that the
Company will always be able to do so.
As the Company introduces new products, it plans its manufacturing
capacity based upon the forecasted demand for such new products. Actual demand
for such new products may exceed forecasted demand. The Company's unique product
designs often require sophisticated manufacturing techniques, which can limit
the Company's ability to quickly expand its manufacturing capacity to meet the
full demand for new products. If the Company is unable to produce sufficient
quantities of new products in time to fulfill actual demand, especially during
the Company's traditionally busy second and third quarters, it could limit the
Company's sales and adversely affect its financial performance.
Product Breakage
Since the Company does not rely upon traditional designs in the development of
its golf clubs, its products may be more likely to develop unanticipated
problems than those of many of its competitors which use traditional designs.
For example, clubs have been returned with cracked clubheads, broken graphite
shafts and loose medallions. While any breakage or warranty problems are deemed
significant to the Company, the incidence of clubs returned as a result of
cracked clubheads, broken graphite shafts, loose medallions and other product
problems to date has not been material in relation to the volume of Callaway
Golf clubs which have been sold. The Company monitors closely the level and
nature of any product breakage and, where appropriate, seeks to incorporate
design and production changes to assure its customers of the highest quality
available in the market. The Company's Biggest Big Bertha(TM) Drivers, because
of their large clubhead size and extra long graphite shafts, have experienced
shaft breakage at a rate higher than generally experienced with the Company's
other metal woods. Significant increases in the incidence of shaft breakage or
other product problems may adversely affect the Company's sales and image with
golfers.
Dependence on Certain Vendors
The Company is dependent on a limited number of suppliers for its clubheads and
shafts. In addition, some of the Company's products require specifically
developed manufacturing techniques and processes which make it difficult to
identify and utilize alternative suppliers quickly. Consequently, if a
significant delay or disruption in the supply of these component parts occurs,
it may have a material adverse effect on the Company's business. In the event of
a significant delay or disruption, the Company believes that suitable clubheads
and shafts could be obtained from other manufacturers, although the transition
to other suppliers could result in significant production delays and an adverse
impact on results of operations during the transition.
The Company uses United Parcel Service ("UPS") for substantially all
ground shipments of products to its domestic customers. The Company is
considering alternative methods of ground shipping to reduce its reliance on
UPS, but no change has been made. Any interruption in UPS services could have a
material adverse effect on the company's sales and results of operations.
Intellectual Property and Proprietary Rights
The Company has an active program of enforcing its proprietary rights against
companies and individuals who market or manufacture counterfeits and "knock off"
products, and aggressively asserts its rights against infringers of its patents,
trademarks, and trade dress. However, there is no assurance that these efforts
will reduce the level of acceptance obtained by these infringers. Additionally,
there can be no assurance that other golf club manufacturers will not be able to
produce successful golf clubs which imitate the Company's designs without
infringing any of the Company's patents, trademarks, or trade dress.
An increasing number of the Company's competitors have, like the Company
itself, sought to obtain patent, trademark or other protection of their
proprietary rights and designs. From time to time others have or may contact the
Company to claim that they have proprietary rights which have been infringed by
the Company and/or its products. The Company evaluates any such claims and,
where appropriate, has obtained or sought to obtain licenses or other business
arrangements. To date, there have been no interruptions in the Company's
business as the result of any claims of infringement. No assurance can be given,
however, that the Company will not be adversely affected in the future by the
assertion of intellectual property rights belonging to others. This effect could
include alteration of existing products, withdrawal of existing products and
delayed introduction of new products.
Various patents have been issued to the Company's competitors in the golf
ball industry. As Callaway Golf Ball Company develops a new golf ball product,
it must avoid infringing on these patents or other intellectual property
31
<PAGE>
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 actions.
Despite its efforts to avoid such infringements, there can be no assurance that
Callaway Golf Ball Company will not infringe on the patents or other
intellectual property rights of third parties in its development efforts, or
that it will be able to obtain licenses to use any such rights, if necessary.
"Gray Market" Distribution
Some 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 authorized 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 a potential decrease in sales to those customers who are selling Callaway
Golf products to unauthorized distributors and/or an increase in sales returns
over historical levels. 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 stopped such commerce. The Company's efforts to address gray
market issues could have an adverse impact on the Company's sales and financial
performance.
Professional Endorsements
The Company also establishes relationships with professional golfers in order to
promote the Callaway Golf brand among both professional and amateur golfers. The
Company has entered into endorsement arrangements with members of the Senior
Professional Golf Association's Tour, the Professional Golf Association's Tour,
the Ladies Professional Golf Association's Tour, the European Professional Golf
Association's Tour and the Nike Tour. While most professional golfers fulfill
their contractual obligations, some have been known to stop using a sponsor's
products despite contractual commitments. If one or more of Callaway Golf's
professional endorsers were to stop using the Company's products contrary to
their endorsement agreements, the Company's business could be adversely affected
in a material way by the negative publicity.
Many professional golfers throughout the world use the Company's golf
clubs even though they are not contractually bound to do so. The Company has
created cash "pools" that reward such usage. For the last several years, the
Company has experienced an exceptional level of driver penetration on the
world's five major professional tours, and the Company has heavily advertised
that fact. There is no assurance that the Company will be able to sustain this
level of professional usage. Many other companies are aggressively seeking the
patronage of these professionals, and are offering many inducements, including
specially designed products and significant cash rewards. While it is not clear
whether professional endorsements materially contribute to retail sales, it is
possible that a decline in the level of professional usage could have a material
adverse effect on the Company's business.
New Business Ventures
Beginning in 1995, the Company began to evaluate and pursue new business
ventures which it believes constitute potential growth opportunities in and
outside of the golf equipment industry. The Company has invested, and expects to
continue to invest, significant capital resources in these new ventures in the
form of research and development, capital expenditures and the hiring of
additional personnel. Investments in these ventures could have a negative impact
on the Company's future cash flows and results of operations. There can be no
assurance that new ventures will lead to new product offerings or otherwise
increase the revenues and profits of the Company. Like all new businesses, these
ventures require significant management time, involve a high degree of risk and
will present many new challenges for the Company. There can be no assurance that
these activities will be successful, or that the Company will realize
appropriate returns on its investments in these new ventures.
International Distribution
The Company's management believes that controlling the distribution of its
products throughout the world will be an element in the future growth and
success of the Company. The Company is actively pursuing a reorganization of its
international operations, including the acquisition of distribution rights in
certain key countries in Europe and Asia. These efforts have and will result in
additional investments in inventory, accounts receivable, corporate
infrastructure and facilities. The integration of foreign distributors into the
Company's international sales operations will require the dedication of
management resources which may temporarily detract from attention to the
day-to-day business of the Company, and also increase the Company's exposure to
fluctuations in exchange rates for various foreign currencies. International
reorganization also could result in disruptions in the distribution of the
Company's products in some areas. There can be no assurance that the acquisition
of some or all of the Company's foreign distributors will be successful, and it
is possible that an attempt to do so will adversely affect the Company's
business.
The Company, through a distribution agreement, appointed Sumitomo Rubber
Industries, Ltd. ("Sumitomo") as the sole distributor of the Company's golf
clubs in Japan. The current distribution agreement began in February 1993 and
runs through December 31, 1999. The Company does not intend to extend this
agreement.
32
<PAGE>
The Company has established ERC International Company ("ERC"), a
wholly-owned Japanese corporation, for the purpose of distributing Odyssey(R)
products immediately, Callaway Golf balls when ready and Callaway Golf clubs
beginning January 1, 2000. There will be significant costs and capital
expenditures invested in ERC before there will be sales sufficient to support
such product costs. Furthermore, there are significant risks associated with the
Company's intention to effectuate distribution in Japan through ERC, and it is
possible that doing so will have a material adverse effect on the Company's
operations and financial performance.
Golf Ball Development
In June 1996, the Company formed Callaway Golf Ball Company, a wholly-owned
subsidiary of the Company, for the purpose of designing, manufacturing and
selling golf balls. The Company has previously licensed the manufacture and
distribution of a golf ball product in Japan and Korea. The Company also
distributed a golf ball under the trademark "Bobby Jones." These golf ball
ventures were not commercially successful.
The Company has determined that Callaway Golf Ball Company will enter the
golf ball business by developing a new product in a new plant to be constructed
just for this purpose. The successful implementation of the Company's strategy
could be adversely affected by various risks, including, among others, delays in
product development, construction delays and unanticipated costs. There can be
no assurance if and when a successful golf ball product will be developed or
that the Company's investments will ultimately be realized.
The Company's golf ball business is in the early stages of development. It
is expected, however, that it will have a negative impact on the Company's
future cash flows and results of 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 introductions, also apply to the
golf ball business. In addition, the golf ball business is highly competitive
with a number of well-established and well-financed competitors. 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.
Year 2000 Compliance
Historically, certain computer programs have been written using two digits
rather than four to define the applicable year, which could result in the
computer recognizing a date using "00" as the year 1900 rather than the year
2000. This, in turn, could result in major system failures or miscalculations,
and is generally referred to as the "Year 2000" problem.
In October 1997, the Company implemented a new computer system which runs
most of the Company's principal data processing and financial reporting software
applications. The application software used on this new system is Year 2000
compliant. The information systems of certain of the Company's subsidiaries,
however, have not been converted to the new system, but the Company is in the
process of implementing such conversion. Pursuant to the Company's Year 2000
Plan, the Company is currently evaluating its computerized production equipment
to assure that the transition to the Year 2000 will not disrupt the Company's
manufacturing capabilities. The Company is currently assessing the extent of the
Year 2000 impact on its suppliers, distributors, customers and other vendors.
Presently, the Company does not believe that Year 2000 compliance will result in
additional material investments by the Company, nor does the Company anticipate
that the Year 2000 problem will have material adverse effects on the business
operations or financial performance of the Company. There can be no assurance,
however, that the Year 2000 problem will not adversely affect the Company and
its business.
Management Information Systems
As noted above, in October 1997, the Company converted to a new integrated
computer system which runs substantially all of the Company's principal data
processing and financial reporting software applications. As the Company enters
its traditional busy selling season in the second and third quarters, the
demands on the Company's information systems will increase substantially. Any
significant disruptions or delays in the Company's information systems during
this period could negatively impact the Company's ability to process sales
orders and compile other management information, which in turn could have
material adverse effects on the Company's sales and results of operations.
33
<PAGE>
--------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
<TABLE>
<CAPTION>
December 31,
(in thousands, except share and per share data) 1997 1996
-------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 26,204 $ 108,457
Accounts receivable, net 124,470 74,477
Inventories, net 97,094 98,333
Deferred taxes 23,810 25,948
Other current assets 10,208 4,298
-------------------------
Total current assets 281,786 311,513
Property, plant and equipment, net 142,503 91,346
Intangible assets, net 112,141 4,277
Other assets 25,284 21,292
-------------------------
$ 561,714 $ 428,428
=========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 30,063 $ 14,996
Accrued employee compensation and benefits 14,262 16,195
Accrued warranty expense 28,059 27,303
Income taxes payable 2,558
-------------------------
Total current liabilities 72,384 61,052
Long-term liabilities (Note 7) 7,905 5,109
Commitments and contingencies (Note 9)
Shareholders' equity:
Preferred Stock, $.01 par value, 3,000,000 shares authorized,
none issued and outstanding at December 31, 1997 and 1996
Common Stock, $.01 par value, 240,000,000 shares authorized,
74,251,664 and 72,855,222 issued and outstanding at
December 31, 1997 and 1996 (Note 4) 743 729
Paid-in capital 337,403 278,669
Unearned compensation (3,575) (3,105)
Retained earnings 298,169 238,349
Less: Grantor Stock Trust (5,300,000 shares at December 31, 1997
and 1996) at market (Note 4) (151,315) (152,375)
-------------------------
Total shareholders' equity 481,425 362,267
-------------------------
$ 561,714 $ 428,428
=========================
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE>
--------------------------------
CONSOLIDATED STATEMENT OF INCOME
--------------------------------
<TABLE>
<CAPTION>
(in thousands, except per share data) Year ended December 31,
1997 1996 1995
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $842,927 100% $678,512 100% $553,287 100%
Cost of goods sold 400,127 47% 317,353 47% 270,125 49%
---------------------------------------------------------------------------------
Gross profit 442,800 53% 361,159 53% 283,162 51%
Selling expenses 120,589 14% 80,701 12% 64,310 12%
General and administrative expenses 70,724 8% 74,476 11% 55,891 10%
Research and development costs 30,298 4% 16,154 2% 8,577 2%
Litigation settlement 12,000 1%
---------------------------------------------------------------------------------
Income from operations 209,189 25% 189,828 28% 154,384 28%
Interest and other income, net 4,576 5,767 4,017
---------------------------------------------------------------------------------
Income before income taxes 213,765 25% 195,595 29% 158,401 29%
Provision for income taxes 81,061 73,258 60,665
---------------------------------------------------------------------------------
Net income $132,704 16% $122,337 18% $ 97,736 18%
=================================================================================
Earnings per common share
Basic $1.94 $1.83 $1.47
Diluted $1.85 $1.73 $1.40
Common equivalent shares
Basic 68,407 66,832 66,641
Diluted 71,698 70,661 69,855
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
<TABLE>
<CAPTION>
(in thousands) Year ended December 31,
1997 1996 1995
--------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 132,704 $ 122,337 $ 97,736
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 19,408 12,691 10,778
Non-cash compensation 8,013 4,194 2,027
Tax benefit from exercise of stock options 29,786 14,244 11,236
Deferred taxes 1,030 (4,420) 4,978
Increase (decrease) in cash resulting from changes in:
Accounts receivable, net (36,936) 3,510 (43,923)
Inventories, net 6,271 (44,383) 22,516
Other assets (6,744) (12,817) (6,518)
Accounts payable and accrued expenses 13,529 (15,395) 9,227
Accrued employee compensation and benefits (2,437) 2,031 1,322
Accrued warranty expense 756 3,534 5,587
Income taxes payable (2,636) 626 (9,845)
Other liabilities 2,796 2,902 1,597
--------------------------------------------------------
Net cash provided by operating activities 165,540 89,054 106,718
--------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (67,938) (35,352) (29,510)
Acquisition of a business, net of cash acquired (129,256) (610)
--------------------------------------------------------
Net cash used in investing activities (197,194) (35,962) (29,510)
--------------------------------------------------------
Cash flows from financing activities:
Issuance of Common Stock 21,558 12,258 7,991
Retirement of Common Stock (52,985) (67,022)
Dividends paid, net (19,123) (16,025) (13,350)
--------------------------------------------------------
Net cash used in financing activities (50,550) (3,767) (72,381)
--------------------------------------------------------
Effect of exchange rate changes on cash (49) (25) (26)
--------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (82,253) 49,300 4,801
Cash and cash equivalents at beginning of year 108,457 59,157 54,356
--------------------------------------------------------
Cash and cash equivalents at end of year $ 26,204 $ 108,457 $ 59,157
========================================================
Supplemental disclosure:
Cash paid for income taxes $ 54,358 $ 62,938 $ 58,543
--------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
------------------------------------------------------
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands) Common Stock
-----------------------------------------------------------------------------
Paid-In Unearned Retained
Shares Amount Capital Compensation Earnings GST Total
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 68,095 $680 $ 75,002 $(3,670) $114,402 $186,414
Exercise of stock options 2,329 24 7,971 (4) 7,991
Tax benefit from exercise of stock options 11,236 11,236
Compensatory stock options 759 1,250 2,009
Compensatory stock 1 18 18
Stock retirement (4,813) (48) (66,974) (67,022)
Cash dividends (13,550) (13,550)
Dividends on shares held by GST 200 200
Equity adjustment from foreign currency (98) (98)
Establishment of GST 5,300 53 86,785 $ (86,838)
Adjustment of GST shares to market value 33,075 (33,075)
Net income 97,736 97,736
-----------------------------------------------------------------------------
Balance, December 31, 1995 70,912 709 214,846 (2,420) 131,712 (119,913) 224,934
Exercise of stock options 1,775 18 12,240 12,258
Tax benefit from exercise of stock options 14,244 14,244
Compensatory stock options 2,604 (685) 1,919
Employee stock purchase plan 168 2 2,273 2,275
Cash dividends (17,297) (17,297)
Dividends on shares held by GST 1,272 1,272
Equity adjustment from foreign currency 325 325
Adjustment of GST shares to market value 32,462 (32,462)
Net income 122,337 122,337
-----------------------------------------------------------------------------
Balance, December 31, 1996 72,855 729 278,669 (3,105) 238,349 (152,375) 362,267
Exercise of stock options 2,877 29 21,529 21,558
Tax benefit from exercise of stock options 29,786 29,786
Compensatory stock options 2,511 (470) 2,041
Employee stock purchase plan 372 4 5,968 5,972
Stock retirement (1,852) (19) (52,966) (52,985)
Cash dividends (20,607) (20,607)
Dividends on shares held by GST 1,484 1,484
Equity adjustment from foreign currency (795) (795)
Adjustment of GST shares to market value (1,060) 1,060
Net income 132,704 132,704
-----------------------------------------------------------------------------
Balance, December 31, 1997 74,252 $743 $337,403 $(3,575) $298,169 $(151,315) $481,425
=============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE>
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------
Note 1
THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Callaway Golf Company ("Callaway Golf" or the "Company") is a California
corporation formed in 1982. The Company designs, develops, manufactures and
markets high-quality, innovative golf clubs. Callaway Golf's primary products
include Big Bertha(R) Metal Woods with the War Bird(R) soleplate, Great Big
Bertha(R) Titanium Metal Woods, Biggest Big Bertha(TM) Titanium Drivers, Big
Bertha(R) Irons, Great Big Bertha(R) Tungsten.Titanium(TM) Irons, Odyssey(R)
putters and wedges and various other putters. The consolidated financial
statements include the accounts of the Company and its subsidiaries, Callaway
Golf Sales Company, Callaway Golf Ball Company, Odyssey Golf, Inc., CGV, Inc.,
Callaway Golf (UK) Limited, ERC International Company and Callaway Golf
(Germany) GmbH. All significant intercompany transactions and balances have been
eliminated.
Revenue Recognition
Sales are recognized at the time goods are shipped, net of an allowance for
sales returns.
Advertising Costs
The Company advertises primarily through television and print media. The
Company's policy is to expense advertising costs, including production costs, as
incurred. Advertising expenses for 1997, 1996 and 1995 were $20,320,000,
$18,321,000 and $12,148,000, respectively.
Foreign Currency Translation and Transactions
The accounts of the Company's foreign subsidiaries have been translated into
United States dollars at appropriate rates of exchange. Cumulative translation
gains or losses are recorded as a separate component of shareholders' equity.
Gains or losses resulting from foreign currency transactions (transactions
denominated in a currency other than the entity's local currency) are included
in the consolidated statement of income. The Company recorded transaction losses
of $940,000 in 1997. The amounts recorded as a result of foreign currency
transactions in 1996 and 1995 were not material.
During 1997, 1996 and 1995, the Company entered into forward foreign
currency exchange rate contracts to hedge payments due on intercompany
transactions by one of its wholly-owned foreign subsidiaries, Callaway Golf (UK)
Limited. Realized and unrealized gains and losses on these contracts are
recorded in income. The effect of this practice is to minimize variability in
the Company's operating results arising from foreign exchange rate movements.
The Company does not engage in foreign currency speculation. These foreign
exchange contracts do not subject the Company to risk due to exchange rate
movements because gains and losses on these contracts offset losses and gains on
the intercompany transactions being hedged, and the Company does not engage in
hedging contracts which exceed the amount of the intercompany transactions. At
December 31, 1997, 1996 and 1995, the Company had approximately $2,575,000,
$5,774,000 and $446,000, respectively, of foreign exchange contracts
outstanding. The contracts outstanding at December 31, 1997 mature between
January and May of 1998. The Company had net realized and unrealized gains on
foreign exchange contracts of $261,000 in 1997, net realized and unrealized
losses of $521,000 in 1996 and net realized and unrealized gains of $106,000 in
1995.
Earnings per Common Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 128, "Earnings Per Share." This statement
requires presentation of basic and diluted earnings per common share. Basic
earnings per common share is calculated by dividing net income for the period by
the weighted-average number of common shares outstanding during the period.
Diluted earnings per common share is calculated by dividing net income for the
period by the weighted-average number of common shares outstanding during the
period, increased by dilutive potential common shares ("dilutive securities")
that were outstanding during the period. Dilutive securities include shares
owned by the Callaway Golf Company Grantor Stock Trust (Note 4), options issued
pursuant to the Company's stock option plans (Note 6), shares related to the
Employee Stock Purchase Plan (Note 6) and rights to purchase preferred shares
under the Callaway Golf Company Shareholder Rights Plan (Note 6). Dilutive
securities related to the Callaway Golf Company Grantor Stock Trust and the
Company's stock option plans are included in the calculation of diluted earnings
per common
38
<PAGE>
share using the treasury stock method. Dilutive securities related to the
Employee Stock Purchase Plan are calculated by dividing the average withholdings
during the period by 85% of the lower of the offering period price or the market
value at the end of the period. The dilutive effect of rights to purchase
preferred shares under the Callaway Golf Shareholder Rights Plan have not been
included as dilutive securities because the conditions necessary to cause these
rights to be redeemed were not met. All earnings per common share data reported
in prior periods have been restated in accordance with SFAS No. 128. A
reconciliation of the numerators and denominators of the basic and diluted
earnings per common share calculations for the years ended December 31, 1997,
1996, and 1995 is presented in Note 5.
Financial Statement Preparation
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents are highly liquid investments purchased with maturities of
three months or less. Cash equivalents consist of investments in money market
accounts and U.S. Treasury bills.
At December 31, 1996, the Company held investments in U.S. Treasury bills
with maturities of three months or less in the aggregate amount of $96,407,000.
Management determines the appropriate classification of its U.S. Government and
debt securities at the time of purchase and reevaluates such designation as of
each balance sheet date. The Company recorded these securities at amortized
costs and designated them as "held-to-maturity." No investments in U.S. Treasury
bills were held at December 31, 1997.
The acquisition of substantially all of the assets and certain liabilities
of Odyssey Sports, Inc. (Note 11) and the repurchase and retirement of certain
of the Company's outstanding Common Stock necessitated the sale of certain
held-to-maturity debt securities with amortized costs of $115,428,000 and
$31,805,000, respectively, during 1997. These securities were purchased at a
discount and were sold within two weeks to two months of their respective stated
maturity dates. As such, the securities are considered to be sold at maturity
under the provisions of SFAS No. 115 "Accounting for Certain Investments in Debt
and Equity Securities." No realized or unrealized gain or loss resulted from the
sale of these securities.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over estimated useful
lives of three to fifteen years. Repair and maintenance costs are charged to
expense as incurred.
Long-Lived Assets
The Company assesses potential impairments to its long-lived assets when there
is evidence that events or changes in circumstances have made recovery of the
asset's carrying value unlikely. An impairment loss would be recognized when the
sum of the expected future net cash flows is less than the carrying amount of
the asset. No impairment losses have been identified by the Company.
Intangible Assets
Intangible assets consist primarily of trade name, trademark, trade dress,
patents and goodwill resulting from the purchase of substantially all of the
assets and certain liabilities of Odyssey Sports, Inc. (Note 11). Intangible
assets are amortized using the straight-line method over periods ranging from
three to forty years. During 1997, amortization of intangible assets was
$1,778,000. Amortization expense for the years ended December 31, 1996 and 1995
was not material.
Stock-Based Compensation
Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." The Company will continue to measure compensation
expense for its stock-based employee compensation plans using the intrinsic
value method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Pro forma disclosures of net income and earnings per share, as if
the fair value-based method prescribed by SFAS No. 123 had been applied in
measuring compensation expense, are presented in Note 6.
Income Taxes
Current income tax expense is the amount of income taxes expected to be payable
for the current year. A deferred income tax asset or liability is established
for the expected future consequences resulting from the differences in the
financial reporting and tax bases of assets and liabilities. Deferred income tax
expense (benefit) is the net change during the year in the deferred income tax
asset or liability.
39
<PAGE>
Diversification of Credit Risk
The Company's financial instruments that are subject to concentrations of credit
risk consist primarily of cash equivalents and trade receivables.
The Company invests its excess cash in money market accounts and U.S.
Government securities and has established guidelines relative to diversification
and maturities in an effort to maintain safety and liquidity. These guidelines
are periodically reviewed and modified to take advantage of trends in yields and
interest rates.
The Company operates in the golf equipment industry and primarily sells its
products to golf equipment retailers. The Company performs ongoing credit
evaluations of its customers' financial condition and generally requires no
collateral from its customers. The Company maintains reserves for potential
credit losses.
Reclassifications
Certain prior period amounts have been reclassified to conform with the current
period presentation.
NOTE 2
SELECTED FINANCIAL STATEMENT INFORMATION
(in thousands) December 31,
1997 1996
----------------------
Cash and cash equivalents:
U.S. Treasury bills $ 96,407
Cash, interest bearing $ 24,438 11,415
Cash, non-interest bearing 1,766 635
----------------------
$ 26,204 $ 108,457
======================
Accounts receivable, net:
Trade accounts receivable $ 131,516 $ 80,814
Allowance for doubtful accounts (7,046) (6,337)
----------------------
$ 124,470 $ 74,477
======================
Inventories, net:
Raw materials $ 47,780 $ 50,012
Work-in-process 3,083 1,651
Finished goods 51,905 51,954
----------------------
102,768 103,617
Reserve for obsolescence (5,674) (5,284)
----------------------
$ 97,094 $ 98,333
======================
Property, plant and equipment, net:
Land $ 16,398 $ 9,589
Buildings and improvements 51,797 35,076
Machinery and equipment 45,332 29,778
Furniture, computers
and equipment 48,071 20,329
Production molds 13,690 9,399
Construction-in-process 19,361 21,003
----------------------
194,649 125,174
Accumulated depreciation (52,146) (33,828)
----------------------
$ 142,503 $ 91,346
======================
Intangible assets:
Trade name $ 69,629
Trademark and trade dress 29,841
Patents, goodwill and other 14,641 $ 4,502
----------------------
114,111 4,502
Accumulated amortization (1,970) (225)
----------------------
$ 112,141 $ 4,277
======================
Accounts payable and accrued expenses:
Accounts payable $ 18,379 $ 2,442
Accrued expenses 11,684 12,554
----------------------
$ 30,063 $ 14,996
======================
Accrued employee compensation and benefits:
Accrued payroll and taxes $ 9,729 $ 12,914
Accrued vacation and sick pay 4,092 3,017
Accrued commissions 441 264
----------------------
$ 14,262 $ 16,195
======================
Total rent expense was $1,760,000, $1,363,000, and $1,181,000 in 1997, 1996
and 1995, respectively.
NOTE 3
BANK LINE OF CREDIT
The Company had a $50,000,000 unsecured line of credit with an interest rate
equal to the bank's prime rate (8.5% at December 31, 1997). The line of credit
was renewed in February 1998 (Note 14). The line of credit has been primarily
utilized to support the issuance of letters of credit, of which there were
$4,046,000 outstanding at December 31, 1997, reducing the amount available under
the Company's line of credit to $45,954,000.
The line requires the Company to maintain certain financial ratios,
including current and debt-to-equity ratios. The Company is also subject to
other restrictive covenants under the terms of the credit agreement.
40
<PAGE>
NOTE 4
COMMON AND PREFERRED STOCK
As of December 31, 1997, the Company had 240,000,000 authorized shares of Common
Stock, $.01 par value, of which 74,251,664 were issued and outstanding.
As of December 31, 1997, the Company was authorized to issue up to
3,000,000 shares of $.01 par value Preferred Stock. No Preferred Stock has been
issued.
In July 1995, the Company established the Callaway Golf Company Grantor
Stock Trust (GST). In conjunction with the formation of the GST, the Company
sold 4,000,000 shares of newly issued Common Stock to the GST at a purchase
price of $60,575,000 ($15.14 per share). In December 1995, the Company sold an
additional 1,300,000 shares of newly issued Common Stock to the GST at a
purchase price of $26,263,000 ($20.20 per share). The sale of these shares had
no net impact on shareholders' equity. During the term of the GST, shares in the
GST may be used to fund the Company's obligations with respect to one or more of
the Company's non-qualified or qualified employee benefit plans.
Shares owned by the GST are accounted for as a reduction to shareholders'
equity until used in connection with employee benefits. Each period the shares
owned by the GST are valued at the closing market price, with corresponding
changes in the GST balance reflected in capital in excess of par value.
NOTE 5
EARNINGS PER COMMON SHARE
The schedule below summarizes the elements included in the calculation of basic
and diluted earnings per common share for the years ended December 31, 1997,
1996 and 1995.
<TABLE>
<CAPTION>
(in thousands, except per share data) Year ended December 31,
1997 1996 1995
----------------------------------------------------------------------------------------------------------
Net Per-Share Net Per-Share Net Per-Share
Income Shares Amount Income Shares Amount Income Shares Amount
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income $132,704 $122,337 $97,736
Basic EPS 68,407 $1.94 66,832 $1.83 66,641 $1.47
Dilutive Securities 3,291 3,829 3,214
------ ------ ------
Diluted EPS 71,698 $1.85 70,661 $1.73 69,855 $1.40
==========================================================================================================
</TABLE>
For the years ended December 31, 1997, 1996 and 1995, 917,000, 269,000 and
1,329,000 options outstanding were excluded from the calculations, as their
effect would have been antidilutive.
NOTE 6
STOCK OPTIONS AND RIGHTS
Options
The Company had the following fixed stock option plans, under which shares were
available for grant at December 31, 1997: the 1991 Stock Incentive Plan (the
"Incentive Plan"), the Promotion, Marketing and Endorsement Stock Incentive Plan
(the "Promotion Plan"), the Non-Employee Directors Stock Option Plan, the 1995
Employee Stock Incentive Plan ("1995 Plan"), the 1996 Stock Option Plan ("1996
Plan") and two plans for certain key officers. The Incentive Plan and the 1996
Plan permit the granting of options to purchase Common Stock to the Company's
officers, consultants, employees, or Directors who are also employees, at option
prices which may be less than the market value of such stock at the date of
grant, while the 1995 Plan permits the granting of options to only employees and
consultants of the Company at option prices that may be less than market value
at the date of grant. The Company is authorized to grant options to acquire up
to 10,000,000 shares of Common Stock under the Incentive Plan and 146,000 shares
were available for grant at December 31, 1997. During 1997, the 1995 Plan and
the 1996 Plan were amended to increase the maximum number of options to acquire
shares of Common Stock to 3,600,000 and 3,000,000, respectively, while the
number of shares available for grant at December 31, 1997 was 209,000 and
1,280,000, respectively. Under the Promotion Plan, up to 3,560,000 shares of
Common Stock may be granted in the form of options or other stock awards to golf
professionals and other parties at prices which may be less than the market
value of the stock at the grant date.
41
<PAGE>
Under the Promotion Plan, 774,000 shares were available for grant at December
31, 1997. The Non-Employee Directors Stock Option Plan permits the granting of
options to acquire up to 840,000 shares of Common Stock, of which 204,000 were
available for grant at December 31, 1997, to Directors of the Company who are
not employees, at prices based on a non-discretionary formula, which may be less
than the market value of the stock at the date of grant. During 1996 and 1995,
the Company granted options to purchase 600,000 and 500,000 shares,
respectively, to two key officers, under separate plans, in conjunction with
terms of their initial employment. At December 31, 1997, no shares were
available for grant under these plans. Additionally, under the 1990 Amended and
Restated Stock Option Plan ("1990 Plan"), 4,920,000 shares were authorized for
issuance at December 31, 1997, while no shares were available for future grant
at December 31, 1997.
Under the Company's stock option plans, outstanding options vest over
periods ranging from zero to five years from the grant date and expire up to ten
years after the grant date.
The following summarizes stock option transactions for the years ended
December 31, 1997, 1996, and 1995:
<TABLE>
<CAPTION>
(in thousands, except per share data) Year ended December 31,
1997 1996 1995
--------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 10,800 $15.03 9,842 $ 9.87 10,652 $ 6.59
Granted 3,406 33.79 2,760 28.47 3,145 16.54
Exercised (2,877) 7.81 (1,775) 7.07 (2,329) 3.57
Canceled (72) 28.81 (27) 16.98 (1,626) 9.98
--------------------------------------------------------------------------------------
Outstanding at end of year 11,257 $22.41 10,800 $15.03 9,842 $ 9.87
Options exercisable at end of year 3,453 $12.17 3,939 $ 8.83 3,354 $ 6.05
--------------------------------------------------------------------------------------
Price range of outstanding options $0.44 -- $40.00 $0.44 -- $34.38 $.019 -- $18.06
======================================================================================
</TABLE>
The following table summarizes additional information about outstanding stock
options at December 31, 1997:
<TABLE>
<CAPTION>
Weighted-
Average
Number Remaining Weighted- Number Weighted-
Range of Outstanding Contractual Average Exercisable Average
Exercise Prices (in thousands) Life-Years Exercise Price (in thousands) Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0 -- $15 3,734 3.7 $ 9.69 2,594 $ 8.20
$15 -- $30 3,994 5.9 $23.63 693 $23.58
$30 -- $40 3,529 7.3 $34.98 166 $32.37
- ------------------------------------------------------------------------------------------------------------------------------------
$ 0 -- $40 11,257 5.6 $22.41 3,453 $12.17
====================================================================================================================================
</TABLE>
42
<PAGE>
During August 1995, the Company canceled 634,000 employee stock options,
exclusive of those held by Directors, with option prices in excess of the
then-current market price of the Company's stock. The Company then reissued an
equivalent number of options at the then-current market price.
Rights
The Company has granted officers, consultants, and employees rights to receive
an aggregate of 826,800 shares of Common Stock for services or other
consideration. At December 31, 1997, rights to receive 80,000 shares of Common
Stock remained outstanding. No rights were granted or exercised during 1997,
1996, or 1995.
In 1995, the Company implemented a plan to protect shareholders' rights in
the event of a proposed takeover of the Company. Under the plan, each share of
the Company's outstanding Common Stock carries one right to Purchase one
one-thousandth of a share of the Company's Series "A" Junior Participating
Preferred Stock (the "Right"). The Right entitles the holder, under certain
circumstances, to purchase Common Stock of Callaway Golf Company or of the
acquiring company at a substantially discounted price ten days after a person or
group publicly announces it has acquired or has tendered an offer for 15% or
more of the Company's outstanding Common Stock. The Rights are redeemable by the
Company at $.01 per Right and expire in 2005.
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan ("ESPP") whereby eligible
employees may purchase shares of Common Stock at 85% of the lower of the fair
market value on the first day of a two year offering period or last day of each
six month exercise period. Employees may authorize the Company to withhold
compensation during any offering period, subject to certain limitations. During
1997, the ESPP was amended to increase the maximum number of shares of the
Company's Common Stock that employees may acquire under this plan to 1,500,000
shares. During 1997 and 1996, the ESPP purchased approximately 372,000 and
168,000 shares, respectively, of the Company's Common Stock. No shares were
purchased during 1995. As of December 31, 1997, 960,000 shares were reserved for
future issuance.
Compensation Expense
During 1997, 1996, and 1995, the Company recorded $2,041,000, $1,919,000, and
$2,009,000, respectively, in compensation expense as the value of certain
options and rights to purchase shares of Common Stock granted to employees and
consultants of the Company. The valuation of the options and rights granted to
employees is based on the difference between the exercise price and the market
value of the stock on the measurement date. The valuation of the options and
rights granted to non-employees is estimated using the Black-Scholes option
pricing model.
Unearned compensation has been charged for the value of options granted to
both employees and non-employees on the measurement date based on the valuation
methods described above. These amounts are amortized over the vesting period of
employee options and over the contract terms for non-employees. The unamortized
portion of unearned compensation is shown as a reduction of shareholders' equity
in the accompanying consolidated balance sheet.
Pro Forma Disclosures
If the Company had elected to recognize compensation expense based upon the fair
value at the grant date for awards under these plans consistent with the
methodology prescribed by SFAS No. 123, the Company's net income and earning per
share would be reduced to the pro forma amounts indicated below:
(in thousands, except per share data) Year ended December 31,
1997 1996 1995
------------------------------
Net income:
As reported $132,704 $122,337 $97,736
Pro forma $124,978 $113,587 $95,510
Earnings per common share:
As reported
Basic $1.94 $1.83 $1.47
Diluted $1.85 $1.73 $1.40
Pro forma
Basic $1.83 $1.70 $1.43
Diluted $1.77 $1.59 $1.36
The pro forma amounts reflected above may not be representative of future
disclosures since the estimated fair value of stock options is amortized to
expense over the vesting period and additional options may be granted in future
years. The fair value of employee stock options was estimated at the date of
grant using the Black-Scholes option
43
<PAGE>
pricing model with the following assumptions for the years ended December 31,
1997, 1996, and 1995, respectively:
Year ended December 31,
1997 1996 1995
--------------------------------------------
Dividend yield 0.9% 0.9% 0.9%
Expected volatility 31.5% 31.5% 31.5%
Risk free
interest rates 5.64-5.89% 5.32-7.66% 5.32-7.66%
Expected lives 3-6 years 2-6 years 2-6 years
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
subjective input assumptions can materially affect the fair value estimates, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of grants under the Company's employee stock-
based compensation plans.
NOTE 7
EMPLOYEE BENEFIT PLANS
The Company has a voluntary deferred compensation plan under Section 401(k) of
the Internal Revenue Code (the "401(k) Plan") for all employees who satisfy the
age and service requirements under the 401(k) Plan. Each participant may elect
to contribute up to 10% of annual compensation, up to the maximum permitted
under federal law, and the Company is obligated to contribute annually an amount
equal to 100% of the participant's contribution up to 6% of that participant's
annual compensation. Additionally, the Company can make discretionary
contributions based on the profitability of the Company. For the years ended
December 31, 1996 and 1995, the Company recorded compensation expense for
discretionary contributions of $6,390,000 and $6,481,000, respectively.
Discretionary contributions related to 1997 will not be made and accordingly, no
compensation expense was recorded. Employees contributed to the 401(k) Plan
$5,384,000, $3,315,000 and $3,336,000 in 1997, 1996 and 1995, respectively. In
accordance with the provisions of the 401(k) Plan, the Company matched employee
contributions in the amount of $4,495,000, $1,988,000 and $1,458,000 during
1997, 1996 and 1995, respectively.
The Company also has an unfunded, nonqualified deferred compensation plan.
The plan allows officers and certain other employees of the Company to defer all
or part of their compensation, to be paid to the participants or their
designated beneficiaries upon retirement, death or separation from the Company.
For the years ended December 31, 1997, 1996 and 1995, the total participant
deferrals, which are reflected in long-term liabilities, were $1,166,000,
$2,564,000 and $1,460,000, respectively.
NOTE 8
INCOME TAXES
Income before income taxes was taxed under the following jurisdictions for the
following periods:
(in thousands) Year ended December 31,
1997 1996 1995
-------------------------------------
Domestic $212,453 $193,170 $154,054
Foreign 1,312 2,425 4,347
-------------------------------------
$213,765 $195,595 $158,401
=====================================
The provision for income taxes is as follows:
(in thousands) Year ended December 31,
1997 1996 1995
-------------------------------------
Current tax provision:
Federal $66,462 $65,287 $48,563
State 12,419 11,154 9,840
Foreign 1,150 1,244 1,626
Deferred tax expense (benefit):
Federal 1,042 (3,911) (317)
State 50 (437) 1,053
Foreign (62) (79) (100)
-------------------------------------
Provision for income taxes $81,061 $73,258 $60,665
=====================================
During 1997, 1996 and 1995, the Company recognized certain tax benefits
related to stock option plans in the amount of $29,786,000, $14,244,000, and
$11,236,000, respectively. Such benefits were recorded as a reduction of income
taxes payable and an increase in additional paid-in capital.
Deferred tax assets are comprised of the following:
(in thousands) December 31,
1997 1996
-----------------
Reserves and allowances $15,914 $15,056
Depreciation and amortization 6,107 5,585
Deferred compensation 4,559 3,088
Effect of inventory overhead adjustment 1,555 2,057
Compensatory stock options and rights 1,589 1,541
State taxes, net 5 697
Other 702 3,437
-----------------
Net deferred tax asset $30,431 $31,461
=================
44
<PAGE>
The Company did not require a deferred tax asset valuation allowance at
December 31, 1997 or 1996.
A reconciliation of income taxes computed by applying the statutory federal
income tax rate to income before income taxes to the provision for income taxes
is as follows:
(in thousands) Year ended December 31,
1997 1996 1995
------------------------------------
Amounts computed at
statutory federal tax rate $74,816 $68,458 $55,440
State income taxes,
net of federal benefit 8,105 6,966 7,081
Other (1,860) (2,166) (1,856)
------------------------------------
Provision for income taxes $81,061 $73,258 $60,665
====================================
NOTE 9
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 clubheads costing
approximately $73,714,000 from one of its vendors. These clubheads are to be
shipped to the Company in accord with a production schedule that extends into
1999.
The Company and its subsidiaries, incident to their business activities,
are parties to a number of legal proceedings in various stages of development.
The Company believes that the majority of these proceedings involve matters as
to which liability, if any, will be adequately covered by insurance. Management
believes that the probable result of these matters individually and in the
aggregate will not have a material adverse effect upon the Company's financial
position, results of operations or cash flows.
NOTE 10
LITIGATION SETTLEMENT
On September 23, 1997, the Company settled a lawsuit brought against it and
certain officers of the Company by a former officer of the Company with the
payment of $12,000,000. The Company is seeking coverage for the costs of
defending and settling this lawsuit with certain of its insurance carriers and
an insurance agent; however, no assurance can be given that any of the costs
will be recovered. The Company entered into a six year employment agreement with
the former officer which included the issuance of 600,000 stock options at the
market price on the date of the grant.
NOTE 11
ACQUISITION
On August 8, 1997, the Company consummated its acquisition of substantially all
of the assets and certain liabilities of Odyssey Sports, Inc., by its
wholly-owned subsidiary, Odyssey Golf, Inc. ("Odyssey"), subject to certain
adjustments as of the time of closing. Odyssey's results of operations have been
included in the Company's consolidated results of operations since August 8,
1997. Odyssey manufactures and markets the Odyssey(R) line of putters and wedges
with Stronomic(R) and Lyconite(TM) face inserts.
The cost to acquire substantially all of the assets and certain liabilities
of Odyssey Sports, Inc., including professional fees directly related to the
acquisition, was approximately $129,256,000 and has been accounted for using the
purchase method of accounting. The allocation of the acquisition cost to assets
acquired and liabilities assumed is summarized in the table that follows.
Amounts allocated to trade name, trademark, trade dress and goodwill are being
amortized on the straight-line basis over forty years. The amounts allocated to
the process patent and covenant not to compete are being amortized on the
straight-line basis over sixteen and three years, respectively.
(in thousands) August 8, 1997
--------------
Assets acquired/liabilities assumed:
Total assets acquired $132,591
Total liabilities assumed (3,335)
--------
Net assets acquired $129,256
========
The following unaudited pro forma net sales, net income and earnings per
share data for the years ended December 31, 1997 and 1996 are based on the
respective historical financial statements of the Company and Odyssey Sports,
Inc. The pro forma data presented for the year ended December 31, 1997 combines
the results of operations of the Company for the year ended December 31, 1997
with the results of operations of Odyssey Sports, Inc. for the ten months ended
August 7, 1997 and the results of Odyssey for the two months ended September 30,
1997, and assumes that the acquisition of substantially all of the assets and
certain liabilities of Odyssey Sports, Inc. occurred on January 1, 1997. The pro
forma data presented for the year ended December 31, 1996 combines the results
of operations of the Company for the year ended December 31, 1996 with the
results of operations of Odyssey Sports, Inc. for the year ended September 30,
1996 and assumes that the acquisition of substantially all the assets and
certain liabilities of Odyssey Sports, Inc. occurred on January 1, 1996.
45
<PAGE>
The pro forma financial data presented are not necessarily indicative of
the Company's results of operations that might have occurred had the transaction
been completed at the beginning of the periods specified, and do not purport to
represent what the Company's consolidated results of operations might be for any
future period.
Year ended December 31,
(in thousands, except per share data) (unaudited)
1997 1996
------------------------
Net sales $884,840 $711,715
------------------------
Net income $134,512 $119,385
------------------------
Earnings per common share
Basic $1.97 $1.79
Diluted $1.88 $1.69
NOTE 12
SALES INFORMATION
The Company is engaged in domestic and international sales through retail
customers and distributors located within the following geographic areas:
(in thousands) Year ended December 31,
1997 1996 1995
---------------------------------
United States $547,256 $460,611 $367,359
Japan 84,634 58,156 60,971
All others -- individually
less than 10% of
net sales 211,037 159,745 124,957
---------------------------------
$842,927 $678,512 $553,287
=================================
The Company, through a distribution agreement, appointed Sumitomo Rubber
Industries, Ltd. ("Sumitomo") as the sole distributor of Callaway(R) golf clubs
in Japan. The distribution agreement requires Sumitomo to purchase specified
minimum quantities. The current distribution agreement began in February 1993
and ends on December 31, 1999. In 1997, 1996 and 1995, sales to Sumitomo
accounted for 10%, 9% and 11%, respectively, of the Company's net sales.
NOTE 13
RELATED PARTY TRANSACTIONS
During June 1997, the Company entered into an agreement with Saint Andrews Golf
Corporation to form All-American Golf LLC ("All-American") whereby the Company
is a 20% equity owner in All-American, which operates a nine-hole golf course,
performance center, training facility and driving range (the "Center") located
in Las Vegas, Nevada. As of December 31, 1997, the Company had made capital
contributions to All-American of $750,000. Additionally, the Company loaned
All-American $5,250,000, pursuant to a secured promissory note, for purposes of
construction and various other start-up costs. The note, which is secured by
certain assets of All-American, bears interest of 10% per annum and is payable
in monthly installments. Commencing on the fifth anniversary of the Center's
opening, the principal shall be repaid in sixty equal monthly installments.
NOTE 14
SUBSEQUENT EVENTS
Dividend
On January 28, 1998, the Company declared a quarterly cash dividend of $.07 per
share payable on March 3, 1998, to shareholders of record on February 10, 1998.
Bank Line of Credit
On February 4, 1998, the Company renewed its line of credit, increasing it to
$150,000,000. The line of credit is unsecured and requires the Company to
maintain certain financial ratios, including current and debt-to-equity ratios.
The Company is also subject to other restrictive covenants under the terms of
the credit agreement.
Acquisition
On February 11, 1998, the Company purchased distribution rights and
substantially all of the assets of its Korean distributor, subject to certain
liabilities. The purchase price consisted of $3,696,000 in conversion of
accounts receivable and cash of approximately $3,137,000.
46
<PAGE>
-----------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
-----------------------------------------
[LOGO OF PRICE WATERHOUSE APPEARS HERE]
To the Board of Directors and Shareholders of Callaway Golf Company
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of cash flows and of shareholders' equity
present fairly, in all material respects, the financial position of Callaway
Golf Company and its subsidiaries at December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
San Diego, California
January 28, 1998, except as to
Note 14, which is as of February 11, 1998
47
<PAGE>
-------------------------------------------------------
SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
-------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands, except per share data) Fiscal Year 1997 Quarters
- ----------------------------------------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th Total
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $169,073 $253,032 $257,435 $163,387 $842,927
Gross Profit $87,002 $134,742 $138,769 $82,287 $442,800
Net Income $24,466 $46,821 $37,049 $24,368 $132,704
Earnings per common share*
Basic $0.36 $0.69 $0.54 $0.35 $1.94
Diluted $0.34 $0.66 $0.52 $0.34 $1.85
<CAPTION>
Fiscal Year 1996 Quarters
- ----------------------------------------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th Total
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $135,138 $210,002 $194,545 $138,827 $678,512
Gross Profit $68,632 $111,083 $106,071 $75,373 $361,159
Net Income $19,455 $38,937 $38,418 $25,527 $122,337
Earnings per common share*
Basic $0.29 $0.58 $0.57 $0.38 $1.83
Diluted $0.28 $0.55 $0.54 $0.36 $1.73
</TABLE>
*Earnings per share is computed individually for each of the quarters presented;
therefore, the sum of the quarterly earnings per share will not necessarily
equal the total for the year.
MARKET FOR COMMON SHARES AND RELATED SHAREHOLDER MATTERS
The Company's Common Shares are traded on the New York Stock Exchange (NYSE).
The Company's symbol for its Common Shares is "ELY."
As of February 24, 1998, the approximate number of holders of record of the
Company's Common Stock was 8,797.
STOCK PRICE INFORMATION
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996
-----------------------------------------------------------------------------
Period: High Low Dividend High Low Dividend
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $33.63 $28.63 $.07 $28.13 $18.50 $.06
Second Quarter $38.13 $27.25 $.07 $33.88 $24.50 $.06
Third Quarter $38.38 $32.94 $.07 $36.63 $27.88 $.06
Fourth Quarter $36.38 $26.13 $.07 $36.63 $26.63 $.06
</TABLE>
48
<PAGE>
Exhibit 21.1
------------
SUBSIDIARIES OF CALLAWAY GOLF COMPANY
-------------------------------------
<TABLE>
<CAPTION>
NAME JURISDICTION OF FORMATION
---- -------------------------
<S> <C>
Callaway Golf Sales Company California
Callaway Golf Ball Company California
CGV, Inc. California
Odyssey Golf, Inc. California
Callaway Golf (Germany) GmbH Germany
Callaway Golf Trading GmbH
(owned 80% by Callaway Golf Germany GmbH) Germany
Callaway Golf Europe Ltd.
(formerly Callaway Golf (UK) Limited) United Kingdom
ERC International Company Japan
Callaway Golf Korea, Ltd. Korea
</TABLE>
<PAGE>
Exhibit 23.1
------------
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement of Form S-3 (No. 33-77024) and
in the Registration Statements on Form S-8 (No. 33-85692, No. 33-50564, No. 33-
56756, No. 33-67160, No. 33-73680, No. 33-98750, No. 33-92302, No. 333-242, No.
333-5719, No. 333-5721, No. 333-24207, No. 333-27089, No. 333-27091, No. 333-
39093, and No. 333-39095) of Callaway Golf Company of our report dated January
28, 1998, except as to Note 14, which is as of February 11, 1998, appearing on
page 47 of the Annual Report to Shareholders which is incorporated in the Annual
Report on Form 10-K. We also consent to the incorporation by reference of our
report on Financial Statement Schedule, which appears on page 21 of this Form
10-K.
/s/ PRICE WATERHOUSE LLP
San Diego, California
March 26, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CALLAWAY
GOLF COMPANY CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME AT
DECEMBER 31, 1997 AND FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<CASH> 26,204
<SECURITIES> 0
<RECEIVABLES> 131,516
<ALLOWANCES> 7,046
<INVENTORY> 102,768
<CURRENT-ASSETS> 281,786
<PP&E> 194,649
<DEPRECIATION> 52,146
<TOTAL-ASSETS> 561,714
<CURRENT-LIABILITIES> 72,384
<BONDS> 0
0
0
<COMMON> 743
<OTHER-SE> 480,682
<TOTAL-LIABILITY-AND-EQUITY> 561,714
<SALES> 842,927
<TOTAL-REVENUES> 842,927
<CGS> 400,127
<TOTAL-COSTS> 400,127
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,354
<INTEREST-EXPENSE> 10
<INCOME-PRETAX> 213,765
<INCOME-TAX> 81,061
<INCOME-CONTINUING> 132,704
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 132,704
<EPS-PRIMARY> 1.94
<EPS-DILUTED> 1.85
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE HAS BEEN RESTATED TO REFLECT THE COMPANY'S ADOPTION
OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, "EARNINGS PER SHARE."
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CALLAWAY
GOLF COMPANY CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME AT
DECEMBER 31, 1996 AND FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 108,457
<SECURITIES> 0
<RECEIVABLES> 80,814
<ALLOWANCES> 6,337
<INVENTORY> 98,333
<CURRENT-ASSETS> 311,513
<PP&E> 125,174
<DEPRECIATION> 33,828
<TOTAL-ASSETS> 428,428
<CURRENT-LIABILITIES> 61,052
<BONDS> 0
0
0
<COMMON> 729
<OTHER-SE> 361,538
<TOTAL-LIABILITY-AND-EQUITY> 428,428
<SALES> 678,512
<TOTAL-REVENUES> 678,512
<CGS> 317,353
<TOTAL-COSTS> 317,353
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21
<INCOME-PRETAX> 195,595
<INCOME-TAX> 73,258
<INCOME-CONTINUING> 122,337
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 122,337
<EPS-PRIMARY> $1.83
<EPS-DILUTED> $1.73
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE HAS BEEN RESTATED TO REFLECT THE COMPANY'S ADOPTION
OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, "EARNINGS PER SHARE."
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CALLAWAY
GOLF COMPANY CONSOLIDATED CONDENSED BALANCE SHEET (UNAUDITED) AND CONSOLIDATED
CONDENSED STATEMENT OF INCOME (UNAUDITED) AT SEPTEMBER 30, 1997 AND 1996 AND FOR
THE NINE MONTH PERIODS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> SEP-30-1997 SEP-30-1996
<CASH> 41,493 140,331
<SECURITIES> 0 0
<RECEIVABLES> 169,208 91,301
<ALLOWANCES> 7,336 6,437
<INVENTORY> 73,016 86,629
<CURRENT-ASSETS> 308,301 340,483
<PP&E> 173,029 111,635
<DEPRECIATION> 46,484 30,652
<TOTAL-ASSETS> 571,122 444,655
<CURRENT-LIABILITIES> 89,337 105,572
<BONDS> 0 0
0 726
0 0
<COMMON> 746 0
<OTHER-SE> 474,277 335,213
<TOTAL-LIABILITY-AND-EQUITY> 571,122 444,655
<SALES> 679,540 539,685
<TOTAL-REVENUES> 679,540 539,685
<CGS> 319,026 253,899
<TOTAL-COSTS> 319,026 253,899
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 1,098 0
<INTEREST-EXPENSE> 10 14
<INCOME-PRETAX> 175,110 154,918
<INCOME-TAX> 66,773 58,108
<INCOME-CONTINUING> 108,337 96,810
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 108,337 96,810
<EPS-PRIMARY> $1.59 $1.45
<EPS-DILUTED> $1.52 $1.38
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE HAS BEEN RESTATED TO REFLECT THE COMPANY'S ADOPTION
OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, "EARNINGS PER SHARE."
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CALLAWAY
GOLF COMPANY CONSOLIDATED CONDENSED BALANCE SHEET (UNAUDITED) AND THE
CONSOLIDATED CONDENSED STATEMENT OF INCOME (UNAUDITED) AT JUNE 30, 1997 AND 1996
AND FOR THE SIX MONTH PERIODS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> JUN-30-1997 JUN-30-1996
<CASH> 150,849 105,854
<SECURITIES> 0 0
<RECEIVABLES> 133,757 95,259
<ALLOWANCES> 6,382 6,390
<INVENTORY> 74,405 81,833
<CURRENT-ASSETS> 386,656 300,222
<PP&E> 155,567 102,615
<DEPRECIATION> 41,000 27,437
<TOTAL-ASSETS> 522,782 395,696
<CURRENT-LIABILITIES> 99,073 98,366
<BONDS> 0 0
0 0
0 0
<COMMON> 732 722
<OTHER-SE> 417,156 293,620
<TOTAL-LIABILITY-AND-EQUITY> 522,782 395,696
<SALES> 422,105 345,140
<TOTAL-REVENUES> 422,105 345,140
<CGS> 200,360 165,425
<TOTAL-COSTS> 200,360 165,425
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 104 0
<INTEREST-EXPENSE> 6 0
<INCOME-PRETAX> 115,194 93,527
<INCOME-TAX> 43,906 35,135
<INCOME-CONTINUING> 71,288 58,392
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 71,288 58,392
<EPS-PRIMARY> $1.05 $0.88
<EPS-DILUTED> $1.00 $0.83
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE HAS BEEN RESTATED TO REFLECT THE COMPANY'S ADOPTION
OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, "EARNINGS PER SHARE."
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CALLAWAY
GOLF COMPANY CONSOLIDATED CONDENSED BALANCE SHEET (UNAUDITED) AND CONSOLIDATED
CONDENSED STATEMENT OF INCOME (UNAUDITED) AT MARCH 31, 1997 AND 1996 AND FOR THE
THREE MONTH PERIODS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> MAR-31-1997 MAR-31-1996
<CASH> 113,623 63,396
<SECURITIES> 0 0
<RECEIVABLES> 103,669 91,240
<ALLOWANCES> 6,360 6,387
<INVENTORY> 101,395 72,021
<CURRENT-ASSETS> 342,368 241,854
<PP&E> 136,637 96,359
<DEPRECIATION> 37,277 24,174
<TOTAL-ASSETS> 466,230 326,606
<CURRENT-LIABILITIES> 89,208 71,945
<BONDS> 0 0
728 0
0 0
<COMMON> 0 718
<OTHER-SE> 370,545 251,515
<TOTAL-LIABILITY-AND-EQUITY> 466,230 326,606
<SALES> 169,073 135,138
<TOTAL-REVENUES> 169,073 135,138
<CGS> 82,071 66,506
<TOTAL-COSTS> 82,071 66,506
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3 0
<INCOME-PRETAX> 39,599 30,997
<INCOME-TAX> 15,133 11,542
<INCOME-CONTINUING> 24,466 19,455
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 24,466 19,455
<EPS-PRIMARY> $0.36 $0.29
<EPS-DILUTED> $0.34 $0.28
</TABLE>
