<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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)
DELAWARE 95-3797580
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2285 RUTHERFORD ROAD, CARLSBAD, CA 92008-8815
(760) 931-1771
(Address, including zip code and telephone number, including area code, of
principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
The number of shares outstanding of the Registrant's Common Stock, $.01 par
value, as of July 31, 1999 was 75,833,761.
<PAGE>
CALLAWAY GOLF COMPANY
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheet at June 30, 1999
and December 31, 1998 3
Consolidated Condensed Statement of Operations for the three
and six months ended June 30, 1999 and 1998 4
Consolidated Condensed Statement of Cash Flows for the six
months ended June 30, 1999 and 1998 5
Consolidated Condensed Statement of Shareholders' Equity for
the six months ended June 30, 1999 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
Part II. Other Information
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
</TABLE>
2
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED BALANCE SHEET
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
=============================================================================================================
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 26,898 $ 45,618
Accounts receivable, net of allowance of $6,418 and $9,939
at June 30, 1999 and December 31, 1998, respectively (Note 4) 125,346 73,466
Inventories, net 84,284 149,192
Deferred taxes 49,322 51,029
Other current assets 6,981 4,301
- -----------------------------------------------------------------------------------------------------------
Total current assets 292,831 323,606
Property, plant and equipment, net 194,335 172,794
Intangible assets, net 123,673 127,779
Other assets 32,479 31,648
- -----------------------------------------------------------------------------------------------------------
$643,318 $655,827
===========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 37,696 $ 35,928
Line of credit (Note 3) 70,919
Note payable (Note 3) 25,595 12,971
Accrued employee compensation and benefits 23,072 11,083
Accrued warranty expense 38,029 35,815
Accrued restructuring costs 3,212 7,389
Income taxes payable 10,858 9,903
- -----------------------------------------------------------------------------------------------------------
Total current liabilities 138,462 184,008
Long-term liabilities:
Deferred compensation 9,000 7,606
Accrued restructuring costs 10,229 11,117
Commitments and contingencies (Note 6)
Shareholders' equity:
Preferred Stock, $.01 par value, 3,000,000 shares authorized, none
issued and outstanding at June 30, 1999 and December 31, 1998
Common Stock, $.01 par value, 240,000,000 shares authorized, 75,833,761
and 75,095,087 issued and outstanding at June 30, 1999, and
December 31, 1998, respectively 758 751
Paid-in capital 286,364 258,015
Unearned compensation (4,611) (5,653)
Retained earnings 280,270 252,528
Accumulated other comprehensive income 359 1,780
Less: Grantor Stock Trust (5,300,000 shares) at market (77,513) (54,325)
- -----------------------------------------------------------------------------------------------------------
Total shareholders' equity 485,627 453,096
- -----------------------------------------------------------------------------------------------------------
$643,318 $655,827
===========================================================================================================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
- -------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $229,708 100% $233,251 100% $415,452 100% $410,160 100%
Cost of goods sold 121,044 53% 124,461 53% 223,268 54% 217,664 53%
- -------------------------------------------------------------------------------------------------------------------
Gross profit 108,664 47% 108,790 47% 192,184 46% 192,496 47%
Operating expenses:
Selling 34,942 15% 42,236 18% 66,242 16% 78,029 19%
General and administrative 22,852 10% 23,679 10% 44,455 11% 44,184 11%
Research and development 8,279 4% 8,413 4% 16,733 4% 17,078 4%
Restructuring 362 487
- -------------------------------------------------------------------------------------------------------------------
Income from operations 42,229 18% 34,462 15% 64,267 15% 53,205 13%
Other (expense) income, net (1,393) 296 (2,165) (40)
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 40,836 18% 34,758 15% 62,102 15% 53,165 13%
Provision for income taxes 16,065 13,621 24,509 20,868
- -------------------------------------------------------------------------------------------------------------------
Net income $ 24,771 11% $ 21,137 9% $ 37,593 9% $ 32,297 8%
===================================================================================================================
Earnings per common share:
Basic $0.35 $0.30 $0.54 $0.47
Diluted $0.35 $0.30 $0.53 $0.45
Common equivalent shares:
Basic 70,302 69,350 70,142 69,267
Diluted 71,407 71,591 70,989 71,383
Dividends paid per share $0.07 $0.07 $0.14 $0.14
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
- -------------------------------------------------------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $37,593 $32,297
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 17,529 13,560
Loss (gain) on disposal of assets 636 (3)
Non-cash compensation 997 5,009
Tax benefit from exercise of stock options 1,294 2,049
Deferred taxes 2,753 (4,200)
Changes in assets and liabilities, net of effects from
acquisitions:
Accounts receivable, net (52,677) (2,172)
Inventories, net 64,089 (45,742)
Other assets (5,731) (8,848)
Accounts payable and accrued expenses 4,662 12,424
Accrued employee compensation and benefits 12,062 1,021
Accrued warranty expense 2,210 4,103
Income taxes payable 899 2,936
Accrued restructuring costs (4,177)
Other liabilities 1,394 (5,969)
Accrued restructuring costs - long term (888)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 82,645 6,465
- -------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Business acquisitions, net of cash acquired (495) (18,381)
Capital expenditures (41,456) (27,770)
Sale of assets 5,049 13
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (36,902) (46,138)
- -------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of Common Stock 3,919 4,443
Dividends paid (9,851) (9,709)
Retirement of Common Stock (1,303)
Proceeds from note payable 12,625
Line of credit, net (70,919) 55,000
- -------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (64,226) 48,431
- -------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (237) 148
- -------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (18,720) 8,906
Cash and cash equivalents at beginning of period 45,618 26,204
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $26,898 $35,110
===================================================================================================================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE>
CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Other
Common Stock Paid-in Unearned Retained Comprehensive Comprehensive
Shares Amount Capital Compensation Earnings Income GST Total Income
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 75,095 $751 $258,015 ($5,653) $252,528 $1,780 ($54,325) $453,096
- ----------------------------------------------------------------------------------------------------------------------------------
Exercise of stock options 562 5 2,201 2,206
Cancellation of Restricted
Common Stock (4) (108) 110 2
Tax benefit from exercise of
stock options 1,294 1,294
Compensatory stock and
stock options 63 932 995
Employee stock purchase plan 181 2 1,711 1,713
Cash dividends (10,593) (10,593)
Dividends on shares held
by GST 742 742
Adjustment of GST shares
to market value 23,188 (23,188)
Equity adjustment from foreign
currency translation (1,421) (1,421) $ (1,421)
Net income 37,593 37,593 37,593
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 75,834 $758 $286,364 ($4,611) $280,270 $ 359 ($77,513) $485,627 $ 36,172
=================================================================================================================================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
6
<PAGE>
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
---------------------
The accompanying financial information for the three and six months ended June
30, 1999 and 1998 has been prepared by Callaway Golf Company (the "Company") and
has not been audited. These financial statements, in the opinion of management,
include all adjustments (consisting only of normal recurring accruals) necessary
for a fair presentation of the financial position, results of operations and
cash flows for the periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K filed for the year ended December 31, 1998.
Interim operating results are not necessarily indicative of operating results
for the full year.
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.
Certain prior period amounts have been reclassified to conform with the current
period presentation.
2. INVENTORIES
-----------
June 30, December 31,
1999 1998
- ---------------------------------------------------------------------
(Unaudited)
Inventories, net (in thousands):
Raw materials $ 60,476 $102,352
Work-in-process 3,499 1,820
Finished goods 52,561 81,868
- ---------------------------------------------------------------------
116,536 186,040
Less reserve for obsolescence (32,252) (36,848)
- ---------------------------------------------------------------------
$84,284 $149,192
=====================================================================
3. BANK LINE OF CREDIT AND NOTE PAYABLE
------------------------------------
On February 12, 1999, the Company consummated the amendment of its line of
credit to increase the revolving credit facility to $120.0 million (the "Amended
Credit Agreement"). The Amended Credit Agreement has a five-year term and is
secured by substantially all of the assets of the Company. The Amended Credit
Agreement bears interest at the Company's election at the London Interbank
Offering Rate ("LIBOR") plus a margin or the higher of the base rate on
corporate loans at large U.S. money center commercial banks (prime rate) or the
Federal Funds Rate plus 50 basis points. The line of credit requires the Company
to maintain certain minimum financial ratios including a fixed charge coverage
ratio, as well as other restrictive covenants. As of June 30, 1999, up to $118.5
million of the credit facility remained available for borrowings (including a
reduction of $1.5 million for outstanding letters of credit), subject to meeting
certain availability requirements under a borrowing base formula and other
limitations.
7
<PAGE>
Effective as of December 30, 1998, Callaway Golf Ball Company, a wholly-owned
subsidiary of the Company, entered into a master lease agreement for the
acquisition and lease of approximately $56.0 million of machinery and equipment.
This lease program is expected to commence during the third quarter of 1999 and
includes an interim finance agreement (the "Finance Agreement"). The Finance
Agreement provides pre-lease financing advances for the acquisition and
installation costs of the aforementioned machinery and equipment. The Finance
Agreement bears interest at LIBOR plus a margin and is secured by the underlying
machinery and equipment and a corporate guarantee from the Company. As of June
30, 1999, $25.6 million was outstanding under this facility.
4. ACCOUNTS RECEIVABLE SECURITIZATION
----------------------------------
The Company's wholly-owned subsidiary, Callaway Golf Sales Company, sells trade
receivables on an ongoing basis to its wholly-owned subsidiary, Golf Funding
Corporation ("Golf Funding"). Pursuant to an agreement with a securitization
company (the "Accounts Receivable Facility"), Golf Funding, in turn, sells such
receivables to the securitization company on an ongoing basis, which yields
proceeds of up to $80.0 million at any point in time. Golf Funding's sole
business is the purchase of trade receivables from Callaway Golf Sales Company.
Golf Funding is a separate corporate entity with its own separate creditors,
which in the event of its liquidation will be entitled to be satisfied out of
Golf Funding's assets prior to any value in Golf Funding becoming available to
the Company. The Accounts Receivable Facility expires in February 2004.
Under the Accounts Receivable Facility, the receivables are sold at face value
with payment of a portion of the purchase price being deferred. As of June 30,
1999, no amount was outstanding under the Accounts Receivable Facility. Fees
incurred in connection with the sale of accounts receivable for the three and
six months ended June 30, 1999 were $315,000 and $673,000, respectively, and
were recorded as other expense.
5. EARNINGS PER SHARE
------------------
A reconciliation of the numerators and denominators of the basic and diluted
earnings per common share calculations for the three and six months ended June
30, 1999, and 1998 is presented below.
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
(Unaudited)
- ----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $24,771 $21,137 $37,593 $32,297
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted-average shares outstanding:
Weighted-average shares outstanding - Basic 70,302 69,350 70,142 69,267
Dilutive securities 1,105 2,241 847 2,116
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding - Diluted 71,407 71,591 70,989 71,383
==================================================================================================================================
Earnings per common share
Basic $0.35 $0.30 $0.54 $0.47
Diluted $0.35 $0.30 $0.53 $0.45
</TABLE>
For the three months ended June 30, 1999 and 1998, 10,132,000 and 8,189,000,
respectively, options outstanding were excluded from the calculations, as their
effect would have been antidilutive.
8
<PAGE>
6. COMMITMENTS AND CONTINGENCIES
-----------------------------
Subject to certain conditions, the Company has committed to purchase titanium
golf clubheads costing approximately $13.9 million from one of its vendors.
Under the current schedule, the clubheads are to be shipped to the Company
during the remainder of 1999.
The Company and its subsidiaries, incident to their business activities, are
parties to a number of legal proceedings, lawsuits and other claims. Such
matters are subject to many uncertainties and outcomes are not predictable with
assurance. Consequently, management is unable to ascertain the ultimate
aggregate amount of monetary liability, amounts which may be covered by
insurance, or the financial impact with respect to these matters as of June 30,
1999. Management believes, however, that the final resolution of these matters,
individually and in the aggregate, will not have a material adverse effect upon
the Company's annual consolidated financial position, results of operations or
cash flows.
7. RESTRUCTURING
-------------
During the fourth quarter of 1998, the Company recorded a restructuring charge
of $54.2 million resulting from a number of cost reduction actions and
operational improvements. These actions included the consolidation of the
operations of the Company's wholly-owned subsidiary, Odyssey Golf, Inc.
("Odyssey"), into the operations of the Company while maintaining the distinct
and separate Odyssey(R) brand image; the discontinuation, transfer or suspension
of certain initiatives not directly associated with the Company's core business,
such as the Company's involvement with interactive golf sites, golf book
publishing, new player development and a golf venue in Las Vegas; and the re-
sizing of the Company's core business to reflect current and expected business
conditions. These initiatives are expected to be completed largely during 1999.
The restructuring charges (shown below in tabular format) primarily related to:
1) the elimination of job responsibilities, resulting in costs incurred for
employee severance; 2) the decision to exit certain non-core business
activities, resulting in losses on disposition of assets, as well as excess
lease costs; and 3) consolidation of the Company's continuing operations
resulting in impairment of assets, losses on disposition of assets and excess
lease costs.
During the second quarter of 1999, the Company incurred a charge of $1.2 million
on the disposition of building improvements eliminated during the consolidation
of manufacturing operations, as well as other charges. These charges did not
meet the criteria for accrual in 1998. This charge was partially offset by a
gain of $1.0 million on the disposition of one of the Company's buildings
included in the restructuring plan, for which an impairment charge was taken in
1998. Activity during the first half of 1999 primarily related to cash payments
for severance, disposition of assets, contract cancellation and other items.
During the first quarter of 1999, substantially all of the approximately 750
non-temporary work force reductions occurred.
9
<PAGE>
Details of the one-time charge are as follows (in thousands):
<TABLE>
<CAPTION>
Reserve
Balance Reserve
Cash/ One-Time at Balance
Non-Cash Charge Activity 12/31/98 Activity at 6/30/99
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ELIMINATION OF JOB RESPONSIBILITIES $11,664 $ 8,473 $ 3,191 $2,898 $ 293
Severance packages Cash 11,603 8,412 3,191 2,898 293
Other Non-cash 61 61
EXITING CERTAIN NON-CORE BUSINESS ACTIVITIES $28,788 $12,015 $16,773 $4,324 $12,449
Loss on disposition of subsidiaries Non-cash 13,072 10,341 2,731 2,426 305
Excess lease costs Cash 12,660 146 12,514 536 11,978
Contract cancellation fees Cash 2,700 1,504 1,196 1,092 104
Other Cash 356 24 332 270 62
CONSOLIDATION OF OPERATIONS $13,783 $ 2,846 $10,937 $6,841 $ 4,096
Loss on impairment/disposition of assets Non-cash 12,364 2,730 9,634 6,456 3,178
Excess lease costs Cash 806 4 802 154 648
Other Cash 613 112 501 231 270
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Future cash outlays are anticipated to be completed by the end of 1999,
excluding certain lease commitments that continue through February 2013.
8. SEGMENT INFORMATION
-------------------
The Company's operating segments are organized on the basis of products and
include golf clubs and golf balls. The Golf Clubs segment consists of
Callaway(R) titanium and steel metal woods and irons, Callaway(R) and Odyssey(R)
putters and wedges, and related accessories. The Golf Balls segment consists of
golf balls that are to be designed, manufactured, marketed and distributed by
the Company's wholly-owned subsidiary, Callaway Golf Ball Company. In
accordance with its restructuring plan, the Company is no longer pursuing the
initiatives previously included in its All Other segment, which included
interactive golf sites, golf book publishing, new player development and a
driving range venture (Note 7). There are no significant intersegment
transactions. The tables below contain information utilized by management to
evaluate its operating segments for the interim periods presented.
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Additions to Additions to
Income (loss) long-lived Income (loss) long-lived
Net Sales before tax assets Net Sales before tax assets
<S> <C> <C> <C> <C> <C> <C>
Golf Clubs $229,708 $49,051 $ 421 $233,251 $42,133 $ 5,029
Golf Balls (8,215) 9,458 (5,504) 8,995
All Other (1,871) 10,383
- ---------------------------------------------------------------------------------------------------------------------
Consolidated $229,708 $40,836 $9,879 $233,251 $34,758 $24,407
=====================================================================================================================
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Additions to Additions to
Income (loss) long-lived Income (loss) long-lived
Net Sales before tax assets Net Sales before tax assets
<S> <C> <C> <C> <C> <C> <C>
Golf Clubs $415,452 $ 77,751 $ 4,434 $410,160 $65,853 $18,827
Golf Balls (15,649) 37,900 (9,522) 10,686
All Other (3,166) 12,325
- ---------------------------------------------------------------------------------------------------------------------
Consolidated $415,452 $ 62,102 $42,334 $410,160 $53,165 $41,838
=====================================================================================================================
</TABLE>
9. ADOPTION OF NEW ACCOUNTING STANDARD
-------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and hedging activities and
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
Changes in the fair value of derivatives are recorded each period in income or
other comprehensive income, depending on whether the derivatives are designated
as hedges and, if so, the types of hedges. SFAS No. 133, as amended by SFAS No.
137, "Deferral of the Effective Date of FAS 133," is effective for all periods
beginning after June 15, 2000; the Company elected to early adopt SFAS No. 133
on January 1, 1999.
In the first half of 1999, the Company entered into forward foreign currency
exchange rate contracts to hedge payments due on intercompany transactions by
certain of its wholly-owned foreign subsidiaries. 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 generally 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. Transaction losses recorded during the
six months ended June 30, 1999 were $1.9 million and were not material for the
comparable period in 1998. At June 30, 1999 and 1998, the Company had
approximately $19.6 million and $18.8 million, respectively, of foreign exchange
contracts outstanding. The contracts outstanding at June 30, 1999 mature
between July 1999 and May 2000. The Company's net unrealized gains and losses
on foreign exchange contracts included in net income for the first half of 1999
and 1998 were not material.
Adoption of this statement did not significantly affect the way in which the
Company accounts for derivatives to hedge payments due on intercompany
transactions. Accordingly, no cumulative-effect-type adjustments were made.
However, the Company expects that it also may hedge anticipated transactions
denominated in foreign currencies using forward foreign currency exchange rate
contracts and put or call options. The forward contracts used to hedge
anticipated transactions will be recorded as either assets or liabilities in the
balance sheet at fair value. Gains and losses on such contracts will be
recorded in other comprehensive income and will be recorded in income when the
anticipated transactions occur. The ineffective portion of all hedges will be
recognized in current period earnings.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements used in this discussion 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 also are urged to
carefully review and consider the various disclosures made by the Company which
describe certain factors which affect the Company's business, including the
disclosures made under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Certain Factors Affecting
Callaway Golf Company" below, as well as the Company's other periodic reports on
Forms 10-K and 10-Q and Current Reports on Form 8-K filed with the Securities
and Exchange Commission.
Readers also should be aware that while the Company does, from time to time,
communicate with securities analysts, it is against the Company's policy to
disclose to them any material non-public information or other confidential
commercial information. Accordingly, shareholders should not assume that the
Company agrees with any statement or report issued by any analyst irrespective
of the content of the statement or report. Further, the Company has a policy
against issuing or confirming financial forecasts or projections issued by
others. Accordingly, to the extent that reports issued by securities analysts
contain any projections, forecasts or opinions, such reports are not the
responsibility of the Company.
CERTAIN FACTORS AFFECTING CALLAWAY GOLF COMPANY
- -----------------------------------------------
RESTRUCTURING
In the second quarter of 1999, the Company continued to implement its
restructuring in accordance with the plan adopted in the fourth quarter of 1998.
See "Restructuring" section below.
SALES; GROSS MARGIN; SEASONALITY
The Company believes that the premium golf equipment market has been declining
in certain major markets, including Japan, the United States and Europe, and may
continue to decline during the foreseeable future. During the first half of
1999, the Company's sales in the Unites States decreased 8% compared to the same
period in 1998. The Company believes that this decrease was due in part to 1998
inventory build-up at the retail level of the Company's and its competitors'
golf equipment and corresponding sales of such inventory at close-out prices.
Despite the softness in the United States golf market, it is believed that the
Company's overall market share for woods increased in the first half of 1999
compared to the same period in 1998. See "Certain Factors Affecting Callaway
Golf Company--Competition."
While sales of the Company's Great Big Bertha(R) Hawk Eye(R) Titanium Metal
Woods, Big Bertha(R) Steelhead(TM) Metal Woods, and Big Bertha(R) and X-12(R)
Irons have been strong to date, no assurances can be given that the demand for
these products or the Company's other existing products, or the introduction of
new products, will permit the Company to experience growth in sales, or maintain
historical levels of sales, in the future.
Sales to Japan, which accounted for approximately 9% of the Company's total
sales in 1998 and 10% of total sales in 1997, comprised 9% of the Company's
total sales for the first half of 1999 may be lower overall for 1999 as compared
to 1998 as the Company's distributor, Sumitomo Rubber Industries, Ltd.
("Sumitomo"), prepares for the transition of responsibility from it to ERC
International Company ("ERC"), a wholly-owned Japanese subsidiary of the
Company, by January 1, 2000. The Company believes that a decrease in the second
half of 1999 may result as Sumitomo focuses on liquidating its existing
inventory rather than placing new orders. See "Certain Factors Affecting
Callaway Golf Company-International distribution."
12
<PAGE>
The Company's gross margin as a percentage of net sales was 47% in the second
quarter of 1999, which was the same as the second quarter of 1998. If sales of
older model golf clubs sold at close-out prices were excluded, gross margin as a
percentage of net sales would have been 50%, representing an increase of
approximately 3% compared to the second quarter of 1998. The Company's higher
gross margin for current products related primarily to improved product mix,
reduced customer compensation expense due to the charge incurred in the second
quarter of 1998 associated with the price reduction enacted during that quarter,
and greater production efficiencies. For all of 1999, the Company anticipates
its gross margin percentage will exceed its 1998 levels. Consumer acceptance of
current and new product introductions, the sale and disposal of non-current
products at reduced sales prices and continuing pricing pressure from
competitive market conditions may have an adverse effect on the Company's future
sales and gross margin.
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. For several years, the Company's business has
generally followed this seasonal trend and the Company expects this to continue.
Unusual or severe weather conditions such as the "El Nino" weather patterns
experienced during the winter of 1997-1998 may compound these seasonal effects.
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, as well as new companies with popular products. New
product introductions and/or price reductions by competitors continue to
generate increased market competition. However, the Company believes that it has
gained unit and dollar market share for woods in the United States during the
first half of 1999 as compared to the same period in 1998. 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.
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 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
increasingly important to its future success. 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.
Further, new products that retail at a lower price than prior products may
negatively impact the Company's revenues unless unit sales increase. New
designs generally should 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. While all of the Company's current products have been
found to conform to USGA and R&A rules, 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.
On November 2, 1998, the USGA announced the adoption of a test protocol to
measure the so-called "spring-like effect" in certain golf clubheads. The USGA
has advised the Company that none of the Company's current products are barred
by this test. The R&A is considering the adoption of a similar or related test.
Future actions by the USGA or the R&A may impede the Company's ability to
introduce new products and therefore could have a material adverse effect on the
Company's results of operations and cash flows.
The Company's new products have tended to incorporate significant innovations in
design and manufacture, which have resulted in higher prices for the Company's
products relative to other products 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
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equipment. Thus, although the Company has achieved certain successes in the
introduction of its premium priced 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 such market acceptance in the future.
The rapid introduction of new products by the Company can result in closeouts of
existing inventories at both the wholesale and retail levels. Such closeouts
can result in reduced margins on the sale of older products, as well as reduced
sales of new products, given the availability of older products at lower prices.
The Company plans its manufacturing capacity based upon the forecasted demand
for its products. Actual demand for such products may exceed or be less than
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 its
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. On the other hand, the Company
commits to components and other manufacturing inputs for varying periods of
time, which can limit the Company's ability to quickly react if actual demand is
less than forecast. As in 1998, this could result in excess inventories and
related obsolescence charges that could adversely affect the Company's financial
performance.
PRODUCT BREAKAGE
The Company supports all of its golf clubs with a limited 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. In addition, the
Company's Biggest Big Bertha(R) Drivers, because of their large clubhead size
and extra long, lightweight graphite shafts, have experienced shaft breakage at
a rate higher than generally experienced with the Company's other metal woods,
even though these shafts are among the most expensive to manufacture in the
industry. 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 that have
been sold. The Company monitors 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. Significant
increases in the incidence of breakage or other product problems may adversely
affect the Company's sales and image with golfers. While the Company believes
that it has sufficient reserves for warranty claims, there can be no assurance
that these reserves will be sufficient if the Company were to experience an
unusually high incidence of breakage or other product problems.
CREDIT RISK
The Company primarily sells its products to golf equipment retailers and foreign
distributors. The Company performs ongoing credit evaluations of its customers'
financial condition and generally requires no collateral from these customers.
Historically, the Company's bad debt expense has been low. However, the recent
downturn in the retail golf equipment market has resulted in delinquent or
uncollectible accounts for some of the Company's significant customers. As a
result, during the second quarter of 1999, the Company wrote off approximately
$4.0 million of past due trade accounts receivable incurred in previous years
against the Company's reserve for uncollectible accounts receivable. The
Company considers its remaining reserve for uncollectible accounts receivable to
be adequate. Management does not foresee any significant improvement in the
golf equipment market during 1999, and thus there can be no assurance that
failure of the Company's customers to meet their obligations to the Company will
not adversely impact the Company's results of operations or cash flows.
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DEPENDENCE ON CERTAIN VENDORS AND MATERIALS
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. The Company believes that
suitable clubheads and shafts could be obtained from other manufacturers in the
event its regular suppliers are unable to provide components. However, any
significant production delay or disruption caused by the inability of current
suppliers to deliver or the transition to other suppliers could have a material
adverse impact on the Company's results of operations.
The Company uses United Parcel Service ("UPS") for substantially all ground
shipments of products to its U.S. customers. The Company is continually
reviewing alternative methods of ground shipping to supplement its use and
reduce its reliance on UPS. To date, a limited source of alternative vendors
have been identified and adopted by the Company. Nevertheless, any interruption
in UPS services could have a material adverse effect on the Company's sales and
results of operations.
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.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The golf club industry, in general, has been characterized by widespread
imitation of popular club designs. 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 copyrights, 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 copyrights, patents, trademarks, or trade dress.
An increasing number of the Company's competitors have, like the Company itself,
sought to obtain patent, trademark, copyright 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 that 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 a 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
attempts to avoid infringing valid patents or other intellectual property
rights. If any new golf ball product is found to infringe on protected
technology, the Company could incur substantial costs to redesign its golf ball
product, obtain a license and/or defend legal actions. Despite its efforts to
avoid such infringements, there can be no assurance that Callaway Golf Ball
Company will not be found to infringe on the valid 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.
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"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 foreign wholesale 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. For example, the Company experienced a decline
in sales in the United States in 1998, and believes the decline was due, in
part, to a decline in "gray market" shipments to Asia and Europe. While the
Company has taken some lawful steps to limit commerce in its products in the
"gray market" in both U.S. and international markets, it has not stopped such
commerce.
GOLF PROFESSIONAL ENDORSEMENTS
The Company establishes relationships with professional golfers in order to
evaluate and promote Callaway Golf and Odyssey branded golf clubs. The Company
has entered into endorsement arrangements with members of the various
professional tours, including the Senior PGA Tour, the PGA Tour, the LPGA Tour
and the PGA European Tour. While most professional golfers fulfill their
contractual obligations, some have been known to stop using a sponsor's products
despite contractual commitments. If certain 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 and do not grant any
endorsement to the Company. In addition, the Company has created cash pools
("Pools") that reward such usage. During 1998, the Company continued its Pools
for the PGA, Senior PGA, LPGA and Nike Tours. The Company believes that its
professional endorsements and its Pools contributed to its usage on the
professional tours in 1998. However, in 1999, the Company has significantly
reduced these Pools for both Callaway Golf(R) and Odyssey(R) brand products for
the PGA and the Senior PGA Tours, and has significantly reduced the Pools for
Odyssey(R) brand products and eliminated the Pools for Callaway Golf(R) brand
products for the LPGA and Nike Tours. In addition, many other companies are
aggressively seeking the patronage of these professionals, and are offering many
inducements, including specially designed products and significant cash rewards.
As a result, the Company anticipates that the level of professional usage of the
Company's products will be lower in 1999 than 1998. In the first half of 1999,
driver usage on the PGA, Senior PGA, LPGA and Nike Tours was substantially
reduced compared to the first half of 1998. 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. While it is not clear whether professional usage materially
contributes to retail sales, it is possible that the recent decline in the level
of professional usage of the Company's products could have a material adverse
effect on the Company's business.
NEW BUSINESS VENTURES
The Company has invested significant capital in new business ventures. However,
in connection with the Company's 1998 restructuring, the Company discontinued,
transferred or suspended certain business ventures not directly associated with
the Company's core business. See "Restructuring" section below. However, the
Company continues development of its golf ball business. See "Certain Factors
Affecting Callaway Golf Company - Golf Ball Development."
INTERNATIONAL DISTRIBUTION
The Company's management believes that controlling the distribution of its
products in certain major markets in the world has been and will be an element
in the future growth and success of the Company. The Company has been actively
pursuing a reorganization of its international operations, including the
acquisition of distribution rights in certain key countries in Europe, Asia and
North America. These efforts have resulted and will continue to result in
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additional investments in inventory, accounts receivable, corporate
infrastructure and facilities. The integration of foreign distribution into the
Company's international sales operations will require the dedication of
management and other Company resources.
Additionally, the Company's plan of integration of foreign distribution
increases the Company's exposure to fluctuations in exchange rates for various
foreign currencies which could result in losses and, in turn, could adversely
impact the Company's results of operations. There can be no assurance that the
Company will be able to mitigate this exposure in the future through its
management of foreign currency transactions. This integration of foreign
distribution 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 distribution will be
successful, and it is possible that an attempt to do so will adversely affect
the Company's business.
In 1993, the Company, through a distributor agreement, appointed Sumitomo Rubber
Industries, Ltd. as the sole distributor, and Sumitomo Corporation as the sole
importer, of Callaway Golf(R) golf clubs in Japan. This distributor agreement
runs through December 31, 1999. The Company has notified Sumitomo that it will
be concluding the distribution agreement on December 31, 1999. During the second
half of 1999, there could be a decrease in shipments of Callaway Golf(R)
products to Sumitomo compared to the second half of 1998 as Sumitomo focuses on
liquidating its existing inventory rather than placing new orders.
The Company established ERC, a wholly-owned Japanese corporation, for the
purpose of distributing Odyssey(R) products in Japan. ERC also will distribute
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 costs. However, these
costs have not been material to date. Furthermore, there are significant risks
associated with the Company's intention to effectuate distribution of Callaway
Golf clubs in Japan through ERC beginning January 2000, 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 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 in Japan and Korea. The Company also distributed a
golf ball under the trademark "Bobby Jones." These golf ball ventures were
introduced primarily as promotional efforts and were not commercially
successful.
The Company has determined that Callaway Golf Ball Company will enter the golf
ball business by creating, developing and manufacturing golf balls in a new
plant 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. The Company currently anticipates launching its golf ball
in early 2000. However, there can be no assurance as to whether the golf ball
developed will be ready by that time, that it will be commercially successful or
that a return on the Company's investments will ultimately be realized.
The development of the Company's golf ball business, by plan, has had a
significant negative impact on the Company's cash flows and results of
operations and will continue to do so during the second half of 1999. The
Company believes that many of the same factors that 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
the Company will need to penetrate for its golf ball business to be successful.
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YEAR 2000 ISSUE
Historically, many computer programs have been written using two digits rather
than four to define the applicable year, which could result in the program
failing to properly recognize a year that begins with "20" instead of "19."
This, in turn, could result in major system failures or miscalculations, and is
generally referred to as the "Year 2000" or "Y2K" issue.
While the Company's own products do not contain date-based functionality and are
not susceptible to the Y2K issue, much of the Company's operations incorporate
or are affected by systems which may contain date-based functionality.
Therefore, the Company has formulated a Year 2000 Plan to address the Company's
Y2K issue. The Company's Year 2000 Plan contemplates four phases -- assessment,
remediation, testing and release/installation -- which will overlap to a
significant degree. The Company's own internal critical systems and key
suppliers are the primary areas of focus. The Company believes critical systems
and key suppliers are those systems or suppliers, which, if they are not Y2K
compliant, may disrupt the Company's manufacturing, sales or distribution
capabilities in a material manner.
The assessment phase, which has been completed, involved an inventory,
prioritization and preliminary evaluation of the Y2K compliance of the Company's
key systems (e.g., hardware, software and embedded systems) and critical
suppliers and customers (e.g., component suppliers, vendors, customers,
utilities and other service providers) on which the Company relies to operate
its business. During this phase it was determined that over 450 of the
Company's key systems were considered critical to the ongoing operations of the
Company.
The remediation phase primarily included or will include altering the product or
software code, upgrading or replacing the product, recommending changes in how
the product is used or retiring the product. The remediation phase was
substantially completed for critical systems by June 30, 1999. For non-critical
systems, remediation should be substantially completed by September 30, 1999.
In addition, the Company received information concerning the Y2K compliance
status of critical suppliers and customers in response to extensive inquiries
aimed at determining the extent to which the Company is vulnerable to those
third parties' failure to remediate their own Y2K issues. The Company relies on
suppliers for timely delivery of a broad range of goods and services worldwide,
including components for its golf clubs. Moreover, the Company's suppliers rely
on countless other suppliers, over which the Company has little or no influence
regarding Y2K compliance. The level of preparedness of critical suppliers and
customers can vary greatly from country to country. The Company believes that
critical suppliers and customers present an area of significant risk to the
Company in part because of the Company's limited ability to influence actions of
third parties, and in part because of the Company's inability to estimate the
level and impact of noncompliance of third parties throughout the extended
supply chain. The process of evaluating these suppliers and selected customers
is continuing and is expected to be completed by the fourth quarter of 1999.
In October 1997, the Company implemented a new business computer system, which
runs most of the Company's data processing and financial reporting software
applications (including material subsidiaries) and has in part addressed
remediation issues Company-wide. The manufacturer of the application software
used on the new computer system has represented that the software addresses the
Y2K issue, and the Company's own testing of that representation has been
completed.
The Company presently plans to have completed the four phases with respect to
those systems which are critical to its operations no later than the end of the
third quarter of 1999. Some non-critical systems may not be addressed until
after January 2000.
The total cost associated with assessment and required modifications to
implement the Company's Year 2000 Plan is not expected to be material to the
Company's financial position or results of operations. The Company currently
estimates that the total cost of implementing its Year 2000 Plan will not exceed
$6.0 million. This estimate will be updated as the Company continues its
remediation and contingency planning. The total amount expended on the Year 2000
Plan through June 1999 was $1,975,000, of which approximately $1,065,000 related
to repair or replacing of software and related hardware problems and
approximately $910,000 related to internal and external labor costs.
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If the Company's new business computer system fails due to the Y2K issue, or if
any computer hardware or software applications or embedded systems critical to
the Company's manufacturing, shipping or other processes are overlooked, there
could be a material adverse impact on the business operations and financial
performance of the Company. Additionally, there can be no assurance that the
Company's critical suppliers and customers will not experience a Y2K-related
failure that could have a material adverse effect on the business operations or
financial performance of the Company. In particular, if third party suppliers,
due to the Y2K issue, fail to provide the Company with components or materials
which are necessary to manufacture its products, with sufficient electric power
and other utilities to sustain its manufacturing process, or with adequate,
reliable means of transporting its products to its customers worldwide, then any
such failure could have a material adverse effect on the business operations and
financial performance of the Company.
The Company has established contingency plans to address unavoided or
unavoidable risks. In particular, with respect to third party component
suppliers, the Company has formulated contingency plans to guard against
disruptions in the supply of critical components. These plans include booking
orders and producing products before anticipated business disruptions. Even so,
judgments regarding contingency plans -- such as how to develop them and to what
extent -- are themselves subject to many variables and uncertainties. There can
be no assurance that the Company will correctly anticipate the level, impact or
duration of noncompliance by suppliers. As a result, there is no certainty that
the Company's contingency plans will be sufficient to mitigate the impact of
noncompliance by suppliers, and some material adverse effect to the Company may
result from one or more third parties regardless of defensive contingency plans.
Estimates of time, cost, and risk are based on currently available information.
Developments that could affect estimates include, but are not limited to, the
availability and cost of trained personnel; the ability to locate and correct
all relevant computer software code and systems; cooperation and remediation
success of the Company's suppliers and customers (and their suppliers and
customers); and the ability to correctly anticipate risks and implement suitable
contingency plans in the event of system failures at the Company or its
suppliers and customers (and their suppliers and customers).
EURO CURRENCY
Many of the countries in which the Company sells its products are Member States
of the Economic and Monetary Union ("EMU"). Beginning January 1, 1999 Member
States of the EMU have the option of trading in either their local currencies or
the euro, the official currency of EMU participating Member States. Parties are
free to choose the unit they prefer in contractual relationships during the
transitional period, beginning January 1999 and ending June 2002. The Company
has installed a new computer system that supports sales throughout Europe. This
new system runs substantially all of the principal data processing and financial
reporting software for such sales. The Company anticipates that, after the
implementation of an upgrade, the new system will contain the functionality to
process transactions in either a country's local currency or euro. The
implementation of this upgrade, which is part of a larger plan to update the
Company's enterprise-wide software to the manufacturer's current version, is
planned to take place during 2000. Until such time as the upgrade has occurred,
transactions denominated in euro will be processed manually. To date, the
Company has not experienced and does not anticipate in the near future a large
demand from its customers to transact in euros.
Additionally, the Company does not believe that it will incur material costs
specifically associated with manually processing data or preparing its business
systems to operate in either the transitional period or beyond. However, there
can be no assurance that the conversion of EMU Member States to euro will not
have a material adverse effect on the Company and its operations.
RESULTS OF OPERATIONS
Three-month periods ended June 30, 1999 and 1998:
Net sales decreased 2% to $229.7 million for the three months ended June 30,
1999 compared to $233.3 million for the comparable period in the prior year.
Although unit sales of both titanium and steel metal woods increased
largely due to the continued success of Big Bertha(R) Steelhead(TM) Metal Woods
and the January 1999 introduction of
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Great Big Bertha(R) Hawk Eye(R) Metal Woods, certain sales, in particular sales
of the Company's closeout products, were made at significantly reduced prices,
thus generating lower revenue per unit. Also contributing to the decrease in
sales was an overall decrease in sales of irons, both in units and dollars.
During the second quarter of 1999, sales in the United States and in Japan
decreased $13.5 million (9%) and $3.9 million (22%), respectively. Sales to the
rest of Asia increased $13.7 million (173%) over the same quarter of the prior
year while sales to Europe decreased during this period by $2.7 million (6%).
Sales in Canada and other regions increased by $1.7 million (17%) and $1.2
million (18%), respectively during the three months ended June 30, 1999 as
compared to the same period in the prior year.
For the three months ended June 30, 1999, gross profit remained essentially
constant at $108.7 million as compared with $108.8 million for the same period
in the prior year. As a percentage of net sales, gross profit also remained
constant at 47% for the quarter ended June 30, 1999 as compared to the same
quarter of the prior year. During the second quarter of 1999, the Company
implemented a closeout strategy for certain of its older products. These
products were sold at significantly lower prices, thereby generating lower
margins. If the lower margin closeout sales are excluded, gross profit as a
percentage of net sales would have increased to 50%. The increase in gross
margin for current products was primarily due to improved product mix, reduced
customer compensation expense due to the charge incurred in the second quarter
of 1998 associated with the price reduction enacted during that quarter, and
greater production efficiencies.
Selling expenses decreased to $34.9 million in the second quarter of 1999
compared to $42.2 million in the second quarter of 1998. As a percentage of net
sales, selling expenses decreased to 15% from 18% during the second quarter of
1999 over the second quarter of 1998. The $7.3 million decrease was primarily
related to planned reductions in advertising, pro tour and other promotional
expenses as a result of the implementation of the Company's restructuring plan
(see "Restructuring" below).
General and administrative expenses decreased to $22.9 million for the three
months ended June 30, 1999 from $23.7 million for the comparable period in the
prior year. As a percentage of net sales, general and administrative expenses
in the second quarter of 1999 remained constant at 10% as compared to the same
period in 1998. The $0.8 million decrease was primarily related to decreased
consulting, legal and other general and administrative expenses, partially
offset by costs associated with the ramp-up of golf ball operations.
Research and development expenses decreased to $8.3 million in the second
quarter of 1999 compared to $8.4 million in the comparable period of the prior
year. As a percentage of net sales, research and development expenses in the
second quarter of 1999 remained constant at 4% for the three months ended June
30, 1999 and 1998. The $0.1 million decrease was primarily the result of the
shutdown of the Company's prototype foundry, partially offset by costs
associated with the ramp-up of golf ball operations and an increase in employee
compensation.
Other expense increased $1.7 million for the quarter ended June 30, 1999 as
compared to the same period in the prior year. This increase was attributable
to increased losses on foreign currency transactions and a decrease of interest
income resulting from lower cash balances during three months ended June 30,
1999 versus 1998.
Six-month periods ended June 30, 1999 and 1998:
Net sales increased 1% to $415.5 million for the six months ended June 30, 1999
compared to $410.2 million for the comparable period in the prior year. Although
unit sales of both titanium and steel metal woods increased largely due to the
continued success of Big Bertha(R) Steelhead(TM) Metal Woods and the January
1999 introduction of Great Big Bertha(R) Hawk Eye(R) Metal Woods, certain sales,
in particular sales of the Company's closeout products, were made at
significantly reduced prices, thus generating lower revenue per unit. The
increase in sales was partially offset by an overall decrease in sales of irons,
both in units and dollars.
During the first half of 1999, sales in the United States and Europe decreased
$21.1 million (8%) and $2.0 million (3%), respectively. During this same
period, sales in Japan and the rest of Asia increased $0.3 million (1%) and
$22.8 million (170%), respectively. Sales to Canada and the rest of the world
in the first six months of 1999 increased $1.5 million (9%) and $3.8 million
(32%), respectively, over the same period of the prior year.
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For the six months ended June 30, 1999, gross profit decreased to $192.2 million
from $192.5 million for the comparable period in the prior year. As a
percentage of net sales, gross profit decreased to 46% from 47% for the six
months ended June 30, 1999 as compared to the same period of the prior year.
During the second quarter of 1999, the Company implemented a closeout strategy
for certain of its products. These products were sold at significantly lower
prices, thereby generating lower margins. If the lower margin closeout sales
are excluded, gross profit as a percentage of net sales would have increased to
48%. The increase in gross margin for current products was primarily due to
improved product mix, reduced customer compensation expense due to the charge
incurred in the second quarter of 1998 associated with the price reduction
enacted during that quarter.
Selling expenses decreased to $66.2 million in the first half of 1999 compared
to $78.0 million in the first half of 1998. As a percentage of net sales,
selling expenses decreased to 16% from 19% during the first half of 1999 over
the first half of 1998. The $11.8 million decrease was primarily related to
planned reductions in advertising, pro tour and other promotional expenses as a
result of the implementation of the Company's restructuring plan (see
"Restructuring" below).
General and administrative expenses increased to $44.5 million for the six
months ended June 30, 1999 from $44.2 million for the comparable period of the
prior year. As a percentage of net sales, general and administrative expenses in
the first half of 1999 remained constant at 11% for the six months ended June
30, 1999 and 1998. The $0.3 million increase was largely attributable to costs
associated with the ramp-up of the Company's golf ball operations, increased
employee compensation costs, and increased amortization expense as a result of
the Company's 1998 acquisitions of certain of its foreign distributors. This
increase was partially offset by decreased consulting, legal and other general
and administrative expenses.
Research and development expenses decreased to $16.7 million in the first half
of 1999 compared to $17.1 million in the comparable period of the prior year.
As a percentage of net sales, research and development expenses in the first
half of 1999 remained constant at 4% for the six months ended June 30, 1999 and
1998. The $0.4 million decrease was primarily the result of the shut-down of the
Company's prototype foundry and a decrease in consulting fees, partially offset
by an increase in depreciation expense, primarily related to golf ball
operations, and an increase in employee compensation.
Other expense increased $2.1 million for the six months ended June 30, 1999 over
the comparable period of the prior year. This decrease was attributable to
interest expense incurred during the first half of 1999 related to the Company's
Amended Credit Agreement, Finance Agreement and Accounts Receivable Facility
(see Notes 3 and 4 of the Company's unaudited Consolidated Condensed Financial
Statements) due primarily to higher interest and yield rates and related fees.
Increased foreign currency transaction losses also contributed to the increase.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, cash and cash equivalents decreased to $26.9 million from
$45.6 million at December 31, 1998 primarily as a result of cash used in
investing activities of $36.9 million and cash used in financing activities of
$64.2 million, partially offset by cash provided by operations of $82.6 million,
inclusive of a $41.0 million reduction in advances under the Accounts Receivable
facility, which was reflected as a reduction of Accounts Receivable (see Note 4
to the Company's unaudited Consolidated Condensed Financial Statements). Cash
flows used in investing activities resulted from capital expenditures, primarily
associated with the ramp-up of golf ball operations, partially offset by
proceeds from the sale of fixed assets, largely those related to the Company's
restructuring. Cash flows used in financing activities is primarily attributed
to the repayment of the Amended Credit Agreement and dividends paid, partially
offset by proceeds from the Finance Agreement.
The Company's principal source of liquidity, both on a short-term and long-term
basis, has been cash flow provided by operations and the Company's credit
facilities. The Company expects this trend to continue even though sales
declined in 1998 and the Company does not foresee any significant improvement in
sales during 1999. On February 12, 1999, the Company consummated the amendment
of its line of credit to increase the revolving credit facility to up to $120.0
million and entered into an $80.0 million accounts receivable securitization
facility (the "Accounts Receivable Facility") (see Notes 3 and 4 to the
unaudited Consolidated Condensed Financial Statements). During the first
quarter of 1999, the Company utilized its Accounts Receivable Facility and
borrowed against its line of
21
<PAGE>
credit under the Amended Credit Agreement to fund operations and finance capital
expenditures. At June 30, 1999, the Company had repaid the outstanding balance
of the Amended Credit Agreement with cash flow from operations and had $118.5
million available, net of outstanding letters of credit, under its credit
facilities, subject to meeting certain availability requirements under a
borrowing base formula and other limitations. Also at June 30, 1999, advances
under the Accounts Receivable Facility had been reduced, leaving up to $80.0
million available under this facility. Further, the Company anticipates the
$25.6 million note payable under its Finance Agreement to be converted to a
lease before the end of 1999 (see Note 3 to the unaudited Consolidated Condensed
Financial Statements).
As a result of the implementation of its plan to improve operating efficiencies
(see "Restructuring"), the Company incurred charges of $54.2 million in the
fourth quarter of 1998. Of these charges, $25.5 million were non-cash. Since
the adoption of this restructuring plan in the fourth quarter of 1998, cash
outlays for employee termination costs, contract cancellation fees, excess lease
costs and other expenses have been $15.4 million. Future cash outlays for such
costs are estimated at $13.3 million. Of this amount, approximately $1.6
million is anticipated to occur primarily during the second half of 1999, while
the remainder, which principally relates to excess lease costs, will be paid
through February 2013. These cash outlays will be funded by cash flows from
operations and, if necessary, the Company's credit facilities. If the actual
actions taken by the Company differ from the plans on which these estimates are
based, actual losses recorded and resulting cash outlays made by the Company
could differ significantly.
The Company believes that, based upon its current operating plan, analysis of
its consolidated financial position and projected future results of operations,
it will be able to maintain its current level of operations, including purchase
commitments and planned capital expenditures for the foreseeable future, through
operating cash flows and its credit facilities. There can be no assurance,
however, that future industry specific or other developments, or general
economic trends will not adversely affect the Company's operations or its
ability to meet its future cash requirements.
RESTRUCTURING
During the fourth quarter of 1998, the Company recorded a restructuring charge
of $54.2 million resulting from a number of cost reduction actions and
operational improvements. These actions included the consolidation of the
operations of the Company's wholly-owned subsidiary, Odyssey Golf, Inc.
("Odyssey"), into the operations of the Company while maintaining the distinct
and separate Odyssey(R) brand image; the discontinuation, transfer or suspension
of certain initiatives not directly associated with the Company's core business,
such as the Company's involvement with interactive golf sites, golf book
publishing, new player development and a golf venue in Las Vegas; and the re-
sizing of the Company's core business to reflect current and expected business
conditions. These initiatives are expected to be completed largely during 1999.
The restructuring charges (shown below in tabular format) primarily related to:
1) the elimination of job responsibilities, resulting in costs incurred for
employee severance; 2) the decision to exit certain non-core business
activities, resulting in losses on disposition of assets, as well as excess
lease costs; and 3) consolidation of the Company's continuing operations
resulting in impairment of assets, losses on disposition of assets and excess
lease costs.
During the second quarter of 1999, the Company incurred a charge of $1.2 million
on the disposition of building improvements eliminated during the consolidation
of manufacturing operations, as well as other charges. These charges could not
be accrued in 1998. This charge was partially offset by a gain of $1.0 million
on the disposition of one of the Company's buildings included in the
restructuring plan, for which an impairment charge was taken in 1998. Activity
during the first half of 1999 primarily related to cash payments for severance,
disposition of assets, contract cancellation and other items. During the first
quarter of 1999, substantially all of the approximately 750 non-temporary work
force reductions occurred.
22
<PAGE>
Details of the one-time charge are as follows (in thousands):
<TABLE>
<CAPTION>
Reserve
Balance Reserve
Cash/ One-Time at Balance
Non-Cash Charge Activity 12/31/98 Activity at 6/30/99
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ELIMINATION OF JOB RESPONSIBILITIES $11,664 $ 8,473 $ 3,191 $2,898 $ 293
Severance packages Cash 11,603 8,412 3,191 2,898 293
Other Non-cash 61 61
EXITING CERTAIN NON-CORE BUSINESS ACTIVITIES $28,788 $12,015 $16,773 $4,324 $12,449
Loss on disposition of subsidiaries Non-cash 13,072 10,341 2,731 2,426 305
Excess lease costs Cash 12,660 146 12,514 536 11,978
Contract cancellation fees Cash 2,700 1,504 1,196 1,092 104
Other Cash 356 24 332 270 62
CONSOLIDATION OF OPERATIONS $13,783 $ 2,846 $10,937 $6,841 $ 4,096
Loss on impairment/disposition of assets Non-cash 12,364 2,730 9,634 6,456 3,178
Excess lease costs Cash 806 4 802 154 648
Other Cash 613 112 501 231 270
=============================================================================================================================
</TABLE>
Future cash outlays are anticipated to be completed by the end of 1999,
excluding certain lease commitments that continue through February 2013.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of foreign currency fluctuations due to its
international operations and certain export sales. The Company is exposed to
both transactional currency/functional currency and functional
currency/reporting currency exchange rate risks. In the normal course of
business, the Company employs established policies and procedures to manage its
exposure to fluctuations in the value of foreign currencies. Pursuant to its new
foreign exchange hedging policy, beginning in January 1999, the Company may use
forward foreign currency exchange rate contracts to hedge certain firm
commitments and the related receivables and payables with its foreign
subsidiaries. During the first half of 1999, the Company entered into such
contracts on behalf of two of its wholly-owned subsidiaries, Callaway Golf
Europe Ltd. and Callaway Golf Canada Ltd. The Company also hedged certain yen-
denominated transactions with its Japanese distributor. The effect of this
practice is to minimize variability in the Company's operating results arising
from foreign exchange rate movements. These foreign exchange contracts generally
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 transactions being
hedged, and the Company does not engage in hedging contracts which exceed the
amounts of these transactions.
Also pursuant to its new foreign exchange hedging policy, the Company expects
that it also may hedge anticipated transactions denominated in foreign
currencies using forward foreign currency exchange rate contracts and put or
call options. Foreign currency derivatives will be used only to the extent
considered necessary to meet the Company's objectives and the Company does not
enter into forward contracts for speculative purposes. The Company's foreign
currency exposures include most European currencies, Japanese yen, Canadian
dollars and Korean won.
23
<PAGE>
Additionally, the Company is exposed to interest rate risk from its Accounts
Receivable Facility and Amended Credit Agreement (see Notes 3 and 4 to the
Company's unaudited Consolidated Condensed Financial Statements) which are
indexed to the LIBOR and Redwood Receivables Corporation Commercial Paper Rate.
Sensitivity analysis is the measurement of potential loss in future earnings of
market sensitive instruments resulting from one or more selected hypothetical
changes in interest rates or foreign currency values. The Company used a
sensitivity analysis model to quantify the estimated potential effect of
unfavorable movements of 10% in foreign currencies to which the Company was
exposed at June 30, 1999 through its derivative financial instruments.
The sensitivity analysis model is a risk analysis tool and does not purport to
represent actual losses in earnings that will be incurred by the Company, nor
does it consider the potential effect of favorable changes in market rates. It
also does not represent the maximum possible loss that may occur. Actual future
gains and losses will differ from those estimated because of changes or
differences in market rates and interrelationships, hedging instruments and
hedge percentages, timing and other factors.
The estimated maximum one-day loss in earnings from the Company's foreign-
currency derivative financial instruments, calculated using the sensitivity
analysis model described above, is $1.7 million at June 30, 1999. The Company
believes that such a hypothetical loss from its derivatives would be offset by
increases in the value of the underlying transactions being hedged.
Notes 3 and 4 to the unaudited Consolidated Condensed Financial Statements
outline the principal amounts, and other terms required to evaluate the expected
cash flows and sensitivity to interest rate changes.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company, incident to its business activities, is the plaintiff in several
legal proceedings, both domestically and abroad, in various stages of
development. In conjunction with the Company's program of enforcing its
proprietary rights, the Company has initiated a number of actions against
alleged infringers under the intellectual property laws of various countries,
including, for example, the United States Lanham Act, the U.S. Patent Act, 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 one or more of 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, are
parties to a number of legal proceedings, lawsuits and other claims, including
those discussed above. Such matters are subject to many uncertainties and
outcomes are not predictable with assurance. Consequently, management is unable
to ascertain the ultimate aggregate amount of monetary liability, amounts that
may be covered by insurance, or the financial impact with respect to these
matters. Management believes, however, that the final resolution of these
matters, individually and in the aggregate, will not have a material adverse
effect upon the Company's annual consolidated financial position, results of
operations or cash flows.
24
<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 5, 1999, the Company held its Annual Meeting of Shareholders near the
Company's headquarters in Carlsbad, California. Ely Callaway, William C. Baker,
Vernon E. Jordan, Jr., Yotaro Kobayashi, Bruce A. Parker, Aulana L. Peters,
Frederick R. Port, Richard L. Rosenfield, William A. Schreyer and Charles J.
Yash were elected to the Board of Directors. Additionally the Company's
shareholders approved: (i) the reincorporation of the Company as a Delaware
corporation by means of a merger of the Company with and into a wholly owned
Delaware subsidiary of the Company; and (ii) the adoption of the Callaway Golf
Company 1999 Employee Stock Purchase Plan under which employees may purchase
shares of the Company's Common Stock pursuant to the provisions of and the
regulations relating to Section 423 of the Internal Revenue Code. The voting
results for the election of Directors were as follows:
VOTES
NAME VOTES FOR WITHHELD
Ely Callaway 67,691,301 734,301
William C. Baker 67,663,026 762,576
Vernon E. Jordan, Jr. 65,670,350 2,755,252
Yotaro Kobayashi 67,681,167 744,435
Bruce A. Parker 67,673,079 752,523
Aulana L. Peters 67,667,830 757,772
Frederick R. Port 67,646,758 778,844
Richard L. Rosenfield 67,681,863 743,739
William A. Schreyer 67,703,635 721,967
Charles J. Yash 67,711,174 714,428
The voting results for the proposal to reincorporate Callaway Golf Company as a
Delaware corporation were as follows:
VOTES FOR VOTES AGAINST ABSTAIN BROKER NON-VOTE
39,620,389 2,403,294 216,756 26,185,163
The voting results for the proposal to adopt the Callaway Golf Company 1999
Employee Stock Purchase Plan were as follows:
VOTES FOR VOTES AGAINST ABSTAIN BROKER NON-VOTE
65,057,585 2,722,854 645,163 0
ITEM 5. OTHER INFORMATION
None
25
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
a. Exhibits:
--------
3.1 Certificate of Incorporation (filed as Exhibit 3.1 to the
Company's Current Report on Form 8-K, as filed with the Securities
and Exchange Commission (the "Commission") on July 1, 1999, and
incorporated herein by this reference.)
3.2 Bylaws (filed as Exhibit 3.2 to the Company's Current Report on
Form 8-K as filed with the Commission on July 1, 1999, and
incorporated herein by this reference.)
10.1 Indemnification Agreement by and between Callaway Golf Company and
William C. Baker dated as of July 1, 1999(+)
10.2 Indemnification Agreement by and between Callaway Golf Company
and Vernon E. Jordan, Jr., dated as of July 1, 1999(+)
10.3 Indemnification Agreement by and between Callaway Golf Company
and Yotaro Kobayashi dated as of July 1, 1999(+)
10.4 Indemnification Agreement by and between Callaway Golf Company
and Aulana L. Peters dated as of July 1, 1999(+)
10.5 Indemnification Agreement by and between Callaway Golf Company
and Richard L. Rosenfield dated as of July 1, 1999(+)
10.6 Indemnification Agreement by and between Callaway Golf Company
and William A. Schreyer dated as of July 1, 1999(+)
27 Financial Data Schedule(+)
b. Reports on Form 8-K:
-------------------
(1) On July 1, 1999, the Company filed a Current Report on Form 8-K
reporting that the Company had completed its reincorporation from
a California corporation to a Delaware corporation.
- -------------
(+)Included with this Report.
26
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Description
------- -----------
3.1 Certificate of Incorporation (filed as Exhibit 3.1 to the
Company's Current Report on Form 8-K, as filed with the Securities
and Exchange Commission (the "Commission") on July 1, 1999, and
incorporated herein by this reference.)
3.2 Bylaws (filed as Exhibit 3.2 to the Company's Current Report on
Form 8-K as filed with the Commission on July 1, 1999, and
incorporated herein by this reference.)
10.1 Indemnification Agreement by and between Callaway Golf Company and
William C. Baker dated as of July 1, 1999(+)
10.2 Indemnification Agreement by and between Callaway Golf Company
and Vernon E. Jordan, Jr., dated as of July 1, 1999(+)
10.3 Indemnification Agreement by and between Callaway Golf Company
and Yotaro Kobayashi dated as of July 1, 1999(+)
10.4 Indemnification Agreement by and between Callaway Golf Company
and Aulana L. Peters dated as of July 1, 1999(+)
10.5 Indemnification Agreement by and between Callaway Golf Company
and Richard L. Rosenfield dated as of July 1, 1999(+)
10.6 Indemnification Agreement by and between Callaway Golf Company
and William A. Schreyer dated as of July 1, 1999(+)
27 Financial Data Schedule(+)
- -------------
(+)Included with this Report.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CALLAWAY GOLF COMPANY
Date: August 16, 1999 /s/ ELY CALLAWAY
-----------------
Ely Callaway
Chairman, President and
Chief Executive Officer
/s/ DAVID A. RANE
-----------------
David A. Rane
Executive Vice President,
Administration and Planning
and Chief Financial Officer
28
<PAGE>
EXHIBIT 10.1
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT is made as of the 1st day of July,
1999, by and between Callaway Golf Company, a Delaware corporation (the
"Company"), and William C. Baker ("Indemnitee"), a director of the Company.
WHEREAS, the Company and Indemnitee recognize the increasing
difficulty in obtaining liability insurance covering directors, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance;
WHEREAS, although the Company currently has directors' liability
insurance, the coverage of such insurance is such that many claims which may be
brought against Indemnitee may not be covered, or may not be fully covered, and
the Company may be unable to maintain such insurance;
WHEREAS, the Company and the Indemnitee further recognize the
substantial increase in corporate litigation subjecting directors to expensive
litigation risks at the same time that liability insurance has been severely
limited;
WHEREAS, the current protection available may not be adequate given
the present circumstances, and Indemnitee may not be willing to serve as a
director without adequate protection;
WHEREAS, the Company desires to attract and retain the services of
highly qualified individuals, such as Indemnitee, to serve as directors of the
Company and to indemnify its directors so as to provide them with the maximum
protection permitted by law;
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. DEFINITIONS. The following terms, as used herein, have the following
-----------
meaning:
1.1 Affiliate. "Affiliate" means, (i) with respect to any
---------
corporation, any officer, director or 10% or more shareholder of such
corporation, or (ii) with respect to any individual, any partner or immediate
family member of such individual or the estate of such individual, or (iii) with
respect to any partnership, trust or joint venture, any partner, co-venturer or
trustee of such partnership, trust of joint venture, or any beneficiary or owner
having 10% or more interest in the equity, property or profits of such
partnership, trust or joint venture, or (iv) with respect to any Person, any
other Person which, directly or indirectly, controls, is controlled by, or is
under common control with such Person or any Affiliate of such Person.
1.2 Agreement. "Agreement" shall mean this Indemnification
---------
Agreement, as the same may be amended from time to time hereafter.
<PAGE>
1.3 DGCL. "DGCL" shall mean the Delaware General Corporation Law, as
----
amended.
1.4 Person. "Person" shall mean any individual, partnership,
------
corporation, joint venture, trust, estate, or other entity.
1.5 Subsidiary. "Subsidiary" shall mean any corporation of which the
----------
Company owns, directly or indirectly, through one or more subsidiaries,
securities having more than 50% of the voting power of such corporation.
2. INDEMNIFICATION
---------------
2.1 Third Party Proceedings. The Company shall indemnify Indemnitee
-----------------------
if Indemnitee is or was a party or witness or other participant in, or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than action by or in the right of the Company) by reason of the fact that
Indemnitee is or was a director of the Company or any subsidiary of the Company,
by reason of any action or inaction on the part of Indemnitee while a director
of the Company or any Subsidiary, and/or by reason of the fact that Indemnitee
is or was serving at the request of the Company as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against all expense, liability and loss (including attorneys' fees),
judgments, fines and amounts paid in settlement (if such settlement is approved
in advance by the Company, which approval shall not be unreasonably withheld)
actually and reasonably incurred by Indemnitee in connection with such action,
suit or proceeding if Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe Indemnitee's conduct was unlawful and provided,
further, that the Company has determined that such indemnification is otherwise
permitted by applicable law.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent
shall not, of itself, create a presumption that Indemnitee did not act in good
faith and in a manner which Indemnitee reasonably believed to be in the best
interests of the Company or that Indemnitee had reasonable cause to believe that
Indemnitee's conduct was unlawful.
2.2 Proceedings by or in the Right of the Company. The Company shall
---------------------------------------------
indemnify Indemnitee if Indemnitee was or is a party or a witness or other
participant in or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Company or any Subsidiary to
procure a judgment in its favor by reason of the fact that Indemnitee is or was
a director of the Company or any Subsidiary, by reason of any action or inaction
on the part of Indemnitee while a director of the Company or a Subsidiary or by
reason of the fact that Indemnitee is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other
2
<PAGE>
enterprise, against all expense, liability and loss (including attorneys' fees)
and amounts paid in settlement (if such settlement is court-approved) actually
and reasonably incurred by Indemnitee in connection with the defense or
settlement of such action or suit if Indemnitee acted in good faith and in a
manner Indemnitee reasonably believed to be in or not opposed to the best
interests of the Company and its shareholders and provided, further, that the
Company has determined that such indemnification is otherwise permitted by
applicable law. No indemnification shall be made in respect of any claim, issue
or matter as to which Indemnitee shall have been adjudged to be liable to the
Company in the performance of Indemnitee's duties to the Company and its
shareholders, unless and only to the extent that the court in which such
proceeding is or was pending shall determine upon application that, in view of
all the circumstances of the case, Indemnitee is fairly and reasonably entitled
to indemnity for expenses and then only to the extent that the court shall
determine.
2.3 Mandatory Payment of Expenses. To the extent that Indemnitee has
-----------------------------
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Section 2.1 or 2.2 or the defense of any claim, issue
or matter therein, Indemnitee shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by Indemnitee in connection
therewith.
2.4 Enforcing the Agreement. If Indemnitee properly makes a claim
-----------------------
for indemnification or an advance of expenses which is payable pursuant to the
terms of this Agreement, and that claim is not paid by the Company, or on its
behalf, within ninety days after a written claim has been received by the
Company, the Indemnitee may at any time thereafter bring suit against the
Company to recover the unpaid amount of the claim and if successful in whole or
in part, the Indemnitee shall be entitled to be paid also all expenses actually
and reasonably incurred in connection with prosecuting such claim.
2.5 Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of the Indemnitee, who shall execute all papers required and shall
do everything that may be necessary to secure such rights, including the
execution of such documents necessary to enable the Company effectively to bring
suit to enforce such rights.
3. EXPENSES; INDEMNIFICATION PROCEDURE
-----------------------------------
3.1 Advancement of Expenses. The Company shall advance all expenses
-----------------------
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action, suit or proceeding referenced in
Section 2.1 or 2.2 hereof. Indemnitee hereby undertakes to repay such amounts
advanced only if, and to the extent that, it shall ultimately be determined that
Indemnitee is not entitled to be indemnified by the Company as authorized hereby
or that such indemnification is not otherwise permitted by applicable law. The
advances to be made
3
<PAGE>
hereunder shall be paid by the Company to Indemnitee within thirty (30) days
following delivery of a written request therefor or by Indemnitee to the
Company.
3.2 Determination of Conduct. Any indemnification (unless ordered by
------------------------
a court) shall be made by the Company only as authorized in the specified case
upon a determination that indemnification of Indemnitee is proper under the
circumstances because Indemnitee has met the applicable standard of conduct set
forth in Sections 2.1 or 2.2 of this Agreement. Such determination shall be
made by any of the following: (1) the Board of Directors (or by an executive
committee thereof) by a majority vote of directors (or committee members) who
are not parties to such action, suit or proceeding, even though less than a
quorum, (2) if there are no such disinterested directors, or if such
disinterested directors so direct, by independent legal counsel in a written
opinion, (3) by the shareholders, with the shares owned by Indemnitee not being
entitled to vote thereon, or (4) the court in which such proceeding is or was
pending upon application made by the Company or Indemnitee or the attorney or
other person rendering services in connection with the defense, whether or not
such application by Indemnitee, the attorney or the other person is opposed by
the Company.
3.3 Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to Indemnitee's right to be indemnified under this
Agreement, give the Company notice in writing as soon as practicable of any
claim made against Indemnitee for which indemnification will or could be sought
under this Agreement. Notice to the Company shall be given in the manner set
forth in Section 10.3 hereof and to the address stated therein, or such other
address as the Company shall designate in writing to Indemnitee. In addition,
Indemnitee shall give the Company such information and cooperation as it may
reasonably require and as shall be within Indemnitee's power.
3.4 Notice to Insurers. If, at the time of the receipt of a notice
------------------
of a claim pursuant to Section 3.3 hereof, the Company has director liability
insurance in effect, the Company shall give prompt notice of the commencement of
such proceeding to the insurers in accordance with the procedures set forth in
the respective policies. The Company shall thereafter take all necessary or
desirable actions to cause such insurers to pay, on behalf of the Indemnitee,
all amounts payable as a result of such proceeding in accordance with the terms
of such policies.
3.5 Selection of Counsel. In the event the Company shall be
--------------------
obligated under Section 3.1 hereof to pay the expenses of any proceeding against
Indemnitee, the Company shall be entitled to assume the defense of such
proceeding, with counsel approved by Indemnitee, upon the delivery to Indemnitee
of written notice of its election so to do. After delivery of such notice,
approval of such counsel by Indemnitee and the retention of such counsel by the
Company, the Company will not be liable to Indemnitee under this Agreement for
any fees of counsel subsequently incurred by Indemnitee with respect to the same
proceeding, provided that (a) Indemnitee shall have the right to employ separate
counsel in any such proceeding at Indemnitee's expense; and (b) if (i) the
employment of counsel by Indemnitee has been previously authorized by the
4
<PAGE>
Company, (ii) Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company and Indemnitee in the conduct of any
such defense, or (iii) the Company shall not, in fact, have employed counsel to
assume the defense of such proceeding, then the fees and expenses of
Indemnitee's counsel shall be at the expense of the Company (subject to the
provisions of this Agreement).
4. ADDITIONAL INDEMNIFICATION RIGHTS; NON-EXCLUSIVITY
--------------------------------------------------
4.1 Application. The provisions of this Agreement shall be deemed
-----------
applicable to all actual or alleged actions or omissions by Indemnitee during
any and all periods of time that Indemnitee was, is, or shall be serving as a
director of the Company or a Subsidiary.
4.2 Scope. The Company hereby agrees to indemnify Indemnitee to the
-----
fullest extent permitted by law (except as set forth in Section 8 hereof),
notwithstanding that such indemnification is not specifically authorized by the
other provisions of this Agreement, the Company's Certificate of Incorporation,
the Company's Bylaws or by statute. In the event of any changes, after the date
of this Agreement, in any applicable law, statute, or rule which expands the
right of a Delaware corporation to indemnify a member of its board of directors,
such changes shall be, ipso facto, within the purview of Indemnitee's rights and
----------
the Company's obligations under this Agreement. In the event of any change in
any applicable law, statute, or rule which narrows the right of a Delaware
corporation to indemnify a member of its board of directors, such changes,
except to the extent otherwise required by such law, statute or rule to be
applied to this Agreement shall have no effect on this Agreement or the parties'
rights and obligations hereunder.
4.3 Non-Exclusivity. The indemnification provided by this Agreement
---------------
shall not be deemed exclusive of any rights to which an Indemnitee may be
entitled under the Company's Certificate of Incorporation, its Bylaws, any
agreement, any vote of shareholders or disinterested directors, the DGCL, or
otherwise, both as to action in Indemnitee's official capacity and as to action
in another capacity while holding such office. The indemnification provided
under this Agreement shall continue as to Indemnitee for an action taken or not
taken while serving in an indemnified capacity even though he may have ceased to
serve in such capacity at the time of any action, suit or other covered
proceeding.
5. PARTIAL INDEMNIFICATION
-----------------------
5.1 Partial Indemnity. If Indemnitee is entitled under any provision
-----------------
of this Agreement to indemnification by the Company for some or a portion of the
expenses, judgments, fines or penalties actually or reasonably incurred by
Indemnitee in the investigation, defense, appeal or settlement of any civil or
criminal action, suit or proceedings but not, however, for the total amount
thereof, the Company shall nevertheless indemnify Indemnitee for that portion to
which Indemnitee is entitled.
5
<PAGE>
6. MUTUAL ACKNOWLEDGMENT
---------------------
6.1 Acknowledgment. Both the Company and Indemnitee acknowledge that
--------------
in certain instances, federal law or public policy may override applicable state
law and prohibit the Company from indemnifying its directors under this
Agreement or otherwise. For example, the Company and Indemnitee acknowledge
that the Securities and Exchange Commission (the "SEC") has taken the position
that indemnification is not permissible for liabilities arising under certain
federal securities laws, and federal legislation prohibits indemnification for
certain ERISA violations. Indemnitee understands and acknowledges that the
Company has undertaken or may be required in the future to undertake with the
SEC to submit the question of indemnification to a court in certain
circumstances for a determination of the Company's right under public policy to
indemnify Indemnitee.
7. LIABILITY INSURANCE
-------------------
7.1 Obtaining Insurance. The Company shall, from time to time, make
-------------------
the good faith determination whether or not it is practicable for the Company to
obtain and maintain a policy or policies of insurance with reputable, insurance
companies providing the directors with coverage for losses from wrongful acts,
or to ensure the Company's performance of its indemnification obligations under
this Agreement. Among other considerations, the Company will weigh the costs of
obtaining such insurance coverage against the protection afforded by such
coverage. In all such policies of liability insurance, Indemnitee shall be
named as an insured in such a manner as to provide Indemnitee the same rights
and benefits as are accorded to the most favorably insured of the Company's
directors. Notwithstanding the foregoing, the Company shall have no obligation,
to obtain or maintain such insurance if the Company determines in good faith
that such insurance is not reasonably available, if the premium costs for such
insurance are disproportionate to the amount of coverage provided, if the
coverage provided by such insurance is limited by exclusions so as to provide an
insufficient benefit, or if Indemnitee is covered by similar insurance
maintained by a parent or Subsidiary of the Company.
8. SEVERABILITY
------------
8.1 Severability. Nothing in this Agreement is intended to require
------------
or shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 8.1. If this Agreement or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, the Company
shall nevertheless indemnify Indemnitee to the full extent permitted by any
applicable portion of this Agreement that shall not have been invalidated, and
the balance of this Agreement not so invalidated shall be enforceable in
accordance with its terms.
6
<PAGE>
9. EXCEPTIONS
----------
9.1 Exceptions to Company's Obligations. Any other provision to the
-----------------------------------
contrary notwithstanding, the Company shall not be obligated pursuant to the
terms of this Agreement for the following:
(a) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, unless said proceedings or
claims were authorized by the board of directors of the Company.
(b) Improper Personal Benefit. To indemnify Indemnitee against
-------------------------
liability for any transactions from which Indemnitee, or any Affiliate of
Indemnitee, derived an improper personal benefit, including, but not limited to,
self-dealing or usurpation of a corporate opportunity.
(c) Dishonesty. To indemnify Indemnitee if a judgment or other final
----------
adjudication adverse to Indemnitee established that Indemnitee committed acts of
active and deliberate dishonesty, with actual dishonest purpose and intent,
which acts were material to the cause of action so adjudicated.
(d) Insured Claims; Paid Claims. To indemnify Indemnitee for expenses
---------------------------
or liabilities of any type whatsoever (including but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) which
have been paid directly to Indemnitee (i) by an insurance carrier under a policy
of liability insurance maintained by the Company, or (ii) otherwise by any other
means.
(e) Claims Under Section 16(b). To indemnify Indemnitee for an
--------------------------
accounting of profits in fact realized from the purchase and sale of securities
within the meaning of Section 16(b) of the Securities Exchange Act of 1934, as
amended, or any similar successor statute.
10. MISCELLANEOUS
-------------
10.1 Construction of Certain Phrases.
-------------------------------
(a) For purposes of this Agreement, references to the "Company" shall
include any resulting or surviving corporation in any merger or consolidation in
which the Company (as then constituted) is not the resulting or surviving
corporation so that Indemnitee will continue to have the full benefits of this
Agreement.
(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
service as a director, officer, employee or agent of the Company which impose
duties on, or involves services
7
<PAGE>
by, such director, officer, employee or agent with respect to an employee
benefit plan, its participants, or beneficiaries; and if Indemnitee acted in
good faith and in a manner Indemnitee reasonably believed to be in the best
interests of the participants and beneficiaries of an employee benefit plan,
Indemnitee shall be deemed to have acted in a manner "reasonably believed to be
in the best interests of the Company and its shareholders" as referred to in
this Agreement.
10.2 Successors and Assigns. This Agreement shall be binding upon
----------------------
the Company and its successors and assigns, and shall inure to the benefit of
Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns.
Notwithstanding the foregoing, the Indemnitee shall have no right or power to
voluntarily assign or transfer any rights granted to Indemnitee, or obligations
imposed upon the Company, by or pursuant to this Agreement. Further, the rights
of the Indemnitee hereunder shall in no event accrue to the benefit of, or be
enforceable by, any judgment creditor or other involuntary transferee of the
Indemnitee.
10.3 Notice. All notices, requests, demands and other communications
------
under this Agreement shall be in writing and shall be deemed duly given (i) if
mailed by domestic certified or registered mail with postage prepaid, properly
addressed to the parties at the addresses set forth below, or to such other
address as may be furnished to Indemnitee by the Company or to the Company by
Indemnitee, as the case may be, on the third business day after the date
postmarked, or (ii) otherwise notice shall be deemed received when such notice
is actually received by the party to whom it is directed.
If to Indemnitee: To the address set forth below the signature
line of Indemnitee on the signature page
hereof.
If to Company: Callaway Golf Company
2285 Rutherford Road
Carlsbad, CA 92008
Attention: General Counsel
10.4 Consent to Jurisdiction. The Company and Indemnitee each hereby
-----------------------
irrevocably consent to the jurisdiction of the courts of the State of California
for all purposes in connection with any action or proceeding which arises out of
or related to this Agreement and agree that any action instituted under this
Agreement shall be brought only in the state courts of the State of California.
10.5 Choice of Law. This Agreement shall be governed by and its
-------------
provisions construed in accordance with the internal laws of the State of
Delaware, as applied to contracts between Delaware residents entered into and to
be performed entirely within Delaware, and without regard to choice of law
principles.
8
<PAGE>
10.6 Irrevocable Arbitration of Disputes.
-----------------------------------
(a) Indemnitee and the Company agree that any dispute, controversy or
claim arising hereunder or in any way related to this Agreement, its
interpretation, enforceability, or applicability, 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.
(b) Any demand for arbitration shall be in writing and must be made to
the Company's Chief Legal Officer within one (1) year, or within the time period
stated in the applicable statute of limitations, whichever is longer, after the
discovery of the alleged claim or cause of action by the aggrieved party.
(c) The arbitration shall be conducted pursuant to the Commercial
Arbitration Rules of the American Arbitration Association ("AAA") in San Diego,
California before an arbitrator who is licensed to practice law in the state of
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 AAA will be selected pursuant
to the Commercial Arbitration Rules of the AAA.
(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. However, at a minimum, each party will be
entitled to one deposition.
(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.
9
<PAGE>
(g) The provisions of this section shall survive the expiration or
termination of this agreement, and shall be binding on the parties in
perpetuity.
The parties have read Section 10.6 and irrevocably agree to arbitrate any
dispute identified above.
_________ (Indemnitee's initials) ______________ (Company's initials)
10.7 Entire Agreement. The provisions of this Agreement contain
----------------
the entire agreement between the parties and supersede all prior agreements,
oral or written, between the parties, including the Indemnification Agreement by
and between Callaway Golf Company, a California corporation, and William C.
Baker dated as of January 25, 1995. This Agreement may not be released,
discharged, abandoned, changed or modified in any manner except by an instrument
in writing signed by the parties.
10.8 Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall constitute an original and all of which together shall
constitute one and the same instrument.
[SIGNATURE PAGE FOLLOWS]
10
<PAGE>
IN WITNESS WHEREOF, the parties hereby have executed this Agreement as
of the date first above written.
"Company" Callaway Golf Company,
a Delaware corporation
By:
-----------------------------------
David A. Rane
Executive Vice President,
Administration and Planning, and
Chief Financial Officer
"Indemnitee" William C. Baker
----------------------------------
Address: 3 Lochmoor Lane
Newport Beach, CA. 92660
11
<PAGE>
EXHIBIT 10.2
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT is made as of the 1st day of July,
1999, by and between Callaway Golf Company, a Delaware corporation (the
"Company"), and Vernon E. Jordan, Jr. ("Indemnitee"), a director of the Company.
WHEREAS, the Company and Indemnitee recognize the increasing
difficulty in obtaining liability insurance covering directors, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance;
WHEREAS, although the Company currently has directors' liability
insurance, the coverage of such insurance is such that many claims which may be
brought against Indemnitee may not be covered, or may not be fully covered, and
the Company may be unable to maintain such insurance;
WHEREAS, the Company and the Indemnitee further recognize the
substantial increase in corporate litigation subjecting directors to expensive
litigation risks at the same time that liability insurance has been severely
limited;
WHEREAS, the current protection available may not be adequate given
the present circumstances, and Indemnitee may not be willing to serve as a
director without adequate protection;
WHEREAS, the Company desires to attract and retain the services of
highly qualified individuals, such as Indemnitee, to serve as directors of the
Company and to indemnify its directors so as to provide them with the maximum
protection permitted by law;
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. DEFINITIONS. The following terms, as used herein, have the following
-----------
meaning:
1.1 Affiliate. "Affiliate" means, (i) with respect to any
---------
corporation, any officer, director or 10% or more shareholder of such
corporation, or (ii) with respect to any individual, any partner or immediate
family member of such individual or the estate of such individual, or (iii) with
respect to any partnership, trust or joint venture, any partner, co-venturer or
trustee of such partnership, trust of joint venture, or any beneficiary or owner
having 10% or more interest in the equity, property or profits of such
partnership, trust or joint venture, or (iv) with respect to any Person, any
other Person which, directly or indirectly, controls, is controlled by, or is
under common control with such Person or any Affiliate of such Person.
1.2 Agreement. "Agreement" shall mean this Indemnification
---------
Agreement, as the same may be amended from time to time hereafter.
<PAGE>
1.3 DGCL. "DGCL" shall mean the Delaware General Corporation Law, as
----
amended.
1.4 Person. "Person" shall mean any individual, partnership,
------
corporation, joint venture, trust, estate, or other entity.
1.5 Subsidiary. "Subsidiary" shall mean any corporation of which the
----------
Company owns, directly or indirectly, through one or more subsidiaries,
securities having more than 50% of the voting power of such corporation.
2. INDEMNIFICATION
---------------
2.1 Third Party Proceedings. The Company shall indemnify Indemnitee
-----------------------
if Indemnitee is or was a party or witness or other participant in, or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than action by or in the right of the Company) by reason of the fact that
Indemnitee is or was a director of the Company or any subsidiary of the Company,
by reason of any action or inaction on the part of Indemnitee while a director
of the Company or any Subsidiary, and/or by reason of the fact that Indemnitee
is or was serving at the request of the Company as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against all expense, liability and loss (including attorneys' fees),
judgments, fines and amounts paid in settlement (if such settlement is approved
in advance by the Company, which approval shall not be unreasonably withheld)
actually and reasonably incurred by Indemnitee in connection with such action,
suit or proceeding if Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe Indemnitee's conduct was unlawful and provided,
further, that the Company has determined that such indemnification is otherwise
permitted by applicable law.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent
shall not, of itself, create a presumption that Indemnitee did not act in good
faith and in a manner which Indemnitee reasonably believed to be in the best
interests of the Company or that Indemnitee had reasonable cause to believe that
Indemnitee's conduct was unlawful.
2.2 Proceedings by or in the Right of the Company. The Company shall
---------------------------------------------
indemnify Indemnitee if Indemnitee was or is a party or a witness or other
participant in or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Company or any Subsidiary to
procure a judgment in its favor by reason of the fact that Indemnitee is or was
a director of the Company or any Subsidiary, by reason of any action or inaction
on the part of Indemnitee while a director of the Company or a Subsidiary or by
reason of the fact that Indemnitee is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other
2
<PAGE>
enterprise, against all expense, liability and loss (including attorneys' fees)
and amounts paid in settlement (if such settlement is court-approved) actually
and reasonably incurred by Indemnitee in connection with the defense or
settlement of such action or suit if Indemnitee acted in good faith and in a
manner Indemnitee reasonably believed to be in or not opposed to the best
interests of the Company and its shareholders and provided, further, that the
Company has determined that such indemnification is otherwise permitted by
applicable law. No indemnification shall be made in respect of any claim, issue
or matter as to which Indemnitee shall have been adjudged to be liable to the
Company in the performance of Indemnitee's duties to the Company and its
shareholders, unless and only to the extent that the court in which such
proceeding is or was pending shall determine upon application that, in view of
all the circumstances of the case, Indemnitee is fairly and reasonably entitled
to indemnity for expenses and then only to the extent that the court shall
determine.
2.3 Mandatory Payment of Expenses. To the extent that Indemnitee has
-----------------------------
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Section 2.1 or 2.2 or the defense of any claim, issue
or matter therein, Indemnitee shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by Indemnitee in connection
therewith.
2.4 Enforcing the Agreement. If Indemnitee properly makes a claim
-----------------------
for indemnification or an advance of expenses which is payable pursuant to the
terms of this Agreement, and that claim is not paid by the Company, or on its
behalf, within ninety days after a written claim has been received by the
Company, the Indemnitee may at any time thereafter bring suit against the
Company to recover the unpaid amount of the claim and if successful in whole or
in part, the Indemnitee shall be entitled to be paid also all expenses actually
and reasonably incurred in connection with prosecuting such claim.
2.5 Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of the Indemnitee, who shall execute all papers required and shall
do everything that may be necessary to secure such rights, including the
execution of such documents necessary to enable the Company effectively to bring
suit to enforce such rights.
3. EXPENSES; INDEMNIFICATION PROCEDURE
-----------------------------------
3.1 Advancement of Expenses. The Company shall advance all expenses
-----------------------
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action, suit or proceeding referenced in
Section 2.1 or 2.2 hereof. Indemnitee hereby undertakes to repay such amounts
advanced only if, and to the extent that, it shall ultimately be determined that
Indemnitee is not entitled to be indemnified by the Company as authorized hereby
or that such indemnification is not otherwise permitted by applicable law. The
advances to be made
3
<PAGE>
hereunder shall be paid by the Company to Indemnitee within thirty (30) days
following delivery of a written request therefor or by Indemnitee to the
Company.
3.2 Determination of Conduct. Any indemnification (unless ordered by
------------------------
a court) shall be made by the Company only as authorized in the specified case
upon a determination that indemnification of Indemnitee is proper under the
circumstances because Indemnitee has met the applicable standard of conduct set
forth in Sections 2.1 or 2.2 of this Agreement. Such determination shall be
made by any of the following: (1) the Board of Directors (or by an executive
committee thereof) by a majority vote of directors (or committee members) who
are not parties to such action, suit or proceeding, even though less than a
quorum, (2) if there are no such disinterested directors, or if such
disinterested directors so direct, by independent legal counsel in a written
opinion, (3) by the shareholders, with the shares owned by Indemnitee not being
entitled to vote thereon, or (4) the court in which such proceeding is or was
pending upon application made by the Company or Indemnitee or the attorney or
other person rendering services in connection with the defense, whether or not
such application by Indemnitee, the attorney or the other person is opposed by
the Company.
3.3 Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to Indemnitee's right to be indemnified under this
Agreement, give the Company notice in writing as soon as practicable of any
claim made against Indemnitee for which indemnification will or could be sought
under this Agreement. Notice to the Company shall be given in the manner set
forth in Section 10.3 hereof and to the address stated therein, or such other
address as the Company shall designate in writing to Indemnitee. In addition,
Indemnitee shall give the Company such information and cooperation as it may
reasonably require and as shall be within Indemnitee's power.
3.4 Notice to Insurers. If, at the time of the receipt of a notice
------------------
of a claim pursuant to Section 3.3 hereof, the Company has director liability
insurance in effect, the Company shall give prompt notice of the commencement of
such proceeding to the insurers in accordance with the procedures set forth in
the respective policies. The Company shall thereafter take all necessary or
desirable actions to cause such insurers to pay, on behalf of the Indemnitee,
all amounts payable as a result of such proceeding in accordance with the terms
of such policies.
3.5 Selection of Counsel. In the event the Company shall be
--------------------
obligated under Section 3.1 hereof to pay the expenses of any proceeding against
Indemnitee, the Company shall be entitled to assume the defense of such
proceeding, with counsel approved by Indemnitee, upon the delivery to Indemnitee
of written notice of its election so to do. After delivery of such notice,
approval of such counsel by Indemnitee and the retention of such counsel by the
Company, the Company will not be liable to Indemnitee under this Agreement for
any fees of counsel subsequently incurred by Indemnitee with respect to the same
proceeding, provided that (a) Indemnitee shall have the right to employ separate
counsel in any such proceeding at Indemnitee's expense; and (b) if (i) the
employment of counsel by Indemnitee has been previously authorized by the
4
<PAGE>
Company, (ii) Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company and Indemnitee in the conduct of any
such defense, or (iii) the Company shall not, in fact, have employed counsel to
assume the defense of such proceeding, then the fees and expenses of
Indemnitee's counsel shall be at the expense of the Company (subject to the
provisions of this Agreement).
4. ADDITIONAL INDEMNIFICATION RIGHTS; NON-EXCLUSIVITY
--------------------------------------------------
4.1 Application. The provisions of this Agreement shall be deemed
-----------
applicable to all actual or alleged actions or omissions by Indemnitee during
any and all periods of time that Indemnitee was, is, or shall be serving as a
director of the Company or a Subsidiary.
4.2 Scope. The Company hereby agrees to indemnify Indemnitee to the
-----
fullest extent permitted by law (except as set forth in Section 8 hereof),
notwithstanding that such indemnification is not specifically authorized by the
other provisions of this Agreement, the Company's Certificate of Incorporation,
the Company's Bylaws or by statute. In the event of any changes, after the date
of this Agreement, in any applicable law, statute, or rule which expands the
right of a Delaware corporation to indemnify a member of its board of directors,
such changes shall be, ipso facto, within the purview of Indemnitee's rights and
----------
the Company's obligations under this Agreement. In the event of any change in
any applicable law, statute, or rule which narrows the right of a Delaware
corporation to indemnify a member of its board of directors, such changes,
except to the extent otherwise required by such law, statute or rule to be
applied to this Agreement shall have no effect on this Agreement or the parties'
rights and obligations hereunder.
4.3 Non-Exclusivity. The indemnification provided by this Agreement
---------------
shall not be deemed exclusive of any rights to which an Indemnitee may be
entitled under the Company's Certificate of Incorporation, its Bylaws, any
agreement, any vote of shareholders or disinterested directors, the DGCL, or
otherwise, both as to action in Indemnitee's official capacity and as to action
in another capacity while holding such office. The indemnification provided
under this Agreement shall continue as to Indemnitee for an action taken or not
taken while serving in an indemnified capacity even though he may have ceased to
serve in such capacity at the time of any action, suit or other covered
proceeding.
5. PARTIAL INDEMNIFICATION
-----------------------
5.1 Partial Indemnity. If Indemnitee is entitled under any provision
-----------------
of this Agreement to indemnification by the Company for some or a portion of the
expenses, judgments, fines or penalties actually or reasonably incurred by
Indemnitee in the investigation, defense, appeal or settlement of any civil or
criminal action, suit or proceedings but not, however, for the total amount
thereof, the Company shall nevertheless indemnify Indemnitee for that portion to
which Indemnitee is entitled.
5
<PAGE>
6. MUTUAL ACKNOWLEDGMENT
---------------------
6.1 Acknowledgment. Both the Company and Indemnitee acknowledge that
--------------
in certain instances, federal law or public policy may override applicable state
law and prohibit the Company from indemnifying its directors under this
Agreement or otherwise. For example, the Company and Indemnitee acknowledge
that the Securities and Exchange Commission (the "SEC") has taken the position
that indemnification is not permissible for liabilities arising under certain
federal securities laws, and federal legislation prohibits indemnification for
certain ERISA violations. Indemnitee understands and acknowledges that the
Company has undertaken or may be required in the future to undertake with the
SEC to submit the question of indemnification to a court in certain
circumstances for a determination of the Company's right under public policy to
indemnify Indemnitee.
7. LIABILITY INSURANCE
-------------------
7.1 Obtaining Insurance. The Company shall, from time to time, make
-------------------
the good faith determination whether or not it is practicable for the Company to
obtain and maintain a policy or policies of insurance with reputable, insurance
companies providing the directors with coverage for losses from wrongful acts,
or to ensure the Company's performance of its indemnification obligations under
this Agreement. Among other considerations, the Company will weigh the costs of
obtaining such insurance coverage against the protection afforded by such
coverage. In all such policies of liability insurance, Indemnitee shall be
named as an insured in such a manner as to provide Indemnitee the same rights
and benefits as are accorded to the most favorably insured of the Company's
directors. Notwithstanding the foregoing, the Company shall have no obligation,
to obtain or maintain such insurance if the Company determines in good faith
that such insurance is not reasonably available, if the premium costs for such
insurance are disproportionate to the amount of coverage provided, if the
coverage provided by such insurance is limited by exclusions so as to provide an
insufficient benefit, or if Indemnitee is covered by similar insurance
maintained by a parent or Subsidiary of the Company.
8. SEVERABILITY
------------
8.1 Severability. Nothing in this Agreement is intended to require
------------
or shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 8.1. If this Agreement or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, the Company
shall nevertheless indemnify Indemnitee to the full extent permitted by any
applicable portion of this Agreement that shall not have been invalidated, and
the balance of this Agreement not so invalidated shall be enforceable in
accordance with its terms.
6
<PAGE>
9. EXCEPTIONS
----------
9.1 Exceptions to Company's Obligations. Any other provision to the
-----------------------------------
contrary notwithstanding, the Company shall not be obligated pursuant to the
terms of this Agreement for the following:
(a) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, unless said proceedings or
claims were authorized by the board of directors of the Company.
(b) Improper Personal Benefit. To indemnify Indemnitee against
-------------------------
liability for any transactions from which Indemnitee, or any Affiliate of
Indemnitee, derived an improper personal benefit, including, but not limited to,
self-dealing or usurpation of a corporate opportunity.
(c) Dishonesty. To indemnify Indemnitee if a judgment or other final
----------
adjudication adverse to Indemnitee established that Indemnitee committed acts of
active and deliberate dishonesty, with actual dishonest purpose and intent,
which acts were material to the cause of action so adjudicated.
(d) Insured Claims; Paid Claims. To indemnify Indemnitee for expenses
---------------------------
or liabilities of any type whatsoever (including but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) which
have been paid directly to Indemnitee (i) by an insurance carrier under a policy
of liability insurance maintained by the Company, or (ii) otherwise by any other
means.
(e) Claims Under Section 16(b). To indemnify Indemnitee for an
--------------------------
accounting of profits in fact realized from the purchase and sale of securities
within the meaning of Section 16(b) of the Securities Exchange Act of 1934, as
amended, or any similar successor statute.
10. MISCELLANEOUS
-------------
10.1 Construction of Certain Phrases.
-------------------------------
(a) For purposes of this Agreement, references to the "Company" shall
include any resulting or surviving corporation in any merger or consolidation in
which the Company (as then constituted) is not the resulting or surviving
corporation so that Indemnitee will continue to have the full benefits of this
Agreement.
(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
service as a director, officer, employee or agent of the Company which impose
duties on, or involves services
7
<PAGE>
by, such director, officer, employee or agent with respect to an employee
benefit plan, its participants, or beneficiaries; and if Indemnitee acted in
good faith and in a manner Indemnitee reasonably believed to be in the best
interests of the participants and beneficiaries of an employee benefit plan,
Indemnitee shall be deemed to have acted in a manner "reasonably believed to be
in the best interests of the Company and its shareholders" as referred to in
this Agreement.
10.2 Successors and Assigns. This Agreement shall be binding upon
----------------------
the Company and its successors and assigns, and shall inure to the benefit of
Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns.
Notwithstanding the foregoing, the Indemnitee shall have no right or power to
voluntarily assign or transfer any rights granted to Indemnitee, or obligations
imposed upon the Company, by or pursuant to this Agreement. Further, the rights
of the Indemnitee hereunder shall in no event accrue to the benefit of, or be
enforceable by, any judgment creditor or other involuntary transferee of the
Indemnitee.
10.3 Notice. All notices, requests, demands and other communications
------
under this Agreement shall be in writing and shall be deemed duly given (i) if
mailed by domestic certified or registered mail with postage prepaid, properly
addressed to the parties at the addresses set forth below, or to such other
address as may be furnished to Indemnitee by the Company or to the Company by
Indemnitee, as the case may be, on the third business day after the date
postmarked, or (ii) otherwise notice shall be deemed received when such notice
is actually received by the party to whom it is directed.
If to Indemnitee: To the address set forth below the signature
line of Indemnitee on the signature page
hereof.
If to Company: Callaway Golf Company
2285 Rutherford Road
Carlsbad, CA 92008
Attention: General Counsel
10.4 Consent to Jurisdiction. The Company and Indemnitee each hereby
-----------------------
irrevocably consent to the jurisdiction of the courts of the State of California
for all purposes in connection with any action or proceeding which arises out of
or related to this Agreement and agree that any action instituted under this
Agreement shall be brought only in the state courts of the State of California.
10.5 Choice of Law. This Agreement shall be governed by and its
-------------
provisions construed in accordance with the internal laws of the State of
Delaware, as applied to contracts between Delaware residents entered into and to
be performed entirely within Delaware, and without regard to choice of law
principles.
8
<PAGE>
10.6 Irrevocable Arbitration of Disputes.
-----------------------------------
(a) Indemnitee and the Company agree that any dispute, controversy or
claim arising hereunder or in any way related to this Agreement, its
interpretation, enforceability, or applicability, 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.
(b) Any demand for arbitration shall be in writing and must be made to
the Company's Chief Legal Officer within one (1) year, or within the time period
stated in the applicable statute of limitations, whichever is longer, after the
discovery of the alleged claim or cause of action by the aggrieved party.
(c) The arbitration shall be conducted pursuant to the Commercial
Arbitration Rules of the American Arbitration Association ("AAA") in San Diego,
California before an arbitrator who is licensed to practice law in the state of
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 AAA will be selected pursuant
to the Commercial Arbitration Rules of the AAA.
(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. However, at a minimum, each party will be
entitled to one deposition.
(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.
9
<PAGE>
(g) The provisions of this section shall survive the expiration or
termination of this agreement, and shall be binding on the parties in
perpetuity.
The parties have read Section 10.6 and irrevocably agree to arbitrate any
dispute identified above.
_________ (Indemnitee's initials) ______________ (Company's initials)
10.7 Entire Agreement. The provisions of this Agreement contain
----------------
the entire agreement between the parties and supersede all prior agreements,
oral or written, between the parties, including the Indemnification Agreement by
and between Callaway Golf Company, a California corporation, and Vernon E.
Jordan, Jr. dated as of July 16, 1997. This Agreement may not be released,
discharged, abandoned, changed or modified in any manner except by an instrument
in writing signed by the parties.
10.8 Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall constitute an original and all of which together shall
constitute one and the same instrument.
[SIGNATURE PAGE FOLLOWS]
10
<PAGE>
IN WITNESS WHEREOF, the parties hereby have executed this Agreement as
of the date first above written.
"Company" Callaway Golf Company,
a Delaware corporation
By:
-----------------------------------
David A. Rane
Executive Vice President,
Administration and Planning, and
Chief Financial Officer
"Indemnitee" Vernon E. Jordan, Jr.
----------------------------------
Address: Akin, Gump, Strauss, Hauer & Feld LLP
1333 New Hampshire Avenue NW
Suite 400
Washington, D.C. 20036
11
<PAGE>
EXHIBIT 10.3
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT is made as of the 1st day of July,
1999, by and between Callaway Golf Company, a Delaware corporation (the
"Company"), and Yotaro Kobayashi ("Indemnitee"), a director of the Company.
WHEREAS, the Company and Indemnitee recognize the increasing
difficulty in obtaining liability insurance covering directors, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance;
WHEREAS, although the Company currently has directors' liability
insurance, the coverage of such insurance is such that many claims which may be
brought against Indemnitee may not be covered, or may not be fully covered, and
the Company may be unable to maintain such insurance;
WHEREAS, the Company and the Indemnitee further recognize the
substantial increase in corporate litigation subjecting directors to expensive
litigation risks at the same time that liability insurance has been severely
limited;
WHEREAS, the current protection available may not be adequate given
the present circumstances, and Indemnitee may not be willing to serve as a
director without adequate protection;
WHEREAS, the Company desires to attract and retain the services of
highly qualified individuals, such as Indemnitee, to serve as directors of the
Company and to indemnify its directors so as to provide them with the maximum
protection permitted by law;
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. DEFINITIONS. The following terms, as used herein, have the following
-----------
meaning:
1.1 Affiliate. "Affiliate" means, (i) with respect to any
---------
corporation, any officer, director or 10% or more shareholder of such
corporation, or (ii) with respect to any individual, any partner or immediate
family member of such individual or the estate of such individual, or (iii) with
respect to any partnership, trust or joint venture, any partner, co-venturer or
trustee of such partnership, trust of joint venture, or any beneficiary or owner
having 10% or more interest in the equity, property or profits of such
partnership, trust or joint venture, or (iv) with respect to any Person, any
other Person which, directly or indirectly, controls, is controlled by, or is
under common control with such Person or any Affiliate of such Person.
1.2 Agreement. "Agreement" shall mean this Indemnification
---------
Agreement, as the same may be amended from time to time hereafter.
<PAGE>
1.3 DGCL. "DGCL" shall mean the Delaware General Corporation Law, as
----
amended.
1.4 Person. "Person" shall mean any individual, partnership,
------
corporation, joint venture, trust, estate, or other entity.
1.5 Subsidiary. "Subsidiary" shall mean any corporation of which the
----------
Company owns, directly or indirectly, through one or more subsidiaries,
securities having more than 50% of the voting power of such corporation.
2. INDEMNIFICATION
---------------
2.1 Third Party Proceedings. The Company shall indemnify Indemnitee
-----------------------
if Indemnitee is or was a party or witness or other participant in, or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than action by or in the right of the Company) by reason of the fact that
Indemnitee is or was a director of the Company or any subsidiary of the Company,
by reason of any action or inaction on the part of Indemnitee while a director
of the Company or any Subsidiary, and/or by reason of the fact that Indemnitee
is or was serving at the request of the Company as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against all expense, liability and loss (including attorneys' fees),
judgments, fines and amounts paid in settlement (if such settlement is approved
in advance by the Company, which approval shall not be unreasonably withheld)
actually and reasonably incurred by Indemnitee in connection with such action,
suit or proceeding if Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe Indemnitee's conduct was unlawful and provided,
further, that the Company has determined that such indemnification is otherwise
permitted by applicable law.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent
shall not, of itself, create a presumption that Indemnitee did not act in good
faith and in a manner which Indemnitee reasonably believed to be in the best
interests of the Company or that Indemnitee had reasonable cause to believe that
Indemnitee's conduct was unlawful.
2.2 Proceedings by or in the Right of the Company. The Company shall
---------------------------------------------
indemnify Indemnitee if Indemnitee was or is a party or a witness or other
participant in or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Company or any Subsidiary to
procure a judgment in its favor by reason of the fact that Indemnitee is or was
a director of the Company or any Subsidiary, by reason of any action or inaction
on the part of Indemnitee while a director of the Company or a Subsidiary or by
reason of the fact that Indemnitee is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other
2
<PAGE>
enterprise, against all expense, liability and loss (including attorneys' fees)
and amounts paid in settlement (if such settlement is court-approved) actually
and reasonably incurred by Indemnitee in connection with the defense or
settlement of such action or suit if Indemnitee acted in good faith and in a
manner Indemnitee reasonably believed to be in or not opposed to the best
interests of the Company and its shareholders and provided, further, that the
Company has determined that such indemnification is otherwise permitted by
applicable law. No indemnification shall be made in respect of any claim, issue
or matter as to which Indemnitee shall have been adjudged to be liable to the
Company in the performance of Indemnitee's duties to the Company and its
shareholders, unless and only to the extent that the court in which such
proceeding is or was pending shall determine upon application that, in view of
all the circumstances of the case, Indemnitee is fairly and reasonably entitled
to indemnity for expenses and then only to the extent that the court shall
determine.
2.3 Mandatory Payment of Expenses. To the extent that Indemnitee has
-----------------------------
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Section 2.1 or 2.2 or the defense of any claim, issue
or matter therein, Indemnitee shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by Indemnitee in connection
therewith.
2.4 Enforcing the Agreement. If Indemnitee properly makes a claim
-----------------------
for indemnification or an advance of expenses which is payable pursuant to the
terms of this Agreement, and that claim is not paid by the Company, or on its
behalf, within ninety days after a written claim has been received by the
Company, the Indemnitee may at any time thereafter bring suit against the
Company to recover the unpaid amount of the claim and if successful in whole or
in part, the Indemnitee shall be entitled to be paid also all expenses actually
and reasonably incurred in connection with prosecuting such claim.
2.5 Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of the Indemnitee, who shall execute all papers required and shall
do everything that may be necessary to secure such rights, including the
execution of such documents necessary to enable the Company effectively to bring
suit to enforce such rights.
3. EXPENSES; INDEMNIFICATION PROCEDURE
-----------------------------------
3.1 Advancement of Expenses. The Company shall advance all expenses
-----------------------
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action, suit or proceeding referenced in
Section 2.1 or 2.2 hereof. Indemnitee hereby undertakes to repay such amounts
advanced only if, and to the extent that, it shall ultimately be determined that
Indemnitee is not entitled to be indemnified by the Company as authorized hereby
or that such indemnification is not otherwise permitted by applicable law. The
advances to be made
3
<PAGE>
hereunder shall be paid by the Company to Indemnitee within thirty (30) days
following delivery of a written request therefor or by Indemnitee to the
Company.
3.2 Determination of Conduct. Any indemnification (unless ordered by
------------------------
a court) shall be made by the Company only as authorized in the specified case
upon a determination that indemnification of Indemnitee is proper under the
circumstances because Indemnitee has met the applicable standard of conduct set
forth in Sections 2.1 or 2.2 of this Agreement. Such determination shall be
made by any of the following: (1) the Board of Directors (or by an executive
committee thereof) by a majority vote of directors (or committee members) who
are not parties to such action, suit or proceeding, even though less than a
quorum, (2) if there are no such disinterested directors, or if such
disinterested directors so direct, by independent legal counsel in a written
opinion, (3) by the shareholders, with the shares owned by Indemnitee not being
entitled to vote thereon, or (4) the court in which such proceeding is or was
pending upon application made by the Company or Indemnitee or the attorney or
other person rendering services in connection with the defense, whether or not
such application by Indemnitee, the attorney or the other person is opposed by
the Company.
3.3 Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to Indemnitee's right to be indemnified under this
Agreement, give the Company notice in writing as soon as practicable of any
claim made against Indemnitee for which indemnification will or could be sought
under this Agreement. Notice to the Company shall be given in the manner set
forth in Section 10.3 hereof and to the address stated therein, or such other
address as the Company shall designate in writing to Indemnitee. In addition,
Indemnitee shall give the Company such information and cooperation as it may
reasonably require and as shall be within Indemnitee's power.
3.4 Notice to Insurers. If, at the time of the receipt of a notice
------------------
of a claim pursuant to Section 3.3 hereof, the Company has director liability
insurance in effect, the Company shall give prompt notice of the commencement of
such proceeding to the insurers in accordance with the procedures set forth in
the respective policies. The Company shall thereafter take all necessary or
desirable actions to cause such insurers to pay, on behalf of the Indemnitee,
all amounts payable as a result of such proceeding in accordance with the terms
of such policies.
3.5 Selection of Counsel. In the event the Company shall be
--------------------
obligated under Section 3.1 hereof to pay the expenses of any proceeding against
Indemnitee, the Company shall be entitled to assume the defense of such
proceeding, with counsel approved by Indemnitee, upon the delivery to Indemnitee
of written notice of its election so to do. After delivery of such notice,
approval of such counsel by Indemnitee and the retention of such counsel by the
Company, the Company will not be liable to Indemnitee under this Agreement for
any fees of counsel subsequently incurred by Indemnitee with respect to the same
proceeding, provided that (a) Indemnitee shall have the right to employ separate
counsel in any such proceeding at Indemnitee's expense; and (b) if (i) the
employment of counsel by Indemnitee has been previously authorized by the
4
<PAGE>
Company, (ii) Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company and Indemnitee in the conduct of any
such defense, or (iii) the Company shall not, in fact, have employed counsel to
assume the defense of such proceeding, then the fees and expenses of
Indemnitee's counsel shall be at the expense of the Company (subject to the
provisions of this Agreement).
4. ADDITIONAL INDEMNIFICATION RIGHTS; NON-EXCLUSIVITY
--------------------------------------------------
4.1 Application. The provisions of this Agreement shall be deemed
-----------
applicable to all actual or alleged actions or omissions by Indemnitee during
any and all periods of time that Indemnitee was, is, or shall be serving as a
director of the Company or a Subsidiary.
4.2 Scope. The Company hereby agrees to indemnify Indemnitee to the
-----
fullest extent permitted by law (except as set forth in Section 8 hereof),
notwithstanding that such indemnification is not specifically authorized by the
other provisions of this Agreement, the Company's Certificate of Incorporation,
the Company's Bylaws or by statute. In the event of any changes, after the date
of this Agreement, in any applicable law, statute, or rule which expands the
right of a Delaware corporation to indemnify a member of its board of directors,
such changes shall be, ipso facto, within the purview of Indemnitee's rights and
----------
the Company's obligations under this Agreement. In the event of any change in
any applicable law, statute, or rule which narrows the right of a Delaware
corporation to indemnify a member of its board of directors, such changes,
except to the extent otherwise required by such law, statute or rule to be
applied to this Agreement shall have no effect on this Agreement or the parties'
rights and obligations hereunder.
4.3 Non-Exclusivity. The indemnification provided by this Agreement
---------------
shall not be deemed exclusive of any rights to which an Indemnitee may be
entitled under the Company's Certificate of Incorporation, its Bylaws, any
agreement, any vote of shareholders or disinterested directors, the DGCL, or
otherwise, both as to action in Indemnitee's official capacity and as to action
in another capacity while holding such office. The indemnification provided
under this Agreement shall continue as to Indemnitee for an action taken or not
taken while serving in an indemnified capacity even though he may have ceased to
serve in such capacity at the time of any action, suit or other covered
proceeding.
5. PARTIAL INDEMNIFICATION
-----------------------
5.1 Partial Indemnity. If Indemnitee is entitled under any provision
-----------------
of this Agreement to indemnification by the Company for some or a portion of the
expenses, judgments, fines or penalties actually or reasonably incurred by
Indemnitee in the investigation, defense, appeal or settlement of any civil or
criminal action, suit or proceedings but not, however, for the total amount
thereof, the Company shall nevertheless indemnify Indemnitee for that portion to
which Indemnitee is entitled.
5
<PAGE>
6. MUTUAL ACKNOWLEDGMENT
---------------------
6.1 Acknowledgment. Both the Company and Indemnitee acknowledge that
--------------
in certain instances, federal law or public policy may override applicable state
law and prohibit the Company from indemnifying its directors under this
Agreement or otherwise. For example, the Company and Indemnitee acknowledge
that the Securities and Exchange Commission (the "SEC") has taken the position
that indemnification is not permissible for liabilities arising under certain
federal securities laws, and federal legislation prohibits indemnification for
certain ERISA violations. Indemnitee understands and acknowledges that the
Company has undertaken or may be required in the future to undertake with the
SEC to submit the question of indemnification to a court in certain
circumstances for a determination of the Company's right under public policy to
indemnify Indemnitee.
7. LIABILITY INSURANCE
-------------------
7.1 Obtaining Insurance. The Company shall, from time to time, make
-------------------
the good faith determination whether or not it is practicable for the Company to
obtain and maintain a policy or policies of insurance with reputable, insurance
companies providing the directors with coverage for losses from wrongful acts,
or to ensure the Company's performance of its indemnification obligations under
this Agreement. Among other considerations, the Company will weigh the costs of
obtaining such insurance coverage against the protection afforded by such
coverage. In all such policies of liability insurance, Indemnitee shall be
named as an insured in such a manner as to provide Indemnitee the same rights
and benefits as are accorded to the most favorably insured of the Company's
directors. Notwithstanding the foregoing, the Company shall have no obligation,
to obtain or maintain such insurance if the Company determines in good faith
that such insurance is not reasonably available, if the premium costs for such
insurance are disproportionate to the amount of coverage provided, if the
coverage provided by such insurance is limited by exclusions so as to provide an
insufficient benefit, or if Indemnitee is covered by similar insurance
maintained by a parent or Subsidiary of the Company.
8. SEVERABILITY
------------
8.1 Severability. Nothing in this Agreement is intended to require
------------
or shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 8.1. If this Agreement or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, the Company
shall nevertheless indemnify Indemnitee to the full extent permitted by any
applicable portion of this Agreement that shall not have been invalidated, and
the balance of this Agreement not so invalidated shall be enforceable in
accordance with its terms.
6
<PAGE>
9. EXCEPTIONS
----------
9.1 Exceptions to Company's Obligations. Any other provision to the
-----------------------------------
contrary notwithstanding, the Company shall not be obligated pursuant to the
terms of this Agreement for the following:
(a) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, unless said proceedings or
claims were authorized by the board of directors of the Company.
(b) Improper Personal Benefit. To indemnify Indemnitee against
-------------------------
liability for any transactions from which Indemnitee, or any Affiliate of
Indemnitee, derived an improper personal benefit, including, but not limited to,
self-dealing or usurpation of a corporate opportunity.
(c) Dishonesty. To indemnify Indemnitee if a judgment or other final
----------
adjudication adverse to Indemnitee established that Indemnitee committed acts of
active and deliberate dishonesty, with actual dishonest purpose and intent,
which acts were material to the cause of action so adjudicated.
(d) Insured Claims; Paid Claims. To indemnify Indemnitee for expenses
---------------------------
or liabilities of any type whatsoever (including but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) which
have been paid directly to Indemnitee (i) by an insurance carrier under a policy
of liability insurance maintained by the Company, or (ii) otherwise by any other
means.
(e) Claims Under Section 16(b). To indemnify Indemnitee for an
--------------------------
accounting of profits in fact realized from the purchase and sale of securities
within the meaning of Section 16(b) of the Securities Exchange Act of 1934, as
amended, or any similar successor statute.
10. MISCELLANEOUS
-------------
10.1 Construction of Certain Phrases.
-------------------------------
(a) For purposes of this Agreement, references to the "Company" shall
include any resulting or surviving corporation in any merger or consolidation in
which the Company (as then constituted) is not the resulting or surviving
corporation so that Indemnitee will continue to have the full benefits of this
Agreement.
(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
service as a director, officer, employee or agent of the Company which impose
duties on, or involves services
7
<PAGE>
by, such director, officer, employee or agent with respect to an employee
benefit plan, its participants, or beneficiaries; and if Indemnitee acted in
good faith and in a manner Indemnitee reasonably believed to be in the best
interests of the participants and beneficiaries of an employee benefit plan,
Indemnitee shall be deemed to have acted in a manner "reasonably believed to be
in the best interests of the Company and its shareholders" as referred to in
this Agreement.
10.2 Successors and Assigns. This Agreement shall be binding upon
----------------------
the Company and its successors and assigns, and shall inure to the benefit of
Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns.
Notwithstanding the foregoing, the Indemnitee shall have no right or power to
voluntarily assign or transfer any rights granted to Indemnitee, or obligations
imposed upon the Company, by or pursuant to this Agreement. Further, the rights
of the Indemnitee hereunder shall in no event accrue to the benefit of, or be
enforceable by, any judgment creditor or other involuntary transferee of the
Indemnitee.
10.3 Notice. All notices, requests, demands and other communications
------
under this Agreement shall be in writing and shall be deemed duly given (i) if
mailed by domestic certified or registered mail with postage prepaid, properly
addressed to the parties at the addresses set forth below, or to such other
address as may be furnished to Indemnitee by the Company or to the Company by
Indemnitee, as the case may be, on the third business day after the date
postmarked, or (ii) otherwise notice shall be deemed received when such notice
is actually received by the party to whom it is directed.
If to Indemnitee: To the address set forth below the signature
line of Indemnitee on the signature page
hereof.
If to Company: Callaway Golf Company
2285 Rutherford Road
Carlsbad, CA 92008
Attention: General Counsel
10.4 Consent to Jurisdiction. The Company and Indemnitee each hereby
-----------------------
irrevocably consent to the jurisdiction of the courts of the State of California
for all purposes in connection with any action or proceeding which arises out of
or related to this Agreement and agree that any action instituted under this
Agreement shall be brought only in the state courts of the State of California.
10.5 Choice of Law. This Agreement shall be governed by and its
-------------
provisions construed in accordance with the internal laws of the State of
Delaware, as applied to contracts between Delaware residents entered into and to
be performed entirely within Delaware, and without regard to choice of law
principles.
8
<PAGE>
10.6 Irrevocable Arbitration of Disputes.
-----------------------------------
(a) Indemnitee and the Company agree that any dispute, controversy or
claim arising hereunder or in any way related to this Agreement, its
interpretation, enforceability, or applicability, 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.
(b) Any demand for arbitration shall be in writing and must be made to
the Company's Chief Legal Officer within one (1) year, or within the time period
stated in the applicable statute of limitations, whichever is longer, after the
discovery of the alleged claim or cause of action by the aggrieved party.
(c) The arbitration shall be conducted pursuant to the Commercial
Arbitration Rules of the American Arbitration Association ("AAA") in San Diego,
California before an arbitrator who is licensed to practice law in the state of
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 AAA will be selected pursuant
to the Commercial Arbitration Rules of the AAA.
(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. However, at a minimum, each party will be
entitled to one deposition.
(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.
9
<PAGE>
(g) The provisions of this section shall survive the expiration or
termination of this agreement, and shall be binding on the parties in
perpetuity.
The parties have read Section 10.6 and irrevocably agree to arbitrate any
dispute identified above.
_________ (Indemnitee's initials) ______________ (Company's initials)
10.7 Entire Agreement. The provisions of this Agreement contain
----------------
the entire agreement between the parties and supersede all prior agreements,
oral or written, between the parties, including the Indemnification Agreement by
and between Callaway Golf Company, a California corporation, and Yotaro
Kobayashi dated as of June 4, 1998. This Agreement may not be released,
discharged, abandoned, changed or modified in any manner except by an instrument
in writing signed by the parties.
10.8 Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall constitute an original and all of which together shall
constitute one and the same instrument.
[SIGNATURE PAGE FOLLOWS]
10
<PAGE>
IN WITNESS WHEREOF, the parties hereby have executed this Agreement as
of the date first above written.
"Company" Callaway Golf Company,
a Delaware corporation
By:
-----------------------------------
David A. Rane
Executive Vice President,
Administration and Planning, and
Chief Financial Officer
"Indemnitee" Yotaro Kobayashi
----------------------------------
Address: Fuji Xerox Co., Ltd.
2-17-22 Akasaka, Minato-ku
Tokyo 107-0052, Japan
11
<PAGE>
EXHIBIT 10.4
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT is made as of the 1st day of July,
1999, by and between Callaway Golf Company, a Delaware corporation (the
"Company"), and Aulana L. Peters ("Indemnitee"), a director of the Company.
WHEREAS, the Company and Indemnitee recognize the increasing
difficulty in obtaining liability insurance covering directors, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance;
WHEREAS, although the Company currently has directors' liability
insurance, the coverage of such insurance is such that many claims which may be
brought against Indemnitee may not be covered, or may not be fully covered, and
the Company may be unable to maintain such insurance;
WHEREAS, the Company and the Indemnitee further recognize the
substantial increase in corporate litigation subjecting directors to expensive
litigation risks at the same time that liability insurance has been severely
limited;
WHEREAS, the current protection available may not be adequate given
the present circumstances, and Indemnitee may not be willing to serve as a
director without adequate protection;
WHEREAS, the Company desires to attract and retain the services of
highly qualified individuals, such as Indemnitee, to serve as directors of the
Company and to indemnify its directors so as to provide them with the maximum
protection permitted by law;
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. DEFINITIONS. The following terms, as used herein, have the following
-----------
meaning:
1.1 Affiliate. "Affiliate" means, (i) with respect to any
---------
corporation, any officer, director or 10% or more shareholder of such
corporation, or (ii) with respect to any individual, any partner or immediate
family member of such individual or the estate of such individual, or (iii) with
respect to any partnership, trust or joint venture, any partner, co-venturer or
trustee of such partnership, trust of joint venture, or any beneficiary or owner
having 10% or more interest in the equity, property or profits of such
partnership, trust or joint venture, or (iv) with respect to any Person, any
other Person which, directly or indirectly, controls, is controlled by, or is
under common control with such Person or any Affiliate of such Person.
1.2 Agreement. "Agreement" shall mean this Indemnification
---------
Agreement, as the same may be amended from time to time hereafter.
<PAGE>
1.3 DGCL. "DGCL" shall mean the Delaware General Corporation Law, as
----
amended.
1.4 Person. "Person" shall mean any individual, partnership,
------
corporation, joint venture, trust, estate, or other entity.
1.5 Subsidiary. "Subsidiary" shall mean any corporation of which the
----------
Company owns, directly or indirectly, through one or more subsidiaries,
securities having more than 50% of the voting power of such corporation.
2. INDEMNIFICATION
---------------
2.1 Third Party Proceedings. The Company shall indemnify Indemnitee
-----------------------
if Indemnitee is or was a party or witness or other participant in, or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than action by or in the right of the Company) by reason of the fact that
Indemnitee is or was a director of the Company or any subsidiary of the Company,
by reason of any action or inaction on the part of Indemnitee while a director
of the Company or any Subsidiary, and/or by reason of the fact that Indemnitee
is or was serving at the request of the Company as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against all expense, liability and loss (including attorneys' fees),
judgments, fines and amounts paid in settlement (if such settlement is approved
in advance by the Company, which approval shall not be unreasonably withheld)
actually and reasonably incurred by Indemnitee in connection with such action,
suit or proceeding if Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe Indemnitee's conduct was unlawful and provided,
further, that the Company has determined that such indemnification is otherwise
permitted by applicable law.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent
shall not, of itself, create a presumption that Indemnitee did not act in good
faith and in a manner which Indemnitee reasonably believed to be in the best
interests of the Company or that Indemnitee had reasonable cause to believe that
Indemnitee's conduct was unlawful.
2.2 Proceedings by or in the Right of the Company. The Company shall
---------------------------------------------
indemnify Indemnitee if Indemnitee was or is a party or a witness or other
participant in or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Company or any Subsidiary to
procure a judgment in its favor by reason of the fact that Indemnitee is or was
a director of the Company or any Subsidiary, by reason of any action or inaction
on the part of Indemnitee while a director of the Company or a Subsidiary or by
reason of the fact that Indemnitee is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other
2
<PAGE>
enterprise, against all expense, liability and loss (including attorneys' fees)
and amounts paid in settlement (if such settlement is court-approved) actually
and reasonably incurred by Indemnitee in connection with the defense or
settlement of such action or suit if Indemnitee acted in good faith and in a
manner Indemnitee reasonably believed to be in or not opposed to the best
interests of the Company and its shareholders and provided, further, that the
Company has determined that such indemnification is otherwise permitted by
applicable law. No indemnification shall be made in respect of any claim, issue
or matter as to which Indemnitee shall have been adjudged to be liable to the
Company in the performance of Indemnitee's duties to the Company and its
shareholders, unless and only to the extent that the court in which such
proceeding is or was pending shall determine upon application that, in view of
all the circumstances of the case, Indemnitee is fairly and reasonably entitled
to indemnity for expenses and then only to the extent that the court shall
determine.
2.3 Mandatory Payment of Expenses. To the extent that Indemnitee has
-----------------------------
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Section 2.1 or 2.2 or the defense of any claim, issue
or matter therein, Indemnitee shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by Indemnitee in connection
therewith.
2.4 Enforcing the Agreement. If Indemnitee properly makes a claim
-----------------------
for indemnification or an advance of expenses which is payable pursuant to the
terms of this Agreement, and that claim is not paid by the Company, or on its
behalf, within ninety days after a written claim has been received by the
Company, the Indemnitee may at any time thereafter bring suit against the
Company to recover the unpaid amount of the claim and if successful in whole or
in part, the Indemnitee shall be entitled to be paid also all expenses actually
and reasonably incurred in connection with prosecuting such claim.
2.5 Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of the Indemnitee, who shall execute all papers required and shall
do everything that may be necessary to secure such rights, including the
execution of such documents necessary to enable the Company effectively to bring
suit to enforce such rights.
3. EXPENSES; INDEMNIFICATION PROCEDURE
-----------------------------------
3.1 Advancement of Expenses. The Company shall advance all expenses
-----------------------
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action, suit or proceeding referenced in
Section 2.1 or 2.2 hereof. Indemnitee hereby undertakes to repay such amounts
advanced only if, and to the extent that, it shall ultimately be determined that
Indemnitee is not entitled to be indemnified by the Company as authorized hereby
or that such indemnification is not otherwise permitted by applicable law. The
advances to be made
3
<PAGE>
hereunder shall be paid by the Company to Indemnitee within thirty (30) days
following delivery of a written request therefor or by Indemnitee to the
Company.
3.2 Determination of Conduct. Any indemnification (unless ordered by
------------------------
a court) shall be made by the Company only as authorized in the specified case
upon a determination that indemnification of Indemnitee is proper under the
circumstances because Indemnitee has met the applicable standard of conduct set
forth in Sections 2.1 or 2.2 of this Agreement. Such determination shall be
made by any of the following: (1) the Board of Directors (or by an executive
committee thereof) by a majority vote of directors (or committee members) who
are not parties to such action, suit or proceeding, even though less than a
quorum, (2) if there are no such disinterested directors, or if such
disinterested directors so direct, by independent legal counsel in a written
opinion, (3) by the shareholders, with the shares owned by Indemnitee not being
entitled to vote thereon, or (4) the court in which such proceeding is or was
pending upon application made by the Company or Indemnitee or the attorney or
other person rendering services in connection with the defense, whether or not
such application by Indemnitee, the attorney or the other person is opposed by
the Company.
3.3 Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to Indemnitee's right to be indemnified under this
Agreement, give the Company notice in writing as soon as practicable of any
claim made against Indemnitee for which indemnification will or could be sought
under this Agreement. Notice to the Company shall be given in the manner set
forth in Section 10.3 hereof and to the address stated therein, or such other
address as the Company shall designate in writing to Indemnitee. In addition,
Indemnitee shall give the Company such information and cooperation as it may
reasonably require and as shall be within Indemnitee's power.
3.4 Notice to Insurers. If, at the time of the receipt of a notice
------------------
of a claim pursuant to Section 3.3 hereof, the Company has director liability
insurance in effect, the Company shall give prompt notice of the commencement of
such proceeding to the insurers in accordance with the procedures set forth in
the respective policies. The Company shall thereafter take all necessary or
desirable actions to cause such insurers to pay, on behalf of the Indemnitee,
all amounts payable as a result of such proceeding in accordance with the terms
of such policies.
3.5 Selection of Counsel. In the event the Company shall be
--------------------
obligated under Section 3.1 hereof to pay the expenses of any proceeding against
Indemnitee, the Company shall be entitled to assume the defense of such
proceeding, with counsel approved by Indemnitee, upon the delivery to Indemnitee
of written notice of its election so to do. After delivery of such notice,
approval of such counsel by Indemnitee and the retention of such counsel by the
Company, the Company will not be liable to Indemnitee under this Agreement for
any fees of counsel subsequently incurred by Indemnitee with respect to the same
proceeding, provided that (a) Indemnitee shall have the right to employ separate
counsel in any such proceeding at Indemnitee's expense; and (b) if (i) the
employment of counsel by Indemnitee has been previously authorized by the
4
<PAGE>
Company, (ii) Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company and Indemnitee in the conduct of any
such defense, or (iii) the Company shall not, in fact, have employed counsel to
assume the defense of such proceeding, then the fees and expenses of
Indemnitee's counsel shall be at the expense of the Company (subject to the
provisions of this Agreement).
4. ADDITIONAL INDEMNIFICATION RIGHTS; NON-EXCLUSIVITY
--------------------------------------------------
4.1 Application. The provisions of this Agreement shall be deemed
-----------
applicable to all actual or alleged actions or omissions by Indemnitee during
any and all periods of time that Indemnitee was, is, or shall be serving as a
director of the Company or a Subsidiary.
4.2 Scope. The Company hereby agrees to indemnify Indemnitee to the
-----
fullest extent permitted by law (except as set forth in Section 8 hereof),
notwithstanding that such indemnification is not specifically authorized by the
other provisions of this Agreement, the Company's Certificate of Incorporation,
the Company's Bylaws or by statute. In the event of any changes, after the date
of this Agreement, in any applicable law, statute, or rule which expands the
right of a Delaware corporation to indemnify a member of its board of directors,
such changes shall be, ipso facto, within the purview of Indemnitee's rights and
----------
the Company's obligations under this Agreement. In the event of any change in
any applicable law, statute, or rule which narrows the right of a Delaware
corporation to indemnify a member of its board of directors, such changes,
except to the extent otherwise required by such law, statute or rule to be
applied to this Agreement shall have no effect on this Agreement or the parties'
rights and obligations hereunder.
4.3 Non-Exclusivity. The indemnification provided by this Agreement
---------------
shall not be deemed exclusive of any rights to which an Indemnitee may be
entitled under the Company's Certificate of Incorporation, its Bylaws, any
agreement, any vote of shareholders or disinterested directors, the DGCL, or
otherwise, both as to action in Indemnitee's official capacity and as to action
in another capacity while holding such office. The indemnification provided
under this Agreement shall continue as to Indemnitee for an action taken or not
taken while serving in an indemnified capacity even though he may have ceased to
serve in such capacity at the time of any action, suit or other covered
proceeding.
5. PARTIAL INDEMNIFICATION
-----------------------
5.1 Partial Indemnity. If Indemnitee is entitled under any provision
-----------------
of this Agreement to indemnification by the Company for some or a portion of the
expenses, judgments, fines or penalties actually or reasonably incurred by
Indemnitee in the investigation, defense, appeal or settlement of any civil or
criminal action, suit or proceedings but not, however, for the total amount
thereof, the Company shall nevertheless indemnify Indemnitee for that portion to
which Indemnitee is entitled.
5
<PAGE>
6. MUTUAL ACKNOWLEDGMENT
---------------------
6.1 Acknowledgment. Both the Company and Indemnitee acknowledge that
--------------
in certain instances, federal law or public policy may override applicable state
law and prohibit the Company from indemnifying its directors under this
Agreement or otherwise. For example, the Company and Indemnitee acknowledge
that the Securities and Exchange Commission (the "SEC") has taken the position
that indemnification is not permissible for liabilities arising under certain
federal securities laws, and federal legislation prohibits indemnification for
certain ERISA violations. Indemnitee understands and acknowledges that the
Company has undertaken or may be required in the future to undertake with the
SEC to submit the question of indemnification to a court in certain
circumstances for a determination of the Company's right under public policy to
indemnify Indemnitee.
7. LIABILITY INSURANCE
-------------------
7.1 Obtaining Insurance. The Company shall, from time to time, make
-------------------
the good faith determination whether or not it is practicable for the Company to
obtain and maintain a policy or policies of insurance with reputable, insurance
companies providing the directors with coverage for losses from wrongful acts,
or to ensure the Company's performance of its indemnification obligations under
this Agreement. Among other considerations, the Company will weigh the costs of
obtaining such insurance coverage against the protection afforded by such
coverage. In all such policies of liability insurance, Indemnitee shall be
named as an insured in such a manner as to provide Indemnitee the same rights
and benefits as are accorded to the most favorably insured of the Company's
directors. Notwithstanding the foregoing, the Company shall have no obligation,
to obtain or maintain such insurance if the Company determines in good faith
that such insurance is not reasonably available, if the premium costs for such
insurance are disproportionate to the amount of coverage provided, if the
coverage provided by such insurance is limited by exclusions so as to provide an
insufficient benefit, or if Indemnitee is covered by similar insurance
maintained by a parent or Subsidiary of the Company.
8. SEVERABILITY
------------
8.1 Severability. Nothing in this Agreement is intended to require
------------
or shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 8.1. If this Agreement or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, the Company
shall nevertheless indemnify Indemnitee to the full extent permitted by any
applicable portion of this Agreement that shall not have been invalidated, and
the balance of this Agreement not so invalidated shall be enforceable in
accordance with its terms.
6
<PAGE>
9. EXCEPTIONS
----------
9.1 Exceptions to Company's Obligations. Any other provision to the
-----------------------------------
contrary notwithstanding, the Company shall not be obligated pursuant to the
terms of this Agreement for the following:
(a) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, unless said proceedings or
claims were authorized by the board of directors of the Company.
(b) Improper Personal Benefit. To indemnify Indemnitee against
-------------------------
liability for any transactions from which Indemnitee, or any Affiliate of
Indemnitee, derived an improper personal benefit, including, but not limited to,
self-dealing or usurpation of a corporate opportunity.
(c) Dishonesty. To indemnify Indemnitee if a judgment or other final
----------
adjudication adverse to Indemnitee established that Indemnitee committed acts of
active and deliberate dishonesty, with actual dishonest purpose and intent,
which acts were material to the cause of action so adjudicated.
(d) Insured Claims; Paid Claims. To indemnify Indemnitee for expenses
---------------------------
or liabilities of any type whatsoever (including but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) which
have been paid directly to Indemnitee (i) by an insurance carrier under a policy
of liability insurance maintained by the Company, or (ii) otherwise by any other
means.
(e) Claims Under Section 16(b). To indemnify Indemnitee for an
--------------------------
accounting of profits in fact realized from the purchase and sale of securities
within the meaning of Section 16(b) of the Securities Exchange Act of 1934, as
amended, or any similar successor statute.
10. MISCELLANEOUS
-------------
10.1 Construction of Certain Phrases.
-------------------------------
(a) For purposes of this Agreement, references to the "Company" shall
include any resulting or surviving corporation in any merger or consolidation in
which the Company (as then constituted) is not the resulting or surviving
corporation so that Indemnitee will continue to have the full benefits of this
Agreement.
(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
service as a director, officer, employee or agent of the Company which impose
duties on, or involves services
7
<PAGE>
by, such director, officer, employee or agent with respect to an employee
benefit plan, its participants, or beneficiaries; and if Indemnitee acted in
good faith and in a manner Indemnitee reasonably believed to be in the best
interests of the participants and beneficiaries of an employee benefit plan,
Indemnitee shall be deemed to have acted in a manner "reasonably believed to be
in the best interests of the Company and its shareholders" as referred to in
this Agreement.
10.2 Successors and Assigns. This Agreement shall be binding upon
----------------------
the Company and its successors and assigns, and shall inure to the benefit of
Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns.
Notwithstanding the foregoing, the Indemnitee shall have no right or power to
voluntarily assign or transfer any rights granted to Indemnitee, or obligations
imposed upon the Company, by or pursuant to this Agreement. Further, the rights
of the Indemnitee hereunder shall in no event accrue to the benefit of, or be
enforceable by, any judgment creditor or other involuntary transferee of the
Indemnitee.
10.3 Notice. All notices, requests, demands and other communications
------
under this Agreement shall be in writing and shall be deemed duly given (i) if
mailed by domestic certified or registered mail with postage prepaid, properly
addressed to the parties at the addresses set forth below, or to such other
address as may be furnished to Indemnitee by the Company or to the Company by
Indemnitee, as the case may be, on the third business day after the date
postmarked, or (ii) otherwise notice shall be deemed received when such notice
is actually received by the party to whom it is directed.
If to Indemnitee: To the address set forth below the signature
line of Indemnitee on the signature page
hereof.
If to Company: Callaway Golf Company
2285 Rutherford Road
Carlsbad, CA 92008
Attention: General Counsel
10.4 Consent to Jurisdiction. The Company and Indemnitee each hereby
-----------------------
irrevocably consent to the jurisdiction of the courts of the State of California
for all purposes in connection with any action or proceeding which arises out of
or related to this Agreement and agree that any action instituted under this
Agreement shall be brought only in the state courts of the State of California.
10.5 Choice of Law. This Agreement shall be governed by and its
-------------
provisions construed in accordance with the internal laws of the State of
Delaware, as applied to contracts between Delaware residents entered into and to
be performed entirely within Delaware, and without regard to choice of law
principles.
8
<PAGE>
10.6 Irrevocable Arbitration of Disputes.
-----------------------------------
(a) Indemnitee and the Company agree that any dispute, controversy or
claim arising hereunder or in any way related to this Agreement, its
interpretation, enforceability, or applicability, 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.
(b) Any demand for arbitration shall be in writing and must be made to
the Company's Chief Legal Officer within one (1) year, or within the time period
stated in the applicable statute of limitations, whichever is longer, after the
discovery of the alleged claim or cause of action by the aggrieved party.
(c) The arbitration shall be conducted pursuant to the Commercial
Arbitration Rules of the American Arbitration Association ("AAA") in San Diego,
California before an arbitrator who is licensed to practice law in the state of
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 AAA will be selected pursuant
to the Commercial Arbitration Rules of the AAA.
(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. However, at a minimum, each party will be
entitled to one deposition.
(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.
9
<PAGE>
(g) The provisions of this section shall survive the expiration or
termination of this agreement, and shall be binding on the parties in
perpetuity.
The parties have read Section 10.6 and irrevocably agree to arbitrate any
dispute identified above.
_________ (Indemnitee's initials) ______________ (Company's initials)
10.7 Entire Agreement. The provisions of this Agreement contain
----------------
the entire agreement between the parties and supersede all prior agreements,
oral or written, between the parties, including the Indemnification Agreement by
and between Callaway Golf Company, a California corporation, and Aulana L.
Peters dated as of July 18, 1996. This Agreement may not be released,
discharged, abandoned, changed or modified in any manner except by an instrument
in writing signed by the parties.
10.8 Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall constitute an original and all of which together shall
constitute one and the same instrument.
[SIGNATURE PAGE FOLLOWS]
10
<PAGE>
IN WITNESS WHEREOF, the parties hereby have executed this Agreement as
of the date first above written.
"Company" Callaway Golf Company,
a Delaware corporation
By:
-----------------------------------
David A. Rane
Executive Vice President,
Administration and Planning, and
Chief Financial Officer
"Indemnitee" Aulana L. Peters
----------------------------------
Address: Gibson, Dunn & Crutcher
333 South Grand Avenue
47th Floor
Los Angeles, CA. 90071
11
<PAGE>
EXHIBIT 10.5
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT is made as of the 1st day of July,
1999, by and between Callaway Golf Company, a Delaware corporation (the
"Company"), and Richard L. Rosenfield ("Indemnitee"), a director of the Company.
WHEREAS, the Company and Indemnitee recognize the increasing
difficulty in obtaining liability insurance covering directors, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance;
WHEREAS, although the Company currently has directors' liability
insurance, the coverage of such insurance is such that many claims which may be
brought against Indemnitee may not be covered, or may not be fully covered, and
the Company may be unable to maintain such insurance;
WHEREAS, the Company and the Indemnitee further recognize the
substantial increase in corporate litigation subjecting directors to expensive
litigation risks at the same time that liability insurance has been severely
limited;
WHEREAS, the current protection available may not be adequate given
the present circumstances, and Indemnitee may not be willing to serve as a
director without adequate protection;
WHEREAS, the Company desires to attract and retain the services of
highly qualified individuals, such as Indemnitee, to serve as directors of the
Company and to indemnify its directors so as to provide them with the maximum
protection permitted by law;
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. DEFINITIONS. The following terms, as used herein, have the following
-----------
meaning:
1.1 Affiliate. "Affiliate" means, (i) with respect to any
---------
corporation, any officer, director or 10% or more shareholder of such
corporation, or (ii) with respect to any individual, any partner or immediate
family member of such individual or the estate of such individual, or (iii) with
respect to any partnership, trust or joint venture, any partner, co-venturer or
trustee of such partnership, trust of joint venture, or any beneficiary or owner
having 10% or more interest in the equity, property or profits of such
partnership, trust or joint venture, or (iv) with respect to any Person, any
other Person which, directly or indirectly, controls, is controlled by, or is
under common control with such Person or any Affiliate of such Person.
1.2 Agreement. "Agreement" shall mean this Indemnification
---------
Agreement, as the same may be amended from time to time hereafter.
<PAGE>
1.3 DGCL. "DGCL" shall mean the Delaware General Corporation Law, as
----
amended.
1.4 Person. "Person" shall mean any individual, partnership,
------
corporation, joint venture, trust, estate, or other entity.
1.5 Subsidiary. "Subsidiary" shall mean any corporation of which the
----------
Company owns, directly or indirectly, through one or more subsidiaries,
securities having more than 50% of the voting power of such corporation.
2. INDEMNIFICATION
---------------
2.1 Third Party Proceedings. The Company shall indemnify Indemnitee
-----------------------
if Indemnitee is or was a party or witness or other participant in, or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than action by or in the right of the Company) by reason of the fact that
Indemnitee is or was a director of the Company or any subsidiary of the Company,
by reason of any action or inaction on the part of Indemnitee while a director
of the Company or any Subsidiary, and/or by reason of the fact that Indemnitee
is or was serving at the request of the Company as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against all expense, liability and loss (including attorneys' fees),
judgments, fines and amounts paid in settlement (if such settlement is approved
in advance by the Company, which approval shall not be unreasonably withheld)
actually and reasonably incurred by Indemnitee in connection with such action,
suit or proceeding if Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe Indemnitee's conduct was unlawful and provided,
further, that the Company has determined that such indemnification is otherwise
permitted by applicable law.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent
shall not, of itself, create a presumption that Indemnitee did not act in good
faith and in a manner which Indemnitee reasonably believed to be in the best
interests of the Company or that Indemnitee had reasonable cause to believe that
Indemnitee's conduct was unlawful.
2.2 Proceedings by or in the Right of the Company. The Company shall
---------------------------------------------
indemnify Indemnitee if Indemnitee was or is a party or a witness or other
participant in or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Company or any Subsidiary to
procure a judgment in its favor by reason of the fact that Indemnitee is or was
a director of the Company or any Subsidiary, by reason of any action or inaction
on the part of Indemnitee while a director of the Company or a Subsidiary or by
reason of the fact that Indemnitee is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other
2
<PAGE>
enterprise, against all expense, liability and loss (including attorneys' fees)
and amounts paid in settlement (if such settlement is court-approved) actually
and reasonably incurred by Indemnitee in connection with the defense or
settlement of such action or suit if Indemnitee acted in good faith and in a
manner Indemnitee reasonably believed to be in or not opposed to the best
interests of the Company and its shareholders and provided, further, that the
Company has determined that such indemnification is otherwise permitted by
applicable law. No indemnification shall be made in respect of any claim, issue
or matter as to which Indemnitee shall have been adjudged to be liable to the
Company in the performance of Indemnitee's duties to the Company and its
shareholders, unless and only to the extent that the court in which such
proceeding is or was pending shall determine upon application that, in view of
all the circumstances of the case, Indemnitee is fairly and reasonably entitled
to indemnity for expenses and then only to the extent that the court shall
determine.
2.3 Mandatory Payment of Expenses. To the extent that Indemnitee has
-----------------------------
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Section 2.1 or 2.2 or the defense of any claim, issue
or matter therein, Indemnitee shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by Indemnitee in connection
therewith.
2.4 Enforcing the Agreement. If Indemnitee properly makes a claim
-----------------------
for indemnification or an advance of expenses which is payable pursuant to the
terms of this Agreement, and that claim is not paid by the Company, or on its
behalf, within ninety days after a written claim has been received by the
Company, the Indemnitee may at any time thereafter bring suit against the
Company to recover the unpaid amount of the claim and if successful in whole or
in part, the Indemnitee shall be entitled to be paid also all expenses actually
and reasonably incurred in connection with prosecuting such claim.
2.5 Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of the Indemnitee, who shall execute all papers required and shall
do everything that may be necessary to secure such rights, including the
execution of such documents necessary to enable the Company effectively to bring
suit to enforce such rights.
3. EXPENSES; INDEMNIFICATION PROCEDURE
-----------------------------------
3.1 Advancement of Expenses. The Company shall advance all expenses
-----------------------
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action, suit or proceeding referenced in
Section 2.1 or 2.2 hereof. Indemnitee hereby undertakes to repay such amounts
advanced only if, and to the extent that, it shall ultimately be determined that
Indemnitee is not entitled to be indemnified by the Company as authorized hereby
or that such indemnification is not otherwise permitted by applicable law. The
advances to be made
3
<PAGE>
hereunder shall be paid by the Company to Indemnitee within thirty (30) days
following delivery of a written request therefor or by Indemnitee to the
Company.
3.2 Determination of Conduct. Any indemnification (unless ordered by
------------------------
a court) shall be made by the Company only as authorized in the specified case
upon a determination that indemnification of Indemnitee is proper under the
circumstances because Indemnitee has met the applicable standard of conduct set
forth in Sections 2.1 or 2.2 of this Agreement. Such determination shall be
made by any of the following: (1) the Board of Directors (or by an executive
committee thereof) by a majority vote of directors (or committee members) who
are not parties to such action, suit or proceeding, even though less than a
quorum, (2) if there are no such disinterested directors, or if such
disinterested directors so direct, by independent legal counsel in a written
opinion, (3) by the shareholders, with the shares owned by Indemnitee not being
entitled to vote thereon, or (4) the court in which such proceeding is or was
pending upon application made by the Company or Indemnitee or the attorney or
other person rendering services in connection with the defense, whether or not
such application by Indemnitee, the attorney or the other person is opposed by
the Company.
3.3 Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to Indemnitee's right to be indemnified under this
Agreement, give the Company notice in writing as soon as practicable of any
claim made against Indemnitee for which indemnification will or could be sought
under this Agreement. Notice to the Company shall be given in the manner set
forth in Section 10.3 hereof and to the address stated therein, or such other
address as the Company shall designate in writing to Indemnitee. In addition,
Indemnitee shall give the Company such information and cooperation as it may
reasonably require and as shall be within Indemnitee's power.
3.4 Notice to Insurers. If, at the time of the receipt of a notice
------------------
of a claim pursuant to Section 3.3 hereof, the Company has director liability
insurance in effect, the Company shall give prompt notice of the commencement of
such proceeding to the insurers in accordance with the procedures set forth in
the respective policies. The Company shall thereafter take all necessary or
desirable actions to cause such insurers to pay, on behalf of the Indemnitee,
all amounts payable as a result of such proceeding in accordance with the terms
of such policies.
3.5 Selection of Counsel. In the event the Company shall be
--------------------
obligated under Section 3.1 hereof to pay the expenses of any proceeding against
Indemnitee, the Company shall be entitled to assume the defense of such
proceeding, with counsel approved by Indemnitee, upon the delivery to Indemnitee
of written notice of its election so to do. After delivery of such notice,
approval of such counsel by Indemnitee and the retention of such counsel by the
Company, the Company will not be liable to Indemnitee under this Agreement for
any fees of counsel subsequently incurred by Indemnitee with respect to the same
proceeding, provided that (a) Indemnitee shall have the right to employ separate
counsel in any such proceeding at Indemnitee's expense; and (b) if (i) the
employment of counsel by Indemnitee has been previously authorized by the
4
<PAGE>
Company, (ii) Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company and Indemnitee in the conduct of any
such defense, or (iii) the Company shall not, in fact, have employed counsel to
assume the defense of such proceeding, then the fees and expenses of
Indemnitee's counsel shall be at the expense of the Company (subject to the
provisions of this Agreement).
4. ADDITIONAL INDEMNIFICATION RIGHTS; NON-EXCLUSIVITY
--------------------------------------------------
4.1 Application. The provisions of this Agreement shall be deemed
-----------
applicable to all actual or alleged actions or omissions by Indemnitee during
any and all periods of time that Indemnitee was, is, or shall be serving as a
director of the Company or a Subsidiary.
4.2 Scope. The Company hereby agrees to indemnify Indemnitee to the
-----
fullest extent permitted by law (except as set forth in Section 8 hereof),
notwithstanding that such indemnification is not specifically authorized by the
other provisions of this Agreement, the Company's Certificate of Incorporation,
the Company's Bylaws or by statute. In the event of any changes, after the date
of this Agreement, in any applicable law, statute, or rule which expands the
right of a Delaware corporation to indemnify a member of its board of directors,
such changes shall be, ipso facto, within the purview of Indemnitee's rights and
----------
the Company's obligations under this Agreement. In the event of any change in
any applicable law, statute, or rule which narrows the right of a Delaware
corporation to indemnify a member of its board of directors, such changes,
except to the extent otherwise required by such law, statute or rule to be
applied to this Agreement shall have no effect on this Agreement or the parties'
rights and obligations hereunder.
4.3 Non-Exclusivity. The indemnification provided by this Agreement
---------------
shall not be deemed exclusive of any rights to which an Indemnitee may be
entitled under the Company's Certificate of Incorporation, its Bylaws, any
agreement, any vote of shareholders or disinterested directors, the DGCL, or
otherwise, both as to action in Indemnitee's official capacity and as to action
in another capacity while holding such office. The indemnification provided
under this Agreement shall continue as to Indemnitee for an action taken or not
taken while serving in an indemnified capacity even though he may have ceased to
serve in such capacity at the time of any action, suit or other covered
proceeding.
5. PARTIAL INDEMNIFICATION
-----------------------
5.1 Partial Indemnity. If Indemnitee is entitled under any provision
-----------------
of this Agreement to indemnification by the Company for some or a portion of the
expenses, judgments, fines or penalties actually or reasonably incurred by
Indemnitee in the investigation, defense, appeal or settlement of any civil or
criminal action, suit or proceedings but not, however, for the total amount
thereof, the Company shall nevertheless indemnify Indemnitee for that portion to
which Indemnitee is entitled.
5
<PAGE>
6. MUTUAL ACKNOWLEDGMENT
---------------------
6.1 Acknowledgment. Both the Company and Indemnitee acknowledge that
--------------
in certain instances, federal law or public policy may override applicable state
law and prohibit the Company from indemnifying its directors under this
Agreement or otherwise. For example, the Company and Indemnitee acknowledge
that the Securities and Exchange Commission (the "SEC") has taken the position
that indemnification is not permissible for liabilities arising under certain
federal securities laws, and federal legislation prohibits indemnification for
certain ERISA violations. Indemnitee understands and acknowledges that the
Company has undertaken or may be required in the future to undertake with the
SEC to submit the question of indemnification to a court in certain
circumstances for a determination of the Company's right under public policy to
indemnify Indemnitee.
7. LIABILITY INSURANCE
-------------------
7.1 Obtaining Insurance. The Company shall, from time to time, make
-------------------
the good faith determination whether or not it is practicable for the Company to
obtain and maintain a policy or policies of insurance with reputable, insurance
companies providing the directors with coverage for losses from wrongful acts,
or to ensure the Company's performance of its indemnification obligations under
this Agreement. Among other considerations, the Company will weigh the costs of
obtaining such insurance coverage against the protection afforded by such
coverage. In all such policies of liability insurance, Indemnitee shall be
named as an insured in such a manner as to provide Indemnitee the same rights
and benefits as are accorded to the most favorably insured of the Company's
directors. Notwithstanding the foregoing, the Company shall have no obligation,
to obtain or maintain such insurance if the Company determines in good faith
that such insurance is not reasonably available, if the premium costs for such
insurance are disproportionate to the amount of coverage provided, if the
coverage provided by such insurance is limited by exclusions so as to provide an
insufficient benefit, or if Indemnitee is covered by similar insurance
maintained by a parent or Subsidiary of the Company.
8. SEVERABILITY
------------
8.1 Severability. Nothing in this Agreement is intended to require
------------
or shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 8.1. If this Agreement or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, the Company
shall nevertheless indemnify Indemnitee to the full extent permitted by any
applicable portion of this Agreement that shall not have been invalidated, and
the balance of this Agreement not so invalidated shall be enforceable in
accordance with its terms.
6
<PAGE>
9. EXCEPTIONS
----------
9.1 Exceptions to Company's Obligations. Any other provision to the
-----------------------------------
contrary notwithstanding, the Company shall not be obligated pursuant to the
terms of this Agreement for the following:
(a) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, unless said proceedings or
claims were authorized by the board of directors of the Company.
(b) Improper Personal Benefit. To indemnify Indemnitee against
-------------------------
liability for any transactions from which Indemnitee, or any Affiliate of
Indemnitee, derived an improper personal benefit, including, but not limited to,
self-dealing or usurpation of a corporate opportunity.
(c) Dishonesty. To indemnify Indemnitee if a judgment or other final
----------
adjudication adverse to Indemnitee established that Indemnitee committed acts of
active and deliberate dishonesty, with actual dishonest purpose and intent,
which acts were material to the cause of action so adjudicated.
(d) Insured Claims; Paid Claims. To indemnify Indemnitee for expenses
---------------------------
or liabilities of any type whatsoever (including but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) which
have been paid directly to Indemnitee (i) by an insurance carrier under a policy
of liability insurance maintained by the Company, or (ii) otherwise by any other
means.
(e) Claims Under Section 16(b). To indemnify Indemnitee for an
--------------------------
accounting of profits in fact realized from the purchase and sale of securities
within the meaning of Section 16(b) of the Securities Exchange Act of 1934, as
amended, or any similar successor statute.
10. MISCELLANEOUS
-------------
10.1 Construction of Certain Phrases.
-------------------------------
(a) For purposes of this Agreement, references to the "Company" shall
include any resulting or surviving corporation in any merger or consolidation in
which the Company (as then constituted) is not the resulting or surviving
corporation so that Indemnitee will continue to have the full benefits of this
Agreement.
(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
service as a director, officer, employee or agent of the Company which impose
duties on, or involves services
7
<PAGE>
by, such director, officer, employee or agent with respect to an employee
benefit plan, its participants, or beneficiaries; and if Indemnitee acted in
good faith and in a manner Indemnitee reasonably believed to be in the best
interests of the participants and beneficiaries of an employee benefit plan,
Indemnitee shall be deemed to have acted in a manner "reasonably believed to be
in the best interests of the Company and its shareholders" as referred to in
this Agreement.
10.2 Successors and Assigns. This Agreement shall be binding upon
----------------------
the Company and its successors and assigns, and shall inure to the benefit of
Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns.
Notwithstanding the foregoing, the Indemnitee shall have no right or power to
voluntarily assign or transfer any rights granted to Indemnitee, or obligations
imposed upon the Company, by or pursuant to this Agreement. Further, the rights
of the Indemnitee hereunder shall in no event accrue to the benefit of, or be
enforceable by, any judgment creditor or other involuntary transferee of the
Indemnitee.
10.3 Notice. All notices, requests, demands and other communications
------
under this Agreement shall be in writing and shall be deemed duly given (i) if
mailed by domestic certified or registered mail with postage prepaid, properly
addressed to the parties at the addresses set forth below, or to such other
address as may be furnished to Indemnitee by the Company or to the Company by
Indemnitee, as the case may be, on the third business day after the date
postmarked, or (ii) otherwise notice shall be deemed received when such notice
is actually received by the party to whom it is directed.
If to Indemnitee: To the address set forth below the signature
line of Indemnitee on the signature page
hereof.
If to Company: Callaway Golf Company
2285 Rutherford Road
Carlsbad, CA 92008
Attention: General Counsel
10.4 Consent to Jurisdiction. The Company and Indemnitee each hereby
-----------------------
irrevocably consent to the jurisdiction of the courts of the State of California
for all purposes in connection with any action or proceeding which arises out of
or related to this Agreement and agree that any action instituted under this
Agreement shall be brought only in the state courts of the State of California.
10.5 Choice of Law. This Agreement shall be governed by and its
-------------
provisions construed in accordance with the internal laws of the State of
Delaware, as applied to contracts between Delaware residents entered into and to
be performed entirely within Delaware, and without regard to choice of law
principles.
8
<PAGE>
10.6 Irrevocable Arbitration of Disputes.
-----------------------------------
(a) Indemnitee and the Company agree that any dispute, controversy or
claim arising hereunder or in any way related to this Agreement, its
interpretation, enforceability, or applicability, 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.
(b) Any demand for arbitration shall be in writing and must be made to
the Company's Chief Legal Officer within one (1) year, or within the time period
stated in the applicable statute of limitations, whichever is longer, after the
discovery of the alleged claim or cause of action by the aggrieved party.
(c) The arbitration shall be conducted pursuant to the Commercial
Arbitration Rules of the American Arbitration Association ("AAA") in San Diego,
California before an arbitrator who is licensed to practice law in the state of
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 AAA will be selected pursuant
to the Commercial Arbitration Rules of the AAA.
(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. However, at a minimum, each party will be
entitled to one deposition.
(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.
9
<PAGE>
(g) The provisions of this section shall survive the expiration or
termination of this agreement, and shall be binding on the parties in
perpetuity.
The parties have read Section 10.6 and irrevocably agree to arbitrate any
dispute identified above.
_________ (Indemnitee's initials) ______________ (Company's initials)
10.7 Entire Agreement. The provisions of this Agreement contain
----------------
the entire agreement between the parties and supersede all prior agreements,
oral or written, between the parties, including the Indemnification Agreement by
and between Callaway Golf Company, a California corporation, and Richard L.
Rosenfield dated as of January 25, 1995. This Agreement may not be released,
discharged, abandoned, changed or modified in any manner except by an instrument
in writing signed by the parties.
10.8 Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall constitute an original and all of which together shall
constitute one and the same instrument.
[SIGNATURE PAGE FOLLOWS]
10
<PAGE>
IN WITNESS WHEREOF, the parties hereby have executed this Agreement as
of the date first above written.
"Company" Callaway Golf Company,
a Delaware corporation
By:
-----------------------------------
David A. Rane
Executive Vice President,
Administration and Planning, and
Chief Financial Officer
"Indemnitee" Richard L. Rosenfield
----------------------------------
Address: California Pizza Kitchen
6053 West Century Blvd.
Suite 1100
Los Angeles, CA. 90045
11
<PAGE>
EXHIBIT 10.6
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT is made as of the 1st day of July,
1999, by and between Callaway Golf Company, a Delaware corporation (the
"Company"), and William A. Schreyer ("Indemnitee"), a director of the Company.
WHEREAS, the Company and Indemnitee recognize the increasing
difficulty in obtaining liability insurance covering directors, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance;
WHEREAS, although the Company currently has directors' liability
insurance, the coverage of such insurance is such that many claims which may be
brought against Indemnitee may not be covered, or may not be fully covered, and
the Company may be unable to maintain such insurance;
WHEREAS, the Company and the Indemnitee further recognize the
substantial increase in corporate litigation subjecting directors to expensive
litigation risks at the same time that liability insurance has been severely
limited;
WHEREAS, the current protection available may not be adequate given
the present circumstances, and Indemnitee may not be willing to serve as a
director without adequate protection;
WHEREAS, the Company desires to attract and retain the services of
highly qualified individuals, such as Indemnitee, to serve as directors of the
Company and to indemnify its directors so as to provide them with the maximum
protection permitted by law;
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. DEFINITIONS. The following terms, as used herein, have the following
-----------
meaning:
1.1 Affiliate. "Affiliate" means, (i) with respect to any
---------
corporation, any officer, director or 10% or more shareholder of such
corporation, or (ii) with respect to any individual, any partner or immediate
family member of such individual or the estate of such individual, or (iii) with
respect to any partnership, trust or joint venture, any partner, co-venturer or
trustee of such partnership, trust of joint venture, or any beneficiary or owner
having 10% or more interest in the equity, property or profits of such
partnership, trust or joint venture, or (iv) with respect to any Person, any
other Person which, directly or indirectly, controls, is controlled by, or is
under common control with such Person or any Affiliate of such Person.
1.2 Agreement. "Agreement" shall mean this Indemnification
---------
Agreement, as the same may be amended from time to time hereafter.
<PAGE>
1.3 DGCL. "DGCL" shall mean the Delaware General Corporation Law, as
----
amended.
1.4 Person. "Person" shall mean any individual, partnership,
------
corporation, joint venture, trust, estate, or other entity.
1.5 Subsidiary. "Subsidiary" shall mean any corporation of which the
----------
Company owns, directly or indirectly, through one or more subsidiaries,
securities having more than 50% of the voting power of such corporation.
2. INDEMNIFICATION
---------------
2.1 Third Party Proceedings. The Company shall indemnify Indemnitee
-----------------------
if Indemnitee is or was a party or witness or other participant in, or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than action by or in the right of the Company) by reason of the fact that
Indemnitee is or was a director of the Company or any subsidiary of the Company,
by reason of any action or inaction on the part of Indemnitee while a director
of the Company or any Subsidiary, and/or by reason of the fact that Indemnitee
is or was serving at the request of the Company as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against all expense, liability and loss (including attorneys' fees),
judgments, fines and amounts paid in settlement (if such settlement is approved
in advance by the Company, which approval shall not be unreasonably withheld)
actually and reasonably incurred by Indemnitee in connection with such action,
suit or proceeding if Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe Indemnitee's conduct was unlawful and provided,
further, that the Company has determined that such indemnification is otherwise
permitted by applicable law.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent
shall not, of itself, create a presumption that Indemnitee did not act in good
faith and in a manner which Indemnitee reasonably believed to be in the best
interests of the Company or that Indemnitee had reasonable cause to believe that
Indemnitee's conduct was unlawful.
2.2 Proceedings by or in the Right of the Company. The Company shall
---------------------------------------------
indemnify Indemnitee if Indemnitee was or is a party or a witness or other
participant in or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Company or any Subsidiary to
procure a judgment in its favor by reason of the fact that Indemnitee is or was
a director of the Company or any Subsidiary, by reason of any action or inaction
on the part of Indemnitee while a director of the Company or a Subsidiary or by
reason of the fact that Indemnitee is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other
2
<PAGE>
enterprise, against all expense, liability and loss (including attorneys' fees)
and amounts paid in settlement (if such settlement is court-approved) actually
and reasonably incurred by Indemnitee in connection with the defense or
settlement of such action or suit if Indemnitee acted in good faith and in a
manner Indemnitee reasonably believed to be in or not opposed to the best
interests of the Company and its shareholders and provided, further, that the
Company has determined that such indemnification is otherwise permitted by
applicable law. No indemnification shall be made in respect of any claim, issue
or matter as to which Indemnitee shall have been adjudged to be liable to the
Company in the performance of Indemnitee's duties to the Company and its
shareholders, unless and only to the extent that the court in which such
proceeding is or was pending shall determine upon application that, in view of
all the circumstances of the case, Indemnitee is fairly and reasonably entitled
to indemnity for expenses and then only to the extent that the court shall
determine.
2.3 Mandatory Payment of Expenses. To the extent that Indemnitee has
-----------------------------
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Section 2.1 or 2.2 or the defense of any claim, issue
or matter therein, Indemnitee shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by Indemnitee in connection
therewith.
2.4 Enforcing the Agreement. If Indemnitee properly makes a claim
-----------------------
for indemnification or an advance of expenses which is payable pursuant to the
terms of this Agreement, and that claim is not paid by the Company, or on its
behalf, within ninety days after a written claim has been received by the
Company, the Indemnitee may at any time thereafter bring suit against the
Company to recover the unpaid amount of the claim and if successful in whole or
in part, the Indemnitee shall be entitled to be paid also all expenses actually
and reasonably incurred in connection with prosecuting such claim.
2.5 Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of the Indemnitee, who shall execute all papers required and shall
do everything that may be necessary to secure such rights, including the
execution of such documents necessary to enable the Company effectively to bring
suit to enforce such rights.
3. EXPENSES; INDEMNIFICATION PROCEDURE
-----------------------------------
3.1 Advancement of Expenses. The Company shall advance all expenses
-----------------------
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action, suit or proceeding referenced in
Section 2.1 or 2.2 hereof. Indemnitee hereby undertakes to repay such amounts
advanced only if, and to the extent that, it shall ultimately be determined that
Indemnitee is not entitled to be indemnified by the Company as authorized hereby
or that such indemnification is not otherwise permitted by applicable law. The
advances to be made
3
<PAGE>
hereunder shall be paid by the Company to Indemnitee within thirty (30) days
following delivery of a written request therefor or by Indemnitee to the
Company.
3.2 Determination of Conduct. Any indemnification (unless ordered by
------------------------
a court) shall be made by the Company only as authorized in the specified case
upon a determination that indemnification of Indemnitee is proper under the
circumstances because Indemnitee has met the applicable standard of conduct set
forth in Sections 2.1 or 2.2 of this Agreement. Such determination shall be
made by any of the following: (1) the Board of Directors (or by an executive
committee thereof) by a majority vote of directors (or committee members) who
are not parties to such action, suit or proceeding, even though less than a
quorum, (2) if there are no such disinterested directors, or if such
disinterested directors so direct, by independent legal counsel in a written
opinion, (3) by the shareholders, with the shares owned by Indemnitee not being
entitled to vote thereon, or (4) the court in which such proceeding is or was
pending upon application made by the Company or Indemnitee or the attorney or
other person rendering services in connection with the defense, whether or not
such application by Indemnitee, the attorney or the other person is opposed by
the Company.
3.3 Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to Indemnitee's right to be indemnified under this
Agreement, give the Company notice in writing as soon as practicable of any
claim made against Indemnitee for which indemnification will or could be sought
under this Agreement. Notice to the Company shall be given in the manner set
forth in Section 10.3 hereof and to the address stated therein, or such other
address as the Company shall designate in writing to Indemnitee. In addition,
Indemnitee shall give the Company such information and cooperation as it may
reasonably require and as shall be within Indemnitee's power.
3.4 Notice to Insurers. If, at the time of the receipt of a notice
------------------
of a claim pursuant to Section 3.3 hereof, the Company has director liability
insurance in effect, the Company shall give prompt notice of the commencement of
such proceeding to the insurers in accordance with the procedures set forth in
the respective policies. The Company shall thereafter take all necessary or
desirable actions to cause such insurers to pay, on behalf of the Indemnitee,
all amounts payable as a result of such proceeding in accordance with the terms
of such policies.
3.5 Selection of Counsel. In the event the Company shall be
--------------------
obligated under Section 3.1 hereof to pay the expenses of any proceeding against
Indemnitee, the Company shall be entitled to assume the defense of such
proceeding, with counsel approved by Indemnitee, upon the delivery to Indemnitee
of written notice of its election so to do. After delivery of such notice,
approval of such counsel by Indemnitee and the retention of such counsel by the
Company, the Company will not be liable to Indemnitee under this Agreement for
any fees of counsel subsequently incurred by Indemnitee with respect to the same
proceeding, provided that (a) Indemnitee shall have the right to employ separate
counsel in any such proceeding at Indemnitee's expense; and (b) if (i) the
employment of counsel by Indemnitee has been previously authorized by the
4
<PAGE>
Company, (ii) Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company and Indemnitee in the conduct of any
such defense, or (iii) the Company shall not, in fact, have employed counsel to
assume the defense of such proceeding, then the fees and expenses of
Indemnitee's counsel shall be at the expense of the Company (subject to the
provisions of this Agreement).
4. ADDITIONAL INDEMNIFICATION RIGHTS; NON-EXCLUSIVITY
--------------------------------------------------
4.1 Application. The provisions of this Agreement shall be deemed
-----------
applicable to all actual or alleged actions or omissions by Indemnitee during
any and all periods of time that Indemnitee was, is, or shall be serving as a
director of the Company or a Subsidiary.
4.2 Scope. The Company hereby agrees to indemnify Indemnitee to the
-----
fullest extent permitted by law (except as set forth in Section 8 hereof),
notwithstanding that such indemnification is not specifically authorized by the
other provisions of this Agreement, the Company's Certificate of Incorporation,
the Company's Bylaws or by statute. In the event of any changes, after the date
of this Agreement, in any applicable law, statute, or rule which expands the
right of a Delaware corporation to indemnify a member of its board of directors,
such changes shall be, ipso facto, within the purview of Indemnitee's rights and
----------
the Company's obligations under this Agreement. In the event of any change in
any applicable law, statute, or rule which narrows the right of a Delaware
corporation to indemnify a member of its board of directors, such changes,
except to the extent otherwise required by such law, statute or rule to be
applied to this Agreement shall have no effect on this Agreement or the parties'
rights and obligations hereunder.
4.3 Non-Exclusivity. The indemnification provided by this Agreement
---------------
shall not be deemed exclusive of any rights to which an Indemnitee may be
entitled under the Company's Certificate of Incorporation, its Bylaws, any
agreement, any vote of shareholders or disinterested directors, the DGCL, or
otherwise, both as to action in Indemnitee's official capacity and as to action
in another capacity while holding such office. The indemnification provided
under this Agreement shall continue as to Indemnitee for an action taken or not
taken while serving in an indemnified capacity even though he may have ceased to
serve in such capacity at the time of any action, suit or other covered
proceeding.
5. PARTIAL INDEMNIFICATION
-----------------------
5.1 Partial Indemnity. If Indemnitee is entitled under any provision
-----------------
of this Agreement to indemnification by the Company for some or a portion of the
expenses, judgments, fines or penalties actually or reasonably incurred by
Indemnitee in the investigation, defense, appeal or settlement of any civil or
criminal action, suit or proceedings but not, however, for the total amount
thereof, the Company shall nevertheless indemnify Indemnitee for that portion to
which Indemnitee is entitled.
5
<PAGE>
6. MUTUAL ACKNOWLEDGMENT
---------------------
6.1 Acknowledgment. Both the Company and Indemnitee acknowledge that
--------------
in certain instances, federal law or public policy may override applicable state
law and prohibit the Company from indemnifying its directors under this
Agreement or otherwise. For example, the Company and Indemnitee acknowledge
that the Securities and Exchange Commission (the "SEC") has taken the position
that indemnification is not permissible for liabilities arising under certain
federal securities laws, and federal legislation prohibits indemnification for
certain ERISA violations. Indemnitee understands and acknowledges that the
Company has undertaken or may be required in the future to undertake with the
SEC to submit the question of indemnification to a court in certain
circumstances for a determination of the Company's right under public policy to
indemnify Indemnitee.
7. LIABILITY INSURANCE
-------------------
7.1 Obtaining Insurance. The Company shall, from time to time, make
-------------------
the good faith determination whether or not it is practicable for the Company to
obtain and maintain a policy or policies of insurance with reputable, insurance
companies providing the directors with coverage for losses from wrongful acts,
or to ensure the Company's performance of its indemnification obligations under
this Agreement. Among other considerations, the Company will weigh the costs of
obtaining such insurance coverage against the protection afforded by such
coverage. In all such policies of liability insurance, Indemnitee shall be
named as an insured in such a manner as to provide Indemnitee the same rights
and benefits as are accorded to the most favorably insured of the Company's
directors. Notwithstanding the foregoing, the Company shall have no obligation,
to obtain or maintain such insurance if the Company determines in good faith
that such insurance is not reasonably available, if the premium costs for such
insurance are disproportionate to the amount of coverage provided, if the
coverage provided by such insurance is limited by exclusions so as to provide an
insufficient benefit, or if Indemnitee is covered by similar insurance
maintained by a parent or Subsidiary of the Company.
8. SEVERABILITY
------------
8.1 Severability. Nothing in this Agreement is intended to require
------------
or shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 8.1. If this Agreement or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, the Company
shall nevertheless indemnify Indemnitee to the full extent permitted by any
applicable portion of this Agreement that shall not have been invalidated, and
the balance of this Agreement not so invalidated shall be enforceable in
accordance with its terms.
6
<PAGE>
9. EXCEPTIONS
----------
9.1 Exceptions to Company's Obligations. Any other provision to the
-----------------------------------
contrary notwithstanding, the Company shall not be obligated pursuant to the
terms of this Agreement for the following:
(a) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, unless said proceedings or
claims were authorized by the board of directors of the Company.
(b) Improper Personal Benefit. To indemnify Indemnitee against
-------------------------
liability for any transactions from which Indemnitee, or any Affiliate of
Indemnitee, derived an improper personal benefit, including, but not limited to,
self-dealing or usurpation of a corporate opportunity.
(c) Dishonesty. To indemnify Indemnitee if a judgment or other final
----------
adjudication adverse to Indemnitee established that Indemnitee committed acts of
active and deliberate dishonesty, with actual dishonest purpose and intent,
which acts were material to the cause of action so adjudicated.
(d) Insured Claims; Paid Claims. To indemnify Indemnitee for expenses
---------------------------
or liabilities of any type whatsoever (including but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) which
have been paid directly to Indemnitee (i) by an insurance carrier under a policy
of liability insurance maintained by the Company, or (ii) otherwise by any other
means.
(e) Claims Under Section 16(b). To indemnify Indemnitee for an
--------------------------
accounting of profits in fact realized from the purchase and sale of securities
within the meaning of Section 16(b) of the Securities Exchange Act of 1934, as
amended, or any similar successor statute.
10. MISCELLANEOUS
-------------
10.1 Construction of Certain Phrases.
-------------------------------
(a) For purposes of this Agreement, references to the "Company" shall
include any resulting or surviving corporation in any merger or consolidation in
which the Company (as then constituted) is not the resulting or surviving
corporation so that Indemnitee will continue to have the full benefits of this
Agreement.
(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
service as a director, officer, employee or agent of the Company which impose
duties on, or involves services
7
<PAGE>
by, such director, officer, employee or agent with respect to an employee
benefit plan, its participants, or beneficiaries; and if Indemnitee acted in
good faith and in a manner Indemnitee reasonably believed to be in the best
interests of the participants and beneficiaries of an employee benefit plan,
Indemnitee shall be deemed to have acted in a manner "reasonably believed to be
in the best interests of the Company and its shareholders" as referred to in
this Agreement.
10.2 Successors and Assigns. This Agreement shall be binding upon
----------------------
the Company and its successors and assigns, and shall inure to the benefit of
Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns.
Notwithstanding the foregoing, the Indemnitee shall have no right or power to
voluntarily assign or transfer any rights granted to Indemnitee, or obligations
imposed upon the Company, by or pursuant to this Agreement. Further, the rights
of the Indemnitee hereunder shall in no event accrue to the benefit of, or be
enforceable by, any judgment creditor or other involuntary transferee of the
Indemnitee.
10.3 Notice. All notices, requests, demands and other communications
------
under this Agreement shall be in writing and shall be deemed duly given (i) if
mailed by domestic certified or registered mail with postage prepaid, properly
addressed to the parties at the addresses set forth below, or to such other
address as may be furnished to Indemnitee by the Company or to the Company by
Indemnitee, as the case may be, on the third business day after the date
postmarked, or (ii) otherwise notice shall be deemed received when such notice
is actually received by the party to whom it is directed.
If to Indemnitee: To the address set forth below the signature
line of Indemnitee on the signature page
hereof.
If to Company: Callaway Golf Company
2285 Rutherford Road
Carlsbad, CA 92008
Attention: General Counsel
10.4 Consent to Jurisdiction. The Company and Indemnitee each hereby
-----------------------
irrevocably consent to the jurisdiction of the courts of the State of California
for all purposes in connection with any action or proceeding which arises out of
or related to this Agreement and agree that any action instituted under this
Agreement shall be brought only in the state courts of the State of California.
10.5 Choice of Law. This Agreement shall be governed by and its
-------------
provisions construed in accordance with the internal laws of the State of
Delaware, as applied to contracts between Delaware residents entered into and to
be performed entirely within Delaware, and without regard to choice of law
principles.
8
<PAGE>
10.6 Irrevocable Arbitration of Disputes.
-----------------------------------
(a) Indemnitee and the Company agree that any dispute, controversy or
claim arising hereunder or in any way related to this Agreement, its
interpretation, enforceability, or applicability, 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.
(b) Any demand for arbitration shall be in writing and must be made to
the Company's Chief Legal Officer within one (1) year, or within the time period
stated in the applicable statute of limitations, whichever is longer, after the
discovery of the alleged claim or cause of action by the aggrieved party.
(c) The arbitration shall be conducted pursuant to the Commercial
Arbitration Rules of the American Arbitration Association ("AAA") in San Diego,
California before an arbitrator who is licensed to practice law in the state of
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 AAA will be selected pursuant
to the Commercial Arbitration Rules of the AAA.
(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. However, at a minimum, each party will be
entitled to one deposition.
(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.
9
<PAGE>
(g) The provisions of this section shall survive the expiration or
termination of this agreement, and shall be binding on the parties in
perpetuity.
The parties have read Section 10.6 and irrevocably agree to arbitrate any
dispute identified above.
_________ (Indemnitee's initials) ______________ (Company's initials)
10.7 Entire Agreement. The provisions of this Agreement contain
----------------
the entire agreement between the parties and supersede all prior agreements,
oral or written, between the parties, including the Indemnification Agreement by
and between Callaway Golf Company, a California corporation, and William A.
Schreyer dated as of January 25, 1995. This Agreement may not be released,
discharged, abandoned, changed or modified in any manner except by an instrument
in writing signed by the parties.
10.8 Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall constitute an original and all of which together shall
constitute one and the same instrument.
[SIGNATURE PAGE FOLLOWS]
10
<PAGE>
IN WITNESS WHEREOF, the parties hereby have executed this Agreement as
of the date first above written.
"Company" Callaway Golf Company,
a Delaware corporation
By:
-----------------------------------
David A. Rane
Executive Vice President,
Administration and Planning, and
Chief Financial Officer
"Indemnitee" William A. Schreyer
----------------------------------
Address: Merrill Lynch & Co., Inc.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CALLAWAY
GOLF COMPANY UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEET AND UNAUDITED
CONSOLIDATED CONDENSED STATEMENT OF INCOME AT JUNE 30, 1999 AND FOR THE SIX
MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 26,898
<SECURITIES> 0
<RECEIVABLES> 131,764
<ALLOWANCES> 6,418
<INVENTORY> 116,536
<CURRENT-ASSETS> 292,831
<PP&E> 284,697
<DEPRECIATION> 90,362
<TOTAL-ASSETS> 643,318
<CURRENT-LIABILITIES> 138,462
<BONDS> 0
0
0
<COMMON> 758
<OTHER-SE> 484,869
<TOTAL-LIABILITY-AND-EQUITY> 643,318
<SALES> 415,452
<TOTAL-REVENUES> 415,452
<CGS> 223,268
<TOTAL-COSTS> 223,268
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 388
<INTEREST-EXPENSE> 2,277
<INCOME-PRETAX> 62,102
<INCOME-TAX> 24,509
<INCOME-CONTINUING> 37,593
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,593
<EPS-BASIC> 0.54
<EPS-DILUTED> 0.53
</TABLE>
